Derivatives

Derivatives: Recently, IndusInd Bank reported derivative losses of ₹2,100 crore on March 10, 2025, leading to a 23% decline in its share price.

• About Derivatives: It is a financial contracts whose value depends on an underlying asset, index, or rate.
• Purpose: Used for hedging risks, speculation, and portfolio diversification.
• Common Underlying Assets: Stocks, bonds, commodities, currencies, interest rates, and market indexes.
• Types of Derivatives:

o Futures: It contract to buy/sell an asset at a fixed price on a future date.

ü For example: Commodity traders hedging against price fluctuations.

o Options: It gives the right (but not obligation) to buy (call) or sell (put) an asset at a set price before a deadline.

ü For example: Stock options in equity markets.

o Swaps: It is an agreements to exchange cash flows based on financial metrics.

ü For example: Interest rate swaps to reduce borrowing costs.

o Forwards: It is private agreements (OTC) to buy/sell assets at a future date.

ü For example: Currency forward contracts for importers/exporters.

• About Exchange-Traded Currency Derivatives (ETCDs): It is a standardized contracts that allow investors to speculate on future currency exchange rate movements.

o Feature: Traded on stock exchanges, unlike Over-the-Counter (OTC) derivatives, which are private.