Derivative markets in india

Essay by sapangoyalUniversity, Bachelor'sF, March 2004

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For a trade to take place, what you need is two people- one with some goods to sell and the other to buy it. The process of the trade will consist of both these parties expressing their individual interests- one to buy and the other to sell - and then they get into an auction process so as to decide the price. Once there is an agreement on the price, the two shake hands and a transaction is complete. Where multiple buyers and sellers congregate and multiple trades begin to occur, is called a market. There are two ways that a trade can take place. One, the goods are physically exchanged for money (like in a retail shop) or Two, there could be a transaction in a "promise" to deliver the goods at a future point of time for a price agreed upon in the present.

This kind of transaction was the norm where the goods were expected to arrive or be ready for shipment after a while - such as in Crops or commodities that were imported or exported from other lands.

The people dealing in such items would be either the producer of it or a consumer of it. For example, a wheat farmer would be quite interested in ensuring that he gets a good price for his crop - when he is ready with it - from the bread manufacturer (who is the consumer of his product).

In the same fashion, the bread manufacturer is equally interested in tying up good and consistent supply of wheat so that he can produce his goods (i.e. bread) uninterrupted. This need of both parties is met by the formation of the "Forward Market" or a market that deals in the present for value to be settled at some...