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Stock Market Operations

Notes In addition, the existing system, although futures style, does not ask for any margins from the
clients. Given the volatility of the equities market in India, this system has become quite prone
to systemic collapse. This was evident in the MS Shoes scandal. At the time of default taking
place on the BSE, the defaulting member of the BSE Mr. Zaveri had a position close to ` 18 crore.
However, due to the default, BSE had to stop trading for a period of three days. At the same time,
the Barings Bank failed on the Singapore Monetary Exchange (SIMEX) for the exposure of more
than US $ 20 billion (more than ` 84,000 crore) with a loss of approximately US $ 900 million
(around ` 3,800 crore). Although, the exposure was so high and even the loss was also very big
compared to the total exposure on MS Shoes for BSE of ` 18 crore, the SIMEX had taken so much
margins that they did not stop trading for a single minute.

Self Assessment
State whether the following statements are true or false:

11. Derivatives decrease speculation and do not serve any economic purpose.
12. Numerous studies of derivatives activity have led to a broad consensus, both in the private
and public sectors that derivatives provide numerous and substantial benefits to the users.

13. Derivatives are a high-cost, ineffective method for users to hedge and manage their
exposures to interest rates, commodity prices, or exchange rates.
14. By providing investors and issuers with a wider array of tools for managing risks and
raising capital, derivatives improve the allocation of credit and the sharing of risk in the
global economy, lowering the cost of capital formation and stimulating economic growth.
15. Global markets for trade and finance have become more integrated.

Case Study Airline Fuel Costs: Airlines Hedge Oil Exposures

01 July 2008
Colin Packham analyses whether derivatives are saving the airline industry from the
soaring cost of oil
With oil prices increasing to new highs everyone is feeling the pinch. But, even more than
most, the travel and transport industries are being dealt blow after blow as oil prices
continue their upward trend. However, while the rising cost of fuel presents a danger to
many in the industry, derivatives could come to the rescue.
But to what extent has the aviation industry embraced the use of derivatives to offset the
oil market highs?

The Fundamentals
Oil has been the subject of record settlement highs throughout 2008, culminating in yet
another peak reported on June 27 when New York Mercantile Exchange (Nymex)’s August
WTI hit a record $142.26 a barrel before easing back to close at $141.64. Intercontinental
Exchange (ICE) also recorded a new settlement high in its August Brent contract, which
surged to $142.13 a barrel, before edging back to $141.10.
This rise in the price of oil has been nothing short of disastrous for the airline industry.
Michael Waldron, oil markets analyst at Lehman Brothers says: “High oil prices are the
number one enemy of airlines.” Meanwhile, International Air Transport Association says
the global airline industry may lose a record $6.1 billion this year.
Contd...

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