Presented By Fenil Shah 18th June, 2011

Content:
Introduction

Factors Driving The Growth Of Derivatives

Types of Derivatives Participants

Underlying Asset Class

Economic functions Benefits

Criticism Derivatives in India

Introduction
Derivatives are synthetic instruments

They derive value from an underlying asset class

Asset classes range from financial instruments to

commodities.
Common underlying theme of derivatives is that

they are leveraged products.

Factors Driving The Growth Of Derivatives

Increased volatility.
Increased integration with the international

markets.
Development of more sophisticated risk management

tools.

Types of Derivatives
Futures/Forwards.
Options Swaps Baskets Swaptions

Derivative Positions and Participants

Naked open position taking a directional call on the

markets Hedge against underlying asset class Arbitrage position within an asset class Speculators Hedgers Arbitrageurs

Underlying Asset Class

Asset classes: financial which includes currencies and

commodities
Financial asset classes: Interest rates, equities and

currencies
Commodities range from agricultural commodities to

minerals and metals

Economic Functions
Leverage
Speculate & make a profit Hedge or mitigate risk in the underlying Obtain exposure to the underlying

Benefits
Derivatives facilitate the buying and selling of risk.
Helps increasing Buying in the underlying. Create Liquidity in the Market.

Criticism
Possible large losses.
Counter-party risk. Leverage of an economy's debt.

Derivatives in India
The structured derivative market in India is relatively new (about 10 years old) However derivatives have caught the fancy of the market and exchange traded equity and commodity derivatives are vibrant.

Equity Derivatives in India

Nifty index futures are the highest traded contracts
Single stock futures are actively traded for arbitrage Nifty index options are also traded actively Single stock options do not trade actively

Factors to Study in Nifty Futures

Open interest
Traded volumes as % to total derivative volumes Basis spread Movement of spread Roll overs Calendar Spreads

Factors to Study in Nifty Options

Changes in price
Open interest Implied Volatility Put call parity

Factors to Study in Single Stock Futures

Open interest
Basis Spread Cost of carry Volumes Top traded single stock futures