Page 222 - DCOM507_STOCK_MARKET_OPERATIONS

Unit 11: Introduction to Derivatives

The days passed by and he had heard nothing. Then he received an email from the agent Notes
saying there was a problem with the boat as the previous owners were a divorced couple
who were involved in a settlement agreement in which the boat was a part of. However he
was assured the dispute would be resolved within two months.
He could pull out, but he was sure this was the boat he wanted, and didn’t really want to
go through the whole process again. The exchange rate was however showing signs of
going against him, so he wanted to find some way of stopping the rate while it was
favourable before transferring all of his money. After doing some research on the internet,
Tim found a website called ‘Currency Today’ that suggested a possible solution. On his
$100,000 boat purchase, he could put down £5000 now, and hold the exchange rate at 2.0 for
two months.

Two months later, his boat finally became available and the paperwork was sent through.
Tim paid the remaining £45,000 to the foreign exchange company and his $100,000 was
immediately sent out to the U.S bank account the agent had specified. Two weeks later, at
the port of Southampton, Tim met his new boat, saving himself a total of £6000 through a
favourable Dollars exchange rate, and forward planning.
How to keep an eye on the exchange rate, without being there?
If you need to watch the market closely for an imminent transfer, you may have found it’s
not only an arduous task, attempting to will an uncontrollable market, but also time
consuming and often impractical to fit into a working day. Fortunately, it’s possible to call
upon the expertise of a foreign exchange company, who will assign you a ‘personal account
manager’. This is basically someone who will watch the market for you, and act on your
instruction for buying and selling any amount of foreign currency you need. They also
have the ability to set a level in the market above where it may be currently (known as a
limit order) or below where it is currently (known as a stop order), to either achieve a rate
you want, or prevent you losing any more than you have to if the exchange rate falls.

Source: http://www.footballvillagespain.co.uk/buy-euros-pounds.htm

11.2 Development and Regulation of Derivative Markets in India

The SEBI Board in its meeting on June 24, 2002 considered some important issues relating to the
derivative markets, including:
Physical settlement of stock options and stock futures contracts.
Review of the eligibility criteria of stocks on which derivative products are permitted.

Use of sub-brokers in the derivative markets.
Norms for use of derivatives by mutual funds.
The recommendations of the Advisory Committee on Derivatives on some of these issues were
also placed before the SEBI Board. The Board desired that these issues be reconsidered by the
Advisory Committee on Derivatives (ACD) and requested a detailed report on the aforesaid
issues for the consideration of the Board.

In the meantime, several other important issues like the issue of minimum contract size, the
segregation of the cash and derivative segments of the exchange and the surveillance issues in
the derivatives market were also placed before the ACD for its consideration.
The Advisory Committee, therefore, decided to take this opportunity to present a comprehensive
report on the development and regulation of derivative markets including a review of the
recommendations of the L. C. Gupta Committee (LCGC).

LOVELY PROFESSIONAL UNIVERSITY 217