There are two types of derivatives instruments traded on NSE; namely Futures and Options :
Futures : A futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. All the futures contracts are settled in cash at NSE.
Options : An Option is a contract which gives the right, but not an obligation, to buy or sell the underlying at a stated date and at a stated price. While a buyer of an option pays the premium and buys the right to exercise his option, the writer of an option is the one who receives the option premium and therefore obliged to sell/buy the asset if the buyer exercises it on him. Options are of two types - Calls and Puts options : “Calls” give the buyer the right but not the obligation to buy a given quantity of the underlying asset, at a given price on or before a given future date. “Puts” give the buyer the right, but not the obligation to sell a given quantity of underlying asset at a given price on or before a given future date. All the options contracts are settled in cash. Further the Options are classifi ed based on type of exercise. At present the Exercise style can be European or American.
American Option - American options are options contracts that can be exercised at any time upto the expiration date. Options on individual securities available at NSE are American type of options.
European Options - European options are options that can be exercised only on the expiration date. All index options traded at NSE are European Options. Options contracts like futures are Cash settled at NSE.

Yes. Margins are computed and collected on-line, real time on a portfolio basis at the client level. Members are required to collect the margin upfront from the client & report the same to the Exchange.

All the Futures and Options contracts are settled in cash on a daily basis and at the expiry or exercise of the respective contracts as the case may be. Clients/Trading Members are not required to hold any stock of the underlying for dealing in the Futures / Options market. All out of the money and at the money option contracts of the near month maturity expire worthless on the expiration date.

Investors must understand that investment in derivatives has an element of risk and is generally not an appropriate avenue for someone of limited resources/ limited investment and / or trading experience and low risk tolerance. An investor should therefore carefully consider whether such trading is suitable for him or her in the light of his or her fi nancial condition. An investor must accept that there can be no guarantee of profi ts or no exception from losses while executing orders for purchase and / or sale of derivative contracts, Investors who trade in derivatives at the Exchange are advised to carefully read the Model Risk Disclosure Document and the details contained therein. This document is given by the broker to his clients and must be read, the implications understood and signed by the investor. The document clearly states the risks associated with trading in derivatives and advises investors to bear utmost caution before entering into the markets.

Futures and Options contracts have a maximum of 3-month trading cycle -the near month (one), the next month (two) and the far month (three), except for the Long dated Options contracts. New contracts are introduced on the trading day following the expiry of the near month contracts. The new contracts are introduced for a three month duration. This way, at any point in time, there will be 3 contracts available for trading in the market (for each security) i.e., one near month, one mid month and one far month duration respectively. For example on January 26,2008 there would be three month contracts i.e. Contracts expiring on January 31,2008, February 28, 2008 and March 27, 2008. On expiration date i.e January 31,2008, new contracts having maturity of April 24,2008 would be introduced for trading.

Derivatives, such as futures or options, are financial contracts which derive their value from a spot price, which is called the “underlying”. For example, wheat farmers may wish to enter into a contract to sell their harvest at a future date to eliminate the risk of a change in prices by that date. Such a transaction would take place through a forward or futures market. This market is the “derivatives market”, and the prices of this market would be driven by the spot market price of wheat which is the “underlying”. The term “contracts” is often applied to denote the specific traded instrument, whether it is a derivative contract in wheat, gold or equity shares. The world over, derivatives are a key part of the fi nancial system. The most important contract types are futures and options, and the most important underlying markets are equity, treasury bills, commodities, foreign exchange, real estate etc.

In a forward contract, two parties agree to do a trade at some future date, at a stated price and quantity. No money changes hands at the time the deal is signed.

Futures markets were designed to solve all the three problems (listed in Question 4) of forward markets. Futures markets are exactly like forward markets in terms of basic economics. However, contracts are standardised and trading is centralized (on a stock exchange). There is no counterparty risk (thanks to the institution of a clearing corporation which becomes counterparty to both sides of each transaction and guarantees the trade). In futures markets, unlike in forward markets, increasing the time to expiration does not increase the counter party risk. Futures markets are highly liquid as compared to the forward markets.