SlideShare a Scribd company logo
1 of 23
Download to read offline
What is a “Derivative”?
 The term ‘Derivative’ stands for a contract whose
price is derived from or is dependent upon an
underlying asset.
 The underlying asset could be a financial asset
such as currency, stock and market index, an
interest bearing security or a physical commodity.
 As Derivatives are merely contracts between two
or more parties, anything like weather data or
amount of rain can be used as underlying assets.
As Per SCRA ACT 1956……..
“Derivative” includes—
 (A) 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;
 (B) a contract which derives its value from the
prices, or index of prices, of underlying
securities;
Examples of Derivative
Contracts
 Farmer locks in a specified price for the commodity,
prices could rise (due to, for instance, reduced supply
because of weather-related events) and the farmer will
end up losing any additional income that could have
been earned. Likewise, prices for the commodity could
drop and the miller will have to pay more for the
commodity than he otherwise would have.
 Over the Counter (OTC) derivatives are those which
are privately traded between two parties and involves
no exchange or intermediary.
 Non-standard products are traded in the so-called
over-the-counter (OTC) derivatives markets.
 The Over the counter derivative market consists of
the investment banks and include clients like hedge
funds, commercial banks, government sponsored
enterprises etc.
What is OTC (Over the counter)??
 A derivatives exchange is a market where
individuals trade standardized contracts that have
been defined by the exchange.
 A derivatives exchange acts as an intermediary
to all related transactions, and takes initial margin
from both sides of the trade to act as a
guarantee.
Exchange Traded Derivatives Market
TYPES OF DERIVATIVE CONTRACTS
DERIVATIVE CONTRACTS
Forwards
FUTURES
OPTIONS
DERIVATIVE CONTRACTS
WARRANTS
LEAPS
SWAPS
DERIVATIVE CONTRACTS
Forwards
 A forward contract is a customized contract
between two parties to buy or sell an asset at a
specified price on a future date. A forward contract
can be used for hedging or speculation
Futures
 Futures contract is a standardized contract between
two parties to exchange a specified asset of
standardized quantity and quality for a price agreed
today (the futures price or the strike price) with
delivery occurring at a specified future date, the
delivery date
 Since the futures price will generally change
daily, the difference in the prior agreed-upon
price and the daily futures price is settled daily
also.
 The exchange will draw money out of one party's
margin account and put it into the other's so that
each party has the appropriate daily loss or
profit.
 Thus on the delivery date, the amount
exchanged is not the specified price on the
contract but the spot value.
Concept of Margin
 Options
OPTIONS
CALL PUT
Option
 An option is a derivative financial
instrument that specifies a contract between
two parties for a future transaction on an
asset at a reference price.
 The buyer of the option gains the right, but
not the obligation, to engage in that
transaction, while the seller incurs the
corresponding obligation to fulfill the
transaction.
 Warrants: Options generally have lives of up to
one year, the majority of options traded on
options exchange shaving a maximum maturity
of nine months.
 LEAPS:LEAPS means Long-Term Equity
Anticipation Securities. These are options
having a maturity of upto three years
 Swaps
Currency Swaps
Interest Rate
Swaps
CONTIN
 Interest Rate Swaps: These entails wapping
only the interest related cash flows
between the parties in the same currency.
 Currency swaps: These entails wapping
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
EXAMPLE
Participants in Derivative
markets
Hedgers Speculators Arbitrageurs
Hedgers
 The process of managing the risk or risk
management is called as hedging. Hedgers
are those individuals or firms who manage
their risk with the help of derivative
products.
 Hedging does not mean maximizing of
return. The main purpose for hedging is to
reduce the volatility of a portfolio by
reducing the risk.
 Speculators
 Speculators do not have any position on which
they enter into futures and options Market i.e.,
they take the positions in the futures market
without having position in the underlying cash
market.
 They only have a particular view about future
price of a commodity, shares, stockindex,
interest rates or currency. They take risk in turn
from high returns. They help in providing the
market the much desired volume and liquidity
 Arbitrageurs
 Arbitrage is the simultaneous purchase
and sale of the same underlying in two
different markets in an attempt to make
profit from price discrepancies between
the two markets.
 Arbitrage involves activity on several
different instruments or assets
simultaneously to take advantage of
price distortions judged to be only
temporary.
 Call Option: Right but not the obligation to
buy
 Put Option: Right but not the obligation to sell
 Option Price: The amount per share that an
option buyer pays to the seller
 Expiration Date: The day on which an option
is no longer valid
 Strike Price: The reference price at which the
underlying may be traded
 Long Position: Buyer of an option assumes
long position
 Short Position: Seller of an option assumes
short position
Some Terminologies
Derivative market

More Related Content

What's hot

Foreign Currency Exposure And Risk
Foreign Currency Exposure And RiskForeign Currency Exposure And Risk
Foreign Currency Exposure And RiskBrahma Kumaris
 
Payoff options
Payoff optionsPayoff options
Payoff optionsAnushya D
 
Foreign exchange market
Foreign exchange marketForeign exchange market
Foreign exchange marketPrince Sathya
 
Formula Plan in Securities Analysis and Port folio Management
Formula Plan in Securities Analysis and Port folio ManagementFormula Plan in Securities Analysis and Port folio Management
Formula Plan in Securities Analysis and Port folio ManagementSuryadipta Dutta
 
Futures and future contracts & trading mechanism of derivatives on stock...
Futures and future contracts & trading mechanism of  derivatives on stock...Futures and future contracts & trading mechanism of  derivatives on stock...
Futures and future contracts & trading mechanism of derivatives on stock...Ameya Ranadive
 
Derivatives - Basics of Derivatives contract covered in this ppt
Derivatives - Basics of Derivatives contract covered in this pptDerivatives - Basics of Derivatives contract covered in this ppt
Derivatives - Basics of Derivatives contract covered in this pptSundar B N
 
Introduction to investments
Introduction to investmentsIntroduction to investments
Introduction to investmentsMohammed Umair
 
Financial derivatives
Financial derivativesFinancial derivatives
Financial derivativesmittali1503
 
Types of futures contract
Types of futures contractTypes of futures contract
Types of futures contractKranthi Kumar
 
Pricing forward & future contracts
Pricing forward & future contractsPricing forward & future contracts
Pricing forward & future contractsAmeya Ranadive
 
Swaps (derivatives)
Swaps (derivatives)Swaps (derivatives)
Swaps (derivatives)kunaljoshi79
 
Derivatives basics
Derivatives basicsDerivatives basics
Derivatives basicsAjay Mishra
 

What's hot (20)

forward and future contract
forward and future contractforward and future contract
forward and future contract
 
Foreign Currency Exposure And Risk
Foreign Currency Exposure And RiskForeign Currency Exposure And Risk
Foreign Currency Exposure And Risk
 
Payoff options
Payoff optionsPayoff options
Payoff options
 
Foreign exchange market
Foreign exchange marketForeign exchange market
Foreign exchange market
 
Formula Plan in Securities Analysis and Port folio Management
Formula Plan in Securities Analysis and Port folio ManagementFormula Plan in Securities Analysis and Port folio Management
Formula Plan in Securities Analysis and Port folio Management
 
Futures and future contracts & trading mechanism of derivatives on stock...
Futures and future contracts & trading mechanism of  derivatives on stock...Futures and future contracts & trading mechanism of  derivatives on stock...
Futures and future contracts & trading mechanism of derivatives on stock...
 
Derivatives - Basics of Derivatives contract covered in this ppt
Derivatives - Basics of Derivatives contract covered in this pptDerivatives - Basics of Derivatives contract covered in this ppt
Derivatives - Basics of Derivatives contract covered in this ppt
 
Option contract
Option contractOption contract
Option contract
 
Introduction to investments
Introduction to investmentsIntroduction to investments
Introduction to investments
 
Forex Market - Risk Exposure
Forex Market - Risk ExposureForex Market - Risk Exposure
Forex Market - Risk Exposure
 
Financial derivatives
Financial derivativesFinancial derivatives
Financial derivatives
 
Types of futures contract
Types of futures contractTypes of futures contract
Types of futures contract
 
Swap
SwapSwap
Swap
 
Derivatives defined
Derivatives definedDerivatives defined
Derivatives defined
 
Pricing forward & future contracts
Pricing forward & future contractsPricing forward & future contracts
Pricing forward & future contracts
 
Stock market.
Stock market.Stock market.
Stock market.
 
Unraveling the ‘Yield Curve’
Unraveling the ‘Yield Curve’ Unraveling the ‘Yield Curve’
Unraveling the ‘Yield Curve’
 
Swaps (derivatives)
Swaps (derivatives)Swaps (derivatives)
Swaps (derivatives)
 
Derivatives trading
Derivatives  tradingDerivatives  trading
Derivatives trading
 
Derivatives basics
Derivatives basicsDerivatives basics
Derivatives basics
 

Similar to Derivative market

Similar to Derivative market (20)

Introduction to derivatives
Introduction to derivativesIntroduction to derivatives
Introduction to derivatives
 
DERIVATIVES UNIT 2.docx
DERIVATIVES UNIT 2.docxDERIVATIVES UNIT 2.docx
DERIVATIVES UNIT 2.docx
 
Financial derivatives
Financial derivativesFinancial derivatives
Financial derivatives
 
Derivatives
DerivativesDerivatives
Derivatives
 
Derivatives
DerivativesDerivatives
Derivatives
 
FINACIAL DERIVATIVE General.doc
FINACIAL DERIVATIVE General.docFINACIAL DERIVATIVE General.doc
FINACIAL DERIVATIVE General.doc
 
Derivatives
DerivativesDerivatives
Derivatives
 
Derivatives & risk management
Derivatives & risk managementDerivatives & risk management
Derivatives & risk management
 
Rati ranjan
Rati ranjanRati ranjan
Rati ranjan
 
Derivatives
DerivativesDerivatives
Derivatives
 
Financial derivatives
Financial derivativesFinancial derivatives
Financial derivatives
 
Derivatives market
Derivatives marketDerivatives market
Derivatives market
 
Financial derivatives types & participants
Financial derivatives types & participantsFinancial derivatives types & participants
Financial derivatives types & participants
 
Financial derivatives (2)
Financial derivatives (2)Financial derivatives (2)
Financial derivatives (2)
 
Financial derivatives
Financial derivativesFinancial derivatives
Financial derivatives
 
Devrivatives in india
Devrivatives in indiaDevrivatives in india
Devrivatives in india
 
workers participation
workers participationworkers participation
workers participation
 
Derivatives.pptx
Derivatives.pptxDerivatives.pptx
Derivatives.pptx
 
Derivatives kotak 2010
Derivatives kotak 2010Derivatives kotak 2010
Derivatives kotak 2010
 
Financial Derivatives
Financial DerivativesFinancial Derivatives
Financial Derivatives
 

Recently uploaded

Money Forward Integrated Report “Forward Map” 2024
Money Forward Integrated Report “Forward Map” 2024Money Forward Integrated Report “Forward Map” 2024
Money Forward Integrated Report “Forward Map” 2024Money Forward
 
TEST BANK For Auditing & Assurance Services A Systematic Approach, 11th Editi...
TEST BANK For Auditing & Assurance Services A Systematic Approach, 11th Editi...TEST BANK For Auditing & Assurance Services A Systematic Approach, 11th Editi...
TEST BANK For Auditing & Assurance Services A Systematic Approach, 11th Editi...marcuskenyatta275
 
Introduction to Health Economics Dr. R. Kurinji Malar.pptx
Introduction to Health Economics Dr. R. Kurinji Malar.pptxIntroduction to Health Economics Dr. R. Kurinji Malar.pptx
Introduction to Health Economics Dr. R. Kurinji Malar.pptxDrRkurinjiMalarkurin
 
ekthesi-trapeza-tis-ellados-gia-2023.pdf
ekthesi-trapeza-tis-ellados-gia-2023.pdfekthesi-trapeza-tis-ellados-gia-2023.pdf
ekthesi-trapeza-tis-ellados-gia-2023.pdfSteliosTheodorou4
 
2024-04-09 - Pension Playpen roundtable - slides.pptx
2024-04-09 - Pension Playpen roundtable - slides.pptx2024-04-09 - Pension Playpen roundtable - slides.pptx
2024-04-09 - Pension Playpen roundtable - slides.pptxHenry Tapper
 
Uk-NO1 Rohani Amil In Islamabad Amil Baba in Rawalpindi Kala Jadu Amil In Raw...
Uk-NO1 Rohani Amil In Islamabad Amil Baba in Rawalpindi Kala Jadu Amil In Raw...Uk-NO1 Rohani Amil In Islamabad Amil Baba in Rawalpindi Kala Jadu Amil In Raw...
Uk-NO1 Rohani Amil In Islamabad Amil Baba in Rawalpindi Kala Jadu Amil In Raw...Amil baba
 
What is sip and What are its Benefits in 2024
What is sip and What are its Benefits in 2024What is sip and What are its Benefits in 2024
What is sip and What are its Benefits in 2024prajwalgopocket
 
Global Macroeconomics: Introducing GDP 2.0.pdf
Global Macroeconomics: Introducing GDP 2.0.pdfGlobal Macroeconomics: Introducing GDP 2.0.pdf
Global Macroeconomics: Introducing GDP 2.0.pdfnqsh
 
Seeman_Fiintouch_Newsletter_Apr-2024 (1).pdf
Seeman_Fiintouch_Newsletter_Apr-2024 (1).pdfSeeman_Fiintouch_Newsletter_Apr-2024 (1).pdf
Seeman_Fiintouch_Newsletter_Apr-2024 (1).pdfAshis Kumar Dey
 
(Gender) tone at the top: the effect of board diversity on gender inequality
(Gender) tone at the top: the effect of board diversity on gender inequality(Gender) tone at the top: the effect of board diversity on gender inequality
(Gender) tone at the top: the effect of board diversity on gender inequalityGRAPE
 
Demographic transition and the rise of wealth inequality
Demographic transition and the rise of wealth inequalityDemographic transition and the rise of wealth inequality
Demographic transition and the rise of wealth inequalityGRAPE
 
Test bank for corporate finance 13th stephen ross randolph westerfield jeffre...
Test bank for corporate finance 13th stephen ross randolph westerfield jeffre...Test bank for corporate finance 13th stephen ross randolph westerfield jeffre...
Test bank for corporate finance 13th stephen ross randolph westerfield jeffre...marcuskenyatta275
 
Hello this ppt is about seminar final project
Hello this ppt is about seminar final projectHello this ppt is about seminar final project
Hello this ppt is about seminar final projectninnasirsi
 
Aon-UK-DC-Pension-Tracker-Q1-2024. slideshare
Aon-UK-DC-Pension-Tracker-Q1-2024. slideshareAon-UK-DC-Pension-Tracker-Q1-2024. slideshare
Aon-UK-DC-Pension-Tracker-Q1-2024. slideshareHenry Tapper
 
ΤτΕ: Ανάπτυξη 2,3% και πληθωρισμός 2,8% φέτος
ΤτΕ: Ανάπτυξη 2,3% και πληθωρισμός 2,8% φέτοςΤτΕ: Ανάπτυξη 2,3% και πληθωρισμός 2,8% φέτος
ΤτΕ: Ανάπτυξη 2,3% και πληθωρισμός 2,8% φέτοςNewsroom8
 
2B Nation-State.pptx contemporary world nation
2B  Nation-State.pptx contemporary world nation2B  Nation-State.pptx contemporary world nation
2B Nation-State.pptx contemporary world nationko9240888
 
OAT_RI_Ep18 WeighingTheRisks_Mar24_GlobalCredit.pptx
OAT_RI_Ep18 WeighingTheRisks_Mar24_GlobalCredit.pptxOAT_RI_Ep18 WeighingTheRisks_Mar24_GlobalCredit.pptx
OAT_RI_Ep18 WeighingTheRisks_Mar24_GlobalCredit.pptxhiddenlevers
 
Building pressure? Rising rents, and what to expect in the future
Building pressure? Rising rents, and what to expect in the futureBuilding pressure? Rising rents, and what to expect in the future
Building pressure? Rising rents, and what to expect in the futureResolutionFoundation
 
Zimbabwe's New Gold-Backed Currency- A Path to Stability or Another Monetary.pdf
Zimbabwe's New Gold-Backed Currency- A Path to Stability or Another Monetary.pdfZimbabwe's New Gold-Backed Currency- A Path to Stability or Another Monetary.pdf
Zimbabwe's New Gold-Backed Currency- A Path to Stability or Another Monetary.pdfFREELANCER
 

Recently uploaded (19)

Money Forward Integrated Report “Forward Map” 2024
Money Forward Integrated Report “Forward Map” 2024Money Forward Integrated Report “Forward Map” 2024
Money Forward Integrated Report “Forward Map” 2024
 
TEST BANK For Auditing & Assurance Services A Systematic Approach, 11th Editi...
TEST BANK For Auditing & Assurance Services A Systematic Approach, 11th Editi...TEST BANK For Auditing & Assurance Services A Systematic Approach, 11th Editi...
TEST BANK For Auditing & Assurance Services A Systematic Approach, 11th Editi...
 
Introduction to Health Economics Dr. R. Kurinji Malar.pptx
Introduction to Health Economics Dr. R. Kurinji Malar.pptxIntroduction to Health Economics Dr. R. Kurinji Malar.pptx
Introduction to Health Economics Dr. R. Kurinji Malar.pptx
 
ekthesi-trapeza-tis-ellados-gia-2023.pdf
ekthesi-trapeza-tis-ellados-gia-2023.pdfekthesi-trapeza-tis-ellados-gia-2023.pdf
ekthesi-trapeza-tis-ellados-gia-2023.pdf
 
2024-04-09 - Pension Playpen roundtable - slides.pptx
2024-04-09 - Pension Playpen roundtable - slides.pptx2024-04-09 - Pension Playpen roundtable - slides.pptx
2024-04-09 - Pension Playpen roundtable - slides.pptx
 
Uk-NO1 Rohani Amil In Islamabad Amil Baba in Rawalpindi Kala Jadu Amil In Raw...
Uk-NO1 Rohani Amil In Islamabad Amil Baba in Rawalpindi Kala Jadu Amil In Raw...Uk-NO1 Rohani Amil In Islamabad Amil Baba in Rawalpindi Kala Jadu Amil In Raw...
Uk-NO1 Rohani Amil In Islamabad Amil Baba in Rawalpindi Kala Jadu Amil In Raw...
 
What is sip and What are its Benefits in 2024
What is sip and What are its Benefits in 2024What is sip and What are its Benefits in 2024
What is sip and What are its Benefits in 2024
 
Global Macroeconomics: Introducing GDP 2.0.pdf
Global Macroeconomics: Introducing GDP 2.0.pdfGlobal Macroeconomics: Introducing GDP 2.0.pdf
Global Macroeconomics: Introducing GDP 2.0.pdf
 
Seeman_Fiintouch_Newsletter_Apr-2024 (1).pdf
Seeman_Fiintouch_Newsletter_Apr-2024 (1).pdfSeeman_Fiintouch_Newsletter_Apr-2024 (1).pdf
Seeman_Fiintouch_Newsletter_Apr-2024 (1).pdf
 
(Gender) tone at the top: the effect of board diversity on gender inequality
(Gender) tone at the top: the effect of board diversity on gender inequality(Gender) tone at the top: the effect of board diversity on gender inequality
(Gender) tone at the top: the effect of board diversity on gender inequality
 
Demographic transition and the rise of wealth inequality
Demographic transition and the rise of wealth inequalityDemographic transition and the rise of wealth inequality
Demographic transition and the rise of wealth inequality
 
Test bank for corporate finance 13th stephen ross randolph westerfield jeffre...
Test bank for corporate finance 13th stephen ross randolph westerfield jeffre...Test bank for corporate finance 13th stephen ross randolph westerfield jeffre...
Test bank for corporate finance 13th stephen ross randolph westerfield jeffre...
 
Hello this ppt is about seminar final project
Hello this ppt is about seminar final projectHello this ppt is about seminar final project
Hello this ppt is about seminar final project
 
Aon-UK-DC-Pension-Tracker-Q1-2024. slideshare
Aon-UK-DC-Pension-Tracker-Q1-2024. slideshareAon-UK-DC-Pension-Tracker-Q1-2024. slideshare
Aon-UK-DC-Pension-Tracker-Q1-2024. slideshare
 
ΤτΕ: Ανάπτυξη 2,3% και πληθωρισμός 2,8% φέτος
ΤτΕ: Ανάπτυξη 2,3% και πληθωρισμός 2,8% φέτοςΤτΕ: Ανάπτυξη 2,3% και πληθωρισμός 2,8% φέτος
ΤτΕ: Ανάπτυξη 2,3% και πληθωρισμός 2,8% φέτος
 
2B Nation-State.pptx contemporary world nation
2B  Nation-State.pptx contemporary world nation2B  Nation-State.pptx contemporary world nation
2B Nation-State.pptx contemporary world nation
 
OAT_RI_Ep18 WeighingTheRisks_Mar24_GlobalCredit.pptx
OAT_RI_Ep18 WeighingTheRisks_Mar24_GlobalCredit.pptxOAT_RI_Ep18 WeighingTheRisks_Mar24_GlobalCredit.pptx
OAT_RI_Ep18 WeighingTheRisks_Mar24_GlobalCredit.pptx
 
Building pressure? Rising rents, and what to expect in the future
Building pressure? Rising rents, and what to expect in the futureBuilding pressure? Rising rents, and what to expect in the future
Building pressure? Rising rents, and what to expect in the future
 
Zimbabwe's New Gold-Backed Currency- A Path to Stability or Another Monetary.pdf
Zimbabwe's New Gold-Backed Currency- A Path to Stability or Another Monetary.pdfZimbabwe's New Gold-Backed Currency- A Path to Stability or Another Monetary.pdf
Zimbabwe's New Gold-Backed Currency- A Path to Stability or Another Monetary.pdf
 

Derivative market

  • 1.
  • 2. What is a “Derivative”?  The term ‘Derivative’ stands for a contract whose price is derived from or is dependent upon an underlying asset.  The underlying asset could be a financial asset such as currency, stock and market index, an interest bearing security or a physical commodity.  As Derivatives are merely contracts between two or more parties, anything like weather data or amount of rain can be used as underlying assets.
  • 3. As Per SCRA ACT 1956…….. “Derivative” includes—  (A) 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;  (B) a contract which derives its value from the prices, or index of prices, of underlying securities;
  • 4. Examples of Derivative Contracts  Farmer locks in a specified price for the commodity, prices could rise (due to, for instance, reduced supply because of weather-related events) and the farmer will end up losing any additional income that could have been earned. Likewise, prices for the commodity could drop and the miller will have to pay more for the commodity than he otherwise would have.
  • 5.  Over the Counter (OTC) derivatives are those which are privately traded between two parties and involves no exchange or intermediary.  Non-standard products are traded in the so-called over-the-counter (OTC) derivatives markets.  The Over the counter derivative market consists of the investment banks and include clients like hedge funds, commercial banks, government sponsored enterprises etc. What is OTC (Over the counter)??
  • 6.  A derivatives exchange is a market where individuals trade standardized contracts that have been defined by the exchange.  A derivatives exchange acts as an intermediary to all related transactions, and takes initial margin from both sides of the trade to act as a guarantee. Exchange Traded Derivatives Market
  • 7. TYPES OF DERIVATIVE CONTRACTS DERIVATIVE CONTRACTS Forwards FUTURES OPTIONS
  • 9. DERIVATIVE CONTRACTS Forwards  A forward contract is a customized contract between two parties to buy or sell an asset at a specified price on a future date. A forward contract can be used for hedging or speculation
  • 10. Futures  Futures contract is a standardized contract between two parties to exchange a specified asset of standardized quantity and quality for a price agreed today (the futures price or the strike price) with delivery occurring at a specified future date, the delivery date
  • 11.  Since the futures price will generally change daily, the difference in the prior agreed-upon price and the daily futures price is settled daily also.  The exchange will draw money out of one party's margin account and put it into the other's so that each party has the appropriate daily loss or profit.  Thus on the delivery date, the amount exchanged is not the specified price on the contract but the spot value. Concept of Margin
  • 13. Option  An option is a derivative financial instrument that specifies a contract between two parties for a future transaction on an asset at a reference price.  The buyer of the option gains the right, but not the obligation, to engage in that transaction, while the seller incurs the corresponding obligation to fulfill the transaction.
  • 14.  Warrants: Options generally have lives of up to one year, the majority of options traded on options exchange shaving a maximum maturity of nine months.  LEAPS:LEAPS means Long-Term Equity Anticipation Securities. These are options having a maturity of upto three years
  • 16. CONTIN  Interest Rate Swaps: These entails wapping only the interest related cash flows between the parties in the same currency.  Currency swaps: These entails wapping 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
  • 18. Participants in Derivative markets Hedgers Speculators Arbitrageurs
  • 19. Hedgers  The process of managing the risk or risk management is called as hedging. Hedgers are those individuals or firms who manage their risk with the help of derivative products.  Hedging does not mean maximizing of return. The main purpose for hedging is to reduce the volatility of a portfolio by reducing the risk.
  • 20.  Speculators  Speculators do not have any position on which they enter into futures and options Market i.e., they take the positions in the futures market without having position in the underlying cash market.  They only have a particular view about future price of a commodity, shares, stockindex, interest rates or currency. They take risk in turn from high returns. They help in providing the market the much desired volume and liquidity
  • 21.  Arbitrageurs  Arbitrage is the simultaneous purchase and sale of the same underlying in two different markets in an attempt to make profit from price discrepancies between the two markets.  Arbitrage involves activity on several different instruments or assets simultaneously to take advantage of price distortions judged to be only temporary.
  • 22.  Call Option: Right but not the obligation to buy  Put Option: Right but not the obligation to sell  Option Price: The amount per share that an option buyer pays to the seller  Expiration Date: The day on which an option is no longer valid  Strike Price: The reference price at which the underlying may be traded  Long Position: Buyer of an option assumes long position  Short Position: Seller of an option assumes short position Some Terminologies