DERIVATIVES CRUX NOTES

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I FUTURES

A Speculation
strong belief that Price will increase in future Buy Futures
decrease in future sell futures
Eg
Rel 3months futures available 3000 lot size 50uts
It is expected that price will decrease in future
Cal Gain loss it often3m Price changes to a 3500 b 2700

at Price changes to 2700

Sell 3m Futures At Contracted Matey 3000 50 150000

Buy 0 Days futures CurrentPrice 2700 50 135000

Profit to be received in Cash 15000

b Price changes to 3500

Sell 3m Futures At Contracted Matey 3000 50 150000

Buy 0 Days Futures CurrentPrice 3500 50 175000

Loss to be paid in cash 25000

shoes
B Hedging physical

Buy position in cash market Sell Futures

Sell Position in cash market Buy futures

Col Spot Interest Dividend

 E.g Inv in Tel shares 500nth 3000 1500000 Beta 1 5
Spot Nifty 3000 Intrate ftp.a continuous compounding

Dividend 31 lot sire 20

outnall
Call effect if after Bonths Nifty decreases by 10
501
d t 0 015
3000108
Seem
3m Nitty futures 3000 e
3000 1.012578

3038
Fontof Nifty fatwill to sell 1500000 115 2250000

i One contract value 3038 20 60760

i No of Contracts 2250000 37 Contracts
60760
37 20 3038

Cash market
Nifty Futures
Buy 4 500 its 30007 1500000 Sell 3m Futures 437 20 30387 2248120

After 3m TCS fetch 151 After 3m Nifty falls 101

Revised Position 1500000 151 Buy SpotFutures437 20 273427 2023308
1275000 Profit received in cash 224812
Capital 1055 225000

i overall effect 224812 225000 188 Negligible

Overall effect is NIL

overall Blta of Portfolio 0
Note
Amount 1500000 Beth 1.5
of Investment
For Beth 0 Ant of Nitty futures to self 1500000 15 2250000
15 1.5

For Beth 4 in a is i sell 1500000 1.1 1650000

l l
15 in
 For Beta 1 n e e bell 1500000 5 750000
115 1
For Beth 2.4 in a Bill 15000000.9 1350000

15 0.9 2.4

Ii Beta Shanges in stockmet

Changel inmkt Mlf

ail charges in mtf meth Change in stockmet

Reta
iii changes in stock meth a Beta changes in market met

cost of Cammy model

Futures Price Spot Interest Storagecost Dividend convenience
yield
Futures Price Sem d't it continuous compounding

it 1min Futures Price Spot 1 month Interest I month Dividendyield

Iiii 3mn Spot 3months Interest 3monthsDividendyield

Note
Dividend Yield Spotmarket Price DivYield rate time Period
Dividend face value Dividend mate No time dearied

0333117 0033373
Note e e e

e 93rd ofe 4 0033311

Note 99
lil Amt of Nifty futures to sell for Penfelt Hedge Investmentvalue Beta
iil is for 50 Portfolio Investmentvalue Beta 50
liiil i 120 Investment value Beta 120
 Margin in Futures
Initial margin Daily Absolute change 3 times S D
ie u 36
maintenance margin 751 of Initial margin
Lib margin reduces below 751 Deposit Amount to increase margin to 100 7

Note

If you want to use hmonth Futures to hedge for next 3 months

Firstly for Hedging sell h months Futures 4son 5050
After months to settle Buy 1 months Futures 4Say 4511.257
Gainloss on settlement say 538.757

options

call option 4option Holden Pays Premium to option writer

Holden Right to buy shares of Poledetermined exercise Price on maturity

it is exercise when underlying Sh Price goes beyond exercise price

Writer Obligation to sell shares if holden exercise its might to buy

Ef Call option strike Price 5000 Amemium 60 maturity 2 months

After 2 months Price becomes I 5h00
option Holden 4Exercised option option writer
Right to Buy 5000 Obligation to sell 5000

After 2 months sell 5h00 After 2m Buy 5400

Pay off inflow 400 Pay off outflow 2 400
c I Amemium 60 c 1 Premium Inflow 160

net PayoffInflow 340 wet Dayoff outflow 340

if price becomes 5000 or less then option lapses

NetPay off loss to Holden 60 Net Payoff Profit to writer 60
Put option
Holden Right to sell shames of Poledetermined exercise Price on maturity

it is exercise when underlying Sh Price goes below exercise price

Writer Obligation to Buy shares if holder exercise its might to sell

Ef Put option strike Price 5000 Amemium 60 maturity 2 months

After 2 months Price becomes a 5400 b 4500

a At 5400 Put option lapses

Net Pay off to Holden Premium loss 60
Written Premium Gain 60

b At 4500 Put option Exercised

Put option Holden Put option writer
Right to sell 5000 Obligation to Buy 5000

After 2 Months Buy 4500 After 2m Sell 4500

Payoff inflow 500 Pay off outflow 2 500

c I Amemium 60 c 1 Premium Inflow 160

net PayoffSinflow 440 Net Pay offoutflow 440

Note E.g Exercise price of call and Put option 150

Expected Price
on maturity 1m06 Call Payoff Put Pay off
120 05 lapses 1.5 430 05
140 20 lapses 2 410 27
160 50 5 410 507 lapses

180 10 3 430 107 lapses

190 15 6 440 15 lapses
 i Value of call option call Premium 5 3 6 14
i Put option Put Premium 15 2 35

Binomial model
so PXSu 1 P Sd
R

To find Probabilities
i Risk Neutral method So 1 Sh 11 Psd

Iii Binomial model 1 P R d

n d

if 20 up on 20 down and Mb 8 then

4 1 201 1120 d 1 dot 80 M 1 08

to PXCu 1 P Cd Po PXPu 1 D Pd
R R

Two Period Binomial model

NodeB 5625 720 Can 205 Pun 0

600
v5 7375
500 480 find 0 And 35
ModeA
my 56h5
to 515 400 480 Cda 0 Pdn 35
model 320 Cdd 0 Pdd 195

I 1 025 80
I 1 20 80
5625

1 P 3375
Cil American option Can be exercised anytime on on before maturity
value of option May 4Discountedvalue Intrinsicvalue

i value ofcalloption may 4 a Pled

f Intrinsic value

value ofPutoption may 21 Pu 1 P d Intrinsic value

R

ii European option Canbe exercised only on maturity

value ofoption Discounted value only intrinsic value is ignored

i Value of call option PX Cn f pled

R

i value of putoption PXPh C P Pd

R

Riskless Hedge Portfolio

Hedge ratio Delta In Cd on Pu Pd

su sa su Sd

Eg

780 In 2 150 Pu 0
So 600 150
Eso
Eo 630 na Pd 150

i Hedge ratio 150 0 1 5

780 480 0
5 Stock for I call

For Riskless Hedge Buy 5 Stock and I call

outflow from 112Shame Buy 4600 X 57 300 Contflow
 After 3months
if share price becomes 780 it sharePrice becomes 480
Inflow from sale Proceeds 4780X 5 390 InflowfromSale 4480 X57 240
outflow Pay for call Exercised 1507 fall lapses NIL
Net inflow 240 Net Inflow 240

Dv of future certain cash Inflow 234.15

2,4L

i value of call option today at minimum for breakeven 300 234 15

65.85
Also if 601 Prob of Price going up and 401 Prob of Pricegoing down
value of call option 60 150 40 0 90

i Reta has pen 1cal 90 65 85

36 67 f
100
65.85

Black Scholes

value of call option So N di Een x Nldr

d In M 56 E d denominator
f di 6ft

if dividend expected to be paid in 2m say I 107 then Dividend

is reduced from so where Adjusted 10 So 1v of dividend
Kay408

i Adjusted so 408 10 408 408

05 212 808m
e e gg
398.083
 In caseof Real option Black Scholes model

Here we can also solve using above formula However it is recommended

to follow real formula which is little bit different

me
d e
s
4cm att s É.dz d of
Interestratepra

edividendmatep.ae
Nail Neda timely
co En fedt

so 1 Ned
Ene 41 Nlda
value
of Put option

Note N 0.9596 2 N 0.9596

However NC 0.9596 1 N 0.9596

Fort Cal of old I N dn Always take cumulative area

hit if one tail area is given cumulative Area I One tail
cumulative Area two tail
ii if two tail area is given 1
2

0125 0125 calculator

to find e say e 2.7183
1.01258 Press V27183 12times

I 0125 I

12times

To bind In a say In 10375 03681 Calculator

1.0375 12times

L X 4095.503
 Real option
11 Value of Growth option Expansion dv of Additional NAV from expansion
of 0thyear
il Abandonment option Right to sell on Abandon up 30 down 40 Mf 8
9115
686 Grave
f v ofProposal cooch
ofAboption NIL
314
60cm
Proposal
laybe sold for2 80cm
Valueof Ab option 80 60 206

Prof f P hot Sf
308 40 thor 08 value Aboption 686 0 314 20
of
1 08
D P ht.to 686

1 P 314 5.816

Ciiil Timing option Startimmediately on wait for 1year

Startimmediately D v of futuresavings 211 2.19
101
Cost 25cm
i NPV 2.1 2.5 0.40cm

wait for lyear investinProject

the
favourable condition 3,51 3 56 3 59 NPV
unfavourable condition 1.2cm 2.10
12,1
1 26 NPV NIL
TillnotinvestinProjed
However ICAI 501 is wrong
5
14
4 3
52 5 100 hot
25
2.5cm
340 1 d 1.22 5 100 52
1 2cm
NPV 2.5 1.2
I 307 i I hot f P 52 8

Exp NPV 652 1cm f 348 1 3cm 401 52 52P 08

1 08 P 652 1 P 348
60,92
18.481 i Waitfor
Theory
option Greeks

1 Delta 4 Ned Degree

of change inoptionvaluedue to change in Underlying ShPrice
ForDeeply of Deltaclose to Zero Deeply in themoney delta close to 1
ofmoney option
2 Gamma measure how fastdeltachanges boy small change in underlying stockPrice
3 Theta Time Decay option value decreases with expiry of time
4 Vega option value Inc dec due to 1 f change in
volatility
51 Rito option value changes fam 11 change in risk free mates

Exotic option
1 Chooseroption To choose call on Putoption after a specified Period
oftime
2 Compoundoption Inthis option the underlying is an option hoption on option
3 Barrieroption Contract activated only if underlying meashes certain Price
4 Binary option Predecided Pay off based on happening
of certain event
5 Asianoption Payoffdecided by Aug of Price of underlying during lifetime of option
6 Bermuda Exercise
ofoption restricted to certaindates Compromise bet American Efforts
7 Basket option value of option depends on PORTFOLIO
8 Spread option Payoff depends on difference bet two underlying
9 lookBackoption Onmaturity optionholden givenchanceto choose most favourable
strike price during lifetime of option

Commodity Derivatives
Hedge ratio
If
Investmentvalue
then For Perfect Hedge Amount of short futures Hedgeratio

Electricity Derivatives weather Derivatives Credit derivatives

Just Read mom PDF Notes Provided It is very simple
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