Q. Many a times we read in the financial newspapers about a term “Derivative”. In this context, consider the following statements:
A derivative is an instrument which is settled at a Future Rate only.
The Value of this instrument gets derived from the change of the Interest Rates & Foreign Exchange Rates
In India, a Derivative can be traded in exchanges only.
Which among the above statements is / are correct?
Answer: Only 2
Notes:
- A derivative is an instrument which is settled at a Future Rate only: This statement is incorrect. A derivative is a contract between two or more parties which derives its value from an underlying asset. The settlement of a derivative contract can happen immediately or at a future date. Hence, it is not always settled at a future date.
- The Value of this instrument gets derived from the change of the Interest Rates & Foreign Exchange Rates: This statement is correct. Derivatives derive their value from changes in interest rates, foreign exchange rates, equity prices and commodity prices. The underlying variables can be one or more of these.
- In India, a Derivative can be traded in exchanges only: This statement is incorrect. In India, derivatives are traded on stock exchanges such as NSE, BSE as well as Over-The-Counter (OTC) markets. OTC derivatives are specifically designed contracts traded independently between two parties without going through an exchange.
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