Introduction to Futures & Options|
Faculty: Dr. Sharif N. Ahkam
In recent times the Derivative markets have gained importance in terms of their vital role in the economy. The purpose of this report to get an orientation to the derivatives and develop a basic understanding of what it is and how does it work.
Derivatives are financial instruments, which derive their value from an underlying asset. The underlying asset can be bullion, index, share, bonds, currency, interest, etc. Derivatives are likely to grow even at a faster rate in near future.
The emergence of the market for derivatives products, most notably futures and options, can be tracked back to the willingness of risk-averse economic agents to guard themselves against uncertainties arising out of fluctuations in asset prices. By their very nature, the financial markets are marked by a very high degree of volatility. Through the use of derivative products, it is possible to partially or fully transfer price risks by locking-in asset prices. As instruments of risk management, these generally do not influence the fluctuations in the underlying asset prices. However, by locking-in asset prices, derivative product minimizes the impact of fluctuations in asset prices on the profitability and cash flow situation of risk-averse investors.
However, the use of F&O has grown into other segments like leveraged trading and arbitrage.
2.0 OBJECTIVES OF THE REPORT:
To get a basic understanding of what these instruments are and how are these instruments used in the financial market.
Derivatives are financial instruments, which derive their value from an underlying asset. The underlying asset can be bullion, index, share, bonds, currency, interest etc. For example, equity futures and options are derived from equities in the underlying share market
In India, there is a stock market Index which is called NIFTY, which is a weighted average indicator of value of the major companies listed on National Stock Exchange, New Delhi. There is a possibility to buy Futures in NIFTY which has a value which is directly linked with the spot value of the index based on the value of the various shares included for indexing.
The S&P CNX Nifty, also called the Nifty 50 or simply the Nifty, is owned and managed by India Index Services and Products Ltd. (IISL), which is a joint venture between NSE and CRISIL (Credit Rating and Information Services of India Ltd). IISL is India's first specialized company focused upon the index as a core product. IISL has a marketing and licensing agreement with Standard & Poor's for co-branding equity indices. 'CNX' in its name stands for 'CRISIL NSE Index'.
Graph of S&P CNX Nifty from January 1997 to March 2011
S&P CNX Nifty has shaped up as the largest single financial product in India, with an ecosystem comprising: exchange traded funds (onshore and offshore), exchange-traded futures and options (at NSE in India and at SGX and CME abroad), other index funds and OTC derivatives (mostlyoffshore).
The S&P CNX Nifty covers 22 sectors of the Indian economy and offers investment managers exposure to the Indian market in one portfolio. The S&P CNX Nifty stocks represents about 67.27% of the free float market capitalization of the stocks listed at National Stock Exchange (NSE) as on September 30, 2012.
The prices of Nifty on 13-Dec are as follows:
| | | | | |
| Spot Price [NIFTY] : 5,886.50 |
UnderLying| Product Symbol| Expiry Date| Lot Size| LTP| NIFTY| FUTIDX| 27-Dec-12| 50| 5,924.95|
NIFTY| FUTIDX| 31-Jan-13| 50| 5,960.35|
NIFTY| FUTIDX| 28-Feb-13| 50| 5,987.20|
| | | | |
| | | | | |
| | | | | |
As seen in the above table,these instruments have an expiry date on which the specified transaction should be settled if the...