Term Paper on Financial Derivatives

The Balance of Payments in India mainly relies on services exports, remittances and the course capital flows, both foreign direct investments (FDI) and FII. It is very essential that all market participants, such as banks and other intermediaries be provided with the wherewithal so that they can undertake a risk management in a way that is scientific. One of the ways to access domestic, foreign exchange markets is to hedge on the underlying foreign exchange exposures. In addition, the facilities that are available as the booking of forward contracts were included in the domestic forex market in order to evolve and acquire volumes and depth (Sumanth, 2012). Some of the newer hedging instruments have put in place swaps and options in the

Hedging is a significant measure of financial risk management. Since the 1970s, the increasing number of powerful companies started to control the risk of the exchange rate, the interest rate and commodity by using financial derivatives. ISDA (2013) based on the Global 500 Annual Report 2012 survey found that 88 percent of companies use foreign exchange derivatives. Modigliani & Miller (1958) believed that if the financial markets were under perfect conditions, for instance, there was no agency costs, asymmetric information, taxes and transaction costs, hedging would not increase the company 's value because investors can hedge by themselves. However, a large number of practical studies have shown that hedging is beneficial

The presentation was scheduled for the first week of December 1990. Mr. Pross outlined the use of various derivatives, noting that they differed widely in their ability to reduce risk. If the company was, say, placing a large bid to buy a building abroad, one might prefer to use foreign currency options to hedge the currency risk in the event the deal fell through. He argued, however, that foreign currency futures were best suited to hedge the fluctuations in revenues arising from currency movements. Mr. Pross proposed a plan to hedge currency risk using futures which

Derivative contracts were either negotiated with specific counterparties (over-the-counter) or were standardized contracts executed and traded on an exchange. Negotiated over-the-counter derivatives were comprised of forwards, swaps, and specialized options contracts. Over the counter derivatives can be tailored to meet the customers’ needs with respect to time and quantity and they are not traded in an organized exchange. On the other hand, standardized exchange-traded derivatives consisted of futures and options contracts. Even though over-the-counter derivatives were usually not traded like securities in an exchange, they might be terminated or assigned to an alternative counterparty. Standardized derivatives trade on an exchange and have time and quantity that are fixed.

The definition of "derivatives" is also very wide, and includes options and warrants, whoever they are issued by, as well as rights and interests in respect of listed securities (or other derivatives).

Analyze the derivatives market and determine the use of derivatives to efficiently manage investment risks in an investment portfolio.

In 2008, the whole world encountered the biggest crisis on the economy generally in the finance sector. One of the essential driving factors of this was the deregulation in the finance industry. It permitted financial organizations to be engaged with offsetting the risk in fund exchange with the derivative. As a result, the financial institutions (like banks) claimed for more mortgages that would support derivatives trade that was profitable (Scott, 2010).

4. Options written or held---Derivative financial instruments that are entered into contemporaneously with, or in contemplation of, the transfer. Arrangements to provide financial support.

Nestlé S.A. is a Swiss company and owns a prestigious position being the world’s leading nutrition, health and wellness group (Nestlé, 2016). According to its annual report (2015), this company is exposed to many risks caused by movements in foreign currency exchange rates, interest rate and market prices. The foreign exchange risk comes from transactions and translations of foreign operations in Swiss Francs (CHF). The interest rate risk faces the borrowings at fixed and variable rates. The market price risk comes from commodity price and equity price. The former risk arises from world commodity market for the supplies of coffee, cocoa beans, sugar and others. The later risk arises from the fluctuations of the prices of investments held. (Nestle annual reports, 2015). Thus, financial derivatives instruments are used by this multinational corporation in order to hedge these risks.

The popularity of online options trading has exploded in recent years. The Internet has fueled a booming business of small investors throwing money at the derivatives market. The upside to an expanding array of financial products is a greater potential for profit to be made by investors skilled in daily trading; the downside is increased risk and a more complex trading environment. For the amateur investor who is ready to learn how to trade stock options the derivatives market can be enticing, but also frightening. This article will outline some of the advantages and disadvantages of the stock options market for the average investor.

-Brokerage firms manage and facilitate the purchase of stocks, bonds, and other types of investments.

In 1973, Myron Scholes and Fisher Black developed the framework on option pricing and presented the theory in their seminal paper. With reference to both approach and application the Black Scholes Model is considered to be one of the most significant concepts in modern financial theory. For valuing options the Black Sholes Model is viewed as a standard model.

Exchange Traded Funds (ETFs), similar in many ways to mutual funds, are investment funds traded on stock exchanges. ETFs track the performance of commodities, bonds, and large indices such as the S&P 500 (SPX), NASDAQ (IXIC), Dow Jones (DJI), etc. Much like stocks, ETFs experience price changes throughout the trading day in which they are bought and sold. Fundamentally, the prices of assets traded remain close to, but not always equal, to its net asset value. Largely attractive due to lower costs, flexibility, minimal capital gains taxes, and leverage for market exposure, ETFs have become popular amongst investors. With a recent influx of ETF investments, the risks associated can have severe ramifications to the individual investor and financial markets. To mitigate these risks, ETFs can have options written against them as a hedging strategy for speculative investors.

This journal explained how to bridge the gap between strategic planning and finance theory. Myers wrote this journal to explain why finance analysis had only slight impact on strategic planning, even though strategic planning needs finance. Strategic and financial analysis are not reconciled. When low net present value (NPV) projects are nurtured "for strategic reasons," the strategic analysis overrides measures of financial value, and vice versa.

Among the most fundamental risks, associated with exchange-traded derivatives, is variable degree of risk. According to Ernst, Koziol, & Schweizer (2011), the transactions in