Derivatives

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CHAPTER 1

INTRODUCTION TO DERIVATIVES

DEFINITION OF DERIVATIVES

Derivatives

CHAPTER 1

INTRODUCTION :
Derivatives are one of the most complex
instruments. The word derivative comes from the word to
derive. It indicates that it has no independent value. A
derivative is a contract whose value is derived from the value
of another asset, known as the underlying asset, which could
be a share, a stock market index, an interest rate, a
commodity, or a currency. The underlying is the identification
tag for a derivative contract. When the price of the underlying
changes, the value of the derivative also changes. Without
an underlying asset, derivatives do not have any meaning.
For example, the value of a gold futures contract derives
from the value of the underlying asset i.e., gold. The prices in
the derivatives market are driven by the spot or cash market
price of the underlying asset, which is gold in this example.

Derivatives
Derivatives are very similar to insurance.
Insurance protects against specific risks, such as fire, floods,
theft and so on. Derivatives on the other hand, take care of
market risks - volatility in interest rates, currency rates,
commodity prices, and share prices. Derivatives offer a
sound mechanism for insuring against various kinds of risks
arising in the world of finance. They offer a range of
mechanisms to improve redistribution of risk, which can be
extended to every product existing, from coffee to cotton and
live cattle to debt instruments.
In this era of globalisation, the world is a riskier
place and exposure to risk is growing. Risk cannot be
avoided or ignored. Man, however is risk averse. The risk
averse characteristic of human beings has brought about
growth in derivatives. Derivatives help the risk averse
individuals by offering a mechanism for hedging risks.
Derivative products, several centuries ago,
emerged

as

hedging

devices

against

fluctuations

in

commodity prices. Commodity futures and options have had

a lively existence for several centuries. Financial derivatives
came into the limelight in the post-1970 period; today they
account for 75 percent of the financial market activity in
Europe, North America, and East Asia. The basic difference
between commodity and financial derivatives lies in the

Derivatives
nature

of

the

underlying

instrument.

In

commodity

derivatives, the underlying asset is a commodity; it may be

wheat, cotton, pepper, turmeric, corn, orange, oats, Soya
beans, rice, crude oil, natural gas, gold, silver, and so on. In
financial derivatives, the underlying includes treasuries,
bonds, stocks, stock index, foreign exchange, and Euro
dollar deposits. The market for financial derivatives has
grown tremendously both in terms of variety of instruments
and turnover.
Presently, most major institutional borrowers
and investors use derivatives. Similarly, many act as
intermediaries dealing in derivative transactions. Derivatives
are responsible for not only increasing the range of financial
products available but also fostering more precise ways of
understanding, quantifying and managing financial risk.
Derivatives contracts are used to counter the
price risks involved in assets and liabilities. Derivatives do
not eliminate risks. They divert risks from investors who are
risk averse to those who are risk neutral. The use of
derivatives instruments is the part of the growing trend
among financial intermediaries like banks to substitute offbalance sheet activity for traditional lines of business. The
exposure to derivatives by banks have implications not only
from the point of capital adequacy, but also from the point of

Derivatives
view of establishing trading norms, business rules and
settlement process. Trading in derivatives differ from that in
equities as most of the derivatives are market to the market.

DEFINITION OF DERIVATIVES :
Derivative is a product whose value is derived
from the value of one or more basic variables, called bases
(underlying asset, index, or reference rate), in a contractual
manner. The underlying asset can be equity, forex,
commodity or any other asset.
According

to

Securities

Contracts

(Regulation) Act, 1956 {SC(R)A}, derivatives is

A security derived from a debt instrument, share, loan,
whether secured or unsecured, risk instrument or
contract for differences or any other form of security.
A contract which derives its value from the prices, or
index of prices, of underlying securities.
Derivatives are securities under the Securities
Contract (Regulation) Act and hence the trading of
derivatives is governed by the regulatory framework under
the Securities Contract (Regulation) Act.

Derivatives

CHAPTER 2

Derivatives

HISTORY OF DERIVATIVES

DERIVATIVES IN INDIA

DEVELOPMENT

OF

DERIVATIVES
MARKET IN INDIA

Factors contributing
growth of derivatives

CHAPTER 2

to

the

Derivatives
HISTORY OF DERIVATIVES :
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 1700s 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 1860s. 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

Derivatives
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

Derivatives
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 Dealers Association was set up in
early 1900s 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

10

Derivatives
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 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.

The CBOT and the CME are two largest
financial exchanges in the world on which futures contracts
are traded. The CBOT now offers 48 futures and option
contracts (with the annual volume at more than 211 million in
2001).The CBOE is the largest exchange for trading stock
options. The CBOE trades options on the S&P 100 and the
S&P 500 stock indices. The Philadelphia Stock Exchange is
the premier exchange for trading foreign options.
The most traded stock indices include S&P
500, the Dow Jones Industrial Average, the Nasdaq 100, and
the Nikkei 225. The US indices and the Nikkei 225 trade
almost round the clock. The N225 is also traded on the
Chicago Mercantile Exchange.

11

Derivatives

DERIVATIVES IN INDIA :
India has started the innovations in financial
markets very late. Some of the recent developments initiated
by the regulatory authorities are very important in this
respect. Futures trading have been permitted in certain
commodity exchanges. Mumbai Stock Exchange has started
futures trading in cottonseed and cotton under the BOOE
and under the East India Cotton Association. Necessary
infrastructure has been created by the National Stock
Exchange (NSE) and the Bombay Stock Exchange (BSE)
for trading in stock index futures and the commencement of
operations in selected scripts. Liberalised exchange rate
management system has been introduced in the year 1992
for regulating the flow of foreign exchange. A committee
headed by S.S.Tarapore was constituted to go into the merits
of full convertibility on capital accounts. RBI has initiated
measures for freeing the interest rate structure. It has also
envisioned Mumbai Inter Bank Offer Rate (MIBOR) on the
line of London Inter Bank Offer Rate (LIBOR) as a step
towards introducing Futures trading in Interest Rates and
Forex. Badla transactions have been banned in all 23 stock
exchanges from July 2001. NSE has started trading in index
options based on the NIFTY and certain Stocks.

12

Derivatives
A.} EQUITY DERIVATIVES IN INDIA
In the decade of 1990s revolutionary changes
took place in the institutional infrastructure in Indias equity
market. It has led to wholly new ideas in market design that
has come to dominate the market. These new institutional
arrangements, coupled with the widespread knowledge and
orientation towards equity investment and speculation, have
combined to provide an environment where the equity spot
market is now Indias most sophisticated financial market.
One aspect of the sophistication of the equity market is seen
in the levels of market liquidity that are now visible. The
market impact cost of doing program trades of Rs.5 million at
the NIFTY index is around 0.2%. This state of liquidity on the
equity spot market does well for the market efficiency, which
will be observed if the index futures market when trading
commences. Indias equity spot market is dominated by a
new practice called Futures Style settlement or account
period settlement. In its present scene, trades on the largest
stock exchange (NSE) are netted from Wednesday morning
till Tuesday evening, and only the net open position as of
Tuesday evening is settled. The future style settlement has
proved to be an ideal launching pad for the skills that are
required for futures trading.

13

Derivatives
Stock trading is widely prevalent in India, hence
it seems easy to think that derivatives based on individual
securities could be very important. The index is the counter
piece of portfolio analysis in modern financial economies.
Index fluctuations affect all portfolios. The index is much
harder to manipulate. This is particularly important given the
weaknesses of Law Enforcement in India, which have made
numerous manipulative episodes possible. The market
capitalisation of the NSE-50 index is Rs.2.6 trillion. This is six
times larger than the market capitalisation of the largest
stock and 500 times larger than stocks such as Sterlite, BPL
and Videocon. If market manipulation is used to artificially
obtain 10% move in the price of a stock with a 10% weight in
the NIFTY, this yields a 1% in the NIFTY. Cash settlements,
which is universally used with index derivatives, also helps in
terms of reducing the vulnerability to market manipulation, in
so far as the short-squeeze is not a problem. Thus, index
derivatives

are

inherently

less

vulnerable

to

market

manipulation.
A good index is a sound trade of between
diversification and liquidity. In India the traditional index- the
BSE sensitive index was created by a committee of
stockbrokers in 1986. It predates a modern understanding of
issues in index construction and recognition of the pivotal
role of the market index in modern finance. The flows of this

14

Derivatives
index and the importance of the market index in modern
finance, motivated the development of the NSE-50 index in
late 1995. Many mutual funds have now adopted the NIFTY
as the benchmark for their performance evaluation efforts. If
the stock derivatives have to come about, the should
restricted to the most liquid stocks. Membership in the NSE50 index appeared to be a fair test of liquidity. The 50 stocks
in the NIFTY are assuredly the most liquid stocks in India.
The choice of Futures vs. Options is often
debated. The difference between these instruments is
smaller than, commonly imagined, for a futures position is
identical to an appropriately chosen long call and short put
position. Hence, futures position can always be created once
options exist. Individuals or firms can choose to employ
positions where their downside and exposure is capped by
using options. Risk management of the futures clearing is
more complex when options are in the picture. When
portfolios contain options, the calculation of initial price
requires greater skill and more powerful computers. The
skills required for pricing options are greater than those
required in pricing futures.
B.} COMMODITY DERIVATIVES TRADING IN INDIA

15

Derivatives
In India, the futures market for commodities
evolved by the setting up of the Bombay Cotton Trade
Association Ltd., in 1875. A separate association by the
name "Bombay Cotton Exchange Ltd was established
following widespread discontent amongst leading cotton mill
owners and merchants over the functioning of the Bombay
Cotton Trade Association. With the setting up of the Gujarati
Vyapari Mandali in 1900, the futures trading in oilseed
began. Commodities like groundnut, castor seed and cotton
etc began to be exchanged.
Raw jute and jute goods began to be traded in
Calcutta with the establishment of the Calcutta Hessian
Exchange Ltd. in 1919. The most notable centres for
existence of futures market for wheat were the Chamber of
Commerce at Hapur, which was established in 1913. Other
markets

were

located

at

Amritsar,

Moga,

Ludhiana,

Jalandhar, Fazilka, Dhuri, Barnala and Bhatinda in Punjab

and

Muzaffarnagar,

Chandausi,

Meerut,

Saharanpur,

Hathras, Gaziabad, Sikenderabad and Barielly in U.P. The

Bullion Futures market began in Bombay in 1990. After the
economic reforms in 1991 and the trade liberalization, the
Govt. of India appointed in June 1993 one more committee
on Forward Markets under Chairmanship of Prof. K.N.
Kabra. The Committee recommended that futures trading be
introduced in basmati rice, cotton, raw jute and jute goods,

16

Derivatives
groundnut, rapeseed/mustard seed, cottonseed, sesame
seed, sunflower seed, safflower seed, copra and soybean,
and oils and oilcakes of all of them, rice bran oil, castor oil
and its oilcake, linseed, silver and onions. All over the world
commodity trade forms the major backbone of the economy.
In India, trading volumes in the commodity market have also
seen a steady rise - to Rs 5,71,000 crore in FY05 from Rs
1,29,000 crore in FY04. In the current fiscal year, trading
volumes in the commodity market have already crossed Rs
3,50,000 crore in the first four months of trading. Some of the
commodities traded in India include Agricultural Commodities
like Rice Wheat, Soya, Groundnut, Tea, Coffee, Jute,
Rubber, Spices, Cotton, Precious Metals like Gold & Silver,
Base Metals like Iron Ore, Aluminium, Nickel, Lead, Zinc and
Energy Commodities like crude oil, coal. Commodities form
around 50% of the Indian GDP. Though there are no
institutions or banks in commodity exchanges, as yet, the
market for commodities is bigger than the market for
securities. Commodities market is estimated to be around Rs
44,00,000 Crores in future. Assuming a future trading
multiple is about 4 times the physical market, in many
countries it is much higher at around 10 times.

17

Derivatives
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, 1995, which
withdrew the prohibition on options in securities. The market
for derivatives, however, did not take off, as there was no
regulatory framework to govern trading of derivatives. SEBI
set up a 24member committee under the Chairmanship of
Dr.L.C.Gupta on November 18, 1996 to develop appropriate
regulatory framework for derivatives trading in India. The
committee

submitted

its report on

March

17, 1998

prescribing necessary preconditions for introduction of

derivatives trading in India. 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 also set up a
group

in

June

Prof.J.R.Varma,

1998
to

under

the

recommend

Chairmanship

measures

for

of
risk

containment in derivatives market in India. The report, which

was submitted in October 1998, worked out the operational
details of margining system, methodology for charging initial
margins, broker net worth, deposit requirement and realtime
monitoring requirements. The Securities Contract Regulation
Act (SCRA) was amended in December 1999 to include

18

Derivatives
derivatives within the ambit of securities and the regulatory
framework was developed for governing derivatives trading.
The act also made it clear that derivatives shall be legal and
valid only if such contracts are traded on a recognized stock
exchange, thus precluding OTC derivatives. The government
also rescinded in March 2000, the three decade old
notification, which prohibited forward trading in securities.
Derivatives trading commenced in India in June 2000 after
SEBI granted the final approval to this effect in May 2001.
SEBI permitted the derivative segments of two stock
exchanges,

NSE

and

BSE,

and

their

clearing

house/corporation to commence trading and settlement in

approved derivatives contracts. To begin

with, SEBI

approved trading in index futures contracts based on S&P

CNX Nifty and BSE30 (Sense) index. This was followed by
approval for trading in options based on these two indexes
and options on individual securities.
The

trading

in

BSE

Sensex

options

commenced on June 4, 2001 and the trading in options on

individual securities commenced in July 2001. Futures
contracts on individual stocks were launched in November
2001. The derivatives trading on NSE commenced with S&P
CNX Nifty Index futures on June 12, 2000. The trading in
index options commenced on June 4, 2001 and trading in
options on individual securities commenced on July 2, 2001.

19

Derivatives
Single stock futures were launched on November 9, 2001.
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, byelaws, 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.
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. It constituted 70 per
cent of the total turnover during June 2002. A primary
reason attributed to this phenomenon is that traders
are comfortable with single-stock futures than equity
options, as the former closely resembles the erstwhile
badla system.

On relative terms, volumes in the index options

segment continues to remain poor. This may be due
to the low volatility of the spot index. Typically, options
are considered more valuable when the volatility of
the underlying (in this case, the index) is high. A

20

Derivatives
related issue is that brokers do not earn high
commissions by recommending index options to their
clients, because low volatility leads to higher waiting
time for round-trips.

Put volumes in the index options and equity options

segment have increased since January 2002. The
call-put volumes in index options have decreased
from 2.86 in January 2002 to 1.32 in June. The fall in
call-put volumes ratio suggests that the traders are
increasingly becoming pessimistic on the market.

Farther month futures contracts are still not actively

traded. Trading in equity options on most stocks for
even the next month was non-existent.

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. The fact that the option premiums tail
intra-day stock prices is evidence to this. If calls and
puts are not looked as just substitutes for spot trading,
the intra-day stock price variations should not have a
one-to-one impact on the option premiums.

21

Derivatives
FACTORS CONTRIBUTING TO THE GROWTH OF
DERIVATIVES :
Factors contributing to the explosive growth of
derivatives are price volatility, globalisation of the markets,
technological developments and advances in the financial
theories.
A.} PRICE VOLATILITY
A price is what one pays to acquire or use
something of value. The objects having value maybe
commodities, local currency or foreign currencies.

The

concept of price is clear to almost everybody when we

discuss commodities. There is a price to be paid for the
purchase of food grain, oil, petrol, metal, etc. the price one
pays for use of a unit of another persons money is called
interest rate. And the price one pays in ones own currency
for a unit of another currency is called as an exchange rate.
Prices are generally determined by market
forces. In a market, consumers have demand and
producers or suppliers have supply, and the collective
interaction of demand and supply in the market determines
the price. These factors are constantly interacting in the
market causing changes in the price over a short period of

22

Derivatives
time. Such changes in the price is known as price volatility.
This has three factors : the speed of price changes, the
frequency of price changes and the magnitude of price
changes.
The changes in demand and supply influencing
factors culminate in market adjustments through price
changes. These price changes expose individuals, producing
firms and governments to significant risks. 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. The globalisation of the markets
and rapid industrialisation of many underdeveloped countries
brought a new scale and dimension to the markets. Nations
that were poor suddenly became a major source of supply of
goods. The Mexican crisis in the south east-Asian currency
crisis of 1990s have also brought the price volatility factor on
the surface. The advent of telecommunication and data
processing bought information very quickly to the markets.
Information which would have taken months to impact the
market earlier can now be obtained in matter of moments.
Even equity holders are exposed to price risk of corporate
share fluctuates rapidly.
These price volatility risk pushed the use of
derivatives like futures and options increasingly as these

23

Derivatives
instruments can be used as hedge to protect against adverse
price changes in commodity, foreign exchange, equity shares
and bonds.
B.} GLOBALISATION OF MARKETS
Earlier, managers had to deal with domestic
economic concerns ; what happened in other part of the
world was mostly irrelevant. Now globalisation has increased
the size of markets and as greatly enhanced competition .it
has benefited consumers who cannot obtain better quality
goods at a lower cost. It has also exposed the modern
business to significant risks and, in many cases, led to cut
profit margins
In Indian context, south East Asian currencies
crisis of 1997 had affected the competitiveness of our
products vis--vis depreciated currencies. Export of certain
goods from India declined because of this crisis. Steel
industry in 1998 suffered its worst set back due to cheap
import of steel from south east asian countries. Suddenly
blue chip companies had turned in to red. The fear of china
devaluing its currency created instability in Indian exports.
Thus, it is evident that globalisation of industrial and financial
activities necessitiates use of derivatives to guard against

24

Derivatives
future losses. This factor alone has contributed to the growth
of derivatives to a significant extent.
C.} TECHNOLOGICAL ADVANCES
A significant growth of derivative instruments
has been driven by technological break through. Advances
in this area include the development of high speed
processors, network systems and enhanced method of data
entry. Closely related to advances in computer technology
are advances in telecommunications. Improvement in
communications

allow

for

instantaneous

world

wide

conferencing, Data transmission by satellite. At the same

time

there

were

significant

advances

in

software

programmes without which computer and telecommunication

advances would be meaningless. These facilitated the more
rapid movement of information and consequently its
instantaneous impact on market price.

25

Derivatives
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. The effect of this risk can
easily destroy a business which is otherwise well managed.
Derivatives can help a firm manage the price risk inherent in
a market economy. To the extent the technological
developments

increase

volatility,

derivatives

and

risk

management products become that much more important.

D.} ADVANCES IN FINANCIAL THEORIES
Advances in financial theories gave birth to
derivatives. Initially forward contracts in its traditional form,
was the only hedging tool available. Option pricing models
developed by Black and Scholes in 1973 were used to
determine prices of call and put options. In late 1970s, work
of Lewis Edeington extended the early work of Johnson and
started the hedging of financial price risks with financial
futures. The work of economic theorists gave rise to new
products for risk management which led to the growth of
derivatives in financial markets.

26

Derivatives
The above factors in combination of lot many
factors led to growth of derivatives instruments.

CHAPTER 3

27

Derivatives

Types of DERIVATIVES

FUTURES VS. FORWARD MARKETS

CHAPTER 3

28

Derivatives

TYPES OF DERIVATIVES :
There are mainly four types of derivatives i.e.
Forwards, Futures, Options and swaps.

Derivatives

Forwards

Futures

Options

Swaps

1. FORWARDS A contract that obligates one counter party to

buy and the other to sell a specific underlying asset at a
specific price, amount and date in the future is known as a

29

Derivatives
forward contract. Forward contracts are the important type of
forward-based derivatives. They are the simplest derivatives.
There is a separate forward market for multitude of
underlyings, including the traditional agricultural or physical
commodities, as well as currencies and interest rates. The
change in the value of a forward contract is roughly
proportional to the change in the value of its underlying
asset. These contracts create credit exposures. As the value
of the contract is conveyed only at the maturity, the parties
are exposed to the risk of default during the life of the
contract. Forward contracts are customised with the terms
and conditions tailored to fit the particular business, financial
or risk management objectives of the counter parties.
Negotiations often take place with respect to contract size,
delivery grade, delivery locations, delivery dates and credit
terms.
2.

FUTURES A future contract is an agreement between two

parties to buy or sell an asset at a certain time the future at

the certain price. Futures contracts are the special types of
forward contracts in the sense that are standardized
exchange-traded contracts.

30

Derivatives
Equities,

bonds,

hybrid

securities

and

currencies are the commodities of the investment business.

They are traded on organised exchanges in which a clearing
house interposes itself between buyer and seller and
guarantees all transactions, so that the identity of the buyer
or the seller is a matter of indifference to the opposite party.
Futures contract protect those who use these commodities in
their business.
Futures trading are to enter into contracts to
buy or sell financial instruments, dealing in commodities or
other financial instruments for forward delivery or settlement
on standardised terms. The futures market facilitates stock
holding and shifting of risk. They act as a mechanism for
collection and distribution of information and then perform a
forward pricing function. The futures trading can be
performed when there is variation in the price of the actual
commodity

and

there

exists

economic

agents

with

commitments in the actual market. There must be a

possibility to specify a standard grade of the commodity and
to measure deviations from this grade. A futures market is
established specifically to meet purely speculative demands
is possible but is not known. Conditions which are thought of
necessary for the establishment of futures trading are the
presence of speculative capital and financial facilities for
payment of margins and contract settlement. In addition, a

31

Derivatives
strong infrastructure is required, including financial, legal and
communication systems.
3. 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 AND PUT OPTION.
a. CALL OPTION :
A contract that gives its owner the right
but not the obligation to buy an underlying assetstock 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.

32

Derivatives
b. PUT OPTION :
A contract that gives its owner the right
but not the obligation to sell an underlying assetstock 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.
4.

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

33

Derivatives
exchanged and not the principle amount. The two commonly
used swaps are:
a. INTEREST RATE SWAPS :
Interest rate swaps is an arrangement
by which one party agrees to exchange his series
of fixed rate interest payments to a party in
exchange for his variable rate interest payments.
The fixed rate payer takes a short position in the
forward contract whereas, the floating rate payer
takes a long position in the forward contract.
b. CURRENCY SWAPS :
Currency swaps is an arrangement in
which both the principle amount and the interest
on loan in one currency are swapped for the
principle and the interest payments on loan in
another currency. The parties to the swap contract
of currency generally hail from two different
countries. This arrangement allows the counter
parties to borrow easily and cheaply in their home
currencies. Under a currency swap, cash flows to
be exchanged are determined at the spot rate at a
time when swap is done. Such cash flows are

34

Derivatives
supposed to remain unaffected by subsequent
changes in the exchange rates.
c. FINANCIAL SWAP :

Financial swaps constitute a funding

technique which permit a borrower to access one
market and then exchange the liability for another
type of liability. It also allows the investors to
exchange one type of asset for another type of
asset with a preferred income stream.
The other kind of derivatives, which are not,
much popular are as follows :
5.

BASKETS Baskets options are option on portfolio of

underlying asset. Equity Index Options are most popular

form of baskets.
6. 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

35

Derivatives
contracts are popularly known as Leaps or Long term Equity
Anticipation Securities.
7.

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.
8.

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.

Fu t u r e s M a r k e t

Fo r w a r d M a r ke t

Margin deposits are to be required Typically, no money changes hands

of all participants.

until delivery, although a small

margin deposit might be required of

36

Derivatives
non-dealer customers on certain
occasions.
Contract terms are standardised All contract terms are negotiated
with

all

buyers

and

sellers privately by the parties.

negotiating only with respect to

price.
Non-member
through

participants

brokers

deal Participants deal typically on a

(exchange principal-to-principal basis.

members who represent them on

the exchange floor)
Participants
include

banks, Participants are primarily institutions

corporations, financial institutions, dealing with one other and other

individual

investors,

and interested parties dealing through

speculators.
one or more dealers.
The clearing house of the exchange A participant must examine the
becomes the opposite side to each credit risk and establish credit limits
cleared transactions; therefore, the for each opposite party.
credit risk for a futures market
participant is always the same and
there is no need to analyse the
credit of other market participants.

Settlements are made daily through

Settlement occurs on date agreed

the exchange clearing house.

upon between the parties to each

Gains on open positions may be

transaction.

withdrawn and losses are collected

daily.

37

Derivatives
Long

and

short

positions

are

Forward positions are not as easily

usually liquidated easily.

offset or transferred to the other

Settlements are normally made in

participants.
Most transactions result in delivery.

cash, with only a small percentage

of all contracts resulting actual
delivery.
A single, round trip (in and out of

No commission is typically charged

the market) commission is charged.

if the transaction is made directly

It is negotiated between broker and

with another dealer. A commission

customer and is relatively small in

is charged to born buyer and seller,

relation to the value of the contract.

however, if transacted through a

Trading is regulated.
The delivery price is the spot price.

broker.
Trading is mostly unregulated.
The delivery price is the forward
price.

CHAPTER 4

38

Derivatives

Participants in derivatives
market

role of derivatives

CHAPTER 4

39

Derivatives
PARTICIPANTS IN THE DERIVATIVES MARKET :
The participants in the derivatives market are
as follows:

A.} TRADING PARTICIPANTS :

1.] HEDGERS
The process of managing the risk or risk
management is called as hedging. Hedgers are those
individuals or firms who manage their risk with the help of
derivative products. Hedging does not mean maximising of
return. The main purpose for hedging is to reduce the
volatility of a portfolio by reducing the risk.
2.] SPECULATORS
Speculators do not have any position on which
they enter into futures and options Market i.e., they take the
positions in the futures market without having position in the
underlying cash market. They only have a particular view
about future price of a commodity, shares, stock index,
interest rates or currency. They consider various factors like
demand and supply, market positions, open interests,
economic fundamentals, international events, etc. to make

40

Derivatives
predictions. They take risk in turn from high returns.
Speculators are essential in all markets commodities,
equity, interest rates and currency. They help in providing the
market the much desired volume and liquidity.
3.] ARBITRAGEURS
Arbitrage is the simultaneous purchase and
sale of the same underlying in two different markets in an
attempt to make profit from price discrepancies between the
two markets. Arbitrage involves activity on several different
instruments or assets simultaneously to take advantage of
price distortions judged to be only temporary.
Arbitrage occupies a prominent position in the
futures world. It is the mechanism that keeps prices of
futures contracts aligned properly with prices of underlying
assets. The objective is simply to make profits without risk,
but the complexity of arbitrage activity is such that it is
reserved to particularly well-informed and experienced
professional traders, equipped with powerful calculating and
data processing tools. Arbitrage may not be as easy and
costless as presumed.

B.} INTERMEDIARY PARTICIPANTS :

41

Derivatives
4.] BROKERS
For any purchase and sale, brokers perform an
important function of bringing buyers and sellers together. As
a member in any futures exchanges, may be any commodity
or finance, one need not be a speculator, arbitrageur or
hedger. By virtue of a member of a commodity or financial
futures exchange one get a right to transact with other
members of the same exchange. This transaction can be in
the pit of the trading hall or on online computer terminal. All
persons hedging their transaction exposures or speculating
on price movement, need not be and for that matter cannot
be members of futures or options exchange. A non-member
has to deal in futures exchange through member only. This
provides a member the role of a broker. His existence as a
broker takes the benefits of the futures and options
exchange to the entire economy all transactions are done in
the name of the member who is also responsible for final
settlement and delivery. This activity of a member is price
risk free because he is not taking any position in his account,
but his other risk is clients default risk. He cannot default in
his obligation to the clearing house, even if client defaults.
So, this risk premium is also inbuilt in brokerage recharges.
More and more involvement of non-members in hedging and
speculation in futures and options market will increase
brokerage business for member and more volume in turn

42

Derivatives
reduces the brokerage. Thus more and more participation of
traders other than members gives liquidity and depth to the
futures

and

options

market.

Members

can

attract

involvement of other by providing efficient services at a

reasonable cost. In the absence of well functioning broking
houses, the futures exchange can only function as a club.
5.] MARKET MAKERS AND JOBBERS
Even in organised futures exchange, every
deal cannot get the counter party immediately. It is here the
jobber or market maker plays his role. They are the members
of the exchange who takes the purchase or sale by other
members in their books and then square off on the same day
or the next day. They quote their bid-ask rate regularly. The
difference between bid and ask is known as bid-ask spread.
When volatility in price is more, the spread increases since
jobbers price risk increases. In less volatile market, it is less.
Generally, jobbers carry limited risk. Even by incurring loss,
they square off their position as early as possible. Since they
decide the market price considering the demand and supply
of the commodity or asset, they are also known as market
makers. Their role is more important in the exchange where
outcry system of trading is present. A buyer or seller of a
particular futures or option contract can approach that
particular jobbing counter and quotes for executing deals. In

43

Derivatives
automated screen based trading best buy and sell rates are
displayed on screen, so the role of jobber to some extent. In
any case, jobbers provide liquidity and volume to any futures
and option market.

C.} INSTITUTIONAL FRAMEWORK :

6.] EXCHANGE
Exchange provides buyers and sellers of
futures and option contract necessary infrastructure to trade.
In outcry system, exchange has trading pit where members
and their representatives assemble during a fixed trading
period and execute transactions. In online trading system,
exchange provide access to members and make available
real time information online and also allow them to execute
their orders. For derivative market to be successful exchange
plays a very important role, there may be separate exchange
for financial instruments and commodities or common
exchange for both commodities and financial assets.
7.] CLEARING HOUSE
A

clearing

house

performs

clearing

of

transactions executed in futures and option exchanges.

Clearing house may be a separate company or it can be a

44

Derivatives
division of exchange. It guarantees the performance of the
contracts and for this purpose clearing house becomes
counter party to each contract. Transactions are between
members and clearing house. Clearing house ensures
solvency of the members by putting various limits on him.
Further, clearing house devises a good managing system to
ensure performance of contract even in volatile market. This
provides confidence of people in futures and option
exchange. Therefore, it is an important institution for futures
and option market.
8.] CUSTODIAN / WARE HOUSE
Futures and options contracts do not generally
result into delivery but there has to be smooth and standard
delivery mechanism to ensure proper functioning of market.
In stock index futures and options which are cash settled
contracts, the issue of delivery may not arise, but it would be
there in stock futures or options, commodity futures and
options and interest rates futures. In the absence of proper
custodian or warehouse mechanism, delivery of financial
assets and commodities will be a cumbersome task and
futures prices will not reflect the equilibrium price for
convergence of cash price and futures price on maturity,
custodian and warehouse are very relevant.

45

Derivatives
9.] BANK FOR FUND MOVEMENTS
Futures and options contracts are daily settled
for which large fund movement from members to clearing
house and back is necessary. This can be smoothly handled
if a bank works in association with a clearing house. Bank
can make daily accounting entries in the accounts of
members and facilitate daily settlement a routine affair. This
also reduces a possibility of any fraud or misappropriation of
fund by any market intermediary.
10.] REGULATORY FRAMEWORK
A regulator creates confidence in the market
besides providing Level playing field to all concerned, for
foreign exchange and money market, RBI is the regulatory
authority so it can take initiative in starting futures and
options trade in currency and interest rates. For capital
market, SEBI is playing a lead role, along with physical
market in stocks, it will also regulate the stock index futures
to be started very soon in India. The approach and outlook of
regulator directly affects the strength and volume in the
market. For commodities, Forward Market Commission is
working for settling up national National Commodity
Exchange.

46

Derivatives
ROLE OF DERIVATIVES :
Derivative markets help investors in many
different ways :
1.]

RISK MANAGEMENT
Futures and options contract can be used for

altering the risk of investing in spot market. For instance,

consider an investor who owns an asset. He will always be
worried that the price may fall before he can sell the asset.
He can protect himself by selling a futures contract, or by
buying a Put option. If the spot price falls, the short hedgers
will gain in the futures market, as you will see later. This will
help offset their losses in the spot market. Similarly, if the
spot price falls below the exercise price, the put option can
always be exercised.
Derivatives markets help to reallocate risk
among investors. A person who wants to reduce risk, can
transfer some of that risk to a person who wants to take
more risk. Consider a risk-averse individual. He can
obviously reduce risk by hedging. When he does so, the
opposite position in the market may be taken by a speculator
who wishes to take more risk. Since people can alter their
risk exposure using futures and options, derivatives markets

47

Derivatives
help in the raising of capital. As an investor, you can always
invest in an asset and then change its risk to a level that is
more acceptable to you by using derivatives.
2.]

PRICE DISCOVERY
Price discovery refers to the markets ability to

determine true equilibrium prices. Futures prices are

believed to contain information about future spot prices and
help in disseminating such information. As we have seen,
futures markets provide a low cost trading mechanism. Thus
information

pertaining

to

supply

and

demand

easily

percolates into such markets. Accurate prices are essential

for ensuring the correct allocation of resources in a free
market economy. Options markets provide information about
the volatility or risk of the underlying asset.
3.]

OPERATIONAL ADVANTAGES
As opposed to spot markets, derivatives

markets involve lower transaction costs. Secondly, they offer

greater liquidity. Large spot transactions can often lead to
significant price changes. However, futures markets tend to
be more liquid than spot markets, because herein you can
take large positions by depositing relatively small margins.
Consequently, a large position in derivatives markets is

48

Derivatives
relatively easier to take and has less of a price impact as
opposed to a transaction of the same magnitude in the spot
market. Finally, it is easier to take a short position in
derivatives markets than it is to sell short in spot markets.
4.]

MARKET EFFICIENCY
The availability of derivatives makes markets

more efficient;

spot, futures and options markets are

inextricably linked. Since it is easier and cheaper to trade in

derivatives, it is possible to exploit arbitrage opportunities
quickly and to keep prices in alignment. Hence these
markets help to ensure that prices reflect true values.
5.]

EASE OF SPECULATION
Derivative markets provide speculators with a

cheaper alternative to engaging in spot transactions. Also,

the amount of capital required to take a comparable position
is less in this case. This is important because facilitation of
speculation is critical for ensuring free and fair markets.
Speculators always take calculated risks. 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.

49

Derivatives

CHAPTER 5

HOW BANKS USE DERIVATIVES

ASSET liability management

50

Derivatives

CHAPTER 5

HOW BANKS USE DERIVATIVES :

ASSET LIABILITY MANAGEMENT Banks have traditionally taken deposits from their
customers and put those deposits to work as loans. Because
the deposits and the loans are dominated in the same

51

Derivatives
currency, this activity has no associated foreign exchange
risk. But it does limit banks to lending to customers which
need to borrow in the currencies which the banks have
available on deposits.
If a bank is asked to lend to a customer in a currency
other than one of those it has on deposits it creates a
currency exposure for the bank. Suppose a customer wants
to borrow EUROS from a US Bank for 5 years and that the
US bank has no natural source of EUROS. It is possible for
the banks to cover this exposure in the forward market by
selling EUROS forwards and buying US dollars. The
transaction costs associated with this, in particular the bid /
offer spread in the medium term foreign exchange forward
market, would make the resultant cost of the loan
prohibitively expensive for the borrower.
Currency swaps provide an economic alternative to
this problem for banks. In order to cover the exposure
created by a loan to a customer in EUROS funded by a
banks deposit in US dollar, a bank could receive fixed rate
US dollars in a currency swap and pay fixed rate EUROS.
One of the consequences of the development of the
currency swap market is that banks now often make much
more competitive medium term forward foreign exchange

52

Derivatives
prices than they used to. Most banks quote forward foreign
exchange and currency swap prices from the same desk and
increases liquidity in the latter has improved liquidity in the
former. Banks therefore, need no longer restrict their lending
activities to the currencies in which they have natural
deposits. They are free to fund themselves in the most
competitively priced currency and to lend to their customers
in the currency of the customers preference, using a
currency swap as an asset and liability matching tool
The Normal yield curve, reflects that it is much
easier for banks to borrow at the short end of the curve than
the long end. This means that banks can fund themselves
much more effectively in the inter bank market in maturities
such as the overnight, tom / next (overnight from tomorrow,
or tomorrow to the next day), spot / next, one week, one
month, three months and six months than they can in
maturities such as five years or 20 years.
With the development of the swaps market it is
possible for banks to satisfy their customers demands for
fixed rate funding while ensuring that the banks assets and
liabilities are matched. Suppose a bank has a customer who
needs 5 years fixed rate funds. Let us say that the bank
finances in this loan in the interbank market at 3 month

53

Derivatives
LIBOR. The bank now has a 3 month liability and a 5 year
asset (Figure 1).

The bank is short floating rate interest at 3 month

LIBOR and long fixed rate interest at the rate at which it
lends to its customer. This is called the asset liability
mismatch. So in order to hedge its position the banks needs

54

Derivatives
to match its exposure to 3 month LIBOR by receiving on a
floating rate basis in an interest rate swap, and match its
exposure on a fixed rate basis by paying a fixed rate in a
interest rate swap. This is a hedge which is ideally suited to
an interest rate swap which the bank receives a floating rare
of interest and pays a fixed rare (Figure 2).
This structure has the benefit for the bank that it
eliminates the banks exposure to interest rate risk. The bank
can no longer profit from a fall in interest rates but it cannot
lose money on its asset and liability mismatch as a result of
an increase in rates. The bank will make or lose money
based on its pricing of the credit risk in the transaction and its
overall loan exposure rather than on its ability to forecast
interest rates. Hence the interest rate swaps provide banks
with an opportunity to change their risks from interest rate to
credit.

55

Derivatives

56

Derivatives

CHAPTER 6

CASE STUDIES
hedging interest rate risk
Hedging foreign exchange risk

57

Derivatives

CHAPTER 6

CASE STUDIES :
CASE STUDY 1
Hedging interest rate risk
Scenario
A major aircraft manufacturer has decided to replace his
mainframe computer. The cost after trade in is $ 10 million,
payable on delivery.
Delivery
Mid December, 2006.
Funding

58

Derivatives
A projected cash flow short fall will create a $ 10 million
borrowing requirement.
Borrowing Rate
LIBOR + 50 Basis points
Outlook
The treasurer is worried that the central banks future policy
directions will lead to an increase in short term rates.
Market Conditions
Current LIBOR - 8.38 %
Euro-Dollar Options On Futures :
December 91.25 (implied rate of 8.75%) Put, Premium of .25
December 91.00 (implied rate of 9.00%) Put, Premium of .15
Strategy
The treasurer buys the December Put Option with a strike
price of 91.25 (implied rate of 8.75%), which allows the
manufacturer to enter into a Euro Dollar futures contract for
a premium price of .25. the notional principal, that is the size
of the contract is $ 1 million, so ten contracts are taken to
cover the full short-term borrowing cost. The put will make

59

Derivatives
money only if the underlying future falls below the strike price
less the price paid for the option. Remember, the Euro-Dollar
future is quoted as an index on a base of 100, a lower price
means a higher rate of interest
Results
In Mid-December, depending upon how the LIBOR rate has
changed, the treasurer will use or not use the put option on
the future which was purchased. If the cost of short-term
borrowing has remained the same or declined, the put option
will expire worthless. The money expended upon the
premium, of 0.25 % per $ 1 million contract, will have been
lost. If, however, interest rates were to rise, the put option
contract on the Euro-Dollar future will be exercised. If, for
example, Euro Dollar Rates rise to 10.76% (89.10 on the
index) which would have given the treasurer a borrowing
cost of 11.26% (LIBOR + 50 bases points), the Put would be
utilised, exercising the right to sell the option on the future at
the strike price of 91.25, for an intrinsic value of 2.1 (Or 2%
in interest terms).
The gain in value on the Put options contract compensates
for the increased cost of borrowing on the LIBOR Rate. The
risk of funding the new mainframe computer has been
managed.

60

Derivatives

CASE STUDY 2
Hedging foreign exchange rate risk
Scenario
An American manufacturer of clothing imports fabric from the
United Kingdom. In 6 months time, in anticipation of the
2005-06 winter season, he will need to purchase 1 million
Pounds Sterling, in order to pay for the desired imports, in
order for his finished goods to be competitive and ensure
adequate margins, the exchange rate must not fluctuate
significantly. A weakening of the US dollar by more than 5%
may create problems in terms of price competitiveness and
profit margins.
Delivery

61

Derivatives
In Mid June, 2005, the manufacturer is scheduled to receive
and pay for the imports.
Funding
The manufacturer has no funding exposure as the imports
will be paid from working capital.
Exchange Rate
The present rate is STG/ USD = 1.50, which is satisfactory
with respect to commercial objectives, but a weakening of
more than 5% will result in diminished margins or a non
competitive position.
Outlook
The manufacturer is worried that because of declining rates
of interests and the current account deficits, the US dollar
may waken against the Pound Sterling, from its current rate
of 1.50.
Market Conditions
Current spot rate - STG/USD = 1.50

62

Derivatives
June calls @ strike price of STG/USD = $1.51, premium of
2.50% per contract, that is 4 US cents.
June calls @ Strike price of STG/USD = $1.52, premium of
2.00% per contract, that is 3 US cents.
Strategy
The manufacturer buys one call option contract with a Strike
or Exercise price of 1.51. If the US dollar weakens the call
contract will be used to buy the Pounds Sterling at the set
price. If, the US dollar stays the same or strengthens, the
contract will expire worthless and the premium paid for the
option will have been lost.
Results
In June 2005, the Us dollar does weaken and the new spot
exchange rate is STG/USD = 1.60. Hence, the call option at
1.51 has intrinsic value of 9 US cents. Instead of the 1 million
Pound Sterling required by the manufacturer costing 1.6
million US dollars, the exercise of the call contract will net $
90000 US ( $ 1.6 million $ 1.51 million).
After subtracting the price of the premium of 2.5%, the net
gain will be $ 50000 US ( $ 1.6 million $ 1.55 million),

63

Derivatives
which partially off-sets the depreciation in the US Dollar
exchange Rate, and is within the manufacturers target range
of 5% to remain competitive on pricing.
Through this hedging technique the underlying commercial
objective will be ensured. If the US Dollar exchange rate had
not weakened, the expenditure on the premium would still
have kept his net cost of the imports within the self imposed
5% competitive range.

RECOMMENDATIONS

RBI should play a greater role in supporting derivatives.

64

Derivatives

Derivatives market should be developed in order

to keep it at par with other derivative markets in
the world.

Speculation should be discouraged.

There must be more derivative instruments

aimed at individual investors.

SEBI should conduct seminars regarding the use

of derivatives to educate individual investors.

BIBLIOGRAPHY :

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Derivatives
BOOKS
Futures markets Sunil. K. Parameswaran
Understanding futures market Robert. W. Klob
Derivatives Market in India Susan Thomas
Financial Derivatives V. K. Bhalla
Financial Services and Markets Dr. S. Guruswamy
Futures and Options D. C. Gardner

INTERNET
www.cxotoday.com
www.indiainfoline.com
www.indiamart.com

ABBREVIATION

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Derivatives

A
AMEX - American Stock Exchange.

B
BSE - Bombay Stock Exchange.

C
CHE - Calcutta Hessian Exchange Ltd.
CBOE - Chicago Board options Exchange.
CBOT - Chicago Board of Trade.
CEBB - Chicago Egg and Butter Board.
CME - Chicago Mercantile Exchange.
CPE - Chicago Produce Exchange.

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Derivatives

I
IMM - International Monetary Market.

L
LIBOR - London Inter Bank Offer Rate.
LEAPS - Long term Equity Anticipation Securities.

M
MCX Multi Commodity Exchange
MIBOR - Mumbai Inter Bank Offer Rate.

N
NCDX National Commodities and Derivatives Exchange
NSE - National Stock Exchange.

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Derivatives

O
OTC - Over the counter.

P
PHLX - Philadelphia Stock Exchange.

S
SIMEX - Singapore International Monetary Exchange.
S&P - Standard and Poor.
SC(R) A - Securities Contracts (Regulation) Act, 1956.

69