FBU Training 2

8/8/2019 FBU Training 2

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Demystifying Derivatives


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DerivativesDerivatives -- IntroductionIntroduction

Derivatives are wasting assets, which derive their values from an

underlying asset. These underlying assets are of various categories

like

Stocks (Equity)

Agri Commodities including grains, coffee beans, etc. Precious metals like gold and silver.

Foreign exchange rate

Bonds

Short-term debt securities such as T-bills


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No counter party risk

Standardization of contracts

Liquidity

Mark to Market (MTM) margining system

Trade is judged on basis of OPEN Interest

Squared off in cash on expiration.

Three series trade at any point in time.

Contract expires on last Thursday of the month.

DerivativesDerivatives -- FeaturesFeatures


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Types of Derivatives

Forwards Futures

OptionsSwaps


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A Forward Contract is a transaction in which the buyer and the seller

agree upon a delivery of a specific quality and quantity of asset usually

a commodity at a specified future date. The price may be agreed on in

advance or in future.

Forward Contract


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It involves an obligation on both the parties i.e the buyer and

the seller to fulfill the terms of the contract (i.e. these are pre-

determined contracts entered today for a date in the future)

Future Contract


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Features Forward Futures

Operational

Mechanism

Not traded on exchange Traded on exchange.

Contract Specifications Differs from trade to

trade.

Contracts are standardized

contracts.

Counterparty Risk Exists. Exists, but assumed by

Clearing Corporation/

house

Liquidation Poor Liquidity as

contracts are tailor made

contracts

Very high Liquidity as

contracts are standardized

contracts.

Profile Price Discovery Poor; as markets are

fragmented.

Better; as fragmented

markets are brought to the

common platform.

Distinguishing Features b/w Forward and Future


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SWAPS

A Swap transaction is simultaneously buying or selling of same

underlying asset or obligation of equivalent capital amount where the

exchange of financial arrangement provides both parties to the

transaction with more favorable condition than they would otherwise

expect.

Interest rate Swaps

Currency Swaps


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OPTIONS

An Options contract confers the right but not the obligation to buy

(call option) or sell (put option) a specified underlying instrument or

asset at a specified price the Strike or Exercised price up until or

an specified future date the Expiry date.

The Price is called Premium and is paid by buyerof the option to the seller orwriter

of the option.


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Types ofOption

Buy Sell

Call Right to buy an

asset

Obligation to sell

an asset

Put Right to Sell an

asset

Obligation to

buy an asset


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Nature ofOption

ITM ATM OTM

CALL S > K3100 >3000

S = K

3100 = 3100

S < K

3100 < 3200

PUT S < K

3100 < 3200

S = K

3100 = 3100

S > K

3100 > 3000

Index= Nifty Index

Spot (S) = 3100

Strike (K) = 3000,3100,3200

Expiry= 29Jan2008


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Long Call

Short Call

Long Put

Short Put

Loss Limited

Loss Limited

Profit Limited Profit Limited

OptionPay-off


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Derivatives Jargon


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Open Interest

A number of contracts outstanding at a given point of time

Open Interest New contract is traded

Open Interest Existing party squares of the position


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Open Interest cont Ex.

Trade in Infosys futures on 6th January 2009

Time Trader Trade Change Net OI

04th Jan 2009 Mr. A

Mr. B

Buy 2 Futures

Sells 2 Future

2

05th Jan 2009 Mr. B

Mr. C

Buy 2 Futures

Sells 2 Futures

= 2

05th Jan 2009 Mr. D

Mr. E

Sells 4 Futures

Buys 4 Futures

6

06th Jan 2009 Mr. E

Mr. A

Sells 2 Futures

Buys 2 Futures

4


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Open Interest Cont

OI as an Indicator

OPEN INTEREST PRICE OUTLOOK

POSITIVE

NEGATIVE

POSITIVE

NEGATIVE


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BASIS

The difference between the prevailing spot price of an asset and thefutures price

Spot price - Future price

A function of Cost of carry

Contango Market Spot price < Futures price

Backwardation market or Inverted Spot price > Future price

F = Se ( r*t)


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Historical Volatility

Historical Volatility is a statistical measure of the volatility of a futures

contract, security, or other instrument over a specified number of past

trading days

Implied Volatility

Implied Volatility can be defined as the volatility of an instrument as implied by the

prices of an option on that instrument, calculated using an options pricing model


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Option Strategies


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SPREADSSTRATEGY

Bull Spread

(A) Buying a lowerStrike call and Selling a higher strike call

(B) Buying a lowerStrike Put and Selling a higher strike put

(A) Buying a lowerStrike call and Selling a higher strike call

Investor : Ms Kiran

Stock : BPCL

Spot price : 348.00

Buy ATM Call 350 11

Sell OTM Call 380 3


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Long call Short call

Hedged position

Stock price

350 380 383361

Profit

Loss

0

22

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DIAGRAMFOR BULL SPREAD (CALL)


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Protective Put

Long position, Buy putInvestor : Mr. Sharma

Current holding : 1000 DLF @ 290

Sentiment: Bullish for the stock

Sceptism: Market may move down

Trading strategy

Buy 1000 OTM PUT OF 280

Premium Rs. 14Profit :

Unlimited

above

breakeven

Loss:

Limited

(X-S) + (P) =

(280-290)+(-14)= -24

Break even:

S+(S-X) + (P)

=

290+(290-280)+14

= 304


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Payoff of put option

Payoff of longposition

Payoff of hedgedposition

290280 304

LONGPOSITION , BUYPUT


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Covered Call

Buying a Stock, Writing a call

Investor: Mr. Mehta

Position: Long 300HDFC BANK980

Strategy: Write 30029JAN2008 call at 1020

Premium inflow:20

Profit: Limited to (X-S) + P i.e. (1020-

980) +20 = 60

Loss: Unlimited if market moves

downwards

Breakeven

: S-P = 980-20 =960


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COVERED CALL STRATEGY

980 1020

Short Call

Long Stock

Hedge position

10601040


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Products


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Smart Trader :

(1) Technical Outlook

(2) Derivatives Outlook

(3) Derivative strategy

Smart trader for 19-01-2009


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Key Support and Resistance ofNifty and

Sensex

13,50 and 200 days Exponential moving averages

acting as crucial support/ Resistance area for the

market

Daily market outlook covering the trend witnessed

in previous trading session along with technical

study using Elliot- wave theory.

Daily 2 intraday call along with description

SmartTrader- Technical


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SmartTrader- Derivatives Outlook

Intraday F&O Call Daily Comments

Premium/Discount

(i) Premium turning into discount - Short built up(ii) Discount turning into premium-Short covering(iii) No change - trend continues

Implied Volatility- Increase from previous day

(i) Call IV > Put IV = Bulls have upper hand(ii) Put IV > Call IV = Bears have upper hand

Putcall Ratio(i) Nifty Open Interest wise(ii) Market volume wise

FII Activity

OI Movement

(i) Call and put distribution across strikes

Highest Call activity - Resistance for the marketHighest Put activity - Support for the market

(ii) Most active contracts(iii) Good indicator during expiry

OI Movers


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SmartTrader- Derivatives Strategy

Outlook(i) Strategy Outlook

(ii) Strategy range

Strategy - Describes the strategy in detail

Leverage Cost(i) Span margin

(ii) Initial outflow/ inflow in rupee term

Conclusion

(i) Profit range for the strategy

(ii) Breakeven(iii) Hedge


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DeriPair

Opportunity based strategy meant for the trader

Position into stock from same sector

Spread price chart of two stocks

Rupee neutral position

Spread ratio chart depicting the reversion oraversion pattern along with Mean +/- 1,2, and 3 std

deviation line

Product Note


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THANKYOU

QUESTION & ANSWER

Documents

FBU Training 2