Derivatives are financial instruments whose value is based on an underlying asset such as commodities, interest rates, indices, or share prices. They are used to manage risk exposure in volatile markets through hedging and speculation. The main players in derivatives markets are hedgers who seek to reduce risk, arbitrageurs who profit from pricing discrepancies, and speculators who take positions based on their expectations of future price movements. Common types of derivatives include swaps, options, futures, and forwards, which allow parties to take long or short positions on assets.

1. FINANCIAL DERIVATIVES

2. INTRODUCTION
• Derivatives
– Defined as securities whose values are
determined by the market price of some other
assets.
– Financial instruments used to manage one's
exposure to today's volatile markets.
– Product's value depends upon and is derived
from an underlying instrument such as
commodity prices, interest rates, indices, and
share prices.

3. PURPOSES OF DERIVATIVES
• Risk Management - Reducing the risk in holding a
market position while speculation referred to
taking a position in the way the markets will move
that enable companies to more effectively manage
risk.
• Price discovery - Futures market prices depend on
a continuous flow of information from around the
world and require a high degree of transparency
that impact supply and demand of assets and thus
the current and future prices of the underlying
asset on which the derivative contract is based.

4. ROLES OF DERIVATIVES
• Provide global diversification in financial
instruments and currencies.
• Help hedge against inflation and deflation.
• Generate returns that are not correlated with
more traditional investments.
• Allow fast product innovation because new
contracts can be introduced rapidly and can be
tailored to the specific needs of any user

5. MAIN PLAYER IN DERIVATIVES
MARKETS
• Hedgers: They are the players whose
objective is risk reduction.
• Arbitrageurs: They are the players whose
objective is to profit from pricing
differentials/mispricing.
• Speculators: They are the players who
establish positions based on their
expectations of future price movements.

6. POSITION OF DERIVATIVES
• Long position – Purchase an asset
due to the price will increase in the
futures.
• Short position – Sold an asset due to
the price will fall in the future.

7. TYPES OF DERIVATIVES
1. SWAP
– Transaction between 2 parties simultaneously
exchanges cash flow on the national amount of
asset.
– Example: counterparty A agrees to pay a fixed rate
interest payment to counterparty B in exchange
for variable interest rate payment form
counterparty B.
– Types of swaps:
• Interest rate swaps
• Currency swaps

8. TYPES OF DERIVATIVES
2. OPTIONS
– A contract between 2 parties in which one party
(buyer) has a right but Not the obligation to buy
or sell a specified asset at a specified at or
before specified date from other party (seller).
– Features of option contract:
i. Type of option whether call or put,
ii. State the underlying asset,
iii. Exercise price or strike price
iv. Maturity or expiration date
v. Exercise style, whether American or European style.

9. • Types of options:
– Call option
An option that the holder the right but not the obligation
to buy the underlying asset at a predetermined price.
• Long – Price will increase (bullish).
• Short – Price will decrease (bearish).
Example:
If an investor expects the price of RM 12 shares to
rise (bullish), they might pay RM0.20 for a three
month call option that gives them the right to buy
those shares for RM 12 at a later date.

10. • Put options
An option that the holder the right but not the
obligation to sell the underlying asset at a
predetermined price.
• Long – Investor expects price will decrease.
• Short – Investor expects price will increase.
Example:
If the market will be bullish so investor A decide to sell a
put to investor B for RM0.15 that gave investor B the
right to sell the shares at RM 12. If the stock rises in
value to RM 14, what is the payoff?

11. • Option Strategies have three types:
Straddle - Buy / sell call and put with the SAME strike
price and expiration date.
Strangle - Buy / sell a call and put with SAME
expiration date but DIFFERENT strike price.
Spread - Take a position option either 2 call or 2 put
in different strike price.
Bull – expect a stock price will be increase.
Bear – expect a stock price will be decline.

12. TYPES OF DERIVATIVES
3. FUTURE & FORWARD
– A contract between 2 parties that has
right and obligation to buy the
underlying asset at predetermine price.
FUTURES FORWARD
Method of trading Per electronic trading system Over the counter or by
through a central exchange telephone
Contract size Standardized - type and quality of Negotiated to suit
the underlying asset, terms of individual needs
contract, method of settlement and
price determination.
Delivery date Standardised on a specific date for Negotiated to suit
certain contracts individual needs

13. Futures Forwards
Integrity of system and Guaranteed by the clearing Dependent on the risk
payments house of the central relating to the individual
exchange parties to the contract
Regulation Regulated by law, statutory No formal regulation
body and exchange
Tradability Traded in secondary markets No secondary market for
these contracts
Securities and Security deposits to be No formal security unless
protection of parties lodged with the exchange at agreed by parties to the
closing of contracts, and contract
daily cash settlements for
fluctuations in prices

15. Types of Futures Contract

16. COMMODITY FUTURES
Contract Code FCPO
Underlying Crude Palm Oil
Instrument
Contract Size 25 metric tons
Minimum Price RM1 per metric ton
Fluctuation
Contract Months Spot month and the next 5 succeeding
months, and thereafter, alternate months
up to 24 months ahead

18. EQUITY FUTURES
Contract Code FCPO
Underlying FTSE Bursa Malaysia Kuala Lumpur Composite
Instrument Index (FBM KLCI)
Contract Size FBM KLCI multiplied by RM50
Minimum Price 0.5 index point valued at RM25
Fluctuation
Contract Months Spot month, the next month and the next two
calendar quarterly months. The calendar
quarterly months are March, June, September
and December.