The Impact of Maturity on Futures and Options with Reference to National Stock Exchange: An Exploratory Study ()
1. Introduction
Introduction of derivatives is a paradigm shift in the Indian Financial Market with the recommendations of L.C Gupta Committee. Nifty 50 Index futures contract was the first derivative contract launched on National Stock Exchange in India. Derivatives need to be understood as a tool to hedge against stock price fluctuations. In National Stock Exchange the trading volume in index futures in 2001 was Rs. 2365 crores and for the 2017-2018 the volume was Rs. 164984859 crores as on June 2018 (www.nseindia.com). Compared to cash segment, derivatives volumes and traded value of derivatives have grown immensely over the last two decades. Futures and Options have registered tremendous growth in the recent past not just for trading but also as a tool to minimize the risk which emerges out of stock price fluctuations. Index, stock futures and option are based on monthly, bimonthly and quarterly contracts which expire on last Thursday of every month whereas the futures contracts are associated with the benefits like hedging, low-cost execution and liquidity the demerit can be uncontrollable future events, complex issues of new investors, leverage issues and timing. Options contract, wherein the option possessor has the right to buy or sell an asset but do not have any obligation to enter into the contract. To capitalize on short term moves, minimizing the effects of time decay and hedge event related risk weekly options as a tool had been added as a feather to the existing crown. It was found that trading volumes were significantly high during expiration days for the futures and options instruments [1] .
Bank Nifty index are known for their high volatility and huge volumes which can be a reason to consider introducing bank nifty weekly options which are now more than 2-year-old. With the success of Bank Nifty weekly options, Nifty weekly was introduced in National Stock Exchange recently. Weekly options are another tool in the existing toolbox which is dominant enough to generate quick profits or losses depending upon the usage. The index weekly options can be helpful to the investors to safeguard their portfolio risk in a volatile market.
2. Theoretical Background
Extant studies on expiration-day effects widely studied in USA and these studies have focused on research such as the trading volume, return, volatility, and the purported “triple-witching hour” expiration Fridays. The conventional research on derivatives was confined to advanced countries as the markets are liberalized and known for giant contribution in the derivatives segment. However, there has been an increasing trend in studying the derivative instruments in emerging markets [2] . The impact of expiration date on futures and options has received limited attention. The research conducted so far in the Indian context presents the case of mixed results. The present section makes an attempt to present a summary of all the relevant work done in the emerging markets in two parts 1) review of literature in derivatives markets, and 2) futures and options.
Gakhar and Meetu [3] suggested that as the regulatory framework in Indian Capital Markets are centralized, to boost the confidence of participants in derivatives segment many issues like tax, bottlenecks and economies of scale need to have an independent regulator. Kadioglu et al. [4] observed that when volatility occurs in market, there is a tendency is to blame new happenings at that particular time. Derivatives started early 80’s and ample data were available for testing. To date, there is no evidence to sustain the argument that trading of stock futures has diluted the market. Mishra et al. [5] found that the dominance of spot market over futures and options market was due to the increase in Securities Transaction Tax. It was also opined that Securities Transaction Tax should act as a tax shelter on put and call positions. Wang [6] found that the speculators responded optimistically to market sentiment, in contrast hedgers traded against market sentiment after controlling for the market threat factors. Bose and Bhaumik [7] observed that trading volumes were considerably superior on expiration days than on non-expiration days, there was noteworthy expiration day effect on a daily basis returns to the market index and also on fluctuation of the returns. Ankit Jain et al. [8] examined the effect of entry of small investors in derivatives segment to find that entry of small investors exerted influence on both spot market and derivatives markets leading to increase in stock valuations, price efficiency and a significant increase in liquidity. Agarwal et al. [9] examined the effect of derivatives on diverse stock features such as valuation, price effectiveness and liquidity and found that derivatives put in value by improving price competence and liquidity of the stock. Shalini and Raveendra [10] suggested that globalization and liberalization across the world have increased the financial risk. It was found that equity derivatives play an important in price-discovery, hedging strategies; innovations in financial engineering are driving financial derivatives. Lai [11] suggested that superior returns can be enjoyed by hedged portfolios developed from copula-based GARCH model than traditional form of hedging models. Nandan et al. [12] examined the price effectiveness of the Nifty Index Futures contracts to conclude that there are chances of overpricing and also a major difference between mispricing series with varying days to expiry. Kamaiah and Sakthivel [13] investigated the impact of stock futures expiration on the spot market in the NSE and observed positive abnormal returns and volumes on days before the expiry day. Vipul [14] analyzed the expiry day impact in the Indian stock market. 14 equity shares of different sectors were considered for the study and it found that share prices have fallen the day before the expiration day and has risen significantly the day after the expiration day. Debasish and Puri [15] examined whether latent expiration effects subsist on the Index Futures and observed that volumes are significantly higher on the expiration day and do not have any price distortions on the expiration day. Bodla and Jindal [16] observed that Compound Annual Growth Rate of trading volume has diminished slightly after the introduction of derivatives and also found a positive effect of expiration of derivatives on trading volume of sample stocks. Mahalwala [17] found that although the trading volumes were higher on expiration days than non-expiration days, there was no significant difference between the return on expiration between expiration and non-expiration days. Table 1 and Table 2 present a summary of all the relevant works in the areas of maturity/expiration day and maturity/expiration day impact on futures and options market in India respectively.
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Table 1. Review of literature in derivatives markets.
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Table 2. Maturity/expiration day impact on futures and options in India.
3. Conclusion
Extant literature provides important insights pertaining to the expiration day impact on futures and options market in India. The literature review drives to the conclusion that there was a considerable expiration day effect on a daily basis returns to the market index and also on the volatility of returns. Futures and Options are decades old to the global market and gained significant progress in developed countries. In developing economy like India, it is hardly two decades old. Of late, Securities Exchange Board of India (SEBI), Indian regulatory authority, has introduced the weekly options contracts like Bank Nifty weekly options and Nifty weekly options contracts. Extant research focusing on Futures and Options contracts examined the monthly contracts and majority studies have examined the futures and options expiration day effect on volatility of underlying market, individual stocks and returns. With the introduction of new product “Weekly Options” in the line can be understood as a new tool, which is believed to be useful for the investors in hedging their portfolios, to utilize volatility for short term gains due to lesser chance of time decay. Thus, there is a wider scope for the future research in the areas of Bank Nifty weekly options and Nifty weekly options and exploring the impact of expiration day impact of weekly options on individual stocks, Bank Nifty Index, Nifty Index, and Volatility of spot market and also on volatility of returns. It would be interesting to examine the impact of expiration day for high-frequency data [15] . Further, agricultural future contracts remain yet other key areas of research to study the relationship between expiration day and volatility [4] . Further, it is important to study the performance and expiration day impact in the emerging economies by clubbing diverse economies in the world. Such studies would provide some assistance in policy making which determines the financial architecture of emerging economies [2] .