Presentation on Derivatives market

1. 2nd topic

2. DERIVATIVE MKT
 Instrument which derives its value from some
underlying assets. These underlying assets
could be equities, debt,, currencies and even
indices
 Spot market
is a securities market in which security are sold
for cash and delivered immediately

3. INDEX
 Barometer to check the movement of stock
 Is a basket of identified stock and its value is
computed by taking the weighted average of
the price of the constituent stock of index

4. FORWARDS
 It is contract between 2 parties to buy or sell an asset at a
certain future date Expiry for certain price that is pre
decided on the date of contract
 Important conditions in fwd contract:
Time of delivery
Qty/volume of underlying assets
Fwd price

5. SETTLEMENT OF CONTRACT
 Physical settlement
Spot price > than fwd price
Spot price < fwd price
Spot price = fwd price
 Cash settlement
No delivery of goods only margin involved

6. FUTURES
 Similar to fwd contracts
 Agreement between 2 parties
 Buyer agrees to buy an asset from seller on future
date @ a predetermined price. However, futures
contract is not a private contract since it gets traded
on a recognized Exchange
 All terms except price are decided by exchange

7. ROLE OF CLEARING CORPORATION
 Futures contract are through recognized stock
exchange both buyer and seller are protected
against counterparty risk by an entity called CC
 If any of the party defaults cc comes in to
picture to fulfill the obligation thereby protecting
them from counterparty risk

8. MARGIN MONEY
to be able to guarantee the fulfillment of the
obligations under the contract, the cc holds an
amount as a security from both the parties
 Initial margin
Money deposited by both the buyer and seller to
assure the trade

9. MONEYNESS OF THE OPTION
Call (buy) mkt
movement upwards
Put (sell) mkt
movement downwards
In the money Mkt price> strike price Mkt price< strike price
At the money Mkt price= strike price Mkt price= strike price
Out of the money Mkt price<strike price Mkt price>strike price

10. INTRINSIC VALUE
 Price difference between underlying
security and the strike price
Time value
• Price of the option exceeds its intrincic value.
Time value premium of an option declines as
the expiration date approaches.
Option pricing
• IV+TV= OP

11. FACTOR INFLUENCING PRICE OF AN OPTION
 UNDERLYING STOCK
 STRIKE PRICE OF THE OPTION ITSELF
 TIME REMAINING UNTIL THE OPTION EXPIRES
 VOLATILITY OF UNDERLYING STOCKS

12. BLACK SHOLES OPTION PRICING MODEL
 FIRST OPTION PRICING MODEL
 SIMILAR TO EUROPEAN STYLE
 MODIFIED TO AMERICAN STYLE
 MODEL FOR PRICING OPTIONS BEFORE OPTION WERE TRADED
 PREMIUM
 SPECULATIVE AND RISKY
 OPTION SELLER IS OPTION WRITER (GAIN IS LTD AND LOSS IS
UNLTD)
 OPTION BUYER LOSS IS LTD TO PREMIUM & GAIN IS UNLTD
CHARACTERISTICS OF OPTION

13. MOTIVES OF DERIVATIVES
 HEDGING
 SPECULATORS
 ARBITRAGE – RISK FREE SPECULATION

14. FEATURES OF DERIVATIVES
 UNDERLYING ASSETS
 DELIVERY
 SPECULATIVE
 SETTLEMENT (COMPULSORILY SETTLED)

15. TRADING PROCESS
 BUYER
PURCHASE ORDER
BROKE
R
SELLER
EXCHANGE
SETTLEMENT AND PAYMENT SETTLEMENT AND PAYMENT
TRANSACTION THROUGH TRADING SOFTWARE
BROKE
R
SALES ORDER
EXCHAN
GE

16. UNDERLYING ASSETS OF DERIVATIVES
 COMMODITY
 STOCK
 CURRENCY
 INTEREST RATES
 BARTER
 COMMODITY SWAPS ARE RARE
 CURRENCY SWAPS (xchange currencies at future date)
 INTEREST RATE SWAPS
SWAP

17. FEATURES OF SWAP
 NEGOTIATED CONTRACTS
 INTERMEDIARY
 COMBINATION OF FORWARD CONTRACTS
 SETTLEMENT

18. ADVANTAGES OF DERIVATIVES
 RISK MITIGATION
 REARRANGEMENT OF RISK
 EASE IN TRADING
 INVESTMENT
 MONEY FLOWS
 EQULIBRIUM

19. DISADVANTAGE OF DERIVATIVES
 RISK SPECULATION
 MARKET MOVEMENTS
 HOT MONEY
 TIMED SETTLEMENT
 ACCOUNTING AMBIGUITIES

20. DERIVATIVE MARKET WORLD WIDE
 EUREX- F&O XCHANGE
 CHOICE FOR TRADING AND CLEARING OF
DERIVATIVES
 OFFERS OPEN,SIMPLE DEMOCRATIC AND
COST EFFECTIVE ACCES FROM ANY PT OF
THE GLOBE
 700 LOCATIONS

21. NASDAQ
Largest US electronic change
3200 companies listed
Derivatives in India
1875 mumbai-1st commodity xchange
CC -1918
Oilseeds future mkt 1900 then wheat then
rawjutes so on…
India original home for options-1898

22.  NCDEX -2003 55 COMMODITIES
 MCX-7000 CR
 NABARD,NSE,BANKS,INSURANCE
COMPANIES ETC..
 BSE AND NSE
 Stock market futures and index futures