Derivatives: what they are
Contracts that take their value from something else: what they do, how margin works, what SEBI found
SEBI study figures for FY 2025-26, published August 2026; rules as on 12 October 2026
Verified 12 October 2026
For training and education only. Not investment advice.
Trainer notes
Say this at the start: Trustner is a mutual fund distributor. We do not distribute or recommend derivative trading. This deck exists so that staff understand the words, can explain how a mutual fund uses derivatives, and can answer a client who asks about futures and options with facts.
A derivative is a contract whose value comes from the price of something else.
That something else is called the underlying. It can be a share, an index, a currency, a commodity or an interest rate. The price is agreed today; the contract is settled later.
Trainer notes
The word 'derivative' means 'derived from'. A contract does not make its holder the owner of the underlying; that can happen only at settlement, by delivery, as with stock derivatives.
Four kinds of contract
Forward
A private agreement to buy or sell something on a future date at a price fixed today. It is not traded on an exchange.
Future
A forward in a standard size, traded on an exchange. A clearing corporation stands between the buyer and the seller.
Option
A right, but not a duty, to buy (a call) or to sell (a put) at a set price. The buyer pays a premium for that right.
Swap
An agreement to exchange one stream of payments for another, such as a fixed interest rate for a floating one.
Trainer notes
Futures and options on shares and indices are what people mean by 'F&O'. Forwards and most swaps are arranged directly between two parties, usually with a bank on one side. The person who sells an option receives the premium and takes on the duty the buyer does not have.
Hedging: an exporter fixes her rupees
THE SET-UP
An invented garment exporter will be paid US$ 1,00,000 three months from now.
She agrees a forward with her bank: she will sell the dollars at ₹90 each on that day. The rate is assumed.
- With the forward she will receive 1,00,000 × ₹90 = ₹90,00,000, whatever the dollar is worth on the day.
- If the dollar is at ₹87 on the day, she would have received ₹87,00,000 unhedged. The forward leaves her ₹3,00,000 better off.
- If the dollar is at ₹93 on the day, she would have received ₹93,00,000 unhedged. The forward leaves her ₹3,00,000 worse off.
- In both cases she receives ₹90,00,000. She gave up the possible gain to remove the possible loss.
Result: A hedge does not aim to make money. It fixes an outcome that was uncertain.
Illustration with an invented exporter and assumed exchange rates. Not a view on the rupee.
Trainer notes
Ask the room whether she 'lost' ₹3,00,000 in the third step. She did not: she got exactly what she planned for. She already had the dollar risk from her business. The forward cancelled it. Bank charges are ignored here.
Three reasons people use them
| Use | What the person does | What happens to risk |
|---|---|---|
| Hedging | Already has an exposure and takes the opposite position in a derivative. The exporter on the previous slide is a hedger. | An existing risk is reduced. Some possible gain is given up in return. |
| Speculation | Has nothing to protect. Takes a position because of a view on where the price will go. | A new risk is taken on. The result depends on being right, and on being right in time. |
| Arbitrage | Buys in one market and sells the same thing in another at the same time, to capture a gap between the two prices. | Little price risk is intended. The gaps are usually small and close quickly. |
The contract is the same in all three. What differs is the position the person already holds.
Trainer notes
A speculator is often the other side of a hedger's trade, so speculation is not useless to the market. The concern, covered later in this deck, is what happens to individuals who speculate. Arbitrage is not free of risk: costs, timing and execution can go wrong.
Cash market and derivatives market
Cash market
- You buy the share itself.
- You pay the full price.
- There is no expiry. You can hold for years.
- The loss cannot exceed what you paid.
Derivatives market
- You enter a contract on a share or an index.
- You deposit a margin, a part of the value.
- Every contract has an expiry date.
- A loss on futures can exceed the margin.
Take-away: An index derivative contract must be worth at least ₹15 lakh when it is introduced (SEBI, 2024).
Source for the contract value: SEBI circular SEBI/HO/MRD/TPD-1/P/CIR/2024/132, 1 Oct 2024, para 5.4.
Trainer notes
Exceptions: a cash-market buyer who borrows to buy can lose more than his own money. An option buyer's loss is limited to the premium paid; an option seller's loss can be many times the premium received. Gains and losses on futures are settled in cash every day ('mark to market'), so a losing position demands more money before expiry.
Margin: a small move, a large result
ONE CONTRACT
An index futures contract is worth ₹16,00,000.
The buyer deposits a margin of 12.5%, which is ₹2,00,000.
All figures are assumed.
- He controls ₹16,00,000 with ₹2,00,000. That is 8 times his money (16,00,000 ÷ 2,00,000).
- The index rises 2%. Gain: 2% of ₹16,00,000 = ₹32,000. On his ₹2,00,000 that is a gain of 16%.
- The index falls 2% instead. Loss: ₹32,000. On his ₹2,00,000 that is a loss of 16%.
- The index falls 15%. Loss: ₹2,40,000. That is his whole margin and ₹40,000 more.
Result: A 2% move became 16% of his money, up or down. Leverage multiplies both.
Illustration with assumed figures. Actual margins are set by the clearing corporation and change with risk.
Trainer notes
Compare with a cash buyer of the same ₹16,00,000 of shares: a 2% move is a 2% gain or loss. A fall of 12.5% equals the whole margin. In practice losses are collected daily, so the buyer is asked for more money, or the position is closed, before that point. Costs and taxes are ignored.
SEBI found: most individual traders lose
| Net losses (₹ lakh crore) | |
|---|---|
| FY22 | 0.41 |
| FY23 | 0.66 |
| FY24 | 0.75 |
| FY25 | 1.12 |
| FY26 | 0.92 |
Equity futures and options
- In FY 2025-26, 87.7% of individual traders made a net loss (90.9% the year before).
- Sample's combined net loss, FY 2025-26: ₹91,685 crore, after transaction costs.
- Average net loss: ₹1.17 lakh a trader. Options made up 92% of the losses.
- Five years, FY22 to FY26: about ₹3.85 lakh crore of net losses.
Source: SEBI, 'Profitability of Individual Traders in the Equity Derivatives Segment (FY25-FY26)', August 2026. Sample: top 15 brokers, about 90% of individual traders.
Trainer notes
Exact figures in ₹ crore: 40,824; 65,747; 74,812; 1,11,788; 91,685. FY26 means April 2025 to March 2026. FY25 is SEBI's revised figure (15 brokers); the July 2025 study gave 1,05,603 (13 brokers). Loss-makers were 90.2%, 91.5% and 91.1% of traders in FY22 to FY24. SEBI's September 2024 study put the figure at about 93% for FY22 to FY24 together. SEBI says the FY26 improvement needs caution, as active traders fell from 106.2 lakh to 87.5 lakh. 'Individual traders' includes HUFs, NRIs and sole proprietorships.
What SEBI changed from late 2024
| Measure | What changed | Date |
|---|---|---|
| Larger contracts | An index derivative contract must be worth at least ₹15 lakh when introduced. The earlier range, ₹5 lakh to ₹10 lakh, was set in 2015. | 20 Nov 2024 (new); NSE 2 Jan 2025 |
| Fewer weekly expiries | Each exchange may offer contracts with a weekly expiry on only one of its benchmark indices. | 20 Nov 2024 |
| Expiry-day margin | An additional 2% margin on options sold that expire that day. Offsetting across expiries is not allowed for contracts expiring that day. | 20 Nov 2024 and 10 Feb 2025 |
| Premium upfront | Brokers must collect the option premium from the buyer upfront. | 10 Feb 2025 |
| Fixed expiry days | Each exchange's equity derivatives expire on one day, Tuesday or Thursday. Apart from one weekly index option, contracts run at least a month. | Circular of 26 May 2025 |
Sources: SEBI circulars SEBI/HO/MRD/TPD-1/P/CIR/2024/132 (1 Oct 2024) and SEBI/HO/MRD/MRD-TPD-1/P/CIR/2025/76 (26 May 2025); SEBI study, Jul 2025.
Trainer notes
Dates are those SEBI's July 2025 study records as applied: the circular set 1 February 2025 for upfront premium and the calendar-spread change; the exchanges applied 10 February 2025. Larger contracts took effect on NSE on 2 January 2025 and BSE on 10 January 2025. Intraday monitoring of position limits was required from 1 April 2025. The 26 May 2025 circular asked exchanges to propose their expiry day by 15 June 2025. A circular of 29 May 2025 changed how open interest and position limits are measured. SEBI's Annual Report 2025-26 lists further steps, such as ending the calendar-spread margin benefit on single-stock derivatives on expiry day. The Government also raised securities transaction tax on equity derivatives from 1 October 2024.
How mutual funds may use derivatives
- 100%
Total exposure cap
Equity, debt and derivative exposure together cannot exceed 100% of net assets. A hedge no larger than its holding is exempt.
- 20%
Options
A scheme cannot write (sell) options, except covered calls on shares it holds. Option premium paid and received is capped at 20% of net assets.
- 65%
Arbitrage funds
They typically buy shares and sell matching futures. At least 65% of assets is in equity and equity-related instruments.
Take-away: Trustner distributes mutual funds. It does not distribute or recommend derivative trading.
Source: SEBI Master Circular for Mutual Funds as on 20 March 2026: paras 8.5.1, 13.15.1, 13.18.1, 13.18.3 and 13.18.6, and the category table for hybrid schemes.
Trainer notes
A scheme's own documents state whether and how it uses derivatives; SEBI requires that disclosure. Covered calls are allowed only on Nifty 50 and Sensex shares and within limits. A hedge is exempt from the cap only if it has the same underlying as the holding and is no larger than it. Specialized Investment Funds have a different rule (unhedged short exposure up to 25%) and are outside this deck. An arbitrage fund's returns are not assured.
Four things people get wrong
Misconception'Derivatives are only for gambling.'
What is trueExporters, importers, producers and funds use them to hedge. The contract is the same; what differs is the use.
Misconception'The margin is the most I can lose.'
What is trueOn futures, and on options sold, the loss can exceed the margin. For an option buyer the loss is limited to the premium paid.
Misconception'Options cost little, so the risk is low.'
What is trueThe whole premium is lost if the option expires worthless. Options made up 92% of individuals' losses in FY 2025-26.
Misconception'An arbitrage fund is a derivatives bet.'
What is trueIt holds shares and sells matching futures, so the two positions largely offset each other. Its returns are still not assured.
Take-away: Trustner does not distribute or recommend derivative trading. This deck explains; it does not coach.
Source: SEBI, 'Profitability of Individual Traders in the Equity Derivatives Segment (FY25-FY26)', August 2026.
Trainer notes
If a client asks about F&O: say that Trustner is a mutual fund distributor and does not distribute or recommend derivative trading; give SEBI's figures with the year and the source; explain leverage with the margin example. Do not suggest strategies, tips, brokers or position sizes.
Check yourself
Question 1: An exporter will receive US$ 50,000 in two months and sells them forward at an assumed ₹90. How many rupees does she receive if the dollar is at ₹86 on the day? At ₹94?
Answer: ₹45,00,000 in both cases (50,000 × ₹90). At ₹86 she is ₹2,00,000 better off than unhedged (₹43,00,000). At ₹94 she is ₹2,00,000 worse off than unhedged (₹47,00,000).Question 2: A futures contract is worth ₹20,00,000 and the margin is an assumed 10%. The price falls 4%. What is the loss in rupees, and as a share of the margin?
Answer: Margin: ₹2,00,000. Loss: 4% of ₹20,00,000 = ₹80,000. That is 40% of the margin (80,000 ÷ 2,00,000).Question 3: In SEBI's August 2026 study, what share of individual traders in equity derivatives made a net loss in FY 2025-26, and what was their combined net loss?
Answer: 87.7% made a net loss. The sample's combined net loss was ₹91,685 crore, after transaction costs.
Sources and disclaimer
Sources for the figures in this explainer
- Losses of individual traders: SEBI, 'Profitability of Individual Traders in the Equity Derivatives Segment (FY25-FY26)', August 2026.
- Earlier findings: SEBI studies of January 2023, September 2024 and July 2025, as summarised in the August 2026 study and in SEBI's July 2025 comparative study.
- Measures: SEBI circulars SEBI/HO/MRD/TPD-1/P/CIR/2024/132 (1 Oct 2024) and SEBI/HO/MRD/MRD-TPD-1/P/CIR/2025/76 (26 May 2025); SEBI Annual Report 2025-26, Chapter 4.
- Mutual funds and derivatives: SEBI Master Circular for Mutual Funds as on 20 March 2026, paragraphs 8.5, 13.15 and 13.18, and the scheme category table.
- The exporter and the futures buyer are invented. Their exchange rates, contract value and margin are assumed for the arithmetic only.
This material is for training and investor education only. It is not investment, tax or legal advice and is not a recommendation to buy, sell or hold any security or scheme. Examples use assumed figures unless a source and date are shown. Mutual fund investments are subject to market risks; read all scheme related documents carefully. Trustner Asset Services Pvt. Ltd. is an AMFI-registered Mutual Fund Distributor (ARN-286886).