What are derivatives? How does financial derivatives different from commodity derivatives?
Derivative is a product whose value is derived form the value of one or more basic variables, called bases (underlying asset, index, or reference rate), in a contractual manner. The underlying asset can be equity, Forex, commodity or any other asset. For example, wheat farmers may wish to sell their harvest at a future date to eliminate the risk of change in prices by that date. Such a transaction is an example of a derivative. The price of this derivative is driven by the spot price of wheat which is the underlying. In the Indian context the securities contracts (regulation) act, 1956(SC(R) A) defines derivative to include A security derived from a debt instrument, share, and loan whether secured or unsecured, risk instrument or contract for differences or and other form of security. A contract, which derives its value from the prices, or index of prices, of underlying securities. Difference between commodity and financial derivatives: The basic concept of a derivative contract remain
