CHAPTER-1

INTRODUCTION
A derivative is a security whose value depends on the value of to gather more basic underlying variable. These are also known as contingent claims. Derivative securities have been very successful innovation in capital market. The emergence of the market for derivative products, most notably forwards, futures and options, can be traced back to the willingness of risk adverse economic agents to guard themselves against uncertainties arising out of fluctuations in asset prices. By their very nature, financial markets are marked by a very high degree of volatility. Through the use of derivative products, is possible to partially or fully transfer price risks by a locking - in asset prices. As instruments of risk management, these generally do not influence the fluctuation in the underlying asset prices. However, by locking-in asset prices, derivative products minimize the impact of fluctuations in asset prices on the profitability and cash flow situation of risk-averse investor. Derivatives are risk management instruments, which drive their value form underlying asset. Underlying asset can be bullion, index, share, bonds, currency, interest etc.

OBJECTIVES OF STUDY:
To study various trends in derivative market. Comparison of the profits/losses in cash market and derivative market. To find out profit/losses position of the option writer and option holder. To study in detail the role of the future and options. To study the role of derivatives in Indian financial market To understand the concept and importance of the Financial Derivatives such as Futures and Options. .To study the evaluation of the market for derivative products in India. To examine the advantages and disadvantages of different strategies along with situations.

SCOPE OF THE STUDY

The study is limited to Derivatives With special reference to Futures and Options in the Indian context and the net worth stock broking has been taken as representative sample for the study. The study cannot be said as totally perfect, any alteration may come. The study has only made humble attempt at evaluating Derivatives Markets only in Indian Context. The study is not based on the International Perspective of the Derivatives Markets.

RESEARCH METHODOLOGY
DATA COLLECTION: Primary data for a project is the first hand information regarding the project being studied. In this regard the primary data for this project would be getting the necessary information from the company management by an interview, telephonic conversation or direct mail. Secondary data for a project would be the collection of information that has a bearing on the outcome of the project from secondary sources like news, press releases, internet etc. The data collected for this project was from a secondary source. The data was complied with the help of sources like News articles, Internet, Capitoline software. In this research, primary data could not be gathered as the company officials could not be contacted for a one to one interview or a telephonic interview

LIMITATIONS:
The study was conducted in Hyderabad only. As the time was limited, study was confined to conceptual understanding of Derivatives market in India.

CHAPTER-2
COMPANY PROFILE & INDUSTRY PROFILE

COMPANY PROFILE
Reliance Capital Limited (RCL) was incorporated in year 1986 at Ahmadabad in Gujarat as Reliance Capital & Finance Trust Limited. The name RCL came into effect from January 5, 1995. In 2002, RCL shifted its registered office to Jamnagar in Gujarat before it finally moved to Mumbai in Maharashtra, in 2006.In 2006, Reliance Capital Ventures Limited merged with RCL and with this merger the shareholder base of RCL rose from 0.15 million shareholders to 1.3 million. RCL entered the Capital Market with a maiden public issue in 1990 and in subsequent years further tapped the capital market through rights issue and public issues. The equity shares were initially listed on the Ahmedabad Stock Exchange and The Stock Exchange Mumbai. Presently the shares are listed on The Stock Exchange Mumbai and the National Stock Exchange of India.RCL in the initial years engaged itself in steady annuity yielding businesses such as leasing, bill discounting, and inter-corporate deposits. Later, in 1993 diversified its business in the areas of portfolio investment, lending against securities, custodial services, money market operations, project finance advisory services, and investment banking.RCL was accredited a Category 1 Merchant banker by the Securities Exchange Board of India (SEBI). It had lead managed/comanaged 15 issues of an aggregate value of Rs. 400 crore and had underwritten 33 issues for an aggregate value of Rs. 550 crore. All these companies were listed on various exchanges.RCL obtained its registration as a Non-banking Finance Company (NBFC) in December 1998. In view of the regulatory requirements RCL surrendered its Merchant Banking License. RCL has since diversified its activities in the areas of asset management and mutual fund; life and general insurance; consumer finance and industrial finance; stock broking; depository services; private equity and proprietary investments; exchanges, asset reconstruction; distribution of financial products and other activities in financial services. Reliance Industries Ltd (RIL) has regained its position as the countrys largest company by market capitalisation, as its shares jumped six per cent on Monday. While the consensus view on the stock is not bullish, some domestic brokerages have a contrarian

view on the company. This divergence is also seen among the big investors. While domestic institutions are bullish on

the stock and their holding in the company has risen, data suggest foreign institutional investors have pared their holding in the company at the end of the June quarter. Over the last one year, RILs shares have languished, as gas production has fallen and profitability of the other businesses has come under pressure. The company has been struggling to get further approvals for its upstream business from the government. As news trickled in on Monday that RIL had agreed to share KG-D6 accounts with the CAG, under the terms of the production sharing contracts, the stock price moved up. Edelweiss Securities, which has an anti-consensus buy on the stock, in a note on Monday said: Progress on RILs upstream investment has been held up for a long while due to lack of approvals, and we see the easing of tensions between RIL and the government to lead to greater visibility on timelines of field development and subsequent production. Analysts who met the management on Monday said the company has said it plans to file a field development plan for KG-D6 in the third quarter and the fourth quarter, and a consolidated field development plan (including satellite fields). The market has been particularly negative on the stock, as exploration & production is the most profitable business segment and it has seen output dwindle. Any ramp up in production from the D6 block, including the current D1, D3, D26 and the R-series, can happen only three-four years after getting all approvals from the government. So, a section of the market is still not so optimistic on this segment. However, Edelweiss Securities believes despite all the noise around E&P, nonregulated businesses will contribute 90 per cent of the FY12-17 incremental Ebitda, driven by refining, chemicals and investments in shale gas. Margins in the refining business are expected to increase, driven by product optimisation and increased ability to process heavier crude, claim analysts. Refining capacity closures across the world would offset fresh capacity additions. The contrarian view on the stock is also driven by the outlook on shale, expected to contribute 39 per cent of the incremental Ebitda on a

50 per cent compound annual growth rate production over FY12-17. In either case, it indicates that fortunes of the non-regulated and E&P businesses should not get worse.

PRESENT POSITION OF COMPANY

New Delhi: Anil Ambani groups brokerage arm Reliance Securities is planning to invest Rs300 crore for upgrading infrastructure, hiring staff and enhancing the capability of its online trading platform. The company will make this investment over the next 3-5 years with an aim to upgrade the IT infrastructure and to add new features to its trading platform, sources said. The staff strength at Reliance Securities, a subsidiary of Anil Ambani groups financial services arm Reliance Capital, could grow to 1,400 by the end of next year, from about 800 currently. When contacted, Reliance Securities executive director Vikrant Gugnani said: We are making substantial investment in our processes, IT infrastructure, reach and headcount to offer the next level of world-class interaction and trading experience to our consumers. He did not elaborate on the investment size, but confirmed the plans for hiring about 600 employees in the coming months. The move comes at a time when the stock market is on an uptrend and the benchmark Sensex has regained 20,000-point level after a gap of 32 months. The index is moving closer to its all-time peak and investor interest is said to be seeing a revival in both primary and secondary markets. Sources said that the company was betting big on online trading and was upgrading its IT systems with deployment of Omnesys software solution. They said the roll-out would be completed by month end. The new system will have ability to process 10,000 orders per minute, which is among the highest in industry. The company would be investing around Rs300 crore in next 3-5 years in upgrading IT infrastructure, investing in customer centric projects, increasing headcount and enhancing reach.

Besides, it is considering building substantially higher bandwidth capacities for new customers post 3G deployment, which would allow high-speed internet access on mobile phones. In addition, the company is considering offering customisation at individual customer level and would launch new features to allow multiple trading products with configurable risk rules and also offer ability to charge different margins - by product and instrument type. It will offer new product features free of charge to its customers. Recently, the brokerage firms parent company Reliance Capital CEO Sam Ghosh at the companys AGM had said that Reliance Securities achieved a pan-India presence with over 5,000 outlets and the average daily turnover had increased to Rs2,300 crore. Ghosh said in a presentation to the shareholders that it has been ranked as best equity broking house by Dun & Bradstreet for two consecutive years and was rated top broking house in India by Starcom.

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4.4 ACHIVEMENTS& MILESTONES

Reliance Power has won Euro moneys Deal of the year 2010 for its Sasan Ultra Mega Power Project. The $3-billion debt raising for Sasan UMPP is India's largest ever-project financing sourced solely from domestic lenders against the backdrop of the global financial crisis. This is the first such project to reach financial closure without multilateral or foreign commercial banking commitments in the quickest possible time world-wide. 2009 World Communication Awards- Best Device Award We have won the prestigious Global World Communication Awards, held in London in the Best Device Category where we participated with a new network device, developed with CISCO. RCOM was the only Indian company to win an award at WCA 09. Frost and Sullivan Award We have been awarded with Frost and Sullivan Market Share Leadership award for Data Center and Managed Services category. 2010 Maharashtra IT Award-Datacenters RCOM received Maharashtra IT Award (MITA) for 2010 under the category of Datacenters. Voice & Data Award-Broadband We have won the Voice and Data Award for the year 2010 in the Broadband category. During the year, RIL and BP announced a strategic partnership in the oil and gas business. This partnership comprises BP taking 30 per cent stake in 23 oil and gas production sharing contracts that Reliance operates in India, including the KG-D6 block, and the formation of a joint venture (50:50) for sourcing and marketing gas in India. During the year, the Company took a significant step by entering into partnerships in the United States of America with Atlas Energy, Pioneer Natural Resources and Carrizo Oil & Gas through three distinctive joint venture agreements. During the year, RIL and Russia's SIBUR announced a joint venture for the setting up of a facility for producing 100,000 tones of butyl rubber in India. Reliance Petroleum Limited (RPL) continued the second year of implementation of its refinery project with an overall project progress of 90%. We are delighted with the seamless integration of the Hawk submarine cable system with Reliance Global Network offering our customers greater choice, flexibility and diversity, with improved performance, on this critical route. Our existing customer base of over 37000 corporate in India and over 1400 corporate in Europe and USA, along with over 200 carrier customers will immensely benefit from this lowest latency network between India, Middle East, Europe and USA , said Punit Garg, President & CEO, Reliance Globalcom.

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4.5 PRODUCTS &SERVICES

PRODUCTS: Trading: Reliance Securities facilitates trading activities in all the major market segments including, cash, derivatives, debt and currency futures.The company offers online trading facility through its website, www.rsec.co.in.Reliance Securities has recently migrated all its customers to its new trading platform, Insta Plus and Insta Express.Apart from internet trading, customers are also provided with the option of trading through the Call & Trade facility and through RSec.mobi, a personal mobile phone service. Clients can place and track their orders on BSE and NSE on a real time basis with access to RSec.mobi. This facility is available to Reliance Securities trading account holders across all mobile platforms independent of device, operator and the underlying carrier technology Investment Banking: Reliance Securities also offers Investment Banking services. Distribution of Financial Products: Reliance Securities is involved in the distribution of financial products such as mutual funds, insurance and IPOs. DEMAT Services: The company offers DEMAT services through Reliance Capital and is a registered member with NSDL and CDSL. WMS: The Company makes available Wealth Management Solutions to its customers Research: Reliance Securities offers research based services to its clients. Its research wing encompasses 100 companies across 20 sectors. This division offers complete research solutions on IPOs, mutual funds, economic research and other special reports and newsletters. Insurance: Reliance Securities also provides a range of insurance products including life insurance and general insurance through Reliance Composite Insurance Broking NRI Services: NRI clients can place orders using the new their trading platform such as Insta plus and Insta Express. NRIs can execute their securities transactions under the provisions of the RBI.

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4.6 BOARD OF DIRECTORS

"Between my past, the present and the future, there is one common factor: Relationship and Trust. This is the foundation of our growth." Shri Dhirubhai H. Ambani Founder Chairman Reliance Group December 28, 1932 - July 6, 2002 Board of Directors of Reliance Industries Limited Shri Mukesh D. Ambani Chairman & Managing Director Shri Nikhil R. Meswani Executive Director Shri Hital R. Meswani Executive Director Shri PMS Prasad Executive Director Shri P.K.Kapil Executive Director Shri Ramniklal H. Ambani Shri Mansingh L. Bhakta Shri Yogendra P. Trivedi Dr. D. V. Kapur Shri M. P. Modi Prof. Ashok Misra Prof. Dipak C Jain Dr. Raghunath

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COMMODITIES Commodities are now an asset class! For those who want to diversify their portfolios beyond shares, bonds and real estate, commodities are an excellent option. Commodities are one of the easiest investment avenues to understand as they are based on the fundamentals of demand and supply. Historically, prices in commodities futures have been less volatile compared with equity and bonds, thus providing an efficient portfolio diversification option. VSL helps investors understand the risks and advantages of trading in commodities futures before take they take the big leap. It provides clients with an effective platform to participate and trade in Commodities with both the leading Commodity Exchanges of the country. VSL commodity services are a class apart and the following features differentiate our services from others: Professionally qualified analysts with rich industry experience Research on Agro Commodities, Precious Metals, Base Metals, Energy products and Polymers Market watch for MCX and NCDEX with BSE / NSE Streaming quotes and live updates Relationship management desk Educating clients on commodities futures market

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INDUSTRY PROFILE

Bombay Stock Exchange Limited is the oldest stock exchange in Asia with a rich heritage. Popularly known as "BSE", it was established as "The Native Share & Stock Brokers Association" in 1875. It is the first stock exchange in the country to obtain permanent recognition in 1956 from the Government of India under the Securities Contracts (Regulation) Act, 1956.The Exchange's pivotal and preeminent role in the development of the Indian capital market is widely recognized and its index, SENSEX, is tracked worldwide. Earlier an Association of Persons (AOP), the Exchange is now a demutualised and corporative entity incorporated under the provisions of the Companies Act, 1956, pursuant to the BSE (Corporatisation and Demutualization) Scheme, 2005 notified by the Securities and Exchange Board of India (SEBI).
With demutualization, the trading rights and ownership rights have been de-linked effectively addressing concerns regarding perceived and real conflicts of interest. The Exchange is professionally managed under the overall direction of the Board of Directors. The Board comprises eminent professionals, representatives of Trading Members and the Managing Director of the Exchange. The Board is inclusive and is designed to benefit from the participation of market intermediaries. In terms of organization structure, the Board formulates larger policy issues and exercises over-all control. The committees constituted by the Board are broad-based. The day-to-day operations of the Exchange are managed by the Managing Director and a management team of professionals. The Exchange has a nation-wide reach with a presence in 417 cities and towns of India. The systems and processes of the Exchange are designed to safeguard market integrity and enhance transparency in operations. During the year 20042005, the trading volumes on the Exchange showed robust growth. The Exchange provides an efficient and transparent market for trading in equity, debt instruments and

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derivatives. The BSE's On Line Trading System (BOLT) is a proprietary system of the Exchange and is BS 7799-2-2002 certified. The Surveillance and clearing & settlement functions of the Exchange are ISO 9001:2000 certified.

The National Stock Exchange of India Limited has genesis in the report of the High Powered Study Group on Establishment of New Stock Exchanges, which recommended promotion of a National Stock Exchange by financial institutions (FIs) to provide access to investors from all across the country on an equal footing. Based on the recommendations, NSE was promoted by leading Financial Institutions at the behest of the Government of India and was incorporated in November 1992 as a tax-paying company unlike other stock exchanges in the country. On its recognition as a stock exchange under the Securities Contracts (Regulation) Act, 1956 in April 1993, NSE commenced operations in the Wholesale Debt Market (WDM) segment in June 1994. The Capital Market (Equities) segment commenced operations in November 1994 and operations in Derivatives segment commenced in June 2000.

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Our Mission NSE's mission is setting the agenda for change in the securities markets in India. The NSE was set-up with the main objectives of: Establishing a nation-wide trading facility for equities, debt instruments and hybrids, Ensuring equal access to investors all over the country through an appropriate communication network, Providing a fair, efficient and transparent securities market to investors using electronic trading systems, Enabling shorter settlement cycles and book entry settlements systems, and Meeting the current international standards of securities markets.
The standards set by NSE in terms of market practices and technologies have become industry benchmarks and are being emulated by other market participants. NSE is more than a mere market facilitator. It's that force which is guiding the industry towards new horizons and greater opportunities.

Equity shares
By investing in shares, investors basically buy the ownership right to the company. When the company makes profits, shareholders receive their share of the profits in the form of dividends. In addition, when company performs well and the future expectation from the company is very high, the price of the companys shares goes up in the market. This allows shareholders to sell shares at a profit, leading to capital gains. Investors can invest in shares either through primary market offerings or in the secondary market. The primary market has shown abnormal returns to investors who subscribed for the public issue and were allotted shares.

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Stock Exchange:
In a stock exchange a person who wishes to sell his security is called a seller, and a person who is willing to buy the particular stock is called as the buyer. The rate of stock depends on the simple law of demand and supply. If the demand of shares of company x is greater than its supply then its price of its security increases. In Online Exchange the trading is done on a computer network. The sellers and buyers log on to the network and propose their bids. The system is designed in such ways that at any given instance, the buyers/sellers are bidding at the best prices. The transaction cycle for purchasing and selling shares online is depicted below:

Client

Member/ Broking firm.

Stock Exchange (BSE / NSE)

Member/ Broking firm.

Client

Transaction Cycle

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Corporate overview:

Net worth is a listed entity on the BSE since 1994.

The company is professionally managed with experience of over a decade in broking and advisory services Net worth is a member of BSE, NSE, MCX, NCDEX, AMFI, CDSL, and NSDL. Current network in Southern and Western India with 250 branches and franchise, Presence in major metros and cities. Empanelled with prominent domestic Mutual Funds, Insurance Companies, Banks, Financial Institutions and Foreign Financial Institutions. Strong experienced professional team. 75000+ strong and growing client bases. Average daily broking turnover of around INR 1 billion. AUM with Investment Advisory Services of around INR 3 billion.

Products and services portfolio: Retail and institutional broking Research for institutional and retail clients Distribution of financial products Corporate finance Net trading

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Depository services Commodities Broking

Infrastructure:
A corporate office and 3 divisional offices in CBD of Mumbai which houses state-of-the-art dealing room, research wing & management and back offices. All of 250 branches and franchisees are fully wired and connected to hub at corporate office at Mumbai. Add on branches also will be wired and connected to central hub Web enabled connectivity and software in place for net trading. 125 operative IDs for dealing room State of the Art accounting and billing system, on line risk management system in place with 100% redundancy back up. In house technology back up team to ensure un-interrupted connectivity.

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Resea rch R ne & O i l n O ffl i

e broking in com offlin mod e& n itie i l lue chain as va g s n i On i n d o a ffin t tr e g as va y l ue ch N ositor ain Dep n age m a e n M t Sch lio em rtfo e Po te F ra i o n ance p r o C visory Se or Ad rvi est ces v In Company, n o Se ts cto or ep broking in Eq ui ne

my ono Ec r, Derivatie s

& ty

Services

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CHAPTER-3 REVIEW OF LETERATURE

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DERIVATIVES
The emergence of the market for derivatives products, most notably Forwards, futures and options can be tracked back to the willingness of risk adverse economic agents to guard themselves against uncertainties arising out of fluctuations in asset prices. By their very nature, the financial markets are marked by a very high degree of volatility. Through the use of derivative products, it is possible to partially or fully transfer price risks by locking-in asset prices. As instruments of risk management, these generally do influence the fluctuations in the underlying asset prices. However, by locking-in asset prices on the profitability and cash flow situation of risk adverse investors. Derivatives are risk management instruments, which derive their value From an underlying asset. The underlying asset can be bullion, index, share, Bonds currency, interest, etc.... Banks, securities firms, companies and investors to hedge risks to gain access to cheaper money and to make profit, use derivatives. Derivatives are likely to grow even at a faster rate in future. Derivatives are financial contracts whose value is dependent on the Behaviors of the price of one or more basic underlying assets (often simply Known as the underlying). These contracts are legally binding agreements, Made on the trading screen of stock exchanges, to buy/ sell an asset in future.

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DEFINATION
Derivatives are financial products, such as futures contracts, options, and mortgagebacked securities. Most of derivatives ' value is based on the value of an underlying security, commodity, or other financial instrument. movement of oil prices. Derivatives is a product whose value is derived from the one or more basic Variables, called base (underlying asset, index, or value of reference rate), in a Contractual manner. The underlying asset can be equity, fore, commodity or any other asset. In the Indian context the securities contrasts (regulation) act, 1956 (SCR Act) Defines derivative as: 1) A security derived from an instrument, share, loan whether secured or unsecured, risk instrument or contract for differences or any other form of security. 2) A contract, which derives its value from the prices, or index of prices, of Underlying securities. Futures contracts, forward contracts, options and swaps are the most common types of derivatives. Because derivatives are just contracts, just about based on weather data, such as the amount of rain or the number of anything can be used as an underlying asset. There are even derivatives sunny days in a particular region. Derivatives are generally used to hedge risk, but can also be used for speculative purposes For example, the changing value of a crude oil futures contract depends primarily on the upward or downward

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Risks involved in Derivatives: Derivatives are used to separate risks from traditional instruments and transfer these risks to parties willing to bear these risks. The fundamental risks involved in derivative business includes A. Credit Risk: This is the risk of failure of a counterpart to perform its obligation as per the contract. Also known as default or counterpart risk, it differs with different instruments. B. Market Risk: Market risk is a risk of financial loss as result of adverse movements of prices of the underlying asset/instrument. C. Liquidity Risk: The inability of a firm to arrange a transaction at prevailing market prices is termed as liquidity risk. A firm faces two types of liquidity risks: Related to liquidity of separate products. Related to the funding of activities of the firm including derivatives. D. Legal Risk: Derivatives cut across judicial boundaries, therefore the legal aspects associated with the deal should be looked into carefully.

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Characteristics of Derivatives: 1. Their value is derived from an underlying instrument such as stock index, currency, etc. 2. They are vehicles for transferring risk. 3. They are leveraged instruments.

EVALUTION OF DERIVATIVES: Derivatives can be found throughout the history of mankind. In the Middle Ages, engaging in contracts at predetermined prices for future delivery of farming products. The new era for the derivative markets was ushered with the introduction of financial derivatives, and it continues to last to this day. Although commodity derivatives are still quite active, particularly oil and precious metals, financial derivatives dominate trading in the current derivative markets . Although the derivatives markets slowed down considerably by the end of the 20th century, that did not mean that there were not a steady offering of existing, as well as new derivative products. Derivatives exchanges also went through a period of change; some consolidated, some merged, some became for-profit institutions. Regardless, they all had something in commonthe need for less regulation. Aside from structural changes, some derivative exchanges also changed the way they conducted trading. Old systems of face-to-face trading on trading floors have been replaced with electronic trading, and telephone and computer networks. With

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the advent of Internet, electronic trading evolved into e-trading. And although trading floors still dominate derivative markets in the U.S., it is obvious that to stay competitive, the U.S. will have to eventually embrace electronic trading The following factors have contributed to the growth of financial derivatives: 1) Increased volatility in asset prices in financial markets. 2) Increased integration of national financial markets with the international markets. 3) Marked improvement in communication facilities and sharp decline in their costs. 4) Development of more sophisticated risk management tools, providing economic agents a wider choice of risk management strategies. 5) Innovations in the derivatives markets, which optimally combine the risks and returns over a large number of financial assets leading to higher returns, reduced risk as well as transactions costs as compared to individual financial assets. 6) Technology facilitates the ability to track the payoffs and risk exposures associated with a portfolio of derivative positions. 7) An important factor in the growth of derivatives markets has been a Variety of intellectual advances. The development of economic Models for valuing derivative instruments and assessing their Riskyness and the increasing sophistication of such models have Played a crucial role in the growth of the market.

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FUNCTIONS OF DERIVATIVES MARKETS: The following are various functions that are performed by the derivatives markets. They are 1) Prices in an organized derivatives market reflect the perception of market participants about the future and lead the prices of underlying to the perceived future level. 2) Derivatives market helps to transfer risks from those who have them but may not like them to those who have appetite for them.

3) Derivatives, due to their inherent nature, are linked to the underlying cash markets. With the introduction of derivatives, the underlying market witnesses higher trading volumes because of participation by more players who would not otherwise participate for lack of an arrangement to transfer risk. 4) Speculative trades shift to a more controlled environment of derivatives market.

5) Derivatives trading acts as a catalyst for new entrepreneurial activity. 6) They often energize others to create new businesses, new products and new employment opportunities .

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7) Derivatives markets help increase savings and investment in the long run. Transfer of risk enables market participants to expand their volume of activity. Derivatives thus promote economic development PARTICIPANTS: The following three categories of participants in the derivatives market:

SWAPS OPTIONS FUTURES FORWARDS DERIVATIVES

HEDGERS
1) HEDGERS 2) SPECULATORS 3) ARBITRAGEURS HEDGERS: Hedgers face risk associated with the price of an asset. They use futures or options market to reduce or eliminate this risk. Hedgers are those who protect themselves from the risk associated with the price of an asset by using derivatives. He keeps a close watch upon the prices discovered in trading and when the comfortable price is reflected according to his wants, he sells

29

futures contracts. Hedgers use futures for protection against adverse future price movements in the underlying cash commodity. Hedgers are often businesses, or individuals, who at one point or another deal in the underlying cash commodity. SPECULATORS: Speculators are some what like a middle man. They are never interested in actual owing the commodity. They will just buy from one end and sell it to the other in anticipation of future price movements. They actually bet on the future movement in the price of an asset. They are the second major group of futures players. These participants include independent floor traders and investors. They handle trades for their personal clients or brokerage firms. Buying a futures contract in anticipation of price increases is known as going long. Selling a futures contract in anticipation of a price decrease is known as going short. ARBITRAGEIRS: Arbitrators are the person who takes the advantage of a discrepancy between prices in two different markets. If he finds future prices of a commodity edging out with the cash price, he will take offsetting positions in both the markets to lock in a profit. Risk less Profit Making is the prime goal of Arbitrageurs. Buying in one market and selling in another, buying two products in the same market are common. They could be making money even without putting there own money in and such opportunities often come up in the market but last for very short timeframes. This is because as soon as the situation arises arbitrageurs take advantage and demand-supply forces drive the markets back to normal.

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TYPES OF DERIVATIVES: The most commonly used derivatives contracts are forwards, futures and options. Here are various derivatives contacts that have come to be used Given briefly:

FORWARDS FUTURES OPTIONS WARRANTS LEAPS SWAPS SWAPTIONS

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FORWARDS:

Forward contract is a customized contract between two entities, where settlement takes place on a specific date in the future at today's pre-agreed price. Futures: A futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. Futures contracts are special types of forward contracts in the sense that the former are standardized exchangetraded contracts. Option: The right, but not the obligation, to buy (for a call option) or sell (for a put option) a specific amount of a given stock, commodity, currency, index, or debt, at a specified price (the strike price) during a specified period of time Options are of two types and puts Calls option: Gives the buyer the right but not the obligation to buy a given quantity of the underlying asset, at a given price on or before a given future date. Put option: Give the buyer the right, but not the obligation to sell a given quantity of the underlying asset at a given price on or before a given date. Warrants:

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Options generally have lives of up to one year, the majority of options traded on options exchanges having a maximum maturity of nine months. Longerdated options are called warrants and are generally traded over-the-counter. Swaps: Swaps are private agreements between two parties to exchange cash flows in the future according to a prearranged formula. They can be regarded as portfolios of forward contracts. The two commonly used swaps are: Interest rate swaps: These entail swapping only the interest related cash flows between the parties in the same currency. Currency swaps: These entail swapping both principal and interest between the parties, with the cash flows in one direction being in a different currency than those in the opposite direction. LEAPS: The acronym LEAPS means Long-Term Equity Anticipation Securities. These are options having a maturity of up to three years. Swaptions: Swaptions are options to buy or sell a swap that will become operative at the expiry of the options. Thus a swaption is an option on a forward swap. Rather than have calls and puts, the swaptions market has receiver swaptions and payer swaptions. A receiver swaption is an option to receive fixed and pay floating. A payer swaption is an option to pay fixed and receive floating.

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DERIVATIES TRADING AT NSE / BSE:

The derivatives trading on the National Stock Exchange commenced with S&P CNX Nifty Index futures on June 12, 2000. The trading in index options commenced on June 4, 2001 and trading in options on individual securities commenced on July 2. 2001. Single stock futures were launched on November 9, 2001. The index futures and options contract on NSE is based on S&P CNX Nifty Index. Currently, the futures contracts have a maximum of 3-months expiration cycles. Three contracts are available for trading, with 1 month, 2months and 3 monthexpiry. A new contract is introduced on the next trading of Derivatives is taking place with SENSEX comprising 30 scripts for Index Futures and Options.

Contract Periods:
At any point of time there will be always be available nearly 3months contract periods in Indian Markets. These were 1) Near Month 2) Next Month 3) Far Month For example in the month of September 2007 one can enter into September futures contract or October futures contract or November futures contract. The last Thursday of

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the month specified in the contract shall be the final settlement date for the contract at both NSE as well as BSE, It is also know as Expiry Date.

RATIONALE BEHIND THE DEVELOPMENT OF DERIVATIVES:

Holding portfolios of securities is associated with the risk of the possibility that the investor may realize his returns, which would be much lesser than what he expected to get. There are various factors, which affect the returns: 1. Price or dividend (interest) 2. Some are internal to the firm like Industrial policy Management capabilities Consumers preference Labour strike, etc. These forces are to a large extent controllable and are termed as non systematic risks. An investor can easily manage such non-systematic by having a well-diversified portfolio spread across the companies, industries and groups so that a loss in one may easily be compensated with a gain in other. There are yet other of influence which are external to the firm, cannot be controlled and affect large number of securities. They are termed as systematic risk. They are: 1. Economic 2. Political 3. Sociological changes are sources of systematic risk.

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For instance, inflation, interest rate, etc. their effect is to cause prices of nearly all-individual stocks to move together in the same manner. We therefore quite often find stock prices falling from time to time in spite of companys earning rising and vice versa. Rational Behind the development of derivatives market is to manage this systematic risk, liquidity in the sense of being able to buy and sell relatively large amounts quickly without substantial price concession. In debt market, a large position of the total risk of securities is systematic. Debt instruments are also finite life securities with limited marketability due to their small size relative to many common stocks. Those factors favor for the purpose of both portfolio hedging and speculation, the introduction of a derivatives securities that is on some broader market rather than an individual security.

36

FUTURES

37

DEFINATION: A future is a contract between two parties whereby the one party (the buyer) agrees to buy an underlying asset from the other party to the contract on a specific future date, and at a price determined at the close of the contract. A future is a derivative that is used to transfer the price risk of the underlying instrument from one party to another. The underlying asset can be a financial asset such as a bond, a currency such as US dollars, a commodity, etc. A future is normally classified according to the underlying instrument. Where, for instance, two parties agree to buy and sell a specific quantity of rice (of a certain quality) at a certain price on a future date, the contract will be a commodity futures contract. Where two parties agree to buy and sell bonds, this will be known as a financial futures contract, and where two parties agree to buy and sell a certain amount of foreign currency, this is a currency futures contract.

FEATURES OF FUTURES: Futures are highly standardized. The contracting parties need not pay any down payments. Hedging of price risks. They have secondary markets to.

38

A future contract is thus:

An agreement between two parties To buy and sell A standardized type and quantity Of a specified underlying asset With a certain quality At a price determined at the closing of the contract On a specified date Through a central exchange.

TYPES OF FUTURES: On the basis of the underlying asset they derive, the futures are divided in to two types: 1) Stock futures: The stock futures are the futures that have the underlying asset as the individual securities. The settlement of the stock futures is of cash settlement and the settlement price of the future is the closing price of the underlying security. 2) Index futures: Index futures are the futures, which have the underlying asset as an index. The index futures are also cash settled. The settlement price of the index

39

futures shall be the closing value of the underlying index on the expiry date of the contract.

PARTIES IN FUTURES CONTRACT: There are two parties in a future contract, the buyer and seller. The buyer of the futures contract is one who LONG on the futures contract and the seller of the futures contract is who is SHORT on the futures contract. In a futures contract, both parties have an obligation,

one to buy the underlying instrument The other to sell the underlying instrument Both the buyer and the seller can make a profit or suffer a

loss, due to the fact that the contract price (at which the underlying instrument is bought and sold) is determined at closing of the contract. If the market price at the delivery date is lower than the futures contract price, the buyer suffers a loss because he could have bought the instrument in the market at a lower price. He is now obliged, according to the contract, to buy the underlying instrument at the higher price specified in the contract. The opposite applies when the market value of the underlying instrument is above the futures contract price. The buyer can now buy the underlying instrument at the lower contract price, and sell the instrument immediately at the higher market price, thus making an immediate profit. The pay off for the buyer and the seller of the futures of the contracts are as follows: 1. pay off for a buyer of futures

40

2. pay off for a seller of futures

PAY-OFF FOR A BUYER OF FUTURES

PROFIT P E2

E1

LOSS

F- FUTURES PRICE E1, E2 SETTLEMENT PRICE CASE 1:- The buyer bought the futures contract at (F); if the futures price
41

Goes to E1 then the buyer gets the profit of (FP). CASE 2:- The buyer gets loss when the future price goes less then (F), if The future price goes to E2 then the buyer gets the loss of (FL).

PAY- OFF FOR A SELLER OF FUTURES

PROFIT P E2 E1

LOSS

F- FUTURES PRICE E1, E2 SETTLEMENT PRICE

CASE 1:- The seller sold the future contract at (f); if the future goes to E1

42

Then the seller gets the profit of (FP). CASE 2: - The seller gets loss when the future price goes greater than (F), if The future price goes to E2 then the seller gets the loss of (FL).

MARGINS: Margins are the deposits which reduce counter party risk, arise in a futures contract. These margins are collect in order to eliminate the counter party risk. There are three types of margins. Initial Margins: When ever a futures contract is signed, both buyer and seller are required to post initial margins. Both buyer and seller are required to make security deposits that are intended to guarantee that will infact be able to fulfill their obligation. These deposits are initial margins and they are often referred as purchase price of futures contract. Marking to market margins: The process of adjusting the equity in an investors account in order to reflect the change in the settlement price of futures contract is known as MTM margin. At the end of each day, the open positions are marked to closing price of the day. Accordingly, this will reflect that the gain or loss in each day Maintenance margin: The investor must keep the futures account equity equal to or greater than certain percentage of the amount deposited as initial margin. If the equity goes less than that percentage of initial margin, then the investor receives a call for an additional deposit of cash known as maintenance margin to bring the equity up to the

43

initial margin. Any customer can withdraw the positive balance in the margin amount above the initial margin. To ensure that sufficient money is available, maintenance margin is set. If the balance in the margin account is below the maintenance margin, the clearing member is required to deposit the funds to bring to initial margin level. If it is not brought in, the positions will be closed out.

Pricing the futures: The Fair value of the futures contract is derived from a model known as the cost of carry model. This model gives the fair value of the contract. Cost of carry:

t F=S (1+r-q)
Where F- Futures price s- Spot price of the underlying r- Cost of financing q- Expected dividend yield t- Holding period

FUTURES TERMINOLOGY

44

Spot price: The price at which an asset trades in the spot market. Futures price: The price at which the futures contract trades in the futures market. Contract cycle: The period over which contract trades. The index futures contracts on the NSE have one-month; two-month and three month expiry cycle which Expire on the last Thursday of the month. Thus a January expiration contract Expires on the last Thursday of January and February expiration contract ceases trading on the last Thursday of February. On the Friday following the last Thursday, a new contract having a three- month expiry is introduced for trading. Expiry date: It is the date specifies in the futures contract. This is the last day on which the contract will be traded, at the end of which it will cease to exist. Contract size: The amount of asset that has to be delivered less than one contract. For instance, the contract size on NSEs futures market is 200 nifties. Basis: In the context of financial futures, basis can be defined as the futures price minus the spot price. There will be a different basis for each delivery month for contract. In a normal market, basis will be positive. This reflects that futures prices normally exceed spot prices. Cost carry:

45

The relationship between futures prices and spot prices can be summarized in terms of what is known as the cost of carry. This measures the storage cost plus the interest that is paid to finance the asset less income earned on the asset. Open Interest: Total outstanding long or short position in the market at any specific time. As total long positions in the market would be equal to short position, for calculation of open interest, only one side of the contract is counter.

DEFINATION: A Forward contract is an agreement to buy or sell on a specified date for a specified price. One of the parties to the contract assumes a long position and agrees to buy the underlying asset on a certain specified future date for a certain specified price. The other party assumes a short position and agrees to sell the asset on the same date for the same price. Other contract details like delivery date, price and quantity are negotiated bilaterally by the parties to the contract. The forward contracts are normally traded outside the exchanges. Most forward contracts don't have standards and aren't traded on exchanges. A farmer would use a forward contract to "lock-in" a price for his grain for the upcoming fall harvest.

A forward contract is one to one bi-partite contract, to be performed in the future, at the terms decided today. (E.g. forward currency market in India).

46

Forward contracts offer tremendous flexibility to the parties to design the contract in terms of the price, quantity, quality (in case of commodities), delivery time and place.

Forward contracts suffer from poor liquidity and default risk.

In a forward transaction, no actual cash changes hands. If the transaction is collateralized, exchange of margin will take place according to a preagreed rule or schedule. Otherwise no asset of any kind actually changes hands, until the maturity of the contract.

The forward price of such a contract is commonly contrasted with the spot price , which is the price at which the asset changes hands (on the spot date, usually two business days). The difference between the spot and the forward price is the forward premium or forward discount.

Forward contracts are of two types specific delivery and other than specific delivery. The first, which is a merchandising contract, enables producers and consumers to market a commodity. Generally, sellers and buyers directly negotiate the contract terms.

47

Forward contracts are very useful in hedging and speculation. The classic hedging application would be that of an exporter who expects to receive payment in dollars three months later. He is exposed to the risk of exchange rate fluctuations. By using the currency forward market to see dollars forward, he can lock on to a rate today and reduce his uncertainty. Similarly an importer who is required to make a payment in dollars two months hence can reduce his exposure to exchange rate fluctuations by buying dollars forward.

If a speculator has information or analysis, which forecasts an upturn in a price, then he can go long on the forward, wait for the price to rise, and then take a reversing transaction to book profits. Speculators may well be required to deposit a margin upfront. However, this is generally a relatively small proportion of the value of the assets underlying the forward contract. The use of forward markets here supplies leverage to the speculator. A forward contract for the future delivery of a particular underlying asset must have the following information: 1) Name of the principal party 2) Name of the counter party 3) Name of the underlying asset to be delivered 4) Amount of contract 5) Date of delivery 6) Place of delivery 7) Price agreed upon

48

8) The date when the contract is sold 9) The value date 10) Other terms and conditions. LIMITATIONS:

Lack of centralization of trading Ill liquidity, and Counter-party risk.

DIFFERENCE BETWEEN FORWARDS AND FUTURES FORWARDS Future agreement that obliges the buyer and seller FUTURES Future agreement that obliges the buyer and seller

Contract
1

contract size

Depending on the transaction Standardized and the requirements of the contracting parties.

Expiry Date
3

Depending on the transaction Standardized

Transaction method
4

Negotiated directly by the buyer and seller

Quoted and traded on the Exchange

49

Guarantees

None. It is very difficult to undo the operation; profits and losses are cash settled at expiry.

Both parties must deposit an initial guarantee (margin). The value of the operation is marked to market rates with daily settlement of profits and losses.

Secondary Market

None. It is difficult to quit the operation; profit or loss at expiry.

Futures Exchange. Operation can be quit prior to expiry. Profit or loss can be realized at any time. Clearing House Contracts are usually closed prior to expiry by taking a compensating position. At expiry contracts can be cash settled or settled by delivery

Institutional Guarantee
7

The contracting parties Cash settled.

Settlement

50

OPTIONS

DEFINATION: Option is a type of contract between two persons where one grants the other the right to buy a specific asset at a specific price within a specific time period. Alternatively the contract may grant the other person the right to sell a specific asset at a specific price within a specific time period. In order to have this right, the option buyer has to pay the seller or the option premium. The assets on which option can be derived are stocks, commodities, indexes etc. If the underlying asset is the financial asset, then the option are financial option like stock options, currency options, index options etc, and if options like commodity option.

51

Options contracts are instruments that give the holder of the instrument the right to buy or sell the underlying asset at a predetermined price. PROPERTIES OF OPTIONS: Options have several unique properties that set them apart from other securities. The following are the properties of options: Limited Loss High Leverage Potential Limited Life

PARTIES IN AN OPTION CONTRACT: 1. Buyer of the Option: The buyer of an option is one who by paying option premium buys the right but not the obligation to exercise his option on seller/writer. 2. Writer/Seller of the Option: The writer of a call/put options is the one who receives the option premium and is there by obligated to sell/buy the asset if the buyer exercises the option on him.

52

TYPES OF OPTIONS: The options are classified into various types on the basis of various variables. The following are the various types of options: I). On the basis of the Underlying asset: On the basis of the underlying asset the options are divided into two types: INDEX OPTIONS: The Index options have the underlying asset as the index .
STOCK OPTIONS: A stock option gives the buyer of the option the right to buy/sell stock at a specified price. Stock options are options on the individual stocks, there are currently more than 50 stocks are trading in this segment.

II). On the basis of the market movement: On the basis of the market movement the options are divided into two types. They are: CALL OPTION:

A call options is bought by an investor when he seems that the stock price moves upwards. A call option gives the holder of the option the right but not
the obligation to buy an asset by a certain date for a certain price.

C = SN(D1) Xe -r t N(-D2)-

PUT OPTION:

53

put option is bought by an investor when he seems that the stock price moves downwards. A put option gives the holder of the option right but not the obligation to sell an asset by a certain date for a certain price

P = Xe-rt N (-D2)-SN (-D2)

Where C = VALUE OF CALL OPTION S = SPOT PRICE OF STOCK N = NORMAL DISTRIBUTION V = VOLATILITY X = STRIKE PRICE r = ANNUAL RISK FREE RETURN t = CONTRACT CYCLE
L

d1 =

n (S/X) + (r+v2/2) t -------------------------v t d1 v t

d2 =

Ill) On the basis of exercise of option: On the basis of the exercising of the option, the options are classified into two categories. AMERICAN OPTION: American options are options that can be exercised at any time up to the expiration date; most exchange-traded options are American.

54

EUROPEAN OPTION: European options are options that can be exercised only on the expiration date itself. European options are easier to analyze than American option. Call option The following example would clarify the basics on Call Options. Illustration 1: An investor buys one European Call option on one share of Reliance Petroleum at a premium of Rs. 2 per share on 31 July. The strike price is Rs.60 and the contract matures on 30 September. The payoffs for the investor on the basis of fluctuating spot prices at any time are shown by the payoff table (Table 1). It may be clear form the graph that even in the worst case scenario, the investor would only lose a maximum of Rs.2 per share which he/she had paid for the premium. The upside to it has an unlimited profits opportunity. On the other hand the seller of the call option has a payoff chart completely reverse of the call options buyer. The maximum loss that he can have is unlimited though a profit of Rs.2 per share would be made on the premium payment by the buyer

55

A European call option gives the following payoff to the investor: max (S Xt, 0). The seller gets a payoff of: -max (S - Xt,0) or min (Xt - S, 0). Notes: S - Stock Price Xt - Exercise Price at time 't1 C - European Call Option Premium Payoff - Max (S - Xt, O )

56

Net Profit - Payoff minus 'c' Exercising the Call Option and what are its implications for the Buyer and the Seller? The Call option gives the buyer a right to buy the requisite shares on a specific date at a specific price. This puts the seller under the obligation to sell the shares on that specific date and specific price. The Call Buyer exercises his option only when he/ she feel it is profitable. This Process is called "Exercising the Option". This leads us to the fact that if the spot price is lower than the strike price then it might be profitable for the investor to buy the share in the open market and forgo the premium paid. The implications for a buyer are that it is his/her decision whether to exercise the option or not. In case the investor expects prices to rise far above the strike price in the future then he/she would surely be interested in buying call options. On the other hand, if the seller feels that his shares are not giving the desired returns and they are not going to perform any better in the future, a premium can be charged and returns

57

from selling the call option can be used to make up for the desired returns. At the end of the options contract there is an exchange of the underlying asset. In the real world, most of the deals are closed with another counter or reverse deal. There is no requirement to exchange the underlying assets then as the investor gets out of the contract just before its expiry. Put Options The European Put Option is the reverse of the call option deal. Here, there is a contract to sell a particular number of underlying assets on a particular date at a specific price. An example would help understand the situation a little better: Illustration 2: An investor buys one European Put Option on one share of Reliance Petroleum at a premium of Rs. 2 per share on 31 July. The strike price is Rs.60 and the contract matures on 30 September. The payoff table shows the fluctuations of net profit with a

58

change

in

the

spot

The payoff for the put buyer is: max (Xt - S, 0) The payoff for a put writer is: -max (Xt - S, 0) or min(S - Xt, 0)

59

These are the two basic options that form the whole gamut of transactions in the options trading. These in combination with other derivatives create a whole world of instruments to choose form depending on the kind of requirement and the kind of market expectations. Exotic Options are often mistaken to be another kind of option. They are nothing but non-standard derivatives and are not a third type of option.

Options Classifications Options are often classified as:

Strike Price:
The Price specified in the options contract is known as strike price or Exercise price.

60

Options Premium:
Options Premium is the price paid by the options buyer to the option seller.

Expiration Date:
The date specified in the options contract is known as expiration date.

Out-of-the-money option:
An out-of-the-money option is an option that would lead to negative cash flow if it is exercised immediately.

In-the-money option:
An In the money option is an option that would lead to positive cash inflow ti the holder if it exercised immediately.

At-the-money option:
An at the money option is an option that would lead to Zero cash flow if it is exercised immediately.

61

MONEYNESS
Out-of-the Money In-the-money At-the-money

PUT OPTIONS
Spot Price>exercise Price Spot Price<exercise Price Spot Price=exercise Price

CALL OPTIONS
Spot Price<Exercise Price Spot Price>Exercise Price Spot Price=Exercise Price

Example: Calls, Reliance 350 Stock Series.

Naked Options: These are options which are not combined with an offsetting contract to cover the existing positions. Covered Options: These are option contracts in which the shares are already owned by an investor (in case of covered call options) and in case the option is exercised then the offsetting of the deal can be done by selling these shares held. OPTIONS PRICING Prices of options are commonly depending upon six factors. Unlike futures which derives there prices primarily from prices of the undertaking. Option's prices are far more complex. These are the two basic options that form the whole gamut of transactions in the options trading. These in combination with other derivatives create a whole world of instruments to choose form depending on the kind of requirement and the kind of market expectations. Exotic Options are often mistaken to be another kind of option. They are nothing but non-standard derivatives and are not a third type of option. Options undertakings .

62

Stocks, Foreign Currencies, Stock Indices, Commodities, Others - Futures Options, are options on the futures contracts or Underlying assets are futures contracts. The futures contract generally matures shortly after the options expiration OPTIONS PRICING Prices of options are commonly depending upon six factors. Unlike futures which derives there prices primarily from prices of the undertaking. Option's prices are far more complex. The table below helps understand the affect of each of these factors and gives a broad picture of option pricing keeping all other factors constant. The table presents the case of European as well as American Options. EFFECT OF INCREASE IN THE RELEVANT PARAMETRE ON OPTION PRICES:

63

SPOT PRICES: In case of a call option the payoff for the buyer is max(S -Xt, 0) Therefore, more the Spot Price more is the payoff and it is favorable for the buyer. It is the other ways round for the seller, more the Spot Price higher are the chances of his going into a loss. In case of a put Option, the payoff for the buyer is max (Xt - S, 0) therefore, more the Spot Price more are the chances of going into a loss. It is the reverse for Put Writing. STRIKE PRICE: In case of a call option the payoff for the buyer is shown above. As per this relationship a higher strike price would reduce the profits for the holder of the call option. TIME TO EXPIRATION: More the time to Expiration more favorable is the option. This can only exist in case of American option as in case of European Options the Options Contract matures only on the Date of Maturity. VOLATILITY: More the volatility, higher is the probability of the option generating higher returns to the buyer. The downside in both the cases of Call and put is fixed but the gains can be unlimited. If the price falls heavily in case of a call buyer then the maximum that he loses is the premium paid and nothing more than that. More so he/ she can buy the same shares form the spot market at a lower price. Similar is the case of the put option buyer. The table shows all effects on the buyer side of the contract.

64

RISK FREE RATE OF INTEREST: In reality the r and the stock market is inversely related. But theoretically speaking, when all other variables are fixed and interest rate increases this leads to a double effect: Increase in expected growth rate of stock prices discounting factor increases making the price fallIn case of the put option both these factors increase and lead to a decline in the put value. A higher expected growth leads to a higher price taking the buyer to the position of loss in the payoff chart. The discounting factor increases and the future value become lesser. In case of a call option these effects work in the opposite direction/The first effect is positive as at a higher value in the future the call option would be exercised and would give a profit. The second affect is negative as is that of discounting. The first effect is far more dominant than the second one, and he overall effect is favorable on the call option. DIVIDENDS: When dividends are announced then the stock prices on ex-dividend are reduced. This is favorable for the put option and unfavorable for the call option CALL OPTION: PUT OPTION: Where C - VALUE OF CALL OPTION S - SPOT PRICE OF STOCK X - STRIKE PRICE r - ANNUAL RISK FREE RETURN t - CONTRACT CYCLE

C = SN (Dl)-Xe"rtN(D2) p = xe^NC-oaj-SNC-oa)

65

CHAPTER-4
DATA ANALYSIS

66

ANALYSIS AND INTERPRETATION:

S&P CNX NIFTY JAN-MARCH 2012 Index:
Shares Turnover Open High Low Close Traded (Rs. Cr) 4640. 4645. 4588. 4636. 1084606 2-Jan-12 2 95 05 75 68 3590.96 4675. 4773. 4675. 4765. 1466211 3-Jan-12 8 1 8 3 15 5021.29 4774. 4782. 4728. 4749. 1659388 4-Jan-12 95 85 85 65 49 5661.16 4779. 4730. 4749. 1778629 5-Jan-12 4749 8 15 95 36 5873.79 4724. 4794. 4686. 4754. 1760572 6-Jan-12 15 9 85 1 82 5234.69 4755. 4759. 4743. 4746. 1878388 7-Jan-12 6 4 05 9 0 414.88 4747. 4758. 4695. 4742. 1475345 9-Jan-12 55 7 45 8 37 4548.3 10-Jan- 4771. 4855. 4768. 4849. 2016611 12 85 9 25 55 74 6222.27 11-Jan- 4863. 4877. 4841. 4860. 2090797 12 15 2 6 95 58 6364 12-Jan- 4840. 4869. 4803. 4831. 1830686 12 95 2 9 25 97 7271.44 13-Jan- 4861. 4898. 4834. 2309406 12 95 85 2 4866 04 7117.5 16-Jan4880. 4827. 4873. 1604798 12 4844 8 05 9 91 5297.89 17-Jan- 4904. 4975. 4967. 2230041 12 5 55 4904 3 83 7170.72 18-Jan- 4977. 4980. 4931. 4955. 2111987 12 75 65 05 8 96 7424.79 19-Jan5023. 4991. 5018. 2034876 12 4995 8 4 4 08 6634.33 20-Jan- 5044. 5064. 5004. 5048. 2210480 12 85 15 3 6 07 8120.35 23-Jan- 5025. 5059. 5021. 5046. 1581775 5934.04

Date

67

12 24-Jan12 25-Jan12 27-Jan12 30-Jan12 31-Jan12 1-Feb-12 2-Feb-12 3-Feb-12 6-Feb-12 7-Feb-12 8-Feb-12 9-Feb-12 10-Feb12 13-Feb12 14-Feb12 15-Feb12 16-Feb12 17-Feb12 21-Feb12 22-Feb12 23-Feb12 24-Feb12 27-Feb12 28-Feb12

35 5064. 8 5151. 5 5216. 75 5163. 55 5125. 25 5198. 15 5272. 1 5276. 1 5379. 45 5412. 95 5343. 8 5343. 05 5399. 8 5382. 1 5380. 8 5460. 6 5513. 75 5574. 2 5561. 9 5609. 75 5490. 05 5479. 15 5448. 1 5310. 5

55 5141. 05 5174. 15 5217 5166. 15 5215. 4 5244. 6 5289. 95 5334. 85 5390. 05 5413. 35 5396. 9 5423. 4 5427. 75 5421. 05 5428. 05 5542. 1 5531. 4 5606. 7 5621. 5 5629. 95 5537. 4 5521. 4 5449. 8 5391. 1

35 5049. 8 5130. 25 5162. 4 5076. 7 5120. 15 5159 5225. 75 5255. 55 5327. 25 5322. 95 5325. 2 5338. 9 5341. 05 5351. 4 5377. 95 5460. 6 5483. 75 5545. 2 5561. 75 5491. 35 5460. 8 5405. 9 5268. 15 5306. 45

25 5127. 35 5158. 3 5204. 7 5087. 3 5199. 25 5235. 7 5269. 9 5325. 85 5361. 65 5335. 15 5368. 15 5412. 35 5381. 6 5390. 2 5416. 05 5531. 95 5521. 95 5564. 3 5607. 15 5505. 35 5483. 3 5429. 3 5281. 2 5375. 5

71 2020065 65 2191757 09 2159233 77 1811414 37 2157707 19 2348993 58 3379606 51 2173581 88 2150804 87 1811945 61 2361354 16 2553069 65 2253520 93 1815619 10 2014099 96 3143660 96 2700604 77 3293075 16 2311321 26 2630134 27 3072465 19 3646606 34 2353189 61 2081338 89

8172.43 8156.04 7881.15 6181.32 8075.54 8066.68 11126.39 7573.02 7703.06 6797.14 9359.98 8143.96 7396.34 6738 6693.43 9958.28 9053.45 11512.01 8169.38 9694.44 9987.65 17356.76 7706.81 7815.9

68

29-Feb12 1-Mar-12 2-Mar-12 3-Mar-12 5-Mar-12 6-Mar-12 7-Mar-12 9-Mar-12 12-Mar12 13-Mar12 14-Mar12 15-Mar12 16-Mar12 19-Mar12 20-Mar12 21-Mar12 22-Mar12 23-Mar12 26-Mar12 27-Mar12 28-Mar12 29-Mar12 30-Mar12

5424. 95 5366 5369. 45 5360. 05 5342. 55 5266 5207. 05 5294. 1 5420. 1 5391. 05 5490. 55 5462. 5 5380. 35 5337. 35 5257. 15 5267. 2 5361. 1 5255. 65 5274. 35 5242. 95 5231. 7 5145. 95 5206. 6

5458. 8 5372. 45 5392. 55 5369. 6 5344. 5 5382. 05 5243. 85 5342. 3 5421. 9 5438. 65 5499. 4 5462. 5 5445. 65 5340. 7 5297. 35 5372. 35 5385. 95 5312 5274. 95 5277. 95 5236. 55 5194. 3 5307. 1

5352. 25 5297. 5 5315. 05 5353. 4 5265. 7 5206. 4 5171. 45 5291. 6 5327. 3 5390. 8 5437. 8 5362. 3 5305 5238. 55 5233. 25 5256 5205. 65 5220 5174. 9 5184. 65 5169. 6 5135. 95 5203. 65

5385. 2 5339. 75 5359. 35 5359. 4 5280. 35 5222. 4 5220. 45 5333. 55 5359. 55 5429. 5 5463. 9 5380. 5 5317. 9 5257. 05 5274. 85 5364. 95 5228. 45 5278. 2 5184. 25 5243. 15 5194. 75 5178. 85 5295. 55

2260222 32 1968679 05 1850215 26 1677099 1 1964211 55 2903960 14 2307260 17 2030058 45 1766682 37 1799652 96 1817140 70 1602576 51 2675211 47 1798774 54 1813452 85 1997879 85 2055810 62 1727385 74 1697858 35 2087754 21 1458035 97 2425578 89 1647900 56

8454.41 6847.63 6768.52 429.35 6036.63 9319.01 7173.14 7080.66 6484.38 5907.14 7345.67 5961.15 9432.07 6275.89 6158 6807.02 7359.89 6371.46 5582.28 7445.92 5411.63 8632.05 6082.93

69

INDEX: It observe the above data Contract : OPEN=4640 HIGH=4640 LOW= 4588 CLOSE =4630

INTERPRETATION:

In the above graph I calculated BEP:

Breakeven point (BEP) = HIGH VALUE+LOW VALUE / 2 =4640+4588/2 =9228/2 =4614

GRAPHICAL REPRESENRTATION FOR FEB CONTRACT

70

GRAPHICAL REPRESENRTATION FOR MARCH CONTRACT

71

FEB-MARCH It observe the above data 2012 Dec month contract: OPEN=5198 HIGH=5244 LOW= 5159 CLOSE =5235.12

INTERPRETATION: In the above graph I calculated BEP: Breakeven point (BEP) = HIGH VALUE+LOW VALUE / 2 =5244+5159/2 =10403/2

=5201.55
In this graph I observed the following fluctuations. In the period of (20-May-11 to 23-Jun-11)in these I found as BEP was 5380.025 values. Here I observed as value share is a lose of point of Nifty-50 value was ( 5380.025-

5577.65=197.625)So here share value is decrease. Due to UN expected change in

market, policies and lack of experience of investors. Here I observed as there is a change of Nifty-50 share value that is period of (22-12-2008) goes to the share value high (5380.25-5182.4=197.85) so here share value is increased. And it is good signal of investment to the buyers. So here investor gets more longs. Again I found margin of safety (MOS): (1)Margin of safety(MOS)= OPENING SHARE VALUE-BEP =5445-5380.025 =64.975*(1LOT) So here MOS is less than the BEP value .so here investors gets more loss. (2)Margin of safety(MOS)= HIGH SHARE VALUE-BEP =5577.65-5380.025 =197.625*(1LOT) So here margin of safety is more than the BEP value. So the investor gets higher profits and longs to be produced.

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(3)Margin of safety (MOS)= LOW SHARE VALUE-BEP =5182.4-5380.25 =197.625* So here margin of safety is less than the BEP value. So the loss is higher.

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FINDINGS, SUGGESTIONS, & CONCLUSIONS

CHAPTER-5

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FINDINGS
From the above analysis it can be concluded that: 1. Derivative market is growing very fast in the Indian Economy. The turnover of Derivative Market is increasing year by year in the Indias largest stock exchange NSE. In the case of index future there is a phenomenal increase in the number of contracts. But whereas the turnover is declined considerably. In the case of stock future there was a slow increase observed in the number of contracts whereas a decline was also observed in its turnover. In the case of index option there was a huge increase observed both in the number of contracts and turnover. 2. After analyzing data it is clear that the main factors that are driving the growth of Derivative Market are Market improvement in communication facilities as well as long term saving & investment is also possible through entering into Derivative Contract. So these factors encourage the Derivative Market in India. 3. It encourages entrepreneurship in India. It encourages the investor to take more risk & earn more return. So in this way it helps the Indian Economy by developing entrepreneurship. Derivative Market is more regulated & standardized so in this way it provides a more controlled environment. In nutshell, we can say that the rule of High risk & High return apply in Derivatives. If we are able to take more risk then we can earn more profit under Derivatives.

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SUGGESTION
The investors can minimize risk by investing in derivatives. The use of derivative equips the investor to face the risk, which is uncertain. Though the use of derivatives does not completely eliminate the risk, but it certainly lessens the risk. It is advisable to the investor to invest in the derivatives market because of the greater amount of liquidity offered by the financial derivatives and the lower transaction costs associated with the trading of financial derivatives. The derivative products give the investor an option or choice whether the exercise the contract or not. Option gives the choice to the investor to either exercise his right or not. If on expiry date the investor finds that the underlying asset in the option contract is traded at a less price in the stock market then, he has the full liberty to get out of the option contract and go ahead and buy the asset from the stock market. So in case of high uncertainty the investor can go for option. However, these instruments act as a powerful instrument for knowledge traders to expose them to the properly calculated and well understood risks in pursuit of reward i.e profit.

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OTHER SUGGESTIONS ARE :

1).Increase in scripts under derivative segment:
SEBI and the stock exchanges should constantly endeavor to Update the lists of stocks available for derivatives trading by including in the list of companies with very strong fundamentals and a history of excellent track record and also with excellent corporate govern record even while periodically deleting Companies which do not keep up their record of high disclosures And corporate governance and also those companies which may Come under any serious allegations of being associated with any Stock market scams etc. 2. Physical

settlement:

Presently the derivatives traded are settled on cash basis on the last Thursday of each month. Thus, there is no physical delivery of the traded securities. This is one of the reasons for the Derivatives market to be dominated by speculators and big players with grossly inadequate interest shown by small investors to take advantages of the derivative trading, there is a need to switch over the phases to the physical system.

3.vestor and broker education:

This is the need of the hour. While the Indian investor is familiar With the forward trading under Badla system, the derivatives Strategies are not yet familiar to him. Like the certification of traders on the derivatives desk, there has to be an orientation program for the brokers and intermediaries can best do this job as part of service to expand the market and awareness 4. SEBI has to take steps to reduce the speculation that is going on in The market segment

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CONCLUSION
1. Derivative have existed and evolved over a long time, with roots in commodities market .In the recent years advances in financial markets and technologies have made derivatives easy for the investors. 2. Derivatives market in India is growing rapidly unlike equity markets. Trading in derivatives require more than average understanding of finance. Being now markets, Maximum number of investors have not yet understood thee full implications of the trading in derivatives. SEBI should take actions to create awareness in investors about the derivative market. 3. Introduction of derivative implies better risk management. These markets can greater depth, stability and liquidity to India capital markets. Successful risk management with derivatives requires a through understanding 0 principles that govern the pricing of financial derivatives. 4. In order to increase the derivatives market in India SEBI should revise some of their regulation like contract size, participation of Fill in the derivative market. Contract size should be minimized because small investor cannot afford this much of huge premiums. 5. Derivatives are mostly used for hedging purpose. 6. In derivative market the profit and loss of the option writer/option holder purely depends on the fluctuations of the underlying.

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BIBLIOGRAPH

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BIBLIOGRAPH

BOOKS:

AUTHOURS

BOOKS Financial Markets and Service Derivatives Core Modul Workbook Indian Financial System Futures & Options Investment management financial risk management

Gordon and Natrajan NCFM material M.Y.Khan R. Mahajan V.K. Bhalla DUN & Bradstreet

Newspapers: Economic Time. Business line.

Websites:
WWW.sebi.gov.in www.nseindia.com www.bseibdia.com www.networthdirect .com www.derivatives.com www.analytics.com www.reliancecapital.com
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