Sie sind auf Seite 1von 17

Derivative Instruments- Future, Forward

Presented By Ganesha.CK

Contents
Introduction
What is Derivatives

Features of Derivative Instruments


Participants in Derivative market Reasons to use Derivatives Concepts to understand Future contract, Features Forward contract, Features Payoff, Offsetting,

Introduction
In the financial marketplace some instruments are regarded as fundamentals,
while others are regarded as derivatives.

Financial Marketplace

Derivatives

Fundamentals

Introduction

(II)

Financial Marketplace

Derivatives Futures Forwards Options Swaps

Fundamentals Stocks Bonds Etc.

What is a Derivative? (I)

Options
The value of the derivative instrument is DERIVED from the underlying security

Futures

Forwards

Swaps
Underlying instrument such as a commodity, a stock, a stock index, an exchange rate, a bond, another derivative etc..

What is a Derivative? (II)

Futures

The owner of a future has the OBLIGATION to sell or buy


something in the future at a predetermined price.

Forwards

The owner of a forward has the OBLIGATION to sell or buy

something in the future at a predetermined price. The difference


to a future contract is that forwards are not standardized. The owner of an options has the OPTION to buy or sell something at a predetermined price and is therefore more costly than a futures contract.

Options

Swaps

A swap is an agreement between two parties to exchange a sequence of cash flows.

Features of Derivative Instrument


A Derivative instruments relates to the future contract
between two parties.

Derivative instruments have the value (Derived from


underlying assets )

The counter parties have specified obligation under


derivative control. (all contracts are different)

The size of the derivative depends upon its notional


amount. Derivatives are also called deferred delivery or deferred payment instrument. ( short and long position)

Participants in Derivative Market


The participants in the derivative markets an be Banks, FIIs, Corporate, Brokers. Etc He is a person who undertakes a position in future and other markets for purpose of reducing exposure to one or more types of risk. Speculators are operators who are willing to take a risk by taking future position with the expectation to earn profits. They are the operators who deal in different markets simultaneously for profit and eradicate the mispricing of securities across different markets. He is a person who believes in lower expected return at the reduced risk .

1.Hedgers

2.Speculators

3.Arbitrageurs

4.Spreaders

Reasons to use derivatives (I)


Derivative markets have attained an overwhelming popularity for a variety of reasons...

Hedging:

Interest rate volatility Stock price volatility Exchage rate volatility Commodity prices volatility

VOLATILITY

Speculation:

High portion of leverage Huge returns

EXTREMELY RISKY

Reasons to use Derivatives (II)

Also derivatives create...


a complete market, defined as a market in which all identifiable payoffs can be obtained by trading the securities available in the market. and market efficiency, characterized by low transaction costs

and greater liquidity.

Concepts to Understand

Short Selling:

Short selling is the selling of a security that the seller does not own. Short sellers assume the risk that they will be able to buy the stock at a more favorable price than the price at which they sold short.

Holding Long Position:


Investors are legally owning a security. Investors are the legal owners of a security.

Future Contracts (I)


The owner of a future contract has the Futures OBLIGATION to sell or buy something in the future at a predetermined price.(Ex Former) 1.Commodity futures - underlying asset is a commodity 2.Financial futures - underlying is asset

Types
1. Interest rate future: Treasury bills, notes, bonds, debenture etc..

2. Foreign currency future:


3. Stock index future: 4. Bond index future:

Features of Future contract


1. Standardization : specification, quality, quantity of asset, date & month of delivery, etc..
2. Clearing House : Intermediary, Guarantee.

3. Settlement Price : Dr or Cr profit or loss.

4. Daily settlement and margin : 1 Initial margin 2. Maintenance margin 3. Variation margin 5. Delivery : expiry date

Forward Contracts (II)


Forwards
The owner of a forward has the OBLIGATION to sell or buy something in the future at a predetermined price. The difference to a future contract is that forwards are not

standardized.
A Forward Contract underlies the same principles as a future contract, besides the aspect of non-standardization.

Example: x enter into contact on 1st October 2005 To buy 50 shares at Rs 1000 on 1st December 2005 from y x has to pay 50000 on 1st December 2005

Features of Forward contracts


they are bilateral contract counter risk

they are unique in terms of size, expiration date, asset size of both parties.
It specifies future date of delivery and payment. It obligates the buyer and seller to delivery of assets. It specifies the price which determined presently is to be paid in future

Payoff from forward contract


To explain profit and loss (payoff) on a forward contract

What is Offsetting the Forward contract?


In forward contract the party bears the risk until the contracts expire because profit to be incurred will depend upon the future spot price of the underlying assets

THANK YOU ALL

Das könnte Ihnen auch gefallen