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.

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

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

which has appreciated at the risk free rate.] 4.2. 3. he returns it now. The difference between the two amounts is the arbitrage profit. . In the case where the forward price is lower: 1. 3. On the delivery date. he cashes in the matured investment. he invests the proceeds. On the delivery date. the arbitrageur hands over the underlying. 4. and receives the agreed forward price. He then repays the lender the borrowed amount plus interest. The arbitrageur buys the futures contract and sells the underlying today (on the spot market). He then receives the underlying and pays the agreed forward price using the matured investment. [If he was short the underlying. 2. The difference between the two amounts is the arbitrage profit.

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

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

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

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

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

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

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

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

Derivatives are complex and exotic instruments that Indian investors will find difficulty in understanding. derivatives markets have become the most important markets in the world. 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. (2) Myths and realities about derivatives In less than three decades of their coming into vogue. which have developed into a very large market. Financial derivatives came into the spotlight along with the rise in uncertainty of post-1970. there are still apprehensions about the introduction of derivatives. which are well regulated with all the safety mechanisms in place. Today. cross currency options etc.(1) Need for derivatives in India today In less than three decades of their coming into vogue. The opening of Indian economy has precipitated the process of integration of India¶s financial markets with the international financial markets. . the Indian capital market had no access to the latest trading methods and was using traditional out-dated methods of trading. derivatives have become part and parcel of the day-to-day life for ordinary people in major parts of the world. There was a huge gap between the investors¶ aspirations of the markets and the available means of trading. derivatives markets have become the most important markets in the world. derivatives have become part and parcel of the day-today life for ordinary people in major part of the world. 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. Today. While this is true for many countries. 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. Until the advent of NSE. There are many myths about derivatives but the realities that are different especially for Exchange traded derivatives.

(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. . 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. but I feel that this new system is very useful especially to retail investors. Greater variety of strike price options at a given time. before June 2001 New System Vs Existing System for Market Players Figure 3. It increases the no of options investors for investment.3d shows how advantages of new system (implemented from June 20001) v/s the old system i. The figure 3. New Peril &Prize Approach 1) Deliver based Trading.3a ±3.3a Speculators Existing Approach SYSTEM Peril &Prize 1) Both profit & loss to extent of price change. In fact it should have been introduced much before and NSE had approved it but was not active because of politicization in SEBI. margin trading & carry forward transactions. 2) Buy Index Futures hold till expiry.e.

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

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

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

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

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

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

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

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.Index futures on June 12. the index) is high. This may be due to the low volatility of the spot index. volumes in the index options segment continue to remain poor. ‡ Put volumes in the index options and equity options segment have increased since January 2002. 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. Foreign Institutional Investors (FIIs) are permitted to trade in all Exchange traded derivative products. Trading in equity options on most stocks for even the next month was non-existent. ‡ On relative terms. ‡ Farther month futures contracts are still not actively traded. 2001 and trading in options on individual securities commenced on July 2. and regulations of the respective exchanges and their clearing house/corporation duly approved by SEBI and notified in the official gazette. A primary reason attributed to this phenomenon is that traders are comfortable with single-stock futures than equity options.32 in June. A related issue is that brokers do not earn high commissions by recommending index options to their clients. as the former closely resembles the erstwhile badla system. byelaws. The trading in index options commenced on June 4. 2001. . Single stock futures were launched on November 9. 2001. The call-put volumes in index options have decreased from 2.86 in January 2002 to 1. It constituted 70 per cent of the total turnover during June 2002. The fall in call-put volumes ratio suggests that the traders are increasingly becoming pessimistic on the market. because low volatility leads to higher waiting time for round-trips. options are considered more valuable when the volatility of the underlying (in this case. 2000.

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). I would like to emphasise that currency swaps allowed companies wit h ECBs to swap their foreign currency liabilities into rupees. If calls and puts are not looked as just substitutes for spot trading. However. Normally such risks should be taken by corporates who have natural hedge or have potential foreign exchange earnings. 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. 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. 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. y The spot foreign exchange market remains the most important segment but the derivative segment has also grown.‡ 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. But often corporate assume these risks due to interest rate differentials and views on currencies. 803 central . The fact that the option premiums tail intra-day stock prices is evidence to this. the intra-day stock price variations should not have a one-to-one impact on the option premiums. the value of the trades has gone up steadily from Rs 17. since banks could not carry open positions the risk was allowed to be transferred to any other resident corporate.

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

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

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

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

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

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

Guar Gum Mustard seed complex Mustard seed Complex . Several Commodities Exchange Ltd. Soyaoil and Soya meals. Coffee Bangalore 19. Kapas Surendranagar 20.. 23.. Central India Commercial Exchange Ltd. its oil & oilcake Ltd. Coffee Futures Exchange India Ltd. E-Commodities Ltd. Indore 14.. Gur and Mustard seed Gwalior 16. Mumbai 22. E-sugar India Ltd. Surendranagar Cotton Oil & Oilseeds.. Multi Commodity Exchange Ltd. Kochi 15. 13. Jaipur commodity Exchange Several Commodities Ltd. Mumbai Sugar National Multi-Commodity Exchange of Several Commodities India Ltd. Cotton. 17. Mumbai Bikaner Bikaner 24. Hissar Bullion Association Ltd. The Spices & Oilseeds Exchange Ltd. Guar seed. 21. Turmeric Sangli. Gram.. New Delhi National Commodity & Sugar (trading yet to commence) Derivatives. Mustard seeds its oil & oilcake. 25.. Rapeseed/Mustardseed its oil and oilcake and RBD Palmolien The First Commodities Exchange of India Copra/coconut.... Cottonseed... Ahmedabad 18.. National Board of Trade. Soya seed.12. Haryana Commodities Ltd.

2. The Board at its meeting on November 29. .510 crore. Accordingly. 3. Observations on the quarterly data for July-September. 2002 had desired that a quarterly report be submitted to the Board on the developments in the derivative market.315.STATUS REPORT OF THE DEVELOPMENTS IN THE DERIVATIVE MARKET 1. 2008-09 During July-September 2008-09. the turnover at BSE was Rs. Equity Derivatives Segment A. which was insignificant as compared to that of NSE at Rs. this memorandum presents a status report for the quarter July-September 2008-09 on the developments in the derivative market.491 crore.1.

0 32.ICICI Bank Ltd 25.49 1.3 69.Reliance .48 34.12 59.07 8. µ000) 542.1 514. Ltd .11 1.1 58.94 30. µ000) kh) VOLUME & TURNOVER Index Future 415.26 segment .317. Ltd.6 Index Option Single Stock Future Stock Option Total Market Share ( %) Index Future 240.130.35 Market Depth .08 4.76 60.Reliance Capital Ltd .8 1.Infosys Tech.9 1.3 2.68 35.2 599.093. of Turnover Contracts(Lakh) (Rs.039.26 2.9 Single Stock 41.20 Index Option 21.77 31. i .5 1.039.12 1.Reliance Petro.1 3.Tata Steel F&O Segment .077.19 Market Concentration 35.195.09 31.State Bank of India .698. Ltd Depth the F&O Segment Contribution of the above fi ve to total derivatives 23.5 1.3 Future Stock Option 2.72 turnover (%) Client (excluding FII trades) Proprietary FII 27.Reliance Capital Ltd active scrips in .7 935.33 2.19 69. of Turnover PRODUCT Contracts(La (Rs.7 31.3 1.Reliance Five most active .17 of three months (avg.Table-4A: Fact file of July-September 2008-09 APRIL-JUNE 2008-09 No.5 25.658.1 Turnover in F&O as multiple of turnover in cash 3.Reliance Petro.5 571.077.6 521.130.88 12.9 1.0 35.4 JULY-SEPTEMBER2008-09 No. scrips in the .

88 3.655.64 1.4 36.) (more of Table-6: Data for Mini Nifty derivative contracts Time (Quarter) July-September 2008-09 Apr-Jun 09 200843.11 2.) .8 29. µ000 cr.87 12.5 of Turnover (Rs.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. µ000 cr.9 27.194.97 3.83 9. µ000 cr.) more No contracts (lakh) than 3 months) Turnover (Rs.7 Period No of contract (lakh) Turnover (Rs.694.307.99 4.

61 2.034 8.Table-7: Minimum.10 2.08 2.98 1. 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 (%) 2.241.61 2.09 Maximum Volatility (%) Minimum Volatility (%) Table-8: SGX volume as a percentage of NSE volume for Nifty Future in terms of no. 2008-09 NSE Month (Nifty volume) JulySeptember 2008-09 Apr-Jun 200809 37.71 1. of contracts for the period April ± September.51 2.80 2.104.776 3.99 2.38 2.47 1.05 1.58 47.418 8.28 3.27 2.55 Volume SGX Future (Nifty volume) Volume SGX volume as Future % of NSE Volume .85 2.977.28 2.775 4.764.56 1.

08%) during July-September 2008-09 over April-June 2008-09. 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. of contracts) and open interest in the derivatives market has increased even when the underlying market is witnessing a downward trend. as observed from the data. However. 2008) Salient points for the 2nd quarter 2008-09  The volume (no.95%) and volume (117.org (as on November 10. This indicates that there are sufficient long position holders who anticipate value proposition in a falling market. there is a sharp increase in turnover (97.  In Index Option.world-exchanges. Market observers believe that conditions across markets and asset classes have become more volatile and uncertain in the recent past. Generally in such conditions. under the present scenario the fall in the market has been accompanied by high volumes. 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.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.

both turnover (15.  For shorter dated derivative contracts.04%) and volume (17. but the volumes have not picked up consequently.92%) in Single Stock Futures during JulySeptember 2008-09 as compared to April-June 2008-09.  There is a decrease in turnover (4.  During 2008-09.52% whereas volume increased by 4.  There is a decrease in turnover (21.81% in second quarter of 2008-09 as compared to the first quarter of 2008-09. turnover increased by 24.17%) and volume (30.43% during July-September 2008-09 over April-June 2008-09.  Longer dated derivatives were launched in March 2008. .39%) in Longer Dated derivative contracts in second quarter of 2008-09 as compared to the first quarter of 2008-09. In Index Future. 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. Mini Nifty volumes increased by 49.15% and turnover increased by 33.53%) have increased during July-September 2008-09 as compared to April-June 2008-09.  Except Index Option.

there is high business growth in the derivative segment in India. 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.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. . the number of contracts in Index Future were 1025588 where as a significant increase of 4116679 is observed in the year 2008-09.

) 925679. 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.Table 10B No of turnovers Year 2008-09 2007-08 2006-07 2005-06 2004-05 2003-04 2002-03 2001-02 Turnover (Rs. . there is high turn over in the derivative segment in India.27 2539574 1513755 772147 554446 43952 21483 FIGURE 10B Turnover in Rs. Cr. 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.96 3820667.

Then there was a huge increase of 20. 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. 35.TABLE 11A STOCK FUTURES Year 2008-09 2007-08 2006-07 2005-06 2004-05 2003-04 2002-03 2001-02 2000-01 No. and 87. .952 in the year 2007-08 but there was a steady decline to 51449737 in the year 2008-09. it predominently increased to 1957856.

Crores) 2008-09 2007-08 2006-07 2005-06 2004-05 2003-04 2002-03 2001-02 2000-01 1093048.26 7548563.23 in the year 2007-08 with a considerable decline of 1093048. but in the year there was a huge increae of 7548563. 200 -09 2007-0 2006-07 2005-06 2004-05 2003-04 2002-03 2001-02 2000-01 . There was a steady increase of stock future 51515 in the year 2001-02. there were no stock futures available in the year 2000-01.26 in the year 2008-09.TABLE 11B NO OF TURNOVERS Year Turnover (Rs.23 3830967 2791697 1484056 1305939 286533 51515 - FIGURE 11B Turnover in Rs. Crores 000000 7000000 6000000 5000000 4000000 3000000 2000000 1000000 0 year INTERPRETATION: From the data and bar chart above.

200 -0 2007-0 2006-07 2005-06 2004-05 2003-04 2002-03 2001-02 . the no of contracts of index option was nil in the year 20002001.TABLE 12A INDEX OPTIONS Year 2008-09 2007-08 2006-07 2005-06 2004-05 2003-04 2002-03 2001-02 2000-01 No. But there was a predominant increase of 1.75. 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. In the year 20072008 there was a huge increase in the index option contracts to 55366038 and a decline of 24008627 in the year 2008-2009.900 in the year 2001-2002.

there was no turnover in the year 2000-2001 for Index option.02 1362110. Crores Year 2008-09 2007-08 2006-07 2005-06 2004-05 2003-04 2002-03 2001-02 2000-01 Turnover (Rs.088 and a sudden decline to 71340. Crores) 71340. .88 791906 338469 121943 52816 9246 3765 - FIGURE 14B Turnover per year in Rs. It slowly started increasing in the year 2000-2001 to 3765.TABLE 12B Turnover per year in Rs.02 observed in 2008-2009. 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.But in the year 2007-2008 there was a huge increase of 1362110.

It was 9460631 which was the highest in the year 2007-2008. But a gradual decline of 2546175 in the year 2008-2009. 2008-09 2007-08 2006-07 2005-06 2004-05 2003-04 2002-03 2001-02 . 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 there was a huge increase of 1037529 observed in the year 2001-2002.TABLE 13A STOCK OPTIONS Year 2008-09 2007-08 2006-07 2005-06 2004-05 2003-04 2002-03 2001-02 2000-01 No.

There was a slow increase of 25163 in the year 2001-2002.TABLE 13B National turnover in Rs. But a phenomenal increase of 359136.55 in the year 2007-2008. 2008-09 2007-08 2006-07 2005-06 2004-05 2003-04 2002-03 2001-02 .03 359136. and a decline of 58355. 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.03 in the year 2008-2009. crores) 58335. 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.55 193795 180253 168836 217207 100131 25163 - FIGURE 13B National turnover in Rs.

) 2648403.75 7356242 4824174 2546982 2130610 439862 101926 2365 FIGURE 14A Average daily turnovers in Rs.30 13090477. of contracts 119171008 425013200 216883573 157619271 77017185 56886776 16768909 4196873 90580 Turnover (Rs. the overall trading contracts in the year 2000-2001 was 90580 and huge increase of 119171008 in the year 2008-2009. .30 observed in the year 2008-2009. cr. 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. 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.TABLE 14A OVERALL TRADING Year 2008-09 2007-08 2006-07 2005-06 2004-05 2003-04 2002-03 2001-02 2000-01 No.

27 203587 952 754856 3.579 0 8 382066 7. ) No. cr.02 254617 5 58335. 3 0 1 3 0 9 0 4 7 7 . of cont racts Turno ver (Rs. ) 2 6 4 8 4 0 3 .) ts cr.) No.) Tu rn Notion Notion No.23 55366 038 136211 0.0 4250132 0 00 2 814874 0 24 253957 4 104955 401 383096 7 25157 438 791906 528331 0 193795 0 0 2168835 73 . c r .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. No. er (Rs. of contract ( R s s .55 0 0.69 0 9 . 7 5 7 3 925679 2 0 0 8 411664 .96 514497 37 109304 8. ov al al of of of er Turnov Turnov con contra contrac (R er (Rs.88 946063 1 359136 . 03 0. of contrac ts Turno ver (Rs. trac cts ts s.26 24008 627 571340 .) cr. cr. No.0 1191710 0 08 0 2 0 0 7 156598 . cr.

49 0 5 2 0 0 3 171916 .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 .3 0 3 2 0 0 1 102558 .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 .

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. Index Options.30 29543 19220 10167 8388 1752 410 11 .21 52153. Crores) 45390. June 2001. Av. Stock Options and Stock Futures were introduced in June 2000. July 2001 and November 2001 respectively.

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