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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 asindex futures
8ame as indexfutures
&ontract8i-e
Permitted lot si-eis> multiples
thereof
8ame asindex futures
$s stipulatedby%8' (not less
+han Bs.
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%8&&) undertakes clearing and settlement of all deals executed on the
%8'Hs derivatives segment. It acts as legal counterparty to all deals on the
derivative segment and guarantees settlement.
T>0* & C0(/$%; 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
CONSTRAINTS OF THE STUDY
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CONSTRAINTS OF THE STUDY
* 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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