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FINANCIAL

DERIVATIVES

PRESENTED BY

JAYA KANESH R
R.BUPATHY & CO.,
CHARTERED ACCOUNTANTS
DERIVIATIVES
 A Derivative is a product whose value is
derived from the value of one or more
underlying asset.
 Eg:
– Equity
– Forex
– Commodity
– Currencyor
– Any Other Asset
MARKET INDEX
An Index is a number which measures the
change in a set of values over a period of time
The base value of Nifty on the start date of
November 3, 1995 is 1000 Points
Every stock price moves for 2 Major reasons
● News about the Company
● News about the Nation
Nifty is a combination of 50 stocks and sensex is of 30
Types of Indexes
Price Weighted Index
● Weight Proportional to its stock price
● Not used in INDIA

Market Capitalization weighted index


Current Market Capitalization
Index= ------------------------------------ X Base Value
Base Market Capitalization
Free Float (Excluding Promoters Shares) – BSE & NSE
Full Float (Including Promoters Shares)
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Types of Derivatives
Second level
● Third level

● Fourth level

● Fifth level

S
Forward Contract
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Second level
● Third level

● Fourth level

● Fifth level
Characteristics

Fully Customized Contract


No Involvement of Stock Exchange
Mostly OTC
Actual Delivery of Asset takes Place
Counter Party Risk
Limitations of Forward
Market
Lack of Centralization
● No Hard and Fast Rules
● No Involvement of Stock Exchange
● Too much Flexibility makes the Contract Non-Tradable
Illiquidity
● Both the parties have to wait till the time of maturity
● No one can come out of the contract
Counterparty Risk
● Default by one party makes the other party to suffer
Future Contracts
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Second level
● Third level

● Fourth level

● Fifth level
Futures v/s Forwards
Future Terminology
Spot Price
Future Price
Contract cycle
Expiry date
Contract size
Initial margin
Marking to market
Maintenance of margin
Future Payoffs (Profit)
Long Futures
Future Payoffs (Profit)
Short Futures
Application of Futures

Hedging – A Risk Management Tool


Speculation
Arbitrage
Option Contracts
Options Payoffs
Swap Click to edit Master text styles
Second level
● Third level

● Fourth level

● Fifth level
 Similar to Phone
SWAP
 Especially for
Banks
 Not Followed in
India
THANK YOU
FOR MORE INFO
www.jaiganeshca.blogspot.com