Don’t miss these things about the Indian derivatives market

The concept of derivatives is said to have originated in 12th-century Europe. The farmers and traders wanted to protect themselves from financial losses. Hence, they would hedge their produce against future price fluctuations. Today, derivatives have evolved into a legitimate type of security, leveraged by investment bankers to generate wealth and mitigate risk.

An example of derivatives can be seen in the film "The Big Short", which is set against the subprime crisis of 2008. Financial companies had developed a housing mortgage product that received a high rating from renowned credit rating agencies. Yet, a few investment bankers designed derivatives that bet against the success of the housing mortgage product. When the housing markets finally crashed, these investment bankers made billions of dollars for their clients and themselves.

In this blog, we understand more about derivatives and how pursuing a derivatives markets course can be a stepping stone for ambitious finance professionals looking to carve a niche in the world of investment banking.

What are derivatives?

Derivatives are essentially financial contracts between two or more market players. The derivative derives its value from an underlying asset or group of assets, which can include securities such as stocks, mutual funds, bonds, money market instruments, and home loan products, to name a few. The players consist of hedgers and speculators.

The hedgers own the assets, and they aim to transfer the future price fluctuation risk. The speculators need not own assets. However, based upon predictions of future price fluctuations of the underlying assets, they take positions in the contracts based on their prediction of how the asset will perform.

Snapshot of derivatives in India

The derivatives market in India has its origins in 1875 when the Bombay Cotton Trading Association engaged in futures trading. This is a type of contract between a buyer and seller with a future expiration date. Derivatives in their contemporary form only kicked off on the Bombay Stock Exchange (BSE) after 2001 and the National Stock Exchange (NSE) in 2000. Today, the following derivatives exist in the Indian financial markets.

Forward contract

This is a customized contract between parties concerning buying or selling an asset at a specified price on a predetermined future date. There is no monetary transaction at the time of creation, and profits and losses are booked only on that future date. Assets can include gold.

Futures contract

This is similar to a forward contract. The main difference is that a futures contract can only be based on stock market exchanges.

Options trading

This type of derivatives contract gives a party a right but not the obligation to buy or sell a specific stock, bond, mutual fund, or another asset at a specific price on a particular date.

Swaps

This type of derivative contract between two parties involves an exchange of cash flows over time. Parties make a profit or loss based on whether a specific financial instrument price rises above or goes below a specific reference point.

Intrigued enough to want to learn about the derivatives market?

Become a derivatives expert

In the banking world, investment bankers continuously study the market and learn how to leverage derivatives to create wealth and mitigate risk for their clients as part of their job roles. If you want to be a part of this dynamic world, then pursue an investment banking course with placement opportunities. Here's my advice on choosing the right program:

Always go for a program that comes with a legitimate certification. Recruiters have limited time to go through various resumes and online profiles. However, a certification grabs their attention instantly. For instance, a Euronext Group certification is recognised as a gold standard by the finance industry.

Ensure that the curriculum is up-to-date and aligned with the industry's needs

Live training must be a part of the program. These simulations allow you to translate theoretical concepts into a hands-on engagement.

Last but not least, go for a program with a robust placement framework. Career services, such as resume building and job interview training, come in handy because investment banking is such a specialised field.

In Conclusion

Once you have successfully completed your program and have joined the world of investment banking, you can also go on to pioneer innovative derivative products. Success in the world of investment banking not only comes with adequate compensation but recognition for your innovative ideas and opportunities for fast career growth up the corporate ladder.

To know about Imarticus’ Certified Investment Banking Operations Professional, contact us through chat support, or drive to our training centres in Mumbai, Thane, Pune, Chennai, Bengaluru, Delhi, Gurgaon, or Ahmedabad.