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CALL :Calls give the buyer the right but not the
obligation
to buy a given quantity of the underlying asset, at a
given
price on or before a given future date.
PUT :Puts give the buyer the right but not the obligation
to
sell a given quantity of the underlying asset, at a given
price on or before a given future date.
OTC Derivatives
Characteristics of OTC Derivatives market:
– The management of counter-party (credit)
risk
is located within individual institutions. No
formal limit on individual positions, leverage,
or margining.
– No formal rules of risk and burden sharing
– No formal rules for ensuring market stability
and integrity
– Lack of regulator, although they are affected
indirectly by national legal systems, banking
supervision and market surveillance.
Exchange Traded Derivatives Market
• Individuals trade standardized contracts
that have been defined by the exchange.
(First Futures contract were traded in
1865 in CBOT) (www.cbot)
NSE’s derivatives market
Commencement of derivative trading with
S & P CNX Nifty Index futures on 12/06/2000.
Trading in index options commenced on 04/06/2001.
Single Stock trading in options started on 02/07/2001
Single Stock trading in futures started on 09/11/2001.
NSE’s Derivatives Market
2 tier Membership Structure
Trading Mechanism
NEAT F&O
Features
Fully Automated
Screen Based F&O Trading
Anonymous order driven Market
Transparency in Operations
Operates on Price – Time priority
NEAT Corporate Hierarchy
Corporate Manager
Branch Manager
Dealer
Futures Terminology
Spot Price
Futures Price
Contract Cycle
Expiry Date
Contract Size
Basis
Cost of Carry
Initial Margin
MTM
Maintenance Margin
Options Terminology
Index Options
Stock Options
Buyer of an option
Writer of an option
Call Option
Put Option
Option Price / Premium
Expiration Date
Strike price
American Option
European Option
In the money Option
At the money Option
Out of the money Option
Time Value of an option
Payoff Model
Long
Futures
Short
Futures
Long Call
Short Call
Long Put
Derivative Greeks
Delta - measure of how option value changes with changes in underlying
asset e.g. share price
Theta - measure of change in option value with change in time to
maturity
Vega - change in option value with change volatility of underlying asset
Rho - change in option with respect to interest rates (in the case of a
share option where delta relates to stock)
Gamma - Delta is not static. Gamma is a measure of how the delta itself
changes with changes in
Types of Orders
Time Conditions
•Day Orders
•Immediate or Cancel (IOC)
Price Conditions
•Stop Loss
Other Conditions
•Market Price
•Trigger Price
•Limit Price
•Pro
•Cli
Contract Details
Present Month
Next Month
Far Month
Criteria for Stock qualifying for
Derivative segment Trading
Disqualification
Failure to meet the above criteria for 3 consecutive months
Criteria for Index qualifying for
Derivative segment Trading
80% of the stocks contributing to the index are eligible for derivative
trading
No single ineligible stock in the index should have a weight age of
more than 5% in the Index
Disqualification
Failure to meet the above criteria for 3 consecutive months
Clearing and Settlement
Clearing Members
SCM
TM – CM
PCM
NSCCL
Functions
Clearing
Settlement
Risk Management
Clearing Mechanism
Underlying
Strike Price
Volatility
Expiry
Interest Rate
Types of Margins
Initial Margin
Premium Margin
Assignment Margin
Client Margin
Disclosure
Requirements
Accounting for Options
STT on Derivative
transactions
Regulatory Framework