Financial Securities and

Derivatives
Dr.Saravanakrishnan V
Why to study FSD?
Job roles in Derivatives

 Risk Management
 Trading
 Analyst
 Operation
 Do you how stock market function?
 Do you the difference between index and stock?
Derivatives

 A derivative is a contract between two parties which derives its value/price

from an underlying asset. The most common types of derivatives are futures,
options, forwards and swaps.
Types of derivatives

 Forwards
 Futures
 Options
 Swaps
Evolution of Derivatives
 Derivative emerged as hedging product.
 Derivatives on commodities is first emerged
 First, organized attempt, CBOT Chicago Board of Trade
provided the initial platform for byers and sellers to enter
forward contracts in 1864.
 These exchanges traded forward contracts became knowns as
future contracts.
 CBOT today operates round the clock and is present virtually
across the globe.
 Types of derivatives - commodity, energy, weather, exchange
rates, indices, interest rates, stocks, etc.,
 Then merged with Chicago Mercantile Exchange (CME)
 Contrary the development of Indian derivatives is very old.
 Bombay Cotton Trade Association Ltd was set up in 1875 for futures
trading in Cotton.
 In 1893 Bombay Cotton Exchange Ltd was established for the same
purpose.
 In 1900 with the establishment of Gujarat Vyapari Mandali futures of
trading in groundnut, castor seed, and cotton commenced.
 Future trading in bullion began in erstwhile Bombay in 1920.
 Forward Market Commission (FMC) was established in 1953. In due
course several other exchanges were created in country to trade in
diverse commodities.
 MCX, NMCE, NBOT, NCDEX & ICEX
Participants and Functions

Participants Functions
 Hedgers  Enable Price Discovery
 Speculators  Facilitate Transfer of Risk
 Arbitragers  Provide Leveraging
Misuses, Criticism of Derivatives

 Increased Volatility
 Increased Bankruptcies
 Burden of Increased Regulation
Myths about Derivatives

 Derivatives are new, complex, high-tech financial products created by wall street’s rocket
scientist.
 Derivatives are purely speculative, highly leveraged instrument
 The enormous size of the financial derivatives market dwarfs bank capital, thereby
making derivatives trading an unsafe and unsound banking practice
 Only large multinational corporations and large banks have a purpose for using derivatives
 Financial derivatives are simply the latest risk-management fad
 Derivatives take money out of productive processes and never put anything back
 Only risk-seeking organisation should use derivatives
 The risks associated with financial derivatives are new and unknown
 Because of the risks associated with derivatives, banking regulators should ban their use
by any institution covered by federal deposit insurance.
Simple Problem

• A dealer sold one January Nifty futures contract for Rs.250,000 on 15th
January. Each Nifty futures contract is for delivery of 50 Nifties. On
25th January, the index closed at 5100. How much profit/loss did he
make ?
 Manoj owns five hundred shares of ABC Ltd. Around budget time, he gets
uncomfortable with the price movements. Which of the following will give
him the hedge he desires (assuming that one futures contract = 100 shares) ?
 (a) Buy 5 ABC Ltd.futures contracts
 (b) Sell 5 ABC Ltd.futures contracts
 (c) Sell 10 ABC Ltd.futures contracts
 (d) Buy 10 ABC Ltd.futures contracts