1. Derivatives  Derivative is a financial contract of pre-determined duration, whose value is derived from the value of an underlying asset. It includes Securities, commodities,bullion, currency, stock, index (interest rates, exchange rates, etc.)

2. What do derivatives do?  Derivatives attempt either to minimize the loss arising from adverse price movements of the underlying asset  Or maximize the profits arising out of favorable price fluctuation. The name derivative signifies that the value is derived from an underlying asset. The name derivative signifies that the value is derived from an underlying asset.

3. Types of Derivatives  Based on the underlying assets derivatives are classified into.  Financial Derivatives  Commodity Derivatives  Index Derivative (example:BSE sensex)

4. How are derivatives used? Derivatives are risk shifting instruments. Hedging is the most important aspect of derivatives. Derivatives can be compared to an insurance policy.

5. What is a Hedge To Be cautious or to protect against loss. In finance, hedging is the act of reducing uncertainty about future price movements in financial security, a commodity or foreign currency. Thus a hedge is a way of insuring an investment against risk.

6. Derivative Instruments. Forward contracts Futures –Commodity –Financial (Stock index, interest rate & currency ) Options –Put –Call Swaps. –Interest Rate –Currency

7. Forward Contracts. It is a bipartite contract, which is to be performed in future at the terms decided today. Example: Jay and Viru enter into a contract to trade in 100 stocks of Infosys after 3 months from today (the date of the contract) @ a price of Rs2800/- Note: Here Product,Price,Quantity & Time have been decided in advance by both the parties. Delivery and payments will take place as per the terms of this contract on the designated date and place.

8. Futures. These are standardized contracts. That is quantity, quality, delivery time and place for settlement in future are pre-definedon any date. These contracts are traded on exchanges. Future markets are very liquid In these markets, clearing corporation or, the clearing house becomes the counter-party to all the trades. It provides the unconditional guarantee for the settlement of trades In other words, the credit risk of the transactions is eliminated by the exchange through the clearing corporation/house.

9. Long and Short Positions in a futures contract Long - this is when a person buys a futures contract, and agrees to receive delivery at a future date. Eg: Viru’s position Short - this is when a person sells a futures contract, and agrees to make delivery. Eg: Jay’s Position

10. Options An option is a contract giving the buyer the right, but not the obligation, to buy or sell an underlying asset at a specific price on or before a certain date. An option is a security, just like a stock or bond, and is a binding contract with strictly defined terms and properties.

11. Strike Price or Exercise Price Price of an option is the specified/ pre- determined price of the underlying asset at which the same can be bought or sold if the option buyer exercises his right to buy/ sell on or before the expiration day. Price of an option is the specified/ pre- determined price of the underlying asset at which the same can be bought or sold if the option buyer exercises his right to buy/ sell on or before the expiration day. Expiration date: The date on which the option expires is known as Expiration Date Exercise: An action by an option holder taking advantage of a favourable market situation trade in the option for stock. Exercise Date: is the date on which the option is actually exercised

12. AMERICAN & EUROPEAN OPTIONS AMERICAN & EUROPEAN OPTIONS European style of options: option which can be exercised by the buyer on the expiration day only & not anytime before that. American style of options: option which can be exercised by the buyer on or before the expiration date, i.e. anytime between the day of purchase of the option and the day of its expiry. Asian style of options: these are in- between European and American. An Asian option's payoff depends on the average price of the underlying asset over a certain period of time. Asian style of options: these are in- between European and American. An Asian option's payoff depends on the average price of the underlying asset over a certain period of time.

13. Call option: An option contract giving the owner the right to buy a specified amount of an underlying security at a specified price within a specified time. Put Option: An option contract giving the owner the right to sell a specified amount of an underlying security at a specified price within a specified time

14. In-the-money: For a call option, in-the-money is when the option's strike price is below the market price of the underlying stock. For a put option, in the money is when the strike price is above the market price of the underlying stock. In other words, this is when the stock option is worth money and can be turned around and exercised for a profit. For a call option, in-the-money is when the option's strike price is below the market price of the underlying stock. For a put option, in the money is when the strike price is above the market price of the underlying stock. In other words, this is when the stock option is worth money and can be turned around and exercised for a profit.

15. Intrinsic Value: The intrinsic value of an option is defined as the amount by which an option is in-the-money, or the immediate exercise value of the option when the underlying position is marked-to-market. For a call option: Intrinsic Value = Spot Price - Strike Price For a put option: Intrinsic Value = Strike Price - Spot Price For a put option: Intrinsic Value = Strike Price - Spot Price

16. Swaps Swap is an agreement between two parties to exchange one set of cash flows for another. In essence it is a portfolio of forward contracts. While a forward contract involves one exchange at a specific future date, a swap contract entitles multiple exchanges over a period of time. The most popular are interest rate swaps and currency swaps.

17. Interest Rate Swap A B Fixed Rate of 12% LIBOR ‘A’ is the fixed rate receiver and variable rate payer. ‘B’ is the variable rate receiver and fixed rate payer. Rs50,00,00,000.00 – Notional Principle Counter Party