In the 19 years since the first edition of this book appeared, much has changed. There was a time when the Western expert consensus was that financial markets should be largely left alone and that derivatives should be regulated as lightly as possible. That has changed after the global financial crisis of 2008. There is now greater caution about the effects of derivatives on the economy.

Derivatives were relatively insignificant in Indian financial markets in 1998 and were just beginning to recover from decades of severe restrictions, imposed at a time when the government pursued a ‘socialistic pattern of society’. Today, India has active derivative markets not only in commodities but also in various financial instruments (so much so that there have been criticisms that equity derivatives trading in India has reached excessive proportions vis-à-vis the cash markets). Meanwhile, the Indian economy too has grown faster than the global average. In short, derivatives are more significant now in Indian markets and Indian markets are more significant in global terms.

Amidst all the changes, one fact remains unchanged: derivatives are an important feature of a modern market economy and are here to stay. They matter not only to developed markets but to emerging markets as well. Therefore, a basic understanding of how these markets work is essential for those who participate in these markets, those who aspire to work in them and those who comment on them, but also for those who seek to study the economy. Students of commerce, business and finance, bankers and accountants, analysts and financial journalists, non-financial economists and managers – all need a basic understanding of the essentials of derivatives markets. Yet, most books on derivatives are geared to specialists and they often take a mathematical approach.

This book aims to enable the general reader – whether student, practitioner, banker, commentator or investor – to gain a basic understanding of the derivatives markets and how they operate. It does not presume any prior knowledge of derivatives. The response to the first edition (which went into nine reprints till 2010) indicated that it succeeded in good measure in attaining that objective. It is the authors’ sincere hope that this edition will do the same.