introduction to derivatives
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TRANSCRIPT
Presented ByFenil Shah
18th June, 2011
Content:IntroductionFactors Driving The Growth Of DerivativesTypes of DerivativesParticipantsUnderlying Asset ClassEconomic functionsBenefitsCriticismDerivatives in India
IntroductionDerivatives are synthetic instruments
They derive value from an underlying asset class
Asset classes range from financial instruments to commodities.
Common underlying theme of derivatives is that they are leveraged products.
Factors Driving The Growth Of DerivativesIncreased volatility.
Increased integration with the international markets.
Development of more sophisticated risk management tools.
Types of Derivatives
Futures/Forwards.OptionsSwapsBasketsSwaptions
Derivative Positions and Participants
Naked open position taking a directional call on the markets
Hedge against underlying asset classArbitrage position within an asset class SpeculatorsHedgersArbitrageurs
Underlying Asset Class
Asset classes: financial which includes currencies and commodities
Financial asset classes: Interest rates, equities and currencies
Commodities range from agricultural commodities to minerals and metals
Economic Functions
Leverage
Speculate & make a profit
Hedge or mitigate risk in the underlying
Obtain exposure to the underlying
BenefitsDerivatives facilitate the buying and selling
of risk.
Helps increasing Buying in the underlying.
Create Liquidity in the Market.
CriticismPossible large losses.
Counter-party risk.
Leverage of an economy's debt.
Derivatives in India
The structured derivative market in India is relatively new (about 10 years old)
However derivatives have caught the fancy of the market and exchange traded equity and commodity derivatives are vibrant.
Equity Derivatives in IndiaNifty index futures are the highest traded
contractsSingle stock futures are actively traded for
arbitrage Nifty index options are also traded activelySingle stock options do not trade actively
Factors to Study in Nifty FuturesOpen interestTraded volumes as % to total derivative
volumesBasis spreadMovement of spreadRoll overs Calendar Spreads
Factors to Study in Nifty OptionsChanges in priceOpen interestImplied VolatilityPut call parity
Factors to Study in Single Stock FuturesOpen interestBasis SpreadCost of carryVolumesTop traded single stock futures