NATIONAL INSTITUTE OF SECURITIES MARKETS 
                                                    
                          SCHOOL FOR SECURITIES EDUCATION 
                             EQUITY DERIVATIVES 
                                Frequently Asked Questions (FAQs) 
                       Authors: 
                        
                       NISM PGDM 2019-21 Batch Students: 
                       Abhilash Rathod        Akash Sherry           Akhilesh Krishnan 
                       Devansh Sharma         Jyotsna Gupta          Malaya Mohapatra 
                       Prahlad Arora          Rajesh Gouda           Rujuta Tamhankar 
                       Shreya Iyer            Shubham Gurtu          Vansh Agarwal 
                        
                       Faculty Guide: Ritesh Nandwani, Program Director, PGDM, NISM 
                                         Table of Contents 
                                                        
                                                        
                   Sr.                     Topic                      Question     Page No 
                  No.                                                 Numbers 
                    1           Introduction to Derivatives              1-16          2 
                    2       Understanding Futures & Forwards            17-42          9 
                    3             Understanding Options                 43-66         20 
                    4                Option Properties                  66-90         29 
                    5           Options Pricing & Valuation             91-95         39 
                    6             Derivatives Applications             96-125         44 
                    7           Options Trading Strategies             126-271        53 
                    8      Risks involved in Derivatives trading       272-282        86 
                    9         Trading, Margin requirements &           283-329        90 
                                  Position Limits in India 
                   10          Clearing & Settlement in India          330-345        105 
                            Annexures : Key Statistics & Trends           -           113 
                                                        
                                                        
                                                        
                                                        
                                                        
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                       I. INTRODUCTION TO DERIVATIVES 
             
            1.  What are Derivatives? 
            Ans. A Derivative is a financial instrument whose value is derived from the value of an 
            underlying asset. The underlying asset can be equity shares or index, precious metals, 
            commodities, currencies, interest rates etc. A derivative instrument does not have any 
            independent value. Its value is always dependent on the underlying assets. Derivatives can 
            be used either to minimize risk (hedging) or assume risk with the expectation of some 
            positive pay-off or reward (speculation). 
               
            2.  What are some common types of Derivatives? 
            Ans. The following are some common types of derivatives: 
              a)  Forwards 
              b)  Futures 
              c)  Options 
              d)  Swaps 
             
            3.  What is Forward? 
            A forward is a contractual agreement between two parties to buy/sell an underlying asset 
            at a future date for a particular price that is pre‐decided on the date of contract. Both the 
            contracting parties are committed and are obliged to honour the transaction irrespective of 
            price of the underlying asset at the time of delivery. Since forwards are negotiated between 
            two parties, the terms and conditions of contracts are customized. Forwards contracts are 
            negotiated bilaterally between two parties in Over the counter (OTC) markets and are not 
            traded on the Stock Exchange.  
             
            4.  What are Futures? 
            A futures contract is similar to a forward, except that the deal is made through an organized 
            and regulated stock exchange rather than being negotiated directly between two parties.  
            Forwards and Futures contracts are discussed in detail in Part II of the document 
               
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                     5.  What are Options? 
                     An Option is a contract that gives the right, but not an obligation, to buy or sell the 
                     underlying on or before a stated date and at a stated price. While buyer of option pays the 
                     premium and buys the right so write off the contract at any time whereas the writer/seller 
                     of option receives the premium with an obligation to sell/ buy the underlying asset, if the 
                     buyer exercises his right. 
                      
                     6.  What are the types of Options? 
                     There are two types of Options, Call Options and Put Options 
                     A call option gives, the holder, the right to buy a specified quantity of the underlying asset 
                     at the strike price on a predetermined date. 
                     A put option, on the other hand, gives, the holder, the right to buy a specified quantity of 
                     the underlying asset at the strike price on a predetermined date.  
                     Options are discussed in detail in Part III of the document 
                      
                     7.  What are various underlying asset classes on which Derivatives contracts exist? 
                     Ans.  The  following  are  some  popular  underlying  asset  classes  on  which  Derivatives 
                     contracts exist: 
                            Equity 
                            Commodities 
                            Interest rates 
                            Currencies 
                                                       Popular Derivatives Contracts 
                                                                                                       
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