Chapter6 INTRODUCTION TO DERIVATIVE MARKET 1 Futures and

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Chapter-6 INTRODUCTION TO DERIVATIVE MARKET 1 Futures and Forwards, 2 Options, and 3 Swaps

Chapter-6 INTRODUCTION TO DERIVATIVE MARKET 1 Futures and Forwards, 2 Options, and 3 Swaps Dr. Krishna Gadasandula

Welcome to all 2 nd Year MBA. Students Dr. Krishna Gadasandula M. B. A.

Welcome to all 2 nd Year MBA. Students Dr. Krishna Gadasandula M. B. A. , M. Com. M. Phil. and Ph. D. With more than ten years of experience in Accounting and Finance Teaching, Research, Training & Education Management. Mail: krishnagadasandula@gmail. com, # +91 9866349726 -, 0904565415(Local Phone No. ) Hyderabad. India.

INTRODUCTION TO DERIVATIVES Derivatives are the financial instruments which derive their value from the

INTRODUCTION TO DERIVATIVES Derivatives are the financial instruments which derive their value from the value of the underlying asset. HISTORY: Derivatives markets can be traced back to middle ages. They were developed to meet the needs of farmers and merchants. First future exchange was established in Japan in 16 th century. The Chicago Board of Trade was established in 1848. The international Monetary market was established in 1972 for future trading in foreign currencies

Players in the derivatives market? � Hedgers � Speculators � Arbitrageurs

Players in the derivatives market? � Hedgers � Speculators � Arbitrageurs

HEDGER � A hedger is someone who faces risk associated with price movement of

HEDGER � A hedger is someone who faces risk associated with price movement of an asset and who uses derivatives as means of reducing risk.

And SWAPS

And SWAPS

Forward contracting is valuable in hedging and speculation.

Forward contracting is valuable in hedging and speculation.

BASIS FOR COMPARISON FORWARD CONTRACT FUTURES CONTRACT Meaning Forward Contract is an agreement between

BASIS FOR COMPARISON FORWARD CONTRACT FUTURES CONTRACT Meaning Forward Contract is an agreement between parties to buy and sell the underlying asset at a specified date and agreed rate in future. A contract in which the parties agree to exchange the asset for cash at a fixed price and at a future specified date, is known as future contract. What is it? It is a tailor made contract. It is a standardized contract. Traded on Over the counter, i. e. there is no Organized stock exchange. secondary market. Settlement On maturity date. On a daily basis. Risk High Low Default As they are private agreement, the chances of default are relatively high. No such probability. Size of contract Depends on the contract terms. Fixed Collateral Not required Initial margin required. Maturity As per the terms of contract. Predetermined date Regulation Self regulated By stock exchange Liquidity Low High

Options

Options

SWAPS

SWAPS

SWAPS

SWAPS

Thank you.

Thank you.

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