MEANING OF FINANCIAL DERIVATIVES

The term "Derivative" indicates that it has no independent value. Its value is entirely derived
form the value of the underlying asset. The underlying asset can be securities, Commodities,
bullion, currency, Stock Index, live stock or anything else.
In other words, we can say that, Derivative means a forward, future, option or any other hybrid
contract of pre-determined fixed duration, linked for the purpose of contract fulfillment to the
value of a specified real or financial asset or to an index of securities.
With Securities Laws (Second Amendment) Act, 1999 Derivatives has been included in the
definition of Securities.
The term Derivative has been defined in Securities Contracts (Regulations) Act, as "A Contract
which derives its value form the pricc;s or index of prices, of underlying Securities."
Over-the-counter (OTC) derivatives are contracts that are traded (and privately negotiated)
directly between two parties, without going through an exchange or other intermediary. Products
such as swaps, forward rate agreements, and exotic options are almost always traded in this way.
The aTC derivatives market is huge. According to t~e Bank for International Settlements, the
total outstanding notional amount is USD 298 trillion (as of 2005).
Exchange-traded derivatives are those derivatives products that are traded via Derivatives
exchanges. A derivatives exchange acts as an intermediary to all transactions, and takes Initial
marginfrom both sides of the trade to act as a guarantee. The world's largest ill derivatives
exchanges (by number of transactions) are the Korea Exchange (which lists KOSPI Index
Futures & Options), Eurex (which lists a wide range of European products such as interest rate &
index products), Chicago Mercantile Exchange and the Chicago Board of Trade. According to
BIS, the combined turnover in the world's derivatives exchanges totalled USD 344 trillion.
Hedgers:
Hedgers are those who protect themselves- from the risk associated with the price of an asset by
using derivatives. A person keeps a close watch upon the prices discovered in trading and when
1

the comfortable price is reflected according to his wants, he sells futures contracts. In this way he
gets an 'assured fixed price of his produce.
In general, hedgers use futures for protection against adverse future pnce movements in the
underlying cash commodity. Hedgers are often businesses, or individuals, who at one point or
another deal in the underlying cash commodity.

Take an example: A Hedger pay more to -the farmer or dealer of a produce if its prices go up. For
protection against higher prices of the produce, he hedge the risk exposure by buying enough
future contracts of the produce to cover the amount of produce he expects to buy. Since cash and
futures prices do tend to move in tandem, the futures position will profit if the price of the
produce rise enough to offset cash loss on the produce.
Speculators:
Speculators are some what like a middle man. They are never interested in actual owing the
commodity. They will just buy from one end and sell it to the other in anticipation of future price
movements. They actually bet on the future movement 111 the pnce of an asset. They are the
second major group of futures players. These participants include independent floor traders and
investors. They handle ,trades for their personal clients or brokerage firms. Buying a futures
contract in anticipation of price increases is known as 'going long'. Selling a futures contract in
anticipation of a price decrease is known as 'going short'.

Arbitrators:
According to dictionary definition, a person who has been officially chosen to make a decision
between two people or groups who do not agree is known as Arbitrator. In commodity market
Arbitrators are the person who takes the advantage of a discrepancy between prices in two
different markets. If he finds future prices of a commodity edging out with the cash price, he will
take offsetting positions in both the markets to lock in a profit. Moreover the commodity futures
investor is not charged interest on the difference between margin and the full contract value.
Basis Risk This is the spot (cash) price of the underlying asset being hedged, less the
2

price of the derivative contract used to hedge the asset.

Credit Risk Credit risk or default risk evolves from the possibility that one of the parties
to a derivative contract will not satisfy its financial obligations under the derivative
contract. a
Market Risk This is the potential financial loss due to adverse changes in the fair value
of a derivative. Market risk encompasses legal risk, control risk, and accounting risk.
History of derivatives:
The history of derivatives is surprisingly longer than what most people think. Some texts even
find the existence of the characteristics of derivative contracts III incidents of Mahabharata.
Traces of derivative contracts can even be found III incidents that date back to the ages before
Jesus Christ.
However, the advent of modem day derivative contracts is attributed to the need for farmers to
protect themselves from any decline in the price of their crops due to delayed monsoon, or
overproduction.
The first 'futures' contracts can be traced to the Yodoya rice market in Osaka, Japan around 1650.
These were evidently standardized contracts, which made them much like today's futures.
The Chicago Board of Trade (CBOT), the largest derivative exchange in the world, was
established in 1848 where forward contracts on various commodities were standardized around
1865. From then on, futures contracts have remained more or less in the same form, as we know
them today.
Derivatives have had a long presence in India; The commodity derivative market has been
functioning in India since the nineteenth century with organized trading in cotton through the
establishment of Cotton Trade Association in 1875. Since then contracts on various other
commodities have been introduced as well.

Exchange traded financial derivatives were introduced in India in June 2000 at the two major
stock exchanges, NSE and BSE. There are v,arious contracts currently traded on these
exchanges.
National Commodity & Derivatives Exchange Limited (NCDEX) started its operations in
December 2003, to provide a platform for commodities trading.
The derivatives market in India has grown exponentially, especially at NSE. Stock Futures are
the most highly traded contracts on NSE accounting for around 55% of the total turnover of
derivatives at NSE.
Futures/Forwards, which are contracts to buy or sell an asset at a specified future date.
Options, which are contracts that give the buyer the right (but not the
obligation) to buy or sell an asset at a specified future date.

Swaps, where the two parties agree to exchange cash flows.

In finance, a futures contract is a standardized contract, traded on a futures exchange, to buy or

sell a certain underlying instrument at a celiain date in the future, at a pre-set price. The future
date is called the delivery date or final settlement date. The pre-set price is called the futures
price. The price of the underlying asset on the delivery date is called the settlement price. The
settlement price, normally, converges towards the futures price on the delivery date.
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. In other words, the owner of an options contract
may exercise (to buy or sell) on or prior to the pre-determined settlement/expiration date. Both
parties of a "futures contract" must exercise the contract (buy or sell) on the settlement date. 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, or simply futures, are exchange traded derivatives. The exchange acts as
4

counterparty on all contracts, sets margin requirements, etc.

Futures contracts ensure their liquidityby being highly standardized, usually by specifying:

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 the case of bonds, this specifies which bonds can be
delivered. In the case of physical commodities, this specifies not only the quality of
the underlying goods but also the manner and location of delivery. For example, the
NYMEX Light Sweet Crude Oil contract specifies the acceptable sulfur content and
API specific gravity, as well as the location where delivery must be made.

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. 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
5

day, called the "settlement" or mark-to market price of the contract.

Simple example
As an example, what if an investor owns l00 shares of a particular stock purchased originally for
$40 per share, and that stock is currently trading at $60 per share, then the "mark to market"
value of the investor's shares is equal to (l 00 shares x $60), or $6000, whereas the Book value
might (depending on the accounting principles used) only equal $4000.
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.
Physical delivery is common with commodities and bonds. 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). The Nymex crude futures contract uses this method of settlement
upon expiration.

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 (as well as for most equity options), this happens on the
Last Thursday of certain trading month.
On this day the t+ 2 futures contract becomes the t forward contract. For example, for most

OPTION CONTRACT

Options Contract is a type of Derivatives Contract which gives the buyer/holder of the contract
the right (but not the obligation) to buy/sell the underlying asset at a predetermined price within
or at end of a specified period. The buyer / holder of the option purchase the right from the
seller/writer for a consideration which is called the premium. The seller/writer of an option is
obligated to settle the option as per the terms of the contract when the buyer/holder exercises his
right. The underlying asset could include securities, an index of prices of securities etc.

Swaps:
Swaps are private agreements between two parties to exchange cash flows in the future
according to a prearranged formula. They can be regarded as portfolios of forward contracts. The
two commonly used swaps are:
Interest rate swaps:
These entail swapping only the interest related cash flows between the patiies in the same
currency.
Currency swaps:
entail swapping both principal and interest between the parties, with the cash flows in one
direction being in a different currency than those in the opposite direction.
Swaps are usually entered into at-the-money (i.e. with minimal initial cash payments because fair
value is zero), through brokers or dealers who take an upfront cash payment or who ad just the
rate to bear default risk. The two most prevalent swaps are interest rate swaps and foreign
currency swaps, while others include equity swaps, commodity swaps, and swaptions.
EXCHANGE TRADED DERIVATIVES ON (NSE) NATIONAL STOCK
EXCHANGE
Futures & Options
The National Stock Exchange of India Limited (NSE) commenced trading in derivatives with the
launch of index futures on June 12, 2000. The futures contracts are based on the popular
benchmark S&P CNX Nifty Index.

The Exchange introduced trading in Index Options (also based on Nifty) on June 4, 2001. NSE
also became the first exchange to launch trading in options on individual securities from July 2,
7

2001. Futures on individual securities were introduced on November 9, 2001. Futures and
Options on individual securities are available on 152 securities stipulated by SEBI.
FINANCIAL DERIVATIVE ON NSE

S&P CNX Nifty

Futures S&P
CNX

Nifty Options

CNXIT Options

CNXIT Future

BANK Nifty

ORIGIN OF DERIVATIVE TRADING IN INDIA

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 24member 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 preconditions 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 realtime 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 was 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
derivatives4. The government also rescinded in March 2000, the threedecade old notification,
which prohibited forward trading in securities.
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.

Some milestones:
Nov.1996 - Formation of Dr. L C Gupta Committee
Dec.1999 - Formation of Prof. J R Varma Committee
May 2000 - Granting approval by SEBI
June 2000 Commencement of Derivatives Trading (Index Futures)
June 2001 Commencement of trading in Index Options
July 2001 Commencement of trading in Options on Individual Securities
November 2001 Commencement of trading in Futures on Individual Securities
August 2003 Launch of Futures & options in CNXIT Index
June 2005 Launch of Futures & options in BANK Nifty Index
December 2006 'Derivative Exchange of the Year', by Asia Risk magazine
TYPES OF DERIVATIVE CONTRACTS:
The following types of derivative contracts are there. But, the most commonly used derivative
contracts are forwards, futures and options.

FORWARDS: a forward contract is a customized contract between two entities, where

settlement takes place on a specific date in the futures at today's pre-agreed price.

FUTURES: a future contract is an agreement between two parties to buy or sell an asset at a
certain time the future at the certain price. Futures contracts are the special types of forward
contracts in the sense that are standardized exchange traded contracts.

OPTIONS: options are of two types: call option and put options.
a. Call Option gives the buyer the right but not the obligation to buy a given quantity of
the underlying asset, at a give price on or before a given future date.
b. Put Option gives the buyer the right but not the obligation to sell a give quantity of the
underlying asset at a given price on or before a given date.

10

LEAPS: Normally option contracts are for a period of 1 to 12 months. However,

exchange may introduce option contracts with a maturity period of 2-3 years. These longterm option contracts are popularly known as Leaps or Long term Equity Anticipation
Securities.

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.

BASKETS: Baskets options are option on portfolio of underlying asset. Equity Index
Options are most popular form of baskets.

SWAPS: these are private agreements between two parties to exchange cash flows in the
future according to a prearrange formula. They can be regarded as portfolios of forward's
contracts. The two commonly used swaps are:
a. Interest rate swaps: these entail swapping both Principal and interest between the
parties, with the cash flow in one direction being in a different currency than those in
the opposite direction.
b. Currency swaps: these entail swapping both Principal and interest between the
parties, with the cash flow in one direction being in a different currency than those in
the opposite direction.

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 swaptionss 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.

11

Cash Vs Derivative Market

The basis differences between these two may be noted as follows:

In cash market tangible asset are traded whereas in derivatives market contract based on
tangible assets or intangible like index or rates are traded.

The value of derivative contract is always based on and linked to the underlying asset.
Though, this linkage may not be on point-to point basis.

Cash market contracts are settled by delivery and payment or through an offsetting
contract. The derivative contracts on tangible may be settled through payment and
delivery, offsetting contract or cash settlement, whereas derivative contracts on
intangibles are necessarily settled in cash or through offsetting contracts.

The cash markets always have a net long position, whereas the net position in derivative
market is always zero.

Cash asset may be meant for consumption or investment. Derivatives are used for
hedging, arbitration or speculation.

Derivative markets are highly leveraged and therefore could be much more risky.

THE DERIVATIVE MARKETS PERFORM A NUMBER OF ECONOMIC FUNCTIONS:

Prices in organized derivative markets reflect the perception of market participants about
the future and lead the prices of underlying to perceived future level. The prices of
derivatives converge with the prices of the underlying at the expiration of the derivative
contract. Thus derivatives help in discovery of future as well current prices.

The derivative market helps to transfer the risks from those who have them but may like
them to those who have an appetite for them.

Derivatives due to their inherent nature are linked to the underlying cash markets. With
the introduction of derivative, the underlying market, witness higher trading volumes
12

because of participation by more players who would not otherwise participate for lack of
an arrangement to transfer risk.

Derivatives have a history of attracting many bright, creative, well-educated people with
an entrepreneurial attitude. They often energize others to create new business, new
products and new employment opportunities, the benefits of which are immense.

Derivatives market helps increase savings and investments in the long run Transfer of risk
enables market participants to expand their volume of activities.

13

INSTRUMENTS OF DERIVATIVE TRADING:

FORWARD
DERIVATIVE

FUTURE
OPTIONS
SWAPS

FORWARD CONTRACT:
"It is an agreement to buy/sell an asset on a certain future date at an agreed price".
The two parties are:

Who takes a long position agreeing to buy

Who takes a short positionagreeing to sell

The mutually agreed price is known as "delivery price" or "forward price". The delivery price is
chosen in such a way that the value of contract for both parties is zero at the time of entering the
contract, but the contract takes a positive or negative value for parties as the price of underlying
asset moves. It removes the future price risk. It a speculator has information or analysis, which
forecast an upturn in price, and then he can go long on the forward market instead of cash
market.
The speculator would go long on the forward, wait for the price to rise, and then take a reversing
transaction to book profits. Speculator may well be required to deposit a margin upfront.
However, this is generally a relatively small proportion of the value of assets underlying the
forward contract.

14

Effect of change in price:

As mentioned above the value of such a contract in zero for both the parties. But later as the
price & the underlying asset changes, it gives positive or negative value for contract.
PRICE & UNDERLYING

HOLDER

&

LONG HOLDER

ASSETS

POSITION

INCREASE

POSITIVE

DECREASE

NEGATIVE VALUE

&

SHORT

POSITION

VALUE NEGATIVE

VALUE

POSITIVE VALUE

E.g: Suppose that A wants to buy a house in one year's time. At the same time, suppose that B
currently owns a house worth Rs.1 lac that he wishes to sell in one year's time. Both parties could
enter into a forward contract with each other. Suppose that they both agree on the sale price in
one year's time of Rs.104,000 (more below on why the sale price should be this amount).A and B
have entered into a forward contract. A, because he is buying the underlying, is said to have
entered a long forward contract. Conversely, B will have the short forward contract.
At the end of one year, suppose that the current market valuation of Bs house is Rs.110,000.
Then, because B is obliged to sell to A for only Rs.104,000. A will make a profit of Rs.6,000. To
see why this is so, one need only to recognize that A can buy from B for Rs.104,000 and
immediately sell to the market for Rs.110,000. A has made the difference in profit. In contrast, B
has made a potential loss of Rs6,000 and an actual profit of Rs.4000. Profit/Loss = ST-E
Where, ST= Spot price on maturity date
E = Delivery price
Limitations of forward contract:

No standardization.
15

One party can breach its obligation.

Lack of centralization of trading.

Lack of liquidity

A forward contract is specified with four variables:

the underline,

the notional amount n,

the delivery price k, and

the settlement date on which the underline and payment will be exchanged.

Valuation of Forward Contract

The Forward contract can be put under three categories for the purpose & valuation:
Valuation of those Securities Providing No Income:

Shares which neither accepts to pay any dividend in future nor having arbitrage opportunities.
e.g. Here Price (F) = Stert
Where, F = Future Price
St = the spot price of asset
r = Risk free rate of interest p.a. with continuous compounding.
t = Time of maturity.
If (F) > Stert
In this case the investor will buy asset and take a short position in the forward contract.
Short position is not position of investor is of seller means contract sold is greater than contract
bought.
16

Investor may buy the assets, borrowing an amount equal to * * for t period at risk free rate. At
the time of maturity, the assets will be delivered for price F and repayment will be equal to Stert
and there is net profit equal to F - Stert
If F < Stert
He will long his position in Forward Contract. When contract matures: the assets would be
purchased for F. Here profit is Stert F.
E.g. Consider a forward contract where nondividend shares available at Rs. 70 matures in 3
months, Risk free rate 8% p.a. compounded continuously.
Stert = 70 X [e] 0.25X0.08
= 70 X 0202
= Rs.71.41
If F = 73 then an arbitrageur will short a contract, borrow an amount of Rs.70 & buy shares.
Repay the loan of Rs.70. At maturity sell it as Rs.73 (Forward contract price) and 71.40, thus
profit is (73 71.40) Rs.1.60. Thus he shorts his forward contract position.

17

FUTURES
A futures contract is a legally binding agreement to buy or sell a specific

commodity, such as

soybeans, or financial instrument, such as silver or the Euro, on a particular date in the future at
an agreed upon price. Futures belong to a

category

of

financial

instruments

known

as

derivatives, because their prices are derived from the value of other, underlying instruments,
items, or products. In the case of futures, commodities of various kinds are the products
underlying the contracts.
Futures contracts
A futures transaction always has two parties, a buyer and a seller, and you can
market either way. If you buy a contract, you take a long position and

enter

the

are called the long. If

you sell a contract, you take a short position and are called the short. Further, in the futures
market,

every

contract

has

an

equal

number

of

long

and

short

positions.

To liquidate and leave the futures market, you need to cancel your existing futures position either
by offsetting your contract with a matching futures contract on the opposite side of the market, or
by delivering or taking delivery of the commodity or its cash value. Long positions are offset by
short positions, and

short positions by long ones. For example, if you have a long position on

5,000 bushels of soybeans deliverable in January, you need to short or enter a contract to sell
5,000 bushels of soybeans deliverable in January or expect to

have

the

5,000

bushels

delivered to your doorstep.

This obligation differs from the terms of an options contract you buy, which you may allow to
expire unexercised. But it resembles what happens when you sell an options contract and must
offset or fulfill your part of the bargain.
To overcome the problems in forward contract, other type of derivative instrument known as
"Future Contract came into existence. It is an agreement between buyer and seller for the
purchase and sale of a particular assets at a specific future date; specific size, date of delivery,
place and alternative asset. It takes obligation on both parties to fulfill the contract.

History
18

What we know as the futures market of today came from some humble beginnings. Trading in
futures originated in Japan during the eighteenth century and was primarily used for the trading
of rice and silk. It wasn't until the 1850s that the U.S. started using futures markets to buy and
sell commodities such as cotton, corn and wheat.
Futures Fundamentals
A futures contract is a type of derivative instrument, or financial contract, in which two parties
agree to transact a set of financial instruments or physical commodities for future delivery at a
particular price. If you buy a futures contract, you are basically agreeing to buy something that a
seller has not yet produced for a set price. But participating in the futures market does not
necessarily mean that you will be responsible for receiving or delivering large inventories of
physical commodities - remember, buyers and sellers in the futures market primarily enter into
futures contracts to hedge risk or speculate rather than to exchange physical goods (which is the
primary activity of the cash/spot market). That is why futures are used as financial instruments
by not only producers and consumers but also speculators. The consensus in the investment
world is that the futures market is a major financial hub, providing an outlet for intense
competition among buyers and sellers and, more importantly, providing a center to manage price
risks. The futures market is extremely liquid, risky and complex by nature, but it can be
understood if we break down how it functions.

Features of Future Contract:

Standardized contracts e.g. contract size.

Between two parties who do not necessarily know each other.

Guarantee for performance by a clearing corporation or clearing house. Clearinghouse is

associated with matching, processing, registering, confirming setting, reconciling and
guaranteeing the trades on the future exchanges. Clearinghouse tries to eliminate risk of
default by either party.
19

Standardized Items in Futures:

Quantity of the underlying
Quality of the underlying
The date and month of delivery
The units of price quotation and minimum price change
Location of settlement

Future terminology:
Spot price: the price at which an asset trades in the spot market.
Futures price: the price at which the futures contract trades in the futures market.
Contract cycle: the period over which the contract trades. The index futures contracts on the
NSE have one month, two month, and three-month expiry cycles, which expire on the last
Thursday of the month. Thus a January expiration contract expires on the last Thursday of the
January. On the Friday following the last Thursday, a new contract having three-month expiry is
introduced of trading.
Expiry date: it is date specified in the futures contract. This is the last day on which the contract
will be traded, at the end of which it will cease to exist.
Contract size: the amount of asset that has to be delivered less than one contract. For instance,
the contract size on NSE's futures market is Nifty.
Basis: in the contract of financial futures, basis can be defined as the futures price minus the spot
price. There will be a different basis for each delivery month for each contract. in a normal
market, basis will be positive. This reflects that futures prices normally exceed spot prices.

20

Initial margin: the amount that must be deposited in the margin account at a time a future
contract is first entered into is known as initial margin.
Cost of carry: the relation between futures price and spot price can be summarized in terms of
what is known as cost of carry. This measures the storage cost plus the interest that is paid to
finance the assets less the incomes earned on the asset.
Marking-to-market: in the futures market, at the end of each trading day, the margin account is
adjusted to reflect the investor's margin gain or loss depending upon the future's closing price.
Maintenance margin: this is somewhat lower than initial margin. This is set to ensure that the
balance in the margin account never becomes negative. If the balance amount falls below the
maintenance margin, the investor receives a margin call and is expected to top up the margin
account to the initial margin level before trading commences on the next day.

Forwards Vs Futures:
Features

Forward

Future

21

Operational Mechanism

Traded between two parties

Traded thro exchange

Contract specification

Customized contract

Standardized contract

Counter party risk

Exists such risk

No such risk

Liquidity

Low

High

Price discovery example

Not efficient current market

Highly efficient current

Settlement

At end of period

market
Daily

22

INDEX FUTURES:
Index futures are futures contracts where the underlying asset is the index. The index futures
provide a hedge against price fluctuations of the securities and hedgers are using it as an
insurance tool.
A stock index future contract is an obligation to deliver at settlement an amount of cash equal to
the difference between the stock index value at the clause of the last trading day of the contract &
the price at which the futures contracts was originally struck. For instance ,if the SENSEX index
is at 3000 & a lot size of contract is equal to 50,a contract struck at this level could be worth
Rs150000(3000* 50).If ,at the expiration of the contracts ,the SENSEX stock index is at 3100,a
cash settlement of Rs5000 is required [(3100-3000)*50]. In stock index futures, no physical
delivery of stock is made.
In India, the BSE was the first stock exchange to introduce Index futures on June 9, 2000 on
SENSEX. In NSE the trading of index futures commenced on June 12, 2000 on the S&P CNX
NIFTY. The stock index futures are traded on the F&O segment of the both exchanges.
Both buyers & sellers are required to deposit margin at the time of contract. The margin amount
is based volatility if market indices. In India the initial margin is expected to be around 810%.The margin is kept in a way that it covers price movement more than 99% of the time.
Usually key sigma (standard deviation) is used or this measurement. This technique is also called
value at risk (VAR).
In futures market, at the end of each trading day the margin account is adjusted to reflect the
investors gains or loss depending up on the futures closing price & variation may be required or
released. This is known as MTM (mark to market).
In India, three types of future derivatives are available for trading at NSE & two at BSE. Future
derivatives that are trading in BSE are:

Equity index future on SENSEX.

Stock futures on 41individual securities.

Future derivatives that are trading in NSE are:

Equity index future on S&P CNX NIFTY.

23

Stock futures on 41 individual securities.

Interest rate future on 91/365 T-bills, ten year notional bond (with coupon rate) &
ten year notional bond (zero coupon rate)
STOCK FUTURE

Stock futures are the contracts where the underlying asset is the individual securities or stock. In
stock futures the investors also require to deposit initial margin, the margin is decided by the
exchange (on the basis of four times changes in security prices in a day) on the volatility of
individual stock. Beside this, exposure margin is also required by the stock exchange, it can 5%
(6% or 7% at specific securities) of all 41 individual securities. In India settlement of future on
individual stock is settled in cash only.
In India the stock future are available on the blue chip securities & these securities are free from
price fluctuation bonds. The securities are approved by SEBI. At present 41 individual securities
are available for stock future. NSE & BSE commenced trading in stock future on individual
securities on November 9, 2001 & November 2001 respectively.

INTEREST RATE FUTURE

Interest rate futures are based on a list of underlying (T-bills, bonds, notes & credit
instrument).The list of underlying is specified by the exchange & approved by SEBI time to
time. Interest rate futures provide a hedge against the interest rate risk. In India, the interest rate
has a downtrend since last four years.
NSE was the exchange in India to introduce interest rate future trading on June 24, 2003. To
begin that interest rate future contract, the following underlying shall be available for trading in
F&O segment of the exchange:
S.No
1
2

Symbol
NSETB91D
NSE10Y06

Description
Futures contracts on notional 91 days T-Bills
Future contract on notional 10 year coupon
24

NSE10YZC

bearing bond
Future contract on notional 10 year zero
coupon bond

The interest rate future contract shall be for a period of maturity of one year with three-month
continuous contract, for the first three-month & fixed quartile contracts for the entire year. New
contract will be introduced on trading day following the expiry the near month contract.

Characteristics of the interest rate futures/contract specification:

Contract

Notional 10 year bond

Notional 10 year zero

Notional 91 day T-Bill

underlying
Contract

(6% coupon)
N FUTINT NSE

coupon bond
N FUTINT NSE 10YZ

N FUTINT

descriptor

10Y06 26JUN2003

26JUN 2003

NSETB91D
26JUN2003

Contract value
Lot size
Tick size
Expiry date
Contract

Rs.2,00,000
2000
Re. 0.01
Last Thursday of month
The contract shall be for a period of a maturity of one year with three months

months

continuous contract for the first three months & fixed quarterly contract for

Price limits
Settlement

the entire year

Not applicable
As may be stipulated by NSCCL in this regard from time to time.

price

25

Options
Options are fundamentally different from forward and futures. An option gives the holder/buyers
of the option the right to do something. The holder does not have committed himself to doing
something. In contrast, in a forward or futures contract, the two parties have committed them self
to doing something. Whereas it nothing (expect margin requirement) to enter in to a futures he
purchases of an option require an up front payment.
An options is the right, but not the obligation to buy or sell a specified amount (and quality) of a
commodity, currency, index or financial instruments to buy or sell a specified number of
underlying futures contracts, at a specified price on a before a give date in the future.
OPTION

BUYER

SELLER

RIGHT

OBLIGATION

TO BUY

TO SELL

(CALL)

(PUT)

TO SELL
(CALL)

TO BUY (PUT)

Thus, option like futures, also provide a mechanism by which one can acquire a certain
commodity on other assets, or take position in order to make profits or cover risk for a price.
Participants in the Options Market:
There are four types of participants in options markets depending on the position they take:
1. Buyers of calls
2. Sellers of calls
3. Buyers of puts
4. Sellers of puts
26

People who buy options are called holders and those who sell options are called writers;
furthermore, buyers are said to have long positions, and sellers are said to have short positions.

History:
Options on stocks were first traded on an organized stock exchange in 1973. Since then there has
been extensive work on these instruments and manifold growth in the field has taken the world
markets by storm. This financial innovation is present in cases of stocks, stock indices, foreign
currencies, debt instruments, commodities, and futures contracts.

Terminology of Options
Options are of two basic types: The Call and the Put 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 fulfill the contract and is paid a price
for this, which is called "the put option premium or put option price".
The price at which the underlying asset would be bought in the future at a particular date is the
"Strike Price" or the "Exercise Price". The date on the options contract is called the "Exercise
date", "Expiration Date" or the "Date of Maturity".
There are two kind of options based on the date. The first is the European Option which can be
exercised only on the maturity date. The second is the American Option which can be exercised
before or on the maturity date.

In most exchanges the options trading starts with European Options as they are easy to execute
and keep track of. This is the case in the BSE and the NSE
27

Cash settled options are those where, on exercise the buyer is paid the difference between stock
price and exercise price (call) or between exercise price and stock price (put). Delivery settled
options are those where the buyer takes delivery of undertaking (calls) or offers delivery of the
undertaking (puts).

Call Options
The following example would clarify the basics on Call Options.
Illustration:
An investor buys one European Call option on one share of Reliance Petroleum at a premium of
Rs. 2 per share on 31 July. The strike price is Rs.60 and the contract matures on 30 September.
The payoffs for the investor on the basis of fluctuating spot prices at any time are shown by the
payoff table (Table 1). It may be clear form the graph that even in the worst case scenario, the
investor would only lose a maximum of Rs.2 per share which he/she had paid for the premium.
The upside to it has an unlimited profits opportunity.
On the other hand the seller of the call option has a payoff chart completely reverse of the call
options buyer. The maximum loss that he can have is unlimited though a profit of Rs.2 per share
would be made on the premium payment by the buyer.

S
57
58
59

Payoff from Call Buying/Long (Rs.)

Xt c
Payoff
Net Profit
60 2
0
-2
60 2
0
-2
60 2
0
-2
28

60
61
62
63
64
65
66

60
60
60
60
60
60
60

2
2
2
2
2
2
2

0
1
2
3
4
5
6

-2
-1
0
1
2
3
4

A European call option gives the following payoff to the investor: max (S - Xt, 0).
The seller gets a payoff of: -max (S - Xt,0) or min (Xt - S, 0).
Notes:
S - Stock Price
Xt - Exercise Price at time 't'
C - European Call Option Premium
Payoff - Max (S - Xt, O )

29

Graph:
Net Profit - Payoff minus 'c'
Exercising the Call Option and what are its implications for the Buyer and the Seller?
The Call option gives the buyer a right to buy the requisite shares on a specific date at a specific
price. This puts the seller under the obligation to sell the shares on that specific date and specific
price. The Call Buyer exercises his option only when he/ she feels it is profitable. This Process is
called "Exercising the Option". This leads us to the fact that if the spot price is lower than the
strike price then it might be profitable for the investor to buy the share in the open market and
forgo the premium paid.

The implications for a buyer are that it is his/her decision whether to exercise the option or not.
In case the investor expects prices to rise far above the strike price in the future then he/she
would surely be interested in buying call options. On the other hand, if the seller feels that his
shares are not giving the desired returns and they are not going to perform any better in the
future, a premium can be charged and returns from selling the call option can be used to make up
for the desired returns. At the end of the options contract there is an exchange of the underlying
asset. In the real world, most of the deals are closed with another counter or reverse deal. There
is no requirement to exchange the underlying assets then as the investor gets out of the contract
just before its expiry.

30

Put Options

The European Put Option is the reverse of the call option deal. Here, there is a contract to sell a
particular number of underlying assets on a particular date at a specific price. An example would
help understand the situation a little better:

Illustration 2:
An investor buys one European Put Option on one share of Reliance Petroleum at a premium of
Rs. 2 per share on 31 July. The strike price is Rs.60 and the contract matures on 30 September.
The payoff table shows the fluctuations of net profit with a change in the spot price.

S
55
56
57
58
59
60
61
62
63
64

Payoff from Put Buying/Long (Rs.)

Xt p
Payoff
Net Profit
60 2
5
3
60 2
4
2
60 2
3
1
60 2
2
0
60 2
1
-1
60 2
0
-2
60 2
0
-2
60 2
0
-2
60 2
0
-2
60 2
0
-2

The payoff for the put buyer = Max (Xt - S, 0)

The payoff for a put writer = Max(Xt - S, 0) or Min(S - Xt, 0)

31

Graph

These are the two basic options that form the whole gamut of transactions in the options trading.
These in combination with other derivatives create a whole world of instruments to choose form
depending

on

the

kind

of

requirement

and

the

kind

of

market

expectations.

Exotic Options are often mistaken to be another kind of option. They are nothing but nonstandard derivatives and are not a third type of option.
AMERICAN Vs EUROPEAN OPTION:
Its owner can exercise an American option at any time on or before the expiration date.
A European style option gives the owner the right to use the option only on expiration date and
not before.

32

In-The-Money and Out-The-Money Options

Condition
So>E
So<E
So=E

Call
In the money
Out of the money
At the money

Put
Out of the money
In the money
At the money

So =spot price
E = exercise price

INDEX OPTION:
Index options are the contracts between two parties that give the right, but not the obligation, to
buy or sell underlying at a stated date & a stated price to the buyer of the contract. In index
option, the underlying is share price index & all contracts are based up on it. In index option the
buyer requires to pay a sum for the buying the contract that is called premium. The premium is
decided by the market forces & not by the stock exchange. All index option is cash settled &
physical delivery is not applicable.
Beside the premium the seller of the contract is required to pay 3% margin on contract value to
the exchange to eliminate the risk
That is called exposure margin.
In India the options on index started by the BSE & NSE on their index SENSEX and S&P CNX
NIFTY respectively. Trading on S&P CNX NIFTY commenced at NSE on June 2, 2001.

Contract specification:
33

Underlying index

S & P CNX NIFTY

Exchange of trading

National Stock Exchange

Security descriptor

N OPTIDX NIFTY

Contract size

Permitted lot size shall be 200 & multiples

thereof (minimum value Rs.2 lakh)

Price steps

Rs.0.05

Price band

Not applicable

Trading cycle

The futures contracts will have a maximum of three

month trading cycle-the near month (one), the next
month (two) & the far month (three).New contracts
will be introduced on the next trading day following

Expiry date

the expiry of the near month contract.

The last Thursday of the expiry month of the previous

Settlement basis

trading day if the last Thursday is a trading holiday.

Cash settled on T+1 basis.

Style of option
Strike price

EUROPEAN
RS.20

Daily settlement price

Final settlement price

Premium value (net).

Closing value of the index on the trading day.

In index option, the investor can hedge their risk & make profits. In index options the loss is
limited to premium paid & profit is unlimited of the buyer, on the other hand the profit to
premium received of the writer is limited & loss is unlimited.
Example:

34

Current Nifty is 1400. You buy one contract of nifty near month calls for Rs.30 each. The strike
price is 1430 i.e. 2.14% out of money. The premium paid by you will be (Rs.30n *200)
Rs.6000.Given these, your break-even level nifty is 1460 (1430+30).If at expiration nifty
advanced by 5%, i.e.1470, then
Nifty
Less strike price
Option value
Less purchase price
Profit per nifty
Profit on the contract

1470
1430
40 (1470-1430)
30
10
Rs.2000 (Rs.10 * 200)

STOCK OPTION
Stock options are the contract on the individual scrips means where underlying are individual
scrips. In stock options the buyers of the options have right but not obligation to buy or sell the
underlying asset.
The buyer is requires to pay some money at the time of the purchases of the contract to seller of
the contract that is called premium. And seller requires paying exposure margin to exchange
that is 5% (6%and 7% on specific securities) on the contract value. At present in India 41
individual scrips are approved by the SEBI for stock option.
The trading on the stock commenced at NSE on July 2, 2001.These contracts are available at
BSE & NSE on highly liquid & price band free 41scrips.

Contract Specification:
Underlying
Exchange of trading
Security descriptor
Contract size
Price steps

Individual securities
National Stock Exchange
N-OPTSTK
100 or multiples thereof (minimum value of Rs.2 lakh)
Rs.0.05

35

Price band

Not applicable

Trading cycle

The futures contracts will have a maximum of three month

trading cycle- the near month (one), the next month (two) &
the far month (three).new contract will be introduced on the
next trading day following the expiry of the near month

Expiry day

contract.
The last Thursday of the expiry month of the previous

Settlement basis

trading day if the last Thursday is trading holiday.

Daily settlement on T+1 basis & final option exercise

Style of option

settlement on T+2 basis.

American

Strike price interval

Between Rs.2.5 & Rs.100 depending on the price of the

Daily settlement price

under lying
Premium value (net).

Final settlement price

Settlement day

Closing value of the index on the last trading day.

Last trading day

Swap
A swap is a derivative in which two counterparties agree to exchange one stream of cash flows
against another stream. These streams are called the legs of the swap.
The cash flows are calculated over a notional principal amount, which is usually not exchanged
between counterparties. Consequently, swaps can be used to create unfunded exposures to an
underlying asset, since counterparties can earn the profit or loss from movements in price
without having to post the notional amount in cash or collateral. Swaps can be used to hedge
certain risks such as interest rate risk, or to speculate on changes in the underlying prices.

Structure
36

A swap is an agreement between two parties to exchange future cash flows according to a
prearranged formula. They can be regarded as portfolios of forward contracts. The streams of
cash flows are called legs of the swap. Usually at the time when contract is initiated at least
one of these series of cash flows is determined by a random or uncertain variable such as interest
rate, foreign exchange rate, equity price or commodity price.
Most swaps are traded Over The Counter (OTC), "tailor-made" for the counterparties. Some
types of swaps are also exchanged on futures markets, for instance Chicago Mercantile Exchange
Holdings Inc., the largest U.S. futures market, the Chicago Board Options Exchange and
Frankfurt-based Eurex AG

Structure of Derivative Markets in India?

Derivative trading in India takes can place either on a separate and independent Derivative
Exchange or on a separate segment of an existing Stock Exchange. Derivative
Exchange/Segment function as a Self-Regulatory Organization (SRO) and SEBI acts as the
oversight regulator. The clearing & settlement of all trades on the Derivative Exchange/Segment
would have to be through a Clearing Corporation/House, which is independent in governance
and membership from the Derivative Exchange/Segment.

Regulatory framework of Derivatives markets in India?

With the amendment in the definition of 'securities' under SC(R)A (to include derivative
contracts in the definition of securities), derivatives trading takes place under the provisions of
the Securities Contracts (Regulation) Act, 1956 and the Securities and Exchange Board of India
Act, 1992.
Dr. L.C Gupta Committee constituted by SEBI had laid down the regulatory framework for
derivative trading in India. SEBI has also framed suggestive bye-law for Derivative
Exchanges/Segments and their Clearing Corporation/House which lay's down the provisions for
trading and settlement of derivative contracts. The Rules, Bye-laws & Regulations of the
Derivative Segment of the Exchanges and their Clearing Corporation/House have to be framed in
line with the suggestive Bye-laws. SEBI has also laid the eligibility conditions for Derivative
37

Exchange/Segment and its Clearing Corporation/House. The eligibility conditions have been
framed to ensure that Derivative Exchange/Segment & Clearing Corporation/House provide a
transparent trading environment, safety & integrity and provide facilities for redressal of investor
grievances. Some of the important eligibility conditions are

Derivative trading to take place through an on-line screen based Trading System.

The Derivatives Exchange/Segment shall have on-line surveillance capability to monitor

positions, prices, and volumes on a real time basis so as to deter market manipulation.

The Derivatives Exchange/ Segment should have arrangements for dissemination of

information about trades, quantities and quotes on a real time basis through atleast two
information vending networks, which are easily accessible to investors across the country.

The Derivatives Exchange/Segment should have arbitration and investor grievances redressal
mechanism operative from all the four areas / regions of the country.

The Derivatives Exchange/Segment should have satisfactory system of monitoring investor

complaints and preventing irregularities in trading.

The Derivative Segment of the Exchange would have a separate Investor Protection Fund.

The Clearing Corporation/House shall perform full novation, i.e., the Clearing
Corporation/House shall interpose itself between both legs of every trade, becoming the legal
counterparty to both or alternatively should provide an unconditional guarantee for settlement
of all trades.

The Clearing Corporation/House shall have the capacity to monitor the overall position of
Members across both derivatives market and the underlying securities market for those
Members who are participating in both.

The level of initial margin on Index Futures Contracts shall be related to the risk of loss on
the position. The concept of value-at-risk shall be used in calculating required level of initial
margins. The initial margins should be large enough to cover the one-day loss that can be
encountered on the position on 99% of the days.

The Clearing Corporation/House shall establish facilities for electronic funds transfer (EFT)
for swift movement of margin payments.
38

In the event of a Member defaulting in meeting its liabilities, the Clearing Corporation/House
shall transfer client positions and assets to another solvent Member or close-out all open
positions.

The Clearing Corporation/House should have capabilities to segregate initial margins

deposited by Clearing Members for trades on their own account and on account of his client.
The Clearing Corporation/House shall hold the clients margin money in trust for the client
purposes only and should not allow its diversion for any other purpose.

The Clearing Corporation/House shall have a separate Trade Guarantee Fund for the trades
executed on Derivative Exchange / Segment.
Presently, SEBI has permitted Derivative Trading on the Derivative Segment of BSE and the
F&O Segment of NSE.

39

What are the various membership categories in the derivatives market?

The various types of membership in the derivatives market are as follows:
Trading Member (TM) A TM is a member of the derivatives exchange and can trade on
his own behalf and on behalf of his clients.
Clearing Member (CM) These members are permitted to settle their own trades as well as
the trades of the other non-clearing members known as Trading Members who have agreed
to settle the trades through them.
Self-clearing Member (SCM) A SCM are those clearing members who can clear and
settle their own trades only.

40

LITERATURE REVIEW
Barua et al (1994) undertakes a comprehensive assessment of the private corporate debt market,
the public sector bond market, the govt. securities market, the housing finance and other debt
markets in India. This provides a diagnostic study of he state of the Indian debt market,
recommending necessary measures for the development of the secondary market for debt. It
highlights the need to integrate the regulated debt market with the free debt market, the necessity
for market making for financing and hedging options and interest rate derivatives, and tax
reforms.
Cho (1998) points out the reasons for which reforms were made in Indian capital market stating
the after reform developments. Shah (1999) describes the financial sector reforms in India as an
attempt at developing financial markets as an alternative vehicle determining the allocation of
capital in the economy.

Shah and Thomas (2003) review the changes which took place on Indias equity and debt
markets in the decade of the 1990s. This has focused on the importance of crises as a mechanism
for obtaining reforms.
Mohan (2004) provides the rationale of financial sector reforms in India, policy reforms in the
financial sector, and the outcomes of the financial sector reform process in some detail.

Shirai (2004) examines the impact of financial and capital market reforms on corporate finance
in India. Indias financial and capital market reforms since the early 1990s have had a positive
impact on both the banking sector and capital markets. Nevertheless, the capital markets remain
shallow, particularly when it comes to differentiating high-quality firms from low-quality ones
(and thus lowering capital costs for the former compared with the latter). While some highquality firms (e.g., large firms) have substituted bond finance for bank loans, this has not
occurred to any significant degree for many other types of firms (e.g., old, export-oriented and
commercial paper-issuing ones). This reflects the fact that most bonds are privately placed,
41

exempting issuers from the stringent accounting and disclosure requirements necessary for public
issues. As a result, banks remain major financiers for both high and low-quality firms. The paper
argues that India should build an infrastructure that will foster sound capital markets and
strengthen banks incentives for better risk management.
Chakrabarti and Mohanty (2005) discuss how capital market in India is evolved in the reform
period. Thomas (2005) explains the financial sector reforms in India with stories of success as
well as failure.

Bajpai (2006) concludes that the capital market in India has gone through various stages of
liberalization, bringing about fundamental and structural changes in the market design and
operation, resulting in broader investment choices, drastic reduction in transaction costs, and
efficiency, transparency and safety as also increased integration with the global markets. The
opening up of the economy for investment and trade, the dismantling of administered interest and
exchange rates regimes and setting up of sound regulatory institutions have enabled time.
Gurumurthy (2006) arrives at the conclusion that the achievements in the financial sector
indicate that the financial sector could become competitive without involving unhealthy
competition, within the constraints imposed by the macroeconomic policy stance.

Mohan (2007) reviews Indias approach to financial sector reforms that set in process since early
1990s. Allen, Chakrabarti, and De (2007) concludes that with recent growth rates among large
countries second only to Chinas, India has experienced nothing short of an economic
transformation since the liberalization process began in the early 1990s.
Chhaochharia (2008) arrives at the conclusion that India has a more modern financial and
banking system than China that allocates capital in a more efficient manner. However, the study
is skeptical about who would emerge with the stronger capital market, as both the country is
facing challenges regarding their capital markets.
42

Prasad and Rajan (2008) argues that the time has come to make a more concerted push toward
the next generation of financial reforms. The study advocates that a growing and increasingly
complex market-oriented economy and its greater integration with global trade and finance will
require deeper, more efficient, and well regulated financial markets.
Bose, Suchismita conducted research on (2006) found that Derivatives products provide certain
important economic benefits such as risk management or redistribution of risk away from riskaverse investors towards those more willing and able to bear risk. Derivatives also help price
discovery, i.e. the process of determining the price level for any asset based on supply and
demand. These functions of derivatives help in efficient capital allocation in the economy. At the
same time their misuse also poses threat to the stability of the financial sector and the overall
economy.

Routledge, Bryan and Zin, Stanley E of Carnegie Mellon University conducted research on
Model Uncertainty and Liquidity in year 2001. Extreme market outcomes are often followed
by a lack of liquidity and a lack of trade. This market collapse seems particularly acute for
markets where traders rely heavily on a specific empirical model such as in derivative markets.
Sen Shankar Som and Ghosh Santanu Kumar (2006) studied the relationship between stock
market liquidity and volatility and risk. The paper also deals with time series data by applying
Cochrane Orchutt two step procedures. An effort has been made to establish a relation between
liquidity and volatility in their paper. It has been found that there is a statistically significant
negative relationship between risk and stock market liquidity. Finally it is concluded that there is
no significant relationship between liquidity and trading activity in terms of turnover.
Shenbagraman (2004) reviewed the role of some non-price variables such as open interests,
trading volume and other factors, in the stock option market for determining the price of
underlying shares in cash market. The study covered stock option contracts for four months from
Nov. 2002 to Feb. 2003 consisting 77 trading days. The study concluded that net open interest of
stock option is one of the significant variables in determining future spot price of underlying

43

share. The results clearly indicated that open interest based predictors are statistically more
significant than volume based predictors in Indian context.
Masih AM, Masih R, (2007), had studied Global Stock Futures: A Diagstinoc Analysis of a
Selected Emerging and Developed Markets with Special Reference to India, by using tools
correlation coefficients , grangers causality test, augmented Dicky Fuller test (ADF), Elliott,
Rothenberg and Stock point optimal test. The Authors, through this paper, have tried to find out
what kind of relationship exists between emerging and developed futures markets of selected
countries.

Kumar, R. and Chandra, A. (2000), had studied that Individuals often invest in securities based
on approximate rule of thumb, not strictly in tune with market conditions. Their emotions drive
their trading behavior, which in turn drives asset (stock) prices. Investors fall prey to their own
mistakes and sometimes others mistakes, referred to as herd behavior. Markets are efficient,
increasingly proving a theoretical concept as in practice they hardly move efficiently. The purely
rational approach is being subsumed by a broader approach based upon the trading sentiments of
investors. The present paper documents the role of emotional biases towards investment (or
disinvestment) decisions of individuals, which in turn force stock prices to move.

44

PROFILE OF INDUSTRY
Securities is online stock trading company, provider of India-based investment banking and
corporate finance service. Was founded by a group of professionals specializing in areas of
Indian & international Capital, Derivatives and Commodities Markets. Derivatives started
by operations in After 1991 the deregulation of the of the price of all
commodity. The experience gained during these years is a distinct advantage over many
others. Its values of integrity and transparency are embedded deep into its corporate culture. This
helps to provide excellent services, steady growth and complete satisfaction to all its clients and
associates. It has followed a consistent growth path and is established as one of the leading top
10% broking houses of the country with the support and confidence of clients, investors,
employees and associates.
Membership of exchanges of Exports Group Companies

National Stock Exchange of India Ltd.-Capital Market

National Stock Exchange of India Ltd. Futures & Options

Multi-Commodity Exchange (MCX)

Interconnected Stock Exchange (ISE)

OTC Exchange of India

Recent developments have continues the aim of providing consistency in quality of services and
timely delivery through continuous technical innovation, involvement of personnel and
implementation of an effective and efficient Quality Management System built on the foundation
of international Standard IS/ISO 9001:2000. The Company HO is presently located in Cannaught
place, New Delhi and has branch offices and network of business partners across India.
Vision: To become the most RESPECTED and HONEST company in Financial Industry.

45

Mission: To be a Leader in delivering Financial Products and Services. Have the highest
standards for Clients Satisfaction and to enhance the Wealth of our Investors and Associates.
Word of Honour: It is the duty of every employee to put in his/her efforts to achieve higher
productivity standards.
To make optimum utilization of resources at Companys disposal and to ensure companys
survival & growth.

Main Tradings
Equity Trading:
A member of the National Stock Exchange of India Ltd. and other exchanges. Serving more than
2,500 investors with the best possible executions and value-added research, the unfailing
integrity of has been known for last 15 years. The firm's senior management, along with its
research team sit on the trading desk-every day. Escorts provide the best infrastructure and
telecommunication facility to discreetly and nimbly execute clients' trades in increasingly
complex markets.
Nationwide electronic trading desks and centeralise back office is seamlessly integrated with
each other. Regional offices have a PAN India presence.

Derivative Trading :
A member of the National Stock Exchange of India Ltd. and other exchanges, is a derivative
trading firm. Our singular goal: serving the more than 1,500 investors in our client base with the
best possible executions and value-added research with the unfailing integrity for which escorts
has been known since last 15 years. The firm's senior management, along with its Research team,
sit on the trading desk-every day. There, they provide the Street smarts and worlds best
46

infrastructure and lease line to discreetly and nimbly execute clients' trades in increasingly
complex markets.
Nationwide Escorts and electronic trading desks, and centeralise back office is seamlessly
integrated with each other and with regional offices having PAN India presence.

Commodity Trading:

India commodity markets have been in existence for decades. However in 1975 the Government
banned forward contracts on commodities. Later in 2003 the Government of India again allowed
forward contracts in commodities. There have been over 20 exchanges existing for commodities
all over the country. However these exchanges are commodity specific and have a strong
regional focus. The Government, in order to make the commodities market more transparent and
efficient, accorded approval for setting up of national level multi commodity exchanges.
Accordingly three exchanges are there which deal in a wide variety of commodities and which
allow nation-wide trading. They are
1. Multi Commodity Exchange (MCX)
2. National Commodities Derivatives Exchange (NCDEX)
3. National Multi Commodity Exchange (NMCE)

47

Following are the commodities traded in MCX.

Gold, Gold M, Gold HNI, Silver, Silver M, Silver HNI

Castor Seeds, Soy Seeds, Castor Oil, Refined Soy Oil, Soymeal, RBD Palmolein, Crude
Palm Oil, Groundnut Oil, Mustard Seed, Mustard Seed Oil, Cottonseed Oilcake,
Cottonseed
Pepper, Red Chilli, Jeera, Turmeric
Steel Long, Steel Flat, Copper, Nickel, Tin
Kapas, Long Staple Cotton, Medium Staple Cotton
Chana, Urad, Yellow Peas, Tur
Rice, Basmati Rice, Wheat, Maize, Sarbati Rice
Crude Oil
Rubber, Guar Seed, Gur, Guargum Bandhani, Guargum, Cashew Kernel, Guarseed
Bandhani

48

Following are the commodities traded in NCDEX

Arabica Coffee
Castor Seed
Chilli
Common Parboiled Rice
Cotton Seed Oilcake
Grade A Parboiled Rice
Guar gum
Gur
Jute sacking bags
Long Staple Cotton
Medium Staple Cotton
Mulberry Raw Silk
Pepper
RBD Palmolein
Robusta Coffee
Sesame Seeds
Yellow Soybean Meal
Turmeric
Wheat
Yellow Red Maize

Cashew
Chana
Common Raw Rice
Crude Palm Oil
Expeller Mustard Oil
Grade A Raw Rice
Guar Seeds
Jeera
Lemon Tur
Maharashtra Lal Tur
Mulberry Green Cocoons
Mustard Seed
Raw Jute
Refined Soy Oil
Rubber
Soyabean
Sugar
Urad
Yellow Peas

OBJECTIVES OF THE PROJECT

The main Objectives of my study are as follows:

To study the various trends that comes in the way of derivatives market.
49

To find out that what would be the future and market potential of derivatives market in
India.

To know the awareness & familiarity of investors, dealers and brokers hold regarding
derivative markets.

To know the experience of dealers, investors and brokers with derivatives till date

To get knowledge about shortcomings in Indian derivative market.

50

RESEARCH METHODOLOGY

Research is a procedure of logical and systematic application of the fundamentals of science to

the general and overall questions of a study and scientific technique by which provide precise
tools, specific procedures and technical, rather than philosophical means for getting and ordering
the data prior to their logical analysis and manipulation.
Different type of research designs is available depending upon the nature of research project,
availability of able manpower and circumstances

SAMPLING AND SAMPLE DESIGN6

Sampling method is that method in which data is collected from the sample of items selected
from the population and conclusions are drawn from them. The method of selecting a sample out
of a given population is called sampling. In other words, sampling denotes the selection of a part
of the aggregate statistical material with a view to obtaining information about the whole.
Nowadays, there are various methods of selecting a sample from a population in accordance with
various needs
DATA COLLECTION6
After the research problem has been identified and selected the next step is to gather the requisite
data. While deciding about the method of data collection to be used for the researcher should
keep in mind two types of data i.e. primary and secondary.

TYPES OF DATA

PRIMARY
DATA

51

SECONDRY
DATA

Primary Data:
The primary data are those, which are collected afresh and for the first time, and thus happened
to be original in character. We can obtain primary data either through observation or through
direct communication with respondent in one form or another or through personal interview.

METHODS OF PRIMARY DATA

OBSERVATION
METHOD

INTERVIEW
METHIOD

QUETIONAIRE
METHOD

SCHEDULE
METHOD

Secondary Data
The secondary data on the other hand, are those which have already been collected by someone
else and which have already been passed through the statistical processes. When the researcher
utilizes secondary data then he has to look into various sources from where he can obtain them.
For eg. Books, magazine, newspaper, Internet, publications and reports.
Methods Used In Study
I collected the data through the secondary sources such as.

Books

Magazines

Newspapers

Internet

52

RESEARCH DESIGN
At the outset may be noted that there are several ways of studying and tackling a problem. The
formidable problem that follows the task of defining the research problem is the preparation of
the design of research project popularly known as research design.

TYPES OF RESEARCH
DESIGN

EXPLORATORY
RESEARCH
DESIGN

DESCRIPTIVE
&
DIAGNOSTIC
RESEARCH DESIGN

EXPERIMENTAL
RESEARCH
DESIGN

EXPLORATORY RESEARCH DESIGN

Exploratory research design is termed as formulating research studies. The main purpose of study
is that of formulating a problem. The major emphasis in such study is on discovery of new ideas
and insights. As such the research design appropriate for such studies must be flexible enough to
provide opportunity for considering different aspects of problem.
DESCRIPTIVE AND DIAGNOSTIC RESEARCH DESIGN6
Descriptive research designs are those design which are concerned with describing the
characteristics of particular individual or of the group. Whereas diagnostic research studies
determine the frequency with which something occurs or its association with some else. In
descriptive and diagnostic study the researcher must be able to define clearly what he wants to
measure and must find adequate method for measuring it.

53

EXPERIMENTAL RESEARCH DESIGN

These are those studies where the researcher tests the hypothesis of casual relationship between
variables. Such study requires procedure that will not only reduce biasness and increase
reliability but will permit drawing influence about causality. Usually experiments meets this
requirement, hence these research designs are prepared for experiment.
RESEARCH DESIGN IN STUDY
In the study I will apply descriptive research design. As descriptive research design is the
description of state of affairs, as it exists at present. In this type of research the researcher has no
control over the variables; he can only report what ahs happened or what is happening.
TYPE OF RESEARCH:The research study is descriptive in nature. Descriptive research include surveys & fact-finding
enquiries of different kinds. The major purpose of descriptive research is description of the state
of the affairs as it exists in present.

RESEARCH DESIGN:The research design is descriptive. The established objectives are kept in mind during the study.
TYPE OF DATA:The core finding of the study are based on the information collected through primary data &
secondary data both
METHOD FOR COLLECTION OF DATA:The information was collected from the people with the help of a structured questionnaire. The
books of different authors, information brochures of company & different websites have also
been consulted as a secondary source of information.

DESCRIPTION OF QUESTIONNAIRE:A structured questionnaire was formed for the purpose of obtaining information from the people.
It contains close-ended questions as the objective demanded.
54

SAMPLING UNIT:The people are those who invest money in Share Market & also in derivative market. My
sampling unit is divided into 2 parts. One questionnaire is filled from investors & another
questionnaire is prepared for Brokers that help in trading.
=> From India Bulls

20

=> From Karvy

20

=> From India Info line

. 20

=> From Share Khan Ltd.

20

SAMPLE SIZE:80 persons were visited for the purpose of the study

SAMPLING TECHNIQUE:In this study, the respondents are chosen through convenience, judgment sampling.

SAMPLE AREA:Ambala
Region

55

LIMITAITONS OF STUDY

In India very few people invest in Derivative Market. So there was a problem
to seek the persons that invest in Derivative Market. So it took more time.

The major limitation of study that 80% people are unaware about Derivative
Market. So they are not able to provide correct information regarding
Derivative Market.

In India mostly people invest in Derivative for Speculation purpose. They are
not rational investor. So they are not real investors for study.

Shortage of time was another limitation of the study. Mostly people have don't
time for fulfilling questionnaire. So they don't provide true information.

ANALYSIS AND INTERPRETATION

1. How long you investing money in Derivative Market?

Recently

25%

Last 1 year

37%

Last 3 year

20%

Last 5 or more

18%

INTERPRETATION:This chart show that 25% investor say that they can invest there money recently in
the derivative market & 37% investor say that they can invest there money for the
last 1 year in the derivative market & 20% investor say that they can invest there
money for the last 3 year in the derivative market & 18% investor say that they
can invest there money for the last 5 year and more in the derivative market.

2. Your duration for investing money in Derivative Market?

Very Freq.
Less Freq.
Often
Rarely

10%
20%
45%
25%

INTERPRETATION:This chart show that 10% investor say that they can invest there money very freq.
in the derivative market & 20% investor say that they can invest there money less
freq in the derivative market & 45% investor say that they can invest there money
often in the derivative market & 25% investor say that they can invest there
money rarely in the derivative market.

3. Please tell in which type of Derivative Contract you invest your money?

Future/Forward
Option
Swaps

62%
25%
13%

Swaps
13%

Future/Forward
Option

Option
25%

Swaps

Future/
Forward
62%

INTERPRETATION:This chart show that 62% investor say that they can play future/forward in the
derivative market & 25% investor say that they can play option in the derivative
market & 13% investor say that they can play swaps in the derivative market.

4. Which type of asset you prefer to obtain in Derivative Contract?

Shares
Commodity
Bonds
Index
Bullion
Currency

32%
37%
13%
10%
5%
3%

INTERPRETATION:This chart show that 32% investor say that they can invest there money in share in
the derivative market & 37% investor say that they can invest there money in
commodity in the derivative market & 13% investor say that they can invest there
money in bond in the derivative market & 10% investor say that they can invest
there money in index in the derivative market & 5% investor say that they can
invest there money in bullion in the derivative market & 3% investor say that
they can invest there money in currency in the derivative market.

5. According to your past experience whether Derivative cover your risk

against future change in price of assets.
Yes
No

75%
25%

INTERPRETATION:This chart show that 75% investor say that the derivative market cover risk against
future change in price & 25% investor say that the derivative market can not cover
risk against future change in price.

6. What is your purpose of investing money in the Derivative Market?

Protection Against Risk
High Return
Proper Liquidity
Speculation Purpose
Saving For Long Run

25%
20%
35%
5%
15%

INTERPRETATION:This graph show that 25% investor say that the derivative market provide
protection against risk & 37% investor say that it provide high return & 35%
investor say that they it provide proper liquidity & 5% investor say that they can
invest there money in the derivative market for the purpose of speculation & 10%
investor say that they can invest there money in the derivative market for the
purpose of saving for long run.

7. Some problem faced by the investor while investing the money In

Derivative Market.
Attributes

Solid agree

Agree

Disagree

Lack of
awareness
Regarding SEBI
regulations
Complicated
procedure

65%

25%

7%

Solid
disagree
3%

49%

40%

10%

1%

5%

15%

25%

55%

INTERPRETATION:This above graph show that investor face some problem when he invest money in
the derivative market first is lack of awareness for this problem 65% people are
solid agree & 25% people are agree & 7% people are disagree & 3% people are
solid disagree. Second problem is regarding SEBI regulations for this problem 49%
people are solid agree & 40% people are agree & 10% people are disagree & 1%
people are solid disagree. Third problem is regarding complicated procedure for this
problem 5% people are solid agree & 15% people are agree & 25% people are
disagree & 55% people are solid disagree.

FOR BROKER
8. Do you think the rule of high risk & high return applies in Derivative
Market?

Yes
No

94%
6%

INTERPRETATION:This chart show that 94% brokers say that high risk & high return is applies in the
derivative market & 6% broker say it is not applies in the derivative market.

9. According to you, what are the factor driving growth of Derivative Market?

Attributes
Improvement in communication facilities
More innovation in derivative market
Long term saving &investment

Solid
agree
47%
27%
40%

Agree

Disagree

38%
53%
43%

8%
13%
15%

Solid
disagree
7%
7%
2%

INTERPRETATION:The above graph show the main factor driven for the growth of financial derivatives
in India is First is Improvement in communication 47% people are solid agree &
38% people are agree & 8% people are disagree & 7% people are solid disagree.
Second more Innovation in Financial derivatives 27% people are solid agree &
53% people are agree & 13% people are disagree & 7% people are solid disagree.
Third Long term saving and investment 40% people are solid agree & 43% people
are agree & 15% people are disagree & 2% people are solid disagree.

10. Do you think, Derivative market can influence our Indian economy if we invest
more in derivatives?
Yes
No

97%
3%

INTERPRETATION:This chart show that 97% brokers say that if we invest money more in the derivative
market it influence our Indian economy & 3% broker say it will not effect our
economy.

11. Which type of asset investor prefers to obtain in derivative contract?

Shares
Commodity
Bonds
Index
Bullion
Currency

32%
37%
13%
10%
5%
3%

INTERPRETATION:This chart show that 32% broker say that the investor invest there money in share
& 37% broker say that investor invest there money in commodity & 13% broker
say investor invest there money in bond & 10% broker say investor invest there
money in index & 5% broker say investor invest there money in bullion & 3%
broker say investor invest there money in currency in the derivative market.

12. Do you think, SEBI take necessary steps for the improvement in derivative
market?
Yes
No

72%
28%

INTERPRETATION:This chart show that 72% broker say that SEBI take necessary steps for
improvement in derivative market & 28% broker say no need to take more step for
improvement of derivative market.

13. What are the constraints faced by you (that is put by SEBI) while facilitating
trading in derivative contract?

Attributes
Regarding margin requirement
Regarding clearing corporations
Regarding settlement of contract

Solid agree Agree

32%
10%
25%

Disagree

50%
22%
8%

13%
60%
62%

Solid
disagree
5%
8%
5%

INTERPRETATION:This above graph show the main constraint faced while trading in derivatives are :
First is Regarding margin requirement 32% people are solid agree & 50% people
are agree & 13% people are disagree & 5% people are solid disagree.
Second regarding clearing corporation 10% people are solid agree & 22% people
are agree & 60% people are disagree & 8% people are solid disagree.
Third regarding settlement of contract 25% people are solid agree & 8% people are
agree & 62% people are disagree & 5% people are solid disagree.

STATISTICAL TOOLS

Years
2005-06
2006-07
2007-08
2008-09
2009-10

Index

Stock

Index

stock

Interest rate

future

future

option

option

future

59
93
156
255
382

85
112
145
218
309

29
43
59
83
113

23
34
42
61
75

13
19
23
27
38

Statistical tools are the basic measures, which helps in defining the relation between different
items, present, past & future trend of the particular business etc. A wide variety of statistical tools
are available & any of them can be used by any businessman depending upon the nature of his
trade. Various statistical tools are :1. Correlation
2. Regression
3. Time Series
4. Index Numbers
5. Probability Distribution

PRINCIPLE OF COMPONENT ANALYSIS6

INTERPRETATION:
As there are three factors which are lying in the fourth quadrant i.e. index future, index option,
stock future are the most important factors for company.

MULTIPLE LINEAR REGRESSION

Regression:- It is the study of relationship between the variable so that one may be able to predict
the unknown value of an variable for a known value of another variable.
YEAR
2005-06
2006-07
2007-08
2008-09
2009-10

Index future
59
93
156
255
382

Index option
29
43
59
83
113

Stock future
85
112
145
218
309

INTERPRETATION:
This shows that two observation are best for company, but observation 5 is best than other. Because
it has minimum value as compared to other.

ANALYSIS OF VARIANCE

Years
2005-06
2006-07
2007-08
2008-09
2009-10

Index future

Stock future
59
93
156
255
382

85
112
145
218
309

INTERPRETATION:
After applying ANOVA, we see that Index Future Which is an independent variable affects Stock
Future, which is a dependent variable, the most.

BLACK-SCHOLES OPTION PRICING MODEL

The breakthrough in option pricing theory came with the famous black and Scholes paper in 1973.
Black and Scholes paper where the first to show that operations could be priced by constructing a
risk free hedge by dynamically managing a simple portfolio consisting of the underlying assest and
cash. The same principle is the foundation for almost any option pricing formula used in todays
financial markets. Black and scholes(1973) formula can be used to value European stock options
on a stock that does not pay dividends. In it, C and P the price of European call & options
respectively, the formula states that:C=SN (d1)-Xe-rT N (d2)
P=Xe-rT N (-d2)-SN (-d1),
Where
d1 = ln(S/X) +(r+2/2)T
(T)1/2
d2 = ln(S/X)+(r+2/2)T

= d1- (T)1/2

(T)1/2

Example consider a European call option with three months to expiry. The stock price is 60, the
strike price is 65, the risk-free interest rate is 8% per annum, and the volatility is 30% per annum.
Thus , S = 60, x = 65 , T = 0.25, r = 0.08, =0.30.
d1 = ln(60/65) +(0.08+0.302/2)0.25
0.30(0.25)1/2
= -0.3253
d2 = d1 0.30(0.25)1/2 = -0.4753

The value of the cumulative normal distribution N(.) can be found using the approximation
function in appendix A or tables A-1 and A-2 in the same appendix.
Where,
N(d1) = N(-0.3253) = 0.3725,

N(d2)= N(-0.4753) = 0.3173

c = 60N(d1) - 65e-0.08*0.25 N(d2) = 2.1334

FINDINGS

Brokers not dealing in derivatives at present are also not going to adopt it in near futures.

Hedging & Risk Management is the most important feature of derivatives.

It is not for small Investors.

It has increased brokers turnovers as well as helpful in aggregate investment.

Brokers dont have adequate knowledge about options, so most by them are dealing in futures
only.

There is a risk factor in derivative also.

Most of investors are not investing in derivatives.

People are not aware of derivatives, even people who are invested in it, havent adequate
knowledge about it. These are interested to take it in their future portfolio also. They consider it
as a tool of risk management.

They normally invest in future contracts.

They are investing in future contract, because futures have up to home extent similar quality as
Badla.

RECOMMENDATIONS

Lot size: Lot size should be reduced so that the major segment of an India society i.e. small
saving class can come under F & O trading. There is strong need for revision of lot sizes as the
lot sizes of some of the individual scripts that were worth of Rs. 200000 in starting, now same
lot size amount to a much larger value.

Sub broker: Sub-broker concept should be added and the actual brokers should give all rights
of brokers in F & O segment also.

Scripts: More scripts of reputed companies etc. should be introduced in "F & O segment".

Trading period: Trading period should be increased.

Training classes or Seminars: There should be proper classes on derivatives for investors,
traders, brokers, students and employees of stock exchanges. Because lack of knowledge is the
main reason of its less development. The first step towards it should be seminars provide to
brokers & LSE employees and secondly seminar to students.

CONCLUSION
The Indian accounting guidelines in this area need to be carefully reviewed. The international trend
is moving the underlying securities as well as associated derivative instrument to market. Such a
practice would bring into the account a Clear picture of the impact of derivative related operations.
On the basis of overall study on derivatives it was found that derivative products initially emerged
as hedging devices against fluctuation and commodity prices and commodity linked derivatives
remained the soul form of such products. The financial derivatives came in spotlight in 1972 due to
growing in stability in financial market.
I was really surprised to see during my study that a layman or a simple investor does not even
know how to hedge and how to reduce risk on his portfolios. All these activities are generally
performed by big individual investors, institutional investors, mutual funds etc.
No doubt that derivative growth towards the progress of economy is positive. But the problems
confronting the derivative market segment are giving it a low customer base. The main problems
that it confronts are unawareness and bit lot sizes etc. these problems could be overcome easily by
revising lot sizes and also there should be seminar and general discussions on derivatives at varied
places.

BIBLOGRAPHY
BOOKS:

Gaurav

Dhingra

An

understanding

Of

Financial

Derivativesedition2001-

02,pgNo.23-25

NCFM MODULE-4, Published by National Stock Exchange, pg.No.23-56,78-88

Murty GRK Derivatives Instruments Why and Why Not?pgNo.34-35

William c. hunter & David Marshall Thoughts on financial derivatives, systematic

risk, and central banking: a review of some recent developments,pgno45-49,78-80,

Jain,T.R., and Aggarwal, Dr. S.C., Statistics For M.B.A,VK publication, PP1-3 Part b,
, 2nd Edition ,PP 131-134

Kothari C.R., Research Methodology Methods and Techniques (Second Edition)

New Age International Publishers, An sari Road, Daryaganj, New Delhi-110002. Chapter 4,
Page 55-58. Chapter 6, Page 95,100,111.

Redhead Keith, Financial derivatives: An introduction to futures, forwards, options

and swaps, Eastern economy edition.,pg.NO.45-56

Prakash Gaba, Derivative market..New opportunities. Portfolio organizer, January

2003, Pg. No. 62-63.

Dhingra Gaurav An understanding of financial derivatives, the chartered Accountant

(March 2004), Volume 52 no.9, Pg.No.976-981.

Gibson Rajna and Zimmermann Heinz The benefits and Risks of derivatives
Instruments: An economic Prospective, December, 1994,pgNO.56-78,98-114

Tucker Alan L Financial futures, Options and Swaps edition 2001-02,pg.No.79-84

Coopers & Lybrand Interest Rate swapschapter-2, pg.No.12

Frassca Taylor Mastering Derivatives market edition 2003-04,pg.No.56-58,79

TV Soma Nathan Derivatives-Hill series Publisher

Tata McGraw hill chapter-

8,pg.No.5,8

V.K. Bhalla Financial Derivates: An International Perspective chapter-12,pg.No.9-12

Stock market derivatives: Bumpy Road Ahead? GRK Murty Portfolio Organizer,
February 2003, Pg. No. 50-53

Vinod Kothari Manna from Heaven publisher-Himalaya publication,pgNO.234-237

Simon Cooke Interest Rate and Currency Derivates pgNo98-104

R. Schwartz, 1988," Equity markets Structure, trading and performance". Harper and
Row, New York,pg.NO169-173

JOURNALS:

The Chartered Accountant, volume 52.No.9, March 2004

Chartered Financial Analyst, April 2001, Pg.No.43-47.

Journal of finance,volumn36-39,No.7,Jan2005

Facts for u,volumn53.No.5,Jan2008

Chartered Financial Analyst, December 2002, Pg.No. 50-51.

SITES:

www.escorts securities.com

www.escortinvestment.com

www.nse.com.

www.bseindia.com.

www.bsewebx.com

LINKS:

http://www.findarticles.com/p/articles/mim0825/is370/ai 6237491.
http://www.findarticles.com/p/articles/mi m2294/is 3-4 51/ai n6212706.

http://www.financialinks.com/index.htm

http://www.moneycontrol.com/financialreports.

http://www.acclimited.com/profile.

http://www.acclimited.com/management.

. http://www.acclimited.com/comparison.

http://www.acclimited.com/investments.

QUESTIONNAIRE (FOR INVESTOR)

STUDY OF EMERGENCE OF DERIVATIVE MARKET IN INDIA
Q1. How Long You Investing Money In Derivative Market?

Recently

Last 1 year

Last 3 year

Last 5 or more

Q2. Your Duration For Investing Money In Derivative Market?

Very Freq.

Less Freq.

Often

Rarely

Q3. Please Tell In Which Type Of Derivative Contract You Invest Your Money?

Future/Forward

Option

Swaps

Q4. Which Type Of Asset You Prefer To Obtain In Derivative Contract?

Shares

Commodity

Bonds

Index

Bullion

Currency

Q5.

According To Your Past Experience Whether Derivative Cover Your Risk against Future

Change In price Of Assets.

Yes

No

Q6.

What Is Your Purpose Of Investing Money In The Derivative Market?

Protection against Risk

High Return

Proper Liquidity

Speculation Purpose

Saving For Long Run

Q7. What Are The Problem Faced By The Investor While Investing the money In Derivative
Market?
Attributes
Lack of
awareness
Regarding SEBI
regulations
Complicated
procedure

Solid agree

Agree

Disagree

Solid disagree

QUESTIONNAIRE (FOR BROKERS)

Q8. Do You Think The Rule Of High Risk & High Return Applies In Derivative Market?

Yes

No

Q9. According To You, What Are The Factor Driving Growth Of Derivative Market?
Attributes

Solid

Agree

Disagree

agree

Solid
disagree

Improvement in communication facilities

More innovation in derivative market
Long term saving &investment
Q10. Do You Think, Derivative Market Can Influence Our Indian Economy If We Invest More In
Derivatives?

Yes

No

Q11. Which Type Of Asset Investor Prefers To Obtain In Derivative Contract?

Shares

Bonds

Commodity

Bonds

Index

Bullion

Currency

Q12. Do You Think, SEBI Take Necessary Steps For The Improvement In Derivative Market?

Yes

No

Q13. What Are the Constraints Faced By you (That Is Put By SEBI) While Facilitating Trading In
Derivative Contract?
Attributes

Solid agree Agree

Disagree

Solid
disagree

Regarding margin requirement

Regarding clearing corporations
Regarding settlement of contract