Impact of Currency Futures on Spot 3 Market Volatility: an Empirical Study

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“A Report On Pricing and Technical Analysis of Derivatives”

THE INDIAN INSTITUTE OF PLANNING AND MANAGEMENT

EXECUTIVE SUMMARY

The emergence of Derivatives market especially Futures and Options can be traced back to the willingness of the risk adverse economic agents to guard against themselves against the fluctuations in the price of Underlying asset. Derivatives, whose price is determined by the price of underlying asset, generally do not cause any fluctuations in the price of underlying asset. But impact of any change in the price of underlying asset may cause swift change in the price of Derivatives instrument. This project concerns one of the core issues in DerivativesPricing of Derivatives and impact of change in price of underlying to the price of Futures and Option through scenario analysis , valuation of Option and Futures through appropriate mathematical models and comparison of actual market price with theoretical price and exploiting arbitrage opportunities when even there are any deviations in the pricing , past trend of Options and Futures market and daily movements in Nifty Spot , Nifty Futures and Options for the past three months.

Another important issue in Derivatives is the appropriate position to choose from plethora of series of Call options and Put Options on a single day and permutations and combinations of strategies along with various option positions can be daunting task. This project seeks to answer some of the questions regarding appropriate strategy to choose in order to maximize total payoff through technical analysis of the parameters of Option.

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TABLE OF CONTENTS DERIVATIVES:....................................................................................................................... 6 FORWARD CONTRACT:...................................................................................................... 6 FUTURES CONTRACT: ........................................................................................................ 6 PAYOFFS FROM THE FORWARD CONTRACT: ........................................................................................................6

BASIS: ..................................................................................................................................... 16 BASIS RISK: .......................................................................................................................... 16 PRICING OF FUTURES: ..................................................................................................... 27 FUTURES PRICE CALCULATOR ................................................................................................................. 28

STRATEGY USING FUTURES: ......................................................................................... 30 ARBITRAGE OPPORTUNITIES:...................................................................................................................30 HAVE FUNDS- LEND THEM TO THE MARKET: .....................................................................................................30 HAVE SECURITIES –LEND THEM TO THE MARKET. .............................................................................................30

HEDGING: ............................................................................................................................. 31 SHORT HEDGE...............................................................................................................................................31 LONG HEDGE:................................................................................................................................................31 OPTIMAL HEDGE RATIO:....................................................................................................................................31

HEDGING USING INDEX FUTURES: .............................................................................. 32 LONG...
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