Derivatives in india

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Financial Derivatives in India

Karthikeyan Jawahar, CFPCM

Director – Research & ConsultingFinerva Financial Solutions Pvt Ltd


Derivatives Fundamentals

• Origin in Forward Contract– Related to Agricultural Commodities– To Preserve Profits and Marketability (Hedging)

• Over the Counter Market– One-on-one Deals (Not Transferable)– Predominantly between a bank and its client

• Exchange Tradable– Futures– Options


How Derivatives?

• Options Payoff Charts

Expectation – Share Price will GO DOWN

Expectation – Share Price will GO UP

Profit / Loss Line

Target (Exercise) Price


Dominant types

• Forwards• Futures• Options• Swaps

– All the others are combinations or modifications of the above.


Types of Players

• Hedgers• Arbitrageurs• Speculators


Indian Scene

• Was one of the World’s Largest Futures Market - Cotton Futures Trade

• Shifted predominantly to OTC post independence• Market Trading started from June 2000 with Index Futures• Index Option June 2001• Individual Securities Options from July 2001• Individual Stock Futures from July 2001• Commodity Futures started June 2000 – regular addition

of commodities even today• Forex (US$) Futures Started October 2008


Market Dynamics

• Lots sizes ranging value of in Rs.2.5 to Rs.4 lakhs

• Dominant market is NSE• Rapid Growth in Volumes– Daily Volumes of Rs.68,000 Cr– Only Rs.18,000 Cr in cash segment

• Dominated by Index Derivatives


Year Average Daily Turnover (Rs. cr.)

2009-10

67,789.66

2008-09

45,310.63

2007-08

52,153.30

2006-07

29,543.00

2005-06

19,220.00

2004-05

10,107.00

2003-04

8,388.00

2002-03

1,752.00

2001-02

410.00

2000-01

11.00


Is This For ME?

• Market Dominated by Speculators• Highly Leveraged

– Invest only the margin (Premium)Eg. Rs.300 x 50 = Rs.15,000/- only for a CE-DEC 4800 (S&P CNX Nifty)

– Contract value = Rs.4700 x 50 = Rs.235,000– If Nifty Goes to 5000, profit is Rs.300 x 50 = Rs.15,000/- => 100%

returns– If Nifty even stays at 4700, loss is Rs.300 x 50 = Rs.15,000/-. =>

Entire Capital Lost• Zero Sum Game• 80% of Day-traders Lose Money in USA• Las Vegas Effect


Zero Sum Game

• Stock market is a Non-Zero Sum Game.– Everyone can make profits. One person’s loss is not another’s

profit.• Derivatives is a Zero Sum Game.

– The profit made is another person’s loss.– My premium lands up with the market maker– My profit is paid by the market maker– The market makers are large financial corporations or the stock

market itself.– Failed Market makers are – Barrings Bank, Societe Generale,

Lehman Brothers, many more banks & hedge funds in the USA.


Questions and Sharings

• Thank You

• Mail for further queries to – Karthikeyan Jawahar– [email protected]


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Derivatives in india