A Study of Indian Derivatives Market and Global
Nov 18, 2014
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IntroductionDerivatives are recognized as the best and most cost-efficient way of meeting the felt need for risk hedging in certain types of commercial and financial operations.
Through the use of derivatives products, it is possible to partially or fully transfer price risk away from risk-averse investors towards those more willing and able to bear risk by locking in asset prices.
Derivatives also help price discovery, i.e. the process of determining the price level for any asset based on supply and demand.
Derivatives market in India started working in 2001
Financial derivatives came into the spotlight in the post-1970 period due to growing instability in the global financial markets
Research MotivationDerivatives market has emerged in India after 2000, but its
foundation had already been laid just after the reforms of the stock market between 1993 and 1996 and these reforms paved the way for the exchange traded equity derivatives market in India
The total turnover of derivatives market has already superseded the total turnover of cash market in India. The screen based trading in India has given an edge to the trading of derivatives in India. The derivatives market of India has expanded torrently but it’s still very less in comparison to the other developed markets of the world.
Objective of the StudyTo study Indian derivatives marketTo study different constituents of Indian derivatives
market e.g. commodity derivatives market, foreign exchange derivatives market and exchange traded financial derivatives market.
To study the various regulatory requirements of derivatives market of India
Comparative study of cash market and derivatives market of India
Comparative study of Indian derivatives market and global derivatives market
Research Methodology Source of Data
To conduct this study there is a need of comprehensive secondary data of cash market and derivatives market, Indian as well as global. Secondary data has been collected from various research papers, journals, articles, websites and books etc.
Research Design
The design of the research is descriptive in nature.
Limitations The study is limited to the secondary data available
for the Indian derivatives and cash market
The constraint of global derivatives data
The study has been conducted within a limited period of time
The study has been conducted from a particular location
Indian Derivatives MarketTurnover in Cash and Derivative Segment - NSE
Cash
Derivative
0100,000200,000300,000400,000500,000600,000700,000800,000900,000
1,000,000
Rs.
cr
Top 5 most active futures contracts, May 2005
33%
11%5%3%3%
45%
Nifty May 2005
Nifty June 2005
Tisco May 2005
SBIN May 2005
Reliance May 2005
Others
Top 5 traded symbols in Options segment, May 2005
58%
7%5%
5%
4%
21% Nifty
Tisco
SatyamComp
SBIN
Reliance
Others
Top 5 most active futures contracts, May 2006
33%
13%4%3%
1%
46%
Nifty May 2006
Nifty June 2006
Reliance May 2006
TATA Steel May 2006
Hindalco May 2006
Others
Top 5 traded symbols in Options segment, May 2006
36%
5%2%2%2%
53%
Nifty
Reliance
Infosys
MTNL
Hindalco
Others
NSE global rankAsia—Pacific
rank
Stock Index Options
No. of contracts traded 239207 10 4
Notional Turnover (mn USD) 22340 12 5
Stock Index Futures
No. of contracts traded 1447464 7 4
Notional Turnover (mn USD) 134192 16 8
Stock Options
No. of contracts traded 590300 11 2
Notional Turnover (mn USD) 47841 6 2
Single Stock Futures
No. of contracts traded 5238498 1 1
Notional Turnover (mn USD) 412668 1 1
Source: Focus, World Federation of Exchanges.
Productwise contribution to total derivatives turnover
0
50000
100000
150000
200000
250000
300000
IndexFutures
StockFutures
IndexOptions
StockOptions
Tu
rno
ver
(Rs
Cro
re)
6-Sep
6-Oct
Global Derivatives MarketGlobal Equity Linked Derivatives at the end June
2006 (in mn.US Dollars)
1,679,957
849,2683,419,338
109,988
444,032
280,728
US Equities
Japanese Equities
European Equities
Latin American Equities
Other Asian Equities
Other Equities
Derivatives Financial Instrument (Futures) Traded on Organized Exchange (in bn US Dollars) in 2005
564237.1380613
53091.5
7877
North America
Europe
Asia and Pacific
Other Markets
Contd…
Global Derivatives Market
100
370
0
50
100
150
200
250
300
350
400
2001 2006
$ T
rill
ion
s
Contd…
0
500000
1000000
1500000
Billion US Dollars
Indian and North American Derivatives Market
Series1 1010758.1 880
North America India
0
200000
400000
600000
Billion US Dollars
European and Indian Derivatives Market
Series1 566360 880
Europe India
0
50000
100000
150000
Billiion US Dollars
Asia & Pacific and Indian Derivatives Market
Series1 133105.6 880
Asia and Pacific India
Findings and DiscussionAfter the economic reforms of 1991, capital
market had gained momentum and it paved the way for the derivatives market in India
In India there are mainly two exchanges e.g. BSE and NSE in which NSE accounts for nearly all the exchange traded derivatives trading.
Stock futures has the maximum share of the total derivatives market and that makes India to come in highest position in trading of stock futures
In both futures and options market, as far as most traded contract is concerned, Index trading has got the maximum share.
The correlation coefficient between the turnover of cash market and the turnover of derivatives market is ρ= 0.92
Contd…The market capitalization to GDP ratio was 85.6% in March 21, 2006
Foreign exchange derivatives in India have progressed significantly over a period of three years and have increased nearly three fold
The global derivatives market has increased four times in a decade which is 30 times the size of US economy
The nominal value of interest rate derivatives has increased 24% in just 6 months to stand at about $US262 trillion
Europe has the highest share in notional amount outstanding of forwards and swaps as well as in options bought and sold followed by US
In exchange traded derivatives markets, North America has the highest share followed by Europe and then Asia
Conclusion and RecommendationsAs there is a wide variety and sophistication of
instruments, range of market participants, as well as the volume of turnover so Adequate regulatory measures are also being put in place
A few important characteristics of the Indian financial derivatives market, which relate to features like liquidity, volatility, costs, and width of the market
Derivatives market provides two important benefits to the economy: Risk management Price discovery
The two major concerns of derivatives markets are: Abuse of derivatives Negative consequences
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