1. Derivatives

2. A project by 3. 3.Types of Derivatives 1.Introductionon Derivatives Disadvantages2.advantages & 4.Derivative Market World Wide 5.Derivativesin India Outline 4. What is Derivatives? Derivative comes from the word to derive. A derivative is a contract whose value is derived from the value of another asset called underlying asset. 5. History of Derivatives Chicago Board of Trade (CBOT) for derivatives trading, became functional in 1848 and by 1865 futures contract in commodities started trading. 1972 currency futures were introduced. 1975 Introduction to Interest Rate futures. 1981 Currency Swaps were introduced 1982 Index futures, Interest Rate swaps and Currency Options were started. 1983 Index Options and Options on futures were started. 6. Types of Derivatives Swap These are instruments granting the right to buy or sell a fixed quantity of a security, commodity, currency etc. of a particular date at a particular price. Option These are arrangement to buy or sell a fixed quantity of a particular security, commodity or currency for delivery at a fixed date and fixed price in the future. Futures Swaps means by which intending parties can exchange their cash flows, usually through an intermediary of a bank. 2 31 7. Example An Indian Company has ordered machinery from USA. The price of $50,000 is payable after six months. The current exchange rate is 49.08 as on 28th Feb 2010. At the current rate the company needs 49.08*50,000 = 24,54,000. If the company anticipates depreciation of Indian rupee over time. The company can enter into a forward contract & forget about any exchange rate fluctuations. Suppose the exchange rate becomes 50, then also the company has to pay Rs. 24,54,000 for buying $5,00,000 though the value is 25,00,000. 8. Introduction 9. 1. Negotiated Contract 2. intermediary 3. Combination of Forward Contract 1. Rearrangement of risk 2. Ease in trading 3. Equilibrium Features Advantages Disadvantages 1. Market movements 2. Time settlement 10. Forward Contract Future Contract Swap Interest Rate Swap Currency Swap Option Contract Types of Derivatives 11. 11 Derivative Market World Wide 1) EUREX 2) EURONEXT 3) LME 4) CBOT 5) CME 6) NASDAQ 7) TFX 12. Derivatives in India Development of Derivative Market in India Derivative Instruments Traded in India 13. Derivatives are an innovation that has redefined the financial services industry and it has assumed a very significant place in the capital markets. However, trading in derivatives is complicated and risky. Derivatives have no value of their own because they derive their value from the value of some other asset, which is known as the underlying. For example, derivatives of the shares of Infosys (underlying), will derive its value from the share price of the Infosys. Derivatives are specialised contracts which signify an agreement or an option to buy or sell the underlying asset of the derivative up to a certain time in the future at a prearranged price or the exercise price. Conclusion 14. Professor-in-charge Prof.Farzin Daruwalla SYBBI (Banking & Insurance) [Semester IV] Subject Innovation in Banking and Insurance