Impact of Mutual funds in Derivatives markets

Introduction

Derivatives are a broadly misunderstood term. This word very often conjures up visions of speculative dealings, a big boom and a big crash. Bad news spreads fast. So also the Barings Bank collapse as well as Orange County an episode has helped strengthen the idea that derivative trading is nothing but reckless speculation.

Role of Mutual funds in Derivatives markets

But this perception is not true. If used carefully, a derivative transaction helps cover risks, which would arise on the trading of securities on which the derivative is based. A derivative security can be termed as a security whose value depends on the values of other underlying variables. Very frequently, the variables underlying the derivative securities are the prices of traded securities. A stock option, for instance, is a derivative security whose value is contingent upon the price of a stock. On the other hand, derivative securities can be contingent upon the price of almost any variable. For this cause, another name accorded to derivative securities are contingent claims.

Need for a derivatives market

The derivatives market performs various numbers of economic functions. Such as they help

Participants in a derivatives market

Derivatives markets in India:

Derivatives trading came to existences in India in June 2000 after SEBI granted the final approval to this effect in May 2001. SEBI permitted the derivative segments of two stock exchanges they are NSE and BSE, and their clearing house/corporation to commence trading and settlement in approved derivatives contracts. To start with, SEBI approved trading in index futures contracts based on S&P CNX Nifty and BSE–30(Sensex) index. This was followed by sanction for trading in options based on Nifty and Sensex indexes and also options on individual securities.

The trading in BSE Sensex options started on June 4, 2001 and the trading in options on individual securities commenced in July 2001. On November 2001, Futures contracts on individual stocks came into force. The derivatives trading on NSE started with S&P CNX Nifty Index futures on June 12, 2000. The trading in index options began on June 4, 2001 and trading in options on individual securities commenced on July 2, 2001.Single stock futures were came into existence on November 9, 2001. The index futures and options contract on NSE are purely based on S&P CNX.

Trading and settlement in derivative contracts is exactly done in accordance with the rules, byelaws, and regulations of the respective exchanges and their clearing house/corporation duly approved by SEBI and notified in the official gazette. Foreign Institutional Investors (FIIs) are permitted to trade in all kinds of Exchange traded derivative products.

The following are some interpretation based on the trading statistics provided in the NSE report on the futures and options (F&O) :