Presentation for NSE

8/6/2019 Presentation for NSE

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Presented by Susir Acharya Derivative market


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Introduction to derivative

Definition Derivatives Market

Classes of derivative

Why Derivative

Derivative market in Nepal

Benefits Drawbacks

NSE derivative market

Derivative segments

Business flow

Documentation and fee for BM

Contract specification

Contract validation

Order Types

Conclusion



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Derivative market

Financial Instrument /contracts whose value is derived from

an underlying assets.

Acts as magical word for framers, producers, traders,

exporter, importers, financial institution, investors and end

users.


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Exchange

Intermediary who accommodates the trade and

guarantees the execution

Collects the Margin if applies Specialized Derivatives Exchanges

Regular Exchanges

OTC (Over-the-counter)

Direct Contract between two partiesNon-standard contracts

Derivative marketPresented by Susir Acharya


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Financial Commodity

Future

Forward Swap

Option

Spot



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A legally binding agreement to sell or buy a commodity orfinancial instrument some time in future with predeterminedprice.

Futures are standardized according to quality, quantity, anddelivery time and location for each commodity

Price of futures is discovered on an exchange trading floor

Exchange takes some responsibility for futures approved/sold onthe floor

Futures contract needs funds to be deposited (margin) bybuyer/seller as a guarantee

Futures can be settled with cash instead of delivery of the actualunderlying asset

Futures contracts are available on

Corn and other grains, Crude oil, Treasury bond, Foreigncurrency, Stock and other financial instruments



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Non-standardized futures contracts

Contract between two individual parties

Sold/traded in OTC Markets

Usually Brokerage Institutions arrange deals

Carry the risk of default

Futures are interchangeable; Forwards are not

Similar to Futures Contract but not Standard

Traded between two private parties

On delivery date, holder may actually deliver the instrument orpay the price difference

Riskier than Futures

Popular on Currencies and Interest Rates



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Exchange Traded

Usually closed out prior to

maturity

Standardized

Settled daily

MTM

OTC Traded

Usually underlying asset

delivered

Terms vary

Settled at expiry



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Right to buy or sell an underlying instrument

Just premium is paid to buy the option not the value of the

underlying asset

It is just a RIGHT not an OBLIGATIONHolder may not execute his right at all

Popular Options

(Stock, Bond, Commodity, Interest Rate ) option etc.



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Is an agreement between two parties to swap one set of cashflow with another set

For example, holder of Fixed interest rate loan may exchangehis cash flow (return stream) with a party who holds Floating

rate loan cash flow

Traded in OTC Derivatives Markets

Various SWAPs

Interest Rate Swap

Currency Swap etc



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The spot market /cash market is a public financial market.

In spot market financial instruments or commodities are

traded for immediate delivery.

It contrasts with a futures market in which delivery is due at alater date.

A spot market can be: Organized market, an exchange or OTC.



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Commodity markets are markets where raw or primary

products are exchanged.

It covers physical product (food, metals, electricity)

Modern Commodity Market have their roots in the trading ofagricultural products

The trading of commodities includes physical trading of food

items, Energy and Metals, etc.



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Hedging / Insurance Transfer the RISK Ex: Farmer selling a crop before its harvest to protect from

any future fluctuations in prices

Arbitrage Buying an instrument in one market and selling in another

and profiting from the difference Speculation

Speculating the price variation in instrument and buyingfutures or options of that instrument

To change the nature of liability To change the nature of the investment without selling the

instrument itself etc.



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The Nepalese Derivative Market is still young.

Investors are either afraid, unwilling or havent been able to analyze

the market situation.

No idea about derivative and trust on it. They think it as some sort of

gambling.

Investors are not smart enough to study the situation and take goodjudgment. They think Future market as Satta market.

They are afraid of being legally bonded because of illegal money/ black

money.

Nepalese economy has been facing problems which have a huge

impact on the derivative market.

First comes is the power supply problem due to which Industries are

not able to function properly.

The continuous political instability has also hit hard to the market.



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Producers, framers, traders, importer, exporter can take

futures position in the derivative market and insure their

risk from the fluctuating product prices.

Investors can study the market and invest in the productand can get attractive returns.

Financial institutions can mitigate or even eliminate the

interest rate risk by locking their Interest rate with

derivative exchange. End users can buy the goods at a pre-determined price so

that they can get away from the risk of increase in price.



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Credit risk This is very low or almost zeros because the Exchange takes on the

responsibility for the performance of contracts but still people doubt about it.

Market risk

Market risk is the risk of loss on account of adverse movement of price.

Liquidity risk

Liquidity risks are the risk that unwinding of transactions may be difficult, if

the market is illiquid.

Legal risk

Legal risk is that legal objections might be raised; regulatory framework might

not allow some activities.

Operational risk

Operational risk is the risk arising out of some operational difficulties like,

failure of electricity, due to which it becomes difficult to operate in the

market.



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NSE

Roll Over segment (International Product) Spot Segment (local product)

Gold Red lintel

Silver Tea

Crude oil Cardamom

copper Bengal gram

Natural gas Maze

Wheat


Bid

Ask

Spread


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NSE

Clearing Member

Broker Member

Investor


Regulator and market

facilitator

Clearing and settlement

of trade

Intermediaries


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Documents requirement to be a BM

MOA (Memorandum of agreement)and AOA

Declare / Bio-data

Company with net worth 5 lakhs

FCC letter

ROC (Registrar of companies)

VAT and PAN registration

Fee Structure of BM:

Membership fee: Rs. 50K +Vat

Member Deposit A/C: Rs. 50K with limitation of 15 clients

Software cost : 1000 + VAT / TWS



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Profit share in Major and Mini contract:

Major contract: Rs. 1000 + VAT with in comprise 70% forBM and rest 30% to CM and CSS for exchange.

Note: - BM can go till the lowest level of 300 + VAT. Withhis 70% share but cannot with 30% share that he has topay to CM and CSS for exchange

Mini contract: Rs. 300 + VAT with in comprise 70% for BMand rest 30% to CM and CSS for exchange.

Note: - BM can go till the lowest level of 90 + VAT. Withhis 70% share but cannot with 30% share that he has topay to CM and CSS for exchange.



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Lets imagine we are trading gold whose bid price is Rs.37186.30and ask price is 37191.12

Product name: Gold

Symbol: GOLD

Contract size: 1kg

Price quotation Unit: per 10gm

Margin: (0.6-2.5) %

Storage cost: buy -> -1.5%, sell -> 0.25%

Tick size: 4.82 Tick value:482

Face value: 1000



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Intraday

BTST

Regular



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Market Order:

Limit Order:

OCO:

Stop Order:



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NSE is young but holds potential to change the traditional practiceof derivatives markets in Nepal with online commodity spotexchange.

Same is the case of investors in Nepalese market they have

potential but confused and afraid but NSE have to bring trust andenlighten them, that derivative market is not similar to gambling.People are utilizing the derivative market for speculating ratherthan risk hedging.

The derivative market on the resources available locally can helpdevelop the derivatives market as well the infrastructures makingpeople as well as the country resourceful.

How fast and with what level of ease does the economy overcomethe imbalance is what determines the future of the NepaleseDerivative Market

Derivative marketPresented by Susir Acharya


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Derivative market

Presentation for NSE

Documents

Transcript of Presentation for NSE