Financial Derivatives

Dr Roshna Varghese
Asst Prof, RCBS Email: roshna@rajagiri.edu; roshnavarghese@gmail.com Mob : 98474743625

Evaluation Criteria
• • • • • • Mid – Trimester Exam End Trimester Exam Assignment Projects/Presentations Class Participation Attendance TOTAL : 20 marks : 40 marks : 10 marks : 15 marks : 10 Marks : 5 marks : 100 marks

Financial Derivatives. (2006). New Delhi : Prentice Hall of India . Hull. (2007). Thomson South Western • S. Options. Strong. Derivatives : An Introduction. Futures and other Derivatives.References • John C. 6th ed. Kumar ( 2007).S. New Delhi : Prentice Hall of India • Robert A.S.

real options . interest rate derivative • Module 5 • Swaps.Outline of the lectures • Module 1 • Introduction to Derivatives • Module 2 • Options • Module 3 • Futures • Module 4 • Currency. commodity. credit derivatives.

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.Investment • Investment is a commitment of funds made in the expectation of some positive rate of return.

if Income > expenditure • Investment – Savings – expectation of return .Investment and Savings • Savings lead to investment • Savings.

Characteristics of investment • Return • Risk • Marketability • Safety .

Financial Assets .Equity shares. machinery.g. work of art (dealt in product market) –Intangible Assets : legal claims • E.Investment : Assets –Tangible Assets • Land. bonds… (dealt in financial Market) .

precious objects .Investment Avenues • Corporate Securities • Equity shares Preference shares • Debentures/Bonds • GDRs/ADRs • • • • • • • • Derivatives Govt and semi govt Securities Money market instruments Mutual fund schemes Deposits in banks and non banking companies Post office Savings/Life insurance policies Provident fund schemes Real assets – Real estate.

debentures or other marketable securities like securities of incorporated companies or other body corporate or government.Securities Definition of “Security” “Securities include shares. bonds.” Securities Contract Regulation Act 1956 .

Chart .Securities Market • Financial Market .

Derivatives market • Primary or Secondary market . • Equity Market. Ready forward contracts (Repo) market. Debt Market .Securities Market • Money Market • Debt instruments having a maturity of less than one year are dealt in money market. • T.bill market. Call money market. Commercial Paper market • Capital Market • Securities with maturities of more than one year are bought and sold in the capital market.

Derivatives .

.Derivatives • Instruments that derive value from underlying assets. • Changes in price of the underlying asset affect the price of the derivative security.

coffee . Bonds and other debt instruments • • • • Foreign Exchange rate Interest rate Index of prices Weather.Derivatives – Underlying assets • Commodities • including grain. • Precious metal like gold and silver • Securities • stock. .……..

Types of Derivatives • Options • Futures • Complex Derivatives • Swaps • Credit Derivatives .

S. p.Derivatives permitted in India Derivatives Equity Debt Forex Commoditi es Index futures & Options Single stock options & futures Interest rate futures & forwards Interest rate swaps Currency futures Currency options Forwards Cross currency swaps Forwards Futures S.4 . Financial Derivatives. Kumar ( 2007).S. New Delhi : Prentice Hall of India.

at a price set in the present • In formalized futures and options trading on exchanges. quantity. standardized agreements specify price.What are futures and options? • A contract to make or take delivery of a product in the future. but have expanded to a wide range of products . and month of delivery • Started in agriculture.

Derivatives . pp.S.History • Not a modern invention • First option transaction by Greek Philosopher Thales from Miletus (624 BC – 546 BC) • Futures markets evolved from commodity markets • Agriculture futures • Money lenders used to compel their borrowers to sell their forthcoming crop at a price agreed upon at the time of taking loan S.S.2-3 . New Delhi : Prentice Hall of India. Financial Derivatives. Kumar ( 2007).

Chicago Metal Exchange (CME) in 1898 • Trading in financial derivatives – foreign currency started in Chicago Metal Exchange in 1972 • Publication of Black Scholes Option pricing model in 1973 .Derivatives .History • Establishment of Chicago Board of Trade (CBoT) in 1848 • New York Mercantile Exchange (NYMEX) in 1877 • London Metal Exchange (LME).

prohibited derivatives trading • Reintroduction in 2000 • Trading in index futures began on BSE and NSE • 2001 : Trading in options on index and stocks on BSE and NSE • 2002 – Trading on single stock futures • 2003 – Interest rate futures. in 1969.Derivatives in India • In India • First organised futures market in 1875 in Bombay • Bombay Cotton Trade Association Ltd • After independence. commodity futures • 2008– Currency futures .

What led to the development of Derivatives Market? • Economic pursuits became very risky • Breakthrough in option pricing .

Where do derivatives trade • BSE • NSE • NCDEX ( National Commodity and Derivative Exchange) • MCX (Multi Commodity Exchange) .

Uses of Derivatives • Risk Management • Risk Transfer • Hedging • Income Generation • Financial Engineering .

Participants in Derivative Market • Hedging (Hedger) • Speculation (Speculator) • Arbitrage (Arbitrageur) .

Alan Greenspan Congressional Testimony. these instruments have come to play an important role in portfolio management. 1988 . May 19.What many critics of equity derivatives fail to realise is that the markets for these instruments have become so large not because of slick sales campaigns but because they are providing economic value to their users. By enabling pension funds and other institutional investors to hedge and adjust positions quickly and inexpensively.

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