STRATEGIC FINANCIAL MANAGEMENT Types of Derivatives PUT AND CALL OPTIONS

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STRATEGIC FINANCIAL MANAGEMENT Types of
Derivatives PUT AND CALL OPTIONS
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STRATEGIC FINANCIAL MANAGEMENT Types of
Derivatives PUT AND CALL OPTIONS

• Types of Derivatives  CA Final students will
  find some knowledge about derivatives and its
  types and learning about put and call options. I
  will try to cover and explain calls and put
  options together with an example for clear
  understanding.  Here we start.
• Introduction
• Books Definition Derivatives are financial
  contracts which derive its value from some
  underlying assets reference rate.
• Another way it can be defined as an instrument
  designed for betting.
• TYPES OF DERIVATIVES
• Derivates are categories on the basis of
• Forward Commitment Both sided betting for
  example Forward Financial Swap.
• Contingent Claims One Sided Betting Example
  Option, CAP, Floor.

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STRATEGIC FINANCIAL MANAGEMENT Types of
Derivatives PUT AND CALL OPTIONS

• Derivates are of various types, most commonly
  are  Forward contract, Futures, Financial
  Swaps(counter) and Options.
• Forward contract both sided betting involves
• Long position will gain if the price
• A short position will gain if prices fall.
• Futures are similar to forward contract but they
  are exchange-traded.
• Financial swaps are a portfolio of forward
  contracts it is called over the counter.
• Options Put option and Call option
• Call options are upside betting in which buy of
  call defines the right to buy and right to enjoy
  upside without paying downside. While the selling
  of call options defines obligation to sale and
  obligation to pay upside without enjoying
  downside.
• Put Options are defined as downside betting where
  the purchase of put options right to the sale and
  right to enjoy downside without paying upside.
  While the sale of put option gives obligation to
  sale and obligation to pay downside without
  receiving upside.
• In both above call and put option, the buyer of
  the option will pay a premium for buying an
  option to sales of the option.

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STRATEGIC FINANCIAL MANAGEMENT Types of
Derivatives PUT AND CALL OPTIONS

• Example 1
• You bought a put option at a strike price of Rs.
  500.00 at a premium of Rs. 60.00 per option. At
  the date of maturity what will be profit and pay
  off, if
• Spot rate happens to be 590.00.
• Spot rate happens to be Rs. 430.00.
• Solution
• Case 1 Spot Rate 590.00, in this case, put will
  lapse no pay off in such a case and a loss of
  premium to the buyer of Rs. 60.00 per option.
• Case 2 Spot Rate 430.00, in this case, put will
  be exercised in our favor i.e. payoff will be
  500-430-6010.00.
• Example 2
• You sold a call option of a stock at a strike
  price of Rs. 800.00 for a premium of Rs. 90.00
  what would be payoff and profit.
• Case-1       Spot Price Rs. 1000.00
• Case-2       Spot Price Rs. 500.00
• Solution

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STRATEGIC FINANCIAL MANAGEMENT Types of
Derivatives PUT AND CALL OPTIONS

• Case 1 if Spot price happens to be Rs. 1000.00
  call will be exercised against us and pay off
  will be 1000-20090 Rs110.00
• Case 2 if spot price happens to be Rs. 500.00
  than call will lapse no pay off in such a case
  and profit will be equal to the premium received
  on sale of the call option.
• Food for thought
• Option buyer runs a high probability of losing
  small amount with a low possibility of winning a
  high amount.
• This is how to put and call options in the market
  of derivatives works and this is how stakeholders
  according to their calculations get to enter into
  the contracts of buying call and put options.
  This topic is very vast in scope and learning.
  For the deep understanding of the topic please
  visit the e-learning portal provided by takshila
  e-learning. Where you all will get a great
  learning from experienced faculties.
• CA FINAL  STRATEGIC FINANCIAL MANAGEMENT
  DERIVATIVES ANALYSIS AND VALUATION-DERIVATIVES
  DIFFERENCE BETWEEN OVER THE COUNTER AND EXCHANGE
  TRADED DERIVATIVES AND PLAYERS OF DERIVATIVE
  MARKET
• In this article I have tried to cover about the
  differences in between exchange derivatives and
  over the counter derivatives.

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STRATEGIC FINANCIAL MANAGEMENT Types of
Derivatives PUT AND CALL OPTIONS

• INTRODUCTION
• Derivatives are two types in nature in the view
  of trading which are called exchange traded and
  over the counter derivatives.
• Exchange Traded Derivatives  Derivatives which
  have standardized lot size and traded on an
  organized future exchange furthermore they
  required payment of initial deposit settled
  through a clearing house.
• Over the Counter   A stock that is not listed on
  an exchange. Trading is carried out directly
  between dealers over various means of
  communication like telephone and computer etc.  
• Going through the above definitions we can
  differentiate both of derivatives on the
  following basis.
• Lot Size and Maturity Date Exchange Traded
  Derivatives has standardized lot size and fixed
  the date of maturity, while over the counter
  derivatives happen to be customized.
• Margin Requirement Exchange Traded Derivatives
  have strict margin requirement, while Over the
  Counter does not have any margin requirement.
• Settlement Exchange Traded are marked to margin
  every day with the difference being adjusted in
  the margin. So there is a daily settlement of
  gain and losses. In case of over the counter,
  there is no reprising hence gains and losses are
  accumulated.

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STRATEGIC FINANCIAL MANAGEMENT Types of
Derivatives PUT AND CALL OPTIONS

• Law and Regulations Exchange Traded are highly
  regulated in comparison to over the counter.
• Liquidity Exchange Traded are highly liquid but
  over the counter are not.
• Risk virtually in case of Exchange Traded there
  no counterparty default risk, but in case of over
  the counter, there is high counterparty default
  risk.
• Suitability Exchange traded is more suitable for
  speculation while over the counter is more
  suitable for hedging.
• Settlement Exchange traded squared off on the
  date of maturity, while over the counter settled
  on the date of maturity.
• Futures are generally happened to be
  exchange-traded while forward and swaps are
  happening to be over the counter.
• PLAYERS AND PARTICIPANTS OF DERIVATIVE MARKET
• Hedgers They have an existing exposure. They
  take up a long or short position in derivative to
  reduce exposure.
• Speculator They have no exposure but a strong
  price belief. They take up a long and short
  position in the derivative market to earn profit
  from their price belief knowing well that they
  can lose.
• Arbitragers They are sophisticated institutions,
  who invest in human and physical infrastructure
  to discover mispricing. Accordingly, they take up
  simultaneous long and short position with a view
  to making a riskless

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STRATEGIC FINANCIAL MANAGEMENT Types of
Derivatives PUT AND CALL OPTIONS

• Note   All the derivatives are priced according
  to the prevention of arbitrage principal.
• WHY DERIVATIVES PREFERED OVER CASH MARKET
• Derivatives provide leverage, taking a big
  exposure by putting in a small amount.
• Derivatives have high liquidity.
• Derivatives have a lower transaction cost.
• Shorting is easier done through derivatives.
• That is all I can cover to differentiate in
  between exchange-traded and over the counter
  derivatives and its participants. To get further
  knowledge about the topic please visit takshila
  e-learning portal. Where you all may get the
  online facility to learn all subjects of CA Final
  or Subjects as per your needs or your choices.
• Get STRATEGIC FINANCIAL MANAGEMENT Online classes
  at Takshila Learning with best faculty support.
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