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DERIVATIVES

PRESENTED BY
JEETENDRA SINGH
ROLL NO (56)

Topics

Derivatives

Futures

Forwards

Mark to mark

Basis and convergence

Individuals in the future industry- hedgers speculators arbitrageurs

Swaps

Options

Intrinsic value and Time value

Margin

Index options

Implied volatility

Black scholes option pricing model

Put call parity

What are Derivatives???

Derivatives is one whose performance is


based on the behavior of the price of an
underlying asset.

The underlying asset can be equity, fixed


income instruments, interest rates,
foreign exchange or commodities.

Major events in derivative market

The first exchange for trading in


derivatives appeared to be in London.
The first FUTURES "contracts are
generally traced to the yodoyo rice
market in Osaka ,japan around 1650.
The first commodity futures exchange
was set up in 1875,in Mumbai.

Various types of Derivatives

Advantages of using Derivatives

Leveraged Positions
Lesser transaction costs
Ease of creating positions
Derivatives as Risk Management
Products
Derivatives as Trading Products

Types of Derivatives

Uses of Derivatives

A derivative product can be used for ,


Risk management.
Speculation.
Risk mitigation.
Risk taking.

Users of Derivatives

Hedgers.
Traders.
Private clients.
Arbitrageurs.

American and European


options

The owner of an American option can


excise it on or before the expiration
date.

The owner of a European style can


excise it only on the expiration date.

Forwards

The terms of the contract are agreed


upon today ,and delivery and payment
take place in the future, at what is called
either the delivery date, the settlement
or maturity date.
Example-on a 19/02/2011 Jeetendra Ltd.
enters into a forward contract with sushi
Ltd for buying USD 1 crore at Rs.45 per
USD on 5/03/2011.

Futures

Afutures contractis a
standardizedcontractbetween two parties to buy
or sell a specified asset of standardized quantity
and quality for a price agreed today priceorstrike
with delivery and payment occurring at a
specified future date, the delivery date.
Three series of future contract are always
available and have one-month, two month, and
three month expiry cycles.
Example-on a 3rd August 2011,jeetendra enters
into a August 2011 Future contract for buying
1000 shares of godrej Ltd.

Comparison between Forward and


Future
Forward

Future

Private Contract between two parties

Traded on an exchange

Not standardized

Standardized Contract

Usually one specified delivery date

Range of delivery dates

Settled at the end of contract

Settled daily

Delivery or final cash settlement usually


takes place

Contract is usually closed out prior to


maturity

Some credit risk

Virtually no credit risk

Swaps

Swaps are contractual agreements between two


parties to exchange cash flows
Currency swaps
Interest rate swaps

Interest rate swaps is the one in which


one parties agrees to pay (to other
counterparty) a fixed amount of money
on specific dates.
In currency swap, two different currencies
are periodically exchanged.

Options

Option is a derivatives instrument that


gives the holder a right, without any
obligation to perform.
Option are basically contracts which give
to the buyer a facility which is similar to
buy or sell certain asset (underlying) but
the buyer of an option has limited risk &
unlimited profit.
Options can be exchange traded
derivatives or even over the counter
derivatives.

Types of Options
OPTION
S

CALL

PUT

Call Option

A call option is a contract that gives its


owner the right but not the obligation, to
buy something at a specified price on or
before a specified date.

Put Option

Comparison between Call Option & Put


Option
Call Option

Put Option

Option which gives the holder right to


Option which gives the holder right
BUY an assets but not an obligation to
to SELL an assets but not an
buy.
obligation to SELL.
Call option will be exercise only when
the exercise price is lower than the
market price.

Put option will be exercise only when


the exercise price is Higher than
the market price.

Seller/writer is under obligation to


Seller/writer is under obligation to sell the
sell the underlying assets if the
underlying assets if the buyer exercise
buyer exercise his option to sell
his option to buy the shares .
the shares .

ITM, ATM, OTM Options

In the money
At the money
Out of money

Intrinsic and Time value of the option

Intrinsic value is equal to the amount by


which option is in the money.
Time value is the difference between
market price of the option and intrinsic
value.

Summary of basic option


strategies