Professional Training Academy

DERIVATIVE IN INDIA

1

Professional Training Academy

Increased volatility in asset prices

Integration of National &

International Market

Low Transaction Cost of Trading

Development of Risk Management

Tools

2

Why Derivatives in India

Professional Training Academy

Origin

1.• First introduced in Chicago

Board of Trade in 1848 for forward contract in Commodities

2.• Derivative Introduce in

Indian Stock Exchanges in June 2000

3

Professional Training Academy

Index FuturesIndex Options

Stock Futures Stock Options

4

Derivatives Trading on Exchanges

Professional Training Academy

Business Growth of F&O Segment in India

5

Professional Training Academy

Types of Market

Spot Market

Derivative Market

6

Professional Training Academy 7

Spot Market

Assets Class Delivery

Equity Shares

Commodity Physical

Currency Physical

Immediate Delivery

Immediate Payment

Professional Training Academy

Derivative Market

Forward Segment

Future Segment

Options Segment

8

Professional Training Academy

Forwards

Contact Two Private Parties

Transaction at Expiry Date

(Forward Price)

Physical / Cash

Settlement

9

Professional Training Academy

Participants in Forward Contract

Money

Buyer (Who takes a long position)

Seller (Who takes a

short position )

10

Professional Training Academy

Future

Contract Between Two Parties

Traded in Recognized Stock Exchange

Future Date

Price Agreed Upon Today

11

Professional Training Academy

Participants in Futures Contract

Future Buyer Future Seller

Payment

Sell Contract

Buy Contract

Payment

Clearing Corporation

12

Professional Training Academy

Positions in a Futures Contract

• When a person buy a futures contract Long

• When a person sell a futures contract Short

13

Professional Training Academy

Difference Between Future & Forward

Forward Future

Nature of Contracts Customized Standardized

Counterparty Any Party Clearing Corporation

Credit Risk Exist No Risk

Liquidity Very Low Very High

Margins Not Required Received / Paid on Daily Basis

Valuation Not Done Daily Basis

Delivery Physical / Cash No Delivery 14

Professional Training Academy

A contract between two parties

Where Buyer of the option has the right and not obligation to fulfill the contract

Seller is under obligation to fulfill the Contract

Options

15

Professional Training Academy

Options

Call Option

Put Option

16

Types of Options

Professional Training Academy

Right to Buy

Call Options

17

Professional Training Academy

Right to Sell

Put Options

18

Professional Training Academy

Underlying Price Strike Price

Time to Expiration Risk Free Rate

Volatility

19

Factors impacting Option Prices

Professional Training Academy

Derivative Terminology

Lot Size Expiry Date

Contract Size

Spot Price Strike Price

Initial Margin

Mark to Market Margin

Option Premium

Closing Price

20

Professional Training Academy

Contact Specification

S. no Terminology Remark Index Future(Nifty)

Index Option (Nifty)

1 Lot Size Minimum Quantity traded in a lot decided by the exchanges

50 50

2 Spot Price Price prevailing in delivery market

5500 5500

3 Future/Strike Price

Price Prevailing in future market/price for which call or put option exercise

5550 5550

4 Option Premium Amount decided by the exchange on the basis of strike price and spot price

100

5 Expiry Date Last Thursday of a month Last Thursday Last Thursday

6 Contract Next Three Month Feb, March, April Feb, March, April21

Professional Training Academy

Contact SpecificationS. no Terminology Remark Index Future

(Nifty)Index Option

(Nifty)

7 Initial Margin Minimum amount required to make position (Suppose 25% of contract Size)

Rs 69,375(25% of 2,77,500)

Option Premium * Lot Size

Rs 5,000(100*50)

8 Closing Price Closing Price at the end of day

5500

9 Mark to MarketMargin

Difference between Trade price & closing Price (Daily Settled )MTM=(Trade price – closing price)* Lot Size

Pay Rs 2,500

(5550-5500)*50

No MTM as we pay whole amount

Our Expectation is that index rise

22

Professional Training Academy

Participant

Hedgers• Insuring an investment

against risk.

Speculators • Who bets on derivatives

markets

Arbitrageurs • Attempt to profit from

pricing inefficiencies

23

Professional Training Academy 24

Play Grounds

Professional Training Academy 25

Professional Training Academy

www.nseindia.com

www.bseindia.com

26

Important Website

Professional Training Academy

27

Professional Training Academy

28

Professional Training Academy

Particulars Income /Loss from Derivatives

Head “Income from Business & Profession’

Taxed According to the tax slab

Loss from Derivatives Adjusted under all Five Head Profit & Carry Forward to Next Year

29

Taxation

Professional Training Academy

Sr. Taxes Rates Futures Options

Buy 1 Lot of Nifty at 6000 ,Contract Size ( 50shares* 6000) / Buy 6000 call option at 60 Rs premium(50shares*60)

3,00,000 3,000

1Brokerage 0.03 % On Contract

Size/2.5% on Option Premium (Both Side)

90 Rs (0.03% on 3,00,000) 75 Rs (2.5% on 3,000)

2Service Tax 10.36% on Brokerage

Amount(Both Side)

9.32 (10.36% on 90 Rs)

7.77(10.36% on 75 Rs)

3Securities Transaction Tax(STT)

0.017% on Contract Size (Only on Selling Side)

25.50(0.0085% on 3,00,000 Rs)

2.55(0.0085% on 3000Rs)

4Stamp Duty 0.004% on Contract

Size(Both Side)12(0.004% on 3,00,000 Rs) 1.2(0.004% *3,000Rs)

5 Education Cess 2% on Tax Amount 0.93(2% on 9.32+25.50+12) 0.23(2% * 7.77+2.55 +1.2)

6 Higher Edu Cess 1% on Education Cess 0.014 (1% on 0.93) 0.0028 (1% on 0.23)

Total Cost 137.76 86.75

30

Cost of Trading in Derivative

Professional Training Academy

How does One Make Money in A Futures Contract?

• Trade according to the trends• Complete knowledge of Derivatives• Discipline Approach• Keep Stop loss on every trade

31

Professional Training Academy 32

Thank You