Financial instruments - derivatives

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SECURITIES – THE DERIVATIVES
Exchange Traded & OTC (Over The Counter) Markets
CONTRACTS
Futures & Options Forwards & Swaps
DERIVATIVES
a. Commodities
b. Financial
• Currencies
• Securities
• Interest rate
• Equity
Equity
• Warrants
• Convertibles (Stock-Debentures-Stock)
Trading method
• Call
• Put
Cash flow
• At the money – zero cash flow
• In the money – positive cash flow
• Out of money – negative cash flow
BUYER
SELLER
a. Commodity
b. Financial
• Credit
• Equity
• Interest rate
Fixed – Floating, S
Fixed – Floating, D
Float – Float, S
Float – Float, D
• Currency
Same, S
Different , D
PRICE & YIELD
Spot (Cash) or Immediate
Strike (Exercise or nominal)
Maturity (Expiration)
Forward
Futures
Market
Rights & NO ObligationsObligations & NO Rights Rights & full Obligations
Financial Intermediaries, e. g brokers
Investor /Client
Long
Short
Positions
Issued to
Traded in
a. Commodity
b. Financial
Buy order or Bid
Sell order or Ask
Sell order or Ask
Buy order or Bid
Traded via
TIME PERIOD OR DURATION
Outstanding /Unsettled buy
1 2
3 4
MARGINS
•Initial
•Maintenance
•Variation
•Cross
•Additional
•Day
Outstanding /Unsettled sell
Open
Control
Basis swap
Cross currency swap
Issue to
Outstanding /Unsettled buy or sell
TRADING STYLE
Derivate values are measured &
determined by
Differentiates
Rights & NO Obligations

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•Market Order
• Limit Order
•Day
•Week
•Month
•Open order
• Stop Order
•Stop limit
•Stop loss
•Stop buy
PRICE & YIELD
Spot (Cash) or Immediate
Strike (Exercise or nominal)
Maturity (Expiration)
Forward
Futures
Market
SECURITY
MARGINS
•Initial
•Maintenance
•Variation
•Cross
•Profit /loss
•Day
Financial Intermediaries
•Brokers, Institutional banks
Investor /Client
Exchange Traded & OTC (Over The Counter) Markets
National Market System
(ISS1)
DAX
CAC etc
NYSE
NASDAQ
LSE
TOPIX etc
• NSDL &
• CDSL
•BSE
•NSE
•Regional
SWIFT (Society for Worldwide
International Financial Telecommunication)
•CHCIL (ECDS)
(Clearing House Corporation)•Futures & Options
•Forwards & Swaps
Continued …
Determine
Control
Derivative Classes
Order driven
(Auction)
Quote driven
Trading System Types
Determine
Clearing of securities
INTERNATIONAL EXCHANGE MARKETS
CHIPS
(Clearing House Interbank Payment System)
Electronic settlement via Computer networks
1. Interconnected Security Services
Intrinsic Value
Time Value
+
Total Value
=
TIME
Derivative values
Measured by
Time value of contract in market
Round lot
Odd lot
Until cancelled
Trades rounds off the price of security
in terms of multiples of 10, 100, 200 etc
until the specified quoted or order duration
Trades evaluates the
security in the
prevailing price
Evaluates until
the security is withdrawn
or cancelled
Depositories
Stock
exchanges