Stock Derivatives and Performance of Underlying Securities in

Manjunath K Rajappa, Madegowda J


Stock Derivatives have their presence in Indian capital market for more than a decade from now. As a part of financial innovation to provide hedging opportunities to their participants and creating potential markets for trading, Indian Capital Markets introduced Derivatives such as Index Derivatives (introduced in 2000), Stock Derivatives and the recently introduced Currency Derivatives. By introducing these Derivatives, the capital markets have tried to bring about turnaround in their operations, creating opportunities to their participants to realize optimal reward from their investments and to manage the associated risk effectively. Though the objective behind the introduction of Derivatives is the provision of opportunities to hedgers to transfer risk, there are a large group of speculators and arbitrageurs operating in these segments making the spot or cash markets to suffer. Because, cash markets have a high degree of influence by the operations of such underlying instruments on which the contracts are drawn in derivative markets. This study is an attempt to evaluate the nature and degree of association between the Cash Market, and Futures and Options (F&O) Markets in India with an emphasis on understanding how F&O markets and cash markets performance are related, and conclude that F&O markets in India are greatly supplementing the performance of cash markets, by creating better liquidity platforms to the investors, and enhancing the trading volumes in cash markets.         


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