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1.1 ABOUT THE DERIVATIVES
A financial derivative in India is a growing subject in Indian capital market. Trading in financial derivatives started in National Stock Exchange (NSE) in June 2000, with tools like futures and options. My research in this field is still in its initial stage and there is lot of potential scope in the field of derivative. Trading strategies in derivatives studied in the project are the basic strategies used by investors to reduce risk and gain returns. There are different strategies used according to different market situations. The strategies are developed using combination of options, futures and spot. The accounting of derivative transactions is significant subject in derivative segment. Accounting procedures and standards ensures the reliability of derivative trading. Accounting of various derivative contracts have been studied in the project report.
Trading Strategies and Accounting Procedure of Derivatives
1.2 OBJECTIVES OF STUDY
To get informed with various terminologies in the derivative market.
To understand Payoff patterns of Derivatives Contracts in real market conditions
To be familiar with preparation of various derivatives reports for clients.
Trading Strategies and Accounting Procedure of Derivatives
1.3 SCOPE OF STUDY
Study covered the basic knowledge of different strategies in futures & options
market: Hedging Speculation Arbitrage It also includes analysis of real market prices of for two months to make comparison
between theoretical strategies and practical returns.
It also covers comprehensive study of various accounting procedure of three
derivatives contract: Futures Contract Option Contract Effects Of Derivatives In Financial Statements
Trading Strategies and Accounting Procedure of Derivatives
1.4 REVIEW OF LITERATURE Author: Chiara Oldani (Luiss Guido Carli)
A derivative is defined by the BIS (1995) as “a contract whose value depends on the price of underlying assets, but which does not require any investment of principal in those assets. As a contract between two counterparts to exchange payments based on underlying prices or yields, any transfer of ownership of the underlying asset and cash flows becomes unnecessary”. This definition is strictly related to the ability of derivatives of replicating financial instruments. Derivatives can be divided into 5 types of contracts: Swap, Forward, Future, Option and Repo, the last being the forward contract used by the ECB to manage liquidity in the European inter-bank market. These 5 types of contracts can be combined with each other in order to create a synthetic asset/liability, which suits any kind of need; this extreme flexibility and freedom widely explain the incredible growth of these instruments on world financial markets.
Author: Helios Herrera
(Centro de Investigation Economical (CIE), Institute
Technologic Autonomous de Mexico (ITAM)) and Enrique Schroth (University of Investment banks develop their own innovative derivatives to underwrite corporate issues but they cannot preclude other banks from imitating them. However, during the process of underwriting an innovator can learn more than its imitators about the potential clients. Moving first puts him ahead in the learning process. Thus, he develops an information advantage and he can capture rents in equilibrium despite being imitated. In this context, innovation can arise without patent protection. Consistently with this hypothesis, case studies of recent innovations in derivatives reveal that innovators keep private some details of their deals to preserve the asymmetry of information.
Trading Strategies and Accounting Procedure of Derivatives
Author: Cohen, Benjamin H
It is sometimes suggested that trading in derivatives leads to excessive volatility in underlying asset prices relative to what would be called for by fundamental values. These effects are tested by comparing the variances of price changes over different time horizons before and after the start of organized derivatives trading. It is found that ratios of the variances of multi-day and daily price movements decline for bond prices in the United States and Germany and for stock indices in the US, Japan and the UK, though no such effect is found for Japanese bonds. Other indicators confirm that serial correlation has tended to decline since the introduction of derivatives. While these results offer strong grounds for rejecting predictions of the destabilizing effects of derivatives, an alternative view, that derivatives accelerate the price-discovery functions of cash markets, cannot be definitively confirmed, given ambiguous breakpoint results and the many other contemporaneous developments in financial technology. Copyright 1999 by Blackwell Publishers Ltd.
For this project I have used only secondary data. and describes the data. Vohra and B. tabulates. interpreting. The primary purpose for applied research is discovering.5 RESEARCH METHODOLOGY Research is defined as human activity based on intellectual application in the investigation of matter. It involves gathering data that describe events and then organizes.Trading Strategies and Accounting Procedure of Derivatives 1.D. Secondary Data. For this project I have used descriptive research.R. Research design can be exploratory research or descriptive research. and the development of methods and systems for the advancement of human knowledge on a wide variety of scientific matters of our world and the universe RESEARCH DESIGN: A research design is the specification of methods and procedures for acquiring the information needed. 6 . Secondary data are those data which are collected by the other person and which are used by the researcher for his present study. SOURCES OF DATA Sources of data are means from where information is collected for the study and analysis purpose. Bagri. There are two sources of data collection. I have used the secondary data to understand the basic concept of derivatives from the reference book N. 1. depicts. A descriptive research design a fact finding investigation with adequate interpretation. Primary Data 2.
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A financial derivative is an indeed derived from the financial market. interest rates and market indexes. commodities. live stock or anything else. which is derivative of milk. The price of curd depends upon the price of milk which in turn depends upon the demand and supply of milk. The derivative itself is merely a contract between two or more parties. Most derivatives are characterized by high leverage. The underlying asset can be securities. The most common underlying assets include stocks. its value is entirely "derived" from the value of the underlying asset. It means. Something derived. this word has been arisen by derivation.1 CONCEPT AND DEFINATION OF DERIVATIVES Derivatives Concept: A word formed by derivation. bonds. The Underlying Securities for Derivatives are: 12 .e. The term "Derivative" indicates that it has no independent value. Its value is determined by fluctuations in the underlying asset. A very simple example of derivatives is curd.Trading Strategies and Accounting Procedure of Derivatives 3. currencies. bullion. i. it means that some things have to be derived or arisen out of the underlying variables. currency. commodities.
Pepper. Potatoes. such as swaps. such as Black-Scholes. etc.or more simply. the Black–Scholes formula. an agreement between two people or two parties .that has a value determined by the price of something else (called the underlying). Derivatives are generally used as an instrument to hedge risk.S. some more commonplace derivatives. 13 . the investor could purchase currency futures to lock in a specified exchange rate for the future stock sale and currency conversion back into Euros. is widely used in the pricing of European-style options.Trading Strategies and Accounting Procedure of Derivatives Commodities: Castor seed. However. a European investor purchasing shares of an American company of an American exchange (using U. Grain. For example. a derivative is a financial instrument . futures. The model develops partial differential equations whose solution.such as a share or a currency. To hedge this risk. but can also be used for speculative purposes. which have a theoretical face value that can be calculated using formulas. Referring to derivatives as assets would be a misconception. It is a financial contract with a value linked to the expected future price movements of the asset it is linked to . since a derivative is incapable of having value of its own. dollars to do so) would be exposed to exchange-rate risk while holding that stock. The Black–Scholes model is a mathematical description of financial markets and derivative investment instruments. Precious Metal : Gold. Silver Short Term Debt Securities : Treasury Bills Interest Rates Common shares/stock Stock Index Value : NSE Nifty Currency : Exchange Rate In financial terms. and options.
risk management is of particular importance. r reference rate) in a contractual manner. the transfer of a certain amount of US dollars at a specified USD-EUR exchange rate at a future date. mostly in the range of 3 to 12 months from the date of commencement of the contract. index. The asset can be an interest. share. the time between entering into the contract and the ultimate fulfillment or termination of the contract. Given the possible price fluctuations of the underlying and thus of the derivative contract itself. The life of a derivative contract. the USD-EUR exchange rate. These contracts are legally binding agreements. Over the life of the contract. In the Indian Context the Securities Contracts (Regulations) Act. Derivative is a product whose value is derived from the value of one or more basic variables. In the market's language. index. the value of the derivative fluctuates with the price of the so-called “underlying” of the contract – in our example. In practice. made on the trading screen of stock exchanges. 1956 (SC(R) A) defines "derivative" to include: 14 . every derivative "contract" has a fixed expiration date. etc.Trading Strategies and Accounting Procedure of Derivatives Derivatives are meant essentially to facilitate temporarily hedging of price risk of inventory holding or a financial/commercial transaction over a certain period. to buy or sell an asset in future. they are "risk management tools". called bases (underlying asset. DEFINATION OF FERIVATIVES “A derivative is a contract between a buyer and a seller entered into today regarding a transaction to be fulfilled at a future point in time.” For example. that is. can be very long – in some cases more than ten years. commodities or foreign exchange. The use of forward/futures contracts as hedging techniques is a wellestablished practice in commercial and industrial operations.
For this he paid the deposits in advance with an agreement that he will not demand his money if the harvest is not good. 2. share.Trading Strategies and Accounting Procedure of Derivatives 1. Bernstien (1992) attributes the first option transaction to the Greek philosopher Thales from Miletus who was adept at forecasting the harvest of olives in the ensuing season. or index of prices. loan whether secured or unsecured. risk instrument or contract for differences or any other form of security. When the harvest time came. A contract which derives its value from the prices.2 EVOLUTION OF DERIVATIVES Derivatives are definitely not a modern invention. They were know and were used from ancient times. 3. He predicted an outstanding next autumn and so also the demand for the olive presses. Therefore he entered in to agreements with olive press owners before autumn for the exclusive use of their presses. A security derived from a debt instrument. of underlying securities. there 15 .
Futures contracts on individual stocks were launched in November 2001. This is a primitive form of derivatives where Thales knew well in advance that his maximum loss will be the advance he paid while his profits depended on what he demand.3 NEED AND IMPORTANCE OF DERIVATIVES MARKET The following points shoes the need for the derivative market: 16 .C. 1998. Still they represent the forerunners to the relatively organized future that evolved subsequently in the 18 th century in the US. submitted its report on March 17. L. Though Thales was not interested in making money.1 DERIVATIVES INTRODUCTION IN INDIA The first step towards introduction of derivatives trading in India was the promulgation of the Securities Laws (Amendment) Ordinance. The committee recommended that the derivatives should be declared as ‘securities’ so that regulatory framework applicable to trading of ‘securities’ could also govern trading of derivatives. Gupta on November 18.2. The way these agreements are futures but their price were not determined at arm’s length distance nor the contract are liquid enough. SEBI set up a 24 – member committee under the chairmanship of Dr. though there are reports of future trading on Amsterdam bourse after its creation in 1611. 3. Agricultural futures are not unfamiliar contracts. money lenders used to compel most of their borrowers to sell their forthcoming crop at a price agreed upon at the time of taking the loan. which withdrew the prohibition on options in securities.in most parts of the world. 1996 to develop appropriate regulatory framework for derivatives trading in India. 1995. Most future markets have evolved from the basic commodity market and agricultural futures were the foremost contracts that made their appearance long before financial futures.Trading Strategies and Accounting Procedure of Derivatives was plenty of demand for the presses and since he had the rights to use them. he hired out them at high prices and made big money. To begin with. 3. SEBI approved trading in index futures contracts based on S&P CNX Nifty and BSE-30 (Sensex) index. The trading in index options commenced in June 2001 and the trading in options on individual securities commenced in July 2001. all he wanted was to prove that philosophers can make money if they do so desire.
Derivatives have a number of advantages such as hassle free settlement. Price risk that share may go up or down due to reasons affecting the sentiments of the whole market (systematic risk). flexibility in terms of various permutations and combinations of trading strategies etc. To help in the discovery of future as well as current prices 3. Derivatives allow you to manage these risks more efficiently by unbundling the risks and allowing either hedging or taking only one risk at a time. To help in transferring risks from risk averse people to risk oriented people 2. If we buy a share of we take the following risks: Price risk that share may go up or down due to company specific reasons (unsystematic risk). To increase savings and investment in the long run IMPORTANCE OF DERIVATIVES India's three-year old futures and options market is the on the verge of fast becoming a haven for retail investors. To increase the volume traded in markets because of participation of risk averse people in greater numbers 5. They are slowly emerging as instruments for mass investment. 17 . What is noteworthy is that notwithstanding stringent margins. lower transaction cost. hedging and speculation. Managing risk There are several risks inherent in financial transactions. For example. a small set of scripts and surveillance and reporting requirements still the derivatives volume have surpassed cash market volumes within such a short time. To catalyze entrepreneurial activity 4.Trading Strategies and Accounting Procedure of Derivatives 1.
but wish to take only systematic risk . but they are temporarily mispriced. where there is essentially no initial investment except margin payments. He is known as 'bull'. On the other hand. Once investor is long on share investor can hedge the systematic risk by going short on share Futures. Speculation Derivatives offer an opportunity to make unlimited money by way of speculation. their expectations turn out to be true. they may limit their losses through options. in future. in future. without buying any individual shares. Arbitrage Arbitrageurs profit from price differential existing in two markets by simultaneously operating in two different markets. or are simply not feasible. if investors do not want to take unsystematic risk on anyone share. The case is most obvious for futures. One type is of optimistic variety. The other type is a pessimist. If. options and futures represent (highly) levered investments in the underlying cash instruments. if our position is very large.Trading Strategies and Accounting Procedure of Derivatives Liquidity risk. and he sees a fall in prices. resulting in default.investor can go long on Index Futures. He is known as 'bear'. Speculators are of two types. auction and subsequent losses. For example. They undertake 'futures' transactions with the intention of making gains through difference in contracted prices and future cash market price prices. Of course. Cash out-flow risk that we may not able to arrange the full settlement value at the time of delivery. Arbitrage can be done between two instruments when they are related to each other. However. the futures 18 . High leverage Leverage opportunities are often expensive and complicated to implement for many investors in the cash market. and sees a rise in prices in future. they gain and if not they lose. that we may not be able to cover our position at the prevailing price (called impact cost). They require only a small fraction of the investment in the underlying securities.
Hedging mechanism Derivatives provide an excellent mechanism to hedge the future price risk. A hedge can help lock in existing profits.Trading Strategies and Accounting Procedure of Derivatives price and spot price are related by the interest rate. elections and other political or corporate turmoil. 19 . Derivatives are widely used for hedging. Hedging is a mechanism to reduce price risk inherent in open positions. Hence hedging is beneficial. by reducing the risk. Liquidity 4. The basic rule in hedging is that the risk of loss in portfolio is offset by the gains in the futures or options. Risk Management 3.4 THE PARTICIPANTS IN A DERIVATIVES MARKET Hedgers use futures or options markets to reduce or eliminate the risk associated with price of an asset. if any. in the interregnum. Hedging is used to protect portfolio volatility due to market fluctuation during budget. Efficient Allocation of Risk 2. Its purpose is to reduce the volatility of a portfolio. 1. One needs to keep in mind that hedging does not make money but removes unwanted risk by reducing the losses. They can also be important for. Lower Cost of Hedging 3. Thus hedging helps to reduce risk by locking returns but does not maximize them rather it minimizes the loss arising out of adverse situations. time to maturity and corporate benefit.
they see the futures price of an asset getting out of line with the cash price. If. 3. they will take offsetting positions in the two markets to lock in a profit. The individuals with better information and judgment are liable to participative in these 20 . for example.5 FUNCTIONS PERFORMED BY THE DERIVATIVE MARKET Price Discovery The futures and options market serve an all important functions of price discovery.Trading Strategies and Accounting Procedure of Derivatives Speculators use futures and options contracts to get extra leverage in betting on future movements in the price of an asset. They can increase both the potential gains and potential losses by usage of derivatives in a speculative venture. Arbitrageurs are in business to take advantage of a discrepancy between prices in two different markets.
Therefore. A market would be said to be complete if instruments may be created which can. or states. These 21 . In this sense. there is a consensus among all investors in the economy as to the number of odds. Risk Transfer By their very nature. the actions of speculators quickly feed their information into the derivatives markets causing changes in prices of the derivatives. external risk is common to business. for instance. The derivative instruments of futures and options are the instruments that provide the investor the ability to hedge against possible odds in the economy. and. Whether it is a small domestic importer or a transnational manufacturing giant. perhaps some good news about the economy. they merely redistribute the risk between the market participants. Market Completion The existence of derivative instruments adds to the degree of completeness of the market. A complete market implies that the number of independent securities is equal tithe number of all possible future states of the economy. 3. Rather. provide a cover against all the possible adverse outcomes. As these markets are usually the first ones to react because the transaction cost is much lower in these markets than in the spot market. the derivative instruments do not themselves involve risk. these markets indicate what is likely to happen and thus assist in better price discovery. solely or jointly. and providing means and opportunities to those who are prepared to take risks and make money in the process.Trading Strategies and Accounting Procedure of Derivatives markets to take advantage of such information. there should exists an 'efficient fund' on which simple options can be traded. while a simple option is one whose payoff depends only on one underlying return. that the economy can land up with. When some new information arrives.6 TYPES OF DERIVATIVES The modem derivatives market provides a wide range of products linked to the key factors affecting financial and commercial performance. It is held that a complete market can be achieved only when. secondly. firstly. Here an efficient fund implies a portfolio of basic securities that exist in the market with the property of having a unique return for every possible outcome. the whole derivatives market may be compared to a gigantic insurance company providing means to hedge against adversities of unfavorable market movements in return for a premium.
Japan and the United States were the primary users. Traditional techniques such as fundamental and technical analysis. the swap market has developed into the primary method of managing interest rate risk. Foreign Exchange Derivatives The main foreign exchange linked derivatives are currency swaps. however. even small investors have a direct means to manage equity risk. Weaker borrowers only have access to floating rate loans. Initially large institutional investors in Europe. including interest rate caps. This success has also encouraged intermediaries to introduce a diverse array of further innovations. essentially derivatives upon derivatives. foreign exchange. but today. long dated forwards. access to currency 22 . collars. Importantly. currency options and combinations of the above. floors and options on interest rate swaps. Equity derivative instruments allow investors to structure requirements in terms of market timing and risk-reward profile. cheap rate funds. equity values and commodity prices. For borrowers.Trading Strategies and Accounting Procedure of Derivatives factors include interest rates. By exchanging their payment obligations through a swap. Interest Rate Swaps Swaps are private agreements between two parties to exchange cash flows in the future according to a prearranged formula. diversification strategies and asset allocation strategies now rank alongside the derivative risk management as means of achieving investment objectives. Interest rate swaps make use of one party's comparative advantage in the capital market strong issuer of notes are able to borrow through fixed. They can be regarded as portfolios of forward contracts. the use of derivatives has changed the nature of equity portfolio management. Equity Linked Derivatives The equity derivatives were almost usual in order for the risk and reward profile of equity investments to remain competitive with the fixed income offered by debt instruments such as bonds. The power of derivative instruments manages and finds opportunity in risks. both parties are able to obtain a lower cost of funds. From this pattern of strong issuer weak borrower and the source of capital markets for credit.known as swaptions.
active users include oil producers. commodity derivatives satisfy the needs of participants to manage price risk. The international capital markets through foreign exchange derivatives markets. 3. airline companies. the cost of borrowings abroad and the returns on global investment portfolios. In addition to this integration role. electricity generation companies. mining companies to mention a few. Liquidity.7 TYPES OF DERIVATIVES CONTRACTS 23 . solvency and possibly even survival demand the use of derivatives. foreign exchange derivatives serve a very real purpose.Trading Strategies and Accounting Procedure of Derivatives derivatives ensures that they have access to the lowest cost capital markets around the world. Precise commercial and financial objectives can be managed through such derivatives. refiner and consumers of the world's materials. Commodity price risk often forms the core business of users of such derivatives. Foreign exchange fluctuations affect the competitive positions of companies. Today. The original derivatives market. encourages a competitive cost of capital. Commodity Linked Derivatives The commodity derivatives are designed to satisfy the needs of producers. Commodity derivatives are also being used with lenders and investors to ensure the returns and carrying capacity of new projects.
there are two distinct groups of derivative contracts. these publicly traded derivatives provide investors access to risk/reward and volatility characteristics that. nonetheless are distinctive. Exchange-traded derivative contracts (ETD) are those derivatives instruments that are traded via specialized derivatives exchanges or other exchanges. According to BIS. Because OTC derivatives are not traded on an exchange. Products such as swaps. and exotic options are almost always traded in this way. the combined turnover in the world's derivatives exchanges totaled USD 344 trillion during Q4 2005. while related to an underlying commodity. and takes Initial margin from both sides of the trade to act as a guarantee. Also. which are distinguished by the way they are traded in the market: 1. since each counter-party relies on the other to perform. and is largely unregulated with respect to disclosure of information between the parties. there is no central counter-party. without going through an exchange or other intermediary. Reporting of OTC amounts are difficult because trades can occur in private. A derivatives exchange acts as an intermediary to all related transactions. without activity being visible on any exchange.Exchange-traded Over-the-counter (OTC) derivatives are contracts that are traded (and privately negotiated) directly between two parties.OTC and 2. like an ordinary contract. Like other derivatives. such as hedge funds. since the OTC market is made up of banks and other highly sophisticated parties. Therefore.Trading Strategies and Accounting Procedure of Derivatives In broad terms. FORWARD CONTRACTS 24 . A derivatives exchange is a market where individuals trade standardized contracts that have been defined by the exchange. Some types of derivative instruments also may trade on traditional exchanges. The OTC derivative market is the largest market for derivatives. they are subject to counter-party risk. hybrid instruments such as convertible bonds and/or convertible preferred may be listed on stock or bond exchanges. warrants (or "rights") may be listed on equity exchanges. forward rate agreements. For instance.
One of the parties to the contract assumes a long position and agrees to buy the underlying asset on certain specified future date for a certain specified price. Limitations of forward contracts Lack of centralization of trading Illiquidity Counter party risk 25 . the contract has to be settled by delivery of the assets. The contract is generally not available in public domain on the expiration date. Features of forward contracts They are the bilateral contracts and hence exposed to counter-party risk Each contract is custom designed. it has to compulsorily go to the same counterparty. which often results in high prices being charged. The essential idea of entering into a forward contract is to peg the price and thereby avoid the price risk. and hence is unique in terms of contract size. The seller is also under an obligation to perform as per the terms of the contract. It is an agreement to buy or sell an asset at a certain future time for a certain price.Trading Strategies and Accounting Procedure of Derivatives A forward contract is the simplest mode of a derivative transaction. If the party wishes to reverse the contract. It is an agreement between a buyer and a seller in which the buyer has the right and obligation to buy a specified assets on a specified date and at a specified price. The other party assumes a short position and agrees to sell on the same asset on the same date for same specified price. expiration date and the asset type and quality.
Expiry date: It is the date specified in the futures contract. Hence. A future are also a kind of a forward which represent obligation on the part of the buyer and seller but the term and condition of the contract are specified by the exchange where they are actually traded.Trading Strategies and Accounting Procedure of Derivatives FUTURE CONTRACTS Futures contracts designed to solve the problems that exist in forward markets. two-months and three months expiry cycles which expire on the last Thursday of the month. Contract cycle: The period over which a contract trades. Thus. The index futures contracts on the NSE have one-month. Futures contracts are standardized contracts between two parties to buy or sell an asset at a certain time in futures at certain price. 26 . at the end f which it will cease to exist. a new contract having three-month expiry is introduced for trading. They are entered into through exchange. On the Friday. This is last day on which the contract will be traded. DITINCTION BETWEEN FUTURE AN FORWARD FUTURE Trade on an organized exchange Standardized contract terms More liquid Requires margin payments Follows daily settlement FORWARD Not traded Customized contract items Less liquid No margin payment Settlement happens at the end of period Futures terminology Spot price: The price at which an asset trades in the spot market Futures price: The price at which the future contract trades in the futures market. traded on exchange and clearing corporation/house provides the settlement guarantee for trades. following the last Thursday of every month. a January contracts expires on the last Thursday of January. futures markets are more liquid with centralization of trading.
only one side of the contracts is counted. As total long positions for market would be equal to total short positions. If the balance in the margin account falls below the maintenance margin. This measures the storage cost plus the interest that is paid to finance the asset less the income earned on the asset. the contract size on NSE’s futures market is 50 Nifty. For instance. Physical delivery: Open position at the expiry of the contract is settled through delivery of the underlying. the margin account is adjusted to reflect the investor’s gain or loss depending upon the futures closing price. OPTION CONTRACTS 27 .Trading Strategies and Accounting Procedure of Derivatives Contract size: The amount of asset has to be delivered under one contract. Open interest: Total outstanding long or short positions in the market at any specific point in time. This is set to ensure that the balance in the margin account never becomes negative. Tick Size: It is the minimum price difference between two quotes of similar nature. for calculation of open Interest. Marking-to-market: In the futures market. Cost of carry: The relationship between futures prices and spot prices can be summarized in terms of what is known as the cost of carry. In futures market. Margins Initial margin: The amount that must be deposited in the margin account at the time a futures contracts first entered into is known as initial margin. delivery is low. This is called marking-to-market. the investors receives a margin call and is expected to top up the margin account to the initial margin level before trading commences on the next day. at the end of each trading day. Maintenance margin: This is somewhat lower than the initial margin.
The price at which the sale takes place is known as the strike price. but not the obligation. A contract gives the holder the right to buy or sell shares at the specified price Participants in Options Contract 28 . Strike price is fixed. the owner has the right to require the sale to take place on (but not before) the maturity date.e. and is specified at the time the parties enter into the option. Only short at risk. In the case of a. DISTINCTION BETWEEN FUTURE AND OPTION FUTURE Exchange trade. with notation Exchange defines the product Price is zero. in the case of an American option. An option gives the holder of the option the right to do something. the owner can require the sale to take place at any time up to the maturity date. to buy (in the case of a call option) or sell (in the case of a put option) an asset. the counter-party has the obligation to carry out the transaction. Same as futures. right but not obligations. Options are contracts that give the owner the right. An option is a contract. Option terminologies Types of Options On the basis Of Exchange Index options: Index options have the index as the underlying. which gives rights. to exercise on the counter-party i. If the owner of the contract exercises this right. Some options are European while others are American. Options currently trade on over 1000 stocks listed on NSE.Trading Strategies and Accounting Procedure of Derivatives Option contracts are fundamentally different from forwards and futures contract. strike price moves Price is zero Linear payoff Both long and short at risk OPTION Same as futures. The option contract also specifies a maturity date. Like index futures contracts. price moves Price is always positive. index options are also cash settled. Stock options: Stock options are the options on individual stocks. but not the obligation. Non-linear payoff.
Types of options on the Basis of Clearing American options: American options are the options that can be exercised at any time up to the expiration date. 29 .Trading Strategies and Accounting Procedure of Derivatives Buyer of option: The buyer of an option is the one who pays an option premium and buys the right but not the obligation to exercise his option on the seller/writer. European options are easier to analyze than American options. Expiration date: The date specified in the option contract is known as the expiration date. It is also referred to as the option premium. the strike date or the maturity. European options: European options are options that can be exercised only on the expiration date itself. and properties of American options are frequently deduced from those of its European counterpart. Put options: Put option gives the holder 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. at a given price on or before future date. the exercise date. Most exchange traded options are American. S&P CNX IT options at NSE are European type of option. Writer of option: The writer of an option is one who receives the option premium and is thereby obliged to sell/buy the asset if the buyer exercises on him. There are two basic types of options: Call option: A call option gives the holder right but not obligation to buy a given quantity of the underlying asset. Strike price: The price specified in the options contract is known as the strike price or the exercise price. Options on the individual securities available at NSE are American type of option. Option price/premium: Option price is the price which the option buyer pays to the option seller.
the-money Option is an option that would lead to negative cash flow if it were exercised immediately. spot price < strike price).Trading Strategies and Accounting Procedure of Derivatives Time Money of Option at the Inception In-the-time money option: An in-the-money (ITM) option is an option that would lead to positive cash flow to the holder if it were exercised immediately. spot price > strike price). If the current price is much lower than the strike price the call is said to be deep out-of-the money. The most familiar interest rate swap is fixed or floating rate swap. Out-of-the-money-option (OTM) . At-the-money-option (ATM) . a Call is said to be deep in-the-money option.e. If the Spot price is much higher than the strike price. In this swap one of the counter parties agrees to make fixed rate payment to the other and vice versa. A Call option is out-of-the-money when the current price stands at a level which is less than the strike price (i.e. In the case of a Put. the put is in-the-money if the Spot price is below the strike price (i.e. SWAP CONTRACT A swap is contract between two parties to deliver one sum of money against another sum of money at periodic interval. spot price < Strike price). The most basic form of swap is an interest rate swap where two parties agree to exchange interest payment for a certain period of time. A Call option is said to be in-the-money when the current price stands at a level higher than the strike price (i. An option on the index is said to be "at-themoney" when the current price equals the strike price (i. Spot price = strike price).At-the money option is an option that would lead to zero cash flow if it were exercised immediately.An out-of.e. the put is “out of the money” OTM if current price is higher than strike price ((i. spot price > strike price). These two payments 30 . In case of a Put.e.
31 .Trading Strategies and Accounting Procedure of Derivatives are known as the legs or sides of swap. Swap payments are made generally semi annually and the maturity on generic swap range from 3 to 5 years. Equity swap market is substantially smaller than IRS or currency swap even in major markets like New York and Landon. Effective date: It is the date when interest commence to accrue. Fixed rate payer: The party who pays fixed interest and receive variable is known as fixed rate payer. Trade date: Trade date is the day the party agree to commit to the swap. Floating rate payer: The other party who pays variable and receive fixed is known as floating rate payer. Equity swap are similar to interest rate swap contract. There are two counterparties who exchange regular cash flows based on some agreed term to maturity. Swap Terminology: Counterparties: One party pays fixed rate interest payment to another party who pays variable rate payment to the first party. There are three content of swap contract: Currency swap in which two currency are periodically exchanged. An important thing in that there is an exchange of principle in the currency swap on the origination date and at maturity at the same pre-determined exchange rate. Commodity swap requires the counterparties to exchange a cash flow based upon a fixed price and quantity of a particular commodity for a cash flow based upon the same quantity and market price of that commodity.
Equity 32 . TRADING STRATEGIES OF DERIVATIVE A investment decision is a function of risk and return.Trading Strategies and Accounting Procedure of Derivatives Settlement or payment date: It is when interest payments are made (6 months after the effective date). A number of mathematical model exist which can enable an individual to take a prudent investment decision. Maturity date: It is last payment date on which swap principle is paid.
Strategies are generally combination of various product like future. because the put purchased (future OTM) is cheaper than the put sold. puts and enable an individual to realize unlimited profits. than the higher strike put sold.Trading Strategies and Accounting Procedure of Derivatives tend to give returns greater then this risk free asset and the growth of capital market and trading platform has provided a liquidity. The net effect of the strategy is to be the cost and breakeven. unlimited losses or limited losses on his profit or risk taking ability. the investor makes the maximum loss (cost of the trade) and if the stock price rise to the higher (sold) strike. calls. which acts as insurance of the put sold. Bearish view. the investor makes the maximum profit. Bull spread using puts: Sell put option and cover the downside of a put sold by buying a lower strike put. so that the investors receives a net credit. This risk of the capital market bring into the powerful risk management tools in the form of derivatives. The lower strike price would be ITM while the call with the higher strike price is OTM. Bullish view. The investor makes a profit only when the stock price/ index rise. Volatile view and Neutral view. yet there is a market risk leading to capital erosion also. 4. limited profit.1 BILLISH VIEW: Bull Spread using Calls: Buy in-the-money (ITM) call option and sell another out-of-the-money (OTM)call option with the same underlying security and expiry. If the stock price falls to the lower (bought) strike. Four simple views. The lower strike put purchased is the future OTM. + [PAY OFF PROFILE FOR BULL SPREAD] 0 _ 33 .
then the investor has a maximum loss potential of the net debit. If the underlying price closes below the out-of-the-money (lower) put option strike price on the expiration date. This strategy can be done with both OTM call with the call purchased being higher OTM strike than the call sold. Bear put spread: Buy an (ITM) put option and sell an OTM (lower) put option on the same stock with the same expiration date. Otherwise he could make a loss. The investor makes the money only when the price of underlying falls. The maximum loss is the difference in strike less the net credit received. then the investor gets maximum profits. This strategy creates a net debit for the investor. the investor makes a profit. + [PAY OFF PROFILE FOR BEARS SPREAD] 0 _ 34 .Trading Strategies and Accounting Procedure of Derivatives 4. As long as the underlying remains below that level. The bought put caps the investors downside. If underlying falls both calls will expire worthless and the investor retains the net lower strike plus the net credit.2 BEARISH VIEW Bear call spread: Buy OTM call option and simultaneously sell ITM call option on the same underlying. If the stock price increases above the in-the-money (higher) put option strike price at the expiration date.
the call expires worthless. the put is exercised. Either way if there is volatility to cover the cost of the trade. and if it were not to happen. during budget time. a favorable proposal might impact the price favorably. + [PAY OFF PROFILE FOR LONG STRADDLE] 0 _ 35 . the strike price plus both Premia and the strike price minus both Premia. or the price could fall significantly. I this sense. a negative development might dampen the prices. If the price of the underlying increases. The straddle has two break even points viz. Long straddle: Buy a call as well as put on the same underlying for the same maturity and strike price. Decision on hue lawsuit could significantly impact prices any which direction. a volatile view is opposite of the neutral view. Volatile view is usually based on various situations which might warrant heavy movement. market will not stay where it is. While a positive development might result in a price rise. An expected foreign collaboration could see the price rise. the call is exercised while the put expire worthless and if the price of the underlying decreases. However.Trading Strategies and Accounting Procedure of Derivatives 4. profits are to be made. the price could fall. but which way is not clear. For example.3 VOLATILE VIEW A volatile view will imply that the market will move either upwards or downwards.
The position is profitable in case there is a bi move in the underlying. There should be equal distance between each strike. [PAY OF PROFILE FOR LONG STRANGLE] + 0 _ Short call butterfly: Sell one lower strike ITM. Straddle the investor is directional neutral. but is looking for an increased volatility in the stock / index and the prices moving significantly in the either direction. The maximum profit occurs if the stock 36 . Buy simultaneously a slight OTM put and a slight out-of-the-money OTM call of the same underlying and expiration date.e. the strategy has a limited downside (i. the call and the put premium) and unlimited upside potential.Trading Strategies and Accounting Procedure of Derivatives Long strangle: A strangle is a slight modification to the straddle to make it cheaper to execute. The lower cost however implies a wider break even and you would make profit only if the scrip moves up or down by a wider margin. A strangle is a slightly safer strategy in the sense that one buy a call and a put but at different strike prices rather than one single strike price. as in the case of a straddle. Investor gets a net credit. As with a straddle. buy two ATM calls and sell another higher strike OTM call. The maximum risk occur if the underlying is at the middle strike at expiration.
[PAY OFF POFILE FOR SHORT CALL BUTTERFLY] + 0 _ 4. However. If the underlying does not move much in the either direction. Investors get net income. However this strategy offers very small returns when compared to straddles. which is the premium received is made. [PAY OFF PROFILE FOR SHORT STRADDLE] + 0 _ 37 . up or down significantly. or that the movement is not likely to be significant. short straddle: It is the opposite of the long straddle and is adopted when it is expected that the market will remain range bound. in case the underlying moves in either direction. If the underlying value stays close to the strike price on expiry of the contracts.4 NEUTRAL VIEW Neutral view is when that the index or scrip in question is likely to remain whether it is. Sell a call and a put on the same underlying for the same maturity and strike price.Trading Strategies and Accounting Procedure of Derivatives finishes on either side of the upper and lower strike prices at expiration. strangers with only slight less risk. maximum gain. the investor retains the premium as neither the call nor the put will be exercised. This makes it a risky strategy and so it should be adopted very carefully. the investor’s losses can be significant.
investor should sell strangles rather than straddles_ this is a relatively lower risk lower return strategy. [PAY OFF PROFILE FOR SHORT STRANGLE] + 0 _ As a seller of the option with a neutral view.Trading Strategies and Accounting Procedure of Derivatives Short strangle: A short strangle is a slight modification to the short straddle. The underlying has to move significantly for the call and put to be worth exercising. The net credit received by the seller is less as compared to a short straddle. Simultaneously sell a slight OTM put and a slight OTM call of the same underlying stock and expiration date. If the underlying does not show much of a movement. It tries to improve the profitability of the trade for the seller of the option by widening the breakeven points so that there is a much greater movement required in the underlying stock/ index. for the call and the put option to be worth exercising. the seller of the strangle gets to keep the premium. but the breakeven points are also widened. 38 .
yet if that is reasonable then one would actively pursue this strategy. A long butterfly is similar to a short straddle expect that the losses are capped. Long call butterfly: The strategy offers a good risk/ reward ratio. but 1 ITM Call. and buy 1 OTM call option (equidistance between the strike price).Trading Strategies and Accounting Procedure of Derivatives As a buyer of volatility. Sell 2 At The Money Calls. together with low cost. The maximum reward in this strategy is however restricted and takes place when the underlying is at the middle strike at expiration. The result is positive in case the underlying remains range bound.3 ACCOUNTING OF FUTURES 39 . [PAY OFF PROFILE OF LONG CALL BUTTERFLY] + 0 _ ACCOUNTING OF DERIVATIVES 5. one would rather buy straddle most of the time (rather than strangles) as it gives profit faster than strangles. The maximum losses are also limited. Although there is outward flow of premia to buy a straddle.
40 . clearing members and clearing corporations. a trade in equity index futures is similar to trade in. Clearing member: Clearing member means a member of clearing corporation and includes all categories of clearing members as may be admitted as such but the clearing corporation to the derivative segment Contract month: Contract month means the month in which the exchange/clearing corporation rules require a contract to be fully be finally settled. Final settlement price: The final settlement price is the closing of equity index futures contract in the last trading day of the contract or such other price as may be specified by the clearing corporation.Trading Strategies and Accounting Procedure of Derivatives The institute of chartered accountants] of India (ICAI) has issued guidance notes on accounting of equity index and equity stock futures & options contracts from the view point of parties who enter into such future contract as buyers or sellers. say shares. All the clearing and settlement for the trades that happen on the NSE’s market is done through NSCCL. trading members. For other parties involved in the trading process like brokers. from time to time. Open position: Open position means the total number of equity index futures contract that have not yet been offset and closed by an opposite position. Daily settlement price: Daily settlement prices is the closing prices of the equity index future contract for the day or such other as may be decided by the clearing house from time to time. and does not pose any peculiar accounting problems. Long position: Long position is an equity index futures contract means outstanding purchase obligations in respect of the index futures contract at any point of time. Clearing corporation/house: Clearing corporation/house means the clearing corporation/house approved by SEBI for clearing and settlement of trades on the derivatives exchange/segment.
Payments made or received on account of daily settlement by the client would be 41 . if any. Amount --------------------- It may be mentioned that at the time when contract is entered into for purchase/sale of equity index futures. no entry is passed for recording the contract because no payment is made at the time except for the initial margin. the balance in the “Initial margin – equity index futures account” should be shown separately under the head “current assets”. Accounting At the Inception of The Contract Every client is required to pay to the trading member/clearing member. Accounting At The Time Of Daily Settlement This involves the accounting of payment/receipts of mark-to-market margin money.Trading Strategies and Accounting Procedure of Derivatives Settlement date: Settlement date means the date on which the outstanding obligations in an equity index futures contract are required to be settled as provided in the Bye-Laws of the Derivative exchange/segment. Trading member: Trading member means a Member of the Derivative exchange/segment and registered with SEBI. should also be accounted for in the same manner. Short position: Short position in an equity index futures contract means outstanding in respect of any equity index futures contract at any point of time. In cases where instead of paying initial margin in cash. The initial margin determined by the clearing corporation as per the Bye-Laws/regulations of the exchange for entering into equity index futures contact. the client provides bank guarantee or lodges securities with the member. At the balance sheet date. a disclosure should be made in the notes to the financial statements of the client. Additional margins. Initial Margin Payment Initial margin of equity stock a/c To bank a/c Dr. Such initial margin paid/payable should be debited to “initial margin – equity index futures account”.
At the expiry of equity index futures. Profit = Final Settlement price < Contract Price 42 . Deposit Made To Margin Account Deposit made to margin a/c To bank/cash a/c Dr. the profit/loss. Profit = Final settlement Price > Contract Price For Short.Trading Strategies and Accounting Procedure of Derivatives credited/debited to the bank account and the corresponding debit or credit for the same should be made to an account titled as “mark-to-market margin money – equity index futures account” Payment Of Daily Margin Mark to mark margin a/c To bank/cash a/c Dr. on final settlement of the contracts in the series. Accounting At The Time Of Final Settlement This involves accounting at the time of final settlement or squaring-up of the contract. should be calculated as the difference between final settlement price and contract prices for all the contracts in the series. The amount so paid is in the nature of a deposit and should be debited to appropriate account. Receipt Of Daily Margin Bank/cash a/c To Make to mark margin a/c Dr. Amount --------------------Amount --------------------- Payment Made In Case Of deposit Of Margin Made Mark to market margin a/c Dr. The amount of “mark-to-market margin” received/paid from such account should be credited/debited to “mark-to-market margin money – equity index futures account” with a corresponding debit/credit to “Deposit for mark-to-market margin money account”. balance in the “Deposit for mark-to-market margin money account” should be shown as deposit under the head “current assets”. For Long. Say. Sometimes the client may deposit a lump sum amount with broker/trading member in respect of mark-to-market margin money instead of receiving/paying mark-to-market margin money on the daily basis. To deposit to mark to market margin a/c At the year-end. “Deposit for mark-to-market margin money account”.
any loss on arising on such settlement should be first charged to such provision account. To initial margin of equity stock a/c Amount --------------------- Accounting in cases of a default When a client defaults in making payment in respected of a daily settlement. To initial margin a/c Amount --------------------- 43 . the contract price of the contract co squared-up should be determined using the weighted average method for calculating profit/loss on the squaring-up. to the extent of the balance available in thru provision account. should be recognized in the profit and loss account by corresponding debit/credit to “mark-to-market margin money – equity index futures account”. The amount not paid by the Client is adjusted against the initial margin. In the books of client. so computed. and a corresponding debit should be given to bank account or the deposit account (where the amount is not received). the contract is closed out. Same accounting treatment should be made when a contract is squared-up by entering into a reverse contract. If more than one contract in respect of the series of equity index futures contracts to which the squared-up contract pertains is outstanding at the time of the squaring of the contract. where a balance exists in the provision account created for anticipated loss. if any should be charged to profit and loss account. the amount so adjusted should be debited to “mark-to-market – equity index futures account” with corresponding credit to “initial margin – equity index futures account”.Trading Strategies and Accounting Procedure of Derivatives The profit/loss. However. Release of Initial Margin Bank a/c Dr. the initial margin paid in respect of the contract is released which should be credited to “initial margin – equity index futures account”. Adjustment Of Mark-To-Market Margin In Default Mark to market margin a/c Dr. and the balance of loss. On the settlement of equity index futures contract.
FUTURE CONTRACTS Profit & Loss Account of the ………. will be released.for the year ending………. The number of equity index futures contracts having open position. In case. Disclosure Requirements The amount of bank guarantee and book value as also the market value of securities lodged should be disclosed in respect of contracts having open positions at the year end. if it continues to exist on the balance sheet date. The amount of profit or loss on the contract so closed out should be calculated and recognized in the profit and loss account in the manner dealt with above. 44 .Trading Strategies and Accounting Procedure of Derivatives The amount of initial margin on the contract. of each series of equity index futures. the amount t be paid on daily settlement exceeds the initial margin the excess is a liability and should be shown as such under the head ‘current liabilities and provisions’. where initial margin money has been paid by way of bank guarantee and/or lodging of securities. in excess of the amount adjusted against the mark-to-market margin not paid. Total number of contracts entered and gross number of units of equity futures traded (separately for buy/sell) should be disclosed in respect of each series of index futures. The accounting treatment in this regard will be the same as explained above. number of units of equity index futures pertaining to those contracts and the daily settlement price as of the balance sheet date should be disclosed separately for long and short positions.
Amt. 45 . Balance loss incurred Profits Adjusted Current Liabilities: Net Amount Received from Deposits To Initial Margin Initial Margin + Excess Margins Deposit margin: to Mark-to-market Broker . payable to daily margin Opening Balance . Liabilities Ref No. Assets Current Assets: Provision for anticipated Loss: Op. Expense Dr. Ref No.. Ref No.. 5. To M-2-M margin A/c (Loss) Provision for anticipated Loss . Income Cr.2 Accounting for Equity Index Options/Equity Stock Options: The institute of chartered accountants] of India (ICAI) has issued guidance notes on accounting of equity index options and equity stock options from the view point of the parties who enter into such contracts as buyers/holders or sellers/writers.M-2-M margin Paid = Closing Balance Loans & Advances: Net Amount Paid to the broker Disclosure: Note: Initial paid in form of Bank Guarantee and Lodge securities.as on ………………. Following are the guidelines for accounting treatment in case of cash settled index options and stock options.Loss incurred To M-2-M margin a/c (Profit) Balance Sheet of ……………….Trading Strategies and Accounting Procedure of Derivatives Ref No.
pay initial margin for entering into the option contract. Bank/cash a/c Dr. Deposit Made By Seller For Avoiding Daily Margin Requirement Deposit To Equity Index/Stock Option a/c Dr. Net Amount Received/Paid By The Seller On The Open Position Amount Paid Amount Received Equity Index/Stock Option Margin a/c Dr. Accounting At The Time Of Payment/Receipt Of Margin Payments made or received by the seller/writer for the margin should be credited/debited to the bank account and the corresponding debit/credit for the same should also be made to ‘equity index option margin account’ or ‘equity stock option margin account’. Such initial margin paid would be debited to ‘equity index option margin account’ or ‘equity stock option margin account’. such account should be shown separately under the head ‘current assets’. At the end of the year the balance in this account would be shown as deposit under ‘current assets’. the amount of margin paid/received from/into such accounts should be debited/credited to the ‘deposit of margin account’. In such case. as the case may be. the client deposit a lump sum amount with the trading/clearing member in respect of the margin instead of paying/receiving margin on daily basis. as the case may be.Trading Strategies and Accounting Procedure of Derivatives Accounting At The Inception Of A Contract The seller/writer of the option is required to. To Bank/Cash a/c Amount --------------------- Accounting At The Time Of Final Settlement 46 . Initial Margin Payment By Seller Equity Index/Stock Option Margin a/c To bank a/c Dr. Amount --------------------- In the balance sheet. To bank/cash a/c Equity Index/Stock Option Margin a/c Sometimes.
margin paid towards such option would be released by the exchange. if any. as the case may be. Release of Initial Margins Paid By Buyer Equity index/stock option margin a/c To Initial margin. Such payment is recognized as loss. the seller/writer will recognize premium as an income and credit the profit and loss account by debiting ‘equity index option premium account’ or ‘equity stock option premium account’.Trading Strategies and Accounting Procedure of Derivatives On the exercise of the option. Income = final settlement price > Exercise price (long call & Short Put) Income = final settlement price < Exercise price (long put & short call) On exercise of the option. D2 Apart from above. between the final settlement prices at the exercise/expiry date and the strike price. between the final settlements price as on the exercise/expiry date and the strike price. D1 Apart from the above.equity index/stock option a/c Dr. which will be recognized as income. if any. Loss = Final Settlement price > Exercise price (long call & short put) Loss = Final settlement price < Exercise Price (long put & Short call) As soon as an option gets exercised. which should be credited to ‘equity index option margin account’ or ‘equity stock option margin account’. the buyer/holder will recognize premium as an expense and debit the profit and loss account by crediting ‘equity index option premium account’ or ‘equity stock option premium account’. Amount --------------------- 47 . the seller/writer will pay the adverse difference. the buyer/holder will receive favourable difference. and the bank account will be debited.
.equity option ___ From Seller’s Viewpoint To equity index/premium a/c (loss) To provision for loss. No. Income Cr.Trading Strategies and Accounting Procedure of Derivatives OPTION CONTRACTS Profit & Loss Account of the ………….equity option To equity index/premium a/c (loss) ___ ___ By Equity index/premium a/c (profit) ____ By Equity index/premium a/c (profit) 48 . For the year ending………… Ref Ref Expense Dr. No. From Buyer’s Viewpoint To equity index/premium a/c (loss) To provision for loss.
Ref No.profit from option a/c + loss from option a/c = Closing Balance ----------- FINDINGS The result of the study explores a good understanding of different strategies in derivatives.provision for current year .. Assets Equity index/stock Premium Paid Received Provision for loss in equity option a/c: Opening balance .Margins received Liabilities Ref No..profit from option a/c + loss from option a/c = Closing balance ------From Seller’s Viewpoint Current liabilities: Equity index/stock -----Current Assets: Premium Margins Paid in Advance Deposits to Equity Index/Stock Margin + Margins Paid .provision for current year . From Buyer’s Viewpoint Provision for loss in Equity option A/c: Opening balance .Trading Strategies and Accounting Procedure of Derivatives Balance Sheet of ……………….as on ………………. These strategies are effectively used for hedging loss or gaining risk-free returns 49 .
It consists of all the accounting entry made at each stage for all actions in futures and options contract. various factors also have influence. The study shows how strategy works according to fundamental changes. Thus in outline. It also provides information of reports generation for all the elements of transactions from view point of client. CONCLUSION 50 . project report establishes knowledge of different strategies and accounting standards of derivatives. The understanding of payoff patterns of futures and options has contributed to knowledge of implementation of strategies. Finally. Each transaction is accounted with its complete effects from inception to financial year end. it recognizes the basic strategies and their usage in real stock market where besides price.Trading Strategies and Accounting Procedure of Derivatives by arbitrage and provide good knowledge of when to use these strategies in most effective way according to different market situation. The second part of study revealed importance of accounting in derivatives.
The understanding patterns of all future and options payoffs help in their accounting procedures. there is need of knowledge of all the elements and terminologies used in derivatives contracts such as participants. but most important are hedging and arbitrage. study provides significant knowledge of trading strategies and accounting procedures in derivatives. This study attempts to simplify the concept of these basis strategies with the knowledge of market condition and payoff strategies so that investor can make out opportunities for reducing the loss and gain fair returns. Thus.Trading Strategies and Accounting Procedure of Derivatives The Indian Capital Market has undergone qualitative changes in the last decade due to phenomenal growth of derivatives. payoff and their full effects to client’s book. The pricing & accounting of the derivatives thus provides client with skills of profit generation in stock market. Derivatives are used for variety of purposes. To make accounting records. margins. SUGGESTIONS There should be the rapid development of derivatives products in financial as well as 51 .
52 . The main developments may be like this: Introducing more innovative types of risk hedging contracts. Kumar.Trading Strategies and Accounting Procedure of Derivatives commodity market all over the world but with some consciousness.S. BIBLIOGRAPHY “Financial derivatives” by S. Introducing adequate risk management and internal monitoring techniques to curb unnecessary speculation so as to protect the interest of small investors. Increasing the scope of current derivatives products in emerging markets so as to include more individual stocks as well as all types of indices. Eastern Economy Edition.S.
D.net/project-reports/?prefixid=finance www.html 53 .com www. Eastern Economy Edition. “Futures and options” by N.Trading Strategies and Accounting Procedure of Derivatives 2007 by Prentice-Hall of India Private Limited. Vohra and B. New Delhi.com www. 2003 Tata McGraw-Hill Publishing Company Limited. New Delhi. www. “Financial derivatives” by Keith Redhead.nseindia. Bagri.org/educat/faqs.R. Second Edition. 1997 by Prentice-Hall Europe.mbaguys.njfundz.isda.
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