JIMS Rohini News - Introduction to Derivatives by Mr. N.P. Singh (Associate Professor - JIMS Rohini Sector 5) - PGDM Programme . Derivatives are defined as contracts which derive their value from an underlying asset. - Stock - Index - Commodity - Currency - Interest Rate or - Any other asset Jagan Institute of Management Studies has evolved as an institution of excellence and commitment in the field of Management and Technical education. The institute from the very outset focused on professional studies at the Post- Graduate level with a view to tap, direct and channelize the enormous talent pool in the country. We offer Post Graduate Diploma in Management (PGDM) (two year - Full Time and three year - Part Time).

1. By: N. P. Singh
Associate Prof.
JIMS, Rohini
Introduction to Derivatives

2. OVERVIEW

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 Derivatives are defined as contracts which derive their value from an underlying asset (or
bases) like
◦Stock
◦Index
◦Commodity
◦Currency
◦Interest Rate or
◦Any other asset
 Governed by the regulatory framework of SCRA, 1956
Derivatives Defined

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 Risk management – Risk transfer
 Boosts the trading volume of underlying asset
 Price Discovery – Future price
 Provides an organized platform for speculative traders
Economic Functions of Derivatives

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 Increased volatility in asset prices in financial markets
 Fast and cheap communication
 Increased integration of national financial markets with the international markets
Factors Driving the Growth of Derivatives
 Higher returns, reduced risk and transaction costs as compared to individual financial
assets

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 Forwards
 Options
 Futures
Types of Derivatives
 Warrants
 LEAPS (Long Term Equity Anticipation Securities)
 Baskets
 Swaps
 Swaption
◦Payer swaption
◦Receiver swaption

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 Hedgers
 Speculators
Participants
 Arbitrageurs

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 Forward contracts are similar to futures except that they trade in the over-the-counter
market
 The party that has agreed to buy has what is termed a long position
 Forward contracts are particularly popular on currencies and interest rates
Forward Contracts
 The party that has agreed to sell has what is termed a short position

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Foreign Exchange Quotes for GBP
Bid Offer
Spot 2.0558 2.0562
1-month forward 2.0547 2.0552
3-month forward 2.0526 2.0531
6-month forward 2.0483 2.0489

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PLAYING Profit from a Long Forward Position: (ST - K)
Profit
Price of Underlying
at Maturity, ST

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Profit from a Short Forward Position: (K- ST)
Profit
Price of Underlying
at Maturity, STK

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 Agreement to buy or sell an asset for a certain price at a certain time
Futures Contracts
 Similar to forward contract
 Whereas a forward contract is traded OTC, a futures contract is traded on an exchange

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 Chicago Board of Trade (CBOT)
Exchanges Trading Futures
 Chicago Mercantile Exchange (CME)
 NSE
 BSE
 MCX
 NCDEX
 Eurex (Europe)
 LIFFE (London)
 BM&F (Sao Paulo, Brazil)
 TIFFE (Tokyo)

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Agreement to:
Buy 100 oz. of gold @ US$900/oz. in December (NYMEX)
Sell £62,500 @ 2.0500 US$/£ in March (CME)
Sell 1,000 bbl. of oil @ US$120/bbl. in April (NYMEX)
Examples of Futures Contracts

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Agreement to:
Buy 100 oz. of gold @ US$900/oz. in December (NYMEX)
Sell £62,500 @ 2.0500 US$/£ in March (CME)
Sell 1,000 bbl. of oil @ US$120/bbl. in April (NYMEX)
Options

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 An American option can be exercised at any time during its life e.g. Stock options traded on
NSE
American vs European Options
 A European option can be exercised only at maturity e.g. Index options on Nifty

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 An American option can be exercised at any time during its life e.g. Stock options traded on
NSE
American vs European Options
 A European option can be exercised only at maturity e.g. Index options on Nifty

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 Chicago Board Options Exchange
Exchanges Trading Options
 American Stock Exchange
 Philadelphia Stock Exchange
 National Stock Exchange (NSE) of India
 Bombay Stock Exchange (BSE) of India
 Pacific Exchange
 LIFFE (London)
 Eurex (Europe) etc.

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 A futures/forward contract gives the holder the obligation to buy or sell at a certain price
 An option gives the holder the right to buy or sell at a certain price
Options vs Futures/Forwards

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Global Derivatives Market

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NSE BSE
Market share of NSE in Equity Derivatives
Segment (2008-09)

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Equity Derivatives Trading (F&O Segment) at
NSE
Year Total Turnover
inn F&O
Segment
(Rs. Crore)
June 2000- March 2001 2,356
2001-02 101,925
2002-03 439,855
2003-04 2,130,649
2004-05 2,547,053
2005-06 4,824,250
2006-07 7,356,271
2007-08 13,090,478
2008-09 11,010,482
Growth of Turnover in F&O Segment of NSE
(Rs. Crore)
0
2000000
4000000
6000000
8000000
10000000
12000000
14000000
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09

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Products available for trading on Derivatives Segment on NSE
Products on Derivative Segment Date of Launch
S&P CNX Nifty Futures June 12, 2000
S&P CNX Nifty Options June 4, 2001
Single Stock Options July 2, 2001
Single Stock Futures November 9, 2001
Interest Rate Futures June 24, 2003
CNX IT Futures & Options August 29, 2003
Bank Nifty Futures & Options June 13, 2005
CNX Nifty Junior Futures & Options June 1, 2007
CNX 100 Futures & Options June 1, 2007
Nifty Midcap 50 Futures & Options October 5, 2007
Mini Nifty Futures & Options on S&P
CNX Nifty January 1, 2008
Long term Options on S&P CNX Nifty March 3, 2008
S&P CNX Defty Futures and Options December 10, 2008

24. Jagan Institute of Management Studies

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About JIMS
JIMS Rohini is one of the leading MBA
institutes of Delhi. We impart professional
education both at post graduate and
undergraduate levels in the fields of
management and information technology.
Our PGDM program is approved by the AICTE and is
accredited from NBA for excellence in quality education.
PGDM program has also been granted equivalence to
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JIMS, Rohini, Sector 5 also offers technical programs viz BBA,
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Established in 1993, JIMS completed its 20 years of
Excellence in 2013. We offer excellent academic
structure, industry interaction and job opportunities.

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