DERIVATIVES BASICS

A standout amongst the most critical occasions in the securities markets has been the

improvement and development of financial derivatives. The expression “derivatives”

is utilized to allude to budgetary instruments which get their esteem from some basic

resources. The basic resources could be values (offers), obligation (bonds, T-bills, and

notes), monetary standards, and even files of these different resources, for example,

the Nifty 50 Index. Derivatives get their names from their particular basic resource. In

this way if a subsidiary’s hidden resource is value, it is called value derivative.

Derivatives can be exchanged either on a managed trade, for example, the NSE or off

the trades, i.e., straightforwardly between the diverse gatherings, which is called

“over-the- counter” (OTC) exchanging. (In India just trade exchanged value

derivatives are allowed under the law.) The fundamental reason for subsidiaries is to

exchange the value hazard (innate in variances of the benefit costs) starting with one

gathering then onto the next; they encourage the distribution of hazard to the

individuals why should willing take it. In this manner, derivatives moderate the

hazard emerging from the future vulnerability of costs. For instance, on November 1,

2009 a rice agriculturist may wish to offer his collect at a future date (say January 1,

2010) at a pre-decided settled cost to dispense with the danger of progress in costs by

that date. Such an exchange is a case of a derivatives contract. The cost of this

derivatives is driven by the spot cost of rice which is the “basic”.

DERIVATIVES ORIGIN

While exchanging derivative items has become enormously as of late, the most

punctual proof of these sorts of instruments can be followed back to old Greece.

Despite the fact that derivatives have been in presence in some frame or the other

since antiquated times, the coming of current derivative contracts is credited to

ranchers’ have to secure themselves against a decrease in harvest costs because of

different financial and natural variables. Therefore, derivative contracts at first created

in wares. The primary “prospects” contracts can be followed to the Yodoya rice

showcase in Osaka, Japan around 1650. The agriculturists feared rice costs falling

later on at the season of reaping. To secure a value (that is, to offer the rice at a

foreordained altered cost later on), the ranchers went into contracts with the

purchasers. These were clearly institutionalized contracts, much like today’s prospects

contracts.

In 1848, the Chicago Board of Trade (CBOT) was built up to encourage exchanging

of forward contracts on different products. From that point on, prospects contracts on

items have stayed pretty much in similar frame, as we probably are aware of them

today.

Given below are the contents of DERIVATIVES BASICS module:

 

CHAPTER 1: INTRODUCTION OF DERIVATIVES BASICS:

 DEFINITION OF DERIVATIVES

 ORIGIN OF DERIVATIVES

 DERIVATIVES IN INDIA.

 

CHAPTER 2: DEFINITIONS OF DERIVATIVES BASICS

FORWARDS.

 SETTLEMENT OF FORWARD CONTRACTS

 DEFAULT RISK IN FORWARD CONTRACTS

FUTURES

OPTIONS

 CALL OPTION

 PUT OPTION

TERMINOLOGY OF DERIVATIVES

 SPOT PRICE (ST)

 FORWARD PRICE OR FUTURES PRICE (F)

 STRIKE PRICE (K).

 EXPIRATION DATE (T).

 TYPES OF OPTIONS.

 CONTRACT SIZE.

 CONTRACT VALUE

 MARGINS

MONEYNESS OF AN OPTION

 IN-THE- MONEY OPTION

 AT-THE- MONEY OPTION

 OUT-THE- MONEY OPTION

 

CHAPTER 3: APPLICATIONS OF DERIVATIVES

PARTICIPANTS IN THE DERIVATIVES MARKET

 HEDGERS

 SPECULATORS

 ARBITRAGEURS

USES OF DERIVATIVES

 RISK MANAGEMENT

 MARKET EFFICIENCY

 PRICE DISCOVERY

 

CHAPTER 4: TRADING FUTURES

 PAY-OFF DIAGRAM FOR A LONG FUTURES POSITION

 PAY-OFF DIAGRAM FOR A SHORT POSITION

 

CHAPTER 5: TRADING OPTIONS

OPTION PAYOUT

 A LONG POSITION IN A CALL OPTION.

 A LONG POSITION IN A PUT OPTION

 A SHORT POSITION IN A CALL OPTION

 A SHORT POSITION IN A PUT OPTION

OPT ION STRATEGIES

 LONG OPTION STRATEGY.

 SHORT OPTION STRATEGY

DETERMINATION OF OPTION PRICES

 INTRINSIC VALUE AND TIME VALUE

 FACTORS IMPACTING OPTION PRICES

 

CHAPTER 6: DERIVATIVES TRADING ON EXCHANGE

DERIVATIVES TRADING ON NSE

 CONTRACT SPECIFICATIONS FOR INDEX BASED FUTURES

 CONTRACT SPECIFICATIONS FOR INDEX BASED OPTIONS

 CONTRACT SPECIFICATIONS FOR STOCK BASED FUTURES

 CONTRACT SPECIFICATIONS FOR STOCK BASED OPTIONS

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