Derivative Market

Presented by Sujan Neupane Nepal Derivative Exchange Limited(NDEX) Position: Intern

Today’s Topic of Presentation
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Introduction to Derivative Types of Derivative Future vs. Forward Derivative Market Risk in Derivative Market Market Analysis Structure of derivative Market in Nepal Benefits of derivative Market Future vs. Stock Market Trading Procedure in Future Market Calculation of profit/loss. Operators in derivative Market Market interpretation Conclusion & recommendation

Introduction to Derivative
 A security whose price is dependent upon or

derived from one or more underlying assets. For ex stocks, bonds, commodities, currencies, interest rates and market indexes.
 It is merely a contract between two or more parties

whose value is determined by fluctuations in the underlying asset.
 Most derivatives are characterized by high

leverage.

Types of derivative Derivative future Option forward swaps .

expiry etc. seller.Future  A futures contract is a standardized contract between two parties to exchange a specified asset of standardized quantity and quality for a price agreed today (the future price or the strike price) with delivery occurring at a specified future date.  The contracts are traded on a futures exchange like NDEX  Every future contract has features like buyer. . the delivery date. price.

 .  Parties to the contract assumes both long and short position.  These contracts are not traded in exchange.Forward A forward contract is an agreement to buy or sell an asset on a specified date for a specified price.

 Calls give the buyer the right but not the obligation to buy a given quantity of the underlying asset. but not the obligation to sell a given quantity of the underlying asset at a given price on or before a given date.Option  Options are of two types . . at a given price on or before a given future date.calls and puts.  Puts give the buyer the right.

.  Currency swaps: These entail swapping both principal and interest between the parties. the money which is being swapped is in different currency for both parties.Swap  Swaps are private agreements between two parties to exchange cash flows in the future. Also.  They can be regarded as portfolios of forward contracts.  The two commonly used swaps are: Interest rate swaps: These entail swapping only the interest related cash flows between the parties in the same currency.

NDEX over-the – counter market Not standardized Standardized Usually one specified delivery date Settled at the end of contract Range of delivery Settled daily .Future vs. For ex. forward contract Forward contract Future contract Private contract between Traded through two parties and traded on exchange.

.Derivative Market  The derivatives market is the financial market for derivatives. which are derived from other forms of assets. financial instruments like futures contracts or options.

DERIVATIVE MARKET Exchange Traded Derivatives Over The Counter Derivative s Nepal Derivative Exchange Limited(NDEX ) Mercantile Exchange Limited(MEX) Commodity Future Exchange Limited(CFX) others .

 Over-the-counter (OTC) derivatives are contracts that are traded (and privately negotiated) directly between two parties. without going through an exchange or other intermediary. A derivatives exchange is a market where individual’s trade standardized contracts that have been defined by the exchange.  Exchange-traded derivative contracts (ETD) Those derivatives instruments that are traded via specialized derivatives exchanges or other exchanges. For Example: contract between farmer and dealer. forward rate agreements. and takes initial margin from both sides of the trade to act as a guarantee. Derivatives exchange acts as an intermediary to all related transactions. .

Risks in derivative market  Credit risk  Market risk  liquidity risk  legal risk  operational risk .

 Enable transactions to be made at this price quickly and easily (provision of liquidity).What do derivatives market do?  Determine a fair price for the commodities it trades(Price discovery).  Enable transactions to be made at as low a cost as possible (Minimization of trading costs). .

Import and export regulation .Money flow index (MFI) .Weather condition .Natural disaster .Market Analysis  Fundamental Analysis .Demand and supply condition .Production and consumption. • Technical Analysis .Government interference. .Distance between consuming centers to producing center. .Commodity Channel index (CCI) .Relative Strength index (RSI) .

a buy signal might be given when the CCI moved back above -100.  It range between +100(overbought) to - 100(oversold).  CCI (+100).  From oversold level.  From overbought. CCI (-100).Bullish.Commodity Channel index (CCI)  Developed by Donald Lambert. a sell signal might be given when the CCI moves back above +100.Bearish. .

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If the RSI is below 50. . it generally mean that the stock’s losses are greater than gains.Relative Strength index       Developed by J. Welles Wilder. According to Wilder. Dash midline at 50 signals of no trend ( neutral). RSI is considered overbought when above 70 and oversold when below 30. It oscillates between zero and 100. Relative Strength Index (RSI) is a momentum oscillator that measures the speed and change of price movements. (Vice-versa).

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Above 80 suggest an asset has been overbought. MFI accounts for Volume. .(100/(1+money rate)).Money Flow index (MFI)  It is used as measure of the Strength of Money      going in and out of security. Money Rate= Positive money Flow/ Negative money Flow Money Flow index(MFI)= 100. MFI is range bound between 0 and 100. It values below 20 suggests that an asset has been oversold.

Structure of derivative market in Nepal Nepal Derivative Exchange Limited Clearing Member Clearing Bank: NIBL Trading Member Sub-Trading Member Trader/client Trader/ Client .

Kathmandu Derivative Clearing service. For ex: kasthamandap clearing house pvt.  Trading Member It’s a financial intermediary which interfaces with the investors to buy or sell securities on behalf of them and charges some percentage of the settlement amount for doing so . Ltd. Clearing Members (CMs) are the members of the Clearing Houses/Clearing Corporations who facilitate settlement of trades done on exchanges.

 Financial institutions can mitigate or even eliminate the  Investors can invest in the products and can get attractive returns.  End users can buy the goods at a pre-determined price so that they can get away from the risk of increase in price. . traders.Benefits of Derivative Market in Nepal  Growers. exporters. interest rate risk by locking their interest rate with derivative exchange. importers can insure their risk from the fluctuating product prices by taking futures position in the derivative market.

Difference between Future and stock Market Future market Standardized Contract Highly Leverage Risk Can be managed through time limit Stock market Company ownership Low leverage Difficult to Manage risk .

G.  Margin call by broker.  commission with Vat  Capital gain tax (C. For Ex: 1 kg gold contract needs RS. 75000 initial margin.T)  .How to Trade in future market Initial margin is to be maintained as per contract specification and size.

 Spread is difference between ask and bid price.400 . For 1 kg Gold contract maximum spread is 4.How to calculate profit or loss in future market?  Spread is the profit or loss for the future traders.  Tick value for 1 kg Gold = contract size/Quotation Base =1000gm/10gm = 100 • Initial Profit/loss = Spread* tick value For 1 kg Gold contract profit/ loss is +/.

Operators in Derivative Market  Hedgers .  Speculators . in pursuit of profit and eliminate mis-pricing .Operators.Operators who operate in the different markets simultaneously.  Arbitrageurs . who intentionally take the risk from hedgers in pursuit of profit.Operators. who want to transfer a risk component of their portfolio.

Market Interpretation Price Rising Rising Volume Rising Falling Open Interest Rising Falling Interpretatio n Market is Strong Market is Weakening Falling Falling Rising Falling Rising Falling Market is weak Market is strengthening .

 It can bring the stability in the market condition of Nepal. . For EX: Gold and oil market price risk can be minimized through future market.  It creates healthy climate for demand and supply.Conclusion & Recommendation • Derivative market is emerging concept in Nepal.  It can diversify risk of Nepalese Investors.

ANY QUESTIONS???? BEST OF LUCK FOR NDEX THANK YOU .

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