Indian Financial Derivative

INTRODUCTION

Risk is always present in the capital markets.[1] There are variations which takes place all the prices of Agricultural and Non-Agricultural commodities which are induced by the demand and supply dynamics.[2] There has been an increase in the volume of International Trade and business with the growth of Globalisation and Liberalisation.[3] This lead to the result in various rapid variations of interest and exchange rates, stock market prices, exposing the corporate world and growing of financial risk.

The increase in the financial risk leads to the losses.[4] This shows that there should be a financial risk management to fight against this uncertainty. Derivatives solve the problem of risk which is caused by uncertainty in underlying assets.[5] They provide an effective solution to the problem.

Derivatives are the tools of the risk management that helps an organisation to effectively transfer the risk. Derivatives have no independent value. The value of derivatives depends upon the underlying assets and these underlying assets maybe financial or non-financial.[6]

CONCEPT OF DERIVATIVES

“The term ‘derivatives, refers to a broad class of financial instruments which mainly include options and futures. These instruments derive their value from the price and other related variables of the underlying asset”.[7]

A simple example of a derivative is better which is derivative of milk. The price of butter will depend upon the price of milk and this will depend to the demand and supply of the milk. Section 2 (ac) Securities Contract Regulation Act, 1956 states derivative as-

  1. “A security derived from a debt instrument, share, loan whether secured or unsecured, risk instrument or contract for differences or any other form of security”;[8]
  2. b) “A contract which derives its value from the prices, or index of prices, of underlying securities”.[9]

The value of derivative instrument depends upon the underlying assets. These assets could be in any form like-

  1. Commodities including grain, coffee beans, orange juice
  2. Foreign exchange rates or currencies
  • Precious metals like gold and silver
  1. Bonds of different types, including medium to long term negotiable debt securities issued by governments, companies, etc.
  2. Shares and share warrants of companies traded on recognized stock exchanges and Stock Index
  3. Short term securities such as T-bills
  • Over- the Counter (OTC) money market products such as loans or deposits.

PARTICIPANTS IN THE DERIVATIVES MARKET

1.     HEDGERS

They are used for reducing the risk associated with the price of an asset.

2.     SPECULATORS

The transaction future and options contracts depend on the future movement of the price of an asset. This leads to both potential gains and potential losses.

3.     ARBITRAGEURS

This behaviour is guided to take an advantage of discrepancy between the prices of more or less the same assets in the different markets.

HISTORY OF DERIVATIVES MARKET IN INDIA

The derivative market which is in India is existed in one form or the other form from the long time. The Bombay Cotton Trade Association started its trading way back in 1875.[10] In the year 1952, the Government of India had Cash Settlement and Options Trading. The derivative trading started shifting to informal Forward Market.[11] The first step which leads to promulgation of Securities Law (Amendment) Ordinance, 1995 provided the withdrawal of prohibition on option in the securities.[12] The derivatives trading were started in India in June 2008 for the final approval which came from ST Gupta Committee. The Securities and Exchange Board of India permitted derivatives segments under 2 exchanges that are National Stock Exchange and Bombay Stock Exchange. The trading index was approved by SEBI.[13] The Bombay Stock Exchange Sensex options were commenced on 4th June 2001 and the trading options between individual securities were started in July 2001.[14]


References

[1] ‘Trading statistics of Derivatives segment at BSE’, available at: www. bseindia.com (accessed on May 30, 2017)

[2] Bodla, B. S. and Jindal, K. (2008), ‘Equity Derivatives in India: Growth Pattern and Trading Volume Effects’, The Icfai Journal of Derivatives Markets, Vol. V, No. 1, pp.62-82. [3] Growth of Derivatives Market in India, available at: http://www.valuenotes.com/njain/nj_derivatives_15sep03.asp?ArtCd=33178&Cat=T&Id=10 (accessed on May 30, 2017).

[4] Harish, A. S. (2001) ‘Potential of Derivatives Market in India’, The ICFAI Journal of Applied Finance, Vol. 7, No.5, pp 1-24.

[5] Hirani, Kapil (2007), ‘Understanding Derivatives’, available at: http://kapilhirani.com/News5.php (accessed on May 20, 2017)

[6] http://www.indiainfoline.com/news/showleader.asp?lmn=1&storyId=344(accessed on May 20,2017)

[7]http://www.valuenotes.com/njain/nj_derivatives_15sep03.asp?ArtCd=33178&Cat=T&Id=10 (accessed on May 28,2017)

[8] ‘Indian Securities Market, A Review’ (ISMR)-2008 available at: http://www.nseindia.com.(accessed on May 27, 2017)

[9] ‘International Options Market Association (IOMA) Derivatives Market Survey’ 2007, available at: http://www.world-exchanges.org/ioma (accessed on May 30, 2017).

[10] ‘Introduction to derivatives in India’, available at: http://business.mapsofindia.com/investmentindustry/introduction-to-derivatives.html (accessed on May 27, 2017).

[11] Kannan, R. (2008), ‘Onset of Derivatives Trading in Derivatives market’, available at: www.geocities.com/kstability/content/derivatives/first.html (accessed on May 20, 2017).

 [12] Kaur, P.(2004), ‘Financial derivatives: Potential of derivative market in India and emerging derivatives market structure in India’ available at: www.icwai.org/icwai/knowledgebank (accessed on May 28, 2017)

[13] Misra Dheeraj and Misra Sangeeta D (2005), ‘Growth of Derivatives in the Indian Stock Market: Hedging v/s Speculation’, The Indian Journal of Economics, Vol. LXXXV, No. 340.

[14] NSE fact book, 2008 Issue, available at: http://www.nseindia.com.(accessed on May 15, 2017)

[15] Reddy, Y. V. and Sebastin, A. (2008), ‘Interaction between Equity and Derivatives Markets in India: An Entropy Approach’, The Icfai Journal of Derivatives Markets, Vol. V, No.1, pp.18- 32.

[16] Sarkar, A. (2006), ‘Indian Derivatives Markets’ available at: www.newyorkfed.org/research/economists/sarkar/derivatives_in_india.pdf (accessed on May 10, 2017).

[17] Srivastava, P. (2004), ‘Financial and legal aspect of derivative trading in. India’, available at: www.taxmann.net/Datafolder/Flash/article0412_4.pdf (accessed on May 10, 2017).

 3rd year student of the W.B. National University of Juridical Sciences (NUJS), Kolkata.

[1] Bodla, B. S. and Jindal, K. (2008), ‘Equity Derivatives in India: Growth Pattern and Trading Volume Effects’, The Icfai Journal of Derivatives Markets, Vol. V, No. 1, pp.62-82.

[2] Growth of Derivatives Market In India, available at: http://www.valuenotes.com/njain/nj_derivatives_15sep03.asp?ArtCd=33178&Cat=T&Id=10 (accessed on May 27, 2017).

[3] B. Brahmaiah and Rao P. Subba, “Financial futures and option”, 1st ed., Himalaya Publishing House,

New Delhi, 1998, PP.25- 14.

[4] D. Vasant, “The Indian financial system and development”, 4th ed., Himalaya Publishing House, New Delhi, 2017, PP.398-412, 645-677.

[5] Misra Dheeraj and Misra Sangeeta D (2005), ‘Growth of Derivatives in the Indian Stock Market: Hedging v/s Speculation’, The Indian Journal of Economics, Vol. LXXXV, No. 340.

[6] Srivastava, P. (2004), ‘Financial and legal aspect of derivative trading in. India’, available at: www.taxmann.net/Datafolder/Flash/article0412_4.pdf (accessed on June 10,2017).

[7] Section 2 (ac) Securities Contract Regulation Act, 1956

[8] Section 2 (ac) Securities Contract Regulation Act, 1956

[9] Id.

[10] Misra Dheeraj and Misra Sangeeta D (2005), ‘Growth of Derivatives in the Indian Stock Market: Hedging v/s Speculation’, The Indian Journal of Economics, Vol. LXXXV, No. 340.

[11] ‘Introduction to derivatives in India’, available at: http://business.mapsofindia.com/investmentindustry/introduction-to-derivatives.html (accessed on May 27, 2017).

[12] Kannan, R. (2008), ‘Onset of Derivatives Trading in Derivatives market’, available at: www.geocities.com/kstability/content/derivatives/first.html (accessed on May 20, 2017).

[13] Securities and Exchange Board of India.

[14] R.P. Rustagi, “Investment analysis and portfolio management”, 1st ed., Sultan Chand & Sons, New Delhi, 2007, PP.459- 596.

 

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