...Impact of derivative trading on the volatility in the stock market of India -Abhinav Barik Abstract This research paper focuses on the impact the derivative trading has had on the stock market of India. The impact is judged by the change in the volatility after the introduction of the derivative trading. In this paper 5 stocks are taken on which derivative trading was introduced and 4 stocks on which derivative trading was not introduced. The daily closing price of those stocks was taken for two periodspre derivative period and the post derivative period. These were analyzed using GARCH model to find the variance equation and then the GARCH coefficients from this equation were compared using the Wald test to check if the volatility has actually changed. The study suggests that the volatility has decreased for 4 companies, increased for 2 and two other companies did not show any significant change in the volatility. * Keywords: volatility, derivative, correlogram diagram, unit root, GARCH, Wald test *MBA student (2010-12), ICFAI BUSINESS SCHOOL, Hyderabad barik.abhinav@rediffmail.com 1. Introduction Derivative trading was introduced on the individual stocks of the Indian market in the year 2001 by SEBI. This was with a view to decrease the risk taken by the investors and to increase the investment opportunities. Since the derivative market and the spot market are linked so that the risk can be transferred, therefore the investors if want to transfer their risk...
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...AAMJAF, Vol. 4, No. 2, 43–65, 2008 ASIAN ACADEMY of MANAGEMENT JOURNAL of ACCOUNTING and FINANCE THE IMPACT OF DERIVATIVES ON STOCK MARKET VOLATILITY: A STUDY OF THE NIFTY INDEX T. Mallikarjunappa1* and Afsal E. M.2 1 Department of Business Administration, Mangalore University, Mangalagangotri – 574199, Mangalore, DK, Karnataka, India 2 School of Management and Business Studies, Mahatma Gandhi University, P.D. Hills, Kottayam – 686560, Kerala State, India *Corresponding author: tmmallik@yahoo.com ABSTRACT This paper studies the volatility implications of the introduction of derivatives on stock market volatility in India using the S&P CNX Nifty Index as a benchmark. To account for non-constant error variance in the return series, a GARCH model is fitted by incorporating futures and options dummy variables in the conditional variance equation. We find clustering and persistence of volatility before and after derivatives, while listing seems to have no stabilisation or destabilisation effects on market volatility. The postderivatives period shows that the sensitivity of the index returns to market returns and any day-of-the-week effects have disappeared. That is, the nature of the volatility patterns has altered during the post-derivatives period. Keywords: conditional volatility, heteroscedasticity, volatility clustering, market efficiency INTRODUCTION The modelling of asset returns volatility continues to be one of the key areas of financial...
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...Derivatives Trading and Its Impact on the Volatility of NSE, India GEL : G10, G14, G20, G19 ABSTRACT This article examines the impact of introduction of financial derivatives trading on the volatility of Indian stock market (an emerging stock market). It examines the theme that the introduction of derivatives in the stock market in India would reduce the volatility (risk) in the stock market. NSE Nifty 50 index has been used as a proxy of stock market return. ARCH/GARCH technique has been employed in the analysis. The conditional volatility of interday market returns before and after the introduction of derivatives products are estimated with the (GARCH) model. The Finding suggests that derivatives trading has reduced the volatility. Executive Summary Derivatives trading in the stock market have been a subject of enthusiasm of research in the field of finance the most desired instruments that allow market participants to manage risk in the modern securities trading are known as derivatives. The derivatives are defined as the future contracts whose value depends upon the underlying assets. If derivatives are introduced in the stock market, the underlying asset may be anything as component of stock market like, stock prices or market indices, interest rates, etc. The main logic behind derivatives trading is that derivatives reduce the risk by providing an additional channel to invest with lower trading cost and it facilitates the investors to extend their settlement...
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...Literature Review On Index Traded Derivative Instrument In India 1. Effect Of Future Trading On Spot Market Market Volatility: A Study Of CNX Bank Nifty. Mallikarjunappa And Afsal E.M. This Paper Studies The Volatility Implications Of The Introduction Of Derivatives On Stock Market Volatility In India Using The S&P Cnx Nifty Index As A Benchmark. To Account For Non-Constant Error Variance In The Return Series, A Garch Model Is Fitted By Incorporating Futures And Options Dummy Variables In The Conditional Variance Equation.The Introduction Of Derivative Trading On Spot Market Volatility Of Nifty And Concluded That Price Sensitivity To Old News Is Higher During Pre Future Period Than Post Future Period And With Introduction Of Future, Market Volatility Is Determined By Recent Innovation. They Also Explored Effect Of Future Trading On Spot Market Volatility By Using Garch Model On Cnx Bank Nifty And Found That There Is No Impact Of Future Trading On Spot Market Volatility. However, Impact Of New News Increased And Persistence Effect Of Old News Decreased In Post Future Period. 2. Impact Of Derivative Trading On Stock Market Volatility In India: A Study Of S&P CNX Nifty. Ruchika Gahlot, Saroj K. Datta, Sheeba Kapil The Purpose Of The Study Is To Examine The Impact Of Derivative Trading On Stock Market Volatility. The Sample Data Consist Of Closing Prices Of S&P Cnx Nifty As Well As Closing Prices Of Five Derivative Stocks And Five Non Derivative Stocks From April 1, 2002...
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...Essay topic: why companies use currency derivatives? Currency derivative can be defined as a contract or financial agreement to exchange two currencies at a given rate or a contract whose value is derived from the rate of exchange of two currencies on spot (Shoup, 1998). Currency derivatives are developed and adopted to implement a strategy known as hedging, in which an organisation acquires a contract in order to offset an expected drop or rise in value of a position or future cash flow (Belk & Edelshain, 1997). This essay will outline the incentives and rationales behind an organisation that uses currency derivatives. There are three types of currency derivatives used in hedging, future contracts, forward contracts and options, although swaps are also commonly considered as a currency derivative (Shoup, 2008). These instruments are derived from a spot rate, which is the price of the “underlying currency” (Eiteman, Stonehill & Moffett, 2009). Options are normally more costly than future contracts and forward contracts, because options are rights rather than obligations to buy or sell a currency (gives buyers the right not to exercise the contract if the spot rate movement is not favourable) (Belk & Edelshain, 1997). Research in New Zealand indicates that 70% of currency derivative users used forwards, which are most prevalent currency derivative instrument (Chan, Gan & McGraw, 2003). This is possibly because forwards are easy to manage and understand and can be used in frequent...
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...MANAGING F OREIGN E XCHANGE R ISK WITH DERIVATIVES by Gregory W. Brown* The University of North Carolina at Chapel Hill May, 2000 Version 3.4 Abstract This study investigates the foreign exchange risk management program of HDG Inc. (pseudonym), an industry leading manufacturer of durable equipment with sales in more than 50 countries. The analysis relies primarily on a three month field study in the treasury of HDG. Precise examination of factors affecting why and how the firm manages its foreign exchange exposure are explored through the use of internal firm documents, discussions with managers, and data on 3110 foreign-exchange derivative transactions over a three and a half year period. Results indicate that several commonly cited reasons for corporate hedging are probably not the primary motivation for why HDG undertakes a risk management program. Instead, informational asymmetries, facilitation of internal contracting, and competitive pricing concerns seem to motivate hedging. How HDG hedges depends on accounting treatment, derivative market liquidity, foreign exchange volatility, exposure volatility, technical factors, and recent hedging outcomes. * Department of Finance, Kenan-Flagler Business School, The University of North Carolina at Chapel Hill, CB 3490 – McColl Building, Chapel Hill, NC 27599-3490. Voice: (919) 962-9250, Fax: (919) 962-2068, Email: gregwbrown@unc.edu. A more recent version of this document may be available from my web page: http://itr.bschool...
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...The contagious impact of the European sovereign debt crisis on the foreign exchange market 1. Introduction In 2010, the debt crisis caused the euro to go down 10% in a three-month period. Some largest hedge funds in America discovered this opportunity and short euro in groups to an enormous scale. Later on, the British pound is being infected. It continuously dropped for six days, which wrote the longest dropping period record. In this paper, the objective is to critically analyse how the European sovereign debt crisis affects foreign exchange markets. The theme focuses on the contagion on the markets. The contagion phenomenon exists between foreign exchange spot and derivative markets. One of the channels is the investor sentiment, which makes large scale of influences on both markets and volatility dynamics (Corredor, P., Ferrer, E., Santamaria, R., 2015). It makes sense on aspects like trading volume, effective transaction costs and so on. This paper has two main parts. The first part is to evaluate impacts on foreign exchange spot market through analysing the political channel, bank channel and financial markert channel. The second part is to investigate impacts on foreign exchange derivatives, especially on the foreign exchange swap. 2. Contagious impact on the foreign exchange market 2-1 Impacts on foreign exchange spot (impacts on euro) In this part, we explain how the debt crisis makes impacts on the foreign exchange spot market, especially, we focus...
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...WP/09/173 Counterparty Risk, Impact on Collateral Flows, and Role for Central Counterparties Manmohan Singh and James Aitken © 2009 International Monetary Fund WP/09/173 IMF Working Paper Monetary and Capital Markets Department Counterparty Risk, Impact on Collateral Flows and Role for Central Counterparties Prepared by Manmohan Singh and James Aitken 1 Authorized for distribution by Inci Ötker-Robe August 2009 Abstract This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate. Counterparty risk in the United States stemming from exposures to OTC derivatives payables (after netting) is now concentrated in five banks―Goldman Sachs, JPMorgan, Bank of America, Morgan Stanley and Citi. This note analyzes how such risks have shifted over the past year. We estimate that the adverse impact of counterparty risk on high-grade collateral flows and global liquidity due to decrease in rehypothecation, reduced securities lending, and hoarding of cash by major banks is at least $5 trillion. In order to mitigate counterparty risk, there have been regulatory initiatives to establish central counterparties (CCPs). From a policy perspective, counterparty risk remains large at present and recent experience...
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...Foreign Exchange Derivatives Definition Any financial instrument that locks in a future foreign exchange rate. These can be used by currency or forex traders, as well as large multinational corporations. The latter often uses these products when they expect to receive large amounts of money in the future but want to hedge their exposureto currency exchange risk. Financial instruments that fall into this category include: currency options contracts, currency swaps, forward contracts and futures contracts. Types There are three types of foreign exchange derivatives used for hedging as follows: I. Forward Hedging II. Money Market Hedging III. Option Hedging Forward Hedging It refers to the Contract to buy or sell an asset at a given price on a specific date in the future. Investors use this device to avoid major losses if the price of the asset changes dramatically before it is exchanged. Money Market Hedging It refers to the Borrowing and lending in multiple currencies, for example to eliminate currency risk by locking in the value of a foreign currency transaction in one's own country's currency. Option Hedging It refers to the right to buy or sell foreign exchange at a specified strike price in exchange of a certain option premium either at the option expiration date or during the option period. * If one acquires the right to purchase foreign exchange, it is called the call option. Buyer of the call option pays option premium & it will be...
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...Case Study on PepsiCo’s Use of Financial Derivatives 1. Introduction 1.1 PepsiCo’s History The Pepsi-Cola Company was incorporated in 1919 by Caleb Bradham, the inventor of the Pepsi-Cola soft drink. PepsiCo became a multinational beverage and snack food company in 1965 when Pepsi-Cola merged with Frito-Lay. Since the 1965 merger PepsiCo has expanded its operations by acquiring Quaker-Oats, Tropicana, and Gatorade brands. With sales of $66.86 billion in 2014 and with products sold in over 200 countries, PepsiCo is one of the leading food and beverage companies in the world (PepsiCo, 2014). 1.2 PepsiCo’s Industry The beverage and snack food industries are both in the mature stage in their life cycles, and companies in these industries largely depend on product innovation, brand recognition, and low prices to remain competitive. Like all companies PepsiCo faces risk of increases in operating expenses and decreases in net income due to market risk. Companies in PepsiCo’s industry have been forced to expand its product offerings into healthy foods and drinks due to an insurgent health and wellness in American culture. 1.3 PepsiCo’s Competitors PepsiCo’s top competitors consist of The Coca-Cola Company, Dr Pepper Snapple Group, and Nestle; additionally, because PepsiCo is a multinational company it must also compete with countless local snack and beverage companies across the globe. Coca-Cola has been viewed as PepsiCo’s main rival for around 100 years, and the competition...
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...Variable Annuities—An Analysis of Financial Stability Ma rch 201 3 The Geneva Association (The International Association for the Study of Insurance Economics) The Geneva Association is the leading international insurance “think tank” for strategically important insurance and risk management issues. The Geneva Association identifies fundamental trends and strategic issues where insurance plays a substantial role or which influence the insurance sector. Through the development of research programmes, regular publications and the organisation of international meetings, The Geneva Association serves as a catalyst for progress in the understanding of risk and insurance matters and acts as an information creator and disseminator. It is the leading voice of the largest insurance groups worldwide in the dialogue with international institutions. In parallel, it advances—in economic and cultural terms—the development and application of risk management and the understanding of uncertainty in the modern economy. The Geneva Association membership comprises a statutory maximum of 90 chief executive officers (CEOs) from the world’s top insurance and reinsurance companies. It organises international expert networks and manages discussion platforms for senior insurance executives and specialists as well as policy-makers, regulators and multilateral organisations. The Geneva Association’s annual General Assembly is the most prestigious gathering of leading insurance CEOs worldwide...
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...Derivative Market – A Case Study on NSE A Report Submitted as per the curriculum of the Master in Business Administration Under Biju Patnaik University of Technology, Rourkela, Orissa. By L Rama kumari Roll No.: 200960712 Regd. No.: 0906202013 [pic] March 2011 Under the Guidance of Mr. Shom Prasad Das NATIONAL INSTITUTE OF SCIENCE & TECHNOLOGY Palur Hills, Berhampur- 761008, Orissa, India DECLARATION I, L rama kumari, student of 2009-11 batch of NIST, Berhampur do here by declare that the report entitled “Derivative Market :A Case Study on NSE” that has been submitted by me as a partial fulfillment of the degree of MBA. This report is my own work and no part of this project has been ever submitted by me for any other purpose. I declare that the work has been carried out to the best of my knowledge and belief and according to my capacity and capability. Date: Place: L Rama kumari ACKNOWLEDGEMENT I would like to take this opportunity to thank all those individuals whose valuable contribution in a direct or indirect manner has gone into the making of this dissertation a tremendous learning experience for me. I take this privilege to express my heartfelt gratitude to our Hon. Director Prof. Sangram Mudali, Hon. Batch co-coordinator Mr.Chinmaya Sahu for encouraging doing this dissertation as a part of curriculum. I would like to express sincerely my deep...
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...becoming clearer. It is a future of more capital, more liquidity and less risk. And, inevitably, it is a future with lower returns on capital, higher costs of doing business and slower growth with ultimate effects to be felt by shareholders and end consumers. Greater scrutiny by investors, regulators and other stakeholders regarding balance sheet usage is also expected. Basel III is set to redraw the banking landscape. It will have a profound impact PwC (US) on profitability and force many banks to +1 (646) 471 5257 transform their business models. It will fernando.de.la.mora@us.pwc.com also require firms to undertake significant process and system changes. Fernando De La Mora challenges but also keep abreast of the competition. The markets have already started to price Basel III impact. As shown in Figure 1, the credit default swap (CDS) market already pays more attention to banks’ pro-forma capital adequacy levels under Basel III rather than to the current standards. As the equity markets better understand the return on equity (ROE) impact of new standards and bank strategies become more clearly articulated, investors will be in a better position to analyse and compare risk-adjusted performance and thus to drive stock valuation differences in due course. Recent US Federal Reserve guidance requiring Basel III pro-forma analysis to restore dividend and buyback programs is another sign that Basel III is here.1 Chris Matten PwC (Singapore) +65 6236 3878 chris.matten@sg.pwc...
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...TITLE RISK MANAGEMENT IN BANKS EXECUTIVE SUMMARY Risk management is the identification, assessement , and prioritization of risk (whether positive or negative) followed by co ordination and economical application of resources to minimize, monitor, and control the probability or impact or unfortunate or to maximize the realization of opportunities. Risk can come from uncertainty in financial markets, project failures, legal liabilities, credit risk, accident, natural causes and disasters as well as deliberate attack from adversary. The financial crises exposed inherent weakness in the risk management system: soled infrastructure, disparate system and processes, fragmented decision making, inadequate forecasting and a dearth of cohesive reporting, among others. The impact of these flaws on many institutions shocked the industry. As a result, there has been a seismic shift in attitude towards risk. Wherever there is a investment, there exists Risk, and we have to analyse the risk quotient before investing/lending . Risk exists because of the inability of the decision makers to make perfect forecasts. Forecast cannot be made with perfection or certainty since the future events on which they depend on uncertain. Risk arises in investment or lending evaluation. In financial economics , a financial institutions is a institution that provides financial services for its clients or members. Probably the most important financial services provide by financial...
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...Chapter 1 The Government and Not-For-Profit Environment ------------------------------------------------- Questions for Review and Discussion 1. The critical distinction between for-profit businesses and not-for-profits including governments is that businesses have profit as their main motive whereas the others have service. A primary purpose of financial reporting is to report on an entity’s accomplishments — how well it achieved its objectives. Accordingly, the financial statements of businesses measure profitability, their key objective. Financial reports of governments and other not-for-profits should not focus on profitability, since it is not a relevant objective. Ideally, therefore, they should focus on other performance objectives, such as how well the organizations met their service goals. In reality, however, the goal of reporting on how well they have achieved such goals has proven difficult to attain and the financial reports have focused mainly on financially-related data. 2. Governments and not-for-profits are “governed” by the budget, whereas businesses are governed by the marketplace. The budget is the key political and fiscal document of governments and not-for-profits. It determines how an entity obtains its resources and how it allocates them. It encapsulates most key decisions of consequence made by the organization. In a government the budget is not merely a managerial document; it is the law. 3. Owing to the significance of the budget...
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