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CONCEPT OF DERIVATIVES
A contract to buy and sell which is set today but will
TYPES OF DERIVATIVE
MARKETS
1. FUTURES
A futures contract is an agreement between two
2. OPTIONS
An option provides the holder/buyer the right, but
BENEFITS OF DERIVATIVES
Managing the risk associated with holding the
these products
THE EXCHANGE
An exchange is a specific market place where
OTC
EXCHANGE TRADED
Market Place
Not Centralized
Centralized
Regulation
Self-regulated
Commission-regulated
Trading
Negotiated contract
Standardized contract
Margins payment
No legal
requirement
Legal requirement
High
Low
Transparency
No
Yes
Guarantee
performance
No
CLEARING HOUSE
The clearing house that clears the contracts traded
as follows:
It provides central clearing-ensuring all members
fulfills their obligation.
It acts as a central bank to all exchange members
by matching all trades transacted on the exchange
It sets margin levels and handles movement in
margin requirement
It takes the responsibility of good delivery of each
contract, thereby guaranteeing trades.
INTERMEDIARIES IN BM
DERIVATIVES
i. FUTURE BROKERS
Conduct a futures broking business, act as
FUTURE FUND
MANAGERS
A person who carry out a future fund
management business.
Specialize in managing funds that trades in
future & options
Employees of futures fund managers are called
futures fund manager representative
HEDGERS
ii. SPECULATORS
Individuals who trade future contracts with the
iii. Arbitragers
People who engage in arbitrage activities
Involves locking in a risk less profit by