CHAPTER-1 INTRODUCTION TO DERIVATIVE...
Transcript of CHAPTER-1 INTRODUCTION TO DERIVATIVE...
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CHAPTER-1
INTRODUCTION TO
DERIVATIVE MARKET
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1.1 INTRODUCTION
Risk is a characteristic feature of all commodity and capital markets. Prices of all
commodities both agricultural and non-agricultural commodities are subject to fluctuations
overtime keeping with the prevailing supply and demand conditions. Similarly, the price of
shares, debentures, and bonds and other securities are also subject to continuous change.
Therefore, the sellers and buyers are constantly and continuously exposed
to the risk of losses on account of fluctuations in the prices of such assets. Thus, Derivatives
came into being primarily to deal with and also to eliminate such price risks prevent in
commodity and security market.
The objective of an investment decision is to get required rate of return with minimum
risk. To achieve this objective, various instruments, practices and strategies have been devised
and developed in the recent past. With the opening of boundaries for international trade and
business, the world trade gained momentum. In the last decade, the world has entered into a new
phase of global integration and liberalization. The integration of capital markets world-wide has
given rise to increased financial risk with the frequent changes in the interest rates, currency
exchange rates and stock prices. To overcome the risk arising out of these fluctuating variables
and increased dependence of capital markets of one set of countries to the other and risk
management practices have also been reshaped by inventing such instruments as can mitigate the
risk element. These new popular instruments are known as financial derivatives which not only
reduce financial risk but also open new opportunity for high risk takers. As Derivative is a
financial instrument of risk management, these generally do not influence the fluctuation in the
underlying asset prices. However, by locking-in asset prices, derivative products minimize the
impact of fluctuation in asset prices on the profitability and cash flow situation of risk-averse
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investors. Derivatives are used by different investors with different purposes to hedge the risk
arising from the investments made on the underlying asset to speculate on the underlying asset
and gain from price fluctuations, for arbitrage, or to create synthetic products. These are also
used to make investment strategies for safe and risk –free investment1.
Today, derivative contracts exist on a variety of commodities such as corn, pepper,
cotton, wheat, silver, etc. besides commodities. Derivatives contracts also exist on a lot of
financial underlying assets like stocks, interest rates, exchange rates, etc. Derivative products
initially emerged as hedging devices against fluctuations in commodity prices. Financial
derivatives came into the spotlight in the post-1970 period due to growing instability in the
financial markets. However, since their emergence, these products have become popular and by
1990s, they accounted for about two - thirds of total transactions in derivative products. In recent
years, the market for financial derivatives has grown tremendously in terms of instruments
available, their complexity and also turnover. In the class of equity derivatives the world over,
futures and options on stock indices have gained more popularity than individual stocks and
especially institutional investors, who are major users of index linked derivatives. Even small
investors find it more useful due to high correlation of the popular indexes with various
portfolios and ease of use. The lower costs associated with index derivatives vis-à-vis derivative
products based on individual securities is another reason for the growing use2.
The source of derivatives can be traced back to the need of farmers to protect themselves
against fluctuations in the price of their crop from the time of sowing to the time of crop harvest.
Through the use of simple derivative products, it was possible for the farmer to partially or fully
transfer price risks by locking-in asset prices. These were simple contracts developed to meet the
needs of farmers and were basically a means of reducing risk.
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A farmer who sowed crop in the month of June face uncertainty over the price and farmer
may receive harvest in the month of September. In years of scarcity, farmer probably obtains
attractive prices. However, during times of oversupply, farmer would have to dispose off his
harvest at a very low price. Clearly this meant that the farmer was exposed to a high risk of price
uncertainty.
On the other hand, a merchant with ongoing requirement of grains too would face a price
risk - that of having to pay exorbitant prices during dearth, although favorable prices could be
obtained during periods of oversupply. Under such circumstances, it clearly made sense for the
farmer and the merchant to come together and enter into a contract where by the price of the
grain to be delivered in the month of September could be decided earlier3. What they would then
negotiate happened to be a future-type contract, which would enable both parties to eliminate the
price risk. “Derivatives are one type of securities whose value is derived from the underlying
assets. These underlying assets are most commonly Stocks, Bonds, Currencies and
Commodities.” Derivatives have a significant place in finance and risk management. Financial
markets are by nature extremely volatile and hence, the risk factor is an important concern for
financial agents4.
1.2 NEED FOR DERIVATIVES MARKET
The derivatives market performs a number of meaningful functions:
� It helps in transferring risk from risk averse to risk takers
� It helps in predicting future prices based on current prices
� It catalyzes entrepreneurial activity
� It increases the volume traded in markets because of participation of risk averse people in
greater numbers
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� It increases savings and investments in the long run5.
1.3 CONCEPT OF DERIVATIVE
In the Indian context the Securities Contracts (Regulation) Act, 1956 SC(R) A, defines
"derivative" as —
“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”.
“A contract which derives its value from the prices, or index of prices, of underlying
securities”
“Financial instruments that linked to a specific financial instrument or indicator or commodity
and through which specific risks can be traded in financial markets in their own right. The value
of a financial derivative derives from the price of an underlying item, such as an asset or index.
Unlike debt securities, no principal is advanced to be repaid and no investment income accrues.”
-The International Monetary Fund (IMF)
“A derivative is a financial instrument whose value depends on (or derives from) the values of
other, more basic underlying variables” - John C. Hull
“A financial instrument “which has a value determined by the price of something else. This
“something else” can be almost anything: it can be assets or commodities”.
- Robert L. Mc Donald
1.4 EMERGENCE OF DERIVATIVES
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Derivative products initially emerged as hedging devices against fluctuations in
commodity prices and commodity-linked derivatives remained the sole form of such products for
almost three hundred years. Financial derivatives came into the spotlight in the post-1970 period
due to growing instability in the financial markets. However, since their emergence, these
products have become popular and by 1990s, they accounted for about two - thirds of total
transactions in derivative products.
In recent years, the market for financial derivatives has grown tremendously in terms of
instruments available, their complexity and also turnover. In the class of equity derivatives the
world over, futures and options on stock indices have gained more popularity than on individual
stocks, especially among institutional investors, who are major users of index linked derivatives.
Even small investors find these are useful due to high correlation of the popular indexes with
various portfolios and ease of use. The lower costs associated with index derivatives vis-à-vis
derivative products based on individual securities is another reason for their growing use6.
1.5 FUNCTIONS OF DERIVATIVES MARKET
Like other segments of Financial Markets, Derivatives Market serves the following specific
functions:
� Derivatives market helps in improving price discovery based on actual valuations and
expectations.
� Derivatives market helps in transfer of various risks from those who are exposed to risk but
have low risk appetite to participants with high risk appetite. For example hedgers want to
give away the risk where as traders are willing to take risk.
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� Derivatives market helps shift of speculative trades from unorganized market to organized
market. Risk management mechanism and surveillance of activities of various participants in
organized space provide stability to the financial system.
1.6 FACTORS DRIVING THE GROWTH OF FINANCIAL DERIVATIVES
The following factors are the driving force for the growth of derivatives
1. Increased volatility in asset prices in financial markets
2. Increased integration of national financial markets with the international markets
3. Marked improvement in communication facilities and sharp decline in their costs
4. Development of more sophisticated risk management tools, providing economic agents a
wider choice of risk management strategies, innovations in the derivatives markets, which
optimally combine the risks and returns over a large number of financial assets leads to
higher returns, reduced risk as well as transactions costs as compared to individual financial
assets7.
The following table presents the milestones in the development of Indian financial derivatives.
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Table: 1.1
Milestones in the development of Indian Financial Derivatives
Sl.
No.
Progress
Date
Progress of Financial Derivatives
1 1952 Enactment of the forward contracts (Regulation) Act
2 1953 Setting up of the forward market commission
3 1956 Enactment of Securities Contract Regulation Act 1956
4 1969 Prohibition of all forms of forward trading under section 16 of SCRA
5 1972 Informal carry forward trades between two settlement cycles began on
BSE 6 1980 Khurso Committee recommends reintroduction of futures in most
commodities 7
1983 Govt. amends bye-laws of exchange of Bombay, Calcutta and Ahmedabad
and introduced carry forward trading in specified shares 8 1992 Enactment of the SEBI Act
9 1993 SEBI Prohibits carry forward transactions
10 1994 Kabra Committee recommends futures trading in 9 commodities
11 1995 G.S. Patel Committee recommends revised carry forward system
12 14th
Dec.
1995
NSE asked SEBI for permission to trade index futures
13 1996 Revised system restarted on BSE
14 18th
Nov.
1996
SEBI setup LC Gupta committee to draft frame work for index futures
15 11th
May
1998
LC Gupta committee submitted report
16 1st June 1999 Interest rate swaps/forward rate agreements allowed at BSE
17 7th
July 1999 RBI gave permission to OTC for interest rate swaps/forward rate
agreements 18 24th
May
2000
SIMEX chose Nifty for trading futures and options on an Indian index
19 25th
May
2000
SEBI gave permission to NSE & BSE to do index futures trading
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20 9th
June 2000 Equity derivatives introduced at BSE
21 12th
June
2000
Commencement of derivatives trading (index futures) at NSE
22 31st Aug.
2000
Commencement of trading futures & options on Nifty at SIMEX
23 1st June 2001 Index option launched at BSE
24 Jun 2001 Trading on equity index options at NSE
25 July 2001 Trading at stock options at NSE
26 9th
July 2001 Stock options launched at BSE
27 July 2001 Commencement of trading in options on individual securities
28 1st Nov. 2001 Stock futures launched at BSE
29 Nov. 2001 Commencement of trading in futures on individual security
30 9th
Nov. 2001 Trading of Single stock futures at BSE
31 June 2003 Trading of Interest rate futures at NSE
32 Aug. 2003 Launch of futures & options in CNX IT index
33 13th
Sept.
2004
Weekly options of BSE
34 June 2005 Launch of futures & options in Bank Nifty index
35 Dec. 2006 'Derivative Exchange of the Year by Asia risk magazine
36 June 2007 NSE launches derivatives on Nifty Junior & CNX 100
37 Oct. 2007 NSE launches derivatives on Nifty Midcap -50
38 1stJan. 2008 Trading of Chhota (Mini) Sensex at BSE
39 1stJan. 2008 Trading of mini index futures & options at NSE
40 3rd
March
2009
Long term options contracts on S&P CNX Nifty index
41 NA Futures & options on sectoral indices ( BSE TECK, BSE FMCG, BSE
Metal, BSE Bankex & BSE oil & gas)
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42 29th
Aug.
2008
Trading of currency futures at NSE
43 Aug. 2008 Launch of interest rate futures
44 1st Oct. 2008 Currency derivative introduced at BSE
45 10th Dec.
2008
S&P CNX Nifty futures & options at NSE
46 Aug. 2009 Launch of interest rate futures at NSE
47 7th
Aug. 2009 BSE-USE form alliance to develop currency & interest rate derivative
markets 48 18th
Dec2009 BSE's new derivatives rate to lower transaction costs for all
49 Feb. 2010 Launch of currency future on additional currency pairs at NSE
50 Apr. 2010 Financial derivatives exchange award of the year by Asian Banker to
NSE 51 July 2010 Commencement trading of S&P CNX Nifty futures on CME at NSE
52 Oct. 2010 Introduction of European style stock option at NSE
53 Oct. 2010 Introduction of Currency options on USD INR by NSE
54 July 2011 Commencement of 91 day GOI trading Bill futures by NSE
55 Aug. 2011 Launch of derivative on Global Indices at NSE
56 Sept. 2011 Launch of derivative on CNX BSE & CNX infrastructure Indices at
NSE 57 30th
March
2012
BSE launched trading in BRICSMART indices derivatives
58 29th Nov
2013
BSE launched currency derivative segment
59 28th
Jan 2014 Launch of Interest Rate Futures (BSE –IRF)
60 11th
Feb 2014 Launch of Institutional Trading Platform on BSE SME
61 20th
Mar 2014
BSE Launches New Debt Segment
62 04th
Apr 2014 BSE SME exceeds USD 1 billion market capitalization
63 7th
Apr 2014 Launch of Equity Segment on BOLT Plus with Median Response Time of
200 (µs)
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64 27th
May
2014
BSE felicitated at The Asian Banker Summit 2014 - BSE Best Managed
Financial Derivatives Exchange in the Asia Pacific 65 26th
Sept
2014
BSE links MoU with BNY Mellon
66 22th
Oct 2014 BSE inks strategic partnership with YES BANK
67 28th
Nov 2014 BSE listed companies market cap crosses landmark 100 lakh crore
68 12th
Dec 2014 Market Cap of BSE SME listed companies crosses landmark 10,000 crore
69 08th
Jan 2015 BSE commenced live trading from its Disaster Recovery site in Hyderabad
70 16th
Apr 2015 Asia Index Private Limited launches S&P BSE All Cap, S&P BSE
SENSEX Leverage and Inverse Indices 71 18th
May
2015
BSE introduces overnight investment product
72 28th
May
2015
BSE exceeds 1 billion derivatives contracts on its new Deutsche Borse T7
powered trading platform 73 09th
July 2015 BSE celebrated its 140th Foundation Day
74 16th
July 2015 BSE SME platform successfully completes listing of 100 SMEs under its
SME umbrella 75 13th
Oct 2015 BSE becomes the fastest exchange in the world with a median response
speed of 6 microseconds 76 09th
Dec 2015 BSE partners with CII (Confederation of Indian Industry) and IICA (Indian
Institute of Corporate Affairs) to launch a one of its kind CSR platform Source: Compiled data from NSE and BSE websites NA: Not Available
1.7 DEVELOPMENT OF DERIVATIVES 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 the govern trading of derivatives. SEBI set up a 24-member committee under the
Chairmanship of Dr. L.C.Gupta on November 18, 1996 to develop an appropriate regulatory
framework for derivatives trading in India. The committee submitted its report on March 17,
1998 prescribing necessary pre-conditions for introduction of derivatives trading in India. The
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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 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 real- time monitoring requirements8.
The Securities Contract Regulation Act (SCRA) was amended in December 1999 to
include derivatives within the ambit of ‘securities’ and the regulatory framework were 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 on 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 BSE- 30 (Sensex) index. This was followed by
approval for trading in options based on these two indexes and options on individual securities9.
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
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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 products10
.
The following are some observations based on the trading statistics provided in the NSE report
on the futures and options (F&O):
• Single- stock futures continue to account for a sizable proportion of the F&O segment. It
constituted 70 percent of the total turnover during June 2002. A primary reason attributed to
this phenomenon is that traders are more comfortable with single- stock futures than equity
options, as the former closely resembles the erstwhile badla system.
• On relative terms, volumes in the index options segment continue to remain poor. This may
be due to the low volatility of the spot index. Typically, options are considered more valuable
when the volatility of the underlying (in this case, the index) is high. A related issue is that
brokers do not earn high commission by recommending index options to their clients,
because low volatility leads to higher waiting time for round- trips.
• Puts volumes in the index options and equity options segment have increased since January
2002. The call–put volumes in index options have decreased from 2.86 in January 2002 to
1.32 in June. The fall in call- put volumes ratio suggests that the traders are increasingly
becoming pessimistic on the market.
• Further month futures contracts are still not actively traded. Trading in equity options on
most stocks for even the next month was non- existent.
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• Daily option price variations suggest that traders use the F&O segment as a less risky
alternative (read substitute) to generate profits from the stock price movements. The fact that
the option premiums tail intra-day stock prices is evidence to this. Calls on Satyam fall, while
puts rise when Satyam fall intra-day. If calls and puts are not looked as just substitutes for
spot trading, the intraday stock price variations should not have a one- to- one impact on the
option premiums11
.
1.8 INSTRUMENTS AVAILABLE IN INDIA
Table 1.2 and 1.3 presents derivative products traded at BSE and NSE respectively.
Table: 1.2
Products Traded in Derivatives Segment at BSE
Sl.No Product Traded with underlying asset Introduction Date
1 Index Futures- Sensex June 9 th
, 2000
2 Index Options- Sensex June 1st, 2001
3 Stock Option on 109 Stocks July 9th
, 2001
4 Stock futures on 109 Stocks November 9th
, 2002
5 Weekly Option on 4 Stocks September 13 th
,2004
6 Chhota (mini) SENSEX January 1st, 2008
7
Futures & Options on Sectoral indices namely BSE
TECK, BSE FMCG, BSE Metal, BSE Bankex and
BSE Oil & Gas.
NA
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8 Currency Futures on US Dollar Rupee October 1st, 2008
9 Launched BRICSMART indices derivatives March 30th
,2012
Source: Compiled from BSE website NA: Not Available
Table: 1.3
Derivative Products at NSE
Products Index Futures Index Options
Futures on
Individual
Securities
Options on
Individual
Securities
Underlying
Instrument
S&P CNX Nifty S&P CNX Nifty
30 securities
stipulated by
SEBI
30 securities
stipulated by SEBI
Type European American
Trading Cycle
Maximum of 3-
month trading cycle.
At any point in
time, there will be 3
contracts available:
1) near month,
2) mid month &
3)far month
duration
Same as index
futures
Same as index
futures
Same as index
futures
Expiry Day Last Thursday of Same as index Same as index Same as index
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the expiry month futures futures futures
Contract Size
Permitted lot size is
200 & multiples
thereof
Same as index
futures
As stipulated by
NSE (not less
than RS.2 lacs)
As stipulated by
NSE (not less than
RS.2 lacs)
Price Steps Re.0.05 Re.0.05
Base Price First
day of trading
Previous day
closing Nifty value
Theoretical
value of the
options contract
arrived at based
on Black-
Scholes model
Previous day
closing value of
underlying
security
Same as Index
options
Base price
Subsequent
Daily settlement
price
Daily close
price
Daily settlement
price
Same as Index
options
Price Bands
Operating ranges
are kept at + 10 %
Operating
ranges for are
kept at 99 % of
the base price
Operating ranges
kept at + 20 %
Operating ranges
for are kept at 99
% of the base price
Quantity Freeze
20,000 units or
greater
20,000 units or
greater
Lower of 1 % of
market wide
position limit
stipulated for
open positions or
RS.5 crores
Same as individual
futures
Source: Compiled from NSE website
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1.9 EVOLUTION OF DERIVATIVES MARKET – WORLD WIDE
History of Derivatives may be mapped back to the several centuries. Some of the specific
milestones in evolution of Derivatives Market Worldwide are given below:
� 12th Century - In European trade fairs, sellers signed contracts promising future delivery of
the items they sold.
� 13th Century - There are many examples of contracts entered into by English Cistercian
Monasteries, who frequently sold their wool up to 20 years in advance to foreign merchants.
� 1634-1637 - Tulip Mania in Holland, Fortunes were lost in after a speculative boom in tulip
futures burst.
� Late 17th Century - In Japan at Dojima, near Osaka, a futures market in rice was developed
to protect rice producers from bad weather or warfare.
� In 1848, The Chicago Board of Trade (CBOT) facilitated trading of forward contracts on
various commodities.
� In 1865, the CBOT went a step further and listed the first ‘exchange traded” derivative
contract in the US. These contracts were called ‘futures contracts”.
� In 1919, Chicago Butter and Egg Board, a spin-off of CBOT, was reorganized to allow
futures trading. Later its name was changed to Chicago Mercantile Exchange (CME).
� In 1972, Chicago Mercantile Exchange introduced International Monetary Market (IMM),
which allowed trading in currency futures.
� In 1973, Chicago Board Options Exchange (CBOE) became the first marketplace for trading
listed options.
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� In 1975, CBOT introduced Treasury bill futures contract. It was the first successful pure
interest rate futures.
� In 1977, CBOT introduced T-bond futures contract.
� In 1982, CME introduced Eurodollar futures contract.
� In 1982, Kansas City Board of Trade launched the first stock index futures.
� In 1983, Chicago Board Options Exchange (CBOE) introduced option on stock indexes with
the S&P 100® (OEX) and S&P 500® (SPXSM) Indexes.
1.10 EVOLUTION OF THE COMMODITY DERIVATIVE MARKET IN
INDIA
The beginning of the modern worldwide commodity derivative market can be traced at
Chicago, which had emerged as an important agricultural commodity trading center in the early
1800s. In 1848, the Chicago Board of Trade (CBOT) was founded as a commodity exchange.
Commodity derivatives are not new in India too12
. In fact, forward trading in commodities
existed in India from ancient times (it was mentioned in Kautilya’s “Arthashastra”), but the first
modern futures market was established in 1875 for cotton contracts by the Bombay Cotton Trade
Association. Oilseed and food grain futures followed and before the World War II, futures were
being traded on commodities such as wheat, rice, sugar, groundnut, groundnut oil, raw jute, jute
products and castor seed as well as precious metals. During World War II futures trading was
prohibited to contain runaway speculation and illegal hoarding.
After independence, the Forward Contracts (Regulation) Act was enacted in 1952 to regulate
the trading in forward and futures. The Forward Markets Commission (FMC) which oversees
forward trading was instituted as a regulatory body the following year. The Act applied to all
contracts whereby the delivery of goods occurs after a period longer than 11 days. The task of
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the commission was to monitor and regulate the trading of forward contracts since manipulation
in these markets are likely to create severe imbalances with adverse welfare effects13
.
Nevertheless, Indian markets did not really blossom over the following four decades.
Regulators viewed markets in general with suspicion and derivative markets particularly as the
terrain of unscrupulous speculation. Price control was a central feature of economic policy
during much of this period. This overly regulated nature of the economy did not bode well for
the development of these markets. In 1966, futures trade was altogether banned to give effective
powers to government price control.
A few select commodities saw a reintroduction of futures in 1980 following the Khusro
Committee report. But the real breakthrough came with the liberalization of the Indian economy
in the early 1990s. In 1993, the Kabra Committee was appointed to look into forward markets.
The committee recommended in 1994 that all futures banned in 1966 be reintroduced as well as
many others added. Six years later, the National Agricultural Policy 2000 envisioned the removal
of price controls in agricultural markets and widespread use of futures contracts. However, the
commodity futures market made the true restart in early 2000s with establishment of a number of
nationwide multi commodity exchanges14
.
1.11 COMMODITY DERIVATIVE MARKETS IN INDIA
Commodity futures markets have a long history in India. Cotton was the first commodity
to attract futures trading in the country leading to the setting up of the Bombay Cotton Trade
Association Ltd in 1875. The Bombay Cotton Exchange Ltd. was established in 1893 following
the widespread discontent amongst leading cotton mill owners and merchants over the
functioning of Bombay Cotton Trade Association.
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Subsequently, many exchanges came up in different parts of the country for futures
trading in various commodities. Futures trading in oilseeds started in 1900 with the establishment
of the Gujarati Vyapari Mandali, which carried on futures trade in groundnut, castor seed and
cotton. Before the Second World War broke out in 1939, several futures markets in oilseeds were
functioning in Gujarat and Punjab.
Futures trading in wheat existed at several places in Punjab and Uttar Pradesh, the most
notable of which was the Chamber of Commerce at Hapur, which began futures trading in wheat
in 1913 and served as the price setter in that commodity till the outbreak of the Second World
War in 1939.
Futures trading in bullion began in Mumbai in 1920 and subsequently markets came up in
other centers like Rajkot, Jaipur, Jamnagar, Kanpur, Delhi and Kolkata.
Kolkata Hessian Exchange Ltd. was established in 1919 for futures trading in raw jute and jute
goods. But organized futures trading in raw jute began only in 1927 with the establishment of
East Indian Jute Association Ltd. These two associations amalgamated in 1945 to form the East
India Jute & Hessian Ltd. to conduct organized trading in both raw jute and jute goods. In due
course several other exchanges were also created in the country to trade in such diverse
commodities as pepper, turmeric, potato, sugar and gur (jaggery).
After independence, with the subject of `Stock Exchanges and futures markets' being
brought under the Union list, responsibility for regulation of commodity futures markets
devolved on Government of India. A Bill on forward contracts was referred to an expert
committee headed by Prof. A. D. Shroff and select committees of two successive Parliaments
and finally in December 1952 Forward Contracts (Regulation) Act, 1952, was enacted.15
The Act 1952 provided a 3-tier regulatory system
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(a) An association recognized by the Government of India on the recommendation of Forward
Markets Commission,
(b) The Forward Markets Commission (it was set up in September 1953) and
(c) The Central Government.
Forward Contracts (Regulation) Rules were notified by the Central Government in July, 1954.
According to FC(R) Act, commodities are divided into 3 categories with reference to extent of
regulation, viz:
� Commodities in which futures trading can be organized under the auspices of recognized
association.
� Commodities in which futures trading is prohibited.
� Commodities which have neither been regulated nor prohibited for being traded under the
recognized association are referred as Free Commodities and the association organized in
such free commodities is required to obtain the Certificate of Registration from the Forward
Markets Commission.
India was in an era of physical controls since independence and the pursuance of a mixed
economy set up with socialist proclivities had ramifications on the operations of commodity
markets and commodity exchanges. Government intervention was in the form of buffer stock
operations, administered prices, regulation on trade and input prices, restrictions on movement of
goods, etc. Agricultural commodities were associated with the poor and were governed by
polices such as Minimum Price Support and Government Procurement16
. Further, as production
levels were low and had not stabilized, there was the constant fear of misuse of these platforms
which could be manipulated to fix prices by creating artificial scarcities. This was also a period
which was associated with wars, natural calamities and disasters which invariably led to
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shortages and price distortions. Hence, in an era of uncertainty with potential volatility, the
government banned futures trading in commodities in the 1960s.
The Khusro Committee which was constituted in June 1980 had recommended
reintroduction of futures trading in most of the major commodities, including cotton, kapas, raw
jute and jute goods and suggested that steps may be taken for introducing futures trading in
commodities, like potatoes, onions, etc. at appropriate time. The government, accordingly
initiated futures trading in Potato during the latter half of 1980 in quite a few markets in Punjab
and Uttar Pradesh.
With the gradual trade and industry liberalization of the Indian economy pursuant to the
adoption of the economic reform package in 1991, GOI constituted another committee on
Forward Markets under the chairmanship of Prof. K.N. Kabra. The Committee which submitted
its report in September 1994 recommended that futures trading be introduced in the following
commodities:
• Basmati Rice
• Cotton, Kapas, Raw Jute and Jute Goods
• Groundnut, rapeseed/mustard seed, cottonseed, sesame seed, sunflower seed, safflower seed,
copra and soybean and oils and oilcakes like
• Rice bran oil, Castor oil and its oilcake, Linseed, Silver, Onions
The committee also recommended that some of the existing commodity exchanges particularly
the ones in pepper and castor seed, may be upgraded to the level of international futures
markets17
.
UNCTAD and World Bank joint Mission Report "India: Managing Price Risk in India's
Liberalized Agriculture: Can Futures Market Help? (1996)" highlighted the role of futures
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markets as market based instruments for managing risks and suggested the strengthening of
institutional capacity of the Regulator and the exchanges for efficient performance of these
markets.
Another major policy statement, the National Agricultural Policy, 2000, also expressed
support for commodity futures. The Expert Committee on Strengthening and Developing
Agricultural Marketing (Guru Committee: 2001) emphasized the need for and role of futures
trading in price risk management and in marketing of agricultural produce. This Committee's
Group on Forward and Futures Markets recommended that it should be left to interested
exchanges to decide the appropriateness/usefulness of commencing futures trading in products
(not necessarily of just commodities) based on concrete studies of feasibility on a case-to-case
basis. It, however, noted that all the commodities are not suited for futures trading. For a
commodity to be suitable for futures trading it must possess some specific characteristics.
The liberalized policy being followed by the Government of India and the gradual
withdrawal of the procurement and distribution channel necessitated setting in place a market
mechanism to perform the economic functions of price discovery and risk management.
The National Agriculture Policy announced in July 2000 and the announcements of
Hon'ble Finance Minister in the Budget Speech for 2002-2003 were indicative of the
Governments resolve to put in place a mechanism of futures trade market. As a follow up, the
Government issued notifications on 1.4.2003 permitting futures trading in the commodities, with
the issue of these notifications futures trading is not prohibited in any commodity. Options
trading in commodity are however presently prohibited.
The year 2003 is a landmark in the history of commodity futures market witnessing the
establishment and recognition of three new national exchanges like National Commodity and
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Derivatives Exchange of India Ltd. (NCDEX), Multi Commodity Exchange of India Ltd (MCX)
and National Multi Commodity Exchange of India Ltd. (NMCE) with on-line trading and
professional management.
These markets depicted phenomenal growth in terms of number of products on offer,
participants, spatial distribution and volume of trade. Majority of the trade volume is contributed
by the national level exchanges whereas regional exchanges have a very less share. With
developments on way, the commodity futures exchanges registered an impressive growth till it
saw the first ban of two pulses (Tur and Urad) towards the end of January 2007. Subsequently
the ban of two more commodities from cereals group i.e. Wheat and Rice in the next month. The
commodity market regulator, Forward Markets Commission as a measure of abundant caution,
suspended futures trading in Chana, Soya oil, Rubber and Potato w.e.f. May 7, 2008. However,
with the easing of inflationary pressure, the suspension was allowed to lapse on November 30,
2008. Trading in these commodities resumed on December 4, 2008. Later on futures trading in
wheat was re-introduced in May 2009. In May 2009, a future trading in sugar was suspended.
Due to mistaken apprehensions that futures trading contributes to inflation, futures trading in
rice, urad, tur and sugar has been temporarily suspended18
.
1.12 COMMODITY DERIVATIVE TRADING EXCHANGES
In the 1970s and 80s, the United States was a leading player in commodity derivatives
trading which began there with corn contracts at the Chicago Exchange in the mid-19th century
and cotton at the New York Exchange. By the early 1980s, the US was home to 13 major futures
and options exchanges, including the Chicago Board of Trade (CBOT), one of the world’s
biggest futures and options exchange; Chicago Mercantile Exchange (CME); and New York
Mercantile Exchange (NYMEX). However, Europe emerged as a clear leader in the mid-1990s,
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particularly in the non-agricultural commodities and tilted the balance away from the US in its
own favour. Table.1.4 contains top 10 Derivative Exchanges
Worldwide Based on number of contracts Traded and/or cleared (2013).
Table: 1.4
World Wide Top 10 Derivative Exchange
Ranking Exchange No. of Contracts
1 CME Group (US) 3,161,476,638
2 Intercontinental Exchange* (US) 2,807,970,132
3 Eurex (Germany) 2,190,548,148
4 National Stock Exchange of India 2,135,637,457
5 BM&F BOVESPA (Brazil) 1,603,600,651
6 CBOE Holdings (US) 1,187,642,669
7 NASDAQ OMX (US) 1,142,955,206
8 Moscow Exchange (Russia) 1,134,477,258
6 BM&F BOVESPA (Brazil) 1,603,600,651
9 Korea Exchange (South Korea) 820,664,621
10 MCX India (India) 820,664,621
Source: www.futuresindustry.org. *Includes NYSE Euro next
Since 2005, commodity markets in Asia (primarily China and India) are witnessing huge
trading volumes, despite the fact that Chicago, New York and London remain the big hubs for
agricultural goods, precious and base metals and oil and gas products. In terms of trading
volumes, Asia now accounts for more than half of global commodity futures and options trades.
Commodity Exchange, Multi Commodity Exchange of India and some exchanges have merged
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and carry out trading across borders such as Euro next (Paris, Brussels, Amsterdam, London and
Lisbon) and the CME Group.19
1.13 Milestones in Commodity Futures Trading in India
The following Table presents the milestones in commodity futures trading.
Table: 1.5
Milestones in Commodity Futures Trading
Years Development
1875 Bombay Cotton Trade Association
Between 1st and 2nd
World war
Rapid growth of futures markets
During 2nd World War
Defense of India Act- Prohibited Futures trading in major
Commodities owing to short supply
1950s to mid 1960s
Thriving Commodity futures markets Banned Commodity Futures
trading in most of the Commodities except two minor Commodities
Mid 1960s to 1970s Pepper and Turmeric
1980s Revival of Futures trading in Potato, Castor Seed and Gur (Jaggery)
1992 Futures trading in Hessian permitted
1999 Futures trading in various edible oilseeds complexes permitted
2000
The National Agricultural Policy recognized the positive role of
forward and futures markets in price discovery and price risk
management
2001 Futures trading in Sugar permitted
2003 Lifted prohibition on futures trading in all Commodities Recognition
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to 3 National Commodity Electronic Exchanges MCX, NCDEX and
NMCE
2008
Commission issued guidelines on setting up of New National Multi
Commodity Exchanges
2009 Recognition to ICEX as 4th National Exchange
2010
Recognition to ACE as 5th National Exchange Notified “Iron Ore”
under section 15 of the FCRA, 1952
2012 Recognition to UCX as 6th
National Exchange
Source: From Annual reports of Forward Market commision
1.14 TYPES OF DERIVATIVES MARKET IN INDIA
The following chart depicts types of derivatives.
Figure 1.1
TYPES OF DERIVATIVES MARKET
Commodity Derivative Financial Derivative
Forwards Futures
Equity Debt Forex
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Futures Options Swaps Forwards Futures Forwards Swaps
One form of classification of derivative instruments is between commodity derivatives
and financial derivatives. The basic difference between these is the nature of the underlying
instrument or asset. In a commodity derivative, the underlying instrument is a commodity which
may be wheat, cotton, pepper, sugar, jute, turmeric, corn, soya beans, crude oil, natural gas, gold,
silver, copper and so on. In a financial derivative, the underlying instrument may be treasury
bills, stocks, bonds, foreign exchange, stock index, gilt-edged securities, cost of living index, etc.
It is to be noted that financial derivative is fairly standard and there are no quality issues whereas
in commodity derivative, the quality may be the underlying matter. However, despite the
distinction between these two from structure and functioning point of view, both are almost
similar in nature. The most commonly used derivatives contracts are forwards, futures, options
and swaps20
.
1.14.1 Forwards:
A forward contract is a customized contract between two parties, where settlement takes
place on a specific date in the future at today’s pre-agreed price.
The main features of forward contracts are
� They are bilateral contracts and hence exposed to counter party risk.
� Each contract is custom designed, and hence is unique in terms of contract size,
expiration date and the asset type and quality.
� The contract price is generally not available in public domain.
� The contract has to be settled by delivery of the asset on expiration date.
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� In case the party wishes to reverse the contract, it has to compulsorily go to the same
counter party, which being in a monopoly situation can command the price it wants.
1.14.2 Futures:
A futures contract is an agreement between two parties to buy or sell an asset at a certain
time in the future at a certain price. Futures contracts are special types of forward contracts in the
sense that the former are standardized exchange- traded contracts.
The main features of futures contracts are:
� Futures trading is necessarily organized under the auspices of a market association so that
such trading is confined to or conducted through members of the association in
accordance with the procedure laid down in the rules and bye laws of the association.
� It is invariably entered into for a standard variety known as the “Basis variety” with
permission to deliver other identified varieties known as “tenderable varieties”
� The units of price quotation and trading are fixed in these contract and parties to the
contract not being capable of altering these unites.
� The delivery periods are specified.
� The seller in a futures market has the choice to decide whether to deliver goods against
outstanding sale contracts. In case he decides to deliver goods, he can do so not only at
the location of the association through which trading is organized but also at a number of
other pre-specified delivery centers.
1.14.3 Options:
Options are of two types –calls and puts. While “Calls” give the buyer the right, but not
the obligation, to buy a given quality of the underlying asset at a given price on or before a given
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future date, “puts” give the seller the right, but not the obligation, to sell a given quantity of the
underlying asset at a given price on or before a given date.
1.14.4 Warrants:
Options generally have lives of up to one year; the majority of options traded on options
exchanges have a maximum maturity of nine months. Longer-dated options are called warrants
and are generally traded over- the-counter.
1.14.5 Leaps:
The acronym leaps means Long- term Equity Anticipation Securities. These are options
having a maturity of up to three years.
1.14.6 Baskets:
Basket options are options on portfolios of underlying assets. The underlying asset is
usually a moving average or a basket of assets. Equity index options are a form of basket
options.
1.14.7 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.
� 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.
1.14.8 Swaptions:
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Swaptions are options to buy or sell a swap that will become operative at the expiry of
the options. Thus a swaptions is an option on a forward swap. Rather than have calls and puts,
the swaptions market has receiver swaptions and payer swaptions. A receiver swaptions is an
option to receive fixed and pay floating. A payer swaptions is an option to pay fixed and receive
floating21
.
1.15. MARKET PARTICIPANTS OF DERIVATIVES
Derivative instruments are used for varied purposes i.e. managing risk by managing
funds; making profit by taking risk, and taking advantage of price differentiation in different
markets at any given point of time. Accordingly, there are varied types of trades or participants
who trade in the futures and option market. Those are hedgers, speculators and arbitrageurs, who
constitute three major classes of such trader.
1.15.1 Hedgers:
To safeguard something, is to construct a protective fence around. It is applied to
financial markets. Hedging is nothing but eliminating the risk in an asset or liability. It is applied
to stock market, hedging also eliminates the risk in an investment portfolio. Hedging is the
process of reducing exposure to risk. Thus, hedge is an act that reduces the price risk of a certain
position in the cash market. Futures contract are the primary tools of effective hedging and they
enable the market participants to change their risk exposure from unexpected adverse price
fluctuations. Futures act as a hedge when a position is taken in them which are just opposite to
that taken by the investor in the existing cash position. Hedgers sell futures (short futures) when
they have already had a long position on the cash asset, and they buy futures (long futures) in the
situation of having a short position (advance sell) on the cash asset22
.
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Hedging strategies: Essentially, futures contract try to predict what the value of a
commodity will be at some date in the future. Speculators in the futures market can use different
strategies to take advantage of rising and declining prices. The most common are known as going
long and going short, also referred to as long hedge and short hedge respectively23
.
1.15.2 Speculators:
Speculators are participants who wish to bet on future movements in the price of an asset.
Futures contracts can give them leverage; that is, by putting in small amounts of money upfront,
they can take large positions on the market. As a result of this leveraged speculative position,
they increase the potential for large gains as well as large losses.
1.15.3 Arbitragers:
Arbitrage refers to riskless profit earned by taking position in spot futures market.
Arbitragers work at making profits by taking advantage of discrepancy between prices of the
same product across different markets. For example, they see the futures price of an asset getting
out of line with the cash price, they will take offsetting positions in the two markets to lock in the
profit24
1.16. COMMODITY DERIVATIVES VS FINANCIAL DERIVATIVES
The basic concept of a derivative contract remains the same whether the underlying
happens to be a commodity or a financial asset. However, there are some features which are very
peculiar to commodity derivative markets. 22
In the case of financial derivatives, most of these
contracts are cash settled. Since financial assets are not bulky, they do not need special facility
for storage even in case of physical settlement. On the other hand, due to the bulky nature of the
underlying assets, physical settlement in commodity derivatives creates the need for
warehousing. Similarly, the concept of varying quality of asset does not really exist as far as
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financial underlying is concerned. However, in the case of commodities, the quality of the asset
underlying a contract can vary largely. This becomes an important issue to be managed.25
1.16.1 Physical Settlement
Physical settlement involves the physical delivery of the underlying commodity, typically
at an accredited warehouse. The seller intending to make delivery would have to take the
commodities to the designated warehouse and the buyer intending to take delivery would have to
go to the designated warehouse and pick up the commodity. This may sound simple, but the
physical settlement of commodities is a complex process. The issues faced in physical settlement
are enormous. There are limits on storage facilities in different states. There are restrictions on
interstate movement of commodities. Besides state level octroi and duties have an impact on the
cost of movement of goods across locations. The process of taking physical delivery in
commodities is quite different from the process of taking physical delivery in financial assets.
1.16.2 Delivery notice period
Unlike in the case of equity futures, typically a seller of commodity futures has the option
to give notice of delivery. This option is given during a period identified as `delivery notice
period'.
1.16.3 Assignment
Whenever delivery notices are given by the seller, the clearing house of the Exchange
identifies the buyer to whom this notice may be assigned. Exchanges follow different practices
for the assignment process.
1.16.4 Delivery
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The procedure for buyer and seller regarding the physical settlement for different types of
contracts is clearly specified by the Exchange.25
The period available for the buyer to take
physical delivery is stipulated by the Exchange. Buyer or his authorized representative in the
presence of seller or his representative takes the physical stocks against the delivery order. Proof
of physical delivery having been affected is forwarded by the seller to the clearing house and the
invoice amount is credited to the seller's account.
The clearing house decides on the delivery order rate at which delivery will be settled.
Delivery rate depends on the spot rate of the underlying adjusted for discount/ premium for
quality and freight costs. The discount/ premium for quality and freight costs are published by
the clearing house before introduction of the contract. The most active spot market is normally
taken as the benchmark for deciding spot prices26
.
1.16.5 Warehousing
One of the main differences between financial and commodity derivative is the need for
warehousing. In case of most exchange-traded financial derivatives, all the positions are cash
settled. Cash settlement involves paying up the difference in prices between the time the contract
was entered into and the time the contract was closed. For instance, if a trader buys futures on a
stock at Rs.100 and on the day of expiration, the futures on that stock close at Rs.120, he does
not really have to buy the underlying stock. All he does is take the difference of Rs.20 in cash.27
Similarly, the person who sold this futures contract at Rs.100 does not have to deliver the
underlying stock. All he has to do is pay up the loss of Rs.20 in cash.
In case of commodity derivatives however, there is a possibility of physical settlement. It
means that if the seller chooses to hand over the commodity instead of the difference in cash, the
buyer must take physical delivery of the underlying asset. This requires the Exchange to make an
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arrangement with warehouses to handle the settlements27
.The efficacy of the commodities
settlements depends on the warehousing system available. Such warehouses have to perform the
following functions:
• Earmark separate storage areas as specified by the Exchange for storing commodities;
• Ensure proper grading of commodities before they are stored;
• Store commodities according to their grade specifications and validity period; and
• Ensure that necessary steps and precautions are taken to ensure that the quantity and grade of
commodity, as certified in the warehouse receipt, are maintained during the storage period. This
receipt can also be used as collateral for financing.
In India, NCDEX has accredited over 775 delivery centres which meet the requirements for the
physical holding of goods that are to be delivered on the platform. As future trading is delivery
based, it is necessary to create the logistics support for the same28
.
1.16.6 Quality of Underlying Assets
A derivatives contract is written on a given underlying asset. Variance in quality is not an
issue in case of financial derivatives as the physical attribute is missing. When the underlying
asset is a commodity, the quality of the underlying asset is of prime importance29
. There may be
quite some variation in the quality of what is available in the marketplace. When the asset is
specified, it is therefore important that the Exchange stipulate the grade or grades of the
commodity that are acceptable. Commodity derivatives demand good standards and quality
assurance certification procedures. A good grading system allows commodities to be traded by
specification.
Trading in commodity derivatives also requires quality assurance and certifications from
specialized agencies. In India, for example, the Bureau of Indian Standards (BIS) under the
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Department of Consumer Affairs specifies standards for processed agricultural commodities.
AGMARK is another certifying body under the Department of Agriculture and Co-operation
specifies standards for basic agricultural commodities30
.
1.17 Uses of Derivatives
Generally derivatives are used as risk management tools. Here is the brief description of
their uses and functions. Derivatives are supposed to provide the following services:
1.17.1 Risk aversion tools:
One of the most important services provided by the derivatives is to control, avoid, shift
and manage efficiently different types of risks through various strategies like hedging,
arbitraging, speculation, spreading, etc. Derivatives assist the holders to shift or modify suitably
the risk characteristics of their portfolios. These are specifically useful in highly volatile financial
market conditions like erratic trading, highly flexible interest rates, volatile exchange rates and
monetary chaos31
.
1.17.2 Prediction of future prices:
Derivatives serve as barometers of the future trends in prices which result in the
discovery of new prices both on the spot and futures markets. Further, they help in disseminating
different information regarding the futures markets trading of various commodities and securities
to the society which enable to discover or form suitable or correct or true equilibrium prices in
the markets. As a result, they assist in appropriate and superior allocation of resources in the
society32
.
1.17.3 Enhance liquidity:
As we see that in derivatives trading no immediate full amount of the transaction is
required since most of them are based on margin trading. As a result, large number of traders,
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speculators, arbitrageurs operates in such markets. Therefore, derivatives trading enhance
liquidity and reduce transaction costs in the markets for underlying assets33
.
1.17.4 Assist investors:
The derivatives assist the investors, traders and managers of large pools of funds to
devise such strategies so that they may make proper asset allocation to increase their yields and
achieve other investment goals.
1.17.5 Integration of price structure:
It has been observed from the derivatives trading in the market that the derivatives have
smoothen out price fluctuations, squeeze the price spread, integrate price structure at different
points of time and remove gluts and shortages in the markets.
1.17.6 Catalyst growth of financial markets:
The derivatives trading encourage the competitive trading in the markets, different risk
taking preference of the market operators like speculators, hedgers, traders, arbitrageurs, etc.
resulting in increase in trading volume in the country. They also attract young investors,
professionals and other experts who will act as catalysts to the growth of financial markets.
1.17.7 Market Completion:
Lastly it is observed that, derivative trading develops market towards the ‘complete
market’. Complete market concept refers to that situation where no particular investors can be
better off than others, or patterns of returns of all additional securities are spanned by the already
existing securities in it, or there is no further scope of additional security34
.
References
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1. Michael Chui “Derivatives markets, products and participants: an overview” former Senior
Economist, BIS Representative Office for Asia and the Pacific, Hong Kong IFC Bulletin
No 35.
2. The article on “A commodity market in India: Past, Present and Future” by Rajnarayan
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4. Dummu, Tata Rao (2009), “Commodity Futures Market in India: It’s Impact on Production
and Prices”, Indian Journal of Agricultural Economics, Vol. 64 No. 3,
5. Srivastava, Swami Prakash and Saini, Bhawana, (2009), “Commodity Futures
6. Bose, S (2008),”Commodity Futures Market in India - A Study of Trends in the Notional
Multi-Commodity Indices” ICRA Bulletin of Money and Finance
7. Kumar, B., Singh, P. and Pandey, A. (2008); Hedging Effectiveness of Constant and Time
Varying Hedge Ratio in Indian Stock and Commodity Futures Markets; Working Paper,
Indian Institute of Management (Ahmedabad), India
8. Sen Abhijit (2008), Report of the Expert Committee to Study the Impact of Futures Trading
on Agricultural Commodity Prices, Government of India
9. Lokare, S. M. (2007); Commodity Derivatives and Price Risk Management: An Empirical
Anecdote; Reserve Bank of India Occasional Papers, Vol. 28, and No. 2.
10. Ali, Jabir and Gupta, Kriti Bardhan (2007), “Agricultural Price Volatility and Effectiveness
of Commodity Futures Markets in India”, Indian Journal of Agricultural Economics. Vol.
62, No.3.
11. FAO (2007), “Commodity Exchanges and Derivatives Markets: Evolution, Experience and
Outlook in the Cereal Sector”, Report of the Committee on Commodity Problems.
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Effect on Inflation; Working Paper, Indian Institute of Management (Lucknow), India.
13. Ahuja,N. L. (2006); Commodity Derivatives Market in India: “Development, Regulation
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15. Fitch Ratings, 2004, Fixed Income Derivatives A Survey of the Indian Market,
www.fitchratings.com
16. Nair, C. G. K., 2004, Commodity Futures Markets in India: Ready for “Take off”? National
Stock Exchange of India Limited, Mumbai, India
17. Lee, Rupert, 2004, Seeing Double, FOW. ISMR, Indian Securities Market: A Review,
2004, National Stock Exchange of India Limited, Mumbai, India.
18. Kolamkar, D. S. (2003) Regulation and policy issues for commodity derivatives in India, in
Susan Thomas (ed.) Derivatives Markets in India, Oxford University Press, India
19. Government of India (2003): Report of the Task Force on Convergence of securities and
Commodity Derivatives Markets (Chairman, Wajahat Habibullah).
20. Government of India (September 2003) Draft report of the inter-ministerial task force on
convergence of securities and commodity derivative markets, Ministry of Consumer
Affairs, Food and Public Distribution, New Delhi
21. 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.
22. 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
23. 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.
24. Morgan, C. W. (2000); Commodity Futures Markets in LDCs: A Review and Prospects:
CREDIT Research Paper, University of Nottingham, UK.
25. Frida Youssef (October 2000) Integrated report on commodity exchanges and Forward
Markets Commission, World Bank project for the improvement of the commodities futures
markets in India.
26. Abhyankar, A. (1998), Linear and Nonlinear Granger Causality: Evidence from the U.K.
27. Abhyankar, Abhay H (June 1995) Return and volatility dynamics in the FTSE 100 stock
index and stock index futures markets, The Journal of Futures Markets 15(4) 457–488
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28. zhan K. (1992), A Further Analysis of the Lead-Lag Relationship between the Cash Market
and Stock Index Futures Market, Review of Financial Studies 5 (1), 123-152.
29. Chan, K. (1992) A further analysis of the lead-lag relationship between the cash market and
stock index futures market, Review of Financial Studies 5(1) 123–52
30. Bollerslev, Tim, Chou, Ray Y. and Kroner, Kenneth F. (April 1992) ARCH modeling in
finance: a review of the theory and empirical evidence, Journal of Econometrics 52(1)5–59
31. Bessler, David A. and Covey, Ted (August 1991) Cointegration: some results on U.S. cattle
prices, The Journal of Futures Markets 11(4) 461–74
32. Chan, K., Chan, K. C. and Karolyi, G. A. (1991) Intra–day volatility in the stock index and
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33. Brorsen, B.Wade, Oellermann, Charles M. and Farris, Paul L. (August 1989) The live
cattle futures market and daily cash price movements, The Journal of Futures Markets 9(4)
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34. Markets and its Role in Indian Economy”, Indian Journal of Agricultural Economics, Vol.
64 No. 3
Books:
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1. O.P.Agarwal, Financial derivatives and risk management (first edition) published by
Himalaya Publishing House.
2. Bishnupriya Mishra and satya swaroop debasish, Financial Derivatives (first edition)
published by excel books.
3. Prafulla kumar swain, Fundamental of Financial Derivatives (first edition) published by
Himalaya Publishing House.
4. S.l.Gupta, Financial Derivatives published by PHL Learning limited. New Delhi
5. N.R.Parasuraman , Fundamental of financial Derivative (first edition)published by Wiley
Indian Pvt. Ltd. New Delhi
Websites:
www.mcxindia.com
www.ncdex.com
www.fmc.gov.in
www.nmce.com