It relates to the MBA Finance category

1. Derivative Market in India
by
Smruti Ranjan Sahoo
PhD in Commerce & Management

2. Concept of Derivatives
“ A contract which derives its value from
the prices, or index of prices, of
underlying securities”.
A simple example of derivative is butter,
which is derivative of milk. The price of
butter depends upon price of milk,
which in turn depends upon the demand
and supply of milk.
Deferred delivery of deferred payment
instruments

3. Need of Derivatives
Since 1991, due to LPG, the India economy has entered
into new era. Now a days the price of commodities are
decontrolled. Due to deregulating exchange rate, interest
rate, trade control, FIIs, have increased the viability of
price of goods & services. Hence hedging activities
through various derivatives emerged to different risks.
India has all the infrastructure facilities & potential to deal
with the different derivatives.

4. The need for a derivatives
market
The derivatives market performs a number of economic
functions:
1. They help in transferring risks from risk averse people to
risk oriented people
2. They help in the discovery of future as well as current
prices
3. They catalyze entrepreneurial activity
4. They increase the volume traded in markets because of
participation of risk averse people in greater numbers
5. They increase savings and investment in the long run

5. Evolution of derivatives
• The first step towards introduction of derivatives trading
in India was the promulgation of the Securities Laws
Amendment Ordinance, 1995, which withdrew the
prohibition on options in securities. The market for
derivatives, however, did not take off, as there was no
regulatory framework to govern trading of derivatives.
SEBI set up a 24–member committee under the
Chairmanship of 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 pre–conditions for
introduction of derivatives trading in India.

6. Derivatives trading commenced in India in
June 2000 after SEBI granted the final
approval to this effect in May 2001. SEBI
permitted the derivative segments of two
stock exchanges, NSE and BSE, and their
clearing house/corporation to commence
trading and settlement in approved
derivatives contracts. To begin with, SEBI
approved trading in index futures contracts
based on S&P CNX Nifty and BSE–
30(Sensex) index. This was followed by
approval for trading in options based on
these two indexes and options on individual
securities.

7. Derivatives in India
Date Progress
14 December 1995 NSE asked SEBI for permission to trade index futures.
18 November 1996 SEBI setup L. C. Gupta Committee to draft a policy framework for index futures.
11 May 1998 L. C. Gupta Committee submitted report.
7 July 1999 RBI gave permission for OTC forward rate agreements (FRAs) and interest rate swaps
24 May 2000 SIMEX chose Nifty for trading futures and options on an Indian index.
25 May 2000 SEBI gave permission to NSE and BSE to do index futures trading.
9 June 2000 Trading of BSE Sensex futures commenced at BSE.
12 June 2000 Trading of Nifty futures commenced at NSE.
31 August 2000 Trading of futures and options on Nifty to commence at SIMEX.
June 2001 Trading of Equity Index Options at NSE
July 2001 Trading of Stock Options at NSE
November 9, 2002 Trading of Single Stock futures at BSE
June 2003 Trading of Interest Rate Futures at NSE
September 13, 2004 Weekly Options at BSE

8. January 1, 2008 Trading of Chhota(Mini) Sensex at BSE
January 1, 2008 Trading of Mini Index Futures & Options at NSE
August 29,2008 Trading of Currency Futures at NSE
October 2,2008 Trading of Currency Futures at BSE

9. Features of Derivative
• Relates future contract between two
parties
• The value which derived from the value of
other underlying assets.
• The counter parties have specified
obligations.
• Derivatives contract can be undertaken
directly between the two parties or through
the particular exchange.
• The underlying transaction are settled
through offsetting positions in themselves.

10. Classification of Derivatives
Commodity Financial
Basic
Complex Instrument
(Exotic, Swaptions and LEAPS etc.)
Forward Futures Options Swaps
DERIVATIVES

11. Forward Contract
• A customized contract between two parties
to buy or sell an asset at a certain time in
the future for a certain price . It is traded in
OTC market.
• Ege, An Indian company buys Automobile
parts from USA with payment of one million
dollar due in 90 days. The importer is short
of dollar, so it owes dollars for future
delivery. Suppose present price of dollar is
Rs.48. Over the next 90 days dollar might
rise against Rs.48. The importer can hedge

12. Continued……
This exchange risk by negotiating a 90 days
forward contract with a bank at a price
Rs.50. According to 90 days forward
contract the bank will give importer one
million dollar and importer will give the bank
50 million rupees hedging a future payment
with forward contract. On the due date
importer will make a payment of Rs.50
million to bank & bank will pay one million
dollar to importer, whatever rate of dollar is
after 90 days.

13. Features of Forward contract
• These are bilateral contract & are exposed to
counter party risk.
• Contract are custom designed , unique in terms
of contract size, expiration date,the asset type,
quality
• A party will take long position to buy the asset
at a specified future date & the other party
assumes a short position to sell the same asset
at the same date for the same specified price.
• Specifies the future date at which the delivery &
payment is to be made.

14. Continued….
• The Forward contract has to be settled by
delivery of the asset on expiration date.
• It is very popular for foreign exchange
market as well as interest rate bearing
instruments.

15. Classification of forward contract
• Hedge Contracts
• Transferable specific delivery contract
• Non transferable specific delivery contracts

16. Future Contract
• It is an agreement between two parties to
buy or sell a specified quantity of an asset
at a specified price & at a specified time &
place(stock Exchange).
• Exp. A silver manufacturer expects to
have about 20,000 ounces of silver ready
in next two months. The current price of
silver on may 10 is 1052 per ounce & july
futures price is Rs1068 per ounce, which
he believes to be satisfied price. But he
fears that prices in future may go down.

17. Continued…..
So he will enter in to a future contract at
MCX where each contract is of 5000 ounces
at Rs.1068 for delivery in July.
Features:
1.Standardization
2. Clearing house
3.Settlement price
4. Daily settlement & Margin
5.Tick Size( Minimum Price Movement)
6.Cash Settlement 7.Delivery 8.Regulation

18. Types of future contract
• Interest Rate Futures Interest bearing
securities like TBs, Notes,
Bonds,Debentures,
• Foreign Currency Futures- Exchange rate
Futures
• Stock Index futures-Stock Market Indices
like Dow jones Industrial average, S&P
500, New York Stock Exchange
• Bond index futures
• Cost of living index futures- like consumer
price index, Wholesale index price

19. Option Contracts
A contract between two parties whereby one
party obtains the right, but not the obligation
, to buy or sell a particular asset, at a
specified price , on or before a specified
date. The person who acquires the right is
known as the option buyer or option holder,
while the other person who confers the right
is known as option seller or option writer.The
seller of the option for giving such option to
the buyer charges an amount which is
known as the option premium.
CALL & PUT OPTION

20. Swap Contracts
It is an agreement between two counter
parties to exchange cash flows in the future.
Under this agreement , dated when the cash
flows are to be paid, the currency in which to
be paid & the mode of payment are
determined & finalized by the parties.
It may be interest rate swap & currency
swap.

21. The participants in a derivatives market
• Hedgers use futures or options markets to reduce or
eliminate the risk associated with price of an asset.
• Speculators use futures and options contracts to get
extra leverage in betting on future movements in the
price of an asset. They can increase both the potential
gains and potential losses by usage of derivatives in a
speculative venture.
• Arbitrageurs are in business to take advantage of a
discrepancy between prices in two different markets.
• Spreaders Spreading is a specific trading activity in
which offsetting futures position is involved by creating
almost net position. So the spreaders believe in lower
expected return but at the less risk

22. Derivatives Products Traded in Derivatives
Segment of BSE
• Index Futures- Sensex June 9,2000
• Index Options- Sensex June 1,2001
• Stock Option on 109 Stocks July 9, 2001
• Stock futures on 109 Stocks November 9,2002
• Weekly Option on 4 Stocks September 13,2004
• Chhota (mini) SENSEX January 1, 2008
• Futures & Options on Sectoral indices namely BSE
TECK, BSE FMCG, BSE Metal, BSE Bankex and BSE
Oil & Gas. N.A.
• Currency Futures on US Dollar Rupee October
1,2008

23. Derivatives Products Traded in Derivatives
Segment of NSE
• Index Futures- S&P CNX Nifty June 12,2000
• Index Options- S&P CNX Nifty June 4,2001
• Stock Option on 233 Stocks July 2, 2001
• Stock futures on 233 Stocks November 9,2001
• Interest Rate Futures- T – Bills and 10 Years Bond June 23,2003
• CNX IT Futures & Options August 29,2003
• Bank Nifty Futures & Options June 13,2005
• CNX Nifty Junior Futures & Options June 1,2007
• CNX 100 Futures & Options June 1,2007
• Nifty Midcap 50 Futures & Options October 5,2007
• Mini index Futures & Options - S&P CNX Nifty index January 1, 2008
• long Term Option contracts on S&P CNX Nifty Index March 3,2008
• Currency Futures on US Dollar Rupee August 29,2008
• S& P CNX Defty Futures & Options

24. NSE Derivatives Segment
Turnover ( Rs crores)

25. NSE Cash & Derivatives Segment
Turnover ( Rs crores)

26. Number of contract Traded at NSE
Derivatives Segment

27. BSE Derivatives Segment Turnover

28. Number of Contract Traded at BSE
Derivatives Segment

29. BSE Cash & Derivatives Segment
Turnover

30. Structure of derivative market
Derivatives
Financial Commodities
Regulated by Regulated by
Stock f Index
Equity Future
RBISEBI
Index
Forward market
commission
Stock opt
Carry forward
OTC
Currencies F Interest Rate
Option Forward
S.Term L.Term
Stock exchange

31. Summary and Concluding
• 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.

32. Forward & Future Contract
• It is private bilateral
Contract
• Not standardized
• Normally on specific
delivery date
• Settled at the end of
maturity. No cash
exchange prior to
delivery date.
• More than 90% of all
forward contract are
settled by actual
• Traded on Organized
stock exchanges
• Standardized
Contracts
• Range of delivery
dates
• Daily settled & P/L are
paid in cash
• Not more than 5%
contracts are settled
by delivery

33. Continued…..
• Delivery of final cash
settlement takes place
• Usually no margin
money required
• Cost of forward
contracts based on
bid-ask spread
• There is credit risk for
each party. credit limits
must be set for each
consumer.
• Contracts normally
closed out prior to the
delivery
• Margins are required
of all the participants
• Entail brokerage fee
for buy & sell orders
• The exchange’s
clearing house
becomes the opposite
side to each futures
contract to reduce
credit risk