Derivatives - Classroom Presentation


Published on

Its all about Derivatives and its categories which i have presented on my lecture

Published in: Economy & Finance
  • Be the first to comment

No Downloads
Total views
On SlideShare
From Embeds
Number of Embeds
Embeds 0
No embeds

No notes for slide

Derivatives - Classroom Presentation

  1. 1. Presentation by,Ragumoorthy Nehrumoorthy
  2. 2. Indian History of DerivativesThe Bombay Cotton trade association started futureTrading in 1875In 1952 the government banned cash settlement andOption TradingIn 1995 a Prohibition of trading options was liftedIn 1999, the Securities Contract (Regulation) Actof 1956 was amended and derivatives could beDeclared “securities”NSE Started trade in future and option by 2005
  3. 3. Derivative is . . . .A Derivative is a Financial Instrument whosevalue depends on – is derived from – the valueof some other financial instrument, called theunderlying asset.The value of derivative is linked to risk or volatility inEither financial asset, transaction, market rate, orcontingency, and creates a product
  4. 4. Foreign Exchange Agricultural Rate CommoditiesInterest Rates Stocks Underlying Assets Bonds T-Bill Crude Oil Precious Metals
  5. 5. Features of DerivativesTraded on ExchangeAll Transaction in derivatives take place in futurespecific dateHedging Device-Reduces RiskDerivatives are often leveraged, such that a smallmovement in the underlying value can cause aLarge difference in the value of the derivative
  6. 6. Basic Purpose of DerivativesIn Derivative Transactions, one party’s loss is alwaysanother party’s gainThe main purpose of derivatives is to transfer riskfrom one person or firm to another, that is, to provideinsuranceIf a farmer before planting can guarantee a certainprice he will receive, he is more likely to plantDerivatives improve overall performance of theeconomy
  7. 7. Types of Derivatives Contract FuturesForwards Swaps Options
  8. 8. Futures A Financial contract obligating the buyer to purchase an asset, (or the seller to sell an Asset), such as a physical commodity or a financial instrument, at a predetermined Future date and price.Some of the most popular assets on which futuresContracts are available are equity stocks, indices,Commodities and Currency
  9. 9. Margin accounts and marking to marketClearing Corporation requires initial deposits in amargin accountTracks daily gains and losses and posts these to marginaccountsThe contract is settled daily basis which is known as“Marking to Market”
  10. 10. Practical View on Futures & Clearing Corporation
  11. 11. ForwardsA forward contract is a customized contract betweentwo entities, where settlement takes place as a specificdate in the future at Predetermined priceForwards are also known as Private ContractsNormally traded outside exchange
  12. 12. OptionsThe owner of the option has option to sell or buy assetsat a given price on or before given date American Option European OptionAn option that may be An option that may only beexercised on any trading exercised on expiry dateDay on or before expiry
  13. 13. Important Concepts of Option
  14. 14. OptionsCall Option – a right to buy an asset at a predeterminedprice (strike price) on or Before a specific date If asset price is higher 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 below the strike price - Option is out of the money Obviously would not exercise an option that is out of the money
  15. 15. OptionsPut Option – a right to sell and asset at a predeterminedPrice on or before a specific 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
  16. 16. Swaps Swaps are private agreement between two parties to exchange cash flows in the future according to a pre-arranged formulaThey can be regarded as portfolio of forward contractsThe two commonly used Swaps are:(i)Interest Rate Swaps : A interest rate swap entails swapping only the interest related cash flows between the parties in the same currency.(ii) Currency Swaps : A currency swap is a foreign exchange Agreement between two parties to exchange a given amount of one currency for Another and after a specified period of time, to give back the original Amount swapped.
  17. 17. Practical View on SWAPS
  18. 18. Types of Derivatives MarketsOver-the-Counter derivatives : Contracts that are traded between two parties directlywithout going through an exchangeForward and Swap Contracts are OTC derivativesExchange-traded derivatives : Contracts that are traded in derivatives exchanges
  19. 19. Market PlayersHedgers – Transfer of Risk component of their portfolioSpeculators – Intentionally taking the risk from theHedgers in pursuit of profitArbitrageurs – Operating in different marketsSimultaneously, in pursuit of profit and eliminatemis-pricing
  20. 20. Any Questions ?