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OPTIONS, FUTURES, AND OTHER DERIVATIVES Chapter 1 Introduction - ppt download

Logasakthi Kandasamy , Assistant Professor at Knowledge Business School,Salem. Full Name Comment goes here. Are you sure you want to Yes No. Apekshit Dhoke at ProjectingIT No mention of Credit Default Swaps or Credit Derivatives in the presentation Apekshit Dhoke at ProjectingIT OTC Trading isn't defined correctly The real fact is that OTC trading compared to exchange trading offers more customization of the derivative contract in terms of the length, quantity, and also for the underlying instrument Also the volume of OTC trading in global markets is much higher than exchange trading Apekshit Dhoke at ProjectingIT Swaps are NOT complex derivatives Embeds 0 No embeds.

No notes for slide. Financial derivatives ppt 1. Professor VSA School of Management, Salem. Derivatives - Meaning Derivatives: Derivatives Definition A financial instrument whose characteristics and valuedepend upon the characteristics and value of anunderlier, typically a commodity, bond, equity or currency. Examples of derivatives include futures and options.

Advanced investors sometimes purchase or sell derivativesto manage the risk associated with the underlyingsecurity, to protect against fluctuations in value, or to profitfrom periods of inactivity or decline. These techniques canbe quite complicated and quite risky. Advantages of Derivative Market 6. The salient features of forward contracts are as follows: Limitations of Forward contract1.

Forward markets are afflicted by several problems: Lack of centralization of trading,3. Liquidity and Counterparty risk. When one of the two sides to the transaction declares bankruptcy, the other suffers FUTURE CONTRACTFuture contract Future contract is an agreement between two parties to buy or sell an asset at a certain time in the future, at a certain price.

But unlike forward contract, futures contract are standardized and stock ex-changed traded. Quantity of the underlying,2. Quality of the underlying,3. The units of price quotation and minimum price change and5. Distinction between futures and forwardS.

Also known as "unlisted stock", these securities are traded by broker-dealers who negotiate directly with one another over computer networks and by phone. OTC stocks are generally unlisted stocks which trade on the Over the Counter Bulletin Board OTCBB The price at which the futures contract trade in the future market.

The period over which a contract trades. The index futures contract typically have one month, two months and three months expiry cycles that expire on the last Thursday of the month.

It is the date specified in the futures contract. This is the last day on which the contract will be traded, at the end of which it will cease to exist. The amount of asset that has to be delivered under one contract. Basis is defined as the future price minus the spot price. There will be different basis for each delivery month for each contract.

In the a normal market, basis will be positive. This reflects that futures prices normally exceed spot prices. The relationship between futures prices and spot prices can be summarised in terms of the cost of carry. The amount that must be deposited in the margin account at the time a futures contract is first entered into is the initial margin. Futures contracts have linear pay off.

Pay off for Buyer of Futures: Long Future The pay offs for a person who buys a futures contract is similar to the pay off for a person who holds an asset. He has a potentially unlimited upside as well as downside. Take the case of a speculator who sells a two month Nifty index futures contact when the Nifty stands at When the index moves down the short futures position starts making profits and when the index moves up it starts making losses.

An option is the right, but not theobligation to buy or sell something on aspecified date at a specified price. In thesecurities market, an option is a contractbetween two parties to buy or sell specifiednumber of shares at a later date for an agreedprice. Continue…,, There are three parties involved in the option trading, the option seller, buyer and the broker.

The option seller or writer is a person who grants someone else the option to buy or sell. He receives premium on its price. The option buyer pays a price to the option writer to induce him to write the option. The securities broker acts as an agent to find the option buyer and the seller, and receives a commission or fee for it. Options An option to buy anything is known as a CALLwhile an option to sell a thing is called a PUT.

Options trade in an organized market but,large percentage of it is traded over thecounter i. Note that this is just an option.

Thatmeans it is a right and not an obligation. Price specified in the optionscontract is known as the strike price orexercise price. A call option is a contract giving the right to buy the shares. Put option is a contract giving the right to sell the shares. Put option contract contains: The name of the company shares to be sold.

The number of shares to be sold. The selling price or the striking price. The expiration date of the option. The substitution of a new contract for an old one; or the substitution of one party in a contract with another party.

Futures and Options

The replacement of existing debt or obligation with a new one. Swaps are private agreements between two parties to exchange cash flows in the future according to a prearranged formula. They can be regarded as portfolios of forward contracts. These entail swapping only the interest related cash flows between the parties in the same currency. These entail swapping both principal and interest between the parties, with the cash flows in one direction being in a different currency than those in the opposite direction.

Types Of SwapsThere are four types of swaps. FUTURES Future contract is an agreement betweentwo parties to buy or sell an asset at a certaintime in the future, at a certain price. But unlikeforward contract, futures contract arestandardized and stock ex-changed traded. Continue…,Future is a financial contract which derives its value from the underlying asset.

Sugar cane or wheat or cotton farmers may wish to have contracts to sell their harvest at a future date to eliminate the risk of change in price by that date.

There are commodity futures and financial futures. Continue…,,The standardized items in a futures contract are: Basically, futures markets resemble the forward marketThree distinct features of the futures markets are: Derivatives - Classroom Presentation. Start clipping No thanks. You just clipped your first slide!

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