Presented By:
Megha Jain
Samrudhi Soni
Contents
Derivatives
Financial Derivatives
Types of Financial Derivatives
Commodity Derivatives
Benefits of Commodity Derivatives
Derivatives
•In the context of securities contracts (regulations) act, 1956 defines
“derivates” as the instruments whose value is derived from one or more
underlying financial asset.
•The underlying instrument could be a financial security, a securities index or
some combination of securities, indexes and commodities.
•They hedge the risk of owing things that are subject to unexpected price
fluctuations.
Derivatives
Commodity
Basic
Instrument
Forward Future Option Swaps
Financial
Complex
Instrument
Exotic Swaptions Leaps
Features of Derivatives
Contract between two parties
Value of underlying asset
Specified obligation
Types of trading
No physical delivery
Deferred payment instrument
Secondary market instruments
Standardized and customized
Financial
Derivatives
Financial derivatives
•These are financial instrument that are linked to a specific financial
instrument or indicator of commodity, and through which specific
financial risks can be traded in financial markets in their own right.
•The value of financial derivatives derives from the price of an underlying
item, such as an asset or index.
•Financial derivates are used for a number of purposes including risk
management, hedging, arbitrage between markets and speculation.
Financial Instruments
Short term securities
Interest rate
Common shares/stock.
Bonds and debentures
Stock index value
Foreign currency, etc.
Forwards
• It is a cash market transaction in which delivery of the instrument is
deferred until the contract has been made.
• the delivery is made in future, the price is determined on the initial
trade date.
•The contract terms like delivery price and quantity are mutually agreed
upon by the parties to the contract.
•These are traded over-the-counter and are not dealt with on an
exchange unlike future contracts.
Futures
It is an agreement between two parties to buy or sell an asset at a
certain time in the future at a certain price.
Future contracts are special type of forward contracts in the sense that
the former are standardized exchange-traded contracts.
Unlike forward contracts, the counterparty to a future contract is the
clearing corporations on the appropriate exchange.
Future often are settled in cash or cash equivalents, rather than
requiring physical delivery of the underlying asset.
These are traded on an organized exchange like NSE, BSE, etc.
These involve standardized contract terms.
Options
It represents the right to buy or sell a security or other asset during a
given time for a specified price (the ‘strike’ price).
Option
Call option – it gives the buyer the right but not the obligation to buy
a given quantity of the underlying asset, at a give price or on before a
given future date.
Put option- it gives the buyer the right but not the obligation to sell
a given quantity of the underlying asset, at a give price or on before
a given future date.
Swaps
These are private agreements between two parties to exchange cash flows in
the future according to a pre determined formula.
They are regarded as a portfolios of forward contract. these are traded OTC
through swap dealers.
swaps
Interest swaps- these entail swapping only the interest- related cash flows
between the parties in the same currency.
Currency swaps- these entail swapping both the principal and interest
between the parties, with the cash flows in one direction being in a
different currency than those in the opposite direction.
Commodity
Derivatives
Commodity Market
A commodity market is a market that trades in primary economic
sector rather than manufactured products.Soft commodities are
agricultural products such as wheat, coffee, cocoa and sugar. Hard
commodities are mined, such as gold and oil.
commodity market is a contaract and legal agreement between two
people for1 of them to either buy or sell the commodity or have boption
to buy or sale the commodity,which would be the underlying assetr in
this case,to the other person at a specific price within a specific time
limit.
Specific price is called exercise price.
Specific length of time is shown by thwe expiration date on the
coontract.
Investors use derivatives to predict the oprice of future correctly , and
get a return on their investment.
These return offer high return and high risk so they are not for all
investors especially conservatives ones.
Benefits of trading in commodity market
•Price risk management
•Price discovery
•An option for high net worth investors
•Commodities as an asset class for diversification of portfolio risk
•Control on Prices manipulation
•Useful to the producer
Commodity Future Trading
The trade enters buy / sell order for specific contract
The order is executed on the floor of the exchange by open-
outcry ,or an electonic trading platform and trade is made.
The exchange clearing house collects the requirwed margin from
the cleatring number (all trades of non-clearing member must
be registered and settled through a clearing member).
The executed trade gives the trader an open option.
The exchange increases the open interest to reflect the trader’s
new option position.
•There can be 2 cases which are as follows :
•The trader offset his position before delivery noticed period starts.
•The trader enters into the delivery noticed period with the intention of giving /taking
delivery.
In Case (1)
The text is squred-off or offset
through a reversing trade
Clearing house releases and
returns clearing member’s
margin money deposits
Any capital gain on the trade is paid-
out to the customer,while losses are
deducted from the margin deposits.
If losses exceed the margin
funds deposited,the clearing
member colllects the
difference from the trader in
form of margin call.
The exchange adjusts open
interest to reflect the close of
an open position .
In case (2)
Again these can
be 2 cases :
• physical delivery
• cash delivery
Physical
delivery
• When open contracts run into delivery period,then
contracts are initiated for delivery
Cash delivery
• When neither sellr nor buyer itends to give or take dilevery,
open contracts on expiry are cash settled at due date rate .
• Due dates for this purpose are notified by the exchange .
Derivatives

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Derivatives

  • 2. Contents Derivatives Financial Derivatives Types of Financial Derivatives Commodity Derivatives Benefits of Commodity Derivatives
  • 3. Derivatives •In the context of securities contracts (regulations) act, 1956 defines “derivates” as the instruments whose value is derived from one or more underlying financial asset. •The underlying instrument could be a financial security, a securities index or some combination of securities, indexes and commodities. •They hedge the risk of owing things that are subject to unexpected price fluctuations.
  • 4. Derivatives Commodity Basic Instrument Forward Future Option Swaps Financial Complex Instrument Exotic Swaptions Leaps
  • 5. Features of Derivatives Contract between two parties Value of underlying asset Specified obligation Types of trading No physical delivery Deferred payment instrument Secondary market instruments Standardized and customized
  • 7. Financial derivatives •These are financial instrument that are linked to a specific financial instrument or indicator of commodity, and through which specific financial risks can be traded in financial markets in their own right. •The value of financial derivatives derives from the price of an underlying item, such as an asset or index. •Financial derivates are used for a number of purposes including risk management, hedging, arbitrage between markets and speculation.
  • 8. Financial Instruments Short term securities Interest rate Common shares/stock. Bonds and debentures Stock index value Foreign currency, etc.
  • 9. Forwards • It is a cash market transaction in which delivery of the instrument is deferred until the contract has been made. • the delivery is made in future, the price is determined on the initial trade date. •The contract terms like delivery price and quantity are mutually agreed upon by the parties to the contract. •These are traded over-the-counter and are not dealt with on an exchange unlike future contracts.
  • 10. Futures It is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. Future contracts are special type of forward contracts in the sense that the former are standardized exchange-traded contracts. Unlike forward contracts, the counterparty to a future contract is the clearing corporations on the appropriate exchange. Future often are settled in cash or cash equivalents, rather than requiring physical delivery of the underlying asset. These are traded on an organized exchange like NSE, BSE, etc. These involve standardized contract terms.
  • 11. Options It represents the right to buy or sell a security or other asset during a given time for a specified price (the ‘strike’ price). Option Call option – it gives the buyer the right but not the obligation to buy a given quantity of the underlying asset, at a give price or on before a given future date. Put option- it gives the buyer the right but not the obligation to sell a given quantity of the underlying asset, at a give price or on before a given future date.
  • 12. Swaps These are private agreements between two parties to exchange cash flows in the future according to a pre determined formula. They are regarded as a portfolios of forward contract. these are traded OTC through swap dealers. swaps Interest swaps- these entail swapping only the interest- related cash flows between the parties in the same currency. Currency swaps- these entail swapping both the principal and interest between the parties, with the cash flows in one direction being in a different currency than those in the opposite direction.
  • 14. Commodity Market A commodity market is a market that trades in primary economic sector rather than manufactured products.Soft commodities are agricultural products such as wheat, coffee, cocoa and sugar. Hard commodities are mined, such as gold and oil. commodity market is a contaract and legal agreement between two people for1 of them to either buy or sell the commodity or have boption to buy or sale the commodity,which would be the underlying assetr in this case,to the other person at a specific price within a specific time limit.
  • 15. Specific price is called exercise price. Specific length of time is shown by thwe expiration date on the coontract. Investors use derivatives to predict the oprice of future correctly , and get a return on their investment. These return offer high return and high risk so they are not for all investors especially conservatives ones.
  • 16. Benefits of trading in commodity market •Price risk management •Price discovery •An option for high net worth investors •Commodities as an asset class for diversification of portfolio risk •Control on Prices manipulation •Useful to the producer
  • 17. Commodity Future Trading The trade enters buy / sell order for specific contract The order is executed on the floor of the exchange by open- outcry ,or an electonic trading platform and trade is made. The exchange clearing house collects the requirwed margin from the cleatring number (all trades of non-clearing member must be registered and settled through a clearing member). The executed trade gives the trader an open option. The exchange increases the open interest to reflect the trader’s new option position.
  • 18. •There can be 2 cases which are as follows : •The trader offset his position before delivery noticed period starts. •The trader enters into the delivery noticed period with the intention of giving /taking delivery.
  • 19. In Case (1) The text is squred-off or offset through a reversing trade Clearing house releases and returns clearing member’s margin money deposits Any capital gain on the trade is paid- out to the customer,while losses are deducted from the margin deposits. If losses exceed the margin funds deposited,the clearing member colllects the difference from the trader in form of margin call. The exchange adjusts open interest to reflect the close of an open position .
  • 20. In case (2) Again these can be 2 cases : • physical delivery • cash delivery Physical delivery • When open contracts run into delivery period,then contracts are initiated for delivery Cash delivery • When neither sellr nor buyer itends to give or take dilevery, open contracts on expiry are cash settled at due date rate . • Due dates for this purpose are notified by the exchange .