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FUTURES AND DERIVATIVES FUTURES AND DERIVATIVES

What are futures? What are futures?Example: The farmer

Futures are also exchange-traded would agree with the dealer on a price
derivatives. Futures represent a trade to deliver to him 5,000 bushels of
agreement, to buy or sell an asset for wheat at the end of June. The bargain
an agreed price, which will be taken suited both parties. The farmer knew
place in future. The entire futures how much he would be paid for his
contract has a final trading date, which wheat, and the dealer knew his costs in
is specified only by the exchange. advance. The two parties may have
exchanged a written contract to this
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money representing a "guarantee."

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FUTURES AND DERIVATIVES FUTURES AND DERIVATIVES

What is a derivative? What is a derivative?

A derivative is a financial instrument - Example:
or more simply, an agreement between
two people or two parties - that has a
value determined by the price of
something else

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FUTURES AND DERIVATIVES FUTURES AND DERIVATIVES

Derivatives are used by investors to: Derivatives are used by investors to:
o provide leverage or gearing, such that o hedge or mitigate risk in the underlying,
a small movement in the underlying by entering into a derivative contract
value can cause a large difference in whose value moves in the opposite
the value of the derivative direction to their underlying position and
cancels part or all of it out.
o speculate and to make a profit if the
o obtain exposure to underlying where it is
value of the underlying asset moves
not possible to trade in the underlying
the way they expect.

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FUTURES AND DERIVATIVES FUTURES AND DERIVATIVES
o Hedging: Speculation and arbitrage:
o Hedging is a technique that attempts to o Derivatives can be used to acquire risk,
reduce risk. In this respect, derivatives rather than to insure or hedge against
can be considered a form of insurance. risk.

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Over-the-counter(OTC) derivatives are o Common derivative contract types:
contracts that are traded (and privately 1.Futures/Forwards are contracts to buy
negotiated) directly between two parties, or sell an asset on or before a future date
without going through an exchange or at a price specified today.
other intermediary.

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o Common derivative contract types: o Common derivative contract types:
2. Options are contracts that give the 3. Swaps are contracts to exchange cash
owner the right, but not the obligation, to (flows) on or before a specified future
buy (in the case of a call option) or sell (in date based on the underlying value of
the case of a put option) an asset. currencies/exchange rates, bonds/interest
rates, commodities, stocks or other
assets.

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FUTURES AND DERIVATIVES FUTURES AND DERIVATIVES
A put option (usually just called a "put") A call option, often it is simply labeled a
is a financial contract between two "call", is a financial contract between two
parties, the writer (seller) and the buyer parties, the buyer and the seller of this
of the option. The buyer acquires a short type of option.The buyer of the call option
position by purchasing the right to sell has the right, but not the obligation to buy
the underlying instrument to the seller of an agreed quantity of a
the option for a specified price (the strike particular commodity or financial
price) during a specified period of time. instrument(the underlying) from the seller
of the option at a certain time (the
expiration date) for a certain price.
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o Common derivative contract types: o Terms:
3. Swaps are contracts to exchange cash o A long position in a security, such as
(flows) on or before a specified future a stock or a bond, or equivalently to be
date based on the underlying value of long in a security, means the holder of
currencies/exchange rates, bonds/interest the position owns the security and will
rates, commodities, stocks or other profit if the price of the security goes up.
assets. Going long is the more conventional
practice of investing and is contrasted
with going short.

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FUTURES AND DERIVATIVES THANK YOU !
o Terms:
o Short selling (also known
as shorting or going short) is the
practice of selling assets,
usually securities, that have been
borrowed from a third party (usually
a broker) with the intention of buying
identical assets back at a later date to
return to the lender.

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