http://en.wikipedia.

org/wiki/Derivative_(finance)

Derivative (finance)
In finance, a derivative is a financial instrument (or, more simply, an agreement between two
parties) that has a value, based on the expected future price movements of the asset to which it is
linked—called the underlying asset—[1] such as a share or a currency. There are many kinds of
derivatives, with the most common being swaps, futures, and options. Derivatives are a form of
alternative investment.

A derivative is not a stand-alone asset, since it has no value of its own. However, more common
types of derivatives have been traded on markets before their expiration date as if they were
assets. Among the oldest of these are rice futures, which have been traded on the Dojima Rice
Exchange since the eighteenth century.[2]

Derivatives are usually broadly categorized by:

 the relationship between the underlying asset and the derivative (e.g., forward, option,
swap);
 the type of underlying asset (e.g., equity derivatives, foreign exchange derivatives,
interest rate derivatives, commodity derivatives or credit derivatives);
 the market in which they trade (e.g., exchange-traded or over-the-counter);
 their pay-off profile.

Another arbitrary distinction is between:[3]

 vanilla derivatives (simple and more common); and

 exotic derivatives (more complicated and specialized).

[edit] Uses
Derivatives are used by investors to:

 provide leverage (or gearing), such that a small movement in the underlying value can
cause a large difference in the value of the derivative;
 speculate and make a profit if the value of the underlying asset moves the way they
expect (e.g., moves in a given direction, stays in or out of a specified range, reaches a
certain level);
 hedge or mitigate risk in the underlying, by entering into a derivative contract whose
value moves in the opposite direction to their underlying position and cancels part or all
of it out;
  obtain exposure to the underlying where it is not possible to trade in the underlying (e.g.,
weather derivatives);
 create option ability where the value of the derivative is linked to a specific condition or
event (e.g., the underlying reaching a specific price level).

[edit] Hedging

Derivatives can be considered as providing a form of insurance in hedging, which is itself a

technique that attempts to reduce risk.

Derivatives allow risk related to the price of the underlying asset to be transferred from one party
to another. For example, a wheat farmer and a miller could sign a futures contract to exchange a
specified amount of cash for a specified amount of wheat in the future. Both parties have reduced
a future risk: for the wheat farmer, the uncertainty of the price, and for the miller, the availability
of wheat. However, there is still the risk that no wheat will be available because of events
unspecified by the contract, such as the weather, or that one party will renege on the contract.
Although a third party, called a clearing house, insures a futures contract, not all derivatives are
insured against counter-party risk.

From another perspective, the farmer and the miller both reduce a risk and acquire a risk when
they sign the futures contract: the farmer reduces the risk that the price of wheat will fall below
the price specified in the contract and acquires the risk that the price of wheat will rise above the
price specified in the contract (thereby losing additional income that he could have earned). The
miller, on the other hand, acquires the risk that the price of wheat will fall below the price
specified in the contract (thereby paying more in the future than he otherwise would have) and
reduces the risk that the price of wheat will rise above the price specified in the contract. In this
sense, one party is the insurer (risk taker) for one type of risk, and the counter-party is the insurer
(risk taker) for another type of risk.

Hedging also occurs when an individual or institution buys an asset (such as a commodity, a
bond that has coupon payments, a stock that pays dividends, and so on) and sells it using a
futures contract. The individual or institution has access to the asset for a specified amount of
time, and can then sell it in the future at a specified price according to the futures contract. Of
course, this allows the individual or institution the benefit of holding the asset, while reducing
the risk that the future selling price will deviate unexpectedly from the market's current
assessment of the future value of the asset.
Derivatives traders at the Chicago Board of Trade.

Derivatives can serve legitimate business purposes. For example, a corporation borrows a large
sum of money at a specific interest rate.[4] The rate of interest on the loan resets every six months.
The corporation is concerned that the rate of interest may be much higher in six months. The
corporation could buy a forward rate agreement (FRA), which is a contract to pay a fixed rate of
interest six months after purchases on a notional amount of money.[5] If the interest rate after six
months is above the contract rate, the seller will pay the difference to the corporation, or FRA
buyer. If the rate is lower, the corporation will pay the difference to the seller. The purchase of
the FRA serves to reduce the uncertainty concerning the rate increase and stabilize earnings.

[edit] Speculation and arbitrage

Derivatives can be used to acquire risk, rather than to insure or hedge against risk. Thus, some
individuals and institutions will enter into a derivative contract to speculate on the value of the
underlying asset, betting that the party seeking insurance will be wrong about the future value of
the underlying asset. Speculators look to buy an asset in the future at a low price according to a
derivative contract when the future market price is high, or to sell an asset in the future at a high
price according to a derivative contract when the future market price is low.

Individuals and institutions may also look for arbitrage opportunities, as when the current buying
price of an asset falls below the price specified in a futures contract to sell the asset.

Speculative trading in derivatives gained a great deal of notoriety in 1995 when Nick Leeson, a
trader at Barings Bank, made poor and unauthorized investments in futures contracts. Through a
combination of poor judgment, lack of oversight by the bank's management and regulators, and
unfortunate events like the Kobe earthquake, Leeson incurred a US$1.3 billion loss that
bankrupted the centuries-old institution.[6]

[edit] Types of derivatives

[edit] OTC and exchange-traded
In broad terms, there are two groups of derivative contracts, which are distinguished by the way
they are traded in the market:

 Over-the-counter (OTC) derivatives are contracts that are traded (and privately
negotiated) directly between two parties, without going through an exchange or other
intermediary. Products such as swaps, forward rate agreements, and exotic options are
almost always traded in this way. The OTC derivative market is the largest market for
derivatives, and is largely unregulated with respect to disclosure of information between
the parties, since the OTC market is made up of banks and other highly sophisticated
parties, such as hedge funds. Reporting of OTC amounts are difficult because trades can
occur in private, without activity being visible on any exchange. According to the Bank
for International Settlements, the total outstanding notional amount is US$684 trillion (as
of June 2008).[7] Of this total notional amount, 67% are interest rate contracts, 8% are
credit default swaps (CDS), 9% are foreign exchange contracts, 2% are commodity
contracts, 1% are equity contracts, and 12% are other. Because OTC derivatives are not
traded on an exchange, there is no central counter-party. Therefore, they are subject to
counter-party risk, like an ordinary contract, since each counter-party relies on the other
to perform.

 Exchange-traded derivative contracts (ETD) are those derivatives instruments that are
traded via specialized derivatives exchanges or other exchanges. A derivatives exchange
is a market where individuals trade standardized contracts that have been defined by the
exchange.[8] A derivatives exchange acts as an intermediary to all related transactions, and
takes Initial margin from both sides of the trade to act as a guarantee. The world's
largest[9] derivatives exchanges (by number of transactions) are the Korea Exchange
(which lists KOSPI Index Futures & Options), Eurex (which lists a wide range of
European products such as interest rate & index products), and CME Group (made up of
the 2007 merger of the Chicago Mercantile Exchange and the Chicago Board of Trade
and the 2008 acquisition of the New York Mercantile Exchange). According to BIS, the
combined turnover in the world's derivatives exchanges totaled USD 344 trillion during
Q4 2005. Some types of derivative instruments also may trade on traditional exchanges.
For instance, hybrid instruments such as convertible bonds and/or convertible preferred
may be listed on stock or bond exchanges. Also, warrants (or "rights") may be listed on
equity exchanges. Performance Rights, Cash xPRTs and various other instruments that
essentially consist of a complex set of options bundled into a simple package are
routinely listed on equity exchanges. Like other derivatives, these publicly traded
derivatives provide investors access to risk/reward and volatility characteristics that,
while related to an underlying commodity, nonetheless are distinctive.

[edit] Common derivative contract types

There are three major classes of derivatives:

1.
Futures/Forwards are contracts to buy or sell an asset on or before a future date at a price
specified today. A futures contract differs from a forward contract in that the futures
contract is a standardized contract written by a clearing house that operates an exchange
 where the contract can be bought and sold, whereas a forward contract is a non-
standardized contract written by the parties themselves.
2.
Options are contracts that give the owner the right, but not the obligation, to buy (in the
case of a call option) or sell (in the case of a put option) an asset. The price at which the
sale takes place is known as the strike price, and is specified at the time the parties enter
into the option. The option contract also specifies a maturity date. In the case of a
European option, the owner has the right to require the sale to take place on (but not
before) the maturity date; in the case of an American option, the owner can require the
sale to take place at any time up to the maturity date. If the owner of the contract
exercises this right, the counter-party has the obligation to carry out the transaction.
3.
Swaps are contracts to exchange cash (flows) on or before a specified future date based
on the underlying value of currencies/exchange rates, bonds/interest rates, commodities,
stocks or other assets.

More complex derivatives can be created by combining the elements of these basic types. For
example, the holder of a swaption has the right, but not the obligation, to enter into a swap on or
before a specified future date.

[edit] Examples

The overall derivatives market has five major classes of underlying asset:

 interest rate derivatives (the largest)

 foreign exchange derivatives
 credit derivatives
 equity derivatives
 commodity derivatives

Some common examples of these derivatives are:

CONTRACT TYPES
UNDERLYING Exchange- Exchange-
OTC swap OTC forward OTC option
traded futures traded options
DJIA Index Option on DJIA
Back-to-back Stock option
future Index future
Equity Equity swap Repurchase Warrant
Single-stock Single-share
agreement Turbo warrant
future option
Option on Interest rate
Eurodollar Eurodollar cap and floor
Interest rate Forward rate
Interest rate future future Swaption
swap agreement
Euribor future Option on Basis swap
Euribor future Bond option
Credit Bond future Option on Bond Credit default Repurchase Credit default
future swap agreement option
Total return
 swap
Foreign Option on Currency Currency Currency
Currency future
exchange currency future swap forward option
Iron ore
WTI crude oil Weather Commodity
Commodity forward Gold option
futures derivatives swap
contract

Other examples of underlying exchangeables are:

 Property (mortgage) derivatives

 Economic derivatives that pay off according to economic reports[10] as measured and
reported by national statistical agencies
 Freight derivatives
 Inflation derivatives
 Weather derivatives
 Insurance derivatives[citation needed]
 Emissions derivatives[11]

[edit] Valuation

Total world derivatives from 1998-2007[12] compared to total world wealth in the year 2000[13]

[edit] Market and arbitrage-free prices

Two common measures of value are:

 Market price, i.e., the price at which traders are willing to buy or sell the contract;
 Arbitrage-free price, meaning that no risk-free profits can be made by trading in these
contracts; see rational pricing.
[edit] Determining the market price

For exchange-traded derivatives, market price is usually transparent (often published in real time
by the exchange, based on all the current bids and offers placed on that particular contract at any
one time). Complications can arise with OTC or floor-traded contracts though, as trading is
handled manually, making it difficult to automatically broadcast prices. In particular with OTC
contracts, there is no central exchange to collate and disseminate prices.

[edit] Determining the arbitrage-free price

The arbitrage-free price for a derivatives contract is complex, and there are many different
variables to consider. Arbitrage-free pricing is a central topic of financial mathematics. The
stochastic process of the price of the underlying asset is often crucial. A key equation for the
theoretical valuation of options is the Black–Scholes formula, which is based on the assumption
that the cash flows from a European stock option can be replicated by a continuous buying and
selling strategy using only the stock. A simplified version of this valuation technique is the
binomial options model. OTC represents the biggest challenge in using models to price
derivatives. Since these contracts are not publicly traded, no market price is available to validate
the theoretical valuation. And most of the model's results are input-dependant (meaning the final
price depends heavily on how we derive the pricing inputs).[14] Therefore it is common that OTC
derivatives are priced by Independent Agents that both counterparties involved in the deal
designate upfront (when signing the contract).

[edit] Criticism
Derivatives are often subject to the following criticisms:

[edit] Possible large losses

See also: List of trading losses

The use of derivatives can result in large losses because of the use of leverage, or borrowing.
Derivatives allow investors to earn large returns from small movements in the underlying asset's
price. However, investors could lose large amounts if the price of the underlying moves against
them significantly. There have been several instances of massive losses in derivative markets,
such as:

 The need to recapitalize insurer American International Group (AIG) with US$85
billion of debt provided by the US federal government.[15] An AIG subsidiary had
lost more than US$18 billion over the preceding three quarters on Credit Default
Swaps (CDS) it had written.[16] It was reported that the recapitalization was
necessary because further losses were foreseeable over the next few quarters.
 The loss of US$7.2 Billion by Société Générale in January 2008 through mis-use
of futures contracts.
  The loss of US$6.4 billion in the failed fund Amaranth Advisors, which was long
natural gas in September 2006 when the price plummeted.
 The loss of US$4.6 billion in the failed fund Long-Term Capital Management in
1998.
 The loss of US$1.3 billion equivalent in oil derivatives in 1993 and 1994 by
Metallgesellschaft AG.[17]
 The loss of US$1.2 billion equivalent in equity derivatives in 1995 by Barings
Bank.[18]

Members of President Clinton's Working Group on Financial Markets: Larry Summers, Alan
Greenspan, Arthur Levitt, and Robert Rubin, have been criticized for torpedoing an effort to
regulate the derivatives' markets, and thereby helping to bring down the financial markets in Fall
2008. President George W. Bush has also been criticized because he was President for 8 years
preceding the 2008 meltdown. Bush has stated that deregulation was one of the core tenets of his
political philosophy.

[edit] Counter-party risk

Some derivatives (especially swaps) expose investors to counter-party risk.

For example, suppose a person wanting a fixed interest rate loan for his business, but finding that
banks only offer variable rates, swaps payments with another business who wants a variable rate,
synthetically creating a fixed rate for the person. However if the second business goes bankrupt,
it can't pay its variable rate and so the first business will lose its fixed rate and will be paying a
variable rate again. If interest rates have increased, it is possible that the first business may be
adversely affected, because it may not be prepared to pay the higher variable rate.

Different types of derivatives have different levels of counter-party risk. For example,
standardized stock options by law require the party at risk to have a certain amount deposited
with the exchange, showing that they can pay for any losses; banks that help businesses swap
variable for fixed rates on loans may do credit checks on both parties. However, in private
agreements between two companies, for example, there may not be benchmarks for performing
due diligence and risk analysis.

[edit] Large notional value

Derivatives typically have a large notional value. As such, there is the danger that their use
could result in losses that the investor would be unable to compensate for. The possibility that
this could lead to a chain reaction ensuing in an economic crisis, has been pointed out by famed
investor Warren Buffett in Berkshire Hathaway's 2002 annual report. Buffett called them
'financial weapons of mass destruction.' The problem with derivatives is that they control an
increasingly larger notional amount of assets and this may lead to distortions in the real capital
and equities markets. Investors begin to look at the derivatives markets to make a decision to buy
or sell securities and so what was originally meant to be a market to transfer risk now becomes a
leading indicator. (See Berkshire Hathaway Annual Report for 2002)
[edit] Leverage of an economy's debt

Derivatives massively leverage the debt in an economy, making it ever more difficult for the
underlying real economy to service its debt obligations, thereby curtailing real economic activity,
which can cause a recession or even depression. In the view of Marriner S. Eccles, U.S. Federal
Reserve Chairman from November, 1934 to February, 1948, too high a level of debt was one of
the primary causes of the 1920s-30s Great Depression. (See Berkshire Hathaway Annual Report
for 2002)

[edit] Benefits
The use of derivatives also has its benefits:

 Derivatives facilitate the buying and selling of risk, and many people[who?] consider this to
have a positive impact on the economic system. Although someone loses money while
someone else gains money with a derivative, under normal circumstances, trading in
derivatives should not adversely affect the economic system because it is not zero sum in
utility.
 Former Federal Reserve Board chairman Alan Greenspan commented in 2003 that he
believed that the use of derivatives has softened the impact of the economic downturn at
the beginning of the 21st century.[citation needed]

[edit] Government regulation

In the context of a 2010 examination of the ICE Trust, an industry self-regulatory body, Gary
Gensler, the chairman of the Commodity Futures Trading Commission which regulates most
derivatives, was quoted saying that the derivatives marketplace as it functions now "adds up to
higher costs to all Americans." More oversight of the banks in this market is needed, he also
said. Additionally, the report said, "[t]he Department of Justice is looking into derivatives, too.
The department’s antitrust unit is actively investigating 'the possibility of anticompetitive
practices in the credit derivatives clearing, trading and information services industries,' according
to a department spokeswoman."[19]

[edit] Definitions
 Bilateral netting: A legally enforceable arrangement between a bank and a counter-party
that creates a single legal obligation covering all included individual contracts. This
means that a bank’s obligation, in the event of the default or insolvency of one of the
parties, would be the net sum of all positive and negative fair values of contracts included
in the bilateral netting arrangement.
 Credit derivative: A contract that transfers credit risk from a protection buyer to a credit
protection seller. Credit derivative products can take many forms, such as credit default
swaps, credit linked notes and total return swaps.
 Derivative: A financial contract whose value is derived from the performance of assets,
interest rates, currency exchange rates, or indexes. Derivative transactions include a wide
assortment of financial contracts including structured debt obligations and deposits,
swaps, futures, options, caps, floors, collars, forwards and various combinations thereof.
 Exchange-traded derivative contracts: Standardized derivative contracts (e.g., futures
contracts and options) that are transacted on an organized futures exchange.
 Gross negative fair value: The sum of the fair values of contracts where the bank owes
money to its counter-parties, without taking into account netting. This represents the
maximum losses the bank’s counter-parties would incur if the bank defaults and there is
no netting of contracts, and no bank collateral was held by the counter-parties.
 Gross positive fair value: The sum total of the fair values of contracts where the bank is
owed money by its counter-parties, without taking into account netting. This represents
the maximum losses a bank could incur if all its counter-parties default and there is no
netting of contracts, and the bank holds no counter-party collateral.
 High-risk mortgage securities: Securities where the price or expected average life is
highly sensitive to interest rate changes, as determined by the FFIEC policy statement on
high-risk mortgage securities.
 Notional amount: The nominal or face amount that is used to calculate payments made on
swaps and other risk management products. This amount generally does not change
hands and is thus referred to as notional.
 Over-the-counter (OTC) derivative contracts: Privately negotiated derivative contracts
that are transacted off organized futures exchanges.
 Structured notes: Non-mortgage-backed debt securities, whose cash flow characteristics
depend on one or more indices and / or have embedded forwards or options.
 Total risk-based capital: The sum of tier 1 plus tier 2 capital. Tier 1 capital consists of
common shareholders equity, perpetual preferred shareholders equity with non-
cumulative dividends, retained earnings, and minority interests in the equity accounts of
consolidated subsidiaries. Tier 2 capital consists of subordinated debt, intermediate-term
preferred stock, cumulative and long-term preferred stock, and a portion of a bank’s
allowance for loan and lease losses.
http://lastbull.com/list-of-derivatives-on-nse-%E2%80%93-futures-and-options-for-trading-on-
nse-2-2/

Derivatives with index as underlying:

NSE Symbol Underlying Index

NIFTY S&P CNX Nifty
S&P CNX Nifty MINIFTY
CNX IT CNXIT
BANK Nifty BANKNIFTY
Nifty Midcap 50 NFTYMCAP50

http://www.bseindia.com/about/derivati.asp#Eligible

Derivatives
INTRODUCTION

BSE created history on June 9, 2000 by launching the first Exchange traded Index Derivative Contract i.e.
futures on the capital market benchmark index - the BSE Sensex. The inauguration of trading was done by
Prof. J.R. Varma, member of SEBI and chairman of the committee responsible for formulation of risk
containment measures for the Derivatives market. The first historical trade of 5 contracts of June series was
done on June 9, 2000 at 9:55:03 a.m. between M/s Kaji & Maulik Securities Pvt. Ltd. and M/s Emkay Share &
Stock Brokers Ltd. at the rate of 4755.

In the sequence of product innovation, the exchange commenced trading in Index Options on Sensex on June
1, 2001. Stock options were introduced on 31 stocks on July 9, 2001 and single stock futures were launched on
November 9, 2002.

September 13, 2004 marked another milestone in the history of Indian Capital Markets, the day on which the
Bombay Stock Exchange launched Weekly Options, a unique product unparallel in derivatives markets, both
domestic and international. BSE permitted trading in weekly contracts in options in the shares of four leading
companies namely Reliance, Satyam, State Bank of India, and Tisco in addition to the flagship index-Sensex.

Top

Contract Specifications :

•  Contract Specification for Sensex® Futures contracts

Security Symbol
Underlying BSX

SENSEX®
Contract Multiplier
25
Contract Period 1, 2, 3 months
Tick size 0.05 index points
Price Quotation SENSEX points
Trading Hours 9:55 a.m. to 3:30 p.m.
Last Trading/Expiration Last Thursday of the contract month. If it is holiday, the immediately preceding business day. Note: Business day is
Day a day during which the underlying stock market is open for trading.
Cash Settlement. On the last trading day, the closing value of the underlying index would be the final settlement
Final Settlement
price of the expiring futures contract.
Why SENSEX Futures:

There are many reasons why SENSEX® futures:

oSENSEX® as compared with other indices shows less volatility and at the same time gives returns
equivalent to the returns given by the other indices.
o SENSEX® is widely used to describe the mood in Indian stock market, and because of its long history
and wide acceptance, no other index matches the BSE SENSEX® in reflecting market movements
and sentiments and it makes an attractive underlying for index based products like Index funds,
futures & options and Exchange traded fund.
o SENSEX® is truly investable as it is the only broad based index in India that is “free float market
capitalization weighted”, which reflects the market trends more rationally and takes into consideration
only those shares that are available for trading in the market.

It may be noted that in addition to the SENSEX®, six sectoral indices belonging to the 90/FF series are also
available for trading in the Futures and Options Segment of BSE Limited. The term ‘90 /FF' means that the
indices cover 90% of the market capitalisation of the sector to which the index belongs and is thus well
representative of that sector. Also, FF stands for free float – i.e. the indices are based on the globally followed
standard of free float market capitalisiation methodology. The six sectoral indices that are presently available
for F&O are BSE PSU, BSE TECK, BSE FMCG, BSE Metal, BSE Bankex and BSE Oil & Gas.

Top

TYPES OF PRODUCTS

Index Futures

A futures contract is a standardized contract to buy or sell a specific security at a future date at an agreed
price.
An index future is, as the name suggests, a future on the index i.e. the underlying is the index itself. There is no
underlying security or a stock, which is to be delivered to fulfill the obligations as index futures are cash settled.
As other derivatives, the contract derives its value from the underlying index. The underlying indices in this
 case will be the various eligible indices and as permitted by the Regulator from time to time.

Click here for list of Index Futures Products

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Index Options

Options contract give its holder the right, but not the obligation, to buy or sell something on or before a
specified date at a stated price. Generally index options are European Style. European Style options are those
option contracts that can be exercised only on the expiration date. The underlying indices for index options are
the various eligible indices and as permitted by the Regulator from time to time.

Click here for list of Index Options Products

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Stock Futures

A stock futures contract is a standardized contract to buy or sell a specific stock at a future date at an agreed
price. A stock future is, as the name suggests, a future on a stock i.e. the underlying is a stock. The contract
derives its value from the underlying stock. Single stock futures are cash settled.

Click here for list of Stock Futures Products

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Stock Options

Options on Individual Stocks are options contracts where the underlyings are individual stocks. Based on
eligibility criteria and subject to the approval from the regulator, stocks are selected on which options are
introduced. These contracts are cash settled and are American style. American Style options are those option
contracts that can be exercised on or before the expiration date.

Click here for list of Stock Options Products

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Weekly Options

Equity Futures & Options were introduced in India having a maximum life of 3 months. These options expire on
the last Thursday of the expiring month. There was a need felt in the market for options of shorter maturity. To
cater to this need of the market participants BSE launched weekly options on September 13, 2004 on 4 stocks
and the BSE Sensex.

Weekly options have the same characteristics as that of the Monthly Stock Options (stocks and indices) except
that these options settle on Friday of every week. These options are introduced on Monday of every week and
have a maturity of 2 weeks, expiring on Friday of the expiring week.

Click here for the list of Weekly Stock and Index Option Contracts
Top

CONTRACT SPECIFICATIONS

Contract Specification for Index Futures contracts

Security Symbol Click here for details

 Underlying

Contract Multiplier

Contract Period 1, 2, 3 months

Tick size 0.05 index points
Price Quotation index points
Trading Hours 9:55 a.m. to 3:30 p.m.
Last Trading/Expiration Last Thursday of the contract month. If it is holiday, the immediately preceding business day.Note: Business day is a
Day day during which the underlying stock market is open for trading.
Cash Settlement. On the last trading day, the closing value of the underlying index would be the final settlement price
Final Settlement
of the expiring futures contract.
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Contract Specification for Index Options contracts (Monthly & Weekly)

Security Symbol

Underlying Click here for details

Contract Multiplier

Contract Period 1, 2, 3 months & 1, 2 weeks

Exercise Style European
Settlement Style Cash
Tick size 0.05 index points
Premium Quotation In index points
Strike price Intervals Shall have a minimum of 3 strikes (1 in-the-money, 1 near-the-money, 1 out-of-the-money).
Trading Hours 9:55 a.m. to 3:30 p.m.
Last Thursday of the contract month in case of monthly & last Friday of contract maturity in case of weekly options. If it
Last
is a holiday, then the immediately preceding business day.Note: Business day is a day during which the underlying
Trading/Expiration Day
stock market is open for trading.
Top

Contract Specifications for Single Stock futures

Security Symbol

Underlying Click here for details

Contract Multiplier

Contract Period 1, 2 & 3 months

Tick size 0.05 points i.e. 5 paisa
Price Quotation Rupees per share.
Trading Hours 9:55 a.m. to 3:30 p.m.
Last Trading/Expiration Last Thursday of the contract month. If it is holiday, then the immediately preceding business day.Note: Business day
Day is a day during which the underlying stock market is open for trading.
Cash Settlement. On the last trading day, the closing value of the underlying stock is the final settlement price of the
Final Settlement
expiring futures contract.
Top

Contract Specification for Stock Options contracts (Monthly & Weekly Options)

Security Symbol Click here for details

 Underlying

Contract Multiplier

Contract Period 1, 2, 3 months & 1, 2 weeks

Exercise Style American
Settlement Style Cash
Tick size 0.05 i.e. 5 paisa
Premium Quotation Rupees per share
Strike price Intervals Shall have a minimum of 3 strikes (1 in-the-money, 1 near-the-money, 1 out-of-the-money).
Trading Hours 9:55 a.m. to 3:30 p.m.
Last Thursday of the contract month in case of monthly & last Friday of contract maturity in case of weekly options. If it
Last is a holiday, then the immediately preceding business day during which the underlying stock market is open for trading.
Trading/Expiration Day
-Note: Business day is a day during which the underlying stock market is open for trading.
The final settlement of the expiring option contracts would be based on the closing price of the underlying stock. The
following algorithm is used for calculating closing value of the individual stocks in the cash segment of BSE including
the stocks constituting Sensex:
Final Settlement
-Weighted Average price of all the trades in the last thirty minutes of the continuous trading session.

-If there are no trades during the last thirty minutes, then the last traded price in the continuous trading session would
be taken as the official closing price.
It is a specified time (Exercise Session) everyday. All in-the-money options would be deemed to be exercised on the
Exercise Notice Time
day of expiry unless the participant communicates otherwise in the manner specified by the Derivatives Segment.
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ELIGIBILITY CRITERIA

As prescribed by SEBI vide its Circulars regarding the eligibility criteria for introducing Futures & Options
Contracts on stocks and indices, the following revised eligibility criteria would be applied w.e.f. September
22nd, 2006 to determine the eligibility of stocks and indices on which Futures & Options contract could be
introduced for trading in Derivatives.

Eligibility criteria for introducing Futures & Options Contracts on Stocks.

o The stocks would be chosen from amongst the top 500 stocks in terms of average daily market
capitalization and average daily traded value in the previous six-month on a rolling basis.
o For a stock to be eligible, the median quarter-sigma order size over the last six months should not be
less than Rs. 1 lac (Rs 0.01 Million). For this purpose, a stock's quarter sigma order size shall mean
the order size (in value terms) required to cause a change in the stock price equal to one-quarter of a
standard deviation.
o The Market Wide Position Limit in the Stock shall not be less than Rs 50 crores (Rs 500 Million). The
Market Wide Position Limit is valued taking into consideration 20% of number of shares held by the
Non Promoters (i.e free-float holding) in the relevant underlying Security(i.e free-float holding) and the
closing prices of the stock in the underlying cash market on the date of expiry of contract in the month.
Market Wide Position Limit is calculated at the end of every month.

The methodology used for calculating quarter sigma order size is as follows:

o Quarter sigma order size would be calculated taking four snapshots in a day from the order book of
the stock in the past six months.
o The sigma (standard deviation) or volatility estimate would be calculated in the manner specified by
Prof. J. R. Varma Committee on risk containment measures for Index Futures. This daily closing
volatility estimate value would be applied to the day's order book snapshots to compute the order size.
o The quarter sigma percentage would be applied to the average of the best bid and offer price in the
order book snapshot to compute the order size to move price of the stock by quarter sigma.
o The median order size to cause quarter sigma price movement shall be determined separately for the
buy side and the sell side. The average of the median order size for the buy and the sell side is taken
 as the median quarter sigma order size.
o The quarter sigma order size in stock shall be calculated on the 15th of each month, on a rolling basis,
considering the order book snapshots in the previous six months. Similarly, the average daily market
capitalization and the average daily traded value shall also be computed on the 15th of each month,
on a rolling basis, to arrive at the list of top 500 stocks.

Eligibility criteria for unlisted companies coming out with Initial Public Offering :

For unlisted companies coming out with initial public offering, if the net public offer is Rs. 500 crores (Rs 5
Billion) or more, then the exchange may consider introducing stock options and stock futures on such stocks at
the time of its listing in the cash market.

Eligibility criteria for stocks on account of corporate restructuring:

All the following conditions should be met in the case of shares of a company undergoing restructuring through
any means for eligibility to re-introduce derivative contracts on that company from the first day of listing of the
post restructured company in the underlying market:

o The Futures and Options contracts on the stock of the original (pre-restructure) company were traded
on any exchange prior to its restructuring.
o o The pre restructured company had a market capitalization of at least Rs. 1000 crores (Rs 10 Billion)
prior to restructuring.
o o The post restructure company would be treated like a new stock and if it is, in the opinion of the
exchange, likely to be at least one third of the size of the pre structuring company in terms of
revenues or assets or analyst valuations, and
o o In the opinion of the exchange, the scheme of restructuring does not suggest that the post
restructured company would have any characteristic that would render the company ineligible for
derivatives trading.
o o If the post restructured company comes out with an Initial Public Offering (IPO), then the same
prescribed criteria as currently applicable for introduction of derivatives on a company coming out with
an IPO is applied for introduction of derivatives on stocks of the post restructured company from its
first day of listing.

Discontinuance / Exit of Futures & Options Contracts on stocks : No fresh month contracts shall be issued
on the stocks under the following instances

o o If a stock does not conform to the above eligibility criteria for a consecutive period of three months,
no fresh month contracts shall be issued on the same.
o o If the stock remains in the banned position in the manner stated in SEBI Circular No.
SEBI/DNPD/Cir-26/2004/07/16 dated July 16, 2004 as per para 4 (i) (a), (b) (c) of the aforementioned
SEBI circular, for a significant part of the month, consistently for three months, then no fresh month
contracts shall be issued on those scrips.
o The exit criteria shall be more flexible as compared to entry criteria in order to prevent frequent entry
and exit of stocks in the derivatives segment. Therefore, for a stock to become ineligible, the criteria
for market wide position limit shall be relaxed upto 10% of the criteria applicable for the stock to
become eligible for derivatives trading. The other eligibility conditions would be applicable mutas
mutandis for the stock to become ineligible.

If a stock fails to meet the aforesaid eligibility criteria for three months consecutively, then no fresh
month contract shall be issued on that stock

However, the exstinig unexpired contracts may be permitted to trade till expiry and new strikes may
also be introduced in the existing contract months.

The Exchange may compulsorily close out all derivative contract positions in a particular underlying
when that underlying has ceased to satisfy the eligibility criteria or the exchange is of the view that the
 continuance of derivative contracts on such underlying is detrimental to the interest of the market
keeping in view the market integrity and safety. The decision of such forced closure of derivative
contracts shall be taken in consultation with other exchanges where such derivative contracts and are
also traded shall be applied uniformly across all exchanges.

o Re-Introduction of Stocks Discontinued from Futures & Options Trading :

A stock, which is dropped from derivatives trading, may become eligible once again. In such
instances, the stock is required to fulfill the eligibility criteria for three consecutive months (instead of
one month as specified earlier) to be re-introduced for derivatives trading. Derivative contracts on
such stocks may be re-introduced by the exchange itself. However, introduction of futures and option
contracts on a stock for the first time would continue to be subject to SEBI approval.

Eligibility criteria for introducing Futures & Options Contracts on Index

The Futures Options Contracts on an index can be issued only if 80% of the index constituents are individually
eligible for derivatives trading. However, no single ineligible stock in the index shall have a weightage of more
than 5% in the index. The index on which Futures and Options contracts are introduced shall be required to
comply with the eligibility criteria on a monthly basis.

SEBI has subsequently clarified that "The Exchange may consider introducing derivative contracts on an index
if the stocks contributing to 80% weightage of the index are individually eligible for derivative trading. However,
no single ineligible stock in the index shall have a weightage of more than 5% in the index."

Discontinuance of Futures & Options Contracts on index:

If the index fails to meet the above eligibility criteria for three months consecutively, then no fresh month
contract shall be issued on that Index. However, the existing unexpired contracts shall be permitted to trade till
expiry and new strike prices will continue to be introduced in the existing contracts.

The above requirements as prescribed by SEBI need to be necessarily met for introduction of F&O contracts
on underlying stocks of the cash market. However, once the criteria are met, it is at the discretion of the
Exchange to apply to SEBI for permission to launch F&O contract on the eligible stocks. Once the SEBI
approval in respect of those stocks is obtained, the exchange issues a suitable notice to the market, in advance
and then introduces F&O contracts on the respective stocks.

To get a list of the scrips which have become eligible for trading in the Derivatives Segment of the exchange
please click here (http://www.bseindia.com/about/ordersize.asp)

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TRADING SYSTEM

The Derivatives Trading at BSE takes place through a fully automated screen based trading platform called as
DTSS (Derivatives Trading and Settlement System). The DTSS is designed to allow trading on a real time
basis. In addition to generating trades by matching opposite orders, the DTSS also generates various reports
for the member participants.

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Order Matching Rules

Order Matching will take place after order acceptance wherein the system searches for an opposite matching
order. If a match is found, a trade will be generated. The order against which the trade has been generated will
 be removed from the system. In case the order is not exhausted further matching orders will be searched for
and trades generated till the order gets exhausted or no more match-able orders are found. If the order is not
entirely exhausted, the system will retain the order in the pending order book. Matching of the orders will be in
the priority of price and timestamp. A unique trade-id will be generated for each trade and the entire information
of the trade is sent to the members involved.

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Order Conditions

The derivatives market is order driven i.e. the traders can place only Orders in the system. Following are the
Order types allowed for the derivative products. These order types have characteristics similar to ones in the
cash market.

o Limit Order: An order for buying or selling at a limit price or better, if possible. Any unexecuted portion
of the order remains as a pending order till it is matched or its duration expires.
o Market Order: An order for buying or selling at the best price prevailing in the market at the time of
submission of the order. There are two types of Market orders:
1. Partial fill rest Kill (PF): execute the available quantity and kill any unexecuted portion.
2. Partial fill rest Convert (PC): execute the available quantity and convert any unexecuted
portion into a limit order at the traded price.
o Stop Loss: An order that becomes a limit order only when the market trades at a specified price.

All orders shall have the following attributes:

o Order Type (Limit / Market PF/Market PC/ Stop Loss)
o The Asset Code, Product Type, Maturity, Call/Put and Strike Price.
o Buy/Sell Indicator
o Order Quantity
o Price
o Client Type (Own / Institutional / Normal)
o Client Code
o Order Retention Type (GFD / GTD / GTC)
Good For Day (GFD) - The lifetime of the order is that trading session.
Good Till Date (GTD) - The life of the order is till the number of days as specified by the Order
Retention Period.
Good Till Cancelled (GTC) - The order if not traded will remain in the system till it is cancelled or the
series expires, whichever is earlier.
o Order Retention Period (in calendar days) This field is enabled only if the value of the previous
attribute is GTD. It specifies the number of days the order is to be retained.
o Protection Points This is a field relevant in Market Orders and Stop Loss orders. The value enterable
will be in absolute underlying points and specifies the band from the touchline price or the trigger price
within which the market order or the stop loss order respectively can be traded.
o Risk Reducing Orders (Y/N): When the member's collateral falls below 50 lacs then he will be allowed
to put only risk reducing orders and he will not be allowed to take any fresh positions. It is not
essentially a type of order but a mode into which the member is put into when he violates his collateral
limit. A member who has entered the risk-reducing mode will be allowed to put only one risk reducing
order at a time.

Muhurat Trading will be held on Tuesday, 28th October 2008 (Diwali Amavasya - Laxmi Puja)

The Exchange may alter / change any of the above Holidays, for which a separate circular will be issued in
advance.

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 SESSION TIMINGS

FROM TO
SESSION NAME
Login Session 8:30 9:55
Trading Session 9:55 15:30
Position Transfer Session 15:30 15:50
Closing Session 15:50 16:10
Option Exercise Session 16:10 16:40
Margin Session 16:40 16:55
Query Session 16:55 17:40
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PRICE BANDS

There are no maximum and minimum price ranges for Futures and Options Contracts. However, to avoid
erroneous order entry, dummy price bands have been introduced in the Derivatives Segment. Further, no price
bands are prescribed in the Cash Segment for stocks on which Futures & Options contracts are available for
trading. Also, for those stocks which do not have Futures & Options Contracts available on them but are
forming part of the index on which Futures & Options contracts are available, no price bands are attracted
provided the daily average trading on such indices in the F & O Segment is not less than 20 contracts and
traded on not less than 10 days in the preceding month.

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LIMITED TRADING MEMBERSHIP FOR BSE DERIVATIVES SEGMENT

A Limited Trading Member (LTM) is a non-clearing trading participant having full trading rights and access to
the Derivatives Trading System of the Exchange.

o A LTM is provided with derivatives trading terminals for execution of trades either on his own account
or on account of his clients.
o A LTM can issue contract notes to his clients in his own name.
o A LTM can exercise and perform trade and position management functions online and also check his
payment obligations that may result from his trading activities.
o A LTM, however, cannot clear and settle trades executed by him directly with the Clearing House of
the Exchange. For this purpose, LTM would need to enter into an arrangement with an existing
Clearing Member of the Derivatives Segment of BSE. (A list of Clearing Members can be obtained
from the Exchange.)

What are the advantages of becoming a LTM?

There are following significant advantages in becoming LTM of the Derivatives Segment of the BSE.

o Access to the on-line Derivatives Trading & settlement System(DTSS) of the Exchange
o Trading in Option and Futures on Sensex,Sectoral Indices,Single Stock Futures and Options in
eligible scrips.
o Access to new products as and when they are introduced

Who can become LTM?

Individuals, firms, corporates and institutions, who are not members of the Cash Segment of
BSE, can become LTM.

What are the requirements for becoming a LTM?

o Minimum networth of Rs. 25 lakhs

o A registration with SEBI

Charges payable by LTM:

One-time (non-refundable) contribution to Trade Guarantee Fund (TGF) : Rs.1,00,000 One-time (non-
refundable) contribution to Investors Protection Fund (IPF) : Rs.2,00,000

* Annual membership charges : Rs.25,000

Minimum Security Deposit:

LTM has to maintain a minimum security deposit of Rs.7,50,000 with the Clearing Member and the same is
available to him for the purpose of trading limits and initial margin requirements.

Transaction Charges:

The members are at present required to pay transaction charges at a Re. 0.25 per Rs.1,00,000 of turnover
which is appropriated towards TGF & IPF.
Sub-brokers in the Cash Segment can become LTMs of the Derivatives Segment with minimum investment
and significant advantages as mentioned above.

* Annual membership charges of Rs. 25,000/- have been waived for the financial year, 2004-05.

For further information please contact us on -

Neeraj Agarwal - Tel: 22723887 (D) ; 22721233/34 (Extn: 8346)
Girish Vyas - Tel: 22721233/34 (Extn: 8502)
Ameya Bhagwat - Tel: 22721233/34 (Extn: 8419)
Email: derivativesinfo@bseindia.com

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