The

Derivatives Market
 What is the Derivatives and Derivatives
Market
• Derivatives Market is a marketplace for
Derivative instruments which are financial
assets in the form of financial contracts
whose value is derived or dependent on
an underlying asset, group of assets, or
benchmark.
• Derivatives is used for Hedging and
Speculating.
• Derivatives move risk from risk-averse to
risk-seekers.
 Types of Derivative Instruments
• Forwards Contracts
• Futures Contracts
• Swaps
 Interest Rate Swaps
 Currency Swaps
• Options Contracts
 Call Options
 Put Options
• Interest Rate Caps, Floors, and Collars
 Forwards and Futures Contracts
• Forward and Futures Contract is a
derivatives contract or agreement
between two parties to buy a particular
Financial Assets at a predetermined price
and rate and at predetermined date.
• Futures Contracts are traded in an
exchange while Forwards Contracts are
only facilitated privately making the
former less risky than the latter.
 Swaps Contracts
• A swap is a derivative contract through which
two parties exchange the cash flows or
liabilities from two different financial
instruments. There are two major types of
swaps (1) Interest Rate Swaps and (2)
Currency Exchange Swaps.
• Interest Rate Swaps is an agreement between
two parties to exchange a fixed interest rate
for a variable interest rate payment.
• A currency swap, sometimes referred to as a
cross-currency swap, involves the exchange of
interest and sometimes of principal in one
currency for the same in another currency.
 Options Contracts
• An options contract is an agreement
between two parties to facilitate a
potential transaction on an underlying
security at a preset price, referred to as
the strike price, prior to or on the
expiration date.
• Call Options gives you the right to buy the
products at a set price, while Put Options
gives you the right to sell the products at
the strike price.
• The Buyer of an option contract has the
option to execute but is not obligated.
 Interest Rate Caps and Floors
• An interest rate floor is an agreed-upon
rate in the lower range of rates and an
interest rate cap is an agreed-upon rate in Ceiling
the upper range of rates associated with a
floating rate loan product.
• Sometimes this is partnered with Interest
Rate Swaps.
• The combination of the Caps and Floors
are called Collars.
Floor