Derivatives in india

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Derivatives in india

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

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