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Concept of Derivatives
Derivatives products
- Basics
- Contract Specifications
- Types of Market Participants
Risk Management in Derivatives
Eligibility criteria in Derivatives
     

About Derivatives Department

New developments in Derivatives
Segment
Brief introduction to Weekly Options
Constraints faced at BSE Derivatives
 v 


A Derivative is a contract whose value is

derived from the value of its @
 

Underlying product can be a commodity,

currency, equity, interest rate, foreign
exchange rate, electricity, etc

Derivatives are risk management tools

   
 

 

  



   



 


 
 

      



    

      


   

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Forwards
Futures
Options
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A Forward Contract is an agreement to buy
or sell an asset at a pre-determined future
time for a pre-determined price
The contract is negotiated privately usually
between two parties
The parties to the contract assumes
counter party risk
The contracts are not standardized
 "   D 
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A farmer wants to ensure a specific

price for his crop which he will reap
after three months He sells his crop
in future ie three months hence by
entering into a contract today to sell
his crop three months later at a
specific price
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A Futures Contract is an agreement

between two parties to buy or sell an
asset at a certain time in the future
for a certain price
Futures are traded on Exchange
No counter party risk involved
Futures Contracts are standardised
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When the market is bullish

Take a long position
When Reliance Futures is at Rs

Market rises and Reliance Futures goes
to Rs 
Sell Reliance Futures
Profit is = Rs 2j
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Take a short position
When Reliance Future is at

Sell Reliance Futures
Market falls and Reliance Futures goes to
-
Buy Reliance Futures
Profit = Rs2-
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Options are deferred delivery

contracts that give the buyers the
right, but not the obligation, to buy
or sell a specified underlying at a set
price on or before a specified date
 "    ! 
A buyer wants to buy a new car worth
Rs  lacs for which he pays a booking
amount of Rs 2, - to the dealer
If the buyer does not pay the balance
amount and take delivery of the car
within the prescribed time, the
booking amount is forfeited
  " 
Call Option
Option to buy
Put Option
Option to sell
Option Buyer
has the right but not the obligation
Option WriterSeller
has the obligation but not the right
  " 
Option Premium
Price paid by the buyer to acquire the right
Strike Price OR Exercise Price
Price at which the underlying may be purchased
or sold
Expiration Date
Last date for exercising the option
Exercise Date
Date on which the option is actually exercised
    

American Option
can be exercised any time on or before
the expiration date
European Option
can be exercised only on the expiration
date
 "  

Derivatives Contracts are settled in

cash
- final settlement results in flow
of cash from one party to another
 "   ! 
Bought a Reliance March  Call option by
paying a premium of Rs 1-

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Bought a Reliance March  Put option by
paying a premium of Rs 1-

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SENSEX Futures
SENSEX Options
Stock Futures on 1 individual stocks
Stock Options on 1 individual stocks


 
  

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 Hedgers
Speculators
Arbitrageurs
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Clearing Member - Rs 3 lacs

Trading Member - Rs 2 lacs
Limited Trading Member Rs 2 lacs
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 Initial Margin

Mark to Market Margin

Exposure Margin (Capital Adequacy+

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It is to be collected upfront
Calculated on a portfolio basis
At client level
On trade executed basis
Collateral Adjusted on a real time basis
Based on VAR
Calculated using SPAN
 '  ' 

Charged for Futures Contract ie -

Index Futures and Stock Futures

No M-T-M in case of Options

Collected in Cash on T + 1 basis

  

Second Line of Defense

To be maintained by Clearing Members only
Adjusted in the collateral
3 % for Index products
Higher of  % or 1 sigma for Stock
products
 v  ,+

A popular risk management tool

SPAN was developed in 19

by
Chicago Mercantile Exchange
Used by 1 exchanges worldwide for
example Tokyo Stock Exchange, Hong
Kong Exchange, Singapore Exchange
Supports various derivative and non-
derivative products
 ,+  
The exchange provides inputs to
SPAN
SPAN calculates risk arrays for all
products specified and gives the
output in the form of risk parameter
files
 ,+  
This risk parameter file is made
available to all the market
participants
Members, firms, customers etc then
use the data from the SPAN risk file,
together with their positions data, to
calculate SPAN margin requirements
on their respective portfolios
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Scan risk - the core of SPAN - determines

the worst possible loss using 1 risk
scenarios

Intra-commodity spread charge

Short option minimum charge

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Assures that short option positions are

assessed for margin no matter how deep

Out-of-the-Money they are

7 % for Stock Options

3 % for Index Options

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Market wide Limits

Trading Member level limits

Client level limits

FII limits

Sub - account level limits

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Margins linked to impact cost of the

underlying
If impact cost > 1% margin increased by
7%
Second line of defense linked to daily
volatility of the underlying stocks
1 sigma or % whichever is higher
   !  
 
 
 
Based on liquidity in the cash market
Top  as per average market
capitalisation and average daily traded
volume
Median qtr sigma order size of at least Rs
 lacs
Presently, 1 stocks are permitted to
trade at BSE Derivatives based on the
above eligibility criteria
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