NISM -Vill Ea@urty DERIVATIVES CretrFICATION EXAM 4) Index *® Basica ad pevivatives — - graves @® onderatending ef Gndex - 2 mows Tatroduction to forvsards & Futures - a5 ens Inkro ductor) to option —— a worl option Trading Strodogie — 3 vatts Tuhodudie to Trading Sysleros — J wratks Aninoduction to clearing, uy settlement Sslems - 134 Legal Regultorg Covi ron ment — 18 Movts pccounkirg @ otation - 3 mB OSSGTo0ade Soles prachices & Tnvestoy protection Services - a malts SVR ASSOCIATES 44/3 Arundelpst GUNTUR-622002., Cell: 7671027880chapler-4 Basics of Dedivatives Deaivalive Tt 1 a Contra @r) product, whose volue 16 devived 4yem an underdying Mek. Derivative types D Brwovds ® Raves @ opttors ® Forwovds :- The contrath Twade belween Directty, uso Coonker pasties 15 called forvsavds . @ Ftv e- The contract trade povtles through grclorge called fubcives. beliveer) tuo Conter © options s- option hat gives to right bak rob obligation specie date and Lime "0 we future 18 Glled options. ® eT TEE TT TT eeDerivokive mosket Wistory t- (world Wistory) @ Fervsard& - 1948 - COOT @ Flurey - 1365 - cBoT USA @® eptions - 1993 - CBF cBot - chicago Board of trade CBOE - chicago Board of options exchange Deivelive moakel History t- (India History ) © forwoyels — dune -acco dures = daly — 2001 SET @® options - Nov sod! SEBL— Securities w Excharge Board of- India Market panier pars ® Hedgers ® Specalatord @ Asbi trogers® Hedgers (> Medgers ore fakan torg perio Contra [ive Ayeav, ayeayS Byears .. - - 4) @) Hedgers are also tnown of Risk Reducers” © Here Hedgerd ave proftts high, Risk Low ® Speculators @ Specalators ave faker very short pervok controls [tke Single doy transauions ], (©) Speculators are algo now 03 “Risk takers” @) Aa Day Troders (c) Here Specuhtors ave prohtts tow , Risk high ® ArbitragerS (@ ArbitvegerS trey dent have any Sme Simek, (©) prbitragerS are Shares purche$e in one maitet and Stl In different medtet tor prite Genifits (c) Here ArbitagerS ave preftts high, No RiskRegulated Exchange SEBI } 1992 cP = 3k if Bse pp leTs Nse fb i992 Mcx-sx baota Bombay Stock national Stock Mult Commodite, €xchargd Exchange Exchange Steck exchange : Sensex | nitty SX- 40 ‘ | e Sensitive Index| walional Fifty Stock exchorge~ 40 ee] 30 ie [nalinaliacct companies | ® when Stock moaket index % increased 1 Callect Bull_ market, Bull market @ when Hock marhel index %3 dereased %% Callect Beay market, Rnchapter-2 Sah understanding of Gndex Dodex :- It Ba stokifical measurement of posticwlar oveos of general mete @r) public @r) Economy. Tndex types ® Madket capitalization Index ® Frefloat weigh Index @ price weighed Index @® Equel weighed Inder © Mastek apitaligotion Index Mer = Stock price X No-of- shaves @® Fietloot weighted Index Single Stock price . eit dees Fwi = Total stock price@ price weighted Index New Stock psice pur = X Bose value old stock price | @ Equel weighted Index new Stock price Fab nce Wise: Sulaess re Nose Companies ae X Base volue Impack cost : (Heorfing | The difference between Gest Boy price ane Best ct price 1% called Tmpack c&b Ampack cat 3 [Formula] Actual cost - Ideal price Ideal price Ampack cost = X 100 Best Buy price + Best solt price a Tdeal price =he) Index eptieng are _Detivalive products |® Exchange traded opliond ave _Standordived opkony @ ETE stands for Fachange Traded Finds @ ETF % algo Known ___Backet Sounitieg ® Sup stands Poy ——Stendovel @& poor © BseE stands for Bombay stocke excborge BsE Andex -form Sensex. BSE ack \o45 s MSE Gtanda Poy _nolicral Stoke Exchange Sc SEO co) nn SEO Ce ee ts aera mex —Sx Stands for Mul Commodily Exchange — Store cucherge| mex $x Index form SX=40 CS Ee Cle en 1 eee seer Ack 1992 Segz stands for Secusities & Gxeharge Board of Gnd ia — sensex. full form Sensitive Inder nifty Pull. form _ national fifty FI PLL cE CTA SS9SSFSHSSEOSDchapler 3 Tntroductisy) to Forrsovds wu Fired © Forwovds The contrat trade betwen diredly two Coonler porties % called -forrsorcs . Zn HO8 Contract Risk 18 very high. In thy Contrauk no 3+ posly. Forwavd contra 1s also proven Biltéral contra e Liquidity Risk % also nou as “OS RISK” Cooler paaky Risk % also trou o§ “Defaulk RISK Foyward contracts ave poole, contrad3 ®S®O98O0 00 Forword Centra are OTe contrat OTC — over the counter ® Ferwarl Conttalh are cultomigeot Contraul. ® Forward central ove trvcle Selneen ety two pasties . psec, uobly , query @ Time decile Starting of the agreemert.@® Fulares | The Contract “roole between two coonler pales +hrough Exchange 14 CoMek Fullares . @ To4Ns Gontvak Mise YW low. ® In Wy Control gt pasty 18 there | @ the xt pesky % Stock exchange ; (ese, semcx) ® Fubure contrat 75 algo known a8 “TG Jloteral contrat" @ fatare conivack masgins ave paid by Buyer g Soller @ Ffalave Contract margins are paid to “Bcchange * @ Fulare contvadke ave public contrac ® Rdbave cotvady are centralizect Trodiing platter) @ fifare contralg are Standardized contrady. @ Falure contralg ore Trade befaxen Tree passics @ @ which contract margins are paid tulure contract} psice, Quality, Quantity & Time decided starting the agrement.@ contrat cycle :- Tt is a perlod over which “three months’ Contvat cycle. > Below 3 momhs contraug ave “eontradk qe’ colkecl “ys above 3 momths Contyada ote coblect * warrants * @® Expiration poy :- Each and every contval has expives om the motority nants of Jas thursday > In che thutddag (% holiday ithe — contyat expires previour working doy. @® sattement schedule s- SEUNG uae SSN aa Bt an be settled om T+4d working doy oH om OY) before 10330 Am. at means Friday, > In Gye Friday holiday he Contract Geil om next ooking clay fire; monday) @price Te denoles Th i iy The Fuluuve martat yield moe cncept4 io Qa Garvtrat fo mul imum price i & patraPositions af pexivative market oO Long posi ior, @® Shore position @® open post diay) oO Long positien Be gubstonding Gx) unsettle Buy’ eosiiar % collad Leng position. short positisy &- Se : outstanding GP onsetled “sell” positinn 4 called Short postion. open position t- cubttondivg Gr) onsetrlect Boy | st” Positten 18 called open position, Dmporlank terms 40 Hedging 2 ® Long Hedge ® short Heve @ cross Hedge@ long Hedge :- The person Hedger [§ when Guy" a Contract} Tht perso 1% collect long, Hedge. ae @ shovt Hedge 2— The person Hedger 14 when Sey” a contro trek peréen $4 called Short Hedge. @ cross Hedge s- The perSon Hedger 18 when Bay [seu 4 emtrat That pers 15 callecl cross Hedge. cash and covay model :- *(5 Mavis) cakh and carry model §€3 also known agTntvoduchon to options options ¢- option Thak gives to wight, buk oot obligation Specie dake ord time io the -Pulure. Options are two Types @® Call option 2 Buyel — Boy @ pub optier ; Buyer Selb @ call option s- “the option Bayer gives to wight, bub not obligate to “Boy an underlying asset . @ pvt option :- The optisn Boyer gives to vight, but net obligation to “set” an underlying asset, © option Buyer - The person who boy” an option that person 8% called option Buyer % option Guyer 6 also known a5 “Holder” © option seller 2- The person who eli" an eptton had person fs called option Ler. « optfon Ser % also known of writer” ©® option pyemiom 3—- The amount which % option Boyer pays to option Selle 13 Calla option premio. x opts premiom 14 algo known ah “option price’ @ Leveroge t- he amoont which 18 epticn Guyer pays te option Seller to maintain The relahonship % Calle Leveroge. ® Stock options ¢- These options has “Stock” fs The onder ir Absels © Index options 3- . , “These ephoms hos “Inder ig The onderlyfirgy Asset. ; Gedia ove used % Europian options G0 Srden phos @ stike price OOi- “the price at which qprodled on derivalive mob @& stsike price means agreement price % sistike price 18 also Known of “exercise price’| © Falure price ) The price ak uhich traded ona itive market © Filiwe price means expiry price dhe centraut @ Spot price G) The price of which traded om a Spot market GY) Spot price means cash maskel price iS Sa O wo) ae 10000 hoo a Basis (8) the Difference belween spot price) and. (P Fidure price % Glad Basis. @ Golransic volue (xv) The difference belweer Spot pice G) and Stxike price &) 1% Called Inbxingic value . @: cost ot anny @o) The Relation belueon Future price(F) and spot price (3) % called cAt of camry . C= F-5 @@® Time value (7) the difference between premiom and Unteindfc value %% called rime value ae @ oTm (cut f the Honey) Tt gives oleoays “negative cash How F : SS. 10000 5000 5000, = ) ® ATM Cat the moned) Tt gives aluoys “Zero! cash Hows x F > (zero} 1900616060 j0000 @® ITM (4 the /Meney) Te gives aluaays “positive” xs — aa 10000, 15000 cashHows Tolyinstc value ex6tS only An the money eption.a Monks Pay chal chaals Te can be shown oF a prdits and Losses in a graphteal format © © 60 Optiod Greeks @ Delta (A) = © Gamma) = @ Theta (O) ® vega W) © Rbo (P) cal | put Profit Loss Long onkimited Premium x Lot Short Premiom x Lot onbimi ted Buy a call option = Long call Buy a pul option = Long put Set a call epton = Short call sell a put option = short pub hange in eption premtor ic umit change price Of under ying Change to option Della (A) Unit charge price of underlyirg- charge fo option premium n charge th Time to expiry change in option premium charge in volatali te charge Yn option premiom chorge i Rabe f avterest ©