Derivatives..The Indian Saga

Now that I just prepared and appeared for the Derivatives Module in the NCFM (NSE’s Certification in Financial Markets), I feel better placed to tell you about the Indian Derivatives Markets..(psst..I scored 93.75%)

The purpose behind the formation of the Derivatives Market was to transfer the risk from risk averters to risk takers. However, I guess in the case of India, the speculators out-number the Hedgers by a huge number. The premise on the basis of which I pass this comment – The daily volatility in the Markets. The movement in the market is huge..a 1% move in a day equals an annualised rate of 365%. And we are talking about a normal market movement of 2-3% per day on average. If we have a look at the more developed markets like that of the US, there isn’t as much daily fluctuation in the prices. Moreover, the Equity Markets are more popular compared to the derivatives in that of the US.

The reason for the above can be explained by the low margin requirements for trading in Derivatives. Who would not like to earn so much money overnight that, he/she could own a city next morning. Who would like to wait for a whole life time to be able to do that. Derivatives Market in India can help an Investor do that. With Margin Requirements averaging about 20% of the trade value, the markets provide the investors with great leverage. Thus, it is very tempting to play such a game. This reminds me of the casino, where on the Roulette table the gambler is thinking he/she can get lucky, afterall he can get paid 36 times the amount he puts on the table. Even though he is aware that odds are not in his favor and the zero on the board allows the casino a commision from it. He is ready to do it..He wants to try his luck and I guess the biggest factor driving him is that out of 36 times, atleast once he will win and hopes for that wining bet to be placed before he places his 36th. It is impossible to understand the mechanics of it. But since Ages it has been there and we are aware that Casinos have been making the money they deserve. I guess it is similar in the case of the stock markets. People will always be there thinking that they can outsmart the casino. However, on a whole the casino business is based on solid principles and if followed strictly, the casino will make a living out of it. The casino can be referred to as the whole system in our case, including the Brokers, Exchange, Banks, Government and Technology Partners. Based on the urgency of their services, they take away a share of the commision that the market participant pays.

Coming back to the Derivatives. It has really become popular in India, and given the current scenario I feel technology playing a major role in the coming years. You got to take your pick..You want to be on the playing side or on the making people play side. In order to be on the playing side there are rules that need to be followed which I will be referring to in the next post.

Awaiting your most valued Comments.

Best Regards,

TFG

Let’s Set off..

Greetings Dear Reader,

Thanks for taking time out to come up to here to read my views on Finance. Allow me the time to introduce myself and the Blog. I am a ordinarily budding Entrepreneur in Finance, with extraordinary ambitions.

My Ambition : To integrate the Financial System of the world. One Market, One Currency, Zero Waste

With this vision in mind I am setting off on a thousand mile journey with you, and expect your support and patronage to be my guiding light.

During the course of the Blog, I will be introducing my understanding of Finance first, continuing on to introduce my understanding of the Financial Systems (Please note, everything is limited to the scope of my knowledge, unless you like a divine light of knowledge, shine and contribute).

Thus, Lets drift apart from the shores and set sail..!

Bon Voyage..!

TFG