CHAPTER-1

INTRODUCTION TO

DERIVATIVE MARKET

1.1 INTRODUCTION

Risk is a characteristic feature of all commodity and capital markets. Prices of all

commodities both agricultural and non-agricultural commodities are subject to fluctuations

overtime keeping with the prevailing supply and demand conditions. Similarly, the price of

shares, debentures, and bonds and other securities are also subject to continuous change.

Therefore, the sellers and buyers are constantly and continuously exposed

to the risk of losses on account of fluctuations in the prices of such assets. Thus, Derivatives

came into being primarily to deal with and also to eliminate such price risks prevent in

commodity and security market.

The objective of an investment decision is to get required rate of return with minimum

risk. To achieve this objective, various instruments, practices and strategies have been devised

and developed in the recent past. With the opening of boundaries for international trade and

business, the world trade gained momentum. In the last decade, the world has entered into a new

phase of global integration and liberalization. The integration of capital markets world-wide has

given rise to increased financial risk with the frequent changes in the interest rates, currency

exchange rates and stock prices. To overcome the risk arising out of these fluctuating variables

and increased dependence of capital markets of one set of countries to the other and risk

management practices have also been reshaped by inventing such instruments as can mitigate the

risk element. These new popular instruments are known as financial derivatives which not only

reduce financial risk but also open new opportunity for high risk takers. As Derivative is a

financial instrument of risk management, these generally do not influence the fluctuation in the

underlying asset prices. However, by locking-in asset prices, derivative products minimize the

impact of fluctuation in asset prices on the profitability and cash flow situation of risk-averse

investors. Derivatives are used by different investors with different purposes to hedge the risk

arising from the investments made on the underlying asset to speculate on the underlying asset

and gain from price fluctuations, for arbitrage, or to create synthetic products. These are also

used to make investment strategies for safe and risk –free investment1.

Today, derivative contracts exist on a variety of commodities such as corn, pepper,

cotton, wheat, silver, etc. besides commodities. Derivatives contracts also exist on a lot of

financial underlying assets like stocks, interest rates, exchange rates, etc. Derivative products

initially emerged as hedging devices against fluctuations in commodity prices. Financial

derivatives came into the spotlight in the post-1970 period due to growing instability in the

financial markets. However, since their emergence, these products have become popular and by

1990s, they accounted for about two - thirds of total transactions in derivative products. In recent

years, the market for financial derivatives has grown tremendously in terms of instruments

available, their complexity and also turnover. In the class of equity derivatives the world over,

futures and options on stock indices have gained more popularity than individual stocks and

especially institutional investors, who are major users of index linked derivatives. Even small

investors find it more useful due to high correlation of the popular indexes with various

portfolios and ease of use. The lower costs associated with index derivatives vis-à-vis derivative

products based on individual securities is another reason for the growing use2.

The source of derivatives can be traced back to the need of farmers to protect themselves

against fluctuations in the price of their crop from the time of sowing to the time of crop harvest.

Through the use of simple derivative products, it was possible for the farmer to partially or fully

transfer price risks by locking-in asset prices. These were simple contracts developed to meet the

needs of farmers and were basically a means of reducing risk.

A farmer who sowed crop in the month of June face uncertainty over the price and farmer

may receive harvest in the month of September. In years of scarcity, farmer probably obtains

attractive prices. However, during times of oversupply, farmer would have to dispose off his

harvest at a very low price. Clearly this meant that the farmer was exposed to a high risk of price

uncertainty.

On the other hand, a merchant with ongoing requirement of grains too would face a price

risk - that of having to pay exorbitant prices during dearth, although favorable prices could be

obtained during periods of oversupply. Under such circumstances, it clearly made sense for the

farmer and the merchant to come together and enter into a contract where by the price of the

grain to be delivered in the month of September could be decided earlier3. What they would then

negotiate happened to be a future-type contract, which would enable both parties to eliminate the

price risk. “Derivatives are one type of securities whose value is derived from the underlying

assets. These underlying assets are most commonly Stocks, Bonds, Currencies and

Commodities.” Derivatives have a significant place in finance and risk management. Financial

markets are by nature extremely volatile and hence, the risk factor is an important concern for

financial agents4.

1.2 NEED FOR DERIVATIVES MARKET

The derivatives market performs a number of meaningful functions:

� It helps in transferring risk from risk averse to risk takers

� It helps in predicting future prices based on current prices

� It catalyzes entrepreneurial activity

� It increases the volume traded in markets because of participation of risk averse people in

greater numbers

� It increases savings and investments in the long run5.

1.3 CONCEPT OF DERIVATIVE

In the Indian context the Securities Contracts (Regulation) Act, 1956 SC(R) A, defines

"derivative" as —

“A security derived from a debt instrument, share, loan whether secured or unsecured,

risk instrument or contract for differences or any other form of security”.

“A contract which derives its value from the prices, or index of prices, of underlying

securities”

“Financial instruments that linked to a specific financial instrument or indicator or commodity

and through which specific risks can be traded in financial markets in their own right. The value

of a financial derivative derives from the price of an underlying item, such as an asset or index.

Unlike debt securities, no principal is advanced to be repaid and no investment income accrues.”

-The International Monetary Fund (IMF)

“A derivative is a financial instrument whose value depends on (or derives from) the values of

other, more basic underlying variables” - John C. Hull

“A financial instrument “which has a value determined by the price of something else. This

“something else” can be almost anything: it can be assets or commodities”.

- Robert L. Mc Donald

1.4 EMERGENCE OF DERIVATIVES

Derivative products initially emerged as hedging devices against fluctuations in

commodity prices and commodity-linked derivatives remained the sole form of such products for

almost three hundred years. Financial derivatives came into the spotlight in the post-1970 period

due to growing instability in the financial markets. However, since their emergence, these

products have become popular and by 1990s, they accounted for about two - thirds of total

transactions in derivative products.

In recent years, the market for financial derivatives has grown tremendously in terms of

instruments available, their complexity and also turnover. In the class of equity derivatives the

world over, futures and options on stock indices have gained more popularity than on individual

stocks, especially among institutional investors, who are major users of index linked derivatives.

Even small investors find these are useful due to high correlation of the popular indexes with

various portfolios and ease of use. The lower costs associated with index derivatives vis-à-vis

derivative products based on individual securities is another reason for their growing use6.

1.5 FUNCTIONS OF DERIVATIVES MARKET

Like other segments of Financial Markets, Derivatives Market serves the following specific

functions:

� Derivatives market helps in improving price discovery based on actual valuations and

expectations.

� Derivatives market helps in transfer of various risks from those who are exposed to risk but

have low risk appetite to participants with high risk appetite. For example hedgers want to

give away the risk where as traders are willing to take risk.

� Derivatives market helps shift of speculative trades from unorganized market to organized

market. Risk management mechanism and surveillance of activities of various participants in

organized space provide stability to the financial system.

1.6 FACTORS DRIVING THE GROWTH OF FINANCIAL DERIVATIVES

The following factors are the driving force for the growth of derivatives

1. Increased volatility in asset prices in financial markets

2. Increased integration of national financial markets with the international markets

3. Marked improvement in communication facilities and sharp decline in their costs

4. Development of more sophisticated risk management tools, providing economic agents a

wider choice of risk management strategies, innovations in the derivatives markets, which

optimally combine the risks and returns over a large number of financial assets leads to

higher returns, reduced risk as well as transactions costs as compared to individual financial

assets7.

The following table presents the milestones in the development of Indian financial derivatives.

Table: 1.1

Milestones in the development of Indian Financial Derivatives

Sl.

No.

Progress

Date

Progress of Financial Derivatives

1 1952 Enactment of the forward contracts (Regulation) Act

2 1953 Setting up of the forward market commission

3 1956 Enactment of Securities Contract Regulation Act 1956

4 1969 Prohibition of all forms of forward trading under section 16 of SCRA

5 1972 Informal carry forward trades between two settlement cycles began on

BSE 6 1980 Khurso Committee recommends reintroduction of futures in most

commodities 7

1983 Govt. amends bye-laws of exchange of Bombay, Calcutta and Ahmedabad

and introduced carry forward trading in specified shares 8 1992 Enactment of the SEBI Act

9 1993 SEBI Prohibits carry forward transactions

10 1994 Kabra Committee recommends futures trading in 9 commodities

11 1995 G.S. Patel Committee recommends revised carry forward system

12 14th

Dec.

1995

NSE asked SEBI for permission to trade index futures

13 1996 Revised system restarted on BSE

14 18th

Nov.

1996

SEBI setup LC Gupta committee to draft frame work for index futures

15 11th

May

1998

LC Gupta committee submitted report

16 1st June 1999 Interest rate swaps/forward rate agreements allowed at BSE

17 7th

July 1999 RBI gave permission to OTC for interest rate swaps/forward rate

agreements 18 24th

May

2000

SIMEX chose Nifty for trading futures and options on an Indian index

19 25th

May

2000

SEBI gave permission to NSE & BSE to do index futures trading

20 9th

June 2000 Equity derivatives introduced at BSE

21 12th

June

2000

Commencement of derivatives trading (index futures) at NSE

22 31st Aug.

2000

Commencement of trading futures & options on Nifty at SIMEX

23 1st June 2001 Index option launched at BSE

24 Jun 2001 Trading on equity index options at NSE

25 July 2001 Trading at stock options at NSE

26 9th

July 2001 Stock options launched at BSE

27 July 2001 Commencement of trading in options on individual securities

28 1st Nov. 2001 Stock futures launched at BSE

29 Nov. 2001 Commencement of trading in futures on individual security

30 9th

Nov. 2001 Trading of Single stock futures at BSE

31 June 2003 Trading of Interest rate futures at NSE

32 Aug. 2003 Launch of futures & options in CNX IT index

33 13th

Sept.

2004

Weekly options of BSE

34 June 2005 Launch of futures & options in Bank Nifty index

35 Dec. 2006 'Derivative Exchange of the Year by Asia risk magazine

36 June 2007 NSE launches derivatives on Nifty Junior & CNX 100

37 Oct. 2007 NSE launches derivatives on Nifty Midcap -50

38 1stJan. 2008 Trading of Chhota (Mini) Sensex at BSE

39 1stJan. 2008 Trading of mini index futures & options at NSE

40 3rd

March

2009

Long term options contracts on S&P CNX Nifty index

41 NA Futures & options on sectoral indices ( BSE TECK, BSE FMCG, BSE

Metal, BSE Bankex & BSE oil & gas)

42 29th

Aug.

2008

Trading of currency futures at NSE

43 Aug. 2008 Launch of interest rate futures

44 1st Oct. 2008 Currency derivative introduced at BSE

45 10th Dec.

2008

S&P CNX Nifty futures & options at NSE

46 Aug. 2009 Launch of interest rate futures at NSE

47 7th

Aug. 2009 BSE-USE form alliance to develop currency & interest rate derivative

markets 48 18th

Dec2009 BSE's new derivatives rate to lower transaction costs for all

49 Feb. 2010 Launch of currency future on additional currency pairs at NSE

50 Apr. 2010 Financial derivatives exchange award of the year by Asian Banker to

NSE 51 July 2010 Commencement trading of S&P CNX Nifty futures on CME at NSE

52 Oct. 2010 Introduction of European style stock option at NSE

53 Oct. 2010 Introduction of Currency options on USD INR by NSE

54 July 2011 Commencement of 91 day GOI trading Bill futures by NSE

55 Aug. 2011 Launch of derivative on Global Indices at NSE

56 Sept. 2011 Launch of derivative on CNX BSE & CNX infrastructure Indices at

NSE 57 30th

March

2012

BSE launched trading in BRICSMART indices derivatives

58 29th Nov

2013

BSE launched currency derivative segment

59 28th

Jan 2014 Launch of Interest Rate Futures (BSE –IRF)

60 11th

Feb 2014 Launch of Institutional Trading Platform on BSE SME

61 20th

Mar 2014

BSE Launches New Debt Segment

62 04th

Apr 2014 BSE SME exceeds USD 1 billion market capitalization

63 7th

Apr 2014 Launch of Equity Segment on BOLT Plus with Median Response Time of

200 (µs)

64 27th

May

2014

BSE felicitated at The Asian Banker Summit 2014 - BSE Best Managed

Financial Derivatives Exchange in the Asia Pacific 65 26th

Sept

2014

BSE links MoU with BNY Mellon

66 22th

Oct 2014 BSE inks strategic partnership with YES BANK

67 28th

Nov 2014 BSE listed companies market cap crosses landmark 100 lakh crore

68 12th

Dec 2014 Market Cap of BSE SME listed companies crosses landmark 10,000 crore

69 08th

Jan 2015 BSE commenced live trading from its Disaster Recovery site in Hyderabad

70 16th

Apr 2015 Asia Index Private Limited launches S&P BSE All Cap, S&P BSE

SENSEX Leverage and Inverse Indices 71 18th

May

2015

BSE introduces overnight investment product

72 28th

May

2015

BSE exceeds 1 billion derivatives contracts on its new Deutsche Borse T7

powered trading platform 73 09th

July 2015 BSE celebrated its 140th Foundation Day

74 16th

July 2015 BSE SME platform successfully completes listing of 100 SMEs under its

SME umbrella 75 13th

Oct 2015 BSE becomes the fastest exchange in the world with a median response

speed of 6 microseconds 76 09th

Dec 2015 BSE partners with CII (Confederation of Indian Industry) and IICA (Indian

Institute of Corporate Affairs) to launch a one of its kind CSR platform Source: Compiled data from NSE and BSE websites NA: Not Available

1.7 DEVELOPMENT OF DERIVATIVES MARKET IN INDIA

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 the 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 an 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. The

committee recommended that 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, methodology for charging initial

margins, broker net worth, deposit requirement and real- time monitoring requirements8.

The Securities Contract Regulation Act (SCRA) was amended in December 1999 to

include derivatives within the ambit of ‘securities’ and the regulatory framework were developed

for governing derivatives trading. The act also made it clear that derivatives shall be legal and

valid only if such contracts are traded on a recognized stock exchange, thus precluding OTC

derivatives. The government also rescinded on March 2000, the three–decade old notification,

which prohibited forward trading in securities.

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 securities9.

The trading in BSE Sensex options commenced on June 4, 2001 and the trading in options on

individual securities commenced in July 2001. Futures contracts on individual stocks were

launched in November 2001. The derivatives trading on NSE commenced with S&P CNX Nifty

Index futures on June 12, 2000. The trading in index options commenced on June 4, 2001 and

trading in options on individual securities commenced on July 2, 2001. Single stock futures were

launched on November 9, 2001. The index futures and options contract on NSE are based on

S&P CNX.

Trading and settlement in derivative contracts is done in accordance with the rules, byelaws,

and regulations of the respective exchanges and their clearing house/corporation duly approved

by SEBI and notified in the official gazette. Foreign Institutional Investors (FIIs) are permitted to

trade in all Exchange traded derivative products10

.

The following are some observations based on the trading statistics provided in the NSE report

on the futures and options (F&O):

• Single- stock futures continue to account for a sizable proportion of the F&O segment. It

constituted 70 percent of the total turnover during June 2002. A primary reason attributed to

this phenomenon is that traders are more comfortable with single- stock futures than equity

options, as the former closely resembles the erstwhile badla system.

• On relative terms, volumes in the index options segment continue to remain poor. This may

be due to the low volatility of the spot index. Typically, options are considered more valuable

when the volatility of the underlying (in this case, the index) is high. A related issue is that

brokers do not earn high commission by recommending index options to their clients,

because low volatility leads to higher waiting time for round- trips.

• Puts volumes in the index options and equity options segment have increased since January

2002. The call–put volumes in index options have decreased from 2.86 in January 2002 to

1.32 in June. The fall in call- put volumes ratio suggests that the traders are increasingly

becoming pessimistic on the market.

• Further month futures contracts are still not actively traded. Trading in equity options on

most stocks for even the next month was non- existent.

• Daily option price variations suggest that traders use the F&O segment as a less risky

alternative (read substitute) to generate profits from the stock price movements. The fact that

the option premiums tail intra-day stock prices is evidence to this. Calls on Satyam fall, while

puts rise when Satyam fall intra-day. If calls and puts are not looked as just substitutes for

spot trading, the intraday stock price variations should not have a one- to- one impact on the

option premiums11

.

1.8 INSTRUMENTS AVAILABLE IN INDIA

Table 1.2 and 1.3 presents derivative products traded at BSE and NSE respectively.

Table: 1.2

Products Traded in Derivatives Segment at BSE

Sl.No Product Traded with underlying asset Introduction Date

1 Index Futures- Sensex June 9 th

, 2000

2 Index Options- Sensex June 1st, 2001

3 Stock Option on 109 Stocks July 9th

, 2001

4 Stock futures on 109 Stocks November 9th

, 2002

5 Weekly Option on 4 Stocks September 13 th

,2004

6 Chhota (mini) SENSEX January 1st, 2008

7

Futures & Options on Sectoral indices namely BSE

TECK, BSE FMCG, BSE Metal, BSE Bankex and

BSE Oil & Gas.

NA

8 Currency Futures on US Dollar Rupee October 1st, 2008

9 Launched BRICSMART indices derivatives March 30th

,2012

Source: Compiled from BSE website NA: Not Available

Table: 1.3

Derivative Products at NSE

Products Index Futures Index Options

Futures on

Individual

Securities

Options on

Individual

Securities

Underlying

Instrument

S&P CNX Nifty S&P CNX Nifty

30 securities

stipulated by

SEBI

30 securities

stipulated by SEBI

Type European American

Trading Cycle

Maximum of 3-

month trading cycle.

At any point in

time, there will be 3

contracts available:

1) near month,

2) mid month &

3)far month

duration

Same as index

futures

Same as index

futures

Same as index

futures

Expiry Day Last Thursday of Same as index Same as index Same as index

the expiry month futures futures futures

Contract Size

Permitted lot size is

200 & multiples

thereof

Same as index

futures

As stipulated by

NSE (not less

than RS.2 lacs)

As stipulated by

NSE (not less than

RS.2 lacs)

Price Steps Re.0.05 Re.0.05

Base Price First

day of trading

Previous day

closing Nifty value

Theoretical

value of the

options contract

arrived at based

on Black-

Scholes model

Previous day

closing value of

underlying

security

Same as Index

options

Base price

Subsequent

Daily settlement

price

Daily close

price

Daily settlement

price

Same as Index

options

Price Bands

Operating ranges

are kept at + 10 %

Operating

ranges for are

kept at 99 % of

the base price

Operating ranges

kept at + 20 %

Operating ranges

for are kept at 99

% of the base price

Quantity Freeze

20,000 units or

greater

20,000 units or

greater

Lower of 1 % of

market wide

position limit

stipulated for

open positions or

RS.5 crores

Same as individual

futures

Source: Compiled from NSE website

1.9 EVOLUTION OF DERIVATIVES MARKET – WORLD WIDE

History of Derivatives may be mapped back to the several centuries. Some of the specific

milestones in evolution of Derivatives Market Worldwide are given below:

� 12th Century - In European trade fairs, sellers signed contracts promising future delivery of

the items they sold.

� 13th Century - There are many examples of contracts entered into by English Cistercian

Monasteries, who frequently sold their wool up to 20 years in advance to foreign merchants.

� 1634-1637 - Tulip Mania in Holland, Fortunes were lost in after a speculative boom in tulip

futures burst.

� Late 17th Century - In Japan at Dojima, near Osaka, a futures market in rice was developed

to protect rice producers from bad weather or warfare.

� In 1848, The Chicago Board of Trade (CBOT) facilitated trading of forward contracts on

various commodities.

� In 1865, the CBOT went a step further and listed the first ‘exchange traded” derivative

contract in the US. These contracts were called ‘futures contracts”.

� In 1919, Chicago Butter and Egg Board, a spin-off of CBOT, was reorganized to allow

futures trading. Later its name was changed to Chicago Mercantile Exchange (CME).

� In 1972, Chicago Mercantile Exchange introduced International Monetary Market (IMM),

which allowed trading in currency futures.

� In 1973, Chicago Board Options Exchange (CBOE) became the first marketplace for trading

listed options.

� In 1975, CBOT introduced Treasury bill futures contract. It was the first successful pure

interest rate futures.

� In 1977, CBOT introduced T-bond futures contract.

� In 1982, CME introduced Eurodollar futures contract.

� In 1982, Kansas City Board of Trade launched the first stock index futures.

� In 1983, Chicago Board Options Exchange (CBOE) introduced option on stock indexes with

the S&P 100® (OEX) and S&P 500® (SPXSM) Indexes.

1.10 EVOLUTION OF THE COMMODITY DERIVATIVE MARKET IN

INDIA

The beginning of the modern worldwide commodity derivative market can be traced at

Chicago, which had emerged as an important agricultural commodity trading center in the early

1800s. In 1848, the Chicago Board of Trade (CBOT) was founded as a commodity exchange.

Commodity derivatives are not new in India too12

. In fact, forward trading in commodities

existed in India from ancient times (it was mentioned in Kautilya’s “Arthashastra”), but the first

modern futures market was established in 1875 for cotton contracts by the Bombay Cotton Trade

Association. Oilseed and food grain futures followed and before the World War II, futures were

being traded on commodities such as wheat, rice, sugar, groundnut, groundnut oil, raw jute, jute

products and castor seed as well as precious metals. During World War II futures trading was

prohibited to contain runaway speculation and illegal hoarding.

After independence, the Forward Contracts (Regulation) Act was enacted in 1952 to regulate

the trading in forward and futures. The Forward Markets Commission (FMC) which oversees

forward trading was instituted as a regulatory body the following year. The Act applied to all

contracts whereby the delivery of goods occurs after a period longer than 11 days. The task of

the commission was to monitor and regulate the trading of forward contracts since manipulation

in these markets are likely to create severe imbalances with adverse welfare effects13

.

Nevertheless, Indian markets did not really blossom over the following four decades.

Regulators viewed markets in general with suspicion and derivative markets particularly as the

terrain of unscrupulous speculation. Price control was a central feature of economic policy

during much of this period. This overly regulated nature of the economy did not bode well for

the development of these markets. In 1966, futures trade was altogether banned to give effective

powers to government price control.

A few select commodities saw a reintroduction of futures in 1980 following the Khusro

Committee report. But the real breakthrough came with the liberalization of the Indian economy

in the early 1990s. In 1993, the Kabra Committee was appointed to look into forward markets.

The committee recommended in 1994 that all futures banned in 1966 be reintroduced as well as

many others added. Six years later, the National Agricultural Policy 2000 envisioned the removal

of price controls in agricultural markets and widespread use of futures contracts. However, the

commodity futures market made the true restart in early 2000s with establishment of a number of

nationwide multi commodity exchanges14

.

1.11 COMMODITY DERIVATIVE MARKETS IN INDIA

Commodity futures markets have a long history in India. Cotton was the first commodity

to attract futures trading in the country leading to the setting up of the Bombay Cotton Trade

Association Ltd in 1875. The Bombay Cotton Exchange Ltd. was established in 1893 following

the widespread discontent amongst leading cotton mill owners and merchants over the

functioning of Bombay Cotton Trade Association.

Subsequently, many exchanges came up in different parts of the country for futures

trading in various commodities. Futures trading in oilseeds started in 1900 with the establishment

of the Gujarati Vyapari Mandali, which carried on futures trade in groundnut, castor seed and

cotton. Before the Second World War broke out in 1939, several futures markets in oilseeds were

functioning in Gujarat and Punjab.

Futures trading in wheat existed at several places in Punjab and Uttar Pradesh, the most

notable of which was the Chamber of Commerce at Hapur, which began futures trading in wheat

in 1913 and served as the price setter in that commodity till the outbreak of the Second World

War in 1939.

Futures trading in bullion began in Mumbai in 1920 and subsequently markets came up in

other centers like Rajkot, Jaipur, Jamnagar, Kanpur, Delhi and Kolkata.

Kolkata Hessian Exchange Ltd. was established in 1919 for futures trading in raw jute and jute

goods. But organized futures trading in raw jute began only in 1927 with the establishment of

East Indian Jute Association Ltd. These two associations amalgamated in 1945 to form the East

India Jute & Hessian Ltd. to conduct organized trading in both raw jute and jute goods. In due

course several other exchanges were also created in the country to trade in such diverse

commodities as pepper, turmeric, potato, sugar and gur (jaggery).

After independence, with the subject of `Stock Exchanges and futures markets' being

brought under the Union list, responsibility for regulation of commodity futures markets

devolved on Government of India. A Bill on forward contracts was referred to an expert

committee headed by Prof. A. D. Shroff and select committees of two successive Parliaments

and finally in December 1952 Forward Contracts (Regulation) Act, 1952, was enacted.15

The Act 1952 provided a 3-tier regulatory system

(a) An association recognized by the Government of India on the recommendation of Forward

Markets Commission,

(b) The Forward Markets Commission (it was set up in September 1953) and

(c) The Central Government.

Forward Contracts (Regulation) Rules were notified by the Central Government in July, 1954.

According to FC(R) Act, commodities are divided into 3 categories with reference to extent of

regulation, viz:

� Commodities in which futures trading can be organized under the auspices of recognized

association.

� Commodities in which futures trading is prohibited.

� Commodities which have neither been regulated nor prohibited for being traded under the

recognized association are referred as Free Commodities and the association organized in

such free commodities is required to obtain the Certificate of Registration from the Forward

Markets Commission.

India was in an era of physical controls since independence and the pursuance of a mixed

economy set up with socialist proclivities had ramifications on the operations of commodity

markets and commodity exchanges. Government intervention was in the form of buffer stock

operations, administered prices, regulation on trade and input prices, restrictions on movement of

goods, etc. Agricultural commodities were associated with the poor and were governed by

polices such as Minimum Price Support and Government Procurement16

. Further, as production

levels were low and had not stabilized, there was the constant fear of misuse of these platforms

which could be manipulated to fix prices by creating artificial scarcities. This was also a period

which was associated with wars, natural calamities and disasters which invariably led to

shortages and price distortions. Hence, in an era of uncertainty with potential volatility, the

government banned futures trading in commodities in the 1960s.

The Khusro Committee which was constituted in June 1980 had recommended

reintroduction of futures trading in most of the major commodities, including cotton, kapas, raw

jute and jute goods and suggested that steps may be taken for introducing futures trading in

commodities, like potatoes, onions, etc. at appropriate time. The government, accordingly

initiated futures trading in Potato during the latter half of 1980 in quite a few markets in Punjab

and Uttar Pradesh.

With the gradual trade and industry liberalization of the Indian economy pursuant to the

adoption of the economic reform package in 1991, GOI constituted another committee on

Forward Markets under the chairmanship of Prof. K.N. Kabra. The Committee which submitted

its report in September 1994 recommended that futures trading be introduced in the following

commodities:

• Basmati Rice

• Cotton, Kapas, Raw Jute and Jute Goods

• Groundnut, rapeseed/mustard seed, cottonseed, sesame seed, sunflower seed, safflower seed,

copra and soybean and oils and oilcakes like

• Rice bran oil, Castor oil and its oilcake, Linseed, Silver, Onions

The committee also recommended that some of the existing commodity exchanges particularly

the ones in pepper and castor seed, may be upgraded to the level of international futures

markets17

.

UNCTAD and World Bank joint Mission Report "India: Managing Price Risk in India's

Liberalized Agriculture: Can Futures Market Help? (1996)" highlighted the role of futures

markets as market based instruments for managing risks and suggested the strengthening of

institutional capacity of the Regulator and the exchanges for efficient performance of these

markets.

Another major policy statement, the National Agricultural Policy, 2000, also expressed

support for commodity futures. The Expert Committee on Strengthening and Developing

Agricultural Marketing (Guru Committee: 2001) emphasized the need for and role of futures

trading in price risk management and in marketing of agricultural produce. This Committee's

Group on Forward and Futures Markets recommended that it should be left to interested

exchanges to decide the appropriateness/usefulness of commencing futures trading in products

(not necessarily of just commodities) based on concrete studies of feasibility on a case-to-case

basis. It, however, noted that all the commodities are not suited for futures trading. For a

commodity to be suitable for futures trading it must possess some specific characteristics.

The liberalized policy being followed by the Government of India and the gradual

withdrawal of the procurement and distribution channel necessitated setting in place a market

mechanism to perform the economic functions of price discovery and risk management.

The National Agriculture Policy announced in July 2000 and the announcements of

Hon'ble Finance Minister in the Budget Speech for 2002-2003 were indicative of the

Governments resolve to put in place a mechanism of futures trade market. As a follow up, the

Government issued notifications on 1.4.2003 permitting futures trading in the commodities, with

the issue of these notifications futures trading is not prohibited in any commodity. Options

trading in commodity are however presently prohibited.

The year 2003 is a landmark in the history of commodity futures market witnessing the

establishment and recognition of three new national exchanges like National Commodity and

Derivatives Exchange of India Ltd. (NCDEX), Multi Commodity Exchange of India Ltd (MCX)

and National Multi Commodity Exchange of India Ltd. (NMCE) with on-line trading and

professional management.

These markets depicted phenomenal growth in terms of number of products on offer,

participants, spatial distribution and volume of trade. Majority of the trade volume is contributed

by the national level exchanges whereas regional exchanges have a very less share. With

developments on way, the commodity futures exchanges registered an impressive growth till it

saw the first ban of two pulses (Tur and Urad) towards the end of January 2007. Subsequently

the ban of two more commodities from cereals group i.e. Wheat and Rice in the next month. The

commodity market regulator, Forward Markets Commission as a measure of abundant caution,

suspended futures trading in Chana, Soya oil, Rubber and Potato w.e.f. May 7, 2008. However,

with the easing of inflationary pressure, the suspension was allowed to lapse on November 30,

2008. Trading in these commodities resumed on December 4, 2008. Later on futures trading in

wheat was re-introduced in May 2009. In May 2009, a future trading in sugar was suspended.

Due to mistaken apprehensions that futures trading contributes to inflation, futures trading in

rice, urad, tur and sugar has been temporarily suspended18

.

1.12 COMMODITY DERIVATIVE TRADING EXCHANGES

In the 1970s and 80s, the United States was a leading player in commodity derivatives

trading which began there with corn contracts at the Chicago Exchange in the mid-19th century

and cotton at the New York Exchange. By the early 1980s, the US was home to 13 major futures

and options exchanges, including the Chicago Board of Trade (CBOT), one of the world’s

biggest futures and options exchange; Chicago Mercantile Exchange (CME); and New York

Mercantile Exchange (NYMEX). However, Europe emerged as a clear leader in the mid-1990s,

particularly in the non-agricultural commodities and tilted the balance away from the US in its

own favour. Table.1.4 contains top 10 Derivative Exchanges

Worldwide Based on number of contracts Traded and/or cleared (2013).

Table: 1.4

World Wide Top 10 Derivative Exchange

Ranking Exchange No. of Contracts

1 CME Group (US) 3,161,476,638

2 Intercontinental Exchange* (US) 2,807,970,132

3 Eurex (Germany) 2,190,548,148

4 National Stock Exchange of India 2,135,637,457

5 BM&F BOVESPA (Brazil) 1,603,600,651

6 CBOE Holdings (US) 1,187,642,669

7 NASDAQ OMX (US) 1,142,955,206

8 Moscow Exchange (Russia) 1,134,477,258

6 BM&F BOVESPA (Brazil) 1,603,600,651

9 Korea Exchange (South Korea) 820,664,621

10 MCX India (India) 820,664,621

Source: www.futuresindustry.org. *Includes NYSE Euro next

Since 2005, commodity markets in Asia (primarily China and India) are witnessing huge

trading volumes, despite the fact that Chicago, New York and London remain the big hubs for

agricultural goods, precious and base metals and oil and gas products. In terms of trading

volumes, Asia now accounts for more than half of global commodity futures and options trades.

Commodity Exchange, Multi Commodity Exchange of India and some exchanges have merged

and carry out trading across borders such as Euro next (Paris, Brussels, Amsterdam, London and

Lisbon) and the CME Group.19

1.13 Milestones in Commodity Futures Trading in India

The following Table presents the milestones in commodity futures trading.

Table: 1.5

Milestones in Commodity Futures Trading

Years Development

1875 Bombay Cotton Trade Association

Between 1st and 2nd

World war

Rapid growth of futures markets

During 2nd World War

Defense of India Act- Prohibited Futures trading in major

Commodities owing to short supply

1950s to mid 1960s

Thriving Commodity futures markets Banned Commodity Futures

trading in most of the Commodities except two minor Commodities

Mid 1960s to 1970s Pepper and Turmeric

1980s Revival of Futures trading in Potato, Castor Seed and Gur (Jaggery)

1992 Futures trading in Hessian permitted

1999 Futures trading in various edible oilseeds complexes permitted

2000

The National Agricultural Policy recognized the positive role of

forward and futures markets in price discovery and price risk

management

2001 Futures trading in Sugar permitted

2003 Lifted prohibition on futures trading in all Commodities Recognition

to 3 National Commodity Electronic Exchanges MCX, NCDEX and

NMCE

2008

Commission issued guidelines on setting up of New National Multi

Commodity Exchanges

2009 Recognition to ICEX as 4th National Exchange

2010

Recognition to ACE as 5th National Exchange Notified “Iron Ore”

under section 15 of the FCRA, 1952

2012 Recognition to UCX as 6th

National Exchange

Source: From Annual reports of Forward Market commision

1.14 TYPES OF DERIVATIVES MARKET IN INDIA

The following chart depicts types of derivatives.

Figure 1.1

TYPES OF DERIVATIVES MARKET

Commodity Derivative Financial Derivative

Forwards Futures

Equity Debt Forex

Futures Options Swaps Forwards Futures Forwards Swaps

One form of classification of derivative instruments is between commodity derivatives

and financial derivatives. The basic difference between these is the nature of the underlying

instrument or asset. In a commodity derivative, the underlying instrument is a commodity which

may be wheat, cotton, pepper, sugar, jute, turmeric, corn, soya beans, crude oil, natural gas, gold,

silver, copper and so on. In a financial derivative, the underlying instrument may be treasury

bills, stocks, bonds, foreign exchange, stock index, gilt-edged securities, cost of living index, etc.

It is to be noted that financial derivative is fairly standard and there are no quality issues whereas

in commodity derivative, the quality may be the underlying matter. However, despite the

distinction between these two from structure and functioning point of view, both are almost

similar in nature. The most commonly used derivatives contracts are forwards, futures, options

and swaps20

.

1.14.1 Forwards:

A forward contract is a customized contract between two parties, where settlement takes

place on a specific date in the future at today’s pre-agreed price.

The main features of forward contracts are

� They are bilateral contracts and hence exposed to counter party risk.

� Each contract is custom designed, and hence is unique in terms of contract size,

expiration date and the asset type and quality.

� The contract price is generally not available in public domain.

� The contract has to be settled by delivery of the asset on expiration date.

� In case the party wishes to reverse the contract, it has to compulsorily go to the same

counter party, which being in a monopoly situation can command the price it wants.

1.14.2 Futures:

A 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. Futures contracts are special types of forward contracts in the

sense that the former are standardized exchange- traded contracts.

The main features of futures contracts are:

� Futures trading is necessarily organized under the auspices of a market association so that

such trading is confined to or conducted through members of the association in

accordance with the procedure laid down in the rules and bye laws of the association.

� It is invariably entered into for a standard variety known as the “Basis variety” with

permission to deliver other identified varieties known as “tenderable varieties”

� The units of price quotation and trading are fixed in these contract and parties to the

contract not being capable of altering these unites.

� The delivery periods are specified.

� The seller in a futures market has the choice to decide whether to deliver goods against

outstanding sale contracts. In case he decides to deliver goods, he can do so not only at

the location of the association through which trading is organized but also at a number of

other pre-specified delivery centers.

1.14.3 Options:

Options are of two types –calls and puts. While “Calls” give the buyer the right, but not

the obligation, to buy a given quality of the underlying asset at a given price on or before a given

future date, “puts” give the seller the right, but not the obligation, to sell a given quantity of the

underlying asset at a given price on or before a given date.

1.14.4 Warrants:

Options generally have lives of up to one year; the majority of options traded on options

exchanges have a maximum maturity of nine months. Longer-dated options are called warrants

and are generally traded over- the-counter.

1.14.5 Leaps:

The acronym leaps means Long- term Equity Anticipation Securities. These are options

having a maturity of up to three years.

1.14.6 Baskets:

Basket options are options on portfolios of underlying assets. The underlying asset is

usually a moving average or a basket of assets. Equity index options are a form of basket

options.

1.14.7 Swaps:

swaps are private agreements between two parties to exchange cash flows in the future

according to a prearranged formula. They can be regarded as portfolios of forward contracts. The

two commonly used swaps are:

� Interest rate swaps: These entail swapping only the interest related cash flows between the

parties in the same currency.

� Currency swaps: These 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.

1.14.8 Swaptions:

Swaptions are options to buy or sell a swap that will become operative at the expiry of

the options. Thus a swaptions is an option on a forward swap. Rather than have calls and puts,

the swaptions market has receiver swaptions and payer swaptions. A receiver swaptions is an

option to receive fixed and pay floating. A payer swaptions is an option to pay fixed and receive

floating21

.

1.15. MARKET PARTICIPANTS OF DERIVATIVES

Derivative instruments are used for varied purposes i.e. managing risk by managing

funds; making profit by taking risk, and taking advantage of price differentiation in different

markets at any given point of time. Accordingly, there are varied types of trades or participants

who trade in the futures and option market. Those are hedgers, speculators and arbitrageurs, who

constitute three major classes of such trader.

1.15.1 Hedgers:

To safeguard something, is to construct a protective fence around. It is applied to

financial markets. Hedging is nothing but eliminating the risk in an asset or liability. It is applied

to stock market, hedging also eliminates the risk in an investment portfolio. Hedging is the

process of reducing exposure to risk. Thus, hedge is an act that reduces the price risk of a certain

position in the cash market. Futures contract are the primary tools of effective hedging and they

enable the market participants to change their risk exposure from unexpected adverse price

fluctuations. Futures act as a hedge when a position is taken in them which are just opposite to

that taken by the investor in the existing cash position. Hedgers sell futures (short futures) when

they have already had a long position on the cash asset, and they buy futures (long futures) in the

situation of having a short position (advance sell) on the cash asset22

.

Hedging strategies: Essentially, futures contract try to predict what the value of a

commodity will be at some date in the future. Speculators in the futures market can use different

strategies to take advantage of rising and declining prices. The most common are known as going

long and going short, also referred to as long hedge and short hedge respectively23

.

1.15.2 Speculators:

Speculators are participants who wish to bet on future movements in the price of an asset.

Futures contracts can give them leverage; that is, by putting in small amounts of money upfront,

they can take large positions on the market. As a result of this leveraged speculative position,

they increase the potential for large gains as well as large losses.

1.15.3 Arbitragers:

Arbitrage refers to riskless profit earned by taking position in spot futures market.

Arbitragers work at making profits by taking advantage of discrepancy between prices of the

same product across different markets. For example, they see the futures price of an asset getting

out of line with the cash price, they will take offsetting positions in the two markets to lock in the

profit24

1.16. COMMODITY DERIVATIVES VS FINANCIAL DERIVATIVES

The basic concept of a derivative contract remains the same whether the underlying

happens to be a commodity or a financial asset. However, there are some features which are very

peculiar to commodity derivative markets. 22

In the case of financial derivatives, most of these

contracts are cash settled. Since financial assets are not bulky, they do not need special facility

for storage even in case of physical settlement. On the other hand, due to the bulky nature of the

underlying assets, physical settlement in commodity derivatives creates the need for

warehousing. Similarly, the concept of varying quality of asset does not really exist as far as

financial underlying is concerned. However, in the case of commodities, the quality of the asset

underlying a contract can vary largely. This becomes an important issue to be managed.25

1.16.1 Physical Settlement

Physical settlement involves the physical delivery of the underlying commodity, typically

at an accredited warehouse. The seller intending to make delivery would have to take the

commodities to the designated warehouse and the buyer intending to take delivery would have to

go to the designated warehouse and pick up the commodity. This may sound simple, but the

physical settlement of commodities is a complex process. The issues faced in physical settlement

are enormous. There are limits on storage facilities in different states. There are restrictions on

interstate movement of commodities. Besides state level octroi and duties have an impact on the

cost of movement of goods across locations. The process of taking physical delivery in

commodities is quite different from the process of taking physical delivery in financial assets.

1.16.2 Delivery notice period

Unlike in the case of equity futures, typically a seller of commodity futures has the option

to give notice of delivery. This option is given during a period identified as `delivery notice

period'.

1.16.3 Assignment

Whenever delivery notices are given by the seller, the clearing house of the Exchange

identifies the buyer to whom this notice may be assigned. Exchanges follow different practices

for the assignment process.

1.16.4 Delivery

The procedure for buyer and seller regarding the physical settlement for different types of

contracts is clearly specified by the Exchange.25

The period available for the buyer to take

physical delivery is stipulated by the Exchange. Buyer or his authorized representative in the

presence of seller or his representative takes the physical stocks against the delivery order. Proof

of physical delivery having been affected is forwarded by the seller to the clearing house and the

invoice amount is credited to the seller's account.

The clearing house decides on the delivery order rate at which delivery will be settled.

Delivery rate depends on the spot rate of the underlying adjusted for discount/ premium for

quality and freight costs. The discount/ premium for quality and freight costs are published by

the clearing house before introduction of the contract. The most active spot market is normally

taken as the benchmark for deciding spot prices26

.

1.16.5 Warehousing

One of the main differences between financial and commodity derivative is the need for

warehousing. In case of most exchange-traded financial derivatives, all the positions are cash

settled. Cash settlement involves paying up the difference in prices between the time the contract

was entered into and the time the contract was closed. For instance, if a trader buys futures on a

stock at Rs.100 and on the day of expiration, the futures on that stock close at Rs.120, he does

not really have to buy the underlying stock. All he does is take the difference of Rs.20 in cash.27

Similarly, the person who sold this futures contract at Rs.100 does not have to deliver the

underlying stock. All he has to do is pay up the loss of Rs.20 in cash.

In case of commodity derivatives however, there is a possibility of physical settlement. It

means that if the seller chooses to hand over the commodity instead of the difference in cash, the

buyer must take physical delivery of the underlying asset. This requires the Exchange to make an

arrangement with warehouses to handle the settlements27

.The efficacy of the commodities

settlements depends on the warehousing system available. Such warehouses have to perform the

following functions:

• Earmark separate storage areas as specified by the Exchange for storing commodities;

• Ensure proper grading of commodities before they are stored;

• Store commodities according to their grade specifications and validity period; and

• Ensure that necessary steps and precautions are taken to ensure that the quantity and grade of

commodity, as certified in the warehouse receipt, are maintained during the storage period. This

receipt can also be used as collateral for financing.

In India, NCDEX has accredited over 775 delivery centres which meet the requirements for the

physical holding of goods that are to be delivered on the platform. As future trading is delivery

based, it is necessary to create the logistics support for the same28

.

1.16.6 Quality of Underlying Assets

A derivatives contract is written on a given underlying asset. Variance in quality is not an

issue in case of financial derivatives as the physical attribute is missing. When the underlying

asset is a commodity, the quality of the underlying asset is of prime importance29

. There may be

quite some variation in the quality of what is available in the marketplace. When the asset is

specified, it is therefore important that the Exchange stipulate the grade or grades of the

commodity that are acceptable. Commodity derivatives demand good standards and quality

assurance certification procedures. A good grading system allows commodities to be traded by

specification.

Trading in commodity derivatives also requires quality assurance and certifications from

specialized agencies. In India, for example, the Bureau of Indian Standards (BIS) under the

Department of Consumer Affairs specifies standards for processed agricultural commodities.

AGMARK is another certifying body under the Department of Agriculture and Co-operation

specifies standards for basic agricultural commodities30

.

1.17 Uses of Derivatives

Generally derivatives are used as risk management tools. Here is the brief description of

their uses and functions. Derivatives are supposed to provide the following services:

1.17.1 Risk aversion tools:

One of the most important services provided by the derivatives is to control, avoid, shift

and manage efficiently different types of risks through various strategies like hedging,

arbitraging, speculation, spreading, etc. Derivatives assist the holders to shift or modify suitably

the risk characteristics of their portfolios. These are specifically useful in highly volatile financial

market conditions like erratic trading, highly flexible interest rates, volatile exchange rates and

monetary chaos31

.

1.17.2 Prediction of future prices:

Derivatives serve as barometers of the future trends in prices which result in the

discovery of new prices both on the spot and futures markets. Further, they help in disseminating

different information regarding the futures markets trading of various commodities and securities

to the society which enable to discover or form suitable or correct or true equilibrium prices in

the markets. As a result, they assist in appropriate and superior allocation of resources in the

society32

.

1.17.3 Enhance liquidity:

As we see that in derivatives trading no immediate full amount of the transaction is

required since most of them are based on margin trading. As a result, large number of traders,

speculators, arbitrageurs operates in such markets. Therefore, derivatives trading enhance

liquidity and reduce transaction costs in the markets for underlying assets33

.

1.17.4 Assist investors:

The derivatives assist the investors, traders and managers of large pools of funds to

devise such strategies so that they may make proper asset allocation to increase their yields and

achieve other investment goals.

1.17.5 Integration of price structure:

It has been observed from the derivatives trading in the market that the derivatives have

smoothen out price fluctuations, squeeze the price spread, integrate price structure at different

points of time and remove gluts and shortages in the markets.

1.17.6 Catalyst growth of financial markets:

The derivatives trading encourage the competitive trading in the markets, different risk

taking preference of the market operators like speculators, hedgers, traders, arbitrageurs, etc.

resulting in increase in trading volume in the country. They also attract young investors,

professionals and other experts who will act as catalysts to the growth of financial markets.

1.17.7 Market Completion:

Lastly it is observed that, derivative trading develops market towards the ‘complete

market’. Complete market concept refers to that situation where no particular investors can be

better off than others, or patterns of returns of all additional securities are spanned by the already

existing securities in it, or there is no further scope of additional security34

.

References

1. Michael Chui “Derivatives markets, products and participants: an overview” former Senior

Economist, BIS Representative Office for Asia and the Pacific, Hong Kong IFC Bulletin

No 35.

2. The article on “A commodity market in India: Past, Present and Future” by Rajnarayan

Gupta is Associate Professor, Department of Economics at Presidency University, Kolkata.

In the journal of Analytique P.4, Volume –VII.No.2, April-June 2011.

3. Sen, S. and Paul, M. (2010); Trading In India’s Commodity Future Markets; Working

Paper, Institute for Studies in Industrial Development.

4. Dummu, Tata Rao (2009), “Commodity Futures Market in India: It’s Impact on Production

and Prices”, Indian Journal of Agricultural Economics, Vol. 64 No. 3,

5. Srivastava, Swami Prakash and Saini, Bhawana, (2009), “Commodity Futures

6. Bose, S (2008),”Commodity Futures Market in India - A Study of Trends in the Notional

Multi-Commodity Indices” ICRA Bulletin of Money and Finance

7. Kumar, B., Singh, P. and Pandey, A. (2008); Hedging Effectiveness of Constant and Time

Varying Hedge Ratio in Indian Stock and Commodity Futures Markets; Working Paper,

Indian Institute of Management (Ahmedabad), India

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on Agricultural Commodity Prices, Government of India

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www.fitchratings.com

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Susan Thomas (ed.) Derivatives Markets in India, Oxford University Press, India

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Commodity Derivatives Markets (Chairman, Wajahat Habibullah).

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Affairs, Food and Public Distribution, New Delhi

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Publishing Company Limited, New Delhi, India.

22. Gambhir, Neeraj and Manoj Goel, 2003, Foreign Exchange Derivatives Market in India

Status and Prospects, Susan Thomas (ed.), Derivatives Markets in India, Tata McGraw-Hill

Publishing Company Limited, New Delhi, India

23. Jogani, Ashok and Kshama Fernandes, 2003, Arbitrage in India: Past, Present and Future,

in Susan Thomas (ed.), Derivatives Markets in India, Tata McGraw-Hill Publishing

Company Limited, New Delhi, India.

24. Morgan, C. W. (2000); Commodity Futures Markets in LDCs: A Review and Prospects:

CREDIT Research Paper, University of Nottingham, UK.

25. Frida Youssef (October 2000) Integrated report on commodity exchanges and Forward

Markets Commission, World Bank project for the improvement of the commodities futures

markets in India.

26. Abhyankar, A. (1998), Linear and Nonlinear Granger Causality: Evidence from the U.K.

27. Abhyankar, Abhay H (June 1995) Return and volatility dynamics in the FTSE 100 stock

index and stock index futures markets, The Journal of Futures Markets 15(4) 457–488

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stock index futures market, Review of Financial Studies 5(1) 123–52

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finance: a review of the theory and empirical evidence, Journal of Econometrics 52(1)5–59

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64 No. 3

Books:

1. O.P.Agarwal, Financial derivatives and risk management (first edition) published by

Himalaya Publishing House.

2. Bishnupriya Mishra and satya swaroop debasish, Financial Derivatives (first edition)

published by excel books.

3. Prafulla kumar swain, Fundamental of Financial Derivatives (first edition) published by

Himalaya Publishing House.

4. S.l.Gupta, Financial Derivatives published by PHL Learning limited. New Delhi

5. N.R.Parasuraman , Fundamental of financial Derivative (first edition)published by Wiley

Indian Pvt. Ltd. New Delhi

Websites:

www.mcxindia.com

www.ncdex.com

www.fmc.gov.in

www.nmce.com