derivatives final 130109113619 phpapp01
TRANSCRIPT
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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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