The document provides an overview of financial derivatives, including definitions and types. It discusses common derivative instruments such as forwards, futures, options, and swaps. Forwards and futures are agreements to buy or sell an asset at a future date, while options provide the right but not obligation to buy or sell. Swaps involve exchanging cash flows. Derivatives are used for hedging risks and discovering prices. While they provide benefits like risk management, criticisms include speculation and increased systemic risk. The derivatives market has evolved over centuries with early markets in rice and currencies, and modern exchanges in commodities, stocks and foreign exchange.

1. BY
BINOY JOHN VARGHESE
FINANCIAL DERIVATIVES

2.  MOD 1 - DERIVATIVES (INTRO)
 MOD 2 - FUTURES , FORWARDS & OPTIONS
 MOD 3 - CURRENCY & INTEREST rate DERIVATIVES
,SWAPS
 MOD 4 - DEBT MARKETS & EQUITY RELATED
INSTRUMENTS
 MOD 5 - HYBRID SECURITIES

3. DERIVATIVES
 The term “Derivative "indicates that it has no
independent value, i.e. its value is entirely
derived from the value of the underlying asset.
The underlying asset can be securities,
commodities, currency, livestock or anything
else.
 Derivative means forward, futures, options or
any other hybrid contract of predetermined fixed
duration, linked for the purpose of contract
fulfillment to the value of a specified real or
financial asset or to an index of securities.

4. DEFINITION (DERIVATIVES)
 The Securities Contracts (Regulation) Act 1956
“Derivative includes
1. Security derived from a debt instrument, share,
loan whether secured or unsecured, risk
instrument or contract for differences or any
other form of security.
2. A contract which derives its value from the
prices, or index of prices of underlying
securities”

5. TYPES OF DERIVATIVES

Derivatives
Financials
Basic
Forward
Futures
Options
Warrants and
convertibles
Complex
Swaps
Exotics
Commodities

6. TYPES OF FINANCIAL DERIVATIVES
 Forward contracts
 Futures contracts
 Options contracts
 Warrants and convertibles
 Swap contracts
 Other contracts

7. FORWARDS
 A forward contract is simple customized contract
between two parties to buy or sell an asset at a
certain time in the future for a certain price.
 Unlike future contracts, they are not traded on an
exchange, rather traded in the over-the- counter
market, usually between two financial institutions or
between a financial institution and one of its client.
In brief, forward contract is an
agreement between the counter parties to buy or sell
a specified quantity of an asset at a specified price,
with delivery at a specified time (future) and place.
 These contract are not standardized, each one is
being customized to its owner’s specifications.

8. FUTURES
 Like a forward contract ,a futures contract is
an agreement between two parties to buy or
sell a specified quantity of an asset at a
specified price and at a specified time and
place .
 Futures contracts are normally traded on an
exchange which sets the certain
standardized norms for trading in futures
contracts.

9. OPTIONS
 Options are the most important group of derivative
securities.
 Option may be defined as a contract, between two
parties whereby one party obtains the right, but not
the obligation, to buy or sell a particular asset, at a
specified price , on or before a specified date.
 The person who acquires the right is known as the
option buyer or option holder, while the other person
(who confers the right )is known as option seller or
option writer.
 The seller of the option for giving such option to the
buyer charges an amount which is known as the
option premium.

10. SWAPS
 A swap is an agreement between two parties
to exchange cash flows in the future. Under
this agreement , various terms like the dates
when the cash flows are to be paid, the
currency in which to be paid and the mode of
payment are determined and finalized by the
parties.
 Two types:
 Currency swaps
 Interest rate swaps

11. USES OF DERIVATIES MARKETS
 It controls, avoid, shift and manage efficiently
different types of risks through various
strategies like hedging, arbitraging,
spreading, etc.
 It serves as barometers of the future trends
in prices which result in the discovery of new
prices of both on the spot and futures
market.
 In derivative trading no immediate full
amount of the transaction is required since
most of them are based on margin trading.

12. USES OF DERIVATIES MARKETS
 Derivatives have smoothen out price
fluctuations, squeeze the price spread,
integrate price structure at different points of
time and remove gluts and shortages in the
market.
 Its trading encourages the competitive
trading in the markets resulting in increase in
trading volume in the country.
 Derivative trading develop the market
towards ‘complete markets’

13. ROLE OF DERIVATIES MARKETS
 Risk management
 Price discovery
 Operational advantage
 Market efficiency

14. LINKAGES B/W SPOT AND DERIVATIES MARKET
 Arbitrage and law of one price
 Storage mechanism: spreading consumption
across time
 Delivery and settlement

15. CRITICISMS OF DERIVATIES MARKET
 Speculative and gambling motives
 Increase in risk
 Instability of financial system
 Price instability
 Displacement effect
 Increased regulatory burden

16. EVOLUTION OF DERIVATIES MARKET
12th century - forward trading in England and
France.
17th century - the Dojima rice market in Japan the
first futures market.
1898 – Chicago Mercantile Exchange for futures
trading.( commodities)
1972 – International Monetary Market for futures
trading in foreign currencies.
1980,s- Philadelphia Stock Exchange for options
in foreign exchange.

17. Thank you