Derinatives
BASICS OF EQUITY DERIVATIVES
CONTENTS
1. Introduction to Derivatives 2. Market Index 3. Futures and Options 4. Trading, Clearing and Settlement 5. Regulatory Framework 6. Annexure I – Sample Questions 7. Annexure II – Options – Arithmetical Problems 8. Annexure III – Margins – Arithmetical Problems 9. Annexure IV – Futures – Arithmetical Problems 10. Annexure V – Answers to Sample Questions 11. Annexure VI – Answers to Options – Arithmetical Problems 12. Annexure VI I– Answers to Margins – Arithmetical Problems 13. Annexure VII – Answers to Futures – Arithmetical Problems 1 - 9 10 - 17 18 - 33 34 - 62 63 - 71 72 - 79 80 - 85 86 - 92 93 - 98 99 - 101 102 - 104 105 - 106 107 - 110
1
CHAPTER I - INTRODUCTION TO DERIVATIVES
The emergence of the market for derivative products, most notably forwards, futures and options, can be traced back to the willingness of risk-averse economic agents to guard themselves against uncertainties arising out of fluctuations in asset prices. By their very nature, the financial markets are marked by a very high degree of volatility. Through the use of derivative products, it is possible to partially or fully transfer price risks by lockingin asset prices. As instruments of risk management, these generally do not influence the fluctuations in the underlying asset prices. However, by locking in asset prices, derivative products minimize the impact of fluctuations in asset prices on the profitability and cash flow situation of risk-averse investors.
1.1 DERIVATIVES DEFINED
Derivative is a product whose value is derived from the value of one or more basic variables, called bases (underlying asset, index, or reference rate), in a contractual manner. The underlying asset can be equity, forex, commodity or any other asset. For example, wheat farmers may wish to sell their harvest at a future date to eliminate the risk of a change in prices by that date. Such a transaction is an example of a derivative. The price of this derivative
CONTENTS
1. Introduction to Derivatives 2. Market Index 3. Futures and Options 4. Trading, Clearing and Settlement 5. Regulatory Framework 6. Annexure I – Sample Questions 7. Annexure II – Options – Arithmetical Problems 8. Annexure III – Margins – Arithmetical Problems 9. Annexure IV – Futures – Arithmetical Problems 10. Annexure V – Answers to Sample Questions 11. Annexure VI – Answers to Options – Arithmetical Problems 12. Annexure VI I– Answers to Margins – Arithmetical Problems 13. Annexure VII – Answers to Futures – Arithmetical Problems 1 - 9 10 - 17 18 - 33 34 - 62 63 - 71 72 - 79 80 - 85 86 - 92 93 - 98 99 - 101 102 - 104 105 - 106 107 - 110
1
CHAPTER I - INTRODUCTION TO DERIVATIVES
The emergence of the market for derivative products, most notably forwards, futures and options, can be traced back to the willingness of risk-averse economic agents to guard themselves against uncertainties arising out of fluctuations in asset prices. By their very nature, the financial markets are marked by a very high degree of volatility. Through the use of derivative products, it is possible to partially or fully transfer price risks by lockingin asset prices. As instruments of risk management, these generally do not influence the fluctuations in the underlying asset prices. However, by locking in asset prices, derivative products minimize the impact of fluctuations in asset prices on the profitability and cash flow situation of risk-averse investors.
1.1 DERIVATIVES DEFINED
Derivative is a product whose value is derived from the value of one or more basic variables, called bases (underlying asset, index, or reference rate), in a contractual manner. The underlying asset can be equity, forex, commodity or any other asset. For example, wheat farmers may wish to sell their harvest at a future date to eliminate the risk of a change in prices by that date. Such a transaction is an example of a derivative. The price of this derivative