Indian Derivatives market

History derivatives in india

• The market for financial derivatives has grown tremendously in terms of variety of instruments available, their complexity and also turnover• In India the willingness to embark on formal derivatives trading came

forth only during the reforms process of the 1990s• Though various informal forms of derivatives contracts have existed

since time immemorial in the country.• A variety of interesting derivatives markets came into existence in the

informal financial sector too; these markets trade contracts like teji-mandi, bhav-bhav, and other such strategies that are essentially different combinations of put and call options

Conti• India’s primary securities market also has experience with derivatives

of two kinds: convertible bonds and warrants (a slight variant of call options). Since these warrants are listed and traded, an options market of a sort already existed; however, trading on these instruments has been very limited.• No OTC :-Custom built (OTC) derivatives, specifically, options and

swaps on Indian market indexes and baskets of Indian ADR/GDRs (American/Global Depository Receipts), were being traded on the international market• India went in for formal financial derivatives trading in the exchanges

by 2001 introducing index futures, index options stock options and stock futures in a phased manner.

Benefits • Derivatives markets provide at least two very important benefits to the

economy. One is that they facilitate risk shifting, which is also known as risk management or hedging or redistributing risk away from risk averse investors towards those more willing and able to bear risk.• The financial innovation of introducing derivatives to capital markets allows

these traditional arrangements of risk to be redesigned so as to better match the desired risk profiles of the issuers and holders of these capital instruments• The other benefit of derivatives markets is that they create price discovery, i.e.

the process of determining the price level for a commodity, asset or other item based on supply and demand. An efficient financial market is one, where forecasts about future risk and return determine valuation. Thus the price observed at an instant in time on the ideal efficient market is a good assessment of future risk and return. In an efficient market new information is rapidly captured into prices, a better market being one that reacts faster.

commodities• The first derivatives market for cotton futures was set up in Mumbai,

followed by the establishment of futures markets in edible oilseeds complex, raw jute and jute goods and bullion. Organised futures market in India dates back to the setting up of Bombay Cotton Trade Association Ltd. in 1875.• Futures market in Bullion began in Mumbai as early as 1920. The volumes of

trade in these derivativesmarkets were reported to be extremely large. However, with enactment of Defence of India Act, 1935, futures trading became subject torestrictions/prohibition from time to time• It was generally agreed that the derivatives markets play a valuable role in

shaping decisions of the market intermediaries, including decisions by farmers about sowing and investments in inputs; smoothing price volatility; and giving farmers and consumers better means of protecting themselves against the adverse effects of seasonal/annual price volatility