derivites jagdish
TRANSCRIPT
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Present By:Jagdish koladiyaMBA (21)
DIV (A)
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DERIVATIVES
A Financial Instrument That
Derives Its Value From An
Underlying Security
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Derivatives ExplanationAn easy way to think of derivatives is as
a side bet on interest rates, exchange
rates, commodity prices, and practically
ANYTHING that you can think of.
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Why Derivatives? Not to raise capital
Buy or sell to protect against adversechanges in external factors
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Conventional Securities
Market
Bonds Cash Stocks0
5,000
10,000
15,000
20,000
Amountin
B
illionsof$
Bonds Cash Stocks
Types
Traditional Securities
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Types of Derivatives Forwards
Futures
Options
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Forwards
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Forwards Contracts
The agreement to pay for and pick up,
Something at a pre-determined dateand or time, for a pre-determined price.
Usually traded off of the trading floorbetween two firms.
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Terms
Taking Delivery: Physical reception of
item.
Deliverable Instrument: The item to bedelivered
Making Delivery: Turning over the
item.Forwards are notoptions, they are
obligations and should be considered
as a cash transaction.
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Forwards
Interest-Rate
Futures
Stock-Index
Futures
Currency
Futures
01,000
2,000
3,000
4,000
5,000
6,000
7,000
Amountin
B
illionsof$
Interest-Rate
Futures
Stock-Index
Futures
Currency
Futures
Types
Exchange Traded Derivatives "Forwards"
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Forwards OTCOver-The-Counter Derivatives "Forwards"
Currency Contracts
72%
Interest-Rate
Contracts
28%
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A Modest ExampleAn agreement on Monday to buy a book,
(Fin 374c) from a bookstore on Friday for
$1000.00.
On Friday, you return to the bookstore and
take delivery of the book and pay the
$1000.00.
The contract is actually the agreement.
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Futures
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Futures
Similar to forwards in length of time.
However, profits and losses are
recognized at the close of businessdaily, Mark-to-market. Transactions
go through a clearinghouse to reduce
default risk. 90% of all futurescontracts are delivered to someone
other than the original buyer.
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Futures ExampleOn Monday we enter into a futures contract to buy
our book on Friday. We are required to place a
deposit for the book of 50% ($500.00). We are told
that if the book appreciates in value we may be
required to increase the deposit. If the bookdepreciates in value, we may take back some of the
money. Wednesday the book goes to $1500.00. We
must deposit another $250.00. On Thursday the bookdrops to $750.00. We can collect $375.00. On Friday
the book value is $800.00, therefore we owe $425.00
on the remaining balance.
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Options
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Options
Options come in many flavors. To name afew: collar, cylinder, fence, mini-max,
zero-cost tunnel and straddle. These are all
newer forms of options. The mostcommon options discussed areputand
call.An OPTIONis the right, not the obligation
to buy or sell an underlying instrument.
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Option Terms
Put: the right tosell@ a certain price
Call: the right to buy @ a certain price
Long: topurchase the option Short: tosellorwrite the option
Bullish: feel the value will increase
Bearish: feel the value will decrease
Strike/Exercise Price: Price the option
can be bought or sold.
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Option Market
Interest-Rate Options
Currency Options
Stock-Index Options
Individual Stock Options
0 500 1,000 1,500 2,000 2,500 3,000 3,500
In Billions of $
Interest-Rate Options
Currency Options
Stock-Index Options
Individual Stock Options
Types
Exchange Traded Derivatives "Options"
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Options ContinuedOver-The-Counter Derivitaves "Options"
OTC Interest-Rate
Options
71%
OTC Currency
Options
29%
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Calls
Long a call. Person buys the right (a contract) tobuy
an asset at a cretin price. They feel that the price
in the future will exceed the strike price. This is a
bullish position.
Short a Call. Person sells the right (a contract) to
someone that allows them to buy a asset at a cretinprice. The writer feels that the asset will devalue
over the time period of the contract. This person is
bearish on that asset.
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PUTS
Long a Put. Buy the right to sell an asset at apre-determined price. You feel that the asset will
devalue over the time of the contract. Therefore
you can sell the asset at a higher price than is thecurrent market value. This is a bearish position.
Short a Put. Sell the right to someone else. This
will allow them to sell the asset at a specific
price. They feel the price will go down and you
do not. This is a bullish position.
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Standard Securities
Stocks
Bonds
Cash
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Standard Securities
Bonds Cash Stocks
0
5,000
10,000
15,000
20,000
Amountin
Billionsof$
Bonds Cash Stocks
Types
Traditional Securities
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Total Market
The standard market is what most people think
of when they think of the market. The truth is
that derivatives are the fastest growing sector
of the market. In fact, they are the largest
section of the market. We did not consider
mutual funds in this presentation. There aremore mutual funds in the market than there are
stocks. Again, the next graph does not
account for mutual funds.
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Total Market
Total Market: Traditional & Derivative
Total Derivatives
43%
Total Traditional
57%
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Any Questions?
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Seriously,
Any Questions?
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THANK U