TOPIC - DERIVATIVES

PRESENTED TO: Asst. Prof. Habib Laskar MBA Dept., Assam University

PRESENTED BY: Anupama Chanda Roll No.-10

MEANING

DERIVATIVES SECURITIES ARE THE CONTRACTS WHICH ARE WRITTEN BETWEEN TWO PARTIES AND WHOSE VALUE IS DERIVED FROM THE VALUE OF UNDERLYING WIDELY HELD AND EASILY MARKETABLE ASSETS SUCH AS AGRICULTURAL AND OTHER PHYSICAL COMMODITIES, CURRENCIES.

TYPES OF DERIVATIVES CONTRACTS

OVER-THE-COUNTER EXCHANGE-TRADE DERIVATIVES CONTRACTS

DERIVATIVES INSTRUMENTS

FORWARDS FUTURES OPTIONS WARRANTS SWAPS

FORWARDS

A TAILORED CONTRACT BETWEEN TWO PARTIES WHERE PAYMENT TAKES

PLACE AT A SPECIFIC TIME IN THE FUTURE AT TODAYS PREDETERMINED

PRICE. A forward contract is the simplest of the Derivative products. It is a mutual

agreement between two parties, in which the buyer agrees to buy a quantity of an asset
at a specific price from the seller at a future date. The Price of the contract does not change before delivery. These type of contracts are binding, which means both the buyer and seller must stay committed to the contract. This means they are bound to deliver or take delivery of the product on which the forward contract was agreed upon.

FUTURES

FUTURES ARE CONTRACT TO BUY OR SELL AN ASSSETS ON OR BEFORE

A FUTURE DATE AT A PRICE SPECIFIED TODAY.

A futures contract is an agreement to buy or sell an asset at a certain time in the future at a specific price. The Contractual terms of the futures contracts

are very clear. The Futures market was designed to solve the shortcomings in
the forwards contracts. Unlike forwards, futures are traded in organized exchanges. They also use a clearing house that provides the necessary

protection to both the buyer and the seller. The price of the futures contract can
change prior to delivery.

OPTIONS

OPTIONS ARE THE CONTRATS THAT GIVE THE OWNER

THE RIGHT, BUT NOT THE OBLIGATION, TO BUY OR

SELL AN ASSETS.

WARRANTS

WARRANT IS A CONTRACT ENTERED INTO BY THE ISSUING

COMPANY GIVING HOLDER THE RIGHT TO PURCHASE OR

SUSCRIBE TO THE STATED NUMBER OF EQUITY SHARES OF THAT COMPANY WITHIN PREDETERMINED SPECIFIED PERIOD OF TIME AT A PRE DETERMINED PRICE.

SWAPS

SWAPS ARE THE CONTRACTS TO EXCHANGE CASH ON OR BEFORE A SPECIFIC FUTURES DATE BASED ON THE UNDERLYING VALUE OF CURRENCY EXCHANGE RATES, BONDS RATES , STOCK ETC.

DIFFERENCE BETWEEN FORWARD AND FUTURE CONTRACT

Although a Futures Contract is similar to a Forward Contract in that both are agreements to trade on a set future date, there are some significant differences.
1.

Fututres contracts are highly standardized, while each Forward contract is personalized and unique.

2.

Futures are settled at the end on the last trading date of the contract with the settlement price; whereas, the Forwards are settled at the start with a forward price.

3.

The profit or loss on a Futures position is exchanged in cash every day. With the Forwards contract, the profit or loss is realized only at the time of settlement so the credit exposure can keep increasing.

4.

The Futures contract does not specify to whom the delivery of a physical asset must be made; in a Forwards contract it is clearly specified who recieves the

CONTD..
6. Futures are generally subject to a single regulatory regime in one

jurisdiction, while forwards - although usually transacted by regulated

firms - are transacted across jurisdictional boundaries and are primarily governed by the contractual relations between the parties. 7. In case of physical delivery, the forward contract specifies to whom the delivery should be made. The counterparty on a futures contract is chosen randomly by the exchange. 8. In a forward there are no cash flows until delivery, whereas in futures there are margin requirements and periodic margin calls.

DIFFERERENCE BETWEEN FUTURE AND OPTION

1.

The main fundamental difference between options and futures lies in the obligations they put on their buyers and sellers. An option gives the buyer the right, but not the obligation to buy (or sell) a certain asset at a specific price at any time during the life of the contract. A futures contract gives the buyer the obligation to purchase a specific asset, and the seller to sell and deliver that asset at a specific future date, unless the holder's position is closed prior to expiration.

2.

Aside from commissions, an investor can enter into a futures contract with no upfront cost whereas buying an options position does require the payment of a premium. Compared to the absence of upfont costs of futures, the option premium can be seen as the fee paid for the privilege of not being obligated to buy the underlying in the event of an adverse shift in prices. The premium is the maximum that a purchaser of an option can lose.
Another key difference between options and futures is the size of the underlying position. Generally, the underlying position is much larger for futures contracts, and the obligation to buy or sell this certain amount at a given price makes futures more risky for the inexperienced investor.

3.

CONTD..
4. The final major difference between these two financial instruments is the way the gains are received by the parties. The gain on a option can be realized in the following three ways: exercising the option when it is deep in the money, going to the market and taking the opposite position, or waiting until expiry and collecting the difference between the asset price and the strike price. In contrast, gains on futures positions are automatically 'marked to market' daily, meaning the change in the value of the positions is attributed to the futures accounts of the parties at the end of every trading day - but a futures contract holder can realize gains also by going to the market and taking the opposite position. 5. In a futures contract, both participants in the contract are obliged to buy (or sell) the

underlying asset at the specified price on settlement day. As a result, both buyers and
sellers of futures contracts face the same amount of risk. On the other hand, the option contract buyer has the right but not the obligation to buy (or sell) the underlying asset. Hence the term "option" and this option comes at a price in the form of a premium.

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