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Introduction to Derivative Types of Derivative Future vs. Forward Derivative Market Risk in Derivative Market Market Analysis Structure of derivative Market in Nepal Benefits of derivative Market Future vs. Stock Market Trading Procedure in Future Market Calculation of profit/loss. Operators in derivative Market Market interpretation Conclusion & recommendation
Introduction to Derivative
A security whose price is dependent upon or
derived from one or more underlying assets. For ex stocks, bonds, commodities, currencies, interest rates and market indexes.
It is merely a contract between two or more parties
leverage.
Types of derivative
Derivative
future
Option
forward
swaps
Future
A futures contract is a standardized contract
between two parties to exchange a specified asset of standardized quantity and quality for a price agreed today (the future price or the strike price) with delivery occurring at a specified future date, the delivery date. The contracts are traded on a futures exchange like NDEX Every future contract has features like buyer, seller, price, expiry etc.
Forward
A forward contract is an agreement to buy or sell an asset on a specified date for a specified price. Parties to the contract assumes both long and short position. These contracts are not traded in exchange.
Option
Options are of two types - calls and puts.
obligation to buy a given quantity of the underlying asset, at a given price on or before a given future date. Puts give the buyer the right, but not the obligation to sell a given quantity of the underlying asset at a given price on or before a given date.
Swap
Swaps are private agreements between two
parties to exchange cash flows in the future. They can be regarded as portfolios of forward contracts. The two commonly used swaps are:
Interest rate swaps: These entail swapping only the interest related cash flows between the parties in the same currency. Currency swaps: These entail swapping both principal and interest between the parties. Also,
the money which is being swapped is in different currency for both parties.
Private contract between Traded through two parties and traded on exchange. For ex. NDEX over-the counter market Not standardized Standardized
Range of delivery
Settled daily
Derivative Market
The derivatives market is the financial
market for derivatives, financial instruments like futures contracts or options, which are derived from other forms of assets.
DERIVATIVE MARKET
others
(and privately negotiated) directly between two parties, without going through an exchange or other intermediary. For Example: contract between farmer and dealer, forward rate agreements.
Exchange-traded derivative contracts (ETD)
Those derivatives instruments that are traded via specialized derivatives exchanges or other exchanges.
A derivatives exchange is a market where individuals trade standardized contracts that have been defined by the exchange.
Derivatives exchange acts as an intermediary to all related transactions, and takes initial margin from both sides of the trade to act as a guarantee.
Market risk
liquidity risk legal risk
operational risk
trades(Price discovery). Enable transactions to be made at this price quickly and easily (provision of liquidity). Enable transactions to be made at as low a cost as possible (Minimization of trading costs).
Market Analysis
Fundamental Analysis
- Production and consumption. - Distance between consuming centers to producing center. - Weather condition - Demand and supply condition - Natural disaster - Import and export regulation - Government interference. Technical Analysis - Commodity Channel index (CCI) - Relative Strength index (RSI) - Money flow index (MFI)
100(oversold). CCI (+100)- Bullish, CCI (-100)- Bearish. From overbought, a sell signal might be given when the CCI moves back above +100. From oversold level, a buy signal might be given when the CCI moved back above -100.
Developed by J. Welles Wilder. Relative Strength Index (RSI) is a momentum oscillator that measures the speed and change of price movements. It oscillates between zero and 100. According to Wilder, RSI is considered overbought when above 70 and oversold when below 30. Dash midline at 50 signals of no trend ( neutral). If the RSI is below 50, it generally mean that the stocks losses are greater than gains. (Vice-versa).
going in and out of security. MFI is range bound between 0 and 100. MFI accounts for Volume. It values below 20 suggests that an asset has been oversold. Above 80 suggest an asset has been overbought. Money Rate= Positive money Flow/ Negative money Flow Money Flow index(MFI)= 100- (100/(1+money rate)).
Clearing Member
Trading Member
Sub-Trading Member
Trader/client
Trader/ Client
the Clearing Houses/Clearing Corporations who facilitate settlement of trades done on exchanges. For ex: kasthamandap clearing house pvt. Ltd, Kathmandu Derivative Clearing service. Trading Member Its a financial intermediary which interfaces with the investors to buy or sell securities on behalf of them and charges some percentage of the settlement amount for doing so
Growers, traders, exporters, importers can insure their risk from the fluctuating product prices by taking futures position in the derivative market. interest rate risk by locking their interest rate with derivative exchange.
returns.
End users can buy the goods at a pre-determined price so
that they can get away from the risk of increase in price.
Stock market
Company ownership Low leverage Difficult to Manage risk
For 1 kg Gold contract maximum spread is 4. Tick value for 1 kg Gold = contract size/Quotation Base =1000gm/10gm = 100 Initial Profit/loss = Spread* tick value For 1 kg Gold contract profit/ loss is +/- 400
Market Interpretation
Price Rising Rising Volume Rising Falling Open Interest Rising Falling Interpretatio n Market is Strong Market is Weakening
Falling
Falling
Rising
Falling
Rising
Falling
Conclusion & Recommendation Derivative market is emerging concept in Nepal. It can bring the stability in the market condition of Nepal. For EX: Gold and oil market price risk can be minimized through future market. It creates healthy climate for demand and supply. It can diversify risk of Nepalese Investors.
ANY QUESTIONS????
BEST OF LUCK FOR NDEX THANK YOU