DERIVATIVES

AKANKSHA GOUR-51
ASHISH JAIN-52
INTRODUCTION
 A kind of security whose price or value is
determined by the value of the underlying
variables.

 A contract of future date in which two or more

parties are involved to alleviate future risk.

 High leverage.

 Value is affected by the volatility in the rates

of the underlying asset
 SOME OF THE WIDELY KNOWN UNDERLYING
ASSETS ARE:

 Indexes (consumer price index (CPI), stock

market index, weather conditions or inflation)
 Bonds
 Currencies
 Interest rates
 Exchange rates
 Commodities
 Stocks (equities)
 TYPES OF
DERIVATIVES
1. Forwards-
• Tailor-made contract between two parties.
• settlement is done on a scheduled future
date at today's pre-decided rate.

2. Futures-
• When two entities decide to purchase or
sell an asset at a given time in the future at
a given price.
• Special kind of forward contracts-
customized exchange-traded agreements.
3. Options-
• Two kinds such as calls and puts.

• Calls -not obligated to purchase given

quantity of the underlying variable, at a
mentioned price on or prior to a
scheduled future date.

• Puts-may not necessarily sell a

mentioned quantity of the underlying
variable at a mentioned price on or prior
to a given date.
4. Swaps-

• Private contracts between two entities to deal in cash

flows in the future following a pre-decided formula.
• Somewhat like forward contracts' portfolios.
• Two types such-interest rate swaps and currency
swaps.

Interest rate swaps-

• only interest related cash flows can be exchanged
between the entities in one currency.

Currency swaps-
• principal and interest can be exchanged in one
currency for the same in other form of currency.
IMPORTANCE
OF
DERIVATIVES
 Financial transactions have several risk factors.

 Derivatives are instrumental in alienating risk

factors from traditional instruments and shifting risks
to those entities that are ready to take them.

 Some of the basic risk components in derivatives

business are:
 Credit Risk
 Market Risk
 Liquidity Risk
 Legal Risk
DERIVATIVES
MARKETS IN
INDIA
 India was a controlled economic system and
from there it moved on to constant fluctuation
in prices on a daily basis.

 RBI-building currency forward market and

liberalization process provided the risk
management agencies their much needed
momentum.

 NSE measured market demands, hence in

1999 derivatives trading took place in India.
 Indian derivatives markets are of two types
1) Transaction which depends on the exchange
2) Transaction which takes place 'over the
counter' in one-to-one scenario.

 Referred to as:
 Exchange Traded Derivatives
 Over the Counter (OTC) Derivatives
 Over the Counter (OTC) Equity Derivatives
 Operators in the Derivatives Market
 KINDS OF TRADERS IN THE DERIVATIVES
MARKET

 Hedgers-traders who are interested in

transferring a risk element of their
portfolio.
 Speculators-traders who deliberately go
for risk components from hedgers in look
out for profit.
 Arbitrators-traders who work in various
markets at the same time in order to gain
profit and do away with mis-pricing.
 REFFERENCE

 en.wikipedia.org/wiki/Derivative_(finance)

 www.investopedia.com › Dictionary

 business.mapsofindia.com ›
Investment Industry in India

 www.derivativesindia.com/
THANK-YOU