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19881386 Use of Derivatives in Hedging Risks

19881386 Use of Derivatives in Hedging Risks

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Published by Somesh Painuli

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Categories:Types, Research
Published by: Somesh Painuli on Jul 21, 2010
Copyright:Attribution Non-commercial

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05/12/2014

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CONTENTS
Chapter No
Title
I
Introduction to Derivatives
II
Forwards & Futures
III
Options
IV
Trading ,Clearing &Settlement
Mechanism
V
Conclusion
1
Chapter – I
Introduction
Derivatives
2
INTRODUCTION
A derivative is an instrument whose value depends on the values of one or more basic
underlying variables.

SCRA act 1956 defines ‘derivatives ‘ as, A security derived from a debt instrument, share, loan whether secured or unsecured, risk instrument or contract for differences or any other form of security. A contract which derives its value from the prices, or index of prices, of underlying securities.

i)
Each derivative product has an “underlying” associated with it.
ii)
The value of the derivative depends on, among other things, the value of the
underlying
iii)
The underlying can be

Physical commodities: Coffee, Crude oil, Wheat etc.
Financial assets: Currencies, Stocks, Bonds, etc.
Financial Prices: Interest rates, stock indices
Other Derivatives

Recently: Weather derivatives, emission derivatives etc.
Examples of Derivative
Suppose a person intending to buy some books in Higginbotham gets a gift

voucher valued Rs.500/- such gift voucher is considered to be a derivative whose value is
determined by the value of the underlying asset i.e books.
The various derivative products are as follows
Futures, forward contracts, forward rate agreements, SWAPs
Curreny Options, index options, commodity options etc.
Swaptions, Options on futures.

3

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