Presentation on Derivatives Hasan A Bilgrami Karachi, March 18, 2006.

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Presentation transcript:

Presentation on Derivatives Hasan A Bilgrami Karachi, March 18, 2006

Presentation Objectives Introduction to Derivatives: –Definitions; –Futures; –Options; –Swaps. Taxation strategy

Definition Any asset which derives its value from an underlying asset Shares Asset Backed Securities Mortgage Backed Securities

Futures An agreement made today for a transaction on a future date. Is 'listed' else called 'Forward'; Obligatory for both buyer and seller; Actual delivery may take place; Mainly used in Agricultural products, currencies, oil etc. Gains/losses are capital items in nature March 18th: Deliver 10,000 bales of cotton on January 18 th at Rs. 1,000/bale

Options An agreement made today for a transaction on a future date in such a way that it gives an 'Option' to the buyer and creates an obligation to the seller. May or may not be 'listed'; Option is always created on an underlying asset e.g. Shares, interest rates, currencies, commodities etch etc. Gains/losses are capital items in nature March 18: Purchase 10,000 Rs. 65/Share on April 1.

Swaps Notional exchange of cash flows; Is always a private transaction. Gains losses are not capital in nature First Bank exchanges US $ 10m with Second Bank for a period of 1 year. Pays 10% fixed, receives KIBOR + 1%

Why do it? Speculation; Hedging; Price discovery; Levrage; Executive compensation.

Tax strategy objectives –Capital formation; –Broadening corporate ownership; –Bringing market discipline; –Reducing Risk; –Revenue collection

THANK YOU