3. “A derivative is a financial instrument that is derived from some other asset, index, event, value or condition (known as the underlying asset)”

4. TYPES OF DERIVATIVES

5. 1.FORWARDS

6. FORMULA FOR FORWARDS

7. 2.FUTURES

8.  Tailored to individuals need  Expiry date and contract size depends on the transaction  Negotiated directly by the buyer and seller  Standardized  Standardized contract size n expiry date  Quoted and traded on the Exchange FORWARDS FUTURES

9. FATIMA RAZA

10. Currency Options Market Currency options provide the right to purchase or sell currencies at specified prices. Options can be purchased or sold through brokers for a commission.

11. TYPES OF OPTIONSAmerican Option An option that can be exercised at any time before and on the expiration date. European Option An option that can be exercised only on the expiration date.

12. Currency options are classified as Currency put options Currency call options

13. Currency Call Options A currency call option grants the right to buy a specific currency at a designated price within a specific period of time. The price at which the owner is allowed to buy that currency is known as the exercise price or strike price.

14. Currency Call Options If the spot rate of the currency rises above the strike price, owners of call options can “exercise” their options by purchasing the currency at the strike price, which will be cheaper than the prevailing spot rate. S>X The owner can choose to let the option expire on the expiration date without ever exercising it.

15. A currency call option is said to be in the money when the present exchange rate exceeds the strike price S>X At the money when the present exchange rate equals the strike price S=X Out of the money when the present exchange rate is less than the strike price S<X

16. Buyer of call option + Selling price (S t+1) - Purchase price (E) - Premium paid for option (P)

17. Seller of call option + Selling price (E) - Purchase price (S t+1) + Premium paid for option (P)

18. Currency Put Options The owner of a currency put option receives the right to sell a currency at a specified price (the strike price) within a specified period of time.

19. A currency put option is said to be in the money when the present exchange rate is less than the strike price S<X At the money when the present exchange rate equals the strike price S=X Out of the money when the present exchange rate exceeds the strike price S>X

20. + Selling price (E) - Purchase price (S t+1) - Premium paid for option (P) Buyer of put option

21. Seller of put option + Selling price (S t+1) - Purchase price (E) + Premium paid for option (P)

23. 4.SWAPS

24. Interest Rate Swap Currency Swap Credit Risk Swap Commodity Swap Equity Swap

25. INTEREST RATE SWAP

26. TERMINOLOGIES USED Swap Buyer (Long)Swap Seller (Short)Notional PrincipalSwap TenorFloating and Fixed Rate

29. Fixed Rate Receiver (Return) Floating Rate Payment (Cost) Bond Issued Loan to Public POSITION OF COMPANY ABC PUBLIC ABC COMPANY

30. POSITION OF COMPANY XYZ Bond Issued Loan to Public Fixed Rate Payment (Cost ) Floating Rate Receiver (Return) XYZ COMPANY PUBLIC

31. XYZ COMPANY PUBLIC ABC COMPANY PUBLIC Swap contract In swap contract: (buyer) In swap contract: (seller) Floating rate receiver Floating rate payment Fixed rate payment Fixed rate receiver Fixed Floating Floating Fixed Rate Rate Receiver Payment

32. THE END