Derivatives

In: Business and Management

Submitted By ritukothiwal
Words 2550
Pages 11
FINANCIAL DERIVATIVES
(A Future of Indian Financial Market)

Dr. Ritu Kothiwal,
Associate Professor,
BIET, Hyderabad
Contact No: 09246193330
Email Id: kothiwal55@gmail.com

Mr. Ankur Goel,
Research Scholar (Management),
Mewar University, GZB.
Contact No: 9917745990
Email Id: mrankurgoel@gmail.com.

ABSTRACT
Among all the innovations that have flooded the international financial markets, financial derivatives occupy the driver's seat. These specialized instruments facilitate the shuffling and redistribution of the risks that an investor faces. Thus aids in the process of diversifying ones portfolio. The volatility in the equity markets over the past years has resulted in greater use of equity derivatives. The volume of the exchange traded equity futures and options in most of the mature markets have seen a significant growth. It goes beyond that the local derivative in the emerging markets have witnessed widespread use of the derivative instrument for a variety of reasons. This continuous growth and development by the emerging market participants has resulted in capital inflows as well as helped the investors in risk protection through hedging.

INTRODUCTION AND CONCEPT OF DERIVATIVES: Derivatives are financial contracts whose values are derived from the value of an underlying primary financial instrument, commodity or index, such as: interest rates, exchange rates, commodities, and equities. The International Monetary Fund defines derivatives as "financial instruments that are linked to a specific financial instrument or indicator or commodity and through which specific financial risks can be traded in financial markets in their own right. The value of financial derivatives derives from the price of an underlying item, such as asset or index. Unlike debt securities, no principal is advanced to be repaid and no investment income accrues"…...

Similar Documents

Derivatives

...Introduction The Global Derivatives Market how it is work a- Fundamentals and Market Characteristics 2.1 Basics of derivatives Derivatives are totally different from securities. They are financial instruments that are mainly used to protect against and manage risks, and very often also serve arbitrage or investment purposes, providing various advantages compared to securities. Derivatives come in many varieties and can be differentiated by how they are traded, the underlying they refer to, and the product type. Definition of derivatives A derivative is a contract between a buyer and a seller entered into today regarding a transaction to be fulfilled at a future point in time, for example, the transfer of a certain amount of US dollars at a specified USD-EUR exchange rate at a future date. Over the life of the contract, the value of the derivative fluctuates with the price of the so-called “underlying” of the contract – in our example, the USD-EUR exchange rate. The life of a derivative contract, that is, the time between entering into the contract and the ultimate fulfi llment or termination of the contract, can be very long – in some cases more than ten years. Given the possible price fluctuations of the underlying and thus of the derivative contract itself, risk management is of particular importance.1) Derivatives must be distinguished from securities, where transactions are fulfilled within a few days (Exhibit 1). Some securities have derivative-like......

Words: 1189 - Pages: 5

Derivatives

...Ireland Global Markets (“GM”) for information purposes only. GM believes any information contained herein to be accurate but GM does not warrant its accuracy and accepts no responsibility, other than any responsibility it may owe to you under the European Communities (Markets in Financial Instruments) Regulations 2007 as may be amended from time to time, for any loss or damage caused by any act or omission made as a result of the information contained in this document. No prices or rates mentioned are bids or offers by GM to purchase or sell any currencies, securities or financial instruments. Except as otherwise may be specifically agreed, GM has not acted nor will act as a fiduciary, financial or investment adviser with respect to any derivative transaction that it has executed or will execute. Any investment, trading and hedging decision of a party will be based on its own judgement and not upon any view expressed by GM. This document does not address all risks related to the transactions described. You should obtain independent professional advice before making any investment decision. For private circulation only. This document is property of GM. The content may not be reproduced, either in whole or in part, without the express written consent of a suitably authorised member of GM staff. Bank of Ireland is regulated by the Financial Regulator. the treasury specialists© ...

Words: 930 - Pages: 4

Derivatives

...DERIVATIVES & RISK MANAGEMENT ASSIGNMENT – II By: ATTIKA RAJ, ROLL NO: MS10A009, MBA- 2012 BATCH, DOMS, IITM 2/21/2012 I. Case Analysis – Risk management Policy of Lufthansa Submitted in Assignment 1 II. Case Analysis: Commodity Market Derivatives Case Solutions: 1. Discuss the risk exposure of Amarnath hedge fund. Ans: The Amaranth hedge fund was exposed to following risks: a. Market risk: The risk that occurs from the volatility of investment returns b. Liquidity risk: It measures the degree of difficulty in exiting a given trading position c. Funding risk: It measures the extent to which they were able to meet margin calls on their natural gas position d. Capacity risk: The risk due to putting too much money into one particular strategy 2. What are the negatives to rolling a spread position? Ans: Negatives to rolling a spread position are: When rolling a spread position the investor expects the following months to which the contract was rolled over to be favourable and thus be able to unload its positions. But, if the market moves in a direction opposite to the one anticipated by the investor it can result in huge losses. Also, if the risk increases for a spread position with the increase in the leverage. In the case of Amaranth hedge fund, it had rolled its short positions prior to august into the next month, hoping that market conditions would change and enable it to unload its positions. There were now no more summer months into which it could roll......

Words: 3366 - Pages: 14

Derivatives

...Equity Derivative Strategies Equity Derivative Strategies Joanne M. Hill Vice President, Equity Derivatives Goldman, Sachs & Company Understanding the tax implications of equity derivatives and the application of these instruments for taxable U.S. clients is a challenge worth meeting. Equity derivatives can playa useful role in implementing tax-efficient strategies that maximize after-tax returns. The key is to understand the costs, benefits, and rules for applying each instrument or strategy and then to select the best instrument to accomplish the investor's objectives and minimize the taxes. istorically, u.s. trust departments that managed money for taxable investors were restricted in their use of derivative securities. Because of such obstacles (some of which are a matter of education more than anything else), derivatives are not the first tool that comes to mind for managing taxable investments, even though they offer advantages for many clients. Derivatives are often perceived as complex in themselves; the roles derivatives can play when taxes are involved add yet another layer of complexity. Equity derivatives, independent of any tax motivation, are used for reducing the risk of holding equities or as efficient substitutes for equities. In both contexts, derivatives have natural applications in tax-related strategies. This presentation discusses the general tax issues facing corporate money managers or high-networth individuals with respect to equity......

Words: 7742 - Pages: 31

Derivatives

...1a) Derivatives are an important financial instruments that play significant role in today’s financial markets. It offers various types of risk protection and allow innovative investment strategies. A derivative is so called derivative because its value is derived from another financial security. According to Oxford dictionary, derivative is defined as something derived or obtained from another, coming from a source; not original. In financial jargon, a derivative security is referred to a financial contract whose value is derived from the value of an underlying asset or simply underlying. This underlying is usually stocks, bonds, foreign currency, or commodities. The derivative buyer or seller does not have to own the underlying security to trade these instruments. Several factors have contributed to massive development in derivative markets since the 1970s. First, the collapse of the Bretton Woods system of fixed exchange rates in 1971 increased the demand for hedging against exchange rate risk. The Chicago Mercantile Exchange allowed trading in currency futures in the following year. Second, the changing of its monetary policy target instrument by the US Federal Reserve (FED) promoted various derivatives markets. The adoption of a target for money growth by the FED in 1979 has led to increased interest-rate volatility of Treasury bonds. That in turn raised the demand for derivatives to hedge against adverse movements in interest rates. Later in 1994 when the US......

Words: 7545 - Pages: 31

Derivative

...DERIVATIVES A derivative is a financial instrument - or more simply, an agreement between two people or two parties - that has a value determined by the price of something else (called the underlying). It is a financial contract with a value linked to the expected future price movements of the asset it is linked to - such as a share or a currency. There are many kinds of derivatives, with the most notable being swaps, futures, and options. However, since a derivative can be placed on any sort of security, the scope of all derivatives possible is nearly endless. Thus, the real definition of a derivative is an agreement between two parties that is contingent on a future outcome of the underlying. Some of the widely known underlying assets are: * Indexes (consumer price index (CPI), stock market index, weather conditions or inflation) * Bonds * Currencies * Interest rates * Exchange rates * Commodities * Stocks (equities) Categorization Derivatives are usually broadly categorized by the: * relationship between the underlying and the derivative (e.g., forward, option, swap) * type of underlying (e.g., equity derivatives, foreign exchange derivatives, interest rate derivatives, commodity derivatives or credit derivatives) * market in which they trade (e.g., exchange-traded or over-the-counter) * pay-off profile (Some derivatives have non-linear payoff diagrams due to embedded optionality) Another arbitrary distinction is......

Words: 1908 - Pages: 8

Derivatives

...of products known as derivatives emerged in the financial sector. The aim of this chapter or project is to appreciate derivatives as financial instruments. This chapter is designed with a view to understand the Basic concepts involved in derivatives, their utility in risk management, speculation, arbitrage, types of risks, overleveraging and derivatives as a double edged sword and the various terms that will be used during the course of study. Executive Summary The basic objective of this project is to understand the working of derivatives, its uses and risks associated with it, the extent to which they should be used and how they should be used to be beneficial to the corporate investors. After understanding the basic working of derivatives, we undertook a study of derivatives than their global counterparts. The main objective of the study is to analyze the derivatives markets in India and to analyze the operations of futures and options with the help of questionnaire. Research objective:- Statement of problem:- The study is basically aim to analyze the various derivatives strategies used by investors while trading. This study attempts to analyze the effectiveness of hedging in terms of reducing the risk and also the various kinds of strategies to be used in the bull market, bear market and also in a stable market and project title is a study of derivatives and its strategies used by investors conducted in Mumbai. Need for Study:- The derivative market in India is......

Words: 611 - Pages: 3

Derivatives

...edu Banking Industry Meltdown: The Ethical and Financial Risks of Derivatives INTRODUCTION The 2008–2009 global recession was caused in part by a failure of the financial industry to take appropriate responsibility for its decision to utilize risky and complex financial instruments. Corporate cultures were built on rewards for taking risks rather than rewards for creating value for stakeholders. Unfortunately, most stakeholders, including the public, regulators, and the mass media, do not always understand the nature of the financial risks taken on by banks and other institutions to generate profits. Problems in the subprime mortgage markets sounded the alarm in the 2008–2009 economic downturn. Very simply, the subprime market was created by making loans to people who normally would not qualify based on their credit ratings. The debt from these loans was often repackaged and sold to other financial institutions in order to take it off lenders’ books and reduce their exposure. When the real estate market became overheated, many people were no longer able to make the payments on their variable rate mortgages. When consumers began to default on payments, prices in the housing market dropped and the values of credit default swaps (the repackaged mortgage debt, also known as CDSs) lost significant value. The opposite was supposed to happen. CDSs were sold as a method of insuring against loss. These derivatives, investors were told, would act as an insurance policy to reduce......

Words: 6137 - Pages: 25

Derivatives

...1. INTRODUCTION TO DERIVATIVES While, trading in derivatives products has grown tremendously in recent times, the earliest evidence of these types of instruments can be traced back to ancient Greece. Even though derivatives have been in existence in some form or the other since ancient times, the advent of modern day derivatives contracts is attributed to farmers’ need to protect themselves against a decline in crop prices due to various economic and environmental factors. Thus, derivatives contracts initially developed in commodities. The first “futures” contracts can be traced to the Yodoya rice market in Osaka, Japan around 1650. The origin of derivatives can be traced back to the need of farmers to protect themselves against fluctuations in the price of their crop. From the time it was sown to the time it was ready for harvest, farmers would face price uncertainty. Through the use of simple derivative products, it was possible for the farmer to partially or fully transfer price risks by locking-in asset prices. These were simple contracts developed to meet the needs of farmers and were basically a means of reducing risk. A farmer who sowed his crop in June faced uncertainty over the price he would receive for his harvest in September. In years of scarcity, he would probably obtain attractive prices. However, during times of oversupply, he would have to dispose off his harvest at a very low price. Clearly this meant that the farmer and his family were......

Words: 4572 - Pages: 19

Derivatives

...1 Lecture 1: Introduction to Derivatives 第一讲:衍生工具与衍生工具市场 Outline大纲 • Overview概览 • Types of Derivatives衍生工具的种类 • Derivatives Trading衍生工具交易 • The Notion of Arbitrage套利的概念 Lecture 1: Introduction 2 衍生工具概念 Derivatives is an instrument whose value depends on the values of other more basic underlying variables. Unlike shares, which are issued by companies and purchased by investors. Derivatives represents an agreement between a buyer and a seller. Thus, a derivatives contract is a zero-sum game.衍生工 具的价值依附于其他更基本的标的物(不一定原生品),这与 股票不同,因为股票由公司发行,由投资者购买。衍生工 具是买者和卖者之间的一种合约,因此衍生合约是一种零 合博弈。 Primary security Equity Derivatives ISF: futures contract on individual shares; share options Index futures: futures contract on equity index; index options Interest rate futures; swaps Interest rate options; swaptions Bonds Lecture 1: Introduction 3 • Derivatives is not a terminology solely for rocket scientists. Real estate developers know options. They buy an option on a plot of land for a tiny fraction of its total value. That gives them the right to buy it at a fixed price by a fixed date. Insurance is also essentially an option of a different sort, an option that provides protection on your house and your car, your life. 衍生 工具不只是金融学家的术语。房地产开发商知道期权。他们以土地总 价值的很小比例来购买土地期权。这给与他们在特定日期以特定价格 购买土地的权力。保险也是一种能够为你的房子,车子和生活提供保 障的期权合约。 • Derivatives is becoming more important and popular in practice. „Derivative‟ appears in WSJ headlines only 2 times in 1990; in 1992, 8 times; in......

Words: 3018 - Pages: 13

Derivatives

...What are Derivatives? A) A security whose price is dependent upon or derived from one or more underlying assets. The derivative itself is merely a contract between two or more parties. Its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates, market indexes and “even some other derivative”. In short we can say that Derivatives is a “claim on a claim”, it enables the avoidance of unnecessary risk. Q) At what stage is Derivatives Market in Pakistan? A) In Pakistan, the derivatives market is in the nascent stage. It has been in this stage from 2004. Although in Pakistan trading in the derivatives market is done in different parts, but still it’s considered in the nascent stage, because there is no common awareness of this sort of market. In Pakistan trading in the derivatives market is done by. * Banks * DFIs * Mutual Funds * Non-Banking Financial Institutions * Islamic Banking Banks/DFIs may take exposure in future contracts to the extent of 10% of their equity on an aggregate basis. In this connection, the 10% exposure limit for future contracts will include both, positions taken in future buying and selling. Despite this regulatory support, Banks / DFIs participation is very low. Mutual Funds manage funds of the general public and they work under the supervision of their respective trustees. Mutual Funds mostly trade in equity derivatives to reap......

Words: 347 - Pages: 2

Derivatives

...ethical risks associated with derivatives. Derivatives are financial instruments with values that change relative to underlying variables, such as assets, events, or even prices. The ethical risk that derivatives pose is that they can be very risky for inexperienced investors. The basic of derivatives is that they offer a large reward but this can be a major risk if they are unaware of the investment that they are making at the time. Another ethical risk is that of the mangers and traders not taking into consideration the risk of their stakeholders and investors who has entrusted their investments. The last ethical risk I see is that they are being deceptive and not letting the investors know by not communicating with them and this is very unethical and a big risk because the investor is unaware. 2. Explain the difference between making a bad business decision associated with derivatives and engaging in unethical conduct using derivatives. When you make a bad business decision associated with derivatives you are basically not thinking logically and doing good business. You have the mindset but are not thinking and you are making a bad decision by engaging in derivatives in which you know that it will be bad for the company. Then in contrast when you engage in unethical conduct using derivatives you are aware of what you are doing and you engage in these acts because you are being unethical and trying to find the best way out by using derivatives. The main......

Words: 702 - Pages: 3

Derivatives

...December 1, 2013 | $ 0.600 | 0.609 | December 31, 2013 | 0.610 | 0.612 | January 30, 2014 | 0.608 | 0.605 | March 31, 2014 | 0.602 | | Instructions Prepare all journal entries for Stark Industries for the following independent situations: a. The forward contract was to manage the foreign currency risk from the purchase of furniture for A$ 100,000 on December 1, 2013, with payment due on March 31, 2014. The forward contract is not designated as a hedge b. The forward contract was to hedge a firm commitment agreement made on December 1, 2013. To purchase furniture on January 31, with payment due on March 31, 2014. The derivatives is designated as a fair value hedge c. The forward contract was to hedge an anticipated purchase of furniture on January 30. The purchase took place on January 30. With payment due on March 31, 2014. The derivatives is designated as a cash flow hedge. The company uses the forward exchange rate to measure hedge effectiveness d. The forward contract was for speculative purposes only Problem 2 – Futures Peny One Inc. is a jewelry trading company. On November 1, 2013, Peny One Inc has 1,000,000 ounces of Gold carried at cost of $ 5,000,000 ($5 per ounce). Peny One Inc believes that the price of gold will decrease in the coming month due to bad economic recession. Therefore it decides to enter futures contract which has maturity date on March 31, 2014. In addition, Initial margin $ 0.05 per ounce is required to enter this contract. The......

Words: 793 - Pages: 4

Derivatives

...amount and that the interest rates are on a notional principal amount. The interest payments are settled in net. The fixed rate (3.784% in this example) is referred to as the swap rate.  Example of Currency Swap  Company A is doing business in USA and it has issued bond of $ 20 Million to bondholders that has been nominated in US $. Other company B is doing business in Europe. It has issued bond of  $ 10 Million Euros. Now,both company's directors sit in one room and agreed for exchanging the principle and interest of both the bonds. Company A will get $ 10 million Euros Bonds with  its interest payment and Company B will get $ 20 million bond for exchanging his principle and interest. This is the simple example of currency swap. Credit Derivatives Credit Default Swaps (CDS) Lets assume that we have invested in the General Motors bond mentioned above. Suppose our investment is $10,000,000. Suppose also that we have become worried that General Motors may be getting into financial trouble. What can we do about it? Obviously we could just sell our bond position in the secondary market. However, we can also enter into a credit default swap. The easiest way to think of a credit default swap is as an insurance contract. We are insuring against the possibility that a company might get into financial trouble and cause us to lose money on our bond position. To enter into this insurance contract we have to find someone prepared to insure us. The big banks are usually the people to......

Words: 3329 - Pages: 14

Derivative

...Handbook on Derivatives © Rajkumar .S Adukia B.com (Hons.), L.L.B, AICWA, FCA radukia@vsnl.com/rajkumar@gmail.com 093230 61049/ 093221 39642 www.carajkumarradukia.com If interested in receiving similar technical updates subscribe to carajkumarradukia-subscribe@yahoogroups.com PREFACE Derivatives have changed the world of finance as pervasively as the Internet has changed communications .Well they are everywhere nowadays. The most significant event in finance during the past decade has been the extraordinary development and expansion of financial derivatives. These instruments enhance the ability to differentiate risk and allocate it to those investors who are most able and willing to take it -- a process that has undoubtedly improved national productivity, growth and standards of living. Derivatives products provide certain important economic benefits such as risk management or redistribution of risk away from risk-averse investors towards those more willing and able to bear risk. Derivatives also help price discovery, i.e. the process of determining the price level for any asset based on supply and demand. All markets face various kinds of risks. This has induced the market par-ticipants to search for ways to manage risk. The derivatives are one ofthe categories of risk management tools. As this consciousness about risk management capacity of derivatives grew, the markets for......

Words: 15288 - Pages: 62

Weight Training and Co-ed Owl-free | Dongle de Android TV y accesorios | Christmas Sales 2018