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Derivatives Presentation by Diego, Mark Mawell O.
Derivatives Presentation by Diego, Mark Mawell O.
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DERIVATIVES
A presentation made by:
what is
derivatives?
The word "derivative" represents a particular class of financial contract
whose worth is based on an underlying asset, a group of underlying
assets, or a benchmark. The terms of a derivative are agreed upon by
two or more parties who can trade them on an exchange or over-the-
counter (OTC).
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4 TYPES OF
DERIVATIVES
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forward
derivatives
Forward derivatives are similar to futures as they also come
with an obligation to execute the contract. However, unlike
futures, forwards are traded over-the-counter instead of
through an exchange.
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EXAMPLE:
I agree to sell
BREAD
FARMER 500kgs wheat at
MAKER
Rs.40/kg after 3
months.
3 months later
500kgs wheat
BREAD
FARMER
MAKER
Rs. 20,000
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future
derivatives
Future derivatives is a standardized legal agreement
between the buyer and the seller of the underlying asset.
Under a futures contract, a predetermined quantity and
price are agreed upon, payable at a specific future date.
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EXAMPLE:
FUTURE CONTRACT
PRODUCT:
DELIVERY DATE:
option
derivatives
An option derivatives is a contract wherein the buyer attains
the right to trade the underlying asset over a predetermined
period. The price that both parties determine is known as the
strike price, and the seller of the option is called the option
writer.
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EXAMPLE:
CALL OPTION
PREMIUM
50$
COVERED CALL CALL
SELLER BUYER
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swap
derivatives
Swap derivatives comes under the over-the-counter contracts (OTC).
It enables parties to swap their financial obligations or liabilities,
among which interest rate swaps are the most common.
A company paying a variable rate of interest may swap its interest
payments with another company that will then pay the first company a
fixed rate.
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EXAMPLE:
LIBOR + 1%
1.5 %
Ms. B (Interest rate swap) Mr. A
LIBOR + 1% 1.5 %
Floating Fixed
Interest Rate Interest Rate
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