Derivative in india final

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DERIVATIVE IN INDIA

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Increased volatility in asset prices

Integration of National &

International Market

Low Transaction Cost of Trading

Development of Risk Management

Tools

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Why Derivatives in India

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Origin

1.• First introduced in Chicago

Board of Trade in 1848 for forward contract in Commodities

2.• Derivative Introduce in

Indian Stock Exchanges in June 2000

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Index FuturesIndex Options

Stock Futures Stock Options

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Derivatives Trading on Exchanges

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Business Growth of F&O Segment in India

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Types of Market

Spot Market

Derivative Market

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Spot Market

Assets Class Delivery

Equity Shares

Commodity Physical

Currency Physical

Immediate Delivery

Immediate Payment

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Derivative Market

Forward Segment

Future Segment

Options Segment

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Forwards

Contact Two Private Parties

Transaction at Expiry Date

(Forward Price)

Physical / Cash

Settlement

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Participants in Forward Contract

Money

Buyer (Who takes a long position)

Seller (Who takes a

short position )

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Future

Contract Between Two Parties

Traded in Recognized Stock Exchange

Future Date

Price Agreed Upon Today

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Participants in Futures Contract

Future Buyer Future Seller

Payment

Sell Contract

Buy Contract

Payment

Clearing Corporation

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Positions in a Futures Contract

• When a person buy a futures contract Long

• When a person sell a futures contract Short

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Difference Between Future & Forward

Forward Future

Nature of Contracts Customized Standardized

Counterparty Any Party Clearing Corporation

Credit Risk Exist No Risk

Liquidity Very Low Very High

Margins Not Required Received / Paid on Daily Basis

Valuation Not Done Daily Basis

Delivery Physical / Cash No Delivery 14

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A contract between two parties

Where Buyer of the option has the right and not obligation to fulfill the contract

Seller is under obligation to fulfill the Contract

Options

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Options

Call Option

Put Option

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Types of Options

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Right to Buy

Call Options

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Right to Sell

Put Options

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Underlying Price Strike Price

Time to Expiration Risk Free Rate

Volatility

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Factors impacting Option Prices

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Derivative Terminology

Lot Size Expiry Date

Contract Size

Spot Price Strike Price

Initial Margin

Mark to Market Margin

Option Premium

Closing Price

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Contact Specification

S. no Terminology Remark Index Future(Nifty)

Index Option (Nifty)

1 Lot Size Minimum Quantity traded in a lot decided by the exchanges

50 50

2 Spot Price Price prevailing in delivery market

5500 5500

3 Future/Strike Price

Price Prevailing in future market/price for which call or put option exercise

5550 5550

4 Option Premium Amount decided by the exchange on the basis of strike price and spot price

100

5 Expiry Date Last Thursday of a month Last Thursday Last Thursday

6 Contract Next Three Month Feb, March, April Feb, March, April21

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Contact SpecificationS. no Terminology Remark Index Future

(Nifty)Index Option

(Nifty)

7 Initial Margin Minimum amount required to make position (Suppose 25% of contract Size)

Rs 69,375(25% of 2,77,500)

Option Premium * Lot Size

Rs 5,000(100*50)

8 Closing Price Closing Price at the end of day

5500

9 Mark to MarketMargin

Difference between Trade price & closing Price (Daily Settled )MTM=(Trade price – closing price)* Lot Size

Pay Rs 2,500

(5550-5500)*50

No MTM as we pay whole amount

Our Expectation is that index rise

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Participant

Hedgers• Insuring an investment

against risk.

Speculators • Who bets on derivatives

markets

Arbitrageurs • Attempt to profit from

pricing inefficiencies

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Play Grounds

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www.nseindia.com

www.bseindia.com

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Important Website

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Particulars Income /Loss from Derivatives

Head “Income from Business & Profession’

Taxed According to the tax slab

Loss from Derivatives Adjusted under all Five Head Profit & Carry Forward to Next Year

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Taxation

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Sr. Taxes Rates Futures Options

Buy 1 Lot of Nifty at 6000 ,Contract Size ( 50shares* 6000) / Buy 6000 call option at 60 Rs premium(50shares*60)

3,00,000 3,000

1Brokerage 0.03 % On Contract

Size/2.5% on Option Premium (Both Side)

90 Rs (0.03% on 3,00,000) 75 Rs (2.5% on 3,000)

2Service Tax 10.36% on Brokerage

Amount(Both Side)

9.32 (10.36% on 90 Rs)

7.77(10.36% on 75 Rs)

3Securities Transaction Tax(STT)

0.017% on Contract Size (Only on Selling Side)

25.50(0.0085% on 3,00,000 Rs)

2.55(0.0085% on 3000Rs)

4Stamp Duty 0.004% on Contract

Size(Both Side)12(0.004% on 3,00,000 Rs) 1.2(0.004% *3,000Rs)

5 Education Cess 2% on Tax Amount 0.93(2% on 9.32+25.50+12) 0.23(2% * 7.77+2.55 +1.2)

6 Higher Edu Cess 1% on Education Cess 0.014 (1% on 0.93) 0.0028 (1% on 0.23)

Total Cost 137.76 86.75

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Cost of Trading in Derivative

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How does One Make Money in A Futures Contract?

• Trade according to the trends• Complete knowledge of Derivatives• Discipline Approach• Keep Stop loss on every trade

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Thank You