PROJECT Report

ON
A Case Study of Financial Innovations in
Indian Stock Market (with Special reference
to Financial Derivatives)

SUBMITTED TO:-

Kurukshetra University, Kurukshetra

IN PARTIAL FULFILLMENT OF THE REQUIREMENT

For the degree of

MASTER OF BUSINESS ADMINISTRATION

(M.B.A.)
(SESSION 2004-2006)
Under the Guidance Of:
Mr. Ranjeet Verma
Faculty, MBA
N.C.C.E.,Israna

Submitted By:
ASHA
MBA Final Year
ROLL NO. : MBA/04/010

ACKNOWLEDGEMENT
Preservation, inspiration and motivation have always played a key role in
the success of any venture. In the present world of competition and success
project is like a bridge between theoretical and practical working.
It is a great pleasure to present here the opportunity to express my
heartfelt thanks to everybody who helped me through the successful completion
of the dissertation.
I express my sincerest regards and deep sense of gratitude to Ms. Puja
Mann (HOD,M.B.A. Department,

N.C.College of Engineering,Israna(Panipat)

who gave me an opportunity to work on such a challenging topic.

It gives me great pleasure to acknowledge.

Mr. Lalit Asija

(faculty,

N.C.College of Engineering,Israna(Panipat) for his inspiring guidance which

helped me a lot in selecting this project and working on it.
I

am

also

thankful

to

the

staff

of

N.C.College

of

Engineering,Israna(Panipat) for their keen suggestions from time to time.

Last but not the least my sincere thanks to my parents and friends who
helped me to bring this project in a final shape

ASHA

INDEX

CHAPTERS
1

INTRODUCTION

JUSTIFICATION OF THE TOPIC

REVIEW OF EXISTING LITERATURE

OBJECTIVES OF THE STUDY

RESEARCH METHODOLOGY

FINANCIAL INNOVATIONS

FINDINGS AND CONCLUSION

SUGGESTIONS

CONSTRAINTS OF THE STUDY

10

BIBLIOGRAPHY

EXECUTIVE SUMMARY
Practical training constitutes an integral part of the management
studies. Training gives an opportunity to the students to expose
themselves to the industrial environment, which is quite different from the
classroom teaching. The practical knowledge is an important suffix to the
theoretical knowledge. I consider myself lucky to get mytopic of the report
which is innovations in Indian stock market with special reference
to financial derivatives". . It really helped me to get a practical insight
into the actual business environment and provide me an opportunity to
make my financial management concepts more clear.

The main objective of the study is to analyze the Indian derivative

market.The study conducted by me has also some other objectives such
as giving new suggestions for the improvement of existing system speed
etc.
The conclusions of the study are- people have less awareness
about derivatives and The OTC derivatives markets have witnessed sharp
growth over the last few years.

CHAPTER 1

INTRODUCTION

INTRODUCTION
The emergence of the market for derivative products, most notably
forwards, futures and options can be traced back to the willingness of risk-averse
economic agents to guard themselves against uncertainties arising out of
fluctuations in asset prices.
Financial markets are, by nature, extremely volatile and hence, the risk
factor is an important concern for financial agents. To reduce the risk, the
concept of derivatives comes into picture.

DERIVATION OF DERIVATIVES
Derivatives in the form of forwards and options have been around as long
as there has been commerce because all commerce involves business risk. The
history of derivatives can be traced far back to renaissance period (15 th Century)
where the Venetian spice traders waiting a cargo on high seas would enter into a
forward contract.Forward contracts are also traced in Japanese and American
markets for hundreds of years ago. The Futures trading on the commodities first
started in Chicago way back in 1874. But the explosion of derivative markets in
the form we see today can be attributed to volatility in the foreign exchange rates
created due to collapse of Breton Woods system. (A system whereby all the
exchange rates were pegged to US$ whereas there was fixed parity between
US$ and Gold). It led to the introduction of the forward contracts in the foreign

currency by 1972. The equity options were introduced in 1973. The early 80s
also led to the introduction of few more derivative products viz. currency swaps,
interest rate swaps, index futures and options, etc.
In India, the L.C.Gupta Committee was appointed in 1996 to develop
appropriate regulatory framework for the equity-based derivatives trading.

It

submitted its report in 1998, which was later approved by SEBI. It has suggested
introducing derivative products in a phased manner starting with Index Futures
followed by Index Options and Options on shares. Pursuant to the same, Index
Futures were introduced in India in June 2000 at Bombay Stock Exchange and
National Stock Exchange, Delhi Stock Exchange has indicated to join them
shortly.
Financial Derivatives have been in existence in the markets for over 150
years in fact the first reference to some form of the modern day. Financial
Derivative is found in the Futures markets that were function in Chicago in the
1850s. Over the years a more formalized structure came into place the most
significant fillip in this regard was the seminal work of Fisher Black and Myron
Scholes in 1973. Since then, the development of Financial Derivatives and its
extensive use in the financial sector has been synonymous with the stupendous
growth in the financial sector itself. The 1980s and the 1990s saw tremendous
growth in the Financial Sector and a lot of it was directly fuelled by the growth
and development of the use of derivatives in this area.
The liberalization in the Indian Financial Sector started more than a decade
back. But it is only now that the Reserve Bank of India is looking at allowing the

use of derivatives in the market in a wide scale. Though derivatives in the equity
market were permitted in 2001, the currency and the interest rate sectors of the
financial sector in India were kept immune for the use of derivatives. The only
derivative that was allowed in the money market segment of the financial sector
was Swaps and with a case-by-case approval from RBI some back-to-back
foreign currency option deals.

However, RBI is now keen to open up the

segment and allow for options on both currency (the Indian Rupee) as well as the
interest rate applicable in the Indian markets. In view of this, the traders of banks
and financial institutions as well as corporate need to be aware of these
techniques for both investment as well as risk management functions; especially
given the highly volatile nature of the industry.

FINANCIAL DERIVATIVES
A derivative is a financial instrument whose value is derived from the price
of a more basic asset called the underlying. The underlying may not necessarily
be a tradable product.

Examples of underlying are shares, commodities,

currencies, credits, stock market indices, weather temperatures, sunshine,

results of sport matches, wind speed and so on. Basically, anything which may
have to a certain degree an unpredictable effect on any business activity can be
considered as an underlying of a certain derivative.
All derivatives can be divided into two big classes.
1. Linear
2. Non-Linear

Linear are derivatives whose values depend linearly on the underlyings

value. This includes:

Forwards and Futures

Swaps

Non-linear are derivatives whose value is a non-linear function of the

underlying. This includes:

Options

Convertibles

Equity Linked Bonds

Reinsurances

THE NEED FOR A DERIVATIVES MARKET:The derivatives market performs a number of economic functions:
1.

They help in transferring risk 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:-

HEDGERS

PARTICIPANTS
IN DERIVATIVE
MARKET

SPECULATOR

ARBITRAGEU
R

Hedgers use futures or options markets to reduce or eliminate

the risk associated with price of an asset.

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.

Arbitrageurs are in business to take advantage of a

discrepancy between prices in two different markets.

If, for

sample, 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:-

TYPES OF DERIVATIVES
FORWARDS
FUTURES
OPTIONS
WARRANTS
LEAPS
BASKETS
SWAPS
SWAPTIONS

FORWARDS: A forward contract is a customized contract between two

entities, where settlement takes place on a specific date in the future at todays
pre-agreed price.

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.

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.

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-thecounter.

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

These are options having a maturity of upto three years.

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.

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.

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.

The following factors have generally been identified as the major

driving force behind 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.

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 transaction
costs as compared to individual financial assets.

FUNCTIONS OF DERIVATIVE MARKET:The derivative

market performs a number of economic

functions:
First, prices in an organized derivatives market reflect the perception of market
participants about the future and lead the prices of underlying to the perceived
future level. The prices of derivatives converge with the prices of the underlying
at the expiration of derivative contract. Thus derivatives help in discovery of
future as well as current prices.

Second, the derivatives market helps to transfer risks from those who have
them but may not like them to those who have appetite for them.

Third, derivatives, due to their inherent nature, are linked to the underlying cash
markets. With the introduction of derivatives, the underlying market witnesses
higher trading volumes because of participation by more players who would not
otherwise participate for lack of an arrangement to transfer risk.

Fourth, speculative trades shift to a more controlled environment of derivatives

market. In the absence of an organized derivatives market, speculators trade in
the underlying cash markets.

Margining, monitoring and surveillance of the

activities of various participants become extremely difficult in these kind of mixed

markets.
Fifth, an important incidental benefit that flows from derivatives trading is that it
acts as a catalyst for new entrepreneurial activity. The derivatives have a history
of attracting many bright, creative, well-educated people with an entrepreneurial
attitude. They often energize others to create new businesses, new products
and new employment opportunities, the benefit of which are immense.

Sixth, derivatives markets help increase savings and investment in the long run.
Transfer of risk enables market participants to expand their volume of activity.

CHAPTER-2

JUSTIFICATION OF THE
TOPIC

JUSTIFICATION OF THE TOPIC

Derivatives are risk shifting devices. Initially they were used to reduce
exposure to changes in exchange rates, interest rates, or the stock indexes.
More recently, derivatives have been used to segregate categories of investment
risk that may appeal to different investment categories used by mutual fund
managers, corporate treasurers or pension fund administrators.

These

investment managers may decide that it is more beneficial to assume a specific

risk characteristic of a security.

For instance, several derivative products may be created based on debt

securities that represent an interest in a pool of residential home mortgages.

One derivatives product may provide that the purchaser receives only the
principal payments.

These derivatives products, which react differently to

movements in interests rates, may have specific appeal to different investment

strategies employed by the investment manager.

The financial markets increasingly have become subject to greater

Savings in the interest rate movements than in past decades. As a result
financial derivatives have appealed to corporate treasurer who wish to take
advantage of favourable interest rate in the management of corporate debt
without the expenses of issuing new debt securities.

Globalization and liberalization process has changed the pace of

economic development of many developing countries like India.

One of the

unique features of globalizations and liberalization is that, innovations have taken

place in the different areas of financial system. Product innovation is one of
them.

Along with the economic development, risk in the financial system is

increasing at the same pace, to manage these risks the innovation of new
products like Derivatives is not a mater of surprise.

Financial Derivatives are used by various organizations to manage

different categories of risks i.e. interest rate risk, foreign exchange risk and credit
risk.
The present study is undertaken to view about the various derivative
products that have entered in Indian stock market in June 2000 with the
introduction of Index features on BSE. Later on in mid 2001 stock features and
stock options were introduced on 31 which later on increased to 53.

In 2002 July NSE launched interest rate futures. Recently NSE and BSE
announced the introduction of various new products in Derivatives segment. The
study has great relevance in the light that growth in the derivatives volume is
exponential in India. The above text justifies the selection of research proposal
on the topic.

CHAPTER-3

REVIEW OF EXISTING LITERATURE

REVIEW OF EXISTING LITERATURE

There is wide existing literature available on financial derivatives which
contains information about various aspects of financial derivatives. Few of them
are listed below:
*

Reason (Feb. 2004) Callahan & Kaza

In defense of derivatives: Between Enron, world com and global crossing,

the controversial financial instruments have gotten a bad rap Here's the truth.
*

Indian Derivative Market:- Structural Issues

(ICFAI University Press) Ayriac Kandathil

Wall Street & Technology (June 11,2001)

Celent forecasts Derivatives exchanges going fully electronic within 2

years.

CHAPTER-4

OBJECTIVES OF THE STUDY

OBJECTIVES OF STUDY
The present study will encompass following objectives:-

1)

To study the nature, types and features of these products on NSE and
BSE.

2)

To study the growth and liquidity of these instruments on both stock

exchanges.

3)

To study performance of various products on stock market.

4)

To study the future development in Derivative segment in India.

5)

To make certain suggestion and recommendations with regard to

future Development of Derivatives in Indian Stock Market.

6)

To know about the concept of financial derivatives, its need and nature.

7)

To know about the various innovations, which have taken place in

stock market, particularly in Derivative segment.

CHAPTER-5

RESEARCH METHODOLOGY

RESEARCH METHODOLOGY
Research comprises defining and redefining the problems, formulating
hypothesis or suggested solutions, collecting, organizing and evaluating data and
reaching conclusions.

The Term "Research Methodology" here comprises of all research

activities carried in connection with "Financial derivatives in India". The basic
purpose of the Research Methodology is to describe research procedure.

It

helps the researcher to give the reason for adopting certain line of action while
ruling out the other.

Research Problem:
The research studies the "financial innovations in Indian stock Market".
The research tries to find out the innovations in the field of financial derivatives.

Research Design:
The research is descriptive research. The research describes the problem
and tends to study each and every aspect relating to derivatives.

DATA COLLECTION:
Data can be classified into:
a)

Primary Data

b)

Secondary Data

In this project main source of data is secondary data. The data useful for
the project has been collected from various sources like: journals, magazines,
newspapers, books and internet.

Data Analysis:
The data relating to the growth and volumes of derivatives have been
analyzed using charts and tables.

Scope of the Study:

To know about the innovations which has taken place in stock market,
particularly in financial derivatives.
To study the future development of Derivative segment in India.
To Study the performance of derivative products in stock market.

CHAPTER-6

FINANCIAL INNOVATIONS

FINANCIAL INNOVATIONS
DEVELOPMENT OF DERIVATIVE MARKET 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 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. To begin with, SEBI approved trading in index futures contracts based
on S&P CNX Nifty and BSE-30 (Sensex) index. This was followed by approval
for trading in options based on these two indexes and options on individual
securities.

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 future on June 12, 2000.
The trading in index options commenced on June 4, 2001 and trading in options
on individuals 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):

Single-stock futures continue to account for a sizable proportion of the F&O

segment. It constituted 70 per cent of the total turnover during June, 2002.
A primary reason attributed to this phenomenon is that traders are
comfortable with single-stock futures than equity options, as the former
closely resembles the erstwhile badla system.

On relative terms, volumes in the index options segment continues to remain

poor. This may be due to the low volatility of the spot index. Typically,
options are considered more valuable when the volatility of the underlying (in
this case, the index) is high. A related issue is that brokers do not earn high
commissions by recommending index, options to their clients, because low
volatility leads to higher waiting time for round-trips.

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 to 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 to generate profits from the stock price movements.
The fact that the option premiums Tail intra-day stock prices is evidence to
this calls on Satyam fall, while puts rise when Satyam falls intra-days. If
calls and puts are not looked as just substitutes for Spot Trading, the intraday stock price variations should not have a one-to-one impact on the option
premiums.

DERIVATIVES IN INDIA: A CHRONOLOGY

Day &
Year
Month
14 December 1995

NSE asked SEBI for permission to trade

18 November 1996

index futures
SEBI setup L.C.Gupta Committee to draft a

11 May
7 July

1998
1999

policy framework for index futures

L.C.Gupta Committee submitted report
RBI gave permission for OTC forward rate

2000

agreements (FRAs) and interest rate swaps

SIMEX chose Nifty for trading futures and

2000

options on an Indian index

SEBI gave permission to NSE and BSE to

2000

do index futures trading

Trading
of
BSE
Sensex

2000
2000

commenced at BSE
Trading of Nifty futures commenced at NSE
Trading of futures and options on Nifty to

24 May
25 May
9 June
12 June
31 August

Event

futures

commence at SIMEX
The SCF recommended following measures to safeguard
the integrity of the market and protect investors:

1.

Dr.L.C.Gupta committee appointed by SEBI has drawn out detailed

guidelines pertaining to the regulatory framework on derivatives

prescribing necessary preconditions which should be adopted before the

introduction of derivatives.

2.

There is an urgent need to educate Indian investors by creating

investment awareness among them by conducting intensive educational
programmes, so that they are able to understand their risk profiles in a
better way.

3.

The steps should be taken to strengthen the cash marker so that they
become strong and efficient.

4.

It is incumbent on the regulatory authorities to ensure a strong

surveillance/ vigilance and enforcement machinery.

5.

SEBI should in consultation with the stock exchanges endeavour to

conduct the certification programme on derivatives trading with a view to
educate the investors and market players.

6.

There is a need to protect particularly the small investors by preventing

them from venturing into options and futures market, who may be lured by
sheer speculative gains. Threshold limit of the derivatives transactions
should be pegged not below Rs.2 lakh.

7.

There is an urgent need to prescribe pronounced accounting standards in

the case of investors/ dealers and also back office standards for
intermediaries with a view to reducing the possibility of concealing the loss
and perpetrating the frauds by companies/ intermediaries to a minimum.
Institute of Chartered Accountants of India, in consultation with the stock
exchanges, should formulate suitable accounting standard and SEBI
should prescribe the same before trading in derivatives is commenced.

Group on Risk Management

SEBI constituted a group in June 1998 under the Chairmanship of one of
its members, Prof. J.R.Varma, to recommend measures for risk containment in
the derivatives market in India. The group submitted its report in October, 1998,
covering the operational details of the margining system, methodology for
charging initial margins, broker net worth, deposit (liquid assets) requirement and
real-time monitoring requirements, including intra-day violations etc. to be
followed by all exchanges/ clearing corporations, which allow stock index futures
trading. The main recommendations of the Group were accepted by SEBI in
March 1999.

Forwarding Trading in Securities:

By a notification issued on March 1, 2000, the Government lifted the threedecade old prohibition on forward trading in securities by rescinding 1969

notification.

This prohibition was imposed by Government in exercise of its

powers under section 16 of the SC

( R )A by a notification issued on June

27, 1969 in order to curb certain unhealthy trends, which had developed in the
securities markets at that time and to prevent undesirable speculation. In the
changed financial environment, the relevance of this prohibition had vastly
reduced. Through appropriate amendments in the byelaws of the exchanges,
carry-forward transactions in the securities were permitted. Similarly, periodic
amendments to the aforesaid notification were made to permit repo transactions
in government securities by authorized intermediaries.

Even though the

notification of 1969 was in force, exceptions had been carved out in course of
time as market needs changed and some form of forward trading (carry forward/
ready forward) was prevalent. The repeal of the June 1969 notification was
desirable as a measure of market reform to make way for the introduction of
derivatives trading.

The L.C.Gupta Committee had also recommended in its

report that this notification be amended to enable trading in futures and options.

Regulatory Amendments:
The regulations for Mutual Funds were amended to allow them to trade in
derivatives.

Regulations were also amended to provide for application and

conditions for registration, payment of fees by trading and clearing members of

derivative segment or clearing house.
Currently, FIIs do not pay any margins in the cash market and bring in
funds only for transactions in equities.

In derivatives trading, however, all

investors, including FIIs, have to bring in up-front margins.

The High Level

Committee on Capital markets favoured FIIs to bring in funds in advance to meet

their margin requirements for trading in equity derivatives .

Approval of Derivatives Trading:

SEBI granted final approval to the Derivative Segment of the NSE and
BSE and their clearing house/corporation for commencement of trading and
settlement in SEBI-approved derivative contracts, which included only Index
Futures contracts to begin with. The approval was granted for trading in futures
contracts based on S&P CNX Nifty Index and on BSE-30 (Sensex) Index.
Trading and settlement in derivative contracts would be 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.

New Derivative Products:

A meeting of the Technical Group set up by SEBI for introducing new
derivative products, held on August 4, 2000, laid down the broad framework for
risk management of index options.

It was decided to use a portfolio-based

margining approach, which takes an integrated view of the risks involved in the

positions of each individual client in various index futures and index options
contracts. To cover the risk arising out of change in the value of index as well as
index volatility, margining system would have the ability to compute the worst
case loss under various scenarios of index and volatility changes and charge
margins accordingly. Position limits mandated for future market would also apply
to index options. Any short positions on options would be subject to stringent
margining. Options on index would have maximum maturity of three months with
minimum of three strikes (in the money, near the money and out of the money).

DERIVATIVES MARKET AT NSE:

The derivatives trading on the Exchange commenced with S&P CNX Nifty
Index futures on June 12, 2000. The futures contract on NSE is based on S&P
CNX Nifty Index. Currently, it has a maximum of 3-month expiration cycle. Three
contracts are available for trading, with 1 month, 2 months and 3 months expiry.
A new contract is introduced on the next trading day following the expiry of the
near month contract. Various conditions like, Good-till Day, Good-till-Cancelled,
Good-till-ate, Immediate or Cancel, Stop loss, etc. can be built into an order. The
salient features of S&P Index Futures Contract are presented in Table 1 .

Table 1:Contract Specification for S&P CNX Nifty Index Futures

Item
Security Description
Underlying Unit

Specification
N FUTIDX NIFTY
S&P CNX Nifty Index

Contract Size
Price Steps
Price Bands
Expiration Months
Trading Cycle

200 or multiples thereof

Rs.0.05
Not applicable
3 near months
A maximum of three

month

trading

cycle/the near month (one), the next

month (two) and the far month (three).
New contract is introduced on the next
trading day following the expiry of near
Last Trading/Expiry Day

month contract
The last Thursday of the month or the
preceding trading day, if last Thursday is a

Settlement
Final Settlement Price
Settlement Day
Trading Hours
Margins

holiday
In cash on T+1 basis
Closing of futures contract
Last trading day
9.55 am to 3.30 pm
Upfront initial margin on daily basis

On the last day, the futures closing price for each Nifty index futures contract is
computed by taking the weighted average price for the last half an hour's trade.

The trade details of the Index futures market of NSE from June to
September 2000 are presented in Table 2. The movement of Nifty as compared
to various Nifty futures since June 2000 is presented in Chart .

Trade Details of Nifty Futures Market-June to September 2000

Month/Details

29

27-

Contract Expiring on
31282530

June-

Jul-

Aug-

Sep-

Oct-

Nov-

Dec-

00

00

00

00

00

00

00

28

June 2000
Close Value*
Turnover

1490.

1484.

1486.

1490.

35

55

40

00

(Rs.Crore)
Open

24.42

9.37

1.44

0.03

36

87

15

Close Value*

1336.

1347.

1365.

1390.

Turnover

80

70

00

00

(Rs.Crore)

Interest*(No.
of Contracts)
July 2000

Open
Interest*(No.

77.97

26.82

3.66

0.03

111

237

34

of Contracts)
August
2000

Close Value*

1392.

1398.

1412.

Turnover

35

10

00

67.47

20.61

1.77

94

174

16

(Rs.Crore)
Open
Interest*(No.
of Contracts)
September
2000
Close Value*

1267.

1282.

1285.

1290.00

Turnover

05

80

50

0.03

80.68

31.70

6.50

256

455

51

(Rs.Crore)
Open
Interest*(No.
of Contracts)
*As at end of the month or date of expiry of the contract

Trading Mechanism:
The Futures and Options trading system of NSE, called NEAT-F&O trading
system, provides a fully automated screen-based trading for S&P CNX Nifty

futures on a nationwide basis and an online monitoring and surveillance

mechanism.

It supports an order driven market and provides complete

transparency of trading operations. It is similar to that of trading of equities in the

CM segment.

The NEAT-F&O trading system is accessed by two types of users. The

Trading Members have access to functions such as, order entry, order
matching, order and trade management. The Clearing Members (CM) use the
trader workstation for the purpose of monitoring the trading member (s) for whom
they clear the trades. Additionally, they can enter and set limits to positions,
which a trading member can take.

Charges
The maximum brokerage chargeable by a trading member in relation to
trades affected in the contracts admitted to dealing on the derivatives segment of
the Exchange is fixed at 2.5% of the contract value, exclusive of statutory levies.

The transaction charges payable by each trading member on the trades

executed by him on the derivatives segment are fixed at Rs.2 per lakh or
turnover (0.002%) (each side) or Rs.1 lakh annually, whichever is higher.
However, these charges have been waived upto 3rd of 2000. The

trading

members contribute to Investor Protection Fund of derivatives segment at the

rate of Rs.10 per crore of turnover (0.0001%) (each side).

Basket Trading Facility in Derivatives Segment:

In order to provide a facility for easy arbitrage between futures and cash
markets, NSE introduced basket-trading facility. This enables generation of
portfolio offline order files in the derivatives trading system and its execution in
the cash segment. A trading member can buy or sell a portfolio through a single
order, once he determines its size. The system automatically works out the
quantity of each security to be bought or sold in proportion to their weights in the
portfolio.

INSTRUMENTS AVAILABLE IN INDIA

Financial derivative instruments:
The National Stock Exchange (NSE) has the following derivative products :
Products
Underlying
Instrument
Type
Trading
Cycle

Index Futures

Index
Options

Future on
Individual
Securities
S&P CNX Nifty
S&P
CNX 30 securities
Nifty
stipulated by
SEBI
European
Maximum of 3Same
as Same
as
Month
trading index futures index futures
cycle. At any
point in time,
there will be 3
contracts
available:
1)near month,
2) mid month &
3)far
month
duration

Options on
Individual
Securities
30 securities
stipulated by
SEBI
American
Same as index
futures

Expiry Day
Contract
Size

Last Thursday of
the expiry month
Permitted lot size
is
200 & multiples
thereof

Price Steps
Base PriceFirst day of
Trading

Res.0.05
Previous
closing
Nifty value

Same
as
index futures
Same
as
index futures

Re.0.05
day Theoretical
value of the
options
contract
arrived
at
based
on
BlackScholes
model
Base Price- Daily settlement
Dairy
close
Subsequen Price
price
t
Price
Bands

Operating
ranges
are kept at +10%

Quantity
Freeze

20,000 units or
greater

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

Same
as
index futures
As stipulated
by
NSE (not less
Than
Rs.2
lacs)

Same as index
futures
As stipulated
by
NSE (not less
Than
Rs.2
lacs)

Previous day
Same
Closing value Index
of
Options
Underlying
Security

as

Daily
settlement
Price

as

Same
Index
Options

Operating
ranges
Are kept
+20%

Operating
ranges
at For are kept at
99% of the
base
price
20,000 units Lower of 1% Same
as
or
of
indivi-dual
greater
Marketwide
futures
Position limit
Stipulated for
Open
positions
Or Rs.5 crores

BSE also offers similar products in the derivatives segment.

Clearing and Settlement:

NSCCL undertakes clearing and settlement of all deals executed on the

NSE's derivatives segment. It acts as legal counterparty to all deals on the
derivative segment and guarantees settlement.

Types of Clearing Members:

In the derivatives segment, NSCCL has admitted Clearing Members
(CMs) distinct from Trading Members (TMs), Primarily, a CM undertakes clearing
for all his TMs, performs actual settlement and undertakes risk management.
There are two types of clearing members:

Trading Member Clearing Member (TM-CM) - A CM who is also a TM, TMCM may clear and settle his own proprietary trades and clients' trades as well
as clear and settle for other TMs

Professional Clearing Member (PCM) - A CM who is not a TM. Typically

banks or custodians could become a PCM and clear and settle for TMs.
This is in line with the 2-tier membership structure stipulated by SEBI to

enable wider participation in the derivatives segment.

Derivatives segment are cleared through a CM of NSCCL .

Settlement Mechanism:

All trades on the

Nifty index futures contracts are cash settled, i.e., through exchange of cash
differences in value. Settlement is done on a daily basis by marking to market all
open positions on the basis of the daily settlement price. Members are required
to pay the mark to market losses by T+1 day and the same is, in turn, paid to the
members who have made a profit. The contracts are finally settled on expiry of
the Nifty index futures contract, when NSCCL marks the open positions of a CM
to the closing price of the underlying index and resulting profit/loss is settled in
cash.

Risk Management System:

The salient features of risk containment measures on the derivatives
segment are:

Only a member on the CM segment can take membership on the Derivatives

segment. A member is required to comply with the following capital adequacy
norms: (in Rs. Lakh)

Requirement

Net Worth
Interest Free Security
Deposit
Collateral Security
Deposit

Existing Members of
CM Segment
TM
TM-CM

New Members
TM

100
8

300
33*

100
25

TMCM
300
50

25

25

*Additional deposits of Rs.10 lakh for each TM for which CM takes clearing

NSCCL charges an upfront initial margin for all the open positions of a CM
upto client level. It follows value-at-risk (VaR) based margining as stipulated
by SEBI's J.R.Varma Committee. The initial margin percentage for Nifty index
futures contract will vary daily depending upon the volatility of the Nifty index
futures contract. NSCCL computes the initial margin percentage for each
Nifty index futures contract on a daily basis and informs the CMs. The CM in
turn collects the initial margin from the TMs and their respective clients.

NSCCL's on-line position monitoring system monitors a CM's open positions

on a real-time basis. Limits are set for each CM based on his base capital
and additional capital deposited with NSCCL. The on-line position monitoring
system generates alerts whenever a CM reaches a position limit set by
NSCCL, NSCCL monitors the CMs and TMs for mark to market value
violation and for contract-wise position limit violation.

CMs are provided a Trading Terminal for the purpose of monitoring the open
positions of all the TMs clearing and settling through them. A CM may set
exposure limits for a TM clearing and settling through him. NSCCL assist the
CM to monitor the intra-day exposure limits set up a CM and whenever a TM
exceeds the limits, it withdraws the facility provided to such TM.

A separate settlement guarantee fund for this segment has been created out
of the capital deposited by the members with NSCCL.

Table-3:

Business growth of futures and options market:NSE

Turnover(Rs. cr)

Month

Index

Stock

Index

Stock

Total

Jun-00

futures
35

futures
-

options
-

options
-

35

Jul-00

108

108

Aug-00

90

90

Sep-00

119

119

Oct-00

153

153

Nov-00

247

247

Dec-00

237

237

01-Jan

471

471

01-Feb

524

524

01-Mar

381

381

01-Apr

292

292

01-May

230

230

01-Jun

590

196

785

01-Jul

1309

326

396

2031

01-Aug

1305

284

1107

2696

01-Sep

2857

559

2012

5281

01-Oct

2485

559

2433

5477

01-Nov

2484

2811

455

3010

8760

01-Dec

2339

7515

405

2660

12919

02-Jan

2660

13261

338

5089

21348

02-Feb

2747

13939

430

4499

21616

02-Mar

2185

13989

360

3957

20490

2001-02

21482

51516

3766

25163

101925

DERIVATIVES MARKET AT BSE

Derivatives trading at BSE commenced with BSE Sensex futures on June 9,

2000. The salient features of BSE Sensex Futures contract are presented in
Table 4. The trade details of the index futures market of BSE from June to
September are presented .

Table-4: Contract Specification for Sensex Index Futures

Item
Specification
Security Symbol
BSX
Underlying Unit

BSE Sensitive Index

Contract Size

50 or multiples thereof

Tick Size

0.1

MinimumPrice

Rs.5

Fluctuation

Not applicable

Price Bands

3 near months

Expiration Months

A maximum of three month trading cycle-the near

Trading Cycle

month(one), the next month(two) and the far month

(three). New contract is introduced on the next
trading day following the expiry of near month
contract

Last

Trading/Expiry Last Thursday of the month or the preceding trading

Day

day, if last Thursday is a holiday.

Settlement

In cash on T+1 basis

Final Settlement Price Index closing price on the last trading day1
Daily Settlement Price Weighted average price of trades during the day.
Settlement Day

Last trading day

Trading Hours

Same as in cash market.

Margins
1

Upfront initial margin on daily basis

On the last day, the futures closing price of each BSE Sensex futures contract

is calculated bsed on 120 price points of the cash Sensex values during last half
an hour of trading. The highest and lowest 20 points are ignored and the closing
price is computed at an average of remaining 80 points.

Derivatives Volumes:
It is generally observed that the volumes in the derivatives market are
roughly five times the volumes in the cash market. However, as may be seen,
Indian derivatives market is witnessing low volumes. This is on account of nonparticipation by institutions who are comfortable with derivatives.

They are

awaiting certain clarifications pertaining to margins, guidelines or standards for

accounting

and taxation, and internal approvals. Retail participation would

improve with better understanding and comfort with the product. With greater
participation the volumes are expected to take off.

TABLE-5:Trade Details of BSE Futures Futures Market- June to

September 2000

Month/

Contract Expiring on
312825

29

27-

June-

Jul

Aug-

Sep-

00

-00

00

Close

4801.

4760.

Value*

40

Turnover

Details

30

28

-Oct-

Nov-

Dec-

00

00

00

00

4811.3

No

10

Tradin

46.27

8.97

0.87

37

136

12

0.00

June 2000

(Rs.Crore)
Open
Interest*

(No. of
Contracts)
July 2000
Close

4266.

Value*

50

Turnover

126.2

4285.
50

(No.

3.85
9

Interest*

205
of

00

25.66

(Rs.Crore)
Open

4300. Notrading

464

142

0.00

Contracts)
August
2000

4471.

4499.

4519.00

Close

20

60

1.48

Value*

86.16

38.03

20

466

438

Turnover
(Rs.Crore)
Open
Interest*(N
o.

of

Contracts)
Septembe

r 2000

4068.

4121.50

No

Close

10

25.02

tradi

Value*

67.72

375

ng

Turnover
(Rs.Crore)
Open
Interest*(N
o.

of

Contracts)

152

0.00
0

*As at end of the month or date of expiry of the contract

Nifty futures at SGX-DT:

With commencement of trading in derivatives of securities in India, foreign
bourses have evinced interest to introduce trading in derivatives based on Indian
indices. Under an agreement, Singapore Exchange Derivatives Trading Limited
(SGX-DT) has been granted a license to trade futures and options contracts
based on the S&O CNX Nifty Index.
SGX-DT launched the SGX S&P CNX Nifty Index futures contract on
September 25, 2000. The contract is based on the S&P CNX Nifty Index, which
is owned by IISL, a subsidiary of NSE. The SGX S&P CNX Nifty Index futures is
traded in US $, with a contract size equivalent to US $ 20 multiplied by the S&P
CNX Nifty Index. Based on the closing index value of 1358.05 on August 18,
2000, the size of each futures contract is about US $ 27,161 (approximately 5
times dthat of the contract traded in NSE). The contract is cash settled and is
traded on the Exchange's electronic trading platform (SGX ETS) from Monday to
Friday.

The trading of Nifty futures in SGX will enable international market

participants gain exposure to the Indian stock market in a highly cost-effective

manner. With the growing number of global investors getting exposure to the
Indian market place, especially in stocks related to technology, internet and
pharmaceuticals, the contract will help participants to effectively trade as well as
hedge their portfolios.

Forward Rate Agreements/Interest Rate Swaps:

With a view to further deepening the money market as also enable banks,
primary dealers (PDs) and all-India financial institutions to hedge interest rate

risks and ensure orderly development of derivatives market, the Reserve Bank
issued guidelines on Interest Rate Swaps (IRS) and Forward Rate Agreements
(FRAs) in July 1999. Participants undertaking FRAs/IRS were required to ensure
that appropriate infrastructure, risk management and internal control systems,
whereby a clear functional separation of trading, settlement, monitoring, control
and accounting activities is provided, are in place before they undertake such
activities. The Mid-term Review of Monetary and Credit Policy for 1999-2000
announced the decision to permit MFs, in addition to corporates, to undertake
FRAs/IRS with banks, PDs and financial institutions for hedging their balance
sheet risks.

The outstanding notional principal of FRAs/ IRSs contracts

amounted to Rs.4,243 crore as on March 10, 2000, which rose to Rs.5,831 crore
as on June 30, 2000. The tenor of deals generally ranged up to one year and
majority of the contracts used MIBOR as the benchmark rate. The activity in this
segment of the market has, however, been limited on account of lack of
benchmark rates for longer maturities and large spreads in bid-offer rates.
Further, the majority of the prospective participants are in the process of putting
in place adequate internal control systems for undertaking FRAs/IRSs and asset
liability management system, which would facilitate identification of mismatches.
Effective April 27, 2000, the use of interest rates implied in the forex forward
market as a benchmark has been permitted in addition to the existing domestic
money and debt market rates.

Turnover in the Derivatives Market

Derivatives are said to have been in existence since Biblical times in
various forms. As far as the Indian financial market goes, it is more of a recent
phenomenon. The age we live in is seen as the age of the derivatives market, as
futures & options seem to be one of the best ways of trading in the stock
markets.

Lower risk, lower investments and higher returns have made this

segment popular with investors. The turnover in the derivatives market spurted
by over 5 times during 2002. The derivatives market turnover touched a record
high of nearly Rs.40bn, which is at almost 75% of the cash market .

Table No: 6 Turnover in Derivative Market

(Rs. In bn)
Date

Jan-02
Feb-02
Mar-02
Apr-02
May-02
Jun-02
July-02
Aug-02
Sep-02
Oct-02
Nov-02
Dec-02

Cash

Derivatives

Derivatives as

Turnover

Turnover

% of Cash

213.48
216.19
204.90
216.74
236.00
233.32
304.97
269.38
271.40
334.41
398.37
536

Turnver
19.79
27.66
29.29
26.37
28.39
34.53
38.92
38.54
38.90
42.76
91.49
55.75

1978.88
781.39
899.79
821.95
831.16
675.83
781.22
698.94
697.76
782.04
773.82
981.33

The table above on the derivatives market shows the continuing

northbound journey. The turnover of 29 scrips on the derivatives market was
equal to 75% of the cash market turnover on BSE and NSE. On an average
nearly 1000 scrips get traded on both the exchanges.

Cash v/s Derivatives in 2002

Dec,02
Nov,02
Oct,02

Time period

Sept,02
Aug,02
July,02
Jun,02
May,02
Apr,02
Mar,02
Feb.02
Jan,02
0

500

1000

1500

Tunover
Cash Turnover

Derivatives Turnover

The last three months has seen a significant rise in the derivatives market
following the impressive results from infosys and Satyam, discovery of gas by
Reliance and disinvestment news on BPCL & HPCL.
The market is, however, dominated by select scrips, infosys,
Satyam, Reliance, HPCL, BPCL and Digital accounted for nearly 70% of the total
derivatives market. Satyam accounts for nearly 15-20% of the daily turnover in
the derivatives market while infosys constitutes around 10-15%. Reliance makes
up for nearly 9% while HPCL, BPCL and Digital account for 5-10% of the
turnover on the derivatives market.

Company

% of the market
turnover

Satyam
Infosys
Reliance
HPCL
BPCL
Digital
Others
Total

20%
16%
10%
8%
6%
5%
39%
100%

EXCHANGE-TRADED VS. OTC (OVER THE

COUNTER) DERIVATIVES MARKETS:
The OTC derivatives markets have witnessed rather sharp growth over
the last few years, which has accompanied the modernization of commercial and
investment banking and globalisation of financial activities.

The recent

developments in information technology have contributed to a great extent to

these developments. While both exchange-traded and OTC derivative contracts

offer many benefits, the former have rigid structures compared to the latter. It
has been widely discussed that the highly leveraged institutions and their OTC
derivative positions were the main cause of turbulence in financial markets in
1998. These episodes of turbulence revealed the risks posed to market stability
originating in features of OTC derivative instruments and markets.

The OTC derivatives markets have the following features compared to

exchange-traded derivatives:

1.

The management of counter-party (credit) risk is decentralized and

located within individual institutions.

2.

There are no formal centralized limits on individual positions, leverage, or

margining.

3.

There are no formal rules for risk and burden-sharing.

4.

There are no formal rules or mechanisms for ensuring market stability and
integrity, and for safeguarding the collective interests of market
participants, and

5.

The OTC contracts are generally not regulated by a regulatory authority

and the exchange's self-regulatory organization, although they are

affected indirectly by national legal systems, banking supervision and

market surveillance.

Comparison of the close prices of the NIFTY Near Month Futures

Contract (F&O Segment) with the underlying movement of the
NIFTY Index (Cash Segment), along with the Daily Traded value
of the F&O Segment:

MONTHWISE PRODUCTWISE TRADED VALUE ANALYSIS:

A graphical representation of the monthwise productwise turnover in the F&O
Segment for the period August 2004 to January 2005 is as follows:-

Comparative analysis of the Traded Value in the F&O Segment

with the Cash Segment:

It may be observed that the traded value in the F&O Segment has increased
from Rs. 1,76,006 crores in August 2004 to Rs.2,65,290 crores in January 2005,
a growth of 51%, while the Cash Segment has grown by 15% during the same.
There was a fall in total trading volumes during January 2005 in both segments
due to lesser number of trading days. The rate of fall in trading volume was
lesser in F&O segment as compared to Cash segment.
The F&O segment has consistently seen trading volumes at 2 times that of the
Cash Segment. During January 2005 this increased to 2.67 times.

Exemption from Stamp Duty:

It is felt in some quarters that if the derivative contracts attract

stamp duty at existing rates, trading in index futures may be uneconomical. It is,
therefore, suggested that derivatives contracts may be exempted from stamp
duty. The other view is that there should not be any discrimination between the
cash market and the futures market in terms of stamp duty.

The securities

transactions attract stamp duty at two stages, namely, at the time of entering into
the contract, i.e., on contract note and at the time of transfer of securities, i.e., on
transfer deed. Transfer of securities in demat mode has recently been exempted
from stamp duty. In case of index futures, no transfer of securities is involved
and hence no stamp duty is payable. In case of futures on individual securities,
there will be no stamp duty on transfer, if it is in demat mode. The contract notes
for confirmation of trades done in both cash segment and derivatives segment
would attract stamp duty. Hence, securities transactions in cash segment as well
as derivatives segment would attract stamp duty. Hence, securities transactions
in cash segment as well as derivatives segment would attract equal treatment in
terms of stamp duty. Further, the rate of stamp duty on such contracts is not
prohibitively high. In respect of contract notes issued by brokers to clients in
Delhi, the stamp duty is applicable @ fifteen paise for every Rs.10,000 or part
thereof of the value of the security subject to a maximum of Rs.15. It is Re.1 for
every Rs.10,000 or apart thereof of the value of the security, i.e., 0.01% in
Maharashtra. Such low rates of stamp duty on contract notes only may not have
any significant impact on derivative transactions. Further, stamp duty on contract

notes being a state subject, efforts to exempt such duty can virtually stall
derivatives trading.

Taxation:
The income-tax Act does not have any specific provision regarding
taxability from derivatives. The only provisions which have an indirect bearing on
derivative transactions are Sections 73(10 and 43(5). Section 73(1) provides that
any loss, computed in respect of a speculative business carried on by the
assessee, shall not be set off except against profits and gains, if any, of
speculative business. In the absence of a specific provision, it is apprehended
that the derivatives contracts, particularly the index futures which are essentially
cash-settled, may be construed as speculative transactions and therefore the
losses, if any, will not be eligible for set off against other income of the assesse
and will be carried forward and set off against speculative income only up to a
maximum of eight years.

As a result an investor's losses or profits out of

derivatives even though they are of hedging nature in real sense, are treated as
speculative and can be set off only against speculative income.

Future Prospects
As we see it, the derivatives markets will overtake the cash market in the
future.

SEBI had announced that nearly 500 scrips woud be added to the

derivatives markets as against the existing 29 scrips. Therefore, the year 2003
could well turn out to be the year of the derivatives. The derivatives turnover is
expected to see robust growth in coming months. The retail investors, who have
not been active in the derivatives market are likely to participate more in the
derivatives market. This will trigger more volumes and boost the derivatives
market. Moreover, FIIs domestic funds and even operators are expected to play
an active role in the derivatives market rather than the cash market.
If 29 scrips can show a turnover of 75% of the total cash market turnover, one
can imagine what will happen when more scrips are added. The derivatives
market turnover may cross Rs.100bn in the coming years. Cash may be king but
the future lies in derivatives.

CHAPTER-7

FINDINGS AND CONCLUSIONS

FINDINGS
1)

Low awareness about derivatives among the people is the obstacle in the
way of success of financial derivatives in Indian Stock Market.

2)

One of the recent success in the Indian Stock Market is the widespread
popularity in the exchange traded derivatives segment, especially the
individual stock futures contract.

3)

Involvement of people in India regarding derivates is not upto the mark

because derivatives are difficult to analyse.

4)

In India, the exchange traded derivatives market has quite substantially a

retail focus with the institutional interest in the market.

5)

The depth of the derivatives Market will rise in the form of rising on
interest, as institutions tend to take a relatively longer term view on the
market.

6)

Several large portfolio investors in the spot market who are keen to hedge
their positions using derivatives are constrained by the low limits and

prefer to leave their positions un-hedged rather than hedge every small
portion of their exposure.

7)

The OTC derivatives markets have witnessed sharp growth over the last
few years, which has accompanied the modernization of commercial and
investment banking and globalization of financial activities.

8)

Options and futures on individual stocks are viewed with apprehension

by many in India. It is their view that these are risky and prone to
manipulation.

CHAPTER-8

SUGGESTIONS

SUGGESTIONS

1)

Higher institutional participation is important for the overall development of

both the exchange traded derivatives market and the spot market.

2)

The education of retail investor should be increased in this subject

because still, the knowledge of derivatives is not widely available in Indian
context.

3)

The role of speculators should be controlled to the extent of providing a

fair deal of liquidity into the market, their excessive participation will make
the derivative trade unfair.

4)

More derivative products should be launched in Indian derivative market

giving more liberty to Indian investor to rationally invest their funds in
Indian financial derivative market.

5)

Options and futures are risky and prone to manipulation. So Risk should
be admirably managed by clearing house processes. Manipulation can
and should be managed, deterred and punished by effective surveillance
by a timely legal process.

6)

Options should be listed on individual stocks. This would enable the finer
pricing of employee stock options and equity warrants. Thus would boost
capital information enterprise within enterprises and Risk Taking.

7)

Futures should be listed on individual stock. Then futures are play on

mean prices. The management of mean prices of a stock is less costly
and more efficient with direct access to futures on that stock than through
futures on a stock index.

CHAPTER-9

CONSTRAINTS OF THE STUDY

CONSTRAINTS OF THE STUDY

1)

Time Span:
Report is prepared in a time span of 2 months, which was not sufficient.
As for complete disection of a topic, one require ample time.

2)

Result Aspect:
Result of interpretation are indicative and not exhaustive.

3)

Subjectivity:
Element of subjectivity cannot be ruled out while preparing this report.

4)

Insufficient Data:
The report contains the information which is based only on secondary
data.

5)

Constraint regarding the use of Techniques:

The statistical techniques like: analysis of variance, multiple regression
analysis etc. could not be adopted due to constraint of time and effort.

CHAPTER-10

BIBLIOGRAPHY

BIBLIOGRAPHY
BOOKS:
Options, futures and other derivatives John C. Hull
Futures and options N.D. Vohra, B.R. Bagri
Financial Institutions and Markets L.M. Bhole
Keith Redhead : Financial derivatives
Kothari C.R. "Research Methodlogy Methods and Techniques
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