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Derivative Trading in India

(Group No: 10)

Gopal Krishna Kumar Vinodanand Pradeep Mazumdaar Suhail M.M Varadraj.S.Raikar

What is Derivative ?

A derivative is an instrument whose value is derived from the value of one or more underlying, which can be commodities, currency, bonds, stocks etc.

Type of derivatives

Forward contract Future contract Options Swaps

Derivative products

Fixed Income

FRAs IR futures IR options: Caps, Collars IR swaps, swaptions

Foreign Exchange

Cross Currency Swaps Currency Options Currency Futures Stock options and futures Index options and futures



Commodity futures Commodity Swaps

Derivatives products in India

OTC 1980s Currency Forwards 1997 Long term FC Rupee swaps July 1999 Interest rate swaps and FRAs Exchange traded
June 2000 Equity Index futures June 2001 Equity Index options July 2001 Stock Options November 2001 Stock futures

June 2003 Interest rate futures November 2002 - RBI Working group on Rupee derivatives March 2003 - RBI Working group on credit derivatives

July 2003 FCRupee options


Introduced on BSE & NSE on June 9th & 12th in the year 2000 Securities law bill in parliament in 1998 Regulatory body SEBI In January 2004, values of NSE & BSE - Derivative market 3278.5bn - Cash market 1998.89bn

Financial Derivatives Usage

Global derivative market is growing at around 14% per annum Banks are among the largest players in global derivative markets 60% firms worldwide use financial derivatives FX derivatives: 44%, IR derivatives: 34%, Commodity Derivatives: 10% Forwards more popular than swaps for hedging Currency Risk Swaps preferred to forwards to hedge interest rate risk


Purely speculative
Lack Of Infrastructure

Lack Of Transparency
Counterparty Risk


Used As A Tax Evasion Tool Only Large Multinational Corporations And Large Banks Have A Purpose For Using Derivatives



Increase in volume of trades and liquidity in the markets Gain in trading volumes and in market capitalization Currency and interest rate swaps Drawing greater levels of FII investment

Few Remaining Issues

Issue of imposing tax Contract Size OTC derivative Transparency of derivative market

The New Initiatives

Extend to other popular indices Encourage the participation from domestic institutional investors. Strengthen the financial infrastructure Training program for investors RBI allowed FIIs to fully hedge their equity exposure.

A derivative is like a razor. You can use it to shave yourself and make yourself attractive for your girlfriend. You can slit her throat with it. Or you can use it to commit suicide. Financial Times