85594965 indian derivative market

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INDEXCH 1: Introduction about derivatives

1.1 Derivatives in India

1.2 Development of derivative market in India

1.3 Types of traders in a derivative market

1.4 Risk characteristics of derivative

1.5 Factors contributing to growth of derivatives

CH 2: Types of derivatives

2.1 Future

2.2 Option2.3 Futures vs. Forward

2.4 Swap

2.5 Swaption

2.6 Other types

CH 3: Structure of derivative market in India

CH 4: Benefits of derivatives

CH 5: Exchange traded derivatives on NSE

CH 6: Introduction about derivatives on BSE

CH 7: Derivatives in commodity

CH 8: Research methodology

CH 9: Objectives of study

CH 10: Business growth in derivative (NSE)

CH 11: Findings and suggestions

Bibliography


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CHAPTER 1

INTRODUCTION ABOUT DERIVATIVES

The term Derivative indicates that it has no independent value. Its value is entirely derived

form the value of the underlying asset. The underlying asset can be securities, Commodities,

bullion, currency, Stock Index, live stock or anything else.

The term Derivative has been defined in Securities Contracts (Regulations) Act, as :-

A Contract which derives its value form the prices or index of prises, of underlying

Securities.

There are two distinct groups of Derivative:-

Over-the-counter (OTC) derivatives are contracts that are traded (and privatelynegotiated) directly between two parties, without going through an exchange or other

intermediary. Products such as swaps, forward rate agreements, and exotic options are

almost always traded in this way. The OTC derivatives market is huge.

Exchange-traded derivatives are those derivatives products that are traded viaDerivatives exchanges. A derivatives exchange acts as an intermediary to all transactions,

and takes Initial margin from both sides of the trade to act as a guarantee.

2.1 DERIVATIVES IN INDIAExchange traded financial derivatives were introduced in India in June 2000 at the two major

stock exchanges, NSE and BSE. There are various contracts currently traded on these exchanges.

National Commodity & Derivatives Exchange Limited (NCDEX) started its operations in

December 2003, to provide a platform for commodities trading.

The derivatives market in India has grown exponentially, especially at NSE. Stock Futures are

the most highly traded contracts on NSE accounting for around 55% of the total turnover of

derivatives at NSE, as on April 13, 2005.

A.} EQUITY DERIVATIVES IN INDIA

In the decade of 1990s revolutionary changes took place in the institutional infrastructure in

Indias equity market. It has led to wholly new ideas in market design that has come to dominate

the market. These new institutional arrangements, coupled with the widespread knowledge and
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orientation towards equity investment and speculation, have combined to provide an

environment where the equity spot market is now Indias most sophisticated financial market.

One aspect of the sophistication of the equity market is seen in the levels of market liquidity that

are now visible. The market impact cost of doing program trades of Rs.5 million at the NIFTY

index is around 0.2%. This state of liquidity on the equity spot market does well for the market

efficiency, which will be observed if the index futures market when trading commences. Indias

equity spot market is dominated by a new practice called Futures Style settlement or account

period settlement. In its present scene, trades on the largest stock exchange (NSE) are netted

from Wednesday morning till Tuesday evening, and only the net open position as of Tuesday

evening is settled. The future style settlement has proved to be an ideal launching pad for the

skills that are required for futures trading.

The market capitalisation of the NSE-50 index is Rs.2.6 trillion. This is six times larger than the

market capitalisation of the largest stock and 500 times larger than stocks such as Sterlite, BPL

and Videocon. If market manipulation is used to artificially obtain 10% move in the price of a

stock with a 10% weight in the NIFTY, this yields a 1% in the NIFTY. Cash settlements, which

is universally used with index derivatives, also helps in terms of reducing the vulnerability to

market manipulation, in so far as the short-squeeze is not a problem. Thus, index derivatives

are inherently less vulnerable to market manipulation.

A good index is a sound trade of between diversification and liquidity. In India the traditional

index- the BSEsensitive index was created by a committee of stockbrokers in 1986. It predates

a modern understanding of issues in index construction and recognition of the pivotal role of the

market index in modern finance. The flows of this index and the importance of the market index

in modern finance, motivated the development of the NSE-50 index in late 1995. Many mutual

funds have now adopted the NIFTY as the benchmark for their performance evaluation efforts. If

the stock derivatives have to come about, the should restricted to the most liquid stocks.

Membership in the NSE-50 index appeared to be a fair test of liquidity. The 50 stocks in the

NIFTY are assuredly the most liquid stocks in India.

B.} COMMODITY DERIVATIVES TRADING IN INDIA

In India, the futures market for commodities evolved by the setting up of the Bombay Cotton

Trade Association Ltd., in 1875. A separate association by the name "Bombay Cotton Exchange

Ltd was established following widespread discontent amongst leading cotton mill owners and


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merchants over the functioning of the Bombay Cotton Trade Association. With the setting up of

the Gujarati Vyapari Mandali in 1900, the futures trading in oilseed began. Commodities like

groundnut, castor seed and cotton etc began to be exchanged.

After the economic reforms in 1991 and the trade liberalization, the Govt. of India appointed in

June 1993 one more committee on Forward Markets under Chairmanship of Prof. K.N. Kabra.

The Committee recommended that futures trading be introduced in basmati rice, cotton, raw jute

and jute goods, groundnut, rapeseed/mustard seed, cottonseed, sesame seed, sunflower seed,

safflower seed, copra and soybean, and oils and oilcakes of all of them, rice bran oil, castor oil

and its oilcake, linseed, silver and onions. All over the world commodity trade forms the major

backbone of the economy. In India, trading volumes in the commodity market have also seen a

steady rise - to Rs 5,71,000 crore in FY05 from Rs 1,29,000 crore in FY04. In the current fiscal

year, trading volumes in the commodity market have already crossed Rs 3,50,000 crore in the

first four months of trading. Some of the commodities traded in India include Agricultural

Commodities like Rice Wheat, Soya, Groundnut, Tea, Coffee, Jute, Rubber, Spices, Cotton,

Precious Metals like Gold & Silver, Base Metals like Iron Ore, Aluminium, Nickel, Lead, Zinc

and Energy Commodities like crude oil, coal. Commodities form around 50% of the Indian GDP.

Though there are no institutions or banks in commodity exchanges, as yet, the market for

commodities is bigger than the market for securities. Commodities market is estimated to be

around Rs 44,00,000 Crores in future. Assuming a future trading multiple is about 4 times the

physical market, in many countries it is much higher at around 10 times.

2.2 DEVELOPMENT OF DERIVATIVE MARKET IN INDIA

The first step towards introduction of derivatives trading in India was the promulgation of the

Securities Laws (Amendment) Ordinance, 1995, which withdrew the prohibition on options in

securities. The market for derivatives, however, did not take off, as there was no regulatory

framework to govern trading of derivatives. SEBI set up a 24member committee under the

Chairmanship of Dr.L.C.Gupta on November 18, 1996 to develop appropriate regulatory

framework for derivatives trading in India. The committee submitted its report on March 17,

1998 prescribing necessary preconditions for introduction of derivatives trading in India. The

committee recommended that derivatives should be declared as securities so that regulatory

framework applicable to trading of securities could also govern trading of securities. SEBI also

set up a group in June 1998 under the Chairmanship of Prof. J. R. Varma, to recommend


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measures for risk containment in derivatives market in India. The report, which was submitted in

October 1998, worked out the operational details of margining system, methodology for charging

initial margins, broker net worth, deposit requirement and realtime monitoring requirements.

The Securities Contract Regulation Act (SCRA) was amended in December 1999 to include

derivatives within the ambit of securities and the regulatory framework was developed for

governing derivatives trading. The act also made it clear that derivatives shall be legal and valid

only if such contracts are traded on a recognized stock exchange, thus precluding OTC

derivatives. The government also rescinded in March 2000, the three decade old notification,

which prohibited forward trading in securities. Derivatives trading commenced in India in June

2000 after SEBI granted the final approval to this effect in May 2001. SEBI permitted the

derivative segments of two stock exchanges, NSE and BSE, and their clearing house/corporation

to commence trading and settlement in approved derivatives contracts. To begin with, SEBI

approved trading in index futures contracts based on S&P CNX Nifty and BSE30 (Sense)

index. This was followed by approval for trading in options based on these two indexes and

options on individual securities.

The trading in BSE Sensex options commenced on June 4, 2001 and the trading in options on

individual securities commenced in July 2001. Futures contracts on individual stocks were

launched in November 2001. The derivatives trading on 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. The index futures and options contract on NSE are based on

S&P CNX Trading and settlement in derivative contracts is done in accordance with the rules,

byelaws, and regulations of the respective exchanges and their clearing house/corporation duly

approved by SEBI and notified in the official gazette. Foreign Institutional Investors (FIIs) are

permitted to trade in all Exchange traded derivative products.


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2.3 TYPES OF TRADERS IN A DERIVATIVE MARKET

TRADING PARTICIPANTS:HEDGERS:

Hedgers are those who protect themselves from the risk associated with the price of an asset by

using derivatives. A person keeps a close watch upon the prices discovered in trading and when

the comfortable price is reflected according to his wants, he sells futures contracts.

Take an example: A Hedger pay more to the farmer or dealer of a produce if its prices go up.

For protection against higher prices of the produce, he hedge the risk exposure by buying enough

future contracts of the produce to cover the amount of produce he expects to buy. Since cash and

futures prices do tend to move in tandem, the futures position will profit if the price of the

produce raise enough to offset cash loss on the produce.

SPECULATORS:Speculators are some what like a middle man. They are never interested in actual owing the

commodity. They just buy from one end and sell it to the other in anticipation of future price

movements. They actually bet on the future movement in the price of an asset.

They are the second major group of futures players. These participants include independent floor

traders and investors. They handle trades for their personal clients or brokerage firms.

Buying a futures contract in anticipation of price increases is known as going long. Sellin g a

futures contract in anticipation of a price decrease is known as going short.

ARBITRATORS:

In commodity market Arbitrators are the person who takes the advantage of a discrepancy

between prices in two different markets. If he finds future prices of a commodity edging out with

the cash price, he will take offsetting positions in both the markets to lock in a profit. Moreover

the commodity futures investor is not charged interest on the difference between margin and the

full contract value.

INTERMEDIARY PARTICIPANTS :

BROKERS:

For any purchase and sale, brokers perform an important function of bringing buyers and sellers

together. A non-member has to deal in futures exchange through member only. This provides a

member the role of a broker. All transactions are done in the name of the member who is also

responsible for final settlement and delivery. Members can attract involvement of other by


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providing efficient services at a reasonable cost. In the absence of well functioning broking

houses, the futures exchange can only function as a club.

MARKET MAKERS AND JOBBERS:

Even in organised futures exchange, every deal cannot get the counter party immediately. It is

here the jobber or market maker plays his role. They are the members of the exchange who takes

the purchase or sale by other members in their books and then square off on the same day or the

next day. They quote their bid-ask rate regularly. The difference between bid and ask is known

as bid-ask spread. When volatility in price is more, the spread increases since jobbers price risk

increases. In less volatile market, it is less. Generally, jobbers carry limited risk. Even by

incurring loss, they square off their position as early as possible. Since they decide the market

price considering the demand and supply of the commodity or asset, they are also known as

market makers. A buyer or seller of a particular futures or option contract can approach that

particular jobbing counter and quotes for executing deals. In automated screen based trading best

buy and sell rates are displayed on screen, so the role of jobber to some extent.

INSTITUTIONAL FRAMEWORK :

EXCHANGE:

Exchange provides buyers and sellers of futures and option contract necessary infrastructure to

trade. Exchange has trading pit where members and their representatives assemble during a fixed

trading period and execute transactions. In online trading system, exchange provides access to

members and makes available real time information online and also allows them to execute their

orders. For derivative market to be successful exchange plays a very important role.

CLEARING HOUSE:

A clearing house performs clearing of transactions executed in futures and option exchanges.

Clearing house may be a separate company or it can be a division of exchange. It guarantees the

performance of the contracts and for this purpose clearing house becomes counter party to each

contract. Transactions are between members and clearing house. Clearing house ensures

solvency of the members by putting various limits on him. Further, clearing house devises agood managing system to ensure performance of contract even in volatile market.

CUSTODIAN / WARE HOUSE:

Futures and options contracts do not generally result into delivery but there has to be smooth and

standard delivery mechanism to ensure proper functioning of market. In stock index futures and

options which are cash settled contracts, the issue of delivery may not arise, but it would be there


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in stock futures or options, commodity futures and options and interest rates futures. In the

absence of proper custodian or warehouse mechanism, delivery of financial assets and

commodities will be a cumbersome task and futures prices will not reflect the equilibrium price

for convergence of cash price and futures price on maturity, custodian and warehouse are very

relevant.

BANK FOR FUND MOVEMENTS:

Futures and options contracts are daily settled for which large fund movement from members to

clearing house and back is necessary. Bank makes daily accounting entries in the accounts of

members and facilitates daily settlement a routine affair. This reduces possibility of any fraud or

misappropriation of fund by any market intermediary.

REGULATORY FRAMEWORK:

A regulator creates confidence in the market besides providing Level playing field to all

concerned, for foreign exchange and money market, RBI is the regulatory authority so it can take

initiative in starting futures and options trade in currency and interest rates. For capital market,

SEBI is playing a lead role, along with physical market in stocks; it will also regulate the stock

index futures to be started very soon in India. The approach and outlook of regulator directly

affects the strength and volume in the market. For commodities, Forward Market Commission is

working for settling up National Commodity Exchange.

2.4 Risk Characteristics of Derivatives

The main types of risk characteristics associated with derivatives are:

Basis RiskThis is the spot (cash) price of the underlying asset being hedged, less the price of the

derivative contract used to hedge the asset.

Credit RiskCredit risk or default risk evolves from the possibility that one of the parties to a

derivative contract will not satisfy its financial obligations under the derivative contract. a

Market Risk This is the potential financial loss due to adverse changes in the fair value of a

derivative. Market risk encompasses legal risk, control risk, and accounting risk.


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2.5 FACTORS CONTRIBUTING TO THE GROWTH OF DERIVATIVES

A.} PRICE VOLATILITY

Prices are generally determined by market forces. In a market, consumers have demand and

producers or suppliers have supply, and the collective interaction of demand and supply in the

market determines the price. These factors are constantly interacting in the market causing

changes in the price over a short period of time. Such change in the price is known as price

volatility. This has three factors: the speed of price changes, the frequency of price changes and

the magnitude of price changes.

B.} GLOBALISATION OF MARKETS

Earlier, managers had to deal with domestic economic concerns; what happened in other part of

the world was mostly irrelevant. Now globalisation has increased the size of markets and as

greatly enhanced competition .it has benefited consumers who cannot obtain better quality goodsat a lower cost. It has also exposed the modern business to significant risks and, in many cases,

led to cut profit margins. Globalisation of industrial and financial activities necessitates use of

derivatives to guard against future losses. This factor alone has contributed to the growth of

derivatives to a significant extent.

C.} TECHNOLOGICAL ADVANCES

A significant growth of derivative instruments has been driven by technological break through.

Advances in this area include the development of high speed processors, network systems and

enhanced method of data entry. Improvement in communications allow for instantaneous world

wide conferencing, Data transmission by satellite. These facilitated the more rapid movement of

information and consequently its instantaneous impact on market price.

D.} ADVANCES IN FINANCIAL THEORIES

Advances in financial theories gave birth to derivatives. Initially forward contracts in its

traditional form, was the only hedging tool available. Option pricing models developed by Black

and Scholes in 1973 were used to determine prices of call and put options. In late 1970s, work

of Lewis Edeington extended the early work of Johnson and started the hedging of financial

price risks with financial futures. The work of economic theorists gave rise to new products for

risk management which led to the growth of derivatives in financial markets.


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CHAPTER 3

TYPES OF DERIVATIVES

Exchange Traded Derivatives Over The Counter Derivatives

National Stock Exchange Bombay Stock Exchange National Commodity &

Derivative Exchange

Index Future Index option Stock option Stock future Interest rate future

TYPES OF DERIVATIVES

Derivatives

Future Option Forward Swaps


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3.1 FUTURE CONTRACT

In finance, a futures contract is a standardized contract, traded on a futures exchange, to buy or

sell a certain underlying instrument at a certain date in the future, at a pre-set price. The future

date is called the delivery date orfinal settlement date. The pre-set price is called the futures

price. The price of the underlying asset on the delivery date is called the settlement price. The

settlement price, normally, converges towards the futures price on the delivery date.

A futures contract gives the holder the right and the obligation to buy or sell, which differs

from an options contract, which gives the buyer the right, but not the obligation, and the option

writer (seller) the obligation, but not the right. To exit the commitment, the holder of a futures

position has to sell his long position or buy back his short position, effectively closing out the

futures position and its contract obligations. Futures contracts are exchange traded derivatives.The exchange acts as counterparty on all contracts, sets margin requirements, etc.

BASIC FEATURES OF FUTURE CONTRACT

1.Standardization:

Futures contracts ensure theirliquidityby being highly standardized, usually by specifying:

Theunderlying. This can be anything from a barrel of sweet crude oil to a short terminterest rate.

The type of settlement, either cash settlement or physical settlement. The amount and units of the underlying asset per contract. This can be the notional

amount of bonds, a fixed number of barrels of oil, units of foreign currency, the notional

amount of the deposit over which the short term interest rate is traded, etc.

The currency in which the futures contract is quoted. The grade of the deliverable. In case of bonds, this specifies which bonds can be

delivered. In case of physical commodities, this specifies not only the quality of the

underlying goods but also the manner and location of delivery. The delivery month.

The last trading date. Other details such as the tick, the minimum permissible price fluctuation.
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2.Margin:

Although the value of a contract at time of trading should be zero, its price constantly fluctuates.

This renders the owner liable to adverse changes in value, and creates a credit risk to the

exchange, who always acts as counterparty. To minimize this risk, the exchange demands that

contract owners post a form ofcollateral, commonly known as Margin requirements are waivedor reduced in some cases forhedgers who have physical ownership of the covered commodity or

spread traders who have offsetting contracts balancing the position.

Initial margin: is paid by both buyer and seller. It represents the loss on that contract, as

determined by historical price changes, which is not likely to be exceeded on a usual day's

trading. It may be 5% or 10% of total contract price.

Mark to market Margin: Because a series of adverse price changes may exhaust the initial

margin, a further margin, usually called variation or maintenance margin, is required by the

exchange. This is calculated by the futures contract, i.e. agreeing on a price at the end of each

day, called the "settlement" ormark-to-marketprice of the contract.

To understand the original practice, consider that a futures trader, when taking a position,

deposits money with the exchange, called a "margin". This is intended to protect the exchange

against loss. At the end of every trading day, the contract is marked to its present market value. If

the trader is on the winning side of a deal, his contract has increased in value that day, and the

exchange pays this profit into his account. On the other hand, if he is on the losing side, the

exchange will debit his account. If he cannot pay, then the margin is used as the collateral from

which the loss is paid.

3.Settlement

Settlement is the act of consummating the contract, and can be done in one of two ways, as

specified per type of futures contract:

Physical delivery - the amount specified of the underlying asset of the contract isdelivered by the seller of the contract to the exchange, and by the exchange to the buyers

of the contract. In practice, it occurs only on a minority of contracts. Most are cancelled

out by purchasing a covering position - that is, buying a contract to cancel out an earlier

sale (covering a short), or selling a contract to liquidate an earlier purchase (covering a

long).

Cash settlement - a cash payment is made based on the underlying reference rate, suchas a short term interest rate index such as Euribor, or the closing value of a stock market
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index. A futures contract might also opt to settle against an index based on trade in a

related spot market.

Expiry is the time when the final prices of the future are determined. For many equity index and

interest rate futures contracts, this happens on the Last Thrusday of certain trading month. On

this day the t+2 futures contract becomes the t forward contract.

Pricing of future contract

In a futures contract, for no arbitrage to be possible, the price paid on delivery (the forward

price) must be the same as the cost (including interest) of buying and storing the asset. In other

words, the rational forward price represents the expected future value of the underlying

discounted at the risk free rate. Thus, for a simple, non-dividend paying asset, the value of the

future/forward, , will be found by discounting the present value at time to maturity

by the rate of risk-free return .

This relationship may be modified for storage costs, dividends, dividend yields, and convenience

yields. Any deviation from this equality allows for arbitrage as follows.

In the case where the forward price is higher:

1. The arbitrageur sells the futures contract and buys the underlying today (on the spotmarket) with borrowed money.

2. On the delivery date, the arbitrageur hands over the underlying, and receives the agreedforward price.

3. He then repays the lender the borrowed amount plus interest.4. The difference between the two amounts is the arbitrage profit.

In the case where the forward price is lower:

1. The arbitrageur buys the futures contract and sells the underlying today (on the spotmarket); he invests the proceeds.

2. On the delivery date, he cashes in the matured investment, which has appreciated at therisk free rate.

3. He then receives the underlying and pays the agreed forward price using the maturedinvestment. [If he was short the underlying, he returns it now.]

4. The difference between the two amounts is the arbitrage profit.
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3.2 OPTION CONTRACT

Options Contract is a type of Derivatives Contract which gives the buyer/holder of the contract

the right (but not the obligation) to buy/sell the underlying asset at a predetermined price within

or at end of a specified period. The buyer / holder of the option purchase the right from the

seller/writer for a consideration which is called the premium. The seller/writer of an option is

obligated to settle the option as per the terms of the contract when the buyer/holder exercises his

right. The underlying asset could include securities, an index of prices of securities etc.

COMMON TYPES OF OPTION CONTRACT

Call options:

A call option is an option to purchase, which entitles the holder to buy a stated security at a

price and time agreed. Call designates that you are electing to purchase when you exercise your

right.

Put options

Contrary to purchase rights the investor may also buy options with a right to sell. A put option

gives the holder the right to sell a stated security at a price and time agreed. Put refers to the

placing or disposing of something, i.e. selling a security.

FEATURES OF OPTION CONTRACT

The following is specified in the option contract:

the asset to be traded (referred to as the underlying asset) the time when the trade is to take place (the expiry date) the price that must be paid (the strike price) if the option holder exercises his purchase

right

An example of a call option would see the buyer has the right, but not the obligation, to buy 100

shares at the price of 80 before or on the expiry date. If the market price of the shares on the day

of expiry is 105, a capital gain of 25 per share can be achieved if the purchase right is exercised.

If, on the other hand, the market price is 70, the right to buy shares at the strike price of 80 will

not be used. For this right a price is payable, the "option premium".


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SETTLEMENT

As in the case of futures contracts, option contracts can be also be settled by delivery of the

underlying asset or cash. However, unlike futures cash settlement in option contract entails

paying/receiving the difference between the strikes price/exercise price and the price of the

underlying asset either at the time of expiry of the contract or at the time of exercise / assignment

of the option contract.

PRICING OF OPTION CONTRACT

The Strike Price:

The strike price for an option is the price at which the underlying stock is bought or sold if the

option is exercised. Strike prices are generally set at narrow intervals to be close to the market

price of the underlying shares. Strike prices are set at the following intervals: 2 1/2-points when

the strike price to be set is $25 or less; 5-points when the strike price to be set is over $25

through $200; and 10-points when the strike price to be set is over $200. Option prices can be

obtained quickly and easily at any time on nasdaq-amex.com. Additionally, closing option prices

(premiums) for exchange-traded options are published daily in many newspapers.

New strike prices are introduced when the price of the underlying security rises to the highest, or

falls to the lowest, strike price currently available. The strike price, a fixed specification of an

option contract, should not be confused with the premium, the price at which the contract trades,

which fluctuates daily.

The relationship between the strike price and the actual price of a stock determines, in the unique

language of options, whether the option is in-the-money, at-the-money or out-of-the-money.

In the money: An in-the-money Call option strike price is below the actual stock price. Example:

An investor purchases a Call option at the $95 strike price for WXYZ that is currently trading at

$100. The investors position is in the money by $5.


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An in-the-money Put option strike price is above the actual stock price. Example: An investor

purchases a Put option at the $110 strike price for WXYZ that is currently trading at $100. This

investor position is In-the-money by $10.

At-the-money: For both Put and Call options, the strike and the actual stock prices are the same.

Out-of-the-money: An out-of-the-money Call option strike price is above the actual stock price.

Example: An investor purchases an out-of-the-money Call option at the strike price of $120 of

ABCD that is currently trading at $105. This investors position is out-of-the-money by $15.

An out-of-the-money Put option strike price is below the actual stock price. Example: An

investor purchases an out-of-the-money Put option at the strike price of $90 of ABCD that is

currently trading at $105. This investors position is out of the money by $15.

The Premium:

The premium is the price a buyer pays the seller for an option. The premium is paid up front at

purchase and is not refundable - even if the option is not exercised. Premiums are quoted on a

per-share basis. Thus, a premium of 7/8 represents a premium payment of $87.50 per option

contract ($0.875 x 100 shares). The amount of the premium is determined by several factors - the

underlying stock price in relation to the strike price (intrinsic value), the length of time until the

option expires (time value) and how much the price fluctuates (volatility value).

Intrinsic value + Time value + Volatility value = Price of Option

For example: An investor purchases a three month Call option at a strike price of $80 for a

volatile security that is trading at $90.

Intrinsic value = $10

Time value = since the Call is 90 days out, the premium would add moderately for time value.

Volatility value = since the underlying security appears volatile, there would be value added to

the premium for volatility.

Top three influencing factors affecting options prices:

The underlying stockprice in relation to the strike price (intrinsic value)

The length of time until the option expires (time value)And how much the price fluctuates (volatility value).

Other factors that influence option prices (premiums) including:

the quality of the underlying stock the dividend rate of the underlying stock


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prevailing market conditions supply and demand for options involving the underlying stock Prevailing interest rates.

The premium of an option has two main components: intrinsic value and time value.

Intrinsic Value (Calls): -

When the underlying security's price is higher than the strike price a call option is said to be "in-

the-money."

Intrinsic Value (Puts): -

If the underlying security's price is less than the strike price, a put option is "in-the-money." Only

in-the-money options have intrinsic value, representing the difference between the current price

of the underlying security and the option's exercise price, or strike price.

Time Value:

Prior to expiration, any premium in excess of intrinsic value is called time value. Time value is

also known as the amount an investor is willing to pay for an option above its intrinsic value, in

the hope that at some time prior to expiration its value will increase because of a favorable

change in the price of the underlying security. The longer the amount of time for market

conditions to work to an investor's benefit, the greater the time value.


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3.3 Futures vs. Forwards Contract

While futures and forward contracts are both a contract to trade on a future date, key differencesinclude:-

1. Futures are always traded on an exchange, whereas forwards always trade over-the-counter

2. Futures are highly standardized, whereas each forward is unique.3. The price at which the contract is finally settled is different: -

Futures are settled at the settlement price fixed on the last trading date of thecontract (i.e. at the end)

Forwards are settled at the forward price agreed on the trade date (i.e. at the start)4. The credit risk of futures is much lower than that of forwards: - Traders are not subject to credit risk due to the role played by the clearing house. The

day's profit or loss on a futures position is exchanged in cash every day (known as a

'margin payment'). After this the credit exposure is again zero.

The profit or loss on a forward contract is only realised at the time of settlement, so thecredit exposure can keep increasing

5. In case of physical delivery, the forward contract specifies to whom to make the delivery.

6. The counterparty on a futures contract is chosen randomly by the exchange.

7. In a forward there are no cash flows until delivery, whereas in futures there are margin

requirements and periodic margin calls.

3.4 Swaps

Swaps are private agreements between two parties to exchange cash flows in the future

according to a prearranged formula. They can be regarded as portfolios of forward contracts. The

two commonly used swaps are :

Interest rate swaps:

These entail swapping only the interest related cash flows between the parties in the same

currency.
http://en.wikipedia.org/wiki/Forward_contracthttp://en.wikipedia.org/wiki/Futures_exchangehttp://en.wikipedia.org/wiki/Over-the-counter_(finance)http://en.wikipedia.org/wiki/Over-the-counter_(finance)http://en.wikipedia.org/wiki/Over-the-counter_(finance)http://en.wikipedia.org/wiki/Over-the-counter_(finance)http://en.wikipedia.org/wiki/Futures_exchangehttp://en.wikipedia.org/wiki/Forward_contract


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Currency swaps:

These entail swapping both principal and interest between the parties, with the cash flows in one

direction being in a different currency than those in the opposite direction.

Swaps are usually entered into at-the-money (i.e. with minimal initial cash payments because fair

value is zero), through brokers or dealers who take an up-front cash payment or who ad just the

rate to bear default risk. The two most prevalent swaps are interest rate swaps and foreign

currency swaps, while others include equity swaps, commodity swaps, and swaptions.

3.5 Swaptions

Swaptions are options to buy or sell a swap that will become operative at the expiry of the

options. Thus a swaption is an option on a forward swap. Rather than have calls and puts, the

swaptions market has receiver swaptions and payer swaptions. A receiver swaption is an option

to receive fixed and pay floating. A payer swaption is an option to pay fixed and receive floating.

Swap contracts are used to hedge entire price changes (symmetrically) related to an identified

hedged risk, such as interest rate or foreign currency risk, since both counter parties gain or lose

equally.

3.6 The other kind of derivatives, which are not, much popular are as follows :

BASKET

Baskets options are option on portfolio of underlying asset. Equity Index Options are most

popular form of baskets.

LEAPS

Normally option contracts are for a period of 1 to 12 months. However, exchange may introduce

option contracts with a maturity period of 2-3 years. These long-term option contracts are

popularly known as Leaps or Long term Equity Anticipation Securities.

WARRANTS

Options generally have lives of up to one year, the majority of options traded on options

exchanges having a maximum maturity of nine months. Longer-dated options are called warrants

and are generally traded over-the-counter.


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CHAPTER 4

THE STRUCTURE OF DERIVATIVE MARKET IN INDIA

Derivative trading in India takes can place either on a separate and independent Derivative

Exchange or on a separate segment of an existing Stock Exchange. Derivative

Exchange/Segment function as a Self-Regulatory Organisation (SRO) and SEBI acts as the

oversight regulator. The clearing & settlement of all trades on the Derivative Exchange/Segment

would have to be through a Clearing Corporation/House, which is independent in governance

and membership from the Derivative Exchange/Segment.

Regulatory framework of Derivatives markets in India

Derivatives trading takes place under the provisions of the Securities Contracts (Regulation) Act,

1956 and the Securities and Exchange Board of India Act, 1992.

Dr. L.C Gupta Committee constituted by SEBI had laid down the regulatory framework for

derivative trading in India. SEBI has also framed suggestive bye-law for Derivative

Exchanges/Segments and their Clearing Corporation/House which lay's down the provisions for

trading and settlement of derivative contracts. SEBI has also laid the eligibility conditions for

Derivative Exchange/Segment and its Clearing Corporation/House. The eligibility conditions

have been framed to ensure that Derivative Exchange/Segment & Clearing Corporation/House

provide a transparent trading environment, safety & integrity and provide facilities for redressal

of investor grievances. Some of the important eligibility conditions are-

Derivative trading to take place through an on-line screen based Trading System. The Derivatives Exchange/Segment shall have on-line surveillance capability to monitor

positions, prices, and volumes on a real time basis so as to deter market manipulation.

The Derivatives Exchange/ Segment should have arrangements for dissemination ofinformation about trades, quantities and quotes on a real time basis through atleast two

information vending networks, which are easily accessible to investors across the

country.

The Derivatives Exchange/Segment should have arbitration and investor grievancesredressal mechanism operative from all the four areas / regions of the country.

The Derivatives Exchange/Segment should have satisfactory system of monitoringinvestor complaints and preventing irregularities in trading.

The Derivative Segment of the Exchange would have a separate Investor ProtectionFund.


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The Clearing Corporation/House shall perform full novation, i.e., the ClearingCorporation/House shall interpose itself between both legs of every trade, becoming the

legal counterparty to both or alternatively should provide an unconditional guarantee for

settlement of all trades.

The Clearing Corporation/House shall have the capacity to monitor the overall position ofMembers across both derivatives market and the underlying securities market for those

Members who are participating in both.

The level of initial margin on Index Futures Contracts shall be related to the risk of losson the position. The concept of value-at-risk shall be used in calculating required level of

initial margins. The initial margins should be large enough to cover the one-day loss that

can be encountered on the position on 99% of the days.

The Clearing Corporation/House shall establish facilities for electronic funds transfer(EFT) for swift movement of margin payments.

In the event of a Member defaulting in meeting its liabilities, the ClearingCorporation/House shall transfer client positions and assets to another solvent Member or

close-out all open positions.

The Clearing Corporation/House should have capabilities to segregate initial marginsdeposited by Clearing Members for trades on their own account and on account of his

client. The Clearing Corporation/House shall hold the clients margin money in trust for

the client purposes only and should not allow its diversion for any other purpose.

The Clearing Corporation/House shall have a separate Trade Guarantee Fund for thetrades executed on Derivative Exchange / Segment.

Presently, SEBI has permitted Derivative Trading on the Derivative Segment of BSE andthe F&O Segment of NSE.

Membership categories in the derivatives market

The various types of membership in the derivatives market are as follows:

Trading Member (TM)A TM is a member of the derivatives exchange and can trade on his

own behalf and on behalf of his clients.

Clearing Member (CM)These members are permitted to settle their own trades as well as the

trades of the other non-clearing members known as Trading Members who have agreed to settle

the trades through them.


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Self-clearing Member (SCM)A SCM are those clearing members who can clear and settle

their own trades only.

Requirements to be a member of the derivatives exchange/ clearing corporation:

Balance Sheet Networth Requirements: SEBI has prescribed a networth requirement of Rs. 3

crores for clearing members. The clearing members are required to furnish an auditor's certificate

for the net worth every 6 months to the exchange. The net worth requirement is Rs. 1 crore for a

self-clearing member. SEBI has not specified any networth requirement for a trading member.

Liquid Net worth Requirements: Every clearing member (both clearing members and self-

clearing members) has to maintain at least Rs. 50 lakhs as Liquid Networth with the exchange /

clearing corporation.

Certification requirements: The Members are required to pass the certification programme

approved by SEBI. Further, every trading member is required to appoint atleast two approved

users who have passed the certification programme. Only the approved users are permitted to

operate the derivatives trading terminal.

Requirements for a Member with regard to the conduct of his business:

The derivatives member is required to adhere to the code of conduct specified under the SEBI

Broker Sub-Broker regulations. The following conditions stipulations have been laid by SEBI on

the regulation of sales practices:

Sales Personnel: The derivatives exchange recognizes the persons recommended by the Trading

Member and only such persons are authorized to act as sales personnel of the TM. These persons

who represent the TM are known as Authorised Persons.

Know-your-client: The member is required to get the Know-your-client form filled by every

one of client.

Risk disclosure document: The derivatives member must educate his client on the risks of

derivatives by providing a copy of the Risk disclosure document to the client.Member-client agreement: The Member is also required to enter into the Member-client

agreement with all his clients.


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Eligibility criteria for stocks on which derivatives trading may be permitted

A stock on which stock option and single stock future contracts are proposed to be introduced is

required to fulfill the following broad eligibility criteria:-

The stock shall be chosen from amongst the top 500 stock in terms of average dailymarket capitalisation and average daily traded value in the previous six month on a

rolling basis.

The stocks median quarter-sigma order size over the last six months shall be not lessthan Rs.1 Lakh. A stocks quarter-sigma order size is the mean order size (in value terms)

required to cause a change in the stock price equal to one-quarter of a standard deviation.

The market wide position limit in the stock shall not be less than Rs.50 crores. A stock can be included for derivatives trading as soon as it becomes eligible. However,

if the stock does not fulfill the eligibility criteria for 3 consecutive months after beingadmitted to derivatives trading, then derivative contracts on such a stock would be

discontinued.

Minimum contract size

The Standing Committee on Finance, a Parliamentary Committee, at the time of recommending

amendment to Securities Contract (Regulation) Act, 1956 had recommended that the minimum

contract size of derivative contracts traded in the Indian Markets should be pegged not below Rs.

2 Lakhs. Based on this recommendation SEBI has specified that the value of a derivative

contract should not be less than Rs. 2 Lakh at the time of introducing the contract in the market.

In February 2004, the Exchanges were advised to re-align the contracts sizes of existing

derivative contracts to Rs. 2 Lakhs. Subsequently, the Exchanges were authorized to align the

contracts sizes as and when required in line with the methodology prescribed by SEBI.

Lot size of a contract

Lot size refers to number of underlying securities in one contract. The lot size is determined

keeping in mind the minimum contract size requirement at the time of introduction of derivative

contracts on a particular underlying.

For example, if shares of XYZ Ltd are quoted at Rs.1000 each and the minimum contract size is

Rs.2 lacs, then the lot size for that particular scrips stands to be 200000/1000 = 200 shares i.e.

one contract in XYZ Ltd. covers 200 shares.


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Margining system in the derivative markets

Two type of margins have been specified -

Initial Margin - Based on 99% VaR and worst case loss over a specified horizon, which

depends on the time in which Mark to Market margin is collected.

Mark to Market Margin (MTM) - collected in cash for all Futures contracts and adjusted

against the available Liquid Networth for option positions. In the case of Futures Contracts

The initial margins should be large enough to cover the one day loss that can be encountered on

the position on 99% of the days.

CONDITIONS FOR LIQUID NETWORTH

Liquid net worth means the total liquid assets deposited with the clearing house towards initial

margin and capital adequacy; LESS initial margin applicable to the total gross open position at

any given point of time of all trades cleared through the clearing member.

The following conditions are specified for liquid net worth:

Liquid net worth of the clearing member should not be less than Rs 50 lacs at any point of time.

Mark to market value of gross open positions at any point of time of all trades cleared through

the clearing member should not exceed the specified exposure limit for each product.

Liquid Assets

At least 50% of the liquid assets should be in the form of cash equivalents viz. cash, fixed

deposits, bank guarantees, T bills, units of money market mutual funds, units of gilt funds and

dated government securities. Liquid assets will include cash, fixed deposits, bank guarantees, T

bills, units of mutual funds, dated government securities or Group I equity securities which are to

be pledged in favor of the exchange.

MARGIN COLLECTION

Initial Margin - is adjusted from the available Liquid Networth of the Clearing Memberon an online real time basis.

Marked to Market Margins-Futures contracts: The open positions (gross against clients and net of proprietary / self trading)

in the futures contracts for each member are marked to market to the daily settlement price of the

Futures contracts at the end of each trading day. The daily settlement price at the end of each day

is the weighted average price of the last half an hour of the futures contract. The profits / losses


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arising from the difference between the trading price and the settlement price are collected /

given to all the clearing members.

Option Contracts: The marked to market for Option contracts is computed and collected as part

of the SPAN Margin in the form of Net Option Value. The SPAN Margin is collected on an

online real time basis based on the data feeds given to the system at discrete time intervals.

Client Margins

Clearing Members and Trading Members are required to collect initial margins from all their

clients. The collection of margins at client level in the derivative markets is essential as

derivatives are leveraged products and non-collection of margins at the client level would

provide zero cost leverage. In the derivative markets all money paid by the client towards

margins is kept in trust with the Clearing House / Clearing Corporation and in the event of

default of the Trading or Clearing Member the amounts paid by the client towards margins are

segregated and not utilised towards the dues of the defaulting member.

Therefore, Clearing members are required to report on a daily basis details in respect of such

margin amounts due and collected from their Trading members / clients clearing and settling

through them. Trading members are also required to report on a daily basis details of the amount

due and collected from their clients. The reporting of the collection of the margins by the clients

is done electronically through the system at the end of each trading day. The reporting of

collection of client level margins plays a crucial role not only in ensuring that members collect

margin from clients but it also provides the clearing corporation with a record of the quantum of

funds it has to keep in trust for the clients.

Exposure limits in Derivative Products

It has been prescribed that the notional value of gross open positions at any point in time in the

case of Index Futures and all Short Index Option Contracts shall not exceed 33 1/3 (thirty three

one by three) times the available liquid networth of a member, and in the case of Stock Option

and Stock Futures Contracts, the exposure limit shall be higher of 5% or 1.5 sigma of the

notional value of gross open position.In the case of interest rate futures, the following exposure limit is specified:

The notional value of gross open positions at any point in time in futures contracts on the

notional 10 year bond should not exceed 100 times the available liquid networth of a member.

The notional value of gross open positions at any point in time in futures contracts on the

notional T-Bill should not exceed 1000 times the available liquid networth of a member.


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Position limits in Derivative Products

The position limits specified are as under-

Client / Customer level position limits:

For index based products there is a disclosure requirement for clients whose position exceeds

15% of the open interest of the market in index products.

For stock specific products the gross open position across all derivative contracts on a particular

underlying of a customer/client should not exceed the higher of

1% of the free float market capitalisation (in terms of number of shares).

Or

5% of the open interest in the derivative contracts on a particular underlying stock (in terms of

number of contracts).

This position limits are applicable on the combine position in all derivative contracts on an

underlying stock at an exchange. The exchanges are required to achieve client level position

monitoring in stages.

The client level position limit for interest rate futures contracts is specified at Rs.100 crore or

15% of the open interest, whichever is higher.

Trading Member Level Position Limits:

For Index options the Trading Member position limits are Rs. 250 cr or 15% of the total open

interest in Index Options whichever is higher and for Index futures the Trading Member position

limits are Rs. 250 cr or 15% of the total open interest in Index Futures whichever is higher.

For stocks specific products, the trading member position limit is 20% of the market wide limit

subject to a ceiling of Rs. 50 crore. In Interest rate futures the Trading member position limit is

Rs. 500 Cr or 15% of open interest whichever is higher.

It is also specified that once a member reaches the position limit in a particular underlying then

the member shall be permitted to take only offsetting positions (which result in lowering the

open position of the member) in derivative contracts on that underlying. In the event that theposition limit is breached due to the reduction in the overall open interest in the market, the

member are required to take only offsetting positions (which result in lowering the open position

of the member) in derivative contract in that underlying and fresh positions shall not be

permitted. The position limit at trading member level is required to be computed on a gross basis

across all clients of the Trading member.


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Market wide limits:

There are no market wide limits for index products. For stock specific products the market wide

limit of open positions (in terms of the number of underlying stock) on an option and futures

contract on a particular underlying stock would be lower of

30 times the average number of shares traded daily, during the previous calendar month, in the

cash segment of the Exchange, Or

20% of the number of shares held by non-promoters i.e. 20% of the free float, in terms of

number of shares of a company.

Measures have been specified by SEBI to protect the rights of investor in Derivatives

Market:

Investor's money has to be kept separate at all levels and is permitted to be used onlyagainst the liability of the Investor and is not available to the trading member or clearing

member or even any other investor.

The Trading Member is required to provide every investor with a risk disclosuredocument which will disclose the risks associated with the derivatives trading so that

investors can take a conscious decision to trade in derivatives.

Investor would get the contract note duly time stamped for receipt of the order andexecution of the order. The order will be executed with the identity of the client and

without client ID order will not be accepted by the system. The investor could also

demand the trade confirmation slip with his ID in support of the contract note. This will

protect him from the risk of price favour, if any, extended by the Member.

In the derivative markets all money paid by the Investor towards margins on all openpositions is kept in trust with the Clearing House/Clearing corporation and in the event of

default of the Trading or Clearing Member the amounts paid by the client towards

margins are segregated and not utilised towards the default of the member. However, in

the event of a default of a member, losses suffered by the Investor, if any, on settled /

closed out position are compensated from the Investor Protection Fund, as per the rules,

bye-laws and regulations of the derivative segment of the exchanges.

The Exchanges are required to set up arbitration and investor grievances redressalmechanism operative from all the four areas / regions of the country.


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CHAPTER 5

BENEFITS OF DERIVATIVES

Derivative markets help investors in many different ways:

1.] RISK MANAGEMENT

Futures and options contract can be used for altering the risk of investing in spot market. For

instance, consider an investor who owns an asset. He will always be worried that the price may

fall before he can sell the asset. He can protect himself by selling a futures contract, or by buying

a Put option. If the spot price falls, the short hedgers will gain in the futures market, as you will

see later. This will help offset their losses in the spot market. Similarly, if the spot price falls

below the exercise price, the put option can always be exercised.

2.] PRICE DISCOVERY

Price discovery refers to the markets ability to determine true equilibrium prices. Futures prices

are believed to contain information about future spot prices and help in disseminating such

information. As we have seen, futures markets provide a low cost trading mechanism. Thus

information pertaining to supply and demand easily percolates into such markets. Accurate

prices are essential for ensuring the correct allocation of resources in a free market economy.

Options markets provide information about the volatility or risk of the underlying asset.

3.] OPERATIONAL ADVANTAGES

As opposed to spot markets, derivatives markets involve lower transaction costs. Secondly, they

offer greater liquidity. Large spot transactions can often lead to significant price changes.

However, futures markets tend to be more liquid than spot markets, because herein you can take

large positions by depositing relatively small margins. Consequently, a large position in

derivatives markets is relatively easier to take and has less of a price impact as opposed to a

transaction of the same magnitude in the spot market. Finally, it is easier to take a short position

in derivatives markets than it is to sell short in spot markets.

4.] MARKET EFFICIENCY

The availability of derivatives makes markets more efficient; spot, futures and options markets

are inextricably linked. Since it is easier and cheaper to trade in derivatives, it is possible to

exploit arbitrage opportunities quickly and to keep prices in alignment. Hence these markets help

to ensure that prices reflect true values.


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5.] EASE OF SPECULATION

Derivative markets provide speculators with a cheaper alternative to engaging in spot

transactions. Also, the amount of capital required to take a comparable position is less in this

case. This is important because facilitation of speculation is critical for ensuring free and fair

markets. Speculators always take calculated risks. A speculator will accept a level of risk only if

he is convinced that the associated expected return, is commensurate with the risk that he is

taking.

The derivative market performs a number of economic functions.

The prices of derivatives converge with the prices of the underlying at the expiration ofderivative contract. Thus derivatives help in discovery of future as well as current prices.

An important incidental benefit that flows from derivatives trading is that it acts as acatalyst for new entrepreneurial activity.

Derivatives markets help increase savings and investment in the long run. Transfer of riskenables market participants to expand their volume of activity.


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CHAPTER 6

EXCHANGE TRADED DERIVATIVES

ON (NSE) NATIONAL STOCK EXCHANGE

Futures & Options

The National Stock Exchange of India Limited (NSE) commenced trading in derivatives with

launch of index futures on June 12, 2000. The futures contracts are based on S&P CNX

NiftyIndex.

The Exchange introduced trading in Index Options (also based on Nifty) on June 4, 2001. NSE

also became the first exchange to launch trading in options on individual securities from July 2,

2001. Futures on individual securities were introduced on November 9, 2001. Futures and

Options on individual securities are available on 152 securities stipulated by SEBI.

The Exchange has also introduced trading in Futures and Options contracts based on the CNX-IT

and BANK NIFTY indices from August 29, 2003 and June 13, 2005 respectively.

FINANCIAL DERIVATIVE ON NSE

S&P CNX Nifty Futures

S&P CNX Nifty Options

CNXIT Futures

CNXIT Options

BANK Nifty Futures

BANK Nifty Options

Futures on Individual Securities

Options on Individual Securities

Interest Rate Derivatives
http://www.nseindia.com/content/fo/fo_NIFTY.htmhttp://www.nseindia.com/content/fo/fo_NIFTY.htmhttp://www.nseindia.com/content/fo/fo_underlyinglist.htmhttp://www.nseindia.com/content/fo/fo_CNXIT.htmhttp://www.nseindia.com/content/fo/fo_niftyfutures.htmhttp://www.nseindia.com/content/fo/fo_niftyoptions.htmhttp://www.nseindia.com/content/fo/fo_cnxitfutures.htmhttp://www.nseindia.com/content/fo/fo_cnxitoptions.htmhttp://www.nseindia.com/content/fo/fo_bankniftyfutures.htmhttp://www.nseindia.com/content/fo/fo_bankniftyoptions.htmhttp://www.nseindia.com/content/fo/fo_stockfutures.htmhttp://www.nseindia.com/content/fo/fo_stockoptions.htmhttp://www.nseindia.com/content/fo/fo_interestrate.htmhttp://www.nseindia.com/content/fo/fo_interestrate.htmhttp://www.nseindia.com/content/fo/fo_stockoptions.htmhttp://www.nseindia.com/content/fo/fo_stockfutures.htmhttp://www.nseindia.com/content/fo/fo_bankniftyoptions.htmhttp://www.nseindia.com/content/fo/fo_bankniftyfutures.htmhttp://www.nseindia.com/content/fo/fo_cnxitoptions.htmhttp://www.nseindia.com/content/fo/fo_cnxitfutures.htmhttp://www.nseindia.com/content/fo/fo_niftyoptions.htmhttp://www.nseindia.com/content/fo/fo_niftyfutures.htmhttp://www.nseindia.com/content/fo/fo_CNXIT.htmhttp://www.nseindia.com/content/fo/fo_underlyinglist.htmhttp://www.nseindia.com/content/fo/fo_NIFTY.htmhttp://www.nseindia.com/content/fo/fo_NIFTY.htm


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6.1 S&P CNX Nifty Futures

A futures contract is a forward contract, which is traded on an Exchange. NSE commenced

trading in index futures on June 12, 2000. The index futures contracts are based on the popular

market benchmarkS&P CNX Nifty index. NSE defines the characteristics of the futures contract

such as the underlying index, market lot, and the maturity date of the contract. The futures

contracts are available for trading from introduction to the expiry date.

Contract Specifications:

Security descriptor:

The security descriptor for the S&P CNX Nifty futures contracts is:

Market type: N

Instrument Type: FUTIDX

Underlying: NIFTY

Expiry date: Date of contract expiry

Instrument type represents the instrument ie, Futures on index. Underlying symbol denotes the

underlying index which is S&P CNX Nifty.

Trading cycle:

S&P CNX Nifty futures contracts have a maximum of 3-month trading cycle - the near month

(one), the next month (two) and the far month (three). A new contract is introduced on the

trading day following the expiry of the near month contract. The new contract will be introducedfor a three month duration. This way, at any point in time, there will be 3 contracts available for

trading in the market i.e., one near month, one mid month and one far month duration

respectively.

Expiry day:

S&P CNX Nifty futures contracts expire on the last Thursday of the expiry month. If the last

Thursday is a trading holiday, the contracts expire on the previous trading day.

Trading Parameters:

Contract size:

The value of the futures contracts on Nifty may not be less than Rs. 2 lakhs at the time of

introduction. Thepermitted lot size for futures contracts & options contracts shall be the same

for a given underlying or such lot size as may be stipulated by the Exchange from time to time.
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Price steps:

The price step in respect of S&P CNX Nifty futures contracts is Re.0.05.

Base Prices:

Base price of S&P CNX Nifty futures contracts on the first day of trading would be theoretical

futures price.. The base price of the contracts on subsequent trading days would be the daily

settlement price of the futures contracts.

Price bands:

There are no day minimum/maximum price ranges applicable for S&P CNX Nifty futures

contracts. However, in order to prevent erroneous order entry by trading members, operating

ranges are kept at +/- 10 %. In respect of orders which have come under price freeze, members

would be required to confirm to the Exchange that there is no inadvertent error in the order entry

and that the order is genuine. On such confirmation the Exchange may approve such order.

Quantity freeze:

Orders which may come to the exchange as a quantity freeze shall be based on the notional value

of the contract of around Rs. 5 crores. Quantity freeze is calculated for each underlying on the

last trading day of each calendar month and is applicable through the next calendar month. In

respect of orders which have come under quantity freeze, members would be required to confirm

to the Exchange that there is no inadvertent error in the order entry and that the order is genuine.

On such confirmation, the Exchange may approve such order. However, in exceptional cases, the

Exchange may, at its discretion, not allow the orders that have come under quantity freeze for

execution for any reason whatsoever including non-availability of turnover / exposure limits

6.2 S&P CNX Nifty Options

An option gives a person the right but not the obligation to buy or sell something. An option is a

contract between two parties wherein the buyer receives a privilege for which he pays a fee(premium) and the seller accepts an obligation for which he receives a fee. The premium is the

price negotiated and set when the option is bought or sold. A person who buys an option is said

to be long in the option. A person who sells (or writes) an option is said to be short. NSE

introduced trading in index options on June 4, 2001. The options contracts are European style

and cash settled and are based on the popular market benchmarkS&P CNX Nifty index.
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Contract Specifications:

Security descriptor

The security descriptor for the S&P CNX Nifty options contracts is:

Market type :N

Instrument Type : OPTIDX

Underlying : NIFTY

Expiry date : Date of contract expiry

Option Type : CE/ PE

Strike Price: Strike price for the contract

6.3 CNXIT Futures

A futures contract is a forward contract, which is traded on an Exchange. CNX IT Futures

Contract would be based on the indexCNX IT index.

NSE defines the characteristics of the futures contract such as the underlying index, market lot,

and the maturity date of the contract. The futures contracts are available for trading from

introduction to the expiry date.

Contract Specifications

Security descriptor

The security descriptor for the CNX IT futures contracts is:

Market type : N

Instrument Type : FUTIDX

Underlying : CNXIT


6.4 CNXIT Options


contract between two parties wherein the buyer receives a privilege for which he pays a fee

(premium) and the seller accepts an obligation for which he receives a fee. The premium is the

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to be long in the option. A person who sells (or writes) an option is said to be short in the option.

The options contracts are European style and cash settled and are based on the CNX IT index.


Security descriptor

The security descriptor for the CNX IT options contracts is:

Market type : N


Underlying : CNXIT




Instrument type represents the instrument i.e. Options on Index. Underlying symbol denotes the

underlying index, which is CNXIT Expiry date identifies the date of expiry of the contract

Option type identifies whether it is a call or a put option., CE - Call European, PE - Put

European.

6.5 BANK Nifty Futures

A futures contract is a forward contract, which is traded on an Exchange. BANK Nifty futures

Contract would be based on the index CNX Bank index. (Selection criteria for indices)

NSE defines the characteristics of the futures contract such as the underlying index, market lot,

and the maturity date of the contract. The futures contracts are available for trading from

introduction to the expiry date.


Security descriptor

The security descriptor for the BANK Nifty futures contracts is:

Market type : N

Instrument Type : FUTIDX

Underlying : BANKNIFTY


Instrument type represents the instrument i.e. Futures on Index. Underlying symbol denotes the
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underlying index which is BANK Nifty. Expiry date identifies the date of expiry of the contract

6.6 BANKNIFTY Options





to be long in the option. A person who sells (or writes) an option is said to be short in the option.

The options contracts are European style and cash settled and are based on the BANK NIFTY

index.

Security descriptor

The security descriptor for the BANKNIFTY options contracts is:

Market type : N


Underlying : BANKNIFTY




Instrument type represents the instrument i.e. Options on Index. Underlying symbol denotes the

underlying index, which is BANKNIFTY Expiry date identifies the date of expiry of the contract

Option type identifies whether it is a call or a put option, CE - Call European, PEPutEuropean.

6.7Futures on Individual Securities

A futures contract is a forward contract, which is traded on an Exchange. NSE commencedtrading in futures on individual securities on November 9, 2001. The futures contracts are

available on 152 securities stipulated by the Securities & Exchange Board of India (SEBI). NSE

defines the characteristics of the futures contract such as the underlying security, market lot, and

the maturity date of the contract. The futures contracts are available for trading from introduction

to the expiry date.
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Security descriptor:

The security descriptor for the futures contracts is:

Market type : N

Instrument Type : FUTSTKUnderlying : Symbol of underlying security


Underlying Instrument:

Futures contracts are available on 152 securities stipulated by the Securities & Exchange Board

of India (SEBI). These securities are traded in the Capital Market segment of the Exchange.

Trading cycle:

Futures contracts have a maximum of 3-month trading cycle - the near month (one), the next

month (two) and the far month (three). New contracts are introduced on the trading day

following the expiry of the near month contracts. The new contracts are introduced for a three

month duration. This way, at any point in time, there will be 3 contracts available for trading in

the market (for each security) i.e., one near month, one mid month and one far month duration

respectively.

Contract size:

The value of the futures contracts on individual securities may not be less than Rs. 2 lakhs at the

time of introduction for the first time at any exchange. The permitted lot size for futures

contracts & options contracts shall be the same for a given underlying or such lot size as may be

stipulated by the Exchange from time to time.

Price steps

The price step in respect of futures contracts is Re.0.05.

Base Prices

Base price of futures contracts on the first day of trading (i.e. on introduction) would be the

theoretical futures price. The base price of the contracts on subsequent trading days would be the

daily settlement price of the futures contracts.

Price bands

There are no day minimum/maximum price ranges applicable for futures contracts. However, in

order to prevent erroneous order entry by trading members, operating ranges are kept at +/- 20

%. In respect of orders which have come under price freeze, members would be required to
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confirm to the Exchange that there is no inadvertent error in the order entry and that the order is

genuine. On such confirmation the Exchange may approve such order.

Quantity freeze

Orders which may come to the exchange as a quantity freeze shall be based on the notional value

of the contract of around Rs. 5 crores. Quantity freeze is calculated for each underlying on the

last trading day of each calendar month and is applicable through the next calendar month. In

respect of orders which have come under quantity freeze, members would be required to confirm

to the Exchange that there is no inadvertent error in the order entry and that the order is genuine.

On such confirmation, the Exchange may approve such order. However, in exceptional cases, the

Exchange may, at its discretion, not allow the orders that have come under quantity freeze for

execution for any reason whatsoever including non-availability of turnover / exposure limits

6.8 Options on Individual Securities





to be long in the option. A person who sells (or writes) an option is said to be short in the option.NSE became the first exchange to launch trading in options on individual securities. Trading in

options on individual securities commenced from July 2, 2001. Option contracts are American

style and cash settled and are available on 152 securities stipulated by the Securities & Exchange

Board of India (SEBI).

Security descriptor

The security descriptor for the options contracts is:

Market type : N

Instrument Type : OPTSTK

Underlying : Symbol of underlying security


Option Type : CA / PA

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Instrument type represents the instrument i.e. Options on individual securities. Option type

identifies whether it is a call or a put option., CA - Call American, PA - Put American.

Underlying Instrument

Option contracts are available on 152 securities stipulated by the Securities & Exchange Board

of India (SEBI). These securities are traded in the Capital Market segment of the Exchange.

Trading cycle

Options contracts have a maximum of 3-month trading cycle - the near month (one), the next

month (two) and the far month (three). On expiry of the near month contract, new contracts are

introduced at new strike prices for both call and put options, on the trading day following the

expiry of the near month contract. The new contracts are introduced for three month duration.

Expiry day

Options contracts expire on the last Thursday of the expiry month

Strike Price Intervals

The Exchange provides a minimum of seven strike prices for every option type (i.e Call & Put)

during the trading month. At any time, there are three contracts in-the-money (ITM), three

contracts out-of-the-money (OTM) and one contract at-the-money (ATM).

New contracts with new strike prices for existing expiration date are introduced for trading on

the next working day based on the previous day's underlying close values, as and when required.

In order to decide upon the at-the-money strike price, the underlying closing value is rounded off

to the nearest strike price interval.

The in-the-money strike price and the out-of-the-money strike price are based on

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