Derivatives in india

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Derivatives in india

  1. 1. www.finerva.com | support@finerva.com | +91-9787-11-11-66 Financial Derivatives in India Karthikeyan Jawahar, CFPCM Director – Research & Consulting Finerva Financial Solutions Pvt Ltd
  2. 2. www.finerva.com | support@finerva.com | +91-9787-11-11-66 Derivatives Fundamentals • Origin in Forward Contract – Related to Agricultural Commodities – To Preserve Profits and Marketability (Hedging) • Over the Counter Market – One-on-one Deals (Not Transferable) – Predominantly between a bank and its client • Exchange Tradable – Futures – Options
  3. 3. www.finerva.com | support@finerva.com | +91-9787-11-11-66 How Derivatives? • Options Payoff Charts Expectation – Share Price will GO DOWN Expectation – Share Price will GO UP Profit / Loss Line Target (Exercise) Price
  4. 4. www.finerva.com | support@finerva.com | +91-9787-11-11-66 Dominant types • Forwards • Futures • Options • Swaps – All the others are combinations or modifications of the above.
  5. 5. www.finerva.com | support@finerva.com | +91-9787-11-11-66 Types of Players • Hedgers • Arbitrageurs • Speculators
  6. 6. www.finerva.com | support@finerva.com | +91-9787-11-11-66 Indian Scene • Was one of the World’s Largest Futures Market - Cotton Futures Trade • Shifted predominantly to OTC post independence • Market Trading started from June 2000 with Index Futures • Index Option June 2001 • Individual Securities Options from July 2001 • Individual Stock Futures from July 2001 • Commodity Futures started June 2000 – regular addition of commodities even today • Forex (US$) Futures Started October 2008
  7. 7. www.finerva.com | support@finerva.com | +91-9787-11-11-66 Market Dynamics • Lots sizes ranging value of in Rs.2.5 to Rs.4 lakhs • Dominant market is NSE • Rapid Growth in Volumes – Daily Volumes of Rs.68,000 Cr – Only Rs.18,000 Cr in cash segment • Dominated by Index Derivatives
  8. 8. www.finerva.com | support@finerva.com | +91-9787-11-11-66 Year Average Daily Turnover (Rs. cr.) 2009-10 67,789.66 2008-09 45,310.63 2007-08 52,153.30 2006-07 29,543.00 2005-06 19,220.00 2004-05 10,107.00 2003-04 8,388.00 2002-03 1,752.00 2001-02 410.00 2000-01 11.00
  9. 9. www.finerva.com | support@finerva.com | +91-9787-11-11-66 Is This For ME? • Market Dominated by Speculators • Highly Leveraged – Invest only the margin (Premium)Eg. Rs.300 x 50 = Rs.15,000/- only for a CE-DEC 4800 (S&P CNX Nifty) – Contract value = Rs.4700 x 50 = Rs.235,000 – If Nifty Goes to 5000, profit is Rs.300 x 50 = Rs.15,000/- => 100% returns – If Nifty even stays at 4700, loss is Rs.300 x 50 = Rs.15,000/-. => Entire Capital Lost • Zero Sum Game • 80% of Day-traders Lose Money in USA • Las Vegas Effect
  10. 10. www.finerva.com | support@finerva.com | +91-9787-11-11-66 Zero Sum Game • Stock market is a Non-Zero Sum Game. – Everyone can make profits. One person’s loss is not another’s profit. • Derivatives is a Zero Sum Game. – The profit made is another person’s loss. – My premium lands up with the market maker – My profit is paid by the market maker – The market makers are large financial corporations or the stock market itself. – Failed Market makers are – Barrings Bank, Societe Generale, Lehman Brothers, many more banks & hedge funds in the USA.
  11. 11. www.finerva.com | support@finerva.com | +91-9787-11-11-66 Questions and Sharings • Thank You • Mail for further queries to – Karthikeyan Jawahar – karthiK@finerva.com
  12. 12. www.finerva.com | support@finerva.com | +91-9787-11-11-66

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