1. How does the derivatives settlement system take place on the exchange in India?

SETTLEMENT OF FUTURES When two parties trade a futures contract, both have to deposit margin money which is called The initial margin. Futures contracts have two types of settlement: (i) (ii) the mark-to-market (MTM) settlement which happens on a continuous basis at the end of each day (ii) the final settlement which happens on the last trading day of the futures contract i.e., the last Thursday of the expiry month.

(i)

Mark to market settlement

To cover for the risk of default by the counterparty for the clearing corporation, the futures contracts are marked-to-market on a daily basis by the exchange. Mark to market settlement is the process of adjusting the margin balance in a futures account each day for the change in the value of the contract from the previous day, based on the daily settlement price of the futures contracts. This process helps the clearing corporation in managing the counterparty risk of the future contracts by requiring the party incurring a loss due to adverse price movements to part with the loss amount on a daily basis. Simply put, the party in the loss position pays the clearing corporation the margin money to cover for the shortfall in cash. In extraordinary times, the Exchange can require a mark to market more frequently. To ensure a fair mark-to-market process, the clearing corporation computes and declares the official price for determining daily gains and losses. This price is called the settlement price and represents the closing price of the futures contract. The closing price for any contract of any given day is the weighted average trading price of the contract in the last half hour of trading. (ii) Final settlement for futures

After the close of trading hours on the expiry day of the futures contracts, NSCCL marks all positions of clearing members to the final settlement price and the resulting profit/loss is settled in cash. Final settlement loss is debited and final settlement profit is credited to the relevant clearing bank accounts on the day following the expiry date of the contract. SETTLEMENT OF OPTIONS In an options trade, the buyer of the option pays the option price or the option premium. The options seller has to deposit an initial margin with the clearing member as he is exposed to unlimited losses. There are basically three types of settlement in stock option contracts: daily premium settlement, exercise settlement and interim exercise settlement. In index options, there is no interim exercise settlement as index options cannot be exercised before expiry.

(i)

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 options sold by him. The same person may sell some contracts and buy some contracts as well. The premium payable and the premium receivable are netted to compute the net premium payable or receivable for each client for each options contract at the time of settlement.

(ii)

Exercise settlement

Normally most option buyers and sellers close out their option positions by an offsetting closing transaction but a better understanding of the exercise settlement process can help in making better judgment in this regard. There are two ways an option can be exercised. One way of exercising is exercise at the expiry of the contract; the other is an interim exercise, which is done before expiry. Stock options can be exercised in both ways where as index options can be exercised only at the end of the contract.

(iii)

Final Exercise Settlement

On the day of expiry, all in the money options are exercised by default. An investor who has a long position in an in-the-money option on the expiry date will receive the exercise settlement value which is the difference between the settlement price and the strike price. Similarly, an investor who has a short position in an in-the-money option will have to pay the exercise settlement value.

Interim Exercise Settlement Interim exercise settlement takes place only for stock options and not for index options. An investor can exercise his in-the-money options at any time during trading hours. Interim exercise settlement is effected for such options at the close of trading hours, on the same day. When a long option holder exercises his option it is the stock exchange which pays the option holder and receives equivalent amount from one of the short option investors through assignment process. In this case assignment process is the process of selecting a short investor randomly and forcing him to pay the settlement amount. The client who has been assigned the contract has to pay the settlement value which is the difference between closing spot price and the strike price.

How are FIIs different from hedge funds ? How do they set up shops in India ?
HEDGE FUNDS A hedge fund is an investment fund that can undertake a wider range of investment and trading activities than other funds, but which is only open for investment from particular types of investors specified by regulators. These investors are typically institutions, such as pension funds, university endowments and foundations, or high net worth individuals. As a class, hedge funds invest in a diverse range of assets, but they most commonly trade in liquid securities on public markets. They also employ a wide variety of investment strategies, and make use of techniques such as short selling and leverage. Hedge funds are typically open-ended, meaning that investors can invest and withdraw money at regular, specified intervals. The value of an investment in a hedge fund is calculated as a share of the fund's net asset value, meaning that increases and decreases in the value of the fund's assets (and fund expenses) are directly reflected in the amount an investor can later withdraw FII Institutional investors are organizations which pool large sums of money and invest those sums in securities, real property and other investment assets. They can also include operating companies which decide to invest their profits to some degree in these types of assets. Most of them will pour their money in the existing stock markets and will stand to gain as and when the index will go up. Types of typical investors include banks, insurance companies, retirement or pension funds, hedge funds, investment advisors and mutual funds. Their role in the economy is to act as highly specialized investors on behalf of others. For instance, an ordinary person will have a pension from his employer. The employer gives that person's pension contributions to a fund. The fund will buy shares in a company, or some other financial product. Funds are useful because they will hold a broad portfolio of investments in many companies. This spreads risk, so if one company fails, it will be only a small part of the whole fund's investment. Institutional investors will have a lot of influence in the management of corporations because they will be entitled to exercise the voting rights in a company. They can actively engage in corporate governance. Furthermore, because institutional investors have the freedom to buy and sell shares, they can play a large part in which companies stay solvent, and which go under. Influencing the conduct of listed companies, and providing them with capital are all part of the job of investment management.

What is Portfolio Management? Explain hoe can one take advantage of this study to make sound Portfolio?
Portfolio Management is defined as handling money of Industries , HNIs or Corporates by professionals to make returns after making basket of difficult class. Thus it is the professional management of various securities (shares, bonds and other securities) and assets in order to meet specified investment goals for the benefit of the investors. Investors may be institutions or private investors. Portfolio management is done time wise and return wise. That is it takes in consideration both the time and the risk of the security before taking any action..It is handled under PMS. All the documents are registered with SEBI. Here the Portfolio Manager has to abide by the contract between him and his customer. It the customer specifies he does not want to get into speculation, the PM cannot do speculation and buy risky securities in the customers portfolio. Portfolio which is diversified gives less returns but it is safe.

ADVANTAGE Portfolio Management Services (PMS) is a sophisticated investment vehicle that offers a range of specialized investment strategies to capitalize on opportunities in the market. Personalized Advice Experienced Fund Managers give you sound investment advice and strategies that help you invest smartly. You get the fund managers in the industry who crafts customised stock portfolios that work wonders. With PMS products you get More choice in terms of portfolios to suit individual client needs and risk appetite Ability to structure products that meet specific investment objectives Choice of alternate investment products that were traditionally available to the very wealthy

Professional Management PMS products combine the benefits of professional money management with the flexibility, control and potential tax advantages of owning individual stocks or other securities. The Portfolio Managers take care of all the administrative aspects of your portfolio with a monthly or semi annual reporting on the overall status of the portfolio and performance. Continuous Monitoring

The expert Fund Managers and research team keep a constant watch on your money. The team of experts in these fund houses know exactly how your money is performing through continuous monitoring. You, as a customer are always informed through: Communications that include relevant information on major market events Quarterly or semi-annual performance updates

Hassle Free Operation As a PMS customer you get hassle-free operations. With total portfolio transparency, in-depth market information for better decision making and direct access to the portfolio management team, PMS brings high service standards.

What are futures and options? Explain different types or derivatives.

The term derivatives is used to refer to financial instruments which derive their value from some underlying assets. The underlying assets could be equities (shares), debt (bonds, T-bills, and notes), currencies, and even indices of these various assets, such as the Nifty 50 Index. Derivatives derive their names from their respective underlying asset. Thus if a derivatives underlying asset is equity, it is called equity derivative and so on. Derivatives can be traded either on a regulated exchange, such as the NSE or off the exchanges, i.e., directly between the different parties, which is called over-the-counter (OTC) trading. The basic purpose of derivatives is to transfer the price risk from one party to another; they facilitate the allocation of risk to those who are willing to take it. In so doing, derivatives help mitigate the risk arising from the future uncertainty of prices. There are various types of derivatives traded on exchanges across the world. They range from the very simple to the most complex products. The following are the three basic forms of derivatives: Forwards Futures Options Swaps

FORWARDS A forward contract or simply a forward is a contract between two parties to buy or sell an asset at a certain future date for a certain price that is pre-decided on the date of the contract. The future date is referred to as expiry date and the pre-decided price is referred to as Forward Price. It may be noted that Forwards are private contracts and their terms are determined by the parties involved. A forward is thus an agreement between two parties in which one party, the buyer, enters into an agreement with the other party, the seller that he would buy from the seller an underlying asset on the expiry date at the forward price. Therefore, it is a commitment by both the parties to engage in a transaction at a later date with the price set in advance. FUTURES Like a forward contract, a futures contract is an agreement between two parties in which the buyer agrees to buy an underlying asset from the seller, at a future date at a price that is agreed upon today. However, unlike a forward contract, a futures contract is not a private transaction but gets traded on a recognized stock exchange. In addition, a futures contract is standardized by the exchange. All the terms, other than the price, are set by the stock exchange. Also, both buyer and seller of the futures contracts are protected against the counter party risk by an entity called the Clearing Corporation. OPTIONS An option is a derivative contract between a buyer and a seller, where one party gives to the other (say Second Party) the right, but not the obligation, to buy from the First Party the underlying asset on or before a specific day at an agreed-upon price.

In return for granting the option, the party granting the option collects a payment from the other party. This payment collected is called the premium or price of the option. The right to buy or sell is held by the option buyer (also called the option holder); the party granting the right is t he option seller or option writer. Options can be traded either on the stock exchange or in over the counter (OTC) markets. Options traded on the exchanges are backed by the Clearing Corporation thereby minimizing the risk arising due to default by the counter parties involved. Options traded in the OTC market however are not backed by the Clearing Corporation. A call option is an option granting the right to the buyer of the option to buy the underlying asset on a specific day at an agreed upon price, but not the obligation to do so. It is the seller who grants this right to the buyer of the option. A put option is a contract granting the right to the buyer of the option to sell the underlying asset on or before a specific day at an agreed upon price, but not the obligation to do so. It is the seller who grants this right to the buyer of the option.

Explain 3 types of avenues available for investments in mutual funds.

A mutual fund is just the connecting bridge or a financial intermediary that allows a group of investors to pool their money together with a predetermined investment objective. The mutual fund will have a fund manager who is responsible for investing the gathered money into specific securities (stocks or bonds). When you invest in a mutual fund, you are buying units or portions of the mutual fund and thus on investing becomes a shareholder or unit holder of the fund. Mutual funds are considered as one of the best available investments as compare to others they are very cost efficient and also easy to invest in, thus by pooling money together in a mutual fund, investors can purchase stocks or bonds with much lower trading costs than if they tried to do it on their own. But the biggest advantage to mutual funds is diversification, by minimizing risk & maximizing returns. The mutual funds can be broadly classified on the basis of investment parameter viz, Each category of funds is backed by an investment philosophy, which is pre-defined in the objectives of the fund. The investor can align his own investment needs with the funds objective and invest accordingly. By investment objective: Growth Schemes: Growth Schemes are also known as equity schemes. The aim of these schemes is to provide capital appreciation over medium to long term. These schemes normally invest a major part of their fund in equities and are willing to bear short-term decline in value for possible future appreciation.

Income Schemes: Income Schemes are also known as debt schemes. The aim of these schemes is to provide regular and steady income to investors. These schemes generally invest in fixed income securities such as bonds and corporate debentures. Capital appreciation in such schemes may be limited.

Balanced Schemes: Balanced Schemes aim to provide both growth and income by periodically distributing a part of the income and capital gains they earn. These schemes invest in both shares and fixed income securities, in the proportion indicated in their offer documents (normally 50:50).

Money Market Schemes: Money Market Schemes aim to provide easy liquidity, preservation of capital and moderate income. These schemes generally invest in safer, short-term instruments, such as treasury bills, certificates of deposit, commercial paper and inter-bank call money.

What are the contents of a Contract note issued by a broker to the client ?
Contract Note is a confirmation of trades done on a particular day on behalf of the client by a trading member. It imposes a legally enforceable relationship between the client and the trading member with respect to purchase/sale and settlement of trades. It also helps to settle disputes/claims between the Investor and the trading member It Is a prerequisite for filing a complaint or arbitration proceeding against the trading member in case of a dispute. A valid contract note should be in the prescribed form, contain the details of trades, stamped with requisite value and duly signed by the authorized signatory. Contract notes are kept in duplicate, the trading member and the client should keep one copy each. Met verifying the details contained therein, the client keeps one copy and returns the second copy to the trading member duly acknowledged by him A broker has to issue a contract note to clients for all transactions in the form specified by the stock exchange. The contract note inter-alia should have following: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. Name, address and SEBI Registration number of the Member broker. Name of partner/proprietor/Authorised Signatory. Dealing Office Address/Tel. No./Fax no., Code number of the member given by the Exchange. Contract number, date of issue of contract note, settlement number and time period for settlement Constituent (Client) name/Code Number Order number and order time corresponding to the trades Trade number and Trade time. Quantity and kind of Security bought/sold by the client. Brokerage and Purchase/Sale rate. Service tax rates, Securities Transaction Tax and any other charges levied by the broker. Appropriate stamps have to be affixed on the contract note or it is mentioned that the consolidated stamp duty is paid. Signature of the Stock broker/Authorized Signatory,

2. Difference between capital market and bond market.

A market in which individuals and institutions trade financial securities. Organizations/institutions in the public and private sectors also often sell securities on the capital markets in order to raise funds.Thus, this type of market is composed of both the primary and secondary markets. Both the stock and bond markets are parts of the capital markets. For example, when a company conducts an IPO, it is tapping the investing public for capital and is therefore using the capital markets. This is also true when a country's government issues Treasury bonds in the bond market to fund its spending initiatives. The bond market is a financial market where participants can issue new debt, known as the primary market, or buy and sell debt securities, known as the Secondary market, usually in the form of bonds. The primary goal of the bond market is to provide a mechanism for long term funding of public and private expenditures. The Securities Industry and Financial Markets Association (SIFMA) classifies the broader bond market into five specific bond markets.

Corporate Government & agency Municipal Mortgage backed, asset backed, and collateralized debt obligation Funding