Financial Derivatives & Risk Management

A SYNOPSIS OF THE SUMMER PROJECT

ON
“A STUDY ON FINANCIAL DERIVATIVES AND RISK MANAGEMENT
WITH REFERANCE TO INDIA INFOLINE LIMITED”

By

ABDUL NOUFAL

Reg. No. A9GMBA1504

Under the guidance of

Mr. G.S. Subrahmonya

(Internal guide)

MALIK DEENAR INSTITUTE OF MANAGEMENT STUDIES

SEETHANGOLI, BELA POST,
KASARAGOD-671321

Malikdeenar Institute of Management Studies

Financial Derivatives & Risk Management

A STUDY ON FINANCIAL DERIVATIVES AND RISK MANAGEMENT

WITH REFERANCE TO INDIA INFOLINE LIMITED

1.1 INTRODUCTION

Finance may be defined as the art and science of managing money. The
major areas of finance are: (1) financial services and (2) managerial finance/
corporate finance/ financial management. While financial services are concerned
with the design and delivery of advice and financial products to individuals,
businesses and governments within the areas of banking and related institutions,
personal financial planning, investments, real estates, insurances and so on,
financial management is concerned with the duties of the finance managers in
the business firm.
A person making an investment expects to get some return from the investment in the future. But,
as future is uncertain, so is the future expected return. It is the uncertainty associated with the returns from
an investment that introduces risk into an investment. Thus, Risk can be defined in terms of variability of
returns. “Risk is the potential for variability in returns”.
Risk management is the identification, assessment, and prioritization of risks followed by
coordinated and economical application of resources to minimize, monitor, and control the probability
and/or impact of unfortunate events or to maximize the realization of opportunities. Risk management is
the practice of creating economic value in a firm by using financial instruments to manage exposure
to risk, particularly credit risk and market risk.
Fluctuations in the prices of financial assets expose the dealers in such assets to risk. The dealers
would like to hedge the risk involved in their financial transactions. Financial derivatives have evolved
as instruments for hedging the risk involved in buying, holding and selling various kinds of financial
assets. Basically, they are financial instruments for the management of risk arising from the uncertainty
prevailing in financial markets regarding asset prices.
A financial derivative has an underlying asset, that is, a financial derivative is evolved to hedge the
risk involved in dealing in a particular financial asset such as a share or a foreign currency. Financial
derivatives are a kind of risk management instrument. Value of a derivative depends on the price changes
in some more fundamental underlying assets. Many forms of financial derivatives instruments exist in the
financial markets. Among them, the three most fundamental financial derivatives instruments are: forward
contracts, futures, and options.
In the risk management of the underlying assets using financial derivatives, the basic strategy is
hedging, i.e., the trader holds two positions of equal amounts but opposite directions, one in the
underlying markets, and the other in the derivatives markets, simultaneously.

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Financial Derivatives & Risk Management

1.2 ABOUT INDIA INFOLINE

India Infoline (IIL) is engaged in business of equities broking, wealth advisory services and
portfolio management services. The company was incorporated in October 1995 as Probity Research &
Services and later in April 2000 the name was changed to India Infoline.com. Then in March 2001 the
company again changed its name to India Infoline.

The company is part of India Infoline Group. It has pan- India presence through its distribution network of
607 branches, 151 franchisees located in 346 cities. The company also has presence in Dubai, New York
and Singapore.

IIFL operates portals such as www.indiainfoline.com and www.5paisa.com.

Awards

India Infoline has been awarded the ‘Best Broker in India’ by Finance Asia.

Company’s Rs. 5 billion short-term debt programme has received an A1+ rating from ICRA. This reflects
highest -credit-quality of short-term debt instruments.

Outlook

India Infoline has received approval from SEBI for sponsoring mutual fund. Through this, the company
wants to expand its product offerings.

1.3 WHY IIFL….?

India Infoline offers lifetime free demat and trading account just pay Rs.555 at the time of account
opening after that no headache for renewal.

"India Infoline" The name itself is enough...why????

* Trust of over 6.7 lakhs customers
* Presence in over 240 cities and 1300 locations all over India
* It offers wide range of products like Equity, commodity, currency brokerage, Mutual funds and
Insurance, in other way It is one stop Investment shop.
* Provides timely and relevant advice and all queries of customers.
* It provides wide range of research and reports to investors/traders
* Daily reports, weekly/regular reports and long term research reports for investors and traders like
Market mantra, Daily strategy watch, Company reports...
* Provides excellent Trading platform for both online and offline customers.

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Financial Derivatives & Risk Management

1.4 STATEMENT OF PROBLEM

The word 'derivative' originates from mathematics and refers to a variable, which has been derived
from another variable. Derivatives are so called because they have no value of their own. They derive their
value from the value of some other asset, which is known as the underlying.
“Derivatives are specialized contracts which signify an agreement or an option to buy or sell the
underlying asset of the derivate up to a certain time in the future at a prearranged price, the exercise
price.”
Derivatives markets have been in existence in India in some form or other for a long time. In the
area of commodities, the Bombay Cotton Trade Association started futures trading in 1875 and, by the
early 1900s India had one of the world’s largest futures industries. In 1952 the government banned cash
settlement and options trading and derivatives trading shifted to informal forwards markets. In recent
years, government policy has changed, allowing for an increased role for market-based pricing and less
suspicion of derivatives trading. The ban on futures trading of many commodities was lifted starting in the
early 2000s, and national electronic commodity exchanges were created. Derivatives worldwide are
recognized as risk management products.
This study mainly covers the deep area of financial derivatives and risk management in India, Its
objectives, scope, classifications, advantages, limitations.

1.5 DERIVATIVES IN INDIA: CHRONOLOGY

December 14, 1995

The NSE sought SEBI's permission to trade index futures.
November 18, 1996
The LC Gupta Committee set up to draft a policy framework for index futures.
May 11, 1998
The LC Gupta Committee submitted a report on the policy framework for index futures.
July 7, 1999
Reserve Bank of India gave permission for OTC forward rate agreements and interest rate swaps.
May 24, 2000
SIMEX chose Nifty for trading futures and options on an Indian index.
May 25, 2000
SEBI allowed the NSE and the BSE to trade in index futures.
June 9, 2000
Trading of the BSE Sensex futures commenced on the BSE.
June 12, 2000
Trading of Nifty futures commenced on the NSE.
September 25, 2000
Nifty futures trading commenced on the SGX.

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Financial Derivatives & Risk Management

1.6 RISK MANAGEMENT

Risk is defined as the effect of uncertainty on objectives (whether positive or negative). Risk
management can therefore be considered the identification, assessment, and prioritization of risks
followed by coordinated and economical application of resources to minimize, monitor, and control the
probability and/or impact of unfortunate events or to maximize the realization of opportunities. Risks can
come from uncertainty in financial markets, project failures, legal liabilities, credit risk, accidents, natural
causes and disasters as well as deliberate attacks from an adversary.

Method
For the most part, these methods consist of the following elements, performed, more or less, in the
following order.
1. Identify, characterize, and assess threats
2. Assess the vulnerability of critical assets to specific threats
3. Determine the risk (i.e. the expected consequences of specific types of attacks on specific assets)
4. Identify ways to reduce those risks
5. Prioritize risk reduction measures based on a strategy
Principles of risk management
The International Organization for Standardization identifies the following
principles of risk management:
Risk management should:
create value.
be an integral part of organizational processes.
be part of decision making.
explicitly address uncertainty.
be systematic and structured.
be based on the best available information.
be tailored.
take into account human factors.
be transparent and inclusive.
be dynamic, iterative and responsive to change.
be capable of continual improvement and enhancement.

2.1 OBJECTIVE OF THE STUDY

The study will be conducted in order to;

• To find out the extent to which risk can be minimized by applying hedging
strategies.
• To analyze whether the hedger enjoys better returns from the hedging.
• To examine how much reduction in risk is possible
• To analyze risk of loss due to misjudgment on index movements.

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Financial Derivatives & Risk Management

2.2 SCOPE OF THE STUDY

• It helps the researcher to construct a diversified portfolio.

• Provide an insight on return and risk analysis.
• It helps to make a general study on derivatives (future & options).
• It helps to identify and reduce risk by using hedging strategies and
speculation.

2.3 LIMITATIONS OF THE STUDY

• Size of samples is small

• Time will also be constraint
• Number of reference is just one i.e.; IIFL

2.4 RESEARCH DESIGN

For the preparation of this study Exploratory research design is adopted. Exploratory research design
seeks to discover new relationships between several facts. It discovers ideas and insights. The major
purpose of exploratory research design is the clear identification of problems segregating from irrelevant
variables and alternatives.

Exploratory research design can be carried out by the following methods;

a) Search of secondary data or literature search

b) Survey of knowledgeable person or experience survey

c) Focus group

d) Case study

For my project work I mainly concentrated on the following methods:

• Search of secondary data or literature search

• Survey of knowledgeable person or experience survey

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Financial Derivatives & Risk Management
2.5 PLAN OF ACTION

The study will be carried with reference to India Infoline limited and also with the help of websites,
magazines, journals, text books etc

Malikdeenar Institute of Management Studies