Financial Derivatives Market in India.pdf

Financial Derivatives Market in India.pdf

• 1.
  Understanding the Landscape and Opportunities DERIVATIVE MARKETIN INDIA: AN OVERVIEW BY: ANJANEY JAIN
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  INDEX Serial No. Topic 1.Introduction 2. What are Derivatives? 3. Benefits 4. Types of Derivatives in India 5. Market Size and Growth 6. Market Structure 7. Participants 8. Challenges 9. Conclusion
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  Derivatives are financialinstruments whose value is derived from an underlying asset or a group of assets. These assets range from stocks, bonds, commodities, currencies, interest rates, or market indices. The derivatives market is a financial marketplace where derivative contracts are bought and sold.  Definition of derivatives: A derivative is a financial contract between two or more parties that derives its value from an underlying asset, commodity, or index.  Importance of derivatives: Derivatives are financial instruments that play a vital role in risk management, speculation, and leverage.  Indian derivative market scenario: India has two types of derivative markets: the exchanges-traded market and the over-the-counter (OTC) market. INTRODUCTION
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   Definition: A derivativeis a financial instrument that derives its value from an underlying asset. Examples: Options, Futures, Forwards, Swaps.  History of Derivative Market in India: 1990: Introduction of derivatives in India. 2000: Launch of index futures and options on NSE. 2001: Launch of stock futures and options on NSE 2003: Introduction of interest rate derivatives. WHAT ARE DERIVATIVES?
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  BENEFITS Risk Management Increased Market Efficiency LiquidityFlexibility Levage Derivatives enable hedging, allowing participants to manage and mitigate potential losses or gains. Derivatives help allocate risk more efficiently, leading to more accurate pricing in the underlying market. They provide an opportunity, increasing market liquidity and attracting more participants. Derivatives offer customized solutions for hedging and speculation, catering to diverse needs. Derivatives allow for leveraged positions, amplifying potential gains (and losses). Speculation Price Discovery Arbitrage Opportunities Diversification Economic Growth Derivatives enable speculation, allowing participants to take positions on market expectations. Derivatives contribute to price discovery, providing insights into market expectations. Derivatives facilitate arbitrage, ensuring price consistency across markets. Derivatives offer a new asset class, enabling diversification and potentially reducing portfolio risk. Derivatives facilitate investment, financing, and risk management, supporting economic growth.
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   Equity Derivatives: Currency Derivatives:  Interest Rate Derivatives: TYPES OF DERIVATIVES IN INDIA Index: Derive their value from market movements for an underlying index. Stock: Derive their value from market movements for an underlying stock. Currency: One buys or sells a specific foreign currency for delivery at a designated price in future. Government Securities: Debt instruments issued by governments to raise funds. Interest Rate Swaps: Financial agreement to exchange cash flows over a contract's lifetime.
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  The Indian derivativemarket has experienced significant growth in recent years, with a substantial increase in market size and trading volumes. As of 2022, the total turnover in the Indian derivative market stood at approximately ₹1,400 lakh crore (₹140 trillion), with an average daily turnover of around ₹6 lakh crore (₹6 trillion). This represents a growth of over 20% compared to the previous year. The growth in the Indian derivative market can be attributed to factors such as increased market awareness, improved trading infrastructure, and regulatory initiatives aimed at promoting derivatives trading. Additionally, the introduction of new products and instruments, such as weekly options and volatility indexes, has further contributed to the market's expansion. Looking ahead, the Indian derivative market is expected to continue its growth trajectory, driven by increasing demand for risk management and investment products. MARKET SIZE AND GROWTH
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  The market structureof Indian derivatives is comprised of several key components. At the core are the exchanges, which include the National Stock Exchange (NSE), Bombay Stock Exchange (BSE), Multi Commodity Exchange (MCX), and National Commodity and Derivatives Exchange (NCDEX). These exchanges provide a platform for trading various derivative instruments. The Securities and Exchange Board of India (SEBI) serves as the regulatory body, overseeing the derivatives market to ensure fair and transparent trading practices. SEBI sets guidelines and rules to protect investors and maintain market integrity. A diverse range of market participants engage in the Indian derivatives market, including retail investors, institutional investors, foreign institutional investors (FIIs), market makers, hedgers, speculators, and arbitrageurs. Each participant plays a unique role in contributing to market liquidity and efficiency. MARKET STRUCTURE
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  Retail Investors Institutional Investors Foreign Institutional Investors(FIIs) Market Makers Hedgers Individual investors who trade in derivatives for personal investment or hedging purposes. Organizations that invest in derivatives on behalf of their clients or beneficiaries, such as: Mutual Funds, Banks, etc. Foreign entities that invest in Indian derivatives, such as: Foreign Mutual Funds, Foreign Banks, etc. Specialized participants who provide liquidity to the market by: trading securities, Maintaining market stability, etc. Participants who use derivatives to mitigate risks associated with: Price fluctuations, Commodity price changes, etc. Speculators Arbitrageurs Proprietary Trading Firms Financial Institutions Clearing Members Participants who take positions in derivatives to profit from: Price movements, Market volatility, Market trends, etc. Participants who exploit price differences between: Two or more markets, etc. Companies that trade derivatives using their own capital, often employing advanced trading strategies. Entities that participate in the derivative market to: Hedge their own risks, Provide derivative products, Engage in trading. Members of clearing corporations who: Clear and settle trades, Guarantee trades, Manage risk, etc. PARTICIPANTS
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   Regulatory complexitiesand frequent changes  Limited trading hours and platforms  Inefficient clearing and settlement mechanisms  Low liquidity in certain segments  Limited range of derivative products  Complexity in product structures and pricing  Limited awareness and education among retail investors  High costs and fees associated with trading and clearing  Outdated technology and trading systems  Cyber security risks and data privacy concerns  Intense global competition  Limited competitiveness of Indian derivative products  Talent retention issues CHALLENGES
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  In conclusion, thederivative market in India has come a long way since its introduction in the 1990s. From a humble beginning to a thriving market with a total turnover of over ₹140 trillion in 2022-2023. The market offers a range of products, including equity, currency, and interest rate derivatives, catering to the needs of various participants. Despite the growth, the market faces challenges such as regulatory complexities, market volatility, and lack of awareness. However, these challenges also present opportunities for growth and development. As the market continues to evolve, it is essential to address these challenges and work towards creating a more robust and efficient derivative market. The future outlook of the derivative market in India looks promising, with increasing participation from retail investors, growing popularity of options trading, and the introduction of new products. As the market continues to grow, it is expected to play a significant role in the overall development of the Indian financial market. With the right regulatory framework, infrastructure, and market practices in place, the Indian derivative market is poised for continued success. CONCLUSION