Presentation by

 Priyank Karoor
 Bansri Jogia
 Sumit Singh
 Shyam Sharma
 Vivek Khetan

www.wondershare.com
FUTURES
&
OPTIONS
Derivatives
What are the Importance of
Derivatives
There is a debate going on in the Indian fina
ncial circles on
the issue of introduction of derivatives. Wor
ld over, in
developed financial markets, these instrument
s have been in
vogue for quite some time now. The arguments
in favor are as
follows:
A tool for hedging
Risk management
Better avenues for raising money
Price discovery
Arguments against derivatives are as follows:

Speculation
Market efficiency
Volatility
Counter party risk
Liquidity risk
What do you mean
by “HEDGING”?
Protecting existing or anticipated physical
market exposure from an adverse move

Both hedgers and speculators can benefit by

knowing how to properly utilize a foreign c
urrency hedge

Changes in the international economic and p

olitical landscape

This uncertainty leads to volatility and th

e need for an effective vehicle to hedge th
e risk
Not just a simple risk management strategy,
it is a process

A number of variables must be analyzed and

factored in before a proper currency hedgin
g strategy can be implemented

Learning how to place a foreign exchange he

dge is essential to managing foreign exchan
ge rate risk
What are different
types of hedging?
 Risk Mitigation Measures

Hedging by
Natural Hedging
Contracts

Currenc Leading
Netting FOR FUT OPT OT
y and
and WA UR ION HE
denomi- lagging
offsetting RDS ES S RS
nation Definitio
n
PARTICIPANTS in
the derivatives
market
Trading participants: Intermediary particip
Hedgers ants:
Speculators Brokers
Arbitrageurs Market markers a
nd jobbers
Institutional framework:
Exchange
Clearing house
 1. Trading participants

Hedgers:-

Individuals or firms who manage their risk

with the help of derivative products

To reduce the volatility of a portfolio by

reducing the risk
 Speculators

Speculators do not have any position on whi

ch they enter into futures and options Mark
et
Consider various factors like demand and su
pply, market positions, open interests, eco
nomic fundamentals, international events, e
tc.
They take risk in turn from high returns
Essential in all markets
 Arbitrageurs
Simultaneous purchase and sale of the same
underlying in two different markets in an a
ttempt to make profit from price discrepanc
ies between the two markets

A prominent position in the futures world

Objective is simply to make profits without

risk

May not be as easy and costless as presumed

 2. Intermediary participants
Brokers:

Brokers perform an important function of b

ringing buyers and sellers together
All persons hedging their transaction expo
sures or speculating on price movement nee
d not be and for that matter cannot be mem
bers of futures or options exchange
A non-member has to deal in futures exchan
ge through member only
His presence benefits the entire economy

Members are responsible for final settlemen

t and delivery

Activity of a member is price risk free bec

ause he is not taking any position in his a
ccount
CURRENCY
OPTIONS
 Introduction
Currency Futures were launched in 1972 on t
he International Money Market (IMM) at Chic
ago.
It is to be noted that commodity Futures ha
d been in use for a long time.
Currency Future markets developed at Philad
elphia (Philadelphia Board of Trade), Londo
n (London International Financial Futures E
xchange (LIFFE)), Tokyo (Tokyo Internationa
l Financial Futures Exchange), Sydney (Sydn
ey Futures Exchange), and Singapore Interna
tional Monetary Exchange (SIMEX).
Volumes traded are much smaller

Holds a very significant position in USA an

d UK

While a futures contract is similar to a fo

rward contract, there are several differenc
es between them

–The contract size and maturity dates

–Can be traded only on exchanges and comp
etitively
–Margins
OPTIONS
 Currency Option Contract

A contract (agreement)
Giving a right to buy/ sell
A specific asset
At a specific price
Within a specific time period
 Types of Option

The right to buy a specified amount of

 Call Option currency at a specified rate
 

The right to sell a specified amount

Put Option of currency at a specified rate
 
Types of Option Contracts
 In this the right can be exercised only on a
European Option fixed date in the contract; i.e. Option only
exercisable on the expiry date.

In this the right can be exercised on or

American Option before a fixed date in the contract, i.e.
Option exercisable at any time until expiry
date.
 
 3.)STRADDLE

A straddle strategy involves a combination

of a call and a put Option.

Buying a straddle means buying a call and a

put Option simultaneously for the same stri
ke price and same maturity.

The straddle strategy is adopted when a buy

er is anticipat­ing significant fluctuations
of a currency, but does not know the direct
ion of fluctuations.
On the contrary, the seller of straddle doe
s not expect the currency to vary too much
and hopes to be able to keep his premium.

He anticipates a diminishing volatility.

His profit is maximum if the spot rate is e

qual to the exercise price.

In that case, he gains the entire premium

amount. The gains for the buyer of a stradd
le are unlimited while losses are limited.
 4.) SPREAD

Spread refers to the simultaneous buying

of an Option and selling of another in resp
ect of the same underlying currency. Spread
s are often used by traders in banks.
Spread

Vertical spread Horizontal spread

 When a call option is bought with a lower
strike price and another call is sold with
a higher strike price, the maximum loss in
this combination is equal to the difference
between the premium earned on selling one o
ption and the premium paid on buying anothe
r. This combination is known as bullish cal
l spread. The opposite of this is a bearish
call.
 The other combination is to sell a put Opt
ion with a higher strike price of and to b
uy another put Option with a lower strike p
rice of Maximum gain is the difference bet
ween the premium obtained for selling and t
he premium paid for buying.

This combination is called bullish put spr

ead while the opposite is bearish put. The
strategies of spread are used for limited g
ain and limited loss.
Are you a regular Investor 

Yes
No

www.wondershare.com
Where do u Invest your money

BANKING
SHARES
PPF
GOLD
TELECOM

www.wondershare.com
Do you have a De-mat account

YES
NO

www.wondershare.com
Are you aware of Futures and options

yes
no

www.wondershare.com
 What is your portfolio size

1-10 lacs
10 - 20 lacs
Above 20 lacs

www.wondershare.com
do you prefer equity or F&O

EQUITY
F&O
BOTH

www.wondershare.com
Do you keep a watch on Indices

YES
NO

www.wondershare.com
 Which sector do you invest the most

BANKING
PHARMA
TELICOM

www.wondershare.com
What is your Risk appetite

LOW
MEDIUM
HIGH

www.wondershare.com
Thank you

www.wondershare.com