Instrument Management

Instrument Management Presenter M.Murali Krishna

Agenda • Types of Instruments • Attributes required to Manage Equities • What are Derivatives and the various attributes required to manage them. • What are Bonds and the attributes required to manage them.

Financial instruments are cash, evidence of an ownership interest in an entity, or a contractual right to receive, or deliver, cash or another financial instrument. Instruments can be categorized into 2 types namely : 6. Cash instruments are financial instruments whose value is determined directly by markets. Ex : Loans and deposits. 7. Derivative instruments are financial instruments which derive their value from the value and characteristics of one or more underlying assets. They can be divided into exchange-traded derivatives and over-the-counter (OTC) derivatives.

Equities and general attributes required to Definition : A stock or any other security representing an ownership interest is called Equity. ISIN number : A code that uniquely identifies a specific securities issue. Tick : The minimum upward or downward movement in the price of a security. Face Value : The value of a security that is set by the company issuing it.

Types of Derivates 1. Futures : A financial contract obligating the buyer to purchase an asset (or the seller to sell an asset), such as a physical commodity or a financial instrument, at a predetermined future date and price.

2. Options : An option is a contract that gives the buyer

the right, but not the obligation, to buy or sell an underlying asset at a specific price on or before a certain date.

Attributes required to manage Futures & Options

Trading Symbol : It is the symbol of the security that must be delivered when a derivative contract is exercised. Expiry Period : Futures can be classified into Monthly expiry/Weekly expiry/Quarterly Expiry Futures. Expiry Dates : Depending on the number of months a monthly future will expire at the end of the month it was issued for. A weekly future will expire at the end of the week it was issued for. A quarterly future will expire at the end of the calendar quarter (i.e. March, June, September or December) it was issued for.

•The last trading date of an instrument will be on or before the date of expiry. •If the expiration date, last trading date is a non trading day, the related operations will be performed before the start of trading of the next trading day. A symbol will not be available for trading after its last trading date. A new symbol will be created and available for trading on the day after its last trading date.

Lot Size : Lot size is the minimum quantity that can be traded. It differs from one underlying to another. Minimum Trading Units : It is the minimum quantity that can be traded for an commodity. For e.g. Heating oil in HKME is measured in barrels. 42000 U.S. gallons = 1000barrels. Price Quotation : Currency quoting as Dollars/Rupees/Pounds etc. Minimum Price Fluctuation : It can also be termed as “Tick Size” which is the minimum amount to be quoted or incremented. e.g. In NSE minimum tick size is 5 Paisa.

Settlement Type : The settlement type can be either cash or physical. In case of commodities a delivery period is given which is agreed by both parties and the delivery should take place before the last business day of the delivery month. Grade and Quality Specifications : In case of commodities the delivery is based on the grade of the stock and the quality which is certified by the warehouse receipt in NSE. Position Accountability Levels and Limits : Every individual and broker firm will be limited to hold an position for a stock.

Additional Attributes required to manage Call Option : An option contract giving the owner the right (but not the obligation) to buy a specified amount of an underlying security at a specified price within a specified time. Put Option : An option contract giving the owner the right, but not the obligation, to sell a specified amount of an underlying asset at a set price within a specified time. Strike Price : The price at which a specific derivative contract can be exercised. Premium : The specified amount of payment required periodically by an insurer to provide coverage under a given insurance plan for a defined period of time.

What are Bonds? Definition : A debt investment in which an investor loans money to an entity (corporate or governmental) that borrows the funds for a defined period of time at a fixed interest rate. Bonds are used by companies, municipalities, states and U.S. and foreign governments to finance a variety of projects and activities. Bonds are commonly referred to as fixed-income securities and are one of the three main asset classes, along with stocks and cash equivalents.

Attributes required to manage bonds Par value – face amount of the bond, which is paid at maturity (assume $1,000). Coupon interest rate – stated interest rate (generally fixed) paid by the issuer. Multiply by par to get dollar payment of interest. Maturity date – years until the bond must be repaid. Issue date – when the bond was issued. Yield to maturity - rate of return earned on a bond held until maturity (also called the “promised yield”).

Interest rates and bond prices have an inverse • When rates go up, newly issued bonds come to the market with higher yields than existing bonds. The newly issued bonds are more attractive than comparable existing bonds with lower yields. In order to sell their existing bonds, investors have to reduce their prices to make them equally attractive.

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