Derivatives in India Blackbook Project TYBFM 2015-2016: Download Now

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Derivatives in India
Blackbook Project TYBFM 
2015-2016
Blackbook Risk Management Complete Project Growth and Dev
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A detailed insight into derivatives in India Full description
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1) INTRODUCTION :
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Blackbook Risk Management Complete Project Growth and Dev Derivatives Blackbook project Derivatives Project on
Project- Indian… of Financial… Commodity… Elopement of… Questionnaire on modernizati… Project Report Derivative Market
Derivatives are one of the most complex instruments. The word derivative comes
from the word ‘to derive’. It indicates that it has no independent value. A derivative is
a contract whose value is derived from the value of another asset, known as the
underlying asset, which could be a share, a stock market index, an interest rate, a
commodity, or a currency. The underlying is the identification tag for a derivative
contract. When the price of the underlying changes, the value of the derivative also
changes. Without an underlying asset, derivatives do not have any meaning. For
example, the value of a gold futures contract derives from the value of the underlying
asset i.e., gold. The prices in the derivatives market are driven by the spot or cash
market price of the underlying asset, which is gold in this example.
Derivatives are very similar to insurance. Insurance protects against

specific risks, such as fire, floods, theft and so on. Derivatives on the other hand, take
care of market risks - volatility in interest rates, currency rates, commodity prices, and
share prices. Derivatives offer a sound mechanism for insuring against various kinds
of risks arising in the world of finance. They offer a range of mechanisms to improve
redistribution of risk, which can be extended to every product existing, from coffee to
cotton and live cattle to debt instruments.
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In this era of globalisation, the world is a riskier place and exposure to

risk is growing. Risk cannot be avoided or ignored. Man, however is risk averse. The
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Copy Link Email risk averse characteristic of human beings has brought about growth in derivatives.
Derivatives help the risk averse individuals by offering a mechanism for hedging

risks.
Derivative products, several centuries ago, emerged as hedging devices

against fluctuations in commodity prices. Commodity futures and options have had a
lively existence for several centuries. Financial derivatives came into the limelight in
the post-1970 period; today they account for 75 percent of the financial market
activity in Europe, North America, and East Asia. The basic difference between
commodity and financial derivatives lies in the nature of the underlying instrument. In
commodity derivatives, the underlying asset is a commodity; it may be wheat, cotton,
pepper, turmeric, corn, orange, oats, Soya beans, rice, crude oil, natural gas, gold,
silver, and so on. In financial derivatives, the underlying includes treasuries, bonds,
stocks, stock index, foreign exchange, and Euro dollar deposits. The market for
financial derivatives has grown tremendously both in terms of variety of instruments
and turnover.
Presently, most major institutional borrowers and investors use

derivatives. Similarly, many act as intermediaries dealing in derivative transactions.
Derivatives are responsible for not only increasing the range of financial products
available but also fostering more precise ways of understanding, quantifying and
managing financial risk.
Derivatives contracts are used to counter the price risks involved in

assets and liabilities. Derivatives do not eliminate risks. They divert risks from
investors who are risk averse to those who are risk neutral..
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1.1 DEFINITION OF DERIVATIVES :
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Derivative is a product whose value is derived from the value of one or
more basic variables, called bases (underlying asset, index, or reference rate), in a
contractual manner. The underlying asset can be equity, forex, commodity or any 
other asset.
Project- Indian… of Financial… Commodity…
AccordingElopement of…
to Securities Questionnaire(Regulation)
Contracts on modernizati… Project
Act, 1956 Report
{SC(R)A}, Derivative Market
derivatives is
 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.
Derivatives are securities under the Securities Contract (Regulation)

Act and hence the trading of derivatives is governed by the regulatory framework
under the Securities Contract (Regulation) Act.
1.2 HISTORY OF DERIVATIVES :
The history of derivatives is quite colourful and surprisingly a lot longer than
most people think. Forward delivery contracts, stating what is to be delivered for a
fixed price at a specified place on a specified date, existed in ancient Greece and
Rome. Roman emperors entered forward contracts to provide the masses with their
supply of Egyptian grain. These contracts were also undertaken between farmers and
merchants to eliminate risk arising out of uncertain future prices of grains. Thus,
forward contracts have existed for centuries for hedging price risk.
The first organized commodity exchange came into existence in the early 1700’s
in Japan. The first formal commodities exchange, the Chicago Board of Trade
(CBOT), was formed in 1848 in the US to deal with the problem of ‘credit risk’ and
to provide centralised location to negotiate forward contracts. From ‘forward’ trading
in commodities emerged the commodity ‘futures’. The first type of futures contract
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was called ‘to arrive at’. Trading in futures began on the CBOT in the 1860’s. In

1865, CBOT listed the first ‘exchange traded’ derivatives contract, known as the
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Copy Link Email futures contracts. Futures trading grew out of the need for hedging the price risk
involved in many commercial operations. The Chicago Mercantile Exchange

(CME), a spin-off of CBOT, was formed in 1919, though it did exist before in 1874
Blackbook
under the Complete
Risk Management
names Project
of ‘Chicago Produce Derivatives
Growth and Dev
Exchange’ (CPE) and ‘Chicago Egg and Project on
Blackbook project Derivatives
Project- Indian… of Financial… Commodity…
Butter Board’ (CEBB). Elopement
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Questionnaire
futures to on modernizati… Project Report
emerge were the currency in Derivative Market
1972 in the US. The first foreign currency futures were traded on May 16, 1972, on
International Monetary Market (IMM), a division of CME. The currency futures
traded on the IMM are the British Pound, the Canadian Dollar, the Japanese Yen, the
Swiss Franc, the German Mark, the Australian Dollar, and the Euro dollar. Currency
futures were followed soon by interest rate futures. Interest rate futures contracts were
traded for the first time on the CBOT on October 20, 1975. Stock index futures and
options emerged in 1982. The first stock index futures contracts were traded on
Kansas City Board of Trade on February 24, 1982.
The CBOT and the CME are two largest financial exchanges in the world on
which futures contracts are traded. The CBOT now offers 48 futures and option
contracts (with the annual volume at more than 454 million in 2003).The CBOE is the
largest exchange for trading stock options. The CBOE trades options on the S&P 100
and the S&P 500 stock indices. The Philadelphia Stock Exchange is the premier
exchange for trading foreign options.
The most traded stock indices include S&P 500, the Dow Jones Industrial
Average, the Nasdaq 100, and the Nikkei 225. The US indices and the Nikkei 225
trade almost round the clock. The N225 is also traded on the Chicago Mercantile
Exchange.
1.3 DERIVATIVES 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 govern trading of derivatives. SEBI
set up a 24 — member committee under the Chairmanship of Dr. L. C. Gupta on
4
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 81% (32) · 9K views · 54 pages RELATED TITLES

A detailed insight into derivatives in India Full description

Download now 1 of 54    Search document 

TYBFM SEM V DERIVATIVES IN INDIA

Derivatives are very similar to insurance. Insurance protects against

TYBFM SEM V DERIVATIVES IN INDIA

Derivative products, several centuries ago, emerged as hedging devices

Presently, most major institutional borrowers and investors use

Derivatives contracts are used to counter the price risks involved in

TYBFM SEM V DERIVATIVES IN INDIA

Derivatives are securities under the Securities Contract (Regulation)

1.2 HISTORY OF DERIVATIVES :

TYBFM SEM V DERIVATIVES IN INDIA

1.3 DERIVATIVES IN INDIA :

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