This document provides an overview of derivatives and the capital markets in India. It defines key terms like the primary and secondary markets, stock exchanges, indices, and types of derivatives like forwards, futures, options, and swaps. It describes the functions and objectives of derivatives for hedging risk and speculation. The history of derivatives trading in India is summarized, along with the major participants like hedgers, speculators, and arbitrageurs.

1. PRESENTOR :
Priyanshi Joshi
MFA 3rd Sem

2. INTRODUCTION
CAPITAL MARKET
STOCK MARKET
DERIVATIVES
HISTORY OF DERIVATIVES IN INDIA
FUNCTIONS
OBJECTIVES
TYPES
PARTICIPANTS

3. The Indian Security Market, in the last
decade, witnessed a significant
transformation. It has developed and grown
voluminously on several counts such as the
number of brokers, institutional investors,
number of listed companies, market
capitalization, trading volumes and turnover
on stock exchanges.

4.  The Capital Market is a place/market where
the issuance and further trading of the
securities takes place.
Capital
Market
Primary
Market
Secondary
Market

5.  Primary market is a market for new issuance
of the securities by new and existing
companies through common method of
IPOs.
 Secondary market,also known as Stock
Market and Spot Market, is the place where
“existing securities are traded for N no. of
times”.

6.  A Stock Exchange is an organisation which
provides buying and selling facilities for
traders and investors in stocks and other
securities.
 In India there exists two major exchanges viz
Bombay Stock Exchange(BSE)1875 &National
Stock Exchange(NSE)1992.
 BSE Sensex 30 and NSE Nifty 50 are two
important market index.

7.  Derivative security is a financial security whose
payoff depends on or derives from other more
fundamental .variables such as a stock price, an
exchange rate, a commodity price, an interest
rate.
 The underlying driving variable is commonly
referred to as simply the underlying.
 .Example :
The value of a gold futures contract is derived
from the value of the underlying asset i.e. Gold.

8.  The Bombay Cotton trade association started future
Trading in 1875
 In 1952 the government banned cash settlement and
Option Trading
 In 1995 a Prohibition of trading options was lifted
 In 1999, the Securities Contract (Regulation) Act
of 1956 was amended and derivatives could be
Declared “securities”
 NSE Started trade in future and option by 2005

9.  Derivatives enable price discovery,
 Improve the liquidity of the underlying asset,
 Serve as effective hedging instruments and offer
better ways of raising money.
 They contribute substantially in to increasing the
depth of markets.
 Derivatives shift the risk from the buyer of the
derivative product to the seller and as such are
very effective risk management tools.
 They provide better avenues for raising money.

10.  The main purpose of derivatives is to transfer
risk from one person or firm to another, that is,
to provide insurance
 For example: If a farmer before planting can
guarantee a certain price he will receive, he is
more likely to plant.

11. DERIVATIVES FORWARDS
OPTIONS
SWAPS

12.  A forward contract is a particularly simple derivative, a contract
between two parties. It is an agreement to buy or sell an asset at a
certain future time for a certain price. It can be contrasted with a
spot contract, which is an agreement to buy or sell an asset today.
A forward contract is traded in the over-the-counter market—
usually between two financial institutions or between a financial
institution and one of its clients.
 One of the parties to a forward contract assumes a long position
and agrees to buy the underlying asset on a certain specified
future date for a certain specified price.The other party assumes a
short position and agrees to sell the asset on the same date for the
same price.
 These are not traded on exchanges because they are negotiated
directly between two

13. Features of Forward Contracts:
 Over the CounterTrading (OTC).
 No down Payment
 Settlement at Maturity.
 Linearity (Loss of a forward buyer is the gain
of the forward seller)
 No Secondary Market
 Necessity of a third party

14. I agree to sell
500kgs wheat at
Rs.40/kg after 3
months.
Farmer Bread
Maker
3 months Later
Farmer
Bread
Maker
500kgs wheat
Rs.20,000

15.  Credit Risk – Is the other party capable of
making the payment?
 Operational Risk –Will the other party make
delivery?Will the other party accept delivery?
 Liquidity Risk – Incase either party wants to
opt out of the contract, how to find another
counter party

16.  Futures is a contract between two parties to
buy and sell an underlying asset at a certain
time in the future at a certain agreed price.
 Futures are the Standardized Forwards.
 Futures are traded on organised exchange.

17. A
B C
L Rs.10
S Rs.12
S Rs.10
L Rs.14
L Rs.12
S Rs.14
Profit Rs.2
Loss Rs.4 Profit Rs.2
Market
Price/Spot Price
D1
Rs.10
D2
Rs.12
D3
Rs.14

18.  Stock FuturesTrading- deals with shares
 Commodity FuturesTrading -deals with gold
futures, crude oil futures
 Index FuturesTrading -deals with stock
market indices

19.  Most futures contracts are not held till expiry,
but closed before that.
 If held till expiry, they are generally settled by
delivery. (2-3%)
 By closing a futures contract before expiry,
the net difference is settled between traders,
without physical delivery of the underlying.

20.  Standardization.
 Intermediation by the Exchange.
 Price Limits.
 Margin requirements.
 Marking to market.

21. S.No FORWARDS FUTURES
1. EssentiallyOTC contracts involving
only the buyer and the seller.
A contract traded through an exchange
Buyer, Seller and exchanges are
involved
2. Both the parties have necessarily
to perform the contract.
The contract need not necessarily
culminate in delivery of the underlying.
3. There is no payment of initial
margins.
To trade in futures contract, one has to
become a member of the exchange by
paying the initial margin and maintain a
variable margin account too with the
Futures Exchange.
4. The maturity and size of the
contract may be customized.
The maturity and size of contracts are
standardized.
5. Settlements take place only on the
date of maturity.
Settlement is on a daily basis on all the
outstanding contracts(marking to
market on a daily basis).
6. Credit or counter-party risk is The futures exchange takes care of

22.  An Option is a financial security that gives the
holder the right (but not the obligation)to buy
or sell a specified asset at a specified price on
or before a specified date.
 Options are traded both on exchanges and in
the over-the-counter market.

23.  It may be classified into two categories Options
are of two types - Calls and Puts options:
 ‘Calls’ give the buyer the right but not the
obligation to buy a given quantity of the
underlying asset, at a given price on or before a
given future date.
 ‘Puts’ give the buyer the right, but not the
obligation to sell a given quantity of underlying
asset at a given price on or before a given future
date.

24. Right to buy 100
Reliance shares at
a price of Rs.300
per share after 3
months.
CALL OPTION
Strike Price
Premium =
Rs.25/share
Amt to buy Call
option = Rs.2500
Current Price = Rs.250
Suppose after a month,
Market price is Rs.400, then
the option is exercised i.e.
the shares are bought.
Net gain = 40,000-30,000-
2500 = Rs.7500
Suppose after a month, market
price is Rs.200, then the option
is not exercised.
Net Loss = Premium amt
= Rs.2500
Expiry
date

25. Right to sell 100
Reliance shares at
a price of Rs.300
per share after 3
months.
PUT OPTION
Strike Price
Premium =
Rs.25/share
Amt to buy Call
option = Rs.2500
Current Price = Rs.250
Suppose after a month,
Market price is Rs.200, then
the option is exercised i.e.
the shares are sold.
Net gain = 30,000-20,000-
2500 = Rs.7500
Suppose after a month, market
price is Rs.300, then the option
is not exercised.
Net Loss = Premium amt
= Rs.2500
Expiry
date

26.  The other two types are – European style
options and American style options.
 European style options can be exercised only
on the maturity date of the option, also
known as the expiry date.
 American style options can be exercised at
any time before and on the expiry date.

27.  BUYER=HOLDER=LONG POSITION
 SELLER=WRITER=SHORT POSITION
 The asset specified in the option contract is
called the underlying asset or simply the
underlying.
 The price specified in the contract is the strike
price or the exercise price of the option.
 The date specified in the contract is called the
maturity date or the expiration date of the
option.

28. There are many strategies used in the
trading of options. Some of them are:-
 Covered calls and protective puts.
 Spreads: straddles, strangles, strips and
straps.
 Others: collars,box spreads, ratio spreads and
condors.

30.  A swap is an agreement between two
companies to exchange cash flows in the
future.The agreement defines the dates
when the cash flows are to be paid and the
way in which they are to be calculated.
 Usually the calculation of the cash flows
involves the future values of one or more
market variables.

31.  Most swaps are traded “OverThe Counter”.
 Some are also traded on futures exchange
market.
 There are 2 main types of swaps:
 Plain vanilla fixed for floating swaps
or simply interest rate swaps.
 Fixed for fixed currency swaps
or simply currency swaps

32.  HEDGERS: minimizing the risk by diversifying
the portfolios. Hedgers consists of
corporations, investment institutions, banks
and governments that want to reduce
exposure to market variables such as interest
rates, share values, bond prices, currency
exchange rates and commodity prices

33.  Speculators :Bets on future movements in
the price of an asset. Speculators are those
such as hedge funds that want to bet on the
prices of commodities and financial assets
and on key market variables such as interest,
indices, and exchange rates. It is usually much
cheaper to speculate using derivatives than
on the underlying. As a result, the risks and
returns are much greater.

34.  Arbitrageurs :Takes advantage of a
discrepancy between prices in two different
markets. Arbitrageurs exploit mispricing in
the market to create risk-free profits.

35. QUERIES????

36. THANK YOU