Security analysis and portfolio management concept derivatives

The most notable development concern secondary segment of the Indian capital market is the introduction of derivatives trading in June 2000. The SEBI approved derivatives trading based on the future contract at both BSE & NSE. In accordance with the  and regulation of the stock exchange.

Stock index futures contract also for the buying and selling of the particular stock index for a specified price at a specified future date.

Stock index futures in India are available with 1 month, 2 month, 3 month mature while derivatives traded based on the sensitive index [sensex] commercial at the BSE on June 2000, derivatives trading based on NIFTY commercial at at the NSE   on June 12th 2000. SIF is development of derivative trading.

Derivative is a product huge value derived from the value of one or more basic variables called basis index or reference rate in an contractual manner. The underlined asset can be equity foreign exchange, commodity.

The following factors have been deriving. The growth of financial derivative.

increased volatility in asset prices in financial markets.

increased integration of national financial markets with the international markets.

market improvement in communication facilitates and sharp declining in their cost.

Options

Options are instrument whereby the right is given by the option seller to the option buyer to buy or sell a specific asset at a specific price on or before a specific day.

Options seller

One who gives the option. He has an obligation to perform, incase option buyer desires to exercise his option.

Option buyer

One who buys the option. He has the right to exercise the option but no obligation.

●      Call option : option to buy

●      Put option  :  option to sell

●      American option: an option that can be exercise any time on or before the ex date.

●      European price or strike price: price at which the option is to be exercised.

●      Expiration date:  date on which the option expires.

●      Exercise date: date on which the options gets exercised by the option folder or buyer.

●      Option premium : the price paid by the option buyer to the option seller for grow thing the option.

Features of options:

●      The option is exerciser only by the owner, namely the buyer of the option.

●      The owner has limited liability

●      Owners of options has no right affordable to share holders such as voting right and divided right

●      Options have high degree of risk to the option writers.

●      Options are popular because they allow the buyer profits from favorable movements in exchange rate.

●      Options involve buying counter position by the option sellers

●      Flexibility in investor needs

Types of option

          Options are classified into two

call option

put option
 call option

          A call option gives the holder the right to buy an underling asset by a certain date for a certain price. The seller is under an obligation to fulfill the contract and is paid a price of these, which is called the call of premium or call option price.

Put option:

          A put option and the other band give the holder the right to sell an underlying asset by a certain date for a certain price. The buy is under an obligation to fulfill the contract and is paid a price for the which is called the put option premium or put option price.

Options are often classified as

In the money : - these result in a positive cash flow towards                                                                     the investors

At the money ;- these result in a zero cash flow to the investor

Out of money :- these result in a negative flow for the investor