Financial Markets

    • The organized future trading was started in 1848 in CBOT. Over the years, it has experienced a rapid growth in terms of trade and volume. Apart from CBOT, Chicago Mercantile Exchange also became very popular for trading in derivative instruments. These two exchanges cover almost 80% of the total volume traded in the futures contracts in the US.
    • The Futures Commission Merchants (FCM), brokers, speculators are the main players in the futures market. The function of the futures clearing houses is very much similar to those of the option-clearing corporations.
    • In India, trading in futures started on June 12, 2000. National Securities Clearing Corporation Limited (NSCCL) is the clearing and settlement agency for all the deals executed on behalf of the legal counterpart of NSE's futures traders. A trading system while clearing member of NSCCL clears and settles all deals. To begin with, the National Stock Exchange has introduced trading in index based futures contracts with a cash market index as the underlying assets. Nifty index futures and options are cash settled.
    • All clearing members are required to open a separate bank account with NSCCL designated clearing banks. The outstanding positions in the index futures are market-to-market at the closing price for the day.
    • Commodity futures are not very popular in India although there is a Commodity Futures Exchange here. Commodity futures are basically popular in the form of coffee futures in India. Options on commodities started in 1860 in the US on various underlying commodities like gold, silver and petroleum. Currently, options are traded on stocks, stock indices and foreign currencies and futures.
    • The option buyer has the right but not an obligation to buy or sell.
    • An option is called a call option if the writer gives the buyer of the option the right to purchase the underlying asset from him.
    • An option contract is said to be a put option if the writer gives the buyer of the option the right to sell the underlying asset.
    • Options Clearing Corporation (OCC): It is a clearing house established to ensure smooth trading in options. The process of matching trades and tracking payments is done by the OCC.
    • Covered Call Writing: When the option is covered or protected by the writer of the option by depositing the share of the company on which the option is written in an escrow account with brokerage firm.
    • Naked Call Writing: If a trader writes a call option without owning the underlying asset, it is called Naked Call Writing.
    • Naked Put Writing: Here the brokerage firm does not have either the cash or the stock of other companies as security deposited by the writer of the put option.
    • Currency swap was the first formal swap instrument.
    • Swap market primarily comprises interest rate swaps and currency swaps.