Margining system, Financial Management

Assignment Help:

Margining System:

Indian capital markets have finally acquired an international flavor with the market-wide rolling settlement coming into place on both the premier exchanges (Bombay Stock Exchange and National Stock Exchange) and volumes in the derivatives market slowly creeping up.

"Badla was an integrated product suited to Indian stockmarket conditions. Now, with these (futures and options) successors, the product has simply bifurcated into two variants for a different set of market participants," says a former badla financier who is now active in the derivatives segment.

In India (BLESS on BSE and ALBM on NSE), there was a financier who stepped into fund the long (outstanding buy position) or lend securities to the short (outstanding sell position). Therefore, there was always a cash market settlement at the exchange linked to these transactions whereas stock futures is currently being settled in cash and the settlements in futures and cash markets are segregated. With identical trading terminals quoting both the spot and futures market movement, the difference only being that a person can buy a single share in cash market while one has to enter a minimum stipulated size for a particular stock in the derivatives segment.

So, a trader buying a Satyam contract (minimum 1,200) would have to pay an upfront margin of 15-20 percent to buy a contract of a Satyam futures or options. He can shift his position from a one-month contract expiring at the end of that month, to a two-month contract at a slightly higher rate reflecting the implied cost-of-carry for another month. Here the rate of interest, which is nothing but the implied Cost Of Carry (COC percent) is known to the investor beforehand, while in badla the rates were decided by the trades in the badla session, reflecting a level of transparency in derivatives. The margin is collected by the broker on behalf of the exchange on a daily basis depending on daily volatility on the ‘mark-to-market' system in operation.

A contract bought by paying an upfront margin is calculated on Value-Added Risk (VAR) basis, which traces the historic volatility (fluctuations in stock price) of a particular stock and arrives at a margin which is reflective of this volatility. This basically implies that a volatile stock, like a Sterlite Opticals or a Satyam Computer, would attract higher margin requirement from an investor compared to the volatile stock like a Hindustan Lever or an ITC.

 


Related Discussions:- Margining system

Which is lower for company cost of debt or cost of quality, Which is lower ...

Which is lower for a given company:  the cost of debt or the cost of equity?  Explain.  Ignore taxes in your answer. The cost of debt is all the time less than the cost of equi

What are financial centers?, Banks and brokerage firms are measured financi...

Banks and brokerage firms are measured financial centers

Calculate tax gain or loss, High Tech Production Inc. purchased a comp...

High Tech Production Inc. purchased a computerized measuring device two years ago for $80,000. This equipment falls into the five-year category for MACRS depreciatio

Security offered - influence the rate of interest, Q. Security offered -  ...

Q. Security offered -  influence the rate of interest ? The rate of interest charged on the loan will be lesser if the debt is secured against an asset or assets of the company

Does high operating leverage always mean high business risk, Does high oper...

Does high operating leverage always mean high business risk?  Explain. High operating leverage doesn't always mean high business risk.  If the company's sales are quite steady

Fundamentals of structured product engineering, Fundamentals of Structured ...

Fundamentals of Structured Product Engineering 1. (a) Let r m denote the m month swap rate (or Libor rate). Subsequently the 3 × n month forward rate f (3 ×n )

Optimal cash model, Optimal Cash Model: Cash Management is a bigger as...

Optimal Cash Model: Cash Management is a bigger aspect that involves range of functions that assist individuals and business to process their payments and receipts in an organ

Calculation of variances, a) Distinguish among standard costing and budgeta...

a) Distinguish among standard costing and budgetary control.  (b)"Calculation of variances in standard costing is not an end in itself, but a means  to an end" Brief discussion

Explain monetary approach to exchange rate determination, Derive and illust...

Derive and illustrate the monetary approach to exchange rate determination. Answer: The monetary approach is related with the Chicago School of Economics.  It is relies on two

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd