derivativves & risk management
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YOGESH NAMDEO INGLE.MBA (FINANCE), NET (MANAGEMENT), Ph.D (WIP), G.D.C &A, NCMP.
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DERIVATIVES & RISK MANAGEMENT
derivatives
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YOGESH NAMDEO INGLE.MBA (FINANCE), NET (MANAGEMENT), Ph.D (WIP), G.D.C &A, NCMP.
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Contract Price is derived from or is dependent
upon an underlying asset.
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YOGESH NAMDEO INGLE.MBA (FINANCE), NET (MANAGEMENT), Ph.D (WIP), G.D.C &A, NCMP.
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Underlying asset could be a financial asset such as
1. Currency 2. Stock and market index 3. An interest bearing security 4. Physical commodity
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YOGESH NAMDEO INGLE.MBA (FINANCE), NET (MANAGEMENT), Ph.D (WIP), G.D.C &A, NCMP.
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Derivative contracts are also traded on –
1. Electricity2. Weather3. Temperature 4. Volatility
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YOGESH NAMDEO INGLE.MBA (FINANCE), NET (MANAGEMENT), Ph.D (WIP), G.D.C &A, NCMP.
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According to the Securities Contract Regulation Act, (1956) the term “derivative” includes:
A security derived from a debt instrument, share, loan, whether secured or unsecured, risk instrument or contract for differences or any other form of security.
A contract which derives its value from the prices or index of prices of underlying securities. derivatives
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YOGESH NAMDEO INGLE.MBA (FINANCE), NET (MANAGEMENT), Ph.D (WIP), G.D.C &A, NCMP.
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Types of Derivative Contracts
Forward Contracts Futures Contracts Options Contracts Swaps
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YOGESH NAMDEO INGLE.MBA (FINANCE), NET (MANAGEMENT), Ph.D (WIP), G.D.C &A, NCMP.
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Forward Contracts
An agreement to buy or sell an asset on a specified date for a specified price.
Long position Short position Negotiated bilaterally by the parties to
the contract.
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Features of forward contracts Bilateral contracts Unique Not available in public domain Has to be settled
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YOGESH NAMDEO INGLE.MBA (FINANCE), NET (MANAGEMENT), Ph.D (WIP), G.D.C &A, NCMP.
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Limitations of forward contracts
Lack of centralization of trading, Illiquidity Counterparty risk
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YOGESH NAMDEO INGLE.MBA (FINANCE), NET (MANAGEMENT), Ph.D (WIP), G.D.C &A, NCMP.
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Introduction to Futures
Standardized and exchange traded Quantity of the underlying Quality of the underlying The date and the month of delivery The units of price quotation and
minimum price change Location of settlement
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YOGESH NAMDEO INGLE.MBA (FINANCE), NET (MANAGEMENT), Ph.D (WIP), G.D.C &A, NCMP.
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Options Contracts
An option gives the holder of the option the right to do something in future. The holder does not have to exercise this right.
Purchase of an option requires an up-front payment.
Non linear or asymmetrical profit profiles
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Buyer of an option: The buyer of an option is the one who by paying the option premium buys the right but not the obligation to exercise his option on the seller/ writer.
Writer of an option: The writer of a call/put option is the one who receives the option premium and is thereby obliged to sell/buy the asset if the buyer exercises on him.
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Two basic types of options
Call option It gives the holder the right but not the
obligation to buy an asset by a certain date for a certain price.
Put option A It gives the holder the right but not the
obligation to sell an asset by a certain date for a certain price.
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Swaps
Swaps are private agreements between two parties to exchange cash flows in the future.
The two commonly used swaps 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, with the cash flows in one direction being in a different currency than those in the opposite direction.
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Participants in a Derivative Market
Hedgers Speculators Arbitrageurs
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Distinction between Futures and Forwards
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Basic purpose of derivatives
The main purpose of derivatives is to transfer risk from one person or firm to another, that is, to provide insurance.
For example- If a farmer before planting can guarantee a
certain price he will receive, he is more likely to plant.
Derivatives improve overall performance of the economy
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YOGESH NAMDEO INGLE.MBA (FINANCE), NET (MANAGEMENT), Ph.D (WIP), G.D.C &A, NCMP.
Help yourself
derivative
derivatives