AND FUTIRE PROSPECTS OF DERIVATIVE MARKET IN INDIA"

Submitted to

Mr. H.K JHA

BLS Institute of Management

(Approved by AICTE Ministry of HRD Government of India)

Mohan Nagar, Ghaziabad (U.P.)

Submitted in Partial Fulfillment of the Requirement of the Post Graduate

Diploma in Management as Dissertation (PGDM 2008-10)

Submitted by:

Anuradha Gupta

PGDM 4th Semester (Finance & Marketing)

Roll No.-0125142128

2
 ACKNOWLEDGEMENT

I would like to thank my guide Mr. H.K Jha (for his kind guidance and
support through the project. He has always been there whenever I need
any expert advice and have been more than willing to go out of the way
to help.

I am grateful to the Library and Computer Center staff for all the help and
cooperation extended to us.

Finally, I would also like to take this opportunity to thank all my friends
who took out time to go through our documents and provide me positive
criticism. The project would not have been a value addition without the
help of the above stated people.

3
 EXECUTIVE SUMMARY

New ideas and innovations have always been the hallmark of progress
made by mankind. At every stage of development, there have been two
core factors that drive man to ideas and innovation. These are increasing
returns and reducing risk, in all facets of life.
The financial markets are no different. The endeavor has always been to
maximize returns and minimize risk. A lot of innovation goes into
developing financial products centered on these two factors. It has
spawned a whole new area called financial engineering.
Derivatives are among the forefront of the innovations in the financial
markets and aim to increase returns and reduce risk. They provide an
outlet for investors to protect themselves from the vagaries of the financial
markets. These instruments have been very popular with investors all over
the world.
In this report, first the overview of Derivative Market in India has been
given. Now, investors are more cautious before investing their money into
any derivative segment as they fear losses. I was given portfolio of various
clients of HSBC InvestDirect (India) Limited, which clearly depicted that
even till today there are only few investors who are willing to invest in
derivative market as it carries an element of risk and uncertainty with it.
Other than that the real servings come when one moves ahead. Apart from
secondary data analysis, I have done primary data analysis: i.e. Study of

4
investment pattern of general public among derivatives and the conclusion
says that most of the people are not willing to participate in the derivative
market because they consider it highly risky. Also during the survey,
findings showed that general public is optimistic that market condition
will improve soon and they also thought that this is the right time to invest
as prices are at all time lows.
The study has been done to know the different types of derivatives and
also to know the derivative market in India. This study also covers the
recent developments in the derivative market taking into account the
trading in past years.

TABLE OF CONTENTS

1. PROJECT
 INTRODUCTION
 STATE OF PROBLEM
 OBJECTIVE OF THE STUDY
 NEED
 SCOPE
 RESEARCH METHEDOLOGY
 LIMITATION OF STUDY
 HISTORY OF DERIVATIVES
 INDIANDERIVATIVE MARKET
 NEED FOR DERIVATIVE IN INDIA
 USES OF DERIVATIVE MARKET
 ECONOMIC FUNCTION OF DERIVATIVE MARKET
 MYTHS AND REALITIES OF DERIVATIVE MARKET
 MAJOR FACTORS RESPONSIBLE FOR THE GROWTH OF FINANCIAL
DERIVATIVES
 THE PARTICIPANTS IN A DERIVATIVES MARKET
 EQUITY DERIVATIVES EXCHANGES IN INDIA
 TYPES OF DERIVATIVES MARKET
 FORWARD AND SWAPS
 FUTURE AND OPTION

5
  BUSINESS GROWTH IN DERIVATIVES SEGMENT (NSE)
 QUESTIONNAIRE ANALYSIS
 LIMITATIONS OF SURVEY:
 FINDINGS FROM SURVEY
 FINDINGS
 AREAS OF CONCERN:-
 RECOMMENDATIONS & SUGGESTIONS
 CONCLUSION
3) REFRENCES
4) QUESTIONNAIRE

6
 INTRODUCTION

The emergence of the market for derivative products, most notably

forwards, futures and options, can be traced back to the willingness of
risk-averse economic agents to guard themselves against uncertainties
arising out of fluctuations in asset prices. By their very nature, the
financial markets are marked by a very high degree of volatility. Through
the use of derivative products, it is possible to partially or fully transfer
price risks by locking-in asset prices. As instruments of risk management,
these generally do not influence the fluctuations in the underlying asset
prices. However, by locking in asset prices, derivative products minimize
the impact of fluctuations in asset prices on the profitability and cash flow
situation of risk-averse investors.

A derivative is financial instrument whose value is ‘derived’ from another

7
underlying security or a basket of securities. Traders can assume highly
leveraged positions at low transaction costs using these extremely flexible
instruments.

Derivative products like index futures, stock futures, index options and
stock options have become important instruments of price discovery,
portfolio diversification and risk hedging in stock markets all over the
world in recent times.
With the introduction of all the above-mentioned derivative products in
the Indian markets a wider range of instruments are now available to
investors.

Introduction of derivative products, however, has not always been

perceived in a positive light all over the world. It is, in fact, perceived as a
market for speculators and concerns that it may have adverse impact on
the volatility of the spot market are neither new nor understudied. Recent
research, however, strengthens the
Argument that introduction of these products have not only deepened the
markets but have also been instrumental in reduction of volatility in the
spot markets.

The most desired instruments that allow market participants to manage

risk in the modern securities trading are known as DERIVATIVES. The
main logic behind the derivatives trading is that:-
• Derivatives reduce the risk by providing an additional channel to invest
with lower trading cost and
• It facilitates the investors to extend their settlement through the future
contracts.
• It provides extra liquidity in the stock market.
• They represent contracts whose payoff at expiration is determined by
the price of the underlying asset—a currency, an interest rate, a
commodity, or a stock.

STATEMENT OF PROBLEM:-

8
To know how the Derivative market has performed so far and recent
development and future prospect of derivative market in INDIA.

OBJECTIVES OF THE STUDY

Primary Objective:

 To analyse the performance of Derivatives Trading since 2000 with

special reference to Futures & Options.
 To analyze investors perception towards investment in derivative
market.

Secondary Objectives:

 To understand the concept of the Derivatives and Derivative

Trading.
 To know different types of Financial Derivatives
 To know the role of derivatives trading in India.

NEED OF THE STUDY

The study has been done to know the different types of derivatives and
also to know the derivative market in India. This study also covers the
recent developments in the derivative market taking into account the
trading in past years.
Through this study I came to know the trading done in derivatives and
their use in the stock markets.

SCOPE OF THE PROJECT

The project covers the derivatives market and its instruments. For better
understanding various strategies with different situations and actions have
been given. It includes the data collected in the recent years and also the
market in the derivatives in the recent years. This study extends to the
trading of derivatives done in the National Stock Markets. Along with that
9
it also tells us about the perception of a general investor towards the
investment in derivative market.

RESARCH METHODOLOGY

A) RESEARCH DESIGN:-

 DESCRIPTIVE RESEARCH

The research is primarily descriptive in nature. The sources of information

are both primary and secondary.

Method of data collection:-

Primary sources:-

 Questionnaire Analysis

Secondary sources:-

It is the data which has already been collected by some one or an

organization for some other purpose or research study .The data for study
has been collected from various sources:

 Books
 Journals
 Magazines
 Internet sources

The objective of the exploratory research is to gain insights and ideas. The
Objective of the descriptive research study is typically concerned with
determining the frequency with which something occurs. A well
structured questionnaire was prepared for the primary research.

10
SAMPLING METHODOLOGY

 Sampling Technique:

Judgment sampling.

 Sampling Unit:

The respondents who were asked to fill out the questionnaire were from
Ghaziabad, are the sampling units. These respondents comprise of the
persons dealing in stock trading. The people have been interviewed in the
open market, in front of the companies, telephonic interviews and through
other sources also.

 Sample Size:

The sample size was restricted to only 120 respondents.

 Sampling Area:

The area of the research was Ghaziabad only.

TIME: 2 months

STATISTICAL TOOLS USED:

Simple tools like bar graphs, tabulation, pie-charts have been used.

LIMITAITONS OF STUDY

• LIMITED TIME: The time available to conduct the study was

only 2 months. It being a wide topic had a limited time.
11
 • LIMITED RESOURCES: Limited resources are available to
collect the information about the commodity trading
• VOLATALITY: Share market is so much volatile and it is difficult
to forecast any thing about it whether you trade through online or
offline
• ASPECTS COVERAGE: Some of the aspects may not be covered
in my study.

HISTORY OF DERIVATIVES:

 Derivatives trading began in 1865 when the Chicago Board of

Trade (CBOT) listed the first "exchange traded" derivatives contract
in the USA. These contracts were called "futures contracts".

 In 1919, the Chicago Butter and Egg Board, a spin-off of CBOT,

was reorganized to allow futures trading. Its name was changed to
Chicago Mercantile Exchange (CME).

 The first stock index futures contract was traded at Kansas City
Board of Trade. Currently the most popular stock index futures
contract in the world is based on the Standard & Poor's 500 Index
traded on the CME.

 In April 1973, the Chicago Board of Options Exchange was set up

specifically for the purpose of trading in options.

 The market for options developed so rapidly that by early 80s the
number of shares underlying the option contract sold each day
exceeded the daily volume of shares traded on the New York Stock
Exchange. And there has been no looking back ever since.

12
INDIAN DERIVATIVES MARKET

Starting from a controlled economy, India has moved towards a world

where prices fluctuate every day. The introduction of risk management
instruments in India gained momentum in the last few years due to
liberalization process and Reserve Bank of India’s (RBI) efforts in
creating currency forward market. Derivatives are an integral part of
liberalization process to manage risk. NSE gauging the market
requirements initiated the process of setting up derivative markets in India.
In July 1999, derivatives trading commenced in India.

Table 3.1 Chronology of instruments

1991 Liberalization process initiated

14 December 1995 NSE asked SEBI for permission to trade index futures.

18 November 1996 SEBI setup L.C.Gupta Committee to draft a policy framework

for index futures.
11 May 1998 L.C.Gupta Committee submitted report.

13
7 July 1999 RBI gave permission for OTC forward rate agreements
(FRAs) and interest rate swaps.
24 May 2000 SIMEX chose Nifty for trading futures and options on an
Indian index.
25 May 2000 SEBI gave permission to NSE and BSE to do index futures
trading.
9 June 2000 Trading of BSE Sensex futures commenced at BSE.
12 June 2000 Trading of Nifty futures commenced at NSE.
25 September 2000 Nifty futures trading commenced at SGX.

2 June 2001 Individual Stock Options & Derivatives

NEED FOR DERIVATIVES IN INDIA TODAY

In less than three decades of their coming into vogue, derivatives markets
have become the most important markets in the world. Today, derivatives
have become part and parcel of the day-to-day life for ordinary people in
major part of the world.
Until the advent of NSE, the Indian capital market had no access to the
latest trading methods and was using traditional out-dated methods of
trading. There was a huge gap between the investors’ aspirations of the
markets and the available means of trading. The opening of Indian
economy has precipitated the process of integration of India’s financial
markets with the international financial markets. Introduction of risk
management instruments in India has gained momentum in last few years
thanks to Reserve Bank of India’s efforts in allowing forward contracts,
cross currency options etc. which have developed into a very large market.

THE USES OF DERIVATIVE MARKETS

14
  Derivatives markets serve to shift risk.

 Hedgers use derivatives to reduce risk exposure. For instance, a

refiner can lock in costs and revenues (i.e., lock in its margin) by
buying crude oil futures and selling oil and gasoline futures.

 Speculators use derivatives to increase risk exposure in the

anticipation of making a profit.

 Thus, derivatives markets facilitate the shifting of risk from those

who bear it at a high cost (the risk averse) to those who bear it at a
low cost (the risk tolerant).

 Speculators perform a valuable service by absorbing risk from

hedgers. In return, they receive a reward—a risk premium. The risk
premium is the expected profit on a derivatives transaction.
Speculators may win or lose in any given trade, but on average
speculators expect to profit.

 The risk premium is also the cost of hedging.

DATE OF INTRODUCTION OF DERIVATIVES

PRODUCTS

15
ECONOMIC FUNCTION OF THE DERIVATIVE
MARKET

In spite of the fear and criticism with which the derivative markets are
commonly looked at, these markets perform a number of economic
DERIVATIVE DATE OF INTRO. UNDERLYING
PRODUCTS IND.
INDEX FUTURES JUNE 2000 SENSEX, S& P
NIFTY
STOCK FUTURES DEC. 2001 SENSEX, S& P
NIFTY
INDEX OPTIONS JUNE 2001 SENSEX, S& P
NIFTY
functions.

1) Prices in an organized derivatives market reflect the perception of

market participants about the future and lead the prices of underlying to
the perceived future level. The prices of derivatives converge with the
prices of the underlying at the expiration of the derivative contract. Thus
derivatives help in discovery of future as well as current prices.

2) The derivatives market helps to transfer risks from those who have
them but may not like them to those who have an appetite for them.

3) Speculative trades shift to a more controlled environment of derivatives

market. In the absence of an organized derivatives market, speculators
trade in the underlying cash markets. Margining, monitoring and
surveillance of the activities of various participants become extremely
difficult in these kinds of mixed markets.

4) The flows from derivatives trading are that it acts as a catalyst for new
entrepreneurial activity. The derivatives have a history of attracting many
bright, creative, well-educated people with an entrepreneurial attitude.
They often energize others to create new businesses, new products and
16
new employment opportunities, the benefit of which are immense.
In a nut shell, derivatives markets help increase savings and investment in
the long run. Transfer of risk enables market participants to expand their
volume of activity.

MYTHS AND REALITIES ABOUT DERIVATIVES

In less than three decades of their coming into vogue, derivatives markets
have become the most important markets in the world.
Today, derivatives have become part and parcel of the day-to-day life for
ordinary people in major parts of the world. While this is true for many
countries, there are still apprehensions about the introduction of
derivatives. There are many myths about derivatives but the realities that
are different especially for Exchange traded derivatives, which are well
regulated with all the safety mechanisms in place.

What are these myths behind derivatives?

 Derivatives increase speculation and do not serve any economic

purpose.
 Indian Market is not ready for derivative trading.
 Disasters prove that derivatives are very risky and highly
leveraged instruments.
 Derivatives are complex and exotic instruments that Indian
investors will find difficulty in understanding.
 Is the existing capital market safer than Derivatives?

MAJOR FACTORS RESPONSIBLE FOR THE GROWTH

OF FINANCIAL DERIVATIVES

 Integration of international markets with national financial markets

 Increased volatility in asset prices in financial markets

17
 Development of more sophisticated risk management tools, providing
economic agents a wider choice of risk management strategies
 Improvement in technology and communication facilities and sharp
decline in costs
 Innovations in the derivatives markets have led to the diversification of
risk over a large number of financial assets, leading to higher returns
 The modernization of commercial and investment banking
 Sectors of underdeveloped economies, such as commercial banking,
which had been closed to foreigners, have been opened to foreign
private sector investment
 Restructuring of the corporate sector
 The privatization of state-owned enterprises

THE PARTICIPANTS IN A DERIVATIVES MARKET

• HEDGERS use futures or options markets to reduce or eliminate the risk

associated with price of an asset.

• SPECULATORS use futures and options contracts to get extra leverage

in betting on future movements in the price of an asset. They can increase
both the potential gains and potential losses by usage of derivatives in a
speculative venture.

• ARBITRAGEOURS are in business to take advantage of a discrepancy

between prices in two different markets. If, for example, they see the
futures price of an asset getting out of line with the cash price, they will
take offsetting positions in the two markets to lock in a profit.

18
cifications BSE- 30 Sensex Futures
e- Rs. 50 times the Index
last Thursday of the month
basis - cash settled
le - 3 months

cifications S&P CNX Nifty Futures

e- Rs. 200 times the Index
last Thursday of the month
basis - cash settled
le - 3 months
EQUITY DERIVATIVES EXCHANGES IN
INDIA

In the equity markets both the National Stock Exchange of India Ltd.
(NSE) and The Stock Exchange, Mumbai (BSE) has applied to SEBI for
setting up their derivatives segments.The exchanges started trading in
Stock Index futures by mid-May 2000.

BSE's and NSE’s plans

Both the exchanges have set-up an in-house segment instead of setting up

a separate exchange for derivatives.
BSE’s Derivatives Segment starts with Sensex futures as its first product.
NSE’s Futures & Options Segment was launched with Nifty futures as the
first product.

19
 Types of Derivatives Market

TYPES OF DERIVATIVES MARKET

EXCHANGE TRADED DERIVATIVES OVER THE COUNTER

DERIVATIVES

NATIONAL STOCK BOMBAY STOCK NATIONAL

COMMODITY &
EXCHANGE EXCHANGE DERIVATIVE
EXCHANGE

20
 INDEX FUTURE INDEX OPTION STOCK OPTION STOCK
FUTURE

TYPES OF DERIVATIVES

21
 FORWARD AND SWAPS

(A) FORWARD CONTRACTS

A forward contract is an agreement to buy or sell an asset on a

specified date for a specified price. One of the parties to the contract
assumes a long position and agrees to buy the underlying asset on a
certain specified future date for a certain specified price. The other
party assumes a short position and agrees to sell the asset on the
same date for the same price. Other contract details like delivery
date, price and quantity are negotiated bilaterally by the parties to the
contract. The forward contracts are n o r m a l l y traded outside the
exchanges.

The salient features of forward contracts are:

 They are bilateral contracts and hence exposed to counter-party risk.

 Each contract is custom designed, and hence is unique in terms
of contract size, expiration date and the asset type and quality.
 The contract price is generally not available in public domain.
 On the expiration date, the contract has to be settled by delivery of
the asset.
 If the party wishes to reverse the contract, it has to compulsorily go
to the same counter-party, which often results in high prices
being charged.

However forward contracts in certain markets have become very

22
standardized, as in the case of foreign exchange, thereby
reducing transaction costs and increasing transactions volume. This
process of standardization reaches its limit in the organized futures
market. Forward contracts are often confused with futures contracts.
The confusion is primarily because both serve essentially the same
economic functions of allocating risk in the presence of future price
uncertainty. However futures are a significant improvement over the
forward contracts as they eliminate counterparty risk and offer
more liquidity.

(B) SWAPS

Swaps are transactions which obligates the two parties to the contract to
exchange a series of cash flows at specified intervals known as payment or
settlement dates. They can be regarded as portfolios of forward's contracts.
A contract whereby two parties agree to exchange (swap) payments, based
on some notional principle amount is called as a ‘SWAP’. In case of
swap, only the payment flows are exchanged and not the principle amount.
The two commonly used swaps are:

(a) INTEREST RATE SWAPS:

Interest rate swaps is an arrangement by which one party agrees to
exchange his series of fixed rate interest payments to a party in exchange
for his variable rate interest payments. The fixed rate payer takes a short
position in the forward contract whereas the floating rate payer takes a
long position in the forward contract.

(b) CURRENCY SWAPS:

Currency swaps is an arrangement in which both the principle amount and
the interest on loan in one currency are swapped for the principle and the
interest payments on loan in another currency. The parties to the swap
contract of currency generally hail from two different countries. This
arrangement allows the counter parties to borrow easily and cheaply in
their home currencies. Under a currency swap, cash flows to be exchanged
are determined at the spot rate at a time when swap is done. Such cash
23
flows are supposed to remain unaffected by subsequent changes in the
exchange rates.

(c)FINANCIAL SWAP:
Financial swaps constitute a funding technique which permit a borrower to
access one market and then exchange the liability for another type of
liability. It also allows the investors to exchange one type of asset for
another type of asset with a preferred income stream.

FUTURE AND OPTION

(C)FUTURE CONTRACT

In finance, a futures contract is a standardized contract, traded on a futures

exchange, to buy or sell a certain underlying instrument at a certain date in
the future, at a pre-set price. The future date is called the delivery date or
final settlement date. The pre-set price is called the futures price. The price
of the underlying asset on the delivery date is called the settlement price.
The settlement price, normally, converges towards the futures price on the
delivery date.
A futures contract gives the holder the right and the obligation to buy or
sell, which differs from an options contract, which gives the buyer the
right, but not the obligation, and the option writer (seller) the obligation,
but not the right. To exit the commitment, the holder of a futures position
has to sell his long position or buy back his short position, effectively
closing out the futures position and its contract obligations. Futures
contracts are exchange traded derivatives. The exchange acts as
counterparty on all contracts, sets margin requirements, etc.

BASIC FEATURES OF FUTURE CONTRACT

1. Lot size:- lot size means that we cannot buy single share as in equity
market we can only buy bundle of shares of a particular script ,like, if we
want to purchase future of reliance than lot size is 150 share therefore you

24
have to purchase whole lot. For example: - in NIFTY lot size is 50 shares,
MINI NIFTY (it is for retail sector) lot size is 20 shares.

2. Margin: when anyone executes a future trade, then initial

margin has to be paid, which may be 10% of the value of the
contract-it is fixed by the exchange. The margin consists of cash
or cash equivalents, is to ensure that the traders will honour the
obligation arising out of future contract. The margin has to be
posted by the future both the parties to the future contract as both
are exposed to losses.

• Initial margin:
Initial margin is paid by both buyer and seller. It represents the loss on that
contract, as determined by historical price changes, which is not likely to
be exceeded on a usual day's trading. It may be 5% or 10% of total
contract price for NIFTY and in STOCKS it varies between 20%-60%-
110%.

• Mark to market Margin: while the forward contract are settled

on the maturity date, futures contracts are ‘marked to market’ on
periodical basis. This means profit/loss on futures is settled on
periodical basis. for example: suppose on Monday investor take a
long position in a future contract that mature on Friday afternoon,
but is marked to market on daily basis. The agreed upon price say
Rs. 10. At the close of trading day on Monday, future price rises to
Rs, 105.now, the marking to market feature means three things
would occur that is:-
1) Investor will receive a cash profit of Rs 5.
2) The existing future contract of Rs. 100 will be cancelled.
3) Investor will receive a new futures contract at Rs 105.

3. Settlement
Settlement is the act of consummating the contract, and can be done in one
of two ways, as specified per type of futures contract:

25
 • Physical delivery - the amount specified of the underlying asset
of the contract is delivered by the seller of the contract to the
exchange, and by the exchange to the buyers of the contract. In
practice, it occurs only on a minority of contracts. Most are
cancelled out by purchasing a covering position - that is, buying a
contract to cancel out an earlier sale (covering a short), or selling a
contract to liquidate an earlier purchase (covering a long).

• Cash settlement - a cash payment is made based on the

underlying reference rate, such as a short term interest rate index
such as Euribor, or the closing value of a stock market index. A
futures contract might also opt to settle against an index based on
trade in a related spot market.

4. Expiry
Expiry is the time when the final prices of the future are determined. For
many equity index and interest rate futures contracts, this happens on the
Last Thursday of certain trading month. On this day the t+2 futures
contract becomes the t forward contract.

TYPES OF PRODUCTS

INDEX FUTURES:-

A futures contract is a standardized contract to buy or sell a specific

security at a future date at an agreed price. An index future is, as the name
suggests, a future on the index i.e. the underlying is the index itself. There
is no underlying security or a stock, which is to be delivered to fulfill the
obligations as index futures are cash settled. As other derivatives, the
contract derives its value from the underlying index. The underlying
indices in this case will be the various eligible indices and as permitted by
the Regulator from time to time.

INDEX OPTIONS:-
26
Options contract give its holder the right, but not the obligation, to buy or
sell something on or before a specified date at a stated price. Generally
index options are European Style. European Style options are those option
contracts that can be exercised only on the expiration date. The underlying
indices for index options are the various eligible indices and as permitted
by the Regulator from time to time.

STOCK FUTURES:-

A stock futures contract is a standardized contract to buy or sell a specific

stock at a future date at an agreed price. A stock future is, as the name
suggests, a future on a stock i.e. the underlying is a stock. The contract
derives its value from the underlying stock. Single stock futures are cash
settled.

STOCK OPTIONS:-

Options on Individual Stocks are options contracts where the underlying

are individual stocks. Based on eligibility criteria and subject to the
approval from the regulator, stocks are selected on which options are
introduced. These contracts are cash settled and are American style.
American Style options are those option contracts that can be exercised on
or before the expiration date

DISTINCTION BETWEEN FUTURES AND FORWARDS

CONTRACTS

FEATURE FORWARD FUTURE CONTRACT

CONTRACT

27
Operational Traded directly Traded on the exchanges.
Mechanism between two parties
(not traded on the
exchanges).
Contract Differ from trade to Contracts are standardized
Specifications trade. contracts.

Counter-party Exists. Exists. However, assumed by the

risk clearing corp., which becomes the
counter party to all the trades or
unconditionally guarantees their
settlement.

Liquidation Low, as contracts are High, as contracts are standardized

Profile tailor made contracts exchange traded contracts.
catering to the needs
of the needs of the
parties.
Price Not efficient, as Efficient, as markets are
discovery markets are scattered. centralized and all buyers and
sellers come to a common
platform to discover the price.

Examples Currency market in Commodities, futures, Index

India. Futures and Individual stock
Futures in India.

(D) OPTIONS

A derivative transaction that gives the option holder the right but not the
28
obligation to buy or sell the underlying asset at a price, called the strike
price, during a period or on a specific date in exchange for payment of a
premium is known as ‘option’. Underlying asset refers to any asset that is
traded. The price at which the underlying is traded is called the ‘strike
price’.

FEATURES OF OPTIONS:-

1) LOT SIZE
2) MARGIN SAME AS FUTURE
3) EXPIRY
4) TYPE:-There are two types of options i.e., CALL OPTION AND
PUT OPTION.

a) CALL OPTION:

A contract that gives its owner the right but not the obligation to buy an
underlying asset-stock or any financial asset, at a specified price on or
before a specified date is known as a ‘Call option’. The owner makes a
profit provided he sells at a higher current price and buys at a lower future
price.

b) PUT OPTION:

A contract that gives its owner the right but not the obligation to sell an
underlying asset-stock or any financial asset, at a specified price on or
before a specified date is known as a ‘Put option’. The owner makes a
profit provided he buys at a lower current price and sells at a higher future
price. Hence, no option will be exercised if the future price does not
increase.

29
BUSINESS GROWTH IN DERIVATIVES SEGMENT
(NSE)
A) INDEX FUTURES- CONTRACTS

Year Number of contracts

2000-01 90580
2001-02 1025588
2002-03 2126763
2003-04 17191668
2004-05 21635449
2005-06 58537886
2006-07 81487424
2007-08 156598579
2008-09 210428103
2009-10 35279898
GRAPHICAL REPRESENTATION OF NUMBER OF
CONTRACTS PER YEAR:-

30
 Number of contracts

250000000

200000000

150000000

100000000

50000000

0
01 02 03 04 05 06 07 08 09 10
00- 01- 02- 03- 04- 05- 06- 07- 08- 09-
20 20 20 20 20 20 20 20 20 20

INTERPRETATION: FROM THE DATA AND THE BAR DIAGRAM ABOVE,

THERE IS HIGH BUSINESS GROWTH IN THE DERIVATIVE SEGMENT IN
INDIA. IN THE YEAR 2000-01, THE NUMBER OF CONTRACTS IN INDEX
FUTURE WERE 90580 WHERE AS A SIGNIFICANT INCREASE OF
210428103 IS OBSERVED IN THE YEAR 2008-09.

TURNOVER
NUMBER OF TURNOVERS OF STOCK FUTURES
Year Turnover (Rs. Cr.)

2000-01 2365
2001-02 21483
2002-03 43952
2003-04 554446
2004-05 772147
2005-06 1513755
2006-07 2539574
2007-08 3820667.27
2008-09 3570111.40
2009-10 619179.23

31
GRAPHICAL REPRESENTATION OF TURNOVER (RS. IN
CRORES)

Turnover (Rs. Cr.)

4000000
3500000
3000000
2500000
2000000
1500000
1000000
500000
0
01 02 03 04 05 06 07 08 09 10
00- 01- 02- 03- 04- 05- 06- 07- 08- 09-
20 20 20 20 20 20 20 20 20 20

INTERPRETATION:

FROM THE DATA AND ABOVE BAR CHART, THERE IS HIGH TURN
OVER IN THE DERIVATIVE SEGMENT IN INDIA. IN THE YEAR 2001-02
THE TURNOVER OF INDEX FUTURE WAS 21483 WHERE AS A HUGE
INCREASE OF 3570111.40 IN THE YEAR 2008-09 ARE OBSERVED.

B) STOCK FUTURES:-

CONTRACTS
Year No. of contracts
2000-01 -
2001-02 1957856
2002-03 10676843
2003-04 32368842
2004-05 47043066
2005-06 80905493

32
 2006-07 104955401
2007-08 203587952
2008-09 221577980
2009-10 19386820
GRAPHICAL REPRESENTATION NUMBER OF CONTRACTS
PER YEAR IN STOCK FUTURE
No. of contracts -

250000000

200000000

150000000

100000000

50000000

0
2 3 4 5 6 7 8 9 0
-0 -0 -0 -0 -0 -0 -0 -0 -1
01 02 03 04 05 06 07 08 09
20 20 20 20 20 20 20 20 20

INTERPRETATION:
FROM THE DATA AND BAR DIAGRAM ABOVE THERE WERE NO STOCK
FUTURES AVAILABLE BUT IN THE YEAR 2001-02, IT PREDOMINANTLY
INCREASED TO 1957856. THEN THERE WAS A HUGE INCREASE OF 20,
35, AND 87,952 IN THE YEAR 2007-08 AND THEREAFTER THERE WAS A
STEADY RISE TO 221577980 IN THE YEAR 2008-09.

TURNOVER
NUMBER OF OF TURNOVERS IN STOCK FUTURES

Year Turnover(Rs. Crores)

2000-01 -
2001-02 51515
2002-03 286533

33
 2003-04 1305939
2004-05 1484056
2005-06 2791697
2006-07 3830967
2007-08 7548563.23
2008-09 3479642.12
2009-10 804537.87
GRAPHICAL REPRESENTATION OF TURNOVER IN RS.
CRORES

Turnover(Rs. Crores) -

8000000
7000000
6000000
5000000
4000000
3000000
2000000
1000000
0
02 03 04 05 06 07 08 09 10
01- 02- 03- 04- 05- 06- 07- 08- 09-
20 20 20 20 20 20 20 20 20

INTERPRETATION:
FROM THE DATA AND BAR CHART ABOVE, THERE WERE NO STOCK
FUTURES AVAILABLE IN THE YEAR 2000-01. THERE WAS A STEADY
INCREASE OF STOCK FUTURE 51515 IN THE YEAR 2001-02. BUT IN THE
YEAR THERE WAS A HUGE INCREASE OF 7548563.23 IN THE YEAR 2007-
08 WITH A CONSIDERABLE DECLINE OF 3479642.12 IN THE YEAR 2008-
09.

C) INDEX OPTIONS-
CONTRACTS
Year No. of contracts

34
 2000-01 -
2001-02 175900
2002-03 442241
2003-04 1732414
2004-05 3293558
2005-06 12935116
2006-07 25157438
2007-08 55366038
2008-09 212088444
2009-10 48377511
GRAPHICAL REPRESENTATION OF NUMBER OF
CONTRACTS PER CONTRACTS
No. of contracts -

250000000

200000000

150000000

100000000

50000000

0
02 03 04 05 06 07 08 09 10
01- 02- 03- 04- 05- 06- 07- 08- 09-
20 20 20 20 20 20 20 20 20

INTERPRETATION:
FROM THE DATA AND BAR CHART ABOVE, THE NO OF CONTRACTS
OF INDEX OPTION WAS NIL IN THE YEAR 2000-2001. BUT THERE WAS A
PREDOMINANT INCREASE OF 1, 75,900 IN THE YEAR 2001-2002. IN THE
YEAR 2008-2009 THERE WAS A HUGE INCREASE IN THE INDEX OPTION
CONTRACTS TO 212088444 IN THE YEAR 2008-2009.

35
 TURNOVER

INDEX OPTION TURNOVER PER YEAR IN RS. CRORES

Year Turnover (Rs. Crores)
2000-01 -
2001-02 3765
2002-03 9246
2003-04 52816
2004-05 121943
2005-06 338469
2006-07 791906
2007-08 1362110.88
2008-09 3731501.84
2009-10 884302.84

GRAPHICAL REPRESENTATION OF TURNOVER PER YEAR

(RS. IN CRORE)

36
 Turnover (Rs. Crores) -

4000000
3500000
3000000
2500000
2000000
1500000
1000000
500000
0
02 03 04 05 06 07 08 09 10
01- 02- 03- 04- 05- 06- 07- 08- 09-
20 20 20 20 20 20 20 20 20

INTERPRETATION:
FROM THE DATA AND BAR CHART ABOVE, THERE WAS NO
TURNOVER IN THE YEAR 2000-2001 FOR INDEX OPTION. IT SLOWLY
STARTED INCREASING IN THE YEAR 2000-2001 TO 3765. BUT IN THE
YEAR 2007-2008 THERE WAS A HUGE INCREASE OF 1362110.088 AND
CONSISTENT INCREASE TO 3731501.84 OBSERVED IN 2008-2009.

D) STOCK OPTIONS-
CONTRACTS
Year Number of contracts
2000-01 -
2001-02 1037529
2002-03 3523062
2003-04 5583071
2004-05 5045112
2005-06 5240776
2006-07 5283310
2007-08 9460631
2008-09 13295970
2009-10 1451603
GRAPHICAL REPRESENTATION OFNUMBER OF CONTRACTS
37
TRADED PER YEAR IN STOCK OPTION
Number of contracts -

14000000
12000000
10000000
8000000
6000000
4000000
2000000
0
2 3 4 5 6 7 8 9 0
1-0 2-0 3-0 4-0 5-0 6-0 7-0 8-0 9-1
0 0 0 0 0 0 0 0 0
20 20 20 20 20 20 20 20 20

INTERPRETATION:

FROM THE DATA AND BAR CHART ABOVE THE NO OF CONTRACTS OF

STOCK OPTION IN THE YEAR 2000-2001 WAS NIL. BUT THERE WAS A
HUGE INCREASE OF 1037529 OBSERVED IN THE YEAR 2001-2002. IT WAS
13295970 WHICH WAS THE HIGHEST IN THE YEAR 2008-2009 AND
STANDS AT 1451603 IN THE FIRST QUARTER OF THE YEAR 2009-10.

TURNOVER

STOCK OPTION TURNOVER (RS. IN CRORE)

Year Notional turnover (Rs. crores)

2000-01 -
2001-02 25163
2002-03 100131
2003-04 217207
2004-05 168836
2005-06 180253
2006-07 193795
2007-08 359136.55
38
 2008-09 229226.81
2009-10 62594.96
GRAPHICAL REPRESENTATION OF TURNOVER IN RS.
CRORES PER YEAR
Notional turnover (Rs. crores) -

400000
350000
300000
250000
200000
150000
100000
50000
0
02 03 04 05 06 07 08 09 10
01- 02- 03- 04- 05- 06- 07- 08- 09-
20 20 20 20 20 20 20 20 20

INTERPRETATION:

FROM THE CHART AND THE BAR DIAGRAM ABOVE THE STOCK
OPTION TURNOVER IN THE YEAR 2000-2001 WAS NIL. THERE WAS A
SLOW INCREASE OF 25163 IN THE YEAR 2001-2002. BUT A
PHENOMENAL INCREASE OF 359136.55 IN THE YEAR 2007-2008, AND A
DECLINE OF 62594.96 IN THE YEAR 2009-2010.

OVERALL TRADING

Year No. of contracts Turnover (Rs. cr.)

2000-01 90580 2365
2001-02 4196873 101926
2002-03 16768909 439862
39
 2003-04 56886776 2130610
2004-05 77017185 2546982
2005-06 157619271 4824174
2006-07 216883573 7356242
2007-08 425013200 13090477.75
2008-09 657390497 11010482.20
2009-10 104495832 2370614.86

INTERPRETATION:
ACCORDING TO THE ABOVE DATA, WE CAN SEE THA FROM 200-01 TO
TILL 2008-09THERE IS A TREMENDOUS GROWTH IN OVERALL
TRADING IN DERIVATIVE MARKET .BUT DUE CRASH IN THE STOCK
MARKET LAST YEAR NUMBER OF CONTRACT AND TURNOVER
REDUCED TO A GREAT EXTENT.

OVERALL TRADE DESCRIPTION UNDER NSE

Interest
Index Stock Index Stock
Rate
Total
Futures Futures Options Options
Futures
Ye N Turn No. Turno No. Noti No. Noti No. T No. Tur
40
 ur
o. no
onal onal
of ve nov
over ver Turn Turn of r er
ar co (Rs. of (Rs. of over of over con of
ntr contr cr.) contr (Rs. contr (Rs. (R contra (Rs
cr.) trac s. .
act acts acts cr.) acts cr.) cts cr.)
ts cr
s
.)
20
237
00 905 1451 6259 0. 10449 061
2365 - - - 0
- 80 603 4.96 00 5832 4.8
01 6
20
102 2292 110
01 2148 1957 1759 1329 0. 65739 104
558 51515 3765 26.8 0
- 3 856 00 5970 00 0497 82.
8 1
02 20
20
212 3591 130
02 4395 1067 28653 4422 9460 0. 42501 904
676 9246 36.5 0
- 2 6843 3 41 631 00 3200 77.
3 5
03 75
20
171
03 5544 3236 13059 1732 5281 5283 1937 21688 735
916 0 0
- 46 8842 39 414 6 310 95 3573 624
68 2
04
20 216 7721 4704 14840 3293 1219 5240 1802 0 0 15761 482
04 354 47 3066 56 558 43 776 53 9271 417
4
41
-
49
05
20
585
05 1513 8090 27916 1293 3384 5045 1688 77017 254
378 0 0 698
- 755 5493 97 5116 69 112 36 185
86 2
06
20
814 1049
06 2539 38309 2515 7919 5583 2172 107 20 56886 213
874 5540 061
- 574 67 7438 06 071 07 81 2 776
24 1 0
07
20
156 3820 2035 1362
07 75485 5536 3523 1001 16768 439
598 667. 8795 110. - -
- 63.23 6038 062 31 909 862
579 27 2 88
08
20
210 3570 2215 2120 3731
08 34796 1037 2516 41968 101
428 111. 7798 8844 501. - -
- 42.12 529 3 73 926
103 40 0 4 84
09
20
352 6191 8843
09 1938 80453 4837
798 79.2 02.8 - - - - 90580 236
- 6820 7.87 7511 5
98 3 4
10

QUESTIONNAIRE ANALYSIS
SURVEY QUESTIONNAIRE OF INVESTOR’S PERCEPTION

42
TOWARDS INVESTMENT IN DERIVATIVE MARKET

SAMPLE TAKEN: - 120

1) HAVE YOU EVER INVESTED IN DERIVATIVES?

OPTIONS NUMBER OF %AGE

RESPONDENTS
YES 95 79
NO 25 21
TOTAL 120 100

THE FOLLOWING IS THE PIE-CHART OF ABOVE DATA

(ACCORDING TO THE PERCENTAGE)

INTERPRETATION:-

OUT OF 120 RESPONDENTS ONLY 95(79%) PERSONS INVEST

IN THE DERIVATIVE MARKET.

2) EDUCATIONAL QUALIFICATION

43
OPTIONS NUMBER OF %AGE
RESPONDENTS
UNDERGRADUATE 20 21
GRADUATE 13 14
POST GRADUATE 19 20
PROFESSIONAL DEGREE HOLDER 43 45
TOTAL 95 100

THE FOLLOWING CHART SHOWS THE PICTORIAL VIEW OF

THE ABOVE STATISTICAL DATA (ON THE BASIS OF
PERCENTAGE)

INTERPRETATION:-
HERE WE CAN FIND THAT, MAXIMUM NUMBER OF
PROFESSIONAL DEGREE HOLDERS (45), INVEST IN THIS

44
MARKET.

3) INCOME RANGE

OPTIONS NUMBER OF %AGE

RESPONDENTS
LESS THAN 1,50,000 10 11

1,50,000 – 3,00,000 23 24

3,00,000 – 5,00,000 34 36

ABOVE 5,00,000 28 29

TOTAL 95 100

THE FOLLOWING CHART SHOWS THE PICTORIAL VIEW OF

THE ABOVE STATISTICAL DATA: (ACCORDING TO THE
%AGE)

INTERPRETATION:
45
FROM THE ABOVE FIGURE, WE CAN SAY THAT PEOPLE WITH MORE
THAN 3, 00,000 ANNUAL INCOME GENERALLY INVEST IN THIS
MARKET.

4) PERCENTAGE OF MONTHLY HOUSEHOLD

INCOME,
AVAILABLE FOR INVESTMENT

OPTIONS NUMBER OF %AGE

RESPONDENTS
BETWEEN 5% TO 10% 9 9

BETWEEN 11% TO 15% 17 18

BETWEEN 16% TO 20% 15 16
BETWEEN 21% TO 25% 36 38
MORE THAN 25% 18 19

TOTAL 95 100

THE FOLLOWING CHART SHOWS THE PICTORIAL VIEW OF

THE ABOVE STATISTICAL DATA: (ACCORDING TO THE
%AGE)

46
INTERPRETATION:
FROM THE ABOVE DATA WE CAN SAY THAT PEOPLE, WHO
INVEST IN MARKET, GENERALLY INVEST 21 % TO 25% OF
THEIR MONTHLY HOUSEHOLD INCOME OF THEIR INCOME.

5) PRIMARY INVESTMENT PURPOSE

OPTIONS NUMBER OF % AGE

RESPONDENTS
RETIREMENT PLANNING 26 27
BUILDING UP A CORPUS FOR 0 0
CHARITY DONATIONS
SUPPORTING FUTURE 30 32
EDUCATION OF YOUR
CHILDREN
OTHER (SPECIFY) 39 41
TOTAL 95 100

47
THE FOLLOWING PIE CHART SHOWS THE PICTORIAL VIEW
OF THE ABOVE STATISTICAL DATA (ON THE BASIS OF
PERCENTAGE)

INTERPRETATION:
FROM THE ABOVE DATA IT CAN BE SAID THAT PEOPLE HAVE
DIFFERENT REASON FOR INVESTING IN STOCK MARKET DEPENDING
UPON THERE NEEDS AND REQUIREMENT.
6) KIND OF RISK WHILE INVESTING IN THE STOCK
MARKET
OPTIONS NUMBER OF % AGE
RESPONDENTS
UNCERTAINTY OF 29 31
RETURNS
SLUMP IN STOCK MARKET 33 35
FEAR OF BEING WOUND UP 22 23
OF COMPANY
ANY OTHER 11 11
TOTAL 95 100

48
THE FOLLOWING PIE CHART SHOWS THE PICTORIAL VIEW
OF THE ABOVE STATISTICAL DATA :( ON THE BASIS OF
PERCENTAGE)

INTERPRETATION:
FROM THE ABOVE DATA WE CAN SAY THAT, WHILE INVESTING IN
THE STOCK MARKET THE BIGGEST RISK IS SLUMP IN THE STOCK
MARKET.

7) WHY PEOPLE DO NOT INVEST IN DERIVATIVE

MARKET

OPTIONS NUMBER OF % AGE

RESPONDENTS
LACK OF KNOWLEDGE 31 33
INCREASE SPECULATION 17 18
VERY RISKY AND HIGHLY 22 23
LEVERAGED

49
COUNTER PARTY RISK 25 26
TOTAL 95 100

THE FOLLOWING PIE CHART SHOWS THE PICTORIAL VIEW

OF THE ABOVE STATISTICAL DATA (ON THE BASIS OF
PERCENTAGE)

INTERPRETATION:
FROM THE ABOVE GRAPHICAL REPRESENTATION WE CAN INFER
THAT THE MAIN REASON OF NOT INVESTING IN DERIVATIVE
MARKET IS LACK OF KNOWLEDGE REPRESENTED BY 33% AND
AFTER THAT COUNTER PARTY RISK IS ALSO ONE OF THE BIGGEST
OBSTACLES.

8) PURPOSE OF INVESTING IN DERIVATIVE MARKET

OPTIONS NUMBER OF %AGE

RESPONDENTS
50
TO HEDGE THEIR FUND 38 40
RISK CONTROL 25 26
MORE STABLE 10 11

DIRECT INVESTMENT WITHOUT 22 23

BUYING AND HOLDING ASSETS
TOTAL 95 100

THE FOLLOWING PIE CHART SHOWS THE PICTORIAL VIEW

OF THE ABOVE STATISTICAL DATA (ON THE BASIS OF
PERCENTAGE)

INTERPRETATION:
OUT OF THE SURVEYED PEOPLE 40 PER CENT OF THE RESPONDENTS
INVEST IN DERIVATIVE MARKET TO HEDGE THEIR FUNDS.

9) PARTICIPATION IN DERIVATIVE MARKET AS

51
OPTIONS NO OF PERCENTAGE%
RESPONDENTS
INVESTOR 42 44
SPECULATOR 27 29
BROKER/DEALER 21 22
HEDGER 5 5
TOTAL 95 100

THE FOLLOWING PIE CHART SHOWS THE PICTORIAL VIEW

OF THE ABOVE STATISTICAL DATA (ON THE BASIS OF
PERCENTAGE)

INTERPRETATION:

MOST OF THE PEOPLE ACT AS AN INVESTOR IN THE

DERIVATIVE MARKET AS COMPARE TO THE SPECULATOR,
BROKER, HEDGER.

52
10) ADVICE BEFORE INVESTING IN DERIVATIVE
MARKET

OPTIONS NUMBER OF % AGE

RESPONDENTS
BROKERAGE HOUSES 48 51
RESEARCH ANALYST 28 29

WEBSITES 3 3
NEWS NETWORKS 16 17
TOTAL 95 100

THE FOLLOWING BAR GRAPH SHOWS THE PICTORIAL

VIEW OF THE ABOVE STATISTICAL DATA (ON THE BASIS OF
PERCENTAGE)

53
INTERPRETATION:
FROM THE ABOVE DATA WE CAN INTERPRET THAT OUT OF
THE SURVEYED PEOPLE 51% TAKE ADVICE FROM BROKERAGE
HOUSES AND ONLY 3% TAKE ADIVE FROM THE WEBSITES.

11) PARTICIPATION IN

OPTIONS NUMBER OF % AGE

RESPONDENTS
STOCK INDEX FUTURES 37 39
STOCK INDEX OPTIONS 24 25
FUTURE ON INDIVIDUAL 10 11
STOCK
OPTIONS ON INDIVIDUAL 24 25
STOCK
CURRENCY FUTURES 0 0
TOTAL 95 100

THE FOLLOWING PIE CHART SHOWS THE PICTORIAL VIEW

OF THE ABOVE STATISTICAL DATA (ON THE BASIS OF
PERCENTAGE)

54
INTERPRETATION:
FROM THE ABOVE DATA WE CAN SE THAT MOST OF THE
INVESTOR INVEST IN STOCK INDEX FUTURES AS WELL AS
STOCK INDEX OPTIONS AND OPTIONS ON INDIVIDUAL STOCK.

12) CONTRACT MATURITY PERIOD FOR TRADING

OPTIONS NUMBER OF %AGE

RESPONDENTS
1 MONTH 45 47
2 MONTH 23 24
3 MONTH 26 28
6 MONTH 1 1
9 MONTH 0 0
12 MONTH 0 0
TOTAL 95 100

THE FOLLOWING PIE CHART SHOWS THE PICTORIAL VIEW

55
OF THE ABOVE STATISTICAL DATA. (ON THE BASIS OF
PERCENTAGE)

INTERPRETATION:
MOST OF THE RESPONDENT’S I.E. 47 PER CENT STATED THEIR
PREFERENCE TO INVEST FOR 1 MONTH. AND ON THE OTHER
HAND, 28 PERCENT RESPONDENTS SHOWED INTEREST IN
INVESTING FOR 3 MONTH CONTRACT.

14) APPROACH TO INVEST AS A MEANS OF

ACHIEVING GOALS

56
 OPTIONS NUMBER OF %AGE
RESPONDENTS
RELATIVE LEVEL OF STABILITY IN 45 47
OVERALL INVESTMENT PORTFOLIO
INCREASING INVESTMENT VALUE WHILE 36 38
MINIMIZING POTENTIAL FOR LOSS OF
PRINCIPAL.

INVESTMENT GROWTH WITH MODERATE 11 12

HIGH LEVELS OF RISK
MAXIMUM LONG-TERM RETURNS WITH 3 3
HIGH RISK
TOTAL 95 100

THE FOLLOWING BAR GRAPH SHOWS THE PICTORIAL

VIEW OF THE ABOVE STATISTICAL DATA (ON THE BASIS OF
THE PERCENTAGE)

INTERPRETATION:
MAXIMUM NUMBER OF RESPONDENT WHO INVESTS IN DERIVATIVE
MARKET, AROUND 47%, HAS APPROACH TO INVEST AS A MEANS OF
ACHIEVING RELATIVE LEVEL OF STABILITY IN OVERALL
INVESTMENT PORTFOLIO.

57
15) RESULT OF INVESTMENT IN DERIVATIVE
MARKET

OPTIONS NUMBER OF %AGE

RESPONDENTS
GREAT RESULTS 12 13

MODERATE BUT ACCEPTABLE 35 36

DISAPPOINTED 48 51
TOTAL 95 100

THE FOLLOWING BAR GRAPH SHOWS THE PICTORIAL

VIEW OF THE ABOVE STATISTICAL DATA (ON THE BASIS OF
PERCENTAGE)

INTERPRETATION:

MOST OF THE INVESTORS WERE DISAPPOINTED WITH THEIR

RESULTS OF INVESTMENT IN DERIVATIVE MARKET. FEW OF

58
THEM ARE SATISFIED WITH THEIR RESULTS AS STOCK
MARKET IS VERY VOLATILE SO IT REQUIRES CONTINUOUS
INVOLVEMENT OF THE INVESTOR FROM 9.55 A.M TO 3.30 P.M.
THEREFORE INVESTORS KNOWLEDGE SHOULD ALSO BE
APPROPRIATE FOR THE INVESTMENT.

LIMITATIONS OF SURVEY:

 Limited area of study: Our survey is confined only to Delhi and

Ghaziabad.
 Sample size was limited so it might be possible that in study all type of
investors or people are not covered.
 Limited span of study: All the findings and suggestions will be based
on the current market situation, which is dynamic in nature.
 Indian stock market is semi-efficient market, where sentiments play a
major role in price; hence 100% accurate predictions cannot be made
about its future path.

FINDINGS FROM SURVEY:

After the entire analysis of survey and questionnaires it has been found
that:
 Majority of the people are not willing to go for derivative market as an
investment option because it is highly risky and requires continuous
involvement of the investor. It is time consuming.
 Majority of people invest in stock (equity) market only.
 For non-investors there are two dominant reasons: working on
expansion plan and reinvestment in their own unit.
 Factors considered for investment is majorly growth and quick money.
 Majority of the investors are preferred to invest as trader or jobber
rather than an investor. Lack of knowledge is the main reason why
people do not invest in derivative market.
 Many investors prefer to take Professional Advice before investing in

59
 derivative market. Research report in the form of DERI PAIR is being
provided to the investors of derivative market by HSBC InvestDirect
for more strategic investment.
 In India, investment in equity is quite popular among investors. Survey
findings reveal that only 44 per cent respondents are ready to go for
derivative market as an investment option. Based on the survey’s
findings, the company assigned the task to increase the awareness level
regarding derivative market among the prospective investors .I meet
various investors and explained the benefits of investing in derivative
market

FINDINGS
FROM THE ABOVE ANALYSIS IT CAN BE DERIVED
THAT………

1. Derivative market is growing very fast in the Indian Economy.

The turnover of Derivative Market is increasing year by year in the
India’s largest stock exchange NSE. In the case of index future
there is a phenomenal increase in the number of contracts. But
whereas the turnover is declined considerably. In the case of stock
future there was a slow increase observed in the number of contracts
whereas a decline was also observed in its turnover. In the case of
index option there was a huge increase observed both in the number
of contracts and turnover.
2. After analyzing data it is clear that the main factors that are driving
the growth of Derivative Market are Market improvement in
communication facilities as well as long term saving & investment
is also possible through entering into Derivative Contract. So these

60
 factors encourage the Derivative Market in India.
3. It encourages entrepreneurship in India. It encourages the investor
to take more risk & earn more return. So in this way it helps the
Indian Economy by developing entrepreneurship. Derivative Market
is more regulated & standardized so in this way it provides a more
controlled environment. In nutshell, we can say that the rule of
High risk & High return apply in Derivatives. If we are able to
take more risk then we can earn more profit under Derivatives.

Commodity derivatives have a crucial role to play in the price risk

management process for the commodities in which it deals. And it can be
extremely beneficial in agriculture-dominated economy, like India, as the
commodity market also involves agricultural produce. Derivatives like
forwards, futures, options, swaps etc are extensively used in the country.
However, the commodity derivatives have been utilized in a very limited
scale. Only forwards and futures trading are permitted in certain
commodity items.

AREAS OF CONCERN

The major area of concern is the manner in which the derivatives market
can expand the risk taking activity. By enhancing the efficiency of
transactions and capital, derivatives can increase both hedging and
speculation.

Derivatives might also lead to unfair practices like fraud, manipulation,

outflanking prudential financial market regulations, manipulate accounting
rules and evade taxation. Most of the OTC derivatives are non transparent
in nature. This increases the risk in this market and further enhances
speculation.

61
Worldwide there has been introduction of a new credit risk, which seeks to
shift the various types of risks. This new credit risk, especially in OTC
markets, is not subject to collateral or margin standards or requirements
and is not treated in the most economically efficient way for purposes of
capital requirements.
The liquidity risks attached with the interest rate swaps are another area of
concern.

RECOMMENDATIONS & SUGGESTIONS

62
Future Trends and Recommendations

The decision about whether to use derivatives should be driven, not by the
company's size, but by its strategic objectives. It is important that all users
of derivatives understand how their contracts are structured, the unique
price and risk characteristics of those instruments, and how they will
perform under stressful and volatile economic conditions.
To increase market transparency improved information on the size and
structure of the derivatives market should be provided. Internationally
consistent market statistics on the notional amounts and gross market
values outstanding of broad categories of foreign exchange, interest rate,
and equity-based derivative instruments should be provided. This would
benefit individuals as well as organizations in better prediction of the
global financial activity.
A careful risk management study in respect to the corporate goals with
complete market stimulation is very necessary for participating in the
derivatives market. Without this study the use of derivatives can be
dangerous. The long-range objectives of the firm might not be met.
Moreover this could also lead to unsafe and unsound practices that could
lead to the organizations insolvency. It may be wise to stay away from the
more exotic instruments, unless the risk/reward tradeoffs are clearly
understood by the firm's senior management and its independent risk
management review team. Exotic contracts should not be used unless there
is some obvious reason for doing so. But when used wisely, financial
derivatives can increase shareholder value by providing a means to better
control a firms risk exposures and cash flows.

In nut shell, after study it is clear that Derivative influence our Indian
Economy up to much extent. So, SEBI should take necessary steps for
improvement in Derivative Market so that more investors can invest in
Derivative market. There is a need of more innovation in Derivative
Market because in today scenario even educated people also fear for
investing in Derivative Market Because of high risk involved in
Derivatives.

 RBI should play a greater role in supporting derivatives.

63
 Derivatives market should be developed in order to keep it at par
with other derivative markets in the world.

 Speculation should be discouraged.

 There must be more derivative instruments aimed at individual

investors.

 SEBI should conduct seminars regarding the use of derivatives to

educate individual investors.

64
 CONCLUSION

Derivatives allow firms and individuals to hedge risks and to take risks
efficiently.
They also can create risk at the firm level, especially if a firm uses
derivatives episodically and is inexperienced in their use. For the economy
as a whole, a collapse of a large derivatives user or dealer may create
systemic risks. On balance, derivatives help make the economy more
efficient.

However, neither users of derivatives nor regulators can be complacent.

Firms have to make sure that derivatives are used properly. This means
that the risks of derivatives positions have to be measured and understood.
Those in charge of taking derivatives positions must have the proper
training. It also means that firms must have well-defined policies for
derivatives use. A firm’s board must know how risk is managed within the
firm and which role derivatives play. Regulators have to make sure to
monitor carefully financial firms with large derivatives positions.

Though regulators seem to be doing a good job in monitoring banks and

brokerage houses, the risks taken by insurance companies, hedge funds
and government sponsored enterprises should be understood and
monitored.

So should we fear derivatives? The answer is “no.” We should have a

healthy respect for them. We do not fear planes because they may crash
and do not refuse to board them because of that risk. Instead, we make
sure that planes are as safe as it makes economic sense for them to be. The

65
same applies to derivatives. Typically, the losses from derivatives are
localized, but the whole economy gains from the existence of derivatives
markets.

66
 REFRENCES
BOOKS REFERRED:

 Hull.C,John, “Options Futures, and other Derivatives”

 Shah.Ajay, “Derivatives FAQ”
 NSE’s Certification in Financial Markets: - Derivatives
Core module
 Financial Markets & Services by Gordon & Natarajan

WEBSITES VISITED:

 www.nse-india.com
 www.bseindia.com
 www.sebi.gov.in
 www.google.com
 www.derivativesindia.com

67
 QUESTIONNAIRE
SURVEY QUESTIONNAIRE OF INVESTOR’S
PERCEPTION TOWARDS INVESTMENT IN DERIVATIVE
MARKET

Sir/Ma’am,
This questionnaire is meant for educational purposes only.
The information provided by you will be kept secure and
confidential.

NAME-
__________________________________________________
CONTACT-
______________________________________________
GENDER-
________________________________________________
OCCUPATION-
___________________________________________

1. HAVE YOU EVER INVESTED IN DERIVATIVES?

• YES
• NO

2. EDUCATIONAL QUALIFICATION
UNDERGRADUATE GRADUATE
POST GRADUATE PROFESSIONAL
DEGREE
HOLDER

68
3. INCOME RANGE:

BELOW 1, 50,000 P.A. 1, 50,000 – 3, 00,000 P.A.

3, 00,000 – 5, 00,000 P.A. ABOVE 5, 00,000 P.A.

4. NORMALLY WHAT PERCENTAGE OF YOUR MONTHLY

HOUSEHOLD INCOME COULD BE AVAILABLE FOR
INVESTMENT?

BETWEEN 5% TO 10% BETWEEN 11% TO 15%

BETWEEN 16% TO 20% BETWEEN 21% TO 25%

MORE THAN 25%

5. WHAT IS YOUR PRIMARY INVESTMENT PURPOSE?

RETIREMENT PLANNING

BUILDING UP A CORPUS FOR CHARITY DONATIONS

SUPPORTING FUTURE EDUCATION OF YOUR CHILDREN

OTHER (SPECIFY) _____________________

6. WHAT KIND OF RISK DO YOU PERCEIVE WHILE INVESTING

IN THE STOCK MARKET?

UNCERTAINTY OF RETURNS

SLUMP IN STOCK MARKET

69
FEAR OF BEING WINDUP OF COMPANY

OTHER (SPECIFY) _________________

7 WHY PEOPLE DO NOT INVEST IN DERIVATIVE MARKET?

LACK OF KNOWLEDGE AND DIFFICULTY IN UNDERSTANDING

INCREASE SPECULATION

VERY RISKY AND HIGHLY LEVERAGED INSTRUMENT

COUNTER PARTY RISK

8. WHAT IS THE PURPOSE OF INVESTING IN DERIVATIVE

MARKET?

TO HEDGE THEIR FUND

RISK CONTROL

MORE STABLE

DIRECT INVESTMENT WITHOUT BUYING AND HOLDING

ASSETS

9. YOU PARTICIPATE IN DERIVATIVE MARKET AS:

INVESTOR SPECULATOR

BROKER/DEALER HEDGER

70
10. FROM WHERE YOU PREFER TO TAKE ADVICE BEFORE
INVESTING IN DERIVATIVE MARKET?

BROKERAGE HOUSES RESEARCH ANALYST

WEBSITES NEWS NETWORKS

OTHER (SPECIFY) _________________

11. IN WHICH OF THE FOLLOWING WOULD YOU LIKE TO

PARTICIPATE?

STOCK INDEX FUTURES

STOCK INDEXOPTIONS

FUTURE ON INDIVIDUAL STOCK

OPTIONS ON INDIVIDUAL STOCK

CURRENCY FUTURES

12. WHAT CONTRACT MATURITY PERIOD WOULD INTEREST

YOU FOR TRADING IN?

1 MONTH 2 MONTH

3 MONTH 6 MONTH

9 MONTH 12 MONTH

14. WHICH OF THE FOLLOWING STATEMENTS BEST

DESCRIBES YOUR OVERALL APPROACH TO INVEST AS A
MEAN OF ACHIEVING YOUR GOALS?

71
 HAVING A RELATIVE LEVEL OF STABILITY IN MY OVERALL
INVESTMENT PORTFOLIO.

MODERATELY INCREASING MY INVESTMENT VALUE WHILE

MINIMIZING POTENTIAL FOR LOSS OF PRINCIPAL.

PURSUE INVESTMENT GROWTH, ACCEPTING MODERATE TO

HIGH LEVELS OF RISK AND PRINCIPAL FLUCTUATION.

SEEK MAXIMUM LONG-TERM RETURNS, ACCEPTING

MAXIMUM RISK WITH PRINCIPAL FLUCTUATION.

15. WHAT WAS THE RESULT OF YOUR INVESTMENT?

GREAT RESULTS (MORE THAN 50% OF YOUR INITIAL

INVESTMENT)

MODERATE BUT ACCEPTABLE (20%-40% OF YOUR INITIAL

INVESTMENT)

DISAPPOINTED (LESS THAN 10% OF YOUR INITIAL

INVESTMENT)

72