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7/25/2019 Derivatives Final 130109113619 Phpapp01

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Ragumoorthy Nehrumoorthy

Presentation by,


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Indian History of Derivatives

The Bombay Cotton trade association started futureTrading in 18!

In 1"!# the government banned cash sett$ement and

%&tion TradingIn 1""! a Prohibition of trading o&tions 'as $ifted

In 1""", the (ecurities Contract )Regu$ation* +ctof 1"! 'as amended and derivatives cou$d be

Dec$ared -securities.

N(/ (tarted trade in future and o&tion by #00!


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+ Derivative is a inancia$ Instrument 'hose

va$ue de&ends on 2 is derived from 2 the va$ue

of some other financia$ instrument, ca$$ed the

under$ying asset3

Derivative is . . . .

The va$ue of derivative is $in4ed to ris4 or vo$ati$ity in

/ither financia$ asset, transaction, mar4et rate, or

contingency, and creates a &roduct


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5nder$ying +ssets(toc4s

Interest Rates

Precious 6eta$s

+gricu$tura$

Commodities

Crude %i$

Bonds

oreign /7change

Rate

TBi$$


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eatures of Derivatives

Traded on /7change

+$$ Transaction in derivatives ta4e &$ace in future

s&ecific date

Hedging DeviceReduces Ris4

Derivatives are often $everaged, such that a sma$$movement in the under$ying va$ue can cause a

9arge difference in the va$ue of the derivative


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Basic Pur&ose of Derivatives

In Derivative Transactions, one &arty:s $oss is a$'ays

another &arty:s gain

The main &ur&ose of derivatives is to transfer ris4

from one &erson or firm to another, that is, to &rovide

insurance

If a farmer before &$anting can guarantee a certain

&rice he 'i$$ receive, he is more $i4e$y to &$ant

Derivatives im&rove overa$$ &erformance of the

economy


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Ty&es of Derivatives Contract

or'ards ('a&s

%&tions

utures


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utures

+ inancia$ contract ob$igating the buyer to &urchase an

asset, )or the se$$er to se$$ an +sset*, such as a &hysica$

commodity or a financia$ instrument, at a &redetermined

uture date and &rice3

(ome of the most &o&u$ar assets on 'hich futures

Contracts are avai$ab$e are e;uity stoc4s, indices,

Commodities and Currency


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6argin accounts and

mar4ing to mar4et

C$earing Cor&oration re;uires initia$ de&osits in a

margin account

Trac4s dai$y gains and $osses and &osts these to margin

accounts

The contract is sett$ed dai$y basis 'hich is 4no'n as

-Marking to Market


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Practica$


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or'ards

+ for'ard contract is a customi>ed contract bet'een

t'o entities, 'here sett$ement ta4es &$ace as a s&ecific

date in the future at Predetermined &rice

Norma$$y traded outside e7change

or'ards are a$so 4no'n as Private Contracts


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%&tions

The o'ner of the o&tion has o&tion to se$$ or buy assets

at a given &rice on or before given date

American Option European Option

+n o&tion that may be

e7ercised on any tradingDay on or before e7&iry

+n o&tion that may on$y be

e7ercised on e7&iry date


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Im&ortant Conce&ts of %&tion


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%&tions

Ca$$ %&tion 2 a right to buy an asset at a &redetermined&rice )stri4e &rice* on or Before a s&ecific date

If asset &rice is higher than the stri4e &rice

%&tion is in the moneyIf asset &rice is e7act$y at the stri4e &rice

%&tion is at the money

If asset &rice is be$o' the stri4e &rice

%&tion is out of the money

%bvious$y 'ou$d not e7ercise an o&tion that is out of

the money


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%&tions

Put %&tion 2 a right to se$$ and asset at a &redeterminedPrice on or before a s&ecific date

If asset &rice is $o'er than the stri4e &rice

%&tion is in the money

If asset &rice is e7act$y at the stri4e &rice

%&tion is at the money

If asset &rice is higher than the stri4e &rice %&tion is out of the money


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('a&s('a&s are &rivate agreement bet'een t'o &arties to

e7change cash f$o's in the future according to a&rearranged formu$a

They can be regarded as &ortfo$io of for'ard contracts

The two commonly used Swaps are:

i!"nterest #ate Swaps ? + interest rate s'a& entai$s s'a&&ing

on$y the interest re$ated cash f$o's bet'een the &arties in the

same currency3

)ii* $urrency Swaps ? + currency s'a& is a foreign e7change

+greement bet'een t'o &arties to e7change a given amount of

one currency for +nother and after a s&ecified &eriod of time,

to give bac4 the origina$ +mount s'a&&ed3


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Practica$


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Ty&es of Derivatives 6ar4ets

%vertheCounter derivatives ?

Contracts that are traded bet'een t'o &arties direct$y

'ithout going through an e7change

or'ard and ('a& Contracts are %TC derivatives

/7changetraded derivatives ?

Contracts that are traded in derivatives e7changes


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6ar4et P$ayers

Hedgers 2 Transfer of Ris4 com&onent of their &ortfo$io

(&ecu$ators 2 Intentiona$$y ta4ing the ris4 from the

Hedgers in &ursuit of &rofit

+rbitrageurs 2 %&erating in different mar4ets

(imu$taneous$y, in &ursuit of &rofit and e$iminate

mis&ricing


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+ny Auestions


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