One of the important functions of the futures market is to provide hedging facilities to hedge price risk. This market also provides scope to speculators due to low transaction cost and leverage. This paper tests whether futures trading is going towards hedging price risk or towards fulfilling the speculative desires of sophisticated traders. The author uses daily data collected from NSE for the period June 12, 2000 to March 25, 2004 for a near month contract. He employes Ordinary Least Square (OLS) for empirical analysis.The results establish that futures trading is moving towards satisfying the speculative desires of speculators rather than hedging price risk.

Equity derivatives in India was started as a part of capital market reforms to hedge price risk resulted from greater financial integration between nations in the 90’s. Introduction of derivatives in India was recommended by the L C Gupta Committee Report on Derivatives in 1997 in a phased manner. Accordingly, the stock index futures were introduced first. BSE was the first stock exchange in the country to start trading in index futures based on BSE Sensex on June 9, 2000. NSE also commenced its trading on June 12, 2000 based on S&P Nifty. Subsequently, other products like stock futures on individual securities were introduced in November 2001. This was followed by approval of trading in index options based on these two indices and options on individual securities.

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