derivative market in India (ppt)

DERIVATIVE MARKET IN INDIA

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interest rates and currencies. It relates to equities. bonds. Financial derivatives are financial instruments whose prices are derived from the prices of other financial instruments which are also know as underlying. loans. .

TYPES OF DERIVATIVES  OPTIONS  FUTURES  SWAPS .

OPTIONS TYPES: EXCHANGE TRADED OPTIONS  OVER THE COUNTER OPTIONS  EMPLOYEE STOCK OPTIONS  STOCK INDEX OPTIONS  INTREST OPTIONS  CURRENCY OPTIONS  RANGE FORWARD(RF)  RATIO RANGE FORWARDS CONTRACTS(RRF¶S)  SWAPTIONS  .

Participation in overall market movement. Investment opportunities.BENEFITS      CALLSCALLS. Reduction of total portfolio transaction cost. PUTSPUTS. Possibility of windfall profits.Control a claim on underlying asset. .Duplicate a short sale without margin account.

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FUTURES CHARACTERISTICS:  TRADING  RISK  SETTLEMENT .

Indicate expected future prices.SERVICES RENDERED    Provide hedging facilities to buyers and sellers to protect them against unpredictable price fluctuations over time. Introduce an element of stability market prices. .

.SWAPS  It is an agreement between two parties to exchange sequences of cash flows for a set period of time.

Alpha Corp.3 month .5 years Fixed rate payer. semiannual Floating rate.5 %. Floating rate payer-Gamma Corp. Fixed Rate.INTREST RATE SWAP  EXAMPLE: TERMS: Notional amount.100 lakh Maturity.

Fixed rate payment (5% semi-annual) Alpha Corp Gamma Corp Floating rate payment (3-month Libor) .

3divided by four and multiplied by the notional amount. Alpha will pay 2. Gamma will pay 2. or 2.6% of 100 lakhs = 0. for the next 5 years. if the 3-month LIBOR is 2.4% / 4 = 0. four times per year. For example. twice a year. Gamma Corp agrees to pay 3-month LIBOR on a 333monthly basis (or quarterly basis) to Alpha Corp for the next 5 years.4 % on the 3reset date. . Gamma will pay the 3-month LIBOR rate.     Alpha Corp agrees to pay 5 % of 100 lakhs on a semiannual basis to Gamma Corp. That is.6 lakhs every 3 months.5 lakhs.5 % of 100 lakhs. That is.

Basis=Current cash price ± Future price. Spreads.VALUATION OF DERIVATIVES  a) b) c) d) e) Pricing futures: Following factors affect the future prices: Spot Price. Expected future spot price Cost of storage .

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T = Time remaining before the expiration of option N(d2) = Cumulative density function of d2 . Pricing options: Explained with the help of following Model           THE BLACK SCHOLES MODEL: COV = MPS [N (d)] ² EP [antilog (-rt)] [N (d2)] (Where. COV= Call option value MPS = Current price of underlying asset N(d) = Cumulative density function EP = Exercise price of option R = Continuity compounded risk less rate of interest on an annual basis.

. Convenient. Provides information on market movement. To protect the interest of individual and institutional investors. Does not create new risk and minimizes existing ones. low cost and simple to operate. Lowers transaction cost. Provides wide choice of hedging.IMPORTANCE         To minimize risk. Offers high liquidity and flexibility.

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