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Edit Comment Close Premium member Presentation Transcript Derivatives : Derivatives A presentation by Vishal Trehan Roll No. 880506 CBM Department Guru Nanak Dev University Derivatives : Derivatives Derivative is a product whose value is derived from the value of one or more basic variables, called underlying assets. Those assets can be These underlying assets are of various categories like Stocks(Equity) Agri Commodities including grains, coffee beans, etc. Precious metals like gold and silver. Foreign exchange rate Bonds Short-term debt securities such as T-bills Slide 3: Exchange Traded vs OTC Derivatives Market As the word suggests, derivatives that trade on an exchange are called exchange traded derivatives, where as privately negotiated derivative contracts are called OTC contracts. The former have rigid structures compared to the latter. Slide 4: OTC derivatives markets have the following features compared to exchange traded derivatives : The management of counter-party risk is decentralized and located within individual institutions. There are no formal centralized limits on individual positions, leverage, or margining There are no formal rules for risk and burden sharing, 4. There are no formal rules or mechanisms for ensuring market stability and integrity, and for safeguarding the collective interests of market participants, and 5. The OTC contracts are generally not regulated by a regulatory authority and the exchange’s self –regulatory organisation, although they are affected indirectly by national legal systems, banking supervision and market surveillance. Features of Exchage Traded Derivatives : Features of Exchage Traded Derivatives Centralization of Trading No counter party risk Standardization of contracts Liquidity Mark to Market (MTM) margining system Squared off in cash on expiration. Three series trade at any point in time. Contract expires on last Thursday of the month. Slide 6: The National Stock Exchange of India Limited (NSE) commenced trading in derivatives with the launch of index futures on June 12, 2000. The futures contracts are based on the popular benchmark S&P CNX Nifty Index.The Exchange introduced trading in Index Options (also based on Nifty) on June 4, 2001. NSE also became the first exchange to launch trading in options on individual securities from July 2, 2001. Futures on individual securities were introduced on November 9, 2001. Futures and Options on individual securities are available on 224 securities stipulated by SEBI.The Exchange provides trading in other indices i.e. CNX-IT, BANK NIFTY, CNX NIFTY JUNIOR, CNX 100 and NIFTY MIDCAP 50 indices. The Exchange is now introducing mini derivative (futures and options) contracts on S&P CNX Nifty index w.e.f. January 1, 2008. History of Exchange Traded Derivatives PARTICIPANTS : PARTICIPANTS Speculators - willing to take on risk in pursuit of profit. Hedgers - transfer risk by taking a position in the Derivatives Market. Arbitrageurs - aim to make a risk less profit by taking advantage of price differentials and thus bring about an alignment in prices by participating in two markets simultaneously Slide 8: Types of derivatives Forward Contract : Forward Contract “A Forward Contract is an agreement to buy or sell an asset on a specified date for a specified price. Salient Features : They are bilateral Contracts and hence exposed to counter party risk. Each contract is custom designed, and hence is unique in terms of contract size, expiration date and the asset type and quality. 3. The contract price is generally not available in public domain On the expiration date, the contract has to be settled by delivery of the asset. 5. If the party wishes to reverse the contract, it has to compulsorily go to the same counter-party, which often results in high prices being charged. Limitations of Forward Markets : Limitations of Forward Markets Lack of centralisation of trading Illiquidity Counterparty risk Futures markets were designed to solve the problems that exist in forward markets. A futures 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 contracts, the futures contracts are standardized and exchange traded. : Futures Contract Futures markets were designed to solve the problems that exist in forward markets. A futures 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 contracts, the futures contracts are standardized and exchange traded. Salient Features Obligation to buy or sell Stated quantity At a specific price Stated date (Expiration Date) Marked to Market on a daily basis Distinction between futures and forwards : Distinction between futures and forwards Slide 13: To understand all these terms we will use NIFTY. OPTIONS : OPTIONS “ An Options contract confers the right but not the obligation to buy (call option) or sell (put option) a specified underlying instrument or asset at a specified price – the Strike or Exercised price up until or an specified future date – the Expiry date. ” The Price is called Premium and is paid by buyer of the option to the seller or writer of the option.” Types of option Call Option Put option Slide 15: To understand these lets check Nifty and Reliance Call Option : Call Option In-the-Money (ITM) Strike price < Spot price(current price) At-the-Money (ATM) Strike price = Spot price Out-of-the-Money (OTM) Strike price >Spot price Put Option : Put Option In-the-Money (ITM) Strike price > Spot price At-the-Money (ATM) Strike price = Spot price Out-of-the-Money (OTM) Strike price < Spot price What is payoff ? : What is payoff ? A payoff is the likely profit/loss that would accrue to a market participant with change in the price of the underlying asset. This is generally depicted in the form of payoff diagrams which show the price of the underlying asset on theX-axis and the profits/losses on the Y-axis. FUTURES PAYOFFS : FUTURES PAYOFFS PRICING FUTURES : PRICING FUTURES where: F futures price S spot index value r cost of financing q expected dividend yield T holding period With expected dividend Without dividend Example: Security XYZ Ltd trades in the spot market at Rs. 1150. Money can be invested at 11% p.a. The fair value of a one-month futures contract on XYZ is calculated as follows : Example: Security XYZ Ltd trades in the spot market at Rs. 1150. Money can be invested at 11% p.a. The fair value of a one-month futures contract on XYZ is calculated as follows Slide 22: Payoff for buyer of futures: Long futures The figure shows the profits/losses for a long futures position. The investor bought futures when the index was at 2220. If the index goes up, his futures position starts making profit. If the index falls, his futures position starts showing losses. Payoff for seller of futures: Short futures : Payoff for seller of futures: Short futures The figure shows the profits/losses for a short futures position. The investor sold futures when the index was at 2220. If the index goes down, his futures position starts making profit. If the index rises, his futures position starts showing losses OPTIONS PAYOFFS : OPTIONS PAYOFFS Payoff profile for buyer of call options: Long callThe figure shows the profits/losses for the buyer of a three-month Nifty 2250 call option. As can be seen, as the spot Nifty rises, the call option is in-the-money. If upon expiration, Nifty closes above the strike of 2250, the buyer would exercise his option and profit to the extent of the difference between the Nifty-close and the strike price. The profits possible on this option are potentially unlimited. However if Nifty falls below the strike of 2250, he lets the option expire. His losses are limited to the extent of the premium he paid for buying the option. : Payoff profile for buyer of call options: Long callThe figure shows the profits/losses for the buyer of a three-month Nifty 2250 call option. As can be seen, as the spot Nifty rises, the call option is in-the-money. If upon expiration, Nifty closes above the strike of 2250, the buyer would exercise his option and profit to the extent of the difference between the Nifty-close and the strike price. The profits possible on this option are potentially unlimited. However if Nifty falls below the strike of 2250, he lets the option expire. His losses are limited to the extent of the premium he paid for buying the option. Payoff profile for writer of call options: Short call : Payoff profile for writer of call options: Short call Payoff profile for buyer of put options: Long put : Payoff profile for buyer of put options: Long put Payoff profile for writer of put options: Short put : Payoff profile for writer of put options: Short put PRICING OPTIONS : PRICING OPTIONS N(d1) is called the delta of the option Bull spreads - Buy a call and sell another : Bull spreads - Buy a call and sell another The buyer of a bull spread buys a call with an exercise price below the current index level and sells a call option with an exercise price above the current index level. Payoff for a bull spread created using call options : Payoff for a bull spread created using call options Bear spreads - sell a call and buy another : Bear spreads - sell a call and buy another In a bear spread, the strike price of the option purchased is greater than the strike price of the option sold. The buyer of a bear spread buys a call with an exercise price above the current index level and sells a call option with an exercise price below the currentindex level. Straddles : Straddles Rs. 4300 Buy Call & Put When market is volatile Pay-off of Straddle Strategy : Pay-off of Straddle Strategy Nifty Lot Size = 50 Shares On settlement if Nifty touches 4500 4000 4250 Stranglers : Stranglers For April 2007 Buy Call of 4400 Buy Put 4200 When market is volatile Pay-off of Strangle Strategy : Pay-off of Strangle Strategy Nifty Lot Size = 50 Shares On settlement if Nifty touches 4600 4000 4300 You do not have the permission to view this presentation. In order to view it, please contact the author of the presentation.
derivatives trehanvishal1 Download Post to : URL : Related Presentations : Share Add to Flag Embed Email Send to Blogs and Networks Add to Channel Uploaded from authorPOINT lite Insert YouTube videos in PowerPont slides with aS Desktop Copy embed code: (To copy code, click on the text box) Embed: URL: Thumbnail: WordPress Embed Customize Embed The presentation is successfully added In Your Favorites. Views: 2418 Category: Business & Fin.. License: All Rights Reserved Like it (5) Dislike it (1) Added: December 02, 2009 This Presentation is Public Favorites: 5 Presentation Description all about derivatives Comments Posting comment... By: ravish1 (15 month(s) ago) Thank you "trehanvishal1"... Saving..... Post Reply Close Saving..... Edit Comment Close By: basu.rose143 (19 month(s) ago) sup up Saving..... Post Reply Close Saving..... Edit Comment Close Premium member Presentation Transcript Derivatives : Derivatives A presentation by Vishal Trehan Roll No. 880506 CBM Department Guru Nanak Dev University Derivatives : Derivatives Derivative is a product whose value is derived from the value of one or more basic variables, called underlying assets. Those assets can be These underlying assets are of various categories like Stocks(Equity) Agri Commodities including grains, coffee beans, etc. Precious metals like gold and silver. Foreign exchange rate Bonds Short-term debt securities such as T-bills Slide 3: Exchange Traded vs OTC Derivatives Market As the word suggests, derivatives that trade on an exchange are called exchange traded derivatives, where as privately negotiated derivative contracts are called OTC contracts. The former have rigid structures compared to the latter. Slide 4: OTC derivatives markets have the following features compared to exchange traded derivatives : The management of counter-party risk is decentralized and located within individual institutions. There are no formal centralized limits on individual positions, leverage, or margining There are no formal rules for risk and burden sharing, 4. There are no formal rules or mechanisms for ensuring market stability and integrity, and for safeguarding the collective interests of market participants, and 5. The OTC contracts are generally not regulated by a regulatory authority and the exchange’s self –regulatory organisation, although they are affected indirectly by national legal systems, banking supervision and market surveillance. Features of Exchage Traded Derivatives : Features of Exchage Traded Derivatives Centralization of Trading No counter party risk Standardization of contracts Liquidity Mark to Market (MTM) margining system Squared off in cash on expiration. Three series trade at any point in time. Contract expires on last Thursday of the month. Slide 6: The National Stock Exchange of India Limited (NSE) commenced trading in derivatives with the launch of index futures on June 12, 2000. The futures contracts are based on the popular benchmark S&P CNX Nifty Index.The Exchange introduced trading in Index Options (also based on Nifty) on June 4, 2001. NSE also became the first exchange to launch trading in options on individual securities from July 2, 2001. Futures on individual securities were introduced on November 9, 2001. Futures and Options on individual securities are available on 224 securities stipulated by SEBI.The Exchange provides trading in other indices i.e. CNX-IT, BANK NIFTY, CNX NIFTY JUNIOR, CNX 100 and NIFTY MIDCAP 50 indices. The Exchange is now introducing mini derivative (futures and options) contracts on S&P CNX Nifty index w.e.f. January 1, 2008. History of Exchange Traded Derivatives PARTICIPANTS : PARTICIPANTS Speculators - willing to take on risk in pursuit of profit. Hedgers - transfer risk by taking a position in the Derivatives Market. Arbitrageurs - aim to make a risk less profit by taking advantage of price differentials and thus bring about an alignment in prices by participating in two markets simultaneously Slide 8: Types of derivatives Forward Contract : Forward Contract “A Forward Contract is an agreement to buy or sell an asset on a specified date for a specified price. Salient Features : They are bilateral Contracts and hence exposed to counter party risk. Each contract is custom designed, and hence is unique in terms of contract size, expiration date and the asset type and quality. 3. The contract price is generally not available in public domain On the expiration date, the contract has to be settled by delivery of the asset. 5. If the party wishes to reverse the contract, it has to compulsorily go to the same counter-party, which often results in high prices being charged. Limitations of Forward Markets : Limitations of Forward Markets Lack of centralisation of trading Illiquidity Counterparty risk Futures markets were designed to solve the problems that exist in forward markets. A futures 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 contracts, the futures contracts are standardized and exchange traded. : Futures Contract Futures markets were designed to solve the problems that exist in forward markets. A futures 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 contracts, the futures contracts are standardized and exchange traded. Salient Features Obligation to buy or sell Stated quantity At a specific price Stated date (Expiration Date) Marked to Market on a daily basis Distinction between futures and forwards : Distinction between futures and forwards Slide 13: To understand all these terms we will use NIFTY. OPTIONS : OPTIONS “ An Options contract confers the right but not the obligation to buy (call option) or sell (put option) a specified underlying instrument or asset at a specified price – the Strike or Exercised price up until or an specified future date – the Expiry date. ” The Price is called Premium and is paid by buyer of the option to the seller or writer of the option.” Types of option Call Option Put option Slide 15: To understand these lets check Nifty and Reliance Call Option : Call Option In-the-Money (ITM) Strike price < Spot price(current price) At-the-Money (ATM) Strike price = Spot price Out-of-the-Money (OTM) Strike price >Spot price Put Option : Put Option In-the-Money (ITM) Strike price > Spot price At-the-Money (ATM) Strike price = Spot price Out-of-the-Money (OTM) Strike price < Spot price What is payoff ? : What is payoff ? A payoff is the likely profit/loss that would accrue to a market participant with change in the price of the underlying asset. This is generally depicted in the form of payoff diagrams which show the price of the underlying asset on theX-axis and the profits/losses on the Y-axis. FUTURES PAYOFFS : FUTURES PAYOFFS PRICING FUTURES : PRICING FUTURES where: F futures price S spot index value r cost of financing q expected dividend yield T holding period With expected dividend Without dividend Example: Security XYZ Ltd trades in the spot market at Rs. 1150. Money can be invested at 11% p.a. The fair value of a one-month futures contract on XYZ is calculated as follows : Example: Security XYZ Ltd trades in the spot market at Rs. 1150. Money can be invested at 11% p.a. The fair value of a one-month futures contract on XYZ is calculated as follows Slide 22: Payoff for buyer of futures: Long futures The figure shows the profits/losses for a long futures position. The investor bought futures when the index was at 2220. If the index goes up, his futures position starts making profit. If the index falls, his futures position starts showing losses. Payoff for seller of futures: Short futures : Payoff for seller of futures: Short futures The figure shows the profits/losses for a short futures position. The investor sold futures when the index was at 2220. If the index goes down, his futures position starts making profit. If the index rises, his futures position starts showing losses OPTIONS PAYOFFS : OPTIONS PAYOFFS Payoff profile for buyer of call options: Long callThe figure shows the profits/losses for the buyer of a three-month Nifty 2250 call option. As can be seen, as the spot Nifty rises, the call option is in-the-money. If upon expiration, Nifty closes above the strike of 2250, the buyer would exercise his option and profit to the extent of the difference between the Nifty-close and the strike price. The profits possible on this option are potentially unlimited. However if Nifty falls below the strike of 2250, he lets the option expire. His losses are limited to the extent of the premium he paid for buying the option. : Payoff profile for buyer of call options: Long callThe figure shows the profits/losses for the buyer of a three-month Nifty 2250 call option. As can be seen, as the spot Nifty rises, the call option is in-the-money. If upon expiration, Nifty closes above the strike of 2250, the buyer would exercise his option and profit to the extent of the difference between the Nifty-close and the strike price. The profits possible on this option are potentially unlimited. However if Nifty falls below the strike of 2250, he lets the option expire. His losses are limited to the extent of the premium he paid for buying the option. Payoff profile for writer of call options: Short call : Payoff profile for writer of call options: Short call Payoff profile for buyer of put options: Long put : Payoff profile for buyer of put options: Long put Payoff profile for writer of put options: Short put : Payoff profile for writer of put options: Short put PRICING OPTIONS : PRICING OPTIONS N(d1) is called the delta of the option Bull spreads - Buy a call and sell another : Bull spreads - Buy a call and sell another The buyer of a bull spread buys a call with an exercise price below the current index level and sells a call option with an exercise price above the current index level. Payoff for a bull spread created using call options : Payoff for a bull spread created using call options Bear spreads - sell a call and buy another : Bear spreads - sell a call and buy another In a bear spread, the strike price of the option purchased is greater than the strike price of the option sold. The buyer of a bear spread buys a call with an exercise price above the current index level and sells a call option with an exercise price below the currentindex level. Straddles : Straddles Rs. 4300 Buy Call & Put When market is volatile Pay-off of Straddle Strategy : Pay-off of Straddle Strategy Nifty Lot Size = 50 Shares On settlement if Nifty touches 4500 4000 4250 Stranglers : Stranglers For April 2007 Buy Call of 4400 Buy Put 4200 When market is volatile Pay-off of Strangle Strategy : Pay-off of Strangle Strategy Nifty Lot Size = 50 Shares On settlement if Nifty touches 4600 4000 4300