“Indian Derivative Market”

Project report submitted towards fulfillment of PGDM LBSIMT, Bareilly Academic Session [2008-2010] Submitted by Sarang Mani UNDER THE GUIDANCE OF

Mr. Rahul Kumar Agarwal Area Sales Manager IL & FS InvestSmart Securities Ltd.
Submitted by: Name – Sarang Mani



I wish to extend my sincere gratitude to, Mr. Rahul Kumar Agarwal, Area Sales Manager, IL&FS InvestSmart Securities Ltd., for providing me with all the facilities to carry on this research work efficiently. I also extend my gratitude towards Mr. Amitab, Branch Manager for helping me in the completion of this report, the entire team at IL&FS, for their co-operation and last but not the least the employees at IL&FS for their support and encouragement in fulfilment of this report.



On behalf of IL&FS InvestSmart Securities Ltd., I take the privilege of recognizing the efforts put in by Mr. Sarang Mani to carry out her Project on “Indian Derivative Market” from 5th May to 5th July 2009. Sarang has not only carried out this study as a part of his curriculum but he has proven to be a key member in bringing positive contribution in our Sales strategies. The project carried out by Sarang has given us some focused reasons to improve our people practices, focus on employee satisfaction level as well contribute to our sales. In fact we are considering adapting a few suggestions given by him in the above context. Lastly, I would like to thank your esteemed institution for providing your students such a platform; for them to learn from their experiences while carrying out these studies.

Warm regards,

(Rahul Kumar Agarwal) Area Sales Manager


........................ 14.... OTC derivatives markets.................................................................. 22 Main Topics of Study Introduction to Derivative............................. 54 Price Discovery............................................ 25 Types of Derivatives...... 18 Objective of the Study.... 20 Research Methodology...................................................... 16 Need of the Study................................... 12.............................................................. 10....... 50 Benifits of Derivatives……………………................................. 39 Myths and realities about derivatives……………………... Executive Summary …………………………………………………................. 1) 2) TOPICS PAGE NO.......................... 6................ 49 Development of Derivative Markets in India……………………............................TABLE OF CONTENTS S....... 39 Derivatives increase speculation and do not serve any economic purpose ........... 1.....................................…………… 43 Exchange-traded vs.............. 24 Types of Derivatives Market.... 33 Other Kinds of Derivatives.............................................................................................. 21 Limitations of Study................. 34 History of Derivatives....................... 54 4 ............................... 48 Technological Advances.................……………............…………..... 54 Risk Management........... 40 Indian Market is not ready for derivative trading................................................... 27 Options................... 06 Company Profile…………………………………………….......... 8....................... 10 Introduction ………………………………………………….................................................................................... 47 Globalisation of Markets........................................................................................................................................................................... 32 Swap....... 5..................................………….......... 25 Forward Contracts................... 38 Need of Derivatives in India today.............................................. 9........................................................ 7... 26 Future Contracts................... 49 Advances in Financial Theories………...................... 35 Indian Derivative Market ……………………...................................................................................................... 23 Derivative Defined...................... 1) 2) 3) 4) i) ii) iii) iv) 5) 11................................................................................. 3...................................................................................................... 47 Price Volatility............. 1) 2) i) ii) 3) 4) 5) i) ii) iii) iv) 13..................................... 41 Comparison of New System with Existing System................................................... No............. 17 Literatural Review................ 19 Scope of the Study.................................................... 45 Factors Contributing To The Growth Of Derivatives....... 4.............................................. 2.......

............................................................................................................ 20............................. 54 55 55 59 60 62 69 81 82 83 84 5 ....... Abbrevations............ Findings & Conclusion................................................................................... Business Growth in Derivatives segment (NSE)...................................................... Present Status..3) 4) 5) 15........... Bibliography ………………………………………………………........................................................................ Easy to Speculation........................ Recommendations & Suggestions................................ 21..................... 17.......................... Market Efficiency................ 18............. National Exchanges...................................................... 19....................................... Status Report of the development in Derivative Market. Operational Advantages................ 16......... 22....

With over 25 million shareholders. 1997. 2007. Switzerland. calculated by the number of daily transactions done on the exchanges. The Indian capital market is significant in terms of the degree of development. Australia. India’s market capitalization was the highest among the emerging markets. Turnover in the Spot and Derivatives segment both in NSE & BSE was higher by 45% into 2006 as compared to 2005. was US$ 175 billion has grown by 37. UK. volume of trading.5% percent every twelve months and was over US$ 834 billion as of January.EXECUTIVE SUMMARY Firstly I am briefing the current Indian market and compairing it with it past. 6 .). France. India has the third largest investor base in the world after USA and Japan.4 billion. With daily average volume of US $ 9. Bombay Stock Exchanges (BSE). which. 3 & 5 in the world. The Total Turnover of Indian Financial Markets crossed US$ 2256 billion in 2006 – An increase of 82% from US $ 1237 billion in 2004 in a short span of 2 years only. I am also giving brief data about foreign market. accounts for the largest number of listed companies transacting their shares on a nationwide online trading system. Over 7500 companies are listed on the Indian stock exchanges (more than the number of companies listed in developed markets of Japan. Germany. as on July 31. Total market capitalization of The Bombay Stock Exchange (BSE). one of the oldest in the world. Canada and Hong Kong. the Sensex has posted excellent returns in the recent years. transparency and its tremendous growth potential. The two major exchanges namely the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) ranked no. Then at the last I am giving my suggestions and recommendations.

interest rates. etc. called Hedging. The derivatives are defined as the future contracts whose value depends upon the underlying assets. a dollar forward is a derivative contract. The prices of the derivatives are driven by the spot prices of these underlying assets. • Over-The-Counter (OTC) money market products such as loans or deposits. the most important use of derivatives is in transferring market risk. which gives the buyer a right & an obligation to buy dollars at some future date. including medium to long-term negotiable debt securities issued by governments. • Foreign exchange rate. • Equities For example. It provides extra liquidity in the stock market. companies. However. etc. stock prices or market indices. which derive their values from an underlying asset. 2009 was Rs 48. Derivatives trading in the stock market have been a subject of enthusiasm of research in the field of finance the most desired instruments that allow market participants to manage risk in the modern securities trading are known as derivatives. The main logic behind 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. These underlying assets are of various categories like • Commodities including grains. coffee beans. • Precious metals like gold and silver. etc.Currently the market cap of the Sensex as on July 4th. •Bonds of different types. • Short-term debt securities such as T-bills. the underlying asset may be anything as component of stock market like. which is a protection against losses resulting from unforeseen 7 . Derivatives are assets. If derivatives are introduced in the stock market.4 Lakh Crore with a P/E of more than 20.

Swaps “A Forward Contract is a transaction in which the buyer and the seller agree upon a delivery of a specific quality and quantity of asset usually a commodity at a specified future date. which is called "the call option premium or call option price". 8 . 1. There are various derivative products traded. The contract also has a standard specification so both parties know exactly what is being done”. derivatives are a very important tool of risk management. “An Options contract confers the right but not the obligation to buy (call option) or sell (put option) a specified underlying instrument or asset at a specified price – the Strike or Exercised price up until or an specified future date – the Expiry date. The Price is called Premium and is paid by buyer of the option to the seller or writer of the option.” “A Future contract is a firm contractual agreement between a buyer and seller for a specified as on a fixed date in future. Options 4. Forwards 2. The seller is under an obligation to fulfill the contract and is paid a price of this. Futures 3. The price may be agreed on in advance or in future.” A call option gives the holder the right to buy an underlying asset by a certain date for a certain price. Thus. They are. The contract price will vary according to the market place but it is fixed when the trade is made.price or volatility changes.

SEBI should take necessary steps for improvement in Derivative Market so that more investors can invest in Derivative market. They can be regarded as portfolios of forward's contracts. Sorry to say that today even educated persons are not willing to invest in derivative market because they have the fear of high risk. on the other hand gives the holder the right to sell an underlying asset by a certain date for a certain price. based on some notional principle amount is called as a ‘SWAP’. On the other hand RBI has to play an important role in derivative market. So. A contract whereby two parties agree to exchange (swap) payments. In case of swap. So the person who is ready to take risk and want to gain more should invest in the derivative market. The buyer is under an obligation to fulfill the contract and is paid a price for this. 9 .A put option. Also SEBI must encourage investment in derivative market so that the investors get the benefit out of it. only the payment flows are exchanged and not the principle amount” I had conducted this research to find out whether investing in the derivative market is beneficial or not? You will be glad to know that derivative market in India is the most booming now days. “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. which is called "the put option premium or put option price".

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Swap and different types of options are regularly traded outside exchanges by financial intuitions. prices of gold or copper. there is no single market place or organized exchanges. INTRODUCTION A Derivative is a financial instrument whose value depends on other. The variables underlying could be prices of traded securities and stock. banks and their corporate clients in what are termed as over-the-counter markets – in other words.SmartNext Sell Receivable Shares Sell Receivable Shares SRS is a facility offered by Investsmart online wherein the customer will be able to sell the shares that he has purchased even before he receives the delivery of the shares from the Exchange. more basic. underlying variables. He will not have to wait till the time he receives the delivery from the Exchange thus increasing his liquidity. Derivatives have become increasingly important in the field of finance. Options and Futures are traded actively on many exchanges. Forward contracts. 17 .

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. 18 . 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.

The financial derivatives came into spotlight in post-1970 period due to growing instability in the financial markets. However. I have chosen this topic. futures and options on stock indices have gained more popularity than on individual stocks. by locking-in asset prices. Even small investors find these useful due to high correlation of the popular indices with various portfolios and ease of use. as hedging devices against fluctuations in commodity prices and commodity-linked derivatives remained the sole form of such products for almost three hundred years. 19 . can be traced back to the willingness of risk-averse economic agents to guard themselves against uncertainties arising out of fluctuations in asset prices. Derivative Trading is fast gaining momentum. The lower costs associated with index derivatives vis-vis derivative products based on individual securities is another reason for their growing use. As instruments of risk management. In recent years. the market for financial derivatives has grown tremendously both in terms of variety of instruments available. most notably forwards. especially among institutional investors. these products have become very popular and by 1990s. these generally do not influence the fluctuations in the underlying asset prices. they accounted for about two-thirds of total transactions in derivative products. the financial markets are marked by a very high degree of volatility. As in the present scenario. who are major users of index-linked derivatives. since their emergence. futures and options. In the class of equity derivatives. their complexity and also turnover. derivative products minimize the impact of fluctuations in asset prices on the profitability and cash flow situation of risk-averse investors. Through the use of derivative products. However. By their very nature.LITERATURE REVIEW The emergence of the market for derivative products. Derivative products initially emerged. it is possible to partially or fully transfer price risks by locking-in asset prices.

OBJECTIVES OF THE STUDY  To understand the concept of the Derivatives and Derivative Trading.  To analyse the performance of Derivatives Trading since 2001with special reference to Futures & Options 20 .  To know different types of Financial Derivatives  To know the role of derivatives trading in India.

For better understanding various strategies with different situations and actions have been given. This study extends to the trading of derivatives done in the National Stock Markets. 21 . It includes the data collected in the recent years and also the market in the derivatives in the recent years.SCOPE OF THE PROJECT The project covers the derivatives market and its instruments.

The data for study has been collected from various sources:     Books Journals Magazines Internet sources Time: 2 months Statistical Tools Used: Simple tools like bar graphs. tabulation. 22 .RESARCH METHODOLOGY Method of data collection:Secondary sources:It is the data which has already been collected by some one or an organization for some other purpose or research study . line diagrams have been used.

LIMITED RESOURCES: Limited resources are available to collect the information about the commodity trading. LIMITED TIME: The time available to conduct the study was only 2 months. 23 . It being a wide topic had a limited time. ASPECTS COVERAGE: Some of the aspects may not be covered in my study. VOLATALITY: Share market is so much volatile and it is difficult to forecast any thing about it whether you trade through online or offline 4.LIMITAITONS OF STUDY 1. 2. 3.

he would probably obtain attractive prices. he would have to dispose off his harvest at a very low price. farmers would face price uncertainty. was established to bring farmers and merchants together. A group of traders got together and created the ‘to-arrive’ contract that permitted farmers to lock into price upfront and deliver the grain later.MAIN TOPICS OF STUDY 1. Clearly this meant that the farmer and his family were exposed to a high risk of price uncertainty. These were simple contracts developed to meet the needs of farmers and were basically a means of reducing risk. the Chicago Board Of Trade. In 1848. Through the use of simple derivative products. it was possible for the farmer to partially or fully transfer price risks by locking-in asset prices. From the time it was sown to the time it was ready for harvest. A farmer who sowed his crop in June faced uncertainty over the price he would receive for his harvest in September. These to-arrive contracts proved useful as a device for 24 . it clearly made sense for the farmer and the merchant to come together and enter into contract whereby the price of the grain to be delivered in September could be decided earlier. which would enable both parties to eliminate the price risk. However. a merchant with an ongoing requirement of grains too would face a price risk that of having to pay exorbitant prices during dearth. during times of oversupply. In years of scarcity. INTRODUCTION TO DERIVATIVE The origin of derivatives can be traced back to the need of farmers to protect themselves against fluctuations in the price of their crop. What they would then negotiate happened to be futures-type contract. On the other hand. although favourable prices could be obtained during periods of oversupply. Under such circumstances. or CBOT.

The price of this derivative is driven by the spot price of wheat which is the “underlying” in this case. In our earlier discussion. risk instrument or contract differences or any other form of security. Such a transaction is an example of a derivative. interest rate. we saw that wheat farmers may wish to sell their harvest at a future date to eliminate the risk of change in price by that date. 1956 (SCRA). regulation of derivatives came under the purview of Securities Exchange Board of India (SEBI). As per this the Forward Markets Commission (FMC) continues to have jurisdiction over commodity futures contracts. regulates the forward/futures contracts in commodities all over India. pepper. 1956 defines “derivative” to includeA security derived from a debt instrument. The underlying asset can be equity. DERIVATIVE DEFINED A derivative is a product whose value is derived from the value of one or more underlying variables or assets in a contractual manner. 1952. The Forwards Contracts (Regulation) Act. 25 . and in 1925 the first futures clearing house came into existence. Today derivatives contracts exist on variety of commodities such as corn. 2. silver etc. wheat. The Securities Contracts (Regulation) Act. was amended to include derivative contracts in securities. Besides commodities. We thus have separate regulatory authorities for securities and commodity derivative markets. exchange rate. cotton. commodity or any other asset. However when derivatives trading in securities was introduced in 2001. Consequently. These were eventually standardized. Derivatives are securities under the SCRA and hence the trading of derivatives is governed by the regulatory framework under the SCRA. the term “security” in the Securities Contracts (Regulation) Act. etc. derivatives contracts also exist on a lot of financial underlying like stocks. loan whether secured or unsecured.hedging and speculation on price charges. forex. share.

TYPES OF DERIVATIVES Derivatives Future Option Forward Swaps 26 . or index of prices. TYPES OF DERIVATIVES MARKET Exchange Traded Derivatives Over The Counter Derivatives National Stock Exchange Bombay Stock & Exchange Exchange National Commodity Derivative Index Future Index option Stock option Stock future Figure.A contract which derives its value from the prices.1 Types of Derivatives Market 4. 3. of underlying securities.

On the expiration date. Forward contracts are often confused with futures contracts. expiration date and the asset type and quality. However forward contracts in certain very standardized. The confusion 27 . The contract price is generally not available in public domain. price and quantity are negotiated bilaterally by the parties to the contract. BASIC FEATURES OF FORWARD CONTRACT • • • • • They are bilateral contracts and hence exposed to counter-party risk. process of standardization reaches its limit in the organized futures market. and hence is unique in terms of contract size. exchange.2 Types of Derivatives (i) FORWARD CONTRACTS A forward contract is an agreement to buy or sell an asset on a specified date for a specified price. it has to compulsorily go to the same counter-party. reducing transaction as in the case of costs and increasing markets have foreign transactions become thereby This volume. 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.Figure. If the party wishes to reverse the contract. The forward contracts are n o r m a l l y traded outside the exchanges. Each contract is custom designed. the contract has to be settled by delivery of the asset. Other contract details like delivery date. which often results in high prices being charged. The other party assumes a short position and agrees to sell the asset on the same date for the same price.

The settlement price. the holder of a futures position has to sell his long position or buy back his short position. etc. which differs from an options contract. To exit the commitment. a futures contract is a standardized contract. (ii) FUTURE CONTRACT In finance. but not the right. The future date is called the delivery date or final settlement date. to buy or sell a certain underlying instrument at a certain date in the future. usually by specifying: • • The underlying. The pre-set price is called the futures price. normally. traded on a futures exchange. and the option writer (seller) the obligation. A futures contract gives the holder the right and the obligation to buy or sell. which gives the buyer the right. 28 . Standardization: Futures contracts ensure their liquidity by being highly standardized. The price of the underlying asset on the delivery date is called the settlement price. either cash settlement or physical settlement. This can be anything from a barrel of sweet crude oil to a short term interest rate. Futures contracts are exchange traded derivatives. The type of settlement. at a pre-set price.is primarily because both serve essentially t h e same economic fun ction s of allocating risk in the presence of future price uncertainty. sets margin requirements. but not the obligation. converges towards the futures price on the delivery date. BASIC FEATURES OF FUTURE CONTRACT 1. However futures are a significant improvement over the forward contracts as they eliminate counterparty risk and offer more liquidity. The exchange acts as counterparty on all contracts. effectively closing out the futures position and its contract obligations.

consider that a futures trader. Margin: Although the value of a contract at time of trading should be zero. as determined by historical price changes. To understand the original practice. It represents the loss on that contract. • • The last trading date. its price constantly fluctuates. This can be the notional amount of bonds. etc. and creates a credit risk to the exchange. units of foreign currency. The delivery month. usually called variation or maintenance margin. 2. It may be 5% or 10% of total contract price. is required by the exchange. In case of physical commodities. the exchange demands that contract owners post a form of collateral. a fixed number of barrels of oil. commonly known as Margin requirements are waived or reduced in some cases for hedgers who have physical ownership of the covered commodity or spread traders who have offsetting contracts balancing the position. This renders the owner liable to adverse changes in value. agreeing on a price at the end of each day. who always acts as counterparty.• The amount and units of the underlying asset per contract. this specifies not only the quality of the underlying goods but also the manner and location of delivery. the notional amount of the deposit over which the short term interest rate is traded. In case of bonds. To minimize this risk. the minimum permissible price fluctuation. called the "settlement" or mark-to-market price of the contract. when taking a position. called a "margin". which is not likely to be exceeded on a usual day's trading.e. The grade of the deliverable. Other details such as the tick. This is intended 29 . Mark to market Margin: Because a series of adverse price changes may exhaust the initial margin. deposits money with the exchange. a further margin. This is calculated by the futures contract. • • The currency in which the futures contract is quoted. this specifies which bonds can be delivered. Initial Margin: is paid by both buyer and seller. i.

If the trader is on the winning side of a deal. At the end of every trading day. 3. as specified per type of futures contract: • Physical delivery .that is. the exchange will debit his account. On this day the t+2 futures contract becomes the t forward contract. For many equity index and interest rate futures contracts. buying a contract to cancel out an earlier sale (covering a short). A futures contract might also opt to settle against an index based on trade in a related spot market. Most are cancelled out by purchasing a covering position . or the closing value of a stock market index. Thus. Expiry is the time when the final prices of the future are determined. Settlement Settlement is the act of consummating the contract. the contract is marked to its present market value. this happens on the Last Thursday of certain trading month. it occurs only on a minority of contracts. In practice. or selling a contract to liquidate an earlier purchase (covering a long). then the margin is used as the collateral from which the loss is paid. and by the exchange to the buyers of the contract. • Cash settlement . his contract has increased in value that day. the price paid on delivery (the forward price) must be the same as the cost (including interest) of buying and storing the asset. for 30 . if he is on the losing side. and the exchange pays this profit into his account. such as a short term interest rate index such as Euribor. the rational forward price represents the expected future value of the underlying discounted at the risk free rate. In other words. PRICING OF FUTURE CONTRACT In a futures contract. If he cannot pay. for no arbitrage to be possible. and can be done in one of two ways.to protect the exchange against loss.the amount specified of the underlying asset of the contract is delivered by the seller of the contract to the exchange. On the other hand.a cash payment is made based on the underlying reference rate.

He then repays the lender the borrowed amount plus interest. On the delivery date. In the case where the forward price is lower: 1. 31 . non-dividend paying asset. [If he was short the underlying. The difference between the two amounts is the arbitrage profit. On the delivery date. dividend yields. he cashes in the matured investment. In the case where the forward price is higher: 1. and convenience yields. the arbitrageur hands over the underlying. 3. 4. the value of the future/forward. 3. which has appreciated at the risk free rate. He then receives the underlying and pays the agreed forward price using the matured investment.a simple. and receives the agreed forward price. The arbitrageur sells the futures contract and buys the underlying today (on the spot market) with borrowed money. Any deviation from this equality allows for arbitrage as follows. be found by discounting the present value of risk-free return .] 4. dividends. 2. The arbitrageur buys the futures contract and sells the underlying today (on the spot market). 2. The difference between the two amounts is the arbitrage profit. he returns it now. at time to maturity . will by the rate This relationship may be modified for storage costs. he invests the proceeds.

are standardized Exists. as markets Efficient. two parties (not traded on the exchanges). 32 .. Index Futures and Individual stock Futures in India. Price discovery Not efficient. guarantees their Liquidation Profile Low. Contracts contracts. price. as contracts are standardized made contracts exchange traded contracts. Commodities. assumed by the clearing corp. Contract Specifications Counter-party risk Differ from trade to trade. tailor as contracts are High. futures. as markets are centralized are scattered. However. which becomes the counter party to all the trades or unconditionally settlement. and all buyers and sellers come to a common platform to discover the Examples Currency market in India. Exists.TABLE 1DISTINCTION BETWEEN FUTURES AND FORWARDS CONTRACTS FEATURE Operational Mechanism FORWARD CONTRACT FUTURE CONTRACT Traded directly between Traded on the exchanges. catering to the needs of the needs of the parties.

OPTIONS A derivative transaction that gives the option holder the right but not the 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’. There are two types of options i.e., CALL OPTION & PUT OPTION. 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. 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.

Put and calls are almost always written on equities, although occasionally preference shares, bonds and warrants become the subject of options.


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: 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. 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 flows are supposed to remain unaffected by subsequent changes in the exchange rates. 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.


The other kind of derivatives, which are not, much popular are as follows:

BASKETS Baskets options are option on portfolio of underlying asset. Equity Index Options are most popular form of baskets.

LEAPS Normally option contracts are for a period of 1 to 12 months. However, exchange may introduce option contracts with a maturity period of 2-3 years. These long-term option contracts are popularly known as Leaps or Long term Equity Anticipation Securities.

WARRANTS Options generally have lives of up to one year, the majority of options traded on options exchanges having a maximum maturity of nine months. Longer-dated options are called warrants and are generally traded over-the-counter.

SWAPTIONS Swaptions are options to buy or sell a swap that will become operative at the expiry of the options. Thus a swaption is an option on a forward swap. Rather than have calls and puts, the swaptions market has receiver swaptions and payer swaptions. A receiver swaption is an option to receive fixed and pay floating. A payer swaption is an option to pay fixed and receive floating.


The history of derivatives is quite colourful and surprisingly a lot longer than most people think. Forward delivery contracts, stating what is to be delivered for a fixed price at a specified place on a specified date, existed in ancient Greece and Rome. Roman emperors entered forward contracts to provide the masses with their supply of Egyptian grain. These contracts were also undertaken between farmers and merchants to eliminate risk arising out of uncertain future prices of grains. Thus, forward contracts have existed for centuries for hedging price risk. The first organized commodity exchange came into existence in the early 1700’s in Japan. The first formal commodities exchange, the Chicago Board of Trade (CBOT), was formed in 1848 in the US to deal with the problem of ‘credit risk’ and to provide centralised location to negotiate forward contracts. From ‘forward’ trading in commodities emerged the commodity ‘futures’. The first type of futures contract was called ‘to arrive at’. Trading in futures began on the CBOT in the 1860’s. In 1865, CBOT listed the first ‘exchange traded’ derivatives contract, known as the futures contracts. Futures trading grew out of the need for hedging the price risk involved in many commercial operations. The Chicago Mercantile Exchange (CME), a spin-off of CBOT, was formed in 1919, though it did exist before in 1874 under the names of ‘Chicago Produce Exchange’ (CPE) and ‘Chicago Egg and Butter Board’ (CEBB). The first financial futures to emerge were the currency in 1972 in the US. The first foreign currency futures were traded on May 16, 1972, on International Monetary Market (IMM), a division of CME. The currency futures traded on the IMM are the British Pound, the Canadian Dollar, the Japanese Yen, the Swiss Franc, the German Mark, the Australian Dollar, and the Euro dollar. Currency futures were followed soon by interest rate futures. Interest rate futures contracts were traded for the first time on the CBOT on October 20, 1975. Stock index futures and options emerged in 1982. The first stock index


futures contracts were traded on Kansas City Board of Trade on February 24, 1982.The first of the several networks, which offered a trading link between two exchanges, was formed between the Singapore International Monetary Exchange (SIMEX) and the CME on September 7, 1984. Options are as old as futures. Their history also dates back to ancient Greece and Rome. Options are very popular with speculators in the tulip craze of seventeenth century Holland. Tulips, the brightly coloured flowers, were a symbol of affluence; owing to a high demand, tulip bulb prices shot up. Dutch growers and dealers traded in tulip bulb options. There was so much speculation that people even mortgaged their homes and businesses. These speculators were wiped out when the tulip craze collapsed in 1637 as there was no mechanism to guarantee the performance of the option terms. The first call and put options were invented by an American financier, Russell Sage, in 1872. These options were traded over the counter. Agricultural commodities options were traded in the nineteenth century in England and the US. Options on shares were available in the US on the over the counter (OTC) market only until 1973 without much knowledge of valuation. A group of firms known as Put and Call brokers and Dealer’s Association was set up in early 1900’s to provide a mechanism for bringing buyers and sellers together. On April 26, 1973, the Chicago Board options Exchange (CBOE) was set up at CBOT for the purpose of trading stock options. It was in 1973 again that black, Merton, and Scholes invented the famous Black-Scholes Option Formula. This model helped in assessing the fair price of an option which led to an increased interest in trading of options. With the options markets becoming increasingly popular, the American Stock Exchange (AMEX) and the Philadelphia Stock Exchange (PHLX) began trading in options in 1975. The market for futures and options grew at a rapid pace in the eighties and nineties. The collapse of the Bretton Woods regime of fixed parties and the


the Nasdaq 100. The N225 is also traded on the Chicago Mercantile Exchange. The Philadelphia Stock Exchange is the premier exchange for trading foreign options. The CBOT now offers 48 futures and option contracts (with the annual volume at more than 211 million in 2001). the Dow Jones Industrial Average. The CBOE trades options on the S&P 100 and the S&P 500 stock indices.introduction of floating rates for currencies in the international financial markets paved the way for development of a number of financial derivatives which served as effective risk management tools to cope with market uncertainties. 38 . The most traded stock indices include S&P 500. and the Nikkei 225. The US indices and the Nikkei 225 trade almost round the clock.The CBOE is the largest exchange for trading stock options. The CBOT and the CME are two largest financial exchanges in the world on which futures contracts are traded.

INDIAN DERIVATIVES MARKET Starting from a controlled economy. SIMEX chose Nifty for trading futures and options on an Indian index.12. The introduction of risk management instruments in India gained momentum in the last few years due to liberalisation process and Reserve Bank of India’s (RBI) efforts in creating currency forward market. derivatives trading commenced in India Table 2. SEBI setup L. NSE gauging the market requirements initiated the process of setting up derivative markets in India. RBI gave permission for OTC forward rate agreements (FRAs) and interest rate swaps. 12 June 2000 Trading of Nifty futures commenced at NSE.C. India has moved towards a world where prices fluctuate every day.Gupta Committee submitted report. 2000 2 June 2001 Individual Stock Options & Derivatives (1) Need for derivatives in India today 39 .Gupta Committee to draft a policy framework for index futures.C. Chronology of instruments 1991 14 December 1995 18 November 1996 11 May 1998 7 July 1999 24 May 2000 25 May 2000 Liberalisation process initiated NSE asked SEBI for permission to trade index futures. In July 1999. Derivatives are an integral part of liberalisation process to manage risk. SEBI gave permission to NSE and BSE to do index futures trading. 25 September Nifty futures trading commenced at SGX. L. 9 June 2000 Trading of BSE Sensex futures commenced at BSE.

There was a huge gap between the investors’ aspirations of the markets and the available means of trading. There are many myths about derivatives but the realities that are different especially for Exchange traded derivatives. Today. Today. 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. The opening of Indian economy has precipitated the process of integration of India’s financial markets with the international financial markets. While this is true for many countries.In less than three decades of their coming into vogue. which have developed into a very large market. derivatives have become part and parcel of the day-to-day life for ordinary people in major part of the world. which are well regulated with all the safety mechanisms in place. derivatives markets have become the most important markets in the world. cross currency options etc. when US announced an end to the Bretton Woods System of fixed exchange rates leading to introduction of currency derivatives followed by other innovations including stock index futures. Financial derivatives came into the spotlight along with the rise in uncertainty of post-1970. (2) Myths and realities about derivatives In less than three decades of their coming into vogue. 40 . derivatives markets have become the most important markets in the world. derivatives have become part and parcel of the day-to-day life for ordinary people in major parts of the world. 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. Until the advent of NSE. there are still apprehensions about the introduction of derivatives. the Indian capital market had no access to the latest trading methods and was using traditional out-dated methods of trading.

the financial markets in the world started undergoing radical changes. This situation led to development derivatives as effective risk management tools for the market participants. effective method for users to hedge and manage their exposures to interest rates. increased trading in variety of derivatives instruments. Agricultural futures and options helped farmers and processors hedge against commodity price risk. By providing investors and issuers with a wider array of tools for managing risks and raising capital. After the fallout of Bretton wood agreement. etc.• • Derivatives are complex and exotic instruments that Indian investors will find difficulty in understanding Is the existing capital market safer than Derivatives? (i) Derivatives increase speculation and do not serve any economicpurpose: Numerous studies of derivatives activity have led to a broad consensus. An equity fund. for example. This period is marked by remarkable innovations in the financial markets such as introduction of floating rates for the currencies. As the complexity of instruments increased many folds. The need for derivatives as hedging tool was felt first in the commodities market. derivatives improve the allocation of credit 41 . Derivatives are a low-cost. on-line trading in the capital markets. commodity prices or exchange rates. the accompanying risk factors grew in gigantic proportions. Looking at the equity market. both in the private and public sectors that derivatives provide numerous and substantial benefits to the users. can reduce its exposure to the stock market quickly and at a relatively low cost without selling off part of its equity assets by using stock index futures or index options. derivatives allow corporations and institutional investors to effectively manage their portfolios of assets and liabilities through instruments like stock index futures and options.

High Liquidity underlying in the The daily average traded volume in Indian capital market today is around 7500 crores.765000 crores.and the sharing of risk in the global economy. and innovative legal guardian who is helping the market to evolve to a Trade guarantee A Strong Depository A Good legal guardian 42 . which are needed for the introduction of derivatives. NSCCL is responsible for guaranteeing all open positions on the National Stock Exchange (NSE) for which it does the clearing. Here. National Securities Depositories Limited (NSDL) which started functioning in the year 1997 has revolutionalised the security settlement in our country. Now that world markets for trade and finance have become more integrated. derivatives have strengthened these important linkages between global markets. and how Indian market fares: TABLE 3. The first clearing corporation guaranteeing trades has become fully functional from July 1996 in the form of National Securities Clearing Corporation (NSCCL). independent. In the Institution of SEBI (Securities and Exchange Board of India) today the Indian capital market enjoys a strong. PRE-REQUISITES INDIAN SCENARIO Large market India is one of the largest market-capitalised Capitalisation countries in Asia with a market capitalisation of more than Rs. Which means on an average every month 14% of the country’s Market capitalisation gets traded. These are clear indicators of high liquidity in the underlying. increasing market liquidity and efficiency and facilitating the flow of trade and finance (ii) Indian Market is not ready for derivative trading Often the argument put forth against derivatives trading is that the Indian capital market is not ready for derivatives trading. we look into the prerequisites. lowering the cost of capital formation and stimulating economic growth.

before June 2001 New System Vs Existing System for Market Players Figure 3. SYSTEM Peril &Prize 1) Both profit & loss to extent of price change. In fact it should have been introduced much before and NSE had approved it but was not active because of politicization in SEBI.3d shows how advantages of new system (implemented from June 20001) v/s the old system i. but I feel that this new system is very useful especially to retail investors. It increases the no of options investors for investment. margin possible trading & carry forward transactions. New Peril Approach 1)Buy &Sell stocks 1)Maximum on delivery basis loss 2) Buy Call &Put by paying premium to premium paid Advantages • • Greater Leverage as to pay only the premium. 2) Buy Index Futures hold till expiry.3a –3. Greater variety of strike price options at a given time. The figure 3.e. (3) Comparison of New System with Existing System Many people and brokers in India think that the new system of Futures & Options and banning of Badla is disadvantageous and introduced early.healthier place for trade practices.3a Speculators Existing Approach &Prize 1) Deliver based Trading. 43 .

44 .3c Hedgers Existing Approach &Prize SYSTEM Peril &Prize Approach New Peril 1) Difficult to 1) No Leverage offload holding available risk during adverse reward dependant market conditions on market prices as circuit filters limit to curtail losses. cost is only 2)For Long. in weekly settlement forward transactions. 2) Cash &Carry 2) If Future Contract arbitrage continues more or less than Fair price • Fair Price = Cash Price + Cost of Carry. long position benefit else exercise the option. 1)Fix price today to buy 1) Additional latter by paying premium. Option. the Market moves. Figure 3. buy ATM Put premium.3b Arbitrageurs Existing Approach &Prize SYSTEM Peril &Prize Approach New Peril 1) Buying Stocks in 1) Make money 1) B Group more 1) Risk free one and selling in whichever way promising as still game.Figure 3. another exchange. If market goes up.

45 .3)Sell deep OTM call option with underlying shares. SYSTEM Peril &Prize 1) Plain Buy/Sell implies unlimited profit/loss. 1) Buy Call/Put options based on market outlook 2) Hedge position if holding underlying stock Advantages • Losses Protected.3d Small Investors Existing Approach &Prize 1) If Bullish buy stocks else sell it. New Approach Peril 1) Downside remains protected & upside unlimited. earn premium + profit with increase prcie Advantages • Availability of Leverage Figure 3.

banking supervision and market surveillance. The OTC derivatives markets have the following features compared to exchange-traded derivatives: 1. or margining. the former have rigid structures compared to the latter. leverage. These episodes of turbulence revealed the risks posed to market stability originating in features of OTC derivative instruments and markets. The OTC contracts are generally not regulated by a regulatory authority and the exchange’s self-regulatory organization. 3. OTC derivatives markets The OTC derivatives markets have witnessed rather sharp growth over the last few years. The recent developments in information technology have contributed to a great extent to these developments. 4. The management of counter-party (credit) risk is decentralized and located within individual institutions. 46 . It has been widely discussed that the highly leveraged institutions and their OTC derivative positions were the main cause of turbulence in financial markets in 1998. There are no formal centralized limits on individual positions. which has accompanied the modernization of commercial and investment banking and globalisation of financial activities.4. Exchange-traded vs. and 5. and for safeguarding the collective interests of market participants. Some of the features of OTC derivatives markets embody risks to financial market stability. There are no formal rules for risk and burden-sharing. 2. There are no formal rules or mechanisms for ensuring market stability and integrity. although they are affected indirectly by national legal systems. While both exchange-traded and OTC derivative contracts offer many benefits.

occur which significantly alter the perceptions of current and potential future credit exposures. the progress has been limited in implementing reforms in risk management. There has been some progress in addressing these risks and perceptions. those who provide OTC derivative products. Indian law considers them illegal.The following features of OTC derivatives markets can give rise to instability in institutions. When asset prices change rapidly. Instability arises when shocks. (ii) information asymmetries. Moreover. 47 . The problem is more acute as heavy reliance on OTC derivatives creates the possibility of systemic financial events. In view of the inherent risks associated with OTC derivatives. such as counter-party credit events and sharp movements in asset prices that underlie derivative contracts. and (v) the central role of OTC derivatives markets in the global financial system. including counter-party. the size and configuration of counter-party exposures can become unsustainably large and provoke a rapid unwinding of positions. (iv) the high concentration of OTC derivative activities in major institutions. which fall outside the more formal clearing house structures. liquidity and operational risks. However. hedge their risks through the use of exchange traded derivatives. and the international financial system: (i) the dynamic nature of gross credit exposures. and OTC derivatives markets continue to pose a threat to international financial stability. and their dependence on exchange traded derivatives. (iii) the effects of OTC derivative activities on available aggregate credit. markets.

These factors are constantly interacting in the market causing changes in the price over a short period of time. There is a price to be paid for the purchase of food grain. The break down of the BRETTON WOODS agreement brought and end to the stabilising role of fixed exchange rates and the gold convertibility of the dollars. In a market. local currency or foreign currencies. Nations that were poor suddenly 48 . petrol. oil. The objects having value maybe commodities. Such changes in the price are known as ‘price volatility’. FACTORS CONTRIBUTING TO THE GROWTH OF DERIVATIVES: Factors contributing to the explosive growth of derivatives are price volatility. globalisation of the markets.5. metal. These price changes expose individuals. consumers have ‘demand’ and producers or suppliers have ‘supply’.} PRICE VOLATILITY – A price is what one pays to acquire or use something of value. the price one pays for use of a unit of another persons money is called interest rate. technological developments and advances in the financial theories. The globalisation of the markets and rapid industrialisation of many underdeveloped countries brought a new scale and dimension to the markets. Prices are generally determined by market forces. producing firms and governments to significant risks. The changes in demand and supply influencing factors culminate in market adjustments through price changes. This has three factors: the speed of price changes. A. The concept of price is clear to almost everybody when we discuss commodities. And the price one pays in one’s own currency for a unit of another currency is called as an exchange rate. and the collective interaction of demand and supply in the market determines the price. the frequency of price changes and the magnitude of price changes. etc.

} GLOBALISATION OF MARKETS – Earlier. B. This factor alone has contributed to the growth of derivatives to a significant extent. it is evident that globalisation of industrial and financial activities necessitates use of derivatives to guard against future losses. what happened in other part of the world was mostly irrelevant. Now globalisation has increased the size of markets and as greatly enhanced competition . The advent of telecommunication and data processing bought information very quickly to the markets. managers had to deal with domestic economic concerns.became a major source of supply of goods. led to cut profit margins In Indian context. south East Asian currencies crisis of 1997 had affected the competitiveness of our products vis-à-vis depreciated currencies. Even equity holders are exposed to price risk of corporate share fluctuates rapidly. The fear of china devaluing its currency created instability in Indian exports. Steel industry in 1998 suffered its worst set back due to cheap import of steel from south East Asian countries. Information which would have taken months to impact the market earlier can now be obtained in matter of moments. foreign exchange. It has also exposed the modern business to significant risks and. equity shares and bonds. in many cases. Suddenly blue chip companies had turned in to red. Export of certain goods from India declined because of this crisis. Thus. 49 . These price volatility risks pushed the use of derivatives like futures and options increasingly as these instruments can be used as hedge to protect against adverse price changes in commodity. The Mexican crisis in the south east-Asian currency crisis of 1990’s has also brought the price volatility factor on the surface.it has benefited consumers who cannot obtain better quality goods at a lower cost.

The effect of this risk can easily destroy a business which is otherwise well managed. These facilitated the more rapid movement of information and consequently its instantaneous impact on market price. At the same time there were significant advances in software programmes without which computer and telecommunication advances would be meaningless. Although price sensitivity to market forces is beneficial to the economy as a whole resources are rapidly relocated to more productive use and better rationed overtime the greater price volatility exposes producers and consumers to greater price risk. Derivatives can help a firm manage the price risk inherent in a market economy.} ADVANCES IN FINANCIAL THEORIES – Advances in financial theories gave birth to derivatives. In late 1970’s. Option pricing models developed by Black and Scholes in 1973 were used to determine prices of call and put options. derivatives and risk management products become that much more important. Improvement in communications allow for instantaneous worldwide conferencing. Initially forward contracts in its traditional form. Closely related to advances in computer technology are advances in telecommunications. Data transmission by satellite. network systems and enhanced method of data entry. To the extent the technological developments increase volatility.C.} TECHNOLOGICAL ADVANCES – A significant growth of derivative instruments has been driven by technological breakthrough. was the only hedging tool available. Advances in this area include the development of high speed processors. D. The above factors in combination of lot many factors led to growth of derivatives instruments 50 . The work of economic theorists gave rise to new products for risk management which led to the growth of derivatives in financial markets. work of Lewis Edeington extended the early work of Johnson and started the hedging of financial price risks with financial futures.

worked out the operational details of margining system.Gupta on November 18. broker net worth. The report. deposit requirement and real–time monitoring requirements. however. 1996 to develop appropriate regulatory framework for derivatives trading in India. Derivatives trading commenced in India in June 2000 after SEBI granted the final approval to this effect in May 2001. The act also made it clear that derivatives shall be legal and valid only if such contracts are traded on a recognized stock exchange. methodology for charging initial margins. The Securities Contract Regulation Act (SCRA) was amended in December 1999 to include derivatives within the ambit of ‘securities’ and the regulatory framework were developed for governing derivatives trading. The government also rescinded in March 2000. which was submitted in October 1998.Varma. To begin with. The committee recommended that derivatives should be declared as ‘securities’ so that regulatory framework applicable to trading of ‘securities’ could also govern trading of securities. SEBI set up a 24–member committee under the Chairmanship of Dr. This 51 . The committee submitted its report on March 17. NSE and BSE. the three decade old notification. as there was no regulatory framework to govern trading of derivatives.J. SEBI approved trading in index futures contracts based on S&P CNX Nifty and BSE–30 (Sense) index. The market for derivatives. which withdrew the prohibition on options in securities. and their clearing house/corporation to commence trading and settlement in approved derivatives contracts. 1998 prescribing necessary pre–conditions for introduction of derivatives trading in India. to recommend measures for risk containment in derivatives market in India. did not take off.C.13.L. SEBI also set up a group in June 1998 under the Chairmanship of Prof. which prohibited forward trading in securities. DEVELOPMENT OF DERIVATIVES MARKET IN INDIA The first step towards introduction of derivatives trading in India was the promulgation of the Securities Laws (Amendment) Ordinance. SEBI permitted the derivative segments of two stock exchanges. thus precluding OTC derivatives.R. 1995.

as the former closely resembles the erstwhile badla system. options are considered more valuable when the volatility of the underlying (in this case. The trading in index options commenced on June 4. The following are some observations based on the trading statistics provided in the NSE report on the futures and options (F&O): • Single-stock futures continue to account for a sizable proportion of the F&O segment. The index futures and options contract on NSE are based on S&P CNX Trading and settlement in derivative contracts is done in accordance with the rules. the index) is high. A primary reason attributed to this phenomenon is that traders are comfortable with single-stock futures than equity options. and regulations of the respective exchanges and their clearing house/corporation duly approved by SEBI and notified in the official gazette. Foreign Institutional Investors (FIIs) are permitted to trade in all Exchange traded derivative products. 2001 and trading in options on individual securities commenced on July 2. • On relative terms. 2001 and the trading in options on individual securities commenced in July 2001. byelaws. The trading in BSE Sensex options commenced on June 4. 2000. Single stock futures were launched on November 9. Futures contracts on individual stocks were launched in November 2001.was followed by approval for trading in options based on these two indexes and options on individual securities. Typically. A related issue is that brokers do not earn high 52 . This may be due to the low volatility of the spot index. 2001. 2001. volumes in the index options segment continue to remain poor. It constituted 70 per cent of the total turnover during June 2002. The derivatives trading on NSE commenced with S&P CNX Nifty Index futures on June 12.

the intra-day stock price variations should not have a one-to-one impact on the option premiums. The fact that the option premiums tail intra-day stock prices is evidence to this. The fall in call-put volumes ratio suggests that the traders are increasingly becoming pessimistic on the market. turnover been of derivatives in India followed by market foreign exchange swaps account for the largest share of the total forwards Significant milestones in the development of derivatives market (i) permission to banks to undertake cross currency derivative to the transactions subject to certain conditions (1996) (ii) allowing corporates to undertake long term foreign currency swaps that contributed rupee options (2003) and (iv) introduction development of the term currency swap market (1997) (iii) allowing dollar of currency futures (2008). • The spot foreign exchange market remains the most important In the derivative and options. I would like to emphasise that currency swaps allowed companies with ECBs to swap their foreign currency liabilities into rupees. since banks 53 . Trading in equity options on most stocks for even the next month was non-existent.commissions by recommending index options to their clients. • Farther month futures contracts are still not actively traded.32 in June. However.86 in January 2002 to 1. • Daily option price variations suggest that traders use the F&O segment as a less risky alternative (read substitute) to generate profits from the stock price movements. because low volatility leads to higher waiting time for round-trips. If calls and puts are not looked as just substitutes for spot trading. The call-put volumes in index options have decreased from 2. • Put volumes in the index options and equity options segment have increased since January 2002. have segment but the derivative segment ha s also grown.

Normally such risks should be taken by corporates who have natural hedge or have potential foreign exchange earnings. The turnover in the currency futures market is in line with the international scenario.9 21. This period has also witnessed several relaxations in regulations relating to forex markets and also greater liberalisation in capital account regulations leading to greater integration with the global economy.0 April’06Mar’07 6.37: 1 49.6:1 50.9 17.3 April’08Dec’08 9.7 19. where I understand the share of futures market ranges between 2 – 3 per cent.could not carry open positions the risk was allowed to be transferred to any other resident corporate.1ForexMarketActivity April’05Total turnover (USD billion) Inter-bank to Merchant ratio Spot/Total Turnover (%) Forward/Total Turnover (%) Mar’06 4.181 crores during the same period.404 2. The average daily turnover in all the exchanges has also increased from Rs871 crores to Rs 2.5 54 .571 2. 803 crores in December 2008. Table 4.304 2.5 19.7:1 51.9 April’07Mar’08 12.621 2.66:1 45. 429 crores in October 2008 to Rs 45. • Cash settled exchange traded currency futures have made foreign But often corporate assume these risks due to interest rate differentials and currency a separate asset class that can be traded without any underlying need or exposure a n d on a leveraged basis on the recognized stock exchanges with credit risks being assumed by the central counterparty Since the commencement of trading of currency futures in all the three exchanges. the value of the trades has gone up steadily from Rs 17. views on currencies.

consider an investor who owns an asset. futures markets provide a low cost trading mechanism. Large spot transactions can often lead to significant price changes.] OPERATIONAL ADVANTAGES – As opposed to spot markets. the put option can always be exercised.5 30. if the spot price falls below the exercise price. they offer greater liquidity.] RISK MANAGEMENT – Futures and options contract can be used for altering the risk of investing in spot market. Thus information pertaining to supply and demand easily percolates into such markets.7 14. He can protect himself by selling a futures contract. However.Swap/Total Turnover (%) Source: RBI 30. as you will see later. For instance. Similarly.1 31. Futures prices are believed to contain information about future spot prices and help in disseminating such information. BENEFITS OF DERIVATIVES Derivative markets help investors in many different ways: 1. because herein you can take large positions by depositing relatively small margins. derivatives markets involve lower transaction costs. futures markets tend to be more liquid than spot markets. 2. the short hedgers will gain in the futures market. He will always be worried that the price may fall before he can sell the asset. Accurate prices are essential for ensuring the correct allocation of resources in a free market economy. Consequently. Options markets provide information about the volatility or risk of the underlying asset. a large position in derivatives markets is relatively easier to take and has less of a price impact as opposed to 55 .1 32. or by buying a Put option. If the spot price falls.] PRICE DISCOVERY – Price discovery refers to the markets ability to determine true equilibrium prices. 3. This will help offset their losses in the spot market. As we have seen. Secondly.

Finally. 56 .a transaction of the same magnitude in the spot market. it is easier to take a short position in derivatives markets than it is to sell short in spot markets.

Since it is easier and cheaper to trade in derivatives.] EASE OF SPECULATION – Derivative markets provide speculators with a cheaper alternative to engaging in spot transactions.4. Also. Thus derivatives help in discovery of future as well as current prices.] MARKET EFFICIENCY – The availability of derivatives makes markets more efficient. Speculators always take calculated risks. Derivatives markets help increase savings and investment in the long run. spot. 5. the amount of capital required to take a comparable position is less in this case. The derivative market performs a number of economic functions. it is possible to exploit arbitrage opportunities quickly and to keep prices in alignment. • • An important incidental benefit that flows from derivatives trading is that it acts as a catalyst for new entrepreneurial activity. A speculator will accept a level of risk only if he is convinced that the associated expected return is commensurate with the risk that he is taking. This is important because facilitation of speculation is critical for ensuring free and fair markets. 57 . futures and options markets are inextricably linked. Transfer of risk enables market participants to expand their volume of activity. • The prices of derivatives converge with the prices of the underlying at the expiration of derivative contract. Hence these markets help to ensure that prices reflect true values.

Ahmedabad.. viz.15. Ahmedabad commenced futures trading in November 2002. Ltd. While the NMCE. Corporation India.) an independent and demutulised multi commodity exchange has permanent recognition from Government of India for facilitating online trading. HDFC Bank. State Bank of Saurashtra. MCX MCX (Multi Commodity Exchange of India Ltd. Three such Exchanges. Traders. Exporters. Canera Bank. Regional Trading Canters. (NMCE). Bank of Bank of Baroda. Today MCX is offering spectacular growth opportunities and advantages to a large cross section of the participants including Producers / Processors. State Bank of India. National Multi-Commodity Exchange of India Ltd. clearing and settlement operations for commodity futures markets across the country. National Commodity & Derivatives Exchange (NCDEX). MCX is led by an expert management team with deep domain knowledge of the commodity futures markets. offering multiple commodities for trading with wide reach and penetration and robust infrastructure. National Exchanges In enhancing the institutional capabilities for futures trading the idea of setting up of National Commodity Exchange(s) has been pursued since 1999. State Bank of Hyderabad. Union Bank of India. MCX and NCDEX. Industry Associations. Cooperatives. SBI Life Insurance Co. Mumbai. Mumbai have become operational. amongst others MCX being nation-wide commodity exchange. Corporate.. Importers. 58 . “National Status” implies that these exchanges would be automatically permitted to conduct futures trading in all commodities subject to clearance of byelaws and contract specifications by the FMC.. Bank Headquartered in Mumbai. Mumbai commenced operations in October/ December 2003 respectively. Key shareholders of MCX are Financial Technologies (India) Ltd. and Multi Commodity Exchange (MCX). State Bank of Indore.

Even today. facilitates online trading. In 59 . Punjab National Bank (PNB) took equity of the Exchange to establish that linkage. a state-ofthe-art nationwide. It has also established fair and transparent rule-based procedures and demonstrated total commitment towards eliminating any conflicts of interest. National Institute of Agricultural Marketing (NIAM). NMCE facilitates electronic derivatives trading through robust and tested trading platform. Gujarat Agro-Industries Corporation Limited (GAICL). Derivative Trading Settlement System (DTSS). cooperatives.MCX. is an independent and demutualised multi commodity Exchange. and Neptune Overseas Limited (NOL). digital Exchange. MCX. NMCE is the only Exchange in India to have such investment and technical support from the commodity relevant institutions. National Agricultural Cooperative Marketing Federation of India (NAFED). NMCE follows best international risk management practices. NMCE was the first commodity exchange to provide trading facility through internet. warehousing. Gujarat State Agricultural Marketing Board (GSAMB). through Virtual Private Network (VPN). It is the only Commodity Exchange in the world to have received ISO 9001:2000 certification from British Standard Institutions (BSI). private and public sector marketing of agricultural commodities. The contracts are marked to market on daily basis. finance was still a vital missing link. having a permanent recognition from the Government of India. It has robust delivery mechanism making it the most suitable for the participants in the physical commodity markets. viz. While various integral aspects of commodity economy.. research and training were adequately addressed in structuring the Exchange. NMCE National Multi Commodity Exchange of India Ltd. (NMCE) was promoted by Central Warehousing Corporation (CWC). The system of upfront margining based on Value at Risk is followed to ensure financial security of the market. provided by CMC. clearing and settlement operations for a commodities futures trading.

Rapeseed - 60 . Chilli. Stamp Act. special intra-day clearing and settlement is held. Expeller Mustard Oil. Castor Seed. Chana. The unique strength of NMCE is its settlements via a Delivery Backed System. It has been launched to provide a worldclass commodity exchange platform for market participants to trade in a wide spectrum of commodity derivatives driven by best global practices. Mild Steel Ingot. These deliveries are executed through a sound and reliable Warehouse Receipt System. It is a public limited company registered under the Companies Act. Gold. Maharashtra in Mumbai on April 23.Cashew. Crude Palm Oil. NCDEX currently facilitates trading of thirty six commodities . Guar gum. leading to guaranteed clearing and settlement. Cotton. Guar Seeds. Mulberry Green Cocoons.the event of high volatility in the prices. Forward Commission (Regulation) Act and various other legislations. The reach will gradually be expanded to more centres.2003. NCDEX National Commodity and Derivatives Exchange Ltd (NCDEX) is a technology driven commodity exchange. Gur. 1956 with the Registrar of Companies. professionalism and transparency. Jute sacking bags. which impinge on its working. Cotton Seed Oilcake. NMCE was the first to initiate process of dematerialization and electronic transfer of warehoused commodity stocks. Besides. It is located in Mumbai and offers facilities to its members in more than 390 centres throughout India. Pepper. It has an independent Board of Directors and professionals not having any vested interest in commodity markets. Contracts Act. an imperative in the commodity trading business. Coffee. Jeera. NCDEX is subjected to various laws of the land like the Companies Act. Forward Markets Commission regulates NCDEX in respect of futures trading in commodities.

Tur. Rice. Sesame Seeds. Soy Bean. TABLE4: THE CURRENT PROFILE OF FUTURES TRADING IN INDIA WITH RESPECT TO THE VARIOUS EXCHANGES IN INDIA:- 61 . Wheat. RBD Palmolein. Yellow Red Maize & Yellow Soybean Meal. Urad (Black Matpe). Yellow Peas. Turmeric.Raw Jute. Refined Soy Oil. Silk. Sugar.Mustard Seed . Rubber. Silver.

The Present Status: 62 .16.

Calcutta The East India Cotton Association Cotton Ltd. 12. Rajkot 9. 13.Presently futures’ trading is permitted in all the commodities. 4. 1. The Ahmedabad palmolein. Mustard seed its oil & Ltd. Potatoes and Mustard seed Commodities Gur Exchange Ltd. Gur Bhatinda The Chamber of Commerce. cottonseed. Groundnut. Sangli. 63 . Delhi oilcake Bhatinda Om & Oil Exchange Ltd. Gur. Exchange India Pepper COMMODITY Trade Pepper (both domestic and international contracts) Ltd. Indore Soya seed. Mustard seed & Spice Association. Hapur The Meerut Agro Gur. Mumbai The Spices & Oilseeds Exchange Turmeric Ltd... Trading is taking place in about 78 commodities through 25 Exchanges/Associations as given in the table below:TABLE 4 Registered commodity exchanges in India No.. Commodity Castorseed. 11. 2.. 3. cottonseed.. Meerut The Bombay Commodity Exchange Oilseed Complex.. Castor Ltd. and cotton RBD (kapas) Merchants Association. Oil & oil international contracts Bullion Castor seed. its oil & cake. National Board of Trade. Ahmedabad oil and oilcake The East India Jute & Hessian Hessian & Sacking Exchange Ltd. 6. 7. 5. 10. Kochi (IPSTA) Vijai Beopar Chambers Muzaffarnagar Rajdhani Oils & Oilseeds Exchange Gur. Soyaoil and Soya meals.. its oil & cake.. its Exchange. Mumbai Rajkot Seeds. 8.

.. 21. 2008-09 64 .14. The Board at its meeting on November 29.. Several Commodities Mumbai Bikaner commodity Exchange Ltd. Bikaner Guar Gum 24. Accordingly. Mumbai Multi Commodity Exchange Ltd.. Equity Derivatives Segment A. Gwalior E-sugar India Ltd. Observations on the quarterly data for July-September. 19. New Delhi commence) National Commodity & Derivatives. Hissar Mustard seed complex 25. Kapas Sugar (trading yet to Oilseeds. Haryana Commodities Ltd. 17. 16. 2002 had desired that a quarterly report be submitted to the Board on the developments in the derivative market. Bangalore Surendranagar Cotton Oil & Cotton.. its oil & India Ltd. Cottonseed. Several Commodities Exchange Ltd.. Mustard seeds its oil & oilcake. 23.. 2.. Kochi Central India oilcake Commercial Gur and Mustard seed Exchange Ltd. Gram.. Surendranagar E-Commodities Ltd. Guar seed. 20. Rapeseed/Mustardseed its oil and oilcake and RBD Palmolien The First Commodities Exchange of Copra/coconut. this memorandum presents a status report for the quarter July-September 2008-09 on the developments in the derivative market. Ahmedabad Coffee Futures Exchange India Coffee Ltd. 22. 15. 18. STATUS REPORT OF THE DEVELOPMENTS IN THE DERIVATIVE MARKET 1.. Jaipur Mustard seed Complex 17.. Mumbai Sugar National Multi-Commodity Several Commodities Exchange of India Ltd. Bullion Association Ltd.

 Options constituted 32. 9870 crore.94% respectively.12% of derivatives turnover in individual stocks.7 lakh while turnover increased by 24. Stock Future and Index Future accounted for 35.19 times that of its cash segment.  Client trading constituted 60.491 crore. State Bank of India and ICICI Bank Ltd were the most actively traded scrips in the derivatives segment.80% of the total volumes.  Reliance.1.315.698. 3. the turnover at BSE was Rs.  Futures (Index Future + Stock Future) constituted 67.17%. 65 .307 thousand crore.76% of the total turnover.510 crore.  Turnover at F&O segment was 4.99 lakh and total turnover was Rs.  Total volume in shorter dated derivative contracts (contracts with maturity up to 3months) was 1.06% to 1. Refer Table 1  Volume (no.During July-September 2008-09. Reliance Capital Ltd. This mainly comprised of trading in Index Option (30.20% of the total number of contracts traded in the F&O Segment.68%). Reliance Petro.77% to Rs. 3. Ltd. of contracts) increased by 42. 3. which was insignificant as compared to that of NSE at Rs.317 thousand crore in JulySeptember 2008-09 over April-June 2008-09.695 lakh and total turnover was Rs. Propriety trading constituted 31.07% and FII trading constituted remaining 8. Refer Table 2  Volume in longer dated derivative contracts (contracts with maturity of more than three months and up to 3 years) was 3. Together they contributed 25.26% and 31.

2 1. 37 thousand crore.Refer Table 3  Volume in Mini Nifty (contracts with minimum lot size of Rs. S&P CNX Nifty futures recorded highest average daily volatility of 2.1 599.5 1.3 521.9 Single Stock 514.6 1. of contracts traded) of Nifty Future at SGX as a percentage of the volume of Nifty Future at NSE was 8. ‘000) Contracts(Lakh) (Rs.130.55% during July.7 935.6 542. of Turnover PRODUCT Contracts(L (Rs. Refer Table 5  The volume (in terms of no.1 lakh) was 44 lakh and total turnover was Rs. Refer Table 6  India stands 2nd in Stock Futures.077.5 Index Option 240. of Turnover No.85% in July 2008.3 Future 66 . Table-5: Fact file of July-September 2008-09 with respect to the Depth Market Depth previous quarter APRIL-JUNE 2008-09 JULY-SEPTEMBER2008-09 No.September 2008-09.0 1. 2008) in World Derivatives Market (in terms of volume) at the end of September 2008.093.  Derivative contracts were launched on 38 securities at National Stock Exchange during July-September 2008-09. ‘000) akh) VOLUME & TURNOVER Index Future 415. 16th in Stock Option and 4th in Index Options (as on November 10. 2008. Refer Table 4  During July-September. 2nd in Index Futures.039.1 571.

12 1.48 34.7 31.9 1. Ltd .8 1.76 Table-6: Data for Shorter Dated and Longer Dated derivative contracts Time Period Trades in Shorter Dated Trades in 3 Months) more than Longer Dated 3 months) derivative contracts (up t o derivative contracts 67 .ICICI Bank Ltd in (avg.Reliance Petro.9 Single Stock 41.77 31.1 Turnover in F&O as multiple of turnover in 3.195.72 derivatives turnover (%) Client (excluding FII trades) Proprietary 27.88 .94 30.08 4.1 3.17 FII 12.Reliance Petro.33 2.11 69.0 32.Infosys Tech.07 60.130.4 35.Reliance Five most active .077.658.317.49 35.68 35.3 2.Reliance .20 21.26 cash segment .5 1.039.5 58.35 8.Reliance Capital Ltd active scrips in .Stock Option Total Market Share ( %) Index Future 25.State Bank of India .19 69.3 Future Stock Option 2. scrips in the . of three months 25.19 Market Concentration Index Option 1. Ltd the F&O Segment Contribution of the above f iv e to total 23. Ltd.26 2.Tata Steel F&O Segment .12 59.09 31.698.Reliance Capital Ltd .

‘000 cr. ‘000 cr.307.655.694.) No (lakh) (more of contracts Turnover (Rs.) July-September 2008-09 Apr-Jun 09 20081.97 3.194.(Quarter) No contracts (lakh) of Turnover (Rs.11 2.4 36.9 27.99 4.64 1.5 Table-7: Data for Mini Nifty derivative contracts Time (Quarter) Period No contract (lakh) of Turnover (Rs.87 12.7 68 .8 29.) July-September 2008-09 Apr-Jun 09 200843.83 9. ‘000 cr.88 3.

55 Volume SGX Future (Nifty volume) Volume SGX volume as Future % of NSE Volume 69 . Maximum and Average Daily Volatility of the F&O segment at NSE for S&P CNX Nifty since April 2008 Average volatility Month April-08 May-08 June-08 July-08 August-08 September08 (%) 2.776 3.61 2.241.38 2.58 47.Table-8: Minimum.05 1.28 3.10 2.47 1.764.418 8.09 Maximum Volatility (%) Minimum Volatility (%) Table-9: SGX volume as a percentage of NSE volume for Nifty Future in terms of no.08 2.28 2.775 4.99 2.977.80 2.27 2.61 2.034 8. 2008-09 NSE Month (Nifty volume) JulySeptember 2008-09 Apr-Jun 200809 37. of contracts for the period April – September.104.51 2.85 2.98 1.71 1.56 1.

as observed from the data.  In Index Option.08%) during July-September 2008-09 over April-June 2008-09. Possible reasons for increase in options trading activity can be attributed to increase in volatility. 2008) Salient points for the 2nd quarter 2008-09  The volume (no. However. under the present scenario the fall in the market has been accompanied by high volumes. This indicates that there are sufficient long position holders who anticipate value proposition in a falling market. Market observers believe that conditions across markets and asset classes have become more volatile and uncertain in the recent past. of contracts) and open interest in the derivatives market has increased even when the underlying market is witnessing a downward trend.95%) and volume (117. Falling or rising markets on the back of low volumes may be a cause of concern from the point of market integrity.world-exchanges. 70 .Table-10: Standing of India in World Derivatives Market (in terms of volume) Products Stock Future Index Future Stock Option Index Option July 2008 1 2 9 4 August 2008 1 2 15 4 September 2008 2 2 16 4 Source: www.org (as on November 10. Generally in such conditions. there is a sharp increase in turnover (97.

many people believe that options act as "insurance" against adverse price movements while offering the flexibility to benefit from possible favourable price movements at the same time. turnover increased by 24.  In Index Future.15% and turnover increased by 33.  For shorter dated derivative contracts.  There is a decrease in turnover (4.43% during July-September 2008-09 over April-June 2008-09.04%) and volume (17.92%) in Single Stock Futures during July.52% whereas volume increased by 4. Another reason which can be attributed to the increase in activity is the new directive as per the Budget 2008-09 which states that STT would now be levied on the Option premium instead of the strike price.81% in second quarter of 2008-09 as compared to the first quarter of 2008-09. the market share of all other products has decreased (both in terms of volume and turnover) in second quarter of 2008-09 as compared to the first quarter of 2008-09.39%) in Longer Dated derivative contracts in second quarter of 2008-09 as compared to the first quarter of 2008-09.53%) have increased during July-September 2008-09 as compared to April-June 2008-09.17%) and volume (30.September 2008-09 as compared to April-June 2008-09. Mini Nifty volumes increased by 49. 71 .  During 2008-09. but the volumes have not picked up consequently.  Longer dated derivatives were launched in March 2008.  There is a decrease in turnover (21.  Except Index Option. both turnover (15.

Business Growth in Derivatives segment (NSE) TABLE 11A Index futures Year 2008-09 2007-08 2006-07 2005-06 2004-05 2003-04 2002-03 2001-02 No.18. of contracts 4116649 156598579 81487424 58537886 21635449 17191668 2126763 1025588 FIGURE 11A Number of contracts per year 72 .

Table 11B No of turnovers Year 2008-09 2007-08 2006-07 2005-06 2004-05 2003-04 2002-03 2001-02 Turnover (Rs. the number of contracts in Index Future were 1025588 where as a significant increase of 4116679 is observed in the year 2008-09. Crores 73 .27 2539574 1513755 772147 554446 43952 21483 FIGURE 11B Turnover in Rs.) 925679.96 3820667. there is high business growth in the derivative segment in India. Cr.160000000 140000000 120000000 100000000 80000000 60000000 40000000 20000000 0 year 2008-09 2007-08 2006-07 2005-06 2004-05 2003-04 2002-03 2001-02 INTERPRETATION: From the data and the bar diagram above. In the year 2001-02.

In the year 2001-02 the turnover of index future was 21483 where as a huge increase of 92567996 in the year 2008-09 are observed.4000000 3500000 3000000 2500000 2000000 1500000 1000000 500000 0 2008-09 2007-08 2006-07 2005-06 2004-05 2003-04 2002-03 2001-02 year INTERPRETATION: From the data and above bar chart. there is high turn over in the derivative segment in India. 74 .

it predominently increased to 1957856.952 in the year 2007-08 but there was a steady decline to 51449737 in the year 2008-09.TABLE 12A STOCK FUTURES Year 2008-09 2007-08 2006-07 2005-06 2004-05 2003-04 2002-03 2001-02 2000-01 No. and 87. TABLE 12B NO OF TURNOVERS 75 . Then there was a huge increase of 20. 35. of contracts 51449737 203587952 104955401 80905493 47043066 32368842 10676843 1957856 - FIGURE 12A Number of contracts per year in stock future 250000000 200000000 150000000 100000000 50000000 0 year 2008-09 2007-08 2006-07 2005-06 2004-05 2003-04 2002-03 2001-02 INTERPRETATION: From the data and bar diagram above there were no stock futures available but in the year 2001-02.

TABLE 13A INDEX OPTIONS Year 2008-09 2007-08 2006-07 No. Crores 8000000 7000000 6000000 5000000 4000000 3000000 2000000 1000000 0 year Turnover (Rs.26 7548563.26 in the year 2008-09.Year 2008-09 2007-08 2006-07 2005-06 2004-05 2003-04 2002-03 2001-02 2000-01 FIGURE 12B Turnover in Rs. Crores) 1093048.23 in the year 2007-08 with a considerable decline of 1093048. there were no stock futures available in the year 2000-01.23 3830967 2791697 1484056 1305939 286533 51515 - 2008-09 2007-08 2006-07 2005-06 2004-05 2003-04 2002-03 2001-02 2000-01 INTERPRETATION: From the data and bar chart above. of contracts 24008627 55366038 25157438 76 . but in the year there was a huge increae of 7548563. There was a steady increase of stock future 51515 in the year 2001-02.

In the year 2007-2008 there was a huge increase in the index option contracts to 55366038 and a decline of 24008627 in the year 2008-2009. But there was a predominant increase of 1. TABLE 13B Turnover per year in Rs.75.2005-06 2004-05 2003-04 2002-03 2001-02 2000-01 12935116 3293558 1732414 442241 175900 - FIGURE 13A Number of contracts per year 60000000 50000000 40000000 30000000 20000000 10000000 0 year 2008-09 2007-08 2006-07 2005-06 2004-05 2003-04 2002-03 2001-02 Interpretation: From the data and bar chart above.900 in the year 2001-2002.88 77 .02 1362110. the no of contracts of index option was nil in the year 2000-2001. Crores Year 2008-09 2007-08 Turnover (Rs. Crores) 71340.

2006-07 2005-06 2004-05 2003-04 2002-03 2001-02 2000-01 791906 338469 121943 52816 9246 3765 - FIGURE 13B Turnover per year in Rs. of contracts 2546175 9460631 5283310 5240776 78 .02 observed in 2008-2009. there was no turnover in the year 20002001 for Index option.But in the year 2007-2008 there was a huge increase of 1362110. It slowly started increasing in the year 2000-2001 to 3765.088 and a sudden decline to 71340. TABLE 14A STOCK OPTIONS Year 2008-09 2007-08 2006-07 2005-06 No. Crores 1400000 1200000 1000000 800000 600000 400000 200000 0 year 2008-09 2007-08 2006-07 2005-06 2004-05 2003-04 2002-03 2001-02 Interpretation: From the data and bar chart above.

2004-05 2003-04 2002-03 2001-02 2000-01 5045112 5583071 3523062 1037529 - FIGURE 14A Number of contracts traded per year in stock option 10000000 9000000 8000000 7000000 6000000 5000000 4000000 3000000 2000000 1000000 0 2008-09 2007-08 2006-07 2005-06 2004-05 2003-04 2002-03 2001-02 year INTERPRETATION: From the data and bar chart above the no of contracts of stock option in the year 2000-2001 was nil. TABLE 14B National turnover in Rs. It was 9460631 which was the the highest in the year 2007-2008. 79 . But there was a huge increase of 1037529 observed in the year 2001-2002. But a gradual decline of 2546175 in the year 2008-2009. Crores per year Year 2008-09 2007-08 2006-07 Notional crores) 58335.03 359136.55 193795 turnover (Rs.

There was a slow increase of 25163 in the year 2001-2002. But a phenomenal increase of 359136. cr. of contracts 119171008 425013200 216883573 157619271 Turnover (Rs.03 in the year 2008-2009.55 in the year 2007-2008. TABLE 15A OVERALL TRADING Year 2008-09 2007-08 2006-07 2005-06 No. Crores per year 400000 350000 300000 250000 200000 150000 100000 50000 0 year 2008-09 2007-08 2006-07 2005-06 2004-05 2003-04 2002-03 2001-02 Interpretation: From the chart and the bar diagram above the stock option turnover in the year 2000-2001 was nil. and a decline of 58355.75 7356242 4824174 80 .2005-06 2004-05 2003-04 2002-03 2001-02 2000-01 180253 168836 217207 100131 25163 - FIGURE 14B National turnover in Rs.30 13090477.) 2648403.

) Stock Futures No. cr. of contract s Notional Turnove r (Rs. of contract s Turnove r (Rs.) Interest Rate Futures No. Crores 60000 50000 40000 30000 20000 10000 0 year 2000-2001 2001-2002 2002-2003 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 Interpretation: From the data and bar chart above. Total No. Tu of rno cont ver ract (Rs s . of contracts T u r n o 81 . of contrac ts Notional Turnove r (Rs. cr. the overall trading contracts in the year 2000-2001 was 90580 and huge increase of 119171008 in the year 2008-2009. cr.) Index Options No.30 observed in the year 2008-2009. TABLE 16 Overall trade description under NSE Index Futures Y No.2004-05 2003-04 2002-03 2001-02 2000-01 77017185 56886776 16768909 4196873 90580 2546982 2130610 439862 101926 2365 FIGURE 15A Average daily turnovers in Rs. cr.) Stock Options No. e of a contr r acts Turnove r (Rs. From the data and bar chart above the overall trading turnover in the year 20002001 was as low as 2365 but a predominant increase of 2648403.

27 2035879 52 7548563.) 925679. ) 2 6 4 8 4 0 3 .0 2 2546175 58335.0 0 42501320 0 8148742 4 2539574 1049554 01 3830967 251574 38 791906 5283310 193795 0 0 21688357 3 5853788 6 1513755 8090549 3 2791697 129351 16 338469 5240776 180253 0 0 15761927 1 2163544 9 772147 4704306 6 1484056 329355 8 121943 5045112 168836 0 0 77017185 82 . c r . 7 5 7 3 5 6 2 4 2 4 8 2 4 1 7 4 2 5 4 6 9 8 2 cr.0 0 11917100 8 2 0 0 1565985 7 79 0 8 2 0 0 6 0 7 2 0 0 5 0 6 2 0 0 4 0 5 3820667.9 2 0 0 4116646 8 9 0 9 6 5144973 7 1093048.5 5 0 0.v e r ( R s . 88 9460631 359136.03 0 0. 23 553660 38 1362110. 26 240086 27 571340. 3 0 1 3 0 9 0 4 7 7 .

2 0 0 3 0 4 2 0 0 2 0 3 2 0 0 1 0 2 2 0 0 0 0 1 1719166 8 554446 3236884 2 1305939 173241 4 52816 5583071 217207 1078 1 202 56886776 2 1 3 0 6 1 0 4 3 9 8 6 2 1 0 1 9 2 6 2 3 6 5 2126763 43952 1067684 3 286533 442241 9246 3523062 100131 - - 16768909 1025588 21483 1957856 51515 175900 3765 1037529 25163 - - 4196873 90580 2365 - - - - - - - 90580 TABLE 17 AVERAGE DAILY TURNOVERS 83 .

Crores) 45390.21 52153. June 2001.Year 2008-09 2007-08 2006-07 2005-06 2004-05 2003-04 2002-03 2001-02 2000-01 Av. Index Options. 84 . daily turnover (Rs. Stock Options and Stock Futures were introduced in June 2000. July 2001 and November 2001 respectively.30 29543 19220 10167 8388 1752 410 11 Note: Notional Turnover = (Strike Price + Premium) * Quantity Index Futures.

In the case of index option there was a huge increase observed both in the number of contracts and turnover. So these factors encourage the Derivative Market in India. The turnover of Derivative Market is increasing year by year in the India’s largest stock exchange NSE. as the commodity market also 85 . It encourages the investor to take more risk & earn more return. 2. Derivative market is growing very fast in the Indian Economy. In nutshell. But whereas the turnover is declined considerably. It encourages entrepreneurship in India.FINDINGS & CONCLUSION From the above analysis it can be concluded that: 1. Commodity derivatives have a crucial role to play in the price risk management process for the commodities in which it deals. So in this way it helps the Indian Economy by developing entrepreneurship. we can say that the rule of High risk & High return apply in Derivatives. Derivative Market is more regulated & standardized so in this way it provides a more controlled environment. If we are able to take more risk then we can earn more profit under Derivatives. In the case of index future there is a phenomenal increase in the number of contracts. like India. 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. 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. And it can be extremely beneficial in agriculture-dominated economy. 3.

RELIANCE is the most active future contracts on individual securities traded with 90090 contracts and RNRL is the next most active futures contracts with 63522 contracts being traded.      After study it is clear that Derivative influence our Indian Economy up to much extent. Derivatives like forwards. swaps etc are extensively used in the country. RECOMMENDATIONS & SUGGESTIONS  RBI should play a greater role in supporting derivatives. the commodity derivatives have been utilized in a very limited scale.involves agricultural produce. There must be more derivative instruments aimed at individual investors. However. options. Derivatives market should be developed in order to keep it at par with other derivative markets in the world. futures. So. SEBI should take necessary steps for improvement in Derivative Market so that more investors can invest in Derivative market. Speculation should be discouraged. SEBI should conduct seminars regarding the use of derivatives to educate individual investors. Only forwards and futures trading are permitted in certain commodity items. 86 .

87 . 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.

nse-india.gov.com  www.in  www.derivativesindia.com  www.BIBLIOGRAPHY Books referred:  Options Futures.L.ncdex.C.sebi.GUPTA Websites visited:  www.com 88 . and other Derivatives by John C Hull  Derivatives FAQ by Ajay Shah  NSE’s Certification in Financial Markets: .google.bseindia.com  www.Derivatives Core module  Financial Markets & Services by Gordon & Natarajan Reports:  Report of the RBI-SEBI standard technical committee on exchange traded Currency Futures  Regulatory Framework for Financial Derivatives in India by Dr.com  www.

Chicago Board options Exchange CBOT .Crisil Nse 50 Index CPE .Forward Rate Agreements G GAICL-Gujarat Agro Industries Corporation Limited GSAMB.Bombay Stock Exchange BSI.Chicago Produce Exchange CWC.Chicago Egg and Butter Board CME .British Standard Institute C CBOE .International Monetary Market IPSTA.India Pepper & Spice Trade Association M MCX – Multi Commodity Exchange 89 .Central Warehousing Corporation D DTSS.Forward Markets Commission FRAs.America Stock Exchange B BSE.Chicago Mercantile Exchange CNX.Chicago Board of Trade CEBB .ABBREVATIONS A AMEX.Derivative Trading Settlement System F FIIs.Foreign Institutional Investors F & O – Future and Options FMC.Gujarat State Agricultural Marketing Board I IMM .

Punjab National Bank R RBI. 1956 SEBI.National Multi Commodity Exchange NOL.National Securities Clearing Corporation NSDL.N NAFED-National Agricultural Co-Operative Marketing Federation Of India NCDEX – National Commodities and Derivatives Exchange NIAM.National Stock Exchange O OTC.Securities Exchange Board Of India SGX.Singapore Stock Exchange SIMEX .Reserve Bank Of India S SC(R) A .Over The Counter P PHLX .National Securities Depositories Limited NSE .Neptune Overseas Limited NSCCL.Philadelphia Stock Exchange PNB.Securities Contracts (Regulation) Act.Virtual Private Network 90 .Singapore International Monetary Exchange V VPN.National Institute Of Agricultural Marketing NMSE.

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