Derivatives
EXECUTIVE SUMMARY :
Derivatives are financial instruments whose value is derived on the basis of underlying instrument or assets. Most common derivative instruments are forwards, futures, options and swaps. Most important factors which contributed to the growth of derivatives are ± price volatility, globalisation of markets, technological advances and advances in financial theories. There are two types of derivative instruments i.e., exchange traded derivatives and over the counter (OTC) derivatives.
A forward contract obligates one counter party to buy and the other to sell a specific underlying asset at a specific price, amount and date in the future. Forward contracts are the important type of forward-based derivatives. They are the simplest derivatives. There is a separate forward market for multitude of underlyings, including the traditional agricultural or physical commodities, as well as currencies and interest rates.
A futures contract is an agreement between buyer and a seller which requires a seller to deliver to the buyer a specified quantity of security or asset at a fixed time in future at a predetermined price. These contracts can be bought or sold in only organised futures market. These were developed from forward market which existed earlier. Main difference between forward and futures contracts are that futures contracts are standardised in terms of quantity, delivery date and mode of delivery whereas forwards are tailor made. Futures contract do not have counter party risk which is present in forward contracts. Futures are through futures exchange market whereas forwards are O.T.C traded.
Derivatives
An option is a contract between two parties in which one party has a right but not the obligation to buy or sell some underlying asset. Options are different than futures in a way, that futures contract gives equal opportunities to both long and short but option gives right to buyer and obligation to option seller. Options involve some upfront premium which is not there in futures. Options can be both exchange traded as well as OTC type. There are two types of options i.e., Call Option and Put Option. Call option gives buyer right to buy the underlying asset at specified price during a specified period whereas put option gives option buyer a right to sell the underlying asset at a set price. Options have great utility in money market and capital market apart from foreign exchange market. Transactions which obligates the two parties to the contract to exchange a series of cash flows at specified intervals, known as payment or settlement dates, are called as Swaps. They are portfolios of forward's contracts. A contract whereby two parties agree to exchange (swap) payments, based on some notional principle amount is called as a Swap. There are three types of swaps viz., interest rate swap, currency swap and financial swap.
Derivatives
OBJECTIVE OF THE STUDY :
The main objectives behind the study of derivatives are :
To understand the finer points of derivatives.
To understand the concept of derivatives in a more appropriate way.
To understand the scope and growth of derivatives in India.
To understand how the derivatives are used in banks.
To understand how derivatives can be used to hedge risk.
Derivatives
ACKNOWLEDGEMENT
If words are considered as a symbol of approval and token of appreciation then let the words play the heralding role expressing my gratitude.
I am indebted to the reviewer of the project Miss. xxxxx xxxxx, my project guide for her support and guidance. I would sincerely like to thank her for all her efforts.
I am also grateful to Mr. xxxxxxxx xxxxxxxxx (Sales Analyst ± Deutsche Bank) and Mr. xxx xxxxxxxx(C.E.O ± Deutsche Bank) for helping me understand the concept of derivatives and for providing their insights in the making of this project. I would like to thank the University of Mumbai, for introducing Banking and Insurance course, thereby giving its student a platform to abreast with changing business scenario, with the help of theory as a base and practical as a solution. Last but not least, I would like to thank my parents for giving the best education and friends for their support and feelings without which this project would have not been possible.
doc_706397220.docx
EXECUTIVE SUMMARY :
Derivatives are financial instruments whose value is derived on the basis of underlying instrument or assets. Most common derivative instruments are forwards, futures, options and swaps. Most important factors which contributed to the growth of derivatives are ± price volatility, globalisation of markets, technological advances and advances in financial theories. There are two types of derivative instruments i.e., exchange traded derivatives and over the counter (OTC) derivatives.
A forward contract obligates one counter party to buy and the other to sell a specific underlying asset at a specific price, amount and date in the future. Forward contracts are the important type of forward-based derivatives. They are the simplest derivatives. There is a separate forward market for multitude of underlyings, including the traditional agricultural or physical commodities, as well as currencies and interest rates.
A futures contract is an agreement between buyer and a seller which requires a seller to deliver to the buyer a specified quantity of security or asset at a fixed time in future at a predetermined price. These contracts can be bought or sold in only organised futures market. These were developed from forward market which existed earlier. Main difference between forward and futures contracts are that futures contracts are standardised in terms of quantity, delivery date and mode of delivery whereas forwards are tailor made. Futures contract do not have counter party risk which is present in forward contracts. Futures are through futures exchange market whereas forwards are O.T.C traded.
Derivatives
An option is a contract between two parties in which one party has a right but not the obligation to buy or sell some underlying asset. Options are different than futures in a way, that futures contract gives equal opportunities to both long and short but option gives right to buyer and obligation to option seller. Options involve some upfront premium which is not there in futures. Options can be both exchange traded as well as OTC type. There are two types of options i.e., Call Option and Put Option. Call option gives buyer right to buy the underlying asset at specified price during a specified period whereas put option gives option buyer a right to sell the underlying asset at a set price. Options have great utility in money market and capital market apart from foreign exchange market. Transactions which obligates the two parties to the contract to exchange a series of cash flows at specified intervals, known as payment or settlement dates, are called as Swaps. They are portfolios of forward's contracts. A contract whereby two parties agree to exchange (swap) payments, based on some notional principle amount is called as a Swap. There are three types of swaps viz., interest rate swap, currency swap and financial swap.
Derivatives
OBJECTIVE OF THE STUDY :
The main objectives behind the study of derivatives are :
To understand the finer points of derivatives.
To understand the concept of derivatives in a more appropriate way.
To understand the scope and growth of derivatives in India.
To understand how the derivatives are used in banks.
To understand how derivatives can be used to hedge risk.
Derivatives
ACKNOWLEDGEMENT
If words are considered as a symbol of approval and token of appreciation then let the words play the heralding role expressing my gratitude.
I am indebted to the reviewer of the project Miss. xxxxx xxxxx, my project guide for her support and guidance. I would sincerely like to thank her for all her efforts.
I am also grateful to Mr. xxxxxxxx xxxxxxxxx (Sales Analyst ± Deutsche Bank) and Mr. xxx xxxxxxxx(C.E.O ± Deutsche Bank) for helping me understand the concept of derivatives and for providing their insights in the making of this project. I would like to thank the University of Mumbai, for introducing Banking and Insurance course, thereby giving its student a platform to abreast with changing business scenario, with the help of theory as a base and practical as a solution. Last but not least, I would like to thank my parents for giving the best education and friends for their support and feelings without which this project would have not been possible.
doc_706397220.docx