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Guidance Note on Accounting for Equity Index and Equity Stock Futures and Options

Guidance Note on Accounting for Equity Index and Equity Stock Futures and Options. Composed By: PRAKASH SOMANI. prakash somani. Derivatives. Types of derivatives instruments:- 1. Futures and forward contracts Equity index futures Equity stock futures 2. Options and Swaps contracts

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Guidance Note on Accounting for Equity Index and Equity Stock Futures and Options

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  1. Guidance Note on Accounting for Equity Index and Equity Stock Futures and Options Composed By: PRAKASHSOMANI prakash somani

  2. Derivatives Types of derivatives instruments:- 1. Futures and forward contracts • Equity index futures • Equity stock futures 2. Options and Swaps contracts • Equity stock options • Equity index options These are also called as “Equity Derivative Instrument” (EDI)

  3. Applicability Applicable to all contracts entered into for EDI irrespective of the motive

  4. Forward contracts • Agreement between two parties i.e. buyer and seller • At a future time • For an agreed price (Contract price) • Settled by actual delivery at maturity

  5. Futures contract • An agreement between two parties to buy and sell an asset • At a certain time in future • At an agreed price • No actual delivery • Both parties are under obligation • Premium is lower then in the options

  6. Options • Option is a contract which gives the buyer/holder the right, but not obligation, • to buy or sell a specified underlying asset • at a predetermined price • on or before the specified future date. • The person who gets such rights is called “option buyer/holder” • The person against whom the buyer can exercise his right is called” option seller/writer” • Unlike as buyer the option seller has no right to exercise the option but has an obligation to sell/buy the underlying asset as and when option buyer exercise his option. • Every option contract is for a specified period of time.

  7. Classification of options • American style options: the buyer can exercise his right at any time before the contract expires or on the expiry date • European style options: buyer can exercise his option only on expiry date

  8. Option premium In order to acquire the right of option the buyer pays to the seller a price paid for the right Premium is higher then in the futures.

  9. Types of options • Call option: buyer/holder gets the right to purchases the underlying asset on or before the expiry date • Put option: buyer/holder gets the right to sell the underlying asset • Long call/put: buying a option • Short call/put: selling a option

  10. summary

  11. Strike or Exercise price The price at which the buyer/ holder has the right to buy or sell and the seller/writer has right to sell or buy or, The price specified in the option contract at which the underlying asset may be purchased or sold by buyer/Holder.

  12. Option contract • At the money: current market value=strike price • In the money: call option: current market value>exercise price put option: current market value<exercise price • Out of money: call option: current market value<exercise price put option: current market value>exercise price

  13. Trading Area • There can be futures and options on commodities, currencies, securities, stock index, individual stock, etc. • Future and options are permitted in india in two equity indexes viz. BSE SENSEX and S&P CNX NIFTY(NSE)

  14. Equity Index Future It is a contract to buy / sell equity index at an agreed amount on a specified future date.

  15. Equity Stock Future It is a contract to buy / sell security at an agreed amount on a specified future date.

  16. Difference

  17. Equity Index Options Whereby a person gets the right to buy or sell An agreed number of units of equity index On a specified future date

  18. Equity Stock Options Whereby a person gets the right to buy or sell An agreed number of units of a security On or before a specified future date

  19. Difference between EIO & ESO

  20. Daily settlement price The closing price of the equity index/stock futures contract for the day.

  21. Contract month • In relation to futures contract: the month in which the contract is to be finally settled • In relation to options contracts: the month in which the expiry date falls.

  22. Thanks You

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