derivatives 9

8/8/2019 Derivatives 9

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M arkingM arking toto-- market: Buyers M argin Accountmarket: Buyers M argin AccountDayDay Closing priceClosing price

of gold/gmof gold/gmDaily gainDaily gain(loss)(loss)

CumulativeCumulativegaingain(loss)(loss)

M arginM arginbalancebalance

VariationVariationM arginM argin

Nov1Nov1 400400 -- -- 40004000Nov2Nov2 403403 300300 300300 43004300

33 398398 (500)(500) (200)(200) 3800380044 390390 (800)(800) (1000)(1000) 3000300055 392392 200200 (800)(800) 3200320066 387387 (500)(500) (1300)(1300) 27002700 1300130077 394394 700700 (600)(600) 4700470088 401401 700700 100100 5400540099 405405 400400 500500 58005800

1010 410410 500500 10001000 63006300


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M arkingM arking toto-- market: Sellers M argin Accountmarket: Sellers M argin AccountDayDay Closing priceClosing price

of gold/gmof gold/gmDaily gainDaily gain(loss)(loss)

CumulativeCumulativegaingain(loss)(loss)

M arginM arginbalancebalance

VariationVariationM arginM argin

Nov1Nov1 400400 -- -- 40004000Nov2Nov2 403403 (300)(300) (300)(300) 37003700

33 398398 500500 200200 4200420044 390390 800800 10001000 5000500055 392392 (200)(200) 800800 4800480066 387387 500500 13001300 5300530077 394394 (700)(700) 600600 4600460088 401401 (700)(700) (100)(100) 3900390099 405405 (400)(400) (500)(500) 35003500

1010 410410 (500)(500) (1000)(1000) 30003000


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Closing of futuresClosing of futures

2 methods2 methods Exchange of the asset and the cash on theExchange of the asset and the cash on the

delivery date.delivery date. Cash settlement which is done by enteringCash settlement which is done by entering

into a reverse trade on any day before theinto a reverse trade on any day before thedelivery date.delivery date.


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OptionsOptions

Options are contract which provide theOptions are contract which provide theholder the right to sell or buy a specifiedholder the right to sell or buy a specifiedquantity of an underlying asset at a fixedquantity of an underlying asset at a fixedprice on or before the expiration of theprice on or before the expiration of theoption date.option date.


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Types of optionTypes of option

Call optionCall option provides to the holder a rightprovides to the holder a rightto buy specified assets at specified priceto buy specified assets at specified priceon or before a specified date.on or before a specified date.Put optionPut option provides to the holder a rightprovides to the holder a rightto sell specified assets at specified priceto sell specified assets at specified priceon or before a specified date.on or before a specified date.


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The specified price at which the option canThe specified price at which the option can

be exercised is known as the strike price.be exercised is known as the strike price. In options, the buyer of the option has to buyIn options, the buyer of the option has to buythe right from the seller by paying an optionthe right from the seller by paying an optionpremium.premium.

The premium payable by the buyer( alsoThe premium payable by the buyer( alsocalled the option holder) to the seller( alsocalled the option holder) to the seller( alsocalled the option writer) is a onecalled the option writer) is a one- -time nontime non- -refundable amount for availing the right.refundable amount for availing the right.

In case, the right is not exercised, then theIn case, the right is not exercised, then thepremium is not refunded by the option writer.premium is not refunded by the option writer.


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On the specified date, the actual price of On the specified date, the actual price of the underlying asset may be different fromthe underlying asset may be different fromthe strike price.the strike price.

The difference between the two gives riseThe difference between the two gives riseto the profit opportunities to the optionto the profit opportunities to the optionholder.holder.


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For the call option holder, it is worthwhileFor the call option holder, it is worthwhileto exercise the option only if the actualto exercise the option only if the actualprice of the underlying asset is more thanprice of the underlying asset is more thanthe strike price.the strike price.Eg Strike price Rs.50Eg Strike price Rs.50

Actual price: Rs. 60 Actual price: Rs. 60 Exercise optionExercise option


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For the put option holder it is worthwhile toFor the put option holder it is worthwhile toexercise the option only if the actual priceexercise the option only if the actual pricefall below the strike price.fall below the strike price.

Eg; strike price Rs.50Eg; strike price Rs.50 Actual price: Rs. 45 Actual price: Rs. 45


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Depending on how exercise priceDepending on how exercise pricecompares with the market price, optionscompares with the market price, options

are said to beare said to be at the money or in theat the money or in themoney or out of the money money or out of the money Call option Put optionCall option Put option

At the money At the money E.P = M .P E.P = M .PE.P = M .P E.P = M .PIn the moneyIn the money E.P < M .P E.P > M .PE.P < M .P E.P > M .POut of the moneyOut of the money E.P > M .P E.P < M .PE.P > M .P E.P < M .P


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Option holder has to pay a premium to theOption holder has to pay a premium to theoption writer for availing the right.option writer for availing the right.The monetary risk of the option holder isThe monetary risk of the option holder is

restricted to the option premium paid to therestricted to the option premium paid to theseller, but his possible gains may be unlimitedseller, but his possible gains may be unlimiteddepending upon the difference between thedepending upon the difference between theactual price and the strike price.actual price and the strike price.M

onetary gain of the option writer is limited toM

onetary gain of the option writer is limited tothe extent of the premium received but his lossthe extent of the premium received but his lossis unlimited.is unlimited.


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American and European options: American and European options: In the American option, the option holder canIn the American option, the option holder can

exercise the right to buy or sell, at anytimeexercise the right to buy or sell, at anytimebefore the expiration or on the expiration datebefore the expiration or on the expiration date

In the European option, the right can beIn the European option, the right can be

exercised only on the expiry date and notexercised only on the expiry date and notbefore.before.


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Difference between Futures andDifference between Futures andOptionsOptions

FuturesFutures OptionsOptions1.1. Obligation must beObligation must be

fulfilled by both thefulfilled by both the

parties.parties.2.2. M argin money isM argin money is

requiredrequired3.3. Unlimited profit or lossUnlimited profit or loss

depending upon thedepending upon thespecified price and thespecified price and theactual price on theactual price on thesettlement daysettlement day

1.1. Option holder has theOption holder has theright to exercise or not toright to exercise or not to

exercise his optionexercise his option2.2. Option holder has to payOption holder has to pay

a premiuma premium3.3. Loss of the option holder Loss of the option holder

is restricted to theis restricted to thepremium paid but hispremium paid but hisgains are unlimitedgains are unlimited

derivatives 9

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