V Derivatives are financial contracts whose

value/price is dependent on the behavior of

the price of one or more underlying assets.
V These contracts are legally binding
agreements made on the trading screen of
stock exchanges, to buy or sell an asset in
future.
V A derivative by itself does not constitute
ownership, instead it is a promise to convey
ownership.
V Rnderlying securities for derivates are:
V Commodities (grain, coffee, pepper,
potatoes, etc.,)
V Precious metals (gold, silver, etc.,)
V Short term debt securities (treasury bills)
V Interest rates
V Common shares
V It includes forwards future contracts, options
and swaps
V Common underlying assets includes interest
rates, exchange rates, commodities, stocks
and bonds
V The two most common type of derivatives
are future and options
V It has one or more underlying assets
V Requires negligible initial investments
compared to other types of financial
contracts
V Should provide for net settlement
V Derivative contracts are traded both on
established exchanges like NSE, Chicago
Board of Option Exchange and OTC
ETD (Exchange Traded Derivatives) Ȃ
V Derivatives traded on the regulated
exchanges are highly standardized.
V The parties to the contracts do not decide the
terms of the contracts.
V It offers maximum protection to the
investors.
OTC (Over The Counter) -
V It encompass tailored financial derivatives
such as swaps.
V Traded in the offices of the worldǯs leading
financial institutions.
V These contracts are customized (the term of
OTC contracts are individually agreed
between two counter parties).
V orward Contracts
V uture Contracts
V Options
V Swaps
V Interest Rates Swaps
V Currency Swaps
V Trading derivative contracts were legal
before 1977.
V In June 2000, NSE and BSE started trading in
futures on Sensex and Nifty.
V Option trading commence in June 2001.
V Discovery of prices
V Transfer of Risk
V Liquidity and Volume Trading
V Trading Catalysts
V (edgers
V Speculators
V Arbitragers
V It is an agreement between two parties to
buy or sell underlying assets at a
predetermined future date at a price agreed
when the contract in two.
V They are not standardized products
V They are OTC derivatives that are tailored to
meet specific user needs.
V The underlying assets of this contract
includes:
V Traditional agricultural or physical
commodities.
V Currencies ( forwards)
V Interest rates (forward rate agreements or
RAs)
orward contracts in India is broadly governed
by the orward Contracts (Regulations) Act,
1952.
V (edge contracts
V Transferable specific delivery forward
contract
V Non-Transferable specific delivery forward
contract