derivative concept derivative types forward contracts future contract option contract swap contract derivative participants or market player advantages and disadvantages of derivative function of derivative contract between buyer and seller with derivative derivative examples 4 major types it and suitable examples in each point basic understanding of derivative easy concept of contract

1. DERIVATIVE
TRADING

2. CONTENT
• Introduction
• Types of underlying assets
• Types of derivative contract
• Market players or traders
• Benefits and cons of
derivative
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3. INTRODUCTION
 It is a financial instrument that derives its value from some other asset.
 The value is derived from the value of one or more variables related to underlying
asset in a contractual manner.
 Hence, derivative is actually a contract, not an asset.
 The buyer agrees to purchase the asset on a specific date at a specific price. And vice
versa
 The assets include commodities, Stocks , bonds, interest rates and currencies
 Derivatives can be used either for risk management[hedging] or for
speculation[betting].
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4. TYPES OF UNDERLYING ASSETS
1. Financial assets such as equities, debts, bonds, currencies and indices.
2. Agricultural produce such as grains, coffee, pulses and cotton.
3. Metals such as gold, silver, copper and aluminum.
4. Energy sources such as crude oil, natural gas, electricity and coal.
5. Interest rate.

5. TYPES OF DERIVATIVE CONTRACT
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6. FORWARD CONTRACT
• A forward contract or simply a forward is a contract between
two parties to buy or sell an asset at a certain future date for a
certain price that is pre-decided on the date of the contract.
• The future date is referred to as expiry date and the pre-decided
price is referred to as Forward Price.
• It is the customized contract[non standardized] , in the sense
that the term of the contract are agreed upon by the individual
parties.
• Hence it is traded on Over The Counter (OTC).
• Default risk, Credit risk & Counter-party risk involved in this
type of contract. And not involved stock exchange.
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7. EXAMPLE OF FORWARD CONTRACT
3 months Later
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Farmer Bread maker
I agree to sell 500kgs wheat
at Rs.40/kg after 3 months.
Farmer 500 kg wheat
Rs. 20,000

8. FUTURE CONTRACT
• Like a forward contract, a futures contract is an agreement
between two parties in which the buyer agrees to buy an
underlying asset from the seller, at a future date at a price that is
agreed upon today.
• Unlike a forward contract, a futures contract is not a private
transaction but gets traded on a recognized stock exchange. In
addition, a futures contract is standardized by the exchange.
• Both buyer and seller of the futures contracts are protected
against the counter party risk.
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9. OPTION CONTRACT
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• Contracts that give the holder the option to buy/sell specified
quantity of the underlying assets at a particular price on or before
a specified time period.
• The word "option" means that the holder has the right but not the
obligation to buy/sell underlying assets.
• The other two types are - European style options and American
style options.
• European style options can be exercised only on the maturity date
of the option, also known as the expiry date.
• American style options can be exercised at any time before and on
the expiry date.

10. EXAMPLE OF OPTION CONTRACT
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11. SWAP CONTRACT
In a swap, two counter parties agree to enter into a contractual agreement
wherein they agree to exchange cash flows at periodic intervals.
Most swaps are traded "Over The Counter".
There are 2 main types of swaps:
• interest rate swaps.
• currency swaps
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12. MARKET PLAYERS OR
PARTICIPANTS IN
DERIVATIVE MARKET
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HEDGERS
• Minimizes the risk of portfolio
SPECULATORS
• In order make profit on future price predictions
Arbitrageurs
• Make risk free profits
Currency swap

13. Advantages
• Hedging risk
• Determine underlying asset
price
• Low transaction cost
• Enhance market efficiency
Disadvantages
• High risk
• Counter party risk
• Requires expertise
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14. THANK YOU
Jitender Dhalia
Jitenderdayal11@gmail.com