INTRODUCTION TO
OPTIONS AND
FUTURES
CLASSIFICATION OF
FINANACIAL MARKETS
NATURE OF CLAIM
MATURITY OF CLAIM
SEASONING OF CLAIM
TIMING OF DELIVERY
ORGANISATIONAL STRUCTURE
DERIVATIVE
ACCORDING TO SC(R) ACT 1956;
- A SECURITY DERIVED FROM DEBT
INSTRUMENT,SHARE,LOAN,CONTRACT
FOR DIFFERENCES,COMMODITY,INDEX
OR ANY OTHER FORM OF SECURITY
- A CONTRACT WHICH DERIVES ITS
VALUE FROM THE PRICES OF
UNDERLYING SECURITIES/ASSETS.
FINANCIAL
DERIVATIVES
FORWARD CONTRACTS
FUTURES
OPTIONS
FORWARD CONTRACTS
AN AGREEMENT BETWEEN TWO
PARTIES TO BUY OR SELL AN ASSET AT
A SPECIFIED FUTURE DATE AND PRICE
- OTC CONTRACT
- BILATERAL
- CUSTOMISED
- PRICE IS NOT AVAILABLE PUBLICLY
- SETTLEMENT BY DELIVERY ON MATURITY
LIMITATIONS OF
FORWARD CONTRACTS
LACK OF CENTRALISED TRADING
ILLIQUIDITY
COUNTERPARTY RISK
FUTURES
AN AGREEMENT TO BUY OR SELL AN
ASSET/SECURITY IN FUTURE AT A
CERTAIN PRICE
- EXCHANGE TRADED
- ANONYMOUS TRADING
- STANDARDISED
- MARGINS
- MARK TO MARKET
- SETTLEMENT IS GUARANTEED
FUTURES V/S
FORWARDS
EXCHANGE OTC IN
TRADED NATURE
STANDARDISE
D CUSTOMISED
LIQUID ILLIQUID
REQUIRES NO MARGIN
MARGIN ON MATURITY
DAILY
SETTLEMENT
OPTIONS
A CONTRACT WHICH GIVES RIGHT BUT
WITH NO OBLIGATION
- CALL OPTION:OPTION THAT GIVES RIGHT TO BUY A
SECURITY
- PUT OPTION:OPTION THAT GIVES RIGHT TO SELL A
SECURITY
- AMERICAN OPTION:CAN BE EXERCISED ANY TIME
- EUROPEAN OPTION:CAN BE EXERCISED ONLY ON MATURITY
- Asian Options: Asian options are options whose
payoffs depend on the average price of the
underlying asset during some portion of the life of
the option.
FUTURES V/S OPTIONS
EXCHANGE TRADED EXCHANGE TRADED
STANDARDISED STANDARDISED
PRICE IS ZERO OPTION PREMIUM
BOTH PARTIES ARE ONLY OPTION
REQUIRED TO WRITER WILL HAVE
PERFORM OBLIGATION
LINEAR PAY OFF NON LINEAR PAY
BOTH LONG AND OFF
SHORT ARE AT RISK ONLY SHORT IS AT
RISK
Options
BUYER/HOLDER SELLER/WRITER
RIGHTS/ BUYERS HAVE RIGHTS- SELLERS HAVE ONLY
OBLIGATIONS NO OBLIGATIONS OBLIGATIONS-NO
RIGHTS
CALL RIGHT TO BUY/TO GO OBLIGATION TO SELL/GO
LONG SHORT ON EXERCISE
PUT RIGHT TO SELL/ TO OBLIGATION TO
BUY/GO
GO SHORT LONG ON EXERCISE
PREMIUM PAID RECEIVED
EXERCISE BUYER’S DECISION SELLER CANNOT
INFLUENCE
MAX. LOSS COST OF PREMUIM UNLIMITED LOSSES
POSSIBLE
MAX. GAIN UNLIMITED PROFITS PRICE OF PREMIUM
POSSIBLE
CLOSING • EXERCISE • ASSIGNMENT ON
OPTION
POSITION OF • OFFSET BY SELLING • OFFSET BY BUYING BACK
EXCHANGE OPTION IN MARKET OPTION IN MARKET
TRADED • LET OPTION LAPSE • OPTION EXPIRES AND KEEP
FUNCTIONS OF
DERIVATIVES
MARKETS
RISK TRANSFER
HIGH LIQUIDITY,PRICE DISCOVERY
LOW TRANSACTION COSTS
PROFITS WITH MINIMUM CAPITAL
INDICATES MARKET PERCEPTION
ELIMINATE SECURITY SPECIFIC
RISK
ARBITRAGE OPPORTUNITY
ORIGIN OF
DERIVATIVES MARKET
IN INDIA
1995 SECURITIES LAWS
AMENDMENT ORDINANCE
1996 L.C.GUPTA COMMITTEE
1998 SUBMITTED ITS REPORT
1998 J.R.VARMA COMMITTEE
1999 SCR ACT AMENDED
2000 WITHDRAWAL OF BAN ON
FORWARD TRADING
INTRODUCTION OF
DERIVATIVES TRADING
12 JUNE 2000 INDEX FUTURES
4 JUNE 2001 INDEX OPTIONS
2 JULY 2001 STOCK OPTIONS
9 NOV 2001 STOCK FUTURES
24 JUNE 2003 INTEREST RATE
FUTURES
29 AUG 2008 CURRENCY
FUTURES
REQUIREMENTS FOR
SUCESSFUL DERIVATIVES
MARKETS
REGULATORY MECHANISM
RISK MANAGEMENT TOOLS
CLEARING CORPORATION
MONITORING AND SURVEILANCE
INVESTOR EDUCATION AND
TRANING
TECHNOLOGY
FACTORS LED FOR THE
GROWTH OF
DERIVATIVES
INSTABILITY IN MACROECONOMIC
VARIABLES
INCREASED VOLATILITY IN CASH
MARKET
INCREASED FOREIGN TRADE
TECHNOLOGY
REFINED PRICING TOOLS
PARTICIPANTS
SPECULATORS
HEDGERS
ARBITRAGEURS
USERS OF
DERIVATIVES
COMPANIES
MUTUAL FUNDS
BANKS
BROKERS
PORTFOLIO MANAGERS/ADVISERS
INDIVIDUALS
Terminology
- OPTION HOLDER AND OPTION WRITER
– EXERCISE PRICE OR STRIKING PRICE
– EXPIRATION DATE OR MATURITY DATE
– EUROPEAN OPTION AND AMERICAN OPTION
– EXCHANGE-TRADED OPTIONS AND OTC
OPTIONS
– AT THE MONEY, IN THE MONEY, AND OUT OF
THE MONEY OPTIONS
Futures Terminology
SPOT PRICE
FUTURES PRICE
CONTRACT CYCLE
EXPIRY DATE
CONTRACT SIZE
THE AMOUNT OF ASSET THAT HAS TO
BE DELIVERED UNDER ONE
CONTRACT. FOR INSTANCE, THE
CONTRACT SIZE ON NSE’S FUTURES IS 50
NIFTIES
BASIS
FUTURES PRICE - SPOT PRICE
INITIAL MARGIN
MARKING TO MARKET
MAINTENANCE MARGIN
OPTION PAYOFF
OPTION BUYER-CALL
OPTION
STRIKE SPOT PRICE OPTION PAY OFF
PRICE PRICE
500 400 20 -20
500 450 20 -20
500 500 20 -20
500 550 20 +30
500 600 20 +80
500 650 20 +130
140
120
100
80
60
PAY OFF
40
20
-20
-40
OPTION BUYER-PUT OPTION
STRIKE SPOT OPTION PAY OFF
PRICE PRICE PRICE
2000 1700 50 +250
2000 1800 50 +150
2000 1900 50 +50
2000 2050 50 0
2000 2100 50 -50
2000 2150 50 -50
2000 2200 50 -50
300
250
200
150
100 PAY OFF
50
-50
-100
OPTION SELLER-CALL
OPTION
STRIKE SPOT OPTION PAY OFF
PRICE PRICE PRICE
500 400 20 +20
500 450 20 +20
500 500 20 +20
500 550 20 -30
500 600 20 -80
500 650 20 -130
40
20
-20
-40
PAY OFF
-60
-80
-100
-120
-140
OPTION SELLER-PUT
OPTION
STRIKE SPOT OPTION PAY OFF
PRICE PRICE PRICE
2000 1700 50 -250
2000 1800 50 -150
2000 1900 50 -50
2000 2050 50 +50
2000 2100 50 +50
2000 2200 50 +50
2000 2300 50 +50
100
50
-50
-100 PAY OFF
-150
-200
-250
-300
FUTURES PAYOFF
PAY OFF FOR FUTURES
BUYER
FUTURES SPOT PRICE PAY OFF
PRICE
2000 1800 -200
2000 1900 -100
2000 2000 0
2000 2100 100
2000 2200 200
250
200
150
100
50
0 PAY OFF
-50
-100
-150
-200
-250
PAY OFF FOR FUTURES
SELLER
FUTURES SPOT PRICE PAY OFF
PRICE
2000 1800 200
2000 1900 100
2000 2000 0
2000 2100 -100
2000 2200 -200
250
200
150
100
50
0 PAY OFF
-50
-100
-150
-200
-250
