DERIVATIVES MARKETS IN INDIA

As the underlying stride towards presentation of derivatives exchange in India, SEBI set up a 24– part board of trustees under the Chairmanship of Dr. L. C. Gupta on November 18, 1996 to create suitable administrative structure for derivatives exchange in India. The board of trustees presented its details regarding March 17, 1998 suggesting that derivatives ought to be announced as “securities” so that administrative structure relevant to exchanging of “securities” could likewise administer exchanging of derivatives. Therefore, SEBI set up a gathering in June 1998 under the Chairmanship of Prof. J. R. Verma, to suggest measures for hazard control in derivatives advertise in India. The advisory group presented its report in October 1998. It worked out the operational points of interest of margining framework, strategy for charging introductory edges, participation subtle elements and total assets paradigm, store prerequisites and constant checking of positions necessities.

 

In 1999, The Securities Contract Regulation Act (SCRA) was corrected to incorporate ” derivatives ” inside the area of “securities” and administrative system was created for overseeing derivatives exchange.  In March 2000, government cancelled a three-decade old warning, which denied forward exchanging securities.

 

The trade exchange derivatives began in India in June 2000 with SEBI allowing BSE and NSE to present value derivatives portion. In any case, SEBI affirmed exchanging record futures contracts in light of CNX Nifty and BSE Sensex, which started exchanging in June 2000. Exchange in Index options started in June 2001 and options on individual stocks initiated in July 2001.  Future contracts on individual stocks began in November 2001. MCX-SX (renamed as MSEI) began exchanging every one of these items (Futures and options on Index SX40 and individual stocks) in February 2013.

 

 

RISKS IN DERIVATIVES

 

Participants in markets must comprehend that derivatives, being utilized instruments, have dangers like counterparty hazard (default by counterparty), value chance (misfortune on position in view of value move), liquidity chance (powerlessness to exit from a position), legitimate or administrative hazard (enforceability of agreements), operational hazard (misrepresentation, deficient documentation, dishonorable execution, and so on.) and may not be a fitting road for somebody of constrained assets, exchanging background and generally safe resistance. A market member ought to in this way precisely consider whether such exchanging is reasonable for him/her in view of these parameters. Showcase members, who exchange derivatives are encouraged to painstakingly read the Model Risk Disclosure Document, given by the dealer to his customers at the season of consenting to arrangement.

 

Display Risk Disclosure Document is issued by the individuals from Exchanges and contains vital data on exchanging Equities and F&O Segments of trades. Every single imminent member ought to peruse this record before exchanging on Capital Market/Cash Segment or F&O fragment of the Exchanges.

 

PRICING OF FUTURES

 

Estimating of futures relies on upon the qualities of hidden resource. There is no single approach to value prospects contracts in light of the fact that distinctive resources have diverse request and supply designs, diverse attributes and income designs. This makes it hard to plan a solitary technique for estimation of evaluating of prospects contracts. Advertise members utilize diverse models for estimating futures. Here, our talk is constrained to just two mainstream models of futures evaluating – Cash and Carry model and Expectancy model.

 

 

DERIVATIVES ADVANTAGES

 

HEDGERS

Organizations, Investing Institutions, Banks and Governments all utilization subordinate items to fence or lessen their exposures to market factors, for example, loan costs, share values, security costs, coin trade rates and ware costs. The great illustration is the rancher who offers futures contracts to bolt into a cost for conveying a product on a future date. The purchaser may be a nourishment preparing organization, which wishes to alter a cost for taking conveyance of the harvest later on. Another case is that of an organization due to get an instalment in a remote money on a future date. It goes into a forward exchange with a bank consenting to offer the remote cash and get a foreordained amount of local coin.

 

SPECULATORS/TRADERS

Derivatives are exceptionally appropriate to exchanging on the costs of items and money related resources and on key market factors, for example, loan fees, securities exchange lists and coin trade rates. It is a great deal less costly to make a theoretical position utilizing derivatives than by really exchanging the fundamental product or resource. Subsequently, the potential returns are much more prominent. An exemplary application is the merchant who trusts that expanding request or rare creation is probably going to support the cost of a product. He has two alternatives with him – first choice is to purchase and store the physical product though other choice is to go long on futures. Dealer picks the second alternative to go long futures contract on the basic resource. In the event that product cost builds, the estimation of the agreement will likewise rise and he can switch back position to book his benefit.

 

ARBITRAGE

An arbitrage is an arrangement that produces hazard free benefits by abusing a mispricing in the market. A straightforward arbitrage happens when a merchant buys an advantage efficiently in one area/trade and all the while organizes to offer it at another area/trade at a higher cost. Such open doors are probably not going to hold on for long, since arbitrageurs would surge into purchase the advantage in the shabby area and at the same time offer at the costly area, along these lines lessening the valuing crevice. As specified above, there are three noteworthy players in derivatives – Hedgers, Traders, and Arbitrageurs. Hedgers are there to fence their hazard, merchants go for broke which hedgers plan to offload from their presentation and arbitragers set up a productive connection between various markets.

Given below are the contents of EQUITY DERIVATIVES module:

 

 

CHAPTER 1:  BASICS OF DERIVATIVES

 

  • BASICS OF DERIVATIVES
  • DERIVATIVES MARKET – HISTORY AND EVOLUTION
  • INDIAN DERIVATIVES MARKET
  • MARKET PARTICIPANTS
  • VARIOUS RISKS FACED BY THE PARTICIPANTS IN DERIVATIVES
  • SIGNIFICANCE OF DERIVATIVES
  • TYPES OF DERIVATIVES MARKET

CHAPTER 2: UNDERSTANDING INDEX

 

  • INTRODUCTION TO INDEX
  • SIGNIFICANCE OF INDEX
  • TYPES OF STOCK MARKET INDICES
  • ATTRIBUTES OF AN INDEX
  • INDEX MANAGEMENT
  • MAJOR INDICES IN INDIA
  • APPLICATION OF INDICES

CHAPTER 3: INTRODUCTION TO FORWARDS AND FUTURES

 

  • INTRODUCTION TO FORWARD AND FUTURES CONTRACTS
  • PAY OFF CHARTS FOR FUTURES CONTRACT
  • FUTURES PRICING
  • USES OF FUTURES

CHAPTER 4: INTRODUCTION TO OPTIONS

 

  • BASICS OF OPTIONS
  • CHARTS FOR OPTIONS
  • BASICS OF OPTION PRICING AND OPTION GREEKS
  • USES OF OPTIONS

 

CHAPTER 5:  OPTION TRADING STRATEGIES

 

  • OPTION SPREADS
  • COVERED CALL
  • BUTTERFLY SPREAD

 

CHAPTER 6:  INTRODUCTION TO TRADING SYSTEMS

 

  • SELECTION CRITERIA OF STOCKS FOR TRADING
  • ADJUSTMENTS FOR CORPORATE ACTIONS
  • USING DAILY NEWSPAPERS TO TRACK FUTURES AND OPTIONS
  • POSITION LIMIT

 

CHAPTER 7:  INTRODUCTION TO CLEARING AND SETTLEMENT SYSTEM

 

  • CLEARING MECHANISM
  • SETTLEMENT MECHANISM
  • RISK MANAGEMENT
  • MARGINING AND MARK TO MARKET UNDER SPAN

 

CHAPTER 8:  LEGAL AND REGULATORY ENVIRONMENT

 

  • SECURITIES CONTRACTS (REGULATION) ACT, 1956
  • SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992
  • REGULATIONS IN CLEARING & SETTLEMENT AND RISK MANAGEMENT
  • MAJOR RECOMMENDATIONS OF DR. L. C. GUPTA COMMITTEE
  • MAJOR RECOMMENDATIONS OF PROF. J. R. VERMA COMMITTEE

CHAPTER 9:  ACCOUNTING AND TAXATION

 

  • TAXATION OF DERIVATIVE TRANSACTION IN SECURITIES
  • SALES PRACTICES AND INVESTORS PROTECTION SERVICES
  • UNDERSTANDING RISK PROFILE OF THE CLIENT
  • INVESTORS GRIEVANCE MECHANISM
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