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Derivatives: More options - Views on News from Equitymaster
 
 
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  • Dec 19, 2000

    Derivatives: More options

    Itís been about half a year since derivatives have been trading on the both the exchanges (NSE and BSE). Initially only three contracts have been introduced by both the exchanges. The financial community has been watching the derivatives markets very keenly. World over the derivative markets are bigger than the equity markets. The interest has grown gradually. Initially, the volumes were just 100 contracts but for the last month the volumes traded are in the region of 1000 contracts.

    As of now both, BSE and NSE, have introduced a three tier margining method. This includes, initial margins, mark to market margin and spread margins. Additionally, there is a provision for ad-hock margins that can be introduced as and when required. According to the J. R Verma committee report the initial margin has been pegged around 10%. This can be paid in terms of collateral. The mark to market settlement is only cash based.

    Spread margin computations involve contracts that are basically opposite in nature (long and short) but have expiry in different months. A spread implies a long and a short obligation with the exchange. Therefore, the default risk is lower; hence, the margins are a fraction of one of the contracts instead of being on both the contracts.

    Suppose there are two contracts one for January and one for February. If both the contracts are long then the initial margin will be 2*X (X is the margin on a contract) but if one of them were to be short then the initial margin would be a*X (where a is between 0 and 0.99 i.e. lower than the margin on one side).

    As of now the margins are flat across the board but as the markets mature, margining will get more subjective. It will see the introduction of more advanced margining methods like SPAN (standard portfolio analysis) margining.

    But so far, of what has been seen, the major players in the derivative markets have been the financial institutions and the retail investor is yet to come in. This is due to the slightly complex nature of the derivative instruments. According to a study conducted it is estimated that the use of derivatives in the US markets is roughly split in the ratio of 60:40 between institutions and individual investors.

    Then
    22th June, 2000

    BSE (SENSEX CLOSE: 4,794.1)
    Series Previous
    close
    Dayís
    high
    Dayís
    low
    Closing
    price
    Volume
    (no. of contracts)
    Value
    (Rs in m)
    No. of
    trades
    Open interest
    (no. of contracts)
    June 4,811.10 4,790 4,691 4,749 97 23 58 139
    July 4,865.50 4,839 4,720 4,787.5 6 1.4 6 14
    Aug 4,920.10 4,880 4,880 4,880 1 0.2 1 3
    Total 104 24.7 65 156

    NSE (NIFTY CLOSE : 1,490.1)
    Series Previous
    close
    Dayís
    high
    Dayís
    low
    Closing
    price
    Volume
    (no. of contracts)
    Value
    (Rs in m)
    No. of
    trades
    Open interest
    (no. of contracts)
    June 1,486 1,499 1,474 1,493 8,000 11.8 32 16,200
    July 1,503 1,500 1,491 1,500 1,000 1.4 5 4,000
    August 1,502 - - - - - - -
    Total 9,000 13.3 37 20,200

    Now
    15th December, 2000

    BSE (SENSEX CLOSE: 4,137.1)
    Series Dayís
    high
    Dayís
    low
    Last traded
    price
    Volume
    (no. of contracts)
    Value
    (Rs in m)
    No. of
    trades
    Open interest
    (no. of contracts)
    Dec 4,259 4,139 4,145 756 158 193 1,096
    Jan 4,250 4,156 4,156 62 13 18 87
    Feb 4,250 4,250 4,250 5 1 1 15
    Total 823 172 212 1,198

    NSE (NIFTY CLOSE : 1,311.1)
    Series Dayís
    high
    Dayís
    low
    Last traded
    price
    Volume
    (no. of contracts)
    Value
    (Rs in m)
    No. of
    trades
    Open interest
    (no. of contracts)
    Dec 1,345 1,311 1,312 441 116 206 1,599
    Jan 1,337 1,315 1,323 89 24 32 160
    Feb 1,345 1,322 1,322 7 2 7 12
    Total 537 141 245 1,771

    BSE is putting in a lot of effort to popularise the derivatives market and generate awareness amongst the investing community. It is considering increasing trading hours for the derivatives segment, which is already half an hour more than the equities market. Also, it will be introducing new products like index options and stock options sometime next year.

    These are steps that will help the Indian capital markets mature. Today the investors can quantify the down side thanks to derivatives. At this time with the limited experience in the area hedging would be a smarter choice. Speculation is something, which the retail segment should look at with a lot of caution. But one thing is for sure the onus is on the individual investor too. The maturity of the capital markets is not the sole responsibility of the governing bodies and exchanges.

    To know more about different derivatives product and their uses please refer to our four part Part I, Part II, Part III and Part IV special report.

     

     

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