Presentation .pptx derivatives and definition

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1. DEFINITION AND CONCEPT OF DERIVATIVES ​ ​ A derivative is a contract whose value is derived from the value of another asset called 'underlying asset'. An underlying asset could be a share, stock market index, interest rate, currency or a commodity. The value of the derivative changes when the value of the underlying asset changes. For example, the value of a copper futures contract derives from the value of the underlying asset, i.e. copper. Therefore, when the value of the copper changes, the value of a copper futures contract also changes.

2. Types of Financial Derivatives​ ​ ​ Forwards: A forward contract is a contract between two parties obligating each to exchange a particular good or instrument at a set price on a future date. It is an over-the-counter agreement and has standardised market features. ​ ​ ​ Futures: Futures are standardised contracts between the buyers and sellers, which fix the terms of the exchange that will take place between them at some fixed future date. A futures contract is a legally binding agreement. Futures are special types of forward contracts which are exchange traded, that is, traded on an organised exchange. The major types of futures are stock index futures, interest rate futures, and currency futures.

3. Options: Options are contracts between the option writers and buyers which obligate the former and entitles (without obligation) the latter to sell/buy stated assets as per the provisions of contracts. The major types of options are stock options, bond options, currency options, stock index options, futures options, and options on swaps. Swaps: Swaps are generally customised arrangements between counterparts to exchange one set of financial obligations for another as per the terms of agreement. The major types of swaps are currency swaps, and interest-rate swaps, bond swaps, coupon swaps, debt-equity swaps.

4. FEATURES OF DERIVATIVES MARKET 1. The derivatives market has the same characteristics as in other markets. 2. Market opinion plays an important role in the derivatives market like the cash market. The profit or loss position in this market very much depends on market view. 3. An investor can take long position in this market even without holding the underlying asset. 4. It is the only market where an investor can take long and short position on the same asset at the same time. 5. Margin-based trading makes trading in derivatives attractive. A trader can trade in derivatives simply by paying a small fraction of the total value.