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• Accounting Standard 30 defines derivatives as:

A derivative is a financial instrument or other contract within the scope of this Standard with all three of the following characteristics:

• its value changes in response to the change in 'underlying' • it requires no initial investment or an initial net investment

and • it is settled at a future date.

Over-the-counter (OTC) : A computer. and fund managers Contracts can be non-standard and there is some small amount of credit risk . but increasingly they are switching to electronic trading Contracts are standard there is virtually no credit risk. corporations.and telephone-linked network of dealers at financial institutions.Derivatives Markets Exchange traded : Traditionally exchanges have used the open-outcry system.

Types of Derivatives Forward Option Futures Swaps Forward Rate Agreements(FRA) .

Forward Contracts Contractual Commitment to buy or sell a specified quantity and quality of underlying asset at a future date and for a specified price. Forward contracts are particularly popular on currencies and interest rates . Forward contracts are similar to futures except that they trade in the over-the-counter market.

Futures Contracts contract is an agreement to buy or sell a specified quantity and quality of an underlying product at a specified date in the future. for a price agreed Similar to forward contract Whereas a forward contract is traded OTC. a futures contract is traded on an exchange .

Position traders and scalpers Use derivatives to bet on the future direction of the market variables Arbitrageurs Take offsetting positions in two or more instruments to lock in a profit .Types of Traders Hedgers Use derivatives to reduce risk that they face from potential future movements in the market variables Speculators – day traders.

Options An option is a contract that grants a right to the holder or purchaser of the contract to buy or sell an underlying asset at a specific price on a specific date or upto a specified date without a corresponding obligation to perform on the contract. The holder or the purchaser pays a premium for the right. .

The right to sell a specified amount of currency at a specified rate.The right to buy a specified amount of currency at a specified rate. . Put option.Types of options Call option.

ATM.ITM. At-the-money 3.In-the-money Strike Price less than Strike Price greater than Spot Price of underlying Spot Price of underlying asset asset Strike Price equal to Spot Strike Price equal to Spot Price of underlying asset Price of underlying asset 2.OTM Call Option Put Option 1. Out-of-the-money Strike Price greater than Strike Price less than Spot Price of underlying Spot Price of underlying asset asset .

Margin required • Initial Margin : An Initial margin is the deposit required to maintain either a short or long position in a futures contract. . • Maintenance Margin : Maintenance margin is the amount of initial margin that must be maintained for that position before a margin call is generated.

Basis & Convergance Basis = Spot price – Future price process of basis moving towards zero is Convergance. .

Time value is the difference between premium and intrinsic value .Intrinsic value & Time value Intrinsic value is difference between strike price and the spot price.

the premium on the option will be relatively high. . and vice versa. If volatility is high.Volatility Volatility is a measure of the rate and magnitude of the change of prices (up or down) of the underlying.

Greeks • Delta • Gamma • Vega • Theta .

5 At ITM delta is between 0.5 to 1 . It is the probability of option being itm at the expiration.Delta The movement of the option position relative to the movement of the underlying position.5 At OTM delta is between 0 to 0. At ATM delta of Call & Put is 0.

. Options Gamma describes how much the options delta changes as the price of the underlying stock changes.Gamma Options Gamma is the rate of change of options delta with a small rise in the price of the underlying stock. Just as options delta measures how much the value of an option changes with a change in the price of the underlying stock.

and is progressively lower as options are ITM and OTM. the price of stock options rises along with it. .Vega Options Vega measures the sensitivity of a stock option's price to a change in implied volatility. Vega is highest for ATM options. When implied volatility rises. Options Vega measures how much rise in option value with every 1 percentage rise in implied volatility.

. which is the rate of time decay of stock options. Time decay is a well known phenomena in options trading where the value of options reduces over time even though the underlying stock remains stagnant Positive Theta means that the option's value will increase as the time passes & vice-versa. Negative Theta means that the option's value will fall as the time passes & vice-versa. and is progressively lower as options are ITM and OTM. Theta is highest for ATM options.Theta • Theta is that options Greek which tells you how much an • • • • option's price will diminish over time.

Greeks Table Long call Long put Short call Short put Delta Positive Negative Negative Positive Gamma Positive Positive Negative Negative Vega Positive Positive Negative Negative Theta Negative Negative Positive positive .

OPTION STRATEGY INCOME STRATEGIES COVERED CALL BULL PUT SPREAD BEAR CALL SPREAD .

Vega: negative (harmful for this position) 4. • Greeks : 1. Delta : positive and expected to fall to zero 2. Theta: positive (time decay is helpful for the position) . Gamma: negative (net seller) 3.COVERED CALL DIRECTION Bullish Assset legs Long stock Short call (OTM) Max risk Uncapped Max reward Capped Strategy type Income •Description: It is like collecting rent while you own a stock • Outlook : neutral to bullish (steady rise).

BULL PUT SPREAD Direction Bullish Asset Legs Long Put (FOTM) Shot Put (OTM) Max Risk Capped Max Rewards Capped Strategy Types Income Oulook: bullish or neutral to bullish Rationale: income for a net credit while reducing your maximum risk. Greeks : Delta:Positive .

Bear call spread Direction Bearish Asset Legs Short Call (ITM) Long Call (OTM) Max Risk Capped Max Rewards Capped Strategy Type Income Outlook: bearish or neutral to bearish. Greeks: Delta: negative Gamma: negative Vega: positve Theta: negative .

OPTION STRATEGY VOLATILITY STRATEGIES Straddle Strangle .

STRADDLE Direction Neutral Asset Legs Long Put (ATM) Long Call (ATM) Max Risk Capped Max Rewards Uncapped Strategy Type Capital Gains Outlook: movement in either direction Greeks: Delta: highest in either direction Gamma: highest Vega: positive (helpful) Theta: negative (harmful) .

STRANGLE Direction Neutral Asset Legs Long Put (OTM) Long Call (OTM) Max Risk Capped Max Rewards Uncapped Strategy Type Capital Gains Outlook: huge movement expected in either direction. Greeks: Delta: is highest Gamma: positive Vega: positive Theta: negative or harmful .

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