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8/2/2019 Derivative- Class Ppt
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DERIVATIVES
A presentation by:
HemalathaAshwin N R
8/2/2019 Derivative- Class Ppt
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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.
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MAJOR DERIVATIVE INSTRUMENTS
Futures
Forwards
SwapsOptions
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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
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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
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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
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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
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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
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Spot price
Forward price
Expiration date
Underlying asset
Long or short position
Payoff
No cash due up-front
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Settlement of Forwards
Cash settlement
Physical delivery
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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
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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