DERIVATIVES - an overview
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The document discusses derivatives such as futures and options. It defines derivatives as products whose value is derived from underlying assets like equity, forex or commodities. Futures and options are described as the main types of derivatives. Futures are traded on organized exchanges while options provide the right but not obligation to buy/sell assets. Derivatives are used for hedging risk or speculative purposes.
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DERIVATIVES - an overview
- 1. Presented By:- Ankur Mehrotra Neha Verma Rajiv Bist Arafat Khan Sonal Gupta Tarun Shovpern Yugantar Khanduri
- 2. Derivative is a product whose value is derived from the value of one or more basic variables, called bases (underlying asset, index, or reference rate), in a contractual manner. The underlying asset can be equity, forex, commodity or any other asset. Used for Hedging & Speculation
- 3. FUTURES OPTIONS COMMODITIES
- 4. Futures Forwards Trade on an organized exchange OTC in nature Standardized contract terms Customised contract terms Requires margin payments No margin payment Follows daily settlement Settlement happens at end of period
- 6. The first modern organized futures exchange began in 1710 at the Dojima Rice Exchange in Osaka, Japan Chicago Mercantile Exchange trading more than 70% of its Futures contracts It counts for over 45.5 Billion dollars of nominal trade (over 1 million contracts) every single day in "electronic trading"
- 7. In terms of trading volume, the National Stock Exchange of India in Mumbai is the largest stock futures trading exchange in the world, followed by JSE Limited in Sandton, Gauteng, South Africa .
- 8. Hedgers:- are those who have interest in the underlying commodity of the future contract and aim at eliminating or reducing the financial risk of price changes Speculators :- are those who buy future contracts with the aim of earning profit by speculating market movements.
- 9. TYPES ONE MONTH FUTURE TWO MONTH FUTURE THREE MONTH FUTURE
- 10. Initial Margin The Initial Margin is the sum of money (or collateral) to be deposited by a firm to the clearing corporation to cover possible future loss in the positions (the set of positions held is also called the portfolio) held by a firm. Mark-to-Market The Mark-to-Market Margin (MTM margin) on the other hand is the margin collected to offset losses (if any) that have already been incurred on the positions held by a firm. This is computed as the difference between the cost of the position held and the current market value of that position.
- 11. HDFC FUTURES BUY OPEN HIGH LOW CLOSE 13/2010 1245 1210 1290 1210 1280 14/2010 1280 1320 1260 1310 15/2010 1310 1330 1250 1290
- 12. DISCOUNT PREMIUM
- 13. NIFTY FUTURES STOCK FUTURES
- 14. NIFTY FUTURE OPEN HIGH LOW CLOSE 13/2010 5567 5590 5550 5565 14/2010 5565 5610 5555 5590 15/2010 5590 5620 5575 5610 5500 5520 5540 5560 5580 5600 5620 5640 OPEN HIGH LOW CLOSE rates 13/2010 14/2010 15/2010
- 15. HDFC FUTURES BUY OPEN HIGH LOW CLOSE 13/2010 1245 1210 1290 1210 1280 14/2010 1280 1320 1260 1310 15/2010 1310 1330 1250 1290 1150 1200 1250 1300 1350 BUY OPEN HIGH LOW CLOSE hdfcfuture 13/2010 14/2010 15/2010
- 16. Quiz Q: Futures trading commenced first on ___________. 1. Chicago Board of Trade 3. Chicago Board Options Exchange 2. Chicago Mercantile Exchange 4. London International Financial A: The correct answer is number 1.
- 17. Q: The underlying asset for a derivative contract can be __________. 1. Equity 3. Interest rate 2. Commodities 4. Any of the above A: The correct answer is number 4.
- 18. Q: Derivatives first emerged as ________ products. 1. Speculative 3. Volatility 2. Hedging 4. Risky A: The correct answer is number 2.
- 19. Q: Who are the participants in the derivatives market? 1. Hedgers 3. Arbitrageurs 2. Speculators 4. All of the above A: The correct answer is number 4.
- 20. Q: The first exchange traded financial derivative in India commenced with the trading of ____________. 1. Index futures 3. Stock options 2. Index options 4. Interest rate futures A: The correct answer is number 1.
- 21. Q: Which of the following is not an example of a derivative on security derivative? 1. Index futures 3. Stock futures 2. Index options 4. Interest rate futures A: The correct answer is number 4.
- 22. OPTIONS Particular price Particular asset CONTRACT •Written by seller •Right and not an obligation •Seller collects premium
- 23. Option price/premium: Option price is the price which the option buyer pays to the option seller. It is also referred to as the option premium. Expiration date: The date specified in the options contract is known as the expiration date, the exercise date, the strike date or the maturity. Strike price: The price specified in the options contract is known as the strike price or the exercise price. American options: American options are options that can be exercised at any time upto the expiration date. European options: European options are options that can be exercised only on the expiration date itself.
- 24. •In-the-money option: +ve cf CALL ( exercise price < market price) •At-the-money option: 0 cf strike price = market price •Out-of-the-money option: -ve cf CALL (strike price > market price)
- 25. • Index options: These options have the index as the underlying. In India, they have a European style settlement. Eg. Nifty options, Mini Nifty options etc. Stock options: Stock options are options on individual stocks. A stock option contract gives the holder the right to buy or sell the underlying shares at the specified price. They have an American style settlement.
- 26. CALL OPTION Depends on Stock price and exercise price Symbo l Date Expiry Strike Price Open High Low Close Settle Price Underlying Value NIFTY 16-Sep- 10 30-Sep- 10 5300 564 616.3 532 547.4 547.4 5828.7 NIFTY 17-Sep- 10 30-Sep- 10 5300 589.7 5 620 580 609.4 5 609.45 5884.95 NIFTY 20-Sep- 10 30-Sep- 10 5300 625 702 610.5 5 694.4 694.4 5980.45 NIFTY 21-Sep- 10 30-Sep- 10 5300 710 743.9 5 675.1 709.5 709.5 6009.05 NIFTY 22-Sep- 10 30-Sep- 10 5300 745.9 745.9 657.5 705.0 5 705.05 5991 PREMIUM + ( stock price – strike price) PREMIUM
- 27. E S BUYERSPAYOFF
- 31. Metals Basmatirice Cotton and kapas Raw jute and jute goods Groundnut, rapeseed/mustard seed, cottonseed, sesame seed, sunflower seed, safflower seed, copra and soybean etc. Rice bran oil Castor oil and its oilcake Onions
- 32. Short position long position
- 34. Trading rooms Floor brokers Trading cards Physical Delivery or Dematerialization