Transforming our Financial Markets

Feb 15, 2014

- By Asad Dossani, Author, The Lucrative Derivative Report

Asad Dossani
India's financial markets have increased in sophistication over the last decade. In the last decade, a variety of new financial products have entered the marketplace. This is particularly true, in the case for derivatives contracts. The new products include commodity futures, currency futures, and a variety of options contracts.

The process of adding depth to the financial markets is moving ahead strongly in 2014. Last month, a type of derivative contract was introduced to the Indian financial market place. The new contracts are interest rate futures. These derivative contracts are settled based on the value of 10 year government bonds.

The interest rate futures allow financial institutions and other companies to hedge their interest rate risk. In an environment where inflation and interest rates are volatile, these products can be extremely valuable. Investors can also use these products to speculate on the movement of interest rates. As liquidity in this market improves over time, we can use the prices of these contracts to gauge market expectations about future interest rates.

At the end of this month, another new derivative security is set to enter the marketplace. The new securities are VIX futures contracts. The India VIX is an index that uses the prices of options contracts to measure the implied volatility (IV) of the Nifty index. The VIX is sometimes called the fear index and it moves inversely to the market index. This is because when markets are falling, volatility is typically rising and the VIX rises along with volatility.

The new derivative contracts are futures contracts that are settled based on the value of the VIX index. They will allow users to hedge volatility exposure, or speculate on the future volatility in the market. VIX futures have been trading in the US, for nearly 10 years and have proven extremely popular over that period, especially in recent years.

In an environment where economic reforms move at a snail's pace, it is refreshing to witness that the transformation of our financial markets is moving along just fine. The RBI and SEBI are the two organizations behind many of the financial reforms and they are doing a good job of improving our financial sector. Let's hope they keep it up.

On the Equitymaster club forum, we are asking the question: "Do you agree that our financial markets are improving at the right pace?" We invite you to please post your reponse.

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is a financial analyst and columnist. He actively trades his own and others' funds, investing primarily in currency, commodity, and stock index derivative products. Prior to this, he worked at Deutsche Bank as an analyst in the FX derivatives team. He is a graduate of the London School of Economics. Asad is a keen observer of macroeconomic trends and their effects on global financial markets. He is deeply passionate about educating investors, and encouraging individuals to take part in and profit from financial markets. To put it colloquially, he wishes to take Wall Street products and turn them into Main Street profits!

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1 Responses to "Transforming our Financial Markets"


Feb 16, 2014

While it is encouraging to see the attempt for transformation one can not but think whether our financial systems are equipped to handle the products wisely and there sure sufficient controls in place to ensure robustness.

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