Declaration

I NEHA KUMARI student of PGDM 4th Semester of School of management sciences !aranasi here"# declare that the re$ort entitled Derivative Market in India :An Overview is su"mitted "# me in the line of $artial fulfillment of the course o"%ecti&es for the Post' Graduate Di$loma in Management(

I assure that this $ro%ect is the result of m# o)n efforts and that an# other institute for the a)ard of an# degree or di$loma has not su"mitted it(

Neha Kumari PG*+,*-4. PGDM 4th Semester

Acknowledgement

I e/$ress m# sincere than0s to m# all PGDM faculties for guiding me right from the ince$tion till the successful com$letion of this $ro%ect( I sincerel# ac0no)ledge the efforts of Mr. Shubhagata Roy Reader SMS !arana"i for his &alua"le guidance su$$ort for literature and critical re&ie)s of $ro%ect re$ort and a"o&e all the moral su$$ort he had $ro&ided to me at e&er# stage of this $ro%ect(

1ast "ut not the least I )ould li0e to than0 each and e&er# one )ho has hel$ed me in m# learning $rocess(

Neha Kumari PG*+,*-4. PGDM 4th Semester

#re$ace
It is great $ri&ilege for me to $lace this re$ort "efore the reader( 2his re$ort is concerned )ith Derivative Market in India: An Overview this $ro%ect has "een com$leted )ith the hel$ of man# $eo$le
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)ho guided through thic0 and thin and $ro&ided me e&er# 0ind of su$$ort in com$leting m# re$ort( At last I )ant to gi&e m# than0s to e&er#"od# )ho has co'o$erated me a lot in com$leting this $ro%ect(

Neha 0umari PG*+,*-4. PGDM 4th semester

%ontent

#age &o.

'. ()(%*+I!( S*MMAR, .. I&+ROD*%+IO& ..' 2i"tory o$ derivative".

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'' / 01

... ..1 ..3 ..0 ..5 ..6 ..7 ....'8 ..'' ..'. ..'1 ..'3 ..'0

Derivative" market in India. Role o$ derivative" in Indian economy. Derivative". +y4e" o$ derivative" Derivative market growth. Derivative" in"trument traded in India. Derivative" u"er" in India. Sco4e o$ derivative" in India. Ri"k in derivative". #layer" in market. +rading in 9 : O. Margin" in 9 : O. #rere;ui"ite" $or derivative market. (conomic $unction o$ derivative". 03 05 07 58 5. 53 55

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(@ecutive Summary
Deri&ati&es or deri&ati&e securities are contracts )hich are )ritten "et)een t)o $arties 3counter$arties4 and )hose &alue is deri&ed from the &alue of underl#ing )idel#'held and easil# mar0eta"le assets such as agricultural and other $h#sical 3tangi"le4 commodities or currencies or short term and long'term and long term financial instruments or intangi"le things li0e commodities $rice inde/ 3inflation rate4 e5uit# $rice inde/ or "ond $iece inde/( 2he counter$arties to such contracts are those other than the original issuer 3holder4 of the underl#ing asset(
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2he &alues of deri&ati&es and those of their underl#ing assets are closel# related( Usuall# in trading deri&ati&es the ta0ing or ma0ing of deli&er# of underl#ing assets is not in&ol&ed6 the transactions are mostl# settled "# ta0ing offsetting $ositions in the deri&ati&es themsel&es( 2here is therefore no effecti&e limit on the 5uantit# of claims )hich can "e traded in res$ect of underl#ing assets( Deri&ati&es are 7off "alance sheet8 instruments a fact that is said to o"scure the le&erage and financial might the# gi&e to the $art#( 2he# are mostl# secondar# mar0et instruments and ha&e little usefulness in mo"ili9ing fresh ca$ital "# the com$anies 3)arrants con&erti"les "eing the e/ce$tions4( Although the standardi9ed general e/change'traded deri&ati&es are "eing contracts )hich are in &ogue and )hich e/$ose the users to o$erational ris0 counter$art# ris0 li5uidit# ris0 and legal ris0( 2here is also an uncertaint# a"out the regulator# status of such deri&ati&es( 2he $rimar# $ur$oses of a deri&ati&e contract is to transfer 7ris08 from one $art# to another i(e( ris0 in a financial sense is transfer from a $art# that is )illing to ta0e it on( Here the ris0 that is "eing dealt )ith is that of $rice ris0( 2he transfer of such a ris0 can therefore "e s$eculati&e in nature or act as a hedge against $rice mo&ement in a current or antici$ated $h#sical $osition( 2here are "e)ilderingl# com$le/ &arieties of deri&ati&es alread# in e/istence and the mar0ets are inno&ating ne)er and ne)er ones continuousl#: $lain sim$le or straightfor)ard com$osite %oint or h#"rid s#nthetic le&eraged mildl# le&eraged customi9ed or ;2<' traded standardi9ed or organi9ed'e/change traded( Although )e are not going to discuss all of them the names of certain deri&ati&es ma# "e noted here: futures o$tions range for)ard and ratio range for)ard o$tions s)a$s )arrants con&erti"le "onds credit deri&ati&es ca$tions s)a$ o$tions futures o$tions the ratio s)a$s $eriodic floors s$read loc0 one and t)o treasur#'lin0ed s)a$s )edding "ands three and si/ in&erse floaters inde/ amorti9ing s)a$s and so on6 "ecause of their com$le/it# deri&ati&es ha&e "ecome a continuing $ain for the accounting $erson and a true mind'"ender for an#one tr#ing to &alue them(
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2he turno&er of the stoc0 e/changes has "een tremendousl# increasing from last +- #ears( 2he num"er of trades and the num"er of in&estors )ho are $artici$ating ha&e increased( 2he in&estors are )illing to reduce their ris0 so the# are see0ing for the ris0 management tools( Mutual funds =IIs and other in&estors )ho are de$ri&ed of hedging 3i(e( ris0 reducing4 o$$ortunities )ill no) ha&e a deri&ati&es mar0et to "an0 on(

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I&+ROD*%+IO& Deri&ati&es are financial instruments )hose &alue is deri&ed from the &alue of something else( 2he# generall# ta0e the form of contracts under )hich the $arties agree to $a#ment "et)een them "ased u$on the &alue of an underl#ing asset or other data at a $articular $oint in time( 2he main t#$es of deri&ati&es are futures for)ard o$tion and s)a$s( 2he main use of deri&ati&e is to reduce ris0 for one $art# )hile offering the $otential for a high return 3at increased ris04 to another( 2he differs range of $otential underl#ing asset and $a#off alternati&es leads to a huge range of deri&ati&es contracts a&aila"le to "e traded in the mar0et( Deri&ati&e can "e "ased on different t#$es of assets such as commodities e5uities 3stoc0s4 >onds interest rates e/change rates or inde/es(

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2heir $erformance determined "oth the amount and the timing of the $a#offs( ># far the most significant e&ent in finance during the $ast decade has "een the e/traordinar# de&elo$ment and e/$ansion of financial deri&ati&es( Deri&ati&es ma# "e traded for a &ariet# of reasons( A deri&ati&e ena"les a trader to hedge some $ree/isting ris0 "# ta0ing $ositions in deri&ati&es mar0ets that offset $otential losses in the underl#ing or s$ot mar0et( In India most deri&ati&es users descri"e themsel&es as hedgers 3=itch Ratings .--44 and Indian la)s generall# re5uire that deri&ati&es "e used for hedging $ur$oses onl#( Another moti&e for deri&ati&es trading is s$eculation 3i(e( ta0ing $ositions to $rofit from antici$ated $rice mo&ements4( In $ractice it ma# "e difficult to distinguish )hether a $articular trade )as for hedging or s$eculation and acti&e mar0ets re5uire the $artici$ation of "oth hedgers and s$eculators( A third t#$e of trader called ar"itrageurs $rofit from discre$ancies in the relationshi$ of s$ot and deri&ati&es $rices and there"# hel$ to 0ee$ mar0ets efficient( ?ogani and =ernandes 3.--@4 descri"e IndiaAs long histor# in ar"itrage trading )ith line o$erators and traders ar"itraging $rices "et)een e/changes located in different cities and "et)een t)o e/changes in the same cit#( 2heir stud# of Indian e5uit# deri&ati&es mar0ets in .--. indicates that mar0ets )ere inefficient at that time( 2he# argue that lac0 of 0no)ledge( Mar0et frictions and regulator# im$ediments ha&e led to lo) le&els of ca$ital em$lo#ed in ar"itrage trading in India( Ho)e&er more recent e&idence suggests that the efficienc# of Indian e5uit# deri&ati&es mar0ets ma# ha&e im$ro&ed(

2IS+OR, O9 D(RI!A+I!(S Deri&ati&es ha&e had a long $resence in India( 2he commodit# deri&ati&e mar0et has "een functioning in India since the nineteenth centur# )ith organi9ed trading in cotton through the esta"lishment of <otton 2rade Association in +,BC( Since then contracts on &arious other commodities ha&e "een introduced as )ell( E/change traded financial
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deri&ati&es )ere introduced in India in ?une .--- at the t)o ma%or stoc0 e/changes NSE and >SE( 2here a &arious contracts currentl# traded on these e/changes( National <ommodit# D Deri&ati&es E/change 1imited 3N<DEE4 started its o$erations in Decem"er .--@ to $ro&ide a $latform for commodities trading( 2he Deri&ati&es mar0et has e/isted from centuries as need for "oth users and $roducers of natural resources to hedge against $rice fluctuations in underl#ing commodities( Although trading in agriculture and other commodities has "een the dri&ing force "ehind the de&elo$ment of Deri&ati&es mar0et in India the demand for $roducts "ased on financial instruments F such as "ond currencies stoc0s and stoc0 indices had outstri$$ed the commodities mar0ets( India has "een trading in deri&ati&es mar0et in Sil&er s$ices gold coffee cotton and in oil mar0ets for decades gra# mar0et( 2rading in deri&ati&es mar0et )as legal "efore Morar%i DesaiAs Go&ernment had "anned for)ard contracts( Deri&ati&es on stoc0s )ere traded in the form of 2e%i and mandi in unorgani9ed mar0ets( Recentl# futures contracts &arious commodities )ere allo)ed to "e on &arious e/changes( =or E/am$le <otton and ;il futures )ere traded in Mum"ai So#a "ean futures in >ho$al Pe$$er futures in Kochi <offee futures in Mangalore etc( 2he Institute of <hartered Accountants of India 3I<AI4 has issued guidance notes on accounting of inde/ futures contracts from the &ie) $oint of $arties )ho enter into such futures contracts as "u#ers or sellers( =or other $arties in&ol&ed in the trading $rocess li0e "ro0ers trading mem"ers clearing mem"ers and clearing cor$orations a trade in e5uit# inde/ futures is similar to a trade in sa# shares and does not $ose an# $eculiar accounting $ro"lems(

D(RI!A+I!(S MARA(+ I& I&DIA Prior to li"erali9ation in India financial mar0ets there )ere onl# a fe) financial $roducts and the stringent regulator# $roducts and the
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stringent regulation en&ironment also eluded an# $ossi"ilit# of de&elo$ment of a deri&ati&es mar0et in countr#( All Indian cor$orate )ere mainl# rel#ing on term lending institution for meeting their $ro%ect financing or an# other financing re5uirements and on commercial "an0s for meeting )or0ing ca$ital finance re5uirement( <ommercial "an0s are on their assets and lia"ilities( 2he onl# deri&ati&e $roduct the# )ere a)are of is the foreign e/change for)ard contracts "ut this scenario changed in the $ost li"erali9ation $eriod( <onser&ati&e Indian "usiness $ractitioners "egan to ta0e a different &ie) of &arious as$ects of their o$erations to remain com$etiti&e( =inancial ris0s )ere gi&en ade5uate attention and 7treasur# function 7has assumed a significance role in all ma%or cor$orate since then( Initiall# "an0s )ere allo)ed to $ass on gains arising out of cancellation of for)ardAs contracts to the customers and customers )ere $ermitted to cancel and re' "oo0 the for)ard contracts( 2his remar0a"le change )as follo)ed "# the introduction of cross currenc# for)ard contacts( >ut the ma%or milestone in de&elo$ing fore/ deri&ati&es mar0et in India )as the introduction of cross currenc# o$tions( 2he R>IAs o"%ecti&e of introducing cross currenc# o$tions )as to $ro&ide a com$licated hedging strateg# for the cor$orate in their ris0 management acti&ities( 2he conce$t of 7deri&ati&es8is of course not ne) to the Indian mar0et( 2hough deri&ati&es in the financial mar0ets ha&e nothing to tal0 a"out home in the commodit# mar0ets the# ha&e a long histor# of o&er hundred #ears( In +,BC the first commodit# futures e/change )as set u$ in Mum"ai under the guidance of >om"a# <otton 2raders Association( A clearing house for clearing and settlement of these traders )as setu$ in +G+,( ;&er a $eriod of t)ent# #ears during +G--'+G.- other futures mar0ets )ere set u$ in &arious $laces( =utures mar0et in ra) %ute in Kol0ata 3+G+.4 )heat futures mar0et in Ha$ur 3+G+@4 and "ullion futures mar0et in Mum"ai 3+G.-4(Hhen it comes to financial mar0ets deri&ati&es in e5uities claim a long e/istence( 2he official histor# of >om"a# Stoc0 E/change 3then 0no)n as Nati&e Share and Stoc0 >ro0ers Association4 re&eals that the conce$t of o$tions e/isted since +,G, as is reflected from a 5uote gi&en "# one of the MPs'7India "eing the original home of o$tions a nati&e "ro0er )ould gi&e a fe) $oints to the "ro0ers of the other nations in the mani$ulation of $uts and calls8( Ho)e&er such an earl# e/$ertise gained "# Indian traders in deri&ati&es trading has come to an end )ith the Go&ernment of IndiaAs "an on for)ard contract during the+GI-As on the ground of their intrinsic
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undesira"ilit#( >ut ironicall# the same )ere re'introduced "# the go&ernment in the +G,-As as essential instruments for eliminating )ide fluctuations in $rices and more so "ecause of the Horld >an0 F UN<2AD re$ort )hich strongl# urged the Indian go&ernment to start futures trading in ma%or cash cro$s es$eciall# in &ie) of IndiaAs entr# to H2;( Hith the )orld em"racing the deri&ati&e trading on large scale the Indian mar0et o"&iousl# cannot remain aloof es$eciall# after li"erali9ation has "een set in motion( No) )e are in the threshold of introducing trading in deri&ati&es "eginning )ith the stoc0 inde/ futures to "e )ell set for the introduction of deri&ati&e trading( RO>( O9 D(RI!A+I!(S I& I&DIA& (%O&OM, >enefits that ac5uire to the Indian ca$ital mar0ets and the Indian econom# from deri&ati&es are discussed here( Deri&ati&es )ill ma0e $ossi"le hedging )hich other)ise is infeasi"le this is illustrated "# the dollar'ru$ee for)ard mar0et( Im$orts and e/$orts used to ta0e $lace in the countr# under the $resum$tion that im$orter and e/$orters ha&e to "ear currenc# ris0( 2o the e/tent that im$orters and e/$orters are ris0 a&erse the e/istence of this ris0 )ould lead them to do international trade in smaller 5uantities than the# ha&e li0ed to( ;nce the dollar' ru$ee for)ard mar0et came a"out im$orters and e/$orters could hedge themsel&es against currenc# ris0( 2oda# the use of such hedging is e/tremel# common amongst com$anies that are e/$osed to currenc# ris0( 2his hedging facilit# has definitel# hel$ed im$orters and e/$orters do international trade in larger 5uantities than "efore( 2he R>IAs $ermission for the dollar'ru$ee for)ard mar0et is therefore $art of the e/$lanation for the enormous gro)th in im$orts and e/$orts that has ta0en $lace in the last fi&e #ears( Similarl# on the e5uit# mar0et man# retail in&estors )ho are uncomforta"le a"out the e5uit# mar0et )ould enter if the# )ere gi&en the alternati&e of "u#ing insurance )hich controls their do)nside ris0( 2his )ould enhance the action of the sa&ings of the countr# )hich are routed through the e5uit# mar0et( 2he same )ould "e the case )ith international in&estors )ho )ould $lace limit orders( 2hese im$ro&ements in the 5ualit# of the underl#ing mar0et ha&e "een o"ser&ed across a &ariet# of research studies done on foreign mar0ets )hich ha&e com$ared mar0et 5ualit# "efore introduction of deri&ati&es as com$ared )ith after(

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D(RI!A+I!(S Deri&ati&es are the financial instruments )hich deri&e their &alue from some other financial instruments called the underl#ing( 2he foundation of all deri&ati&es mar0et is the underl#ing mar0et )hich could "e s$ot mar0et for gold or it could "e a $ure num"er such as the le&el of the )holesale $rice inde/ of a mar0et $rice( A derivative i" a $inancial in"trument who"e value de4end" on the value o$ other ba"ic underlying variable" According to the Securitie" %ontract BRegulationC Act '-05 derivative" include:/ A securit# deri&ed from a de"t instrument share and loan )hether secured or unsecured ris0 instrument or contract for differences or an# other form of securit#( A contract )hich deri&es its &alue from the $rices or inde/ of $rices of underl#ing securities( 2herefore deri&ati&es are s$eciali9ed contracts to facilitate tem$oraril# for hedging )hich is $rotection against losses resulting from unforeseen $rice or &olatilit# changes( 2hus deri&ati&es are a &er# im$ortant tool of ris0 management( Deri&ati&es $erform a num"er of economic functions li0e $rice disco&er# ris0 transfer and mar0et com$letion( 2hese assets can "e an#thing ranging from share inde/ "ond ru$ee dollar e/change rate sugar crude so#a'"ean cotton coffee etc(

9unction" o$ derivative" market

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2he follo)ing are the &arious functions that are $erformed "# the deri&ati&es mar0ets( 2he# are: Prices in an organi9ed deri&ati&es mar0et reflect the $erce$tion of mar0et $artici$ants a"out the future and lead the $rices of underl#ing to the $ercei&ed future le&el( Deri&ati&es mar0et hel$s to transfer ris0s from those )ho ha&e them "ut ma# not li0e them to those )ho ha&e an a$$etite for them( Deri&ati&e trading acts as a catal#st for ne) entre$reneurial acti&it#( Deri&ati&es mar0ets hel$ increase sa&ings and in&estment in the long run(

+he underlying "ecuritie" $or derivative" are: E5uit# Shares Stoc0 Inde/ !alue Interest Rate Short'term De"t Securities32'"ills4 Precious Metals3Gold sil&er4 <ommodities3<aster seed Grain <offee "eans ?agger# Pe$$er4

Deri&ati&e on its o)n does not ha&e an# &alue( It is considered im$ortant "ecause of its underl#ing asset( Deri&ati&es can of different
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t#$es li0e for)ards futures o$tion s)a$s collars ca$s floor etc( 2he most $o$ular deri&ati&e instruments are futures and o$tions( E(g(: A farmer fears that the $rice of coffee 3underl#ing4 )hen his cro$ is read# for deli&er# )ill "e lo)er than his cost of $roduction( In order to o&ercome this uncertaint# in the selling $rice of his cro$ he enters into a contract 3deri&ati&e4 )ith a merchant )ho agrees to "u# the cro$ at a certain $rice )hen the cro$ is read#( 9eature" o$ derivative" Deri&ati&es are contracts that ha&e no inde$endent &alue( 2he# deri&e their &alue from their underl#ing assets(

2he# are used as 7ris0 shifting8 or hedging instruments( 2he deri&ati&e mar0et is li5uid( 2he deri&ati&e mar0ets are screen'"ased com$uteri9ed e/changes(

Deri&ati&es ma# "e traded for a &ariet# of reasons( A deri&ati&e ena"les a trader to hedge some $ree/isting ris0 "# ta0ing $ositions in deri&ati&es mar0ets that offset $otential losses in the underl#ing or s$ot mar0et( In India most deri&ati&es users descri"e themsel&es as hedgers 3=itch Ratings .--44 and Indian la)s generall# re5uire that deri&ati&es "e used for hedging $ur$oses onl#( Another moti&e for deri&ati&es trading is s$eculation 3i(e( ta0ing $ositions to $rofit from antici$ated $rice mo&ements4( In $ractice it ma# "e difficult to distinguish )hether a $articular trade )as for hedging or s$eculation and acti&e mar0ets re5uire the $artici$ation of "oth hedgers and s$eculators( A third t#$e of trader called ar"itrageurs $rofit from discre$ancies in the relationshi$ of s$ot and deri&ati&es $rices and there"# hel$ to 0ee$ mar0ets efficient( ?ogani and =ernandes 3.--@4 descri"e IndiaAs long histor# in ar"itrage trading )ith line o$erators
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and traders ar"itraging $rices "et)een e/changes located in different cities and "et)een t)o e/changes in the same cit#( 2heir stud# of Indian e5uit# deri&ati&es mar0ets in .--. indicates that mar0ets )ere inefficient at that time( 2he# argue that lac0 of 0no)ledge6 mar0et frictions and regulator# im$ediments ha&e led to lo) le&els of ca$ital em$lo#ed in ar"itrage trading in India( Ho)e&er more recent e&idence suggests that the efficienc# of Indian e5uit# deri&ati&es mar0ets ma# ha&e im$ro&ed(

%la""i$ication o$ derivative" 9inancial Derivative" 2he deri&ati&es in currencies guilt'edged de"t securities shares shares indices etc( are 0no)n as financial deri&ati&es( 2hese are traded at different e/changes all o&er the )orld( =inancial deri&ati&es can "e "roadl# classified into currenc# deri&ati&es interest rate deri&ati&es and stoc0 and stoc0 inde/ deri&ati&es( In India Stoc0 =utures Stoc0 Inde/ =utures Stoc0 ;$tions and Stoc0 Inde/ ;$tions are traded at >SE or NSE( Interest rate deri&ati&e ha&e also "een allo)ed "# the Go&ernment of India( %ommodity Derivative" Deri&ati&e contract are made into the different t#$es of commodities such as %ute sugar tea coffee oil so#"eans etc( 2hese deri&ati&e contracts are traded into commodit# e/changes( 2he ma%or commodit# e/changes in India are three:' National <ommodit# D Deri&ati&es E/change 1imited 3N<DEE4 Multi'<ommodit# E/change of India 1imited 3M<E4 National Multi'<ommodit# E/change of India 1imited3NM<EI14(

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e(g(: 2rade ta0es $lace "et)een AD>J +-- to "u# D sell / commodit#( After + month it is trading at Rs(+.-( If A )as he "u#er he )ould gain Rs( .- D > 1oose Rs(.-( In case > defaults #ou are e/$osed to counter $art# Ris0 i(e( #ou )ill no) entitled to #our gains( In case of =uture the e/change gi&es a counter guarantee e&en if the counter $art# defaults #ou )ill recei&e Rs(.-*' as a gain( Each contract is custom designed and hence uni5ue in terms of contract si9e e/$iration date asset t#$e asset 5ualit# etc(A contract has to "e settled in deli&er# or cash on e/$iration date( In case one of the t)o $arties )ishes to re&erse a contract he has to com$ulsoril# go to the other $art#( 2he counter $art# "eing in a mono$ol# situation can command the $rice he )ants(

+,#(S O9 D(RI!A+I!(S 9orward" 9uture O4tion" Swa4"

;ne form of classification of deri&ati&es is "et)een commodit# deri&ati&es and financial deri&ati&es( 2hus futures o$tion or s)a$s on gold sugar %ute $e$$er etc are commodit# deri&ati&es( Hhile futures o$tions or s)a$s on currencies gilt'edged securities stoc0 and share stoc0 mar0et indices etc are financial deri&ati&es( AC 9ORDARDS

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=or)ard contract is an agreement to "u# or sell an asset at a $rice determined toda# "ut is settled later at the $re'determined date( Parties go for for)ard contract to eliminate $rice ris0( E(g( "oo0ing a mo&ie tic0et "oo0ing an automo"ile( A for)ard is an agreement "et)een t)o $arties to e/change an agreed 5uantit# of asset at a s$ecified future date at a $redetermined $rice s$ecified in the agreements( 2he $arties concerned agree the settlement date and $rice in ad&ance( 2he $romised asset ma#"e currenc# commodit# instrument etc( It is the oldest t#$e of all the deri&ati&es( 2he $art# )ho $romises to "u# "ut he s$ecified asset at an agreed $rice at a fi/ed future date is said to "e in the K1ong $osition Kand the $art# )ho $romises to sell at an agreed $rice at a future date is said to "e inK short $ositionA. A for)ard contract is a agreement "et)een t)o entities to "u# or sell an asset at a s$ecified $oint of time in the future( 2he Price of the underl#ing instrument in )hate&er form is $aid "efore control of the instrument changes( 2his is one of the man# forms of "u#*sell orders )here the time of trade is not the time )here the securities themsel&es are e/changed( 9eature" o$ $orward contract Each contract is custom designed and hence is uni5ue in terms of contract si9e maturit# date and the asset t#$e and 5ualit#( ;n the e/$iration date the contract is normall# settled "# the deli&er# of the asset( =or)ard contracts "eing "ilateral contracts are e/$osed to counter $art# ris0( If the $art# )ishes to cancel the contract or change an# of its terms it has necessaril# to go to the same counter $art#( <C 9*+*R(S

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2he futures contracts re$resent an im$ro&ement o&er the for)ard contracts in terms of standardi9ation $erformance guarantee and li5uidit#( A futures contract is a standardi9ed contract "et)een t)o $arties )here one of the $arties commits to sell and the other to "u# a sti$ulated 5uantit# 3and 5ualit# )here a$$lica"le4 of a commodit# currenc# securit# inde/ or some other s$ecified item at an agreed $rice on a gi&en date in the future( <ounter$art# ris0 has al)a#s "een a $art of =or)ard mar0et )here one $art# or the other "reaches the contract( 2he futures mar0et tries to eliminate the counter$art# ris0 "# in&ol&ing the third $art# into it( 2he role of the guarantor to ensure a default'free e/ecution can "e $erformed "# an organi9ed "od# i(e( an e/change also 0no)n as <learing House( S4eci$ication o$ a 9uture" %ontract:/ *nderlying A""et: =utures "eing deri&ati&es are $riced according to the assets on )hich it is )ritten( <ontracts are normall# s$ecified "# the name of the underl#ing asset and month and #ear of the e/$ir# of the contract( A future contract in RI<E at Multi <ommodit# E/change 3M<E4 denoted as RI<E DE<+. im$lies that the contract in rice is due for deli&er# in Decem"er .-+.( It is similar to the for)ard contract in all the res$ect( In fact a future is a standardi9ed form of for)ard contract( A future is a contract or an agreement "et)een t)o $arties to e/change assets * currenc# or commodit# at a certain future date at an agreed $rice( 2he trader )ho $romises to "u# is said to "e in Klong $ositionK and the $art# )ho $romises to sell said "e in Kshort $ositionA. =utures contracts are contracts s$ecif#ing a standard &olume of a $articular currenc# to "e e/changed on a s$ecific settlement date( A future contract is an agreement "et)een a "u#er and a seller( Such a contract confers on the "u#er an o"ligation to "u# from the seller and the seller an o"ligation to sell to the "u#er a s$ecified 5uantit# of an underl#ing asset at a fi/ed $rice on or "efore a fi/ed da# in future( Such a contract can "efore deli&er# of an underl#ing asset( 2o eliminate
22

counter $art# ris0 and guarantee traders futures mar0ets use a clearing house )hich em$lo#s initial margin dail# mar0et to mar0et margin6 e/$osures limits etc( to ensure contract com$liance and guarantee settlement standardi9ed futures contracts generate li5uidit#( In addition due to these instruments "eing traded on recogni9ed e/changeAs results in greater trans$arenc# fairness and efficienc#( Due to these inherent ad&antages futures mar0ets ha&e "een enormousl# successful in com$arison )ith for)ard mar0ets all o&er the )orld the difference "et)een for)ard contract and future is that future is a standardi9ed contract in terms of 5uantit# date and deli&er#( It is traded on organi9ed e/changes( So it has secondar# mar0ets( =uture contract is al)a#s settled dail# irres$ecti&e of the maturit# date )hich is called mar0ing to the mar0et( A futures contract is an agreement "et)een t)o $arties to "u# or sell an asset at a certain time in the future at a certain $rice( =utures contracts are s$ecial t#$es of for)ard contracts in the sense that the former are standardi9ed e/change'traded contract(

9unction" o$ $uture" Hel$ to determine the future $rices( Hel$ transfer ris0( Higher trading &olumes in underl#ing securities( Reduces s$eculation in the cash mar0et( Increase sa&ing and in&estment( +y4e" o$ 9uture" 2he futures contracts can "e discussed de$ending u$on the nature of underl#ing assets( It can "e di&ided into mainl# t)o t#$es:' <ommodit# =utures
23

 =inancial =utures %ommodity 9uture" 2he commodit# futures deal )ith trading in all t#$es of commodit# a&aila"le $articularl# in futures mar0ets( 2he &alue of commodit# futures generall# de$ends u$on the $rice mo&ements of mar0et( <ommodit# futures are traded in agriculture as )ell as million and metals( In India futures on so#a"ean "lac0 $e$$er and s$ices ha&e "een trading for long( 9inancial $uture" =utures contracts "ased on a financial $roducts or a financial inde/ are 0no)n as financial futures( =inancial futures can "e classified as:' Stoc0 =utures Stoc0 Inde/ =utures

Interest Rate =utures <urrenc# =utures

Di$$erence between 9uture" : 9orward"

Sr. &o. +

<a"i"

9uture"

9orward"

Nature

2raded on organi9ed e/change

;&er the <ounter

24

<ontract terms 1i5uidit#

Standardi9ed

<ustomi9ed

@ 4 C

More 1i5uid

1ess 1i5uid Not re5uired At the end of the $eriod(

Margin Re5uires Margin Pa#ments Pa#ments Settlement =ollo)s dail# settlement

<ontract can "e re&ersed S5uaring <an "e re&ersed )ith an# mem"er onl# )ith the same off of the e/change( counter'$art# Hith )hom it )as entered into(

%C O#+IO&S ;$tion is a contract that gi&es the o)ner the right "ut no o"ligation to "u# or sell at a $redetermined $rice )ithin a gi&en time frame( +erminology o$ O4tion":/ %all O4tion A right to >UL the underl#ing asset at $redetermined $rice )ithin s$ecified inter&al of time is called a <A11 o$tion( #ut O4tion A right to SE11 the underl#ing asset at $redetermined $rice )ithin a s$ecified inter&al of time is called a PU2 o$tion( <uyer or 2older

25

2he $erson )ho o"tains the right to "u# or sell "ut has no o"ligation to $erform is called the o)ner * holder of the o$tion( ;ne )ho "u#s an o$tion has to $a# a $remium to o"tain the right( Driter or Seller ;ne )ho confers the right and underta0es the o"ligation to the holder is called seller * )riter of an o$tion( #remium Hhile conferring a right to the holder )ho is under no o"ligation to $erform the )riter is entitled to charge a fee u$front( 2he u$front amount is called the $remium( 2his is $aid "# the holder to the )riter and is also called the $rice of the o$tion( Strike #rice 2he $redetermined $rice at the time of "u#ing * )riting o$tion at )hich it can "e e/ercised is called the stri0e $rice( It is the $rice at )hich the holder of an o$tion "u#s * sells the assets( Strike Date E Maturity Date 2he right to e/ercise the o$tion is &alid for a limited $eriod of time( 2he latest time )hen the o$tion can "e e/ercised is called the time to maturit#( It is also referred to as e/$ir# * maturit# date(

#ayo$$ o$ %all O4tion:/ As long as the $rice of the underl#ing asset A remains "elo) the stri0e $rice S the "u#er of call o$tion )ill not e/ercise it6 and the loss of the "u#er )ould "e limited to the $remium $aid on the <all ;$tion < and if the $rice is more than the e/ercise $rice the holder e/ercises the o$tion and generate $rofit e5ual to the difference of the t)o $rices( Alternati&el# )hen A M S >u#er lets the call e/$ire(
26

1oss N Premium < A N S >u#er is indifferent( 1oss N Premium < A O S >u#er e/ercises the <all ;$tion( Gain N A ' S F < Mathematicall# !alue of the <all ;$tion N Ma/ 3- A'S4 ' < #ayo$$ o$ #ut O4tion:/ As long as $rice of the securit# remains "elo) the stri0e $rice the "u#er of the o$tion )ill e/ercise it "ecause he stands to gain other)ise his loss )ould "e limited to the $remium $aid on the $ut o$tion P( Alternati&el# )hen A M S >u#er e/ercises the Put ;$tion( Gain N S ' A F P A N S >u#er is indifferent( 1oss N Premium P A O S >u#er lets the call e/$ire( 1oss N Premium P Mathematicall# !alue of the <all ;$tion N Ma/ 3- S'A4 F P +he o4tion" can be categoriFed under "everal head":/ +( Nature of E/ercise .( Nature of Mar0ets @( Nature of underl#ing Assets &ature o$ (@erci"e >ased on the timing of e/ercise the o$tions can "e either American or Euro$ean( A (uro4ean o4tion ma# "e e/ercised onl# at the e@4iration date of the o$tion i(e( at a single $re'defined $oint in time(
27

 An American o4tion on the other hand ma# "e e/ercised at any time "efore the e/$ir# date( &ature o$ Market ;$tions can "e categori9ed as ;2< or e/change traded de$ending u$on )here and ho) the# are created traded and settled( 2he standardi9ation of ;$tion contract )ould "e in at the discretion of the e/change and is done in terms of:' BaC Guantity o$ underlying A""et

;nl# s$ecific 5uantit# of the underl#ing asset could "e traded on the e/change and need to "e $redetermined( 3"4 Strike 4rice" ;nl# s$ecific stri0e $rices can "e handled in a standardi9ed $roduct traded on the e/changes( ;2< $roducts can ha&e an# stri0e $rice as agreed "# the t)o contracting $arties( 3c4 (@4iration Date" 1i0e stri0e $rices the e/$iration dates too must "e 0no)n "efore trading can ta0e $lace in o$tions at the e/changes( BdC &ature o$ (@erci"e o$ O4tion

Hhether the o$tions are American or Euro$ean in nature too must "e 0no)n to traders in o$tions( 3e4 Day" o$ Settlement ;$tions can "e settled either "# deli&er# of underl#ing asset or "# cash settlement )hich is closing out "# e/changing the differential of $rice at initiation and closing out(
28

<ash settlement at the e/$ir# is done "# e/changing difference "et)een the e/ercise $rice and the $rice of the underl#ing asset( It can also "e settled "# the cancellation of the contract "# entering into an e5ual and o$$osite contract to the original one( &ature o$ *nderlying A""et" 1i0e for)ard D futures o$tions too ha&e an# asset as underl#ing( ;$tions on stoc0s indices commodities currencies and interest rates are a&aila"le either ;2< or on e/changes( 2hough not a&aila"le in India as of no) o$tions on commodities are traded internationall# on agricultural $roducts li&e stoc0 food $roducts energ# D metals( ;$tions are also a&aila"le on &arious currencies such as US Dollar EUR; Len Pound etc( ;$tions on currencies are mostl# ;2<( ;$tions are also traded on the e/changes on futures contract rates( ;$tions can also "e traded on interest rates either on cash assets such as treasur# "onds D notes or on interest rate futures contracts( 9eature" o$ O4tion" 2he o$tion is e/ercisa"le onl# "# the o$tion holder namel# the "u#er of the o$tion( ;)ners of o$tions ha&e no &oting rights and di&idend right( 2he o$tion holder has limited lia"ilit#( ;$tions ha&e high degree of ris0 to the o$tion )riters( It gi&es fle/i"ilit# in in&estors needs( ;$tions reduce the total $ortfolio transaction costs( ;$tions ena"le a "etter return )ith a limited amount of in&estment(
29

+y4e" o$ O4tion" +( %all o4tion:/

<all o$tion gi&es the "u#er the right "ut not the o"ligation to "u# a gi&en 5uantit# of the underl#ing asset at a gi&en $rice on or "efore a gi&en future date( .. #ut o4tion:/

Put o$tion gi&es the "u#er the right "ut not the o"ligation to sell a gi&en 5uantit# of the underl#ing asset at a gi&en $rice on or "efore a gi&en date(

#ay/o$$ $or O4tion"H >u#er of call o$tions: long call Hriter of call o$tions: short call

>u#er of $ut o$tions: long $ut Hriter of $ut o$tions: short $ut

%all o4tion gi&es the "u#er the right "ut not the o"ligation to "u# a gi&en 5uantit# of the underl#ing asset at a gi&en $rice on or "efore a gi&en future date( >u#er of call o$tions: long call Hriter of call o$tions: short call

30

#ut o4tion gi&es the "u#er the right "ut not the o"ligation to sell a gi&en 5uantit# of the underl#ing asset at a gi&en $rice on or "efore a gi&en date( >u#er of $ut o$tions: long $ut Hriter of call o$tions: short $ut

DCSDA#: A s)a$ transaction is one )here t)o or more $arties e/change 3s)a$4 one set of $redetermined $a#ments for another( S)a$ is an agreement "et)een t)o $arties to e/change one set of financial o"ligations )ith other( It is )idel# used throughout the )orld "ut is recent in India( S)a$ ma# "e interest s)a$ or currenc# s)a$s( S)a$s gi&e com$anies e/tra fle/i"ilit# to e/$loit their com$arati&e ad&antage in their res$ecti&e "orro)ing mar0ets( S)a$s allo) com$anies to focus on their com$arati&e ad&antage in "orro)ing in a single currenc# in the short end of the maturit# s$ectrum &s( the long' end of the maturit# s$ectrum( S)a$s allo) com$anies to e/$loit ad&antages across a matri/ of currencies and maturities(

31

+y4e" o$ "wa4":/

Intere"t rate "wa4" A is currentl# $a#ing floating "ut )ants to $a# fi/ed( > is currentl# $a#ing fi/ed "ut )ants to $a# floating( ># entering into an interest rate s)a$ the net result is that each $art# can Ps)a$P their e/isting o"ligation for their desired o"ligation( Normall# the $arties do not s)a$ $a#ments directl# "ut rather each sets u$ a se$arate s)a$ )ith a financial intermediar# such as a "an0( In return for matching the t)o $arties together the "an0 ta0es a s$read from the s)a$ $a#ments( An interest rate s)a$ is an agreement "et)een t)o $arties to e/change interest o"ligations or recei$ts in the same currenc# on an agreed amount of notional $rinci$al for an agreed $eriod of time( %urrency "wa4" A currenc# s)a$ is an agreement "et)een t)o $arties to e/change $a#ments or recei$ts in one currenc# for $a#ments or recei$t in another( %ommodity "wa4" A commodit# s)a$ is an arrangement "# )hich one $art# 3a commodit# user * "u#er4 agrees to $a# a fi/ed $rice for a designated 5uantit# of a commodit# to the counter $art# 3commodit# $roducer * seller4 )ho in turn $a#s the first $art# a $rice "ased on the $re&ailing mar0et $rice 3or an acce$ted inde/ thereof4 for the same 5uantit#( <ommodit# s)a$s are a means of hedging commodit# $rice ris0 o&er a long $eriod( (;uity Swa4"

32

An e5uit# s)a$ is an arrangement "# )hich one $art# $a#s to the counter'$art# an amount "ased on the &alue of the shares in a com$an# and recei&es from the counter $art# an amount fi/ed or floating interest on an e5ui&alent notional &alue( In effect an e5uit# $osition is con&erted into a de$osit or de"enture(

(conomic 9unction o$ Swa4 +ran"action":/ 9inancing 9unction: S)a$s "# e/$loiting com$arati&e ad&antage ma0e funds a&aila"le to "orro)ers at chea$er rates than )ould other)ise "e $ossi"le( 2he# therefore $erform a financing function "# ma0ing in&estment ca$ital chea$er( Arbitrage 9unction: Interest rate s)a$s can reduce "orro)ing costs for "oth $arties "# e/$loiting the differences in the interest s$reads in different segments 3i(e( fi/ed !s floating4( Similarl# currenc# s)a$s e/$loit the differences in interest s$reads "et)een different currenc# segments( 2he a&aila"ilit# of s)a$s tends to:' Increase demand or reduce su$$l# in the under$riced segment6 Reduce demand or increase su$$l# in the o&er$riced segment( ># doing so it actuall# tend to narro) the ga$ "et)een the t)o segments( S)a$s therefore act as an ar"itrage mechanism )hich hel$s mar0et integration and reduces interest rate distortions( 2edging 9unction:

33

S)a$s are considered as a hedging tool in conte/t of the differential rates $re&ailing in different segments( Also )hereas futures onl# $ro&ide a short'term 3ma/imum . #ears4 hedging facilit# s)a$s $ro&ide a long'term hedging facilit# )hich is not a&aila"le through other instruments(

D(RI!A+I!( MARA(+ ?ROD+2 2he Deri&ati&es Mar0et Gro)th )as a"out @-Q in the first half of .--, )hen it reached si9e of RUS @B- trillion( 2his gro)th )as mainl# due to the increase in the $artici$ation of the "an0ers in&estors and different com$anies( 2he deri&ati&e mar0et instruments are used "# them to hedge ris0s as )ell as to satisf# their s$eculati&e needs Deri&ati&es 2he Deri&ati&e Mar0et Gro)th for e5uit# reached R++4(+ trillion( 2he o$en interest in the f u t u r e s a n d o $t i o n s m a r 0 e t g r e ) " # @ , Q ) h i l e t h e i n t e r e s t r at e f u t u r e s g r e ) " # 4 . Q ( Hence the deri&ati&e mar0et si9e for the futures and the o$tions mar0et )as R4G trillion( 2he contracts traded through ;&er'the'<ounter mar0et )itnessed a .4 Q increase in its face &alue and the o&er'the 'counter deri&ati&e mar0et si9e reached RB- --- "illion( 2his sho)s that the face &alue of the deri&ati&e contracts has multi$lied @- times the si9e of the US econom#( Nota"le increases )ere recorded for foreign e/change interest rate e5uit# and commodit# "ased deri&ati&e follo)ing an increase in the si9e of the ;&er'the <ounter deri&ati&e mar0et( 2he Deri&ati&e Mar0et Gro)th does not necessitate an increase in the ris0 ta0en "# the different In&estors( E&en then the o&ershoot in the face &alue of the deri&ati&e contracts sho)s that these deri&ati&e instruments $la#ed a $i&otal role in the financial mar0et of toda#As4Deri&ati&e Mar0et
34

Gro)th for the <redit Deri&ati&es( 2he credit deri&ati&es gre) from R4(C trillion to R-(B trillion in .--+( 2hisderi&ati&esmar0etg r o ) t h i s a t t r i " u t e d t o t h e i n c r e a s e i n t h e t r a d i n g i n t h e s # n t h e t i c c o l l a t e r a l D e " t o"ligations and also to the electronic trading s#stems that ha&e come into e/istence( 2he >an0 of International Settlements measures the si9e and the gro)th of the deri&ati&e mar0et( 2he deri&ati&e mar0et gro)th in the o&er the counter deri&ati&e mar0et )itnessed slum$ in the second half of .--,(Although the credit deri&ati&e mar0et gre) at a ra$id $ace such gro)th )as made offset "# a slum$ some)here else( 2he notional amount of the <redit Default S)a$ )itnessed gro)th of 4.Q( <redit deri&ati&es gre) "# C4Q( 2he single name contracts gre) "# @IQ(2he interest deri&ati&es gre) "# ++Q( 2he ;2< foreign e/change deri&ati&es slo)ed "#CQ the ;2< e5uit# deri&ati&es slo)ed "# +-Q( <ommodit# deri&ati&es also e/$erienced cra)ling gro)th $attern( D(RI!A+I!( I&S+R*M(&+S +RAD(D I& I&DIA In the e/change'traded mar0et the "iggest success stor# has "een deri&ati&es on e5uit# $roducts( Inde/ futures )ere introduced in ?une .--- follo)ed "# inde/ o$tions in ?une .--+ and o$tions and futures on indi&idual securities in ?ul# .--+ and No&em"er .--+ res$ecti&el#( As of .--C the NSE trades futures and o$tions on ++, indi&idual stoc0s and stoc0 indices( All these deri&ati&e contracts are settled "# cash $a#ment and do not in&ol&e $h#sical deli&er# of the underl#ing $roduct 3)hich ma# "e costl#4( Deri&ati&es on stoc0 inde/es and indi&idual stoc0s ha&e gro)n ra$idl# since ince$tion( In $articular single stoc0 futures ha&e "ecome hugel# $o$ular accounting for a"out half of NSEAs traded &alue in ;cto"er .--C( In fact NSE has the highest &olume 3i(e( num"er of contracts traded4 in the single stoc0 futures glo"all# ena"ling it to ran0 +I among )orld e/changes in the first half of .--C( Single stoc0 o$tions are less $o$ular than futures( Inde/ futures are increasingl# $o$ular and accounted for close to 4-Q of traded &alue in ;cto"er .--C( =igure . illustrates the gro)th in &olume of futures and o$tions on the Nift# inde/ and sho)s that inde/ futures ha&e gro)n more strongl# than inde/ o$tions( NSE launched interest rate futures in ?une .--@ "ut in contrast to e5uit# deri&ati&es there has "een little
35

trading in them( ;ne $ro"lem )ith these instruments )as fault# contract s$ecifications resulting in the underl#ing interest rate de&iating erraticall# from the reference rate used "# mar0et $artici$ants( Institutional in&estors ha&e $referred to trade in the ;2< mar0ets )here instruments such as interest rate s)a$s and for)ard rate agreements are thri&ing( As interest rates in India ha&e fallen com$anies ha&e s)a$$ed their fi/ed rate "orro)ings into floating rates to reduce funding costs(+- Acti&it# in ;2< mar0ets d)arfs that of the entire e/change'traded mar0ets )ith dail# &alue of trading estimated to "e Rs( @- "illion in .--4 3=itch Ratings .--44( =oreign e/change deri&ati&es are less acti&e than interest rate deri&ati&es in India e&en though the# ha&e "een around for longer( ;2< instruments in currenc# for)ards and s)a$s are the most $o$ular( Im$orters e/$orters and "an0s use the ru$ee for)ard mar0 to hedge their foreign currenc# e/$osure( 2urno&er and li5uidit# in this mar0et has "een increasing although trading is mainl# in shorter maturit# contracts of one #ear or less 3Gam"hir and Goel .--@4( In a currenc# s)a$ "an0s and cor$orations ma# s)a$ its ru$ee denominated de"t into another currenc# 3t#$icall# the US dollar or ?a$anese #en4 or &ice &ersa( 2rading in ;2< currenc# o$tions is still muted( 2here are no e/change'traded currenc# deri&ati&es in India( E/change'traded commodit# deri&ati&es ha&e "een trading onl# since .--- and the gro)th in this mar0et has "een une&en( 2he num"er of commodities eligi"le for futures trading has increased from , in .--- to ,- in .--4 )hile the &alue of trading has increased almost four times in the same $eriod 3Nair .--44( Ho)e&er man# contracts "arel# trade and of those that are acti&e trading is fragmented o&er multi$le mar0et &enues including central and regional e/changes "ro0erages and unregulated for)ards mar0ets( 2otal &olume of commodit# deri&ati&es is still small less than half the si9e of e5uit# deri&ati&es 3Gorham et al .--C4( D(RI!A+I!(S *S(RS I& I&DIA

36

2he use of deri&ati&es &aries "# t#$e of institution( =inancial institutions such as "an0s ha&e assets and lia"ilities of different maturities and in different currencies and are e/$osed to different ris0s of default from their "orro)ers( 2hus the# are li0el# to use deri&ati&es on interest rates and currencies and deri&ati&es to manage credit ris0( Non'financial institutions are regulated differentl# from financial institutions and this affects their incenti&es to use deri&ati&es( Indian insurance regulators for e/am$le are #et to issue guidelines relating to the use of deri&ati&es "# insurance com$anies( In India financial institutions ha&e not "een hea&# users of e/change' traded deri&ati&es so far )ith their contri"ution to total &alue of NSE trades "eing less than ,Q in ;cto"er .--C( Ho)e&er mar0et insiders feel that this ma# "e changing as indicated "# the gro)ing share of inde/ deri&ati&es 3)hich are used more "# institutions than "# retail in&estors4( In contrast to the e/change'traded mar0ets domestic financial institutions and mutual funds ha&e sho)n great interest in ;2< fi/ed income instruments( 2ransactions "et)een "an0s dominate the mar0et for interest rate deri&ati&es )hile state'o)ned "an0s remain a small $resence 3<hitale .--@4( <or$orations are acti&e in the currenc# for)ards and s)a$s mar0ets "u#ing these instruments from "an0s( Hh# do institutions not $artici$ate to a greater e/tent in deri&ati&es mar0etsS Some institutions such as "an0s and mutual funds are onl# allo)ed to use deri&ati&es to hedge their e/isting $ositions in the s$ot mar0et or to re"alance their e/isting $ortfolios( Since "an0s ha&e little e/$osure to e5uit# mar0ets due to "an0ing regulations the# ha&e little incenti&e to trade e5uit# deri&ati&es( =oreign in&estors must register as foreign institutional in&estors 3=II4 to trade e/change'traded deri&ati&es and "e su"%ect to $osition limits as s$ecified "# SE>I( Alternati&el# the# can incor$orate locall# as a "ro0er'dealer( =IIs ha&e a small "ut increasing $resence in the e5uit# deri&ati&es mar0ets( 2he# ha&e no incenti&e to trade interest rate deri&ati&es since the# ha&e little in&estments in the domestic "ond mar0ets 3<hitale .--@4( It is $ossi"le

37

that unregistered foreign in&estors and hedge funds trade indirectl# using a local $ro$rietar# trader as a front 31ee .--44( Retail in&estors 3including small "ro0erages trading for themsel&es4 are the ma%or $artici$ants in e5uit# deri&ati&es accounting for a"out I-Q of turno&er in ;cto"er .--C according to NSE( 2he success of single stoc0 futures in India is uni5ue as this instrument has generall# failed in most other countries( ;ne reason for this success ma# "e retail in&estorsA $rior familiarit# )ith 7"adla8 trades )hich shared some features of deri&ati&es trading( Another reason ma# "e the small si9e of the futures contracts com$ared to similar contracts in other countries( Retail in&estors also dominate the mar0ets for commodit# deri&ati&es due in $art to their long'standing e/$ertise in trading in the 7ha&ala8 or for)ards mar0ets(

S%O#( O9 D(RI!A+I!(S I& I&DIA In India all attem$ts are "eing made to introduce deri&ati&e instruments in the ca$ital mar0et( 2he National Stoc0 E/change has "een $lanning to introduce inde/'"ased futures stiff net )orth criteria of Rs(B to +- corers co&er is $ro$osed for mem"ers )ho )ish to enroll for such trading( >ut it has not #et recei&ed the necessar# $ermission from the securities and E/change >oard of India( In the fore/ mar0et there are "righter chancesof introducing deri&ati&es on a large scale( Infact the necessar# ground)or0 for the introduction of deri&ati&es in fore/ mar0et )as $re$ared "# a high'le&el e/$ert committee a$$ointed "# the R>I( It )as headed "# Mr( ;(P( Sodhani( <ommitteeAs re$ort )as alread# su"mitted to the Go&ernment in +GGC( As it is a fe) deri&ati&e $roducts such as interest rate s)a$s cou$on s)a$s currenc# s)a$s and fi/ed rate agreements are a&aila"le on limited scale( It is easier to introduce deri&ati&es in fore/ mar0et "ecause most of these $roducts are ;2< $roducts 3;&er'the'counter4 and the# are highl# fle/i"le( 2hese are al)a#s "et)een
38

t)o $artiesand one among them is al)a#s a financial intermediar#(Ho )e&er there should "e $ro$er legislations for the effecti&e im$lementation of deri&ati&e contracts( 2he utilit# of deri&ati&es through Hedging can "e deri&ed onl# )hen there is trans$arenc# )ith honest dealings( 2he $la#ers in the deri&ati&e mar0et should ha&e a sound financial "ase for dealing in deri&ati&e transactions( Hhat is more im$ortant for the success of deri&ati&es is the $rescri$tion of $ro$er ca$ital ade5uac# norms training of financial intermediaries and the $ro&ision of )ell'esta"lished indices( >ro0ers must also "etrained in the intricacies of the deri&ati&e'transactions( No) deri&ati &es ha&e "eenintroduced in the Indian Mar0et in the form of inde/ o$tions and inde/ futures( Inde/ o$tions and inde/ futures are "asicall# deri&ate tools "ased on stoc0 inde/( 2he# are reall# the ris0 management tools( Since deri&ates are $ermitted legall# one can use them to insulate his e5uit# $ortfolio against the &agaries of the mar0etE&er# in&estor in the financial area is affected "# inde/ fluctuati ons( Hence ris0management using inde/ deri&ati&es is of far more im$ortance than ris0 management usingindi&idual securit# o$tions( Moreo&er Portfolio ris0 is dominated "# the mar0et ris0 regardless of the com$osition of the $ortfolio( Hence in&estors )ould "e more interested in using inde/'"ased deri&ati&e $roducts rather than securit# "ased deri&ati&e $roducts( 2here are no deri&ati&es "ased on interest rates in India toda#( Ho)e&er Indian users of hedging ser&ices are allo)ed to "u# deri&ati&es in&ol&ing other currencies on foreign mar0ets( India has a strong dollar' ru$ee for)ard mar0et )ith contracts "eing traded for one to si/ month e/$iration( Dail# trading &olume on this for)ard mar0et is around RC-- million a da#(

RISA I& D(RI!A+I!(S Hhere there are ris0s there are deri&ati&es to stri$ the ris0 and transfer it( As deri&ati&es are essentiall# de&ices of transferring ris0s their t#$es and a$$lications differ "ased on the t#$e of ris0 facing a "usiness(
39

2a0e for instance the follo)ing sources of ris0 and the deri&ati&es to $rotect a "usiness against such ris0s:

Intere"t Rate Ri"k Most common interest rates on )hich deri&ati&es are traded are 1ondon Inter >an0 ;ffer Rate 31I>;R4 or instruments )hose &alue is de$endent u$on interest rates such as 2'>ills and treasur# "onds(

9oreign (@change Ri"k =oreign e/change ris0 3also 0no)n as e/change rate ris0 or currenc# ris04 is a financial ris0 $osed "# an e/$osure to unantici$ated changes in the e/change rate "et)een t)o currencies( In&estors and "usinesses e/$orting or im$orting goods and ser&ices or ma0ing foreign in&estments ha&e an e/change rate ris0 )hich can ha&e se&ere financial conse5uences6 "ut ste$s can "e ta0en to manage 3ie( reduce4 the ris0 %ommodity Ri"k" <ommodit# ris0 refers to the uncertainties of future mar0et &alues and of the si9e of the future income caused "# the fluctuation in the $rices of commodities ( 2hese commodities ma# "e grains metals gas electricit# etc( %redit Ri"k <redit ris0 refers to the ris0 that a "orro)er )ill default on an# t#$e of de"t "# failing to ma0e re5uired $a#ments( 2he ris0 is $rimaril# that of the lender and includes lost $rinci$al and interest disru$tion to cash flo)s and increased collection costs( 2he loss ma# "e com$lete or $artial and can arise in a num"er of circumstances(

40

#>A,(RS I& +2( MARA(+

S4eculator" Peo$le )ho "u# or sell in the mar0et to ma0e $rofits( 2he# are $eo$le )ho )ish to "et on future mo&ements in the $rice of the asset( =uture and ;$tions contracts can gi&e them an e/tra le&erage6 that is the# can increase "oth the $otential gains and losses in a s$eculati&e &enture( S$eculators are those )ho enter into a deri&ati&e contract to ma0e $rofit "# assuming ris0( 2he# ha&e inde$endent &ie) of future $rice "eha&ior of the underl#ing asset and ta0e a$$ro$riate $osition in deri&ati&es )ith the intention of ma0ing $rofit later( S$eculator $erforms an e/tremel# im$ortant function i(e( 1i5uidit#( A$art from li5uidit# the# ma0e the mar0et com$etiti&e reduce transaction cost D e/$and the mar0et si9e( =or e/am$le if #ou )ill the stoc0 $rice of Reliance is e/$ected to go u$ to Rs( 4-- in one month6 one can "u# a one'month future of Reliance at Rs( @C- and ma0e $rofits( 2edger" Peo$le )ho "u# or sell to minimi9e their losses( Hedgers face ris0 associated )ith the $rice of an asset( Hedgers are those )ho enter into a deri&ati&e contract )ith the o"%ecti&e of co&ering ris0( E/: =armer gro)ing )heat faces uncertaint# a"out the $rices of his $roduce at the time of the har&est( Similarl# a flour mill needing )heat also faces uncertaint# of $rice of in$ut( Price ris0 is in&ol&ed( Arbitrageur" 2he# $erform the function of ma0ing the $rices con&erge and "e in tandem )ith each other in different mar0et(Hhile hedger and s$eculators )ant to eliminate D assume ris0 res$ecti&el# the ar"itrageur ta0es ris0less $osition and #et earns $rofit( An
41

ar"itrageurAs ta0e ris0 neutral $osition and ma0es $rofits "ecause mar0ets are im$erfect( Ar"itrageurs are in "usiness to ta0e ad&antage of a discre$anc# "et)een $rices in t)o different mar0ets( =or e(g( If the# see the futures $rice of an asset getting out of line )ith the cash $rice the# )ill ta0e offsetting $ositions in the t)o mar0ets to loc0 in a $rofit(

Derivative" can al"o be cla""i$ied under two head":/ Over/the/counter 4roduct". ;&er'the'counter deri&ati&es ha&e ad&antage the s$ecific needs of the counter $artiesA (Not traded in the mar0et( Normall# settled "# deli&er# of the $roduct( =or)ard <ontract D S)a$ are an ;2< $roduct(

(@change traded 4roduct". E/change traded deri&ati&es ha&e 0no)n transaction costs ha&e no counter'$art# ris0 and $ro&ide eas# entr# and e/it( Gets traded on organi9ed e/changes( >u#er and sellers do not need to meet for the transaction to ta0e $lace(

#o"ition" in $uture" +( .( 1ong Position Short Position

>ong #o"ition If #ou hold a &ie) that the underl#ing asset )ill rise #ou could "u# futures ' 0no)n as a 1;NG futures $osition ' )hich commits #ou to ta0e deli&er# of the underl#ing shares or e5ui&alent cash &alue at a $re' arranged $rice and "# a certain date(
42

Short #o"ition If #our &ie) is that the share $rices for the underl#ing asset )ill fall #ou could sell futures ' 0no)n as a SH;R2 futures $osition ' )hich commits #ou to deli&er the underl#ing shares or e5ui&alent cash &alue at a $rearranged $rice and "# a certain date(

Dhy u"e $uture"I Lou can $rofit in a falling mar0et as )ell as a rising mar0et <ost efficienc#( 2ow are $uture" 4ricedI =air e5uit# futures $rice N toda#Ps share $rice T interest costs ' di&idends recei&ed

StandardiFation in 9uture" Each futures contract has a standard set of s$ecifications:' Underl#ing asset ' )hat does the futures contract re$resentS Is it a commodit# currenc# financial instrument or inde/( Si9e ' the amount of the underl#ing commodit# )hich is re$resented "# the contract( =or instance + corn futures re$resents C --"ushels )hile + crude oil futures contract usuall# re$resents + --"arrels( Price =luctuation ' this is the ma/imum and minimum fluctuations that the contract can ta0e( 2o $re&ent massi&e &olatilit# man# futures contracts are limited in the amount their $rice can fluctuate in one trading da# if the $rice reaches the u$$er or lo)er limit then the contract )ill "e halted until the ne/t trading da#(

43

StandardiFation in 9uture" 2rading Months ' 2his is the s$ecified months for )hich the $articular futures contract can "e traded this &aries( E/$iration Date ' 2he date "# )hich the futures trading month ceases to e/ist at )hich all o"ligations are terminated(

9*+*R(S : O#+IO&S =utures and ;$tions are traded in )ell regulated e/changes through clearing mem"ers( >u#ers and sellers can ha&e long and short $ositions o&er a s$an of time( Positions of traders are safe "ecause settlement is made through clearing house( 2he settlement in the =uture contract through the dail# "ases Mar0 to Mar0et segment(

#artici4ant" in the trading "y"tem:/ 2rading Mem"ers <learing Mem"ers Professional clearing Mem"ers Partici$ants

44

+RADI&? I& 9:O:

In India =D; are traded at >SE and NSE stoc0 e/changes and commodit# =D; are traded into commodit# e/changes( 2he trading s#stem of NSE for futures and o$tions is 0no)n as NEA2 =D;( It is an order dri&er soft)are s#stem )hich matches orders automaticall# on the "asis of securit# $rice time and 5ualit#( Hhen an order is $laced into the s#stem "# an# trader 3)ho is authori9ed to ma0e NSEAs transaction4 it tries to find out a matching out of other traders if s#stem finds a match a transaction is generated( If match is not found "# s#stem and trade is not remo&ed then this trade is 0no)n to "e K$assi&e orderA )hen a suita"le match )ill "e a&aila"le s#stem )ill ma0e a transaction 3this transaction is 0no)n as acti&e order transaction4( =D; transactions e/$ire on last 2hursda# of each month( =D; are a&aila"le in stoc0s indices etc( In different lot si9e and at different $remium and e/$ir# time according to 0ind of underl#ing assets(

45

 Settlements of futures contract ha&e t)o t#$es of settlements i(e( Dail# settlement 3Mar0 to Mar0et4 and final settlement at the da# of e/$ir# of contract date*time(

MAR?I&S I& 9:O //Initial and Maintenance Margin"

In the =D; mar0et margin refers to the initial de$osit of 7good faith8 made into an account in order to enter into a futures contract( 2his mone# is 0no)n as 7good faith8 "ecause it is this mone# that is used to de"it an# da# to da# losses( Each =D; contracts are mar0ed to mar0et at the dail# "asis until contract e/$ires( At the time*da# of e/$iration these contracts are either cash settled "# offsetting $osition 3re&erse the $osition4 in futures or other)ise settlement is made "# $h#sical deli&er# )hich is common in commodit# mar0et( Hhen an# in&estor o$en a =D; $osition at an# e/change through an# "ro0er then futures e/change )ill state a minimum amount of mone# that the in&estor must de$osit into "ro0erAs account to initiate a transaction( ;riginal mone# re5uired to initiate a transaction is called initial margin mone#( Hhen #our contract is li5uidated #ou )ill get this mone# "ac0 along )ith $rofit or loss on #our transaction o&er the s$an of the futures( Initial margin is ad%usted from the a&aila"le li5uid net )orth of the clearing mem"er on an online real time "asis "# e/change in account of its mem"ers( 2his initial margins are fi/ed range from . $er cent to C- $ercent of the &alue of the contract and &aries according to $rice le&el $rice
46

&olatilit# and other factors( At times of high mar0et &olatilit# initial margin re5uirements can "e raised( Hhen the &alue of funds 3margin4 de$osited )ith the "ro0er reaches a certain le&el the trader is re5uired to re$lenish the margin "# de$ositing additional funds to "ring it "ac0 to its initial le&el demanding for additional funds 3margin call4( If due to mar0 to mar0et settlement 3M2M4 #our initial margin account dro$s to certain le&el "ecause of dail# losses "ro0ers )ill ma0e a margin call into #our account to "ring #our account le&el "ac0 to the initial amount le&el 3u$ to initial margin le&el4( Maintenance margins are the additional funds re5uired to re$lenish the margin to "ring it "ac0 to its initial le&el( Mostl# if the &alue of initial margin le&el falls "# C-'BC $er cent of its original &alue then the "ro0er )ill demand from his client for margin call( Hhen an in&estor fails to $ut u$ funds to meet at original le&el the "ro0er has the right to li5uidate or close its $osition(

(ligibility %riteria $or Stock" in 9:O A stoc0 on )hich stoc0 o$tion and single stoc0 future contracts are $ro$osed to "e introduced is re5uired to fulfill the follo)ing "road eligi"ilit# criteria:' 2he stoc0 shall "e chosen from amongst the to$ C-- stoc0 in terms of a&erage dail# mar0et ca$itali9ation and a&erage dail# traded &alue in the $re&ious si/ month on a rolling "asis( 2he stoc0As median 5uarter'sigma order si9e o&er the last si/ months shall "e not less than Rs(+ la0h( A stoc0As 5uarter'sigma

47

order si9e is the mean order si9e re5uired to cause a change in the stoc0 $rice e5ual to one'5uarter of a standard de&iation( 2he mar0et )ide $osition limit in the stoc0 shall not "e less than Rs(C- cores(

A stoc0 can "e included for deri&ati&es trading as soon as it "ecomes eligi"le( Ho)e&er if the stoc0 does not fulfill the eligi"ilit# criteria for @ consecuti&e months after "eing admitted to deri&ati&es trading then deri&ati&e contracts on such a stoc0 )ould "e discontinued(

9uture" : O4tion" *nderlying Stock >i"t

&ame o$ underlying Stock >SE SENSEE >SE 2E<K INDEE >SE >ANKEE >SE ;I1 D GAS INDEE >SE @- SENSEE MINI

A""et %ode in Derivative" >SE 2EK >NK ;GE MSE

Role o$ %learing 2ou"e <learing'houses are a $art of deri&ati&e e/changes( E&er# e/change has an affiliated clearing'house( NS<<1 acts as the clearing house for NSE( =ollo)ings are the function of the clearing'house:' All trades are registered )ith the clearing'houses(
48

Margins are de$osited )ith clearing'house(

<learing'house loo0 after all settlement $rocedures( <learing'house ta0es res$onsi"ilit# in case of default( <learing'house gi&es guarantee to their mem"ers for settlement(

<learing'house is re5uired to $erform the contract to "oth the $arties(i(e( 2o deli&er the underl#ing asset to the "u#er and to $a# to the seller( =ollo)ing figure sho)s that the role of clearing'house( Its role is to easil# s5uare off the lia"ilities of trade made "# "u#er and seller(

#R(R(G*ISI+(S 9OR D(RI!A+I!(S MARA(+ 2here are fi&e essential $rere5uisites for deri&ati&es mar0et to flourish in a countr#( aC >arge market ca4italiFation At a mar0et ca$itali9ation of near R+(C trillion India is )ell ahead of man# other countries )here deri&ati&es mar0ets ha&e succeeded( bC >i;uidity in the underlying A fe) #ears ago the total trading &olume in India used to "e around Rs' @--crores a da#( 2oda# dail# trading &olume in India is around Rs' +C--- cores a da#( 2his im$lies a degree of li5uidit# )hich is around si/ times su$erior to the earlier conditions( 2here is em$irical e&idence to suggest that there are man# financial instruments in the countr# toda# )hich ha&e ade5uate to su$$ort deri&ati&e mar0et( c4 %learing hou"e that guarantee" trade" <ounter $art# ris0 is one of the ma%or factor recogni9ed as essential for starting a strong and health# deri&ati&es mar0et( 2rade guarantee therefore "ecomes im$erati&e "efore a deri&ati&es mar0et could start( 2he first clearinghouse cor$oration guarantees trades ha&e "ecome full# functional from ?ul# +GGI in the form of National Securities <learing <or$oration 3NS<<4( NS<< is res$onsi"le for guaranteeing all
49

o$en $ositions on the National Stoc0 E/change 3NSE4 for )hich it does the clearing( ;ther e/changes are also mo&ing to)ards setting u$ se$arate and )ell'funded clearing cor$orations for $ro&iding trade guarantees(

dC #hy"ical in$ra"tructure IndiaAs e5uit# mar0ets are all mo&ing to)ards satellite connecti&it# )hich allo)s in&estors and traders an#)here in the countr# to "u# li5uidit# ser&ices from an#)here else( 2his telecommunications infrastructure IndiaAs ca$a"ilities in com$uter hard)are and soft)are )ill ena"le the esta"lishment of com$uter s#stem for creation of deri&ati&es mar0ets( Setting u$ of automated trading s#stem as an e/$erience )ith &arious $ros$ecti&e e/changes )ill also "e "eneficial )hile setting u$ the deri&ati&e mar0et( e4 Ri"k/taking ca4ability and Analytical "kill" IndiaAs in&estors are &er# strong in their ris0 '"earing ca$acit# and can co$e )ith the ris0 that deri&ati&es $ose( E&idence of the &olumes traded on the ca$ital mar0ets )hich are a0in to a futures mar0et is indicati&e of this ca$acit#( In contrast in some other countries in&estors sim$l# lac0 the ris0'"earing ca$acit# to sustain the gro)th of e&en the e5uit# mar0et( It is e/$ected that such a "arrier )ill not a$$ear in India( ;n the su"%ect of anal#tical s0ills deri&ati&es re5uire a high degree of anal#tical ca$a"ilit# for man# su"tle trading strategies to $ricing( India has an enormous $ool of mathematicall# literate finance $rofessionals )ho )ould e/cel in this field( 1astl# an o"&ious ad&antage for the Indian mar0et is that )e ha&e enormous e/$erience )ith futures mar0ets through the settlement c#cle oriented e5uit# )hich is not trul# a s$ot mar0et "ut a futures mar0et 3including conce$ts li0e mar0et'to'mar0et margin lo) deli&er# ratios and last'da#'of settlement a"normalities in $rices4( He also ha&e acti&e futures mar0ets on si/ commodities( Hith this state of de&elo$ment of the ca$ital mar0ets it is felt that there is no ma%or hurdle left for the creation of de&elo$ment of the ca$ital mar0ets( Hence on ?ul# . +GGI the SE>I

50

"oard ga&e an in $rinci$al a$$ro&al for the launch of deri&ati&es mar0ets in India(

(%O&OMI% 9*&%+IO& O9 D(RI!A+I!(S Deri&ati&es $la# the follo)ing im$ortant roles in e&er# econom# )here the# are traded:' #rice di"covery and 4lanning Prices of an organi9ed deri&ati&es mar0et reflect the com"ined &ie)s and $erce$tion of "u#ers and sellers not onl# of the current demand and su$$l# "ut also of their e/$iration( At the time of e/$iration the $rices of deri&ati&es con&erge )ith the $rice of the underl#ing assets( 2his $rocess of $rice disco&er# is a$$lica"le to "oth futures and o$tions( Information generated "# futures trading through $rice disco&er# $rocess hel$s in $lanning of all users at e&er# stage( 2o the e/tent that these mar0ets im$ro&e $lanning and efficienc# as )ell as reduce o$erating costs "enefits )ill accrue to consumers in the econom#( Ri"k "hi$ting 2he deri&ati&e mar0et allo)s and facilitates ris0s to "e transferred from those )ho ha&e them "ut ma# not )ant them( 2he ris0 in case of deri&ati&es is $rimaril# $rice ris0( 2his ris0 re$resent a cost )hich must "e "orne "# someone if the dealer lender "orro)er merchant or middlemen has to assume ris0 then the# )ill $a# the o$$osite $art# less or charge them more or a com"ination of the t)o( If the ris0 is assumed directl# "# the dealer or merchant the# are com$ensated for "earing the ris0( Numerous general economic "enefits flo) from the ris0 shifting of hedging function( 2hese include reduced finance charges in carr#ing in&entor# of all 0inds including $ortfolio of in&estments( 2he larger "an0s that finance $roducers distri"utors and $rocessors gi&e their "est

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terms for the &alue of the in&entor# that is full# $rotected "# an ade5uate hedge( (nhance li;uidity in the underlying market" Deri&ati&es due to their inherent nature are lin0ed to the underl#ing cash mar0ets( It has "een o"ser&ed the )orld o&er that introduction of deri&ati&es increases the trading &olume in the underl#ing( Mar0ets $la#ers reluctant to $artici$ate due to the a"sence of ris0 shifting mechanism can no) $artici$ate in the cash mar0et( Inter$la# "et)een the underl#ing deri&ati&es mar0et generates additional acti&it# in the underl#ing mar0et increasing li5uidit# in the underl#ing( Shi$t" the "4eculative trading to a more controlled environment In the a"sence of an organi9ed deri&ati&es mar0et s$eculators o$erate in the underl#ing cash mar0ets( 2his acts as an esta"lishing factor for the underl#ing mar0er since the underl#ing mar0et act also as $ro/# futures and o$tions mar0et( Margining monitoring and sur&eillance of the acti&ities of the &arious $artici$ants is difficult in these 0ind of mi/ed mar0ets( Deri&ati&es mar0et $ro&ides a mechanism for the s$eculators to "e identified se$aratel# and sur&eillance of these $artici$ants and their $ositions can "e done in a "etter manner( 2his reduce im"alance in the underl#ing mar0ets( 2hus the deri&ati&es mar0ets )ill hel$ in controlling the acti&ities of s$eculators and reduce the ris0s no) $re&alent in the underl#ing securities mar0et in India(

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;>?E<2I!ES

2o anal#9e the deri&ati&es traded in stoc0 mar0ets in India(

2o anal#9e the o$erations of futures and o$tions(

2o find the $rofit*loss $osition of futures "u#er and seller and also the o$tion )riter and o$tion holder(

2o stud# a"out ris0 management in financial mar0ets )ith the hel$ of deri&ati&es

2o 0no) different t#$es of deri&ati&es instruments(

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Re"earch methodology

+y4e o$ re"earch 2he t#$e of research is selected on the "asis of $ro"lems identified( Here the research t#$e used is descri$ti&e research( Descri$ti&e research includes fact'findings and en5uiries of different 0inds( 2he ma%or $ur$ose of descri$ti&e research is a descri$tion of the state of affairs as it e/ists in the $resent s#stem( In this dissertation an attem$t has "een made to disco&er &arious issues related to deri&ati&es in the Indian mar0et and ho) the# hel$ the hedge the ris0( %ollection o$ data Data %ollection $rom "econdary Source" Secondar# data )ere gathered from numerous sources( Hhile $re$aration of this $ro%ect re$ort the secondar# data ha&e "een collected through: Data )as generated from general li"rar# research sources te/t"oo0s trade %ournals articles from ne)s$a$er "rochures(

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57

%O&%>*SIO&

Deri&ates mar0et is an inno&ation to cash mar0et( A$$ro/imatel# its dail# turno&er reaches to the e5ual stage of cash mar0et( 2he a&erage dail# turno&er of the NSE deri&ati&e segments(

In cash mar0et the $rofit*loss of the in&estor de$end the mar0et $rice of the underl#ing asset( 2he in&estor ma# incur huge $rofits or he ma# incur huge $rofits or he ma# incur huge loss( >ut in deri&ati&es segment the in&estor the in&estor en%o#s huge $rofits )ith limited do)nside(

In cash mar0et the in&estor has to $a# the total mone# "ut in deri&ati&es the in&estor has to $a# $remiums or margins )hich are some $ercentage of total mone#(

Deri&ati&es are mostl# used for hedging $ur$ose(

In deri&ati&e segment the $rofit*loss of the o$tion )riter is $urel# de$end on the fluctuations of the underl#ing asset(

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59

R(%OMM(&DA+IO& <ontract si9e should "e minimi9ed "ecause small in&estors cannot afford this much of huge $remiums(

R>I should $la# a greater role in su$$orting deri&ati&es(

Deri&ati&es mar0et should "e de&elo$ed in order to 0ee$ it at $ar )ith other deri&ati&e mar0ets in the )orld(

S$eculation should "e discouraged(

2here must "e more deri&ati&e instruments aimed at indi&idual in&estors(

SE>I should conduct seminars regarding the use of deri&ati&es to educate indi&idual in&estors(

After stud# it is clear that Deri&ati&e influence our Indian Econom# u$ to much e/tent( So SE>I should ta0e necessar# ste$s
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for im$ro&ement in Deri&ati&e Mar0et so that more in&estors can in&est in Deri&ati&e mar0et(

2here is a need of more inno&ation in Deri&ati&e Mar0et "ecause in toda# scenario e&en educated $eo$le also fear for in&esting in Deri&ati&e Mar0et >ecause of high ris0 in&ol&ed in Deri&ati&es(

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>IMI+A+IO&

All data )ere collected onl# on the "asis of secondar# data(

2he time a&aila"le to conduct the stud# )as 4 months( >eing a )ide to$ic I had a limited time(

1imited resources )ere a&aila"le to collect the information a"out commodit# trading.

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Sco4e o$ the "tudy

Deri&ati&es deals )ith e5uit# currenc# commodit# etc( in this )e are find out )hich is the "est one and anal#9e the customer a)areness in deri&ati&e mar0et and it also co&er the recent changes in deri&ati&e mar0et( It gi&es the information a"out for)ard future o$tion and s)a$( It gi&es more concentrate on ho) securities traded in deri&ati&e mar0et(

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<ibliogra4hy >oo0s

Deri&ati&es3McGra) Hill4 F Somnathan =utures D ;$tions 32MH4 F!ohra D >agai Mone# D ca$ital mar0et 3McGra) Hill4 FRose D Mar5uis Securities mar0et 3>asic4 Module : N<=M Economic 2imes Hi0i$edia

He"sites

)))(e5uit#master(com )))(in&esto$edia(com )))(&aluenotes(com )))(nseindia(com )))("seindia(com

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