Derivative ppt
- 2. NAME ROLL NO. HARSH ADHIYA 01 KESHAV AGARWAL 02 NEIL GALA 09 ABHISHEK OZA 20 YATIN PRABHU 25 DHAVAL SOLANKI 29
- 3. The term “derivatives” is used to refer to financial instruments which derive their value from some underlying assets. The underlying assets could be equities (shares), debt (bonds, T-bills, and notes), currencies, and even indices of these various assets, such as the Nifty 50 Index. Derivatives contracts are bought and sold by a large number of individuals, institutions and other’s for a variety of purposes. When the price of the underlying changes, the value of the derivative also changes. E.g. The value of the gold futures contract is derived from the value of underlying asset i.e. gold.
- 4. The Bombay Cotton Trade Association started future trading in 1875. In 1952 the Govt. banned cash settlement and option trading. In 1995 a prohibition of trading options was lifted. In 1999 the Securities Contract (Regulation) Act of 1956 was amended and derivatives could be declared “securities”. NSE started trade in future & option by 2005.
- 6. A forward contract or simply a forward is a contract between two parties to buy or sell an asset at a certain future date for a certain price that is pre-decided on the date of the contract. The future date is referred to as expiry date and the pre-decided price is referred to as Forward Price. It is the customized contract, in the sense that the term of the contract are agreed upon by the individual parties. Hence it is traded on Over The Counter (OTC). Default risk, Credit risk & Counter-party risk involved in this type of contract.
- 8. Like a forward contract, a futures contract is an agreement between two parties in which the buyer agrees to buy an underlying asset from the seller, at a future date at a price that is agreed upon today. Unlike a forward contract, a futures contract is not a private transaction but gets traded on a recognized stock exchange. In addition, a futures contract is standardized by the exchange. Both buyer and seller of the futures contracts are protected against the counter party risk by an entity called the Clearing Corporation.
- 10. Like forwards and futures, options are derivative instruments that provide the opportunity to buy or sell an underlying asset on a future date. Options can be divided into two different categories depending upon the primary exercise styles associated with options. These categories are American option & European option. There are two types of options—call options and put options—which are explained below.
- 12. Call option gives the buyer the right but not the obligation to buy a given quantity of the underlying assets, at a given price on or before a given future date. If assets price is higher than the strike price – Option is in the money. If assets price is exactly at the strike price – Option is at the money. If assets price is below the strike price – Option is out of the money.
- 15. Put gives the buyer the right but not obligation to sell a given quantity of the underlying asset at a given price on or before a given date. If asset price is lower than the strike price – Option is in the money. If asset price is exactly at the strike price – Option is at the money. If asset price is higher than the strike price – Option is out of the money.
- 18. Swaps are private agreement between two parties to exchange cash flows in the future according to pre arranged formula. They can be regarded as portfolio’s of forward contract. The two commonly used swaps are: Interest rate swaps: This entail swapping only the interest related cash flows between the parties in the same currency. Currency swaps: This entail swapping both principal and interest between the parties with the cash flows in one direction being in a different currency than those in the opposite direction.
- 19. Exchange Traded Derivatives: Derivatives which are traded on an exchange are called exchange traded derivatives. Trades on an exchange generally take place with anonymity i.e. buyer and seller do not know each other. Generally go through the clearing corporation. E.g. S&PCNX nifty futures, OPTINDX nifty. OTC Derivatives: A derivative contract which is privately negotiated is called the OTC derivative. OTC trades have no anonymity and they generally do not go through a clearing corporation. E.g. foreign exchange transaction between banks and its cliants.
- 21. Hedge is the position taken in derivative exchange/markets for the purpose of reducing risk. A person who takes such position is called hedger. A hedger uses the derivatives market to reduce risk caused by movement in prices of shares/securities, commodities, exchange rates, interest rate, indices, etc. The position taken by hedger is opposite to the risk he is exposed. Taking an opposite position to the risk exposure is called hedging strategy.
- 22. A speculator may be defined as a investor who is willing to take a risk by taking derivatives position with the expectation to earn profits. The speculator forecasts the future economic conditions and decides which position (long or short) to be taken will yield a profit if his forecast is correct.
- 23. An arbitrageur is an intelligent trader who attempts to make profits in a derivatives market by simultaneously entering into two transaction at a time in two different markets and takes advantage of the difference in pricing. The arbitrage opportunities available in two markets usually do not last long because of heavy transaction by arbitrageur when such opportunity arises.