Derivatives
BASICS OF DERIVATIVES
© Copyright 2002 India Infoline Ltd. All rights reserved. Regd. Off: 24, Nirlon Complex, Off W E Highway, Goregaon(E) Mumbai-400 063. Tel.: +(91 22) 685 0101/0505 Fax: 685 0585
BASICS OF DERIVATIVES
CONTENTS
FOREWORD ...................................................................................................................... 3 1.INTRODUCTION.......................................................................................................... 5 2. FUTURES .................................................................................................................... 11 3. OPTIONS..................................................................................................................... 26 4. TRADING STRATEGIES USING FUTURES AND OPTIONS ........................... 40 5. RISK MANAGEMENT IN DERIVATIVES............................................................ 50 6. SETTLEMENT OF DERIVATIVES ........................................................................ 52 7. REGULATORY AND TAXATION ASPECTS OF DERIVATIVES.................... 57 8. CASE STUDY- WHEN THINGS GO WRONG!..................................................... 58 ANNEXURE 1-GLOSSARY OF TERMS USED IN DERIVATIVES ...................... 63 ANNEXURE 2- GROWTH OF DERIVATIVES MARKET IN INDIA ................... 72 ANNEXURE 3- BLACK AND SCHOLES OPTION PRICING FORMULA .......... 74 ANNEXURE 4- L C GUPTA COMMITTEE REPORT............................................. 75
2
BASICS OF DERIVATIVES
Foreword
New ideas and innovations have always been the hallmark of progress made by mankind. At every stage of development, there have been two core factors that drives man to ideas and innovation. These are increasing returns and reducing risk, in all facets of life.
The financial markets are no different. The endeavor has always been to maximize returns and minimize risk. A lot of innovation goes into developing financial products centered on these
© Copyright 2002 India Infoline Ltd. All rights reserved. Regd. Off: 24, Nirlon Complex, Off W E Highway, Goregaon(E) Mumbai-400 063. Tel.: +(91 22) 685 0101/0505 Fax: 685 0585
BASICS OF DERIVATIVES
CONTENTS
FOREWORD ...................................................................................................................... 3 1.INTRODUCTION.......................................................................................................... 5 2. FUTURES .................................................................................................................... 11 3. OPTIONS..................................................................................................................... 26 4. TRADING STRATEGIES USING FUTURES AND OPTIONS ........................... 40 5. RISK MANAGEMENT IN DERIVATIVES............................................................ 50 6. SETTLEMENT OF DERIVATIVES ........................................................................ 52 7. REGULATORY AND TAXATION ASPECTS OF DERIVATIVES.................... 57 8. CASE STUDY- WHEN THINGS GO WRONG!..................................................... 58 ANNEXURE 1-GLOSSARY OF TERMS USED IN DERIVATIVES ...................... 63 ANNEXURE 2- GROWTH OF DERIVATIVES MARKET IN INDIA ................... 72 ANNEXURE 3- BLACK AND SCHOLES OPTION PRICING FORMULA .......... 74 ANNEXURE 4- L C GUPTA COMMITTEE REPORT............................................. 75
2
BASICS OF DERIVATIVES
Foreword
New ideas and innovations have always been the hallmark of progress made by mankind. At every stage of development, there have been two core factors that drives man to ideas and innovation. These are increasing returns and reducing risk, in all facets of life.
The financial markets are no different. The endeavor has always been to maximize returns and minimize risk. A lot of innovation goes into developing financial products centered on these