Professional Documents
Culture Documents
MANAGEMENT
Submitted By,
Ambar R. Kumar Nagpal- 32
Abhinav Nair- 33
Nitin V. Shukla- 47
Samarth R. Singh- 49
Flow Of Presentation
Derivatives?
Forwards
Futures
Options
Swap
Derivatives: Risk Management Tool
Risk Management by Exchange
New developments
What are Derivatives?
Ø Traded in OTC
Ø Long Position- Agree to buy
Bid Offer
Spot 2.0558 2.0562
1-month forward 2.0547 2.0552
3-month forward 2.0526 2.0531
6-month forward 2.0483 2.0489
PAYOFFS FROM FORWARD
CONTRACT
Ø The payoff from the contract is the trader’s
total gain or loss from the contract.
Ø The payoff from a long position in a forward
contract on one unit of an asset is
ST – K
Ø The payoff from a short position in a forward
contract on one unit of an asset is
K – ST
Ø In the last example, if K=2.0489 & if a corporation
has a long contract.
When ST =2.1000, the payoff is $0.0511 per £1
When ST = 1.9000, the payoff is $-0.1489 per
£1
Bid Offer
Spot 2.0558 2.0562
1-month forward 2.0547 2.0552
3-month forward 2.0526 2.0531
6-month forward 2.0483 2.0489
PAYOFF FROM LONG
POSITION
Payoff
0
K ST
PAYOFF FROM SHORT
POSITION
Payoff
0
K ST
FUTURE CONTRACTS
Ø It is an agreement between two parties to
buy or sell an asset at a certain time in the
future for a certain price
In the Money Option : Positive cashflow to holder
At the Money Option : Zero Cashflow to holder
Out of the Money Option: Negative Cash flow to holder
Option Premium:
Intrinsic Value :
Call : Max [0,Spot Price- Strike Price]
Put : Max [o, Strike Price- Spot Pice]
Time Value of an option
Settlement Type
Derivatives Contracts are settled in cash
- final settlement results in flow
of cash from one party to another.
Example of a Call Option
Bought a Reliance March 500 Call option by
paying a premium of Rs 10/-.
Translate an asset
Plain Vanilla Interest Rate Swap
Meaning:
5 %
5.2%
Intel Microsoft
LIBOR + 0.8%
LIBOR
Payoffs
Microsoft
Intel
Libor Libor
Currency Swaps
Meaning:
USD AUD
USD AUD
General Motors 5.0% 12.6%
Qantas Airways 7.0% 13.0%
Payoffs
Hedgers
Speculators
Arbitrageurs
Hedgers: Forward
Contracts
Hedgers using forward contracts to safeguard
from currency risk
Example:
O p tio n 2
B u y 2 0 ca llo p tio n co n tra cts fo r $ 2 0 0 0 , a ssu m in
O p tio n 1
B u y 1 0 0 sh areN oswfo, rp ri
$ ce
2 0 0g0o e s u p b y $ 2 7
S u p p o se th eProp rifi
cet: g2o0e0s0 *u$p4to
.5 =
$ 2$79 0 0 0
Pro fit: 1 0 0 * $N7 =
e t$Pro
7 0 fi
0 t= $ 7 0 0 0
Risk Management:
Exchange Regulations
Levels of Risk
Management
Liquid Net worth of a member
Security Deposit (Collateral)
Margining
Position Limits
Liquid Networth of a Member
of the Derivatives Segment
Initial Margin
It is to be collected upfront
Calculated on a portfolio basis
At client level
On trade executed basis
Based on VAR
Calculated using SPAN (Standard Portfolio
Analysis of Risk)
Mark to Market Margin
Charged for Futures Contract i.e. - Index Futures
THANK YOU