PRESENTATION ON DERIVATIVES

MARKET Presented By:-Ankur MehrotraNeha VermaRajiv BistArafat KhanSonal GuptaTarun ShovpernYugantar Khanduri

Derivative is a product whose value is derived from the value of one or more basic variables, called bases (underlying asset, index, or reference rate), in a contractual manner.

The underlying asset can be equity, forex, commodity or any other asset.

Used for Hedging & Speculation

WHAT ARE DERIVATIVES ?

FUTURES

OPTIONS COMMODITIES

COVERED

Futures Forwards Trade on an organized exchange OTC in nature

Standardized contract terms Customised contract terms

Requires margin payments No margin payment

Follows daily settlement Settlement happens at end of period

CAPTURE THE FUTURE

FUTURES

The first modern organized futures exchange began in 1710 at the Dojima Rice Exchange in Osaka, Japan

Chicago Mercantile Exchange trading more than 70% of its Futures contracts

It counts for over 45.5 Billion dollars of nominal

trade (over 1 million contracts) every single day in "electronic trading"

CAME IN

In terms of trading volume, the National Stock Exchange of India in Mumbai is the largest stock futures trading exchange in the world, followed by JSE Limited in Sandton, Gauteng, South Africa .

Hedgers:- are those who have interest in the underlying

commodity of the future contract and aim at eliminating or reducing the financial risk of price changes

Speculators :- are those who buy future contracts with the

aim of earning profit by speculating market movements.

Main Participants of the Future Market

TYPES

ONE MONTH FUTURE

TWO MONTH FUTURE

THREE MONTH FUTURE

Initial Margin The Initial Margin is the sum of money (or collateral) to be deposited by a firm to the clearing corporation to cover possible future loss in the positions (the set of positions held is also called the portfolio) held by a firm.

Mark-to-Market The Mark-to-Market Margin (MTM margin) on the other hand is the margin collected to offset losses (if any) that have already been incurred on the positions held by a firm. This is computed as the difference between the cost of the position held and the current market value of that position.

HDFC FUTURES

BUY

OPEN

HIGH

LOW

CLOSE

13/2010 1245 1210 1290 1210 1280

14/2010 1280 1320 1260 1310

15/2010 1310 1330 1250 1290

DISCOUNT

PREMIUM

Terminologies

NIFTY FUTURES

STOCK FUTURES

ANALYSIS

NIFTY FUTURE

OPEN

HIGH

LOW

CLOSE

13/2010 5567 5590 5550 556514/2010 5565 5610 5555 559015/2010 5590 5620 5575 5610

5500

5520

5540

5560

5580

5600

5620

5640

OPEN HIGH LOW CLOSE

rate

s 13/2010

14/2010

15/2010

NIFTY FUTURES

STOCK FUTURESHDFC FUTURES BUY OPEN HIGH LOW CLOSE

13/2010 1245 1210 1290 1210 1280

14/2010 1280 1320 1260 1310

15/2010 1310 1330 1250 1290

1150

1200

1250

1300

1350

BUY OPEN HIGH LOW CLOSE

hdfc

futu

re

13/2010

14/2010

15/2010

Quiz

Q: Futures trading commenced first on ___________.

1. Chicago Board of Trade 3. Chicago Board Options Exchange

2. Chicago Mercantile Exchange 4. London International Financial

A: The correct answer is number 1.

Q: The underlying asset for a derivative contract can be __________.

1. Equity 3. Interest rate 2. Commodities 4. Any of the above

A: The correct answer is number 4.

Q: Derivatives first emerged as ________ products.

1. Speculative 3. Volatility 2. Hedging 4. Risky

A: The correct answer is number 2.

Q: Who are the participants in the derivatives market?

1. Hedgers 3. Arbitrageurs 2. Speculators 4. All of the above

A: The correct answer is number 4.

Q: The first exchange traded financial derivative in India commenced with

the trading of ____________.

1. Index futures 3. Stock options 2. Index options 4. Interest rate futures

A: The correct answer is number 1.

Q: Which of the following is not an example of a derivative on security derivative?

1. Index futures 3. Stock futures 2. Index options 4. Interest rate futures

A: The correct answer is number 4.

OPTIONSParticular priceParticular asset

CONTRACT• Written by seller• Right and not an obligation• Seller collects premium

Buyer of the option CALL

Writter/Seller of the option PUT

Option price/premium: Option price is the price which the option buyer

pays to the option seller. It is also referred to as the option premium.

Expiration date: The date specified in the options contract is known as the expiration date, the exercise date, the strike date or the maturity.

Strike price: The price specified in the options contract is known as the strike price or the exercise price.

American options: American options are options that can be exercised at any time upto the expiration date.

European options: European options are options that can be exercised only on the expiration date itself.

OPTION TERMINOLOGY

• In-the-money option: +ve cfCALL ( exercise price < market price)

• At-the-money option: 0 cfstrike price = market price

• Out-of-the-money option: -ve cfCALL (strike price > market price)

• Index options: These options have the index as the underlying. In India, they have a European style settlement. Eg. Nifty options, Mini Nifty options etc.

Stock options: Stock options are options on individual stocks. A stock option contract gives the holder the right to buy or sell the underlying shares at the specified price. They have an American style settlement.

EQUITY OPTIONS

Pay offs and CallsCALL OPTION

Depends on Stock price and exercise price

Symbol Date Expiry

Strike Price Open High Low Close Settle Price Underlying Value

NIFTY16-Sep-

1030-Sep-

10 5300 564 616.3 532 547.4 547.4 5828.7

NIFTY17-Sep-

1030-Sep-

10 5300589.7

5 620 580609.4

5 609.45 5884.95

NIFTY20-Sep-

1030-Sep-

10 5300 625 702610.5

5 694.4 694.4 5980.45

NIFTY21-Sep-

1030-Sep-

10 5300 710743.9

5 675.1 709.5 709.5 6009.05

NIFTY22-Sep-

1030-Sep-

10 5300 745.9 745.9 657.5705.0

5 705.05 5991

PREMIUM + ( stock price – strike price)

PREMIUM

E S

BU

YE

RS

PAY

OFF

E S

WR

ITE

R/S

ELL

ER

s

PAY

OFF

PUT OPTION

Pay offs and PutB

UY

ER

S

PAY

OFF

WR

ITE

R/S

ELL

ER

PA

YO

FF

Metals Basmatirice Cotton and kapas Raw jute and jute goods Groundnut, rapeseed/mustard seed, cottonseed,

sesame seed, sunflower seed, safflower seed, copra and soybean etc.

Rice bran oil Castor oil and its oilcake Onions

COMMODITIES

Short position

long position

Contracts offers commodity traders two possibilities

Clearing House

Buyer Clearing House Selle

r

Trading rooms

Floor brokersTrading cardsPhysical Delivery or Dematerialization

TRADING MECHANISM

Trading Rings/ Trading Pits

Commodity Symbol.doc