Based on a study of the futures and options on the National Stock Exchange’s benchmark index NIFTY and 10 other randomly selected NSE stocks, it is found that the spot market has been dominating the futures and options markets. The dominance of the futures market over options has diminished after the increase in the Security Transaction Tax. It is proposed that the STT on protective put and hedged call positions should be reduced to give a boost to the options market. Whether introduction of financial derivatives led to better price discovery in India is explored. Price discovery is analysed simultaneously in the three markets for the individual stocks—options, futures, and spot.
