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DERIVATIVES LESSONS
- 1. DERIVATIVES
- 7. Very high Liquidity as contracts are standardized contracts. Poor Liquidity as contracts are tailor made contracts Liquidation Better; as fragmented markets are brought to the common platform. Poor; as markets are fragmented. Profile Price Discovery Exists, but assumed by Clearing Corporation/ house Exists. Counterparty Risk Contracts are standardized contracts. Differs from trade to trade. Contract Specifications Traded on exchange. Not traded on exchange Operational Mechanism Futures Forward Features
- 10. Option Jargons S = Spot price K = Strike price S > K 2800 > 2700 S = K 2800 = 2800 S < K 2800 < 2900 PUT S < K 2800 < 2900 S = K 2800 = 2800 S > K 2800 > 2700 CALL Out -the-Money (OTM) At-the-Money (ATM) In-the-Money (ITM) Infosys (2800)
- 13. Eg. Stock ONGC (-30) or 0 11 (1200-1230) = 11 OTM 1200 1230 CA 25/01/2006 OPTSTK 0 24 (1200-1200) = 24 ATM 1200 1200 CA 25/01/2006 OPTSTK 7 (1200-1170) = 30 37 ITM 1200 1170 CA 25/01/2006 OPTSTK TIME VALUE INTRINSIC VALUE PREMIUM TYPE OF OPTION SPOT STRIKE CALL / PUT EXPIRY TYPE
- 21. Derivatives’ Strategies Calculation of Historical Volatility 1. Measure the day-to-day price changes in the market: Calculate the natural log of the ratio (R t ) of a stock’s price (S) from the current day (t) to the previous day (t-1): 2. Calculate the Average daily price change (R m ) for a period of time (n) 3. “Average Variance” from the mean is calculated which is the historical volatility
- 26. 1) Cash and Carry Arbitrage Expiry Date Act. Yield (%)* Fut. Price Cash Price Scrip Reversal Date 31-08-2006 14.87 1128.75 1128.61 Reliance 28-08-2006 31-08-2006 13.01 1002.45 992.61 Reliance 07-08-2006 Expiry Date Exp. Yield (%) * Fut. Price Cash Price Scrip Execution Date
- 27. 2) Reverse Cash and Carry Arbitrage Expiry Date Exp. Yield (%) * Fut. Price Cash Price Scrip Reversal Date 31-08-2006 529.84 528.23 Wipro 30-08-2006 31-08-2006 477.17 483.43 Wipro 25-07-2006 Expiry Date Exp. Yield (%) * Fut. Price Cash Price Scrip Execution Date
- 31. 121 NIFTY CONTRACTS : DEPLOYMENT Rs. 16,940,000 Rs. 96,800,000 Total 48,400,000*20% = Rs. 9,680,000 Rs. 48,400,000 Due to Perfect Hedge strategy. Stock Futures 48,400,000*15% = Rs. 7,260,000 4,000*12,100 = Rs. 48,400,000 Nifty Futures (currently @ 4,000) Margin Deployment Contract Value Instrument
- 39. Payoff Diagram: 1150 1200 Short Call Long Stock Hedge position 1142 1218
- 41. Payoff Diagram: Long Put Long Stock Hedged Position 505 500 555
- 43. Payoff Diagram: 520 540 551 537 Long call Short call Hedged position Stock price Profit Loss 0 14 -6
- 45. Payoff Diagram: Long put Short put Hedged position Stock price 1128 1168 1140 1110 Profit Loss 0 20 -10
- 47. Payoff Diagram: 1672 Hedged position Long Call Long put Profit Loss 1800 1928
- 49. Payoff Diagram: 780 820 868 732 Long Put Long Call Hedged position Profit Loss