Professional Documents
Culture Documents
Structured by:
HDFC Securities Ltd.
1
Derivatives
Derivative is a product whose value is derived from the value of the underlying asset. Underlying asset can be equity, forex, commodity, or any other asset.
Features
Centralization of Trading No counter party risk Standardization of contracts Liquidity Mark to Market (MTM) margining system
HDFC Securities Ltd.
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Features
contd
No. of contracts existing at any given point of time is called Open Interest. Squared off in cash on expiration. Three series trade at any point in time. The market lot is 200 for Nifty and 50 for Sensex Contract expires on last Thursday of the month
HDFC Securities Ltd.
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Options
Hyundai is launching SONATA Price is Rs 15 Lakh You can book the car by paying Rs 50,000
contd
By booking the car, what have you bought? When booking matures, can Hyundai force you to buy SONATA? Can you force Hyundai to sell SONATA?
HDFC Securities Ltd.
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Options
gives the buyer the right not the obligation to buy or sell a specified underlying at a set price on or before a specified date
HDFC Securities Ltd.
Features
Option Premium
Price paid by the buyer to acquire the right Intrinsic and Time
Strike Prices
In-the-money (ITM)
Option with positive cash flow
At-the-money (ATM)
Exercise Price = Market Price
Out-of-the-money (OTM)
Option with negative cash flow
HDFC Securities Ltd.
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contd
At-The-Money-Strike In-The-Money Calls Out-The-Money-Calls 950 1050 1150 1250 1350 1450 1550
Spot
950 1050 1150 1250 1350 1450 1550 Out-The-Money-Puts In-The-Money-Puts At-The-Money-Strike
HDFC Securities Ltd.
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contd
Expiration Date
Last date for exercising the option or the date on which option expires.
Exercise Date
Date on which the option is actually exercised
11
contd
Assignment
When the holder of an option exercises his right to buy/ sell, a randomly selected option seller (at the client level) is assigned the obligation to honor the underlying contract
Open Interest
The total number of options contracts outstanding in the market at any given point of time.
HDFC Securities Ltd.
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Types of Option
European Option
can be exercised only on the expiration date
American Option
can be exercised any time on or before the expiration date
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Call Option
A call option gives the buyer, the right to buy specified quantity of the underlying asset at the set strike price on or before expiration date. The seller (writer) however, has the obligation to sell the underlying asset if the buyer of the call option decides to exercise his option to buy.
HDFC Securities Ltd.
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Payoffs
Nifty Spot 1000 1100 1200 1250 1350 1400 1500
Below strike Value of 1250 call Premium paid Net Profit / (Loss) 0
Below strike 0
Below strike 0
At strike
-100
-100
-100
-100
-100
-100
-100
-100
-100
-100
-100
50
150
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200
Payoff chart
150
100
50
0 1,000
1,100
1,200
1,250
1,350
1,450
1,550
-50
-100
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Payoffs
Nifty Spot 1000 1100 1200 1250 1350 1450 1550
Below strike Value of 1250 call Premium recd Net Profit / (Loss) 0
Below strike 0
Below strike 0
At strike
100
100
100
100
100
100
100
100
100
100
100
-100
-200
19
Payoff Chart
200 150 100
50
0 1,000
1,100
1,200
1,250
1,350
1,450
1,550
-50
-100
-150
-200
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Put Option
A Put option gives the buyer the right to sell specified quantity of the underlying asset at the set strike price on or before expiration date. The seller (writer) however, has the obligation to buy the underlying asset if the buyer of the put option decides to exercise his option to sell.
HDFC Securities Ltd.
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Payoffs
Nifty Spot 1000 1100 1150 1250 1350 1450 1550
Below strike Value of 1250 put Premium paid Net Profit / (Loss) 250
At strike
Above strike 0
Above strike 0
Above strike 0
-100
-100
-100
-100
-100
-100
-100
150
50
-100
-100
-100
-100
23
Payoff Chart
200 150
100
50
0 950
1050
1150
1250
1350
1450
1550
-50
-100
24
Payoff
Nifty Spot 1000 1100 1150 1250 1350 1450 1550
Below strike Value of 1250 put Premium recd Net Profit / (Loss) -250
At strike
Above strike 0
Above strike 0
Above strike 0
100
100
100
100
100
100
100
-150
-50
100
100
100
100
26
Payoff Chart
200 150 100
50
0 950
1050
1150
1250
1350
1450
1550
-50
-100
-150
-200
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Option Pricing
Quantifiable Factors Current Price of the underlying asset (S) Exercise Price of the option (X) Interest Rates (Rf) Time to Expiry (T) Volatility of prices of the underlying asset ()
HDFC Securities Ltd.
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800
Mahanagar Telephone
1600
1200
2500
Bharat Petroleum
1100
800
BSES
1100
Reliance Industries
600
Cipla Ltd.
200
4300
Digital Equipment
400
1200
200
1000
Grasim Industries
700
Sterlite Optical
600
1100
Tata Engg.
3300
Hindustan Aluminium
300
1800
1000
1600
Hindustan Petroleum
1300
Tata Tea
1100
HDFC
300
700
I C I C I Ltd. (discontinued)
2800
200
Infosys Technologies
100
BSE Sensex
50
ITC Ltd.
300
30
Less than or equal to Rs.50 > Rs. 50 to < Rs. 150 > Rs. 150 to < Rs. 250 >Rs. 250 to < Rs. 500 >Rs. 500 to < Rs. 1000 >Rs. 1000 to < Rs. 2500 > Rs. 2500
2.5 5 10 20 30 50 100
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Futures Contract
Agreement between two parties to exchange an asset at a certain date in future at a certain price. It is a standardized forward contract that is traded on an exchange.
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Futures Buyer
Mr. X buys a Nifty futures at 1250.
Nifty 1,000 1,100 1,200 1,300 1,400
HDFC Securities Ltd.
50
1,000 -50
1,100
1,200
1,300
1,400
1,500
1250
-150
-250
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Futures Seller
Mr. X sells a Nifty futures at 1250.
Nifty 1,000 1,100 1,200 1,300 1,400
HDFC Securities Ltd.
50
1,000 -50
1,100
1,200
1,300
1,400
1,500
1250
-150
-250
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Futures Pricing
In equation terminologyF = S+C = S(1+r)T Where, F = Future Price S = Spot Price C = Cost of Carry r = Rate of Interest T = Time to expiry
HDFC Securities Ltd.
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Example
Spot Nifty (S) = 1250 Interest rate cost (r)= 10% Time to expiration (t) = 1 month
39
contd
F = S(1+r) t = 1250 (1+0.10) 1/12 = 1260
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Points to remember
Derivatives can be a very effective tool to take advantage of a rising, falling and range bound underlying. The following points may be kept in mind while trading in derivative products: Choose a month that allows enough time for the anticipated move in the underlying. In-the-money calls are initially more responsive to underlying price changes than out-of-the-money calls. Choose a strike price level that offers a good risk/reward ratio given the expected price movement.
HDFC Securities Ltd.
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contd
Watch for Bid/Ask price offered for Spot, Future, & Options simultaneously Liquidity of products involved Transaction Costs
HDFC Securities Ltd.
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To sum up
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Thank You
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