Presented By Fenil Shah 18th June, 2011

Content:
y Introduction y Factors Driving The Growth Of Derivatives y Types of Derivatives y Participants y Underlying Asset Class

y Economic functions y Benefits y Criticism y Derivatives in India

Introduction
y Derivatives are synthetic instruments y They derive value from an underlying asset class y Asset classes range from financial instruments to

commodities.
y Common underlying theme of derivatives is that

they are leveraged products.

Factors Driving The Growth Of Derivatives

y Increased volatility. y Increased integration with the international

markets.
y Development of more sophisticated risk management

tools.

Types of Derivatives
y Futures/Forwards. y Options y Swaps y Baskets y Swaptions

Derivative Positions and Participants

y Naked open position taking a directional call on the

markets y Hedge against underlying asset class y Arbitrage position within an asset class y Speculators y Hedgers y Arbitrageurs

Underlying Asset Class

y Asset classes: financial which includes currencies and

commodities
y Financial asset classes: Interest rates, equities and

currencies
y Commodities range from agricultural commodities to

minerals and metals

Economic Functions
y Leverage y Speculate & make a profit y Hedge or mitigate risk in the underlying y Obtain exposure to the underlying

Benefits
y Derivatives facilitate the buying and selling of risk. y Helps increasing Buying in the underlying. y Create Liquidity in the Market.

Criticism
y Possible large losses. y Counter-party risk. y Leverage of an economy's debt.

Derivatives in India
y The structured derivative market in India is

relatively new (about 10 years old)

y However derivatives have caught the fancy of the

market and exchange traded equity and commodity derivatives are vibrant.

Equity Derivatives in India

y Nifty index futures are the highest traded contracts y Single stock futures are actively traded for arbitrage y Nifty index options are also traded actively y Single stock options do not trade actively

Factors to Study in Nifty Futures

y Open interest y Traded volumes as % to total derivative volumes y Basis spread y Movement of spread y Roll overs y Calendar Spreads

Factors to Study in Nifty Options

y Changes in price y Open interest y Implied Volatility y Put call parity

Factors to Study in Single Stock Futures

y Open interest y Basis Spread y Cost of carry y Volumes y Top traded single stock futures