Derivatives and Its Strategies

INTRODUCTION
On the eve of the millennium India is preparing itself to keep pace with the developed
countries in all aspects of the rapidly integrating global economy.
With the expansion of innovative practices in information technology, especially in the trade
and tele-communication systems. There is a growing pressure in the stock exchanges to get
ready to face the new unforeseen challenges.
This study analysis the various strategies used in Derivative trading and the usage of these
strategies by Derivative traders with respect to investors of Religare Securities Limited in
Bangalore.
This study mainly focuses on Derivatives & its strategies used in different conditions and the
purpose of the strategy that is whether it aimed to reduce the market risk of the position or
with the motive to speculate. The study analyses the investment allocation of the investors
into different areas like mutual fund, insurance, derivative, etc.
It also studies the decision making process in investment. It studies the various information
used by investors to make the decision. Whether the investors are going with high technical
analysis or those going with the market information that is the information collected from
family, friends, brokers, market experts etc., or at the end going with the individual analysis.
Financial markets are, by nature, extremely volatile and hence the risk factor is an important
concern for financial agents. To reduce this risk, the concept of derivatives comes into the
picture.
Derivatives are products whose values are derived from one or more basic variables
called bases. These bases can be underlying assets (for example forex, equity, etc), bases or
reference rates. For example, wheat farmers may wish to sell their harvest at a future date to
eliminate the risk of a change in prices by that date. The transaction in this case would be the
derivative, while the spot price of wheat would be the underlying asset.
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The need for a derivatives market
The derivatives market performs a number of economic functions:
 They help in transferring risks from risk a verse people to risk oriented people.
 They help in the discovery of future as well as current prices.
 They catalyze entrepreneurial activity.
 They increase the volume traded in markets because of participation of risk adverse
people in greater numbers.
 They increase savings and investment in the long run.
The participants in a derivatives market:
Participants
Hedgers Speculators Arbitrageurs
• Hedgers use futures or options markets to reduce or eliminate the risk associated with price
of an asset.
• Speculators use futures and options contracts to get extra leverage in betting on future
movements in the price of an asset. They can increase both the potential gains and potential
losses by usage of derivatives in a speculative venture.
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• Arbitrageurs are in business to take advantage of a discrepancy between prices in two
different markets. If, for example, they see the futures price of an asset getting out of line with
the cash price, they will take offsetting positions in the two markets to lock in a profit.
Types of Derivatives:
Forwards: A 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 exchange-traded contracts
Options: Options are of two types - calls and puts. Calls give 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. Puts 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: Options generally have lives of up to one year, the majority of options traded on
options exchanges having a maximum maturity of nine months. Longer-dated options are
called warrants and are generally traded over-the-counter.
LEAPS: The acronym LEAPS means Long-Term Equity Anticipation Securities. These are
options having a maturity of up to three years.
Baskets: Basket options are options on portfolios of underlying assets. The underlying asset is
usually a moving average or a basket of assets. Equity index options are a form of basket
options.
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
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.
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INTRODUCTION TO FUTURES AND OPTIONS
Futures Options
Exchange traded, with notation Same as futures.
Exchange defines the product Same as futures.
Price is zero, strike price moves Strike price is fixed, price moves.
Price is zero Price is always positive.
Linear payoff Non-Linear payoff
Both long and short at risk Only short at risk.
Strategies of futures
We look here at some strategies of futures contracts. We refer to single stock futures.
However since the index is nothing but a security whose price or level is a weighted average
of securities constituting an index, all strategies that can be implemented using stock futures
can also be implemented using index futures.
 Hedging: Long security, sell futures
 Speculation: Bullish security, buy futures
 Speculation: Bearish security, sell futures
 Arbitrage: Overpriced futures: buy spot, sell futures
 Arbitrage: Under-priced futures: buy futures, sell spot
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Hedging: Long security, sell futures
Futures can be used as an effective risk—management tool. Take the case of an investor who
holds the shares of a company and gets uncomfortable with market movements in the short
run. He sees the value of his security falling from Rs.450 to Rs.390. In the absence of stock
futures, he would either suffer the discomfort of a price fall or sell the security in anticipation
of a market upheaval. With security futures he can minimize his price risk. All he need do is
enter into an offsetting stock futures position, in this case, take on a short futures position.
Assume that the spot price of the security he holds is Rs.390. Two—month futures cost him
Rs.402. For this he pays an initial margin. Now if the price of the security falls any further, he
will suffer losses on the security he holds. However, the losses he suffers on the security will
be offset by the profits he makes on his short futures position. Take for instance that the price
of his security falls to Rs.350. The fall in the price of the security will result in a fall in the
price of futures. Futures will now trade at a price lower than the price at which he entered into
a short futures position. Hence his short futures position will start making profits. The loss of
Rs.40 incurred on the security he holds, will be made up by the profits made on his short
futures position.
Index futures in particular can be very effectively used to get rid of the market risk of a
portfolio. Every portfolio contains a hidden index exposure or a market exposure. This
statement is true for all portfolios, whether a portfolio is composed of index securities or not.
In the case of portfolios, most of the portfolio risk is accounted for by index fluctuations
(unlike individual securities, where only 30—60% of the securities risk is accounted for by
index fluctuations). Hence a position LONG PORTFOLIO + SHORT NIFTY can often
become one—tenth as risky as the LONG PORTFOLIO position!
Suppose we have a portfolio of Rs. I million which has a beta of 1.25. Then a complete hedge
is obtained by selling Rs. 1.25 million of Nifty futures.
Warning: Hedging does not always make money. The best that can be achieved using hedging
is the removal of unwanted exposure, i.e. unnecessary risk. The hedged position will make
less profit than the unhedged position, half the time. One should not enter into a hedging
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strategy hoping to make excess profits for sure; all that can come out of hedging is reduced
risk.
Speculation: Bullish security, buy futures
Take the case of a speculator who has a view on the direction of the market. He would like to
trade based on this view. He believes that a particular security that trades at Rs. 1000 is
undervalued and expects its price to go up in the next two—three months. How can he trade
based on this belief? In the absence of a deferral product, he would have to buy the security
and hold on to it. Assume he buys 100 shares which cost him one lakh rupees. His hunch
proves correct and two months later the security closes at Rs.1010. He makes a profit of
Rs.l000 on an investment of Rs. 1, 00,000 for a period of two months. This works out to an
annual return of 6 percent.
Today a speculator can take exactly the same position on the security by using futures
contracts. Let us see how this works. The security trades at Rs. 1000 and the two-month
futures trades at 1006. Just for the sake of comparison, assume that the minimum contract
value is 1, 00,000. He buys 100 security futures for which he pays a margin of Rs.20, 000.
Two months later the security closes at 1010. On the day of expiration, the futures price
converges to the spot price and he makes a profit of Rs.400 on an investment of Rs.20, 000.
This works out to an annual return of 12 percent. Because of the leverage they provide,
security futures form an attractive option for speculators.
Speculation: Bearish security, sell futures
Stock futures can be used by a speculator who believes that a particular security is over—
valued and is likely to see a fall in price. How can he trade based on his opinion? In the
absence of a deferral product, there wasn’t much he could do to profit from his opinion.
Today all he needs to do is sell stock futures.
Let us understand how this works. Simple arbitrage ensures that futures on an individual
securities move correspondingly with the underlying security, as long as there is sufficient
liquidity in the market for the security. If the security price rises, so will the futures price. If
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the security price falls, so will the futures price. Now take the case of the trader who expects
to see a fall in the price of ABC Ltd. He sells one two—month contract of futures on ABC at
Rs.240 (each contact for 100 underlying shares). He pays a small margin on the same. Two
months later, when the futures contract expires, ABC closes at 220. On the day of expiration,
the spot and the futures price converges. He has made a clean profit of Rs.20 per share. For
the one contract that he bought, this works out to be Rs.2000.
Arbitrage: Overpriced futures: buy spot, sell futures
As we discussed earlier, the cost-of-carry ensures that the futures price stay in tune with the
spot price. Whenever the futures price deviates substantially from its fair value, arbitrage
opportunities arise.
If you notice that futures on a security that you have been observing seem overpriced, how
can you cash in on this opportunity to earn risk-less profits Say for instance, ABC Ltd. trades
at Rs. 1000. One—month ABC futures trade at Rs. 1025 and seem overpriced. As an
arbitrageur, you can make risk-less profit by entering into the following set of transactions.
1. On day one, borrow funds; buy the security on the cash/spot market at 1000.
2. Simultaneously, sell the futures on the security at 1025.
3. Take delivery of the security purchased and hold the security for a month.
4. On the futures expiration date, the spot and the futures price converge. Now unwind the
position.
5. Say the security closes at Rs.1015. Sell the security.
6. Futures position expires with profit of Rs.10.
7. The result is a risk less profit of Rs. 15 on the spot position and Rs. 10 on the futures
position.
8. Return the borrowed fluids.
When does it make sense to enter into this arbitrage? If your cost of borrowing funds to buy
the security is less than the arbitrage profit possible, it makes sense for you to arbitrage. These
are termed as cash—and—carry arbitrage. Remember however, that exploiting an arbitrage
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opportunity involves trading in the spot and futures market. In the real world, one has to build
in the transactions costs into the arbitrage strategy.
Arbitrage: Under-priced futures: buy futures, sell spot
Whenever the futures price deviates substantially from its fair value, arbitrage opportunities
arise. It could be the case that you notice the futures on a security you hold seem under-
priced. How can you cash in on this opportunity to earn risk-less profits? Say for instance,
ABC Ltd. trades at Rs. 1000. One—month ABC futures trade at Rs. 965 and seem under-
priced. As an arbitrageur, you can make risk-less profit by entering into the following set of
transactions.
1. On day one, sell the security in the cash/spot market at 1000.
2. Make delivery of the security.
3. Simultaneously, buy the futures on the security at 965.
4. On the futures expiration date, the spot and the futures price converge. Now unwind the
position.
5. Say the security closes at Rs.975. Buy back the security.
6. The futures position expires with a profit of Rs. 10.
7. The result is a risk-less profit of Rs.25 on the spot position and Rs. 10 on the futures
position.
If the returns you get by investing in risk-less instruments are more than the return from the
arbitrage trades, it makes sense for you to arbitrage. These are termed as reverse—cash—and
—carry arbitrage. It is this arbitrage activity that ensures that the spot and futures prices stay
in line with the cost—of—carry. As we can see, exploiting arbitrage involves trading on the
spot market. As more and more players in the market develop the knowledge and skills to do
cash—and—carry and reverse cash—and—carry, we will see increased volumes and lower
spreads in both the cash as well as the derivatives market.
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Strategies of options
We look here at some Strategies of options contracts. We refer to single stock options here.
However since the index is nothing but a security whose price or level is a weighted average
of securities constituting the index, all strategies that can be implemented using stock futures
can also be implemented using index options.
 Hedging: Have underlying buy puts
 Speculation: Bullish security, buy calls or sell puts
 Speculation: Bearish security, sell calls or buy puts
Hedging: Have underlying buy puts
Owners of stocks or equity portfolios often experience discomfort about the overall stock
market movement. As an owner of stocks or an equity portfolio, sometimes you may have a
view that stock prices will fall in the near future. At other times you may see that the market
is in for a few days or weeks of massive volatility, and you do not have an appetite for this
kind of volatility. The union budget is a common and reliable source of such volatility: market
volatility is always enhanced for one week before and two weeks after a budget. Many
investors simply do not want the fluctuations of these three weeks. One way to protect your
portfolio from potential downside due to a market drop is to buy insurance using put options.
Index and stock options are a cheap and easily implemental way of seeking this insurance.
The idea is simple. To protect the value of your portfolio from falling below a particular level,
buy the right number of put options with the right strike price. If you are only concerned
about the value of a particular stock that you hold, buy put options on that stock. If you are
concerned about the overall portfolio, buy put options on the index. When the stock price falls
your stock will lose value and the put options bought by you will gain, effectively ensuring
that the total value of your stock plus put does not fall below a particular level. This level
depends on the strike price of the stock options chosen by you. Similarly when the index falls,
your portfolio will lose value and the put options bought by you will gain, effectively
ensuring that the value of your portfolio does not fall below a particular level. This level
depends on the strike price of the index options chosen by you.
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Portfolio insurance using put options is of particular interest to mutual funds who already own
well-diversified portfolios. By buying puts, the fund can limit its downside in case of a market
fall.
Speculation: Bullish security, buy calls or sell puts
There are times when investors believe that security prices are going to rise. For instance,
after a good budget. Or good corporate results, or the onset of a stable government. How does
one implement a trading strategy to benefit from an upward movement in the underlying
security? Using options there are two ways one can do this:
I. Buy call options; or
2. Sell put options
We have already seen the payoff of a call option. The downside to the buyer of the call option
is limited to the option premium he pays for buying the option. His upside however is
potentially unlimited. Suppose you have a hunch that the price of a particular security is going
to rise in a month’s time. Your hunch proves correct and the price does indeed rise, it is this
upside that you cash in on. However, if your hunch proves to be wrong and the security price
plunges down, what you lose is only the option premium.
Having decided to buy a call, which one should you buy? Given that there is a number of one
—month calls trading, each with a different strike price, the obvious question is: which strike
should you choose? Let us take a look at call options with different strike prices. Assume that
the current price level is 1250, risk-free rate is 12% per year and volatility of the underlying
security is 30%. The following options are available:
1. A one month call with a strike of 1200.
Which of these options you choose largely depends on how strongly you feel about the
likelihood of the upward movement in the price, and how much you are willing to lose should
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this upward movement not come about. There are five one—month calls and five one—month
puts trading in the market. The call with a strike of 1200 is deep in—the—money and hence
trades at a higher premium. The call with a strike of 1275 is out—of—the—money and trades
at a low premium. The call with a strike of 1300 is deep—out—of—money. Its execution
depends on the unlikely event that the underlying will rise by more than 50 points on the
expiration date. Hence buying this call is basically like buying a lottery. There is a small
probability that it may be in—the—money by expiration, in which case the buyer will make
profits. In the more likely event of the call expiring out—of—the—money, the buyer simply
loses the small premium amount of Rs.27.50.
As a person who wants to speculate on the hunch that prices may rise, you can also do so by
selling or writing puts. As the writer of puts, you face a limited upside and an unlimited
downside. If prices do rise, the buyer of the put will let the option expire and you will earn the
premium. If however your hunch about an upward movement proves to be wrong and prices
actually fall, then your losses directly increase with the falling price level. If for instance the
price of the underlying falls to 1230 and you’ve sold a put with an exercise of 1300, the buyer
of the put will exercise the option and you’ll end up losing Rs.70. Taking into account the
premium earned by you when you sold the put, the net loss on the trade is Rs.5.20.
Having decided to write a put, which one should you write? Given that there are a number of
one-month puts trading, each with a different strike price, the obvious question is: which
strike should you choose? This largely depends on how strongly you feel about the likelihood
of the upward movement in the prices of the underlying. If you write an at—the—money put.
The option premium earned by you will be higher than if you write an out—of—the—money
put. However the chances of an at—the—money put being exercised on you are higher as
well. In the example in Figure 4.10, at a price level of 1250, one option is in—the—money
and one is out—of—the—money. As expected, the in—the—money option fetches the
highest premium of Rs.64.80 whereas the out—of—the—money option has the lowest
premium of Rs. 18.15.
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Speculation: Bearish security, sell calls or buy puts
Do you sometimes think that the market is going to drop? That you could make a profit by
adopting a position on the market? Due to poor corporate results, or the instability of the
government, many people feel that the stocks prices would go down. How does one
implement a trading strategy to benefit from a downward movement in the market? Today,
using options, you have two choices:
I. Sell call options; or
2. Buy put options
We have already seen the payoff of a call option. The upside to the writer of the call option is
limited to the option premium he receives upright for writing the option. His downside
however is potentially unlimited. Suppose you have a hunch that the price of a particular
security is going to fall in a month’s time. Your hunch proves correct and it does indeed fall,
it is this downside that you cash in on. When the price falls, the buyer of the call lets the call
expire and you get to keep the premium. However, if your hunch proves to be wrong and the
market soars up instead, what you lose is directly proportional to the rise in the price of the
security.
Having decided to write a call, which one should you write? Given that there are a number of
one-month calls trading, each with a different strike price, the obvious question is: which
strike should you choose? Let us take a look at call options with different strike prices.
Assume that the current stock price is 1250, risk-free rate is 12% per year and stock volatility
is 30%. You could write the following options:
I. A one month call with a strike of 1200.
Which of these options you write largely depends on how strongly you feel about the
likelihood of the downward movement of prices and how much you are willing to lose should
this downward movement not come about. There are five one-month calls and five one-month
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puts trading in the market. The call with a strike of 1200 is deep in-the-money and hence
trades at a higher premium. The call with a strike of 1275 is out-of-the-money and trades at a
low premium. The call with a strike of 1300 is deep-out-of-money. Its execution depends on
the unlikely event that the stock will rise by more than 50 points on the expiration date. Hence
writing this call is a fairly safe bet. There is a small probability that it may be in-the-money by
expiration in which case the buyer exercises and the writer suffers losses to the extent that the
price is above 1300. In the more likely event of the call expiring out-of-the-money, the writer
earns the premium amount of Rs.27.50.
As a person who wants to speculate on the hunch that the market may fall, you can also buy
puts. As the buyer of puts you face an unlimited upside but a limited downside. If the price
does fall, you profit to the extent the price falls below the strike of the put purchased by you.
If however your hunch about a downward movement in the market proves to be wrong and
the price actually rises, all you lose is the option premium. If for instance the security price
rises to 1300 and you’ve bought a put with an exercise of 1250, you simply let the put expire.
If however the price does fall to say 1225 on expiration date, you make a neat profit of Rs.25.
Having decided to buy a put, which one should you buy? Given that there are a number of
one-month puts trading, each with a different strike price, the obvious question is: which
strike should you choose? This largely depends on how strongly you feel about the likelihood
of the downward movement in the market. If you buy an at-the-money put, the option
premium paid by you will by higher than if you buy an out-of-the-money put. However the
chances of an at-the-money put expiring in-the-money are higher as well.
Clearing and settlement
National Securities Clearing Corporation Limited (NSCCL) undertakes clearing and

settlement of all trades executed on the futures and options (F&O) segment of the NSE. It also
acts as legal counterparty to all trades on the F&O segment and guarantees their financial
settlement.
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Clearing entities
Clearing and settlement activities in the F&O segment are undertaken by NSCCL with the
help of the following entities:
Clearing members
In the F&O segment, some members, called self clearing members, clear and settle their
trades executed by them only either on their own account or on account of their clients. Some
others called trading member—cum—clearing member, clear and settle their own trades as
well as trades of other trading members (TMs). Besides, there is a special category of
members, called professional clearing members (PCM) who clear and settle trades executed
by TMs. The members clearing their own trades and trades of others, and the PCMs are
required to bring in additional security deposits in respect of every TM whose trades they
undertake to clear and settle.
Clearing banks
Funds settlement takes place through clearing banks. For the purpose of settlement all
clearing members are required to open a separate bank account with NSCCL designated
clearing bank for F&O segment. The Clearing and Settlement process comprises of the
following three main activities:
I. Clearing
2. Settlement
Proprietary position of trading member Madanbhai on Day 1
Trading member Madanbbai trades in the futures and options segment for himself and two of
his clients. The table shows his proprietary position.
Note: A buy position 200@ 1000” means 200 units bought at the rate of Rs. 1000.
Trading member Madanbhai
Buy Sell BUY SELL
Proprietary position 200@ 1000 400@ 1010
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Client position of trading member Madanbhai on Day 1
Trading member Madanbhai trades in the futures and options segment for himself and two of
his clients. The table shows his client position.
Trading member Madanbhai
Buy Open Sell Close Sell Open Buy Close
Client position
BUY OPEN SELL CLOSE
Client A 400@1109 200@1000
SELL OPEN BUY CLOSE
Client B 600@1100 200@1099
3. Risk Management
Settlement mechanism
All futures and options contracts are cash settled, i.e. through exchange of cash. The
underlying for index futures/options of the Nifty index cannot be delivered. These contracts,
therefore, have to be settled in cash. Futures and options on individual securities can be
delivered as in the spot market. However, it has been currently mandated that stock options
and futures would also be cash settled. The settlement amount for a CM is netted across all
their TMs/clients, with respect to their obligations on MTM, premium and exercise
settlement.
Settlement of futures contracts
Futures contracts have two types of settlements, the MTM settlement which happens on a
continuous basis at the end of each day, and the final settlement which happens on the last
trading day of the futures contract.
MTM settlement:
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All futures contracts for each member are marked-to-market (MTM) to the daily settlement
price of the relevant futures contract at the end of each day. The profits/losses are computed
as the difference between:
1. The trade price and the day’s settlement price for contracts executed during the day but not
squared up.
2. The previous day’s settlement price and the current day’s settlement price for brought
forward contracts.
3. The buy price and the sell price for contracts executed during the day and squared up.
Final settlement for futures
On the expiry day of the futures contracts, after the close of trading hours, NSCCL marks all
positions of a CM to the final settlement price and the resulting profit/loss is settled in cash.
Final settlement loss/profit amount is debited/ credited to the relevant CM’s clearing hank
account on the day following expiry day of the contract.
Settlement prices for futures
Daily settlement price on a trading day is the closing price of the respective futures contracts
on such day. The closing price for a futures contract is currently calculated as the last half an
hour weighted average price of the contract in the F&0 Segment of NSE. Final settlement
price is the closing price of the relevant underlying index/security in the capital market
segment of NSE, on the last trading day of the contract. The closing price of the underlying
Index/security is currently its last half an hour weighted average value in the capital market
segment of NSE.
Settlement of options contracts
Options contracts have three types of settlements, daily premium settlement, exercise
settlement, interim exercise settlement in the case of option contracts on securities and final
settlement.
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Daily premium settlement
Buyer of an option is obligated to pay the premium towards the options purchased by him.
Similarly, the seller of an option is entitled to receive the premium for the option sold by him.
The premium payable amount and the premium receivable amount are netted to compute the
net Premium payable or receivable amount for each client for each option contract.
Exercise settlement
Although most option buyers and sellers close out their options positions by an offsetting
closing transaction, an under-standing of exercise can help an option buyer determine whether
exercise might be more advantageous than an offsetting sale of the option. There is always a
possibility of the option seller being assigned an exercise. Once an exercise of an option has
been assigned to an option seller, the option seller is bound to fulfill his obligation (meaning,
pay the cash settlement amount in the case of a cash-settled option) even though he may not
yet have been notified of the assignment.
Interim exercise settlement
Interim exercise settlement takes place only for option contracts on securities. An investor can
exercise his in-the-money options at any time during trading hours, through his trading
member. Interim exercise settlement is effected for such options at the close of the trading
hours, on the day of exercise. Valid exercised option contracts are assigned to short positions
in the option contract with the same series (i.e. having the same underlying, same expiry date
and same strike price), on a random basis, at the client level. The CM who has exercised the
option receives the exercise settlement value per unit of the option from the CM who has been
assigned the option contract.
Final exercise settlement
Final exercise settlement is effected for all open long in—the—money strike price options
existing at the close of trading hours, on the expiration day of an option contract. All such
long positions are exercised and automatically assigned to short positions in option contracts
with the same series, on a random basis. The investor who has long in—the—money options
on the expiry date will receive the exercise settlement value per unit of the option from the
investor who has been assigned the option contract.
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Exercise process
The period during which an option is exercisable depends on the style of the option. On NSE,
index options are European style, i.e. options are only subject to automatic exercise on the
expiration day, if they are in—the—money. As compared to this, options on securities are
American style. In such cases, the exercise is automatic on the expiration day, and voluntary
prior to the expiration day of the option contract, provided they are in—the—money.
Automatic exercise means that all in—the—money options would be exercised by NSCCL on
the expiration day of the contract. The buyer of such options need not give an exercise notice
in such cases. Voluntary exercise means that the buyer of an in—the—money option can
direct his TM/CM to give exercise instructions to NSCCL. In order to ensure that an option is
exercised on a particular day, the buyer must direct his TM to exercise before the cut-off time
for accepting exercise instructions for that day. Usually, the exercise orders will be accepted
by the system till the close of trading hours. Different TMs may have different cut—off times
for accepting exercise instructions from customers, which may vary for different options. An
option, which expires unexercised, becomes worthless. Some TMs may accept standing
instructions to exercise, or have procedures for the exercise of every option, which is in—the
—money at expiration. Once an exercise instruction is given by a CM to NSCCL, it cannot
ordinarily be revoked. Exercise notices given by a buyer at anytime on a day are processed by
NSCCL after the close of trading hours on that day. All exercise notices received by NSCCL
from the NEAT F&O system are processed to determine their validity. Some basic validation
checks are carried out to check the open buy position of the exercising client/TM and if option
contract is in—the—money. Once exercised contracts are found valid, they are assigned.
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Assignment process
The exercise notices are assigned in standardized market lots to short positions in the option
contract with the same series (i.e. same underlying, expiry date and strike price) at the client
level. Assignment to the short positions is done on a random basis. NSCCL determines short
positions, which are eligible to be assigned and then allocates the exercised positions to any
one or more short positions. Assignments are made at the end of the trading day on which
exercise instruction is received by NSCCL and notified to the members on the same day. It is
possible that an option seller may not receive notification from its TM that an exercise has
been assigned to him until the next day following the date of the assignment to the CM by
NSCCL.
Exercise settlement computation
In case of index option contracts, all open long positions at in—the—money strike prices are
automatically exercised on the expiration day and assigned to short positions in option
contracts with the same series on a random basis. For options on securities, where exercise
settlement may be interim or final, interim exercise for an open long in—the—money option
position can be effected on any day till the expiry of the contract. Final exercise is
automatically effected by NSCCL for all open long in—the—money positions in the expiring
month option contract, on the expiry day of the option contract. The exercise settlement price
is the closing price of the underlying (index or security) on the exercise day (for interim
exercise) or the expiry day of the relevant option contract (final exercise). The exercise
settlement value is the difference between the strike price and the final settlement price of the
relevant option contract. For call options, the exercise settlement value receivable by a buyer
is the difference between the final settlement price and the strike price for each unit of the
underlying conveyed by the option contract, while for put options it is difference between the
strike price and the final settlement price for each unit of the underlying conveyed by the
option contract. Settlement of exercises of options on securities is currently by payment in
cash and not by delivery of securities. It takes place for in-the-money option contracts.
The exercise settlement value for each unit of the exercised contract is computed as follows:
Call options — closing price of the security on the day of exercise — Strike price
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Put options — Strike price — Closing price of the security on the day of exercise
For final exercise the closing price of the underlying security is taken on the expiration day
the exercise settlement by NSCCL would ordinarily take place on 3rd day following the day
of exercise. Members may ask for clients who have been assigned to pay the exercise
settlement value earlier.
Special facility for settlement of institutional deals
NSCCL provides a special facility to Institutions/Foreign Institutional Investors (FIIs)/Mutual

Funds etc. to execute trades through any TM, which may be cleared and settled by their own
CM. Such entities are called custodial participants (CPs). To avail of this facility, a CP is
required to register with NSCCL. Through his CM. A unique CP code is allotted to the CP by
NSCCL. All trades executed by a CP through any TM are required to have the CP code in the
relevant field on the trading system at the time of order entry. Such trades executed on behalf
of a CP are confirmed by their
Own CM (and not the CM of the TM through whom the order is entered), within the time
specified by NSE on the trade day though the on-line confirmation facility. Till such time the
trade is confirmed by CM of concerned CP, the same is considered as a trade of the TM and
the responsibility of settlement of such trade vests with CM of the TM. Once confirmed by
CM of concerned CP, such CM is responsible for clearing and settlement of deals of such
custodial clients. FIIs have been permitted to trade in all the exchange traded derivative
contracts subject to compliance of the position limits prescribed for them and their sub-
accounts, and compliance with the prescribed procedure for settlement and reporting. A FTI/a
sub-account of the FIT, as the case may be, intending to trade in the F&O segment of the
exchange, is required to obtain a unique Custodial Participant (CP) code allotted from the
NSCCL. FIIs/sub—accounts of FIIs which have been allotted a unique CP code by NSCCL
are only permitted to trade on the F&O segment. The FII/sub—account of FTI ensures that all
orders placed by them on the Exchange carry the relevant CP code allotted by NSCCL
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Risk management
NSCCL has developed a comprehensive risk containment mechanism for the F&O segment.
The salient features of risk containment mechanism on the F&O segment are:
1. The financial soundness of the members is the key to risk management. Therefore, the
requirements for membership in terms of capital adequacy (net worth, security deposits) are
quite stringent.
2. NSCCL charges an upfront initial margin for all the open positions of a CM. It specifies the
initial margin requirements for each futures/options contract on a daily basis. It also follows
value-at-risk (VAR) based margining through SPAN. The CM in turn collects the initial
margin from the TMs and their respective clients.
3. The open positions of the members are marked to market based on contract settlement price
for each contract. The difference is settled in cash on a T+l basis.
4. NSCCL’s on-line position monitoring system monitors a CM’s open positions on a real-
time basis. Limits are set for each CM based on his capital deposits. The on-line position
monitoring system generates alerts whenever a CM reaches a position limit set up by NSCCL.
NSCCL monitors the CMs for MTM value violation, while TMs arc monitored for contract-
wise position limit violation.
5. CMs arc provided a trading terminal for the purpose of monitoring the open positions of all
the TMs clearing and settling through him. A CM may set exposure limits for a TM clearing
and settling through him. NSCCL assists the CM to monitor the intra-day exposure limits set
up by a CM and whenever a TM exceed the limits, it stops that particular TM from further
trading.
6. A member is alerted of his position to enable him to adjust his exposure or bring in
additional capital. Position violations result in withdrawal of trading facility for all TMs of a
CM in case of a violation by the CM.
7. A separate settlement guarantee fund for this segment has been created out of the capital of
members.
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The most critical component of risk containment mechanism for F&O segment is the
margining system and on-line position monitoring. The actual position monitoring and
margining is carried out on—line through Parallel Risk Management System (PRISM).
PRTSM uses SPAN(r) (Standard Portfolio Analysis of Risk) system for the purpose of
computation of on-line margins, based on the parameters defined by SEBI.
NSCCL—SPAN
The objective of NSCCL—SPAN is to identify overall risk in a portfolio of all futures and
options contracts for each member. The system treats futures and options contracts uniformly,
while at the same time recognizing the unique exposures associated with options portfolios,
like extremely deep out—of—the—money short positions and inter—month risk. Its over—
riding objective is to determine the largest loss that a portfolio might reasonably be expected
to suffer from one day to the next day based on 99% VAR methodology. SPAN considers
uniqueness of option portfolios. The following factors affect the value of an option:
1. Underlying market price
2. Strike price
3. Volatility (variability) of underlying instrument
4. Time to expiration
5. Interest rate
As these factors change, the value of options maintained within a portfolio also changes.
Thus, SPAN constructs scenarios of probable changes in underlying prices and volatilities in
order to identify the largest loss a portfolio might suffer from one day to the next. It then sets
the margin requirement to cover this one—day loss. The complex calculations (e.g. the
pricing of options) in SPAN are executed by NSCCL. The results of these calculations are
called risk arrays. Risk arrays, and other necessary data inputs for margin calculation are
provided to members daily in a file called the SPAN risk parameter file. Members can apply
the data contained in the risk parameter files, to their specific portfolios of futures and options
contracts, to determine their SPAN margin requirements. Hence, members need not execute a
complex option pricing calculation, which is performed by NSCCL. SPAN has the ability to
estimate risk for combined futures and options portfolios, and also re—value the same under
various scenarios of changing market conditions.
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Types of margins
The margining system for F&O segment is explained below:
• Initial margin: Margin in the F&O segment is computed by NSCCL upto client level for
open positions of CMs/TMs. These are required to be paid up-front on gross basis at
individual client level for client positions and on net basis for proprietary positions. NSCCL
collects initial margin for all the open positions of a CM based on the margins computed by
NSE-SPAN. A CM is required to ensure collection of adequate initial margin from his TMs
up-front. The TM is required to collect adequate initial margins up-front from his clients.
• Premium margin: In addition to initial margin, premium margin is charged at client level.
This margin is required to be paid by a buyer of an option till the premium settlement is
complete.
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RESEARCH DESIGN
STATEMENT OF THE PROBLEM
The study is basically aim to analyze the various derivative strategies used by investors while
trading. This study attempts to analyze the effectiveness of hedging in terms of reducing the
risks and also various kinds of strategies to be used in a bull market, bear market, and also in a
stable market and project Title is a study of the derivatives and its strategies used by
investors conducted at Religare Securities Limited Bangalore.
NEED FOR STUDY

The derivative market in India is rapidly growing, and at the same time it is providing a very
good opportunity for the investors and traders to trade in the derivative market, and maximize
their returns on the investment. Derivative market connects the local market with the global
market.
The futures contracts are designed to deal directly with the credit risk involved in
Locking-in prices and obtaining forward cover. These contracts can be used for hedging price
risk and discovering future prices. For commodities that compete in world or National
markets, the discovering the future price or the market movement will help fulls the traders to
use the strategies in a profitable way and also at the same time to avoid the losses. To predict
the market movement, one should master the methods and tools used to study the market
movements.
Hence the study helps the traders or the investors of the derivative market in predicting
the market movements and strategies used for trading. The study provides the method or the
tool which are very help full to study the market movement. And accordingly the risk is
minimized. The traders can well utilize the opportunity and make the profits. The organization
or the management can also use these methods or the tools to advise their customers, to trade
profitably.
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REVIEW OF LITERATURE
 In this dissertation many international and national literatures related to the topic have
been reviewed. None of these are giving a clear idea about this topic. Many books and
magazines are focusing only the international market i.e. US and Europe. There are no
special books for the Indian context.
 In the Indian context only very few studies relating to the topic is noticed. But these
studies are taken before the introduction of Indian derivative market. These studies
have their own limitations. No studies are covering the present system of derivative
trading in India in detail.
 The book futures and options by N.D.Vohra and B.R.Bagri published by Tata
McGraw Hill giving a general idea about the option and its strategies. But this book is
mainly referring the international examples and the book is published before the
introduction of the derivatives in India. So it lacks the current information about the
topic.
 The report presented by Shah A & Thomas S (1997) published by Oxford University
Press is giving the information of recent developments of Futures and options in
Indian market. But it lacks the current system of derivatives in India.
 Apart from these books other old projects and articles in various magazines such as
“southern economists” and business world (personal finance) referred.
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OBJECTIVES OF THE STUDY
 To analyze the growth of derivative market in India.
 To study the strategies of future and options trading.
 To understand the effectiveness of hedging.
OPERATIONAL DEFINITION OF CONCEPTS

Derivatives defined:
A derivative is a product whose value is derived from the value of one or more underlying
variables or assets in a contractual manner. The underlying asset can be equity, forex,
commodity or any other asset.
• Hedgers use futures or options markets to reduce or eliminate the risk associated with price
of an asset.
• Speculators use futures and options contracts to get extra leverage in betting on future
movements in the price of an asset. They can increase both the potential gains and potential
losses by usage of derivatives in a speculative venture.
• Arbitrageurs are in business to take advantage of a discrepancy between prices in two
different markets. If, for example, they see the futures price of an asset getting out of line with
the cash price, they will take offsetting positions in the two markets to lock in a profit.
Types of Derivatives:
Forwards: A 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.
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Warrants: Options generally have lives of up to one year, the majority of options traded on
options exchanges having a maximum maturity of nine months. Longer-dated options are
called warrants and are generally traded over-the-counter.
LEAPS: The acronym LEAPS means Long-Term Equity Anticipation Securities. These are
options having a maturity of up to three years.
Baskets: Basket options are options on portfolios of underlying assets. The underlying asset is
usually a moving average or a basket of assets. Equity index options are a form of basket
options.
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
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.
Types of margins
The margining system for F&O segment is explained below:
• Initial margin: Margin in the F&O segment is computed by NSCCL upto client level for
open positions of CMs/TMs. These are required to be paid up-front on gross basis at
individual client level for client positions and on net basis for proprietary positions. NSCCL
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collects initial margin for all the open positions of a CM based on the margins computed by
NSE-SPAN. A CM is required to ensure collection of adequate initial margin from his TMs
up-front. The TM is required to collect adequate initial margins up-front from his clients.
• Premium margin: In addition to initial margin, premium margin is charged at client level.
This margin is required to be paid by a buyer of an option till the premium settlement is
complete.
SCOPE OF THE STUDY
The scope of the study is clearly seen as it helps in understanding the various derivative
markets. It helps to evaluate the effectiveness of hedging in the derivative trading. The study
reveals some vital information regarding reduction of market risk and maximizing profit
before applying investment strategies.
SAMPLING DESIGN
The sampling procedure adopted is ‘Random sampling’. This involved picking up of samples or
units of population on a random basis with out any prejudice.
• Sample size.
• Time and place of survey.
Sample unit and size

Existing customers of Religare securities Ltd. The sample chosen to collect data consists of
100 investors. The data collected is used for final tabulation and analysis.
SOURCES OF DATA
Primary Data
Secondary Data
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TOOLS OF DATA COLLECTION
The study has used both primary data as well as secondary data. The collection of primary
data was through questionnaire method. The information was collected from derivatives
investors of Religare Securities Limited, from all the branches in Bangalore.
The Secondary data’s were collected from Journal’s, Books and websites.
STATISTICAL TOOLS USED:

Tabulation of data is the simplest and most revealing device for summarizing data and
presenting them in a meaningful fashion in the statistical table. A table is a systematic
arrangement of statistical data in columns and rows. The purpose of a table is to simplify the
presentation and to facilitate comparisons
LIMITATION OF THE STUDY
Some of the investor are not ready to give there financial states. And this final decision taken
from the investor’s opinion.
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INDUSTRY PROFILE
The first derivative product to be introduced in the Indian securities market is going to be
"INDEX FUTURES".
In the world, first index futures were traded in U.S. on Kansas City Board of Trade (KCBT)
on Value Line Arithmetic Index (VLAI) in 1982.
BSE created history on June 9, 2000 by launching the first Exchange traded Index Derivative
Contract i.e. futures on the capital market benchmark index - the BSE Sensex. The
inauguration of trading was done by Prof. J.R. Varma, member of SEBI and chairman of the
committee responsible for formulation of risk containment measures for the Derivatives
market. The first historical trade of 5 contracts of June series was done on June 9, 2000 at
9:55:03 a.m. between M/s Kaji & Maulik Securities Pvt. Ltd. and M/s Emkay Share & Stock
Brokers Ltd. at the rate of 4755.
In the sequence of product innovation, the exchange commenced trading in Index Options on
Sensex on June 1, 2001. Stock options were introduced on 31 stocks on July 9, 2001 and
single stock futures were launched on November 9, 2002.
September 13, 2004 marked another milestone in the history of Indian Capital Markets, the
day on which the Bombay Stock Exchange launched Weekly Options, a unique product
unparallel in derivatives markets, both domestic and international. BSE permitted trading in
weekly contracts in options in the shares of four leading companies namely Reliance, Sat
yam, State Bank of India, and Tisco in addition to the flagship index-Sensex.
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TYPES OF PRODUCTS
Index Futures
A futures contract is a standardized contract to buy or sell a specific security at a future date at
an agreed price.
An index future is, as the name suggests, a future on the index i.e. the underlying is the index
itself. There is no underlying security or a stock, which is to be delivered to fulfill the
obligations, as index futures are cash settled. As other derivatives, the contract derives its
value from the underlying index. The underlying indices in this case will be the various
eligible indices and as permitted by the Regulator from time to time.
Index Options
Options contract give its holder the right, but not the obligation, to buy or sell something on or
before a specified date at a stated price. Generally index options are European Style.
European Style options are those option contracts that can be exercised only on the expiration
date. The underlying indices for index options are the various eligible indices and as permitted
by the Regulator from time to time.
Stock Futures
A stock futures contract is a standardized contract to buy or sell a specific stock at a future
date at an agreed price. A stock future is, as the name suggests, a future on a stock i.e. the
underlying is a stock. The contract derives its value from the underlying stock. Single stock
futures are cash settled.
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Stock Options
Options on Individual Stocks are options contracts where the underlying are individual stocks.
Based on eligibility criteria and subject to the approval from the regulator, stocks are selected
on which options are introduced. These contracts are cash settled and are American style.
American Style options are those option contracts that can be exercised on or before the
expiration date.
Weekly Options
Equity Futures & Options were introduced in India having a maximum life of 3 months.
These options expire on the last Thursday of the expiring month. There was a need felt in the
market for options of shorter maturity.
To cater to this need of the market participants BSE launched weekly options on September
13, 2004 on 4 stocks and the BSE Sensex. Weekly options have the same characteristics as
that of the Monthly Stock Options (stocks and indices) except that these options settle on
Friday of every week. These options are introduced on Monday of every week and have a
maturity of 2 weeks, expiring on Friday of the expiring week.
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COMPANY PROFILE
HISTORY
Religare is driven by ethical and dynamic process for wealth creation. Based on this, the
company started its endeavor in the financial market.
Registered Office Registrar & Share Transfer Agent
55, Hanuman Road, Connaught Place, , New Intime Spectrum Registry Ltd.
Delhi, Delhi - 110001 A-31, 3rd Floor, Near PVR, Naraina
Industrial Area, Phase I, New Delhi - 110028,
Tel: 23346875, , , Delhi.
Fax: 23346876,
Tel: 51410592, 51410593, 51410594
Key Officials
Name Designation
Harpal Singh Chairman / Chair Person
Sunil Godhwani Managing Director
Other Details
Business Group Ranbaxy Group
Industry Finance - Leasing & Hire Purchase
Listings BSE , NSE
ISIN No. INE991C01018
Incorporation 23/03/1994
Public Issue Date 02/01/1995
Religare Enterprises Limited (A Ranbaxy Promoter Group Company) through Religare

Securities Limited, Religare Finvest Limited, Religare Commodities Limited and Religare
Insurance Broking Limited provides integrated financial solutions to its corporate, retail and
wealth management clients. Today, we provide various financial services which include
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Investment Banking, Corporate Finance, Portfolio Management Services, Equity &
Commodity Broking, Insurance and Mutual Funds. Plus, there’s a lot more to come your way.
Religare is proud of being a truly professional financial service provider managed by a highly
skilled team, who have proven track record in their respective domains. Religare operations
are managed by more than 3000 highly skilled professionals who subscribe to Religare
philosophy and are spread across its country wide branches.
Today, we have a growing network of more than 300 branches and more than 580 business
partners spread across more than 300 cities/towns in India and a fully operational international
office at London. However, our target is to have 500 branches and 1000 business partners in
India and 7 International offices by March 2008.
Unlike a traditional broking firm, Religare group works on the philosophy of partnering for
wealth creation. We not only execute trades for our clients but also provide them critical and
timely investment advice. The growing list of financial institutions with which Religare is
empanelled as an approved broker is a reflection of the high level service standard maintained
by the company.
Vision
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To be India's first Multinational providing complete financial services solution across the
globe.
Mission
Providing integrated financial care driven by the relationship of trust and confidence.
GROUP COMPANIES:
Religare Enterprises Limited group comprises of Religare Securities Limited, Religare
Commodities Limited, Religare Finvest Limited and Religare Insurance Broking Limited,
which deal in equity, commodity and financial services business.
NATURE OF BUSINESS
RELIGARE SECURITIES LTD:
RSL is one of the leading broking houses of India and are dealing into Equity Broking,
Depository Services, Portfolio Management Services, Institutional Equity Brokerage &
Research, Investment Banking and Corporate Finance.
Extension of services has been a constant feature in Religare to regard the needs of our
clients. Consequently, company is soon going to launch Internet Trading and Merchant
Banking. This would take care of different investment needs of different classes of investors.
To facilitate free and fare trading process Religare is a member of major financial institutions
like, National Stock Exchange of India, Bombay Stock Exchange of India, Depository
Participant with National Securities Depository Limited and Central Depository Services (I)
Limited, and a SEBI approved Portfolio Manager.
RSL serves a platform to all segments of investors to avail the opportunities offered by
investing in Indian equities either on their own or through managed funds in Portfolio
Management.
RELIGARE COMMODITIES LTD:
35
Religare is a member of NCDEX and MCX and provides platform for trading in commodities,
which is an online facility also.
RCL provides platform to both agro and non-agro commodity traders to derive the actual
price of the commodity and also to trade and hedge actively in the growing commodity
trading market in India.
With this realization, Religare Commodities is coming up with its branches at 42 mandi
locations. It is a flagship effort from our team, which would be helpful in facilitating trade and
speculating price of commodities in future.
RELIGARE FINVEST:
Religare Finvest Limited (RFL), a Non Banking Finance Company (NBFC) is aggressively
making a name in the financial services arena in India. In a fast paced, constantly changing
dynamic business environment, RFL has delivered the most competitive products and
services.
RFL is primarily engaged in the business of providing finance against securities in the
secondary market. It also provides finance for application in Initial Public Offers to non-retail
clients in the primary market.
RFL is also planning to initiate personal loan portfolio as fund based activity and mutual fund
distribution as fee based activities.
Along with this, the company also undertakes non-fund based advisory operations in the field
of Corporate Financing in the nature of Credit Syndication which includes inter alia, bills
discounting, inter corporate deposit, working capital loan syndication, placement of private
equity and other structured products.
RELIGARE INSURANCE BROKING LTD:
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Religare has been taking care of financial services for long but there was a missing link.
Financial planning is incomplete without protective measure i.e. structured products to take
care of event of things that may go wrong.
Consequently, Religare is soon coming up with Religare Insurance Broking Limited. As

composite insurance broker, we would deal in both insurance and reinsurance, providing our
clients risk transfer solutions on life and non-life sides.
This service will take benefit of Religare’s vast business empire spread throughout the
country -- providing our valued clients insurance services across India. We aim to have a wide
reach with our services – literally! That’s why we are catering the insurance requirements of
both retail and corporate segments with products of all the insurance companies on life and
non-life side.
Still, there is more in store. We also cater individuals with a complete suite of insurance
solutions, both life and general to mitigate risks to life and assets through our existing
network of over 150 branches – expected to reach 250 by the end of this year!
For corporate clients, we will be offering value based customized solutions to cover all risks
which their business is exposed to. An operations team equipped with the best of technology
support will support our clients.
Religare Insurance Broking aims to provide neutral, transparent and professional risk transfer
advice to become the first choice of India.
Religare team is led by a very eminent Board of Directors who provide policy guidance and
work under the active leadership of its CEO & Managing Director and support of its Central
Guidance Team.
Board of Directors:
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Following is the list of Directors of Religare Securities Limited:
Chairman Mr. Harpal Singh
Managing Director Mr. Sunil Godhwani
Director Mr. Vinay Kumar Kaul
Director Mr. Malvinder Mohan Singh
Director Mr. Shivinder Mohan Singh
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PRODUCTS AND SERVICES:
EQUITY AND DERIVATIVE:
For the first time Religare brings investing community the power to be associated with the
elite dealing rooms and freedom to execute trade on their own. That is, you may trade from
our branches or trade on your own over the net and with that you get our expertise and
assistance.
R-ALLY
It has been designed to provide world class experience and expertise to investors.
R-ALLY as the name suggests is the perfect partner for savvy investors. Clients opting for
this service would be provided services managed by a team of dedicated relationship
managers and experienced trade dealers. They would not only assist the client in information
dissemination but would also take care of all post trade requirements.
R-ACE
This product comes as RACE, RACElite and RACEpro. It gives you the power of trading
from your home, office or while traveling and trade in the market of equity and derivatives.
You can log on and get started from your computers or your mobile devices. These products
have very exciting features like integrated DP, hot key functions and much more...
COMMODITIES:
Commodities as a word originated from the French word ‘commdite’ meaning ‘benefit,
profit’. Rightly so! The kind of continuously growing turnover which commodities market has
seen is incredible, benefiting both producers and buyers. These amazing results have
transformed commodities as a most sought after asset class. And this has caught attention of
the whole world.
Commodities market is particularly significant to our country as India is essentially a

commodity based economy. Therefore, it should not be surprising to see that Indian
Commodities Market is also taking giant strides, growing at a scorching pace and is well
39
poised to occupy its rightful place in the world. This has provided the Indian investors with
new emerging investment opportunities in the arena of commodities.
Commodity Derivatives trading in India is now done through the electronic trading platform
of two popular exchanges NCDEX (National Commodity & Derivative Exchange Limited)
and MCX (Multi Commodity Exchange). The various commodities being traded on the
exchanges include precious metals, crude oil, agro-commodities amongst others.
Religare Commodities Limited is a member of both the exchanges (MCX & NCDEX) that
allows you to trade in all the commodities traded at both the exchanges. At present, trading in
commodities is restricted to futures contracts only.
BENEFIT OF TRADING:
One thing especially luring about commodities is that it offers equally great incentives to all
involved in the trade.
To Producer: Producer of a commodity can hedge against the price fluctuations by selling the
futures contracts of the commodity, thereby locking in a desired price to sell produce. It
would insulate producer from adverse market movements as losses in spot market would be
offset by profits in the futures market. Thus, risk gets reduced by paying a small amount as
brokerage.
To Investors: Investors always look for alternative investment avenues where they can
diversify their funds to achieve their financial goals. In financial markets, commodity futures
have rapidly emerged as a major investment tool as they help in diversifying investments and
to hedge against inflation, greatest threat to any investor.
Commodities as an investment option also offer following advantages to an investor:

• High degree of leverage.
• Higher reward compared to stocks and other financial instruments.
• Better chance of intraday day trades than other financial instruments.
• Presence of the international commodities like gold, silver, crude oil, aluminum, steel
etc. which can be tracked based on the international market movements as well.
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To Commodity Trader: A trader can use commodities futures to ensure protection against any
adverse change in the prices. A trader can enter into a futures contract for purchase of a
certain quantity of the underlying at a particular price on a particular date, or enter into a
futures contract for sale of a particular quantity on a particular date at a particular price and be
assured of the margins because both purchase price as well as the sale price are fixed reducing
the uncertainty and hence the risk associated.
To Exporter: Futures trading is very useful to the exporters as it provides an advance
indication of the prices likely to prevail and thereby help the exporter in quoting a realistic
price and thereby secure export contract in a competitive market. Having entered into an
export contract, it enables exporters to hedge their risk by operating in futures market.
DEPOSITORY SERVICE:
Religare is among the few major Depository Participants holding securities worth more than
Rs.6000 core under its management. RSL provides depository services to investors as a
Depository Participant with NSDL and CDSL.
The Depository system in India links issuers, depository participants, depositories National
Securities Depository Limited (NSDL) and Central Depository Services (India) Limited
(CDSL) and clearing house / clearing corporation of stock exchanges. These facilitate holding
of securities in dematerialized form and securities transactions are processed by means of
account transfers.
PORTFOLIO MANAGEMENT SERVICE:
Portfolio Management Services manage our client’s wealth more efficiently, reduce risk by
diversifying across assets, sectors and funds, and maximizing returns. Expert Portfolio
Managers find best of avenues to achieve optimum returns at managed levels of risk.
This service could also be called as “transparent collective investments”. You get an upper
hand in many ways.
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OFFERINGS
We offer four different schemes to investors according to their varying tastes, objectives and
risk tolerance.
Each benefits from professional management that aims to provide you consistent returns at a
reduced level of risk.
Aims to achieve gradual growth in the portfolio value over a period of
time by way of careful and judicious investment in fundamentally strong
and attractive valued shares.
more...
Aims to achieve higher returns by taking aggressive positions across

sectors and market capitalization.
more...
Aims to generate steady return over a longer period by investing in

securities selected only from BSE 100 index.
more...
The scheme seeks to provide medium to long term capital appreciation by

investing in stocks across the market capitalization range
more...
Scheme aims to achieve capital appreciation over along period of time by

investing in a diversified portfolio.
INTERNATIONAL EQUITY AND COMMODITY:
International Equity and Commodities division scales up investment horizon for investors by
tapping into huge potential of international markets. This lets an investor partake a share of
international profits.
OFFERINGS:
42
Religare takes pride in introducing our –
International equity partner
Wall Street*E is a full service online brokerage firm
• Barron's Best Online Broker Review for six consecutive years

• Forbes Best of the Web
• Optionetics as the #1 site for trading options two years in a row
Enabling the client with technology
• Like web based high performance trading, investment and risk management tools.
• Carrying out functions that assure compliance with all rules and regulations that
affect their relationships with clients
• Giving direct on-line access to:
• Clearing spot trades
• Execution option
• Margin derivatives
• Trading Features
• Ease of operation
• Real time account balances
• Detailed client holdings/history
• Risk management of accounts
• Execution of trade-time / price bound
• E-mail centre contract notes
• Single or multiple order entry for stocks, options, mutual funds, spread order entry
for options
• View intraday order status and electronic confirmations
• Ease of operation
• NAQ quotes, charts, news
43
• All orders electronically exposed to price improvement
• Online trading module
International Commodities Partner: XPRESSTRADE
• XPRESSTRADE is one of the premier players in internet based futures and

forex brokerage, headquartered in the Chicago Mercantile Exchange Centre,
right in the centre of the world's futures trading capitol.
• XPRESSTRADE is a 100% web-based broker, so there's no software to

download or install. Easy website trading access anywhere in the world. Unique,
timesaving features -- like EZ Offset, EZ Reverse, and EZ Stop.
• Trade futures and forex through a single online broker, with 24 hours access to
the leading future exchanges in the world. This includes 20 exchanges and more
than 300 future products and easy access to the spot currency rates.
• Risk Management of Accounts.
• Offers special and innovative order types like One-Triggers-Others, One-

Cancels-Others and Alert-Triggered-Orders apart from conventional orders.
• Fast and accurate order execution. Direct-access order routing system sends your
orders straight-through to both electronic and traditional open/outcry markets. In
many cases, you'll see a confirmed fill in your account (as well as by e-mail)
online, in literally 1-2 seconds!
• Gain from real-time futures and options snapshot quotes, interactive java charts,
FX charting tools.
44
• Efficient customer services with experienced, knowledgeable, well-trained
professionals.
• State-of-the-art hardware systems and software from manufacturers like Sun

Microsystems and Cisco.
• Highest privacy and confidentiality standards with different security measures

like Firewall protection, data encryption and authentication and password protection.
• Experienced and dedicated management professionals with knowledge and

experience as floor brokers, pit traders, brokerage firm owners/managers, and
exchange governors.
NRI DESK
NRI - Non Resident Indians Invest Back Home

India has emerged as one of the fastest growing financial markets in the world and is a
preferred destination for investment among the global investor fraternity. Religare Securities
– country’s premier financial services company will help you pick the best of products.
Products Offered to NRI

• Equity Trading on NSE & BSE
• Derivatives trading on the NSE
• IPO online
• Portfolio Management Services
• Investments in Mutual Funds
INVESTMENT BANKING
Investment Banking Division

We provide innovative, integrated and best-fit solutions to our corporate customers, it is our
continuous endeavor to provide value enhancement through diverse financial solution on an
45
on-going basis, through products like corporate debt, private equity, IPO, ECB, FCCB,
GDR/ADR etc.
Investment Banking Division offers the following services:
Corporate Finance
We focus on finding partner for our client, who not only help in adding value but also
improve the future valuation of the organization. We specialize in structured financing and
providing advisory services related to financial planning, modeling and advising on financial
requirement.
Corporate finance products offered by us:
Placement of Debt
1. Working Capital Facility
2. Project Finance
3. Term Loan
4. Short Term unsecured loan (ICD/Loans against shares/Bill discounting)
5. Promoter funding
6. Interest rate swaps and other structured instruments
Corporate Advisory Group- (CAG):
Religare has set up a new TOP level sales force named Corporate Advisory Group- (CAG) in
order to create, maintain and serve excellent relationship by providing various solutions to the
corporate and Institutional sector globally.
CAG is a segmentric approach where for one segment all the products will be offered by us.
CAG will be the one point for relationship for all big and small corporate, banks, financial
institution.
OFFERINGS: Corporate Advisory Group provides various solutions to corporates, banks

and FIs on the management of debt, equity and investments. While we give them solutions,
46
based upon the models of debt structuring and garnering short term and long term funds from
the market, we also help them in public and private placements of equity.
Needless to say that our services extend from advising our clients to earn maximum profits by
investing through selected papers/schemes like MF/PMS etc. The CAG can help you in –
Equity Management
• Placement of equity
• Public offers and right issues
• Promoter funding
• Private placement of shares
• Capital Restructuring
Debt Services
• Syndication of loans from Banks/FI and project financing
• Bridging short term working capital
• Other Debts like Inter Corporate Deposits,etc
• Placement of long/short term debt papers like debentures & bonds
• Sourcing medium/short term papers
Investment Solutions
• Treasury operations
• Non- SLR investments
• Cash flow Management
• Mutual Fund Investments
• Portfolio Management Services
• Group Insurance for your Staffs
• General Insurance for your assets
47
ORGANISATION STRUCURE
Figure no: 3.1
Chairman
Mr. Harpal Singh
Managing director
Mr. Sunil Godhwani
Religare Securities Religare Insurance

Religare Finvest
Limited Broking Ltd.
Executive Director Chief Executive Officer Executive Director
COMPETITORS
 Geojit Financial Services Ltd.

 India Bulls Financial services Ltd.
 Karvy Financial services.
 Way to Wealth Securities Ltd.
 Kotak Securities Ltd.
Table no: 3.1 CAPTIAL STRUCTURE
Share Holding Pattern as on : 31/12/2006 30/09/2006 30/06/2006
48
Face Value 10.00 10.00 10.00
No. Of Shares % Holding No. Of Shares % Holding No. Of Shares % Holding
PROMOTER'S HOLDING
Indian Promoters 20188299 74.96 20588249 76.45 20588249 79.61
Sub Total 20188299 74.96 20588249 76.45 20588249 79.61
NON PROMOTER'S HOLDING
Institutional Investors
Banks Fin. Inst. and Insurance 950 0.00 950 0.00 0 0.00
FII's 385000 1.43 0 0.00 0 0.00
Sub Total 385950 1.43 950 0.00 0 0.00
Other Investors
Private Corporate Bodies 1017793 3.78 1307017 4.85 980714 3.79
NRI's/OCB's/Foreign Others 1085193 4.03 1073681 3.99 1075631 4.16
Directors/Employees 51400 0.19 1400 0.01 1850 0.01
Sub Total 2154386 8.00 2382098 8.84 2058195 7.96
General Public 4203140 15.61 3960478 14.71 3213931 12.43
GRAND TOTAL 26931775 100.00 26931775 100.00 25860375 100.00
INCOME STATEMENT
49
FINANCIAL HIGHLIGHTS
(Rs. Lacs)
Particulars March 31 March 31
2006 2005
Gross Income 2623.16 918.73
Profit before Tax (PBT) 243.59 41.17
Amounts written off 900.14 0.00
Provision for Tax 7.18 0.00
Profit after Tax (PAT) 236.41 41.17
Reversal of Provision for 1205.09 894.20
Non Performing Assets/
Diminution in value of
Investments
Balance Brought (3692.35) (2975.68)
Forward from last year
Balance Carried Forward (2224.63) (3692.34)
NUMBER OF BRANCHES
They have a growing network of more than 300 branches and more than 580 business
partners spread across more than 300 cities/towns in India and a fully operational international
office at London.
STUDY OF DERIVATIVE AND ITS STRATEGY
1) The table showing age group of respondents.
50
Table no: 4.1
Age group Frequency Percentage
<25 9 9%
26-40 65 65%
41-60 24 24%
>61 2 2%
Total 100 100%
Figure no: 4.1
AGE GROUP
>61
41-60
<25
26-40
Analysis:
65% of the total respondents fall under the age category between 26-40 years.
24% of the respondents have an age of 41- 60 years.
51
2) Table showing occupation of the respondents.
Table no: 4.2

Occupation Frequency Percentage
Business 28 28%
Professional 38 38%
Salaried 32 32%
Other 2 2%
Total 100 100%
Figure no: 4.2
OCCUPATION
OTHER
SALARIED
BUSINESS
PROFESSIONAL
Analysis;
From the above data collected, 38% of the respondents were Professionals.
32% are salaried and 28% of them were business.
The rest of the respondents belonged to other occupation.
52
3) Monthly income of the respondents.
Table no: 4.3

Income level Frequency Percentage
<10000 5 5%
10001-30000 47 47%
30001-50000 30 30%
>50001 18 18%
Total 100 100%
Figure no: 4.3
MONTHELY INCOME
<10000
>50001
10001-30000
30001-50000
Analysis;
From the above data collected, 47% of the respondents’ monthly income is between Rs.10001
to 30000, 30% of respondents’ monthly income is between Rs. 30001 to 50000
The rest of the respondents belonged to other income group.
53
4) Table showing different types of investors.
Table no: 4.4

Investors type Frequency Percentage
Long term investor 43 43%
Short term investor 37 37%
Daily trader 20 20%
Total 100 100%
Figure no: 4.4
INVESTMENT TYPE
DAILY TRADER
LONG TERM INVESTOR
SHORT TERM INVESTOR
Analysis;
From the above data collected, 43% of the respondents are long term investors.
37% are short term investors and 20% of them are daily trader.
Here;
Long Term traders: Investment for more than 3 months
Short Term traders: Investment of less than 3 months
Daily Traders: Those who buy & sell on the same day
54
5) Table showing allocation of total investment by investors.
Table no: 4.5

Types of investment frequency Percentage
Equity trading 30 30%
Fixed deposits 10 10%
Insurance 20 20%
Mutual fund 35 35%
Other investment 5 5%
Total 100 100%
Figure no:
5%
30%
Equity trading
35% Fixed deposits
Insurance
Mutual fund
Other investment
10%
20%
Analysis;
From the above data collected, 35% of the respondents are investing in mutual fund.
30% are equity traders and 20% of them are investing in insurance.
The rest of the respondents belonged to other investments.
55
6) Rank the investment objectives.
Table no: 4.6

Investment objective Frequency Percentage
High return 56 56%
Tax benefit 6 6%
Future return 31 31%
Capital gain 7 7%
Total 100 100%
Figure no: 4.6
INVESTMENT OBJECTIVE
CAPITAL GAIN
FUTURE RETURN
HIGH RETURN
TAX BENEFITS
Analysis:
From the above data collected, 56% of the respondent’s investment objective is to get high
return. 31% respondent’s investment objective is to get future benefit.
The rest of the respondents belonged to other investment objective.
56
7) Information using in derivative trading.
Table no: 4.7

Information Frequency Percentage
Technical 8 8%
information
Market information 27 27%
Individual 26 26%
information
All of the above 39 39%
Total 100 100%
Figure no: 4.7
USING INFORMATION TO TRADE DERIVATIVE

ALL OF THE ABOVE
TECHNICAL INFORMATIO
MARKET INFORMATION
INDIVIDUAL ANALYSIS
Analysis:
The above table shows the different information used for derivatives trading such as technical
information, market information and individual analysis. 39% of the respondents use all the
information.
57
8) Derivative products using by the investors.
Table no: 4.8

Derivative products Frequency Percentage
Option 44 44%
Futures 26 26%
Forwards 23 23%
Swaps 7 7%
Total 100 100%
Figure no: 4.8
MOST USING THE DERIVATIVE PRODUCT
SWAPS
FORWARDS
OPTIONS
FUTURES
Analysis:
From the above data collected, 44% of the respondents spend maximum portion of their
investment on options, 26% are futures trading and 23% of them on forwards trading.
The rest of the respondents belonged to other derivative product.
58
9) The investors feeling towards risk in trading derivatives.
Table no:4.9
Risk Frequency Percentage
High risk 32 32%
Low risk 44 44%
Moderate risk 14 14%
No risk 10 10
Total 100 100%
Figure no: 4.9
THE RISK INVOLVED IN DERIVATIVE TRADING
NO RISK
MODERATE RISK HIGH RISK
LOW RISK
Analysis:
From the above data collected, 44% of the respondents feel trading in derivatives is of low
risk. 32% feel that the risk is high and 14% of them feel the risk is moderate.
59
10) Investment strategy using by investor at bullish market.
Table no: 4.10

Strategies Frequency Percentage
Long index futures 41 41%
Long index call 27 27%
Long call 15 15%
Long futures stock 17 17%
Total 100 100%
Figure no: 4.10
INVESTMENT STARATEGIES AT BULLISH MARKET

LONG FUTURES STOCK
LONG INDEX FUTURES
LONG CALL
LONG INDEX CALL
Analysis:
From the above data collected, 41% of the respondents were using long index futures at the
time of the market being bullish. 27% are using long index call.
The rest of the respondents belonged to other strategies.
60
11) Investment strategy using by investor at bearish market.
Table no: 4.11

Strategies Frequency Percentage
Short index future 42 42%
Short index call 15 15%
Short call 19 19%
Short futures stock 24 24%
Total 100 100%
Figure no: 4.11
INVESTMENT STARATEGIES AT BEARISH MARKET
SHORT FUTURES STOCK
SHORT INDEX FUTURE
SHORT CALL
SHORT INDEX CALL
Analysis:
From the above data collected, 42% of the respondents were using short index futures at time
of the market being bearish. 24% are using short futures stock.
The rest of the respondents belonged to other strategies.
61
12) The investors familiar with hedging in derivatives.
Table no: 4.12

Using hedging tool Frequency Percentage
Yes 54 54%
No 46 46%
Total 100 100%
Figure no: 4.12
DO YOU USE HEDGING STARTEGIES

NO
YES
Analysis:
From the above data collected, 54% of the respondents are using hedging tool for trading in
derivatives and the rest of the respondents not using hedging tools.
62
13) Investors feeling towards derivatives as an effective hedging tool.
Table no: 4.13

Effective hedging tool Frequency Percentage
Yes 66 66%
No 34 34%
Total 100% 100%
Figure no: 4.13
DERIVATIVE AS AN EFFECTIVE HEDGING TOOL

NO
YES
Analysis:
From the above data collected, 66% of the respondents feel that derivatives is an effective
hedging tool and the rest of the respondents do not feel that derivative is an effective hedging
tool.
63
14) Satisfaction towards present regulatory mechanism entered in derivatives segment.
Table no: 4.14

Frequency Percentage
Satisfied 79 79%
Unsatisfied 21 21%
Total 100 100%
Figure no: 4.14
NO
YES
Analysis:
From the above data collected, 79% of the respondents are satisfied with regulatory
mechanism present in the derivatives segment.
64
SUMMARY OF FINDINGS
♦ There are different types of investor’s viz.,
Long Term traders: Investment of more than 3 months
Short Term traders: Investment of less than 3 months
Daily Traders: Those who buy & sell on the same day
As per the table 43% are long term, 37% are short term and 20% are daily trader.
♦ The majority of respondents are investing in mutual fund.
♦ Out of 100 respondents, 56 respondent’s investment objective is to get high return. 31
respondent’s investment objective is to get future benefit.
♦ The information used for derivatives trading such as technical information, market
information and individual analysis. 39 respondents use all the information.
♦ Out of 100respondents, 44 respondents spend maximum portion of their investment on
options, 26 are futures trading and 23 of them on forwards trading.
♦ Out of 100 respondents, 44 respondents feel trading in derivatives is of low risk. 32 feel
that the risk is high and 14 of them feel the risk is moderate.
♦ Out of 100 respondents, 41 respondents were using long index futures at the time of the
market being bullish. 27 are using long index call.
♦ Out of 100 respondents, 42 respondents were using short index futures at time of the
market being bearish. 24 are using short futures stock.
♦ 54% of the respondents are using hedging tool for trading in derivatives trading.
♦ 66% of the respondents feel that a derivative is an effective hedging tool.
♦ 79% of the respondents are satisfied with regulatory mechanism present in the derivatives
segment.
65
SUGGESTIONS
1. This study reveals that among investors the knowledge about the various derivative
strategies is limited, there by not making an exact investment strategies which matches
with the financial goals of the investors.
2. This study also focused on the effectiveness of hedging. In the recent market crash
those who have hedges their position had made only limited loss or no losses. So
investors should given a more importance to the effectiveness of hedging.
3. The usage of option market should be adequate with respect to the market conditions
in order to protect the position from the market risk arising from the market volatility.
66
CONCLUSION
Though trading in Derivative instruments is riskier it is catching the attention of traders
very rapidly due to its specialty such as margin payment system, short term nature etc.
There are many important functions done by this derivative instrument in the financial
system of a country.
Numerous studies have led to broad consensus, both in the private and public sectors, that
derivatives provide substantial benefits to the users. Derivatives are a low-cost, effective
method for users to hedge and manage their exposures to interest.
Now the world markets for trade and finance have become more integrated derivatives
have strengthened these important linkages among global markets, increasing market
liquidity and efficiency and facilitating the flow of trade and finance.
Mainly focuses on Derivatives & its strategies used in different conditions and the
purpose of the strategy that is whether it aimed to reduce the market risk of the position or
with the motive to speculate. The study analyses the investment allocation of the investors
into different areas like mutual fund, insurance, derivative, etc.
It also studies the decision making process in investment. It studies the various
information used by investors to make the decision. Whether the investors are going with
high technical analysis or those going with the market information that is the information
collected from family, friends, brokers, market experts etc., or at the end going with the
individual analysis.
67
BIBLOGRAPHY
www.religare.in
www.nseindia.com
www.derivativeindia.com
Derivative traders of Religare Securities Limited
68

Derivatives and Its Strategies

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INTRODUCTION

 They help in the discovery of future as well as current prices.

 They catalyze entrepreneurial activity.

The participants in a derivatives market:

Hedgers Speculators Arbitrageurs

 Hedging: Long security, sell futures

 Speculation: Bullish security, buy futures

 Speculation: Bearish security, sell futures

 Arbitrage: Overpriced futures: buy spot, sell futures

 Arbitrage: Under-priced futures: buy futures, sell spot

Speculation: Bullish security, buy futures

Speculation: Bearish security, sell futures

Arbitrage: Overpriced futures: buy spot, sell futures

2. Simultaneously, sell the futures on the security at 1025.

5. Say the security closes at Rs.1015. Sell the security.

6. Futures position expires with profit of Rs.10.

8. Return the borrowed fluids.

Arbitrage: Under-priced futures: buy futures, sell spot

1. On day one, sell the security in the cash/spot market at 1000.

2. Make delivery of the security.

3. Simultaneously, buy the futures on the security at 965.

5. Say the security closes at Rs.975. Buy back the security.

6. The futures position expires with a profit of Rs. 10.

 Hedging: Have underlying buy puts

 Speculation: Bullish security, buy calls or sell puts

 Speculation: Bearish security, sell calls or buy puts

Hedging: Have underlying buy puts

Speculation: Bullish security, buy calls or sell puts

I. Buy call options; or

2. Sell put options

1. A one month call with a strike of 1200.

2. A one month call with a strike of 1225.

3. A one month call with a strike of 1250.

4. A one month call with a strike of 1275.

5. A one month call with a strike of 1300.

I. Sell call options; or

2. Buy put options

I. A one month call with a strike of 1200.

2. A one month call with a strike of 1225.

3. A one month call with a strike of 1250.

4. A one month call with a strike of 1275.

5. A one month call with a strike of 1300.

Clearing and settlement

National Securities Clearing Corporation Limited (NSCCL) undertakes clearing and

Proprietary position of trading member Madanbhai on Day 1

Trading member Madanbhai

Buy Sell BUY SELL

Proprietary position 200@ 1000 400@ 1010

Trading member Madanbhai

Buy Open Sell Close Sell Open Buy Close

BUY OPEN SELL CLOSE

Client A 400@1109 200@1000

SELL OPEN BUY CLOSE

Client B 600@1100 200@1099

Settlement of futures contracts

Final settlement for futures

Settlement prices for futures

Settlement of options contracts

Interim exercise settlement

Final exercise settlement

Exercise settlement computation

Special facility for settlement of institutional deals

NSCCL provides a special facility to Institutions/Foreign Institutional Investors (FIIs)/Mutual