DERIVATIVES.pptx
- 1. PRESENTED BY Bhumika Shetty Debangshu Das Neha Naidu Nissi Shelke Govind Varma Cindrella D'souza Ayush Gadiya DERIVATIVES
- 2. PRESENTATION OUTLINE INTRODUCTION FUTURE AND OPTIONS MONEY MARKET CONCLUSION
- 3. DERIVATES • Derivatives are financial contracts that derive their value from an underlying asset. • The variables underlying derivatives are the prices of traded assets. • Derivatives are the most modern financial tools for hedging risk. IMPORTANT DERIVATIVE SECURITIES 1.Forward Contracts 2.Futures Contracts 3.Options
- 4. PRICE DISCOVERY: Derivatives help discover market prices for underlying assets. RISK MANAGEMENT: They provide a way to manage financial risk and exposure to market volatility. IMPROVE MARKET EFFICIENCY: They help improve market efficiency for the underlying assets. REDUCE TRANSACTION COSTS: They reduce the costs of trading underlying assets. RELOCATE RISKS: Derivatives help move risk from one party to another. IMPORTANCE
- 6. FUTURES • Futures are contracts that obligate the buyer or seller to buy or sell an underlying asset at a specific price and date in the future. • They are used to hedge against price fluctuations or to speculate on future prices.
- 7. OPTIONS • Options are contracts that give the buyer the right, but not the obligation, to buy or sell an underlying asset at a specific price and date in future. • They can be used for hedging or speculation, and there are two types: call options and put options.
- 8. CALL OPTION Buyer has the right to buy an underlying asset at a predetermined price before or on the expiration date. TYPES OF OPTIONS PUT OPTION Buyer has the right to sell an underlying asset at a predetermined price before or on the expiration date.
- 9. IMPORTANT TERMS USED IN OPTION CONTRACTS OPTION PREMIUMS Obligation in return for some compensation. EXPIRATION Definite predetermined maturity date. BUYERS AND SELLERS Buyer is an option holder and Seller desires partial price protection. STRIKE PRICE The price at which the underlying commodity can be exchanged. UNDERLYING COMMODITY The future contract for the commodity.
- 10. OPTIONS • Options confer rights but not the obligation to do the same. • Payment is involved and premium paid on options is non- refundable. • Options are smaller in value. • Options set a range within or outside which a position proves profitable. • The buyer can exercise option any time prior to the expiry date. • Futures create an obligation to make or take delivery at some future date. • No payment is involved for entering into a future contract. • Future contracts are usually larger in value. • They establish a price. • The parties of the contract must perform at the settlement date. FUTURE
- 11. Money market options are options on money market instruments.They are used for hedging and short-term investment purposes. Money market futures are short-term contracts on money market instruments like treasury bills, commercial paper, and certificates of deposit. MONEY MARKET FUTURES AND OPTIONS
- 12. HEDGING SWAPS • Risk Management strategy employed to offset losses in investments by taking an opposite position in a related asset. • Balance supports any type of investment. • Protects individual finances from being exposed. FORWARD CONTRACTS • A derivative security which is an agreement to buy or sell an asset at a certain future time for a certain price • A forward contract is settled at maturity. • Its a contract to buy or sell a specified quantity of an asset at a future date. • Swaps are agreements between two parties to exchange cash flows based on different financial instruments. • Application of Swaps- • For hedging of risks • As a tool for accessing previously unavailable markets.
- 13. CONCLUSION Derivatives are financial contracts that derive their value from an underlying asset.They are important for price discovery, risk management, and improving market efficiency.Derivatives include futures, options, swaps, and forward contracts.Options are contracts that give the buyer the right but not the obligation to buy or sell an underlying asset at a predetermined price and time.Futures contracts offer the buyer the obligation to buy or sell the underlying asset at a predetermined price and time, while options contracts offer the right but not the obligation to buy or sell the asset.Money market futures and options are short-term contracts used for hedging and short- term investment purposes.Forward contracts and swaps are used for hedging, speculative trading, and reducing exposure to market risks.