STRUCTURE OF PRESENTATION

Introduction
Definition
Emergence of Derivatives
Types of Derivatives
Economic Significance of Derivatives
Different Types of Products
Forwards
Futures
Options
DEFINITION

A Financial Contract whose value is Derived

from the value of an Underlying Asset.

The Underlying Asset may be a Stock, Bond,

a Foreign Currency, Commodity or even
another Derivative Security.
 The Securities Contract (Regulation) Act, 1956
defines derivatives as;

1. A Security derived from a debt instrument,

share, loan whether secured or unsecured, risk
instrument or contract for differences or any
other form of security.

2. A contract that derives its value from the price,

or index of prices, of underlying securities.
PARTICIPANTS IN DERIVATIVES MARKET

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EMERGENCE OF DERIVATIVES

V Bible, Genesis Chapter 29. (Jacob, Laban,

Rachel)
V First Exchange Traded Derivative: Royal
Exchange, London. Forward Contracts on Tulip
Bulbs, 1637.
V First Futures Contract: Yodaya Rice Market in
Osaka, Japan, 1650.

V CBOT, 1848.

V 1865, CBOT, First Futures Contract.

V 1919, Chicago Butter and Egg Board. (CME)
V 1925, First Clearinghouse for Futures
V 1970¶s, Modern Derivatives Market
V Unprecedented Volatility,
V Breakdown of Brettonwood System
V Next Fillip, Interest Deregulation, 1979
V Oil Shock, 1980¶s
V Balance of Payment Situation.
TYPES OF DERIVATIVES
DIFFERENT TYPES OF PRODUCTS

Forwards Swaps

Futures Swaptions

Options

Warrants

LEAPS

Baskets
FORWARDS

A Forward contract is a customized

agreement between two parties to buy or sell
certain asset, where settlement takes place on
a specific date in the future at today¶s pre-
agreed price.
 FEATURES
Bilateral contracts, hence exposed to Counter-
party Risk.
Custom designed, hence unique in terms of
contract size, expiration date, asset type and
quality.
Contracts are settled by delivery of asset.
If the party wishes to reverse the contract, it
has to go to the same party, which results in
high prices being charged.
Normally traded in OTC Market.
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V Lack of a centralize Market

V Illiquidity

V Counterparty Risk
FUTURES
An agreement between two parties to buy or
sell an asset at a certain time in the future at a
certain price.
These are Standardized Exchange Traded
Forward Contracts.
These are standardized in terms of; Quantity,
Quality of underlying, date and month of
delivery, location of settlement.
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V Spot Price V Settlement Date

V Futures Price V Basis
V Contract specification V Mark-to-Market
V Contract Cycle V Tick Size
V Contract Size V Initial Margin
V Expiry Date V Maintenance Margin
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V Reliance industries Futures Price, as on 22nd
June, 2010

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V Customized V Standardized
V Bilateral Contracts V Exchange Plays a role of
Mediator
V No Daily Settlement
V Daily Settlement
V No Margin
V Margin Required
V No Regulation
V Highly Regulated
V None gives Guarantee V Exchange¶s Clearinghouse
for the contracts Guarantees the contracts
V Parties know each V Parties do not know each
other other
OPTIONS
Options give the buyer the right, but not the
obligation to buy or sell certain amount of asset
at a certain price on or before given future
date.

Two Types: Call Option & Put Option

Call Option: Give the buyer the right, but not

the obligation to buy certain amount of assets
at certain price at certain future date.
Put Option: Give the buyer the right, but not
obligation to sell certain amount of assets at a
certain price at a certain future date.

On exercise Option are of two types:-

American options and European Option

American Option: Options that can be

exercised at any time up to the expiration
date.

European Option: Options that can be

exercised only on the expiration date.
  

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V Call Option V %&' (

V Put Option V ) (

V Writer of Option V '* &'+

V Buyer of Option V )



V Premium V 
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V Intrinsic Value V )



V Time Value
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INDEX OPTION SEGMENT OF NSE


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STOCK OPTION SEGMENT OF NSE


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V Future Owner has the V Option Owner has the

obligation right, but no obligation
V Linear Pay-off V Pay ± off is Truncated

V Loss is Unlimited V Maximum Loss is the

V Mark ± to ± Market Premium paid

V No Mark ± to - Market