Académique Documents
Professionnel Documents
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Derivatives
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What do you mean by rest?
Why does BSE index moves
upwards and volatile?
Mortgage market?
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Reasons
• In USA most of the banks engaged in mortgage
market by lending without seeing the client's credit
worthiness. But most of the customers fail to repay
the long term loan. The banks are allowed to recover
such loans by sale of such properties.
• The total funds have to be reinvested in profitable
way. Most of the banks see(BRIC countries)India is
one of the countries where they can get better return
and also india’s inflation is arround 4% and growth
rate is around 9%.
• BRIC-Bracil, Russia, India and China
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Leading Investment and
Commercial banks
• Banc of America Securities LLC
• Citigroup
• Credit Suisse
• Goldman Sachs
• JPMorgan Chase
• Lehman Brothers
• Merrill Lynch
• Morgan Stanley
• UBS
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banks in the international markets
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Investment And Commercial Banks
Differ?
• Commercial Banks (CB) accept
deposits and make commercial loans
as a financial intermediary.
• CB traditionally could underwrite only
low-risk securities of governments per
the Glass-Steagall Act.
• Many large firms now use the direct
financial markets to finance rather than
bank loans.
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RISK /Uncertain???
• Case-1
• An Indian Garments company has received an
order to supply I,00,000 units of shirts from USA.
The price of $ 500,000 is receivable after six
months. The current exchange rate is
Rs.39.76/$. At the current exchange rate, the
company would get: 39.76 × 500,000 = Rs
1,98,80,000. But the company anticipates
appreciation of Indian rupee over time. Does the
company loose/gain due to appreciation in the
Indian Rupee? How does company minimise the
risk?
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Alternative work is rest
Minimising risk case-1
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Happiness by giving/receiving?
Case 2
• You have imported machinery for $ 100,000 on 180 days
credit at zero interest. The dollar quotes at Rs 39. Is
this deal risk free?
• This deal is not free of risk because after six months
when you pay the loan, if the dollar quotes anything
more than Rs39., say Rs 40, you will end up paying
more [Rs 1 extra for every $ 1, which is equivalent to Rs
100,000 additional cost]. On the other hand, if the dollar
quotes anything less than Rs 39, you will stand to gain
• The question here is not whether you stand to gain or
loose – it is the risk you are taking
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Happiness by giving not receiving
Case 03
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See the next slide…
Advantages
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Guess what does she pick up?
uses
• Price discovery
– Most price changes are first reflected in the derivative market.
That way derivative market feeds the spot market
– For instance, if the dollars are going down, it means that the
professional investors are expecting dolor price to go down in
the future – this is a good sign for you to buy in the spot market
• Risk transfer
– A derivative market is like an insurance company
– Derivative instruments redistribute the risk amongst market
players
– However, if you want protection against adverse price
movements, you must pay a price, ie the premium
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Children are not allowed to go near by…!
Derivative instruments on
Stocks (Equity)
Agri Commodities including grains, coffee beans, pepper,.
Precious metals like gold and silver.
Crude oil
Foreign exchange rate
Bonds
Short-term debt securities such as T-bills
Index
Interest rate
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The old lady looked shabby…
TYPES OF DERIVATIVES
Futures
Forwards
Option
Floor
cap
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Policemen also ask the public to go away from her
Players in the market
• Banks-Citi Bank
• Deutsche Bank
• Goldman Saches
• JP Morgan Chase
• HSBC
• ICICI
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See next slide
Old lady in a seashore?
• She picked up broken glasses from
seashore?
• Picked up stones?
• Does she harm anybody?
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What is your answer?
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Broken glasses should not
harm the children
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Lesson:1 What we perceive may not
be what is real
Lesson-2
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Ways of making contract?
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Threat is an opportunity
How do they settle the contract?
Present strengths
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How does stock exchange operate?
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Important terms
• LIBOR
• SWAP
• OPTION HODER
• EXERCISE THE CONTRACT
• CURRENCY SWAPS
• INTEREST SWAPS
• PREMIUM STRIKE PRICE
• AMERICAN OPTION SPOT PRICE
• EUROPEAN OPTION EXPIRY OF CONTRACT
• BERMUDA OPTION BASIS RISK
• OPTION HOLDER COUNTER PARTY RISK
• OPTION WRITER
• CALL OPTION
• PUT OPTION
• LONG
• SHORT
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QUESTIONS?
• By Prof.Augustin Amaladas
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