A_Comparative_Study_of_Future_&_Options_on_Bse_and_Nse_Since_Inception

Research Project Report On A COMPARATIVE STUDY OF FUTURE & OPTIONS ON BSE AND NSE SINCE INCEPTION Submitted in Partial fulfillment of MBA 2008-2010 Under the guidance of Dr. Dinesh Kr. Sharma Submitted to: Dr. Dinesh Sharma Submitted by: Arun Sharma Arun Kumar Aslam Ahmed Ujjwal kansal Greater Noida Gautam Budh Nagar- 201308 Gautam  Buddha  University     Page  1   List of Symbols and Abbreviations F&O NSE BSE SCRA SEBI CBOT S&P CME NYSE NCFM WDM CM SPAN Future & Options National Stock Exchange Bombay Stock Exchange Securities Contract Regulation Act Securities and Exchange Board of India Chicago Board of Trade Standard and Poor’s Chicago Mercantile Exchange New York Stock Exchange NSE’s Certifications in Financial Market Wholesale Debt Market Capital Market Standard Portfolio Analysis of Risk Gautam  Buddha  University     Page  2   Acknowledgement We take immense pleasure in thanking Dr. Dinesh Kr. Sharma, for having permitted us to carry out this project work. We wish to express our deep sense of gratitude to our Internal Guides, Dr. Dinesh Kr. Sharma and Dr. Shweta Anand for their able guidance and useful suggestions, which helped us in completing the project, in time. Words are inadequate in offering our thanks to the faculty staff for their encouragement and cooperation in carrying out the project work. Finally, yet importantly, I would like to express our heartfelt thanks to our friends/classmates for their help and wishes for the successful completion of this project. Gautam  Buddha  University     Page  3   Table of Content 1. Abstract………………………………………………………………………5 2. Introduction…………………………………………………………………..6 2.1 Concept of Derivatives…………………………………………………………….....6 2.2 Definition of Financial Derivatives………………………………………….……….6 2.3 Participants in Derivatives Market…………………………………………………...6 2.4 Application of financial Derivatives…………………………………………………7 2.5 Classification of Derivatives…………………………………………………………8 2.6 History of Derivatives in India……………………………………………………….9 2.7 Regulation of Derivatives trading in India……...…………………………………...10 3. Limitations………………………………….……………………………….11 4. Objectives of the study…………………….………………………………..12 5. Literature Review…………………………………………………………...13 6. Research Methodology……………….……………………………………..15 7. Data Collection and Analysis…………………………………………….....16 7.1 Derivatives Market in India…...……………………………………………………..16 7.2 Derivatives Products Traded in Derivatives Segment of BSE………………..……..16 7.3 Derivatives Products Traded in Derivatives Segment of NSE………..……………..17 7.4 Growth of Derivatives Market in India………………………..…………………….18 7.5 Members……………………….…………………………..…………………………21 7.6 Trading  System……………………….…………………………..…………………………………………………21 7.7 BSE contract specification….……………………………………………………….22 7.8 NSE contract specification….…………………………………………………….....25 8. Findings and Conclusions…..………………………………………………27 9. Suggestion…………….….…………………………………………………29 10. References…………..………………………………………………………30 Gautam  Buddha  University     Page  4   Abstract Derivatives have probably been around for as long as people have been trading with one another. The demand for risk management instruments and processes by emerging countries are now large and it will continue to grow throughout the twenty-first century. Since, the Indian market has started to play an important role in the trading of derivatives products the two nationwide stock exchanges have witnessed a large difference in terms of trading volume and turnover. Although the trading of F & O had commenced almost together at both exchanges, but today NSE is the largest derivative exchange (99%) in India; in terms of volume and turnover. Currently it has reputed itself as one among the top 10 derivative exchange worldwide. In India, the emergence and growth of derivatives market is relatively a recent phenomenon. Since its inception in June 2000, derivatives market has exhibited exponential growth both in terms of volume and number of traded contracts. The market turnover has grown from Rs.2365 crore in 2000-2001 to Rs. 11010482.20 crore in 2008-2009. Within a short span of eight years, derivatives trading in India has surpassed cash segment in terms of turnover and number of traded contracts. This paper brings the light on the comparative analysis of both the exchanges and investigates main obstacles in the root of successful trading of derivative products at BSE and feasible ways to come out of them. The aim of this paper is to assist the possible ways to increase the trading volume of derivatives at BSE, to make it competitive with NSE’s derivative segment which may possess a sound derivative segment in the country and would ultimately lead to effective and efficient financial system. Gautam  Buddha  University     Page  5   Introduction Concept of Derivatives: The term ‘derivatives, refers to a broad class of financial instruments which mainly include options and futures. These instruments derive their value from the price and other related variables of the underlying asset. They do not have worth of their own and derive their value from the claim they give to their owners to own some other financial assets or security. A simple example of derivative is butter, which is derivative of milk. The price of butter depends upon price of milk, which in turn depends upon the demand and supply of milk. The general definition of derivatives means to derive something from something else. So in nutshell we can say that derivative instruments are financial instruments, whose value is based on another security, The asset underlying a derivative may be commodity or a financial asset. Derivatives are those financial instruments that derive their value from the other assets. For example, the price of gold to be delivered after two months will depend, among so many things, on the present and expected price of this commodity. Definition of Financial Derivatives: Section 2(ac) of Securities Contract Regulation Act (SCRA) 1956 defines Derivative as: 1. “a security derived from a debt instrument, share, loan whether secured or unsecured, risk instrument or contract for differences or any other form of security; 2. “a contract which derives its value from the prices, or index of prices, of underlying securities”. Participants in Derivatives Market: Hedgers: They use derivatives markets to reduce or eliminate the risk associated with price of an asset. Majority of the participants in derivatives market belongs to this category. Speculators: They transact futures and options contracts to get extra leverage in betting on future movements in the price of an asset. They can increase both the potential gains and potential losses by usage of derivatives in a speculative venture. Gautam  Buddha  University     Page  6   Arbitrageurs: Their behavior is guided by the desire to take advantage of a discrepancy between prices of more or less the same assets or competing assets in different markets. If, for example, they see the futures price of an asset getting out of line with the cash price, they will take offsetting positions in the two markets to lock in a profit. Applications of Financial Derivatives: Some of the applications of financial derivatives can be enumerated as follows: 1. Management of risk: This is most important function of derivatives. Risk management is not about the elimination of risk rather it is about the management of risk. Financial derivatives provide a powerful tool for limiting risks that individuals and organizations face in the ordinary conduct of their businesses. It requires a thorough understanding of the basic principles that regulate the pricing of financial derivatives. Effective use of derivatives can save cost, and it can increase returns for the organizations. 2. Efficiency in trading: Financial derivatives allow for free trading of risk components and that leads to improving market efficiency. Traders can use a position in one or more financial derivatives as a substitute for a position in the underlying instruments. In many instances, traders find financial derivatives to be a more attractive instrument than the underlying security. This is mainly because of the greater amount of liquidity in the market offered by derivatives as well as the lower transaction costs associated with trading a financial derivative as compared to the costs of trading the underlying instrument in cash market. 3. Speculation: This is not the only use, and probably not the most important use, of financial derivatives. Financial derivatives are considered to be risky. If not used properly, these can leads to financial destruction in an organization like what happened in Barings Plc. However, these instruments act as a powerful instrument for knowledgeable traders to expose themselves to calculated and well understood risks in search of a reward, that is, profit. 4. Price discover: Another important application of derivatives is the price discovery which means revealing information about future cash market prices through the futures market. Derivatives markets provide a mechanism by which diverse and scattered opinions of future Gautam  Buddha  University     Page  7   are collected into one readily discernible number which provides a consensus of knowledgeable thinking. 5. Price stabilization function: Derivative market helps to keep a stabilizing influence on spot prices by reducing the short-term fluctuations. In other words, derivative reduces both peak and depths and leads to price stabilization effect in the cash market for underlying asset. Classification of Derivatives: Broadly derivatives can be classified in to two categories as shown in Fig.1: Commodity derivatives and financial derivatives. In case of commodity derivatives, underlying asset can be commodities like wheat, gold, silver etc., whereas in case of financial derivatives underlying assets are stocks, currencies, bonds and other interest rates bearing securities etc. Since, the scope of this case study is limited to only financial derivatives so we will confine our discussion to financial derivatives only. Gautam  Buddha  University     Page  8   History of Derivatives Markets in India: Derivatives markets in India have been in existence in one form or the other for a long time. In the area of commodities, the Bombay Cotton Trade Association started futures trading way back in 1875. In 1952, the Government of India banned cash settlement and options trading. Derivatives trading shifted to informal forwards markets. In recent years, government policy has shifted in favour of an increased role of market-based pricing and less suspicious derivatives trading. The first step towards introduction of financial derivatives trading in India was the promulgation of the Securities Laws (Amendment) Ordinance, 1995. It provided for withdrawal of prohibition on options in securities. The last decade, beginning the year 2000, saw lifting of ban on futures trading in many commodities. Around the same period, national electronic commodity exchanges were also set up. Derivatives trading commenced in India in June 2000 after SEBI granted the final approval to this effect in May 2001 on the recommendation of L. C Gupta committee. Securities and Exchange Board of India (SEBI) permitted the derivative segments of two stock exchanges, NSE and BSE, and their clearing house/corporation to commence trading and settlement in approved derivatives contracts. Initially, SEBI approved trading in index futures contracts based on various stock market indices such as, S&P CNX, Nifty and Sensex. Subsequently, index-based trading was permitted in options as well as individual securities. The trading in BSE Sensex options commenced on June 4, 2001 and the trading in options on individual securities commenced in July 2001. Futures contracts on individual stocks were launched in November 2001. The derivatives trading on NSE commenced with S&P CNX Nifty Index futures on June 12, 2000. The trading in index options commenced on June 4, 2001 and trading in options on individual securities commenced on July 2, 2001. Single stock futures were launched on November 9, 2001. The index futures and options contract on NSE are based on S&P CNX. In June 2003, NSE introduced Interest Rate Futures which were subsequently banned due to pricing issue. Table 1 gives chronology of introduction of derivatives in India. Gautam  Buddha  University     Page  9   Regulation of Derivatives Trading in India: The regulatory framework in India is based on the L.C. Gupta Committee Report, and the J.R. Varma Committee Report. It is mostly consistent with the IOSCO5 principles and addresses the common concerns of investor protection, market efficiency and integrity and financial integrity. The L.C. Gupta Committee Report provides a perspective on division of regulatory responsibility between the exchange and the SEBI. It recommends that SEBI’s role should be restricted to approving rules, bye laws and regulations of a derivatives exchange as also to approving the proposed derivatives contracts before commencement of their trading. It emphasises the supervisory and advisory role of SEBI with a view to permitting desirable flexibility, maximizing regulatory effectiveness and minimizing regulatory cost. Regulatory requirements for authorization of derivatives brokers/dealers include relating to capital adequacy, net worth, certification requirement and initial registration with SEBI. The J.R. Varma committee suggests a methodology for risk containment measures for index-based futures and options, stock options and single stock futures. The risk containment measures include calculation of margins, position limits, exposure limits and reporting and disclosure. Gautam  Buddha  University     Page  10   Limitations The present study has certain limitations that need to be taken into account when considering the study and its contributions However, some of these limitations can be seen as fruitful avenues for future research under the same theme.This research is fully based on secondary data available on various websites. Time limitation was one of the major constraints while doing this research and lack of existing research in this particular area was also restricted us to reveal the insights about trading in derivative segment between two exchanges. As per the requirement of quantitative data researcher were fully dependent on the sites of NSE and BSE and it was very difficult to match the appropriate parameters of comparison between two exchanges. Gautam  Buddha  University     Page  11   Objectives of the Study The objective of this research is to study the current status of derivative trading on both BSE and NSE; make out the existing gap between both exchange’s derivative segment. This study also aimed at investigating the possible reasons why BSE is not able to compete with NSE in derivative segment. The following are the main objectives of our study: • • Trade comparison of F&O between NSE and BSE considering the factors, Trade Volume, Settlement time, trading frequency, trade size. Try to find out some possible ways for BSE to improve its share in Derivatives Market in India. Gautam  Buddha  University     Page  12   Literature Review Forward contracting dates back at least to the 12th century, and May well have been around before then. A liquid market exists for some security; an attempt to create another market for that same security tends not to do well. There is a “natural monopoly” character to a market that has entrenched liquidity. When a second market tries to compete with the first, it is difficult to attract away the order flow. From the viewpoint of a market user, the second market is illiquid on the day that operations commence, so it is efficient to continue sending orders to the entrenched market. If this happens, the second market is illiquid, and this illiquidity deters further orders. These arguments are consistent with empirical experience. Internationally, second markets have had difficulty displacing the liquidity of an entrenched market. For example, the Chicago Board of Trade (CBOT) and New York Futures Exchange (NYFE) failed to take away market share or liquidity from the main stock index futures product of the United States, which is the Standard & Poor’s (S&P) 500 at the Chicago Mercantile Exchange (CME). Similarly, the U.S. equity market has been dominated by the New York Stock Exchange (NYSE); alternative trading venues for NYSE-listed stocks have been unable to displace the NYSE as the most liquid stock market in the United States. Debates about the natural monopoly of an entrenched securities exchange have significant implications for public policy. If an entrenched exchange is earning a rent on a monopoly, then there may be a case for antitrust actions, which diminish the costs to society. On the other hand, if the exchange industry is contestable and profits are hence kept in check, then the status quo may be acceptable. While there has been plethora of studies concerning the quality of stock exchanges of developed countries, there has been negligible research attention devoted to the comparative study of stock markets in emerging countries. A very few research has been done on the topic for example (Dr. Sasi Dharan-2006) examined the performance of F&O segment in Indian capital market and concluded futures are playing a significant role and options do not have that much volume. The turnover in the F&O segment is too low compared to NSE. The recent reports reveal that BSE is planning to induct a strategic partner to boost the trading activities. However, NSE has already established their position in the market. Moreover now all the 50 stocks have been offered for Gautam  Buddha  University     Page  13   derivative trading. It is expected to push the trading in the stock derivatives market in India to newer heights. Chandrasekhar Krishnamurti (Division of Banking and Finance) -2006 has concluded that by using MEC and price volatility as measures of liquidity, it has been established that liquidity is indeed better in NSE than in BSE. This is in sync with the expectation held before empirical evidence made its entry. The presence of a share depository in NSE also gives it an edge in liquidity. In a similar study by Bae, K, Cha, B, and Cheung, Y (1999) the researchers tried to show the information transmission mechanism that operates for stocks which are dually listed. This has helped in understanding the channel of transmission of information that makes the exchanges Dependant on each other. The present study not only provides additional empirical evidence in this regard but also contributes to the literature in some aspects. First, all the previous studies except Bandivadekar and Ghosh (2003) mainly concentrated on the volatility behavior of S&P CNX Nifty on the presumption that turnover on BSE Futures and Options segment is negligible. This paper seeks to examine the behaviour of BSE Sensex after the introduction of derivatives trading in June 2000 since the important point is the volatility of the cash market affected or unaffected by the futures trading. Secondly, this paper makes an attempt to examine the behaviour of not only those index on which derivatives products are available like S&P CNX Nifty and BSE Sensex but also the behaviour of those indices such as BSE100, BSE-200, S&P CNX Nifty Junior, NSE 200 and S&P CNX Nifty 500 to see whether market wide volatility has declined due to other improvements like screen-based electronic trading, rolling settlement of ‘ T+2’ and other institutional developments introduced in the Indian market in recent years. Thirdly, this paper tries to see the impact of introduction of futures trading and option trading simultaneously on the behavior of volatility of the indices. Finally, this paper also makes an attempt to find whether the reported decline in the volatility as claimed by certain previous studies is due to introduction of derivatives trading alone. Gautam  Buddha  University     Page  14   Research Methodology The analysis is based on secondary data collected from the various sources, websites, and brochures. This study has also drawn information from the study materials of NCFM Derivatives Module published by National Stock Exchange. The information relating to Bombay Stock Exchange was collected from their brochures and its website. The annually turnover of index, stock futures and options were also used for comparison of both exchanges. This research is cross sectional and exploratory. Researchers have compared both exchanges’ derivative segment on the basis of various parameters (trade volume, trade amount, contract specification, trading formats, etc). Gautam  Buddha  University     Page  15   Data Collection and Analysis Derivatives Market in India: As mentioned in the preceding discussion, derivatives trading commenced in Indian market in 2000 with the introduction of Index futures at BSE, and subsequently, on National Stock Exchange (NSE). Since then, derivatives market in India has witnessed tremendous growth in terms of trading value and number of traded contracts. Here we may discuss the performance of derivatives products in India markets as follows. Derivatives Products Traded in Derivatives Segment of BSE: The BSE created history on June 9, 2000 when it launched trading in Sensex based futures contract for the first time. It was followed by trading in index options on June 1, 2001; in stock options and single stock futures (31 stocks) on July 9, 2001 and November 9, 2002, respectively. Currently, the number of stocks under single futures and options is 109. BSE achieved another milestone on September 13, 2004 when it launched Weekly Options, a unique product unparalleled worldwide in the derivatives markets. It permitted trading in the stocks of four leading companies namely; Satyam, State Bank of India, Reliance Industries and TISCO (renamed now Tata Steel). Chhota (mini) SENSEX was launched on January 1, 2008. With a small or 'mini' market lot of 5, it allows for comparatively lower capital outlay, lower trading costs, more precise hedging and flexible trading. Currency futures were introduced on October 1, 2008 to enable participants to hedge their currency risks through trading in the U.S. dollar-rupee future platforms. Table 2 summarily specifies the derivative products and their date of introduction on the BSE. Gautam  Buddha  University     Page  16   Derivatives Products Traded in Derivatives Segment of NSE: NSE started trading in index futures, based on popular S&P CNX Index, on June 12, 2000 as its first derivatives product. Trading on index options was introduced on June 4, 2001. Futures on individual securities started on November 9, 2001. The futures contracts are available on 233 securities stipulated by the Securities & Exchange Board of India (SEBI). Trading in options on individual securities commenced from July 2, 2001. The options contracts are American style and cash settled and are available on 233 securities. Trading in interest rate futures was introduced on 24 June 2003 but it was closed subsequently due to pricing problem. The NSE achieved another landmark in product introduction by launching Mini Index Futures & Options with a minimum contract size of Rs 1 lac. NSE crated history by launching currency futures contract on US Dollar-Rupee on August 29, 2008 in Indian Derivatives market. Table 3 presents a description of the types of products traded at F& O segment of NSE. Gautam  Buddha  University     Page  17   Growth of Derivatives Market in India: Equity derivatives market in India has registered an "explosive growth", and is expected to continue the same in the years to come. Introduced in 2000, financial derivatives market in India has shown a remarkable growth both in terms of volumes and numbers of traded contracts. NSE alone accounts for 99 percent of the derivatives trading in Indian markets. The introduction of derivatives has been well received by stock market players. Trading in derivatives gained popularity soon after its introduction. In due course, the turnover of the NSE derivatives market exceeded the turnover of the NSE cash market. For example, in 2008, the value of the NSE derivatives markets was Rs. 130, 90,477.75 Cr. whereas the value of the NSE cash markets was only Rs. 3,551,038 Cr. If we compare the trading figures of NSE and BSE, performance of BSE is not encouraging both in terms of volumes and numbers of contracts traded in all product categories. Among all the products traded on NSE in F& O segment, single stock futures also known as equity futures, are most popular in terms of volumes and number of contract traded, followed by index futures with turnover shares of 52 percent and 31 percent, respectively. In case of BSE, index futures outperform stock futures. An important feature of the derivative segment of NSE which may be observed from Table 6 and Table 5 is the huge gap between average daily transactions of its derivatives segment and cash segment. In sharp contrast to NSE, the situation at BSE is just the opposite: its cash segment outperforms the derivatives segment as can be seen from Table 4. Table 4: Comparison of Cash and Derivative Segment NSE Year 2007-08 2006-07 2005-06 2004-05 2003-04 2002-03 2001-02 2000-01 Cash Segment 3,551,038 1,945,285 1,569,556 1,140,071 1,099,535 617,989 513,167 1,339,510 Derivative Segment 1,30,90,477.75 15,78,857 (Rs. Crores) BSE Cash Segment Derivative Segment 2,42,309 59,006 9 16,112 12,452 2,478 1,922 1,673 73,56,242 48,24,174 25,46,982 21,30,610 4,39,862 1,01,926 2,365 9,56,185 8,16,074 5,18,715 5,03,053 3,14,073 3,07,292 10,00,032 Gautam  Buddha  University     Page  18   Table 5: Comparison of Average Daily Transaction at NSE in Derivative and Cash Segment Year 2007-08 2006-07 2005-06 2004-05 2003-04 2002-03 2001-02 2000-01 Derivative Segment 52153.30 29543 19220 10107 8388 1752 410 11 Cash Segment 14,148 7,812 6,253 4,506 4,328 2,462 2,078 5,337 (Source- Compiled from NSE website and NSE fact book 2008) Table 6: Comparison of Number of Contracts Traded BSE Future Year Index Stock Call 2007-08 2006-07 2005-06 2004-05 2003-04 2002-03 2001-02 2000-01 71,57,078 16,38,779 89 4,49,630 2,46,443 1,11,324 79,552 77,743 2,95,117 1,42,433 12 6,725 1,28,193 25,842 17,951 951 2 100 48,065 1 41 1,139 - NSE Future Index Stock Put 6 1 0 17 3,230 19 1,500 15,65,98,579 8,14,87,424 5,85,37,886 2,16,35,449 1,71,91,668 21,26,763 10,25,588 90,580 20,35,87,952 10,49,55,401 8,09,05,493 4,70,43,066 3,23,68,842 1,06,76,843 19,57,856 5,53,66,038 2,51,57,438 1,29,35,116 32,93,558 17,32,414 4,42,241 1,75,900 94,60,631 52,83,310 52,40,776 50,45,112 55,83,071 35,23,062 10,37,529 - Options Index Put 210 2 0 27,210 0 2 1,276 - Options Index Stock Stock Call 9 0 2 72 4,391 783 3,605 - (Source- Compiled from BSE and NSE website and SEBI bulletin) Gautam  Buddha  University     Page  19   Table 7: Comparison of Derivatives Segment Turnover BSE (Rs Cr.) Futures Year 2007-08 2006-07 2005-06 2004-05 2003-04 Index 234660   55491   5   13600   6572   Stock 7609   3515   1   213   5171   Options Index 39   0   3   2300   0   Stock 0   0   0   2   320   Futures Index 3820667   2539574   1513755   772147   554446   NSE (Rs. Cr.) Options Index Stock 7548563   3830967   2791697   1484056   1305939       stock 1362111   359136.6   791906   338469   121943   52816   193795   180253   168836   217207   Despite of encouraging growth and developments, industry analyst feels that the derivatives market has not yet, realized its full potential in terms of growth & trading. Analysts points out that the equity derivative markets on the BSE and NSE has been limited to only four products- index futures, index options and individual stock futures and options, which in turn, are limited to certain select stocks only. Although recently NSE and BSE has added more products in their derivatives segment (Weekly Options, Currency futures, Mini Index etc.) but still it is far less than the depth and variety of products prevailing across many developed capital markets. Gautam  Buddha  University     Page  20   Members: While the BSE has over 874 members-brokers across the country, NSE has more than, 1000 members. In NSE, a prospective trading member is admitted to any of the following combinations of market segments: Wholesale Debt Market segment, Capital Market (CM) and the Futures and Options segments, CM Segment and the WDM segment, or CM Segment, the WDM and the F & O segment. There is no such thing at BSE and members join as any of the following: Trading Members, Trading cum Clearing Members, Professional clearing member, Limited trading member and Self Clearing member. Trading System: All derivatives contracts in India are exchange traded. The advantage of an exchange traded contract is that the exchange is taken the counterparty position and the contracts are marked to market every month. Marking to market operations enables the exchange to crystallize the liabilities on a daily basis so that they can unwind speculative positions and avoid substantial losses. The exchanges across the world insist on maintenance of margins by the traders. Every trader is required to remit an initial margin when he starts trading and maintain the required margin so long as he holds an open position. A computer programme SPAN calculates the margin. When margin falls short of margin; the exchange issues margin call to the trader for remitting additional margin. A comparison of the contract specifications both these exchanges reveal some differences in the trading style. While BSE is more specific on the premium quotation, price quotations and trading hours NSE has not specified these. While NSE is specific on the market lot and minimum value of the contract, BSE has fixed the market lot for only index derivatives. They have accepted the market lot for the individual stock as the market lot for stock derivatives and no minimum contract value is specified. Futures and Options contracts are structured for specific maturities. Contracts are available at both NSE and BSE for consecutive 3 months at a time. The contracts expire on the last Thursday of the respective month and on the next day trading for the contract for next month starts. For example an October contract expires on the last Thursday of October. On the next day the January contract will be available for trading. The contract specifications at BSE and NSE are given in the Tables below: Gautam  Buddha  University     Page  21   BSE CONTRACT SPECIFICATIONS: Contract Specifications Underlying Asset Index Futures SENSEX Options SENSEX Stock Futures Corresponding market Contract Lot Contract Month 3 nearest serial 1,2 and 3 months 50 times of 100 times of Stock Specific (Eg. Stock Specific (Eg. Market lot of Market lot of Infosys is 100 1,2 and 3 months Infosys is 100) 1,2 and 3 months Options Corresponding Stock Stock in the cash in the cash market Multiplier/ Market SENSEX SENSEX months Strike Interval Price NA 50 SENSEX points. NA At any time minimum 3 strikes will be available i.e. 1 in-the-money, 1 near-the money and 1 out-of-the-money Premium Quotation NA Exercise Style Tick Size Price Quotations Trading Hours Settlement Style Settlement Value NA 0.1 point ( INR 5) SENSEX Point 9.30 am to 3.30 pm NA NA 9.30 am to 3.30 pm Cash Closing SENSEX value on SENSEX points European 0.1 point (INR 10) NA NA 0.01 Rupees per share Rupees per share American 0.01 NA Shall have a minimum of 3 strikes i.e. 12 in-the-money, 1 and near-the 1 money out-of-the- money 9.30 am to 3.30 pm 9.30 am to 3.30 pm NA of NA the Closing value of the respective stocks in the cash segment of BSE settlement day Exercise Time Notice NA It would be a NA time It is a specified time (Exercise Session) everyday. All in-themoney options would be deemed to be specified (Exercise Session) on the last trading day of the contract. Gautam  Buddha  University     Page  22   All in-the-money exercised on the day of expiry unless the participant communicates otherwise the Segment. in the manner specified by Derivatives options by certain specified ticks would deemed to be exercised on the day of expiry unless the participant communicates otherwise the Segment Last in the manner specified by Derivatives Trading/ Last Thursday of the Last Thursday of the Last Thursday of Last Thursday of the contract month. If it contract is holiday, immediately preceding last month Friday of in the contract month. contract of immediately last Note: case month Friday of in of the case of monthly & If it is holiday, the case of monthly & Expiration Day business contract maturity in preceding business contract maturity in weekly day. then weekly then the day. Note: Business case which underlying trading. the holiday, day is a day during options. If it is a Business day is a options. If it is a the day during which holiday, the business stock market is preceding underlying trading. -Note: Business day is a day during which the underlying stock market is open for trading. Final Settlement Cash Settlement. On The final settlement Cash the last trading day, of the the closing value of option contracts day, Settlement. The final settlement the expiring contracts the of closing option stock immediately underlying immediately business stock day during which the market is open for market is open for preceding day. Note: Business open for trading day is a day during which the underlying stock market is open for trading. expiring On the last trading of the underlying index would be taken as value the would be based on index the closing price of would be the final the closing value of underlying settlement price of the underlying index. would be the final the underlying stock. Gautam  Buddha  University     Page  23   athe expiring futures The contract. calculating value following settlement price of The closing futures contract the calculating value following closing of the algorithm is used for the of expiring algorithm is used for individual stocks in the cash segment of BSE including the stocks constituting Sensex:-Weighted Average price of all the trades in the last thirty minutes of the continuous trading session.-If there are no trades during the last thirty minutes, then the last traded price session in would the trading be individual stocks in the cash segment of BSE including the stocks Sensex: -Weighted in the Average thirty the trading constituting price of all the trades last of minutes continuous session. -If there are no trades during the last thirty minutes, then the last traded price in the continuous session trading be would continuous taken as the official closing price.. taken as the official closing price. Source: BSE Derivatives Contract Specifications, Bombay Stock Exchange, Mumbai Gautam  Buddha  University     Page  24   NSE CONTRACT SPECIFICATIONS Contract Specifications Underlying Asset Index Futures S&P CNX NIFTY Options S&P CNX NIFTY Stock Futures Individual securities Security descriptor N FUTIDX NIFTY Contract Size N OPTIDX NIFTY lot 200 N FUTSTK N OPTSTK or multiples (minimum Options Individual securities Permitted lot size shall Permitted be 200 and multiples shall thereof value Rs. 2 lakhs) be (minimum multiples 2 lakhs size 100 or multiples 100 and thereof (minimum thereof of Rs. thereof value 2 value of Rs. 2 lakhs) (minimum value Rs. lakhs) Strike Interval Price NA Rs.20 NA Between Rs.2.5 and Rs.100 depending on the price of the underlying Style of Option Price Steps Price Bands Trading cycle NA Re. 0.05 NA European Re. 0.05 NA NA Re.0.05 NA American Re.0.05 NA futures The option contracts maximum of of three months The futures contracts The option contracts The of three months of three months a will have a maximum will have a maximum contracts will have will have a maximum trading cycle- the near trading cyclethe three months trading cycle- the near month (one), the next near month (one), the trading cycle- the month (one), the next month (two) and the next month (two) and near month (one), month (two) and the far month (three). New the far month (three). the contract will introduced on the next introduced trading day following next month contract of on next month far month (three). be New contract will be (two) and the far New contract will be the month (three). New introduced on the next day contract month next expiry will be trading day following day month contract the of near trading near the expiry of near following the expiry introduced on the the expiry of near trading contract following month contract Gautam  Buddha  University     Page  25   Expiry Day The last Thursday of The last Thursday of The last Thursday The last Thursday of the expiry month or the expiry month or of the expiry month the expiry month or the previous trading the previous trading or day if the last day if the the previous the previous trading if the last last trading day if the day trading holiday Thursday is a trading Thursday is a trading last Thursday is a Thursday is a trading holiday Settlement Basis holiday holiday Mark to market and Cash cash settled on T+1 basis. settlement Mark to market and Daily settlement on final settlement T+1 basis and final exercise on T+3 settlement basis will be cash settled option on T+1 basis final settlement will be onT+1 basis Daily Price Settlement Daily settlement price Premium value (net). Daily will be the closing price of the futures contracts for the trading day and the final settlement price shall be the closing value of the underlying index on the last trading day settlement Premium value (net) price will be the closing price of the futures and contracts the final price the for the trading day settlement value of shall be the closing underlying security on the last trading day Final price settlement Closing value of the index on the last trading day Closing underlying price of on exercise day or expiry day. Last trading day is the settlement day Source: NCFM Derivatives Core Module Work Book, National Stock Exchange Limited The trading system has four categories of participants. The trading members are permitted to trade their own or on behalf of their clients including the participants and holds and ID allotted by the exchange. There are clearing members are permitted to carry out risk management activities and confirmation/inquiry of trades through the trading system. The professional clearing members like banks and custodians are not trading members and them clear and settle for their trading members. Finally, there are participants like financial institutions who trade through multiple trading members and settles through the clearing members. The clearing and settlement in NSE is undertaken by NSCCL (National Stock Exchange Clearing Corporation Limited). Gautam  Buddha  University     Page  26   Findings and Conclusions During this research researcher found that currently, the number of stocks under single futures & options is 109 at BSE while 233 at NSE which depicts a huge gap between two exchanges, it signifies that NSE offers wide range of individual securities to its customers which leads to more turnover at NSE for individual securities than BSE. The study also reveal that BSE deals in 9 type of products while NSE deals in 14 type of diversified products (refers to table 2 and 3). In due course, the turnover of the NSE derivatives market exceeded the turnover of the NSE cash market. For example, in 2008, the value of the NSE derivatives markets was Rs. 130, 90,477.75 Cr. whereas the value of the NSE cash markets was only Rs. 3,551,038 Cr. If compare, then the trading figures of NSE and BSE, performance of BSE is not encouraging both in terms of volumes and numbers of contracts traded in all product categories. One of the major finding shows that at NSE the trading on individual stocks is more than trading on index stocks, while at BSE the scenario is just opposite to NSE. Another finding is at NSE derivative segment dominated over cash segment and at BSE just vice-versa. The major reason behind this difference is availability of products, mechanism and trading formats are very different from each other’s derivative segment. One other reason is member brokers are also very less on BSE and NSE has diversified presence in pan India while BSE has its presence in few selected cities. The online trading system of NSE is also far better than BSE which leads to more trading. A comparison of the contract specifications both these exchanges reveal some differences in the trading style. While BSE is more specific on the premium quotation, price quotations and trading hours NSE has not specified these. While NSE is specific on the market lot and minimum value of the contract, BSE has fixed the market lot for only index derivatives. They have accepted the market lot for the individual stock as the market lot for stock derivatives and no minimum contract value is specified. Gautam  Buddha  University     Page  27   Derivative provides an opportunity to transfer risk, from the one who wish to avoid it; to one, who wish to accept it. India’s experience with the launch of equity derivatives market has been extremely encouraging and successful. The derivatives turnover on the NSE has surpassed the equity market turnover. Significantly, its growth in the recent years has surpassed the growth of its counterpart globally. Majority of the Derivatives sells at NSE market because the offer more variety, more transparent system, mechanism etc. On the other hand BSE has to be more effective and efficient through enhance their offerings, technology, mechanism, terms and conditions etc. Gautam  Buddha  University     Page  28   Suggestions Following are the few suggestions which can be implemented by the BSE to improve its turnover and enhance the competition level of Derivatives market in Indian economy. • According to the observation of researcher the trading window of BSE (Webx) is not as efficient as NSE (NEAT, SPAN which is very specific for analysis of risk). So BSE should improve its online trading system as it is currently using Webx as trading window; they can make it more competitive and efficient by upgrading its technology. Generally the traders have the perception that NSE is providing better trading facilities, trading formats and better technology as compared to BSE. This research also indicating this reason on the basis of turnover and volume (refer to table no. 4 – 7). Simply it reveals that traders have a top of the mind awareness for NSE, so BSE should promote its derivative segment through some marketing strategies, promotional campaign, and awareness initiatives. BSE should also increase its offerings i.e., the number of products and types in which they are currently trading. It would help BSE to increase their turnover and compete with NSE. It will also generate awareness about derivatives at NSE and enable it to offer diversified services. BSE should also adopt specific approach on the market lot and minimum value of contract as NSE has already adopted this years before, so they should fixed some minimum contract value. • • • Gautam  Buddha  University     Page  29   References   • • • • • • • • • • • • • www.Derivativesindia.com Forward market commission 123eng.com Sciencedirect.com International review of economics and Finance-General www.nseindia.com www.bseindia.com www.ebscohost.com www.google.com emerald.com moneycontrol.com NCFM derivatives module Indiainfoline.com Gautam  Buddha  University     Page  30