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

General functions of financial management, GENERAL FUNCTIONS Several f...

GENERAL FUNCTIONS Several functions of financial management currently range from planning of funds to distribution of earnings and also are extend beyond.  Some of the well-kn

Aims of financial services authority, Aims of FSA The aim of FSA is to ...

Aims of FSA The aim of FSA is to promote efficient, orderly and fair markets, and to help retail consumers to get a fair deal. In fact, FSA has set out its aims under three bro

Operating cycle, applicability of operating cycle in poultry

applicability of operating cycle in poultry

Interpretations of market based ratio''s, Market based Ratio's   PE:...

Market based Ratio's   PE:           The Price-to-Earnings ratio is calculated by market price per share to earnings per share and is expressed in terms of times. It shows h

Preliminary screening, I am facing some problems in my assignment on the to...

I am facing some problems in my assignment on the topic Preliminary Screening. Can anybody suggest me the proper explanation for it?

What do you mean by sarbanes-oxley, Q. What do you mean by Sarbanes-Oxley? ...

Q. What do you mean by Sarbanes-Oxley? Sarbanes-Oxley (SOX) - Sarbanes-Oxley Act was signed into law on 30 July 2002 by President Bush. Act is designed to oversee the financial

Calculate the cumulative probability , Compound options are usually cheaper...

Compound options are usually cheaper than vanilla options and we know that there are four main types of compound options: a call on a call; a put on a call; a call on a put; a put

Explain what is comprehensive income, Q. Explain what is Comprehensive Inco...

Q. Explain what is Comprehensive Income? Comprehensive Income - Change in EQUITY of a business enterprise during a period from transactions and other circumstances and events f

What do you meant by common stocks in the financial term, What do you meant...

What do you meant by common stocks in the financial term? Common Stocks: Common stocks illustrate ownership interests into the firm. Common stockholders obtain dividends (wh

Dividend yield plus growth in dividend process, Q. Dividend Yield plus Grow...

Q. Dividend Yield plus Growth in Dividend process? Dividend Yield plus Growth in Dividend process: - This process is used to compute the cost of equity capital when the dividen

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