Derivatives PPT 2022

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Classification of Derivative

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Classification of Derivati  Future Contract :  Index Future : Nifty & Bank N  Stock Future : Any Individual  2. Option Contract :  Index Options: Nifty & Bank  (i) Call Option : Right to buy  (ii) Put Option : Right to Sell  Stock Options: Any particula

ives Nifty l Stock Future : Tata Steel k Nifty (Most Popular ) y ( For Bullish Market) ( For Bearish Market ) ar stock call & Put options

Future Terminology



Future contract  Futures markets were innovated to overcome an agreement made through an organized e commodity or a financial asset on a future d standardized forward contracts that are trad associated with the exchange guarantees se futures contract, takes a long position and th  Takes a short position. The words buy and se underlying asset changes hand, between buy Future contract are traded worldwide du investor Before trading in to the future contract we contract with suitable examples.

e the limitations of forwards. A futures contract is exchange to buy or sell a fixed amount of a date at an agreed price. Simply, futures are ded on an exchange. The clearing house ettlement of these trades. A trader, who buys he one, who sells futures, ell are figurative only because no money or yer and seller, when the deal is signed. ue to its characteristic and popular among s, Traders. have to understand terminology of the future

Terminology of Fut 27 Explanation / Description Sr Name 1 Spot The price at which an asset trades in the s price 2 Futures The price at which the futures contract trad price futures market. 3 Contract It is a period over which a contract trades cycle months contract cycle‐ the near month (Se month (November 2016). Every futures co 4 Expiry The day on which a derivative contract c date day of the contract. The expiry date in the of the expiry month. If the last Thursday i trading day. On expiry date, all the contra

ture spot market. des in the s. The maximum number of index futures contracts is of 3 eptember 2016), the next month (October 2016) and the far ontract expires on last Thursday. ceases to exist. It is last trading e quotes given is September 24, 2015. It is the last Thursday is a trading holiday, the contracts expire on the previous acts are compulsorily settled. www.isfm.co.in 23 May 2022

Future Terminology… 28 It is minimum move allowed in the contracts as part of contract specifi 5. Tick Size price buyer is willing to pay and as 6. Basis The difference between the spot pr 7. Cost of Carry Cost of Carry is the relationship be storage cost (in commodity markets till delivery less the income earned 8. Contract Size Futures contracts are traded in lots and contract the contract value we have to multi value contract size. 9. Margin As exchange guarantees the settlem Account by either counterparty, it charges va margins from their customers.

……… e price quotations. Exchanges decide the tick sizes on traded ication. Tick size for Nifty futures is 5 paisa. Bid price is the sk price is the price seller is willing to sell. rice and the futures price is called basis. etween futures prices and spot prices. It measures the s) plus the interest that is paid to finance or ‘carry’ the asset d on the asset during the holding period. and to arrive at iply the price with contract multiplier or lot size or ment of all the trades, to protect itself against default variouwswmwa.irsgfmin.scof.rionm b2ro3kMerasy. B2r0o2ke2rs in turn charge

Future Terminology… 29 The amount one needs futures contract is know 10. Initial Margin Margin + Span Margin 11. Total Margin Span Margin + Exposu Span held with Exchang 12. Marking to Market (MTM) In futures market, while losses are settled on day‐to‐da 13. Open Interest and Volumes An open interest is the Traded an underlying asset, Vo regards to specific cont or month or over entire Price Band No price band applicab per exchange norms.

… to deposit in the margin account at the time of entering a wn as the initial margin. It is combination of the Exposure ure Margin ge + Exposure held with broker e contracts have maturity of several months, profits and ay basis – called mark to market (MTM) settlement. total number of contracts outstanding (yet to be settled) for olumes traded give us an idea about the market activity with tract over a given period – volume over a day, over a week e life of the contract. ble for derivatives securities, just circuit breakers apply as www.isfm.co.in 23 May 2022

Futures – Index Contrac

ct Specifications

Index Future Example 31 Future Index Nifty 1 Instrument type 25th Jan 2021 2 Underlying asset 18000 ( as on 18/11/ 3 Expiry date 50 4 CMP 18000*50 = 9 Lakh r 5 Lot Size 1.80 Lakh (20% Appr 6 Total Turnover 5 paisa 7 Margin require Near – March, Next – 8 Tick Size 18000 9 Contract Cycle 18150 10 Open 17940 11 High 18008 12 Low 13 Closing

e /2021) rupees rox. ) April, Far – May www.isfm.co.in 23 May 2022

Stock Future Example 32 Future Stock Escort 1 Instrument type 25th Nov 2021 2 Underlying asset 1645 3 Expiry date 550 4 CMP 1645*550 = 9 Lakh a 5 Lot Size 2 lakh -/ Approx (28% 6 Total Turnover 5 paisa 7 Margin require Near – March, Next – 8 Tick Size 1635 9 Contract Cycle 1670 10 Open 1591 11 High 1647 12 Low 13 Closing

e approx %) April, Far – May www.isfm.co.in 23 May 2022

Futures – Stock Contract Sp

pecifications

What is Fair Value



Futures Pric FUUTURE PRICE = Intrinsic V Basic Valu Example - Tata Cosuntancy  Future Price 2350 = 2338 (Cash m Or  Future Price 2350 = 2365 (Cash m

cing + Cost of Carry Value Discount or Premium ue market Price) + 12 (Premium) market Price3)5+ 1253 M(Dayis20c2o2unt)

Future Price Live Sc

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Future Price Live Sc

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Settlement / Pay off  Pay off charts for futures  In case of futures contracts, long as well as short po into linear pay offs for futures contracts. Futures pa  Pay off for buyer of futures: Long futures  Let us say a person goes long in a futures contract underlying at Rs. 100 on expiry. Now, if on expiry, will buy at Rs. 100, as per the futures contract and cash market at Rs.150, thereby making a profit of 70 at expiry, he would have to buy at Rs. 100, as cash market, he would receive only Rs. 70, translat  Short Futures pay off  As one person goes long, some other person has to profits and losses for the short futures position will shown in the below table and chart:

osition has unlimited profit or loss potential. This results ay offs are explained in detail below: t at Rs.100. This means that he has agreed to buy the , the price of the underlying is Rs. 150, then this person d will immediately be able to sell the underlying in the Rs. 50. Similarly, if the price of the underlying falls to Rs. per the futures contract, and if he sells the same in the ting into a loss of Rs. 30. o go short, otherwise a deal will not take place. The be exactly opposite of the long futures position. This is

Long and Short Future @ 39 Long Futures Pay off Market price -50 at expiry -40 50 -30 60 -20 70 -10 80 0 90 10 100 20 110 30 120 40 130 50 140 60 150 160

@ 100 with Example Market price Long Futures at expiry Pay off 50 50 60 40 70 30 80 20 90 10 100 0 110 -10 120 -20 130 -30 140 -40 15w0ww.isfm.co.in 23 Ma-y502022 160 -60

40

www.isfm.co.in 23 May 2022

What is MTM



Margin & M2M  We have to maintain margin on daily b  If we face shortage then we can face th  MTM is notional profit / loss that a pers  If you square off your position then it w  Before buying future contract trader mu

basis as per guideline by the exchange. he penalty by exchange. son face due to open position in the market. would be converted in to real one. ust think about the MTM maintenance also.

Futures – Marked to M Nifty Feb Futures Bought at 10,900 Lot Size 75 Date Settle Price Marked-To-Market A Margin (in Points) 19-Jan-18 10,921.00 21.00 22-Jan-18 10,992.50 71.50 23-Jan-18 11,107.85 115.35 24-Jan-18 11,105.40 (2.45) 25-Jan-18 11,062.60 (42.80) 29-Jan-18 11,137.65 75.05 30-Jan-18 11,072.10 (65.55) 31-Jan-18 11,055.40 (16.70) 1-Feb-18 11,031.30 (24.10) 43

Market Margin Absolute MTM Initial margin 81,750 Profit/ Loss 9,847.50 1,575.00 5,362.50 8,651.25 (183.75) (3,210.00) 5,628.75 (4,916.25) (1,252.50) 23 May 2022 (1,807.50) www.isfm.co.in

Margin Shortage and Penal 44 Margin Required Actual M 100000 90000 Days 100000 80000 1st day 100000 85000 2nd day 100000 80000 3rd day 100000 80000 4th day 10000 85000 5th day 6th day Note : If any other trade we make after ab MTM then we will face the 5% penalty from After Expiry of the contract we will get aga

lty Margin Short % Penalty 10000 1% 20000 1% 15000 1% 20000 1% 20000 5% 15000 5% bove scenario and we face shortage of m day one in that month. ain relaxation of the 1% slab. www.isfm.co.in 23 May 2022

Options Trading



Difference between Future a Future  Need to pay 20-30% Margin  You must maintain to MTM on real time basis  Only one price available for buying or selling  Margin is same for buyer and seller  Unpredicted profit and loss for trading  Rollover is possible  No effect of time value of money  Monthly contract available only

and Options Options  Need to pay only 2% Margin  Only one time premium payment  Can bet on multiple strike price  Margin is different totally for buyer and seller  Maximum loss is predictable, no cap of profit  Rollover is not possible because of price gap  Time value of money play major role  Monthly and Weekly both contracts available

Options  An Option is a contract that gives the right, asset on or before a stated date/day, at a position i.e. buying the option is called buyer short position i.e. selling the option is called t has the right but no obligation with regards option writer has the obligation in the contra his option only when the situation is favorabl writer would be legally bound to honor the c  Options may be categorized into two main t  Call Options  Put Options  Option, which gives buyer a right to buy the  the option which gives buyer a right to sell th