Innovation of derivatives have redefined and revolutionized the landscape of financial industry across the world and derivatives have earned a well deserved and extremely significant place among all the financial products. Derivatives are risk management tool that help in effective management of risk by various stakeholders. Derivatives provide an opportunity to transfer risk, from the one who wish to avoid it; to one, who wish to accept it. India’s experience with the launch of equity derivatives market has been extremely encouraging and successful.

1. National University
On-Campus Advanced MBA Program
8th Batch (2nd Semester)
Session:2021-22

2. WELCOME TO MY PRESENTATION
Financial Derivatives and Risk Management (621011)
Topic: Overview of Indian Derivatives Market ;Concentration of option Market
Mechanism
Submitted To:
Md. Saiful Islam
Assistant Professor
Department of Finance and Banking
Business Studies Group
National University
Presented By:
Emran Hossen
Advanced MBA (8th Batch)
Department of Finance & Banking
Registration No: 21824200017
Season: 2021-2022

3. Overview of presentation
No Name Slide No
1 Introduction 4
2 Objectives of Derivatives 5
3 Evolution of Derivatives 6
4 Evolution of Derivatives in India 7-8
5 Positions of Indian Derivatives market 9
6 Indian’s Derivative market At a Glance 10
7 The main exchanges Market which facilitate derivatives trading 11
8 Products of Indian Derivatives Markets 12
9 Users of Derivatives in India 13
10 Types of Traders in India 14
11 Committees on Derivative Trading 15-16
12 Regulatory Aspects of Derivatives Trading in India 17-18
13 Options markets In India 19
14 Types of Options 20-23
15 Assets Underlying Exchange-Traded Options 24
16 Specification of Exchange-Traded Options 25
17 Characteristics of Exchange Traded Options 26-27
18 Call Option strategies 28-30
19 Put Option strategies 31-33
20 Conclusion 34

4. Introduction
 A derivative is a contract between two parties which derives its
value/price from an underlying asset. It does not have any value of
its own but its value in turn depends on the price movements of
other assets underlying the contract, known as underlying assets
(such as commodities, shares, bonds, foreign currencies etc.) or
indices (such as stock market index, consumer price index etc.).
 Expected to be settled at a future date.
 Its Value is derived from the value of the underlying assets.
 No initial investment or very small amount of initial investment is
required.

5. Objectives of Derivatives
 The main purpose of Derivatives is to transfer risk from
one person or one firm to another that is provide
insurance
 For example :If a farmer before planting can gurantee a
certain price he will receive ,he is more likely to plant.
 Derivatives improve overall performance of the
economy.
 They increase savings and Investment in the long run.
 They help in the discovery of future as well as current
prices.

6. Evolution of Derivatives
 According to some financial scholars, future trading dates back in India to
around 200 B. C.
 Evolution of trading methods of futures can be traced in the medieval fairs of
France and England as early as the 12th century.
 The first futures contracts were reportedly done in respect of rice in Japan in
the 17th century when forward agreements were entered into for the trading of
commodities in Japan.
 The first traded financial futures were foreign currency contracts which began
trading on the International Commercial Exchange (ICE) in 1970.
 The history of derivatives has two important milestones. The first was the
establishment of stock options trade in Chicago — initially OTC and
subsequently on the CBOT market in equity derivatives in 1987. The CBOT was
set up in 1848 as a meeting place for farmers and merchants.

7. Evolution of Derivatives in India
 The Indian derivatives market is in existence for very long. In the derivatives market,
we deal with derivatives securities. In the Indian derivatives market, trade takes with
the help of derivative securities.
 Such derivatives securities or instruments are forward ,futures, option and swaps.
Participation in derivatives securities not only trade in these simple derivative securities
but also trade hybrid derivative instrument
 Derivatives market in India has a history dating back in 1875.The Bombay cotton
trading association started future trading in this year. History suggested that by 1900
India became one of the world’s largest futures trading industry.
 After Independence in 1952, the government of India officially put a ban on cash
settlement and options trading.
 In 1993 the national stock exchange an electronics based trading exchange came into
existence. The Bombay stock exchange was already fully functional for over 100 years
then.
 Over the BSE ,forward trading was there in the form of Badla trading, but formally
derivatives trading kicked started in its present form after 2001 only. The NSE started
trading in CNX Nifty index futures on June 12,2000,based on CNX Nifty 50 Index.

8. To be continued
 In 1995 a prohibition of trading options was lifted.
 In 1995 the securities contract (Regulation) act of 1956 was amended and derivatives
could be declared “securities”
 NSE started trade in future and option by 2005.

9. Positions of Indian Derivatives market

10. Indian Derivative market At a Glance
 World’s Largest Derivatives Exchange by Volume.
 The National Stock Exchange of India Limited (NSE) commenced trading in
derivatives with the launch of index futures on June 12, 2000. The futures
contracts are based on the popular benchmark Nifty 50 Index. The Exchange
introduced trading in Index Options (also based on Nifty 50) on June 4, 2001.
 Volume on the Indian exchange grew 58% to about 6 billion derivative
contracts in 2019.
 NSE has also been ranked as the fourth largest exchange in the world for
trading cash equities for 2021. In terms of sheer value traded, the NSE has a
monopoly over equity derivatives in India and the only competitor to it is BSE,
which has less than 5 per cent share in the derivative segment.
 In India, different derivatives instruments are permitted and regulated by
various regulators, like Reserve Bank of India (RBI), Securities and Exchange
Board of India (SEBI) and Forward Markets Commission (FMC).

11. The main exchanges Market which
facilitate derivatives trading
Exchanges Market
Stock
National Stock
Exchange(NSE)
Bombay Stock
Exchange(BSE)
Currency
National Stock
Exchange(NSE)
Bond
National Stock
Exchange(NSE)
commodities
Multi Commodity
Exchange of India
Limited (MCX)

12. Products of Indian Derivatives Markets
Stock
NIFTY 50
NIFTY Bank
NIFTY
Medicap
NIFTY IT
NIFTY CPSE
NIFTY
Infrastructure
NIFTY PSE
Currency
USD-INR
GBP-INR
JPY-INR
EUR-INR
Bond
91-Day
Treasury Bill
(91DTB)
MIBOR
commoditi
es
Copper
Crude oil
Gold
Silver

13. Users of Derivatives in India
Main
Users
Banks
Corporations
Financial
Institutions
Investors
A country as a
whole

14. Types of Traders in India
• They are player whose objectives is risk reduction. they
avoid risk by incurring cost.
Hedgers
• They are the players who establish position based on
their expectations of future price movements. and they
make profit by taking risk
Speculators
• They are the players whose objectives is to profit from
pricing differentials. they make profit without taking risk
Arbitrageurs
• They are the players who believes in lower expected
return at the reduced risk.
Spreaders

15. Committees on Derivative Trading
Committees on
Derivatives
JR VARMA
COMMITTEE
L.C GUPTA
COMMITTEE

16. To be Continued
 Dr. L. C Gupta on November 18,1996 to develop appropriate regulatory
framework for derivatives trading in India. The committee submitted its
report on march 17, 1998 prescribing necessary preconditions for
introduction of derivatives trading in India.
 According to the committee recommendations ,derivatives should be
declared as ‘securities’ so that, regulatory framework applicable to
trading of “securities’ could also govern trading of securities.
 SEBI also set up a group in June 1998 under the chairmanship of prof.
J.R Varma ,to recommend measures for risk containment in derivatives
market in India .the report ,which was submitted in October 1998,
worked out the operational details of margining system.

17. Regulatory Aspects of Derivatives Trading in India
 The LCGC defined the goals of regulation exceedingly well in its
report. We support these regulatory principles completely and
base our recommendations also on these same principles.
Therefore ,we reproduce this paragraph of the LCGC report:2
“The committee believes that regulation should be designed to
achieve specific ,well –defined goals.it is inclined towards positive
regulation designed to encourage healthy activity and behavior.”

18. Its has been guided by following objectives
Guided
Objectives
Investor
Protection
Fairness and
transparency
Safeguard for
clients money
Competent and
Honest Service
Market Integrity
Quality of Market
Cost Efficiency
Price continuity
Price Discovery
Innovation
Developing
Territory
Increase
Information
Technology

19. Options markets In India
 An Options is a financial security that gives the holder the right (but not the
obligation) to buy or sell a specified asset at a specified price on or before a
specified date. Option are traded both on exchanges and in the over the counter
market.
 Option contracts are available on 194 securities stipulated by the Securities &
Exchange Board of India (SEBI).
 The 657 million index options contracts traded at NSE this year through
August is higher than any other venue and the country’s total outstrips any
other nation, according to the World Federation of Exchanges.
 The most popular Options – Equity Options.

20. Types of Options
 It may be classified into two basic categories, options are of two
types- Calls and Puts options.
 Calls give the buyer the right but not the obligation to buy a given
quantity of the underlying asset, at a given price on or before a
given future date.
 Puts give the buyer right ,but not the obligation to sell a given
quantity of underlying asset at a given price on or before a given
future date.

21. Call Option Example
Right to buy
100 Reliance
shares at a
price of Rs 300
per share after
3 months
Suppose, after a month ,
Market price is 400/-,then
the option is exercised the
are bought .
Net gain=40000-30000-
2500
=7500/-
Let,
Current Price =250/-,
Strike Price 300/-,
Expire date =after 3 months
Premium=25/- per share
To buy call option =2500/-
Suppose after a month
market price is 200/- then
the option is not exercised.
Net loss = Only premium
amount that is 2500/-

22. Put Option Example
Right to buy
100 Reliance
shares at a
price of Rs 300
per share after
3 months
Suppose, after a month ,
Market is 200/-,then the
option is exercised the are
Sold.
Net gain=30000-20000-
2500
=7500/-
Let,
Current Price =250/-,
Strike Price 300/-,
Expire date =after 3 months
Premium=25/- per share
To buy call option =2500/-
Suppose after a month
market price is 300/- then
the option is not exercised.
Net loss = Only premium
amount that is 2500/-

23. From time of exercising viewpoint,
there are 2 types of options:
A European option can be exercised only on the
expiration date; not before.
An American option can be exercised at any time
up to the expiration date

24. Assets Underlying Exchange-Traded Options
 Stocks
 Foreign Currency
 Stock Indices
 Futures

25. Specification of Exchange-Traded Options
Expiration date
Strike price
European or American
Call or Put (option class)

26. Characteristics of Exchange Traded Options
 Four types of underlying assets
 Equity securities
 Stock indexes
 government debt securities
 foreign currencies
 Have standardized terms
 Trading activity is determined by supply and demand
 Option interest: number of outstanding options

27. Exercise price (or Strike price): Promised or predetermined
price for underlying assets
At-the-money: when option price equals current market price
of underlying assets
In-the-money: when the strike price is less (more) than the
market price of the underlying asset for a call (put)
Out-of-money: when the strike price is more (less) than the
market price of the underlying asset for call (put)

28. Call Option strategies
 Long position: the right (but not obligation) to buy the underlying
asset at a strike price for a limited period of time.
 The right to buy stock at a fixed price becomes more valuable
as price of stock increases (in the money when current stock
price > exercise price)
 Risk for buyer is limited to the call premium and potential is
unlimited
 Short position: payoff mirror image of long position (zero sum
game)
 Covered call: sale of a call option on a stock that is owned.

31. Put option strategies
 Long position: the right, but not obligation, to sell an underlying
asset at strike price.
 The right to sell stock at a fixed price becomes valuable as
price of the stock decreases (in the money when current price
< exercise price)
 Risk for buyer is limited to the premium and profit is also
limited (price cannot be below zero)
 Short position: mirror image of long position
 Protective put: insurance against a sharp correction. Purchase of a
stock and put option

34. Conclusion
Derivative market is a very lucrative alternative to the stock market
due to number of benefits. However, it can prove out to be one of the
riskiest markets amongst al other financial markets ,if trader without
proper knowledge and experience. Before you step in the world of
Derivatives ,it is better to get your risk profile analysis updated from
a SEBI registered investment advisor, which will help of Delta
Derivative plus and Equity Derivative pack which will provide you
with research –based recommendations for trading in the derivatives
market.

35. Thank You