Financial derivatives, from the economic point of view, are cash flows that are conditionally stochastic and discounted to present value. The market risk inherent in the underlying asset is attached to the financial derivatives through contractual agreements and hence can be traded separately. In the last decade, the derivatives market in India has grown astronomically. This paper analyzes whether the growth of the derivatives segment has overtaken the cash market in National Stock Exchange (NSE) and Bombay Stock Exchange (BSE). The paper also analyzes the Pearson’s correlation between the Turnover (T/O) of BSE cash segment and derivatives segment, stock futures, index futures, index call options and index put options, stock call options and stock put options. The results reveal that derivatives do indeed facilitate transfer of risk and that this segment has gradually overtaken the cash segment in terms of T/O and that there is a correlation between the above-mentioned parameters.

Derivative is a contract that derives its value from the performance of an underlying entity. This underlying entity can be an asset, index, or interest rate. Derivatives can be used for insuring against price movements (hedging), increasing exposure to price movements for speculation or getting access to otherwise hard to trade assets or markets. The most common underlying assets include commodities, stocks, bonds, interest rates and currencies. The underlying asset does not have to be acquired. Derivatives therefore allow the breakup of ownership and participation in the market value of an asset. In June 2000, the Bombay Stock Exchange (BSE) launched the first exchange-traded index derivatives contract in India, i.e., futures on the capital market benchmark index—the BSE Sensex. BSE commenced trading in index options on Sensex in June 2001. Stock options were introduced on 31 stocks in July 2001 and Single Stock Futures were launched in November 2002. The National Stock Exchange (NSE) commenced trading in derivatives with the launch of index futures in June 2000. In the futures and options segment, trading in CNX Nifty index, CNX IT index, Bank Nifty index, Nifty Midcap 50 index and single stock futures are available. In August 2008, currency derivatives were introduced in India with the launch of currency futures in USD/ INR by NSE. It also added currency futures in euros, pounds and yen. Only the NSE and the BSE have been permitted to trade in equity derivatives contracts. Derivative instruments were issued in India not only in index product but also at individual stock level. The need of the derivative instruments was felt in India post liberalization because derivatives trading provides various benefits such as risk management, price discovery, operational advantage,market efficiency and opportunity to speculate. Introduction of risk management instruments in India has gained momentum in the last few years, thanks to Reserve Bank of India’s efforts in allowing forward contracts, cross currency options, etc. which have developed into a very large market.

Applied Finance Journal, Derivatives Segment, Bombay Stock Exchange (BSE), National Stock Exchange (NSE), USD/ INR, NSE, Cash Segment, India, Comparative Performance Analysis.