Margining system, Financial Management

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.

 

Posted Date: 9/10/2012 9:15:38 AM | Location : United States







Related Discussions:- Margining system, Assignment Help, Ask Question on Margining system, Get Answer, Expert's Help, Margining system Discussions

Write discussion on Margining system
Your posts are moderated
Related Questions

Venture capitalist is an organization in the practice of providing capital to fledgling organization with high growth potential in exchange for equity stakes and/or management cont

Financial Reports: Each person has their own perception on what a particular financial report should contain, and invariably in what they consider to be the important factors w

Earn out arrangements   Consideration could be delayed and paid only upon achievement of certain criteria. For illustration the predator company may pay additional cash if acq

Q. Show the Projected Balance Sheet Method? Projected Balance Sheet Method: - Under this process an approximate is made of assets and liabilities for a future date and a projec

Seasonal Variation Under this variation, we observe that the variable under consideration shows a similar pattern during certain months of the successive years. An example of s

How Debt securities is different from term loan Debt securities are different from term loans provided by financial institutions and banks to the company. Term loans are long t

Cash Flow Statement Ratios: This ratio, which is defined as a percentage, compares a company's operating cash flow to its total sales or revenues, which provide investors an i

Defined Contribution Plans In defined contribution plans, the contributions made by or on behalf of the employee are accumulated and paid on retirement along with such return a

Q. What are the Benefits of Holding Inventories? (1) Timing of Demand and Supply: - Requirement to hold inventory of raw materials arises because it isn't possible for a firm