NAGINDAS KHANDWALA COLLEGE

CLASS SYBBI
SUBJECT FINANCIAL MARKETS

TOPIC DERIVATIVES
SUBMITTED TO PROF. ROHAN

NIKITA GAJENDRAGADKAR
AVANI GANDHI

313
314

ISHITA GANDHI
VISHAKHA SHAH

315
346

KRUNAL SHETH
RAKSHA SHETTY

347
348

 Derivatives are an important class of financial

instruments that are central to todays financial and trade Markets.

Financial instruments that are mainly used to protect

against and manage risks

Derivatives are financial contracts that are designed

to create market price exposure to changes in an

underlying commodity, asset or event.

 Examples of derivatives include futures, forwards,

options and swaps, and these can be combined with each other or traditional securities and loans in order to create hybrid instruments or structured securities.
Derivatives market is predominantly a professional

wholesale market with banks, investment firms,

insurance companies and corporate as its main

participants.

A derivative is a contract between a buyer and a seller entered into today . There are two competing segments in the derivatives market: the off-exchange or over-the-counter (OTC) segment and the on-exchange segment. All three prerequisites for a well-functioning market safety, efficiency and innovation are fulfilled in the derivative market.

 Derivatives have played a role in commerce and

finance for thousands of years.

First known instance of derivatives trading dates to

2000 B.C. when merchants, in what is now called Bahrain Island in the Arab Gulf, made consignment

transactions for goods to be sold in India. Derivatives

trading, dating back to the same era, also occurred in Mesopotamia (Swan, 1993).

 A more literary reference comes some 2,350 years

ago from Aristotle who discussed a case of market manipulation through the use of derivatives on olive oil press capacity in Chapter 9 of his Politics.

As of 2003, the world's largest derivative exchange is the Eurex which is an entirely electronic trading "exchange" that is based in Frankfurt, Germany.

 Prices in an organized derivatives market reflect the

perception of market participants about the future and lead the prices of underlying to the perceived future level.
The derivatives market helps to transfer risks from

those who have them but may not like them to those
who have appetite for them.

 Derivatives, due to their inherent nature, are

linked to the underlying cash markets.

Speculative trades shift to a more controlled

environment of derivatives market.

An important incidental benefit that flows from

derivatives trading is that it acts as a catalyst for new entrepreneurial activity.

Derivatives markets help increase savings and

investment in the long run.

 It is an agreement to buy or sell a specified

quantity of an asset at a certain future date for a certain price agreed upon.
They are private contracts. When a forward contract is written, a

specified price is fixed. This price is known as a delivery price.

 Agreement between two counterparties

Specifies quantity and type of the asset to be sold and

purchased Specifies future date at which delivery and payment are to be made Specifies a price which has been determined presently to be paid in the future Obligates the seller to deliver the asset and also obligates the buyer to buy it There can be no money transaction until the delivery date.

 Standardized agreement between the buyer and the seller. Traded on organized exchanges. The future market described as continuous auction market. Exchanges provide latest information about demand & supply.

 Organized Exchanges Standardization Clearing House Actual delivery is rare

Margins

 Initial Futures Margin

It is the amount of the money which a buyer or a seller must deposit in his account whenever he takes any future position. The minimum margin set by a stock exchange which is usually 10% of the value of the contract.
Margin Maintenance

It is the minimum margin required to hold a position. If the account balance falls below the maintenance margin, the margin call is made. Margin maintenance is the amount of money where a loss on your futures position requires you to allocate more funds to bring the margin back to the initial margin level.

 Variation Margin If the margin call is made and the money is deposited by the trader to bring the account to level of initial margin then the amount that is deposited is called variation margin. A margin call on futures contracts is triggered when the value of your account drops below the maintenance level.

 The right to buy or sell property at an

agreed price; the right is purchased and if it is not exercised by a stated date the money is forfeited.

 A put or put option is a contract between two parties to exchange

an asset, the underlying, at a specified price, the strike, by a predetermined date, the expiry or maturity.

Puts give the buyer the right, but not the obligation to sell a

given quantity of underlying asset at a given price on or before a given future date. between two parties, the buyer and the seller.

A call option, often simply labeled a "call", is a financial contract

Calls give the buyer the right but not the obligation to buy a

given quantity of the underlying asset, at a given price on or before a given future date.

 Type of derivative It is a contract Has buyer and seller potential loss asymmetrical payoff pattern options can protect against price fluctuations extremely risky investment Option premiums are significantly cheaper costs of trading options (including both

commissions and significantly higher

the

bid/ask

spread)

is

 Hedgers Speculators Arbitrageurs Floor trader