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Objectives
Which of the exchanges in India trade in derivative
products? What are the various types of orders used in derivatives exchanges? What is the trading mechanism in derivatives exchanges? What is an OTC derivatives market? How are derivatives traded on it? What contracts are available in Indian exchanges?
the-counter
Over-the-counter markets suffer from counterparty
issues
cattle, metal and energy products like oil and electricity Equity derivatives on single-stock and stock indices Interest rate derivatives on short-term and long-term interest rates Currency derivatives Credit derivatives Traded on exchanges and over-the-counter markets
Derivatives in India
Financial derivatives in NSE and BSE in 2000 Commodity derivatives started in MCX, NMCE and
NCDEX in 2003 Index futures (2000) and index options (2001) as well as stock futures and options (2001) are traded Short- and long-term interest rate futures were introduced in 2003, but withdrawn in 2006; in 2009 they were re-introduced Currency futures introduced in 2008 and traded in NSE, BSE and MCX Interest rate swaps, currency swaps, forward rate agreements and credit derivatives traded in the overthe-counter market
Types of Orders
Market order Limit order Stop-loss order Immediate or cancel order Good-till day order Good-till cancelled order Good-till date order
Spread order
order
An order may match partially with another order,
Order Conditions
On the basis of time: Day orders Immediate or Cancel orders
Clearing System
Clearing means that a transaction is clearly recorded,
undertaken by traders Trading members are members who can trade on behalf of clients, and match orders that members receive A clearing member performs: a. Clearance b. Settlement c. Risk management The clearing corporation provides qualifications for a trader to be a clearing member
Clearing Mechanisms
When a trading member matches an order received
from a client, the trading member will approach a clearing member to clear the trade
The clearing member takes the position of
a clearing member
Margins
The cleaning member will be required to post a
cleared
The margin account will be updated daily, using
marking-to-market procedure
If the margin account balance falls below a certain
level, a margin call will be issued by the clearing corporation and the member will have to put up additional costs as margin Dorling Kindersley India Pvt. Ltd. 2011
Settlement
Settlement means that parties will be settling their
Trading Process
The contract is brokered and an order will be place The broker enters the order in the order book When the order is matched, the broker will clear the
daily settlement price, and a margin call will be issued when necessary
Dorling Kindersley India Pvt. Ltd. 2011
inform the broker, who will match the order, close the margin account, and pay the balance
If the contract is held until maturity, the margin
account will be closed with the final settlement amount and balance given to the client