Futures and options have a long history in India, with some historians tracing their origins to Kautilya’s ‘Arthashastra’, a 2,000-year-old economics and state-craft treatise. But modern India’s first rulers decided to ban them a few years after Independence fearing such instruments would lead to speculation and stoke inflation in a poor country. But farmers and traders need to insure themselves against any price risk, and earn a profit on the side. So, informally, instruments with names such as Teji, Fatak and Mandi flourished, while in the stock markets an indigenous system of carry forward called Badla gained popularity.
Ten years ago, India saw its first formal exchange-traded equity derivatives trades, after a belated realization that there was a market to protect against risks; and exchanges in other countries were gearing to launch futures based on Indian indices. In the decade since, robust economic growth and increasing linkages to the rest of the world have left the Indian investor exposed to greater risk, prompting the introduction of products such as index options, currency rate futures and interest futures. In the equity market alone, the derivatives turnover is three times cash trade. Next in line are contracts based on the volatility index—the India VIX—and contracts based on foreign indices such as the Dow Jones Industrial Average and the S&P 500.
Also See A Decade of Equity Derivatives (Graphics)
Compiled by Ravi Krishnan and N. Sundaresha Subramanian
Graphics by Ahmed Raza Khan / Mint