Introduction

Derivatives are recognized as the best and most cost-efficient

way of meeting the felt need for risk hedging in certain types of
commercial and financial operations.
 Through the use of derivatives products, it is possible to
partially or fully transfer price risk away from risk-averse
investors towards those more willing and able to bear risk by
locking in asset prices.
 Derivatives also help price discovery, i.e. the process of
determining the price level for any asset based on supply and
demand.
 Derivatives market in India started working in 2001
 Financial derivatives came into the spotlight in the post-1970
period due to growing instability in the global financial markets
Research Motivation
 Derivatives market has emerged in India after 2000, but its
foundation had already been laid just after the reforms of
the stock market between 1993 and 1996 and these
reforms paved the way for the exchange traded equity
derivatives market in India

 The total turnover of derivatives market has already

superseded the total turnover of cash market in India. The
screen based trading in India has given an edge to the
trading of derivatives in India. The derivatives market of
India has expanded torrently but it’s still very less in
comparison to the other developed markets of the world.
Objective of the Study
To study Indian derivatives market
To study different constituents of Indian derivatives
market e.g. commodity derivatives market, foreign
exchange derivatives market and exchange traded
financial derivatives market.
To study the various regulatory requirements of
derivatives market of India
Comparative study of cash market and derivatives
market of India
Comparative study of Indian derivatives market and
global derivatives market
Research Methodology
Source of Data

To conduct this study there is a need of

comprehensive secondary data of cash market
and derivatives market, Indian as well as global.
Secondary data has been collected from various
research papers, journals, articles, websites and
books etc.
Research Design

The design of the research is descriptive in

nature.
Limitations
• The study is limited to the secondary data available for the
Indian derivatives and cash market
• The constraint of global derivatives data
• The study has been conducted within a limited period of time
• The study has been conducted from a particular location
Indian Derivatives Market
Turnover in Cash and Derivative Segment - NSE

1,000,000
900,000
800,000
700,000
Rs. cr

600,000
500,000
400,000 Derivative
300,000
200,000
100,000 Cash
0
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06
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 Top 5 most active futures contracts, May 2005 Top 5 traded symbols in Options segment, May
2005

21% Nifty
Nifty May 2005
33% Tisco
Nifty June 2005 4%
45% SatyamComp
Tisco May 2005 SBIN
SBIN May 2005 5% 58% Reliance
Reliance May 2005 5% 7% Others
3% 3% 5% 11%
Others

Top 5 most active futures contracts, May 2006 Top 5 traded symbols in Options segment, May
2006

Nifty May 2006

Nifty
33% Nifty June 2006 36%
46% Reliance
Reliance May 2006
Infosys
TATA Steel May 2006
MTNL
Hindalco May 2006 53%
1% 13% Hindalco
4% Others
3% 5% Others
2%2%2%
 NSE global rank Asia—Pacific
rank
Stock Index Options
No. of contracts traded 239207 10 4
Notional Turnover (mn USD) 22340 12 5
Stock Index Futures
No. of contracts traded 1447464 7 4
Notional Turnover (mn USD) 134192 16 8
Stock Options
No. of contracts traded 590300 11 2
Notional Turnover (mn USD) 47841 6 2
Single Stock Futures
No. of contracts traded 5238498 1 1
Notional Turnover (mn USD) 412668 1 1
Source: Focus, World Federation of Exchanges.
 Productwise contribution to total derivatives
turnover

300000
Turnover (Rs Crore)

250000
200000
6-Sep
150000
6-Oct
100000
50000
0
Index Stock Index Stock
Futures Futures Options Options
Global Derivatives Market
G lo b a l E q u ity L in k e d D e riv a tiv e s a t th e e n d J u n e D e r iv a tiv e s F in a n c ia l In s tr u m e n t ( F u tu r e s ) T r a d e d
2 0 0 6 (in m n .U S D o lla rs ) o n O r g a n iz e d E x c h a n g e (in b n U S D o lla r s ) in 2 0 0 5

28 0 ,7 28
7877
4 4 4 ,0 3 2 U S E q u it ie s
1 ,6 7 9 ,9 5 7 J a p a n e s e E q u it ie s 5 3 0 9 1 .5 N o rt h A m e ric a
109,988
E u ro p e a n E q u it ie s E u ro p e
L a t in A m e ric a n E q u it ie s 380613 A s ia a n d P a c ific
84 9 ,268 56 4 2 3 7 .1
3,4 1 9,33 8 O t h e r A s ia n E q u it ie s O t h e r M a rk e t s
O t h e r E q u it ie s
 Contd…
Global Derivatives Market

400 370
350
300
$ Trillions

250
200
150
100
100
50
0
2001 2006
 Contd…
European and Indian Derivatives Market

600000

400000
Billion US
Dollars
200000

Indian and North American Derivatives Market 0

Europe India
Series1 566360 880

1500000

1000000
Billion US
Dollars
500000

0 Asia & Pacific and Indian Derivatives Market

North America India
Series1 1010758.1 880

150000

100000
Billiion US
Dollars
50000

0
Asia and Pacific India
Series1 133105.6 880
Findings and Discussion
After the economic reforms of 1991, capital market
had gained momentum and it paved the way for the
derivatives market in India
In India there are mainly two exchanges e.g. BSE
and NSE in which NSE accounts for nearly all the
exchange traded derivatives trading.
Stock futures has the maximum share of the total
derivatives market and that makes India to come in
highest position in trading of stock futures
In both futures and options market, as far as most
traded contract is concerned, Index trading has got
the maximum share.
The correlation coefficient between the turnover of
cash market and the turnover of derivatives market
is ρ= 0.92
The market capitalization to GDP ratio was 85.6% in
March 21, 2006 Contd…
Foreign exchange derivatives in India have progressed
significantly over a period of three years and have
increased nearly three fold
The global derivatives market has increased four times
in a decade which is 30 times the size of US economy
The nominal value of interest rate derivatives has
increased 24% in just 6 months to stand at about
$US262 trillion
Europe has the highest share in notional amount
outstanding of forwards and swaps as well as in
options bought and sold followed by US
In exchange traded derivatives markets, North America
has the highest share followed by Europe and then
Asia
Conclusion and
Recommendations
 As there is a wide variety and sophistication of
instruments, range of market participants, as well as the
volume of turnover so Adequate regulatory measures are
also being put in place

 A few important characteristics of the Indian financial

derivatives market, which relate to features like liquidity,
volatility, costs, and width of the market

 Derivatives market provides two important benefits to the

economy:
 Risk management
 Price discovery

The two major concerns of derivatives markets are:

 Abuse of derivatives
 Negative consequences