Professional Documents
Culture Documents
Derivative Contracts: ..The Instrument For Future Trading
Derivative Contracts: ..The Instrument For Future Trading
Derivative Contracts: ..The Instrument For Future Trading
Hence we say,
the value of the derivative contract depends on the
value of the underlying asset.
Types of Derivative contracts –
Derivative
Contracts
Trading Nature
Forwards
Exchange Traded
Forward Contracts
It is an agreement between two parties whereby
one party agrees to buy from, or sell to the other
party an asset at a future time for an agreed price.
Parties can be individuals, corporate, or financial
institutions.
A forward contract is settled by delivery of the
asset by seller to the buyer against respective
payment.
Example -
‘A’ agrees to buy 10 gms of Gold from ‘B’ after
90 days for Rs.1000/ gm.
On settlement date,
Expiration date -
All options have specified date of maturity known as expiration
date.
Options expire on the last Thursday of the expiry month.
If last Thursday trading holiday contract expires on
previous trading day.
Maximum 3 months trading cycle..
Near month ( 1st month )
Next month ( 2nd month )
Far month ( 3rd month )
Options
Expiry Nature
For this Mr.A pays premium of Rs.5/ unit to the writer of option.
If on or before the expiry date,
Price of equity shares > Rs.250, Mr.A will exercise his right to call
Delivery settled –
Mr.A will acquire 1000 shares of Airtel & make profit [ CMP > 250]
Cash settled –
Mr.A will get difference [ CMP - strike price]
If CMP is below Rs.250 then he will not exercise his call option.
Equity Index Options -
It gives a person the right to buy or sell no. of units of equity
index ( e.g. Units of SENSEX ) on or before a specified future
date.
Underlying asset – Equity Index
European style – Exercise only on expiry date.
Settlement –
Receipt / payment of difference between the strike price &
value of security on expiry day, in cash.
Example of Equity Index Option
of Sensex
( Strike Price)
j
for this Mr.B pays premium of Rs.25/ unit to the writer of option. j
If the share price of Infosys goes above 2500 then, he will exercise call.