...SPEECH Indian Derivatives Market - A Regulatory and Contextual Perspective Shyamala Gopinath Indian Derivatives Market - A Regulatory and Contextual Perspective* Shyamala Gopinath Let me first thank Euromoney for inviting me for this seminar on Indian derivatives market. The esoteric world of derivatives has come into sharp focus in recent times precisely on account of their complexity and recent events have triggered a debate on their impact on the financial system stability. My discussion today will be confined to the regulatory framework in India in regard to forex, debt and credit derivative markets and the regulatory imperatives arising in dealing with these instruments and their future development, particularly in the context of global developments. The financial markets, including derivative markets, in India have been through a reform process over the last decade and a half, witnessed in its growth in terms of size, product profile, nature of participants and the development of market infrastructure across all segments - equity markets, debt markets and forex markets. Derivative markets worldwide have witnessed explosive growth in recent past. According to the BIS Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity as of April 2007 was released recently and the OTC derivatives segment, the average daily turnover of interest rate and non-traditional foreign exchange contracts increased by 71 per cent to US $ 2.1 trillion in April 2007...
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...Ch 1: BASIC CONCEPTS IN FINANCE • Finance is the study of how resources are valued and allocated in time. • Outcomes of financial decisions are spread out over time and not known with certainty in advance • Three key concepts in finance are : Time value of money Asset Valuation (stocks, bonds, derivatives,...) Risk management 1.1: Interest and return • Income almost never matches consumption desires exactly. Either one will need to borrow to purchase more than one can afford or save excess income. • Costs / benefits of financial decisions are spread over time. So one needs to compare values of cashflows which mature at different times. Time value of money: 1ZAR in the hand today is worth more than the expectation of 1ZAR in the future. Why? • Opportunity cost: To give up consumption of your 1ZAR today, you would expect to be rewarded with a greater amount in the future; the promise of consumption at a higher level in the future motivates one to save. The desire to receive surplus on savings leads to an interest rate called the pure time value of money. • Inflation: Prices of goods rarely stay the same over time. The purchasing power of 1ZAR now is (usually) greater than 1ZAR later. Investors expect a higher rate of return to compensate for inflation. • Uncertainty: One may not receive the expected sum - this is referred to as investment or credit risk. • Opportunity cost: Pure time value of money give rise to pure rate of interest. • Inflation: The rate of...
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...establishing the production and marketing operations in foreign countries. These MNCs face a variety of challenges. One of challenge faced by MNCs in foreign markets is fluctuations in currency exchange rates. Movements in exchange rates can cause instability in profit margins and significant losses to an MNC’s bottom line. Thus, exchange rate risk management is an integral part in MNC’s decisions about foreign currency exposure. Measuring and managing exchange rate risk exposure are important functions in reducing a MNC’s vulnerabilities from major exchange rate movements. In order to manage currency exchange rate risks, MNC often use financial instruments or currency derivatives. Required: 1. What are the types of exchange rate risks faced by the MNCs? 2. Understand the attempt for the use of foreign exchange derivatives (exchange rate risk management approaches) that can benefits the MNCs. Assignment required student to demonstrate professional skills in research, presentation and communication with full references and an appropriate bibliography. * Assignment should be completed using a word processor and should be no more than 10 pages, using Arial 12, single spaced. * Submission should be a single word document. * This is an independent assessment, and it is unlikely that students will provide identical comments. Question 1 MNCs, Multinational Corporation, a corporation that has its facilities and other assets in at least one country other than its...
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...Foreign Exchange Derivatives Definition Any financial instrument that locks in a future foreign exchange rate. These can be used by currency or forex traders, as well as large multinational corporations. The latter often uses these products when they expect to receive large amounts of money in the future but want to hedge their exposureto currency exchange risk. Financial instruments that fall into this category include: currency options contracts, currency swaps, forward contracts and futures contracts. Types There are three types of foreign exchange derivatives used for hedging as follows: I. Forward Hedging II. Money Market Hedging III. Option Hedging Forward Hedging It refers to the Contract to buy or sell an asset at a given price on a specific date in the future. Investors use this device to avoid major losses if the price of the asset changes dramatically before it is exchanged. Money Market Hedging It refers to the Borrowing and lending in multiple currencies, for example to eliminate currency risk by locking in the value of a foreign currency transaction in one's own country's currency. Option Hedging It refers to the right to buy or sell foreign exchange at a specified strike price in exchange of a certain option premium either at the option expiration date or during the option period. * If one acquires the right to purchase foreign exchange, it is called the call option. Buyer of the call option pays option premium & it will be...
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...I. Overview of the Hong Kong Capital Market Located in the heart of Asia, Hong Kong positioned itself to be a major international financial center of the continent. Its capital market is comprised of integrated network of institutions and markets which provide a wide range of products and services to local and international customers and investors. Hong Kong’s financial markets are characterized by a high degree of liquidity and operate under effective and transparent regulations, which meet international standards. The Government of the Hong Kong Special Administrative Region (HKSAR) abides by the principle of keeping intervention into the way in which the market operates to a minimum and has endeavoured to provide a favorable environment in which business operates. Its policy of low and simple taxation allows maximum room for business initiatives and innovation. There is a strong emphasis on the rule of law and fair market. There are no barriers of access to the market by foreign businesses and no restrictions on capital flows into and out of Hong Kong. Hong Kong’s privileged location in the Northeast Asia, on the other hand, makes it a gateway to China. Moreover, Hong Kong is situated at appropriate time zones that allow 24-hour continuous trading of foreign exchange and gold when the two markets in New York and London are closed. II. Financial Players and Intermediaries in Hong Kong Preview:A closer look at the financial markets As of July 2010, there were...
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...Executive Summary With the world demand for oil and gas is increasing and likely to increase further and as a developing country creating a best way to produce oil and gas to the unlimited demand. Petroliam Nasional Berhad(PETRONAS) has decided to analyse its business venture in three different countries all over the world. The countries are United States, China and Russia. Investing in international country may give out some financial risk. This paper is discussing the method Petronas can use to overcome all the financial risk in United States, China and Russia. A study on the derivative market of all the three countries is done to measure the risks and to know the ways to overcome the risks. Besides, this paper also discusses the taxation of every each country and how Petronas can minimize the tax burden. At the end of this paper, a conclusion is made (based on the criteria mention above) to which country to invest with different proportion. 1.0 Company Background and Risk Profile 1.1 Introduction to Oil and Gas industry in Malaysia Malaysia is one of the largest net exporters of oil and gases its region and the world. They have many gas and oil deposits on land and in the oceans surrounding the country. The country produces almost 2% of the world’s natural gas and nearly 13% of the world’s liquefied natural gas (LNG) and is ranked 25th in oil production in the world producing more than 750,000...
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...Project Report On “DERIVATIVES – THE BEST TOOL IN INDIAN MARKET TO GET THE OPTIMUM RETURNS” ACKNOWLEDGEMENT We take this opportunity to place on record our grateful thanks & sincere gratitude to those who gave us valuable advice & inputs for our studies. Our study could not have been completed if we had not have been completed if we had not been able to get the reference material from the company. Whenever & whatever we present today has been made possible by true efforts & kind support of our project guide Mr. Akhilesh Rathi, Head, SNR Securities & Finance, Indore. We express our sincere regards & feel paucity of word to express our utmost gratitude toward him for providing us the necessary resources, worthwhile suggestions & constant guidance. We also like to express our thanks towards other staff members of SNR Securities & Finance who inspired us to put in our best efforts for the completion of the project. PREFACE Financial system is the mirror reflection of an economy. The performance of any economy to a large extent is dependent on the performance of the Financial Institution. Financial system plays an important role by mobilizing saving and allocating them to the most profitable activities, and enables society to make more productive use of its scarce resources. The Financial system consist of many institution, instruments, and markets. Financial Institution range from moneylender to banks, pension funds, insurance...
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...its entirety or any part cannot be stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise. CONTENTS CHAPTER 1....................................................................................................................................................5 INTRODUCTION TO DERIVATIVES ..................................................................................................5 1.1 DERIVATIVES DEFINED.......................................................................................................... 5 1.2 FACTORS DRIVING THE GROWTH OF DERIVATIVES................................................. 6 1.3 DERIVATIVE PRODUCTS ........................................................................................................ 7 1.4 PARTICIPANTS IN THE DERIVATIVES MARKETS ........................................................ 8 1.5 ECONOMIC FUNCTION OF THE DERIVATIVE MARKET ............................................ 8 1.6 EXCHANGE-TRADED VS. OTC DERIVATIVES MARKETS ........................................ 10 1.7 NSE' S DERIVATIVES MARKET ............................................................................................ 11 1.7.1 Participants and functions.................................................................................................11 1.7.2 Trading...
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...Bern University of Applied Sciences Business Option Strategies – A practical Guideline for Retail Investors Bachelor Thesis Submitted within the study program Bachelor of Science in Business Administration By XXX For the module Bachelor Thesis (BTHE) Instructor XXX Co-Supervisor XXX Submission date Friday, 16 May 2014 “Option strategies – A practical Guideline for Retail Investors” Acknowledgment The development of this paper has been observed and accompanied by instructor Professor XXX and co-instructor Professor XXX of the XXX. Both of the tutors shall be thanked gratefully at this point. Furthermore I would like to acknowledge the interviewees for their advices and information, who made it possible to complete this bachelor thesis. 2 “Option strategies – A practical Guideline for Retail Investors” Management Summary This bachelor thesis examines option strategies and what costs and fees an individual investor will be confronted with when trading such instruments in Switzerland. In theory, option strategies are an interesting and multifunctional instrument for every market direction. However, in practice, there are several difficulties which retail investors have to overcome. For example, they have only limited available assets for trading and thus the margin of the broker and the transaction costs significantly influence the potential profit (economies of scale). There are also legal restrictions like naked...
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...Assignment Derivatives Market in Asian Countries 2 An Overview The purpose of this report is to examine the following; to discuss the derivatives markets in Asian economies whilst simultaneously discussing the benefits and risks posed by these markets to their financial systems. In conclusion, I will propose a set of specific policy actions/recommendations aimed at reducing these risks. Growth in emerging markets has been due to several factors including privatizations, participation of foreign institutional investors, increase in the domestic investor base, and increased IPOs. In a nutshell, economies are taking steps to lowers the cost of capital to spur economic activities by fast-tracking financial market development. If those points stated were considered the first generation, emerging markets now find that they need to focus on the second-generation capital market development issues. These can be stated as: developing financial intermediaries that have professionals with financial sector skills; enhancing domestic institutional investor base with financial sector skills, enhancing domestic institutional investor base in addition to foreign investors, providing self-regulatory organization and developing mechanisms for investor protection (Fratzscher 2006). Derivative Products in Asia There are five main derivatives products that are traded in Asian markets; foreign exchange products, interest rate derivatives, equity derivatives, commodity derivatives, credit derivatives...
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...with is: y'=(2(2)-3)(e^((4-6+12)*ln8) y'=e^(10*ln8) The deivative of a^f(x) is a^f'(x) ln (a), where a is a consatnt. y=8^((x^2)-3x+12) y' = 8^((x^2)-3x+12) (2x-3) ln (8) y'= 8(2x-3) 8^((x^2)-3x+12) when x=2 y'=8(1)8^(4-6+12) =8 8^10 =8^11 lny=(x^2-3x+12)ln8 1/y(dy/dx) = (2x - 3)ln8 then you multiply by y, remembring that you had y=.. at the start an substituting that in dy/dx = 8^(x^2-3x+12)*(2x-3)ln8 so when x=2 dy/dx = 8^(4 - 6 +12) * ln8 dy/dx = 8^10*ln8 = 2232783354 to a whopping 10 s.f. but they usually just want the answer in terms of ln ln(a / b) does not equal ln(a) / ln(b), from the property of logs, split the log into two separate logs through subtraction: y = ln(x + 2) - ln(x - 1) Now take the derivative of each term: dy/dx = [1/(x + 2) * 1] - [1/(x - 1) * 1] dy/dx = 1 / (x + 2) - 1 / (x - 1) Optionally, you can make the denominators common and combine them into a single fraction: dy/dx = -3 / (x - 1)(x + 2) ln [base m] x = ln(x) / ln(m) This is how you convert log of any base to log of base e. log[base5] (x + 2) = ln(x+2) /ln(5) log[base7] { ln(x+2) /ln(5) } = ln (ln(x+2) /ln(5)) / ln(7) log[base3] { ln (ln(x+2) /ln(5)) / ln(7) } = ln ( ln (ln(x+2) /ln(5)) / ln(7) ) / ln(3) f(x) = [1/ln(3)] ln ( ln (ln(x+2) /ln(5)) / ln(7) ) let k = [1/ln(3)] Let ln (x+2) /ln(5) = u f(x) = k ln ( ln (u) /ln(7) ) f'(x) = k [1 / ( ln (u) /ln(7) ) ] d/dx[ ( ln (u) /ln(7) ) ---(1) d/dx [ ln (u) / ln(7) ] = 1/ln(7) (1/u) du/dx...
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...WAS THE POTENTIAL INDIRECT EFFECT OF THIS CATEGORY INVESTOR FAILURE? 7 DOES THE RESCUE OF INSTITUTIONS LABELLED “TOO BIG TO FAIL” 9 Strengthen the long term stability of financial services sector? If so, how? 9 Encourage excessive risk taking in the knowledge of an implicit “safety net”? If so, explain why 9 WAS THIS A CASE OF CRONY CAPITALISM? 10 REFERENCES: 11 WHAT ARE HEDGE FUNDS? Hedge funds are private investment funds that aim to make profits for their shareholders by trading securities. Hedge fund utilises a variety of financial instruments to reduce risks, enhance returns and minimise the correlation with equity and bond markets. They are flexible in their investment options and can use short selling, leverage, derivatives and arbitrage. Hedge funds are defined by their freedom from regulatory controls, stipulated by the Investment Company Act of 1940 or the Security Exchange Commission. Hedge funds do not have to disclose their activities to third parties, they offer a high degree of privacy for their investors and generally they take significant risks. They are actively managed investment portfolios holding position in publicly trading securities and...
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...Derivatives and Hedging Over recent years, the volatility in the financial markets has increased due to substantial changes domestically and internationally. This has given rise to increased financial price risks faced by both domestic and multi-national companies. Financial Derivatives are widely used by corporations to adjust to exposure to currency risk, interest rate risks, commodity price risks, and security holdings risk. Largely, companies are currently exposed to risks caused by unexpected movements in exchange rates and interest rates. Companies with a growing global presence are especially exposed to a wide range of financial risks, in particular foreign exchange risks and interest rate risk. Although, financial risks are the center of business operations of financial service firms, but they also impact the risk exposure of non-financial corporations. The management and supervision of these risks has become vital for the existence of companies in today’s unpredictable financial markets. The major financial risks that most firms are exposed to are interest rate risk, currency rate risk, commodity price risk, and security holdings risk. Interest rate risk is a very common type of risk, and result from a discrepancy in the sensitivity of a firms assets and liabilities to interest rate movements. On the other hand, currency risk exposure is virtually encountered by all firms, even if their exposure is not from a transaction or a translation risk. Many firms are...
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...$2331000 of accrued wages. The wages were all earned within the past 2 weeks, and no single employee is due more than $2000. Long-term bank loans actually consist of two different loans: $5 million in straight unsecured debt, plus another $4563000 in loans that are subordinate to the $5 million loan. In recent times, with the financial markets strengthening up, more and more people entering this financial market as players, there arises the need to further increase the scope of the financial markets which primarily dealt in stocks and debt. This lead to the rise of the product: derivatives. Derivatives are those financial instruments which derive its value from its underlying asset, the asset can be anything. The scope of derivatives has been really widening. So, this assignment also focuses on some of the derivatives like futures, options, forward rate agreements and swaps. These derivatives were earlier designed to cover the risks from uncertain conditions, or rather for the purpose of hedging; however they have been widely used for further purposes like speculation, different forms of trading, arbitraging, etc. Of course, future cash flows cannot be predicted with certainty. The greater the banks confidence in a companys future cash flow, the more it will be willing to lend against it. A critical part of a credit officers expertise is to make judgments about the relative risks to a companys cash flow posed by unforeseen events, both external to the company (changes...
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...should help you in this test, you must recognize that the format of an electronic assignment does not enable certain types of questions to be asked. Therefore, you need to prepare for different types of questions in addition to those you encounter in assignments. This is especially true in view of the fact that, for instance, it is difficult in an e-assignment to ask for intermediate work in obtaining a derivative starting with its definition – namely using a limit. In the following I will attempt to give a flavour of how some questions may be worded.] There will be 4 questions of equal weight, drawn from various topics. It is entirely possible that a topic found in the text but not appearing below may appear in your test, i.e. what appears below does not constitute an exhaustive list of examinable topics. 5 possible questions are presented below. lim trig expression involving a&h Q. a) If a and b are constants, evaluate h→0 trig expression involving b&h A correct answer without detailed reasoning will be given little merit. b) Something involving related rates. Q. Obtain the derivative of the following functions, and simplify as far as possible: … functions not shown…say two different part questions involving log,...
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