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THE WORLD OF DERIVATIVES MARKET

THE WORLD OF DERIVATIVES MARKET. Dr. G. Kotreshwar Professor, University of Mysore. HOW MUCH DO YOU KNOW ABOUT CAPITAL MARKET ??. LIKE A CRICKET IT IS MADE UP OF PLAYERS, RULES AND INSTRUMENTS. WHAT INSTRUMENTS ?. BONDS DEBEUTURES GOVT. SECURESTES – LIKE TBs EQUTIES / STOKS ? ?.

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THE WORLD OF DERIVATIVES MARKET

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  1. THE WORLD OF DERIVATIVES MARKET Dr. G. Kotreshwar Professor, University of Mysore

  2. HOW MUCH DO YOU KNOW ABOUT CAPITAL MARKET ?? • LIKE A CRICKET IT IS MADE UP OF PLAYERS, RULES AND INSTRUMENTS

  3. WHAT INSTRUMENTS ? • BONDS • DEBEUTURES • GOVT. SECURESTES – LIKE TBs • EQUTIES / STOKS • ? • ?

  4. “DERIVATIVE” ? • IS IT SOMETHING DERIVED ON THE BASIS OF SOME OTHER ??

  5. WHAT ARE DERIVATIVES ? • NOT SECURITES ISSUED BY AN ENTITY • A CONTRACT WHICH DERIVES VALUE FROM THE PRICES, OR INDEX OF PRICES OF UNDERLYING SECURITIES • A SECURITY DERIVED FROM A DEBT INSTRUMENT, SHARE, LOAN OR ANY OTHER FORM OF SECURITY.

  6. DERIVATIVE…….. • A DERIVATIVE IS BASICALLY A CONTRACT • A CONTRACT FOR DELIVERING THE UNDERLYING ASSET ON SOME FUTURE DATE

  7. DERIVATIVE…… • THE ‘UNDERLYING’ MAY BE ANYTHING : STOCK COMMODITY CURRENCY INT. RATE AN INDEX, ETC.

  8. FUNDAMENTAL DIFFERENCS

  9. WHY WERE DERIVATIVES CREATED ?? • DEFINITELY NOT FOR FUN !!!

  10. WHY WERE DERIVATIVES CREATED ?? • CONVERTING A PROBLEM IN TO AN OPPORTUNITY • DERIVATIES MARKET WAS AN ANSWER FOR THE PHENOMENA OF RISK (FEAR) FACTOR

  11. FACTORS CONTRIBUTING TO THE GROWTH OF DERIVATIVES • 1. Volatile exchange & internet rates 1. Exchange Rates (Breakdown of Bretton Woods) 2. Interest Rates (Increasing inflation) 2. Globalization of markets 1. Commodity prices (petrol, gold, etc.,) 2. Stock prices (Integration of capital markets)

  12. FACTORS…………….. • 1. Technological Advances: • Internet • Telecommunication • 2. Advances in financial theories: • Options pricing model • CAPM

  13. Types of Derivatives Derivatives Traded in Organised Markets Traded in OTC Markets. Futures Options Interest Rate Currency Equity Commodity

  14. Types of Derivatives Derivatives Traded in Organised Markets Traded in OTC Markets. Forwards FRAs Options Swaps Interest Rate Currency Equity Commodity

  15. Forward Contract • An agreement between two parties • To buy/sell an asset • At an agreed – upon price • On a specified future date

  16. FRA • A contract between two parties • To apply a specified interest rate • To a notional future loan • For a specified period

  17. Futures • Standardised Forward Contracts • Transferable • Exchange traded • Futures contracts are ‘written’ and put to sale on bourses

  18. Options • A contract between two parties • To buy / sell the underlying asset at a specified price on a specified future date. • The writer of option is called the seller • The buyer of option is called the holder

  19. Swaps • Agreements between two parties • To exchange assets or sets of financial obligations • For a specified period of time • At predetermined intervals

  20. DISTINCTION BETWEEN EXCHANGE TRADED AND OTC DERIVATIVES

  21. Contd…

  22. Contd…

  23. GLOBAL DERIVATIVES MARKET (Organized Exchanges)

  24. GLOBAL DERIVATIVES MARKETS (OTC MARKET)

  25. DERIVATIVES MARKET IN INDIA

  26. COMMODITY FUTURES MARKET IN INDIA • FMC is the regulatory authority • Three national level com exchanges: • NCDEX • NMC of India • Multi Comm. Exchange of India • Over 70 commodities traded (over 50 are agri-commodities) • Cotton, Maize, Coffee, Sugar, etc.,

  27. ROLE OF DERIVATIVES MARKET • Price discovery • Risk management • Transactional efficiency • Catalyze entrepreneurial activity • Revitalizing the capital markets

  28. DERIVATIVES MARKET ALAS !! THERE IS OTHER SIDE TO IT • May flare up speculative pressure (leverage effect) • Increase the risk (OTC Market) • Destabilize the financial system

  29. WARREN BUFFETT BRADED DERIVATIVEA AS WMDs • Examples of derivative debacle: • Lehman brothers • Proctor & gamble • Orange county • Barings bank

  30. CONCLUSION: GLOBAL CAPITAL MARKETS ARE NOT PERFECT; AREN’T RATIONAL EITHER !!! • 1. Derivatives are not ‘magic’ instruments • 2. They are like H.T power line • If used carefully – wonderful results • If mishandled – disaster 3. Strong regulatory framework needed – to ensure safety of financial system

  31. Contd… • The journey of DM has just begun ; it would take long time for stabilization • Long live DERIVATIVES. !!!

  32. THANK YOU ALL

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