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8/6/2019 Presentation for NSE
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Presented by Susir Acharya Derivative market
8/6/2019 Presentation for NSE
2/25
Introduction to derivative
Definition Derivatives Market
Classes of derivative
Why Derivative
Derivative market in Nepal
Benefits Drawbacks
NSE derivative market
Derivative segments
Business flow
Documentation and fee for BM
Contract specification
Contract validation
Order Types
Conclusion
Presented by Susir Acharya Derivative market
8/6/2019 Presentation for NSE
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Derivative market
Financial Instrument /contracts whose value is derived from
an underlying assets.
Acts as magical word for framers, producers, traders,
exporter, importers, financial institution, investors and end
users.
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Exchange
Intermediary who accommodates the trade and
guarantees the execution
Collects the Margin if applies Specialized Derivatives Exchanges
Regular Exchanges
OTC (Over-the-counter)
Direct Contract between two partiesNon-standard contracts
Derivative marketPresented by Susir Acharya
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Financial Commodity
Future
Forward Swap
Option
Spot
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A legally binding agreement to sell or buy a commodity orfinancial instrument some time in future with predeterminedprice.
Futures are standardized according to quality, quantity, anddelivery time and location for each commodity
Price of futures is discovered on an exchange trading floor
Exchange takes some responsibility for futures approved/sold onthe floor
Futures contract needs funds to be deposited (margin) bybuyer/seller as a guarantee
Futures can be settled with cash instead of delivery of the actualunderlying asset
Futures contracts are available on
Corn and other grains, Crude oil, Treasury bond, Foreigncurrency, Stock and other financial instruments
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Non-standardized futures contracts
Contract between two individual parties
Sold/traded in OTC Markets
Usually Brokerage Institutions arrange deals
Carry the risk of default
Futures are interchangeable; Forwards are not
Similar to Futures Contract but not Standard
Traded between two private parties
On delivery date, holder may actually deliver the instrument orpay the price difference
Riskier than Futures
Popular on Currencies and Interest Rates
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8/6/2019 Presentation for NSE
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Exchange Traded
Usually closed out prior to
maturity
Standardized
Settled daily
MTM
OTC Traded
Usually underlying asset
delivered
Terms vary
Settled at expiry
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8/6/2019 Presentation for NSE
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Right to buy or sell an underlying instrument
Just premium is paid to buy the option not the value of the
underlying asset
It is just a RIGHT not an OBLIGATIONHolder may not execute his right at all
Popular Options
(Stock, Bond, Commodity, Interest Rate ) option etc.
Presented by Susir Acharya Derivative market
8/6/2019 Presentation for NSE
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Is an agreement between two parties to swap one set of cashflow with another set
For example, holder of Fixed interest rate loan may exchangehis cash flow (return stream) with a party who holds Floating
rate loan cash flow
Traded in OTC Derivatives Markets
Various SWAPs
Interest Rate Swap
Currency Swap etc
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8/6/2019 Presentation for NSE
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The spot market /cash market is a public financial market.
In spot market financial instruments or commodities are
traded for immediate delivery.
It contrasts with a futures market in which delivery is due at alater date.
A spot market can be: Organized market, an exchange or OTC.
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Commodity markets are markets where raw or primary
products are exchanged.
It covers physical product (food, metals, electricity)
Modern Commodity Market have their roots in the trading ofagricultural products
The trading of commodities includes physical trading of food
items, Energy and Metals, etc.
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Hedging / Insurance Transfer the RISK Ex: Farmer selling a crop before its harvest to protect from
any future fluctuations in prices
Arbitrage Buying an instrument in one market and selling in another
and profiting from the difference Speculation
Speculating the price variation in instrument and buyingfutures or options of that instrument
To change the nature of liability To change the nature of the investment without selling the
instrument itself etc.
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The Nepalese Derivative Market is still young.
Investors are either afraid, unwilling or havent been able to analyze
the market situation.
No idea about derivative and trust on it. They think it as some sort of
gambling.
Investors are not smart enough to study the situation and take goodjudgment. They think Future market as Satta market.
They are afraid of being legally bonded because of illegal money/ black
money.
Nepalese economy has been facing problems which have a huge
impact on the derivative market.
First comes is the power supply problem due to which Industries are
not able to function properly.
The continuous political instability has also hit hard to the market.
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Producers, framers, traders, importer, exporter can take
futures position in the derivative market and insure their
risk from the fluctuating product prices.
Investors can study the market and invest in the productand can get attractive returns.
Financial institutions can mitigate or even eliminate the
interest rate risk by locking their Interest rate with
derivative exchange. End users can buy the goods at a pre-determined price so
that they can get away from the risk of increase in price.
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Credit risk This is very low or almost zeros because the Exchange takes on the
responsibility for the performance of contracts but still people doubt about it.
Market risk
Market risk is the risk of loss on account of adverse movement of price.
Liquidity risk
Liquidity risks are the risk that unwinding of transactions may be difficult, if
the market is illiquid.
Legal risk
Legal risk is that legal objections might be raised; regulatory framework might
not allow some activities.
Operational risk
Operational risk is the risk arising out of some operational difficulties like,
failure of electricity, due to which it becomes difficult to operate in the
market.
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8/6/2019 Presentation for NSE
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NSE
Roll Over segment (International Product) Spot Segment (local product)
Gold Red lintel
Silver Tea
Crude oil Cardamom
copper Bengal gram
Natural gas Maze
Wheat
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Bid
Ask
Spread
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NSE
Clearing Member
Broker Member
Investor
Presented by Susir Acharya Derivative market
Regulator and market
facilitator
Clearing and settlement
of trade
Intermediaries
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Documents requirement to be a BM
MOA (Memorandum of agreement)and AOA
Declare / Bio-data
Company with net worth 5 lakhs
FCC letter
ROC (Registrar of companies)
VAT and PAN registration
Fee Structure of BM:
Membership fee: Rs. 50K +Vat
Member Deposit A/C: Rs. 50K with limitation of 15 clients
Software cost : 1000 + VAT / TWS
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Profit share in Major and Mini contract:
Major contract: Rs. 1000 + VAT with in comprise 70% forBM and rest 30% to CM and CSS for exchange.
Note: - BM can go till the lowest level of 300 + VAT. Withhis 70% share but cannot with 30% share that he has topay to CM and CSS for exchange
Mini contract: Rs. 300 + VAT with in comprise 70% for BMand rest 30% to CM and CSS for exchange.
Note: - BM can go till the lowest level of 90 + VAT. Withhis 70% share but cannot with 30% share that he has topay to CM and CSS for exchange.
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Lets imagine we are trading gold whose bid price is Rs.37186.30and ask price is 37191.12
Product name: Gold
Symbol: GOLD
Contract size: 1kg
Price quotation Unit: per 10gm
Margin: (0.6-2.5) %
Storage cost: buy -> -1.5%, sell -> 0.25%
Tick size: 4.82 Tick value:482
Face value: 1000
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Intraday
BTST
Regular
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Market Order:
Limit Order:
OCO:
Stop Order:
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NSE is young but holds potential to change the traditional practiceof derivatives markets in Nepal with online commodity spotexchange.
Same is the case of investors in Nepalese market they have
potential but confused and afraid but NSE have to bring trust andenlighten them, that derivative market is not similar to gambling.People are utilizing the derivative market for speculating ratherthan risk hedging.
The derivative market on the resources available locally can helpdevelop the derivatives market as well the infrastructures makingpeople as well as the country resourceful.
How fast and with what level of ease does the economy overcomethe imbalance is what determines the future of the NepaleseDerivative Market
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Derivative market