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A PROJECT REPORT ON
DERIVATIVE MARKET IN INDIA
OF
SUBMITTED TO SUBMITTED BY
SHAREKHAN PVT.LTD ABHISHEK
JOSHI BHUBANESWAR
PGPIB,ASBM
ABHISHEK JOSHI
BHUBANESWAR
PGPIB, ASBM
DECLARATION
This is the report of the project work entitled “DERIVATIVE MARKET IINDIA”
undertaken by me during the two month training at share khan, Bhubaneswar
A copy of this project has been submitted to the organization where the project
was developed. This project is not submitted to any other organization or
university or College and is the Outcome of my work.
Date-
signature
ASBM,PGPIB
A C K N O W L E D G E M E N T TO COMPANY
I also extend my gratitude towards Mr. Prashanta kumar Nanda for helping
me in the completion of this report, the entire team at sharekhan, for their co-
operation and last but not the least the employees at sharekhan for their
support and encouragement in fulfilment of this report.
Date- Signature
Acknowledgement to the Faculty
ASIAN SCHOOL OF BUSINESS Management
Last but not the least my special thanks to the faculty of Asian school
of business management
For their kind co–operation and providing me with all the necessary
documents needed and guidance during the time period of project
completion.
DR.NITIRA
NJAN CHAND
ASBM,
BHUBANESWAR
TO WHOMSOEVER IT MAY CONCERN
On behalf SHAREKHAN Ltd., I take the privilege of recognizing the efforts put
in by Mr. ABHISHEK JOSHI to carry out her Project on “Indian Derivative
Market” from 19th APRIL to 12th JuNE 2010. ABHISHEK has not only
carried out this study as a part of his curriculum but he has proven to be a key
member in bringing positive contribution in our Sales strategies.
The project carried out by ABHISHEK has given us some focused reasons to
improve our people practices, focus on employee satisfaction level as well
contribute to our sales. In fact we are considering adapting a few suggestions
given by him in the above context.
Lastly, I would like to thank your esteemed institution for providing your
students such a platform; for them to learn from their experiences while
carrying out these studies.
Warm regards,
(BIJAN PANDA)
AST.branch
Manager
CONTENTS
18 questioner
19. Business Growth in Derivatives segment (NSE).............................
20. Findings & Conclusion.....................................................................
21. Recommendations & Suggestions..................................................
22 Bibliography ………………………………………………………........
23. Abbrevations...................................................................................
EXECUTIVE SUMMARY
Firstly I am briefing the current Indian market and comparing it with it past. I
am also giving brief data about foreign market. Then at the last I am giving my
suggestions and recommendations.
With over 25 million shareholders, India has the third largest investor base in
the world after USA and Japan. Over 7500 companies are listed on the Indian
stock exchanges (more than the number of companies listed in developed
markets of Japan, UK, Germany, France, Australia, Switzerland, Canada and
Hong Kong.). The Indian capital market is significant in terms of the degree of
development, volume of trading, transparency and its tremendous growth
potential.
India’s market capitalization was the highest among the emerging markets.
Total market capitalization of The Bombay Stock Exchange (BSE), which, as
on July 31, 1997, was US$ 175 billion has grown by 37.5% percent every
twelve months and was over US$ 834 billion as of January, 2007. Bombay
Stock Exchanges (BSE), one of the oldest in the world, accounts for the
largest number of listed companies transacting their shares on a nationwide
online trading system. The two major exchanges namely the National Stock
Exchange (NSE) and the Bombay Stock Exchange (BSE) ranked no. 3 & 5 in
the world, calculated by the number of daily transactions done on the
exchanges.
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. Turnover in the Spot and Derivatives segment both in NSE & BSE
was higher by 45% into 2006 as compared to 2005. With daily average
volume of US $ 9.4 billion, the Sensex has posted excellent returns in the
recent years. Currently the market cap of the Sensex as on July 4th, 2009
was Rs 48.4 Lakh Crore with a P/E of more than 20.
Derivatives are assets, which derive their values from an underlying asset.
These underlying assets are of various categories like
• Commodities including grains, coffee beans, etc.
• Precious metals like gold and silver.
• Foreign exchange rate.
•Bonds of different types, including medium to long-term negotiable debt
securities issued by governments, companies, etc.
• Short-term debt securities such as T-bills.
• Over-The-Counter (OTC) money market products such as loans or deposits.
• Equities
For example, a dollar forward is a derivative contract, which gives the buyer a
right & an obligation to buy dollars at some future date. The prices of the
derivatives are driven by the spot prices of these underlying assets.
However, the most important use of derivatives is in transferring market risk,
called Hedging, which is a protection against losses resulting from unforeseen
price or volatility changes. Thus, derivatives are a very important tool of risk
management.
There are various derivative products traded. They are;
1. Forwards
2. Futures
3. Options
4. Swaps
“A Forward Contract is a transaction in which the buyer and the seller agree
upon a delivery of a specific quality and quantity of asset usually a commodity
at a specified future date. The price may be agreed on in advance or in
future.”
“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 Price is called Premium and is paid by buyer of
the option to the seller or writer of the option.”
A call option gives the holder the right to buy an underlying asset by a
certain date for a certain price. The seller is under an obligation to fulfill the
contract and is paid a price of this, which is called "the call option premium or
call option price".
A put option, on the other hand gives the holder the right to sell an
underlying asset by a certain date for a certain price. The buyer is under an
obligation to fulfil the contract and is paid a price for this, which is called "the
put option premium or put option price".
“Swaps are transactions which obligates the two parties to the contract to
exchange a series of cash flows at specified intervals known as payment or
settlement dates. They can be regarded as portfolios of forward's contracts. A
contract whereby two parties agree to exchange (swap) payments, based on
some notional principle amount is called as a ‘SWAP’. In case of swap, only
the payment flows are exchanged and not the principle amount”
SSKI (Shripal Sevantilal Kantilal Ishwarlal ) investors Services Pvt. Ltd. offers
World- Sharekhan is stock broking company. ShareKhan comes under retail arm of
class facilities for buying and selling Shares on BSE and NSE, Demate
Services(DP)Derivatives(F&O). SSKI group also comprises of Institutional broking
and Corporate Finance. Sharekhan does not claim expertise in too many things.
Sharekhan's expertise lies in stocks and that's what he talks about with authority. So
when he says that investing in stocks should not be confused with trading in stocks or
a portfolio-based strategy is better than betting on a single horse, it is something that
is spoken with years of focused learning and experience in the stock markets. And
these beliefs are reflected in everything Sharekhan does for you!
Those of you who feel comfortable dealing with a human being and would rather visit
a brick-and-mortar outlet than talk to a PC, you'd be glad to know that Sharekhan
offers you the facility to visit (or talk to) any of our share shops across the country. In
fact Sharekhan runs India's largest chain of share shops with over hundred outlets in
more than 80 cities! What's a share shop? How do you locate a share shop in your
city?
Sharekhan is 80 years old company which is started online in the year 2000 & it is the
first company who started online in 1984 they ventured into institutional broking&
corporate finance. They having 14 branches, 400 franchises also having 466 shops in
210 cities.
CURRENT POSITION
VISION
To empower the investor with quality advice and superior service to help him take
better investment decisions. We believe that our growth depends on client
satisfaction.
MISSION
To provide the best customer service and product innovation tuned to diverse
needs of clientele
CORE VALUE
• SSKI named its online division as SHARE KHAN and it is into retail Broking
• It has specialized research product for the small investors and day traders
• .it has 240 branch and 800 franchise all over india.
• It offers its customers with the trade execution facilities on the NSE, for cash
as well as derivatives, depository services
1. Sharekhan provides 4 in 1 account. –
2. Demat a/c
3. Trading a/c: for cash calculation
4. Bank a/c: for fund transfer
5. Mutual fund schemes
6. Dial and Trade: for query relating trading Products:
7. Bonds
8. Shares -online and offline
9. Portfolio Management System ¬Insurance Commodities
This accounts for active traders who trade frequently during the day's
trading session. Following are few popular features of Speed Trade
account
Single screen interface for cash and derivatives
In the first week we had training sessions for 3 days in which our company guide Mr.
bijan panda gave us the complete information about the company, its products and
policies. He gave us tips on how to open and close the calls. He also gave us tips on
how to do telecalling. He also gave us information on how to fill the KYC form and
what are the documents required to open the demat account. Then finally after this
we were sent to the market to bring demat accounts and Mutual funds. Initially we
faced many obstacles and reasons were many like bad stock market
conditions And we were unable to locate potential market etc.but slowly I collected
a good number of leads and references from hom so ever I met. I am still following
the clients who are giving follow up dates During this venture I came across many
people who came from different walks of life. I have learned How to deal with them
and convince them to open the demat account with Sharekhan. Selling a demat
account requires special focus on targeting the customer Each and every person does
not invest in the share market. The person who will be investing in the share market
should have at least the basic knowledge about the same or should have the curiosity
to gain the same. So what I had to do is to identify the prospective client and then try
to convince them. Wasting time on the customer who does not know Anything about
stock market is completely worthless. While on the call if customer asks me any
query about which I am not very much sure then I call our prasnta sir my interal
corporate guide who then clears my doubts and queries without any irritation. This
not only solves clients query but also makes our concepts clear and strong. I initially
met 2 to people every day. Out of these I found 5 to 6 persons who took actual
interest in the Demat account and Mutual funds. As I met more and more people, I
learned how to identify the prospective clients. I came to know more about how to
talk to them, how much time should be given to each client. So my clients’
conversion ratio also increased. Even, by solving the customer queries, my own
understandings were enhanced. While selling our product in the market, I also came
to know more about our competitor's product like, ICICIDirect, India bulls, India
Infoline, Broking etc. and their strategy of marketing and the consumer's preference
towards the competitor's product. I did cold calling in these three months and created
my own database through it. In the second month some of the follow-ups from the
first month started converting. Sharekhan also started giving advertisement in leading
English dailies and on channels like CNBC where the customers care toll free number
is displayed. Sharekhan also started giving ads on the various sites like Yahoo,
Google etc.Sharekhan also started a scheme of free demat account opening and also
the one in which the brokerage reduces to half of the original brokerage of 0.05% for
Intraday and 0.05% for Delivery. I met people in different locations i.e. at saheed
nagar,acharya bihar,nayapalli,.. This includes people from the Big Showrooms and
malls like Big Bazzar, Chartered Accountants, Travel agents, business people,
housewives, real estate people, Customer Relationship Managers, Assistant Sales
Manager, and engineers of some companies. and give the report to my company
guide.
INTRODUCTION
A Derivative is a financial instrument whose value depends on other, more
contracts, Swap and different types of options are regularly traded outside
The study has been done to know the different types of derivatives and also to
know the derivative market in India and perception of investor towards Indian
derivative market . This study also covers the recent developments in the
Through this study I came to know the trading done in derivatives and their use in
The emergence of the market for derivative products, most notably forwards, futures
and options, can be traced back to the willingness of risk-averse economic agents to
guard themselves against uncertainties arising out of fluctuations in asset prices. By
their very nature, the financial markets are marked by a very high degree of volatility.
Through the use of derivative products, it is possible to partially or fully transfer price
risks by locking-in asset prices. As instruments of risk management, these generally
do not influence the fluctuations in the underlying asset prices. However, by locking-
in asset prices, derivative products minimize the impact of fluctuations in asset prices
on the profitability and cash flow situation of risk-averse investors.
Derivative products initially emerged, as hedging devices against fluctuations in
commodity prices and commodity-linked derivatives remained the sole form of such
products for almost three hundred years. The financial derivatives came into spotlight
in post-1970 period due to growing instability in the financial markets. However,
since their emergence, these products have become very popular and by 1990s, they
accounted for about two-thirds of total transactions in derivative products. In recent
years, the market for financial derivatives has grown tremendously both in terms of
variety of instruments available, their complexity and also turnover. In the class of
equity derivatives, futures and options on stock indices have gained more popularity
than on individual stocks, especially among institutional investors, who are major
users of index-linked derivatives.
Even small investors find these useful due to high correlation of the popular indices
with various portfolios and ease of use. The lower costs associated with index
derivatives vis-vis derivative products based on individual securities is another reason
for their growing use.
As in the present scenario, Derivative Trading is fast gaining momentum, I
have chosen this topic.
OBJECTIVES OF THE STUDY
The project covers the derivatives market and its instruments. For better
understanding various strategies with different situations and actions have been
given. It includes the data collected in the recent years and also the market in the
derivatives in the recent years. This study extends to the trading of derivatives
A farmer who sowed his crop in June faced uncertainty over the price he
would receive for his harvest in September. In years of scarcity, he would probably
obtain attractive prices. However, during times of oversupply, he would have to
dispose off his harvest at a very low price. Clearly this meant that the farmer and his
family were exposed to a high risk of price uncertainty.
DERIVATIVE DEFINED
A derivative is a product whose value is derived from the value of one or more
underlying variables or assets in a contractual manner. The underlying asset can be
equity, forex, commodity or any other asset. In our earlier discussion, we saw that
wheat farmers may wish to sell their harvest at a future date to eliminate the risk of
change in price by that date. Such a transaction is an example of a derivative. The
price of this derivative is driven by the spot price of wheat which is the “underlying”
in this case.
The Forwards Contracts (Regulation) Act, 1952, regulates the forward/futures
contracts in commodities all over India. As per this the Forward Markets Commission
(FMC) continues to have jurisdiction over commodity futures contracts. However
when derivatives trading in securities was introduced in 2001, the term “security” in
the Securities Contracts (Regulation) Act, 1956 (SCRA), was amended to include
derivative contracts in securities. Consequently, regulation of derivatives came under
the purview of Securities Exchange Board of India (SEBI). We thus have separate
regulatory authorities for securities and commodity derivative markets.
Derivatives are securities under the SCRA and hence the trading of derivatives is
governed by the regulatory framework under the SCRA. The Securities Contracts
(Regulation) Act, 1956 defines “derivative” to include-
A security derived from a debt instrument, share, loan whether secured or unsecured,
risk instrument or contract differences or any other form of security.
A contract which derives its value from the prices, or index of prices, of underlying
securities.
TYPES OF DERIVATIVES MARKET
TYPES OF DERIVATIVES
Derivatives
This age-old trading mechanism in the Indian stock markets used to create many
functional inefficiencies. Lack of liquidity and transparency, long settlement periods
and benami transactions are a few examples that adversely affected investors. In order
to overcome these inefficiencies, OTCEI was incorporated in 1990 under the
Companies Act 1956. OTCEI is the first screen based nationwide stock exchange in
India created by Unit Trust of India, Industrial Credit and Investment Corporation of
India, Industrial Development Bank of India, SBI Capital Markets, Industrial Finance
Corporation of India, General Insurance Corporation and its subsidiaries and Can
Bank Financial Services.
A type of financial derivative that has its transaction directly negotiated between two
parties rather than through an exchange. Some financial derivatives, such as a swap, a
forward rate agreement or an exotic option, are usually done over the counter.
(ii)FUTURE CONTRACT
A futures contract gives the holder the right and the obligation to buy or sell, which
differs from an options contract, which gives the buyer the right, but not the
obligation, and the option writer (seller) the obligation, but not the right. To exit the
commitment, the holder of a futures position has to sell his long position or buy back
his short position, effectively closing out the futures position and its contract
obligations. Futures contracts are exchange traded derivatives. The exchange acts as
counterparty on all contracts, sets margin requirements, etc.
1. Standardization :
• The underlying. This can be anything from a barrel of sweet crude oil to a
short term interest rate.
• The type of settlement, either cash settlement or physical settlement.
• The amount and units of the underlying asset per contract. This can be the
notional amount of bonds, a fixed number of barrels of oil, units of foreign
currency, the notional amount of the deposit over which the short term interest
rate is traded, etc.
• The currency in which the futures contract is quoted.
• The grade of the deliverable. In case of bonds, this specifies which bonds can
be delivered. In case of physical commodities, this specifies not only the
quality of the underlying goods but also the manner and location of delivery.
The delivery month.
• The last trading date.
• Other details such as the tick, the minimum permissible price fluctuation.
2. Margin :
Although the value of a contract at time of trading should be zero, its price constantly
fluctuates. This renders the owner liable to adverse changes in value, and creates a
credit risk to the exchange, who always acts as counterparty. To minimize this risk,
the exchange demands that contract owners post a form of collateral, 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.
Initial Margin: is paid by both buyer and seller. It represents the loss on that
contract, as determined by historical price changes, which is not likely to be exceeded
on a usual day's trading. It may be 5% or 10% of total contract price.
Mark to market Margin: Because a series of adverse price changes may exhaust
the initial margin, a further margin, usually called variation or maintenance margin, is
required by the exchange. This is calculated by the futures contract, i.e. agreeing on a
price at the end of each day, called the "settlement" or mark-to-market price of the
contract.
To understand the original practice, consider that a futures trader, when taking a
position, deposits money with the exchange, called a "margin". This is intended to
protect the exchange against loss. At the end of every trading day, the contract is
marked to its present market value. If the trader is on the winning side of a deal, his
contract has increased in value that day, and the exchange pays this profit into his
account. On the other hand, if he is on the losing side, the exchange will debit his
account. If he cannot pay, then the margin is used as the collateral from which the
loss is paid.
3. Settlement
Settlement is the act of consummating the contract, and can be done in one of two
ways, as specified per type of futures contract:
• Physical delivery - the amount specified of the underlying asset of the
contract is delivered by the seller of the contract to the exchange, and by the
exchange to the buyers of the contract. In practice, it occurs only on a minority of
contracts. Most are cancelled out by purchasing a covering position - that is,
buying a contract to cancel out an earlier sale (covering a short), or selling a
contract to liquidate an earlier purchase (covering a long).
• Cash settlement - a cash payment is made based on the underlying reference
rate, such as a short term interest rate index such as Euribor, or the closing value
of a stock market index. A futures contract might also opt to settle against an
index based on trade in a related spot market.
Expiry is the time when the final prices of the future are determined. For many
equity index and interest rate futures contracts, this happens on the Last Thursday of
certain trading month. On this day the t+2 futures contract becomes the t forward
contract.
This relationship may be modified for storage costs, dividends, dividend yields, and
convenience yields. Any deviation from this equality allows for arbitrage as follows.
In the case where the forward price is higher:
1. The arbitrageur sells the futures contract and buys the underlying today (on
the spot market) with borrowed money.
2. On the delivery date, the arbitrageur hands over the underlying, and receives
the agreed forward price.
3. He then repays the lender the borrowed amount plus interest.
4. The difference between the two amounts is the arbitrage profit.
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, called the strike price, during a period or on
a specific date in exchange for payment of a premium is known as ‘option’.
Underlying asset refers to any asset that is traded. The price at which the underlying
is traded is called the ‘strike price’.
There are two types of options i.e., CALL OPTION & PUT OPTION.
CALL OPTION:
A contract that gives its owner the right but not the obligation to buy an underlying
asset-stock or any financial asset, at a specified price on or before a specified date is
known as a ‘Call option’. The owner makes a profit provided he sells at a higher
current price and buys at a lower future price.
PUT OPTION:
A contract that gives its owner the right but not the obligation to sell an underlying
asset-stock or any financial asset, at a specified price on or before a specified date is
known as a ‘Put option’. The owner makes a profit provided he buys at a lower
current price and sells at a higher future price. Hence, no option will be exercised if
the future price does not increase.
Put and calls are almost always written on equities, although occasionally preference
shares, bonds and warrants become the subject of options.
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. They
can be regarded as portfolios of forward's contracts. A contract whereby two parties
agree to exchange (swap) payments, based on some notional principle amount is
called as a ‘SWAP’. In case of swap, only the payment flows are exchanged and not
the principle amount. The two commonly used swaps are:
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. 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. Under a currency swap, cash flows to be
exchanged are determined at the spot rate at a time when swap is done. Such cash
flows are supposed to remain unaffected by subsequent changes in the exchange
rates.
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. It also allows the
investors to exchange one type of asset for another type of asset with a preferred
income stream.
OTHER KINDS OF DERIVATIVES
The other kind of derivatives, which are not, much popular are as
follows:
BASKETS -
Baskets options are option on portfolio of underlying asset. Equity Index Options are
most popular form of baskets.
LEAPS -
WARRANTS -
Options generally have lives of up to one year, the majority of options traded
on options exchanges having a maximum maturity of nine months. Longer-
dated options are called warrants and are generally traded over-the-counter.
SWAPTIONS -
Swaptions are options to buy or sell a swap that will become operative at the expiry
of the options. Thus a swaption is an option on a forward swap. Rather than have calls
and puts, the swaptions market has receiver swaptions and payer swaptions. A
receiver swaption is an option to receive fixed and pay floating. A payer swaption is
an option to pay fixed and receive floating.
HISTORY OF DERIVATIVES:
The history of derivatives is quite colourful and surprisingly a lot longer than most
people think. Forward delivery contracts, stating what is to be delivered for a fixed
price at a specified place on a specified date, existed in ancient Greece and Rome.
Roman emperors entered forward contracts to provide the masses with their supply of
Egyptian grain. These contracts were also undertaken between farmers and merchants
to eliminate risk arising out of uncertain future prices of grains. Thus, forward
contracts have existed for centuries for hedging price risk.
The first organized commodity exchange came into existence in
the early 1700’s in Japan. The first formal commodities exchange, 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. From
‘forward’ trading in commodities emerged the commodity ‘futures’. The first type of
futures contract was called ‘to arrive at’. Trading in futures began on the CBOT in the
1860’s. In 1865, CBOT listed the first ‘exchange traded’ derivatives contract, known
as the futures contracts. Futures trading grew out of the need for hedging the price
risk involved in many commercial operations. The Chicago Mercantile Exchange
(CME), a spin-off of CBOT, was formed in 1919, though it did exist before in 1874
under the names of ‘Chicago Produce Exchange’ (CPE) and ‘Chicago Egg and Butter
Board’ (CEBB). The first financial futures to emerge were the currency in 1972 in the
US. The first foreign currency futures were traded on May 16, 1972, on International
Monetary Market (IMM), a division of CME. The currency futures traded on the
IMM are the British Pound, the Canadian Dollar, the Japanese Yen, the Swiss Franc,
the German Mark, the Australian Dollar, and the Euro dollar. Currency futures were
followed soon by interest rate futures. Interest rate futures contracts were traded for
the first time on the CBOT on October 20, 1975. Stock index futures and options
emerged in 1982. The first stock index futures contracts were traded on Kansas City
Board of Trade on February 24, 1982.The first of the several networks, which offered
a trading link between two exchanges, was formed between the Singapore
International Monetary Exchange (SIMEX) and the CME on September 7, 1984.
Options are as old as futures. Their history also dates back to ancient Greece and
Rome. Options are very popular with speculators in the tulip craze of seventeenth
century Holland. Tulips, the brightly coloured flowers, were a symbol of affluence;
owing to a high demand, tulip bulb prices shot up. Dutch growers and dealers traded
in tulip bulb options. There was so much speculation that people even mortgaged
their homes and businesses. 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 first call and put options were invented by an American
financier, Russell Sage, in 1872. These options were traded over the counter.
Agricultural commodities options were traded in the nineteenth century in England
and the US. Options on shares were available in the US on the over the counter
(OTC) market only until 1973 without much knowledge of valuation. 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.
On April 26, 1973, the Chicago Board options Exchange (CBOE)
was set up at CBOT for the purpose of trading stock options. It was in 1973 again that
black, Merton, and Scholes invented the famous Black-Scholes Option Formula. This
model helped in assessing the fair price of an option which led to an increased interest
in trading of options. With the options markets becoming increasingly popular, the
American Stock Exchange (AMEX) and the Philadelphia Stock Exchange (PHLX)
began trading in options in 1975.
The market for futures and options grew at a rapid pace in the eighties and nineties.
The collapse of the Bretton Woods regime of fixed parties and the introduction of
floating 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 CBOT and the CME are two largest financial exchanges in the world on which
futures contracts are traded. The CBOT now offers 48 futures and option contracts
(with the annual volume at more than 211 million in 2001).The CBOE is the largest
exchange for trading stock options. The CBOE trades options on the S&P 100 and the
S&P 500 stock indices. The Philadelphia Stock Exchange is the premier exchange for
trading foreign options.
The most traded stock indices include S&P 500, the Dow Jones Industrial
Average, the Nasdaq 100, and the Nikkei 225. The US indices and the Nikkei 225
trade almost round the clock. The N225 is also traded on the Chicago Mercantile
Exchange.
High Liquidity in the The daily average traded volume in Indian capital
underlying market today is around 7500 crores. Which means on
an average every month 14% of the country’s Market
capitalisation gets traded. These are clear indicators of
high liquidity in the underlying.
In Indian context, south East Asian currencies crisis of 1997 had affected the
competitiveness of our products vis-à-vis depreciated currencies. Export of certain
goods from India declined because of this crisis. Steel industry in 1998 suffered its
worst set back due to cheap import of steel from south East Asian countries. Suddenly
blue chip companies had turned in to red. The fear of china devaluing its currency
created instability in Indian exports. Thus, it is evident that globalisation of industrial
and financial activities necessitates use of derivatives to guard against future losses.
This factor alone has contributed to the growth of derivatives to a significant extent.
The first step towards introduction of derivatives trading in India was the
promulgation of the Securities Laws (Amendment) Ordinance, 1995, which withdrew
the prohibition on options in securities. The market for derivatives, however, did not
take off, as there was no regulatory framework to govern trading of derivatives. SEBI
set up a 24–member committee under the Chairmanship of Dr.L.C.Gupta on
November 18, 1996 to develop appropriate regulatory framework for derivatives
trading in India. The committee submitted its report on March 17, 1998 prescribing
necessary pre–conditions for introduction of derivatives trading in India. 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. SEBI also set up a group in June 1998 under the Chairmanship of
Prof.J.R.Varma, to recommend measures for risk containment in derivatives market
in India. The report, which was submitted in October 1998, worked out the
operational details of margining system, methodology for charging initial margins,
broker net worth, deposit requirement and real–time monitoring requirements. 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. The act also made it clear that
derivatives shall be legal and valid only if such contracts are traded on a recognized
stock exchange, thus precluding OTC derivatives. The government also rescinded in
March 2000, the three decade old notification, which prohibited forward trading in
securities. Derivatives trading commenced in India in June 2000 after SEBI granted
the final approval to this effect in May 2001. SEBI permitted the derivative segments
of two stock exchanges, NSE and BSE, and their clearing house/corporation to
commence trading and settlement in approved derivatives contracts. To begin with,
SEBI approved trading in index futures contracts based on S&P CNX Nifty and
BSE–30 (Sense) index. This was followed by approval for trading in options based on
these two indexes and options on individual securities.
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):
• 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.
• 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 in India followed by forwards and options.
Significant milestones in the development of derivatives market have
been (i) 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.
• 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 per cent.
Table 4.1ForexMarketActivity
BENEFITS OF DERIVATIVES
Derivative markets help investors in many different ways:
1.] RISK MANAGEMENT –
Futures and options contract can be used for altering the risk of investing in spot
market. For instance, consider an investor who owns an asset. He will always be
worried that the price may fall before he can sell the asset. He can protect himself by
selling a futures contract, or by buying a Put option. If the spot price falls, the short
hedgers will gain in the futures market, as you will see later. This will help offset
their losses in the spot market. Similarly, if the spot price falls below the exercise
price, the put option can always be exercised.
MCX
NMCE
National Multi Commodity Exchange of India Ltd. (NMCE) was promoted by
Central Warehousing Corporation (CWC), National Agricultural Cooperative
Marketing Federation of India (NAFED), Gujarat Agro-Industries Corporation
Limited (GAICL), Gujarat State Agricultural Marketing Board (GSAMB), National
Institute of Agricultural Marketing (NIAM), and Neptune Overseas Limited (NOL).
While various integral aspects of commodity economy, viz., warehousing,
cooperatives, private and public sector marketing of agricultural commodities,
research and training were adequately addressed in structuring the Exchange, finance
was still a vital missing link. Punjab National Bank (PNB) took equity of the
Exchange to establish that linkage. Even today, NMCE is the only Exchange in India
to have such investment and technical support from the commodity relevant
institutions.
MARKET
1. The Board at its meeting on November 29, 2002 had desired that a quarterly
report be submitted to the Board on the developments in the derivative market.
Accordingly, this memorandum presents a status report for the quarter July-
September 2008-09 on the developments in the derivative market.
Refer Table 1
Reliance, Reliance Capital Ltd, Reliance Petro. Ltd, State Bank of India and
ICICI Bank Ltd were the most actively traded scrips in the derivatives
segment. Together they contributed 25.12% of derivatives turnover in
individual stocks.
Client trading constituted 60.17%, Propriety trading constituted 31.07% and
FII trading constituted remaining 8.76% of the total turnover.
Refer Table 2
Volume in longer dated derivative contracts (contracts with maturity of more
than three months and up to 3 years) was 3.99 lakh and total turnover was Rs.
9870 crore.
Refer Table 3
Volume in Mini Nifty (contracts with minimum lot size of Rs.1 lakh) was
44 lakh and total turnover was Rs. 37 thousand crore.
Refer Table 4
During July-September, 2008, S&P CNX Nifty futures recorded highest
average daily volatility of 2.85% in July 2008.
Refer Table 5
The volume (in terms of no. of contracts traded) of Nifty Future at SGX
as a percentage of the volume of Nifty Future at NSE was 8.55% during
July- September 2008-09.
Refer Table 6
India stands 2nd in Stock Futures, 2nd in Index Futures, 16th in Stock
Option and
PRODUCT
Contracts(L (Rs. ‘000) Contracts(Lakh) (Rs. ‘000)
akh)
VOLUME & TURNOVER
Index Future 415.7 935.6 542.6 1,077.5
Index Option 240.1 571.3 521.2 1,130.9
Single Stock 514.5 1,093.1 599.0 1,039.3
Future
Stock Option 25.5 58.3 35.9 69.1
Total 1,195.8 2,658.4 1,698.7 3,317.0
Market Share ( %)
Index Future 1,077.5 35.20 31.94 32.48
Index Option 1,130.9 21.49 30.68 34.09
Single Stock
1,039.3 41.12 35.26 31.33
Future
Stock Option 69.1 2.19 2.11 2.08
Turnover in F&O as
multiple of turnover in 4.19
cash segment 3.26
- Reliance - Reliance
Five most active
Market Concentration
Client
(excluding FII 59.77 60.17
trades)
Proprietary 27.88 31.07
FII 12.35 8.76
Time
Period Trades in Shorter Dated Trades in Longer Dated
derivative contracts (up t o derivative contracts
3 Months) more than 3 months)
(more
(Quarter) No of No of
Turnover Turnover
contracts contracts
(Rs. ‘000 cr.) (Rs. ‘000 cr.)
(lakh) (lakh)
July-September
2008-09 1,694.64 3,307.11 3.99 9.87
Apr-Jun 2008-
1,194.97 2,655.88 4.83 12.5
09
Apr-Jun 2008-
29.4 27.7
09
Salient points for the 2nd quarter 2008-09
The volume (no. of contracts) and open interest in the derivatives market
has increased even when the underlying market is witnessing a downward trend. This
indicates that there are sufficient long position holders who anticipate value
proposition in a falling market. Falling or rising markets on the back of low
volumes may be a cause of concern from the point of market integrity. However, as
observed from the data, under the present scenario the fall in the market has been
accompanied by high volumes.
Except Index Option, the market share of all other products has decreased
(both in terms of volume and turnover) in second quarter of 2008-09 as compared
to the first quarter of 2008-09.
There is a decrease in turnover (21.04%) and volume (17.39%) in Longer
Dated derivative contracts in second quarter of 2008-09 as compared to the first
quarter of 2008-09.
Longer dated derivatives were launched in March 2008, but the volumes
have not picked up consequently.
RESARCH METHODOLOGY
RESARCH METHODOLOGY
After collecting the Secondary data the next phase will be collection of primary data
using Questionnaires. The questionnaire will be filled by around 50 people who will be
mainly from Bhubaneswar . The sample will consist of people who are employed or
work as free lancers dealing in derivative market to know their perception towards
investment in derivative market.
The data collected will be then entered into MS Excel for analysis of the data collected
from the questionnaire.
RESEARCH DESIGN
Non probability
The non –probability respondents have been researched by selecting the persons
who do the trading in derivative market. Those persons who do not trade in derivative
market have not been interviewed.
Exploratory and descriptive research
The research is primarily both exploratory and descriptive in nature. The sources
of information are both primary and secondary. The secondary data has been taken by
referring to various magazines, newspapers, internal sources and internet to get the
figures required for the research purposes. The objective of the exploratory research is
to gain insights and ideas. The objective of the descriptive research study is typically
concerned with determining the frequency with which something occurs. A well
structured questionnaire was prepared for the primary research and personal interviews
were conducted to collect the responses of the target population.
SAMPLING METHODOLOGY
Sampling Technique
Initially, a rough draft was prepared a pilot study was done to check the accuracy of
the Questionnaire and certain changes were done to prepare the final questionnaire to
make it more judgmental.
Sampling Unit
The respondents who were asked to fill out the questionnaire in the Bhubaneswar are
the sampling units. These respondents comprise of the persons dealing in derivative
market. The people have been interviewed in the open market, in front of the
companies, telephonic interviews and through other sources also
Sample Size
The sample size was restricted to only 50 respondents.
Sampling Area
The area of the research was Bhubaneswar.
Time:
8 week
Statistical Tools Used:
Simple tools like bar graphs, tabulation, line diagrams have been used.
LIMITAITONS OF STUDY
1. LIMITED TIME:
The time available to conduct the study was only 8 week. It being a wide topic
had a limited time.
2. LIMITED RESOURCES:
Limited resources are available to collect the information about the commodity
trading.
3. VOLATALITY:
Share market is so much volatile and it is difficult to forecast any thing about it
whether you trade through online or offline
4. ASPECTS COVERAGE:
Some of the aspects may not be covered in my study.
The study takes into account the performance of the derivative till jul 2009..
ANALYSIS
Q. What kind of risk do you perceive while investing in the stock market?
Risk in stock market No.of result
Uncertainty of returns 19
Slump in stock market 22
Fear of windup of company 6
Others 3
Q. From where you prefer to take advice before investing in derivative market?
Advice From No. of Result
Brokerage houses 15
Research analyst 7
Websites 2
News Networks 23
Others 3
1. Derivative market is growing very fast in the Indian Economy. The turnover
of Derivative Market is increasing year by year in the India’s largest stock
exchange NSE. In the case of index future there is a phenomenal increase in
the number of contracts. But whereas the turnover is declined considerably. In
the case of stock future there was a slow increase observed in the number of
contracts whereas a decline was also observed in its turnover. In the case of
index option there was a huge increase observed both in the number of
contracts and turnover.
2. After analyzing data it is clear that the main factors that are driving the growth
of Derivative Market are Market improvement in communication facilities as
well as long term saving & investment is also possible through entering into
Derivative Contract. So these factors encourage the Derivative Market in
India.
3. It encourages entrepreneurship in India. It encourages the investor to take
more risk & earn more return. So in this way it helps the Indian Economy by
developing entrepreneurship. Derivative Market is more regulated &
standardized so in this way it provides a more controlled environment. In
nutshell, we can say that the rule of High risk & High return apply in
Derivatives. If we are able to take more risk then we can earn more profit
under Derivatives.
Commodity derivatives have a crucial role to play in the price risk management
process for the commodities in which it deals. And it can be extremely beneficial in
agriculture-dominated economy, like India, as the commodity market also involves
agricultural produce. Derivatives like forwards, futures, options, swaps etc are
extensively used in the country. However, the commodity derivatives have been
utilized in a very limited scale. Only forwards and futures trading are permitted in
certain commodity items.
RELIANCE is the most active future contracts on individual securities
traded with 90090 contracts and RNRL is the next most active futures contracts with
63522 contracts being traded.
RECOMMENDATIONS & SUGGESTIONS
Books referred:
Options Futures, and other Derivatives by John C Hull
Derivatives FAQ by Ajay Shah
NSE’s Certification in Financial Markets: - 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.L.C.GUPTA
Websites visited:
www.nse-india.com
www.bseindia.com
www.sebi.gov.in
www.ncdex.com
www.derivativesindia.com
ANNEXURE
Sir/Ma’am,
This questionnaire is meant for educational purposes only.
The information provided by you will be kept secure and confidential.
NAME- __________________________________________________
CONTACT- ______________________________________________
GENDER-________________________________________________
OCCUPATION-___________________________________________
1. Educational Qualification
<INPUT TYPE=\ RADIO > MACROBUTTON HTMLDirect Undergraduate
<INPUT TYPE=\ RADIO > MACROBUTTON HTMLDirect Graduate
<INPUT TYPE=\ RADIO > MACROBUTTON HTMLDirect Post Graduate
<INPUT TYPE=\ RADIO > MACROBUTTON HTMLDirect Professional Degree
Holder
2. Income Range:
<INPUT TYPE=\ RADIO > MACROBUTTON HTMLDirect Below 1,50,000
<INPUT TYPE=\ RADIO > MACROBUTTON HTMLDirect 1,50,000 – 3,00,000
<INPUT TYPE=\ RADIO > MACROBUTTON HTMLDirect 3,00,000 – 5,00,000
<INPUT TYPE=\ RADIO > MACROBUTTON HTMLDirect Above 5,00,000
5. What kind of risk do you perceive while investing in the stock market?
<INPUT TYPE=\ RADIO > MACROBUTTON HTMLDirect Uncertainty of returns
<INPUT TYPE=\ RADIO > MACROBUTTON HTMLDirect Slump in stock market
<INPUT TYPE=\ RADIO > MACROBUTTON HTMLDirect Fear of being windup
of company <INPUT TYPE=\ RADIO > MACROBUTTON HTMLDirect
Other (Specify) _________________
6. Why people do not invest in derivative market? (Rank your preference 1-4)
<INPUT TYPE=\ RADIO > MACROBUTTON HTMLDirect Lack of knowledge
and difficulty in understanding
<INPUT TYPE=\ RADIO > MACROBUTTON HTMLDirect Increase speculation
<INPUT TYPE=\ RADIO > MACROBUTTON HTMLDirect Very risky and highly
leveraged instrument
<INPUT TYPE=\ RADIO > MACROBUTTON HTMLDirect Counter party risk
7. What is the purpose of investing in derivative market?
<INPUT TYPE=\ RADIO > MACROBUTTON HTMLDirect To hedge their fund
<INPUT TYPE=\ RADIO > MACROBUTTON HTMLDirect Risk control
<INPUT TYPE=\ RADIO > MACROBUTTON HTMLDirect More stable
<INPUT TYPE=\ RADIO > MACROBUTTON HTMLDirect Direct investment
without buying and holding assets
9. From where you prefer to take advice before investing in derivative market?
<INPUT TYPE=\ RADIO > MACROBUTTON HTMLDirect Brokerage houses
<INPUT TYPE=\ RADIO > MACROBUTTON HTMLDirect Research analyst
<INPUT TYPE=\ RADIO > MACROBUTTON HTMLDirect Websites
<INPUT TYPE=\ RADIO > MACROBUTTON HTMLDirect News Networks
<INPUT TYPE=\ RADIO > MACROBUTTON HTMLDirect Other (Specify)
_________________
11. What contract maturity period would interest you for trading in?
<INPUT TYPE=\ RADIO > MACROBUTTON HTMLDirect 1 month
<INPUT TYPE=\ RADIO > MACROBUTTON HTMLDirect 2 month
<INPUT TYPE=\ RADIO > MACROBUTTON HTMLDirect 3 month
<INPUT TYPE=\ RADIO > MACROBUTTON HTMLDirect 6 month
<INPUT TYPE=\ RADIO > MACROBUTTON HTMLDirect 9 month
<INPUT TYPE=\ RADIO > MACROBUTTON HTMLDirect 12 month
ABBREVATIONS
A
AMEX- America Stock Exchange
B
BSE- Bombay Stock Exchange
BSI- British Standard Institute
C
CBOE - Chicago Board options Exchange
CBOT - Chicago Board of Trade
CEBB - Chicago Egg and Butter Board
CME - Chicago Mercantile Exchange
CNX- Crisil Nse 50 Index
CPE - Chicago Produce Exchange
CWC- Central Warehousing Corporation
D
DTSS- Derivative Trading Settlement System
F
FIIs- Foreign Institutional Investors
F & O – Future and Options
FMC- Forward Markets Commission
FRAs- Forward Rate Agreements
G
GAICL-Gujarat Agro Industries Corporation Limited
GSAMB- Gujarat State Agricultural Marketing Board
I
IMM - International Monetary Market
IPSTA- India Pepper & Spice Trade Association
M
MCX – Multi Commodity Exchange
N
NAFED-National Agricultural Co-Operative Marketing Federation Of India
NCDEX – National Commodities and Derivatives Exchange
NIAM- National Institute Of Agricultural Marketing
NMSE- National Multi Commodity Exchange
NOL- Neptune Overseas Limited
NSCCL- National Securities Clearing Corporation
NSDL- National Securities Depositories Limited
NSE - National Stock Exchange
O
OTC- Over The Counter
P
PHLX - Philadelphia Stock Exchange
PNB- Punjab National Bank
R
RBI- Reserve Bank Of India
S
SC(R) A - Securities Contracts (Regulation) Act, 1956
SEBI- Securities Exchange Board Of India
SGX- Singapore Stock Exchange
SIMEX - Singapore International Monetary Exchange
V
VPN- Virtual Private Network