Index derivatives are derivative contracts, which derive their value from an underlying index.
The two most popular index derivatives are index futures and index options.
Index derivatives have become very popular worldwide. In his report, Dr.L.C.Gupta attributes the popularity of index derivatives to the advantages they offer.
• Institutional and large equity-holders need portfolio-hedging facility. Index–derivatives are more suited to them and more cost–effective than derivatives based on individual stocks. Pension funds in the US are known to use stock index futures for risk hedging purposes.
• Index derivatives offer ease of use for hedging any portfolio irrespective of its composition.
• Stock index is difficult to manipulate as compared to individual stock prices, more so in India, and the possibility of cornering is reduced. This is partly because an individual stock has a limited supply, which can be cornered.
• Stock index, being an average, is much less volatile than individual stock prices. This implies much lower capital adequacy and margin requirements.
• Index derivatives are cash settled, and hence do not suffer from settlement delays and problems related to bad delivery, forged/fake certificates.
The L.C.Gupta committee which was setup for developing a regulatory framework for derivatives trading in India had suggested a phased introduction of derivative products in the following order:
1. Index futures
2. Index options
3. Options on individual stocks
With all the above infrastructure in place, trading of index futures and index options commenced at NSE in June 2000 and June 2001 respectively.
The two most popular index derivatives are index futures and index options.
Index derivatives have become very popular worldwide. In his report, Dr.L.C.Gupta attributes the popularity of index derivatives to the advantages they offer.
• Institutional and large equity-holders need portfolio-hedging facility. Index–derivatives are more suited to them and more cost–effective than derivatives based on individual stocks. Pension funds in the US are known to use stock index futures for risk hedging purposes.
• Index derivatives offer ease of use for hedging any portfolio irrespective of its composition.
• Stock index is difficult to manipulate as compared to individual stock prices, more so in India, and the possibility of cornering is reduced. This is partly because an individual stock has a limited supply, which can be cornered.
• Stock index, being an average, is much less volatile than individual stock prices. This implies much lower capital adequacy and margin requirements.
• Index derivatives are cash settled, and hence do not suffer from settlement delays and problems related to bad delivery, forged/fake certificates.
The L.C.Gupta committee which was setup for developing a regulatory framework for derivatives trading in India had suggested a phased introduction of derivative products in the following order:
1. Index futures
2. Index options
3. Options on individual stocks
With all the above infrastructure in place, trading of index futures and index options commenced at NSE in June 2000 and June 2001 respectively.