Puts — You would buy a put Option if you believe the underlying futures price will move lower. For example, if you expect soybean futures to move lower, you will want to buy a soybean put Option. Premium — You are obviously going to have to pay some kind of price when you buy an Option. The term used for the price of an Option is premium. You can think of the pricing of Option as a bet.
The bigger the long shot, the less expensive they will be. Oppositely, the more sure the bet is, the more expensive it will be. Contract Months Time — Option have an expiration date, which means they only last for a certain period of time. When you buy an Option, you cannot hold it forever. For example, a December corn call expires in late November.
You will need to close the position before expiration. Generally, the more time you have on an Option, the more expensive it will be. Strike Price — This is the price at which you could buy or sell the underlying futures contract. It is currently January, so you would probably buy an August gold call to give yourself enough time. Suppose the market price of equity share of reliance on the expiration date is Rs and the exercise price is Rs The value of call option is Rs 15 [Rs — Rs ] In case the value of share on expiration date turn out to be Rs the value of c would not be negative Rs 5 [Rs —rs ], it would be zero as the investor would not purchase share Rs which is available in the market and thereby incur a loss Rs 5per share.
Put Option Example Consider an investor who wants the right to sell reliance equity shares at Rs after 2 months. He is to buy a 2 month put option with a Rs exercise price. If the market price falls below the sp say to Rs it will be profitable for the put option holder to excise his put option right as he get Rs compared to Rs An important difference between futures and options is that trading in futures contracts is based on prices, while trading in options is based on premiums. The The buyers and sellers of futures can be classified as hedgers or speculators.
Hedgers use futures to minimize risk, like the farmers who use futures to guarantee a price for their product, or a miller who wants a set price for grain when it is harvested. Futures can also be used to hedge investment portfolios. Thus, futures is a significant means of price risk transfer—transferring price risk to someone with an opposite risk, or to a speculator who is willing to accept risk to make a profit.
Speculators use futures to make a profit, by buying low and selling high not necessarily in that order. The speculator has no intention of making or taking delivery. A speculator is making a bet on the future price of a commodity. If he thinks the price of the commodity will drop, he takes a short position by selling a futures contract. If he thinks that the price of the commodity will increase, then he takes a long position by buying a futures contract.
Later, he will close out his position by offsetting the contract. If he sold short, he will buy back the contract, and if he bought long, then he will sell the contract. The buying and selling of futures contracts is a zero sum gain, because it is basically a contract between 2 traders. It is not an investment in a company that creates wealth, where every shareholder can win—or lose.
If the short side profits, the long side loses an equal amount, and vice versa. SWAPS A swap is an agreement between two parties to exchange the cash flows in the future. The agreement defines the dates when the cash flow are to be paid and the way it has to be calculated. There are two basic types of swaps : 1 Interest Rate Swap 2 Currency Swap A currency swap is an agreement between two parties to exchange the principal loan amount and interest applicable on it in one currency with the principal and interest payments on an equal loan in another currency.
These contracts are valid for a specific period, which could range up to ten years, and are typically used to exchange fixed-rate interest payments for floating-rate payments on dates specified by the two parties. Since the exchange of payment takes place in two different currencies, the prevailing spot rate is used to calculate the payment amount. This financial instrument is used to hedge interest rate risks A currency swap agreement specifies the principal amount to be swapped, a common maturity period and the interest and exchange rates determined at the commencement of the contract.
The two parties would continue to exchange the interest payment at the predetermined rate until the maturity period is reached. On the date of maturity, the two parties swap the principal amount specified in the contract.
The equivalent amount of the loan value in another currency is calculated by using the net present value NPV. This implies that the exchange of the principal amount is carried out at market rates during the inception and maturity periods of the agreement. Benefits of Currency Swaps This happens when the government of a country acquires huge foreign debts to temporarily support a declining currency.
This leads to a huge downturn in the value of the domestic currency. It addresses the specific needs of Indian students and managers by successfully blending the best global derivatives and risk management practices with an in-depth coverage of the Indian environment. Instructor Resources. Member Login. Forgot Password? First-time Users, Request Access. If you are new to this site, and you do not have a username and password, please register. PowerPoint Slides. Chap 11 ppt KB. Toggle navigation.
Madhumathi , M. ISBN Your tags:. Send-to-Kindle or Email Please login to your account first Need help? The book is a step-by-step guide to derivative products. By distilling the complex mathematics and theory …. Skip to main content. Start your free trial. Book description Through the incorporation of real-life examples from Indian organizations, Derivatives and Risk Management provides cutting-edge material comprising new and unique study tools and fresh, thought-provoking content.
The organization of the text is designed to conceptually link a firm's actions to its value as determined in the derivatives market. It addresses the specific needs of Indian students and managers by successfully blending the best global derivatives and risk management practices with an in-depth coverage of the Indian environment. Show and hide more.
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