Derivatives in india

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  • 1. Financial Derivatives in India
    Karthikeyan Jawahar, CFPCM
    Director – Research & Consulting
    Finerva Financial Solutions Pvt Ltd
  • 2. Derivatives Fundamentals
    Origin in Forward Contract
    Related to Agricultural Commodities
    To Preserve Profits and Marketability (Hedging)
    Over the Counter Market
    One-on-one Deals (Not Transferable)
    Predominantly between a bank and its client
    Exchange Tradable
    Futures
    Options
  • 3. How Derivatives?
    Options Payoff Charts
    Profit / Loss Line
    Target (Exercise) Price
    Expectation – Share Price will GO DOWN
    Expectation – Share Price will GO UP
  • 4. Dominant types
    Forwards
    Futures
    Options
    Swaps
    All the others are combinations or modifications of the above.
  • 5. Types of Players
    Hedgers
    Arbitrageurs
    Speculators
  • 6. Indian Scene
    Was one of the World’s Largest Futures Market - Cotton Futures Trade
    Shifted predominantly to OTC post independence
    Market Trading started from June 2000 with Index Futures
    Index Option June 2001
    Individual Securities Options from July 2001
    Individual Stock Futures from July 2001
    Commodity Futures started June 2000 – regular addition of commodities even today
    Forex (US$) Futures Started October 2008
  • 7. Market Dynamics
    Lots sizes ranging value of in Rs.2.5 to Rs.4 lakhs
    Dominant market is NSE
    Rapid Growth in Volumes
    Daily Volumes of Rs.68,000 Cr
    Only Rs.18,000 Cr in cash segment
    Dominated by Index Derivatives
  • 8.
  • 9. Is This For ME?
    Market Dominated by Speculators
    Highly Leveraged
    Invest only the margin (Premium)Eg. Rs.300 x 50 = Rs.15,000/- only for a CE-DEC 4800 (S&P CNX Nifty)
    Contract value = Rs.4700 x 50 = Rs.235,000
    If Nifty Goes to 5000, profit is Rs.300 x 50 = Rs.15,000/- => 100% returns
    If Nifty even stays at 4700, loss is Rs.300 x 50 = Rs.15,000/-. => Entire Capital Lost
    Zero Sum Game
    80% of Day-traders Lose Money in USA
    Las Vegas Effect
  • 10. Zero Sum Game
    Stock market is a Non-Zero Sum Game.
    Everyone can make profits. One person’s loss is not another’s profit.
    Derivatives is a Zero Sum Game.
    The profit made is another person’s loss.
    My premium lands up with the market maker
    My profit is paid by the market maker
    The market makers are large financial corporations or the stock market itself.
    Failed Market makers are – Barrings Bank, Societe Generale, Lehman Brothers, many more banks & hedge funds in the USA.
  • 11. Questions and Sharings
    Thank You
    Mail for further queries to
    Karthikeyan Jawahar
    karthiK@finerva.com