This paper examines the impact of financial derivatives trading on the volatility of Indian stock market. NSE S& P CNX Nifty index has been used as a proxy for stock market and period covered under the study varies from 1995-1996 to 2008-09 on the financial year basis. The finding suggests that a derivative trading has reduced the volatility.

The decrease in volatility would be mainly being attributed to the fact that derivative markets attract an additional set of traders to the market, which led to increase in the trading volume. With the increase in trading volume, a greater liquidity will be reflected in the prices of the underlying market and then the market will become more stable.