Among all the innovations that have flooded the international financial markets, financial derivatives occupy the driver’s seat. These specialized instruments facilitate the shuffling and redistribution of the risks that an investor faces. Thus aids in the process of diversifying one’s portfolio. The volatility in the equity markets over the past years has resulted in greater use of equity derivatives. The volume of the exchange traded equity futures and options in most of the mature markets have seen a significant growth.
It goes beyond that the local derivative in the emerging markets have witnessed widespread use of the derivative instrument for a variety of reasons. This continuous growth and development by the emerging market participants has resulted in capital inflows as well as helped the investors in risk protection through hedging.
Derivatives trading commenced in India in June 2000 after SEBI granted the approval to this effect in May 2000. SEBI permitted the derivative trading on two stock exchanges, i.e. and BSE, and NSE, their clearing house/corporation to commence trading and settlement in approved derivative contracts. Begin with SEBI’s approved trading in index futures contracts based on S&P CNX Nifty Index and BSE-30 (Sensex) Index. This was followed by approval for trading in options based on these two indices and options on individual securities.
The trading in index options commenced in June 2001 and trading in options on individual securities would commence in July 2000. While trading in futures of individual stocks started from November 2001. In June 2003, SEBI and/RBI approved the trading on interest rate derivative instruments only in NSE. Introduced trading of interest rate futures contracts on June 24, 2003 on 91-day Notional T-Bills and 10-year Notional 6% coupon bearing as well as zero coupon Bonds. Futures and Options were also introduced on CNX IT Index in August 2003. The total exchange traded derivatives witnessed a value of Rs.5, 423, 333 million during 2002-03 as against Rs. 1,038,480 million during the preceding year. While NSE accounted for about 99.5% of total turnover, BSE accounted for less than 1% in2002-03.
The market witnessed higher trading levels from June 2001 with introduction of index options, and still higher volumes with the introduction of stock options in July 2001. In the year 2002 has been a remarkable year for the global derivatives market. This year witnessed NSE making huge strides and also moved upward in the global ranking. According to the Futures Industry Associations in the year 2002, NSE ranked 30th in the global futures and options volume, whereas it ranks 2nd in the world, in terms of stock futures.