Derivatives are securities whose value is derived from an underlying asset such as stocks, bonds, currencies, or commodities. There are several types of derivatives including forwards, futures, options, and warrants. Futures contracts obligate the buyer to purchase an asset at a predetermined future date and price. They are standardized and exchange-traded. Options contracts provide the right but not the obligation to buy or sell an underlying asset at a strike price by expiration. Margin requirements are used to minimize counterparty risk for derivatives traders.

1. DERIVATIVESDERIVATIVES

2. Definition of Derivatives.Definition of Derivatives.
 Derivatives are securities whose value isDerivatives are securities whose value is
derived from the underlying security.derived from the underlying security.
 Examples of security: Such as bonds,Examples of security: Such as bonds,
stocks, currencies, commodities, an indexstocks, currencies, commodities, an index
or temperature.or temperature.

3. Types of Derivatives.Types of Derivatives.
 ForwardForward
 FutureFuture
 OptionsOptions
 WarrantsWarrants
Necessity of DerivativesNecessity of Derivatives
 CounterpartyCounterparty
 Common AssetCommon Asset
 MarketMarket
 Contractual AgreementContractual Agreement

4.  CBOE-Chicago Board Options Exchange,CBOE-Chicago Board Options Exchange,
 CBOT-Chicago Board of Trade, USA CBOT-Chicago Board of Trade, USA
 LIFFE-London international financialLIFFE-London international financial
futures Exchanges (LIFFE).futures Exchanges (LIFFE).
 BOX - Boston Options Exchange BOX - Boston Options Exchange
 EDX London - London's Equity DerivativesEDX London - London's Equity Derivatives
Exchange, UK Exchange, UK
MarketsMarkets

5. Forward ContractsForward Contracts

6. Forward ContractsForward Contracts
 Definition:-A forward contract is anDefinition:-A forward contract is an
agreement between two parties to buy oragreement between two parties to buy or
sell an asset at a pre-agreed future pointsell an asset at a pre-agreed future point
in time.in time.
 The owner of a forward contract has theThe owner of a forward contract has the
obligation to buy the underlying asset at aobligation to buy the underlying asset at a
fixed date in the future for a fixed price.fixed date in the future for a fixed price.
 They are traded on, over the counter .They are traded on, over the counter .

7. Example of how the payoff of aExample of how the payoff of a
forward contract worksforward contract works
 ““A” enters a forward contract to buys a houseA” enters a forward contract to buys a house
from “B” $1,04,000 on 1.1.2005from “B” $1,04,000 on 1.1.2005
 Situation 1: On 1.1.2006, if the value of theSituation 1: On 1.1.2006, if the value of the
house is $1,10,000, (spot price)house is $1,10,000, (spot price)
““A” will gain $6000 and “B” will loose $ - 6,000.A” will gain $6000 and “B” will loose $ - 6,000.
 Situation 2: On 1.1.2006, if the value of theSituation 2: On 1.1.2006, if the value of the
house is $ 1,00,000, (spot price)house is $ 1,00,000, (spot price)
““A” will loose $ -4000 and “B” will gain $4000.A” will loose $ -4000 and “B” will gain $4000.

8. Example of How Forward Prices Should BeExample of How Forward Prices Should Be
Agreed Upon ConsideringAgreed Upon Considering the Time valuethe Time value
 On 1.1.2005, the value of the house isOn 1.1.2005, the value of the house is
$1,00,000.$1,00,000.
 If B sold on 1.1.2005, & deposited in bank, heIf B sold on 1.1.2005, & deposited in bank, he
would earn at least 4% p.a. (i.e.$1,04,000)would earn at least 4% p.a. (i.e.$1,04,000)
 If A takes a loan and buys the above house onIf A takes a loan and buys the above house on
1.1.2005 he will have to at least pay 4% interest1.1.2005 he will have to at least pay 4% interest
to the bank.to the bank.
 Hence it would be ideal for A & B to enter into aHence it would be ideal for A & B to enter into a
one year’s forward contract (expire dateone year’s forward contract (expire date
1.1.2006) for at least $1,04,0001.1.2006) for at least $1,04,000

9. FUTURE CONTRACTSFUTURE CONTRACTS

10. Future ContractsFuture Contracts
 Definition: Future contract is an obligation to buy or sell a specific quantityDefinition: Future contract is an obligation to buy or sell a specific quantity
and quality of a commodity or security at a certain price on a specifiedand quality of a commodity or security at a certain price on a specified
future date.future date.
 They are standardized, and exchange tradedThey are standardized, and exchange traded
 Some futures contracts may call for physical delivery of the asset, whileSome futures contracts may call for physical delivery of the asset, while
most are settled in cash.most are settled in cash.
 Example:-Example:-
 Commodities markets farmers often sell futures contracts for the crops andCommodities markets farmers often sell futures contracts for the crops and
livestock they produce to guarantee a certain price, making it easier for them tolivestock they produce to guarantee a certain price, making it easier for them to
plan. Similarly, livestock producers often purchase futures to cover their feedplan. Similarly, livestock producers often purchase futures to cover their feed
costs, so that they can plan on a fixed cost for feed.costs, so that they can plan on a fixed cost for feed.
 In modern (financial) markets, "producers" of interest rate swaps or equityIn modern (financial) markets, "producers" of interest rate swaps or equity
derivative products will use financial futures or equity index futures to reduce orderivative products will use financial futures or equity index futures to reduce or
remove the risk on the swap.remove the risk on the swap.

11. Seller A
-Who wants
to sell X
Co.Shares
Buyer B
who wants
to buy X
Co. Shares
Calls Traders
on Exchange
Calls Broker A’s
Broker
B’s
Broker
Calls Traders
On ExchangeCalls Broker
Traders on
Exchange find X
Co. Share
buyers
Traders on
Exchange find
X Co. Share
Sellers
Exchange
Orders get Exchanged
Futures Trade Process Flow

12. SpecificationSpecification
on a Future Contracton a Future Contract
Futures contracts ensure their liquidity by being highly standardized, usually byFutures contracts ensure their liquidity by being highly standardized, usually by
specifying:specifying:
 The underlying. This can be anything from a barrel of sweet crude oil to a short termThe underlying. This can be anything from a barrel of sweet crude oil to a short term
interest rate.interest rate.
 The type of settlement, either cash settlement or physical settlement.The type of settlement, either cash settlement or physical settlement.
 The amount and units of the underlying asset per contract. This can be the notionalThe amount and units of the underlying asset per contract. This can be the notional
amount of bonds, a fixed number of barrels of oil, units of foreign currency, theamount of bonds, a fixed number of barrels of oil, units of foreign currency, the
notional amount of the deposit over which the short term interest rate is traded, etc.notional amount of the deposit over which the short term interest rate is traded, etc.
 The currency in which the futures contract is quoted.The currency in which the futures contract is quoted.
 The grade of the deliverable. In the case of bonds, this specifies which bonds can beThe grade of the deliverable. In the case of bonds, this specifies which bonds can be
delivered. In the case of physical commodities, this specifies not only the quality ofdelivered. In the case of physical commodities, this specifies not only the quality of
the underlying goods but also the manner and location of delivery. For example, thethe underlying goods but also the manner and location of delivery. For example, the
NYMEX Light Sweet Crude OilNYMEX Light Sweet Crude Oil contract specifies the acceptable sulfur content andcontract specifies the acceptable sulfur content and
API specific gravity, as well as the location where delivery must be made.API specific gravity, as well as the location where delivery must be made.
 The delivery month.The delivery month.
 The last trading date.The last trading date.
 Margin percentage are specified.Margin percentage are specified.
 Other details such as the commodity tick, the minimum permissible price fluctuation.Other details such as the commodity tick, the minimum permissible price fluctuation.

13. Types of Future ContractsTypes of Future Contracts
There are many different kinds of futures contract, reflecting theThere are many different kinds of futures contract, reflecting the
many different kinds of tradable assets of which they aremany different kinds of tradable assets of which they are
derivatives.derivatives.
 Foreign exchange marketForeign exchange market
 Bond marketBond market
 Money marketMoney market
 Equity index marketEquity index market
 Soft Commodities marketSoft Commodities market

14. Who trades futures?Who trades futures?
 Hedgers:-Hedgers, who have an interest in the underlyingHedgers:-Hedgers, who have an interest in the underlying
commodity and are seeking to hedge out the risk of price changescommodity and are seeking to hedge out the risk of price changes
 Speculators:-Speculators, who seek to make a profit by predictingSpeculators:-Speculators, who seek to make a profit by predicting
market moves and buying a commodity "on paper" for which theymarket moves and buying a commodity "on paper" for which they
have no practical use.have no practical use.
 Arbitragers also trade in future, if they feel that the instrument inArbitragers also trade in future, if they feel that the instrument in
over priced, they would buy in Spot and sell in futures or if they feelover priced, they would buy in Spot and sell in futures or if they feel
that the instrument is under priced , they would sell in Spot and buythat the instrument is under priced , they would sell in Spot and buy
in futures.in futures.
 Hedgers typically include producers and consumers of a commodity.Hedgers typically include producers and consumers of a commodity.

15. Margin on Future ContractsMargin on Future Contracts
 Although the value of a contract at time of trading should be zero, its price constantlyAlthough the value of a contract at time of trading should be zero, its price constantly
fluctuates. This renders the owner liable to adverse changes in value, and creates afluctuates. This renders the owner liable to adverse changes in value, and creates a
credit risk to the exchange, who always acts as counterparty. To minimize this risk, thecredit risk to the exchange, who always acts as counterparty. To minimize this risk, the
exchange demands that contract owners post a form of collateral, in the US formallyexchange demands that contract owners post a form of collateral, in the US formally
called performance bond, but commonly known as margin.called performance bond, but commonly known as margin.
 Initial Margin: While entering into a trade the investor pays an upfront some percentageInitial Margin: While entering into a trade the investor pays an upfront some percentage
of the total contract value as an initial margin money.of the total contract value as an initial margin money.
 Variation Margin: The cash transfer that takes place after each trading day (andVariation Margin: The cash transfer that takes place after each trading day (and
sometimes intraday) in most futures markets to mark long and short positions to thesometimes intraday) in most futures markets to mark long and short positions to the
market. Most contracts are settled daily by the payment of variation margin from themarket. Most contracts are settled daily by the payment of variation margin from the
party who has lost money that day to the party who has made money.party who has lost money that day to the party who has made money.
 Example: If each point in the price of a contract is worth $1,000, and the futures priceExample: If each point in the price of a contract is worth $1,000, and the futures price
goes up by 1/2 point during a session, the short will pay the long $500 per contract ingoes up by 1/2 point during a session, the short will pay the long $500 per contract in
variation margin.variation margin.
 Margin requirements are waived or reduced in some cases for hedgers who haveMargin requirements are waived or reduced in some cases for hedgers who have
physical ownership of the covered commodity or traders who have offsetting contractsphysical ownership of the covered commodity or traders who have offsetting contracts
balancing the position.balancing the position.

16. Future v/s Forward ContractFuture v/s Forward Contract
FutureFuture ForwardForward
Exchange tradedExchange traded Over the counterOver the counter
Standard contractStandard contract Customized contractCustomized contract
MarginsMargins May not requireMay not require
marginsmargins
Daily SettlementDaily Settlement End of the periodEnd of the period
settlementsettlement
LiquidLiquid IlliquidIlliquid
No counter party riskNo counter party risk Counter party riskCounter party risk

17. Options ContractsOptions Contracts

18. Options - Definition.Options - Definition.
 An option is a type of derivative where theAn option is a type of derivative where the
buyer has the right, but not the obligation,buyer has the right, but not the obligation,
to buy (call option) or sell (put option) ato buy (call option) or sell (put option) a
commodity or financial asset at a specifiedcommodity or financial asset at a specified
price (the strike price) during a specifiedprice (the strike price) during a specified
period of time in future.period of time in future.

19. Features of an option contract.Features of an option contract.
 Unit of Trading: One option contract gives right over a fixed quantity of theUnit of Trading: One option contract gives right over a fixed quantity of the
underlying asset, eg. one individual equity option gives right over 1000underlying asset, eg. one individual equity option gives right over 1000
shares (in the UK). It is 100 shares in the USA.shares (in the UK). It is 100 shares in the USA.
 Expiration: The rights conferred upon the owner of an option are only validExpiration: The rights conferred upon the owner of an option are only valid
for a certain period (until expiration) - after this expiry date they are notfor a certain period (until expiration) - after this expiry date they are not
legitimate.legitimate.
 Writer: The option seller is also known as the option writer.Writer: The option seller is also known as the option writer.
 Strike / Exercise Price: The price of which the option holder has the right toStrike / Exercise Price: The price of which the option holder has the right to
buy (or sell) the underlying asset. Most exercise prices gravitate around thebuy (or sell) the underlying asset. Most exercise prices gravitate around the
current price of the underlying asset.current price of the underlying asset.
 Premium: The amount paid by the option buyer to the option writer for thePremium: The amount paid by the option buyer to the option writer for the
right. Premium is determined by a intrinsic value and time valueright. Premium is determined by a intrinsic value and time value

20. Option Exercise StyleOption Exercise Style
 American option: Can be exercised at any time for bothAmerican option: Can be exercised at any time for both
stock & indicesstock & indices
 European option: Can only be exercised on the expiryEuropean option: Can only be exercised on the expiry
date for the underline stock or indicesdate for the underline stock or indices
 Capped-style Option:Capped-style Option:
The term "capped-style option" means an option contractThe term "capped-style option" means an option contract
that is automatically exercised when the cap price isthat is automatically exercised when the cap price is
reached. If this does not occur prior to expiration, it canreached. If this does not occur prior to expiration, it can
be exercised ,(relating to the cutoff time for exercisebe exercised ,(relating to the cutoff time for exercise
instructions and to the rules of the clearing corporation),instructions and to the rules of the clearing corporation),
only on its expiration date.only on its expiration date.
 Bermuda Option: A type of option that can only beBermuda Option: A type of option that can only be
exercised on predetermined dates, usually every month.exercised on predetermined dates, usually every month.

21. Call OptionsCall Options
 An option contract that gives its holder theAn option contract that gives its holder the
right (but not the obligation) to buy aright (but not the obligation) to buy a
specified number of shares of thespecified number of shares of the
underlying stock at a given strike price, onunderlying stock at a given strike price, on
or before the expiration date of theor before the expiration date of the
contract is known as call option.contract is known as call option.

22. CALL OPTION STRATERGYCALL OPTION STRATERGY
CALL OPTION (BUY)
Long (Right)
Advantage if Price goes up
Short (Obliged)
Disadvantage if price goes down
Price goes up-Profits unlimited
If Price falls /remain same
losses limited to premium paid
Price goes up-Losses are unlimited
If Price falls /remain same
profits are limited to premium received

23. Put OptionsPut Options
 An option contract that gives its holder theAn option contract that gives its holder the
right (but not the obligation) to sell aright (but not the obligation) to sell a
specified number of shares of thespecified number of shares of the
underlying stock at a given strike price, onunderlying stock at a given strike price, on
or before the expiration date of theor before the expiration date of the
contract is known as put optioncontract is known as put option

24. PUT OPTION STRATERGYPUT OPTION STRATERGY
PUT OPTION (SELL)
Long (Right)
Advantage if price goes down
Short (Obliged)
Disadvantage if price rises
Price goes down-profits unlimited
If Price rises /remain same
losses limited to premium paid
Price goes down - losses are unlimited
If Price rises /remain same
profits are limited to premium received

25. Equity options.Equity options.
 Equity options:-Exchange traded equityEquity options:-Exchange traded equity
options are "physical delivery" options. Itoptions are "physical delivery" options. It
gives the owner the right to receivegives the owner the right to receive
physical delivery (if it is a call), or to makephysical delivery (if it is a call), or to make
physical delivery (if it is a put), ofphysical delivery (if it is a put), of
underlying shares when the option isunderlying shares when the option is
exercised.exercised.

26. Equity Option Trading ExampleEquity Option Trading Example
 Equity options allow you to take advantage ofEquity options allow you to take advantage of
share price movements by allowing you to gainshare price movements by allowing you to gain
exposure, to larger amounts of shares for lessexposure, to larger amounts of shares for less
initial cash outlay than would be possible wheninitial cash outlay than would be possible when
trading the actual shares.trading the actual shares.
 If you buy an equity option, you get the right -If you buy an equity option, you get the right -
without the obligation - to buy or sell thewithout the obligation - to buy or sell the
underlying shares at a fixed price by anunderlying shares at a fixed price by an
appointed time.appointed time.
 If the market moves in your favour, you gain; ifIf the market moves in your favour, you gain; if
you get it wrong, all you lose is the price youyou get it wrong, all you lose is the price you
paid for the option (premium).paid for the option (premium).

27. Intrinsic ValueIntrinsic Value
 In options terminology, intrinsic value is the positiveIn options terminology, intrinsic value is the positive
difference between the current price for the underlyingdifference between the current price for the underlying
and the strike price of an option. For a call option theand the strike price of an option. For a call option the
strike price has to be under the price of the underlying;strike price has to be under the price of the underlying;
for a put option the strike price has to be over the pricefor a put option the strike price has to be over the price
of the underlying. If an option has intrinsic value, it isof the underlying. If an option has intrinsic value, it is
also referred to as in-the-money, if it has no intrinsicalso referred to as in-the-money, if it has no intrinsic
value, it is referred to as out-of-the-money.value, it is referred to as out-of-the-money.
 For example, if the strike price for a call option is USD 1For example, if the strike price for a call option is USD 1
and the price of the underlying is USD 1.20, then theand the price of the underlying is USD 1.20, then the
option has an intrinsic value of USD 0.20. Options areoption has an intrinsic value of USD 0.20. Options are
usually sold for their intrinsic value plus their time valueusually sold for their intrinsic value plus their time value

28. In the Money OptionIn the Money Option
 An in-the-money call option is described as aAn in-the-money call option is described as a
call whose strike (exercise) price is lower thancall whose strike (exercise) price is lower than
the present price of the underlying. An in-the-the present price of the underlying. An in-the-
money put is a put whose strike (exercise) pricemoney put is a put whose strike (exercise) price
is higher than the present price of theis higher than the present price of the
underlying, i.e. an option which could beunderlying, i.e. an option which could be
exercised immediately for a cash credit shouldexercised immediately for a cash credit should
the option buyer wish to exercise the option.the option buyer wish to exercise the option.

29. Example for ITM optionExample for ITM option
 In our Microsoft example, an in-the-money call option would be any listedIn our Microsoft example, an in-the-money call option would be any listed
call option with a strike price below $65.00 (the price of the stock). So, thecall option with a strike price below $65.00 (the price of the stock). So, the
MSFT January 60 call option would be an example of an in-the-money call.MSFT January 60 call option would be an example of an in-the-money call.
The reason is that at any time prior to the expiration date, you couldThe reason is that at any time prior to the expiration date, you could
exercise the option and profit from the difference in value: in this case $5.00exercise the option and profit from the difference in value: in this case $5.00
($65.00 stock price - $60.00 call option strike price = $5.00 of intrinsic($65.00 stock price - $60.00 call option strike price = $5.00 of intrinsic
value). In other words, the option is $5.00 “in-the-money.”value). In other words, the option is $5.00 “in-the-money.”
Using our Microsoft example, an in-the-money put option would be anyUsing our Microsoft example, an in-the-money put option would be any
listed put option with a strike price above $65.00 (the price of the stock).listed put option with a strike price above $65.00 (the price of the stock).
The MSFT January 70 put option would be an example of an in-the-moneyThe MSFT January 70 put option would be an example of an in-the-money
put.put.
It is in-the-money because at any time prior to the expiration date, you couldIt is in-the-money because at any time prior to the expiration date, you could
exercise the option and profit from the difference in value: in this case $5.00exercise the option and profit from the difference in value: in this case $5.00
($70.00 put option strike price - $65.00 stock price = $5.00 of intrinsic value.($70.00 put option strike price - $65.00 stock price = $5.00 of intrinsic value.
In other words, the option is $5.00 “in-the-money.”In other words, the option is $5.00 “in-the-money.”

30. In-the-money option examplesIn-the-money option examples
MSFT CALLS STOCK = $65.00MSFT CALLS STOCK = $65.00
Strike PriceStrike Price Option PriceOption Price StatusStatus Intrinsic ValueIntrinsic Value
5050 15.1015.10 ITMITM 15.0015.00
5555 10.3010.30 ITMITM 10.0010.00
6060 5.705.70 ITMITM 5.005.00
6565 1.501.50 ATMATM 00
7070 0.750.75 OTMOTM 00
7575 0.350.35 OTMOTM 00
8080 0.150.15 OTMOTM 00
MSFT PUTS STOCK = $65.00MSFT PUTS STOCK = $65.00
Strike PriceStrike Price Option PriceOption Price StatusStatus Intrinsic ValueIntrinsic Value
5050 0.100.10 OTMOTM 00
5555 0.300.30 OTMOTM 00
6060 0.700.70 OTMOTM 00
6565 1.501.50 ATMATM 00
7070 5.705.70 ITMITM 5.005.00
7575 10.3010.30 ITMITM 10.0010.00
8080 15.1015.10 ITMITM 15.0015.00

31. Out of-the-money optionOut of-the-money option
 An out-of-the-money call is described as aAn out-of-the-money call is described as a
call whose exercise price (strike price) iscall whose exercise price (strike price) is
higher than the present price of thehigher than the present price of the
underlying.underlying.
There is no intrinsic value in an out-of-the-There is no intrinsic value in an out-of-the-
money call because the option’s strikemoney call because the option’s strike
price is higher than the current stock price.price is higher than the current stock price.

32. Example for OTM optionExample for OTM option
 For example, if you chose to exercise the MSFT January 70 call while theFor example, if you chose to exercise the MSFT January 70 call while the
stock was trading at $65.00, you would essentially be choosing to buy thestock was trading at $65.00, you would essentially be choosing to buy the
stock for $70.00 when the stock is trading at $65.00 in the open market.stock for $70.00 when the stock is trading at $65.00 in the open market.
This action would result in a $5.00 loss. Obviously, you wouldn’t do that.This action would result in a $5.00 loss. Obviously, you wouldn’t do that.
An out-of-the-money put has an exercise price that is lower than the presentAn out-of-the-money put has an exercise price that is lower than the present
price of the underlying.price of the underlying.
There is no intrinsic value in an out-of-the-money put because the option’sThere is no intrinsic value in an out-of-the-money put because the option’s
strike price is lower than the current stock price. For example, if you chosestrike price is lower than the current stock price. For example, if you chose
to exercise the MSFT January 60 put while the stock was trading at$65.00,to exercise the MSFT January 60 put while the stock was trading at$65.00,
you would be choosing to sell the stock at $60.00 when the stock is tradingyou would be choosing to sell the stock at $60.00 when the stock is trading
at $65.00 in the open market. This action would result in a $5.00 loss.at $65.00 in the open market. This action would result in a $5.00 loss.
Obviously, you would not want to do that.Obviously, you would not want to do that.

33. Out-of-the-money option examplesOut-of-the-money option examples
MSFT CALLS STOCK = $65.00MSFT CALLS STOCK = $65.00
Strike PriceStrike Price Option PriceOption Price StatusStatus Intrinsic ValueIntrinsic Value
5050 15.1015.10 ITMITM 15.0015.00
5555 10.3010.30 ITMITM 10.0010.00
6060 5.705.70 ITMITM 5.005.00
6565 1.501.50 ATMATM 00
7070 0.750.75 OTMOTM 00
7575 0.350.35 OTMOTM 00
8080 0.150.15 OTMOTM 00
MSFT PUTS STOCK = $65.00MSFT PUTS STOCK = $65.00
Strike PriceStrike Price Option PriceOption Price StatusStatus Intrinsic ValueIntrinsic Value
5050 0.100.10 OTMOTM 00
5555 0.300.30 OTMOTM 00
6060 0.700.70 OTMOTM 00
6565 1.501.50 ATMATM 00
7070 5.705.70 ITMITM 5.005.00
7575 10.3010.30 ITMITM 10.0010.00
8080 15.1015.10 ITMITM 15.0015.00

34. At-the-money-optionAt-the-money-option
 An at-the- money option (ATM) option isAn at-the- money option (ATM) option is
an option that would lead to a zero cashan option that would lead to a zero cash
flow if it were exercised immediately. Anflow if it were exercised immediately. An
option on the index is at the money whenoption on the index is at the money when
the current index equals the strike price.the current index equals the strike price.
(i.e. spot price=strike price).(i.e. spot price=strike price).

35. Example for ATM optionExample for ATM option
 An at-the-money option is described as anAn at-the-money option is described as an
option whose exercise or strike price isoption whose exercise or strike price is
approximately equal to the present price of theapproximately equal to the present price of the
underlying stock.underlying stock.
For instance, if Microsoft (MSFT) was trading atFor instance, if Microsoft (MSFT) was trading at
$65.00, then the January $65.00 call would an$65.00, then the January $65.00 call would an
example of an at-the-money call option.example of an at-the-money call option.
Similarly, the January $65.00 put would be anSimilarly, the January $65.00 put would be an
example of an at-the-money put option.example of an at-the-money put option.

36. Difference between Futures &Difference between Futures &
Options.Options.
FutureFuture OptionsOptions
Obligation to the buyer &Obligation to the buyer &
seller to honor the contract.seller to honor the contract.
Gives the buyer the right, butGives the buyer the right, but
not the obligation to buy (ornot the obligation to buy (or
sell)sell)
Aside from commissions, anAside from commissions, an
investor can enter into ainvestor can enter into a
futures contract with nofutures contract with no
upfront cost.upfront cost.
Premium upfront (cost) is thePremium upfront (cost) is the
maximum that a purchasermaximum that a purchaser
of an option can lose.of an option can lose.
Are more risky for thoseAre more risky for those
investors new to the marketinvestors new to the market
Are less risky, since theAre less risky, since the
holder has the option not toholder has the option not to
exercise.exercise.

37. Warrants ContractsWarrants Contracts

38. WarrantsWarrants
 It is aIt is a part of the derivatives family as their valuepart of the derivatives family as their value
depends on the value of an underlying security.depends on the value of an underlying security.
As such, the warrant investor gains economicAs such, the warrant investor gains economic
exposure to this underlying security withoutexposure to this underlying security without
actually owning it.actually owning it.
 A warrant is the right (but not the obligation) toA warrant is the right (but not the obligation) to
buy or sell an underlying financial instrument atbuy or sell an underlying financial instrument at
a specific price (strike price or exercise price)a specific price (strike price or exercise price)
until a specific time (expiration date).until a specific time (expiration date).

39. Types of WarrantsTypes of Warrants
 Equity WarrantsEquity Warrants : Equity warrants can be call and put: Equity warrants can be call and put
warrantswarrants..
 Call warrants give you the right to buy the underlyingCall warrants give you the right to buy the underlying
securities or if your prediction is that an underlyingsecurities or if your prediction is that an underlying
asset is going to rise in value, then you will want toasset is going to rise in value, then you will want to
buy a call warrant. This gives you the right to buy thebuy a call warrant. This gives you the right to buy the
underlying asset at a certain price (the strike price).underlying asset at a certain price (the strike price).
 Put warrants give you the right to sell the underlyingPut warrants give you the right to sell the underlying
securities or if your expectation is that that thesecurities or if your expectation is that that the
underlying security is going to fall in value then youunderlying security is going to fall in value then you
will want to buy a put warrant. This will give you thewill want to buy a put warrant. This will give you the
right to sell the underlying security at the agreed strikeright to sell the underlying security at the agreed strike
price.price.

40. Difference between warrants &Difference between warrants &
optionsoptions
WarrantsWarrants OptionsOptions
Normally issued by theNormally issued by the
company.company.
Available at the exchange.Available at the exchange.
Terms of issue are variable,Terms of issue are variable,
depending upon issuer.depending upon issuer.
Terms are standardized byTerms are standardized by
exchange.exchange.
Normal life time is 3monthsNormal life time is 3months
to 15 yearsto 15 years
Life time is Spot upto 5Life time is Spot upto 5
yearsyears
Cannot be short soldCannot be short sold Can be short soldCan be short sold
Conversion ratio is decidedConversion ratio is decided
by the issuerby the issuer
Each contract is of 1000Each contract is of 1000
sharesshares

41. THANK YOUTHANK YOU