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

Analyse and interpret company financial statements, INSTRUCTIONS Downl...

INSTRUCTIONS Download the 2011 Annual Report for Marks and Spencer PLC, from the link provided on Study Space. Review the Annual Report, paying particular attention to the Fin

Example of relationship between bond price and time, Illustration    ...

Illustration      Discount bond (5 yr. bond with 10% coupon) (expected rate yield at 12%) Premium bo

Explain dividend policy decision, Q. Explain Dividend Policy Decision? ...

Q. Explain Dividend Policy Decision? Dividend Policy Decision: - The financial management has to make a decision as to which portion of the profits is to be distributed as divi

Determine the management buy-outs, Determine the Management buy-outs ...

Determine the Management buy-outs Management buy-outs (MBOs) The management of company buy out the shareholders. Management will usually require financial backers (ventu

ACCRUAL INCOME VERSU CASH FLOW, Thomas book sales, inc. supplies texbooks t...

Thomas book sales, inc. supplies texbooks to college and university bookstore. The books are shipped with a proviso that they must be paid for within 30 days but can be returned f

Financial accounting, Financial accounting: Financial accounting attemp...

Financial accounting: Financial accounting attempts to establish the value of a particular organisation at a specific point in time, and its earnings over a specified period of

Advantages of just-in-time inventory management, Q. Advantages of Just-in-t...

Q. Advantages of Just-in-time inventory management? JIT inventory management methods look for eliminate waste at all stages of the manufacturing process by minimising or elimin

Financial analysis, are footnotes important in analysing ratios

are footnotes important in analysing ratios

Commercial paper, Commercial Paper (CP) is a short-term unsecured pro...

Commercial Paper (CP) is a short-term unsecured promissory note issued in the open market. It also represents the obligation of the issuer. Normally, it is issued

Operating cycle, #questionoperating cycle in vegetable growing business in ...

#questionoperating cycle in vegetable growing business in uganda..

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