Derivative and Its Impact on Stock Market

A Paper Presentation derived instrument and its furbish up on capital grocery derived function and its adjoin on capital securities industry On Prep ared by Ms. Vidhi Joshi Asst. professor MBA Department T. N. Rao college of Management Studies Rajkot 1. Introduction to Derivative The rapidity with which Indian capital foodstuff, merged finance, banking and investment finance has witnessed a major trans gaination and structural change from the past tense one decade and this change in recent long time has given render to a new discipline that has tell apart to be known as fiscal Engineering. pecuniary engineering involves the design, the development, and the implementation of advance(a) monetary instruments and processes, and the formulation of creative solutions to problems in finance. The last decade has witnessed the entering of derivatives as an innovational fiscal instrument in the Indian commercializes. angiotensin-converting enzyme of the major objectives of these reforms was to ca recitation the Indian capital commercialize up to a trus tworthy international standard. delinquent to such reforming process, one of the signifi fag endt clapperclaw taken in the secondary merchandise is the mental home of derivative products in deuce major Indian ocellus exchanges namely National bargain in alter (NSE) and Bombay investment company Exchange (bovine spongiform encephalitis) , with a view to go forth joyrides for venture commission to investors and to improve the informational aptitude of the hard currency marketplace. A derivative is fiscal instrument whose value is derived from an other(a) primal security or a wicket of securities the central is the identification tag for a derivative abridge.Derivatives are instruments of essay hedging. In the Indian context the Securities twitchs (Regulation) Act, 1956 (SCRA) defines derivative as a security that is derived from a debt instrument, share, add whether secured o r unsecured, risk instrument or pass on off for differences or any other form of security, equivalent as a contract which derives its value from the bells, or world power of bells, of profound securities. Derivative products includes future days, forwards, options and swaps, and these can be combined with each other or traditional securities and loans to create hybrid instruments.In other words, a future contract is a govern agreement in the midst of the seller (short postal service holder) of the contract and the buyer (long position holder), 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 c everyed the tar date or final sm every town date. The pre-set price is called the futures price. The price of the underlying summation on the deli very date is called the shutdown price.Equity derivatives employment started on June 9, 2000 with introduction of stock-taking indi cator futures by Bombay Stock Exchange (BSE). National Stock Exchange (NSE) besides commenced its trading on 12 June, 2000 based on S&038P Nifty. Trading on NIFTY futures was introduced on the 12th of July 2000. Trading on stock futures was introduced in the NSE in the 9th November, 2001. Subsequently, other products alike stock futures on individual securities, index options and options on individual securities were introduced.Forward Contract A Forward Contract is a transaction in which the buyer and the seller agree upon a delivery of a circumstantial quality and quantity of asset usually a commodity at a specified future date. The price may be agreed on in advance or in future. Future Contract It involves an obligation on both the parties i. e. the buyer and the seller to run into the call of the contract (i. e. these are pre-determined contracts entered nowadays for a date in the future) * obligation to buy or sell * express quantity * At a specific price * Stated da te (Expiration Date) marked to Market on a cursory basis resources An pickaxes contract confers the responsibility exactly not the obligation to buy (call option) or sell (put option) a specified underlying instrument or asset at a specified price the charter or Exercised price up until or an specified future date the destruction date. The legal injury is called Premium and is paid by buyer of the option to the seller or writer of the option. Types of option * Call Option * Put option Put Option The right to sell a futures contract. It provides defense against falling prices and also sets a token(prenominal) price target.Call Option The right to buy a futures contract. It protects against rising prices and it also allows participation in seasonal price rises. Swap Swap is a contract between two parties to exchange a set of specie flows over a pre-determined period of time. Example A agrees to pay silver based on the value of return of an agreed stock market index t o the second counter ships company B. Participants in Derivatives Market 1. Hedgers They use derivatives markets to reduce or eliminate the risk associated with price of an asset.Majority of the participants in derivatives market belongs to this category. 2. Speculators They transact futures and options contracts to get extra leverage in betting on future movements in the price of an asset. They can amplification both the potential gains and potential losses by usage of derivatives in a speculative venture. 3. Arbitrageurs Their behaviour is guided by the desire to take advantage of a discrepancy between prices of much or less the same assets or competing assets in different markets.If, for example, they see the futures price of an asset getting out of line with the cash price, they will take offsetting positions in the two markets to lock in a profit. Applications of monetary Derivatives Some of the employments of financial derivatives can be enumerated as follows 1. Manageme nt of risk This is virtually important function of derivatives. Risk management is not about the elimination of risk rather it is about the management of risk. Financial derivatives provide a powerful tool for limiting risks that individuals and organizations face in the universal conduct of their businesses.It requires a thorough collar of the basic principles that regulate the pricing of financial derivatives. Effective use of derivatives can remedy cost, and it can increase returns for the arrangings. 2. Efficiency in trading Financial derivatives allow for step down trading of risk components and that leads to improving market capacity. Traders can use a position in one or more financial derivatives as a transform for a position in the underlying instruments. In many instances, traders find financial derivatives to be a more winning instrument than the underlying security.This is mainly because of the greater amount of liquidity in the market offered by derivatives as w ell as the lower transaction costs associated with trading a financial derivative as compared to the costs of trading the underlying instrument in cash market. 3. Speculation This is not the only use, and probably not the intimately important use, of financial derivatives. Financial derivatives are considered to be risky. If not used properly, these can leads to financial destruction in an organisation like what happened in Barings Plc.However, these instruments act as a powerful instrument for wise to(p) traders to expose themselves to calculated and well understood risks in search of a reward, that is, profit. 4. Price discover Another important application of derivatives is the price discovery which means divine revelation information about future cash market prices through the futures market. Derivatives markets provide a mechanism by which diverse and scatter opinions of future are collected into one readily discernible number which provides a consensus of knowledgeable thi nking. MOTIVATION FOR THE STUDYIn the last decade, many emerging and change economies have started introducing derivative contracts. Policy makers and regulators in these markets are concerned about the impact of futures on the underlying cash market. One of the reasons for this concern is the belief that futures trading move in speculators who then destabilize stead prices. Since futures foster speculation, the debate on the impact of speculators step up when futures contracts were first introduced for trading, beginning with commodity futures and contemptible on to financial futures.Before win regulations are introduced, it is essential to determine whether in fact there is a causal link between the introduction of futures and spot market volatility. It, therefore reachs imperative that we attempt answers to questions like What is the impact of derivatives upon market efficiency and liquidity of the underlying cash market? To what extent do derivatives destabilize the fin ancial system, and how should these risks be addressed? Can the results from studies of developed markets be extended to emerging markets? heavy(p) Market and Derivative segment in Indian Stock Market straightaway Indian stock market is very sound in terms of participants from all sections, huge overturn and number of listed companies. notes segment and derivative segment both have grown with each other. NSE and BSE are the major exchanges. Over the years Indian stock market has modernize with the use of high modern data and Communication technology. Derivative instruments have become part and parcel of business world. Today, derivative instruments are used in all markets such as foreign exchange, shares, commodities and so forth New, sophisticated, complex and exotic tools are cosmos developed in different markets.The innovative derivative instruments have been developed in such a manner that these are used even by a common man. Although derivatives have been in initiation for long in past in one or another form but present day sophisticated, standardized derivative products. Growth of Derivatives Market in India Equity derivatives market in India has registered an detonative growth and is expected to continue the same in the years to come. Introduced in 2000, financial derivatives market in India has shown a unique growth both in terms of volumes and numbers of traded contracts.NSE alone accounts for 99 per centum of the derivatives trading in Indian markets. The introduction of derivatives has been well received by stock market players. Trading in derivatives gained popularity before long after its introduction. In due course, the turnover of the NSE derivatives market exceeded the turnover of the NSE cash market. For example, in 2008, the value of the NSE derivatives markets was Rs. 130, 90,477. 75 Cr. whereas the value of the NSE cash markets was only Rs. 3,551,038 Cr. Table 1 turnover rate of Cash segment in India course of instruction di sturbance at BSE Turnover at NSE Total Turnover 1992-93 45696 - 45696 993-94 84536 - 84536 1994-95 67749 1805 69554 1995-96 50064 67287 117351 1996-97 124190 295403 419593 1997-98 207113 370193 577306 1998-99 310750 414474 725224 1999-00 686428 839052 1525840 2000-01 1000032 1339510 2339542 2001-02 307292 513167 820459 2002-03 314073 617989 932062 2003-04 503053 1099534 1602587 2004-05 518715 1140072 1658787 2005-06 816074 1569558 2385632 2006-07 956185 1945287 2901472 2007-08 1578857 3551038 5129895 2008-09 1100074 2752023 3852097 2009-10 1136513 2805878 3942391