Assignment

On

Derivative
(Indian Capital Market.)
Date-21/02/2016

2014-16
PGP-GBM

Submitted byAvish Jain(244)

PGP-GBM
Professor

Submitted toMr. Devang Patel

Futures Contract

Option Contract

In futures seller and buyer both have

obligation. futures contract gives the
buyer the obligation to purchase a
specific asset, and the seller to sell
and deliver that asset at a specific
future date unless the holder's
position is closed prior to expiration.

An option gives buyer the right but not the

obligation to buy or sell a certain asset at a
specific price at any time during the life of the
contract. Where seller has obligation to the
contract.

Buyer and seller have unlimited profit

and loss.

In option buyer have limited loss unlimited

profit and seller has limited profit, unlimited
loss.

No premium is require to pay by buyer

to seller.

Premium is require to pay by buyer to seller.

Both buyer and seller require to

margin.

In option buyer only require to pay premium

where seller require to pay minimum margin.

Price is zero, Strike price

moves(futures price).

Strike price is fixed, price moves(premium).

Q.1.Difference between Futures and Option Contract

Q.2.
a.)Trading volume:Volume represents the total amount of trading activity or contracts that have changed hands
in a given commodity market for a single trading day. The greater the amount of trading
during a market session the higher will be the trading volume.A higher volume bar on the
chart means that the trading activity was heavier for that day. Another way to look at this, is
that the volume represents a measure of intensity or pressure behind a price trend. The
greater the volume the more we can expect the existing trend to continue rather than
reverse. Technicians believe that volume precedes price, meaning that the loss of upside
price pressure in an uptrend or downside pressure in a downtrend will show up in the volume
figures before presenting itself as a reversal in trend on the bar chart.
b.)Open interest:-

Open Interest is the total number of outstanding contracts that are held by market
participants at the end of each day. Where volume measures the pressure or intensity
behind a price trend, open interest measures the flow of money into the futures market. For
each seller of a futures contract there must be a buyer of that contract. Thus a seller and a
buyer combine to create only one contract. Therefore, to determine the total open interest for
any given market we need only to know the totals from one side or the other, buyers or
sellers, not the sum of both.

Q.3).
a.)Option buyer:The one who pay the premium to seller or by paying the option premium buys the right but
no obligation to exercise his option on the seller.
b.)Option seller:He is the one who receive the option premium and has obligation but no right if buyer
exercise on him.
c.)Exercise price:The price at which buyer exercise his option is called exercise price. Also called as strike
price.
d.)Option premium:It is the price which option buyer pay to the option seller.
e.) Expiration date:The last date on which the option expire(specified in contract) is called expiration date.

Q.4.) Difference between hedgers, speculators and arbitrageurs with reference to

derivatives market.

Objective

Hedgers

Speculators

Arbitrageurs

Reduce risk or limit the

price risk

Anticipate the
futures price
moment to make
profit out of it

to take advantage of
price inefficiency or
discrepancy

Risk
Transfer risk

no risk(execution risk)
Accept risk

Position

Strategy

no risk for arbitrage

Pre risk existing
position

Long hedge and short

hedge

Create risky position

Long (buy) position

and short(sell)
position

cash and carry arbiter

age(buy spot sell
futures)
reverse cash and
carry(sell spot buy
futures)

Q.5.Profit and loss accruing to a buyer of a call option contract.

In option buyer uses his right to buy shares at some above specific price. Consider buyer
will buy shares when price will go above Rs.1000.so buyer have to pay some premium to
seller to fix this transaction. In this case buyer have paid Rs.10 premium to seller. If price is
between 900 to 1000 then buyer wont purchase and Buyer will have only limited loss
Rs10.But if price will be beyond 1000 then buyer will have unlimited profit.
Strike Price

Buyer profit and loss

900

(10)

950

(10)

1000

(10)

1050

40

1100

90

Q.6. Basic risks involved in the trading of derivatives instruments.

Risk of higher volatility(up and down)

Risk of lower liquidity(less buyer and seller)
Risk of wider spread(bid ask spread)
Risk of risk reducing orders(stop order limit order)
Risk of news announcement(whether you know or not)
Risk of rumours
System risk
Network congestion

Effect of leverage(gearing futures)

Risk of option buyer and seller
Deposited case and other securities
Commission and other charges