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Introduction to derivatives


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Published in: Business, Economy & Finance

Introduction to derivatives

  1. 1. Presented By Fenil Shah 18 th June, 2011
  2. 2. Content: <ul><li>Introduction </li></ul><ul><li>Factors Driving The Growth Of Derivatives </li></ul><ul><li>Types of Derivatives </li></ul><ul><li>Participants </li></ul><ul><li>Underlying Asset Class </li></ul><ul><li>Economic functions </li></ul><ul><li>Benefits </li></ul><ul><li>Criticism </li></ul><ul><li>Derivatives in India </li></ul>
  3. 3. Introduction <ul><li>Derivatives are synthetic instruments </li></ul><ul><li>They derive value from an underlying asset class </li></ul><ul><li>Asset classes range from financial instruments to commodities. </li></ul><ul><li>Common underlying theme of derivatives is that they are leveraged products. </li></ul>
  4. 4. Factors Driving The Growth Of Derivatives <ul><li>Increased volatility. </li></ul><ul><li>Increased integration with the international </li></ul><ul><li>markets. </li></ul><ul><li>Development of more sophisticated risk management tools. </li></ul>
  5. 5. Types of Derivatives <ul><li>Futures/Forwards. </li></ul><ul><li>Options </li></ul><ul><li>Swaps </li></ul><ul><li>Baskets </li></ul><ul><li>Swaptions </li></ul>
  6. 6. Derivative Positions and Participants <ul><li>Naked open position taking a directional call on the markets </li></ul><ul><li>Hedge against underlying asset class </li></ul><ul><li>Arbitrage position within an asset class </li></ul><ul><li>Speculators </li></ul><ul><li>Hedgers </li></ul><ul><li>Arbitrageurs </li></ul>
  7. 7. Underlying Asset Class <ul><li>Asset classes: financial which includes currencies and commodities </li></ul><ul><li>Financial asset classes: Interest rates, equities and currencies </li></ul><ul><li>Commodities range from agricultural commodities to minerals and metals </li></ul>
  8. 8. Economic Functions <ul><li>Leverage </li></ul><ul><li>Speculate & make a profit </li></ul><ul><li>Hedge or mitigate risk in the underlying </li></ul><ul><li>Obtain exposure to the underlying </li></ul>
  9. 9. Benefits <ul><li>Derivatives facilitate the buying and selling of risk. </li></ul><ul><li>Helps increasing Buying in the underlying. </li></ul><ul><li>Create Liquidity in the Market. </li></ul>
  10. 10. Criticism <ul><li>Possible large losses. </li></ul><ul><li>Counter-party risk. </li></ul><ul><li>Leverage of an economy's debt. </li></ul>
  11. 11. Derivatives in India <ul><li>The structured derivative market in India is relatively new (about 10 years old) </li></ul><ul><li>However derivatives have caught the fancy of the market and exchange traded equity and commodity derivatives are vibrant. </li></ul>
  12. 12. Equity Derivatives in India <ul><li>Nifty index futures are the highest traded contracts </li></ul><ul><li>Single stock futures are actively traded for arbitrage </li></ul><ul><li>Nifty index options are also traded actively </li></ul><ul><li>Single stock options do not trade actively </li></ul>
  13. 13. Factors to Study in Nifty Futures <ul><li>Open interest </li></ul><ul><li>Traded volumes as % to total derivative volumes </li></ul><ul><li>Basis spread </li></ul><ul><li>Movement of spread </li></ul><ul><li>Roll overs </li></ul><ul><li>Calendar Spreads </li></ul>
  14. 14. Factors to Study in Nifty Options <ul><li>Changes in price </li></ul><ul><li>Open interest </li></ul><ul><li>Implied Volatility </li></ul><ul><li>Put call parity </li></ul>
  15. 15. Factors to Study in Single Stock Futures <ul><li>Open interest </li></ul><ul><li>Basis Spread </li></ul><ul><li>Cost of carry </li></ul><ul><li>Volumes </li></ul><ul><li>Top traded single stock futures </li></ul>