GDP vs.

Sensex & Nifty
Submitted by: Group 9
Brinda Balachander, Debnarayan Banerjee, Gagan Singh, Ira Singla, Priyanshu Mishra, Ranjini Ballal, Sulabh Sharma

Introduction: A derivative security is a financial contract whose value is derived from the value of something else, such as a stock price, a commodity price, an exchange rate, an interest rate, or even an index of prices. Derivatives may be traded for a variety of reasons. A derivative enables a trader to hedge some preexisting risk by taking positions in derivatives markets that offset potential losses in the underlying or spot market. Derivatives markets have been in existence in India in some form or other for a long time. In the area of commodities, the Bombay Cotton Trade Association started futures trading in 1875 and, by the early 1900s India had one of the world’s largest futures industry. In 1952 the government banned cash settlement and options trading and derivatives trading shifted to informal forwards markets. In recent years, government policy has changed, allowing for an increased role for market-based pricing and less suspicion of derivatives trading. The ban on futures trading of many commodities was lifted starting in the early 2000s, and national electronic commodity exchanges were created.

Factors affecting market movements: The ability to analyse factors affecting stock market movement provides an additional advantage for being able to evaluate the direction of the markets.

Economic factors:

Government budget deficits or surpluses: The market usually reacts negatively to widening government budget deficits, and positively to narrowing budget deficits. The impact is reflected in the value of a country's currency. Balance of trade levels and trends: The trade flow between countries illustrates the demand for goods and services, which in turn indicates demand for a country's currency to conduct trade. Surpluses and deficits in trade of goods and services reflect the competitiveness of a nation's economy. Economic growth and health: Reports such as gross domestic product (GDP), employment levels, retail sales, capacity utilisation and others, detail the levels of a country's economic growth and health. Generally, the more healthy and robust a

country's economy, the better its currency will perform, and the currency will have more demand. Internal, regional, and international political conditions and events can have a profound effect on currency markets.
 o

Inflation and Interest rates fluctuations

Political conditions:

All exchange rates are susceptible to political instability and anticipations about the new government. GDP being one of the main contributors, the market movements are found to be positively correlated to it. Objective: From September 2001 to September 2009: Compare and contrast India’s GDP and Market Capitalization of BSE and NSE. Compare and contrast Equity market and Derivatives market turnover.

Analysis of GDP vs. Market Capitalization of BSE and NSE:
70000000 60000000 50000000 In Rs Cr 40000000 30000000 20000000 6000000 5000000 4000000 3000000 2000000 1000000


10000000 0


From the graph we can see that the GDP and the market capitalization of NSE and BSE are positively correlated. We can see from the graph that for the year 2002-2003 the GDP growth rate declined to 4.3% and so did the market capitalization of NSE and BSE.

The main reason for the decline in the GDP growth can be attributed to the worst drought in over a decade which made the agricultural growth down to -3.2% compared to 5.7% growth in 2001-2002. Moving further to the year 2006-2007 we can see a increase in the GDP growth to 9.2% and consequently there was a sharp increase in the market capitalization of NSE and BSE. The main reason for the increase in the market capitalization can be attributed to the following few factors:1. The availability of liquidity in the financial system and high volatility in the market for the year 2006. 2. The impressive growth in the profitability of the domestic corporate. 3. The overall higher growth in the economy and 4. Other global factors like continuation of relatively soft interest rates and fall in the crude oil prices in the global market. From the year 2008 onwards the GDP growth started declining to an extend of 7.4% and so did the market capitalization. The major reason for such a decline can be attributed to the global melt down.

Analysis of Turnovers of BSE and NSE from 2003 to 2009:

50000 40000 In Rs Cr 30000 20000 10000 0 Index Futures Index Options@

Stock Futures
Stock Options@

8000000 7000000 6000000 In Rs Cr 5000000

3000000 2000000 1000000 0

Index Futures Index Options@ Stock Futures Stock Options@

While looking at the graph of yearly turnover of derivatives market, we find the following points:In yearly BSE graph Index futures are highest followed by Stock futures, then Index options, whereas Stock options are minimal in numbers. Same in yearly NSE graph, Stock futures are on top, followed by index futures then Index options and in the last Stock options. Between April 2002 and March 2006, the total turnover of the derivatives segment increased by 4633% while the average daily turnover increased by 4587%. At the end of November 2006, 1098 companies were listed on the exchange and 1014 of these stocks were regularly traded. The meteoric growth of the derivatives segment of the NSE is graphically highlighted. Of the 1098 listed securities, 123 as underlying assets for futures and option contracts. In November 2006, the turnover in the derivatives segment of the equity market was 342% of the corresponding turnover in the underlying cash market.

The major factors which drive the growth of financial derivatives areIncreased volatility in asset prices in financial markets. Increased integration of National financial markets with the international markets. Market improvement in Commercial facilities and sharp decline in their costs. Development of more sophisticated risk management tools, providing economic agents a wider choice of risk management strategies. Innovations in the derivatives markets, which optimally combine the risks and return over a large number of financial assets leading to higher returns, reduced risk as well as transaction costs as compared to individual financial assets.

Observations on the monthly turnover of NSE & BSE for the FY 2008-09:

Indian equity derivatives market’s trading trends typically deviate from those in developed derivatives markets where options trading dominates. Futures on Nifty and stocks used to trade much more than options on Nifty and stocks. But this began changing, and trading volume in options rose rapidly, especially after the markets crashed during 2008 and investors’ risk appetite came down sharply. Aggregated for financial year 2008-09, options trades contributed a healthy 35.9 per cent of all equity derivatives trades on the NSE. The current financial year’s aggregate figures so far, (till 17 August), has seen options’ contribution total become even healthier at 42.2 per cent. More than 90% of options trades are taking place in index options, primarily in Nifty, and the rest in stock options. In futures trades, the spoils are shared roughly equally by index and stock futures. The high liquidity in Nifty options is a major attraction for traders. This was earlier limited only to Nifty futures and futures in select stocks. The shift in trader preferences from futures to options is because of convenient trading strategies in options and synthetic stop loss trades through a combination of options and futures. The high volatility in Nifty was resulting in top loss trades in

naked Nifty futures positions getting triggered too often. The stops do not get triggered when done through a synthetic stop using options. Observations on the quarterly data for July-September, 2008-09 During July-September 2008-09, the turnover at BSE was Rs.1,510 crore, which was insignificant as compared to that of NSE at Rs. 3,315,491 crore. Volume (no. of contracts) increased by 42.06% to 1,698.7 lakh while turnover increased by 24.77% to Rs. 3,317 thousand crore in July-September 2008-09 over April-June 2008-09. Futures (Index Future + Stock Future) constituted 67.20% of the total number of contracts traded in the F&O Segment. Stock Future and Index Future accounted for 35.26% and 31.94% respectively. Options constituted 32.80% of the total volumes. This mainly comprised of trading in Index Option (30.68%). Turnover at F&O segment was 4.19 times that of its cash segment. Reliance, Reliance Capital Ltd, Reliance Petro. Ltd, State Bank of India and ICICI Bank Ltd were the most actively traded scrips in the derivatives segment. Together they contributed 25.12% of derivatives turnover in individual stocks.

Details of July-September 2008-09 with respect to the previous quarter APRIL-JUNE 2008-09 PRODUCT Market Depth No. of Turnover Contracts (Rs. ‘000) (Lakh) JULY-SEPTEMBER 2008-09 No. of Contracts (Lakh) Turnover (Rs. ‘000)

VOLUME & TURNOVER Index Future Index Option Single Stock Future Stock Option 415.7 240.1 514.5 25.5 935.6 571.3 1,093.1 58.3 542.6 521.2 599.0 35.9 1,077.5 1,130.9 1,039.3 69.1

Total Market Share ( %) Index Future





1,077.5 1,130.9 1,039.3 69.1

35.20 21.49 41.12 2.19 4.19

31.94 30.68 35.26 2.11

32.48 34.09 31.33 2.08

Index Option Single Stock Future Stock Option

Turnover in F&O as multiple of turnover in cash 3.26 segment - Reliance Five most active scrips in the F&O Segment active scrips in the F&O Segment - Reliance Petro. Ltd. - Tata Steel - Reliance Capital Ltd - Infosys Tech. Ltd Contribution o f t h e above fi v e t o total derivatives turnover 23.72 (%) Client (excluding FII trades) Proprietary FII

-Reliance -Reliance Capital Ltd -Reliance Petro. Ltd -State Bank of India -ICICI Bank Ltd

three Market Concentration


59.77 27.88 12.35

60.17 31.07 8.76

avg. months

Salient points for the year 2008-09: The volume (no. of contracts) and open interest in the derivatives market has increased even when the underlying market is witnessing a downward trend. This indicates that there are sufficient long position holders who anticipate value proposition in a falling market. Falling or rising markets on the back of low volumes may be a cause of concern from the point of market integrity. However, as

observed from the data, under the present scenario the fall in the market has been accompanied by high volumes. In Index Option, there is a sharp increase in turnover (97.95%) and volume (117.08%) during July-September 2008-09 over April-June 2008-09. Possible reasons for increase in options trading activity can be attributed to increase in volatility. Market observers believe that conditions across markets and asset classes have become more volatile and uncertain in the recent past. Generally in such conditions, 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. 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. In Index Future, both turnover (15.17%) and volume (30.53%) have increased during July-September 2008-09 as compared to April-June 2008-09. There is a decrease in turnover (4.92%) in Single Stock Futures during JulySeptember 2008-09 as compared to April-June 2008-09. Except Index Option, 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. There is a decrease in turnover (21.04%) and volume (17.39%) in Longer Dated derivative contracts in second quarter of 2008-09 as compared to the first quarter of 2008-09. Longer dated derivatives were launched in March 2008, but the volumes have not picked up consequently. For shorter dated derivative contracts, turnover increased by 24.52% whereas volume increased by 4.81% in second quarter of 2008-09 as compared to the first quarter of 2008-09. During 2008-09, Mini Nifty volumes increased by 49.15% and turnover increased by 33.43% during July-September 2008-09 over April-June 2008-09.

Emerging Equity Derivative Markets: The fastest growth in equity derivative markets has been recorded in Asia, which currently accounts for over one third of worldwide volumes. The Korean Stock Exchange has become the largest derivatives exchange in the world, and extremely rapid growth rates in Brazil, Mexico, China, and India have propelled their exchanges to the world’s top-20. While many of them are focusing on equity derivatives (Korea, India, Hong Kong), others are specializing in fixed-income products (Brazil, Mexico, Singapore) and there are also a few remaining commodity specialist exchanges (Dalian, Tokyo, and Zhengzhou). Equity derivatives in emerging Asia are ETD, as opposed to foreign exchange and interest rate derivatives, which are mostly, traded OTC. Countries with formalized and regulated exchanges are leading the growth in Asian derivative markets, which can be divided into three categories: (1) Fully demutualized exchanges (Hong Kong and Singapore), which offer a wide range of derivative products; (2) Partially demutualized exchanges, which have specialized in equity futures (India and Malaysia) and index products (Korea and Taiwan); (3) Derivative markets with no or marginal exchange-based and limited OTC derivative trading (China, Indonesia, Philippines, and Thailand). NSE is the Second Largest Growing Equity Derivative Exchange in the world and JSE of South Africa is the 10th largest derivative exchange in terms of number of contracts traded.

Forecast for GDP growth in Emerging and Developing Economies by IMF:

Rankings of Various exchanges of Emerging Economies in Global scenario:

Challenges to the further development of equity derivative markets in emerging markets: The impediments to the efficacy and further development of derivative markets in many emerging economies include considerable shortcomings in cash market liquidity and trading infrastructure. In several countries, evolving derivative trading is also afflicted by inadequate legal and regulatory frameworks.

Conclusion: Overall we can conclude but if observation of the yearly trends shows the dominant role of stock futures and index futures towards the contribution to the turnovers but the observation of the recent monthly trends reveals that there has been increase in trading in options instruments resulting its effective contribution towards the turnovers indicating its growing awareness ,preference and its untapped potential. However use of such instrument is still in the nascent phase and people need to me made aware about such hedging instruments which will make them better appreciate the product and can help them to manage their risk efficiently.

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