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Derivatives Final

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Importance of Derivatives and its impact on the economy, their function and role play
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  DERIVATIVESINTRODUCTION _____________________________________________________________________  Introduction The word “DERIVATIVES” is derived from the word itself derived of an nderl!in asset# It is a ftre ima e or $o%! of an nderl!in asset whi$hma! &e shares' sto$(s' $ommodities' sto$( indi$es' et$#A derivative is a finan$ial %rod$t )shares' &onds* an! a$t whi$h is $on$erned with lendin and &orrowin )&an(* does not have its vale &orrow the vale from nderl!in asset+ &asi$ varia&les#A derivative is derived from the followin %rod$ts, A.SharesB.DebenturesC.Mutual fundsD.GoldE.SteelF.Interest rateG.Currencies. A derivative is a t!%e of mar(et where two %arties are entered into a $ontra$t oneis &llish and other is &earish in the mar(et havin o%%osite views re ardin the mar(et# There $annot &e derivatives havin same views a&ot the mar(et# In short it is li(e a INSURANCE mar(et where investors $over their ris( for a %arti$lar %osition#A derivative tradin has &een a new introd$tion to the Indian mar(ets# It is' in asense %romotion and a$$e%tan$e of mar(et e$onom!' that has reall! 1  DERIVATIVES$ontri&ted towards the rowin awareness of ris( and hen$e the radal introd$tion of derivatives to hed e s$h ris(s# Initially derivatives were launched in Aerica called Chica!o. hen in 1###$ %BI introduced derivatives in the local currency Interest Rate mar(ets' whi$h have not reall! develo%ed' &t with the radal a$$e%tan$e of the A-. idelines &! &an(s' there shold &e an instrmental %rod$t in hed in their &alan$e sheet lia&ilities# he first &roduct which was launched by BSE and 'SE in the derivatives ar(et was inde) futures. /AINERS AND -OSERSS!m&ol-T0)Rs#*E1%# DateCh )2* %E'*+A#,.--/0Feb0111.,23E%434'DA1#12./550Dec0151.2,3E%434'DA1#5-.-,06an0111.3E%434'DA17,2.55/0Feb01111.# S!m&ol-T0)Rs#*E1%# DateCh )2* BE85.55,06an0110155.559ESBA'+ ,,.,-/0Feb0110#.D8F7,./5/0Feb0110-./2*'I:34S1-2.25,06an0110/.1  DERIVATIVESDE3INITIONS _____________________________________________________________________  Definitions A$$ordin to 4O5N C# 5U- “A derivatives $an &e defined as a finan$ial instrment whose vale de%ends on )or derives from* the vales of other' more &asi$ nderl!in varia&les#”A$$ordin to RO6ERT -# .CDONA-D “A derivative is sim%l! a finan$ial instrment )or even more sim%l! an a reement &etween two %eo%le* whi$h has a vale determined &! the %ri$e of somethin else#7ith Se$rities -aws )Se$ond Amendment* A$t' 8999' Derivatives has &een in$lded in the definition of Se$rities# The term Derivative has &een defined in Se$rities Contra$ts )Re lations* A$t' as,:A Derivative in$ldes, : : se$rit! derived from a de&t instrment' share' loan' whether se$red or nse$red' ris( instrment or $ontra$t for differen$es or an! other form of se$rit!; : Contra$t whi$h derives its vale from the %ri$es' or inde1 of %ri$es' of nderl!in se$rities#   DERIVATIVESDerivatives were develo%ed %rimaril! to mana e' offset or hed e a ainst ris( &t some were develo%ed %rimaril! to %rovide the %otential for hi h retrns#T<0ES O3 DERIVATIVES _____________________________________________________________________  y&es of Derivatives;0Forwards , A forward $ontra$t is a $stomi=ed $ontra$t &etween two entities' where settlement ta(es %la$e on a s%e$ifi$ date in the ftre at toda!>s %re:a reed %ri$e# Futures , A ftres $ontra$t is an a reement &etween two %arties to &! or sell an asset at a $ertain time in the ftre at a $ertain %ri$e# 3tres $ontra$ts are s%e$ial t!%es of forward $ontra$ts in the sense that the former are standardi=ed e1$han e:traded $ontra$ts# 4&tions , O%tions are of two t!%es : $alls and %ts# Calls ive the &!er the ri ht &t not the o&li ation to &! a iven ?antit! of the nderl!in asset' at a iven %ri$e on or &efore a iven ftre date# 0ts ive the &!erthe ri ht' &t not the o&li ation to sell a iven ?antit! of the nderl!in asset at a iven %ri$e on or &efore a iven date# Swa&s , Swa%s are %rivate a reements &etween two %arties to e1$han e $ash flows in the ftre a$$ordin to a %rearran ed formla# The! $an &e re arded as %ortfolios of forward $ontra$ts# he two coonly used swa&s are;/
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