The Hindu Business Line : Beware of these risks and more

THE National Stock Exchange of India Ltd (NSEIL) has not passed the merits of participating in this trading segment nor has NSEIL passed the adequacy or accuracy of this disclosure document. This brief statement does not disclose all of the risks and other significant aspects of trading. In light of the risks, you should undertake such transactions only if you understand the nature of the contracts (and contractual relationships) into which you are entering and the extent of your exposure to risk. Risk of loss in trading in derivatives can be substantial.

Risks involved in trading in derivatives contracts.

Effect of `Leverage' or `Gearing': The amount of margin is small relative to the value of the derivatives contract so the transactions are `leveraged' or `geared'. Derivatives trading, which is conducted with a relatively small amount of margin, provides the possibility of great profit or loss in comparison with the principal investment amount.

But transactions in derivatives carry a high degree of risk.

You should, therefore, completely understand the following statements before actually trading in derivatives and also trade with caution while taking into account one's circumstances, and financial resources.

Futures trading involves daily settlement of all positions. Every day the open positions are marked-to-market based on the closing level of the index. If the index has moved against you, you will be required to deposit the amount of loss (notional) resulting from such movement. This margin will have to be paid within a stipulated time frame, generally before commencement of trading next day.

If you fail to deposit the additional margin by the deadline or if an outstanding debt occurs in your account, the broker/member may liquidate a part of or the whole position or substitute securities. In this case, you will be liable for any losses incurred due to such close-outs.

Under certain market conditions, an investor may find it difficult or impossible to execute transactions. For example, this situation can occur due to factors such as illiquidity i.e. when there are insufficient bids or offers or suspension of trading due to price limit or circuit breakers.

In order to maintain market stability, the following steps may be adopted: Changes in the margin rate, increases in the cash margin rate or others. These new measures may be applied to the existing open interests. In such conditions, you will be required to put up additional margins or reduce your positions.

You must ask your broker to provide the full details of the derivatives contracts you plan to trade i.e. the contract specifications and the associated obligations.

Source: The Risk Disclosure Document of the National Stock Exchange of India (www.nseindia.co.in)

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