CHAPTER I: DEFINITION AND USES OF DERIVATIVES
Derivative is defined as a security which is a financial contract. Its value is derived from the value of some other thing such as – commodity price, stock price, exchange rate, interest rate, an index of prices, etc. Some simple kinds of derivatives are –
* Forwards
* Futures
* Options
* Swaps.
Derivatives are traded for different reasons. Derivatives enable traders in hedging an already existing risk by taking position in the markets to offset potential losses. Chiefly, the derivative users are referred to as hedgers in India. Further, as per Indian laws, derivatives ought to be used only for the purposes of hedging. Derivative trading is also done under speculation where traders take positions to make profit from the anticipated variations in prices. However, it is practically difficult to distinguish as to whether a particular trade was done for the purposes of hedging or for speculation.
There is another type of trader called the arbitrageurs who seek to profit from the discrepancies in the derivative and spot prices. Arbitraging has been found to exist in India between two different exchanges intra-city and inter-city.
An analysis of 2002 of Indian equity derivatives markets reflects Indian markets as being inefficient. It is argued that impediments such as market frictions, lack of knowledge, regulatory impediments, etc have been responsible for the low levels of capital employed in trading in arbitrage in India.
The Term Paper on Black Market and The Indian Economy
Statistics:It is said that black money in India accounts for 20 % of GDP. If this is true, then black money generated every year must be around Rs 400,000 crore or $ 80 billion. This is a huge amount, more than the entire budget of the government at the Centre. We have a government that spends about Rs 350,000 crore a year, most of it on itself, and asks for accounts of every paisa. On the other ...
CHAPTER II: EXCHANGE TRADED AND OVER THE COUNTER (OTC) DERIVATIVE INSTRUMENTS
Over-the-counter or OTC contracts like swaps and forwards are negotiated on a bilateral basis between the parties. Terms of OTC contracts are characterized as usually flexible and may be customized to suit the requirements of particular user/users. OTC contracts carry considerable credit risk that the counterparty who owes money could make defaults on his obligation to pay. Generally, OTC derivatives are prohibited in India barring a few exceptions such as- the ones which are specifically permitted by RBI or those which are informally traded in ‘havala’ or forward markets in case of commodities which are under regulation of Forward Markets Commission.
Exchange traded contracts have a standardized format which specifies the underlying asset which is to be delivered, size of contract, logistics of the delivery, etc, for instance a futures contract. They do their trade on organized exchanges. The prices are determined from the interaction of buyers and sellers in the market. In India, NSE and the BSE are the two exchanges that offer trading in derivatives. Presently, NSE virtually accounts for almost all exchange traded derivatives constituting more than 99% of the volume of trade in the financial year 2003-2004. Performance of the contract is guaranteed by a clearing-house which is a wholly owned subsidiary of the NSE. In relation to OTC contracts, the exchange-traded contracts are at a substantially lower credit risk.
CHAPTER III: DEVELOPMENT OF DERIVATIVE MARKETS IN INDIA
Presence of derivative markets has been in one or the other form in India since quite a while. In the commodities sector, the Bombay Cotton Trade Association had first started trading in futures as early as the year 1875. The market started to develop by early 1900 making in India’s futures industry among the largest. The government had banned cash settlement and options trading in 1952, hence, derivative trading had moved to the informal forwards markets. Recently, the government’s policy has changed, thereby permitting a greater role for market determined pricing. In early 2000, government lifted the ban on futures trading in several commodities. Consequently, national electronic commodity exchanges were established.
The Business plan on Derivative market
... and revolving credits, and OTC foreign exchange, interest rate and equity derivative contracts Under the advanced approach (A-IRB) ... have any securitization exposures. TABLE DF-8: MARKET RISK IN TRADING BOOK Qualitative disclosures: 1) The following ... safety Clients, Products, & Business Practice- market manipulation, antitrust, improper trade, product defects, fiduciary breaches, account churning ...
Among equity markets, a particular system of trading known as ‘badla’ had been in use since many decades. It involved certain concepts of forwards trading. However, it was later prohibited and allowed several times as it started leading to undesirable practices. Later, it was finally banned by SEBI in 2001.
Further multiple reforms in Indian stock markets from 1993 to 1996 played important role in development of exchange traded equity derivative market. NSE (National Stock Exchange) was created in 1993 by the government in collaboration with many state owned financial institutions. There was increased transparency and efficiency in stock markets due to the formation of NSE. NSE introduced the facility of real time price dissemination and fully automated screen based trading systems. Also, prohibition from trading in options was removed with effect from 1995. Further, in the year 1996, NSE sent a proposal to the SEBI for allowing the listing of exchange traded derivatives.
According to L. C. Gupta Committee Report which was set up by the SEBI, it recommended a phased introduction of derivative products and a bi-level regulation where stock exchanges would undertake self regulation and SEBI would supervise and play an advisory role. Additionally, as per J. R. Varma Committee report of 1998, various operational details like the margining systems were worked out. In 1999, SCRA or Securities Contracts (Regulation) Act of 1956) was amended whereby derivatives could be declared “securities” under the Act. Hence, the regulatory framework applicable to securities would be extended to the derivatives. Accordingly, under the Act, trading in derivatives would be legal and valid provided that they are traded on exchanges. Subsequently, the thirty year ban on forward trading too was lifted in 1999.
Economic liberalization during the 1990s led to introduction of derivatives based on interest rates and foreign exchange. India adopted a system of exchange rates which is determined as per market forces in March 1993. In August 1994, the Indian Rupee was declared as fully convertible on current account. Thus, such reforms have increased integration between markets, both nationally and internationally, and generated a requirement to manage currency risk. A greater need to manage interest rate risk was felt due to the easing of several restrictions on free movement of interest rates.
The Essay on Bombay Stock Exchange 2
Monetary policy is the use by the Government or central bank ( In Indian Context RBI) of interest rates or controls on the money supply to influence the Economy. The reserve bank of India is the agency which formulates and Implements monetary policy on behalf of the Indian government in an attempt to achieve a set of objectives that are expressed in terms of macroeconomic variables such as the ...
CHAPTER IV: DERIVATIVE INSTRUMENTS TRADED IN INDIA
In exchange traded market, the greatest success has been achieved by derivatives on equity products. Introduction of Index futures in June 2000, index options in June 2001, options on individual securities in July 2001 and futures on individual securities and November 2001. By the year 2005, the NSE had been trading in futures and options touched 118 stocks and three stock indices. These derivative contracts are settled by payment in cash and do not involve delivery of the underlying product physically.
Derivatives on various stock index including individual stocks have since grown rapidly. In June 2003, NSE launched interest rate futures. There are no exchange-traded currency derivatives in India.
CHAPTER V: DERIVATIVE USERS IN INDIA
Use of derivatives differs according to the type of institution. Banks usually have assets/liabilities of different maturities. These are in different currencies and exposed to different types of risks of default from borrowers. Regulation of non financial institutions is different from that of the financial institutions. Hence, non financial institutions get lesser incentives to use derivatives. For instance, Indian insurance regulators have not issued any guidelines in respect of use of derivatives by insurance companies till date.
Financial institutions have not been heavy users of derivates in India. However, this situation is changing fast. Inter-bank transactions dominate the market for interest-rate derivatives whereas the state owned banks have a smaller presence. Corporations are mainly active in swaps and currency forwards.
Certain institutions like banks and mutual funds are permitted only to use derivatives to hedge their existing positions or for re-balancing their already existing portfolios. As banks have small or little exposure to the equity markets because of the stringent banking regulations they are dissuaded from trading in equity derivatives.
The Essay on Stock Market September Stocks People
September 11, 2001 was a day that Americans and the world for that matter will not soon forget. When two planes went into the twin towers of the World Trade Center and two others went into the Pentagon and a small town in Pennsylvania, the world was rocked. Everyone in the United States felt very vulnerable and unsafe from attacks that might follow. As a result, confidence in the CIA, FBI, and the ...
Trading in single stock futures has been a huge success in India even though it has mostly failed in most of the other countries. A reason for its success could be the familiarity of retail investors with ‘badla’ transactions which had certain characteristics of derivative trading. Another reason is the small size of futures contracts in comparison to similar contracts made in other countries. Retail investors are also dominant in the markets for commodity derivatives.
CHAPTER VI: SUMMARY AND CONCLUSIONS
The Indian derivative market performed better in terms of growth and variety of derivatives than other regional markets.Although growth has been mainly spearheaded by private sector institutions, retail investors and large corporations, but now, state owned institutions and smaller companies are also increasingly participating. Also, the variety of derivative instruments has also been expanding with new ones being added from time to time.
Some areas of concern, though, still remain as far as the Indian derivative traders and users are concerned. Such concerns are more pronounced in case of the actively traded derivates. In equity derivatives statistics from NSE indicate that nearly 90% of activity can be attributed to index or stock futures whereas options trading remains limited to a few stocks, partly due to the fact that they are settled in cash instead of the underlying stocks. Exchange traded derivatives based on currencies and interest rates are practically null-traded.
Two quintessential characteristics of an advanced and mature market are-
* Transparency, and,
* Liquidity.
Transparency is attained substantially through financial disclosures. Misleading statements lead to misinformation among institutions and other investors/users of derivatives. Additionally, there appears to be no consistent method of accounting to reflect accurately the gains/losses in the trading of derivatives. Therefore, it is highly required that a proper frame-work to account for derivatives be developed.
The Essay on How Markets and Investors value stocks
Collectively, Team B believes stock is a security that shows possession in a company or asset and symbolizes claim from investors or the owner. The market and invests are interested in two types of stocks which are common and preferred. Common stock typically gives a share of ownership in a corporation, to which gives owners and investors rights to vote or make decisions, and a right to receive ...
Liquid markets sustain the liquidity in exchange of derivatives by participation of considerable number of active buyers and sellers. The scenario in India is that market making is dominated by the private and foreign banks. However, the author feels that there is further scope to improve liquidity as currently it is well below potential of the Indian markets.
Derivative markets are still relatively a recent phenomenon and hugely depend upon regulatory reforms. Properly channelized regulatory reforms would go a long way to encourage the markets to grow. For instance different taxation policies for different segments of the markets affect investment in a particular segment of securities in relation to others segments.
With the growth of Indian derivative market, investor confidence assumes greater importance. Many investor awareness and education programmes have been introduced by the NSE for traders, dealers, brokers and market personnel. Moreover, institutions would now be required to maintain necessary infrastructure and technology necessary for trading in derivative markets.
References
* Chitale, Rajendra P., 2003, Use of Derivatives by India’s Institutional Investors: Issues and Impediments, in Susan Thomas (ed.), Derivatives Markets in India, Tata McGraw-Hill Publishing Company Limited, New Delhi, India.
* FitchRatings, 2004, Fixed Income Derivatives—A Survey of the Indian Market, www.fitchratings.com
* Gambhir, Neeraj and Manoj Goel, 2003, Foreign Exchange Derivatives Market in India—Status and Prospects, Susan Thomas (ed.), Derivatives Markets in India, Tata McGraw-Hill Publishing Company Limited, New Delhi, India.
* Gorham, Michael, Thomas, Susan and Ajay Shah, 2005, India: The Crouching Tiger, Futures Industry.
* Lee, Rupert, 2004, Seeing Double, FOW.
* ISMR, Indian Securities Market: A Review, 2004, National Stock Exchange of India Limited, Mumbai, India.
* Jogani, Ashok and Kshama Fernandes, 2003, Arbitrage in India: Past, Present and Future, in Susan Thomas (ed.), Derivatives Markets in India, Tata McGraw-Hill Publishing Company Limited, New Delhi, India.
* Nair, C. G. K., 2004, Commodity Futures Markets in India: Ready for “Take Off”? National Stock Exchange of India Limited, Mumbai, India.
The Business plan on Securities Exchange Board of India
In 1988 the Securities and Exchange Board of India (SEBI) was established by the Government of India through an executive resolution, and was subsequently upgraded as a fully autonomous body (a statutory Board) in the year 1992 with the passing of the Securities and Exchange Board of India Act (SEBI Act) on 30th January 1992. In place of Government Control, a statutory and autonomous regulatory ...
