Introduction of index derivatives, which are less volatile and difficult to manipulate as compared to individual stock prices, have large prospects for small retail investors.

Since index future do not represent physically deliverable asset, they are cash settled all over the world on the premise that index value is derived from the cash market, hence these require less margin capital which induces more players to join the market.

The unusual arbitrage opportunities due to the large pricing anomalies persisting between BSE/NSE prices for the same underlying shares again makes the market really attractive.

Expansion in the derivative market would also increase the flow of FII and FDI investment. The currency risk and country risks of these investors can easily be mitigated by diversifying the derivatives market by introducing dollar- rupee futures and options for the first one; and index futures and options for the second one.

While India lacks index derivatives as of today, there is a direct opportunity to make progress on these issues via the dollar-rupee forward market. The constraints that are placed in the way of FII's on using the dollar-rupee forward market are counterproductive. If the FII is allowed to obtain insurance using this market, they will bring more money to India.

Thus, India needs to overcome its recent sluggish pace toward derivatives trading and pave the way for a open and developed financial market which have great prospects.

Commodity Derivatives

Existing in India from the nineteenth century, through the establishment of Cotton Trade Association, trading in commodity futures was banned in 1960s due to excessive speculation. To tap the spur growth in commodities, worldwide, Future Commodity Trading was re-opened in 54 commodities in February 2003. Three national electronic exchanges NCDEX, MCX and NMCE, along with 20 other regional off-line commodity exchanges like The Indian Pepper and Spice Traders Association (IPSTA) and the Coffee Owners Futures Exchange of India (COFEI), were authorized to re-introduce commodity derivatives in India.

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* Contributed by -
Nidhi Sethi,
Batch of 2006,
IMT Ghaziabad.