Presented By: Dhaval Dedhia (08)

Accounting Standard 30 defines derivatives as:

A derivative is a financial instrument or other contract within the scope of this Standard with all three of the following characteristics:
its value changes in response to the change in 'underlying' it requires no initial investment or an initial net investment

and it is settled at a future date.

Derivatives Markets
Exchange traded :
Traditionally exchanges have used the open-outcry system,

but increasingly they are switching to electronic trading Contracts are standard there is virtually no credit risk.
Over-the-counter (OTC) :
A computer- and telephone-linked network of dealers at

financial institutions, corporations, and fund managers Contracts can be non-standard and there is some small amount of credit risk

Types of Derivatives

Forward
Option

Futures
Swaps Forward Rate Agreements(FRA)

Forward Contracts
Contractual Commitment to buy or sell
a specified quantity and quality of underlying asset at a future date and

for a specified price.

Forward contracts are similar to futures except that they trade

in the over-the-counter market.

Forward contracts are particularly popular on currencies and

interest rates

Futures Contracts
contract is an agreement to buy or sell
a specified quantity and quality of an underlying product at a specified date in the future, for a price agreed

Similar to forward contract

Whereas a forward contract is traded OTC, a futures contract is

traded on an exchange

Types of Traders
Hedgers
Use derivatives to reduce risk that they face from potential

future movements in the market variables

Speculators day traders, Position traders and scalpers
Use derivatives to bet on the future direction of the market

variables
Arbitrageurs
Take offsetting positions in two or more instruments to lock

in a profit

Options
An option is a contract that grants a right to the holder or

purchaser of the contract

to buy or sell an underlying asset at a specific price on a specific date or upto a specified date without a corresponding

obligation to perform on the

contract.
The holder or the purchaser pays a premium for the right.

Types of options
Call option- The right to buy a specified amount of currency at

a specified rate.

Put option- The right to sell a specified amount of currency at

a specified rate.

ITM,ATM,OTM
Call Option Put Option 1.In-the-money Strike Price less than Strike Price greater than Spot Price of underlying Spot Price of underlying asset asset Strike Price equal to Spot Strike Price equal to Spot Price of underlying asset Price of underlying asset

2. At-the-money

3. Out-of-the-money

Strike Price greater than Strike Price less than Spot Price of underlying Spot Price of underlying asset asset

Margin required
Initial Margin :

An Initial margin is the deposit required to maintain either a short or long position in a futures contract.

Maintenance Margin :

Maintenance margin is the amount of initial margin that must be maintained for that position before a margin call is generated.

Basis & Convergance

Basis = Spot price Future price
process of basis moving towards zero is

Convergance.

Intrinsic value & Time value

Intrinsic value is difference between strike price and the spot

price.
Time value is the difference between premium and intrinsic

value

Volatility
Volatility is a measure of the rate and magnitude of the change

of prices (up or down) of the underlying.

If volatility is high, the premium on the option will be

relatively high, and vice versa.

Greeks
Delta Gamma Vega

Theta

Delta
The movement of the option position relative to the movement

of the underlying position.

It is the probability of option being itm at the expiration. At ATM delta of Call & Put is 0.5 At OTM delta is between 0 to 0.5

At ITM delta is between 0.5 to 1

Gamma
Options Gamma is the rate of change of options delta with a

small rise in the price of the underlying stock.

Just as options delta measures how much the value of an option

changes with a change in the price of the underlying stock, Options Gamma describes how much the options delta changes as the price of the underlying stock changes.

Vega
Options Vega measures the sensitivity of a stock option's price

to a change in implied volatility.

When implied volatility rises, the price of stock options rises

along with it.

Options Vega measures how much rise in option value with

every 1 percentage rise in implied volatility.

Vega is highest for ATM options, and is progressively lower as

options are ITM and OTM.

Theta
Theta is that options Greek which tells you how much an

option's price will diminish over time, which is the rate of time decay of stock options. Time decay is a well known phenomena in options trading where the value of options reduces over time even though the underlying stock remains stagnant Positive Theta means that the option's value will increase as the time passes & vice-versa. Negative Theta means that the option's value will fall as the time passes & vice-versa. Theta is highest for ATM options, and is progressively lower as options are ITM and OTM.

Greeks Table
Long call Long put Short call Short put Delta Positive Negative Negative Positive

Gamma

Positive

Positive

Negative

Negative

Vega

Positive

Positive

Negative

Negative

Theta

Negative

Negative

Positive

positive

OPTION STRATEGY
INCOME STRATEGIES
COVERED CALL BULL PUT SPREAD BEAR CALL SPREAD

COVERED CALL
DIRECTION Bullish Assset legs Long stock Short call (OTM) Max risk Uncapped Max reward Capped Strategy type Income

Description: It is like collecting rent while you own a stock Outlook : neutral to bullish (steady rise). Greeks : 1. Delta : positive and expected to fall to zero 2. Gamma: negative (net seller) 3. Vega: negative (harmful for this position) 4. Theta: positive (time decay is helpful for the position)

BULL PUT SPREAD

Direction Bullish Asset Legs Long Put (FOTM) Shot Put (OTM) Max Risk Capped Max Rewards Capped Strategy Types Income

Oulook: bullish or neutral to bullish Rationale: income for a net credit while reducing your maximum risk. Greeks : Delta:Positive

Bear call spread

Direction Bearish Asset Legs Short Call (ITM) Long Call (OTM) Max Risk Capped Max Rewards Capped Strategy Type Income

Outlook: bearish or neutral to bearish. Greeks: Delta: negative Gamma: negative Vega: positve Theta: negative

OPTION STRATEGY
VOLATILITY STRATEGIES
Straddle Strangle

STRADDLE
Direction Neutral Asset Legs Long Put (ATM) Long Call (ATM) Max Risk Capped Max Rewards Uncapped Strategy Type Capital Gains

Outlook: movement in either direction Greeks: Delta: highest in either direction Gamma: highest Vega: positive (helpful) Theta: negative (harmful)

STRANGLE
Direction Neutral Asset Legs Long Put (OTM) Long Call (OTM) Max Risk Capped Max Rewards Uncapped Strategy Type Capital Gains

Outlook: huge movement expected in either direction. Greeks: Delta: is highest Gamma: positive Vega: positive Theta: negative or harmful

THANK YOU