| COVERING TOPICS : |
|---|
| (1) Derivatives Market - History & Evolution |
| (2) Why Derivatives? |
| (3) What is derivatives? Or Definitions of Derivatives. |
| (4) what are the use of derivatives? (A) Hedging (B) Speculation (C) Arbitrage |
| (5) What is the forward derivatives? |
| (6) What is the Futures derivatives? |
| (7) Forwards contact vs. Futures contracts: what's the difference? |
| (8) What is the options derivatives? |
| (9) Types of options. (A) call option (B) put option |
| (10) What is the swaps derivatives? |
Derivatives Market - History & Evolution
12th Century
In European trade fairs , sellers signed contracts promising future delivery of the items they said .
13th Century
There are many examples of contracts entered into by English Cistercian Monasteries , who frequently sold their wool up to 20 years in advance , to foreign merchants.
In 1848 , The Chicago Board of Trade ( CBOT ) Facilitated trading of forward contracts on various commodities .
Why Derivatives ?
- Only Margin Money Required- Positional Short Selling possible without Delivery
- Tool for Risk Management
What are Derivatives ?
- Financial Instruments- Derives its value from an Underlying Asset
- Settlement at a Future Date
- Not Necessary to pay Full Money
What is derivatives? Or Definitions of Derivatives.
What are the use of derivatives?
( i ) Hedging - Managing the Risk , used by those who P are exposed to risk . Academy( ii ) Speculation - Taking risk to earn profit
( iii ) Arbitrage - Taking the risk free position to earn profit from the difference in prices in two markets .
What is Forwards derivatives?
- Contractual agreement between two parties
- To buy / sell the underlying asset - At a certain future date for a particular price that is pre - decided
Customization can be done for Academy :
✓Commodity type
✓Date of delivery
✓Delivery location
✓Contract Size
✓Currency of settlement
What is Futures derivatives?
Like forward contract , futures contract is also an agreement between two parties to buy or sell an asset at predefined date in future at pre - decided price . Futures are traded on exchanges like BSE , NSE etc.
Forward Contracts vs. Futures Contracts: What's the Difference?
| Forwards | Futures | |
|---|---|---|
| NATURE | CUSTOMIZED CONTRACT | STANDARDIZED CONTRACT |
| TRADING | TRADES ON OVER-THE-COUNTER | TRADES ON A EXCHANGE |
| LIQUIDITY | LOW LIQUIDITY | HIGHLY LIQUID LIQUIDITY |
| COUNTERPARTY RISK | HIGH | LOW |
| SETTLEMENT | UPON MATURITY | ANYTIME |
| MARGIN | NO INITIAL PAYMENT | INITIAL MARGIN PAYMENT REQUIRED |
| MARK TO MARKET | NOT MARKED TO MARKET | MARKED ON A DAILY BASIS |
Forward Contracts vs. Futures Contracts
What is Options derivatives?
Options are the financial products which gives the right , to the holder , to buy or sell the underlying asset at predefined price at predefined future date.
Types of Options :
1. Call Option : A call option gives the holder the right to buy the underlying asset at certain price on a set at certain price on a certain date .
2. Put Option : A put option gives the holder the right to sell the underlying asset at certain price on a certain date .
1. Buy an Option :
The buyer of the option pay the right to buy / sale the underlying premium.
He has the has the buy / sale the underlying asset.
2. Sell an Option :
the seller of the option receives the premium and is obligated to buy / sell the underlying asset as per the requirement of option buyers .
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