FINANCIAL DERIVATIVESFINANCIAL DERIVATIVESPRESENTED TO:

SIR ILYAS RANA

PRESENTED BY:TAQDEES TAHIR

FINANCIAL DERIVATIVES

Financial derivatives are the instruments that help financial institution managers manage risk better.

Most important financial derivatives are:

Forward ContractsFinancial Futures ContractsOptionsSwaps

Forward Contracts

Forward Contracts are agreements by two parties to engage in a financial transaction at a future (forward) point in time.

Interest rate forward contractsForward contracts that are linked to debt instruments called Interest rate forward contracts.

It involves the future sale of a debt instruments and have several dimensions:1-specification of the actual debt instrument that will be delivered at a future date.2-amount of the debt instrument to be delivered.3-price (interest rate) on the debt instrument when it is delivered.4-date on which delivery will take place.

Financial Future Contracts

A financial future contract is that a financial instrument must be delivered by one party to another on a stated future date.

At the expiration date of a futures contract, the price of the contract is the same as the price of the underlying asset to be delivered.

OPTIONS

Options are contracts that gives the purchaser the option, or right, to bur or sell the underlying financial instrument at a specify price,called exercise price or strike price, with in a specific period of time (the term to expiration).

CALL OPTION is a contract that gives the owner the right to buybuy a financial instrument at the exercise price with in a specific period of time.

PUT OPTION is a contract that gives the owner the right to sellsell a financial instrument at the exercise price with in a specific period of time.

Contd..There are two types of option contracts:

1-American Optionscan be exercised at any time up to the expiration date of the contract.2-European Optionscan be exercised only on the expiration date.

SWAPS

Swaps are financial contracts that obligate one party to exchange (swap) a set of payments it owns for another set of payments owned by another party.

Contd..There are two basic kinds of swaps:

1- Currency swapsinvolves the exchange of a set of payments in one currency for a set of payments in another currency.2- Interest rate swapsinvolves the exchange of one set of interest payments for another set of interest payments, all denominated in the same currency.