DERIVATIVES

DERIVATIVES

The term derivatives refers to a broad class of final instruments which mainly include options and features.these instruments derive their value from the price and other related variable of underlying asset. They do not worth have their own and derive their value from the claim they give to their owners to owesome other financial assets or security.

Derivatives market s in India have been existence in one form or the other for a long time.derivative s trading commenced in india in June 2000 after SEBI granted the final approval to this effect in may 2001 on the recommendation of L.C Gupta committee. SEBI permitted the derivative segments of two stock exchanges, NSE3 and BSE4 and their clearing corporation to Commence trading and settlements in approved derivatives contracts.

 Flexibility
Risk retension Stable economy

 Credit risk

Crimes
Interest rates

 Management of risk Efficiency in trading

Speculation
Price discover

Price stabilization

DERIVATIVE PRODUCTS

Forward Contract

Future Contract
Option Swap

A forward contract is a way for a buyer or a seller to lock in a purchasing or selling price for an asset, with the transaction set to occur in the future. In essence ,it is a financial contract obligating the buyer to buy, and the seller to sell a given asset at a predetermined price and date in the future. No cash and asset are exchanged until expiry, or the delivery date of the contract. On the delivery date, forward contract can be settled by physical delivery of the asset or cash settlement.

A future contract is a commitment to make or take delivery of a specific quantity of a commodity or other financial obligation at a predetermined place and time in the future. All terms of the contract are standardized and established before hand , except for the price, which is determined by open outcry in a pit or ring on the exchange trading floor of a commodity exchange. All contracts are ultimately settled either through liquidation or by delivery of the actual underlying of physical commodity.

 Nature of contract Existence of secondary market Modus operandi Delivery of asset Downpayment

An option is a contract to buy or sell a specific financial product officially known as the options underlying instruments or underlying interest. For equity underlying instrument is a stock, Exchange Traded Fund(ETF), or similar product. The contract itself is a very precise.it establishes a specific price, called the strike price, at which the contract may be exercised or acted on. And it has an expiration date. When an option expires, it no longer has value and no longer exists.

Call option
Purchase Call option

Put option
Purchase Put option

A swap is nothing but a barter or exchange but it plays a very important role in international finance. A swap is the exchange of one set of cash flows for another. A swap is a contract between two parties in which the first party promises to make a payment to the second and second party promises to make a payment to the first party. Both payments take place on specific date. Different formulas are used to determine what the two sets of payment will be
.

Classification of swaps is done on yhe basis of what the payments based on.there are different types of swaps are as follows: Interest rate swaps Currence swaps Commodity swaps Equity swaps

 Hedging Speculator

Arbitrage

Derivatives provide an effective solution to the problem of risk caused by uncertainity and voltality in underlying in asset. Derivatives are risk management tools that help an organization to effectively transfer risk. Derivatives are instruments which have no independent value. Their value depends on underlying an asset. It may be financial or non-financial.