...Assignment 1 Financial Derivative Securities 312 P’eau James Chilton 15505480 Joyce Khuu Question 1 Use simultaneous equation in terms of payoffs J,K and L: J = [2,3] PJ = $0.08 Equation 1: 2J + 3K = 1 K = [3,1] PK = $0.05 Equation 2: 3J + K = 4 L = [1,4] PL = ? Rearrange equation 2: K = 4 – 3J Substitute K = 4 – 3J into equation 1: 2J + 3(4 – 3J) = 1 2J + 12 – 9J = 1 -7J = -11 J = 11/7 Substitute J = 11/7 into equation 2: 3(11/7) + K = 4 K = - 5/7 Therefore, in our replication portfolio we have 11/7 of security J and -5/7 of security K tp replicate security L. 11/7 [2,3] – 5/7 [3,1] = [1,4] If the price of PJ = $0.08 and PK = $0.05 the price of PL is the cost of the replication portfolio. PL = 11/7 (0.08) – 5/7 (0.05) PL = $0.09 Question 2 T = [1,0] PT = $0.60 U = [0,1] PU = $0.70 V = [4,3] PV = $4.30 Use simultaneous equation: Equation 1: T = 4 Equation 2: U = 3 4T + 3U = V Therefore, 4 [1,0] + 3 [0,1] = [4,3] The fair value of V given the replication portfolio: 4 (PT) + 3 (PU) = Pv 4 (0.60) + 3 (0.70) = Pv Pv = $4.50 It is undervalued in the market ($4.50 > $4.30). Therefore, an arbitrage exists. To take advantage of the arbitrage we would sell the replication portfolio for $4.50 and simultaneous buy security V at Pv = $4.30 Arbitrage is the difference: $4.20 - $4.50 = - $0.20 Since, this is money today - $0.20 with no negative liability in the future this is a type 2...
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...Assignment 1 [Due 11 September 2015, 4pm] Assignment should be submitted in the box 402-512 by the due date. Penalty will apply for late submission Question-1 The six month and one-year rates are 3% and 4% per annum with semi-annual compounding. Is 3.90% or 3.95% or 3.99% closest to the one-year par yield expressed with semi-annual compounding? (3 marks) Question-2 A company enters into a short futures contract to sell 50,000 units of a commodity for 70 cents per unit. The initial margin is $4,000 and the maintenance margin is $3,000. Explain what is the futures price per unit above which there will be a margin call? (3 marks) Question-3 The spot price of an investment asset is $30 and the risk-free rate for all maturities is 10% with continuous compounding. The asset provides an income of $2 at the end of the first year and at the end of the second year. What is the three-year forward price? (2 mark) Question-4 On March 1 a commodity’s spot price is $60 and its August futures price is $59. On July 1 the spot price is $64 and the August futures price is $63.50. A company entered into futures contracts on March 1 to hedge its purchase of the commodity on July 1. It closed out its position on July 1. What is the effective price (after taking account of hedging) paid by the company? (2 marks)...
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...9-205-074 REV: FEBRUARY 21, 2006 GEORGE CHACKO MARTI G. SUBRAHMANYAM VINCENT DESSAIN ANDERS SJÖMAN Advising on Currency Risk at ICICI Bank In March 2003, Shilpa Kumar, joint general manager of the Markets Advisory Group at ICICI Bank, India’s second-largest bank, had to come up with a recommendation. One of ICICI Bank’s customers, the Power Finance Corporation Ltd. (PFC), had asked ICICI Bank’s advice on its currency exposure. PFC worked with the Indian power sector and especially with India’s various state electricity boards (SEBs) to finance their operations. PFC’s loans to the boards were primarily in Indian rupees (INR), but the loans that PFC had to take itself were often denominated in other currencies. PFC therefore found itself regularly with large foreign exchange exposures. At her last meeting in New Delhi with PFC’s deputy general manager, Rajeev Mehrotra, Kumar had learned that PFC’s current exposure was running close to INR 1,300 crore1 (about US$300 million), mostly in U.S. dollars and Japanese yen (JPY). Out of this exposure, Mehrotra was especially interested in hedging a Japanese yen loan equivalent to $100 million with a five-year tenor. Back at ICICI Bank’s headquarters in Bombay, Kumar now had to come up with recommendations for how PFC should handle this JPY exposure. Mehrotra had made it clear that he was uninterested in hearing about a full hedge for the entire exposure but that he hoped ICICI Bank could present alternative strategies that potentially...
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...Project Report On “DERIVATIVES – THE BEST TOOL IN INDIAN MARKET TO GET THE OPTIMUM RETURNS” ACKNOWLEDGEMENT We take this opportunity to place on record our grateful thanks & sincere gratitude to those who gave us valuable advice & inputs for our studies. Our study could not have been completed if we had not have been completed if we had not been able to get the reference material from the company. Whenever & whatever we present today has been made possible by true efforts & kind support of our project guide Mr. Akhilesh Rathi, Head, SNR Securities & Finance, Indore. We express our sincere regards & feel paucity of word to express our utmost gratitude toward him for providing us the necessary resources, worthwhile suggestions & constant guidance. We also like to express our thanks towards other staff members of SNR Securities & Finance who inspired us to put in our best efforts for the completion of the project. PREFACE Financial system is the mirror reflection of an economy. The performance of any economy to a large extent is dependent on the performance of the Financial Institution. Financial system plays an important role by mobilizing saving and allocating them to the most profitable activities, and enables society to make more productive use of its scarce resources. The Financial system consist of many institution, instruments, and markets. Financial Institution range from moneylender to banks, pension funds, insurance...
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...SPEECH Indian Derivatives Market - A Regulatory and Contextual Perspective Shyamala Gopinath Indian Derivatives Market - A Regulatory and Contextual Perspective* Shyamala Gopinath Let me first thank Euromoney for inviting me for this seminar on Indian derivatives market. The esoteric world of derivatives has come into sharp focus in recent times precisely on account of their complexity and recent events have triggered a debate on their impact on the financial system stability. My discussion today will be confined to the regulatory framework in India in regard to forex, debt and credit derivative markets and the regulatory imperatives arising in dealing with these instruments and their future development, particularly in the context of global developments. The financial markets, including derivative markets, in India have been through a reform process over the last decade and a half, witnessed in its growth in terms of size, product profile, nature of participants and the development of market infrastructure across all segments - equity markets, debt markets and forex markets. Derivative markets worldwide have witnessed explosive growth in recent past. According to the BIS Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity as of April 2007 was released recently and the OTC derivatives segment, the average daily turnover of interest rate and non-traditional foreign exchange contracts increased by 71 per cent to US $ 2.1 trillion in April 2007...
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...Derivative Market – A Case Study on NSE A Report Submitted as per the curriculum of the Master in Business Administration Under Biju Patnaik University of Technology, Rourkela, Orissa. By L Rama kumari Roll No.: 200960712 Regd. No.: 0906202013 [pic] March 2011 Under the Guidance of Mr. Shom Prasad Das NATIONAL INSTITUTE OF SCIENCE & TECHNOLOGY Palur Hills, Berhampur- 761008, Orissa, India DECLARATION I, L rama kumari, student of 2009-11 batch of NIST, Berhampur do here by declare that the report entitled “Derivative Market :A Case Study on NSE” that has been submitted by me as a partial fulfillment of the degree of MBA. This report is my own work and no part of this project has been ever submitted by me for any other purpose. I declare that the work has been carried out to the best of my knowledge and belief and according to my capacity and capability. Date: Place: L Rama kumari ACKNOWLEDGEMENT I would like to take this opportunity to thank all those individuals whose valuable contribution in a direct or indirect manner has gone into the making of this dissertation a tremendous learning experience for me. I take this privilege to express my heartfelt gratitude to our Hon. Director Prof. Sangram Mudali, Hon. Batch co-coordinator Mr.Chinmaya Sahu for encouraging doing this dissertation as a part of curriculum. I would like to express sincerely my deep...
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...Futures, Options, Swaps Financial Derivatives Commodity Derivatives 1 Derivatives – Overview • Financial instrument or security whose payoffs depend on another instrument or security • Price of instrument a derivative of underlying security – Farmer who sows a crop in June, faces uncertainty over the price received at harvest time in September – Merchant/ consumer faces a price in September as well – Farmer, merchant negotiate on a price in June for settlement in September • Chicago Board of Trade 1848 • Yodoya rice futures in 1650 • Forwards, Futures, Options, Swaps 2 Derivatives - Definitions • Forwards – involves a contract initiated at one time, performance in accordance with the terms of the contract occurs at a subsequent future time • Futures – type of forward contract with standardized and closely specified contract terms – – – – Traded in organized exchange Standardized, specific quantity, delivery date, mechanism Performance guaranteed by clearinghouse Margins – good faith deposit with the exchange • Option – the right to purchase underlying good at a specific price until a specific date – Calls and Puts • Swaps – Agreement between two or more parties to exchange sequence of cash flows over a period in the future 3 Derivatives - Applications • Price risk elimination • Speculation • Market completeness • Information efficiency • Trading efficiency 4 Derivatives - Markets • Commodity Derivatives: underlying asset a commodity –...
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...Workbook for NISM-Series-VIII: Equity Derivatives Certification Examination National Institute of Securities Markets www.nism.ac.in 1 This workbook has been developed to assist candidates in preparing for the National Institute of Securities Markets (NISM) NISM-Series-VIII: Equity Derivatives Certification Examination (NISM-Series-VIII: ED Examination). Workbook Version: September 2012 Published by: National Institute of Securities Markets © National Institute of Securities Markets, 2012 Plot 82, Sector 17, Vashi Navi Mumbai – 400 703, India All rights reserved. Reproduction of this publication in any form without prior permission of the publishers is strictly prohibited. 2 Disclaimer The contents of this publication do not necessarily constitute or imply its endorsement, recommendation, or favouring by the National Institute of Securities Market (NISM) or the Securities and Exchange Board of India (SEBI). This publication is meant for general reading and educational purpose only. It is not meant to serve as guide for investment. The views and opinions and statements of authors or publishers expressed herein do not constitute a personal recommendation or suggestion for any specific need of an Individual. It shall not be used for advertising or product endorsement purposes. The statements/explanations/concepts are of general nature and may not have taken into account the particular objective/ move/ aim/ need/ circumstances of individual user/ reader/ organization/...
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...Derivatives and Hedging Over recent years, the volatility in the financial markets has increased due to substantial changes domestically and internationally. This has given rise to increased financial price risks faced by both domestic and multi-national companies. Financial Derivatives are widely used by corporations to adjust to exposure to currency risk, interest rate risks, commodity price risks, and security holdings risk. Largely, companies are currently exposed to risks caused by unexpected movements in exchange rates and interest rates. Companies with a growing global presence are especially exposed to a wide range of financial risks, in particular foreign exchange risks and interest rate risk. Although, financial risks are the center of business operations of financial service firms, but they also impact the risk exposure of non-financial corporations. The management and supervision of these risks has become vital for the existence of companies in today’s unpredictable financial markets. The major financial risks that most firms are exposed to are interest rate risk, currency rate risk, commodity price risk, and security holdings risk. Interest rate risk is a very common type of risk, and result from a discrepancy in the sensitivity of a firms assets and liabilities to interest rate movements. On the other hand, currency risk exposure is virtually encountered by all firms, even if their exposure is not from a transaction or a translation risk. Many firms are...
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...Jenny Olivos Professor Ling-Locke Investment and Securities 11/20/15 Types of Investments Securities or Property * Securities: stocks, bonds, derivatives * Real Property: land, buildings * Tangible Personal Property: gold, artwork, antiques * Debt, Equity or Derivative Securities * Debt: investor lends funds in exchange for interest income and repayment of loan in future (bonds) * Equity: represents ongoing ownership in a business or property (common stocks) * Derivative Securities: neither debt nor equity; derive value from an underlying asset (futures, options, swaps, indices) Risks * Low Risk or High Risk * Risk: chance that actual investment returns will differ from those expected Time * Short-Term or Long-Term * Short-Term: mature within one year * Long-Term: maturities of longer than a year * Domestic or Foreign * Domestic: home country based companies of the investor * Foreign: foreign-based companies * Institutional Investors * Paid to manage other people’s money * Trade large volumes of securities * Include: banks, life insurance companies, mutual funds and pension funds Different stages of an Economic/Market style Markets and Efficiency * A perfect market, where prices are such that there are no excess profits, requires: * Large number of buyers and sellers * No barriers to entry or exit * No transaction costs ...
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...recognize derivative instruments, including certain derivative instruments embedded in other contracts, as assets or liabilities in the statement of financial position and measure them at fair value. If certain conditions are met, an entity may elect, under this Topic, to designate a derivative instrument in any one of the following ways: a. A hedge of the exposure to changes in the fair value of a recognized asset or liability, or of an unrecognized firm commitment, that are attributable to a particular risk (referred to as a fair value hedge) b. A hedge of the exposure to variability in the cash flows of a recognized asset or liability, or of a forecasted transaction, that is attributable to a particular risk (referred to as a cash flow hedge) c. A hedge of the foreign currency exposure of any one of the following: 1. An unrecognized firm commitment (a foreign currency fair value hedge) 2. An available-for-sale security (a foreign currency fair value hedge) 3. A forecasted transaction (a foreign currency cash flow hedge) 4. A net investment in a foreign operation. Objectives 10-1 Four fundamental decisions serve as cornerstones underlying the guidance in this Topic: * a. Derivative instruments represent rights or obligations that meet the definitions of assets or liabilities and should be reported in financial statements. * b. Fair value is the most relevant measure for financial instruments and the only relevant measure for derivative instruments...
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...A PROJECT REPORT ON “Analysis of derivative segment (Future & Options Market) of capital market” SUBMITTED BY: RAVINDER SINGH NEGI NRS/011304 In the partial fulfillment of the requirement as per THE INSTITUTE OF COST AND WORKS ACCOUTANT OF INDIA Institute of Cost and Works accountant of India Delhi Office 3, Institutional Area Lodhi Road, New Delhi - 110003 Phones: 011-24622156, 24521492 Fax: 011-43583642, 24622156, 24618645 DECLARATION I hereby declare that the Project report has been prepared by me during the year 2011. In partial fulfillment of the requirement for the award of the degree of Institute of Cost and Works Accountant of India (NIRC). Ravinder Singh Negi Place:--New Delhi Date:--...
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...FINANCIAL DERIVATIVES (A Future of Indian Financial Market) Dr. Ritu Kothiwal, Associate Professor, BIET, Hyderabad Contact No: 09246193330 Email Id: kothiwal55@gmail.com Mr. Ankur Goel, Research Scholar (Management), Mewar University, GZB. Contact No: 9917745990 Email Id: mrankurgoel@gmail.com. ABSTRACT Among all the innovations that have flooded the international financial markets, financial derivatives occupy the driver's seat. These specialized instruments facilitate the shuffling and redistribution of the risks that an investor faces. Thus aids in the process of diversifying ones portfolio. The volatility in the equity markets over the past years has resulted in greater use of equity derivatives. The volume of the exchange traded equity futures and options in most of the mature markets have seen a significant growth. It goes beyond that the local derivative in the emerging markets have witnessed widespread use of the derivative instrument for a variety of reasons. This continuous growth and development by the emerging market participants has resulted in capital inflows as well as helped the investors in risk protection through hedging. INTRODUCTION AND CONCEPT OF DERIVATIVES: Derivatives are financial contracts whose values are derived from the value of an underlying primary financial instrument, commodity or index, such as: interest rates, exchange rates, commodities, and equities. The International Monetary Fund defines derivatives as "financial...
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...Handbook on Derivatives © Rajkumar .S Adukia B.com (Hons.), L.L.B, AICWA, FCA radukia@vsnl.com/rajkumar@gmail.com 093230 61049/ 093221 39642 www.carajkumarradukia.com If interested in receiving similar technical updates subscribe to carajkumarradukia-subscribe@yahoogroups.com PREFACE Derivatives have changed the world of finance as pervasively as the Internet has changed communications .Well they are everywhere nowadays. The most significant event in finance during the past decade has been the extraordinary development and expansion of financial derivatives. These instruments enhance the ability to differentiate risk and allocate it to those investors who are most able and willing to take it -- a process that has undoubtedly improved national productivity, growth and standards of living. Derivatives products provide certain important economic benefits such as risk management or redistribution of risk away from risk-averse investors towards those more willing and able to bear risk. Derivatives also help price discovery, i.e. the process of determining the price level for any asset based on supply and demand. All markets face various kinds of risks. This has induced the market par-ticipants to search for ways to manage risk. The derivatives are one ofthe categories of risk management tools. As this consciousness about risk management capacity of derivatives grew, the markets for derivatives de-veloped...
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...sellers etc. Financial markets may be classified on the basis of • • • • types of claims – debt and equity markets maturity – money market and capital market trade – spot market and delivery market deals in financial claims – primary market and secondary market Indian Financial Market consists of the following markets: • • • Capital Market/ Securities Market o Primary capital market o Secondary capital market Money Market Debt Market Primary capital market- A market where new securities are bought and sold for the first time Types of issues in Primary market • • • • • Initial public offer (IPO) (in case of an unlisted company), Follow-on public offer (FPO), Rights offer such that securities are offered to existing shareholders, Preferential issue/ bonus issue/ QIB placement Composite issue, that is, mixture of a rights and public offer, or offer for sale (offer of securities by existing shareholders to the public for subscription). Primary market Deals with new securities Provides additional companies capital Difference between Secondary market Market for existing securities, which are...
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