The document discusses financial derivatives in India. It notes that derivatives originated from forward contracts related to agricultural commodities and were initially used to hedge risks. It describes the different types of derivatives including forwards, futures, options, and swaps. It outlines the major players in derivatives markets as hedgers, arbitrageurs, and speculators. It then provides an overview of the development of India's derivatives market, noting it began in 2000 and is now the largest in the world in terms of futures trading volume, dominated by index derivatives. The document closes by cautioning that derivatives markets are highly leveraged, a zero-sum game, and most individual traders lose money.

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Financial Derivatives in India
Karthikeyan Jawahar, CFPCM
Director – Research & Consulting
Finerva Financial Solutions Pvt Ltd

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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

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How Derivatives?
• Options Payoff Charts
Expectation – Share Price
will GO DOWN
Expectation – Share
Price will GO UP
Profit / Loss Line
Target (Exercise) Price

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Dominant types
• Forwards
• Futures
• Options
• Swaps
– All the others are combinations or modifications
of the above.

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Types of Players
• Hedgers
• Arbitrageurs
• Speculators

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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

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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

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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

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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

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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.

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Questions and Sharings
• Thank You
• Mail for further queries to
– Karthikeyan Jawahar
– karthiK@finerva.com

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