Description
derivative markets in india
DERIVATIVES MARKET
CONTENTS
Sr No 1. 2. 3. 4. 5 6. 7. 8. 9. 10. 11. 12. 13.
Topic Derivatives
Page Number 1
History of derivatives globally2 Introduction of commodity derivatives India 3 Introduction of financial derivatives in India. .Derivatives in India- A chronology Forward Contract Futures Contract Options Contract Swaps Swaptions Participants of derivatives Advantages of derivatives market Future of derivatives market 5 6 7 9 12 14 18 20 23 25
Derivatives A derivative is a security whose price is dependent upon or derived from one or more underlying assets. This is where it gets it?s name from. It comes from the English word “derive” which means that its value is derived or dependent upon the value of another underlying asset. The derivative itself is merely a contract between two or more parties. Its value is determined by fluctuations in the underlying asset. This underlying serves as the identity tag for the derivative contract. The underlying assets range from commodities like cotton, wheat, rice, orange, soya, pulses to financial assets such as stock, shares, currency etc. Thus a derivative can be formed on an underlying of any nature.The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes.
Derivatives are broadly of two types: Commodity derivatives- They are the derivatives that have been running since olden days. Their existence can be traced back to years Before Christ. The underlying asset is a commodity. Most common underlying assets were agricultural products such as wheat, cotton, rice etc as they were subject to market fluctuations. Thus, commodity derivatives served as a breather for farmers who could enter forward or futures contract and thereby, safeguard against the risks he was exposed to. Financial derivatives- They emerged much after their commodity counterparts. The underlying asset of a financial derivative is currency, exchange rate, interest rates, stocks, shares etc. financial derivatives with their entry have caused sweeping changes in financial sectors across countries. Their advantages of protecting against financial market volatility and ability to reveal future market prices have led to their speedy and massive expansion contributing to financial growth.
History of derivatives globally To start we need to go back to the Bible. In Genesis Chapter 29, believed to be about the year 1700 B.C., Jacob purchased an option costing him seven years of labour that granted him the right to marry Laban's daughter Rachel. His prospective father-in-law, however, reneged, perhaps making this not only the first derivative but the first default on a derivative. Laban required Jacob to marry his older daughter Leah. Jacob married Leah, but because he preferred Rachel, he purchased another option, requiring seven more years of labour, and finally married Rachel, bigamy being allowed in those days. Jacob ended up with two wives, twelve sons, who became the patriarchs of the twelve tribes of Israel. Some argue that Jacob really had forward contracts, which obligated him to the marriages but that does not matter. Jacob did derivatives, one way or the other. Around 580 B.C., Thales the Milesian purchased options on olive presses and made a fortune off of a bumper crop in olives. So derivatives were around before the time of Christ. The first known instance of derivatives trading dates to 2000 B.C. when merchants, in what is now calledBahrain Island in the Arab Gulf, made consignment transactions for goods to besold in India. Derivatives trading in the same era also occurred in Mesopotamia. The trading in Mesopotamia is evidenced by manyclay tablets in the cuneiform writing, and these are available at the BritishMuseum, the Louvre and were some of the many items stolen from museums inBaghdad during the U.S invasion in 2003. A more literary reference comes some2,350 years ago from Aristotle who discussed a case of market manipulationthrough the use of derivatives on olive oil press capacity in Chapter 9 of hisPolitics. Derivatives trading in an exchange environment and with trading rules can betraced back to Venice in the 12th Century. Forward and options contracts weretraded on commodities, shipments and securities in Amsterdam after 1595. TheJapanese traded futures-like contracts on warehouse receipts or rice in the 1700s.Dojima Rice Exchange was established in 1710 in Osaka, Japan. The UnitedStates followed in the early 1800s. Forward contracts were standard at the time.In 1848, theChicago Board of Trade (CBOT) was formed. Trading was originally in forwardcontracts, the first contract (on corn) was written on March 13, 1851. In 1865,standardized futures contracts were introduced. In 1972,the International Monetary Market (IMM), a division of the Chicago Mercantile Exchange, was formed to offer futures contracts in foreign currencies: British pound, Canadian dollar,German mark, Japanese yen, Mexican peso, and Swiss franc. In 1881, a regionalmarket was founded in continuously since then; today the Minneapolis GrainExchange (MGEX) is the only exchange for hard red spring wheat futures andoptions. The 1970s saw the development of the financial futures contracts, whichallowed trading in the future value of interest rates. Today, the futures marketshave far outgrown their agricultural origins. Introduction of commodity derivatives in India
The history of organized commodity derivatives in India goes back to thenineteenth century when the Cotton Trade Association started futures trading in1875, barely about a decade after the commodity derivatives started in Chicago. Over time the derivatives market developed in several other commodities in India.Following cotton, derivatives trading started in oilseeds in Bombay (1900), raw jute and jute goods in Calcutta (1912), wheat in Hapur (1913) and in Bullion inBombay (1920). However, many feared that derivatives fuelled unnecessaryspeculation in essential commodities, and were detrimental to the healthyfunctioning of the markets for the underlying commodities, and hence to thefarmers. With a view to restricting speculative activity in cotton market, theGovernment of Bombay prohibited options business in cotton in 193
Cotton as commodity derivative Wheat as commodity derivative Later in1943, forward trading was prohibited in oilseeds and some other commoditiesincluding food-grains, spices, vegetable oils, sugar and cloth.After Independence, the Parliament passed Forward Contracts (Regulation) Act,1952 which regulated forward contracts in commodities all over India. The Actapplies to goods, which are defined as any movable property other than security,currency and actionable claims. The Act prohibited options trading in goods alongwith cash settlements of forward trades, rendering a crushing blow to thecommodity derivatives market. Under the Act, only those associations/exchanges,which are granted recognition by the Government, are allowed to organize forwardtrading in regulated commodities. The Act envisages three-tier regulation: (i) (ii) (iii) The Exchange which organizes forward trading in commodities can regulate trading on a day-to-day basis; The Forward Markets Commission provides regulatory oversight under the powers delegated to it by the central Government. The Central Government - Department of Consumer Affairs, Ministry of Consumer Affairs, Food and Public Distribution - is the ultimate regulatory authority.
The already shaken commodity derivatives market got a crushing blow when in1960s, following several years of severe draughts that forced many farmers todefault on forward contracts (and even caused some suicides), forward trading was banned in many commodities considered primary or essential. As a result,commodities derivative markets dismantled and went underground where to someextent they continued as OTC contracts at negligible
volumes. Much later, in1970s and 1980s the Government relaxed forward trading rules for somecommodities, but the market could never regain the lost volumes. After the Indian economy embarked upon the process of liberalization andglobalization in 1990, the Government set up a Committee in 1993 to examine therole of futures trading. The Committee (headed by Prof. K.N. Kabra)recommended allowing futures trading in 17 commodity groups. It alsorecommended strengthening of the Forward Markets Commission, and certainamendments to Forward Contracts (Regulation) Act 1952, particularly allowingoptions trading in goods and registration of brokers with Forward MarketsCommission. The Government accepted most of these recommendations andfutures trading were permitted in all recommended commodities.Commodity futures trading in India remained in a state of hibernation for nearlyfour decades, mainly due to doubts about the benefits of derivatives. Finally arealization that derivatives do perform a role in risk management led thegovernment to change its stance. The policy changes favouring commodityderivatives were also facilitated by the enhanced role assigned to free marketforces under the new liberalization policy of the Government. Indeed, it was atimely decision too, since internationally the commodity cycle was on the upswing and the following decade was one of commodities. To make up for the loss of growth and development during the four decades of restrictive government policies, FMC and the Government encouraged setting upof the commodity exchanges using the most modern systems and practices in theworld. Some of the main regulatory measures imposed by the FMC include dailymark to market system of margins, creation of trade guarantee fund, back-office.
Introduction of Financial derivatives in India The first step towards introduction of financial derivatives trading in India was the promulgation of the
Securities Laws (Amendment) Ordinance, 1995. It provided for withdrawal of prohibition on options in securities. The last decade, beginning the year 2000, saw lifting of ban on futures trading in many commodities. Around the same period, national electronic commodity exchanges were also set up. Derivatives trading commenced in India in June 2000 after SEBI granted the final approval to this effect in May 2001 on the recommendation of L. C Gupta committee. Securities and Exchange Board of India (SEBI) permitted the derivative segments of two stock exchanges, NSE and BSE and their clearing house/corporation to commence trading and settlement in approved derivatives contracts. Initially, SEBI approved trading in index futures contracts based on various stock market indices such The National Stock Exchange (NSE), located in Bombay is the first screen based automated stock exchange. It was set up in 1993 to encourage stock exchange reform through system modernization and competition. It opened for trading in mid-1994 and today accounts for 99% market shares of derivatives trading in India. Bombay Stock Exchange (BSE), which is Asia's Oldest Broking House, was established in 1875 in Mumbai. It is also called as Dalal Street. The BSE Index, called the Sensex, is calculated by Free Float Method by including scripts of top 30companies selected on the market capitalization criterion. 21 International Research Journal of Finance and Economics Issue 37 (2010)as, S&P CNX, Nifty and Sensex. Subsequently, index-based trading was permitted in options as well as individual securities. The trading in BSE Sensex options commenced on June 4, 2001 and the trading in options on individual securities commenced in July 2001. Futures contracts on individual stocks were launched in November 2001. The derivatives trading on NSE commenced with S&P CNX Nifty Index futures on June 12, 2000. The trading in index options commenced on June 4, 2001 and trading in options on individual securities commenced on July 2, 2001. Single stock futures were launched on November 9, 2001. The index futures and options contract on NSE are based on S&P CNX. In June 2003, NSE introduced Interest Rate Futures which were subsequently banned due to pricing issue.
Derivatives in India: A Chronology Date Progress 14 December 1995 NSE asked SEBI for permission to trade index futures. 18 November 1996 SEBI setup L. C. Gupta Committee to draft a policy frameworkfor index futures. 11 May 1998 L. C. Gupta Committee submitted report.
7 July 1999 RBI gave permission for OTC forward rate agreements (FRAs)and interest rate swaps 24 May 2000 SIMEX chose Nifty for trading futures and option on an Indian index. 25 May 2000 SEBI gave permission to NSE and BSE to do index futurestrading. 9 June 2000 Trading of BSE Sensex futures commenced at BSE. 12 June 2000 Trading of Nifty futures commenced at NSE. 31 August 2000 Trading of futures and options on Nifty to commence at SIMEX. June 2001 Trading of Equity Index Options at NSE July 2001 Trading of Stock Options at NSE November 9, 2002 Trading of Single Stock futures at BSE June 2003 Trading of Interest Rate Futures at NSE September 13, 2004 Weekly Options at BSE January 1, 2008 Trading of Chhota(Mini) Sensex at BSE January 1, 2008 Trading of Mini Index Futures & Options at NSE August 29,2008 Trading of Currency Futures at NSE October 2,2008 Trading of Currency Futures at BSE
Classification of derivatives 1. Forward contract In finance and economics, a forward contract or simply a forward is a non-standardized contract between two parties to buy or sell an asset at a specified future time at a price agreed today. This is in contrast to a spot contract, which is an agreement to buy or sell an asset today. It costs nothing to enter a forward contract. The party agreeing to buy the underlying asset in the future assumes a long position, and the party agreeing to sell the asset in the future assumes a short position. The price agreed upon is called the delivery price, which is equal to the forward price at the time the contract is entered into.
The price of the underlying instrument, in whatever form, is paid before control of the instrument changes. This is one of the many forms of buy/sell orders where the time of trade is not the time where the securities themselves are exchanged. The forward price of such a contract is commonly contrasted with the spot price, which is the price at which the asset changes hands on the spot date. The difference between the spot and the forward price is the forward premium or forward discount, generally considered in the form of a profit, or loss, by the purchasing party. Forwards, like other derivative securities, can be used to hedge risk (typically currency or exchange rate risk), as a means of speculation, or to allow a party to take advantage of a quality of the underlying instrument which is time-sensitive. A closely related contract is a futures contract; they differ in certain respects. Forward contracts are very similar to futures contracts, except they are not exchange-traded, or defined on standardized assets. Forwards also typically have no interim partial settlements or "trueups" in margin requirements like futures – such that the parties do not exchange additional property securing the party at gain and the entire unrealized gain or loss builds up while the contract is open. However, being traded OTC; forward contracts specification can be customized and may include mark-to-market and daily margining. Hence, a forward contract arrangement might call for the loss party to pledge collateral or additional collateral to better secure the party at gain.
How a forward contract works Suppose that Bob wants to buy a house a year from now. At the same time, suppose that Andy currently owns a $100,000 house that he wishes to sell a year from now. Both parties could enter into a forward contract with each other. Suppose that they both agree on the sale price in one year's time of $104,000. Andy and Bob have entered into a forward contract. Bob, because he is buying the underlying, is said to have entered a long forward contract. Conversely, Andy will have the short forward contract. At the end of one year, suppose that the current market valuation of Andy's house is $110,000. Then, because Andy is obliged to sell to Bob for only $104,000, Bob will make a profit of $6,000. To see why this is so, one needs only to recognize that Bob can buy from Andy for $104,000 and immediately sell to the market for $110,000. Bob has made the
difference in profit. In contrast, Andy has made a potential loss of $6,000, and an actual profit of $4,000. Currency forwards are also similar, where one party opens a forward contract to buy or sell a currency (ex. a contract to buy Canadian dollars) to expire/settle at a future date, as they do not wish to be exposed to exchange rate risk over a period of time. As the exchange rate between U.S. dollars and Canadian dollars fluctuates between the trade date and the earlier of the date at which the contract is closed or the expiration date, one party gains and the counterparty loses as one currency strengthens against the other. Sometimes, the buy forward is opened because the investor will actually need Canadian dollars at a future date such as to pay a debt owed that is denominated in Canadian dollars. Other times, the party opening a forward does so, not because they need Canadian dollars nor because they are hedging currency risk, but because they are speculating on the currency, expecting the exchange rate to move favourably to generate a gain on closing the contract.
Example of how forward prices should be agreed upon- Continuing on the example above, suppose now that the initial price of Andy's house is $100,000 and that Bob enters into a forward contract to buy the house one year from today. But since Andy knows that he can immediately sell for $100,000 and place the proceeds in the bank, he wants to be compensated for the delayed sale. Suppose that the risk free rate of return R (the bank rate) for one year is 4%. Then the money in the bank would grow to $104,000, risk free. So Andy would want at least $104,000 one year from now for the contract to be worthwhile for him – the opportunity cost will be covered.
2. Futures contract In finance and economics, a futures contract is a standardized contract between two parties to exchange a specified asset of standardized quantity and quality for a price agreed today (the futures price or the strike price) with delivery occurring at a specified future date, the delivery date. The contracts are traded on a futures exchange. The party agreeing to buy the underlying asset in the future i.e. the "buyer" of the contract, is said to be "long", and the party agreeing to sell the asset in the future i.e. the "seller" of the contract, is said to be "short". The terminology reflects the expectations of the parties -- the buyer hopes or expects that the asset price is going to increase, while the seller hopes or expects that it will decrease. Note that the contract itself costs nothing to enter; the buy/sell terminology is a linguistic convenience reflecting the position each party is taking (long or short).
In many cases, the underlying asset to a futures contract may not be traditional commodities at all – that is, for financial futures the underlying asset or item can be currencies, securities or financial instruments and intangible assets or referenced items such as stock indexes and interest rates. While the futures contract specifies a trade taking place in the future, the purpose of the futures exchange institution is to act as intermediary and minimize the risk of default by either party. Thus the exchange requires both parties to put up an initial amount of cash, the margin. Additionally, since the futures price will generally change daily, the difference in the prior agreed-upon price and the daily futures price is settled daily also. The exchange will draw money out of one party's margin account and put it into the other's so that each party has the appropriate daily loss or profit. If the margin account goes below a certain value, then a margin call is made and the account owner must replenish the margin account. This process is known as marking to market. Thus on the delivery date, the amount exchanged is not the specified price on the contract but the spot value (since any gain or loss has already been previously settled by marking to market). A closely related contract is a forward contract. A forward is like a futures contract in that it specifies the exchange of goods for a specified price at a specified future date. However, a forward is not traded on an exchange and thus does not have the interim partial payments due to marking to market. Nor is the contract standardized, as on the exchange. Unlike an option, both parties of a futures contract must fulfil the contract on the delivery date. The seller delivers the underlying asset to the buyer, or, if it is a cash-settled futures contract, then cash is transferred from the futures trader who sustained a loss to the one who made a profit. To exit the commitment prior to the settlement date, the holder of a futures position can close out its contract obligations by taking the opposite position on another futures contract on the same asset and settlement date. The difference in futures prices is then a profit or loss. Futures contracts and exchanges There are many different kinds of futures contracts, reflecting the many different kinds of "tradable" assets about which the contract may be based such as commodities, securities (such as single-stock futures), currencies or intangibles such as interest rates and indexes. Futures are traded in the following markets: Foreign exchange market, Money market, Bond market, Equity market, Soft Commodities market. Trading on commodities began in Japan in the 18th century with the trading of rice and silk, and similarly in Holland with tulip bulbs. Trading in the US began in the mid 19th century, when central grain markets were established and a marketplace was created for farmers to bring their commodities and sell them either for immediate delivery (also called spot or cash market) or for forward delivery. These forward contracts were private contracts between buyers and sellers and became the forerunner to today's exchange-traded futures contracts.
Although contract trading began with traditional commodities such as grains, meat and livestock, exchange trading has expanded to include metals, energy, currency and currency indexes, equities and equity indexes, government interest rates and private interest rates.
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Traders in futures Futures traders are traditionally placed in one of two groups: hedgers, who have an interest in the underlying asset (which could include an intangible such as an index or interest rate) and are seeking to hedge out the risk of price changes; and speculators, who seek to make a profit by predicting market moves and opening a derivative contract related to the asset "on paper", while they have no practical use for or intent to actually take or make delivery of the underlying asset. In other words, the investor is seeking exposure to the asset in a long futures or the opposite effect via a short futures contract. Options on futures In many cases, options are traded on futures, sometimes called simply "futures options". A put is the option to sell a futures contract, and a call is the option to buy a futures contract. For both, the option strike price is the specified futures price at which the future is traded if the option is exercised. Futures are often used since they are delta one instruments. Calls and options on futures may be priced similarly to those on traded assets by using an extension of the Black-Scholes formula, namely Black's formula for futures. Investors can either take on the role of option seller/option writer or the option buyer. Option sellers are generally seen as taking on more risk because they are contractually obligated to take the opposite futures position if the options buyer exercises his or her right to the futures position specified in the option. The price of an option is determined by supply and demand principles and consists of the option premium, or the price paid to the option seller for offering the option and taking on risk.
Futures versus forwards While futures and forward contracts are both contracts to deliver an asset on a future date at a prearranged price, they are different in two main respects: -Futures are exchange-traded, while forwards are traded over-the-counter.Thus futures are standardized and face an exchange, while forwards are customized and face a non-exchange counterparty. - Futures are margined, while forwards are not. Thus futures have significantly less credit risk, and have different funding.
3. Options The right, but not the obligation, to buy (for a call option) or sell (for a put option) a specific amount of a given stock, commodity, currency, index, or debt, at a specified price (the strike price) during a specified period of time is called an option. For stock options, the amount is usually 100 shares. Each option contract has a buyer, called the holder, and a seller, known as the writer. If the option contract is exercised, the writer is responsible for fulfilling the terms of the contract by delivering the shares to the appropriate party. In the case of a security that cannot be delivered such as an index, the contract is settled in cash. For the holder, the potential loss is limited to the price paid to acquire the option and the possible gain is unlimited. When an option is not exercised, it expires. No shares change hands and the money spent to purchase the option is lost. Option contracts, like stocks, are therefore said to have an asymmetrical payoff pattern. For the writer, the potential loss is unlimited unless the contract is covered, meaning that the writer already owns the security underlying the option. Option contracts are most frequently as either leverage or protection. As leverage, options allow the holder to control equity in a limited capacity for a fraction of what the shares would cost. The difference can be invested elsewhere until the option is exercised. As protection, options can guard against price fluctuations in the near term because they provide the right acquire the underlying stock at a fixed price for a limited time. Risk is limited to the option premium (except when writing options for a security that is not already owned). However, the costs of trading options (including both commissions and the bid/ask spread) is higher on a
percentage basis than trading the underlying stock. In addition, options are very complex and require a great deal of observation and maintenance.
Application of option contract in unilateral contracts The option contract provides an important role in unilateral contracts. In unilateral contracts, the promisor seeks acceptance by performance from the promisee. In this scenario, the classical contract view was that a contract is not formed until the performance that the promisor seeks is completely performed. This is because the consideration for the contract was the performance of the promisee. Once the promisee performed completely, the condition is satisfied and a contract is formed and only the promisor is bound to his promise. A problem arises with unilateral contracts because of the late formation of the contract. With classical unilateral contracts, a promisor can revoke his offer for the contract at any point prior to the promisee's complete performance. So, if a promisee provides 99% of the performance sought, the promisor could then revoke without any remedy for the promisee. The promisor has maximum protection and the promisee has maximum risk in this scenario. An option contract can provide some security to the promisee in the above scenario. Essentially, once a promisee begins performance, an option contract is implicitly created between the promisor and the promisee. The promisor impliedly promises not to revoke the offer and the promisee impliedly promises to furnish complete performance, but as the name suggests, the promisee still retains the "option" of not completing performance. Basically, the consideration is provided by the promisee's beginning of performance. Case law differs from jurisdiction to jurisdiction, but an option contract can either be implicitly created instantaneously at the beginning of performance (the Restatement view) or after some "substantial performance." It has been hypothesized that option contracts could help allow free market roads to be constructed without resorting to eminent domain, as the road company could make option
contracts with many landowners, and eventually consummate the purchase of parcels comprising the contiguous route needed to build the road.
4. Swap A swap is nothing but a barter or exchange but it plays a very important role in international finance. A swap is the exchange of one set of cash flows for another. A swap is a contract between two parties in which the first party promises to make a payment to the second and the second party promises to make a payment to the first. Both payments take place on specified dates. Different formulas are used to determine what the two sets of payments will be.
Classification of swaps is done on the basis of what the payments are based on. The different types of swaps are as follows. Interest rate swaps The interest rate swap is the most frequently used swap. An interest rate swap generally involves one set of payments determined by the Eurodollar (LIBOR) rate, although, it can be pegged to other rates. The other set is fixed at an agreed-upon rate. This other agreed upon rate usually corresponds to the yield on a Treasury Note with a comparable maturity, although, this can also be variable.
Additionally, there will be a spread of a pre-determined amount of basis points. This is just one type of interest rate swap. Sometimes payments tied to floating rates are used for interest rate swaps. The notional principal is the exchange of interest payments based on face value. The notional principal itself is not exchanged. On the day of each payment, the party who owes more to the other makes a net payment i.e. the party making a loss pays the loss amount to the party making a profit. Here the loss amount will be equal to the profit amount. Only one party makes a payment. Currency swaps A currency swap is an agreement between two parties in which one party promises to make payments in one currency and the other promises to make payments in another currency. Currency swaps are similar yet notably different from interest rate swaps and are often combined with interest rate swaps. Currency swaps help eliminate the differences between international capital markets. Interest rates swaps help eliminate barriers caused by regulatory structures. While currency swaps result in exchange of one currency with another, interest rate swaps help exchange a fixed rate of interest with a variable rate. The needs of the parties in a swap transaction are diametrically different. Swaps are not traded or listed on exchange but they do have an informal market and are traded among dealers. A swap is a contract, which can be effectively combined with other type of derivative instruments. An option on a swap gives the party the right, but not the obligation to enter into a swap at a later date. Commodity swaps In commodity swaps, the cash flows to be exchanged are linked to commodity prices. Commodities are physical assets such as metals, energy stores and food including cattle. E.g. in a commodity swap, a party may agree to exchange cash flows linked to prices of oil for a fixed cash flow. Commodity swaps are used for hedging against -Fluctuations in commodity prices or -Fluctuations in spreads between final product and raw material prices (E.g. Cracking spread which indicates the spread between crude prices and refined product prices significantly affect the margins of oil refineries) A Company that uses commodities as input may find its profits becoming very volatile if the commodity prices become volatile. This is particularly so when the output prices may not change as frequently as the commodity prices change. In such cases, the company would enter into a swap whereby it receives payment linked to commodity prices and pays a fixed rate in exchange. A producer of a commodity may want to reduce the variability of his
revenues by being a receiver of a fixed rate in exchange for a rate linked to the commodity prices.
Gold- popular commodity swap
Oil – popular commodity swap
Equity swaps Under an equity swap, the shareholder effectively sells his holdings to a bank, promising to buy it back at market price at a future date. However, he retains a voting right on the shares. Credit default swaps A credit default swap (CDS) is a swap contract in which the buyer of the CDS makes a series of payments to the seller and, in exchange, receives a payoff if an instrument - typically a bond or loan - goes into default (fails to pay). Less commonly, the credit event that triggers the payoff can be a company undergoing restructuring, bankruptcy or even just having its credit rating downgraded. CDS contracts have been compared with insurance, because the buyer pays a premium and in return, receives a sum of money if one of the events specified in the contract occur. Unlike an actual insurance contract the buyer is allowed to profit from the contract and may also cover an asset to which the buyer has no direct exposure. Other variations There are myriad different variations on the vanilla swap structure, which are limited only by the imagination of financial engineers and the desire of corporate treasurers and fund managers for exotic structures. A total return swap is a swap in which party „A? pays the total return of an asset, and party „B? makes periodic interest payments. The total return is the capital gain or loss, plus any interest or dividend payments. Note that if the total return is negative, then party „A? receives this amount from party „B?. The parties have exposure to the return of the underlying stock or index, without having to hold the underlying assets. The profit or loss of party „B? is the same for him as actually owning the underlying asset. An option on a swap is called a swaption. These provide one party with the right but not the obligation at a future time to enter into a swap.
A variance swap is an over-the-counter instrument that allows one to speculate on or hedge risks associated with the magnitude of movement, a CMS, is a swap that allows the purchaser to fix the duration of received flows on a swap. An Amortising swap is usually an interest rate swap in which the notional principal for the interest payments declines during the life of the swap, perhaps at a rate tied to the prepayment of a mortgage or to an interest rate benchmark such as the LIBOR. It is suitable to those customers of banks who want to manage the interest rate risk involved in predicted funding requirement, or investment programs. A Zero coupon swap is of use to those entities which have their liabilities denominated in floating rates but at the same time would like to conserve cash for operational purposes. A Deferred rate swap is particularly attractive to those users of funds that need funds immediately but do not consider the current rates of interest very attractive and feel that the rates may fall in future. An Accreting swap is used by banks which have agreed to lend increasing sums over time to its customers so that they may fund projects. A Forward swap is an agreement created through the synthesis of two swaps differing in duration for the purpose of fulfilling the specific time-frame needs of an investor.-also referred to as a forward start swap, delayed start swap, and a deferred start swap.
Components of swap price There are four major components of a swap price: Benchmark price: Swap rates are based on a series of benchmark instruments. They may be quoted as a spread over the yield on these benchmark instruments or on an absolute interest rate basis. In the Indian markets the common benchmarks are MIBOR, 14, 91, 182 & 364 day T-bills, CP rates and PLR rates. Liquidity: Liquidity, which is function of supply and demand, plays an important role in swaps pricing. This is also affected by the swap duration. It may be difficult to have counterparties for long duration swaps, especially so in India. Transaction Costs: Transaction costs include the cost of hedging a swap. Say in case of a bank, which has a floating obligation of 91 days T. Bill. Now in order to hedge the bank would go long on a 91 day T. Bill. For doing so the bank must obtain funds. The transaction cost would thus involve such a difference. Yield on 91 day T. Bill - 9.5% Cost of fund (e.g.- Repo rate) – 10% The transaction cost in this case would involve 0.5%
Credit Risk: Credit risk must also be built into the swap pricing. Based upon the credit rating of the counterparty a spread would have to be incorporated. Say for e.g. it would be 0.5% for an AAA rating.
5. Swaptions A swaption is an option granting its owner the right but not the obligation to enter into an underlying swap. Although options can be traded on a variety of swaps, the term "swaption" typically refers to options on interest rate swaps. There are two types of swaption contracts:
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A payer swaption gives the owner of the swaption the right to enter into a swap where they pay the fixed leg and receive the floating leg. A receiver swaption gives the owner of the swaption the right to enter into a swap in which they will receive the fixed leg, and pay the floating leg.
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The buyer and seller of the swaption agree on:
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the premium (price) of the swaption the strike rate (equal to the fixed rate of the underlying swap) length of the option period (which usually ends two business days prior to the start date of the underlying swap), the term of the underlying swap, notional amount, amortization, if any frequency of settlement of payments on the underlying swap = basis point spread
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The swaption market The participants in the swaption market are predominantly large corporations, banks, financial institutions and hedge funds. End users such as corporations and banks typically use swaptions to manage interest rate risk arising from their core business or from their financing arrangements. For example, a corporation wanting protection from rising interest rates might buy a payer swaption. A bank that holds a mortgage portfolio might buy a receiver swaption to protect against lower interest rates that might lead to early prepayment of the mortgages. A hedge fund believing that interest rates will not rise by more than a certain amount might sell a payer swaption, aiming to make money by collecting the premium.
Major investment and commercial banks such as JP Morgan Chase, Bank of America Securities and Citigroup make markets in swaptions in the major currencies, and these banks trade amongst themselves in the swaption interbank market. The market making banks typically manage large portfolios of swaptions that they have written with various counterparties. A significant investment in technology and human capital is required to properly monitor the resulting exposure. Swaption markets exist in most of the major currencies in the world, the largest markets being in U.S. dollars, euro, sterling and Japanese yen. The swaption market is over-the-counter (OTC), i.e., not traded on any exchange. Legally, a swaption is an agreement between the two counterparties to exchange the required payments. The counterparties are exposed to each other?s failure to make scheduled payments on the underlying swap, although this exposure is typically mitigated through the use of "collateral agreements" whereby margin is posted to cover the anticipated future exposure.
Participants in Derivatives market Hedgers
Hedgers are individuals and firms that make purchases and sales in the futures market solely for the purpose of establishing a known price level--weeks or months in advance--for something they later intend to buy or sell in the cash market (such as at a grain elevator or in the bond market). In this way they attempt to protect themselves against the risk of an unfavourable price change in the interim. Or hedgers may use futures to lock in an acceptable margin between their purchase cost and their selling price. The details of hedging can be somewhat complex but the principle is simple. Consider this example: A jewellery manufacturer will need to buy additional gold from his supplier in six months. Between now and then, however, he fears the price of gold may increase. That could be a problem because he has already published his catalogue for a year ahead. To lock in the price level at which gold is presently being quoted for delivery in six months, he buys a futures contract at a price of, say, $350 an ounce. If, six months later, the cash market price of gold has risen to $370, he will have to pay his supplier that amount to acquire gold. However, the extra $20 an ounce cost will be offset by a $20 an ounce profit when the futures contract bought at $350 is sold for $370. In effect, the hedge provided insurance against an increase in the price of gold. It locked in a net cost of $350, regardless of what happened to the cash market price of gold. Had the price of gold declined instead of risen, he would have incurred a loss on his futures position but this would have been offset by the lower cost of acquiring gold in the cash market. The number and variety of hedging possibilities is practically limitless. A cattle feeder can hedge against a decline in livestock prices and a meat packer or supermarket chain can hedge against an increase in livestock prices. Borrowers can hedge against higher interest rates, and lenders against lower interest rates. Investors can hedge against an overall decline in stock prices, and those who anticipate having money to invest can hedge against an increase in the over-all level of stock prices. And the list goes on. Whatever the hedging strategy, the common denominator is that hedgers willingly give up the opportunity to benefit from favourable price changes in order to achieve protection against unfavourable price changes. Past performance is not necessarily indicative of future results. The risk of loss exists in futures and options trading.
Speculators Speculators are somewhat like a middle man. They are never interested in actual owing the commodity. They will just buy from one end and sell it to the other in anticipation of future price movements. They actually bet on the future movement in the price of an asset.
They are the second major group of futures players. These participants include independent floor traders and investors. They handle trades for their personal clients or brokerage firms. Buying a futures contract in anticipation of price increases is known as „going long?. Selling a futures contract in anticipation of a price decrease is known as „going short?. Speculative participation in futures trading has increased with the availability of alternative methods of participation. Speculators have certain advantages over other investors they are as follows: 1. If the trader?s judgement is good, he can make more money in the futures market faster because prices tend, on average, to change more quickly than real estate or stock prices. 2. Futures are highly leveraged investments. The trader puts up a small fraction of the value of the underlying contract as margin, yet he can ride on the full value of the contract as it moves up and down. The money he puts up is not a down payment on the underlying contract, but a performance bond. The actual value of the contract is only exchanged on those rare occasions when delivery takes place.
Arbitrageurs A type of investor who attempts to profit from price differences in the market by making simultaneous trades that offset each other and capturing risk-free profits. An arbitrageur would, for example, seek out price discrepancies between stocks listed on more than one exchange, and buy the undervalued shares on one exchange while short selling the same
number of overvalued shares on another exchange, thus capturing risk-free profits as the prices on the two exchanges converge. Suppose that the exchange rates (after taking out the fees for making the exchange) in London are £5 = $10 = ¥1000 and the exchange rates in Tokyo are ¥1000 = $12 = £6. Converting ¥1000 to $12 in Tokyo and converting that $12 into ¥1200 in London, for a profit of ¥200, would be arbitrage. In reality, this "triangle arbitrage" is so simple that it almost never occurs. But more complicated foreign exchange arbitrages, such as the spot-forward arbitrage are much more common.
Advantages of derivatives market Today's sophisticated international markets have helped foster the rapid growth in derivative instruments. In the hands of knowledgeable investors, derivatives can derive profit from: -Changes in interest rates and equity markets around the world -Currency exchange rate shifts
-Changes in global supply and demand for commodities such as agricultural products, precious and industrial metals, and energy products such as oil and natural gas Adding some of the wide variety of derivative instruments available to a traditional portfolio of investments can provide global diversification in financial instruments and currencies, help hedge against inflation and deflation, and generate returns that are not correlated with more traditional investments. The two most widely recognized benefits attributed to derivative instruments are price discovery and risk management. 1. Price Discovery Futures market prices depend on a continuous flow of information from around the world and require a high degree of transparency. A broad range of factors (climatic conditions, political situations, debt default, refugee displacement, land reclamation and environmental health, for example) impact supply and demand of assets (commodities in particular) - and thus the current and future prices of the underlying asset on which the derivative contract is based. This kind of information and the way people absorb it constantly changes the price of a commodity. This process is known as price discovery. With some futures markets, the underlying assets can be geographically dispersed, having many spot (or current) prices in existence. The price of the contract with the shortest time to expiration often serves as a proxy for the underlying asset. Second, the price of all future contracts serve as prices that can be accepted by those who trade the contracts in lieu of facing the risk of uncertain future prices. Options also aid in price discovery, not in absolute price terms, but in the way the market participants view the volatility of the markets. This is because options are a different form of hedging in that they protect investors against losses while allowing them to participate in the asset's gains.
2. Risk Management This could be the most important purpose of the derivatives market. Risk management is the process of identifying the desired level of risk, identifying the actual level of risk and altering the latter to equal the former. This process can fall into the categories of hedging and speculation. Hedging has traditionally been defined as a strategy for reducing the risk in holding a market position while speculation referred to taking a position in the way the markets will move. Today, hedging and speculation strategies, along with derivatives, are useful tools or techniques that enable companies to more effectively manage risk.
3. Improve Market Efficiency for the Underlying Asset For example, investors who want exposure to the S&P 500 can buy an S&P 500 stock index fund or replicate the fund by buying S&P 500 futures and investing in risk-free bonds. Either of these methods will give them exposure to the index without the expense of purchasing all the underlying assets in the S&P 500. If the cost of implementing these two strategies is the same, investors will be neutral as to which they choose. If there is a discrepancy between the prices, investors will sell the richer asset and buy the cheaper one until prices reach equilibrium. In this context, derivatives create market efficiency. 4. Help Reduce Market Transaction Costs Because derivatives are a form of insurance or risk management, the cost of trading in them has to be low or investors will not find it economically sound to purchase such "insurance" for their positions
Future of the derivatives market The derivatives market has grown rapidly since it?s inception. Today derivatives account for nearly 75% of market transactions in the USA, Europe and Japan. Derivatives are fast catching up in the developing countries as well. In India also derivatives have registered a substantial growth. Although commodity derivatives existed since centuries ago, the market for financial derivatives has now grown tremendously both in terms of variety of instruments and turnover.
The value of underlying assets of derivatives is more than US $16 trillion which is almost 3 times the value of stocks traded at the NYSE and twice the size of the US GDP. This insurgent growth is expected to continue at this pace or faster as markets continue to get more advanced and developed. As derivatives are excellent hedging devices, a trader has very little to lose and a lot to gain. It is this feature of the derivative which will ensure it grows and takes over 90% of market transactions in the near future. One can only keep guessing and making arbitrary assumptions about the value of underlying assets that will be traded in the future.
Bibliography 1. 2. 3. 4. 5. www.eurojournals.com www.investopedia.com Wikipedia www.unitedfutures.com www.scribd.com
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doc_250659211.docx
derivative markets in india
DERIVATIVES MARKET
CONTENTS
Sr No 1. 2. 3. 4. 5 6. 7. 8. 9. 10. 11. 12. 13.
Topic Derivatives
Page Number 1
History of derivatives globally2 Introduction of commodity derivatives India 3 Introduction of financial derivatives in India. .Derivatives in India- A chronology Forward Contract Futures Contract Options Contract Swaps Swaptions Participants of derivatives Advantages of derivatives market Future of derivatives market 5 6 7 9 12 14 18 20 23 25
Derivatives A derivative is a security whose price is dependent upon or derived from one or more underlying assets. This is where it gets it?s name from. It comes from the English word “derive” which means that its value is derived or dependent upon the value of another underlying asset. The derivative itself is merely a contract between two or more parties. Its value is determined by fluctuations in the underlying asset. This underlying serves as the identity tag for the derivative contract. The underlying assets range from commodities like cotton, wheat, rice, orange, soya, pulses to financial assets such as stock, shares, currency etc. Thus a derivative can be formed on an underlying of any nature.The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes.
Derivatives are broadly of two types: Commodity derivatives- They are the derivatives that have been running since olden days. Their existence can be traced back to years Before Christ. The underlying asset is a commodity. Most common underlying assets were agricultural products such as wheat, cotton, rice etc as they were subject to market fluctuations. Thus, commodity derivatives served as a breather for farmers who could enter forward or futures contract and thereby, safeguard against the risks he was exposed to. Financial derivatives- They emerged much after their commodity counterparts. The underlying asset of a financial derivative is currency, exchange rate, interest rates, stocks, shares etc. financial derivatives with their entry have caused sweeping changes in financial sectors across countries. Their advantages of protecting against financial market volatility and ability to reveal future market prices have led to their speedy and massive expansion contributing to financial growth.
History of derivatives globally To start we need to go back to the Bible. In Genesis Chapter 29, believed to be about the year 1700 B.C., Jacob purchased an option costing him seven years of labour that granted him the right to marry Laban's daughter Rachel. His prospective father-in-law, however, reneged, perhaps making this not only the first derivative but the first default on a derivative. Laban required Jacob to marry his older daughter Leah. Jacob married Leah, but because he preferred Rachel, he purchased another option, requiring seven more years of labour, and finally married Rachel, bigamy being allowed in those days. Jacob ended up with two wives, twelve sons, who became the patriarchs of the twelve tribes of Israel. Some argue that Jacob really had forward contracts, which obligated him to the marriages but that does not matter. Jacob did derivatives, one way or the other. Around 580 B.C., Thales the Milesian purchased options on olive presses and made a fortune off of a bumper crop in olives. So derivatives were around before the time of Christ. The first known instance of derivatives trading dates to 2000 B.C. when merchants, in what is now calledBahrain Island in the Arab Gulf, made consignment transactions for goods to besold in India. Derivatives trading in the same era also occurred in Mesopotamia. The trading in Mesopotamia is evidenced by manyclay tablets in the cuneiform writing, and these are available at the BritishMuseum, the Louvre and were some of the many items stolen from museums inBaghdad during the U.S invasion in 2003. A more literary reference comes some2,350 years ago from Aristotle who discussed a case of market manipulationthrough the use of derivatives on olive oil press capacity in Chapter 9 of hisPolitics. Derivatives trading in an exchange environment and with trading rules can betraced back to Venice in the 12th Century. Forward and options contracts weretraded on commodities, shipments and securities in Amsterdam after 1595. TheJapanese traded futures-like contracts on warehouse receipts or rice in the 1700s.Dojima Rice Exchange was established in 1710 in Osaka, Japan. The UnitedStates followed in the early 1800s. Forward contracts were standard at the time.In 1848, theChicago Board of Trade (CBOT) was formed. Trading was originally in forwardcontracts, the first contract (on corn) was written on March 13, 1851. In 1865,standardized futures contracts were introduced. In 1972,the International Monetary Market (IMM), a division of the Chicago Mercantile Exchange, was formed to offer futures contracts in foreign currencies: British pound, Canadian dollar,German mark, Japanese yen, Mexican peso, and Swiss franc. In 1881, a regionalmarket was founded in continuously since then; today the Minneapolis GrainExchange (MGEX) is the only exchange for hard red spring wheat futures andoptions. The 1970s saw the development of the financial futures contracts, whichallowed trading in the future value of interest rates. Today, the futures marketshave far outgrown their agricultural origins. Introduction of commodity derivatives in India
The history of organized commodity derivatives in India goes back to thenineteenth century when the Cotton Trade Association started futures trading in1875, barely about a decade after the commodity derivatives started in Chicago. Over time the derivatives market developed in several other commodities in India.Following cotton, derivatives trading started in oilseeds in Bombay (1900), raw jute and jute goods in Calcutta (1912), wheat in Hapur (1913) and in Bullion inBombay (1920). However, many feared that derivatives fuelled unnecessaryspeculation in essential commodities, and were detrimental to the healthyfunctioning of the markets for the underlying commodities, and hence to thefarmers. With a view to restricting speculative activity in cotton market, theGovernment of Bombay prohibited options business in cotton in 193
Cotton as commodity derivative Wheat as commodity derivative Later in1943, forward trading was prohibited in oilseeds and some other commoditiesincluding food-grains, spices, vegetable oils, sugar and cloth.After Independence, the Parliament passed Forward Contracts (Regulation) Act,1952 which regulated forward contracts in commodities all over India. The Actapplies to goods, which are defined as any movable property other than security,currency and actionable claims. The Act prohibited options trading in goods alongwith cash settlements of forward trades, rendering a crushing blow to thecommodity derivatives market. Under the Act, only those associations/exchanges,which are granted recognition by the Government, are allowed to organize forwardtrading in regulated commodities. The Act envisages three-tier regulation: (i) (ii) (iii) The Exchange which organizes forward trading in commodities can regulate trading on a day-to-day basis; The Forward Markets Commission provides regulatory oversight under the powers delegated to it by the central Government. The Central Government - Department of Consumer Affairs, Ministry of Consumer Affairs, Food and Public Distribution - is the ultimate regulatory authority.
The already shaken commodity derivatives market got a crushing blow when in1960s, following several years of severe draughts that forced many farmers todefault on forward contracts (and even caused some suicides), forward trading was banned in many commodities considered primary or essential. As a result,commodities derivative markets dismantled and went underground where to someextent they continued as OTC contracts at negligible
volumes. Much later, in1970s and 1980s the Government relaxed forward trading rules for somecommodities, but the market could never regain the lost volumes. After the Indian economy embarked upon the process of liberalization andglobalization in 1990, the Government set up a Committee in 1993 to examine therole of futures trading. The Committee (headed by Prof. K.N. Kabra)recommended allowing futures trading in 17 commodity groups. It alsorecommended strengthening of the Forward Markets Commission, and certainamendments to Forward Contracts (Regulation) Act 1952, particularly allowingoptions trading in goods and registration of brokers with Forward MarketsCommission. The Government accepted most of these recommendations andfutures trading were permitted in all recommended commodities.Commodity futures trading in India remained in a state of hibernation for nearlyfour decades, mainly due to doubts about the benefits of derivatives. Finally arealization that derivatives do perform a role in risk management led thegovernment to change its stance. The policy changes favouring commodityderivatives were also facilitated by the enhanced role assigned to free marketforces under the new liberalization policy of the Government. Indeed, it was atimely decision too, since internationally the commodity cycle was on the upswing and the following decade was one of commodities. To make up for the loss of growth and development during the four decades of restrictive government policies, FMC and the Government encouraged setting upof the commodity exchanges using the most modern systems and practices in theworld. Some of the main regulatory measures imposed by the FMC include dailymark to market system of margins, creation of trade guarantee fund, back-office.
Introduction of Financial derivatives in India The first step towards introduction of financial derivatives trading in India was the promulgation of the
Securities Laws (Amendment) Ordinance, 1995. It provided for withdrawal of prohibition on options in securities. The last decade, beginning the year 2000, saw lifting of ban on futures trading in many commodities. Around the same period, national electronic commodity exchanges were also set up. Derivatives trading commenced in India in June 2000 after SEBI granted the final approval to this effect in May 2001 on the recommendation of L. C Gupta committee. Securities and Exchange Board of India (SEBI) permitted the derivative segments of two stock exchanges, NSE and BSE and their clearing house/corporation to commence trading and settlement in approved derivatives contracts. Initially, SEBI approved trading in index futures contracts based on various stock market indices such The National Stock Exchange (NSE), located in Bombay is the first screen based automated stock exchange. It was set up in 1993 to encourage stock exchange reform through system modernization and competition. It opened for trading in mid-1994 and today accounts for 99% market shares of derivatives trading in India. Bombay Stock Exchange (BSE), which is Asia's Oldest Broking House, was established in 1875 in Mumbai. It is also called as Dalal Street. The BSE Index, called the Sensex, is calculated by Free Float Method by including scripts of top 30companies selected on the market capitalization criterion. 21 International Research Journal of Finance and Economics Issue 37 (2010)as, S&P CNX, Nifty and Sensex. Subsequently, index-based trading was permitted in options as well as individual securities. The trading in BSE Sensex options commenced on June 4, 2001 and the trading in options on individual securities commenced in July 2001. Futures contracts on individual stocks were launched in November 2001. The derivatives trading on NSE commenced with S&P CNX Nifty Index futures on June 12, 2000. The trading in index options commenced on June 4, 2001 and trading in options on individual securities commenced on July 2, 2001. Single stock futures were launched on November 9, 2001. The index futures and options contract on NSE are based on S&P CNX. In June 2003, NSE introduced Interest Rate Futures which were subsequently banned due to pricing issue.
Derivatives in India: A Chronology Date Progress 14 December 1995 NSE asked SEBI for permission to trade index futures. 18 November 1996 SEBI setup L. C. Gupta Committee to draft a policy frameworkfor index futures. 11 May 1998 L. C. Gupta Committee submitted report.
7 July 1999 RBI gave permission for OTC forward rate agreements (FRAs)and interest rate swaps 24 May 2000 SIMEX chose Nifty for trading futures and option on an Indian index. 25 May 2000 SEBI gave permission to NSE and BSE to do index futurestrading. 9 June 2000 Trading of BSE Sensex futures commenced at BSE. 12 June 2000 Trading of Nifty futures commenced at NSE. 31 August 2000 Trading of futures and options on Nifty to commence at SIMEX. June 2001 Trading of Equity Index Options at NSE July 2001 Trading of Stock Options at NSE November 9, 2002 Trading of Single Stock futures at BSE June 2003 Trading of Interest Rate Futures at NSE September 13, 2004 Weekly Options at BSE January 1, 2008 Trading of Chhota(Mini) Sensex at BSE January 1, 2008 Trading of Mini Index Futures & Options at NSE August 29,2008 Trading of Currency Futures at NSE October 2,2008 Trading of Currency Futures at BSE
Classification of derivatives 1. Forward contract In finance and economics, a forward contract or simply a forward is a non-standardized contract between two parties to buy or sell an asset at a specified future time at a price agreed today. This is in contrast to a spot contract, which is an agreement to buy or sell an asset today. It costs nothing to enter a forward contract. The party agreeing to buy the underlying asset in the future assumes a long position, and the party agreeing to sell the asset in the future assumes a short position. The price agreed upon is called the delivery price, which is equal to the forward price at the time the contract is entered into.
The price of the underlying instrument, in whatever form, is paid before control of the instrument changes. This is one of the many forms of buy/sell orders where the time of trade is not the time where the securities themselves are exchanged. The forward price of such a contract is commonly contrasted with the spot price, which is the price at which the asset changes hands on the spot date. The difference between the spot and the forward price is the forward premium or forward discount, generally considered in the form of a profit, or loss, by the purchasing party. Forwards, like other derivative securities, can be used to hedge risk (typically currency or exchange rate risk), as a means of speculation, or to allow a party to take advantage of a quality of the underlying instrument which is time-sensitive. A closely related contract is a futures contract; they differ in certain respects. Forward contracts are very similar to futures contracts, except they are not exchange-traded, or defined on standardized assets. Forwards also typically have no interim partial settlements or "trueups" in margin requirements like futures – such that the parties do not exchange additional property securing the party at gain and the entire unrealized gain or loss builds up while the contract is open. However, being traded OTC; forward contracts specification can be customized and may include mark-to-market and daily margining. Hence, a forward contract arrangement might call for the loss party to pledge collateral or additional collateral to better secure the party at gain.
How a forward contract works Suppose that Bob wants to buy a house a year from now. At the same time, suppose that Andy currently owns a $100,000 house that he wishes to sell a year from now. Both parties could enter into a forward contract with each other. Suppose that they both agree on the sale price in one year's time of $104,000. Andy and Bob have entered into a forward contract. Bob, because he is buying the underlying, is said to have entered a long forward contract. Conversely, Andy will have the short forward contract. At the end of one year, suppose that the current market valuation of Andy's house is $110,000. Then, because Andy is obliged to sell to Bob for only $104,000, Bob will make a profit of $6,000. To see why this is so, one needs only to recognize that Bob can buy from Andy for $104,000 and immediately sell to the market for $110,000. Bob has made the
difference in profit. In contrast, Andy has made a potential loss of $6,000, and an actual profit of $4,000. Currency forwards are also similar, where one party opens a forward contract to buy or sell a currency (ex. a contract to buy Canadian dollars) to expire/settle at a future date, as they do not wish to be exposed to exchange rate risk over a period of time. As the exchange rate between U.S. dollars and Canadian dollars fluctuates between the trade date and the earlier of the date at which the contract is closed or the expiration date, one party gains and the counterparty loses as one currency strengthens against the other. Sometimes, the buy forward is opened because the investor will actually need Canadian dollars at a future date such as to pay a debt owed that is denominated in Canadian dollars. Other times, the party opening a forward does so, not because they need Canadian dollars nor because they are hedging currency risk, but because they are speculating on the currency, expecting the exchange rate to move favourably to generate a gain on closing the contract.
Example of how forward prices should be agreed upon- Continuing on the example above, suppose now that the initial price of Andy's house is $100,000 and that Bob enters into a forward contract to buy the house one year from today. But since Andy knows that he can immediately sell for $100,000 and place the proceeds in the bank, he wants to be compensated for the delayed sale. Suppose that the risk free rate of return R (the bank rate) for one year is 4%. Then the money in the bank would grow to $104,000, risk free. So Andy would want at least $104,000 one year from now for the contract to be worthwhile for him – the opportunity cost will be covered.
2. Futures contract In finance and economics, a futures contract is a standardized contract between two parties to exchange a specified asset of standardized quantity and quality for a price agreed today (the futures price or the strike price) with delivery occurring at a specified future date, the delivery date. The contracts are traded on a futures exchange. The party agreeing to buy the underlying asset in the future i.e. the "buyer" of the contract, is said to be "long", and the party agreeing to sell the asset in the future i.e. the "seller" of the contract, is said to be "short". The terminology reflects the expectations of the parties -- the buyer hopes or expects that the asset price is going to increase, while the seller hopes or expects that it will decrease. Note that the contract itself costs nothing to enter; the buy/sell terminology is a linguistic convenience reflecting the position each party is taking (long or short).
In many cases, the underlying asset to a futures contract may not be traditional commodities at all – that is, for financial futures the underlying asset or item can be currencies, securities or financial instruments and intangible assets or referenced items such as stock indexes and interest rates. While the futures contract specifies a trade taking place in the future, the purpose of the futures exchange institution is to act as intermediary and minimize the risk of default by either party. Thus the exchange requires both parties to put up an initial amount of cash, the margin. Additionally, since the futures price will generally change daily, the difference in the prior agreed-upon price and the daily futures price is settled daily also. The exchange will draw money out of one party's margin account and put it into the other's so that each party has the appropriate daily loss or profit. If the margin account goes below a certain value, then a margin call is made and the account owner must replenish the margin account. This process is known as marking to market. Thus on the delivery date, the amount exchanged is not the specified price on the contract but the spot value (since any gain or loss has already been previously settled by marking to market). A closely related contract is a forward contract. A forward is like a futures contract in that it specifies the exchange of goods for a specified price at a specified future date. However, a forward is not traded on an exchange and thus does not have the interim partial payments due to marking to market. Nor is the contract standardized, as on the exchange. Unlike an option, both parties of a futures contract must fulfil the contract on the delivery date. The seller delivers the underlying asset to the buyer, or, if it is a cash-settled futures contract, then cash is transferred from the futures trader who sustained a loss to the one who made a profit. To exit the commitment prior to the settlement date, the holder of a futures position can close out its contract obligations by taking the opposite position on another futures contract on the same asset and settlement date. The difference in futures prices is then a profit or loss. Futures contracts and exchanges There are many different kinds of futures contracts, reflecting the many different kinds of "tradable" assets about which the contract may be based such as commodities, securities (such as single-stock futures), currencies or intangibles such as interest rates and indexes. Futures are traded in the following markets: Foreign exchange market, Money market, Bond market, Equity market, Soft Commodities market. Trading on commodities began in Japan in the 18th century with the trading of rice and silk, and similarly in Holland with tulip bulbs. Trading in the US began in the mid 19th century, when central grain markets were established and a marketplace was created for farmers to bring their commodities and sell them either for immediate delivery (also called spot or cash market) or for forward delivery. These forward contracts were private contracts between buyers and sellers and became the forerunner to today's exchange-traded futures contracts.
Although contract trading began with traditional commodities such as grains, meat and livestock, exchange trading has expanded to include metals, energy, currency and currency indexes, equities and equity indexes, government interest rates and private interest rates.
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Traders in futures Futures traders are traditionally placed in one of two groups: hedgers, who have an interest in the underlying asset (which could include an intangible such as an index or interest rate) and are seeking to hedge out the risk of price changes; and speculators, who seek to make a profit by predicting market moves and opening a derivative contract related to the asset "on paper", while they have no practical use for or intent to actually take or make delivery of the underlying asset. In other words, the investor is seeking exposure to the asset in a long futures or the opposite effect via a short futures contract. Options on futures In many cases, options are traded on futures, sometimes called simply "futures options". A put is the option to sell a futures contract, and a call is the option to buy a futures contract. For both, the option strike price is the specified futures price at which the future is traded if the option is exercised. Futures are often used since they are delta one instruments. Calls and options on futures may be priced similarly to those on traded assets by using an extension of the Black-Scholes formula, namely Black's formula for futures. Investors can either take on the role of option seller/option writer or the option buyer. Option sellers are generally seen as taking on more risk because they are contractually obligated to take the opposite futures position if the options buyer exercises his or her right to the futures position specified in the option. The price of an option is determined by supply and demand principles and consists of the option premium, or the price paid to the option seller for offering the option and taking on risk.
Futures versus forwards While futures and forward contracts are both contracts to deliver an asset on a future date at a prearranged price, they are different in two main respects: -Futures are exchange-traded, while forwards are traded over-the-counter.Thus futures are standardized and face an exchange, while forwards are customized and face a non-exchange counterparty. - Futures are margined, while forwards are not. Thus futures have significantly less credit risk, and have different funding.
3. Options The right, but not the obligation, to buy (for a call option) or sell (for a put option) a specific amount of a given stock, commodity, currency, index, or debt, at a specified price (the strike price) during a specified period of time is called an option. For stock options, the amount is usually 100 shares. Each option contract has a buyer, called the holder, and a seller, known as the writer. If the option contract is exercised, the writer is responsible for fulfilling the terms of the contract by delivering the shares to the appropriate party. In the case of a security that cannot be delivered such as an index, the contract is settled in cash. For the holder, the potential loss is limited to the price paid to acquire the option and the possible gain is unlimited. When an option is not exercised, it expires. No shares change hands and the money spent to purchase the option is lost. Option contracts, like stocks, are therefore said to have an asymmetrical payoff pattern. For the writer, the potential loss is unlimited unless the contract is covered, meaning that the writer already owns the security underlying the option. Option contracts are most frequently as either leverage or protection. As leverage, options allow the holder to control equity in a limited capacity for a fraction of what the shares would cost. The difference can be invested elsewhere until the option is exercised. As protection, options can guard against price fluctuations in the near term because they provide the right acquire the underlying stock at a fixed price for a limited time. Risk is limited to the option premium (except when writing options for a security that is not already owned). However, the costs of trading options (including both commissions and the bid/ask spread) is higher on a
percentage basis than trading the underlying stock. In addition, options are very complex and require a great deal of observation and maintenance.
Application of option contract in unilateral contracts The option contract provides an important role in unilateral contracts. In unilateral contracts, the promisor seeks acceptance by performance from the promisee. In this scenario, the classical contract view was that a contract is not formed until the performance that the promisor seeks is completely performed. This is because the consideration for the contract was the performance of the promisee. Once the promisee performed completely, the condition is satisfied and a contract is formed and only the promisor is bound to his promise. A problem arises with unilateral contracts because of the late formation of the contract. With classical unilateral contracts, a promisor can revoke his offer for the contract at any point prior to the promisee's complete performance. So, if a promisee provides 99% of the performance sought, the promisor could then revoke without any remedy for the promisee. The promisor has maximum protection and the promisee has maximum risk in this scenario. An option contract can provide some security to the promisee in the above scenario. Essentially, once a promisee begins performance, an option contract is implicitly created between the promisor and the promisee. The promisor impliedly promises not to revoke the offer and the promisee impliedly promises to furnish complete performance, but as the name suggests, the promisee still retains the "option" of not completing performance. Basically, the consideration is provided by the promisee's beginning of performance. Case law differs from jurisdiction to jurisdiction, but an option contract can either be implicitly created instantaneously at the beginning of performance (the Restatement view) or after some "substantial performance." It has been hypothesized that option contracts could help allow free market roads to be constructed without resorting to eminent domain, as the road company could make option
contracts with many landowners, and eventually consummate the purchase of parcels comprising the contiguous route needed to build the road.
4. Swap A swap is nothing but a barter or exchange but it plays a very important role in international finance. A swap is the exchange of one set of cash flows for another. A swap is a contract between two parties in which the first party promises to make a payment to the second and the second party promises to make a payment to the first. Both payments take place on specified dates. Different formulas are used to determine what the two sets of payments will be.
Classification of swaps is done on the basis of what the payments are based on. The different types of swaps are as follows. Interest rate swaps The interest rate swap is the most frequently used swap. An interest rate swap generally involves one set of payments determined by the Eurodollar (LIBOR) rate, although, it can be pegged to other rates. The other set is fixed at an agreed-upon rate. This other agreed upon rate usually corresponds to the yield on a Treasury Note with a comparable maturity, although, this can also be variable.
Additionally, there will be a spread of a pre-determined amount of basis points. This is just one type of interest rate swap. Sometimes payments tied to floating rates are used for interest rate swaps. The notional principal is the exchange of interest payments based on face value. The notional principal itself is not exchanged. On the day of each payment, the party who owes more to the other makes a net payment i.e. the party making a loss pays the loss amount to the party making a profit. Here the loss amount will be equal to the profit amount. Only one party makes a payment. Currency swaps A currency swap is an agreement between two parties in which one party promises to make payments in one currency and the other promises to make payments in another currency. Currency swaps are similar yet notably different from interest rate swaps and are often combined with interest rate swaps. Currency swaps help eliminate the differences between international capital markets. Interest rates swaps help eliminate barriers caused by regulatory structures. While currency swaps result in exchange of one currency with another, interest rate swaps help exchange a fixed rate of interest with a variable rate. The needs of the parties in a swap transaction are diametrically different. Swaps are not traded or listed on exchange but they do have an informal market and are traded among dealers. A swap is a contract, which can be effectively combined with other type of derivative instruments. An option on a swap gives the party the right, but not the obligation to enter into a swap at a later date. Commodity swaps In commodity swaps, the cash flows to be exchanged are linked to commodity prices. Commodities are physical assets such as metals, energy stores and food including cattle. E.g. in a commodity swap, a party may agree to exchange cash flows linked to prices of oil for a fixed cash flow. Commodity swaps are used for hedging against -Fluctuations in commodity prices or -Fluctuations in spreads between final product and raw material prices (E.g. Cracking spread which indicates the spread between crude prices and refined product prices significantly affect the margins of oil refineries) A Company that uses commodities as input may find its profits becoming very volatile if the commodity prices become volatile. This is particularly so when the output prices may not change as frequently as the commodity prices change. In such cases, the company would enter into a swap whereby it receives payment linked to commodity prices and pays a fixed rate in exchange. A producer of a commodity may want to reduce the variability of his
revenues by being a receiver of a fixed rate in exchange for a rate linked to the commodity prices.
Gold- popular commodity swap
Oil – popular commodity swap
Equity swaps Under an equity swap, the shareholder effectively sells his holdings to a bank, promising to buy it back at market price at a future date. However, he retains a voting right on the shares. Credit default swaps A credit default swap (CDS) is a swap contract in which the buyer of the CDS makes a series of payments to the seller and, in exchange, receives a payoff if an instrument - typically a bond or loan - goes into default (fails to pay). Less commonly, the credit event that triggers the payoff can be a company undergoing restructuring, bankruptcy or even just having its credit rating downgraded. CDS contracts have been compared with insurance, because the buyer pays a premium and in return, receives a sum of money if one of the events specified in the contract occur. Unlike an actual insurance contract the buyer is allowed to profit from the contract and may also cover an asset to which the buyer has no direct exposure. Other variations There are myriad different variations on the vanilla swap structure, which are limited only by the imagination of financial engineers and the desire of corporate treasurers and fund managers for exotic structures. A total return swap is a swap in which party „A? pays the total return of an asset, and party „B? makes periodic interest payments. The total return is the capital gain or loss, plus any interest or dividend payments. Note that if the total return is negative, then party „A? receives this amount from party „B?. The parties have exposure to the return of the underlying stock or index, without having to hold the underlying assets. The profit or loss of party „B? is the same for him as actually owning the underlying asset. An option on a swap is called a swaption. These provide one party with the right but not the obligation at a future time to enter into a swap.
A variance swap is an over-the-counter instrument that allows one to speculate on or hedge risks associated with the magnitude of movement, a CMS, is a swap that allows the purchaser to fix the duration of received flows on a swap. An Amortising swap is usually an interest rate swap in which the notional principal for the interest payments declines during the life of the swap, perhaps at a rate tied to the prepayment of a mortgage or to an interest rate benchmark such as the LIBOR. It is suitable to those customers of banks who want to manage the interest rate risk involved in predicted funding requirement, or investment programs. A Zero coupon swap is of use to those entities which have their liabilities denominated in floating rates but at the same time would like to conserve cash for operational purposes. A Deferred rate swap is particularly attractive to those users of funds that need funds immediately but do not consider the current rates of interest very attractive and feel that the rates may fall in future. An Accreting swap is used by banks which have agreed to lend increasing sums over time to its customers so that they may fund projects. A Forward swap is an agreement created through the synthesis of two swaps differing in duration for the purpose of fulfilling the specific time-frame needs of an investor.-also referred to as a forward start swap, delayed start swap, and a deferred start swap.
Components of swap price There are four major components of a swap price: Benchmark price: Swap rates are based on a series of benchmark instruments. They may be quoted as a spread over the yield on these benchmark instruments or on an absolute interest rate basis. In the Indian markets the common benchmarks are MIBOR, 14, 91, 182 & 364 day T-bills, CP rates and PLR rates. Liquidity: Liquidity, which is function of supply and demand, plays an important role in swaps pricing. This is also affected by the swap duration. It may be difficult to have counterparties for long duration swaps, especially so in India. Transaction Costs: Transaction costs include the cost of hedging a swap. Say in case of a bank, which has a floating obligation of 91 days T. Bill. Now in order to hedge the bank would go long on a 91 day T. Bill. For doing so the bank must obtain funds. The transaction cost would thus involve such a difference. Yield on 91 day T. Bill - 9.5% Cost of fund (e.g.- Repo rate) – 10% The transaction cost in this case would involve 0.5%
Credit Risk: Credit risk must also be built into the swap pricing. Based upon the credit rating of the counterparty a spread would have to be incorporated. Say for e.g. it would be 0.5% for an AAA rating.
5. Swaptions A swaption is an option granting its owner the right but not the obligation to enter into an underlying swap. Although options can be traded on a variety of swaps, the term "swaption" typically refers to options on interest rate swaps. There are two types of swaption contracts:
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A payer swaption gives the owner of the swaption the right to enter into a swap where they pay the fixed leg and receive the floating leg. A receiver swaption gives the owner of the swaption the right to enter into a swap in which they will receive the fixed leg, and pay the floating leg.
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The buyer and seller of the swaption agree on:
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the premium (price) of the swaption the strike rate (equal to the fixed rate of the underlying swap) length of the option period (which usually ends two business days prior to the start date of the underlying swap), the term of the underlying swap, notional amount, amortization, if any frequency of settlement of payments on the underlying swap = basis point spread
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The swaption market The participants in the swaption market are predominantly large corporations, banks, financial institutions and hedge funds. End users such as corporations and banks typically use swaptions to manage interest rate risk arising from their core business or from their financing arrangements. For example, a corporation wanting protection from rising interest rates might buy a payer swaption. A bank that holds a mortgage portfolio might buy a receiver swaption to protect against lower interest rates that might lead to early prepayment of the mortgages. A hedge fund believing that interest rates will not rise by more than a certain amount might sell a payer swaption, aiming to make money by collecting the premium.
Major investment and commercial banks such as JP Morgan Chase, Bank of America Securities and Citigroup make markets in swaptions in the major currencies, and these banks trade amongst themselves in the swaption interbank market. The market making banks typically manage large portfolios of swaptions that they have written with various counterparties. A significant investment in technology and human capital is required to properly monitor the resulting exposure. Swaption markets exist in most of the major currencies in the world, the largest markets being in U.S. dollars, euro, sterling and Japanese yen. The swaption market is over-the-counter (OTC), i.e., not traded on any exchange. Legally, a swaption is an agreement between the two counterparties to exchange the required payments. The counterparties are exposed to each other?s failure to make scheduled payments on the underlying swap, although this exposure is typically mitigated through the use of "collateral agreements" whereby margin is posted to cover the anticipated future exposure.
Participants in Derivatives market Hedgers
Hedgers are individuals and firms that make purchases and sales in the futures market solely for the purpose of establishing a known price level--weeks or months in advance--for something they later intend to buy or sell in the cash market (such as at a grain elevator or in the bond market). In this way they attempt to protect themselves against the risk of an unfavourable price change in the interim. Or hedgers may use futures to lock in an acceptable margin between their purchase cost and their selling price. The details of hedging can be somewhat complex but the principle is simple. Consider this example: A jewellery manufacturer will need to buy additional gold from his supplier in six months. Between now and then, however, he fears the price of gold may increase. That could be a problem because he has already published his catalogue for a year ahead. To lock in the price level at which gold is presently being quoted for delivery in six months, he buys a futures contract at a price of, say, $350 an ounce. If, six months later, the cash market price of gold has risen to $370, he will have to pay his supplier that amount to acquire gold. However, the extra $20 an ounce cost will be offset by a $20 an ounce profit when the futures contract bought at $350 is sold for $370. In effect, the hedge provided insurance against an increase in the price of gold. It locked in a net cost of $350, regardless of what happened to the cash market price of gold. Had the price of gold declined instead of risen, he would have incurred a loss on his futures position but this would have been offset by the lower cost of acquiring gold in the cash market. The number and variety of hedging possibilities is practically limitless. A cattle feeder can hedge against a decline in livestock prices and a meat packer or supermarket chain can hedge against an increase in livestock prices. Borrowers can hedge against higher interest rates, and lenders against lower interest rates. Investors can hedge against an overall decline in stock prices, and those who anticipate having money to invest can hedge against an increase in the over-all level of stock prices. And the list goes on. Whatever the hedging strategy, the common denominator is that hedgers willingly give up the opportunity to benefit from favourable price changes in order to achieve protection against unfavourable price changes. Past performance is not necessarily indicative of future results. The risk of loss exists in futures and options trading.
Speculators Speculators are somewhat like a middle man. They are never interested in actual owing the commodity. They will just buy from one end and sell it to the other in anticipation of future price movements. They actually bet on the future movement in the price of an asset.
They are the second major group of futures players. These participants include independent floor traders and investors. They handle trades for their personal clients or brokerage firms. Buying a futures contract in anticipation of price increases is known as „going long?. Selling a futures contract in anticipation of a price decrease is known as „going short?. Speculative participation in futures trading has increased with the availability of alternative methods of participation. Speculators have certain advantages over other investors they are as follows: 1. If the trader?s judgement is good, he can make more money in the futures market faster because prices tend, on average, to change more quickly than real estate or stock prices. 2. Futures are highly leveraged investments. The trader puts up a small fraction of the value of the underlying contract as margin, yet he can ride on the full value of the contract as it moves up and down. The money he puts up is not a down payment on the underlying contract, but a performance bond. The actual value of the contract is only exchanged on those rare occasions when delivery takes place.
Arbitrageurs A type of investor who attempts to profit from price differences in the market by making simultaneous trades that offset each other and capturing risk-free profits. An arbitrageur would, for example, seek out price discrepancies between stocks listed on more than one exchange, and buy the undervalued shares on one exchange while short selling the same
number of overvalued shares on another exchange, thus capturing risk-free profits as the prices on the two exchanges converge. Suppose that the exchange rates (after taking out the fees for making the exchange) in London are £5 = $10 = ¥1000 and the exchange rates in Tokyo are ¥1000 = $12 = £6. Converting ¥1000 to $12 in Tokyo and converting that $12 into ¥1200 in London, for a profit of ¥200, would be arbitrage. In reality, this "triangle arbitrage" is so simple that it almost never occurs. But more complicated foreign exchange arbitrages, such as the spot-forward arbitrage are much more common.
Advantages of derivatives market Today's sophisticated international markets have helped foster the rapid growth in derivative instruments. In the hands of knowledgeable investors, derivatives can derive profit from: -Changes in interest rates and equity markets around the world -Currency exchange rate shifts
-Changes in global supply and demand for commodities such as agricultural products, precious and industrial metals, and energy products such as oil and natural gas Adding some of the wide variety of derivative instruments available to a traditional portfolio of investments can provide global diversification in financial instruments and currencies, help hedge against inflation and deflation, and generate returns that are not correlated with more traditional investments. The two most widely recognized benefits attributed to derivative instruments are price discovery and risk management. 1. Price Discovery Futures market prices depend on a continuous flow of information from around the world and require a high degree of transparency. A broad range of factors (climatic conditions, political situations, debt default, refugee displacement, land reclamation and environmental health, for example) impact supply and demand of assets (commodities in particular) - and thus the current and future prices of the underlying asset on which the derivative contract is based. This kind of information and the way people absorb it constantly changes the price of a commodity. This process is known as price discovery. With some futures markets, the underlying assets can be geographically dispersed, having many spot (or current) prices in existence. The price of the contract with the shortest time to expiration often serves as a proxy for the underlying asset. Second, the price of all future contracts serve as prices that can be accepted by those who trade the contracts in lieu of facing the risk of uncertain future prices. Options also aid in price discovery, not in absolute price terms, but in the way the market participants view the volatility of the markets. This is because options are a different form of hedging in that they protect investors against losses while allowing them to participate in the asset's gains.
2. Risk Management This could be the most important purpose of the derivatives market. Risk management is the process of identifying the desired level of risk, identifying the actual level of risk and altering the latter to equal the former. This process can fall into the categories of hedging and speculation. Hedging has traditionally been defined as a strategy for reducing the risk in holding a market position while speculation referred to taking a position in the way the markets will move. Today, hedging and speculation strategies, along with derivatives, are useful tools or techniques that enable companies to more effectively manage risk.
3. Improve Market Efficiency for the Underlying Asset For example, investors who want exposure to the S&P 500 can buy an S&P 500 stock index fund or replicate the fund by buying S&P 500 futures and investing in risk-free bonds. Either of these methods will give them exposure to the index without the expense of purchasing all the underlying assets in the S&P 500. If the cost of implementing these two strategies is the same, investors will be neutral as to which they choose. If there is a discrepancy between the prices, investors will sell the richer asset and buy the cheaper one until prices reach equilibrium. In this context, derivatives create market efficiency. 4. Help Reduce Market Transaction Costs Because derivatives are a form of insurance or risk management, the cost of trading in them has to be low or investors will not find it economically sound to purchase such "insurance" for their positions
Future of the derivatives market The derivatives market has grown rapidly since it?s inception. Today derivatives account for nearly 75% of market transactions in the USA, Europe and Japan. Derivatives are fast catching up in the developing countries as well. In India also derivatives have registered a substantial growth. Although commodity derivatives existed since centuries ago, the market for financial derivatives has now grown tremendously both in terms of variety of instruments and turnover.
The value of underlying assets of derivatives is more than US $16 trillion which is almost 3 times the value of stocks traded at the NYSE and twice the size of the US GDP. This insurgent growth is expected to continue at this pace or faster as markets continue to get more advanced and developed. As derivatives are excellent hedging devices, a trader has very little to lose and a lot to gain. It is this feature of the derivative which will ensure it grows and takes over 90% of market transactions in the near future. One can only keep guessing and making arbitrary assumptions about the value of underlying assets that will be traded in the future.
Bibliography 1. 2. 3. 4. 5. www.eurojournals.com www.investopedia.com Wikipedia www.unitedfutures.com www.scribd.com
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