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A Study On The Derivatives Market in India: SSRN Electronic Journal January 2019
A Study On The Derivatives Market in India: SSRN Electronic Journal January 2019
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Toopalli Sirisha
Assistant Professor
Department of Management Studies
Sri Venkateswara College of Engineering
Karakambadi Road, Tirupati-517507
Andhra Pradesh, India
Email:thopallisirisha@gmail.com
Abstract:
Derivatives market a significant role to play in a country's economic development.The study's o
bjective is to investigate the effect on the underlying market volatility of financial derivatives (f
utures and options).Currently, financial derivatives have become increasingly popular and
utmostfrequently used in the world of finance. This has grown with anextraordinary speed all
over the world that now it is called as the derivatives revolution. In India, the emergence and
growth of the derivatives market is relatively more.Derivative. This article aims to study
futures and options by considering acompany derivative from Indian stock market. This paper
aims at suggesting the best possible ways to investors to gain more profits in derivative
markets.
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1. Introduction:
Derivatives are one of the most multifaceted instruments. The word derivative comes from the
word to derive. It indicates that it has no independent value. A derivative is a contract whose value
is derived from the value of another asset, known as the underlying asset, which could be a share,
a stock market index, an interest rate, a commodity, or a currency. The underlying is the
identification tag for a derivative contract. When the price of the underlying changes the value of
the derivative also changes. Without an underlying asset, derivatives do not have any meaning.
For example, the value of a gold futures contract derives from the value of the underlying asset
i.e., gold. The prices in the derivatives market are driven by the spot or cash market price of the
underlying asset, which is gold in this example.The basic purpose of these instruments is to
provide commitments to prices for future dates for giving protection against adverse movements in
future prices, in order to reduce the extent of financial risks.
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Categorisation of Derivatives
Derivatives
Commodity Financial
Commodity derivatives: Commodity derivatives are investment tools that allow investors to
profit from certain commodities without possessing them. The buyer of a derivatives contract buys
the right to exchange a commodity for a certain price at a future date. The buyer may be buying or
selling the commodity.
Financial derivative: A financial derivative is a contract between two or more parties whose
value is based on an agreed-upon underlying financial asset (like a security) or set of assets (like
an index). Common underlying instruments include bonds, commodities, currencies, interest rates,
market indexes, and stocks
Forwards: Forwards are over the counter (OTC) derivatives that enable buying or selling an
underlyingon a future date, at an agreed upon price. The terms of a forward contract are as
agreed between counterparties.
Futures: Futures are exchange traded forwards. A future is a contract for buying or selling a
specific underlying, on a future date, at a price specified today, and entered through a formal
mechanism on an exchange. The terms of the contract are specified by the exchange.
Options:
An option is a contract that gives the right, but not an obligation, to buy or sell the underlying
on or before a stated date and at a stated price. While buyer of option pays the premium and
buys the right, writer/seller of option receives the premium with obligation to sell/buy the
underlying asset, if the buyer exercises his right.
Swaps: A swap is an agreement made between two parties to exchange cash flow in the future
according to a prearranged formula. Swaps are, broadly speaking, series of forward contracts.
Swaps help market participants manage risk associated with volatile interest rates, currency
exchange rates and commodity prices.
Exotic Derivatives: Exotic Derivatives usually refers to more complex, unusual and
specific derivative contracts that depend on the value of some underlying asset or defined set of
assets.
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LEAPS: LEAPS (an acronym for Long Term Equity Anticipation Security) are options of
longer terms than other more common options. In traditional short-term options, LEAPS are
available in two forms, calls and puts.
2. Need for the Study
➢ It helps the investors to construct a diversified portfolio.
➢ This study suggests investors about investment in futures, options, and swaps.
➢ It is used to know the risk management in derivatives.
Table 4.1
TCS Stock Futures
DATE OPEN HIGH LOW CLOSE SETTLE PRICE CONTRACTS TURNOVER(IN LACS) OI
29-Mar-2019 2025.95 2036.95 2001.05 2014.60 2014.60 11093 55944.77 13977000
Buyer Seller
15/03/2019(buying) 2058.70
29/03/2019(closing) 2014.602014.60
Loss = 44.10 Profit = 44.10
Loss = 44.10*250 = 11025 Profit = 44.10*250 = 11025
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Interpretation: From the above table 4.1 it understood that FUTURE (BUY) has been
increasing which in turn leads to increases the profit.FUTURE (SELL) increases which in
turn lead to loss.
Table 4. 2
Option Market Analysis
TCS Stock March Equity Table
This analysis is useful to know where to buy and sell options as such as call and put.
Open price= 2005.00 on 05th mar 19
Low price= 1958.05 on 29th mar 19
High price= 2068.95 on 15th mar 19
Close price= 2001.65 on 29thmar 19
Break Even point (BEP) = (high price +low price)/2
= (2068.95+1958.05)/2
=2013.5
Margin of Safety (MOS):
1. Margin of safety = opening share value-BEP = 2005.00 – 2013.5 = -8.
Here margin of safety is negative. So, investor get more loss and shorts. Investors can buy a
put option to get more profits.investor suggested to avoid investing in call option.
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3. Margin of safety= low share value -BEP =1958.05 – 2013.5= - 55.4
Here margin of safety is negative. So, investor get more loss and shorts. Investors can sell a
put option to get more profits. investor suggested to avoid investing in call option.
.
Interpretation:from the above calculation, it is observed TCS stock is at BEP 2013.5 at the
high price of TCS stock the margin of safety is as 55.45 and the low price of TCS stock the
margin of safety is -55.45. and, the open price of TCS stock the margin of safety is -8.5.
Table 4.3
TCS Stock Call Option Table March (STRIKE PRICE= 1700) Buyers
DATE OPEN HIGH LOW CLOSE SETTLE PRICE CONTRACTS TURNOVER(IN LACS) OI
Pay Off:
Spot price on 5th November
Spot price 1988
Strike price 1700
Amount 288
Premium paid (-) 314.40
Net loss26.4*250
Buyer loss =6600
Interpretation:
From the above calculation it is inferred that even though spot price amount is positive, the
premium paid is negative. Hence buyer gets loss.
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profit26.4*250
Seller profit =6600
Interpretation:
From the above calculation it is inferred that even though spot price amount is negative, the
premium paid is positive. Hence seller gets profit.
Table 4.4
TCS Stock Put Option Table March (Strike Price= 1700)
DATE OPEN HIGH LOW CLOSE SETTLE CONTRACTS TURNOVER (IN OI
PRICE LACS)
29-Mar-2019 4.60 4.60 3.60 3.70 3.70 7 29.82 1250
28-Mar-2019 3.60 4.40 3.60 4.40 4.40 2 8.52 2250
27-Mar-2019 0.00 0.00 0.00 6.50 0.60 0 0.00 2250
26-Mar-2019 0.00 0.00 0.00 6.50 0.55 0 0.00 2250
25-Mar-2019 0.00 0.00 0.00 6.50 0.75 0 0.00 2250
22-Mar-2019 6.00 6.50 5.90 6.50 6.50 3 12.80 2250
20-Mar-2019 4.60 4.60 4.60 4.60 4.60 1 4.26 1500
19-Mar-2019 5.50 6.00 5.50 5.50 5.50 3 12.79 1750
18-Mar-2019 4.60 4.60 4.60 4.60 4.60 1 4.26 1250
15-Mar-2019 0.00 0.00 0.00 6.70 1.60 0 0.00 1000
14-Mar-2019 6.70 6.70 6.70 6.70 6.70 2 8.53 1000
13-Mar-2019 0.00 0.00 0.00 6.00 2.35 0 0.00 500
12-Mar-2019 0.00 0.00 0.00 6.00 2.50 0 0.00 500
11-Mar-2019 0.00 0.00 0.00 6.00 3.00 0 0.00 500
08-Mar-2019 5.00 6.00 5.00 6.00 6.00 2 8.53 500
07-Mar-2019 0.00 0.00 0.00 6.60 4.95 0 0.00 0
06-Mar-2019 0.00 0.00 0.00 6.60 6.65 0 0.00 0
05-Mar-2019 0.00 0.00 0.00 6.60 8.55 0 0.00 0
Interpretation:
It is an out of the money and the buyer will get loss. If spot decreases the buyer’s loss will
decrease.
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Interpretation:
It is an Out of the money and the seller will get profit. If spot price increases the seller profit
will increases.
5. Findings:
➢ From the study it is found that derivatives will minimize the risk occurred in the stock
market.
➢ In futures investor cover the loss occurred in near month contract by using mid-month
contract.
➢ In options investor get profits by using a call or put option as required.
➢ It is found that options will give more growth to the investors over the future.
➢ Investor can use margin of safety and know where to buy and sell the stocks.
6. Suggestions:
➢ The market is based on economic issues, global news and company’s related news. So
while investing investors have to know about all these issues.
➢ The risk-taking investors get more returns.
➢ Margin of safety helps the investor todetermine when they can buy and sell the stocks
safely.
➢ Investors should possess basic knowledge about derivatives prior to investment
➢ Options are giving more returns with less risk than the futures.
7. Conclusion
From this study it is concluded that the Options give more returns compared to futures. The
stock market will give high returns to the investors who can bear high risk. Where derivatives
are ainstrument used to minimize the risk and covered the loss occurred in the stock market.
The options will give more returns and less risk when compared to futures.
8. References:
1. “Regulatory Framework for Financial Derivatives in India” by Dr.L.C.Gupta
2. A. Vashishtha, S. Kumar, "Development of financial derivatives market in India-a case
study", www.eurojounals.com (accessed on 20 February, 2014)
3. Ameer and Rashid (2011) “A Survey on the Usage of Derivatives and Their Effect on
Cost of Equity Capital” Journal of Derivatives; Fall 2011; 19, 1; ABI/INFORM Global
pg. 56
4. Bandivadekar, S. & Ghosh, S., 2003. Derivatives and Volatility on Indian Stock Markets.
RBI Occasional Papers, 24(3), pp.12-28
5. Kumar, B. & Pandey, A., 2009. Role of Indian Commodity Derivatives Market in
Hedging Price Risk: Estimation of Constant and Dynamic Hedge Ratio and Hedging
Effectiveness. 22 Asralian Finance and Banking Conference 2009.
6. Report of the RBI-SEBI standard technical committee on exchange traded Currency
Futures
S.S.S. Kumar, "Financial derivatives", 2nd Pr., PHI Learning Private Ltd., New Delhi,
2008, PP.1-27, 57-306
7. Saravana, S., 2010. An Analysis of Investor Preference towards Equity and Derivatives.
The Indian Journal of Commerce, 63(3), p.71.
8. V. Gangadhar, G. Ramesh Babu, "Investment management", 1st rep., Anmol Publication
Pvt. Ltd., 2006, PP.437-465
9. Vashishtha, A. & Kumar, S., 2010. Development of Financial Derivatives Market in
India- A Case Study. International Research Journal of Finance and Economics.
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10. Viral Acharia and Matt Richardson (2009) “Derivatives – The Ultimate Financial
Innovation” From Restoring Financial Stability: How to Repair a Failed System
11. Yogesh Maheshwari (2012) “Equity Derivatives Introduction and Stock Market
Efficiency” Journal of Management Research Vol. 12, No. 3, December 2012, pp. 141-
152
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