The document defines derivatives and describes the key characteristics of different types of derivatives like forwards, futures, options, and swaps. It also discusses derivatives markets, types of traders, option strategies like covered calls and bull put spreads, and volatility strategies like straddles and strangles. The key details covered include how derivatives derive their value from underlying assets, the difference between exchange-traded and over-the-counter derivatives, Greeks like delta and gamma, and using different option positions for income generation or playing volatility.

1. Presented By:
Dhaval Dedhia (08)

2. • Accounting Standard 30 defines derivatives as:
A derivative is a financial instrument or other contract
within the scope of this Standard with all three of the following
characteristics:
• its value changes in response to the change in 'underlying'
• it requires no initial investment or an initial net investment
and
• it is settled at a future date.

3. Derivatives Markets
 Exchange traded :
 Traditionally exchanges have used the open-outcry
system, but increasingly they are switching to electronic
trading
 Contracts are standard there is virtually no credit risk.
 Over-the-counter (OTC) :
 A computer- and telephone-linked network of dealers at
financial institutions, corporations, and fund managers
 Contracts can be non-standard and there is some small
amount of credit risk

4. Types of Derivatives
 Forward
 Option
 Futures
 Swaps
 Forward Rate Agreements(FRA)

5. Forward Contracts
 Contractual Commitment to buy or sell
 a specified quantity and quality of underlying asset
 at a future date and
 for a specified price.
 Forward contracts are similar to futures except that they trade
in the over-the-counter market.
 Forward contracts are particularly popular on currencies and
interest rates

6. Futures Contracts
 contract is an agreement to buy or sell
 a specified quantity and quality of an underlying product
 at a specified date in the future,
 for a price agreed
 Similar to forward contract
 Whereas a forward contract is traded OTC, a futures contract is
traded on an exchange

7. Types of Traders
 Hedgers
 Use derivatives to reduce risk that they face from potential
future movements in the market variables
 Speculators – day traders, Position traders and scalpers
 Use derivatives to bet on the future direction of the market
variables
 Arbitrageurs
 Take offsetting positions in two or more instruments to lock
in a profit

8. Options
 An option is a contract that grants a right to the holder or
purchaser of the contract
 to buy or sell an underlying asset
 at a specific price on a specific date or upto a specified date
 without a corresponding obligation to perform on the
contract.
 The holder or the purchaser pays a premium for the right.

9. Types of options
 Call option- The right to buy a specified amount of currency at
a specified rate.
 Put option- The right to sell a specified amount of currency at
a specified rate.

10. ITM,ATM,OTM
Call Option Put Option
1.In-the-money Strike Price less than Strike Price greater than
Spot Price of underlying Spot Price of underlying
asset asset
2. At-the-money Strike Price equal to Spot Strike Price equal to Spot
Price of underlying asset Price of underlying asset
3. Out-of-the-money Strike Price greater than Strike Price less than
Spot Price of underlying Spot Price of underlying
asset asset

11. Margin required
• Initial Margin :
An Initial margin is the deposit required to maintain
either a short or long position in a futures contract.
• Maintenance Margin :
Maintenance margin is the amount of initial margin
that must be maintained for that position before a margin
call is generated.

12. Basis & Convergance
 Basis = Spot price – Future price
 process of basis moving towards zero is
Convergance.

13. Intrinsic value & Time value
 Intrinsic value is difference between strike price and the spot
price.
 Time value is the difference between premium and intrinsic
value

14. Volatility
 Volatility is a measure of the rate and magnitude of the change
of prices (up or down) of the underlying.
 If volatility is high, the premium on the option will be
relatively high, and vice versa.

15. Greeks
• Delta
• Gamma
• Vega
• Theta

16. Delta
 The movement of the option position relative to the movement
of the underlying position.
 It is the probability of option being itm at the expiration.
 At ATM delta of Call & Put is 0.5
 At OTM delta is between 0 to 0.5
 At ITM delta is between 0.5 to 1

17. Gamma
 Options Gamma is the rate of change of options delta with a
small rise in the price of the underlying stock.
 Just as options delta measures how much the value of an option
changes with a change in the price of the underlying
stock, Options Gamma describes how much the options delta
changes as the price of the underlying stock changes.

18. Vega
 Options Vega measures the sensitivity of a stock option's price
to a change in implied volatility.
 When implied volatility rises, the price of stock options rises
along with it.
 Options Vega measures how much rise in option value with
every 1 percentage rise in implied volatility.
 Vega is highest for ATM options, and is progressively lower as
options are ITM and OTM.

19. Theta
• Theta is that options Greek which tells you how much an
option's price will diminish over time, which is the rate of time
decay of stock options.
• Time decay is a well known phenomena in options trading
where the value of options reduces over time even though the
underlying stock remains stagnant
• Positive Theta means that the option's value will increase as the
time passes & vice-versa.
• Negative Theta means that the option's value will fall as the
time passes & vice-versa.
• Theta is highest for ATM options, and is progressively lower as
options are ITM and OTM.

20. Greeks Table
Long call Long put Short call Short put
Delta Positive Negative Negative Positive
Gamma Positive Positive Negative Negative
Vega Positive Positive Negative Negative
Theta Negative Negative Positive positive

21. OPTION STRATEGY
 INCOME STRATEGIES
 COVERED CALL
 BULL PUT SPREAD
 BEAR CALL SPREAD

22. COVERED CALL
DIRECTION Assset legs Max risk Max reward Strategy type
Bullish Long stock Uncapped Capped Income
Short call
(OTM)
•Description: It is like collecting rent while you own a stock
• Outlook : neutral to bullish (steady rise).
• Greeks :
1. Delta : positive and expected to fall to zero
2. Gamma: negative (net seller)
3. Vega: negative (harmful for this position)
4. Theta: positive (time decay is helpful for the position)

23. BULL PUT SPREAD
Direction Asset Legs Max Risk Max Strategy
Rewards Types
Bullish Long Put Capped Capped Income
(FOTM)
Shot Put
(OTM)
Oulook: bullish or neutral to bullish
Rationale: income for a net credit while reducing your
maximum risk.
Greeks :
Delta:Positive

24. Bear call spread
Direction Asset Legs Max Risk Max Strategy
Rewards Type
Bearish Short Call Capped Capped Income
(ITM)
Long Call
(OTM)
Outlook: bearish or neutral to bearish.
Greeks:
Delta: negative
Gamma: negative
Vega: positve
Theta: negative

25. OPTION STRATEGY
 VOLATILITY STRATEGIES
 Straddle
 Strangle

26. STRADDLE
Direction Asset Legs Max Risk Max Strategy
Rewards Type
Neutral Long Put Capped Uncapped Capital
(ATM) Gains
Long Call
(ATM)
Outlook: movement in either direction
Greeks:
Delta: highest in either direction
Gamma: highest
Vega: positive (helpful)
Theta: negative (harmful)

27. STRANGLE
Direction Asset Legs Max Risk Max Strategy
Rewards Type
Neutral Long Put Capped Uncapped Capital Gains
(OTM)
Long Call
(OTM)
Outlook: huge movement expected in either direction.
Greeks:
Delta: is highest
Gamma: positive
Vega: positive
Theta: negative or harmful

28. THANK YOU