The equity derivatives market has witnessed significant growth over the past few decades after the publication of the famous option pricing paper by Black and Scholes in 1973 – both in terms of trading volumes and varieties of product payoff to the investor. The market crash on 19 October 1987 (Black Monday) marked another turning point when option traders started to realise that the assumption of flat volatility surface implied by the Black–Scholes option model was no longer valid. The observation of volatility skew in the equity options market led to the development of the local volatility model by Derman and Kani and Dupire independently in 1994. Since then, equity derivatives contracts traded in the market have grown beyond simple option contracts to include complex payoffs – for example, barrier options, cliquets, auto-callables, variance swaps, VIX futures and options and so on.

Large growth in the equity derivatives market has been driven by many factors; one important factor is increased liquidity in exchange listed equity futures and options. Market makers use these instruments to hedge other complex derivatives products they offer to the investor. Good liquidity in these hedging instruments would lower the cost of hedging and make these more complex derivatives products economically appealing.

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