Derivative and Its Impact on Stock Market

Option (finance), Futures contract, Forward contract

A Paper Presentation
Derivative and its impact on capital market
Derivative and its impact on capital market
Prepared by
Ms. Vidhi Joshi
Asst. Professor
MBA Department
T.N.Rao college of Management Studies

1. Introduction to Derivative:

The rapidity with which Indian capital market, corporate finance, banking and investment finance has witnessed a major transformation and structural change from the past one decade and this change in recent years has given birth to a new discipline that has come to be known as Financial Engineering. Financial engineering involves the design, the development, and the implementation of innovative financial instruments and processes, and the formulation of creative solutions to problems in finance. The last decade has witnessed the introduction of ‘derivatives’ as an innovative financial instrument in the Indian markets.

One of the major objectives of these reforms was to bring the Indian capital market up to a certain international standard. Due to such reforming process, one of the significant step taken in the secondary market is the introduction of derivative products in two major Indian stock exchanges viz. National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) , with a view to provide tools for risk management to investors and to improve the informational efficiency of the cash market.

A derivative is financial instrument whose value is ‘derived’ from another underlying security or a basket of securities the underlying is the identification tag for a derivative contract. Derivatives are instruments of risk hedging.

In the Indian context the Securities Contracts (Regulation) Act, 1956 (SCRA) defines “derivative” as a security that is derived from a debt instrument, share, loan whether secured or unsecured, risk instrument or contract for differences or any other form of security, same as a contract which derives its value from the prices, or index of prices, of underlying securities....
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