Description
This is a PPT about future of derivative instruments in destail.
DERIVATIVE INSTRUMENTS -FUTURES
BY JINESH SANGHAVI
What are Derviatives?
• Derivatives are financial instruments whose value is derived from the value of an underlying asset. • They generally take the form of contracts under which the parties agree to make payments to each other based on the value of the asset at a particular point in time. • The main types of derivatives are FUTURES, FORWARDS, OPTIONS and SWAPS
Definition Of Future Contract
• “A futures contract is an agreement
between two parties to buy or sell an asset at a certain time in the future at a certain price”
Features Of Future Contract
• Used by Hedgers, Arbitrageurs and speculators • Designed to solve problems that exist in forward markets
• Standardized and Exchange traded
• Generally an offsetting transaction
Standardized Items
• • • • 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
Terminology
• • • • • • • • Going Long and Going Short Spot Price Futures Price Contract Cycle Expiry Date Contract Size Basis Cost of Carry
Terminology Contd
• Marking to Market • Maintenance Margin
Payoff Diagram
• Linear Payoffs- Unlimited Losses & Profits
Buyer’s pay-offs Futures Price Spot price of underlying assets
Seller’s pay-offs
Pricing Futures
• Cost Of Carry Model • Fair value of a Future Contract is calculated as where r = Cost of financing (using continuously compounded interest rate) T =Time till expiration in years e = 2.71828
Example
• Security XYZ Ltd trades in the spot market at Rs. 1150. Money can be invested at 11% p.a. The fair value of a one-month futures contract on XYZ is calculated as follows:
Example of pricing index futures considering dividend
• Nifty futures trade on NSE as one, two and three-month contracts. Money can be borrowed at a rate of 10% per annum. What will be the price of a new two-month futures contract on Nifty?
Let us assume that ABC Ltd. will be declaring a dividend of Rs.20 per share after 15 days of purchasing the contract.Current value of Nifty is 4000 and Nifty trades with a multiplier of 100.
Contd..
Since Nifty is traded in multiples of 100, value of the contract is 100*4000 = Rs.400,000. • If ABC Ltd. Has a weight of 7% in Nifty, its value in Nifty is Rs.28,000 i.e.(400,000 * 0.07) If the market price of ABC Ltd. Is Rs.140, then a traded unit of Nifty involves 200 shares of ABC Ltd. i.e. (28,000/140). • To calculate the futures price, we need to reduce the cost-of-carry to the extent of dividend received. The amount of dividend received is Rs.4000(200*20). The dividend is received 15 days later and hence compounded only for the remainder of 45 days.
• To calculate the futures price we need to compute the amount of dividend received per unit of Nifty. Hence we divide the compounded dividend figure by 100.
Basis & Convergence
• As the expiration date comes near basis reduces
• Zero Basis- Arbitrage oppurtunity near delivery date
Different Traders in Futures
• • • • • • • Speculators Hedgers Arbitragers Floor traders Scalpers Floor brokers Other market participants
Strategies in Futures Market
• Hedging: Long security, sell futures • Speculation: Bullish security, buy futures
Why Trade a Futures Contract?
• Easier to short compared to other markets • Leverage – Ability of the trader to control large amounts of Quantity with lower amount of capital
doc_858643779.pptx
This is a PPT about future of derivative instruments in destail.
DERIVATIVE INSTRUMENTS -FUTURES
BY JINESH SANGHAVI
What are Derviatives?
• Derivatives are financial instruments whose value is derived from the value of an underlying asset. • They generally take the form of contracts under which the parties agree to make payments to each other based on the value of the asset at a particular point in time. • The main types of derivatives are FUTURES, FORWARDS, OPTIONS and SWAPS
Definition Of Future Contract
• “A futures contract is an agreement
between two parties to buy or sell an asset at a certain time in the future at a certain price”
Features Of Future Contract
• Used by Hedgers, Arbitrageurs and speculators • Designed to solve problems that exist in forward markets
• Standardized and Exchange traded
• Generally an offsetting transaction
Standardized Items
• • • • 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
Terminology
• • • • • • • • Going Long and Going Short Spot Price Futures Price Contract Cycle Expiry Date Contract Size Basis Cost of Carry
Terminology Contd
• Marking to Market • Maintenance Margin
Payoff Diagram
• Linear Payoffs- Unlimited Losses & Profits
Buyer’s pay-offs Futures Price Spot price of underlying assets
Seller’s pay-offs
Pricing Futures
• Cost Of Carry Model • Fair value of a Future Contract is calculated as where r = Cost of financing (using continuously compounded interest rate) T =Time till expiration in years e = 2.71828
Example
• Security XYZ Ltd trades in the spot market at Rs. 1150. Money can be invested at 11% p.a. The fair value of a one-month futures contract on XYZ is calculated as follows:
Example of pricing index futures considering dividend
• Nifty futures trade on NSE as one, two and three-month contracts. Money can be borrowed at a rate of 10% per annum. What will be the price of a new two-month futures contract on Nifty?
Let us assume that ABC Ltd. will be declaring a dividend of Rs.20 per share after 15 days of purchasing the contract.Current value of Nifty is 4000 and Nifty trades with a multiplier of 100.
Contd..
Since Nifty is traded in multiples of 100, value of the contract is 100*4000 = Rs.400,000. • If ABC Ltd. Has a weight of 7% in Nifty, its value in Nifty is Rs.28,000 i.e.(400,000 * 0.07) If the market price of ABC Ltd. Is Rs.140, then a traded unit of Nifty involves 200 shares of ABC Ltd. i.e. (28,000/140). • To calculate the futures price, we need to reduce the cost-of-carry to the extent of dividend received. The amount of dividend received is Rs.4000(200*20). The dividend is received 15 days later and hence compounded only for the remainder of 45 days.
• To calculate the futures price we need to compute the amount of dividend received per unit of Nifty. Hence we divide the compounded dividend figure by 100.
Basis & Convergence
• As the expiration date comes near basis reduces
• Zero Basis- Arbitrage oppurtunity near delivery date
Different Traders in Futures
• • • • • • • Speculators Hedgers Arbitragers Floor traders Scalpers Floor brokers Other market participants
Strategies in Futures Market
• Hedging: Long security, sell futures • Speculation: Bullish security, buy futures
Why Trade a Futures Contract?
• Easier to short compared to other markets • Leverage – Ability of the trader to control large amounts of Quantity with lower amount of capital
doc_858643779.pptx