2. Contract
Price is derived from or is dependent upon an
underlying asset.
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YOGESH NAMDEO INGLE.MBA (FINANCE), NET
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3. Underlying asset could be a financial asset
such as
1. Currency
2. Stock and market index
3. An interest bearing security
4. Physical commodity
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YOGESH NAMDEO INGLE.MBA (FINANCE), NET
(MANAGEMENT), Ph.D (WIP), G.D.C &A, NCMP.
4. Derivative contracts are also traded on –
1. Electricity
2. Weather
3. Temperature
4. Volatility
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YOGESH NAMDEO INGLE.MBA (FINANCE), NET
(MANAGEMENT), Ph.D (WIP), G.D.C &A, NCMP.
5. According to the Securities Contract
Regulation Act, (1956) the term “derivative”
includes:
A security derived from a debt instrument,
share, loan, whether secured or unsecured,
risk instrument or contract for differences or
any other form of security.
A contract which derives its value from the
prices or index of prices of underlying
securities.
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YOGESH NAMDEO INGLE.MBA (FINANCE), NET
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7. Forward Contracts
An agreement to buy or sell an asset on a
specified date for a specified price.
Long position
Short position
Negotiated bilaterally by the parties to the
contract.
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YOGESH NAMDEO INGLE.MBA (FINANCE), NET
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8. Features of forward contracts
Bilateral contracts
Unique
Not available in public domain
Has to be settled
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YOGESH NAMDEO INGLE.MBA (FINANCE), NET
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9. Limitations of forward contracts
Lack of centralization of trading,
Illiquidity
Counterparty risk
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YOGESH NAMDEO INGLE.MBA (FINANCE), NET
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10. Introduction to Futures
Standardized and exchange traded
Quantity of the underlying
Quality of the underlying
The date and the month of delivery
The units of price quotation and minimum
price change
Location of settlement
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YOGESH NAMDEO INGLE.MBA (FINANCE), NET
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13. Options Contracts
An option gives the holder of the option the
right to do something in future. The holder
does not have to exercise this right.
Purchase of an option requires an up-front
payment.
Non linear or asymmetrical profit profiles
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YOGESH NAMDEO INGLE.MBA (FINANCE), NET
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14. Buyer of an option: The buyer of an option is
the one who by paying the option premium
buys the right but not the obligation to exercise
his option on the seller/ writer.
Writer of an option: The writer of a call/put
option is the one who receives the option
premium and is thereby obliged to sell/buy the
asset if the buyer exercises on him.
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YOGESH NAMDEO INGLE.MBA (FINANCE), NET
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15. Two basic types of options
Call option
It gives the holder the right but not the
obligation to buy an asset by a certain date for
a certain price.
Put option
A It gives the holder the right but not the
obligation to sell an asset by a certain date for
a certain price.
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YOGESH NAMDEO INGLE.MBA (FINANCE), NET
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20. Swaps
Swaps are private agreements between two
parties to exchange cash flows in the future.
The two commonly used swaps
Interest rate swaps: These entail swapping
only the interest related cash flows between
the parties in the same currency.
Currency swaps: These entail swapping both
principal and interest between the parties, with
the cash flows in one direction being in a
different currency than those in the opposite
direction.
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YOGESH NAMDEO INGLE.MBA (FINANCE), NET
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21. Participants in a Derivative
Market
Hedgers
Speculators
Arbitrageurs
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23. Distinction between Futures and
Forwards
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YOGESH NAMDEO INGLE.MBA (FINANCE), NET
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24. Basic purpose of derivatives
The main purpose of derivatives is to transfer risk
from one person or firm to another, that is, to
provide insurance.
For example-
If a farmer before planting can guarantee a certain
price he will receive, he is more likely to plant.
Derivatives improve overall performance of the
economy
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