DERIVATIVES

A Derivative is a financial instrument with a value dependent upon underlying variables. The term can refer to a contract, or its value, derived from the underlying assets. Derivatives can be used for speculating purposes ("bets") or to hedge ("insurance"). The most common derivatives are futures, options, and swaps but may also include other tradable assets such as a stock or commodity or non-tradable items such as the temperature (in the case of weather derivatives), the unemployment rate, or any kind of (economic)index.

TYPES OF DERIVATIVES
Forward: A customized, risk-exposed contract for a future trade. Futures: A standardized, exchange-traded, daily-settled forward. Swap: A multiple of forwards with periodic settlements. Option: A forward synthesized with a risk-free asset.

FORWARD
A forward contract calls for the delivery of an asset (real or financial) at a future date for a predetermined price. Informal, private, customized and risk-exposed (because of inherent, strong incentives to default) waiday ka sauda at local exchanges. Futures A formal, standardized exchange-traded contract in which the underlying asset will be delivered on a future date at a

FUTURES
A formal, standardized exchange-traded contract in which the underlying asset will be delivered on a future date at a

OPTIONS
An Option is a right, but not an obligation, to buy or sell, a specified amount of an underlying asset, at an agreed upon price, on or before a specified date.

TYPES OF OPTIONS
Call- Right to BUY a specified amount of underlying asset Put- Right to SELL a specified amount of the underlying asset Underlying Asset This is the asset which the Option Buyer has the right to buy or sell Bonds, Foreign Exchange, Futures Contracts Strike Price or Exercise Price This is the price at which the underlying asset can be bought or sold Premium This is the cost of the Option- the amount (fee) paid by the Option buyer to the Option seller

 Time to Expiration or Maturity This is the amount of time remaining that the Option buyer has the right to exercise the option. There are two types of options: European Option- The Option buyer has the right to exercise only on the maturity date American Option- The Option buyer has the right to exercise at any time on or before the maturity date

SWAPS
Traditionally, the exchange of one security for another to change the maturity (bonds), quality of issues (stocks or bonds), or because investment objectives have changed. Swaps have grown to include currency swaps and interest rate swaps.

Types of Swap Transactions

Pure Swap - Purchase and sale of the same currency for different value dates with the same counter-party. Engineered Swap - Purchase and sale of the same currency the different value dates but with different counter-parties.

INTEREST RATE SWAP

An interest rate swap is a derivative in which one party exchanges a stream of interest payments for another party's stream of cash flows. Interest rate swaps can be used by hedgers to manage their fixed or floating assets and liabilities They can also be used by speculators to replicate unfunded bond exposures to profit from changes in interest rates. Interest rate swaps are very popular and highly liquid instruments. ISDA represents participant in the privately negotiated derivatives industry and is the largest global financial trade association, by number of member firms.

TYPES OF INTEREST RATE SWAP

Fixed-for-floating rate swap - same currency. Fixed-for-floating rate swap - different currencies.

Floating-for-floating rate swap - same currency.

Floating-for-floating rate swap - different currencies.

CURRENCY SWAP
A currency swap (or cross currency swap) is a foreign exchange agreement between two parties to exchange principal and fixed rate interest payments a loan in one currency for principal and fixed rate interest payments on an equal (regarding net present value) loan in another currency. Currency swaps are motivated by comparative advantage Unlike interest rate swaps, currency swaps involve the exchange of the principal amount. Interest payments are not netted (as they are in interest rate swaps) because they are denominated in different currencies.

CREDIT DEFAULT SWAP

A credit default swap (CDS) is a credit derivative contract between two counterparties. The buyer makes periodic payments to the seller, and in return receives a payoff of an underlying financial instrument defaults. CDS contracts have been compared with insurance, because the buyer pays a premium and, in return receives a sum of money if one of the specified events occur.

VOLUME
An overview of PMEXs performance can be seen in tables below:
Year 1/July /2009 30/ June/ 2010 1/July/ 2010 30/June/ 2011 1/July/ 2011 30/June/2012 Lot 313,639 1,465,010 3,698,615 Value (Rs) 62,673,708,671 487,289,049,057 910,664,668,658

On 12th December the volume of lots traded were 31360 and volume in Rs were 7,291,859,494.

 Pakistan Mercantile Exchange ended the first quarter of FY 2012-13 with a record trading volume of Rupees 385.58 Billion in terms of value. This represents an increase of 40.71 % on previous quarter. Over Rupees 150 Billion of traded volume was seen in September which is a monthly record, beating previous monthly high of 129 Billion Rupees set in August 2012Corresponding number of contracts traded in the quarter was 1,051,032 which is also a record. Number of active brokers reached a high of 67 and investor accounts were at record level of close to 8,000.

 PMEX is showing continuous improvement and diversification in its product mix. Mr. Mansoor Ali, Chief Business Officer at PMEX commented Our product mix has been growing for quite some time now as investors become aware of and familiar with different products. While Gold has been the dominant product since the initial days, improvement in Crude Oil trading has been witnessed as it took a market share of 40% in the overall product mix of PMEX increasing from Rs 4.7 Billion in September 2011 to over Rs 60 Billion in September 2012. This reinforces the view that investors can use PMEX for all fuel hedging needs given the deep liquidity and trading volumes on the Exchange.