CONTENT
Introduction
Definition and basic concept of derivatives
Application of Derivatives
Trading Futures
Basic concept of derivatives
Futures Contract:- Future contract is between two parties.one is agrees to buy related underlying asset and other is agree to sale at a specified date and specified price. Both party get agree today for future deal in advance. All the terms are made by stock exchange other than price .Both party are protected against counter party risk by an entity called clearing corporation.by entrant of this corporation participating parties do not suffer by risk of defaulting its obligation. To fulfil guarantee of its obligation clearing corporation holds some amount as security from both parties. This amount is called margin of money and can be in the form of cash or other financial asset.
Spot Market:-It is a security market where securities are sold for cash and delivered immediately,The delivery happens after settlement period. Which is T+2
Terminology of Derivatives:-
Spot price:-This is price of an underlying asset which is quoted for immediate delivery of asset.
Forward price or Future price:-This is price at which both parties get agreed to trade commodity at specific future date. This price is dependent on spot price.
APPLICATION OF DERIVATIVES
There is a broad range of investors those invest in different category to manage their risk.These investors broadly categorize in three categories.
1. Hedgers
2. speculators
3. Arbitrageurs.
Hedgers
These investors have a position (i.e., have bought stocks) in the underlying market but are worried about a potential loss arising out of a change in the asset price in the future. Hedgers participate in the derivatives mark...
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... , the lower the loss. Similarly, if S T is greater than
F, the investor makes a profit and higher the S T, the higher is the profit.
Pay-off diagram for a short position is the pay-off diagram for someone who has taken a short position on a futures contract on the stock at a price F.
Short Futures
Payoff for Short Futures
Here, the investor makes profits if the spot price (ST) at expiry is below the futures contract price F, and makes losses if the opposite happens. Here, if ST is less than F, the investor makes
a profit and the higher the ST , the lower the profit. Similarly, if ST is greater than F, the investor makes a loss and the higher the S T, the lower is the profit.
As can be seen from the pay-off diagrams for futures contracts, the pay-off is depicted by a straight line (both buy and sell). Such pay-off diagrams are known as linear pay-offs
The purpose of this paper is to provide a summary of the article called “Can We Keep Our Promises?” by Robert D. Arnott, and to help better understand the three key risks facing each investor.
of USD, it would need to put more weight in long futures contracts as much as they believe in by
The goal is to teach you to wear the glasses of a professional trader who sees the difference between low and high-probability trades. With these new glasses, your trading account gradually reflects the consequences of making high-probability trades. With more money in your trading account, you can buy more contracts. You experience the law of compounding, and your account grows exponentially.
Making an analysis of the profitability of the shareholder can be seen that although both companies have similar returns, the source of this return is different.
...r investments that can support the other weight and balance their portfolio and therefore alleviate some of the risk they face.
Pennings, Joost M.E. Research in Agricultural Futures Markets: Past Present and Future. Presentation Paper: Wageningen Agricultural University: Netherlands. 8 June 2001.
Cost-plus pricing, it the industry pricing standard, and is a method to determine a price of the product by finding the cost per unit and then including a mark-up
4. At FF15.00, will Lille Tissages, S.A. earn a profit on item 345? How do you
to give up a large percentage of the profit in a good year. Or maybe both sides
below, if firm X decides to lower its price from B to D, sales should
Since the listing of KOSPI 200 futures in May 1996, the derivatives market has grown into one of the key derivatives markets in the world. In the meantime, the market has achieved a higher level of excellence in market operation and secured a trading system and fair market management, and consequently figures as a decent reference among derivatives markets. The brief history of Korean derivatives market related to the products is as follows:
Spot market means that a commodity is purchased on the spot with an immediate settlement with the commodity being settled with the purchaser receiving the commodity on the spot or within a couple of days of the transaction. The spot market price can be based on the importance of the transaction to the purchaser or seller. For instance, if the seller has a product that the buyer is demanding, the seller can sell the product above or below the market price. However, if the sellers’ product has exceeded what they would like to have on hand, the seller can sell the product at a market price rather the product becoming irrelevant to the purchaser. According to the author of, “Futures and spot prices – an analysis of the Scandinavian electricity market”, “physical trade takes place in the spot market.” The advantage of on the spot market is flexibility of time the spot market is available to the 24 hours per day so that the seller can trade the commodities. The agreement is normally settled instantaneous with cash and the product is delivered to the purchaser and the account is usually set...
...ting in hedging activities in the financial futures market companies are able to reduce the future risk of rising interest rates. By participating in the financial futures market companies are able to trade financial instruments now for a future date (Block & Hirt, 2005).
This paper will define and discuss five financial theories and how they impact business decisions made by financial managers. The theories will be the Modern Portfolio Theory, Tobin Separation Theorem, Equilibrium Theory, Arbitrage Pricing Theory (APT), and the Efficient Markets Hypothesis.