Future of Derivative in India

A Study on
Future of Derivative
In India
Submitted in partial fulfillment of the
requirements
for the award of the degree of
Post Graduate Diploma in Financial
Management
At
(NMIMS GLOBAL ACCESS SCHOOL FOR CONTINUING
EDUCATION)
Year-2021
Under the Guidance of Submitted by

Ms. Purva Shah Priyanjan Bothra
SAP Id-
77119241722
Acknowledgment
“It is not possible to prepare a project report without the assistance & encouragement of other
people. This one is certainly no exception”
On the very outset of this report, I would like to extend my sincere & heartfelt Obligation towards
all the personage who have helped me in this project. Without their active guidance, help,
cooperation & encouragement, I would not have made headway in the project.
I take this opportunity to extend my sincere thanks to NMIMS Global Access School for
Continuing
Education (NGA-SCE) for offering a unique platform to earn exposure and gather knowledge in
the field
of Finance. First of all, I extend my heartfelt gratitude to my project guide for having made my
project a
great learning experience by giving me his guidance, insights and encouragement which acted as a
continuous source of support for me during this entire period. I would also like to thank for his help
and
guidance in finance and all my colleagues for their sincere cooperation. Without which the success
of this
project wouldn’t had been possible at my own without any help.
Lastly, I would like to thank each and every person who directly or indirectly helped me in the
completion
of the project especially my Parents and Peers who supported me throughout my project.
INDEX
Particulars Page No.
1. Introduction 05-33
1.1 Introduction 05
1.2 What is a Derivative? 08
1.2.1 Types of Derivatives
1.2.2 Risk involved in Derivatives
1.3 Market Participants and Makers 27
1.3.1 Hedgers
1.3.2 Speculators
1.3.3 Arbitrageurs
1.4 Regulation and its structure 29
1.4.1 Reserve Bank of India
1.4.2 Securities and Exchange Board of India
1.5 Growth of Derivative Market in India 30
1.6 Future of Derivative Market in India 33
2. Review of Literature 34-39
2.1 Development of Financial Derivatives Market in India- A Case

Study. 36
By :- Ashutosh Vashishtha & Satish Kumar
2.2 Role and Growth of Financial Derivative in the Indian Capital Market. 36
By :- Dr. Himanshu Barot & Dr. Nilesh B. Gajjar
2.3 Derivative market in India: Prospects & Issues. 37

By :- Dr. Priyanka Saroha & Dr. S.K.S. Yadav
2.4 Development of Financial Derivatives Market in India and its

Position in Global Financial Crisis. 37
By :- Dr. Shree Bhagwat, Ritesh Omre & Deepak Chand
2.5 Trends of Capital Market in India. 38

By :- Jency S
2.6 Assessing the Expansion of Financial Derivatives in India. 39
By :- Pankaj Tiwari
3. Research Methodology 40-45

3.1 Purpose of Study 41
3.2 Objectives 41
3.3 Scope 41
3.4 EXECUTIVE SUMMARY 42-43
3.5 Methodology 44
3.6 Tools 44
3.6.1 Primary Data
3.6.2 Secondary Data
3.6.3 Design of Questionnaire
3.6.4 Limitation of the study
3.6.5 Measurement Techniques Used
3.7 Collection of Primary Data 45
3.8 Collection of Secondary Data 45
3.9 Hypothesis of The Study 45
4. Data Analysis, Interpretation and Presentation 46-60
4.1 Analyzing Growth of Derivative Market through Secondary Data. 47

4.2 Analyzing Investor’s views towards Derivatives Products through
Primary Data. 50
4.3 Hypothesis Testing 57
4.3.1 Comparing Income and Investment in Derivative market
4.3.2 Comparing Age and purpose of Investing in Derivative
Market
4.3.3 Comparing Risk taking Strategy and Rate of Return
5. Findings & Recommendations 61-63
6. Bibliography 64-65
7. Annexure (Questioner)
CHAPTER 1
INTRODUCTION
1.1 Introduction
In general, a derivative instrument is a financial contract whose payment structure is defined by the
value of the underlying commodity, security, interest rate, stock price index, exchange rate, oil price,
or other similar factors. As a result, a derivative is an instrument whose values are derived from an
underlying variable or asset. A derivative instrument does not create ownership in and of itself.
Instead, it's a pledge to transfer ownership.
All derivatives are based on monetary items in some way. A derivative instrument's underlying asset
can be any of the following sorts of products.
A derivative is a financial instrument – or, to put it another way, an agreement between two
individuals or parties – whose value is determined by the price of something else (called the
underlying). The following are some of the most well-known underlying assets:
 Bonds
 Over the counter (OTC)
 Interest rates
 Foreign Exchange rates
 Short term debt securities like T-bills
The core of financial management is to maximise earnings with the least amount of work, expense,
and danger. In contemporary times, extraordinary quantities of money might be generated through
stock exchanges, currency trading, commodity exchanges, and other means. High risk and great
volatility (which may or may not result in high profits) are the fundamental characteristics on which
these exchanges function. People put themselves in dangerous situations/positions in order to benefit
from the transactions they engage in.
The Derivatives Market refers to the marketplace where derivatives are traded. Derivatives are
securities whose value is derived from the value of the underlying assets. The value of these
derivatives is influenced by the underlying assets' volatility. Stocks, bonds, currencies, interest rates,
commodities, and market indexes are the most prevalent underlying assets. Because derivatives are
just contracts between two or more parties, underlying assets such as meteorological data or the
quantity of rain can be employed. Future Contracts, Forward Contracts, Options, Swaps, and Credit
Derivatives are all types of derivatives. There are two types of derivatives markets: exchange-traded
derivatives and over-the-counter derivatives. Although many market players are involved in both, the
legal nature of these items and the method they are exchanged are substantially different.
The mother of all innovations, as they say. Derivatives are a modern-day commercial idea that
allows consumers to maximize profits on their investments while assuming the least amount of risk.
It entails deferring advantages until you have attained your optimum/satisfactory level.
Year Activity
A committee was appointed under the chairmanship of Shri.
M. Narasimham, to examine all aspects of the structures,
1991 organization, function and procedures of the financial
system.
Free pricing of issues, FDI & FII norms relaxed.
1992 Parliament passed SEBI Bill &accorded statutory status as
on autonomous body to SEBI.
1993 Private MFs allowed.
1994 Automated screen - based trading.
1998 Dematerialization.
Rolling settlement.
2000
Index derivatives.
2001 Stock Derivatives
2003 T+2 Settlements.
Corporatization and Demutualization of Exchanges.
Reforms in Corporate governance.
Comprehensive Risk management framework.
2005 IPO grading.
Gold exchange traded fund.
Initiatives to develop Corporate Bond market.
2007
Short selling and Stock lending and Borrowing.
Source: India’s Financial Sector- An Assessment- Volume V, Advisory Panel on Institutions and Market
Structure- Committee on Financial Sector Assessment March 2009, RBI, Government of India .
1.2 What is Derivative ?
A derivative is a financial tool, whose value is based on the underlying asset value. The prices of
traded assets are the variables that underpin derivatives. For example, the price of a stock (share), the
price of commodities such as wheat, rice, and pulses, interest rates, currency exchange rates, and so
on.
A derivative is a financial instrument whose value is "derived" from the value of another financial
instrument or economic variable. The derivative's value is based on other prices or factors, making it
a good vehicle for risk transmission and management.
John C. Hull, “A derivative can be defined as a financial instrument whose value depends on (or
derives from) the values of other, more basic underlying variables.”
Robert L. McDonald “A derivative is simply a financial instrument (or even more simply an
agreement between two people) which has a value determined by the price of something else.”
According to the Securities Contract (Regulation) Act, 1956, derivatives include:
 • Securities produced from the debt tool, share and loan, whether secured or unsecured, risk
tool or difference contract or any other kind of security.
 A contract, which derives its value from the prices of index or prices of underlying securities.
As a result, derivatives are specialised contracts that allow for temporary hedging, or protection
against losses caused by unanticipated price or volatility swings. As a result, derivatives are an
essential risk management tool.
Price discovery, risk transfer, and market completion are just a few of the economic activities that
derivatives accomplish.
Prerequisites for Derivatives Market

Five key conditions exist for a country to succeed on the derivatives market are :
a) Large market capitalization
With a market value of about $2.8 trillion, India is well ahead of many other nations that have
successfully implemented derivatives markets.
b) Liquidity in the underlying

The overall trade volume in India used to be about Rs-300 crores per day a few years back. India's
daily trade volume is currently about Rs-15000 crores. This suggests a level of liquidity that is
roughly six times higher than previous conditions. Empirical research suggests that there are several
financial instruments in the nation today that are sufficient to support the derivative market.
c) Clearing house that guarantees trades
One of the most important components in establishing a vibrant and robust derivatives market is
counter party risk. As a result, a trade guarantee is required before a derivatives market may begin.
The National Securities Clearing Corporation, which was established in July 1996, is the first
clearinghouse corporation to guarantee trades (NSCC). The NSCC is in charge of guaranteeing all
open positions on the National Stock Exchange (NSE), which it clears. Other exchanges are
considering forming their own, well-funded clearing businesses to provide transaction assurances.
d) Physical infrastructure
All of India's equities markets are heading toward satellite connection, which would allow investors
and dealers to acquire liquidity services from anywhere in the nation. This telecommunications
infrastructure, as well as India's computer hardware and software skills, will make it possible to set
up a computer system for the construction of derivatives markets. Setting up an automated trading
system would be advantageous when establishing the derivative market since it will provide
experience with numerous potential exchanges.
e) Risk-taking capability and Analytical skills

India's investors have a high risk-bearing capacity and can withstand the danger posed by
derivatives. This capacity may be seen in the quantities traded on the capital markets, which are
similar to a futures market.
When it comes to analytical capabilities, many delicate trading methods and pricing in derivatives
need a high level of analytical competence. India has a large pool of financially savvy
mathematicians who would succeed in this discipline. Finally, an apparent benefit for the Indian
market is that we have extensive experience with futures markets through settlement cycle-oriented
equity, which is not truly a spot market but rather a futures market (including concepts like market-
to-market margin, low delivery ratios, and last-day-of settlement abnormalities in prices). On six
commodities, we also have active futures markets.
1.2.1 Types of Derivatives.

a) Classification of Derivatives
Derivatives
Commodity Financial
i. Commodity derivatives
Commodity derivatives are financial products whose value is determined by the price
of underlying commodities such as rice, paddy, gold, silver, and oil. Commodity
derivatives were created with the intention of providing farmers with a risk
management tool. They may guarantee to sell crops at a set price in the future.
ii. Financial derivative

It is a financial instrument whose value is determined by the value of one or more
underlying assets or asset indexes. Equities (stocks), debt (bonds, bills, and notes),
currency (USD, JPY, GBP, and EUR), and indices of these items may all be used to
create derivatives.
b) Types of Derivatives Products
Derivatives
Forwards Futur Option Swap

e s
i. Forward Contracts
A forward contract is an agreement to acquire or sell an asset at a certain price on a predetermined

date. One of the contract's participants takes a long position and commits to purchase the underlying
asset at a specific future date for a specific price. The promised asset may be a cash, a commodity, an
instrument, or something else. The other party takes a short position in the asset and promises to sell
it at the same price on the same date. Other contract terms, such as delivery date, price, and quantity,
are discussed bilaterally between the contracting parties. Normally, forwards are transacted outside
of the exchange.
Basic Features of Forward Contract
Highly customized - Counterparties can choose and establish the conditions and
features that best suit their purposes, such as when the underlying asset will be
delivered and the exact identify of the underlying asset.
All parties are exposed to counterparty default risk - This is the risk that the other
party cannot supply or pay the required amount.
Banks, investment banks, the government, and companies all participate in
transactions in vast, private, and generally unregulated marketplaces.
Stocks, bonds, foreign currencies, commodities, or a mix of these can be used as

underlying assets. It's possible that the underlying asset is interest rates.
They are typically held to maturity and have little market liquidity.
A forward contract is any agreement between two parties to exchange an

asset in the future.
Physical Settlement
A forward contract can be completed by a short investor (i.e., the selling) physically
delivering the underlying asset to a long investor (i.e., the buyer) and the buyer paying
the agreed forward price to the seller on the agreed settlement date.
Cash settlement
It does not imply that the security is delivered or received. Each party either pays
(receives) cash equal to their respective position in the contract's net loss (profit).
ii. Future Contracts

A futures contract, like a forward contract, is an agreement between two parties in which the
buyer commits to purchase an underlying asset from the seller at a price agreed upon today
at a future date. A futures contract, unlike a forward contract, is not a private transaction;
instead, it is exchanged on a recognized stock exchange. Furthermore, the exchange
standardizes a futures contract. Except for the price, the stock market sets all of the terms. In
addition, the Clearing Corporation protects both the buyer and the seller of futures contracts
against counter-party risk. This assurance is provided by the Clearing Corporation to ensure
that the buyer or seller of a futures contract is not harmed as a result of the counter party's
failure to meet its obligations. If one of the parties’ defaults, the Clearing Corporation steps
in to satisfy that party's obligations, ensuring that the other party is not harmed as a result of
the contract's non-fulfillment. The Clearing Corporation keeps an amount as a security from
both parties in order to guarantee the execution of the contract's obligations. Margin money
is an amount that might be in the form of cash or other financial assets.
Basic Features of Future Contracts
Organized Exchanges: Futures are exchanged on established exchanges with

a specific physical location where trading takes place, unlike forward
contracts, which are handled over-the-counter. This creates a ready-to-trade,
liquid market where futures may be purchased and sold at any moment, just
like stocks.
Standardization: The quantity of commodities to be supplied and the

maturity date are negotiated between the buyer and seller in forward currency
contracts, and can be tailored to the buyer's needs. Both of these are
standardized by the exchange on which the futures contract is traded in a
futures contract.
Clearing House: All contracts exchanged on the exchange are cleared through
the exchange. For example, the exchange acts as a buyer to every seller and a
seller to every buyer in every contract and transaction. This has the advantage
of removing the need for A and B to do any creditworthiness checks on each
other. It also ensures the market's financial stability.
Margins: As with other exchanges, only members may trade on future exchange
contracts. Other people can employ the members' services as brokers to use this
instrument. As a result, an exchange member can trade for himself as well as for
a customer. The clearing members, or members of the clearing house, are a
subset of the members, and non-clearing members must clear all of their
transactions through a clearing member. The margin is usually between 2.5
percent and 10% of the contract's value, although it can be higher or lower. A
member operating on behalf of a client, in turn, expects the customer to pay a
margin. Cash or securities such as Treasury bills or bank letters of credit can be
used as margin.
Marking to Market: The exchange utilizes a marking system, where all

outstanding contracts are reimbursed at the settlement price of that trade
session at the conclusion of each trade session. This means that some
participants will lose while others will benefit. This is adjusted by debiting the
margin accounts of the members who lost and crediting the accounts of the
members who won.
Actual Delivery is Rare: The goods are actually delivered by the seller in most
forward contracts and are accepted by the buyer. Advanced contracts are concluded
to acquire or disposal a product for a gain at the current price. In contrast, the true
delivery is carried out in fewer than 1% of the contracts traded in most future
markets.
Flow of Transactions in a Futures Contract
In the diagram below, the fundamental flow of a transaction involving three parties, namely the
Buyer, Seller, and Clearing Corporation, is represented.
Source: NSE Workbook.
Future’s Terminology
Contract Size
The contract value at a particular index level. It is Index level * Multiplier.
Multiplier
It's a pre-determined figure that's utilized to establish the contract's size. It

refers to the cost per index point.
Tick Size
It is the smallest price variation between two similar quotations.
Contract Month
The month in which the contract will expire.
Expiry Day
The last day when the contract can be traded and matured.
Open interest
At any one time, the total number of open long or short positions on the market.
Because the overall long holdings for the market are equal to the total short
positions, only one side of the contracts is counted for calculating open interest.
Volume
The number of contracts traded during a particular period of time. During a

single day, a week, or a month.
Long position
At any moment in time, you may have an outstanding/unsettled buy position.
Short position
At any given time, you may have an outstanding/unsettled sales situation.
Open position
At any time, outstanding/unsettled long or short position.
Physical delivery
The open position shall be fixed by the delivery of the underlying items at
the end of the contract. Living is low in the future market.
Cash settlement
Open position shall be paid in cash upon the expiry of the contract. The
alternative supply procedure (ADP) for these contracts — Open position at
contract expiry is fixed by two parties — a purchaser and a seller, under terms
not stipulated in the exchange. A major part worldwide is concluded by
alternative delivery procedure for energy and associated contracts (crude oil,
heater and petrol oil).
Payoff for futures:
A payoff is a potential gain/loss that a market player would get by changing the price
of the basic asset. Linear payoffs are provided for future contracts. It simply implies
that both losses and profits are infinite for the purchaser and seller of futures
agreements.
Payoff for Buyer of futures: (Long futures)
The payouts for a buyer of a future contract are like the payment for a holder
of an asset. He has both upside and downside possibly endless. Take the
scenario of an individual speculator who purchases a contract for two months
of Nifty index when the Nifty reaches 15520. In this situation, the underlying
asset is Nifty. When the index rises, the long-term position begins to benefit
while the index falls and begins to lose.
PPROFIT
E2
F E
LOSS 1
CASE 1:- The consumers purchased the futures contract at (F);
if the price of the futures contract rises to E1, the buyer
earns a profit of (F) (FP).
CASE 2:- When the futures price falls below (F), the buyer loses; if the
futures price falls below E2, the buyer loses (FL).
Payoff for seller of futures: (short futures)
The payout for a person selling a future contract is like the payment for the
person shortening an asset. He has both upside and downside possibly
endless. Take a speculator who sells a two-month contract for the future of
the Nifty index while the Nifty is around 15520. In this situation, the
underlying asset is Nifty. When the index falls, the short-term position begins
to make profits as the index falls, and losses begin to arise.
P
PROFIT
E2
E1 F
LOSS
CASE 1:- The seller sells the future contract for (F); if the future trades at E1, the
seller earns a profit of (F) (FP).
CASE 2:- When the future price exceeds the current price, the seller suffers a loss (F)
If the future price drops to E2, the seller will lose money (FL).
iii. Options Contracts
An alternative is the contract which grants the right to purchase and sell the
underlying asset at a defined price, on or before a certain date/day. The party who
takes a long position, i.e., to purchase the option is termed the buyer/holder of the
option and the party takes the shortest position.
The buyer of the option is entitled but not obliged to purchase or sell the underlying
property, whereas the buyer of the option has a contractual duty. Thus, the
buyer/holder option will only be allowed to use the option if it is advantageous, but
the writer of the option would be legally obliged to respect the contract when he
decides to exercise.
Categorization of Option Contracts:
Options
Contacts
Call Options Contact Put Options

Contact
 Call Option Contracts
A contract that gives its owner the right but not the obligation to buy an underlying asset
(Stock, Bond, Currency & Commodity) at a specified price on or before a specified date is
known as a “Call option‟. The owner generates profit as long as he sells for a higher price
and purchases for a cheaper price in the future.
 Put Option Contracts
A contract that gives its owner the right but not the obligation to sell an underlying asset
(Stock, Bond, Currency & Commodity) at a specified price on or before a specified date is
known as a “Put option”. If the owner buys at a lower current price and sells at a lower
future price, he makes a profit. If the price does not rise in the future, no option will be
exercised.
Option’s Terminology
Index option: The underlying asset is the index of these options. For instance,
Nifty, Sensex, etc. possibilities.
Stock option: These options have individual stocks as the underlying asset.
For example, option on ONGC, NTPC etc.
Buyer of an option: An option buyer is someone who has a right but not a
duty under the contract. He pays a fee to the option seller for possessing this
privilege, which is known as the "option premium."
Writer of an option: If the buyer of an alternative exercises his rights, the
author is a person who receives the option premium, which obliges him to
sell/buy the assets.
American option: The owner of such an option should have the right to
exercise his right on or before the contract expiry date/day.
European option: The owner of such an option can only exercise his right on
the contract's expiration date/day. Index options are European in India.
Option price/Premium: It is the amount paid to the option seller by the

option buyer.
Lot size: The number of units of underlying asset in a contract is referred to
as the lot size. Nifty option contracts have a lot size of 50.
Expiration Day: The date on which a derivative contract is no longer valid.
It is the contract's last trading date/day. Contracts are due to expire on the
final Thursday of each month.
Spot price (S): In the spot market, it is the price at which the underlying asset trades.
Strike price or Exercise price (X): The strike price is the price per share at
which the option holder can buy or sell the underlying securities.
In the money (ITM) option: This option would give holder a positive cash
flow, if it were exercised immediately. A call option is said to be ITM, when
spot price is higher than strike price. And, a put option is said to be ITM when
spot price is lower than strike price. In our examples, call option is in the
money.
At the money (ATM) option: If executed immediately, the money option

would lead to zero cash flow. So, the strike price is the same as the spot price for
calling and putting in ATM options.
Out of the money (OTM) option: The cash option is one with a hit price
that is worse than the spot price for the option holder. In other words, if the
holder is exercised immediately, this option would provide a negative cash
flow. A spot price is less than the strike price. A call option is considered to
be OTM. And an OTM is an option if the spot price is higher than the price of
a strike. Put the option out of the cash in our examples.
Intrinsic value: The above specified premium option consists of two

parts – inherent value and time value (intrinsic value).
For an alternative, the intrinsic value refers to the amount by that option
in the money, i.e., before adjusting for the premium paid, the amount that
an option buyer realizes when he immediately exerts it. Therefore, the
intrinsic value is exclusively for the in-money options, whereas the in-
money options have nil intrinsic value. A negative inherent value can
never have an option.
Time value: It is the difference between the premium value and an option, if
any, intrinsic value. The temporal value of ATM and OTM options is limited,
as their value inherently is zero.
Open Interest: The total number of option contracts outstanding for an
underlying asset is the open interest as explained in the future section.
Factors Determining Option Value:
Underlying Price: - The current market price for the underlying asset is the most
important determinant in an option premium. As the prices of the underlying grow
in general, call prices are rising and prices are falling. Conversely, if the
underlying prices decline, calling prices fall and prices rise.
Strike price: - The price of the strike decides whether the option has an inherent
value. Note that the inherent value is the difference between the option's strike
price and the current underlying price. The premium usually grows when the
option gets more in cash (where the strike price is more advantageous than the
existing underlying price).
Time to expiration: -The longer an option has until expiration, the greater the
chance it will end up in-the-money, or profitable. As expiration approaches, the
option's time value decreases. The underling’s volatility is a factor in time value:
If the underlying is highly volatile, you can reasonably expect a greater degree of
price movement before expiration. In the case of low volatility, the reverse is true.
Volatility: Volatility is the extent to that, whether up or down, price moves. The
speed and amount of the price change underlined are measured. Historical
volatility refers to the real price variations seen over a certain period of time.
Risk free interest rate: - Interest rates and dividends affect option values in a
minor but noticeable way. As interest rates grow, call premiums are generally
increasing and prices are down. The cost of owning the underlying products is this:
Either interest (if the money is borrowed) or lost interest income is charged to the
acquisition (if existing funds are used to purchase the shares). The buyer will bear
interest fees in each situation.
Dividend: - Dividends can affect option prices because the underlying stock's
price typically drops by the amount of any cash dividend on the ex-dividend date.
As a result, if the underlining’s dividend increases, call prices will decrease and
put prices will increase. Conversely, if the underlining’s dividend decreases, call
prices will increase and put prices will decrease.
Pay off Charts for Options
PROF
R
IT
M
S
AT E
OT M 1
M
Payoff for Buyer of E LOS (Long

Call Option: P Call)
2 S
The payment of a purchaser's options depends on the spot price of an asset. The
following diagram demonstrates the payment of a call option by purchasers.
S = Strike price ITM = In the Money

SP = Premium / loss ATM = At the Money
E1 = Spot price 1 OTM = Out of the Money
E2 = Spot price 2
SR = Profit at spot price E1
CASE 1: (Spot Price > Strike price)
Because the underlying asset's Spot price (E1) is higher than the strike price (S).
If the price climbs more than E1, the profit will likewise rise above that of the
purchaser (SR) (SR)
CASE 2: (Spot Price < Strike Price)

Because the underlying asset's spot price (E2) is less than the strike price (S)
If the price falls below E2, then the buyer's loss is limited to his premium. (SP).
Payoff for Seller of Call Option: (Short Call)
The seller's payment for the call option depends on the location price of the asset. The
payment for a seller of a calling option is shown in the following graph:

PROFI
SP = Premium / loss T
ATM = At the Money
P
E2 = Spot price 2 IT AT
SR = Profit at spot price E2 M M E
2
E
1 S
OT
M
LOS
S
CASE 1: (Spot price < Strike price)
Since the underlying spot price (E1) is below the strike price (S). If the price drops
below E1, then the seller also receives the profit (SP), if the price lowers less than E 1,
(SP).
CASE 2: (Spot price > Strike price)
As the spot price (E2) of the underlying asset exceeds the strike price (S), the
seller receives loss (SR), when the price exceeds E2, the seller's loss also
exceeds E2 (SR).
Payoff for Buyer of Put Option: (Long Put)
The payment of the option's purchaser relies on the spot price of the asset. The graph
below depicts the payment of a call option by the buyer.
PROFIT
S = Strike price ITM
R = In the Money
E1 = Spot price 1 ITM OTM = Out of the Money
E2 = Spot price 2 S
E2
E1 ATM
OTM
P LOSS

Since the current price of the asset (E1) is below the impact price (S). If the buyer
earns the profit (SR), then the profit will rise if the price lowers less than E1 (SR).

As the underlying asset's spot price is higher than its strike price (S), if the
price goes higher than E2 then the buyer's loss is restricted to the buyer's
premium (SP).
Payoff for Seller of Put Option: (Short Put)
The payment of the option for a seller relies on the current price of the asset. The
diagram below demonstrates a reimbursement by the seller.
PROFIT
P
ITM
E1 ATM
E2
S
OTM
LOSS

E2 = Spot price 2
The seller receives (SR) loss if the price drops below E1, the loss is additionally
increased by more than that due to the size of the underlying Asset (E1) (SR).
Because the seller's spot price (E2) is larger than a hit price (S), price exceeds E2 than the
seller's profit is restricted to his premium the salesman's profit exceeds E2 (SP).
Summary of options
Call option buyer Call option writer (seller)
Pays premium Receives premium
Obligation to sell shares if
Right to exercise and buy the share exercised
Profits from decreased or neutral
Profits from rising prices pricing
Potentially infinite profit, finite Potentially unlimited losses,
losses limited gain
Put option buyer Put option writer (seller)
Pays premium Receives premium
Obligation to buy shares if
Right to exercise and sell shares exercised
Profits from rising prices or
Profits from falling prices remaining neutral
Limited losses, potentially Potentially unlimited losses,
unlimited gain limited gain
iv. Swap Contracts
The exchange of financial instruments is a derivative agreement between two parties.

These instruments can be virtually anything, but most swaps involve cash flows based on
a conceptual principal amount agreed by both parties. The director does not usually
change hands. One leg of a swap is included in each cash flow. In general, the one cash
flow is fixed while the other variable is the floating currency exchange rate or the index
price based on a benchmark interest rate.
An interest rate swap is the most common type of swap. Swaps are not exchanged, and
retail investors generally do not exchange. Instead, swap contracts between companies or
financial institutions are over- the-counter contracts.
 Interest Rate Swap
An exchange between two counterparties of the interest rate is a contractual agreement to

exchange cash flows in future. Two types of legs are present (or series of cash flows). A
flat rate payer makes a number of fixed payments and these cash flows are known at the
beginning of the exchange. The variable rate payer makes a number of payments that are
based on future interest rate levels (for example, a quoted index such as LIBOR), and
most or all these cash flows do not appear at the beginning of the swap. The swap
agreement sets all terms and terminology needed for administering the swap including
the notional principal, fixed coupon, accrual, day counting method, effective date, end
date, cash flow frequency, compounding rate and floating index basis. In addition, the
swap agreement sets forth the terms and conditions of the swap.
A rate swap can be either set for floating (usually), or for floating (often referred to as a
basis swap). To sum up, each step of the swap (using the relevant interest rate curve),
and then aggregating the two findings, is charged to price an interest rate swap.
 Commodity Swap
A product exchange is an exchange in which one of the commodity payment streams is
fixed and the other floats. Usually only payment streams are swapped, not the principal,
although actual delivery is becoming more frequent.
Since the mid-1970s, commodity swaps exist and allow producers and consumers to hedge
prices for commodity products. In general, the consumer would pay for growing input
prices as a fixed payer. In this situation, the manufacturer is paying floating (that is,
obtaining the product) therefore preventing falling commodity prices. The difference will
be paid by the floating payer if the price of the floating commodity is higher than the fixed
price.
 Foreign-Exchange (FX) Swaps
An FX swap is where cash flows from one leg are paid in one currency, while cash flows
in another currency are paid from the other. A FX exchange may either be fixed for
floating, floating or fixed for floating. To price an FX swap, each leg in its currency is
valued first (using the appropriate curve for the currency).
 Total Return Swap
Total Return Swap (TRS) is a bilateral financial contract where one counterparty pays the
complete return of the asset in exchange, including all payments of interest and capital
appreciation, or depreciation, for regular fixed or fluctuation cash flows. The main
baseline assets for full return swaps are corporate bonds, loans and stocks. A complete
return swap may be paid before the end date only or sometimes, e.g., quarterly.
Uses of Swap:
1. Create liabilities or assets, whether synthetic fixed or floating,
2. To hedge against adverse movements,
3. As an asset liability management tool,
4. 4. Reduce the cost of financing through the use of the comparative benefits in
fixed/floating rate markets for each counterparty.
1.2.2 Risk involved in Derivatives
Market, counterparty, liquidity, and interconnectivity are the main risk associated with
trading derivatives. Derivatives are investment instruments consisting of a contract
between parties whose value stems from the value of a financial asset underlying it and
depends on that value. Futures, options, differential contracts or CFDs and swaps are
among the most often traded derivatives.
 Market Risk
Market risk in any investment refers to the general risk. Investors are taking the
judgments and positions on assumptions, technical analyses or other variables that
lead to specific conclusions about the performance of the investment. The probability
of an investment being profitable and the risk/reward proportion of the potential losses
as compared to potential gains are important parts of investment analysis.
 Counterparty Risk
The counterparty risk or counterparty credit risk emerges when a default in the
contract occurs in one of the parties participating in the trade in derivatives, such as
the buyer, seller or dealer. In over-the-counter markets or OTCs, that are significantly
less regulated than common trading exchanges, this danger is larger.
 Liquidity Risk
Investors that plan to exit a derivative business before maturity are at a
liquidity risk. These investors have to assess if the deal is difficult to close out or
whether existing tender spreads are so high that they are costly.
1.3 Market Participants and Makers
Three sorts of market players – hedgers, traders (sometimes called speculators) and
arbitrators – generally occur. In various market settings an individual might play
different roles. You can check for one of the following:
• Banks
• Producers/ Corporations/ Traders/ Farmers
• Financial Institutions like Insurance companies, Investment Banks,
Merchant Banks
• Exporters and Importers
• Individuals
• Governments: National, State, Local
1.3.1 Hedgers
They confront the risk of the underlying asset values and employ derivatives in order
to lower their risk. Corporations, organizations and banks all hedge or lower market
factors including interest rates, equity values, bond prices, exchange rates and
commodity prices via derivatives products.
For example, farmers that plant wheat do not know how much they will receive
during the season of harvest. Similarly, the price of the flour mill for the future wheat
is uncertain. Both the farmer and the meal would conclude an advance tender in which
the farmer would agree to sell his wheat at a predetermined price to the flour mill.
During the harvest season, the farmer expects a decrease in prices and the farmer
expects a price gain. Both parties are therefore exposed to price risk. The forward
contract they concluded would eliminate the pricing risk for both parties. The players
are referred to as hedging and as hedgers.
With the delivery of the indicated assets, the hedgers wish to conclude the contract.
The farmers delivering the wheat to the flour meal on the specified day and the agreed
price would conclude the contract in the scenario stated.
1.3.2 Speculators
They attempt to anticipate future price movements of the underlying assets and take
positions in derivative agreements, depending on their perspective. Derivatives are
chosen over underlying assets for speculation because they give leverage, are less
costly (transaction costs are often less than the underlying cost) and may be
implemented in magnitude faster (high volumes market).
For example, for a contract which expires in three months, the forward price in US
dollars is Rs. 73. If the speculator thinks that the US currency price will be Rs 75
three months hence, he/she will purchase and sell later today. Instead, he would sell
now and purchase afterwards if he feels that in one month, he will devalue the US
currency in Rs. 71. The aim is not to provide the emphasis but instead to make a profit
from the price difference. Speculators make the market liquid, competitive markets
and market size increase. It also helps hedgers to conveniently discover opposing
parties.
1.3.3 Arbitrageurs
Arbitrage is an agreement that makes profit by taking advantage of a price
discrepancy in a product in two separate marketplaces. Arbitrage comes when a trader
bought a property from one place cheaply and arranged at the same time to sell it to
another place at a higher price. Such possibilities will probably not last for a long time
as arbitrators will rush to such transactions and therefore close the price disparity at
various sites.
For example, if the Infosys share price is Rs. 1410/- on the National Stock Exchange
and Rs. 1430/- the arbitrators will purchase Rs. 20/- each share at the NSE and
concurrently sell the BSE at the BSE. An arbitrator is risk-neutral and makes
imperfect gains in markets. These brief life chances are taken into consideration since
these defects are incredibly short life.
The speculators and arbitrators are fundamentally inside the same group as they do
not possess, disavow or physically deliver the underlying asset like hedgers. Both
make the market competitive by helping people find prices there. The difference is the
amount of risk they take between the two groups. While speculators have their ideas
on the future price of the highlighted asset, the arbitrators focus on the price
difference across multiple marketplaces, adopting a riskless position without investing
themselves.
1.4 Regulation and its structure
1.4.1 Reserve Bank of India

Reserve Bank of India (RBI) was established in 1935 and is the Central / Federal bank
of India. The Reserve Bank of India (RBI) is the financial and banking system's
regulator, formulating monetary policy and enforcing foreign exchange control
standards. A broad sector of financial institutions, which include commercial banks,
cooperative banks, non-bank financial institutions and numerous financial markets, is
regulated by the Reserve Bank of India.
On April 20, 2007, the RBI announced extensive rules on the use of foreign currency
futures, swaps, and options in the OTC market in order to help companies manage
currency market volatility. At the same time, the RBI formed an internal working
group to investigate the benefits of introducing currency futures.
The Terms of Reference to the Committee were as under:
1. To coordinate the regulatory roles of RBI and SEBI in regard to trading of

Currency and Interest Rate Futures on the Exchanges.
2. To suggest the eligibility norms for existing and new Exchanges for Currency
and Interest Rate Futures trading.
3. To suggest eligibility criteria for the members of such exchanges.
4. To review product design, margin requirements and other risk mitigation

measures on an ongoing basis
5. To suggest surveillance mechanism and dissemination of market information.
6. To consider microstructure issues, in the overall interest of financial stability.
1.4.2 Securities and Exchange Board of India
SEBI Act, 1992 provides for establishment of Securities and Exchange Board of India
(SEBI) with statutory powers for (a) protecting the interests of investors in securities
(b) promoting the development of the securities market and (c) regulating the
securities market. Its regulatory jurisdiction extends over corporate in the issuance of
capital and transfer of securities, in addition to all intermediaries and persons
associated with securities market.
1.5 Growth of Derivative Market in India
In India, derivatives markets have been functioning since the nineteenth century, with
organized trading in cotton through the establishment of the Cotton Trade Association
in 1875. Derivatives, as exchange traded financial instruments were introduced in India
in June 2000. The National Stock Exchange (NSE) and Bombay Stock Exchange
(BSE) are the largest exchanges in India in derivatives trading. The first derivative
contract in India was launched on NSE was the Nifty 50 index futures contract. The
equity derivatives segment in India is called the Futures & Options Segment or F&O
Segment. A series of reforms in the financial markets paved way for the development
of exchange-traded equity derivatives markets in India. L.C. Gupta Committee, set up
by the Securities and Exchange Board of India (SEBI), recommended a phased
introduction of derivatives instruments with self-regulation by exchanges, with SEBI
providing the overall regulatory and supervisory role. In 1999, the Securities Contracts
(Regulation) Act of 1956, or SC(R) A, was amended so that derivatives could be
declared as “securities”. This allowed the regulatory framework for trading securities
to be extended to derivatives. The Act considers derivatives on equities to be legal and
valid, but only if they are traded on exchanges. At present, the equity derivatives
market is the most active derivatives market in India. Trading volumes in equity
derivatives are, on an average more than three and a half times the trading volumes in
the cash equity markets.
Milestones in the Development of Indian Derivative Market

Derivatives trading commenced in India in June 2000 after SEBI granted the final
approval to this effect in May 2000. SEBI permitted the derivative segments of two
stock exchanges, NSE and BSE, and their clearing house/corporation to commence
trading and settlement in approved derivative contracts. The trading in index options
commenced in June 2001 and those in options on individual securities commenced in
July 2001. Futures contracts on individual stock were launched in November 2001.
Table shows the sequence of events in the development of derivative market in India.
Date Milestone Achieved
December,1995 NSE asked SEBI for permission to trade index futures

SEBI setup L.C.Gupta Committee to draft a policy
November,1996 framework for index futures.
May,1998 L. C. Gupta Committee submitted report.

RBI gave permission for OTC forward rate agreements
July,1999 (FRAs) and interest rate swaps
SIMEX chose Nifty for trading futures and options on an
May,2000 Indian index.
SEBI gave permission to NSE and BSE to do index futures
May,2000 trading.
June,2000 Trading of BSE Sensex futures commenced at BSE.
June,2000 Trading of Nifty futures commenced at NSE.

Trading of futures and options on Nifty to commence at
August,2000 SIMEX.
Trading of Equity Index Options at NSE

June,2001
Trading in BSE SENSEX options commenced
July,2001 Trading of Stock Options at NSE
November,2002 Trading of Single Stock futures at BSE
June,2003 Trading of Interest Rate Futures at NSE
September,2004 Weekly Options at BSE
January,2008 Trading of Mini Sensex at BSE
January,2008 Trading of Mini Index Futures & Options at NSE
August,2008 Trading of Currency Futures at NSE
October,2008 Trading of Currency Futures at BSE
August,2009 Interest rate derivatives trading commences on the NSE
February,2010 Launch of Currency Futures on additional currency pairs
October,2010 Introduction of European style Stock Options
October,2010 Introduction of Currency Options
September,2015 Subsequent to the passing of the Finance Act 2015, Forward

market commission (FMC) was merged with SEBI.
Source: Compiled from the BSE and NSE Fact Book.
India become largest derivative market by volume

India’s National stock exchange has surpassed America’s CME Group Inc. to become the
world’s largest derivatives bourse by volume. Mumbai-based NSE traded the most contract
in the world in 2019, the exchange said in a statement, citing data from the Future Association.
Volume on the Indian Exchange grew 58% to about 6 billion derivatives contracts in 2019,
Exchange 2019 Volume (Billion Contracts)
NSE 5.96
CME GROUP 4.83
B3 3.88
Intercontinental Exchange 2.26
Eurex 1.95
surpassing CME’s 4.83 billion, according to the FIA’s website.
1.6 Future of Derivative market in India
The FO segment increased from 72,392.07 crores to 6,78,588.45 crores between 2010 and
2018. The average daily turnover in 2012-13 was 21,705.62 crores, which fell to 16,444.73
crores and 12,705.49 crores in 2014 and 2015. Following that, it steadily grew from 2016,
2017 to 2018, reaching a high of 20,759.63 cr.
These numbers suggest that the derivatives market, as well as investors, are on the rise. It's
a huge increase and a positive indicator for the Indian economy.
The volume of trading in derivative products on the National Stock Exchange (NSE) are
indicated in the tables below:
Trends in FII Derivative Trades – May 27, 2021
Daily Trends in FPI Derivative Trades on 27-May-2021

Open Interest at
Buy Sell
Derivative the
Products end of the date.
No. of Amount No. of Amount No. of Amount
Contracts in Crore Contracts in Crore Contracts in Crore
Index
77287 7902.37 64855 6612.78 158612 17225.57
Futures
Index
4566032 429957.13 4522476 425730.62 1339240 140093.2
Options
7
Stock
393162 30237.51 402438 30943.92 1450174 111882.6
Futures
6
Stock
173552 14001.32 173478 14057.57 215388 16750.27
Options
Interest
Rate 0.00 0.00 0.00 0.00 0.00 0.00
Futures
The above report is compiled on the basis of reports submitted to depositories by NSE and
BSE on 27-May-2021 and constitutes FPIs/FIIs trading / position of the previous trading day.
Source: www.fpi.nsdl.co.in
This the traded volume of the derivatives in India on 27th May 2021 as of the previous volumes
the derivative market in India is continuously growing. India is becoming the largest traded volume
in derivative market in the year 2019 as well. This shows a positive trend as well that in coming
years the derivative market will grow faster as expected.
CHAPTER 2
REVIEW OF LITERATURE
Review of Literature
Ashutosh Vashishtha & Satish Kumar, examines that derivative turnover has
grown from 2365 crores in 2000-01 to Rs11010482 crores, within a short span of
eight years derivative trading in India has surpassed cash segment in terms of volume
and turnovers.
Dr. Himanshu Barot & Dr. Nilesh B. Gajjar, examines that derivative products
serve the extremely important economic functions of price discovery as well as risk
management. The analysis done in research paper, 25.58%, 9% and 33.35% of
compounding annual growth in terms of institutional investors, retail investors and
proprietary investors respectively, which indicates that proprietary investors are
participating more in equity derivatives market followed by institutional and retail
investors. However, in proprietary and institutional investors‟ percentage share in
total turnover increased whereas in retail investors it decreased.
Dr. Priyanka Saroha & Dr. S.K.S. Yadav, examines that derivatives help in
efficient capital allocation in the economy; at the same time their misuse also poses a
threat to the stability of the financial sector and the overall economy. Also, this paper
presents accounts of the major developments in the Indian commodity, exchange rate
and financial derivatives markets, and outlines the regulatory provisions that have
been introduced to minimize misuse of derivatives.
Shree Bhagwat, Ritesh Omre & Deepak Chand, have presented that the Launch of
equity derivatives in Indian market has been extremely encouraging and successful. It
has surpassed the growth of its counterpart globally. Research sates that global
financial crisis has proved to be a structural break in the financial derivative segment
of NSE & BSE through turnover structure. Also shift in investor’s obsession from
Single Stock Futures contracts to Index Option contracts.
Jency S, has studied the rising trends in Indian financial market. Also states that
innovation and reforms have added value to technology, system & reduced cost of
capital. The change in operational and systematic risk management parameters,
settlement system, disclosures, accounting standards are studied along with their
parity with global standards.
Pankaj Tiwari, attempts to deals with the concept, definition, appearance and
types of banking derivatives initially. After that he, have displayed heat of
advancement of derivative market, adjustment & action development of market.
At last, he has discussed cachet of all-around derivatives bazaar adverse Indian
derivatives market.
2.1 Development of Financial Derivatives Market in India- A Case Study.

By: - Ashutosh Vashishtha & Satish Kumar
Innovation of derivatives have redefined and revolutionized the landscape of financial

industry across the world and derivatives have earned a well-deserved and extremely
significant place among all the financial products. Derivatives are risk management
tool that help in effective management of risk by various stakeholders. Derivatives
provide an opportunity to transfer risk, from the one who wish to avoid it; to one, who
wish to accept it. India’s experience with the launch of equity derivatives market has
been extremely encouraging and successful. The derivatives turnover on the NSE has
surpassed the equity market turnover. Significantly, its growth in the recent years has
surpassed the growth of its counterpart globally.
The turnover of derivatives on the NSE increased in 2007-08. India is one of the most
successful developing countries in terms of a vibrant market for exchange-traded
derivatives. This reiterates the strengths of the modern development of India’s
securities markets, which are based on nationwide market access, anonymous safe and
secure electronic trading, and a predominantly retail market.
2.2 Role and Growth of Financial Derivative in the Indian Capital Market.
By: - Dr. Himanshu Barot & Dr. Nilesh B. Gajjar
Derivatives products serve the extremely important economic functions of price

discovery as well as risk management. The transparency, which emerges from their
trading mechanism, ensures the price discovery in the underlying market. Further,
they serve as risk management tools by facilitating the trading of risks among the
market participants.
The analysis done in research paper, 25.58%, 9% and 33.35% of compounding annual
growth in terms of institutional investors, retail investors and proprietary investors
respectively, which indicates that proprietary investors are participating more in equity
derivatives market followed by institutional and retail investors. However, in proprietary
and institutional investors‟ percentage share in total turnover increased whereas in
retail investors it decreased. But as a logical step to the derivatives segment
progress in the Indian capital market, this segment presents wide opportunity to
the investors to get better return with hedge the portfolio and equipped to become
a dominant player in the market.
2.3 Derivative market in India: Prospects & Issues.
By: - Dr. Priyanka Saroha & Dr. S.K.S. Yadav
Derivatives products provide certain important economic benefits such as risk

management or redistribution of risk away from risk-averse investors towards those
more willing and able to bear risk. Derivatives also help price discovery, i.e., the
process of determining the price level for any asset based on supply and demand.
These functions of derivatives help in efficient capital allocation in the economy.
This paper presents accounts of the major developments in the Indian commodity,
exchange rate and financial derivatives markets, and outlines the regulatory
provisions that have been introduced to minimize misuse of derivatives. In the mid-
1990s India started reviving the exchange traded commodity derivatives market and
introduced a variety of instruments in the foreign exchange derivatives market, while
exchange traded financial derivatives were introduced in 2001.
Overall, it was found from the research paper that in the early years of the equity
derivatives market there was a degree of concentration in the market and
consequent lack of width and depth across segments.
2.4 Development of Financial Derivatives Market in India and its Position in

Global Financial Crisis.
By: - Dr. Shree Bhagwat, Ritesh Omre & Deepak Chand
Financial derivatives have earned a well-deserved and extremely significant place

among all the financial instruments (products), due to innovation and
revolutionized the landscape. Derivatives are tool for managing risk. Derivatives
provide an opportunity to transfer risk from one to another. Launch of equity
derivatives in Indian market has been extremely encouraging and successful. The
growth of derivatives in the recent years has surpassed the growth of its
counterpart globally. The equity derivatives market is playing a major role in
shaping price discovery. Volatility in financial asset price, integration of financial
market internationally, sophisticated risk management tools, innovations in
financial engineering and choices at risk management strategies have been driving
the growth of financial derivatives worldwide, also in India. From paper we can
say there is big significance and contribution of derivatives to financial system.
The global financial crisis has proved to be a structural break in the financial
derivative Ssegment of NSE & BSE. As has been reflected by the analysis, the
turnover structure of NSE & BSE of India, the exchange with dominating position
in India, has shown that the derivatives trading has been a substantial & significant
component of Indian stock market. Within this segment, the investors have been
spotted with their obsession with Single Stock Futures contracts in the pre global
financial crisis period. This obsession has now been altered in the post-crisis
period.
However, the obsession is now with the Index Option contracts. However, with
such preference for Index based derivative products, studies focusing on the
interaction of derivatives trading with spot market on aspects of lead-lag
relationship, impact on liquidity, transfer of trading, etc. can now be justified to
come up with robust conclusions. Such studies have been inconclusive so far in
Indian contexts.
Nevertheless, such a skewed preference is not desirable situation for an emerging

economy like India. Reasonable mix of the derivative products should provide a
better alternative to the investors by supplementing the avenues for investment and
risk management with the growing maturity of India’s derivatives market.
2.5 Trends of Capital Market in India.

By: - Jency S
India being an emerging economy needs innovations and reforms in the financial
market. Innovation and reforms not only add value in the existing technology and
system but also lead to decrease in the cost of capital and mitigate the risk
exposure of the capital market instruments. There has been a revolutionary change
over a period of time. In fact, on almost all the operational and systematic risk
management parameters, settlement system, disclosures, accounting standards, the
Indian Capital Market is at par with the global standards. The goal of SEBI is to
make market competitive, transparent and efficient. A 96 perception is steadily
growing about the Indian Capital Market, as a dynamic market, among the
International community.
2.6 Assessing the Expansion of Financial Derivatives in India.

By :- Pankaj Tiwari
Innovation of derivatives acquire redefined and revolutionized the mural of banking

industry beyond the apple and derivatives acquire becoming an able-bodied adapted
and acutely cogent abode a part of all the banking products. Derivatives are accident
administration apparatus that advice in able administration of accident by assorted
stakeholders. Derivatives accommodate a befalling to alteration risk, from the one
who ambition to abstain it; to one, who ambition to acquire it. India’s acquaintance
with the barrage of disinterestedness derivatives bazaar has been acutely auspicious
and successful. The derivatives about-face on the NSE has surpassed the
disinterestedness bazaar turnover. Significantly, its advance in the contempt years has
surpassed the advance of its analogue globally.
India is one of the lots of acknowledged developing countries in agreement of an

active bazaar for exchange-traded derivatives. This reiterates the strengths of the
avant-garde development of India’s balance markets, which are based on civic
bazaar access, bearding safe and defended cyber banking trading, and a
predominantly retail market. There is an accretion faculty that the
disinterestedness derivatives bazaar is arena a above role in abstraction amount
discovery. Factors like added animation in banking asset prices; growing
affiliation of civic banking markets with all-embracing markets; development of
added adult accident administration tools; added choices of accident
administration strategies to bread-and-butter agents and innovations in banking
engineering, acquire been active the advance of banking derivatives common and
acquire as well fueled the advance of derivatives here, in India. There is no bigger
way to highlight the acceptation and addition of derivatives but the comments of
the longest confined Governor of Federal Reserve, Alan Greenspan: “Although the
allowances and costs of derivatives abide the accountable of active debate, the
achievement of the abridgement and the banking arrangement in contempt years
suggests that those allowances acquire materially exceeded the costs."
CHAPTER 3
RESEARCH METHODOLOGY
3.1 Purpose of Study
Since a considerable time has passed (since year 2000) after the introduction of the
derivative instruments in Indian financial system, this study attempts to know the
different types of derivatives and also to know the derivative market in India and
the future of derivatives in India as well. This study also covers the recent
developments in the derivative market taking into account the trading in past
years. Through this study I came to know the trading done in derivatives and their
use in the stock markets.
3.2 Objectives of the study

The research would involve study of how derivatives market evolved
and its growth from inception.
To know different types of Derivatives instruments.
(a) In terms of Turnover
(b) In terms of Traded Quantity
(c) In terms of No of Contracts Traded
The basic idea behind undertaking Derivatives Market project to gain
knowledge about future of derivative market.
(A) Primary Objective -
 To analyze the performance of Derivatives Trading since 2000 with special

reference to Futures & Options.
 To analyze investors perception towards investment in derivative market.
(B) Secondary Objectives -
 To understand the concept of the Derivatives and Derivative Trading.
 To know different types of Financial Derivatives.
 To know the Future of derivatives in India.
3.3 Scope of the Project
The project covers the derivatives market and its instruments. For better
understanding various strategies with different situations and actions have been
given. It includes the data collected in the recent years and also the market in the
derivatives in the recent years. This study extends to the trading of derivatives
done in the National Stock Markets.
3.4 EXECUTIVE SUMMARY
Firstly, I am briefing the current Derivative market and comparing it with it past
and about the future of the derivative market in India. Then at the last I am giving
my suggestions and recommendations.
Derivatives trading in the stock market have been a subject of enthusiasm of

research in the field of finance the most desired instruments that allow market
participants to manage risk in the modern securities trading are known as
derivatives. The derivatives are defined as the future contracts whose value
depends upon the underlying assets. If derivatives are introduced in the stock
market, the underlying asset may be anything as component of stock market like,
stock prices or market indices, interest rates, etc. The main logic behind
derivatives trading is that derivatives reduce the risk by providing an additional
channel to invest with lower trading cost and it facilitates the investors to extend
their settlement through the future contracts. It provides extra liquidity in the stock
market.
Derivatives are assets, which derive their values from an underlying asset. These
underlying assets are of various categories like
• Commodities including grains, coffee beans, etc.
• Precious metals like gold and silver.
• Foreign exchange rate.
•Bonds of different types, including medium to long-term negotiable debt

securities issued by governments, companies, etc.
• Short-term debt securities such as T-bills.
• Over-The-Counter (OTC) money market products such as loans or deposits.
• Equities
For example, a dollar forward is a derivative contract, which gives the buyer a
right & an obligation to buy dollars at some future date. The prices of the
derivatives are driven by the spot prices of these underlying assets. However, the
most important use of derivatives is in transferring market risk, called Hedging,
which is a protection against losses resulting from unforeseen price or volatility
changes. Thus, derivatives are a very important tool of risk management.
There are various derivative products traded. They are;
1. Forwards 2. Futures 3. Options, Swaps
“A Forward Contract is a transaction in which the buyer and the seller agree upon a
delivery of a specific quality and quantity of asset usually a commodity at a specified
future date. The price may be agreed on in advance or in future.”
“A Future contract is a firm contractual agreement between a buyer and seller for a
specified as on a fixed date in future. The contract price will vary according to the
market place but it is fixed when the trade is made. The contract also has a standard
specification so both parties know exactly what is being done”.
“An Options contract confers the right but not the obligation to buy (call option) or sell
(put option) a specified underlying instrument or asset at a specified price – the Strike
or Exercised price up until or a specified future date – the Expiry date. The Price is
called Premium and is paid by buyer of the option to the seller or writer of the option.”
A call option gives the holder the right to buy an underlying asset by a certain date for a
certain price. The seller is under an obligation to fulfill the contract and is paid a price
of this, which is called "the call option premium or call option price".
A put option, on the other hand gives the holder the right to sell an underlying asset by
a certain date for a certain price. The buyer is under an obligation to fulfill the contract
and is paid a price for this, which is called "the put option premium or put option
price".
“Swaps are transactions which obligates the two parties to the contract to exchange a
series of cash flows at specified intervals known as payment or settlement dates. They
can be regarded as portfolios of forward's contracts. A contract whereby two parties
agree to exchange (swap) payments, based on some notional principal amount is called
as a “SWAP‟. In case of swap, only the payment flows are exchanged and not the
principal amount”.
The future of the derivative market in India is growing rapidly as more and more
investors are investing. In the coming future the daily volume traded will record a new
high. As per the past trends as well we have seen that there is a huge growth in the
derivative market in India and in the coming years as well the trends will follow and
grow.
3.5 Methodology
The primary sources of collection of the data would be from general investors
(students, individuals working in financial market, professionals, Business
Individual).
The research would include primarily the study of existing different type of
derivative product, history of derivatives in India & Development of derivative
market.
Study the pace at which the trading in different contract’s increased whit statistical
data present at NSE, BSE & SEBI website.
Studying the investor’s perception towards derivatives trading & Derivative market.
Descriptive and Exploratory research methods are used to gather and analyze data.
Exploratory research would rely on collection of data through secondary research
such as reviewing available literature and/or data, or qualitative approaches such as
informal discussions with respondents (here brokers, investors & professionals)
Internet research methods like posting of questionnaire through Google support
would be used to reach respondent. The results of exploratory research would
provide significant insight into a given situation or concept.
3.6 Tools
The information for the research would be collected through following modes:
3.6.1 Primary Data
Primary data was collected through a structured questionnaire. The

Questionnaire was distributed through online tool using Google Forms.
3.6.2 Secondary Data
Written Material on Derivatives available in Books, on Internet and Research

Papers.
Statistical Data of derivative trading available on NSE, BSE & SEBI website.
3.6.3 Design of Questionnaire
Questionnaires were designed to seek responses from the different investor/trader in

the derivative market. It is attached as annexure.
3.6.4 Limitation of the study
The time available to conduct the study was only 2 months. Being a wide
topic, I had a limited time.
The primary data has been collected through a structured questionnaire to a
sample of ~100 investors, which may not reflect the opinion of the entire
population.
3.6.5 Measurement Techniques Used

CHI SQUARE test is used for testing the Hypothesis
3.7 Collection of Primary Data

Primary data was collected through a structured questionnaire. The questionnaire was
circulated to the Graduate and Post-Graduation students, Market Players (traders),
Investors, Businessman’s, Professional. It includes combination of selective and
scaled questions. It also includes combination of open-ended questions. Likert Scale
was used to collect responses from the respondents.
3.8 Collection of Secondary Data

Secondary data was collected through journals of NSE (Market Plus, Indian
Securities Market A Review).
Also book on topic for Derivative markets to understand different concept of
derivates.
Also, statistical data was collected form NSE, BSE, SEBI, RBI & NSDL
website.
Modules provided by NSE are used in order to understand the derivatives

products in details along with back-end process.
3.9 Hypothesis of the Study

H0: Income and investment in derivative instruments are not related.
H1: Income and investment in derivative instruments are related.
H0: Age and purpose of Investing in Derivative market are not related.
H1: Age and purpose of Investing in Derivative market are related.
H0: Risk taking Strategy and Rate of Return are no related.
H1: Risk taking Strategy and Rate of Return are related.
CHAPTER 4
DATA ANALYSIS, INTERPRETATION AND
PRESENTATION
4.1 Growth of Derivative Market through Secondary Data.
Year total No. of Total turnover Average daily turnover (in .
contract (in Cr.) Cr.)
2017-18 1896548351 163539816.12 678588.45

2016-17 1399746129 94370301.61 389959.92
2015-16 2098610395 64825834.30 267875.34
2014-15 1837041131 55606453.39 233640.56
2013-14 1284424321 38211408.05 155557.68
2012-13 1131467418 31533003.96 126638.57
2011-12 1205045464 31349731.74 125902.54
2010-11 1034212062 29248221.09 115150.48
2009-10 679293922 17663664.57 72392.07
Source: Compiled from NSE website.
800000
700000
600000
500000
400000
Series 1
300000
200000
100000
2017-18 2016-17 2015-16 2014-15 2013-14 2012-13 2011-12 2010-11 2009-10
The above chart depicts continuous growth in derivative market in FO segment.

From year 2010 to 2018 which increase 72392.07 cr. to 678588.45 cr. It is a
tremendous growth and good sign for Indian economy.
4.1.1 Chart showing comparison of Derivatives Contract Traded and Equity Traded
in BSE
25,000
20,000
15,000
10,000
5,000
0
4.1.2 Chart showing comparison of Derivatives Turnover and Equity Turnover in

BSE
2,000,000.00
1,500,000.00
1,000,000.00
500,000.00
0.00
Total Derivative Turnover in (Rs. Ten Thousand) Total Equity Turnover in (Rs. Ten Thousand)
The above charts represent the Turnover & Contracts traded at BSE exchange. From the chart we are
able to see that there is high increase in the volume of the contract traded in exchange from 1.43Lakh
in 2003-04 to 4300.58 Lakh in 2017-18(till November 23rd). Also, there was a new high where
8,166.88 Lakh contracts were traded in year 2014-15and saw an increase of 139%. The amount of
turnover is also increased by 13% averagely.
The above Chart represent that there is steady increase in Volume and contracts traded at BSE
exchange.
4.1.3 Chart showing comparison of Derivatives Contract Traded and Equity Traded in
NSE
30,000
25,000
20,000
15,000
10,000
5,000
0
4.1.4 Chart showing comparison of Derivatives Turnover and Equity Turnover in

NSE
1,200
1,000
800
600
400
200
0
The above charts represent the Turnover & Contracts traded at NSE exchange. From
the chart we are able to see that there is high increase in the volume of the contract
traded in exchange from 90580 in 2000-01 to 163.39 crore in 2017-18(till November
23rd). Also, there was a new high where 277.22 crore contracts were traded in year
2015-16 and saw an increase of 19.61%YoY. The amount of turnover is also
increased by 319% averagely, as there is a steep rise in turnover from year 2008-09.
The above Chart represent that there is steady increase in Volume and contracts
traded at NSE exchange with tremendous growth in trading.
4.2 Analyzing Investor’s views towards Derivatives Products through Primary
Data.
This part includes the study of the responses received for the questioner circulated
among the respondent. It gives a view on the responses received from the respondents
(sample of the population) about their perception on Derivative Market.
1. Gender Participation in Research Data Collection.
Gender Frequency Percent

Female 09 7.76%
Male 107 92.24%
Grand Total 116 100.00%
Frequency
8%
Female
Male
92%
Interpretation: From the questionnaire it is observed that 92% of the respondents are
Male and 8% of them are Female.
2. Occupation of the respondents
Occupation Frequency Percent

Business Frequency 19 16.38%
Professional 17 14.66%
Salaried 69 59.48%
Student 9% 16% 11 Business 9.48%
Professional
Grand Total 116 Salaried 100.00%
15% Student
59%
Interpretation: From the questionnaire it is observed that 92% of the respondents are
Male and 8% of them are Female.
3. Annual Income of the respondents
Income Slab Frequency Percent

Up to Rs. 1 lac 15 12.93%
Rs. 1 lacs to Rs. 5 lacs 33 28.45%
Rs. 5 lacs to Rs. 10 lacs 30 25.86%
Rs. 10 lacs Rs. 15 lacs 13 11.21%
Rs. 15 lacs Rs. 25 lacs 13 11.21%
Above Rs. 25 lacs 12 10.34%
Frequency
Up to Rs. 1 lac Rs. 1 lacs to Rs. 5 lacs Rs. 5 lacs to Rs. 10 lacs
Rs. 10 lacs Rs. 15 lacs Rs. 15 lacs Rs. 25 lacs Above Rs. 25 lacs
Interpretation: 13% of the respondents have annual income of up to Rs.1 Lacs, were as
respondents having income above from l lacs to 5 lacs are 29%, between 5 lacs to 10
Lac are 26%, between 10 lacs to 15 Lac & between 15 lacs to 25 Lac are 11% each
& Above 25 Lacs are 10%.
It states that majority of respondent income is between Rs.1 lac to Rs.10 lacs accounting
to 54% to total population.
4. Respondent’s Preferred period of investment
Term Frequency Percent

Long Term (More than 5 years) 48 41.38%
Medium Term ( 1-5 years) 52 44.83%
Short Term (Less than 1 year) 16 13.79%
Frequency
14%
Long Term (More than 5
years)
41% Medium Term ( 1-5 years)
Short Term (Less than 1 year)
45%
Interpretation: 45% of the respondents have Medium Term (1 year to 5 year)

preference of period of investment, where 41% of the respondents have Long Term
(More than 5 year) preference of period of investment & only 14% prefer Short term
that is less than 1 year.
This denotes that respondents prefer investing their money for more than 1 year.
5. Respondent of Total sample invest in Derivative Markets
Frequency Percent
Yes 43 37.07%
Do not invest due to lack of knowledge of derivatives 28 24.14%
Do not invest since I consider investing in derivatives is risky 45 38.79%
Yes
Do not invest due to lack of knowledge of derivatives
Do not invest since I consider investing in derivatives is risky
Interpretation: The above chart represents the total percentage of sample who invests
in derivative market. From the sample 37% respondent invest in derivative market,
where 63% do not. From 63% of respondent 24% do not invest in derivatives
because of lack of knowledge & others 39% do not because they find derivative
risky.
6. Age of the respondents Trading in Derivative Markets
Age Frequency Percent

18 - 25 Years 13 30.23%
26 - 35 Years 15 34.88%
36 - 45 Years 7 16.28%
45 - 60 Years 8 18.60%
Above 60 Years 0 0.0%
Frequency
18 - 25 Years 26 - 35 Years 36 - 45 Years

45 - 60 Years Above 60 Years
Interpretation: 30.23% of the respondents fall under the age category of 18–25 years,
34.88% of them fall under 26-35 years were as 16.28% of the respondents are
between the age category of 36-45 years and 18.60% of the respondents are Between
the age group of 45 – 60 years.
This shows that the participation of young people ageing between 18 to 35 years is
highest and makes up 65.12% of the total population investing in Derivatives.
7. Respondents preferred Risk Taking strategy in Derivative market

Pattern Frequency Percent
High Risk 5 11.63%
Low Risk 5 11.63%
Moderate Risk 33 76.74%
Frequency
12% High Risk

Low Risk
12%
Moderate Risk
77%
Interpretation:
77% of the
respondent who
invest in derivative approach for Moderate risk-taking strategy. Whereas 11% & 12
% of respondent approach for High risk and Low risk respectively.
8. Risk which is of most concern in the equity derivative market to
respondents.
Risk Frequency Percent
Behavioral 1 2.33%
Legal Risk 1 2.33%
Liquidity Risk 2 4.65%
Market Risk/Price risk/Potential Loss Risk 31 72.09%
Settlement risk 1 2.33%
Systematic risk 7 16.28%
Frequency
Behavioral Legal Risk

Liquidity Risk Market Risk/Price risk/Potential Loss Risk
Settlement risk Systematic risk
Interpretation: 72% of the respondents who invest in derivative find Market Risk as
concerning. 16% of the respondent who invest in derivative find Systematic Risk
concerning. Other risk account for 12 % which concern respondents who invest in
derivative market.
9. Derivative Trading has resulted in exposure to high risk.

Frequency Percent
Agree 17 39.53%
Disagree 5 11.63%
Neutral 13 30.23%
Strongly agree 7 16.28%
Strongly disagree 1 2.33%
Interpretation: 24 respondents have agreed that Derivative Trading has resulted in

exposure to high risk, where 13 have neutral view about it, and 6 have disagreed to it.
So, it can be understood that as per chart that Derivative Trading has resulted in
exposure to high risk.
10. Characterizing respondent trading activity in the equity derivatives
segment.
Trading Activity Frequency Percent
Arbitrage 3 6.98%
Hedging 11 25.58%
Speculation 28 65.12%
Strategy Trading 1 2.33%
Frequency
Strategy Trading
Arbitrage
Hedging
Speculation
Interpretation: 65.00% (28 respondents) are using derivative for speculative purpose
where as 25.58% (11 respondents) are using it for hedging purpose.
This makes sure that the derivatives products are used for speculative or hedging
purpose, where arbitraging is done at relatively low level.
11. Respondent preference to the type product in Equity Derivatives.
Product Frequency Percent

Currency forwards 1
Frequency 2.33%
Index Futures 19 44.19%
Stock Options
Index Options 28 65.12%
StockStock
Futures
Futures 19 44.19%
Stock Options 22 51.16%
Index Options
Index Futures
Currency forwards
0 5 10 15 20 25 30
Interpretation: Among 43 respondents who invest in derivatives 1 respondent invest in
Currency Forwards Contracts, 22 respondents invest in Stock Option Contracts, 19
respondents invest in Stock Future Contracts, 28 respondents invest in Index Option
Contracts, 19 respondents invest in Index Future Contracts.
The most famous products where investors invest are Index Option Contracts, Stock
Option Contracts, Index Future Contracts & Stock Future Contracts.
4.3 Hypothesis Testing
4.3.1 Comparing Income and Investment in Derivative market.
H0: Income and investment in derivative instruments are not related.

H1: Income and investment in derivative instruments are related.
Annual Income of Respondent * Type of product in Equity Derivatives respondent

invest.
Type of product in Equity Derivatives respondent invests.

COUNT Currency Index Index Stock Stock
forwards Futures Options Futures Options Total
up to 0 10 0 2 1 13
Rs. 1 lac
Rs. 1 lac
to Rs. 5 0 13 5 1 1 20
lacs
Rs. 5
lacs to 0 15 7 2 1 25
Rs.
Annual
10 lacs
Income of
Rs. 1 lac
Respondent
to Rs. 1 0 4 2 0 7
15 lacs
Rs. 15
lac to 0 15 0 1 1 17
Rs. 25
lacs
Above
Rs. 25 0 4 1 0 2 7
Lacs
1 57 17 8 6 89
Total
Chi-square: 41.321
degrees of freedom: 20
p-value: 0.00338716
The value of chi-squared statistic is 41.321. The chi-squared statistic has 10 degree of
freedom. The p value (.003) is less than 0.05. Hence there is significant relationship
between income and investment in different type of derivative instruments.
4.3.2 Comparing Age and purpose of Investing in Derivative market
H0: Age and purpose of Investing in Derivative market are not related.
H1: Age and purpose of Investing in Derivative market are related.
Age of Respondent * Purpose of Investing in Derivative market
Purpose of Investing in Derivative market

Count Grand
Arbitrage Hedging Speculation Strategy
Total
18 - 25
2 5 6 0 13
Years
26 - 35
0 2 13 0 15
Age of Years
Respondent 36 - 45
0 2 5 0 7
Years
45 - 60
1 2 4 1 8
Years
Grand Total 3 11 28 1 43
Chi-square: 11.436
p-value: 0.247
freedom. The p value (.247) is more than 0.05. Hence there is not a significant relationship
between age and purpose of Investing in Derivative market.
4.3.3. Comparing Risk taking Strategy and Rate of Return
H0: Risk taking Strategy and Rate of Return are no related.
H1: Risk taking Strategy and Rate of Return are related.
Risk taking Strategy * Rate of Returns
Respondents preferred Risk Taking strategy in

Derivative market
Count
High Low Grand
Moderate Risk
Risk Risk Total
Less than 12% 0 1 2 3
Rate of 12% - 24% 2 1 26 29
Return 24% - 36% 1 2 3 6
36% & above 2 1 2 5
Grand Total 5 5 33 43
Chi-square: 12.225
p-value: 0.057
freedom. The p value (0.057) is more than 0.05. Hence there is marginal significant
relationship between Rate of Return and Preferred risk-taking strategy in Derivative
market.
CHAPTER 5
FINDINGS & RECOMMENDATIONS
5. FINDINGS & RECOMMENDATIONS
Finding for Growth of Derivative Market in India

There is substantial growth in the turnover and contract traded in NSE and
BSE, which represent the tremendous growth in Derivative trading in India.
Also, the view of respondent is that the derivative market has grown at fast
pace from year 2003.
Finding for Investors Perception on Derivative Market in India
92.24% of the respondents are Male and 7.76% of them are Female.
54% of respondent fall under age group of 18-35.

37% respondent invests in derivative market, where 63% do not. From 63%
of respondent 24% do not invest in derivatives because of lack of knowledge
& others 39% do not because they find derivative risky.
33% respondent investing in Derivative Market are from the age group of 26-
35 years & 31% from 18-25 years age group.
Investors prefer moderate risk-taking strategy while investing in Derivatives.
Market Risk/Price risk/Potential Loss Risk concerns the investor most.
Investor prefers to invest in Equity & Index Contract, then commodity or

currency contracts.
Index Options are the preferred by investor in order to trade in Derivative
Markets following by Stocks Options.
Investors prefer contracts expiring in 1 month than going for far maturity date
contracts.
56% of respondents believe that Derivative Trading has resulted in exposure to
high risk.
Majority of Respondent’s state’s that they trade in derivatives for speculation

purpose.
Inadequate understanding on the Use of derivative instruments is the factor
that can lead to financial crises as per views of respondent.
Hypothesis test shown that there is relationship Income and Investment in

Derivative market, Risk taking Strategy and Rate of Return. Whereas, there is
not a significant relationship between age and purpose of Investing in Derivative
market.
Recommendations
Knowledge needs to be spread concerning the risk and return of derivative

market.
Investors should have knowledge of technical analysis, especially 5 Day

moving averages as derivatives trading is for a short period of time Investors
should analysis their script with the help of 5 Day moving average before
making their trades.
Investors „portfolio should only consist of 15 – 20% Derivatives contracts or
scripts.
As derivatives trading is very risky investors should have only a small portion
of their portfolio consisting of derivatives.
SEBI should conduct seminars regarding the use of derivatives to educate
individual investors.
As FII play a prominent role in Derivatives trading, an individual investor
should keep himself updated with various economic trends, government
policies, company & industry announcements.
CHAPTER 6
Bibliography
BIBLIOGRAPHY
Websites
www.nse-india.com
www.bseindia.com
www.sebi.gov.in
www.moneycontrol.com
www.rbi.org.in
Research Paper
Ashutosh Vashishtha and Satish Kumar “Development of Financial

Derivatives Market in India- A Case Study”
Dr. Himanshu Barot 'Role and Growth of Financial Derivative'
Dr. Priyanka Saroha 'Derivative market in India Prospects Issues'
Dr. Shree Bhagwat1, Ritesh Omre, Deepak Chand “Development-of-

Financial-Derivatives-Market-in-India-and-its-Position-in-Global-Financial-
Crisis”
Jency S 'Trends of Capital Market in India'
Pankaj Tiwari 'Assessing the Expansion of Financial'
Snehal Bandivadekar and Saurabh Ghosh “Derivatives and Volatility on

Indian Stock Markets”
Books & Reports
Market Plus (NSE monthly Report)
Indian Security Market A Review

Option Future and other Derivatives by John C Hull
Derivatives FAQ by Ajay Shah

NCFM Modules Currency Derivatives: A Beginner's Module.
NCFM Modules Equity Derivatives: A Beginner's Module.

Financial Markets & Services by Gordan & Natrajan.
“Investment Analysis and Portfolio Management”, Second Edition- Prasanna

Chandra
NSE Annual Report 2019-2020.
CHAPTER 7
ANNEXURE ( QUESTIONER)
ANNEXURE
I am conducting a survey to study viewpoint of respondent on Derivatives market in

India. Please help me by filling this questioner. This survey includes some basic
question about your investment perspective and investment pattern in derivative market.
This survey will not take more than 10 minutes of you valuable time. Your responses
will be kept confidential, & will be used only for an academic research work purpose.
Name of the Investor ________________
Q1. GENDER
 Male
 Female
Q2 Please enter the occupation details ?

 Salaried
 Professional
 Business
 Retired
Q3 What is the Annual Income Range you fall in ?

 Up to Rs. 1 Lacs
 Rs. 1,00,000 Rs. 5,00,000 Lacs
 Rs. 5,00,000 Rs. 10,00,000 Lacs
 Rs. 10,00,000 Rs.15,00,000 Lacs
 Rs. 15,00,000 Rs. 20,00,000 Lacs
 Above 25 Lacs
Q4 Preferred Period of Investment ?

 Long Term (More Than 5 Years)
 Medium Term ( 1 – 5 Years )
 Short Term ( Less Than 1 year)
Q5. Do You Invest in Derivative Markets ?

 Yes
 Do not invest since I consider investing in derivative is risky.
 Do not invest due to lack of knowledge of derivatives.
Q6 Age *
 18 - 25
 26 - 35
 36 - 45
 45 – 60
 Above 60 Years
Q7 Your preferred Risk-Taking strategy in derivative market ?
 Low Risk
 High Risk
 Moderate Risk
Q8 Which risk is most concern in the equity derivative market to you today ?
 Behavioral
 Legal Risk
 Liquidity Risk
 Market Risk / Price Risk / Potential Loss Risk
 Settlement Risk
 Systematic Risk
Q9 Derivative Trading has resulted in exposure to high risk ?
 Agree
 Disagree
 Neutral
 Strongly Agree
 Strongly Disagree
Q10 Which of the following characterizes your trading activity in the equity
derivative segment ?
 Hedging
 Speculation
 Arbitrage
 Other

Future of Derivative in India

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A Study on

Submitted in partial fulfillment of the

for the award of the degree of

Post Graduate Diploma in Financial

Under the Guidance of Submitted by

project wouldn’t had been possible at my own without any help.

2. Review of Literature 34-39

2.1 Development of Financial Derivatives Market in India- A Case

2.3 Derivative market in India: Prospects & Issues. 37

2.4 Development of Financial Derivatives Market in India and its

2.5 Trends of Capital Market in India. 38

3. Research Methodology 40-45

4. Data Analysis, Interpretation and Presentation 46-60

4.1 Analyzing Growth of Derivative Market through Secondary Data. 47

5. Findings & Recommendations 61-63

 Over the counter (OTC)

 Foreign Exchange rates

 Short term debt securities like T-bills

Prerequisites for Derivatives Market

a) Large market capitalization

b) Liquidity in the underlying

e) Risk-taking capability and Analytical skills

1.2.1 Types of Derivatives.

ii. Financial derivative

b) Types of Derivatives Products

Forwards Futur Option Swap

A forward contract is an agreement to acquire or sell an asset at a certain price on a predetermined

Basic Features of Forward Contract

Stocks, bonds, foreign currencies, commodities, or a mix of these can be used as

A forward contract is any agreement between two parties to exchange an

ii. Future Contracts

Organized Exchanges: Futures are exchanged on established exchanges with

Standardization: The quantity of commodities to be supplied and the

Marking to Market: The exchange utilizes a marking system, where all

Source: NSE Workbook.

The contract value at a particular index level. It is Index level * Multiplier.

It's a pre-determined figure that's utilized to establish the contract's size. It

It is the smallest price variation between two similar quotations.

The month in which the contract will expire.

The number of contracts traded during a particular period of time. During a

At any moment in time, you may have an outstanding/unsettled buy position.

At any given time, you may have an outstanding/unsettled sales situation.

At any time, outstanding/unsettled long or short position.

Payoff for futures:

CASE 1:- The consumers purchased the futures contract at (F);

if the price of the futures contract rises to E1, the buyer

earns a profit of (F) (FP).

Payoff for seller of futures: (short futures)

iii. Options Contracts

Categorization of Option Contracts:

Call Options Contact Put Options

Option price/Premium: It is the amount paid to the option seller by the

At the money (ATM) option: If executed immediately, the money option

Intrinsic value: The above specified premium option consists of two

Payoff for Buyer of E LOS (Long

S = Strike price ITM = In the Money

CASE 1: (Spot Price > Strike price)

CASE 2: (Spot Price < Strike Price)

Payoff for Seller of Call Option: (Short Call)

S = Strike price ITM = In the Money

CASE 2: (Spot price > Strike price)

Payoff for Buyer of Put Option: (Long Put)

CASE 1: (Spot price < Strike price)

CASE 2: (Spot price > Strike price)