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AMOL GAWANDE AMOL KHANVILKAR SHEETAL RAUT BHUMIKA SHAH UJALA YADAV 115 137 141 158
Derivatives
Derivatives are wasting assets, which derive their values from an underlying asset. These underlying assets are of various categories like Stocks(Equity) Agri Commodities including grains, coffee beans, etc. Precious metals like gold and silver. Foreign exchange rate Bonds Short-term debt securities such as T-bills
Features
Centralization of Trading No counter party risk Standardization of contracts Liquidity Mark to Market (MTM) margining system
PARTICIPANTS
Speculators - willing to take on risk in pursuit of profit. Hedgers - transfer risk by taking a position in the Derivatives Market. Arbitrageurs - aim to make a risk less profit by taking advantage of price differentials and thus bring about an alignment in prices by participating in two markets simultaneously
Types of derivatives
Derivatives
Futures
Options
Forwards
Swaps
Call
Put
Forward Contract
A Forward Contract is a transaction in which the buyer and the seller agree upon a delivery of a specific quality and quantity of asset usually a commodity at a specified future date. The price may be agreed on in advance or in future.
Futures Contract
It involves an obligation on both the parties i.e the buyer and the seller to fulfill the terms of the contract(i.e. these are pre-determined contracts entered today for a date in the future)
Obligation to buy or sell Stated quantity At a specific price Stated date (Expiration Date) Marked to Market on a daily basis
OPTIONS
An Options contract confers the right but not the obligation to buy (call option) or sell (put option) a specified underlying instrument or asset at a specified price the Strike or Exercised price up until or an specified future date the Expiry date. The Price is called Premium and is paid by buyer of the option to the seller or writer of the option. Types of option Call Option Put option
Call Option:
The right to buy a futures contract Protects against rising prices (e.g. feed costs) Allows participation in seasonal price rises
Components of Premium
Intrinsic Value + Time Value = Premium
INTRINSIC VALUE
Positive difference between the strike price and the underlying commodity futures price. FOR A CALL OPTION strike price below futures price FOR A PUT OPTION strike price exceeds futures price
Note: Futures price means current price of underlying futures contract.
Call Option
In-the-Money (ITM) Strike price < Spot price(current price) At-the-Money (ATM) Strike price = Spot price Out-of-the-Money (OTM) Strike price >Spot price For Commodity Markets Spot price is prevailing Futures price
Put Option
In-the-Money (ITM) Strike price > Spot price
SPREADS
1.
2. 3. 4. 5. 6.
7. Long Butterfly Spread 8. Short Butterfly Spread 9. Calendar Spreads Involving Call Options 10. Calendar Spreads Involving Put Options
4580
4400 4950
Particulars (A) Payoff of Nifty Premium Received/Paid Net Payoff Total Net Payoff Nil
Lot Sise
Profit/Loss(Net Payoff*Lot Size)
50
(7750)
50
(7750)
50
2250
A= Purchase of Call
B= Sale of Call
Premium
(135) 430
Nifty Lot Size = 50 Shares
1900
2100 3200
Particulars
1900
2100
3200
(A)
Payoff of Nifty Premium Received/Paid Net Payoff Total Net Payoff Lot Size Profit/Loss (Net Payoff*Lot Size) A= Purchase of Put 100 (135) 35
(B)
(600) 430 (170) (135) 50
(A)
Nil (135) (135) (105) 50
(B)
(400) 430 30
(A)
Nil (135) (135) 295 50
(B)
Nil 430 430
(5250)
14750
Nifty Lot Size = 50 Shares On settlement if Nifty touches 4200 4700 5100
Particulars (A)
Payoff of Nifty Premium Received/Paid Net Payoff Total Net Payoff Nil
4200 (B)
Nil 146.90
4700 (A)
(100) (54.95)
5100 (B)
Nil
(A)
(500) (54.95)
(B)
300 146.9 0
(54.95) (54.95)
146.90
91.95
Lot Size
Profit/Loss (Net Payoff*Lot Size)
50
4597.50
50
(402.50)
50
(5402.5)
A= Purchase of Put
B= Sale of Put
Particulars
(A)
4150
(B) (A)
5300
(B) (A)
4500
(B)
Payoff of Nifty
Premium Received/Paid Net Payoff
450
(145.70 )
(250)
66.70
Nil
(145.70 )
Nil
66.70
100
(145.70 ) (45.70)
Nil
66.70 66.70
21
50
6050
(3950)
1050
B= Sale of Put
Straddles
For April 2007
Premium Paid 98
22
Nifty Lot Size = 50 Shares
4500
4000 4250
Particulars
4500
4000
4250
200
(120) 80
300
(120) 180
50
(120) (70)
Lot Size
Profit/Loss (Net Payoff*Lot Size)
50
4000
50
9000
50
(3500)
Stranglers
For April 2007
Nifty Lot Size = 50 Shares On settlement if Nifty touches 4600 4000 4300
Particulars
Payoff Nifty Call/Put Total Premium Net Payoff Lot Size
4400
200 (170) 30 50
4200
200 (170) 30 50
4300
Nil (170) (170) 50
1500
1500 (8500)