CHARCTORSTICS OF DERIVATIVES:• It has one or more underling assets.• One or more notional amount are payments provision or both.• Those terms determines the amount of settlement.• It requires no initial net investment that is smaller than would be required for other types of contract that would be expected to have a similar response changes in the marketing factor.• Term required.
IMPORTANCE:• To provide price commitments for future dates.• Giving protection against average movement in future.• In order to reduce the financial risk.
FEATURES OF DERIVATIVES:• A DERIVATIVE INSTRUMENT RELATES TO THE FUTURE CONTRACT BETWEEN TWO PARTIES. IT MEANS THEIR MUST BE A CONTRACT BINDING ON THE UNDERLINED PARTY’S AND THE SAME TO FULL FILLED IN THE FUTURE. THE FUTURE PERIOD MAY BE SHORT OR LONG TERM DEPENDS UP ON THE NATURE OF THE CONTRACT.
• Normally the derivative • In general counter instrument have the parties have specified value which derived obligation under the from the values of derivative contract. The underlined asset. Such nature of the obligation as agricultural would be different as commodity, financial per the type of the assts , etc., the value of installment. derivative depends up • The derivative Contract on the value of can be under taken underlined instruments between the two and which changes as parties. per the changes in the underlined asset.
• The size of the • Derivatives are differed derivative contract payment instruments. depends up on its • Although in the market notional amount. The the notional amount (Face standardized, general value) is the amount and exchange traded used to cal the pay off. derivatives are being• Derivatives are mostly increasingly evolved. secondary market Still there are so many instruments. private negotiated customized, over the counter derivatives are existence.
FINANCIAL DERIVATIVES: OPTIONS• The purchaser of an Option has rights (but not obligations) to buy or sell the asset during a given time for a specified price (the "Strike" price). An Option to buy is known as a "Call," and an Option to sell is called a "Put. "• The seller of a Call Option is obligated to sell the asset to the party that purchased the Option. The seller of a Put Option is obligated to buy the asset.• In a “Covered” Option, the seller of the Option already owns the asset. In a “Naked” Option, the seller does not own the asset• Options are traded on organized exchanges and OTC.
FORWARD CONTRACT• In a Forward Contract, both the seller and the purchaser are obligated to trade a security or other asset at a specified date in the future. The price paid for the security or asset may be agreed upon at the time the contract is entered into or may be determined at delivery.• Forward Contracts generally are traded OTC.
FUTURE CONTRACT• A Future is a contract to buy or sell a standard quantity and quality of an asset or security at a specified date and price.• Futures are similar to Forward Contracts, but are standardized and traded on an exchange, and are valued daily. The daily value provides both parties with an accounting of their financial obligations under the terms of the Future.• Unlike Forward Contracts, the counterparty to the buyer or seller in a Futures contract is the clearing corporation on the appropriate exchange.• Futures often are settled in cash or cash equivalents, rather than requiring physical delivery of the underlying asset.
SWAPS• A Swap is a simultaneous buying and selling of the same security or obligation. Perhaps the best-known Swap occurs when two parties exchange interest payments based on an identical principal amount, called the "notional principal amount."• Think of an interest rate Swap as follows: Party A holds a 10-year $10,000 home equity loan that has a fixed interest rate of 7 %, and Party B holds a 10-year $10,000 home equity loan that has an adjustable interest rate that will change over the "life" of the mortgage. If Party A and Party B were to exchange interest rate payments on their otherwise identical mortgages, they would have engaged in an interest rate Swap.
SWAPS• Interest rate swaps occur generally in three scenarios. Exchanges of a fixed rate for a floating rate, a floating rate for a fixed rate, or a floating rate for a floating rate.• The "Swaps market" has grown dramatically. Today, Swaps involve exchanges other than interest rates, such as mortgages, currencies, and "cross-national" arrangements. Swaps may involve cross- currency payments (U.S. Dollars vs. Mexican Pesos) and cross market payments, e.g., U.S. short-term rates vs. U.K. short-term rates.
WARRANTS• a warrant is a security that entitles the holder to buy the underlying stock of the issuing company at a fixed exercise price until the expiry date.• Warrants and options are similar in that the two contractual financial instruments allow the holder special rights to buy securities. Both are discretionary (JUDGMENT) and have expiration dates. The word warrant simply means to "endow with the right", which is only slightly different from the meaning of option.
BENEFITS OF DERIVATIVES• Through this derivative the financial market has been improved tremendously.• Improvement in the market quality on the underlined equity market.• Diversification• Foreign investors are coming into India would be more comfortable through the derivative market.• Logical step in the development of FM. Through that a change to change economic development in India.
DERIVATIVES FINANCIAL DERIVATIVE COMMODITIES MARKET FUTURE MARKET. REGULATED BY REGULATED BY FORWARD MARKET COMMISSIONSSEBI RBISTOCK OTCEXCHA PARTY -NGE CURRENCY INTERESTEQUITY FUTURES FORWARDS RATE FORW.1 STOCK FUTURES 1.OPTIONS 1. SHORT2. INDEX FUTU. 2.FORWARD TERM3. STOCK / INDES S 2. LONG OPTIONS TERM
DERIVATIVE TRADE IN INDIA• Index futures based on sensex and nifty index are also traded under supervision of SEBI.• The RBI has permitted banks, fin. Institutions a primary dealers to enter into the forward rate of agreement or interest rate swaps in order to facilitate hedging of interest rate risk & also for the development of D markets.• The NSE became the first exchange to launch trading in options of individual securities and also the NSE performs the activity of future contracts first time on 9-9-2001.
REGULATIONS OF FIN. DERIVATIVES IN INDIASTOCK MARKETS :• 15- PUBLICK LIMITED• 5 – LIMITED BY GAURANTEE• 3 – NON-PROFIT MOTO ORG. (VOLANTORY)
UNIT – II• Features of futures• Difference B/W forwards and futures• Financial futures• Trading• Currency future• Interest rate futures.• Pricing of future contract.
Features of futures– FUTURES: - a future contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. It is a strandardised contract which settled through cash or cash equivalents, rather than requiring physical delivery of the underlying asset.
• FEATURES OF FUTURES: CASH OR TRADING CASH TRHOUGH EQUIVALANTS ORGANISED EXCHANGE ASSET REGULATORY FUTURES SETTELMENT AUTHORITY STANDARDISED CLEARING CONTRACT HOUSE
• ORGANISED EXCHANGE: future contracts are traded on an organized exchanges through IMM, LIFFE, NSE, BSE, CBOT, etc.Chicago Board of Trade, International Monetary Market, London International Financial Futures and Options Exchange.• STANDARDIZED : - time, maturity, asset, price, value, etc. was cleared through negotiations.• ASSET SETTLEMENT: - daily settlements and margin settlements will give safeguard to the contractors.
• HOUSE: - all agreements have to posses with clearing houses for smooth functioning and safeguard the settlements.• REGULATORY AUTHORITY: - it will supervise and monitor all activities of futures.• CASH SETTLEMENTS: - Instead of delivery of underlying asset settled through cash.
DIFFERENCE B/W FUTURES & FORWARDS FUTURES FORWARDSRECOGNIZED EXCHANGES TRADING OVER TELEPHONE / OTC DAILY PRICE PRICE FIXED MARKED 2 MARKET MARKET TO MARK NOT NECESSARY EVERYDAY NOT AT RISK RISK PRESENT PARTY RISK IT IS NOT PERFECT HEDGING TAILOR-MADE FOR ABOUT SPECIFIC DATE AND QUANTITY AND DATE QUANTITY SPECIFICALLY DECIDED DELIVERY MODE STANDARDIZED ONE IT IS NUMBER OF CONTRACTS NO FIXED IN A YEAR LIMIT NO LIQUIDITY LIQUIDITY HIGHLY LIQUID MOST OF CONTRACTS DELIVERY FEW CONTRACTS ARE ARE SETTELED SETTELED BY ACTUAL BY DELIVERY DATE DELIVERY DATE
TYPES OF FUTURES TYPES OF FUTURESFINANCIAL FUTURES COMMODITY FUTURES INDEX FUTURES INTEREST RATE CURRENCIES FUTURE & INDIVIDUAL STOCK FUTURES.