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TYPES OF RISK
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TYPES OF RISK
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RISK AND RETURNTRADEOFF
The risk/return tradeoff is the balance between the desire for the lowestpossible risk and the highest possible return.
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UNDERSTANDING INTERESTRATE
money paid regularly a
particular rate for the u
money lent, or for dela
repayment of a debt.
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NOMINAL INTEREST RATE
The nominal interest rate is conceptually the simplest
type of interest rate. It is quite simply the stated interes
rate of a given bond or loan.
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THE REAL INTEREST
The real interest rate is so named because it states the
real rate that the lender or investor receives after
inflation is factored in; that is, the interest rate that
exceeds the inflation rate.
Nominal interest rate Inflation = Real int
rate
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EFFECTIVE INTEREST RATE
One other type of interest rate that investors an
borrowers should know is called the effective rate, whic
takes the power of compounding into account.
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BASE OF STOCK MARKETINDICES
Price Weighted Indexes
Market value Weighted Indexes
Un Weighted Indexes
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Index Weightings Sample
Dow Jones Industrial Average Price-Weighted 30 of the largest and mheld firms in the U.S.
NASDAQ Composite Maraket-Cap Weighted All domestic and interncommon stocks listed oNASDAQ.
NASDAQ-100 Market-Cap Weighted100 of the largest domeinternational non-financcompanies listed on the
BSE SENSEXMarket-Cap Weighted
30 MAJOR INDIAN C
NSE-50(NIFTY) Market-Cap Weighted 50 MAJOR INDIAN COM
Economic Times Index of ordinaryshare Un Weighted Index All companies equal weigh
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ECONOMIC SIGNIFICANCEOF INDEX MOVEMENTS
To recognizedbroad trends in the
economy.
To guide investorwhere to invest?
To helpful forfuture contracts
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INDEX CONSTRUCTION
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INDEX CONSTRUCTIONISSUES
The compositionof the stocks
The Weights
Base year
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DESIRABLE ATTRIBUTES OF AN INDEX
IndustryRepresentati
on
MarketCapitalization Liquidity
The MarketDepth
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APPLICATION OF INDICES
To Recognized Broad Trends in the Market
For Creation of Benchmark for evaluating the investor portfolio
To know the economic health of nation
To earn better return with low risk
To study future performance of market on the bases of past data
CONSTRUCTION AND COMPOSITION
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CONSTRUCTION AND COMPOSITIONSENSEX AND NIFTY
S&P BSE SENSEX, first compiled in 1986, was
calculated on a "Market Capitalization-
Weighted" methodology of 30 component
stocks representing large, well-established and
financially sound companies across key
sectors. The base year of S&P BSE SENSEX
was taken as 1978-79. S&P BSE SENSEX today
is widely reported in both domestic and
international markets through print as well as
CONSTRUCTION AND COMPOSITION
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CONSTRUCTION AND COMPOSITIONSENSEX AND NIFTY
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METHODOLOGY S&P BSE SENSEX is calculated using the 'Free-float Market Capitalization' methodology, where
level of index at any point of time reflects the free-float market value of 30 component stocks rel
to a base period.
The market capitalization of a company is determined by multiplying the price of its stock by the
number of shares issued by the company.
This market capitalization is further multiplied by the free-float factor to determine the free-float
capitalization.
The base period of S&P BSE SENSEX is 1978-79 and the base value is 100 index points. This is
often indicated by the notation 1978-79=100.
Scrip Scrip
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Sr.No.ScripCode
Company
1 500010 HDFC
2 532540 TCS
3 500875 ITC
4 500112 SBIN
5 50 03 25 R ELIAN CE
6 500696 HINDUNILVR
7 500312 ONGC
8 500570 TATAMOTORS
9 500103 BHEL
10 500209 INFY
11 53 25 00 MAR UTI
12 524715 SUNPHARMA
13 532215 AXISBANK
14 50 01 80 H DFC BAN K
15 500520 M&M
Sr.No.ScripCode
16 532454 BHA
17 532174 ICIC
18 500510 LT
19 500124 DRR
20 500087 CIPL
21 507685 WIPR
22 533278 COA
23 532555 NTPC
24 500182 HER
25 500400 TATA
26 532977 BAJA
27 532155 GAIL
28 500 440 H IND
29 500470 TATA
30 500295 SSLT
CNX NIFTY 50
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CNX NIFTY 50
The CNX Nifty, also called the Nifty 50 or simply the Nifty, is National Stock
Exchange of India's benchmark index for Indian equity market.
Nifty is owned and managed by India Index Services and Products Ltd. (IISL),
which is a wholly owned subsidiary of the NSE Strategic Investment Corporatio
Limited. IISL is India's first specialized company focused upon the index as a
core product.
'CNX' in its name stands for 'CRISIL NSE Index'.
The CNX Nifty is a well diversified 50 stock index accounting for 22 sectors of
the economy. It is used for a variety of purposes such as benchmarking fund
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METHODOLOGY
CNX Nifty is computed using market capitalization weighted method, wherein t
level of the index reflects the total market value of all the stocks in the ind
relative to a particular base period. The method also takes into accouconstituent changes in the index and importantly corporate actions such as stock
splits, rights, etc without affecting the index value
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assume that the free-float market capitalisation is Rs 10,00,000Crore. At that point, the Sensex is at 12500. What would be the valueof Sensex if the free-float market capitalization is Rs 11,50,000 Crore?
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UNIT-II: INTRODUCTIONTO DERIVATIVES
TRADING AND
SETTLEMENT
By:- Prof.Ru
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Derivatives are financial instruments whose value
is derived from the value of an underlying asset
(such as gold, wheat or other commodities) or
other financial instruments including bonds, or
market benchmarks such as interest rates.
Meaning of Derivative Contracts
TYPE F DERIVATIVE
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TYPE F DERIVATIVEMARKET
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In the Exchange Traded Derivatives Market or Future Market, exchange acts as the main party and by tradi
of derivatives actually risk is traded between two parties.
One party who purchases future contract is said to go long and the person who sells the futurecontract is said to go short.
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THE MAIN PARTICIPANTS OFOTC MARKET
Investment Banks, Commercial Banks, Govt. Sponsored
Enterprises and Hedge Funds. The investment banks markets
the derivatives through traders to the clients like hedge funds
and the rest.
BASIC FINANCIAL
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BASIC FINANCIAL
DERIVATIVES:-
FORWARD CONTRACTforward contract is an agreement between the counter parties to buy or sell a
specified quantity of an asset at a specified price, with delivery at a specifie
time (future) and place.
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FUTURES CONTRACTSLike a forward contract, a futures contract is an agreement between two parties to buy o
a specified quantity of an asset at a specified price and at a specified time and place. Futcontracts are normally traded on an exchange which sets the certain standardized norm
trading in the futures contracts.
Standardization
Clearing House
Settlement PriceDaily Settlement andMarginTick Size
Cash Settlement
Delivery
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OPTIONS CONTRACTS
Options are the most important group of derivative securities. Option may be defined as
a contract, between two parties whereby one party obtains the right, but not the
obligation, to buy or sell a particular asset, at a specified price, on or before a specified
date.
The person who acquires the right is known as the option buyer or option holder.
Other person (who confers the right) is known as option seller or option writer.
option premium.
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OPTIONS CONTRACTS
Calloptio
n
exercise price or the strike price
expiration date or the exercise date or the maturitydate
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SWAP CONTRACTS
Swaps have become popular derivative instruments in recent years all over t
world.
A swap is an agreement between two counter parties to exchange cash flow
in the future.
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PARTICIPANTS IN THEDERIVATIVES WORLD
Hedging
Speculation
Arbitrage
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HEDGING
If someone bears an economic risk and uses the futures market toreduce that risk, the person is a hedger
Hedging is a prudent business practice and a prudent manager has alegal duty to understand and use the futures market hedgingmechanism
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ARBITRAGE
Arbi t rage is the existence of a riskless profit
Arbitrage opportunities are quickly exploited and eliminated
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ARBITRAGE (CONTD)
Persons actively engaged in seeking out minor pricing discrepanciesare called arbi t rageurs
Arbitrageurs keep prices in the marketplace efficientAn efficient market is one in which securities are priced in accordance with theirperceived level of risk and their potential return
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USES OF DERIVATIVES
Risk management
Income generation
Financial engineering
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