derivative in india final
TRANSCRIPT
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DERIVATIVE IN INDIA
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Increased volatility in asset prices
Integration of National &
International Market
Low Transaction Cost of Trading
Development of Risk Management
Tools
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Why Derivatives in India
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Origin
1.• First introduced in Chicago
Board of Trade in 1848 for forward contract in Commodities
2.• Derivative Introduce in
Indian Stock Exchanges in June 2000
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Index FuturesIndex Options
Stock Futures Stock Options
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Derivatives Trading on Exchanges
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Business Growth of F&O Segment in India
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Types of Market
Spot Market
Derivative Market
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Spot Market
Assets Class Delivery
Equity Shares
Commodity Physical
Currency Physical
Immediate Delivery
Immediate Payment
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Derivative Market
Forward Segment
Future Segment
Options Segment
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Forwards
Contact Two Private Parties
Transaction at Expiry Date
(Forward Price)
Physical / Cash
Settlement
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Participants in Forward Contract
Money
Buyer (Who takes a long position)
Seller (Who takes a
short position )
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Future
Contract Between Two Parties
Traded in Recognized Stock Exchange
Future Date
Price Agreed Upon Today
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Participants in Futures Contract
Future Buyer Future Seller
Payment
Sell Contract
Buy Contract
Payment
Clearing Corporation
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Positions in a Futures Contract
• When a person buy a futures contract Long
• When a person sell a futures contract Short
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Difference Between Future & Forward
Forward Future
Nature of Contracts Customized Standardized
Counterparty Any Party Clearing Corporation
Credit Risk Exist No Risk
Liquidity Very Low Very High
Margins Not Required Received / Paid on Daily Basis
Valuation Not Done Daily Basis
Delivery Physical / Cash No Delivery 14
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A contract between two parties
Where Buyer of the option has the right and not obligation to fulfill the contract
Seller is under obligation to fulfill the Contract
Options
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Options
Call Option
Put Option
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Types of Options
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Right to Buy
Call Options
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Right to Sell
Put Options
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Underlying Price Strike Price
Time to Expiration Risk Free Rate
Volatility
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Factors impacting Option Prices
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Derivative Terminology
Lot Size Expiry Date
Contract Size
Spot Price Strike Price
Initial Margin
Mark to Market Margin
Option Premium
Closing Price
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Contact Specification
S. no Terminology Remark Index Future(Nifty)
Index Option (Nifty)
1 Lot Size Minimum Quantity traded in a lot decided by the exchanges
50 50
2 Spot Price Price prevailing in delivery market
5500 5500
3 Future/Strike Price
Price Prevailing in future market/price for which call or put option exercise
5550 5550
4 Option Premium Amount decided by the exchange on the basis of strike price and spot price
100
5 Expiry Date Last Thursday of a month Last Thursday Last Thursday
6 Contract Next Three Month Feb, March, April Feb, March, April21
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Contact SpecificationS. no Terminology Remark Index Future
(Nifty)Index Option
(Nifty)
7 Initial Margin Minimum amount required to make position (Suppose 25% of contract Size)
Rs 69,375(25% of 2,77,500)
Option Premium * Lot Size
Rs 5,000(100*50)
8 Closing Price Closing Price at the end of day
5500
9 Mark to MarketMargin
Difference between Trade price & closing Price (Daily Settled )MTM=(Trade price – closing price)* Lot Size
Pay Rs 2,500
(5550-5500)*50
No MTM as we pay whole amount
Our Expectation is that index rise
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Participant
Hedgers• Insuring an investment
against risk.
Speculators • Who bets on derivatives
markets
Arbitrageurs • Attempt to profit from
pricing inefficiencies
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Play Grounds
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www.nseindia.com
www.bseindia.com
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Important Website
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Particulars Income /Loss from Derivatives
Head “Income from Business & Profession’
Taxed According to the tax slab
Loss from Derivatives Adjusted under all Five Head Profit & Carry Forward to Next Year
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Taxation
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Sr. Taxes Rates Futures Options
Buy 1 Lot of Nifty at 6000 ,Contract Size ( 50shares* 6000) / Buy 6000 call option at 60 Rs premium(50shares*60)
3,00,000 3,000
1Brokerage 0.03 % On Contract
Size/2.5% on Option Premium (Both Side)
90 Rs (0.03% on 3,00,000) 75 Rs (2.5% on 3,000)
2Service Tax 10.36% on Brokerage
Amount(Both Side)
9.32 (10.36% on 90 Rs)
7.77(10.36% on 75 Rs)
3Securities Transaction Tax(STT)
0.017% on Contract Size (Only on Selling Side)
25.50(0.0085% on 3,00,000 Rs)
2.55(0.0085% on 3000Rs)
4Stamp Duty 0.004% on Contract
Size(Both Side)12(0.004% on 3,00,000 Rs) 1.2(0.004% *3,000Rs)
5 Education Cess 2% on Tax Amount 0.93(2% on 9.32+25.50+12) 0.23(2% * 7.77+2.55 +1.2)
6 Higher Edu Cess 1% on Education Cess 0.014 (1% on 0.93) 0.0028 (1% on 0.23)
Total Cost 137.76 86.75
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Cost of Trading in Derivative
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How does One Make Money in A Futures Contract?
• Trade according to the trends• Complete knowledge of Derivatives• Discipline Approach• Keep Stop loss on every trade
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Thank You