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    Financial Instruments Derivatives PPT MBA FINANCE

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    Babasab Patil (Karrisatte)
    This document provides an overview of various types of derivative financial instruments, including futures, forwards, options, and swaps. It defines derivatives as financial instruments whose value is based on an underlying asset such as a stock, bond, commodity, or currency. The key points covered include: - Derivatives allow parties to hedge against volatility in prices and lock in future prices. Speculators can also take on risk for potential profit. - Futures and forwards obligate buyers and sellers to exchange the underlying asset at a predetermined price and date. Options provide the right but not obligation to buy or sell the asset. - Swaps involve an agreement between two parties to exchange a series of cash flows over time

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    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd

    Financial Instruments Derivatives PPT MBA FINANCE

    Uploaded by

    Babasab Patil (Karrisatte)
    2K views24 pages
    This document provides an overview of various types of derivative financial instruments, including futures, forwards, options, and swaps. It defines derivatives as financial instruments whose value is based on an underlying asset such as a stock, bond, commodity, or currency. The key points covered include: - Derivatives allow parties to hedge against volatility in prices and lock in future prices. Speculators can also take on risk for potential profit. - Futures and forwards obligate buyers and sellers to exchange the underlying asset at a predetermined price and date. Options provide the right but not obligation to buy or sell the asset. - Swaps involve an agreement between two parties to exchange a series of cash flows over time

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    Financial Instruments Derivatives Ppt @ Bec Doms Bagalkot Mba Finance by babasab patil

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    Financial Instruments Derivatives Ppt MBA FINANCE

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    This document provides an overview of various types of derivative financial instruments, including futures, forwards, options, and swaps. It defines derivatives as financial instruments whose value is based on an underlying asset such as a stock, bond, commodity, or currency. The key points covered include: - Derivatives allow parties to hedge against volatility in prices and lock in future prices. Speculators can also take on risk for potential profit. - Futures and forwards obligate buyers and sellers to exchange the underlying asset at a predetermined price and date. Options provide the right but not obligation to buy or sell the asset. - Swaps involve an agreement between two parties to exchange a series of cash flows over time

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    2K views24 pages

    Financial Instruments Derivatives PPT MBA FINANCE

    Uploaded by

    Babasab Patil (Karrisatte)
    This document provides an overview of various types of derivative financial instruments, including futures, forwards, options, and swaps. It defines derivatives as financial instruments whose value is based on an underlying asset such as a stock, bond, commodity, or currency. The key points covered include: - Derivatives allow parties to hedge against volatility in prices and lock in future prices. Speculators can also take on risk for potential profit. - Futures and forwards obligate buyers and sellers to exchange the underlying asset at a predetermined price and date. Options provide the right but not obligation to buy or sell the asset. - Swaps involve an agreement between two parties to exchange a series of cash flows over time

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    of 24

    Financial Instruments Money & Banking

    -Derivatives PRESENTED BY:BABASAB PATIL

    Content Outline
    1. 2. 3. 4. 5. 6. 7. 8. 9. Introduction What is a derivative? Reasons to use derivatives Concepts to understand Futures Forwards Options Swaps Questions

    Introduction (I)
    In the financial marketplace some instruments are regarded as fundamentals , while others are regarded as derivatives .

    Financial Marketplace

    Derivatives

    Fundamentals

    Simply another way to catagorize the diversity in the FM*.


    *Financial Market

    Introduction (II)
    Financial Marketplace

    Derivatives Futures Forwards Options Swaps

    Fundamentals Stocks Bonds Etc.

    What is a Derivative? (I)


    Options
    The value of the derivative instrument is DERIVED from the underlying security

    Futures

    Forwards

    Swaps
    Underlying instrument such as a commodity, a stock, a stock index, an exchange rate, a bond, another derivative etc..

    What is a Derivative? (II)


    Futures
    The owner of a future has the OBLIGATION to sell or buy something in the future at a predetermined price.

    Forwards

    The owner of a forward has the OBLIGATION to sell or buy something in the future at a predetermined price. The difference to a future contract is that forwards are not standardized .

    Options

    The owner of an options has the OPTION to buy or sell something at a predetermined price and is therefore more costly than a futures contract. A swap is an agreement between two parties to exchange a sequence of cash flows.

    Swaps

    Reasons to use derivatives (I)


    Derivative markets have attained an overwhelming popularity for a variety of reasons...

    Hedging:

    Interest rate volatility Stock price volatility Exchage rate volatility Commodity prices volatility

    VOLATILITY Speculation:
    High portion of leverage Huge returns

    EXTREMELY RISKY

    Reasons to use Derivatives (II)


    Also derivatives create...
    a complete market , defined as a market in which all identifiable payoffs can be obtained by trading the securities available in the market*. and market efficiency , characterized by low transaction costs and greater liquidity.

    Concepts to Understand
    Short Selling:
    Short selling is the selling of a security that the seller does not own. Short sellers assume the risk that they will be able to buy the stock at a more favorable price than the price at which they sold short.

    Holding Long Position:


    Investors are legally owning a security. Investors are the legal owners of a security.

    Future Contracts (I)


    Futures Scenario:
    You are a farmer and you know that you will harvest corn in three months from today on. How can you protect yourself from loosing if corn price happens to drop until March by using corn forward contracts? The owner of a future contract has the OBLIGATION to sell or buy something in the future at a predetermined price.

    t 1/1 3/1 Harvest

    Future Contracts (II)


    You lock into a price by holding a short position in a corn future contract with a maturity date a little bit longer than the harvest date.

    Suppose the price drops...


    You close out the corn contract and the gain in the futures market will offset the loss in the sport market

    You either take delivery and lock in a price.

    A futures contract makes unfavourable price movements less unfavourable and a favourable price movements less favourable!

    Future Contracts (III)


    General Rule for Hedgers:
    If you are going to sell something in the near future but want to lock in a secured price, you take a short position.

    If you are going to receive/buy something in the future but want to lock in a secured price, you take a long position.

    Future Contracts (IV)


    The Role of Speculators:
    As the name implies, speculators are involved in price betting and take the risk of price movements against them.

    Assume the following:


    You, as hedger, believe that prices will raise. Thus, you are convinced that a long position will benefit you.

    Key Word: Zero-Sum-Gain Large gains due to the concept of leverage

    Forward Contracts (I)


    Forwards
    The owner of a forward has the OBLIGATION to sell or buy something in the future at a predetermined price. The difference to a future contract is that forwards are not standardized.

    A Forward Contract underlies the same principles as a future contract, besides the aspect of non-standardization. Thus, a detail illustration is not necessary as I already elaborated in the mechanism of the futures contract.

    Options (I)
    Options
    The owner of an options has the OPTION to buy or sell something at a predetermined price and is therefore more costly than a futures.

    Some terms to understand:


    Call option Put option Excersice price / strike price Option premium Moneyness (in-the-money, at-the-money, out-of-money) European vs. American Options

    Options (II)
    The four basic positions: Call Option Write Purchase

    Write Put Option Purchase

    Options (III)
    Write & Purchase Call Option:

    Value

    Long Call

    x
    Stock Price at Expiration

    Short Call

    Options (IV)
    Write & Purchase Call Option:

    Profit and Loss

    Long Call Zero-Sum-Game

    Premium Earned x Premium Paid Short Call

    Stock Price at Expiration

    Options (V)
    Write & Purchase Call Option:

    Profit and Loss

    Long Put

    Stock Price at Expiration

    Short Put

    Options (VI)
    Write & Purchase Call Option:

    Profit and Loss

    Long Put Premium Earned


    Stock Price at Expiration

    Short Put

    Premium Paid

    Swaps (I)
    Swaps
    Counterparties Interest rate swaps Currency swaps Phenomenal growth of the swap market Future and Option markets only provide for short term investment horizon Traded in OTC markets with little regulations No secondary market Market limited to institutional investors A swap is an agreement between two parties to exchange a sequence of cash flows.

    Swaps (II)
    A Plain Vanilla Interest Rate Swap:
    An interest rate swap is an agreement between two parties to exchange a sequence of fixed interest rate payments against floating interest rate payments.

    Terms to understand:
    Fixed side Receive-fixed side Tenor Notional amount

    Swaps (III)
    Example:
    5 year tenor; notional amount $1 million; Party A is the fixed side paying 9%, Party B is the receive-fixed side, paying a LIBOR flat rate

    Party A 0 Party B 0

    Libor*$1m

    Libor*$1m Libor*$1m Libor*$1m Libor*$1m

    1
    $90,000 $90,000

    2
    $90,000 $90,000

    3
    $90,000 $90,000

    4
    $90,000 $90,000

    5
    $90,000 $90,000

    1
    Libor*$1m

    Libor*$1m Libor*$1m Libor*$1m Libor*$1m

    QUESTIONS

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