Derivative Market in India
Derivative Market in India
Derivative Market in India
MARKET IN
INDIA
Financial derivatives are financial
instruments whose prices are
derived from the prices of other
financial instruments which are also
know as underlying. It relates to
equities, loans, bonds, interest rates
and currencies.
TYPES OF DERIVATIVES
OPTIONS
FUTURES
SWAPS
OPTIONS
TYPES:
EXCHANGE TRADED OPTIONS
OVER THE COUNTER OPTIONS
EMPLOYEE STOCK OPTIONS
STOCK INDEX OPTIONS
INTREST OPTIONS
CURRENCY OPTIONS
RANGE FORWARD(RF)
RATIO RANGE FORWARDS
CONTRACTS(RRF’S)
SWAPTIONS
BENEFITS
CALLS- Control a claim on underlying
asset.
PUTS- Duplicate a short sale without
margin account.
Possibility of windfall profits.
Investment opportunities.
Reduction of total portfolio transaction
cost.
Participation in overall market movement.
FUTURES
CHARACTERISTICS:
TRADING
RISK
SETTLEMENT
SERVICES RENDERED
Provide hedging facilities to buyers
and sellers to protect them against
unpredictable price fluctuations over
time.
Introduce an element of stability
market prices.
Indicate expected future prices.
SWAPS
It is an agreement between two
parties to exchange sequences of
cash flows for a set period of
time.
INTREST RATE SWAP
EXAMPLE:
TERMS:
Notional amount- 100 lakh
Maturity- 5 years
Fixed rate payer- Alpha Corp.
Floating rate payer-Gamma Corp.
Fixed Rate- 5 %, semiannual
Floating rate- 3 month
Fixed rate payment
(5% semi-annual)
Floating rate
payment
(3-month Libor)
Alpha Corp agrees to pay 5 % of 100 lakhs on a semiannual
basis to Gamma Corp. for the next 5 years.
That is, Alpha will pay 2.5 % of 100 lakhs, or 2.5 lakhs,
twice a year.
Gamma Corp agrees to pay 3-month LIBOR on a 3-monthly
basis (or quarterly basis) to Alpha Corp for the next 5 years.
That is, Gamma will pay the 3-month LIBOR rate, divided by
four and multiplied by the notional amount, four times per
year.
For example, if the 3-month LIBOR is 2.4 % on the reset
date, Gamma will pay 2.4% / 4 = 0.6% of 100 lakhs = 0.6
lakhs every 3 months.
VALUATION OF
DERIVATIVES
Pricing futures: Following factors affect
the future prices:
a) Spot Price.
b) Basis=Current cash price – Future
price.
c) Spreads.
d) Expected future spot price
e) Cost of storage
Pricing options: