An Exchange-Traded Derivative or ETD is a financial contract listed and traded on an exchange such as the National Stock Exchange or the Bombay Stock Exchange. These Derivatives are overseen by regulators and have various advantages over the Over the Counter (OTC) derivatives because of the liquidity, standardisation, and no default risk.
But what areExchange-Traded Derivatives?How are they traded in the market?
Like Derivatives, ETDs can beOptions, Futures, or other financial contracts listed and traded on exchanges. These Derivatives are well-suited for retail investors, unlike their OTC counterparts. While OTC Derivatives are complex, ETDs, are not so. ETDs work by standardisation. Every exchange has standard terms and specifications for every ETD contract, making it easy for the investors to figure out how many contracts are bought and sold.
Plus, the size of such contracts is not overwhelming for retail investors either, which is a big plus. The Derivatives Marketis where every transaction happens. This is where investors effectively become buyers for every seller and sellers for every buyer. This, in turn, reduces the risk of default. The gains and losses on every ETD contract are calculated every trading day through the Mark to Market feature.
However, ETDs are not favoured by large institutions because retail investors are attracted to them. Among other reasons, ETDs are transparent, which may not sit well with large institutions that do not want their trade and trading intentions known to anyone else.
Types of ETDs
ETDs have underlying assets like their OTC counterparts. Stocks are the most traded ETDs. These are further divided into Stock Forwards and Options. They are prime Derivatives used to gauge the Stock movements. If you prefer trading in an entire exchange rather than a bunch of stocks, then there are also Index ETDs available. The primary difference between Stock and Index ETD is that stocks are delivered physically, while you cannot expect the same for an Index ETD.
Several commodities or raw materials are also traded as standardised contracts like gold, crude oil, or silver. These Commodity ETDs are traded on the Multi Commodity Exchange of India. Using Currency ETDs, investors can go long and short on Options contracts available for a few currency pairs. Some currency ETDs offered by the NSE are INR vs Euro, INR vs USD, INR vs GBP, and INR vs Yen.
Investors alsotrade real estate as ETDs without buying or selling real estate. However, they are complex instruments, usually handled by investors with solid industry knowledge.
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