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Instrument

Management

Presenter
M.Murali Krishna
Agenda

• Types of Instruments
• Attributes required to Manage Equities
• What are Derivatives and the various attributes required
to manage them.
• What are Bonds and the attributes required to manage
them.
Financial instruments are cash, evidence of an ownership
interest in an entity, or a contractual right to receive, or
deliver, cash or another financial instrument.

Instruments can be categorized into 2 types namely :

6. Cash instruments are financial instruments whose value


is determined directly by markets. Ex : Loans and
deposits.
7. Derivative instruments are financial instruments which
derive their value from the value and characteristics of
one or more underlying assets. They can be divided into
exchange-traded derivatives and over-the-counter (OTC)
derivatives.
Equities and general
attributes required to
Definition : A stock or any other security representing an
ownership interest is called Equity.

ISIN number : A code that uniquely identifies a specific


securities issue.

Tick : The minimum upward or downward movement in the


price of a security.

Face Value : The value of a security that is set by the


company issuing it.
Types of Derivates
1. Futures : A financial contract obligating the buyer
to purchase an asset (or the seller to sell an asset),
such as a physical commodity or a financial
instrument, at a predetermined future date and price.

2. Options : An option is a contract that gives the buyer


the right, but not the obligation, to buy or sell an
underlying asset at a specific price on or before a certain
date.
Attributes required to manage
Futures & Options
Trading Symbol : It is the symbol of the security that must
be delivered when a derivative contract is exercised.

Expiry Period : Futures can be classified into Monthly


expiry/Weekly expiry/Quarterly Expiry Futures.

Expiry Dates : Depending on the number of months a


monthly future will expire at the end of the month it was
issued for. A weekly future will expire at the end of the
week it was issued for. A quarterly future will expire at
the end of the calendar quarter (i.e. March, June,
September or December) it was issued for.
•The last trading date of an instrument will be on or before the
date of expiry.

•If the expiration date, last trading date is a non trading day,
the related operations will be performed before the start of
trading of the next trading day. A symbol will not be available
for trading after its last trading date. A new symbol will be
created and available for trading on the day after its last
trading date.
Lot Size : Lot size is the minimum quantity that can be
traded. It differs from one underlying to another. Minimum

Trading Units : It is the minimum quantity that can be


traded for an commodity.
For e.g. Heating oil in HKME is measured in barrels.
42000 U.S. gallons = 1000barrels.

Price Quotation : Currency quoting as


Dollars/Rupees/Pounds etc.

Minimum Price Fluctuation : It can also be termed as


“Tick Size” which is the minimum amount to be quoted or
incremented.
e.g. In NSE minimum tick size is 5 Paisa.
Settlement Type : The settlement type can be either
cash or physical. In case of commodities a delivery
period is given which is agreed by both parties and the
delivery should take place before the last business day of
the delivery month.

Grade and Quality Specifications : In case of


commodities the delivery is based on the grade of the
stock and the quality which is certified by the warehouse
receipt in NSE.

Position Accountability Levels and Limits : Every


individual and broker firm will be limited to hold an
position for a stock.
Additional Attributes
required to manage
Call Option : An option contract giving the owner the right
(but not the obligation) to buy a specified amount of an
underlying security at a specified price within a specified
time.
Put Option : An option contract giving the owner the right,
but not the obligation, to sell a specified amount of an
underlying asset at a set price within a specified time.
Strike Price : The price at which a specific derivative
contract can be exercised.
Premium : The specified amount of payment required
periodically by an insurer to provide coverage under a
given insurance plan for a defined period of time.
What are Bonds?
Definition : A debt investment in which an investor loans
money to an entity (corporate or governmental) that
borrows the funds for a defined period of time at a
fixed interest rate. Bonds are used by companies,
municipalities, states and U.S. and foreign governments
to finance a variety of projects and activities.

Bonds are commonly referred to as fixed-income


securities and are one of the three main asset classes,
along with stocks and cash equivalents.
Attributes required to manage
bonds
Par value – face amount of the bond, which is paid at
maturity (assume $1,000).
Coupon interest rate – stated interest rate (generally
fixed) paid by the issuer. Multiply by par to get dollar
payment of interest.
Maturity date – years until the bond must be repaid.
Issue date – when the bond was issued.
Yield to maturity - rate of return earned on
a bond held until maturity (also called the “promised
yield”).
Interest rates and bond
prices have an inverse
• When rates go up, newly
issued bonds come to the
market with higher yields
than existing bonds. The
newly issued bonds are
more attractive than
comparable existing
bonds with lower yields.
In order to sell their
existing bonds, investors
have to reduce their
prices to make them
equally attractive.
Thank You!!!!!!!!!!