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Financial Derivatives in India
Karthikeyan Jawahar, CFPCM
Director – Research & Consulting
Finerva Financial Solutions Pvt Ltd

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Derivatives Fundamentals
• Origin in Forward Contract
– Related to Agricultural Commodities
– To Preserve Profits and Marketability (Hedging)
• Over the Counter Market
– One-on-one Deals (Not Transferable)
– Predominantly between a bank and its client
• Exchange Tradable
– Futures
– Options

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How Derivatives?
• Options Payoff Charts
Expectation – Share Price
will GO DOWN
Expectation – Share
Price will GO UP
Profit / Loss Line
Target (Exercise) Price

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Dominant types
• Forwards
• Futures
• Options
• Swaps
– All the others are combinations or modifications
of the above.

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Types of Players
• Hedgers
• Arbitrageurs
• Speculators

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Indian Scene
• Was one of the World’s Largest Futures Market -
Cotton Futures Trade
• Shifted predominantly to OTC post independence
• Market Trading started from June 2000 with Index
Futures
• Index Option June 2001
• Individual Securities Options from July 2001
• Individual Stock Futures from July 2001
• Commodity Futures started June 2000 – regular
addition of commodities even today
• Forex (US$) Futures Started October 2008

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Market Dynamics
• Lots sizes ranging value of in Rs.2.5 to Rs.4
lakhs
• Dominant market is NSE
• Rapid Growth in Volumes
– Daily Volumes of Rs.68,000 Cr
– Only Rs.18,000 Cr in cash segment
• Dominated by Index Derivatives

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Year Average Daily Turnover (Rs. cr.)
2009-10 67,789.66
2008-09 45,310.63
2007-08 52,153.30
2006-07 29,543.00
2005-06 19,220.00
2004-05 10,107.00
2003-04 8,388.00
2002-03 1,752.00
2001-02 410.00
2000-01 11.00

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Is This For ME?
• Market Dominated by Speculators
• Highly Leveraged
– Invest only the margin (Premium)Eg. Rs.300 x 50 =
Rs.15,000/- only for a CE-DEC 4800 (S&P CNX Nifty)
– Contract value = Rs.4700 x 50 = Rs.235,000
– If Nifty Goes to 5000, profit is Rs.300 x 50 = Rs.15,000/- =>
100% returns
– If Nifty even stays at 4700, loss is Rs.300 x 50 = Rs.15,000/-.
=> Entire Capital Lost
• Zero Sum Game
• 80% of Day-traders Lose Money in USA
• Las Vegas Effect

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Zero Sum Game
• Stock market is a Non-Zero Sum Game.
– Everyone can make profits. One person’s loss is not
another’s profit.
• Derivatives is a Zero Sum Game.
– The profit made is another person’s loss.
– My premium lands up with the market maker
– My profit is paid by the market maker
– The market makers are large financial corporations or the
stock market itself.
– Failed Market makers are – Barrings Bank, Societe
Generale, Lehman Brothers, many more banks & hedge
funds in the USA.

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Questions and Sharings
• Thank You
• Mail for further queries to
– Karthikeyan Jawahar
– karthiK@finerva.com

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