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 DERIVATIVES 6.30 hrs.

What is a 'Derivative'
A derivative is a security with a price that is dependent upon or derived from one or more
underlying assets. The derivative itself is a contract between two or more parties based upon the asset or
assets. Its value is determined by fluctuations in the underlying asset. The most common underlying
assets include stocks, bonds, commodities, currencies, interest rates and market indexes.
Derivatives either be traded over-the-counter (OTC) or on an exchange. OTC derivatives constitute the
greater proportion of derivatives in existence and are unregulated, whereas derivatives traded on
exchanges are standardized. OTC derivatives generally have greater risk for the counterparty than do
standardized derivatives.

The value which is derived from the underlying instruments (securities, commodities, fx etc.)

Hedging is a concept which describes the derivative instruments to minimize the risk of Loss.

 Listed
 OTC
Define condition type

Define condition group

Assign cond type to cond group

Define product type:


Similarly maintain/update for Futures as well.

Activate link to classification:

Activate you products.


SPRO ->Transaction management -> Transaction type

Define no. range

Define transaction type:

Get the definition of STOCK, INDEX, FUTURES, COMMODITIES.

Std. cash flow for purchase is – 06, for sale -07


Maintain for Sale as well
Similarly maintain/update for Futures as well.

Define flow types.

 Std. flow type for listed &OTC derivatives = 1500 (purchase), 1510 (Sale)
Derived Flows:

Define calculation procedure.

1. Enter new procedure


2. Currency, Enter upper limit
3.

Define Derivation procedure and rules:

If you want to deduct any commission or other charges.


Maintain for Sale (1510)

Update types:

Assign flow types to update types.

New entires.

Usage type for listed derivatives is = Marginal management listed Options and Futures.

Update types are = MM1500+ & MM1510-

OTC Derivatives
When stocks are not listed in resister stock exchanges

Multinational commodities market from Market data management not from Master data.

1. Options
2. Forwards
3. Swaps

Not recommended

Maintain from below (recomended)


OTC ->transaction management->product types

**Repos… and Forward Loans are belong to Loan Management.

OTC int derivatives: all products having interest (bond, FD) not applicable to commodities/FX/Stocks.

Product category for listed derivatives

Need to maintain for all above product category for each OTC derivatives.
OTC Options:
(Exercise means to put into effect the right specified in a contract. In options trading, the option
holder has the right, but not the obligation, to buy or sell the underlying instrument at a specified
price on or before a specified date in the future. If the holder decides to buy or sell the underlying
instrument (rather than allowing the contract to expire worthless or closing out the position), he or
she will exercise the option, and make use of the right available in the contract).
OTC Forwards.

Difference between Forwards & Futures

()

Difference between Physical Exercise & Cash settlement.

Commodity Forwards:
Security Forwards:

OTC SWAPS:

Transaction management

1. Define no. range


2. Define no. range for underlying transaction = ***maintain both same no. range.

Define Transaction types:

CAP/FLOOR

SWAPS

FRA

For all the above production we need to maintain both purchase and sale.
In addition - Generate initial margin flow.

OTC interest rate derivatives: need to maintain both purchase and sale for all 3 products.

1. For OTC products (two products OTC purchase and OTC sales)maintain both purchase and Sale.
Flow type :

1. Assign flow type to transaction type.

Derived flows – Not required to maintain as we already maintain in listed derivatives

Update types: – Not required to maintain as we already maintain in listed derivatives

Condition types: : – Not required to maintain as we already maintain in listed derivatives

General Setting
Define Calculation indicator:

Enter exchange rate etc.

Define company code additional data

Define Portfolio:
Define Traders: Biz takes place between counterparty and Issuer. Normally Demant account created
by Traders.

Define User data

Transaction management
General valuation class

Position indicator. ----------------------------7.40hrs.

**********General setting, Accounting setting are missing**********

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