Financial Derivatives in India Karthikeyan Jawahar, CFPCM Director – Research & Consulting Finerva Financial Solutions Pvt Ltd
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
How Derivatives? Options Payoff Charts Profit / Loss Line Target (Exercise) Price Expectation – Share Price will GO DOWN Expectation – Share Price will GO UP
Dominant types Forwards Futures Options Swaps All the others are combinations or modifications of the above.
Types of Players Hedgers Arbitrageurs Speculators
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
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
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
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.
Questions and Sharings Thank You Mail for further queries to Karthikeyan Jawahar karthiK@finerva.com