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DERIVATIVES market- INDIA

ABSTRACT

The research on the general study of derivatives market has been conducted to improve the knowledge about the derivatives market and its performance in India. However another problem was that beyond better performance many traders are not trading derivatives. Hence the research has been conducted to study the attitude of the investors and traders. The derivatives market is booming in India and shows better performance year by year. The research has been conducted in Karvy Comtrade Ltd, which works on derivatives. 10 investors have been selected for the research on their easy availability. The results show that lack of knowledge, fear and motivation are the main factors leading the investors and the traders to step aside of the derivatives market. Hence there is a need of improving marketing strategies to motivate them to invest in derivative market. However a Derivative can be defined as a financial instrument whose val ue depends on the values of others, more basic underlying variables. The research how to trade and what are formalities to be accomplished to trade in the derivatives market. The methodology adopted for the research on the basis of sampling design and selection of respondents is clear. Hence the results are better and can be easily acceptable. This research comes across the meaning of derivatives, the trading system and guides to play safely in the market. It would motivate the common people to trade in the derivatives market as it explains the risks in the market and give suggestions to overcome those risks. This report also explains the settlement procedures, the charges involved and process of trading. Hence it enhance the confidence level and persuade to invest or trade in the derivative market

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Chapter 1

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INTRODUCTION
As a part of our curriculum, this project aims to study A GENERAL STUDY ON DERIVATIVES MARKET IN INDIA. The study was conducted in Shimoga. This study mainly helps to know the trading system of derivatives market and its consequences. It creates awareness about the market and persuades to trade in a safe manner. This study also come across various problems faced by the traders of derivatives market and provides some suggestions to overcome it. The study has been conducted under the guidance and assistance of company guide and the staff members of Karvy the finapolis, shimoga and also under the faculty members of our college. The stock market took a diversified step by the way of trading through the Derivatives. Lot of people with lack of knowledge and fear step back to trade in Derivatives. The trading mechanism is such that a win-lose situation as one has to incur the loss and the latter gains which is unlike the equity market. The basic information about the market is provided in the latter part of this thesis. However let us have a look at the research information proposed to be carried out.

RESEARCH PROPOSED TO BE CARRIED OUT


Listing the objectives of the study The objectives are clear and the problem is recognized. The main of the study is to improve the knowledge in the derivatives market and to assist others who wish to trade in such market.

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Preparing the questionnaire Open ended questionnaire are prepared for the purpose of the study as the there is less chances to be biased. The questionnaire prepared to the staff of market and the traders are different. However they are enclosed at the end of the report.

Collection of the secondary data The secondary data is collected by referring books, magazines and internet. The basic knowledge about the market has been collected through books, current news and other information were collected through the internet.

Analysis of secondary data Comparison of the secondary data is done. Screening of the various data collected. The non useful data collected are screened and the data that to be collected for primary data are planned.

Collection of Primary data The interaction with company guide and investors helped for the collection of the primary data. The study of secondary data helped for the collection of some useful data here.

Evaluation of the primary data After the collection of the primary data, comparison between the primary data with secondary data is made to know the reliability and accuracy of the data collected.

Suggestions from faculty guide The suggestion from the college faculty guide is taken and it helped for the follow ups of the research. It also helped for the clear flow of the research conducted.

Preparing the research report Finally the report of the research has been drawn which conveys about the research.
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Objectives of the study


The following research is a part of our curriculum and it enhances the students to improve in their special interests. So the topic was selected as am a student with Finance as my specialization. The following are the objectives that I would accomplish at the end of this project.

To improve my knowledge in the field of investments. To enhance the importance and scope of Derivatives Market. To acquire formalities to be accomplished to trade in this market. To analyze the wideness of differentiation of this market from the other financial markets. To study the investors attitude and their speculations in this market To know practical trading in this market. To learn the calculations pertaining to derivatives market. To know about the loopholes in this market. To enhance myself to give some suggestions for the improvement for better performance To know the contribution of this market to National Income of India. To equip myself for the placement in the field of Finance.

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Company Profile

KARVY- Comtrade Limited


It is a venture of the prestigious Karvy group. With well established presence in the multifarious facets of the modern financial services industry from stock broking to registry services, it is indeed a pleasure for them to make foray into the commodities derivatives market which opens yet another door for them to deliver their service to the beloved customers and the investor public at large.

With the high quality infrastructure already in place and a committed Government providing continuous impetus, it is the responsibility of the company, the intermediaries to deliver these benefits at the door-steps of the esteemed customers. With the expertise in financial services, existence across the lengths and breadths of the country and an enviable technological edge, they are all set to bring the pleasure of investing in this burgeoning market, which they touch upon the lives of a vast majority of the population from the farmer to the corporate alike. They are confident that the commodity futures can be a good value addition to customer portfolio.

The company provides investment, advisory and brokerage services in Indian Commodities Markets. And most importantly, they offer a wide reach through their branch network of over 225 branches located across 180 cities.

As the flagship company of the Karvy Group, Karvy Consultants Limited has always remained at the helm of organizational affairs, pioneering business policies, work ethic and channels of progress. Having emerged as a leader in the registry business, the first of the businesses that they ventured into, they have now transferred this business into a joint venture with Computershare Limited of Australia, the worlds largest registrar. With the advent of depositories in the Indian capital market and the relationships that they have created in the registry business, they believe that they are best positioned to venture into this activity as
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a Depository Participant. They are one of the early entrants registered as Depository Participant with NSDL (National Securities Depository Limited), the first Depository in the country and then with CDSL (Central Depository Services Limited). Today, they service over 6 lakhs customer accounts in this business spread across over 250 cities/towns in India and are ranked amongst the largest Depository Participants in the country. With a growing secondary market presence, they have transferred this business to Karvy Stock Broking Limited (KSBL), they are a associate and a member of NSE, BSE and HSE.

KARVY Stock Broking Limited


Member - National Stock Exchange (NSE), The Bombay Stock Exchange (BSE), and The Hyderabad Stock Exchange (HSE). Karvy Stock Broking Limited, one of the cornerstones of the Karvy edifice, flows freely towards attaining diverse goals of the customer through varied services. Creating a plethora of opportunities for the customer by opening up investment vistas backed by research-based advisory services. Here, growth knows no limits and success recognizes no boundaries. Helping the customer create waves in his portfolio and empowering the investor completely is the ultimate goal.

It is an undisputed fact that the stock market is unpredictable and yet enjoys a high success rate as a wealth management and wealth accumulation option. The difference between unpredictability and a safety anchor in the market is provided by in-depth knowledge of market functioning and changing trends, planning with foresight and choosing one options with care. This is what they provide in their Stock Broking services. They offer services that are beyond just a medium for buying and selling stocks and shares. Instead they provide services which are multi dimensional and multi-

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focused in their scope. There are several advantages in utilizing their Stock Broking services, which are the reasons why it is one of the best in the country.

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KARVY - the Finapolis

The paradigm shift from pure selling to knowledge based selling drives the business today. With their wide portfolio offerings, they occupy all segments in the retail financial services industry. A 1600 team of highly qualified and dedicated professionals drawn from the best of academic and professional backgrounds are committed to maintaining high levels of client service delivery. This has propelled them to a position among the top distributors for equity and debt issues with an estimated market share of 15% in terms of applications mobilized, besides being established as the leading procurer in all public issues. To further tap the immense growth potential in the capital markets they enhanced the scope of their retail brand, Karvy the Finapolis , thereby providing planning and advisory services to the mass affluent. Here they understand the customer needs and lifestyle in the context of present earnings and provide adequate advisory services that will necessarily help in creating wealth. Judicious planning that is customized to meet the future needs of the customer deliver a service that is exemplary. The market-savvy and the ignorant investors, both find this service very satisfactory. The edge that they have over competition is their portfolio of offerings and their professional expertise. The investment planning for each customer is done with an unbiased attitude so that the service is truly customized. Their monthly magazine, Finapolis, provides up-dated market information on market trends, investment options, opinions etc. Thus empowering the investor to base every financial move on rational thought and prudent analysis and embark on the path to wealth creation.

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KARVY Investor Services Limited

Recognized as a leading merchant banker in the country, they are registered with SEBI as a Category I merchant banker. This reputation was built by capitalizing on opportunities in corporate consolidations, mergers and acquisitions and corporate restructuring, which have earned them the reputation of a merchant banker. Raising resources for corporate or Government Undertaking successfully over the past two decades have given them the confidence to renew their focus in this sector. Their quality professional team and their work-oriented dedication have propelled them to offer value-added corporate financial services and act as a professional navigator for long term growth of their clients, who include leading corporates, State Governments, foreign institutional investors, public and private sector companies and banks, in Indian and global markets. They have also emerged as a trailblazer in the arena of relationships, both at the customer and trade levels because of their unshakable integrity, seamless service and innovative solutions that are tuned to meet varied needs. Their team of committed industry specialists, having extensive experience in capital markets, further nurtures this relationship. Their financial advice and assistance in restructuring, divestitures, acquisitions, demergers, spin-offs, joint ventures, privatization and takeover defense mechanisms have elevated their relationship with the client to one based on unshakable trust and confidence.

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KARVY Computershare Private Limited

They have traversed wide spaces to tie up with the worlds largest transfer agent, the leading Australian company, Computershare Limited. The company that services more than 75 million shareholders across 7000 corporate clients and

makes its presence felt in over 12 countries across 5 continents has entered into a 50-50 joint venture with them. With their management team completely transferred to this new entity, they will aim to enrich the financial services industry than before. The future holds new arenas of client servicing and contemporary and relevant technologies as they are geared to deliver better value and foster bigger investments in the business. The worldwide network of Computershare will hold them in good stead as they expect to adopt international standards in addition to leveraging the best of technologies from around the world. Excellence has to be the order of the day when two companies with such similar ideologies of growth, vision and competence, get together.

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KARVY Global Services Limited


The specialist Business Process Outsourcing unit of the Karvy Group. The legacy of expertise and experience in financial services of the Karvy Group serves them well as they enter the global arena with the confidence of being able to deliver and deliver well. Here they offer several delivery models on the understanding that business needs are unique and therefore only a customized service could possibly fit the bill. Their service matrix has permutations and combinations that create several options to choose from. In re-engineering and managing processes or delivering new efficiencies, their service meets up to the most stringent of international standards. Their outsourcing models are designed for the global customer and are backed by sound corporate and operations philosophies, and domain expertise. Providing productivity improvements, operational cost control, cost savings, improved accountability and a whole gamut of other advantages.

They operate in the core market segments that have emerging requirements for specialized services. Their wide vertical market coverage includes Banking, Financial and Insurance Services (BFIS), Retail and Merchandising, Leisure and Entertainment, Energy and Utility and Healthcare.

KARVY- Insurance Broking PVT. LTD


At Karvy Insurance Broking Limited., they provide both life and non-life insurance products to retail individuals, high net-worth clients and corporates. With the opening up of the insurance sector and with a large number of private players in the business, they are in a position to provide tailor made policies for different
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segments of customers. In their journey to emerge as a personal finance advisor, they will be better positioned to leverage their relationships with the product providers and place the requirements of their customers appropriately with the product providers. With Indian markets seeing a sea change, both in terms of investment pattern and attitude of investors, insurance is no more seen as only a tax saving product but also as an investment product. By setting up a separate entity, they would be positioned to provide the best of the products available in this business to their customers. Their wide national network, spanning the length and breadth of India, further supports these advantages. Further, personalized service is provided here by a dedicated team committed in giving hassle-free service to the clients

KARVY Reality and Services (India) Limited


KARVY Realty & Services (India) Limited (KRSIL) is engaged in the business of real estate and property services offering value added property services and offers individuals and establishments a myriad of options across investments, financing and advisory services in the realty sector promoted by the KARVY Group of companies, Indias largest integrated financial services company. KARVY Realty & Services India Limited carries forward its legacy of trust and excellence in investor and customer services delivered with a passion for services and the highest level of quality that align with global standards.

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Chapter 2

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LITERATURE REVIEW
For the purpose of carrying out this project I have referred the book Options, Futures, and Other Derivatives, Security Analysis and Financial Management. The book, Options, Futures, and Other Derivatives is written by John C. Hull. The book is of the fifth edition which provides enormous data regarding the derivatives. Security Analysis and Financial Management are the text books for the students of INC which also give some important information regarding derivatives. However I have even collected some of the PDF files relating to derivatives from my relative Mr. Damodar Pai, who is in Udupi. Apart from these I have collected some information through Internet which relates to Derivatives. The details of the references that I have made are explained below.

Derivatives
Derivatives are playing a major role in the stock market of all countries. At the very first it came in the Japanese rice market. Likewise the derivatives market transaction takes place today was followed in Osaka, Japan during 1650s and the organized derivatives market came into existence in 1848, when the Chicago Board of Trade was established (the largest derivative exchange in the world). Derivatives, the dictionary meaning stands that something derived, not original. However in Finance, a Derivative can be defined as a financial instrument whose value depends on the values of others, more basic underlying variables. The variables underlying derivatives are the prices of a stock. The term "Derivative" indicates that it has no independent value, i.e. its value is entirely "derived" from the value of the underlying asset. The underlying asset can be securities, commodities, bullion, currency, live stock or anything else. In other

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words, Derivative means a forward, future, option or any other hybrid contract of pre determined fixed duration, linked for the purpose of contract fulfillment to the value of a specified real or financial asset or to an index of securities and The Indian Derivative market is regulated as per the "Securities Laws (Second Amendment) Act, 1999". Now, it is necessary to understand the meaning of the terms used in Derivatives Market. Derivatives are of two classifications: One is traded through the exchange and the latter is traded through Over The Counters (OTC). Hence they can find Exchange Traded Derivatives, OTC derivatives and OTC Equity Derivatives. Earlier the derivatives traders used to met at a forum of exchange and used to shout and some hand signals were used to indicate the trades they would like to take out. This system was known as Open outcry system.

Exchange traded Vs OTC markets


With the lot of innovations in the Information technology OTC has been providing good and reliable service for the traders in the derivative markets. Moreover the globalization of financial activities, modernization of commercial activities and investment banking has led to the sharp growth of derivatives market in India. The exchange traded has stringent structure compared to the derivatives market. However the following are the some of features of OTC markets compared to the exchange traded:

The management of credit risk is decentralized and located within individual institutions There are no formal centralized limits on individual positions, leverage, or margining. No formal rules for risk and burden-sharing. No hard and fast rules for market positions and integrity 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


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Need for the derivatives market:


The risk, investment, trading factors signifies derivatives in a unique way. Apart these India is among the top-5 producers of most of the commodities, in addition to being a major consumer of bullion and energy products. Agriculture contributes about 22% to the GDP of the Indian economy. It employees around 57% of the labor force on a total of 163 million hectares of land. Agriculture sector is an important factor in achieving a GDP growth of 8-10%. All this indicates that India can be promoted as a major center for trading of commodity derivatives. Hence it is necessary to understand the why such kind of market is needed? However the following are some of the needs for the derivatives market:

It helps to transfer the risk of the people who are risk averse to the risk oriented people. The risk of future loss may be transferred to the other people.

As the market signifies the future contract and the options the discovery of the anticipated prices are made.

As the derivatives market induces many people to trade, it produces more entrepreneurial activity.

There is increase in trade volume as there are many risk averse people who take participation in the derivatives market.

It promotes the investment and saving in the long run.

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Participants in the Derivatives Market:


This market has noticed good success as they have attracted many different types of traders and posses good liquidity. As such in general banks, corporate, financial institutions, individuals and brokers are the regular participants in derivatives market. The participants can be broadly classified into three categories: 1. Hedgers 2. Speculators 3. Arbitrageurs

Hedgers It is an act, whereby an investor seeks to protect a position or anticipated position in the spot market by using the opposite position in derivatives. They use forwards, futures and options markets to reduce or eliminate the risk associated with price of an asset. The parties are concerned that the there will be some changes in a cash commodity ( such as pepper, wheat, bills etc.)which they plan to buy. Hence they want to limit the movement of such commodities as to protect themselves from loss. In this situation, he buys or sells futures contracts of the same type and quantity. Similar objective can posed with the options and forwards too. As they are risk oriented, they collect much valuable information and help others in analyzing the derivatives. For instance let us consider that A company which is in India agrees to export on any future date (3 months) to B company which is in Dubai on the confirmation of receiving Rs 10 crores . A company can hedge foreign exchange risk by selling Rs 10 crores in the three months forward market in the exchange rate of 10.22. This would have the effect of locking in the Dubai Dirham to be realized for the 102.2 crores.

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Speculators These are the trades who trade in the futures or options with a view to make profit from the subsequent price movements. In other words use futures and options contracts to get extra leverage in betting on future movements in the price of an asset. They can increase both the potential gains and potential losses by usage of derivatives in a speculative venture. They are risk oriented people and operate at a high level of risk in anticipation of profits.

Arbitrageurs They make business to take advantage of a discrepancy between prices in two different markets. They involve locking in a riskless profit by simultaneous transaction in two or more markets. The person who does this activity is referred as an arbitrageur. For instance a person buys stock on NSE market, if the prices are more for the stock in BSE, he sells his stock in BSE. However both arbitrageurs and speculators fall into same category as they perform similar activity or function.

Over The Counter Market (OTC).


The OTC market is an important alternative for the exchanges and measured in terms of the total volume of trading. It is a telephone and computer linked network of dealers. The trading usually takes place between two financial institutions or between financial institution and one of its corporate clients. The calls are usually taped to resolve any dispute about what the traders had agreed earlier. Advantage of the system is the terms of a contract do not have to be those specified by an exchange. Traders are free to negotiate any mutually. The

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main disadvantage of the system is that there is Credit Risk that is the small risk that the contract will not be honored. Let us now consider the different types of derivatives. The following page explains the different types of derivatives.

Types of Derivatives:
Forward contract It is a simple derivative. A forward contract is a customized contract between two entities, where settlement takes place on a specific date in the future at todays pre-agreed price. In other words, It is an agreement to buy or sell an asset at a certain future time for a certain price. A forward contract is traded in the over the counter market between two financial institutions or between financial institution and one of its corporate clients. One of the parties 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. Forward contracts on foreign exchange are very popular. Besides the Forward market in currencies has been a vibrant market in India for several decades.

Futures: A futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. Futures contracts are special types of forward contracts in the sense that the former are standardized exchange-traded contracts.

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Options: Options are of two types - calls and puts. Calls give the buyer the right but not the obligation to buy a given quantity of the underlying asset, at a given price on or before a given future date. Puts give the buyer the right, but not the obligation to sell a given quantity of the underlying asset at a given price on or before a given date. The price in the contract is known as exercise or strike price. The date of the contract is known as expiration date or maturity. Options are traded on stocks, stock indices, foreign currencies and futures.

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

Leaps The acronym LEAPS means Long-Term Equity Anticipation Securities. These are options having a maturity of up to three years.

Baskets Basket options are options on portfolios of underlying assets. The underlying asset is usually a moving average or a basket of assets. Equity index options are a form of basket options.

Swaps Swaps are private agreements between two parties to exchange cash flows in the future according to a prearranged formula. They can be regarded as portfolios of forward contracts. In other words a subset of forwards and involve the exchange of one asset (or liability) against another at a future date (or dates).

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The two commonly used swaps are: Interest rate swaps These entail swapping only the interest related cash flows between the parties in the same currency. Currency swaps These entail swapping both principal and interest between the parties, with the cash flows in one direction being in a different currency than those in the opposite direction.

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.

The following figure generalizes the different types of derivatives and how they are traded:

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Differences between the futures and forward contracts Futures contract Forward contracts

These are traded in organized No particular physical location as location as exchanges such

the terms of the contract are highly Terms are structured to suit both standardized the contracting parties

Contracts are cleared by a separate No such facility exist clearing house clearing house guarantees the No organization guarantees the performance of the contract performance of the counterparty. Depends on the worth of the counterparty. Traders have to deposit initial No compulsion to make such

margin irrespective of their trading deposits position Traders have to pay daily Quite difficult to do so

settlement margin depending on movement in the price of the underlying stock Future contracts can be easily Regulations are not as tight as the closed latter

Futures markets are monitored Regulation is not as tight as in the and regulated by special agencies latter

Marking to market is done at the No such adjustments are carried out end of every trading day

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Difference between Futures and Options


1. In options to honor the contract the obligation is on the writer of the option whereas in future d both the parties are equally responsible to honor their obligations 2. The buyer has to pay premium to the writer of the option in options, but in futures both the parties have to deposit the initial margin with the clearing house and also the variation margin on the basis that whether the price fluctuation is favorable to them or not. 3. In options the buyer limits the downside risk to the extent of premium paid. Whereas the buyer is exposed to the whole of the downside risk and had the potential for all the upside return. 4. The expiration period for the options is nine months, while for the future it is twelve months 5. Options are employed by both the hedgers and speculators, while trading in futures is by and large by speculators.

A brief history of Derivatives Market in India:


Derivatives market were existed long back in India, but in the area of commodities, the Bombay cotton trade association started futures trading in 1875 and was the worlds largest future trader by early s of 1990. Due to the ban of cash settlement and option trading by the government in 1952, the derivatives took informal forward trading. By 2000s National electronic commodity exchanges were created. The system of Badla was banned due to so me undesirable practices and the SEBI banned it for goods in 2001. A series of reforms of the stock market between 1993 and 1996 paved the way for the development of exchange-traded equity derivatives markets in India.

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The report of L C Gupta committee recommended for the self regulation by the exchanges and the report of J C Varma committee recommended for the margining systems. In 1999, the Securities Contracts (Regulation) Act of 1956, or SC(R) A, was amended so that derivatives could be declared securities. This allowed for the extension of regulatory framework of trading securities to derivatives. The economic liberalization of the early nineties facilitated the introduction of derivatives based on interest rates and foreign exchange. A system of marketdetermined exchange rates was adopted by India in March 1993. In August 1994, the rupee was made fully convertible on current account. These reforms allowed increased integration between domestic and international markets, and created a need to manage currency risk.

Factors leading for the Growth of Derivatives


Increased volatility in asset prices in financial markets Increased integration of national financial markets with the international markets Marked improvement in communication facilities and sharp decline in their costs Development of more sophisticated risk management tools, providing economic agents a wider choice of risk management strategies Innovations in the derivatives markets, which optimally combine the risks and returns over a large number of financial assets, leading to higher returns, reduced risk as well as trans-actions costs as compared to individual financial assets

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Derivatives Instruments Traded in India


Derivatives in equity products have succeeded in India. Index future, Index options, options and futures on individual securities were introduced in June 2000, June 2001, July 2001 and November 2001 respectively. In 2005, NSE trades 118 individual stocks and 3 stock indices in futures and options. All these stock are settled by cash payment and there was no physical movement of underlying products. In June 2003, NSE launched Interest Rate Futures, but the problem with these was faulty contract specifications, resulting in the underlying interest rate deviating erratically from the reference rate used by market participants. Later the institutional investors preferred the trade in OTC markets where interest rate swaps and forward rate agreements were flourishing as the interest rate were falling during 2005, companies swapped their fixed rate borrowings into floating rates to reduce funding costs. OTC instruments in currency forwards and swaps are the most popular. Importers, exporters and banks use the rupee forward market to hedge their foreign currency exposure. But currently for the currency trading there is a separate market called Currency Market.

Derivatives Users in India


As usual the derivatives in India are traded by the financial and non financial institutions. Financial institutions use derivatives on interest rates, currencies and derivatives to manage credit risk as they have the assets and liabilities of different maturities and transactions through different currencies. Apart from these they are exposed to different risk of default from their borrowers. However Nonfinancial institutions are regulated differently from financial institutions and this affects their incentives to use derivatives.

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The exchange-traded markets, domestic financial institutions and mutual funds have shown great interest in OTC fixed income instruments. But the transactions of the banks dominate the derivatives of interest rate while the proportion of state owned banks are small. Moreover Corporations show great interest in Currency forwards and Swap markets. The institutions have not been participating to the fullest capabilities as some institutions such as banks and mutual funds are not allowed to hedge their existing positions in the spot market or to rebalance their existing positions. Moreover the banks are little exposure to equity market due to the banking regulations they have little incentives in equity derivatives. Foreign institutions must register as FIIs (Foreign Institutional Investors) to trade in exchange traded derivatives and are posed to certain limits assigned by SEBI. However they can incorporate as local Broker Dealers (some foreign investors also invest in Indian markets by issuing Participatory Notes to an off-shore investor). The FIIs have little incentive to trade in interest rate derivatives as th ey have little investment in domestic bond markets. Retail investors (including small brokerages trading for themselves) are the major participants in equity derivatives, accounting for about 60% of turnover in October 2005, according to NSE. The success of single stock futures in India is unique, as this instrument has generally failed in most other countries. One reason for this success may be retail investors prior familiarity with Badla trades which shared some features of derivatives trading. Another reason may be the small size of the futures contracts, compared to similar contracts in other countries. Retail investors also dominate the markets for commodity derivatives, due in part to their long-standing expertise in trading in the Havala or forwards markets.

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Modern Commodity Exchanges


The regulations, stringent government policies over the derivatives market acted as hurdles for the growth and development. Hence FMC (Forward Market Commission) and Government encouraged the setting up of more commodity exchanges with the implications of modern systems and policies followed world wide. Some of the main regulatory measures imposed by the FMC include daily mark to market system of margins, creation of trade guarantee fund, back-office computerization for the existing single commodity Exchanges, online trading for the new Exchanges, demutualization for the new Exchanges, and one-third representation of independent Directors on the Boards of existing Exchanges etc. There were several changes in the trading system due to the globalization in India and hence responding to the changes the several Nation wide Multi Commodity Exchange [NMCE] was set up in the year 2002 by the usage of modern practices such as electronic trading and clearing. The two most commodity exchanges in India are Multi-Commodity Exchange of India Limited (MCX), and National Multi-Commodity & Derivatives Exchange of India Limited (NCDEX), where for the purpose of facilitating online trading and clearing and settlement operations for commodity futures market across the country, the Government of India has given a permanent recognition for MCX as an independent and de-mutulised multi commodity exchange. Key shareholders of MCX are Financial Technologies (India) Ltd., State Bank of India, NABARD, NSE, HDFC Bank, State Bank of Indore, State Bank of Hyderabad, State Bank of Saurashtra, SBI Life Insurance Co. Ltd., Union Bank of India, Bank Of India, Bank Of Baroda, Canara Bank, Corporation Bank. The Headquarter is in Mumbai, and is led by an expert management team with deep domain knowledge of the commodity futures markets.

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However the National Commodity & Derivatives Exchange Limited (NCDEX) is a professionally managed online multi commodity exchange promoted by ICICI Bank Limited (ICICI Bank), Life Insurance Corporation of India (LIC), National Bank for Agriculture and Rural Development (NABARD) and National Stock Exchange of India Limited (NSE). Punjab National Bank (PNB), CRISIL Limited (formerly the Credit Rating Information Services of India Limited), Indian Farmers Fertilizer Cooperative Limited (IFFCO) and Canara Bank by subscribing to the equity shares have joined the initial promoters as shareholders of the Exchange. NCDEX is the only commodity exchange in the country promoted by National level institutions.

Commodity Derivatives
Futures contracts in pepper, turmeric, gur (jaggery), hessian (jute fabric), jute sacking, castor seed, potato, coffee, cotton, and soybean and its derivatives are traded in 18 commodity exchanges located in various parts of the country. Futures trading in other edible oils, oilseeds and oil cakes have been permitted. Trading in futures in the new commodities, especially in edible oils, is expected to commence in the near future. The sugar industry is exploring the merits of trading sugar futures contracts. The policy initiatives and the modernization program include extensive training, structuring a reliable clearinghouse, establishment of a system of warehouse receipts, and the thrust towards the establishment of a national commodity exchange. The Government of India has constituted a committee to explore and evaluate issues pertinent to the establishment and funding of the proposed national commodity exchange for the nationwide trading of commodity futures contracts, and the other institutions and institutional processes such as warehousing and clearinghouses. With commodity futures, delivery is best effected using warehouse receipts (which are like dematerialized securities). Warehousing functions have enabled viable exchanges to augment their strengths in contract design and trading. The viability of the national commodity exchange is predicated on the reliability of the warehousing functions. The programme for establishing a system of warehouse receipts is in progress. The Coffee Futures Exchange India (COFEI) has operated a system of warehouse receipts since 1998.

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Top 10 Commodities.
Due to non availability of the recent top list, the top ten commodities futures of the year 2005 during 15-9-09 to 30-9-09 are as follows: (INR 43.84 per USD)
Commodity Guar seed Gold Silver Crude oil Chana (chick peas) Urad (Black Legume) Soy oil Gur (Jaggery: cane sugar) Guar Gum Tur (Lentils) Turnover in $ Millions 4,432.71 4,082.15 3,869.36 3,380.13 2,100.15 624.71 478.28 369.72 345.08 329.35

The figure depicts that the growth for the commodities has high certainty and indicate that the commodities derivative market has a bright future. The volume and value of trade in commodity derivatives could in fact take a quantum jump as bullion, crude oil and other high value commodities being added with each passing day get more actively traded in the coming months. It is also being speculated by market operators that finally the commodity derivatives market would out-pace and overtake the market for stock derivatives.
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Fixed Income Derivatives in India


The fixed income derivative market is a relatively new market in India, with the first interest rate swaps in India being traded in July 1999. These derivatives have seen exponential growth in volumes, an increase in liquidity as evidenced by narrowing in bidoffer spreads, and expansion of the universe of market participants.

Salient features
Banks can offer these derivatives to corporate for hedging underlying genuine exposures Benchmark can be any rate from the domestic money or debt market, or any rate implied in the forward foreign exchange markets, provided that the methodology of calculating the rate is objective, transparent and mutually acceptable There are no restrictions on size or tenor for interest rate swaps, though there are some limits on currency swaps

Banks are allowed to deal without underlying exposure for market making activity (within prudential internal limits).

Usage of fixed Income derivatives


The primary purpose of using the fixed income derivatives is for hedging. However there are variety of purposed to which the derivatives are used. They are as follows: Separation of interest rate risk from the liquidity risk By the usage of this derivatives the corporate can raise money in whichever market where it is easily available (liquidity risk) and and they can manage the interest rate by swapping all or a portion of it.

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Debt Portfolio Management By simply dealing in the swap market rather than in the underlying cash markets, Indian corporate and banks are now able to manage various features of their debt portfolio like the fixedfloating mix, currency mix and portfolio duration. For example, an Indian company can raise all of its debt in fixed rate rupees, and then swap a quarter of it into floating dollar debt. Investment Portfolio Management The flip side of debt portfolio management is investment portfolio management. For e.g., the duration of the investment portfolio of a financial institution can be changed by entering into interest rate swaps. Improve Funding Costs There are a number of Indian companies who have managed to rise cheaper funding by arbitraging between differentials in credit spreads in the bond markets and swap markets. For instance many companies who wish to raise dollar funding can raise in cheap rupee fund and swap it into dollar in the derivatives market.

Products and Benchmarks


Till now swaps are the only type of derivatives where a Indian Rupee can be traded in India. However the following are the three main categories of products, which in turn have different benchmarks on which these are transacted:

Plain Vanilla Interest Rate Swaps


These are the most basic and actively traded instruments in the market. The underlying benchmark in these swaps is linked to funding costs for banks or corporate. The principal benchmarks are:

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Overnight Index Swaps (OIS) This is the most popular and liquid benchmark. This was the first benchmark that was actively used by banks, since it fulfilled a long felt need for them to be able to extend the duration and manage the volatility of their overnight borrowings. As the name implies, the underlying benchmark is the overnight call money rate. The floating benchmark is known as MIBOR, which is a daily fixing done by the National Stock Exchange (NSE) against which the swap is settled.
MITOR Swaps

These are similar to OIS swaps, with the difference being that the underlying overnight floating rupee rate is derived from the USD Fed Funds Rate, rather than being directly derived from the actual call rate in the Indian market. This benchmark is not as popular as the preceding OIS benchmark.
MIFOR

Large number of Indian Corporate now regularly use this benchmark to actively manage the interest rate risk on their debt portfolios, and access funding at better rates. Since India does not have a fully developed term money market, it is derived from USD Libor and the USD/INR Forward Premia, both of which are extremely deep and liquid markets. The perception is that MIFOR might be subject to sudden swings on account of the fact that it is derived from the forex forwards market. This is a misplaced fear, as it is simply the Indian equivalent of USD Libor and the USD Interest Rate Swaps market, and behaves like an interest rate benchmark, not a forex benchmark.

Currency Swaps These are interest rate derivatives whereby Rupee debt held by banks or corporate can be swapped into debt in another currency or vice versa. As expected, the most popular currency for swapping debt is the US Dollar. It is especially useful for companies having raised forex debt who wish to hedge all or part of the foreign

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exchange risk and interest rate risk by swapping into Rupees and companies holding rupee debt who wish to either lower funding costs or diversify the currency mix of their debt portfolios often choose to swap from rupee debt into forex debt. There are also many variants of currency swaps, like coupon swaps and Principal Only swaps (POS) which are popular amongst Indian corporate.

GSec Linked Swaps This category of benchmarks is linked to the Government of Indias borrowing cost that is yields on Government Securities (GSec). These swaps are important as they allow banks and corporate to take views on the relative movements of GOI yields and corporate spreads, without necessarily actually taking positions in the securities themselves. Till now we come across the usage of derivatives. But as usual they also do not stand aside from the various risk. We have read in news papers or magazines that the companies undergoing huge amount of losses in derivatives market. The fact is that when the risk is gone through thoroughly the amount of loss can minimized. Hence it necessary to know about the risk that follows while is trading in derivatives market.

Associated risks while trading in derivatives


Strategic risk It is the risk to earnings or capital arising from adverse business decisions or improper implementation of those decisions. This risk is a function of the compatibility between an organizations strategic goals, the business strategies developed to achieve those goals, the resources deployed in pursuit of these goals, and the quality of implementation. The management of strategic risk involves more than development of the strategic plan. It also focuses on how plans, systems, and implementation affect the value of

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the institution. It includes analyses of external factors affecting the banks strategic direction and analyses of the success of past business strategies.

Reputation Risk Reputation risk is the risk to earnings or capital arising from negative public opinion. This affects the institutions ability to establish new relationships or services, or continue servicing existing relationships. This risk can expose the institution to litigation, financial loss, or damage to its reputation. Reputation risk is present throughout the organization and includes the responsibility to exercise an abundance of caution in dealing with its customers and community. This risk is present in such activities as asset management and agency transactions. Management of reputation risk begins with fostering a know-your-customer culture within the institution. Senior management should adopt a code of conduct that addresses such areas as conflicts of interest, customer confidentiality, sales practices, appropriateness, illegal and improper payments, and insider trading. Management should encourage compliance with policies through employee affirmations, standardized disclosures, and appropriate testing processes. The administration of prompt and consistent disciplinary action against infractions will also help to foster a strong compliance culture. Senior management should continually assess the compatibility of bank activities and employee compensation programs with the code of conduct.

Price Risk Price risk is the risk to earnings or capital arising from changes in the value of portfolios of financial instruments. This risk arises from market-making, dealing, and position-taking activities for interest rate, foreign exchange, equity and commodity markets.

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Interest Rate Risk Interest rate risk applies to Banks and Dealers, those who use derivatives as active position-takers or limited end-users. Interest rate risk is the risk to earnings or capital arising from movements in interest rates. Interest rate risk is the risk to earnings or capital arising from movements in interest rates, from changing relationships among different yield curves affecting bank activities, from changing rate relationships across the spectrum of maturities and from interest-related options embedded in bank products.

Liquidity risk Liquidity risk is the risk to earnings or capital from a banks inability to meet its obligations when they come due, without incurring unacceptable losses. Liquidity risk includes the inability to manage unplanned decreases or changes in funding sources. Liquidity risk also arises from the failure to recognize or address changes in market conditions that affect the ability to liquidate assets quickly and with minimal loss in value.

Foreign exchange risk Foreign exchange risk is the risk to earnings or capital arising from movement of foreign exchange rates. This risk is applicable to cross-border investing and operating activities. Market-making and position-taking in foreign currencies should be captured under price risk. Foreign exchange risk is also known as translation risk. Foreign exchange translation risk arises from holding accrual accounts denominated in foreign currency, including loans, bonds, and deposits.

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Credit risk Credit risk is the risk to earnings or capital of an obligor's failure to meet the terms of any contract with the bank or otherwise to perform as agreed. Credit risk arises from all activities in which success depends on counterparty, issuer, or borrower performance. It arises any time bank funds are extended, committed, invested, or otherwise exposed through actual or implied contractual agreements, whether reflected on or off the balance sheet.

Transaction Risk Transaction risk is the risk to earnings or capital arising from problems with service or product delivery. This risk is a function of internal controls, information systems, employee integrity, and operating processes. Transaction risk exists in all products and services. Derivative activities can pose challenging operational risks because of their complexity and continual evolution. The operations function, which is discussed in a later section, refers to the product support systems and related processes.

Compliance Risk Compliance risk is the risk to earnings or capital arising from violations, or nonconformance with, laws, rules, regulations, prescribed practices, or ethical standards. The risk also arises when the laws or rules governing certain bank products or activities of the banks clients may be ambiguous or untested. Compliance risk exposes the institution to fines, civil money penalties, payment of damages, and the voiding of contracts. Compliance risk can lead to a diminished reputation, reduced franchise value, limited business opportunities, lessened expansion potential, and an inability to enforce contracts.

Despite the various derivatives still a success story in the Indian Market. When there is profit, it will be certainly backed by risk. However it is important to know the contribution of the derivatives in India.
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Derivatives a booming business


The exchanges have made quick business and profits when the national level commodity derivatives exchange was started since 2002. There was a good come back of the commodities future trading in India both in the number of quantity and value of commodities. In the year only 8 commodities were traded, and it rose to 80 commodities by 2004 and today we trade around 180 commodities in the derivatives market. The value of trading in local currency saw a quantum jump from about INR 350 billion in 2001-02 to INR 1.3 Trillion in 2003-04. A comparative data presented below give some facts which states the performance of derivatives market. It is a comparative trading data for three fortnightly periods in March, June and September 2005. (Due to the non availability of recent progress, a bit older has been given). Multi-Commodity Exchange of India Limited, Mumbai recorded $m 3,503.69 during 16th march to 30th march, $m 4974. 76 (16 Jun 05 to 30 Jun 05), $m 11,042.25 (16 Sep 05 to 30 Sep 05).

National Multi-Commodity Exchange of India Limited, Ahmedabad, recorded $m135.64 (16 Mar 05to 31 Mar 05), $m 113.13 (16 Jun 05 to 30 Jun 05), $m106.85 (16 Sep 05 to 30 Sep 05). National Commodity & Derivatives Exchange Limited, Mumbai recorded $m5, 360.45, $m 7,950.49 and $m 10,694.29 during 16 Mar 05to 31 Mar 05, 16 Jun 05 to 30 Jun 05 and 16 Sep 05 to 30 Sep 05 respectively.

The above data shows that the market for the commodity derivatives were more than a double over a six-month period between second half of March 2005 and the second half of September 2005. It also shows that the total commodity futures turnover for the three national level exchanges added up to $21.84 billion for a fortnight in September 2005 or $546 billion for a year.

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Chapter 3

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RESEARCH DESIGN/METHODOLOGY

Sampling design:
The sample selected for the purpose of research is the investors who trade frequently and staff of the Karvy comtrade. The karvy comtrade posses nearly 2000 to 3000 investors, among nearly 800 trade in derivatives. The intra day transactions are carried by nearly 20 people and only 10 people are considered as active customers.

Type of sampling
Convenience sampling which is a type of non probability sampling is carried while selection of samples. The selection of investors from the population based on their easy availability and accessibility to the researcher has been taken.

Criteria for selection of samples


Degree of accuracy As the samples selected on the basis of the convenience (samples are selected on their availability) the information collected carries a good wieghtage. The samples are informed that they are under research and they came forward as respondents. Time The time taken for the research is a long time. Under various circumstances the same questions were asked and the responses were not changed. Hence there was no time constraint or the influence of time upon the investors. Prior knowledge The investors were not new to the market. They have seen the ups and down since many years. Hence the prior knowledge of respondents was good.

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Research design
Nature of research design
Experience survey The research can be categorized under the experience survey as it conducted to gain additional knowledge on derivatives market as a lot of important information is not freely available. The handful of secondary data is available on the subject but it is not sufficient to trade in the derivatives market. However at first the objectives of the study was listed and then the secondary data was collected and then it was analyzed, prepared the questionnaire, interaction with company guide, investors which was the primary data collected. After the collection of the primary data, compared the primary data with secondary data and the evaluation of the primary data is carried out to know the reliability and accuracy of the data collected. However the suggestions from faculty guide has been taken and prepared the research report

Questionnaire design
(The questionnaire is enclosed under the section Annexure) Probing was made when felt necessary. The following are decision taken to collect the information required Required information: The research objectives were clear before conducting the research. While framing questionnaire it was ensured that the questions are designed to draw information that will fulfill research objectives.

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Target respondents Before conducting research it was decided that the target respondents to be the frequent investors or speculators as they possess more knowledge about trading. This was a crucial step because target respondents becomes important as the task of developing a questionnaire that will be suitable to all cross sectional groups of a diversified investors. Data that was gathered In short, the common information collected from the investors who stands of the opinion that the require of investment is more in currency market and commodity market. The loss incurred or the profit earned is huge amount. A small changes in the value of gold or currencies subject huge loss. Hence the risk is more in options of derivatives market under gold or currency. Many investors show less interest to trade in futures and even on commodities as such. Sources from which the data was collected Both the primary data and secondary data are the sources of data collection. Through the primary data information regarding investors attitude towards the investment in derivatives market is studied and through the secondary data the details
of derivatives market is collected.

Data collection

Time of data collection The time for the collection of secondary information around 15 days and for the primary data 45 days

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Field condition during the data collection The market was showing a positive response and the investors were showing keen interest in investment. The affect of recession was not in light as many companies showed better profits. Moreover there was hike in the prices of commodities as well.

Human resource in the research One person to conduct the research under the guidance of the company guide and faculty guide

Training We were well trained during our SIP as it was just like a research. The faculty guide and company guide are trained as per the institution and company norms respectively.

Data analysis

Data handling The secondary data collected are screened and then the primary data has been collected. It was important to acquire knowledge on the derivatives at first and then follow the primary research. The data collected are not mismanaged and are true information as they are collected from the popular sources. The investors are of speculative in nature who posses good knowledge about the market.

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Ground work A clear ground work has been done to pursue the research as the objectives were clear. On the basis of the objectives the secondary data were collected. Contacting the company guide and investors was a major ground work in the research. The permission to conduct the research was taken from the college and company.

Limitations
Various sites have been referred to collect the secondary data. But some sites provided wrong data, the genuine of the data was not good. The books referred failed to provide complete details and hence it made to refer more books and web sites. The investors have good knowledge about trading but they lack the theoretical knowledge. They were speculative in nature and they had good knowledge on the time of changes in the prices. It is assumed that as the market was positive and hence they were showing keen interest in trading. But the same sort of attitude may not be hoped when the market performance is not up to the mark.

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Chapter 4

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RESULTS AND ANALYSIS


The very big myth in common people is that they perceive the derivative market is small. But the derivative market in India are about Rs. 11 trillion worth per annum. The future market is 5 20 times that of the spot market. The following table depicts the following:

Market

Annual Physical Trade 3 times multiple 5 times (Rs . Cr) (Rs in Cr) multiple (Rs in Cr) 40000 60000 500000 500000 1100000 4400 120000 180000 1500000 1500000 3300000 13200 200000 300000 2500000 2500000 5500000 22000

Bullion Metals Agriculture Energy Total Per day

6000000 5000000 4000000 3000000 2000000 1000000 0 Annual Physical Trade (Rs . Cr) 3 times multiple (Rs in Cr)

5 times multiple (Rs in Cr)

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Information collected through research

Steps to Trading

Step 2
Open an account with the broker Deposit the initial margin Broker process the documentation to HQ and they give a code Code and account will be passed on to regional office
Investor can trade on his account Pay the assigned commission to the broker

Step 1

Step 3

The investor who likes to trade in derivatives market has to open an account with the broker. The Karvy comtrade ltd, charges Rs 2000 to open an I zone account from which the investor can trade in both equity market and derivatives market. After opening the account by submitting his documents, it will be forwarded to the Head Quarters of Karvy comtrade ltd, which is located in Hyderabad. It analysis the document and his account. The initial margin is fixed which is 5% to 10% of the contract value. Code will be given on the account for the accessability of trading for the investor. The investor has to trade on this code, where the commission charges apply on code basis. The code will be forwarded to regional office. The investor can trade after the completion of the above process. When a contract takes place he has give 0.05% commission to Karvy comtrade ltd.
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Safety measures

Trade only through registered Members. In the interest of our own safety, it is important to trade only through registered members since the commodity exchanges have jurisdiction over them in terms of their own rules, bye laws, etc and can therefore, play a role in resolving investor grievances or even take action against the members if necessary. The exchange has no jurisdiction over entities who are not their members.

Be familiar with FMC guidelines and rules, regulations, byelaws, circulars, etc. of MCX. Be familiar with FMC guidelines and rules, bye laws, etc. of the exchange to have an adequate understanding of the legal framework under which the commodity futures are traded. This would be useful in terms of giving you a better understanding of the procedures relating to trading, clearing and settlement, your rights as investor, etc.

Take an informed decision Be sure while taking an informed decision. Read the product note available on the exchange website to understand the commodity specifications. Keep track of Government policy announcements such as the Minimum Support Price, Export/Import policy, etc, which have a significant impact on the prices of commodities. Also keep track of exchange announcements made through circulars regarding the methodology of computation of due date rates, launch of new contracts, etc. Understand the commodity thoroughly. Study historical and seasonal price movements of the commodity.

Understand the Delivery and Settlement Procedure. Thoroughly understand the delivery and settlement procedure which differs from commodity to commodity in terms of quality implications, place of delivery, options, penalties, margins, etc. This information is given in the product note available on the website. Understanding of delivery would help in avoiding rejection of your delivery.

Understand and Comply with Taxation and other relevant laws.

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Before initiating a trade, ascertain whether the price of the commodity is inclusive or exclusive of various taxes applicable at the delivery centre at the given point of time.

Be aware of implications of various taxes such as Sales tax, Service tax, VAT, etc. Make sure that you understand and comply with accounting standards for derivatives.

Pay all applicable margins. Collect / pay mark-to-market margins on a daily basis. Pay all the applicable margins on your futures position to the member. Also, collect or pay (as the case may be) mark-to-market margins from/to the member which are required to be settled on a daily basis.

Insist on documentation with the member such as Member Client agreement, and Know Your Client.

Enter into an agreement with the member since that would ensure that you have recourse to all the investor protection mechanisms of the exchange. Co-operate with the member in filling up the 'Know Your Client form. This form has been devised to ensure that a member knows all his clients properly, and you are thus protected from the risk which may arise out of a member having unsuitable clients. Only clients with pan numbers are allowed to trade on commodity exchanges.

Read and understand the Risk Disclosure Document. The Risk Disclosure Document provides valuable insight into the risk associated with futures trading. It is therefore, in your interest to carefully read and understand this document.

Insist on signed Contract Notes containing all relevant information such as Member Registration Number, Order Details, Trade Rate, Quantity, etc.

Insist on signed contract notes with all the relevant information for all your trades. The contract note is a proof of the transaction between you and the member and is absolutely essential for you to be able to approach the exchange for redressal of your complaints, availing arbitration mechanisms, etc.

Obtain receipt for collateral deposited with the Members. Take a receipt from your members for collateral deposited with them. Insist on a periodical statement of your ledger account. Monitor your account with the member properly by insisting on a periodical statement of your ledger account.

Close the de-mat account in case of a long absence.


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Structure of Commodity Market

Ministry of Consumer Affairs

FMC

Commodity Exchange

National Exchange

Regional Exchange

NCDEX

MCX

NMCE

NBOT

Other Regional Exchanges

Trading system
The best five buy and sell orders for every contract available for trading are visible to the market and orders are matched based on price time priority logic. Orders can be placed with time conditions and/ or price conditions

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Time related Conditions DAY order- A Day order is valid for the day on which it is entered. If the order is not matched during the day, the order gets cancelled automatically at the end of the trading day. GTC - A Good Till Cancelled (GTC) order is an order that remains in the system until the expiry of the respective contract in which it is entered or until when the same is cancelled by the member. GTD - A Good Till Date (GTD) order is valid till the date specified by the member. After the specified date the unexecuted orders get automatically cancelled by the system. IOC - An Immediate or Cancel (IOC) order allows a member to execute the orders as soon as the same is placed in the market, failing which the order will get cancelled immediately

Price Conditions
Limit Order The order wherein the price is to be specified while placing the same. Market Order The order at the best available price at the time of placing the same.

Trade timings
Monday to Saturday: 9:45 a.m. to 9:59 a.m. Special Session (order cancellation session) is held to cancel the pending orders prior to opening of market Normal Session: Monday through Friday: 10:00 a.m. to 11:30 p.m. (up to 11:55 p.m. on account of day light savings typically between every November and March of the following year) Saturdays: 10:00 a.m. to 2:00 p.m. Agri-commodities are available for futures trading up to 5:00 p.m. whereas non agricommodities (bullions, metals, energy products) are available up to 11:30 pm / 11.55pm.

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Trading Holidays
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 Mahashivratri Id-E-Milad Good Friday / Holi (1 st Day) Ambedkar Jayanti Mahavir Jayanti Maharashtra Day Buddha Purnima Independence Day Ganesh Chathurthi Ramzan Id / Gandhi Jayanti Dasera Diwali (Laxmi Pujan) Diwali ( Bhaubeez) Gurunanak Jayanti Bakri-Id Christmas

The Exchange may alter / change any of the above Holidays, for which a separate circular will be issued in advance.

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Trading related documents


Application for New User ID creation Application for Change of User Name User Id cancellation Application for User ID/ Member ID mapping Increase/ Decrease in Maximum Order Size of trade Increase/ Decrease in Turnover limit Enablement of Pro facility Reset of Member Admin/ User Id password Application for Cancellation of orders Application for Square-off of trades

Trading rules

The Derivatives Trading at BSE takes place through a fully automated screen-based trading platform called DTSS (Derivatives Trading and Settlement System).The DTSS is designed to allow trading on a real-time basis. In addition to generating trades by matching opposite orders, the DTSS also generates various reports for the member participants. Order Matching Rules Order Conditions

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Order Matching Rules Order Matching takes place after order acceptance wherein the system searches for an opposite matching order. If a match is found, a trade is generated. The order against which the trade has been generated is removed from the system. In case the order is not exhausted further matching orders are searched for and trades generated till the order gets exhausted or no more match-able orders are found. If the order is not entirely exhausted, the system retains the order in the pending order book. Matching of the orders is in the priority of price and timestamp. A unique trade-id is generated for each trade and the entire information of the trade is sent to the relevant Members. Order Conditions The derivatives market is order driven i.e. the traders can place only orders in the system. Following are the order types allowed for the derivative products. These order types have characteristics similar to the ones in the cash market. Limit Order An order for buying or selling at a limit price or better, if possible. Any unexecuted portion of the order remains as a pending order till it is matched or its duration expires. An order that becomes a limit order only when the market trades at a specified price. Market Order An order for buying or selling at the best price prevailing in the market at the time of submission of the order. There are two types of Market Orders Partial Fill Rest Kill (PF): execute the available quantity and kill any unexecuted portion.

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Partial Fill Rest Convert (PC): execute the available quantity and convert any unexecuted portion into a limit order at the traded price. All orders have the following attributes Order Type (Limit / Market PF/Market PC/ Stop Loss) Asset Code, Product Type, Maturity, Call/Put and Strike Price Buy/Sell Indicator Order Quantity Price Client Type (Propritory / Institutional / Normal) Client Code Order Retention Type (GFD / GTD / GTC) Good For Day (GFD) - The lifetime of the order is that trading session Good Till Date (GTD) - The life of the order is till the number of days as specified by the Order Retention Period. Good Till Cancelled (GTC) - The order if not traded will remain in the system till it is cancelled or the series expires, whichever is earlier. Order Retention Period (in calendar days) : This field is enabled only if the value of the previous attribute is GTD. It specifies the number of days the order is to be retained. Protection Points Protection Points : This is a field relevant in Market Orders and Stop Loss orders. The value enterable will be in absolute underlying points and specifies the band from the touchline price or the trigger price within which the market order or the stop loss order respectively can be traded.

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Risk Reducing Orders (Y/N) When a Member's collateral falls below 50 lacs, he will be allowed to put only risk reducing orders and will not be allowed to take any fresh positions. It is not essentially a type of order but a mode into which the Member is put into when he violates his collateral limit. A Member who has entered the risk-reducing mode will be allowed to put only one risk reducing order at a time

National Commodity Exchanges and Regional Commodity Exchanges


Demutualization has gathered pace around the world and Indian commodity exchanges are also looking into it. Existing single and regional commodity exchanges have realized the possible threat that the national level exchange may pose on their future. Given the experience of the regional stock exchanges in India, commodity exchanges are becoming proactive to counter such a threat. Commodity exchanges may not face the threat of extinction because of the following reasons. (1) Commodity exchanges are trading in futures contracts on those commodities, which have some regional relevance. It is not going to be as easy as a share of a company to get listed in a different exchange. (2) Delivery of commodity is a physical activity; delivery of shares is an electronic activity (3) Commodity exchange members are stakeholders in those commodities where in stock exchange members were never the owners of the stock to control where the stock should get traded.

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(4) Importance of commodity exchanges are linked to the stakeholders of that particular commodity wherein success of a stock exchange is more on transparency and low transaction cost. Above reasons are possibilities; national level exchanges could encourage the existing commodity exchanges and their members to the national stream. Such exchanges and members are of relevance to the Indian economy as a whole and for the success of commodity futures in particular.

Member of derivative segment in BSE


Steps to become a member of derivative segment in BSE

Fill the derivatives membership form available at BSE India website

Contact Relationship Managers (BDM Department)

Choose the type of Membership

The applications forms duly filled along with the required documents should be submitted to the Membership Services & Development

SEBI's approval

Applications approved by BSE Committee of Executives will be sent to SEBI for approval and registration

BSE Committee of Executives may call you for a personal interview

Application will be placed before the BSE Committee of Executives

After receipt of SEBI registration, applicants account will be debited by Rs. 50,000.00 in case of Clearing Membership

For Commencement of Business in the Derivatives Segment, please contact Relationship Managers (BDM Department)

START TRADING IN DERIVATIVES

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Types of Memberships in the BSE Derivatives Segment

PROFESSIONAL CLEARING MEMBER (PCM) /CUSTODIAL CLEARING MEMBER (CU) TRADING-CUMCLEARING MEMBER(TCM) LIMITED TRADING MEMBER(LTM)

TRADING MEMBER (TM)

Types of membership

SELF CLEARING MEMBER(SCM)

Trading Member A Trading Member should be an existing Member of BSE cash segment. A Trading Member has only trading rights but no clearing rights. He has to associate with a Clearing Member to clear his trades.

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Trading-Cum-Clearing Member

A Trading-cum-Clearing Member should be an existing Member of BSE cash segment. A TCM can trade and clear his trades. In addition, he can also clear the trades of his associate Trading Members.

Professional Clearing Member / Custodial Clearing Member: A Professional Clearing Member need not be a Member of BSE cash segment. A PCM has no trading rights and has only clearing rights i.e. he just clears the trades of his associate Trading Members & institutional clients. Limited Trading Member

A Limited Trading Member need not be a Member of BSE cash segment. A LTM has only trading rights and no clearing rights. He has to associate with a Clearing Member has to clear his trades.

Self Clearing Member A Self Clearing Member should be an existing Member of the BSE cash segment. An SCM can clear and settle trades on his own account or on account of his client only and not for any other Trading Member.

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FINANCIAL REQUIREMENT AND FEE CHART FOR MEMBERS OF BSE DERIVATIVES SEGMENT

Sl No

Particulars

PCM / CCM / TCM / SCM

TM

LTM

Members of other Stock Exchanges whose Clearing member is a subsidiary Company of a Regional Exchange

Others

Net Worth

300(PCM / TCM) 100 (SCM)

25

10

25

Security Deposit Interest Free Cash Cash/Cash Equivalents (#) Approved Securities Total 2.5 50 _ 0.50 2.5 7.5 _ 0.25 2.5 7.5 _ 0.25 2.5 7.5 _ 0.25 2.5 2.5 2.5 2.5 2.5 2.5 2.5

3 4 5

Processing Fees Annual Charges (*) One Time Charges Exchange Fee (Refundable Deposit)

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Regulators of Derivatives Market in India


Just as SEBI regulates the stock exchanges, the derivatives market are regulated by the FMC (Forward Market Commission). The FCM works under the purview of the Ministry of Food, Agriculture and Public Distribution

The commodities on which futures trading takes place


Almost all commodities known to us are traded in the derivatives market. However there are 180 commodities are traded in this market. They have categorized as follows, only some important commodities traded are taken into consideration. Bullion Oil seeds and Gold and Silver oil Castor seeds, soya beans, castor oil, refined soya oil, soyameal, RBD palmolein, crude palm oil, ground nut oil, mustard seed oil, cotton seed oil, cotton seed oilcake, cotton seed, menthe oil.

Spices Metals

Pepper, red chilly, jeera, turmeric, cardamom, coriander Steel long, steel flat, copper, nickel, tin, steel ingots, zinc, aluminium

Fibre Pulses Cereals Energy Others

Kapas, long staple cotton, medium staple cotton Chana, urad, yellow peas, tur, masur Rice, basmati rice, wheat, maize, sarbati rice. Crude oil, furnace oil, natural gas, heating oil Rubber, guar seed, guargum, cashew, cashew kernel, sugar, gur, coffee, silk

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Interpretation of futures price quotations


Open High Low Settle Change Life time High Dec Mar May July Sep Dec 250 230 220 240 230 260 255 233 224 243 234 265 248 223 217 236 229 254 252 232 223 243 225 255 2 2 3 3 -5 -3 265 243 233 249 240 270 low 245 220 215 230 225 250 Open interest 11000 23000 12330 3600 1245 5688

The first column gives the maturity of the contract that is the month in which the contract will expire. The second column, OPEN denotes the price for the first trade on that particular trading day. The third and the fourth column HIGH and LOW denotes the highest and lowes price at which a particular contract traded on that day. The fifth column SETTLE stands for the settlement price. It is determined by the settlement committee by using a formula which considers the prices at which trading took place during the last few minutes of the closing time. The sixth column CHANGE represents the difference between todays settlement price and yesterdays settlement price. It can be positive or negative. The HIGH and the LOW in the seventh column denotes the highest and the lowest ever price at which the contract was traded till date. The last column OPEN INTEREST denotes the cumulative number of contracts that are due to delivery. In other words it is the number of futures contract that has to be settled on or before expiry date.

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Turnover in financial market and commodity market


Market segments 2002-03 2003-04 2004-05 (Rs in (Rs in (Rs in crores) crores) crores) 1,544,376 2,518,322 2,827,872 658,035 1,374,405 1,057,854 617,989 439,865 316,551 314,073 2,478 NA 2,318,531 3,745,507 3,230,002 1,099,534 2,130,468 515,505 503,053 12,452 130,215 3,867,936 4,160,702 3,641,672 1,147,027 2,494,645 519,030 499,503 19,527 500,000

Government Securities Market Forex Market Total Stock Market Turnover (I+ II) National Stock Exchange (a+b) a)Cash b)Derivatives Bombay Stock Exchange (a+b) a)Cash b)Derivatives Commodities Market

Source : Ankur Rajoria, Student (Batch-2006-SEM-III), ICFAI Business School, ICFAI House, Nr. GNFC Tower, S.G. Highway, Bodakdev, Ahmedabad-380 054 E-mail: ankurrajoria04@yahoo.co.in / ankur.rajoria@gmail.com

Leading commodity exchange of the world


Some of the leading exchanges of the world are New York Mercantile Exchange (NYMEX), London Metal Exchange (LME) Chicago Board of Trade (CBOT).

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Leading commodity markets of India


The government has now allowed national commodity exchanges, similar to the BSE & NSE, to come up and let them deal in commodity derivatives in an electronic trading environment. These exchanges are expected to offer a nation-wide anonymous, order driven, screen based trading system for trading. The Forward Markets Commission (FMC) will regulate these exchanges. Consequently four commodity exchanges have been approved to commence business in this regard. They are:

Multi Commodity Exchange (MCX) located at Mumbai. National Commodity and Derivatives Exchange Ltd (NCDEX) located at Mumbai. National Board of Trade (NBOT) located at Indore. National Multi Commodity Exchange (NMCE) located at Ahmedabad.

Derivatives - Governing / Clearing Council GOVERNING COUNCIL


Non-Executive Chairman - Public Representative - Mr. Jagdish Kapoor Managing Director & Chief Executive Officer - Mr. Madhu Kannan Chief Operating Officer - Mr. M. L. Soneji

CLEARING COUNCIL
Non-Executive Chairman - Public Representative - Mr. Jagdish Kapoor Managing Director & Chief Executive Officer - Mr. Madhu Kannan Chief Operating Officer - Mr. M. L. Soneji

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Chapter 5

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DISCUSSION OF IMPLICATIONS
It is important to note that GOLD is traded more in the derivatives market. Some details about it is provided. Gold is a unique asset based on few basic characteristics. First, it is primarily a monetary asset, and partly a commodity. The distinction between gold and commodities is important. Gold has maintained its value in after-inflation terms over the long run, while commodities have declined.

Role of gold in derivatives market


Timeless and Very Timely Investment For thousands of years, gold has been prized for its rarity, its beauty, and above all, for its unique characteristics as a store of value. Nations may rise and fall, currencies come and go, but gold endures. In todays uncertain climate, many investors turn to gold because it is an important and secure asset that can be tapped at any time, under virtually any circumstances. But there is another side to gold that is equally important, and that is its day-to-day performance as a stabilizing influence for investment portfolios. These advantages are currently attracting considerable attention from financial professionals and sophisticated investors worldwide.

Gold is an effective diversifier Diversification helps protect your portfolio against fluctuations in the value of any one-asset class. Gold is an ideal diversifier, because the economic forces that determine the price of gold are different from, and in many cases opposed to, the forces that influence most financial assets.

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Gold is the ideal gift In many cultures, gold serves as a family treasure or a wealth transfer vehicle that is passed on from generation to generation. Gold bullion coins make excellent gifts for birthdays, graduations, weddings, holidays and other occasions. They are appreciated as much for their intrinsic value as for their mystical appeal and beauty. And because gold is available in a wide range of sizes and denominations, you dont need to be wealthy to give the gift of gold.

Gold is highly liquid Gold can be readily bought or sold 24 hours a day, in large denominations and at narrow spreads. This cannot be said of most other investments, including stocks of the worlds largest corporations. Gold is also more liquid than many alternative assets such as venture capital, real estate, and timberland. Gold proved to be the most effective means of raising cash during the 1987 stock market crash, and again during the 1997/98 Asian debt crisis. So holding a portion of your portfolio in gold can be invaluable in moments when cash is essential, whether for margin calls or other needs.

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Top Gold Demanding Nations


COUNTRIES 1996 India USA China SE Asia Saudi Turkey 506.98 331.56 374.48 329.69 184.75 153.03 1997 736.84 362.04 406.83 204.04 199.06 201.86 1998 1999 2000 855.34 387.55 329.38 267.18 221.14 207.15

814.9 838.86 428.3 459.71 314.5 343.38 51.63 265.62 208.4 199.37 172 139.03

Gold Demand in Key Markets Worldwide


Saudi 5% SE Asia 8% COUNTRIES 51% Turkey 4%

China 10% USA 9%

India 13%

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Recent Developments in India


World Gold Council (WGC) has estimated that the annual Indian demand for the precious metal in recent years has been in excess of 800 tons. Most of it appears to be meant for jewellery fabrication, and the rest, estimated at 10 to 15 percent, is possibly meant to meet demand on account of investment and industrial processes. A major step in the development of gold markets in India was the authorization in July 1997 by the RBI to commercial banks to import gold for sale or loan to jewellers and exporters. Initially, 7 banks were selected for this purpose on the basis of certain specified criteria like minimum capital adequacy, profitability, risk management expertise, previous experience in this area, etc. The number of banks later went upto 18. On a review, since five banks had not evinced adequate interest in this business in terms of activity, the RBI did not find it appropriate to renew their licences for this purpose. At present, 13 banks are active in the import of gold. The quantum of gold imported through these banks has been in the range of 500 tons per year. Import of gold by banks authorized by the RBI has succeeded to a large extent in curbing illegal operations in gold and in foreign exchange markets. It has also resulted in reducing the disparity between international and domestic prices of gold from 57 per cent during 1986 to 1991 to 8.5 percent in 2001. The import duty on gold, which was Rs.220 per ten grams up to January 1999, was increased toRs.400 per ten grams, and with effect from April 2001 has been reduced to Rs.250 per ten grams. The estimates of duty realized from gold imports indicate an annual amount varying from about Rs. 1,000 to Rs. 2,000 crore per annum since 1997. Even though the country consumes more than 800 tons of the metal every year, the system of assaying and hallmarking has not gained the desired importance. The low quality of gold jewels being sold in the country and the resultant losses being incurred by the consumers are being recognized now. Recent surveys conducted

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by the Bureau of Indian Standards (BIS) jointly with Central Consumer Protection Council in 5 major cities reveal that more than 80 per cent of the jewels being sold in the market were of lower purity than claimed and charged for. In some cases, the gold articles sold were 38.6 per cent short in purity in monetary terms. The low purity results in a loss of around 16 per cent to gold jewels. In the recent past, RBI has been actively pursuing the issue of upgrading the quality of trade and products through a system of assaying and hallmarking with Government of India and BIS. The major objectives of introducing a proper assaying and hallmarking system in the country are enabling consumer protection, developing export competitiveness of the gold jewels industry, introducing gold based financial products, which will help in mopping up the vast dormant gold resources with the domestic sector and developing India into a leading gold market centre in the world. The Government of India announced the Gold Deposit Scheme in 1999 and RBI issued guidelines to the banks intending to launch the scheme in October 1999. Five banks have launched their schemes under the guidelines and the quantum of gold mobilized so far has been about 7 tonnes. Unfortunately, the scheme has not evoked the expected response. A number of reasons can be cited for the low response, prominent among them being depositors losing the making charges spent on jewels (as the banks would convert them into primary form before accepting as deposits), the low carat of jewels, low rate of return on deposit (as seen by the depositors) and the absence of any amnesty.

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However numerous data were covered on the study was covered under the study of the derivatives market in India. Howver the clearing and settlement of the futures and options have to seen. They are as follows;

Clearing and settlement of Futures


Clearing mechanism in NSE The open position of CM is calculated by averaging of the open position of all the Trading Members clearing through them. A TMs open position is calculated by adding up his proprietary open positions and clients open positions. The proprietary open position is calculated on net basis and client positions will be calculated on gross basis.

Settlement Mechanism
The Nifty Index Futures and options contracts are cash settled. The CM are required to open bank account specified by NSCCL. The open positions in the index futures contracts are marked to market at the settlement priceof the contract at the end of each trading day. The members who have a loss position should pay the loss amount to NSCCL which is then transferred to the members who have made profits. This is known as daily market to market settlement. The closing price of index futures contract which is computed by taking the weighted average of the prices of the daily settlement price. On the expiry of the futures contract, NSCCL marks the open position of CM to the final settlement price and the resulting profit or loss is settled in cash

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Settlement of Options Contracts


Settlement of Index Options Contract In the index option contract the premium has to be paid or received is calculated for each CM after netting the positions at the end of each day. The CM who has to pay the premium has to pay to NSCCL and this is adjusted with those who have to receive the premium. This is known as daily premium settlement. On the expiry day of the options contract, NSCCL will determine the outstanding in the money contracts based on the final settlement price and resulting profit or loss will be settled in cash. The final settlement price is the closing value of the underlying index price on the expiration day of the contract. The final settlement profit or loss will be the difference between the stock price and the final settlement price of the relevant index option contract. Final settlement profit or loss amount is credited or debited to the relevant CMs clearing bank account on the day next the expiry day.

Settlement of Options Contract on Individual Securities The premium to be paid or received is netted across all option contracts on individual securities at the client level to determine the net premium payable or receivable at the end of each day. The settlement procedure is similar to that of the index option contracts. Interim exercise settlement price is the clearing price of the underlying security on the exercise day. The settlement value is the difference between the strike price and the exercise settlement price of the option contract. The exercise settlement value is debited or credited to the CMs clearing bank account on the third day of the exercise day.

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However besides the second largest populated country India is not seen in top list of commodity exchange. The main reason is that lack of knowledge and many people are risk averse. The commodities are traded world wide but the farmers are not interested to trade in the derivatives market. There is lack of motivation for our farmers to trade in derivatives. Apart from these the investors tend to invest in equities rather than derivatives. Hence Indian Derivatives market is not performing up to the mark. Apart from it is should be noted that the brokers receive message from the market very fastly. So they can guide the investors to earn better profits. The online traders do not get such information and may end up by huge losses.

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Chapter 6

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FINDINGS
The research has helped to gain knowledge over various aspects in the derivatives market. Various changes has been seen in the derivatives market. The Indian market is performing well in these days. The stock exchange Mumbai created history by launching the first exchange traded financial derivatives product in India, the Sensex Futures. The trading was inaugurated by Prof. J R Varma, member of SEBI and chairman of committee responsible for formulation of risk containment measures for the derivatives market. The first historical trade of 5 contracts of June series was done on June 9, 2000 at 9.55.03 am between M/s Kaji & Maulik Securities Pvt. Ltd and M/s Emkay Share & Stock Brokers Ltd., @ 4755 However the following are the findings of the research

Commodity futures help us to procure or sell the commodities at a price decided month before the actual transaction, so risk on any fluctuation in prices may be a minimized.

By taking positions in the futures one can effectively lock in the price at which he wish to sell his produce.

One can store the underlying commodities in exchange approved warehouse and sell in the futures to realize the future value of the commodity.

Selling commodity in futures contract can give assured demand at the time of harvest.

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One can fix the rate of commodities to purchase in future before itself. For instance if an industrialist want to purchase raw materials and there is a scenario of increase in prices for it, he can fix a price for the raw materials now itself.

One can avoid risk of short supply of raw materials by buying a commodity futures contract by which he is assured of supply of a fixed quantity of materials at a pre decided price at the appointed time.

In the derivatives market, the commodity prices are less volatile than the stock prices and hence it is relatively safer.

As many of the commodities are prices on International standards there is ample scope for manipulation.

There will be a doubt on the physical deliveries of the commodities traded through the exchange among many common people. Of course the exchanges in order to maintain the futures prices in line with spot market, have made provisions of settlement of contracts by physical deliveries.

There is no need of paying the sales tax if the trade is squared off, however the sales tax is applicable only in case of trade which result into delivery.

Options in goods are prohibited under section 19 of the Forward Contracts (Regulation) Act, 1952.

India is a signatory of WTO, as such the producers and traders have opportunities to explore the global market.

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FCI Food Corporation of India is working with storage of commodities where many farmers and traders have considered it as a failure. Futures market will produce their own kind of smoothing between the present and the future. If the future price is high and the present price is low, an arbitrager will buy today and sell in the future, if the future price is low the arbitrageur will buy in the futures market. These activities produce their own "optimal" buffer stocks, smooth prices. They also work very effectively when there is trade in agricultural commodities, arbitrageurs on the futures market will use imports and exports to smooth Indian prices using foreign spot markets.

In case of any dispute with a Member regarding the trades, a client holding a valid contract note has the right to obtain redressal as per the byelaws of the Exchange, including arbitration.

The risk of loss in case of options is high. A small drop of prices could account of large amount of loss to the investors.

Many respondents wish to trade in futures as it is of less risk. But the respondents who can considered as speculators wish to trade in options.

The minimum price needed to trade in commodity market is Rs 15000/-. The investors need to deposit initial margin which is between 5% to 10% of the contract and also pay the broker while opening an account which is around Rs.2000/-. It seems to be burden on the prospective investors who wish to trade in derivatives and hence they step aside.

The experienced investors would like to trade privately that is on line trading and other open the account with brokers and trade.

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The returns from derivatives market are free from the direct influence of the equity and debt market which means that they are capable of being used as effective hedging instruments providing better diversification

The margins in the commodity futures market are less than the F&O section of the equity market.

SUGGESTIONS

The derivatives helps to transfer the risk of the people, the discovery of the anticipated prices are made. Derivatives promote the investment and saving in the long run. Retail investors (including small brokerages trading for themselves) are the major participants in equity derivatives, accounting for about 60% of turnover in October 2005, according to NSE. There were several changes in the trading system due to the globalization in India and hence responding to the changes the several Nation wide Multi Commodity Exchange [NMCE] was set up in the year 2002 by the usage of modern practices such as electronic trading and clearing. The Government of India has constituted a committee to explore and evaluate issues pertinent to the establishment and funding of the proposed national commodity exchange for the nationwide trading of commodity futures contracts, and the other institutions and institutional processes such as warehousing and clearing houses. The charges implied has to be lowered down Market information and market knowledge has to be provided to the common man Motivate the farmers to trade in futures to sell their commodities Enlighten the general traders about the market

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Motivate the general traders to trade in derivatives market The restriction on traders and the brokers have to minimized Tax reduction or exemption is to be provided. Financial assistance may be given to farmers to trade in futures. Government should interfere if in case any manipulations takes place while trading international.

Timely research should be conducted to see the performance of the derivatives market. This enables to overcome the hurdles and assure better performance.

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Chapter 7

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CONCLUSION
In India Derivative Market plays a major role in the development of the Nation. Recently SEBI has started CURRENCY MARKET which can be considered as a milestone achieved. It is said that a lot of risk is associated in the currency market. The research objectives are fulfilled except the placement in the finance sector which is hoped on the positive side. Learning and improving my knowledge in the field of derivatives was the main aim of the study. By pursuing the research it was known about the scope of Derivatives Market, formalities to be accomplished to trade in this market, the wideness of differentiation of this market from the other financial markets, the investors attitude and their speculations, practical trading in this market, the calculations pertaining to derivatives market, the loopholes in this market, the contribution of this market to National Income of India and was to give some suggestions for the improvement of the derivatives market.

By referring the books, internet, magazine I came to know what exactly the derivatives market mean, need for the derivatives market, participants in the Derivatives Market, types of Derivatives, differences between the futures and forward contracts, difference between Futures and Options, history of Derivatives Market in India, factors leading for the Growth of Derivatives, Derivatives Users, Derivatives Instruments Traded in India, Associated risks while trading in derivatives and much more theoretical aspects.

The methodology adopted was right as the investors were of speculative in nature and some were inactive traders. The sampling design, Convenience sampling, Criteria for selection of samples was good. The survey can which can be considered as an experience survey would provide better information for the readers of the report. The Questionnaire design which was drafted on the basis of Required
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DERIVATIVES market- INDIA information, Target respondents can be recognized by the company. The data was

collected both from the primary source and secondary source. The limitations of the methodology is also discussed which enhance my professionalism. In the results and analysis I have given details on the Steps to Trading, Safety measures Structure of Commodity Market, Trading system, Trade timings, Trading related documents, Trading rules, National Commodity Exchanges and Regional Commodity Exchanges, Steps to become a member of derivative segment in BSE, Types of Memberships in the BSE Derivatives Segment, FINANCIAL REQUIREMENT AND FEE CHART FOR MEMBERS OF BSE DERIVATIVES SEGMENT, Trading Holidays, Regulators of derivatives market in India, Interpretation of futures price quotations has been discussed. On seeing the results and analysis it can be understood that the derivatives market is booming and showing better performances year by year. Hence it can said that this report furnishes important information about the derivatives market and will be helpful for the readers, company. The students who wish to improve their knowledge can follow this report. The survey was conducted for a long period comprising of 3 months. The time the survey was conducted the market was positive and hence the attitude of the customers is not a very reliable factor. However the details regarding the derivatives market, the company profile, the members, trading tactics possess better weightage. I would like to conclude the report saying that the derivates market is booming in India and hence it is better to invest or trade in derivatives. Before ending up I would like to thank my Parents, college staff and company staff for providing support throughout the project

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REFERENCES
Introduction to Security Analysis (ICFAI press) Financial Management (ICFAI press) Options, futures and Other derivatives. (Fifth edition, author John C Hull). www.nseindia.com Rediff.com news http://www.eurojournals.com/finance.htm Commodity Derivatives Market in India: Development, Regulation and Future Prospects. Author - Narender L. Ahuja. Pdf file. INDIAN DERIVATIVES MARKETS 1. Author - Asani Sarkar file Pdf. Fixed Income Derivatives. Author unknown, file Pdf.
www.mcxindia.com

www.bseindia.com www.indianmba.com Ankur Rajoria, Student (Batch-2006),ICFAI Business School, Ahmedabad-380 054E-mail: ankurrajoria04@yahoo.co.in / ankur.rajoria@gmail.com

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APPENDICES
Specific Research Questions and why these have been selected and pursued Questions to investors: How would you define a derivative market? How does this market differ from the equity market? What are the formalities you come across to trade in this market? Are you an active trader in the market? (Probing: if yes, how frequently you trade, if no the reason is asked) What are the risk associated while trading in the market? What is the good time to trade in the derivatives market? Do derivatives yield better? (Probing: if yes, how much percentage in an average you earn in it) Do you think derivatives market needs more development or marketing? What are the tactics you follow to be on a safer side? Your suggestions

FORMULAE
Basis
Current cash price Futures price

Naked put writing


A (out of money) 1st method Option Premium * Number of Shares + .20 {(Market Value)( Number of Shares)} Number of Shares (Stock Price Exercise Price) 2nd method Number of Shares * Option Premium + .10 [(Stock Price)( Number of Shares)]
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B (In the money option) Option Premium * Number of Shares + .20 (Stock Price) (Number of Shares)

GLOSSARY
Arbitrageurs They make business to take advantage of a discrepancy between prices in two different markets. Baskets Basket options are options on portfolios of underlying assets. Compliance Risk Compliance risk is the risk to earnings or capital arising from violations, or nonconformance with, laws, rules, regulations, prescribed practices, or ethical standards. Credit risk Credit risk is the risk to earnings or capital of an obligor's failure to meet the terms of any contract with the bank or otherwise to perform as agreed. Currency swaps These entail swapping both principal and interest between the parties, with the cash flows in one direction being in a different currency than those in the opposite direction. Forward contract It is a simple derivative. A forward contract is a customized contract between two entities, where settlement takes place on a specific date in the future at todays pre -agreed price. Futures: A futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. Hedgers It is an act, whereby an investor seeks to protect a position or anticipated position in the spot market by using the opposite position in derivatives. Interest rate swaps These entail swapping only the interest related cash flows between the parties in the same currency.

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Leaps The acronym LEAPS means Long-Term Equity Anticipation Securities. These are options having a maturity of up to three years. Liquidity risk Liquidity risk is the risk to earnings or capital from a banks inability to meet its obligations when they come due, without incurring unacceptable losses. Options: Options are of two types - calls and puts. Calls give the buyer the right but not the obligation to buy a given quantity of the underlying asset, at a given price on or before a given future date. Puts give the buyer the right, but not the obligation to sell a given quantity Over The Counter Market (OTC). It is a telephone and computer linked network of dealers. The trading usually takes place between two financial institutions or between financial institution and one of its corporate clients. Price Risk Price risk is the risk to earnings or capital arising from changes in the value of portfolios of financial instruments. Reputation Risk Reputation risk is the risk to earnings or capital arising from negative public opinion. Speculators These are the trades who trade in the futures or options with a view to make profit from the subsequent price movements. Strategic risk It is the risk to earnings or capital arising from adverse business decisions or improper implementation of those decisions. Swaps Swaps are private agreements between two parties to exchange cash flows in the future according to a prearranged formula. Swaptions Swaptions are options to buy or sell a swap that will become operative at the expiry of the options. Warrants Longer dated options are called warrants and are generally traded over the counter.
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