ITM-SIA (Mumbai) - Finance Group Chirag Purohit Diwanshu Sharma, Kalian Srinivasan, Kuber Mahajan, Navnath Pawar.

1. DERIVATIVES
GROUP MEMBERS
• Chirag Purohit
• Diwanshu Sharma
• Kalian Srinivasan
• Kuber Mahajan
• Navnath Pawar
Group D, Finance 12-14, ITM SIA Business School

2. DERIVATIVE DEFINITION :-
A Derivatives are agreements that derive their values on the
basis of some asset called underlying asset.
BASICS:-
Derivative is a contract between two parties that specify
conditions (especially the dates, resulting values & definitions of
the underlying variables, the parties contractual obligations & the
notional amt.) under which payments are to be made between the
parties.
Group D, Finance 12-14, ITM SIA Business School

3. USES OF DERIVATIVES
Hedging:- Hedger are those who enter into derivative contract with
objective of converting risk. Hedging is the practice of taking a position
in one market to offset and balance against the risk adopted by
assuming a position in a contrary or opposing market or investment.
Speculation:- Speculators are those who enter into a derivative contract
to make profit by assuming risk. Speculation is the practice of engaging
in risky financial transactions in an attempt to profit from short or
medium term fluctuations in the market value of a tradable good such
as a financial instrument, rather than attempting to profit from the
underlying financial attributes embodied in the instrument such as
capital gains, interest, or dividends.
Arbitrage:- Arbitrageurs perform the function of making the prices in
different markets converge and be in tandem with each other. They are
conservative in nature and take riskless position and yet earn profit
Group D, Finance 12-14, ITM SIA Business School

4. TYPES OF DERIVATIVES
OVER THE COUNTER DERIVATIVE (OTC)
• Where the contract is directly entered between two mutually
consenting parties with a matching needs that are known to each other
are called Over-The- Counter (OTC) products
• These contracts are customized to requirement of counterparties and
are normally settled by delivery of underlying assets.
• Forward and Swaps are example of OTC derivatives.
• OTC products give rise to another risk called counterparty risk
concerned with failure of one of the parties to the contract to honour
the obligation undertaken.
Group D, Finance 12-14, ITM SIA Business School

5. EXCHANGE TRADED DERRIVATES (ETD)
• Exchange Traded Derivatives are those derivatives instruments that
are traded via specialized derivatives exchanges or other exchanges
• A derivatives exchange acts as an intermediary to all related
transactions, and takes initial margin from both sides of the trade to
act as a guarantee.
• Exchange traded derivatives are free from counterparty risk.
• They are standard products whose specification and characteristic of
underlying assets is designed by the exchange authorities.
Group D, Finance 12-14, ITM SIA Business School

6. TYPES OF DERIVATIVE CONTRACTS
FORWARD CONTRACT :-
A tailored contract between two parties, where payment takes place at a
specific time in the future at today's pre-determined price. It is a non-
standardised contract not regulated by stock exchange.
FUTURES :-
Future contracts are contracts to buy or sell an asset on or before a future
date at a price specified today. It is a standard contract regulated by stock
exchange.
OPTIONS :-
Options are contracts that give the owner the right, but not the obligation,
to buy (in the case of a call option) or sell (in the case of a put option) an
asset. The price at which the sale takes place is known as the strike price,
and is specified at the time the parties enter into the option.
Group D, Finance 12-14, ITM SIA Business School

7. WARRANTS :-
Apart from the commonly used short-dated options which have a
maximum maturity period of 1 year, there exists certain long-dated
options as well, known as Warrant (finance). These are generally traded
over-the-counter.
SWAPS :-
Swaps are contracts to exchange cash (flows) on or before a specified
future date based on the underlying value of currencies exchange rates,
bonds/interest rates, commodities exchange, stocks or other assets.
Group D, Finance 12-14, ITM SIA Business School

8. FUTURE CONTRACTS :-
FUTURE CONTRACT (more colloquially, futures) is a
standardized contract between two parties to buy or sell a specified asset
of standardized quantity and quality for a price agreed upon today
(the or strike price) with delivery and payment occurring at a specified
future date.
While the futures contract specifies a trade taking place in the future, the
purpose of the futures exchange institution is to act as intermediary and
minimize the risk of default by either party. Thus the exchange requires
both parties to put up an initial amount of cash, the margin. Additionally,
since the futures price will generally change daily, the difference in the prior
agreed-upon price and the daily futures price is settled daily also (variation
margin). The exchange will draw money out of one party's margin account
and put it into the other's so that each party has the appropriate daily loss
or profit.
Group D, Finance 12-14, ITM SIA Business School

9. TYPES OF FUTURE CONTRACTS
LONG POSITION (BULLISH VIEW) :-
The long futures position is an unlimited profit, unlimited risk position
that can be entered by the futures speculator to profit from a rise in the
price of the underlying
SHORT POSITION (BEARISH VIEW) :-
The short futures position is an unlimited profit, unlimited risk position
that can be entered by the futures speculator to profit from a fall in the
price of the underlying
Group D, Finance 12-14, ITM SIA Business School

10. FUTURE CONTRACTS
Future contract is a standardized contract between 2 parties where the
seller agrees to sell the asset to the buyer at a specified future for a price
which is agreed upon today
Future contracts are available for fixed tenure of 1 2 or 3 months.
The Future contracts expire on the last Thursday of every month
The underlying asset or instrument, this could be anything from a barrel
of crude oil to a short term interest rate.
A initial margin of 15% is required to be deposited with broker to enter
into a future contract
Group D, Finance 12-14, ITM SIA Business School

11. SETTLEMENTS OF FUTURE CONTRACTS
PHYSICAL DELIVERY :- The amount specified of the underlying asset of the
contract is delivered by the seller of the contract to the exchange, and by the
exchange to the buyers of the contract. They can pay, either by:-
 Cash for long position or
 Deliver shares for short position
CASH SETTLEMENT :- A cash payment is made based on the underlying
reference rate or the closing value of a stock market index. The parties
settle by paying/receiving the loss/gain related to the contract in cash
when the contract expires.
OFFSET :- The investor can take short position to close the long position
and vice-versa. For ex., He took long position but sold it in the middle i.e.
taking short position
Group D, Finance 12-14, ITM SIA Business School

12. Group D, Finance 12-14, ITM SIA Business School
Merci...