This document provides an overview of various types of financial derivatives, including futures, forwards, options, and swaps. It defines derivatives as financial instruments whose value is derived from an underlying security such as a commodity, stock, bond, or other derivative. The document explains the obligations associated with each type of derivative contract and discusses how they can be used for hedging risk or speculative purposes. It also outlines some key concepts for understanding derivatives markets.
This ppt is prepared to provide detailed information regarding Forwards and Futures contracts of Derivatives the topics covered under this are Meaning of Forwards contracts, Underlying Assets of Forwards contracts, FEATURES OF FORWARD CONTRACTS, Tailored made, Why Forwards contracts, FUTURES CONTRACT, What is A Futures Contract, Characteristics of Futures contracts, Mechanism of Trading in Futures Market, Margin requirement, Marking-to-market (M2M), SETTLING A FUTURE POSITION, OFFSETTING, CASH DELIVERY, by Sundar, Assistant Professor of commerce.
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This ppt is prepared to provide detailed information regarding Forwards and Futures contracts of Derivatives the topics covered under this are Meaning of Forwards contracts, Underlying Assets of Forwards contracts, FEATURES OF FORWARD CONTRACTS, Tailored made, Why Forwards contracts, FUTURES CONTRACT, What is A Futures Contract, Characteristics of Futures contracts, Mechanism of Trading in Futures Market, Margin requirement, Marking-to-market (M2M), SETTLING A FUTURE POSITION, OFFSETTING, CASH DELIVERY, by Sundar, Assistant Professor of commerce.
Subscribe to Vision Academy for Video assistance
https://www.youtube.com/channel/UCjzpit_cXjdnzER_165mIiw
Derivative Trading and its types features .pdfJitender Dhalia
derivative concept
derivative types
forward contracts
future contract
option contract
swap contract
derivative participants or market player
advantages and disadvantages of derivative
function of derivative
contract between buyer and seller with derivative
derivative examples
4 major types it and suitable examples in each point
basic understanding of derivative
easy concept of contract
Derivative, Types of Derivative, Risk involved in derivative contracts, Commonly Used Terms, Long positions, Short Position, Spot Contract, Expiration, Market Maker, Bid Ask Spread.
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A Memorandum of Association (MOA) is a legal document that outlines the fundamental principles and objectives upon which a company operates. It serves as the company's charter or constitution and defines the scope of its activities. Here's a detailed note on the MOA:
Contents of Memorandum of Association:
Name Clause: This clause states the name of the company, which should end with words like "Limited" or "Ltd." for a public limited company and "Private Limited" or "Pvt. Ltd." for a private limited company.
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Registered Office Clause: It specifies the location where the company's registered office is situated. This office is where all official communications and notices are sent.
Objective Clause: This clause delineates the main objectives for which the company is formed. It's important to define these objectives clearly, as the company cannot undertake activities beyond those mentioned in this clause.
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Liability Clause: It outlines the extent of liability of the company's members. In the case of companies limited by shares, the liability of members is limited to the amount unpaid on their shares. For companies limited by guarantee, members' liability is limited to the amount they undertake to contribute if the company is wound up.
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Capital Clause: This clause specifies the authorized capital of the company, i.e., the maximum amount of share capital the company is authorized to issue. It also mentions the division of this capital into shares and their respective nominal value.
Association Clause: It simply states that the subscribers wish to form a company and agree to become members of it, in accordance with the terms of the MOA.
Importance of Memorandum of Association:
Legal Requirement: The MOA is a legal requirement for the formation of a company. It must be filed with the Registrar of Companies during the incorporation process.
Constitutional Document: It serves as the company's constitutional document, defining its scope, powers, and limitations.
Protection of Members: It protects the interests of the company's members by clearly defining the objectives and limiting their liability.
External Communication: It provides clarity to external parties, such as investors, creditors, and regulatory authorities, regarding the company's objectives and powers.
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Binding Authority: The company and its members are bound by the provisions of the MOA. Any action taken beyond its scope may be considered ultra vires (beyond the powers) of the company and therefore void.
Amendment of MOA:
While the MOA lays down the company's fundamental principles, it is not entirely immutable. It can be amended, but only under specific circumstances and in compliance with legal procedures. Amendments typically require shareholder
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2. Content Outline
1.
Introduction
2.
What is a derivative?
3.
Reasons to use derivatives
4.
Concepts to understand
5.
Futures
6.
Forwards
7.
Options
8.
Swaps
9.
Questions
2
3. Introduction (I)
In the financial marketplace some instruments are regarded as fundamentals ,
while others are regarded as derivatives .
Financial Marketplace
Derivatives
Fundamentals
Simply another way to catagorize the diversity in the FM*.
3
*Financial Market
5. What is a Derivative? (I)
Options
Futures
The value of the
derivative instrument is
DERIVED from the
underlying security
Forwards
Swaps
Underlying instrument such as a commodity, a stock, a stock index, an exchange
rate, a bond, another derivative etc..
5
6. What is a Derivative? (II)
Futures
The owner of a future has the OBLIGATION to sell or buy
something in the future at a predetermined price.
Forwards
The owner of a forward has the OBLIGATION to sell or buy
something in the future at a predetermined price. The difference
to a future contract is that forwards are not standardized .
Options
The owner of an options has the OPTION to buy or sell
something at a predetermined price and is therefore more costly
than a futures contract.
Swaps
A swap is an agreement between two parties to exchange
a sequence of cash flows.
6
7. Reasons to use derivatives (I)
Derivative markets have attained an overwhelming popularity for a variety of
reasons...
Hedging:
•
•
•
•
Interest rate volatility
Stock price volatility
Exchage rate volatility
Commodity prices volatility
VOLATILITY
Speculation
:
• High portion of leverage
• Huge returns
EXTREMELY RISKY
7
8. Reasons to use Derivatives (II)
Also derivatives create...
• a complete market , defined as a market in which all identifiable payoffs can be
obtained by trading the securities available in the market*.
• and market efficiency , characterized by low transaction costs and greater
liquidity.
* Futures, Options and Swaps by 8
R.W. Kolb
9. Concepts to Understand
Short Selling:
• Short selling is the selling of a security that the
seller does not own.
• Short sellers assume the risk that they will be
able to buy the stock at a more favorable price
than the price at which they sold short.
Holding Long Position:
• Investors are legally owning a security.
• Investors are the legal owners of a security.
9
10. Future Contracts (I)
Futures
The owner of a future contract has the OBLIGATION to sell or
buy something in the future at a predetermined price.
Scenario:
You are a farmer and you know that you will harvest corn in three months from
today on. How can you protect yourself from loosing if corn price happens to drop
until March by using corn forward contracts?
1/1
3/1
Harvest
t
10
11. Future Contracts (II)
You lock into a price by holding a short position in a corn future contract with a
maturity date a little bit longer than the harvest date.
Suppose the price drops...
You either take delivery and
lock in a price.
You close out the corn contract
and the gain in the futures
market will offset the loss in the
sport market
“A futures contract makes unfavourable price movements less unfavourable and a
favourable price movements less favourable“!
11
12. Future Contracts (III)
General Rule for Hedgers:
• If you are going to sell something in the near future but want to lock in a
secured price, you take a short position.
• If you are going to receive/buy something in the future but want to lock in a
secured price, you take a long position.
12
13. Future Contracts (IV)
The Role of Speculators:
• As the name implies, speculators are involved in price betting and take the risk of
price movements against them.
Assume the following:
• You, as hedger, believe that prices will raise. Thus, you are convinced that a long
position will benefit you.
• Key Word: Zero-Sum-Gain
• Large gains due to the concept of leverage
13
14. Forward Contracts (I)
Forwards
The owner of a forward has the OBLIGATION to sell or buy
something in the future at a predetermined price. The difference
to a future contract is that forwards are not standardized.
A Forward Contract underlies the same principles as a future contract, besides the
aspect of non-standardization. Thus, a detail illustration is not necessary as I already
elaborated in the mechanism of the futures contract.
14
15. Options (I)
Options
The owner of an options has the OPTION to buy or sell
something at a predetermined price and is therefore more costly
than a futures.
Some terms to understand:
• Call option
• Put option
• Excersice price / strike price
• Option premium
• Moneyness (in-the-money, at-the-money, out-of-money)
• European vs. American Options
15
16. Options (II)
The four basic positions:
Call Option
Write
Purchase
Write
Put Option
Purchase
16
17. Options (III)
Write & Purchase Call Option:
Long Call
Value
x
Stock Price at Expiration
Short Call
17
18. Options (IV)
Write & Purchase Call Option:
Profit and Loss
Premium Earned
x
Long Call
Zero-Sum-Game
Stock Price at Expiration
Premium Paid
Short Call
18
19. Options (V)
Write & Purchase Call Option:
Profit and Loss
Long Put
Stock Price at Expiration
Short Put
19
20. Options (VI)
Write & Purchase Call Option:
Profit and Loss
Long Put
Premium Earned
Stock Price at Expiration
Short Put
Premium Paid
20
21. Swaps (I)
Swaps
A swap is an agreement between two parties to exchange
a sequence of cash flows.
• Counterparties
• Interest rate swaps
• Currency swaps
• Phenomenal growth of the swap market
• Future and Option markets only provide for short term investment horizon
• Traded in OTC markets with little regulations
• No secondary market
• Market limited to institutional investors
21
22. Swaps (II)
A Plain Vanilla Interest Rate Swap:
An interest rate swap is an agreement between two parties to exchange a sequence
of fixed interest rate payments against floating interest rate payments.
Terms to understand:
• Fixed side
• Receive-fixed side
• Tenor
• Notional amount
22
23. Swaps (III)
Example:
5 year tenor; notional amount $1 million; Party A is the fixed side paying 9%, Party B
is the receive-fixed side, paying a LIBOR flat rate
Party A
Party B
0
Libor*$1m
1
2
3
4
5
$90,000
0
Libor*$1m
Libor*$1m Libor*$1m
$90,000
$90,000
$90,000
$90,000
$90,000
$90,000
$90,000
$90,000
$90,000
1
2
3
4
Libor*$1m
Libor*$1m
Libor*$1m Libor*$1m
Libor*$1m
5
Libor*$1m
23
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