Derivative- Class Ppt

8/2/2019 Derivative- Class Ppt

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DERIVATIVES

A presentation by:

HemalathaAshwin N R



UNDERSTANDING DERIVATIVES

An instrument whose existence and value iscontingent upon the existence of anotherinstrument or security.

The term "Derivative" indicates that it has noindependent value, i.e. its value is entirely"derived" from the value of the underlying asset.

The underlying asset can be securities,commodities, currency, live stock or anythingelse.



MAJOR DERIVATIVE INSTRUMENTS

Futures

Forwards

SwapsOptions



FUTURE CONTRACTS

The underlying asset can be securities,commodities, bullion, currency, live stock oranything else.

It can be used to manipulate a portfolio’s riskexposure.

The contract expires on a pre-specified date

which is called the expiry date of thecontract.

On expiry, futures can be settled by delivery

of the underlying asset or cash



OPTION CONTRACTS

Options Contract is a type of DerivativesContract which gives the buyer/holder of thecontract the right (but not the obligation) to

buy/sell the underlying asset at apredetermined price within or at end of aspecified period.

The buyer / holder of theoption purchases the right from theseller/writer for a consideration which iscalled the premium



An Option to buy is called Call option andoption to sell is called Put option.

if an option that is exercisable on or beforethe expiry date is called American option andone that is exercisable only on expiry date, iscalled European option.

The price at which the option is to beexercised is called Strike price or Exerciseprice



in the case of American options the buyerhas the right to exercise the option atanytime on or before the expiry date.

As in the case of futures contracts, optioncontracts can be also be settled by deliveryof the underlying asset or cash



FORWARD CONTRACTS

A forward contract is a binding agreement by twoparties for the purchase/sale of a specified quantityof an asset at a specified future time for a specified

future price



Spot price

Forward price

Expiration date

Underlying asset

Long or short position

Payoff

No cash due up-front



Settlement of Forwards

Cash settlement

Physical delivery



SWAPS

these instruments are based on anagreement between two counterparties toexchange a series of cash flows.

The cash flows are almost always calculatedby reference to the behavior of an index andare scaled by an agreed nominal principal



USES OF DERIVATIVES

To Speculate

To Hedge a portfolio shares, bonds, foreigncurrency, etc.

To Undertake arbitrage- i. e; benefit frommispricing ;

To engineer or structure desired positions



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Derivative- Class Ppt