DERIVATIVES DEMYSTIFIED

24-Jan-2015

11:00 AM (IST)

The video presents what the derivatives is as a trading instrument in the Indian derivatives market. Derivatives is an instrument whose value is derived from one or more underlying. Underlying could be any asset class. The underlying means the base on which the derivative is created. The underlying instrument can be stocks, indices, commodities etc. Derivatives are legal contracts and all specifications are predefined and binding. The derivatives contracts, can be of mainly of three types: Forwards, Futures and Options.

Forwards are customized contracts between the buyer and the seller for transaction which will happen in future. They are bilateral contracts, customized as they are traded over the counter, there are two parties involved and there is no mediator. The limitations of forward contracts is that it has a counter-party risk involved. It is illiquid, non-transferable and there is always counter-party risk. So the situations in which forward contracts can be used is when the price of the asset class is fixed. Forwards are not advisable where the price of asset class is fluctuating.

Futures are the next derivatives instrument after forwards. Futures are standardized, listed in stock exchange, and transferable. Future contracts are legally binding contracts to buy or sell the underlying, at a future date and at a future price. The underlying can be stocks, commodity, index and as well as Forex. The price, time and quantity are pre-specified. The futures contracts are tradable in both the National Stock Exchange (NSE) as well as the Bombay Stock Exchange (BSE). They are legally binding contract to buy or sell the underlying. They are standardized contracts available for 1 month, 2 month and 3 months contracts. The first month is the near month contract, second month regarded as the next month and the third month is called the far month. The last Thursday of the month is the expiry of the future contracts. All future contracts are cash settled. BSE started the Physical Delivery of stock futures. The NSE is the world's third largest stock exchange in terms of number of contracts. But there are certain limitation of futures contracts as well as there is not much choices available to the investors to trade according to different market conditions. This is where the application of options comes into place.

Options are financial instruments which are available with choices, choices to buy, choices to sell, choice to get right, choice to get obligation. In Option contracts, there is always a buyer of the options and a seller of the option. The options buyer pays the premium, he gets the right, he has no obligation to honor the contract and there is limited loss and there is potential for unlimited gain. The option seller is the one who receives the premium, he has an obligation, there are chances of unlimited loss and limited gain.

Options can be classified into two types, call options and put options. There can be buyers of call options and sellers of call options. There can also be buyers of put options as well as sellers of put options. The options are used are for various objectives by the traders. It can be used for speculation, Hedging as well as arbitrage. Speculation are the speculative trades by paying minimum margin. Hedging used for hedging an existing portfolio in such a way that market movement does not affect portfolio value. Arbitrage is getting the advantage of difference in future price and cash price in derivatives and making risk less profits from it.

Hence the whole video can be summarized a sneak peek into the course of Principles of Financial Derivatives.

About the Speaker


Mr. Kaushal Mandaliya -Chartered Accountant, CTM-

An Engineering graduate with Post Graduation in Finance, Mr. KaushalMandaliyapossess 14 years of experience in Financial Service Industry. Since 2010, he works closely with multiple institutions like National Stock Exchange, Angel Broking, HDFC Bank, Kotak Bank, Axis Bank, ICICI Bank, ICICI Securities, Marwadi Shares &Bansal Finstock. 

He is also a CPE Trainer (Continuous Professional Education) empanelled with National Institute of Securities and Market (NISM) – a flagship institution affiliated with SEBI. In last five years, Kaushal has trained over 14,500 executives &spent 4500 hours of training.

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