This document provides an overview of financial derivatives and futures and forwards contracts. It defines derivatives as contracts whose value is derived from underlying assets, and lists common types including forwards, futures, options, swaps, and more. Benefits of derivatives include price discovery, risk management, and market efficiency. Features of derivatives markets are low transaction costs, standardization, liquidity, and risk transfer. The document also distinguishes exchange-traded versus over-the-counter derivatives and explores futures and forwards contracts in more detail.

1. UNIT – 1 Overview of financial derivatives

2. Derivatives
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.

3. Types of financial derivatives
Forward Contracts
Future Contracts
Options Contracts
Swaps
Commodity derivatives
Interest rate derivatives
Credit derivatives

4. Economic benefits of derivatives
•Price Discovery
•Risk Management
•To Improve Market Efficiency for the Underlying Asset
•To Reduce Market Transaction Costs

5. Features of derivatives market
•Transaction cost is less
•Standardized contract
•Liquidity is high
•Risk transfer

6. Exchange traded Vs OTC derivatives
•Location
•Contracts
•Regulation
•Counterparty risk
•Products

7. UNIT – 2 Futures and Forwards

8. Forward contracts
•In a forward contract, the buyer agrees to pay cash at a later date
when the seller delivers the goods.
•Usually no money changes hands when forward contracts are
entered into, but sometimes one or both the parties to a contract
may like to ask for some initial deposit to ensure that the contract
is honored by the other party.
•The essential idea of entering into a forward contract is to peg the
price and thereby avoid the price risk.

9. Futures contract
•A futures contract is a contractual agreement, generally made on
the trading floor of a futures exchange, to buy or sell a particular
commodity or financial instrument at a pre-determined price in
the future.
•Futures contracts detail the quality and quantity of the
underlying asset; they are standardized to facilitate trading on a
futures exchange.

10. Distinction between futures and forwards
contracts
1. Standardization
2. Liquidity
3. Conclusion of contract
4. Margins
5. Profit/Loss settlement

11. Types of future contracts
1. Commodity futures
2. Financial futures

12. Difference between Commodity futures and
Financial futures
1. Cash settlement
2. Contract life
3. Maturity dates

13. Participants of futures markets
1. Hedgers
2. Speculators
3. Arbitrageurs

14. Margins
1. Percentage margin
2. Initial margin
3. Maintenance margin

15. Valuation of futures
Valuation concepts









 1
-
e
m
r m
r
1
2









m
r
1
ln
m
r2 1

16. Valuation of futures
•For securities providing no Income
F = S0ert
•For securities providing known income
F = (S0 – I)ert I = De-rt
•For securities providing known yield
F = S0e(r-y)t

17. Valuation of futures
Commodity futures
F = (S0+ S)ert
If storage cost is incurred at the end of maturity
S = Se-rt

18. Valuation of index futures

19. Adjusting portfolio beta