Behaviour of Stock Markets WRT Introduction of Derivatives

BEHAVIOUR OF STOCK MARKET VOLATILITY AFTER INTRODUCTION OF DERIVATIVE

“BEHAVIOUR OF STOCK MARKET VOLATILITY BEFORE AND
AFTER INTRODUCTION OF DERIVATIVE IN INDIA”
$',66(57$7,21
68%0,77(',13$57,$/)8/),//0(172)7+(
5(48,5(0(176)257+($:$5'2)0%$'(*5((2)
%$1*$/25(81,9(56,7<

68%0,77('%<

$1$1' 61<$0$*28'$
5(*12 ;4&0

81'(57+(*8,'$1&(2)

'5160$/$9$//,
35,1&,3$/03%,5/$,167,787(2)0$1$*(0(17

03%,5/$,167,787(2)0$1$*(0(17%$1*$/25(
$662&,$7(%+$5$7,<$9,'<$%+$9$1
MP BIRLA INSTITUTE OF MANAGEMENT

DECLARATION
I hereby declare, that this project report titled

“BEHAVIOUR OF STOCK MARKET VOLATILITY BEFORE AND
AFTER INTRODUCTION OF DERIVATIVE IN INDIA”, has been
successfully completed under the guidance of Dr N S Malavalli, Principal,
M P Birla Institute of Management in partial fulfillment of Masters in
Business Administration degree at Bangalore University.
I further declare that this project report is the result of my

own efforts and that it has not been submitted to any other university for the
award of a degree or does not form the basis of any degree or diploma of
other similar title of recognition in any other university.
Place: Bangalore Anand S Nyamagouda

Date: 15th June 2005 03XQCM6004
MPBIM-BVB

Guide’s Certificate
This is to certify that the Project titled “BEHAVOUR OF

STOCK MARKET VOLATILITY BEFORE AND AFTER
INTRODUCTION OF DERIVATIVE IN INDIA” has been prepared by
Mr.Anand S Nyamagouda bearing the registration number 03XQCM6004
under my guidance. This has not formed a basis for the award of any
Degree/Diploma by any other University.
Place: Bangalore Dr.N S Malavalli

Date:

EXECUTIVE SUMMARY
Among all the innovations that have flooded the international financial markets, financial
derivatives occupy the driver's seat. Derivatives are financial instruments whose values
depend on the values of underlying assets.
This research focuses on how the introduction of Derivatives on the securities has
affected the volatility of the Indian stock market. The different types of instruments
which are available for trading in the market are Options, Futures, and Stock Index
Futures. To arrive at the results a quantitative research has been carried out on 15 stocks
which were randomly selected from the National Stock Exchange. The daily price of the
stock during the following period January 1, 1999 to May 31, 2000 – PD1, June 1, 2000
to November 30, 2001 – PD2, December 1, 2001 to October 31, 2003 – PD3, June 1,
2002 to October 31, 2003 – PD4 , November 1, 2002 to October 2003 – PD5 is used.
PD1 represent the period before the introduction of derivatives and PD 2 ,PD 3 ,PD 4
PD5 represents the period after the introduction of derivatives . As Standard deviation is
a measure of volatility it is calculated for the following periods and are compared to
see if there is a reduction in the standard deviation .The investigation reveals that there
has been considerable reduction in standard deviation from PD 1 to PD 5 . The
difference between the standard deviation for the two periods as denoted by D is
computed. To arrive at the results t-test has been carried out using the value D. It is found
that t tab is less than t cal which in turn proves that our H1 Hypothesis is true that is
“Introduction of Derivatives has reduced the Volatility in the Stock Market “

CHAPTER
INTRODUCTION

NTRODUCTION
Among all the innovations that have flooded the international financial markets, financial
derivatives occupy the driver's seat. These specialized instruments facilitate the shuffling
and redistribution of the innumerable risks that an investor face and, thus aids in the
process of diversifying ones portfolio.. The volatility in the equity markets over the past
years has resulted in greater use of equity derivatives. The volume of the exchange traded
equity futures and options in most of the mature markets have seen a significant growth.
It goes beyond doubt that the local derivative markets in the emerging markets have
witnessed widespread use of the derivative instrument for a variety of reasons. This
continuous growth and development by the emerging market participants has resulted in
capital inflows as well as helped the investors in risk protection through hedging.
)LQDQFLDOPDUNHWOLEHUDOL]DWLRQVLQFHHDUO\VKDVEURXJKWDERXWPDMRUFKDQJHVLQWKH
ILQDQFLDOPDUNHW VLQ,QGLD7KHFUHDWLRQDQGHPSRZHUPHQWRI6HFXULWLHVDQG([FKDQJH
%RDUGRI,QGLD6(%,KDVKHOSHGLQSURYLGLQJKLJKHUOHYHODFFRXQWDELOLW\LQWKHPDUNHW
1HZLQVWLWXWLRQVOLNH1DWLRQDO6WRFN([FKDQJHRI,QGLD16(,/1DWLRQDO6HFXULWLHV
&OHDULQJ&RUSRU DWLRQ16&&/1DWLRQDO6HFXULWLHV'HSRVLWRU\16'/KDYHEHHQWKH
FKDQJHDJHQWVDQGKHOSHGFOHDQLQJWKHV\VWHPDQGSURYLGHGVDIHW\WRLQYHVWLQJSXEOLFDW
ODUJH:LWKPRGHUQWHFKQRORJ\LQKDQGWKHVHLQVWLWXWLRQVGLGVHWEHQFKPDUNVDQGVWDQGDUGV
IRURWKHUV WRIROORZ0LFURVWUXFWXUHFKDQJHVEURXJKWDERXWUHGXFWLRQLQWUDQVDFWLRQFRVWWKDW
KHOSHGLQYHVWRUVWRORFNLQDGHDOIDVWHUDQGFKHDSHU 2QHGHFDGHRIUHIRUPVVDZ
LPSOHPHQWDWLRQRISROLFLHVWKDWKDYHLPSURYHGWUDQVSDUHQF\LQ KHV\VWHPSURYLGHGIRU
FKHDSHUPRGHRILQIRUPDWLRQGLVVHPLQDWLRQZLWKRXWPXFKWLPH GHOD\EHWWHUFRUSRUDWH
JRYHUQDQFHHWF7KHFDSLWDOPDUNHWZLWQHVVHGDPDMRUWUDQVIRUPDWLRQ DQGVWUXFWXUDOFKDQJH

GXULQJWKHSHULRG7KHUHIRUPVSURFHVVKDYHKHOSHGWRLPSURYH HIILFLHQF\LQLQIRUPDWLRQ
GLVVHPLQDWLRQHQKDQFLQJWUDQVSDUHQF\SURKLELWLQJXQIDLUWUDGH SUDFWLFHVOLNHLQVLGHUWUDGLQJ

DQGSULFHULJJLQJ7KHREMHFWLYHKDVEHHQWRPRYHWKH,QGLDQ PDUNHWWRVXFKDOHYHOZKHUHLW
ZRXOGIXOO\LQWHJUDWHZLWKWKHJOREDOGHYHORSHGPDUNHWV,QWURGXF WLRQRIGHULYDWLYHVLQ
,QGLDQFDSLWDOPDUNHWZDVLQLWLDWHGE\WKH*RYHUQPHQW WKURXJK/&*XSWD&RPPLWWHH
UHSRUW7KH/&*XSWD&RPPLWWHHRQ'HULYDWLYHVKDG UHFRPPHQGHGLQ'HFHPEHUWKH
LQWURGXFWLRQRIVWRFNLQGH[IXWXUHVLQWKHILUVWSODFHWR EHIROOR ZHGE\RWKHUSURGXFWVRQFH
WKHPDUNHWPDWXUHV7KHSUHSDUDWLRQRIUHJXODWRU\ IUDPHZRUNIRUWKHRSHUDWLRQVRIWKH
LQGH[IXWXUHVFRQWUDFWVWRRNVRPHPRUHWLPHDQGILQDOO\ IXWXUHVRQEHQFKPDUNLQGLFHVZHUH
LQWURGXFHGLQ-XQHIROORZHGE\RSWLRQVRQLQGLFH VLQ-XQHIROORZHGE\RSWLRQVRQ
LQGLYLGXDOVWRFNVLQ-XO\DQGILQDOO\IROORZHGE\ IXWXUHVRQLQGLYLGXDOVWRFNVLQ
1RYHPEHU
Derivatives trading commenced in India in June 2000 after SEBI granted the approval to
this effect in May 2000. SEBI permitted the derivative trading on two stock exchanges,
i.e. and BSE, and their clearing house/corporation to commence trading and settlement in
approved derivative contracts. To begin with, SEBI approved trading in index futures
contracts based on S&P CNX Nifty Index and BSE-30 (Sensex) Index. This was
followed by approval for trading in options based on these two indices and options on
individual securities. The trading in index options commenced in June 2001 and trading
in options on individual securities would commence in July 2001 while trading in futures
of individual stocks started from November 2001. In June 2003, SEBI/RBI approved the
trading on interest rate derivative instruments and only NSE introduced trading in interest
rate futures contracts on June 24, 2003 on 91-day Notional T-Bills and 10-year Notional
6% coupon bearing as well as zero coupon Bonds. Futures and Options were also
introduced on CNX IT Index in August 2003. The total exchange traded derivatives
witnessed a value of Rs.4,423,333 million during 2002-03 as against Rs. 1,038,480
million during the preceding year. While NSE accounted for about 99.5% of total

turnover, BSE accounted for less than 1% in2002-03. The market witnessed higher
trading levels from June 2001 with introduction of index options, and still higher volumes
with the introduction of stock options in July 2001. There was a spurt in volumes in
November 2001 when stock futures were introduced. The calendar year 2002 has been a
remarkable year for the global derivatives market. This year witnessed NSE making huge
strides and also moved upward in the global ranking. According to the Futures Industry
Associations in the year 2002, NSE ranked 30 in the global futures and options volume,
whereas it ranks second in the world in terms of stock futures only.

PROBLEM STATEMENT:
The introduction of equity and equity index derivative contracts in Indian market has not
been very old but today the total notional trading values in derivatives contracts are ahead
of cash market. On many occasions, the derivatives notional trading values are double the
cash market trading values. Given such dramatic changes, we would like to study the
behavior of volatility in stock market after the introduction of derivatives.
Research Objective:
1) To study the Behavior of volatility in stock market after the introduction of Derivative.
Hypothesis:
H0 = Introduction of Derivatives has not reduced the volatility of stock market in India.
H1 = = Introduction of Derivatives has reduced the volatility of stock market in India.

DERIVATIVES
Derivatives are financial instruments whose values depend on the values of other, more
basic underlying assets. Exchange traded financial derivatives were introduced in India in
June 2000 at the two major stock exchanges, NSE and BSE. Derivatives are used by :
1.Hedgers : For protecting against adverse movement. Hedging is a mechanism to

reduce price risk inherent in open positions. Derivatives are widely used for hedging. A
Hedge can help lock in existing profits. Its purpose is to reduce the volatility of a
portfolio, by reducing the risk.
2.Speculators: To make quick fortune by anticipating/forecasting future market

movements. Hedgers wish to eliminate or reduce the price risk to which they are already
exposed. Speculators, on the other hand are those class of investors who willingly take
price risks to profit from price changes in the underlying. While the need to provide
hedging avenues by means of derivative instruments is laudable, it calls for the existence
of speculative traders to play the role of counter-party to the hedgers. It is for this reason
that the role of speculators gains prominence in a derivatives market.
3.Arbitrageurs: To earn risk-free profits by exploiting market imperfections.

Arbitrageurs profit from price differential existing in two markets by simultaneously
operating in the two different markets.

TYPES OF DERIVATIVES
Derivatives are basically classified into two based upon the mechanism that is used to
trade on them.
• Over the Counter derivatives

• Exchange traded derivatives
The OTC derivatives are between two private parties and are designed to suit the
requirements of the parties concerned.
The Exchange traded ones are standardized ones where the exchange sets the standards
for trading by providing the contract specifications and the clearing corporation provides
the trade guarantee and the settlement activities
CLASSIFICATION OF DERIVATIVES
The derivatives can be classified as:
• Forward
• Future

• Option
• Swaps
1) Forward contract:
Forward contract is a one to one bipartite contract, which is to be performed in future at

the terms decided today. Forward contracts are being used in India on large scale in the
foreign exchange market to cover the currency risk.
Forward contracts being negotiated by the parties on one to one basis, offer the
tremendous flexibility to them to articulate the contract in terms of price, quantity,
quality, delivery time and place. However, forward contracts suffer from poor liquidity
and default risk.
2) Futures contract :
Future contracts are the organized/standardized contracts in terms of quantity, quality,

delivery time and place for settlement on any date in future. These contracts are traded on
exchanges. In a nutshell futures markets are the extension of the forward contracts.
These markets being organized/standardized are very liquid by their own nature.
Therefore, liquidity problem, which persists in the forward market, does not exist in the
futures market.
In these markets, clearing corporation/house becomes the counter-party to all the trades
or provides the unconditional guarantee for the settlement of trades’ i.e: assumes the
financial integrity of the whole system. In other words, we may say that the credit risk of
the transactions is eliminated by the exchange through the clearing corporation/house
3) Options:

An option is a contract, which gives the buyer (holder) the right, but not the obligation, to
buy or sell specified quantity of the underlying assets, at a specific price on or before a
specified time. The underlying may be physical commodities like wheat/ rice/ cotton/
gold/ oil etc. or financial instruments like equity stocks/ stock index/ bonds etc. There are
two types of Options
• Call Option: A call option gives the holder (buyer/ one who is long call), the
right to buy specified quantity of the underlying asset at a specified price on or
before a specified time. The seller (one who is short call ) however, has the
obligation to sell the underlying asset if the buyer of the call option decides to
exercise his option to buy.
• Put Option: A Put option gives the holder (buyer/ one who is long Put), the right
to sell specified quantity of the underlying asset at a specified price on or before a
specified time. The seller (one who is short put) however, has the obligation to
buy the underlying asset if the buyer of the put option decides to exercise his
option to sell.
4) Swaps:
Swap can be defined as "A financial transaction in which two counterparties agree to
exchange streams of payments, or cash flows, over time". Generally, two types of swaps
are generally seen i.e. interest rate swaps and currency swaps. A swap results in reducing
the borrowing cost of both parties. The two major types of swaps are as follows-
Interest Rate Swap: Interest payments streams of differing characters are

periodically exchanged. There are three main types:
Coupons swaps: fixed for floating rates
Basic swaps: the exchange of one bench-mark for another under floating rates

Currency swap: It involve cash flows(on principal and repayments alone) in two
currencies. The exchange rate used is the ruling spot rate between the two
currencies. A currency swap can also be considered as a series of forward
contracts. Even a currency swap can be combined with an interest rate swap; in
that case, the dollar outflows would carry LIBOR-based interest rate. As weaker
counter parties would not be able to get swap quotes for a longer maturity.

DERIVATIVE MARKET IN INDIA
An important step towards introduction of derivatives trading in India was the

promulgation of the Securities Laws (Amendment) Ordinance, 1995, which lifted the
prohibition on "options in securities" (NSEIL, 2001). However, since there was no
regulatory framework to govern trading of securities, the market could not develop. SEBI
set up a committee in November 1996 under the chairmanship of Dr. L.C. Gupta to
develop appropriate regulatory framework for derivatives trading. The committee
suggested that if derivatives could be declared as "securities" under SCRA, the
appropriate regulatory framework of "securities" could also govern trading of derivatives.
SEBI also set up a group under the chairmanship of Prof. J.R. Varma in 1998 to
recommend risk containment measures for derivatives trading. The Government decided
that a legislative amendment in the securities laws was necessary to provide a legal
framework for derivatives trading in India.
Consequently, the Securities Contracts (Regulation) Amendment Bill 1998 was

introduced in the Lok Sabha on 4 th July 1998 and was referred to the Parliamentary
Standing Committee on Finance for examination and report thereon. The Bill suggested
that derivatives may be included in the definition of "securities" in the SCRA whereby
trading in derivatives may be possible within the framework of that Act. The said
Committee submitted the report on 17th March 1999.
The Committee was of the opinion that the introduction of derivatives, if implemented,
with proper safeguards and risk containment measures, will certainly give a fillip to the
sagging market, result in enhanced investment activity and instill greater confidence
among investors/participants. The Committee was of the view that since cash settled
contracts could be classified as "wagering agreements" which can be null and void under
Section 30 of the Indian Contracts Act, 1872, and since index futures are always cash

settled, such futures contracts can be entangled in legal controversy. The Committee,
therefore, suggested an overriding provision as a matter of abandoned caution-
"Notwithstanding anything contained in any other Act, contracts in derivatives as per the
SCRA shall be legal and valid". Further, since Committee was convinced that stock
exchanges would be better equipped to undertake trading in derivatives in sophisticated
environment it would be prudent to allow trading in derivatives by such stock exchanges
only. The Committee, therefore, suggested a clause- "The derivative shall be traded and
settled on stock exchanges and clearing houses of the stock exchanges, respectively in
accordance with the rules and bye-laws of the stock exchange". The Proposed Bill, which
incorporated the recommendations of the said Parliamentary Committee, was finally
enacted in December 1999.
DERIVATIVES PRODUCTS LEGALLY PERMITTED TO BE TRADED IN INDIAN
1. Equity Derivatives (Index/stock futures/options) - Legally permitted to be traded

through stock exchanges approved by SEBI
2. Commodity Trading - Commodity futures are permitted. Commodity futures
permitted only for trading in commodities approved by the Government in
Commodity Exchanges recognised by Forward Markets Commission. Option
contracts in commodities trading are not permitted.
3. Foreign Exchange Derivatives - Forward Contracts as approved by RBI permitted to
be transacted by Banks and other approved foreign-exchange dealers.
4. OTC rupee derivatives in the form of Forward Rate Agreements (FRAs)/Interest Rate
Swaps (IRS) - These were introduced by RBI in India in July 1999 in terms powers
vested with it Foreign Exchange Management Act, 2000. These derivatives enable
banks, primary dealers (PDs) and all-India financial institutions (FIs) to hedge interest

5. rate risk for their own balance sheet management and for market-making purposes.
Banks/PDs/FIs can undertake different types of plain vanilla FRAs/IRS. Swaps
having explicit/implicit option features such as caps/floors/collars are not permitted
now.
6. Exchange Traded Interest Rate Derivatives were introduced by RBI/SEBI during
June, 2003. These can be traded through stock exchanges by primary dealers subject
to conditions stipulated by RBI. OTC Rupee derivatives are presently not permitted.
The different derivatives products traded in the Indian Markets are as under:
CATEGORIES OF DERIVATIVES TRADED IN INDIA
1. Commodities Futures for Coffee, Oil Seeds, Oil (Castor, Palmolein), Pepper,
Cotton, Jute and Jute Goods are traded in the Commodities Futures. Forward
Markets Commission regulates the trading of commodities futures.
2. Index futures based on Sensex and Nifty Index are also traded under the
supervision of SEBI.
3. RBI has permitted Banks, FIs and PDs to enter into forward rate agreement
(FRAs)/interest rate swaps in order to facilitate hedging of interest rate risks and
ensuring orderly development of the derivatives market;
4. 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
41 securities stipulated by the Securities & Exchange Board of India (SEBI)
5. NSE commenced trading in futures on individual securities on November 9, 2001.
The futures contracts are available on 41 securities stipulated by the Securities &
Exchange Board of India (SEBI).BSE also has started trading in individual stock
options & futures (both Index & Stocks) around the same time as NSE

OTC EXCHANGE TRADED
1980s - Currency Forwards

• June 2000 - Equity Index futures
• 1997 - Long term FC - Rupee • June 2001 - Equity Index Options
swaps
• July 2001 - Stock Options
• July 1999 - Interest rate swaps
FRAs • June 2000 - Interest rate futures
• July 2003 - FC-Rupee options

DATE PROGRESS
14 Dec1995 NSE asked SEBI for permission to trade index futures.
SEBI setup L. C. Gupta Committee to draft a policy framework for index

18 Nov 1996
futures.
11 May 1998 L. C. Gupta Committee submitted report.
RBI gave permission for OTC forward rate agreements (FRAs) and
7 July 1999
interest rate swaps
24 May 2000 SIMEX chose Nifty for trading futures and options on an Indian index.
25 May 2000 SEBI gave permission to NSE and BSE to do index futures trading.
9 June 2000 Trading of BSE Sensex futures commenced at BSE.
12 June 2000 Trading of Nifty futures commenced at NSE.
31 Augus2000 Trading of futures and options on Nifty to commence at SIMEX.
DERIVATIVES IN INDIA: A CHRONOLOGY

DERIVATIVE MARKETS TODAY
• The prohibition on options in SCRA was removed in 1995. Foreign currency

options in currency pairs other than Rupee were the first options permitted by
RBI.
• The Reserve Bank of India has permitted options, interest rate swaps, currency
swaps and other risk reductions OTC derivative products.
• Besides the Forward market in currencies has been a vibrant market in India for
several decades.
• In addition the Forward Markets Commission has allowed the setting up of
commodities futures exchanges. Today we have 18 commodities exchanges most
of which trade futures e.g. The Indian Pepper and Spice Traders Association
(IPSTA) and the Coffee Owners Futures Exchange of India (COFEI).
• In 2000 an amendment to the SCRA expanded the definition of securities to
included Derivatives thereby enabling stock exchanges to trade derivative
products.
• The year 2000 heralded the introduction of exchange traded equity derivative
products
EQUITY DERIVATIVES EXCHANGES IN INDIA
• In the equity markets both the National Stock Exchange of India Ltd. (NSE) and
The Stock Exchange, Mumbai (BSE) were quick to apply to SEBI for setting up
their derivatives segments.
• NSE as stated earlier commenced derivatives trading in the same year i.e. 2000
AD, while BSE followed after a few months in 2001.

• Both the exchanges have set-up an in-house segment instead of setting up a

separate exchange for derivatives.
• NSE's Futures & Options Segment was launched with Nifty futures as the first
product.
• BSE'
s Derivatives Segment, started with Sensex futures as it's first product.
• Stock options and stock futures were introduced in both the Exchanges in the year
2001
HISTORICAL DATAS OF DERIVATIVE TRADING IN INDIA
The first year of operations not surprisingly saw modest volumes. Average monthly
traded value was around Rs. 240 crore, approximately Rs. 12 crore per day. The period
January to March saw better volumes reflecting the higher levels of volatility in the
underlying market. However, the kink in the curve came in 2001, an interesting year for
derivatives. Three new products, index options, options on individual securities and
futures on individual securities were introduced in 2001. At about the same time, SEBI
introduced T+5 rolling settlements and banned deferral products. The number of users
enabled to participate in derivatives trading also rose as members gradually acquired
SEBI approval. By June 2001 volumes had touched Rs. 800 crore and in July, it crossed
Rs. 2,000 crore. September 2001 saw a huge surge in derivatives volumes globally. India
was no exception and saw volumes cross Rs. 5,000 crore. Stock futures were introduced
in November 2001. Given the market’s historical preference to think in terms of
individual securities even when they intend to take an exposure to the market at large,
market volumes jumped. Current volumes are stable at around Rs. 1200 crore per day
with fairly liquid contracts in the near month. The F&O segment witnessed a record
turnover of Rs. 2,156 crore on February 28, 2002.



ADVANTAGES OF THE INTRODUCTION OF DERIVATIVES IN INDIA

CHAPTER
REVIEW OF LITERATURE

REVIEW OF LITERATURE:
The introduction of equity and equity index derivative contracts in Indian market has not
been very old but today the total notional trading values in derivatives contracts are ahead
of cash market. On many occasions, the derivatives notional trading values are double the
cash market trading values. Given such dramatic changes, we would like to study the
behaviour of volatility in cash market after the introduction of derivatives. Impact of
derivatives trading on the volatility of the cash market in India has been studied by
Thenmozhi(2002), Shenbagaraman(2003), Gupta and Kumar (2002) Gupta and
Kumar(2002) did find that the overall volatility of underlying market declined after
introduction of derivatives contracts on indices. Thenmozhi(2002) reported lower level
volatility in cash market after introduction of derivative contracts. Shenbagaraman(2003)
reported that there was no significant fall in cash market volatility due to introduction of
derivatives contracts in Indian market. Raju and Karande (2003) reported a decline in
volatility of the cash market after derivatives introduction in Indian market. All these
studies have been done using the market index and not individual stocks. These studies
were conducted using data for a smaller period and when the notional trading volume in
the market was not significant and before tremendous success of futures on individual
stocks. Today derivatives market in India is more successful and we have more than 3
years of derivatives market. Hence the present study would use the longer period of data
to study the behaviour of volatility in the market after derivatives was introduced. The
study uses individual stocks for analysis.

CHAPTER
METHODOLOGY

RESEARCH METHOD
We have used the daily stock market data from January 1999 to October 2003. We have
calculated daily returns using the
following equation:
Rt = Log(Pt/Pt-1)*100
where Rt is the daily return, Pt is the value of the security on day t and Pt-1 is the value
of the security on day t-1.
We have calculated the standard deviation of returns using the following methods:
N _
σ =∑ (Rt-R)2/(N-1)
2
t =1
where R is the average return over the period. We have calculated the standard deviation
for the various period.We have used the closing stock prices of 15 companies from NSE
INDIA website which have Futures and Options during the for the period January 1999
to October 2003.
We have divided the entire period into the following blocks:
· First Sample period from January 1, 1999 to May 31, 2000 – PD1
· Second sample period from June 1, 2000 to November 30, 2001 – PD2
· Third Sample period from December 1, 2001 to October 31, 2003 – PD3
· Fourth Sample period from June 1, 2002 to October 31, 2003 – PD4
· Fifth Sample period from November 1, 2002 to October 2003 – PD5
The justification for sub-periods is that we have given 6 months time after introduction of
all available four products (futures on individual stocks and indices, options on individual
stocks and indices) to settle down. We have also tried to study the behaviour during last
one year (November 2002 to October 2003). We have taken the period from June 2000 to

November 2001 as the intervening period during which various derivative products were
introduced in the market.
To arrive at our conclusion we have used t –test.. Using the standard deviation for
the period PD 1 and PD 2 the value of D is calculated or the 15 stocks . Mean of
this D value is found out which is represented by ÿ$OVRWKHVWDQGDUGGHYLDWLRQRI
D values is calculated which is denoted by SD.
For the t-test t cal is tabulated by using the following equation:
t cal ÿ6'VTUW1
N is the number of observations.
IFf t tab < t cal then our null hypothesis is true

FOLLWING ARE THE 15 COMPANIES :
STOCK
DR REDDY
RANBAXY
RELIANCE
INFOSYS
SATYAM
ICICI
WIPRO
TISCO
ONGC
STAR
SBIN
ITC
UTI
HLL

CHAPTER
ANALYSIS & DISCUSSION

STANDARD DEVIATION FOR DIFFERNT PERIODS
STOCK PD 1 PD 2 PD 3 PD 4 PD 5 DIFFERENCE
DR REDDY 4.1766 4.5202 2.0154 2.0865 2.0484 2.1282
HDFC 3.8070 2.3748 3.0028 1.6964 1.8089 1.9981
HLL 2.7990 11.9287 1.5739 1.7668 1.7846 1.0144
ICICI 4.2500 4.1120 2.6648 2.2904 2.2720 1.9780
INFOSYS 6.6891 4.0886 2.8253 3.0116 3.3128 3.3763
ITC 3.5596 2.3630 1.8483 1.5167 1.4297 2.1299
ONGC 3.6393 2.4228 3.3477 2.1063 2.0815 1.5578
RANBAXY 3.9156 2.7908 1.9199 3.0284 1.5634 2.3522
RELIANCE 3.4196 2.4635 1.8483 1.8058 1.6805 1.7391
SATYAM 5.7651 9.5028 3.3477 3.0950 3.2956 2.4695
SBIN 3.5300 2.3839 1.9199 1.6543 1.8039 1.7261
STAR 5.5519 5.0387 6.3176 5.9980 5.3840 0.1679
TISCO 3.5875 2.9302 2.2438 2.0660 2.0822 1.5053
UTI 4.2141 3.1100 2.7454 2.6667 2.9785 1.2356
WIPRO 9.5975 5.1006 3.0909 2.9942 3.0205 6.5770

t-TEST FOR THE PERIODS PD1 & PD 5
Using the standard deviation for the period PD 1 and PD 2 the value of D is
calculated or the 15 stocks . Mean of this D value is found out which is represented
by ÿ$OVRWKHVWDQGDUGGHYLDWLRQRI'YDOXHVLVFDOFXODWHGZKLFKLVGHQRWHGE\
SD.
For the t-test t cal is tabulated by using the following equation:
t cal ÿ6'VTUW1
N is the number of observations.
In this particular case the values are as shown in the table given below and is
tabulated as follows
Mean 2.13036
Std. Deviation 1.425837
NOS 15
N-1 14
T CALCULATED 5.78667
T TABULATED 1.76
t cal = 2.13036/(1.425837/sqrt 15) = 5.78667

t tab is got from the t table and it is 1.76
t tab < t cal

GRAPHS SHOWING THE STANDARD DEVIATION FOR THE STOCKS FROM
DR REDDY
ST A N D A R D D EVIA T IO N
5.000 0
4.000 0
3.000 0
S er ies 1
2.000 0
1.000 0
0.000 0
1 2 3 4 5
T IM E
HDFC
4 .0 0 0 0
3 .0 0 0 0
2 .0 0 0 0 S e r ie s 1
1 .0 0 0 0
0 .0 0 0 0
1 2 3 4 5
T IM E

HLL
14.0000
STANDARD DEVIATION
12.0000
10.0000
8.0000
Series1
6.0000
4.0000
2.0000
0.0000
1 2 3 4 5
TIME
IC IC I
5 .0 0 0 0
4 .0 0 0 0
3 .0 0 0 0
S e ries 1
2 .0 0 0 0
1 .0 0 0 0
0 .0 0 0 0
1 2 3 4 5
T IM E

INFOSYS
8 .0 0 0 0
6 .0 0 0 0
4 .0 0 0 0 S e rie s 1
2 .0 0 0 0
0 .0 0 0 0
1 2 3 4 5
T IM E
ITC
4.0000
STANDARD
DEVIATION
3.0000
2.0000 Series1
1.0000
0.0000
1 2 3 4 5
TIME

ONGC
STANDARD DEVIATION
4.0000
3.0000
2.0000 Series1
1.0000
0.0000
1 2 3 4 5
TIME
RANBAXY
5.0 000
4.0 000
3.0 000
S er ies 1
2.0 000
1.0 000
0.0 000
1 2 3 4 5
T IM E

RELIANCE
STANDARD DEVIATION
4.0000
3.5000
3.0000
2.5000
2.0000 Series1
1.5000
1.0000
0.5000
0.0000
1 2 3 4 5
TIME
SA T YA M
1 0 .0 0 0 0
8 .0 0 0 0
6 .0 0 0 0
S e r ie s 1
4 .0 0 0 0
2 .0 0 0 0
0 .0 0 0 0
1 2 3 4 5
T IM E

S BIN
4.0000
3.5000
3.0000
2.5000
2.0000 S eries 1
1.5000
1.0000
0.5000
0.0000
1 2 3 4 5
T IM E
ST A R
8 .0 0 0 0
6 .0 0 0 0
4 .0 0 0 0 S er ie s 1
2 .0 0 0 0
0 .0 0 0 0
1 2 3 4 5
T IM E

T ISC O
4.0 00 0
3.0 00 0
2.0 00 0 S er ies 1
1.0 00 0
0.0 00 0
1 2 3 4 5
T IM E
UTI
5 .00 0 0
4 .00 0 0
3 .00 0 0
Se ries 1
2 .00 0 0
1 .00 0 0
0 .00 0 0
1 2 3 4 5
T IM E

W IPRO
1 2 .00 0 0
1 0 .00 0 0
8 .0 00 0
6 .0 00 0 S e r ie s 1
4 .0 00 0
2 .0 00 0
0 .0 00 0
1 2 3 4 5
T IM E

Has Introduction of derivatives reduced the volatility?
Derivatives were introduced in India in June 2000. So in order to find out whether there
is reduction in volatility in the stock market the standard deviation of the stocks for the
period before and after the introduction of derivatives was tabulated as standard deviation
is a measure of volatility. The standard deviation calculated for the 15 stocks selected
from the National Stock exchange for the different periods PD1, PD2 PD3, PD 4, and PD
5 reveals that there is a considerable reduction in the standard deviation as shown in the
tables and as depicted in the graphs for the 15 stocks ie there is a considerable reduction
in the volatility. Also the t- test carried out with the value D which is the difference
between the standard deviation for the period PD 1 and PD 2 zero downs to the
conclusion that t tab is less than t cal which in urn proves that our H1 is true ie
“Introduction of Derivatives has reduced the Volatility in the stock market.”

CHAPTER
CONCLUSION

CONCLUSION
It is observed that the standard deviation has reduced from the period PD 1 to PD 5
In a considerable manner. Also the t - test confirms that the standard deviation has
reduced .As standard deviation is a measure of volatility we conclude that “Introduction
Of Derivatives has reduced the volatility in the stock market.”

Behaviour of Stock Markets WRT Introduction of Derivatives

Diunggah oleh

Informasi Dokumen

Judul Asli

Hak Cipta

Format Tersedia

Bagikan dokumen Ini

Bagikan atau Tanam Dokumen

Opsi Berbagi

Apakah menurut Anda dokumen ini bermanfaat?

Apakah konten ini tidak pantas?

Hak Cipta:

Format Tersedia

Behaviour of Stock Markets WRT Introduction of Derivatives

Diunggah oleh

Hak Cipta:

Format Tersedia

BEHAVIOUR OF STOCK MARKET VOLATILITY AFTER INTRODUCTION OF DERIVATIVE

MP BIRLA INSTITUTE OF MANAGEMENT

I hereby declare, that this project report titled

I further declare that this project report is the result of my

Place: Bangalore Anand S Nyamagouda

MP BIRLA INSTITUTE OF MANAGEMENT

This is to certify that the Project titled “BEHAVOUR OF

Place: Bangalore Dr.N S Malavalli

MP BIRLA INSTITUTE OF MANAGEMENT

MP BIRLA INSTITUTE OF MANAGEMENT

MP BIRLA INSTITUTE OF MANAGEMENT

MP BIRLA INSTITUTE OF MANAGEMENT

MP BIRLA INSTITUTE OF MANAGEMENT

MP BIRLA INSTITUTE OF MANAGEMENT

MP BIRLA INSTITUTE OF MANAGEMENT

1.Hedgers : For protecting against adverse movement. Hedging is a mechanism to

2.Speculators: To make quick fortune by anticipating/forecasting future market

3.Arbitrageurs: To earn risk-free profits by exploiting market imperfections.

MP BIRLA INSTITUTE OF MANAGEMENT

• Over the Counter derivatives

The derivatives can be classified as:

MP BIRLA INSTITUTE OF MANAGEMENT

Forward contract is a one to one bipartite contract, which is to be performed in future at

Future contracts are the organized/standardized contracts in terms of quantity, quality,

MP BIRLA INSTITUTE OF MANAGEMENT

Interest Rate Swap: Interest payments streams of differing characters are

Coupons swaps: fixed for floating rates

MP BIRLA INSTITUTE OF MANAGEMENT

MP BIRLA INSTITUTE OF MANAGEMENT

DERIVATIVE MARKET IN INDIA

An important step towards introduction of derivatives trading in India was the

Consequently, the Securities Contracts (Regulation) Amendment Bill 1998 was

MP BIRLA INSTITUTE OF MANAGEMENT

DERIVATIVES PRODUCTS LEGALLY PERMITTED TO BE TRADED IN INDIAN

1. Equity Derivatives (Index/stock futures/options) - Legally permitted to be traded

MP BIRLA INSTITUTE OF MANAGEMENT

CATEGORIES OF DERIVATIVES TRADED IN INDIA

MP BIRLA INSTITUTE OF MANAGEMENT

OTC EXCHANGE TRADED

1980s - Currency Forwards

MP BIRLA INSTITUTE OF MANAGEMENT

14 Dec1995 NSE asked SEBI for permission to trade index futures.

SEBI setup L. C. Gupta Committee to draft a policy framework for index

11 May 1998 L. C. Gupta Committee submitted report.

9 June 2000 Trading of BSE Sensex futures commenced at BSE.

12 June 2000 Trading of Nifty futures commenced at NSE.

31 Augus2000 Trading of futures and options on Nifty to commence at SIMEX.

DERIVATIVES IN INDIA: A CHRONOLOGY

MP BIRLA INSTITUTE OF MANAGEMENT

DERIVATIVE MARKETS TODAY

• The prohibition on options in SCRA was removed in 1995. Foreign currency

EQUITY DERIVATIVES EXCHANGES IN INDIA

MP BIRLA INSTITUTE OF MANAGEMENT

• Both the exchanges have set-up an in-house segment instead of setting up a

HISTORICAL DATAS OF DERIVATIVE TRADING IN INDIA

MP BIRLA INSTITUTE OF MANAGEMENT

MP BIRLA INSTITUTE OF MANAGEMENT

MP BIRLA INSTITUTE OF MANAGEMENT

ADVANTAGES OF THE INTRODUCTION OF DERIVATIVES IN INDIA

MP BIRLA INSTITUTE OF MANAGEMENT

MP BIRLA INSTITUTE OF MANAGEMENT

MP BIRLA INSTITUTE OF MANAGEMENT

MP BIRLA INSTITUTE OF MANAGEMENT

1980s - Currency Forwards