DERIVATIVES CONTRACT

1. TYPES OF CONTRACTS :
FORWARD, FUTURE,
OPTION, SWAPS

2. HELLO!
 NAME : RUSHIT BHATTI
 SUBJECT : DERICATIVES AND
FINANCIAL MANAGEMENT
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3. DERIVATIVES
 A Derivative is a financial instrument whose value is derived from the
value of another asset, which is known as the underlying.
 When the price of the underlying changes, the value of the derivative also
changes.
 A Derivative is not a product. It is a contract that derives its value from
changes in the price of the underlying.
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4. “
Participant
Insuring an investment against
risk.
Hedgers
Who bets on derivatives
markets
Speculators
Attempt to profit from pricing
inefficiencies
Arbitrageurs
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6. TYPES OF CONTRACT
1. FORWARD
2. FUTURE
3. OPTION
4. SWAPS
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7. FORWARD CONTRACT
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Contact
Two Private
Parties
Transaction
at Expiry
Date
(Forward
Price)
Physical /
Cash
Settlement

8. FEATURES
▸ It is a contract between two parties (Bilateral contract).
▸ No down payments
▸ Settlement at maturity
▸ Linearity (If So > Fo, Gain= spot price – contract price ).
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9. “
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Participants in Forward Contract
Money
Delivery of Asset
Buyer
(Who takes a
long position)
Seller
(Who takes a
short position )

10. Risks in Forward Contracts
Credit Risk –Does the other party have the means to pay?
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?
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11. 2. Future contracts
▸ Futures contract is a standardized contract between two parties to exchange a
specified asset of standardized quantity and quality for a price agreed today
with delivery occurring at a specified future date, the delivery date.
▸ It is traded on an organized exchange.
▸ Deals in commodity, currency and assets.
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12. Features of Future Contract
▸ Highly Standardized
▸ Down payment & Settlements
▸ Hedging of Price risk
▸ Secondary Market
▸ Non-delivery of Assets
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Positions in a Futures Contract
Long
When a person sell a futures contractShort
When a person buy a futures contract
Unsettled future either buy or sellOpen

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Positions in a Futures Contract- cont…
Opening a Position
Closing a
Position
Either buying or selling a contract, which
increases client’s open position (long or short).
Either buying or selling a contract, which
essentially results in reduction of client’s open
position (long or short) .

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Positions in a Futures Contract-cont…
Short
Naked and calendar spread positions
Naked Position
Calendar Spread
Positions
Long or short position in any futures contract
without having any position in the underlying
asset.
Combination of two positions in futures on the
same underlying - long on one maturity contract
and short on a different maturity contract.

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Difference Between Future & Forward
Forward Future
Nature of Contracts Customized Standardized
Counterparty Any Party Clearing Corporation
Credit Risk Exist No Risk
Liquidity Very Low Very High
Margins Not Required Received / Paid on Daily
Basis
Valuation Not Done Daily Basis
Delivery Physical / Cash No Delivery

17. 3. Option Contract
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A contract between two parties
Where Buyer of the option has the right and not
obligation to fulfill the contract
Seller is under obligation to fulfill the Contract
Assets included Stocks, Bonds, Currency,
Commodity
Volatile environment of risk of fluctuation in price
of assets for certain time

18. Features: -
• Contract made from both party requirement.Highly flexible: -
• Small amount of advance(If Contract bleach
advance loose)
Down payment : -
• At Maturity asset TransferredSettlement: -
• If option holder doesn’t exercise contract,
order cancelled
No Obligation: -
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19. Types of Option
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Call
Option
Seller have right to prematurity
selling.
Buyers have decision to right to buy
before Maturity.
Put
Option

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American Option Option Exercised on or before
maturity.
European Option Option Exercised on Maturity not
before that.

21. 4. Swaps Contract
▸ Derivative contract through which two parties exchange the cash flows or
liabilities from two different financial instruments
▸ Includes Interest rates risk & Currency risk hedging
▸ Two types: -
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• Swaps in which two currency Exchanged.Cross Currency
• Fix Interest rates exchange with Floting
Rate
Interest rate
• One stream floting rate exchange with other
Stream Floting rate
Basis Swaps

22. Features: -
 Basically Forward: -
Combination of Forward Contract
 Long Term Agreements: -
Base on risk
 Settlement: -
Settle fix rate against floting rate
 Necessity of Intermediaries: -
Needed two different need matching party.
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23. Derivative Terminology
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Lot Size Expiry Date Contract Size
Spot Price Strike Price Initial Margin
Mark to
Market
Margin
Option
Premium
Closing Price

24. Conclusion
▸ Derivatives are most commonly used tools for hedging risk in market but
they cannot completely eliminate the risk of the firms they can only
minimize the risk included in the trade.
▸ So looking at the situation of Emerald he should choose either Future
contract or Option Contract to minimize his risk of trade and to gain from
the Euro appreciation in market.
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