Derivatives on a global platform and in India

By Shruti Datt on November 4, 2013
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Derivatives have been an old financial instrument in India, finding its roots in agricultural commodities trading. The first recorded derivatives contract, according to Chakrabarti and De (2010) took place in 1875 on a cottons exchange. Since then, the derivatives market in India has seen immense growth. All derivatives trading here takes place under the jurisdiction of the Securities and Exchange Board of India (SEBI). The exchanges in derivatives market stood at Rs. 11010482.20 crore in 2008-2009,  up from Rs. 2365 crore in 2000-2001. Factors which have contributed towards this growth are explained below in detail (Gurumsamy, 2009):

  1. Globalisation: With the advent of globalization the size and reach of business operations has also increased manifolds. The effect of globalization was also seen on the financial markets across the globe. Investors and financial institutes across the globe started participating in the global financial markets which require necessary tools for risk management and thus the role of derivatives was identified.
  2. Technological advancement: The technological advancements in the communication industry have also contributed towards the growth and rise of the derivatives market. These advancements in network and computer technologies has helped improve storage of data and also rapid transmission of information across the globe.
  3. Development of financial theories: A number of financial theories have been developed which contributed towards the development of innovative products in the derivatives market. These theories were developed to find ways for efficient management of risks associated with investments and asset trading in the derivatives market. One of the most famous theory was proposed by Black and Scholes in the year 1973. Which was developed to determine the value of “call” and “put” options.

Growth of derivatives in Indian capital market

The Equity derivative market in India like the world market has seen immense growth since its inception in the securities market in FY 2000. The growth has been remarkable both in terms of volumes and numbers of traded contracts. National Stock Exchange (NSE) accounts for more than 90% of the derivatives trading in the Indian Market. Derivative trading got recognition and popularity soon after its introduction. Within a due course of time the turnover of NSE derivatives exceeded the turnover of NSE cash market (SEBI, 2012).

Derivatives turnover Vs. cash market turnover in FY 2012-13 (source: NSE and BSE).
Derivatives turnover Vs. cash market turnover in FY 2012-13 (source: NSE and BSE).

Indian derivatives market and global derivatives market

As can be observed from the discussion above, the derivatives segment has expanded and grown immensely both globally as well as in the Indian Capital Market. Until 2012, the derivatives market has seen massive growth (See chart 1.3.1 given below). However, as per the FIA 2012 Annual Volume survey trading in the derivatives market has seen a dip of 15.3% in 2012. All the major regions i.e. Asia-Pacific, Europe and North America reported a two-digit decline percentage. Of all the regions, greatest decline has been observed in Asia Pacific (-23.4%) followed by Europe (-12.5%) and North America (-11.9%) (FIA, 2012).

Global futures and options volume by region (source: FIA-2012 annual volume survey).
Global futures and options volume by region (source: FIA-2012 annual volume survey).

Although not many but few exchanges as well as contracts enjoyed exceptional growth in FY 2012-13 which may head towards additional growth in FY 2013-14. Sectors like agriculture, energy, ad non-precious metals reflected double digits growth percentage (FIA, 2012).

References

  1. Chakrabarti, R., and De, S. (2010). Capital Markets in India. New Delhi: Sage.
  2. Gurusamy (2009). Capital Markets. 2nd Ed., McGraw Hill Publications [Online] Retrieved from: http://books.google.co.in/books?id=TREjwESaQu0C&pg=PA120&dq=operations+of+derivatives+market+in+india&hl=en&sa=X&ei=TsIqUpeaHYGPrQfzl4GoDw&ved=0CEAQ6AEwAw#v=onepage&q=operations%20of%20derivatives%20market%20in%20india&f=false.
  3. SEBI Annual Report (2012-13). Retrieved from: http://www.sebi.gov.in/cms/sebi_data/attachdocs/1378192045802.pdf.
  4. FIA Annual Volume Survey (2012). Retrieved from: http://www.futuresindustry.org/downloads/FI-2012_Volume_Survey.pdf.
Shruti Datt
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