CMI - Screencast 1

• Finance


  Accounting is finance, the terms are synonymous
• Financial markets are for professionals, not for the general public
• Investment


  All about maximising profit and returns
• Derivatives


  A financial contract whose value is dependent on an underlying set of group of asset
• Commonly used assets


  • Stocks
  • Bonds
  • Currencies
  • Commodities
  • Market indices
• The value of the underlying asset keeps changing according to market condition
• Basic principle behind entering into derivative contracts


  To earn profits by speculating on the value of the underlying asset in future
• Prices fall to rupees 1970 due to large supply in the market


  The broker will be bound to pay rupees 2000 to the farmer
• Market price of the wheat rises to rupees 2020


  The farmer ends up losing rupees 20 per quintile as he is bound to sell at rupees 2000
• Forward contract


  A derivative contract where the underlying asset is a commodity
• Four major types of derivative contracts

  • Forwards
  • Futures
  • Options
  • Swaps
• Forwards and futures


  Financial contracts that obligate the buyer to purchase an asset at a pre agreed price on a specified future date
• Difference between forwards and futures


  Futures are traded on exchanges while forwards are customized contracts and they are not traded anywhere
• Options


  Provide the buyer of the contracts the right but not the obligation to purchase or sell the underlying asset at a predetermined price
• Two kinds of options

  • Call
  • Put
• Call option


  Right but not the obligation to buy a given quantity of underlying asset at a given price
• Put option


  Right but not the obligation to sell a given quantity of the underlying commodity or asset at a given price
• Swaps


  Derivative contracts that allow the exchange of cash flows between two parties
• Most popular types of swaps

  • Interest rate swaps
  • Commodity swaps
  • Currency swaps
• Mark-to-market


  Recording the price or value of the security to reflect the current market value rather than the book value
• Benefits of derivative trading

  • Hedging risk exposure
  • Underlying asset price determination
  • Higher returns
• Hedging risk


  • Reducing risk in one's investment by making an other investment to offset the risk of any adverse price movement
• Underlying asset price determination

  Spot derivatives are frequently used to determine the price of the underlying asset
• Risks of derivative trading

  • High volatility
  • Peculiar features
• Derivatives are widely regarded as a tool of speculation due to the extremely risky nature of derivatives and their unpredictable behavior
• Unreasonable speculation may lead to huge losses
• Derivatives trading can be extremely beneficial but it is suggested to enter only after having 6 years of experience in the stock market