STUDY OF DERIVATIVES IN INDIAN

CAPITAL MARKET”

Presented by:
DHEERAJ ARORA
 In this presentation:
 Introduction about Indian capital market.
 Meaning and types of derivatives.
 Pay off for derivative contract.
 Clearing and settlement of contracts.
 Indian derivative market.
 Users of derivatives.
 Legal framework for derivatives in India.
 Conclusion.
INDIAN CAPITAL MARKET
 By 1830's business on corporate stocks and shares in Bank
and Cotton presses took place in Bombay.
 During 1840 and 1850, there were only half a dozen brokers
recognized by banks and merchants.
 By 1860 the number of brokers increased into 60.
 In 1887, brokers formally established in Bombay, the "Native
Share and Stock Brokers' Association" (which is alternatively
known as " The Stock Exchange ").
 In 1899, the Stock Exchange at Bombay was consolidated.
Post-independence Scenario
 Lahore Exchange was closed during partition of the
country and later migrated to Delhi and merged with
Delhi Stock Exchange.
 Bangalore Stock Exchange Limited was registered in
1957 and recognized in 1963.
 Only Bombay, Calcutta, Madras, Ahmadabad, Delhi,
Hyderabad and Indore, the well established
exchanges, were recognized under the Securities
Contracts (Regulation) Act, 1956 till 1957.
 During early sixties, there were eight recognized
stock exchanges in India.
Growth Pattern of the Indian Stock Market
Sl. No. As on 31st 1946 1961 1971 1975 1980 1985 1991 2010
December
1 No. of
Stock Exchanges 7 7 8 8 9 14 20 23
2 No. of
Listed Cos. 1125 1203 1599 1552 2265 4344 6229 8987
3 No. of Stock
Issues of
Listed Cos. 1506 2111 2838 3230 3697 6174 8967 11789
4 Capital of Listed
Cos. (Cr. Rs.) 270 753 1812 2614 3973 9723 32041 61235
5 Market value of
Capital of Listed
Cos. (Cr. Rs.) 971 1292 2675 3273 6750 25302 110279 502245
6 Capital per
Listed Cos. (4/2)
(Lakh Rs.) 24 63 113 168 175 224 514 715
7 Market Value of
Capital per Listed
Cos. (Lakh Rs.) 86 107 167 211 298 582 1770 6112
Trading Pattern of the Indian Stock Market

Listed Securities

Specified Non-specified
securities(forward securities(cash
list) list)
 Two types of transactions can be carried out on the Indian
stock exchanges:
 Spot delivery transactions "for delivery and payment within the time
or on the date stipulated when entering into the contract which shall
not be more than 14 days following the date of the contract“.
 Forward transactions "delivery and payment can be extended by
further period of 14 days each so that the overall period does not
exceed 90 days from the date of the contract".
NSE

Trading at NSE

Wholesale debt
Capital market
market
DERIVATIVES MARKET
 INTRODUCTION TO “FUTURES & OPTIONS”

Forward Contracts

Options
a)call option
b)put option
c)
Strike price
d)
Maturity date
e)
American option
f)European option
g)
Premium (Option price, Option value)
h)Intrinsic value of the option
i)Time value of the option
j)At-the-Money, In-the-Money and Out-of-the-Money Options


FUTURES
 PAYOFF FOR DERIVATIVES CONTRACTS
• Payoff For A Seller On Nifty Future
profit

1220

Nifty

loss

FIG. PAYOFF FOR A SELLER OF FUTURE

• Payoff for a buyer on Nifty Futures

profit

1220

Nifty

loss
• Fig. Payoff for a buyer on Nifty futures
•  
• Payoff profile of buyer of asset: Long asset
profit

-------------------------------
1160 1220 1280 Nifty

-----------------

loss

Fig. Payoff for investor who went long Nifty at 1220

• Payoff profile for seller of asset: Short asset

Profit

1160 1220 1280 Nifty

Loss

Fig. Payoff for investor who went short Nifty at 1220

 
• Payoff profile for buyer of call option: Long run

Profit

0 1250 Nifty

86.60

Loss

Fig. Payoff for buyer of a call

• Payoff profile for writer of call option: Short call

Profit

86.60

0 1250 Nifty

Loss

Fig. Payoff for a writer of calls options

• Payoff for buyer of put option: Long put

profit

1250 Nifty

61.70

loss

Fig. Payoff for buyer of put option

• Payoff profile for writer of put option: short put

profit

61.70

0 1250 Nifty

loss

Fig. Payoff for writer of put option 

 CLEARING AND SETTLEMENT
 

 Clearing Entities
TMCM

Clearing
PCM
members

SCM
 Settlement Mechanism
 

 Settlement of future contracts:

Futures contracts have two types of settlement, the
MTM settlement, which happen on a continuous
basis at the end of each day, and the final settlement,
which happens on the last trading day of the futures
contracts.
 SETTLEMENT OF OPTIONS CONTRACTS:
There are three types of settlement, Daily premium
settlement, Interim exercise settlement and final
exercise settlement.
INDIAN DERIVATIVE
MARKET
 DERIVATIVES MARKET AT NSE

Business Growth of Derivatives at NSE from 2000-2009

 Product wise Turnover of F&O at NSE from 2000-2008
 

Source: Author’s calculation based on data complied from NSE

 NSE Derivatives Segment Turnover

Year Index Stock Index Stock Interest Total Avg. daily

futures futures options options Rate turnover
Futures

2008-09 2583617 2558863 2358916 149498 0.00 7950896 46938

2007-08 3820667 7548563 1362110 359136 0.00 13090477 52153
2006-07 2539574 3830967 791906 193795 0 7356242 29543
2005-06 1513755 2791697 338469 180253 0 4824174 19220
2004-05 772147 1484056 121943 168836 0 2546982 10107
2003-04 554446 1305939 52816 217207 2130610 8388
202 439862
2002-03 43952 286533 9246 100131 1752
2001-02 21483 51515 3765 25163 ___ 101926 410
2000-01 2365 ___ ___ ___ ___ 2365 11
___

Source: Complied from NSE website

 Users of
derivatives

Mutual All India Life & Gen.

Banks FIIs
Funds FIs Insurers
 Legal Framework for Derivatives Trading
 
 SEBI set up a committee in November 1996 under
the chairmanship of Dr. L.C. Gupta
 SEBI also set up a group under the chairmanship of
Prof. J.R. Varma in 1998 to recommend risk
containment measures for derivatives trading.
 The Securities Contracts (Regulation) Amendment
Bill 1998 was introduced in the Lok Sabha on 4th July
1998.
 The Bill suggested that derivatives may be included in
the definition of "securities" in the SCRA whereby
trading in derivatives may be possible within the
framework of that Act.
 Conclusion
 Derivative is a type of product which is very useful for
investors to reduce the risk as a hedging device and as a
speculation by speculators to make a profit.
 There is very much scope in this market. Hence, use of
Derivatives by the investors in their portfolios should be
increased.
 So, the investors should be more aware about the use of
derivatives as a hedging device.
Thank You