Page 27 - DCOM510_FINANCIAL_DERIVATIVES

Financial Derivatives

Notes 2.2.2 Start of Derivative Trading (NSE)
The derivatives trading on the NSE commenced with S&P CNX Nifty index futures on June 12,
2000. The trading in index options commenced on June 4, 2001 and trading in options on individual
securities commenced on July 2, 2001. Single stock futures were launched on November 9, 2001.
Today, both in terms of volume and turnover, NSE is the largest derivatives exchange in India.
Currently, the derivatives contracts have a maximum of 3-month expiration cycles. Three contracts
are available for trading, with 1 month, 2 months and 3 months expiry. A new contract is
introduced on the next trading day following the expiry of the near month contract.
NSE has the following derivative products given in table 2.1:
Table 2.1: Derivative Products at NSE

Products Index Futures Index Options Futures on Options on
Individual Individual
Securities Securities
Underlying S&P CNX Nifty S&P CNX Nifty 30 securities 30 securities
Instrument stipulated by SEBI stipulated by SEBI
Type European American
Trading Cycle Maximum of Same as index Same as index Same as index
3-month trading futures futures futures
cycle. At any point
in time, there will
be 3 contract
available:
1. near month
2. mid month
3. far month
duration
Expiry Day Last Thursday of Same as index Same as index Same as index
the expiry month futures futures futures
Contract Size Permitted lot size Same as index As stipulated by As stipulated by
is 200 & multiples futures NSE (not less than NSE (not less than
thereof ` 2 lacs) ` 2 lacs)
Price Steps ` 0.05 ` 0.05
Base Price-First Previous day Theoretical value Previous day Same as index
day of trading closing Nifty of the options closing value of futures
value contract arrived at underlying
base on black- security
scholes models
Base Price- Daily settlement Daily close price Daily settlement Same as index
Subsequent price price futures
Price Bonds Operating ranges Operating ranges Operating ranges Operating ranges
are kept at + 10% for are kept at 99% are kept at + 20% for are kept at 99%
of the base price of the base price
Quantity Freeze 20,000 units or 20,000 units or Lower of 1% of Same as
greater greater marketwide individual futures
position limit
stipulated for open
position of
` 5 cores

Task The introduction of index futures trading on NSE at the beginning of 2000 was
described as India’s derivatives explosion. Much of that hoopla has died now. Contrary to
their initial promise, derivatives never really picked up in the country. What went wrong?
Elucidate with examples.

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