Beruflich Dokumente
Kultur Dokumente
Sonal
Agenda
History
Introduction to Exchange
Open outcry system
Instruments
Types of Traders
History
The first exchange for trading derivatives appeared
1891
The
Options Contracts
Chicago
Board of Trade
Chicago Mercantile Exchange
New York Mercantile Exchange
Montreal Exchange
Philadelphia exchange - currency options
London International Financial Futures Exchange
(LIFFE)
London Traded Options Market (LTOM)
Others- Australia, Switzerland, etc.
9
10
Forwards
Futures
Options
Swaps
Instruments
Instruments
Derivatives
Physical
OTC
Spot
Exchange
Forwad
Options
Forward
Swaps
Options
Future
Derivatives
Uses of Derivatives
Risk
management
Income generation
Financial engineering
15
Product Characteristics
16
Product Characteristics
(contd)
The
17
Product Characteristics
(contd)
Listed
OTC
Product Characteristics
(contd)
Options
Forward Contracts
Forward contract is a non-standardized contract
between two parties to buy or sell an asset at a
specified future time at a price agreed upon today.
Non-Standardized-
involved.
Specified Future time- Any time in future when the delivery
is to be made.
Price Agreed upon Today- Price is mutually decided at the
time of entering into the contract.
Generally done in OTC market
OR
Example(Normal forward
contract)
BP
Example(Hedging)
BP
Futures
What is Futures Market?
A location where trading (buy-sell) in commodities is conducted in
accordance with specific rules, procedures, and guarantees.
Futures (Contd.)
FUTURES CONTRACTS
A contractual agreement to buy /sell a particular
commodity or financial instrument at a predetermined price in
the future.
Detail
Exchange
Features Of Exchange
Platform for buyer & seller to transact with full
anonymity.
Standardized Contracts They are predefined
with Quantity, Quality, Delivery Month, Delivery
Location, Lot Size, etc (not flexible like the OTC
market)
Settlement Process, Pricing Methodology, etc
defined by the exchange
Exchange mitigates counterparty credit risk
Roles of Exchange
Anonymous auction platform
-price discovery by matching of demand-supply
Neutrality conflict of interest avoided.
Liquidity to participants
Standardized specifications- contract structure
Standard margining system
Role of Exchange
Risk
Open Outcry
A method of communicating on a stock,
commodity or futures exchange .
Involves verbal bids and offers as well as hand
signals to convey trading information in the
trading pits.
A contract is made when one trader cries out
that they want to sell at a certain price and
another trader responds that they will buy at that
same price.
Also called pit trading.
Example: NYMEX
Forwards vs Futures
Forwards
Futures
Standardized contracts
Contd..
Forwards
Futures
Options
Example
Mr A buys a European call option with a
strike price of $5/mmbtu to purchase
1mmbtu of Natural gas, the expiration date
of the option is in one month, the premium
price is $1/mmbtu.
If price in exchange is $8/mmbtu on the
expiration date.
Mr A will have an option whether to execute
the contract.
If he executes the contract there will be a
profit of $2/mmbtu.($8-$5-$1)
If he doesnt loss of $1(premium).
Example
Mr A bought an European put option with a
strike price of $5/mmbtu to sell 1mmbtu of
Natural gas, the expiration date of the option is
in one month, the premium price is $1/mmbtu.
If price in exchange is $8/mmbtu on the
expiration date.
Mr A will have an option whether to execute the
contract.
If he executes the contract there will be a loss
of $2($8-$5-$1).
In case he doesnt execute the contract there
will be loss of $1.
at a
Put Option
Premium
Option holder
Option writer (seller) Sells the option, has obligations, has a short option
position
Mechanics of options
Call Option
-- Buyer
Has the right to buy a futures contract at a predetermined price on or before a
defined date. Expectation: Rising prices
-- Seller
Grants right to buyer, so has obligation to sell futures at predeter- mined price
at buyer's discretion. Expectation: Neutral or falling prices
Put Option
-- Buyer
Has right to sell futures contract at a predetermined price on or before a
defined date. Expectation: Falling prices
-- Seller
Grants right to buyer, so has obligation to buy futures at a predetermined price
at buyer's discretion. Expectation: Neutral or rising prices
Swaps
A swap is a purely financial transaction designed to transfer price risk between the swap purchaser
and the swap provider.
Plain vanilla OTC agreement
Fixed for floating exchange of risk
Purely a financial transaction no delivery
Settlement:
floating price lower than fixed (swap) price swap provider pays swap buyer
If floating price is higher than fixed (swap) price buyer pays seller/provider.
If
Example four month fix for Brent crude oil at $25.00 bbl:
Jan
Feb
March
April
Floating price ($/bbl)
24.50
24.75
25.40
Quantity (bbls)
10,000
10,000
10,000
Actual cost $ 245,000
247,500
254,000
268,000
Swap seller pays
0
0
4,000
Swap buyer pays
(5,000)
(2,500)
0
Final cost to buyer
250,000
250,000
250,000
Cost to buyer $/bbl
25.00
25.00
25.00
26.80
10,000
18,000
0
2,50,000
25.00
Types of Traders
Hedgers-reduce
Example (Arbitrageurs)
Price
in CME is $100/barrel.
Price in MCX is $101/barrel.
Cost of transportation from US to India is
$.5/barrel
In this case a traders will take long position in
US market and short position in Indian
Market thereby making a profit of $.5/barrel.
NG
Venue
Hours
(All Times are
New York
Time/ET)
Contract Unit
NG
Pricing Quotation
Minimum Price
Increment
Termination of Trading
Listed Contracts
Code
NG
Settlement Type
Physical
Exchange Rule
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