In coming days and weeks i will take you through the maze of derivatives trading. This blog will provide you with knowledge from the basics of derivatives to the pricing of options.
Chapter 1
What are Derivatives?
Derivatives as the name suggests "derived from". Simply put it is a product which derives its value from one or more basic variables called underlying asset. This asset can be equity, forex, commodity etc.
To give an example, a wheat farmer in Punjab has sown his crop, but is worried about fluctuations in prices three months from now. This fluctuation in price could be due to weather, overall production etc. So he goes to an agent in mandi. Mutually they agree that the farmer is to sell his wheat crop at INR 1000 per quintal three months from now. This transaction is a form of derivatives.
