DISSERTATION

ON

ROLES ROLES ROLES ROLES AND EVOLUTION OF DERIVATIVES MARKET IN INDIAAND EVOLUTION OF DERIVATIVES MARKET IN INDIAAND EVOLUTION OF DERIVATIVES MARKET IN INDIAAND EVOLUTION OF DERIVATIVES MARKET IN INDIA

Submitted in Partial Fulfillment of the Requirements for the

Award of the Degree

OF

MASTER OF BUSINESS ADMINISTRATION

(ACADEMIC SESSION)

2012-2014

Under the supervision of Submitted By

Dr. RASHID USMAN ANSARI MOHAMMED JAVED ANSARI

(Assistant Professor) (12-MBAW-16)

Department of Business Administration

ALIGARH MUSLIM UNIVERSITY MURSHIDABAD CENTRE (W.B)

(2013-2014)

Date:____/____/______

CERTIFICATE

TO WHOM IT MAY CONCERN

This is to certify that Mr. MOHAMMED JAVED ANSARI, student of

Master of Business Administration (MBA) has completed his dissertation on the topic entitled ROLES AND EVOLUTION OF

DERIVATIVES MARKET IN INDIA under my supervision and

guidance.

To the best of my knowledge and belief the work is based on

the investigations made, data collected and analyzed by him

and it has not been submitted in any other University or

Institution for award of any degree or diploma.

Dr. RASHID USMAN ANSARI

Dr. Rashid Usman Ansari (Assistant Professor)

Department of Business Administration Aligarh Muslim University,

Murshidabad Centre, West Bengal

ACKNOWLEDGEMENT

As we know success does not come through individual effort, behind a success of

work there are some hands that enable one to work hard and propel to be a winner.

Although this was the individual research but during this research I have got some

invisible hands which helped me lots and without their help I cant think to cross

this milestone.

I am deeply indebted to my supervising teacher Dr. RASHID USMAN

ANSARI, ASSISTANT PROFESSOR who initiated and sustained my interest in this

area of study and guided me throughout my inquiry. It is only his constructive

thoughts and actions that helped me to complete this research successfully within

the time frame. May I express my heartfelt gratitude to my guide .DR.RASHID

USMAN ANSARI.

I also acknowledge my heartfelt gratitude for my Parents and Friends for their

moral support.

I am also grateful to Aligarh Muslim University for providing me a platform and

opportunity to do work in the field of management.

I would also like to give thanks our entire faculty member who coordinated well to

me beside my dissertation work.

Above all, I thank ALLAH, the Almighty, for His blessings on me for the successful

completion of this study.

( MOHAMMED JAVED ANSARI)

DECLARATION

I, MOHAMMED JAVED ANSARI hereby declared that I have prepared this project

report-ROLES AND EVOLUTION OF DERIVATIVES MARKET IN INDIA in partial

fulfillment award of Master of Business Administration (MBA) from Aligarh Muslim

University Murshidabad Centre under the guidance of DR. RASHID USMAN

ANSARI. This project is compiled and submitted by me is my original framework. The

findings in the report are based on the data collected by me while preparing this report. I

have not copied the data from any previous report.

MOHAMMED JAVED ANSARI 12MBAW-16 GG-9400

TABLE OF CONTENTS

PARTICULARS PAGE NO. CERTIFICATE ACKNOWLEDGEMENT DECLARATION EXECUTIVE SUMMARY

CHAPTER 1 INTRODUCTION TO DERIVATIVES

2-19

Introduction to Derivatives 2-5 Underlying Markets 5 Forms/Instruments of Derivatives Market 6-10 Terminologies of Derivatives 11-13 Moneyness of Options 13-14 Regulatory Framework 14-16 Application of Derivatives 17-19 CHAPTER 2 LITERATURE REVIEW

21-23

CHAPTER 3 RESEARCH METHODOLOGY

25-26

CHAPTER 4 TRADING MECHAMISM IN DERIVATIVES MARKET (INDIA)

28-36

F & O trading system 28-31 Traders workstation 32 Derivatives Trading (With NSEL) 32-36 CHAPTER 5 ROLES OF DERIVATIVES MARKET (INDIA)

38-40

CHAPTER 6 EVOLUTION OF DERIVATIVES MARKET

42-57

Evolution of Derivatives Market in India 42 History of Derivatives 42-44 Historical Developments of Derivatives Market in India 44-48 Risk associated with Derivatives Market 49-50 Development and Growth of Derivative Markets in India 50-53 CHAPTER 6 FINDINGS AND CONCLUSION

55-57

CHAPTER 7 BIBLIOGRAPHY

60-61

EXECUTIVE SUMMARY

A derivative is a product whose value is derived from the value of one or more underlying

variables or assets in a contractual manner. The underlying asset can be equity, forex, commodity or any other asset. They may take the form of forwards, futures, option or swap. The

three main players in the derivatives market consist of hedgers, speculators and arbitrageurs. In India, we have index futures as the first step towards building a more liquid market.

In India, NSE has introduced index futures contract based on S&P CNX Nifty. The S&P CNX

Nifty futures are traded on NSE as one, two and three-month contracts. Whereas BSE has introduced index futures contract based on BSE-30 Sensex. They are contracts whose underlying is the value of the index at any point in time. At the time of delivery, the trade is settled in cash. Trading in index futures is not just to hedge market risk; it can well be a source of profit through arbitrage. There are arbitrage opportunities in index futures, just as in stocks.

Financial innovation that led to the issuance and trading of derivative products has been an

important boost to the development of financial markets. While the benefits stemming from the economic functions performed by derivative securities have been discussed and proven by academics, there is increasing concern within the financial community that the growth of the derivatives markets - whether standardized or not - destabilizes the economy.

The Derivatives Committee strongly favors the introduction of financial derivatives in order to provide the facility for hedging in the most cost-efficient way against market risk. This is an important economic purpose. At the same time, it recognizes that in order to make hedging possible, the market should also have speculators who are prepared to be counter-parties to hedgers. And if sufficient numbers of hedgers with genuine hedging needs are not there and we still introduce futures market, then we would end up having only speculators. Such a futures market would be devoid of any connection with the cash or the spot market and would have its

own life full of speculation and bubbles. So now the question arises, do Indian investors need futures trading? If trading in index futures is advocated on the basis of hedging needs of investors, one must assess the market demand and supply source for trading in the market risk before introducing the index futures.

The desirability of successful derivatives, such as futures trading, depends crucially on the solidity and maturity of cash markets in underlying securities. To make cash markets robust and effective, first let us put in place the mechanism of margin trading, short sale, dematerialized

settlement and electronic transfer of funds among market participants.

TABLE OF CONTENTS

CERTIFICATE

ACKNOWLEDGEMENT

DECLARATION

TABLE OF CONTENTS

CHAPTER 1: INTRODUCTION TO DERIVATIVES 2-19

1.1 Introduction to Derivatives 2-5

1.2 Underlying Markets 5

1.3 Forms of Derivatives Market 6-10

1.4 Terminologies of Derivatives 11-13

1.5 Moneyness of Options 13-14 1.6 Regulatory Framework 14-16 1.7 Application of Derivatives 17-19

CHAPTER 2: LITERATURE REVIEW 21-23

CHAPTER 3: RESEARCH METHODOLOGY 25-26

3.1 Research Design and Methods of collection Data 25

3.2 Objectives of Study 26

CHAPTER 4: TRADING MECHANISM IN DERIVATIVES MARKET 28-36

(INDIA)

4.1 F & O trading system 28-31

4.2 Traders workstation 32

4.3 Derivatives Trading (With NSEL) 32-36

CHAPTER 5: ROLES OF DERIVATIVES MARKET (INDIA) 38-40

CHAPTER 6: EVOLUTION OF DERIVATIVES MARKET 42-53

6.1 Evolution of Derivatives Market in India 42

6.2 History of Derivatives 42-44

6.3 Historical Developments of Derivatives Market in India 44-48

6.4 Risk associated with Derivatives Market 49-50

6.5 Development and Growth of Derivative Markets in India 50-53

CHAPTER 7: FINDINGS AND CONCLUSION 55-57

7.1 Findings 55

7.2 Conclusion 56-58

CHAPTER 8: BIBLIOGRAPHY 60-61