Professional Documents
Culture Documents
problems…
We normally face as a student of
Finance and we need to answer them in
SCIENTIFIC MANNER!!!!!!!!!!!!!
What is Futures
and options????
How do we know
that a option price
is undervalued or
over valued!!!!!
Which model of option
pricing is better
binominal or BSM
Who are
arbitrageurs
Who are
speculators
Who are hedgers
Is it possible for me to
know at what time I
should buy or sell
If you are looking forward to
answer the issues raised, then
you have to enter into the
world of……
This Class will take you to the
WORLD of Stock market
first!!!!
Look!!! I am having lot of
money with me and want
to invest. I really do not
know - should I look for
investment in bonds or
equity? Can you help me?
He is a high net
worth person and
looking for some who
can manage his
wealth.
If you are given a sum of Rs. 10 lakhs, then how you
will decide where to put the money? - in Bonds? In
Shares? In both? How much in each?
IS 2022 a YEAR of Bonds or
Equity?
During the phase of rapid growth
in an economy, should you invest
in bonds or shares?
How to safeguard
oneself against
Business Cycles?
This man is having RBI Bonds. Is he exposed to any kind of
risk?
RB
8% I B o n
, 2 0 ds
18
This man has read in a newspaper that the Indian Economy is expected
to grow at 3.50% for 2022-23 and the inflation rate ending last week is
more than 1% of the previous week. The Fed is thinking to increase its
bank rate in near future. He has huge exposure in long-term
Government Bonds.
Primary Secondary
Market Market
What is
investment?
Issue#1
Investment
benefits”.
Why should
we
investment?
Issue#2
OBJECTIVES OF INVESTMENT
Togenerate maximum RETURN/INCOME/
PROFIT/ BENEFITS.
Issue#3
Real Assets
Vs.
Financial Assets
We should investment in a financial assets
…
of financial assets –
Issue#4
One should invest in Financial Markets!
• Primary Market –
• IPOs and FPOs
• Secondary Market –
• Stock Exchanges
IPO AND FPO
Secondary Market – Stock Exchanges
First - Few basic of stock market
Spot or equity
A forward contract is a
customized
contract between two entities,
where settlement takes place
on a specific date in the future
at today's pre agreed price.
DERIVATIVE PRODUCTS
Meet Mr. X. Currently he
exports 100 tones of wheat
to the USA and he will
receive 100000$ in the
month of Aug.
Current USDINR
rate is 80 per $
But Que. is what will
be the rate of USDINR
in the month of
Aug??????????
Now Mr. X. will go to
bank and enter into a
contract which is
called a forwards
contract.
Contract details
Forwards:
A futures contract is a
standardized contract
between two parties to buy or
sell an asset at a certain time
in the future at a certain
price.
Example
Stock exchange,
Where,
◦ Time of Delivery is Fixed
◦ Place of delivery is Fixed,
◦ Quantity per lot is Fixed,
◦ Quality is Fixed,
◦ Currency is Fixed,
◦ Price is driven by Demand and Supply.
DERIVATIVE PRODUCTS (continued…)
Options: Option means choice.
In stock market option also means
choice between buy or not to buy
(sell or not to sell)
2. Put option - Puts option give the buyer the right to sell,
but not the obligation to sell a given quantity of the
underlying asset at a given price on or before a given
date.
Features of derivative markets
5. Counter-party risk.
LIMITATIONS OF FORWARD MARKETS
2. Illiquidity.
3. Counterparty risk.
Why Forwards?
margin.
Remember, for every buyer there is a
seller
◦ If the buyer does not bring the money,
seller may not get his / her money and
vice versa.
Therefore, margin is levied on the seller
also.
◦ To ensure that seller gives the 100
shares.
◦Margin payments ensure
that each investor is
serious about buying or
selling shares.
Sir!!!
Are margins same
across cash and
derivatives
markets?
No!!!!!!!!!!
◦ Shares traded on cash market are
settled in two days
◦ Whereas derivative contracts may
have longer time to expiry.
◦ Time period,
◦ Confidence level
VaR1,99 = 1000
VaR10,95 = 10000
◦ Shares trade
◦ Liquidity
How much a large buy or sell order changes the price of the
scrip, what is technically called ‘impact cost’.
Value at Risk (VaR) margin
These 3 categories are:
◦ Group 1
Regularly traded (more than 80% of the trading days in the
previous six months)
High liquidity (Impact cost less than 1%)
◦ Group 2
Regularly traded (more than 80% of the trading days in the
previous six months)
Moderate liquidity (Impact cost more than 1%)
◦ Group 3
All other shares
Value at Risk (VaR) margin for group 1
shares
Group 1, the VaR margin rate would be higher of
◦ 7.5%
For example,
◦ 3.5*2.8033 = 9.81155%
Value at Risk (VaR) margin for group 2
shares
Group 2, the VaR margin rate would be
First higher of
◦ 3.5 times volatility x 1.732051
◦ 3.5*2.8033*1.732051 = 16.9941%
Value at Risk (VaR) margin for group 3
shares
Group 3, the VaR margin rate would be
◦ 5*5*1.732051 = 43.30%
Calculation of Extreme Loss Margin
The extreme loss margin aims at covering the
losses that could occur outside the coverage of
VaR margins.
Suppose,
Futures Price
Spot Price
Time
Convergence of Futures to Spot
Futures
Spot Price
Price
Spot Price Futures
Price
Time Time
(a) (b)
Convergence of Futures to Spot on real
data
Futures
Data:-https://www1.nseindia.com/products/conten
t/derivatives/equities/historical_fo.htm
Spot Data:-
https://www1.nseindia.com/products/content/equit
ies/equities/eq_security.htm
Symbol Expiry Date SBI-Futures
SBI Spot Di ff
SBIN ######## 01-Oct-20 192 190.3 1.7
SBIN ######## 05-Oct-20 190.6 188.75 1.85
SBIN ######## 06-Oct-20 193.3 191.6 1.7
SBIN ######## 07-Oct-20 192.2 190.7 1.5
SBIN ######## 08-Oct-20 193.15 191.5 1.65
SBIN ######## 09-Oct-20 199.85 198.3 1.55
SBIN ######## 12-Oct-20 200.15 198.7 1.45
SBIN ######## 13-Oct-20 197 195.7 1.3
SBIN ######## 14-Oct-20 201.45 200.05 1.4
SBIN ######## 15-Oct-20 193.8 192.85 0.95
SBIN ######## 16-Oct-20 197.1 195.95 1.15
SBIN ######## 19-Oct-20 205.35 204 1.35
SBIN ######## 20-Oct-20 204.05 203.05 1
SBIN ######## 21-Oct-20 204.7 203.75 0.95
SBIN ######## 22-Oct-20 204.65 203.3 1.35
SBIN ######## 23-Oct-20 203.85 202.8 1.05
SBIN ######## 26-Oct-20 197.55 196.7 0.85
SBIN ######## 27-Oct-20 195.5 194.65 0.85
SBIN ######## 28-Oct-20 191 190.45 0.55
SBIN ######## 29-Oct-20 189.35 188.7 0.65
SBIN ######## 30-Oct-20 189.95 189.25 0.7
SBIN ######## ######## 196.85 196.05 0.8
SBIN ######## ######## 205.35 204.75 0.6
SBIN ######## ######## 208.15 207 1.15
SBIN ######## ######## 219.15 218.65 0.5
SBIN ######## ######## 219.25 219.2 0.05
SBIN ######## ######## 220.5 219.5 1
SBIN ######## ######## 232.6 231.7 0.9
SBIN ######## ######## 234.55 234.2 0.35
SBIN ######## ######## 227.8 226.8 1
SBIN ######## ######## 230.25 229.45 0.8
SBIN ######## ######## 229.6 229.65 -0.05
SBIN ######## ######## 240.3 240.2 0.1
SBIN ######## ######## 252.2 252 0.2
SBIN ######## ######## 240.35 239.75 0.6
SBIN ######## ######## 242.7 242.75 -0.05
SBIN ######## ######## 238.85 238.7 0.15
SBIN ######## ######## 243.9 243.85 0.05
SBIN ######## ######## 242.7 243 -0.3
SBIN ######## ######## 245.45 245.45 0
Convergence of Futures Price to Spot Price…
“spot price is higher than future price”
Assume that the spot price is higher than the future
price during the delivery month.
Arbitrage opportunity:
◦ Get delivery
Since spot price is greater than the future price the
investor makes a profit
Convergence of Futures Price to Spot Price…
“future price is higher than the spot price”
◦ Make delivery
Since future price is greater than the spot price the
investor makes a profit
Stock Futures Prices
PRICING FUTURES
Pricing of futures contract is very simple. Using the cost-
of-carry logic, we calculate the fair value of a futures
contract.
The cost of carry model used for pricing futures is given
below
◦ F = Sert
F = future price R = cost of financing
S = Spot price T = time to expiration
PRICING FUTURES
Security XYZ Ltd trades in the spot market at Rs. 1150.
Money can be invested at 11% p.a. The fair value of a 1-
month futures contract on XYZ is calculated as follows.
F = Sert
F = 1150 * e 0.11* 1/12
F = 1160.444404
PRICING FUTURES of dividend paying
stock
Security XYZ Ltd trades in the spot market at Rs. 1150. Money can be
invested at 11% p.a. The fair value of a 1-month futures contract on
XYZ is calculated as follows.
Let us assume that XYZ Ltd. will be paying a dividend of Rs.20 per
share after 15 days.
◦ Cash settled
◦ F = 4000*e0.1*60/365
◦ F = 4066.296837
Pricing index futures given expected
dividend amount
Nifty futures trade on NSE as one, two and three-month contracts.
Money can be borrowed at a rate of 10% per annum. What will be the
price of a new two-month futures contract on Nifty?
PARTICIPANTS
UP Basis-nc
Basis-
dw
Price NC Basis-nc
Basis-up
DOWN Basis-nc
Basis-
dw
Long Hedge case 1 (No change in basis)
Suppose that
In July when the Yen is received the spot and futures price
are 0.7200 and 0.7250 cents/Yen respectively.
Payoff?
Short 4 contracts
______________________
Alternatively.
_____________________________
Alternatively.
-$0.90