Index: Topics Page No

INDEX TOPICS

Page no.

1. INRODUCTION TO DERIVATIVES 2.Brief history of DERIVATIVES

1

3.Development

9

4.Reason for success of DERIVATIVES 5.Usage of DERIVATIVES

12

6.DERIVATIVES of INDIA

15

7.Def. & Features of DERIVATIVES

16

8.Types of Risks

18

9.Various market participants

19

June 14, 2009

8

13

Rajesh

RAJESH B. YADAV June 14, 2009

Rajesh

1

CAPITAL MARKETS

Cash Segment

June 14, 2009

Derivatives

Rajesh

2

Bradman of Capital Markets Warren Buffet “I do not deal much into Derivatives as I do not quite understand them”

June 14, 2009

Rajesh

3

Titanic = Derivatives Over Confidence, Entertainment, etc

•Sell the Taj Mahal •Also the neighbor’s House June 14, 2009

Rajesh

4

1. Disaster is not immediately visible 2. Salesman said it was unsinkable, yet it was under water on day 1 3. Structure seemed strong enough, but collapsed the moment it hit trouble 4. Not too many people bother about the risk of the transaction 5. Its destiny that not many people are able to be saved June 14, 2009

Rajesh

5

6. Disaster happens when you sleep over it and do nothing about it 7. Living there itself is a risk and that is what is the most important 8. Too much time & money is spent to salvage something highly insignificant 9. The only people who made money with the transactions were the people who were no way connected with the original transaction. 10. Still people venture and will continue… ….. June 14, 2009

Rajesh

6

Derivatives is a boon for CA’s because Indian mind is a speculative mind ex. Yudhishtira Derivatives are not a tool of speculation. It is a hedging tool June 14, 2009

Rajesh

7

Brief History of Derivatives *Omnipresent since 16th & 17th Century *Tulip futures in the 17th Century *Financial Concept – 1970’s *Became immensely popular – 1990’s Introduced in June, July 2000 on Indian Stock Exchanges June 14, 2009

Rajesh

8

DEVELOPMENT *Initial turnover 5, 10, 25,50 Crores *Today about 40000 crores *Double of Cash Segment *Expectation to be 6 times

June 14, 2009

Rajesh

9

Derivatives by their nature are not tough. It is easy to understand. Problems are deep within with issues in accounting, Taxation & Valuation June 14, 2009

Rajesh

10

Derivatives is a ZERO Sum Game. If somebody makes a loss, other has to make a loss. This is not the case of cash segment.

June 14, 2009

Rajesh

11

Reasons for success of Derivatives 1. 2. 3. 4. 5. 6. 7. June 14, 2009

Increased Volatility Integration of financial markets Standardization & High Volumes Good Communication Facilities Better Risk management Tools Innovations & higher returns Reduced Transaction costs Rajesh

12

Usage of Derivatives 1. 2. 3. 4. 5.

Discovery of Current & Future Prices Helps Transfer risk from one to other Hence, higher volumes Participation of more people Shift of Speculators into a more organized sector and this facilitates Control over them (Contd. ..)

June 14, 2009

Rajesh

13

Usage of Derivatives 6. Attracts new Talent – a Global feature 7. New business opportunities 8. Increase savings 9. Boost Investment 9. Helps maintain Balance.

June 14, 2009

Rajesh

14

Derivatives in India 1. 2. 3. 4. 5. 6.

Nov 96: SEBI set up L.C.Gupta committee Mar 98: Committee submits Framework J.R. Verma comm. Gives report Withdrawal of Prohibition of Options May 00: SEBI Gives approval Finally trading started on Bombay Stock Exchange & National Stock Exchange

June 14, 2009

Rajesh

15

DEFINITION The term Derivative has been defined in Securities Contracts (Regulations) Act, as:A Derivative includes: a. security derived from a debt instrument, share, loan, whether secured or unsecured, risk instrument or contract for differences or any other form of security; b. a contract which derives its value from the prices, or index of prices, of underlying securities;

June 14, 2009

Rajesh

16

Features of Derivatives ♦ No value of its own ♦ Depends on the value of the

Underlying ♦ It is in the nature of a Contract ♦ Not covered by the Contract Act. ♦ It is covered by Securities Contracts (Regulations) Act June 14, 2009

Rajesh

17

RISKS Systematic Risk

Non Systematic Risks

Risks that affect the economy, market and the world at large.

It is also called unique risk It is a scrip and company specific risk

It can be hedged by the selling Index futures.

Best way to hedge is to diversify portfolio.

Example of index future June 14, 2009

Example of diversified portfolio Rajesh

18

Speculators

Arbitrageurs

Hedgers

VARIOUS MARKET PARTICIPANTS June 14, 2009

Rajesh

19

SPECULATORS They are willing to take bets on the future Trade on a daily basis Appetite for high risk Help create volumes Target high profits and face risk. June 14, 2009

Rajesh

20

HEDGERS Want to transfer risk to speculators Aim to make profits @ minimum risk Do not mind to settle with small gains Are willing to protect themselves at an extra cost also Hedgers want to transfer the risks and the speculators want to take the risks June 14, 2009

Rajesh

21

ARBITRAGEURS Lend reliability to prices in the market Ensures consistency Assist in price discovery Correct the abnormalities in the market mechanism Back themselves with huge volumes and funding June 14, 2009

Rajesh

22

Various Types of Derivatives

June 14, 2009

Rajesh

23

June 14, 2009

Rajesh