You are on page 1of 5

Derivative market in India

Forwards: A forward contract is an agreement between two parties to buy or sell an asset at a specified point of time in the future. In case of a forward contract the price which is paid/ received by the parties is decided at the time of entering into contract. It is the simplest form of derivative contract mostly entered by individuals in day to day¶s life.

Futures: A futures contract is an agreement between two parties to buy or sell an Asset at a certain time in the future at a certain price. Futures contracts are special types of forward contracts in the sense that the former are standardized exchange-traded contracts. Options: Options are of two types - calls and puts. Calls give the buyer the right but not the obligation to buy a given quantity of the underlying asset, at a given price on or before a given future date. Puts give the buyer the right, but not the obligation to sell a given quantity of the underlying asset at a given price on or before a given date. Warrants: Options generally have lives of up to one year, the majority of options traded on options exchanges having a maximum maturity of nine months. Longer-dated options are called warrants and are generally traded over-the-counter.

Derivatives concepts
The term µderivatives, refers to a broad class of financial instruments which mainly include options and futures. These instruments derive their value from the price and other related variables of the underlying asset. They do not have worth of their own and derive their value from the claim they give to their owners to own some other financial assets or security. A simple example of derivative is butter, which is derivative of milk. The price of butter depends upon price of milk, which in turn depends upon the demand and supply of milk. The general definition of derivatives means to derive something from something else.


Page 1

the value of a derivative instrument depends upon the underlying asset. among so many things. As defined above. stock. precious metals exchange rates. on the present and expected price of this commodity.Derivative market in India Another example. The price of gold to be delivered after two months will depend. sitams Page 2 . short term securities. The Underlying asset may assume many forms: commodity.

in which the exchange members and other representatives assemble during a fixed trading period and execute transaction. The clearing house ensures the solvency of the members of the exchange by imposing various limits on them. (iii) Custodian/warehouse Future and option contracts do not generally result in delivery. The exchange plays an important role in the success of a derivative market. A clearing house may be a separate company or division of the exchange. sitams Page 3 . The issue of delivery may not arise in stock index futures and options. There can be separate exchanges for financial instrument and commodity/or a common exchange for both. (ii) Clearing house An clearing house the transaction executed in a futures and option exchange. The clearing house also devises a suitable margin system to condition. but they needa smooth and standard delivery mechanism to ensure the proper functioning of the market.Derivative market in India Institutional and legal frame work (i) Exchange An exchange provides buys and sellers to futures and option contract the infrastructure they need to trade. It guarantees the performance of contract. This boosts the confidence of the people in the future and option exchange. In the on line trading system. In the outcry system of trading. the exchange has a trading pit. the exchange provides with real-time access to information online and also aloe them to execute their order. Transactions are conducted between members and the clearing house. which is why it is also a counter party to each contract. which are cash settled contracts.

(iv) regulatory frame work A regulator creates confidence in the market and provides a level playing filed for all concerned. the delivery of the financial assets and commodity will be a cumbersome task and the futures prices will not reflect equilibrium price for the convergence of the price and the futures price on maturity. The RBI is the regulatory authority authority for the forex and money market. In the absence of a proper custodial or warehouse. so it can take the initiative in starting futures and option trade in currency and interest rate. SEBI regulates the capital market. along with the physical market in stock. it also regulate the stock index futures. sitams Page 4 . commodity futures and option and interest rate future and option. The regulator¶s approach and outlook directly affect the strength and volume of the market. The forward market commission set up a national commodities and derivative exchange (NCDEX).Derivative market in India but it would aeries in stock futures and option.

Derivative market in India sitams Page 5 .