neha singhi, arihant, derivatives

1. Derivatives Basic Concept Arihant Bhansali Neha Singhi & Company Mob+919831407321 Email: arihant@nehasinghi.com

3. Expansion- Variety of financial instruments vis-a-vis Scale of operations

4. Derivatives-a financial product becoming increasingly popular

5. Exchange traded financial derivatives were introduced in India in June 2000 at the two major stock exchanges, NSE and BSE

7. The value of derivative is linked to risk or volatility in either financial asset, transaction, market rate, or contingency, and creates a product

8. Underlying Assets T-Bill Interest Rates Index & Bonds Foreign Exchange Rate Crude Oil Precious Metals Agri Commodities Stocks

10. No compulsory physical trading of underlying assets

11. All transactions in derivatives take place in future specific date

12. Hedging Device-Reduces risk

13. Derivatives has low transaction cost

14. Derivatives are often leveraged, such that a small movement in the underlying value can cause a large difference in the value of the derivative.

15. Types of Derivatives Contract Derivatives Contract Forwards Futures Swaps Options

18. Futures contracts detail the quality and quantity of the underlying asset; they are standardized to facilitate trading on a futures exchange.

19. Some futures contracts may call for physical delivery of the asset, while others are settled in cash. The futures markets are characterized by the ability to use very high leverage relative to stock markets.

20. Some of the most popular assets on which futures contracts are available are equity stocks, indices, commodities and currency.

22. They can be regarded as portfolio of forward contracts.

23. The two commonly used Swaps are- i) Interest Rate Swaps: - A interest rate swap entails swapping only the interest related cash flows between the parties in the same currency. ii) Currency Swaps: - A currency swap is a foreign exchange agreement between two parties to exchange a given amount of one currency for another and after a specified period of time, to give back the original amount swapped.

25. No standardization

26. No centralized trading

27. Options… The owner of the option has option to sell or buy assets at a given price on or before given date . Options Put Option Call Option A right to sell the underlying assets , not a obligation A right to buy the underlying assets , not a obligation

28. American Option An option that may be exercised on any trading day on or before expiry . European Option An option that may only be exercised on expiry date

34. Future price- the price at which the future contracts trades in future markets.

35. Strike price- the price specified in the option contract

36. Expiry date- the date specified in future and option contracts.

37. Contract size- the amount of assets that has to be delivered under one contract.

38. Basis= Future price- Spot Price

39. Initial Margin- the amount that must be deposited at the future contract is first entered into.

40. Marking to market

41. Maintenance Margin- A set minimum margin per outstanding future contract that a customer must maintain in his margin account

43. In 1952 the government banned cash settlement and option trading.

44. In 1995 a prohibition on trading options was lifted.

45. In 1996, NSE sent a proposal to SEBI for listing exchange traded derivatives.

46. In 1999, the Securities Contract (Regulation) Act of 1956 was amended and derivatives could be declared “securities”.

47. Index future were introduced in June 2000 and Index option in 2001.

48. NSE started trade in future and option by 2005

49. Business Growth in Derivatives segment in NSE

51. Financial Institution contribution to NSE trade being less than 8% in October 2005

52. Banks use derivatives on interest rates and currencies to manage credit risk

53. Non financial institution are regulated differently from financial institution, and this affects their incentives to use derivatives

55. Retail Investor are familiar with “BADLA” trade which shared some features of derivatives trading.

56. Retails Investor also dominate the market of commodity derivatives for their long-standing expertise in trading .

59. Minimum 50 members

61. All members to inspected.

62. Exchange to provide the full details of proposed contract.

63. Trading days and hours to be stipulated in advance.

65. Minimum deposit Rs. 50 Lakhs

66. Registration with SEBI in addition to registration with exchange .

67. Brokers and dealers to pass a certification programme .

69. Collection of margins before trading hours next days from all clients

70. Initial margin to be based on 99% value at Risk

71. Liquid net worth shall be 50 Lac.

72. Initial margin applicable to total gross open position.

73. Trading software would provide volatility information on real-time basis.

75. Quality of Markets

76. Fairness and transparency

77. Innovation

78. Safeguards of investors money

79. Market integrity