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Derivatives Market
Delta
The delta of stock option can be defined as the ratio of
change in the price of an option to the change in the
price of underlying asset. An increase in the value of
the underlying assets makes the premium on calls to
increase and premium on put to decrease. Delta of call
optio is always positive and vive-versa[
For example, with respect to call options, a delta of 0.7
means that for every $1 the underlying stock increases, the
call option will increase by $0.70.

Put option deltas, on the other hand, will be negative,
because as the underlying security increases, the value of
the option will decrease. So a put option with a delta of -0.7
will decrease by $0.70 for every $1 the underlying increases
in price.

As an in-the-money call option nears expiration, it will
approach a delta of 1.00, and as an in-the-money put option
nears expiration, it will approach a delta of -1.00.
Gamma
The gamma of an option tells you how much the delta
of an option would increase or decrease for a unit
change in the price of the underlying. Delta tells you
how much the premium would change; gamma
changes delta and tells you how much the next
premium change would be for a unit price change in
the price of the underlying.
THETA
Theta tells you how much value the option would lose
after one day, with all the other parameters remaining
the same.
Suppose the theta of TISCO 30-day call option with a
strike OF Rs 3900 is 4.5 when Tisco is quoting at Rs
3900,volatility is 50% and risk-free interest rate is 8%.
Other things will remain same the value of the option
is decrease by 4.5 after one day.
VEGA
VEGA indicates how much the option premium would
change for a unit change in volatility of the underlying.
Suppose the vega of an option is 0.6 and its premium is
Rs 15,when volatility of the underlying is 35% .As the
volatility increase to 36%,the premium of the option
would change upward to Rs15.6
Futures contracts have linear payoffs. In simple words, it
means that the losses as well as profits for the buyer and
the seller of a futures contract are unlimited. These linear
payoffs are fascinating as they can be combined with
options and the underlying to generate various complex
payoffs.
Payoff for buyer of futures: Long futures
The payoff for a person who buys a futures contract is
similar to the payoff for a person who holds an asset. He
has a potentially unlimited upside as well as a potentially
unlimited downside. Take the case of a speculator who buys
a two month
Nifty index futures contract when the Nifty stands at
2220.The underlying asset in this case is the Nifty
portfolio. When the index moves up, the long futures
position starts making profits, and when the index
moves down it starts making losses. Figure 4.1 shows
the payoff diagram for the buyer of afutures contract.

Payoff for a buyer of Nifty futures
The figure shows the profits/losses for a long futures
position. The investor bought futures when the index
was at 2220. If the index goes up, his futures position
starts making profit. If the index falls, his futures
position starts showing losses.
Payoff for seller of futures: Short futures
The payoff for a person who sells a futures contract is
similar to the payoff for a person who shorts an asset.
He has a potentially unlimited upside as well as a
potentially unlimited downside. Take the case of a
speculator who sells a two-month Nifty index futures
contract when the Nifty stands at 2220. The underlying
asset in this case is the Nifty portfolio. When the index
moves down, the short futures position starts making
profits, and when the index moves up, it starts
makinglosses. Figure 4.2 shows the payoff diagram for
the seller of a futures contract.
The figure shows the profits/losses for a short futures
position. The investor sold futures when the index was
at 2220. If the index goes down, his futures position
starts making profit. If the index rises, his futures
position starts showing losses.
BASIS
Basis = Spot price- future price
In the normal market spot price is less than future
price 9which includes cost of carry)and accordingly
the basis would be negative. A market in which the
basis is negative is know as Contago
When the future price is lower than spot price it is
referred as Backwardation and this may be happened
when the cost of carry is negative
Cost of carry model
Future Price =Spot rate + carry cost carry return
The spot price of XYZ Share on 31
st
March 2012 is Rs
220 per share and cost of financing is 15% p.a .what
should be the price of a future contract on this, for a
contract having strike date 3 months and Annual
dividend on stock is 25% payable before 31
st
March
2013.

On the expiration of contract if the spot rate is higher
than future rate than this provide arbitrage advantage.
Squaring up
An investor can square up his position at any time till
the expiry. The investor can first buy then sell stock
futures to square up or vice-versa