Financial markets an introduction.A forward contract for which the under lying asset is a commodity, such contract is regarded as commodity forward contract

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1. F2 Module-6
Financial Markets

2. Learning Objectives
Futures, options and other financial derivatives
Foreign exchange markets
Interest rates futures market
Financial Markets in India
Primary and Secondary Market
OTC Market
Call Money Market
Treasury Bills Market
Commercial Bills Market
Gild edged securities market

3. Derivatives Markets
Derivatives is an instrument the
value of whch is derived from the
underlying asset.

4. Types of Derivatives
Forwards
Futures
Options
Swaps

5. Forwards
A forwards contract refers to an
agreement between two parties to
exchange an agreed quantity of an asset
for cash at a certain date in future at a
predetermined price specified in that
agreement. The asset my be commodity,
currency etc
A forward contract is an agreement to buy
or sell an asset on a specified date for a
specific price

6. Commodity forwards
A forward contract for which the under
lying asset is a commodity, such contract
is regarded as commodity forward
contract
A forward contract in which the underlying
assert is a financial asset are known as
financial forwards
Eg, contract on interest rates, currency etc

7. Features
Over the counter trading (OTC):-
These contracts are purely privately
arranged agreements and hence, they
are not at all standardize once.
It is much flexible as it can be modified
according to the requirements of the
parties to the contract

8. No down payment, There will be a promise
to supply or receive a specified asset at an
agreed price at a future date. So no need of
down payment at the time of agreement.
Settlement at maturity, no commodity
changes hand when the contract is signed. IT
takes place only when maturity takes place
Linearity, It means symmetrical gain or
losses due to price flotation of the underlying
asset.
No secondary market, it is purely a private
contract, so it cannot be traded on an
organized stock exchange.

9. Continued,,,,,,,,
Requirement of a third party, there is a need
for an intermediary to enable the parties to
enter into a forward rate contract. Eg., banks,
or any other
There is a risk or counter party default, in
case either of the party defaults the risk is
high for the other party
The contract should be held till the
maturity, The contract will continue till the
assets are delivered.
Delivery, the subject matter of the forward is
the asset, the delivery of the asset is essential
on the date of delivery

10. Futures
A future contract is an agreemtn
between two parties to buy or sell an
asset at a certain time in the future at
certain price.
Compared to forwards the future
contracts are standardized and
exchange traded.

11. Characters
Standardized –and traded through spealized
institutions like stock exchanges
Down payments-are not necessary in the case of
futures, but a certain amount has to be made as
deposit which is a margin of the contract
Liquidity –a future may be liquidated or held till
the time of maturity
Hedging of price risks-Parties enter into future
contract on the basis of their expectations of the
future price in the spot market for the asset in
question

12. Continued …………….
Less risk, the risk of counter party default is
less as the stock exchange acts as a mediator
and is very organized
Linearity, It possesses the character of
linearity, parties to the contract get
symmetrical gains or losses due to price
fluctuations
Secondary Market, Futures are dealt in
organized exchanges, and as such, they have
secondary market
Delivery of asset, generally parties simply
exchange the difference between the future
and spot prices on the date of maturity

13. Types of futures
Commodity futures –A future contract for
commodities like agricultural products, metals
and minerals etc
Eg., London metal exchange, new York cotton
exchange
Financial futures–a financial future contract
in which the underlying asset is a financial
asset such as stock, interest rates, currency
etc
Eg, International money market, London
international financial future exchange

14. Options
An option contract gives the buyer a right to
buy or sell an underlying asset at a
predetermined price but not an obligation to
buy the underlying asset
Call option, a option which gives the holder
the right to buy a underlying asset at a
predetermined price, or
Put option, which gives the option holder the
right to sell an underlying asset
Double option, is one which gives te otpion
holder both the rights

15. Characters
Highly Flexible
Down payment, must pay certain amount
called premium
Settlement
Non Linearity
No obligation to buy or sell

16. SWAPs
A swap is a combination of forwards
by two parties.
The main objectives of swap is to
reap the benefits arising from the
fluctuations in the market

17. Features
It is almost like a forward
Intermediary
Settlement
Long term agreement

18. Forex
The value of one currency stated in
terms of another currency. In forex
market one person exchanges one
courtiers money for currency of
another country

19. Advantages of forex market
Liquidity
Leverage

20. Treasury bills and commercial bills
Treasury bills are money market
instruments to finance the short term
requirement of the governt