Derivatives PPT 2022

future adverse price needs to take an equal and opposite position in the futures market dden exposure to the index, which is denoted by the beta. Assuming .2, you can factor a complete hedge by selling Rs 1.2 mn of S&P tock is not known, it is unit decrease in the folio. This is achieved by by the market value of his to short sell 1.2 * 1 million =

Types of Hedge  1. Long Hedge- Long in  2. Short Hedge – Short i  3. Cross Hedge – Buy in  4. Complete Hedge – Bu Future  5. Partial Hedge – Buy 1 lakh Nity lot in future.

Future and Short in Cash in Future and long in Cash n Cash and Sell Nifty uying in Cash and Sell in 10 lakh in cash and sell 8

Long Hedge & Short Hed  Long hedge: Long hedge is the transaction when we futures market. For example, we expect to receive in the securities market. We have not yet decided t be made. We expect the market to go up in near f higher price. We can hedge by going long index f cash market and simultaneously unwind correspond securities at higher price, resulting from the upward would be partially or fully compensated by the pro  Short hedge: Short Hedge is a transaction when the  short in futures market. For instance, assume, we ha  in near future but we expect the prices to go down  our plan and may result in reduction in the portfolio  value, today, we can short index futures of equival  made in cash market will be partly or fully compen  positions.

dge we hedge our position in cash market by going long in some funds in future and want to invest the same amount the specific company/companies, where investment is to future and bear a risk of acquiring the securities at a futures today. On receipt of money, we may invest in the ding index futures positions. Any loss due to acquisition of d movement in the market over intermediate period, ofit made on our position in index futures. e hedge is accomplished by going ave a portfolio and want to liquidate n in near future. This may go against o value. To protect our portfolio’s lent amount. The amount of loss nsated by the profits on our futures

Cross Hedge  Cross hedge: When futures contract on look forward to an asset that is closely in the futures market of that closely asso may trade in futures in this asset to prot This is called cross hedge.  For instance, if futures contracts on jet fu  markets then hedgers may use contracts crude oil, heating oil or gasoline due to hedging purpose. This is an example of  Indeed, in a crude sense, we may say th hedge against the market risk on a port hedge because we are not using the ex

an asset is not available, market participants associated with their underlying and trades ociated asset, for hedging purpose. They tect the value of their asset in cash market. uel are not available in the international s available on other energy products like o their close association with jet fuel for f cross hedge. hat when we are using index futures to tfolio, we are essentially establishing a cross xact underlying to hedge the risk against.

What is Open Interest



Open Interest  What is Open Interest ?  How is it different from Volum  How can we benefit from the  How its predict market trend?  How we can identify operator

mes? Volumes and Open interest data? ? rs game in stock

What is open Interest  Definition: Open interest is the total number participants at the end of each day. Open in futures market.  Description: If both parties to the trade are new seller), open interest will increase by on or old position (one old buyer and one old s one old trader passes off his position to a ne open interest will not change. Increasing open interest means that new mon be that the present trend (up, down or sidew that the market is liquidating and implies tha Therefore, open interest provides a lead ind To determine the total open interest for any from one side or the other, buyers or sellers,

of outstanding contracts that are held by market nterest measures the total level of activity into the initiating a new position (one new buyer and one ne contract. If both traders are closing an existing seller), open interest will decline by one contract. If ew trader (one old buyer sells to one new buyer), ney is flowing into the marketplace. The result will ways) will continue. Declining open interest means at the prevailing price trend is coming to an end. dication of an impending change of trend. given market, we only need to know the totals and not the sum of both.

Example



NSE Open Interest

t Chain

OI and Volume interpretati  Open interest information tells us how many contract hand tells us how many trades were executed on the up to 1. For instance, on a given day, 400 contracts the day is 400 and not 800. Clearly volumes and op set of information. The volume counter starts from ze new trades occur. Hence the volume data always inc discrete like volumes, OI stacks up or reduces based example we have just discussed, let us summarize th  Notice how OI and volume change on a daily basis. volume. However, it is not true for OI. From a stand-a pretty useless. However traders generally associate the market.

ion ts are open and live in the market. Volume on the other e given day. For every 1 buy and 1 sell, volume adds were bought and 400 were sold, then the volume for pen interest are two different; buy seemingly similar ero at the start of the day and increments as and when creases on an intra-day basis. However, OI is not d on the entry and exit of traders. In fact for the he OI and volume information. Today’s volume has no implication on tomorrow’s alone perspective both OI and volume numbers are these numbers with prices to draw an inference about

Volume and OI Price Volume Trader’s Perceptio Increase Increase Bullish Decrease Decrease Bearish trend could Decrease Increase Bearish Increase Decrease Bullish trend could Unlike volumes, the change in Open interes on markets. However it does give a sense o positions. The following tables summarizes t changes in the OI and prices –

ons d probably end, expect reversal d probably end, expect reversal st does not really convey any directional view of strength between bullish and bearish the trader’s perspective with respect to www.isfm.co.in 23 May 2022

Price and OI 133 Price Position Build Sr. Open Interest No. 1 UP UP Long Buildup 2 Down Down Long Unwinding 3 Up Down Short Buildup 4 Down Up Short Covering Do note, if there is an abnormally high OI ba prices then be cautious. This situation simply m leverage being built up in the market. In situa lead to a lot of panic in the market.

Trader Perceptions Market is Bullish Profit booking start Market is Bearish Fancy Market, will come down acked by a rapid increase or decrease in means that there is a lot of euphoria and ations like this, even a small trigger could www.isfm.co.in 23 May 2022

What is PCR Ratio



What is PCR Ratio  Definition of 'Put-call Ratio :-  Put-call ratio (PCR) is an indicator commonly used t contrarian indicator, the ratio looks at options build rise in the market is excessive and if the time has co either on the basis of options trading volumes or on  How it can be calculated :-  PCR (OI) = Put open interest on a given day/Call o It can also be calculated by dividing put trading vo PCR (Volume) = Put trading volume/call trading vo PCR for market wide positions can also be calculat and for all open Put options in a given series.

to determine the mood of the options market. Being a d up, helps traders understand whether a recent fall or ome to take a contrarian call. The ratio is calculated n the basis of options contracts on a given day or period. open interest on the same day olume by call trading volume on a given day. olume ted by taking total number of OI for all open Call options

Interpretation of PCR Sr. More Interpretation Less In No than 1 Than 1 Normal Bullish 0.9 N 1.1 Normal Bullish 0.8 S 1.2 Normal Bullish 0.7 S 1.3 Normal Bullish 0.6 O 1.4 Strong Bullish 0.5 S 1.5 Overbought 0.4 S 1.6 Strong Overbought 0.3 1.7 Strong Overbought 0.2 1.8

nterpretation *Note : If Vix is in Normal Bearish overbought Strong Bearish zone and RSI is Strong above 70 + Vix Oversold is above 20 Strong Oversold then create a Strong Oversold golden opportunity to short the Nifty or buying put in the market.

What Is the Put/Call Ratio  The Put/Call Ratio is used as a contrarian ind indicates that traders may be too bearish, a then there is no one left to push prices lower. short-term bullish for stocks/stock indexes.  An extremely low number of puts (high numb bullish, and if all the “bulls” have already ta prices higher. A very low Put/Call Ratio is the stocks/stock indexes.  Traders watch for extreme levels in the Put/C prices could reverse. These levels will vary b well as market conditions. A long-term up or exact levels used to indicate extreme bullishn Put/Call Ratio will show which levels are acti

Used For? dicator. An extremely high number of puts and if all the “bears” have already taken positions . A very high Put/Call Ratio is therefore potentially ber of calls) indicates that traders may be too aken positions then there is no one left to push erefore potentially short-term bearish for Call Ratio to signal periods where stock and index based on which ratio is used (discussed above), as r downtrend in the stock market may alter the ness or bearishness. Viewing the long-term Total ing as extremes.

Example of PCR  suppose Nifty50 Put option at strike price 9, contracts on a day. Suppose further that Cal same expiry stood at 88,220. In this case, the PCR would be 5,609/88,220 = 0.06  Now suppose the Put open interest for the sa and Call open interest stands at 6,816,250. The PCR in this case would be 4310600/6816250 =0.63 If the ratio is high in a falling market, it refle ratio in a rising market is considered a bullis

,000 for March expiry saw a volume of 5,609 ll volume on that day at the same strike price and ame expiry and strike price stands at 4,310,600 ects how bearish the sentiment is. But a rise in the sh signal.

What is VIX



What is VIX  Introduction:-  “VIX” is a trademark o was the first exchange in the world to compu (F&O) trading on VIX started in 2004 on CB the years. With the increasing popularity of designed similar to the CBOE VIX, we should the India VIX contracts in the coming years.  What is India VIX:-  India VIX is a vo Nifty. It is computed by using the best bid an near month Nifty option contracts. VIX is des annual market volatility over the next 30 cal expected volatility and vice-versa.

of Chicago Board Options Exchange (CBOE). CBOE ute a volatility index back in 1993. The derivative BOE and its popularity has grown immensely over option trading in India, and since India VIX is d be seeing a similar trend in trading activity on olatility index based on the index option prices of nd ask quotes of the out of the money, present and signed to indicate investors’ perception of the lendar days, higher the India VIX, higher the

How it works  The values of India VIX are computed by the Natio  (NSE) using the order book of Nifty options. Based better it is) of all Nifty options contracts, the annua  The figure generated is in percentage and indicate For instance, if India VIX is 37.19, which was the le expected change of 37.19% annually over the com expected to move up or down by 3% (37.19/ 12)  For calculation purposes, the near and next month c month options must have at least one week to expi pricing variation, which might occur close to expira When the near month options have less than a we months of Nifty options. \"Ideally, all the contracts s no liquidity in the contracts which have longer expi

onal Stock Exchange d on the best bid-ask prices (the lower the spread, the alised implied volatility is calculated. es the market volatility over the next 30 calendar days. evel of index on 5th March 2017, it indicates an ming 30 days. In other words, it means that the market is ) over the next 30-day period. call and put options are taken into account. The near iration. \"This norm is followed in order to ensure that ation, is minimised eek to expiration, the VIX rolls to the second and third should be included in the computation. However, there is iry terms

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What is Arbitraging



Arbitrage  Arbitrageurs :  An arbitrage is a deal that produces risk fre A simple arbitrage occurs when a trader pur exchange and simultaneously arranges to se price. Such opportunities are unlikely to pers to buy the asset in the cheap location and sim reducing the pricing gap.  An arbitrageur is basically risk averse. He en profits. When markets are imperfect, buying market gives riskless profit. Arbitrageurs are  In the futures market one can take advantag lower priced market and selling at the highe possible between the spot market and the fu software for buying all 50 Nifty stocks in the

ee profits by exploiting a mispricing in the market. rchases an asset cheaply in one location/ ell it at another location/exchange at a higher sist for very long, since arbitrageurs would rush in multaneously sell at the expensive location, thus nters into those contracts were he can earn riskless g in one market and simultaneously selling in other e always in the look out for such imperfections. ges of arbitrage opportunities by buying from er priced market. In index futures arbitrage is utures market (NSE has provided a special e spot market.

Arbitrage…  Cash and carry arbitrage  The following data is available on stock A a  Cash market price Rs. 1500  December Futures Rs. 1520  Contract multiplier for stock 100 shares  Assume an implied cost of carry of 8% p.a.  Theoretically/ fair price of December future  the theoretical price, we may say that Decem  take advantage of the mispricing, an arbitra  1 futures contract on that at given prices. Thi

as on Jan 15, 2017. i.e. 0.75% per month. es is 1504.69 (= 1500 * e0.0075*5/12). Going by mber futures on stock A are overvalued. To ageur may buy 100 shares of stock A and sell is would result in the arbitrage profit of Rs.

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