The

Derivatives
Market
PRESENTATION

PRESENTED BY: GROUP 1

Presentation Outline
 Definition of Derivatives
 Types of Derivatives and the parts
 Risk and Opportunities for investors
 Traders in the Derivative market
 Criticism of the derivative market
 How can I make money on derivatives
 How to start trading
 WHAT IS
DERIVATIVES?
• Derivative - is a financial instrument whose
value os derived from the value of another
asset, which is known as the underlying asset.

• The term "Derivative" indicates that it has no

independent value. It's value is entirely
dependent on the underlying asset.
 WHAT IS
DERIVATIVES?
• These underlying assets can be
securities, commodities, currency,
livestock, etc.

• These contracts can be used to

trade any number of assets and
carry their own risks.
 WHAT IS
DERIVATIVES?
• Prices for derivatives derive from fluctuations
in the underlying asset.

• Ex: The value of a gold futures contract is

derived from the value of the underlying
asset----gold.
 WHAT IS DERIVATIVES?
• According to the Securities Contract Regulation
Act, 1956, the term 'derivatives' include:

• a security derived from a debt instrument,

share, loan, whether secured or unsecured, risk
instrument or contract for differences or any
other form of security.
• a contract which derives its value from the
prices or index of prices, of underlying
securities.
TYPES OF DERIVATIVES
FORWARD SWAP
CONTRACTS CONTRACTS

OPTIONS
FUTURE Lorem ipsum dolor sit amet, consectetur
CONTRACT
adipiscing elit, sed do eiusmod tempor
CONTRACTS
 FORWARD

CONTRACTS
 Is an agreement between two parties to buy and sell an asset
at a certain time in the future for a certain price
 These contracts are not standardized, each one is being
customized to its owner’s specifications.
 FUTURE
CONTRACTS
 Like forward contracts, is that it is an obligation to perform
a transaction on agreed terms

 Are normally traded on an exchange that sets certain

standardized norms for trading in the futures contract.
 OPTIONS
 Contracts that give the holder the option to buy/sell a specified

CONTRACTS
quantity of the underlying assets at a particular price on or before a

specified time period.

 The word “OPTION” means the holder has the right but not the
PUT OPTION CALL OPTION
obligation to buy/sell underlying assets.
Allow the They give the
 Option buyer or option holder-who acquires thebuy
right to right
the
seller to sell
underlying
the asset
 Option seller or option writer-who confers the right
asset.
 The seller of the option for giving such an option to the buyer

charges an amount which is known as the OPTION PREMIUM.

 SWAP CONTRACTS
 A swap is an agreement between two parties to exchange
cash flows in the future. Under this agreement, various
terms like the dates when the cashflow is to be paid, the
currency in which to be paid, and the mode of payment are
determined and finalized by the parties
 Two types
 Currency swaps
 Interest rate swaps
DERIVATIVES
DIVIDED INTO
2 PARTS
Derivatives divided into
Exchange Traded Derivatives
2 parts:
 Exchange traded derivative contracts (ETD) are those derivative
instruments that are traded via specialized derivatives
1.Exchange Traded Derivatives
exchanges or other exchanges.
 A derivatives exchange is a market where individuals trade
standardized contracts that have been defined by the exchange.

 Investors and traders prefer exchange-traded derivatives since

2.Over the counter
it eliminates a certain amount of defaulting risk and has a
standard structure that needs to be followed.
 As of 2021, the current world's largest derivatives exchange is
the National Stock Exchange of India (in terms of a number of
contracts traded) according to the Futures Industry Association.
 There is a very visible and transparent market price for the
derivatives
Derivatives divided into
Over the counter
2 parts:
1.Exchange Traded Derivatives
Over-the-Counter (OTC) or off-exchange trading is to trade
financial instruments such as stocks, bonds, commodities, or
derivatives directly between two parties without going through
an exchange or other intermediary.
The contracts between parties are privately traded.
2.Over the counter
The contract can be trailor-made to the two parties' liking
Over the counter markets are uncontrolled, unregulated and
have very few laws
 RISK AND
OPPORTUNITIE
S FOR
INVESTOR
 Profitability of derivative trading is determined
by several factors.

The first one is the stated price.

The second is the guarantee obligations, i.e. the premium, that
protect the seller of the derivative in case the buyer refuses to buy.
The third factor is that the derivative financial instruments are
standardized and depend on the underlying asset; therefore they
are predictable in the sense that the buyer of the derivative can
successfully predict the movement of the asset’s price in the
needed direction. Risks of trading derivatives:

Market risk. When the price of the underlying asset changes, one of the
parties to the trade (seller or buy) always suffers a loss.
Finally, there is leverage. Derivative trading through a broker
implies the use of leverage, when a trader can enter into a trade for
Credit risk. If the trade involves the use of leverage and the buyer refuses
to buy, the seller will suffer a loss.
an amount that exceeds his investment.
Liquidity risk. If the demand for the underlying asset drops, so does the
liquidity of its derivative financial instruments.

Operational risk. Time difference (settlement time), delays and failures of

technical systems, human factors – all of these can reduce the profitability
of the trade and even lead to losses for any of the parties.
Profitability of derivative trading is determined
by several factors.

Risks of trading derivatives:

• Market risk. When the price of the underlying asset changes,

one of the parties to the trade (seller or buyer) always
suffers a loss.

• Credit risk. If the trade involves the use of leverage and the
buyer refuses to buy, the seller will suffer a loss.

• Liquidity risk. If the demand for the underlying asset drops,

so does the liquidity of its derivative financial instruments.

• Operational risk. Time differences (settlement time), delays

and failures of technical systems, and human factors – all of
these can reduce the profitability of the trade and even lead
to losses for any of the parties.
TRADERS IN
THE
DERIVATIVE
MARKET
 HEDGER
• A hedger is someone who faces risk associated with price
movement of an asset and who uses derivatives as means of
reducing risks.

• Hedging is when a person invests in financial markets to

reduce the risk of price volatility in exchange markets, i.e.,
eliminate the risk of future price movements. Derivatives
are the most popular instruments in the sphere of hedging. It
is because derivatives are effective in offsetting risk with
their respective underlying assets.

• They provide economic balance to the market.

 SPECULATO
R
• a trader who enters the futures market for pursuit of
profits, accepting risk in the endeavor.

• Speculation is the most common market activity that

participants of a financial market take part in. It is a risky
activity that investors engage in. It involves the purchase
of any financial instrument or an asset that an investor
speculates to become significantly valuable in the future.
Speculation is driven by the motive of potentially earning
lucrative profits in the future.

• They provide liquidity and depth to the market.

ARBITRAGEURS
• a person who simultaneously enters into
transactions in two or more markets to take
advantage of the discrepancies between prices in
these markets.

• Arbitrage is a very common profit-making

activity involving taking advantage of or
profiting from the price volatility of the market.
CONTINUATION....
• Arbitrageurs make a profit from the price
difference arising in an investment of a financial
instrument such as bonds, stocks, derivatives,
etc.

• Arbitrageurs help to make markets liquid, ensure

accurate and uniform pricing and enhance price
stability.

• They help in bringing about price uniformity and

discovery.
 MARGIN
TRADERS
• In the finance industry, margin is the collateral
deposited by an investor investing in a financial
instrument to the counterparty to cover the credit
risk associated with the investment.

• Margin trading is the practice of borrowing money,

depositing cash to serve as collateral, and entering
into trades using borrowed funds. Through the use
of debt and leverage, margin may result in higher
profits than what could have been invested should
the investor have only used their personal money.
Criticisms to the
Derivatives
Market
 Risks
The derivatives market is often
criticized and looked down on,
owing to the high risk
associated with trading in
financial instruments.
 Sensitivity and
Volatility of the
Market
Many investors and traders avoid the
derivatives market because of its high
volatility. Most financial instruments are
very sensitive to small changes such as a
change in the expiration period, interest
rates, etc., which makes the market highly
volatile in nature.
 Complexity
Owing to the high-risk nature and
sensitivity of the derivatives market, it is
often a very complex subject matter.
Because derivatives trading is so
complex to understand, it is most often
avoided by the general public, and they
often employ brokers and trading agents
in order to invest in financial
instruments.
 Legalized
Gambling
Owing to the nature of trading in
financial markets, derivatives are
often criticized for being a form of
legalized gambling, as it is very
similar to the nature of gambling
activities.
 How can I
make money
on derivatives?
 How can I make
money in
derivatives?
Usually, these are options and futures, as they are the
simplest and clearest derivative financial instruments. The
profit is determined by the strategy. For example, you can
speculate with an instrument by reselling a currency
futures or option. Also, you can try to earn a profit from the
asset price, for example buy a securities option at the price
lower than the market, wait for the option execution and
sell the asset at a higher price.
 How can I make money in
TRADING AT THE derivatives?
DERIVATIVES EXCHANGED

Derivatives exchanges are platforms, where

derivative financial instruments are traded. In
reality, there are practically no exchanges that offer
only derivatives, because the absolute majority of
traders view trading derivatives as one of the
instruments, not the only instrument. Also, as we’ve
already mentioned, many use derivatives to hedge
risks.
 How can I make money in
CFD CONTRACTS
derivatives?
CFDs are contracts for differences. Technically, they
are also derivative financial instruments. Under this
contract, the seller undertakes to pay the buyer the
difference in the settlement price of the underlying
asset between the open and closing trades. There
are currency, precious metals, and stock CFDs, and
the seller does not own the underlying asset and
the buyer does not buy it. All transactions are
How to
start
trading
Thank
you
FOR LISTENING!
Don't hesitate to ask any questions!
 REFERENCES
• https://www.wallstreetmojo.com/derivatives-market/
• https://corporatefinanceinstitute.com/resources/knowledge/trading-investing/
derivatives-market/
• https://corporatefinanceinstitute.com/resources/knowledge/trading-
investing/derivatives-market/
• https://www.investopedia.com/terms/m/margin.asp#:~:text=Margin%20trading%20is
%20the%20practice,only%20used%20their%20personal%20money
• https://corporatefinanceinstitute.com/resources/knowledge/trading-investing/
derivatives-market/