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    Derivatives Market

    Uploaded by

    Shushmita Soni
    The document defines and describes various types of derivatives. It begins by defining a derivative as a contract whose price is dependent on an underlying asset such as a security, index, or commodity. Derivatives help transfer risk, discover prices, and increase savings and investment. The main participants are hedgers who offset risk, speculators who bet on price movements, and arbitrageurs who seek mispriced assets. Over-the-counter derivatives are customized contracts traded between two parties, while exchange-traded derivatives are standardized contracts that trade on an exchange. Common OTC derivatives include forwards, swaps, and options, while futures are exchange-traded.

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    Derivatives Market

    Uploaded by

    Shushmita Soni
    248 views12 pages
    The document defines and describes various types of derivatives. It begins by defining a derivative as a contract whose price is dependent on an underlying asset such as a security, index, or commodity. Derivatives help transfer risk, discover prices, and increase savings and investment. The main participants are hedgers who offset risk, speculators who bet on price movements, and arbitrageurs who seek mispriced assets. Over-the-counter derivatives are customized contracts traded between two parties, while exchange-traded derivatives are standardized contracts that trade on an exchange. Common OTC derivatives include forwards, swaps, and options, while futures are exchange-traded.

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    Basics of Derivative market

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    The document defines and describes various types of derivatives. It begins by defining a derivative as a contract whose price is dependent on an underlying asset such as a security, index, or commodity. Derivatives help transfer risk, discover prices, and increase savings and investment. The main participants are hedgers who offset risk, speculators who bet on price movements, and arbitrageurs who seek mispriced assets. Over-the-counter derivatives are customized contracts traded between two parties, while exchange-traded derivatives are standardized contracts that trade on an exchange. Common OTC derivatives include forwards, swaps, and options, while futures are exchange-traded.

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    248 views12 pages

    Derivatives Market

    Uploaded by

    Shushmita Soni
    The document defines and describes various types of derivatives. It begins by defining a derivative as a contract whose price is dependent on an underlying asset such as a security, index, or commodity. Derivatives help transfer risk, discover prices, and increase savings and investment. The main participants are hedgers who offset risk, speculators who bet on price movements, and arbitrageurs who seek mispriced assets. Over-the-counter derivatives are customized contracts traded between two parties, while exchange-traded derivatives are standardized contracts that trade on an exchange. Common OTC derivatives include forwards, swaps, and options, while futures are exchange-traded.

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    of 12
    At a glance
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    The key takeaways are that derivatives are financial contracts whose value is dependent on an underlying asset, and they help transfer risks, discover prices, catalyze activities, and increase savings and investments.

    Derivatives markets help in transferring risks, discovering future and current prices, catalyzing entrepreneurial activity, and increasing savings and investments in the long run.

    The main participants in derivatives markets are hedgers who aim to reduce risk, speculators who take risks to profit from price movements, and arbitrageurs who exploit short-term price differences between markets.

    DERIVATIVES

    MARKET
    WHAT IS A “DERIVATIVE”?
    The term ‘Derivative’ stands for a contract whose price is derived from
    or is dependent upon an underlying asset.
    The underlying asset could be a financial asset such as currency, stock
    and market index, an interest bearing security or a physical
    commodity.
    As Derivatives are merely contracts between two or more parties,
    anything like weather data or amount of rain can be used as
    underlying assets.
    NEED FOR DERIVATIVES
    The derivatives market performs a number of economic functions. They
    help in :
    Transferring risks
    Discovery of future as well as current prices
    Catalyzing entrepreneurial activity
    Increasing saving and investments in long run.
    PARTICIPANTS IN DERIVATIVE MARKETS
    Hedgers

    Speculators

    Arbitrageurs
    WHAT IS OTC (OVER THE COUNTER)??
    Over the Counter (OTC) derivatives are those which are privately
    traded between two parties and involves no exchange or
    intermediary.

    Non-standard products are traded in the so-called over-the-counter


    (OTC) derivatives markets.

    The Over the counter derivative market consists of the investment


    banks and include clients like hedge funds, commercial banks,
    government sponsored enterprises etc.
    EXCHANGE TRADED DERIVATIVES MARKET
    A derivatives exchange is a market where individuals trade
    standardized contracts that have been defined by the exchange.

    A derivatives exchange acts as an intermediary to all related


    transactions, and takes initial margin from both sides of the trade to
    act as a guarantee.
    CLASSIFICATION OTC
    OF DERIVATIVES
    (Over the
    counter ) trading
    Future Contracts
    Forward Contracts Exchange Traded
    Options Derivatives
    Swaps
    OTC Exchange Traded
    Rupee Interest Rate Forward Rate agreements, Interest Rate futures
    Derivatives Interest rate Swaps

    Foreign Currency Derivatives Forwards, Swaps, Options Currency Futures

    Equity Derivatives Index Futures, Index Options,


    Stock futures, Stock options
    FORWARD CONTRACT
    Forward is a non-standardized contract between two parties to buy
    or sell an asset at a specified future time at a price agreed today.

    For Example: If A has to buy a share 6 months from now. and B has
    to sell a share worth Rs.100. So they both agree to enter in a forward
    contract of Rs. 104. A is at “Long Position” and B is at “Short Position”
    Suppose after 6 months the price of share is Rs.110. so, A overall
    gained Rs. 4 but lost Rs. 6 while B made an overall profit of Rs. 6.
    SWAP CONTRACT
    The derivative in which counterparties exchange certain benefits of one party's
    financial instrument for those of the other party's financial instrument. The benefits in
    question depend on the type of financial instruments involved. The types of Swaps
    are:
    Interest rate swaps
    Currency swaps
    Commodity swaps
    Equity Swap
    Credit default swaps
    FUTURES CONTRACT
    Futures contract is a standardized contract between two parties to
    exchange a specified asset of standardized quantity and quality for
    a price agreed today (the futures price or the strike price) with
    delivery occurring at a specified future date, the delivery date.
    Since such contract is traded through exchange, the purpose of the
    futures exchange institution is to act as intermediary and minimize the
    risk of default by either party. Thus the exchange requires both
    parties to put up an initial amount of cash, the margin.
    OPTIONS
    An option is a derivative financial instrument that specifies a contract
    between two parties for a future transaction on an asset at a
    reference price.

    The buyer of the option gains the right, but not the obligation, to
    engage in that transaction, while the seller incurs the corresponding
    obligation to fulfill the transaction.
    Thank You !!

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