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Derivatives Trading Module 2/21/2018 Derivatives Trading Module WWW.ISFM.CO.IN What are Derivatives • Derivative is a product whose value is derived from the value of one or more basic variables, called bases (underlying asset, index, or reference rate), in a contractual manner. The underlying asset can be equity, forex, commodity or any other asset. • For Example : Curd price is depend on Milk, Sugar price depend on Sugar cane. • In the Indian context the Securities Contracts (Regulation) Act, 1956 • (SC(R)A) defines "derivative" to include- • 1. 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. • 2. A contract which derives its value from the prices, or index of prices, of • underlying securities. • Derivatives are securities under the SC(R)A and hence the trading of • derivatives is governed by the regulatory framework under the SC(R)A. International School of Financial Market (ISFM) Best Stock Market School - Gurgaon Reg. office : Plot no. 152 - P, Sec 38, Medicity Road, Gurgaon Contact : 0124-2200689, 9540008689, 9953147497, 9911878442 WWW.ISFM.CO.IN 1 2/21/2018 Difference between Equity & Derivatives Equity Derivatives • You need 100% money to • You need just 10% money to trade. trade. • You are the owner of the • You are hiring the stock. securities. • You have to settle within time • You have no time limit to sell the securities. limit given. • Brokerage rate are different in • Brokerage would be same. intra day and delivery. • You are not liable to get • You are liable to get dividend dividend. on share if you are having in • You have to buy lot not a your portfolio. single share. • You can buy a single share also if want to buy. TYPES OF DERIVATIVES Forwards Futures Derivatives Swaps Options International School of Financial Market (ISFM) Best Stock Market School - Gurgaon Reg. office : Plot no. 152 - P, Sec 38, Medicity Road, Gurgaon Contact : 0124-2200689, 9540008689, 9953147497, 9911878442 WWW.ISFM.CO.IN 2 2/21/2018 WHAT ARE FORWARDS & FUTURES? . Forward Contract Money Buyer Seller Securities . Future Contract A Clearing House B (Buyer) (Seller) Difference between Future & Forward Future Forward • Buyer & Seller don’t know • Buyer & Seller know each each others. others. • Contract are standardised. • Contract are customised. • MTM settled on daily basis. • No need for MTM. • No third party risk due to • Third risk is high because no exchange availability. one is intermediate. • Expiry date is decided in • Expiry date is decided by advance and will not change mutual consent. • Only cash settled in mostly • Physical settlement in cash. mostly cases. • Legal existence is there. • No legal existence. International School of Financial Market (ISFM) Best Stock Market School - Gurgaon Reg. office : Plot no. 152 - P, Sec 38, Medicity Road, Gurgaon Contact : 0124-2200689, 9540008689, 9953147497, 9911878442 WWW.ISFM.CO.IN 3 2/21/2018 Products in Derivatives Market • Forwards • It is a contractual agreement between two parties to buy/sell an underlying asset at a certain future date for a particular price that is pre‐decided on the date of contract. Both the contracting parties are committed and are obliged to honour the transaction irrespective of price of the underlying asset at the time of delivery. Since forwards are negotiated between two parties, the terms and conditions of contracts are customized. These are Over‐the‐counter (OTC) contracts. • Futures • A futures contract is similar to a forward, except that the deal is made through an organized and regulated exchange rather than being negotiated directly between two parties. Indeed, we may say futures are exchange traded forward contracts. • Options • An Option is a contract that gives the right, but not an obligation, to buy or sell the underlying on or before a stated date and at a stated price. While buyer of option pays • the premium and buys the right, writer/seller of option receives the premium with obligation to sell/ buy the underlying asset, if the buyer exercises his right. • Swaps • A swap is an agreement made between two parties to exchange cash flows in the future according to a prearranged formula. Swaps are, broadly speaking, series of forward contracts. Swaps help market participants manage risk associated with volatile interest rates, currency exchange rates and commodity prices. Market Participants • Hedgers • They face risk associated with the prices of underlying assets and use derivatives to reduce their risk. Corporations, investing institutions and banks all use derivative products to hedge or reduce their exposures to market variables such as interest rates, share values, bond prices, currency exchange rates and commodity prices. • Speculators/Traders • They try to predict the future movements in prices of underlying assets and based on the view, take positions in derivative contracts. Derivatives are preferred over underlying asset for trading purpose, as they offer leverage, are less expensive (cost of transaction is generally lower than that of the underlying) and are faster to execute in size (high volumes market). • Arbitrageurs • Arbitrage is a deal that produces profit by exploiting a price difference in a product in two different markets. Arbitrage originates when a trader purchases an asset cheaply in one location and simultaneously arranges to sell it at a higher price in another location. Such opportunities are unlikely to persist for very long, since arbitrageurs would rush in to these transactions, thus closing the price gap Internationalat different School locations. of Financial Market (ISFM) Best Stock Market School - Gurgaon Reg. office : Plot no. 152 - P, Sec 38, Medicity Road, Gurgaon Contact : 0124-2200689, 9540008689, 9953147497, 9911878442 WWW.ISFM.CO.IN 4 2/21/2018 Understanding of Index • What is Index : Index is the barometer of the market. It reflect the change in the market. A good index must be well diversified so that it can represent the market. In India the most popular indices have been the BSE Sensex and S&P CNX Nifty. The BSE Sensex has 30 stocks comprising the index which are selected based on market capitalization, industry representation, trading frequency etc. It represents 30 large well-established and financially sound companies. • The Nifty index consists of shares of 50 companies with each having a market capitalization of more than Rs 500 crore. • Major Indices in India : 1. SENSEX 2. NIFTY 3. BANK NIFTY 4. VIX 5. CNX IT Equity market Current level : 10681 No. of listed co : 1650 Timing : 9:00 am to 3.30 pm Duration : Monday to Friday PE Ratio : 26.23 (12/01/2017) Market cap : 74 T 52 week H / L : 10690: 8322 Website : www.nseindia.com International School of Financial Market (ISFM) Best Stock Market School - Gurgaon Reg. office : Plot no. 152 - P, Sec 38, Medicity Road, Gurgaon Contact : 0124-2200689, 9540008689, 9953147497, 9911878442 WWW.ISFM.CO.IN 5 2/21/2018 Nifty / Fifty List of Nifty / Fifty Sr. no. Company Name Industry Symbol 1 ACC Ltd. CEMENT & CEMENT PRODUCTS ACC Adani Ports and Special Economic 2 Zone Ltd. SERVICES ADANIPORTS 3 Ambuja Cements Ltd. CEMENT & CEMENT PRODUCTS AMBUJACEM 4 Asian Paints Ltd. CONSUMER GOODS ASIANPAINT 5 Aurobindo Pharma Ltd. PHARMA AUROPHARMA 6 Axis Bank Ltd. FINANCIAL SERVICES AXISBANK 7 Bajaj Auto Ltd. AUTOMOBILE BAJAJ-AUTO 8 Bank of Baroda FINANCIAL SERVICES BANKBARODA 9 Bharat Heavy Electricals Ltd. INDUSTRIAL MANUFACTURING BHEL 10 Bharat Petroleum Corporation Ltd. ENERGY BPCL 11 Bharti Airtel Ltd. TELECOM BHARTIARTL 12 Bharti Infratel Ltd. TELECOM INFRATEL 13 Bosch Ltd. AUTOMOBILE BOSCHLTD 14 Cipla Ltd. PHARMA CIPLA 15 Coal India Ltd. METALS COALINDIA 16 Dr. Reddy's Laboratories Ltd. PHARMA DRREDDY 17 Eicher Motors Ltd. AUTOMOBILE EICHERMOT 18 GAIL (India) Ltd. ENERGY GAIL 19 Grasim Industries Ltd. CEMENT & CEMENT PRODUCTS GRASIM 20 HCL Technologies Ltd. IT HCLTECH 21 HDFC Bank Ltd. FINANCIAL SERVICES HDFCBANK 22 Hero MotoCorp Ltd. AUTOMOBILE HEROMOTOCO 23 Hindalco Industries Ltd. METALS HINDALCO 24 Hindustan Unilever Ltd. CONSUMER GOODS HINDUNILVR InternationalHousing School Development Financeof Financial Market (ISFM) 25 Corporation Ltd. FINANCIAL SERVICES HDFC Best Stock Market School - Gurgaon Reg. office : Plot no. 152 - P, Sec 38, Medicity Road, Gurgaon Contact : 0124-2200689, 9540008689, 9953147497, 9911878442 WWW.ISFM.CO.IN 6 2/21/2018 List of Nifty / Fifty 26I T C Ltd. CONSUMER GOODS ITC 27ICICI Bank Ltd. FINANCIAL SERVICES ICICIBANK 28Idea Cellular Ltd. TELECOM IDEA 29IndusInd Bank Ltd. FINANCIAL SERVICES INDUSINDBK 30Infosys Ltd. IT INFY 31Kotak Mahindra Bank Ltd. FINANCIAL SERVICES KOTAKBANK 32Larsen & Toubro Ltd. CONSTRUCTION LT 33Lupin Ltd. PHARMA LUPIN 34Mahindra & Mahindra Ltd. AUTOMOBILE M&M 35Maruti Suzuki India Ltd. AUTOMOBILE MARUTI 36NTPC Ltd. ENERGY NTPC 37Oil & Natural Gas Corporation Ltd. ENERGY ONGC Power Grid Corporation of India 38Ltd. ENERGY POWERGRID 39Reliance Industries Ltd. ENERGY RELIANCE 40State Bank of India FINANCIAL SERVICES SBIN 41Sun Pharmaceutical Industries Ltd. PHARMA SUNPHARMA 42Tata Consultancy Services Ltd. IT TCS 43Tata Motors Ltd DVR AUTOMOBILE TATAMTRDVR 44Tata Motors Ltd. AUTOMOBILE TATAMOTORS 45Tata Power Co. Ltd. ENERGY TATAPOWER 46Tata Steel Ltd. METALS TATASTEEL 47Tech Mahindra Ltd. IT TECHM CEMENT & CEMENT 48UltraTech Cement Ltd. PRODUCTS ULTRACEMCO 49Wipro Ltd. IT WIPRO 50Yes Bank Ltd. FINANCIAL SERVICES YESBANK 51Zee Entertainment Enterprises Ltd. MEDIA & ENTERTAINMENT ZEEL Weightage (%) Sector Constituents (%) Coal India 1.29 Cigarettes ITC 6.51 Cipla 0.95 Metals Hindalco Industries 0.74 Dr. Reddy’s Lab 1.32 Pharmaceuticals Lupin 1.19 Tata Steel 0.92 Sun Pharmaceutical 2.54 BPCL 1.11 Aurobindo Pharma 0.66 HCL Technologies 1.5 GAIL (India) 0.66 Infosys 6.44 Information TCS 4 NTPC 1.33 Technology Tech Mahindra 1 Wipro 0.99 Energy ONGC 1.71 ACC 0.42 Power Grid 1.39 Ambuja Cements 0.54 Cements Grasim Industries 0.93 Reliance Industries 5.41 UltraTech Cement 1.24 Bajaj Auto 1.21 Tata Power 0.44 Bosch 0.62 Bharti Airtel 1.41 Hero MotoCorp 1.34 Mahindra & Mahindra 1.82 Telecom Idea Cellular 0.32 Automobile Maruti Suzuki 2.31 Eicher Motors 0.95 Bharti Infratel 0.66 Tata Motors 2.93 Asian Paints 1.44 Tata Motors Ltd.
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