Prepared By,Krishnakumar S N

Indian Derivatives Market

Introduction to Derivatives

Meaning of Derivatives

Derivative is a contract or a product whose value is derived from value of some other asset known as underlying.

Derivatives are based on wide range of underlying assets.

• Metals such as Gold, Silver, Aluminium, Copper, Zinc, Nickel, Tin, Lead

• Energy resources such as Oil and Gas, Coal, Electricity • Agri commodities such as wheat, Sugar, Coffee, Cotton,

Pulses and • Financial assets such as Shares, Bonds and Foreign Exchange.

Milestones in the development of Indian derivative market

• November 18, 1996 L.C. Gupta Committee set up to draft a policy framework for introducing

derivatives• May 11, 1998 L.C. Gupta committee submits its

report on the policy framework• May 25, 2000 SEBI allows exchanges to trade in index

futures• June 12, 2000 Trading on Nifty futures commences on

the NSE

Milestones in the development of Indian derivative market

• June 4, 2001 Trading for Nifty options commences on the NSE

• July 2, 2001 Trading on Stock options commences on the NSE

• November 9, 2001 Trading on Stock futures commences on the NSE

• August 29, 2008 Currency derivatives trading commences on the NSE

Milestones in the development of Indian derivative market

• August 31, 2009 Interest rate derivatives trading commences on the NSE

• February 2010 Launch of Currency Futures on additional currency pairs

• October 28, 2010 Introduction of European style Stock Options

• October 29, 2010 Introduction of Currency Options

Indian Derivatives Market

• SEBI set up a 24–member committee under the Chairmanship of Dr. L. C. Gupta.

• The committee submitted its report on March 17, 1998.• SEBI set up a group in June 1998 under the Chairmanship of Prof.

J.R.Verma. • The committee submitted its report in October 1998.

Features of Derivatives• Derivative are of three kinds future or forward contract,

options and swaps and underlying assets can be foreign exchange, equity, commodities markets or financial bearing assets.

• As all transactions in derivatives takes place in future specific dates.

• Derivatives have standardized terms due to which it has low counterparty risk.

• When value of underlying assets change then value of derivatives also changes and hence one can construct portfolio which is needed by one and that too without having the underlying asset.

Participants in the Derivatives Market

• Hedgers• Speculators• Arbitrageurs

Products in Derivatives Market

• Forwards• Futures

Products in Derivatives Market

Products in Derivatives Market

• Options1. Call option2. Put option

Difference between forwards and futures

Forwards Futures

Privately negotiated contracts Traded on an exchange

Not standardized Standardized contracts

Settlement dates can be set by the parties

Fixed settlement dates as declared by the exchange

High counter party risk Almost no counter party risk

Difference between futures and options

Futures Options

Both the buyer and the seller areunder an obligation to fulfill thecontract.

The buyer of the option has the right and not an obligation whereas the seller is under obligation to fulfill the contract if and when the buyer exercises his right.

The buyer and the seller aresubject to unlimited risk of loss.

The seller is subjected to unlimited risk of losing whereas the buyer has limited potential to lose (which is the option premium).

The buyer and the seller have potential to make unlimited gain or loss.

The buyer has potential to make unlimited gainwhile the seller has a potential to make unlimited gain. On the other hand the buyer has a limited loss potential and the seller has an unlimited loss potential.