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Final Project Report on Financial Derivativies

Final Project Report on Financial Derivativies

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Published by Sophia Ali

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Published by: Sophia Ali on May 21, 2009
Copyright:Attribution Non-commercial


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Derivatives – an overview
Futures contract
Hedging in futures
Speculating in futures
Arbitrage in futures
Options strategies
Derivatives products
Open interest
Futures price = spot price + cost of carry
http://Pakistanmba.jimdo.comFor Free Downloading of this report and for more projects,assignments,reports on Marketing,Management  Marketing Management, Accounting, Economics Human Resource,Organizational Behaviour,Financial Management Cost Accounting VISIT http://Pakistanmba.jimdo.com
The word “DERIVATIVES” is derived from the word itself derived of a underlying asset. It is afuture image or copy of a underlying asset which may be shares, stocks, commodities, stock indices, etc.Derivatives is a financial product (shares, bonds) any act which is concerned with lending and borrowing (bank) does not have its value borrow the value from underlying asset/ basicvariables.Derivatives is derived from the following products:A.SharesB.DebunturesC.Mutual fundsD.GoldE.SteelF.Interest rateG.Currencies.Derivatives is a type of market where two parties are entered into a contract one is bullish andother is bearish in the market having opposite views regarding the market. There cannot be aderivatives having same views about the market. In short it is like a INSURANCE market whereinvestors cover their risk for a particular position.Derivatives are financial contracts of pre-determined fixed duration, whose values are derivedfrom the value of an underlying primary financial instrument, commodity or index, such as:interest rates, exchange rates, commodities, and equities.Derivatives are risk shifting instruments. Initially, they were used to reduce exposure to changesin foreign exchange rates, interest rates, or stock indexes or commonly known as risk hedging.Hedging is the most important aspect of derivatives and also its basic economic purpose. Therehas to be counter party to hedgers and they are speculators. Speculators don’t look at derivativesas means of reducing risk but it’s a business for them. Rather he accepts risks from the hedgers in pursuit of profits. Thus for a sound derivatives market, both hedgers and speculators areessential.Derivatives trading has been a new introduction to the Indian markets. It is, in a sense promotionand acceptance of market economy, that has really contributed towards the growing awareness of risk and hence the gradual introduction of derivatives to hedge such risks.Initially derivatives was launched in America called Chicago. Then in 1999, RBI introducedderivatives in the local currency Interest Rate markets, which have not really developed, but with
the gradual acceptance of the ALM guidelines by banks, there should be an instrumental productin hedging their balance sheet liabilities.The first product which was launched by BSE and NSE in the derivatives market was indexfutures
Consider a hypothetical situation in which ABC trading company has to import a raw materialfor manufacturing goods. But this raw material is required only after 3 months. However in 3months the prices of raw material may go up or go down due to foreign exchange fluctuationsand at this point of time it can not be predicted whether the prices would go up or come down.Thus he is exposed to risks with fluctuations in forex rates. If he buys the goods in advance thenhe will incur heavy interest and storage charges. However, the availability of derivatives solvesthe problem of importer. He can buy currency derivatives. Now any loss due to rise in rawmaterial prices would be offset by profits on the futures contract and vice versa. Hence thecompany can hedge its risk through the use of derivatives
According to JOHN C. HUL “ A derivatives can be defined as a financial instrument whosevalue depends on (or derives from) the values of other, more basic underlying variables.”According to ROBERT L. MCDONALD “A derivative is simply a financial instrument (or evenmore simply an agreement between two people) which has a value determined by the price of something else.With Securities Laws (Second Amendment) Act,1999, Derivatives has been included in thedefinition of Securities. The term Derivative has been defined in Securities Contracts(Regulations) Act, as:-A Derivative includes: -

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