BSE'S FORAY INTO DERIVATIVES: EXPANDING OPPORTUNITIES FOR INVESTORS

Introduction

On Monday,15^th May 2023, the Bombay Stock exchange (BSE) reopened the Sensex and Bankex derivative contracts, to boost the derivative trading at the platform. According to BSE, the relaunch of derivative products includes a smaller lot size for futures and options, and a new expiry cycle of Friday from Thursday earlier.

BSE’s Managing Director and CEO Sundararaman Ramamurthy mentioned at the relaunch event on Monday- “We are relaunching two contracts—Sensex and Bankex. Sensex is a well-known benchmark and a barometer of India’s economy. It has good performance and a good volatility profile”

Understanding Derivatives

Before delving into BSE's involvement, let's briefly understand what derivatives are. Derivatives are financial instruments whose value is derived from an underlying asset, such as stocks, bonds, commodities, or indices. They provide investors with an opportunity to hedge against market risks, speculate on price movements, and diversify their portfolios.

BSE's Entry into Derivatives

The history of derivatives in the Bombay Stock Exchange (BSE) can be traced back to the introduction of index futures in the early 2000s. Here's a brief overview of the key milestones:

• Introduction of Index Futures (2000): In June 2000, BSE introduced index futures contracts based on the S&P BSE Sensex, which is a benchmark index representing the performance of the top 30 stocks listed on the exchange. The index futures allowed market participants to speculate on the future direction of the Sensex.
• Index Options (2001): In June 2001, BSE introduced index options contracts. This provided investors with the flexibility to hedge their portfolios against market volatility or take speculative positions based on their market outlook.
• Single Stock Futures (2002): BSE introduced single stock futures in November 2002. This allowed market participants to trade futures contracts based on individual stocks listed on the exchange. It provided investors with an additional avenue for hedging and speculation.
• Single Stock Options (2003): In July 2003, BSE introduced single stock options, expanding the derivatives market further. Single stock options gave investors the right, but not the obligation, to buy or sell individual stocks at a predetermined price within a specified period.
• Continuous Product Innovations: BSE has continued to introduce new derivative products and make enhancements to existing products to improve market liquidity, transparency, and investor participation. The exchange has focused on adopting global best practices and introducing new features to attract both domestic and international investors.

Implications:

Benefits expected:

1. Increased Market Liquidity: With the introduced change, the derivatives market in India is expected to become more liquid and competitive. This enhances the ease of execution, improves price discovery, and reduces trading costs for investors. Increased liquidity also attracts a broader range of participants, including institutional investors, thus deepening the market.

2. Diversification Opportunities: BSE's derivatives offerings expand the investment opportunities available to investors. By providing access to index-based derivatives, stock futures, and options, investors can diversify their portfolios beyond traditional equity investments. This diversification helps spread risk and potentially enhances overall portfolio performance.

3. Risk Management: Derivatives serve as effective risk management tools. BSE's foray into derivatives trading enables investors to hedge their existing equity positions and mitigate downside risks. By using futures and options contracts, investors can protect their portfolios from adverse market movements, potentially minimizing losses and enhancing risk-adjusted returns.

4. Competition and Innovation: BSE's active presence in the derivatives market fosters healthy competition with the NSE, stimulating innovation and improved services. Competition drives exchanges to introduce new products, enhance trading platforms, and provide better customer support, ultimately benefiting investors.

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