topic 4 derivatives market in india
TRANSCRIPT
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Indian Derivatives Market
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INTRODUCTION- RISK
MANAGMENT
Risk management is a discipline that helps bringing risks to
manageable extent .
One risk does not get transformed into undesirable risk.
PLAYERS:
Hedgers, Speculators and Arbitrageurs - Market Role
Hedgers and investors provide the economic substance to any
financial market. Without them the markets would lose their purpose
and become mere tools of gambling.
(E.g. Banks)
Speculators provide liquidity and depth to the market.
Arbitrageurs
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DERIVATIVES
Derivatives are financial contracts whose value/price is dependent on the
behavior of the price of one or more basic underlying assets (often simply
known as the underlying). These contracts are legally binding agreements,
made on the trading screen of stock exchanges, to buy or sell an asset in
future.
The asset can be a share, index, interest rate, bond, rupee dollar exchange
rate, sugar, crude oil, soybean,cotton, coffee and what have you.
A very simple example of derivatives is curd, which is derivative of milk. The
price of curd depends upon the price of milk which in turn depends upon the
demand and supply of milk.
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HISTORY OF DERIVATIVES AND
THE MARKET IN INDIAAccording to Mr. Asani Sarkars research work, Derivatives markethas been in existence in India since 1875
He also mentions that in early 1900s India had the largest FuturesIndustry
In 1952, Indian Government banned the options and futurestrading
But, by 2000 various reforms assisted in lifting all such bans andthe derivatives market is booming since then
The exchange traded derivative market is the largest in terms ofnumber of contracts made
In 2004, the daily trading value was 30 billion USD
The commodities eligible for futures trading was 8 and in 2004 itwas increased to 80
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Current Scenario
` Indias experience with the launch of equity derivativesmarket has been extremely positive. The derivatives
turnover on the NSE has surpassed the equity market
turnover. The turnover of derivatives on the NSE
increased from Rs. 23,654 million (US $ 207 million) in2000-01 to Rs. 110,104,821 million (US $ 2,161 bn) in
2008-09. The average daily turnover in this segment of
the markets on the NSE was Rs. 453,106 mn in 2008-09.
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FORWARDS
` A forward contract is a customized contract betweenthe buyer and the seller where settlement takes placeon a specific date in future at a price agreed today.The rupee-dollar exchange rate is a big forward
contract market in India with banks, financialinstitutions, corporate and exporters being themarket participants.
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Features of forward contract
` It is a negotiated contract between two partiesand hence exposed to counter party risk.
eg: Trade takes place between A&B@ 100 to buy &sell x commodity.After 1 month it is trading atRs.120. If A was he buyer he would gain Rs. 20& B Loose Rs.20. In case B defaults you areexposed to counter party Risk i.e. you will nowentitled to your gains. In case of Future, theexchange gives a counter guarantee even if thecounter party defaults you will receive Rs.20/- asa gain.
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Features of forward contract
` Each contract is custom designed and hence unique interms of contract size, expiration date, asset type, assetquality etc.
` A contract has to be settled in delivery or cash onexpiration date.
` In case one of the two parties wishes to reverse a
contract, he has to compulsorily go to the other party.The counter party being in a monopoly situation cancommand the price he wants.
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FUTURES
` Futures are exchange-traded contracts to buy or sell anasset in future at a price agreed upon today. The asset can
be share, index, interest rate, bond, rupee-dollar exchange
rate, sugar, crude oil, soybean, cotton, coffee etc.
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The standard Feature in any
futures contract
Obligation to buy or sellStated quantityAt a specific price
Stated date (Expiration Date)Marked to Market on a daily basis` For example: when you are dealing in March 2002
Satyam futures contract, you know that the marketlot, ie the minimum quantity you can buy or sell, is1,200 shares of Satyam, the contract would expiry
on March 28, 2002, the price is quoted per share,the tick size is 5 paise per share or (1200*0.05) =Rs60 per contract/ market lot, the contract would besettled in cash and the closing price in the cashmarket on expiry day would be the settlement price.
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Motives behind using Futures
` Hedging: It provides an insurance against an increase in
the price.
` The futures market has two main types of foreseeable
risk:
- price risk
- quantity risk
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Interest Rate Futures
` An interest rate futures contract is an agreement to buyor sell a standard quantity of specific interest bearing
instruments, at a predetermined future date and a price
agreed upon between parties
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DIFFERENCE BETWEEN FORWARD
AND FUTURE CONTRACT.
` Customised vs Standardised contract:
` Counter Party Risk
` Liquidity
` Squaring off:
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FUTURES TERMINOLOGY
` COST OFCARRY` INITIALMARGIN
` MARKING TO MARKET
` MAINTENANCE MARGIN
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OPTIONS
` Options contracts grant their purchasers theright but not the obligation to buy or sell aspecific amount of the underlying at aparticular price within a specified period.
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OPTIONS Terminology
` Commodity options
` StockOptions
` Buyer of an option
` Writer of an option
` Call option
` Put option
` Option price
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OPTIONS Terminology
` Expiration date` Strike Price
` American option
` European option
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Pay-off for Options
` Buyer of call options : long call` Writer of call options : short call
` Buyer of put options : long put
` Writer of call options : short put
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Buyer of call options : long call
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Writer of call options : short call
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Buyer of put options : long put
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Writer of call options : short put
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Long Straddle
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Short Straddle
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Long Strangle
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Short Strangle
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Distinguishing Options & Futures