Page 190 - DMGT513_DERIVATIVES_AND_RISK_MANAGEMENT

Unit 14: Management of Derivatives Exposure

understanding of the functioning of the futures markets. These are essential to make evaluation Notes
of derivatives products in terms of their prices and values so that the market participants can
select them as per their objectives.
Futures are useful to the market participants only if futures prices reflect information about the
prices of the underlying assets. That is why it is essential to understand how futures markets
work and how the prices of futures contracts relate to the spot prices. In this section, we will
examine the factors that affect futures prices in general. The futures prices of different assets like
commodities, foreign exchanges and securities are influenced by various factors which are not
common for all such assets. For example, futures prices of foreign currencies may be determined
by different factors as different for determination of futures prices of food grains and vegetables.
Further, we will discuss the terms Basis and Spreads used in trading in futures markets along
with the different theories of futures pricing with their applications.

14.1 Nature of Derivative Trading

According to L C Gupta Committee Report on Derivatives, at the time of introduction of
Derivatives Contracts on any underlying the value of the contract should be at least ` 2 lakhs.
This value of ` 2 lakhs is divided by the market price of the individual stock to arrive at the
initial ‘market lot’ for it. It may be mentioned here that the only exception to this rule is the
‘mini’ contract on the Sensex (both futures and Options). The market lots are reviewed twice a
year and changes are made as per SEBI guidelines to re-align the market lots in cases where the
value has increased/decreased drastically from the value at the time of introduction/previous
review.

Quantity Freeze

The Relevant Authority may, from time to time, decide various parameters like price, quantity,
value or such other parameters for the purpose of applying price, quantity or value freeze to any
order placed by any trading member and such order shall be allowed to be processed for
execution only after ascertaining from the trading member about the genuineness of the order
and about adequacy of capital with the Clearing Agency. The Exchange or Clearing Agency
shall, on best endeavor basis, proceed to ascertain and complete this process. The Exchange or
Clearing Agency shall, however, in no way, be liable for any delay in completing the process for
execution and attendant consequences, if any.

Charges

The maximum brokerage chargeable by a trading member in relation to trades affected in the
contracts admitted to dealing on the F&O segment of NSE is fixed at 2.5%of the contract value in
case of index futures and stock futures. In case of index options and stock options it is 2.5% of the
notional value of the contract [(strike price + premium) × quantity)], exclusive of statutory
levels. The transaction charges payable to the exchange by the trading member for the trades
executed by him on the F&O segment are fixed at the rate of ` 2. per lack of turnover (0.002%)
subject to a minimum of ` 1, 00,000 per year. However for the transactions in the options sub-
segment the transaction charges are levied on the premium value at the rate of 0.05 %( each side)
instead on this strike price as levied earlier. Further to this trading members have been advised
to charge brokerage from their clients on the premium price (traded price) rather than strike
price. The trading members contribute to investor protection fund of F&O segments at the rate
of ` 10 per corer of turnover (0.0001%).

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