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Increased volatility in asset prices

Integration of National &

International Market

Low Transaction Cost of Trading

Development of Risk Management

Tools

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Why Derivatives in India

Origin

1.

• First introduced in Chicago Board of Trade in 1848 for forward contract in Commodities

2.• Derivative Introduce in Indian Stock

Exchanges in June 2000

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Index Futures

Index Options

Stock Futures

Stock Options

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Derivatives Trading on Exchanges

Business Growth of F&O Segment in

India

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Types of Market

Spot Market

Derivative Market

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Spot Market

Assets Class Delivery

Equity Shares

Commodity Physical

Currency Physical

Immediate Delivery

Immediate Payment

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Derivative Market

Forward Segment

Future Segment

Options Segment

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Forwards

Contact Two Private

Parties

Transaction at Expiry

Date

(Forward Price)

Physical / Cash

Settlement

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Participants in Forward Contract

Money

Delivery of Asset

Buyer

(Who takes a

long position)

Seller

(Who takes a

short position )

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Future

Contract Between Two Parties

Traded in Recognized Stock Exchange

Future Date

Price Agreed Upon Today

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Participants in Futures Contract

Future Buyer Future Seller

Payment Sell Contract

Buy Contract Payment

Clearing

Corporation

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Positions in a Futures Contract

• When a person buy a futures contract

Long

• When a person sell a futures contract

Short

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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 14Professional Training Academy

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

Options

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Options

Call Option

Put Option

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Types of Options

Right to Buy

Call Options

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Right to Sell

Put Options

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Underlying Price

Strike PriceTime to

Expiration

Risk Free Rate Volatility

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Factors impacting Option Prices

Derivative Terminology

Lot Size Expiry Date Contract Size

Spot Price Strike Price Initial Margin

Mark to Market Margin

Option Premium

Closing Price

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Contact Specification

S. no Terminology Remark Index Future

(Nifty)

Index Option

(Nifty)

1 Lot Size Minimum Quantity traded

in a lot decided by the

exchanges

50 50

2 Spot Price Price prevailing in

delivery market

5500 5500

3 Future/Strike

Price

Price Prevailing in future

market/price for which call

or put option exercise

5550 5550

4 Option Premium Amount decided by the

exchange on the basis of

strike price and spot price

100

5 Expiry Date Last Thursday of a month Last Thursday Last Thursday

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Contact Specification

S. no Terminology Remark Index Future

(Nifty)

Index Option

(Nifty)

7 Initial Margin Minimum amount

required to make position

(Suppose 25% of contract

Size)

Rs 69,375

(25% of

2,77,500)

Option Premium * Lot

Size

Rs 5,000

(100*50)

8 Closing Price Closing Price at the end of

day

5500

9 Mark to Market

Margin

Difference between Trade

price & closing Price

(Daily Settled )

MTM=(Trade price –

closing price)* Lot Size

Pay Rs 2,500

(5550-5500)*50

No MTM as we

pay whole

amount

Our Expectation is that index rise 22Professional Training Academy

Participant

• Insuring an investment against risk. Hedgers

• Who bets on derivatives marketsSpeculators

• Attempt to profit from pricing inefficienciesArbitrageurs

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Play Grounds

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www.nseindia.com

www.bseindia.com

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Important Website

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Particulars Income /Loss from

Derivatives

Head

“Income from Business &

Profession’

Taxed According to the tax slab

Loss from Derivatives Adjusted under all Five Head Profit

& Carry Forward to Next Year

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Taxation

Sr. Taxes Rates Futures Options

Buy 1 Lot of Nifty at 6000 ,Contract Size

( 50shares* 6000) / Buy 6000 call option at 60 Rs

premium(50shares*60)

3,00,000 3,000

1

Brokerage 0.03 % On Contract

Size/2.5% on Option

Premium (Both Side)

90 Rs (0.03% on 3,00,000) 75 Rs (2.5% on 3,000)

2

Service Tax 10.36% on Brokerage

Amount

(Both Side)

9.32

(10.36% on 90 Rs)

7.77

(10.36% on 75 Rs)

3

Securities

Transaction

Tax(STT)

0.017% on Contract Size

(Only on Selling Side)

25.50

(0.0085% on 3,00,000 Rs)

2.55

(0.0085% on 3000Rs)

4

Stamp Duty 0.004% on Contract

Size(Both Side)

12(0.004% on 3,00,000 Rs) 1.2(0.004% *3,000Rs)

5 Education Cess 2% on Tax Amount 0.93(2% on 9.32+25.50+12) 0.23(2% * 7.77+2.55

+1.2)

6 Higher Edu Cess 1% on Education Cess 0.014 (1% on 0.93) 0.0028 (1% on 0.23)

Total Cost 137.76 86.75

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Cost of Trading in Derivative

How does One Make Money in A

Futures Contract?

• Trade according to the trends

• Complete knowledge of Derivatives

• Discipline Approach

• Keep Stop loss on every trade

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