Beruflich Dokumente
Kultur Dokumente
Semester V
Submitted
By
Roll no – 70
DECLARATION
___________________
Deepesh Vishnani
70
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Equity Derivatives market in India and investors perception towards it
CERTIFICATE
This is to certify that Mr. Deepesh Vishnani, Roll no 70 of Third Year B.M.S.,
Semester V (2017-2018) has successfully completed the project on Research on
Equity Derivatives Market in India and Investors Perception towards Derivative
Markets under the guidance of Ms. Tanzila Khan.
Project Guide
External Examiner
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ACKNOWLEDGEMENT
To list who all have helped me is difficult because they are so numerous and the
depth is so enormous.
I would like to acknowledge the following as being idealistic channels and fresh
dimensions in the completion of this project.
I take this opportunity to thank the University of Mumbai for giving me chance to
do this project.
I would like to thank my Principal, Ms. Hemlata Bagla for providing the necessary
facilities required for completion of this project.
I take this opportunity to thank our Coordinator Ms. Ritika Pathak, for her moral
support and guidance.
I would like to thank my College Library, for having provided various references
books and magazines related to my project.
Lastly, I would like to thank each and every person who have directly or
indirectly helped me in the completion of the project especially my Parents
and Peers who supported me throughout my project.
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ABSTRACT
The emergence of the market for derivatives products, most notably forwards,
futures and options, can be tracked back to the willingness of risk-averse economic
agents to guard themselves against uncertainties arising out of fluctuations in asset
prices. Derivatives are risk management instruments, which derive their value from
an underlying asset. The following are three broad categories of participants in the
derivatives market Hedgers, Speculators and Arbitragers. Prices in an organized
derivatives market reflect the perception of market participants about the future and
lead the price of underlying to the perceived future level. In recent times the
Derivative markets have gained importance in terms of their vital role in the
economy. The increasing investments in stocks (domestic as well as overseas) have
attracted my interest in this area. Numerous studies on the effects of futures and
options listing on the underlying cash market volatility have been done in the
developed markets. The derivative market is newly started in India and it is not
known by every investor, so SEBI has to take steps to create awareness among the
investors about the derivative segment. In cash market the profit/loss of the investor
depends on the market price of the underlying asset. The investor may incur huge
profit or he may incur huge loss. But in derivatives segment the investor enjoys huge
profits with limited downside. Derivatives are mostly used for hedging purpose. In
order to increase the derivatives market in India, SEBI should revise some of their
regulations like contract size, participation of FII in the derivatives market. In a
nutshell the study throws a light on the derivatives market.
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INDEX
Sr. no. Particulars Page no.
1 Introduction 6
2 Definition of Derivatives 8
3 History of Derivatives 9
4 Derivatives in India 12
5 Review of Literature 15
6 Development of Derivatives Market in 17
India
7 Factors contributing to the growth of 20
Derivatives
8 Types of Derivatives 24
13 Conclusion 51
14 Bibliography 52
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1. INTRODUCTION:
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2. DEFINITION OF DERIVATIVES:
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.
➢ A contract which derives its value from the prices, or index of prices, of
underlying securities.
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3. HISTORY OF DERIVATIVES:
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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 first of the several networks, which offered a trading link between
two exchanges, was formed between the Singapore International Monetary
Exchange (SIMEX) and the CME on September 7, 1984.
Options are as old as futures. Their history also dates back to ancient
Greece and Rome. Options are very popular with speculators in the tulip craze of
seventeenth century Holland. Tulips, the brightly colored flowers, were a symbol of
affluence; owing to a high demand, tulip bulb prices shot up. Dutch growers and
dealers traded in tulip bulb options. There was so much speculation that people
even mortgaged their homes and businesses. These speculators were wiped out
when the tulip craze collapsed in 1637 as there was no mechanism to guarantee
the performance of the option terms.
The first call and put options were invented by an American financier,
Russell Sage, in 1872. These options were traded over the counter. Agricultural
commodities options were traded in the nineteenth century in England and the US.
Options on shares were available in the US on the over the counter (OTC) market
only until 1973 without much knowledge of valuation. A group of firms known as
Put and Call brokers and Dealer’s Association was set up in early 1900’s to provide
a mechanism for bringing buyers and sellers together.
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On April 26, 1973, the Chicago Board options Exchange (CBOE) was
set up at CBOT for the purpose of trading stock options. It was in 1973 again that
black, Merton, and Scholes invented the famous Black-Scholes Option Formula.
This model helped in assessing the fair price of an option which led to an increased
interest in trading of options. With the options markets becoming increasingly
popular, the American Stock Exchange (AMEX) and the Philadelphia Stock
Exchange (PHLX) began trading in options in 1975.
The market for futures and options grew at a rapid pace in the
eighties and nineties. The collapse of the Bretton Woods regime of fixed parties
and the introduction of floating rates for currencies in the international financial
markets paved the way for development of a number of financial derivatives which
served as effective risk management tools to cope with market uncertainties.
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 211 million in 2001).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.
4. DERIVATIVES IN INDIA:
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India has started the innovations in financial markets very late. Some
of the recent developments initiated by the regulatory authorities are very important
in this respect. Futures trading have been permitted in certain commodity
exchanges. Mumbai Stock Exchange has started futures trading in cottonseed and
cotton under the BOOE and under the East India Cotton Association. Necessary
infrastructure has been created by the National Stock Exchange (NSE) and the
Bombay Stock Exchange (BSE) for trading in stock index futures and the
commencement of operations in selected scripts. Liberalized exchange rate
management system has been introduced in the year 1992 for regulating the flow
of foreign exchange. A committee headed by S.S.Tarapore was constituted to go
into the merits of full convertibility on capital accounts. RBI has initiated measures
for freeing the interest rate structure. It has also envisioned Mumbai Inter Bank
Offer Rate (MIBOR) on the line of London Inter-Bank Offer Rate (LIBOR) as a
step towards introducing Futures trading in Interest Rates and Forex. Badla
transactions have been banned in all 23 stock exchanges from July 2001. NSE has
started trading in index options based on the NIFTY and certain Stocks.
market liquidity that are now visible. The market impact cost of doing program
trades of Rs.5 million at the NIFTY index is around 0.2%. This state of liquidity on
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the equity spot market does well for the market efficiency, which will be observed
if the index futures market when trading commences. India’s equity spot market is
dominated by a new practice called ‘Futures – Style settlement’ or account period
settlement. In its present scene, trades on the largest stock exchange (NSE) are
netted from Wednesday morning till Tuesday evening, and only the net open
position as of Tuesday evening is settled. The future style settlement has proved
to be an ideal launching pad for the skills that are required for futures trading.
the price of a stock with a 10% weight in the NIFTY, this yields a 1% in the NIFTY.
Cash settlements, which is universally used with index derivatives, also helps in
terms of reducing the vulnerability to market manipulation, in so far as the ‘short-
squeeze’ is not a problem. Thus, index derivatives are inherently less vulnerable
to market manipulation.
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in index construction and recognition of the pivotal role of the market index in
modern finance. The flows of this index and the importance of the market index
in modern finance, motivated the development of the NSE-50 index in late 1995.
Many mutual funds have now adopted the NIFTY as the benchmark for their
performance evaluation efforts. If the stock derivatives have to come about, should
be restricted to the most liquid stocks. Membership in the NSE-50 index appeared
to be a fair test of liquidity. The 50 stocks in the NIFTY are assuredly the most liquid
stocks in India.
5. REVIEW OF LITERATURE
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Financial market liberalization since early 1990s has brought about major changes in
the financial markets in India. The creation and empowerment of Securities and
Exchange Board of India (SEBI) has helped in providing higher level accountability in
the market. New institutions like National Stock Exchange of India (NSEIL), National
Securities Clearing Corporation (NSCCL), and National Securities Depository
(NSDL) have been the change agents and helped cleaning the system and provided
safety to investing public at large. With modern technology in hand, these institutions
did set benchmarks and standards for others to follow. Microstructure changes
brought about reduction in transaction cost that helped investors to lock in a deal
faster and cheaper. One decade of reforms saw implementation of policies that have
improved transparency in the system, provided for cheaper mode of information
dissemination without much time delay, better corporate governance, etc. The capital
market witnessed a major transformation and structural change during the period.
The reforms process have helped to improve efficiency in information dissemination,
enhancing transparency, prohibiting unfair trade practices like insider trading and
price rigging. Introduction of derivatives in Indian capital market was initiated by the
Government through L C Gupta Committee report. The L.C. Gupta Committee on
Derivatives had recommended in December 1997 the introduction of stock index
futures in the first place to be followed by other products once the market matures.
The preparation of regulatory framework for the operations of the index futures
contracts took some more time and finally futures on benchmark indices were
introduced in June 2000 followed by options on indices in June 2001 followed by
options on individual stocks in July 2001 and finally followed by futures on individual
stocks in November 2001.
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Numerous studies on the effects of futures and options listing on the underlying cash
market volatility have been done in the developed markets. The empirical evidence
is mixed and most suggest that the introduction of derivatives do not destabilize the
underlying market. The studies also show that the introduction of derivative contracts
improves liquidity and reduces informational asymmetries in the market. In the late
nineties, many emerging and transition economies have introduced derivative
contracts, raising interesting issues unique to these markets. Emerging stock
markets operate in very different economic, political, technological and social
environments than markets in developed countries like the USA or the UK. This
paper explores the impact of the introduction of derivative trading on cash market
volatility using data on stock index futures and options contracts traded on the S & P
CNX Nifty (India). The results suggest that futures and options trading have not led
to a change in the volatility of the underlying stock index, but the nature of volatility
seems to have changed post-futures. We also examine whether greater futures
trading activity (volume and open interest) is associated with greater spot market
volatility. We find no evidence of any link between trading activity variables in the
futures market and spot market volatility. The results of this study are especially
important to stock exchange officials and regulators in designing trading
mechanisms and contract specifications for derivative contracts, thereby enhancing
their value as risk management tools.
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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
November 18, 1996 to develop 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 requirements. The Securities
Contract Regulation Act (SCRA) was amended in December 1999 to include
derivatives within the ambit of ‘securities’ and the regulatory framework was 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 in 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.
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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 products.
The following are some observations based on the trading statistics provided in the
NSE report on the futures and options (F&O):
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• Put 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.
• Farther 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. If calls and puts are not looked as just substitutes for spot
trading, the intra-day stock price variations should not have a one-to-one
impact on the option premiums.
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of the BRETTON WOODS agreement brought an end to the stabilizing role of fixed
exchange rates and the gold convertibility of the dollars. The globalization of the
markets and rapid industrialization of many underdeveloped countries brought a
new scale and dimension to the markets. Nations that were poor suddenly became
a major source of supply of goods. The Mexican crisis in the south east-Asian
currency crisis of 1990’s have also brought the price volatility factor on the surface.
The advent of telecommunication and data processing bought information very
quickly to the markets. Information which would have taken months to impact the
market earlier can now be obtained in matter of moments. Even equity holders are
exposed to price risk of corporate share fluctuates rapidly.
These price volatility risk pushed the use of derivatives like futures
and options increasingly as these instruments can be used as hedge to protect
against adverse price changes in commodity, foreign exchange, equity shares and
bonds.
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Asian countries. Suddenly blue chip companies had turned in to red. The fear of
china devaluing its currency created instability in Indian exports. Thus, it is evident
that globalization of industrial and financial activities necessitates use of derivatives
to guard against future losses. This factor alone has contributed to the growth of
derivatives to a significant extent.
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Advances in financial theories gave birth to derivatives. Initially forward contracts in its
traditional form, was the only hedging tool available. Option pricing models developed
by Black and Scholes in 1973 were used to determine prices of call and put options.
In late 1970’s, work of Lewis Edeington extended the early work of Johnson and
started the hedging of financial price risks with financial futures. The work of economic
theorists gave rise to new products for risk management which led to the growth of
derivatives in financial markets.
The above factors in combination of lot many factors led to growth of derivatives
instruments.
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8. TYPES OF DERIVATIVES:
There are mainly four types of derivatives i.e. Forwards, Futures, Options and
swaps.
Derivatives
FORWARDS -
A contract that obligates one counter party to buy and the other to sell a specific
underlying asset at a specific price, amount and date in the future is known as a
forward contract. Forward contracts are the important type of forward-based
derivatives. They are the simplest derivatives. There is a separate forward market
for multitude of underlying, including the traditional agricultural or physical
commodities, as well as currencies and interest rates. The change in the value of
a forward contract is roughly proportional to the change in the value of its
underlying asset. These contracts create credit exposures. As the value of the
contract is conveyed only at the maturity, the parties are exposed to the risk of
default during the life of the contract. Forward contracts are customized with the
terms and conditions tailored to fit the particular business, financial or risk
management objectives of the counter parties. Negotiations often take place with
respect to contract size, delivery grade, delivery locations, delivery dates and credit
terms.
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• FUTURES -
Equities, bonds, hybrid securities and currencies are the commodities of the
investment business. They are traded on organized exchanges in which a clearing
house interposes itself between buyer and seller and guarantees all transactions, so
that the identity of the buyer or the seller is a matter of indifference to the opposite
party. Futures contract protect those who use these commodities in their business.
Futures trading are to enter into contracts to buy or sell financial instruments, dealing
in commodities or other financial instruments for forward delivery or settlement on
standardized terms. The futures market facilitates stock holding and shifting of risk.
They act as a mechanism for collection and distribution of information and then
perform a forward pricing function. The futures trading can be performed when there
is variation in the price of the actual commodity and there exists economic agents
with commitments in the actual market. There must be a possibility to specify a
standard grade of the commodity and to measure deviations from this grade. A
futures market is established specifically to meet purely speculative demands is
possible but is not known. Conditions which are thought of necessary for the
establishment of futures trading are the presence of speculative capital and financial
facilities for payment of margins and contract settlement. In addition, a strong
infrastructure is required, including financial, legal and communication systems.
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• OPTIONS -
A derivative transaction that gives the option holder the right but not the obligation
to buy or sell the underlying asset at a price, called the strike price, during a period
or on a specific date in exchange for payment of a premium is known as ‘option’.
Underlying asset refers to any asset that is traded. The price at which the
underlying is traded is called the ‘strike price’.
There are two types of options i.e., CALL OPTION AND PUT OPTION.
a. CALL OPTION :
A contract that gives its owner the right but not the obligation to buy an
underlying asset-stock or any financial asset, at a specified price on or
before a specified date is known as a ‘Call option’. The owner makes a
profit provided he sells at a higher current price and buys at a lower future
price.
b. PUT OPTION:
A contract that gives its owner the right but not the obligation to sell an
underlying asset-stock or any financial asset, at a specified price on or
before a specified date is known as a ‘Put option’. The owner makes a
profit provided he buys at a lower current price and sells at a higher future
price. Hence, no option will be exercised if the future price does not
increase.
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Put and calls are almost always written on equities, although occasionally
preference shares, bonds and warrants become the subject of options.
The other kind of derivatives, which are not, much popular are as follows:
• BASKETS -
Baskets options are option on portfolio of underlying asset. Equity Index Options are
most popular form of baskets.
• LEAPS -
Normally option contracts are for a period of 1 to 12 months. However, exchange may
introduce option contracts with a maturity period of 2-3 years. These long-term option
contracts are popularly known as Leaps or Long term Equity Anticipation Securities.
• WARRANTS -
Options generally have lives of up to one year, the majority of options traded on
options exchanges having a maximum maturity of nine months. Longer-dated
options are called warrants and are generally traded over-the-counter.
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Futures Forwards
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Long and short positions are usually Forward positions are not as easily
liquidated easily. offset or transferred to the other
participants.
A single, round trip (in and out of the No commission is typically charged
market) commission is charged. It is if the transaction is made directly
negotiated between broker and with another dealer. A commission
customer and is relatively small in is charged to born buyer and seller,
relation to the value of the contract. however, if transacted through a
broker.
The delivery price is the spot price. The delivery price is the forward
price.
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1.] HEDGERS –
2.] SPECULATORS –
Speculators do not have any position on which they enter into futures and options
Market i.e., they take the positions in the futures market without having position in
the underlying cash market. They only have a particular view about future price of
a commodity, shares, stock index, interest rates or currency. They consider various
factors like demand and supply, market positions, open interests, economic
fundamentals, international events, etc. to make predictions. They take risk in turn
from high returns. Speculators are essential in all markets – commodities, equity,
interest rates and currency. They help in providing the market the much desired
volume and liquidity.
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3.] ARBITRAGEURS –
Arbitrage is the simultaneous purchase and sale of the same underlying in two
different markets in an attempt to make profit from price discrepancies between the
two markets. Arbitrage involves activity on several different instruments or assets
simultaneously to take advantage of price distortions judged to be only temporary.
4.] BROKERS –
For any purchase and sale, brokers perform an important function of bringing
buyers and sellers together. As a member in any futures exchanges, may be any
commodity or finance, one need not be a speculator, arbitrageur or hedger. By
virtue of a member of a commodity or financial futures exchange one get a right to
transact with other members of the same exchange. This transaction can be in the
pit of the trading hall or on online computer terminal. All persons hedging their
transaction exposures or speculating on price movement, need not be and for that
matter cannot be members of futures or options exchange. A non-member has to
deal in futures exchange through member only. This provides a member the role
of a broker. His existence as a broker takes the benefits of the futures and options
exchange to the entire economy all transactions are done in the name of the
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member who is also responsible for final settlement and delivery. This activity of a
member is price risk free because he is not taking any position in his account, but
his other risk is clients default risk. He cannot default in his obligation to the clearing
house, even if client defaults. So, this risk premium is also inbuilt in brokerage
recharges. More and more involvement of non-members in hedging and
speculation in futures and options market will increase brokerage business for
member and more volume in turn reduces the brokerage. Thus more and more
participation of traders other than members gives liquidity and depth to the futures
and options market.
Even in organized futures exchange, every deal cannot get the counter party
immediately. It is here the jobber or market maker plays his role. They are the
members of the exchange who takes the purchase or sale by other members in
their books and Then Square off on the same day or the next day. They quote their
bid-ask rate regularly. The difference between bid and ask is known as bid-ask
spread. When volatility in price is more, the spread increases since jobbers price
risk increases. In less volatile market, it is less. Generally, jobbers carry limited risk.
Even by incurring loss, they square off their position as early as possible. Since
they decide the market price considering the demand and supply of the commodity
or asset, they are also known as market makers. Their role is more important in
the exchange where outcry system of trading is present. A buyer or seller of a
particular futures or option contract can approach that particular jobbing counter
and quotes for executing deals. In automated screen based trading best buy and
sell rates are displayed on screen, so the role of jobber to some extent. In any
case, jobbers provide liquidity and volume to any futures and option market.
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6.] EXCHANGE –
Exchange provides buyers and sellers of futures and option contract necessary
infrastructure to trade. In outcry system, exchange has trading pit where members
and their representatives assemble during a fixed trading period and execute
transactions. In online trading system, exchange provide access to members and
make available real time information online and also allow them to execute their
orders. For derivative market to be successful exchange plays a very important
role, there may be separate exchange for financial instruments and commodities
or common exchange for both commodities and financial assets.
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Futures and options contracts do not generally result into delivery but there has to
be smooth and standard delivery mechanism to ensure proper functioning of
market. In stock index futures and options which are cash settled contracts, the
issue of delivery may not arise, but it would be there in stock futures or options,
commodity futures and options and interest rates futures. In the absence of proper
custodian or warehouse mechanism, delivery of financial assets and commodities
will be a cumbersome task and futures prices will not reflect the equilibrium price
for convergence of cash price and futures price on maturity, custodian and
warehouse are very relevant.
Futures and options contracts are daily settled for which large fund movement from
members to clearing house and back is necessary. This can be smoothly handled
if a bank works in association with a clearing house. Bank can make daily
accounting entries in the accounts of members and facilitate daily settlement a
routine affair. This also reduces a possibility of any fraud or misappropriation of
fund by any market intermediary.
A regulator creates confidence in the market besides providing Level playing field
to all concerned, for foreign exchange and money market, RBI is the regulatory
authority so it can take initiative in starting futures and options trade in currency
and interest rates. For capital market, SEBI is playing a lead role, along with
physical market in stocks, it will also regulate the stock index futures to be started
very soon in India.
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Futures and options contract can be used for altering the risk of investing in spot
market. For instance, consider an investor who owns an asset. He will always be
worried that the price may fall before he can sell the asset. He can protect himself
by selling a futures contract, or by buying a Put option. If the spot price falls, the
short hedgers will gain in the futures market, as you will see later. This will help
offset their losses in the spot market. Similarly, if the spot price falls below the
exercise price, the put option can always be exercised.
Derivatives markets help to reallocate risk among investors. A person who wants
to reduce risk, can transfer some of that risk to a person who wants to take more
risk. Consider a risk-averse individual. He can obviously reduce risk by hedging.
When he does so, the opposite position in the market may be taken by a speculator
who wishes to take more risk. Since people can alter their risk exposure using
futures and options, derivatives markets help in the raising of capital. As an
investor, you can always invest in an asset and then change its risk to a level that
is more acceptable to you by using derivatives.
Price discovery refers to the markets ability to determine true equilibrium prices.
Futures prices are believed to contain information about future spot prices and help
in disseminating such information. As we have seen, futures markets provide a low
cost trading mechanism. Thus information pertaining to supply and demand easily
percolates into such markets. Accurate prices are essential for ensuring the correct
allocation of resources in a free market economy. Options markets provide
information about the volatility or risk of the underlying asset.
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Equity Derivatives market in India and investors perception towards it
The availability of derivatives makes markets more efficient; spot, futures and
options markets are inextricably linked. Since it is easier and cheaper to trade in
derivatives, it is possible to exploit arbitrage opportunities quickly and to keep
prices in alignment. Hence these markets help to ensure that prices reflect true
values.
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Equity Derivatives market in India and investors perception towards it
Achieving accuracy in any research requires a deep study regarding the subject. The
prime objective of this research is to know investors perception towards derivatives
market in India.
➢ To know the Investors having any Training in Derivatives Market from NSE,
BSE or any Broking firm before trading
DATA BASE
Present study is based on primary data. The primary data was collected with help of
structured questionnaire to examine the awareness level as well as perceptions of
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investors about the derivatives market in India. The questionnaire includes 10 close
ended questions.
For the collection of data, 100 respondents were chosen.
SAMPLING: -
Convenience sampling
PRIMARY DATA:-
Data used in research originally obtained through the direct efforts of the researcher
through surveys, interviews and direct observation.
SECONDARY DATA:-
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Secondary data is the data that have been already collected by and readily available
from other sources. Such data are cheaper and more quickly obtainable than the
primary data and also may be available when primary data cannot be obtained at all.
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Equity Derivatives market in India and investors perception towards it
Age
Yes
42%
No
58%
Yes No
INTERPRETATION
Above Pie Chart shows that only 42% of the sample units actually trade in derivatives
market. The primary reason for less participation was lack of knowledge of leverage
and how to earn money by applying various strategies.
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Equity Derivatives market in India and investors perception towards it
Occupation
Service Sector
Any other sector
14%
18%
Business Sector
Profession Sector 36%
32%
INTERPRETATION
Above Pie Chart Shows that:-
➢ 14% of the investors belong to service Sector.
➢ 36% of the investors belong to Business Sector.
➢ 32% of the investors belong to Profession Sector.
➢ 18% of the investors belong to Any Other Sector.
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Equity Derivatives market in India and investors perception towards it
Annual Income
8 above
14%
Upto 3 lakhs
30%
6-8 lakhs
22%
3-6 lakhs
34%
Upto 3 lakhs 3-6 lakhs 6-8 lakhs 8 above
INTERPRETATION
Above Pie Chart Shows that:-
➢ 30% of the investors Annual Income is Up to 3 Lakhs
➢ 34% of the investors Annual Income is 3-6 Lakhs
➢ 22% of the investors Annual Income is 6-8 Lakhs
➢ 14% of the investors Annual Income is 8 & Above Lakhs
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Equity Derivatives market in India and investors perception towards it
Other
10%
Arbitrageur
14%
Hedger
52%
Speculator
24%
INTERPRETATION
Above Pie Chart Shows that:-
➢ 52% of the investors use derivatives to hedge their position.
➢ 24% of the investors use derivatives to speculate.
➢ 14% of the investors use derivatives to arbitrage.
➢ 10% of the investors use derivatives for other things.
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Yes
48%
No
52%
Yes No
INTERPRETATION
Above Pie Chart Shows that:-
➢ 48% of the Investors are using some kind of Strategy in Derivatives Market
➢ 52% of the Investors are not using any Strategy in Derivatives Market
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Q.6 What is the rate of return expected by you from Derivative market?
Don't trade
44%
5-10%
16%
Less than 5%
16%
Don't trade Less than 5% 5-10% More than 10%
INTERPRETATION
Above Pie Chart Shows that:-
➢ 44% of the Investors don’t trade in derivatives.
➢ 16% of the Investors expect a rate of return less than 5%
➢ 16% of the Investors expect a rate of return less than 5-10%
➢ 24% of the Investors expect a rate of return more than 10%
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Equity Derivatives market in India and investors perception towards it
Low
6%
Do not trade
High
Low
High Do not trade Neutral
20% 60%
INTERPRETATION
Above Pie Chart Shows that:-
➢ 60% of the Investors don’t trade in Derivative Market.
➢ Satisfaction level is high for 20% of the investors.
➢ Satisfaction level is low for 6% of the investors.
➢ It’s neutral for 14% of the investors.
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Forward
Future
Option
Option Swap
29%
Future
33%
INTERPRETATION
Above Pie Chart Shows that:-
➢ 22% of the Investors prefer investment in Forwards.
➢ 33% of the Investors prefer investment in Futures.
➢ 29% of the Investors prefer investment in Option.
➢ 16% of the Investors prefer investment in Swap
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Q.9 Have you undergone any training in derivatives from NSE, BSE or Broking Firms
before starting trading in Derivatives Market?
Yes
32%
Yes
No
No
68%
INTERPRETATION
Above Pie Chart Shows that:-
➢ 32% of the Investors got Training in NSE, BSE for Derivative Market.
➢ 68% of the Investors didn’t get Training in NSE, BSE for Derivative Market.
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Commodity
14% Equity
Currency
Commodity
Any Other
Equity
Currency
62%
12%
INTERPRETATION
Above Pie Chart Shows that:-
➢ 62% of the investors invest in Equity Market in Derivative.
➢ 12% of the investors invest in Currency Market in Derivative.
➢ 14% of the investors invest in Commodity Market in Derivative.
➢ 12% of the investors invest in Any Other Market in Derivative
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Analysis
After studying the responses I learnt that derivatives is still an evolving concept in
India. Only 40% of the sample units actually trade in derivatives. The primary reason
for less participation was lack of knowledge of leverage and how to earn money by
applying various strategies. The people who traded in derivatives were mostly using
derivatives to hedge and speculate. They believed derivatives would amplify and
give them a higher return of 15-25%. Equity Derivatives was the most favored
products and 62% of the people traded in equity based options or futures. People
were neutral about rating the current derivatives market in India.
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13. CONCLUSION
➢ In the recent years advances in financial markets and the technology have
made derivatives easy for the investors.
➢ In order to increase the derivatives market in India SEBI should revise some of
their regulation like contract size, participation of FII in the derivative market.
Contract size should be minimized because small investor cannot afford this
much of huge premiums.
➢ In cash market the profit/loss is limited but where in F& O an investor can enjoy
unlimited profits/loss.
.
➢ The derivatives are mainly used for hedging purpose.
➢ In cash market the investor has to pay the total money, but in derivatives the
investor has to pay premiums or margins, which are some percentage of total
one.
In derivative segment the profit/loss of the option holder/option writer is purely
depended on the fluctuations
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14. BIBLIOGRAPGHY:-
WEBSITES:-
➢ www.indiaifoline.com
➢ www.nseindia.org
➢ www.moneycontrol.com
➢ www.bseindia.com
➢ www.unicon.com
➢ www.sebi.gov.in
➢ http://www.nseindia/content/fo/fo_historicaldata.htm
➢ http://www.nseindia/content/equities/eq_historicaldata.htm
BOOKS
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