a study on the effectiveness of equity derivatives in cash market segment

8/12/2019 A Study on the Effectiveness of Equity Derivatives in Cash Market Segment

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A STUDY ON EFFECTIVENESS OF EQUITY DERIVATIVES IN CASH MARKET

SEGMENT IN INDIA

Submitted by

S.Dinesh,MBA.,M.Phil.,LIII.,PGDCA.,(Ph.D).,

Assistant Professor,

Department of Management Studies,

Sri Jayaram Engineering College,

Cuddaore.

Cell: 93!3""#$$, 9%&'3$!

E(Mail:dines)a$9&!*ya)oo.+om

R.Arivazhagan,MBA.,(Ph.D).

Assistant Professor,

S+)ool of Management,

SM -niersity, /attan0ulat)ur, 1ndia

Abstra+t

2ne of t)e most signifi+ant eents in t)e se+urities mar0ets )as been t)e deelopment

and epansion of finan+ial deriaties. Deriatie produ+ts li0e futures and options on 1ndian

sto+0 mar0ets )ae be+ome important instruments of pri+e dis+oery, portfolio diersifi+ation

and ris0 )edging in re+ent times. 4)e empiri+al analysis points to5ards a de+line in spot

mar0et olatility after t)e introdu+tion of inde futures due to in+reased impa+t of re+ent

ne5s and redu+ed effe+t of un+ertainty originating from t)e old ne5s. 6o5eer, furt)er

inestigation also reeals t)at t)e mar0et 5ide olatility )as fallen during t)e period under

+onsideration. 5)et)er t)e introdu+tion of inde futures per se )as been instrumental in

redu+ing t)e spot mar0et olatility or t)e olatility )as fallen in line 5it) general fall in

mar0et 5ide olatility

/ey5ords: Piote point, 1nterest, Margin, Automated terminal, Deriaties

I. Introduction

4)e origin of deriaties +an be tra+ed ba+0 to t)e need of farmers to prote+t t)emseles

against flu+tuations in t)e pri+e of t)eir +rop. 7rom t)e time it 5as so5n to t)e time it 5as

ready for )arest, farmers 5ould fa+e pri+e un+ertainty. 4)roug) t)e use of simple deriatie

produ+ts, it 5as possible for t)e farmer to partially or fully transfer pri+e ris0s by lo+0ing(in
mailto:[email protected]:[email protected]:[email protected]


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asset pri+es. 4)ese 5ere simple +ontra+ts deeloped to meet t)e needs of farmers and 5ere

basi+ally a means of redu+ing ris0.

1n $&!&, t)e C)i+ago 8oard of 4rade, or C824, 5as establis)ed to bring farmers and

mer+)ants toget)er. A group of traders got toget)er and +reated t)e to(arrie +ontra+t t)at

permitted farmers to lo+0 in to pri+e upfront and delier t)e grain later.

1.1 Deri!tie" de#ined

A deriatie is a produ+t 5)ose alue is deried from t)e alue of one or more

underlying ariables or assets in a +ontra+tual manner. 4)e underlying asset +an be euity,

fore, +ommodity

1.$ NSE%" DERIVATIVES MARKET

4)e deriaties trading on t)e ;SE +ommen+ed 5it) S


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1.$./ Inde #und"

An inde fund is a fund t)at tries to repli+ate t)e inde returns. 1t does so by inesting

in inde sto+0s in t)e proportions in 5)i+) t)ese sto+0s eist in t)e inde. 4)e goal of t)e

inde fund is to a+)iee t)e same performan+e as t)e inde it tra+0s.

1.$.0 Aout Indi! VI(

1ndia >1= is a olatility inde based on t)e inde option pri+es of ;174?. 1ndia >1=

is +omputed using t)e best bid and as0 uotes of t)e out(of(t)e(money near and mid(mont)

;174? option +ontra+ts 5)i+) are traded on t)e 71= indi+ates

t)e inestor@s per+eption of t)e mar0et@s olatility in t)e near term. 4)e inde depi+ts t)e

epe+ted mar0et olatility oer t)e net 3# +alendar days. i.e. )ig)er t)e 1ndia >1= alues,

)ig)er t)e epe+ted olatility and i+e(ersa.

II St!te2ent o# t-e 3ro4e2

1n re+ent year inestment made in deriatie mar0et gro5ing radi+ally. )y be+ause of t)e

deriatie mar0et is )ig)ly olatile in nature ,5)en +ompared to t)e +as) mar0et. 1nitially t)e

deriatie mar0et started it as a tool for )edging. 8ut finally, it is used for s0imming t)e

mar0et opportunities. Espe+ially to t)e settlement +y+le of t)e deriatie mar0et, influen+e

are )uge in +as) mar0et.

III O5ectie o# t-e "tud,

4)e main obBe+tie of t)is study are:

$ 4o assess t)e impa+t of deriatie mar0et effe+t in +as) mar0et segment

" 4o ealuate different stri0e pri+e moement of t)e +ontra+t

3 4o Predi+t t)e +as) mar0et inde and underlying inde

IV Sco3e o# t-e "tud,

1n t)is resear+) study used to 0no5 t)e impa+t of euity deriaties in +as) mar0et

moement. 4)is resear+) study 5ill be used to measure t)e impa+t of +as) mar0et and

proide information to t)e inestors for ma0ing de+ision related to buy)oldsell. So, it 5ill

used to t)e inestors to penetrate t)e mar0et returns.

IV Met-odo4o6, o# t-e "tud,

Met)odology is t)e systemati+ approa+) to sole t)e resear+) problem. 1n t)is

resear+) study resear+)er deployed interest rate +al+ulation, Piote point analysis, ate of

return. And some of t)e important 5ill be used in t)e +ontet of deriaties are ree0s.


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0.1 H,3ot-e"i" o# t-e "tud,

1n t)is resear+) study pri+e moement of euity futures and euity options 5ere

analysed. 4)e rea+tion of +as) mar0et and deriaties +ompared by t)e turnoer, inde points

and stri0e pri+es and interest rates.

Piot Points represents a point at 5)i+) a maBor pri+e moement is epe+ted to o++ur.

Piot points +an be used in t5o 5ays. 4)e first 5ay is for determining oerall mar0et trend: if

t)e piot point pri+e is bro0en in an up5ard moement, t)en t)e mar0et is bullis), and i+e

ersa. 6o5eer, t)at piot points are s)ort(term trend indi+ators, useful for only one day until

t)ey need to be re+al+ulated. 4)e se+ond met)od is to use piot point pri+e leels to enter and

eit t)e mar0ets.

PPFG6HIHC3

4)en, $F G" PP K I, "F PP H G6 ( I, 3F 6 H " GPP ( I, S$F G" PP K 6, S"F PP (

G6 ( I. S3F I ( " G6 ( PP

1f t)e pri+e is aboe t)e PP, t)en one 5ould only be long. 1f t)e pri+e is belo5 t)e PP,

t)en one 5ould only be s)ort. 1f t)ere is support +lose to t)e PP, one 5ill first 5ait for t)e

pri+e to pass t)roug) bot) t)e PP and t)e support before entering s)ort. 1f t)ere is resistan+e

+lose to t)e PP, one 5ill first 5ait for t)e pri+e to moe t)roug) bot) t)e PP and t)e

resistan+e before entering long.

!.3 Data +olle+tion

Primary data 5ere +olle+ted 5it) t)e offi+ials from eligare se+urities, /ota0 se+urities and

1ndia 1nfoline in Cuddalore distri+t t)roug) oral +ommuni+ation.

Se+ondary data 5ere +olle+ted from t)e ;ational Sto+0 E+)ange 5ebsite, Bournals and ne5s

papers.

!.! 4ools used

a Piote point analysis

bAerage pri+e

+ ate of return

V Reie7 o# 4iter!ture

4)e effe+t of introdu+tion of deriaties on t)e olatility of t)e spot mar0ets and in

turn, its role in stabilising or destabilising t)e +as) mar0ets )as remained an a+tie topi+ of

analyti+ and empiri+al interest. Luestions pertaining to t)e impa+t of deriatie trading on

+as) mar0et olatility )ae been empiri+ally addressed in t5o 5ays: by +omparing +as)

mar0et olatilities during t)e pre(and post(futures options trading eras and se+ond, by

ealuating t)e impa+t of options and futures trading Ggenerally proied by trading olume on

t)e be)aiour of +as) mar0ets. 4)e literature is, )o5eer, in+on+lusie on 5)et)er


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introdu+tion of deriatie produ+ts lead to an in+rease or de+rease in t)e spot mar0et

olatility.

2ne s+)ool of t)oug)t argues t)at t)e introdu+tion of futures trading in+reases t)e

spot mar0et olatility and t)ereby, destabilises t)e mar0et GCo $9% 7igle5s0i $9&$ Stein,

$9&%. 2t)ers argue t)at t)e introdu+tion of futures a+tually redu+es t)e spot mar0et olatility

and t)ereby, stabilises t)e mar0et GPo5ers, $9%# S+)5arN and Iaats+), $99$ etc.. 4)erationale and findings of t)ese t5o alternatie s+)ools are dis+ussed in detail in t)is se+tion.

4)e ado+ates of t)e first s+)ool per+eie deriaties mar0et as a mar0et for spe+ulators.

4raders 5it) ery little or no +as) or s)ares +an parti+ipate in t)e deriaties mar0et, 5)i+) is

+)ara+terised by )ig) ris0. 4)us, it is argued t)at t)e parti+ipation of spe+ulatie traders in

systems, 5)i+) allo5 )ig) degrees of leerage, lo5ers t)e uality of information in t)e

mar0et. 4)ese uninformed traders +ould play a destabilising role in +as) mar0ets GC)atrat),

am+)ander and Song, $99'. 6o5eer, a++ording to anot)er ie5point, spe+ulation +ould

also be ie5ed as a pro+ess, 5)i+) eens out pri+e flu+tuations.

4)e debate about spe+ulators and t)e impa+t of futures on spot pri+e olatility

suggests t)at in+reased olatility is undesirable. 4)is is, )o5eer, misleading as it fails to

re+ognise t)e lin0 bet5een t)e information and t)e olatility GAntoniou and 6olmes, $99'.Pri+es depend on t)e information +urrently aailable in t)e mar0et. 7utures trading +an alter

t)e aailable information for t5o reasons: first, futures trading attra+t additional traders in t)e

mar0et se+ond, as transa+tion +osts in t)e futures mar0et are lo5er t)an t)ose in t)e spot

mar0et, ne5 information may be transmitted to t)e futures mar0et more ui+0ly. 4)us, future

mar0ets proide an additional route by 5)i+) information +an be transmitted to t)e spot

mar0ets and t)erefore, in+reased spot mar0et olatility may simply be a +onseuen+e of t)e

more freuent arrial and more rapid pro+essing of information.

2n t)e ot)er )and, arguments suggesting t)at t)e future and option mar0ets )ae

be+ome important mediums of pri+e dis+oery in +as) mar0ets are eually strong. Seeral

aut)ors )ae argued t)at trading in t)ese produ+ts improe t)e oerall mar0et dept), en)an+e

mar0et effi+ien+y, in+rease mar0et liuidity, redu+e informational asymmetries and +ompress

+as) mar0et olatility G/umar, Sarin and S)astri, $99' Antoniou, 6olmes and Priestley,

$99&.

A fe5 studies )ae been underta0en to ealuate t)e effe+t of introdu+tion of

deriatie produ+ts on olatility of 1ndian spot mar0ets. 4)ese studies )ae mainly

+on+entrated on t)e ;SE, and t)e eiden+e is in+on+lusie in t)is regard. )ile 4)enmoN)i

G"##" s)o5ed t)at t)e in+eption of futures trading )as redu+ed t)e olatility of spot inde

returns due to in+reased information flo5. A++ording to S)enbagaraman G"##3, t)e

introdu+tion of deriatie produ+ts did not )ae any signifi+ant impa+t on mar0et olatility in

1ndia. aBu and /arande G"##3 also reported a de+line in olatility of S


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empiri+al analysis 5as +arried out li0e5ise.

Pos)a05ale, Sunil G"##" eamined t)e random 5al0 )ypot)esis in t)e emerging

1ndian sto+0 mar0et by testing for t)e nonlinear dependen+e using a large disaggregated daily

data from t)e 1ndian sto+0 mar0et. 4)e sample used 5as 3& a+tiely traded sto+0s in t)e 8SE

;ational 1nde. 6e found t)at t)e daily returns from t)e 1ndian mar0et do not +onform to arandom 5al0. Daily returns from most indiidual sto+0s and t)e eually 5eig)ted portfolio

e)ibit signifi+ant non(linear dependen+e. 4)is is largely +onsistent 5it) preious resear+)

t)at )as s)o5n eiden+e of non(linear dependen+e in returns from t)e sto+0 mar0et indees

and indiidual sto+0s in t)e -S and t)e -/. ;oor, ANuddin ?a0ob, Diana 8eal and

Delpa+)itra, Sarat) G"## studied t)e sto+0 mar0et seasonality in terms of day(of(t)e(5ee0,

mont)(of(t)eyear, mont)ly and )oliday effe+ts in ten Asian sto+0 mar0ets, namely, Australia,

C)ina, 6ong /ong, Japan, 1ndia, 1ndonesia, Malaysia, Singapore, Sout) /orea and 4ai5an.

6e +on+luded t)at t)e eisten+e of seasonality in sto+0 mar0ets and also suggested t)at t)is is

a global p)enomenon.

VI An!4,"i" !nd Di"cu""ion"

.$ Comparison of ;174? 7utures 21 s Settle pri+e

Date Settle

Pri+e

-nderlying

pri+e

>olume 2pen 1nt C)ange in

21

O of

+)anges in

21

$(;o($# $'".#' $$%.'' 33""9 "'$9!!## &!!&'# 3.3'

"(;o($# $''.9' $$9 3#9# "'#3## ($'%# (#.3

3(;o($# $9$."' $#.' 3#3&'$ "!&''%## ($## (#.%3

!(;o($# 3#$.'' "&$.& !$33" "'$"'9'# "%#"'# $.#&

'(;o($# 3"'.#' 3$".!' &"'"% "'!"!## 3##!'# $.$&

&(;o($# 3##.' "%3." "$!39 "'3!#9## (&''## (#.3!

9(;o($# 333.!' 3#$.'' !$$&"# "'##9'# ("%99'# ($.$"

$#(;o($# 3#&.3 "%'.% "%$3!& "'#'# %!&$## ".9#

$$(;o($# "3".'' $9!."' !$! "!!"&$## ($3'# ('.'

$"(;o($# #9$.'' #%$.' %33 "!3&$'# (!!'# (#.$9

$'(;o($# $!#."' $"$. !'3''" "!9!!"## '"''# "."

Sour+e: Cal+ulated alue

7rom t)e aboe table and +)art +learly s)o5s t)at t)e moement of daily pri+e in future

mar0et is in and around t)e underlying pri+e of t)e parti+ular sto+0 inde. 2pen interest for


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future mar0et )ig)ly olatile in negatie aspe+t in $$ t);o. 1t +learly depi+ts t)at t)e eisting

position also been sold due to t)e negatie aspe+t in t)e mar0et.

." Day to day olatile moement of S


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7rom t)e aboe table and +)art +learly depi+ts t)at $"t);o is t)e day for )ig)

negatie olatile and !t);o is )ig)ly positie olatile in t)e mar0et. C)art +learly s)o5s t)e

moement of t)e inde for ea+) and eery day.

.3 Comparison of 7-41D= and S


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trade. 8ut, t)e ending or t)e settlement time t)e mar0et olatile on t)e moement of future

mar0et.

.' Spread of ;171D=

7rom t)e aboe +)art +learly depi+ts t)at t)e day for )ig) negatie olatile and t)e

)ig)ly positie olatile in t)e mar0et. C)art +learly s)o5s t)e moement of t)e future inde

for ea+) and eery day.

. 2ption CE +losing pri+e for different stri0e pri+es


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7rom t)e aboe +)art +learly depi+ts t)at t)e mar0et in bet5een '3## to '!## points.

So, t)at t)e stri0e pri+e also been same for t)at t5o pri+es. 4)ere is no )uge differen+e

bet5een t)e settlement time. 8ut in t)e beginning of t)e 3 mont) +ontra+t t)e stri0e pri+e

olatile for t)e t5o pri+e moements are almost same. 8ut t)e differen+es are t)ere in pri+es

in t)e first one and )alf mont)s. Epe+tation of t)e buyer in t)e mar0et is )ig), before t)e

settlement period. After t)e mar0et not rea+)ing any good information so ,t)e pri+e is do5n

at t)e settlement period.

.% 2ption PE +losing pri+e for different stri0e pri+es


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7rom t)e aboe +)art +learly depi+ts t)at t)e mar0et in bet5een '3## to '!## points.

So, t)at t)e stri0e pri+e also been same for t)at t5o pri+es. 4)ere is no )uge differen+e

bet5een t)e settlement time. 8ut in t)e beginning of t)e 3 mont) +ontra+t t)e stri0e pri+e

olatile for t)e t5o pri+e moements are almost same. 8ut t)e differen+es are t)ere in pri+es

in t)e first one and )alf mont)s.


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.& Predi+tion of future alue for underlying and deriatie instruments

S?M8AI S-PP243 S-PP24" S-PP24$ P1>24E

P21;4

ES1S4A;CE$ ES1S4A;CE" ES1S4A;CE3

S


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Sour+e: Cal+ulated alue

7rom t)e aboe table s)o5s t)e piote analysis for mont)ly and 5ee0ly for ;174?,

7uture ;ifty, Call option GSP '3## ;ifty, Call option GSP '!## ;ifty, Put option GSP '3##

;ifty, Put option GSP '!## ;ifty. period )as been sele+ted for t)e deriaties from 3# t)July

"#$# to "&t)2+t "#$# GEpiry date:"&$#"#$#. 7rom t)e aboe study +onsist ! 5or0ing

days, out of 5)i+) resear+)er )as to sele+t September mont) for piot mont)ly +al+ulation.

)i+) +onsist of "$ 5or0ing days. ee0ly piote +al+ulated for ! 5or0ing days.

;ifty Gmont)ly piote suggest t)at buy aboe and sell belo5 '&3 points and for

;iftyGee0ly piote suggest t)at buy aboe and sell belo5 #"" points. ;ifty

futureGMont)ly piote suggest t)at buy aboe and sell belo5 '&'3 points and 5ee0ly piote

suggest t)at buy aboe and sell belo5 #!" points. Call option GSP '3## mont)ly finds t)at

buy aboe and sell belo5 s.'&9.'' and for +all option 5ee0ly finds t)at buy aboe and sell

belo5 of s.%!$.&'. Call option GSP '!## mont)ly suggest t)at buy aboe and sell belo5

s.'#'.# and for +all option 5ee0ly suggest t)at buy aboe and sell belo5 of s.!&.'. Put

option GSP '3## mont)ly finds t)at buy aboe and sell belo5 s.!'.' and for put option

5ee0ly finds t)at buy aboe and sell belo5 of s.9.9'. Put option GSP '!## mont)ly suggest

t)at buy aboe and sell belo5 s.'&.&' and for put option 5ee0ly suggest t)at buy aboe and

sell belo5 of s.$!.

VI FINDINGS AND SUGGESTION

2pen interest for future mar0et )ig)ly olatile in negatie aspe+t in $$ t) ;o. 1t

+learly depi+ts t)at t)e eisting position also been sold due to t)e negatie aspe+t in

t)e mar0et.

$"t);o is t)e day for )ig) negatie olatile and !t);o is )ig)ly positie olatile in

t)e mar0et

Most of t)e time t)e moement of 7-41D= a++ompanied 5it) t)e moement of t)e

underlying asset pri+e.

Moement of future mar0et is slo5 in starting time of trade. 8ut, t)e ending or t)e

settlement time t)e mar0et olatile on t)e moement of future mar0et.

8eginning of t)e 3 mont) +ontra+t t)e stri0e pri+e olatile for t)e t5o pri+e

moements are almost same. 8ut t)e differen+es are t)ere in pri+es in t)e first one

and )alf mont)s.


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4)e mar0et in bet5een '3## to '!## points. So, t)at t)e stri0e pri+e also been same

for t)at t5o pri+es. 4)ere is no )uge differen+e bet5een t)e settlement time. 8ut in

t)e beginning of t)e 3 mont) +ontra+t t)e stri0e pri+e olatile for t)e t5o pri+e

moements are almost same. ;ifty Gmont)ly piote suggest t)at buy aboe and sell belo5 '&3 points

;ifty futureGMont)ly piote suggest t)at buy aboe and sell belo5 '&'3 points

Call option GSP '3## mont)ly finds t)at buy aboe and sell belo5 s.'&9.''

Call option GSP '!## mont)ly suggest t)at buy aboe and sell belo5 s.'#'.#

Put option GSP '3## mont)ly finds t)at buy aboe and sell belo5 s.!'.'

Put option GSP '!## mont)ly suggest t)at buy aboe and sell belo5 s.'&.&'

4)e maBor suggestion of t)is resear+) study are:

-se te+)ni+al tools to predi+t t)e mar0et.

Piote point +al+ulations are used to 0no5 t)e resistant and support leel for te+)ni+al

analysis

;ifty futureGMont)ly piote suggest t)at buy aboe and sell belo5 '&'3 points

Call option GSP '3## mont)ly finds t)at buy aboe and sell belo5 s.'&9.''

Put option GSP '!## mont)ly suggest t)at buy aboe and sell belo5 s.'&.&'

CONC*USION

4)is study )as empiri+ally proide t)e information about t)e euity deriaties in

1ndian sto+0 mar0et. 4)e result of t)e study s)o5ed t)e fa+t t)at t)e stri0e pri+e rea+ted to t)e

inde pri+e. 4)e analysis presented in t)is study )as impli+ations to 0no5 t)e terminology

and te+)ni+al analysis of t)e mar0et effi+ien+y.

7rom t)e aboe findings +learly states t)at t)e returns in stri0e pri+es are same

moement in t)e settlement period. Piote points used to 0no5 t)e leel at 5)i+) inestor

going to ta0e a de+ision for buying and selling t)e instruments. 4)is resear+) study furt)erly

proide better s+ope for doing resear+) study in t)e areas of deriatie mar0et effe+ts.

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15/15

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9e"ite"

$. 555.sebi.go.in

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a study on the effectiveness of equity derivatives in cash market segment

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