Introduction to derivatives

1. Financial Derivatives
Introduction

2. Definition
• A derivative is a security with a price that is dependent upon or
derived from one or more underlying assets.
• The derivative itself is a contract between two or more parties based
upon the asset or assets.
• Its value is determined by fluctuations in the underlying asset.
• Financial derivatives are financial instruments that are linked to a
specific financial instrument or indicator or commodity, and through
which specific financial risks can be traded in financial markets in
their own right.

3. ECONOMIC BENEFITS OF DERIVATIVES
• Price Discovery
• Risk Management
• To Improve Market Efficiency for the Underlying Asset
• To Reduce Market Transaction Costs

4. TYPES OF FINANCIAL DERIVATIVES
• Forward Contracts
• Future Contracts
• Options Contracts
• Swaps
• Commodity derivatives
• Interest rate derivatives
• Credit derivatives

5. FEATURES OF DERIVATIVES MARKET
 Underlying
 Notional amount
 Minimal initial investment
 No required delivery
 Standardization

6. FUNCTIONS OF DERIVATIVE MARKETS
• Management of risk
• Price discovery
• Liquidity and reduce transaction cost
• Efficiency in trading
• Speculation and arbitrage
• Hedging
• Price stabilization function
• Develop the complete markets
• Encourage competition

7. TRADERS IN DERIVATIVES MARKET
• Hedger
• Speculator
• Arbitrageur

8. EXCHANGE TRADED DERIVATIVES (ETD) VS OVER THE COUNTER
(OTC) DERIVATIVES
• Location
• Contracts
• Regulation
• Counterparty Risk
• Products

9. DERIVATIVES MARKET IN INDIA