Derivatives

DERIVATIVES Click to edit Master subtitle style

12/18/12

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Derivatives are financial contracts whose value is determined from the underlying assets.i.e.an asset which has no independent value but derives the value from the underlying asset. They allow the investors ,corporate and government to manage financial risk.  The Derivatives are off balance sheet transactions as they are not 12/18/12

Importance of Derivatives •

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Acts as major risk management tool and they are used to minimise risk  They separate risks and transfer them to parties who can bear them i.e. they manipulate risks*  They provide hedging which is cheaper and more convenient in comparison to cash instrument*  They are simple to operate as they

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Forwards •

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Forwards are the oldest derivatives .It is an agreement between two parties where one promises to buy and the other agrees to sell at the price,date,quality and location agreed upon at the time of entering into the contract.  The party that is buying is in the long position and the party that is selling in the short position 12/18/12

Features Of Forward Contract •

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1.Customized Contracts—they are private arrangement and are not standardised so they are flexible flexible and can be modified 2 .It is private contract so no secondary market exists as they are not traded on stock exchange 3.No down Payment----since no money is paid at the time of  12/18/12 commencement of contract so

Futures •

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Futures are an important forward contracts  They are standardized contracts and are legally enforceable and are always traded on organised exchange  They are not required required to pay any down payment but a certain % so as guarantee that the contract will be 12/18/12 honoured.It is called initial margin

Options •

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An option is a contract which gives the buyer or the holder the right to buy or sell underlying asset at a specified price on or before a specified time  TERMS USED IN OPTION CONTRACT CONTRACT::Underlying: It refers to the asset for which option contract is undertaken Option Buyer/Holder: He is the

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Swaps •

A swap is a contract between two parties to deliver one sum of money against another sum of money at periodic interwals.F inter wals.For or example :-A : -A person borrows from from a money lender against an asset and he receives the required required money .Then he regularly pays interest and at maturity he pays the principal and gets backs the 12/18/12 assets. This is a swap contract. They

Features Of swap •

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Basically a forward contract so has all the features of it  Two  Two parties are required required with equal and opposite wants .This has required required the existence of  intermediaries  They are long term agreements agreements as fixed interest are exchange for floating rates 12/18/12