Derivative Market in India
Derivative Market in India
Derivative Market in India
Financial
derivatives are financial instruments whose prices are derived from the prices of other financial instruments which are also know as underlying. It relates to equities, loans, bonds,
TYPES OF DERIVATIVES
OPTIONS FUTURES SWAPS
OPTIONS
TYPES:
EXCHANGE TRADED OPTIONS OVER THE COUNTER OPTIONS EMPLOYEE STOCK OPTIONS STOCK INDEX OPTIONS INTREST OPTIONS CURRENCY OPTIONS RANGE FORWARD(RF) RATIO RANGE FORWARDS CONTRACTS(RRFS) SWAPTIONS
BENEFITS
CALLS- Control a claim on underlying asset. PUTS- Duplicate a short sale without margin account. Possibility of windfall profits. Investment opportunities. Reduction of total portfolio transaction cost. Participation in overall market
FUTURES
CHARACTERISTICS:
TRADING RISK SETTLEMENT
SERVICES RENDERED
Provide hedging facilities to buyers and sellers to protect them against unpredictable price fluctuations over time. Introduce an element of stability market prices.
SWAPS
It
is an agreement between two parties to exchange sequences of cash flows for a set period of time.
Notional amount- 100 lakh Maturity- 5 years Fixed rate payer- Alpha Corp. Floating rate payerGamma Corp. Fixed Rate- 5 %, semiannual Floating rate- 3 month
TERMS: EXAMPLE:
Alpha Corp
Gamma Corp
Alpha Corp agrees to pay 5 % of 100 lakhs on a semiannual basis to Gamma Corp. for the next 5 years. That is, Alpha will pay 2.5 % of 100 lakhs, or 2.5 lakhs, twice a year. Gamma Corp agrees to pay 3-month LIBOR on a 3-monthly basis (or quarterly basis) to Alpha Corp for the next 5 years. That is, Gamma will pay the 3-month LIBOR rate, divided by four and multiplied by the notional amount, four times per year. For example, if the 3-month LIBOR is 2.4 % on the reset date, Gamma will pay 2.4% / 4 = 0.6% of 100 lakhs = 0.6 lakhs every 3
VALUATION OF DERIVATIVES
a) b) c) d) e)
Pricing options:
COV = MPS [N (d)] EP [antilog (-rt)] [N (d2)] Where; COV= Call option value MPS = Current price of underlying asset N(d) = Cumulative density function EP = Exercise price of option R = Continuity compounded risk less rate of interest on an annual basis. T = Time remaining before the expiration of
IMPORTANCE
To minimize risk. To protect the interest of individual and institutional investors. Offers high liquidity and flexibility. Does not create new risk and minimizes existing ones. Lowers transaction cost. Provides information on market movement. Provides wide choice of hedging. Convenient, low cost and simple to operate.