Derivatives In India

Capstone Project by :Manav Sabharwal

201350076

Basic Derivatives
Options
Futures
Forwards

Participants In Derivatives Markets

Hedgers
Speculators, and
Arbitrageurs

Tables Explaining F&O Markets

Positive trend: It gives information about the top gainers in the
futures market.
Negative trend: It gives information about the top losers in the
futures market.
Future OI gainers: It lists those futures whose % increases in
open interest are among the highest on that day.
Future OI losers: It lists those futures whose % decreases in open
interest are among the highest on that day.
Active Calls: Calls with high trading volumes on that particular
day.
Active Puts: Puts with high trading volumes on that particular day.

Taxation of Derivative
Instruments
. The only tax provisions which had indirect bearing on
derivatives transactions were sections 73(1) and 43(5).
Under these sections, trade in derivatives was
considered speculative transactions for the purpose of
determining tax liability. All profits and losses were
taxed under the speculative income category. Therefore,
loss on derivatives transactions could be set off only
against other speculative income and the same could
not be set off against any other income. This resulted in
high tax liability.

 Finance Act, 2005 has amended section 43(5) so as to

exclude transactions in derivatives carried out in a
recognized stock exchange from speculative
transaction. This implies that derivatives transactions
that take place in a recognized stock exchange are
not taxed as speculative income or loss. They are
treated under the business income head of the Income
tax Act. Any losses on these activities can be set off
against any business income in the year and the losses
can be carried forward and set off against any other
business income for the next eight years.

Risk Measurement Techniques

By NSE
The objective of SPAN is to identify overall risk in a portfolio of futures and options contracts for each
member. The system treats futures and options contracts uniformly, while at the same time
recognizing the unique exposures associated with options portfolios like extremely deep out-of-themoney short positions, inter-month risk and inter-commodity risk.
Because SPAN is used to determine performance bond requirements (margin requirements), its
overriding objective is to determine the largest loss that a portfolio might reasonably be expected to
suffer from one day to the next day.
In standard pricing models, three factors most directly affect the value of an option at a given point
in time:
Underlying market price
Volatility (variability) of underlying instrument
Time to expiration
As these factors change, so too will the value of futures and options maintained within a portfolio.
SPAN constructs scenarios of probable changes in underlying prices and volatilities in order to
identify the largest loss a portfolio might suffer from one day to the next. It then sets the margin
requirement at a level sufficient to cover this one-day loss.

Risk Mechanics By SPAN

The complex calculations (e.g. the pricing of options) in SPAN are executed by
the Clearing Corporation. The results of these calculations are called Risk
arrays. Risk arrays, and other necessary data inputs for margin calculation are
then provided to members on a daily basis in a file called the SPAN Risk
Parameter file.
Members can apply the data contained in the Risk parameter files to their
specific portfolios of futures and options contracts to determine their SPAN
margin requirements.
Hence members need not execute complex option pricing calculations which
are performed by NSCCL. SPAN has the ability to estimate risk for combined
futures and options portfolios and re-value the same under various scenarios of
changing market conditions.

Conclusion
The trades in options and futures are more complex
then it seems and people lose their money easily on
these trades so there is need of more insight knowledge
on these instruments and trading methodologies should
be applied.
There is more financial illiteracy in the traders who
trade in derivatives which leads to more losses and also
there is no knowledge among them so as to the tax
which they have to pay on the same.