A Study of Derivatives Market in India
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A Study of Derivatives Market in India

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A Study of Derivatives Market in India

A Study of Derivatives Market in India

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  • hello hardeep, this is a good survey that u have done. Do u have an Excel Sheet of survey, if possible can u mail me as soon as possible... on E-mail ID akashsurana02@gmail.com
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  • @arpitadas . . u need to click on save. . which is on top of the presentation
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A Study of Derivatives Market in India A Study of Derivatives Market in India Document Transcript

  • Global Business School | A Study of Derivatives Market in India 1 KARNATAKA UNIVERSITY DHARWAD GEN Society’s GLOBAL BUSINESS SCHOOL BHAIRIDEVARAKOPPA HUBLI. (Affiliated to Karnataka University, Dharwad & Recognized by AICTE, New Delhi) PROJECT REPORT ON SUBMITTED BY Hardeep Singh Hundal MBA11007028 UNDER THE GUIDANCE OF Institute Guide: Organization Guide: Dr. Ramakant Kulkarni Mr. Shankar Habib “A Study of Derivatives Market in India‖
  • Global Business School | A Study of Derivatives Market in India 2 G.E.N.Society’s GLOBAL BUSINESS SCHOOL BHAIRIDEVARKOPPA, HUBLI – 580025 (Recognized by AICTE, New Delhi & Affiliated to Karnatak University, Dharwad) CERTIFICATE This is to certify that Mr. Hardeep Singh Hundal of MBA IV Semester, Exam No.MBA11007028 has successfully completed her Project work titled, “A Study of Derivatives Market” at Hindustan Financial Services” From 15th April 2012 to 15th June 2012. Dr. Ramakant Kulkarni Prof. M.N.Manik Dr. Ramakant Kulkarni Director Dean Academics Internal Guide
  • Global Business School | A Study of Derivatives Market in India 3 DECLARATION I Hardeep Singh Hundal student of MBA IV semester student of Gen Society‘s, Global Business School, Hubli, hereby declare that the project entitled ―A Study of Derivatives Market in India‖ in Hindustan Financial Services, Hubli is submitted by me to Karnataka University, Dharwad in partial fulfilment for the requirements for the award of the degree of ―Master of Business Administration (MBA)‖. This project report is a work prepared by me under the guidance of Dr. Ramakant Kulkarni. Place: Hubli Hardeep Singh Hundal Date: 18th June 2013 MBA IV Semester
  • Global Business School | A Study of Derivatives Market in India 4 ACKNOWLEDGEMENT It is my privilege to have accomplished this study under the guidance of Dr.Ramakant Kulkarni my faculty and guide, for taking keen interest full involvement, dynamic motivation and valuable guidance extended to me throughout the project. I express my sincerest gratitude and thanks to honorable Mr. Shankar Habib for whose kindness I had the precious opportunity of attaining Training at Angel Broking, under this brilliant untiring guidance I could complete the Project being undertaken on ―A Study of Derivatives Market in India‖ successfully in time. His meticulous attention and valuable suggestions have helped me in simplifying the problem in the work. I would also like to thank the overwhelming support of all the people who gave me an opportunity to learn and gain knowledge about the various aspects of the industry. I am indebted to all staff members of Hindustan Financial Services for their valuable support and cooperation during the entire tenure of this project. Not to forget, the faculty members of Global Business School, Hubli who have kept my spirits surging and helped me in delivering my best and made me reach up to this platform.
  • Global Business School | A Study of Derivatives Market in India 5 Executive Summary The Summer Inplant Project at ―Hindustan Financial Services‖ has given an exposure into the investment scenario in India. The project while working at ―Hindustan Financial Services‖ includes advisory services i.e. educating the existing and potential investors about stock market as an alternative source to investment. This involves catering to the queries of the investors about the concept of stock market, the various options that an investor can invest his money into, funds management of investors. Analyzing the investors‘ behavior includes understanding the concerns a person has towards Stock Market, his stages in life and wealth cycle, the effect of the investments made by the peer groups, effect of the profession he/she is in, education qualification, importance of tax benefits, the most preferred saving tool etc. and this all is analyzed with the help of a schedule prepared. Understanding the significance of Derivatives market, types of instruments present in the Indian Stock Market such as Futures, Options and Forwards. The various techniques used to identify the trend of the market and analysing the scrip before investing. Through the systematic investment plan invest a specific amount for a continuous period, at regular intervals. By doing this, the investor get the advantage of rupee cost averaging which means that by investing the same amount at regular intervals, the average cost per unit remains lower than the average market price.
  • Global Business School | A Study of Derivatives Market in India 6 TABLE OF CONTENTS SL.No Topic Pg.No 1 Industry Profile 1-14 2 Company Profile 15-17 3 Introduction to Derivatives 18 – 40 4 Literature Review 41 5 Objectives 42 6 Limitations 43 7 Hypothesis 43 8 Research Methodology 44-45 9 Analysis 46-59 10 Statistical Tests 60 – 62 11 Charts & Tables 63 – 65 12 Findings 66 13 Recommendations 67 14 Questionnaire 68-70 15 Bibliography 71
  • Global Business School | A Study of Derivatives Market in India 7 Industry Profile Financial services Financial services are the economic services provided by the finance industry, which encompasses a broad range of organizations that manage money, including credit unions, banks, credit card companies, insurance companies, consumer finance companies, stock brokerages, investment funds and some government sponsored enterprises. History of Indian Stock Market The Indian broking industry is one of the oldest trading industries that have been around even before the establishment of BSE in 1875. BSE is the oldest stock market in India. The history of India stock trading starts with 318 persons taking membership in Native share and Stock Brokers Association, which we know by the name Bombay Stock Exchange or BSE in short. In 1965, BSE got permanent recognition from the Government of India. BSE and NSE represent themselves as synonyms of India stock market. The history of India stock market is almost the same as the history of BSE The regulations and reforms been laid down in the equity market has resulted in rapid growth and development .Basically the growth in the equity market is largely due to the effective intermediaries. The broking houses not only act as an intermediate link for the equity market but also for the commodity market, the foreign currency exchange market and many more. The broking houses have also made an impact on foreign investors to invest in India to certain extent. In the last decade, the Indian brokerage industry has undergone a dramatic transformation. Large and fixed commissions have been replaced by wafer thin margins, with competition driving down the brokerage fees, in some cases to a few basis points. There have also been major changes in the way the business is conducted. The scope of services have enhanced from being equity products to a wide range of financial services. Financial Products The survey also revealed that in the past couple of years, apart from trading, the firms have started various investment value services. The sustained growth of the economy in past couple of years has resulted in broking firms offering many diversified services related to IPO‘s, mutual funds, company research etc.
  • Global Business School | A Study of Derivatives Market in India 8 However, the core trading activity is still the predominant form of business, forming 90% of the firms in the sample. 67% firms are engaged in offering IPO related services. The broking industry seems to have capitalized on the growth of the mutual fund industry, which pegged at 40% in 2006. More than 50% of the sample broking houses deal in mutual fund investment services. The average growth in assets under management in last two years is almost 48% company research services. Additionally, a host of other value added services such as fundamental and technical analysis, investment banking, arbitrage etc are offered by the firms at different levels. Capital Market Capital market is a market for securities (debt or equity), where business enterprises (companies) and governments can raise long-term funds. Capital market may be classified as primary markets and secondary markets. In primary market new stock or bond issues are sold to investor via a mechanism known as underwriting. In secondary markets, existing securities are sold and brought among investors or traders, usually on a security exchange, over the counter or elsewhere. The capital market includes e stock market (equity securities) and Bond market (debt). Primary and Secondary Capital Markets A company cannot easily attract investors to invest in their securities if the investors cannot subsequently trade these securities at will. In other words, securities cannot have a good primary market unless it is ensured of an active secondary market. Primary Market Securities generally have two stages in their lifespan. The first stage is when the company initially issues the security directly from its treasury at a predetermined offering price. Primary market is the market for issue of new securities. It therefore essentially consist of the companies issuing securities, the public subscribing to these securities, the regulatory agencies like SEBI and the Government, and the intermediaries such as brokers, merchant bankers and banks who underwrite the issues and help in collecting subscription money from the public. It is referred to as Initial Public offer (IPO). Investment dealers frequently buy initial offering on the primary market and the securities on the secondary market.
  • Global Business School | A Study of Derivatives Market in India 9 Secondary Market The second stage is when an investor or dealer makes the shares, bought from a company treasury, available for sale to other investors on the secondary market. Secondary market is the market for trading in existing securities, after they have been created in the primary market. It essentially consists of the public who are buyers and sellers of securities, brokers, mutual funds, and most importantly, the stock exchanges where the trading takes place, such as the BSE (Bombay Stock Exchange) or NSE (National Stock Exchange). Indian Stock Exchange Stock Market A stock market or equity market is a public entity (a loose network of economic transaction, not a physical facility or discrete entity) for the trading of company stock (shares) and derivatives at an agreed price; these are securities listed on a stock exchange as well as those only traded privately. Stock exchange A stock exchange provides services for stock brokers and traders to trade stocks, bonds and other securities. Stock exchanges also provide facilities for issue and redemption of securities and other financial instruments and capital events including the payment of income and dividends. Securities traded on stock exchange include shares issued by companies, unit trusts, derivatives, pooled investment products and bonds. Equity/Share Total equity capital of a company is divided into equal units of small denominations, each called a share. For example, in a company the total equity capital of Rs. 2,00,00,000 is divided into 20,00,000 units of Rs 10 each. Each such unit of Rs. 10 is called a share. Thus, the company then is said to have 20, 00,000 equity share of Rs 10 each. The holders of such shares are members of the company and have voting rights. There are now stock markets in virtually every developed and most developing economy, with the world‘s biggest being in the United States, UK, Germany, France, India and Japan.
  • Global Business School | A Study of Derivatives Market in India 10 Market participants Market participants include individual retail investors, institutional investors such as mutual funds, banks, insurance companies and hedge funds, and also publically traded corporations trading in their own shares. Trading Participants in the stock market range from small individual stock investors to large hedge fund traders, who can be based anywhere. Listing Listing means admission of securities of an issuer to trading privileges on a stock exchange through a formal agreement. The prime objective of admission to dealing on the Exchange is to provide liquidity and marketability to securities. Securities A Security gives the holder an ownership interest in the assets of a company. For example, when a company issues security in the form of stock, they give the purchaser an interest in the company‘s assets in exchange for money. There are a number of reasons why a company issues securities: meeting a short – term cash crunch or obtaining money for an expansion are just two. WHAT IS SEBI AND WHAT IS ITS ROLE? In 1988 the Securities and Exchange Board of India (SEBI) was established by the Government of India through an executive resolution, and was subsequently upgraded as a fully autonomous body (a statutory Board) in the year 1992 with the passing of the Securities and Exchange Board of India Act (SEBI Act) on 30th January 1992. In place of Government Control, a statutory and autonomous regulatory board with defined responsibilities, to cover both development & regulation of the market, and independent powers have been set up. Paradoxically this is a positive outcome of the Securities Scam of 1990-91.
  • Global Business School | A Study of Derivatives Market in India 11 OBJECTIVES OF SEBI The promulgation of the SEBI ordinance in the parliament gave status to SEBI in 1992. According to the preamble of the SEBI, the three main objectives are: To protect the interests of the investors in securities To promote the development of securities market To regulate the securities market FUNCTIONS OF SEBI The main functions entrusted with SEBI are: Regulating the business in stock exchange and any other securities market Registering and regulating the working of stock brokers, share transfer agents, bankers to the issue, trustees of trust deed, registrars to an issue, merchant bankers, underwriters, portfolio managers, investment advisers and such other intermediaries who may be associated with securities market in any manner. Registering and regulating the working of collective investment schemes including mutual funds Promoting and regulating self-regulatory organizations Prohibiting fraudulent and unfair trade practices in the securities market Promoting investors education and training of intermediaries in securities market Prohibiting insiders trading in securities Regulating substantial acquisition of shares and takeover of companies Calling for information, undertaking inspection, conducting enquiries and audits of the stock exchanges, intermediaries and self-regulatory organizations in the securities market. Since its inception SEBI has been working targeting the securities and is attending to the fulfillment of its objectives with commendable zeal and dexterity. The improvements in the securities markets like capitalization requirements, margining, establishment of clearing corporations etc. reduced the risk of credit and also reduced the market.
  • Global Business School | A Study of Derivatives Market in India 12 SEBI has introduced the comprehensive regulatory measures, prescribed registration norms, the eligibility criteria, the code of obligations and the code of conduct for different intermediaries like, bankers to issue, merchant bankers, brokers and sub-brokers, registrars, portfolio managers, credit rating agencies, underwriters and others. It has framed bye-laws, risk identification and risk management systems for Clearing houses of stock exchanges, surveillance system etc. which has made dealing in securities both safe and transparent to the end investor. Another significant event is the approval of trading in stock indices (like S&P CNX Nifty & Sensex) in 2000. A market Index is a convenient and effective product because of the following reasons: It acts as a barometer for market behavior; It is used to benchmark portfolio performance; It is used in derivative instruments like index futures and index options; It can be used for passive fund management as in case of Index Funds. Two broad approaches of SEBI is to integrate the securities market at the national level, and also to diversify the trading products, so that there is an increase in number of traders including banks, financial institutions, insurance companies, mutual funds, primary dealers etc. to transact through the Exchanges. In this context the introduction of derivatives trading through Indian Stock Exchanges permitted by SEBI in 2000 AD is a real landmark. SEBI appointed the L. C. Gupta Committee in 1998 to recommend the regulatory framework for derivatives trading and suggest bye-laws for Regulation and Control of Trading and Settlement of Derivatives Contracts. The Board of SEBI in its meeting held on May 11, 1998 accepted the recommendations of the committee and approved the phased introduction of derivatives trading in India beginning with Stock Index Futures. The Board also approved the "Suggestive Bye-laws" as recommended by the Dr LC Gupta Committee for Regulation and Control of Trading and Settlement of Derivatives Contracts. SEBI then appointed the J. R. Verma Committee to recommend Risk Containment Measures (RCM) in the Indian Stock Index Futures Market. The report was submitted in November1998.
  • Global Business School | A Study of Derivatives Market in India 13 However the Securities Contracts (Regulation) Act, 1956 (SCRA) required amendment to include "derivatives" in the definition of securities to enable SEBI to introduce trading in derivatives. The necessary amendment was then carried out by the Government in 1999. The Securities Laws (Amendment) Bill, 1999 was introduced. In December 1999 the new framework was approved. Derivatives have been accorded the status of `Securities'. The ban imposed on trading in derivatives in 1969 under a notification issued by the Central Government was revoked. Thereafter SEBI formulated the necessary regulations/bye-laws and intimated the Stock Exchanges in the year 2000. The derivative trading started in India at NSE in 2000 and BSE started trading in the year 2001. Bombay Stock Exchange (BSE) Bombay Stock Exchange is the oldest stock exchange in Asia with a rich heritage, now spanning three centuries in its 133 years of existence. What is now popularly known as BSE was established as "The Native Share & Stock Brokers' Association" in 1875. BSE is the first stock exchange in the country which obtained permanent recognition (in 1956) from the Government of India under the Securities Contracts (Regulation) Act 1956. BSE's pivotal and pre-eminent role in the development of the Indian capital market is widely recognized. It migrated from the open outcry system to an online screen-based order driven trading system in 1995. Earlier an Association of Persons (AOP), BSE is now a corporatized and demutualised entity incorporated under the provisions of the Companies Act, 1956, pursuant to the BSE (Corporatization and Demutualization) Scheme, 2005 notified by the Securities and Exchange Board of India (SEBI). With demutualization, BSE has two of world's best exchanges, Deutsche Börse and Singapore Exchange, as its strategic partners. Over the past 133 years, BSE has facilitated the growth of the Indian corporate sector by providing it with an efficient access to resources. There is perhaps no major corporate in India which has not sourced BSE's services in raising resources from the capital market. Today, BSE is the world's number 1 exchange in terms of the number of listed companies and the world's 5th in transaction numbers. The market capitalization as on December 31, 2007 stood at USD 1.79 trillion. An investor can choose from more than 4,700 listed companies, which for easy reference, are classified into A, B, S, T and Z groups. The BSE Index, SENSEX, is India's first stock market index that enjoys an iconic stature, and is tracked worldwide. It is an index of 30 stocks representing 12 major sectors.
  • Global Business School | A Study of Derivatives Market in India 14 The SENSEX is constructed on a 'free-float' methodology, and is sensitive to market sentiments and market realities. Apart from the SENSEX, BSE offers 21 indices, including 12 sect oral indices. BSE has entered into an index cooperation agreement with Deutsche Börse. This agreement has made SENSEX and other BSE indices available to investors in Europe and America. Moreover, Barclays Global Investors (BGI), the global leader in ETFs through its iShares brand, has created the 'iShares BSE SENSEX India Tracker' which tracks the SENSEX. The ETF enables investors in Hong Kong to take an exposure to the Indian equity market. The first Exchange Traded Fund (ETF) on SENSEX, called "SPICE" is listed on BSE. It brings to the investors a trading tool that can be easily used for the purposes of investment, trading, hedging and arbitrage. SPICE allows small investors to take a long-term view of the market. BSE provides an efficient and transparent market for trading in equity, debt instruments and derivatives. It has a nation-wide reach with a presence in more than 359 cities and towns of India. BSE has always been at par with the international standards. The systems and processes are designed to safeguard market integrity and enhance transparency in operations. BSE is the first exchange in India and the second in the world to obtain an ISO 9001:2000 certification. It is also the first exchange in the country and second in the world to receive Information Security Management System Standard BS 7799-2-2002 certification for its BSE On-line Trading System (BOLT). BSE continues to innovate. In recent times, it has become the first national level stock exchange to launch its website in Gujarati and Hindi to reach out to a larger number of investors. It has successfully launched a reporting platform for corporate bonds in India christened the ICDM or Indian Corporate Debt Market and a unique ticker-cum-screen aptly named 'BSE Broadcast' which enables information dissemination to the common man on the street. In 2006, BSE launched the Directors Database and ICERS (Indian Corporate Electronic Reporting System) to facilitate information flow and increase transparency in the Indian capital market. While the Directors Database provides a single-point access to information on the boards of directors of listed companies, the ICERS facilitates the corporate in sharing with BSE their corporate announcements. BSE also has a wide range of services to empower
  • Global Business School | A Study of Derivatives Market in India 15 investors and facilitate smooth transactions: Investor Services: The Department of Investor Services redresses grievances of investors. BSE was the first exchange in the country to provide an amount of Rs.1 million towards the investor protection fund; it is an amount higher than that of any exchange in the country. BSE launched a nationwide investor awareness programme- 'Safe Investing in the Stock Market' under which 264 programmes were held in more than 200 cities. The BSE On- line Trading (BOLT): BSE On-line Trading (BOLT) facilitates on-line screen based trading in securities. BOLT is currently operating in 25,000 Trader Workstations located across over 359 cities in India. BSEWEBX.com: In February 2001, BSE introduced the world's first centralized exchange-based Internet trading system, BSEWEBX.com. This initiative enables investors anywhere in the world to trade on the BSE platform. Surveillance: BSE's On-Line Surveillance System (BOSS) monitors on a real-time basis the price movements, volume positions and members' positions and real-time measurement of default risk, market reconstruction and generation of cross market alerts. BSE Training Institute: BTI imparts capital market training and certification, in collaboration with reputed management institutes and universities. It offers over 40 courses on various aspects of the capital market and financial sector. More than 20,000 people have attended the BTI programmes Awards The World Council of Corporate Governance has awarded the Golden Peacock Global CSR Award for BSE's initiatives in Corporate Social Responsibility (CSR). The Annual Reports and Accounts of BSE for the year ended March 31, 2006 and March 31 2007 have been awarded the ICAI awards for excellence in financial reporting. The Human Resource Management at BSE has won the Asia - Pacific HRM awards for its efforts in employer branding through talent management at work, health management at work and excellence in HR through technology Drawing from its rich past and its equally robust performance in the recent times, BSE will continue to remain an icon in the Indian capital
  • Global Business School | A Study of Derivatives Market in India 16 National Stock Exchange (NSE) The National Stock Exchange of India is a stock Exchange that is located in Mumbai, Maharashtra. The National Stock Exchange basically function in three market sections, that is, (CM) the Capital Market Section); F&Q (The Future and Options Market Sections) and WDM (Wholesale Debt Market Segment). It is important place where the trading of shares, debt etc takes place. It was in year 1992 that the National stock Exchange was for the first time incorporated in India. It was not regarded as a stock exchange at once. Rather, the national Stock exchange was incorporated as a tax paying company and had got the recognition of a stock exchange only in year 1993 the recognition was given under the provisions of the Securities Contracts (Regulation) Act, 1956. The National Stock exchange is highly active in the field of market capitalization and thus aiming it the ninth largest stock exchange in the said field. Similarly, the trading of the stock exchange in equities and derivatives is so high that it has resulted in high turnovers and thus making it the largest stock exchange in India. It is the stock exchange wherein there is the facility of electronic exchange offering investors. This facility is available in almost types of equitable transactions such as equities, debentures, etc. it is also the largest stock exchange if calculated in the terms of traded values. Origin and History of the National Stock Exchange The National Stock exchange was incorporated for the first time in November, 1992. The national stock exchange was not incorporated as the national stock exchange; rather, it had got the recognition of the recognized stock exchange in April, 1993. The National stock Exchange has increased its trading facilities in June 1994 when the WDM (Wholesale Debt Market Segment) was gone live. It is basically one of the three market segments in which the national stock Exchange works. In the same year, 1994 November, the Capital Market (CM) segment of the stock exchange goes live through VSAT.
  • Global Business School | A Study of Derivatives Market in India 17 The National Stock Exchange has become the first Clearing Corporation in India by the introduction of NSCCL in April 1995. In the same year, 1995 July, it has introduced the Investor protection fund which is a very important function introduced by the national Stock Exchange. The National stock Exchange had grown with leaps and bounds and had shown tremendous growth mainly in all the fields and thus making it the largest stock exchange of India by October, 1995. The concept of NSCCL was extended by the introduction of clearing and settlement with the help of NSCCL in year 1996. The National stock Exchange has introduced its Index for the first time in year April 1996. The index was known as the S&P CNXNifty Index. In year June 1996, it has introduced the Settlement Guarantee Fund. The National Securities Depositor Fund was launched by the National Stock exchange in year 1996, November, and thus making it the first stock exchange who becomes the first depository in India. Because of the efforts and introduction of new concept in the field of trading, the National stock Exchange has received the BEST IT USAGE award by the computer Society of India in the year November, 1996. It has also received an award for the TOP IT USER in the name of ―Dataquest award‖ in year December, 1996. The National stock exchange has also introduced another index in year December 1996 in the name of CNX Nifty Junior in year 1996. It had again received an award for the BEST IT USAGE award by the computer Society of India in the year December, 1996. In May, 1998 it had launched its first website. Further in October 1999, it had launched the NSE.IT LTD. Further in year October, 2002, it had launched the Government securities index. The growth of the National Stock Exchange has been tremendous in every field. It had introduced several programmes and has achieved various achievements and awards while working best in the field in which it is working. The efforts and hard work that is contributed by the National Stock exchange has been tremendous and thus making an important and unique stock exchange in India.
  • Global Business School | A Study of Derivatives Market in India 18 Over the Counter Exchange of India (OTCEI) OTCEI (Over the Counter Exchange of India) was incorporated in 1990 as a Section 25 company under the Companies Act 1956 and is recognized as a stock exchange under Section 4 of the Securities Contracts Regulation Act, 1956. The Exchange was set up to aid enterprising promoters in raising finance for new projects in a cost effective manner and to provide investors with a transparent & efficient mode of trading. Modeled along the lines of the NASDAQ market of USA, OTCEI introduced many novel concepts to the Indian capital markets such as screen-based nationwide trading, sponsorship of companies, market making and scrip less trading. As a measure of success of these efforts, the Exchange today has 115 listings and has assisted in providing capital for enterprises that have gone on to build successful brands for themselves like VIP Advanta, Sonora Tiles & Brilliant mineral water, etc. Trading at OTCEI is done over the centers spread across the country. Securities traded on the OTCEI are classified into: Listed Securities - The shares and debentures of the companies listed on the OTC can be bought or sold at any OTC counter all over the country and they should not be listed anywhere else Permitted Securities - Certain shares and debentures listed on other exchanges and units of mutual funds are allowed to be traded. Initiated debentures - Any equity holding at least one lakh debentures of a particular scrip can offer them for trading on the OTC. OTCEI  Is the first screen based nationwide stock exchange in India.  Is the first exchange to introduce Market Making in India.  Is the first exchange to introduce Sponsorship of companies in India.  Is the only exchange to allow listing of companies with paid-up below Rs.3 crores.  Is the only exchange to allow companies with less than 3 year track record to tap capital market.  Has shifted trading from counter receipts to share certificates.  Has introduced Weekly Settlement Cycle.  Allows short selling.
  • Global Business School | A Study of Derivatives Market in India 19 DETAILS OF STOCK EXCHANGES Sr. No. Name of the Exchange Valid Upto 1 Ahmedabad Stock Exchange Ltd. PERMANENT 2 Bangalore Stock Exchange Ltd. PERMANENT 3 Bhubaneswar Stock Exchange Ltd. June 04, 2012 4 Bombay Stock Exchange Ltd. PERMANENT 5 Calcutta Stock Exchange Ltd. PERMANENT 6 Cochin Stock Exchange Ltd. November 07, 2011 7 Delhi Stock Exchange Ltd. PERMANENT 8 Gauhati Stock Exchange Ltd. April 30, 2012 10 Interconnected Stock Exchange of India Ltd. November 17, 2011 11 Jaipur Stock Exchange Ltd. January 08, 2012
  • Global Business School | A Study of Derivatives Market in India 20 12 Ludhiana Stock Exchange Ltd. April 27, 2012 13 Madhya Pradesh Stock Exchange Ltd PERMANENT 14 Madras Stock Exchange Ltd. PERMANENT 15 MCX Stock Exchange Ltd September 15, 2011 16 National Stock Exchange of India Ltd. PERMANENT 17 OTC Exchange of India August 22, 2012 18 Pune Stock Exchange Ltd. September 01, 2012 19 U.P. Stock Exchange Limited June 02, 2012 20 United Stock Exchange of India Limited March 21, 2012 21 The Vadodara Stock Exchange Ltd. January 03, 2012
  • Global Business School | A Study of Derivatives Market in India 21 Company Profile History of the company SBICAP Securities Limited: SBICAP Securities Ltd (SSL) is a 100% subsidiary of SBI Capital Markets Ltd which is one of the oldest players in the Indian Capital Market and has a dominant position in the Indian primary capital markets. SBICAP Securities Limited is a part of the SBI Group. Business Overview: SBICAP Securities Ltd (SSL) is a 100% subsidiary of SBI Capital Markets Ltd which is one of the oldest players in the Indian Capital Market and has a dominant position in the Indian primary capital markets. SBI Capital Markets Ltd. commenced broking activities in March 2001 to fulfill the secondary market needs of Financial Institutions, FIIs, Mutual Funds, Banks, Corporates, High Networth Individual, Non-residential Investors and Retail domestic investors. SBICAP Securities Ltd. (SSL) is a company, which has been formed to take over the broking operations of SBI Capital Markets Ltd. SSL commenced operations in the first quarter of financial year of 2006-2007. Services currently offered include Institution Equity, Retail Equity, Derivatives, Broking, Depository Participant services, E-Broking. SSL is registered with the Securities Exchange Board of India for its various services, a summary of which is as under: Registered with/as Registration No. SEBI – Stock Broker – NSE INB231052938 SEBI – Stock Broker – BSE INB011053031 SEBI – Stock Broker – NSE – F&O INF231052938 SEBI – Depository Participant IN – DP – CDSL – 370 – 2006 SEBI – Portfolio Manager INP000002098
  • Global Business School | A Study of Derivatives Market in India 22 SBI Group Asset Management Business SBI Investment Operate and manage venture capital funds SBI Asset Management Investment advisory services, investment trust management SBI Capital Operate and manage buyout and revitalization funds SBI Capital Solutions Mezzanine fund management SBI VEN CAPITAL PTE Overseas investments Brokerage & Investment Banking Business SBI Securities Comprehensive online securities company SBI Fund Bank Consulting of mutual fund sales and operation of mutual funds information website based on its unique evaluation and analysis SBI Liquidity Market Offering market Infrastructure and services of Forex trading to financial firms and developing related systems and products.
  • Global Business School | A Study of Derivatives Market in India 23 Financial Services Business SB1 Insurance Non-life insurance company using primarily the Internet SBI Lease Comprehensive leasing business SBI Card Credit card business SBI Business Solutions Back Office support services SBI Marketing Advertising agency SBI Business Support Contact center and temporary staff service for corporations Housing and Real Estate Business SBI Mortgage Long-term, fixed-rate housing loans SBI Planners Architectural construction and consulting services Others SBI Net Systems R & D, Sales and Maintenance for financial system and provision of information security products and solution services.
  • Global Business School | A Study of Derivatives Market in India 24 Definition of Derivatives One of the most significant events in the securities markets has been the development and expansion of financial derivatives. The term ―derivatives‖ is used to refer to financial instruments which derive their value from some underlying assets. The underlying assets could be equities (shares), debt (bonds, T-bills, and notes), currencies, and even indices of these various assets, such as the Nifty 50 Index. Derivatives derive their names from their respective underlying asset. Thus if a derivative‘s underlying asset is equity, it is called equity derivative and so on. Derivatives can be traded either on a regulated exchange, such as the NSE or off the exchanges, i.e., directly between the different parties, which is called ―over-the-counter‖ (OTC) trading. (In India only exchange traded equity derivatives are permitted under the law.) The basic purpose of derivatives is to transfer the price risk (inherent in fluctuations of the asset prices) from one party to another; they facilitate the allocation of risk to those who are willing to take it. In so doing, derivatives help mitigate the risk arising from the future uncertainty of prices. For example, on November 1, 2009 a rice farmer may wish to sell his harvest at a future date (say January 1, 2010) for a pre-determined fixed price to eliminate the risk of change in prices by that date. Such a transaction is an example of a derivatives contract. The price of this derivative is driven by the spot price of rice which is the "underlying".
  • Global Business School | A Study of Derivatives Market in India 25 Origin of Derivatives While trading in derivatives products has grown tremendously in recent times, the earliest evidence of these types of instruments can be traced back to ancient Greece. Even though derivatives have been in existence in some form or the other since ancient times, the advent of modern day derivatives contracts is attributed to farmers‘ need to protect themselves against a decline in crop prices due to various economic and environmental factors. Thus, derivatives contracts initially developed in commodities. The first ―futures‖ contracts can be traced to the Yodoya rice market in Osaka, Japan around 1650. The farmers were afraid of rice prices falling in the future at the time of harvesting. To lock in a price (that is, to sell the rice at a predetermined fixed price in the future), the farmers entered into contracts with the buyers. These were evidently standardized contracts, much like today‘s futures contracts. In 1848, the Chicago Board of Trade (CBOT) was established to facilitate trading of forward contracts on various commodities. From then on, futures contracts on commodities have remained more or less in the same form, as we know them today. While the basics of derivatives are the same for all assets such as equities, bonds, currencies, and commodities, we will focus on derivatives in the equity markets and all examples that we discuss will use stocks and index (basket of stocks).
  • Global Business School | A Study of Derivatives Market in India 26 Derivatives in India In India, derivatives markets have been functioning since the nineteenth century, with organized trading in cotton through the establishment of the Cotton Trade Association in 1875.Derivatives, as exchange traded financial instruments were introduced in India in June 2000.The National Stock Exchange (NSE) is the largest exchange in India in derivatives, trading in various derivatives contracts. The first contract to be launched on NSE was the Nifty 50 index futures contract. In a span of one and a half years after the introduction of index futures, index options, stock options and stock futures were also introduced in the derivatives segment for trading. NSE‘s equity derivatives segment is called the Futures & Options Segment or F&O Segment. NSE also trades in Currency and Interest Rate Futures contracts under a separate segment. A series of reforms in the financial markets paved way for the development of exchange-traded equity derivatives markets in India. In 1993, the NSE was established as an electronic, national exchange and it started operations in 1994. It improved the efficiency and transparency of the stock markets by offering a fully automated screen-based trading system with real-time price dissemination. A report on exchange traded derivatives, by the L.C. Gupta Committee, set up by the Securities and Exchange Board of India (SEBI), recommended a phased introduction of derivatives instruments with bi-level regulation (i.e., self-regulation by exchanges, with SEBI providing the overall regulatory and supervisory role). Another report, by the J.R. Varma Committee in 1998, worked out the various operational details such as margining and risk management systems for these instruments. In 1999, the Securities Contracts (Regulation) Act of 1956, or SC(R)A, was amended so that derivatives could be declared as ―securities‖. This allowed the regulatory framework for trading securities, to be extended to derivatives. The Act considers derivatives on equities to be legal and valid, but only if they are traded on exchanges.
  • Global Business School | A Study of Derivatives Market in India 27 Milestones in the development of Indian Derivative Market November 18, 1996 L.C. Gupta Committee set up to draft a policy framework for introducing derivatives May 11, 1998 L.C. Gupta committee submits its report on the policy Framework May 25, 2000 SEBI allows exchanges to trade in index futures June 12, 2000 Trading on Nifty futures commences on the NSE June 4, 2001 Trading for Nifty options commences on the NSE July 2, 2001 Trading on Stock options commences on the NSE November 9, 2001 Trading on Stock futures commences on the NSE August 29, 2008 Currency derivatives trading commences on the NSE August 31, 2009 Interest rate derivatives trading commences on the NSE February 2010 Launch of Currency Futures on additional currency pairs October 28, 2010 Introduction of European style Stock Options October 29, 2010 Introduction of Currency Options
  • Global Business School | A Study of Derivatives Market in India 28 Two important terms Before discussing derivatives, it would be useful to be familiar with two terminologies relating to the underlying markets. These are as follows: Spot Market In the context of securities, the spot market or cash market is a securities market in which securities are sold for cash and delivered immediately. The delivery happens after the settlement period. Let us describe this in the context of India. The NSE‘s cash market segment is known as the Capital Market (CM) Segment. In this market, shares of SBI, Reliance, Infosys, ICICI Bank, and other public listed companies are traded. The settlement period in this market is on a T+2 basis i.e., the buyer of the shares receives the shares two working days after trade date and the seller of the shares receives the money two working days after the trade date. Index Stock prices fluctuate continuously during any given period. Prices of some stocks might move up while that of others may move down. In such a situation, what can we say about the stock market as a whole? Has the market moved up or has it moved down during a given period? Similarly, have stocks of a particular sector moved up or down? To identify the general trend in the market (or any given sector of the market such as banking), it is important to have a reference barometer which can be monitored. Market participants use various indices for this purpose. An index is a basket of identified stocks, and its value is computed by taking the weighted average of the prices of the constituent stocks of the index. A market index for example consists of a group of top stocks traded in the market and its value changes as the prices of its constituent stocks change. In India, Nifty Index is the most popular stock index and it is based on the top 50 stocks traded in the market. Just as derivatives on stocks are called stock derivatives, derivatives on indices such as Nifty are called index derivatives.
  • Global Business School | A Study of Derivatives Market in India 29 Definitions of Basic Derivatives There are various types of derivatives traded on exchanges across the world. They range from the very simple to the most complex products. The following are the three basic forms of derivatives, which are the building blocks for many complex derivatives instruments (the latter are beyond the scope of this book):  Forwards  Futures  Options Knowledge of these instruments is necessary in order to understand the basics of derivatives. We shall now discuss each of them in detail. Forwards A forward contract or simply aforward is a contract between two parties to buy or sell an asset at a certain future date for a certain price that is pre-decided on the date of the contract. The future date is referred to as expiry date and the pre-decided price is referred to as Forward Price. It may be noted that Forwards are private contracts and their terms are determined by the parties involved. A forward is thus an agreement between two parties in which one party, the buyer, enters into an agreement with the other party, the seller that he would buy from the seller an underlying asset on the expiry date at the forward price. Therefore, it is a commitment by both the parties to engage in a transaction at a later date with the price set in advance. This is different from a spot market contract, which involves immediate payment and immediate transfer of asset. The party that agrees to buy the asset on a future date is referred to as a long investor and is said to have a long position. Similarly the party that agrees to sell the asset in a future date is referred to as a short investor and is said to have a short position. The price agreed upon is called the delivery price or the Forward Price. Forward contracts are traded only in Over the Counter (OTC) market and not in stock exchanges. OTC market is a private market where individuals/institutions can trade through negotiations on a one to one basis.
  • Global Business School | A Study of Derivatives Market in India 30 Futures Like a forward contract, a futures contract is an agreement between two parties in which the buyer agrees to buy an underlying asset from the seller, at a future date at a price that is agreed upon today. However, unlike a forward contract, a futures contract is not a private transaction but gets traded on a recognized stock exchange. In addition, a futures contract is standardized by the exchange. All the terms, other than the price, are set by the stock exchange (rather than by individual parties as in the case of a forward contract). Als o, both buyer and seller of the futures contracts are protected against the counter party risk by an entity called the Clearing Corporation. The Clearing Corporation provides this guarantee to ensure that the buyer or the seller of a futures contract does not suffer as a result of the counter party defaulting on its obligation. In case one of the parties defaults, the Clearing Corporation steps in to fulfill the obligation of this party, so that the other party does not suffer due to non-fulfillment of the contract. To be able to guarantee the fulfillment of the obligations under the contract, the Clearing Corporation holds an amount as a security from both the parties. This amount is called the Margin money and can be in the form of cash or other financial assets. Also, since the futures contracts are traded on the stock exchanges, the parties have the flexibility of closing out the contract prior to the maturity by squaring off the transactions in the market. The basic flow of a transaction between three parties, namely Buyer, Seller and Clearing Corporation is depicted in the diagram below:
  • Global Business School | A Study of Derivatives Market in India 31 Options Like forwards and futures, options are derivative instruments that provide the opportunity to buy or sell an underlying asset on a future date. An option is a derivative contract between a buyer and a seller, where one party (say First Party) gives to the other (say Second Party) the right, but not the obligation, to buy from (or sell to) the First Party the underlying asset on or before a specific day at an agreed-upon price. In return for granting the option, the party granting the option collects a payment from the other party. This payment collected is called the ―premium‖ or price of the option. The right to buy or sell is held by the ―option buyer‖ (also called the option holder); the party granting the right is the ―option seller‖ or ―option writer‖. Unlike forwards and futures contracts, options require a cash payment (called the premium) upfront from the option buyer to the option seller. This payment is called option premium or option price. Options can be traded either on the stock exchange or in over the counter (OTC) markets. Options traded on the exchanges are backed by the Clearing Corporation thereby minimizing the risk arising due to default by the counter parties involved. Options traded in the OTC market however are not backed by the Clearing Corporation. There are two types of options—call options and put options—which are explained below. Call option A call option is an option granting the right to the buyer of the option to buy the underlying asset on a specific day at an agreed upon price, but not the obligation to do so. It is the seller who grants this right to the buyer of the option. It may be noted that the person who has the right to buy the underlying asset is known as the ―buyer of the call option‖. The price at which the buyer has the right to buy the asset is agreed upon at the time of entering the contract. This price is known as the strike price of the contract (call option strike price in this case).
  • Global Business School | A Study of Derivatives Market in India 32 Since the buyer of the call option has the right (but no obligation) to buy the underlying asset, he will exercise his right to buy the underlying asset if and only if the price of the underlying asset in the market is more than the strike price on or before the expiry date of the contract. The buyer of the call option does not have an obligation to buy if he does not want to. Put option A put option is a contract granting the right to the buyer of the option to sell the underlying asset on or before a specific day at an agreed upon price, but not the obligation to do so. It is the seller who grants this right to the buyer of the option. The person who has the right to sell the underlying asset is known as the ―buyer of the put option‖. The price at which the buyer has the right to sell the asset is agreed upon at the time of entering the contract. This price is known as the strike price of the contract (put option strike price in this case). Since the buyer of the put option has the right (but not the obligation) to sell the underlying asset, he will exercise his right to sell the underlying asset if and only if the price of the underlying asset in the market is less than the strike price on or before the expiry date of the contract. The buyer of the put option does not have the obligation to sell if he does not want to. Terminology of Derivatives In this section we explain the general terms and concepts related to derivatives. Spot price (ST) Spot price of an underlying asset is the price that is quoted for immediate delivery of the asset. For example, at the NSE, the spot price of Reliance Ltd. at any given time is the price at which Reliance Ltd. shares are being traded at that time in the Cash Market Segment of the NSE. Spot price is also referred to as cash price sometimes.
  • Global Business School | A Study of Derivatives Market in India 33 Forward price or futures price (F) Forward price or futures price is the price that is agreed upon at the date of the contract for the delivery of an asset at a specific future date. These prices are dependent on the spot price, the prevailing interest rate and the expiry date of the contract. Strike price (K) The price at which t he buyer of an option can buy the stock (in the case of a call option) or sell the stock (in the case of a put option) on or before the expiry date of option contracts is called strike price. It is the price at which the stock will be bought or sold when the option is exercised. Strike price is used in the case of options only; it is not used for futures or forwards. Expiration date (T) In the case of Futures, Forwards, Index and Stock Options, Expiration Date is the date on which settlement takes place. It is also called the final settlement date. Types of Options Options can be divided into two different categories depending upon the primary exercise styles associated with options. These categories are: European Options: European options are options that can be exercised only on the expiration date. American options: American options are options that can be exercised on any day on or before the expiry date. They can be exercised by the buyer on any day on or before the final settlement date or the expiry date.
  • Global Business School | A Study of Derivatives Market in India 34 Contract size As futures and options are standardized contracts traded on an exchange, they have a fixed contract size. One contract of a derivatives instrument represents a certain number of shares of the underlying asset. For example, if one contract of BHEL consists of 300 shares of BHEL, then if one buys one futures contract of BHEL, then for every Re 1 increase in BHEL‘s futures price, the buyer will make a profit of 300 X 1 = Rs 300 and for every Re 1 fall in BHEL‘s futures price, he will lose Rs 300. Contract Value Contract value is notional value of the transaction in case one contract is bought or sold. It is the contract size multiplied but the price of the futures. Contract value is used to calculate margins etc. for contracts. In the example above if BHEL futures are trading at Rs. 2000 the contract value would be Rs. 2000 x 300 = Rs. 6 lacs. Margins In the spot market, the buyer of a stock has to pay the entire transaction amount (for purchasing the stock) to the seller. For example, if Infosys is trading at Rs. 2000 a share and an investor wants to buy 100 Infosys shares, then he has to pay Rs. 2000 X 100 = Rs. 2,00,000 to the seller. The settlement will take place on T+2 basis; that is, two days after the transaction date. In a derivatives contract, a person enters into a trade today (buy or sell) but the settlement happens on a future date. Because of this, there is a high possibility of default by any of the parties. Futures and option contracts are traded through exchanges and the counter party risk is taken care of by the clearing corporation. In order to prevent any of the parties from defaulting on his trade commitment, the clearing corporation levies a margin on the buyer as well as seller of the futures and option contracts. This margin is a percentage (approximately 20%) of the total contract value. Thus, for the aforementioned example, if a person wants to buy 100 Infosys futures, then he will have to pay 20% of the contract value of Rs 2,00,000 = Rs 40,000 as a margin to the clearing corporation. This margin is applicable to both, the buyer and the seller of a futures contract.
  • Global Business School | A Study of Derivatives Market in India 35 Moneyness of an Option ―Moneyness‖ of an option indicates whether an option is worth exercising or not i.e. if the option is exercised by the buyer of the option whether he will receive money or not. ―Moneyness‖ of an option at any given time depends on where the spot price of the underlying is at that point of time relative to the strike price. The premium paid is not taken into consideration while calculating moneyness of an Option, since the premium once paid is a sunk cost and the profitability from exercising the option does not depend on the size of the premium. Therefore, the decision (of the buyer of the option) whether to exercise the option or not is not affected by the size of the premium. The following three terms are used to define the moneyness of an option. In-the-money option An option is said to be in-the-money if on exercising the option, it would produce a cash inflow for the buyer. Thus, Call Options are in-the-money when the value of spot price of the underlying exceeds the strike price. On the other hand, Put Options are in-the- money when the spot price of the underlying is lower than the strike price. Moneyness of an option should not be confused with the profit and loss arising from holding an option contract. It should be noted that while moneyness of an option does not depend on the premium paid, profit/loss do. Thus a holder of an in-the-money option need not always make profit as the profitability also depends on the premium paid. Out-of-the-money option An out-of-the-money option is an opposite of an in-the-money option. An option- holder will not exercise the option when it is out-of-the-money. A Call option is out-of-the- money when its strike price is greater than the spot price of the underlying and a Put option is out-of-the money when the spot price of the underlying is greater than the option‘s strike price. At-the-money option An at-the-money-option is one in which the spot price of the underlying is equal to the strike price. It is at the stage where with any movement in the spot price of the underlying, the option will either become in-the-money or out-of-the-money.
  • Global Business School | A Study of Derivatives Market in India 36 Applications of Derivatives In this chapter, we look at the participants in the derivatives markets and how they use derivatives contracts. Participants in the Derivatives Market As equity markets developed, different categories of investors started participating in the market. In India, equity market participants currently include retail investors, corporate investors, mutual funds, banks, foreign institutional investors etc. Each of these investor categories uses the derivatives market to as a part of risk management, investment strategy or speculation. Based on the applications that derivatives are put to, these investors can be broadly classified into three groups: · Hedgers · Speculators, and · Arbitrageurs Hedgers These investors have a position (i.e., have bought stocks) in the underlying market but are worried about a potential loss arising out of a change in the asset price in the future. Hedgers participate in the derivatives market to lock the prices at which they will be able to transact in the future. Thus, they try to avoid price risk through holding a position in the derivatives market. Different hedgers take different positions in the derivatives market based on their exposure in the underlying market. A hedger normally takes an opposite position in the derivatives market to what he has in the underlying market. Speculators A Speculator is one who bets on the derivatives market based on his views on the potential movement of the underlying stock price. Speculators take large, calculated risks as they trade based on anticipated future price movements. They hope to make quick, large gains; but may not always be successful. They normally have shorter holding time for their positions as compared to hedgers. If the price of the underlying moves as per their expectation they can make large profits. However, if the price moves in the opposite direction of their assessment, the losses can also be enormous.
  • Global Business School | A Study of Derivatives Market in India 37 Arbitrageurs Arbitrageurs attempt to profit from pricing inefficiencies in the market by making simultaneous trades that offset each other and capture a risk-free profit. An arbitrageur may also seek to make profit in case there is price discrepancy between the stock price in the cash and the derivatives markets. Uses of Derivatives Risk management The most important purpose of the derivatives market is risk management. Risk management for an investor comprises of the following three processes: Identifying the desired level of risk that the investor is willing to take on his investments; Identifying and measuring the actual level of risk that the investor is carrying; and Making arrangements which may include trading (buying/selling) of derivatives contracts that allow him to match the actual and desired levels of risk. Market efficiency Efficient markets are fair and competitive and do not allow an investor to make risk free profits. Derivatives assist in improving the efficiency of the markets, by providing a self- correcting mechanism. Arbitrageurs are one section of market participants who trade whenever there is an opportunity to make risk free profits till the opportunity ceases to exist. Risk free profits are not easy to make in more efficient markets. When trading occurs, there is a possibility that some amount of mispricing might occur in the markets. The arbitrageurs step in to take advantage of this mispricing by buying from the cheaper market and selling in the higher market. Their actions quickly narrow the prices and thereby reducing the inefficiencies. Price discovery One of the primary functions of derivatives markets is price discovery. They provide valuable information about the prices and expected price fluctuations of the underlying assets in two ways:
  • Global Business School | A Study of Derivatives Market in India 38 First, many of these assets are traded in markets in different geographical locations. Because of this, assets may be traded at different prices in different markets. In derivatives markets, the price of the contract often serves as a proxy for the price of the underlying asset. For example, gold may trade at different prices in Mumbai and Delhi but a derivatives contract on gold would have one value and so traders in Mumbai and Delhi can validate the prices of spot markets in their respective location to see if it is cheap or expensive and trade accordingly. Second, the prices of the futures contracts serve as prices that can be used to get a sense of the market expectation of future prices. For example, say there is a company that produces sugar and expects that the production of sugar will take two months from today. As sugar prices fluctuate daily, the company does not know if after two months the price of sugar will be higher or lower than it is today. How does it predict where the price of sugar will be in future? It can do this by monitoring prices of derivatives contract on sugar (say a Sugar Forward contract). If the forward price of sugar is trading higher than the spot price that means that the market is expecting the sugar spot price to go up in future. If there were no derivatives price, it would have to wait for two months before knowing the market price of sugar on that day. Based on derivatives price the management of the sugar company can make strategic and tactical decisions of how much sugar to produce and when. What is Open Interest (OI) and Contract in the enclosed charts? Open interest is the total number of options and/or futures contracts that are not closed out on a particular day, that is contracts that have been purchased and are still outstanding and not been sold and vice versa. A c ommon misconception is that open interest is the same thing as volume of options and futures trades. This is not correct since there could be huge volumes but if the volumes are just because of participants squaring off their positions then the open interest would not be large. On the other hand, if the volumes are large because of fresh positions being created then the open interest would also be large. The Contract column tells us about the strike price of the call or put and the date of their settlement. For example, the first entry in the Active Calls section (4500.00-August) means it is a Nifty call with Rs 4500 strike price, that would expire in August. It is interesting to note from the newspaper extract given above is that it is possible to have a number of options at different strike prices but all of them have the same expiry date.
  • Global Business School | A Study of Derivatives Market in India 39 There are different tables explaining different sections of the F&O markets. 1. Positive trend: It gives information about the top gainers in the futures market. 2. Negative trend: It gives information about the top losers in the futures market. 3. Future OI gainers: It lists those futures whose % increases in open interest are among the highest on that day. 4. Future OI losers: It lists those futures whose % decreases in open interest are among the highest on that day. 5. Active Calls: Calls with high trading volumes on that particular day. 6. Active Puts: Puts with high trading volumes on that particular day. Settlement of Derivatives Settlement refers to the process through which trades are cleared by the payment/receipt of currency, securities or cash flows on periodic payment dates and on the date of the final settlement. The settlement process is somewhat elaborate for derivatives instruments which are exchange traded. (They have been very briefly outlined here. For a more detailed explanation, please refer to NCFM Derivatives Markets (Dealers) Module). The settlement process for exchange traded derivatives is standardized and a certain set of procedures exist which take care of the counterparty risk posed by these instruments. At the NSE, the National Securities Clearing Corporation Limited (NSCCL) undertakes the clearing and settlement of all trades executed on the F&O segment of NSE. It also acts as a legal counterparty to all trades on the F&O segment and guarantees their financial settlement. There are two clearing entities in the settlement process: Clearing Members and Clearing Banks. Clearing members A Clearing member (CM) is the member of the clearing corporation i.e., NSCCL. These are the members who have the authority to clear the trades executed in the F&O segment in the exchange. There are three types of clearing members with different set of functions: 1) Self-clearing Members: Members who clear and settle trades executed by them only on their own accounts or on account of their clients. 2) Trading cum Clearing Members: They clear and settle their own trades as well as trades of other trading members (TM).
  • Global Business School | A Study of Derivatives Market in India 40 3) Professional Clearing Members (PCM): They only clear and settle trades of others but do not trade themselves. PCMs are typically Financial Institutions or Banks who are admitted by the Clearing Corporation as members. Clearing banks Some commercial banks have been designated by the NSCCL as Clearing Banks. Financial settlement can take place only through Clearing Banks. All the clearing members are required to open a separate bank account with an NSCCL designated clearing bank for the F&O segment. The clearing members keep a margin amount in these bank accounts. Settlement of Futures When two parties trade a futures contract, both have to deposit margin money which is called the initial margin. Futures contracts have two types of settlement: (i) the mark-to- market (MTM) settlement which happens on a continuous basis at the end of each day, and (ii) the final settlement which happens on the last trading day of the futures contract i.e., the last Thursday of the expiry month. Mark to market settlement To cover for the risk of default by the counterparty for the clearing corporation, the futures contracts are marked-to-market on a daily basis by the exchange. Mark to market settlement is the process of adjusting the margin balance in a futures account each day for the change in the value of the contract from the previous day, based on the daily settlement price of the futures contracts (Please refer to the Tables given below.). This process helps the clearing corporation in managing the counterparty risk of the future contracts by requiring the party incurring a loss due to adverse price movements to part with the loss amount on a daily basis. Simply put, the party in the loss position pays the clearing corporation the margin money to cover for the shortfall in cash. In extraordinary times, the Exchange can require a mark to market more frequently (than daily). To ensure a fair mark-to-market process, the clearing corporation computes and declares the official price for determining daily gains and losses. This price is called the ―settlement price‖ and represents the closing price of the futures contract. The closing price for any contract of any given day is the weighted average trading price of the contract in the last half hour of trading.
  • Global Business School | A Study of Derivatives Market in India 41 Final settlement for futures After the close of trading hours on the expiry day of the futures contracts, NSCCL marks all positions of clearing members to the final settlement price and the resulting profit/loss is settled in cash. Final settlement loss is debited and final settlement profit is credited to the relevant clearing bank accounts on the day following the expiry date of the contract. Suppose the above contract closes on day 6 (that is, it expires) at a price of Rs. 1040, then on the day of expiry, Rs. 100 would be debited from the seller (short position holder) and would be transferred to the buyer (long position holder). Settlement of Options In an options trade, the buyer of the option pays the option price or the option premium. The options seller has to deposit an initial margin with the clearing member as he is exposed to unlimited losses. There are basically two types of settlement in stock option contracts: daily premium settlement and final exercise settlement. Options being European style, they cannot be exercised before expiry. Daily premium settlement Buyer of an option is obligated to pay the premium towards the options purchased by him. Similarly, the seller of an option is entitled to receive the premium for the options sold by him. The same person may sell some contracts and buy some contracts as well. The premium payable and the premium receivable are netted to compute the net premium payable or receivable for each client for each options contract at the time of settlement. Exercise settlement Normally most option buyers and sellers close out their option positions by an offsetting closing transaction but a better understanding of the exercise settlement process can help in making better judgment in this regard. Stock and index options can be exercised only at the end of the contract.
  • Global Business School | A Study of Derivatives Market in India 42 Final Exercise Settlement On the day of expiry, all in the money options are exercised by default. An investor who has a long position in an in-the-money option on the expiry date will receive the exercise settlement value which is the difference between the settlement price and the strike price. Similarly, an investor who has a short position in an in-the-money option will have to pay the exercise settlement value. Accounting and Taxation of Derivatives The Institute of Chartered Accountants of India (ICAI) has issued guidance notes on accounting of index future contracts from the view point of parties who enter into such future contracts as buyers or sellers. For other parties involved in the trading process, like brokers, trading members, clearing members and clearing corporations a trade in equity index futures is similar to a trade in, say shares, and accounting remains similar as in the case of buying or selling of shares. Taxation of Derivative Instruments Prior to the year 2005, the Income Tax Act did not have any specific provision regarding taxability of derivatives. The only tax provisions which had indirect bearing on derivatives transactions were sections 73(1) and 43(5). Under these sections, trade in derivatives was considered ―speculative transactions‖ for the purpose of determining tax liability. All profits and losses were taxed under the speculative income category. Therefore, loss on derivatives transactions could be set off only against other speculative income and the same could not be set off against any other income. This resulted in high tax liability. Finance Act, 2005 has amended section 43(5) so as to exclude transactions in derivatives carried out in a ―recognized stock exchange‖ from ‗speculative transaction‘. This implies that derivatives transactions that take place in a ―recognized stock exchange‖ are not taxed as speculative income or loss. They are treated under the business income head of the Income tax Act. Any losses on these activities can be set off against any business income in the year and the losses can be carried forward and set off against any other business income for the next eight years.
  • Global Business School | A Study of Derivatives Market in India 43 MCX MCX (Multi Commodity Exchange of India Ltd.) an independent and de-mutualised multi commodity exchange has permanent recognition from Government of India for facilitating online trading, clearing and settlement operations for commodity futures markets across the country. Key shareholders of MCX are Financial Technologies (India) Ltd., State Bank of India, HDFC Bank, State Bank of Indore, State Bank of Hyderabad, State Bank of Saurashtra, SBI Life Insurance Co. Ltd., Union Bank of India, Bank of India, Bank of Baroda, Canera Bank, Corporation Bank Headquartered in Mumbai, MCX is led by an expert management team with deep domain knowledge of the commodity futures markets. Today MCX is offering spectacular growth opportunities and advantages to a large cross section of the participants including Producers / Processors, Traders, Corporate, Regional Trading Canters, Importers, Exporters, Cooperatives, Industry Associations, amongst others MCX being nation-wide commodity exchange, offering multiple commodities for trading with wide reach and penetration and robust infrastructure. MCX, having a permanent recognition from the Government of India, is an independent and demutualised multi commodity Exchange. MCX, a state-of-the-art nationwide, digital Exchange, facilitates online trading, clearing and settlement operations for a commodities futures trading.
  • Global Business School | A Study of Derivatives Market in India 44 NCDEX National Commodity and Derivatives Exchange Ltd (NCDEX) is a technology driven commodity exchange. It is a public limited company registered under the Companies Act, 1956 with the Registrar of Companies, Maharashtra in Mumbai on April 23,2003. It has an independent Board of Directors and professionals not having any vested interest in commodity markets. It has been launched to provide a world-class commodity exchange platform for market participants to trade in a wide spectrum of commodity derivatives driven by best global practices, professionalism and transparency. Forward Markets Commission regulates NCDEX in respect of futures trading in commodities. Besides, NCDEX is subjected to various laws of the land like the Companies Act, Stamp Act, Contracts Act, Forward Commission (Regulation) Act and various other legislations, which impinge on its working. It is located in Mumbai and offers facilities to its members in more than 390 centres throughout India. The reach will gradually be expanded to more centres. NCDEX currently facilitates trading of thirty six commodities - Cashew, Castor Seed, Chana, Chilli, Coffee, Cotton, Cotton Seed Oilcake, Crude Palm Oil, Expeller Mustard Oil, Gold, Guar gum, Guar Seeds, Gur, Jeera, Jute sacking bags, Mild Steel Ingot, Mulberry Green Cocoons, Pepper, Rapeseed - Mustard Seed ,Raw Jute, RBD Palmolein, Refined Soy Oil, Rice, Rubber, Sesame Seeds, Silk, Silver, Soy Bean, Sugar, Tur, Turmeric, Urad (Black Matpe), Wheat, Yellow Peas, Yellow Red Maize & Yellow soyabean meal.
  • Global Business School | A Study of Derivatives Market in India 45 NMCE National Multi Commodity Exchange of India Ltd. (NMCE) was promoted by Central Warehousing Corporation (CWC), National Agricultural Cooperative Marketing Federation of India (NAFED), Gujarat Agro-Industries Corporation Limited (GAICL), Gujarat State Agricultural Marketing Board (GSAMB), National Institute of Agricultural Marketing (NIAM), and Neptune Overseas Limited (NOL). While various integral aspects of commodity economy, viz., warehousing, cooperatives, private and public sector marketing of agricultural commodities, research and training were adequately addressed in structuring the Exchange, finance was still a vital missing link. Punjab National Bank (PNB) took equity of the Exchange to establish that linkage. Even today, NMCE is the only Exchange in India to have such investment and technical support from the commodity relevant institutions. NMCE facilitates electronic derivatives trading through robust and tested trading platform, Derivative Trading Settlement System (DTSS), provided by CMC. It has robust delivery mechanism making it the most suitable for the participants in the physical commodity markets. It has also established fair and transparent rule-based procedures and demonstrated total commitment towards eliminating any conflicts of interest. It is the only Commodity Exchange in the world to have received ISO 9001:2000 certification from British Standard Institutions (BSI). NMCE was the first commodity exchange to provide trading facility through internet, through Virtual Private Network (VPN). NMCE follows best international risk management practices. The contracts are marked to market on daily basis. The system of upfront margining based on Value at Risk is followed to ensure financial security of the market.
  • Global Business School | A Study of Derivatives Market in India 46 In the event of high volatility in the prices, special intra-day clearing and settlement is held. NMCE was the first to initiate process of dematerialization and electronic transfer of warehoused commodity stocks. The unique strength of NMCE is its settlements via a Delivery Backed System, an imperative in the commodity trading business. These deliveries are executed through a sound and reliable Warehouse Receipt System, leading to guaranteed clearing and settlement.
  • Global Business School | A Study of Derivatives Market in India 47 Literature Review Dr Premalata (2003) examines the impact of introducing index futures and options contracts on the volatility of the underlining stock index in India. The results suggest that futures and options trading have not led to a change in the volatility of the underlying stock index. Susan Thomas and Ajay Shah (2003) examine the characteristics, growth in liquidity and turnover of Futures and Options. Snehal Bandwadekar and Saurabh Ghosh (2003) identify that derivative products like futures and options on Indian Stock Market have become important instruments of price discovery, portfolio diversification and risk hedging in recent times. Ashutosh Vashishtha (2010) examines that derivative turnover has grown from 2365 crores in 2000-01 to Rs 11010482 crores, within a short span of eight years derivative trading in India has surpassed cash segment in terms of volume and turnovers. O.P Gupta(2004) study suggest that the overall volatility of the stock market has declined after the introduction of the index futures for both Nifty and Sensex indices, However there is no conclusive evidence. Sandeep Srivastava (2005) uses the call and put option open interest and volume based predictors as given by Bhuyan and Yan (2002). The results show that these predictors have significant explanatory power with open interest being more significant as compared to trading volume. Golaka C Nath (2005) studies the behaviour of volatility in cash market after the introduction of derivatives. Rajendra P. Chitale (2003) examines issues and impediments in the use of different types of derivatives available for use by these institutional investors in India. Sumon Bhaumik and Suchismita Bose (2007) examines the impact of expiration of derivatives contracts on the underlying cash market on trading volumes, returns and volatility of returns.
  • Global Business School | A Study of Derivatives Market in India 48 TITLE OF THE PROJECT ―A Study of Derivatives Market in India‖ PURPOSE OF THE STUDY The study has been done to know the different types of derivatives and also to know the derivative market in India. This study also covers the recent developments in the derivative market taking into account the trading in past years. Through this study I came to know the trading done in derivatives and their use in the stock markets. IMPORTANCE OF STUDY The project covers the derivatives market and its instruments. For better understanding various strategies with different situations and actions have been given. It includes the data collected in the recent years and also the market in the derivatives in the recent years. This study extends to the trading of derivatives done in the National Stock Markets. OBJECTIVES OF THE STUDY To know the investors perception towards investment in Derivative Market To know different types of Derivatives instruments To analyse the performance of Derivatives Trading since 2001with special reference to Futures & Options (a) In terms of Turnover (b) In terms of Traded Quantity (c) In terms of No of Contracts Traded
  • Global Business School | A Study of Derivatives Market in India 49 LIMITATIONS OF THE STUDY The time available to conduct the study was only 2 months. Being a wide topic I had a limited time. Limited resources were available to collect the information about commodity trading The primary data has been collected through a structured questionnaire to a sample of 100 investors, which may not reflect the opinion of the entire population. HYPOTHESIS OF THE STUDY H0: Income and investment in different type of derivative instruments are not related. H1: Income and investment in different type of derivative instruments are related. H0: Age and purpose of Investing in Derivative market are not related. H1: Age and purpose of Investing in Derivative market are related. H0: Income per annum and monthly income available for investment are related H1: Income per annum and monthly income available for investment are related H0: Maturity period of investment and results of investment are no related. H1: Maturity period of investment and results of investment are related.
  • Global Business School | A Study of Derivatives Market in India 50 RESEARCH METHODOLOGY Descriptive Research Data Collection Method  Primary Data  Secondary Data Primary Data Primary data was collected through a structured questionnaire. The Questionnaire was distributed through online platform by E-mail. Secondary Data Under Secondary sources, information was collected from internal & external sources. I made use of Internet and miscellaneous sources (such as brochures, pamphlets) under external sources. Sampling Design  Sampling Unit: Hubli  Sampling Size: 100  Sampling Method: Convenience Sampling
  • Global Business School | A Study of Derivatives Market in India 51 Measurement Techniques Used Software Package for Social Science (SPSS) has been used for the purpose of this analysis. CHI SQUARE test was used for testing the Hypothesis More specifically the process was organized. The research questionnaire was pre-tested through pilot survey. In its draft form it went under a pre test with Channel Partner of two different companies. The second pre-test was conducted after discussion with the experts in the field.
  • Global Business School | A Study of Derivatives Market in India 52 ANALYSIS OF THE RESULTS 1. Gender of the respondents Interpretation: From the questionnaire it is observed that 84% of the respondents are Male and 16% of them are Female. Table 1: What is your Gender? Frequency Percent Valid Percent Cumulative Percent Male 84 84.0 84.0 84.0 Female 16 16.0 16.0 100.0 Total 100 100.0 100.0
  • Global Business School | A Study of Derivatives Market in India 53 2. Age of the respondents Table 2: What is your Age? Frequency Percent Valid Percent Cumulative Percent Between 18 - 24 23 23.0 23.0 23.0 Between 25 - 34 22 22.0 22.0 45.0 Between 35 - 44 46 46.0 46.0 91.0 Between 45 -54 9 9.0 9.0 100.0 Total 100 100.0 100.0 Interpretation: 46% of the respondents fall under the age category of 35 – 44 years, 23% of them fall under 18 -24 years were as 22% of the respondents are between the age category of 25 -34 years and 9% of the respondents are Between the age group of 45 – 54 years.
  • Global Business School | A Study of Derivatives Market in India 54 3. Occupation of the respondents Table 3: Which of the following best describes your current Occupation? Frequency Percent Valid Percent Cumulative Percent Employee 37 37.0 37.0 37.0 Businessman 34 34.0 34.0 71.0 Student 10 10.0 10.0 81.0 Professional 19 19.0 19.0 100.0 Total 100 100.0 100.0 Interpretation: From the above chart it is clear that majority of the respondents are employee with a weightage of 37% , Next are Businessman with a total of 34% and Professionals being 19% and Students 10%.
  • Global Business School | A Study of Derivatives Market in India 55 4. Educational Qualification of the respondents Table 4: What is your Educational Qualification? Frequency Percent Valid Percent Cumulative Percent Undergraduate 33 33.0 33.0 33.0 Graduate 35 35.0 35.0 68.0 Post Graduate 21 21.0 21.0 89.0 Professional Degree 11 11.0 11.0 100.0 Total 100 100.0 100.0 Interpretation: Majority of the respondents are Graduate being 35% were are Undergraduate are closely followed with 33%, Post graduates consist of 21% and Professional Degree Holders are 11%.
  • Global Business School | A Study of Derivatives Market in India 56 5. Income per Annum of the respondents Table 5: What is your approximate Income per Annum? Frequency Percent Valid Percent Cumulative Percent Below 1,50,000/- 15 15.0 15.0 15.0 Between 1,50,001 - 3,00,000/- 39 39.0 39.0 54.0 Between 3,00,001 - 4,50,000 14 14.0 14.0 68.0 4,50,000/- and Above 32 32.0 32.0 100.0 Total 100 100.0 100.0 Interpretation: 39% of the respondents have annual income between 1,50,001 – 3,00,000/- were as respondents having income above 4,50,000/- are 32%, between 3,00,001/- - 4,50,000/- are 14% and below 1,50,000/- are 15%.
  • Global Business School | A Study of Derivatives Market in India 57 6. Percentage of monthly income available for investment in Derivatives Table 6: What percentage of your monthly household income would you invest in Derivatives? Frequency Percent Valid Percent Cumulative Percent Between 5 - 10% 27 27.0 27.0 27.0 Between 11 - 15% 41 41.0 41.0 68.0 Between 16 - 20% 32 32.0 32.0 100.0 Total 100 100.0 100.0 Interpretation: 41% of the respondents invest between 11 – 15% of the monthly household income in Derivatives, were as 32% of the respondents would invest between 16- 20% and 27% of the respondents invest between 5 – 10% in Derivatives Market.
  • Global Business School | A Study of Derivatives Market in India 58 7. Kind of risk perceive while investing in Derivatives Table 7: What kind of risk do you perceive while investing? Frequency Percent Valid Percent Cumulative Percent Uncertainty of Returns 43 43.0 43.0 43.0 Slump in Market 34 34.0 34.0 77.0 Fear of Company Windup 9 9.0 9.0 86.0 Others 14 14.0 14.0 100.0 Total 100 100.0 100.0 Interpretation: 43% of the respondents feel that Uncertainty of Returns is the major risk they perceive while investing in Derivative Market, were as 34% of the respondents feel Slump in Market and 9% of the respondents feel that fear of company windup is the risk they perceive while investing in Derivatives.
  • Global Business School | A Study of Derivatives Market in India 59 8. Purpose of Investing in Derivatives Market Table 8: What is the purpose of investing in Derivative Market? Frequency Percent Valid Percent Cumulative Percent To Hedge Funds 33 33.0 33.0 33.0 Risk Control 29 29.0 29.0 62.0 Stable Income 21 21.0 21.0 83.0 Direct Investment 17 17.0 17.0 100.0 Total 100 100.0 100.0 Interpretation: 33% of the respondents invest in Derivatives to hedge funds, 29% of them invest for risk control, 21% of the respondents for stable income and 17% invest as a direct investment.
  • Global Business School | A Study of Derivatives Market in India 60 9. Participation in different type of Derivative instrument Table 9: In which of the following would you like to participate? Frequency Percent Valid Percent Cumulative Percent Index Futures 16 16.0 16.0 16.0 Index Options 29 29.0 29.0 45.0 Stock Futures 19 19.0 19.0 64.0 Stock Options 24 24.0 24.0 88.0 Currency Futures/Options 12 12.0 12.0 100.0 Total 100 100.0 100.0 Interpretation: From the above chart we find that 29% of the respondent would like to participate in Index Options were as 24% of the respondents‘ would like to invest in Stock Options, Stock Futures and Index Futures attract 19 and 16% respectively and respondents liking to invest in Currency Futures and Options are 12%.
  • Global Business School | A Study of Derivatives Market in India 61 10.Interest of investment in terms of time frame Table 10: Which contract maturity period would interest you for trading in? Frequency Percent Valid Percent Cumulative Percent 1 Month 34 34.0 34.0 34.0 2 Months 9 9.0 9.0 43.0 3 Months 27 27.0 27.0 70.0 6 Months 22 22.0 22.0 92.0 1 Year 8 8.0 8.0 100.0 Total 100 100.0 100.0 Interpretation: 34% of the respondents would like to invest their money for 1 Month, 27% of them for 3 months, 22% of the respondents for 6 months, 9% of the respondents for 2 months and 8% of the respondents for 1 Year.
  • Global Business School | A Study of Derivatives Market in India 62 11.Investment in Derivatives market Table 11: How often do you invest in Derivative Market? Frequency Percent Valid Percent Cumulative Percent Between 1 - 10 times 62 62.0 62.0 62.0 Between 11 - 25 times 14 14.0 14.0 76.0 26 - 50 times 15 15.0 15.0 91.0 Regularly 9 9.0 9.0 100.0 Total 100 100.0 100.0 Interpretation: Majority of the respondents 60% of them invest between 1 – 10 times a year in Derivatives, were as respondents investing between 11 – 25 times, 26 – 50 times and regularly are 14%, 15% and 9% respectively.
  • Global Business School | A Study of Derivatives Market in India 63 12.Result of Investment Table 12: What was the result of your Investment? Frequency Percent Valid Percent Cumulative Percent Great Results 17 17.0 17.0 17.0 Moderate but acceptable 50 50.0 50.0 67.0 Disappointed 33 33.0 33.0 100.0 Total 100 100.0 100.0 Interpretation: 50% of the respondents are moderate about their results in investing in Derivatives market, 17% of the respondents have great results and 33% of the respondents are disappointed with their investment in Derivatives Market.
  • Global Business School | A Study of Derivatives Market in India 64 H0: Income and investment in different type of derivative instruments are not related. H1: Income and investment in different type of derivative instruments are related. What is your approximate Income per Annum? * In which of the following would you like to participate? Cross Tab Count In which of the following would you like to participate? TotalIndex Futures Index Options Stock Futures Stock Options Currency Futures/Options What is your approximate Income per Annum? Below 1,50,000/- 3 4 2 0 6 15 Between 1,50,001 - 3,00,000/- 3 14 11 11 0 39 Between 3,00,001 - 4,50,000 3 3 0 5 3 14 4,50,000/- and Above 7 8 6 8 3 32 Total 16 29 19 24 12 100
  • Global Business School | A Study of Derivatives Market in India 65 The value of chi-squared statistic is 28.958. The chi-squared statistic has 12 degree of freedom. The p value (.004) is less than 0.05. Hence there is significant relationship between income and investment in different type of derivative instruments. Chi-Square Tests Value df Asymp. Sig. (2-sided) Pearson Chi-Square 28.958a 12 .004 Likelihood Ratio 35.930 12 .000 Linear-by-Linear Association .315 1 .575 N of Valid Cases 100 a. 12 cells (60.0%) have expected count less than 5. The minimum expected count is 1.68.
  • Global Business School | A Study of Derivatives Market in India 66 H0: Age and purpose of Investing in Derivative market are not related. H1: Age and purpose of Investing in Derivative market are related. What is your Age? * What is the purpose of investing in Derivative market? Cross Tab Count What is the purpose of investing in Derivative market? TotalTo Hedge Funds Risk Control Stable Income Direct Investment What is your Age? Between 18 – 24 10 0 8 5 23 Between 25 – 34 3 14 2 3 22 Between 35 – 44 17 12 8 9 46 Between 45 -54 3 3 3 0 9 Total 33 29 21 17 100 Chi-Square Tests Value df Asymp. Sig. (2-sided) Pearson Chi-Square 26.109a 9 .002 Likelihood Ratio 32.568 9 .000 Linear-by-Linear Association .616 1 .432 N of Valid Cases 100 a. 8 cells (50.0%) have expected count less than 5. The minimum expected count is 1.53. The value of chi-squared statistic is 26.109. The chi-squared statistic has 9 degree of freedom. The p value (.002) is less than 0.05. Hence there is significant relationship between age and purpose of Investing in Derivative market.
  • Global Business School | A Study of Derivatives Market in India 67 H0: Income per annum and monthly income available for investment are related H1: Income per annum and monthly income available for investment are related What is your approximate Income per Annum? * What percentage of your monthly household income would you invest in Derivatives? Cross Tab Count What percentage of your monthly household income would you invest in Derivatives? Total Between 5 - 10% Between 11 - 15% Between 16 - 20% What is your approximate Income per Annum? Below 1,50,000/- 3 3 9 15 Between 1,50,001 - 3,00,000/- 5 17 17 39 Between 3,00,001 - 4,50,000 2 6 6 14 4,50,000/- and Above 17 15 0 32 Total 27 41 32 100 Chi-Square Tests Value df Asymp. Sig. (2- sided) Pearson Chi-Square 30.130a 6 .000 Likelihood Ratio 38.871 6 .000 Linear-by-Linear Association 22.017 1 .000 N of Valid Cases 100 a. 4 cells (33.3%) have expected count less than 5. The minimum expected count is 3.78. The value of chi-squared statistic is 30.130. The chi-squared statistic has 6 degree of freedom. The p value (.000) is less than 0.05. Hence there is significant relationship between income per annum and monthly income available for investment.
  • Global Business School | A Study of Derivatives Market in India 68 H0: Maturity period of investment and results of investment are no related. H1: Maturity period of investment and results of investment are related. What contract maturity period would interest you for trading in? * What was the result of your investment? Cross Tab Count What was the result of your investment? Total Great Results Moderate but acceptable Disappointed What contract maturity period would interest you for trading in? 1 Month 9 16 9 34 2 Months 0 3 6 9 3 Months 0 19 8 27 6 Months 5 9 8 22 1 Year 3 3 2 8 Total 17 50 33 100 Chi-Square Tests Value df Asymp. Sig. (2- sided) Pearson Chi-Square 17.583a 8 .025 Likelihood Ratio 22.085 8 .005 Linear-by-Linear Association .010 1 .921 N of Valid Cases 100 a. 8 cells (53.3%) have expected count less than 5. The minimum expected count is 1.36. The value of chi-squared statistic is 17.583. The chi-squared statistic has 8 degree of freedom. The p value (.025) is more than 0.05. Hence there is no significant relationship between maturity period of investment and results of investment.
  • Global Business School | A Study of Derivatives Market in India 69 Comparison of Derivatives Turnover with Equity turnover on BSE & NSE Equity Turnover in BSE & NSE BSE NSE Year Traded Quantity Turnover (Cr) Traded Quantity Turnover (Cr) 2001-02 182196 307292 278408 513167 2002-03 221401 314073 364065 617989 2003-04 390441 505053 713301 1099534 2004-05 477171 518715 797685 1140072 2005-06 664455 816074 844486 1569558 2006-07 560777 956185 855456 1945287 2007-08 653010 1578857 1498469 3551038 2008-09 739600 1100074 1426355 2752023 2009-10 1136513 1378809 2215530 4138023 2010-11 990777 1105027 1824515 3577410 2011-12 654137 667498 1616978 2810893 Derivatives Turnover in BSE & NSE BSE NSE Year No of Contracts Turnover (Cr) No of Contracts Turnover (Cr) 2001-02 105527 1926 4196873 101925 2002-03 138037 2478 16767852 439865 2003-04 382258 12074 57008110 2130468 2004-05 531719 16112 77017185 2547053 2005-06 203 9 157619271 4824251 2006-07 1781220 59006 216883573 7356270 2007-08 7453371 242308 425013200 13090477 2008-09 496502 11775 657390497 11010482 2009-10 9026 234 677293922 17663655 2010-11 5623 154 1034212062 29248221 2011-12 32222825 808476 1205045464 31349732
  • Global Business School | A Study of Derivatives Market in India 70 Table showing comparison of Derivatives Turnover and Equity Turnover in BSE (source: sebi.gov.in) Derivatives was introduced first time in India in 2001. There after Derivatives market has seen a huge growth in terms traded contracts and turnover. From the above chart we can see that derivatives turnover in the year 2001 – 02 was 1,926 crores compared to equity turnover of 3,07,292. In BSE the equity turnover is superior compared to derivatives turnover but after the financial year 2011- 12 the momentum has shifted from equity to derivatives and in the financial year 2011 – 2012 the derivatives turnover overtook the equity turnover for the 1st time ever, the derivatives turnover stood at 8,08,476 crores compared to equity turnover of 6,67,498 which is 21% more of equity turnover clearly showing the emergence of derivatives market on BSE. 0 200000 400000 600000 800000 1000000 1200000 1400000 1600000 1800000 Turnover of Derivatives in BSE (Cr) Turnover of Equity in BSE(Cr)
  • Global Business School | A Study of Derivatives Market in India 71 Table showing comparison of Derivatives Turnover and Equity Turnover in NSE (source: sebi.gov.in) Derivatives was introduced first time in India in 2001. There after Derivatives market has seen a huge growth in terms traded contracts and turnover. From the above chart we can see that derivatives turnover in the year 2001 – 02 was 1,01,925 crores compared to equity turnover of 5,13,167 but after the financial year 2003 -04 derivatives has seen a huge up growth, It has outperformed equity segment both in volumes and turnover. In the financial year 2011 – 2012 the derivatives turnover stood at 3,13,49,732 crores compared to equity turnover of 28,10,893 which is 1015% more of equity turnover clearly showing the emergence of derivatives market on NSE. 0 5000000 10000000 15000000 20000000 25000000 30000000 35000000 Turnover of Derivatives in NSE(Cr) Turnover of Equity in NSE(Cr)
  • Global Business School | A Study of Derivatives Market in India 72 Findings 84% of the respondents are Male and 16% of them are Female. Most of the investors who invest in derivatives market are graduate. Majority of the investors who invest in derivative market have a income of above 1,50,001 – 3,00,00/- 46% of the respondents fall under the age category of 35 – 44 years Investors generally perceive uncertainty of returns type of risk while investing in derivative market. Most of investor‘s purpose of investing in derivative market is to hedge their funds. Most of investors participate in Index Options. From this survey we come to know that most of investors make a contract of 1 month maturity period. Investors invest 1 -10 times a year in Derivatives Market. The result of investment in derivative market is generally moderate but acceptable. Hypothesis test shown that there is relationship between Income and investment in different type of derivative instruments, Age and purpose of Investing in Derivative market , Income per annum and monthly income available for investment Derivatives turnover compared to Equity turnover is superior on NSE.
  • Global Business School | A Study of Derivatives Market in India 73 Recommendations Knowledge needs to be spread concerning the risk and return of derivative market. Investors should have knowledge of technical analysis, especially 5 Day moving averages as derivatives trading is for a short period of time Investors should analysis their script with the help of 5 Day moving average before making their trades. Investors‘ portfolio should only consist of 15 – 20% Derivatives contracts or scripts. As derivatives trading is very risky investors should have only a small portion of their portfolio consisting of derivatives. SEBI should conduct seminars regarding the use of derivatives to educate individual investors. As FII play a prominent role in Derivatives trading, an individual investor should keep himself updated with various economic trends, government policies, company and industry announcements.
  • Global Business School | A Study of Derivatives Market in India 74 ANNEXURE SURVEY QUESTIONNAIRE FOR INVESTORS Dear Sir/Mam, This questionnaire is meant for educational purposes only. The information provided by you will be kept secure and confidential. 1. Name: ___________________________________________ 2. Gender a) Male b) Female 3. Age a. Below 18 Years b. Between 18 – 24 Years c. Between 25- 34 Years d. Between 45 -54 Years e. Above 55 Years 4. Occupation a. Employee b. Business c. Student d. Professional
  • Global Business School | A Study of Derivatives Market in India 75 5. Educational Qualification a. Undergraduate b. Graduate c. Post Graduate d. Professional Degree Holder 6. Income per Annum a. Below 1,50,000 b. 1,50,000 – 3,00,000 c. 3,00,000 – 5,00,000 d. Above 5,00,000 7. Normally what percentage of your monthly household income could be available for investment? a. Between 5% to 10% b. Between 11% to 15% c. Between 16% to 20% d. Between 21% to 25% e. More than 25% 8. What kind of risk do you perceive while investing in the stock market? a. Uncertainty of returns b. Slump in stock market c. Fear of being windup of company d. Other 9. What is the purpose of investing in Derivative market? a. To hedge funds b. Risk control c. More stable d. Direct investment
  • Global Business School | A Study of Derivatives Market in India 76 10.In which of the following would you like to participate? a. Index Futures b. Index Options c. Stock Futures d. Stock Options e. Currency Futures / Options 11. What contract maturity period would interest you for trading in? a. 1 month b. 2 months c. 3 months d. 6 months e. 9 months f. 12 months 12. How often do you invest in Derivative market? a. 1-10 times in a year b. 11-50 times c. More than 50 times d. Regularly 13.What was the result of your Investment? a. Great results b. Moderate but acceptable c. Disappointed
  • Global Business School | A Study of Derivatives Market in India 77 Bibliography nseindia.com bseindia.com sebi.gov.in Ashutosh Vashishtha and Satish Kumar “Development of Financial Derivatives Market in India- A Case Study” Dr. Premalata Shenbagaraman “Do Futures and Options trading increase stock market volatility?” Golaka C Nath “Behaviour of Stock Market Volatility after Derivatives” O.P. Gupta “Effect Of Introduction Of Index Futures On Stock Market Volatility:The Indian Evidence” Rajendra P. Chitale “Use of Derivatives by India’s Institutional Investors:Issues and Impediments” Sandeep Srivastava “Informational Content Of Trading Volume And Open Interest – An Empirical Study Of Stock Option Market In India” Ajay Shah and Susan Thomas “The evolution of the securities markets in India in the 1990s” Snehal Bandivadekar and Saurabh Ghosh “Derivatives and Volatility on Indian Stock Markets” Sumon Bhaumik and Suchismita Bose “Impact of Derivatives Trading on Emerging Capital Markets: A Note on Expiration Day Effects in India” Susan Thomas and Ajay Shah “Equity derivatives in India: The state of the art”