Derivatives Essay

1089 words - 5 pages


What Does Derivative Mean?
A security whose price is dependent upon or derived from one or more underlying assets. The derivative itself is merely a contract between two or more parties. Its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes. Most derivatives are characterized by high leverage.

Investopedia explains Derivative
Futures contracts, forward contracts, options and swaps are the most common types of derivatives. Derivatives are contracts and can be used as an underlying asset. There are even derivatives based on weather data, such as ...view middle of the document...

Foreign currency options in currency pairs other than Rupee were the first options permitted by RBI.
• The Reserve Bank of India has permitted options, interest rate swaps, currency swaps and other risk reductions OTC derivative products.
• Besides the Forward market in currencies has been a vibrant market in India for several decades.
• In addition the Forward Markets Commission has allowed the setting up of commodities futures exchanges. Today we have 18 commodities exchanges most of which trade futures.
e.g. The Indian Pepper and Spice Traders Association (IPSTA) and the Coffee Owners Futures Exchange of India (COFEI).
• In 2000 an amendment to the SCRA expanded the definition of securities to included Derivatives thereby enabling stock exchanges to trade derivative products.
• The year 2000 will herald the introduction of exchange traded equity derivatives in India for the first time.
Equity Derivatives Exchanges in India
• In the equity markets both the National Stock Exchange of India Ltd. (NSE) and The Stock Exchange, Mumbai (BSE) have applied to SEBI for setting up their derivatives segments.
• The exchanges are expected to start trading in Stock Index futures by mid-May 2000.
BSE's and NSE’s plans
• Both the exchanges have set-up an in-house segment instead of setting up a separate exchange for derivatives.
• BSE’s Derivatives Segment, will start with Sensex futures as it’s first product.
• NSE’s Futures & Options Segment will be launched with Nifty futures as the first product.
Product Specifications BSE-30 Sensex Futures
• Contract Size - Rs. 50 times the Index
• Tick Size - 0.1 points or Rs. 5
• Expiry day - last Thursday of the month
• Settlement basis - cash settled
• Contract cycle - 3 months
• Active contracts - 3 nearest months
Product Specifications S&P CNX Nifty Futures
• Contract Size - Rs. 200 times the Index
• Tick Size - 0.05 points or Rs. 10
• Expiry day - last Thursday of the month
• Settlement basis - cash settled
• Contract cycle - 3 months
• Active contracts - 3 nearest months
• Membership for the new segment in both the exchanges is not automatic and has to be separately applied for.
• Membership is currently open on both the exchanges.
• All members will also have to be separately registered with SEBI before they can be accepted.
Membership Criteria
Clearing Member (CM)
• Networth - 300...

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