What is Derivative

Derivative is a product whose value is derived from 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 a 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-
1. A security derived from a debt instrument, share, loan whether secured or unsecured, risk instrument or contract for differences or any other form of security.
2. A contract which derives its value from the prices, or index of prices, of underlying securities.
DERIVATIVE PRODUCTS
Derivative contracts have several variants. The most common variants are forwards, futures, options and swaps. We take a brief look at various derivatives contracts that have come to be used.
Forwards: A forward contract is a customized contract between two entities, where settlement takes place on a specific date in the future at today's pre-agreed price.
Futures: A futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. Futures contracts are special types of forward contracts in the sense that the former are standardized exchange-traded contracts.
Options: Options are of two types - calls and puts. Calls give the buyer the right but not the obligation to buy a given quantity of the underlying asset, at a given price on or before a given future date. Puts give the buyer the right, but not the obligation to sell a given quantity of the underlying asset at a given price on or before a given date.
Warrants: Options generally have lives of upto one year, the majority of options traded on options exchanges having a maximum maturity of nine months. Longer-dated options are called warrants and are generally traded over-the-counter.
LEAPS: The acronym LEAPS means Long-Term Equity Anticipation Securities. These are options having a maturity of upto three years.
Baskets: Basket options are options on portfolios of underlying assets. The underlying asset is usually a moving average of a basket of assets. Equity index options are a form of basket options.
Swaps: Swaps are private agreements between two parties to exchange cash flows in the future according to a prearranged formula. They can be regarded as portfolios of forward contracts. The two commonly used swaps are:
Interest rate swaps: These entail swapping only the interest related cash flows between the parties in the same currency.
Currency swaps: These entail swapping both principal and interest between the parties, with the cash flows in one direction being in a different currency than those in the opposite direction.
Swaptions: Swaptions are options to buy or sell a swap that will become operative at the expiry of the options. Thus a swaption is an option on a forward swap. Rather than have calls and puts, the swaptions market has receiver swaptions and payer swaptions. A receiver swaption is an option to receive fixed and pay floating. A payer swaption is an option to pay fixed and receive floating.

Risk Minimisation of portfolio........

Taking in to account the past market conditions, each and every individual who was dealing with stock market was very worried . Investor might have invested his savings in the stock market either directly or indirectly.His objective was to minimise his own portfolio risk. Now the qusetions come that " how an individual could minimise his own portfolio risk.
Diversification is the way by which you can minimise your portfolio risk. Investors portfolio has to be diversified. Rather than investing his entire savings in a single company, he must invest small small amounts in different different sectors. One can not predict/forecast future market conditions. So in case rate of return is not as good as you would have wished it may be compensated by heavy profits in some different sector. Your loss can not be compensated untill and unless you have diversified your portfolio. So one must put in his money in different sectors such as IT Sector, Telecom Sector, Pharma Sector , Real Estate Sector etc in order to minimise the portfolio risk.
In case you are investing indirestly in the stock market such as insurance sector, here again one must be acting as aFund Manager. Rather than putting in entire money in one fund say Equity Fund, one must ensure proper debt equity ratio. Taking in to consideration good market conditons no doubt you may put your bulk savings in Equity fund but at the same time must ensure certain savings in debt fund just to secure your money.in this case your ratio may be 85:15 . As soon market conditions get worst you must understand the neccesity of Switching. Switching is just transfering of your money from one fund to another. in this case you must switch from equity fund to debt fund immideately so that your 85% money do not get affected by those adverse market conditions. IIn this case your debt -equity ratio may be 10:90.Again as soon market gets better switch again i.e from debt fund to equity by ensuring some proper debt - equity ratio.Debt funds comprises of many funds such as Protector, preserver etc. Similarly Equity fund comprises of Multiplier, Rich, Balancer, Flexi Growth, etc.Different funda are associated with different NAV which fluctuate in the stock market on daily basis. Again by seeing fund performance of various funds you can mamange your own portfolio and hense can minimise the risk by the way of switching at right time.Thus we can say the way to minimize the portfolio risk is to diversify the portfolio.