Derivatives

Fifth Trimester-
Session-1
Introduction to Derivatives
Prof Bhaskar Reddy
Reddi.bhaskar@gmail.com

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Session-1 Introduction to Derivatives

Session Details

1.1 Introduction to derivatives

1.2 Types of Derivatives
1.3 Factors for growth in derivatives
1.4 Derivatives in India- Prospects and
Policies
1.5 Critiques of Derivatives
1.6 Summary

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Session-1 Introduction to Derivatives

1.1 Introduction to derivatives

Derivatives are financial Instrument or
contracts whose value depends upon the
underlying asset.

So what do you mean by Underlying asset?

Agricultural commodity,Shares, T-bills
Bonds,currencies,Interest rates or
anything
Origin of derivatives – When?

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Session-1 Introduction to Derivatives

1.2 Types of derivatives

Forward, Forward rate agreements

Futures
Options
Swaps
Credit Derivatives

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Session-1 Introduction to Derivatives

1.2 Types of derivatives

Forward:
Transactions involving Delivery of an asset at a
Future date

Forward rate agreements :

Agreement between parties for loan taken
notionally at a specified interest rate
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Session-1 Introduction to Derivatives

1.2 Types of derivatives

Futures;
An Agreement to buy or sell an asset
at a certain time in the future at a
certain price

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Session-1 Introduction to Derivatives

1.2 Types of derivatives

Options:
Contracts Between option writer (seller) and
buyers ,Which obligate the seller to deliver and
entitle the buyer without obligation to buy stated
quantities of asset at future date at today’s
contracted prices

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Session-1 Introduction to Derivatives

1.2 Types of derivatives

Swaps
Contractual Agreement between two counter
parties to exchange a series of cash flows for
an agreed period of time

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Session-1 Introduction to Derivatives

1.3 Factors for growth in derivatives

Increased volatility in the World Economy

Technological changes
Increasing professionalism among market
player
Political developments

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Session-1 Introduction to Derivatives

1.4 Derivatives in India- Prospects and

Policies

Introduced in India In June 2000

Option and futures in 2001
Separate membership for Derivatives
markets
Interest rate derivatives launched in
June 2003

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Session-1 Introduction to Derivatives

1.5 Critiques of Derivatives

Speculative in nature
Increase risk
Instability of financial systtem

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Session-1 Introduction to Derivatives

1.6 Summary

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