Company 3 Stock Market1

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PROJECT ReportON

“ A Case Study of Financial Innovations in

Indian Stock Market (with Special reference

to Financial Derivatives)

SUBMITTED TO:-Kurukshetra University, Kurukshetra

IN PARTIAL FULFILLMENT OF THE REQUIREMENT

For the degree of

MASTER OF BUSINESS ADMINISTRATION

(M.B.A.

(SESSION !""#-!""$

U%der the &'d)%*e Of: S'+,tted B:

Mr. R)%eet /er,) AS0AFaculty, MBA MBA – Final Year N.C.C.E.,Israna ROLL NO. : MBA/04/00


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ACKNOWLEDGEMENT

Preservation, inspiration and motivation have always played a key role in

the success of any venture. In the present world of competition and success

project is like a bridge between theoretical and practical working.

It is a great pleasure to present here the opportunity to express myheartfelt thanks to everybody who helped me through the successful completionof the dissertation.

I express my sincerest regards and deep sense of gratitude to Ms. Puja

Mann (!",M.#.$. "epartment, %.&.&ollege of 'ngineering,Israna(Panipat

who gave me an opportunity to work on such a challenging topic.

It gives me great pleasure to acknowledge. Mr. )alit $sija (faculty,

%.&.&ollege of 'ngineering,Israna(Panipat for his inspiring guidance which

helped me a lot in selecting this project and working on it.

I am also thankful to the staff of %.&.&ollege of

'ngineering,Israna(Panipat for their keen suggestions from time to time.

)ast but not the least my sincere thanks to my parents and friends who

helped me to bring this project in a final shape


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ASHA


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INDEX

CHAPTERS* INTRODUCTION

2 JUSTIFICATION OF THE TOPIC

3 REVIEW OF EXISTING LITERATURE

4 OBJECTIVES OF THE STUDY

5 RESEARCH METHODOLOGY

6 FINANCIAL INNOVATIONS

7 FINDINGS AND CONCLUSION

8 SUGGESTIONS

CONSTRAINTS OF THE STUDY

!" BIBLIOGRAPHY


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EXECUTIVE SUMMARY

Practical training constitutes an integral part of the management

studies. +raining gives an opportunity to the students to expose

themselves to the industrial environment, which is uite different from the

classroom teaching. +he practical knowledge is an important suffix to the

theoretical knowledge. I consider myself lucky to get mytopic of the report

which is #$%%&'()$&%* $% I%+$(% *)&,- .(/-0) 1$) *0,$( /00/0%,0

)& $%(%,$( +0/$'()$'0* . It really helped me to get a practical insight

into the actual business environment and provide me an opportunity to

make my financial management concepts more clear.

+he main objective of the study is to analy-e the Indian derivative

market.+he study conducted by me has also some other objectives such

as giving new suggestions for the improvement of existing system speed

etc.

+he conclusions of the study are people have less awareness

about derivatives and +he !+& derivatives markets have witnessed sharp

growth over the last few years. .


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CHAPTER !

INTRODUCTION


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INTRODUCTION

+he emergence of the market for derivative products, most notably

forwards, futures and options can be traced back to the willingness of riskaverse

economic agents to guard themselves against uncertainties arising out of

fluctuations in asset prices.

/inancial markets are, by nature, extremely volatile and hence, the risk

factor is an important concern for financial agents. +o reduce the risk, the

concept of derivatives comes into picture.

DERIVATION OF DERIVATIVES

"erivatives in the form of forwards and options have been around as long

as there has been commerce because all commerce involves business risk. +he

history of derivatives can be traced far back to renaissance period (*0 th &entury

where the 1enetian spice traders waiting a cargo on high seas would enter into a

forward contract./orward contracts are also traced in 2apanese and $merican

markets for hundreds of years ago. +he /utures trading on the commodities first

started in &hicago way back in *345. #ut the explosion of derivative markets in

the form we see today can be attributed to volatility in the foreign exchange rates

created due to collapse of #reton 6oods system. ($ system whereby all the

exchange rates were pegged to 789 whereas there was fixed parity between

789 and :old. It led to the introduction of the forward contracts in the foreign


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currency by *;4s?

also led to the introduction of few more derivative products vi-. currency swaps,

interest rate swaps, index futures and options, etc.

In India, the ).&.:upta &ommittee was appointed in *;;@ to develop

appropriate regulatory framework for the euitybased derivatives trading. It

submitted its report in *;;3, which was later approved by 8'#I. It has suggested

introducing derivative products in a phased manner starting with Index /utures

followed by Index !ptions and !ptions on shares. Pursuant to the same, Index

/utures were introduced in India in 2une >> at #ombay 8tock 'xchange and

%ational 8tock 'xchange, "elhi 8tock 'xchange has indicated to join them

shortly.

F$%(%,$( D0/$'()$'0* have been in existence in the markets for over *0>

years A in fact the first reference to some form of the modern day. /inancial

"erivative is found in the /utures markets that were function in &hicago in the

*30>?s. !ver the years a more formali-ed structure came into place A the most

significant fillip in this regard was the seminal work of /isher #lack and Myron

8choles in *;4=. 8ince then, the development of /inancial "erivatives and its

extensive use in the financial sector has been synonymous with the stupendous

growth in the financial sector itself. +he *;3>?s and the *;;>?s saw tremendous

growth in the /inancial 8ector and a lot of it was directly fuelled by the growth

and development of the use of derivatives in this area.

+he liberali-ation in the Indian /inancial 8ector started more than a decade

back. #ut it is only now that the Beserve #ank of India is looking at allowing the


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use of derivatives in the market in a wide scale. +hough derivatives in the euity

market were permitted in >*, the currency and the interest rate sectors of the

financial sector in India were kept immune for the use of derivatives. +he only

derivative that was allowed in the money market segment of the financial sector

was 8waps and with a casebycase approval from B#I some backtoback

foreign currency option deals. owever, B#I is now keen to open up the

segment and allow for options on both currency (the Indian Bupee as well as the

interest rate applicable in the Indian markets. In view of this, the traders of banks

and financial institutions as well as corporate need to be aware of these

techniues for both investment as well as risk management functionsC especially

given the highly volatile nature of the industry.

FINANCIAL DERIVATIVES

$ derivative is a financial instrument whose value is derived from the price

of a more basic asset called the underlying. +he underlying may not necessarily

be a tradable product. 'xamples of underlying are shares, commodities,

currencies, credits, stock market indices, weather temperatures, sunshine,

results of sport matches, wind speed and so on. #asically, anything which may

have to a certain degree an unpredictable effect on any business activity can be

considered as an underlying of a certain derivative.

$ll derivatives can be divided into two big classes.

*. )inear


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L$%0(/ are derivatives whose values depend linearly on the underlying?s

value. +his includesD

• /orwards and /utures

• 8waps

N&%$%0(/ are derivatives whose value is a nonlinear function of the

underlying. +his includesD

• !ptions

• &onvertibles

• 'uity )inked #onds

• Beinsurances

THE NEED FOR A DERIVATIVES MAR9ET:

+he derivatives market performs a number of economic functionsD

*. +hey help in transferring risk from risk averse people to risk

oriented people.


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THE PARTICIPANTS IN A DERIVATIVES MAR9ET:

•

H0+;0/* use futures or options markets to reduce or eliminatethe risk associated with price of an asset.

• S0,


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• A/=$)/(;0


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FORWARDS: $ forward contract is a customi-ed contract between two

entities, where settlement takes place on a specific date in the future at today?s

preagreed price.

FUTURES: $ futures contract is an agreement between two parties to buy or

sell an asset at a certain time in the future at a certain price. /utures contracts

are special types of forward contracts in the sense that the former are

standardi-ed exchangetraded contracts.?

OPTIONS: !ptions are of two types A calls and puts. &alls give the buyer the

right but not the obligation to buy a given uantity of the underlying asset, at a

given price on or before a given future date. Puts give the buyer the right, but not

the obligation to sell a given uantity of the underlying asset at a given price on

or before a given date.

WARRANTS: !ptions generally have lives of upto one year, the majority of

options traded on options exchanges having a maximum maturity of nine months.

)ongerdated options are called warrants and are generally traded overthe

counter.


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LEAPS: +he acronym )'$P8 means )ong+erm 'uity $nticipation 8ecurities.

+hese are options having a maturity of upto three years.

BAS9ETS: #asket options are options on portfolios of underlying assets. +he

underlying asset is usually a moving average or a basket of assets. 'uity index

options are a form of basket options.

SWAPS: 8waps are private agreements between two parties to exchange cash

flows in the future according to a prearranged formula. +hey can be regarded as

portfolios of forward contracts. +he two commonly used swaps areD

• INTEREST RATE SWAPS: +hese entail swapping only the interest

related cash flows between the parties in the same currency.

• CURRENCY SWAPS: +hese entail swapping both principal and

interest between the parties, with the cash flows in one direction

being in a different currency than those in the opposite direction.

SWAPTIONS: 8waptions are options to buy or sell a swap that will become

operative at the expiry of the options. +hus a swaption is an option on a forward

swap. Bather than have calls and puts, the swaptions market has receiver

swaptions and payer swaptions. $ receiver swaption is an option to receive fixed

and pay floating. $ payer swaption is an option to pay fixed and receive floating.


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T0 &&1$%; (,)&/* ('0 ;0%0/(> =00% $+0%)$$0+ (* )0 .(?&/

+/$'$%; &/,0 =0$%+ ;/&1) & $%(%,$( +0/$'()$'0*:

*. Increased volatility in asset prices in financial markets.


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S0,&%+@ the derivatives market helps to transfer risks from those who have

them but may not like them to those who have appetite for them.

T$/+, derivatives, due to their inherent nature, are linked to the underlying cash

markets. 6ith the introduction of derivatives, the underlying market witnesses

higher trading volumes because of participation by more players who would not

otherwise participate for lack of an arrangement to transfer risk.

F&


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CHAPTER2

JUSTIFICATION OF THETOPIC


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JUSTIFICATION OF THE TOPIC

"erivatives are risk shifting devices. Initially they were used to reduce

exposure to changes in exchange rates, interest rates, or the stock indexes.

More recently, derivatives have been used to segregate categories of investment

risk that may appeal to different investment categories used by mutual fund

managers, corporate treasurers or pension fund administrators. +hese

investment managers may decide that it is more beneficial to assume a specific

EriskF characteristic of a security.

/or instance, several derivative products may be created based on debt

securities that represent an interest in a pool of residential home mortgages.

!ne derivatives product may provide that the purchaser receives only the

principal payments. +hese derivatives products, which react differently to

movements in interests? rates, may have specific appeal to different investment

strategies employed by the investment manager.

+he financial markets increasingly have become subject to greater

E8avingsF in the interest rate movements than in past decades. $s a result

financial derivatives have appealed to corporate treasurer who wish to take

advantage of favourable interest rate in the management of corporate debt

without the expenses of issuing new debt securities.


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:lobali-ation and liberali-ation process has changed the pace of

economic development of many developing countries like India. !ne of the

uniue features of globali-ations and liberali-ation is that, innovations have taken

place in the different areas of financial system. Product innovation is one of

them. $long with the economic development, risk in the financial system is

increasing at the same pace, to manage these risks the innovation of new

products like "erivatives is not a mater of surprise.

/inancial "erivatives are used by various organi-ations to manage

different categories of risks i.e. interest rate risk, foreign exchange risk and credit

risk.

+he present study is undertaken to view about the various derivative

products that have entered in Indian stock market in 2une >> with the

introduction of Index features on #8'. )ater on in mid >* stock features and

stock options were introduced on =* which later on increased to 0=.

In >< 2uly %8' launched interest rate futures. Becently %8' and #8'

announced the introduction of various new products in "erivatives segment. +he

study has great relevance in the light that growth in the derivatives volume is

exponential in India. +he above text justifies the selection of research proposal

on the topic.


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CHAPTER-3

REVIEW OF EXISTING LITERATURE


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REVIEW OF EXISTING LITERATURE

+here is wide existing literature available on financial derivatives which

contains information about various aspects of financial derivatives. /ew of them

are listed belowD

G R0(*&% F0= 2""4 C(((% 9((

In defense of derivativesD #etween 'nron, world com and global crossing,

the controversial financial instruments have gotten a bad rap ereHs the truth.

G I%+$(% D0/$'()$'0 M(/-0): S)/


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CHAPTER4

OBJECTIVES OF THE STUDY


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OBJECTIVES OF STUDY

+he present study will encompass following objectivesD

* +o study the nature, types and features of these products on %8' and

#8'.


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CHAPTER-5

RESEARCH METHODOLOGY


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RESEARCH METHODOLOGY

Besearch comprises defining and redefining the problems, formulating

hypothesis or suggested solutions, collecting, organi-ing and evaluating data and

reaching conclusions.

+he +erm JBesearch MethodologyJ here comprises of all research

activities carried in connection with J/inancial derivatives in IndiaJ. +he basic

purpose of the Besearch Methodology is to describe research procedure. It

helps the researcher to give the reason for adopting certain line of action while

ruling out the other.

R0*0(/, P/&=0.:

+he research studies the Jfinancial innovations in Indian stock MarketJ.

+he research tries to find out the innovations in the field of financial derivatives.

R0*0(/, D0*$;%:

+he research is descriptive research. +he research describes the problem

and tends to study each and every aspect relating to derivatives.


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DATA COLLECTION:

"ata can be classified intoD

a Primary "ata

b 8econdary "ata

In this project main source of data is secondary data. +he data useful for

the project has been collected from various sources likeD journals, maga-ines,

newspapers, books and internet.

D()( A%(>*$*:

+he data relating to the growth and volumes of derivatives have been

analy-ed using charts and tables.

S,&0 & )0 S):

+o know about the innovations which has taken place in stock market,

particularly in financial derivatives.

+o study the future development of "erivative segment in India.

+o 8tudy the performance of derivative products in stock market.


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CHAPTER6

FINANCIAL INNOVATIONS


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FINANCIAL INNOVATIONS

DEVELOPMENT OF DERIVATIVE MAR9ET IN INDIA:

+he first step towards introduction of derivatives trading in India was the

promulgation of the 8ecurities )aws ($mendment !rdinance, *;;0, which

withdrew the prohibition on options in securities. +he market for derivatives,

however, did not take off, as there was no regulatory framework to govern trading

of derivatives. 8'#I set up a


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also made it clear that derivatives shall be legal and valid only if such contracts

are traded on a recogni-ed stock exchange, thus precluding !+& derivatives.

+he government also rescinded in March >>, the three decade old notification,

which prohibited forward trading in securities.

"erivatives trading commenced in India in 2une >> after 8'#I granted

the final approval to this effect in May >*, 8'#I permitted the derivative

segments of two stock exchanges, %8' and #8', and their clearing

houseLcorporation to commence trading and settlement in approved derivatives

contracts. +o begin with, 8'#I approved trading in index futures contracts based

on 8P &%N %ifty and #8'=> (8ensex index. +his was followed by approval

for trading in options based on these two indexes and options on individual

securities.

+he trading in #8' 8ensex options commenced on 2une 5, >* and the

trading in options on individual securities commenced in 2uly >*. /utures

contracts on individual stocks were launched in %ovember >*. +he derivatives

trading on %8' commenced with 8P &%N %ifty Index future on 2une *>.

+he trading in index options commenced on 2une 5, >* and trading in options

on individuals securities commenced on 2uly *. 8ingle stock futures were

launched on %ovember ;, >*. +he index futures and options contract on %8'

are based on 8P &%N.


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+rading and settlement in derivative contracts is done in accordance with

the rules, byelaws, and regulations of the respective exchanges and their

clearing houseLcorporation duly approved by 8'#I and notified in the official

ga-ette. /oreign Institutional Investors (/IIs are permitted to trade in all

'xchange traded derivative products.

+he following are some observations based on the trading statistics

provided in the %8' report on the futures and options (/!D

• 8inglestock futures continue to account for a si-able proportion of the /!

segment. It constituted 4> per cent of the total turnover during 2une, >


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• Put volumes in the index options and euity options segment have increased

since 2anuary >


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DERIVATIVES IN INDIA: A CHRONOLOGY

D(> M&%)

Y0(/ E'0%)

*5 "ecember *;;0 %8' asked 8'#I for permission to trade

index futures*3 %ovember *;;@ 8'#I setup ).&.:upta &ommittee to draft a

policy framework for index futures** May *;;3 ).&.:upta &ommittee submitted report4 2uly *;;; B#I gave permission for !+& forward rate

agreements (/B$s and interest rate swaps> 8IM'N chose %ifty for trading futures and

options on an Indian index> 8'#I gave permission to %8' and #8' to

do index futures trading; 2une >> +rading of #8' 8ensex futures

commenced at #8'*< 2une >> +rading of %ifty futures commenced at %8'=* $ugust >> +rading of futures and options on %ifty to

commence at 8IM'N

T0 SCF /0,&..0%+0+ &&1$%; .0(*


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prescribing necessary preconditions which should be adopted before the

introduction of derivatives.


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4. +here is an urgent need to prescribe pronounced accounting standards in

the case of investorsL dealers and also back office standards for

intermediaries with a view to reducing the possibility of concealing the loss

and perpetrating the frauds by companiesL intermediaries to a minimum.

Institute of &hartered $ccountants of India, in consultation with the stock

exchanges, should formulate suitable accounting standard and 8'#I

should prescribe the same before trading in derivatives is commenced.

G/&, the :overnment lifted the three

decade old prohibition on forward trading in securities by rescinding *;@;


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notification. +his prohibition was imposed by :overnment in exercise of its

powers under section *@ of the 8& ( B $ by a notification issued on 2une


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conditions for registration, payment of fees by trading and clearing members of

derivative segment or clearing house.

&urrently, /IIs do not pay any margins in the cash market and bring in

funds only for transactions in euities. In derivatives trading, however, all

investors, including /IIs, have to bring in upfront margins. +he igh )evel

&ommittee on &apital markets favoured /IIs to bring in funds in advance to meet

their margin reuirements for trading in euity derivatives.

A/&'( & D0/$'()$'0* T/(+$%;:

8'#I granted final approval to the "erivative 8egment of the %8' and

#8' and their clearing houseLcorporation for commencement of trading and

settlement in 8'#Iapproved derivative contracts, which included only Index

/utures contracts to begin with. +he approval was granted for trading in futures

contracts based on 8P &%N %ifty Index and on #8'=> (8ensex Index.

+rading and settlement in derivative contracts would be in accordance with the

rules, byelaws, and regulations of the respective exchanges and their clearing

houseL corporation duly approved by 8'#I and notified in the official ga-ette.

N01 D0/$'()$'0 P/&+


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positions of each individual client in various index futures and index options

contracts. +o cover the risk arising out of change in the value of index as well as

index volatility, margining system would have the ability to compute the worst

case loss under various scenarios of index and volatility changes and charge

margins accordingly. Position limits mandated for future market would also apply

to index options. $ny short positions on options would be subject to stringent

margining. !ptions on index would have maximum maturity of three months with

minimum of three strikes (in the money, near the money and out of the money.

DERIVATIVES MAR9ET AT NSE:

+he derivatives trading on the 'xchange commenced with 8P &%N %ifty

Index futures on 2une *>. +he futures contract on %8' is based on 8P

&%N %ifty Index. &urrently, it has a maximum of =month expiration cycle. +hree

contracts are available for trading, with * month, < months and = months expiry.

$ new contract is introduced on the next trading day following the expiry of the

near month contract. 1arious conditions like, :oodtill "ay, :oodtill&ancelled,

:oodtillate, Immediate or &ancel, 8top loss, etc. can be built into an order. +he

salient features of 8P Index /utures &ontract are presented in +able *.

T(=0 !:C&%)/(,) S0,$$,()$&% &/ SP CNX N$)> I%+0 F


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&ontract 8i-e > or multiples thereof Price 8teps Bs.>.>0Price #ands %ot applicable'xpiration Months = near months

+rading &ycle $ maximum of three month trading

cycleLthe near month (one, the next

month (two and the far month (three.

%ew contract is introduced on the next

trading day following the expiry of near

month contract)ast +radingL'xpiry "ay +he last +hursday of the month or the

preceding trading day, if last +hursday is a

holiday8ettlement In cash on +* basis/inal 8ettlement Price &losing of futures contract8ettlement "ay )ast trading day

+rading ours ;.00 am to =.=> pmMargins 7pfront initial margin on daily basis

!n the last day, the futures closing price for each %ifty index futures contract is

computed by taking the weighted average price for the last half an hourHs trade.

+he trade details of the Index futures market of %8' from 2une to

8eptember >> are presented in +able > is presented in &hart .


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T/(+0 D0)($* & N$)> F


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&lose 1alueG

+urnover

(Bs.&rore

!pen

InterestG(%o.

of &ontracts

*=;

.@*

*45

*5*>

*.44

*@

S0)0.=0/

2"""

&lose 1alueG

+urnover

(Bs.&rore

!pen

InterestG(%o.

of &ontracts

*0

3>.@3

0*

*.>>

>.>=

*

G $s at end of the month or date of expiry of the contract

T/(+$%; M0,(%$*.:

+he /utures and !ptions trading system of %8', called %'$+/! trading

system, provides a fully automated screenbased trading for 8P &%N %ifty


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futures on a nationwide basis and an online monitoring and surveillance

mechanism. It supports an order driven market and provides complete

transparency of trading operations. It is similar to that of trading of euities in the

&M segment.

+he %'$+/! trading system is accessed by two types of users. +he

+rading Members Q have access to functions such as, order entry, order

matching, order and trade management. +he &learing Members (&M use the

trader workstation for the purpose of monitoring the trading member (s for whom

they clear the trades. $dditionally, they can enter and set limits to positions,

which a trading member can take.

C(/;0*

+he maximum brokerage chargeable by a trading member in relation to

trades affected in the contracts admitted to dealing on the derivatives segment of

the 'xchange is fixed at .>>>.+he trading

members contribute to Investor Protection /und of derivatives segment at the

rate of Bs.*> per crore of turnover (>.>>>*R (each side.


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B(*-0) T/(+$%; F(,$$)> $% D0/$'()$'0* S0;.0%):

In order to provide a facility for easy arbitrage between futures and cash

markets, %8' introduced baskettrading facility. +his enables generation of

portfolio offline order files in the derivatives trading system and its execution in

the cash segment. $ trading member can buy or sell a portfolio through a single

order, once he determines its si-e. +he system automatically works out the

uantity of each security to be bought or sold in proportion to their weights in the

portfolio.

INSTRUMENTS AVAILABLE IN INDIA

F$%(%,$( +0/$'()$'0 $%*)/


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'xpiry "ay )ast +hursday of the expiry month

8ame asindex futures


8ame as indexfutures

&ontract8i-e

Permitted lot si-eis> multiples

thereof


$s stipulatedby%8' (not less

+han Bs.


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%8&&) undertakes clearing and settlement of all deals executed on the

%8'Hs derivatives segment. It acts as legal counterparty to all deals on the

derivative segment and guarantees settlement.

T>0* & C0(/$%; M0.=0/*:

In the derivatives segment, %8&&) has admitted &learing Members

(&Ms distinct from +rading Members (+Ms, Primarily, a &M undertakes clearing

for all his +Ms, performs actual settlement and undertakes risk management.

+here are two types of clearing membersD

• T/(+$%; M0.=0/ C0(/$%; M0.=0/ TMCM $ &M who is also a +M, +M

&M may clear and settle his own proprietary trades and clientsH trades as well

as clear and settle for other +Ms

• P/&0**$&%( C0(/$%; M0.=0/ PCM $ &M who is not a +M. +ypically

banks or custodians could become a P&M and clear and settle for +Ms.

+his is in line with the


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%ifty index futures contracts are cash settled, i.e., through exchange of cash

differences in value. 8ettlement is done on a daily basis by marking to market all

open positions on the basis of the daily settlement price. Members are reuired

to pay the mark to market losses by +* day and the same is, in turn, paid to the

members who have made a profit. +he contracts are finally settled on expiry of

the %ifty index futures contract, when %8&&) marks the open positions of a &M

to the closing price of the underlying index and resulting profitLloss is settled in

cash.

R$*- M(%(;0.0%) S>*)0.:

+he salient features of risk containment measures on the derivatives

segment areD

• !nly a member on the &M segment can take membership on the "erivatives

segment. $ member is reuired to comply with the following capital adeuacy

normsD (in Bs. )akh


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R0> =>> *>> =>>Interest /ree 8ecurity"eposit

3 ==G

&ollateral 8ecurity"eposit


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• &Ms are provided a +rading +erminal for the purpose of monitoring the open

positions of all the +Ms clearing and settling through them. $ &M may set

exposure limits for a +M clearing and settling through him. %8&&) assist the

&M to monitor the intraday exposure limits set up a &M and whenever a +M

exceeds the limits, it withdraws the facility provided to such +M.

• $ separate settlement guarantee fund for this segment has been created out

of the capital deposited by the members with %8&&).

T(=03: B


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>*/eb

>*Mar

>*$pr

>*May

>*2un

>*2ul

>*$ug

>*8ep

>*!ct

>*%ov

>*"ec

>0


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"erivatives trading at #8' commenced with #8' 8ensex futures on 2une ;,

>>. +he salient features of #8' 8ensex /utures contract are presented in

+able 5. +he trade details of the index futures market of #8' from 2une to

8eptember are presented .

Table-4: Contract Sec!"!cat!on "or Sen#e$ In%e$ F&t&re#

Item 8pecification8ecurity 8ymbol

7nderlying 7nit

&ontract 8i-e

+ick 8i-e

MinimumPrice

/luctuation

Price #ands

'xpiration Months

+rading &ycle

)ast +radingL'xpiry

"ay

8ettlement/inal 8ettlement Price

"aily 8ettlement Price

8ettlement "ay

+rading ours

#8N

#8' 8ensitive Index

0> or multiples thereof

>.*

Bs.0

%ot applicable

= near months

$ maximum of three month trading cyclethe near

month(one, the next month(two and the far month

(three. %ew contract is introduced on the next

trading day following the expiry of near month

contract

)ast +hursday of the month or the preceding trading

day, if last +hursday is a holiday.

In cash on +* basisIndex closing price on the last trading day*

6eighted average price of trades during the day.

)ast trading day

8ame as in cash market.


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Margins 7pfront initial margin on daily basis* !n the last day, the futures closing price of each #8' 8ensex futures contract

is calculated bsed on * price points of the cash 8ensex values during last half

an hour of trading. +he highest and lowest points are ignored and the closing

price is computed at an average of remaining 3> points.

D0/$'()$'0* V&


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M&%)

D0)($*

C&%)/(,) E$/$%; &%

2

J


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C&%)/(,)*

A


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G$s at end of the month or date of expiry of the contract


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N$)> 0 on $ugust *3,

>>, the si-e of each futures contract is about 78 9


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risks and ensure orderly development of derivatives market, the Beserve #ank

issued guidelines on Interest Bate 8waps (IB8 and /orward Bate $greements

(/B$s in 2uly *;;;. Participants undertaking /B$sLIB8 were reuired to ensure

that appropriate infrastructure, risk management and internal control systems,

whereby a clear functional separation of trading, settlement, monitoring, control

and accounting activities is provided, are in place before they undertake such

activities. +he Midterm Beview of Monetary and &redit Policy for *;;;>>

announced the decision to permit M/s, in addition to corporates, to undertake

/B$sLIB8 with banks, P"s and financial institutions for hedging their balance

sheet risks. +he outstanding notional principal of /B$sL IB8s contracts

amounted to Bs.5,, >>, which rose to Bs.0,3=* crore

as on 2une =>, >>. +he tenor of deals generally ranged up to one year and

majority of the contracts used MI#!B as the benchmark rate. +he activity in this

segment of the market has, however, been limited on account of lack of

benchmark rates for longer maturities and large spreads in bidoffer rates.

/urther, the majority of the prospective participants are in the process of putting

in place adeuate internal control systems for undertaking /B$sLIB8s and asset

liability management system, which would facilitate identification of mismatches.

'ffective $pril >, the use of interest rates implied in the forex forward

market as a benchmark has been permitted in addition to the existing domestic

money and debt market rates.


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T


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+he table above on the derivatives market shows the continuing

northbound journey. +he turnover of >> scrips get traded on both the exchanges.


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C(* 'G* D0/$'()$'0* $% 2""2

> 0>> *>>> *0>>

2an,><

/eb.><

Mar,><

$pr,><

May,><

2un,><

2uly,><

$ug,><

8ept,><

!ct,><

%ov,><

"ec,><

T $ . 0 3 0 / $ & +

T


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+he last three months has seen a significant rise in the derivatives market

following the impressive results from infosys and 8atyam, discovery of gas by

Beliance and disinvestment news on #P&) P&).

+he market is, however, dominated by select scrips, infosys,

8atyam, Beliance, P&), #P&) and "igital accounted for nearly 4>R of the total

derivatives market. 8atyam accounts for nearly *0R of the daily turnover in

the derivatives market while infosys constitutes around *>*0R. Beliance makes

up for nearly ;R while P&), #P&) and "igital account for 0*>R of the

turnover on the derivatives market.

C&.(%> & )0 .(/-0)

)


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these developments. 6hile both exchangetraded and !+& derivative contracts

offer many benefits, the former have rigid structures compared to the latter. It

has been widely discussed that the highly leveraged institutions and their !+&

derivative positions were the main cause of turbulence in financial markets in

*;;3. +hese episodes of turbulence revealed the risks posed to market stability

originating in features of !+& derivative instruments and markets.

+he !+& derivatives markets have the following features compared to

exchangetraded derivativesD

*. +he management of counterparty (credit risk is decentrali-ed and

located within individual institutions.


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affected indirectly by national legal systems, banking supervision and

market surveillance.

C&.(/$*&% & )0 ,&*0 /$,0* & )0 NIFTY N0(/ M&%) F


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C&.(/()$'0 (%(>*$* & )0 T/(+0+ V(


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It may be observed that the traded value in the /! 8egment has increased

from Bs. *,4@,>>@ crores in $ugust >5 to Bs.0,

a growth of 0*R, while the &ash 8egment has grown by *0R during the same.

+here was a fall in total trading volumes during 2anuary >0 in both segments

due to lesser number of trading days. +he rate of fall in trading volume was

lesser in /! segment as compared to &ash segment.

+he /! segment has consistently seen trading volumes at < times that of the

&ash 8egment. "uring 2anuary >0 this increased to


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It is felt in some uarters that if the derivative contracts attract

stamp duty at existing rates, trading in index futures may be uneconomical. It is,

therefore, suggested that derivatives contracts may be exempted from stamp

duty. +he other view is that there should not be any discrimination between the

cash market and the futures market in terms of stamp duty. +he securities

transactions attract stamp duty at two stages, namely, at the time of entering into

the contract, i.e., on contract note and at the time of transfer of securities, i.e., on

transfer deed. +ransfer of securities in demat mode has recently been exempted

from stamp duty. In case of index futures, no transfer of securities is involved

and hence no stamp duty is payable. In case of futures on individual securities,

there will be no stamp duty on transfer, if it is in demat mode. +he contract notes

for confirmation of trades done in both cash segment and derivatives segment

would attract stamp duty. ence, securities transactions in cash segment as well

as derivatives segment would attract stamp duty. ence, securities transactions

in cash segment as well as derivatives segment would attract eual treatment in

terms of stamp duty. /urther, the rate of stamp duty on such contracts is not

prohibitively high. In respect of contract notes issued by brokers to clients in

"elhi, the stamp duty is applicable T fifteen paise for every Bs.*>,>>> or part

thereof of the value of the security subject to a maximum of Bs.*0. It is Be.* for

every Bs.*>,>>> or apart thereof of the value of the security, i.e., >.>*R in

Maharashtra. 8uch low rates of stamp duty on contract notes only may not have

any significant impact on derivative transactions. /urther, stamp duty on contract


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notes being a state subject, efforts to exempt such duty can virtually stall

derivatives trading.

T(()$&%:

+he incometax $ct does not have any specific provision regarding

taxability from derivatives. +he only provisions which have an indirect bearing on

derivative transactions are 8ections 4=(*> and 5=(0. 8ection 4=(* provides that

any loss, computed in respect of a speculative business carried on by the

assessee, shall not be set off except against profits and gains, if any, of

speculative business. In the absence of a specific provision, it is apprehended

that the derivatives contracts, particularly the index futures which are essentially

cashsettled, may be construed as speculative transactions and therefore the

losses, if any, will not be eligible for set off against other income of the assesse

and will be carried forward and set off against speculative income only up to a

maximum of eight years. $s a result an investorHs losses or profits out of

derivatives even though they are of hedging nature in real sense, are treated as

speculative and can be set off only against speculative income.

F&t&re Pro#ect#

$s we see it, the derivatives markets will overtake the cash market in the

future. 8'#I had announced that nearly 0>> scrips woud be added to the


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derivatives markets as against the existing =

could well turn out to be the year of the derivatives. +he derivatives turnover is

expected to see robust growth in coming months. +he retail investors, who have

not been active in the derivatives market are likely to participate more in the

derivatives market. +his will trigger more volumes and boost the derivatives

market. Moreover, /IIs domestic funds and even operators are expected to play

an active role in the derivatives market rather than the cash market.

If >bn in the coming years. &ash may be king but

the future lies in derivatives.

CHAPTER7


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FINDINGS AND CONCLUSIONS


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FINDINGS

* )ow awareness about derivatives among the people is the obstacle in the

way of success of financial derivatives in Indian 8tock Market.


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prefer to leave their positions unhedged rather than hedge every small

portion of their exposure.

4 +he !+& derivatives markets have witnessed sharp growth over the last

few years, which has accompanied the moderni-ation of commercial and

investment banking and globali-ation of financial activities.

3 !ptions and futures on individual stocks are viewed with apprehension

by many in India. It is their view that these are risky and prone to

manipulation.

CHAPTER-'


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SUGGESTIONS

SUGGESTIONS


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* igher institutional participation is important for the overall development of

both the exchange traded derivatives market and the spot market.


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4 /utures should be listed on individual stock. +hen futures are play on

mean prices. +he management of mean prices of a stock is less costly

and more efficient with direct access to futures on that stock than through

futures on a stock index.


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CHAPTER



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* T$.0 S(%:

Beport is prepared in a time span of < months, which was not sufficient.

$s for complete disection of a topic, one reuire ample time.


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CHAPTER-10

(I(LIOGRAPHY


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BIBLIOGRAPHY

BOO9S:

!ptions, futures and other derivatives A 2ohn &. ull

/utures and options A %.". 1ohra, #.B. #agri

/inancial Institutions and Markets A ).M. #hole

eith Bedhead D /inancial derivatives

othari &.B. JBesearch Methodlogy A Methods and +echniues

MAGAINES:

+he 2ournal of /inance

#usiness India

NEWSPAPERS

'conomic +imes

#usiness 8tandard

WEBSITES

www.nseindia.com

www.bseindia.com

www.rbi.org

www.derivativesportal.org

www.indiainfoline.com

http://www.nseindia.com/http://www.bseindia.com/http://www.rbi.org/http://www.derivativesportal.org/http://www.indiainfoline.com/http://www.nseindia.com/http://www.bseindia.com/http://www.rbi.org/http://www.derivativesportal.org/http://www.indiainfoline.com/


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