Page 37 - DCOM510_FINANCIAL_DERIVATIVES

Financial Derivatives

Notes The Stock Exchange, Mumbai created history by launching the first exchange traded
financial derivatives product in India, the Sensex Futures.

Index derivatives are derivative contracts which have the index as the underlying. The
most popular index derivatives contract the world over is index futures and index options.
Exchange Traded Funds (ETFs) are innovative products, which first came into existence in
the USA in 1993. They have gained prominence over the last few years with over $300
billion invested as of end 2001 in about 360 ETFs globally.

2.8 Keywords

Chhota SENSEX: With a small or ‘mini’ market lot of 5, it allows for comparatively lower
capital outlay, lower trading costs, more precise hedging and flexible trading.
Derivatives trading and Settlement System: The Derivatives Trading at BSE takes place through a
fully automated screen-based trading platform called Derivatives Trading and Settlement System
(DTSS).

Index Derivatives: Index derivatives are derivative contracts which have the index as the
underlying.
Index Funds: An index fund is a fund that tries to replicate the index returns.

Limit Order: An order for buying or selling at a limit price or better, if possible.
Market Order: An order for buying or selling at the best price prevailing in the market at the
time of submission of the order.

National Exchange for Automated Trading (NEAT): National Exchange for Automated Trading
(NEAT) system is an anonymous order-driven system and operates on a strict price/time priority.
NIFTY: It was designed not only as a barometer of market movement but also to be a foundation
of the new world like index futures, index options and index funds.
Sensex Index: An Index is an indicator of the broad market.
Stop Loss: An order that becomes a limit order only when the market trades at a specified price.

2.9 Review Questions

1. Explain the derivatives market in India. Also discuss the important eligibility/regulatory
conditions specified by SEBI.
2. Explain the functioning of derivatives trading in BSE and NSE.

3. What are the rules of derivative trading?
4. Explain the functioning of derivatives trading in NIFTY and SENSEX. Also discuss the
NEAT Trading System.

5. Provide a comparison between NSE and BSE.
6. What are the major stock indices in India? Discuss in detail about the Sensex and S& P CNX
Nifty Indices?

7. “Besides serving as a barometer of the economy/market, the index also has other
applications in finance.” Elaborate the application of index.
8. Write down the meaning of Sensex Index.

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