DERIVATIVES EXISTING IN INDIA…

FINANCIAL DERIVATIVES

The term derivatives refer to a large number of financial instruments whose value is derived from the underlying assets. Derivative instruments like the options and futures facilitate the trading in financial contracts. The most important underlying instruments in the market are in the form of Equity, treasury bills, and foreign exchange. The trading in the financial derivatives has attracted the prominent players of the equity markets.

The primary purpose of a derivative contract is to transfer risk from one party to another i.e. risk is transferred from a party that wants to get rid of it to another party i.e. willing to take it. The major players seen in the derivatives segment are the SPECULATORS whose sole objective is to buy and sell for a profit alone. The HEDGERS are the other breeds of players, who aim merely to have a hedge positions. They are risk free investors whose intention is to have a safety mechanism and wish to protect their portfolio. Nevertheless, they are pursued as a cheap and efficient way of moving risk within the economic system. But the world of derivatives is riddled with jargons making it more awesome.

The trading in equity through the derivatives in India was introduced in the year 2000 by the Securities And Exchange Board of India [SEBI] and this was described as the “India’s derivative explosion”. Although this took a definite form in 2000 but the idea was initiated in the year 1995. it was then in the year 2000 that SEBI permitted the trading the in the options on the platforms of  India’s premier exchange platforms i.e., the National Stock Exchange Of India limited [NSE] and The Bombay Stock Exchange [BSE] in the individual securities. But the futures contracts took 17 long months to get launched on November 09’ 2001.

The trading in options and futures in the individual stocks were permitted to trade on the stable stocks only. The small and highly volatile stocks were an exemption from the trade in derivatives. Futures and options are important tools that help the investors to derive profit. The futures facilitate the investor to enter into a contract to deliver the underlying security at a future date whereas, the options allow it to his discretion as to whether he wants to buy (call) or sell (put) the contract.

The current trading behavior in the derivatives segment reveals that single stock futures continues to account for a sizeable proportion. A recent report indicates that the trading in the individual stock futures in the Indian exchanges has reached global volumes. One possible reason for such a behavior of the trader could be that futures closely resemble the erstwhile ‘BADLA’ system.

Turnover in Financial Markets and Commodity Market
(Rs in Crore)
S No.	Market segments	2002-03		2003-04		2004-05 (E)
1	Government Securities Market	1,544,376	(63)	2,518,322	(91.2)	2,827,872	(91)
2	Forex Market	658,035	(27)	2,318,531	(84)	3,867,936	(124.4)
3	Total Stock Market Turnover (I+ II)	1,374,405	(56)	3,745,507	(136)	4,160,702	(133.8)
I	National Stock Exchange (a+b)	1,057,854	(43)	3,230,002	(117)	3,641,672	(117.1)
	a) Cash	617,989		1,099,534		1,147,027
	b) Derivatives	439,865		2,130,468		2,494,645
II	Bombay Stock Exchange (a+b)	316,551	(13)	515,505	(18.7)	519,030	(16.7)
	a) Cash	314,073		503,053		499,503
	b) Derivatives	2,478		12,452		19,527
4	Commodities Market	NA		130,215	(4.7)	500,000	(16.1)
Note: Fig. in bracket represents percentage to GDP at market prices                               Source: Sebi bulletin

Indian Derivatives Market …. Looking Ahead

Clearly, in the nascent stage, the derivatives market in India is heading in the right direction. In the terms of the number of contracts in a single commodity/stock it is probably the largest market globally. It is no longer a market that can be ignored by any of the serious participants. The Indian economy, now, is at the verge of greater expansion the any other economies in the globe today. This has attracted a large number of institutional investors, both – the Indian as well as foreign, to invest in to the Indian stocks and commodities, thereby bringing in a lot of forex reserves. As predicted by the popular investment Gurus’ and the great Economists world wide, India will be a major player in the global economy by the end of this decade. We can conclude that, with the institutional participation set to increase and a broader product rollout inevitable, the market can only widen and deepen further.