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

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

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

5. 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 KCE @ Rs. 1,000/bale

6. 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 PTCL @ Rs. 65/Share on April 1.

7. 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%

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

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

10. THANK YOU