INTRODUCTION TO

DERIVATIVES
BY

JOYSTON 1307
EVELYN
ASHWIN 1332

WHAT ARE DERIVATIVES ?

Derivatives are financial contracts which
derives its value from performance of
another entity such as asset, stock index,
interest rate etc.
These entities are called underlying.
Example
The value of gold futures contracts is derived
from value of underlying asset i.e. gold.

TYPES OF DERIVATIVES
Futures
Forwards
Options
Swaps

FUTURES CONTRACT
It is a contract between two parties to buy or
sell a specified asset of standardized quantity
and quality for a price agreed upon today
with delivery and payment occurring at
specified future date.
They are traded over the exchange market.
They involve less credit risk.
The agreed price is known as futures price.

OTC AND EXCHANGE

TRADED
OTC derivatives
These are contracts that are traded and privately
negotiated directly between two parties without
going through an exchange or other intermediaries.
Usually some credit risk is involved.
Exchange traded
These are those derivative instruments that are
traded via specialized derivative exchanges.
A derivatives exchange is a market where
individuals trade standardized contracts that have
been standardized by the exchange.

FORWARDS CONTRACT
It is a non-standardized contract
between two parties to buy or to sell
an asset at a specified future time at
a price agreed upon today.
They are traded in OTC market.
More credit risk compared to futures
contract.

OPTIONS CONTRACT
It is a contract which gives the buyer the right but
not the obligation to buy or sell an underlying asset
or instrument at specified strike price on or before
specified date.
Two types of options: European option and American
option
Call & Put options
Call option gives the holder the right to buy an asset
by a certain date for a certain price.
Put option gives the holder the right to sell an asset
by a certain date for a certain price.

SWAPS
A swap is an agreement between counter-parties
to exchange cash flows at specified future times
according to pre-specified conditions.
A swap is equivalent to a coupon-bearing asset
plus a coupon-bearing liability. The coupons
might be fixed or floating.
A swap is equivalent to a portfolio, or strip, of
forward contracts--each with a different maturity
date, and each with the same forward price.

TRADERS IN DERIVATIVES
MARKET
Hedgers
A hedger is someone who faces risk associated
with price movement of an asset and who uses
derivatives as means of reducing risk.
They provide economic balance to the market.
Speculators
Speculators are typically sophisticated, risk-taking
investors with expertise in the market in which
they are trading
They are extremely high risk takers who are in the
Derivative markets merely for the purpose of
making profits.

CONT
Arbitrageur
A person who simultaneously enters into
transactions in two or more markets to
take advantage of the discrepancies
between prices in these markets
Arbitrage involves making profits from
relative mispricing.
They help in bringing about price
uniformity and discovery.

THANK YOU