INDEX

CH 1: Introduction about derivatives 1.1 Derivatives in India 1.2 Development of derivative market in India 1.3 Types of traders in a derivative market 1.4 Risk characteristics of derivative 1.5 Factors contributing to growth of derivatives CH 2: Types of derivatives 2.1 Future 2.2 Option 2.3 Futures vs. Forward 2.4 Swap 2.5 Swaption 2.6 Other types CH 3: Structure of derivative market in India CH 4: Benefits of derivatives CH 5: Exchange traded derivatives on NSE CH 6: Introduction about derivatives on BSE CH 7: Derivatives in commodity CH 8: Research methodology CH 9: Objectives of study CH 10: Business growth in derivative (NSE) CH 11: Findings and suggestions Bibliography

CHAPTER 1 INTRODUCTION ABOUT DERIVATIVES

The term Derivative indicates that it has no independent value. Its value is entirely derived form the value of the underlying asset. The underlying asset can be securities, Commodities, bullion, currency, Stock Index, live stock or anything else. The term Derivative has been defined in Securities Contracts (Regulations) Act, as :A Contract which derives its value form the prices or index of prises, of underlying Securities.

There are two distinct groups of Derivative:

Over-the-counter (OTC) derivatives are contracts that are traded (and privately negotiated) directly between two parties, without going through an exchange or other intermediary. Products such as swaps, forward rate agreements, and exotic options are almost always traded in this way. The OTC derivatives market is huge.

Exchange-traded derivatives are those derivatives products that are traded via Derivatives exchanges. A derivatives exchange acts as an intermediary to all transactions, and takes Initial margin from both sides of the trade to act as a guarantee.

2.1 DERIVATIVES IN INDIA

Exchange traded financial derivatives were introduced in India in June 2000 at the two major stock exchanges, NSE and BSE. There are various contracts currently traded on these exchanges. National Commodity & Derivatives Exchange Limited (NCDEX) started its operations in December 2003, to provide a platform for commodities trading. The derivatives market in India has grown exponentially, especially at NSE. Stock Futures are the most highly traded contracts on NSE accounting for around 55% of the total turnover of derivatives at NSE, as on April 13, 2005. A.} EQUITY DERIVATIVES IN INDIA In the decade of 1990s revolutionary changes took place in the institutional infrastructure in Indias equity market. It has led to wholly new ideas in market design that has come to dominate the market. These new institutional arrangements, coupled with the widespread knowledge and 2

orientation towards equity investment and speculation, have combined to provide an environment where the equity spot market is now Indias most sophisticated financial market. One aspect of the sophistication of the equity market is seen in the levels of market liquidity that are now visible. The market impact cost of doing program trades of Rs.5 million at the NIFTY index is around 0.2%. This state of liquidity on the equity spot market does well for the market efficiency, which will be observed if the index futures market when trading commences. Indias equity spot market is dominated by a new practice called Futures Style settlement or account period settlement. In its present scene, trades on the largest stock exchange (NSE) are netted from Wednesday morning till Tuesday evening, and only the net open position as of Tuesday evening is settled. The future style settlement has proved to be an ideal launching pad for the skills that are required for futures trading. The market capitalisation of the NSE-50 index is Rs.2.6 trillion. This is six times larger than the market capitalisation of the largest stock and 500 times larger than stocks such as Sterlite, BPL and Videocon. If market manipulation is used to artificially obtain 10% move in the price of a stock with a 10% weight in the NIFTY, this yields a 1% in the NIFTY. Cash settlements, which is universally used with index derivatives, also helps in terms of reducing the vulnerability to market manipulation, in so far as the short-squeeze is not a problem. Thus, index derivatives are inherently less vulnerable to market manipulation. A good index is a sound trade of between diversification and liquidity. In India the traditional index- the BSE sensitive index was created by a committee of stockbrokers in 1986. It predates a modern understanding of issues in index construction and recognition of the pivotal role of the market index in modern finance. The flows of this index and the importance of the market index in modern finance, motivated the development of the NSE-50 index in late 1995. Many mutual funds have now adopted the NIFTY as the benchmark for their performance evaluation efforts. If the stock derivatives have to come about, the should restricted to the most liquid stocks. Membership in the NSE-50 index appeared to be a fair test of liquidity. The 50 stocks in the NIFTY are assuredly the most liquid stocks in India. B.} COMMODITY DERIVATIVES TRADING IN INDIA In India, the futures market for commodities evolved by the setting up of the Bombay Cotton Trade Association Ltd., in 1875. A separate association by the name "Bombay Cotton Exchange Ltd was established following widespread discontent amongst leading cotton mill owners and 3

merchants over the functioning of the Bombay Cotton Trade Association. With the setting up of the Gujarati Vyapari Mandali in 1900, the futures trading in oilseed began. Commodities like groundnut, castor seed and cotton etc began to be exchanged. After the economic reforms in 1991 and the trade liberalization, the Govt. of India appointed in June 1993 one more committee on Forward Markets under Chairmanship of Prof. K.N. Kabra. The Committee recommended that futures trading be introduced in basmati rice, cotton, raw jute and jute goods, groundnut, rapeseed/mustard seed, cottonseed, sesame seed, sunflower seed, safflower seed, copra and soybean, and oils and oilcakes of all of them, rice bran oil, castor oil and its oilcake, linseed, silver and onions. All over the world commodity trade forms the major backbone of the economy. In India, trading volumes in the commodity market have also seen a steady rise - to Rs 5,71,000 crore in FY05 from Rs 1,29,000 crore in FY04. In the current fiscal year, trading volumes in the commodity market have already crossed Rs 3,50,000 crore in the first four months of trading. Some of the commodities traded in India include Agricultural Commodities like Rice Wheat, Soya, Groundnut, Tea, Coffee, Jute, Rubber, Spices, Cotton, Precious Metals like Gold & Silver, Base Metals like Iron Ore, Aluminium, Nickel, Lead, Zinc and Energy Commodities like crude oil, coal. Commodities form around 50% of the Indian GDP. Though there are no institutions or banks in commodity exchanges, as yet, the market for commodities is bigger than the market for securities. Commodities market is estimated to be around Rs 44,00,000 Crores in future. Assuming a future trading multiple is about 4 times the physical market, in many countries it is much higher at around 10 times.

2.2 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 24member 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 preconditions 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 4

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 realtime 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 BSE30 (Sense) 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 futures on June 12, 2000. The trading in index options commenced on June 4, 2001 and trading in options on individual securities commenced on July 2, 2001. Single stock futures were launched on November 9, 2001. The index futures and options contract on NSE are based on S&P CNX Trading and settlement in derivative contracts is done in accordance with the rules, byelaws, and regulations of the respective exchanges and their clearing house/corporation duly approved by SEBI and notified in the official gazette. Foreign Institutional Investors (FIIs) are permitted to trade in all Exchange traded derivative products.

2.3 TYPES OF TRADERS IN A DERIVATIVE MARKET

TRADING PARTICIPANTS: HEDGERS: Hedgers are those who protect themselves from the risk associated with the price of an asset by using derivatives. A person keeps a close watch upon the prices discovered in trading and when the comfortable price is reflected according to his wants, he sells futures contracts. Take an example: A Hedger pay more to the farmer or dealer of a produce if its prices go up. For protection against higher prices of the produce, he hedge the risk exposure by buying enough future contracts of the produce to cover the amount of produce he expects to buy. Since cash and futures prices do tend to move in tandem, the futures position will profit if the price of the produce raise enough to offset cash loss on the produce.

SPECULATORS: Speculators are some what like a middle man. They are never interested in actual owing the commodity. They just buy from one end and sell it to the other in anticipation of future price movements. They actually bet on the future movement in the price of an asset. They are the second major group of futures players. These participants include independent floor traders and investors. They handle trades for their personal clients or brokerage firms. Buying a futures contract in anticipation of price increases is known as going long. Sellin g a futures contract in anticipation of a price decrease is known as going short. ARBITRATORS: In commodity market Arbitrators are the person who takes the advantage of a discrepancy between prices in two different markets. If he finds future prices of a commodity edging out with the cash price, he will take offsetting positions in both the markets to lock in a profit. Moreover the commodity futures investor is not charged interest on the difference between margin and the full contract value. INTERMEDIARY PARTICIPANTS : BROKERS: For any purchase and sale, brokers perform an important function of bringing buyers and sellers together. A non-member has to deal in futures exchange through member only. This provides a member the role of a broker. All transactions are done in the name of the member who is also responsible for final settlement and delivery. Members can attract involvement of other by

providing efficient services at a reasonable cost. In the absence of well functioning broking houses, the futures exchange can only function as a club. MARKET MAKERS AND JOBBERS: Even in organised futures exchange, every deal cannot get the counter party immediately. It is here the jobber or market maker plays his role. They are the members of the exchange who takes the purchase or sale by other members in their books and then square off on the same day or the next day. They quote their bid-ask rate regularly. The difference between bid and ask is known as bid-ask spread. When volatility in price is more, the spread increases since jobbers price risk increases. In less volatile market, it is less. Generally, jobbers carry limited risk. Even by incurring loss, they square off their position as early as possible. Since they decide the market price considering the demand and supply of the commodity or asset, they are also known as market makers. A buyer or seller of a particular futures or option contract can approach that particular jobbing counter and quotes for executing deals. In automated screen based trading best buy and sell rates are displayed on screen, so the role of jobber to some extent. INSTITUTIONAL FRAMEWORK : EXCHANGE: Exchange provides buyers and sellers of futures and option contract necessary infrastructure to trade. Exchange has trading pit where members and their representatives assemble during a fixed trading period and execute transactions. In online trading system, exchange provides access to members and makes available real time information online and also allows them to execute their orders. For derivative market to be successful exchange plays a very important role. CLEARING HOUSE: A clearing house performs clearing of transactions executed in futures and option exchanges. Clearing house may be a separate company or it can be a division of exchange. It guarantees the performance of the contracts and for this purpose clearing house becomes counter party to each contract. Transactions are between members and clearing house. Clearing house ensures solvency of the members by putting various limits on him. Further, clearing house devises a good managing system to ensure performance of contract even in volatile market. CUSTODIAN / WARE HOUSE: Futures and options contracts do not generally result into delivery but there has to be smooth and standard delivery mechanism to ensure proper functioning of market. In stock index futures and options which are cash settled contracts, the issue of delivery may not arise, but it would be there 7

in stock futures or options, commodity futures and options and interest rates futures. In the absence of proper custodian or warehouse mechanism, delivery of financial assets and commodities will be a cumbersome task and futures prices will not reflect the equilibrium price for convergence of cash price and futures price on maturity, custodian and warehouse are very relevant. BANK FOR FUND MOVEMENTS: Futures and options contracts are daily settled for which large fund movement from members to clearing house and back is necessary. Bank makes daily accounting entries in the accounts of members and facilitates daily settlement a routine affair. This reduces possibility of any fraud or misappropriation of fund by any market intermediary. REGULATORY FRAMEWORK: A regulator creates confidence in the market besides providing Level playing field to all concerned, for foreign exchange and money market, RBI is the regulatory authority so it can take initiative in starting futures and options trade in currency and interest rates. For capital market, SEBI is playing a lead role, along with physical market in stocks; it will also regulate the stock index futures to be started very soon in India. The approach and outlook of regulator directly affects the strength and volume in the market. For commodities, Forward Market Commission is working for settling up National Commodity Exchange.

2.4 Risk Characteristics of Derivatives

The main types of risk characteristics associated with derivatives are: Basis Risk This is the spot (cash) price of the underlying asset being hedged, less the price of the derivative contract used to hedge the asset. Credit Risk Credit risk or default risk evolves from the possibility that one of the parties to a derivative contract will not satisfy its financial obligations under the derivative contract. a Market Risk This is the potential financial loss due to adverse changes in the fair value of a derivative. Market risk encompasses legal risk, control risk, and accounting risk.

2.5 FACTORS CONTRIBUTING TO THE GROWTH OF DERIVATIVES

A.} PRICE VOLATILITY Prices are generally determined by market forces. In a market, consumers have demand and producers or suppliers have supply, and the collective interaction of demand and supply in the market determines the price. These factors are constantly interacting in the market causing changes in the price over a short period of time. Such change in the price is known as price volatility. This has three factors: the speed of price changes, the frequency of price changes and the magnitude of price changes. B.} GLOBALISATION OF MARKETS Earlier, managers had to deal with domestic economic concerns; what happened in other part of the world was mostly irrelevant. Now globalisation has increased the size of markets and as greatly enhanced competition .it has benefited consumers who cannot obtain better quality goods at a lower cost. It has also exposed the modern business to significant risks and, in many cases, led to cut profit margins. Globalisation of industrial and financial activities necessitates use of derivatives to guard against future losses. This factor alone has contributed to the growth of derivatives to a significant extent. C.} TECHNOLOGICAL ADVANCES A significant growth of derivative instruments has been driven by technological break through. Advances in this area include the development of high speed processors, network systems and enhanced method of data entry. Improvement in communications allow for instantaneous world wide conferencing, Data transmission by satellite. These facilitated the more rapid movement of information and consequently its instantaneous impact on market price. D.} ADVANCES IN FINANCIAL THEORIES Advances in financial theories gave birth to derivatives. Initially forward contracts in its traditional form, was the only hedging tool available. Option pricing models developed by Black and Scholes in 1973 were used to determine prices of call and put options. In late 1970s, work of Lewis Edeington extended the early work of Johnson and started the hedging of financial price risks with financial futures. The work of economic theorists gave rise to new products for risk management which led to the growth of derivatives in financial markets.

CHAPTER 3 TYPES OF DERIVATIVES

Exchange Traded Derivatives

Over The Counter Derivatives

National Stock Exchange

Bombay Stock Exchange

National Commodity & Derivative Exchange

Index Future Index option

Stock option

Stock future

Interest rate future

TYPES OF DERIVATIVES

Derivatives Future Option Forward Swaps

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3.1 FUTURE CONTRACT

In finance, a futures contract is a standardized contract, traded on a futures exchange, to buy or sell a certain underlying instrument at a certain date in the future, at a pre-set price. The future date is called the delivery date or final settlement date. The pre-set price is called the futures price. The price of the underlying asset on the delivery date is called the settlement price. The settlement price, normally, converges towards the futures price on the delivery date. A futures contract gives the holder the right and the obligation to buy or sell, which differs from an options contract, which gives the buyer the right, but not the obligation, and the option writer (seller) the obligation, but not the right. To exit the commitment, the holder of a futures position has to sell his long position or buy back his short position, effectively closing out the futures position and its contract obligations. Futures contracts are exchange traded derivatives. The exchange acts as counterparty on all contracts, sets margin requirements, etc. BASIC FEATURES OF FUTURE CONTRACT 1.Standardization: Futures contracts ensure their liquidity by being highly standardized, usually by specifying: The underlying. This can be anything from a barrel of sweet crude oil to a short term interest rate. The type of settlement, either cash settlement or physical settlement. The amount and units of the underlying asset per contract. This can be the notional amount of bonds, a fixed number of barrels of oil, units of foreign currency, the notional amount of the deposit over which the short term interest rate is traded, etc. The currency in which the futures contract is quoted. The grade of the deliverable. In case of bonds, this specifies which bonds can be delivered. In case of physical commodities, this specifies not only the quality of the underlying goods but also the manner and location of delivery. The delivery month. The last trading date. Other details such as the tick, the minimum permissible price fluctuation.

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2.Margin: Although the value of a contract at time of trading should be zero, its price constantly fluctuates. This renders the owner liable to adverse changes in value, and creates a credit risk to the exchange, who always acts as counterparty. To minimize this risk, the exchange demands that contract owners post a form of collateral, commonly known as Margin requirements are waived or reduced in some cases for hedgers who have physical ownership of the covered commodity or spread traders who have offsetting contracts balancing the position. Initial margin: is paid by both buyer and seller. It represents the loss on that contract, as determined by historical price changes, which is not likely to be exceeded on a usual day's trading. It may be 5% or 10% of total contract price. Mark to market Margin: Because a series of adverse price changes may exhaust the initial margin, a further margin, usually called variation or maintenance margin, is required by the exchange. This is calculated by the futures contract, i.e. agreeing on a price at the end of each day, called the "settlement" or mark-to-market price of the contract. To understand the original practice, consider that a futures trader, when taking a position, deposits money with the exchange, called a "margin". This is intended to protect the exchange against loss. At the end of every trading day, the contract is marked to its present market value. If the trader is on the winning side of a deal, his contract has increased in value that day, and the exchange pays this profit into his account. On the other hand, if he is on the losing side, the exchange will debit his account. If he cannot pay, then the margin is used as the collateral from which the loss is paid.

3.Settlement
Settlement is the act of consummating the contract, and can be done in one of two ways, as specified per type of futures contract: Physical delivery - the amount specified of the underlying asset of the contract is delivered by the seller of the contract to the exchange, and by the exchange to the buyers of the contract. In practice, it occurs only on a minority of contracts. Most are cancelled out by purchasing a covering position - that is, buying a contract to cancel out an earlier sale (covering a short), or selling a contract to liquidate an earlier purchase (covering a long). Cash settlement - a cash payment is made based on the underlying reference rate, such as a short term interest rate index such as Euribor, or the closing value of a stock market 12

index. A futures contract might also opt to settle against an index based on trade in a related spot market. Expiry is the time when the final prices of the future are determined. For many equity index and interest rate futures contracts, this happens on the Last Thrusday of certain trading month. On this day the t+2 futures contract becomes the t forward contract.

Pricing of future contract

In a futures contract, for no arbitrage to be possible, the price paid on delivery (the forward price) must be the same as the cost (including interest) of buying and storing the asset. In other words, the rational forward price represents the expected future value of the underlying discounted at the risk free rate. Thus, for a simple, non-dividend paying asset, the value of the future/forward, , will be found by discounting the present value . at time to maturity

by the rate of risk-free return

This relationship may be modified for storage costs, dividends, dividend yields, and convenience yields. Any deviation from this equality allows for arbitrage as follows. In the case where the forward price is higher: 1. The arbitrageur sells the futures contract and buys the underlying today (on the spot market) with borrowed money. 2. On the delivery date, the arbitrageur hands over the underlying, and receives the agreed forward price. 3. He then repays the lender the borrowed amount plus interest. 4. The difference between the two amounts is the arbitrage profit. In the case where the forward price is lower: 1. The arbitrageur buys the futures contract and sells the underlying today (on the spot market); he invests the proceeds. 2. On the delivery date, he cashes in the matured investment, which has appreciated at the risk free rate. 3. He then receives the underlying and pays the agreed forward price using the matured investment. [If he was short the underlying, he returns it now.] 4. The difference between the two amounts is the arbitrage profit.

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3.2 OPTION CONTRACT

Options Contract is a type of Derivatives Contract which gives the buyer/holder of the contract the right (but not the obligation) to buy/sell the underlying asset at a predetermined price within or at end of a specified period. The buyer / holder of the option purchase the right from the seller/writer for a consideration which is called the premium. The seller/writer of an option is obligated to settle the option as per the terms of the contract when the buyer/holder exercises his right. The underlying asset could include securities, an index of prices of securities etc. COMMON TYPES OF OPTION CONTRACT Call options: A call option is an option to purchase, which entitles the holder to buy a stated security at a price and time agreed. Call designates that you are electing to purchase when you exercise your right. Put options Contrary to purchase rights the investor may also buy options with a right to sell. A put option gives the holder the right to sell a stated security at a price and time agreed. Put refers to the placing or disposing of something, i.e. selling a security. FEATURES OF OPTION CONTRACT The following is specified in the option contract: the asset to be traded (referred to as the underlying asset) the time when the trade is to take place (the expiry date) the price that must be paid (the strike price) if the option holder exercises his purchase right An example of a call option would see the buyer has the right, but not the obligation, to buy 100 shares at the price of 80 before or on the expiry date. If the market price of the shares on the day of expiry is 105, a capital gain of 25 per share can be achieved if the purchase right is exercised. If, on the other hand, the market price is 70, the right to buy shares at the strike price of 80 will not be used. For this right a price is payable, the "option premium".

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SETTLEMENT As in the case of futures contracts, option contracts can be also be settled by delivery of the underlying asset or cash. However, unlike futures cash settlement in option contract entails paying/receiving the difference between the strikes price/exercise price and the price of the underlying asset either at the time of expiry of the contract or at the time of exercise / assignment of the option contract. PRICING OF OPTION CONTRACT The Strike Price: The strike price for an option is the price at which the underlying stock is bought or sold if the option is exercised. Strike prices are generally set at narrow intervals to be close to the market price of the underlying shares. Strike prices are set at the following intervals: 2 1/2-points when the strike price to be set is $25 or less; 5-points when the strike price to be set is over $25 through $200; and 10-points when the strike price to be set is over $200. Option prices can be obtained quickly and easily at any time on nasdaq-amex.com. Additionally, closing option prices (premiums) for exchange-traded options are published daily in many newspapers. New strike prices are introduced when the price of the underlying security rises to the highest, or falls to the lowest, strike price currently available. The strike price, a fixed specification of an option contract, should not be confused with the premium, the price at which the contract trades, which fluctuates daily. The relationship between the strike price and the actual price of a stock determines, in the unique language of options, whether the option is in-the-money, at-the-money or out-of-the-money. In the money: An in-the-money Call option strike price is below the actual stock price. Example: An investor purchases a Call option at the $95 strike price for WXYZ that is currently trading at $100. The investors position is in the money by $5.

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An in-the-money Put option strike price is above the actual stock price. Example: An investor purchases a Put option at the $110 strike price for WXYZ that is currently trading at $100. This investor position is In-the-money by $10. At-the-money: For both Put and Call options, the strike and the actual stock prices are the same. Out-of-the-money: An out-of-the-money Call option strike price is above the actual stock price. Example: An investor purchases an out-of-the-money Call option at the strike price of $120 of ABCD that is currently trading at $105. This investors position is out-of-the-money by $15. An out-of-the-money Put option strike price is below the actual stock price. Example: An investor purchases an out-of-the-money Put option at the strike price of $90 of ABCD that is currently trading at $105. This investors position is out of the money by $15. The Premium: The premium is the price a buyer pays the seller for an option. The premium is paid up front at purchase and is not refundable - even if the option is not exercised. Premiums are quoted on a per-share basis. Thus, a premium of 7/8 represents a premium payment of $87.50 per option contract ($0.875 x 100 shares). The amount of the premium is determined by several factors - the underlying stock price in relation to the strike price (intrinsic value), the length of time until the option expires (time value) and how much the price fluctuates (volatility value). Intrinsic value + Time value + Volatility value = Price of Option For example: An investor purchases a three month Call option at a strike price of $80 for a volatile security that is trading at $90. Intrinsic value = $10 Time value = since the Call is 90 days out, the premium would add moderately for time value. Volatility value = since the underlying security appears volatile, there would be value added to the premium for volatility. Top three influencing factors affecting options prices: The underlying stock price in relation to the strike price (intrinsic value) The length of time until the option expires (time value) And how much the price fluctuates (volatility value). Other factors that influence option prices (premiums) including: the quality of the underlying stock the dividend rate of the underlying stock 16

prevailing market conditions supply and demand for options involving the underlying stock Prevailing interest rates.

The premium of an option has two main components: intrinsic value and time value.

Intrinsic Value (Calls): When the underlying security's price is higher than the strike price a call option is said to be "inthe-money." Intrinsic Value (Puts): If the underlying security's price is less than the strike price, a put option is "in-the-money." Only in-the-money options have intrinsic value, representing the difference between the current price of the underlying security and the option's exercise price, or strike price. Time Value: Prior to expiration, any premium in excess of intrinsic value is called time value. Time value is also known as the amount an investor is willing to pay for an option above its intrinsic value, in the hope that at some time prior to expiration its value will increase because of a favorable change in the price of the underlying security. The longer the amount of time for market conditions to work to an investor's benefit, the greater the time value.

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3.3 Futures vs. Forwards Contract

While futures and forward contracts are both a contract to trade on a future date, key differences include:1. Futures are always traded on an exchange, whereas forwards always trade over-thecounter 2. Futures are highly standardized, whereas each forward is unique. 3. The price at which the contract is finally settled is different: Futures are settled at the settlement price fixed on the last trading date of the contract (i.e. at the end) Forwards are settled at the forward price agreed on the trade date (i.e. at the start)

4. The credit risk of futures is much lower than that of forwards: Traders are not subject to credit risk due to the role played by the clearing house. The day's profit or loss on a futures position is exchanged in cash every day (known as a 'margin payment'). After this the credit exposure is again zero. The profit or loss on a forward contract is only realised at the time of settlement, so the credit exposure can keep increasing 5. In case of physical delivery, the forward contract specifies to whom to make the delivery. 6. The counterparty on a futures contract is chosen randomly by the exchange. 7. In a forward there are no cash flows until delivery, whereas in futures there are margin requirements and periodic margin calls.

3.4 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.

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 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. Swaps are usually entered into at-the-money (i.e. with minimal initial cash payments because fair value is zero), through brokers or dealers who take an up-front cash payment or who ad just the rate to bear default risk. The two most prevalent swaps are interest rate swaps and foreign currency swaps, while others include equity swaps, commodity swaps, and swaptions.

3.5 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. Swap contracts are used to hedge entire price changes (symmetrically) related to an identified hedged risk, such as interest rate or foreign currency risk, since both counter parties gain or lose equally.

3.6 The other kind of derivatives, which are not, much popular are as follows :
BASKET Baskets options are option on portfolio of underlying asset. Equity Index Options are most popular form of baskets. LEAPS Normally option contracts are for a period of 1 to 12 months. However, exchange may introduce option contracts with a maturity period of 2-3 years. These long-term option contracts are popularly known as Leaps or Long term Equity Anticipation Securities. WARRANTS Options generally have lives of up to one year, the majority of options traded on options exchanges having a maximum maturity of nine months. Longer-dated options are called warrants and are generally traded over-the-counter.

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CHAPTER 4 THE STRUCTURE OF DERIVATIVE MARKET IN INDIA

Derivative trading in India takes can place either on a separate and independent Derivative Exchange or on a separate segment of an existing Stock Exchange. Derivative Exchange/Segment function as a Self-Regulatory Organisation (SRO) and SEBI acts as the oversight regulator. The clearing & settlement of all trades on the Derivative Exchange/Segment would have to be through a Clearing Corporation/House, which is independent in governance and membership from the Derivative Exchange/Segment. Regulatory framework of Derivatives markets in India Derivatives trading takes place under the provisions of the Securities Contracts (Regulation) Act, 1956 and the Securities and Exchange Board of India Act, 1992. Dr. L.C Gupta Committee constituted by SEBI had laid down the regulatory framework for derivative trading in India. SEBI has also framed suggestive bye-law for Derivative Exchanges/Segments and their Clearing Corporation/House which lay's down the provisions for trading and settlement of derivative contracts. SEBI has also laid the eligibility conditions for Derivative Exchange/Segment and its Clearing Corporation/House. The eligibility conditions have been framed to ensure that Derivative Exchange/Segment & Clearing Corporation/House provide a transparent trading environment, safety & integrity and provide facilities for redressal of investor grievances. Some of the important eligibility conditions are Derivative trading to take place through an on-line screen based Trading System. The Derivatives Exchange/Segment shall have on-line surveillance capability to monitor positions, prices, and volumes on a real time basis so as to deter market manipulation. The Derivatives Exchange/ Segment should have arrangements for dissemination of information about trades, quantities and quotes on a real time basis through atleast two information vending networks, which are easily accessible to investors across the country. The Derivatives Exchange/Segment should have arbitration and investor grievances redressal mechanism operative from all the four areas / regions of the country. The Derivatives Exchange/Segment should have satisfactory system of monitoring investor complaints and preventing irregularities in trading. The Derivative Segment of the Exchange would have a separate Investor Protection Fund. 20

The Clearing Corporation/House shall perform full novation, i.e., the Clearing Corporation/House shall interpose itself between both legs of every trade, becoming the legal counterparty to both or alternatively should provide an unconditional guarantee for settlement of all trades.

The Clearing Corporation/House shall have the capacity to monitor the overall position of Members across both derivatives market and the underlying securities market for those Members who are participating in both.

The level of initial margin on Index Futures Contracts shall be related to the risk of loss on the position. The concept of value-at-risk shall be used in calculating required level of initial margins. The initial margins should be large enough to cover the one-day loss that can be encountered on the position on 99% of the days.

The Clearing Corporation/House shall establish facilities for electronic funds transfer (EFT) for swift movement of margin payments. In the event of a Member defaulting in meeting its liabilities, the Clearing Corporation/House shall transfer client positions and assets to another solvent Member or close-out all open positions.

The Clearing Corporation/House should have capabilities to segregate initial margins deposited by Clearing Members for trades on their own account and on account of his client. The Clearing Corporation/House shall hold the clients margin money in trust for the client purposes only and should not allow its diversion for any other purpose.

The Clearing Corporation/House shall have a separate Trade Guarantee Fund for the trades executed on Derivative Exchange / Segment. Presently, SEBI has permitted Derivative Trading on the Derivative Segment of BSE and the F&O Segment of NSE.

Membership categories in the derivatives market The various types of membership in the derivatives market are as follows: Trading Member (TM) A TM is a member of the derivatives exchange and can trade on his own behalf and on behalf of his clients. Clearing Member (CM) These members are permitted to settle their own trades as well as the trades of the other non-clearing members known as Trading Members who have agreed to settle the trades through them. 21

Self-clearing Member (SCM) A SCM are those clearing members who can clear and settle their own trades only.

Requirements to be a member of the derivatives exchange/ clearing corporation: Balance Sheet Networth Requirements: SEBI has prescribed a networth requirement of Rs. 3 crores for clearing members. The clearing members are required to furnish an auditor's certificate for the net worth every 6 months to the exchange. The net worth requirement is Rs. 1 crore for a self-clearing member. SEBI has not specified any networth requirement for a trading member. Liquid Net worth Requirements: Every clearing member (both clearing members and selfclearing members) has to maintain at least Rs. 50 lakhs as Liquid Networth with the exchange / clearing corporation. Certification requirements: The Members are required to pass the certification programme approved by SEBI. Further, every trading member is required to appoint atleast two approved users who have passed the certification programme. Only the approved users are permitted to operate the derivatives trading terminal.

Requirements for a Member with regard to the conduct of his business: The derivatives member is required to adhere to the code of conduct specified under the SEBI Broker Sub-Broker regulations. The following conditions stipulations have been laid by SEBI on the regulation of sales practices: Sales Personnel: The derivatives exchange recognizes the persons recommended by the Trading Member and only such persons are authorized to act as sales personnel of the TM. These persons who represent the TM are known as Authorised Persons. Know-your-client: The member is required to get the Know-your-client form filled by every one of client. Risk disclosure document: The derivatives member must educate his client on the risks of derivatives by providing a copy of the Risk disclosure document to the client. Member-client agreement: The Member is also required to enter into the Member-client agreement with all his clients.

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Eligibility criteria for stocks on which derivatives trading may be permitted A stock on which stock option and single stock future contracts are proposed to be introduced is required to fulfill the following broad eligibility criteria: The stock shall be chosen from amongst the top 500 stock in terms of average daily market capitalisation and average daily traded value in the previous six month on a rolling basis. The stocks median quarter-sigma order size over the last six months shall be not less than Rs.1 Lakh. A stocks quarter-sigma order size is the mean order size (in value terms) required to cause a change in the stock price equal to one-quarter of a standard deviation. The market wide position limit in the stock shall not be less than Rs.50 crores. A stock can be included for derivatives trading as soon as it becomes eligible. However, if the stock does not fulfill the eligibility criteria for 3 consecutive months after being admitted to derivatives trading, then derivative contracts on such a stock would be discontinued. Minimum contract size The Standing Committee on Finance, a Parliamentary Committee, at the time of recommending amendment to Securities Contract (Regulation) Act, 1956 had recommended that the minimum contract size of derivative contracts traded in the Indian Markets should be pegged not below Rs. 2 Lakhs. Based on this recommendation SEBI has specified that the value of a derivative contract should not be less than Rs. 2 Lakh at the time of introducing the contract in the market. In February 2004, the Exchanges were advised to re-align the contracts sizes of existing derivative contracts to Rs. 2 Lakhs. Subsequently, the Exchanges were authorized to align the contracts sizes as and when required in line with the methodology prescribed by SEBI. Lot size of a contract Lot size refers to number of underlying securities in one contract. The lot size is determined keeping in mind the minimum contract size requirement at the time of introduction of derivative contracts on a particular underlying. For example, if shares of XYZ Ltd are quoted at Rs.1000 each and the minimum contract size is Rs.2 lacs, then the lot size for that particular scrips stands to be 200000/1000 = 200 shares i.e. one contract in XYZ Ltd. covers 200 shares.

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Margining system in the derivative markets Two type of margins have been specified Initial Margin - Based on 99% VaR and worst case loss over a specified horizon, which depends on the time in which Mark to Market margin is collected. Mark to Market Margin (MTM) - collected in cash for all Futures contracts and adjusted against the available Liquid Networth for option positions. In the case of Futures Contracts The initial margins should be large enough to cover the one day loss that can be encountered on the position on 99% of the days.

CONDITIONS FOR LIQUID NETWORTH Liquid net worth means the total liquid assets deposited with the clearing house towards initial margin and capital adequacy; LESS initial margin applicable to the total gross open position at any given point of time of all trades cleared through the clearing member. The following conditions are specified for liquid net worth: Liquid net worth of the clearing member should not be less than Rs 50 lacs at any point of time. Mark to market value of gross open positions at any point of time of all trades cleared through the clearing member should not exceed the specified exposure limit for each product. Liquid Assets At least 50% of the liquid assets should be in the form of cash equivalents viz. cash, fixed deposits, bank guarantees, T bills, units of money market mutual funds, units of gilt funds and dated government securities. Liquid assets will include cash, fixed deposits, bank guarantees, T bills, units of mutual funds, dated government securities or Group I equity securities which are to be pledged in favor of the exchange.

MARGIN COLLECTION Initial Margin - is adjusted from the available Liquid Networth of the Clearing Member on an online real time basis. Marked to Market Margins-

Futures contracts: The open positions (gross against clients and net of proprietary / self trading) in the futures contracts for each member are marked to market to the daily settlement price of the Futures contracts at the end of each trading day. The daily settlement price at the end of each day is the weighted average price of the last half an hour of the futures contract. The profits / losses 24

arising from the difference between the trading price and the settlement price are collected / given to all the clearing members. Option Contracts: The marked to market for Option contracts is computed and collected as part of the SPAN Margin in the form of Net Option Value. The SPAN Margin is collected on an online real time basis based on the data feeds given to the system at discrete time intervals. Client Margins Clearing Members and Trading Members are required to collect initial margins from all their clients. The collection of margins at client level in the derivative markets is essential as derivatives are leveraged products and non-collection of margins at the client level would provide zero cost leverage. In the derivative markets all money paid by the client towards margins is kept in trust with the Clearing House / Clearing Corporation and in the event of default of the Trading or Clearing Member the amounts paid by the client towards margins are segregated and not utilised towards the dues of the defaulting member. Therefore, Clearing members are required to report on a daily basis details in respect of such margin amounts due and collected from their Trading members / clients clearing and settling through them. Trading members are also required to report on a daily basis details of the amount due and collected from their clients. The reporting of the collection of the margins by the clients is done electronically through the system at the end of each trading day. The reporting of collection of client level margins plays a crucial role not only in ensuring that members collect margin from clients but it also provides the clearing corporation with a record of the quantum of funds it has to keep in trust for the clients. Exposure limits in Derivative Products It has been prescribed that the notional value of gross open positions at any point in time in the case of Index Futures and all Short Index Option Contracts shall not exceed 33 1/3 (thirty three one by three) times the available liquid networth of a member, and in the case of Stock Option and Stock Futures Contracts, the exposure limit shall be higher of 5% or 1.5 sigma of the notional value of gross open position. In the case of interest rate futures, the following exposure limit is specified: The notional value of gross open positions at any point in time in futures contracts on the notional 10 year bond should not exceed 100 times the available liquid networth of a member. The notional value of gross open positions at any point in time in futures contracts on the notional T-Bill should not exceed 1000 times the available liquid networth of a member. 25

Position limits in Derivative Products The position limits specified are as underClient / Customer level position limits: For index based products there is a disclosure requirement for clients whose position exceeds 15% of the open interest of the market in index products. For stock specific products the gross open position across all derivative contracts on a particular underlying of a customer/client should not exceed the higher of 1% of the free float market capitalisation (in terms of number of shares). Or 5% of the open interest in the derivative contracts on a particular underlying stock (in terms of number of contracts). This position limits are applicable on the combine position in all derivative contracts on an underlying stock at an exchange. The exchanges are required to achieve client level position monitoring in stages. The client level position limit for interest rate futures contracts is specified at Rs.100 crore or 15% of the open interest, whichever is higher.

Trading Member Level Position Limits: For Index options the Trading Member position limits are Rs. 250 cr or 15% of the total open interest in Index Options whichever is higher and for Index futures the Trading Member position limits are Rs. 250 cr or 15% of the total open interest in Index Futures whichever is higher. For stocks specific products, the trading member position limit is 20% of the market wide limit subject to a ceiling of Rs. 50 crore. In Interest rate futures the Trading member position limit is Rs. 500 Cr or 15% of open interest whichever is higher. It is also specified that once a member reaches the position limit in a particular underlying then the member shall be permitted to take only offsetting positions (which result in lowering the open position of the member) in derivative contracts on that underlying. In the event that the position limit is breached due to the reduction in the overall open interest in the market, the member are required to take only offsetting positions (which result in lowering the open position of the member) in derivative contract in that underlying and fresh positions shall not be permitted. The position limit at trading member level is required to be computed on a gross basis across all clients of the Trading member. 26

Market wide limits: There are no market wide limits for index products. For stock specific products the market wide limit of open positions (in terms of the number of underlying stock) on an option and futures contract on a particular underlying stock would be lower of 30 times the average number of shares traded daily, during the previous calendar month, in the cash segment of the Exchange, Or 20% of the number of shares held by non-promoters i.e. 20% of the free float, in terms of number of shares of a company.

Measures have been specified by SEBI to protect the rights of investor in Derivatives Market: Investor's money has to be kept separate at all levels and is permitted to be used only against the liability of the Investor and is not available to the trading member or clearing member or even any other investor. The Trading Member is required to provide every investor with a risk disclosure document which will disclose the risks associated with the derivatives trading so that investors can take a conscious decision to trade in derivatives. Investor would get the contract note duly time stamped for receipt of the order and execution of the order. The order will be executed with the identity of the client and without client ID order will not be accepted by the system. The investor could also demand the trade confirmation slip with his ID in support of the contract note. This will protect him from the risk of price favour, if any, extended by the Member. In the derivative markets all money paid by the Investor towards margins on all open positions is kept in trust with the Clearing House/Clearing corporation and in the event of default of the Trading or Clearing Member the amounts paid by the client towards margins are segregated and not utilised towards the default of the member. However, in the event of a default of a member, losses suffered by the Investor, if any, on settled / closed out position are compensated from the Investor Protection Fund, as per the rules, bye-laws and regulations of the derivative segment of the exchanges. The Exchanges are required to set up arbitration and investor grievances redressal mechanism operative from all the four areas / regions of the country. 27

CHAPTER 5 BENEFITS OF DERIVATIVES

Derivative markets help investors in many different ways: 1.] RISK MANAGEMENT Futures and options contract can be used for altering the risk of investing in spot market. For instance, consider an investor who owns an asset. He will always be worried that the price may fall before he can sell the asset. He can protect himself by selling a futures contract, or by buying a Put option. If the spot price falls, the short hedgers will gain in the futures market, as you will see later. This will help offset their losses in the spot market. Similarly, if the spot price falls below the exercise price, the put option can always be exercised. 2.] PRICE DISCOVERY

Price discovery refers to the markets ability to determine true equilibrium prices. Futures prices are believed to contain information about future spot prices and help in disseminating such information. As we have seen, futures markets provide a low cost trading mechanism. Thus information pertaining to supply and demand easily percolates into such markets. Accurate prices are essential for ensuring the correct allocation of resources in a free market economy. Options markets provide information about the volatility or risk of the underlying asset. 3.] OPERATIONAL ADVANTAGES

As opposed to spot markets, derivatives markets involve lower transaction costs. Secondly, they offer greater liquidity. Large spot transactions can often lead to significant price changes. However, futures markets tend to be more liquid than spot markets, because herein you can take large positions by depositing relatively small margins. Consequently, a large position in derivatives markets is relatively easier to take and has less of a price impact as opposed to a transaction of the same magnitude in the spot market. Finally, it is easier to take a short position in derivatives markets than it is to sell short in spot markets. 4.] MARKET EFFICIENCY

The availability of derivatives makes markets more efficient; spot, futures and options markets are inextricably linked. Since it is easier and cheaper to trade in derivatives, it is possible to exploit arbitrage opportunities quickly and to keep prices in alignment. Hence these markets help to ensure that prices reflect true values.

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5.]

EASE OF SPECULATION

Derivative markets provide speculators with a cheaper alternative to engaging in spot transactions. Also, the amount of capital required to take a comparable position is less in this case. This is important because facilitation of speculation is critical for ensuring free and fair markets. Speculators always take calculated risks. A speculator will accept a level of risk only if he is convinced that the associated expected return, is commensurate with the risk that he is taking. The derivative market performs a number of economic functions. 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. An important incidental benefit that flows from derivatives trading is that it acts as a catalyst for new entrepreneurial activity. Derivatives markets help increase savings and investment in the long run. Transfer of risk enables market participants to expand their volume of activity.

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CHAPTER 6
EXCHANGE TRADED DERIVATIVES

ON (NSE) NATIONAL STOCK EXCHANGE Futures & Options

The National Stock Exchange of India Limited (NSE) commenced trading in derivatives with launch of index futures on June 12, 2000. The futures contracts are based on S&P CNX NiftyIndex. The Exchange introduced trading in Index Options (also based on Nifty) on June 4, 2001. NSE also became the first exchange to launch trading in options on individual securities from July 2, 2001. Futures on individual securities were introduced on November 9, 2001. Futures and Options on individual securities are available on 152 securities stipulated by SEBI. The Exchange has also introduced trading in Futures and Options contracts based on the CNX-IT and BANK NIFTY indices from August 29, 2003 and June 13, 2005 respectively.

FINANCIAL DERIVATIVE ON NSE S&P CNX Nifty Futures S&P CNX Nifty Options CNXIT Futures CNXIT Options BANK Nifty Futures BANK Nifty Options Futures on Individual Securities Options on Individual Securities Interest Rate Derivatives

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6.1 S&P CNX Nifty Futures

A futures contract is a forward contract, which is traded on an Exchange. NSE commenced trading in index futures on June 12, 2000. The index futures contracts are based on the popular market benchmark S&P CNX Nifty index. NSE defines the characteristics of the futures contract such as the underlying index, market lot, and the maturity date of the contract. The futures contracts are available for trading from introduction to the expiry date.

Contract Specifications:
Security descriptor: The security descriptor for the S&P CNX Nifty futures contracts is: Market type: N Instrument Type: FUTIDX Underlying: NIFTY Expiry date: Date of contract expiry Instrument type represents the instrument ie, Futures on index. Underlying symbol denotes the underlying index which is S&P CNX Nifty. Trading cycle: S&P CNX Nifty futures contracts have a maximum of 3-month trading cycle - the near month (one), the next month (two) and the far month (three). A new contract is introduced on the trading day following the expiry of the near month contract. The new contract will be introduced for a three month duration. This way, at any point in time, there will be 3 contracts available for trading in the market i.e., one near month, one mid month and one far month duration respectively. Expiry day: S&P CNX Nifty futures contracts expire on the last Thursday of the expiry month. If the last Thursday is a trading holiday, the contracts expire on the previous trading day. Trading Parameters: Contract size: The value of the futures contracts on Nifty may not be less than Rs. 2 lakhs at the time of introduction. The permitted lot size for futures contracts & options contracts shall be the same for a given underlying or such lot size as may be stipulated by the Exchange from time to time.

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Price steps: The price step in respect of S&P CNX Nifty futures contracts is Re.0.05.

Base Prices: Base price of S&P CNX Nifty futures contracts on the first day of trading would be theoretical futures price.. The base price of the contracts on subsequent trading days would be the daily settlement Price bands: There are no day minimum/maximum price ranges applicable for S&P CNX Nifty futures contracts. However, in order to prevent erroneous order entry by trading members, operating ranges are kept at +/- 10 %. In respect of orders which have come under price freeze, members would be required to confirm to the Exchange that there is no inadvertent error in the order entry and that the order is genuine. On such confirmation the Exchange may approve such order. Quantity freeze: Orders which may come to the exchange as a quantity freeze shall be based on the notional value of the contract of around Rs. 5 crores. Quantity freeze is calculated for each underlying on the last trading day of each calendar month and is applicable through the next calendar month. In respect of orders which have come under quantity freeze, members would be required to confirm to the Exchange that there is no inadvertent error in the order entry and that the order is genuine. On such confirmation, the Exchange may approve such order. However, in exceptional cases, the Exchange may, at its discretion, not allow the orders that have come under quantity freeze for execution for any reason whatsoever including non-availability of turnover / exposure limits price of the futures contracts.

6.2 S&P CNX Nifty Options

An option gives a person the right but not the obligation to buy or sell something. An option is a contract between two parties wherein the buyer receives a privilege for which he pays a fee (premium) and the seller accepts an obligation for which he receives a fee. The premium is the price negotiated and set when the option is bought or sold. A person who buys an option is said to be long in the option. A person who sells (or writes) an option is said to be short. NSE introduced trading in index options on June 4, 2001. The options contracts are European style and cash settled and are based on the popular market benchmark S&P CNX Nifty index. 32

Contract Specifications: Security descriptor The security descriptor for the S&P CNX Nifty options contracts is: Market type :N Instrument Type : OPTIDX Underlying : NIFTY Expiry date : Date of contract expiry Option Type : CE/ PE Strike Price: Strike price for the contract

6.3 CNXIT Futures

A futures contract is a forward contract, which is traded on an Exchange. CNX IT Futures Contract would be based on the index CNX IT index. NSE defines the characteristics of the futures contract such as the underlying index, market lot, and the maturity date of the contract. The futures contracts are available for trading from introduction to the expiry date. Contract Specifications Security descriptor The security descriptor for the CNX IT futures contracts is: Market type : N Instrument Type : FUTIDX Underlying : CNXIT Expiry date : Date of contract expiry

6.4 CNXIT Options

An option gives a person the right but not the obligation to buy or sell something. An option is a contract between two parties wherein the buyer receives a privilege for which he pays a fee (premium) and the seller accepts an obligation for which he receives a fee. The premium is the price negotiated and set when the option is bought or sold. A person who buys an option is said 33

to be long in the option. A person who sells (or writes) an option is said to be short in the option. The options contracts are European style and cash settled and are based on the CNX IT index. Contract Specifications Security descriptor The security descriptor for the CNX IT options contracts is: Market type : N Instrument Type : OPTIDX Underlying : CNXIT Expiry date : Date of contract expiry Option Type : CE/ PE Strike Price: Strike price for the contract Instrument type represents the instrument i.e. Options on Index. Underlying symbol denotes the underlying index, which is CNXIT Expiry date identifies the date of expiry of the contract Option type identifies whether it is a call or a put option., CE - Call European, PE - Put European.

6.5 BANK Nifty Futures

A futures contract is a forward contract, which is traded on an Exchange. BANK Nifty futures Contract would be based on the index CNX Bank index. (Selection criteria for indices) NSE defines the characteristics of the futures contract such as the underlying index, market lot, and the maturity date of the contract. The futures contracts are available for trading from introduction to the expiry date. Contract Specifications Security descriptor The security descriptor for the BANK Nifty futures contracts is: Market type : N Instrument Type : FUTIDX Underlying : BANKNIFTY Expiry date : Date of contract expiry Instrument type represents the instrument i.e. Futures on Index. Underlying symbol denotes the 34

underlying index which is BANK Nifty. Expiry date identifies the date of expiry of the contract

6.6 BANKNIFTY Options

An option gives a person the right but not the obligation to buy or sell something. An option is a contract between two parties wherein the buyer receives a privilege for which he pays a fee (premium) and the seller accepts an obligation for which he receives a fee. The premium is the price negotiated and set when the option is bought or sold. A person who buys an option is said to be long in the option. A person who sells (or writes) an option is said to be short in the option. The options contracts are European style and cash settled and are based on the BANK NIFTY index. Security descriptor The security descriptor for the BANKNIFTY options contracts is: Market type : N Instrument Type : OPTIDX Underlying : BANKNIFTY Expiry date : Date of contract expiry Option Type : CE/ PE Strike Price: Strike price for the contract Instrument type represents the instrument i.e. Options on Index. Underlying symbol denotes the underlying index, which is BANKNIFTY Expiry date identifies the date of expiry of the contract Option type identifies whether it is a call or a put option, CE - Call European, PE PutEuropean.

6.7 Futures on Individual Securities

A futures contract is a forward contract, which is traded on an Exchange. NSE commenced trading in futures on individual securities on November 9, 2001. The futures contracts are available on 152 securities stipulated by the Securities & Exchange Board of India (SEBI). NSE defines the characteristics of the futures contract such as the underlying security, market lot, and the maturity date of the contract. The futures contracts are available for trading from introduction to the expiry date. 35

Security descriptor: The security descriptor for the futures contracts is: Market type : N Instrument Type : FUTSTK Underlying : Symbol of underlying security Expiry date : Date of contract expiry Underlying Instrument: Futures contracts are available on 152 securities stipulated by the Securities & Exchange Board of India (SEBI). These securities are traded in the Capital Market segment of the Exchange. Trading cycle: Futures contracts have a maximum of 3-month trading cycle - the near month (one), the next month (two) and the far month (three). New contracts are introduced on the trading day following the expiry of the near month contracts. The new contracts are introduced for a three month duration. This way, at any point in time, there will be 3 contracts available for trading in the market (for each security) i.e., one near month, one mid month and one far month duration respectively. Contract size: The value of the futures contracts on individual securities may not be less than Rs. 2 lakhs at the time of introduction for the first time at any exchange. The permitted lot size for futures contracts & options contracts shall be the same for a given underlying or such lot size as may be stipulated Price steps The price step in respect of futures contracts is Re.0.05. by the Exchange from time to time.

Base Prices Base price of futures contracts on the first day of trading (i.e. on introduction) would be the theoretical futures price. The base price of the contracts on subsequent trading days would be the daily Price bands There are no day minimum/maximum price ranges applicable for futures contracts. However, in order to prevent erroneous order entry by trading members, operating ranges are kept at +/- 20 %. In respect of orders which have come under price freeze, members would be required to 36 settlement price of the futures contracts.

confirm to the Exchange that there is no inadvertent error in the order entry and that the order is genuine. On such confirmation the Exchange may approve such order.

Quantity freeze Orders which may come to the exchange as a quantity freeze shall be based on the notional value of the contract of around Rs. 5 crores. Quantity freeze is calculated for each underlying on the last trading day of each calendar month and is applicable through the next calendar month. In respect of orders which have come under quantity freeze, members would be required to confirm to the Exchange that there is no inadvertent error in the order entry and that the order is genuine. On such confirmation, the Exchange may approve such order. However, in exceptional cases, the Exchange may, at its discretion, not allow the orders that have come under quantity freeze for execution for any reason whatsoever including non-availability of turnover / exposure limits

6.8 Options on Individual Securities

An option gives a person the right but not the obligation to buy or sell something. An option is a contract between two parties wherein the buyer receives a privilege for which he pays a fee (premium) and the seller accepts an obligation for which he receives a fee. The premium is the price negotiated and set when the option is bought or sold. A person who buys an option is said to be long in the option. A person who sells (or writes) an option is said to be short in the option. NSE became the first exchange to launch trading in options on individual securities. Trading in options on individual securities commenced from July 2, 2001. Option contracts are American style and cash settled and are available on 152 securities stipulated by the Securities & Exchange Board of India (SEBI). Security descriptor The security descriptor for the options contracts is: Market type : N Instrument Type : OPTSTK Underlying : Symbol of underlying security Expiry date : Date of contract expiry Option Type : CA / PA Strike Price: Strike price for the contract 37

Instrument type represents the instrument i.e. Options on individual securities. Option type identifies whether it is a call or a put option., CA - Call American, PA - Put American. Underlying Instrument Option contracts are available on 152 securities stipulated by the Securities & Exchange Board of India (SEBI). These securities are traded in the Capital Market segment of the Exchange. Trading cycle Options contracts have a maximum of 3-month trading cycle - the near month (one), the next month (two) and the far month (three). On expiry of the near month contract, new contracts are introduced at new strike prices for both call and put options, on the trading day following the expiry of the near month contract. The new contracts are introduced for three month duration. Expiry day Options contracts expire on the last Thursday of the expiry month Strike Price Intervals The Exchange provides a minimum of seven strike prices for every option type (i.e Call & Put) during the trading month. At any time, there are three contracts in-the-money (ITM), three contracts out-of-the-money (OTM) and one contract at-the-money (ATM). Price of Underlying Less than or equal to Rs. 50 > Rs.50 to less than or equal to Rs. 250 > Rs.250 to less than or equal to Rs. 500 > Rs.500 to less than or equal to Rs. 1000 > Rs.1000 to less than or equal to Rs. 2500 > Rs.2500 Strike Price interval (Rs.) 2.50 5 10 20 30 50

New contracts with new strike prices for existing expiration date are introduced for trading on the next working day based on the previous day's underlying close values, as and when required. In order to decide upon the at-the-money strike price, the underlying closing value is rounded off to the nearest strike price interval. The in-the-money strike price and the out-of-the-money strike price are based on the at-the-

38

money strike price interval. Trading Parameters Contract size The value of the option contracts on individual securities may not be less than Rs. 2 lakhs at the time of introduction for the first time at any exchange. The permitted lot size for futures contracts & options contracts shall be the same for a given underlying or such lot size as may be stipulated Price steps The price step in respect of the options contracts is Re.0.05. Base Prices Base price of the options contracts, on introduction of new contracts, would be the theoretical value of the options contract arrived at based on Black-Scholes model of calculation of options premiums. The base price of the contracts on subsequent trading days, will be the daily close price of the options contracts. The closing price shall be calculated as follows:

by

the

Exchange

from

time

to

time.

If the contract is traded in the last half an hour, the closing price shall be the last half an hour weighted average price.

If the contract is not traded in the last half an hour, but traded during any time of the day, then the closing price will be the last traded price (LTP) of the contract.

If the contract is not traded for the day, the base price of the contract for the next trading day shall be the theoretical price of the options contract arrived at based on Black-Scholes model. Price bands There are no day minimum/maximum price ranges applicable for options contracts. However, in order to prevent erroneous order entry, operating ranges and day minimum/maximum ranges for options contracts are kept at 99% of the base price. In view of this, members will not be able to place orders at prices which are beyond 99% of the base price. Members desiring to place orders in option contracts beyond the day min-max range would be required to send a request to the Exchange. The base prices for option contracts may be modified, at the discretion of the

39

Exchange,

based

on

the

request

received

from

trading

members.

Quantity freeze Orders which may come to the exchange as a quantity freeze shall be based on the notional value of the contract of around Rs. 5 crores. Quantity freeze is calculated for each underlying on the last trading day of each calendar month and is applicable through the next calendar month. In respect of orders which have come under quantity freeze, members would be required to confirm to the Exchange that there is no inadvertent error in the order entry and that the order is genuine. On such confirmation, the Exchange may approve such order. However, in exceptional cases, the Exchange may, at its discretion, not allow the orders that have come under quantity freeze for execution for any reason whatsoever including non-availability of turnover / exposure limits

6.9 Interest Rate Derivatives Product description:

Interest Rate Futures Contracts are contracts based on the list of underlying as may be specified by the Exchange and approved by SEBI from time to time. To begin with, interest rate futures contracts on the following underlyings shall be available for trading on the F&O Segment of the Exchange :

Notional T Bills Notional 10 year bonds (coupon bearing and non-coupon bearing)

The list of securities on which Futures Contracts would be available and their symbols for trading are as under : S. No. 1 2 3 Symbol NSETB91D NSE10Y06 NSE10YZC Description Futures contract on Notional 91 day T bill Futures contract on Notional 10 year coupon bearing bond Futures contract on Notional 10 year zero coupon bond.

NSE defines the characteristics of the futures contract such as the underlying security, market lot and the maturity date of the contract. Contract Specification Security descriptor: Market type : N Instrument Type : FUTINT Underlying : Notional T- bills and Notional 10 year bond (coupon bearing and non-coupon bearing) Expiry Date : Last Thursday of the Expiry month. Instrument type represents the instrument. 40

Underlying Instrument: Interest rate futures contracts are available on Notional T- bills , Notional 10 year zero coupon bond and Notional 10 year coupon bearing bond stipulated by the Securities & Exchange Board of India (SEBI). Tradingcycle: The interest rate future contract shall be for a period of maturity of one year with three months continuous contracts for the first three months and fixed quarterly contracts for the entire year. New contracts will be introduced on the trading day following the expiry of the near month contract. Expiryday: Interest rate future contracts shall expire on the last Thursday of the expiry month. If the last Thursday is a trading holiday, the contracts shall expire on the previous trading day. Further, where the last Thursday falls on the annual or half-yearly closing dates of the bank, the expiry and last trading day in respect of these derivatives contracts would be pre-poned to the previous trading day. Product Characteristics Contract underlying Contract descriptor Contract Value Lot size Tick size Expiry date Contract months Price limits Settlement Price Notional 10 year bond (6 % coupon ) N FUTINT NSE10Y06 26JUN2003 Notional 10 year zero coupon bond N FUTINT NSE10YZC 26JUN2003 Notional 91 day T-Bill N FUTINT NSETB91D 26JUN2003

Rs.2,00,000 2000 Re.0.01 Last Thursday of the month The contracts shall be for a period of a maturity of one year with three months continuous contracts for the first three months and fixed quarterly contracts for the entire year. Not applicable As may be stipulated by NSCCL in this regard from time to time.

Trading Parameters Contract size The permitted lot size for the interest rate futures contracts shall be 2000. The minimum value of a interest rate futures contract would be Rs. 2 lakhs at the time of introduction. Price steps The price steps in respect of all interest rate future contracts admitted to dealings on the Exchange is Re.0.01. 41

The Futures contracts having face value of Rs 100 on notional ten year coupon bearing bond and notional ten year zero coupon bond would be based on price quotation and Futures contracts having face value of Rs. 100 on notional 91 days treasury bill would be based on Rs. 100 minus (-) yield. Base Price & operating ranges Base price of the Interest rate future contracts on introduction of new contracts shall be theoretical futures price computed based on previous days closing price of the notional underlying security. The base price of the contracts on subsequent trading days will be the closing price of the futures contracts. However, on such of those days when the contracts were not traded, the base price will be the daily settlement price of futures contracts. There will be no day minimum/maximum price ranges applicable for the futures contracts. However, in order to prevent / take care of erroneous order entry, the operating ranges for interest rate future contracts shall be kept at +/- 2% of the base price. In respect of orders which have come under price freeze, the members would be required to confirm to the Exchange that the order is genuine. On such confirmation, the Exchange at its discretion may approve such order. If such a confirmation is not given by any member, such order shall not be processed and as such shall lapse. Quantity freeze Orders which may come to the Exchange as a quantity freeze shall be 2500 contracts amounting to 50,00,000 which works out on the day of introduction to approximately Rs 50 crores. In respect of such orders which have come under quantity freeze, the member shall be required to confirm to the Exchange that the order is genuine. On such confirmation, the Exchange at its discretion may approve such order subject to availability of turnover/exposure limits, etc. If such a confirmation is not given by any member, such order shall not be processed and as such shall lapse. Order type/Order book/Order attribute Regular lot order Stop loss order Immediate or cancel Good till day Good till cancelled* Good till date Spread order 2L and 3L orders * Good till cancelled (GTC) orders shall be cancelled at the end of the period of 7 calendar days from the date of entering an order.

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6.10 Contract specifications under NSE:

Parameter Underlying

Index Futures 6 Indices

Index Options 6 Indices

Futures on Individual Securities 228 securities

Options on Individual Securities 228 securities

Security Descriptor: Instrument Underlying FUTIDX Symbol of Underlying Index OPTIDX Symbol of Underlying Index FUTSTK Symbol of Underlying Security OPTSTK Symbol of Underlying Security

Expiry Date DD-MMM-YYYY DD-MMM-YYYY DD-MMM-YYYY DD-MMM-YYYY Option Type Strike Price CE / PE Strike Price CA / PA Strike Price

Trading Cycle Expiry Day Strike Price Intervals Permitted Lot Size Price Steps Price Bands

3 month trading cycle - the near month (one), the next month (two) and the far month (three) Last Thursday of the expiry month. If the last Thursday is a trading holiday, then the expiry day is the previous trading day. Underlying specific Rs.0.05 Depending on underlying price Underlying specific Rs.0.05 Underlying specific Rs.0.05 Depending on underlying price Underlying specific Rs.0.05

Operating range of Operating range of Operating range of Operating range of 10% of the base 99% of the base 20% of the base 99% of the base price price price price

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6.11 Selection Criteria Eligibility Criteria for selection of Securities and Indices on NSE The eligibility of a stock / index for trading in Derivatives segment is based upon the criteria laid down by SEBI through various circulars issued from time to time. The latest circular issued in this respect is circular No. : SEBI/DNPD/Cir-31/2006 dated September 22, 2006. Based on various circulars, the following criteria will be adopted by the Exchange w.e.f September 22, 2006, for selecting stocks and indices on which Futures & Options contracts would be introduced. 1. Eligibility criteria of stocks The stock shall be chosen from amongst the top 500 stocks in terms of average daily market capitalisation and average daily traded value in the previous six months on a rolling basis. The stocks median quarter-sigma order size over the last six months shall be not less than Rs. 0.10 million (Rs. 1 lac). For this purpose, a stocks quarter-sigma order size shall mean the order size (in value terms) required to cause a change in the stock price equal to one-quarter of a standard deviation. The market wide position limit in the stock shall not be less than Rs. 500 million (Rs. 50 crores). The market wide position limit (number of shares) shall be valued taking the closing prices of stocks in the underlying cash market on the date of expiry of contract in the month. The market wide position limit of open position (in terms of the number of underlying stock) on futures and option contracts on a particular underlying stock shall be 20% of the number of shares held by non-promoters in the relevant underlying security i.e. free-float holding. 2. Continued Eligibility For an existing stock to become ineligible, the criteria for market wide position limit shall be relaxed upto 10% of the criteria applicable for the stock to become eligible for derivatives trading. To be dropped out of Derivatives segment, the stock will have to fail the relaxed criteria for 3 consecutive months. If an existing security fails to meet the eligibility criteria for three months consecutively, then no fresh month contract shall be issued on that security. Further, the members may also refer to circular no. NSCC/F&O/C&S/365 dated August 26, 2004, issued by NSCCL regarding Market Wide Position Limit, wherein it is clarified that a stock which has remained subject to a ban on new position for a significant part of the month consistently for three months, shall be phased out from trading in the F&O segment. 44

However, the existing unexpired contracts may be permitted to trade till expiry and new strikes may also be introduced in the existing contract months.

3. Re-introduction of dropped stocks A stock which is dropped from derivatives trading may become eligible once again. In such instances, the stock is required to fulfill the eligibility criteria for three consecutive months to be reintroduced 4. Eligibility criteria of Indices Futures & Options contracts on an index can be introduced only if 80% of the index constituents are individually eligible for derivatives trading. However, no single ineligible stock in the index shall have a weightage of more than 5% in the index. The index on which futures and options contracts are permitted shall be required to comply with the eligibility criteria on a continuous basis. SEBI has subsequently modified the above criteria, vide its clarification issued to the Exchange The Exchange may consider introducing derivative contracts on an index if the stocks contributing to 80% weightage of the index are individually eligible for derivative trading. However, no single ineligible stocks in the index shall have a weightage of more than 5% in the index. The above criteria is applied every month, if the index fails to meet the eligibility criteria for three months consecutively, then no fresh month contract shall be issued on that index, However, the existing unexpired contacts shall be permitted to trade till expiry and new strikes may also be introduced in the existing contacts. for derivative trading.

Selection criteria for unlisted companies For unlisted companies coming out with initial public offering, if the net public offer is Rs. 500 crores or more, then the Exchange may consider introducing stock options and stock futures on such stocks at the time of its listing in the cash market. Clearing & Settlement (Derivatives) National Securities Clearing Corporation Limited (NSCCL) is the clearing and settlement agency for all deals executed on the Derivatives (Futures & Options) segment. NSCCL acts as legal counter-party to all deals on NSE's F&O segment and guarantees settlement.

A Clearing Member (CM) of NSCCL has the responsibility of clearing and settlement of all deals executed by Trading Members (TM) on NSE, who clear and settle such deals through them. 45

Risk Management Minimum Base Capital A Clearing Member (CM) is required to meet with the Base Minimum Capital (BMC) requirements prescribed by NSCCL before activation. The CM has also to ensure that BMC is maintained in accordance with the requirements of NSCCL at all points of time, after activation. Every CM is required to maintain BMC of Rs.50 lakhs with NSCCL in the following manner: (1) Rs.25 lakhs in the form of cash. (2) Rs.25 lakhs in any one form or combination of the below forms: Cash Fixed Deposit Receipts (FDRs) issued by approved banks and deposited with approved Custodians or NSCCL Bank Guarantee in favour of NSCCL from approved banks in the specified format. Approved securities in demat form deposited with approved Custodians.

In addition to the above MBC requirements, every CM is required to maintain BMC of Rs.10 lakhs, in respect of every trading member(TM) whose deals such CM undertakes to clear and settle, in the following manner: (1) Rs.2 lakhs in the form of cash. (2) Rs.8 lakhs in a one form or combination of the following: Cash Fixed Deposit Receipts (FDRs) issued by approved banks and deposited with approved Custodians or NSCCL Bank Guarantee in favour of NSCCL from approved banks in the specified format. Approved securities in demat form deposited with approved Custodians.

Any failure on the part of a CM to meet with the BMC requirements at any point of time, will be treated as a violation of the Rules, Bye-Laws and Regulations of NSCCL and would attract disciplinary action inter-alia including, withdrawal of trading facility and/ore clearing facility, closing out of outstanding positions etc. Additional Base Capital Clearing members may provide additional margin/collateral deposit (additional base capital) to NSCCL and/or may wish to retain deposits and/or such amounts which are receivable from NSCCL, over and above their minimum deposit requirements, towards initial margin and/ or other obligations. 46

Clearing members may submit such deposits in any one form or combination of the following forms: Cash Fixed Deposit Receipts (FDRs) issued by approved banks and deposited with approved Custodians or NSCCL Bank Guarantee in favour of NSCCL from approved banks in the specified format. Approved securities in demat form deposited with approved Custodians.

Payment of Margins The initial margin is payable upfront by Clearing Members. Initial margins can be paid by members in the form of Cash, Bank Guarantee, Fixed Deposit Receipts and approved securities. Non-fulfillment of either the whole or part of the margin obligations will be treated as a violation of the Rules, Bye-Laws and Regulations of NSCCL and will attract penal charges @ 0.07% per day of the amount not paid throughout the period of non-payment. In addition NSCCL may at its discretion and without any further notice to the clearing member, initiate other displinary action, inter-alia including, withdrawal of trading facilities and/ or clearing facility, close out of outstanding positions, imposing penalties, collecting appropriate deposits, invoking bank guarantees/ fixed deposit receipts, etc.

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CHAPTER 7 INTRODUCTION ABOUT DERIVATIVE ON BSE

BSE created history on June 9, 2000 by launching the first Exchange traded Index Derivative Contract i.e. futures on the capital market benchmark index - the BSE Sensex. The inauguration of trading was done by Prof. J.R. Varma, member of SEBI and chairman of the committee responsible for formulation of risk containment measures for the Derivatives market. The first historical trade of 5 contracts of June series was done on June 9, 2000 at 9:55:03 a.m. between M/s Kaji & Maulik Securities Pvt. Ltd. and M/s Emkay Share & Stock Brokers Ltd. at the rate of 4755. In the sequence of product innovation, the exchange commenced trading in Index Options on Sensex on June 1, 2001. Stock options were introduced on 31 stocks on July 9, 2001 and single stock futures were launched on November 9, 2002.

September 13, 2004 marked another milestone in the history of Indian Capital Markets, the day on which the Bombay Stock Exchange launched Weekly Options, a unique product unparallel in derivatives markets, both domestic and international. BSE permitted trading in weekly contracts in options in the shares of four leading companies namely Reliance, Satyam, State Bank of India, and Tisco in addition to the flagship index-Sensex. TYPES OF PRODUCTS IN DERIVATIVE IN BSE Index Futures A futures contract is a standardized contract to buy or sell a specific security at a future date at an agreed price. An index future is, as the name suggests, a future on the index i.e. the underlying is the index itself. There is no underlying security or a stock, which is to be delivered to fulfill the obligations as index futures are cash settled. As other derivatives, the contract derives its value from the underlying index. The underlying indices in this case will be the various eligible indices and as permitted by the Regulator from time to time. Index Options Options contract give its holder the right, but not the obligation, to buy or sell something on or before a specified date at a stated price. Generally index options are European Style. European Style options are those option contracts that can be exercised only on the expiration date. The

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underlying indices for index options are the various eligible indices and as permitted by the Regulator from time to time. Stock Futures A stock futures contract is a standardized contract to buy or sell a specific stock at a future date at an agreed price. A stock future is, as the name suggests, a future on a stock i.e. the underlying is a stock. The contract derives its value from the underlying stock. Single stock futures are cash settled. Stock Options Options on Individual Stocks are options contracts where the underlyings are individual stocks. Based on eligibility criteria and subject to the approval from the regulator, stocks are selected on which options are introduced. These contracts are cash settled and are American style. American Style options are those option contracts that can be exercised on or before the expiration date. Weekly Options Equity Futures & Options were introduced in India having a maximum life of 3 months. These options expire on the last Thursday of the expiring month. There was a need felt in the market for options of shorter maturity. To cater to this need of the market participants BSE launched weekly options on September 13, 2004 on 4 stocks and the BSE Sensex.

Weekly options have the same characteristics as that of the Monthly Stock Options (stocks and indices) except that these options settle on Friday of every week. These options are introduced on Monday of every week and have a maturity of 2 weeks, expiring on Friday of the expiring week. CONTRACT SPECIFICATIONS Contract Specification for Index Futures contracts Security Symbol Underlying Contract Multiplier Contract Period Tick size Price Quotation Trading Hours Last Trading/Expiration Day Final Settlement

1, 2, 3 months 0.05 index points index points 9:55 a.m. to 3:30 p.m. Last Thursday of the contract month. If it is holiday, the immediately preceding business day.Note: Business day is a day during which the underlying stock market is open for trading. Cash Settlement. On the last trading day, the closing value of the underlying index would be the final settlement price of the expiring futures contract. 49

Contract Specification for Index Options contracts (Monthly & Weekly) Security Symbol Underlying Contract Multiplier Contract Period Exercise Style Settlement Style Tick size Premium Quotation

1, 2, 3 months & 1, 2 weeks European Cash 0.05 index points In index points Shall have a minimum of 3 strikes (1 in-the-money, 1 near-theStrike price Intervals money, 1 out-of-the-money). Trading Hours 9:55 a.m. to 3:30 p.m. Last Thursday of the contract month in case of monthly & last Last Friday of contract maturity in case of weekly options. If it is a Trading/Expiration holiday, then the immediately preceding business day.Note: Day Business day is a day during which the underlying stock market is open for trading.

Contract Specifications for Single Stock futures Security Symbol Underlying Contract Multiplier Contract Period Tick size Price Quotation Trading Hours Last Trading/Expiration Day Final Settlement

1, 2 & 3 months 0.05 points i.e. 5 paisa Rupees per share. 9:55 a.m. to 3:30 p.m. Last Thursday of the contract month. If it is holiday, then the immediately preceding business day.Note: Business day is a day during which the underlying stock market is open for trading. Cash Settlement. On the last trading day, the closing value of the underlying stock is the final settlement price of the expiring futures contract.

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Contract Specification for Stock Options contracts (Monthly & Weekly Options) Security Symbol Underlying Contract Multiplier Contract Period Exercise Style Settlement Style Tick size Premium Quotation

1, 2, 3 months & 1, 2 weeks American Cash 0.05 i.e. 5 paisa Rupees per share Shall have a minimum of 3 strikes (1 in-the-money, 1 near-theStrike price Intervals money, 1 out-of-the-money). Trading Hours 9:55 a.m. to 3:30 p.m. Last Thursday of the contract month in case of monthly & last Friday of contract maturity in case of weekly options. If it is a Last holiday, then the immediately preceding business day during which Trading/Expiration the underlying stock market is open for trading. Day -Note: Business day is a day during which the underlying stock market is open for trading. The final settlement of the expiring option contracts would be based on the closing price of the underlying stock. The following algorithm is used for calculating closing value of the individual stocks in the cash segment of BSE including the stocks constituting Sensex: Final Settlement -Weighted Average price of all the trades in the last thirty minutes of the continuous trading session. -If there are no trades during the last thirty minutes, then the last traded price in the continuous trading session would be taken as the official closing price. It is a specified time (Exercise Session) everyday. All in-the-money options would be deemed to be exercised on the day of expiry unless the participant communicates otherwise in the manner specified by the Derivatives Segment.

Exercise Notice Time

TRADING SYSTEM The Derivatives Trading at BSE takes place through a fully automated screen based trading platform called as DTSS (Derivatives Trading and Settlement System). The DTSS is designed to 51

allow trading on a real time basis. In addition to generating trades by matching opposite orders, the DTSS also generates various reports for the member participants. Order Matching Rules Order Matching will take place after order acceptance wherein the system searches for an opposite matching order. If a match is found, a trade will be generated. The order against which the trade has been generated will be removed from the system. In case the order is not exhausted further matching orders will be searched for and trades generated till the order gets exhausted or no more match-able orders are found. If the order is not entirely exhausted, the system will retain the order in the pending order book. Matching of the orders will be in the priority of price and timestamp. A unique trade-id will be generated for each trade and the entire information of the trade is sent to the members involved. Order Conditions: The derivatives market is order driven i.e. the traders can place only Orders in the system. Following are the Order types allowed for the derivative products. These order types have characteristics similar to ones in the cash market. Limit Order: An order for buying or selling at a limit price or better, if possible. Any unexecuted portion of the order remains as a pending order till it is matched or its duration expires. Market Order: An order for buying or selling at the best price prevailing in the market at the time of submission of the order. There are two types of Market orders: 1). Partial fill rest Kill (PF): execute the available quantity and kill any unexecuted portion. 2). Partial fill rest Convert (PC): execute the available quantity and convert any unexecuted portion into a limit order at the traded price. Stop Loss: An order that becomes a limit order only when the market trades at a specified price.

All orders shall have the following attributes: Order Type (Limit / Market PF/Market PC/ Stop Loss) The Asset Code, Product Type, Maturity, Call/Put and Strike Price. Buy/Sell Indicator Order Quantity Price 52

Client Type (Own / Institutional / Normal) Client Code Order Retention Type (GFD / GTD / GTC) Good For Day (GFD) - The lifetime of the order is that trading session. Good Till Date (GTD) - The life of the order is till the number of days as specified by the Order Retention Period. Good Till Cancelled (GTC) - The order if not traded will remain in the system till it is cancelled or the series expires, whichever is earlier.

Order Retention Period (in calendar days) This field is enabled only if the value of the previous attribute is GTD. It specifies the number of days the order is to be retained. Protection Point This is a field relevant in Market Orders and Stop Loss orders. The value enterable will be in absolute underlying points and specifies the band from the touchline price or the trigger price within which the market order or the stop loss order respectively can be traded.

Risk Reducing Orders (Y/N): When the member's collateral falls below 50 lacs then he will be allowed to put only risk reducing orders and he will not be allowed to take any fresh positions. It is not essentially a type of order but a mode into which the member is put into when he violates his collateral limit. A member who has entered the riskreducing mode will be allowed to put only one risk reducing order at a time. PRICE BANDS

There are no maximum and minimum price ranges for Futures and Options Contracts. However, to avoid erroneous order entry, dummy price bands have been introduced in the Derivatives Segment. Further, no price bands are prescribed in the Cash Segment for stocks on which Futures & Options contracts are available for trading. Also, for those stocks which do not have Futures & Options Contracts available on them but are forming part of the index on which Futures & Options contracts are available, no price bands are attracted provided the daily average trading on such indices in the F & O Segment is not less than 20 contracts and traded on not less than 10 days in the preceding month.

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LIMITED TRADING MEMBERSHIP FOR BSE DERIVATIVES SEGMENT A Limited Trading Member (LTM) is a non-clearing trading participant having full trading rights and direct market access to the Derivatives Trading System of the Exchange. A LTM is provided with derivatives trading terminals for execution of trades either on his own account or on account of his clients. A LTM can issue contract notes to his clients in his own name. A LTM can exercise and perform trade and position management functions online and also check his payment obligations that may result from his trading activities. A LTM, however, cannot clear and settle trades executed by him directly with the Clearing House of the Exchange. For this purpose, we would need to enter into an arrangement with an existing Clearing Member of the Derivatives Segment of BSE. (A list of Clearing Members can be obtained from the Exchange.)

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CHAPTER 8
DERIVATIVE IN COMMODITY Trading in derivatives first started to protect farmers from the risk of the value of their crop going below the cost price of their produce. Derivative contracts were offered on various agricultural products like cotton, rice, coffee, wheat, pepper, et cetera. The Indian scenario There are 25 commodity derivative exchanges in India as of now and derivative contracts on nearly 100 commodities are available for trade. The overall turnover is expected to touch Rs 5 lakh crore (Rs 5 trillion) by the end of 2004-2005. National Commodity and Derivatives Exchange (NCDEX) is the largest commodity derivatives exchange with a turnover of around Rs 3,000 crore (Rs 30 billion) every fortnight. Investing in commodity derivatives Commodity derivatives, which were traditionally developed for risk management purposes, are now growing in popularity as an investment tool. Most of the trading in the commodity derivatives market is being done by people who have no need for the commodity itself. They just speculate on the direction of the price of these commodities, hoping to make money if the price moves in their favour. The commodity derivatives market is a direct way to invest in commodities rather than investing in the companies that trade in those commodities. EXAMPLE: an investor buys a tonne of soybean for Rs 8,700 in anticipation that the prices will rise to Rs 9,000 by June 30, 2005. He will be able to make a profit of Rs 300 on his investment, which is 3.4%. Compare this to the scenario if the investor had decided to buy soybean futures instead. A buyer of a derivative contract is a person who pays an initial margin to buy the right to buy or sell a commodity at a certain price and a certain date in the future. The seller accepts the margin and agrees to fulfil the agreed terms of the contract by buying or selling the commodity at the agreed price on the maturity date of the contract. Now let us say the investor buys soybean futures contract to buy one tonne of soybean for Rs 8,700 (exercise price) on June 30, 2005. The contract is available by paying an initial margin of 10%, i.e. Rs 870. Note that the investor needs to invest only Rs 870 here. On June 30, 2005, the price of soybean in the market is, say, Rs 9,000 (known as Spot Price -Spot Price is the current market price of the commodity at any point in time). 55

The investor can take the delivery of one tonne of soybean at Rs 8,700 and immediately sell it in the market for Rs 9,000, making a profit of Rs 300. So the return on the investment of Rs 870 is 34.5%. On the contrary, if the price of soybean drops to Rs 8,400 the investor will end up making a loss of 34.5%. If the investor wants, instead of taking the delivery of the commodity upon maturity of the contract, an option to settle the contract in cash also exists. Cash settlement comprises exchange of the difference in the spot price of the commodity and the exercise price as per the futures contract. At present, the option of cash settlement lies only with the seller of the contract. If the seller decides to make or take delivery upon maturity, the buyer of the contract has to fulfil his obligation by either taking or making delivery of the commodity, depending on the specifications of the contract. In the above example, if the seller decides to go for cash settlement, the contract can be settled by the seller paying Rs 300 to the buyer, which is the difference in the spot price of the commodity and the exercise price. Once again, the return on the investment of Rs 870 is 34.5%. The above example shows that with very little investment, the commodity futures market offers scope to make big bucks. However, trading in derivatives is highly risky because just as there are high returns to be earned if prices move in favour of the investors, an unfavourable move results in huge losses. The most critical function in a commodity derivatives exchange is the settlement and clearing of trades. Commodity derivatives can involve the exchange of funds and goods. The exchanges have a separate body to handle all the settlements, known as the clearing house. For example, the seller of a futures contract to buy soybean might choose to take delivery of soyabean rather than closing his position before maturity. The function of the clearing house or clearing organisation, in such a case, is to take care of possible problems of default by the other party involved by standardising and simplifying transaction processing between participants and the organisation. In spite of the surge in the turnover of the commodity exchanges in recent years, a lot of work in terms of policy liberalisation, setting up the right legal system, creating the necessary infrastructure, large-scale training programs, et cetera still needs to be done in order to catch up with the developed commodity derivative markets.

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Also, trading in commodity options is prohibited in India. The regulators should look towards introducing new contracts in the Indian market in order to provide the investors with choice, plus provide the farmers and commodity traders with more tools to hedge their risks. Two important derivatives are futures and options. (i) Commodity Futures Contracts: A futures contract is an agreement for buying or selling a commodity for a predetermined delivery price at a specific future time. Futures are standardized contracts that are traded on organized futures exchanges that ensure performance of the contracts and thus remove the default risk. The commodity futures have existed since the Chicago Board of Trade was established in 1848 to bring farmers and merchants together. The major function of futures markets is to transfer price risk from hedgers to speculators. For example, suppose a farmer is expecting his crop of wheat to be ready in two months time, but is worried that the price of wheat may decline in this period. In order to minimize his risk, he can enter into a futures contract to sell his crop in two months time at a price determined now. This way he is able to hedge his risk arising from a possible adverse change in the price of his commodity. (ii) Commodity Options contracts: Options are financial instruments used for hedging and speculation. The commodity option holder has the right, but not the obligation, to buy (or sell) a specific quantity of a commodity at a specified price on or before a specified date. Option contracts involve two parties the seller of the option writes the option in favour of the buyer (holder) who pays a certain premium to the seller as a price for the option. There are two types of commodity options: a call option gives the holder a right to buy a commodity at an agreed price, while a put option gives the holder a right to sell a commodity at an agreed price on or before a specified date (called expiry date). The option holder will exercise the option only if it is beneficial to him; otherwise he will let the option lapse. For example, suppose a farmer buys a put option to sell 100 Quintals of wheat at a price of $25 per quintal and pays a premium of $0.5 per quintal (or a total of $50). If the price of wheat declines to say $20 before expiry, the farmer will exercise his option and sell his wheat at the agreed price of $25 per quintal. However, if the market price of wheat increases to say $30 per quintal, it would be advantageous for the farmer to sell it directly in the open market at the spot price, rather than exercise his option to sell at $25 per quintal.

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Modern Commodity Exchanges To make up for the loss of growth and development during the four decades of restrictive government policies, FMC and the Government encouraged setting up of the commodity exchanges using the most modern systems and practices in the world. Some of the main regulatory measures imposed by the FMC include daily mark to market system of margins, creation of trade guarantee fund, back-office computerization for the existing single commodity Exchanges, online trading for the new Exchanges, demutualization for the new Exchanges, and one-third representation of independent Directors on the Boards of existing Exchanges etc. Responding positively to the favorable policy changes, several Nation-wide Multi-Commodity Exchanges (NMCE) have been set up since 2002, using modern practices such as electronic trading and clearing. Selected Information about the two most important commodity exchanges in India [Multi-Commodity Exchange of India Limited (MCX), and National Multi-Commodity & Derivatives Exchange of India Limited (NCDEX)].

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CHAPTER 9 RESARCH Methodology

Research design is a basic frame work, which provides guidelines for the rest of research process. It is a map or blue print according to which the research is to be conducted. The serve research method will be the basic research design .Experience serve will be done, which means the serve of people who have had practical experience with the research to be conducted. The object of such serve is to obtain insight into the relationship between variables and new ideas relating to the research. For such a serve people from various financial institutions will be carefully selected as respondent to ensure a representation of different types of experience. Research Design:A research design is the arrangement of conditions for collection and analysis of data in a manner that aims to combine relevance to the research purpose with economy in procedure. Research Design facilities the smooth sailing of the various research operation, there by making research as efficient as possible yielding maximal information with minimal expenditure of effort, time, and money. Actually it is the blue print for our research project. Characteristics of a good research design:Flexible Appropriate Efficient Economical Type of research Design Adopted for Research:Descriptive research:For the purpose of research, descriptive cum-diagnostic research design is used. It is concerned with describing the characteristics of a particular individual, or of a group. Diagnostic research studies determine the frequency with which some thing occurs or its association with something else. Universe:The first step in developing any sample design is to clearly define the set of objects , technically called universe ,to be studied .It can be finite or infinite .In finite universe we dont have any idea about the total number of items . In present study, the universe is the investor in Karnal.

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Method of data collection:Primary sources:The data collected by the researcher from the field. In this research project this source has not been used.

Secondary sources:It is the data which has already been collected by some one or an organization for some other purpose or research study .The data for study has been collected from various sources: Books Journals Magazines Internet sources News paper

Statistical Tools Used: Simple tools like bar graphs, tabulation, line diagrams have been used.

LIMITAITONS OF STUDY
1. LIMITED TIME: Limited time is available to conduct the study. As it is a wide topic but time was less to analyse more derivatives. 2. LIMITED RESOURCES: Limited resources are available to collect the

information about the commodity trading. 3. VOLATITLTY: Share market is so much volatile and it is difficult to forecast any thing about it whether you trade through online or offline 4. ASPECTS COVERAGE: Some of the aspects may not be covered in my study.

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CHAPTER 10

OBJECTIVE OF THE STUDY :

The broad objective of the study is to investigate the recent trend in Derivative Market in India. The specific objectives of the study are:

To understand the finer points of derivatives.

To understand the scope and growth of derivatives in India.

To study the growth pattern & impact of Derivative Market on Indian Economy

To study about the detail of main contracts those are involved in Derivative Contracts.

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CHAPTER 11 Business Growth in Derivatives segment (NSE) Index futures Year

2008-09 2007-08 2006-07 2005-06 2004-05 2003-04 2002-03 2001-02

No. of contracts
4116649 156598579 81487424 58537886 21635449 17191668 2126763 1025588

Turnover (Rs. Cr.)

925679.96 3820667.27 2539574 1513755 772147 554446 43952 21483

Number of contracts per year

160000000 140000000 120000000 100000000 80000000 60000000 40000000 20000000 0 year

2008-09 2007-08 2006-07 2005-06 2004-05 2003-04 2002-03 2001-02

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Turnover in Rs. Crores

4000000 3500000 3000000 2500000

2008-09 2007-08 2006-07 2005-06 2004-05 2003-04 2002-03 2001-02

2000000
1500000 1000000 500000 0 year

Interpretation: There is a sharp increase in turnover and no of contracts traded in index futures every year.

STOCK FUTURE Year No. of contracts Turnover Crores)

2008-09 2007-08 2006-07 2005-06 2004-05 2003-04 2002-03 2001-02 2000-01 51449737 203587952 104955401 80905493 47043066 32368842 10676843 1957856 1093048.26 7548563.23 3830967 2791697 1484056 1305939 286533 51515 63

(Rs.

Number of contracts per year in stock future

250000000
2008-09

200000000 150000000 100000000 50000000 0 year

2007-08 2006-07 2005-06 2004-05 2003-04 2002-03 2001-02

Turnover in Rs. Crores

8000000 7000000 6000000 5000000 4000000 3000000 2000000 1000000 0 year

Interpretation: in stock futures turnover and number of contracts increased every year. In
2007-08 it was at its peak. 64

2008-09 2007-08 2006-07 2005-06 2004-05 2003-04

2002-03
2001-02 2000-01

INDEX OPTIONS Year

2008-09 2007-08 2006-07 2005-06 2004-05 2003-04 2002-03 2001-02 2000-01

No. of contracts
24008627 55366038 25157438 12935116 3293558 1732414 442241 175900 -

Turnover (Rs. Crores)

71340.02 1362110.88 791906 338469 121943 52816 9246 3765 -

Number of contracts per contracts

60000000 50000000 40000000

2008-09 2007-08 2006-07 2005-06 2004-05

30000000
20000000 10000000 0 year

2003-04
2002-03 2001-02

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Turnover per year in Rs. Crores

1400000 1200000 1000000 800000 600000 400000 200000 0 year

Interpretation: Turnover and contracts traded are increasing year after year.

2008-09 2007-08 2006-07 2005-06 2004-05 2003-04 2002-03 2001-02

STOCK OPTIONS Year No. of contracts Notional turnover (Rs. crores)

2008-09 2007-08 2006-07 2005-06 2004-05 2003-04 2002-03 2001-02 2000-01 2546175 9460631 5283310 5240776 5045112 5583071 3523062 1037529 58335.03 359136.55 193795 180253 168836 217207 100131 25163 -

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Number of contracts traded per year in stock option

10000000
2008-09

8000000 6000000 4000000 2000000 0 year

Notional turnover in Rs. Crores per year

2007-08 2006-07 2005-06 2004-05 2003-04 2002-03 2001-02

400000 350000
2008-09 2007-08 2006-07 2005-06 2004-05 2003-04 2002-03 2001-02

300000
250000 200000 150000 100000 50000 0 year

Interpretation: Notional turnover and no. of contracts traded were maximum in 2007-08 but
from 2007 to 2004 there was decline in its growth.

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OVERALL TRADING Year

2008-09 2007-08 2006-07 2005-06 2004-05 2003-04 2002-03 2001-02 2000-01

No. of contracts
119171008 425013200 216883573 157619271 77017185 56886776 16768909 4196873 90580

Turnover (Rs. cr.)

2648403.30 13090477.75 7356242 4824174 2546982 2130610 439862 101926 2365

Average daily turnover in Rs. Crores

60000
2000-2001

50000 40000 30000 20000 10000 0 year

2001-2002
2002-2003 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009

Interpretation: Average daily turnover in Indian Derivative market if increasing year after
year.

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Overall trade description under NSE

Index Futures
Year 200809 200708 200607 200506 200405 200304 200203 200102 200001 No. of contr acts 4116646 9 1565985 79 8148742 4 5853788 6 2163544 9 1719166 8 2126763 1025588 90580 Turnover (Rs. cr.) 925679.96 3820667.2 7 2539574 1513755 772147 554446 43952 21483 2365

Stock Futures
No. of contracts 51449737 20358795 2 10495540 1 80905493 47043066 32368842 10676843 1957856 Turnover (Rs. cr.) 1093048.26 7548563.23 3830967 2791697 1484056 1305939 286533 51515 -

Index Options
No. of contracts 24008627 55366038 25157438 12935116 3293558 1732414 442241 175900 Notional Turnover (Rs. cr.) 571340.02 1362110.8 8 791906 338469 121943 52816 9246 3765

Stock Options
No. of contracts 2546175 9460631 5283310 5240776 5045112 5583071 3523062 1037529 Notional Turnover (Rs. cr.) 58335.03 359136.55 193795 180253 168836 217207 100131 25163 -

Interest Rate Futures

No. of contrac ts 0 0 0 0 0 10781 Turn over (Rs. cr.) 0.00 0.00 0 0 0 202 -

Total
No. of contracts 119171008 425013200 216883573 157619271 77017185 56886776 16768909 4196873 90580 Turnov er (Rs. cr.) 264840 3.30 130904 77.75 735624 2 482417 4 254698 2 213061 0 439862 101926 2365

Year 2008-09 2007-08 2006-07 2005-06 2004-05 2003-04 2002-03 2001-02 2000-01 Note:

Av . daily turnover (Rs. Crores) 45390.21 52153.30 29543 19220 10167 8388 1752 410 11

Notional Turnover = (Strike Price + Premium) * Quantity Index Futures, Index Options, Stock Options and Stock Futures were introduced in June 2000, June 2001, July 2001 and November 2001 respectively.

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National Stock Exchange of India Limited Futures & Options segment Market Activity Report for July 30, 2008
Index Futures and Index Options Index futures saw a trading volume of Rs.17497.82 crores arising out of 853577 contracts and Index options saw 758105 contracts getting traded at a notional value of Rs.16461.57 crores. The total turnover of the Futures & Options segment of the Exchange was around Rs.58543.91 crores. Instrument wise summary: Index Futures Symbol No of Traded Total Traded Open interest Contracts Quantity Value (Rs. In Crs.) (Qty.) as at end Traded of trading hrs. 778404 38920200 16728.47 48646200 53436 1068720 458.69 485220 7 175 0.12 1150 20881 522025 294.67 310700 849 42450 15.87 41150

NIFTY MINIFTY JUNIOR BANKNIFTY CNXIT Index Options Symbol

NIFTY MINIFTY BANKNIFTY

No of Traded Total Traded Open interest Contracts Quantity Value (Rs. In Crs.) (Qty.) as at end Traded of trading hrs. 758060 37903000 16461.18 71543450 44 880 0.38 3120 1 25 0.01 25

Options on individual securities Out of 228 securities, options on 116 underlying securities got traded. The total number of contracts traded was 60953 with a notional value of Rs.1212.87 crores. The top 20 option contracts on individual securities traded are as under: The top twenty contracts contributed to around 32% of the total traded volume in Options on individual securities. RELIANCE was the most active option contracts on individual securities traded today with 14857 contracts and RNRL was the next most active options contracts with 6526 contracts being traded.

S No 1 2 3 4

Symbol RELIANCE RELIANCE RELIANCE RNRL

Exp Date 31-Jul-2008 31-Jul-2008 31-Jul-2008 31-Jul-2008

Str Price Opt Type 2190 CA 2100 PA 2100 CA 100 CA

No of Notional Cont Value (Rs.) 2516 415765673 2161 341778105 2101 339431220 1844 337318716 70

5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

RELIANCE RELINFRA CAIRN RELIANCE RPL RNRL RELIANCE RNRL RPL RELIANCE IFCI TATASTEEL TATASTEEL RPOWER RELIANCE RELIANCE

31-Jul-2008 28-Aug-2008 28-Aug-2008 31-Jul-2008 31-Jul-2008 31-Jul-2008 31-Jul-2008 31-Jul-2008 31-Jul-2008 28-Aug-2008 31-Jul-2008 31-Jul-2008 31-Jul-2008 31-Jul-2008 31-Jul-2008 31-Jul-2008

2160 1000 240 2190 160 90 2220 95 170 2310 45 600 620 160 2130 2160

CA CA CA PA CA CA CA CA CA CA CA CA CA CA CA PA

1330 1279 1167 993 872 825 762 762 738 625 602 597 587 577 575 489

217791154 188113824 364715875 169009166 240538626 143835571 127297380 135112276 210985680 110806740 54709264 141932845 141647758 47585400 93328673 80092643

Futures on individual securities Out of 228 stock futures on 228 underlying securities got traded. The total number of contracts traded was 1301662 with a traded value of Rs.23371.66 crores. The top 10 futures contracts on individual securities traded are as under: S No 1 2 3 4 5 6 7 8 9 10 Symbol RELIANCE RNRL LT RELIANCE RELCAPITAL ICICIBANK SBIN RPL RELINFRA ICICIBANK Exp Date 31-Jul-2008 31-Jul-2008 31-Jul-2008 28-Aug-2008 31-Jul-2008 31-Jul-2008 31-Jul-2008 31-Jul-2008 31-Jul-2008 28-Aug-2008 Traded Value No of (Rs.) Contracts 9210952013 57154 7912610551 45517 4709736190 36326 5338223483 32911 5648595859 31884 3163615499 28562 3834849117 21307 5716878096 20825 2734840585 20728 2248749886 20259

The top ten contracts contributed to around 22% of the total traded volume in Futures on individual securities.

CHAPTER 12

FINDINGS
1. After studying the data it is clear that Derivative market is growing very fast in the Indian Economy. The turnover of Derivative Market is increasing year by year in the Indias largest stock exchange NSE. 71

2. After study we can say that Derivative Market encourage to entrepreneurship in India. It encourages the investor to take more risk & earn more return. So in this way it help the Indian Economy by developing entrepreneurship. Derivative Market are more regulated & standardized so in this way it provides a more controlled environment. 3. After analyzing data it is clear that the main factors that are driving the growth of Derivative Market are Market improvement in communication facilities as well as long term saving & investment is also possible through entering into Derivative Contract. So these factors encourage the Derivative Market in India. 4. In nutshell, we can say that the rule of High risk & High return apply in Derivatives. If we are able to take more risk then we can earn more profit under Derivatives. 5. RELIANCE is the most active future contracts on individual securities traded with

90090 contracts and RNRL is the next most active futures contracts with 63522 contracts being traded.

SUGGESTIONS
1. After study it is clear that Derivative influence our Indian Economy up to much extent. So, SEBI should take necessary steps for improvement in Derivative Market so that more investors can invest in Derivative market. 2. There is a need of more innovation in Derivative Market because in today scenario even educated people also fear for investing in Derivative Market Because of high risk involved in Derivatives.

BIBLIOGRAPHY
www.bseindia.com

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 www.nseindia.com www.mcx.com www.ncdex.com www.sebi.gov.in www.appliederivatives.com www.economictimes.com www.icicidirect.com www.nsdl.com www.cdsl.com Books Options, Futures and other Derivatives by John C Hull Derivatives FAQ by Ajay Shah Reports Regulatory framework for financial derivatives in India by Dr. L. C. Gupta Risk containment in the derivatives markets by Prof. J. R. Verma

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