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Dhaval Sanghavi (MMS) Pratik Mistry (PG FS) Forwards Futures Options Swaps Forwards Futures Options Swaps.

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Presentation on theme: "Dhaval Sanghavi (MMS) Pratik Mistry (PG FS) Forwards Futures Options Swaps Forwards Futures Options Swaps."— Presentation transcript:

1 Dhaval Sanghavi (MMS) Pratik Mistry (PG FS) Forwards Futures Options Swaps Forwards Futures Options Swaps

2 What are Derivatives ?

3 Equities (most common in Indian markets) Commodities (the oldest form of derivatives) Currencies (forex rates) Interest rates Debt instruments (bonds, T – Bills)

4 Traded on stock/derivative exchange Derivative Exchange/Segment - Self- Regulatory Organization (SRO) SEBI - oversight regulator. Clearing & settlement is done through a Clearing House Entities to trading system  Trading member  Clearing member  Trading member – Clearing member  Self clearing member

5 Participants Hedgers Speculators Speculators Arbitrageurs

6 TYPES FORWARD S FUTURES OPTION S SWAPS

7 A Forward contract is an agreement to buy or sell an asset on a specified date for a specific price. Forwards At start Rs 10,40,000Omkar Buy Ashika (Initial price- 10,00,000) Sell Buy Sell OmkarAshika (Market valuation- 11,00,000) Rs 10,40,000 At end of 1 year

8 Bank deposit @ 4% How prices are agreed upon Omkar Buy Rs 10,40,000 Sell Ashika Rs.10,00,000

9 A future contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. They are standard and highly liquid. Futures Example Rahul purchases following two lots of Nifty Futures Contracts on 4th Sept. 2000: Initial Margin is 6%, Amount of Margin -Rs 16,050 (50 Units per Contract on the NSE). October 2000 Series 1 Contract @Rs. 2,500 November 2000 Series 1 Contract @Rs. 2,850

10 Futures payoff

11 Futures Terminology Spot Price (S) Futures price (F) Contract cycle Basis Futures Payoff Cost of carry Contract Size Open Interest Normal Backwardation Contango

12 Initial margin Mark to Market (MTM) margin Example Romit buys Nifty futures at 1300 Day Closing MTM a/c One 1310 +10 Two 1305 -05 Three 1315+10 Total +15 Maintenance Margin

13 i. Futures price spot price during the delivery Period: Sell a futures contract Buy the asset Make delivery ii. Futures price spot price during the delivery period : Companies will acquire the asset. Convergence of Future price to spot price Delivery period – Future price = Spot price

14 June 300 (spot price) September 350 (future price) September Spot price < 350 Later September Future price Now Future price and Expected Future spot Price September Spot price > 350 September Future price OR Commodity-Corn

15 An option is a contract giving the buyer the right, but not the obligation, to buy or sell an underlying (a stock or index) at a specific price on or before certain date. American option Exercise before maturity European option Exercise only on maturity Options

16 Options Terminology Index options Stock Options Option buyer Option seller Option premium Strike Price Expiration Date Open Interest

17 A call option is a contract giving the buyer the right, but not the obligation, to buy an underlying (a stock or index) at a specific price on or before a certain date. Call Options

18 Eg: Spot price: Rs 1000 Strike price = Rs 975 Option premium= Rs 50 Maturity: 3 months Case I : Spot price < Strike price (Rs 950) (Rs 975) Case II : Spot price > Strike price (Rs 1025) (Rs 975) CALL OPTION

19 Spot price9509759901050 ExercisedNo Yes Buyer-50 -3525 Writer50 35-25

20 Call option pay-off BEP 0 -50 50 1025 975 BEP= Strike price + Premium

21 A put option is a contract giving the buyer the right, but not the obligation, to sell an underlying (a stock or index) at a specific price on or before a certain date. Put Options

22 Eg: Spot price: Rs 1000 Strike price = Rs 975 Option premium= Rs 50 Maturity: 3 months Case I : Spot price < Strike price (Rs 950) (Rs 975) Case II : Spot price > Strike price (Rs 1025) (Rs 975) PUT OPTION

23 Spot price95090010001050 ExercisedYes No Buyer-25+25-50 Writer+25-25+50

24 Put option pay-off BEP 0 -50 50 925 975 BEP= Strike price - Premium

25 Moneyness of an option Call Option S>X In the Money S=X At the money S<X Out of the Money Put Option S>X Out of the money S=X At the money S<X In the money

26 Pricing of options Call option Put option INTRINSIC VALUE TIME VALUE = 1000-950 = Rs.50 = 950 – 1000 = Rs.0 Case I - current stock price = Rs 1000 Strike price = Rs 950 option premium = Rs 110 Call option : 110 – 50 = Rs 60 Put option : 110 – 0 = Rs 110

27 Swaps are agreements between two parties to exchange assets or sets of financial obligations or a series of cash flows for a specified period of time at predetermined intervals. They are customized transactions They are not traded on organized secondary market Swaps are largely unregulated Swaps

28 Types of Swap Fixed for Fixed currency Swap Interest rate Swap Equity Swap

29 Fixed for Fixed Currency Swap BB can borrow in USA @ 9% and in Australia @ 8% AA can borrow in Australia @ 7% and in USA @ 10% BB & AA wants to do business in each others country AA needs USD 1 million & BB needs AUD 2 million Both parties will buy fund in local currency. USA rate : 9% Australia rate: 7% Swap period: 5 yrs

30 Fixed for Fixed Currency Swap AA borrows AUD 2 million from Australian bank @ 7% (AUD 1,40,000) BB borrows USD 1 million from USA bank @ 9% (USD 90,000) AA & BB Swap their currency AA gets USD 1 million, agreeing to pay BB @ 10% BB gets AUD 2 million, agreeing to pay AA @ 8% Now AA owes BB 1,00,000 & BB owes AA 1,60,000 USA rate : 9% Australia rate: 7% Swap period: 5 yrs

31 Fixed for Fixed Currency Swap AA pays Australian bank 1,40,000 @ 7% and gets 1,60,000 from BB to whom he lend it @ 8% (Gain of 20,000) BB pays USA bank 90,000 @ 9% and gets 1,00,000 from AA to whom he lend it @ 10% (Gain of 10,000) After 5 yrs they will reverse the Swap USA rate : 9% Australia rate: 7% Swap period: 5 yrs

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