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Thomas (F10092) Nileena Babu (F10093) cvbnmqwertyuiopasdfghjklzxcvbnmq wertyuiopasdfghjklzxcvbnmqwertyuio pasdfghjklzxcvbnmqwertyuiopasdfghj klzxcvbnmqwertyuiopasdfghjklzxcvbn mqwertyuiopasdfghjklzxcvbnmqwerty uiopasdfghjklzxcvbnmqwertyuiopasdf ghjklzxcvbnmqwertyuiopasdfghjklzxc vbnmqwertyuiopasdfghjklzxcvbnmrty uiopasdfghjklzxcvbnmqwertyuiopasdf ghjklzxcvbnmqwertyuiopasdfghjklzxc

Brief History of NSE Derivatives Segment


NSE started its foray into the FAO segment in June 2000. The first derivative instrument to be launched by the exchange was futures contracts based on its benchmark index, S&P CNX Nifty. It launched options contracts based on Nifty in June 2001. Later, in November in the same year, futures contracts on individual securities were also launched.

Developments
Year 2008 Introduction of Mini Nifty

On January 1, 2008, NSE launched its new product called Mini Nifty. Its underlying asset is the S&P CNX Nifty itself, but the difference is in terms of other contract specifications. The normal Nifty futures

contract has a lot size of 50, i.e. 50 units of Nifty, whereas the Mini Nifty has 20. Therefore the total contract amount also is less than half that of the normal Nifty futures. The contract size being lower, the margin requirement is also lesser compared to normal Nifty futures. The low margin requirement and lesser amount at stake because of smaller lot size made Mini Nifty a very attractive derivative product. It became very popular among the small investors. One could take a position in Mini Nifty Futures by paying margins as less as Rs. 8000 10000. Options contracts are also available in Mini Nifty. According to NSEs statistics, Mini Nifty is the 3rd most traded index derivative on NSE.

Year 2008 Introduction of USD-INR Currency Futures On 26th August 2008, NSE launched its currency derivatives segment. It was the first time that NSE ventured into a form of derivative other than equity/index futures and options. They launched futures contracts with US dollars as underlying asset. One lot of the contract was 1000 USD. The contract is traded in INR. Businesses usually hedge their exchange rate risk by entering into forward rate agreements with banks. Through the introduction of this product, NSE provided standardized contracts with different expiry periods, using which companies could hedge their foreign exchange risk. Later, in January 2010, NSE introduced three more currency pairs under its currency derivatives umbrella; EUR-INR (Euro and Indian Rupee), GBP-INR (Great Britain Pound and Indian Rupee) and JPY-INR (Japanese Yen and Indian Rupee).

Year 2009 Introduction of Cross Margining between Equity and FAO segment The system of cross margining between equity and derivatives segments was started by NSE in 2009. Before the introduction of this system, an investors position in cash market and FAO market were treated separately, even though both were on the same exchange (NSE). This meant that an investor could not pay the margin in the form of shares for taking a position in the derivatives market. However, with the introduction of this system, investors have to pay lesser margin. For example, suppose a person owns 400 shares of SBI in the cash market. If he wants to take a short position for 1000 shares in the futures market, he has to bring in a margin amount for only 600 shares, because he already has an offsetting position on the other 400 shares.

Year 2010 Switch from American to European Style of exercise for single stock options In October 2010, NSE announced that it would switch from American style of exercise to European style for all single stock option contracts expiring on January 27 th 2011 and onwards. Until then, the exchange had followed American style for all stock options and European style for all index options. This is good news for option writers and bad news for option buyers. For the option writer, this eliminates the worry of whether the buyer would exercise his right before the expiry. But for the option buyer, he loses his ability to book profits through exercise before expiry. Now, his only way of making profit before expiry is by squaring off the position. However, this is considered a good move, because it is the global practice.

Year 2011 Introduction of Global Indices Futures

The latest development in NSE FAO segment is the introduction of Futures and Options contracts on Global Indices. NSE will launch trading of Futures contracts on S&P 500 index and both Futures and Options contracts on Dow Jones Industrial Average (DJIA) index on August 29th, 2011. The contracts are rupee denominated and are cash settled. The aim is to provide Indian investors easy access to US markets. Current rules permit Indian investors to invest only in cash market abroad up to $200,000 in a year. These new products will enable Indian investors to take positions in US markets without having such restrictions imposed on them.