DERIVATIVE

Abhishek Khemka
09DF002
Derivative
Derived Value
Underlying Asset
Stocks
Index
Interest Rate
Currency etc….
Contract
Derivative Product
Derivative

Forward Future Option

Contd..

Customized contract
Forward
●

●
Obligation for two parties

Standardized contracts
Future
●

●
Obligation for two parties

Standardized contracts
Option
●

●
Obligation for one party
Business growth of futures
and options market at NSE
Turnover Rs.Crore
Month Index Index Stock Stock
futures options options futures
Jun-00 35 - - -
Jun-01 590 195 - -
Jun-02 2,123 389 4,642 16,178
Jun-03 9,348 1,942 15,042 46,505
Jun-04 64,017 8,473 7,424 78,392
Jun-05 77,218 16,133 14,799 163,096
Jun-06 243,572 57,969 11,306 243,950
Jun-07 240,797 92,503 21,928 451,314
Jun-08 377,939 308,709 21,430 375,987
FUTURES
TERMINOLOGY
Spot Price ●
an asset trades in the spot market

Futures price ●
the futures contract trades in the futures market

Contract cycle ●
The period over which a contract trades

Expiry date ●
The last day on which the contract will be traded

Contract size ●
The amount of asset that has to be delivered under one contract

Cost of carry: ●
The relationship between futures prices and spot prices

Margin ●
Amount deposited while trading
Cost Of Carry
Interest
Time
Volatility
Dividend
Margin

Initial Amount that must be deposited

●

in the margin amount that must

margin: be deposited in the margin

At the end of each trading day, the

Marked-
●

margin account is adjusted to reflect

the investor's gain or loss depending
to-market upon the futures closing price.
Marked-to-market
Buyer purchased 1000 shares @ Rs.100/-at 11 am
on January 1, 2010.
If close price of the shares on that day happens to
be Rs.75/-.
A notional loss of Rs.25,000/- on his buy position.

MTM Profit/Loss = [(Total Buy Qty X Close price)

– Total Buy Value] - [Total Sale Value - (Total Sale
Qty X Close price)]
Contd..
BUY QTY BUY VALUE SELL QTY SELL
PRICE PRICE VALUE

100 10 1000 100 5 500

120 20 2400 90 15 1350

TOTAL 30 3400 TOTAL 20 1850

Settlement Price : Rs 95
MTM Profit/Loss = [(30 x 95)-3400]-[1850-
(20 x 95)] = -4350
Open Interest
Total number of contracts of an underlying
asset that have not been offset and closed by
any opposite transaction or delivery of the
underlying commodity or cash settlement.

Sum of all position taken by different traders

are reflected.

Opposites positions taken by a trader in a

contract reduce the Open Interest.
Contd..
TRADE TRADING ACTIVITY OPEN
DAY INTEREST
MONDAY Client A buys 2 futures contracts of 2
Reliance
Client B sells 2 futures contracts of
Reliance
TUESDAY Client B buys 2 futures contracts of 2
Reliance
Client C sells 2 futures contracts of
Reliance
WEDNESSDA Client D sells 5 futures contracts of 7
Y Reliance
Client E buys 5 futures contracts of
Reliance
THURSDAY Client C buys 2 futures contracts of 5
Reliance
Client A sells 2 futures contracts of
Concluding Open Interest
Price Volume OI Conclusion Trend

Rising Rising Rising Strong Long Very Bullish

Rising Rising Falling Short Covering Bullish till OI falling

Rising Falling Falling Weak Short Moderately Bullish

Covering
Rising Falling Rising Weaker Long Cautiously Bullish

Falling Rising Rising Strong short Very Bearish

Falling Rising Falling Long Covering Bearish till OI falling

Falling Falling Falling Weak Long Moderately Bullish

Covering
Falling Falling Rising Weaker Short Cautiously Bearish
Option
BUYE WRTE
R R
Has right Has
CAL but not
obligatio
obligation
L to buy n to sell

Has right but Has

PU not obligation
to sell
obligatio
n to buy
T
Option Pricing
Intrinsic Value
• Spot Price
• Strike Price

Extrinsic Value
• Volatility
• Time to expiry
• Interest rate
THANK YOU