Financial Derivatives Market and its Development in India
Financial markets are, by nature, extremely volatile and hence the risk factor is an
important concern for financial agents. To reduce this risk, the concept of derivatives
comes into the picture. Derivatives are products whose values are derived from one or more basic variables called bases. ...
Development of exchange-traded derivatives
Derivatives have probably been around for as long as people have been trading with one
another. ...
The need for a derivatives market
The derivatives market performs a number of economic functions:
1. ... They increase savings and investment in the long run
The participants in a derivatives market
• Hedgers use futures or options markets to reduce or eliminate the risk associated
with price of an asset. ... They can increase both the potential
gains and potential losses by usage of derivatives in a speculative venture. ...
Types of Derivatives
Forwards: A forward contract is a customized contract between two entities, where
settlement takes place on a specific date in the future at today’s pre-agreed price. ...
Factors driving the growth of financial derivatives
1. ... Innovations in the derivatives markets, which optimally combine the risks and returns
over a large number of financial assets leading to higher returns, reduced risk as well as
transactions costs as compared to individual financial assets.
Development of derivatives market in India
The first step towards introduction of derivatives trading in India was the promulgation of
the Securities Laws(Amendment) Ordinance, 1995, which withdrew the prohibition on
options in securities. The market for derivatives, however, did not take off, as there was no regulatory framework to govern trading of derivatives. ... Gupta on November 18, 1996 to develop
appropriate regulatory framework for derivatives trading in India. The committee submitted its report on March 17, 1998 prescribing necessary pre–conditions for introduction of derivatives trading in India. The committee recommended that derivatives should be declared as ‘securities’ so that regulatory framework applicable to trading of ‘securities’ could also govern trading of securities. ... Varma, to recommend measures for risk containment in derivatives market in India. ...
The Securities Contract Regulation Act (SCRA) was amended in December 1999 to
include derivatives within the ambit of ‘securities’ and the regulatory framework was
developed for governing derivatives trading.
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