Derivativves & risk management

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Derivativves & risk management

  1. 1. DERIVATIVES & RISK MANAGEMENT derivatives 1 YOGESH NAMDEO INGLE.MBA (FINANCE), NET (MANAGEMENT), Ph.D (WIP), G.D.C &A, NCMP.
  2. 2.  Contract  Price is derived from or is dependent upon an underlying asset. derivatives 2 YOGESH NAMDEO INGLE.MBA (FINANCE), NET (MANAGEMENT), Ph.D (WIP), G.D.C &A, NCMP.
  3. 3.  Underlying asset could be a financial asset such as 1. Currency 2. Stock and market index 3. An interest bearing security 4. Physical commodity derivatives 3 YOGESH NAMDEO INGLE.MBA (FINANCE), NET (MANAGEMENT), Ph.D (WIP), G.D.C &A, NCMP.
  4. 4.  Derivative contracts are also traded on – 1. Electricity 2. Weather 3. Temperature 4. Volatility derivatives 4 YOGESH NAMDEO INGLE.MBA (FINANCE), NET (MANAGEMENT), Ph.D (WIP), G.D.C &A, NCMP.
  5. 5.  According to the Securities Contract Regulation Act, (1956) the term “derivative” includes:  A security derived from a debt instrument, share, loan, whether secured or unsecured, risk instrument or contract for differences or any other form of security.  A contract which derives its value from the prices or index of prices of underlying securities. derivatives 5 YOGESH NAMDEO INGLE.MBA (FINANCE), NET (MANAGEMENT), Ph.D (WIP), G.D.C &A, NCMP.
  6. 6. Types of Derivative Contracts  Forward Contracts  Futures Contracts  Options Contracts  Swaps derivatives 6 YOGESH NAMDEO INGLE.MBA (FINANCE), NET (MANAGEMENT), Ph.D (WIP), G.D.C &A, NCMP.
  7. 7. Forward Contracts  An agreement to buy or sell an asset on a specified date for a specified price.  Long position  Short position  Negotiated bilaterally by the parties to the contract. derivatives 7 YOGESH NAMDEO INGLE.MBA (FINANCE), NET (MANAGEMENT), Ph.D (WIP), G.D.C &A, NCMP.
  8. 8. Features of forward contracts  Bilateral contracts  Unique  Not available in public domain  Has to be settled derivatives 8 YOGESH NAMDEO INGLE.MBA (FINANCE), NET (MANAGEMENT), Ph.D (WIP), G.D.C &A, NCMP.
  9. 9. Limitations of forward contracts  Lack of centralization of trading,  Illiquidity  Counterparty risk derivatives 9 YOGESH NAMDEO INGLE.MBA (FINANCE), NET (MANAGEMENT), Ph.D (WIP), G.D.C &A, NCMP.
  10. 10. Introduction to Futures  Standardized and exchange traded  Quantity of the underlying  Quality of the underlying  The date and the month of delivery  The units of price quotation and minimum price change  Location of settlement derivatives 10 YOGESH NAMDEO INGLE.MBA (FINANCE), NET (MANAGEMENT), Ph.D (WIP), G.D.C &A, NCMP.
  11. 11. derivatives11 YOGESH NAMDEO INGLE.MBA (FINANCE), NET (MANAGEMENT), Ph.D (WIP), G.D.C &A, NCMP.
  12. 12. derivatives12 YOGESH NAMDEO INGLE.MBA (FINANCE), NET (MANAGEMENT), Ph.D (WIP), G.D.C &A, NCMP.
  13. 13. Options Contracts  An option gives the holder of the option the right to do something in future. The holder does not have to exercise this right.  Purchase of an option requires an up-front payment.  Non linear or asymmetrical profit profiles derivatives 13 YOGESH NAMDEO INGLE.MBA (FINANCE), NET (MANAGEMENT), Ph.D (WIP), G.D.C &A, NCMP.
  14. 14.  Buyer of an option: The buyer of an option is the one who by paying the option premium buys the right but not the obligation to exercise his option on the seller/ writer.  Writer of an option: The writer of a call/put option is the one who receives the option premium and is thereby obliged to sell/buy the asset if the buyer exercises on him. derivatives 14 YOGESH NAMDEO INGLE.MBA (FINANCE), NET (MANAGEMENT), Ph.D (WIP), G.D.C &A, NCMP.
  15. 15. Two basic types of options Call option  It gives the holder the right but not the obligation to buy an asset by a certain date for a certain price. Put option  A It gives the holder the right but not the obligation to sell an asset by a certain date for a certain price. derivatives 15 YOGESH NAMDEO INGLE.MBA (FINANCE), NET (MANAGEMENT), Ph.D (WIP), G.D.C &A, NCMP.
  16. 16. derivatives16 YOGESH NAMDEO INGLE.MBA (FINANCE), NET (MANAGEMENT), Ph.D (WIP), G.D.C &A, NCMP.
  17. 17. derivatives17 YOGESH NAMDEO INGLE.MBA (FINANCE), NET (MANAGEMENT), Ph.D (WIP), G.D.C &A, NCMP.
  18. 18. derivatives18 YOGESH NAMDEO INGLE.MBA (FINANCE), NET (MANAGEMENT), Ph.D (WIP), G.D.C &A, NCMP.
  19. 19. derivatives19 YOGESH NAMDEO INGLE.MBA (FINANCE), NET (MANAGEMENT), Ph.D (WIP), G.D.C &A, NCMP.
  20. 20. Swaps  Swaps are private agreements between two parties to exchange cash flows in the future. The two commonly used swaps  Interest rate swaps: These entail swapping only the interest related cash flows between the parties in the same currency.  Currency swaps: These 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. derivatives 20 YOGESH NAMDEO INGLE.MBA (FINANCE), NET (MANAGEMENT), Ph.D (WIP), G.D.C &A, NCMP.
  21. 21. Participants in a Derivative Market  Hedgers  Speculators  Arbitrageurs derivatives 21 YOGESH NAMDEO INGLE.MBA (FINANCE), NET (MANAGEMENT), Ph.D (WIP), G.D.C &A, NCMP.
  22. 22. derivatives22 YOGESH NAMDEO INGLE.MBA (FINANCE), NET (MANAGEMENT), Ph.D (WIP), G.D.C &A, NCMP.
  23. 23. Distinction between Futures and Forwards derivatives 23 YOGESH NAMDEO INGLE.MBA (FINANCE), NET (MANAGEMENT), Ph.D (WIP), G.D.C &A, NCMP.
  24. 24. Basic purpose of derivatives  The main purpose of derivatives is to transfer risk from one person or firm to another, that is, to provide insurance. For example-  If a farmer before planting can guarantee a certain price he will receive, he is more likely to plant.  Derivatives improve overall performance of the economy derivatives 24 YOGESH NAMDEO INGLE.MBA (FINANCE), NET (MANAGEMENT), Ph.D (WIP), G.D.C &A, NCMP.
  25. 25. derivatives25 YOGESH NAMDEO INGLE.MBA (FINANCE), NET (MANAGEMENT), Ph.D (WIP), G.D.C &A, NCMP.
  26. 26. Help yourself derivatives 26 YOGESH NAMDEO INGLE.MBA (FINANCE), NET (MANAGEMENT), Ph.D (WIP), G.D.C &A, NCMP.

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