(FOLLOWING SHOULD BE MENTIONED ON BLACK COVER PAGE) A PROJECT REPORT ON TITLE OF THE PROJECT

SUBMITTED IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR MASTER’s DEGREE IN HUMAN RESOURCES DEVELOPMENT MANAGEMENT FOR MASTER’s DEGREE IN MARKETING MANAGEMENT FOR MASTER’s DEGREE IN FINANCIAL MANAGEMENT TO UNIVERSITY OF MUMBAI BY FULL NAME OF THE STUDENT ROLL NO. 2009-2012 UNDER THE GUIDANCE OF DR. / PROF.

LALA LAJPATRAI INSTITUTE OF MANAGEMENT MAHALAXMI, MUMBAI – 400 034

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A PROJECT REPORT ON Indian Derivative Market

SUBMITTED IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR FOR MASTER’s DEGREE IN FINANCIAL MANAGEMENT TO UNIVERSITY OF MUMBAI

BY Sangeeta Sanil 45. 2009-2012 UNDER THE GUIDANCE OF PROF. Avani Pramod

LALA LAJPATRAI INSTITUTE OF MANAGEMENT MAHALAXMI, MUMBAI – 400 034

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DECLARATION I hereby declare that this dissertation submitted in partial fulfilment of the requirement for the award of MASTER’s DEGREE IN FINANCIAL MANAGEMENT(MMM/MFM/MHRDM) of the University of Mumbai is my original work and has not been submitted for award of any other degree or diploma fellowship or other similar title or prizes. I further certify that I have no objection and grant the rights to LLIM to publish any chapter or project if they deem fit in journals or magazines and newspaper etc. without my permission.

Sangeeta Sanil Kuppa CLASS: MFM III SEM I BATCH: 2009-2012 ROLL NO.:45 DATE: PLACE: MUMBAI

SIGNATURE (Sangeeta Sanil)

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/ Prof. _________ studying in the Third Year of MHRDM /MMM / MFM is doing my project work under the guidance of Dr. the undersigned Roll No. DATE SIGNATURE OF THE INTERNAL GUIDE ______________________ Signature of the Candidate __________________________ Signature of Internal Guide 4 .PROJECT GUIDE CERTIFICATE FORM I Mr. NO. /Ms. (Full Name of the Student). ___________________________ wish to state that I have met my internal guide on the following dates mentioned below for Project Guidance:- SR.

diploma fellowship or other similar titles or prizes. LLIM) --------------------------Dr. The work has also not been published in any scientific journals/ magazines. Angadi (Director.Certificate This is to certify that the dissertation submitted in partial fulfillment of the requirement for the award of MHRDM /MMM / MFM of the University of Mumbai is a result of the bonafide work carried out by Ms. No part of this report has been submitted for award of any other degree.: -----------------------------Dr. DATE: 08th October 2011 PLACE: MUMBAI NAME: ROLL NO. /Prof __________ (Project Guide) 5 . / Mr. B._________________________ under my supervision and guidance. V.

I am thankful to all those who indirectly extended their co-operation and invaluable support to me. I am extremely thankful t him/her or his/her s o f upport. / e. Last but not the least. s I also express my profound gratitude to Dr. siblings nd all those friends who have rds a willingly and with utmost commitment helped me during the cour e of my project work. Angadi. Director of Lala Lajpatrai Institute of Management for givi g me t e opportunity to work on th project and br aden my knowledge and n h e o experience.ACKNOWLEDGEMENT This project has been a great learning experience for m I take thi opportunity to t ank Dr. Arati Kale for her valuable guidance and advice in completing this project. My sincere thanks to Prof. Avani Pramod. I express my heart-felt gratitude towa my parents. 6 . I would like to t ank all the professors and the staff of la Lajpatrai Institute especially the h La Library staff who were ver y helpful in providing books and articles I needed for my project. s h Prof. He/She has encouraged me and channelized my enthusiasm effectively. m internal projectguide whose valuable guid y ance & suggestions made this project possible.

With over 25 million shareholders. The main logic 7 . I am also giving brief data about foreign market. interest rates.5% percent every twelve months and was over US$ 834 billion as of January.4 billion. Over 7500 companies are listed on the Indian stock exchanges (more than the number of companies listed in developed markets of Japan. 3 & 5 in the world. The derivatives are defined as the future contracts whose value depends upon the underlying assets. which. volume of trading. Then at the last I am giving my suggestions and recommendations. Total market capitalization of The Bombay Stock Exchange (BSE). transparency and its tremendous growth potential. UK. Switzerland. France.). Turnover in the Spot and Derivatives segment both in NSE & BSE was higher by 45% into 2006 as compared to 2005. the Sensex has posted excellent returns in the recent years. stock prices or market indices. With daily average volume of US $ 9. calculated by the number of daily transactions done on the exchanges. 2007. Canada and Hong Kong. Australia. as on July 31. etc. India has the third largest investor base in the world after USA and Japan. 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. Germany. India’s market capitalization was the highest among the emerging markets. the underlying asset may be anything as component of stock market like. The two major exchanges namely the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) ranked no. The Indian capital market is significant in terms of the degree of development. one of the oldest in the world. 1997. If derivatives are introduced in the stock market.EXECUTIVE SUMMARY Firstly I am briefing the current Indian market and comparing it with it past. accounts for the largest number of listed companies transacting their shares on a nationwide online trading system. The Total Turnover of Indian Financial Markets crossed US$ 2256 billion in 2006 – An increase of 82% from US $ 1237 billion in 2004 in a short span of 2 years only. was US$ 175 billion has grown by 37. Bombay Stock Exchanges (BSE).

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. which gives the buyer a right & an obligation to buy dollars at some future date. Thus. 1. derivatives are a very important tool of risk management. • Precious metals like gold and silver. which derive their values from an underlying asset. •Bonds of different types. which is a protection against losses resulting from unforeseen price or volatility changes. • Short-term debt securities such as T-bills. etc. • Foreign exchange rate. the most important use of derivatives is in transferring market risk. Futures 3. These underlying assets are of various categories like • Commodities including grains. The prices of the derivatives are driven by the spot prices of these underlying assets. It provides extra liquidity in the stock market. 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. etc. The price may be agreed on in advance or in future. There are various derivative products traded. a dollar forward is a derivative contract. called Hedging. • Over-The-Counter (OTC) money market products such as loans or deposits. They are. coffee beans. Derivatives are assets. companies.” 8 . Options 4. including medium to long-term negotiable debt securities issued by governments. However. • Equities For example. Forwards 2.

“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 an specified future date – the Expiry date. The contract also has a standard specification so both parties know exactly what is being done”.“A Future contract is a firm contractual agreement between a buyer and seller for a specified as on a fixed date in future. The seller is under an obligation to fulfill the contract and is paid a price of this. “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.” A call option gives the holder the right to buy an underlying asset by a certain date for a certain price. A put option. which is called "the put option premium or put option price". based on some notional principle amount is called as a ‘SWAP’. They can be regarded as portfolios of forward's contracts. In case of swap. The Price is called Premium and is paid by buyer of the option to the seller or writer of the option. which is called "the call option premium or call option price". The contract price will vary according to the market place but it is fixed when the trade is made. 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. A contract whereby two parties agree to exchange (swap) payments. only the payment flows are exchanged and not the principle amount” 9 .

So the person who is ready to take risk and want to gain more should invest in the derivative market. Also SEBI must encourage investment in derivative market so that the investors get the benefit out of it. SEBI should take necessary steps for improvement in Derivative Market so that more investors can invest in Derivative market. Sorry to say that today even educated persons are not willing to invest in derivative market because they have the fear of high risk. 10 . On the other hand RBI has to play an important role in derivative market. So.I had conducted this research to find out whether investing in the derivative market is beneficial or not? You will be glad to know that derivative market in India is the most booming now days.

Options and Futures are traded actively on many exchanges. more basic. Swap and different types of options are regularly traded outside exchanges by financial intuitions. there is no single market place or organized exchanges. underlying variables.INTRODUCTION A Derivative is a financial instrument whose value depends on other. banks and their corporate clients in what are termed as over-the-counter markets – in other words. Derivatives have become increasingly important in the field of finance. The variables underlying could be prices of traded securities and stock. 11 . Forward contracts. prices of gold or copper.

NEED OF THE STUDY The study has been done to know the different types of derivatives and also to know the derivative market in India. Through this study I came to know the trading done in derivatives and their use in the stock markets. This study also covers the recent developments in the derivative market taking into account the trading in past years. 12 .

especially among institutional investors. In the class of equity derivatives. However. As instruments of risk management. The financial derivatives came into spotlight in post-1970 period due to growing instability in the financial markets. by locking-in asset prices. Even small investors find these useful due to high correlation of the popular indices with various portfolios and ease of use. futures and options on stock indices have gained more popularity than on individual stocks. they accounted for about two-thirds of total transactions in derivative products. the financial markets are marked by a very high degree of volatility. Through the use of derivative products. the market for financial derivatives has grown tremendously both in terms of variety of instruments available. it is possible to partially or fully transfer price risks by locking-in asset prices. In recent years. Derivative products initially emerged. The lower costs associated with index derivatives visvis derivative products based on individual securities is another reason for their growing use. As in the present scenario. However. Derivative Trading is fast gaining momentum. futures and options. I have chosen this topic 13 . derivative products minimize the impact of fluctuations in asset prices on the profitability and cash flow situation of risk-averse investors. By their very nature. can be traced back to the willingness of risk-averse economic agents to guard themselves against uncertainties arising out of fluctuations in asset prices. who are major users of index-linked derivatives. these products have become very popular and by 1990s. since their emergence. these generally do not influence the fluctuations in the underlying asset prices. as hedging devices against fluctuations in commodity prices and commodity-linked derivatives remained the sole form of such products for almost three hundred years.LITERATURE REVIEW The emergence of the market for derivative products. their complexity and also turnover. most notably forwards.

 To know different types of Financial Derivatives  To know the role of derivatives trading in India.OBJECTIVES OF THE STUDY  To understand the concept of the Derivatives and Derivative Trading.  To analyse the performance of Derivatives Trading since 2001with special reference to Futures & Options 14 .

15 . It includes the data collected in the recent years and also the market in the derivatives in the recent years. For better understanding various strategies with different situations and actions have been given. This study extends to the trading of derivatives done in the National Stock Markets.SCOPE OF THE PROJECT The project covers the derivatives market and its instruments.

VOLATALITY: Share market is so much volatile and it is difficult to forecast anything about it whether you trade through online or offline 4. 3. 16 .LIMITAITONS OF STUDY 1. LIMITED TIME: The time available to conduct the study was only 2 months. LIMITED RESOURCES: Limited resources are available to collect the information about the commodity trading. ASPECTS COVERAGE: Some of the aspects may not be covered in my study. It being a wide topic had a limited time. 2.

gradually with the passage of time number of exchanges were increased and at currently it reached to the figure of 24 stock exchanges. Calcutta. Jaipur. Chennai. Hyderabad. and Madras (1937). popularly called the Bombay Stock Exchange. Coimbatore. the principle bourses are the National Stock Exchange and The Bombay Stock Exchange. Mumbai (The Stock Exchange). and Rajkot. 17 . they formally established in Bombay. In order to check such aberrations and promote a more orderly development of the stock market. the "Native Share and Stock Brokers' Association" (which is alternatively known as "The Stock Exchange"). the Stock Exchange at Bombay was consolidated. Thus in the same way. Mangalore. They are located at Ahmadabad. Mumbai (The Inter-connected Stock Exchange of India). As of January 2002 there were 23 stock exchanges recognized by the central Government. Its history dates back to nearly 200 years ago. Mumbai(the National Stock Exchange or NSE). Baroda. Pune.(the Madras stock Exchanges ). Delhi. Bangalore. the central government introduced a legislation called the Securities Contracts (Regulation) Act. it is mandatory on the part of stock exchanges to seek government recognition.HISTORY OF THE STOCK BROKING INDUSTRY Indian Stock Markets are one of the oldest in Asia. Mumbai (OTCExchange of India). Of course. Patna. In 1887. Kanpur. Cochin. Thus. This was followed by the formation of associations /exchanges in Ahmadabad (1894). 1956. accounting for the bulk of the business done on the Indian stock market. the Stock Exchange acquired a premise in the same street and it was inaugurated in 1899. Indore. Bhubaneswar. Calcutta (1908). Guwahati. Ludhiana. In 1895. Under this legislation.

It is the oldest one in Asia. which was established in 1878. which decides the policies and regulates the affairs of the Exchange. Mumbai. popularly known as "BSE" was established in 1875 as "The Native Share and Stock Brokers Association".BSE (BOMBAY STOCK EXCHANGE) The Stock Exchange. of India under the Securities Contracts (Regulation) Act. Unity (one third of them retire ever year by rotation). A Governing Board having 20 directors is the apex body. three SEBI nominees. 1956. six public representatives and an Executive Director & Chief Executive Officer and a Chief Operating Officer. 18 . who are from the broking comm. It is the first Stock Exchange in the Country to have obtained permanent recognition in 1956 from the Govt. even older than the Tokyo Stock Exchange. The Governing Board consists of 9 elected directors.

with trading on the Wholesale Debt Market Segment. Subsequently it launched the Capital Market Segment in November 1994 as a trading platform for equities and the Futures and Options Segment in June 2000 for various derivative instruments. 19 . It started operations in June 1994.NSE (NATIONAL STOCK EXCHANGE) NSE was incorporated in 1992 and was given recognition as a stock exchange in April 1993.

online multi-commodity market place. is all set up to introduce a state of the art. MCX has taken several initiatives for users in a new generation commodities futures market in the process.MCX (MULTI COMMODITY EXCHANGE) ‘MULTI COMMODITY EXCHANGE’ of India limited is a new order exchange with a mandate for setting up a nationwide. become the country’s premier exchange. offering unlimited growth opportunities to commodities market participants. 20 . As a true neutral market. online digital exchange for commodities futures trading in the country and has accordingly initiated several steps to translate this vision into reality. MCX. an independent and a de-mutualised exchange since inception.

banks and developers of kiosk network NCDEX is able to provide current rates and contracts rate.  NCDEX is providing attractive products like “weather derivatives” 21 . This exchange provides facilities to their trading and clearing member at different 130 centres for contract. Facilities Provided By NCDEX  NCDEX has developed facility for checking of commodity and also provides a ware house facility  By collaborating with industrial partners.  NCDEX is working with tax officer to make clear different types of sales and service taxes. industrial companies. In commodity market the main participants are speculators. news agencies.  To prepare guidelines related to special products of securitization NCDEX works with bank. 2003.  To avail farmers from risk of fluctuation in prices NCDEX provides special services for agricultural. hedgers and arbitrageurs.NCDEX (NATIONAL COMMODITIES AND DERIVATIVES EXCHANGE) NCDEX started working on 15th December.

their remaining share of stock will become increasingly valuable as the business grows. These are called stock certificates. As a Corporation. raising funds to launch the business. They pool their money or obtain loans. may issue over a billion Shares. the owners are not personally responsible or liable for any debts of the company if the company doesn't succeed.STOCK MARKET BASIC What are corporations? Companies are started by individuals or may be a small circle of people. Companies sell stock (pieces of ownership) to raise money and provide funding for the expansion and growth of the business. 22 .500 shares. Later they may choose to "incorporate". such as IBM or the Ford Motor Company. This transition from a privately held corporation to a publicly traded one is Called going public. or IPO. The business founders give up part of their ownership in exchange for this needed cash. The total number of shares will vary from one company to another. A choice is made to organize the business as a sole proprietorship where one Person or a married couple owns everything. while another. Corporations are not allowed to sell shares of stock on the open Stock market without the approval of the Securities and Exchange Commission (SEC). and each certificate represents a set number of shares. One corporation may have only 2. and this first sale of stock to the public is called an initial public offering. or as a partnership with others who may wish to invest money. as each makes its own choice about how many pieces of ownership to divide the corporation into. The expectation is that even though the owners have surrendered a portion of the company to the Public. Corporations issue official-looking sheets of paper that represent ownership of the company.

This gives you a vote at annual shareholder meetings. The corporation's board of directors choose when to declare a dividend and how much to pay. Investors take the risk of the price falling because they hope to make more money in the market than they can with safe investments such as bank CD's or government bonds. 23 . so the shares can be sold at a profit. you own part of that company. The average investor buys stock hoping that the stock's price will rise. When a company pays out profits to the shareholder. What is usually responsible for increased interest in a company's stock is the prospect of the company's sales and profits going up. Why do people invest in the stock market? When you buy stock in a corporation. The potential of a small dividend check is of little concern. and a right to a share of future profits. A company who is a leader in a hot industry will usually see its share price rise dramatically. Most older and larger companies pay a regular dividend. most newer and smaller companies do not. the money received is called a "Dividend". This will happen if more investors want to buy stock in a company than wish to sell.

An index is just a benchmark or yardstick expressed as a number that makes it possible to do this comparison. Secondary market essentially comprises of stock exchanges.g. apart from the Regional Stock 24 . The Securities Market consists of two segments. from day to day. up and down. viz. like the market cap. The price per share. debt or hybrid instruments for subscription by the public. In India. and from year to year. Primary market and Secondary market. has nothing to do with how big a company is. which provide platform for purchase and sale of securities by investors.What is a stock market index? In the stock market world. the Secondary market enables the holders of securities to trade them. For e. Primary market is the place where issuers create and issue equity. you need a way to compare the movement of the market. S&P CNX Nifty is the index of NSE and SENSEX is the index of BSE.

It is believed that India is the largest market in the world for stock futures 25 . and still higher volumes with introduction of stock options in July 2001. 4018 crore during the preceding year. All the exchanges are fully computerized and offer 100% on-line trading. There was a spurt in volumes in November 2001 when stock futures were introduced. The trading platform of the stock exchanges was accessible to 9687 members from over 400 cities on the same date. The total exchange traded derivatives witnessed a volume of Rs. While NSE accounted for about 99. Corporate Securities : The no of stock exchanges increased from 11 in 1990 to 23 now. BSE accounted for about 0.343 crore during 2002-03 as against Rs. The trading platform of stock exchanges is accessible only through brokers and trading of securities is confined only to stock exchanges.5% in 2002-03. 9644 companies were available for trading on stock exchanges at the end of March 2002. 442. there are exchanges like the National Stock Exchange (NSE) and the Over the Counter Exchange of India (OTCEI). The market witnessed higher volumes from June 2001 with introduction of index options.5% of total turnover.Exchanges established in different centres. who provide nationwide trading facilities with terminals all over the country.  Derivatives Market: Derivatives trading commenced in India in June 2000.

portfolio managers. The Central Government has notified SEBI (Stock Brokers & Sub-Brokers) Rules. 1992. The DEMAND is the number of shares investors wish to buy at exactly that same time. sell or deal in securities unless he holds a certificate of registration granted by SEBI under the Regulations made by SEBI ion relation to them. The SUPPLY is the number of shares offered for sale at anyone one moment. These rules came into effect on 20th August.  Secondary Market Intermediaries Stock brokers. 1992. If investors want a stock and are willing to pay more. 1992 in exercise of the powers conferred by section 29 of SEBI Act. 26 . is determined by all investors voting with their money. What a share of a company is worth on anyone day or at any one minute. the price will go up. share transfer agents constitute the important intermediaries in the Secondary Market. If investors are selling a stock and there aren't enough buyers. Supply and Demand A stock's price movement up and down until the end of the trading day is strictly a result of supply and demand. custodians. sub-brokers. No stockbrokers or sub-brokers shall buy. the price will go down Period.

the future rate of the foreign exchange depends upon its spot rate of exchange. at a future date depends upon the share’s current price. a reference rate etc. the underlying asset can be equity. Similarly. the future exchange rate is the derivative and the spot exchange rate is the base. derivative is not primary. which may be value of underlying asset. say share of any company. Therefore. For example: . In financial terms. and hence not independent. the current price of the share is the bases and the future value of the share is the derivative. the share is underlying asset. These basic variable are called bases. derivative means ‘something which is derived from another source’.the value of any asset.INTRODUCTION TO DERIVATIVE MARKET: According to dictionary. Here. In this case. 27 . foreign exchange. commodity or any asset. derivative is a product whose value is derived from the value of one or more basic variables.

crude oil. The quantity and quality of the asset is specified in the contract. Meaning: Derivatives are the financial contracts whose value/price is dependent on the behavior of the price of one or more basic underlying assets (often simply known as the underlying). A contract. which derives its value from the prices. made on the trading screen of stock exchanges. index. loan whether secured or unsecured. risk instrument or contract for differences or other form of security. 28 . cotton. The asset can be a share. These contracts are legally binding agreements. share. In the Indian Context the Security Contracts (Regulation) Act. sugar. The buyer of the asset will make the cash payment at the time of delivery. or index of prices of underlying securities. coffee etc. 1956 (SC(R) A) defines “derivative” to include – A security derived from a debt instrument. soybean. interest rate. bond.Derivatives are contract for future delivery of assets at price agreed at the time of the contract. to buy or sell an asset in future. rupee dollar exchange rate.

Derivatives were developed primarily to manage offset. customized NTSD TSD Futures (Standardized Options ) In financial terms derivatives is a broad term for any instrumental whose value is derived from the value of one more underlying assets such as commodities.Contracts agreement Cash Derivatives Forward Others like Swaps. FRAs etc Merchandisi ng. stocks. precious metal. forex. loans. In the context of equity markets. 29 . or hedge against risk but some were developed primarily to provide potential for high returns. etc. derivatives permit corporations and institutional Investors to effectively manage their portfolios of assets and liabilities through instrument like stock index futures. bonds. stock indices.

a spin-off of CBOT. the Chicago Board of Trade (CBOT). was formed in 1848 in the US to deal with the problem of ‘credit risk’ and to provide centralised location to negotiate forward contracts. Trading in futures began on the CBOT in the 1860’s. the Australian Dollar. Roman emperors entered forward contracts to provide the masses with their supply of Egyptian grain.11. known as the futures contracts. The first type of futures contract was called ‘to arrive at’. In 1865. a division of CME. The first formal commodities exchange. stating what is to be delivered for a fixed price at a specified place on a specified date. These contracts were also undertaken between farmers and merchants to eliminate risk arising out of uncertain future prices of grains. existed in ancient Greece and Rome. The first financial futures to emerge were the currency in 1972 in the US. the Japanese Yen. forward contracts have existed for centuries for hedging price risk. Currency futures were followed soon by interest rate futures. the German Mark. The currency futures traded on the IMM are the British Pound. was formed in 1919. Futures trading grew out of the need for hedging the price risk involved in many commercial operations. The first organized commodity exchange came into existence in the early 1700’s in Japan. HISTORY OF DERIVATIVES: The history of derivatives is quite colourful and surprisingly a lot longer than most people think. Thus. though it did exist before in 1874 under the names of ‘Chicago Produce Exchange’ (CPE) and ‘Chicago Egg and Butter Board’ (CEBB). on International Monetary Market (IMM). the Swiss Franc. The Chicago Mercantile Exchange (CME). Forward delivery contracts. the Canadian Dollar. CBOT listed the first ‘exchange traded’ derivatives contract. From ‘forward’ trading in commodities emerged the commodity ‘futures’. 1972. The first foreign currency futures were traded on May 16. and the Euro dollar. 30 .

This model helped in assessing the fair price of an option which led to an increased interest in trading of options. Merton. in 1872. These options were traded over the counter. tulip bulb prices shot up. were a symbol of affluence. There was so much speculation that people even mortgaged their homes and businesses. Stock index futures and options emerged in 1982. Tulips. Dutch growers and dealers traded in tulip bulb options. the brightly coloured flowers. the American Stock Exchange (AMEX) and the Philadelphia Stock Exchange (PHLX) began trading in options in 1975.The first of the several networks. 1975. Options on shares were available in the US on the over the counter (OTC) market only until 1973 without much knowledge of valuation. Options are as old as futures. Their history also dates back to ancient Greece and Rome. the Chicago Board options Exchange (CBOE) was set up at CBOT for the purpose of trading stock options. Agricultural commodities options were traded in the nineteenth century in England and the US. owing to a high demand. A group of firms known as Put and Call brokers and Dealer’s Association was set up in early 1900’s to provide a mechanism for bringing buyers and sellers together.Interest rate futures contracts were traded for the first time on the CBOT on October 20. The first call and put options were invented by an American financier. 1984. With the options markets becoming increasingly popular. The collapse of the Bretton Woods regime of fixed parties and the introduction of floating 31 . These speculators were wiped out when the tulip craze collapsed in 1637 as there was no mechanism to guarantee the performance of the option terms. The market for futures and options grew at a rapid pace in the eighties and nineties. The first stock index futures contracts were traded on Kansas City Board of Trade on February 24. On April 26. Russell Sage. 1982. which offered a trading link between two exchanges. It was in 1973 again that black. 1973. Options are very popular with speculators in the tulip craze of seventeenth century Holland. and Scholes invented the famous Black-Scholes Option Formula. was formed between the Singapore International Monetary Exchange (SIMEX) and the CME on September 7.

and the Nikkei 225. The CBOT now offers 48 futures and option contracts (with the annual volume at more than 211 million in 2001). The US indices and the Nikkei 225 trade almost round the clock. the Nasdaq 100. The Philadelphia Stock Exchange is the premier exchange for trading foreign options. The most traded stock indices include S&P 500. The CBOT and the CME are two largest financial exchanges in the world on which futures contracts are traded. 32 . The N225 is also traded on the Chicago Mercantile Exchange.rates for currencies in the international financial markets paved the way for development of a number of financial derivatives which served as effective risk management tools to cope with market uncertainties. The CBOE trades options on the S&P 100 and the S&P 500 stock indices.The CBOE is the largest exchange for trading stock options. the Dow Jones Industrial Average.

1998 prescribing necessary pre-conditions for introduction of derivatives trading in India. to recommend measures for risk containment in derivative market in India. The SCRA was amended in December 1999 to include derivatives within the ambit of ‘securities’ and the regulatory framework were developed for governing 33 . 1996 to develop appropriate regulatory framework for derivatives trading in India. however. which was submitted in October 1998. The committee submitted its report on March 17. The repot. which withdrew the prohibition on options in securities.EMERGENCE OF THE DERIVATIVE TRADING IN INDIA  Approval For Derivatives Trading The first step towards introduction of derivatives trading in India was the promulgation of the Securities Laws (Amendment) Ordinance. J. SEBI set up a 24 – member committee under the chairmanship of Dr. 1995. as there was no regulatory framework to govern trading of derivatives.Gupta on November 18. did not take off. deposit requirement and real . SEBI also set up a group in June 1998 under the chairmanship of Prof.time monitoring requirements. worked out the operational details of margining system. methodology for charging initial margins. The committee recommended that derivatives should be declared as ‘securities’ so that regulatory framework applicable to trading of ‘securities’ could also govern trading of securities.C. L. The market for derivatives.Verma. broker net worth.R.

a commodity and would. 34 . The speculators in the derivative markets may be either day trader or position traders. depending upon their respective positions. or short sell. Brokers provide services to others. In this process. therefore. He is a speculator if he takes an open position in the price futures market or if he sells naked option contracts. He earns risk less profit in this activity. speculators consume information. Such opportunities do not exist for long in an efficient market.derivatives trading. By taking position. These people take position in the market and assume risk to profit from fluctuations in prices. stock or other asset to take advantage of mispricing. In fact. they are betting that a price would go up or they are betting that it would go down. A trader acts as a hedger when he transacts in the market for price risk management. The act also made it clear that derivatives shall be legal and valid only if such contracts are traded on PARTICIPANTS OF THE DERIVATIVE MARKET :Market participants in the future and option markets are many and they perform multiple roles. He acts as an arbitrageur when he enters in to simultaneous purchase and sale of a commodity. The day traders speculate on the price movements during one trading day. speculators are those who are willing to take such risk. Speculators If hedgers are the people who wish to avoid the price risk. while market makers create liquidity in the market. make forecasts about the prices and put their money in these forecasts. Hedgers Hedgers are the traders who wish to eliminate the risk (of price change) to which they are already exposed. They may take a long position on. open and close position many times a day and do not carry any position at the end of the day. they feed information into prices and thus contribute to market efficiency. stand to lose should the prices move in the adverse direction.

They monitor the prices continuously and generally attempt to make profit from just a few ticks per trade. The Institute of Chartered Accountant of India. where the price thereof is comparatively higher. weeks or even months. that sells for different prices in different markets. arbitrage involves making risk-less profits by simultaneously entering into transactions in two or more markets. On the other hand. These are done when the same securities are being quoted at different prices in the two markets. An arbitrageur profits by trading a given commodity. the word “ARBITRAGE” has been defines as follows:“Simultaneous purchase of securities in one market where the price there of is low and sale thereof in another market. Arbitrageurs Arbitrageurs thrive on market imperfections. with a view to make profit and carried on with conceived intention to derive advantage from difference in prices of securities prevailing in the two different markets” Thus. the position traders also attempt to gain from price fluctuations but they keep their positions for longer durations may is for a few days. 35 . or other item.

1 Types of Derivatives Market 4. TYPES OF DERIVATIVES 36 . TYPES OF DERIVATIVES MARKET Exchange Traded Derivatives Over The Counter Derivatives National Stock Exchange Bombay Stock Exchange National Commodity & Derivative Exchange Index Future Index option Stock option Stock future Figure.3.

thereby reducing transaction costs and increasing transactions volume. it has to compulsorily go to the same counter-party.2 Types of Derivatives (i) FORWARD CONTRACTS A forward contract is an agreement to buy or sell an asset on a specified date for a specified price. Each contract is custom designed. as in the case of foreign exchange. 37 . The contract price is generally not available in public domain. However forward contracts in certain markets have become very standardized. The confusion is primarily because both serve essentially th e same economic functions of allocating risk in the presence of future price uncertainty. Other contract details like delivery date. and hence is unique in terms of contract size. BASIC FEATURES OF FORWARD CONTRACT • • • • • They are bilateral contracts and hence exposed to counter-party risk. the contract has to be settled by delivery of the asset. One of the parties to the contract assumes a long position and agrees to buy the underlying asset on a certain specified future date for a certain specified price. The forward contracts are n o r m a l l y traded outside the exchanges. On the expiration date. which often results in high prices being charged. However futures are a significant improvement over the forward contracts as they eliminate counterparty risk and offer more liquidity. The other party assumes a short position and agrees to sell the asset on the same date for the same price. This process of standardization reaches its limit in the organized futures market. expiration date and the asset type and quality. price and quantity are negotiated bilaterally by the parties to the contract.Figure. Forward contracts are often confused with futures contracts. If the party wishes to reverse the contract.

A futures contract gives the holder the right and the obligation to buy or sell. normally. the holder of a futures position has to sell his long position or buy back his short position. which gives the buyer the right. The price of the underlying asset on the delivery date is called the settlement price. To exit the commitment. converges towards the futures price on the delivery date. The pre-set price is called the futures price. but not the obligation. a fixed number of barrels of oil. This can be the notional amount of bonds. etc. at a pre-set price. usually by specifying: • • • The underlying. Futures contracts are exchange traded derivatives. The exchange acts as counterparty on all contracts. The future date is called the delivery date or final settlement date. either cash settlement or physical settlement. traded on a futures exchange. This can be anything from a barrel of sweet crude oil to a short term interest rate. but not the right. The amount and units of the underlying asset per contract. a futures contract is a standardized contract. The settlement price. and the option writer (seller) the obligation. The type of settlement. effectively closing out the futures position and its contract obligations. to buy or sell a certain underlying instrument at a certain date in the future.(ii) FUTURE CONTRACT In finance. which differs from an options contract. BASIC FEATURES OF FUTURE CONTRACT 1. sets margin requirements. Standardization: Futures contracts ensure their liquidity by being highly standardized. units of foreign 38 .

• • The currency in which the futures contract is quoted. It may be 5% or 10% of total contract price. The delivery month. Margin: Although the value of a contract at time of trading should be zero. This is intended to protect the exchange against loss. If the trader is on the winning side of a deal. This renders the owner liable to adverse changes in value. is required by the exchange. • • The last trading date. To understand the original practice. This is calculated by the futures contract. 2. deposits money with the exchange. In case of physical commodities. who always acts as counterparty. At the end of every trading day. the notional amount of the deposit over which the short term interest rate is traded. On the 39 . In case of bonds. his contract has increased in value that day. commonly known as Margin requirements are waived or reduced in some cases for hedgers who have physical ownership of the covered commodity or spread traders who have offsetting contracts balancing the position. consider that a futures trader. this specifies not only the quality of the underlying goods but also the manner and location of delivery. its price constantly fluctuates. the contract is marked to its present market value. It represents the loss on that contract. when taking a position. Initial Margin: is paid by both buyer and seller. The grade of the deliverable. and the exchange pays this profit into his account. i. etc. a further margin. called the "settlement" or mark-to-market price of the contract. To minimize this risk.e. as determined by historical price changes.currency. Other details such as the tick. agreeing on a price at the end of each day. and creates a credit risk to the exchange. which is not likely to be exceeded on a usual day's trading. this specifies which bonds can be delivered. usually called variation or maintenance margin. the exchange demands that contract owners post a form of collateral. the minimum permissible price fluctuation. Mark to market Margin: Because a series of adverse price changes may exhaust the initial margin. called a "margin".

For many equity index and interest rate futures contracts. Settlement Settlement is the act of consummating the contract. or selling a contract to liquidate an earlier purchase (covering a long). Any deviation from this equality allows for arbitrage as follows. such as a short term interest rate index such as Euribor. as specified per type of futures contract: • Physical delivery . for no arbitrage to be possible. In other words. then the margin is used as the collateral from which the loss is paid. buying a contract to cancel out an earlier sale (covering a short). the value of the future/forward.other hand. In the case where the forward price is higher: 40 . or the closing value of a stock market index. PRICING OF FUTURE CONTRACT In a futures contract. and can be done in one of two ways. the price paid on delivery (the forward price) must be the same as the cost (including interest) of buying and storing the asset. non-dividend paying asset. If he cannot pay.a cash payment is made based on the underlying reference rate. and by the exchange to the buyers of the contract. On this day the t+2 futures contract becomes the t forward contract. Thus. this happens on the Last Thursday of certain trading month. In practice. if he is on the losing side. for a simple. and convenience yields.the amount specified of the underlying asset of the contract is delivered by the seller of the contract to the exchange. 3. will be found by discounting the present by the rate of risk-free return . it occurs only on a minority of contracts. dividend yields. This relationship may be modified for storage costs. A futures contract might also opt to settle against an index based on trade in a related spot market. the rational forward price represents the expected future value of the underlying discounted at the risk free rate. Most are cancelled out by purchasing a covering position . dividends. the exchange will debit his account. • Cash settlement .that is. Expiry is the time when the final prices of the future are determined. value at time to maturity .

3. he returns it now. The arbitrageur sells the futures contract and buys the underlying today (on the spot market) with borrowed money. he invests the proceeds. he cashes in the matured investment. 3. On the delivery date.1. The difference between the two amounts is the arbitrage profit. 2. In the case where the forward price is lower: 1. He then repays the lender the borrowed amount plus interest. and receives the agreed forward price. The difference between the two amounts is the arbitrage profit. The arbitrageur buys the futures contract and sells the underlying today (on the spot market). the arbitrageur hands over the underlying. which has appreciated at the risk free rate. On the delivery date. 41 . [If he was short the underlying. 4. 2.] 4. He then receives the underlying and pays the agreed forward price using the matured investment.

parties (not traded on the exchanges). High. Exists. Contracts are standardized contracts. which becomes the counter party to all the trades or unconditionally guarantees their settlement. Efficient. assumed by the clearing corp. Exists. Commodities. Price discovery Not efficient. as markets are centralized and all buyers and sellers come to a common platform to discover the price.TABLE 1DISTINCTION BETWEEN FUTURES AND FORWARDS CONTRACTS FEATURE Operational Mechanism FORWARD CONTRACT FUTURE CONTRACT Traded directly between two Traded on the exchanges. Index Futures and Individual stock Futures in India. as markets are scattered. as contracts are tailor made contracts catering to the needs of the needs of the parties. However. Examples Currency market in India. as contracts are standardized exchange traded contracts. 42 .. Contract Specifications Counter-party risk Differ from trade to trade. Liquidation Profile Low. futures.

CALL OPTION & PUT OPTION. at a specified price on or before a specified date is known as a ‘Put option’. There are two types of options i.OPTIONS A derivative transaction that gives the option holder the right but not the obligation to buy or sell the underlying asset at a price.e. called the strike price. CALL OPTION: A contract that gives its owner the right but not the obligation to buy an underlying assetstock or any financial asset. bonds and warrants become the subject of options. Underlying asset refers to any asset that is traded. Put and calls are almost always written on equities.. The price at which the underlying is traded is called the ‘strike price’. 43 . PUT OPTION: A contract that gives its owner the right but not the obligation to sell an underlying assetstock or any financial asset. Hence. at a specified price on or before a specified date is known as a ‘Call option’. although occasionally preference shares. during a period or on a specific date in exchange for payment of a premium is known as ‘option’. The owner makes a profit provided he buys at a lower current price and sells at a higher future price. The owner makes a profit provided he sells at a higher current price and buys at a lower future price. no option will be exercised if the future price does not increase.

FINANCIAL SWAP: Financial swaps constitute a funding technique which permit a borrower to access one market and then exchange the liability for another type of liability. A contract whereby two parties agree to exchange (swap) payments. In case of swap. only the payment flows are exchanged and not the principle amount. The fixed rate payer takes a short position in the forward contract whereas the floating rate payer takes a long position in the forward contract. cash flows to be exchanged are determined at the spot rate at a time when swap is done. Under a currency swap. The two commonly used swaps are: INTEREST RATE SWAPS: Interest rate swaps is an arrangement by which one party agrees to exchange his series of fixed rate interest payments to a party in exchange for his variable rate interest payments. 44 . The parties to the swap contract of currency generally hail from two different countries. This arrangement allows the counter parties to borrow easily and cheaply in their home currencies.SWAPS 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. It also allows the investors to exchange one type of asset for another type of asset with a preferred income stream. based on some notional principle amount is called as a ‘SWAP’. CURRENCY SWAPS: Currency swaps is an arrangement in which both the principle amount and the interest on loan in one currency are swapped for the principle and the interest payments on loan in another currency. They can be regarded as portfolios of forward's contracts. Such cash flows are supposed to remain unaffected by subsequent changes in the exchange rates.

SWAPTIONS Swaptions are options to buy or sell a swap that will become operative at the expiry of the options. Rather than have calls and puts. which are not. LEAPS Normally option contracts are for a period of 1 to 12 months. exchange may introduce option contracts with a maturity period of 2-3 years. These long-term option contracts are popularly known as Leaps or Long term Equity Anticipation Securities. WARRANTS Options generally have lives of up to one year. However. 45 . the majority of options traded on options exchanges having a maximum maturity of nine months. much popular are as follows: BASKETS Baskets options are option on portfolio of underlying asset. Longer-dated options are called warrants and are generally traded over-the-counter.5. the swaptions market has receiver swaptions and payer swaptions. A payer swaption is an option to pay fixed and receive floating. OTHER KINDS OF DERIVATIVES The other kind of derivatives. A receiver swaption is an option to receive fixed and pay floating. Equity Index Options are most popular form of baskets. Thus a swaption is an option on a forward swap.

and their clearing house/corporation to commence trading and settlement in approved derivatives contract. byelaws. Futures contracts on individual stocks were launched in November 2001. Trading and settlement in derivatives contracts is done in accordance with the rules. which prohibited forward trading in securities. 46 . The trading in index options commenced in June 2001. This was followed by approval for trading in options based on these two indices and options on individual securities. To begin with. thus precluding OTC derivatives. NSE and BSE. SEBI permitted the derivative segment of two stock exchanges. The government also rescinded in March 2000. the three – decade old notification. and regulations of the respective exchanges and their clearing house/corporation duly approved by SEBI and notified in the official gazette. SEBI approved trading in index future contracts based on S&P CNX Nifty and BSE-30 (Sensex) index. Derivatives trading commenced in India in June 2000 after SEBI granted the final approval to this effect in May 2000.a recognized stock exchange.

they also have risks of their own. The market risk of leveraged derivatives may be considerable. depending on the degree of leverage and the nature of the security. However. Market Risk Derivatives exhibit price sensitivity to change in market condition.Risk Associated With Derivatives: While derivatives can be used to help manage risks involved in investments. the risks involved in derivatives trading are neither new nor unique – they are the same kind of risks associated with traditional bond or equity instruments. Liquidity Risk 47 . such as fluctuation in interest rates or currency exchange rates.

With the introduction of the derivatives. Credit Risk Derivatives not traded on exchange are traded in the over-the-counter (OTC) market. Hedging Risk Several types of derivatives. are linked to the underlying cash market. including futures.  Derivatives. FUNCTION OF DERIVATIVES MARKET:The derivative market performs a number of economic functions: Prices in an organized derivatives market reflect the perception of market participants about the future and lead the prices of underlying to the perceived future level. Thus. derivatives help in discovery of future as well as current prices. due to their inherent nature. Liquidity may decrease or evaporate entirely during unfavorable markets.Most derivatives are customized instrument and could exhibit substantial liquidity risk implying they may not be sold at a reasonable price within a reasonable period. 48 . the hedge may limit the fund’s total return. options and forward are used as hedges to reduce specific risks. OTC instrument are subject to the risk of counter party defaults.  The derivatives market helps to transfer risks from those who have them but may not like them to those who have an appetite for them. The prices of derivative converge with the prices of the underlying at the expiration of the derivative contract. the underlying market witnesses higher trading volumes because of the participation by more players who would not otherwise participate for lack of arrangement to transfer risk. If the anticipated risks do not develop.

well-educated people with an entrepreneurial attitude. new products and new employment opportunities. creative. Speculative trades shift to a more controlled environment of derivatives market.  The derivatives have a history of attracting many bright. the benefit of which are immense.  Derivatives markets help increase savings and investment in the end. Transfer of risk enables market participants to expand their volumes of activity. They often energize others to create new businesses. In the absence of an organized derivative market. 49 .  An important incidental benefit that flows from derivatives trading is that it acts as a catalyst for new entrepreneurial activity. speculators trade in the underlying cash market.

C. In July 1999. Derivatives are an integral part of liberalisation process to manage risk. NSE gauging the market requirements initiated the process of setting up derivative markets in India.INDIAN DERIVATIVES MARKET Starting from a controlled economy.Gupta Committee submitted report. SIMEX chose Nifty for trading futures and options on an Indian index.C. Trading of Nifty futures commenced at NSE. Chronology of instruments 1991 Liberalisation process initiated 14 December 1995 NSE asked SEBI for permission to trade index futures. Trading of BSE Sensex futures commenced at BSE. Individual Stock Options & Derivatives 50 . L.Gupta Committee to draft a policy framework for 11 May 1998 7 July 1999 24 May 2000 25 May 2000 9 June 2000 12 June 2000 25 September 2000 2 June 2001 index futures. derivatives trading commenced in India Table 2. Nifty futures trading commenced at SGX. 18 November 1996 SEBI setup L. RBI gave permission for OTC forward rate agreements (FRAs) and interest rate swaps. SEBI gave permission to NSE and BSE to do index futures trading. The introduction of risk management instruments in India gained momentum in the last few years due to liberalisation process and Reserve Bank of India’s (RBI) efforts in creating currency forward market. India has moved towards a world where prices fluctuate every day.

the Indian capital market had no access to the latest trading methods and was using traditional out-dated methods of trading. There are many myths about derivatives but the realities that are different especially for Exchange traded derivatives. derivatives markets have become the most important markets in the world. cross currency options etc. Today. While this is true for many countries. Financial derivatives came into the spotlight along with the rise in uncertainty of post-1970. Until the advent of NSE. when US announced an end to the Bretton Woods System of fixed exchange rates leading to introduction of currency derivatives followed by other innovations including stock index futures. derivatives have become part and parcel of the day-to-day life for ordinary people in major parts of the world. which are well regulated with all the safety mechanisms in place. What are these myths behind derivatives? • • • Derivatives increase speculation and do not serve any economic purpose Indian Market is not ready for derivative trading Disasters prove that derivatives are very risky and highly leveraged instruments. Introduction of risk management instruments in India has gained momentum in last few years thanks to Reserve Bank of India’s efforts in allowing forward contracts. 51 . Myths and realities about derivatives In less than three decades of their coming into vogue. Today. derivatives markets have become the most important markets in the world.Need for derivatives in India today In less than three decades of their coming into vogue. there are still apprehensions about the introduction of derivatives. There was a huge gap between the investors’ aspirations of the markets and the available means of trading. which have developed into a very large market. The opening of Indian economy has precipitated the process of integration of India’s financial markets with the international financial markets. derivatives have become part and parcel of the day-to-day life for ordinary people in major part of the world.

derivatives allow corporations and institutional investors to effectively manage their portfolios of assets and liabilities through instruments like stock index futures and options. can reduce its exposure to the stock market quickly and at a relatively low cost without selling off part of its equity assets by using stock index futures or index options. increased trading in variety of derivatives instruments. the accompanying risk factors grew in gigantic proportions. After the fallout of Bretton wood agreement. etc. By providing investors and issuers with a wider array of tools for managing risks and raising capital. As the complexity of instruments increased many folds. both in the private and public sectors that derivatives provide numerous and substantial benefits to the users. Now that world markets for trade and finance have become more integrated. Agricultural futures and options helped farmers and processors hedge against commodity price risk. This period is marked by remarkable innovations in the financial markets such as introduction of floating rates for the currencies. effective method for users to hedge and manage their exposures to interest rates. Derivatives are a low-cost. Looking at the equity market. lowering the cost of capital formation and stimulating economic growth. derivatives have strengthened these important linkages between global markets. An equity fund. This situation led to development derivatives as effective risk management tools for the market participants. on-line trading in the capital markets. the financial markets in the world started undergoing radical changes.• • Derivatives are complex and exotic instruments that Indian investors will find difficulty in understanding Is the existing capital market safer than Derivatives? (i) Derivatives increase speculation and do not serve any economicpurpose: Numerous studies of derivatives activity have led to a broad consensus. derivatives improve the allocation of credit and the sharing of risk in the global economy. commodity prices or exchange rates. for example. 52 . The need for derivatives as hedging tool was felt first in the commodities market.

The first clearing corporation guaranteeing trades has become fully functional from July 1996 in the form of National Securities Clearing Corporation (NSCCL). High Liquidity underlying in the The daily average traded volume in Indian capital market today is around 7500 crores. Trade guarantee A Strong Depository A Good legal guardian 53 . and innovative legal guardian who is helping the market to evolve to a healthier place for trade practices. National Securities Depositories Limited (NSDL) which started functioning in the year 1997 has revolutionalised the security settlement in our country. NSCCL is responsible for guaranteeing all open positions on the National Stock Exchange (NSE) for which it does the clearing. which are needed for the introduction of derivatives. In the Institution of SEBI (Securities and Exchange Board of India) today the Indian capital market enjoys a strong. PRE-REQUISITES Large market Capitalisation INDIAN SCENARIO India is one of the largest market-capitalised countries in Asia with a market capitalisation of more than Rs. These are clear indicators of high liquidity in the underlying. we look into the pre-requisites. Here.increasing market liquidity and efficiency and facilitating the flow of trade and finance (ii) Indian Market is not ready for derivative trading Often the argument put forth against derivatives trading is that the Indian capital market is not ready for derivatives trading. and how Indian market fares: TABLE 3. independent.765000 crores. Which means on an average every month 14% of the country’s Market capitalisation gets traded.

but I feel that this new system is very useful especially to retail investors. 54 .Comparison of New System with Existing System Many people and brokers in India think that the new system of Futures & Options and banning of Badla is disadvantageous and introduced early.3d shows how advantages of new system (implemented from June 20001) v/s the old system i. forward transactions. The figure 3.3a Speculators Existing SYSTEM New Peril &Prize 1)Buy &Sell stocks 1)Maximum on delivery basis loss possible 2) Buy Call &Put to premium by paying paid premium Approach Peril &Prize Approach 1) Deliver based 1) Both profit & Trading. • • Advantages Greater Leverage as to pay only the premium. It increases the no of options investors for investment. before June 2001 New System Vs Existing System for Market Players Figure 3.e. 2) Buy Index Futures hold till expiry. In fact it should have been introduced much before and NSE had approved it but was not active because of politicization in SEBI. Greater variety of strike price options at a given time. margin loss to extent of trading & carry price change.3a –3.

market conditions on market prices Option. If market goes up. cost is only during adverse reward dependant 2)For Long. 2) Cash &Carry 2) If Future Contract arbitrage continues more or less than Fair price • Fair Price = Cash Price + Cost of Carry. 3)Sell deep OTM call option with underlying shares. another exchange. earn premium + profit with increase prcie Advantages 55 .3b Arbitrageurs Existing SYSTEM New Approach Peril &Prize Approach Peril &Prize 1) Buying Stocks in 1) Make money 1) B Group more 1) Risk free one and selling in whichever way promising as still game.Figure 3. in weekly settlement forward transactions.3c Hedgers Existing SYSTEM New Approach Peril &Prize Approach Peril &Prize 1) Difficult to 1) No Leverage 1)Fix price today to buy 1) Additional offload holding available risk latter by paying premium. the Market moves. exercise the option. Figure 3. buy ATM Put premium. as circuit filters long position benefit else limit to curtail losses.

Advantages • Losses Protected.3d Small Investors Existing SYSTEM New Approach 1) If Bullish buy stocks else sell it. 56 . 2) Hedge position if holding underlying stock 1) Downside remains protected & upside unlimited.• Availability of Leverage Figure 3. Peril &Prize Approach Peril &Prize 1) Plain Buy/Sell 1) Buy Call/Put options implies unlimited based on market outlook profit/loss.

which has accompanied the modernization of commercial and investment banking and globalisation of financial activities. The OTC derivatives markets have the following features compared to exchange-traded derivatives: 1. OTC derivatives markets The OTC derivatives markets have witnessed rather sharp growth over the last few years. 4. banking supervision and market surveillance. It has been widely discussed that the highly leveraged institutions and their OTC derivative positions were the main cause of turbulence in financial markets in 1998. and 5. or margining. There are no formal centralized limits on individual positions. and for safeguarding the collective interests of market participants. There are no formal rules for risk and burden-sharing. leverage. The recent developments in information technology have contributed to a great extent to these developments. 3. While both exchange-traded and OTC derivative contracts offer many benefits. 57 . 2. The OTC contracts are generally not regulated by a regulatory authority and the exchange’s self-regulatory organization. the former have rigid structures compared to the latter. The management of counter-party (credit) risk is decentralized and located within individual institutions. There are no formal rules or mechanisms for ensuring market stability and integrity. These episodes of turbulence revealed the risks posed to market stability originating in features of OTC derivative instruments and markets. although they are affected indirectly by national legal systems.Exchange-traded vs.

occur which significantly alter the perceptions of current and potential future credit exposures. Instability arises when shocks. markets. and their dependence on exchange traded derivatives. the progress has been limited in implementing reforms in risk management. In view of the inherent risks associated with OTC derivatives. and (v) the central role of OTC derivatives markets in the global financial system. such as counter-party credit events and sharp movements in asset prices that underlie derivative contracts. which fall outside the more formal clearing house structures. 58 . Moreover. (iii) the effects of OTC derivative activities on available aggregate credit. the size and configuration of counter-party exposures can become unsustainably large and provoke a rapid unwinding of positions. The following features of OTC derivatives markets can give rise to instability in institutions. (ii) information asymmetries. (iv) the high concentration of OTC derivative activities in major institutions.Some of the features of OTC derivatives markets embody risks to financial market stability. and the international financial system: (i) the dynamic nature of gross credit exposures. hedge their risks through the use of exchange traded derivatives. including counter-party. When asset prices change rapidly. Indian law considers them illegal. and OTC derivatives markets continue to pose a threat to international financial stability. There has been some progress in addressing these risks and perceptions. liquidity and operational risks. those who provide OTC derivative products. The problem is more acute as heavy reliance on OTC derivatives creates the possibility of systemic financial events. However.

The break down of the BRETTON WOODS agreement brought and end to the stabilising role of fixed exchange rates and the gold convertibility of the dollars. This has three factors: the speed of price changes. And the price one pays in one’s own currency for a unit of another currency is called as an exchange rate. producing firms and governments to significant risks. The changes in demand and supply influencing factors culminate in market adjustments through price changes. the frequency of price changes and the magnitude of price changes. The advent of telecommunication and data processing bought information 59 . In a market. globalisation of the markets. There is a price to be paid for the purchase of food grain. Nations that were poor suddenly became a major source of supply of goods. local currency or foreign currencies. the price one pays for use of a unit of another persons money is called interest rate. and the collective interaction of demand and supply in the market determines the price. These price changes expose individuals. The concept of price is clear to almost everybody when we discuss commodities. The globalisation of the markets and rapid industrialisation of many underdeveloped countries brought a new scale and dimension to the markets. The Mexican crisis in the south east-Asian currency crisis of 1990’s has also brought the price volatility factor on the surface. Prices are generally determined by market forces. etc. A. petrol. technological developments and advances in the financial theories. These factors are constantly interacting in the market causing changes in the price over a short period of time. oil.FACTORS CONTRIBUTING TO THE GROWTH OF DERIVATIVES: Factors contributing to the explosive growth of derivatives are price volatility. consumers have ‘demand’ and producers or suppliers have ‘supply’.} PRICE VOLATILITY – A price is what one pays to acquire or use something of value. metal. Such changes in the price are known as ‘price volatility’. The objects having value maybe commodities.

} GLOBALISATION OF MARKETS – Earlier. Suddenly blue chip companies had turned in to red. These price volatility risks pushed the use of derivatives like futures and options increasingly as these instruments can be used as hedge to protect against adverse price changes in commodity. B. in many cases. Now globalisation has increased the size of markets and as greatly enhanced competition . what happened in other part of the world was mostly irrelevant. Export of certain goods from India declined because of this crisis.very quickly to the markets. foreign exchange. Steel industry in 1998 suffered its worst set back due to cheap import of steel from south East Asian countries. This factor alone has contributed to the growth of derivatives to a significant extent. managers had to deal with domestic economic concerns. equity shares and bonds. It has also exposed the modern business to significant risks and. south East Asian currencies crisis of 1997 had affected the competitiveness of our products vis-à-vis depreciated currencies. led to cut profit margins In Indian context. Even equity holders are exposed to price risk of corporate share fluctuates rapidly. it is evident that globalisation of industrial and financial activities necessitates use of derivatives to guard against future losses. The fear of china devaluing its currency created instability in Indian exports.it has benefited consumers who cannot obtain better quality goods at a lower cost. Thus. 60 . Information which would have taken months to impact the market earlier can now be obtained in matter of moments.

network systems and enhanced method of data entry. The work of economic theorists gave rise to new products for risk management which led to the growth of derivatives in financial markets.} ADVANCES IN FINANCIAL THEORIES – Advances in financial theories gave birth to derivatives. Option pricing models developed by Black and Scholes in 1973 were used to determine prices of call and put options. Advances in this area include the development of high speed processors. The above factors in combination of lot many factors led to growth of derivatives instruments 61 . D. Data transmission by satellite. Closely related to advances in computer technology are advances in telecommunications.} TECHNOLOGICAL ADVANCES – A significant growth of derivative instruments has been driven by technological breakthrough. Although price sensitivity to market forces is beneficial to the economy as a whole resources are rapidly relocated to more productive use and better rationed overtime the greater price volatility exposes producers and consumers to greater price risk.C. At the same time there were significant advances in software programmes without which computer and telecommunication advances would be meaningless. Derivatives can help a firm manage the price risk inherent in a market economy. The effect of this risk can easily destroy a business which is otherwise well managed. was the only hedging tool available. Initially forward contracts in its traditional form. derivatives and risk management products become that much more important. In late 1970’s. work of Lewis Edeington extended the early work of Johnson and started the hedging of financial price risks with financial futures. To the extent the technological developments increase volatility. These facilitated the more rapid movement of information and consequently its instantaneous impact on market price. Improvement in communications allow for instantaneous worldwide conferencing.

however.L. methodology for charging initial margins. thus precluding OTC derivatives. SEBI also set up a group in June 1998 under the Chairmanship of Prof. SEBI permitted the derivative segments of two stock exchanges. broker net worth. 62 . 1996 to develop appropriate regulatory framework for derivatives trading in India. The Securities Contract Regulation Act (SCRA) was amended in December 1999 to include derivatives within the ambit of ‘securities’ and the regulatory framework were developed for governing derivatives trading. 1995. Derivatives trading commenced in India in June 2000 after SEBI granted the final approval to this effect in May 2001.R. which was submitted in October 1998. The government also rescinded in March 2000. which withdrew the prohibition on options in securities. This was followed by approval for trading in options based on these two indexes and options on individual securities.C. worked out the operational details of margining system.J. The act also made it clear that derivatives shall be legal and valid only if such contracts are traded on a recognized stock exchange. The committee submitted its report on March 17. to recommend measures for risk containment in derivatives market in India.Varma. NSE and BSE. and their clearing house/corporation to commence trading and settlement in approved derivatives contracts. the three decade old notification. deposit requirement and real–time monitoring requirements. SEBI approved trading in index futures contracts based on S&P CNX Nifty and BSE–30 (Sense) index. The committee recommended that derivatives should be declared as ‘securities’ so that regulatory framework applicable to trading of ‘securities’ could also govern trading of securities. To begin with. The report. SEBI set up a 24–member committee under the Chairmanship of Dr. 1998 prescribing necessary pre–conditions for introduction of derivatives trading in India. The market for derivatives. which prohibited forward trading in securities. did not take off. as there was no regulatory framework to govern trading of derivatives.DEVELOPMENT OF DERIVATIVES MARKET IN INDIA The first step towards introduction of derivatives trading in India was the promulgation of the Securities Laws (Amendment) Ordinance.Gupta on November 18.

The trading in BSE Sensex options commenced on June 4, 2001 and the trading in options on individual securities commenced in July 2001. Futures contracts on individual stocks were launched in November 2001. The derivatives trading on NSE commenced with S&P CNX Nifty Index futures on June 12, 2000. The trading in index options commenced on June 4, 2001 and trading in options on individual securities commenced on July 2, 2001. Single stock futures were launched on November 9, 2001. The index futures and options contract on NSE are based on S&P CNX Trading and settlement in derivative contracts is done in accordance with the rules, byelaws, and regulations of the respective exchanges and their clearing house/corporation duly approved by SEBI and notified in the official gazette. Foreign Institutional Investors (FIIs) are permitted to trade in all Exchange traded derivative products. The following are some observations based on the trading statistics provided in the NSE report on the futures and options (F&O): • Single-stock futures continue to account for a sizable proportion of the F&O

segment. It constituted 70 per cent of the total turnover during June 2002. A primary reason attributed to this phenomenon is that traders are comfortable with single-stock futures than equity options, as the former closely resembles the erstwhile badla system. • On relative terms, volumes in the index options segment continue to remain poor.

This may be due to the low volatility of the spot index. Typically, options are considered more valuable when the volatility of the underlying (in this case, the index) is high. A related issue is that brokers do not earn high commissions by recommending index options to their clients, because low volatility leads to higher waiting time for round-trips. • Put volumes in the index options and equity options segment have increased since

January 2002. The call-put volumes in index options have decreased from 2.86 in January 2002 to 1.32 in June. The fall in call-put volumes ratio suggests that the traders are increasingly becoming pessimistic on the market.

63

Farther month futures contracts are still not actively traded. Trading in equity

options on most stocks for even the next month was non-existent. • Daily option price variations suggest that traders use the F&O segment as a less

risky alternative (read substitute) to generate profits from the stock price movements. The fact that the option premiums tail intra-day stock prices is evidence to this. If calls and puts are not looked as just substitutes for spot trading, the intra-day stock price variations should not have a one-to-one impact on the option premiums. • The spot foreign exchange market remains the most important segment but the derivative segment has also grown. In the derivative market foreign exchange swaps account for the largest share of the total turnover of derivatives milestones in India followed by forwards and market options. Significant have been (i) in the development of derivatives

permission to banks to undertake cross currency derivative transactions subject to certain conditions (1996) (ii) allowing corporates to undertake long term foreign currency swaps that contributed to the development of the term currency swap market (1997) (iii) allowing dollar rupee options (2003) and (iv) introduction of currency futures (2008). I would like to emphasise that currency swaps allowed companies with ECBs to swap their foreign currency liabilities into rupees. However, since banks could not carry open positions the risk was allowed to be transferred to any other resident corporate. Normally such risks should be taken by corporates who have natural hedge or have potential foreign exchange earnings. But often corporate assume these risks due to interest rate differentials and views on currencies. This period has also witnessed several relaxations in regulations relating to forex markets and also greater liberalisation in capital account regulations leading to greater integration with the global economy.

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Cash settled exchange traded currency futures have made foreign currency a separate asset class that can be traded without any underlying need or exposure a n d on a leveraged basis on the recognized stock exchanges with credit risks being assumed by the central counterparty

Since the commencement of trading of currency futures in all the three exchanges, the value of the trades has gone up steadily from Rs 17, 429 crores in October 2008 to Rs 45, 803 crores in December 2008. The average daily turnover in all the exchanges has also increased from Rs871 crores to Rs 2,181 crores during the same period. The turnover in the currency futures market is in line with the international scenario, where I understand the share of futures market ranges between 2 – 3 percent.

Table 4.1ForexMarketActivity April’05Total turnover (USD billion) Inter-bank to Merchant ratio Spot/Total Turnover (%) Forward/Total Turnover (%) Swap/Total Turnover (%) Source: RBI Mar’06 4,404 2.6:1 50.5 19.0 30.5 April’06Mar’07 6,571 2.7:1 51.9 17.9 30.1 April’07Mar’08 12,304 2.37: 1 49.7 19.3 31.1 April’08Dec’08 9,621 2.66:1 45.9 21.5 32.7

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This will help offset their losses in the spot market. because herein you can take large positions by depositing relatively small margins. Accurate prices are essential for ensuring the correct allocation of resources in a free market economy. futures markets tend to be more liquid than spot markets. or by buying a Put option. Consequently. As we have seen.] RISK MANAGEMENT – Futures and options contract can be used for altering the risk of investing in spot market. they offer greater liquidity. He will always be worried that the price may fall before he can sell the asset. a large position in derivatives markets is relatively easier to take and has less of a price impact as opposed to a transaction of the same magnitude in the spot 66 .. 2. For instance. If the spot price falls. futures markets provide a low cost trading mechanism. 3. He can protect himself by selling a futures contract. derivatives markets involve lower transaction costs. Futures prices are believed to contain information about future spot prices and help in disseminating such information. Large spot transactions can often lead to significant price changes. Thus information pertaining to supply and demand easily percolates into such markets.] OPERATIONAL ADVANTAGES – As opposed to spot markets. Options markets provide information about the volatility or risk of the underlying asset. consider an investor who owns an asset.BENEFITS OF DERIVATIVES Derivative markets help investors in many different ways: 1. as you will see later. Similarly. Secondly. the put option can always be exercised. the short hedgers will gain in the futures market. if the spot price falls below the exercise price. However.] PRICE DISCOVERY – Price discovery refers to the markets ability to determine true equilibrium prices.

] EASE OF SPECULATION – Derivative markets provide speculators with a cheaper alternative to engaging in spot transactions. Derivatives markets help increase savings and investment in the long run. Thus derivatives help in discovery of future as well as current prices. it is possible to exploit arbitrage opportunities quickly and to keep prices in alignment. Also. The derivative market performs a number of economic functions. • • An important incidental benefit that flows from derivatives trading is that it acts as a catalyst for new entrepreneurial activity. Transfer of risk enables market participants to expand their volume of activity. This is important because facilitation of speculation is critical for ensuring free and fair markets. 5. A speculator will accept a level of risk only if he is convinced that the associated expected return is commensurate with the risk that he is taking.market. Finally. • The prices of derivatives converge with the prices of the underlying at the expiration of derivative contract. Since it is easier and cheaper to trade in derivatives. 4. the amount of capital required to take a comparable position is less in this case. spot. 67 . Speculators always take calculated risks. futures and options markets are inextricably linked.] MARKET EFFICIENCY – The availability of derivatives makes markets more efficient. it is easier to take a short position in derivatives markets than it is to sell short in spot markets. Hence these markets help to ensure that prices reflect true values.

Canera Bank. Ahmedabad. and Multi Commodity Exchange (MCX). Industry Associations. Bank of India. MCX MCX (Multi Commodity Exchange of India Ltd. clearing and settlement operations for commodity futures markets across the country. MCX and NCDEX. Ahmedabad commenced futures trading in November 2002. Exporters. Key shareholders of MCX are Financial Technologies (India) Ltd. (NMCE). State Bank of Saurashtra. Union Bank of India. Regional Trading Canters. National Exchanges In enhancing the institutional capabilities for futures trading the idea of setting up of National Commodity Exchange(s) has been pursued since 1999. Mumbai. SBI Life Insurance Co.. Corporation Bank Headquartered in Mumbai.15.. amongst others MCX 68 . Corporate. Bank of Baroda. Ltd. Importers. viz. Traders.) an independent and demutulised multi commodity exchange has permanent recognition from Government of India for facilitating online trading. Mumbai commenced operations in October/ December 2003 respectively. Mumbai have become operational. National Commodity & Derivatives Exchange (NCDEX). While the NMCE. HDFC Bank. State Bank of Indore. Cooperatives. Three such Exchanges.. “National Status” implies that these exchanges would be automatically permitted to conduct futures trading in all commodities subject to clearance of byelaws and contract specifications by the FMC. MCX is led by an expert management team with deep domain knowledge of the commodity futures markets. State Bank of Hyderabad. National Multi-Commodity Exchange of India Ltd. Today MCX is offering spectacular growth opportunities and advantages to a large cross section of the participants including Producers / Processors. State Bank of India.

69 . NMCE facilitates electronic derivatives trading through robust and tested trading platform. Gujarat Agro-Industries Corporation Limited (GAICL). Punjab National Bank (PNB) took equity of the Exchange to establish that linkage. National Agricultural Cooperative Marketing Federation of India (NAFED). (NMCE) was promoted by Central Warehousing Corporation (CWC). viz.. While various integral aspects of commodity economy. It is the only Commodity Exchange in the world to have received ISO 9001:2000 certification from British Standard Institutions (BSI). facilitates online trading. a state-of-the-art nationwide. MCX. cooperatives. private and public sector marketing of agricultural commodities. warehousing. through Virtual Private Network (VPN). clearing and settlement operations for a commodities futures trading. is an independent and demutualised multi commodity Exchange. and Neptune Overseas Limited (NOL). having a permanent recognition from the Government of India. It has also established fair and transparent rule-based procedures and demonstrated total commitment towards eliminating any conflicts of interest. finance was still a vital missing link. NMCE was the first commodity exchange to provide trading facility through internet. MCX. NMCE National Multi Commodity Exchange of India Ltd.being nation-wide commodity exchange. NMCE is the only Exchange in India to have such investment and technical support from the commodity relevant institutions. Gujarat State Agricultural Marketing Board (GSAMB). It has robust delivery mechanism making it the most suitable for the participants in the physical commodity markets. research and training were adequately addressed in structuring the Exchange. National Institute of Agricultural Marketing (NIAM). offering multiple commodities for trading with wide reach and penetration and robust infrastructure. Even today. digital Exchange. provided by CMC. Derivative Trading Settlement System (DTSS).

which impinge on its working. Maharashtra in Mumbai on April 23. The reach will 70 . The contracts are marked to market on daily basis. an imperative in the commodity trading business. Forward Markets Commission regulates NCDEX in respect of futures trading in commodities. NCDEX National Commodity and Derivatives Exchange Ltd (NCDEX) is a technology driven commodity exchange. It is a public limited company registered under the Companies Act. Stamp Act. In the event of high volatility in the prices. Forward Commission (Regulation) Act and various other legislations. NCDEX is subjected to various laws of the land like the Companies Act. leading to guaranteed clearing and settlement. It has been launched to provide a world-class commodity exchange platform for market participants to trade in a wide spectrum of commodity derivatives driven by best global practices. 1956 with the Registrar of Companies. It has an independent Board of Directors and professionals not having any vested interest in commodity markets.2003. special intra-day clearing and settlement is held. NMCE was the first to initiate process of dematerialization and electronic transfer of warehoused commodity stocks. The unique strength of NMCE is its settlements via a Delivery Backed System. It is located in Mumbai and offers facilities to its members in more than 390 centres throughout India.NMCE follows best international risk management practices. Besides. professionalism and transparency. The system of upfront margining based on Value at Risk is followed to ensure financial security of the market. Contracts Act. These deliveries are executed through a sound and reliable Warehouse Receipt System.

Coffee. Gur. NCDEX currently facilitates trading of thirty six commodities . Gold. Jute sacking bags. Guar Seeds. Jeera.gradually be expanded to more centres. Cotton Seed Oilcake. Silver. Chilli.Mustard Seed . Turmeric. 71 .Raw Jute. RBD Palmolein. Refined Soy Oil. Wheat. Rice. Sesame Seeds. Chana. Yellow Red Maize & Yellow Soybean Meal. Sugar. Mild Steel Ingot. Pepper. Soy Bean. Urad (Black Matpe).Cashew. Cotton. Expeller Mustard Oil. Mulberry Green Cocoons. Rubber. Guar gum. Crude Palm Oil. Rapeseed . Castor Seed. Yellow Peas. Silk. Tur.

. Gur. Exchange India Pepper COMMODITY Trade Pepper (both domestic and international contracts) Ltd. Potatoes and Mustard seed Commodities Gur Exchange Ltd. Meerut The Bombay Commodity Exchange Oilseed Complex. cottonseed. Kochi (IPSTA) Vijai Beopar Chambers Muzaffarnagar Rajdhani Oils & Oilseeds Exchange Gur. Mustard seed & Spice Association.... Trading is taking place in about 78 commodities through 25 Exchanges/Associations as given in the table below:TABLE 4 Registered commodity exchanges in India No. its Association. 3. cotton (kapas) and RBD palmolein.. 10. 2. Mumbai international contracts Rajkot Seeds. Rajkot oil & cake. The Ahmedabad Exchange. 1. 6. Delhi oilcake Bhatinda Om & Oil Exchange Ltd. cottonseed. Hapur The Meerut Agro Gur. Gur Bhatinda The Chamber of Commerce. 8. Ahmedabad The East India Jute 72 . 7. 5. Mustard seed its oil & Ltd. Commodity Castorseed. its oil & and oilcake Hessian Hessian & Sacking 9. Groundnut.The Present Status: Presently futures’ trading is permitted in all the commodities. 4. its oil & cake. Oil & Bullion Merchants Castor seed. Castor oil Ltd.

17.11.. Calcutta The East India Cotton Association Ltd. commence) National Commodity & Derivatives. Coffee Bangalore Surendranagar Cotton Oil & Oilseeds. Kapas Surendranagar E-Commodities Ltd.. Cottonseed. 13. its oil & India Ltd. Indore Soya seed.. 20. Bikaner Guar Gum Haryana Commodities Ltd.. Kochi oilcake Central India Commercial Exchange Gur and Mustard seed Ltd... Several Commodities Exchange Ltd. Gram. Soyaoil and Soya meals. 15. 18. Mustard seeds its oil & oilcake. New Delhi Sugar (trading yet to 14.. Rapeseed/Mustardseed its oil and oilcake and RBD Palmolien The First Commodities Exchange of Copra/coconut.. 22.. 16. National Board of Trade.. 25. Cotton Mumbai The Spices & Oilseeds Exchange Ltd.. Guar seed. Several Commodities Mumbai Bikaner commodity Exchange Ltd. Mumbai Sugar National Multi-Commodity Exchange Several Commodities of India Ltd. Jaipur Mustard seed Complex 24. Mumbai Multi Commodity Exchange Ltd. 21. 23. Hissar Mustard seed complex Bullion Association Ltd.. 19. Turmeric Sangli.. Gwalior E-sugar India Ltd. RESEARCH METHODOLOGY :Problem Statement:  73 . Exchange Ltd. Ahmedabad Coffee Futures Exchange India Ltd. Cotton. 12..

To know the awareness of the Derivative Market in Mumbai City. 2. To find what proportion of the population are investing in such derivatives along with their investment pattern and product preferences. This survey will help the firm to know how the investors invest in the derivative segment & which factors affect their investing behavior. is “DERIVATIVE MARKET” in the firm so the problem statement for this study will be. Scope of the Study: The scope of the study will include the analysis of the survey.The topic. 3. The objectives of the study have restricted the choice of research design up to descriptive research design. which is selected for the study.  Research Source of Data:- 74 . “AWARENESS ABOUT THE DERIVATIVE AND ITS COMPARISION WITH EQUITY. which is being conducted to know the awareness of the Derivative Market in the city & also doing comparison of derivatives with equity.” Objective of the Study:  1. To know which one is beneficial for the investor. The type of research design applied here are “DESCRIPTIVE” as the objective is to check the position of the Derivative Market in Mumbai city. Research Design:  The research design specifies the methods and procedures for conducting a particular study.

DATA ANALYSIS AND INTERPRETATION: 75 . it is necessary to have some of the secondary information. which is collected from the following:-Books. Websites. Methods of Data Collection:The study to be conducted is about the awareness of the Derivative Market in the Mumbai City so the method of data collection used id “SURVEY METHOD”.There are two types of sources of data which is being used for the studies: Primary Source of Data: Preparing a Questionnaire is collecting the primary source of data & it was collected by interviewing the investors. Magazines & Journals.  Secondary Source of Data: For having the detailed study about this topic. Newspapers. etc.

1 Q.0.0 Objective: To know that whether the investors are trading in derivative market or not. Graph: Trading 140 percent/frequency 120 100 80 60 40 20 0 Yes Trading No 74 37 63 Frequencies Percentage 126 Inference: from the above graph out of 200 investors. {Give the rank} 76 .2 Reasons for not investing in derivative market.0 63.0 100. only 37% investors means 74 respondent are trading in derivative market and 63% means 126 respondents are not trading in derivative marke Q.1 Are you trading in derivative market? Yes No Total Frequencies 74 126 200 Percentage 37.

6% investors don’t have specify their reasons for not trading in derivative market.0 Reason 70 60 50 40 30 20 10 0 62 49.2 Q.6 Other Series3 percent/frequency reasons Inference: From the above graphical representation you can see that 49. 0.1 49.5 1.2 13.1 Reasons Lack of knowledge Lack of awareness High risky Huge amount investment Other Total Graph: Frequency 26 19 62 of 17 2 126 Percent 20.1.6 100. 77 .2 Series1 26 20.1 17 13.Objective: To know the reason why investors are not trading in trading in derivative market Frequency 0.6 15.3 what is the objective of trading in derivative market? Objective: To know that why they are trading in derivative market.5 2 1.6 0 0 Reasons Lack of Lack of knowledge awareness High risky Huge amount of investment Series2 19 15.2% investors think that the derivatives are high risky whereas 1.

0 1.4what are the criteria do you taken in the consideration while investing in derivative market? 78 .5% investors are most preferred the objective of high return and 1% investors are neutral while they are trading in derivative market.0 1.5 63 65 Frequency Percent 126 Frequency 126 2 2 5 65 200 Percent 63.5 Some how preferred Most preferred 32.Frequency Don’t trade Not at all preferred Neutral Some how preferred Most preferred Total Graph: High Return 140 percent/frequency 120 100 80 60 40 20 0 Don’t trade 2 1 2 1 5 2.5 32. Q .0 2.5 100 Not at all preferred Neutral preferred Inference: From the above graph we can see that 32.

or available of different contract or for the margin money.Objective: To know that which criteria are consider by the investors while they are investing in derivative market. Frequency Don’t trade Not at all preferred Some how not preferred Neutral Some how preferred Most preferred Total Frequency 126 2 4 16 23 29 200 Percent 63.0 Graph: 79 .5 100. less costly.0 11.5 14.0 8. Which criteria are most important for them whether derivatives are ease in transaction.0 1.0 2.

Ease in transaction percentage/frequency 140 120 100 80 60 40 20 0 126 63 16 8 23 11.5% investors are most preferred and 1% investors are not at all preferred the ease in transaction contract.5 Frequency Percent 2 1 Don’t trade Not at all preferred 4 2 Some how not preferred Neutral Some Most how preferred preferred preferred Inference: from the above graph we can conclude that out of the 200 investors 14. Q-5 Give your preference of trading in derivative instrument.5 29 14. Objective: To know the preference of the investors while they are trading in derivative 80 .

5 Don’t trade Not at all preferred 1 0. 0. 81 .5 .5 Frequency Percent Most preferred preferred Inference: From the above graph we can see that only 0.5 % investors are somehow not preferred .5% investors are some how preferred 21.market.5 100.0 Don’t trade Not at all preferred Some how not preferred Neutral Some how preferred Most preferred Total Graph: Index future 140 120 100 80 60 40 20 0 percent/frequency 126 63 43 1 0.5 Some how not preferred 15 7. Frequency Frequency 126 1 1 15 14 43 200 Percent 63.5 Neutral 14 7 Some how preferred 21.0 .5 7.5 7.5% are most preferred as the preference of their trading in derivative market Q-6 Give your preference in term of trading in derivative market? Objective: To know the preference of the investors in term of trading in derivative market.0 21.5% investors are not at all preferred the index future.7.

5 5.0 27.0 Don’t trade Not at all preferred Some how not preferred Neutral Some how preferred Most preferred Total Graph: Intraday Frequency/percentage 140 120 100 80 60 40 20 0 126 63 0 0 Don’t trade 4 2 Not at all preferred 10.0 .5 Neutral 10 5 Some how preferred 54 27 frequency percentage preferred Inference: from the above graph we can see that 27% investors are most preferred the intraday and 2% investors are not at all preferred the intraday.0 100.0 2.5 Some how not preferred 5 2.5 2. 82 Most preferred .Frequency Frequency 126 4 1 5 10 54 200 Percent 63. Q-7 How much percentage of your income you trade in derivative market? Objective: To know investors are how much percentage of their income trade in derivative market.

5 1.Frequency Don’t trade Less than 5% 5%-10% 11%-15% 16%-20% More than 20% Total Graph: Frequency 126 8 25 25 13 3 200 Percent 63 4.5 25 12.0 More than 20% 16%-20% 11%-15% 5%-10% Less than 5% Don’t trade 0 1.5 3 6.5 6.0 12. Frequency 83 .5% investors are invest 5% to 10% income in the derivative market.5 13 12.5% investors are investing more than 20% of their income. Q-8 what is the rate of return expected by you from derivative market? Objective: To know the investors expectation towards their investment in derivative market. While only 1.5 12.5 25 4 8 63 50 100 126 150 Percent Frequency Inference: From the above graph we can see that 12.5 100.

0 rate of return expected pecentage/frequency 140 120 100 80 60 40 20 0 126 63 21 10.0 11.and 4% investors are expect the 18% to 23% rate of return.55 investors are expect the 14% to 17% of their investment .5 22 11 23 11.0 7. % 14%-17.0 . % 18%-23% Rate of return Inference: From the above graph we can see that 11. You are satisfied with the current performance of the derivative market Objective: To know that investors are satisfied with the performance of the derivative market or not.5 4. % 18%-23% Total Graph: Frequency 126 21 22 23 8 200 Percent 63.0 10.0 4. Frequency Frequency 126 8 14 18 84 Do not trade Strongly disagree Disagree Neutral Percent 63.5 11.5 Frequency Percent 8 4 Do not trade 5%-9% 10%-13.Do not trade 5%-9% 10%-13. % 14%-17. Q-9.0 9.0 100.

Agree strongly agree Total Graph: 25 9 200 12.0 Satisfaction percentage/frequency 140 120 100 80 60 40 20 0 126 Frequency 8 4 Do not trade 14 7 18 9 25 12. Gender: Frequency Frequency 157 43 200 Percent 78.5 100.5 Agree Percent 9 4.5 100.5 4.5% are agree for satisfaction and4% are strongly disagree.5 strongly agree 63 Strongly Disagree Neutral disagree prferred Inference: From the above Graph we can see that 12.5 21.0 Male Female Total Graph: 85 .

gender
180 160 140 120 100 80 60 40 20 0 157

frequency

78.5 43 21.5

Frequency Percent

male gender

female

Inference: From the above graph we can see that there are 157 male investors when 43 are the female investors. AGE: Frequency Below 20 years 20-25 years 26-30 years 31-35 years above 35 years Total Frequency 3 61 51 43 42 200 Percent 1.5 30.5 25.5 21.5 21.0 100.0

Graph:

86

age
35 30 25 20 15 10 5 0 30.5 25.5 21.5 21 Percent 1.5 below 20 years 20-25 years 26-30 years years 31-35 years above 35 years

Inference: From the above graph we can see that out of 200 investors 1.5% investors are below 20 years,30.5% investors are 20 to 25 years,21.5% investors are between 31 to35 years , and 21% investors are above 35 years trading in derivative market. Occupation: Frequency Student Employed Business Professional House wife Others Total Frequency 35 82 32 22 13 16 200 Percent 17.5 41.0 16.0 11.0 6.5 8.0 100.0

Graph:

percent

87

Occupation
45 40 35 30 25 20 15 10 5 0
st ud

41

percentage

17.5

16

11

Percent 6.5 8

en t

ye d

pl o

Inference:

From

the

pr of es s

occupation

above

ho us e

em

bu si

graph

ot he rs

ne ss

na l

io

w

if e

we

can

see

that

17.5% investors are students, 41% are the employed, 16% are the business, 11% investors are the professionals, 6.5% investors are the housewife, and 8% are others, which include the retired, farmers and unemployed. ANNUAL INCOME Frequency

Frequency Valid 0 47 less than 1 lac 62 1-5 lacs 73 6-10 lacs 15 11-15 lacs 1 15 lacs & above 2 Total 200

Percent 23.5 31.0 36.5 7.5 .5 1.0 100.0

Valid Percent 23.5 31.0 36.5 7.5 .5 1.0 100.0

Cumulative Percent 23.5 54.5 91.0 98.5 99.0 100.0

Graph:

88

percentage 89 . 11-15 lacs 1 15 lacs & above Inference: From the above graph we can see that 23.5% investors have the 11 to 15 lacks annual income. 36.5 0.5 0 less than 1 lac 1-5 lacs 6-10 lacs income in Rs. 31% investors have less than 1 lack annual income.5 % investors have the 6 to 10 lacks income. and 1% investors have the 15 lacks and above annual income. 7.5 Percent 7.5 31 23.5% investors don’t have the income.annual income 40 35 30 25 20 15 10 5 0 36. 0.5 % investors have the 1to 5 lacks annual income.

Here we found that out of 200 investors 74 means 37% investors are trading in derivative market whereas 126 means 63% are not trading in derivative market. 7. 3. 5.FINDINGS 1. 2. Their attractive preference is index future and index options 6. 90 . Out of 200 investors 12. 4. high risky. Reasons for not investing in derivative market Is derivative is because lack of awareness and knowledge. The main objective I of trading in derivative market of the investors is getting high return. Criteria for trading is considered by investors are derivatives in derivative they get margin money and derivatives are more liquid.5% investors are investing 11% to 15% of their income trading in derivative market. Most of the investors are trading intraday. need huge amount of investment.

3.12. 10. Investors also prefer Safety and Time Factor as the important parameter for investing. 2.5% are satisfied with derivative market 9.157male investors and 43 female investors out of 200 investors.-most of the businessman and employed are trading in derivative market. 91 . CONCLUSION 1.8. In terms of investment in Derivative and Equity investors have capability of taking risk. The awareness regarding Derivative among investor is 78 percent.

4. The important factor that affecting the investor decision is based on In Consult With Their Broke 92 .

so increase the customer. 4. Only 74 investors are trading whereas 126 are not trading . 26 don’t have knowledge for derivative so provide them knowledge for trading in derivative market.RECOMMENDATION 1. 3. 93 . 2.so attract them for trading. Because negative word mouth of the customers fall down the business. Out of 126.19 are lack of awareness so make them aware with the derivative . Those who are not satisfied with the derivative by knowing their behavior of investment make them satisfied. And good word of mouth builds the business.

com 94 .com  www.L.bseindia.google.BIBLIOGRAPHY Books referred:  Options Futures.derivativesindia.com  www.com  www. and other Derivatives by John C Hull  Derivatives FAQ by Ajay Shah  NSE’s Certification in Financial Markets: .nse-india.sebi.gov.ncdex.C.com  www.Derivatives Core module  Financial Markets & Services by Gordon & Natarajan Reports:  Report of the RBI-SEBI standard technical committee on exchange traded Currency Futures  Regulatory Framework for Financial Derivatives in India by Dr.in  www.GUPTA Websites visited:  www.

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