Types Of Financial Derivative Essay

3475 words - 14 pages

Futures and Options in India
* Options Trading
* Options Trade
* Derivatives Trade
* Trading in shares
The Indian capital market has witness impressive growth and qualitative changes, especially over the last two decades. In the fifties, sixties and most of the seventies, it was in a dormant stage when the investors were generally not familiar with, or inclined towards, the corporate securities. During this time, only few companies accessed the capital market. As a consequence, trading volumes were low during these years. The process of liberalization of the Indian economy since the early nineties has contributed to ...view middle of the document...

This led to a reduction in the stock market activities.
A forward trading system was introduced by the government of India in July, 1983 in the Bombay, Calcutta, Delhi and Ahmedabad stock exchanges. Under the system, the listed shares were divided into two categories: specified and non-specified. The system permitted the carry- forward, or badla trading in specified shares. The underlying principle of the system was simply this that although, strictly, forward trading could not be undertaken, transactions were done on a spot basis, but the settlement was carried forward.
The system was stuffed with a strict schedule of regulatory measures like daily margins, carry over margins, automatic margins, limits on holdings of individuals, limits on price fluctuations- daily and fortnightly, etc. the system induced liquidity in the stock market, which was largely due to participation of the retail investors who otherwise had no access to fund the purchases. The badla system of trading worked well and led to a stupendous growth of the market in terms of various parameters like the number of investors, number of new issues, market capitalization and turnover.
In 1991, the Ministry of Fi9nanace asked the Society for Capital Market Research and Development to undertake an expert study of the trading in shares in stock exchanges, one of the terms of reference to look into the working of Badla system in shares and its effect on trading. In terms of the finding of the study, it was observed that, typically only about one-fourth of the outstanding position at the end of settlement got settled by actual delivery, while the remaining bulk got carried forward to next settlement. The committee did not seem to be in agreement with the brokers’ defence of the system as a provider of liquidity. If felt the carry forward system to be totally unjustifiable and unhealthy practice in economic terms. The system of Badla helps neither speculators, who have neither money to pay nor shares to deliver. In its view, the liquidity provided by speculators, who are not interested in paying and taking delivery on the settlement date, can not be considered as a genuine liquidity. Accordingly, it recommended doing away with the carry forward system.
The Badla system was banned in December 1993 by the market regulator, SEBI, presumably because it led to excessive speculation and/or its misuse. Based on the recommendations of the G S Patel committee that the SEBI had set up, a new carry forward trading system was introduced in January 1996. However, the system did not fond much favour with the broking and investing community. The revised carry forward system entails a number of restrictions which have made it unattractive.
* Limits on the Carry Forward Transactions
* Margins
* Limited Carry Forward
* Cumbersome Reporting Requirement
There were voices for relaxations in the stringent conditions laid down in the revised carry forward scheme from time to time and even...

Other Papers Like Types of Financial Derivative

Ethical Essay

783 words - 4 pages Class of: 2013 Course Title: Financial Risk Management (FRM) Semester: III Credits: 3 Course Objective & Learning Outcome: This course gives students a working knowledge of derivative instruments and their applications in managing various types of financial risks. While doing so, students would understand the organizational aspects of those risk functions and their roles & responsibilities. The emphasis is on

Currency Hedging Essay

685 words - 3 pages United States company doing business in Japan is compensated in yen, that company has risk associated with fluctuations in the value of the yen versus the United States dollar.[1] ------------------------------------------------- Hedge[edit] A hedge is a type of derivative, or a financial instrument, that derives its value from an underlying asset. Hedging is a way for a company to minimize or eliminate foreign exchange risk. Two common hedges


1089 words - 5 pages . 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 the amount of rain or the number of sunny days in a particular region. Derivatives are generally used as an instrument to hedge risk, but can also be used for speculative purposes. For example, a

Minority Shareholders - Potection by Ca 2006

2890 words - 12 pages check on directors and in some cases, majority shareholders in the execution of their duty. It is important to note that as at the time the financial crisis started, it is the common law derivative action that was in place. As such, before considering the statutory derivative action, the common law derivative action will be briefly analysed as to whether it’s provision was sufficient to act as a check on directors or on the contrary part of the

compoundings in modern english

670 words - 3 pages Word-composition (compounding) Compounding or word-composition is one of the productive means of word-formation in Modern English. Compounds are words that are made up of two immediate constituents which are both derivative bases. Derivative bases in compounds can have different degrees of complexity: 1. both bases are simple (weekend, girlfriend). 2. one base is simple, the other is derivative (a shoemaker). 3. one base is compound and

Enron's Weather Derivatives

873 words - 4 pages hedge the weather risk via a new “weather derivative” being proposed by Enron’s Mike James. Since the colder the season, the greater the electrical usage and the recent weather advisory called for another unseasonably warm winter, Mary was considering on of the Enron “weather derivatives”. Problem Statement Mary Watts wants to know how the “weather derivative” products worked, and how they maybe restore PNW’s credibility in the capital

Term Paper of Financial Market

1608 words - 7 pages interplay of three factors: chance, necessity, and design. In short, history matters, and it matters a lot. In addition, throughout his text Mishkin consistently stresses the importance of information. He argues that it is impossible to understand the special nature of financial markets relative to markets for real goods and services unless one understands the peculiar types of "asymmetric information problems" intrinsically associated with


755 words - 4 pages the derivative; the method use has to be consistent with the entity’s approach to managing risk. Management prefers hedging accounting to reduce volatility created by repeated adjustment of financial instrument value or at least attempt to reduce it. This permits to treat a hedge and a derivative as one entry, so that any large swings either way are balanced out. So, the main purpose for hedging accounting is to reduce volatility of the overall portfolio.

Duration and Convexity

3855 words - 16 pages not just limited to bonds. They apply to all financial instruments, fixed income and equity alike. They also measure price reaction to risk factors other than just interest rates. Therefore, put more generally, duration and convexity take into account any change for any risk factor affecting the price of any financial instrument. Although many examples in this note will center on their use for bonds regarding yield and interest rate changes


624 words - 3 pages (PR-4639) Into part In the era of globalization has brought many innovations in the field of financial engineering. Subsequently, a new set of products known as derivatives emerged in the financial sector. The aim of this chapter or project is to appreciate derivatives as financial instruments. This chapter is designed with a view to understand the Basic concepts involved in derivatives, their utility in risk management, speculation

Fins Bank

2455 words - 10 pages ) authorises financial institutions to carry out financial intermediation. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Institutions Management 2e, by Lange, Saunders, Anderson ,Thomson and Cornett Slides prepared by Maike Sundmacher 1-2 Products Sold by the Financial Services Industry • Comparing the products of DIs in 1950 and 2006: – Much greater distinction between types of DIs in terms of products in 1950

Related Essays

Company Law Derivative Actions Essay

1015 words - 5 pages There are two types of derivative actions, common law derivative actions and statutory ones. For common law derivative action, it is taken based on case laws such as Foss and Harbottle case. In this case, two shareholders, Richard Foss and Edward Starkie Turton claimed the board of directors decided to misuse the land in Manchester of company which made company wasted many on the mortgage. Then, they sued the five directors because of their

Master In International Business Essay

581 words - 3 pages quantity to be bought or sold, the maturity, etc.) are fixed at the time you enter the contract. The price of the derivative depends on the underlying. The underlying can be everything as long as it is clearly defined! Examples:  Financial prices: stocks, bonds, stock-indices, exchange rates  Commodities: oil price, gold, copper, coffee, orange juice concentrate, wine, energy In most cases the underlying is the price of a traded asset! 3

Derivative Market In India Essay

1909 words - 8 pages CHAPTER I: DEFINITION AND USES OF DERIVATIVES Derivative is defined as a security which is a financial contract. Its value is derived from the value of some other thing such as - commodity price, stock price, exchange rate, interest rate, an index of prices, etc. Some simple kinds of derivatives are – * Forwards * Futures * Options * Swaps. Derivatives are traded for different reasons. Derivatives enable traders in hedging

Convert Case Essay

1109 words - 5 pages to be derivative instruments for purposes of this Statement: a. Contracts issued or held by that reporting entity that are both (1) indexed to its own stock and (2) classified in stockholders’ equity in its statement of financial position. EITF 00-19, par., 12-32 Conversion option is an embedded derivative instrument, and it requires cash payment to the principle settlement and offers choice of cash or share settlement for conversion spread