Financial Derivatives Notes for MBA
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Financial Derivatives Notes is useful to study Financial Derivatives and also do a project and implimentation on Financial Derivatives . It contains following Pages:-
5.OPTIONS ON EQUITY SECURITIES
6.INDEX FUTURES AND INDEX OPTION CONTRACTS
9.FOREIGN CURRENCY OPTIONS
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Derivatives – Indian Scenario
Introduction to derivatives
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. By their very nature, the financial markets are marked by a very high degree of volatility. 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. However, by locking-in asset prices, derivative products minimize the impact of fluctuations in asset prices on the profitability and cash flow situation of risk-averse investors.
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. However, since their emergence, these products have become very popular and by 1990s, they accounted for about two-thirds of total transactions in derivative products. 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.
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A Derivative is a financial instrument that derives its value from an underlying asset. Derivative is an financial contract whose price/value is dependent upon price of one or more basic underlying asset, these contracts are legally binding agreements made on trading screens of stock exchanges to buy or sell an asset in the future. The most commonly used derivatives contracts are forwards, futures and options, which we shall discuss in detail later.
The main objective of the study is to analyze the derivatives market in India and to analyze the operations of futures and options. Analysis is to evaluate the profit/loss position futures . Derivates market is an innovation to cash market. Approximately its daily turnover reaches to the equal stage of cash market.
SCOPE OF THE STUDY
The Study is limited to “Derivatives” with special reference to futures and Option in the Indian context and the STEEL CITY SECURITIES Pvt Ltd have been Taken as a representative sample for the study. The study can’t be said as totally perfect. Any alteration may come. The study has only made a humble Attempt at evaluation derivatives market only in India context. The study is not Based on the international perspective of derivatives markets, which exists in NASDAQ, CBOT etc.,
DERIVATIVES INSTRUMENTS IN INDIA
The first derivative product to be introduced in the Indian securities market is going to be "INDEX FUTURES". In the world, first index futures were traded in U.S. on Kansas City Board of Trade (KCBT) on Value Line Arithmetic Index (VLAI) in 1982.
Organized exchanges began trading options on equities in 1973 ,where as exchange traded debt options did not appear until 1982 ,on the other hand fixed income futures began trading in 1975 ,but equity related futures did not begin until 1982 .
DERIVATIVES SEGMENT IN BSE & NSE
On June 9-2000 BSE & NSE became the first exchanges in India to introduce trading in exchange traded derivative product with the launch of index futures on sense and Nifty futures respectively.
Index futures was follows by launch of index options in June 2001, stock options in July 2001 and stock futures in Nov 2001.Presently stock futures and options available on 41 well-capitalized and actively traded scrips mandated by SEBI.
HISTORY OF STOCK EXCHANGE
The only stock exchanges operating in the 19th century were those of Bombay set up in 1875 and Ahmedabad set up in 1894. These were organized as voluntary non profit-making association of brokers to regulate and protect their interests. Before the control on securities trading became central subject under the constitution in 1950, it was a state subject and the Bombay securities contracts (control) Act of 1925 used to regulate trading in securities. Under this act, the Bombay stock exchange was recognized in 1927 and Ahmedabad in 1937.
BOMBAY STOCK EXCHANGE
This stock exchange, Mumbai, popularly known as “BSE” was established in 1875 as “The Native share and stock brokers association”, as a voluntary non-profit making association. It has an evolved over the years into its present status as the premiere stock exchange in the country. It may be noted that the stock exchanges the oldest one in Asia, even older than the Tokyo stock exchange, which was founded in 1878.
The exchange, while providing an efficient and transparent market for trading in securities, upholds the interests of the investors and ensures redressed of their grievances, whether against the companies or its own member brokers. It also strives to educate and enlighten the investors by making available necessary informative inputs and conducting investor education programs.
A governing board comprising of 9 elected directors, 2 SEBI nominees, 7 public representatives and an executive director is the apex body, which decides is the apex body, which decides the policies and regulates the affairs of the exchange.