MBA II YEAR I SEMESTER

24MBAP402- Financial Derivatives

Assignment No:1

Name of the Student : B Sunil

Roll No : 24691E00O6
Course & Semester : MBA 3rd Semester
Name of the Subject : Financial Derivatives
Date of Assignment is given : 13October 2025
Submission Date : 18 October 2025
Submitted to the Teacher : Dr. N. SESHADRI
Remarks :

Signature of the Student Signature of the Teacher

HOD- Department of Management Studies

1. Briefly explain origin and Growth of Financial Derivatives
in India

Answer:
Introduction:
Financial derivatives are financial instruments whose value is derived
from an underlying asset such as stocks, bonds, currencies, interest rates,
or market indices. They are widely used for hedging risk, speculation,
and arbitrage purposes. In India, the derivatives market has evolved
gradually over the past few decades, shaped by financial reforms and the
growing need for risk management tools.

Origin of Financial Derivatives in India:

The concept of financial derivatives in India started gaining attention in
the early 1990s, following the process of economic liberalization in
1991. Before that, India had a controlled financial system with limited
scope for market-based instruments.
Key milestones in the origin phase include:
1. 1993 – L. C. Gupta Committee:
The Securities and Exchange Board of India (SEBI) formed the L. C.
Gupta Committee to develop a regulatory framework for derivatives
trading in India.
2. 1998 – Recommendations Accepted:
The committee recommended the introduction of derivatives trading to
improve market efficiency and provide risk management tools to
investors.
3. 1999 – Legal Recognition:
The Securities Laws (Amendment) Act, 1999 officially recognized
derivatives as “securities” under the Securities Contracts (Regulation)
Act, 1956. This gave legal status to derivative instruments in India.
4. 2000 – Introduction of Derivatives Trading:
The National Stock Exchange (NSE) and Bombay Stock Exchange
(BSE) launched index futures in June 2000, marking the formal
beginning of the derivatives market in India.
 Growth of Financial Derivatives in India:
After their introduction in 2000, financial derivatives in India witnessed
rapid growth due to increased market participation, better technology, and
strong regulatory support.
1. Expansion of Products:
o 2001: Index options introduced.
o 2002: Stock options and stock futures launched.
o 2003 onwards: Introduction of interest rate futures, currency
derivatives, and commodity derivatives.
2. Increased Market Volume:
o The derivatives segment on the NSE soon overtook the cash
segment in trading volume, indicating strong investor participation
and market confidence.
3. Regulatory Developments:
o SEBI and the Reserve Bank of India (RBI) established guidelines
to ensure transparency, risk control, and investor protection in
derivatives trading.
o The introduction of clearing corporations reduced settlement risks
and improved liquidity.
4. Technological Advancements:
o Online trading platforms and electronic settlement systems
contributed significantly to the fast growth of the derivatives
market.
5. Currency and Interest Rate Derivatives:
o From 2008 onwards, Indian exchanges introduced currency
futures and options, followed by interest rate futures, allowing
investors to hedge against forex and interest rate risks.

Present Scenario:
Today, India’s derivatives market is among the largest in the world in
terms of trading volume. The NSE is globally recognized for its robust
derivatives segment, with instruments based on major indices such as
Nifty 50, Bank Nifty, and sectoral indices.
Both institutional and retail investors actively use derivatives for hedging,
arbitrage, and speculative purposes.
 Conclusion:
The origin and growth of financial derivatives in India reflect the
country’s journey from a tightly controlled financial system to a globally
competitive market. Supported by strong regulation, advanced
technology, and investor awareness, the derivatives market has become
an integral part of India’s financial infrastructure, contributing to market
stability, liquidity, and risk management.

2. Elucidate Future Contract Pricing and Trading Mechanism

Introduction:
A futures contract is a standardized agreement between two parties to
buy or sell an asset (such as commodities, currencies, or financial
instruments) at a predetermined price on a specified future date. These
contracts are traded on recognized exchanges like the National Stock
Exchange (NSE) and Bombay Stock Exchange (BSE) in India.
The two key aspects of futures are:
1. Pricing Mechanism – How the fair price of a futures contract is
determined.
2. Trading Mechanism – How these contracts are traded and settled on
exchanges.

1. Futures Contract Pricing Mechanism:

The price of a futures contract is derived from the spot price (current
market price) of the underlying asset, adjusted for the cost of carrying
the asset until the contract’s expiration.
(a) Formula for Futures Price:
F=S+CF = S + CF=S+C
or more precisely,
F=S×(1+r−y) F = S \times (1 + r - y) F=S×(1+r−y)
where:
• F = Futures Price
• S = Spot Price of the asset
• r = Risk-free rate of return
 • y = Income or yield expected from the asset (e.g., dividend)
• C = Cost of carry (interest, storage, insurance, etc.)
(b) Explanation:
• The cost of carry represents the cost of holding an asset until the delivery
date.
• For example, if the spot price of a share is ₹1,000 and the risk-free rate is
8% per annum, then the one-month futures price is approximately:
F=1000× (1+0.08×112) =₹1,006.67F = 1000 \times (1 + 0.08 \times \frac
{1}{12}) = ₹1,006.67F=1000× (1+0.08×121) =₹1,006.67
Thus, the futures price is slightly higher than the spot price due to
carrying costs.
(c) Factors Affecting Futures Pricing:
1. Spot price of the underlying asset
2. Interest rate (cost of capital)
3. Dividend or yield on the asset
4. Time to maturity of the contract
5. Market expectations and volatility

2. Futures Trading Mechanism:

Trading in futures contracts on stock exchanges follows a standardized
and transparent process regulated by SEBI.
(a) Participants:
1. Hedgers: Reduce risk by locking in future prices.
2. Speculators: Take advantage of price fluctuations for profit.
3. Arbitrageurs: Exploit price differences between spot and futures
markets.
(b) Steps in the Trading Mechanism:
Stage Process Description

Futures contracts are standardized by the

1. Contract exchange in terms of size, expiry date, and
Creation underlying asset.

Traders must deposit an initial margin (a

2. Margin percentage of contract value) with their broker
Requirement to ensure performance of the contract.
 Stage Process Description

At the end of each trading day, profits or

3. Daily Mark-to- losses are settled based on the daily closing
Market (MTM) price. This ensures that no party accumulates
large unpaid losses.

Orders to buy or sell futures are placed

4. Order electronically through exchange trading
Execution systems like NSE’s NEAT platform.

The clearing corporation acts as a

5. Clearing and counterparty to all trades, ensuring smooth
Settlement settlement and eliminating counterparty risk.

Before expiry, traders can square off their

6. Closing Out or position by entering into an opposite trade. In
Delivery India, most futures are cash-settled instead of
actual delivery.

3. Example of Futures Trading:

Suppose an investor buys Nifty Futures at 22,000 in April, expecting
prices to rise.
If, by expiry, the Nifty index rises to 22,400, the investor gains:
Profit= (22,400−22,000) =400pointsProfit = (22,400 - 22,000) = 400
points Profit = (22,400−22,000) =400points
If each lot has 50 units, total profit = 400 × 50 = ₹20,000.
This profit is adjusted daily through mark-to-market settlement.
Conclusion:
The pricing and trading of futures contracts in India are governed by a
structured and transparent system managed by SEBI and the exchanges.
Futures pricing is determined by the cost-of-carry model, while trading
involves margining, mark-to-market settlements, and clearing
corporation guarantees. This mechanism ensures fair pricing, liquidity,
and risk management, making futures an essential component of India’s
financial markets.