Financial risk management is not just a theoretical nicety; it is practical necessity. Derivatives instruments dont create surprise.

They help minimize them(Risk)

Discussion Points

What are Derivatives: An Introduction Global growth of Derivatives Domestic Derivatives Market Overview of different types of derivatives

Forwards( It is an agreement to buy or sell an asset at a certain future time for certain price) Futures Options Swaps

A derivative is a financial /non financial instrument whose value is derived from underlying asset. Is has no independent value. It has to be derived from underlying asset. The underlying assets could be financial instruments, share price index, metals, agricultural products, oil price, interest rate etc.

Primarily of 2 kinds
Traded on Exchange (organized derivatives trading) Traded on OTC (unorganized trading)

OTC is a generic term used for the market outside the exchange

Futures trading in commodities is said to have originated in Japan in 17th century for silk and rice. The Dojima Rice Exchange in Osaka, Japan is said to be the worlds first organized futures exchange, where trading started in 1710. Chicago becomes a commercial hub in the 1840s. In 1848, the Chicago Board of Trade (CBOT) was established. Chicago Mercantile Exchange was started in 1919.

It is believed that commodity futures have existed in India for thousands of years. Kautilyas Arthashastra alludes to market operations similar to modern futures markets. 1875 Bombay Cotton Trade Association. 1947 Bombay Forward Contracts control Act was enacted by Bombay State. 1952 Forward contracts (Regulation) Act formed by Central Government. 1969 Forward Trading was Prohibited. 1994 Prof. K.N.Kabra Committee recommended the opening up of Futures Trading in 17commodities.

1996 UNCTAD and World Bank joint Mission Report India: Managing Price Risk in Indias Liberalised Agriculture: Can Futures Market Help? Highlighted the role of Futures Markets as market based instruments for managing risks and suggested the strengthening of institutional capacity of the Regulator and the exchanges for efficient performance of these markets. 2000 National Agricultural Policy expressed support for commodity futures. 2001 The Expert Committee on Strengthening and Developing Agricultural Marketing emphasized the need for and role of futures trading in price risk management and in marketing of agricultural produce

Commodity Derivatives are contracts where the underlying asset is a commodity like oil, gold, metals etc. FCRA Forward Contract Regulation Act governs Commodity Derivatives in India (FMC)

Commodity exchanges

NCDEX National Commodity and Derivatives exchange (mostly agri products are traded) MCX Multi Commodity Exchange (trading mostly bullion, metals and energy products) NMCE - agricultural products, Oils and metals ICEX - Metals and spices

The National Stock Exchange of India Limited (NSE) commenced trading in derivatives with the launch of index futures on June 12, 2000. The futures contracts are based on the popular benchmark S&P CNX Nifty Index. The Exchange introduced trading in Index Options (also based on Nifty) on June 4, 2001. NSE also became the first exchange to launch trading in options on individual securities from July 2, 2001. Futures on individual securities were introduced on November 9, 2001. Futures and Options on individual securities are available on 208 securities stipulated by SEBI.

The Exchange has also introduced trading in Futures and Options contracts based on CNX-IT, BANK NIFTY, and NIFTY MIDCAP 50 indices.
Since the launch of the Index Derivatives on the popular benchmark S&P CNX Nifty Index in 2000, the National Stock Exchange of India Limited (NSE) today have moved ahead with a varied product offering in equity derivatives. The Exchange currently provides trading in Futures and Options contracts on 9 major indices and 226 securities. The Exchange also introduced trading in Mini Derivatives contracts to provide easier access for small investors to invest in Nifty futures and options.

A currency future, also known as FX future, is a futures contract to exchange one currency for another at a specified date in the future at a price (exchange rate) that is fixed on the purchase date. On NSE the price of a future contract is in terms of INR per unit of other currency e.g. US Dollars. Currency future contracts allow investors to hedge against foreign exchange risk. Currency Derivatives are available on four currency pairs viz. US Dollars (USD), Euro (EUR), Great Britain Pound (GBP) and Japanese Yen (JPY). Currency options are currently available on US Dollars. NSE was the first exchange to have received an in-principle approval from SEBI for setting up currency derivative segment. The exchange launched its currency futures trading platform on 29th August, 2008. Currency futures on USD-INR were introduced for trading and subsequently the Indian rupee was allowed to trade against other currencies such as euro, pound sterling and the Japanese yen. Currency Options was introduced on October 29, 2010.

Value is derived from future interest rates Underlying instrument is Interest Rate
Interest Rate derivatives (IRD) introduced on NSE from 2009, offers futures contracts on 10 Year Notional Coupon-bearing Government of India (GOI) security (10YGS7) and the recently introduced (2011) 91-day Government of India (GOI) Treasury Bill.

Hedgers Framers, traders(Hedger is a person whose objective is to reduce risk) Speculators- investors, fund managers(Risk takers) Arbitragers-(simultaneously trading in two or three markets) investors, fund managers

Risk Management Price Discovery Market efficiency

Increase in Macroeconomic instability during the crisis of 1970s Oil crisis of 1970s exposed the financial systems to the risk inherent in commodities Collapse of Bretton Woods system that led to most currencies adopting free-float exchange rate Increased currency risk Increased Globalization of Business Activities resulting in higher foreign trade and a need for managing FX exposure

CBOT CME LIFFE SIMEX