2. Exchange Traded Derivatives – An Overview
2.1 Introduction
The Exchange Traded Derivatives (ETD) module of Oracle FLEXCUBE is
an automated and flexible back office system with the capability to process
exchange traded derivative instruments such as Options and Futures.
Using this module you can capture details of long and short deals
and liquidation type of deals entered at your front office, process them
and track life-cycle events of holdings in your own, or in your customer’s
portfolio.
This chapter contains the following sections:
2.2 Portfolios
This section contains the following topics:
2.2.1 Features of Portfolios
Listed below are the various features of portfolios in the ETD module
of Oracle FLEXCUBE.
2.2.2 Own Portfolio
- Opening long and short positions:
- You can book contingent entries for the Long and Short positions
opened during the day.
- You can define the premium exchange involved in Option Style Options,
and book the premium amount.
- You have the facility to define and book the brokerage amount and
charges involved in the deal.
- Closing long and short positions:
- You can reverse contingent entries for all contracts that have been
closed.
- You have the facility to calculate the closing gains and losses and
book appropriate entries for the same.
- Revaluation of Futures and Options
- As part of the End of Day activities you can perform realized revaluation
on futures and future style options based on the closing price of the
instrument and the series.
- For option style options you can perform a Memo or Notional revaluation
for the entire portfolio depending on the frequency that you choose to
maintain.
- Exercise of Options
- Facility to reverse the contingent entries for those contracts that
have been exercised.
- Facility to calculate the exercise gain based on the difference between
the price of the underlying asset and the Strike Price of the instrument
and book accounting entries for the same.
- Assignment of Options
- Facility to reverse the contingent entries for contracts that have
been exercised.
- Facility to calculate the assignment loss based on the difference
between the price of the underlying asset and the strike price of the
instrument and book entries for the same.
- Exchange of futures for physicals
- Facility to reverse the contingent entries while exchanging futures
for physicals.
- Facility to calculate the exchange loss or gain based on the difference
between the price of the underlying asset and the acquisition price and
book entries for the same.
- Expiry of Options
- On the expiry date, if the series is Out of the Money, the system
will process an automatic expiry for the series. Similarly if the series
is In the Money, an automatic exercise/assignment of options event will
be processed.
- The system also calculates the expiry loss or gain depending on whether
it is a long or short deal. The respective accounting entries are also
booked.
- Expiry of Futures
- In the case of futures, on the expiry date the system automatically
exchanges futures for physicals.
Note
While exercising and assigning options, or during
expiry of options and futures only the price differential (i.e., the
Exercise Gain or the Loss) will be processed by the ETD module.
For options the price differential is the difference between the spot
price of the underlying asset and the strike price of the instrument.
For futures the price differential is calculated as the difference between
the spot price of the underlying asset and the acquisition price of the
instrument.
2.2.3 Customer Portfolio
- Opening long and short positions:
- You can define the premium exchange involved in Option Style Options,
and book the premium amount.
- You have the facility to define and book the charges involved in
the deal.
- Closing long and short positions:
- You can calculate the closing gains and losses and book appropriate
entries for the same.
- Revaluation
- Based on the closing price of the instrument and the series you can
perform realized revaluation on futures and future style options on a
daily basis as part of the end of day activities.
- Exercise of Options
- You can book the premium for future style options.
- The difference between the Strike Price and the Underlying Asset
Price is calculated and the appropriate accounting entries are booked
for the same.
- Assignment of Options
- You can book the premium for future style options
- You can book the difference between the Price of the Underlying Asset
and the Strike Price of the instrument and pass entries for the same.
- Exchange of futures for physicals
- You can book the difference between the price of the underlying asset
and the acquisition price and book entries for the same.
- Expiry of Options
- As on the expiry date if the series is Out of the Money, the system
will process an automatic expiry for the series. Similarly if the series
is In the Money automatic exercise/assignment of options event will be
processed.
- Expiry of Futures
- In the case of futures with future style options the system automatically
books the deal premium amount.
2.2.4 Advices
For every deal that is entered in the system a deal confirmation advice
can be generated and sent to the portfolio customer.
2.3 Interaction with the Margin Maintenance Sub-System
The ETD module interacts with the Margin Maintenance sub-system for
the purpose of resolving money settlements arising due to the various
events processed in the ETD module. The margin maintenance module offers
you the flexibility of netting all settlements for a counterparty (Broker
or Portfolio Customer).
For additional information about the sub-system refer
to the Margin Maintenance user manual.
2.4 Illustration of the ETD Workflow
The data diagram given below adequately illustrates the work-flow
of the ETD module: