A Study on Hedging Tools to Minimize Risk and Maximize Returns

A STUDY ON HEDGING TOOLS TO MINIMIZE RISK AND MAXIMIZE RETURNS

ABSTRACT OF THE STUDY

A derivative is a financial instrument whose value depends on other, more basic, underlying variables. The variables underlying could be prices of traded securities and stock, prices of gold or copper, prices of oranges. Derivatives have become increasingly important in the field of finance. Options and futures are traded actively on many exchanges. Forward contracts, swaps and different types of options are regularly traded outside exchanges by financial institutions, banks and their corporate clients in what are termed as over-the-counter markets – in other words, there is no single market place or an organized exchange.

NEED FOR THE SYSTEM

Options

A options agreement is a contract in which the writer of the option grants the buyer of the option the right purchase from or sell to the writer a designated instrument for a specified price within a specified period of time. The writer grants this right to the buyer for a certain sum of money called the option premium. An option that grants the buyer the right to buy some instrument is called a call option. Options that grant the buyer the right to sell an instrument is called a put option. The price at which the buyer an exercise his option is called the exercise price, strike price or the striking price. Options are available on a large variety of underlying assets like common stock, currencies, debt instruments and commodities. Also traded are options on stock indices.

Options Terminology:

• Buyer of an option: The buyer of an option is the one who by paying the option premium buys the right but not the obligation to exercise his option on the seller/writer.

• Writer of an option: The writer of a call/put option is the one who receives the option premium and is thereby obliged to sell/buy the asset if the buyer exercises on him.

• Call option: A call option gives the holder the right but not the...