Financial Derivatives, Futures and Options - Applied Course

Explore forward contracts, traded over the counter with limited market data, where two parties or a bank intermediary set today’s delivery price and quantity for a future asset.

The farmer hedges cotton price risk by selling a forward contract, comparing physical and cash settlements. Forward payoffs stay fixed against different spot prices, illustrating hedging as a risk-management approach.

Explain the difference between a hedger and a speculator, showing how hedgers use forwards to hedge and lock in price, while speculators seek profit and face losses in cash-settled forwards.

Learn how currency forwards hedge rupee exposure by locking a three-month USD/INR rate at 77, compare hedger and speculator payoffs, and analyze cash-settled forward strategies.

Determine your current asset position and expected price movement to decide on a long, short, or no forward or futures position. Assess risk and scenarios for buying, selling, or speculating.

Explore the disadvantages of forwards and how futures address them, while highlighting forwards' advantages like price risk elimination and customizable quantity, date, and quality, and noting counterparty default risk.

Explore futures contracts as fixed price agreements traded on an exchange, highlighting margin, mark-to-market, and cash settlement, and compare them to forwards' counterparty risk and customization.

Hedge cotton prices with exchange-traded futures, replacing forwards with standard contracts, price discovery, and guaranteed counterparty via the exchange, with a 25-bale minimum.

Hedge aluminium price risk for ten metric tons by taking a long aluminium futures position and locking a future price. Examine contract specifications, margins, and delivery versus cash settlement.

Explore how gold futures hedge price risk by comparing buy now, buy later, and long futures strategies. Learn futures pricing, margins, and delivery versus cash settlement for gold.

Explore stock futures on the NSE, including index futures like Nifty 50 and stock futures on 136 eligible shares, with minimum lot sizes and three expiries on the last Thursday.

Learn how to transact stock futures on ICICI Direct, including selecting contracts, placing market orders, and calculating margins and security deposits with real-world examples.

Analyze futures data and payoffs to illustrate hedging with long futures, comparing settlement and spot prices using Reliance Industries Ltd. historical data and June expiry.

Explore the principle of convergence, where share price and futures price move together and converge at expiry, and learn hedging using long or short futures to offset asset movements.

Learn how squaring off futures lets traders exit before expiry by offsetting long and short positions with the same contract and expiry, determining payoff from price differences.

Rolling over a hedge fixes the price for a longer period by closing a maturing contract and opening a new one, as shown by moving from June to September futures.

Learn how daily mark-to-market aligns futures margins with price volatility, realizing profits and losses daily, and protecting the exchange by adjusting margins.

Explore how mark-to-market works on futures with real data, calculating daily margin requirements, cash flows, and profit or loss, and see how daily settlement reduces counterparty risk.

Extract one year of futures data from the NSC website for a stock, build payoffs, and test the convergence principle with rollover and mark-to-market.

Explore futures pricing with Reliance data, showing futures price as the locked price for 25 June expiry, not the payment to enter, and long buys at settlement with no money.

Explore how futures prices derive from spot prices using continuous compounding, incorporating storage costs, dividends or yields, and risk-free rates to determine no gain, no loss pricing.

Solve practice questions on futures pricing using spot, risk-free rate, storage costs, and dividend yield. Compare theoretical and actual prices to explore arbitrage.

Calculate theoretical futures price from spot price, interest rate, dividend yield, and time to expiry for Reliance Industries data, and compare it with actual futures to observe convergence at expiry.

Cost of carry equals the theoretical futures price minus the spot price, representing the interest component, as shown by a graph where carry declines toward zero over time.

Explore basis risk in futures hedging, where spot and actual futures prices diverge, creating imperfect protection due to location, timing, quality, and price matching.

Identify price differences across markets to spot arbitrage opportunities in futures. Trade riskless profits by buying low and selling high while considering costs and market restrictions.

Identify arbitrage opportunities by buying the cheaper actual futures and selling the pricier theoretical futures, accounting for dividends, interest, and potential short selling constraints.

Explore forward pricing in financial derivatives, showing forwards resemble futures with a spot-plus-interest price, yet set by two parties through a less transparent price discovery.

Introduce options contracts and compare them with futures, explaining call and put options, premiums, and payoff structures to hedge risk, including a producer’s hedging example.

Compare futures and options: futures impose obligations on both parties, while options grant the buyer a choice and require a premium, with futures contracts having no premium to enter.

Learn option types: call options give right to buy futures and put options give right to sell futures. Clarify long vs short, premium, and four combinations for hedging.

Compare long futures and call options for hedging a three-month raw material purchase. Futures lock price, while a call option offers buy at 100 with downside limited to the premium.

Take-home exercises four and five challenge you to analyze opposite-party payoffs for futures and options. Complete all exercises and identify which options contracts to trade, then submit your answers.

Compare long and short options by analyzing call and put payoffs; choose long calls and puts for profits with losses limited to the premium, while short positions carry large losses.

Identify the elements of an options contract: asset, expiry date, option type, strike price, premium, and the underlying spot price. Examples show stock options on HDFC Bank and Reliance Industries.

Explore how options on NSC work, including index options, stock options, and long-term options, plus weekly expiries, contract specifications, trading cycles, and market data.

Explore how moneyness, defined by strike versus spot price, distinguishes in the money from out of the money options and affects premium.

Explore how to enter, trade, and exit options on ICICI Direct, choose contracts and expiries, and manage premiums and margins with long and short call strategies.

Enter a call on Nifty 50 with strike 12,250 and premium 208 on October 9, then exit by squaring off, settling at expiry for cash, or letting it expire worthless.

Explore how call premium increases with rising spot price and how put premium rises when the spot falls, illustrated with Nifty 50 data and strike prices 12,200 and 13,000.

Analyze cross-sectional option data to show how call and put premiums vary with strike price and time to expiry, and how volume concentrates near-term expiries.

Explore option strategies for trading risk and profit, from long puts and protective positions to covered calls and collars, including futures hedges and premium concepts.

Analyze naked call options by comparing long call and naked short call strategies using Infosys data, strike price, premium, and payoff outcomes.

Explore naked put strategies to profit from falling prices by buying puts, locking a strike price, and analyzing premium costs, payoff scenarios, and risk when not owning shares.

Explains the protective put strategy by buying stock and a put to cap downside, paying a premium. Compares it with naked put and highlights risk reduction and potential upside.

Learn how to implement the covered call by selling a call on a stock you own with no margin, collect premium, and analyze outcomes as prices rise or fall.

Explore how a long straddle buys a call and a put to profit from high volatility, balancing premiums and break-even thresholds; contrast with the short straddle in low volatility.

Analyze the strangle strategy for volatility, compare it with the straddle, and show how out-of-the-money calls and puts lower premiums and define breakeven for IndusInd Bank.

Analyze options pricing by spot and strike prices, time to expiry, risk-free rate, and volatility, and see how call and put premiums respond. Introduce Black-Scholes and call parity pricing.

Learn put-call parity and how call and put prices relate to the present value of the strike. Build synthetic options and test parity using spot prices, strike, and market data.

Discover how options arbitrage exploits price differences to lock in riskless profits, using put-call parity checks, buying cheap options, selling expensive legs, and calculating net cash flows.