FUTURES AND OPTIONS AS A RISK MANAGEMENT TOOL

Abstract

Derivatives market is an innovation to cash market. Approximately its daily turnover reaches to the equal stage of cash market. The average daily turnover of the NSE derivative segments. In cash market the profit/loss of the investor depends on the market price of the underlying asset. The investor may incur huge profits or he may incur huge losses. But in derivatives segment the investor enjoys huge profits with limited downside. In cash market the investor has to pay the total money, but in derivatives the investor has to pay premiums or margins, which are some percentage of total contract. Derivatives are mostly used for hedging purpose. In derivative segment the profit/loss of the option writer purely depends on the fluctuations of the underlying asset.