Smart DISHA- LJ Integrated MBA-3 Days Workshop-15-17 March 2017

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Basics on Security Markets, Mutual Funds and Risk Management Trhrough Derivatives

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BULL BEAR: Game called - INVESTMENT- M- 70436 90580 www.smartdisha.com

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www.smartdisha.com infosmartdisha.com M-70436 90580 LL- 079 4800 7780 Day-1 Basics for Securities Market Day-2 Basics of Mutual Funds Day-3 Risk management through Derivatives The Game called “INVESTMENT”

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www.smartdisha.com infosmartdisha.com M-70436 90580 LL- 079 4800 7780 Day-1 Basics for Securities Market The Game called “INVESTMENT”

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INVESTMENT BASICS INVESTMENT BASICS www.smartdisha.com infosmartdisha.com M-70436 90580 LL- 079 4800 7780

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BASICS BASICS What is Saving What is Investment Why should one invest When to start invest What care should one take while investing What is interest Determinants of interest rate www.smartdisha.com infosmartdisha.com M-70436 90580 LL- 079 4800 7780

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INVESTMENT OPTIONS INVESTMENT OPTIONS PHYSICAL ASSETS FINANCIAL ASSETS www.smartdisha.com infosmartdisha.com M-70436 90580 LL- 079 4800 7780

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SHORT TERM INVESTMENT OPTIONS SHORT TERM INVESTMENT OPTIONS Saving bank account Liquid funds Fixed deposits www.smartdisha.com infosmartdisha.com M-70436 90580 LL- 079 4800 7780

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LONG TERM INVESTMENT OPTIONS LONG TERM INVESTMENT OPTIONS Post office saving scheme PPF Company FD Bonds Debenture Mutual Funds Equity Shares www.smartdisha.com infosmartdisha.com M-70436 90580 LL- 079 4800 7780

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OTHER CONCEPTS OTHER CONCEPTS What is Index What is depository What is dematerialization Stock exchange Derivative market www.smartdisha.com infosmartdisha.com M-70436 90580 LL- 079 4800 7780

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SECURITIES PRIMARY AND SECURITIES PRIMARY AND SECONDARY MARKET SECONDARY MARKET www.smartdisha.com infosmartdisha.com M-70436 90580 LL- 079 4800 7780

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PRIMARY MARKET PRIMARY MARKET What is Primary Market IPO FPO Right Issue Preferential Issue

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IPO PROCESS IPO PROCESS Who is Merchant Banker Pricing Of Issue Face value Premium and Discount to Face Value Book Building Process Cut-off Price Prospectus Abridged Prospectus Listing of Securities Delisting of Securities www.smartdisha.com infosmartdisha.com M-70436 90580 LL- 079 4800 7780

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SECONDARY MARKET SECONDARY MARKET What is Secondary market Diff. between Primary and Secondary market What is Stock Exchange Products in Secondary Market Shares / Debentures / Bonds What is Trading member What is Clearing Member What is Clearing Corporation What is Rolling Settlement What is Pay-in and Pay-out What is Auction www.smartdisha.com infosmartdisha.com M-70436 90580 LL- 079 4800 7780

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DERIVATIVE MARKETS DERIVATIVE MARKETS Meaning Factors Influencing Derivative Market  Market price fluctuation  Integration of financial market  Latest technology  Innovation in derivative market Types of Derivative market Forwards Futures Options SWAPS Different Derivative Market Equity Derivative Currency Derivative Commodity Derivative Market Participants Hedgers Speculator Arbitrageurs www.smartdisha.com infosmartdisha.com M-70436 90580 LL- 079 4800 7780

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CORPORATE ACTIONS CORPORATE ACTIONS Dividend Stock Splits Bonus Buy back of shares www.smartdisha.com infosmartdisha.com M-70436 90580 LL- 079 4800 7780

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ANALYZING RISK AND RETURN ANALYZING RISK AND RETURN www.smartdisha.com infosmartdisha.com M-70436 90580 LL- 079 4800 7780

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WHAT IS RISK WHAT IS RISK Types of Risk Systematic Risk Unsystematic Risk Measures of Risk Standard Deviation Beta www.smartdisha.com infosmartdisha.com M-70436 90580 LL- 079 4800 7780

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ANALYZING RETURN ANALYZING RETURN Simple Return I Prt Compounded Return FV PV 1+it www.smartdisha.com infosmartdisha.com M-70436 90580 LL- 079 4800 7780

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WHAT IS TIME VALUE OF MONEY WHAT IS TIME VALUE OF MONEY Future value of single cash flow Future value of annuity Present value of single cash flow Present value of annuity www.smartdisha.com infosmartdisha.com M-70436 90580 LL- 079 4800 7780

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RATIO ANALYSIS RATIO ANALYSIS www.smartdisha.com infosmartdisha.com M-70436 90580 LL- 079 4800 7780

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LIQUIDITY RATIO LIQUIDITY RATIO Current Ratio Current Assets / Current Liability Acid – Test Ratio Current Assets – Inventory / Current Liability www.smartdisha.com infosmartdisha.com M-70436 90580 LL- 079 4800 7780

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TURNOVER RATIOS TURNOVER RATIOS Inventory Turnover Ratio Cost of good sold / average inventory Debtors turnover ratio Net credit sales / Average Account Receivable Average collection period average debtors / avg. daily credit sales www.smartdisha.com infosmartdisha.com M-70436 90580 LL- 079 4800 7780

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Average collection period 365 days / debtors turnover Fixed assets turnover ratio net sales / net fixed assets Total assets turnover ratio net sales / average total assets www.smartdisha.com infosmartdisha.com M-70436 90580 LL- 079 4800 7780

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LEVERAGE/CAPITAL STRUCTURE LEVERAGE/CAPITAL STRUCTURE RATIOS: RATIOS: Debt – equity ratio total debt / total equity Debt asset ratio total debt / total assets www.smartdisha.com infosmartdisha.com M-70436 90580 LL- 079 4800 7780

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Interest coverage ratio EBIT / interest Debt Service Coverage Ratio DSCR PAT + DEP + Non Cash Exp. + Interest / Interest + Repayment of Term Loan www.smartdisha.com infosmartdisha.com M-70436 90580 LL- 079 4800 7780

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PROFITABILITY RATIOS: PROFITABILITY RATIOS: Gross Profit Ratio gross profit /net sales 100 Net Profit Ratio net profit /net sales 100 www.smartdisha.com infosmartdisha.com M-70436 90580 LL- 079 4800 7780

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PROFITABILITY RATIOS: PROFITABILITY RATIOS: Return on Total Assets PBIT / Total Assets Return on Capital Employed PAT / Total Capital Employed Return on Shareholders Equity PAT / Net worth www.smartdisha.com infosmartdisha.com M-70436 90580 LL- 079 4800 7780

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PROFITABILITY RATIOS PROFITABILITY RATIOS EPS Profit available to shareholder / no. of equity share outstanding Price-earnings ratios P/E Ratio Market Price / EPS www.smartdisha.com infosmartdisha.com M-70436 90580 LL- 079 4800 7780

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REDRESSAL MECHANISM REDRESSAL MECHANISM Investor grievances cell of stock exchange Arbitration through stock exchange Investor protection fund www.smartdisha.com infosmartdisha.com M-70436 90580 LL- 079 4800 7780

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THANK YOU THANK YOU END OF DAY END OF DAY- -1 1 www.smartdisha.com infosmartdisha.com M-70436 90580 LL- 079 4800 7780

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www.smartdisha.com infosmartdisha.com M-70436 90580 LL- 079 4800 7780 Day-2 Basics of Mutual Funds The Game called “INVESTMENT”

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INTRODUCTION TO MUTUAL FUNDS INTRODUCTION TO MUTUAL FUNDS www.smartdisha.com infosmartdisha.com M-70436 90580 LL- 079 4800 7780

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BASIC CONCEPTS BASIC CONCEPTS MEANING : A mutual fund is a professionally managed type of collective investment scheme that pools money from many investors and invests it in stocks bonds short-term money market instruments and other securities www.smartdisha.com infosmartdisha.com M-70436 90580 LL- 079 4800 7780

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NEED FOR MUTUAL FUNDS NEED FOR MUTUAL FUNDS Managed by professionals Channelizing savings to investments High liquidity Tax Benefit Small investment possible www.smartdisha.com infosmartdisha.com M-70436 90580 LL- 079 4800 7780

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STRUCTURE OF MUTUAL FUNDS STRUCTURE OF MUTUAL FUNDS IN IN INDIA INDIA www.smartdisha.com infosmartdisha.com M-70436 90580 LL- 079 4800 7780

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3 3 – – TIER STRUCTURE TIER STRUCTURE  Sponsor  Trustee  Asset Management Company AMC www.smartdisha.com infosmartdisha.com M-70436 90580 LL- 079 4800 7780

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OTHER CONCEPTS OTHER CONCEPTS Role of AMC Role of Custodian What is NFO What is Registrar and Transfer Agent How to invest in NFO Offer Documents Key Information Memorandum www.smartdisha.com infosmartdisha.com M-70436 90580 LL- 079 4800 7780

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MUTUAL FUNDS PRODUCTS AND MUTUAL FUNDS PRODUCTS AND FEATURES FEATURES www.smartdisha.com infosmartdisha.com M-70436 90580 LL- 079 4800 7780

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EQUITY FUNDS EQUITY FUNDS Equity Funds Definition Open Ended and Close Ended Fund Index Fund Diversified Large Cap Fund Small and Mid Cap Fund Sectoral Fund www.smartdisha.com infosmartdisha.com M-70436 90580 LL- 079 4800 7780

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OTHER EQUITY SCHEMES OTHER EQUITY SCHEMES Arbitrage Fund Multi-cap Fund Quant Fund P/E Ratio Fund International Equity Fund ELSS Fund of Fund www.smartdisha.com infosmartdisha.com M-70436 90580 LL- 079 4800 7780

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OTHER CONCEPTS OTHER CONCEPTS Growth Based Investing Value Based Investing What is NAV Expense Ratio Analysis of Cash Level in Portfolio Exit Loads – Contingent Differed Sales Charge www.smartdisha.com infosmartdisha.com M-70436 90580 LL- 079 4800 7780

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DEBT FUNDS DEBT FUNDS Meaning Features Face Value / Coupon / Maturity Value www.smartdisha.com infosmartdisha.com M-70436 90580 LL- 079 4800 7780

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RISK IN DEBT FUND RISK IN DEBT FUND Interest Rate Risk Credit Risk www.smartdisha.com infosmartdisha.com M-70436 90580 LL- 079 4800 7780

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DEBT FUND PRICING DEBT FUND PRICING Present Value of Future Cash Flow Yield To Maturity Duration as Risk Mgmt Control www.smartdisha.com infosmartdisha.com M-70436 90580 LL- 079 4800 7780

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DEBT MUTUAL FUND SCHEMES DEBT MUTUAL FUND SCHEMES Fixed Maturity Plans Capital Protection Plans Gilt Funds Balanced Funds Monthly Income Plan Child Benefits Plan www.smartdisha.com infosmartdisha.com M-70436 90580 LL- 079 4800 7780

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LIQUID FUNDS LIQUID FUNDS Meaning Investment in Short Dated Securities Major Contributor - 40 of Industry AUM Liquidity Return Risk www.smartdisha.com infosmartdisha.com M-70436 90580 LL- 079 4800 7780

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TAXATION TAXATION EQUITY DEBT Min. 65 in Indian Equity LTCG 0 10 without indexation 20 with indexation STCG 15 Marginal Rate of Tax Profit Added to Income www.smartdisha.com infosmartdisha.com M-70436 90580 LL- 079 4800 7780

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REGULATIONS REGULATIONS Limit of certain 10 of NAV in single security No more that 15 of NAV in rated debt paper No more that 10 of NAV in unrated debt paper Total investment in unrated debt not more than 25 of NAV No investments in unlisted company of sponsor group www.smartdisha.com infosmartdisha.com M-70436 90580 LL- 079 4800 7780

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REGULATIONS REGULATIONS In open ended scheme max. 5 of NAV in unlisted company of other group In close ended scheme max. 10 of NAV in unlisted company of other group No more that 25 of NAV investment in listed company of sponsor group www.smartdisha.com infosmartdisha.com M-70436 90580 LL- 079 4800 7780

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INDUSTRY ASSOCIATION INDUSTRY ASSOCIATION AMFI – Association of Mutual Funds in India www.smartdisha.com infosmartdisha.com M-70436 90580 LL- 079 4800 7780

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OBJECTIVES OF AMFI OBJECTIVES OF AMFI Promote interest of mutual funds and unit holder Interact with SEBI/RBI/Govt. Regulators To set up ethical professional and commercial standards in the industry To increase public awareness and understanding of concepts Develop well trained distributors Undertake training programm www.smartdisha.com infosmartdisha.com M-70436 90580 LL- 079 4800 7780

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OTHER CONCEPTS OTHER CONCEPTS Systematic Investment Plans SIP  Meaning  Advantages Disciplined Saving Flexibility Long term gain www.smartdisha.com infosmartdisha.com M-70436 90580 LL- 079 4800 7780

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OTHER CONCEPTS OTHER CONCEPTS Systematic Transfer Plans STP Meaning Systematic Withdrawal Plans SWP Meaning www.smartdisha.com infosmartdisha.com M-70436 90580 LL- 079 4800 7780

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OTHER CONCEPTS OTHER CONCEPTS Growth Options Dividend Pay Out Options Dividend Re-investment Options www.smartdisha.com infosmartdisha.com M-70436 90580 LL- 079 4800 7780

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FINDING GOOD SCHEME OF MUTUAL FUNDS FINDING GOOD SCHEME OF MUTUAL FUNDS  Identify industry average past return  Identify industry average risk  Find out good performing scheme based on Sharpe ratio and Traynor’s Ratio  Find out major contributor in the portfolio  Identify track record of Promoter  Identify track record of Fund Manager www.smartdisha.com infosmartdisha.com M-70436 90580 LL- 079 4800 7780

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PROCESS OF MUTUAL FUNDS INVESTMENTS PROCESS OF MUTUAL FUNDS INVESTMENTS  KYC is required  Pan card Address Proof Bank Statement to be submitted  Application Form to be submitted  One can subscribe through Distributor or directly through AMC www.smartdisha.com infosmartdisha.com M-70436 90580 LL- 079 4800 7780

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THANK YOU THANK YOU END OF DAY END OF DAY- -2 2 www.smartdisha.com infosmartdisha.com M-70436 90580 LL- 079 4800 7780

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www.smartdisha.com infosmartdisha.com M-70436 90580 LL- 079 4800 7780 Day-3 Risk Management Through Derivative The Game called “INVESTMENT”

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INTRODUCTION TO INTRODUCTION TO DERIVATIVE MARKET DERIVATIVE MARKET www.smartdisha.com infosmartdisha.com M-70436 90580 LL- 079 4800 7780

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MEANING MEANING Derivative is a contract whose value is derived from value of some other assets known as underlying. Its on wide range of underlying like Metals – gold silver zinc copper nickel etc. Energy – Oil Gas Coal Electricity Agri commodity – wheat sugar coffee Financial Assets – shares bonds currency www.smartdisha.com infosmartdisha.com M-70436 90580 LL- 079 4800 7780

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EVOLUTION EVOLUTION Forward Market Evolution Agriculture related products Future Market Evolution Standardized forward contract www.smartdisha.com infosmartdisha.com M-70436 90580 LL- 079 4800 7780

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HISTORY HISTORY 12th Century- In European trade fairs sellers signed contracts promising future delivery of the items they sold. 13th Century- There are many examples of contracts entered into by English Cistercian Monasteries who frequently sold their wool up to 20 years in advance to foreign merchants. 1634-1637 Tulip Mania in Holland. Fortunes were lost in after a speculative boom in tulip futures burst. www.smartdisha.com infosmartdisha.com M-70436 90580 LL- 079 4800 7780

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HISTORY HISTORY In 1848 The Chicago Board of Trade CBOT facilitated trading of forward contracts on various commodities In 1865 the CBOT went a step further and listed the first “exchange traded” derivative contract in the US. These contracts were called “futures contracts”. In 1972 Chicago Mercantile Exchange created International Monetary Market which allowed trading in currency futures. In 1975 CBOT introduced Treasury bill futures contract. It was the first successful pure interest rate futures. In 1983 Chicago Board Options Exchange decided to create an option on an index of stocks. www.smartdisha.com infosmartdisha.com M-70436 90580 LL- 079 4800 7780

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INDIAN DERIVATIVE MARKET INDIAN DERIVATIVE MARKET In 1999 The Securities Contract Regulation Act SCRA was amended to include “derivatives” within the domain of securities’ and regulatory framework was developed for governing derivatives trading. The exchange traded derivatives started in India in June 2000 with index futures contracts based on CNX Nifty and SP BSE Sensex. Later trading in Index options commenced in June 2001 and trading in options on individual stocks commenced in July 2001. Futures contracts on individual stocks started in November 2001. Futures contracts on Volatility Index were launched in 2014. www.smartdisha.com infosmartdisha.com M-70436 90580 LL- 079 4800 7780

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MARKET PARTICIPANTS MARKET PARTICIPANTS Hedgers Speculators Arbitrageurs www.smartdisha.com infosmartdisha.com M-70436 90580 LL- 079 4800 7780

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TYPES OF DERIVATIVE MARKET TYPES OF DERIVATIVE MARKET Organized Exchanges –Exchange Traded Derivatives Over The Counter Derivative Market www.smartdisha.com infosmartdisha.com M-70436 90580 LL- 079 4800 7780

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PRODUCTS IN DERIVATIVE MARKET PRODUCTS IN DERIVATIVE MARKET www.smartdisha.com infosmartdisha.com M-70436 90580 LL- 079 4800 7780

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FORWARD CONTRACT FORWARD CONTRACT Meaning: It is a contractual agreement between two parties to buy/sell an underlying asset at a certain future date for a particular price that is pre-decided on the date of contract. These are OTC contracts. www.smartdisha.com infosmartdisha.com M-70436 90580 LL- 079 4800 7780

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FORWARD MARKET FEATURES FORWARD MARKET FEATURES Operational Mechanism – Traded on OTC Specification – As per needs of parties involved Counter Party Risk – Exist reduced by guarantee Liquidity – Low Example – Currency Forward www.smartdisha.com infosmartdisha.com M-70436 90580 LL- 079 4800 7780

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FUTURE CONTRACTS FUTURE CONTRACTS Meaning: Exchange Traded Standardized Forward Contract www.smartdisha.com infosmartdisha.com M-70436 90580 LL- 079 4800 7780

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FUTURE MARKET FEATURES FUTURE MARKET FEATURES Operational Mechanism – Traded on Exchange Specification – Standardized Counter Party Risk – Exist but clearing agency becomes counter party Liquidity – High Example – Commodity Future Stock Future Index Future Currency Future www.smartdisha.com infosmartdisha.com M-70436 90580 LL- 079 4800 7780

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SWAPS SWAPS Meaning: A swap is an agreement made between two parties to exchange cash flows in the future according to a prearranged formula. Swaps are series of forward contracts. Swaps help market participants manage risk associated with volatile interest rates currency exchange rates and commodity prices. www.smartdisha.com infosmartdisha.com M-70436 90580 LL- 079 4800 7780

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OPTIONS CONTRACT OPTIONS CONTRACT Meaning: An Option is a contract that gives the right but not an obligation to buy or sell the underlying on or before a stated date and at a stated price. While buyer of option pays the premium and buys the right writer/seller of option receives the premium with obligation to sell/ buy the underlying asset if the buyer exercises his right. www.smartdisha.com infosmartdisha.com M-70436 90580 LL- 079 4800 7780

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FACTORS AFFECTING DERIVATIVE MARKET FACTORS AFFECTING DERIVATIVE MARKET Increased fluctuation in market price of financial assets Integration of financial market globally Use of latest technology Frequent innovation in derivative markets www.smartdisha.com infosmartdisha.com M-70436 90580 LL- 079 4800 7780

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PRICING FORWARD AND FUTURE PRICING FORWARD AND FUTURE CONTRACTS CONTRACTS www.smartdisha.com infosmartdisha.com M-70436 90580 LL- 079 4800 7780

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CASH AND CARRY ARBITRAGE CASH AND CARRY ARBITRAGE Forward Price Cash Price + Interest Cost + Carrying Cost FP SP eRT + Other Carrying Cost E exponential function R rate of interest T time period of holding www.smartdisha.com infosmartdisha.com M-70436 90580 LL- 079 4800 7780

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BUYER OF FORWARD / FUTURE BUYER OF FORWARD / FUTURE Obligation – to pay settlement price Margin requirement – Yes Risk – Unlimited if price goes down Profit – Unlimited if price goes up www.smartdisha.com infosmartdisha.com M-70436 90580 LL- 079 4800 7780

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BUYER OF FORWARD / FUTURE BUYER OF FORWARD / FUTURE If a stock future is bought 100 the pay-off diagram is as follow. -60 -40 -20 0 20 40 60 50 60 70 80 90 100 110 120 130 140 150 Series1 www.smartdisha.com infosmartdisha.com M-70436 90580 LL- 079 4800 7780

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SELLER OF FORWARD / FUTURE SELLER OF FORWARD / FUTURE Obligation – to deliver underlying Margin requirement – Yes Risk – Unlimited if price goes up Profit – Unlimited if price goes down www.smartdisha.com infosmartdisha.com M-70436 90580 LL- 079 4800 7780

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SELLER OF FORWARD / FUTURE SELLER OF FORWARD / FUTURE If a stock future is bought 100 the pay-off diagram is as follow. -60 -40 -20 0 20 40 60 50 60 70 80 90 100 110 120 130 140 150 Series1 www.smartdisha.com infosmartdisha.com M-70436 90580 LL- 079 4800 7780

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OPTIONS CONTRACT OPTIONS CONTRACT Meaning: An Option is a contract that gives the right but not an obligation to buy or sell the underlying on or before a stated date and at a stated price. While buyer of option pays the premium and buys the right writer/seller of option receives the premium with obligation to sell/ buy the underlying asset if the buyer exercises his right. www.smartdisha.com infosmartdisha.com M-70436 90580 LL- 079 4800 7780

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TERMS USED IN OPTIONS CONTRACT TERMS USED IN OPTIONS CONTRACT  Call Options – gives buyer the right to buy the underlying  Put Options - gives buyer the right to sell the underlying  Buyer of options pays premium  Seller/writer of options receives premium  Premium is a price of options contract  Strike Price / Exercise Price K – price of underlying at which it is purchased or sold www.smartdisha.com infosmartdisha.com M-70436 90580 LL- 079 4800 7780

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TERMS USED IN OPTIONS CONTRACT TERMS USED IN OPTIONS CONTRACT  Spot Price – Current Market Price  Exercise of options – buying/selling of underlying in an options contract by buyer of the options contract  Expiration day – the day on which options stops to exist  Tenor of options – life of options contract  Lot size – number of units of underlying in an options contract www.smartdisha.com infosmartdisha.com M-70436 90580 LL- 079 4800 7780

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MONEYNESS OF OPTIONS MONEYNESS OF OPTIONS CALL PUT IN – THE – MONEY S K S K AT – THE – MONEY S K S K OUTOF – THE – MONEY S K S K www.smartdisha.com infosmartdisha.com M-70436 90580 LL- 079 4800 7780

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POSITION OF CALL OPTIONS BUYER POSITION OF CALL OPTIONS BUYER  Right - Buy underlying at strike price.  Obligation - Nil.  Premium paid or received - Paid.  Margin requirement - No.  Risk profile - Limited to the extent of premium paid.  Profit potential - Unlimited if prices go up.  Breakeven point Strike price + Premium. www.smartdisha.com infosmartdisha.com M-70436 90580 LL- 079 4800 7780

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PAYOFF OF CALL BUY POSITION PAYOFF OF CALL BUY POSITION Price Cash In Flow Premiu m P L 490 0 -10 -10 495 0 -10 -10 500 0 -10 -10 505 5 -10 -5 510 10 -10 0 515 15 -10 5 520 20 -10 10 525 25 -10 15 530 30 -10 20 Bought/long Tisco call option with strike price of 500 Rs. 10/- -15 -10 -5 0 5 10 15 20 25 490 495 500 505 510 515 520 525 530 Series1 www.smartdisha.com infosmartdisha.com M-70436 90580 LL- 079 4800 7780

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POSITION OF CALL OPTIONS SELLER POSITION OF CALL OPTIONS SELLER  Right – Nil.  Obligation - Sell underlying at strike price / Pay settlement difference.  Premium paid or received - Received.  Margin requirement - Yes.  Risk profile - Unlimited if prices go up.  Profit potential - Limited to the extent of premium received.  Breakeven point Strike price + Premium. www.smartdisha.com infosmartdisha.com M-70436 90580 LL- 079 4800 7780

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PAYOFF OF CALL SELL POSITION PAYOFF OF CALL SELL POSITION Price Cash Flow Premium P L 490 0 10 10 495 0 10 10 500 0 10 10 505 5 10 5 510 10 10 0 515 15 10 -5 520 20 10 -10 525 25 10 -15 530 30 10 -20 -25 -20 -15 -10 -5 0 5 10 15 490 495 500 505 510 515 520 525 530 Series1 Sold/Write Tisco call option with strike price of 500 Rs. 10/- www.smartdisha.com infosmartdisha.com M-70436 90580 LL- 079 4800 7780

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POSITION OF PUT OPTIONS BUYER POSITION OF PUT OPTIONS BUYER  Right - Sell underlying at strike price.  Obligation - Nil.  Premium paid or received - Paid.  Margin requirement - No.  Risk profile - Limited to the extent of premium paid.  Profit potential - Unlimited if prices go down.  Breakeven point Strike price - Premium. www.smartdisha.com infosmartdisha.com M-70436 90580 LL- 079 4800 7780

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PAYOFF OF PUT BUY POSITION PAYOFF OF PUT BUY POSITION Price Cash Flow Premium P L 470 30 -10 20 480 20 -10 10 490 10 -10 0 500 0 -10 -10 510 0 -10 -10 520 0 -10 -10 Bought/long Tisco Put option with strike price of 500 Rs. 10/- -15 -10 -5 0 5 10 15 20 25 470 480 490 500 510 520 Series1 www.smartdisha.com infosmartdisha.com M-70436 90580 LL- 079 4800 7780

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POSITION OF PUT OPTIONS SELLER POSITION OF PUT OPTIONS SELLER  Right - Nil.  Obligation - Buy underlying at strike price / Pay settlement difference.  Premium paid or received - Received.  Margin requirement - Yes.  Risk profile - Unlimited if prices go down.  Profit potential - Limited to the extent of premium received.  Breakeven point Strike price – Premium. www.smartdisha.com infosmartdisha.com M-70436 90580 LL- 079 4800 7780

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PAYOFF OF PUT SELL POSITION PAYOFF OF PUT SELL POSITION Price Cash Flow Premium P L 470 30 10 -20 480 20 10 -10 490 10 10 0 500 0 10 10 510 0 10 10 520 0 10 10 Sold/Write Tisco Put option with strike price of 500 Rs. 10/- -25 -20 -15 -10 -5 0 5 10 15 470 480 490 500 510 520 Series1 www.smartdisha.com infosmartdisha.com M-70436 90580 LL- 079 4800 7780

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OPTIONS PRICING MODELS OPTIONS PRICING MODELS www.smartdisha.com infosmartdisha.com M-70436 90580 LL- 079 4800 7780

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THE BINOMIAL PRICING MODEL THE BINOMIAL PRICING MODEL  The binomial option pricing model was developed by William Sharpe in 1978. It has proved over time to be the most flexible intuitive and popular approach to option pricing.  The binomial model represents the price evolution of the option’s underlying asset as the binomial tree of all possible prices at equally spaced time steps from today under the assumption that at each step the price can only move up and down at fixed rates and with respective simulated probabilities.  This is an intuitive way to price options but also very lengthy and time consuming model. www.smartdisha.com infosmartdisha.com M-70436 90580 LL- 079 4800 7780

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THE BLACK THE BLACK SCHOLES SCHOLES MODEL MODEL  The Black Scholes model was published in 1973 by Fisher Black and Myron Scholes.  It is simplified form of Binomial model with assumption that asset prices are continuously changing rather than having only two possible outcomes over a defined price step.  The original formula for calculating the theoretical Option Price OP is:  OP SNd1-XertNd2  Where  D 1Ins/n+r+v2/2t/ vt0.5  D 2 d1-vt0.5 www.smartdisha.com infosmartdisha.com M-70436 90580 LL- 079 4800 7780

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THE BLACK THE BLACK SCHOLES SCHOLES MODEL MODEL  S stock price  X strike price  t time remaining until expiration expressed in years  r current continuously compounded risk-free interest rate  v annual volatility of stock price the standard deviation of the shortterm returns over one year  In natural logarithm  Nx standard normal cumulative distribution function  e the exponential function www.smartdisha.com infosmartdisha.com M-70436 90580 LL- 079 4800 7780

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IMPACT OF CHANGE IN OPTION IMPACT OF CHANGE IN OPTION PARAMETERS ON CALL AND PUT PARAMETERS ON CALL AND PUT PRICING FACTOR CALL OPTIONS PUT OPTIONS CMP INCREASE DECREASE STRIKE PRICE DECREASE INCREASE VOLATILITY INCREASE INCREASE TIME TO EXPIRATION INCREASE INCREASE INTEREST RATE INCREASE DECREASE Effect of an increase in each pricing factor on the option value holding other factors constant: www.smartdisha.com infosmartdisha.com M-70436 90580 LL- 079 4800 7780

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IMPORTANCE OF RISK MANAGEMENT IMPORTANCE OF RISK MANAGEMENT  Profit can be maximized  Loss can be minimized  Impact of uncertainty can be reduced  Minimization of loss by keeping profit potential can be attained  Consistency of earning profit can be maintained  Discipline in investment management can be developed  Peace of mind www.smartdisha.com infosmartdisha.com M-70436 90580 LL- 079 4800 7780

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THANK YOU THANK YOU END OF DAY END OF DAY- -3 3 www.smartdisha.com infosmartdisha.com M-70436 90580 LL- 079 4800 7780

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ALL THE BEST ALL THE BEST www.smartdisha.com infosmartdisha.com M-70436 90580 LL- 079 4800 7780

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