Content:

Introduction
Factors Driving The Growth Of Derivatives
Types of Derivatives
Participants
Underlying Asset Class
Economic functions
Benefits
Criticism
Derivatives in India
Introduction
Derivatives are synthetic instruments

They derive value from an underlying asset class

Asset classes range from financial instruments to

commodities.

Common underlying theme of derivatives is that

they are leveraged products.
Factors Driving The Growth Of Derivatives
Increased volatility.

Increased integration with the international

markets.

Development of more sophisticated risk management

tools.
Types of Derivatives

Futures/Forwards.
Options
Swaps
Baskets
Swaptions
Derivative Positions and Participants

Naked open position taking a directional call on the

markets
Hedge against underlying asset class
Arbitrage position within an asset class
Speculators
Hedgers
Arbitrageurs
Underlying Asset Class
Asset classes: financial which includes currencies and
commodities

Financial asset classes: Interest rates, equities and

currencies

Commodities range from agricultural commodities to

minerals and metals
Economic Functions

Leverage

Speculate & make a profit

Hedge or mitigate risk in the underlying

Obtain exposure to the underlying

Benefits
Derivatives facilitate the buying and selling of risk.

Helps increasing Buying in the underlying.

Create Liquidity in the Market.

Criticism
Possible large losses.

Counter-party risk.

Leverage of an economy's debt.

Derivatives in India
The structured derivative market in India is
relatively new (about 10 years old)

However derivatives have caught the fancy of the

market and exchange traded equity and
commodity derivatives are vibrant.
Equity Derivatives in India
Nifty index futures are the highest traded contracts
Single stock futures are actively traded for arbitrage
Nifty index options are also traded actively
Single stock options do not trade actively
Factors to Study in Nifty Futures
Open interest
Traded volumes as % to total derivative volumes
Basis spread
Movement of spread
Roll overs
Calendar Spreads
Factors to Study in Nifty Options
Changes in price
Open interest
Implied Volatility
Put call parity
Factors to Study in Single Stock Futures
Open interest
Basis Spread
Cost of carry
Volumes
Top traded single stock futures