Derivatives and financial innovations PDF
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Derivatives and Financial Innovations This book touches all dimensions of futures and options trading starting from basic concepts to sophisticated trading strategies in a simple and lucid manner. I am sure that after going through this work, market participants would have a great understanding of this complex subject. DR M T RAJU Director (In-Charge) Indian Institute of Capital Markets, Mumbai This is a comprehensive work on derivatives encompassing almost all segments of the financial market—commodities, equities, currencies and interest rates. One can read this book like a novel, which is interesting, informative, educative and fun because it focuses on conceptual issues and thought provoking ideas on derivatives without involving mathematical web. DR CHIRAGRA CHAKRABARTY Head—Research & Development & Training Multi Commodity Exchange, Mumbai Authors Manish Bansal and Navneet Bansal are actively associated with derivatives revolution in the country. Both of them have contributed phenomenally in this area through their continuous educational and training efforts along with their successful stints with their respective organizations. This book is a great contribution from both of them to the Indian Financial Market. C VASUDEVAN General Manager—Knowledge Management Head—BSE Training Institute, Mumbai Derivatives and Financial Innovations M B ANISH ANSAL Vice President Citigroup Mumbai N B AVNEET ANSAL Director Equity Risk Management UBS AG Hong Kong Tata McrG aH-w ill lbuP isih n g oC apm n y Liim ted NEW DELHI McGraw-Hill Offices New Delhi NewYork St Louis San Francisco Auckland Bogotá Caracas Kuala Lumpur Lisbon London Madrid MexicoCity Milan Montreal San auJ n Santiaog Sinag op re Sdy ney Tooyk Toronto Published by Tata McGraw-Hill Publishing Company Limited, 7 West Patel Nagar, New Delhi 110 008. Copyright © 2007, by Tata McGraw-Hill Publishing Company Limited No part of this publication may be reproduced or distributed in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise or stored in a database or retrieval system without the prior written permission of the publishers. The program listings (if any) may be entered, stored and executedin a computer system, but they may not be reproduced for publication. This edition can be exported from India only by the publishers, Tata McGraw-Hill Publishing Company Limited. ISBN 0-07-062082-2 Head—Professional and Healthcare: Roystan La’Porte Publishing Manager: R. Chandra Sekhar Editorial Executive: Souvik Mukherjee Senior Copy Editor: Sandhya Iyer Product Manager: Ajit K. Sharma Asst. General Manager—Production: B.L. Dogra Junior Manager—Production: Sohan Gaur Information contained in this work has been obtained by Tata McGraw-Hill, from sources believed to be reliable. However, neither Tata McGraw-Hill nor its authors guarantee the accuracy or completeness of any information published herein, and neither Tata McGraw-Hill nor its authors shall be responsible for any errors, omissions, or damages arising out of use of this information. This work is published with the understanding that Tata McGraw-Hill and its authors are supplying information but are not attempting to render professional services. If such services are required, the assistance of an appropriate professional should be sought. Typeset at Le Studio Graphique, Guru Shivir, 12, Sector 14, Gurgaon 122 001, and printed at Rashtriya Printers, M-135 Panchsheel Garden, Naveen Shahdara, Delhi 110 032 Cover Design: Kapil Gupta RCXYCDDKRBAXA To Our Parents Foreword Financial markets in India have undergone significant changes over the last several years. Both, the chemistry of change and its pace, have become unprecedented and unpredictable. Innovation in products, processes and procedures has become almost ubiquitous. The entry of derivatives into different segments of the Indian market—be they equity, commodity, currency or interest rate—is one such example of change. These products serve the vitally important economic functions of price discovery and risk management. India joined the league of exchange traded derivatives with the introduction of equity derivatives Index Futures in June 2000. Subsequently, expansion of the product portfolio to include Index options, individual stock options and individual stock futures gave the equity derivatives market its required impetus. Today, the market clocks an average daily volume of $ 8–10 billion. The introduction of commodity derivatives at the end of 2003 marked another beginning for the country. Today, we trade futures on various commodities including energy, bullion, base metals and agricultural commodities. This market has also shown remarkable growth over time, with a daily average volume of $ 2–3 billion. There is also a significant amount of derivatives business on foreign exchange and interest rate products. An exposure to derivatives has thus become an imperative for a successful stint in the financial services world. This book is a comprehensive work on the subject, presenting the complicated viii Foreword terminology of derivatives in a simplified manner. The issueshave been worked out thoroughly and knowledgeably, especially inthe Indian context, and I sincerely believe the book is a meaningful contribution to the Indian financial market. MANOJ VAISH President & CEO—India Dun & Bradstreet Information Services India Pvt. Ltd. Preface India today is undergoing the demolition of its rigid structures, cumbersome rules and procedural aspects, and building a higher degree of integration with the rest of the world. This integration, unequivocally, brings in new opportunities by extending trade beyond the geographical boundaries of the nation. At the same time, it presents risks. This risk management demands new set of products and competencies. The economic rationale behind the introduction of deriva- tives in any economy is risk management and efficient price discovery. Fundamentally, derivatives are risk management products. Worldwide, these markets are reflecting unprecedented growth in volumes. In fact, in many countries, volumes in the derivatives markets are many times the volumes in the underlying cash markets. The exploitation of these products’ value generating capa- bilities by the market participants requires sound understanding of product nuances and their strategic use. This work will hope- fully help readers accomplish that. This book is the product of our interaction with thousands of market participants during our seminars and training programmes. No words are sufficient to thank the many friends and colleagues to whom we owe a great deal of the credit for this work. We would like to extend our sincere thanks to Harsh Nahata and Vikram Sampat, who helped us with a part of the book. We would also like to acknowledge our sincere thanks for x Preface the patient and diligent work done by the editorial team that spent nights editing the material. In conclusion, we invite readers’ suggestions and feedback, if any, as it would offer us an opportunity to enrich this work further. MANISH BANSAL [email protected] NAVNEET BANSAL [email protected]
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