A

Project
On
DERIVATIVES




SUBMITTED BY
P OOJA SHARMA
- 1 -
Date:
To Whom It May Concern
This is to certify that Miss Pooja Sharma of M.I.T.School Of
Business,Pune has een an intern at our Pune ranch.
She has successfully com!lete" his !ro#ect title" THE
DERIVATIVES MARKET un"er the $ui"ance of
Mr. %a&i 'ai()a".
Durin$ her summer !ro#ect of si*ty "ays, she )as foun" !unctual
an" har")or(in$ .it is )orth mentionin$ that she is a +uic( learner
an" &ery har" )or(er.
We con$ratulate her on the com!letion of her aforesai" !ro#ect
successfully an" )ish her all the est for her mana$ement stu"ies
an" lon$ term career.
,ar&y securities limite"

- - -
DECLARATION
I POOJA SHARMA herey "eclare that this !ro#ect is the recor"
of
.uthentic )or( carrie" out y me "urin$ the aca"emic year -//0-
/1 an"
2as not een sumitte" to any other uni&ersity or institute to)ar"s
the a)ar" of any "e$ree.
POO3. S2.%M.

- 4 -
Ackno!"#$"m"n%
5irst of all I e*!ress my !rofoun" an" sincere than(s an" "e&otion
in the $o" almi$hty )ho )ith his in&isile han" $ui"e" me to
achie&e the set $oal )ith oun"less &i$or 6 enthusiasm.
I as a stu"ent of MIT SC2OO7 O5 M.8.'9M98T e*!ress my
"ee!est $ratitu"e 6than(s to Mr. %a&i 'ai()a" as
The )hole summer internshi! !erio" )ith ,.%:; STOC,
B%O,I8' 7TD has een full of learnin$ an" sense of
contriutin$ to)ar"s the or$ani<ation. I )oul" li(e to than(
,.%:; STOC, B%O,I8' 7TD for $i&in$ me an o!!ortunity of
learnin$ an" contriutin$ throu$h the !ro#ect DERIVATIVES.I
also ta(e this o!!ortunity to than( all those !eo!le that ma"e this
e*!erience a memorale one.
Durin$ the actual !ro#ect )or( Mr. ,ul"ee! Bhor(ar =Sr.
%elationshi! Mana$er> has een a source of ins!iration throu$h his
constant $ui"ance, !ersonal interest, encoura$ement an" hel!. I
con&ey our sincere than(s to him. In s!ite of his usy sche"ule he
al)ays foun" time to $ui"e me throu$h the !ro#ect. I am also
$rateful to him for re!osin$ confi"ence in my ailities an" $i&in$
me the free"om to )or( on this !ro#ect.
The !ro#ect coul"n?t ha&e een com!lete )ithout timely an"
&ital hel! of other office staff. S!ecial than( to Mr. .hi#eet , Mr.
8ina" %a$hatate, Mr. :i(rant 3oshi, Mr. :i#ay sin$h, Ms. Sonal
Cho!ra for their in&aluale $ui"ance, (een interest, coo!eration,
ins!iration an" of course moral su!!ort throu$h out my !ro#ect
session.
Place : Pune
Date : POOJA SHARMA
- @ -

Derivatives are nothing more than a set of
tools . And just as a saw can built your house
, it can cut off your arm if it isnt used
properly .
&a!%"r D' Ho(s
- 0 -
5inancial "eri&ati&e ha&e recently een intro"uce" in the In"ian
ca!ital mar(et an" (een interest is een en&ince" in the su#ect, not
only y mar(et !artici!ants ut also y stu"ent an" aca"emicians .
One of the (ey factor for the $ro)th an" "e&elo!ment of these ne)
financial !ro"ucts is the soun" (no)le"$e of the fun"amentals y
all mar(et !layers in&ol&e" &i<, an(ers ,financial institution ,
ro(ers , in&estor , an" $eneral !ulic . This !ro#ect, in my
o!inion, essentially fulfills this nee" .
The !ro#ect tries to e*!lain all the essential conce!t an"
fun"amentals of &arious "eri&ati&es !ro"uct is a sim!le an" is easy
to un"erstan" style in the conte*t of ris( mana$ement, in a )ay
hel!in$ stu"ent an" in&estors.
I?m sure that this !ro#ect an" strate$ies mentione" here in )ill e
of $reat hel! to all the in&estor , #ust as it has een to me, in
un"erstan"in$ "eri&ati&es in a sim!le an" effecti&e manner .
The stu"y )as un"erta(en at the !une ranch )hich is a !remier
stoc( ro(in$ firm in In"ia . The fin"in$s of the stu"y )oul" hel!
the in&estor to use the correct strate$y at the ri$ht time in or"er to
$et ma*imum $ains.


- 1 -
Con%"n%s


Cha!ter 1 O#ecti&e Of Deri&ati&es
Cha!ter - Sco!e Of Pro#ect
Cha!ter 4 Profile Of The Com!any
Cha!ter @ Metho" Ase" In Pro#ect
Cha!ter 0 Sources Of Data
Cha!ter 1 7imitation Of The Pro#ect
.nalysis
%ecommen"ation .n" Conclusion
Bilio$ra!hy
- B -
7ist of $ra!hs
5uture
S)a!s
O!tion

Long call
Short call
Long put
Short put
Bullspread
Bear spread
Long straddle
Long strangle
Short straddle
Short strangle
Strip &strap
Long butterfly
Short butterfly
- C -
Introduction
Theoretical background of derivative
Intro"uction to "eri&ati&e
2istory of "eri&ati&es
Deri&ati&es in In"ia
Definition
5eatures
9conomic role
Players
Basis of classification
Ty!es
5or)ar"s
5or)ar" rate a$reements
5utures
O!tions
S)a!s
.ssociate" ris(s
7ist of scri!ts in In"ian "eri&ati&es mar(et
Objectives of the project
- D -
Scope of project
Profile of the organisation
Theoretical background of derivatives
In%ro#)c%ion %o #"ri*a%i*"s+
Deri&ati&es are financial contracts, )hich "eri&es their &alue of
s!ot !rice time-series, )hich is calle" Ethe un"erlyin$E asset can
e e+uity , in"e* , commo"ity or any other asset. Some common
e*am!les of "eri&ati&es are for)ar"s, futures, o!tions, an" s)a!s.
The un"erlyin$ asset can e an a$ricultural commo"ity li(e )heat ,
tea, coffee ,etc ,or in"i&i"uals stoc( li(e Infosys, .CC, 2PC7 .etc
or stoc( in"e*es li(e stan"ar" an" !oor 0// , 8i((ei --0, BS9
sense*, etc .or financial instruments li(e T.Bills, 8otes 6 Bon"s or
Currencies li(e Dollar, 9uro, ;en, Poun", or interest rates etc.
Deri&ati&es hel! to im!ro&e mar(et efficiencies ecause ris( can
e isolate" an" sol" to those !eo!le )ho are )illin$ to acce!t them
at the least cost .usin$ "eri&ati&e rea(s ris( into !ieces that can e
mana$e" in"e!en"ently. 5rom a mar(et Foriente" !ers!ecti&e,
"eri&ati&es offer the free tra"in$ of financial ris(s.
- 1/ -
History of derivative
The "eri&ati&e mar(ets has e*iste" for centuries as a result of the
nee" for oth user an" !ro"ucer of natural resources to he"$e
a$ainst !rice fluctuation in the un"erlyin$ commo"ities . .lthou$h
tra"in$ in a$riculture an" other commo"ities has een the "ri&in$
force ehin" the "e&elo!ment of "eri&ati&es e*chan$es, the
"eman" for !ro"ucts ase" on financial instruments- such as
on"s, currencies, stoc(s an" stoc( in"ices - ha&e no) far
Outstri!!e" that for the commo"ities contracts.
Deri&ati&es ha&e !roaly een aroun" for as lon$ as !eo!le ha&e
een tra"in$ )ith one another. 5or)ar" contractin$ "ates ac( at
least to the 1-
th
century, an" may )ell ha&e een aroun" efore
then . Merchants entere" into contracts )ith one another for future
"eli&ery of s!ecifie" amount of commo"ities at s!ecifie" !rice. .
!rimary moti&ation for !re arran$in$ a uyer or seller for a stoc(
of commo"ities in early for)ar" contracts )as to lessen the
!ossiility that lar$e s)in$s )oul" inhiit mar(etin$ the
commo"ities after a har&est.

- 11 -
Derivatives in India
.!!ro&al for "eri&ati&e tra"in$
The first ste! to)ar"s intro"uction of "eri&ati&es tra"in$ in In"ia
)as the !romul$ation of the securities la)s =amen"ment>
or"inance,1DD0 ,)hich )ith"re) the !rohiition on o!tion in
securities . The mar(et for "eri&ati&es, ho)e&er "i" not ta(e off ,
as there )as no re$ulatory frame)or( to $o&ern tra"in$ of
"eri&ati&es . S9BI set u! a -@ F memer committee un"er the
chairmanshi! of Dr. 7.C.'u!ta on 8o&emer 1C ,1DD1 to "e&elo!
a!!ro!riate re$ulatory frame)or( for "eri&ati&es tra"in$ in In"ia .
Deri&ati&e mar(et at 8S9
The "eri&ati&e tra"in$ on the e*chan$e commence" )ith S6P
CG8 8ifty in"e* future on #une @,-//1 in o!tion on in"i&i"ual
securities commence" on #uly -, -//1. Sin$le stoc( futures )ere
launche" on no&emer D ,-//1. The in"e* future an" o!tion
contract on 8S9 are ase" on SBP C8G nifty in"e* .currently, the
future contracts ha&e a ma*imum of 4 month e*!iration cycles.
Three contracts are a&ailale for tra"in$, )ith one month, - month
6 4 month e*!iry. . ne) contract is intro"uce" on the ne*t tra"in$
"ay follo)in$ the e*!iry of the near month contract.
Tra"in$ mechanism
The future an" o!tion tra"in$ system of 8S9, calle" 89.T-56O
- 1- -
tra"in$ system , !ro&i"es a fully automate" screen- ase" tra"in$
for nifty future an" o!tion an" stoc( future an" o!tion on a nation
)i"e asis an" an online monitorin$ an" sur&eillance mechanism.
It su!!orts an anonymous or"er "ri&en mar(et )hich !ro&i"es
com!lete trans!arency of tra"in$ o!erations an" o!erate on strict
!rice-time !riority. It is similar to that of tra"in$ of e+uities in the
cash Mar(et =CM> se$ment . The 89.T F56O tra"in$ system is
accesse" y t)o ty!e of user .The Tra"in$ Memer =TM> ha&e
access to function such as or"er entry ,or"er matchin$ ,or"er an"
tra"e mana$ement . It !ro&i"es tremen"ous fle*iility to user in
terms of (in"s of or"ers that can e !lace" in the system . &arious
con"itions li(e 'oo" Ftill F"ay , 'oo" Ftill Fcancelle" , 'oo" Ftill
F "ate , imme"iate or cancel , limitHmar(et !rice , sto! loss ,etc
.can e uilt into an or"er . the clearin$ memer =CM> use the
tra"er )or(station for the !ur!ose of monitorin$ the tra"in$
memers for )hom they clear the tra"es . a""itionally, they can
enter an" set limits to !ositions, )hich a tra"in$ memer can ta(e .
M"m,"rshi( cri%"ria
8S9 a"mits memers on its "eri&ati&es se$ment in accor"ance
)ith the rules 6 re$ulation of the e*chan$e an" the norms
s!ecifie" y the S9BI .8S9 follo)s -- tier memershi! structure
sti!ulate" y S9BI to enale )i"er !artici!ation. those intereste"
in ta(in$ memershi! on CM an" 56O se$ment or CM WDM an"
56O se$ment.tra"in$ an" clearin$ memers are a"mitte".
essentially, a clearin$ memer CM "oes clearin$ for all his tra"in$
memer =TM> ,un"erta(es ris( mana$ement an" !erform actual
settlement .There are three ty!es of CMS
- 14 -
Self clearin$ memer: . SCM clears an" settles tra"es
e*ecute" y him only either on his o)n account of his
clients.
Tra"in$ memer an" clearin$ memer: TM-CM is a CM )ho
is also a TM. TM-CM may clear an" settle his o)n
!ro!rietary tra"es as )ell as clear an" settle for other TM?s
Professional clearin$ memer PCM is a CM )ho is not a
TMs.
Turno&er
The tra"in$ &olumes on 8S9?s "eri&ati&es mar(et has seen a
stea"y increase since the launch of the "eri&ati&es contract, i.e.
in"e* future in #une -///. the a&era$e "aily turno&er of 8S9 no)
e*cee"s a 1/// crore. . total of @1D1C4B contracts )ith a total
turno&er of 1/1D-1 crore )as tra"e" "urin$ -//1--//-.
Clearin$ an" settlement
8SCC7 un"erta(in$ clearin$ an" settlement of all "eals e*ecute"
on the 8S9s 56O se$ment an" $uarantees settlement.

D95I8.TIO8
In the In"ian contact the securities contracts act,
1D01=SC=%>.>"efines I"eri&ati&esE to inclu"e-
1.. security "eri&e" from a "et instrument, share, loan )eather
secure" or unsecure", ris( instruments or contract for "ifferences
or any other form of security.
- 1@ -
-.. contact )hich "eri&es its &alues from the !rices, or in"e* of
!rices, of un"erlyin$ securities.
Deri&ati&es are securities un"er the SC=%>. 6 hence the tra"in$ of
"eri&ati&es is $o&erne" y the re$ulatory frame)or( un"er the
SC=%>..
59.TA%9S:
%elation et)een the &alues of "eri&ati&es an" the un"erlyin$
asset-)hen the &alues of the un"erlyin$ asset chan$es , so
"oes the &alue of the "eri&ati&es ase" on them.
It is easer to ta(e short !osition in "eri&ati&es then in any
other assets.
9*chan$e tra"e" "eri&ati&es are li+ui" an" ha&e lo)
transaction cost.
It is !ossile to construct the !ortfolio that is e*actly nee"e",
)ithout ha&in$ the un"erlyin$ asset.
The ma#or !artici!ants in the "eri&ati&es mar(et are he"$ers,
s!eculators, arita$eurs an" mar(et ma(ers
Potential to !ro&i"e insurance to in&estors a$ainst )i"e
fluctuations in the mar(et.
9CO8OMIC %O79 O5 D9%I:.TI:9S
Deri&ati&es mar(et !ro&i"e three essential economic functions
1. ris( mana$ement - refer to the aility of the tra"er to offset
financial ris( throu$h "eri&ati&e
- 10 -
-. !rice "isco&ery - refer to the etter allocation of resources in
an economy that is create" y the )i"e a&aiility of an
e+uilirium !rice, )hich ser&es as a measure of &alue.
4. transitional efficiency- refers to increase" efficiency of
transactin$ throu$h "eri&ati&es.
Deri&ati&es mar(ets re"uce the costs of tra"in$ an" raisin$ ca!ital
therey, enhancin$ their ris( mana$ement an" !rice "isco&ery
functions.
Players
2e"$ers
2e"$in$ is a mechanism to re"uce !rice ris( inherent in o!en
!ositions. Deri&ati&es are )i"ely use" for he"$in$. . 2e"$e can
hel! loc( in e*istin$ !rofits. Its !ur!ose is to re"uce the &olatility
of a !ortfolio, y re"ucin$ the ris(.
2e"$in$ "oes not mean ma*imi<ation of return. It only means
re"uction in &ariation of return. It is +uite !ossile that the return is
hi$her in the asence of the he"$e, ut so also is the !ossiility of
a much lo)er return.
S!eculators
The s!eculator ta(es a &ie) on the mar(et an" !lays accor"in$ly.
If one is ullish on the mar(et, one can uy futures, an" &ice &ersa
for a earish outloo(.
There is another strate$y of !layin$ the s!rea"s, in )hich case the
s!eculator tra"es the IasisE.When a asis ris( is ta(en, the
s!eculator !rimarily ets on either the cost of carry=interest rate in
- 11 -
case of in"e* futures> $oin$ u! =in )hich case he )oul" !ay the
asis> or $oin$ "o)n =recei&e the asis>.
Pay the asis im!lies $oin$ short on a future )ith near month
maturity )hile at the same time $oin$ lon$ on a future )ith lon$er
term maturity.
%ecei&in$ the asis im!lies $oin$ lon$ on a future )ith near month
maturity )hile at the same time $oin$ short on a future )ith lon$er
term maturity.
.ritra$eurs
.ritra$eurs !rofit from !rice "ifferential e*istin$ in t)o mar(ets
y simultaneously o!eratin$ in t)o "ifferent mar(ets. .ll class of
in&estors are re+uire" for a healthy functionin$ of the mar(et.
.ritra$eurs rin$ !rice uniformity an" hel! !rice "isco&ery.
The mar(et !ro&i"es a mechanism y )hich "i&erse an" scattere"
o!inions are reflecte" in one sin$le !rice of the un"erlyin$.
Circuit Brea(er
Circuit rea(er means tra"in$ is halte" for a s!ecifie" !erio" in
stoc(s orHan" stoc( in"e* futures, if the mar(et !rice mo&es out of
a !re-s!ecifie" an". Circuit filters "o not result in tra"in$ halt ut
no or"er is !ermitte" if it falls out of the s!ecifie" !rice ran$e.
."&anta$es
- .llo)s !artici!ants to $ather information an" to assess the
situation-controls !anic.
- Bro(era$es firms can chec( on customer fun"in$ an"
com!liance.
- 1B -
- 9*chan$esHClearin$ houses can monitor their memers.
Disa"&anta$es
-Only !ost!ones the ine&itale.
-7imits the flo) of mar(et information-no one (no)s the real
&alue of a stoc(. They !reci!itate the matter "urin$ &olatile mo&es
as !artici!ants rush to e*ecute their or"ers efore antici!ate"
tra"in$ halt.
Mar(et Ma(ers
. "ealer is sai" to ma(e a mar(et )hen he +uote oth i" an" offer
!rices at )hich he stan"s rea"y to uy an" sell the security. Thus,
he is a !erson that rin$s uyers an" sellers to$ether. 2e len"s
li+ui"ity in the system y ma(in$ tra"in$ feasile.
Basis Of Classification
-8ature of contract
-An"erlyin$ .sset
-Mar(et Mechanism
Ty!e of Deri&ati&es
Deri&ati&es Instruments are of t)o ty!es
-9*chan$e Tra"e" Deri&ati&es i.e. tra"e" on the floor of an
e*chan$e
-OTC: O&er the Counter.
Exchange traded products are those )hich are tra"e" on the floor
of a !hysical e*chan$e. Most im!ortant feature is stan"ar"i<ation
in terms of &arious characteristics li(e +uantity an" +uality of the
- 1C -
un"erlyin$ asset, the start an" the e*!iry "ates of the contract,
!ayment an" settlement mechanism etc. They are hi$hly li+ui" ut
less e*!ensi&e in com!arison to OTC !ro"ucts. Ty!ical one are
5utures.
OTC Products are customi<e" !ro"ucts )hich are struc(
=finali<e"> across the counter, on tele!hone, fa*, e-mail, or any
other mo"e of transaction y an(Hfinancial institutions to suit the
nee"s of their cutomers. These !ro"ucts are fle*ile since almost
any situation can e he"$e" for the ri$ht !rice. 2o)e&er the cost
may e sli$htly e*!ensi&e an" li+ui"ity limite" )hen com!are" to
an e*chan$e" tra"e" !ro"uct.
Ty!ical OTC "eri&ati&es are for)ar"s an" 5%.s, S)a!s an"
O!tions.
-OR&ARDS
In a for)ar" contract, t)o !arties a$ree to "o a tra"e at some future
"ate, at a !rice an" +uantity a$ree" to"ay. 8o money chan$es
han"s at the time the "eal is si$ne". . for)ar" contract is a
customi<e" contract et)een the uyer an" the seller )here
settlement ta(es !lace on a s!ecific "ate in future at a !rice a$ree"
to"ay. The ru!ee-"ollar e*chan$e rates is a i$ for)ar" contract
mar(et in In"ia )ith an(s, financial institutions, cor!orate an"
e*!orters ein$ the mar(et !artici!ants.
The main features of for)ar" contracts are
- They are ilateral contracts an" hence e*!ose" to counter-
!arty ris(.
- 9ach contract is custom "esi$ne", an" hence is uni+ue in
terms of contract si<e, e*!iration "ate an" the asset ty!e an"
+uality.
- 1D -
- The contract !rice is $enerally not a&ailale in !ulic
"omain.
- The contract has to e settle y "eli&ery of the asset on
e*!iration "ate.
In case, the !arty )ishes to re&erse the contract, it has to
com!ulsorily $o to the same counter !arty, )hich ein$ in a
mono!oly situation can comman" the !rice it )ants.
5O%W.%D %.T9 .'%99M98T =5%.>
This is a I5or)ar" CounterE y )hich a orro)er loc(s in
=fi*es> a certain rate of interest for an a$ree" !erio" in the
future. The counter !arty is ty!ically a an( )hich sells 5%..
The main features of 5%. are:
1> 5ree fi*in$ an" OTC !ro"uct.
-> Their !ayoff !rofile for oth sellers an" uyers are linear an"
symmetric.
4> Pre-"ominantly use" as inter-an( tool for he"$in$ of short-
term interest rate ris(.
@> 8o u!front !remium !ayale.
5ATA%9S
5utures are e*chan$e-tra"e" contracts to uy or sell an asset in
future at a !rice a$ree" u!on to"ay. The asset can e share, in"e*,
interest rate, on", ru!ee-"ollar e*chan$e rate, su$ar, cru"e oil,
soyean, cotton, coffee etc.
The standard terms in any futures contract are:
- -/ -
1. Juantity of the un"erlyin$ asset.
-. Juality of the un"erlyin$ asset =not re+uire" in case of
financial futures>.
4. 9*!iration "ate.
@. The unit of !rice +uotation =not the !rice>.
0. Minimum fluctuation in !rice =tic( si<e>.
1. Settlement style.
5uture &alue KS!ot !rice Lcarry cost- carry returns
Where,
S!ot !rice Kcurrent in"e*
Carry cost K2ol"in$ cost of the future in"e*
Carry return KDi&i"en"s accrue" "urin$ the !erio" of carry.
Pricin$ 5utures
Cost and carry model of utures pricing
-5air !rice K S!ot !riceL Cost of carry- Inflo)s
-5PtTK CPtLCPtM=%tT-DtT>M=T-t>H410

Where,
-5PtT-5air !rice of the asset at time t for time T.
-CPt-Cash !rice of the asset.
-%tT-Interest rate at time t for the !erio" u! to T.
- DtT-Inflo)s in terms of "i&i"en" or interest et)een t an" T.
- Cost of carryK5inancin$ cost, stora$e cost an" insurance cost.
- If 5utures !riceN5air !riceO Buy in the cash mar(et an"
simultaneously sell in the futures mar(et.
- If 5utures !riceP5air !riceO Sell in the cash mar(et an"
simultaneously uy in the futures mar(et.
The aritra$e et)een Cash an" 5utures mar(ets )ill remain till
!rices in the Cash an" 5uture mar(ets $et ali$ne".
Set of assum!tions
- -1 -
- 8o seasonal "eman" an" su!!ly in the un"erlyin$ asset.
- Storaility of the un"erlyin$ asset is not a !rolem.
- The un"erlyin$ asset can e sol" short.
- 8o transaction costO no ta*es.
8o mar$in re+uirements, an" so the analysis relates to a for)ar"
contract, rather than a futures contract.
FUTURES IN INDIA
NIFTY FUTURES
The 8ational Stoc( 9*chan$e commence" tra"in$ in In"e* 5utures
on 1- 3une, -///. The 8I5T; futures contracts are ase" on the
!o!ular mar(et enchmar( S6P C8G 8I5T; In"e*.
Trading Cycle
S6P C8G 8ifty futures contracts ha&e a ma*imum of 4-month
tra"in$ cycle- the near month=one>, the ne*t month=t)o> an" the
far month=three>. . ne) contract )ill e intro"uce" on the tra"in$
"ay follo)in$ the e*!iry of the near month contract.
Expiry day
S6P C8G 8ifty futures contracts e*!ire on the last Thurs"ay of
the e*!iry month. If the last Thurs"ay is a tra"in$ holi"ay, the
contracts shall e*!ire on the !re&ious tra"in$ "ay.
Contract size
- -- -
The !ermitte" lot si<e of S6P C8G 8I5T; contracts is -//
multi!les.
Price steps or contracts
The !rice ste! in res!ect of 8I5T; futures contracts is %e. /./0.
Price !ands
There is no "ay minimumHma*imum !rice ran$es a!!licale for
5utures contract. 2o)e&er in or"er to !re&ent erroneous or"er
entry y tra"in$ memers the o!eratin$ ran$es are (e!t at L 1/Q.
In res!ect of or"ers )hich ha&e come un"er !rice free<e, the
memers )oul" e re+uire" to confirm to the 9*chan$e that there
is no ina"&ertent error in the or"er entry an" that the or"er is
$enuine. On such confirmation the 9*chan$e may a!!ro&e such
or"er.
"SE SENSE# FUTURES
The un"erlyin$ for the Sense* 5utures is the BS9 Sensiti&e In"e*
of 4/ scri!s, !o!ularly calle" the Sense*.
$at%rity
%e$ulations !ermit intro"uction of futures u to 1- months maturity.
Initially, ho)e&er, futures for the three near months ha&e een
intro"uce". On D 3une the three futures for 3une, 3uly an" .u$ust
-/// )ere starte". These futures )oul" e*!ire on -D 3une, -B 3uly
an" 41 .u$ust res!ecti&ely. This is ecause the e*!iry "ate has
- -4 -
een fi*e" as the last Thurs"ay of the month for each month. The
"ay after the e*!iry, a ne) future )oul" come into e*istence for
three-month maturity.
Tic& Size
The tic( si<e is I/.1E. This means that the minimum !rice
fluctuation in the &alue of a future can e only /.1. In %u!ee terms,
this translates to minimum !rice fluctuation of %s. 0=Tic( si<e G
Contract Multi!lierK/.1 G %s. 0/>.
Final Settle'ent
The futures closin$ !rice )ill e calculate" ase" on a set o f 1-/
!rice !oints of the cash Sense* &alues ta(en et)een the last half
an our of tra"in$. The hi$hest an" lo)est -/ !rice !oins )ill e
i$nore" an" the closin$ !rice com!ute" as an a&era$e of the
remainin$ C/ !rice !oints. This !rocess )ill ensure that
mani!ulation of the closin$ !rice y mo&in$ it in one "irection for
a short "uration or for only a fe) contracts is eliminate".

(PTI(NS
Deinition
).n o!tion is the ri$ht $i&en y the O!tion-seller to the O!tion-
uyer to uy or sell a s!ecific asset at a s!ecific !rice on or efore
a s!ecific "ate.E
- -@ -
Classiication
- O!tion Seller : One )ho $i&esH)rites the o!tion. 2e has an
oli$ation to !erform, in case o!tion uyer "esires to e*ercise
his o!tion.
- O!tion Buyer: One )ho uys the o!tion. 2e has the ri$ht to
e*ercise the o!tion ut no oli$ation.
- Call O!tion: O!tion to uy.
- Put O!tion: O!tion to sell.
- .merican O!tion: .n o!tion, )hich can e e*ercise"
anytime on or efore the e*!iry "ate.
- 9uro!ean O!tion: .n o!tion, )hich can e e*ercise" only on
e*!iry "ate.
- Stri(e PriceH9*ercise Price: Price at )hich the o!tion is to e
e*ercise".
- 9*!iration Date: Date on )hich the o!tion $ets e*ercise" y
the o!tion hol"erHuyer
- 9*ercise Date: Date on )hich the o!tion $ets e*ercise" y
the o!tion hol"erHuyer.
- O!tion Premium: The !rice !ai" y the o!tion uyer to the
o!tion seller for $rantin$ the o!tion.
In a n%t*s+ell,--
- O!tion are "eferre" settlement contracts
- %i$ht ut not an oli$ation :Buyer
- Oli$ation ut not ri$ht :Seller
- %i$ht to uyHsell.
- . s!ecific .sset=un"erlyin$>.
- .t a s!ecific Price=stri(eHe*ercise>.
- -0 -
- OnHefore a s!ecific "ate.
.+en to exercise option///
*What isRS
In-the-money : Profitale
.t-the-money : Brea(-e&en
Out-of-the-money : 7oss-ma(in$
- Call O!tion 9*ercise" if : StN9
- Put O!tion 9*ercise" if :StP9
Factors Aecting (ption Price
Co or Po . /0S
o
1E12
3
1%1r
/1
#4
&h"r"
C
/
K :alue of Call O!tion
P
/
K :alue of Put O!tion
f K 5unction of
S
/
K Price of un"erlyin$ stoc( to"ay
9 K 9*erciseHStri(e Price
1
-
K Price :olatility of un"erlyin$ asset
t K Time to e*!iration
r
f
K%is(-free interest rate
" KCash "i&i"en"
Call o!tion !rice Put o!tion !rice
S!ot !rice Direct In&erse
9*ercise !rice In&erse Direct
:olatility Direct Direct
Interest %ates Direct Direct
Time In&erse In&erse
- -1 -
Pricin$ metho"
M Put call-!arity
M Binomial Mo"el
M Blac( 6 Scholes Mo"el
Put-call !arityR.

C5E"
6rn
. P5S
Where:
C K :alue of call
P K :alue of Put
S K Current Mar(et Price
9e
-rft
K Present :alue of 9*ercise Price
"ino'ial $odel,
O(%ion D"!%a K Difference in O!tion &alues
Difference in Share Prices
Ca!! Pric"1 C
o
. C
u
!L C
"
=1-!>
%
!K =%-"> H =u-">
)here
u K 1 L Q increase in Price
" K 1 L Q "ecrease in Pric
C K Call Price
C
u
KCall &alue if Price "ecreases
- -B -
C
"
K Call &alue if Price "ecreases
% K 1 L ris( free rate of return
!K Proaility of Price increase
Blac( 6 Scholes Mo"elR
!ssumptions "
- The rates of return on a share are lo$ normally "isture"
- Constant share &alue 6 ris(-free return
- 9fficient Mar(et : 8o transaction costs 6 ta*es
- 8o "i&i"en" to e !ai"
- 9uro!ean 9*ercise Terms use"
C
o
. S N0#
%
4 7 E "
6r%
N0#
3
4
Where :
C
o
K Call o!tion &alue
S K S!ot !rice of un"erlyin$
9K 9*ercise !rice
eK 9*!onential function =to cal. P.:.>
rK %is(-free rate of return
tK Time to e*!iration
8="
1
>K Cumulati&e St". 8ormal "istriution
"
1
K In =SH9> L Tr
f
L 1
-
H-Ut
1Vt
"
-
K "
1
- 1Vt

S.APS

IS#!PS means Exchange$
- -C -
. "eri&ati&e or financial s)a! is a contract )herey t)o !arties (no)n as
counter !arties e*chan$e t)o streams of cash flo)s o&er a "efine" !erio" of
time usually throu$h an interme"iary li(e financial institution.
The nature of cash flo) to e e*chan$e" is "efine" in the contract. De&elo!e"
"urin$ 1DC/?s a&ailale as OTC or e*chan$e tra"e" !ro"ucts. . forei$n
e*chan$e s)a! a currency is simultaneously ou$ht an" sol" for t)o &alue
"ates, one of these may e s!ot an" other may e for)ar" or oth may e
for)ar" "ates.
Po!ular "ue to 9conomic enefits it $i&es to the !artici!ants. 9conomic
rationale of s)a!s ase" on !rinci!le of com!arati&e a"&anta$e an" !rinci!le of
offsettin$ ris(s.

TYPES (F S.APS
I8T9%9ST %.T9 SW.P=I%S>:-
.n I%S is a contractual a$reement et)een counter !arties to e*chan$e a
serrie" of interest !ayments for a state" !erio" of time. . ty!ical I%S in&ol&es
e*chan$in$ fi*e" an" floatin$ rate interest in the same currency.
CA%%98C; SW.P:
Is a contractual a$reement et)een counter !arties in )hich one !arty ma(es
!ayment in one currency an" other !arty ma(es !ayment in "ifferent currency
for a state" !erio" of time.
VAL8ATION AND PRICIN9 O- S&APS
- -D -
These are closely relate". S)a!s can e &ie)e" from t)o &ie)!oints as elo)
%ie& Point'() %ie& Point'*)
1> S)a!s can e &ie)e" as S)a!s can e &ie)e"
"ifference in - !ositions as the !ortfolio series of
i..e. lon$ an" short in 5%..
Bon"s.
-> In case of I%?s I=say fi*e" .n I%?s=say fi*e" to
to fi*e" to floatin$> the floatin$> can e
t)o cash flo)s arisin$ "ecom!ose" into
out of - Bon"s may e series of 5%..
&ie)e" as streams of 2ence an I%. asically
!ayments in"e*e" to !ortfolio of 5%..
"ifferent enchmar(s.
4> In case of currency s)a!, . currency s)a!
the cash flo)s may e in&ol&in$ t)o currency
constructe" as the streams &ie)e" as a !ortfolio of
of !ayments arisin$ out of for)ar" contracts. In
t)o on"s, each "etermine" other )or"s, the t)o
in "ifferent currencies. cash flo) streams
re!resent series of
for)ar"s contracts for
com!any e*chan$es.
A((ro:ima%" Va!)" O/ An IRS . -i:"# Ra%" ;on# 6 -!oa%in$ Ra%" ;on#
The !osition of fi*e" rate an" floatin$ rate on"s in the ao&e e+uation may
chan$e "e!en"in$ u!on the a$ree" cash flo) of the user.
The accrue" &alue of an I%S e+uals to sum of cash flo)s on each cou!on
!ayment "ates "iscounte" at their a!!ro!riate rate.
- 4/ -
A((ro:ima%" *a!)" o/ a c)rr"nc< sa( .
-or"i$n c)rr"nc< ,on#
s!ot e*chan$e rate- "omestic currency on" !rice
.ll s)a!s ha&e - cash flo) streams
ASS(CIATED RIS0S 1it+ derivatives
The fun"amental ris(s in&ol&e" in "eri&ati&e usiness inclu"es:
- Cr"#i% Risk
This is the ris( of failure of a counter!arty to !erform its oli$ations as
!er the contract. .lso (no)n as "efault or counter!arty ris(, it "iffers )ith
"ifferent instruments.
- Mark"% Risk
Mar(et ris( is a ris( of financial loss as a result of a"&erse mo&ements of
!rices of the un"erlyin$ assetHinstrument.
- Li=)i#i%< Risk
The inaility of a firm to arran$e a transaction at !re&ailin$ mar(et !rices
is terme" as li+ui"ity ris(. . firm faces t)o ty!es of li+ui"ity ris(s:
1. %elate" to li+ui"ity of se!arate !ro"ucts.
-. %elate" to the fun"in$ of acti&ities of the firm inclu"in$ "eri&ati&es
L"$a! Risk
- 41 -
Deri&ati&es cut across #u"icial oun"aries, therefore the le$al as!ects
associate" )ith the "eal shoul" e loo(e" into carefully.
Different cate$ory of ris(s:
1. Transaction %is( =%is( in 5orei$n Currency transaction>
-. Position %is(s =Ban(?s !osition in 5orei$n Currency>
4. Settlement or Cre"it %is(s. =Customer relate"-Presettlement 6 settle"
ris(s.
@. O!erational %is(s.
0. Mismatch or li+ui"ity %is(s =arise ecause of a"&ance mo&ement in
1. So&erei$n =Country> %is(.
B. Cross Country %is(s.
2IST (F SCRIPS IN T3E INDIAN DERI4ATI4ES $AR0ET
The minimum +uantity you can tra"e in is one mar(et lot. The mar(et lot is
"ifferent for "ifferent stoc(sHin"e*. Time to time list (ee!s chan$in$.
CN>IT ?@@ HD-C 2@@ Ori"n%a! ;ank ?3@@
Ni/%< 3@@ HD-C ;ank A@@ PN; ?3@@
ACC ?B@@ H"ro Hon#a C@@ Po!aris ?C@@
An#hra ;ank C2@@ Hin#a!co D@@ Ran,a:< C@@
Ar*in# Mi!!s CD@@ HLL 3@@@ REL BB@
;ajaj A)%o C@@ HPCL 2B@ RIL 2@@
;ank o/ ;aro#a ?C@@ i6/!": D@@ Sa%<am ?3@@
;ank o/ In#ia DA@@ ICICI ;ank ?C@@ S;I B@@
;EL BB@ In/os<s 3@@ SCI ?2@@
;HEL 2@@ IOC 2@@ S<n#ica%" ;ank E2@@
;PCL BB@ IPCL ??@@ Ta%a Mo%ors A3B
Canara ;ank ?2@@ ITC D@@ Ta%a Po"r A@@
Ci(!a ?@@@ MFM 23B Ta%a T"a BB@
- 4- -
Dr' R"##<Gs 3@@ Mar)%i C@@ TCS 3B@
9AIL ?B@@ Mas%"k ?2@@ Tisco ?DB@
9rasim In# DB@ MTNL ?2@@ 8nion ;ank C3@@
9)jara% Am,)ja ??@@ Na!co ??B@ &i(ro 2@@

(!5ectives ( T+e Pro5ect
The follo)in$ o#ecti&es )ere (e!t in min" )hile un"erta(in$ te !ro#ect:
- To un"erstan" the im!ortant "istinctions et)een 9*chan$e Tra"e" an"
OTC Pro"ucts.
- To stu"y an" analy<e the &arious o!tion tra"in$ strate$ies.
- To un"erstan" the e*act "ifferences et)een the &arious "eri&ati&e
instruments.
- To stu"y the !ricin$ mo"els for o!tions an" futures.
- To !ro&i"e &arious o!!ortunity ris( an" re)ar" for "eri&ati&e tra"es.
- To stu"y the In"ian "eri&ati&e mar(et in "e!th an" stu"y the future career
as a mana$ement $ra"uate ha&in$ ma#ore" in finance.

Sco(" O/ Th" Proj"c%
The stu"y asically "ealt )ith the &arious "eri&ati&e instruments &i<.,
5or)ar"s, 5or)ar" %ate .$reement, O!tions, 5utures an" S)a!s.
Moreo&er, in-"e!th stu"y, analysis an" un"erstan"in$ of the &arious tra"in$
- 44 -
strate$ies in the 56O se$ment as stu"ie" )ith theory een im!lemente" in
the !ro#ect analysis.
I also stu"ie" the normal tra"in$ rules in the "eri&ati&es mar(et in In"ian
stoc( e*chan$es.
Profile Of The Organization
OVERVIE&+

KARVH, is a !remier inte$rate" financial ser&ices !ro&i"er, an" ran(e"
amon$ the to! fi&e in the country in all its usiness se$ments, ser&ices o&er 11
million in"i&i"ual in&estors in &arious ca!acities, an" !ro&i"es in&estor ser&ices
to o&er 4// cor!orate, com!risin$ the )ho is )ho of Cor!orate In"ia. ,.%:;
co&ers the entire s!ectrum of financial ser&ices such as Stoc( ro(in$,
De!ository Partici!ants, Distriution of financial !ro"ucts - mutual fun"s,
on"s, fi*e" "e!osit, e+uities, Insurance Bro(in$, Commo"ities Bro(in$,
Personal 5inance ."&isory Ser&ices, Merchant Ban(in$ 6 Cor!orate 5inance,
!lacement of e+uity, IPO?s, amon$ others. ,ar&y has a !rofessional
mana$ement team an" ran(s amon$ the est in technolo$y, o!erations an"
research of &arious in"ustrial se$ments.
EARLH DAHS:

The irth of ,ar&y )as on a mo"est scale in 1DC1. It e$an )ith the &ision an"
enter!rise of a small $rou! of !racticin$ Chartere" .ccountants )ho foun"e"
the fla$shi! com!any RKar*< Cons)!%an%s Limi%"#. Com!any starte" )ith
- 4@ -
consultin$ an" financial accountin$ automation, an" car&e" inroa"s into the
fiel" of re$istry an" share accountin$ y 1DC0. Since then, they ha&e utili<e"
their e*!erience an" su!erlati&e e*!ertise to $o from stren$th to stren$thRto
etter their ser&ices, to !ro&i"e ne) ones, to inno&ate, "i&ersify an" in the
!rocess, e&ol&e" ,ar&y as one of In"ia?s !remier inte$rate" financial ser&ice
enter!rise.
Thus o&er the last -/ years ,ar&y has tra&ele" the success route, to)ar"s
uil"in$ a re!utation as an inte$rate" financial ser&ices !ro&i"er, offerin$ a
)i"e s!ectrum of ser&ices. .n" )e ha&e ma"e this #ourney y ta(in$ the route
of +uality ser&ice, !ath rea(in$ inno&ations in ser&ice, &ersatility in ser&ice
an" finallyRtotality in ser&ice. Their hi$hly +ualifie" man!o)er, cuttin$-e"$e
technolo$y, com!rehensi&e infrastructure an" total customer-focus has secure"
for them the !osition of an emer$in$ financial ser&ices $iant en#oyin$ the
confi"ence an" su!!ort of an en&iale clientele across "i&erse fiel"s in the
financial )orl".
Mi!" S%on"s+
- 40 -
KARVH 9RO8P COMPANIES
0?4 KARVH CONS8LTANTS LIMITED
.s the fla$shi! com!any of the ,ar&y 'rou!, ,ar&y Consultants 7imite" has
al)ays remaine" at the helm of or$ani<ational affairs, !ioneerin$ usiness
!olicies, )or( ethic an" channels of !ro$ress.
2a&in$ emer$e" as a lea"er in the re$istry usiness, the first of the usinesses
that ,ar&y &enture" into, com!any ha&e no) transferre" this usiness into a
#oint &enture )ith Com!uter share 7imite" of .ustralia, the )orl"?s lar$est
re$istrar. With the a"&ent of "e!ositories in the In"ian ca!ital mar(et an" the
- 41 -
Karvy Karvy milestones milestones
1985
1985
1990
1990
1990-95
1990-95
2001
2001
1997
1997
2003/04
2003/04
Share Registry and Transfer (R&T)
Business recently hived off to a JV with
Computershare !ustralia
Share Registry and Transfer (R&T)
Business recently hived off to a JV with
Computershare !ustralia
1982
Retail "ro#ing operations (Cash segment)
commenced on the $S%&&
Retail "ro#ing operations (Cash segment)
commenced on the $S%&&
'istri"ution of investment products (mutual
funds ()*s Bonds etc)
Commenced +S% operations
'istri"ution of investment products (mutual
funds ()*s Bonds etc)
Commenced +S% operations
Custodial (')
,
) services launched
Custodial (')
,
) services launched
%-uity 'erivatives "ro#ing commenced
%.panding (nstitutional segment clientele/ Setting up of the Research
des# and )rivate Client 0roup at 1um"ai
%-uity 'erivatives "ro#ing commenced
%.panding (nstitutional segment clientele/ Setting up of the Research
des# and )rivate Client 0roup at 1um"ai
!'T* in "ro#ing crosses Rs 2344 mn
Ran#ed
5
no 6in ()* and in 1utual fund distri"ution
in 7448942
') accounts e.ceed :24444
Bro#ing accounts e.ceed 774444 (retail)
;'1
<
mem"ership o"tained
Branches = 2>3?
Commenced commodity and insurance "ro#ing
operations
!'T* in "ro#ing crosses Rs 2344 mn
Ran#ed
5
no 6in ()* and in 1utual fund distri"ution
in 7448942
') accounts e.ceed :24444
Bro#ing accounts e.ceed 774444 (retail)
;'1
<
mem"ership o"tained
Branches = 2>3?
Commenced commodity and insurance "ro#ing
operations
$ - Depository business
# - Wholesale Debt Market segment on the NSE
@ - by number of applications mobilised
- !igh Net"orth #ndi$idual segment
- !yderabad Stock E%change
relationshi!s that Com!any ha&e create" in the re$istry usiness, ,ar&y elie&e
that they )ere est !ositione" to &enture into this acti&ity as a De!ository
Partici!ant. ,ar&y )ere one of the early entrants re$istere" as De!ository
Partici!ant )ith 8SD7 =8ational Securities De!ository 7imite">, the first
De!ository in the country an" then )ith CDS7 =Central De!ository Ser&ices
7imite">. To"ay, ,ar&y ser&ice o&er 1 la(hs customer accounts in this usiness
s!rea" across o&er -0/ citiesHto)ns in In"ia an" are ran(e" amon$st the lar$est
De!ository Partici!ants in the country. With a $ro)in$ secon"ary mar(et
!resence, they ha&e transferre" this usiness to ,ar&y Stoc( Bro(in$ 7imite"
=,SB7>, their associate an" a memer of 8S9, BS9 an" 2S9.
The cor!orate )esite of the com!any, I))).(ar&y.comE, $i&es access to in-
"e!th information on financial matters inclu"in$ Mutual 5un"s, IPOs, 5i*e"
Income Schemes, Insurance, Stoc( Mar(et an" much more. . lin( calle"
W%esource Center?, "e&ote" solely to research con"ucte" y team of e*!erts on
&arious financial as!ects li(e WSector %esearch?, "eals e*clusi&ely )ith in-"e!th
analysis of the (ey sectors of the In"ian economy. Besi"es, a host of other lin(s
li(e WMy Portfolio? )hich acts as a !ersonali<e" an" customi<e" financial
measure, ma(es this site e*tremely informati&e aout in&estment o!tions,
mar(et tren"s, ne)s an" also aout our their com!any an" each of the ser&ices
offere" here.
034 KARVH STOCK ;ROKIN9 LIMITED
,ar&y Stoc( Bro(in$ 7imite", one of the cornerstones of the ,ar&y e"ifice,
flo)s freely to)ar"s attainin$ "i&erse $oals of the customer throu$h &arie"
ser&ices. Creatin$ a !lethora of o!!ortunities for the customer y o!enin$ u!
in&estment &istas ac(e" y research-ase" a"&isory ser&ices. 2ere, $ro)th
(no)s no limits an" success reco$ni<es no oun"aries. 2el!in$ the customer
create )a&es in his !ortfolio an" em!o)erin$ the in&estor com!letely is the
ultimate $oal.
,ar&y is a Memer of 8ational Stoc( 9*chan$e =8S9>, The Bomay Stoc(
9*chan$e =BS9>, an" The 2y"eraa" Stoc( 9*chan$e =2S9>.
- 4B -
0D4 KARVH INVESTORS SERVICES LIMITED
M"rchan% ;ankin$6 %eco$ni<e" as a lea"in$ merchant an(er in the country,
,ar&y are re$istere" )ith S9BI as a Cate$ory I merchant an(er. This
re!utation )as uilt y ca!itali<in$ on o!!ortunities in cor!orate
consoli"ations, mer$ers an" ac+uisitions an" cor!orate restructurin$, )hich
ha&e earne" us the re!utation of a merchant an(er. %aisin$ resources for
cor!orate or 'o&ernment An"erta(in$ successfully o&er the !ast t)o "eca"es
ha&e $i&en us the confi"ence to rene) com!any focus in this sector.
,ar&y +uality !rofessional team an" their )or(-oriente" "e"ication ha&e
!ro!elle" com!any to offer &alue-a""e" cor!orate financial ser&ices an" act as
a !rofessional na&i$ator for lon$ term $ro)th of com!anies clients, )hich
inclu"es lea"in$ cor!orate, State 'o&ernments, forei$n institutional in&estors,
!ulic an" !ri&ate sector com!anies an" an(s, in In"ian an" $loal mar(ets.
,ar&y financial a"&ice an" assistance in restructurin$, "i&estitures,
ac+uisitions, "e-mer$ers, s!in-offs, #oint &entures, !ri&ati<ation an" ta(eo&er
"efense mechanisms ha&e ele&ate" com!any relationshi! )ith the client to one
ase" on unsha(ale trust an" confi"ence.
0C4 KARVH COMP8TERSHARE PVT' LIMITED
,ar&y ha&e tra&erse" )i"e s!aces to tie u! )ith the )orl"?s lar$est transfer
a$ent, the lea"in$ A)s%ra!ian com(an<1 Com()%"rshar" Limi%"#' The
com!any that ser&ices more than B0 million sharehol"ers across B/// cor!orate
clients an" ma(es its !resence felt in o&er 1- countries across 0 continents has
entere" into a 0/-0/ #oint &enture )ith ,.%:;.
M)%)a! -)n# S"r*ic"s
,ar&y ha&e attaine" a !osition of immense stren$th as a !ro&i"er of across-the-
oar" transfer a$ency ser&ices to .MCs, Distriutors an" In&estors.
- 4C -
8early @/Q of the to!-notch .MCs inclu"in$ !resti$ious clients li(e Deutsche
.MC an" ATI s)ear y the +uality an" ran$e of ser&ices that com!any offer.
Besi"es !ro&i"in$ the entire ac( office !rocessin$, ,ar&y !ro&i"e the lin(
et)een &arious Mutual 5un"s an" the in&estor, inclu"in$ ser&ices to the
"istriutor, the !rime channel in this o!eration.
With an e*!erience of han"lin$ o&er B// issues, ,ar&y to"ay, has the aility to
e*ecute &oluminous transactions an" har"-core e*!ertise in technolo$y
a!!lications ha&e $aine" com!any the 8o.1 slot in the usiness. Kar*< is %h"
/irs% R"$is%r< Com(an< %o r"c"i*" ISO I@@3 c"r%i/ica%ion in In#ia that
stan"s testimony to its stature
Cor(ora%" Shar"ho!#"r S"r*ic"s
,ar&y has een a customer centric com!any since its ince!tion. ,ar&y offers a
sin$le !latform ser&icin$ multi!le financial instruments in its i" to offer
com!lete financial solutions to the &aryin$ nee"s of oth cor!orate an" retail
in&estors )here an e*tensi&e ran$e of ser&ices are !ro&i"e" )ith $reat &olume-
mana$ement ca!aility.
To"ay, ,ar&y is reco$ni<e" as a com!any that can e*cee" customer
e*!ectations )hich is the reason for the loyalty of customers to)ar"s ,ar&y for
all his financial nee"s. .n o!inion !oll commissione" y IThe Merchant
Ban(er A!"ateE an" con"ucte" y the re!ute" mark"% r"s"arch a$"nc<1
MAR9 r"*"a!"# %ha% Kar*< as consi#"r"# %h" Mos% A#mir"# in %h"
r"$is%rar ca%"$or< amon$ financial ser&ices com!anies.
0B4 KARVH 9LO;AL SERVICES LIMITED
The s!ecialist Business Process Outsourcin$ unit of the ,ar&y 'rou!. The
le$acy of e*!ertise an" e*!erience in financial ser&ices of the ,ar&y 'rou!
ser&es us )ell as com!any enter the $loal arena )ith the confi"ence of ein$
ale to "eli&er an" "eli&er )ell.
2ere com!any offer se&eral "eli&ery mo"els on the un"erstan"in$ that usiness
nee"s are uni+ue an" therefore only a customi<e" ser&ice coul" !ossily fit the
- 4D -
ill. ,.%:; ser&ice matri* has !ermutations an" cominations that create
se&eral o!tions to choose from.
,.%:; is in re-en$ineerin$ an" mana$in$ !rocesses or "eli&erin$ ne)
efficiencies, com!any?s ser&ice meets u! to the most strin$ent of international
stan"ar"s. Their outsourcin$ mo"els are "esi$ne" for the $loal customer an"
are ac(e" y soun" cor!orate an" o!erations !hiloso!hies, an" "omain
e*!ertise. Pro&i"in$ !ro"ucti&ity im!ro&ements, o!erational cost control, cost
sa&in$s, im!ro&e" accountaility an" a )hole $amut of other a"&anta$es.
,.%:; o!erate in the core mar(et se$ments that ha&e emer$in$ re+uirements
for s!eciali<e" ser&ices. Their )i"e &ertical mar(et co&era$e inclu"es Ban(in$,
5inancial an" Insurance Ser&ices =B5IS>, %etail an" Merchan"isin$, 7eisure
an" 9ntertainment, 9ner$y an" Atility an" 2ealthcare.
024 KARVH COMMODITIES ;ROKIN9 LIMITED
.t ,ar&y Commo"ities, they are focuse" on ta(in$ commo"ities tra"in$ to ne)
"imensions of reliaility an" !rofitaility. They ha&e ma"e commo"ities
tra"in$, an essentially a$e-ol" !ractice, into a so!histicate" an" scientific
in&estment o!tion.
Com!any enales tra"e in all $oo"s an" !ro"ucts of a$ricultural an" mineral
ori$in that inclu"e lucrati&e commo"ities li(e $ol" an" sil&er an" !o!ular items
li(e oil, !ulses an" cotton throu$h a )ell-systemati<e" tra"in$ !latform.
The technolo$ical an" infrastructural stren$ths an" es!ecially the street-smart
s(ills ma(e them an i"eal ro(er. Their ser&ice matri* is holistic )ith a $amut
of a"&anta$es, the first an" foremost ein$ their le$acy of human resources,
technolo$y an" infrastructure that comes from ein$ !art of the ,ar&y 'rou!.
Their )i"e national net)or(, s!annin$ the len$th an" rea"th of In"ia, further
su!!orts these a"&anta$es. %e$ular tra"in$ )or(sho!s an" seminars are
con"ucte" to hone tra"in$ strate$ies to !erfection. 9&ery mo&e ma"e is a
calculate" one, ase" on reliale research that is con&erte" into &aluale
- @/ -
information throu$h "aily, )ee(ly an" monthly ne)sletters, calls an" intra"ay
alerts. 5urther, !ersonali<e" ser&ice is !ro&i"e" here y a "e"icate" team
committe" to $i&in$ hassle-free ser&ice )hile the ro(era$e rates offere" are
e*tremely com!etiti&e.
,ar&y?s commitment to e*cel in this sector stems from the immense
im!ortance that commo"ity ro(in$ has to a cross-section of in&estors 6 "ashO
farmers, e*!orters, im!orters, manufacturers an" the 'o&ernment of In"ia
itself.
0E4KARVH INS8RANCE ;ROKIN9 PRIVATE LIMITED
.t ,ar&y Insurance Bro(in$ P&t. 7t"., they !ro&i"e oth life an" non-life
insurance !ro"ucts to retail in"i&i"uals, hi$h net-)orth clients an" cor!orate.
With the o!enin$ u! of the insurance sector an" )ith a lar$e numer of !ri&ate
!layers in the usiness, they are in a !osition to !ro&i"e tailor ma"e !olicies for
"ifferent se$ments of customers. In their #ourney to emer$e as a !ersonal
finance a"&isor, they )ill e etter !ositione" to le&era$e their relationshi!s
)ith the !ro"uct !ro&i"ers an" !lace the re+uirements of their customers
a!!ro!riately )ith the !ro"uct !ro&i"ers. &i%h In#ian mark"%s s""in$ a s"a
chan$"1 ,o%h in %"rms o/ in*"s%m"n% (a%%"rn an# a%%i%)#" o/ in*"s%ors1
ins)ranc" is no mor" s""n as on!< a %a: sa*in$ (ro#)c% ,)% a!so as an
in*"s%m"n% (ro#)c%. By settin$ u! a se!arate entity, )e )oul" e !ositione" to
!ro&i"e the est of the !ro"ucts a&ailale in this usiness to their customers.
,.%:; ha&e )i"e national net)or(, s!annin$ the len$th an" rea"th of In"ia,
further su!!orts these a"&anta$es. 5urther, !ersonali<e" ser&ice is !ro&i"e"
here y a "e"icate" team committe" in $i&in$ hassle-free ser&ice to the clients.
KARVH A!!ianc"s
,ar&y Com!utershare Pri&ate 7imite" is a 0/:0/ #oint &enture of ,ar&y
Consultants 7imite" an" Com!utershare 7imite", .ustralia. Com!utershare
7imite" is )orl"Xs lar$est -- an" only $loal -- share re$istry, an" a lea"in$
financial mar(et ser&ices !ro&i"er to the $loal securities in"ustry.
- @1 -
The #oint &enture )ith Com!utershare, rec(one" as the lar$est re$istrar in the
)orl", ser&icin$ o&er 1/ million sharehol"er accounts for o&er B,///
cor!orations across ele&en countries s!rea" across fi&e continents.
Com!utershare mana$es more than B/ million sharehol"er accounts for o&er
14,/// cor!orations aroun" the )orl".
,ar&y Com!utershare Pri&ate 7imite", to"ay, is In"iaXs lar$est %e$istrar an"
Share Transfer .$ent ser&icin$ o&er 4// cor!orate an" mutual fun"s an" 11
million in&estors.
J)a!i%< Po!ic<
To achie&e an" retain lea"ershi!, ,ar&y shall aim for com!lete customer
satisfaction, y cominin$ its human an" technolo$ical resources, to !ro&i"e
su!erior +uality financial ser&ices. In the !rocess, ,ar&y )ill stri&e to
e*cee" CustomerXs e*!ectations.
6%ality (!5ectives
.s !er the Juality Policy, ,ar&y )ill:
Buil" in-house !rocesses that )ill ensure trans!arent an" harmonious
relationshi!s )ith its clients an" in&estors to !ro&i"e hi$h +uality of ser&ices.
9stalish a !artner relationshi! )ith its in&estor ser&ice a$ents an" &en"ors that
)ill hel! in (ee!in$ u! its commitments to the customers.
- @- -
Pro&i"e hi$h +uality of )or( life for all its em!loyees an" e+ui! them )ith
a"e+uate (no)le"$e 6 s(ills so as to res!on" to customerXs nee"s.
Continue to u!hol" the &alues of honesty 6 inte$rity an" stri&e to estalish
un!arallele" stan"ar"s in usiness ethics.
Ase state-of-the art information technolo$y in "e&elo!in$ ne) an" inno&ati&e
financial !ro"ucts an" ser&ices to meet the chan$in$ nee"s of in&estors an"
clients.
Stri&e to e a reliale source of &alue-a""e" financial !ro"ucts an" ser&ices an"
constantly $ui"e the in"i&i"uals an" institutions in ma(in$ a #u"icious choice of
same.
Stri&e to (ee! all sta(e-hol"ers =sharehol"ers, clients, in&estors, em!loyees,
su!!liers an" re$ulatory authorities> !rou" an" satisfie".
Achi"*"m"n%s
.mon$ the to! 4 stoc( ro(ers in In"ia =@Q of 8S9 &olumes>
- @4 -
In"iaXs 8o. 1 %e$istrar 6 Securities Transfer .$ents
To! most De!ository Partici!ants
7ar$est 8et)or( of Branches 6 Business .ssociates
ISO D//- certifie" o!erations y D8:
.mon$ to! 1/ In&estment an(ers
7ar$est Distriutor of 5inancial Pro"ucts
."#u"$e" as one of the to! 0/ IT uses in In"ia y MIS .sia
5ull 5le"$e" IT "ri&en o!erations
Pro5ect Design,
METHODOLO9H 8SED
- @@ -
- 5irst of all the theoretical (no)le"$e )as $aine" form oo(s an"
ma$a<ines.
- Secon"ary "ata )as use" for analysis.
- The !rescrie" !ricin$ mo"els for the 56O Se$ment )as use".
- The "aily turno&er in the 56O Se$ment an" the &olatility )as consi"ere".
- Practically, scri!s tra"e" on the In"ian stoc( e*chan$es )ere ta(en to
stu"y the oo(ish strate$ies.

SO8RCES O- DATA

- The secon"ary "ata )as $aine" from IBha& co!yE )hich is a&ailale on a
"aily asis on the 8S9?s )esite.
- Se&eral te*t material, internet sites an" research !a!ers )ere use" to stu"y
the &arious strate$ies.
TOOLS 8SED -OR ANALHSIS
- Pricin$ mo"els such as Binomial Pricin$, Blac( 6 Scholes Mo"el etc.
- 'ra!hical metho"s usin$ Microsoft 9*cel.
LIMITATIONS O- THE PROJECT
- Time constraint )as a ma#or limitin$ factor. Si*ty "ays )ere insufficient
to e&en $ras! the theoretical conce!ts.
- Se&eral other strate$ies that coul" ha&e een stu"ie" )ere not "one.
- 7ac( of (no)le"$e )ith the ro(ers.
- Difference of theory from !ractice.
- .sence of re+uire" (no)le"$e an" technolo$y.
-8T8RES
- @0 -
.s the futures contract a!!roaches e*!iry, the cost of carry re"uces as time to
e*!iry re"ucesO thus futures an" cash !rices start con&er$in$. On e*!iry "ay,
the futures !rice shoul" e+ual cash mar(et !rice.
;ou can "o "irectional tra"in$ usin$ futures. In case you are ullish on the
un"erlyin$ stoc( or in"e*, you can sim!ly uy futures on stoc(Hin"e*. Similarly
if you are earish o the un"erlyin$, you can sell futures on stoc(Hin"e*.
The i$$est a"&anta$e of futures is that you can short sell )ithout ha&in$ stoc(
an" you can carry your !osition for a lon$ time, )hich is not !ossile in the
cash se$ment ecause of rollin$ settlement. Con&ersely you can uy futures an"
carry the !osition for a lon$ time )ithout ta(in$ "eli&ery unli(e in the cash
se$ment )here you ha&e to ta(e "eli&ery ecause of rollin$ settlement
S&APS
Counter Parties +arket Scenario
5i*e" 5loatin$
Com!any . 1-Q 7IBO%
Com!any B 1@Q 7IBO%L1Q
- @1 -
'oo" case for oth com!any?s to enter into s)a! to share comparative
advantage,
Com!any . a"&anta$e in oth mar(ets. 2o)e&er, if )e )ere ta(e the
com!arati&e a"&anta$e in to consi"eration, the com!any . )hich re+uires
floatin$ rate fun"in$, has a com!arati&e in fi*e" rate mar(et since interest
"ifferentiate" is -Q o&er com!any B.
7i(e)ise Com!any B, )hich see(s fi*e" rate fun"in$, has com!arati&e
a"&anta$e in a floatin$ rate mar(et as the interest "ifferentiate" )hen com!are"
to . is only 1Q.
8o) if Com!any . ta!s the fi*e" rate mar(et an" Com!any B $oes in to
floatin$ rate mar(et, the total enefit to e share" y oth com!any?s )oul" e
1Q i.e. --1K1Q et)een them.
Both com!anies therefore enter into a s)a! "irectly let us "ra) a fi$ure of this
transaction:-
If oth co?s come to$ether "irectly an" e*chan$e cash flo)s, the total
in"i&i"ual cost to each Co? )oul" e as follo)s:-
N"% Cos% To Co'A N"% Cos% To Co';
Inflo):1-.0Q Inflo): 1 Months 7IBO%
Outflo):1 Months 7IBO%L1-Q Outflo):1Months 7IBO%L
- @B -
1QL1-.0Q
8et CostK1 Months 7IBO%- 8et CostK14.0Q
/.0Q=i.e. Su 7IBO%>
Therefore, the net com!arati&e a"&anta$e of 1Q has een share" e+ually.
OPTIONS 9REEK AND STRATE9IES
.s the s!ot !rice rises ao&e the stri(e !rice, the o!tion ecomes in the money
an" its intrinsic &alue increases ut its time &alue "ecreases. In the same )ay as
the s!ot !rice falls elo) the stri(e !rice, the o!tion ecomes out of the money
an" its intrinsic &alue ecomes <ero )hile its time &alue "ecreases.
The uyers of lon$er maturity o!tions en#oy the ri$ht to lon$er "uration an" the
sellers are su#ect to ris( of !rice mo&ement of the un"erlyin$ "urin$ a lon$er
term.
.s the ris(-free rate of interest increases, the !rice of call o!tions increases an"
that of !ut o!tion "ecreases an" &ice-&ersa.
- @C -
.s the s!ot !rice of the un"erlyin$ rises, the &alue of the call o!tion increases
an" that of !ut o!tion "ecreases. .s the s!ot !rice of the un"erlyin$ falls, the
!rice of the call o!tion "ecreases an" that of the !ut o!tion increases.
Since the ris( of the uyer of an o!tion is limite" to the !remium !ai", there is
no mar$in re+uire" from the uyer of the o!tion. The uyer?s cost is limite" to
the !remium !ai". The ris( of the o!tion seller is unlimite" an" therefore he
nee"s to !ay the mar$in as !rescrie" y the e*chan$e at the time of enterin$
into an o!tion contract. To re"uce the "efault ris(, the o!tion !osition of the
seller is mar(e" to mar(et e&ery "ay.
DELTA
5or a $i&en !rice of un"erlyin$, ris(-free interest rate , stri(e !rice, time to
maturity an" &olatility, the "elta of an o!tion is a theoretical numer. If any of
the ao&e factors chan$es, the &alue of "elta also chan$es. Delta can e
com!ute" usin$ the o!tion calculator. The "elta of an o!tion tells you y ho)
much the !remium of the o!tion )oul" increase or "ecrease for a unit chan$e in
the !rice of the un"erlyin$. 5or e*am!le, for an o!tion )ith "elta of /.0, the
!remium of the o!tion )oul" chan$e y 0/ !aisa for a %s1 chan$e in the !rice
of the un"erlyin$. Delta is aout /.0 for nearHat the-money o!tions. .s the
o!tion ecomes in the money, the &alue of "elta increases. Con&ersely as the
o!tion ecomes out of the money, the &alue of "elta "ecreases. In other )or"s,
"elta measures the sensiti&ity of o!tions )ith res!ect to chan$e in the !rice of
the un"erlyin$. Dee! out-of-the-money o!tions are less sensiti&e in com!arison
to at-the-money an" "ee! in-the-money o!tions.
Delta is !ositi&e for a ullish !osition =lon$ call an" short !ut> as the &alue of
the !osition increases )ith rise in the !rice of the un"erlyin$. Delta is ne$ati&e
for a earish !osition =short call an" lon$ !ut> as the &alue of the !osition
"ecreases )ith rise in the !rice of the un"erlyin$. Delta &aries from / to 1 for
call o!tions an" from -1 to / for !ut o!tions. Some !eo!le refer to "elta as / to
- @D -
1 fro call o!tions an" from -1 to / for !ut o!tions. Some !eo!le refer to "elta as
/ to 1// numers. The Delta is an im!ortant !iece of information for a o!tion
Buyer ecause it can tell him much of an o!tion 6 uyer he can e*!ect for
short-term mo&es y the un"erlyin$ stoc(. This can hel! the Buyer of an o!tion
)hich callHPut o!tion shoul" e ou$ht. The factors )hich can chan$e the Delta
of an o!tion are Stoc( Price, :olatility 6 8o. of Days.

THETA
The theta of an o!tion is an e*tremely si$nificant theoretical numer for an
o!tion tra"er. 7i(e the other 'ree( terms you can calculate theta usin$ o!tion
calculator. Theta tells you ho) much &alue the o!tion )oul" lose after one "ay,
)ith all the other !arameters remainin$ the same. Su!!ose the theta of Infosys
4/-"ay call o!tion )ith a stri(e !rice of %s4,D// is @.0 )hen Infosys is +uotin$
at %s4,D//, &olatility remain the same an" one "ay !asses, the &alue of this
o!tion )oul" re"uce y %s@.0.
Theta is al)ays ne$ati&e for the uyer of an o!tion, as the &alue of the o!tion
$oes "o)n each "ay if his &ie) is not reali<e". Con&ersely theta is al)ays
!ositi&e for the seller of an o!tion, as the &alue of the !osition of the seller
increases as the &alue of the o!tion $oes "o)n )ith time. Consi"er o!tions as
- 0/ -
"e!reciatin$ assets ecause of time "ecay an" a!!reciatin$ "ue to fa&orale
!rice mo&ements. If the rate of a!!reciation is more than that of "e!reciation
hol" the o!tion, else sell it off. 5urther, time "ecay of o!tion !remium is &ery
stee! near e*!iry of the o!tion. The follo)in$ $ra!h )oul" ma(e it clearer.


VE9A
:e$a is also a theoretical numer that can e calculate" usin$ an o!tion
calculator for a $i&en set of &alues of un"erlyin$ !rices, time to e*!iry, stri(e
!rice, &olatility an" interest rate etc. :e$a in"icates ho) much the o!tion
!remium )oul" chan$e for a unit chan$e in annual &olatility of the un"erlyin$.
Su!!ose the :e$a of an o!tion is /.1 an" its !remium is %s10 )hen &olatility of
the un"erlyin$ is 40Q. .s the &olatility increases to 41Q the !remium of the
o!tion )oul" chan$e u!)ar" to %s10.1. :e$a is !ositi&e for a lon$ !osition
=lon$ call an" lon$ !ut> an" ne$ati&e for a short !osition =short call an" short
!ut>. Sim!ly !ut, for the uyer it is a"&anta$eous if the &olatility increases after
he has ou$ht the o!tion. On the other han", for the seller any increase in
&olatility is "an$erous as the !roaility of his o!tion $ettin$ in the money
increases )ith any rise in &olatility. Sometimes you mi$ht ha&e oser&e" that
thou$h se&en to ten "ay ha&e !asse" after you ou$ht an o!tion, the un"erlyin$
- 01 -
!rice is almost in the same ran$e )hile the !remium of the o!tion has
increase". This clearly in"icates that &olatility of the un"erlyin$ mi$ht ha&e
increase".

9AMMA
'amma is a so!histicate" conce!t. ;ou nee" !atience to un"erstan" it as it is
im!ortant too. 7i(e "elta, the $amma of an o!tion is a theoretical numer.
5ee"in$ the !rice of un"erlyin$, ris(-free interest rate, stri(e !rice, time to
maturity an" &olatility, you can com!ute &alue of $amma usin$ the o!tion
calculator. The $amma of an o!tion tells you ho) much the "elta of an o!tion
)oul" increase or "ecrease for a unit chan$e in the !rice of the un"erlyin$. 5or
e*am!le, assume the $amma of an o!tion is /./@ an" is "elta is /.0. 5or a unit
chan$e in the !rice of the un"erlyin$, the "elta of the o!tion )oul" chan$e to
/.0L/./@K/.0@. The ne) "elta of the o!tion at chan$e" un"erlyin$ !rice is /.0@O
so the rate of chan$e in the !remium has increase". If I )ere to e*!lain in &ery
sim!le terms: if "elta is &elocity, then $amma is acceleration. Delta tells you
ho) much the !remium )oul" chan$eO $amma chan$es "elta an" tells you ho)
much the ne*t !remium chan$e )oul" e for a unit !rice chan$e in the !rice of
the un"erlyin$. 'amma is !ositi&e for lon$ !ositions =lon$ call an" lon$ !ut>
an" ne$ati&e for short !ositions =short call an" short !ut>. 'amma "oes not
matter much for o!tions )ith lon$ maturity. 2o)e&er for o!tions )ith short
maturity, $amma is hi$h an" the &alue of the o!tions chan$es &ery fast )ith
s)in$s in the un"erlyin$ !rices.

LON9 CALL
- 0- -
When you are &ery ullish on the mar(et as a )hole, uy a call o!tion o in"ices
=8iftyHSense*>.
When you are &ery ullish on a !articular stoc(, uy a call o!tion o that stoc(.
The more ullish you are, the more out of the money =hi$her stri(e !rice>
shoul" e the o!tion you ye. 8o other !osition $i&es you as much le&era$e"
a"&anta$e in a risin$ mar(et )ith limite" "o)nsi"e.
8(si#" (o%"n%ia!+ The !rice of the o!tion increases as the !rice of the
un"erlyin$ rises. ;ou can oo( !rofit y sellin$ the same o!tion at hi$her !rice
)hene&er you thin( that the un"erlyin$ !rice has come to the le&el you
e*!ecte". .t e*!iration the rea(-e&en un"erlyin$ !rice is the stri(e !rice !lus
!remium !ai" for uyin$ the o!tion.
Donsi#" risk+ ;our loss is limite" to the !remium you ha&e !ai". The
ma*imum you can lose is the !remium, if the un"erlyin$ !rice is elo) the
stri(e !rice at e*!iry of the o!tion.
- 04 -
Tim" #"ca< charac%"ris%ic+ O!tion are )astin$ assets in the han"s of a uyer.
.s time !asses, the &alue of the !osition ero"es. If &olatility increases, erosion
slo)s "o)nO if &olatility "ecreases, erosion hastens.
SHORT CALL
When you firmly elie&e that the un"erlyin$ is not $oin$ to rise, sell a call
o!tion. When you firmly elie&e that in"e* =8iftyHSense*> is not $oin$ to rise,
sell a call o!tion on in"e*. When you firmly elie&e that a !articular stoc( is
not $oin$ to rise, sell call o!tion on that stoc(. Sell out-of-the-money =hi$her
stri(e !rice> o!tions if you are only some)hat con&ince"O sell at-the-money
o!tions if you are &ery confi"ent that the un"erlyin$ )oul" remain at the
current le&el or fall.
8(si#" (o%"n%ia!+ your !rofit is limite" to the !remium recei&e". .t e*!iration
the rea(-e&en is stri(e !rice !lus !remium. Ma*imum !rofit is reali<e" if the
un"erlyin$ !rice is elo) the stri(e !rice.
Donsi#" risk+the !rice of the o!tion increases as the un"erlyin$ rises. ;ou
can cut your losses y uyin$ the same o!tion if you thin( that your &ie) is
- 0@ -
$oin$ )ron$. 7osses (ee! on increasin$ as the un"erlyin$ rises an" are
&irtually unlimite". Such a !osition must e monitore" closely.
Tim" #"ca< charac%"ris%ic+ o!tions are $ro)in$ assets in the han"s of a seller.
.s time !asses, the &alue of !osition increases as the o!tion loses its time &alue.
;ou $et ma*imum !rofit if the o!tion is at the money.
LON9 P8T
When you are &ery earish, uy a !ut o!tion. When you are &ery earish on the
mar(et as a )hole, uy !ut o!tion on in"ices=8iftyHSense*>.
When you are &ery earish on a !articular stoc(, uy !ut o!tion on that stoc(.
The more earish you are, the more out of the money =lo)er stri(e !rice>
shoul" e the o!tion you uy. 8o other !osition $i&es you as much le&era$e"
a"&anta$e in a fallin$ mar(et )ith limite" "o)nsi"e.
8(si#" (o%"n%ia!+ the !rice of the o!tion increases as the !rice of the
un"erlyin$ falls. ;ou can s+uare u! your !osition y sellin$ the same o!tion at
a hi$her !rice )hene&er you thin( that the un"erlyin$ !rice has come to the
le&el you e*!ecte". .t e*!iration the rea(-e&en un"erlyin$ !rice is the stri(e
!rice minus !remium !ai" for uyin$ the o!tion.
- 00 -
Donsi#" risk+ your loss is limite" to eh !remium you ha&e !ai". The
ma*imum you can lose is the !remium, if the un"erlyin$ !rice is ao&e the
stri(e !rice at e*!iry of the o!tion.
Tim" #"ca< charac%"ris%ic+ o!tions are )astin$ assets in the han"s of a uyer.
.s time !asses, the &alue of the !osition ero"es. If the &olatility increases,
erosion slo)sO if the &olatility "ecreases, erosion hastens.
S3(RT PUT
When you firmly elie&e that the un"erlyin$ is not $oin$ to fall, sell a !ut
o!tion.
When you firmly elie&e that in"e* =8iftyHSense*> is not $oin$ to fall, sell a
!ut o!tion on the in"e*.
When you firmly elie&e that a !articular stoc( is not $oin$ to fall, sell !ut
o!tion on that stoc(. Sell out-of-the-money =lo)er stri(e !rice> o!tions if you
are only some)hat con&ince"O sell at-the-money o!tions if you are &ery
confi"ent that the un"erlyin$ )oul" remain at the current le&el or rise.
- 01 -
8(si#" (o%"n%ia!+ your !rofit is limite" to the !remium recei&e". .t e*!iration
the rea(-e&en is stri(e !rice minus !remium. Ma*imum !rofit is reali<e" if the
un"erlyin$ !rice is ao&e the stri(e !rice.
Donsi#" risk+ the !rice of the o!tion increases as the un"erlyin$ falls. ;ou
can cut your losses y uyin$ the same o!tion if you thin( that your &ie) is
$oin$ to e )ron$. 7osses (ee! on increasin$ as the un"erlyin$ falls an" are
&irtually unlimite". Such a !osition must e monitore" closely.
Tim" #"ca< charac%"ris%ic+ o!tions are $ro)in$ assets in the han"s of a seller.
.s time !asses, the &alue of the !osition increases as the o!tion loses its time
&alue. Ma*imum !rofit is reali<e" if the o!tion is at the money.
;8LL SPREAD
When you thin( the un"erlyin$ in"e* or stoc( )ill $o u! some)hat or is at
least more li(ely to rise than fall, -ull Spread is the est strate$y.
S%ra%"$< im(!"m"n%a%ion+ a call o!tion is ou$ht )ith a lo)er stri(e !rice an"
another call o!tion is sol" )ith a hi$her stri(e !rice, !ro"ucin$ a net initial
"eit. Or a !ut o!tion is ou$ht )ith a lo)er stri(e !rice an" another !ut sol"
)ith a hi$her stri(e !rice, !ro"ucin$ a net initial cre"it.
- 0B -
8(si#" (o%"n%ia!+ !rofit is limite".
Calls: "ifference et)een stri(es minus initial "eit.
Puts: net initial cre"it.
Ma*imum !rofit if un"erlyin$ !rice at e*!iry is ao&e the hi$her stri(e.
Donsi#" risk+ loss is limite".
Calls: net initial "eit.
Puts: "ifference et)een stri(es minus initial cre"it
Ma*imum loss if the un"erlyin$ !rice at e*!iry is elo) the lo)er stri(e
Tim" #"ca< charac%"ris%ic+ time &alue erosion is not too si$nificant ecause of
alance" !osition.

;EAR SPREAD
When you thin( the un"erlyin$ in"e* or stoc( )ill $o "o)n some)hat or is at
least more li(ely to fall than rise, -ear Spread is the est strate$y.*
S%ra%"$< im(!"m"n%a%ion+ a call o!tion is sol" )ith a lo)er stri(e !rice an"
another call o!tion is ou$ht )ith a hi$her stri(e !rice, !ro"ucin$ a net initial
- 0C -
cre"it or a !ut o!tion is sol" )ith a lo)er stri(e !rice an" another !ut ou$ht
)ith a hi$her stri(e, !ro"ucin$ a net initial "eit.
8(si#" (o%"n%ia!+ !rofit is limite".
Calls: net initial cre"it.
Puts: "ifference et)een stri(es minus initial "eit.
Ma*imum !rofit if the mar(et is elo) the lo)er stri(e at e*!iry.
Donsi#" risk+ !rofit is limite".
Calls: "ifference et)een stri(es minus initial cre"it.
Puts: net initial "eit.
Ma*imum loss if the mar(et is ao&e the hi$her stri(e at e*!iry.
Tim" #"ca< charac%"ris%ic+ time &alue erosion is not too si$nificant ecause of
alance" !ositions.
- 0D -
LON9 STRADDLE
When you thin( the un"erlyin$ in"e* or stoc( )ill rise or all shar!ly ut are not
sure of the "irection, .ong Straddle is the est strate$y.
S%ra%"$< im(!"m"n%a%ion+ uy a call an" !ut o!tion )ith the same stri(e !rice.
'enerally at-the-money stri(e !rice is !referre".
8(si#" (o%"n%ia!+ the !rofit is unlimite" if the un"erlyin$ mo&es shar!ly in
either "irection. 7o)er !oint of rea(-e&en is the stri(e !rice minus the
!remium !ai" for uyin$ oth the o!tions. 2i$her !oint of rea(-e&en is the
stri(e !rice !lus !remium !ai".
Donsi#" risk+ the loss is limite" to the e*tent of !remium !ai". Ma*imum
loss occurs if the un"erlyin$ !rice is e*actly at the stri(e !rice le&el at e*!iry of
the o!tions.
- 1/ -
Tim" #"ca< charac%"ris%ic+ as oth the lon$ o!tions are at the money, the rate
of time &alue erosion ecomes &ery hi$h as the o!tions a!!roach maturity.
Such !ositions are rarely hel" till e*!iry if the &ie) is not reali<e".
LON9 STRAN9LE
When you thin( the un"erlyin$ in"e* or stoc( )ill rise or fall in a i$ )ay ut
are not sure of the "irection, .ong Strangle is the est strate$y.
S%ra%"$< im(!"m"n%a%ion+ uy out-of-the-money call an" !ut o!tions.
8(si#" (o%"n%ia!+ the !rofit is unlimite" f the un"erlyin$ mo&es sustantially
in either "irection. 7o)er !oint of rea(-e&en is the lo)er stri(e !rice minus
!remium !ai" for uyin$ oth the o!tions. 2i$her !oint of rea(-e&en is the
hi$her stri(e !rice !lus !remium !ai".
- 11 -
Donsi#" risk+ this occurs if the un"erlyin$ !rice is et)een the lo)er an"
hi$her stri(e !rice at e*!iry of the o!tions.
Tim" #"ca< charac%"ris%ic+ time &alue erosion "ecreases the &alue of the
!osition as time !asses. Such !ositions are rarely hel" till e*!iry if the &ie) is
not reali<e".
SHORT STADDLE
When you thin( the un"erlyin$ in"e* or stoc( )ill fluctuate in a narro) ran$e
an" neither rise nor fall, Short Straddle is the est strate$y.
S%ra%"$< im(!"m"n%a%ion+ sell a call an" !ut o!tion )ith the same stri(e !rice.
'enerally at-the-money stri(e !rice is !referre".
- 1- -
8(si#" (o%"n%ia!+ the !rofit is limite" to the e*tent of the !remium recei&e".
Ma*imum !rofit is reali<e" if the un"erlyin$ !rice is e*actly at the stri(e !rice
at e*!iry of the o!tions.
Donsi#" risk+ the loss is unlimite" if the un"erlyin$ mo&es shar!ly in either
"irection. 7o)er rea(-e&en !oint is stri(e !rice minus !remium recei&e".
2i$her rea(-e&en !oint is stri(e !rice !lus the !remium recei&e". Such
!ositions must e monitore" closely. It is !ru"ent to s+uare u! the !osition at
close of the e*!iry.
Tim" #"ca< charac%"ris%ic+ as oth short o!tions are at the money, the
!ositions increases in &alue as time !asses ecause time &alue erosion ecomes
&ery hi$h as the o!tions a!!roach maturity.

SHORT STRAN9LE
When you thin( the un"erlyin$ in"e* or stoc( )ill fluctuate in a roa"er ran$e,
Short Strangle is the est strate$y.S%ra%"$< im(!"m"n%a%ion+ sell out-of-the-
money call an" !ut o!tions.
8(si#" (o%"n%ia!+ the !rofit is limite" to the e*tent of the !remium recei&e".
Ma*imum !rofit is reali<e" if the un"erlyin$ !rice is et)een the lo)er an"
hi$her stri(e !rices at e*!iry of the o!tions.
- 14 -
Donsi#" risk+ the loss is unlimite" if the un"erlyin$ mo&es sustantially in
either "irection. 7o)er rea(-e&en !oint is lo)er stri(e !rice minus !remium
recei&e". 2i$her rea(-e&en !oint is hi$her stri(e !rice !lus the !remium
recei&e". Such !ositions must e monitore" closely.
Tim" #"ca< charac%"ris%ic+ the !osition increases in &alue as time !asses
ecause the time &alue of the o!tions ero"es.
STRIP AND STRAP
These strate$ies are +uite similar to Stra""le. The only "ifference is that unli(e
stra""le, call an" !ut o!tions are not ou$ht in e+ual numers.
- 1@ -
In stri!s strate$y, the numer of !uts ou$ht or sol" is "oule that of call
o!tions.
In Stra!, the numer of calls ou$ht or sol" is "oule that of !ut o!tions.
;ou uy stri! )hen you e*!ect shar! mo&ement in the !rices of the un"erlyin$
ut are a little iase" to)ar"s "o)n)ar" mo&ement, so you uy more !ut than
call o!tions. 7i(e)ise )hile uyin$ stra! you are little iase" to)ar"s u!)ar"
mo&ement, you uy more call than !ut o!tions
;ou sell stri! )hen you e*!ect the !rice to fluctuate in a narro) ran$e ut you
also elie&e that in case the !rice mo&es eyon" the ran$e, it )oul" mo&e
u!)ar", so you sell more !ut than call o!tions. 7i(e)ise )hile sellin$ stra! you
are a little iase" to)ar" "o)n)ar" mo&ement of the un"erlyin$ !rice in case it
rea(s the ran$e.
LON9 ;8TTER-LH
When you elie&e that the un"erlyin$ )ill fluctuate in a narro) ran$e ut are
not &ery sure of it mo&in$ shar!ly in either "irections, .ong -utterfly s the est
strate$y.
- 10 -
S%ra%"$< im(!"m"n%a%ion+ uy one in-the-money call, sell t)o at-the-money
calls an" uy one out-of-the-money call o!tion. The same strate$y can e
im!lemente" usin$ !ut o!tions also. It is "ifficult to e*ecute four transactions
simultaneously. .s such there is e*ecution ris( in&ol&e".
8(si#" (o%"n%ia!+ the !rofit is limite" to the e*tent of the "ifference et)een
the lo)er an" mi""le stri(e !rices minus initial "eit.
Donsi#" risk+ the loss is limite" to the e*tent of initial "eit.
Tim" #"ca< charac%"ris%ic+ time )or(s a$ainst.
SHORT ;8TTER-LH
- 11 -
When you are not so sure that the un"erlyin$ in"e* or stoc( )ill rise or fall
shar!ly an" are not certain aout the "irection, Short -utterfly is the est
strate$y.
S%ra%"$< im(!"m"n%a%ion+ sell one in-the-money call, uy t)o at-the-money
calls an" sell one out-of-the-money call o!tion. The same strate$y can e
im!lemente" usin$ !ut o!tions also. It is "ifficult to e*ecute four transactions
simultaneously. .s such there is e*ecution ris( in&ol&e".
8(si#" (o%"n%ia!+ the !rofit is limite" to the e*tent of initial cre"it recei&e".
Donsi#" risk+ the loss is limite" to the e*tent of the "ifference et)een the
lo)er an" mi""le stri(e !rices minus initial cre"it recei&e".
Tim" #"ca< charac%"ris%ic+ time )or(s in fa&or.
- 1B -
Concl%sion
The In"ian "eri&ati&es mar(et is still in a nascent sta$e of "e&elo!ment ut
offers tremen"ous $ro)th !otential.
. "eri&ati&e may e use" to a&oi" the e*!osure to the ris( that the &alue of an
asset or liaility may chan$e unfa&orale o&er time "ue to rateH!rice chan$es.
5or e*am!le, the &alue of in&entory may "ecrease "ue to !rice chan$es.
5actors such as mar(et li+ui"ity, in&estor eha&ior, an" re$ulatory structure an"
ta* la)s ha&e a hea&y earin$ on the eha&ior of mar(et &ariales in this
mar(et.
Mar(et reacts to mi* informationO e&ent )ith $oo" cor!orate results an"
emer$in$ economy, there al)ays is fear for monsoon factor, 'DP $ro)th, an"
7eft 5ront?s interference in the $o&ernment "ecision. Therefore, oth ull an"
ear are in "ilemma an" are not ale to ta(e a firm &ie).
The safest strate$ies usin$ "eri&ati&es in&ol&e aritra$e. This is $enerally in the
form of cash-futures aritra$e an" cashHfutures-o!tions aritra$e. The most
common one is the cash-futures aritra$e in&ol&in$ uyin$ shares, an" sellin$
futures at a hi$her !rice =cash-an"-carry aritra$e>. %e&erse cash-an"-carry
aritra$e is also !ossile an" in&ol&es sellin$ the hi$her-!rice" =than the
futures> stoc( an" uyin$ the lo)er-!rice" future. If !romote", stoc(-len"in$
acti&ities )ill in"uce efficiency in the stoc( an" "eri&ati&es mar(ets.
. lo)-ris( strate$y some mar(et !layers follo) is )ritin$ =sellin$> o!tions.
Prima facie, sellin$ o!tions "oes soun" ha<ar"ous as one un"erta(es !otentially
unlimite" ris( a$ainst a limite" !rofit !otential F a seemin$ly im!racticale
!rofit-to-loss ris( !rofile. ;et the im!act of a 1-!ercent unfa&orale !rice
mo&ement is hi$her on stoc( or futures contracts as com!are" to o!tions.
- 1C -
2ence, althou$h "eri&ati&es are ris(y instruments for an in&estor, he can use it
in a !ru"ent manner to increase his returns. 5utures are also +uite ris(y tools,
ut use of o!tions re"uces the "o)n si"e ris( an" are relati&ely sa$er than any
other "eri&ati&es tool.
- 1D -
"i!liograp+y
1. /erivatives Simplified By P.:.Bhas(ar .n" B.Maha!atra
-. Security !nalysis By Institute Of Chartere" 5inancial Institutions Of
In"ia.
4. uture 0 Options By 8.D.:ohra .n" B.%.Ba$ri.
@. Options !nd inancial utures By Da&i" Duofs(y.
0. inancial +anagement By I.M.Pan"ey.
.e!liograp+yK'
1. ))).nseini"a.com
-. ))).sein"ia.com
4. ))).$oo$le.com
@. )))."eri&ati&efa+.com
0. ))).usiness)orl".com
1. ))).e+uitymaster.com
B. ))).share(han.com
- B/ -