Impact of Derivative Trading on the Volatility in the Stock Market of India

Page 3: Introduction to the Financial System Page 7: Commercial Banks Page 12: The Share Market and the Corporation Page 15: Corporations Issuing Equity into the Share Market Page 19: Investors in the Share Market Page 24: Short-term Debt Page 28: Medium- to Long-term Debt Page 32: Interest Rate Determination and Forecasting Page 37: The Foreign Exchange Market Page 40: Factors that Influence the Exchange Rate Page 42: Futures Contracts and Forward Rate Agreements Page 47: Options

Due to the turbulence of global economic crash, the high volatility appeared in Woolworth’s share price returns from January 2007 to June 2009, the return rate is floating widely. The most serious market crash happened on 9th September 2008 （－13.50％）. During this period of time, the investors had a difficult time. By contrast, there is a low volatility clustering from Jan-11 to Jun-11

A Study on S&P 500 Index Stock Return and Volatility using ARIMA and GARCH Modeling

Analyze the derivatives market and determine the use of derivatives to efficiently manage investment risks in an investment portfolio.

Higher use of derivatives corresponds to greater systematic risk, there is a positive relationship between the derivatives and risk in trading as well as hedging. The figures below shows that this positive relationship is stronger for the large business holding companies (BHC) than for small BHC. This indicates that the large BCH with operations in brokerage, asset management and trading primarily uses derivatives to derive their gains further exposing them to systematic risk. The small BCH results indicate that they use derivative to a larger extent to hedge against the systematic risk.

This article will consider the global issues that has led to stock market volatility in the past year. It will look at how these issues developed, its effect on the equity and global economy and how they interrelate with each other. It considers how investors can benefit by selecting and allocating assets alternative to equity in their investment portfolio. This would help counteract the effects of the

However, with the passage of time, people’s understanding of the role of financial derivatives gradually deepening, hedge funds in recent years, favoured because hedge funds have the ability to make money in the bear market. From 1990 to 2002, ordinary public funds lost an average of 11.7 per cent a year, while hedge funds earned 11.2 per cent a year during the same periods. There are some reasons for hedge funds which got such impressive results in surveys, and the benefits they receive are not as easy as the outside, and almost all hedge fund managers are excellent financial brokers.

Nonetheless, Black-Scholes model remains popularly used for estimating the price of European style options. In fact, the Black-Scholes theory has been used as a standard in the financial world (Ray, 2012). The weakness of the Black-Scholes model will be evaluated in later sections together with solutions to tackle some of these limitations.

The 3-month T-bill rates and Dow Jones index are really close to the whole economic environment; the 3-month T-Bill rates are the preeminent default-risk-free rates in the US money market that is often used by

Investors in volatility market should make no move waiting for the market to steady it self as volatility doesn’t change stocks valuations. Based on analyst’s opinion most of them recommend

Derivatives have become popular in response to the increasing volatility and complexity of financial markets. A diverse range of new financial products have been created to enable market participants to handle the risks arising from trade in securities and to speculate on future expected movements in securities prices, without direct trade in the assets themselves. Derivative contract creates a promise to deliver or trade an underlying product at some time in the future. The contract gives one party a claim on an

Volatility is main important variable in finance. Its appears mainly in pricing, portfolio theory ,risk management , derivatives , business finance , investment valuation and financial econometrics. Volatility cannot be directly observed. Hedging volatility risk is main for investors fluctuating from individuals to pension funds. Volatility risk followed the 1987 crash. Example: Barings Bank , Long Term Capital Management. In Hedging volatility risk there are three issue. First, a strong volatility measure has to be specified. Second, the properties of this particular measure have to be modeled. Third, the suitable instrument should be priced.

Because price changes in ETFs directly reflect market information and alter investors’ behaviours and asset allocation, the underlying security liquidity and volatility should be scrutinized. The third main strand of academic literature has revealed that the potential impacts of ETFs trading on underlying securities, and the markets as a whole, is of substantial interest to both investment professionals and financial academics. There is an extensive amount of research that emphasises the effects on liquidity, volatility and valuation. In fact, ETFs’ impact on the quality of underlying securities is not an unexplored area to theoretical or empirical academics. Existing studies have examined the effects of ETFs introduction on their underlying indices or composite securities. Subrahmanyam (1991) and Gorton et al. (1993) established theoretical models to test “basket securities”, including index-linked securities or index futures contracts (Charupat and Miu, 2013). The models predicted liquidity migration to component securities and indicated that the level of diversification of a composite security is positively correlated with its appeal to liquidity traders. The analysis was based on the idea that component stocks were diversified (with no firm risk), and the liquidity traders, thus, expected lower losses to informed traders by trading in composite securities rather than in underlying individual securities. Due to lower transaction costs, basket securities were more

Where R_t is logarithm of nominal or real exchange rate and m is the number of periods which can be range from 4 to 12.In this paper, we will use the moving average of the standard deviation of exchange rate as the measure of exchange rate volatility by using the real exchange rate and the order m is set to be 12. Koray and Lastrepes (1989) have shown that the moving average of the standard deviation of the exchange rate captures the variation in the

Among the most fundamental risks, associated with exchange-traded derivatives, is variable degree of risk. According to Ernst, Koziol, & Schweizer (2011), the transactions in