Derivative Market

Presented by Sujan Neupane Nepal Derivative Exchange Limited(NDEX) Position: Intern

Todays Topic of Presentation

Introduction to Derivative Types of Derivative Future vs. Forward Derivative Market Risk in Derivative Market Market Analysis Structure of derivative Market in Nepal Benefits of derivative Market Future vs. Stock Market Trading Procedure in Future Market Calculation of profit/loss. Operators in derivative Market Market interpretation Conclusion & recommendation

Introduction to Derivative
A security whose price is dependent upon or

derived from one or more underlying assets. For ex stocks, bonds, commodities, currencies, interest rates and market indexes.
It is merely a contract between two or more parties

whose value is determined by fluctuations in the underlying asset.

Most derivatives are characterized by high

leverage.

Types of derivative
Derivative

future

Option

forward

swaps

Future
A futures contract is a standardized contract

between two parties to exchange a specified asset of standardized quantity and quality for a price agreed today (the future price or the strike price) with delivery occurring at a specified future date, the delivery date. The contracts are traded on a futures exchange like NDEX Every future contract has features like buyer, seller, price, expiry etc.

Forward
A forward contract is an agreement to buy or sell an asset on a specified date for a specified price. Parties to the contract assumes both long and short position. These contracts are not traded in exchange.

Option
Options are of two types - calls and puts.

Calls give the buyer the right but not the

obligation to buy a given quantity of the underlying asset, at a given price on or before a given future date. Puts give the buyer the right, but not the obligation to sell a given quantity of the underlying asset at a given price on or before a given date.

Swap
Swaps are private agreements between two

parties to exchange cash flows in the future. They can be regarded as portfolios of forward contracts. The two commonly used swaps are:

Interest rate swaps: These entail swapping only the interest related cash flows between the parties in the same currency. Currency swaps: These entail swapping both principal and interest between the parties. Also,
the money which is being swapped is in different currency for both parties.

Future vs. forward contract

Forward contract Future contract

Private contract between Traded through two parties and traded on exchange. For ex. NDEX over-the counter market Not standardized Standardized

Usually one specified delivery date Settled at the end of contract

Range of delivery
Settled daily

Derivative Market
The derivatives market is the financial

market for derivatives, financial instruments like futures contracts or options, which are derived from other forms of assets.

DERIVATIVE MARKET

Exchange Traded Derivatives

Over The Counter Derivative s

Nepal Derivative Exchange Limited(NDEX )

Mercantile Exchange Limited(MEX)

Commodity Future Exchange Limited(CFX)

others

 Over-the-counter (OTC) derivatives are contracts that are traded

(and privately negotiated) directly between two parties, without going through an exchange or other intermediary. For Example: contract between farmer and dealer, forward rate agreements.
Exchange-traded derivative contracts (ETD)

Those derivatives instruments that are traded via specialized derivatives exchanges or other exchanges.

A derivatives exchange is a market where individuals trade standardized contracts that have been defined by the exchange.
Derivatives exchange acts as an intermediary to all related transactions, and takes initial margin from both sides of the trade to act as a guarantee.

Risks in derivative market

Credit risk

Market risk
liquidity risk legal risk

operational risk

What do derivatives market do?

Determine a fair price for the commodities it

trades(Price discovery). Enable transactions to be made at this price quickly and easily (provision of liquidity). Enable transactions to be made at as low a cost as possible (Minimization of trading costs).

Market Analysis
Fundamental Analysis

- Production and consumption. - Distance between consuming centers to producing center. - Weather condition - Demand and supply condition - Natural disaster - Import and export regulation - Government interference. Technical Analysis - Commodity Channel index (CCI) - Relative Strength index (RSI) - Money flow index (MFI)

Commodity Channel index (CCI)

Developed by Donald Lambert.

It range between +100(overbought) to -

100(oversold). CCI (+100)- Bullish, CCI (-100)- Bearish. From overbought, a sell signal might be given when the CCI moves back above +100. From oversold level, a buy signal might be given when the CCI moved back above -100.

Relative Strength index

Developed by J. Welles Wilder. Relative Strength Index (RSI) is a momentum oscillator that measures the speed and change of price movements. It oscillates between zero and 100. According to Wilder, RSI is considered overbought when above 70 and oversold when below 30. Dash midline at 50 signals of no trend ( neutral). If the RSI is below 50, it generally mean that the stocks losses are greater than gains. (Vice-versa).

Money Flow index (MFI)

It is used as measure of the Strength of Money

going in and out of security. MFI is range bound between 0 and 100. MFI accounts for Volume. It values below 20 suggests that an asset has been oversold. Above 80 suggest an asset has been overbought. Money Rate= Positive money Flow/ Negative money Flow Money Flow index(MFI)= 100- (100/(1+money rate)).

Structure of derivative market in Nepal

Nepal Derivative Exchange Limited

Clearing Member

Clearing Bank: NIBL

Trading Member

Sub-Trading Member

Trader/client

Trader/ Client

 Clearing Members (CMs) are the members of

the Clearing Houses/Clearing Corporations who facilitate settlement of trades done on exchanges. For ex: kasthamandap clearing house pvt. Ltd, Kathmandu Derivative Clearing service. Trading Member Its a financial intermediary which interfaces with the investors to buy or sell securities on behalf of them and charges some percentage of the settlement amount for doing so

Benefits of Derivative Market in Nepal

Growers, traders, exporters, importers can insure their risk from the fluctuating product prices by taking futures position in the derivative market. interest rate risk by locking their interest rate with derivative exchange.

Financial institutions can mitigate or even eliminate the

Investors can invest in the products and can get attractive

returns.
End users can buy the goods at a pre-determined price so

that they can get away from the risk of increase in price.

Difference between Future and stock Market

Future market
Standardized Contract Highly Leverage Risk Can be managed through time limit

Stock market
Company ownership Low leverage Difficult to Manage risk

How to Trade in future market

Initial margin is to be maintained as per contract specification and size. For Ex: 1 kg gold contract needs RS. 75000 initial margin. Margin call by broker. commission with Vat Capital gain tax (C.G.T)

How to calculate profit or loss in future market?

Spread is the profit or loss for the future traders.
Spread is difference between ask and bid price.

For 1 kg Gold contract maximum spread is 4. Tick value for 1 kg Gold = contract size/Quotation Base =1000gm/10gm = 100 Initial Profit/loss = Spread* tick value For 1 kg Gold contract profit/ loss is +/- 400

Operators in Derivative Market

Hedgers - Operators, who want to transfer a

risk component of their portfolio.

Speculators - Operators, who intentionally take the risk

from hedgers in pursuit of profit.

Arbitrageurs - Operators who operate in the different

markets simultaneously, in pursuit of profit and eliminate mis-pricing

Market Interpretation
Price Rising Rising Volume Rising Falling Open Interest Rising Falling Interpretatio n Market is Strong Market is Weakening

Falling
Falling

Rising
Falling

Rising
Falling

Market is weak Market is strengthening

Conclusion & Recommendation Derivative market is emerging concept in Nepal. It can bring the stability in the market condition of Nepal. For EX: Gold and oil market price risk can be minimized through future market. It creates healthy climate for demand and supply. It can diversify risk of Nepalese Investors.

ANY QUESTIONS????
BEST OF LUCK FOR NDEX THANK YOU