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EP 01: Basics of Futures and Options trading for Beginners with examples In Hindi by Convey - YouTube
Channel: Convey by FinnovationZ
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Hello! Today we are going to talk about
the basics of Futures and Options.
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This entire series will have 5-6 parts.
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Where we will explain Futures
and Options to you in detail.
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Futures and Options come under
types of Derivatives markets.
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Generally, there are four types of
Derivative markets;
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Forward, Futures, Options and, Swap.
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We will understand all
of them one by one.
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First, let us understand what
derivatives markets are.
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Petrol and Diesel are
made from Crude oil.
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Therefore, Petrol and Diesel
are derivatives of Crude oil.
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Similarly, curd is a derivative of
milk as it is, made out of milk.
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So anything which is derived from
something else becomes its derivative.
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Similarly, there are types of markets.
Cash Market and Derivative Market.
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So what is Cash Market? It is the
general market, where normally we
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Buy or sell shares is the Cash Market.
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Futures and Options generally come
under the Derivative Markets.
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In the Cash Market, any shares that you
buy or sell, are traded on a particular day.
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That means the shares are bought
or sold on that particular day.
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In Derivative Markets,
you deal in future dates.
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This means, selling or buying of
commodities on a future date.
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In Derivative Markets, you trade in
future dates and in Cash Markets,
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You trade in current dates,
That's the main difference.
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Another difference is that, in Cash Markets
you can buy and sell any amount of shares.
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For example, you can buy 1, 2, 5, or 10 shares,
you can buy and sell as many as you want.
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In Derivatives Market, there are 'Lots'.
Particular companies have particular Lots.
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You have to trade in Futures
and Options in these Lots.
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One more difference is that all companies in
the Cash market are not in Futures and Options,
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which means you can trade in any
company listed on the Stock Exchange.
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On the other hand, there are limited companies
where you can trade in Futures and Options.
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The third point is that the Derivatives market,
which is mainly Futures and Options,
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is used for Hedging, this means it
is used for reducing risks.
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We will talk about the application process
for this in detail in this series.
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When it comes to Stock Market, there are
three types of Derivatives Markets;
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Forward Market, Futures Market
and Options Market.
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Let's start with Forward Market. We will
understand it with a hypothetical example.
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Today's date is 3rd December and the
rate for gold is 50,000 for 10 grams.
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That means, today you can buy
Ten grams of gold in 50,000.
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But the problem is that you don't
have 50,000 right now.
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You will have the money in one month,
which is the 3rd of January.
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Now the problem is that you will
have 50,000 money in a month,
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And you think gold prices will go
up in a month to 50-53k.
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So, you go to a jeweller and tell him
that you want to buy 10 grams of gold,
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at today's price, which is 3rd
December, at the cost of 50,000.
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But you don't have any money right now,
you will get it in a month, on 3rd January.
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So can you give 10 grams of gold on
3rd January at the 3rd December price.
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To which the Jeweller says no but, he
knows someone in the market,
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Who can give you the gold
at 3rd december's price
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So you go to that Jeweller and tell him
that you will have the money in a month
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and that on 3rd January you want to buy
10 grams of gold at 3rd December's price.
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For this, the Jeweller says yes, he thinks
gold prices will go down in a month.
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It will come down to 47-48k.
So the Jeweller thinks that,
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If he sells gold after a month,
at today's price, he will make a profit.
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So from that point of view,
it is the right deal.
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So this way, you and
the Jeweller makes a deal.
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On 3rd January, whatever the price of gold may be,
the Jeweller will give you 10 grams of gold at 50k.
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So, on 3rd January you will give the Jeweller 50k
and, in return, he will give 10 grams of gold.
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This simple deal is at a future date,
which is the 3rd of January.
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You made the deal today but
its execution date is 3rd January.
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Now, 3rd January is here and gold
prices have gone up to 52,000.
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This means you were right. You thought
the prices will go up and they did.
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After this, you go to the Jeweller and give
him 50k for 10 grams of gold.
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But the Jeweller refuses. He says the prices
have gone up and, he can't sell it for less.
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You say to him that you had a deal
and he can't back out so easily.
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The Jeweller says you can do as
you like but, he will not sell it for 50k.
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52k is the current price and, he will
sell 10 grams only at that price.
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You get angry and leave.
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So in the first condition, the deal was in
your favour and, the Jeweller was at a loss.
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That is why the Jeweller refused and, you
could not profit as the deal wasn't complete.
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Let's take another condition. Assume that
on 3rd January Gold prices fall to 48k,
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You see that your deal is at 50k and,
on 3rd January the price is 48k.
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You realise you have a loss of 2000,
so you don't go to the Jeweller.
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The Jeweller waits for you so
that he can get his profit worth 2k.
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Because the gold price now is 48k and
the deal was for 50k for 10 gram Gold.
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So in this condition, the Jeweller was at
profit and, you were at a loss.
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Since you were at a loss
you didn't go to the Jeweller.
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You thought that if the current price is
48k then, why should you pay 50k.
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But this was your deal and, you didn't
go, so the deal was not complete.
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So the example we used was the
example of Forward Market.
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Where you and the Jeweller made a deal
on a future date without a middleman.
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So, if a party defaults, there is
nobody to take any action.
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Neither did you pay a deposit,
nor were there any middlemen.
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That is why in Forward Markets, there are
chances of the counterparty defaulting.
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This means they abandon
the contract and leave.
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Forward Markets have a lot of problems.
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The first one is to look for counterparties.
Like you had to look for a jeweller for this deal,
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who would deal with you on a future date,
finding counterparties for that is difficult,
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because you have to look for such
counterparties on your own.
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Another problem is that
the default risk is high.
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This means the counterparty, the party you
are dealing with, can leave the contract anytime.
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The third problem is that you can't
cancel the contract mid-way.
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You will have to complete it. If you
want to cancel the contract,
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You will have to convince the
counterparty to cancel the contract.
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So these are the three problems with Forward
Markets, that Future Markets have solved.
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In Forward Markets, people leave the
contract when it is not in their favour.
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But this is not possible in Future Market.
Neither party is allowed to leave the contract.
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Similarly, the job of looking for a counterparty
is done by Stock Exchange or Derivative Exchange.
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Because of which it is very easy to
find a counterparty in future markets.
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And the third problem with the Forward
Market of not being able to cancel the contract,
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is possible in the Futures market. Problems in
the future market are solved by Forward markets.
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In the second part, we will learn the difference
between Forward and Future Markets.
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And how the Future market has solved
all problems of the Forward market.
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So in the next lecture, we will talk about
Futures Markets. See you in the next part.
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Comment and tell us how you like the
first part of the Futures and Options series.
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Share this video with friends so they can
understand Futures and Options in detail.
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Thank You for watching today's
video, and for supporting us.
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