Chapter-I 1 INTRODUCTION

INTRODUCTION 7

1.1 RESEARCH PROBLEM..........................................................................8 1.2 NEED FOR THE STUDY........................................................................8 1.3 OBJECTIVES........................................................................................8 1.4 METHODOLOGY..................................................................................9 1.5 SCOPE OF THE STUDY.......................................................................9 1.6 SAMPLE DESIGN.................................................................................9 1.7 SOURCES OF INFORMATION...............................................................9 1.8 TOOLS AND TECHNIQUES OF ANALYSIS...........................................10 1.9 STRUCTURE OF THE STUDY WITH SOUND JUSTIFICATIONS..............10

2 INTRODUCTION TO DERIVATIVES

11

2.1 DERIVATIVES....................................................................................13 2.2 DEFINITION OF DERIVATIVES............................................................13 2.3 HISTORY OF DERIVATIVES MARKETS................................................14 2.4 THE GROWTH OF DERIVATIVES MARKET..........................................15 2.5 FUNCTIONS OF THE DERIVATIVES MARKET......................................15 2.6 Importance of Derivatives:..............................................................16 2.7 DERIVATIVE PRODUCTS (TYPES) ......................................................17 2.8 PARTICIPANTS IN THE DERRIVATIVES MARKETS...............................19 2.9 SCOPE OF THE STUDY......................................................................19 2.10 OBJECTIVES OF THE STUDY 2.11 NATURE OF THE PROBLEM ......................................................19 ........................................................20

2.12 THE DELOPMENT OF DERIVATIVES MARKET...................................20 2.13 GLOBAL DERIVATIVES MARKET.......................................................21 2.14 NSEs DERIVATIVES MARKET..........................................................22 2.15 REGULATORY FRAMEWORK............................................................22 2.16 Regulation for derivatives trading:.................................................23

2.17 ELIGIBILITY OF ANY STOCK TO ENTER IN DERIVATIVES MARKET....25

3 INTRODUCTION OF FUTURES

27

3.1 DEFINATION......................................................................................27 3.2 HISTORY OF FUTURES......................................................................27 3.3 DISTINCTION BETWEEN FUTURES AND FORWARDS CONTRACTS.....28 3.4 FEATURES OF FUTURES....................................................................29 3.5 TYPES OF FUTURES...........................................................................29 3.6 PARTIES IN THE FUTURES CONTRACT ..........................................30

3.7 ROLE OF MARGINS............................................................................32 3.8 PRICING FUTURES.............................................................................32 3.9 FUTURES TERMINOLOGY .............................................................33

4 INTRODUCTION TO OPTIONS
4.1 DEFINITION

36

..................................................................................36

4.2 HISTORY OF OPTIONS ....................................................................36 4.3 PROPERTIES OF OPTION...................................................................37 4.4 PARTIES IN AN OPTION CONTRACT...................................................38 4.5 TYPES OF OPTIONS ......................................................................38

4.5.1 On the basis of the underlying asset:.........................................38 4.5.2 Index options:.............................................................................38 4.5.3 Stock options:.............................................................................38 4.5.4 On the basis of the market movements :...................................38 4.5.5 Call Option:................................................................................39 4.5.6 Put Option:.................................................................................39 4.6 On the basis of exercise of option: ..................................................39 4.6.1 American Option:.......................................................................39 4.6.2 European Option:.......................................................................39 4.7 PAY-OFF PROFILE FOR BUYER OF A CALL OPTION............................40 4.8 PAY-OFF PROFILE FOR SELLER OF A CALL OPTION...........................41

4.9 PAY-OFF PROFILE FOR BUYER OF A PUT OPTION..............................42 4.10 PAY-OFF PROFILE FOR SELLER OF A PUT OPTION...........................43 4.11 FACTORS AFFECTING THE PRICE OF AN OPTION............................44 4.11.1 Stock Price: ........................................................................44

4.11.2 Strike price:..............................................................................44 4.11.3 Time to expiration:...................................................................44 4.11.4 Volatility:..................................................................................45 4.11.5 Risk- free interest rate:............................................................45 4.12 PRICING OPTIONS...........................................................................45 4.13 OPTIONS TERMINOLOGY.................................................................47 4.13.1 Option price/premium: ............................................................47 4.13.2 Expiration date:........................................................................47 4.13.3 Strike price:..............................................................................47

5 TRADING INTRODUCTION

51

5.1 BASKET TRADING SYSTEM................................................................52

6 industry profile

57

6.1 Stock broking operations an over view.............................................57 6.2 Stockbroker and the investor:..........................................................59 6.3 Types of stockbrokers......................................................................59 6.4 Buying and selling of shares:............................................................60 6.5 Orders:.............................................................................................60 6.6 Online Trading: ................................................................................61 6.7 Regulatory Framework.....................................................................61 6.8 Objects and functions of SEBI:..........................................................62

63 7 COMPANY PROFILE 63

7.1 ICICI Consultancy Services...............................................................64 7.2 Objectives and Background..............................................................66

7.2.1 Housing Finance Sector..............................................................66 7.2.2 Background................................................................................66 7.2.3 Business Objectives...................................................................67 7.2.4 Organizational Goals..................................................................67 7.2.5 Promoter....................................................................................67 7.2.6 Business Focus:..........................................................................67 7.2.7 Capital Stricture ........................................................................68 7.2.8 Technology.................................................................................69 7.2.9 Business.....................................................................................70 7.2.10 Wholesale Banking Services.....................................................70 7.2.11 Retail Banking Services ..........................................................70 7.2.12 Credit Rating ...........................................................................71 7.3 Board of Directors............................................................................72 7.4 Awards & Accolades.........................................................................73 7.4.1 Awards: 2007.............................................................................73 7.4.2 Awards: 2006.............................................................................73 7.4.3 Awards: 2005.............................................................................74 7.4.4 Awards: 2004.............................................................................74 7.4.5 Awards: 2003.............................................................................74

8 LOT SIZES OF SELECTED COMPANIES FOR ANALYSIS.......77

8.1 ANLYSIS AND INTERPRETATION:.......................................................78 8.1.1 FUTURES:...................................................................................78 8.2 FUTURES OF ACC CEMENTS..............................................................79 8.2.1 INTERPRETATION:.......................................................................80

9 FUTURES OF ARVIND MILLS

82

9.1 INTERPRETATION:.............................................................................83

10 FUTURES OF BHEL

83

10.1 Source:...........................................................................................84

10.2 INTERPRETATION:...........................................................................84 10.3 OPTIONS:........................................................................................84 10.3.1 CALL OPTION : .........................................................................84 10.3.2 PUT OPTION :............................................................................84

11 Option.

85

11.1 Source:...........................................................................................85 11.2 PROFIT/LOSS POSITION OF CALL OPTION BUYER OF ACC...............85

12 PROFIT/LOSS POSITION OF PUT OPTION BUYER/WRITER OF ACC 87

12.1 INTERPERATATION:.........................................................................88

13 PROFIT/LOSS POSITION OF CALL OPTION BUYER/WRITER OF ARAVINDMILL 88 14 PROFIT/LOSS POSITION OF PUT OPTION BUYER/WRITER OF ARVIND MILL 89
14.1 INTERPRETATION:...........................................................................90

15 PROFIT/LOSS POSITION OF CALL OPTION BUYER/WRITER OF BHEL 91 16 PROFIT/LOSS POSITION OF PUT OPTION BUYER/WRITER OF BHEL 93
16.1 INTERPRETATION:...........................................................................94

17 CALCULATION OF FUTURE PRICE 18 FINDINGS 19 SUGGESTIONS 20 BIBLIOGRAPHY 21 Appendix A

95 98 99 101 103

CHAPTER-I
6

INTRODUCTION

1 INTRODUCTION
A Derivative is a financial instrument whose value depends on the Value of other, more basic underlying variables. In recent years, derivative has become increasingly important in the world of finance. Futures and options are now trade actively on many exchanges. Forward contracts, swaps, and many different types of options are regularly traded outside exchange by financial instruments fund managers, and corporations in what are termed the over -the counter- market. Derivative is also often form part of a bond or stock issue. Very often the variables underlying derivatives are price of a traded asset. A stock option, for example, is derivative whose value is depending on the price of as stock. How ever as we shall see, derivative can depend on almost any variable, from the price of hogs to the amount of snow falling at a certain ski resort.

1.1 RESEARCH PROBLEM

For maintenance the competitive edge of a company; stock analysis is one of the important tools followed. The analysis of stocks based on derivatives has been established as a tool proof tool for the same. This is done professionally stock broking corporate like anagram. Hence the has been taken as a research problem.

1.2 NEED FOR THE STUDY

The present study on futures is very much appreciable on the grounds that it gives deep insights about the FUTURES market. It would be essential for the perfect way of trading in FUTURES. An investor can choose the fight underlying or portfolio for investment 3which is risk free. The study would explain the various ways to minimize the losses and maximize the profits. The study would help the investors how their profit/loss is reckoned. The study would assist in understanding the FUTURES segment. The study assists in knowing the different factors that cause for the fluctuations in the FUTURES market. The study provides information related to the byelaws of FUTURES trading. The studies elucidate the role of FUTURES in India Financial Markets.

1.3 OBJECTIVES
The following are the major objectives of the study. 1).To presents a theoretical framework relating to derivative market in India. 1). To observe the daily price movement of selected stock futures. 2). To identify the buying and selling signals to the selected scripts. 3). To observe the daily price movement of Nifty Index Futures. 4). To offer suggestions based on the findings to the study. 5). To study the various trends in derivatives market 6). To study in detail the role of futures 7). To find out profit/loss position of the option writer and option holder

8). To study the role of derivatives in India financial market

1.4 METHODOLOGY
The Methodology of the study consists of primary and secondary data collection. Primary data has been collected from company senior officials of the company provided by ICICIStock broking Ltd. Secondary sources consist of daily business news papers, NSE & BSE websites etc.

1.5

SCOPE OF THE STUDY

The study is limited to Derivatives with special reference to futures, and

options in the Indian context and the Bombay stock exchange has been taken as a representative sample for the study. The study cant be said as totally perfect. Any alternation may arise. The study has only made a humble attempt at evaluating derivatives market only in Indian context. The study is not based on the international perspective of derivatives markets, which exists in NYSE etc The study is confined to only one month trading of September month contract. The study is limited by time and cost factors. The sample size chosen is limited to stock future of SBI underlying script. The limited period of study may not be detailed and full-fledged in all aspects.

1.6 SAMPLE DESIGN

The sample design has been taken by the researcher as one month. According to the available one month data the researcher analyzed that up to three months. The researcher suggests to the investors through the analyzed data.

1.7 SOURCES OF INFORMATION

The data had been collected through Primary and Secondary sources. 1. Primary sources: The data had been collected through project guide and staff of the Company. 2. Secondary sources: The data had been collected through Books, Journals and Websites.

1.8 TOOLS AND TECHNIQUES OF ANALYSIS

The data collected from the sources have been analyzed through Moving Average Method, which is one of the popular statistical tool in technical analysis is considered for the study. To examine the underlying trend by smoothing of the data and to provide the Buy and Sell signals to the selected stocks this method serves the best. Downward penetration of the rising average indicates the possibility of a further fall and gives sell signal. Upward penetration of the falling average would indicate the possibility of the further rise and gives the buy signal.

1.9 STRUCTURE OF THE STUDY WITH SOUND JUSTIFICATIONS

The study has been designed in such a way that the collected data has been analyzed with the help of statistical techniques. The study has certainly advantage new information to the existing knowledge in the same field.

CHAPTER-II

10

REVIEW OF LITERATURE

2 INTRODUCTION TO DERIVATIVES
As Indian securities markets continue to evolve, market participants, investors and regulators are looking at different ways in which the risk management may be efficiently met through the introduction of Derivative markets. Through the use of derivative products, it is possible to partially or fully transfer price risks by locking in asset prices. As instruments of risk management, these generally do not influence the fluctuations in the underlying asset prices. Derivatives are risk management instruments, which derive their value form an underlying asset. The underlying asset can be bullion, index, share, bonds,

11

currency, interest etc. banks, securities firms, companies and investors to hedge risks, to gain access to cheaper money and to make profit, uses derivatives. Derivatives are likely to grow even at a faster rate in future. However, the advent of modern day derivative contracts is attributed to the need for farmers to protect themselves from any decline in the price of their crops due to delayed monsoon, or overproduction. The first futures contracts can be traced to the Yodoya rice market in Osaka, Japan around 1650. These were evidently standardized contracts, which made them much like todays futures. The Chicago Board of trade (CBOT), the largest derivative exchange in the world, was established in 1848 where forward contracts on various commodities were standardized around 1865. From then on, futures contracts have remained more or less in the same form, as we know them today.

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2.1 DERIVATIVES
The emergence of the market for derivative products, most notably forwards, futures and options, can be traced back to the willingness of risk-averse economic agents to guard themselves against uncertainties arising out of fluctuations in asset prices. By their very nature, the financial markets are marked by a very high degree of volatility. Through the use of derivative products, it is possible to partially or fully transfer price risks by locking-in asset Prices. As instruments of risk management, these generally do not influence the Fluctuations in the underlying asset prices. However, by locking-in asset prices, Derivative products minimize the impact of fluctuations in asset prices on the Profitability and cash flow situation of risk-averse investors. Derivatives are risk management instruments, which derive their value from an underlying asset. The underlying asset can be bullion, index, share, bonds, Currency, interest, etc., Banks, Securities firms, companies and investors to hedge risks, to gain access to cheaper money and to make profit, use derivatives. Derivatives are likely to grow even at a faster rate in future.

2.2 DEFINITION OF DERIVATIVES

Derivative is a product whose value is derived from the value of an underlying asset in a contractual manner. The underlying asset can be equity, Forex, commodity or any other asset. Securities Contract ( regulation) Act, 1956 (SC(R) A)defines debt instrument, share, loan whether secured or unsecured, risk instrument or contract for differences or any other form of security A contract which derives its value from the prices, or index of prices, of underlying securities.

13

2.3 HISTORY OF DERIVATIVES MARKETS

Early forward contracts in the US addressed merchants concerns about ensuring that there were buyers and sellers for commodities. However credit risk remained a serious problem. To deal with this problem, a group of Chicago; businessmen formed the Chicago Board of Trade (CBOT) in 1848. The primary intention of the CBOT was to provide a centralized location known In advance for buyers and sellers to negotiate forward contracts. In 1865, the CBOT went one step further and listed the first exchange traded derivatives Contract in the US; these contracts were called futures contracts. In 1919, Chicago Butter and Egg Board, a spin-off CBOT was reorganized to allow futures trading. Its name was changed to Chicago Mercantile Exchange (CME). The CBOT and the CME remain the two largest organized futures exchanges, indeed the two largest financial exchanges of any kind in the world today. The first stock index futures contract was traded at Kansas City Board of Trade. Currently the most popular stock index futures contract in the world is based on S&P 500 index, traded on Chicago Mercantile Exchange. During the Mid eighties, financial futures became the most active derivative instruments Generating volumes many times more than the commodity futures. Index futures, futures on T-bills and Euro-Dollar futures are the three most popular Futures contracts traded today. SGX in Singapore, TIFFE in Japan, MATIF in France, Eurex etc., Other popular international exchanges that trade derivatives are LIFFE in England, DTB in Germany,

14

2.4 THE GROWTH OF DERIVATIVES MARKET

Over the last three decades, the derivatives markets have seen a phenomenal growth. A large variety of derivative contracts have been launched at exchanges across the world. Some of the factors driving the growth of financial derivatives are: Increased volatility in asset prices in financial markets, Increased integration of national financial markets with the international markets, Marked improvement in communication facilities and sharp decline in their costs, Development of more sophisticated risk management tools, providing economic agents a wider choice of risk management strategies, and Innovations in the derivatives markets, which optimally combine the risks and returns over a large number of financial assets leading to higher returns, reduced risk as well as transactions costs as compared to individual financial assets.

2.5 FUNCTIONS OF THE DERIVATIVES MARKET

In spite of the fear and criticism with which the derivative markets are commonly looked at, these markets perform a number of economic functions. Price in an organized derivative markets reflect the perception of market participants about the future and lead the prices of underlying to the perceived future level. The prices of derivatives converge with the prices of the underlying at the Expiration of the derivative contract. Thus derivatives help in of future as well as current prices. The derivative markets helps to transfer risks from those who have them but may not like them to those who have an appetite for them. discovery

15

 Derivative due to their inherent nature, are linked to the underlying cash markets. With the introduction of derivatives, the underlying market witness higher trading volumes because of participation by more players who would not otherwise participate for lack of an arrangement to transfer risk. Speculative trades shift to a more controlled environment of derivatives market. In the absence of an organized derivatives market, speculators trade in the underlying cash markets. Margining, monitoring and surveillance of the activities of various participants become extremely difficult in these kinds of mixed markets. An important incidental benefit that flows from derivatives trading is that it acts as a catalyst for new entrepreneurial activity. The derivatives have a history of attracting many bright, creative, Well-educated people with an entrepreneurial attitude. which are immense. They often energize others to create new businesses, new products and new employment opportunities, the benefit of

2.6 Importance of Derivatives:

Derivatives are becoming increasingly important in world markets as a tool for risk management. Derivatives instruments can be used to minimize risk. Derivatives are used to separate risks and transfer them to parties willing to bear these risks. The kind of hedging that can be obtained by using derivatives is cheaper and more convenient than what could be obtained by using cash instruments. It is so because, when we use derivatives for hedging, actual delivery of the underlying asset is not at all essential for settlement purposes.

16

More over, derivatives would not create any risk. They simply manipulate the risks and transfer to those who are willing to bear these risks. For example, Mr. A owns a bike. If does not take insurance, he runs a big risk. Suppose he buys insurance [a derivative instrument on the bike] he reduces his risk. Thus, having an insurance policy reduces the risk of owing a bike. Similarly, hedging through derivatives reduces the risk of owing a specified asset, which may be a share, currency, etc.

2.7 DERIVATIVE PRODUCTS (TYPES)

The following are the various types of derivatives. They are: Forwards: A forward contract is a customized contract between two entities, where settlement takes place on a specific date in the future at todays 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 upto 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.

17

Leaps: The acronym LEAPS means Long-Term Equity Anticipation Securities. These are options having a maturity of upto three years. Baskets: Basket options are options on portfolio of underlying assets. The underlying asset is usually a moving average of a basket of assets. Equity index options are a form of basket options. Swaps: Swaps are private agreement between two parties to exchange cash flows in the future according to a prearranged formula. They can be regarded as portfolios of forward contracts. The two commonly used swaps are: Interest rate swaps: The 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 cashflows in one direction being in a different currency than those in the opposite direction. Swaptions: Swaptions are options to buy or sell a swap that will become operative at the expiry of the options. Thus a swaption is an option on a forward swap. Rather than have calls and puts, the swaptions market has receiver swaptions and payer swaptions. A receiver swaption is an option to receive fixed and pay floating. A payer swaption is an option to pay fixed and received floating.

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2.8 PARTICIPANTS IN THE DERRIVATIVES MARKETS

The following three broad categories of participants: HEDGERS: Hedgers face risk associated with the price of an asset. They use futures or options markets to reduce or eliminate this risk. SPECULATORS: Speculators wish to bet on future movements in the price of an asset. Futures and options contracts can give them an extra leverage; that is, they can increase both the potential gains and potential losses in a speculative venture. ARBITRAGEURS: Arbitrageurs are in business to take advantage of a discrepancy between prices in two different markets. If, for example they see the futures prices 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.

2.9 SCOPE OF THE STUDY

The Study is limited to Derivatives with special reference to futures and Option in the Indian context and the Inter-Connected Stock Exchange have been Taken as a representative sample for the study. The study cant be said as totally perfect. Any alteration may come. The study has only made a humble Attempt at evaluation derivatives market only in India context. The study is not Based on the international perspective of derivatives markets, which exists in NASDAQ, CBOT etc.,

2.10 OBJECTIVES OF THE STUDY

To analyze the derivatives market in India. To analyze the operations of futures and options. To find the profit/loss position of futures buyer and also The option writer and option holder.

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2.11 NATURE OF THE PROBLEM

The turnover of the stock exchange has been tremendously increasing form Last 10 years. The number of trades and the number of investors, who are participating, have increased. The investors are willing to reduce their risk, so they are seeking for the risk management tools. Prior to SEBI abolishing the BADLA system, the investors had this system as a source of reducing the risk, as it has many problems like no strong margining System, unclear expiration date and generating counter party risk. In view of this problem SEBI abolished the BADLA system. After the abolition of the BADLA system, the investors are seeking for a Hedging system, which could reduce their portfolio risk. SEBI thought the Introduction of the derivatives trading, as a first step it has set up a 24 member Committee under the chairmanship of Dr.L.C.Gupta to develop the appropriate Framework for derivatives trading in India, SEBI accepted the recommendation of the committee on May 11, 1998 and approved the phase introduction of the Derivatives trading beginning with stock index futures. There are many investors who are willing to trade in the derivatives segment, Because of its advantages like limited loss unlimited profit by paying the small Premiums.

2.12 THE DELOPMENT OF DERIVATIVES MARKET

Holding portfolios of Securities is associated with the risk of the possibility that the investor may realize his returns, which would be much lesser than what he expected to get. There are various factors, which affect the returns: 1. Price or dividend (interest) 2. Some are internal to the firm like Industrial policy Management capabilities Consumers preference Labor strike, etc.,
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These forces are to a large extent controllable and are termed as non systematic risks. An investor can easily manage such non-systematic by having a Well-diversified portfolio spread across the companies, industries and groups so that a loss in one may easily be compensated with a gain in other. There are yet other of influence which are external to the firm, cannot be controlled and affect large number of securities. They are termed as systematic Risk. They are: 1. Economic 2. political 3. Sociological changes are sources of systematic risk For instance, inflation, interest rate, etc. Their effect is to cause prices if nearly Allindividual stocks to move together in the same manner. We therefore quite often find stock prices falling from time to time in spite of companys earning rising and vice versa. Rational Behind the development of derivatives market is to manage this systematic risk, liquidity in the sense of being able to buy and sell relatively large amounts quickly without substantial price concession. In debt market, a large position of the total risk of securities is systematic. Debt instruments are also finite life securities with limited marketability due to their small size relative to many common sticks. Those factors favor for the purpose of both portfolio hedging and speculation, the introduction of a derivatives securities that is on some broader market rather than an individual security.

2.13 GLOBAL DERIVATIVES MARKET

The global financial centers such as Chicago, New York, Tokyo and London dominate the trading in derivatives. Some of the worlds leading exchanges for the exchangetraded derivatives are: Chicago Mercantile exchange (CME) and London International Financial Futures Exchange (LIFFE) Interest rate futures) ( for currency &

21

 Philadelphia Stock Exchange(PSE), London Stock Exchange (LSE) & Chicago Board Options Exchange currency options) New York Stock Exchange (NYSE) and London Stock Exchange (LSE) (for equity derivatives) Chicago Mercantile Exchange(CME) and London Metal Exchange (LME) ( for Commodities) These exchanges account for a large portion of the trading volume in the respective derivatives segment. (CBOE) ( for

2.14 NSEs DERIVATIVES MARKET

The derivatives trading on the NSE commenced with S&P CNX Nifty index Futures on June 12, 2000. The trading in index options commenced on June 4, 2001 and trading in options on individual securities commenced on July 2, 2001 Single stock futures were launched on November 9, 2001. Today, both in terms of volume and turnover, NSE is the largest derivatives exchange in India. Currently, the derivatives contracts have a maximum of 3-month expiration cycles. Three contracts are available for trading, with 1 month, 2 month and 3 month expiry. A new contract is introduced on the next trading day following of the near month contract.

2.15 REGULATORY FRAMEWORK

The trading of derivatives is governed by the provisions contained in the SC(R) A, the SEBI Act, the rules and regulations framed there under and the rules and bye-laws of stock exchanges. In this chapter we look at the broad regulatory framework for derivatives trading and the requirement to become a member and an authorized dealer of the F&O segment and the position limits as they apply to various participants.

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2.16 Regulation for derivatives trading:

SEBI set up a 24-members committee under the Chairmanship of Dr.L.C.GUPTA to develop the appropriate regulatory framework for derivatives trading in India. On May 11, 1998 SEBI accepted the recommendations of the committee and approved the phased introduction of derivatives trading in India beginning with stock index futures. The provision in the SC(R) A and the regulatory framework developed there under govern trading in securities. The amendment of the SC(R) A to include derivatives within the ambit of securities in the SC(R) A made trading in derivatives possible within the framework of that Act.
Any Exchange fulfilling the eligibility criteria as prescribed in the

L.C.Gupta committee report can apply to SEBI for grant of recognition under Section 4 of the SC(R) A, 1956 to start trading derivatives. The derivatives exchange/segment should have a separate governing council and representation of trading/clearing members shall be limited to maximum of 40% of the total members of the governing council. The exchange would have to regulate the sales practices of its members and would have to obtain prior approval of SEBI before start of trading in any derivative contract.
The Exchange should have minimum 50 members. The members of an existing segment of the exchange would not

automatically become the members of derivative segment. The members of the derivative segment would need to fulfill the eligibility conditions as laid down by the L.C.Gupta committee.
The clearing and settlement of derivatives trades would be through a SEBI

approved clearing corporation/house. to SEBI for grant of approval.

Clearing corporations/houses

complying with the eligibility as laid down by the committee have to apply

Derivatives brokers/dealers and clearing members are required to seek

registration from SEBI. This is in addition to their registration as brokers of existing stock exchanges. The minimum net worth for clearing members of
23

the derivatives clearing corporation/house shall be Rs.300 Lakhs. The net worth of the member shall be computed as follows : Capital + Free reserves Less non-allowable assets viz.,

Fixed assets Pledged securities Members card Non-allowable securities ( unlisted securities) Bad deliveries Doubtful debts and advances Prepaid expenses Intangible assets 30 % marketable securities The minimum contact value shall not be less than

Rs.2 Lakhs. Exchanges have to submit details of the futures contract they propose to introduce. The initial margin requirement, exposure limits linked to capital adequacy and margin demands related to the risk of loss on the position will be prescribed by SEBI / Exchanged from time to time. The L.C.Gupta committee report requires strict enforcement of Know your customer rule and requires that every client shall be registered with the derivatives broker. The members of the derivatives segment are also required to make their clients aware of the risks involved in derivatives trading by issuing to the clients the Risk Disclosure and obtain a copy of the same duly signed by the clients.

24

The trading members are required to have qualified approved user and sales person who have passed a certification programmed approved by SEBI.

2.17 ELIGIBILITY OF ANY STOCK TO ENTER IN DERIVATIVES MARKET

Non Promoter holding ( free float capitalization ) not less than Rs. 750

Crores from last 6 months

Daily Average Trading value not less than 5 Crores in last 6 Months At least 90% of Trading days in last 6 months Non Promoter Holding at least 30%

BETA not more than 4 ( previous last 6 months )

25

26

3 INTRODUCTION OF FUTURES
Futures markets were designed to solve the problems that exist in forward markets. 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. But unlike forward contract, the futures contracts are standardized and exchange traded. To facilitate liquidity in the futures contract, the exchange specifies certain standard features of the contract. It is standardized contract with standard underlying instrument, a standard quantity and quality of the underlying instrument that can be delivered, (Or which can be used for reference purpose in settlement) and a standard timing of such settlement. A futures contract may be offset prior to maturity by entering into an equal and opposite transaction. More than 90% of futures transactions are offset this way. The standardized items in a futures contract are: Quantity of the underlying Quality of the underlying The date and the month of delivery The units of price quotation and minimum price change Location of settlement

3.1 DEFINATION
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.

3.2 HISTORY OF FUTURES

Merton Miller, the 1990 Nobel Laureate had said that financial futures represent the most significant financial innovation of the last twenty years. The first exchange that traded financial derivatives was launched in Chicago in the year 1972. A division of the Chicago Mercantile Exchange, it was called the international monetary market (IMM) and traded currency futures. The brain behind this was a man called Leo Melamed,

27

acknowledged as the father of financial futures who was then the Chairman of the Chicago Mercantile Exchange. Before IMM opened in 1972, the Chicago Mercantile Exchange sold contracts whose value was counted in millions. By 1990, the underlying value of all contracts traded at the Chicago Mercantile Exchange totaled 50 trillion dollars. These currency futures paved the way for the successful marketing of a dizzying array of similar products at the Chicago Mercantile Exchange, the Chicago Board of Trade and the Chicago Board Options Exchange. By the 1990s, these exchanges were trading futures and options on everything from Asian and American stock indexes to interest-rate swaps, and their success transformed Chicago almost overnight into the risk-transfer capital of the world.

3.3 DISTINCTION BETWEEN FUTURES AND FORWARDS CONTRACTS

Forward contracts are often confused with futures contracts. The confusion is primarily because both serve essentially the same economic functions of allocating risk in the presence of futures price uncertainty. However futures are a significant improvement over the forward contracts as they eliminate counterparty risk and offer more liquidity. Comparison between two as follows:

28

FUTURES

FORWARDS

1.Trade on an Organized 1. OTC in nature Exchange 2.Standardized contract terms 2.Customized contract terms 3. hence less liquid 4. No margin payment

3. hence more liquid 4. Requires margin payment 5. Follows daily Settlement

5. Settlement happens at end of period

Table 3.1

3.4 FEATURES OF FUTURES

Futures are highly standardized. The contracting parties need not pay any down payment. Hedging of price risks. They have secondary markets to.

3.5 TYPES OF FUTURES

On the basis of the underlying asset they derive, the futures are divided into two types: Stock Futures Index Futures

29

3.6 PARTIES IN THE FUTURES CONTRACT

There are two parties in a futures contract, the buyers and the seller. The buyer of the futures contract is one who is LONG on the futures contract and the seller of the futures contract is who is SHORT on the futures contract. The pay-off for the buyers and the seller of the futures of the contracts are as follows:

PAY-OFF FOR A BUYER OF FUTURES

PROFIT

LOSS

Figure 3.2

CASE 1:- The buyers bought the futures contract at (F); if the futures Price Goes to E1 then the buyer gets the profit of (FP).

CASE 2:- The buyers gets loss when the futures price less then (F); if The Futures price goes to E2 then the buyer the loss of (FL).

30

PAY-OFF FOR A SELLER OF FUTURES

P PROFIT

E E

F LOSS L

Figure 3.3

F = FUTURES PRICE E1, E2 = SATTLEMENT PRICE CASE 1:- The seller sold the future contract at (F); if the future goes to E1 Then the seller gets the profit of (FP). CASE 2:- The seller gets loss when the future price goes greater than (F); If the future price goes to E2 then the seller get the loss of (FL). MARGINS Margins are the deposits which reduce counter party risk, arise in a futures contract. These margins are collect in order to eliminate the counter party risk. There are three types of margins: Initial Margins:-

31

Whenever a future contract is signed, both buyer and seller are required to post initial margins. Both buyers and seller are required to make security deposits that are intended to guarantee that they will infect be able to fulfill their obligation. These deposits are initial margins and they are often referred as purchase price of futures contract. Mark to market margins:The process of adjusting the equity in an investors account in order to reflect the change in the settlement price of futures contract is known as MTM margin. Maintenance margin:The investor must keep the futures account equity equal to or grater than certain percentage of the amount deposited as initial margin. If the equity goes less than that percentage of initial margin, then the investor receives a call for an additional deposit of cash known as maintenance margin to bring the equity up to the initial margin.

3.7 ROLE OF MARGINS

The role of margins in the futures contract is explained in the following example: Siva Rama Krishna sold an ONGC July futures contract to Nagesh at Rs.600; the following table shows the effect of margins on the Contract. The contract size of ONGC is 1800. The initial margin amount is say Rs. 30,000 the maintenance margin is 65% of initial margin.

3.8 PRICING FUTURES

Pricing of futures contract is very simple. Using the cost-of-carry logic, we calculate the fair value of a future contract. Every time the observed price deviates from the fair value, arbitragers would enter into trades to captures the arbitrage profit. This in turn would push the futures price back to its fair value. The cost of carry model used for pricing futures is given below. F = SerT Where: F S = = Futures price Spot Price of the Underlying
32

Cost of financing (using continuously compounded Interest rate)

T e

= =

Time till expiration in years 2.71828 (OR) F = S (1+r- q) t

Where: F S r q t = = = = = Futures price Spot price of the underlying Cost of financing (or) interest Rate Expected dividend yield Holding Period

3.9 FUTURES TERMINOLOGY

Spot price: The price at which an asset trades in the spot market. Futures Price: The price at which the futures contract trades in the futures market. Contract cycle: The period over which a contract trades. The index futures contracts on the NSE have one-month and three-month expiry cycles which expire on the last Thursday of the month. Thus a January expiration contract expires on the last Thursday of January and a February expiration contract ceases trading on the last Thursday of February. On the Friday following the last Thursday, a new contract having a three-month expiry is introduced for trading.

33

Expiry date: It is the date specified in the futures contract. This is the last day on which the contract will be traded, at the end of which it will cease to exist. Contract size: The amount of asset that has to be delivered under one contract. For instance, the contract size on NSEs futures markets is 200 Nifties. Basis: In the context of financial futures, basis can be defined as the futures price minus the spot price. These will be a different basis for each delivery month for each contract. In a normal market, basis will be positive. This reflects that futures prices normally exceed spot prices. Cost of carry: The relationship between futures prices and spot prices can be summarized in terms of what is known as the cost of carry. This measures the storage cost plus the interest that is paid to finance the asset less the income earned on the asset. Initial margin: The amount that must be deposited in the margin account at the time a futures contract is first entered into is known as initial margin. Marking-to-market: In the futures market, at the end of each trading day, the margin account is adjusted to reflect the investors gain or loss depending upon the futures closing price. This is called marking-to-market. Maintenance margin: This is some what lower than the initial margin. This is set to ensure that the balance in the margin account never becomes negative. If the balance in the margin account falls

34

35

4 INTRODUCTION TO OPTIONS
In this section, we look at the next derivative product to be traded on the NSE, namely options. Options are fundamentally different from forward and futures contracts. An option gives the holder of the option the right to do something. The holder does not have to exercise this right. In contrast, in a forward or futures contract, the two parties have committed themselves to doing something. Whereas it costs nothing (except margin requirement) to enter into a futures contracts, the purchase of an option requires as upfront payment.

4.1 DEFINITION
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 buyers 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.

4.2 HISTORY OF OPTIONS

Although options have existed for a long time, they wee traded OTC, without much knowledge of valuation. The first trading in options began in Europe and the US as early as the seventeenth century. It was only in the early 1900s that a group of firms set up what was known as the put and call Brokers and Dealers Association with the aim of providing a mechanism for bringing buyers and sellers together. If someone wanted to buy an option, he or she would contact one of the member firms. The firms would then attempt to find a seller or writer of the option either from its own clients of those of other member firms. If no seller could be found, the firm would undertake to write the option itself in return for a price. This market however suffered form two deficiencies. First, there was no secondary market and second, there was no mechanism to guarantee that the writer of the option would honor the contract. In 1973, Black, Merton and scholes invented the famed Black-Scholes formula. In April 1973, CBOE was set up specifically for the purpose of trading options. The market for option developed so rapidly that by early 80s, the

36

number of shares underlying the option contract sold each day exceeded the daily volume of shares traded on the NYSE. Since then, there has been no looking back. Option made their first major mark in financial history during the tulip-bulb mania in seventeenth-century Holland. It was one of the most spectacular get rich quick binges in history. The first tulip was brought Into Holland by a botany professor from Vienna. Over a decade, the tulip became the most popular and expensive item in Dutch gardens. The more popular they became, the more Tulip bulb prices began rising. That was when options came into the picture. They were initially used for hedging. By purchasing a call option on tulip bulbs, a dealer who was committed to a sales contract could be assured of obtaining a fixed number of bulbs for a set price. Similarly, tulip-bulb growers could assure themselves of selling their bulbs at a set price by purchasing put options. Later, however, options were increasingly used by speculators who found that call options were an effective vehicle for obtaining maximum possible gains on investment. As long as tulip prices continued to skyrocket, a call buyer would realize returns far in excess of those that could be obtained by purchasing tulip bulbs themselves. The writers of the put options also prospered as bulb prices spiraled since writers were able to keep the premiums and the options were never exercised. The tulip-bulb market collapsed in 1636 and a lot of speculators lost huge sums of money. Hardest hit were put writers who were unable to meet their commitments to purchase Tulip bulbs.

4.3 PROPERTIES OF OPTION

Options have several unique properties that set them apart from other securities. The following are the properties of option: Limited Loss High leverages potential Limited Life

37

4.4 PARTIES IN AN OPTION CONTRACT

There are two participants in Option Contract. Buyer/Holder/Owner of an Option: The Buyer of an Option is the one who by paying the option premium buys the right but not the obligation to exercise his option on the seller/writer. Seller/writer of an Option: The writer of a call/put option is the one who receives the option premium and is thereby obliged to sell/buy the asset if the buyer exercises on him.

4.5 TYPES OF OPTIONS

The Options are classified into various types on the basis of various variables. The following are the various types of options.

4.5.1 On the basis of the underlying asset:

On the basis of the underlying asset the option are divided in to two types:

4.5.2 Index options:

These options have the index as the underlying. Some options are settled. European while others are American. Like index futures contracts, index options contracts are also cash

4.5.3 Stock options:

Stock Options are options on individual stocks. Options currently trade on over 500 stocks in the United States. A contract gives the holder the right to buy or sell shares at the specified price.

4.5.4 On the basis of the market movements :

On the basis of the market movements the option are divided into two types. They are:

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4.5.5 Call Option:

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

4.5.6 Put Option:

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

4.6 On the basis of exercise of option:

On the basis of the exercise of the Option, the options are classified into two Categories.

4.6.1 American Option:

American options are options that can be exercised at any time up to the expiration date. Most exchange traded options are American.

4.6.2 European Option:

European options are options that can be exercised only on the expiration date itself. European options are easier to analyze than American options, and properties of an American option are frequently deduced from those of its European counterpart.

39

4.7 PAY-OFF PROFILE FOR BUYER OF A CALL OPTION

The Pay-off of a buyer options depends on a spot price of an underlying asset. The following graph shows the pay-off of buyers of a call option.

PROFIT ITM

S ATM E
1

OTM

LOSS

Figure 3.4

S= Sp = E1 = E2 = SR =

Strike price premium/loss

ITM = In the Money ATM = At the Money OTM = Out of the Money

Spot price 1 Spot price 2 Profit at spot price E1

CASE 1: (Spot Price > Strike price) As the Spot price (E1) of the underlying asset is more than strike price (S). The buyer gets profit of (SR), if price increases more than E1 then profit also increase more than (SR)

40

CASE 2: (Spot Price < Strike Price) As a spot price (E2) of the underlying asset is less than strike price (S) The buyer gets loss of (SP); if price goes down less than E2 then also his loss is limited to his premium (SP)

4.8 PAY-OFF PROFILE FOR SELLER OF A CALL OPTION

The pay-off of seller of the call option depends on the spot price of the underlying asset. The following graph shows the pay-off of seller of a call option:

PROFIT ITM P ATM

S OTM

R LOSS

Figure 3.5 S= SP = E1 = E2 = SR = Strike price Premium / profit Spot Price 1 Spot Price 2 loss at spot price E2 ITM = In the Money ATM = At The money OTM = Out of the Money

41

CASE 1: (Spot price < Strike price) As the spot price (E1) of the underlying is less than strike price (S). The seller gets the profit of (SP), if the price decreases less than E1 then also profit of the seller does not exceed (SP).

CASE 2: (Spot price > Strike price) As the spot price (E2) of the underlying asset is more than strike price (S) the Seller gets loss of (SR), if price goes more than E2 then the loss of the seller also increase more than (SR).

4.9 PAY-OFF PROFILE FOR BUYER OF A PUT OPTION

The Pay-off of the buyer of the option depends on the spot price of the underlying asset. The following graph shows the pay-off of the buyer of a call option.

PROFIT ITM

S E ATM
1

OTM

LOSS

Figure 3.6 S = Strike price SP = Premium / loss E1 = Spot price 1 E2 = Spot price 2 ITM = In the Money ATM = At the Money OTM = Out of the Money

42

SR = Profit at spot price E1

CASE 1: (Spot price < Strike price) As the spot price (E1) of the underlying asset is less than strike price (S). The buyer gets the profit (SR), if price decreases less than E1 then profit also increases more than (SR). CASE 2: (Spot price > Strike price) As the spot price (E2) of the underlying asset is more than strike price (S), The buyer gets loss of (SP), if price goes more than E2 than the loss of the buyer is limited to his premium (SP).

4.10 PAY-OFF PROFILE FOR SELLER OF A PUT OPTION

The pay-off of a seller of the option depends on the spot price of the underlying asset. The following graph shows the pay-off of seller of a put option.

PROFIT P ITM E ATM S R LOSS E

2 1

OTM

Figure 3.7 S = Strike price SP = Premium/profit ITM = In the Money ATM = At the Money

43

E1 = Spot price 1 E2 = Spot price 2 SR = Loss at spot price E1

OTM = Out of the Money

CASE 1: (Spot price < Strike price) As the spot price (E1) of the underlying asset is less than strike price (S), the seller gets the loss of (SR), if price decreases less than E1 than the loss also increases more than (SR). CASE 2: (Spot price > Strike price) As the spot price (E2) of the underlying asset is more than strike price (S), the seller gets profit of (SP), of price goes more than E2 than the profit of seller is limited to his premium (SP).

4.11 FACTORS AFFECTING THE PRICE OF AN OPTION

The following are the various factors that affect the price of an option they are:

4.11.1 Stock Price:

The pay-off from a call option is an amount by which the stock price exceeds the strike price. Call options therefore become more valuable as the stock price increases and vice versa. The pay-off from a put option is the amount; by which the strike price exceeds the stock price. Put options therefore become more valuable as the stock price increases and vice versa.

4.11.2 Strike price:

In case of a call, as a strike price increases, the stock price has to make a larger upward move for the option to go in-the money. Therefore, for a call, as the strike price increases option becomes less valuable and as strike price decreases, option become more valuable.

4.11.3 Time to expiration:

Both put and call American options become more valuable as a time to expiration increases.

44

4.11.4 Volatility:
The volatility of a stock price is measured of uncertain about future stock price movements. As volatility increases, the chance that the stock will do very well or very poor increases. The value of both calls and puts therefore increases as volatility increase.

4.11.5 Risk- free interest rate:

The put option prices decline as the risk-free rate increases where as the price of call always increases as the risk-free interest rate increases. Dividends:Dividends have the effect of reducing the stock price on the X- dividend rate. This has a negative effect on the value of call options and a positive effect on the value of put options.

4.12 PRICING OPTIONS

An option buyer has the right but not the obligation to exercise on the seller. The worst that can happen to a buyer is the loss of the premium paid by him. His downside is limited to this premium, but his upside is potentially unlimited. This optionality is precious and has a value, which is expressed in terms of the option price. Just like in other free markets, it is the supply and demand in the secondary market that drives the price of an option. There are various models which help us get close to the true price of an option. Most of these are variants of the celebrated Black- Scholes model for pricing European options. Today most calculators and spread-sheets come with a built-in Black- Scholes options pricing formula so to price options we dont really need to memorize the formula. All we need to know is the variables that go into the model. The Black-Scholes formulas for the price of European calls and puts on a nondividend paying stock are:

45

Call option CA = SN (d1) Xe- rT N (d2) Put Option PA = Xe- rT N (- d2) SN (- d1) Where d1 = ln (S/X) + (r + v2/2) T vT And d2 = d1 - vT Where CA = VALUE OF CALL OPTION PA = VALUE OF PUT OPTION S = SPOT PRICE OF STOCK N = NORMAL DISTRIBUTION VARIANCE (V) = VOLATILITY X = STRIKE PRICE r = ANNUAL RISK FREE RETURN T = CONTRACT CYCLE e = 2.71828 r = ln (1 + r)

Table 3.

46

4.13 OPTIONS TERMINOLOGY

4.13.1 Option price/premium:

Option price is the price which the option buyer pays to the option seller. It is also referred to as the option premium.

4.13.2 Expiration date:

The date specified in the options contract is known as the expiration date, the exercise date, the strike date or the maturity.

4.13.3 Strike price:

The price specified in the option contract is known as the strike price or the exercise price. DISTINCTION BETWEEN FUTURES AND OPTIONS FUTURES 1. Exchange traded, with Novation 2. Exchange defines the product 3. Price is zero, strike price moves 4. Price is Zero 5. Linear payoff 6. Both long and short at risk 3. Strike price is fixed, price moves 4. Price is always positive 5. Nonlinear payoff 6. Only short at risk OPTIONS 1. Same as futures 2. Same as futures

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Table 3.6

CALL OPTION

PREMIUM STRIKE PRICE INTRINSIC VALUE 560 540 520 0 0 0 TIME VALUE 2 5 10 TOTAL VALUE 2 5 10 OUT OF THE MONEY CONTRACT

500

15

15

AT THE MONEY

480 460

20 40

10 5

30 45 IN THE

48

440

60

62

MONEY

Table 3.10

PUT OPTION

PREMIUM STRIKE PRICE INTRINSIC VALUE 560 540 520 60 40 20 TIME VALUE 2 5 10 TOTAL VALUE 62 45 30 IN THE MONEY CONTRACT

AT THE 500 0 15 15 MONEY

49

480 460 440

0 0 0

10 5 2

10 5 2

OUT OF THE MONEY

Table 3.11 PREMIUM = INTRINSIC VALUE + TIME VALUE The difference between strike values is called interval

50

5 TRADING INTRODUCTION
The futures & Options trading system of NSE, called NEAT-F&O trading system, provides a fully automated screen-based trading for Nifty futures & options and stock futures & Options on a nationwide basis as well as an online monitoring and surveillance mechanism. It supports an order driven market and provides complete transparency of trading operations. It is similar to that of trading of equities in the cash market segment. The software for the F&O market has been developed to facilitate efficient and transparent trading in futures and options instruments. Keeping in view the familiarity of trading members with the current capital market trading system, modifications have been performed in the existing capital market trading system so as to make it suitable for trading futures and options. On starting NEAT (National Exchange for Automatic Trading) Application, the log on (Pass Word) Screen Appears with the Following Details. 1) User ID 2) Trading Member ID

51

3) Password NEAT CM (default Pass word) 4) New Pass Word Note: - 1) User ID is a Unique 2) Trading Member ID is Unique & Function; it is Common for all user of the Trading Member 3) New password Minimum 6 Characteristic, Maximum 8 characteristics only 3 attempts are accepted by the user to enter the password to open the Screen 4) If password is forgotten the User required to inform the Exchange in writing to reset the Password

5.1 BASKET TRADING SYSTEM

1) Taking advantage for easy arbitration between future market and & cash market difference, NSE introduce basket trading system by off setting positions through off lineorder-entry facility. 2) Orders are created for a selected portfolio to the ratio of their market Capitalization from 1 lake to 30 crores.
1) Offline-order-entry facility: - generate order file in as specified format out side

the system & up load the order file in to the system by invoking this facility in Basket trading system.

52

TRADING NETWORK

53

HUB ANTENNA

SATELLITE

NSE MAIN FRAME

BROKERS PREMISES

Figure 3.12 Participants in Security Market

1) Stock Exchange (registered in SEBI)-23 Stock Exchanges 2) Depositaries (NSDL,CDSL)-2 Depositaries

54

3) Listed Securities-9,413 4) Registered Brokers-9,519 5) FIIs-502

Highest Investor Population State Total No. Investors % of Investors in India

Maharastra

9.11 Lakhs

28.50

Gujarat

5.36 Lakhs

16.75

Delhi

3.25 Lakhs

10.10%

Tamilnadu

2.30 Lakhs

7.205

West Bangal Andhra Pradesh

2.14 Lakhs 1.94 Lakhs

6.75% 6.05%

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CHAPTER-III

COMPANY PROFILE
56

6 industry profile
6.1 Stock broking operations an over view
As capital market operations is a complex activity which require an in depth knowledge of stock market and about the company performance, security analysis of the stock. A full time practicing firm/person is needed to advise for our investment; in fact a broker can also invest his own money to make profit out of stock market operations. A stockbroker invests in the stock market for individuals or corporations so whenever individuals or corporations want to buy or sell stocks they must go through a brokerage house. Stockbrokers often advise and counsel their clients on appropriate investments. Brokers explain the workings of the stock exchange to their clients and gather information from them about their needs and financial ability, and then determine the best investments for them. The broker then sends the order out to the floor of the securities exchange by computer or by phone. When the transaction has been made, the broker supplies the client with the price. The buyer pays for the stock and the broker transfers the title of the stock to the client and performs clearing and settlement procedures. The settlement process is discussed in subsequent pages. The

57

beginning stockbrokers first priority is learning the market. One broker said, First you have to decide whether you have an interest in the stock market. This will determine how well you will do. If you are just interested in making money you wont get very far. Stockbrokers spend their time in a fast-paced office, usually working from nine to five, unless they are just starting out or have to meet with clients. The new broker spends many hours on the phone building up a client base. Sometimes brokers teach financial education classes to expose themselves to potential investors who may then become their clients. Brokerage clerks handle much of the day-to-day operations of brokerages, performing a number of different jobs with a wide range of responsibilities; all involve computing and recording data pertaining to securities transactions. Brokerage clerks also may contact customers, take orders, and inform clients of changes to their accounts. Some of these jobs are more clerical. Brokerage clerks, who work in the operations departments of securities firms, on trading floors, and in branch offices, also are called margin clerks, dividend clerks, transfer clerks, and brokers assistants. Brokerage clerks in the operations areas of securities firms perform many duties to facilitate the sale and purchase of stocks, bonds, commodities, and other kinds of investments. These clerks produce the necessary records of all transactions that occur in their area of the business. Job titles for many of them depend upon the type of work that they perform. Purchase-and-sale clerks, for example, match orders to buy with orders to sell. They balance and verify trades of stock by comparing the records of the selling firm with those of the buying firm. Dividend clerks ensure timely payments of stock or cash dividends to clients of a particular brokerage firm. Transfer clerks execute customer requests for changes to security registration and examine stock certificates to make sure that they adhere to banking regulations. Receive-and-deliver clerks facilitate the receipt and delivery of securities among firms and institutions. Margin clerks record and monitor activity in customers accounts to ensure that clients make payments and stay within legal boundaries concerning their purchases of stock.

58

Technology is changing the nature of many of these jobs. A significant and growing number of brokerage clerks use custom-designed software programs to process transactions more quickly. Only a few customized accounts are still handled manually. Furthermore, the rapid expansion of online trading reduces the amount of paperwork because brokerage clerks are able to make trades electronically.

6.2 Stockbroker and the investor:

The stockbroker should provide adequate information regarding the stocks. He should be capable of giving short term and long-term investment suggestions to the investor and able to confirm the purchase and sale of securities quickly. He should have adequate experience in the market to take correct decision. He should have contact with other stock exchanges to execute the orders profitably and also offer incidental service like arranging for financing the clients transaction.

6.3 Types of stockbrokers

The stock brokers the key players in secondary market. There are various categories of brokers as stated below.

Floor Brokers: They are representatives of the brokers, who enter the trading Commission Broker: A commission broker is a broker who buys and sells

floor and execute orders for their clients of for members. securities on behalf of his clients for a commission. He does not purchase or sell his own name. A broker act for the large number of his clients, and therefore, he deals in a large variety of securities.

Jobbers: A jobber is an independent broker who deals in securities as a owner,

keeps them for a very short period and sells them for profit known as the jobbers turn. Thus a jobber does not work for commission but works for profits. A jobber transacts in the market for quick returns. In the London Stock Exchange even member has to act as a broker or as a jobber. In India, there is no such rigid classification.

59

Badla Financiers/Badliwallas: Badliwallas are the intermediaries who finance

the forward deals in specified securities in return for interest. This interest is called Badla rate.

Arbitragers: They are brokers who buy securities in one market and sell them in

another market to take the advantages of the price differences prevailing in different markets for same scripts.

Wolves: They are clever speculators. They perceive the changing trends in the

market and trade fast and make a fast duck.

6.4 Buying and selling of shares:

To buy and sell the script the investor has to locate register broker or a sub broker who render prompt and efficient services to him. The order to buy of sell specified number of scrip of the company of investors choice ate laced with the broker, the order may be of any of the below mentions type after receiving the order the broker tries to execute the order in his computer terminal. Once matching order is found, the order is executed. The broker delivers the contract note. To the investor, it gives the details regarding the name of the company, number of scripts bought, price, brokerage, and the date of delivery of share. In the physical trading form, once the broker gets the script certificate through the clearing houses the stock broker delivers the share certificate along with transfer deed to the investor. The investor has to fill the transfer deed and stamp it. The stamp duty is one of the percentage consideration, the investor should lodge the share certificate and transfer deed to the register or transfer agent of the company if it is bought in the demit form the broker has to give a matching instruction to his depository participant to transfer shares bought to the investor account. The investor should be account holder in any of depository participant. In the case of sell of shares on receiving payment from the purchasing broker, the broker effects the payment to the investor

6.5 Orders:
Buy and sell orders placed with members of the stock exchange by the investor. The broker is responsible for getting the best price for his customer at the time the order is placed.

60

6.6 Online Trading:

The Net is used as a medium of trading in Internet trading. Orders are communicated to the stock exchange through website. Internet trading started in India on 1st April 2000 with 79 members seeking permission for online trading. The SEBI committees on Internet based securities trading services trading services has allowed the net to be used as an Order Routing System (ORS) through registered stock brokers on behalf of their clients for execution of transaction. The user should have the user id and password to enter into the electronic ring. He should also have a demat account and bank account. order window of the website. The client has to enter stock code and other parameters such as quantity and price of the scrip on the place order window. The client can review the order placed by clicking the review option. He can also reset to clear the values Satisfactory orders are sent by clicking the send option. The client receives an order confirmation message with order number and value of the order. If the order is rejected by the broker or stock exchange of r certain reasons such as invalid price limit, a related message appears at the bottom of the screen. The time taken to execute the order is 10 seconds. When the trade is executed, the broker asks for the transfer of funds by the investor to his account. Stocks are credited/debited according to the buy/sell order in the demat accounts. The system permits only a registered client to log in using user ID and password. Order can be placed using place

6.7 Regulatory Framework

The securities and Exchange Board of India was constituted in 1998 under a resolution of government of India. It was later made statutory body by the SEBI act 1992. According to this act, the SEBI shall constitute of a chairman and five other members appointed by the central government with the coming into effect of the
61

Securities and Exchange Board of India act, 1992. Some of the power and functions exercised by the central government, in respect of the regulation of stock exchange were transferred to the SEBI.

6.8 Objects and functions of SEBI:

I. To protect the interest of investors in securities. II. Regulation the business in stock exchange and any other securities market. III. Registering and regulation the working of intermediaries associated with securities market as well as working of mutual fund. IV. Promoting and regulating self-regulating organizations. V. Prohibiting insides trading in securities. VI. Regulation substantial acquisition of share and take over of companies. VII. Performing such functions and exercising such powers under the provisions of capital issues (control) act, 1947 and the securities to it by the central government. Securities and Exchange Board of India (Stock Brokers And Sub-Brokers) Regulations, 1992, In respect of stockbroker and sub-broker, SEBI has made 12 amendments from November 28, 1995 to September 27, 2002.SEBI has been setup to ensure that the stock exchanges discharge their self-regulatory role properly. Even since SEBI began to monitor brokers, stock broker. Stock broking is emerging as a professional advisory service, in tune with the requirements of a mature, sophisticated, screen-based, ring less, automated stock exchanges in the country. New Membership -CM and F&O segment Eligibility The following persons are eligible to seek membership of the Exchange as Trading Members (Brokers): a. Individuals

62

b. Partnership Firms registered under the Indian Partnership Act, 1932. c. Corporations, Companies or institutions or subsidiaries of such Corporations, Companies or institutions set up for providing financial services. Such other persons or entities as may be permitted from time to time by RBI/SEBI under the securities Contracts (Regulations) Rules, 1957. General Eligibility Conditions: Criteria AGE Individuals Minimum age: 21 years Maximum age: 60 years STATUS Indian Citizen Firms Minimum age: 21 years (applicable for partners) Registered partnership firm under Indian partnership Act, 1932 Corporate Minimum age: 21 years (applicable for directors) Corporate registered under The Companies Act, 1956 (Indian)

7 COMPANY PROFILE

ICICI Bank was incorporated in August 1994 in the name of ICICI Bank Limited, with its registered office in Mumbai, India. The bank commenced operations as a Scheduled Commercial Bank in January 1995.The Housing Development Finance Corporation Limited was amongst the first to receive an in principle approval from the Reserve Bank of India Banking Industry in 1994.

63

Headquartered in Mumbai ICICI Bank has a network of over 53 branches spread over 228 cities across India. All branches are linked on an online real-time basis. Customers in over 120 locations are serviced through Telephone Banking. The bank also has a network of about over 1054 networked ATMs across these cities. ICICI Banks ATM network can be accessed by all domestic and international Visa / Master Card,; Visa Electron / Maestro, plus / circus and American Express Credit / Charge cardholders. ICICI Bank has won many awards for its excellent service. Major among them are Best Bank in India by Hong Kong-based Finance Asia magazine in 2005 and Company of the year Award for Corporate Excellence 2004-2005.

7.1 ICICI Consultancy Services

ICICI is a unique example of a housing finance company which has demonstrated the viability of market-oriented housing finance in a developing country. It is viewed as an innovative institution and a market leader in the housing finance sector in India. The World Bank considers ICICI a model private sector housing finance company in developing countries and a provider of technical assistance for new and existing institutions, in India and abroad. ICICIs executives have undertaken consultancy assignments related to housing finance and urban development on behalf of multilateral agencies all over the world. ICICI has also served as consultant to international agencies such as World Bank, United States Agency for International Development (USAID), Asian Development Bank, United Nations Center for Human Settlements, Commonwealth Development Corporation (CDC) and United Nations Development Programme (UNDP). ICICI has also undertaken assignments for the United Nations Capital Development Fund in Ethiopia, for the UNCHS in Nairobi, for USAID in Russia and Bulgaria, and projects of the World Bank in Indonesia and Ghana.

64

At the national level, ICICI executives have played a key role in formulating national housing policies and strategies. Recognizing ICICIs expertise, the Government of India has invited ICICIs executives to join a number of committees and task forces related to housing finance, urban development and capital markets. Consultancy assignments undertaken Project Title State Mortgage Investment Bank Review of Operations of Bank Tabunga Negara Detailed Analysis of Housing Situation Study of Housing Finance Sector Bhutan Ghana Govt. of Bhutan Govt. of Ghana /World Bank Management and Operations Audit Technical Assistance for Alliance Housing Bank Feasibility of Establishing a New Mortgage Finance Company Feasibility Study for a Second Building Society Workshop on Housing Finance & Managerial Effectiveness for Housing Professionals Review of Nepal Housing Development Finance Company Limited (NICICI) Evaluation of an investment proposal of Turks & CDC Nepal USAID & UNDP Ghana World Bank Malawi Direct Mauritius CDC Thailand Oman CDC Direct Project Country Russia Indonesia USAID World Bank Agency

Commonwealth Development Corporation in Caicos Islands

65

Turks & Caicos Islands Evaluation of Caribbean Housing Finance Corporation Limited, Jamaica Review of Mortgage Underwriting and Servicing Manuals developed for Bulgaria Workshop on Credit Appraisal & Loan Recovery Development of Mortgage Servicing Manual Russia Abt. Associates Inc. Philippines The Asian Coalition Bulgaria The Urban Institute Jamaica CDC

7.2 Objectives and Background

7.2.1 Housing Finance Sector
Against the milieu of rapid urbanization and a changing socio-economic scenario, the demand for housing has grown explosively. The importance of the housing sector in the economy can be illustrated by a few key statistics. According to the National Building Organization (NBO), the total demand for housing is estimated at 2 million units per year and the total housing shortfall is estimated to be 19.4 million units, of which 12.76 million units is from rural areas and 6.64 million units from urban areas. The housing industry is the second largest employment generator in the country. It is estimated that the budgeted 2 million units would lead to the creation of an additional 10 million manyears of direct employment and another 15 million man-years of indirect employment. Having identified housing as a priority area in the Ninth Five Year Plan (1997-2002), the National Housing Policy has envisaged an investment target of Rs. 1,500 billion for this sector. In order to achieve this investment target, the Government needs to make low cost funds easily available and enforce legal and regulatory reforms.

7.2.2 Background
ICICI was incorporated in 1977 with the primary objective of meeting a social need that of promoting home ownership by providing long-term finance to households

66

for their housing needs. ICICI was promoted with an initial share capital of Rs. 100 million.

7.2.3 Business Objectives

The primary objective of ICICI is to enhance residential housing stock in the country through the provision of housing finance in a systematic and professional manner, and to promote home ownership. Another objective is to increase the flow of resources to the housing sector by integrating the housing finance sector with the overall domestic financial markets..

7.2.4 Organizational Goals

ICICIs main goals are to a develop close relationships with individual households, b) maintain its position as the premier housing finance institution in the country, c) transform ideas into viable and creative solutions, d) provide consistently high returns to shareholders, and e) to grow through diversification by leveraging off the existing client base.

7.2.5 Promoter
ICICI is India's premier housing finance company and enjoys an impeccable track record in India as well as in international markets. Since its inception in 1977, the Corporation has maintained a consistent and healthy growth in its operations to remain the market leader in mortgages. Its outstanding loan portfolio covers well over a million dwelling units. ICICI has developed significant expertise in retail mortgage loans to different market segments and also has a large corporate client base for its housing related credit facilities. With its experience in the financial markets, a strong market reputation, large shareholder base and unique consumer franchise, ICICI was ideally positioned to promote a bank in the Indian environment.

7.2.6 Business Focus:

ICICI Bank's mission is to be a World-Class Indian Bank. The objective is to build sound customer franchises across distinct businesses so as to be the preferred
67

provider of banking services for target retail and wholesale customer segments, and to achieve healthy growth in profitability, consistent with the bank's risk appetite. The bank is committed to maintain the highest level of ethical standards, professional integrity, corporate governance and regulatory compliance. ICICI Bank's business philosophy is based on four core values - Operational Excellence, Customer Focus, Product Leadership and People.

7.2.7 Capital Stricture

The authorized capital of ICICI Bank is Rs.450 crore (Rs.4.5 billion). The paid-up capital is Rs.311.9 crore (Rs.3.1 billion). The ICICI Group holds 22.1% of the bank's equity and about 19.4% of the equity is held by the ADS Depository (in respect of the bank's American Depository Shares (ADS) Issue). Roughly 31.3% of the equity is held by Foreign Institutional Investors (FIIs) and the bank has about 190,000 shareholders. The shares are listed on the The Stock Exchange, Mumbai and the National Stock Exchange. The bank's American Depository Shares are listed on the New York Stock Exchange (NYSE) under the symbol "HDB".

In a milestone transaction in the Indian banking industry, Times Bank Limited (another new private sector bank promoted by Bennett, Coleman & Co./Times Group) was merged with ICICI Bank Ltd., effective February 26, 2000. As per the scheme of amalgamation approved by the shareholders of both banks and the Reserve Bank of India, shareholders of Times Bank received 1 share of ICICI Bank for every 5.75 shares of Times Bank. The acquisition added significant value to ICICI Bank in terms of increased branch network, expanded geographic reach, enhanced customer base, skilled manpower and the opportunity to cross-sell and leverage alternative delivery channels. Mr. Jagdish Capoor took over as the bank's Chairman in July 2001. Prior to this, Mr. Capoor was a Deputy Governor of the Reserve Bank of India. The Managing Director, Mr. Aditya Puri, has been a professional banker for over 25 years, and before joining ICICI Bank in 1994 was heading Citibank's operations in
68

Malaysia. The Bank's Board of Directors is composed of eminent individuals with a wealth of experience in public policy, administration, industry and commercial banking. Senior executives representing ICICI are also on the Board. Senior banking professionals with substantial experience in India and abroad head various businesses and functions and report to the Managing Director. Given the professional expertise of the management team and the overall focus on recruiting and retaining the best talent in the industry, the bank believes that its people are a significant competitive strength.

7.2.8 Technology
ICICI Bank operates in a highly automated environment in terms of information technology and communication systems. All the bank's branches have online connectivity, which enables the bank to offer speedy funds transfer facilities to its customers. Multi-branch access is also provided to retail customers through the branch network and Automated Teller Machines (ATMs). The Bank has made substantial efforts and investments in acquiring the best technology available internationally, to build the infrastructure for a world class bank. The Bank's business is supported by scalable and robust systems which ensure that our clients always get the finest services we offer. The Bank has prioritised its engagement in technology and the internet as one of its key goals and has already made significant progress in web-enabling its core businesses. In each of its businesses, the Bank has succeeded in leveraging its market position, expertise and technology to create a competitive advantage and build market share.

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7.2.9 Business
ICICI Bank offers a wide range of commercial and transactional banking services and treasury products to wholesale and retail customers. The bank has three key business segments:

7.2.10 Wholesale Banking Services

The Bank's target market ranges from large, blue-chip manufacturing companies in the Indian corporate to small & mid-sized corporates and agri-based businesses. For these customers, the Bank provides a wide range of commercial and transactional banking services, including working capital finance, trade services, transactional services, cash management, etc. The bank is also a leading provider of structured solutions, which combine cash management services with vendor and distributor finance for facilitating superior supply chain management for its corporate customers. Based on its superior product delivery / service levels and strong customer orientation, the Bank has made significant inroads into the banking consortia of a number of leading Indian corporates including multinationals, companies from the domestic business houses and prime public sector companies. It is recognised as a leading provider of cash management and transactional banking solutions to corporate customers, mutual funds, stock exchange members and banks.

7.2.11 Retail Banking Services

The objective of the Retail Bank is to provide its target market customers a full range of financial products and banking services, giving the customer a one-stop window for all his/her banking requirements. The products are backed by world-class service and delivered to the customers through the growing branch network, as well as through alternative delivery channels like ATMs, Phone The ICICI Bank Preferred program for high net worth individuals, the ICICI .Bank Plus and the Investment Advisory Services programs have been designed keeping in mind needs of customers who seek distinct financial solutions, information and advice on various investment avenues. The Bank also has a wide array of retail loan products including Auto Loans, Loans against marketable securities, Personal Loans and Loans for

70

Two-wheelers. It is also a leading provider of Depository Participant (DP) services for retail customers, providing customers the facility to hold their investments in electronic form. ICICI Bank was the first bank in India to launch an International Debit Card in association with VISA (VISA Electron) and issues the MasterCard Maestro debit card as well. The Bank launched its credit card business in late 2001. By September 30, 2005, the bank had a total card base (debit and credit cards) of 5.2 million cards. The Bank is also one of the leading players in the "merchant acquiring" business with over 50,000 Pointof-sale (POS) terminals for debit / credit cards acceptance at merchant establishments

Treasury
Within this business, the bank has three main product areas - Foreign Exchange and Derivatives, Local Currency Money Market & Debt Securities, and Equities. With the liberalization of the financial markets in India, corporates need more sophisticated risk management information, advice and product structures. These and fine pricing on various treasury products are provided through the bank's Treasury team. To comply with statutory reserve requirements, the bank is required to hold 25% of its deposits in government securities. The Treasury business is responsible for managing the returns and market risk on this investment portfolio.

7.2.12 Credit Rating

The Bank has its deposit programs rated by two rating agencies - Credit Analysis & Research Limited (CARE) and Fitch Ratings India Private Limited. The Bank's Fixed Deposit programme has been rated 'CARE AAA (FD)' [Triple A] by CARE, which represents instruments considered to be "of the best quality, carrying negligible investment risk". CARE has also rated the bank's Certificate of Deposit (CD) programme "PR 1+" which represents "superior capacity for repayment of short term promissory obligations". Fitch Ratings India Pvt. Ltd. (100% subsidiary of Fitch Inc.) has assigned the "tAAA ( ind )" rating to the Bank's deposit programme, with the outlook on the rating as "stable". This rating indicates "highest credit quality" where "protection factors .

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The Bank also has its long term unsecured, subordinated (Tier II) Bonds rated by CARE and Fitch Ratings India Private Limited and its Tier I perpetual Bonds and Upper Tier II Bonds rated by CARE and CRISIL Ltd. CARE has assigned the rating of "CARE AAA" for the subordinated Tier II Bonds while Fitch Ratings India Pvt. Ltd. has assigned the rating "AAA (ind)" with the outlook on the rating as "stable". CARE has also assigned "CARE AAA [Triple A]" for the Banks Perpetual bond and Upper Tier II bond issues. CRISIL has assigned the rating "AAA / Stable" for the Bank's Perpetual Debt programme and Upper Tier II Bond issue. In each of the cases referred to above, the ratings awarded were the highest assigned by the rating agency for those instruments. ICICI is a professionally managed organization with a board of directors consisting of eminent persons who represent various fields including finance, taxation, construction and urban policy & development. The board primarily focuses on strategy formulation, policy and control, designed to deliver increasing value to shareholders.

7.3 Board of Directors

Mr. Deepak S Parekh - Chairman Mr. D N Ghosh

Mr. Keshub Mahindra - Vice Chairman

Dr. S A Dave

Mr. Keki M Mistry - Vice Chairman & Managing Director

Mr. S Venkitaramanan

Ms. Renu S. Karnad - Joint Managing Director

Dr. Ram S Tarneja Mr. N M Munjee

Mr. Shirish B Patel Dr. Jamshed J Irani Mr. B S Mehta

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Mr. D M Satwalekar Mr. D M Sukthankar

7.4 Awards & Accolades

7.4.1 Awards: 2007

Business Today selects Renu Sud Karnad as a Powerful Woman in India Business ICICI emerged as the best Investment Management Company in India at the Liquid Real Estate Awards- 2007 organized by EUROMONEY ICICI ranked 3rd amongst the ASIAN Banking and Finance Sector for Highest Return on Equity by Asiamoney. Ms Renu Sud Karnad, Executive Director, was one of the eminent women felicitated by the FICCI Ladies Organization at their Women Achievers Award2007.

7.4.2 Awards: 2006

Mr Deepak Parekh, Chairman ICICI Ltd, awarded the Best Non Executive Director 2006 by the Asian Centre for Corporate Governance. Mr Keki Mistry, Managing Director ICICI Ltd. Awarded the Best Performing CFO in the Financial Services Sector at the CNBC-TV18 CFO Awards 2006. ICICI won the award for Investment Management in India at the EUROMONEY 2006 Real Estate Awards. Best Home Loan Provider title at Zee Business Pinnacle Awards, 2006. Limca Book of Records, 2006: ICICI for the landmark achievement of Rs. One Lakh Crore. Best Strategy, at the 4Ps Business, Marketing & Advertising Power Awards 2006. Dun & Bradstreet American Express Corporate Awards 2006. Mr. Deepak Parekh, Chairman, ICICI Ltd. Conferred with the prestigious Padma Bhushan award.

73

7.4.3 Awards: 2005

ICICI receives award for The Best Presented Accounts of The Institute of Chartered Accountants of India for 2004-2005. ICICI Ranked as Indias Third Best Managed Company by Finance Asia 2005. Mr. Deepak Parekh awarded the Hall of Fame award by Outlook Money magazine. ICICI receives the Dream Home award for the best Housing Finance3 Company for 2004 from Outlook Money magazine.

7.4.4 Awards: 2004

Awards galore by ICICI at the 44th ABCI Awards!!! 5th Best Company to work for in India , ranked by Business Today in November 2004. Economic Times Corporate Citizen of the year Award November 2004. Rated by Deutsche Bank as one of the top 5 banks/Financials Institutions in Asia in October 2004.

Ranked among the Top 20 companies to deliver healthiest retunes to shareholders, out look Money Magazine September 2004. 1st Prize at the New York Festivals Gold Midas Awards for Environmental Communication Ad in August 2004 Features in the Forbes list of Top 20 leading Indian companies in May 2004 One of the top 10 Investor Friendly Companies, ranked by Business Asia.

7.4.5 Awards: 2003

Clean Sweep by ICICI at the 43rd ABCI Award !!!

74

National Award for Excellence In Corporate Governance by The Institute of Company Secretaries of India. 2nd Best Company for Corporate Governance in India by the Asset magazine. The Economic Times lifetime Achievement Award 2003. (for Mr. Deepak Parekh Chairman, ICICI Ltd.)

One of the Top Ten-Most Admired Companies in India 2003 by Business Barons (for Mr. Deepak Parekh) Indias Second Best Managed Company-2003 by Finance Asia. Indias Biggest wealth Creator in the banking and financial serves by the fourth business Today Stern Steward Survey. One of the Top Ten Most Respected Companies in India By Business world. Highest rating for Governance and value creation By CRISIL. One among the top ten Company Leaders in India by the Far Eastern Economic Review Survey. Best Managed Financial institution in India by fox pit Survey

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DATA ANALYSIS & INTERPRETATION

76

8 LOT SIZES OF SELECTED COMPANIES FOR ANALYSIS

CODE ACC 750 LOT SIZE COMPANY NAME Associates Cement Companies Ltd. Arvind Mills Ltd. Bharat Heavy Electrical Ltd.

ARVIND MILLS BHEL

2150 300

The following tables explain about the table that took place in futures and options between 25/02/08 to 29/02/08. The table has various columns, which explains various factors involved in derivative trading. Date the day on which the trading took place. Closing premium Premium for that day. Open interest- No. of options that did not get exercised. Traded Quantity No. of futures and options traded on that day. N.O.C No. of contracts traded on that day. Closing PriceThe price of the futures at the end of the trading day. Spot parities relation to dividends.
77

Calculation of rate of return

8.1 ANLYSIS AND INTERPRETATION:

8.1.1 FUTURES:
Futures are legally binding agreement to buy or sell an asset at a certain time in the future at a certain price. FORMULA:

Fo = So (1+r-d)

So = closing price of a market on that day. r = Rate of return d = Dividend T = Time period

78

8.2 FUTURES OF ACC CEMENTS

Table: 1

Date dd/mm/y y 25 /02/08 26 /02/08 27 /02/08 28 /02/08 29 /02/08

High Rs 818.3 4 812.4 5 698.3 0 691.0 0 827.0 0

Low Rs 768.0 0 712.6 0 589.8 0 598.5 0 790.5 0

Close Rs 810.6 5 755.9 5 591.4 0 616.8 5 806.2 0

Open Int ('000) 7146 7322 1800 8168 1785

Trd Qty ('000) 986 1012 1943 891 1465

N.O.C .

FO 88582.2 3 89881.3 3 89858.5 4 90154.8 3 90132.0 4

2781 3482 2591 2270 1953

79

The above table has been given in the following graph. Picture 1

FUTURES PRICE OF ACC 90500 90000 89500 89000 88500 88000 87500

1 FO

25 /02/08 26 /02/08 27 /02/08 28 /02/08 29 /02/08

Source: The data has been collected BUSINESS STANDARED (paper) and Online Trading of KOTAK SECURITIES.

8.2.1 INTERPRETATION:
It is observed from the above mentioned table that the future price (Fo) has increased tremendously due to increase in closing price, decrease in open interest and reduction in value and volume of futures.

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81

9 FUTURES OF ARVIND MILLS

Table 2

Date dd/mm/yy 25 /02/08 26 /02/08 27 /02/08 28 /02/08 29 /02/08

High Rs

Low Rs

Close Rs 98.00 94.90 96.25 95.95 95.45

Open Int ('000) 13360 10636 9129 5609 3038

Trd Qty ('000) 5334 3053 4444 3990 5771

N.O.C. 2481 1420 2067 1856 2684

FO 1515.3 1467.4 1488.3 1483.6 1475.9

100.40 97.40 95.10 92.25 96.65 94.85 96.70 95.10 96.70 94.50

The above table has been given in the following graph. Picture 2

FUTURES PRICE OF ARVIND MILLS 1520 1500 1480 1460 1440 Fo 25 /02/08 26 /02/08 27 /02/08 28 /02/08 29 /02/08

Source: The data has been collected BUSINESS STANDARDS (paper) and Online Trading of KOTAK SECURITIES.

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9.1 INTERPRETATION:
The above graph shows that the future price (Fo) has been decrease due to decrease in closing price and decrease in open interest and it is observed that increase in volume and value.

10 FUTURES OF BHEL
Table 3

Date High Rs dd/mm/yy 25 /02/08 26 /02/08 27 /02/08 28 /02/08 29 /02/08

Low Rs

Close Rs 2006.40 2024.75 2221.60 2223.10

Open Int ('000) 2192 1586 1257 871 462

Trd Qty ('000) 988 1405 1508 934 1400

N.O.C. 3293 4682 5025 6147 4667

FO 218768 212665 218096 222906 219881

2010.00 1978.00 2057.00 1995.00 2260.00 2038.00 2335.00 2210.00

2405.10 2300.00 2350.00

The above table has been given in the following graph. Picture 3

FUTURE PRICE OF BHEL

225000 220000 215000 210000 205000 Fo 25 /02/08 26 /02/08 27 /02/08 28 /02/08 29 /02/08

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10.1 Source:
The data has been collected BUSINESS STANDARDS (paper) and Online Trading of KOTAK SECURITIES.

10.2 INTERPRETATION:
From the above mentioned table it is observed that the future price (Fo) has shown fluctuation due to fluctuation in closing price and volume, value is increase and it is observed that open interest is decrease.

10.3 OPTIONS:
Options are two types. They are CALL OPTION and PUT OPTION

10.3.1 CALL OPTION :

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

10.3.2 PUT OPTION :

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

Formula:

Profit of the holder

(Spot Price Strike Price) Premium* (Lot Size) in case of call option.

Profit of the holder

Premium* (Lost Size) in case of Put

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11 Option.
11.1 Source:
The data has been collected through BUSINESS STANDARDS (Paper) and Online Trading of KOTAK SECURITIES. The follow ing table of Net pay-off explain the profit/loss of option holder/writer of ACC for the w eek 25/02/2008 to 29/02/2008.

11.2 PROFIT/LOSS POSITION OF CALL OPTION BUYER OF ACC

Table 1 SPOT PRICE 818.34 818.34 818.34 818.34 STRIKE PREMIUM WHETHER BUYERS PRICE EXERCISED GAIN/LOSS 800 820 840 860 27.00 10.45 5.30 1.90 YES YES NO NO 150.00 2737.50 -3975.00 -1425.00 WEITER GAIN/LOSS -150.00 -2737.50 13875.00 26325.00

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P fta d os r p ot eby r r i n Ls ga h f h ues o wh tk pi e fc l oto i si e rc o a p n t l i 40 00 20 00 0 - 00 20 - 00 40 - 00 60 1 2 3 4 BYR UE S GI / OS A LS N SR E R E T I PI K C

P fit a dL s g p o th w r w s c ro n o s ra h f e rite ith to k p eo c ll o tio ric f a p n

300 00 200 00 100 00 0 -1 0 0 00 1 2 3 4
h

S R EP IC T IK R E W IT R E E G IN O S A /L S

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12 PROFIT/LOSS POSITION OF PUT OPTION BUYER/WRITER OF ACC

Table 2

SPOT PRICE 818.34 818.34 818.34 818.34

STRIKE PREMIUM WHETHER PRICE EXERCISED 800 820 840 860 0.20 2.40 8.90 12.00 NO NO NO YES

BUYERS GAIN/LOSS -150 -1800 -6675 900

WEITER GAIN/LOSS 150 1800 6675 -900

P ftad os r p ot e ue r i n Ls g h f h Byr o a w Si e rc oPtOi n ih t k P e f u po t r i t

20 00 0 - 00 20 - 00 40 - 00 60 - 00 80 1 2 3 4 SR E R E TI PI K C BYR UES GI / OS A LS N

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Profit and Loss Graph of the Writer with Strike Price of Put Option
8000 6000 4000 2000 0 -2000 1 2 3 4 WEITER GAIN/LOSS STRIKE PRICE

12.1 INTERPERATATION:
From the above graph it observed that the buyer get Profit when the Strike Price is less than the spot price and it is also observed that the writer get loss when the strike price is more than the spot price. The following table of Net pay- off explains the profit/loss of option holder/writer of ARAVIND MILL.

13 PROFIT/LOSS POSITION OF CALL OPTION BUYER/WRITER OF ARAVINDMILL

Table 3 SPOT PRICE 100.40 100.40 100.40 100.40 STRIKE WHETHER BUYERS PRICE PREMIUM EXERCISED GAIN/LOSS 85 90 95 100 12.50 8.30 4.30 2.00 YES YES YES NO 537.5 1182.5 3332.5 -4300 WRITERS GAIN/LOSS -537.5 -1182.5 -3332.5 9137.5

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Profit and Loss Graph of the Buyer with Strike Price of Call Option 4000 2000 0 1 -2000 -4000 -6000 2 3 4

STRIKE PRICE BUYERS GAIN/LOSS

14 PROFIT/LOSS POSITION OF PUT OPTION BUYER/WRITER OF ARVIND MILL

Table 4

SPOT PRICE 100.40 100.40 100.40 100.40 100.40

STRIKE PRICE 80 85 90 95 100

PREMIUM 0.25 0.05 0.45 1.300 4.900

WHETHER EXERCISED NO NO NO NO YES

BUYERS GAIN/LOSS -537.5 -967.5 -2795 -10535 5697.5

WRITERS GAIN/LOSS 537.5 967.5 2795 10535 -5697.5

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Profit/Loss graph of the Buyer with Strike Price Of Put Option 10000 5000 0 1 -5000 -10000 -15000 2 3 4 STRIKE PRICE BUYERS GAIN/LOSS

Profit/Loss Graph of the Writer with Strike Price of Put Option 15000 10000
STRIKE PRICE

5000 0 1 -5000 -10000 2 3 4

WRITER'S GAIN/LOSS

14.1 INTERPRETATION:
It is observed from the above mentioned tables that the strike price is less than the spot price the buyer will get profit and strike price is more than the spot price the buyer will get loss then obviously in case of writer it is vice-versa.

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The

following

table

of

Net

pay-off

explains

the

profit/loss

of

holder/writer of BHEL

15 PROFIT/LOSS POSITION OF CALL OPTION BUYER/WRITER OF BHEL

Table 5

SPOT PRICE 2010.00 2010.00 2010.00 2010.00 2010.00

STRIKE PREMIUM WHETHER PRICE EXERCISED 1830 1860 1890 1920 1980 25.00 40.00 19.00 10.00 20.00 YES YES NO NO NO

BUYERS GAIN/LOSS 5700 7800 -5700 -3000 -6000

WRITER'S GAIN/LOSS -5700 -7800 5700 3000 6000

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P fit/L s o th B y rsw S eP eo ro o s f e u e ith trik ric f C ll O tio a p n 100 00 50 00 0 -5 0 00 -1 0 0 00 1 2 3 4 5

S R EP IC T IK R E BYR UES G IN O S A /L S

P r o f it /L o s s g r a p h o f t h e W r ite r w ith S t r ik e P r ic O p tio n 1 0 0 0 0 5 0 0 0 0 -5 0 0 0 1 -1 0 0 0 0 2 3 4 5

S T R IK E P R IC E W R I T E R 'S G A I N / L O S S

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16 PROFIT/LOSS POSITION OF PUT OPTION BUYER/WRITER OF BHEL

Table 6

SPOT PRICE 1874.00 1874.00 1874.00

STRIKE PREMIUM WHETHER BUYERS WRITER'S PRICE EXERCISED GAIN/LOSS GAIN/LOSS 1800 1830 1860 20.00 28.55 31.00 NO NO NO -6000 -8565 -9300 6000 8565 9300

Profit/Loss Graph Of Buyers with Strike Price of Put Option 5000 0 1 -5000 -10000 2 3

STRIKE PRICE BUYERS GAIN/LOSS

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Po o sGa hO B y r w S ik Pic o P t r fit/L s r p f u e s ith tr e r e f u O tio p n 100 00 80 00 60 00 40 00 20 00 0 1 2 3

S R EP IC T IK R E W IT R G IN O S R E 'S A /L S

16.1 INTERPRETATION:
From the above call option and put option tables it is observed that the writer get profit when the strike price is more than the spot price and the writer get loss when the strike price is less than the spot price and it is observed that the buyer it is vice-versa.

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17 CALCULATION OF FUTURE PRICE

On Feb 25 t h : If an investor holds the follow ing contract of the Acc Future closing price=R.s.818.34 Equity share capital=R.s.179.58 Net profit=4446.20 Preference dividend=0 Dividends=0.07

r = Net profit-preference dividend Equity share capital r = 4446.20-0/179.58.00*100=2475.88 =818.34(1+2475.88-0.07) 3 = 818.34(15194.208) 3 =288582.23 *100

On Feb 25 t h : If an investor holds the follow ing contract of the Arvind mills Future closing price=R.s100.40 Equity share capital=R.s.195.38 Net profit=484.81 Preference dividend=0

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Dividends=0.01

r = Net profit-preference dividend Equity share capital R = 484.18-0/195.38*100=248.14 = 100.40 (1+248.14-0.01) 3 =100.40 (1+248.13) 3 =11515.31 On Feb 25 t h : If an investor holds the follow ing contract of the BHEL Future closing price=R.s.2010.40 Equity share capital=R.s.32500.00 Net profit=158163.56 Preference dividend=0 Dividends=0.08 r = Net profit preference dividend Equity share capital r = 158163.56-0/195.38*100=486.66 = 2010.40 (1+486.66-0.08) 3 = 2010.40487.58) 3 = 518768. *100 *100

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CHAPTER-V SUMMARY & CONCLUSION

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18 FINDINGS
The above analysis of futures and options of ACC, ARVINDMILLS and BHEL had shown a positive market in the week. The major factors that influence the futures and options market are the cash market, foreign institutional investor involvement, News related to the underlying asset, national and international markets, Researchers view etc. In cash market the profit/loss is limited but where in future and option an investor can enjoy unlimited profit/loss. It is recommended that SEBI should take measures in improving awareness about the future and option market as it is launched very recently.
At present scenario the derivatives market is increased to a great

position. Its daily turnover reaches to the equal stage of cash market. The average daily turnover of the NSE in derivative is four lacks volume. The derivatives are mainly used for hedging purpose. In cash market the investor has to pay the total money, but in derivatives has to pay the premiums or margins, which are some percentage of the total money. Determination of the future price is mayoral based on the number of contracts of the scrip. Hence value, volume, open interest, closing price of that scrip is influenced by the number of contracts.

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19 SUGGESTIONS
In a bearish market it is suggested to an investor to opt for put option in order to minimize Profits. In a bullish market it is suggested to an investor to apt for call option in order to maximize Profits. It is suggested to an investor to keep in mind the time or expiry duration of futures and options contract before trading. The lengthy time, the risk is low and profit making. The fewer time may be high risk and chances of loss making. At present futures and options are traded on NSE. It is

recommended to SEBI to take actions in trading of futures and options in other regional exchanges. SEBI has to take further steps in the risk management mechanism. Contract size should be minimized because small investors can not afford this much of huge premiums.

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CHAPTER-VI

BIBLIOGRAPHY

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20 BIBLIOGRAPHY
TEXT BOOKS
1. John C. Hull (2007), Options, futures and other derivatives (6th edition). Prentice-

Hall of India Pvt Ltd.

2. S.S.Kumar (2007), Financial derivatives. Prentice-Hall of India Pvt Ltd. 3. Reme M. Stulz (2007), Risk Management & Derivatives. Thomson South-Western 4. David A. Dubofsky (2007), Derivatives Valuation and Risk Management. Oxford

University Press. 5. V.A.Avadhani (2004), Investment Management. Himalaya Publishing House.

Websites

www.nseindia.com www.derivatives.com www.anagram.com www.bseindia.com www.networth.com www.rbi.org.in www.sebi.gov.in www.capitalmarket.com

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CHAPTER-VII

APPENDICES

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21 Appendix A
Organizational structure of ICICIstock broking Ltd.

ICICIStock Broking Ltd

ICICIInvestment Services Ltd

ICICICommoditie s Ltd

ICICIMedia & Research Services Ltd

ICICIMarketing Services Ltd.

Money Credit Ltd

ICICIDistribution Co. Ltd.

ICICITie up with AVIVA Insurance Services Ltd

ICICIInsurance Brokers Ltd

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