1. 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.

2. IMPORTANCE:
• To provide price commitments for future
dates.
• Giving protection against average movement
in future.
• In order to reduce the financial risk.

3. 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.

4. • 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.

5. • 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.

6. DERIVATIVES
FINANCIAL DERIVATIVES COMMODITIES
BASICS: 1. SWAPS
1. FORWARDS 2. EXOITS (NON-
2. FUTURES STANDARS)
3. OPTIONS
4. WARRENTS

7. 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.

8. 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.

9. 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.

10. 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.

11. 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.

12. 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.

13. 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.

14. DERIVATIVES
FINANCIAL DERIVATIVE COMMODITIES
MARKET FUTURE MARKET.
REGULATED BY REGULATED BY
FORWARD MARKET
COMMISSIONS
SEBI RBI
STOCK OTC
EXCHA PARTY
-NGE
CURRENCY INTEREST
EQUITY FUTURES FORWARDS RATE FORW.
1 STOCK FUTURES 1.OPTIONS 1. SHORT
2. INDEX FUTU. 2.FORWARD TERM
3. STOCK / INDES S 2. LONG
OPTIONS TERM

15. 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.

16. REGULATIONS OF FIN. DERIVATIVES IN INDIA
STOCK MARKETS :
• 15- PUBLICK
LIMITED
• 5 – LIMITED BY
GAURANTEE
• 3 – NON-PROFIT
MOTO ORG.
(VOLANTORY)

18. UNIT – II
• Features of futures
• Difference B/W forwards and futures
• Financial futures
• Trading
• Currency future
• Interest rate futures.
• Pricing of future contract.

19. 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.

20. • FEATURES OF FUTURES:
CASH OR TRADING
CASH TRHOUGH
EQUIVALANTS ORGANISED
EXCHANGE
ASSET REGULATORY
FUTURES
SETTELMENT AUTHORITY
STANDARDISED CLEARING
CONTRACT HOUSE

21. • 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.

22. • 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.

23. DIFFERENCE B/W
FUTURES & FORWARDS
FUTURES FORWARDS
RECOGNIZED 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

24. TYPES OF FUTURES
TYPES OF FUTURES
FINANCIAL FUTURES COMMODITY FUTURES
INDEX FUTURES
INTEREST RATE
CURRENCIES
FUTURE &
INDIVIDUAL
STOCK FUTURES.