Equity Stock Markets: Concepts, Instruments, Risks and Derivatives
Prof. P C Narayan
Week 4
Equity Stock Markets: Concepts, Instruments, Risks andDerivatives
Week 04 – Summary
Derivatives in Equity Markets
A derivative instrument means a forward, a future, an option or a swap contract of
predetermined fixed duration link for the purpose of contract fulfilment to the value of
specified assets.
In the case of equity stock market that asset would be equity stocks
Derivative Instruments commonly found in Equity Stock Markets
1. Stock Futures
2. Index Futures
3. Equity Stock Options
Participants in Equity Stock Markets
Hedgers :Wish to hedge their risks i.e. to protect themselves against potential adverse
movement in stock prices
Speculators: Try to gain from the swings and volatilities in equity stock prices over time
Hedging using Stock Futures
Types of Risks
Systematic Risk
© All Rights Reserved. This document has been authored by Professor P C Narayan and is permitted for use only within the course "Equity
Stock Market: Concepts, Instruments, Risks and Derivatives" delivered in the online course format by IIM Bangalore. No part of this document,
including any logo, data, illustrations, pictures, scripts, may be reproduced, or stored in a retrieval system or transmitted in any form or by any
means – electronic, mechanical, photocopying, recording or otherwise – without the prior permission of the author.
, Equity Stock Markets: Concepts, Instruments, Risks and Derivatives
Prof. P C Narayan
Week 4
Systematic Risk impact the price of equity stocks of all firms that are listed in that market
to varying degree.
Contributors to systematic risk include macroeconomic factors pertaining to the country
where the equity stocks are traded like
Inflation
Interest rate
fiscal deficit
Political environment / stability
GDP growth, etc.
Unsystematic Risk (Idiyosyncratic Risk)
The unsystematic risk (idiyosyncratic risk) associated with every equity stock, driven by firm-
specific factors such as
Decline in revenues and/or profits of the firm
Increased competition
Product obsolescence
Higher financing costs
Management failures, etc.
Unsystematic risk can be minimized or diversified away by creating a portfolio of equity
stocks.
Hedging using futures
Equity Stock Futures and Index Futures are meant to minimize the probability of losses even
if it means reduction in potential profits for the investor.
© All Rights Reserved. This document has been authored by Professor P C Narayan and is permitted for use only within the course "Equity
Stock Market: Concepts, Instruments, Risks and Derivatives" delivered in the online course format by IIM Bangalore. No part of this document,
including any logo, data, illustrations, pictures, scripts, may be reproduced, or stored in a retrieval system or transmitted in any form or by any
means – electronic, mechanical, photocopying, recording or otherwise – without the prior permission of the author.
Prof. P C Narayan
Week 4
Equity Stock Markets: Concepts, Instruments, Risks andDerivatives
Week 04 – Summary
Derivatives in Equity Markets
A derivative instrument means a forward, a future, an option or a swap contract of
predetermined fixed duration link for the purpose of contract fulfilment to the value of
specified assets.
In the case of equity stock market that asset would be equity stocks
Derivative Instruments commonly found in Equity Stock Markets
1. Stock Futures
2. Index Futures
3. Equity Stock Options
Participants in Equity Stock Markets
Hedgers :Wish to hedge their risks i.e. to protect themselves against potential adverse
movement in stock prices
Speculators: Try to gain from the swings and volatilities in equity stock prices over time
Hedging using Stock Futures
Types of Risks
Systematic Risk
© All Rights Reserved. This document has been authored by Professor P C Narayan and is permitted for use only within the course "Equity
Stock Market: Concepts, Instruments, Risks and Derivatives" delivered in the online course format by IIM Bangalore. No part of this document,
including any logo, data, illustrations, pictures, scripts, may be reproduced, or stored in a retrieval system or transmitted in any form or by any
means – electronic, mechanical, photocopying, recording or otherwise – without the prior permission of the author.
, Equity Stock Markets: Concepts, Instruments, Risks and Derivatives
Prof. P C Narayan
Week 4
Systematic Risk impact the price of equity stocks of all firms that are listed in that market
to varying degree.
Contributors to systematic risk include macroeconomic factors pertaining to the country
where the equity stocks are traded like
Inflation
Interest rate
fiscal deficit
Political environment / stability
GDP growth, etc.
Unsystematic Risk (Idiyosyncratic Risk)
The unsystematic risk (idiyosyncratic risk) associated with every equity stock, driven by firm-
specific factors such as
Decline in revenues and/or profits of the firm
Increased competition
Product obsolescence
Higher financing costs
Management failures, etc.
Unsystematic risk can be minimized or diversified away by creating a portfolio of equity
stocks.
Hedging using futures
Equity Stock Futures and Index Futures are meant to minimize the probability of losses even
if it means reduction in potential profits for the investor.
© All Rights Reserved. This document has been authored by Professor P C Narayan and is permitted for use only within the course "Equity
Stock Market: Concepts, Instruments, Risks and Derivatives" delivered in the online course format by IIM Bangalore. No part of this document,
including any logo, data, illustrations, pictures, scripts, may be reproduced, or stored in a retrieval system or transmitted in any form or by any
means – electronic, mechanical, photocopying, recording or otherwise – without the prior permission of the author.
