NIFTY IT Derivatives Dissertation
Title: A study on Impact of NIFTY IT Derivatives Trading on Spot Market Volatility
1. Introduction
Preamble
This chapter is an introduction for the scope and topic of the study, which outlines the significance of derivatives market, products and participants in the market, types of derivatives, and introduction to futures and options.
1.1 Background of Derivatives
The emergence of the market for derivative products, most notably forwards, futures and options, can be traced back to the willingness of risk-averse economic agents to guard themselves against uncertainties arising out of fluctuations in asset prices. By their very nature, high degree of volatility has been marked in the financial markets. By locking—in asset prices it is possible to transfer price risks fully or partially through the use of derivative products. As risk management instruments, normally do not affect the fluctuations in the underlying asset prices. Though, by locking in the asset prices, derivative products minimize in asset prices fluctuations which will impact in cash flow and the profitability situation of risk-averse investors. In the past decade, many emerging and transition economies have started in introducing the derivative contracts. In 1865, The Chicago Board of trade introduced commodity futures for the first time, the impact of underlying cash market was the main concern of the policymakers and regulators in these markets. One of the main reasons for this worry is the belief that futures’ trading attracts speculators who then destabilize spot prices. Derivatives are risk management instruments, which helps in deriving their value from a underlying asset. The underlying asset can be bonds, currency, index, bullion, share, interest, etc… Banks, Securities firms, companies and investors to hedge the risks, to gain access to cheap money and to make profit, use derivatives. In future Derivatives are likely to grow even at a faster rate. NIFTY IT Derivatives Dissertation
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1.2 Derivatives:
Derivative is a product whose value is derived from the value of one or more basic variables, called bases (underlying asset, index, or reference rate), in a contractual manner. The underlying asset can be equity, forex, commodity or any other asset. For example, wheat farmers may wish to sell their harvest at a future date to eliminate the risk of a change in prices by that date. Such a transaction is an example of a derivative. The price of this derivative is driven by the spot price of wheat which is the “underlying”.
In the Indian context the Securities Contracts (Regulation) Act, 1956 (SC(R)A) defines “derivative” to include —
- A security derived from a debt instrument, share, loan whether secured or unsecured, risk instrument or contract for differences or any other form of security.
- A contract which derives its value from the prices, or index of prices, of underlying securities. Derivatives are securities under the SC(R)A and hence the trading of derivatives is governed by the regulatory framework under the SC(R)A.
1.2.1 Products, participants and functions
Derivative contracts have several variants. The most common variants are forwards, futures, options and swaps. The following three broad categories of participants – hedgers, speculators, and arbitrageurs trade in the derivatives market. Hedgers face risk associated with the price of an asset. They use futures or options markets to reduce or eliminate this risk. Speculators wish to bet on future movements in the price of an asset. Futures and options contracts can….Read More….