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Method of data collection:Secondary sources:It is the data which has already been collected by some organization for

some other purpose or research study .The data for study has been collected from various sources: Books Journals Magazines Internet sources Time: 2 months Statistical Tools Used: Simple tools like bar graphs, tabulation, line diagrams have been used.

Essence of Derivative market

Derivative products initially emerged, as hedging devices against fluctuations in commodity prices and commodity-linked derivatives. 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. The financial derivatives came into spotlight in post-1970 period, 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. Since their emergence,

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volume of trading.( www. 3 & 5 in the world on the basis of trading transactions done on the exchanges. In recent years. Over 7500 companies are listed on the Indian stock exchanges more than the number of companies listed in developed markets of Japan. there are still apprehensions about the introduction of derivatives. transparency and its tremendous growth potential. USA etc. In less than three decades derivatives markets have become the most important markets in the world. While this is true for many countries. The Indian capital market is significant in terms of the degree of development. futures and options on stock indices have gained more popularity than on individual stocks. The two major exchanges namely the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) ranked no.html).these products have become very popular and by 1990s. India has the third largest investor base in the world after USA and Japan. their complexity and also turnover.net/finance2. UK. Today. who are major users of index-linked derivatives.knowindia. 2 . especially among institutional investors. In the class of equity derivatives. the market for financial derivatives has grown tremendously both in terms of variety of instruments available. With over 25 million shareholders. they accounted for about two-thirds of total transactions in derivative products. derivatives have become part and parcel of the day-to-day life for ordinary people in major parts of the world.

In 1865. the Chicago Board of Trade (CBOT). Currently the market cap of the Sensex as on July 4th. 2009 was Rs 48. History of the world derivative market The history of derivatives is quite surprisingly a lot longer than most people think. known as the 3 . The first organized commodity exchange came into existence in the early 1700¶s in Japan.The Total Turnover of Indian Financial Markets crossed US$ 2256 billion in 2006 i. the Sensex has posted excellent returns in the recent years. Trading in futures began on the CBOT in the 1860¶s. Forward delivery contracts that states what is to be delivered for a fixed price at a specified place on a specified date. The first type of futures contract was called µto arrive at¶. was formed in 1848 in the US to deal with the problem of µcredit risk¶ and to provide centralized location to negotiate forward contracts. Foreign Institutional Investors (FII) held stock assets valued close to Rs 2 trillion as of November µ08. an increase of 82% from US $ 1237 billion in 2004 in a short span of 2 years only. existed in ancient Greece and Rome. forward contracts have existed for centuries for hedging price risk. From µforward¶ trading in commodities emerged the commodity µfutures¶. Roman emperors entered forward contracts to provide the masses with their supply of Egyptian grain.113 registered FIIs as of October '07.4 billion. Thus. There were 1.e. These contracts were also undertaken between farmers and merchants to eliminate risk arising out of uncertain future prices of grains.4 lacs Crore with a P/E of more than 20. CBOT listed the first µexchange traded¶ derivatives contract. The first formal commodities exchange. Turnover in the Spot and Derivatives segment both in NSE & BSE was higher by 45% into 2006 as compared to 2005. With daily average volume of US $ 9.

Tulips. Futures trading grew out of the need for hedging the price risk involved in many commercial operations. The currency futures traded on the IMM are the British Pound. Interest rate futures contracts were traded for the first time on the CBOT on October 20. Their history also dates back to ancient Greece and Rome. 1972. the German Mark. The first foreign currency futures were traded on May 16. The Chicago Mercantile Exchange (CME). Dutch growers and dealers traded in tulip bulb options. tulip bulb prices shot up. were a symbol of affluence. the Japanese Yen. These options were traded over the counter. a spin-off of CBOT. the Swiss Franc. 1984. though it did exist before in 1874 under the names of µChicago Produce Exchange¶ (CPE) and µChicago Egg and Butter Board¶ (CEBB). on International Monetary Market (IMM). Agricultural commodities options were traded in the 4 . 1975. The first call and put options were invented by an American financier. Russell Sage. Stock index futures and options emerged in 1982. was formed in 1919. Options are as old as futures. the brightly coloured flowers. in 1872. There was so much speculation that people even mortgaged their homes and businesses. owing to a high demand. the Canadian Dollar. which offered a trading link between two exchanges. a division of CME. was formed between the Singapore International Monetary Exchange (SIMEX) and the CME on September 7. 1982. the Australian Dollar.The first of the several networks. 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.futures contracts. and the Euro dollar. Options are very popular with speculators in the tulip craze of seventeenth century Holland. Currency futures were followed soon by interest rate futures. The first stock index futures contracts were traded on Kansas City Board of Trade on February 24. The first financial futures to emerge were the currency in 1972 in the US.

the American Stock Exchange (AMEX) and the Philadelphia Stock Exchange (PHLX) began trading in options in 1975. The Philadelphia Stock Exchange is the premier exchange for trading foreign options.The CBOE is the largest exchange for trading stock options. the Dow Jones Industrial Average.nineteenth century in England and the US. This model helped in assessing the fair price of an option which led to an increased interest in trading of options. 1973. The most traded stock indices include S&P 500. The CBOT and the CME are two largest financial exchanges in the world on which futures contracts are traded. It was in 1973 again that black. The N225 is also traded on the Chicago Mercantile Exchange. and Scholes invented the famous Black-Scholes Option Formula. The CBOE trades options on the S&P 100 and the S&P 500 stock indices. The market for futures and options grew at a rapid pace in the eighties and nineties. 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. Options on shares were available in the US on the over the counter (OTC) market only until 1973 without much knowledge of valuation. With the options markets becoming increasingly popular. The US indices and the Nikkei 225 trade almost round the clock. the Chicago Board options Exchange (CBOE) was set up at CBOT for the purpose of trading stock options. The CBOT now offers 48 futures and option contracts (with the annual volume at more than 211 million in 2001). the Nasdaq 100. and the Nikkei 225. Merton. 5 . On April 26. 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.

methodology for charging initial margins. regulates the forward/futures contracts in commodities all over India.R. deposit requirement and real±time monitoring requirements. The market for derivatives. The Securities Contract Regulation Act (SCRA) was amended in December 1999 to include derivativeswithin 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.L. However when derivatives trading in securities was introduced in 2001. The committee submitted its report on March 17. 1998 prescribing necessary pre±conditions for introduction of derivatives trading in India.C. The Forwards Contracts (Regulation) Act. broker net worth. worked out the operational details of margining system. however. 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. which withdrew the prohibition on options in securities.Gupta on November 18. As per this the Forward Markets Commission (FMC) continues to have jurisdiction over commodity futures contracts. the term ³security´ in the Securities Contracts (Regulation) 6 .J.Growth of Derivative Market in India The first step towards introduction of derivatives trading in India was with Securities Laws (Amendment) Ordinance.Varma. 1995. The report. SEBI also set up a group in June 1998 under the Chairmanship of Prof. SEBI set up a 24±member committee under the Chairmanship of Dr. as there was no regulatory framework to govern trading of derivatives. which was submitted in October 1998. 1996 to develop appropriate regulatory framework for derivatives trading in India. did not take off. 1952.

regulation of derivatives came under the purview of Securities Exchange Board of India (SEBI). of underlying securities. To begin with. share. and their clearing house/corporation to commence trading and settlement in approved derivatives contracts. was amended to include derivative contracts in securities. the three decade old notification. 7 . which prohibited forward trading in securities. Derivatives are securities under the SCRA and hence the trading of derivatives is governed by the regulatory framework under the SCRA. thus precluding OTC derivatives. The government also rescinded in March 2000. or index of prices. Derivatives trading commenced in India in June 2000 after SEBI granted the final approval to this effect in May 2001. 1956 (SCRA). risk instrument or contract differences or any other form of security. This was followed by approval for trading in options based on these two indexes and options on individual securities. We thus have separate regulatory authorities for securities and commodity derivative markets. The act also made it clear that derivatives shall be legal and valid only if such contracts are traded on a recognized stock exchange. loan whether secured or unsecured.Act. Consequently. SEBI permitted the derivative segments of two stock exchanges. A contract which derives its value from the prices. 1956 defines ³derivative´ to include. SEBI approved trading in index futures contracts based on S&P CNX Nifty and BSE±30 (Sense) index.A security derived from a debt instrument. NSE and BSE. The Securities Contracts (Regulation) Act.

Chronological advancement of Derivative market in India: 1991 Liberalisation process initiated 14 December 1995 NSE asked SEBI for permission to trade index futures. SEBI gave permission to NSE and BSE to do index futures trading Trading of BSE Sensex futures commenced at BSE.C.Gupta Committee submitted report 11 May 1998 7 July 1999 RBI gave permission for OTC forward rate agreements (FRAs) and interest rate swaps. SIMEX chose Nifty for trading futures and options on an Indian index.Gupta Committee to draft a policy framework for index futures L. 25 September 2000 2 June 2001 Individual Stock Options & Derivatives 8 . 24 May 2000 25 May 2000 9 June 2000 12 June 2000 Trading of Nifty futures commenced at NSE. 25 September Nifty futures trading commenced at SGX.C. 18 November 1996 SEBI setup L.

Derivatives Market Exchange Traded Derivative Over the Counter Derivative National Stock Exchange Bombay Stock Exchange National Commodity Derivative Exchange Index Future Index Option Stock Future Stock Option 9 .

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) 925679. Cr.Growth in Derivatives segment (NSE) Index Future Year 2008-09 2007-08 2006-07 2005-06 2004-05 2003-04 2002-03 2001-02 No.27 2539574 1513755 772147 554446 43952 21483 11 .96 3820667. of contracts 4116649 156598579 81487424 58537886 21635449 17191668 2003-04 1025588 Turnover (Rs.

27 2539574 1513755 772147 554446 43952 21483 Stock Futures Year No.) 925679. of contracts 2008-09 51449737 2007-08 203587952 2006-07 104955401 2005-06 80905493 2004-05 47043066 2003-04 32368842 2002-03 10676843 2001-02 1957856 turnover 2008-09 1093048.Year 2008-09 2007-08 2006-07 2005-06 2004-05 2003-04 2002-03 2001-02 No. of contracts 51449737 156598579 81487424 58537886 21635449 17191668 2003-04 1025588 Turnover (Rs.26 2007-08 7548563.23 12 .96 3820667. Cr.

02 2007-08 1362110. of contracts 2008-09 24008627 2007-08 55366038 2006-07 25157438 2005-06 12935116 2004-05 3293558 2003-04 1732414 2002-03 442241 2001-02 175900 Turnover Year Turnover (Rs.88 2006-07 791906 2005-06 338469 2004-05 121943 2003-04 52816 2002-03 9246 2001-02 3765 STOCK OPTIONS 13 . Crores) 2008-09 71340.2006-07 3830967 2005-06 2791697 2004-05 1484056 2003-04 1305939 2002-03 286533 2001-02 51515 Index option Year No.

Crores) 2008-09 45390. of contracts 2008-09 2546175 2007-08 9460631 2006-07 5283310 2005-06 5240776 2004-05 5045112 2003-04 5583071 2002-03 3523062 2001-02 1037529 turnover Year Notional turnover (Rs.55 2006-07 193795 2005-06 180253 2004-05 168836 2003-04 217207 2002-03 100131 2001-02 25163 TABLE 15A OVERALL TRADING No. crores) 2008-09 58335.Year No. of contracts Turnover (Rs.03 2007-08 359136.30 2007-08 425013200 13090477.75 2006-07 216883573 7356242 2005-06 157619271 4824174 2004-05 77017185 2546982 2003-04 56886776 2130610 2002-03 16768909 439862 2001-02 4196873 101926 2000-01 90580 2365 Year Av. cr.) 2008-09 119171008 2648403.21 14 . daily turnover (Rs.

the number of contracts in Index Future were 1025588 where as a significant increase of 4116679 is observed in the year 2008-09. From the datait is clear that there is high turn over in the derivative segment in India. In the year 200102.2007-08 52153. 15 . of contracts From the data there is high business growth in the derivative segment in India. 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.30 2006-07 29543 2005-06 19220 2004-05 10167 2003-04 8388 2002-03 1752 2001-02 410 2000-01 11 No.

Recession Of 2008 : ‡ ‡ ‡ Lehman Brothers goes bankrupt Merrill Lynch in distress sale AIG seeks bailout Possible Reason For fallout ‡ ‡ Small banks lent money to borrowers with dubious record (mostly housing loan) Small banks repackaged these loans as tradable securities and sold to Lehman & Merrill Lynch ‡ When borrowers defaulted market for such securities collapsed 16 .

‡ Worried about angry voters in an election year Govt. 28 lakh crores) Similarities with the Great Depression of 1932 ‡ According to many US economists. freezing credit for real investment. helped rescue another investment bank Bear Stearns Mid September US Govt. crowding out investment in productive. pumped up money supply without concern for speculative impact. ‡ Lehman filed for bankruptcy .the biggest bankruptcy filing with a debt of $630 billion (Rs. ‡ As speculative investment crowded out real investment cracks appeared in real economy that ultimately led to stock market crash. ensuring corporate failure and massive job loss and THE GREAT DEPRESSION. Govt. 17 .‡ ‡ ‡ Lehman also directly invested in realties that also collapsed. also bailed out two state funded mortgage houses: Freddie Mac and Fannie Mae. there was tax restructuring in the 20¶s with massive tax cuts for the corporates and the wealthy that led to huge accumulated money of the wealthy invested in speculative ventures and conspicuous growth of construction and housing. In March 08 US Govt. real economy that led to financial crisis of the 20¶s in USA culminating in the depression of the early 30¶s ± an uncanny resemblance between what happened in the 20¶s in USA and what is going to happen today ‡ First. refused to use public fund to absorb part of Lehman¶s losses.

we can say that the rule of High risk & High return apply in Derivatives. Advatages derivative in india It encourages entrepreneurship in India. It encourages the investor to take more risk & earn more return. Derivative Market is more regulated & standardized so in this way it provides a more controlled environment. It increases the no.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. So in this way it helps the Indian Economy by developing entrepreneurship. In fact it should have been introduced much before and NSE had approved it but was not active because of politicization in SEBI. If we are able to take more risk then we can earn more profit under Derivatives. but I feel that this anew system is very useful especially to retail investors. 18 . In nutshell. of options investors for investment.

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