Previous Year Question
Consider the following statements:
I. India accounts for a very large portion of all equity option contracts traded globally thus exhibiting a great boom.
II. India’s stock market has grown rapidly in the recent past, even overtaking Hong Kong’s at some point of time.
III. There is no regulatory body either to warn the small investors about the risks of options trading or to act on unregistered financial advisors in this regard.
Which of the statements given above are correct?
I and II only
II and III only
I and III only
I, II and III
Correct Answer: A
Detailed Solution
Statement I is correct. India’s securities market has witnessed very rapid growth in equity derivatives, particularly index options. Measured by the number of contracts, Indian exchanges account for a very large proportion of global equity-options trading.
A distinction must be made between the number of contracts and the actual economic value of trading. A very high number of option contracts does not necessarily mean that every contract has a high value. Smaller contract sizes and repeated trades can produce an exceptionally high contract volume.
SEBI studies have found that a very large proportion of individual traders in the equity Futures and Options segment incur losses. Rapid growth in trading volume must therefore not be equated with investor profitability.
Statement II is correct. The market capitalisation of India’s stock market increased rapidly in the recent past. As a result, India temporarily overtook Hong Kong and became the world’s fourth-largest stock market.
Market capitalisation is calculated as:
Market Capitalisation = Number of listed shares × Market price per share
Market capitalisation changes daily with share prices and exchange rates. The relative positions of two markets can therefore change subsequently. This is why the expression “at some point of time” is important.
Statement III is incorrect. India’s securities market is regulated by the Securities and Exchange Board of India—SEBI. SEBI issues risk disclosures and warnings concerning Futures and Options trading.
SEBI can also act against persons and entities providing investment-advisory services without registration. Therefore, the claim that no regulatory body exists is incorrect.