A STUDY ON DERIVATIVES At TATA CAPITAL (REPORT SUBMITTED TO JNTU IN PARTIAL FULFILLMENT OF THE REQUIREMENT FOR THE AWARD OF MASTER

OF BUSINESS ADMINISTRATION) Submitted by P.RATHNAMALA Roll No: 11TE1E0013 Under the guidance of Mrs.RAMYA

PROF.RAMA REDDY COLLEGE OF ENGINEERING & TECHNOLOGY

(Affiliated to JNTU, Hyderabad) Nandigama. 2011-2013

DECLARATION

I declare that this project report entitled DERIVATIVES is original and bonafide work of my own in the partial fulfilment of the requirements for the award of the Degree of MASTER OF BUSINESS ADMINISTRATION and submitted to the Department of Management, PROF.RAMA REDDY COLLEGE OF ENGINEERING & TECHNOLOGY Nandigama.

The data that has been collected by me is truly authentic and contains true and complete information.

P.RATHNAMALA

ACKNOWLEDGEMENT

Accomplishment of a task with desired success calls for dedication towards work and prompting guidance, co-operation and deliberation from seniors. At the outset, I would like to thank, Mrs .RAMYA Associate Professor Prof..Rama Reddy College Of Engineering & Technology for his support and professional approach in guiding me through the careful details of the project. I am very grateful to my company guides, Mr. Subramaniam and Mr. Ashok who not only helped me on this topic but also helped me to understand the nuances of capital market. In spite of having a very busy schedule, they made sure in every way that we acquire the best possible exposure and knowledge during our project. I would be failing in my duty if I do no express my deep sense of gratitude to Nrs.Ramya, H.O.D. and all the faculty members for their valuable advice and guidance in this project. I am also thankful to our college Principal,Ashok Reddy.

P.RATHNAMALA

CONTENTS
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Chapter No.

Name of the concept Introduction Need of the study Objectives of the study

Page No. 1 2 3 4 5 6 7-22 23-42 43-52 53-73 74-80 81

I Scope of the study Methodology of the study Limitations of the study II III IV V VI VII Review of Literature Industry Profile Company Profile Data analysis and interpretation Findings, Suggestions and Conclusion Bibliography

CHAPTER -1

INTRODUCTION
A Derivative is a financial instrument whose value depends on other, more basic, underlying variables. The variables underlying could be prices of traded securities and stock, prices of gold or copper.Derivatives have become increasingly important in the field of finance, Options and Futures are traded actively on many exchanges, Forward contracts, Swap and different types of options are regularly traded outside exchanges by financial intuitions, banks and their corporate clients in what are termed as over-the-counter markets in other words, there is no single market place or organized exchanges. invest with lower trading cost and it facilitates the investors to extend their settlement through the future contracts. It provides extra liquidity in the stock market. Derivatives are assets, which derive their values from an underlying asset. These underlying assets are of various categories like Commodities including grains, coffee beans, etc. Precious metals like gold and silver. Foreign exchange rate. Bonds of different types, including medium to long-term negotiable debt securities issued by governments, companies, etc. Short-term debt securities such as T-bills. Over-The-Counter (OTC) money market products such as loans or deposits. Equities For example, a dollar forward is a derivative contract, which gives the buyer a right & an obligation to buy dollars at some future date. The prices of the derivatives are driven by the spot prices of these underlying assets. However, the most important use of derivatives is in transferring market risk, called Hedging, which is a protection against losses resulting from unforeseen price or volatility changes. Thus, derivatives are a very important tool of risk management. There are various derivative products traded. They are; 1. Forwards 2. Futures 3. Options 4. Swaps A Forward Contract is a transaction in which the buyer and the seller agree upon a delivery of a specific quality and quantity of asset usually a commodity at a specified future date. The price may be agreed on in advance or in future.

A Future contract is a firm contractual agreement between a buyer and seller for a specified as on a fixed date in future. The contract price will vary according to the market place but it is fixed when the trade is made. The contract also has a standard specification so both parties know exactly what is being done. An Options contract confers the right but not the obligation to buy (call option) or sell (put option) a specified underlying instrument or asset at a specified price the Strike or Exercised price up until or an specified future date the Expiry date. The Price is called Premium and is paid by buyer of the option to the seller or writer of the option. A call option gives the holder the right to buy an underlying asset by a certain date for a certain price. The seller is under an obligation to fulfill the contract and is paid a price of this, which is called "the call option premium or call option price". A put option, on the other hand gives the holder the right to sell an underlying asset by a certain date for a certain price. The buyer is under an obligation to fulfill the contract and is paid a price for this, which is called "the put option premium or put option price". Swaps are transactions which obligates the two parties to the contract to exchange a series of cash flows at specified intervals known as payment or settlement dates. They can be regarded as portfolios of forward's contracts. A contract whereby two parties agree to exchange (swap) payments, based on some notional principle amount is called as a SWAP. In case of swap, only the payment flows are exchanged and not the principle amount

OBJECTIVES OF THE STUDY

To understand the concept of the Derivatives and Derivative Trading. To know different types of Financial Derivatives To know the role of derivatives trading in India. To analyse the performance of Derivatives Trading To present a theoretical framework relating to derivative market in India. To observe the daily price movement of selected stock futures. To identify the buying and selling signals to the selected scripts. To observe the daily price movement of Nifty Index Futures. To offer suggestions based on the findings to the study.

NEED OF THE STUDY

The study has been done to know the different types of derivatives and also to know the derivative market in India. This study also covers the recent developments in the derivative market taking into account the trading in past years. To know the trading done in derivatives and their use in the stock markets. The present study on Derivative futures is very much appreciable on the grounds that it gives deep insights about the stock futures market. It would be essential for the perfect way of trading in stock futures. The study elucidates the role of derivative futures in Indian financial markets.

NEED OF THE STUDY

The study has been done to know the different types of derivatives and also to know the derivative market in India. This study also covers the recent developments in the derivative market taking into account the trading in past years. To know the trading done in derivatives and their use in the stock markets. The present study on Derivative futures is very much appreciable on the grounds that it gives deep insights about the stock futures market. It would be essential for the perfect way of trading in stock futures. The study elucidates the role of derivative futures in Indian financial markets.

SCOPE OF THE PROJECT

The project covers the derivatives market and its instruments. For better understanding various strategies with different situations and actions have been given. It includes the data collected recent years and also the market in the derivatives in the recent years. This study extends to the trading of derivatives done in the National Stock Markets. The study has only made humble in the attempt at evaluating Derivatives Markets only in Indian Context. The study is not based on the International perspective of the Derivatives Markets.

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RESARCH METHODOLOGY
Method of data collection:Secondary sources:It is the data which has already been collected by someone or an organization for some other purpose or research study .The data for study has been collected from various sources: Time: 2 months Statistical Tools Used: Simple tools like bar graphs, tabulation, line diagrams have been used. Primary data: - primary data are collected by my regularly tracking the stock price of various scripts selected Books Journals Magazines Internet sources

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LIMITAITONS OF STUDY
1. LIMITED TIME: The time available to conduct the study was only 2 months. It being a wide topic had a limited time. 2. LIMITED RESOURCES: Limited resources are available to collect the information about the commodity trading. 3. VOLATALITY: Share market is so much volatile and it is difficult to forecast anything about it whether you trade through online or offline 4. ASPECTS COVERAGE: Some of the aspects may not be covered in my study. 5. . Data were collected only on the basis of NSE trading

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CHAPTER-2

13

LITERATURE REVIEW
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. Derivative products initially emerged, as hedging devices against fluctuations in commodity prices and commodity-linked derivatives remained the sole form of such products for almost three hundred years. The financial derivatives came into spotlight in post-1970 period due to growing instability in the financial markets. However, since their emergence, these products have become very popular and by 1990s, they accounted for about two-thirds of total transactions in derivative products. In recent years, the market for financial derivatives has grown tremendously both in terms of variety of instruments available, their complexity and also turnover. In the class of equity derivatives, futures and options on stock indices have gained more popularity than on individual stocks, especially among institutional investors, who are major users of index-linked derivatives. Even small investors find these useful due to high correlation of the popular indices with various portfolios and ease of use. The lower costs associated with index derivatives vis-vis derivative products based on individual securities is another reason for their growing use. As in the present scenario, Derivative Trading is fast gaining momentum, I have chosen this topic.

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. DEVELOPMENT OF DERIVATIVES MARKET IN INDIA The first step towards introduction of derivatives trading in India was the promulgation of the Securities Laws (Amendment) Ordinance, 1995, which withdrew the prohibition on options in securities. The market for derivatives, however, did not take off, as there was no regulatory framework to govern trading of derivatives. SEBI set up a 24member committee under the Chairmanship of Dr.L.C.Gupta on November 18, 1996 to develop appropriate regulatory framework for derivatives trading in India. The committee submitted its report on March 17, 1998 prescribing necessary preconditions for introduction of derivatives trading in India. The committee recommended that derivatives should be declared as securities so that regulatory framework applicable to trading of securities could also govern trading of securities. SEBI also set up a group in June 1998 under the Chairmanship of Prof.J.R.Varma, to recommend measures for risk containment in derivatives market in India. The report, which was submitted in October 1998, worked out the operational details of margining system, methodology for charging initial margins, broker net worth, deposit requirement and realtime monitoring requirements. The Securities Contract Regulation Act (SCRA) was amended in December 1999 to include derivatives within the ambit of securities and the regulatory framework were developed for governing derivatives trading. The act also made it clear that derivatives shall be legal and valid only if such contracts are traded on a recognized stock exchange, thus precluding OTC derivatives. The government also rescinded in March 2000, the three decade old notification, which prohibited forward trading in securities. Derivatives trading commenced in India in June 2000 after SEBI granted the final approval to this effect in May 2001. SEBI permitted the derivative segments of two stock exchanges, NSE and BSE, and their clearing house/corporation to commence trading and settlement in approved derivatives contracts. To begin with, SEBI approved trading in index futures contracts based on S&P CNX Nifty and BSE30 (Sense) index. This was followed by approval for trading in options based on these two indexes and options on individual securities. The trading in BSE Sensex options commenced on June 4, 2001 and the trading in options on individual securities commenced in July 2001. Futures contracts on individual stocks were launched in November 2001. The derivatives trading on 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. The index futures and options contract on NSE

15

are based on S&P CNX Trading and settlement in derivative contracts is done in accordance with the rules, byelaws, and regulations of the respective exchanges and their clearing house/corporation duly approved by SEBI and notified in the official gazette. Foreign Institutional Investors (FIIs) are permitted to trade in all Exchange traded derivative products. The following are some observations based on the trading statistics provided in the NSE report on the futures and options (F&O): Single-stock futures continue to account for a sizable proportion of the F&O segment. It constituted 70 per cent of the total turnover during June 2002. A primary reason attributed to this phenomenon is that traders are comfortable with single-stock futures than equity options, as the former closely resembles the erstwhile badla system. On relative terms, volumes in the index options segment continue to remain poor. This may be due to the low volatility of the spot index. Typically, options are considered more valuable when the volatility of the underlying (in this case, the index) is high. A related issue is that brokers do not earn high commissions by recommending index options to their clients, because low volatility leads to higher waiting time for round-trips. Put volumes in the index options and equity options segment have increased since January 2002. The call-put volumes in index options have decreased from 2.86 in January 2002 to 1.32 in June. The fall in call-put volumes ratio suggests that the traders are increasingly becoming pessimistic on the market. Farther month futures contracts are still not actively traded. Trading in equity options on most stocks for even the next month was non-existent. Daily option price variations suggest that traders use the F&O segment as a less risky alternative (read substitute) to generate profits from the stock price movements. The fact that the option premiums tail intra-day stock prices is evidence to this. If calls and puts are not looked as just substitutes for spot trading, the intra-day stock price variations should not have a one-to-one impact on the option premiums. The spot foreign exchange market remains the most important segment but the

derivative segment has also grown. In the derivative market foreign exchange swaps account for the largest share of the total turnover of derivatives in India followed by forwards and options. Significant milestones in the development of derivatives market have been (i) permission to banks to undertake cross currency derivative

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transactions subject to certain conditions (1996) (ii) allowing corporates to undertake long term foreign currency swaps that contributed to the development of the term currency swap market (1997) (iii) allowing dollar rupee options (2003) and (iv) introduction of currency futures (2010). I would like to emphasise that currency swaps allowed companies with ECBs to swap their foreign currency liabilities into rupees. However, since banks could not carry open positions the risk was allowed to be transferred to any other resident corporate. Normally such risks should be taken by corporates who have natural hedge or have potential foreign exchange earnings. currencies. This period has also witnessed several relaxations in regulations relating to forex markets and also greater liberalisation in capital account regulations leading to greater integration with the global economy. Cash settled exchange traded currency futures have made foreign currency a But often corporate assume these risks due to interest rate differentials and views on

separate asset class that can be traded without any underlying need or exposure a n d on a leveraged basis on the recognized stock exchanges with credit risks being assumed by the central counterparty Since the commencement of trading of currency futures in all the three exchanges, the value of the trades has gone up steadily from Rs 17, 429 crores in October 2010 to Rs 45, 803 crores in December 2010. The average daily turnover in all the exchanges has also increased from Rs871 crores to Rs 2,181 crores during the same period. The turnover in the currency futures market is in line with the international scenario, where I understand the share of futures market ranges between 2 3 per cent. Table 4.1ForexMarketActivity April05Total turnover (USD billion) Inter-bank to Merchant ratio Spot/Total Turnover (%) Forward/Total Turnover (%) Mar06 4,404 2.6:1 50.5 19.0 April06Mar07 6,571 2.7:1 51.9 17.9 April07Mar10 12,304 2.37: 1 49.7 19.3 April10Dec10 9,621 2.66:1 45.9 21.5

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Swap/Total Turnover (%) Source: RBI 14. BENEFITS OF DERIVATIVES

30.5

30.1

31.1

32.7

Derivative markets help investors in many different ways: 1.] RISK MANAGEMENT Futures and options contract can be used for altering the risk of investing in spot market. For instance, consider an investor who owns an asset. He will always be worried that the price may fall before he can sell the asset. He can protect himself by selling a futures contract, or by buying a Put option. If the spot price falls, the short hedgers will gain in the futures market, as you will see later. This will help offset their losses in the spot market. Similarly, if the spot price falls below the exercise price, the put option can always be exercised. 2.] PRICE DISCOVERY Price discovery refers to the markets ability to determine true equilibrium prices. Futures prices are believed to contain information about future spot prices and help in disseminating such information. As we have seen, futures markets provide a low cost trading mechanism. Thus information pertaining to supply and demand easily percolates into such markets. Accurate prices are essential for ensuring the correct allocation of resources in a free market economy. Options markets provide information about the volatility or risk of the underlying asset. 3.] OPERATIONAL ADVANTAGES As opposed to spot markets, derivatives markets involve lower transaction costs. Secondly, they offer greater liquidity. Large spot transactions can often lead to significant price changes. However, futures markets tend to be more liquid than spot markets, because herein you can take large positions by depositing relatively small margins. Consequently, a large position in derivatives markets is relatively easier to take and has less of a price impact as opposed to a transaction of the same magnitude in the spot market. Finally, it is easier to take a short position in derivatives markets than it is to sell short in spot markets. 4.] MARKET EFFICIENCY

The availability of derivatives makes markets more efficient; spot, futures and options markets are inextricably linked. Since it is easier and cheaper to trade in derivatives, it is

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possible to exploit arbitrage opportunities quickly and to keep prices in alignment. Hence these markets help to ensure that prices reflect true values. 5.] EASE OF SPECULATION

Derivative markets provide speculators with a cheaper alternative to engaging in spot transactions. Also, the amount of capital required to take a comparable position is less in this case. This is important because facilitation of speculation is critical for ensuring free and fair markets. Speculators always take calculated risks. A speculator will accept a level of risk only if he is convinced that the associated expected return is commensurate with the risk that he is taking.

The derivative market performs a number of economic functions. The prices of derivatives converge with the prices of the underlying at the expiration of derivative contract. Thus derivatives help in discovery of future as well as current prices. An important incidental benefit that flows from derivatives trading is that it acts as a catalyst for new entrepreneurial activity. Derivatives markets help increase savings and investment in the long run. Transfer of risk enables market participants to expand their volume of activity.

National Exchanges In enhancing the institutional capabilities for futures trading the idea of setting up of National Commodity Exchange(s) has been pursued since 1999. Three such Exchanges, viz, National Multi-Commodity Exchange of India Ltd., (NMCE), Ahmadabad, National Commodity & Derivatives Exchange (NCDEX), Mumbai, and Multi Commodity Exchange (MCX), Mumbai have become operational. National Status implies that these exchanges would be automatically permitted to conduct futures trading in all commodities subject to clearance of byelaws and contract specifications by the FMC. commenced operations in October/ December 2003 respectively.
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While the NMCE,

Ahmadabad commenced futures trading in November 2002, MCX and NCDEX, Mumbai

MCX MCX (Multi Commodity Exchange of India Ltd.) an independent and de-mutualised multi commodity exchange has permanent recognition from Government of India for facilitating online trading, clearing and settlement operations for commodity futures markets across the country. Key shareholders of MCX are Financial Technologies (India) Ltd., State Bank of India, HDFC Bank, State Bank of Indore, State Bank of Hyderabad, State Bank of Saurashtra, SBI Life Insurance Co. Ltd., Union Bank of India, Bank Bank of Baroda, Canera Bank, Corporation Bank of India,

Headquartered in Mumbai, MCX is led by an expert management team with deep domain knowledge of the commodity futures markets. Today MCX is offering spectacular growth opportunities and advantages to a large cross section of the participants including Producers / Processors, Traders, Corporate, Regional Trading Canters, Importers, Exporters, Cooperatives, Industry Associations, amongst others MCX being nation-wide commodity exchange, offering multiple commodities for trading with wide reach and penetration and robust infrastructure. MCX, having a permanent recognition from the Government of India, is an independent and demutualised multi commodity Exchange. MCX, a state-of-the-art nationwide, digital Exchange, facilitates online trading, clearing and settlement operations for a commodities futures trading.

NMCE National Multi Commodity Exchange of India Ltd. (NMCE) was promoted by Central Warehousing Corporation (CWC), National Agricultural Cooperative Marketing Federation of India (NAFED), Gujarat Agro-Industries Corporation Limited (GAICL), Gujarat State Agricultural Marketing Board (GSAMB), National Institute of Agricultural Marketing (NIAM), and Neptune Overseas Limited (NOL). While various integral aspects of commodity economy, viz., warehousing, cooperatives, private and public sector marketing of agricultural commodities, research and training were adequately addressed in structuring the Exchange, finance was still a vital missing link. Punjab National Bank (PNB) took equity of the Exchange to establish that linkage. Even today, NMCE is the only Exchange in India to have such investment and technical support from the commodity relevant institutions.

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NMCE facilitates electronic derivatives trading through robust and tested trading platform, Derivative Trading Settlement System (DTSS), provided by CMC. It has robust delivery mechanism making it the most suitable for the participants in the physical commodity markets. It has also established fair and transparent rule-based procedures and demonstrated total commitment towards eliminating any conflicts of interest. It is the only Commodity Exchange in the world to have received ISO 9001:2000 certification from British Standard Institutions (BSI). NMCE was the first commodity exchange to provide trading facility through internet, through Virtual Private Network (VPN). NMCE follows best international risk management practices. The contracts are marked to market on daily basis. The system of upfront margining based on Value at Risk is followed to ensure financial security of the market. In the event of high volatility in the prices, special intra-day clearing and settlement is held. NMCE was the first to initiate process of dematerialization and electronic transfer of warehoused commodity stocks. The unique strength of NMCE is its settlements via a Delivery Backed System, an imperative in the commodity trading business. These deliveries are executed through a sound and reliable Warehouse Receipt System, leading to guaranteed clearing and settlement. NCDEX National Commodity and Derivatives Exchange Ltd (NCDEX) is a technology driven commodity exchange. It is a public limited company registered under the Companies Act, 1956 with the Registrar of Companies, Maharashtra in Mumbai on April 23,2003. It has an independent Board of Directors and professionals not having any vested interest in commodity markets. It has been launched to provide a worldclass commodity exchange platform for market participants to trade in a wide spectrum of commodity derivatives driven by best global practices, professionalism and transparency.

Forward Markets Commission regulates NCDEX in respect of futures trading in commodities. Besides, NCDEX is subjected to various laws of the land like the Companies Act, Stamp Act, Contracts Act, Forward Commission (Regulation) Act and various other legislations, which impinge on its working. It is located in Mumbai and offers facilities to its members in more than 390 centres throughout India. The reach will gradually be expanded to

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more centres. NCDEX currently facilitates trading of thirty six commodities - Cashew, Castor Seed, Chana, Chilli, Coffee, Cotton, Cotton Seed Oilcake, Crude Palm Oil, Expeller Mustard Oil, Gold, Guar gum, Guar Seeds, Gur, Jeera, Jute sacking bags, Mild Steel Ingot, Mulberry Green Cocoons, Pepper, Rapeseed - Mustard Seed ,Raw Jute, RBD Palmolein, Refined Soy Oil, Rice, Rubber, Sesame Seeds, Silk, Silver, Soy Bean, Sugar, Tur, Turmeric, Urad (Black Matpe), Wheat, Yellow Peas, Yellow Red Maize & Yellow Soybean Meal. THE CURRENT PROFILE OF FUTURES TRADING IN INDIA WITH RESPECT TO THE VARIOUS EXCHANGES IN INDIA :-

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16. The Present Status: Presently futures trading is permitted in all the commodities. Trading is taking place in about 78 commodities through 25 Exchanges/Associations as given in the table below:TABLE 4 Registered commodity exchanges in India No. 1. 2. 3. 4. 5. 6. 7. 8. Exchange COMMODITY India Pepper & Spice Trade Association, Pepper (both domestic and Kochi (IPSTA) Vijai Beopar Chambers international contracts) Ltd., Gur, Mustard seed

Muzaffarnagar Rajdhani Oils & Oilseeds Exchange Ltd., Gur, Mustard seed its oil & Delhi oilcake Bhatinda Om & Oil Exchange Ltd., Gur Bhatinda The Chamber of Commerce, Hapur The Meerut Agro Gur, Potatoes and Mustard

seed Commodities Gur

Exchange Ltd., Meerut The Bombay Commodity Exchange Ltd., Oilseed Complex, Castor oil Mumbai international contracts Rajkot Seeds, Oil & Bullion Merchants Castor seed, Groundnut, its oil Association, Rajkot & cake, cottonseed, its oil & cake, cotton (kapas) and RBD

9. 10. 11. 12. 13.

palmolein. The Ahmedabad Commodity Exchange, Castorseed, cottonseed, its oil Ahmedabad and oilcake The East India Jute & Hessian Exchange Hessian & Sacking Ltd., Calcutta The East India Cotton Association Ltd., Cotton Mumbai The Spices & Oilseeds Exchange Ltd., Turmeric Sangli. National Board of Trade, Indore Soya seed, Soyaoil and Soya meals, Rapeseed/Mustardseed its oil and oilcake and RBD Palmolien The First Commodities Exchange of Copra/coconut, its oil & India Ltd., Kochi oilcake

14.

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15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25.

Central India Commercial Exchange Gur and Mustard seed Ltd., Gwalior E-sugar India Ltd., Mumbai Sugar National Multi-Commodity Exchange of Several Commodities India Ltd., Ahmedabad Coffee Futures Exchange India Ltd., Coffee Bangalore Surendranagar Cotton Oil & Oilseeds, Cotton, Cottonseed, Kapas Surendranagar E-Commodities Ltd., New Delhi Sugar (trading yet to

commence) National Commodity & Derivatives, Several Commodities Exchange Ltd., Mumbai Multi Commodity Exchange Ltd., Several Commodities Mumbai Bikaner commodity Exchange Ltd., Mustard seeds its oil & oilcake, Gram. Guar seed. Guar Gum Mustard seed complex Mustard seed Complex

Bikaner Haryana Commodities Ltd., Hissar Bullion Association Ltd., Jaipur

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17. STATUS REPORT OF THE DEVELOPMENTS IN THE DERIVATIVE MARKET 1. The Board at its meeting on November 29, 2002 had desired that a quarterly report be submitted to the Board on the developments in the derivative market. Accordingly, this memorandum presents a status report for the quarter July-September 2010-09 on the developments in the derivative market. 2. Equity Derivatives Segment A. Observations on the quarterly data for July-September, 2010-09 During July-September 2010-09, the turnover at BSE was Rs.1,510 crore, which was insignificant as compared to that of NSE at Rs. 3,315,491 crore. Refer Table 1 Volume (no. of contracts) increased by 42.06% to 1,698.7 lakh while turnover increased by 24.77% to Rs. 3,317 thousand crore in July-September 2010-09 over April-June 2010-09. Futures (Index Future + Stock Future) constituted 67.20% of the total number of contracts traded in the F&O Segment. Stock Future and Index Future accounted for 35.26% and 31.94% respectively. Options constituted 32.80% of the total volumes. trading in Index Option (30.68%). Turnover at F&O segment was 4.19 times that of its cash segment. Reliance, Reliance Capital Ltd, Reliance Petro. Ltd, State Bank of India and ICICI Bank Ltd were the most actively traded scrips in the derivatives segment. Together they contributed 25.12% of derivatives turnover in individual stocks. Client trading constituted 60.17%, Propriety trading constituted 31.07% and FII trading constituted remaining 8.76% of the total turnover. Refer Table 2 Volume in longer dated derivative contracts (contracts with maturity of more than three months and up to 3 years) was 3.99 lakh and total turnover was Rs. 9870 crore. This mainly comprised of

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 Total volume in shorter dated derivative contracts (contracts with maturity up to 3months) was 1,695 lakh and total turnover was Rs. 3,307 thousand crore.

Refer Table 3 Volume in Mini Nifty (contracts with minimum lot size of Rs.1 lakh) was 44 lakh and total turnover was Rs. 37 thousand crore. Refer Table 4 During July-September, 2010, S&P CNX Nifty futures recorded highest average daily volatility of 2.85% in July 2010. Refer Table 5 The volume (in terms of no. of contracts traded) of Nifty Future at SGX as a percentage of the volume of Nifty Future at NSE was 8.55% during JulySeptember 2010-09. Refer Table 6 India stands 2nd in Stock Futures, 2nd in Index Futures, 16th in Stock Option and 4th in Index Options (as on November 10, 2010) in World Derivatives Market (in terms of volume) at the end of September 2010. Derivative contracts were launched on 38 securities at National Stock Exchange during July-September 2010-09.

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Depth Market Depth

Table-5: Fact file of July-September 2010-09 with respect to the previous quarter APRIL-JUNE 2010-09 No. of Turnover PRODUCT Contracts(La (Rs. 000) kh) VOLUME & TURNOVER Index Future 415.7 935.6 Index Option Single Stock Future Stock Option Total Market Share ( %) Index Future 240.1 514.5 25.5 1,195.8 1,077.5 571.3 1,093.1 58.3 2,658.4 35.20 21.49 JULY-SEPTEMBER2010-09 No. of Turnover Contracts(Lakh) (Rs. 000)

542.6 521.2 599.0 35.9 1,698.7 31.94 30.68 35.26 2.11

1,077.5 1,130.9 1,039.3 69.1 3,317.0 32.48 34.09 31.33 2.10 4.19

Market Concentration

Index Option 1,130.9 Single Stock 41.12 1,039.3 Future Stock Option 2.19 69.1 Turnover in F&O as 3 multiple of turnover in cash .26 segment - Reliance Five most active - Reliance Petro. Ltd. scrips in the - Tata Steel F&O Segment - Reliance Capital Ltd active scrips in - Infosys Tech. Ltd the F&O Segment Contribution of the above f iv e to total derivatives 23.72 turnover (%) Client (excluding FII trades) Proprietary FII 27.88 12.35

- Reliance - Reliance Capital Ltd - Reliance Petro. Ltd - State Bank of India - ICICI Bank Ltd

25.12 59.77 31.07 8.76 60.17

(avg. of three monthsin

Table-6: Data for Shorter Dated and Longer Dated derivative contracts

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The origin of derivatives can be traced back to the need of farmers to protect themselves against fluctuations in the price of their crop. From the time it was sown to the time it was ready for harvest, farmers would face price uncertainty. Through the use of simple derivative products, it was possible for the farmer to partially or fully transfer price risks by locking-in asset prices. These were simple contracts developed to meet the needs of farmers and were basically a means of reducing risk. A farmer who sowed his crop in June faced uncertainty over the price he would receive for his harvest in September. In years of scarcity, he would probably obtain attractive prices. However, during times of oversupply, he would have to dispose off his harvest at a very low price. Clearly this meant that the farmer and his family were exposed to a high risk of price uncertainty. On the other hand, a merchant with an ongoing requirement of grains too would face a price risk that of having to pay exorbitant prices during dearth, although favourable prices could be obtained during periods of oversupply. Under such circumstances, it clearly made sense for the farmer and the merchant to come together and enter into contract whereby the price of the grain to be delivered in September could be decided earlier. What they would then negotiate happened to be futures-type contract, which would enable both parties to eliminate the price risk. In 1848, the Chicago Board Of Trade, or CBOT, was established to bring farmers and merchants together. A group of traders got together and created the to-arrive contract that permitted farmers to lock into price upfront and deliver the grain later. These to-arrive contracts proved useful as a device for hedging and speculation on price charges. These were eventually standardized, and in 1925 the first futures clearing house came into existence. Today derivatives contracts exist on variety of commodities such as corn, pepper, cotton, wheat, silver etc. Besides commodities, derivatives contracts also exist on a lot of financial underlying like stocks, interest rate, exchange rate, etc. 2. DERIVATIVE DEFINED

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A derivative is a product whose value is derived from the value of one or more underlying variables or assets in a contractual manner. The underlying asset can be equity, forex, commodity or any other asset. In our earlier discussion, we saw that wheat farmers may wish to sell their harvest at a future date to eliminate the risk of change in price by that date. Such a transaction is an example of a derivative. The price of this derivative is driven by the spot price of wheat which is the underlying in this case. The Forwards Contracts (Regulation) Act, 1952, regulates the forward/futures contracts in commodities all over India. As per this the Forward Markets Commission (FMC) continues to have jurisdiction over commodity futures contracts. However when derivatives trading in securities was introduced in 2001, the term security in the Securities Contracts (Regulation) Act, 1956 (SCRA), was amended to include derivative contracts in securities. Consequently, regulation of derivatives came under the purview of Securities Exchange Board of India (SEBI). We thus have separate regulatory authorities for securities and commodity derivative markets. Derivatives are securities under the SCRA and hence the trading of derivatives is governed by the regulatory framework under the SCRA. The Securities Contracts (Regulation) Act, 1956 defines derivative to includeA security derived from a debt instrument, share, loan whether secured or unsecured, risk instrument or contract differences or any other form of security. A contract which derives its value from the prices, or index of prices, of underlying securities.

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3. TYPES OF DERIVATIVES MARKET

Exchange Traded Derivatives

Over The Counter Derivatives

National Stock Exchange

Bombay Stock Exchange

National Commodity & Derivative Exchange

Index Future

Index option

Stock option

Stock future

Figure.1 Types of Derivatives Market

4. TYPES OF DERIVATIVES

Derivatives

Future

Option

Forward

Swaps

Figure.2 Types of Derivatives

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FORWARD CONTRACTS
A forward contract is an agreement to buy or sell an asset on a specified date for a specified price. One of the parties to the contract assumes a long position and agrees to buy the underlying asset on a certain specified future date for a certain specified price. The other party assumes a short position and agrees to sell the asset on the same date for the same price. Other contract details like delivery date, price and quantity are negotiated bilaterally by the parties to the contract. n o r m a l l y traded outside the exchanges. The forward contracts are

BASIC FEATURES OF FORWARD CONTRACT

They are bilateral contracts and hence exposed to counter-party risk. Each contract is custom designed, and hence is unique in terms of contract expiration date and the asset type and quality. The contract price is generally not available in public domain. On the expiration date, the contract has to be settled by delivery of the asset. If the party wishes to reverse the contract, it has to compulsorily go to the same counter-party, which often results in high prices being charged. However forward contracts in certain transactions volume. markets have become very standardized, as size,

in the case of foreign exchange, thereby reducing transaction costs and increasing This process of standardization reaches its limit in the organized futures market. Forward contracts are often confused with futures contracts. The confusion is primarily because both serve essentially t he same economic functions of allocating risk in the presence of future price uncertainty. However futures are a significant improvement over the forward contracts as they eliminate counterparty risk and offer more liquidity.

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FUTURE CONTRACT
In finance, a futures contract is a standardized contract, traded on a futures exchange, to buy or sell a certain underlying instrument at a certain date in the future, at a pre-set price. The future date is called the delivery date or final settlement date. The pre-set price is called the futures price. The price of the underlying asset on the delivery date is called the settlement price. The settlement price, normally, converges towards the futures price on the delivery date. A futures contract gives the holder the right and the obligation to buy or sell, which differs from an options contract, which gives the buyer the right, but not the obligation, and the option writer (seller) the obligation, but not the right. To exit the commitment, the holder of a futures position has to sell his long position or buy back his short position, effectively closing out the futures position and its contract obligations. Futures contracts are exchange traded derivatives. The exchange acts as counterparty on all contracts, sets margin requirements, etc.

BASIC FEATURES OF FUTURE CONTRACT

1. Standardization: Futures contracts ensure their liquidity by being highly standardized, usually by specifying: The underlying. This can be anything from a barrel of sweet crude oil to a short term interest rate. The type of settlement, either cash settlement or physical settlement. The amount and units of the underlying asset per contract. This can be the notional amount of bonds, a fixed number of barrels of oil, units of foreign currency, the notional amount of the deposit over which the short term interest rate is traded, etc. The currency in which the futures contract is quoted. The grade of the deliverable. In case of bonds, this specifies which bonds can be delivered. In case of physical commodities, this specifies not only the quality of the underlying goods but also the manner and location of delivery. The delivery month. The last trading date.

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2. Margin: Although the value of a contract at time of trading should be zero, its price constantly fluctuates. This renders the owner liable to adverse changes in value, and creates a credit risk to the exchange, who always acts as counterparty. To minimize this risk, the exchange demands that contract owners post a form of collateral, commonly known as Margin requirements are waived or reduced in some cases for hedgers who have physical ownership of the covered commodity or spread traders who have offsetting contracts balancing the position. Initial Margin: is paid by both buyer and seller. It represents the loss on that contract, as determined by historical price changes, which is not likely to be exceeded on a usual day's trading. It may be 5% or 10% of total contract price. Mark to market Margin: Because a series of adverse price changes may exhaust the initial margin, a further margin, usually called variation or maintenance margin, is required by the exchange. This is calculated by the futures contract, i.e. agreeing on a price at the end of each day, called the "settlement" or mark-to-market price of the contract. To understand the original practice, consider that a futures trader, when taking a position, deposits money with the exchange, called a "margin". This is intended to protect the exchange against loss. At the end of every trading day, the contract is marked to its present market value. If the trader is on the winning side of a deal, his contract has increased in value that day, and the exchange pays this profit into his account. On the other hand, if he is on the losing side, the exchange will debit his account. If he cannot pay, then the margin is used as the collateral from which the loss is paid. 3. Settlement Settlement is the act of consummating the contract, and can be done in one of two ways, as specified per type of futures contract: Physical delivery - the amount specified of the underlying asset of the contract is delivered by the seller of the contract to the exchange, and by the exchange to the buyers of the contract. In practice, it occurs only on a minority of contracts. Most are cancelled out by purchasing a covering position - that is, buying a contract to cancel out an earlier sale (covering a short), or selling a contract to liquidate an earlier purchase (covering a long).

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Cash settlement - a cash payment is made based on the underlying reference rate, such as a short term interest rate index such as Euribor, or the closing value of a stock market index. A futures contract might also opt to settle against an index based on trade in a related spot market. Expiry is the time when the final prices of the future are determined. For many equity index and interest rate futures contracts, this happens on the Last Thursday of certain trading month. On this day the t+2 futures contract becomes the t forward contract. PRICING OF FUTURE CONTRACT In a futures contract, for no arbitrage to be possible, the price paid on delivery (the forward price) must be the same as the cost (including interest) of buying and storing the asset. In other words, the rational forward price represents the expected future value of the underlying discounted at the risk free rate. Thus, for a simple, non-dividend paying asset, the value of the future/forward, maturity , will be found by discounting the present value at time to

by the rate of risk-free return .

This relationship may be modified for storage costs, dividends, dividend yields, and convenience yields. Any deviation from this equality allows for arbitrage as follows. In the case where the forward price is higher: 1. The arbitrageur sells the futures contract and buys the underlying today (on the spot market) with borrowed money. 2. On the delivery date, the arbitrageur hands over the underlying, and receives the agreed forward price. 3. He then repays the lender the borrowed amount plus interest. 4. The difference between the two amounts is the arbitrage profit. In the case where the forward price is lower: 1. The arbitrageur buys the futures contract and sells the underlying today (on the spot market); he invests the proceeds. 2. On the delivery date, he cashes in the matured investment, which has appreciated at the risk free rate. 3. He then receives the underlying and pays the agreed forward price using the matured investment. [If he was short the underlying, he returns it now.] 4. The difference between the two amounts is the arbitrage profit. TABLE 1DISTINCTION BETWEEN FUTURES AND FORWARDS CONTRACTS

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FEATURE Operational Mechanism

FORWARD CONTRACT

FUTURE CONTRACT

Traded directly between two Traded on the exchanges. parties (not traded on the exchanges).

Contract Specifications Counter-party risk

Differ from trade to trade.

Contracts are standardized contracts.

Exists.

Exists. However, assumed by the clearing corp., which becomes the counter party to all the trades or unconditionally guarantees their settlement.

Liquidation Profile

Low, as contracts are tailor High, needs of the needs of the parties.

as

contracts

are

standardized

made contracts catering to the exchange traded contracts.

Price discovery

Not efficient, as markets are Efficient, as markets are centralized and scattered. all buyers and sellers come to a common platform to discover the price.

Examples

Currency market in India.

Commodities, futures, Index Futures and Individual stock Futures in India.

OPTIONS A derivative transaction that gives the option holder the right but not the obligation to buy or sell the underlying asset at a price, called the strike price, during a period or on a specific

35

date in exchange for payment of a premium is known as option. Underlying asset refers to any asset that is traded. The price at which the underlying is traded is called the strike price. There are two types of options i.e., CALL OPTION & PUT OPTION. CALL OPTION: A contract that gives its owner the right but not the obligation to buy an underlying assetstock or any financial asset, at a specified price on or before a specified date is known as a Call option. The owner makes a profit provided he sells at a higher current price and buys at a lower future price. PUT OPTION: A contract that gives its owner the right but not the obligation to sell an underlying assetstock or any financial asset, at a specified price on or before a specified date is known as a Put option. The owner makes a profit provided he buys at a lower current price and sells at a higher future price. Hence, no option will be exercised if the future price does not increase. Put and calls are almost always written on equities, although occasionally preference shares, bonds and warrants become the subject of options.

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SWAPS Swaps are transactions which obligates the two parties to the contract to exchange a series of cash flows at specified intervals known as payment or settlement dates. They can be regarded as portfolios of forward's contracts. A contract whereby two parties agree to exchange (swap) payments, based on some notional principle amount is called as a SWAP. In case of swap, only the payment flows are exchanged and not the principle amount. The two commonly used swaps are:
INTEREST RATE SWAPS: Interest rate swaps is an arrangement by which one party agrees to exchange his series of fixed rate interest payments to a party in exchange for his variable rate interest payments. The fixed rate payer takes a short position in the forward contract whereas the floating rate payer takes a long position in the forward contract. CURRENCY SWAPS: Currency swaps is an arrangement in which both the principle amount and the interest on loan in one currency are swapped for the principle and the interest payments on loan in another currency. The parties to the swap contract of currency generally hail from two different countries. This arrangement allows the counter parties to borrow easily and cheaply in their home currencies. Under a currency swap, cash flows to be exchanged are determined at the spot rate at a time when swap is done. Such cash flows are supposed to remain unaffected by subsequent changes in the exchange rates. FINANCIAL SWAP: Financial swaps constitute a funding technique which permit a borrower to access one market and then exchange the liability for another type of liability. It also allows the investors to exchange one type of asset for another type of asset with a preferred income stream.

OTHER KINDS OF DERIVATIVES

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The other kind of derivatives, which are not, much popular are as follows:

BASKETS Baskets options are option on portfolio of underlying asset. Equity Index Options are most popular form of baskets.

LEAPS Normally option contracts are for a period of 1 to 12 months. However, exchange may introduce option contracts with a maturity period of 2-3 years. These long-term option contracts are popularly known as Leaps or Long term Equity Anticipation Securities.

WARRANTS Options generally have lives of up to one year, the majority of options traded on options exchanges having a maximum maturity of nine months. Longer-dated options are called warrants and are generally traded over-the-counter.

SWAPTIONS Swaptions are options to buy or sell a swap that will become operative at the expiry of the options. Thus a swaption is an option on a forward swap. Rather than have calls and puts, the swaptions market has receiver swaptions and payer swaptions. A receiver swaption is an option to receive fixed and pay floating. A payer swaption is an option to pay fixed and receive floating.

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HISTORY OF DERIVATIVES
The history of derivatives is quite colourful and surprisingly a lot longer than most people think. Forward delivery contracts, stating what is to be delivered for a fixed price at a specified place on a specified date, existed in ancient Greece and Rome. Roman emperors entered forward contracts to provide the masses with their supply of Egyptian grain. These contracts were also undertaken between farmers and merchants to eliminate risk arising out of uncertain future prices of grains. Thus, forward contracts have existed for centuries for hedging price risk. The first organized commodity exchange came into existence in the early 1700s in Japan. The first formal commodities exchange, the Chicago Board of Trade (CBOT), was formed in 1848 in the US to deal with the problem of credit risk and to provide centralised location to negotiate forward contracts. From forward trading in commodities emerged the commodity futures. The first type of futures contract was called to arrive at. Trading in futures began on the CBOT in the 1860s. In 1865, CBOT listed the first exchange traded derivatives contract, known as the futures contracts. Futures trading grew out of the need for hedging the price risk involved in many commercial operations. The Chicago Mercantile Exchange (CME), a spin-off of CBOT, was formed in 1919, though it did exist before in 1874 under the names of Chicago Produce Exchange (CPE) and Chicago Egg and Butter Board (CEBB). The first financial futures to emerge were the currency in 1972 in the US. The first foreign currency futures were traded on May 16, 1972, on International Monetary Market (IMM), a division of CME. The currency futures traded on the IMM are the British Pound, the Canadian Dollar, the Japanese Yen, the Swiss Franc, the German Mark, the Australian Dollar, and the Euro dollar. Currency futures were followed soon by interest rate futures. Interest rate futures contracts were traded for the first time on the CBOT on October 20, 1975. Stock index futures and options emerged in 1982. The first stock index futures contracts were traded on Kansas City Board of Trade on February 24, 1982.The first of the several networks, which offered a trading link between two exchanges, was formed between the Singapore International Monetary Exchange (SIMEX) and the CME on September 7, 1984. Options are as old as futures. Their history also dates back to ancient Greece and Rome. Options are very popular with speculators in the tulip craze of seventeenth century Holland. Tulips, the brightly coloured flowers, were a symbol of affluence; owing to a high demand,

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tulip bulb prices shot up. Dutch growers and dealers traded in tulip bulb options. There was so much speculation that people even mortgaged their homes and businesses. These speculators were wiped out when the tulip craze collapsed in 1637 as there was no mechanism to guarantee the performance of the option terms. The first call and put options were invented by an American financier, Russell Sage, in 1872. These options were traded over the counter. Agricultural commodities options were traded in the nineteenth century in England and the US. Options on shares were available in the US on the over the counter (OTC) market only until 1973 without much knowledge of valuation. A group of firms known as Put and Call brokers and Dealers Association was set up in early 1900s to provide a mechanism for bringing buyers and sellers together. On April 26, 1973, the Chicago Board options Exchange (CBOE) was set up at CBOT for the purpose of trading stock options. It was in 1973 again that black, Merton, and Scholes invented the famous Black-Scholes Option Formula. This model helped in assessing the fair price of an option which led to an increased interest in trading of options. With the options markets becoming increasingly popular, the American Stock Exchange (AMEX) and the Philadelphia Stock Exchange (PHLX) began trading in options in 1975. The market for futures and options grew at a rapid pace in the eighties and nineties. The collapse of the Bretton Woods regime of fixed parties and the introduction of floating rates for currencies in the international financial markets paved the way for development of a number of financial derivatives which served as effective risk management tools to cope with market uncertainties. The CBOT and the CME are two largest financial exchanges in the world on which futures contracts are traded. The CBOT now offers 48 futures and option contracts (with the annual volume at more than 211 million in 2001).The CBOE is the largest exchange for trading

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Starting from a controlled economy, India has moved towards a world where prices fluctuate every day. The introduction of risk management instruments in India gained momentum in the last few years due to liberalisation process and Reserve Bank of Indias (RBI) efforts in creating currency forward market. Derivatives are an integral part of liberalisation process to manage risk. NSE gauging the market requirements initiated the process of setting up derivative markets in India. In July 1999, derivatives trading commenced in India Table 2. Chronology of instruments 1991 Liberalisation process initiated 14 December 1995 NSE asked SEBI for permission to trade index futures. 18 November 1996 SEBI setup L.C.Gupta Committee to draft a policy framework 11 May 1998 7 July 1999 24 May 2000 25 May 2000 9 June 2000 12 June 2000 25 September 2000 2 June 2001 for index futures. L.C.Gupta Committee submitted report. RBI gave permission for OTC forward rate agreements (FRAs) and interest rate swaps. SIMEX chose Nifty for trading futures and options on an Indian index. SEBI gave permission to NSE and BSE to do index futures trading. Trading of BSE Sensex futures commenced at BSE. Trading of Nifty futures commenced at NSE. Nifty futures trading commenced at SGX. Individual Stock Options & Derivatives

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CHAPTER-3

42

COMPANY PROFILE
ABOUT THE COMPANY Tata Capital Limited is a subsidiary of Tata Sons Limited. The Company is registered with the Reserve Bank of India as a Systemically Important Non Deposit Accepting Core Investment Company and offers through itself and its subsidiaries fund and fee-based financial services to its customers. Tata Capital Financial Services Limited ("TCFSL") is a subsidiary of Tata Capital Limited. The Company is registered with the Reserve Bank of India as a Systemically Important Non Deposit Accepting Non Banking Financial Company (NBFC) and offers fund and fee-based financial services to its customers, under the Tata Capital brand. A trusted and customer-centric, one-stop financial services provider, TCFSL caters to the diverse needs of retail, corporate and institutional customers, across various areas of business namely the Commercial Finance, Infrastructure Finance, Wealth Management, Consumer Loans and distribution and marketing of Tata Cards. TCFSL has over 100 branches spanning all critical markets in India. We only do whats right for you The Tatas are amongst the most respected business houses in the world. Tata Capital aims to bring the trust and expertise of the Tatas to an economically and socially relevant sector like financial services. The essence of brand Tata Capital is encapsulated in our brand proposition We only do whats right for you'. The proposition reflects our strong resolve to deliver financial solutions that are right for our customers and the society at large. Tata Capital seeks to build strong relationships with its customers and deliver superior and consistent customer experience across all products and touch-points. At Tata Capital, our wide product suite comprises of the following:

COMMERCIAL FINANCE
The Commercial Finance business helps small, medium and large corporates grow their business. Our range of offerings includes Term Loans, Working Capital Loans, Channel

43

Finance, Equipment Finance, Lease Rental Discounting, Bill Discounting, Letter of Credit* and Bank Guarantee*. * Offered through arrangement made with select banks. ^ Originated and serviced by Tata Capital Financial Services Limited.

INVESTMENT BANKING
Tata Securities Limited (TSL), a wholly-owned subsidiary of Tata Capital Limited holds a Category | Merchant Banking license from the Securities and Exchange Board of India (SEBI ) to carry out merchant banking business. Our Investment banking business provides a broad range of services, including equity capital markets transaction execution, underwriting, mergers, and acquisitions advisory, structured finance advisory, private equity advisory and infrastructure advisory. * Brought to you by Tata Securities Limited (TSL), a wholly-owned subsidiary of Tata Capital Limited. TSL holds a Category I Merchant Banking license from the Securities and Exchange Board of India. Private Equity Tata Capital acts as Investment Manager to Private Equity Funds which identify and invest into target companies with significant growth potential, nurture them and exit profitable.

Infrastructure Finance The Infrastructure Finance business caters to the specialized needs of the infrastructure sector. Our range of offerings includes Equipment Finance, Project Finance, Equipment Rentals, Working Capital Loans, Bill Discounting/ Factoring, Refinance, Top Up Loans and Loan Syndication. ^ Originated and serviced by Tata Capital Financial Services Limited. Securities Tata Securities Limited, a wholly owned subsidiary of Tata Capital Limited, offers, both institutional and retail customers, quality products and services like equity trading and research.

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Wealth Management Tata Capital Wealth Management offers a range of Investment Advisory services and markets third party investment products like Portfolio Management Services, Private Equity and Venture Capital Funds, Structured Products, Mutual Funds, Fixed Deposits and Bonds. ^Marketed by Tata Capital Financial Services Limited Consumer Loans Our wide range of consumer loans such as Home Loans*, Auto Loans, Personal Loans, Business Loans, Education Loans, Loans against Property, Loans against Shares#. * Brought to you by Tata Capital Housing Finance Limited, a wholly-owned subsidiary of Tata Capital Limited. # Currently available in select cities only. ^ Originated and serviced by Tata Capital Financial Services Limited. Tata Cards The Tata Card* combines the convenience of a powerful credit card with a rewarding membership to the Empower program. The credit card allows customers to earn points and membership to the Empower program, India's first multi-brand loyalty program, offering them the advantage of redeeming these points across several loyalty partners. * Tata Card is the White Label Card issued, operated and serviced by the State Bank of India with Tata Capital only marketing the card. ^ Marketed by Tata Capital Financial Services Limited. Travel Related Services TC Travel and Services Limited, a wholly - owned subsidiary of Tata Capital Limited, offers a wide range of services that includes airline ticketing, Visa & passport facilitation, booking hotel accommodation, Cars-hire and surface transport Foreign Exchange TT Holdings & Services Limited, a wholly-owned subsidiary of Tata Capital Limited offers travel related foreign exchange products such as travelers cheques, foreign currency notes, foreign currency denominated pre-paid travel cards, arrangement for inward money transfer service and other associated travel related products.
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Alliances Tata Capitals alliances and partnerships are based on and are an extension of the Companys core objects and values. These include: With Mizuho Securities Co. Ltd. to foster business cooperation in private equity, investment banking including cross border mergers and acquisitions, securities business including broking and distribution, structured finance and other business areas such as wealth management. With Mizuho Corporate Bank Limited (MHCB) to foster business cooperation, enhancing cross-market value creation capabilities, strengthening competitive advantages in addition to aiding each other in gaining a deeper understanding of the Indian and Japanese markets. As part of the understanding, Tata Capital and MHCB will cooperate in a wide-range of business areas. Some of these include Ninja Loans, Project and Infrastructure Finance and Treasury Products.

With Mitsubishi UFJ Securities Co., Limited to establish a basis of cooperation in a wide range of strategic business areas that include cross-border investment banking, global offering of Indian equities and working towards development of the local bond market.

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47

Leaders with a vision Tata Capital Board consists of valuable and extensively experienced individual experts in their domains. They direct and nurture the Company with their priceless guidance, foresight and vision. Farrokh K. Kavarana Farrokh K. Kavarana is a Director of Tata Sons Limited and Tata Industries Limited, the apex holding companies of the Tata Group. He is the Chairman of several Tata Companies in India and abroad notably Tata AIG Life and General Insurance Companies, Tata Asset Management Ltd., Trent Ltd. and Tata Projects Ltd. Between 2000 and 2005, he served as the Executive Chairman of Tata Infotech Ltd. (now merged with Tata Consultancy Services), and from 1994 to 2000 he was the Executive Director of Tata Motors Limited, Indias largest automobile manufacturer. Prior to that, he shared his experience and vision as the ViceChairman and Managing Director of Tata International AG, Switzerland, responsible for the Tata Groups overseas operations and investments. Before joining the Tata Group in 1975, he held key positions with McKinsey & Co. Inc., in London and Washington D.C. as well as The Bowater Corporation in UK and Europe. Farokh Nariman Subedar Mr. F N Subedar is a qualified chartered accountant and company secretary and has vast experience in the matters of company administration, taxation, accounts and finance. He is the senior Vice President - Finance and Company Secretary of Tata Sons Ltd. and is on the board of various Tata companies. Mr. Subedar has served as the Chairman of the Direct Taxation Committee of the Bombay Chambers of Commerce and Industry. Hoshang Noshirwan Sinor Hoshang Noshirwan Sinor was the Chief Executive, Indian Banks Association, Mumbai, India till July 31, 2008. With 46 years of extensive experience in the banking sector, he has had exposure to the working of both public sector and private sector banks in India and has hence, had the experience of both the phases of nationalization and liberalization in this sector in India. He started his career in 1965 with Central Bank of India and in 1969 moved to Union Bank of India where his career grew with the company for 28 long years. In 1996, he was appointed as the Executive Director of Central Bank of India. Thereafter, he moved to ICICI Bank in July 1997 as Executive Director. On 1st June 1998, he took over as
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Managing Director and CEO of ICICI Bank. During his tenure, ICICI Bank emerged from a marginal player to a major player in banking fraternity. During this period, ICICI Bank also became the first bank from India to be listed on New York Stock Exchange. This was followed by an acquisition of an old private sector bank namely Bank of Madura in 2001 which gave ICICI Bank size and the geographic reach. Mr. Sinor has also worked on various committees of the Govt. of India, Reserve Bank of India (RBI) and Confederation of Indian Industry (CII) and has contributed to numerous policy and decision making processes. Ishaat Hussain Ishaat Hussain, the Finance Director of Tata Sons Ltd. since July 2000, joined the Board of Tata Sons as an Executive Director on 1st July 1999. Prior to joining Tata Sons, he served as the Senior Vice-President and Executive Director Finance in Tata Steel where he served for almost 10 years. Besides being on the Board of Tata Sons Ltd., he is also the Chairman of Voltas Limited and Tata Sky Limited. He serves on the Boards of several Tata Companies like Tata Steel, Tata Industries, Tata Teleservices and Titan Industries Limited. Mr. Hussain is a member on the Primary Markets Advisory Committee of the Securities and Exchange Board of India (SEBI). In April 2005, he was appointed a Member of the Board of Trade and in November 2006 he was appointed a Public Interest Director of Bombay Stock Exchange Limited. Janki Ballabh Janki Ballabh joined the State Bank of India in July 1966 and served in several important positions which included assignments at the New York Branch of the Bank, Chief Executive Officer of the Bank's Branch at Singapore, Chief General Manager (Product Development, Marketing and Personal Banking) at the Corporate Office and Deputy Managing Director and Group Executive (International Banking), before taking over as Chairman, State Bank Group in November 1, 2000. Besides heading the State Bank of India, Shri Ballabh was also the chairman of the Seven Associate Banks of the State Bank of India, 4 banking subsidiaries of the Bank abroad and seven non-banking subsidiaries of the Bank in India. On retirement from State Bank of India, Shri Ballabh was appointed by the President of India as Vigilance Commissioner in the Central Vigilance Commission, New Delhi for 3 years from November 2002 to October 2005. Shri Ballabh worked as Chairman, Reserve Bank of India Services Board from 8th December 2005 to 23rd October 2007. He is presently the Chairman, UTI Trustee Co. of UTI Mutual Fund. He also serves as the Director on the Boards of Tata AIG

49

Life Insurance Co. and Small Industries Development Bank of India (SIDBI). He is also a Member of the Asia Pacific Advisory Committee of Barclays Bank PLC, London since June 1, 2007. Praveen P Kadle Praveen P Kadle, the Managing Director of Tata Capital Limited, has been associated with the Tata Group for over 18 years in various important capacities. For the first 5 years, he served as the Chief Financial Officer of Tatas joint venture with IBM in India. Thereafter, he joined Tata Motors Limited as Vice-President (Finance) and in the year 2001 he joined the Board of Tata Motors Limited as Executive Director Finance and Corporate Affairs. SECURITIES The securities and trading business is brought to you by Tata Securities Limited, a wholly owned subsidiary of Tata Capital Limited. Tata Securities Limited is engaged in the business of providing Broking and Distribution services to both Retail and Institutional customers. Tata Securities Limited distributes third-party investment products and offers stock broking services in its capacity as a member of the Bombay Stock Exchange Limited (BSE), the National Stock Exchange of India Limited (NSEIL) and Association of Mutual Funds of India (AMFI). Tata Securities Limited is also a Depository Participant with the Central Depository Services (India) Limited (CDSL) and National Securities Depository Limited (NSDL). Retail Broking We offer a 3-in-1 account which brings to you a seamless platform for trading in Equities and investing in Mutual Funds and IPOs at very attractive brokerage rates. Institutional Broking We provide a suite of products and services to Institutional customers supported with comprehensive and incisive research on companies and their sectors.

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INDUSTRY PROFILE
In less than three decades of their coming into vogue, derivatives markets have become the most important markets in the world. Today, derivatives have become part and parcel of the day-to-day life for ordinary people in major part of the world. Until the advent of NSE, the Indian capital market had no access to the latest trading methods and was using traditional out-dated methods of trading. There was a huge gap between the investors aspirations of the markets and the available means of trading. The opening of Indian economy has precipitated the process of integration of Indias financial markets with the international financial markets. Introduction of risk management instruments in India has gained momentum in last few years thanks to Reserve Bank of Indias efforts in allowing forward contracts, cross currency options etc. which have developed into a very large market. (2) Myths and realities about derivatives In less than three decades of their coming into vogue, derivatives markets have become the most important markets in the world. Financial derivatives came into the spotlight along with the rise in uncertainty of post-1970, when US announced an end to the Bretton Woods

51

System of fixed exchange rates leading to introduction of currency derivatives followed by other innovations including stock index futures. Today, derivatives have become part and parcel of the day-to-day life for ordinary people in major parts of the world. While this is true for many countries, there are still apprehensions about the introduction of derivatives. There are many myths about derivatives but the realities that are different especially for Exchange traded derivatives, which are well regulated with all the safety mechanisms in place. What are these myths behind derivatives? Derivatives increase speculation and do not serve any economic purpose (i) Indian Market is not ready for derivative trading Disasters prove that derivatives are very risky and highly leveraged instruments. Derivatives are complex and exotic instruments that Indian investors will find difficulty in understanding Is the existing capital market safer than Derivatives? Derivatives increase speculation and do not serve any economicpurpose:

Numerous studies of derivatives activity have led to a broad consensus, both in the private and public sectors that derivatives provide numerous and substantial benefits to the users. Derivatives are a low-cost, effective method for users to hedge and manage their exposures to interest rates, commodity prices or exchange rates. The need for derivatives as hedging tool was felt first in the commodities market. Agricultural futures and options helped farmers and processors hedge against commodity price risk. After the fallout of Bretton wood agreement, the financial markets in the world started undergoing radical changes. This period is marked by remarkable innovations in the financial markets such as introduction of floating rates for the currencies, increased trading in variety of derivatives instruments, on-line trading in the capital markets, etc. As the complexity of instruments increased many folds, the accompanying risk factors grew in gigantic proportions. This situation led to development derivatives as effective risk management tools for the market participants.

Looking at the equity market, derivatives allow corporations and institutional investors to effectively manage their portfolios of assets and liabilities through instruments like stock index futures and options. An equity fund, for example, can reduce its exposure to the stock market quickly and at a relatively low cost without selling off part of its equity assets by using stock index futures or index options.

52

By providing investors and issuers with a wider array of tools for managing risks and raising capital, derivatives improve the allocation of credit and the sharing of risk in the global economy, lowering the cost of capital formation and stimulating economic growth. Now that world markets for trade and finance have become more integrated, derivatives have strengthened these important linkages between global markets, increasing market liquidity and efficiency and facilitating the flow of trade and finance (ii) Indian Market is not ready for derivative trading Often the argument put forth against derivatives trading is that the Indian capital market is not ready for derivatives trading. Here, we look into the pre-requisites, which are needed for the introduction of derivatives, and how Indian market fares:

Comparison of New System with Existing System Many people and brokers in India think that the new system of Futures & Options and banning of Badla is disadvantageous and introduced early, but feel that this new system is very useful especially to retail investors. It increases the no of options investors for investment. In fact it should have been introduced much before and NSE had approved it but was not active because of politicization in SEBI. The figure 3.3a 3.3d shows how advantages of new system (implemented from June 20001) v/s the old system i.e. before June 2001 New System Vs Existing System for Market Players

Speculator
Existing Approach
1) Deliver based Trading, margin trading & carry

SYSTEM Peril &Prize

1) Both profit & loss to extent of price change.

New Peril &Prize

1)Maximum loss possible to premium

Approach
on delivery basis 2) Buy Call &Put

1)Buy &Sell stocks

53

forward transactions. 2) Buy Index Futures hold till expiry.

by paying premium

paid

Advantages
Greater Leverage as to pay only the premium. Greater variety of strike price options at a given time.

Arbitrageurs

Advantages
Availability of Leverage

Small Investors
Existing Approach
1) If Bullish buy stocks else sell it.

SYSTEM Peril &Prize

1) Plain Buy/Sell implies unlimited profit/loss.

New Peril &Prize

1) Downside remains protected & upside unlimited.

Approach
1) Buy Call/Put options based on market outlook 2) Hedge position if holding underlying stock

Advantages
Losses Protected.

54

4. Exchange-traded vs. OTC derivatives markets The OTC derivatives markets have witnessed rather sharp growth over the last few years, which has accompanied the modernization of commercial and investment banking and globalisation of financial activities. The recent developments in information technology have contributed to a great extent to these developments. While both exchange-traded and OTC derivative contracts offer many benefits, the former have rigid structures compared to the latter. It has been widely discussed that the highly leveraged institutions and their OTC derivative positions were the main cause of turbulence in financial markets in 1998. These episodes of turbulence revealed the risks posed to market stability originating in features of OTC derivative instruments and markets. The OTC derivatives markets have the following features compared to exchange-traded derivatives: 1. The management of counter-party (credit) risk is decentralized and located within individual institutions, 2. There are no formal centralized limits on individual positions, leverage, or margining, 3. There are no formal rules for risk and burden-sharing, 4. There are no formal rules or mechanisms for ensuring market stability and integrity, and for safeguarding the collective interests of market participants, and 5. The OTC contracts are generally not regulated by a regulatory authority and the exchanges self-regulatory organization, although they are affected indirectly by national legal systems, banking supervision and market surveillance. Some of the features of OTC derivatives markets embody risks to financial market stability. The following features of OTC derivatives markets can give rise to instability in institutions, markets, and the international financial system: (i) the dynamic nature of gross credit exposures; (ii) information asymmetries; (iii) the effects of OTC derivative activities on available aggregate credit; (iv) the high concentration of OTC derivative activities in major institutions; and (v) the central role of OTC derivatives markets in the global financial system. Instability arises when shocks, such as counter-party credit events and sharp movements in asset prices that underlie derivative contracts, occur which significantly alter the perceptions of current and potential future credit exposures. When asset prices change

55

rapidly, the size and configuration of counter-party exposures can become unsustainably large and provoke a rapid unwinding of positions. There has been some progress in addressing these risks and perceptions. However, the progress has been limited in implementing reforms in risk management, including counterparty, liquidity and operational risks, and OTC derivatives markets continue to pose a threat to international financial stability. The problem is more acute as heavy reliance on OTC derivatives creates the possibility of systemic financial events, which fall outside the more formal clearing house structures. Moreover, those who provide OTC derivative products, hedge their risks through the use of exchange traded derivatives. In view of the inherent risks associated with OTC derivatives, and their dependence on exchange traded derivatives, Indian law considers them illegal. 5. FACTORS CONTRIBUTING TO THE GROWTH OF DERIVATIVES: Factors contributing to the explosive growth of derivatives are price volatility, globalisation of the markets, technological developments and advances in the financial theories. A.} PRICE VOLATILITY A price is what one pays to acquire or use something of value. The objects having value maybe commodities, local currency or foreign currencies. The concept of price is clear to almost everybody when we discuss commodities. There is a price to be paid for the purchase of food grain, oil, petrol, metal, etc. the price one pays for use of a unit of another persons money is called interest rate. And the price one pays in ones own currency for a unit of another currency is called as an exchange rate. Prices are generally determined by market forces. In a market, consumers have demand and producers or suppliers have supply, and the collective interaction of demand and supply in the market determines the price. These factors are constantly interacting in the market causing changes in the price over a short period of time. Such changes in the price are known as price volatility. This has three factors: the speed of price changes, the frequency of price changes and the magnitude of price changes.

56

The changes in demand and supply influencing factors culminate in market adjustments through price changes. These price changes expose individuals, producing firms and governments to significant risks. The break down of the BRETTON WOODS agreement brought and end to the stabilising role of fixed exchange rates and the gold convertibility of the dollars. The globalisation of the markets and rapid industrialisation of many underdeveloped countries brought a new scale and dimension to the markets. Nations that were poor suddenly became a major source of supply of goods. The Mexican crisis in the south east-Asian currency crisis of 1990s has also brought the price volatility factor on the surface. The advent of telecommunication and data processing bought information very quickly to the markets. Information which would have taken months to impact the market earlier can now be obtained in matter of moments. Even equity holders are exposed to price risk of corporate share fluctuates rapidly. These price volatility risks pushed the use of derivatives like futures and options increasingly as these instruments can be used as hedge to protect against adverse price changes in commodity, foreign exchange, equity shares and bonds. B.} GLOBALISATION OF MARKETS Earlier, managers had to deal with domestic economic concerns; what happened in other part of the world was mostly irrelevant. Now globalisation has increased the size of markets and as greatly enhanced competition .it has benefited consumers who cannot obtain better quality goods at a lower cost. It has also exposed the modern business to significant risks and, in many cases, led to cut profit margins In Indian context, south East Asian currencies crisis of 1997 had affected the competitiveness of our products vis--vis depreciated currencies. Export of certain goods from India declined because of this crisis. Steel industry in 1998 suffered its worst set back due to cheap import of steel from south East Asian countries. Suddenly blue chip companies had turned in to red. The fear of china devaluing its currency created instability in Indian exports. Thus, it is evident that globalisation of industrial and financial activities necessitates use of derivatives to guard against future losses. This factor alone has contributed to the growth of derivatives to a significant extent. C.} TECHNOLOGICAL ADVANCES

57

A significant growth of derivative instruments has been driven by technological breakthrough. Advances in this area include the development of high speed processors, network systems and enhanced method of data entry. Closely related to advances in computer technology are advances in telecommunications. Improvement in communications allow for instantaneous worldwide conferencing, Data transmission by satellite. At the same time there were significant advances in software programmes without which computer and telecommunication advances would be meaningless. These facilitated the more rapid movement of information and consequently its instantaneous impact on market price. Although price sensitivity to market forces is beneficial to the economy as a whole resources are rapidly relocated to more productive use and better rationed overtime the greater price volatility exposes producers and consumers to greater price risk. The effect of this risk can easily destroy a business which is otherwise well managed. Derivatives can help a firm manage the price risk inherent in a market economy. To the extent the technological developments increase volatility, derivatives and risk management products become that much more important. D.} ADVANCES IN FINANCIAL THEORIES Advances in financial theories gave birth to derivatives. Initially forward contracts in its traditional form, was the only hedging tool available. Option pricing models developed by Black and Scholes in 1973 were used to determine prices of call and put options. In late 1970s, work of Lewis Edeington extended the early work of Johnson and started the hedging of financial price risks with financial futures. The work of economic theorists gave rise to new products for risk management which led to the growth of derivatives in financial markets. The above factors in combination of lot many factors led to growth of derivatives instruments

58

Table-10: Standing of India in World Derivatives Market (in terms of volume) September 2010 2 2 16 4

Products Stock Future Index Future Stock Option Index Option

July 2010 1 2 9 4

August 2010 1 2 15 4

Source: www.world-exchanges.org (as on November 10, 2010) Salient points for the 2nd quarter 2010-09 The volume (no. of contracts) and open interest in the derivatives market has increased even when the underlying market is witnessing a downward trend. This indicates that there are sufficient long position holders who anticipate value proposition in a falling market. Falling or rising markets on the back of low volumes may be a cause of concern from the point of market integrity. However, as observed from the data, under the present scenario the fall in the market has been accompanied by high volumes. In Index Option, there is a sharp increase in turnover (97.95%) and volume (117.10%) during July-September 2010-09 over April-June 2010-09. Possible reasons for increase in options trading activity can be attributed to increase in volatility. Market observers believe that conditions across markets and asset classes have become more volatile and uncertain in the recent past. Generally in such conditions, many people believe that options act as "insurance" against adverse price movements while offering the flexibility to benefit from possible favourable price movements at the same time. Another reason which can be attributed to the increase in activity is the new directive as per the Budget 2010-09 which states that STT would now be levied on the Option premium instead of the strike price. In Index Future, both turnover (15.17%) and volume (30.53%) have increased

59

during July-September 2010-09 as compared to April-June 2010-09. There is a decrease in turnover (4.92%) in Single Stock Futures during JulySeptember 2010-09 as compared to April-June 2010-09. Except Index Option, the market share of all other products has decreased (both in terms of volume and turnover) in second quarter of 2010-09 as compared to the first quarter of 2010-09. There is a decrease in turnover (21.04%) and volume (17.39%) in Longer Dated derivative contracts in second quarter of 2010-09 as compared to the first quarter of 2010-09. Longer dated derivatives were launched in March 2010, but the volumes have not picked up consequently. For shorter dated derivative contracts, turnover increased by 24.52% whereas volume increased by 4.81% in second quarter of 2010-09 as compared to the first quarter of 2010-09. During 2010-09, Mini Nifty volumes increased by 49.15% and turnover increased by 33.43% during July-September 2010-09 over April-June 2010-09.

60

CHAPTER-4

61

DATA ANALYSIS INTERPRETATION

Business Growth in Derivatives segment (NSE)

INDEX FUTURES TABLE:-1
Year 2011-2012 2010-2011 2009-2010 2008-2009 2007-2008 2006-2007 2005-2006 2004-2005 Turnover (Rs. Cr.) 925679.96 3820667.27 2539574 1513755 772147 554446 43952 21483

Number of contracts per year INTERPRETATION: From the data and the bar diagram above, there is high business growth in the derivative segment in India. In the year 2001-03, the number of contracts in Index Future were 2002-03 where as a significant increase of 4116679 is observed in the year 2010-09.

TABLE:-2

NO OF TURNOVERS

62

Year 2011-2012 2010-2011 2009-2010 2008-2009 2007-2008 2006-2007 2005-2006 2004-2005

No. of contracts 4116649 156598579 81487424 58537886 21635449 17191668 2126763 1025588

INTERPRETATION: From the data and above bar chart, there is high turn over in the derivative segment in India. In the year 2001-02 the turnover of index future was 21483 where as a huge increase of 92567996 in the year 2010-09 are observed.

63

TABLE:3

STOCK FUTURES

Year 2011-2012 2010-2011 2009-2010 2008-2009 2007-2008 2006-2007 2005-2006 2004-2005

No. of contracts 51449737 203587952 104955401 80905493 47043066 32368842 10676843 1957856

FIGURE 12A Number of contracts per year in stock future INTERPRETATION: From the data and bar diagram above there were no stock futures available but in the year 2001-02, it predominantly increased to 1957856. Then there was a huge increase of 20, 35, and 87,952 in the year 2007-10 but there was a steady decline to 51449737 in the year 201009.

64

TABLE 4 NO OF TURNOVERS
Year (Rs. Crores) 2011-2012 2010-2011 2009-2010 2008-2009 2007-2008 2006-2007 2005-2006 2004-2005 Turnover 1093048.26 7548563.23 3830967 2791697 1484056 1305939 286533 51515

INTERPRETATION: From the data and bar chart above, there were no stock futures available in the year 2000-01. There was a steady increase of stock future 51515 in the year 2001-02. but in the year there was a huge increae of 7548563.23 in the year 2007-10 with a considerable decline of 1093048.26 in the year 2010-09.

65

TABLE 5 INDEX OPTIONS

Year 2011-2012 2010-2011 2009-2010 2008-2009 2007-2008 2006-2007 2005-2006 2004-2005

No. of contracts 24010627 55366038 25157438 12935116 3293558 1732414 442241 175900

Interpretation: From the data and bar chart above, the no of contracts of index option was nil in the year 2000-2001. But there was a predominant increase of 1,75,900 in the year 2001-2002. In the year 2007-2010 there was a huge increase in the index option contracts to 55366038 and a decline of 24010627 in the year 2010-2009

66

Table -6
Year 2011-2012 2010-2011 2009-2010 2008-2009 2007-2008 2006-2007 2005-2006 2004-2005 Turnover (Rs. Crores) 71340.02 1362110.88 791906 338469 121943 52816 9246 3765

FIGURE 13B Turnover per year in Rs. Crores

Interpretation: From the data and bar chart above, there was no turnover in the year 2004-2005for Index option. It slowly started increasing in the year 2004-2005to 3765.But in the year 2007-2010 there was a huge increase of 1362110.108 and a sudden decline to 71340.02 observed in 2011-2012

67

TABLE-7 STOCK OPTIONS

Year 2011-2012 2010-2011 2009-2010 2008-2009 2007-2008 2006-2007 2005-2006 2004-2005

No. of contracts 2546175 9460631 5283310 5240776 5045112 5583071 3523062 1037529

INTERPRETATION: From the data and bar chart above the no of contracts of stock option in the year 20042005was nil. But there was a huge increase of 1037529 observed in the year 2001-2002. It was 9460631 which was the the highest in the year 2007-2010. But a gradual decline of 2546175 in the year 2011-2012

68

TABLE-8 National turnover in Rs. Crores per year

Year 2011-2012 2010-2011 2009-2010 2008-2009 2007-2008 2006-2007 2005-2006 2004-2005 Notional turnover (Rs. crores) 58335.03 359136.55 193795 180253 168836 217207 100131 25163

Interpretation: From the chart and the bar diagram above the stock option turnover in the year 20042005was nil. There was a slow increase of 25163 in the year 2001-2002. But a phenomenal increase of 359136.55 in the year 2007-2010, and a decline of 58355.03 in the year 20112012

69

CALL OPTIONS OF ICICI BANK

ICICI CALL OPTIONS: The above call options details have revalues that, the premium/price of the call has shown a decreasing nature as the time to expiate in decrease as but at some places there is rise the price due to increase in the index. CA ICICI(600) Close pre 01/02/12 23.7 02/02/12 12.10 03/02/112 8.45 04/02/12 6.6 07/02/12 16.7 11/02/12 28.065 09/02/12 21.55 11/02/12 17.05 14/02/12 18 15/02/12 12.25 16/02/12 11.85 17/02/12 10.2 8/02/12 4.8 21/02/12 5.25 22/02/12 350000 3.9 23/02/12 2.75 24/02/12 0.1 Date
300000

CA ICICI(620) Volume Open int 64K 73K 74K 91K 1L 2L 2L 2L 2L 2L 2L 2L 2L 2L 2L Trade qty 16K 18K 11K 48K 21L 1L 70K 70K 25K 25K 22K 33K 20K 23K 5K Volume 101.86 113.81 65.45 303.35 982.03 801.27 439.61 167.9 140.34 157.49 135.33 204.79 126.14 143.57 30.42

Open int 2L 2L 2L 2L 3L 3L 2L 2L 2L 2L 2L 2L 2L 2L 2L 2L 2L

Trade qty 17K

Close pre 104.67 12 7.15 73K 444.3 5.2 61K 369.4 3.9 3L 1781.59 8.9 3L 2177.89 15.85 1L 699.24 10.5 76K 465.9 8.85 38K 233.95 8.2 36K 223.85 6 37K 227.24 4.75 24K 145.64 CA ICICI (600) 3 42K 254.74 1.85 42K 253.58 1.8 26K 156.58 1.25 22K 134.92 13 0.75

250000

200000

OPEN INT TRADE QTY

Interpretation: 150000 The trade Quantity is maximum 07-02-2012 and 09-02-2012 at 3 lakhs and it is minimum on 01-02-2012 at 17 thousand. 100000 The open interest is common on all dates at 2 lakhs.
50000

Interpretation
0
70

The open interest is maximum from 11-02-2012 to 24-02-2012 at 2 lakhs and it is minimum on 01-02-2012 at 64 thousand. The trade quantity is maximum on 11-02-2012 at 21 lakhs and it is minimum on 2302-2012 at 5 thousand.

CA ICICI (620)
2500000

2000000

1500000 OPEN INT TRADE QTY 1000000

500000

71

CALL OPTIONS OF NTPC

NTPC CALL OPTIONS: The above call options details have revalues that, the premium/price of the call has shown a decreasing nature as the time to expiate in decrease as but at some places there is rise the price due to increase in the index. CA NTPC(110) CA NTPC(115) Close Open Trade Close Open Trade Date Volume Volume pre int qul pre int qul 01/02/12 5.85 4L 2L 237.86 3.1 12L 10L 1102.36 02/02/12 6.25 3 03/02/12 2.65 14L 3L 405.96 04/02/12 7.9 3L 3L 364.01 3.9 14L 11L 1362.69 07/02/12 8.85 3L 2L 217.18 4.2 13L 7L 864.36 11/02/12 9.9 3L 59K 70.05 5.05 12L 5L 545.8 09/02/12 12.25 2L 1L 138.01 7.25 11L 11L 1349.72 11/02/12 11.15 2L 2L 283.51 6.3 6L 3L 391.29 14/02/12 6.2 4L 1L 153.03 15/02/12 4.8 4L 72K 85.83 16/02/12 9.5 3L 2L 299.75 17/02/12 9.45 3L 62K 76.89 18/02/12 21/02/12 22/02/12 14 49K 10K 12.1 9.6 3L 3K 4.05 23/02/12 19.2 46K 23K 28.84 14.4 3L 3L 348.87 24/02/12 22.5 26K 10K 4.9 18.5 1L 13K 17.56
CA 110 NTPC
450000 400000 350000 300000 250000 200000 150000 100000 50000 0
OPEN INT

Interpretation

72

the open interest is maximum on 01-02-2012 at 4 lakhs and it is minimum on 24-022012 at 26 thousand. The trade qty is maximum on 04-02-2012 at 3 lakhs and it is minimum on 24 -022012 at 10 thousand.

CA 115 NTPC
1600000 1400000 1200000 1000000 800000 600000 400000 200000 0
OPEN INT TRADE QTY

73

Interpretation The open interest is maximum on 03-02-2012 at 14 lakhs and it is minimum on 2402-2012 at 1 lakh. The trade qty is maximum on 04-02-2012 at 11 lakhs and it is minimum on 24-022012 at 13 thousand. CA NTPC(120) Open Trade qul int 7L 3L 81K 9L 9L 6L 15L 6L 6L 3L 21L 9L 5L 5L 3L 19L 1L

Date 01/02/12 02/02/12 03/02/12 04/02/12 07/02/12 11/02/12 09/02/12 11/02/12 14/02/12 15/02/12 16/02/12 17/02/12 18/02/12 2500000 21/02/12 22/02/112 23/02/12 24/02/12
2000000

Close pre

Volume 374.86 98.45 1110.23 1160.9 732.2 1811.11 622.77 731.3 356.48 20565.31 1078.94 560.86 627.45 386.49 2405.69 179.25

1.3 5.50 1.15 9L 1.65 13L 1.65 13L 2.45 17L 3.2 18L 2.85 18L 2.55 21L 1.7 21L CA NTPC (120) 4.75 19L 5.15 18L 2.85 17L 3.45 17L 3.1 17L 9.35 17L 11.3 4L

1500000

OPEN INT TRADE QTY

1000000

500000

Interpretation The open interest is maximum on 14-02-2012 at 21 lakhs The trade quantity is maximum on 16-02-2012 at 21 Lakhs and it is minimum on 030 at 81 thousand 02-2012
74

PUT OPTION OF ICICI

ICICI PUT OPTIONS The above put options details have revalues that, the premium/price of the call has shown a decreasing nature as the time to expiate in decrease as but at some places there is rise the price due to increase in the index. PA ICICI(600) PA ICICI(620) Close Open Trade Close Open Trade Date Volume Volume pre int qtyl pre int qty 01/02/12 10.85 51K 8K 51.36 02/02/12 18.30 34 03/02/12 24.6 33K 33K 204.5 04/02/12 37 27K 19K 120.12 07/02/12 15 61K 63K 387.68 11/02/12 11.8 29K 69K 419.57 19.5 18K 19K 120.85 09/02/12 14.2 90K 29K 309.53 11/02/12 12.9 90K 29K 176.15 14/02/12 15/02/12 14.4 84K 21K 128.89 16/02/12 17/02/12 600 ICICI 176.86 BANK 18/02/12 19.2 68K PA 29K 21/02/12 11.05 53K 26K 160.71 22/02/12 23.75 1K 700 437 23/02/12 8.2 52K 6K 34.22 600000 24/02/12 10.75 50K 4K 25.56 -

500000

400000

OPEN INT

TRADE QTY

300000

200000

100000

75

Interpretation The open interest is maximum on 24-02-2012 at 5 lakhs The trade quantity is maximum on 11-02-2012 at 69 thousand and it is minimum on 24-02-2012 at 4 thousand

PUT OPTIONS OF NTPC

NTPC PUT OPTIONS The above put options details have revalues that, the premium/price of the call has shown a decreasing nature as the time to expiate in decrease as but at some places there is rise the price due to increase in the index. PA NTPC(110) PA NTPC(115) Close Open Trade Volum Close Open Trade Date Volume pre int qty e pre int qty 01/02/12 1.5 2L 1L 137.77 4.4 2L 2L 211.76 02/02/12 1.30 3.60 03/02/12 04/02/12 0.95 3L 55K 61.29 2.4 3L 2L 217.29 07/02/12 1.55 4L 2L 231.12 11/02/12 1.35 4L 72K 83.19 09/02/12 1.05 5L 1L 158.64 11/02/12 0.85 5L 1L 139.4 14/02/12 0.65 5L 2L 255.86 15/02/12 16/02/12 - 115 NTPC 0.2 5L 1L 153.56 PA 17/02/12 18/02/12 21/02/12 600000 22/02/12 23/02/12 0.1 5L 3K 3.74 24/02/12 0.05 5L 3K 3.74
500000

400000

OPEN INT

300000
TRADE QTY

200000

100000 Interpretation

The open interest is maximum on 09-02-2012 at 5 lakhs and it is minimum on 01-022012 at 2 lakhs. The trade quantity is maximum on 01-02-2012 at 2 lakhs and it is minimum on at 3 thousand 0
76

350000

PA NTPC 110
300000

250000

200000

150000

OPE N INT

100000

50000

Interpretation 0 open interest is maximum on 04-02-2012 at 3 lakhs and it is minimum on 01-02the 2012 at 2 lakhs. The trade qty is maximum on 01-02-2012 at 1 lakh and it is minimum on 04-2-2012 at 55 thousand.

FUTURES OF FEBRUARY 11
Variable Effect of an increase in each variable on the value of the option, holding other factors constant Increase Decrease Increase Increase Increase Decrease Decrease Increase Increase Increase Decrease Increase

Spot price (S) Strike price (K) Volatility (G) Time to expiration (1) Interest rates (r)

77

 Dividend (D)

In the nutshell, we can formulate the basic rules for options pricing as follows: Ore the time till expiration, greater the call price. More the volatility, higher the call option premium. Higher the interest rates, more the call value.

For calls: Lower the strike (exercise) price, the more valuable the call. Different in call prices cannot exceed difference in the exercise price. A call must be worth at least the stock price less the present value of the exercise price. For puts: Higher the exercise price, more valuable the put. The price different between two puts cannot exceed the different in exercise prices. Before expiration, a put must be worth at least the difference between the exercise price and the stock price. Longer the time to expiration, the more voluble the put. More the volatility, higher the put premium. Higher the interest rate, lower the put value.

78

ICICI BANK
FUTURES FOR THE MONTH OF FEB-12 (ICICI) DATE 01/02/12 02/02/12 03/02/12 04/02/12 07/02/12 11/02/12 09/02/12 11/02/12 14/02/12 15/02/12 16/02/12 17/02/12 18/02/12 21/02/12 22/02/12 23/02/12 24/02/12
630 620 610 600 590 580 570 560 550 540
OPEN CLOSE

OPEN 613.95 614 603 576.01 604.05 62107 616.6 609.4 611.4 611 602 601 603 593.8 599 596 601

CLOSE

OPEN INT

TRD QTY

NO OF CON 2369 4139 3475 8771 9678 6630 3478 1553 3218 2475 1325 2894 3189 2809 2903 3621

612.85 55L 17L 594.30 582.75 54L 29L 570.35 60L 24L 600.5 66L 61L 615.15 66L 68L 604.95 68L 46L 603.35 69L 24L 604.8 68L 13L 595.55 62L 23L 597 56L 17L 597.05 55L 9L 586.9 56L 20L 592.25 43L 22L 593.65 35L 20L FUTURES FOR ICICI 595.33 31L 20L 590.1 20L 25L

79

0 2 / 1

1 0 / 2

1 0 2 / 3

1 0 2 / 4

1 0 2 / 7

1 0 2 / 8

1 0 2 / 9

0 2 / 1

0 2 / 4 1

0 2 / 5 1

0 2 / 6 1

0 2 / 7 1

0 2 / 8 1

0 / 1 2

1 0 / 2

1 0 / 3 2

1 0 / 4 2

Interpretation The open end is maximum on 11-02-2012 at 621.07 and it is minimum on 04-022012 at 576.01. The close end is maximum at 615.15 and it is minimum at 570.35

80

CHAPTER-5

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FINDINGS & CONCLUSION

From the above analysis it can be concluded that: 1. Derivative market is growing very fast in the Indian Economy. The turnover of Derivative Market is increasing year by year in the Indias largest stock exchange NSE. In the case of index future there is a phenomenal increase in the number of contracts. But whereas the turnover is declined considerably. In the case of stock future there was a slow increase observed in the number of contracts whereas a decline was also observed in its turnover. In the case of index option there was a huge increase observed both in the number of contracts and turnover. 2. After analyzing data it is clear that the main factors that are driving the growth of Derivative Market are Market improvement in communication facilities as well as long term saving & investment is also possible through entering into Derivative Contract. So these factors encourage the Derivative Market in India. 3. It encourages entrepreneurship in India. It encourages the investor to take more risk & earn more return. So in this way it helps the Indian Economy by developing entrepreneurship. Derivative Market is more regulated & standardized so in this way it provides a more controlled environment. In nutshell, we can say that the rule of High risk & High return apply in Derivatives. If we are able to take more risk then we can earn more profit under Derivatives. Commodity derivatives have a crucial role to play in the price risk management process for the commodities in which it deals. And it can be extremely beneficial in agriculturedominated economy, like India, as the commodity market also involves agricultural produce. Derivatives like forwards, futures, options, swaps etc are extensively used in the country. However, the commodity derivatives have been utilized in a very limited scale. Only forwards and futures trading are permitted in certain commodity items. RELIANCE is the most active future contracts on individual securities traded with 90090 contracts and RNRL is the next most active futures contracts with 63522 contracts being traded.

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SUGGESTIONS
RBI should play a greater role in supporting derivatives. Derivatives market should be developed in order to keep it at par with other derivative markets in the world. Speculation should be discouraged. There must be more derivative instruments aimed at individual investors. SEBI should conduct seminars regarding the use of derivatives to educate individual investors.

After study it is clear that Derivative influence our Indian Economy up to much extent. So, SEBI should take necessary steps for improvement in Derivative Market so that more investors can invest in Derivative market. There is a need of more innovation in Derivative Market because in today scenario even educated people also fear for investing in Derivative Market Because of high risk involved in Derivatives.

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BIBLIOGRAPHY
Books referred: Options Futures, and other Derivatives by John C Hull Derivatives FAQ by Ajay Shah NSEs Certification in Financial Markets: - Derivatives Core module Financial Markets & Services by Gordon & Natarajan

Reports: Report of the RBI-SEBI standard technical committee on exchange traded Currency Futures Regulatory Framework for Financial Derivatives in India by Dr.L.C.GUPTA Websites visited: www.nse-india.com www.bseindia.com www.sebi.gov.in www.ncdex.com www.derivativesindia.com

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ABBREVATIONS
A AMEX- America Stock Exchange B BSE- Bombay Stock Exchange BSI- British Standard Institute C CBOE - Chicago Board options Exchange CBOT - Chicago Board of Trade CEBB - Chicago Egg and Butter Board CME - Chicago Mercantile Exchange CNX- Crisil Nse 50 Index CPE - Chicago Produce Exchange CWC- Central Warehousing Corporation D DTSS- Derivative Trading Settlement System F FIIs- Foreign Institutional Investors F & O Future and Options FMC- Forward Markets Commission FRAs- Forward Rate Agreements G GAICL-Gujarat Agro Industries Corporation Limited GSAMB- Gujarat State Agricultural Marketing Board I IMM - International Monetary Market IPSTA- India Pepper & Spice Trade Association M MCX Multi Commodity Exchange

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N NAFED-National Agricultural Co-Operative Marketing Federation Of India NCDEX National Commodities and Derivatives Exchange NIAM- National Institute Of Agricultural Marketing NMSE- National Multi Commodity Exchange NOL- Neptune Overseas Limited NSCCL- National Securities Clearing Corporation NSDL- National Securities Depositories Limited NSE - National Stock Exchange O OTC- Over The Counter P PHLX - Philadelphia Stock Exchange PNB- Punjab National Bank R RBI- Reserve Bank Of India S SC(R) A - Securities Contracts (Regulation) Act, 1956 SEBI- Securities Exchange Board Of India SGX- Singapore Stock Exchange SIMEX - Singapore International Monetary Exchange V VPN- Virtual Private Network

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