What derivatives are - and where Nepal stands
डेरिभेटिभ भनेको के हो? फ्युचर्स र अप्सन्सको सजिलो परिचय
A derivative is a contract whose value comes from something else - a share, an index, gold, oil. Futures and options are the two most common kinds. Before the details, understand why they exist at all.
हाल नेप्सेमा फ्युचर्स र अप्सन्स कारोबार गर्न पाइँदैन। नियामक निकायले भविष्यमा अनुमति दिएमा यो कोर्स तपाईंका लागि विस्तृत गाइड हुनेछ।
A promise about a price
Picture a tea farmer in Ilam. His leaves will be ready in three months, but he's worried the price will fall by then. A tea trader in Birtamod is worried about the opposite - that the price will rise. So today they shake hands: in three months, the farmer sells 1,000 kg to the trader at Rs 400 a kilo, whatever the market price is then.
That handshake is a derivative. It isn't tea - nobody can drink the agreement - but its value comes from (is derived from) the price of tea. If tea is Rs 450 in three months, the trader's promise is worth Rs 50 a kilo to him; if it's Rs 350, the farmer is the one who's glad.
The four kinds you'll hear about
- Forwards - a private agreement to trade later at a fixed price, like the tea handshake. Tailor-made, but you have to trust the other side.
- Futures - the same idea, but standardised and traded on an exchange: fixed sizes, fixed dates, and a clearing house in the middle so you never depend on one stranger keeping his promise. Lesson 2.
- Options - the right, not the obligation, to buy or sell at a fixed price. You pay a fee (the premium) for that choice. Lesson 5.
- Swaps - two parties exchange streams of payments, such as a fixed interest rate for a floating one. Mostly used by banks and companies.
When people say "F&O" they mean exchange-traded futures and options - the kind ordinary investors could trade through a broker, and the subject of this course.
Why derivatives exist at all
- Hedging - reducing risk. The farmer locks in his price. An investor holding NABIL protects against a fall before results.
- Price discovery. Futures prices show what the market expects a price to be later - useful information for everyone.
- Speculation. Someone with no tea at all can bet on the price with a small deposit. Speculators take the other side of hedgers' trades, which is why hedgers can find a partner - but it's also where most of the losses happen.
There's a fourth, quieter job: arbitrage - traders who spot a future priced out of line with the share and trade both until the gap closes. They keep prices honest (lesson 4).
Exchange-traded vs private: why the clearing house matters
A forward depends on the other person paying up. If the tea trader goes bust, the farmer's "locked price" is worthless. Exchange-traded futures and options fix this with a clearing house: it stands between every buyer and seller, collects a deposit (margin) from both, and settles gains and losses every day. You never need to know who is on the other side - which is what makes a market of millions of strangers possible.
Where Nepal stands
Nepal's capital market is evolving every year - online trading, more IPOs, new rules on lending and short selling. When F&O arrives, it will most likely start the way it did elsewhere: index futures first, then stock futures and options on the biggest, most-traded companies. Every NEPSE example in this course is written as if that day had come - with made-up contract sizes - so you can learn the mechanics on names you already know.
The one thing to remember from this lesson
Derivatives move more than the thing they're built on, and they expire. That combination makes them excellent for reducing risk and dangerous for anyone who uses them to take more of it without understanding how. India's regulator found that around nine in ten individual F&O traders lost money - we'll look at why in lesson 10. The rest of this course is about being in the other tenth: the person who understands the tool before using it.
See it live on MacroLens NP
Everything in this lesson, worked out on real NEPSE data for every listed company - inside the MacroLens NP desk.
Lesson summary
- A derivative is a contract whose price comes from an underlying asset - a share, an index, a commodity or a currency.
- Futures are an obligation to buy or sell later at a price fixed today; options are a right, not an obligation.
- They exist for hedging (reducing risk), price discovery and speculation - the same tool can do all three.
- NEPSE has no stock futures or options today; SEBON has the legal power to regulate them but the trading rules are still to be made.
Education only, not investment advice: nothing here tells you to buy or sell any share. Investing carries risk - you can lose money. Examples use made-up companies unless a real one is named.