SlideShare a Scribd company logo
1 of 26
Derivatives--Meaning
“Something from something else”.
 Its value is entirely derived from the values of the underlying
asset.
 Underlying asset can be securities, commodities, bullion,
currency, livestock or anything else.
 Derivative means Forward, Future, Option or any other
contract of predetermined fixed duration.
Financial Derivatives--Meaning
 Financial derivatives are financial instruments whose prices or
values are derived from the prices of other underlying
financial instruments or financial assets.
 Underlying financial instrument can be equity share, stock,
bond, debenture, treasury bill, foreign currency etc.
 Financial derivatives are not revolutionary new instruments
rather they are merely combination of older generation
derivatives.
Derivatives--Features
 Future contract between two parties.
 Based on underlying assets.
 Counter parties specifies obligation under derivative contract.
 Contract undertaken directly between two parties or particular
exchange.
 Financial derivatives are carried off-balance sheet.
No asset or liability underlying the contract was put on B/S.
It is treated as contingent asset or liability.
 Taking or making of delivery of underlying assets is not
involved.
 It is known as deferred delivery or deferred payment.
 Mostly it is a secondary market instrument and have little
usefulness in mobilizing fresh capital by corporate.
 Standardized, general and exchange-traded derivatives are
being increasingly evolved.
Type of financial derivatives
Forward contract—Meaning:
 A forward contract is a simple customized contract between
two parties to buy or sell an assets at a certain time in the
future for a certain price.
 Not traded on an exchange , rather traded as a condition to the
contract by the parties concerned.
 Forward contract can be of cash settled or based on physical
delivery.
Features of Forward contract
 Bilateral contract, they are exposed the counter party risk for
non-performance of obligation either of the parties.
 Each contract is custom designed, is unique in terms of
contract size, expiration date, the asset type, quality etc.
 A party with no obligation off setting the forward contract is
said to have an open position. A party with a closed position is
called hedger.
 The contract has to be settled by delivery of the assets on
expiration date.
 It is popular in foreign exchange market as well as interest rate
bearing instruments.
Contd:
• Indian forward contract Act 1952:
 Hedge contract are freely transferable and do not specific, any
particular lot, consignment etc.
 Transferable specific delivery contracts– are freely
transferable from one party to another, but are concerned with
a specific and predetermined consignment.
 Non- transferable specific delivery contract– are contracts, are
not transferable at all and as such, they are highly specific.
 Specified price in a forward contract is referred to as the
delivery price.
 Forward price for a particular forward contract at a particular
time. As time passes the forward price is likely to change
whereas the delivery prices remains the same.
Contd:
Future contract--Meaning
 A Future 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.
 Traded on an exchange which sets certain standardized norms
for trading in the future contract.
Features of future contract
 They are traded on an exchange.
 Standardized norms.
 Liquidity problem, which persists in the forward market, does
not exist in the future market.
 Credit risk of the transactions is eliminated by the exchange
through the clearing house.
Option--Meaning
 A contract between two parties whereby one party obtains the
rights, but not the obligation, to buy or sell a particular asset,
at a specified price, on or before a specified date.
 Person who acquires the right is know as the option buyer or
option holder, while the other person is know 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.
Type of option—Call option and Put option:
 Call option:----gives the holder the right to buy an asset at a
specified date for a specified price.
 Put option:---the holder gets the right to sell an asset at the
specified price and time.
 Specified price in a contract is known as the exercise price or
strike price.
 The date in the contract is known as expiration or exercise or
maturity date.
 Assets or security instruments or commodity covered under
the contract is called as the underlying assets.
 It includes shares, stock, foreign currencies, bonds,
commodities.
Option further divided into—European and American
option
 European option:--can be exercised on the expiration date
only.
 American option:--can be exercised at any time before the
maturity date.
Swap--Meaning
 A Swap is an agreement between two counter parties to
exchange cash flows in the future.
 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 parties.
 Calculation of cash flows involves the future values of one or
more market variables.
Types of Swap—Interest rate and currency swap
 Interest rate swap:
One party agrees to pay other party at a fixed rate on a
principal amount, and in return, it receives interest at a floating
on the same principal amount for a specified period.
Currencies of the two sets of cash flow are the same.
 Currency swap:
It involves in exchanging of interest flows in one currency for
interest flows in other currency, it requires the exchange of
cash flows in two currencies.
Use of Derivatives
 Provides services to control, avoid, shift and manage
efficiently different type of risk through hedging, arbitraging,
spreading, etc.
 Serve as barometer of the future trends in price, to discover the
new prices both on the spot and future market.
 No immediate full amount of the transaction is required for
trading.
 Trading enhance liquidity and reduce transaction costs in the
markets for underlying assets.
 Assist the investors, traders, managers of large pools of funds,
to make proper asset allocation, increase their yields and
achieve investment goals.
Contd:
 Helps in disseminating information regarding the future
markets trading of commodities and securities.
 Attract young investors, professionals, and experts who will
act as catalysts to the growth of financial markets.
 Observed that smoothen out price fluctuations, squeeze the
price spread, integrate price structure at different points time
and remove shortages in the markets.
 Encourage the competitive trading in the market, different risk
taking by the market operators like speculators, hedgers,
trader,
 Assists the holders to shift or modify suitably the risk
characteristics of their portfolios.
Critiques of derivatives
Speculative and gambling motives:
 Trading volumes have increase in multiples of the values of
the underlying assets and one to two percent are settled the
actual delivery of the underlying assets.
 Speculative buying and selling by professionals and amateurs
affect the genuine producers and distributors.
Increase in risk:
 Observed –especially OTC markets, particularly customized,
privately managed and negotiated and they are highly risky.
 Powerful leveraged mechanism used to create risk.
Instability of the financial system:
 Argued that increased risk not only for the users but for the
whole financial system.
 Malpractices, desperate behavior and fraud by the users, have
threatened the stability of the financial markets and financial
system.
Price instability:
 Helpful in price stabilization ,if exist a properly organized,
competitive and well-regulated market, trader behave and
function in professional manner and standard code of conduct.
 All these are not frequently practiced in the market, and cause
to price instability rather than stability.
Displacement effect:
 Growth of derivative will reduce the volume of the business in
the primary or new issue market specifically for the new and
small corporate units.
 Most of investors will divert to the derivative market, raising
fresh capital is difficult, and will create displacement effect in
the financial market.
Increased regulatory burden:
 Instability in financial system, as a result more burden on the
government or regulatory to control the activities of the traders.
 Financial crisis and scams in the market from time to time and
regulatory authorities spent on to find out new regulatory,
supervisory and monitoring tools, for to lead on fall of the
financial system.
Risk in derivatives
 Derivatives trading has become a powerful segment of the
international financial market.
 Trading in equity derivatives have begun at different centers
of global financial markets.
 Derivatives are powerful tools for risk management, they turn
out to be disastrous weapons, if not used properly.
Nature of derivative trading:
 Handling the derivatives are just like handling dangerous
chemicals, or explosive device.
 Markets move at fast speed, market is highly liquid but too
risky.
 Used for different purpose like hedging the risk, speculation,
arbitraging, trading, etc.
Contd:
 Essential to implement as independent management function
to identity, monitor, control, and report all its aspects.
 High level of competent persons in his field.
Setting the risk vision:
 Setting policies
 Commercial objectives
 Risk tolerance
 Capital efficiency
 Financial capability
 Enhance competence
 Reviews
 Increase in complexity of financial market:
 Business firm operates in dynamic business environment.
 Due to globalization and liberalization, the domestic financial
market are linked with the international financial market.
 Optimization of capital:
 Earning through derivatives is a very risky venture, because
derivative are used as powerful risk-management tools.
 Miscalculation of prices of derivative products has created
disaster for the creators.
 Optimum use of capital and financial resources, derivatives
should be used judiciously and carefully.
Reasons for managing derivatives risk:
 Technology advances:
 Increased sophistication and new information technology have
created complications and insecurity in the business.
 Market events:
 Derivative products are in all spheres like agricultural product,
metals, commodities and financial product.
 Activities and development are increasing in different market
at fast rate all over, it will rise a market risk.
 Changes in accounting practices:
 To measure the value, there is need of sound techniques and
other statistical tools.
 Accounting standard and practice for the derivative are
relative new and in a process of evolution.
Types of risks in derivatives trading
 Credit risk:
 Also called as default risk.
 A counter party default its obligation is called credit risk.
 Exchange-traded future contract is likely to have significantly
less counter party risk in comparison to OTC contract.
 Market risk:
 Market risk exposes a firm to uncertainty, due to changes in
market factors, like foreign exchange rates, commodity prices,
equity prices, etc.
 To over come the market risk, the factor like risk strategy and
policy, organization and culture, executive skill, procedure and
control port folio characteristic, etc.
 Liquidity risk:
 Refers to the fluctuation of derivative instruments prices for
not quickly sold or purchased in the market.
 Liquidity risk is higher in OTC market in comparison to the
exchange traded derivatives.
 A rise out of relative ability of an organization and mismatch
between the bank cash inflows and out flows arising out of
derivative activity.
 Legal risk:
 Risk relating to change in law or a regulatory rule, cause an
adverse financial impact on derivative.
 Global data base and the legal and regulatory compliance.
 Operational risk:
 Risk relates to errors or frauds, which occurs in carrying out
operations, placing orders, making payment, taking deliveries,
accounting for derivatives transactions.
 Manual and automated control through out the organization,
play in creating a secure operational environment.
 Model risk(formal risk):
 Derivative instrument are priced or valued through specific
complicated mathematical formula, based on assumption.
 Observed that models, or formula fail to give accurate results
regarding price data.
 Due to changes in assumptions or other environment factors or
undetected flaws in the models.eg financial risk, interest rate
risk, etc.

More Related Content

What's hot

Introduction to derivatives
Introduction to derivativesIntroduction to derivatives
Introduction to derivativesNeelam Asad
 
Foreign exchange exposure PPT
Foreign exchange exposure PPTForeign exchange exposure PPT
Foreign exchange exposure PPTVijay Mehta
 
Swaps (derivatives)
Swaps (derivatives)Swaps (derivatives)
Swaps (derivatives)kunaljoshi79
 
3. Trading - Types of derivatives
3. Trading - Types of derivatives3. Trading - Types of derivatives
3. Trading - Types of derivativesKoffee Financial
 
Lease finance
Lease   financeLease   finance
Lease financeSubin Raj
 
Derivative - Forward and future contract
Derivative - Forward and future contractDerivative - Forward and future contract
Derivative - Forward and future contractMohammed Jasir PV
 
Financial derivatives types & participants
Financial derivatives types & participantsFinancial derivatives types & participants
Financial derivatives types & participantsSmruti Ranjan Sahoo
 
Financial derivatives (2)
Financial derivatives (2)Financial derivatives (2)
Financial derivatives (2)larrotci
 
Financial Market Instruments
Financial Market InstrumentsFinancial Market Instruments
Financial Market InstrumentsKushal Setty
 
Derivative market
Derivative marketDerivative market
Derivative marketSam Malik
 
Inflation accounting or price level accounting
Inflation accounting or price level  accountingInflation accounting or price level  accounting
Inflation accounting or price level accountingneelakshi81
 

What's hot (20)

Introduction to derivatives
Introduction to derivativesIntroduction to derivatives
Introduction to derivatives
 
Currency Swaps
Currency SwapsCurrency Swaps
Currency Swaps
 
Foreign exchange exposure PPT
Foreign exchange exposure PPTForeign exchange exposure PPT
Foreign exchange exposure PPT
 
Swaps (derivatives)
Swaps (derivatives)Swaps (derivatives)
Swaps (derivatives)
 
3. Trading - Types of derivatives
3. Trading - Types of derivatives3. Trading - Types of derivatives
3. Trading - Types of derivatives
 
Lease finance
Lease   financeLease   finance
Lease finance
 
Swaps
SwapsSwaps
Swaps
 
Derivative - Forward and future contract
Derivative - Forward and future contractDerivative - Forward and future contract
Derivative - Forward and future contract
 
Swaps
SwapsSwaps
Swaps
 
Financial derivatives types & participants
Financial derivatives types & participantsFinancial derivatives types & participants
Financial derivatives types & participants
 
Financial derivatives (2)
Financial derivatives (2)Financial derivatives (2)
Financial derivatives (2)
 
Financial Market Instruments
Financial Market InstrumentsFinancial Market Instruments
Financial Market Instruments
 
Swap
SwapSwap
Swap
 
Security Analysis
Security AnalysisSecurity Analysis
Security Analysis
 
investment analysis and portfolio management
investment analysis and portfolio management investment analysis and portfolio management
investment analysis and portfolio management
 
Portfolio analysis
Portfolio analysisPortfolio analysis
Portfolio analysis
 
Derivative market
Derivative marketDerivative market
Derivative market
 
Securities market
Securities marketSecurities market
Securities market
 
CAPM
CAPMCAPM
CAPM
 
Inflation accounting or price level accounting
Inflation accounting or price level  accountingInflation accounting or price level  accounting
Inflation accounting or price level accounting
 

Viewers also liked

Wall Street Derivative Risk Solutions Using Geode
Wall Street Derivative Risk Solutions Using GeodeWall Street Derivative Risk Solutions Using Geode
Wall Street Derivative Risk Solutions Using GeodeVMware Tanzu
 
Trading and exchanges (Larry Harris) - Summary Points
Trading and exchanges (Larry Harris) - Summary PointsTrading and exchanges (Larry Harris) - Summary Points
Trading and exchanges (Larry Harris) - Summary Pointsradhap
 
Apostila curso de técnica vocal
Apostila   curso de técnica vocalApostila   curso de técnica vocal
Apostila curso de técnica vocalTocandoocéu Céu
 
ασκήσεις υποπρογράμματα
ασκήσεις υποπρογράμματαασκήσεις υποπρογράμματα
ασκήσεις υποπρογράμματαNIKOS KARRAS
 
44 nordri design.agl
44   nordri design.agl44   nordri design.agl
44 nordri design.aglEduardo Luna
 
QualiBuild Training Provision and Progress
QualiBuild Training Provision and ProgressQualiBuild Training Provision and Progress
QualiBuild Training Provision and ProgressSeamus Hoyne
 
Social försäljning B2B med LinkedIn som verktyg
Social försäljning B2B med LinkedIn som verktygSocial försäljning B2B med LinkedIn som verktyg
Social försäljning B2B med LinkedIn som verktygHenrik Björklund
 
Seamus hoyne quali build training plans and provision
Seamus hoyne quali build training plans and provisionSeamus hoyne quali build training plans and provision
Seamus hoyne quali build training plans and provisionSeamus Hoyne
 
αισθητικός υπομνηματισμός στην άκρα ταπείνωση
αισθητικός υπομνηματισμός στην άκρα ταπείνωσηαισθητικός υπομνηματισμός στην άκρα ταπείνωση
αισθητικός υπομνηματισμός στην άκρα ταπείνωσηNIKOS KARRAS
 
Apostila curso de teclado - base cifras
Apostila   curso de teclado - base cifrasApostila   curso de teclado - base cifras
Apostila curso de teclado - base cifrasTocandoocéu Céu
 
Protypo experimental lyceum of patras university
Protypo experimental lyceum of patras universityProtypo experimental lyceum of patras university
Protypo experimental lyceum of patras universityNIKOS KARRAS
 
Modern marknadsföring på 5 minuter
Modern marknadsföring på 5 minuterModern marknadsföring på 5 minuter
Modern marknadsföring på 5 minuterHenrik Björklund
 

Viewers also liked (20)

Wall Street Derivative Risk Solutions Using Geode
Wall Street Derivative Risk Solutions Using GeodeWall Street Derivative Risk Solutions Using Geode
Wall Street Derivative Risk Solutions Using Geode
 
Trading and exchanges (Larry Harris) - Summary Points
Trading and exchanges (Larry Harris) - Summary PointsTrading and exchanges (Larry Harris) - Summary Points
Trading and exchanges (Larry Harris) - Summary Points
 
risk management
risk managementrisk management
risk management
 
Prabha ppt
Prabha pptPrabha ppt
Prabha ppt
 
Recycle
RecycleRecycle
Recycle
 
Apostila curso de técnica vocal
Apostila   curso de técnica vocalApostila   curso de técnica vocal
Apostila curso de técnica vocal
 
ασκήσεις υποπρογράμματα
ασκήσεις υποπρογράμματαασκήσεις υποπρογράμματα
ασκήσεις υποπρογράμματα
 
44 nordri design.agl
44   nordri design.agl44   nordri design.agl
44 nordri design.agl
 
4 timmar framgang 20130521
4 timmar framgang 201305214 timmar framgang 20130521
4 timmar framgang 20130521
 
Gary guion
Gary guionGary guion
Gary guion
 
QualiBuild Training Provision and Progress
QualiBuild Training Provision and ProgressQualiBuild Training Provision and Progress
QualiBuild Training Provision and Progress
 
Social försäljning B2B med LinkedIn som verktyg
Social försäljning B2B med LinkedIn som verktygSocial försäljning B2B med LinkedIn som verktyg
Social försäljning B2B med LinkedIn som verktyg
 
Seamus hoyne quali build training plans and provision
Seamus hoyne quali build training plans and provisionSeamus hoyne quali build training plans and provision
Seamus hoyne quali build training plans and provision
 
αισθητικός υπομνηματισμός στην άκρα ταπείνωση
αισθητικός υπομνηματισμός στην άκρα ταπείνωσηαισθητικός υπομνηματισμός στην άκρα ταπείνωση
αισθητικός υπομνηματισμός στην άκρα ταπείνωση
 
Apostila curso de teclado - base cifras
Apostila   curso de teclado - base cifrasApostila   curso de teclado - base cifras
Apostila curso de teclado - base cifras
 
Galeon 3
Galeon 3Galeon 3
Galeon 3
 
Protypo experimental lyceum of patras university
Protypo experimental lyceum of patras universityProtypo experimental lyceum of patras university
Protypo experimental lyceum of patras university
 
Aula01 arte na adoraçao
Aula01 arte na adoraçaoAula01 arte na adoraçao
Aula01 arte na adoraçao
 
Unit v
Unit vUnit v
Unit v
 
Modern marknadsföring på 5 minuter
Modern marknadsföring på 5 minuterModern marknadsföring på 5 minuter
Modern marknadsföring på 5 minuter
 

Similar to Unit i

Capital market innovation and derivatives
Capital market innovation and derivativesCapital market innovation and derivatives
Capital market innovation and derivativesDr. Mustafa Kozhikkal
 
FINACIAL DERIVATIVE General.doc
FINACIAL DERIVATIVE General.docFINACIAL DERIVATIVE General.doc
FINACIAL DERIVATIVE General.docMdSahnawaj1
 
International Banking and Foreign Exchange risk
International Banking and Foreign Exchange riskInternational Banking and Foreign Exchange risk
International Banking and Foreign Exchange riskKalpesh Arvind Shah
 
Introduction to derivatives
Introduction to derivativesIntroduction to derivatives
Introduction to derivativesAmeya Ranadive
 
9.kalpesh arvind shah.subject international banking and foreign exchange risk
9.kalpesh arvind shah.subject international banking and foreign exchange risk9.kalpesh arvind shah.subject international banking and foreign exchange risk
9.kalpesh arvind shah.subject international banking and foreign exchange riskKalpesh Arvind Shah
 
DERIVATIVES UNIT 2.docx
DERIVATIVES UNIT 2.docxDERIVATIVES UNIT 2.docx
DERIVATIVES UNIT 2.docxAvneeshRajput5
 
Equity derivatives in bombay stock exchange
Equity derivatives in bombay stock exchange Equity derivatives in bombay stock exchange
Equity derivatives in bombay stock exchange bhagyasri agarwal
 
Derivatives in Capital Market
Derivatives in Capital MarketDerivatives in Capital Market
Derivatives in Capital MarketSyed Irshad Ali
 
Financial derivatives
Financial derivativesFinancial derivatives
Financial derivativesBINOY JOHN
 
Importance of derivatives in risk management
Importance of derivatives in risk managementImportance of derivatives in risk management
Importance of derivatives in risk managementAnjali
 
Derivatives & risk management
Derivatives & risk managementDerivatives & risk management
Derivatives & risk managementPiyamaddyenu
 
Financial Derivatives
Financial DerivativesFinancial Derivatives
Financial DerivativesVinu Praveenz
 
Derivatives and option pricing theory
Derivatives and option pricing theoryDerivatives and option pricing theory
Derivatives and option pricing theoryWardaMahnoor
 

Similar to Unit i (20)

Derivatives
DerivativesDerivatives
Derivatives
 
Capital market innovation and derivatives
Capital market innovation and derivativesCapital market innovation and derivatives
Capital market innovation and derivatives
 
Derivatives
DerivativesDerivatives
Derivatives
 
FINACIAL DERIVATIVE General.doc
FINACIAL DERIVATIVE General.docFINACIAL DERIVATIVE General.doc
FINACIAL DERIVATIVE General.doc
 
International Banking and Foreign Exchange risk
International Banking and Foreign Exchange riskInternational Banking and Foreign Exchange risk
International Banking and Foreign Exchange risk
 
Introduction to derivatives
Introduction to derivativesIntroduction to derivatives
Introduction to derivatives
 
9.kalpesh arvind shah.subject international banking and foreign exchange risk
9.kalpesh arvind shah.subject international banking and foreign exchange risk9.kalpesh arvind shah.subject international banking and foreign exchange risk
9.kalpesh arvind shah.subject international banking and foreign exchange risk
 
Final yo yo 2
Final yo yo 2Final yo yo 2
Final yo yo 2
 
DERIVATIVES UNIT 2.docx
DERIVATIVES UNIT 2.docxDERIVATIVES UNIT 2.docx
DERIVATIVES UNIT 2.docx
 
Equity derivatives in bombay stock exchange
Equity derivatives in bombay stock exchange Equity derivatives in bombay stock exchange
Equity derivatives in bombay stock exchange
 
Derivatives in Capital Market
Derivatives in Capital MarketDerivatives in Capital Market
Derivatives in Capital Market
 
derivatives
derivativesderivatives
derivatives
 
Financial derivatives
Financial derivativesFinancial derivatives
Financial derivatives
 
Derivatives.pptx
Derivatives.pptxDerivatives.pptx
Derivatives.pptx
 
Importance of derivatives in risk management
Importance of derivatives in risk managementImportance of derivatives in risk management
Importance of derivatives in risk management
 
Derivatives & risk management
Derivatives & risk managementDerivatives & risk management
Derivatives & risk management
 
Derivative market
Derivative market  Derivative market
Derivative market
 
Financial Derivatives
Financial DerivativesFinancial Derivatives
Financial Derivatives
 
Derivatives and option pricing theory
Derivatives and option pricing theoryDerivatives and option pricing theory
Derivatives and option pricing theory
 
FMICh1.pptx
FMICh1.pptxFMICh1.pptx
FMICh1.pptx
 

More from Prabhakar Murugesan (6)

Unit iv
Unit ivUnit iv
Unit iv
 
Unit ii
Unit iiUnit ii
Unit ii
 
Unit iii
Unit  iiiUnit  iii
Unit iii
 
Technical analysis
Technical analysisTechnical analysis
Technical analysis
 
Fundamental analysis
Fundamental analysisFundamental analysis
Fundamental analysis
 
Bank
BankBank
Bank
 

Recently uploaded

cost of capital questions financial management
cost of capital questions financial managementcost of capital questions financial management
cost of capital questions financial managementtanmayarora23
 
Amil Baba In Pakistan amil baba in Lahore amil baba in Islamabad amil baba in...
Amil Baba In Pakistan amil baba in Lahore amil baba in Islamabad amil baba in...Amil Baba In Pakistan amil baba in Lahore amil baba in Islamabad amil baba in...
Amil Baba In Pakistan amil baba in Lahore amil baba in Islamabad amil baba in...amilabibi1
 
NO1 WorldWide Love marriage specialist baba ji Amil Baba Kala ilam powerful v...
NO1 WorldWide Love marriage specialist baba ji Amil Baba Kala ilam powerful v...NO1 WorldWide Love marriage specialist baba ji Amil Baba Kala ilam powerful v...
NO1 WorldWide Love marriage specialist baba ji Amil Baba Kala ilam powerful v...Amil baba
 
Kempen ' UK DB Endgame Paper Apr 24 final3.pdf
Kempen ' UK DB Endgame Paper Apr 24 final3.pdfKempen ' UK DB Endgame Paper Apr 24 final3.pdf
Kempen ' UK DB Endgame Paper Apr 24 final3.pdfHenry Tapper
 
(办理原版一样)QUT毕业证昆士兰科技大学毕业证学位证留信学历认证成绩单补办
(办理原版一样)QUT毕业证昆士兰科技大学毕业证学位证留信学历认证成绩单补办(办理原版一样)QUT毕业证昆士兰科技大学毕业证学位证留信学历认证成绩单补办
(办理原版一样)QUT毕业证昆士兰科技大学毕业证学位证留信学历认证成绩单补办fqiuho152
 
原版1:1复刻温哥华岛大学毕业证Vancouver毕业证留信学历认证
原版1:1复刻温哥华岛大学毕业证Vancouver毕业证留信学历认证原版1:1复刻温哥华岛大学毕业证Vancouver毕业证留信学历认证
原版1:1复刻温哥华岛大学毕业证Vancouver毕业证留信学历认证rjrjkk
 
Economic Risk Factor Update: April 2024 [SlideShare]
Economic Risk Factor Update: April 2024 [SlideShare]Economic Risk Factor Update: April 2024 [SlideShare]
Economic Risk Factor Update: April 2024 [SlideShare]Commonwealth
 
2024 Q1 Crypto Industry Report | CoinGecko
2024 Q1 Crypto Industry Report | CoinGecko2024 Q1 Crypto Industry Report | CoinGecko
2024 Q1 Crypto Industry Report | CoinGeckoCoinGecko
 
BPPG response - Options for Defined Benefit schemes - 19Apr24.pdf
BPPG response - Options for Defined Benefit schemes - 19Apr24.pdfBPPG response - Options for Defined Benefit schemes - 19Apr24.pdf
BPPG response - Options for Defined Benefit schemes - 19Apr24.pdfHenry Tapper
 
Governor Olli Rehn: Dialling back monetary restraint
Governor Olli Rehn: Dialling back monetary restraintGovernor Olli Rehn: Dialling back monetary restraint
Governor Olli Rehn: Dialling back monetary restraintSuomen Pankki
 
The Inspirational Story of Julio Herrera Velutini - Global Finance Leader
The Inspirational Story of Julio Herrera Velutini - Global Finance LeaderThe Inspirational Story of Julio Herrera Velutini - Global Finance Leader
The Inspirational Story of Julio Herrera Velutini - Global Finance LeaderArianna Varetto
 
House of Commons ; CDC schemes overview document
House of Commons ; CDC schemes overview documentHouse of Commons ; CDC schemes overview document
House of Commons ; CDC schemes overview documentHenry Tapper
 
Uae-NO1 Kala Jadu specialist Expert in Pakistan kala ilam specialist Expert i...
Uae-NO1 Kala Jadu specialist Expert in Pakistan kala ilam specialist Expert i...Uae-NO1 Kala Jadu specialist Expert in Pakistan kala ilam specialist Expert i...
Uae-NO1 Kala Jadu specialist Expert in Pakistan kala ilam specialist Expert i...Amil baba
 
Vp Girls near me Delhi Call Now or WhatsApp
Vp Girls near me Delhi Call Now or WhatsAppVp Girls near me Delhi Call Now or WhatsApp
Vp Girls near me Delhi Call Now or WhatsAppmiss dipika
 
NO1 Certified Best Amil In Rawalpindi Bangali Baba In Rawalpindi jadu tona ka...
NO1 Certified Best Amil In Rawalpindi Bangali Baba In Rawalpindi jadu tona ka...NO1 Certified Best Amil In Rawalpindi Bangali Baba In Rawalpindi jadu tona ka...
NO1 Certified Best Amil In Rawalpindi Bangali Baba In Rawalpindi jadu tona ka...Amil baba
 
Role of Information and technology in banking and finance .pptx
Role of Information and technology in banking and finance .pptxRole of Information and technology in banking and finance .pptx
Role of Information and technology in banking and finance .pptxNarayaniTripathi2
 
SBP-Market-Operations and market managment
SBP-Market-Operations and market managmentSBP-Market-Operations and market managment
SBP-Market-Operations and market managmentfactical
 
Economics, Commerce and Trade Management: An International Journal (ECTIJ)
Economics, Commerce and Trade Management: An International Journal (ECTIJ)Economics, Commerce and Trade Management: An International Journal (ECTIJ)
Economics, Commerce and Trade Management: An International Journal (ECTIJ)ECTIJ
 
NO1 Certified kala jadu karne wale ka contact number kala jadu karne wale bab...
NO1 Certified kala jadu karne wale ka contact number kala jadu karne wale bab...NO1 Certified kala jadu karne wale ka contact number kala jadu karne wale bab...
NO1 Certified kala jadu karne wale ka contact number kala jadu karne wale bab...Amil baba
 
NO1 WorldWide Genuine vashikaran specialist Vashikaran baba near Lahore Vashi...
NO1 WorldWide Genuine vashikaran specialist Vashikaran baba near Lahore Vashi...NO1 WorldWide Genuine vashikaran specialist Vashikaran baba near Lahore Vashi...
NO1 WorldWide Genuine vashikaran specialist Vashikaran baba near Lahore Vashi...Amil baba
 

Recently uploaded (20)

cost of capital questions financial management
cost of capital questions financial managementcost of capital questions financial management
cost of capital questions financial management
 
Amil Baba In Pakistan amil baba in Lahore amil baba in Islamabad amil baba in...
Amil Baba In Pakistan amil baba in Lahore amil baba in Islamabad amil baba in...Amil Baba In Pakistan amil baba in Lahore amil baba in Islamabad amil baba in...
Amil Baba In Pakistan amil baba in Lahore amil baba in Islamabad amil baba in...
 
NO1 WorldWide Love marriage specialist baba ji Amil Baba Kala ilam powerful v...
NO1 WorldWide Love marriage specialist baba ji Amil Baba Kala ilam powerful v...NO1 WorldWide Love marriage specialist baba ji Amil Baba Kala ilam powerful v...
NO1 WorldWide Love marriage specialist baba ji Amil Baba Kala ilam powerful v...
 
Kempen ' UK DB Endgame Paper Apr 24 final3.pdf
Kempen ' UK DB Endgame Paper Apr 24 final3.pdfKempen ' UK DB Endgame Paper Apr 24 final3.pdf
Kempen ' UK DB Endgame Paper Apr 24 final3.pdf
 
(办理原版一样)QUT毕业证昆士兰科技大学毕业证学位证留信学历认证成绩单补办
(办理原版一样)QUT毕业证昆士兰科技大学毕业证学位证留信学历认证成绩单补办(办理原版一样)QUT毕业证昆士兰科技大学毕业证学位证留信学历认证成绩单补办
(办理原版一样)QUT毕业证昆士兰科技大学毕业证学位证留信学历认证成绩单补办
 
原版1:1复刻温哥华岛大学毕业证Vancouver毕业证留信学历认证
原版1:1复刻温哥华岛大学毕业证Vancouver毕业证留信学历认证原版1:1复刻温哥华岛大学毕业证Vancouver毕业证留信学历认证
原版1:1复刻温哥华岛大学毕业证Vancouver毕业证留信学历认证
 
Economic Risk Factor Update: April 2024 [SlideShare]
Economic Risk Factor Update: April 2024 [SlideShare]Economic Risk Factor Update: April 2024 [SlideShare]
Economic Risk Factor Update: April 2024 [SlideShare]
 
2024 Q1 Crypto Industry Report | CoinGecko
2024 Q1 Crypto Industry Report | CoinGecko2024 Q1 Crypto Industry Report | CoinGecko
2024 Q1 Crypto Industry Report | CoinGecko
 
BPPG response - Options for Defined Benefit schemes - 19Apr24.pdf
BPPG response - Options for Defined Benefit schemes - 19Apr24.pdfBPPG response - Options for Defined Benefit schemes - 19Apr24.pdf
BPPG response - Options for Defined Benefit schemes - 19Apr24.pdf
 
Governor Olli Rehn: Dialling back monetary restraint
Governor Olli Rehn: Dialling back monetary restraintGovernor Olli Rehn: Dialling back monetary restraint
Governor Olli Rehn: Dialling back monetary restraint
 
The Inspirational Story of Julio Herrera Velutini - Global Finance Leader
The Inspirational Story of Julio Herrera Velutini - Global Finance LeaderThe Inspirational Story of Julio Herrera Velutini - Global Finance Leader
The Inspirational Story of Julio Herrera Velutini - Global Finance Leader
 
House of Commons ; CDC schemes overview document
House of Commons ; CDC schemes overview documentHouse of Commons ; CDC schemes overview document
House of Commons ; CDC schemes overview document
 
Uae-NO1 Kala Jadu specialist Expert in Pakistan kala ilam specialist Expert i...
Uae-NO1 Kala Jadu specialist Expert in Pakistan kala ilam specialist Expert i...Uae-NO1 Kala Jadu specialist Expert in Pakistan kala ilam specialist Expert i...
Uae-NO1 Kala Jadu specialist Expert in Pakistan kala ilam specialist Expert i...
 
Vp Girls near me Delhi Call Now or WhatsApp
Vp Girls near me Delhi Call Now or WhatsAppVp Girls near me Delhi Call Now or WhatsApp
Vp Girls near me Delhi Call Now or WhatsApp
 
NO1 Certified Best Amil In Rawalpindi Bangali Baba In Rawalpindi jadu tona ka...
NO1 Certified Best Amil In Rawalpindi Bangali Baba In Rawalpindi jadu tona ka...NO1 Certified Best Amil In Rawalpindi Bangali Baba In Rawalpindi jadu tona ka...
NO1 Certified Best Amil In Rawalpindi Bangali Baba In Rawalpindi jadu tona ka...
 
Role of Information and technology in banking and finance .pptx
Role of Information and technology in banking and finance .pptxRole of Information and technology in banking and finance .pptx
Role of Information and technology in banking and finance .pptx
 
SBP-Market-Operations and market managment
SBP-Market-Operations and market managmentSBP-Market-Operations and market managment
SBP-Market-Operations and market managment
 
Economics, Commerce and Trade Management: An International Journal (ECTIJ)
Economics, Commerce and Trade Management: An International Journal (ECTIJ)Economics, Commerce and Trade Management: An International Journal (ECTIJ)
Economics, Commerce and Trade Management: An International Journal (ECTIJ)
 
NO1 Certified kala jadu karne wale ka contact number kala jadu karne wale bab...
NO1 Certified kala jadu karne wale ka contact number kala jadu karne wale bab...NO1 Certified kala jadu karne wale ka contact number kala jadu karne wale bab...
NO1 Certified kala jadu karne wale ka contact number kala jadu karne wale bab...
 
NO1 WorldWide Genuine vashikaran specialist Vashikaran baba near Lahore Vashi...
NO1 WorldWide Genuine vashikaran specialist Vashikaran baba near Lahore Vashi...NO1 WorldWide Genuine vashikaran specialist Vashikaran baba near Lahore Vashi...
NO1 WorldWide Genuine vashikaran specialist Vashikaran baba near Lahore Vashi...
 

Unit i

  • 1. Derivatives--Meaning “Something from something else”.  Its value is entirely derived from the values of the underlying asset.  Underlying asset can be securities, commodities, bullion, currency, livestock or anything else.  Derivative means Forward, Future, Option or any other contract of predetermined fixed duration.
  • 2. Financial Derivatives--Meaning  Financial derivatives are financial instruments whose prices or values are derived from the prices of other underlying financial instruments or financial assets.  Underlying financial instrument can be equity share, stock, bond, debenture, treasury bill, foreign currency etc.  Financial derivatives are not revolutionary new instruments rather they are merely combination of older generation derivatives.
  • 3. Derivatives--Features  Future contract between two parties.  Based on underlying assets.  Counter parties specifies obligation under derivative contract.  Contract undertaken directly between two parties or particular exchange.  Financial derivatives are carried off-balance sheet. No asset or liability underlying the contract was put on B/S. It is treated as contingent asset or liability.  Taking or making of delivery of underlying assets is not involved.
  • 4.  It is known as deferred delivery or deferred payment.  Mostly it is a secondary market instrument and have little usefulness in mobilizing fresh capital by corporate.  Standardized, general and exchange-traded derivatives are being increasingly evolved.
  • 5. Type of financial derivatives Forward contract—Meaning:  A forward contract is a simple customized contract between two parties to buy or sell an assets at a certain time in the future for a certain price.  Not traded on an exchange , rather traded as a condition to the contract by the parties concerned.  Forward contract can be of cash settled or based on physical delivery.
  • 6. Features of Forward contract  Bilateral contract, they are exposed the counter party risk for non-performance of obligation either of the parties.  Each contract is custom designed, is unique in terms of contract size, expiration date, the asset type, quality etc.  A party with no obligation off setting the forward contract is said to have an open position. A party with a closed position is called hedger.  The contract has to be settled by delivery of the assets on expiration date.  It is popular in foreign exchange market as well as interest rate bearing instruments.
  • 7. Contd: • Indian forward contract Act 1952:  Hedge contract are freely transferable and do not specific, any particular lot, consignment etc.  Transferable specific delivery contracts– are freely transferable from one party to another, but are concerned with a specific and predetermined consignment.  Non- transferable specific delivery contract– are contracts, are not transferable at all and as such, they are highly specific.  Specified price in a forward contract is referred to as the delivery price.  Forward price for a particular forward contract at a particular time. As time passes the forward price is likely to change whereas the delivery prices remains the same.
  • 8. Contd: Future contract--Meaning  A Future 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.  Traded on an exchange which sets certain standardized norms for trading in the future contract.
  • 9. Features of future contract  They are traded on an exchange.  Standardized norms.  Liquidity problem, which persists in the forward market, does not exist in the future market.  Credit risk of the transactions is eliminated by the exchange through the clearing house.
  • 10. Option--Meaning  A contract between two parties whereby one party obtains the rights, but not the obligation, to buy or sell a particular asset, at a specified price, on or before a specified date.  Person who acquires the right is know as the option buyer or option holder, while the other person is know 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.
  • 11. Type of option—Call option and Put option:  Call option:----gives the holder the right to buy an asset at a specified date for a specified price.  Put option:---the holder gets the right to sell an asset at the specified price and time.  Specified price in a contract is known as the exercise price or strike price.  The date in the contract is known as expiration or exercise or maturity date.  Assets or security instruments or commodity covered under the contract is called as the underlying assets.  It includes shares, stock, foreign currencies, bonds, commodities.
  • 12. Option further divided into—European and American option  European option:--can be exercised on the expiration date only.  American option:--can be exercised at any time before the maturity date.
  • 13. Swap--Meaning  A Swap is an agreement between two counter parties to exchange cash flows in the future.  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 parties.  Calculation of cash flows involves the future values of one or more market variables.
  • 14. Types of Swap—Interest rate and currency swap  Interest rate swap: One party agrees to pay other party at a fixed rate on a principal amount, and in return, it receives interest at a floating on the same principal amount for a specified period. Currencies of the two sets of cash flow are the same.  Currency swap: It involves in exchanging of interest flows in one currency for interest flows in other currency, it requires the exchange of cash flows in two currencies.
  • 15. Use of Derivatives  Provides services to control, avoid, shift and manage efficiently different type of risk through hedging, arbitraging, spreading, etc.  Serve as barometer of the future trends in price, to discover the new prices both on the spot and future market.  No immediate full amount of the transaction is required for trading.  Trading enhance liquidity and reduce transaction costs in the markets for underlying assets.  Assist the investors, traders, managers of large pools of funds, to make proper asset allocation, increase their yields and achieve investment goals.
  • 16. Contd:  Helps in disseminating information regarding the future markets trading of commodities and securities.  Attract young investors, professionals, and experts who will act as catalysts to the growth of financial markets.  Observed that smoothen out price fluctuations, squeeze the price spread, integrate price structure at different points time and remove shortages in the markets.  Encourage the competitive trading in the market, different risk taking by the market operators like speculators, hedgers, trader,  Assists the holders to shift or modify suitably the risk characteristics of their portfolios.
  • 17. Critiques of derivatives Speculative and gambling motives:  Trading volumes have increase in multiples of the values of the underlying assets and one to two percent are settled the actual delivery of the underlying assets.  Speculative buying and selling by professionals and amateurs affect the genuine producers and distributors. Increase in risk:  Observed –especially OTC markets, particularly customized, privately managed and negotiated and they are highly risky.  Powerful leveraged mechanism used to create risk.
  • 18. Instability of the financial system:  Argued that increased risk not only for the users but for the whole financial system.  Malpractices, desperate behavior and fraud by the users, have threatened the stability of the financial markets and financial system. Price instability:  Helpful in price stabilization ,if exist a properly organized, competitive and well-regulated market, trader behave and function in professional manner and standard code of conduct.  All these are not frequently practiced in the market, and cause to price instability rather than stability.
  • 19. Displacement effect:  Growth of derivative will reduce the volume of the business in the primary or new issue market specifically for the new and small corporate units.  Most of investors will divert to the derivative market, raising fresh capital is difficult, and will create displacement effect in the financial market. Increased regulatory burden:  Instability in financial system, as a result more burden on the government or regulatory to control the activities of the traders.  Financial crisis and scams in the market from time to time and regulatory authorities spent on to find out new regulatory, supervisory and monitoring tools, for to lead on fall of the financial system.
  • 20. Risk in derivatives  Derivatives trading has become a powerful segment of the international financial market.  Trading in equity derivatives have begun at different centers of global financial markets.  Derivatives are powerful tools for risk management, they turn out to be disastrous weapons, if not used properly. Nature of derivative trading:  Handling the derivatives are just like handling dangerous chemicals, or explosive device.  Markets move at fast speed, market is highly liquid but too risky.  Used for different purpose like hedging the risk, speculation, arbitraging, trading, etc.
  • 21. Contd:  Essential to implement as independent management function to identity, monitor, control, and report all its aspects.  High level of competent persons in his field. Setting the risk vision:  Setting policies  Commercial objectives  Risk tolerance  Capital efficiency  Financial capability  Enhance competence  Reviews
  • 22.  Increase in complexity of financial market:  Business firm operates in dynamic business environment.  Due to globalization and liberalization, the domestic financial market are linked with the international financial market.  Optimization of capital:  Earning through derivatives is a very risky venture, because derivative are used as powerful risk-management tools.  Miscalculation of prices of derivative products has created disaster for the creators.  Optimum use of capital and financial resources, derivatives should be used judiciously and carefully. Reasons for managing derivatives risk:
  • 23.  Technology advances:  Increased sophistication and new information technology have created complications and insecurity in the business.  Market events:  Derivative products are in all spheres like agricultural product, metals, commodities and financial product.  Activities and development are increasing in different market at fast rate all over, it will rise a market risk.  Changes in accounting practices:  To measure the value, there is need of sound techniques and other statistical tools.  Accounting standard and practice for the derivative are relative new and in a process of evolution.
  • 24. Types of risks in derivatives trading  Credit risk:  Also called as default risk.  A counter party default its obligation is called credit risk.  Exchange-traded future contract is likely to have significantly less counter party risk in comparison to OTC contract.  Market risk:  Market risk exposes a firm to uncertainty, due to changes in market factors, like foreign exchange rates, commodity prices, equity prices, etc.  To over come the market risk, the factor like risk strategy and policy, organization and culture, executive skill, procedure and control port folio characteristic, etc.
  • 25.  Liquidity risk:  Refers to the fluctuation of derivative instruments prices for not quickly sold or purchased in the market.  Liquidity risk is higher in OTC market in comparison to the exchange traded derivatives.  A rise out of relative ability of an organization and mismatch between the bank cash inflows and out flows arising out of derivative activity.  Legal risk:  Risk relating to change in law or a regulatory rule, cause an adverse financial impact on derivative.  Global data base and the legal and regulatory compliance.
  • 26.  Operational risk:  Risk relates to errors or frauds, which occurs in carrying out operations, placing orders, making payment, taking deliveries, accounting for derivatives transactions.  Manual and automated control through out the organization, play in creating a secure operational environment.  Model risk(formal risk):  Derivative instrument are priced or valued through specific complicated mathematical formula, based on assumption.  Observed that models, or formula fail to give accurate results regarding price data.  Due to changes in assumptions or other environment factors or undetected flaws in the models.eg financial risk, interest rate risk, etc.