What Are Equity Derivatives?
Options and futures are the most commonly traded equity derivatives.
This is a series of explainers to educate and inform new investors. In association with Dun & Bradstreet India as knowledge partner.
Equity Derivatives: Definition, Meaning & Basics
Equity derivatives are derivatives on equity shares of companies as well some indices constituted of equity shares. That means, the derivative instrument derives all or part of its value from the underlying asset.
Options and futures are the most commonly traded derivatives and are traded on the NSE and the BSE. Besides derivatives based on shares of companies, even some indices such as Nifty 50, Sensex and Nifty Bank are traded as separate contracts.
Options give a buyer the right, but not the obligation, to buy or sell the underlying at the strike price. Futures are an obligation for both the buyer and seller. Both help in managing or hedging risks.
For shares of companies to be admitted into the equity derivatives segment there are criteria fixed by the stock exchanges -- such as liquidity of shares, market capitalisation, average delivery value of shares in cash market etc.
Equity derivatives contracts have limited maturity which means they expire periodically. Expiry of equity derivatives ranges from weekly to yearly expiry.
Equity derivatives that are traded on NSE have high volumes and huge liquidity.