FUTURES AND OPTIONS : FUTURES AND OPTIONS TEAM MEMBERS:
ANIL MEHROTRA ROLL NO-15
KD CHATURVEDI ROLL NO-36
SANJAY TRIPATHI ROLL NO-37
TAMANNA DHADWAL ROLL NO- 1 Meaning/Definition of Derivative : Meaning/Definition of Derivative Derivative is a product/ financial instrument whose value is derived from an underlying asset.
International Monitory Fund (IMF), defines derivatives as, “Derivatives are financial instrument, that are linked to a specific financial instrument or indicator or commodity and through which specific financial risk can be traded in financial markets in their own right.’’ 2 Slide 3: Reasons for Development 3 Participants in the market : Participants in the market 4 Advantages of derivative market : Advantages of derivative market 5 Advantages of derivative market : Advantages of derivative market 6 Types of Derivatives : Types of Derivatives 7 Types of Derivatives : Types of Derivatives 8 Types of Derivatives : Types of Derivatives 9 Emergence/History of Derivative Market : Emergence/History of Derivative Market Liberalisation in the economy.
Demutualisation and corporatisation.
Integration of financial market
Improvement Information technology
Advancement in communication system
Reduced cost of transaction 10 Regulatory framework : Regulatory framework 11 L.C. Gupta Committee Recommendations : 12 L.C. Gupta Committee Recommendations SEBI set up a 24- member committee under the Chairmanship of L.C.Gupta. The recommendations of the committee are as follows:
Phased introduction of derivative instruments.
Amendments in SC(R)A
Annual inspection by Stock Exchanges
Setting up of Clearing Corporation
Role of clearing Corporation
Eligibility criteria of clearing corporation member
Demutualization of clearing corporation
Disclosure of risk clause in all the contract document Amendments in SC(R)A : Amendments in SC(R)A For trading derivatives, exchange needs to fulfill the eligibility criteria
amendments are made in Section 4 of the SC(R)A, 1956 to include derivative product in the definition of securities
Derivatives exchange/segment should have a separate governing council .
Exchanges would have to regulate the sales practices of its members
The Exchange should have minimum 50 members.
The members of derivative segment need to fulfill the eligibility conditions as laid down by the L. C. Gupta committee. 13 Amendments in SC(R)A : Amendments in SC(R)A The clearing and settlement of derivatives trades would be through a SEBI approved clearing corporation/house.
Clearing corporations/houses have to apply to SEBI for grant of approval.
Derivative brokers/dealers and clearing members are required to seek registration from SEBI. This is in addition to their registration as brokersof existing stock exchanges.
Strict enforcement of KYC norms
Disclosure of risk clause compulsory in documents 14 Futures : Futures Futures are specialised form of forward contract.
Futures are fixed value contract
They are exchange traded
Highly liquid than forwards
No counter party risk exist
Follow daily settlement
Always marked to market 15 Distinguish between Forwards & Futures : Distinguish between Forwards & Futures 16 Types of Futures : Types of Futures 17 Future Terminology : Future Terminology Spot price
Marking to Market
Maintenance Margin 18 Pricing of Stock Futures : Pricing of Stock Futures 19 Comparison Between Cash Market & F&O Market : Comparison Between Cash Market & F&O Market 20 Accounting For Futures : Accounting For Futures Accounting at the inception:
Initial Margin paid to be debited:
“ Initial Margin- Futures A/c”
Additional Margins to be accounted as above.
When contract is made no entry to be passed.
On the Balance Sheet date the above account is shown under the heads Current Assets.
Initial Margin in the form of Bank guarantees or by lodging securities should be disclosed in notes to A/cs. 21 Accounting For Futures : Accounting For Futures 2. Accounting at the time of daily settlement :
Payments made or received on account of daily settlement is credited/debited to:
“Mark-to-market margin - Futures A/c” 22 Accounting For Futures : Accounting For Futures 3. Accounting for open positions:
Anticipated loss to be provided for and anticipated profits to be ignored.
Net payment made to the broker - “current assets, loans and advances (net of provision for loss)” 23 Accounting For Futures : Accounting For Futures 4. Accounting at the time of final settlement:
Profit / Loss = Final settlement price – Contract price
Debited / Credited to “Mark to Market Margin – Futures A/c”
Loss to be adjusted first against the provision made for the anticipated losses and balance from the P&L.
FIFO method is followed. 24 Options : Options Fundamentally different from forward and futures
Gives the holder of the option the right but not an obligation
Purchase of an option requires an up-front payment
Basically there are two types of option. They are Call Option & Put Option 25 Option Terminology : Option Terminology Index options
Buyer of an option
Writer of an option
Expiration date 26 Option Terminology : Option Terminology Strike price
Intrinsic value of an option 27 Pricing Options : Pricing Options 28 Black & Scholes : Black & Scholes 29 Payoff for Investor Who Went Long Nifty at 2220 : Payoff for Investor Who Went Long Nifty at 2220 30 Payoff for Investor Who Went Short Nifty at 2220 : Payoff for Investor Who Went Short Nifty at 2220 31 Payoff For Buyer Of Call Option : Payoff For Buyer Of Call Option 32 Payoff For Writer Of Call Option : Payoff For Writer Of Call Option 33 Payoff For Buyer Of Put Option : Payoff For Buyer Of Put Option 34 Payoff For Writer Of Put Option : Payoff For Writer Of Put Option 35 Payoff For A Bull Spread Created Using Call Options : Payoff For A Bull Spread Created Using Call Options 36 Payoff For A Bear Spread Created Using Call Options : Payoff For A Bear Spread Created Using Call Options 37 Accounting for options : Accounting for options Accounting at the inception:
Initial Margin paid to be paid by writer / seller to be debited:
“ Equity Index / Stock Option Margin A/c”
Buyer / holder not required to pay margin.
Premium is to be paid to the writer by the holder of the option.
which is debited:
“Equity Index / Stock Option Premium A/c” 38 Accounting for options : Accounting for options 2. Accounting at the time of payment/receipt of margin:
Payments made or received on account of daily settlement is credited/debited by the writer to :
“ Equity Index / Stock Option Margin A/c”
In case of deposit made by him instead of Bank A/c “Deposit for Margin A/c” will be debited or credited.
On Balance sheet date balance In the above A/c is shown under the head “ Current Assets”. 39 Accounting for options : Accounting for options 3. Accounting for open positions:
Loss to the holder = Premium paid – Premium on the B/S date.
The above loss to be provided for and to be shown as deduction from “Equity Index / Stock Option Premium A/c” under “current assets, loans and advances”. 40 Accounting for options : Accounting for options 4. Accounting at the time of final settlement:
On exercise of the option:
a. For holder premium to be debited to P&L and credited to “Equity Index / Stock Option Premium A/c”
b. For writer premium to be credited to P&L and debited to “Equity Index / Stock Option Premium A/c”
Final settlement price - Strike price = if -ve then paid by the writer. 41 Accounting for options : Accounting for options 5. Accounting at the time of squaring off an option contract:
On final settlement the writer has to make delivery of the equity shares.
the premium paid/received will be transferred to the profit and loss account 42 Taxation : Taxation Income from derivative contracts:
- not a speculative income
- treated as business income
- losses can be set off against any other income during the year & carried forward to 8 subsequent years.
- securities transaction tax paid on such transactions is eligible as deduction. 43 THANK YOU : THANK YOU 44