Hi Guys Good Afternoon,
Thanks for coming, I’m very glad to share some knowledge that I have.
Please do understand and consider me as this is very first presentation that I’m giving.
Today we are going to see Introduction to Options and Derivatives
Just have a look that what we are actually doing and where we are ?
In Bank there are 3 Divisions they are
Privatte Banking
Investment Banking
Asset Management
PB : – banking and financial services provided by banks to private inviduals investing sizable assets.There is minimum investment barrier like in Millions so only elite people are investing in to this
IB :Where we are working.An investment bank is split into the so-called front office, middle office, and back office.Front Office inclueds Sales and Trading, Mainly focus on Buying and selling products
Middle office :- This is more of Coporate Strategy, Risk Management , Financial Control they are measureing and addressing the financial risk that has been taken by front office.
Back office: This is the backbone of banks because it is handling critical part of bank
Includes operations of data-checking that have been conducted, ensuring that they are not erroneous.
Technology :-Every investment bank considerable amount of in-house software created by technology team who are also responsible for technical support. so we are working here.
Asset Management : To managing the asset is the consist of private equity, real assets, headge funcds, Unfortunatly I do not knoe about this area. I will try to learn and will tell you later.This is what related to bank if we see at broader view at financial Markets consists of following
Derivatives market :- is the market of derivatives and financial intruments like futures,options etc.derivative is a financial instrument (or, more simply, an agreement between two parties) that has a value based on the expected future price movements of the asset it is linked to—called the underlying such as a share or a currency.
There are many kinds of derivatives, with the most common being swaps, futures, and options.The derivative market is very popular and successful instrument in financial market.currently 80% worlds GDP are in derivatives market.
Foregin Exchange : Currency Trading and International Trades
Capital Markets (Raising capital)
A capital market is a market for securities
Forward:
Contract to buy an asset
A pre-determined quantity
On a pre-determined date
At a pre-determined price
Future
Similar to forward, except
Traded on a exchange
Hence standardized
Options
Like a future
But buying is optional
Asset Buyer has makes the choice
On maturity date
Based on market price
Buy if profit
Don’t buy if loss
Example of a Call Option:
Suppose I have an IBM share with a Spot Price $100/share
and i know that market is bullish and is expecting some huge appreciation (rise) …
So, what i do is i buy a call option on IBM share at Strike price of $103/share at the later date say 1M from the
spot(current) date
My White paper will look somewhat like this
SO = $100/share
X = $103/share
T = 1M (30 days)
But, how would a bank trust on me that i am going to buy this option at later date. So bank ask me to pay some price
before hand i.e. nothing but a Premium. Premium is a term used for Price of an option.
Premium = $2/share
Now, after 30Day or 1M i look where is the price of IBM share …. if the price is more $105/share i will excercise
else if price is $100/share there is no use of excersing the option as i can get it for cheaper rate
from market. So, what i had at maturity is an option a choice to buy or not to buy.
Let me show a diagramatic representation of this ….
