Page 223 - DCOM510_FINANCIAL_DERIVATIVES

Financial Derivatives

Notes
Did u know? Indian Share Market is the oldest Asian stock market incorporated in 1875.

The name of the first share trading association in India was Native Share and Stock Broker’s
Association which later came to be known as Bombay Stock Exchange. This association started
with 318 members.
The National Stock Exchange (NSE) is India’s latest exchange which commenced from June 30,
1994. The main objectives of the NSE are to provide speedy transactions, fast settlements and to
benefit the small investors who find it difficult to sell shares at BSE.
The past decade has been quite remarkable for the Securities market in India with the boom in
the economy fuelled by better banking system. It has grown exponentially and the market has
also witnessed fundamental institutional changes. There have also been significant improvements
in efficiency, transparency and safety.
The securities market has two interdependent and inseparable segments, the new issues (primary
market) and the stock (secondary) market.

14.1.1 Primary Market

The primary market provides the channel for sale of new securities. Primary market provides
opportunity to issuers of securities; government as well as corporate, to raise resources to meet
their requirements of investment and/or discharge some obligation.

Did u know? An aggregate of ` 8,561,863 million (US $ 191,755 million) was raised by the
government and the corporate sector in 2010–2011, compared to ` 10,083,446 million (US
$ 223,382 million) in 2009–2010 (a decrease of 15.09 percent). Private placement accounted
for 90.57 percent of the domestic total resource mobilisation by the corporate sector.
Resource mobilisation through Euro Issues dropped significantly by 40.87 percent to
` 94,410 million (US $ 2,114 million) in 2010–2011.

14.1.2 Secondary Market

Secondary market refers to a market where securities are traded after being initially offered to
the public in the primary market and/or listed on the Stock Exchange. Majority of the trading is
done in the secondary market. Secondary market comprises of equity markets and the debt
markets.
The secondary market enables participants who hold securities to adjust their holdings in response
to changes in their assessment of risk and return. They also sell securities for cash to meet their
liquidity needs. The secondary market has further two components, namely the over-the-counter
(OTC) market and the exchange-traded market. OTC is different from the market place provided
by the Over The Counter Exchange of India Limited. OTC markets are essentially informal
markets where trades are negotiated. Most of the trades in government securities are in the OTC
market. All the spot trades where securities are traded for immediate delivery and payment
take place in the OTC market. The exchanges do not provide facility for spot trades in a strict
sense.
Closest to spot market is the cash market where settlement takes place after some time. Trades
taking place over a trading cycle, i.e. a day under rolling settlement, are settled together after a
certain time (currently 2 working days). Trades executed on the National Stock Exchange of
India Limited (NSE) are cleared and settled by a clearing corporation which provides novation

218 LOVELY PROFESSIONAL UNIVERSITY