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SUBMITTED TO PUNJAB TECHNICAL UNIVERSITY, JALANDHAR IN THE PARTIAL FULFILLMENT OF THE REQUIREMENT FOR THE DEGREE OF
SUBMITTED BY :VINAY KUMAR M.B.A 4th year ROLL NO - 80608317058
I Vinay kumar hereby declare that In Final Project Report on “ Trends And Future Of Derivatives In India: A Detailed Study” which is submitted in partial fulfillment of the requirements of degree of Masters Of Business Administration to Punjab Technical University, Jalandhar is my original work and not submitted for the award of any other degree, diploma, fellowship or other similar titles.
This formal piece of acknowledgement may be sufficient to express the feelings of gratitude people who have helped me in successfully completing my Final Project Report. I am grateful to Lect. Ruchi for giving me a chance to do my Final Project Report on “Trends And Future Of Derivatives In India: A Detailed Study” which required extensive study of various Brokers and Investors that are engaged in Derivatives investment. I feel,I shall always remain indebted to Mrs. Sarabjeet kau r(Head Of Department, Management) without whom it is being impossible to complete my project report.He gave his kind supervision,guidance,timely support and all other kind of help required in each and every moment of need. I am deeply indebted to my dear parents,friends whose blessings and inspirations have brought me up to this stage of my carreer. (VINAY KUMAR)
Derivative terminology. 2.CONTENTS OF THE TABLE 1. Importance of derivative investment. Introduction to stock market – a global approach. . Instruments involved in derivative.FINANCIAL DERIVATIVES MARKET. participants and functions. Objectives of the project. CONCEPT OF STOCK MARKET. Introduction of the project. Reasons behind its evolution. Strength of Indian capital market. Various Functions performed in stock market. Products. Future Plans for developing stock market. 3. PROJECT ASSIGNED. Performance of stock market in Indian market. Performance in India. Introduction. History of stock market. Features and characterstics of stock market. Requirements for Future and Options. Historical aspect.
BIBLOGRAPHY. 8. .SAMPLE OF QUESTIONNAIRE.LIMITATIONS OF STUDY. 6.RESULTS AND FINDINGS. Reasons behind less development of F &O at AMRITSAR stock exchange.ANALYSIS OF THE PROJECT.CONCLUSIONS. 7.SUGGESTIONS. 9. Graphical analysis. Research Methodology. 4. 10. Regulatory framework. 5.
i also find out that what would be the future of derivative market in india on the basis of interviews and observations of brokers. Because impression is usually given that losses arose from derivatives are extremely complex and difficult to understand financial strategies. . I have studied various trends that comes in the way of Derivatives market. thereby providing the potential to improve earning quality by offsetting undesired risk. Active use of derivatives instruments allows the overall business risk profile to be modified. regarding future. I have tried to give a solution to these complexities. I have find out that derivatives can indeed be used safely and successfully provided a sensible control and management strategy is established and executed. inspite of that more awareness should be done and technical expertise knowledge should be more expanded.INTRODUCTION OF THE PROJECT Derivatives have vital role to play in enhancing shareholder value by ensuring access to the cheapest source of funds. So after interviewing with different brokers .investors and dealers. Under my project report. dealers and investors.
date. investors and brokers with derivatives till To get knowledge about shortcomings in indian derivative market. dealers and brokers hold To know the experience of dealers. regarding derivatives market.OBJECTIVES OF THE PROJECT The main objectives of my final project report are as follows: To study the various trends that comes in the way of Derivatives market To find out that what would be the future and market potential of derivative To know the awareness & familiarity investors. market in india. .
international economic and financial development etc. all operating on the market simultaneously.. Such changes are subject to secular trends set by the economic progress of the nation. constituted for the purpose of assisting. and governed by the factors like general economic situation.INTRODUCTION TO THE STOCK EXCHANGE A stock exchange is the place where securities. selling. A stock exchange is the nerve center of capital market. political environment. Changes in the capital market are brought about by a complex set of factors. The Securities Contract (Regulation) Act 1956 defines stock exchange as: “A body of individuals whether incorporated or not. shares. It is the essential pillar of the private . A stock exchange provides necessary mobility to capital and directs the flow of capital into profitable and successful enterprises. are bought and sold. debentures and bonds of joint stock companies. regulating or controlling the business of buying. & dealing in securities. organizations. tax changes.” A stock exchange is a platform for the trade of already issued securities through primary market. local bodies and foreign govt. central & state govt. financial and monetary policies. semi govt.
. The trade in market is through the authorized members who have duly registered with concerned stock exchange and SEBI. stock exchange mobilizes savings. not only of the state of health of individual companies. canalizes them as securities into those enterprises which are favored by the investors on the basis of such criteria as – . It is the open auction market where buyers and sellers meet and involve a competitive price for the securities.sector and corporate economy. It exerts a powerful and significant influence as a depressant or stimulant of business activity. The stock exchange serves the role of barometer. . but also of the nation’s economy as a whole (it measures of all the pull and pressure of securities in the market). It reflects hopes aspiration and fears of people regarding the performance of the economy.Future growth prospects.Good returns. . So.Appreciation of capital.
HISTORY OF STOCK EXCHANGE
The trading of securities in India was started in early 1973. The only stock exchange operating in the 19th century were those of Bombay set up in 1875 and in Ahemdabad set up in 1894. These were organized as voluntary nonprofit making associations of brokers to regulate and protect their interests. Before the control on securities trading became a central subject under the constitution in 1950. It was a state subject and Bombay securities contract (control) act of 1925 used to regulate trading in securities. Under this act, Bombay stock exchange was recognized in 1927 and Ahemdabad stock exchange were organized at Bombay, Ahemdabad and other centers but they were not recognized soon after it became a central subject, central legislation was proposed and a committee headed by sh. A.D.GORWALA went into bill for security regulation. On the basis securities contract act became law in 1956. At present there were 23 recognized stock exchanges in India. From these BSE & NSE are the two major stock exchanges and rest 21 are the regional stock exchanges. Daily turnover of all the stock exchange is app. 20,000cr. BSE is 129 years old. NSE is 11 years old and it brought the screen based trading system in India
FEATURES OF THE STOCK EXCHANGE
It is a place where listed securities are bought and sold. It is an association of persons known as members. Trading in securities is allowed under rules and regulations of stock exchange. Membership is must for transacting business. Investors and speculators, who want to buy and sell securities, can do so through members of stock exchange i.e. brokers. There are mainly three participants in stock exchange i.e. • Issuer of security (company). • Investor of security (Individual, HUF). • Intermediaries and products (broker, merchant bankers and shares, bonds, warrants, derivatives products etc.). It is the market as well as source for the capital. Corporate and govt. raise resource from the market.
FUTURE PLANS OF STOCK EXCHANGE
The current market scenario in the capital market is not very encouraging, however, in the future; the business model of ISE would be the most preferred method of accessing multiple markets with low cost and high credibility of an Exchange. ISE is considering several value added services or new products which may help ISE and ISS in fulfilling the demands of low cost users. We are considering derivative segment through NSE and DP services initially for the participants and later for clients through CDSL and NSDL. This futuristic concept of consolidation being pursued by ISE is now being also explored by the Developed Countries. We think such consolidation enables optimal utilization of existing resources, enhanced due to economies of scale and permit product innovation, a sign o any dynamic market. On account of this philosophy we are proposing to implement most of the new products centrally on ISE, like, Internet trading, IPO segment, Distribution of mutual funds units, Information dissemination, etc. We are also planning to provide trading support to the commodities Exchanges and also consider providing hem entry into the securities industries. The creation of a national market has provided the brokers of the RSEs and individual investors in the regions and opportunity approach the liquid national level market. This market is expected to provide liquidity in small capital
FUNCTIONS OF STOCK EXCHANGE Stock Exchange Performs The Following Functions: The stock exchange provides appropriate conditions where by purchase and sale of securities takes place at reasonable and fair prices. Stock exchange protects the interest of the investors through strict enforcement of rules and regulations with respect to dealings. .companies as the other National Level markets have a higher entry norm and may not cater to this market. The stock exchange acts as the center of providing business information relating to enterprise whose securities are traded as the listed companies are to present their financial and other statements to it. The stock exchange provides a ready market for the conversion of existing securities into cash and vice-versa. People having surplus funds invest in the securities and these funds used for industrialization and economic development of country that leads to capital formation. suspension or even expulsion of membership) may be there if broker make any malpractice in dealing with investors like charging high commissions etc. Punishments (including fine.
By By Type of Organization 3. 11. Public ltd. Company Public ltd. Madras Stock Exchange Ltd. Company . Cochin Stock Exchange 10. The Stock Exchange Mumbai 2.U. 8. Madhya Pradesh Stock 1930 Exchange 5. STOCK EXCHANGES OF INDIA Name of Stock Exchange Year of Establishme 1. Stock Exchange Ltd. By guarantee Public ltd. Stock exchange acts as the barometer of the country as it measures all the pulls and pressures of the securities in the market. Bangalore Stock Exchange 9. Company Voluntary Non profit org.P. The stock exchange provides the linkage between the savings in the household sector and the investment in corporate economy. ltd. 1943 7. Voluntary Non profit org. 12. Company guarantee Company ltd. Company Pvt. Hyderabad Stock Exchange Ltd. Converted into Association Ltd. Calcutta Stock Exchange 1908 4.Pune Stock Exchange Ltd. Company Company ltd.Ludhiana Stock Exchange public ltd. company Public ltd. Delhi Stock Exchange 1947 1957 1978 1982 1982 1983 guarantee Public ltd. Ahmedabad Stock Exchange nt 1875 1897 Voluntary Non profit org. 1937 6.
SaurashtraKutch 1983 1989 Public ltd. By Stock 1989 Exchange Ltd.OTC Stock Exchange of India 22.National Stock Exchange of 1994 India Ltd.Vadodara Stock Exchange Ltd. 21. 18.There is large flow of saving.D ltd. 2. 3.D N. investors. Company Company ltd.Jaipur Stock Exchange Ltd.It provides them liquidity. Company Company ltd.Interconnected Stock Exchange (ICSE) WHO BENEFITS FROM STOCK EXCHANGE 1.D N.Bhubaneshwar Stock Exchange 17. Investors: . 4. Company: . By guarantee Company guarantee N.Magadh Stock Exchange Ass.13. 16. By guarantee Public ltd. marketability. 20. 23. better of investments. higher Brokers: .D N. .They receive commission in lieu of services to Economy and Country: . 1990 19. growth more industries and higher income. safety etc.Guwahati Stock Exchange 1984 14. rating and public interest.Mangalore Stock Exchange Ltd.D N.Coimbatore Stock Exchange 1996 Ltd.D N.It provides them access to market funds. 1986 (Patna) 15.
d. The price of the derivative instrument is contingent on the value of underlying assets. It refers to a variable. The underlying assets can be: a. money instruments for example loan & deposits. Any type of agriculture product of grain (not prevailing in India) Price of precious and metals gold Foreign exchange rates Short term as well as long-term bond of securities of different type issued by govt. "a financial contract whose value is derived from the value of an underlying asset/derivative security".INTRODUCTION TO DERIVATIVES Primary market is used for raising money and secondary market is used for trading in the securities.C. . b. and companies etc. Hence derivative market has no independent existence without an underlying asset. c. which has been derived from another variable. O. All derivatives are based on some cash product.T. But derivative market is quite different from other markets as the market is used for minimizing risk arising from underlying assets.e. e. which have been used in primary market. X = f (Y) WHERE X (dependent variable) = DERIVATIVE PRODUCT Y (independent variable) = UNDERLYING ASSET A financial derivative is a product that derives value from the market of another product. As a tool of risk management we can define it as. The work "derivative" originates from mathematics. i.
Example: Wheat farmers may wish to sell their harvest at a future date to eliminate the risk of change in price by that date. The price of these derivatives is driven from spot price of wheat. DEFINITION OF DERIVATIVE In the Indian context the Securities contracts (Regulation), Act 1956 defines "Derivative" to include: (1) A security derived from a debt instrument, Share, Loan whether secured or unsecured, Risk instrument or contract for difference or any other form of security. A contract, which derives its value from the prices of underlying securities.
HISTORICAL ASPECT OF DERIVATIVES:
The need for derivatives as hedging tool was first felt in the commodities market. Agricultural F&O helped farmers and PROCESSORS hedge against commodity price risk. After the fallout of BRITAIN WOOD AGREEMENT, the financial markets in the world started undergoing radical changes, which give rise to the risk factor. This situation led to development of derivatives as effective "Risk Management tools". Derivative trading in financial market started in 1972 when "Chicago Mercantile Exchange opened its International Monetary Market Division (IIM). The IMM provided an outlet for currency speculators and for those looking to reduce their currency risks. Trading took place on currency. Futures, which were contracts for specified quantities of given currencies, the exchange rate was fixed at time of contract later on commodity future contracts was introduced then followed by interest rate futures. Looking at the liquidity market, derivatives allow corporate and institutional investors to effectively manage their portfolios of assets and liabilities through instruments like stock index futures and options. An equity fund e.g. can reduce its exposure to the stock market and at a relatively low cost without selling of part of its equity assets by using stock index futures or index options. Therefore the stock index futures first emerged in U.S.A. in 1982.
PRODUCTS, PARTICIPANTS AND FUNCTIONS
Derivative contracts have several variants. The most common are FORWADS, FUTURES, OPTIONS AND SWAPS. The following three categories of Participants-Hedgers, Speculators, and Arbitrageurs.
Hedgers face risk associated with the price of an asset.
They use futures or options markets to reduce the risk. Thus, they are operation who want to eliminate the risk composing of their portfolio.
They wish to be on future movements in the price of
an asset. A speculator may buy securities in anticipation of rise in price. If this expectation comes true he sells the securities at a higher price and makes a profit. Usually the speculator does not take delivery of securities sold by him. He only receives and pays the difference between the purchase and sale prices.
They are in business to take advantage of discrepancy
between price in two different markets. If for example, they see the future price of an asset getting out of line with the cash price, they will take off setting positions in two markets to lock in profit.
(3) OPTIONS: it is of two types: call and put options. where settlement takes place on a specific date in the futures at today's pre-agreed price. Underlying asset. Futures contracts are the special types of forward contracts in the sense that are standardized exchange traded contracts. (5) BASKETS: . (4) LEAPS: Normally option contracts are for a period of 1 to 12 months.TYPES OF DERIVATIVES The most commonly used derivative contract is forwards. However. These long-term option contracts are popularly known as Leaps or Long term Equity Anticipation Securities. exchange may introduce option contracts with a maturity period of 2-3 years. (2) FUTURES: a future contract is an agreement between two parties to buy or sell an asset at a certain time the future at the certain price. PUTS give the buyer the right but not the obligation to sell a given quantity of the underlying asset at a given price on or before a given date. futures and options: (1) FORWARDS: a forward contract is a customized contract between two entities. at a given price on or before a given future date.
They can be regarded as portfolios of forward's contracts. b) CURRENCY SWAPS: these entail swapping both Principal and interest between the parties. with the cash flow in one direction being in a different currency than those in the opposite direction. Equity Index Options are most popular form of baskets. .Baskets options are option on portfolio of underlying asset. The two commonly used swaps are: a) INTEREST RATE SWAPS: these entail swapping both Principal and interest between the parties. (6) SWAPS: these are private agreements between two parties to exchange cash flows in the future according to a prearrange formula. with the cash flow in one direction being in a different currency than those in the opposite direction.
this linkage may not be on point-to point basis.Cash Vs Derivative Market The basis differences between these two may be noted as follows. Though. the derivative contracts on tangible may be settled through payment and delivery. whereas derivative contracts on intangibles are necessarily settled in cash or through offsetting contracts. e) Cash asset may be meant for consumption or investment. . c) Cash market contracts are settled by delivery and payment or through an offsetting contract. arbitration or speculation. a) In cash market tangible asset are traded whereas in derivatives market contract based on tangible assets or intangible like index or rates are traded. whereas the net position in derivative market is always zero. d) The cash markets always has a net long position. b) The value of derivative contract is always based on and linked to the underlying asset. offsetting contract or cash settlement. f) Derivative markets are highly leveraged and therefore could be much more riskier. Derivatives are used for hedging.
. (4) Derivatives have a history of attracting many bright. witness higher trading volumes because of participation by more players who would not otherwise participate for lack of an arrangement to transfer risk. (2) The derivative market helps to transfer the risks from those who have them but may like them those who have an appetite for them. They often energize others to create new business. (3) Derivatives due to their inherent nature are linked to the underlying cash markets.THE DERIVATIVE MARKETS PERFORM A NUMBER OF ECONOMIC FUNCTIONS: (1) Prices in organized derivative markets reflect the perception of market participants about the future and lead the prices of underlying to perceived future level. The prices of derivatives converge with the prices of the underlying at the expiration of the derivative contract. the benefits of which are immense. (5) Derivatives market helps increase savings and investments in the long run Transfer of risk enables market participants to expand their volume of activities. new products and new employment opportunities. With the introduction of derivative. the underlying market. Thus derivatives help in discovery of future as well current prices. creative. welleducated people with an entrepreneurial attitude.
and futures are used for hedging. • Financial institutions. speculators. However at the same time you feel that overall market may not perform as good and therefore price of your stock may also fall in line with overall marked trend. though fundamentals of the company will remain good. • Clearing. clearing bank. short selling.PARTICIPANTS IN DERIVATIVE MARKET • Exchange. In both these situations you would like to insure your portfolio against any such market fall. therefore. trading members. • Stock lenders and borrowers. You expect that some adverse economic or political event might affect the market sentiments. it is good to retain the stock. The basic purpose of a hedge is to reduce the risk of loss. Hedging is a tool to reduce the inherent risk in an investment. Various strategies designed to reduce investment risk using call option. arbitrageurs. Such insurance is known as hedging. • Hedgers. . clearing members. OBJECTIVES OF DERIVATE TRADING (1) HEDGING: you own a stock and you are confident about the prospects of the company. put options.
(2) ARBITRAGE: The future price of an underlying asset is function of spot price and cost of carry adjusted for any return on investment. distortions in spot prices. To take advantage of such opinion. . Transaction made to take advantage of temporary distortions in the market are known as arbitrage transactions. current information and future expectation. Position taken either in cash market of derivative market on the basis of personal opinion is known as speculation. due to uncertainty about interest rates. This imbalance in future and spot price gives rise to arbitrage opportunities. (3) SPECULATION: you may have very strong opinion about the future market price of a particular asset based on past trends. However. individual asset or the entire market (index) could be sold or purchased. Likewise you may also have an opinion about the overall market trend. or uncertainty about future income stream. prices in futures market may not truly reflect the expected spot price in future.
unpredictable charges and high risk due to inadequate margining are inherent limitations of Badla. to a short position in the same opinion contract. at the same strike price. spot price is always less than future price. . which is exercised. This product is peculiar to India markets. for fulfillment of the obligation. In normal markets this basis is always negative.DERIVATIVE TERMINOLOGY ASSIGNMENT: It means allocation of an option contract. stock lenders and stock traders. in accordance with the procedure specified in by the relevant authority from time to time.e. BASIS: It is difference between spot price and future price of the same asset. i. This involves Badla financiers. A positive basis provides for arbitrage opportunity. BADLA: It is an indigenous mechanism of postponing the settlement of trade. The long buyers and short sellers may postpone settlement of their trade by making payments and giving delivery by using the services of Badla financiers and stock lenders who assume their positions for Badla charges. Counterparty risk.
BETA: It is a measure of the sensitivity of returns on scrip to return on the market index. is known as offsetting contract. EXERCISE: It is defined as the number of future or option contracts required be buying or selling per unit of the spot underlying position to completely hedge against the market risk of the underlying. Failure to pay margins may result in mandatory closure of position. which offsets an existing contract. It shows how the price of scrip would move with every percentage point change in the market index. . MARGIN: It is the money collected from parties to trade to insure against the default risk. Some amount of margins is collected upfront and some are collected shortly after the trade. OFFSETTING CONTRACT: new matching contract. CONTRACT VALUE It is the value arrived at by multiplying the strike price of the option contract with the regular/market lot size.
which he intender to sell in near future. RISK TRANSFER: It refers to hedging against the price risk through futures. Intrinsic value is the difference between the spot price of the underlying and exercise price of the contract. The counterparty assumes the risk in anticipation of making gain . The holder of an asset. Time value represents the cost of carrying the underlying for the option period. The premium has two components intrinsic value and time value. adjusted for any dividend and option premium.OPTION PREMIUM: It is consideration paid by the option buyer to option writer. may transfer the inherent risk by selling futures today.
Unsystematic risk in the form that the price of scrip may go up or down due to “Company Specific Reasons”. 2. 4.Liquidity risk in the form that the particular scrip might not be traded on exchange.Mutual funds may find it difficult to invest the funds raised by them properly as the scrip in which they want to invert might not be available at the right price.Systematic risk in the form that the price of scrip may go up or to reason affecting the sentiment of whole market.Counter party risk on the part of broker.REASON FOR STARTING DERIVATIVES 1. down due . 6. in case it ask money from us but before giving delivery of shares goes bankrupt. 3.
Careful selection of the securities may be listed on a National securities exchange. only the premium should be negotiated on the floor of the exchange. the clearing house has to bear the cost necessary to carry out the contract. Standardization of the terms governing the options contracts. Creation of paper-less trading and a book-entry transfer system. . Uniformity of rules and regulation in all the stock exchanges. 3. 2. a strike price. This is because after the exercise of an option contract. 6. the investors move to the secondary market to book profits. In case of default by a party to a contract. all contracts on the options exchange should have an expiry date. who can write the options contracts. Large. be actively traded. Strict capital adequacy norms to be laid out and followed. and so on. members and a number of market makers. and a contract price. Creation of a strong cash market (secondary market).THE REQUIREMENTS FOR SETTING UP FUTURE AND OPTION TRADING ARE OUTLINED BELOW: 1. For a given underlying security. 5. Creation of an Options Clearing Corporation (OCC) as the single guarantor of every traded option. 7. financially sound institutions. 4. have a wider capital base. This would decrease the transaction costs.
A GOOD LEGAL GUARDIAN: SEBI is acting as a good legal guardian for Indian Capital market.65. . 5. LARGE MARKET CAPITALIZATION: India is one of the largest market capitalized country in Asia with a market capitalization of more than 7. which started functioning in the year 1997. 4. shows high liquidity. Which means on an average every month 14% of the country market capitalization gets traded. STRONG DEPOSITORY: A strong depository National Securities Depositories Ltd.STRENGTH OF INDIAN CAPITAL MARKET FOR INTRODUCTION OF DERIVATIVES 1. TRADER GUARANTEE: The first "clearing corporation" (CCL) guaranteeing trades has become fully functional from July 1996 in the form of National Securities Clearing Corporation (NSCCL) for which it does the clearing. 3.000 corers. has strengthen the securities settlement in our country.(NSDL). 2. HIGH LIQUIDITY: In the underlying securities the daily average traded volume in Indian capital market today is around 7.500 crores.
6. 3. 5. which is basic need of Indian investors. Modifying the payment structure of assets to correspond to investor market view. Reduction of borrowing cost.IMPORTANCE OF DERIVATIVE TRADING 1. speculator and arbitrageurs. No physical delivery of share certificate so reduction in cost by stamp duty. Increase in hedger. Enhancing the yield on assets. 4. INSTRUMENTS OF DERIVATIVE TRADING FORWARD Derivative FUTURE OPTION SWAPS . 2. It does not totally eliminate speculation.
. However. and then be can go long on the forward market instead of cash market. and then take a reversing transaction to book profits. this is generally a relatively small proportion of the value of assets underlying the forward contract. which forecast an upturn in price. The two parties are: • Who takes a long position – agreeing to buy • Who takes a short position—agreeing to sell The mutually agreed price is known as "delivery price" or "forward price". If a speculator has information or analysis. It removes the future price risk.FORWARD CONTRACT "It is an agreement to buy/sell an asset on a certain future date at an agreed price". The delivery price is chosen in such a way that the value of contract for both parties is zero at the time of entering the contract. but the contract takes a positive or negative value for parties as the price of underlying asset moves. Speculator may well be required to deposit a margin upfront. wait for the price to rise. The speculator would go long on the forward.
Profit/Loss = ST-E ST = spot price on maturity date E = delivery price . Now if the price of share on that date is Rs.g. But later as the price & the underlying asset changes. (20*200) = 4000. A agrees to deliver 100 equity shares of Reliance to B on Sept. 30. long position would gain the same amount or vise versa if price quoted is less than delivery price.EFFECT OF CHANGE IN PRICE: As mentioned above the value of such a contract in zero for both the parties. than a who has short position would stand to loss of Rs. PRICE UNDERLYING ASSETS INCREASE DECREASE & HOLDER POSITION POSITIVE & LONG HOLDER & SHORT POSITION VALUE NEGATIVE VALUE NEGATIVE VALUE POSITIVE VALUE E. 140 per share. 120 per share. it gives positive or negative value for contract. 2002 at a Rate of Rs.
One party can breach its obligation. with continuous compounding T = time of maturity.a. dividend in future nor having arbitrage opportunities.g. 3. VALUATION OF FORWARD CONTRACT The forward contract can be put under three categories for the purpose & valuation: VALUATION OF THOSE SECURITIES PROVIDING NO INCOME Shares. Lack of centralization of trading. Lack of liquidity. No standardization. To overcome this other type of derivation instrument known as "Future Contracts" were introduced. If F>S0ert In this case the investor will buy asset and take a short position in the forward contract.LIMITATIONS OF FORWARD CONTRACT 1. e. Here Price (F) = S0e rt Where F = Future Price S0 = spot price of asset R = risk free rate of interest p. which neither expects to do not pay any. . 2. 4.
40. compounded continuously. borrow an amount of Rs. Repay the loan of Rs.71.40) 1.25x0. the assets will be delivered for price F and repayment will be equal to S0ert and there is net profit equal to F. Consider a forward contract were non-dividend shares available at Rs.08 = 70 x 0202 = Rs. 73 (forward contract price) and 71. At maturity sell it as Rs. . At the time of maturity.g. Risk free rate 8% p. Investor may buy the assets. 71.S0ert If F< S0ert He will long his position in forward contract. thus profit is (73.60 Thus he shorts his forward contract position. 70 matures in 3 months. borrowing an amount equal to * * for "t" period at risk free rate."Short position is not position of investor is of seller means contract sold is greater then contract bought".41 If F = 73 Then an arbitrageur will short a contract. S0ert = 70 x [e] 0.a. 70 & buy share at Rs. 70. When contract matures: the assets would be purchased for "F" Here profit is S0ert –F E.
50=Rs.50 = 150xe (4/12)(0. we will determine present value of income e.05127 F = 3842.88 = (3800-145. Profit = F –(So – I) ert If F <(So-I) ert Arbitrageur can long a forward contract.31 .1.10) = 3654.8) e(0.50 in 4 months. Let us consider a 6-month forward contract on 100 shares at Rs. Solution: divided receivable after 4 months resent Value & dividend = 100x1.g.92x1.a. in case of preference share.g. borrow money and buy the asset at present and at maturity asset is sold and earns profit. 1.9672=RS 145. 38 each risk free of interest (compounding continuously) earn is 10% p.SECURITIES PROVIDING A CERTAIN CASH INCOME If there is certain cash income to be generated on securities in future to the investor. dividend is expected to a yield of Rs. short the asset a present and invest the proceeding Profit (at maturity) (So-I) ert –F E.5)(0. Present Value of Dividend = Rate & Interest (continuously compounded) ~If there is no arbitrage Then F = (So – I) ert ~If F> (So –I)ert Arbitrageur can short a forward contract.10)50 = Rs 50x0.
25) = 520x01512 = Rs.VALUATION & FORWARD CONTRACT PROVIDING A KNOWN YIELD In case of share included in portfolio companies the index.a. current value of index is 520 and risk free rate of interest is 10% p.a. y = 0.10. as underlying assets. It is assumed to be paid continuously at a rate of "Y" p. are expected to give dividend in course of time.1% p.25 F = 520xe(0.85 . F = Soert E.a..10-0. r=0. dividend yield of 4.04.40) (0. Stock underlying an under provide a. which may be percentage 0 their prices. 527. * * = 520 T =3/12 =0.g.
registering. CONTRACT CYCLE: the period over which the contract trades. place and alternative asset. 2. Between two parties who do not necessarily know each other. processing. FEATURES OF FUTURE CONTRACT: 1. 3. The index futures contracts on the NSE have one month. specific size. FUTURE TERMINOLOGY SPOT PRICE: the price at which an asset trades in the spot market. Standardized contracts e. Clearinghouse is associated with matching. It takes obligation on both parties to fulfill the contract. Clearinghouse tries to eliminate risk of default by either party. date of delivery. 4. and three-month expiry .FUTURE CONTRACT 'It is an agreement between buyer and seller for the purchase and sale of a particular assets at a specific future date. confirming setting. reconciling and guaranteeing the trades on the future exchanges. FUTURES PRICE: the price at which the futures contract trades in the futures market. contract size.g. Guarantee for performance by a clearing corporation or clearing house. It has some features of Badla also.
There will be a different basis for each delivery month for each contract. in a normal market. basis will be positive. at the end of which it will cease to exist. BASIS: in the contract of financial futures. This is the last day on which the contract will be traded. On the Friday following the last Thursday. CONTRACT SIZE: the amount of asset that has to be delivered less than one contract. a new contract having three-month expiry is introduced of trading. . For instance. the contract size on NSE's futures market is Nifties. This measures the storage cost plus the interest that is paid to finance the assets less the incomes earned on the asset. Thus a January expiration contract expires on the last Thursday of the January.cycles. basis can be defined as the futures price minus the spot price. which expire on the last Thursday of the month. COST OF CARRY: the relation between futures price and spot price can be summarized in terms of what is known as cost of carry. EXPIRY DATE: it is date specified in the futures contract. This reflects that futures prices normally exceed spot prices.
at the end of each trading day. .INITIAL MARGIN: the amount that must be deposited in the margin account at a time a future contract is first entered into is known as initial margin. the margin account is adjusted to reflect the investor's margin gain or loss depending upon the future's closing price. MAINTENANCE MARGIN: this is somewhat lower than initial margin. This is set to ensure that the balance in the margin account never becomes negative. If the balance amount falls below the maintenance margin. MARKING-TO-MARKET: in the futures market. the investor receives a margin call and is expected to top up the margin account to the initial margin level before trading commences on the next day.
Canadian Dollars. Maturity date is standardized. Mini Value line Stock Index. Platinum. Natural Gas. 2. New York: Commodity Exchange. and Cattle etc. US Treasury Bond Futures are of even more than 2 years 3.g. 2. etc. British Pound. New York Mercantile Exchange Includes: Wheat. Contract Life: Mostly for 90 days or less. 4. Russell 3000. 4. S & P 5000. Maturity date is mostly non-standardized. Russell 2000. 3. Euro Dollars. Gold. Trader in American Exchanges like CBOT. Mostly Longer time e.INSTRUMENTS OF FUTURE CONTRACTS COMMODITY FUTURES 1. There connot be any quality variations into these assets. Introduced by IMM (a division of CME) It Includes: 10 or 5 year treasury notes (in 1976 by I:M:M). Nikkie 225. Chicago Mercantile Exchange (CME). . Quality specified FINANCIAL FUTURES 1.
introduced in U. Contracts are based on "S & P CNX NIFTY" At present it has become the most liquid contract in the country. the arbitrage between the futures equity market is further expected to reduce impact cost. 2.g. Impact cost will be much lower than dealing in individual scrip. Brokerage cost is lower. Pension funds in the US are known-to use stock index futures for risk hedging purpose. Institutional and large equity holders need portfolios hedging facility.S. in 1982 by the "Commodity Futures Trading Commission" (CFTC) by approving the Kansas Board proposal. 80-90% of retail participation is expected in India because. Index future contracts are key contracts. Index Futures began trading in India in June 2000 of Trade (KSBT)'s Futures derive its value from the underlying index-e.TYPE OF FUTURE CONTRACTS: INDEX FUTURES & STOCK FUTURES INDEX FUTURES: Of the financial futures. 1. Index derivatives are more suited to them and more cost effective than in individual stocks. 4. Savings in cost is possible thorough reduced bid-ask spreads where stocks are trade in package forms. A. 3. . NSE's futures.
Stock Index is difficult to manipulate as compared to individual stock prices.00. 1. and hence don't suffer from settlement delays and problems related to bad delivery & forged certificates. 20. he makes a profit of Rs.g.000. E. . more so in India.5. Index derivatives are cash settled. OR expiration date. being an average is much less volatile than individual stock prices.000 works out annual return of 12%. 2 months later the stock closes at Rs. He buys 100 Individual stock futures for which he buys a margin of Rs. 7. 1000 and the two month futures trades at 1006. in Reliance SEB! Frame guidelines for its trading stock futures can be effectively used for hedging: speculation and arbitrage At present there are 31 scrips in which stock derivatives are trading. 010. INDIVIDUAL STOCK FUTURES The high level committee on capital market on 2001 decided to permit FII's to participate in "Individual Stock Futures" trading e. Stock index. the Reliance stock traders at Rs. This implies lower capital adequacy and margin requirements.g. Assume that the minimum contract value is Rs. 20. and the possibility of cornering is reduced. 400 on an investment of Rs. 6.000.
3. There is no transaction cost.e. Bid-asks spreads do not exit so that it is assumed that only one price prevails. Carry type commodities Non-Carry type commodities II.There is no restriction on short selling. Valuation of financial futures 2.VALUATION OF FUTURES CONTRACTS It can be made possible on following basis: 1. 2. 4. In this case Price of the contract is = spot price+ Carry cost-carry returns i. (s + C – R) . The value of futures contract on a stock index may be obtained by using the "cost of carry model". All the assets are infinitely divisible. This includes stock index futures. The markets are perfect. Also short selling gets to use the full proceeds of the sales valuations. VALUATION OF FINANCIAL FUTURES: Valuation of financial futures is based on following assumptions 1. Valuation of commodity futures I.
Valuation of Stock Index futures is F = S0e(r-y) t COMMODITY FUTURE'S VALUATION 1) CARRY TYPE OR INVESTMENT PURPOSE These types of commodities are held COMMODITIES VALUATION by significant number.e. of all the storage costs that may be incurred during the life of a future contract then F = (So + s)ert ~If the storage cost were proportional to price of commodity then would be the same as in case of Providing a negative yield. we have F = Soe(r+s) t E. CARRY RETURNS: Dividends etc. + opportunity cost of using funds. ~If storage cost is zero then F = Soert ~If any storage cost or opportunity cost then it is regarded as negative income.g. Let us consider a 6 months gold futures contract of 100 gm.Here: SPOT PRICE: Current Price of One Unit of Deliverable asset in the Market. If S represents the storage costs p. . proportion of spot prices. CARRY COST: Holding cost i. interest Charges etc. Of investor for futures safety as investment alone. If S is the present value.a.
53)e-0.40 2) NON CARRY TYPE COMMODITITES: Consumable goods like agricultural product's futures price will not exceed the sum of spot price + Caring CostCaring Returns. "Convenience return" or "Convenience yield". compounded continuously then R=0.a.5 S=3 x 100 e-(0. Valuation of non-carry commodity futures requires another concept. s=480 x 100= 48000. The financial assets have no convenience return.12 = Rs. C=convenience cost So=Spot price . in these arbitrage arguments doesn't work investor stores these on because of its consumption value only not for investment.5) = Rs.e.Assume that the spot price is Rs.12. 480 per gram and that it cost Rs. 282.12 x 0. If the risk free rate of Interest is 12% p.53 Then F (48000 282. This is different or different investor.V. 3 per gram for the 6 monthly period to store gold and that the cost is incurred at the end of the period. i. which is the returns (in terms of money) that the investor realizes for carrying commodity over his short term needs. F= (So +s) e (r-c) t S= P. 54.438. e = 6/12 = 0.
Result of holding an asset may be unlimited upside or unlimited downside.PAY OF FOR FUTURES: (a) Payoff for buyers of futures contract-long futures Its payoff is same as payoff of a person who holds assets. If Index If Index His futures position shows profits His futures position shows losses . Profit 1220 Nifty (underlying) Assets Loss INTERPRETATION The figure shows P/L for a long futures position. The investor bought futures when THE INDEX WAS AT 1220.
(b) Payoff for seller of futures contract-short futures It can be explained by taking an example: A speculator who sells a 2 months Nifty Index futures contracts when the nifty stands at 1220 (Nifty an underlying assets) Profit …Nifty (underlying assets) Loss INTERPRETATION: When Index moves When index movers. . Seller starts making Loss. Seller start making Profits.
FORWARD VS. FUTURES Features -Operational Mechanism -Contract Specifications -Counter party Risks -Liquidity -Price Discovery -Example -Settlement Forward Traded between two parties Differ from traded to trade Exists such risk Low Not Efficient Currency Market At end of period Future Trade on Exchange Standardised contracts No such risk High Highly Efficient Future Market Daily .
September and December. No. . No.) Contract Months Contract Year Last Trading day March. 2 Dark Northern Spring and Price Quotation Tick Size Daily Price Limit Cents substitution and at different bushel established by the exchange.) One-quarter cent per bushel ($12. 2 Hard Red Winter. Starts in July and ends in May Seventh business day preceding the last business day of the delivery month. 1 Northern Spring wheat at par and No. Red. May. July.COBOT WHEAT FUTURES CONTRACT SPECIFICATIONS Trading Unit Deliverable Grades 5000 Bushels No. 2 Soft.50 per contract) 20 cent per bushel ($1000 per contract) previous above day's or below the price settlement (expandable to 30 cent per bushel) No limit in the spot month (limit are lifted two business day before the spot month begins. quarter-cents ($12.50 per contract.
The holder does not have committed himself to doing something. trading that contract closes in noon. foreign currencies and futures contracts. Ticker Symbol W OPTIONS Options are fundamentally different from forward and futures.30 to 1. Today exchange-traded options are actively traded on stocks. they were traded OTD. without much knowledge of valuation. Only the last trading day of an expiring contract. in a forward or futures contract.m (Chicago time!. .Last Delivery Day Trading Hours Last business day of the delivery month 9. the two parties have committed them self to doing something. HISTORICAL BACKGROUND OF OPTION: Although options have exercised for a long time. Whereas it nothing (expect margin requirement) to enter in to a futures he purchases of an option require an up front payment.15 p. An option gives the holder/buyers of the option the right to do something. Monday through Friday. In contrast. stock indices.
It someone wanted to buy an option. In April 1973. as early as the century. Marton. he or she would contract one of the member firms. or take position in order to make profits or cover risk for a price. No secondary market No mechanism to guarantee the writer of option would honor it In 1973. What is option? An options is the right. index or financial instruments a to buy or sell a specified number of underlying futures contracts.The first trading is options began in Europe and U. The market for options develop so rapidly that by early 80's number of share underlying the options contract sold each day exceed the daily volume of share traded on the NYSE. In this type of contract as well. 2. Since then. The two deficiencies in above markets were 1. It was only in early. there has been no looking back. 1900s that a group of firms set up what is known as the "put and call brokers and dealers association" with the aim of providing a mechanism for bringing buyers and sellers together. also provide a mechanism by which one can acquire a certain commodity on other assets. currency.S. option like futures. but not the obligation to buy or sell a specified amount (and quality) of a commodity. If no seller could be found. Scholes invented the Black-Scholes formula. at a specified price on a before a give date in the future. Thus. the firm would undertake to write the option itself in return of price. there are two parties: . CBOE was set up specially for the purpose of trading options. The firm would then attempt to find a seller or writer of option either from its own client of those of other member firms. Black.
or owner of options) (b) The seller (or writer of options) While the buyer take "long position" the seller take "short position" So every option contract can either be "call option" or "put option" options are created by selling and buying and for every option that is buyer and seller.(a) The buyer (or the holder. OPTION BUYER SELLER RIGHT OBLIGATION TO BUY (CALL) TO SELL (PUT) TO SELL (CALL) TO BUY (PUT) .
Strike price: the price specified in the options contract is knows as strike price or the exercise price. It is also referred as option premium. the exercise date. Writer of an option: the writer of a call/put option is the one who receives the option premium and is thereby obliged to sell/buy the asset if the buyer exercise on him. A call option in the index is set to be in-the-money when the current index stands at a level higher than the strike price (i. In the money option: an in the money option is an option that would lead to a positive cash flow to the holder if it will exercise immediately.e. which the option buyer pays to the option seller. the strike date or the maturity. American options: these are the options that can be exercised at any time upto the expiration date. . Expiration date: the date specified in the options contract is known as expiration date. and properties of American options are frequently deducted from those of its European counterpart. European options: these are the options that can be exercised only on the expiration date itself. spot price>strike price). Option price: option price is the price. Most exchange-traded options are Americans. If the index is much higher than the strike price. These are easier or analyze than American option.OPTION TERMINOLOGY Buyer of an option: the buyer of an option is the one who by paying the option premium buys the right but not the obligation exercise his option on the seller/writer.
Out-of-the money option:(OTM) option is an option that would lead to a negative cash flow it was exercised immediately. At expiration. In the case of a put. If the call is OTM. The longer the time to expiration. the call is set to deep ITM. An option that is OTM or ATM has only time value. An option on the index is at-the-money when the current index equals the strike price. Time value of an option: it is a difference between its premium and its intrinsic value. In the case of a put. if it is ITM. At-money option: (ATM) option is an option that would lead to zero cash flow if it were exercised immediately. Both calls and puts have time value. the call is set to be deep OTM. which is less than the strike price (spot price<strike price). all else equal. If the index is much lower than the strike price. the put is ITM if the index is below the strike price. A call option on the index is OTM when the current index stands at a level. Intrinsic value of an option: the option premium can be broken into two components-intrinsic values and time value. . the greater is an option's time value. the put is OTM if the index is above the strike price. The intrinsic value of a call is the amount the option is ITM. an option should have no time value. Usually the maximum time value exists when the options is ATM. its intrinsic value is zero.
CALL OPTION: It gives an owner the write to buy a specified quantity of the underling assets at a predetermined price i.TYPES OF OPTIONS Thus the options are of two types: CALL OPTION AND PUT OPTION. 210. This is attractive to many people. is the date of maturity. Buying out options is buying insurance. or the specific date i.e. To buy a put option on Nifty is to buy insurance: which reimburses the full extent to which-Nifty drops below the strike price of the put option. the exercise price. if at the expiry date the price in market (spot price on expiry date) is above the exercise price he'll exercise his option and reverse is also true. 210 per share the investor get the right to sell 100 share @ 210 per share. PUT OPTION: It gives the holder the right to sell a specific quantity of underlying assets at an agreed price on date of maturity he gets the right to sell. . of course he is under no obligation. Obviously. EXAMPLE If an investor buys a March Put Option on RIL shares with an exercise price of Rs. EXAMPLE Suppose it is January now and the investor buys a March option contract on Reliance Industries (RIL) Share with an exercise price/strike price Rs. With this he get a right to buy share on a particular date in March.e. The investor would naturally exercise his right if on maturity date price were below 210 and stand to gain and viceversa.
A European style option gives the owner the right to use the option only on expiration date and not before. Premium/Price of an option = Intrinsic Value + Time Value Do Nothing Option to option holder matching writer. it becomes worthless and the premium becomes the profit of the seller. Exercise the option. OPTION PREMIUM A glance at the rights and obligation of buyer and seller reveals that option contracts are skewed. The buyer pays the premium for the option to the seller whether he exercise the option is not exercised. One way naturally wonder as to why the seller (writer) of an option would always be obliged to sell/buy an asset whereas the other party gets the right? The answer is that writer of an option receives. Close out the position by write a. call option or it in case of . This is known as the price or premium to the seller for the option. a consideration for Undertaking the obligation.AMERICAN Vs EUROPEAN OPTION Its owner can exercise an American option at any time on or before the expiration date.
4. Exercise price 3. Dividend on underlying . Time to expiration 6. Supply and demand in secondary market 2.IN-THE-MONEY AND OUT-THE-MONEY OPTIONS Condition So>E So<E So=E So =spot price Call In the money Out of the money At the money E = exercise price Put Out of the money In the money At the money Consideration for selling the option/Option Pricing/Option Premium Assumption Not transaction cost likes brokerage or commission on buying or selling. FACTORS AFFECTING PRICING 1. Risk free interest rate. Volatility of underlying 5.
e How Option Work CALL OPTIONS Spot Nifty: 1100 Strike Price: 1150 Duration :3 months No. 2000 . of option x price Differential-Premium paid=Rs.Option-to-option holder in case of—he opt for expiry date. (200x(1200-1150)2000=Rs.8000) Spot Nifty: 1000 Buyer foregoes the option Loss premium paid Rs. of option bought=200 Premium per option:10 Total premium paid=2000 Da y1 Da y 90 Spot Nifty:1200 Buyer exercise the option Profit: No. i.
8000) Da y1 Spot Nifty: 1100 Strike Price: 1150 Duration :3 months No. 2000 PRICING OF OPTION AT EXPIRATION BEFORE EXPIRATION Call option At expiration Put option Before expiration Put option At expiration Call option Before .CALL OPTION WORK Spot Nifty:1200 Buyer exercise the option Profit: No. of option x price Differential-Premium paid=Rs. (200x(1200-1150)2000=Rs. of option bought=200 Premium per option:10 Total premium paid=2000 Da y 90 Spot Nifty: 1000 Buyer foregoes the option Loss premium paid Rs.
exercise it immediately at S1 and make a profit" of S1—E—C VALUE OF CALL OPTION Value . The buyer is unlikely to exercise option. the call would expire unexercised. it'll. which is available in the market at a lower price. This is because no one would like to buy an asset. writer can purchase asset as S1 and give it at making a profit of (E+S1)+ premium. On the other hand. equal to excess of asset price over the exercise price. If call price <intrinsic value then he can buy call at c.expiration 1 AT EXPIRATION (a) Call option pricing at expiration: If the price of the underlying asset were lower than the exercise price on the expiration date. be worth its intrinsic value. the allowing seller to retain premium. In even of (irrational) exercise of such a call. if the call happens to be in the money. If an out of money call did actually sell for a certain price. the investor can make an arbitrage profit by selling it and earning premium.
it would have resulted in a profit to seller of option of about (E-S1) + premium. the put option will go unexercised. When S1<E Value of put option Value Price of share . This is because there is no use of using option to sell at E when If the option were exercised.E Price of share Put option at expiration: When at the expiration date the price of the underlying asset is greater than exercised price.
greater were time value. .T) Y Price of Call option Intrinsic Value 450 E Stock Price X In figure intrinsic value is shown. equal to the excess of stock price over the exercise price. the options call and put are usually sold for at least intrinsic valued (difference of E & S1). BEFORE EXPIRATION: Before expiration.2. a 45 0 line starting at E.S. (a) Call Option Pricing: A call option will usually sell for at least its intrinsic value. if any longer the time expiry. by. P=f (E. Intrinsic value = S>E To this would be added the time value. Minimum value of call is always is equal to its intrinsic value.
S = 0 P=Time Value b'coz intrinsic value = 0 B Price of put option Time value Value Intrinsic B1 Time Value Stock prices S1 E S2 . For out-the-money/at the money Put Option i. Call Option pence is out. For in the money Put Option i.At Stock price S2.e. higher is the time value. which is excess of exercise price over stock price.e. S<E P=Intrinsic value +Time Value Time Value=f (Time of Maturity) Higher the time to maturity. E.of-the money i.e. when option is in –the money. zero intrinsic value then option price=S2B= only time value (c)Put Option Pricing It would sell for a price that is at least equal to intrinsic value. S>E.
1995 which withdrew the prohibition on options in securities. The committee submitted its report on 17th March. The government also rescinded in March 2002. SEBI set up a 24 members committee under the Chairmanship of Dr. 96 to develop appropriate regulatory framework for derivatives trading in India. as there was no regulatory framework to govern trading of derivatives.C. to recommend measures for risk containment in derivatives market in India. the committee recommended that derivatives should be declared as 'securities' so that regulatory framework applicable to trading of 'securities' could also govern trading of securities. L. . The SCRA was amended in Dec. deposit requirement and real time monitoring requirements. worked out the operational details of margining system. The market for derivatives. The act also made it clear that derivative shall be legal and valid only it such contract are traded on a recognized stock exchange. did not take off. methodology for charging initial margins. broker net worth. however. 1998. 98 prescribing necessary preconditions for introduction of derivatives trading in India. 1999 to include derivatives within the ambit of 'securities' and the regulatory framework was developed for governing derivatives trading. J. which prohibited forward trading in securities. The report. which was submitted in October. thus preluding OTC derivative.R. SEBI also set up a group in June 1998 under the Chairmanship of Prof.DERIVATIVES TRADING IN INDIA The first step towards introduction of derivatives trading in India was the promulgation of the securities laws (amendment) ordinance. Varma. the three decade old notification. Gupta on 18th November.
and their clearing house/corporation to commence trading and settlement in approved derivatives contracts. To begin with. bye-laws. The trading in index options commenced in June 2001. SEBI permitted the derivative segments of two stock exchanges. This was followed by approval. Futures contracts on individual stocks were launched in November 2001. * Stock Index Futures * Stock Index Options * Futures on Individual Stocks * Options on Individual Stocks * Interest Rate Derivatives INDEX FUTURES: Index futures are financial contracts for which the underlying is the cash market index like the Sensex. index futures contract is an agreement to buy or sell a specified quantity of underlying index for a future date at a price agreed . SEBI approved trading in index futures contracts based on S & P CNX Nifty and BSE-30 (Sensex) index. which is the brand index of India. Thus. Trading and Settlement in derivatives contracts is done in accordance with the rules. and regulations of the respective exchanges and their clearing house/corporation duly approved by SEBI and notified in the official gazette. the following five types of Derivatives are now being traded in the India Stock Market. NSE and BSE.Derivatives trading commenced in India in June 2000 after SEBI granted the final approval to this effect in May 2000. for trading in options based on these two indexes and options on individual securities.
INDEX OPTIONS: Index Options are financial contracts whereby the right is given by the option seller in consideration of a premium to the option buyer to buy or sell the underlying index at a specific price (strike price) on or before a specific date (expiry date).upon between the buyer and seller. tick size and method of settlement. the specifications are pre-specified. Just like Index derivatives. The contracts have standardized specifications like market lot. expiry day. INTEREST RATE DERIVATIVES: The derivatives are taken on various rates of interests. OPERATIONAL MECHANISM FOR DERIVATIVES TRADIN . STOCK FUTURES: Stock Futures are financial contracts where the underlying asset is an individual stock. Stock futures contract is an agreement to buy or sell a specified quantity of underlying equity share for a future date at a price agreed upon between the buyer and seller. STOCK OPTIONS: Stock Options are instruments whereby the right of purchase and sale is given by the option seller in consideration of a premium to the option buyer to buy or sell the underlying stock at a specific price (strike price) on or before a specific date (expiry date).
he needs to sign the client agreement with each one of them and resultantly. 2. This ID is broker specific i. he would have different Ids. the name of the employees who would be primarily responsible for the client's affairs. if the investor chooses to deal with different brokers. the investor gets a unique identification number (ID). REGISTRATION WITH BROKER: The first step towards trading in the derivatives market is selection of a proper broker with whom the investor would trade. The investor should also ensure to deal with a broker (member of the exchange) who is a SEBI registered broker and possesses a SEBI registration certificate. 3. 4. The broker would key this identification number in the system at the time of placing the order on behalf of the investor. The particulars would include his SEBI registration number. the precise nature of his liability towards . The client agreement includes provisions specified by SEBI and the derivatives segment. UNIQUE CLIENT IDENTIFICATION NUMBER: After signing the client agreement. CLIENT AGREEMENT: The investor should sign the Client Agreement with the broker before the broker can place any order on his behalf.e.1. Investors should complete all the registration formalities with the broker before commencement of trading in the derivatives market. RISK DISCLOSURE DOCUMENT: As stipulated in the Bye-Laws provide his particulars to the investor.
The risk disclosure document has to be signed by the client and a copy of the same is retained by the broker for his records. This information forms part of the Risk Disclosure document. notifications. which the broker issues to the client. brokerage and other charges. of the derivatives segment or of any regulatory authority to the extent it governs the relationship between the broker and the client. the investor can request for a copy of the trade confirmation slip generated on the systems on execution of the trade. the investor may change an order anytime before the same is executed on the exchange. The investor should carefully read the risk disclosure document and understand the risks involved in the derivatives trading before committing any position in the market. should be separately mentioned in the contract note. The contract note should be time (order receipt and order execution) and price stamped. 5. If desired. circulars and any additions or amendments etc. PLACING ORDER WITH THE BROKER: The investor should place orders only after understanding the monetary implications in the event of execution of the trade. . relevant manuals. The broker must also apprise the investor about the risk associated with the business in derivative trading and the extent of his liability. 6. a contract note for the trade executed within 24 hours. The investor should also obtain from the broker. After the trade is executed.the client in respect of the business done on behalf of the investor. FREE COPY OF RELEVANT REGULATION: The client is also entitled to a free copy of the extracts of relevant provisions governing the rights and obligations of clients. Execution prices. if any.
Any profits on the contract are credited to the client's variation margin account. 7. Both buyer and seller have to deposited before the opening of the position in the futures transaction. The payment of margin ensures that the risk is limited to the previous day's price movement on each outstanding position. the following day. INVESTOR PROTECTION FUND: The derivatives segment has established an "Investor Protection Fund" which is independent of the cash segment to protect the interest of the investors in the derivatives market. . B) MARK TO MARKET MARGIN: All daily losses must be met by depositing of further collateral-known as variation margin. The different types of margins are: A) INITIAL MARGIN: The basic aim of initial margin is to cover the largest potential loss in one day. which is required by the close of business. This margin is calculated by SPAN by considering the worst case scenario. MARGINING SYSTEM IN DERIVATIVES: The aim of margin money is to minimize the risk of default by either counter-party.7.
bonds. Securities contracts (Regulation) Act. Shares. the party thereto shall resolve such complaint. This is the principal Act. the 'Securities' include: 1. Derivative . dispute by arbitrations procedure as defined in the rules and regulations and ByeLaws of the respective exchanges. REGULATORY FRAMEWORK The trading of derivatives is governed by the provisions contained in the SC (R) A. ARBITRATION: In case of any dispute between the members and the clients arising out of the trading or in relation to trading/settlement. the rules and regulations framed there under and the rules and bye-laws of stock exchanges.8. which governs the trading of securities in India. scrips. the SEBI Act. 2. 1956 SC(R) A aims at preventing undesirable transactions in securities by regulating the business of dealing therein and by providing for certain other matters connected therewith. stock. stock or other marketable securities of a like nature in or of any incorporated company or other body corporate. As per Section 2(h). The term "securities" has been defined in the SC(R)A. debentures.
3. of underlying securities. Section 18A provides that notwithstanding anything contained in any other law for the time being in force. • A contract which derives its value from the prices. Government securities. Units or any other instrument issued by any collective investment scheme to the investors in such schemes. risk instrument or contract for differences or any other form of security. contracts in derivative shall be legal and valid if such contracts are: Traded on a recognized stock exchange. in accordance with the rules and bye-laws of such stock exchanges. 5. or index of price. Rights or interests in securities "Derivative" is defined to includes: • A security derived from a debt instrument. Such other instruments as may be declared by the Central Government to be securities 6. loan whether secured or unsecured. . 4. Settled on the clearinghouse of the recognized stock exchange. share.
1998 SEBI accepted the recommendations of the committee and approved the phased introduction of derivatives trading in India beginning with stock index futures. The provisions in the SC(R)A and the regulatory framework developed there under govern trading in securities. Any Exchange fulfilling the eligibility criteria as prescribed in the LC Gupta committee report may apply to SEBI for grant of recognition under Section 4 of the SC(R)A. The Exchange shall have minimum 50 members. 1. Gupta to develop the appropriate regulatory framework for derivatives trading in India. The exchange shall regulate the sales practices of its members and will obtain prior approval of SEBI before start of trading in any derivative contract. SEBI also approved the "suggestive bye-laws" recommended by the committee for regulations and control of trading and settlement of derivatives contracts. 1956 to start trading derivatives. 2. The derivatives exchange/segment should have a separate governing council and representation of trading/clearing members shall be limited to maximum of 40% of the total members of the governing council. The committee submitted its report in March 1998. L.C. The amendment of the SC(R)A to include derivatives within the ambit of 'securities' in the SC(R)A made trading in derivatives possible with in the framework of that Act.REGULATIONS FOR DERIVATIVES TRADING SEBI set up a 24-member committee under the Chairmanship of Dr. On May 11. .
f. The networth of the member shall be computed as follows: • Capital + Fee reserves • Less non-allowable assets viz. Clearing corporation/house complying with the eligibility conditions as laid down by the committee have to apply to SEBI for grant of approval. The members of the derivatives segment need to fulfill the eligibility conditions as laid down by the LC Gupta committee. The clearing and settlement of derivatives traders shall be through a SEBI approved clearing corporation/house. The minimum networth for clearing members of the derivatives clearing corporation/house shall be Rs. d. c. g. Derivative brokers/dealers and clearing members are required to seek registration from SEBI. h. 300 Lakh. 5. The members of an existing segment of the exchange will not atomically become the members of derivative segment. This is in addition to their registration as brokers of existing stock exchanges.3. e. Fixed assets Pledged securities Member's card Non-allowable securities (unlisted securities) Bad deliveries Doubtful debts and advances Prepaid expenses Intangible assets 30% marketable securities . i. a. b. 4.
exposure limits linked to capital adequacy and margin demands related to the risk of loss on the position shall be prescribed by SEBI/Exchanges from time to time. 9. . The trading members are required to have qualified approved user and sales person who have passed a certification programme approved by SEBI. The members of the derivatives segment are also required to make their clients aware of the risks involved in derivatives trading by issuing to the client the Risk Disclosure Document and obtain a copy of the same duly signed by the client. 2 Lakh.C.6. The minimum contract value shall not be less than Rs. The L. 7. Gupta committee report requires strict enforcement of "Know your customer" rule and requires that every client shall be registered with the derivatives broker. The initial margin requirement. Exchange should also submit details of the futures contract they propose to introduce. 8.
b) SEBI to approve rules. L. bye-laws and regulation of the derivatives exchange and the derivatives contracts. Gupta as its chairman in November. d) SEBI should create a special Derivatives Cell as it involves special knowledge. and a Derivatives advisory council may be created to tap outside experts for independent. c) SEBI need not be involved in framing exchange level regulations.C. L.C. f) Existing stock exchanges with cash trading to be allowed to trade derivatives if they meet prescribed eligibility condition—importantly. e) Legal restrictions on institutions.R. on use of derivatives should be removed.DR. with the latter depending on the former for settlement of trades. J. This is no bring in more traders. The recommendations of L. g) Two categories of member-clearing members and non-clearing members. Gupta Committee at a glance: a) Stock index futures to be the starting point of equity derivatives. a separate Governing Council and at least 50 members.GUPTA COMMITTEE The Securities and exchange board of India (SEBI) appointed a committee with Dr.C. 1996 to develop regulatory framework for derivatives trading in India. Varma as its Chairman to recommend measures for risk containment in the derivative market in India. The committee recommended introduction of derivatives market in a phased manner with the introduction of index futures and SEBI appointed a group with Prof. . including mutual funds.
o) Much stricter regulation for derivatives as compared to cash trading. j) Clearing corporation to be the center piece of the derivatives market. maximum exposure limits for each broker/dealer on gross basis and capital adequacy requirements to be prescribed. margins for derivatives purposes not to take into account positions in cash and futures market and across all stock exchanges. p) Strengthen cash market with uniform settlement cycles among all SEs and regulatory oversight. Proper supervision of sales practices with registration of every client with the dealer/broker and risk disclosure as the corner-stone. 3 crores for participants. a centralized clearing corporation has been recommended. l) Mark-to-market to be collected before next day's trading starts. existing clearing corporation be allowed to participate in derivatives. . m) As a conservative measure. n) Margins to be systematically collected and not left to discretion of brokers/dealers. dealers and sales persons in the derivatives market must have passed a certificate programme to be registered with SEBI.h) Broker members. i) Co-ordination between SEBI and the RBI of financial derivatives market must have passed a certificate programme to be registered with SEBI. both for implementing the margin system and providing trade guarantee. In the near term. For the long-term. k) Minimum networth requirement of Rs.
Continuously refining of Margin system. RECOMMENDATIONS . -There is no data on the volatility on Index futures. Varma was the chairman of the group. VARMA COMMITTEE After the submission of L.Submission of periodic reports by CC and SE to SEBI. .J. J.Only traders with high net worth be allowed to traded in Derivatives.R.Proper liquid net worth.Daily changes in the Margins be calculated and imposed. -Even at 99% "Value At Risk" model there could be possibility of default once in six months. . -Volatility is not constant & varying. .Imposition of VAR margin system. Gupta committee report and approval of the introduction of index futures trading by SEBI the board mandated the setting up of a group to recommend measures for risk containment in the derivative market in India. . TM. CM and Market level.C. ASSUMPTIONS -Volatility in India markets are high. Prof. -Not efficient organized arbitragers players. -Online position monitoring at customer. .R. .
Limits are set for each CM based on his capital deposits. security deposits) are quite stringent. 5. 3. Therefore. A CM may set exposure limits for a TM clearing and settling through him. NSCCL assists the CM to monitor the intra-day exposure limits set up by . The open positions of the members are marked to market based on contract settlement price for each contract. NSCCL's on-line position monitoring system monitors a CM's open positions on a real-time basis. while TMs are monitored for contract-wise position limit violation. The financial soundness of the members is the key to risk management. The on-line position monitoring system generates alerts whenever a CM reaches a position limit set up by NSCCL. the requirements for membership in terms of capital adequacy (net worth. The CM in turn collects the initial margin from the TMs and their respective clients. The salient features of risk containment mechanism on the F & O segment are: 1. NSCCL monitors the CMs for MTM value violation. CMs are provided a trading terminal for the purpose of monitoring the open position of all the TMs clearing and settling through him. It also follows value-at-risk (VaR) based margining through SPAN. 4. 2. The difference is settled in cash on a T + 1 basis.RISK MANAGEMENT NSCCL has developed a comprehensive risk containment mechanism for the F & O segment. NSCCL charges an upfront initial margin for all the open positions of a CM. It specifies the initial margin requirements for each futures/options contract on a daily basis.
PRISM uses SPAN (r) (Standard Portfolio Analysis of Risk) system for the purpose of computation of on-line margins. MINIMUM BASE CAPITAL A Clearing Member (CM) is required to meet with the Base Minimum Capital (BMC) requirements prescribed by NSCCL before activation. 6.50 lakhs with NSCCL in the following manner: . Every CM is required to maintain BMC of Rs. Position violations result in withdrawal of trading facility for all TMs a CM is case of a violation by the CM. 7. The fund had a balance of Rs.a CM and whenever a TM exceed the limits. it stops that particular TM from further trading. based on the parameters defined by SEBI. 648 crore at the end of March 2002. The actual position monitoring and margining is carried out online through Parallel Risk Management System (PRISM). The CM has also to ensure that BMC is maintained in accordance with the requirements of NSCCL at all points of time. A member is alerted of his position to enable him to adjust his exposure or bring in additional capital. after activation. A separate settlement guarantee fund for this segment has been created out of the capital of members. The most critical component of risk containment mechanism for F & O segment is the margining system and on-line position monitoring.
towards initial margin and/ or other obligations. APPROVED SECURITIES approved Custodians. over and above their minimum deposit requirements.25 lakhs in any one form or combination of the below forms: FIXED DEPOSIT RECEIPTS (FDRs) issued by approved banks and deposited with approved Custodians or NSCCL BANK GUARANTEE in favour of NSCCL from approved banks in the specified format. will be treated as a violation of the Rules. ADDITIONAL BASE CAPITAL Clearing members may provide additional margin/collateral deposit (additional base capital) to NSCCL and/or may wish to retain deposits and/or such amounts which are receivable from NSCCL. . in demat form deposited with Any failure on the part of a CM to meet with the BMC requirements at any point of time.(1) Cash Rs. withdrawal of trading facility and/ore clearing facility.25 lakhs in the form of cash. (2) Rs. closing out of outstanding positions etc. Bye-Laws and Regulations of NSCCL and would attract disciplinary action inter-alia including.
bank guarantee. The most critical component of a risk containment mechanism for NSCCL is the online position monitoring and . cash component means cash. T-bills and dated government securities. Non-cash component shall mean all other forms of collateral deposits like deposit of approved demat securities. Liquid Networth Liquid Networth is computed by reducing the initial margin payable at any point deposits. At least 50% of the Effective Deposits should be in the form of cash. in time from the effective MARGINS NSCCL has developed a comprehensive risk containment mechanism for the Futures & Options segment. For Additional Base Capital. fixed deposit receipts.EFFECTIVE DEPOSITS / LIQUID NETWORTH Effective deposits All collateral deposits made by CMs are segregated into cash component and non-cash component. The Liquid Networth maintained by CMs at any point in time should not be less than Rs.50 lakhs (referred to as Minimum Liquid Net Worth).
Initial margin requirements are based on 99% value at risk over a one day time horizon. Similarly.margining system.A CM is in turn required to collect the initial margin from the TMs and his respective clients. on an intra-day basis. where it may not be possible to collect mark to market settlement value. The actual margining and position monitoring is done online. at the Trading/ Clearing Member level. which is a portfolio based Initial system Margin NSCCL collects initial margin up-front for all the open positions of a CM based on the margins computed by NSCCL-SPAN . INITIAL MARGIN REQUIREMENT FOR A MEMBER: For client positions . However. The methodology for computation of Value at Risk percentage is as per the recommendations of SEBI from time to time. the initial margin may be computed over a two-day time horizon. without any setoffs between clients. NSCCL uses the SPAN (Standard Portfolio Analysis of Risk) system for the purpose of margining. in the case of futures contracts (on index or individual securities). before the commencement of trading on the next day. a TM should collect upfront margins from his clients.shall be netted at the level of individual client and grossed across all clients. applying the appropriate statistical formula. .
The premium margin is the client wise margin amount payable for the day and will be required to be paid by the buyer till the premium settlement is complete.For proprietory positions . Bank Guarantee . Premium Margin would be charged to members. Premium Margin In addition to Initial Margin.shall be netted at Trading/ Clearing Member level without any setoffs between client and proprietory positions. ABC can be provided by the members in the form of Cash . Assignment Margin Assignment Margin is levied on a CM in addition to SPAN margin and Premium Margin. Fixed Deposit Receipts and approved securities . till such obligations are fulfilled. In case a trading member wishes to take additional trading positions his CM is required to provide Additional Base Capital (ABC) to NSCCL. . It is required to be paid on assigned positions of CMs towards Interim and Final Exercise Settlement obligations for option contracts on individual securities. various parameters are specified from time to time. For the purpose of SPAN Margin.
In addition NSCCL may at its discretion and without any further notice to the clearing member. withdrawal of trading facilities and/ or clearing facility closing out of outstanding positions. Initial margins can be paid by members in the form of Cash .09% per day of the amount not paid throughout the period of non-payment. Bye-Laws and Regulations of NSCCL and will attract penal charges @ 0. Bank Guarantee. Non-fulfillment of either the whole or part of the margin obligations will be treated as a violation of the Rules. inter-alia including. imposing penalties. PAYMENT OF MARGINS The initial margin is payable upfront by Clearing Members. etc. . initiate other disciplinary action. Fixed Deposit Receipts and approved securities . collecting appropriate deposits.The margin is charged on the Net Exercise Settlement Value payable by a Clearing Member towards Interim and Final Exercise Settlement and is deductible from the effective deposits of the Clearing Member available towards margins. Assignment margin is released to the CMs for exercise settlement pay-in. invoking bank guarantees/ fixed deposit receipts.
The risk of each trading and clearing member is monitored on a real-time basis and alerts/disablement messages are generated if the member crosses the set limits. VIOLATIONS & PRICE SCAN RANGE Position addition to initial margins requirements • Exposure Limits • Trading Memberwise Position Limit • Client Level Position Limits Limits Clearing Members are subject to the following exposure / position limits in • Market Wide Position Limits (for Derivative Contracts on Underlying Stocks) Collateral limit for Trading Members VIOLATIONS PRISM (Parallel Risk Management System) is the real-time position monitoring and risk management system for the Futures and Options market segment at NSCCL. • Initial Margin Violation • Exposure Limit Violation • Trading Memberwise Position Limit Violation .POSITION LIMITS.
Clearing Members (CMs) and Trading Members (TMs) are required to collect upfront initial margins from all their Trading Members/ Constituents. details in respect of such margin amount due and collected. NSCCL renders a service to members. In respect of violation on more than one occasion on the same day. may submit a written request to NSCCL to either reduce their open position or.is levied for each violation and is debited to the clearing account of clearing member on the next business day. CMs are required to compulsorily report. on a daily basis. from the TMs/ Constituents clearing and settling through them. with respect to the trades executed/ open positions of the TMs/ Constituents. A penalty of Rs. bring in additional collateral deposits by way of cash or bank guarantee or FDR or securities. each instance is treated as a separate violation for the purpose of calculation of penalty. The penalty is charged to the clearing member irrespective of whether the clearing member brings in margin deposits subsequently. which the CMs . 5000/.• Client Level Position Limit Violation • Market Wide Position Limit Violation • Violation arising out of misutilisation of trading member/ constituent collaterals and/or deposits • Violation of Exercised Positions Clearing members who have violated any requirement and/ or limits. whereby the members can give standing instructions to debit their account towards additional base capital.
TMs are required to report on a daily basis details in respect of such margin amount due and collected from the constituents clearing and settling through them. and on which the CMs have allowed initial margin limit to the TMs. with respect to the trades executed/ open positions of the constituents. for the requirements. which the trading members have paid to the CMs. purpose of meeting margin Similarly.have paid to NSCCL. .
accurately the characteristic of population.dealers and investors. Different type of research designs is available depending upon the nature of research project. So survey method is used for the study. specific procedures and technical. availability of able manpower and circumstances.RESEARCH METHODOLOGY & ANALYSIS RESEARCH METHODOLOGY Research is a procedure of logical and systematic application of the fundamentals of science to the general and overall questions of a study and scientific technique by which provide precise tolls. The chief aim of sampling is to make an inference about unknown parameters from a measurable sample statistics. The statistical hypothesis relating t population. Sampling Procedure The small representative selected out of large population is selected at random is called sample. rather than philosophical means for getting and ordering the data prior to their logical analysis and manipulation. Well-selected sample may reflect fairly. . The sample size was 60 which includes brokers. The study about " Trends and future of derivatives in india " is descriptive in nature.
Interview schedule . Collection Instruments: 1. Secondary Sources: The secondary data is data. These are called 'tools' or 'instruments of data collection. Observation 2. which is collected and compiled for the different purpose. Primary Sources: Primary data is collected by structured questionnaire administered by sitting with guide and discussing problems. which are used in research for this study.Sources of Data: The sources of data includes primary and secondary data sources. The secondary data include material collected from: Newspaper Magazine Internet Data collection instruments The various method of data gathering involves the use of appropriate recording forms. Interview guide 3.
. It is assumed that this method is more suitable for collection of data. The tool for data collection translates the research objectives in to specific term/questions to the response. The instrument data collection in our study interview schedule mainly. The methodology used for this purpose are survey and questionable method. It is assumed that the respondent have sufficient knowledge to ensure questionable. Methodology Assumptions: The research was based on the following assumption: 1. 2. Every respondent was conducted personally with an interview schedule containing questions. It is assumed that the respondent have filled right and correct option according to their view.Each tool is used for specific method of data gathering. 3. which will provide research objective. Interview method was used because it can be explained more easily and clearly and takes less time to answer.
25 20 15 10 5 0 Less than 1 year 1 year 2 year 3 year More than 3 year 13 13 7 6 Series1 Series2 21 From my sample of 60.BROKER'S PERCEPTION ABOUT DERIVATIVES (ANALYSIS) TRADING PERIOD IN DERIVATIVES Trading period in derivatives. .7 (11%) are investing from last 3 years and only 6 (10%) have experience of more than 3 years of investment in derivatives. 13 (22%) brokers and investors investing in derivatives from last 1 year and less than this. 21(35%) are investing from last 2 years .
investor R is k M a na g em Li qu id ity . risk management hedging.investors and dealers e.REASONS BEHIND ITS ADOPTION Purpose for derivative Trading 3 0 2 5 2 0 1 5 1 0 5 u la tio n en t 2 4 1 5 1 4 7 S rie e s1 S rie e s2 0 H e dg in g S p ec Reasons behind adoption of derivatives are different by brokers. liquidity.g.
24 (40%) for investor (client's) demand (speculation) and remaining 7 (12%) due to liquidity.17 (29%) feels that equities are better option for onvestment than derivativies. Out of 60 brokers.remaining 6 (10%) have other opinion thatonly those investors.because derivative requires huge investment and risk also. 14 (23%) find that derivatives can’t give big profits in future.demand(speculation) etc.brokers can derive good return from derivatives those have surplus funds and patience for long period. . EXPERIENCE WITH DERIVATIVE Out of my sample size 60. only 23 (38%) find derivatives as quite profitable investment..investors dealing in derivatives 14 (23%) adopt it due to characteristics of risk management. 15 (25%) due to hedging .
3 0 2 5 2 0 1 5 1 0 5 0 2 la cs 2 lacs-5 la cs 5 lacs-1 0 la cs A yo e n th r S rie e s1 S rie e s2 S rie e s3 .INVESTED AMOUNT IN DERIVATIVES Invested am ount in derivative trading.
and remaining have invested in other amounts.27 (45%) investors and brokers have invested 2 lacs normally. Reason behind this is that those are investing from many years are taking the risk of investing huge amount.9 (15%) invested between 2 lacs to 5 lacs.Out of my sample size 60 . 2 5 2 0 1 5 1 0 5 0 We e kly M n ly o th M re th n o a 1m n o th M re th n o a 2m n s o th 1 3 5 2 3 1 9 S rie e s1 S rie e s2 13 (22%) investors and brokers are investing weekly in derivatives.19 (32 %) investing after more than 1 month and only 5 ( 8%) investing too late after 2 months. . TRADED PERIOD IN DERIVATIVES T d dp rio fo d riv tiv ra e e d r e a e in e tm n v s e t.23 ( 38%) investing monthly.and 15 (25%) invested between 5 lacs to 10 lacs.
but derivatives increases customer base of 42 (70%) wich is more than half. In investment sector need minimum of Rs.it is basically beneficial for those who are investing from last 2 or more years.15 ( 25%) said their customer base remain same because they have started just now for investing in derivatives. . 3 ( 5%) of brokers said that it doesn't increase their customer base because introducing small savings as investment.00.in future it will increase their customer base.IMPACT ON CUSTOMER BASE Impact on customer base. 50 40 30 20 10 0 Increase 3 Decrease Remain same 15 Series1 Series2 42 Out of 60 brokers and investors.000 as investment so it is basically for corporate and investment sector only not for small investors. 2.
28 (47%) are not able to say anything because they don’t have proper knowledge about stock market. .RELATIONSHIP WITH CASH MARKET relation Between derivative and cash market.they are investing with the guidance of brokers and with the support of their close relatives those are investing for last many years.dealers 27 (45%) have the positive response toward the relation between derivative and cash market and remaining 5 (8%) has negative response. 30 20 10 0 Positiv e Negativ e Can't say 5 27 28 Series1 Series2 Out of 60 brokers.
BROKER'S PERCEPTION TOWARDS INDIAN INVESTOR i. DERIVATIVES AND RISK Every broker says that there is a risk factor (up to some extent) in derivatives also.e. SHORTCOMINGS IN INDAIN DERIVATIVE SYSTEM . 40 30 20 10 0 Yes N o 23 Series1 37 out of total 37 (62%) of investors and dealers are saying it hasn't settled in Indian investor psyche and 23 (38%) are saying it has. is settled in Indian investor psyche? Relation am ong derivative and cash m arket.
8. so most by them are dealing in futures only. It has increased brokers turnovers as well as helpful in aggregate investment. 6.People are not aware of derivatives. 2. Hedging & Risk Mgt. There is a risk factor in derivative also.investors respond towards shortage of domestic technical expertise. 3. because futures have up to home extent similar quality as Badla. They consider it as a tool of risk management. 9. Most of investors are not investing in derivatives. RESULTS / FINDINGS 1. even people who have invested in it.They are investing in future contract. 7. Brokers not dealing in derivatives at present are also not going to adopt it in near futures.They normally invest in future contracts. Is the most important feature of derivatives. . Brokers haven't adequate knowledge about options. 5. It is not for small investors. 10. hasn’t adequate knowledge about it. 31(52%) feel lack of awareness in investor about derivatives and remaining 2 (3%) market failure.27 (45%) brokers. These people are interested to take it in their future portfolio also. 4.
the is become possible by L. At L.e. The Limited mutual faith in the parties involved. in Nov. It will take time to take position in derivative or capital market. (301 members) are working as a client of LSES Ltd. this will make easy to understand and take simple investor under investor base of derivative trading.E. At National Level 1.L. 2.S.E.E. Market failures Scandals Inadequate infrastructures . 2001. So they can't trade as a broker of their client and sub-broker concept does not exist in F&O segment. 3.S.E. Itself (in reality).S. and the broker of L.S.S. Securities and contract's regulations act has recognized "index" as a security very later i. which is working as a broker at N. 5.E. 7. 6. 4.REASON BEHIND LESS DEVELOPMENT OF F&O SEGMENT AT L.S. It hasn't a legalized market. Commodity F & O market has not yet been come to India.
8. There is strong need for revision of lot sizes as the lot sizes of some of the individual scrips that were worth of Rs. SCRIPS: More scrips of reputed companies etc. There are less scripts under derivatives segment. 12. In India there can't be a long term trading in F & O. TRADING PERIOD: Trading period should be increased. 4. LOT SIZE: Lot size should be reduced so that the major segment of an India society i. so small investors are not able to come under derivative segment. small saving class can come under F & O trading. 200000 in starting. SUB BROKER: Sub-broker concept should be added and the actual brokers should give all rights of brokers in F & O segment also. Large lot size. should be introduced in "F & O segment". in India even most of people are not aware of concept derivatives.e. now same lot size amount to a much larger value. 9. 11. 3. Shortage to domestic technical expertise. 2. SUGGESTIONS 1. High margin as compare to Badla. 10. 5. it is only for 1 to 2 or maximum for 3 months. TRAINING CLASSES OR SEMINARS: .
Because lack of knowledge is the main reason of its less development.There should be proper classes on derivatives for investors. traders. brokers. The first step towards it should be seminars provide to brokers & LSE employees and secondly seminar to students. however good it may and every study has some limitations: Time is the main constraint of my study. . students and employees of stock exchanges. LIMITATIONS OF THE STUDY No study is complete in itself. Sample size is not enough to have a clear opinion. Availability of information was not sufficient because of less awareness among investors/brokers Study is based only on NSE because information and trading in BSE is not available here.
mutual funds etc. The financial derivatives came in spotlight in 1972 due to growing in stability in financial market. But the problems confronting the derivative market segment are giving it a low customer base. these problems could be overcome easily . institutional investors.CONCLUSION On the basis of overall study on derivatives it was found that derivative products initially emerged as hedging devices against fluctuation and commodity prices and commodity linked derivatives remained the soul form of such products. I was really surprised to see during my study that a layman or a simple investor does not even know how to hedge and how to reduce risk on his portfolios. No doubt that derivative growth towards the progress of economy is positive. All these activities are generally performed by big individual investors. The main problems that it confronts are unawareness and bit lot sizes etc.
by revising lot sizes and also there should be seminar and general discussions on derivatives at varied places. MAGAZINES The Dalal Street LSE Bulletin 3.sebi.nseindia. The Indian Commodity-Derivatives Market in Operations. BOOKS AND ARTICLES NCFM on derivatives core module by NSEIL. BIBLIOGRAPHY 1. 2.com www.derivativeindia.bseindia.com www.in .com www. INTERNET SITES www.gov.
I am a student of MBA 2nd year.: . NAME: OCCUPATION: ADDRESS: PHONE NO. I am working on the project " TRENDS AND FUTURE OF DERIVATIVES IN INDIA : A DETAILED STUDY” You are requested to fill in the questionnaire to enable. to undertake the study on the said project.SAMPLE OF QUESTIONNAIRE Dear Respondent.
2) What is your purpose for trading in derivatives? a) Hedging c) Risk Management b) Speculation d) Liquidity 3) How will you describe your experience with derivative till date? a) I find these quite profitable b) I don't find derivatives can give big profits c) I feel that equities are better than derivatives d) Any other __________________________________ 4)What is amount of money you are investing in normally? a) 2.000 c) Rs.000 b) Rs.00. 2.00.00. 10. 5.1) For how long you have been trading in derivatives? a) Less than 1 year c) 2 Year b) 1 Year d) 3 Year e) More than 3 years.00.000 to Rs.000 d) Any other amount____________ 5)How often do you trade? a) Weekly d) More than 2 month 6)What is your customer base with introduction of derivatives? a) Increase b) Decrease c) Remain same b) Monthly c) More than 1 month 7)What according to you is relationship between derivative market and cash market? .000 to Rs. 5.00.
b) Shortage of domestic technical expertise. c) If any other___________________________ 10) Which of following Media would you prefer the most for investor education? a) TV b) Newspaper c) Magazines 11) What suggestions do you want to make with regard to investors education in derivatives market in India? THANKS FOR YOUR COOPERATION .a) Positive b) Negative c) Can't say 8) According to you have derivatives settled in Indian investors psyche? a) Yes b) No 9)What shortcomings do you feel in Indian derivative market? a) Lack of awareness among the investors about derivatives.