Page 23 - DCOM510_FINANCIAL_DERIVATIVES

Financial Derivatives

Notes NSE, BSE, NIFTY and SENSEX. The various section and sub-section of this units will also
summarises the important eligibility/regulatory conditions specified by SEBI, comparison
between NSE and BSE, Index derivatives and Exchange Traded Funds. To make the learning
easier, we will take the help of globally recognised best practices.
Derivative products like futures and options on Indian stock markets have become important
instruments of price discovery, portfolio diversification and risk hedging in recent times. The
volumes in derivative markets, especially in the case of National Stock Exchange (NSE), have
shown a tremendous increase and presently the turnover in derivative markets is much higher
than the turnover in spot markets. At the NSE, the total turnover in the cash segment was
` 6,95,049 crore during April-September 2005. The turnover in the NSE’s derivative segment
continued to be higher than in the cash segment. It increased by 59.2 per cent to ` 17, 55,790 crore
during April-September 2005. Hence, it becomes increasingly important to know its intricacies.
The most notable of development in the history of secondary segment of the Indian stock
market is the commencement of derivatives trading in June, 2000.
The SEBI approved derivatives trading based on futures contracts at National Stock Exchange
(NSE) and Bombay Stock Exchange (BSE) in accordance with the rules/bye-laws and regulations
of the stock exchanges. To begin with, the SEBI permitted equity derivatives named stock index
futures. The BSE introduced on 9 June, 2000 stock index futures based on the sensitive Index
named BSX, and NSE started on June 12, 2000 stock index future based on its index S&P CNX
NIFTY in the name of NFUTIDX NIFTY.

2.1 Indian Derivatives Market

The Indian Derivatives markets can be broadly categorised into two markets namely; financial
derivatives markets and commodities futures markets. Financial derivatives markets deal with
the financial futures instruments like stock futures, index futures, stock options, index options,
interest rate futures, currency forwards and futures, financial swaps, etc. whereas commodity
futures markets deal with commodity instruments like agricultural products; food grains, cotton
and oil; metals like gold, silver, copper and steel and other assets like live stocks, vegetables and
so on.
Financial derivatives markets in India are regulated and controlled by the Securities and Exchange
Board of India (SEBI). The SEBI is authorised under the SEBI Act to frame rules and regulations
for financial futures trading on the stock exchanges with the objective to protect the interest of
the investors in the market.
Some of the other financial derivatives like currency options and futures and interest rate
futures are controlled by the Reserve Bank of India (RBI). These are dealt on Over-the-Counter
(OTC) markets. Financial futures on interest rate include both short-term interest rate and long-
term interest rate forwards. Currencies include options and forwards. Since the RBI is the apex
body to regulate currencies and interest rates in India, hence, financial derivatives relating to
foreign currencies and interest rates are generally come under the RBI regulation.

Notes Major stock exchanges in India, under the regulation of the SEBI, trade in two kinds
of futures products, namely equity and carry forwards.
Equity futures include stock futures, index futures, stock options and index options. Currently
these are traded on National Stock Exchange and Bombay Stock Exchange.

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