INSTITUTIONAL & LEGAL FRAMEWORK OF DERIVATIVES MARKET EXCHANGE Provides buyers & sellers of futures & options contracts

s the infrastructure they need to trade CLEARING HOUSE It guarantees the performance of contracts, which is way it is also a counterparty to each contract REGULATORY FRAMEWORK -RBI is the regulatory authority for the FOREX & MONEY MARKET -SEBI regulate the capital market -NCDEX (National Commodities & Derivative Exchange )

USED OF DERIVATIVES To control, avoid, shift & manage efficiently different types of risks Barometers of the future trends in prices Enhance liquidity & reduce transaction costs Competitive trading in the markets Achieve investment goals..

THE GUIDING PRINCIPLES OF SEBI 1. Investor protection Fairness & transparency Safeguard for clients money Competent & honest service Market integrity

2. Quality of market
3. Innovation

FORWARD CONTRACT: It is an agreement where the buyer & the seller agree to exchange the asset & its price at a future date, at a price fixed in advance. FEATURES OF FORWARD CONTRACT: An agreement between the two counter parties Specified a quantity & type of the asset Specified the future date at which the delivery & payment are to be made Specified a price at which the payment is to be made It obligates the seller to deliver the asset & also obligates the buyer to buy the asset. No money charges hands until the delivery date reaches , except for a small service fee, if there is.

TERMINOLOGY USED IN FORWARD TRADING Long position : The party who agrees to buy in the future is said to hold long position. Short position : The party who agrees to sell in the future is said to hold short position. Underlying asset : It means any asset in the form of commodity, security or currency that will be bought & sold when the contract expires. Spot price: It is the quoted price for buying & selling of an asset at the spot or immediate delivery. Future spot price: The spot price of the underlying asset when the contract expired Delivery price: The specified price in the forward contract . Forward price: The agreed upon price at which both the counter parties will transect when the contract expired.

 Investment assets: Assets held for investment purposed like stocks, shares, bonds, treasury.. Consumption assets: Assets held primarily for consumption like copper, oil, food grains. Compounding is a quantitative tool which is used to know the lump sum value of the proceeds received in a particular period.

Example: Suppose on April 10, 2013 UK firm knows that the firm will receive one million US dollar after 3 months, i.e., July 10 2013 & want to hedge against the exchange rate movement. Currently /$=0.60 The firm contact a bank & find out that the exchange rate for 3 month forward contract on dollar against pound sterling is /$=0.6250 & agrees to sell dollar.

long position, short position, underlying asset, forward price, spot price?