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Trading in derivatives, which was initiated two years ago, has seen vibrant activity after the introduction of stock futures and the cessation of badla. Can the volumes in the derivative segment overtake cash volumes? Judging by the pace at which volumes on the futures and options segment are growing in the past few months, the possibility cannot be ruled out.
More than 50 years ago, around the time India became independent, men in Mumbai gambled on the price of cotton in New York. They bet on the last one or two digits of the closing price on the New York Cotton Exchange. If they guessed the last number, they got seven rupees for every rupee laid out. If they guessed the last two digits correctly, they got 72 rupees. Gamblers preferred using the New York cotton price because the cotton market at home was less liquid and could easily be manipulated.
Now India has acquired its own market for hedging risk. The country, emerging from a long history of stock market and foreign exchange controls, is one of the last major economies in Asia to refashion its capital markets to attract Western investments. Although derivatives are present in all the underlying assets: Commodities, currencies, equity shares, and interest rates and securities issued by governments, primarily the Indian derivative market is dwelling on stock related derivatives.
Though the existence of equity derivatives can be traced back to 1993, India entered the derivatives league in June 2000 with the introduction of index futures and then India witnessed the introduction of index options in June 2001, stock options in July 2001 and futures on individual securities in November 2001. There has been a steady increase in the volumes. For instance, average daily volumes in NSE derivative segment rose from Rs. 438 crore in August 2001 to Rs. 1073 crore in May 2002. Volumes in derivatives segment have grown phenomenally in the past few months, particularly after the introduction of stock futures and options. This spurt in activity can be attributed to stock futures that have aroused trading interest like no other derivative product.
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