A STUDY ON TECHNICAL ANALYSIS OF DERIVATIVE STOCK FUTURES AND THE ROLE FOR DEBT MARKET DERIVATIVES IN DEBT MARKET DEVELOPMENT IN INDIA

(1)

ww w.zenit hre se ar ch.o rg.i n

81 A STUDY ON TECHNICAL ANALYSIS OF DERIVATIVE STOCK

FUTURES AND THE ROLE FOR DEBT MARKET DERIVATIVES IN

DEBT MARKET DEVELOPMENT IN INDIA

NENAVATH SREENU*

*Research Scholar, School of Management Studies,

University of Hyderabad.

ABSTRACT

This research paper attempts to collect literature from various sources in on attempt to answer three pertinent questions related to the derivatives growth and model in Indian. This paper examine the analyzes recent trends in derivate in emerging markets, institutional. Obstacles to more diversified and adequate funding sources for the derivative market, and the vulnerabilities associated with the currently available sources. The main trends in emerging markets derivative include an increase in derivative and stagnation or a decline in bank lending and equity issues. As a result, in part, of a series of policy measures, derivative have become a relevant source of funding in some Indian market, the paper also briefly reports on major changes in the financing of derivative market growth in India and considers its implications for the extant theories of law, finance and corporate governance. And analyzes the potential limits of organizational growth in derivative market and explores the implications of integration and diversification for antitrust policy.

KEYWORDS: derivative, finance, market industries and growth.

______________________________________________________________________________

INTRODUCTION

As Indian securities markets continue to evolve, market participants, investors and regulators are looking at different ways in which the risk management may be efficiently met through the introduction of Derivative markets. Through the use of derivative products, it is possible to partially or fully transfer price risks by locking in asset prices. As instruments of risk management, these generally do not influence the fluctuations in the underlying asset prices. Derivatives are risk management instruments, which derive their value form an underlying asset. The underlying asset can be bullion, index, share, bonds, currency, interest etc. banks, securities firms, companies and investors to hedge risks, to gain access to cheaper money and to make profit, uses derivatives. Derivatives are likely to grow even at a faster rate in future.

However, the advent of modern day derivative contracts is attributed to the need for farmers to protect themselves from any decline in the price of their crops due to delayed monsoon, or overproduction. The first „futures‟ contracts can be traced to the Yodoya rice market in Osaka, Japan around 1650. These were evidently standardized contracts, which made them much like today‟s futures. The Chicago Board of trade (CBOT), the largest derivative exchange in the

(2)

82

world, was established in 1848 where forward contracts on various commodities were standardized around 1865. From then on, futures contracts have remained more or less in the same form, as we know them today.

DERIVATIVES

Derivatives are defined as financial instruments whose value derived from the prices of one or more other assets such as equity securities, fixed-income securities, foreign currencies, or commodities. Derivative is also a kind of contract between two counter parties to exchange payments linked to the prices of underlying assets.

DEFINITION

In the Indian context the Securities Contracts (Regulation) Act, 1956 (SC(R) A) defines “derivative” to include-

1. A security derived from a debt instrument, share, loan whether secured or unsecured, risk instrument or contract for differences or any other from of security.

2. A contract which derives its value from the prices, or index or prices, of underlying securities

The above definition conveys that Derivatives are financial products and derive its value from the underlying assets. Derivatives are derived from a matter financial contract called the underlying.

OBJECTIVES

The following are the major objectives of the study.

1. To present a theoretical framework relating to derivative market in India. 2. To observe the daily price movement of selected stock futures.

3. To identify the buying and selling signals to the selected scripts.

DEVELOPMENT OF DERIVATIVE MARKETS IN INDIA

Derivatives markets have been in existence in India in some form or other for a long time. In the area of commodities, the Bombay Cotton Trade Association started futures trading in 1875 and, by the early 1900s India had one of the world‟s largest futures industry. In 1952 the government banned cash settlement and options trading and derivatives trading shifted to informal forwards markets. In recent years, government policy has changed, allowing for an increased role for market-based pricing and less suspicion of derivatives trading. The ban on futures trading of many commodities was lifted starting in the early 2000s, and national electronic commodity exchanges were created. In the equity markets, a system of trading called “badla” involving some elements of forwards trading had been in existence for decades. However, the system led to a number of undesirable practices and it was prohibited off and on till the Securities and Exchange

(3)

83

Board of India (SEBI) banned it for good in 2001. A series of reforms of the stock market between 1993 and 1996 paved the way for the development of exchange-traded equity derivatives markets in India. In 1993, the government created the NSE in collaboration with state-owned financial institutions. NSE improved the efficiency and transparency of the stock markets by offering a fully automated screen-based trading system and real-time price dissemination. In 1995, a prohibition on trading options was lifted. In 1996, the NSE sent a proposal to SEBI for listing exchange-traded derivatives. The report of the L. C. Gupta Committee, set up by SEBI, recommended a phased introduction of derivative products, and bi-level regulation (i.e., self-regulation by exchanges with SEBI providing a supervisory and advisory role). Another report, by the J. R. Varma Committee in 1998, worked out various operational details such as the margining systems. In 1999, the Securities Contracts (Regulation) Act of 1956, or SC(R) A, was amended so that derivatives could be declared “securities.” This allowed the regulatory framework for trading securities to be extended to derivatives. The Act considers derivatives to be legal and valid, but only if they are traded on exchanges. Finally, a 30-year ban on forward trading was also lifted in 1999. The economic liberalization of the early nineties facilitated the introduction of derivatives based on interest rates and foreign exchange. A system of market-determined exchange rates was adopted by India in March 1993. In August 1994, the rupee was made fully convertible on current account. These reforms allowed increased integration between domestic and international markets, and created a need to manage currency risk. Figure 1 shows how the volatility of the exchange rate between the Indian Rupee and the U.S. dollar has increased since 1991.7 the easing of various restrictions on the free movement of interest rates resulted in the need to manage interest rate risk.

DERIVATIVES INSTRUMENTS TRADED IN INDIA

In the exchange-traded market, the biggest success story has been derivatives on equity products. Index futures were introduced in June 2000, followed by index options in June 2001, and options and futures on individual securities in July 2001 and November 2001, respectively. As of 2005, the NSE trades futures and options on 118 individual stocks and

3 stock indices. All these derivative contracts are settled by cash payment and do not involve physical delivery of the underlying product (which may be costly). Derivatives on stock indexes and individual stocks have grown rapidly since inception. In particular, single stock futures have become hugely popular; accounting for about half of NSE‟s traded value in October 2005. In fact, NSE has the highest volume (i.e. number of contracts traded) in the single stock futures globally, enabling it to rank 16 among world exchanges in the first half of 2005. Single stock options are less popular than futures. Index futures are increasingly popular, and accounted for close to 40% of traded value in October 2005. The growth in volume of futures and options on the Nifty index, and shows that index futures have grown more strongly than index options NSE launched interest rate futures in June 2003 but, in contrast to equity derivatives, there has been little trading in them. One problem with these instruments was faulty contract specifications, resulting in the underlying interest rate deviating erratically from the reference rate used by market participants. Institutional investors have preferred to trade in the OTC markets, where instruments such as interest rate swaps and forward rate agreements are thriving. As interest rates in India have fallen, companies have swapped their fixed rate borrowings into floating rates to

(4)

84

reduce funding costs. Activity in OTC markets dwarfs that of the entire exchange-traded markets, with daily value of trading estimated to be Rs. 30 billion in 2004

INSTRUMENTS AVAILABLE IN INDIA

Financial derivative instruments: The National stock Exchange (NSE) has the following derivative products:

Products Index Futures Index Options Futures on Individual Securities Options on Individual Securities Underlying Instrument

S&P CNX Nifty S&P CNX Nifty 30 securities stipulated by SEBI

30 securities stipulated by SEBI

Type European American

Trading Cycle Maximum of 3-

Month trading cycle. At any point in time, there will be 3 contracts available : 1) near month, 2) mid month &

3) far month duration Same as index futures Same as index futures Same as index futures

Expiry Day Last Thursday of

the expiry month Same as index futures Same as index futures Same as index futures

Contract Size Permitted lot size is

(5)

85

200 & multiples thereof

futures NSE (not less

than Rs.2 lacs)

NSE (not less than Rs.2 lacs)

Price Steps Re.0.05 Re.0.05

Base Price- First day of trading previous day closing Nifty value Theoretical value of the options contract arrived at based on Black- Scholes model previous day closing value of underlying security Same as Index options Base Price- Subsequent Daily settlement price

daily close price Daily settlement price

Same as Index options

Price Bands Operating ranges

are

kept at + 10 %

Operating ranges for are kept at 99% of the base price

Operating ranges are kept at + 20 %

Operating ranges for are kept at 99% of the base price Quantity Freeze 20,000 units or greater 20,000 units or greater Lower of 1% of market wide position limit stipulated for open positions or Rs.5 crores Same as individual futures

BSE also offers similar products in the derivatives segment.

DERIVATIVES USERS IN INDIA

The use of derivatives varies by type of institution. Financial institutions, such as banks, have assets and liabilities of different maturities and in different currencies, and are exposed to different risks of default from their borrowers. Thus, they are likely to use derivatives on interest rates and currencies, and derivatives to manage credit risk. Non-financial institutions are

(6)

86

regulated differently from financial institutions, and this affects their incentives to use derivatives. Indian insurance regulators, for example, are yet to issue guidelines relating to the use of derivatives by insurance companies. In India, financial institutions have not been heavy users of exchange-traded derivatives so far, with their contribution to total value of NSE trades being less than 8% in October 2005. However, market insiders feel that this may be changing, as indicated by the growing share of index derivatives (which are used more by institutions than by retail investors). In contrast to the exchange-traded markets, domestic financial institutions and mutual funds have shown great interest in OTC fixed income instruments. Transactions between banks dominate the market for interest rate derivatives, while state-owned banks remain a small presence (Chitale, 2003). Corporations are active in the currency forwards and swaps markets, buying these instruments from banks. Why do institutions not participate to a greater extent in derivatives markets? Some institutions such as banks and mutual funds are only allowed to use derivatives to hedge their existing positions in the spot market, or to rebalance their existing portfolios. Since banks have little exposure to equity markets due to banking regulations, they have little incentive to trade equity derivatives. Foreign investors must register as foreign institutional investors (FII) to trade exchange-traded derivatives, and be subject to position limits as specified by SEBI. Alternatively, they can incorporate locally as a broker-dealer. FIIs have a small but increasing presence in the equity derivatives markets. They have no incentive to trade interest rate derivatives since they have little investments in the domestic bond markets (Chitale, 2003). It is possible that unregistered foreign investors and hedge funds trade indirectly, using a local proprietary trader as a front (Lee, 2004).

THE NEED FOR A DERIVATIVES MARKET

The derivatives market performs a number of economic functions:

1. They help in transferring risks from risk averse people to risk oriented people 2. They help in the discovery of future as well as current prices

3. They catalyze entrepreneurial activity

4. They increase the volume traded in markets because of participation of risk averse people in greater numbers

5. They increase savings and investment in the long run

THE PARTICIPANTS IN A DERIVATIVES MARKET

1. Hedgers use futures or options markets to reduce or eliminate the risk associated with price of an asset.

2. Speculators use futures and options contracts to get extra leverage in betting on future movements in the price of an asset. They can increase both the potential gains and potential losses by usage of derivatives in a speculative venture.

(7)

87

3. Arbitrageurs are in business to take advantage of a discrepancy between prices in two different markets. If, for example, they see the futures price of an asset getting out of line with the cash price, they will take offsetting positions in the two markets to lock in a profit.

TYPES OF DERIVATIVES

1. FORWARDS: A forward contract is a customized contract between two entities, where

settlement takes place on a specific date in the future at today‟s pre-agreed price.

2. FUTURES: A 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. Futures contracts are special types of forward contracts in the sense that the former are standardized exchange-traded contracts

3. OPTIONS: Options are of two types - calls and puts. Calls give the buyer the right but

not the obligation to buy a given quantity 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 quantity of the underlying asset at a given price on or before a given date.

4. WARRANts: Options generally have lives of upto 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.

5. LEAPS: The acronym LEAPS means Long-Term Equity Anticipation Securities. These

are options having a maturity of upto three years.

6. BASKETS: Basket options are options on portfolios of underlying assets. The

underlying asset is usually a moving average or a basket of assets. Equity index options are a form of Basket options.

7. SWAPS: Swaps are private agreements between two parties to exchange cash flows in

the future according to a prearranged formula. They can be regarded as portfolios of forward contracts. The two commonly used swaps are:

 INTEREST RATE SWAPS: These entail swapping only the interest related cash flows Between the parties in the same currency.

 CURRENCY SWAPS: These 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.

8. SWAPTIONS: Swaptions are options to buy or sell a swap that will become operative at the

Expiry of the options. Thus a swaption is an option on a forward swap. Rather than have Calls and puts, the swaptions market has receiver swaptions and payer swaptions. A receiver swaption is an option to receive fixed and pay floating. A payer swaption is an Option to pay fixed and receive floating.

(8)

88

FACTORS DRIVING THE GROWTH OF FINANCIAL DERIVATIVES

1. Increased volatility in asset prices in financial markets,

2. Increased integration of national financial markets with the international markets, 3. Marked improvement in communication facilities and sharp decline in their costs,

4. Development of more sophisticated risk management tools, providing economic agents a wider choice of risk management strategies, and

5. Innovations in the derivatives markets, which optimally combine the risks and returns over a large number of financial assets leading to higher returns, reduced risk as well as transactions costs as compared to individual financial assets.

FUNCTIONS OF DERIVATIVE MARKET

The following are the various functions that are performed by the derivatives markets. They are:  Price in an organized derivatives market reflects the perception of market participations

about the futures and let the prices of underlying to the perceived future level.

 Derivatives market helps to transfer risks from those who have them but may not like them to those who have an appetite for them.

 Derivative trading acts as a catalyst for new entrepreneurial activity.  Derivatives markets help increase savings and investment in the long run.

THE ECONOMIC ROLE OF DERIVATIVES

Derivative markets provide three essential economic functions: Risk management

Price discovery

Transactional efficiency

RISK MANAGEMENT

The principal benefit of the Derivative market is that it provides the opportunity for risk management through Hedging.

(9)

89

RISKS INVOLVED IN DERIVATIVES

Risk can be defined as “The possibility or probability of loss”. Derivatives are used to separate risks from traditional instruments and transfer these risks. The fundamental risks involved in derivatives business includes following:

CREDIT RISK

This is the risk of a counterpart to perform its obligations as per the contract. Also known as default or counterpart risk, it differs with different instruments.

MARKET RISK

Market risk is a risk of financial loss as a result of adverse movements of prices of the underlying asset.

LIQUIDITY RISK

The inability of a firm to arrange a transaction at prevailing market prices is termed as liquidity risk.

Related to liquidity of separate products.

Related to the funding of activities of the firm including derivatives.

LEGAL RISK

Derivatives cut a cross judicial boundaries therefore the legal aspects Associated with the deal should be looked into carefully.

Risk management/Hedging strategies can be broadly grouped into three categories: 1. Inventory hedging to protect the value of existing portfolio of assets.

2. Anticipatory hedging to sell/buy derivatives especially forwards and futures instead of the anticipated inflows (assets)/ outflows (liabilities). A classic example is that of exporters and importers who sells/buys currency futures/options.

3. Return enhancement hedge using derivatives to create synthetic securities, which minic cash assets.

PRICE DISCOVERY

The second major function of derivative market is price discovery. This is a process of providing equilibrium prices that reflect current and prospective demands on current and prospective supplies, and making these prices visible to all.

(10)

90

TRANSACTIONAL EFFICIENCY

Derivative markets allow institution to transact more efficiently than otherwise. They reduce the direct cost of transacting in cash/financial markets are also provided, through clearing houses, an efficient mechanism to deal with counter party risk.

INTRODUCTION TO FUTURES

A 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. Future markets were designed to solve the problems that exist in forward markets. But unlike forward contracts, the futures contracts ate standardized and exchange traded. To facilitate liquidity in the futures contracts, the exchange specifies certain standard features of the contract. It is a standardized contract with standard underlying instrument, a standard quantity and quality of the underlying instrument that can be delivered, (or which can be used for reference purposes in settlement) and a standard timing of such settlement. The standardized items in a futures contract are:

o Quantity of the underlying o Quality of the underlying o Date and Month of Delivery

o The units of Price quotations and Minimum price changes o Location of settlement

TYPES OF FUTURES

On the basis of the underlying asset they derive, the futures are divided into following types.  STOCK FUTURES

The stock futures are the futures that have the underlying asset as the individual securities. The settlement of the stock futures is of cash settlement and the settlement price of the future is the closing price of the underlying security.

 INDEX FUTURES

Index futures are the futures, which have the underlying asset as an Index. The Index futures are also cash settled. The settlement price of the Index futures shall be the closing value of the underlying index on the expiry date of the contract.

 COMMODITY FUTURES

In this case, the underlying asset is a commodity. It can be an agricultural commodity like wheat corn, or even a precious asset like gold, silver etc.

(11)

91

 FINANCIAL FUTURES

In this case, the underlying assets are financial instruments like money market paper, Treasury Bills, notes, bonds etc.

 CURRENCY FUTURES

Currency futures are those in which the underlying assets are major convertible currencies like the U.S. dollar, the Pound Sterling, the Euro and the Yen etc.

MARGINS

Margins are the deposits, which reduce counter party risk, arise in a futures contract. These margins are collected in order to eliminate the counter party risk. There are three types of margin.

INITIAL MARGINS

Whenever a futures contract is signed, both buyer and seller are required to post initial margin. Both buyer and seller are required to make security deposits that are intended to guarantee that they will infact be able to fulfill their obligation. These deposits ate Initial margins and they are often referred as performance as performance margins. The amount of margin is roughly 5% to 15% of total purchase price of futures contract.

MARKING OF MARKET MARGIN

The process of adjusting the equity in an investor‟s account in order to reflect the change in the settlement price of futures contract is known as MTM Margin.

MAINTENANCE MARGIS

The investor must keep the futures account equity equal to or grater than certain percentage pf the amount deposited as Initial Margin. If the equity goes less than that percentage of Initial margin, then the investor receives a call for an additional deposit of cash known as Maintenance Margin to bring the equity up to the Initial margin.

PRICING THE FUTURES

The fair value of the futures contract is derived from a model known as the Cost of Carry model. This model gives the fair value of the futures contract.

COST OF CARRY MODEL

F=S (1+r-q) t Where

(12)

92

S – Spot price of the Underlying R – Cost of Financing

q – Expected Dividend Yield t – Holding Period.

THE ROLE FOR DEBT MARKET DERIVATIVES IN DEBT MARKET DEVELOPMENT

The traditional focus in debt market development has been to obtain a liquid market for interest rate products which yields the rate of time preference for various maturities. Often it is felt that there is an innate sequencing of market development, where countries should embark upon debt derivatives after core issues of the spot market have been properly addressed. A liquid spot market for interest rates is clearly valuable in the establishment of interest rate derivatives. However, interest rate derivatives provide important feedback mechanisms through which market efficiency can be obtained in the spot interest rate market itself: Derivatives trading can lead to improvements in the liquidity of the spot market since interest rate derivatives improve the ability of economic agents to reduce their vulnerability to interest rate volatility. Many developing countries have started out on financial sector reforms in an environment with fixed interest rates and a repressed financial sector. Moving away from this regime towards greater interest rate flexibility imposes costs upon economic agents who are used to fixed interest rates. From a political economy standpoint, it is useful to develop institutional mechanisms for derivatives trading on a spot price before undertaking economic reforms which would increase the volatility of that price. Interest rate derivatives reduce the political cost of moving away from a repressed interest rate market.

The spot market for interest rates, in numerous countries, is notorious for non-transparency, barriers to market access, and hence poor liquidity and market efficiency. The entrenched nature of intermediation and regulation on the spot market often make it difficult for policy makers to make progress in terms of making improvements on it. In this situation, policy makers generally have an opportunity to start afresh on interest rate derivatives, in terms of moving towards much more transparent markets, opening up access to the market to all economic agents, and obtaining liquidity and market efficiency. It is often possible to obtain a situation where price discovery is focused upon the derivative market, which would then drive prices on the spot market. Trading in interest rate derivatives market enhances liquidity of the interest rate spot market through three channels:

1. Arbitrage between spot and derivative market generates a new order flow for the spot market.

2. Access to derivatives, which can be used in hedging systematic risk factors, reduces the economic cost of holding undiversified inventories in spot market trading and hence improves the supply of liquidity on the spot market.

(13)

93

3. Access to leveraged speculation on interest rates on the interest rate derivative markets increases the supply of research and forecasting about interest rates. This reduces uncertainty about future interest rates, and helps to narrows spreads on the spot market.

METHODOLOGY

The Methodology of the study consists of Source of data collection

Statistical tool Data Analysis

SOURCE OF DATA COLLECTION

The data had been collected through Primary and Secondary sources.

PRIMARY SOURCES

The data had been collected through project guide and staff of the Company.

SECONDARY SOURCES

The data had been collected through Books, Journals and Websites.

STATISTICAL TOOL

The data collected from the above sources have been analysed through „Moving Average Method‟, which is one of the popular statistical tool in technical analysis is considered for the study. To examine the underlying trend by smoothing of the data and to provide the Buy and Sell signals to the selected stocks this method serves the best. Moving averages are used along with the price of the scrip. The stock price may intersect the moving average at a particular point. Downward penetration of the rising average indicates the possibility of a further fall and gives „sell‟ signal. Upward penetration of the falling average would indicate the possibility of the further rise and gives the „buy‟ signal.

SIGNIFICANCE OF THE STUDY

The present study on Derivative futures is very much appreciable on the grounds that it gives deep insights about the stock futures market. It would be essential for the perfect way of trading in stock futures. The study elucidates the role of derivative futures in Indian financial markets. Studies of this type are more useful to academicians and scholars to make further insights into the various aspects of derivative futures in similar organizations. An investor can choose the right underlying for investment, which is risk free. The study included the changes in daily price movement and buying and selling signals to the selected stocks. These helps the investor to take right decisions regarding trading in derivative stock futures

(14)

94

LIMITATIONS OF THE STUDY

1. The study is limited by time and cost factors.

2. The sample size chosen is limited to stock futures of ten underlying scrip‟s. 3. The limited period of study may not be detailed and full-fledged in all aspects.

GROWTH OF DERIVATIVES MARKET IN INDIA

Equity derivatives market in India has registered an "explosive growth" and is expected to continue the same in the years to come. Introduced in 2000, financial derivatives market in India has shown a remarkable growth both in terms of volumes and numbers of traded contracts. NSE alone accounts for 99 percent of the derivatives trading in Indian markets. The introduction of derivatives has been well received by stock market players. Trading in derivatives gained popularity soon after its introduction. In due course, the turnover of the NSE derivatives market exceeded the turnover of the NSE cash market. For example, in 2008, the value of the NSE derivatives markets was Rs. 130, 90,477.75 Cr. whereas the value of the NSE cash markets was only Rs. 3,551,038 C. If we compare the trading figures of NSE and BSE, performance of BSE is not encouraging both in terms of volumes and numbers of contracts traded in all product categories. Among all the products traded on NSE in F& O segment, single stock futures also known as equity futures, are most popular in terms of volumes and number of contract traded, followed by index futures with turnover shares of 52 percent and 31 percent, respectively. In case of BSE, index futures outperform stock futures.

PRODUCT WISE TURNOVER OF F&O AT NSE FROM 2000-2008

Stock future Index future Stock option Index option

52 31 13 4

NSE DERIVATIVES SEGMENT TURNOVER RS IN CR Year s Index future Stock future Index option Stock option Interes t rate future Total Average daily turnover 2010 2009 2008 2007 2583617.9 2 3820667.2 7 2558863.5 5 7548563.2 3 2358916.9 0 1362110.8 8 149498.4 0 359136.5 5 0 0 0 7650896.80 13090477.7 5 7356242 46938.0 2 52153.3 0

(15)

95

2006 2005 2004 2003 2002 2539574 1513755 772147 554446 43952 21483 2365 3830967 2791697 1484056 1305939 286533 51515 --- 791906 338469 121943 52816 9246 3765 --- 193795 180253 168836 217207 100131 25163 --- 0 0 202 0 0 --- 4824174 2546982 2130610 439862 101926 2365 29543 19220 10107 8388 1752 410 11 Source: Complied from NSE website

NSE CASH & DERIVATIVES SEGMENT TURNOVER RS IN CR

Year Cash Segment Derivatives Segment

Year cash segment derivate segment

2010-09 3,551,038 13090477.75 2009-08 1,945,285 7356242 2008-07 1,569,556 4824174 2007-06 1,140,071 2546982 2006-05 1,099,535 2130610 2005-04 617,989 439862 2004-03 513,167 101926 2003-02 1,339,510 2365 Source: Complied From NSE Website

(16)

96

AVERAGE DAILY TRANSACTION AT NSE IN DERIVATIVES AND CASH SEGMENT

RS IN CR

Years Derivate segment Cash segment

2010-09 52153.30 14.148 2009-08 29543 7,812 2008-07 19220 6,253 2007-06 10107 4506 2006-05 8388 4,328 2005-04 1752 2,462 2004-03 410 2,078 2 0 0 3 - 0 2 1 1 5 , 3 3 7

Source: Complied from NSE website and NSE fact book 2010

STATUS OF INDIAN DERIVATIVES MARKET VIS-A VIS GLOBAL DERIVATIVES MARKET

The derivatives segment has expanded in the recent years in a substantial way both globally as well as in the Indian capital market. The figures revealed by Futures Industry Association (FIA) Annual Volume Survey and reported here under bring out the fact that more than 15 billion futures and options contracts were traded during 2009 on the 54 important exchanges that report to the FIA, reflecting a remarkable increase of 28% from the previous year. Looking back at the last four years, it can be worked out that these figures reflect that the growth rate was 29 % in 2008, 19% in 2008, 12% in 2007, and 9% in 2006. From the same table it also follows that of the total volume traded globally over the period 2000-07, the US exchanges alone constituted as much as 35 percent share. presents the break down of derivatives volume by region and it is clearly evident that after North America with a share of about 40 percent, Asia-Pacific occupies the second slot with a share of 28 percent and Europe falls at the third place with its contribution of 24 percent. If we compare the turnover-wise performance of the derivatives segments over the last five years, it may be noticed from an inspection of the relevant columns. the Indian segment has expanded phenomenally as compared to the global segment. The turnover of the NSE derivatives segment in 2006-08 stood at Rs. 2130610 crores. It grew to an astonishing level of Rs.13090477 crores during the year 2007-09, displaying a more than six-time increase over the

(17)

97

five year period. In marked contrast, at the global level the increase was less than even two-fold: the turnover was $ 8163 million in 2003 and $ 15187 million in 2007.

GLOBAL TREND IN TURNOVER OF DERIVATIVES TRADING Year US exchange Non-US exchange Global

2002 1313.65 1675.80 2989.45 2003 1578.62 2768.70 4347.32 2004 1844.90 4372.38 6217.28 2005 2172.52 5990.22 8162.54 2006 2795.21 6069.50 8864.71 2007 3525.00 6448.67 9973.67 2008 4616.73 7245.48 11862.21 2009 6137.20 9049.47 15186.67 2002-09 23983 (35.48) 43620 (64.52) 67604 (100) CONCLUSION

Innovation of derivatives have redefined and revolutionised the landscape of financial industry across the world and derivatives have earned a well deserved and extremely significant place among all the financial products. Derivatives are risk management tool that help in effective management of risk by various stakeholders. Derivatives provide an opportunity to transfer risk, from the one who wish to avoid it; to one, who wish to accept it. India‟s experience with the launch of equity derivatives market has been extremely encouraging and successful. The derivatives turnover on the NSE has surpassed the equity market turnover. Significantly, its growth in the recent years has surpassed the growth of its counterpart globally.

REFERENCES

1. Chitale, Rajendra P., 2003, Use of Derivatives by India‟s Institutional Investors: Issues and Impediments, in Susan Thomas (ed.), Derivatives Markets in India, Tata McGraw-Hill Publishing Company Limited, New Delhi, India.

2. FitchRatings, 2004, Fixed Income Derivatives---A Survey of the Indian Market, www.fitchratings.com www.fitchratings.com

(18)

98

3. Gambhir, Neeraj and Manoj Goel, 2003, Foreign Exchange Derivatives Market in India---Status and Prospects, Susan Thomas (ed.), Derivatives Markets in India, Tata McGraw-Hill Publishing Company Limited, New Delhi, India.

4. Gorham, Michael, Thomas, Susan and Ajay Shah, 2005, India: The Crouching Tiger, Futures Industry.

5. Lee, Rupert, 2004, Seeing Double, FOW. ISMR, Indian Securities Market: A Review, 2004, National Stock Exchange of India Limited, Mumbai, India.

6. Jogani, Ashok and Kshama Fernandes, 2003, Arbitrage in India: Past, Present and Future, in Susan Thomas (ed.), Derivatives Markets in India, Tata McGraw-Hill Publishing Company Limited, New Delhi, India.

7. Nair, C. G. K., 2004, Commodity Futures Markets in India: Ready for “Take Off”? National Stock Exchange of India Limited, Mumbai, India

8. „Trading statistics of Derivatives segment at BSE‟, available at: www. bseindia.com(accessed on May 30,2009)

9. Bodla, B. S. and Jindal, K. (2008), „Equity Derivatives in India: Growth Pattern and Trading Volume Effects‟, The Icfai Journal of Derivatives Markets, Vol. V, No. 1, pp.62- 10. Harish, A. S. (2001) „Potential of Derivatives Market in India‟, The ICFAI Journal of

Applied Finance, Vol. 7, No.5, pp 1-24

http://www.indiainfoline.com/news/showleader.asp?lmn=1&storyId=344

11. National Stock Exchange website Business Line July 27,2002 Bombay Stock Exchange website DSP Merrill Lynch website 'Options, Futures, And Other /derivatives' - John C. Hull

12. Berkowitz, J. (1999), „Dealer polling with noisy reporting of interest rates‟, Journal of Fixed Income 9, 47–54.

13. Black, F. (1971), „Towards a fully automated exchange, Part I and II‟, Financial Analysts Journal 27.

14. Bloomfield, R. & O‟Hara, M. (1999), „Market Transparency: Who wins and who loses?‟, RFS 12(1), 5–35.

15. Cita, J. & Lien, D. (1992), „Constructing accurate cash settlement indices: The role of index specifications‟, Journal of Futures Markets 12(3), 339–360.

16. Cita, J. & Lien, D. (1997), „Estimating cash settlement price: The bootstrap and other estimators‟, Journal of Futures Markets 17(6), 617–632.