Pandeji

The Option & Futures are part of Derivatives Market so lets understand What is derivative?
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.
In the Indian context the Securities Contracts (Regulation) Act, 1956 (SCRA) defines Derivative to
include :
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.
A contract which derives its value from the prices, or index of prices, of underlying securities.
Origin of Derivatives
Derivatives exchanges have existed for a long time. The Chicago Board of Trade (CBOT) was established
in 1848 to bring farmers and merchants together. Initially its main task was to standardize the quantities
and qualities of the grains that were traded. Within a few years the first futures-type contract was
developed which was known as a To-Arrive contract. Speculators soon became interested in the
contract and found trading the contract to be an attractive alternative to trading the grain itself. A rival
futures exchange, the Chicago Mercantile Exchange (CME), was established in 1919. Now futures
exchanges exist all over the world.
Why Derivatives in India
Increased volatility in asset prices
Integration of National & International Market
Low Transaction Cost of Trading
Development of Risk Management Tools
Increasing saving and investments in long run

Participants
Hedgers - Operators, who want to transfer a risk component of their portfolio.
Hedgers are in the position where they face risk associated with the price of an asset. They use
derivatives to reduce or eliminate this risk.
Speculators - Operators, who intentionally take the risk from hedgers in pursuit of profit.
Speculators wish to bet on future movements in the price of an asset. They use derivatives to
get extra leverage.
Arbitrageurs - Operators who operate in the different markets simultaneously, in pursuit of
profit and eliminate mis-pricing. Arbitrageurs are in business to take advantage of a discrepancy
between prices in two different markets.

Derivatives Trading on Exchanges
Index Futures
Index Options
Stock Futures
Stock Options

Abhinav
Types of Derivative Market
Forward Segment
Future Segment
Options Segment
Swaps
Basic Terminologies
Spot Contract: An agreement to buy or sell an asset today.
Spot Price: The price at which the asset changes hands on the spot date.
Spot date: The normal settlement day for a transaction done today.
Long position: The party agreeing to buy the underlying asset in the future assumes a long
position.
Short position: The party agreeing to sell the asset in the future assumes a short position
Delivery Price: The price agreed upon at the time the contract is entered into.
Forwards
Forward is a non-standardized contract between two parties to buy or sell an asset at a specified future
time at a price agreed today. Example

Chetan Bhagat
Future
A futures contract is an agreement between two parties to buy or sell an asset at a certain
specified time in future for certain specified price. In this, it is similar to a forward contract.
These relate to the contractual features, the way the markets are organized, profiles of
gains and losses, kinds of participants in the markets and the ways in which they use
the two instruments. Futures contracts in physical commodities such as wheat, cotton,
corn, gold, silver, cattle, etc. have existed for a long time. Futures in financial assets,
currencies, interest bearing instruments like T-bills and bonds and other innovations like
futures contracts in stock indexes are a relatively new development dating back mostly
to early seventies in the United States and subsequently in other markets around the
world.
Participants in Futures Contract
Clearing House
Buyer
Seller
Positions in a Futures Contract
Difference Between Future & Forward
Some Terminology
Lot Size
Expiry Date
Contract Size
Initial Margin
Mark to Market Margin
Concept of Margin
Since the futures price will generally change daily, the difference in the prior
agreed-upon price and the daily futures price is settled daily also.
The exchange will draw money out of one party's margin account and put it into
the other's so that each party has the appropriate daily loss or profit.
Thus on the delivery date, the amount exchanged is not the specified price on
the contract but the spot value.


Ankit G
Options
An option is a derivative financial instrument that specifies a contract between two parties for a
future transaction on an asset at a reference price.
The buyer of the option gains the right, but not the obligation, to engage in that transaction,
while the seller incurs the corresponding obligation to fulfill the transaction.
Participants in Options Market
Option Styles
European option an option that may only be exercised on expiration.
American option an option that may be exercised on any trading day on or before expiry.
Bermudan option an option that may be exercised only on specified dates on or before
expiration.
Types of Options
Call Option
Right but not the obligation to buy
A call option gives the option buyer the right to purchase currency Y against currency X,
at a stated price X/Y, on or before a stated date. For exchange traded options, one
contract represents a standard amount of the currency Y. The writer of a call option
must deliver the currency if the option buyer chooses to exercise his option.
Put Option
Right but not the obligation to sell
A put option gives the option buyer the right to sell a currency Y against currency X at a
specified price on or before a specified date. The writer of a put option must take
delivery if the option is exercised.
Factors impacting Option Prices
Underlying Price
Strike Price
Time to Expiration
Risk Free Rate
Volatility
Derivative Terminology
Lot Size -
Exercise Date - Date on which the option expires.
Spot Price - Current Market Price
Strike Price - Price at which the option is to be exercised.
Option Premium - The price paid by the option buyer to the option seller for granting the
option.
Closing Price Price on the last day

Akshay
DIFFERENCE BETWEEN FUTURES & OPTIONS
Example - Contact Specification
How does One Make Money in F & O?
Trade according to the trends
Complete knowledge of Derivatives
Discipline Approach
Keep Stop loss on every trade
Business Growth of F&O Segment in India



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