A key factor in the development of derivatives exchanges has been the rapid growth of IT (information technology) and telecommunications, observes Sunil K. Parameswaran in ‘Futures and Options: Concepts and applications’ (www.tatamcgrawhill.com). From streamlining back-end operations in the exchanges and brokerage houses to facilitating stock index arbitrage, computers have played a pivotal role in the growth of these markets, he adds.

“Today, prices and news from the leading exchanges in the world are flashed across the globe in a matter of seconds… Institutions and high net-worth investors have come to realise that while it is true that one should not put all his eggs in one basket, there is no reason why the basket should be domestic.”

Another factor that the author identifies is the gradual move by the major central banks to abandon their policies of keeping interest rates stable. “The focus shifted to adjustments in the levels of money supply, and interest rates became market determined. The resultant volatility in interest rates was addressed by the introduction of interest rate derivatives.”

The book is an ideal read for those who wish to learn the basics of the many financial products that populate the derivatives space. And to help comprehension, there are numerous examples.

Sample this illustration, about one ‘Shefali Talwar,’ who had a long position in 200 futures contracts as of yesterday. “Yesterday’s settlement price was Rs. 114. Each contract is for 50 units of the underlying asset. Today she went long in an additional 100 contracts at a trade price of Rs. 118. 125 contracts were subsequently offset at a price of Rs. 122.50. Today’s settlement price is Rs. 126.” Now, compute the profit/loss due to marking to market…

Recommended addition to the finance professionals’ shelf.

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