AMITY UNIVERSITY -----UTTAR

PRADESH----- Amity International Business

School

DESERTATION SYNOPSIS

Student Name SWATI CHAWLA

Enrollment No A1806507043
Programme MBA (IB) (Integrated)

Industry
Guide
Name NAMITA SAHAY

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Topic DERIVATIVE MARKET

Introduction :

A derivative is an agreement or contract that is not based on a real, or true,

exchange, i.e.: There is nothing tangible like money, or a product, that is being
exchanged. For example, a person goes to the grocery store, exchanges a currency
(money) for a commodity (say, an apple). The exchange is complete, both parties
have something tangible. If the purchaser had called the store and asked for the
apple to be held for one hour while the purchaser drives to the store, and the seller
agrees, then a derivative has been created. The agreement (derivative) is derived
from a proposed exchange (trade money for apple in one hour, not now).

I have undertaken project titled “Derivative Market” with an aim to develop an

understanding for the Derivative Market and to study how derivative instruments
can be managed .

The project covers the derivatives market and its instruments. For better
understanding various strategies with different situations and actions have been
given. It includes the data collected in the recent years and also the market in the
derivatives in the recent years.

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This study extends to the trading of derivatives done in the National Stock Markets
The study has been done to know the different types of derivatives and also to
know the derivative market in India.

This study also covers the recent developments in the derivative market taking into
account the trading in past years.

Through this study I came to know the trading done in derivatives and their use in
the stock markets.

This project covers study of interest rate and process of Derivative instruments. It
comments specifically on the role and use of Derivative instruments for Derivative
market in India.

A Derivative is a financial instrument whose value depends on other, more basic,

underlying variables. The variables underlying could be prices of traded securities
and stock, prices of gold or copper. Derivatives have become increasingly
important in the field of finance, Options and Futures are traded actively on many
exchanges, Forward contracts, Swap and different types of options are regularly
traded outside exchanges by financial intuitions, banks and their corporate clients
in what are termed as over-the-counter markets – in other words, there is no single
market place or organized exchanges.

Types of Derivative Market

TYPES OF DERIVATIVES MARKET

Exchange Traded Derivatives Over The Counter Derivatives

National Stock Bombay Stock National Commodity &

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 Exchange Exchange Derivative Exchange

Index Future Index option Stock option Stock

future

Figure.1 Types of Derivatives Market

Litreature Review:
• The emergence of the market for derivative products, most notably forwards,
futures and options, can be traced back to the willingness of risk-averse
economic agents to guard themselves against uncertainties arising out of
fluctuations in asset prices.

• Through the use of derivative products, it is possible to partially or fully

transfer price risks by locking-in asset prices. As instruments of risk
management, these generally do not influence the fluctuations in the
underlying asset prices.

• Derivative products initially emerged, as hedging devices against

fluctuations in commodity prices and commodity-linked derivatives
remained the sole form of such products for almost three hundred years.

• The financial derivatives came into spotlight in post-1970 period due to

growing instability in the financial markets.

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 • In recent years, the market for financial derivatives has grown tremendously
both in terms of variety of instruments available, their complexity and also
turnover.

• In the class of equity derivatives, futures and options on stock indices have
gained more popularity than on individual stocks, especially among
institutional investors, who are major users of index-linked derivatives.

• Even small investors find these useful due to high correlation of the popular
indices with various portfolios and ease of use. The lower costs associated
with index derivatives vis-vis derivative products based on individual
securities is another reason for their growing use.

o As in the present scenario, Derivative Trading is fast gaining

momentum, I have chosen this topic.

Project Objective

1. To understand the concept of the Derivatives and Derivative Trading

2. To know different types of Financial Derivatives

3. To know the role of derivatives trading in India

4. To analyse the performance of Derivatives Trading since 2001with special

reference to Futures & Options

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Methodology to be adopted
The project is based on secondary research. The study was primarily confined to a
period of 2006-10, with a brief overview of past ten years in few cases subject to
availability of data. Data has been taken from numerous sources including the
websites of RBI, SEBI, NSE, FIMMDA, etc.

Findings & Conclusion

1. Derivative market is growing very fast in the Indian Economy. The turnover
of Derivative Market is increasing year by year in the India’s largest stock
exchange NSE. In the case of index future there is a phenomenal increase in
the number of contracts. But whereas the turnover is declined considerably.
In the case of stock future there was a slow increase observed in the number
of contracts whereas a decline was also observed in its turnover. In the case
of index option there was a huge increase observed both in the number of
contracts and turnover.

2. After analyzing data it is clear that the main factors that are driving the
growth of Derivative Market are Market improvement in communication
facilities as well as long term saving & investment is also possible through
entering into Derivative Contract. So these factors encourage the Derivative
Market in India.

3.It encourages entrepreneurship in India. It encourages the investor to take

more risk & earn more return. So in this way it helps the Indian Economy by

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 developing entrepreneurship. Derivative Market is more regulated &
standardized so in this way it provides a more controlled environment. In
nutshell, we can say that the rule of High risk & High return apply in
Derivatives. If we are able to take more risk then we can earn more profit
under Derivatives.

Commodity derivatives have a crucial role to play in the price risk management
process for the commodities in which it deals. And it can be extremely beneficial
in agriculture-dominated economy, like India, as the commodity market also
involves agricultural produce. Derivatives like forwards, futures, options, swaps
etc are extensively used in the country. However, the commodity derivatives have
been utilized in a very limited scale. Only forwards and futures trading are
permitted in certain commodity items.

RELIANCE is the most active future contracts on individual

securities traded with 90090 contracts and RNRL is the next most active futures
contracts with 63522 contracts being traded.