Description
KeyWords: Futures, Options, Forwards, Options
Futures & Options
Derivatives
Derivative Securities
• An agreement between two parties to exchange a standard quantity of an asset at a predetermined price at a specified date in the future • A very important tool for Risk Management • It has assumed a very significant place and seem to be driving global financial market
The underlying assets
• Commodities including grain, coffee beans etc. • Precious metals like Gold and silver • Foreign Exchange Rate • Bonds issued by government, companies etc.
Derivatives
Forward
Futures
Options
Other e.g. Swaps
Forward Contracts
• An agreement between two parties to exchange an asset at a specified price on a specified date • Buyer is long, seller is short; symmetric gains and losses as price changes • Popular in currency exchange markets
Example
• Mr.XYZ wants to buy a TV, which costs Rs 10,000 but he has no cash to buy it outright. He can only buy it 3 months hence. He, however, fears that prices of televisions will rise 3 months from now. So in order to protect himself from the rise in prices Mr.XYZ enters into a contract with the TV dealer that 3 months from now he will buy the TV for Rs 10,100. What Mr.XYZ is doing is that he is locking the current price of a TV for a forward contract. The forward contract is settled at maturity. The dealer will deliver the asset to Mr.XYZ at the end of three months and Mr.XYZ in turn will pay cash equivalent to the agreed price on delivery.
Futures 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.
Futures Contracts Vs Forward Contracts
• Like forward contracts…
– Buyer is long and is obligated to buy – Seller is short and is obligated to sell
• Unlike forward contracts…
– Standardized – hence more liquidity – Traded on organized exchange – Requires Margin payments – Profit/Loss settlement – settles daily
Futures Contracts
Example: Suppose you bought (go long) the most recent Infosys Futures contract at the settle price • What was the original contract value? Value =Rs.2500 x 1000 = Rs250000 • What is your profit if you close your position (sell a contract) for 2600.00? Value = Rs2600 x 1000 = Rs260,000 Profit = Rs260000 - Rs250,000 = Rs10000
Futures
Index Futures
Stock Futures
www.bseindia.com
OPTIONS
• ‘Option’, as the word suggests, is a choice given to the investor to either honour the contract; or if he chooses not to walk away from the contract • Option premium
options
• In the money • Out of the money • At the money – when neither advantageous nor loss making for the investor to exercise the option
Options
Call Option
Put Option
www.bseindia.com
THANK YOU
Fine$$e Club
doc_540099378.ppt
KeyWords: Futures, Options, Forwards, Options
Futures & Options
Derivatives
Derivative Securities
• An agreement between two parties to exchange a standard quantity of an asset at a predetermined price at a specified date in the future • A very important tool for Risk Management • It has assumed a very significant place and seem to be driving global financial market
The underlying assets
• Commodities including grain, coffee beans etc. • Precious metals like Gold and silver • Foreign Exchange Rate • Bonds issued by government, companies etc.
Derivatives
Forward
Futures
Options
Other e.g. Swaps
Forward Contracts
• An agreement between two parties to exchange an asset at a specified price on a specified date • Buyer is long, seller is short; symmetric gains and losses as price changes • Popular in currency exchange markets
Example
• Mr.XYZ wants to buy a TV, which costs Rs 10,000 but he has no cash to buy it outright. He can only buy it 3 months hence. He, however, fears that prices of televisions will rise 3 months from now. So in order to protect himself from the rise in prices Mr.XYZ enters into a contract with the TV dealer that 3 months from now he will buy the TV for Rs 10,100. What Mr.XYZ is doing is that he is locking the current price of a TV for a forward contract. The forward contract is settled at maturity. The dealer will deliver the asset to Mr.XYZ at the end of three months and Mr.XYZ in turn will pay cash equivalent to the agreed price on delivery.
Futures 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.
Futures Contracts Vs Forward Contracts
• Like forward contracts…
– Buyer is long and is obligated to buy – Seller is short and is obligated to sell
• Unlike forward contracts…
– Standardized – hence more liquidity – Traded on organized exchange – Requires Margin payments – Profit/Loss settlement – settles daily
Futures Contracts
Example: Suppose you bought (go long) the most recent Infosys Futures contract at the settle price • What was the original contract value? Value =Rs.2500 x 1000 = Rs250000 • What is your profit if you close your position (sell a contract) for 2600.00? Value = Rs2600 x 1000 = Rs260,000 Profit = Rs260000 - Rs250,000 = Rs10000
Futures
Index Futures
Stock Futures
www.bseindia.com
OPTIONS
• ‘Option’, as the word suggests, is a choice given to the investor to either honour the contract; or if he chooses not to walk away from the contract • Option premium
options
• In the money • Out of the money • At the money – when neither advantageous nor loss making for the investor to exercise the option
Options
Call Option
Put Option
www.bseindia.com
THANK YOU
Fine$$e Club
doc_540099378.ppt