Futures & Options

In India

December 19 & 20, 2009

1
 Derivatives in India
• L. C. Gupta Committee setup - Mar 1996
Framework for introducing derivatives

• J. R. Verma committee – June 1998

Recommended measures in Risk containment for Derivatives
Market in India

• SCRA amendments – December 1999

Derivatives included in the definition of Securities

• SEBI Approval – May 2000

NSE commenced trading in June 2000
2
 Exchange Traded Derivatives
Product Commencement

• Index Futures : June 2000

• Index Options : June 2001

• Single Stock Options : July 2001

• Single Stock Futures : Nov 2001

• Interest Rate Futures : June 2003

• Currency Futures : August 2009

3
 Equity Derivatives Stats

• Around 800 trading members/ 10000 terminals

• In more than 325 cities

• Trading on 5 Indices and 179 securities

• Average daily traded value - Rs. 80,000 crs.

Average no. of contracts traded – 35,00,000

4
 Derivatives Segment at NSE

• Products : Futures and Options

• Underlying : Indices & single stocks
• Indices : NIFTY, CNXIT, BANKNIFTY,
NIFTY JUNIOR, CNX MIDCAP
• Stocks :179 single stocks

5
 Derivatives volumes as % of cash
585.00%
545.00%
505.00% % of derivatives market
465.00% volumes to underlying
market volumes
425.00%
385.00%
345.00%
305.00%
265.00%
225.00%
185.00%
145.00%
105.00%
65.00%
25.00%
May-03

May-06
May-02

May-04

May-05

May-07

May-08
Sep-03

Jan-04

Sep-04

Sep-05

Sep-07
Sep-02

Jan-03

Jan-05

Jan-06

Sep-06

Jan-07

Jan-08
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 Underlying Vs. Derivatives
15000

13000
Underlying Market : Average daily t urnover in
Rs.crores
11000
Derivatives Market : Average daily t urnover in
Rs.crores
9000

7000

5000

3000

1000
Jul-02

Jul-03
Jan-03

Jan-04
Mar-03
Nov-02

Nov-03
May-02

May-03
Sep-02

Sep-03
7
Product wise contribution – in Dec 2008
34.00% 33.00%
31.00%
35%
30%
25%
20%
15%
10% 2.00%
5%
0%
Index Futures Stock Futures Index Options Stock Options
P r oduc ts
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Product wise contribution – in Nov 2009

49.00%
60%
40% 22.00%
26.00%

20% 3.00%

0%
Index Stock Index Stock
Futures Futures Options Options

Products

9
 Derivatives
• Instrument whose value is derived from an underlying
• Underlying - commodity, equity, Index, interest rate,
etc.
• Cash settled or delivery of underlying
• Exchange Traded or OTC
• Most commonly traded – Futures & Options

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 Uses of Derivatives

• To hedge risks
• To take a view on the future direction
• Helps separate speculative and cash markets
• To lock in an arbitrage profit
• Increases liquidity of the underlying market

11
 Derivatives
• Exchange traded
– Screen based, automated trading
– Contracts are standard, there is virtually no credit
risk

• Over-the-counter (OTC)
– A network of dealers at financial institutions,
corporations and fund managers
– Contracts can be non-standard and there is an
element of credit risk
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 Factors driving growth of Derivatives

• Increased volatility of asset prices

• Increased integration of financial markets
• Improved communication facilities and
Aprline in costs
• More sophisticated risk management tools
• InMarations

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 Forward Contract
•SPOT MARKET
– goods and funds change hands the
moment a trade takes place.

FORWARD CONTRACT
– Two parties agree upon everything, but
settlement takes place x days later.

14
 Forwards are Futures when..

• Exchange Traded

• Standardised

• Counter - Party Risk is absent (settlement of

trade is guaranteed)

• Marked to Market everyday

15
 Futures
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.

16
 Futures
• Futures were designed to solve the problems that
existed in the forward markets

• A futures contract is an agreement between two

parties to exchange an asset at a certain date at a
certain price

• Futures contracts are standardized forward contracts

that are traded on an exchange
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 Futures
• To facilitate liquidity, exchange specified
standard features for the contract
Quantity and quality of the underlying
Date and month of delivery
Units of price quotation and min. price change
Location and mode of settlement

• Futures can be offset prior to maturity,

• 99% offset prior to maturity
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 Futures & Spot
• Futures and Spot have different
prices

• The Futures price is derived from

the Spot price

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 Futures & Spot Markets
• In the Spot Market entire amount to be paid
immediately

• In the Futures Market only the stipulated

margin amount to be paid

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Convergence of Futures to Spot

Futures
Spot Price
Price
Spot Price Futures
Price

Time Time

(a) (b)
21