FINANCIAL

DERIVATIVES

PRESENTED BY

JAYA KANESH R
R.BUPATHY & CO.,
CHARTERED ACCOUNTANTS
DERIVIATIVES
A Derivative is a product whose value is
derived from the value of one or more
underlying asset.
Eg:
Equity
Forex
Commodity
Currencyor
Any Other Asset
MARKET INDEX
An Index is a number which measures the
change in a set of values over a period of time
The base value of Nifty on the start date of
November 3, 1995 is 1000 Points
Every stock price moves for 2 Major reasons
1. News about the Company
2. News about the Nation
Nifty is a combination of 50 stocks and sensex
is of 30
Types of Indexes
Price Weighted Index
Weight Proportional to its stock price
Not used in INDIA

Market Capitalization weighted index

Current Market Capitalization
Index= ------------------------------------ X Base
Value
Base Market Capitalization
Free Float (Excluding Promoters Shares) BSE &
NSE
Full Float (Including Promoters Shares)
Types of Derivatives
F
Forward Contract
Characteristics
Fully Customized Contract
No Involvement of Stock
Exchange
Mostly OTC
Actual Delivery of Asset takes
Place
Counter Party Risk
Limitations of Forward
Market
Lack of Centralization
No Hard and Fast Rules
No Involvement of Stock Exchange

Too much Flexibility makes the Contract Non-

Tradable
Illiquidity
Both the parties have to wait till the time of maturity
No one can come out of the contract

Counterparty Risk
Default by one party makes the other party to suffer
Future Contracts
Futures v/s Forwards
Future Terminology
Spot Price
Future Price
Contract cycle
Expiry date
Contract size
Initial margin
Marking to market
Maintenance of
margin
Future Payoffs (Profit)
Long Futures
Future Payoffs (Profit)
Short Futures
Application of Futures
Hedging A Risk Management
Tool
Speculation
Arbitrage
Option Contracts
Options Payoffs
Swap
Similar to Phone
SWAP
Especially for
Banks
Not Followed in
India
 THANK YOU
FOR MORE INFO
www.jaiganeshca.blogspot.com