How are derivatives different from badla?
Badla is closer to being a facility for borrowing and lending of shares and funds. Borrowing and lending of shares is a functionality which is part of the cash market. The borrower of shares pays a fee for the borrowing. When badla works without a strong marginning system, it generates counterparty risk, the evidence of which is the numerous payments crises which were seen in India. Options are obviously not at all like badla. Futures, in contrast, may seem to be like badla to some. Some of the key differences may be summarised here. Futures markets avoid variability of badla financing charges. Futures markets trade distinctly from the cash market so that each futures prices and cash prices are different things (in contrast with badla, where the cash market and all futures prices are mixed up in one price). Futures markets lack counterparty risk through the institution of the clearinghouse which guarantees the trade coupled with marginning, and this elimination of risk eliminates the r
