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. From the time it was sown to the time it was ready for harvest, farmers would face price uncertainty. 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. These were simple contracts developed to meet the needs of farmers and were basically a means of reducing risk.

A farmer who sowed his crop in June faced uncertainty over the price he would receive for his harvest in September. In years of scarcity, he would probably obtain attractive prices. However, during times of oversupply, he would have to dispose off his harvest at a very low price. Clearly this meant that the farmer and his family were exposed to a high risk of price uncertainty.

On the other hand, a merchant with an ongoing requirement of grains too would face a price risk that of having to pay exorbitant prices during dearth, although favourable prices could be obtained during periods of oversupply. Under such circumstances, 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. What they would then negotiate happened to be futures-type contract, which would enable both parties to eliminate the price risk.

In 1848, the Chicago Board Of Trade, or CBOT, was established to bring farmers and merchants together. A group of traders got together and created the µto-arrive¶ contract that permitted farmers to lock into price upfront and deliver the grain later. These to-arrive contracts proved useful as a device for hedging and speculation on price charges. These were eventually standardized, and in 1925 the first futures clearing house came into existence.

Today derivatives contracts exist on variety of commodities such as corn, pepper, cotton, wheat, silver etc. Besides commodities, derivatives contracts also exist on a lot of financial underlying like stocks, interest rate, exchange rate, etc.

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. The underlying asset can be equity, forex, commodity or any other asset. In our earlier discussion, 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. Such a transaction is an example of a derivative. The price of this derivative is driven by the spot price of wheat which is the ³underlying´ in this case.

The Forwards Contracts (Regulation) Act, 1952, regulates the forward/futures contracts in commodities all over India. As per this the Forward Markets Commission (FMC) continues to have jurisdiction over commodity futures contracts. However when derivatives trading in securities was introduced in 2001, the term ³security´ in the Securities Contracts (Regulation) Act, 1956 (SCRA), was amended to include derivative contracts in securities. Consequently, regulation of derivatives came under the purview of Securities Exchange Board of India (SEBI). We thus have separate regulatory authorities for securities and commodity derivative markets.

Derivatives are securities under the SCRA and hence the trading of derivatives is governed by the regulatory framework under the SCRA. The Securities Contracts (Regulation) Act, 1956 defines ³derivative´ to include- : A security derived from a debt instrument, share, loan whether secured or unsecured, risk instrument or contract differences or any other form of security.

TYPES OF DERIVATIVES MARKET

Exchange Traded Derivatives

Over The Counter Derivatives

National Stock Exchange

Bombay Stock Exchange

National Commodity & Derivative Exchange

Index Future

Index option

Stock option

Stock future

Figure.1 Types of Derivatives Market

TYPES OF DERIVATIVES

Derivatives

Future

Option

Forward

Swaps

Figure.2 Types of Derivatives

FORWARD CONTRACTS

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

BASIC FEATURES OF FORWARD CONTRACT
‡ ‡ They are bilateral contracts and hence exposed to counter-party risk. Each contract is custom designed, and hence is unique in terms of contract expiration date and the asset type and quality. ‡ ‡ The contract price is generally not available in public domain. On the expiration date, the contract has to be settled by delivery of the Asset. ‡ If the party wishes to reverse the contract, it has to compulsorily go to the same counterparty, whic h often results in high prices being charged. size,

However forward contracts incertain markets have become very standardized, as in the case of foreign exchange, thereby reducing transaction costs and increasing transactions volume. This process of standardization reaches its limit in the organized futures market. Forward contracts are often confused with futures contracts. The confusion is primarily becau se bot h serve essent ially t he same economic fu nct io ns of allocating risk in the presence of future price uncertainty. However futures are a significant improvement over the forward contracts as they eliminate counterparty risk and offer more liquidity.

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

BASIC FEATURES OF FUTURE CONTRACT 1. Standardization:
Futures contracts ensure their liquidity by being highly standardized, usually by specifying: y The underlying. This can be anything from a barrel of sweet crude oil to a short term interest rate. y y The type of settlement, either cash settlement or physical settlement. The amount and units of the underlying asset per contract. This can be the notional amount of bonds, a fixed number of barrels of oil, units of foreign currency, the notional amount of the deposit over which the short term interest rate is traded, etc. y The currency in which the futures contract is quoted.

This is calculated by the futures contract. the minimum permissible price fluctuation. Mark to market Margin: Because a series of adverse price changes may exhaust the initial margin. On the other hand. Margin: Although the value of a contract at time of trading should be zero. It represents the loss on that contract. To minimize this risk. the exchange will debit his account. Initial Margin: is paid by both buyer and seller. y y The last trading date. usually called variation or maintenance margin. In case of physical commodities. If he cannot pay. It may be 5% or 10% of total contract price.y The grade of the deliverable. This renders the owner liable to adverse changes in value. called the "settlement" or mark-to-market price of the contract. i. its price constantly fluctuates. the contract is marked to its present market value. called a "margin". deposits money with the exchange. and the exchange pays this profit into his account. who always acts as counterparty. To understand the original practice. At the end of every trading day. This is intended to protect the exchange against loss. 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. In case of bonds. The delivery month. this specifies which bonds can be delivered. is required by the exchange. when taking a position.e. agreeing on a price at the end of each day. . then the margin is used as the collateral from which the loss is paid. consider that a futures trader. which is not likely to be exceeded on a usual day's trading. if he is on the losing side. and creates a credit risk to the exchange. this specifies not only the quality of the underlying goods but also the manner and location of delivery. the exchange demands that contract owners post a form of collateral. his contract has increased in value that day. a further margin. 2. Other details such as the tick. as determined by historical price changes. If the trader is on the winning side of a deal.

a cash payment is made based on the underlying reference rate. buying a contract to cancel out an earlier sale (covering a short). and can be done in one of two ways. Most are cancelled out by purchasing a covering position . Any deviation from this equality allows for arbitrage as follows. as specified per type of futures contract: y Physical delivery . or the closing value of a stock market index. for a simple. the value of the future/forward. For many equity index and interest rate futures contracts. it occurs only on a minority of contracts. such as a short term interest rate index such as Euribor. dividend yields. In the case where the forward price is higher: 1. the price paid on delivery (the forward price) must be the same as the cost (including interest) of buying and storing the asset. non-dividend paying asset.3. Thus. the rational forward price represents the expected future value of the underlying discounted at the risk free rate. Expiry is the time when the final prices of the future are determined. dividends. and convenience yields. will be found by discounting the present value at time to maturity by the rate of risk-free return . y Cash settlement . . and by the exchange to the buyers of the contract. or selling a contract to liquidate an earlier purchase (covering a long). In other words.that is. for no arbitrage to be possible. A futures contract might also opt to settle against an index based on trade in a related spot market. In practice. PRICING OF FUTURE CONTRACT In a futures contract. On this day the t+2 futures contract becomes the t forward contract. The arbitrageur sells the futures contract and buys the underlying today (on the spot market) with borrowed money. . this happens on the Last Thursday of certain trading month. Settlement: Settlement is the act of consummating the contract. This relationship may be modified for storage costs.the amount specified of the underlying asset of the contract is delivered by the seller of the contract to the exchange.

the arbitrageur hands over the underlying. 3. The difference between the two amounts is the arbitrage profit. 4. On the delivery date. . he cashes in the matured investment. In the case where the forward price is lower: 1.2.] 4. [If he was short the underlying. and receives the agreed forward price. he invests the proceeds. which has appreciated at the risk free rate. The arbitrageur buys the futures contract and sells the underlying today (on the spot market). 3. he returns it now. He then repays the lender the borrowed amount plus interest. 2. He then receives the underlying and pays the agreed forward price using the matured investment. The difference between the two amounts is the arbitrage profit. On the delivery date.

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

at a specified price on or before a specified date is known as a µCall option¶. The owner makes a profit provided he buys at a lower current price and sells at a higher future price. at a specified price on or before a specified date is known as a µPut option¶. only the payment flows are exchanged and not the principle amount. Put and calls are almost always written on equities. during a period or on a specific date in exchange for payment of a premium is known as µoption¶.. In case of swap. based on some notional principle amount is called as a µSWAP¶. CALL OPTION: A contract that gives its owner the right but not the obligation to buy an underlying asset-stock or any financial asset. called the strike price. They can be regarded as portfolios of forward's contracts. The price at which the underlying is traded is called the µstrike price¶. Hence. CALL OPTION & PUT OPTION. The two commonly used swaps are: . bonds and warrants become the subject of options. PUT OPTION: A contract that gives its owner the right but not the obligation to sell an underlying asset-stock or any financial asset.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. no option will be exercised if the future price does not increase. The owner makes a profit provided he sells at a higher current price and buys at a lower future price.e. although occasionally preference shares. 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. A contract whereby two parties agree to exchange (swap) payments. There are two types of options i. Underlying asset refers to any asset that is traded.

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. Under a currency swap. This arrangement allows the counter parties to borrow easily and cheaply in their home currencies. The parties to the swap contract of currency generally hail from two different countries. It also allows the investors to exchange one type of asset for another type of asset with a preferred income stream. Such cash flows are supposed to remain unaffected by subsequent changes in the exchange rates. cash flows to be exchanged are determined at the spot rate at a time when swap is done.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. 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. 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. .

Rather than have calls and puts. However. Longer-dated options are called warrants and are generally traded over-the-counter. which are not. Equity Index Options are most popular form of baskets. the swaptions market has receiver swaptions and payer swaptions. exchange may introduce option contracts with a maturity period of 2-3 years. A receiver swaption is an option to receive fixed and pay floating. These long-term option contracts are popularly known as Leaps or Long term Equity Anticipation Securities. A payer swaption is an option to pay fixed and receive floating. WARRANTS Options generally have lives of up to one year. much popular are as follows: BASKETS Baskets options are option on portfolio of underlying asset. .OTHER KINDS OF DERIVATIVES The other kind of derivatives. the majority of options traded on options exchanges having a maximum maturity of nine months. LEAPS Normally option contracts are for a period of 1 to 12 months. Thus a swaption is an option on a forward swap. SWAPTIONS Swaptions are options to buy or sell a swap that will become operative at the expiry of the options.

1984. Forward delivery contracts. Trading in futures began on the CBOT in the 1860¶s. 1972.HISTORY OF DERIVATIVES The history of derivatives is quite colourful and surprisingly a lot longer than most people think. Interest rate futures contracts were traded for the first time on the CBOT on October 20. was formed in 1848 in the US to deal with the problem of µcredit risk¶ and to provide centralised location to negotiate forward contracts. the Australian Dollar. The first stock index futures contracts were traded on Kansas City Board of Trade on February 24. the Swiss Franc. Futures trading grew out of the need for hedging the price risk involved in many commercial operations. a spin-off of CBOT. the German Mark. The first formal commodities exchange. The currency futures traded on the IMM are the British Pound. stating what is to be delivered for a fixed price at a specified place on a specified date. The Chicago Mercantile Exchange (CME). The first type of futures contract was called µto arrive at¶. the Japanese Yen. existed in ancient Greece and Rome. The first financial futures to emerge were the currency in 1972 in the US. a division of CME. was formed in 1919. The first organized commodity exchange came into existence in the early 1700¶s in Japan. on International Monetary Market (IMM). 1982. Roman emperors entered forward contracts to provide the masses with their supply of Egyptian grain. Currency futures were followed soon by interest rate futures. The first foreign currency futures were traded on May 16. the Canadian Dollar.The first of the several networks. Stock index futures and options emerged in 1982. . which offered a trading link between two exchanges. forward contracts have existed for centuries for hedging price risk. These contracts were also undertaken between farmers and merchants to eliminate risk arising out of uncertain future prices of grains. was formed between the Singapore International Monetary Exchange (SIMEX) and the CME on September 7. From µforward¶ trading in commodities emerged the commodity µfutures¶. though it did exist before in 1874 under the names of µChicago Produce Exchange¶ (CPE) and µChicago Egg and Butter Board¶ (CEBB). 1975. CBOT listed the first µexchange traded¶ derivatives contract. known as the futures contracts. Thus. In 1865. the Chicago Board of Trade (CBOT). and the Euro dollar.

Tulips. Agricultural commodities options were traded in the nineteenth century in England and the US. It was in 1973 again that black. were a symbol of affluence. The market for futures and options grew at a rapid pace in the eighties and nineties. the Chicago Board options Exchange (CBOE) was set up at CBOT for the purpose of trading stock options. Merton. Dutch growers and dealers traded in tulip bulb options. 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. With the options markets becoming increasingly popular. the brightly coloured flowers. Options are very popular with speculators in the tulip craze of seventeenth century Holland. 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. The CBOT now offers 48 futures and option contracts (with the annual volume at more than 211 million in 2001). There was so much speculation that people even mortgaged their homes and businesses. tulip bulb prices shot up. Their history also dates back to ancient Greece and Rome.The CBOE is the largest exchange for trading stock . These options were traded over the counter. owing to a high demand. Russell Sage. Options on shares were available in the US on the over the counter (OTC) market only until 1973 without much knowledge of valuation.Options are as old as futures. On April 26. This model helped in assessing the fair price of an option which led to an increased interest in trading of options. The CBOT and the CME are two largest financial exchanges in the world on which futures contracts are traded. 1973. 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. and Scholes invented the famous Black-Scholes Option Formula. the American Stock Exchange (AMEX) and the Philadelphia Stock Exchange (PHLX) began trading in options in 1975. in 1872.

The US indices and the Nikkei 225 trade almost round the clock.options. The CBOE trades options on the S&P 100 and the S&P 500 stock indices. the Dow Jones Industrial Average. and the Nikkei 225. The N225 is also traded on the Chicago Mercantile Exchange. The most traded stock indices include S&P 500. . the Nasdaq 100. The Philadelphia Stock Exchange is the premier exchange for trading foreign options.

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

the Indian capital market had no access to the latest trading methods and was using traditional out-dated methods of trading. The opening of Indian economy has precipitated the process of integration of India¶s financial markets with the international financial markets. . derivatives have become part and parcel of the day-to-day life for ordinary people in major parts of the world. cross currency options etc. derivatives markets have become the most important markets in the world. derivatives markets have become the most important markets in the world. There was a huge gap between the investors¶ aspirations of the markets and the available means of trading. Today.(1) Need for derivatives in India today In less than three decades of their coming into vogue. What are these myths behind derivatives? y Derivatives increase speculation and do not serve any economic purpose y y y Indian Market is not ready for derivative trading Disasters prove that derivatives are very risky and highly leveraged instruments. Today. Derivatives are complex and exotic instruments that Indian investors will find difficulty in understanding. (2) Myths and realities about derivatives In less than three decades of their coming into vogue. there are still apprehensions about the introduction of derivatives. Until the advent of NSE. 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. 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. which have developed into a very large market. There are many myths about derivatives but the realities that are different especially for Exchange traded derivatives. Financial derivatives came into the spotlight along with the rise in uncertainty of post-1970. While this is true for many countries. which are well regulated with all the safety mechanisms in place. derivatives have become part and parcel of the day-today life for ordinary people in major part of the world.

e. Greater variety of strike price options at a given time. It increases the no of options investors for investment. 1)Buy &Sell stocks 1)Maximum on delivery basis loss possible 2) Buy Call &Put to premium by paying paid premium Advantages y y Greater Leverage as to pay only the premium.3a ±3. 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. The figure 3. 2) Buy Index Futures hold till expiry. before June 2001 New System Vs Existing System for Market Players Figure 3.3a Speculators Existing Approach SYSTEM Peril &Prize 1) Both profit & loss to extent of price change.(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. New Peril &Prize Approach 1) Deliver based Trading. margin trading & carry forward transactions.

earn premium + profit with increase prcie Advantages y Availability of Leverage . cost is only 2)For Long. another exchange. 2) Cash &Carry 2) If Future Contract arbitrage continues more or less than Fair price y Fair Price = Cash Price + Cost of Carry. Figure 3. 1)Fix price today to buy 1) Additional latter by paying premium. in weekly settlement forward transactions. 3)Sell deep OTM call option with underlying shares.3c Hedgers Existing SYSTEM New Approach Peril &Prize Approach Peril &Prize 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. If market goes up.3b Arbitragers Existing Approach SYSTEM Approach New Peril &Prize Peril &Prize 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. buy ATM Put premium. long position benefit else exercise the option. Option. the Market moves.

1) Buy Call/Put options based on market outlook 2) Hedge position if holding underlying stock Advantages y Losses Protected. which has accompanied the modernization of commercial and investment banking and globalisation of financial activities. the former have rigid structures compared to the latter. There are no formal rules for risk and burden-sharing. Peril &Prize 1) Plain Buy/Sell implies unlimited profit/loss. 3. The OTC derivatives markets have the following features compared to exchange-traded derivatives: 1.Figure 3. The recent developments in information technology have contributed to a great extent to these developments. Exchange-traded vs. 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. Approach Peril &Prize 1) Downside remains protected & upside unlimited. OTC derivatives markets The OTC derivatives markets have witnessed rather sharp growth over the last few years. The management of counter-party (credit) risk is decentralized and located within individual institutions. These episodes of turbulence revealed the risks posed to market stability originating in features of OTC derivative instruments and markets.3d Small Investors Existing SYSTEM New Approach 1) If Bullish buy stocks else sell it. or margining. While both exchange-traded and OTC derivative contracts offer many benefits. 2. leverage. . 4. There are no formal centralized limits on individual positions.

The problem is more acute as heavy reliance on OTC derivatives creates the possibility of systemic financial events. occur which significantly alter the perceptions of current and potential future credit exposures. and (v) the central role of OTC derivatives markets in the global financial system. (ii) information asymmetries. . (iv) the high concentration of OTC derivative activities in major institutions. The OTC contracts are generally not regulated by a regulatory authority and the exchange¶s self-regulatory organization. those who provide OTC derivative products. and their dependence on exchange traded derivatives. including counter-party. which fall outside the more formal clearing house structures. and 5. However. Instability arises when shocks. liquidity and operational risks. such as counter-party credit events and sharp movements in asset prices that underlie derivative contracts. hedge their risks through the use of exchange traded derivatives. In view of the inherent risks associated with OTC derivatives. The following features of OTC derivatives markets can give rise to instability in institutions. banking supervision and market surveillance.4. and the international financial system: (i) the dynamic nature of gross credit exposures. the size and configuration of counterparty exposures can become unsustainably large and provoke a rapid unwinding of positions. although they are affected indirectly by national legal systems. There are no formal rules or mechanisms for ensuring market stability and integrity. the progress has been limited in implementing reforms in risk management. Indian law considers them illegal. (iii) the effects of OTC derivative activities on available aggregate credit. There has been some progress in addressing these risks and perceptions. and OTC derivatives markets continue to pose a threat to international financial stability. markets. and for safeguarding the collective interests of market participants. When asset prices change rapidly. Moreover. Some of the features of OTC derivatives markets embody risks to financial market stability.

The advent of telecommunication and data processing bought information very quickly to the markets. local currency or foreign currencies. . globalisation of the markets. etc. Such changes in the price are known as µprice volatility¶. The globalisation of the markets and rapid industrialisation of many underdeveloped countries brought a new scale and dimension to the markets. technological developments and advances in the financial theories. These price changes expose individuals. And the price one pays in one¶s own currency for a unit of another currency is called as an exchange rate.} PRICE VOLATILITY ± A price is what one pays to acquire or use something of value. A. FACTORS CONTRIBUTING TO THE GROWTH OF DERIVATIVES Factors contributing to the explosive growth of derivatives are price volatility. and the collective interaction of demand and supply in the market determines the price. In a market. The breakdown of the BRETTON WOODS agreement brought an end to the stabilising role of fixed exchange rates and the gold convertibility of the dollars. These factors are constantly interacting in the market causing changes in the price over a short period of time.5. petrol. oil. producing firms and governments to significant risks. consumers have µdemand¶ and producers or suppliers have µsupply¶. The objects having value maybe commodities. The Mexican crisis in the south east-Asian currency crisis of 1990¶s has also brought the price volatility factor on the surface. the price one pays for use of a unit of another person¶s money is called interest rate. This has three factors: the speed of price changes. The changes in demand and supply influencing factors culminate in market adjustments through price changes. The concept of price is clear to almost everybody when we discuss commodities. Prices are generally determined by market forces. Nations that were poor suddenly became a major source of supply of goods. Information which would have taken months to impact the market earlier can now be obtained in matter of moments. the frequency of price changes and the magnitude of price changes. There is a price to be paid for the purchase of food grain. metal.

At the same time there were significant advances in software programmes without which computer and telecommunication advances would be meaningless. equity shares and bonds.Even equity holders are exposed to price risk of corporate share fluctuates rapidly. network systems and enhanced method of data entry. foreign exchange. Export of certain goods from India declined because of this crisis. south East Asian currencies crisis of 1997 had affected the competitiveness of our products vis-à-vis depreciated currencies. Data transmission by satellite. 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. These facilitated the more rapid movement of information and consequently its instantaneous impact on market price. Thus. Suddenly blue chip companies had turned in to red.} GLOBALISATION OF MARKETS ± Earlier. Advances in this area include the development of high speed processors. Closely related to advances in computer technology are advances in telecommunications. Steel industry in 1998 suffered its worst set back due to cheap import of steel from south East Asian countries. it is evident that globalisation of industrial and financial activities necessitates use of derivatives to guard against future losses. B. 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 . led to cut profit margins In Indian context. what happened in other part of the world was mostly irrelevant. Now globalisation has increased the size of markets and as greatly enhanced competition . managers had to deal with domestic economic concerns.} TECHNOLOGICAL ADVANCES ± A significant growth of derivative instruments has been driven by technological breakthrough. Improvement in communications allow for instantaneous worldwide conferencing. This factor alone has contributed to the growth of derivatives to a significant extent. in many cases. The fear of china devaluing its currency created instability in Indian exports. It has also exposed the modern business to significant risks and. C.it has benefited consumers who cannot obtain better quality goods at a lower cost.

The work of economic theorists gave rise to new products for risk management which led to the growth of derivatives in financial markets. Initially forward contracts in its traditional form. To the extent the technological developments increase volatility. In late 1970¶s. work of Lewis Edeington extended the early work of Johnson and started the hedging of financial price risks with financial futures. D. The effect of this risk can easily destroy a business which is otherwise well managed.} ADVANCES IN FINANCIAL THEORIES ± Advances in financial theories gave birth to derivatives. Option pricing models developed by Black and Scholes in 1973 were used to determine prices of call and put options. The above factors in combination of lot many factors led to growth of derivatives instruments. . derivatives and risk management products become that much more important. was the only hedging tool available.exposes producers and consumers to greater price risk. Derivatives can help a firm manage the price risk inherent in a market economy.

however. The market for derivatives. which prohibited forward trading in securities. To begin with. The government also rescinded in March 2000.Gupta on November 18. The act also made it clear that derivatives shall be legal and valid only if such contracts are traded on a recognized stock exchange. SEBI permitted the derivative segments of two stock exchanges. which withdrew the prohibition on options in securities. methodology for charging initial margins. 1995. NSE and BSE.L. broker net worth.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. deposit requirement and real±time monitoring requirements.C. did not take off. and their clearing house/corporation to commence trading and settlement in approved derivatives contracts. The committee submitted its report on March 17. to recommend measures for risk containment in derivatives market in India. worked out the operational details of margining system.R. which was submitted in October 1998. as there was no regulatory framework to govern trading of derivatives. This was followed by approval for trading in options based on these two indexes and options on individual securities. The committee recommended that derivatives should be declared as µsecurities¶ so that regulatory framework applicable to trading of µsecurities¶ could also govern trading of securities. SEBI set up a 24±member committee under the Chairmanship of Dr. thus precluding OTC derivatives. The derivatives trading on NSE commenced with S&P CNX Nifty . The trading in BSE Sensex options commenced on June 4. Futures contracts on individual stocks were launched in November 2001.J. SEBI also set up a group in June 1998 under the Chairmanship of Prof. 1996 to develop appropriate regulatory framework for derivatives trading in India. The Securities Contract Regulation Act (SCRA) was amended in December 1999 to include derivatives within the ambit of µsecurities¶ and the regulatory framework were developed for governing derivatives trading. The report. Derivatives trading commenced in India in June 2000 after SEBI granted the final approval to this effect in May 2001. 2001 and the trading in options on individual securities commenced in July 2001. the three decade old notification. SEBI approved trading in index futures contracts based on S&P CNX Nifty and BSE±30 (Sense) index. 1998 prescribing necessary pre±conditions for introduction of derivatives trading in India.Varma.

the index) is high. 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. as the former closely resembles the erstwhile badla system. A primary reason attributed to this phenomenon is that traders are comfortable with single-stock futures than equity options. because low volatility leads to higher waiting time for round-trips. Trading in equity options on most stocks for even the next month was non-existent. options are considered more valuable when the volatility of the underlying (in this case. 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. . ‡ Put volumes in the index options and equity options segment have increased since January 2002. This may be due to the low volatility of the spot index.Index futures on June 12.32 in June. It constituted 70 per cent of the total turnover during June 2002. 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. Typically. 2001. A related issue is that brokers do not earn high commissions by recommending index options to their clients. and regulations of the respective exchanges and their clearing house/corporation duly approved by SEBI and notified in the official gazette. byelaws. The call-put volumes in index options have decreased from 2. Foreign Institutional Investors (FIIs) are permitted to trade in all Exchange traded derivative products. The trading in index options commenced on June 4. ‡ On relative terms. 2001 and trading in options on individual securities commenced on July 2.86 in January 2002 to 1. 2000. volumes in the index options segment continue to remain poor. Single stock futures were launched on November 9. 2001.

However. I would like to emphasise that currency swaps allowed companies wit h ECBs to swap their foreign currency liabilities into rupees. the intra-day stock price variations should not have a one-to-one impact on the option premiums. since banks could not carry open positions the risk was allowed to be transferred to any other resident corporate. But often corporate assume these risks due to interest rate differentials and views on currencies. 803 central . the value of the trades has gone up steadily from Rs 17. y The spot foreign exchange market remains the most important segment but the derivative segment has also grown. y Cash settled exchange traded currency futures have made foreign 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 counterparty Since the commencement of trading of currency futures in all the three exchanges.‡ 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. 429 crores in October 2008 to Rs 45. 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. The fact that the option premiums tail intra-day stock prices is evidence to this. Normally such risks should be taken by corporates who have natural hedge or have potential foreign exchange earnings. Significant milestones in the development of derivatives market have been (i) permission to banks to undertake cross currency derivative transactions subject to certain conditions (1996) (ii) allowing corporates to undertake long term foreign currency swaps that contributed to the development of the term currency swap market (1997) (iii) allowing dollar rupee options (2003) and (iv) introduction of currency futures (2008). In the derivative market foreign exchange swaps account for the largest share of the total turnover of derivatives in India followed by forwards and options. If calls and puts are not looked as just substitutes for spot trading.

Accurate prices are essential for ensuring the correct allocation of resources in a free market economy. derivatives markets involve lower transaction costs. futures markets tend to be more liquid than spot markets.] RISK MANAGEMENT ± Futures and options contract can be used for altering the risk of investing in spot market. Similarly.crores in December 2008. Thus information pertaining to supply and demand easily percolates into such markets. Futures prices are believed to contain information about future spot prices and help in disseminating such information.] OPERATIONAL ADVANTAGES ± As opposed to spot markets. the put option can always be exercised. a large position in derivatives markets is relatively easier to take and has less of a price impact as opposed to a transaction of the same magnitude in the spot market. they offer greater liquidity. Consequently. as you will see later. The turnover in the currency futures market is in line with the international scenario.] PRICE DISCOVERY ± Price discovery refers to the market¶s ability to determine true equilibrium prices. However. it is easier to take a short position in derivatives markets than it is to sell short in spot markets. 3. or by buying a Put option. He will always be worried that the price may fall before he can sell the asset. if the spot price falls below the exercise price. Finally.181 crores during the same period. The average daily turnover in all the exchanges has also increased from Rs871 crores to Rs 2. Options markets provide information about the volatility or risk of the underlying asset. . where I understand the share of futures market ranges between 2 ± 3 per cent. the short hedgers will gain in the futures market. This will help offset their losses in the spot market. because herein you can take large positions by depositing relatively small margins. Large spot transactions can often lead to significant price changes. He can protect himself by selling a futures contract. If the spot price falls. 2. For instance. Secondly. futures markets provide a low cost trading mechanism. consider an investor who owns an asset. As we have seen. BENEFITS OF DERIVATIVES Derivative markets help investors in many different ways: 1.

viz. futures and options markets are inextricably linked. y The prices of derivatives converge with the prices of the underlying at the expiration of derivative contract. Speculators always take calculated risks. Ahmedabad. y Derivatives markets help increase savings and investment in the long run. the amount of capital required to take a comparable position is less in this case.4. National Commodity & Derivatives Exchange (NCDEX). This is important because facilitation of speculation is critical for ensuring free and fair markets. it is possible to exploit arbitrage opportunities quickly and to keep prices in alignment. 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.] MARKET EFFICIENCY ± The availability of derivatives makes markets more efficient. Transfer of risk enables market participants to expand their volume of activity. spot. Three such Exchanges. 5. y An important incidental benefit that flows from derivatives trading is that it acts as a catalyst for new entrepreneurial activity. Mumbai. 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. The derivative market performs a number of economic functions. ³National Status´ implies that these exchanges would be automatically permitted to conduct futures trading in all commodities subject to clearance . Mumbai have become operational. Thus derivatives help in discovery of future as well as current prices.] EASE OF SPECULATION ± Derivative markets provide speculators with a cheaper alternative to engaging in spot transactions. (NMCE). Since it is easier and cheaper to trade in derivatives. Hence these markets help to ensure that prices reflect true values. Also.. and Multi Commodity Exchange (MCX). National Multi-Commodity Exchange of India Ltd.

MCX.. Traders. Corporate. clearing and settlement operations for commodity futures markets across the country. and Neptune Overseas Limited (NOL). NMCE National Multi Commodity Exchange of India Ltd.of byelaws and contract specifications by the FMC. digital Exchange. Gujarat State Agricultural Marketing Board (GSAMB). amongst others MCX being nation-wide commodity exchange. Exporters. MCX. Bank of Baroda. Canara Bank. SBI Life Insurance Co. Union Bank of India. Regional Trading Canters.) an independent and de-mutualised multi commodity exchange has permanent recognition from Government of India for facilitating online trading. clearing and settlement operations for a commodities futures trading. warehousing. While various integral aspects of commodity economy. While the NMCE. State Bank of Indore. Corporation Bank Headquartered in Mumbai. Bank of India. Ltd. State Bank of Hyderabad. a state-of-the-art nationwide.. National Agricultural Cooperative Marketing Federation of India (NAFED). MCX and NCDEX. is an independent and demutualised multi commodity Exchange. facilitates online trading. Key shareholders of MCX are Financial Technologies (India) Ltd. State Bank of Saurashtra. MCX is led by an expert management team with deep domain knowledge of the commodity futures markets. Industry Associations. Today MCX is offering spectacular growth opportunities and advantages to a large cross section of the participants including Producers / Processors.. cooperatives. HDFC Bank. State Bank of India. having a permanent recognition from the Government of India. (NMCE) was promoted by Central Warehousing Corporation (CWC). Ahmedabad commenced futures trading in November 2002. MCX MCX (Multi Commodity Exchange of India Ltd. Importers. private and public sector marketing of agricultural commodities. Gujarat Agro-Industries Corporation Limited (GAICL). . offering multiple commodities for trading with wide reach and penetration and robust infrastructure. viz. National Institute of Agricultural Marketing (NIAM). Mumbai commenced operations in October/ December 2003 respectively. Cooperatives.

It has robust delivery mechanism making it the most suitable for the participants in the physical commodity markets. These deliveries are executed through a sound and reliable Warehouse Receipt System. The unique strength of NMCE is its settlements via a Delivery Backed System. NMCE is the only Exchange in India to have such investment and technical support from the commodity relevant institutions.research and training were adequately addressed in structuring the Exchange. In the event of high volatility in the prices. through Virtual Private Network (VPN). NMCE facilitates electronic derivatives trading through robust and tested trading platform. NCDEX National Commodity and Derivatives Exchange Ltd (NCDEX) is a technology driven commodity exchange. Derivative Trading Settlement System (DTSS). Even today. It has also established fair and transparent rule-based procedures and demonstrated total commitment towards eliminating any conflicts of interest. It has been launched to provide a world-class commodity exchange platform for market participants to trade in a wide spectrum of commodity derivatives driven by best global practices. Maharashtra in Mumbai on April 23. leading to guaranteed clearing and settlement. NMCE was the first to initiate process of dematerialization and electronic transfer of warehoused commodity stocks. . The system of upfront margining based on Value at Risk is followed to ensure financial security of the market. special intra-day clearing and settlement is held. provided by CMC. professionalism and transparency. The contracts are marked to market on daily basis. NMCE follows best international risk management practices. an imperative in the commodity trading business. It has an independent Board of Directors and professionals not having any vested interest in commodity markets. Punjab National Bank (PNB) took equity of the Exchange to establish that linkage. 1956 with the Registrar of Companies.2003. It is a public limited company registered under the Companies Act. NMCE was the first commodity exchange to provide trading facility through internet. It is the only Commodity Exchange in the world to have received ISO 9001:2000 certification from British Standard Institutions (BSI). finance was still a vital missing link.

Gur. Cotton Seed Oilcake. Tur. Rubber. Yellow Peas. Wheat. Silver. Soy Bean. Sesame Seeds. Coffee.Mustard Seed .Raw Jute. The reach will gradually be expanded to more centres. Urad (Black Matpe). Crude Palm Oil. Refined Soy Oil. Jute sacking bags. Turmeric. Silk. Sugar. Chana. which impinge on its working. Besides. RBD Palmolein. Guar gum. . Mild Steel Ingot. Contracts Act. Chilli.Cashew. Rapeseed . Guar Seeds. NCDEX is subjected to various laws of the land like the Companies Act. Pepper. Forward Commission (Regulation) Act and various other legislations. Stamp Act. Expeller Mustard Oil. It is located in Mumbai and offers facilities to its members in more than 390 centres throughout India. Castor Seed.Forward Markets Commission regulates NCDEX in respect of futures trading in commodities. NCDEX currently facilitates trading of thirty six commodities . Gold. Mulberry Green Cocoons. Jeera. Yellow Red Maize & Yellow Soybean Meal. Rice. Cotton.

Pepper Kochi (IPSTA) international contracts) Chambers Ltd.. Cotton Mumbai .The Present Status: Presently futures¶ trading is permitted in all the commodities. The East India Cotton Association Ltd. Meerut 7.. oilcake Bhatinda Om & Oil Exchange 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... The Ahmedabad Commodity Exchange. Rajkot & cake.. The Chamber of Commerce. its oil & cake. Mustard seed 2. The East India Jute & Hessian Exchange Hessian & Sacking Ltd. Gur.. Potatoes and Mustard seed The Meerut Agro Commodities Exchange Gur Ltd. Gur Bhatinda 5. cotton (kapas) and RBD palmolein. The Bombay Commodity Exchange Ltd. 9. Oilseed Complex. Mustard seed its oil & Delhi 4. 1. Gur. Calcutta 11. Hapur Gur. Castorseed. Oil & Bullion Merchants Castor seed. Vijai Beopar Muzaffarnagar 3. Rajdhani Oils & Oilseeds Exchange Ltd. its oil Association. Exchange COMMODITY (both domestic and India Pepper & Spice Trade Association. Castor oil Mumbai international contracts 8. Rajkot Seeds. cottonseed.. its oil Ahmedabad and oilcake 10. cottonseed. Groundnut. 6.

E-Commodities Ltd. The Spices & Oilseeds Exchange Ltd. Mumbai Sugar National Multi-Commodity Exchange of Several Commodities India Ltd. its oil & oilcake Ltd. Coffee Futures Exchange India Ltd.. Mumbai 22. Surendranagar Cotton Oil & Oilseeds. Mustard seeds its oil & oilcake. Cottonseed. Haryana Commodities Ltd. Jaipur commodity Exchange Several Commodities Ltd.. Multi Commodity Exchange Ltd. Central India Commercial Exchange Ltd. 21. Indore 14.. 23. 25. Gur and Mustard seed Gwalior 16. 17. Hissar Bullion Association Ltd.. Soya seed... Rapeseed/Mustardseed its oil and oilcake and RBD Palmolien The First Commodities Exchange of India Copra/coconut. Kochi 15. New Delhi National Commodity & Sugar (trading yet to commence) Derivatives. Gram.. Coffee Bangalore 19. National Board of Trade. Guar Gum Mustard seed complex Mustard seed Complex . Kapas Surendranagar 20. Several Commodities Exchange Ltd... Mumbai Bikaner Bikaner 24. Soyaoil and Soya meals.. E-sugar India Ltd. Ahmedabad 18.12. 13. Turmeric Sangli. Cotton. Guar seed...

Observations on the quarterly data for July-September. 2008-09 During July-September 2008-09. the turnover at BSE was Rs. 2.491 crore. The Board at its meeting on November 29.1. this memorandum presents a status report for the quarter July-September 2008-09 on the developments in the derivative market. Equity Derivatives Segment A.510 crore. which was insignificant as compared to that of NSE at Rs. Accordingly.315. 2002 had desired that a quarterly report be submitted to the Board on the developments in the derivative market. .STATUS REPORT OF THE DEVELOPMENTS IN THE DERIVATIVE MARKET 1. 3.

1 Turnover in F&O as multiple of turnover in cash 3.6 Index Option Single Stock Future Stock Option Total Market Share ( %) Index Future 240.19 Market Concentration 35.12 59.3 2.77 31.077.Reliance Petro.3 69.9 Single Stock 41. µ000) 542.19 69.3 1.039.5 571.Reliance Capital Ltd .94 30.093.195.0 35.Table-4A: Fact file of July-September 2008-09 APRIL-JUNE 2008-09 No.Reliance Capital Ltd active scrips in .State Bank of India .6 521.0 32.658.48 34.130.077.9 1. µ000) kh) VOLUME & TURNOVER Index Future 415. Ltd .1 58.8 1.9 1.5 1.07 8.7 31.68 35.Tata Steel F&O Segment . Ltd.20 Index Option 21.Reliance .4 JULY-SEPTEMBER2008-09 No.17 of three months (avg. of Turnover Contracts(Lakh) (Rs.Reliance Five most active .Infosys Tech.49 1.1 514.09 31. i .33 2. Ltd Depth the F&O Segment Contribution of the above fi ve to total derivatives 23.130.698.26 segment .11 1.3 Future Stock Option 2.08 4.1 3.5 25.7 935.317.2 599.Reliance Petro.35 Market Depth .5 1. scrips in the .76 60.72 turnover (%) Client (excluding FII trades) Proprietary FII 27.12 1.ICICI Bank Ltd 25.88 12.26 2. of Turnover PRODUCT Contracts(La (Rs.039.

88 3.655.Table-5: Data for Shorter Dated and Longer Dated derivative contracts Time Period Trades in Shorter Dated Trades in Longer Dated derivative contracts (up t o derivative contracts 3 Months) (Quarter) No contracts (lakh) July-September 2008-09 Apr-Jun 09 20081.99 4.) .694.7 Period No of contract (lakh) Turnover (Rs.4 36.) (more of Table-6: Data for Mini Nifty derivative contracts Time (Quarter) July-September 2008-09 Apr-Jun 09 200843.5 of Turnover (Rs. µ000 cr.64 1.) more No contracts (lakh) than 3 months) Turnover (Rs. µ000 cr.83 9. µ000 cr.9 27.97 3.11 2.307.87 12.8 29.194.

55 Volume SGX Future (Nifty volume) Volume SGX volume as Future % of NSE Volume .09 Maximum Volatility (%) Minimum Volatility (%) Table-8: SGX volume as a percentage of NSE volume for Nifty Future in terms of no.28 3. 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 (%) 2.764.98 1.10 2.61 2.47 1.775 4.80 2.51 2.034 8.38 2.418 8.56 1.99 2.Table-7: Minimum.27 2.104.28 2.977.85 2. 2008-09 NSE Month (Nifty volume) JulySeptember 2008-09 Apr-Jun 200809 37.71 1. of contracts for the period April ± September.776 3.58 47.08 2.241.05 1.61 2.

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. Falling or rising markets on the back of low volumes may be a cause of concern from the point of market integrity. Generally in such conditions. there is a sharp increase in turnover (97. 2008) Salient points for the 2nd quarter 2008-09  The volume (no.org (as on November 10.world-exchanges. under the present scenario the fall in the market has been accompanied by high volumes.08%) during July-September 2008-09 over April-June 2008-09.95%) and volume (117. as observed from the data. .Table-9: Standing of India in World Derivatives Market (in terms of volume) September 2008 2 2 16 4 Products Stock Future Index Future Stock Option Index Option July 2008 1 2 9 4 August 2008 1 2 15 4 Source: www. Possible reasons for increase in options trading activity can be attributed to increase in volatility. 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. This indicates that there are sufficient long position holders who anticipate value proposition in a falling market.  In Index Option. However. of contracts) and open interest in the derivatives market has increased even when the underlying market is witnessing a downward trend. Market observers believe that conditions across markets and asset classes have become more volatile and uncertain in the recent past.

81% in second quarter of 2008-09 as compared to the first quarter of 2008-09. .  There is a decrease in turnover (4.  Except Index Option.  There is a decrease in turnover (21. Mini Nifty volumes increased by 49.43% during July-September 2008-09 over April-June 2008-09. turnover increased by 24. In Index Future.04%) and volume (17.53%) have increased during July-September 2008-09 as compared to April-June 2008-09.  Longer dated derivatives were launched in March 2008.52% whereas volume increased by 4.17%) and volume (30.15% and turnover increased by 33. both turnover (15.92%) in Single Stock Futures during JulySeptember 2008-09 as compared to April-June 2008-09.  For shorter dated derivative contracts.39%) in Longer Dated derivative contracts in second quarter of 2008-09 as compared to the first quarter of 2008-09.  During 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. but the volumes have not picked up consequently.

of contracts 4116649 156598579 81487424 58537886 21635449 17191668 2126763 1025588 FIGURE 10A Number of contracts per year 16000000 14000000 12000000 10000000 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. there is high business growth in the derivative segment in India. . the number of contracts in Index Future were 1025588 where as a significant increase of 4116679 is observed in the year 2008-09.Business Growth in Derivatives segment (NSE) TABLE 10A Index futures Year 2008-09 2007-08 2006-07 2005-06 2004-05 2003-04 2002-03 2001-02 No.

96 3820667.Table 10B No of turnovers Year 2008-09 2007-08 2006-07 2005-06 2004-05 2003-04 2002-03 2001-02 Turnover (Rs. 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. . Crores 4000000 3500000 3000000 2500000 2000000 1500000 1000000 500000 0 year 2008-09 2007-08 2006-07 2005-06 2004-05 2003-04 2002-03 2001-02 INTERPRETATION: From the data and above bar chart. Cr.) 925679. there is high turn over in the derivative segment in India.27 2539574 1513755 772147 554446 43952 21483 FIGURE 10B Turnover in Rs.

. of contracts 51449737 203587952 104955401 80905493 47043066 32368842 10676843 1957856 - FIGURE 11A Number of contracts per year in stock future 25000000 20000000 15000000 10000000 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 200102.TABLE 11A STOCK FUTURES Year 2008-09 2007-08 2006-07 2005-06 2004-05 2003-04 2002-03 2001-02 2000-01 No.952 in the year 2007-08 but there was a steady decline to 51449737 in the year 2008-09. 35. Then there was a huge increase of 20. it predominently increased to 1957856. and 87.

Crores) 2008-09 2007-08 2006-07 2005-06 2004-05 2003-04 2002-03 2001-02 2000-01 1093048.26 7548563.23 3830967 2791697 1484056 1305939 286533 51515 - FIGURE 11B Turnover in Rs. 200 -09 2007-0 2006-07 2005-06 2004-05 2003-04 2002-03 2001-02 2000-01 . there were no stock futures available in the year 2000-01. but in the year there was a huge increae of 7548563. Crores 000000 7000000 6000000 5000000 4000000 3000000 2000000 1000000 0 year INTERPRETATION: From the data and bar chart above.26 in the year 2008-09.23 in the year 2007-08 with a considerable decline of 1093048.TABLE 11B NO OF TURNOVERS Year Turnover (Rs. There was a steady increase of stock future 51515 in the year 2001-02.

In the year 20072008 there was a huge increase in the index option contracts to 55366038 and a decline of 24008627 in the year 2008-2009.75. the no of contracts of index option was nil in the year 20002001.900 in the year 2001-2002. of contracts 24008627 55366038 25157438 12935116 3293558 1732414 442241 175900 - FIGURE 12A Number of contracts per year 60000000 50000000 40000000 30000000 20000000 10000000 0 year INTERPRETATION: From the data and bar chart above. But there was a predominant increase of 1.TABLE 12A INDEX OPTIONS Year 2008-09 2007-08 2006-07 2005-06 2004-05 2003-04 2002-03 2001-02 2000-01 No. 200 -0 2007-0 2006-07 2005-06 2004-05 2003-04 2002-03 2001-02 .

Crores Year 2008-09 2007-08 2006-07 2005-06 2004-05 2003-04 2002-03 2001-02 2000-01 Turnover (Rs.88 791906 338469 121943 52816 9246 3765 - FIGURE 14B Turnover per year in Rs.02 1362110.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. 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. there was no turnover in the year 2000-2001 for Index option.TABLE 12B Turnover per year in Rs. Crores) 71340.02 observed in 2008-2009.

of contracts 2546175 9460631 5283310 5240776 5045112 5583071 3523062 1037529 - FIGURE 13A Number of contracts traded per year in stock option 10000000 9000000 8000000 7000000 6000000 5000000 4000000 3000000 2000000 1000000 0 year INTERPRETATION: From the data and bar chart above the no of contracts of stock option in the year 2000-2001 was nil. But a gradual decline of 2546175 in the year 2008-2009. But there was a huge increase of 1037529 observed in the year 2001-2002. 2008-09 2007-08 2006-07 2005-06 2004-05 2003-04 2002-03 2001-02 .TABLE 13A STOCK OPTIONS Year 2008-09 2007-08 2006-07 2005-06 2004-05 2003-04 2002-03 2001-02 2000-01 No. It was 9460631 which was the highest in the year 2007-2008.

Crores per year 400000 350000 300000 250000 200000 150000 100000 50000 0 year INTERPRETATION: From the chart and the bar diagram above the stock option turnover in the year 2000-2001 was nil. But a phenomenal increase of 359136.55 193795 180253 168836 217207 100131 25163 - FIGURE 13B National turnover in Rs.55 in the year 2007-2008.03 359136. crores) 58335. and a decline of 58355. 2008-09 2007-08 2006-07 2005-06 2004-05 2003-04 2002-03 2001-02 . There was a slow increase of 25163 in the year 2001-2002. Crores per year Year 2008-09 2007-08 2006-07 2005-06 2004-05 2003-04 2002-03 2001-02 2000-01 Notional turnover (Rs.03 in the year 2008-2009.TABLE 13B National turnover in Rs.

From the data and bar chart above the overall trading turnover in the year 2000-2001 was as low as 2365 but a predominant increase of 2648403. of contracts 119171008 425013200 216883573 157619271 77017185 56886776 16768909 4196873 90580 Turnover (Rs.30 observed in the year 2008-2009. Crores 60000 2000-2001 50000 40000 30000 20000 10000 0 year INTERPRETATION: 2001-2002 2002-2003 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 From the data and bar chart above. .75 7356242 4824174 2546982 2130610 439862 101926 2365 FIGURE 14A Average daily turnovers in Rs.TABLE 14A OVERALL TRADING Year 2008-09 2007-08 2006-07 2005-06 2004-05 2003-04 2002-03 2001-02 2000-01 No. the overall trading contracts in the year 2000-2001 was 90580 and huge increase of 119171008 in the year 2008-2009.) 2648403. cr.30 13090477.

No.88 946063 1 359136 .55 0 0.02 254617 5 58335.0 4250132 0 00 2 814874 0 24 253957 4 104955 401 383096 7 25157 438 791906 528331 0 193795 0 0 2168835 73 . of contrac ts Turno ver (Rs. er (Rs. 03 0.) No.27 203587 952 754856 3.) cr.26 24008 627 571340 .TABLE 15 Overall trade description under NSE Index Futures Stock Futures Index Options Stock Options Interest Rate Futures Total T u r n o v e r Y e a r No. trac cts ts s. cr.23 55366 038 136211 0. ov al al of of of er Turnov Turnov con contra contrac (R er (Rs.) ts cr. ) No.579 0 8 382066 7. 3 0 1 3 0 9 0 4 7 7 .69 0 9 .0 1191710 0 08 0 2 0 0 7 156598 .96 514497 37 109304 8. cr. of contract ( R s s . of cont racts Turno ver (Rs. ) 2 6 4 8 4 0 3 . cr. c r . No. 7 5 7 3 925679 2 0 0 8 411664 .) Tu rn Notion Notion No.

8 0 2 5 6 2 4 2 4 8 2 4 1 7 4 2 5 4 6 9 8 2 2 1 3 0 6 1 0 4 3 9 8 6 2 151375 5 809054 93 279169 7 12935 116 338469 524077 6 180253 0 0 1576192 71 772147 470430 66 148405 6 32935 58 121943 504511 2 168836 0 0 7701718 5 554446 323688 42 130593 9 17324 14 52816 558307 1 217207 107 81 20 2 5688677 6 43952 106768 43 286533 44224 1 9246 352306 2 100131 - - 1676890 9 21483 195785 6 51515 17590 0 3765 103752 9 25163 - - 4196873 1 0 1 9 2 6 .0 6 0 7 2 0 0 5 585378 .68 0 4 2 0 0 2 212676 .86 0 6 2 0 0 4 216354 .3 0 3 2 0 0 1 102558 .49 0 5 2 0 0 3 171916 .

Stock Options and Stock Futures were introduced in June 2000. July 2001 and November 2001 respectively. Crores) 45390. Index Options.21 52153.2 0 0 0 90580 0 1 2365 - - - - - - - 90580 2 3 6 5 TABLE 16 AVERAGE DAILY TURNOVERS Year 2008-09 2007-08 2006-07 2005-06 2004-05 2003-04 2002-03 2001-02 2000-01 Note: Notional Turnover = (Strike Price + Premium) * Quantity Index Futures. daily turnover (Rs.30 29543 19220 10167 8388 1752 410 11 . Av. June 2001.

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