A Study About Investment & Transition in Indian Derivative Markets.

PROJECT REPORT ON
A Study about investment & transition in Indian

derivative markets.
MASTER OF MANAGEMENT STUDIES (MMS)

UNIVERSITY OF MUMBAI
SUBMITTED TO
Shri. Yashwantrao chavan shikshan prasarak mandals
SINHGAN INSTITUTE OF BUSINESS MANAGEMENT

PLOT NO. 126, MAHADA COLONY, CHANDIVALI, MUMBAI-400072
UNDER THE GUIDANCE OF

SUSHMA VERMA
SUBMITTED BY
MANTHAN JOGANI
ACADEMIC YEAR
2013-2014
1
PROJECT REPORT ON
A Study about investment & transition in Indian derivative

markets.
MASTER OF MANAGEMENT STUDIES
2014
SUBMITTED
IN PARTIAL FULLFILLMENT OF REQUIREMENT FOR THE AWARD OF DEGREE
OF MASTER OF MANAGEMENT STUDIES
BY:
MANTHAN JOGANI
Shri. Yashwantrao chavan shikshan prasarak mandals
SINHGAN INSTITUTE OF BUSINESS MANAGEMENT

PLOT NO. 126, MAHADA COLONY, CHANDIVALI, MUMBAI-400072
UNIVERSITY OF MUMBAI
2014
CERTIFICATE
This is to certify that MR. MANTHAN JOGANI has satisfactorily carried out the project work on the
topicA Study about investment & transition in Indian derivative markets. for the MMS, in
the academic year 2014 & has successfully completed the project work as a part of academic
fulfillment of Masters of Management Studies (M.M.S.) Semester IV examination.
________________________
Name & Signature of Project Guide
_______________
DIRECTOR
SIBM
Place: - ________
Date:-________
DECLARATION
I, MR. MANTHAN JOGANI student of MMS (2014) hereby declare that I have completed the
project on A Study about investment & transition in Indian derivative markets. I further
declare that the information imparted is true and fair to the best of my knowledge.
SIGNATURE
ACKNOWLEDGEMENT
I hereby express my heartiest thanks to all sources who have contributed to the making of this
project. I oblige thanks to all those who have supported, provided their valuable guidance and
helped for the accomplishment of this project. I also extent my hearty thanks to my friends, our
co-ordinator, college teachers and all the well wishers.
I also would like to thanks my project guide SUSHMA VERMA for her guidance and timely
suggestion and the information provided by her on this particular topic.
It is matter of outmost pleasure to express my indebt and deep sense of gratitude to various
person who extended their maximum help to supply the necessary information for the present
thesis, which became available on account of the most selfless cooperation.
Above all its sincere thanks to the UNIVERSITY OF MUMBAI for which this project is given
consideration and was done with outmost seriousness.
EXECUTIVE SUMMARY
One of the interesting developments in financial markets over the last 15 to 20

years has been the growing popularity of derivatives or contingent claims. In many
situations, both hedgers and speculators find it more attractive to trade a derivative
on an asset than to trade the asset itself. Some derivatives are traded on
exchanges. Others are made available to corporate clients by financial institutions
or added to new issues of securities by underwriters.
In this report we have included history of Derivatives. Than we have included

Derivatives Market in India. Than after we have included stock market Derivatives.
In this report we have taken a first look at forward, futures and options contracts. A
forward or futures contract involves an obligation to buy or sell an asset at a certain
time in the future for a certain price. There are two types of options: calls and
puts. A call option gives the holder the right to buy an asset by a certain date for a
certain price. In India the derivatives market has grown very rapidly. There are
mainly three types of traders: hedgers, speculators and arbitrageurs.
In the next section, we have tried to determine the study of Nifty derivatives for the
short term period using the two important indicators namely Open Interest &
Put/Call Ratio. In which Put/Call Ratio analysis proves to be more effective
indicators. Moreover in the analysis of Put/Call Ratio, Combination of Open Interest
& Volume gives more accurate results.
In the last section, we have determined different trading strategies for different
market views i.e. Bullish, Bearish, Range bound & Volatile. On the basis of
investors perceptions they can use suited strategies which will minimize the loss.
There are also some arbitrage strategies prevailing in the market like reversal,
conversion etc. which give fix amount of profit irrespective of market movements
but it is not readily available in the market but one has to grab such Opportunities.
INDEX
Sr.
Pg.
no
1
2
3
Topics
INTRODUCTION TO INDIAN CAPITAL MARKET

INTRODUCTION TO DERIVATIVES
DEVELOPMENT OF DERIVATIVES MARKET IN
INDIA
no.
11
16
RESEARCH METHODOLOGY
19
STOCK MARKET DERIVATIVES
22
INTRODUCTION TO FUTURES
26
INTRODUCTION TO OPTIONS
46
OPEN INTEREST
65
CONCLUSION
70
10
BIBLIOGRAPHY
71
11
GLOSSARY
72
CHAPTER
1
INTRODUCTION TO
CAPITAL
CH. 1 INTRODUCTION TO INDIAN CAPITAL MARKET

CAPITAL MARKET
In todays era investor invest their funds after basic analysis. The basic function of
financial market is to facilitate the transfer of funds from surplus sectors that is
from (lenders) to deficit sectors (borrowers). If we look at the financial cycle then
we can say that households make their savings, which is provided to industrial
sectors, which earn profit and finally this profit will go to the households in the form
of interest and dividend.
Indian Financial System is made-up of 2 types of markets i.e. Money market &
Capital Market. The money market has 2 components-The organized & unorganized.
The organized market is dominated by commercial banks. The other major
participants are RBI, LIC, GIC, UTI, and STCI. The main function of it is that of
borrowing & lending of short term funds. On the other hand unorganized money
market consists of indigenous bankers & money lenders. This sector is continuously
providing finance for trade as well as personal consumption.
Capital Market
Primary Market
Secondary Market
To create funds, new firms use Primary Market by publishing their issues in
different instruments. On the other hand Secondary Market provides base for
trading and securities that have already been issued.
PAST OF SHARE MARKET
Before 1996, all the transactions were done through physical form in security
market. Because of physical form investors were facing so many problems.
At that time the certificates were transferred to the purchase holder. On the other
hand they are now transferred directly in their electronic form which is much more
quicker and safer.
BSE
The Stock Exchange, Mumbai, popularly known as "BSE" was established in 1875
as "The Native Share and Stock Brokers Association". It is the oldest one in
Asia, even older than the Tokyo Stock Exchange, which was established in 1878. It
is a voluntary non-profit making Association of Persons (AOP) and is currently
engaged in the process of converting itself into demutualised and corporate entity.
It has evolved over the years into its present status as the premier Stock Exchange
in the country. It is the first Stock Exchange in the Country to have obtained
permanent recognition in 1956 from the Govt. of India under the Securities
Contracts (Regulation) Act, 1956.
NSE
To obviate the problem, RELATED TO PHYSICAL FORM the NSE introduced screen
based trading system (SBTC) where a member can punch into the computer the
quantities of shares & the prices at which he wants to transact.
10
CAHPTER
2
INTRODUCTION TO
DERIVATIVES
CH 2 INTRODUCTION TO DERIVATIVES
11
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
words, Derivative means a forward, future, option or any other hybrid contract of
pre determined fixed duration, linked for the purpose of contract fulfilment to the
value of a specified real or financial asset or to an index of securities.
Derivatives in mathematics, means a variable derived from another variable.
Similarly in the financial sense, a derivative is a financial product, which has been
derived from a market for another product. Without the underlying product,
derivatives do not have any independent existence in the market.
Derivatives have come into existence because of the existence of risks in business.
Thus derivatives are means of managing risks. The parties managing risks in the
market are known as HEDGERS. Some people/organisations are in the business of
taking risks to earn profits. Such entities represent the SPECULATORS. The third
player in the market, known as the ARBITRAGERS take advantage of the market
mistakes.
The need for a derivatives market
The derivatives market performs a number of economic functions:
1
They help in transferring risks from risk averse people to risk oriented
people.
They help in the discovery of future as well as current prices.
They catalyze entrepreneurial activity.
They increase the volume traded in markets because of participation of riskaverse people in greater numbers.
They increase savings and investment in the long run.
12
Factors driving the growth of financial derivatives

1
Increased volatility in asset prices in financial markets,
Increased integration of national financial markets with the international

markets,
Marked improvement in communication facilities and sharp decline in their

costs,
Development of more sophisticated risk management tools, providing

economic agents a wider choice of risk management strategies, and
Innovations in the derivatives markets, which optimally combine the risks

and returns over a large number of financial assets leading to higher returns,
reduced risk as well as transactions costs as compared to individual financial
assets.
A derivative is a financial instrument whose value depends on the value of other,

more basic underlying variables.
The main instruments under the derivative are:
1. Forward contract
2. Future contract
3. Options
4. Swaps
1. Forward Contract:
13
A forward contract is a particularly simple derivative. It is an agreement to buy or

sell an asset at a certain future time for a certain price. The contract is usually
between two financial institutions or between a financial institution and one of its
corporate clients. It is not normally traded on an exchange.
One of the parties to a forward contract assumes a long position and agrees to buy
the underlying asset on a specified future date for a certain specified price. The
other party assumes a position and agrees to sell the asset on the same date for
the same price. The specified price in a forward contract will be referred to as
delivery price. The forward contract is settled at maturity. The holder of the short
position delivers the asset to the holder of the long position in return for a cash
amount equal to the delivery price. A forward contract is worth zero when it is first
entered into. Later it can have position or negative value, depending on movements
in the price of the asset.
2. Futures Contract:
A futures contract is an agreement between two parties to buy or sell an asset at a

certain time in the future for a certain price. Unlike forward contracts, futures
contract are normally traded on an exchange. To make trading possible, the
exchange specifies certain standardized features of the contract. As the two parties
to the contract do not necessarily know each other, the exchange also provides a
mechanism, which gives the two parties a guarantee that the contract will be
honoured.
One way in which futures contract is different from a forward contract is that an
exact delivery date is not specified. The contract is referred to by its delivery
month, and the exchange specifies the period during the month when delivery must
be made.
3. Options:
An option is a contract, which gives the buyer the right, but not the obligation, to
buy or sell specified quantity of the underlying assets, at a specific (strike) price on
or before a specified time (expiration date). The underlying may be commodities
14
like wheat/rice/ cotton/ gold/ oil/ or financial instruments like equity stocks/ stock
index/ bonds etc.
There are basic two types of options. A call options gives the holder the right to buy
the underlying asset by a certain date for a certain price. A put option gives the
holder the right to sell the underlying asset by a certain date for a certain price.
4. Swaps:
Swaps are private agreements between two companies to exchange cash flows in
the future according to a prearranged formula. They can be regarded as portfolios
of forward contracts.
5. Warrants:
Options generally have lives of upto one year, the majority of options traded on
options exchanges having a maximum maturity of nine months. Longer-dated
options are called warrants and are generally traded over-the-counter.
6. LEAPS:
The acronym LEAPS means Long-Term Equity Anticipation Securities. These are
options having a maturity of up to three years.
7. 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.
Types of Traders in Derivatives Market:

1 Hedgers
Hedgers are interested in reducing a risk that they already face. The purpose of
hedging is to make the outcome more certain. It does not necessarily improve the
outcome.
15
2 Speculators
Whereas hedgers want to eliminate an exposure to movements in the price of assets, speculators wish to take
a position in the market. Either they are betting that a price will go up or they are betting that it will go down.
Speculating using futures market provides an investor with a much higher level of leverage than speculating
using spot market. Options also give extra leverage.
3 Arbitrageurs
They are a third important group of participants in derivatives market. Arbitrage involves locking in a riskless
profit by entering simultaneously into transactions in two or more markets. Arbitrage is sometimes possible
when the futures price of an asset gets out of line with its cash price.
16
CHAPTER
3
DEVELOPMENT OF
DERIVATIVES MARKET IN INDIA
CH 3 DEVELOPMENT OF DERIVATIVES MARKET

IN INDIA
17
The first step towards introduction of derivatives trading in India was the
promulgation of the Securities Laws(Amendment) Ordinance, 1995, which withdrew
the prohibition on options in securities. The market for derivatives, however, did not
take off, as there was no regulatory framework to govern trading of derivatives.
SEBI set up a 24member committee under the Chairmanship of Dr.L.C.Gupta on
November 18, 1996 to develop appropriate regulatory framework for derivatives
trading in India. The committee submitted its report on March 17, 1998 prescribing
necessary preconditions for introduction of derivatives trading in India. The
committee recommended that derivatives should be declared as securities so that
regulatory framework applicable to trading of securities could also govern trading
of securities. SEBI also set up a group in June 1998 under the Chairmanship of
Prof.J.R.Varma, to recommend measures for risk containment in derivatives market
in India. The report, which was submitted in October 1998, worked out the
operational details of margining system, methodology for charging initial margins,
broker net worth, deposit requirement and realtime monitoring requirements.
The Securities Contract Regulation Act (SCRA) was amended in December 1999 to
Include derivatives within the ambit of securities and the regulatory framework
was developed for governing derivatives trading. The act also made it clear that
derivatives shall be legal and valid only if such contracts are traded on a recognized
stock exchange, thus precluding OTC derivatives. The government also rescinded in
March 2000, the threedecade old notification, which prohibited forward trading in
securities.
Derivatives trading commenced in India in June 2000 after SEBI granted the final
approval to this effect in May 2001. SEBI permitted the derivative segments of two
stock exchanges, NSE and BSE, and their clearing house/corporation to commence
trading and settlement in approved derivatives contracts. To begin with, SEBI
approved trading in index futures contracts based on S&P CNX Nifty and BSE
30(Sensex) index. This was followed by approval for trading in options based on
these two indexes and options on individual securities.
The trading in BSE Sensex options commenced on June 4, 2001 and the trading in
options on individual securities commenced in July 2001. Futures contracts on
individual stocks were launched in November 2001. The derivatives trading on NSE
commenced with S&P CNX Nifty Index futures on June 12, 2000. The trading in
index options commenced on June 4, 2001 and trading in options on individual
securities commenced on July 2, 2001. Single stock futures were launched on
November 9, 2001. The index futures and options contract on NSE are based on
S&P CNX.
18
Trading and settlement in derivative contracts is done in accordance with the rules,
byelaws, and regulations of the respective
exchanges and their clearing
house/corporation duly approved by SEBI and notified in the official gazette.
Foreign Institutional Investors (FIIs) are permitted to trade in all Exchange traded
derivative products.
Measures specified by SEBI to protect the rights of investor in

the Derivative Market
1 Investor's money has to be kept separate at all levels and is permitted to be
used only against the liability of the Investor and is not available to the trading
member or clearing member or even any other investor.
2
The Trading Member is required to provide every investor with a risk disclosure
document which will disclose the risks associated with the derivatives trading
so that investors can take a conscious decision to trade in derivatives.
Investor would get the contract note duly time stamped for receipt of the order
and execution of the order. The order will be executed with the identity of the
client and without client ID order will not be accepted by the system. The
investor could also demand the trade confirmation slip with his ID in support of
the contract note. This will protect him from the risk of price favour, if any,
extended by the Member.
In the derivative markets all money paid by the Investor towards margins on
all open positions is kept in trust with the Clearing House/Clearing corporation
and in the event of default of the Trading or Clearing Member the amounts
paid by the client towards margins are segregated and not utilised towards the
default of the member. However, in the event of a default of a member, losses
suffered by the Investor, if any, on settled / closed out position are
compensated from the Investor Protection Fund, as per the rules, bye-laws
and regulations of the derivative segment of the exchanges.
19
CHAPTER
4
RESEARCH
METHODOLOGY
20
CH 4 RESEARCH METHODOLOGY
Objectives
To determine the short term trend of nifty future using the important derivatives
market indicators.
To determine the derivatives trading strategy on the basis of different market
outlooks which will minimize the risk exposure and at the same times will maximize
the profits.
Scope of study
We have done the study of nifty futures only.
We have studied the short term trend of nifty futures for the years.
Data collection sources
Primary No
Secondary
Various stock market web sites

Magazines
Capitaline Neo software
Odin diet Software
Beneficiaries of study
Derivative traders
Hedge funds
Institutional investors
Arbitragers
Hedger
Speculators
Jobbers
Investors
Student
Share broker
Broking houses
21
Limitations
We have taken only Nifty futures for the purpose of study and not any other
stock.
The period of study is only one month derivative contract which may not give
the same result every time.
We have use only two indicators namely Open Interest and Put-Call ratio to
determine the trend of Nifty.
Few of the strategies prescribed in the study may give unlimited loss if the
market goes other way round.
There are many other factors which may lead the Nifty futures apart from the
one which we have studied like technical analysis, Cost of Carry etc.
22
CHAPTER
5
STOCK MARKET
DERVATIVES
23
CH 5 Stock Market Derivatives
Futures & Options
In India, the National Stock Exchange of India Limited (NSE) commenced trading in
derivatives with the launch of index futures on June 12, 2000. The futures contracts
are based on the popular benchmark S&P CNX Nifty Index.
The Exchange introduced trading in Index Options (also based on Nifty) on June 4,
2001. NSE also became the first exchange to launch trading in options on individual
securities from July 2, 2001.
Futures on individual securities were introduced on November 9, 2001. Futures and
Options on individual securities are available on stipulated by SEBI.
24
Instruments available in India

The National stock Exchange (NSE) has the following derivative products:
Index Futures
Products
Underlying
Instrumen
t
S&P CNX Nifty
Type
Trading
Cycle
Index
Options
Futures
Individual
Securities
S&P
Nifty
180 securities
stipulated
by
SEBI
CNX
on
European
Maximum
of
3month trading cycle.
At any point in time,
there will be 3
contracts available :
1) near month,
2) mid month
Options on
Individual
Securities
180
securities
stipulated
by SEBI
American
Same
index
futures
as
Same
index
futures
as
Same as index
futures
Same
index
futures
as
Same as index
futures
Same
index
futures
as
As
stipulated
by NSE (not
less than Rs.2
lacs)
As
stipulated
by NSE (not
less
than
Rs.2 lacs)
&
3) far month
Expiry Day
Contract
Size
Last Thursday of the

expiry month
Permitted lot size is

200
&
multiples
thereof
Same
index
futures
25
as
BSE also offers similar products in the derivatives segment
Minimum contract size
The Standing Committee on Finance, a Parliamentary Committee, at

the time of recommending amendment to Securities Contract
(Regulation) Act, 1956 had recommended that the minimum contract
size of derivative contracts traded in the Indian Markets should be
pegged not below Rs. 2 Lakhs. Based on this recommendation SEBI
has specified that the value of a derivative contract should not be less
than Rs. 2 Lakh at the time of introducing the contract in the market.
Lot size of a contract
Lot size refers to number of underlying securities in one contract.

Additionally, for stock specific derivative contracts SEBI has specified
that the lot size of the underlying individual security should be in
multiples of 100 and fractions, if any, should be rounded of to the next
higher multiple of 100. This requirement of SEBI coupled with the
requirement of minimum contract size forms the basis of arriving at
the lot size of a contract.
For example, if shares of XYZ Ltd are quoted at Rs.1000 each and the
minimum contract size is Rs.2 lacs, then the lot size for that particular
scripts stands to be 200000/1000 = 200 shares i.e. one contract in
XYZ Ltd. covers 200 shares.
26
CHAPTER
6
INTRODUCTION TO
FUTURES
27
CH 6 INTRODUCTION TO FUTURES
Introduction of futures in India
The first derivative product introduced in the Indian securities market was
INDEX FUTURES" in June 2000. In India the STOCK FUTURES were first
introduced on November 9, 2001 how Futures Markets Came About
Many people see pictures of the large crowd of traders standing in a crowd
yelling and signaling with their hands, holding pieces of paper, and writing
frantically. To the outsider, it looks like chaos. But do you really think that
there is in fact chaos going on in the worlds futures pits? Not a chance.
Actually, everyone in the crowd knows exactly what's going on. It is in fact,
another language. Learn the language and you know what is going on.
How does this differ from the way things operated in the 'old days'? Before
there were organized grain and commodity markets, farmers would bring
their harvested crops to major population centers. There they would search
for buyers. There were no storage facilities; and many times the harvest
would rot before buyers were found. Also, because many farmers would
bring their crops to market at the same time, the price of the crops or
commodities would be driven down. There was tremendous supply in relation
to demand. The reverse was true in the spring. Many times there would be a
shortage of crops and commodities and the price would rise sharply. There
was no organized or central marketplace where competitive bidding could
take place.
Initially, the first organized and central marketplaces were created to provide
spot prices for immediate delivery. Shortly thereafter, forward contracts were
28
also established. These 'forwards' were forerunners to the present day

futures contract.
Futures prices and the bid and asked price are continuously transmitted throughout
the world electronically. Regardless of what geographic location the speculator or
hedger is located in, he has the same access to price information as everyone else.
Farmers, bankers, manufacturers, corporations, all have equal access. All they have
to do is call their broker and arrange for the purchase or sale of a futures contract.
The person who takes the opposite side of your trade may be a competitor who has
a different outlook on the future price, it may be a floor broker, or it could be a
speculator.
Types of Futures
Agricultural
The first type of agricultural contract is the grains. This group includes corn,
oats, and wheat. The second type of agricultural contract is the oils and
meal. This group includes soybeans, soya meal, soya oil, sunflower seed oil,
and sunflower seed. The third group of agricultural commodities is livestock.
This group includes live hogs, cattle, and pork bellies. The fourth type of
agricultural commodities is the forest products group. This group includes
lumber and plywood. The fifth group of agricultural commodities is textiles.
This group includes cotton. The last type of agricultural commodity is
foodstuffs. This group includes cocoa, coffee, orange juice, rice, and sugar.
For each of these commodities there are different contract months available.
There are also different grades available. And there are different types of the
commodity available. Contract months generally revolve around the harvest
cycle. More actively traded commodities usually have more contract months
available. Almost every month a new type of contract appears to meet the
needs of a continuously growing corporate and institutional market.
Metallurgical
29
The group of metallurgical commodities includes the metals and the

petroleum's. The metals group includes gold, silver, copper, palladium, and
platinum. The petroleum group includes crude oil, gasoline, heating oil, and
propane. Different contract months, grades, amounts, and types, of these
contracts are available. Almost every month a new type of contract appears
to meet the needs of a continuously growing corporate and institutional
market.
Interest Bearing Assets

This group of futures began trading in 1975. Yet it is this group that has
seen the most explosive growth. This group of futures contracts includes
Treasury Bills, Treasury Bonds, Treasury Notes, Municipal Bonds, and
Eurodollar Deposits. The entire yield curve is represented and it is possible
to trade these instruments with tremendous flexibility as to maturity. It is
also possible to trade contracts with the same maturity but different
expected interest rate differentials. In addition, foreign exchanges also trade
debt instruments. Almost every month a new type of contract appears to
meet the needs of a continuously growing corporate and institutional
market.
Indexes
Today, there are futures on most major indexes. The S&P 500, New York
Stock Exchange Composite, New York Stock Exchange Utilities Index,
Commodities Research Bureau (CRB), Russell 2000, S&P 400 Midcap, Value
Line, and the FT-Se 100 Index (London). Stock index futures are settled in
cash. There is no actual delivery of a good. The only possibility for the trader
to settle his positions is to buy or sell an offsetting position or in cash at
expiration. Almost every month a new type of contract appears to meet the
needs of a continuously growing corporate and institutional market.
30
Foreign Currencies
In the 1970's when freely floating exchange rates were established it

became possible to trade foreign currencies. Most major foreign currencies
are traded. The principal currencies traded are the Canadian dollar, Japanese
yen, British pound, Swiss franc, French franc, Eurodollar, Euromark, and the
Deutsch mark. The forward market in currencies is much larger than the
foreign exchange futures market. Additionally, there is now cross currency
futures that trade. Examples of these are the Deutsch mark/French franc
and the Deutsch mark/yen. Almost every month a new type of contract
appears to meet the needs of a continuously growing corporate and
institutional market.
Miscellaneous
Today, the number and variety of futures contracts that trade increase every
month. Catastrophe insurance, cheddar cheese, cocoa, coffee, sugar, orange
juice, diammonium phosphate (fertilizer), and anhydrous ammonia. Most of
the contracts that trade which are not very liquid, and which one would
never trade, are very useful to certain parties. Generally, these are
corporations, which are using these contracts to hedge positions. They use
them primarily to lock in a pre-determined price for their cost of goods and
offset risk. Because many of these commodities are not liquid, they are poor
selections for the speculator to bet on.
The Indian capital market has grown quite well in the last decade. In the boom
period of 1992 and thereafter, even the common man living in a village was
attracted to the stock market. The stock market was considered a profitable
investment opportunity. Before July 2001, various stock exchanges including the
BSE, NSE, and the Delhi Stock Exchange (DSE), provided carry forward facilities
through the traditional badla system. By means of this system the purchase or sale
of a security was not postponed till a particular future date; instead the system only
provided for the carry forward of a transaction from one settlement period (seven
days) to the next settlement period for the payment of a fee known as badla
charges.
31
In the badla system, due to limited settlement period and no future price discovery,
speculators could manipulate prices, thus causing loss to small investors and
ultimately eroding investors confidence in the capital market. The last eight years
have emphasised the necessity of futures trading in the capital market. In the
absence of an efficient futures market, there was no price discovery; therefore,
prices could be moved in any desired direction. Recent developments in the capital
market culminated in a ban on badla from July 2001.
In the absence of futures trading, certain operators- either on their own or in

collusion with corporate management teams at times manipulated prices in the
secondary market, causing irreparable damage to the growth of the market. The
small and medium investors, who are the backbone of the market, whose savings
come to the market via primary or secondary route shied away, having burnt their
fingers. As the small investor avoided the capital market, the downturn in the
secondary market ultimately affected the primary market because people stopped
investing in shares for fear of loss or liquidity. Introducing futures contracts in
major shares along with index futures helped to revive the capital markets. This did
not only provide liquidity and efficiency to the market, but also helped in future
price discovery
With renewed interest in old economy stocks, activity in the stock futures market
seems to be widening too. While initial trading was restricted to information
technology stocks like Satyam, Infosys or Digital, today punters are slowly building
positions in counters such as SBI, Telco. Tisco, Larsen and Toubro (L&T) and BPCL.
This has increased volumes and depth in the market but has also resulted in the
outstanding position reaching almost Rs 1,000 crore.
Features
Every futures contract is a forward contract. They:
Are entered into through exchange, traded on exchange and clearing

corporation/house provides the settlement guarantee for trades.
Are of standard quantity; standard quality (in case of commodities).
Have standard delivery time and place.
32
Frequently used terms in futures market
Contract Size It specifies the amount of the asset that has to be delivered
under one contract.
Multiplier - It is a pre-determined value, used to arrive at the contract size. It
is the price per index point.
Tick Size - It is the minimum price difference between two quotes of similar
nature.
Contract Month - The month in which the contract will expire.
Open interest - Total outstanding long or short positions in the market at any
specific point in time. As total long positions for market would be equal to total
short positions, for calculation of open Interest, only one side of the contracts
is counted.
Volume - No. of contracts traded during a specific period of time. During a day,
during a week or during a month.
Long position- Outstanding/unsettled purchase position at any point of time.
Short position - Outstanding/ unsettled sales position at any point of time.
Open position - Outstanding/unsettled long or short position at any point of
time.
Physical delivery - Open position at the expiry of the contract is settled through
delivery of the underlying. In futures market, delivery is low.
Cash settlement - Open position at the expiry of the contract is settled in cash.
Index Futures fall in this category. In India we have only cash settlement
system.
Concept of basis in futures market
Basis is defined as the difference between cash and futures prices:

Basis = Cash prices - Future prices.
Basis can be either positive or negative (in Index futures, basis generally is
negative).
Basis may change its sign several times during the life of the contract.
Basis turns to zero at maturity of the futures contract i.e. both cash and
future prices converge at maturity.
Under normal market conditions Futures contracts are priced above the spot
price. This is known as the Contango Market
It is possible for the Futures price to prevail below the spot price. Such a
situation is known as backwardation. This may happen when the cost of
33
carry is negative, or when the underlying asset is in short supply in the cash
market but there is an expectation of increased supply in future example
agricultural products.
India may not be a big deal in international stock markets, but it has pulled it off in
the derivatives segment. Individual stock futures have picked up well in India. In
India the stock futures are the most popular among all the derivatives. They are
similar with the old-age carry-forward system and are very simple. In India, this is
one of the reasons why stock futures are attracting more interest than options.
Sensex Futures
Sensex Futures are futures whose underlying asset is the stock market
index. The index is an indicator of the broad market which reflects stock
market movements. It is one of the oldest and reliable barometers of the
Indian Stock Market; it provides time series data over a fairly long period of
time. The Sensex enables one to effectively gauge stock market movements.
The BSE 30 Sensex was first compiled in 1986 and is the market
capitalization weighted index of 30 scripts which represents 30 large wellestablished and financially sound companies. The Sensex represents a broad
spectrum of companies in a variety of industries. It represents 14 major
industry groups which are large enough to be used for effective hedging.
Given the lower cost structure and the overwhelming popularity of the
Sensex, Sensex futures are expected to garner large volumes. The Sensex is
the first index to be launched by any Stock Exchange in India and has the
the largest social recall attached with it.
The Indian market is witnessing low volumes as it is in its nascent stages of
growth. Retail participation will improve with better understanding and
comfort with the product whereas the market is yet to witness institutional
participation. FIIs have not been able to participate as they are still awaiting
certain clarifications pertaining to margins from the Reserve Bank of India.
34
Why Sensex Futures?
Sensex futures are expected to evolve as the most liquid contract in the
country. This is because Institutional investors in India and abroad, money
managers and small investors use the Sensex when it comes to describing
the mood of the Indian Stock markets. Thus is has been observed that the
Sensex is an effective proxy for the Indian stock markets. Higher liquidity in
the product essentially translates to lower impact cost of trading in Sensex
futures. The arbitrage between the futures and the equity market is further
expected to reduce impact cost. Trading in Stock index futures is likely to be
pre-dominantly retail driven. Internationally, stock index futures are an
institutional product with 60% of the volumes generated from hedging
needs. Immense retail participation to the extent of 80 - 90% is expected in
India based on the following factors:
Stock Index Futures require lower capital adequacy and margin requirements
when compared to margins on carry forward of individual scripts.
Index futures have lower brokerage costs.
Savings in cost is possible through reduced bid-ask spreads where stocks are
traded in packaged forms.
The impact cost will be much lower in case of stock index futures as opposed
to dealing in individual scripts.
The chances of manipulation are much lesser since the market is conditioned
to think in terms of the index and therefore would prefer to trade in stock
index futures.
The Stock index futures are expected to be extremely liquid given the
speculative nature of our markets and the overwhelming retail participation
expected to be fairly high. In the near future, stock index futures will
definitely see incredible volumes in India. It will be a blockbuster product
and is pitched to become the most liquid contract in the world in terms of
number of contracts traded if not in terms of notional value.
The advantage to the equity or cash market is in the fact that they would
become less volatile as most of the speculative activity would shift to stock
index futures. The stock index futures market should ideally have more
35
depth, volumes and act as a stabilizing factor for the cash market. However,
it is to early to base any conclusions on the volume or to form any firm
trend.
Interpreting Futures Data
Derivatives market data is available on the Derivatives Trading and

Settlement System (DTSS) under the head market summary. This terminal is
provided to all members of the Derivatives Segment. Non-members can
have access to the same information via the financial newspapers or from
the Daily Official List of the Stock Exchange.
Theoretical way of Pricing Index Futures
The theoretical way of pricing any Future is to factor in the current price and
holding costs or cost of carry.
In general, the Futures Price = Spot Price + Cost of Carry
Cost of carry is the sum of all costs incurred if a similar position is taken in
cash market and carried to maturity of the futures contract less any revenue
which may result in this period. The costs typically include interest in case of
financial futures (also insurance and storage costs in case of commodity
futures). The revenue may be dividends in case of index futures.
36
Apart from the theoretical value, the actual value may vary depending on
demand and supply of the underlying at present and expectations about the
future. These factors play a much more important role in commodities,
especially perishable commodities than in financial futures.
In general, the Futures price is greater than the spot price. In special cases,
when cost of carry is negative, the Futures price may be lower than Spot
prices.
S&P CNX Nifty Futures

A futures contract is a forward contract, which is traded on an Exchange.
NSE commenced trading in index futures on June 12, 2000. The index
futures contracts are based on the popular market benchmark S&P CNX Nifty
index.
NSE defines the characteristics of the futures contract such as the underlying
index, market lot, and the maturity date of the contract. The futures
contracts are available for trading from introduction to the expiry date.
Contract Specifications
Trading Parameters
Security descriptor
The security descriptor for the S&P CNX Nifty futures contracts is:
Market type : N
Instrument Type : FUTIDX
Underlying : NIFTY
Expiry date : Date of contract expiry
Instrument type represents the instrument i.e. Futures on Index.
Underlying symbol denotes the underlying index which is S&P CNX Nifty
Expiry date identifies the date of expiry of the contract
Underlying Instrument
37
The underlying index is S&P CNX NIFTY.

Trading cycle
S&P CNX Nifty futures contracts have a maximum of 3-month trading cycle - the
near month (one), the next month (two) and the far month (three). A new contract
is introduced on the trading day following the expiry of the near month contract.
The new contract will be introduced for three month duration. This way, at any point
in time, there will be 3 contracts available for trading in the market i.e., one near
month, one mid month and one far month duration respectively.
Expiry day
S&P CNX Nifty futures contracts expire on the last Thursday of the expiry month. If
the last Thursday is a trading holiday, the contracts expire on the previous trading
day.
Trading Parameters
Contract size
The permitted lot size of S&P CNX Nifty futures contracts is 200 and multiples
thereof
Base Prices
Base price of S&P CNX Nifty futures contracts on the first day of trading would be
the previous days closing Nifty value. The base price of the contracts on
subsequent trading days would be the daily settlement price of the futures
contracts.
Price bands
There are no day minimum/maximum price ranges applicable for S&P CNX Nifty
futures contracts. However, in order to prevent erroneous order entry by trading
members, operating ranges are kept at + 10 %. In respect of orders which have
come under price freeze, members would be required to confirm to the Exchange
that there is no inadvertent error in the order entry and that the order is genuine.
On such confirmation the Exchange may approve such order.
38
Futures on Individual Securities

A futures contract is a forward contract, which is traded on an Exchange.
NSE commenced trading in futures on individual securities on November 9,
2001. The futures contracts are available on 31 securities stipulated by the
Securities & Exchange Board of India (SEBI). (Selection criteria for
securities)
NSE defines the characteristics of the futures contract such as the underlying
security, market lot, and the maturity date of the contract. The futures
contracts are available for trading from introduction to the expiry date.
Trading Parameters
Security descriptor
The security descriptor for the futures contracts is:
Market type : N
Instrument Type : FUTSTK
Underlying : NIFTY
Instrument type represents the instrument i.e. Futures on Index.
Underlying symbol denotes the underlying security in the Capital Market (equities)
segment of the Exchange
Futures contracts are available on 31 securities stipulated by the Securities &
Exchange Board of India (SEBI). These securities are traded in the Capital Market
segment of the Exchange.
Trading cycle
Futures contracts have a maximum of 3-month trading cycle - the near month
(one), the next month (two) and the far month (three). New contracts are
39
introduced on the trading day following the expiry of the near month contracts. The
new contracts are introduced for three month duration. This way, at any point in
time, there will be 3 contracts available for trading in the market (for each security)
i.e., one near month, one mid month and one far month duration respectively.
Expiry day
Futures contracts expire on the last Thursday of the expiry month. If the last
Thursday is a trading holiday, the contracts expire on the previous trading day.
Trading Parameters
Contract size
The permitted lot size for the futures contracts on individual securities shall be the
same as the same lot size of options contract for a given underlying security or
such lot size as may be stipulated by the Exchange from time to time.
The value of the option contracts on individual securities may not be less than Rs. 2
lakhs at the time of introduction. The permitted lot size for the options contracts on
individual securities would be in multiples of 100 and fractions if any shall be
rounded off to the next higher multiple of 100.
Base Prices
Base price of futures contracts on the first day of trading (i.e. on introduction)
would be the previous days closing value of the underlying security. The base price
of the contracts on subsequent trading days would be the daily settlement price of
the
futures
contracts.
Price bands
There are no day minimum/maximum price ranges applicable for futures contracts.
However, in order to prevent erroneous order entry by trading members, operating
ranges are kept at + 20 %. In respect of orders which have come under price
freeze, members would be required to confirm to the Exchange that there is no
40
inadvertent error in the order entry and that the order is genuine. On such
confirmation the Exchange may approve such order.
DIFFERENCE BETWEEN FUTURES AND OPTIONS
Although exchange-traded futures and options may act as substitutes for each
other, they have some crucial differences. In futures, the risk exposure and profit
potential are unlimited for both the parties, while in options, risk exposure is
unlimited and profit potential limited for the sellers, and it is the other way round
for the buyers. The maturity of contracts is longer in futures than in options. In
futures, there is no premium paid or received by any party, while in options the
buyers have to pay a premium to the sellers. While Futures impose obligations on
both the parties, options do so only on the sellers. Both the parties have to put in
margins in futures trading, but only the sellers have to do so in options trading.
DIFFERENCE BETWEEN FORWARD AND FUTURES CONTRACTS
DIFFERENCE
FORWARDS
FUTURES
1 Size of contracts
Decided by buyer and

seller
Standardized
contract
41
in
each
Price of contract
Remains
maturity
Mark to market
Not done
Margin
fixed
till
Marked to market every

day
No margin required
5
6
Counterparty risk
No. of contracts in
A year
Margins are to be paid

by both buyers and
sellers
Not present
Present
There
can
be
any
number of contracts
7.
Changes every day
Hedging
These are tailor-made
for a specific date and
quantity,
so
perfect
hedging is possible
No. of contracts in a
year are fixed between
4 and 12.
Hedging is by nearest
month
and
quantity
contracts so it is not
perfect
Highly liquid
8.
Liquidity
No liquidity
Exchange traded
9.
Nature of market
10. Mode of delivery
Over the counter
Specifically
decided.
Most of the contracts
result in delivery.
42
Standardised. Most of
the contracts are cash
settled.
STOCK INDICES IN INDIAN STOCK MARKET
A stock price moves for two possible reasons news about the company or stock
(such as strike in the factory, grant of a major contract or new product launch) or
news about the economy (such as growth in the economy, are related budget
announcement or a war or warlike situation). The job of an index is to capture the
movement of the stock market with reference to news about the economy and the
country. Each stock movement contains the mixture of two elements, stock news
and index news. The most important stock market indices on which index futures
contracts have been introduced are the S & P CNX nifty and the BSE sensex.
Margin Money
The aim of margin money is to minimize the risk of default by either
counter-party. The payment of margin ensures that the risk is limited to the
previous days price movement on each outstanding position. However, even
this exposure is offset by the initial margin holdings. Margin money is like a
security deposit or insurance against a possible Future loss of value.
Different Types of Margin

Yes, there can be different types of margin like Initial Margin, Variation
margin, Maintenance margin and Additional margin.
Objective of Initial Margin

43
The basic aim of Initial margin is to cover the largest potential loss in one
day. Both buyer and seller have to deposit margins. The initial margin is
deposited before the opening of the day of the Futures transaction. Normally
this margin is calculated on the basis of variance observed in daily price of
the underlying (say the index) over a specified historical period (say
immediately preceding 1 year). The margin is kept in a way that it covers
price movements more than 99% of the time. Usually three sigma (standard
deviation) is used for this measurement. This technique is also called value
at risk (or VAR).Based on the volatility of market indices in India, the initial
margin is expected to be around 8-10%.
Variation or Mark-to-Market Margin

All daily losses must be met by depositing of further collateral - known as
variation margin, which is required by the close of business, the following
day. Any profits on the contract are credited to the clients variation margin
account.
Maintenance Margin
Some exchanges work on the system of maintenance margin, which is set at
a level slightly less than initial margin. The margin is required to be
replenished to the level of initial margin, only if the margin level drops below
the maintenance margin limit. For e.g.. If Initial Margin is fixed at 100 and
Maintenance margin is at 80, then the broker is permitted to trade till such
time that the balance in this initial margin account is 80 or more. If it drops
below 80, say it drops to 70, and then a margin of 30 (and not 10) is to be
paid to replenish the levels of initial margin. This concept is not expected to
be used in India.
Additional Margin
In case of sudden higher than expected volatility, additional margin may be
called for by the exchange. This is generally imposed when the exchange
44
fears that the markets have become too volatile and may result in some
crisis, like payments crisis, etc. This is a preemptive move by exchange to
prevent breakdown.
Cross Margining
This is a method of calculating margin after taking into account combined
positions in Futures, options, cash market etc. Hence, the total margin
requirement reduces due to cross-Hedges. This is unlikely to be introduced
in India immediately.
Settlement Mechanism
Futures Contracts on Index or Individual Securities
Daily Mark-to-Market Settlement

The positions in the futures contracts for each member are marked-tomarket to the daily settlement price of the futures contracts at the end of
each trade day.
The profits/ losses are computed as the difference between the trade price
or the previous days settlement price, as the case may be, and the current
days settlement price. The CMs who have suffered a loss are required to pay
the mark-to-market loss amount to NSCCL which is in turning passed on to
the members who have made a profit. This is known as daily mark-tomarket settlement.
Theoretical daily settlement price for unexpired futures contracts, which are
not traded during the last half an hour on a day, is currently the price
computed as per the formula detailed below:
F=S*e
rt
Where:
F = theoretical futures price
45
S = value of the underlying index

r = rate of interest (MIBOR)
t = time to expiration
Rate of interest may be the relevant MIBOR rate or such other rate as may
be specified.
After daily settlement, all the open positions are reset to the daily settlement
price.
CMs are responsible to collect and settle the daily mark to market profits /
losses incurred by the TMs and their clients clearing and settling through
them. The pay-in and pay-out of the mark-to-market settlement is on T+1
days (T = Trade day). The mark to market losses or profits are directly
debited or credited to the CMs clearing bank account.
Final Settlement
On the expiry of the futures contracts, NSCCL marks all positions of a CM to
the final settlement price and the resulting profit / loss is settled in cash.
The final settlement of the futures contracts is similar to the daily settlement
process except for the method of computation of final settlement price. The
final settlement profit / loss is computed as the difference between trade
price or the previous days settlement price, as the case may be, and the
final settlement price of the relevant futures contract.
Final settlement loss/ profit amount is debited/ credited to the relevant CMs
clearing bank account on T+1 day (T= expiry day).
Open positions in futures contracts cease to exist after their expiration day
SETTLEMENT OF INDEX FUTURES CONTRACT
46
Stock index futures transactions are settled by cash delivery. No physical delivery of
stock is given by the short. The long also does not make payment for the full value.
In case of Nifty futures contract, the last trading day is the last Thursday of the
contracts expiring month. The amount is determined by referring to the cash price
at the close of trading in the cash market on the last trading day in the futures
contract. This procedure is generally followed in the case of all indices except the S
& P 500 index. The S & P 500 uses a different settlement procedure. The final
trading day for this contract is always Thursday and all open contracts at that time
are settled as per special opening quotations in the cash market on the following
Friday morning.
47
CHAPTER
7
INTRODUCTION TO
OPTION
48
CH 7 INTRODUCTION TO OPTIONS
As its name signifies, an option is the right to buy or sell a particular asset for a
limited time at a specified rate. These contracts give the buyer a right, but do not
impose an obligation, to buy or sell the specified asset at a set price on or before a
specified date. Today, options are traded not only in commodities, but in all financial
assets such as treasury bills (T-bills), forex, stocks and stock indices.
We will discuss the basics of option contracts- how they work and how they are
priced, stock index options and stock option in India.
An active over the counter (OTC) option market existed in USA for more than a
century under the auspices of the Put and Call Dealers Association. Options were
first traded in an organized exchange in 1973 when Chicago Board Option Exchange
(CBOE) came into existence. The CBOE standardized the call options on 18 common
stocks.
In India, options were traditionally traded on the OTC market with names such as
teji, mandi, teji-mandi, put, call etc. Commodity options were banned by the
forward Contract Regulation Act, 1952, which is still in force. Similarly, options on
securities were also banned in the Securities Contracts (Regulation) Act in 1969.
However, with liberalization and with governments realization of the virtues of
options, options in securities were legally allowed in 1995. Now both NSE and BSE
have started trading in option contracts in their respective indices and also in some
selected scripts. This marked the beginning of options in an organized form in
India. In the forex market, the RBI has allowed certain options to corporate with
forex exposure and to all authorized dealers. Such options are generally traded in
the dollar \ rupee rate. These are basically OTC options. With the ban on badla and
rolling settlement in major scripts, the use of equity options has increased
substantially. These innovative exchange traded instruments provide all possible
opportunities for speculation, hedging and arbitrage. Now let us discuss basics of
options:
49
Four Components to an Option

There are four components to an option. They are: The underlying security,
the type of option (put or call), the strike price, and the expiration date.
Let's take an XYZ November 100-call option as an example. XYZ is the
underlying security. November is the expiration month. 100 is the strike
price (sometimes referred to as the exercise price). And the option is a call
(the holder has the right, not the obligation, to buy 100 shares of XYZ at a
price of 100).
The Parties to an Option
There are two parties to an option. There is the party who buys the option;
and there is the party who sells the option. The party who sells the option is
the writer. The party who writes the option has the obligation to fulfill the
terms of the contract need to it be exercised. This can be done by delivering
to the appropriate broker 100 shares of the underlying security for each
option written.
Types of Option Contracts

The options are of two styles. 1) European option and
2) American option
An American style option is the one, which can be exercised by the buyer on or
before the expiration date, i.e. anytime between the day of purchase of the option
and the day of its expiry. The European kind of option is the one that can be
exercised by the buyer on the expiration day only and not anytime before that.
The options are of two types. 1) Call option and

2) Put option.
50
Call Option
A call option gives the holder/buyer, the right to buy specified quantity of the
underlying asset at the strike price on or before expiration date. The seller however,
has the obligation to sell the underlying asset if the buyer of the call option decides
to exercise his option to buy. One can buy call option when he or she expects the
market to be bullish and sell call option when he or she expects the market to be
bearish.
Example: An investor buys one European call option on Infosys at the strike price of
Rs.3500 at a premium of Rs.100. If the market price of Infosys on the day of expiry
is more than Rs.3500, the option will be exercised. The investor will earn profits
once the share price crosses Rs.3600. Suppose stock price is Rs.3800, the option
will be exercised and the investor will buy 1 share of Infosys from the seller of the
option at Rs.3500 and sell it in the market at Rs.3800 making a profit of Rs.200.
In another scenario, if at the time of expiry stock price falls below Rs.3500 say
suppose it touches Rs.3000, the buyer of the call option will choose not to exercise
his option. In this case the investor loses the premium, paid which shall be the
profit earned by the seller of the call option.
Put Option
A put option gives the buyer the right to sell specified quantity of the underlying
asset at the strike price on or before an expiry date. The seller of the put option
however, has the obligation to buy the underlying asset at the strike price if the
buyer decides to exercise his options to sell. One can buy put option when he or
she expects the market to be bearish and sell put option when he or she expects
the market to be bullish.
Example: An investor buys one European put option on Reliance at the strike price
of Rs.300 at a premium of Rs.25. If the market price of Reliance on the day of
expiry is less than Rs.300, the option will be exercised. The investor will earn profits
once the share price goes below 275. Suppose stock price is Rs.260, the buyer of
51
the put option immediately buys Reliance share in the market @ Rs.260 and
exercises his option selling the Reliance share at Rs.300 to the option writer thus
making a net profit of Rs.15.
In another scenario, if at the time of expiry stock price of Reliance is Rs.320, the
buyer of the put option will choose not to exercise his option. In this case the
investor loses the premium, paid which shall be the profit earned by the seller of
the put option.
In-the-Money, At-the-Money, Out-the-Money
An option is said to be at-the-money, when the options strike price is equal to the
underlying asset price. This is true for both puts and calls.
A call option is said to be in-the-money when the strike price of the option is less
than the underlying asset price. On the other hand, a call option is out-of-themoney when the strike price is greater than the underlying asset price
A put option is in-the-money when the strike price of the option is greater than the
spot price of the underlying asset. A put option is out-the-money when the strike
price is less than the spot price of underlying asset.
Options are said to be deep in-the-money (or deep out-the-money) if exercise price
is at significant variance with the underlying asset price.
52
In-the-money
At-the-money
Out-the-money
CALL OPTION
Strike price < spot price
PUT OPTION
Strike price > spot price
Strike price = spot price
Strike price = spot price
Strike price > spot price
Strike price < spot price
Stock index options

The stock index options are options where the underlying asset is a stock
Index.
For Example: Options on S&P 500 Index/ options on BSE Sensex etc.
Options on individual stocks

Options contracts where the underlying asset is an equity stock, are termed
as options on stocks.
They are mostly American style options cash settled or settled by physical
delivery.
Frequently used terms in options market
Underlying- The specific security/ asset on which an options contract is

based.
Option premium this is the price paid by the buyer to the seller to acquire
the right to buy or sell.
Strike price or exercise price the strike or exercise price of an option is the
specified / pre-determined price of the underlying asset at which the same
can be bought or sold if the option buyer exercises his right to buy/ sell on or
before the expiration day.
Expiration date is the date on which the option expires. On expiration date,
either the option is exercised or it expires worthless.
Exercise date is the date on which the option is actually exercised.
Open interest the total number of options contracts outstanding in the
market at any given point of time.
Option holder is the one who buys an option which can be a call or a put
option.
Option seller/ writer is the one who is obligated to buy or to sell.
Option class all listed options of a particular type(i.e., call or put) on a
particular underlying instrument, e.g., all Sensex Call options (or) all Sensex
put options
53
Option series an option series consists of all the options of a given class
with the same expiration date and strike price. E.g.BSXCMAY3600 is an
option series, which includes all Sensex call options that are traded with
strike price of 3600 and expiry in May.
Option Greeks the option Greeks are the tools that measure the sensitivity
of the option price to the factors like price and volatility of the underlying,
time to expiry etc.
Option Calculator an option calculator is a tool to calculate the price of an
option on the basis of various influencing factors like the price of the
underlying and its volatility, time to expiry, risk free interest rate etc.
Option value
An option premium or the value of the option can be broken into two parts:
1 Intrinsic value and
2 Time value.
The intrinsic value of an option is defined as the amount by which an option

is in-the-money or the immediate exercise value of the option when the
underlying position is marked-to-market.
For a call option: Intrinsic Value = spot price strike price
For a put option: Intrinsic Value = strike price - spot price
The intrinsic value of an option must be a positive number or zero. It can not be
negative.
Time value is the amount option buyers are willing to pay for the possibility that the
option may become profitable prior to expiration due to favourable change in the
price of the underlying. An option loses its time value as its expiration date nears.
At expiration an option is worth only its intrinsic value. Time value cannot be
negative.
54
Factors affecting the value of an option (premium)
There are two types of factors that affect the value of the option premium:
Quantifiable factors:
Underlying stock price

The strike price of the option
The volatility of the underlying stock
The time to expiration
The risk free interest rate.
Non-Quantifiable Factors:
Market participants varying estimates of the underlying assets future

volatility
Individuals varying estimates of future performance of the underlying
asset, based on fundamental or technical analysis.
The effect of supply and demand- both in the options marketplace and
in the market for the underlying asset.
The depth of the market for that option the number of transactions
and the contracts trading volume on any given day.
55
Effect of various factors on option value

As discussed earlier we know that the option price is affected by different factors.
In this section, the effect of various factors is shown in the following table:
Option
Type
Impact on Option Value
Component
of
Option
Value
Call Option
Option Value
move up
also
Intrinsic
Value
Share
price
moves down
Call Option
Option
down
Value
will
move
Intrinsic
Value
Share
moves up
Put Option
Option
down
Value
will
move
Intrinsic
Value
Share
prices
moves down
Put Option
Option Value will move up
Intrinsic
Value
Time to expire is
high
Call Option
Option Value will be high
Time Value
Time to expire is
low
Call Option
Option Value will be low
Time Value
Tim e to expire
is high
Put Option
Time Value
Time to expire is
low
Put Option
Time Value
Volatility is high
Call Option
Time Value
Volatility is low
Call Option
Time Value
Volatility is high
Put Option
Time Value
Volatility is low
Put Option
Time Value
Factor
Share
moves up
price
price
56
will
Margins
When call and put options are purchased, the option price must be paid in full.
Investors are not allowed to buy options on margin. This is because options already
contain substantial leverage. However the option seller needs to maintain funds in a
margin account. This is because the broker and the exchange need to be satisfied
that the investor will not default if the option is exercised. The size of the margin
required depends on the circumstances.
Different pricing models for options

The theoretical option pricing models are used by option traders for calculating the
fair value of an option on the basis of the earlier mentioned influencing factors. An
option pricing model assists the trader in keeping the price of calls and puts in
proper numerical relationship to each other and helping the trader make bids and
offer quickly. The two most popular potion pricing models are
Black Scholes Model which assumes that percentage change in the price of
underlying follows a normal distribution.
Binomial Model which assumes that percentage change in price of the
underlying follows a binomial distribution.
Who decides on the premium paid on options & how is it calculated?
Options premium is not fixed by the Exchange. The fair value/ theoretical price of
an option can be known with the help of pricing models and then depending on
market conditions the price is determined by competitive bids and offers in the
trading environment. An options premium/ price is the sum of intrinsic value and
time value (explained above). If the price of the underlying stock is held constant,
the intrinsic value portion of an option premium will remain constant as well.
Therefore, any change in the price of the option will be entirely due to a change in
the options time value. The time value component of the option premium can
change in response to a change in the volatility of the underlying, the time to
expiry, interest rate fluctuations, dividend payments and to the immediate effect of
supply and demand for both the underlying and its option.
57
Advantages of options
Besides offering flexibility to the buyer in form of right to buy or sell, the major
advantage of options is their versatility. They can be as conservative or as
speculative as ones investment strategy dictates.
Some of the benefits of options are as under:
High leverage as by investing small amount of capital (in form of premium),

one can take exposure in the underlying asset of much greater value.
Pre-known maximum risk for an option buyer.
Large profit potential and limited risk for option buyer.
One can protect his equity portfolio from a decline in the market by way of
buying a protective put wherein on buys puts against an existing stock
position. This option position can supply the insurance needed to overcome
the uncertainty of the marketplace. Hence, by paying a relatively small
premium (compared to the market value of the stock), an investor knows
that no matter how far the stock drops, it can be sold at the strike price of
the put anytime until the put expires.
Risk and gains involved in options

The risk/loss of an option buyer is limited to the premium that he has paid
whereas his gains are unlimited.
The risk of an option writer is unlimited where his gains are limited to the
premiums earned.
When a physical delivery uncovered call is exercised upon, the writer will
have to purchase the underlying asset and his loss will be the excess of the
purchase price over the exercise price of the call reduced by the premium
received for writing the call.
The writer of a put option bears a risk of loss if the value of the underlying
asset declines below the exercise price. The writer of a put bears the risk of a
decline in the price of the underlying a sset potentially to zero.
58
S&P CNX Nifty Options
An option gives a person the right but not the obligation to buy or sell
something. An option is a contract between two parties wherein the buyer
receives a privilege for which he pays a fee (premium) and the seller accepts
an obligation for which he receives a fee. The premium is the price
negotiated and set when the option is bought or sold. A person who buys an
option is said to be long in the option. A person who sells (or writes) an
option is said to be short in the option.
NSE introduced trading in index options on June 4, 2001. The options
contracts are European style and cash settled and are based on the popular
market benchmark S&P CNX Nifty index.
Trading Parameters
Security descriptor
The security descriptor for the S&P CNX Nifty options contracts is:
Market type : N
Instrument Type : OPTIDX
Underlying : NIFTY
Option Type : CE/ PE
Strike Price: Strike price for the contract
Instrument type represents the instrument i.e. Options on Index.
Underlying symbol denotes the underlying index, which is S&P CNX Nifty
Option type identifies whether it is a call or a put option. CE - Call European,
PE - Put European.
59
The underlying index is S&P CNX NIFTY.
Trading cycle
S&P CNX Nifty options contracts have a maximum of 3-month trading cycle the near month (one), the next month (two) and the far month (three). On
expiry of the near month contract, new contracts are introduced at new
strike prices for both call and put options, on the trading day following the
expiry of the near month contract. The new contracts are introduced for
three month duration.
Expiry day
S&P CNX Nifty options contracts expire on the last Thursday of the expiry
month. If the last Thursday is a trading holiday, the contracts expire on the
previous trading day.
Strike Price Intervals
The Exchange provides a minimum of five strike prices for every option type
(i.e. call & put) during the trading month. At any time, there are two
contracts in-the-money (ITM), two contracts out-of-the-money (OTM) and
one contract at-the-money (ATM).
New contracts with new strike prices for existing expiration date are
introduced for trading on the next working day based on the previous day's
close Nifty values, as and when required. In order to decide upon the at-themoney strike price, the Nifty closing value is rounded off to the nearest 10.
The in-the-money strike price and the out-of-the-money strike price are
based on the at-the-money strike price interval.
60
Trading Parameters
Contract size
The permitted lot size of S&P CNX Nifty options contracts is 50 and multiples
thereof
Price bands
There are no day minimum/maximum price ranges applicable for options contracts.
However, in order to prevent erroneous order entry, operating ranges and day
minimum/maximum ranges for options contract are kept at 99% of the base price.
In view of this, members will not be able to place orders at prices which are beyond
99% of the base price. Members desiring to place orders in option contracts beyond
the day min-max range would be required to send a request to the Exchange. The
base prices for option contracts may be modified, at the discretion of the Exchange,
based on the request received from trading members.
Options on Individual Securities

An option gives a person the right but not the obligation to buy or sell
something. An option is a contract between two parties wherein the buyer
receives a privilege for which he pays a fee (premium) and the seller accepts
an obligation for which he receives a fee. The premium is the price
61
negotiated and set when the option is bought or sold. A person who buys an
option is said to be long in the option. A person who sells (or writes) an
option is said to be short in the option.
NSE became the first exchange to launch trading in options on individual
securities. Trading in options on individual securities commenced from July
2, 2001. Option contracts are American style and cash settled and are
available on 31 securities stipulated by the Securities & Exchange Board of
India (SEBI). (Selection criteria for securities)
Trading Parameters
Security descriptor
The security descriptor for the options contracts is:
Market type : N
Instrument Type : OPTSTK
Underlying : Symbol of underlying security
Option Type : CA / PA
Strike Price: Strike price for the contract
Instrument type represents the instrument i.e. Options on individual
securities.
Underlying symbol denotes the underlying security in the Capital Market
(equities) segment of the Exchange
Option type identifies whether it is a call or a put option. CA - Call American,
PA - Put American.
Option contracts are available on 31 securities stipulated by the Securities &
62
Exchange Board of India (SEBI). These securities are traded in the Capital
Market segment of the Exchange.
Trading cycle
Options contracts have a maximum of 3-month trading cycle - the near
month (one), the next month (two) and the far month (three). On expiry of
the near month contract, new contracts are introduced at new strike prices
for both call and put options, on the trading day following the expiry of the
near month contract. The new contracts are introduced for three month
duration.
Expiry day
Options contracts expire on the last Thursday of the expiry month. If the last
Thursday is a trading holiday, the contracts expire on the previous trading
day.
Strike Price Intervals

The Exchange provides a minimum of five strike prices for every option type
(i.e. call & put) during the trading month. At any time, there are two
contracts in-the-money (ITM), two contracts out-of-the-money (OTM) and
one contract at-the-money (ATM).
The strike price interval would be:
Price of Underlying
Strike Price interval (Rs.)
Less than or equal to Rs. 50
2.50
>Rs.50 to < Rs150
> Rs.150 to < Rs.250
10
63
> Rs.250 to < Rs.500
20
> Rs.500 to < Rs.1000
30
> Rs.1000 to < Rs.2500
50
>Rs.2500
100
New contracts with new strike prices for existing expiration date are
introduced for trading on the next working day based on the previous day's
underlying close values, as and when required. In order to decide upon the
at-the-money strike price, the underlying closing value is rounded off to the
nearest strike price interval.
The in-the-money strike price and the out-of-the-money strike price are
based on the at-the-money strike price interval.
Trading Parameters
Contract size
The value of the option contracts on individual securities may not be less
than Rs. 2 lakhs at the time of introduction. The permitted lot size for the
options contracts on individual securities would be in multiples of 100 and
fractions if any, shall be rounded off to the next higher multiple of 100.
Price bands
64
There are no day minimum/maximum price ranges applicable for options contracts.
However, in order to prevent erroneous order entry, operating ranges and day
minimum/maximum ranges for options contracts are kept at 99% of the base price.
In view of this, members will not be able to place orders at prices which are beyond
99% of the base price. Members desiring to place orders in option contracts beyond
the day min-max range would be required to send a request to the Exchange. The
base prices for option contracts may be modified, at the discretion of the Exchange,
based on the request received from trading members.
How does option get settled?

Option is a contract which has a market value like any other tradable commodity.
Once an option is bought there are following alternatives that an option holder has:
One can sell an option of the same series as the one had bought and close
out/square off his/ her position in that option at any time on or before the
expiration.
One can exercise the option on the expiration day in case of European option
or; on or before the expiration day in case of an American option. In case the
option is out of money at the time of expiry, it will expire worthless.
Settlement Mechanism:
Options Contracts on Index or Individual Securities
Daily Premium Settlement

Premium settlement is cash settled and settlement style is premium style.
The premium payable position and premium receivable positions are netted
across all option contracts for each (Clearing Member) CM at the client level
65
to determine the net premium payable or receivable amount, at the end of

each day.
The CMs who have a premium payable position are required to pay the
premium amount to NSCCL which is in turn passed on to the members who
have a premium receivable position. This is known as daily premium
settlement.
CMs are responsible to collect and settle for the premium amounts from the
TMs and their clients clearing and settling through them.
The pay-in and pay-out of the premium settlement is on T+1 days
(T = Trade day). The premium payable amount and premium receivable
amount are directly debited or credited to the CMs clearing bank account.
Interim Exercise Settlement for Options on Individual Securities
Interim exercise settlement for Option contracts on Individual Securities is
effected for valid exercised option positions at in-the-money strike prices, at
the close of the trading hours, on the day of exercise. Valid exercised option
contracts are assigned to short positions in option contracts with the same
series, on a random basis. The interim exercise settlement value is the
difference between the strike price and the settlement price of the relevant
option contract.
Exercise settlement value is debited/ credited to the relevant CMs clearing
bank account on T+3 day (T= exercise date ).
Final Exercise Settlement

Final Exercise settlement is effected for option positions at in-the-money
strike prices existing at the close of trading hours, on the expiration day of
an option contract. Long positions at in-the money strike prices are
automatically assigned to short positions in option contracts with the same
series, on a random basis.
66
For index options contracts, exercise style is European style, while for
options contracts on individual securities, exercise style is American style.
Final Exercise is Automatic on expiry of the option contracts.
Option contracts, which have been exercised, shall be assigned and allocated
to Clearing Members at the client level.
Exercise settlement is cash settled by debiting/ crediting of the clearing
accounts of the relevant Clearing Members with the respective Clearing
Bank.
Final settlement loss/ profit amount for option contracts on Index is debited/
credited to the relevant CMs clearing bank account on T+1 day (T = expiry
day).
Final settlement loss/ profit amount for option contracts on Individual
Securities is debited/ credited to the relevant CMs clearing bank account on
T+3 day (T = expiry day).
Open positions, in option contracts, cease to exist after their expiration day.
The pay-in / pay-out of funds for a CM on a day is the net amount across
settlements and all TMs/ clients, in F&O Segment.
Options on Futures Contracts

Put and call options are being traded on an increasing number of futures contracts.
Trading options on futures allows the speculator to participate in the futures market
and know in advance what the maximum loss on his position will be. The purchase
of a call entitles the option buyer the right, but not the obligation, to purchase a
futures contract at a specified price at any time during the life of the option. The
underlying futures contract and the price are specified. The purchase of a put option
entitles the option buyer the right, not the obligation, to sell a specified futures
contract at a specified price. Keep in mind that the profit realized with an option
strategy is reduced by the option premium. The option's price is determined in the
same fashion that an equity option is determined.
67
CHAPTER
8
OPEN INTEREST
CH 8 OPEN INTEREST
68
Open Interest is the number of open contracts of a given future or option contract.
An open contract can be a long or short contract that has not been exercised,
closed out, or allowed to expire. Open interest is really more of a data field than an
indicator.
A fact that is sometimes overlooked is that a futures contract always

involves a buyer and a seller. This means that one unit of open interest
always represents two people, a buyer and a seller.
Open interest increases when a buyer and seller create a new contract. This
happens when the buyer initiates a long position and the seller initiates a short
position. Open interest decreases when the buyer and seller liquidate existing
contracts. This happens when the buyer is selling an existing long position and the
seller is covering an existing short position.
Open interest remains unchanged when only buyer close out his/her
only seller close out his/her position.
position or
Interpretation
Incidentally, in individual stocks, open interest can be a better indicator of demand
than trading volumes in the underlying. Volumes are often used as an indication of
bullishness. However, daily volumes reflect short-term daily trades that are closed
out by settling rather than delivery. These day trades distort the picture of longterm
demand.
In a stock that has a futures or derivatives market, it is possible to "correct" the
volumes indicator by looking at the open interest position. Open interest reflects
trading views that are not settled intra-session and hence can reflect sentiment in
the
stock
more
effectively.
By itself, open interest only shows the liquidity of a specific contract or market.
However, combining volume analysis with open interest sometimes provides subtle
clues to the flow of money in and out of the market:
Rising volume and rising open interest confirm the direction of the current trend.
Falling volume and falling open interest signal that an end to the current trend
may be imminent.
The following are some interpretation that can be made using open interest.
Rising open interest in an uptrend is bullish

69
Declining open interest in an uptrend is bearish.

Rising open interest in a downtrend is bearish.
Declining open interest in a downtrend is bullish.
Within an uptrend, a sudden leveling off or decline in open interest often warns
a change in trend.
Very high open interest at market tops is dangerous and can intensify downside
pressure.
There are a few interesting contrarian theories that revolve around the "Open
Interest" in derivative contracts. The number of open contracts at the end of the
day will vary according to demand for the underlying stock.
In case of futures trades, one must decide whether this is due to greater
bullishness or bearishness since futures contracts aren't differentiated according to
price -- they are simply bought and sold at a certain spread.
O.I.- A confirming
indicator
70
But options are differentiated according to price as well as position. Analysts can
easily break down open interest into puts and calls. Then, the open interest put-call
ratio can be analysed in a fashion similar to the traded put-call ratio.
How to interpret the open interest?

Scrip: HDIL.
DATE
SPOT
PRICE
VOLUME
OPEN
INTEREST
PUT-CALL
RATIO
June 3
641.00
683600
398800
0.75
June 4
635.00
531600
414400
0.55
June 5
647.80
747200
482800
0.54
June 6
635.00
663600
444000
1.03
June 7
624.00
668400
486800
0.75
June 10
650.90
603200
467600
0.79
June 11
661.00
831200
480800
0.66
June 12
652.60
490400
486800
0.50
June 13
651.00
1243200
498800
0.38
June 14
644.00
525200
501600
0.44
June 17
643.00
332000
503600
0.45
June 18
644.30
468000
470800
0.26
The above table shows spot price, futures volume, futures open interest and
put/call ratios on daily bases. As we have mentioned earlier that one must keep in
mind that one must decide that increase in open interest is due to bullishness or
bearishness in case of futures contracts. As we can see from the table that from
June 3,09 to June 5,09 the open interest for futures contracts has increased
considerably and this increase is due to bullishness so one can buy call option or
sell put option. From the table we find that the spot price of the scrip has increased
during the next three to four days. To decide when to close out the position one can
use volumes as indicator. For example, on June 11,2009 the volume was increasing
71
in large amount, this indicates that the next day the price of the scrip will fall and
so the options price. So one can close out his/her position on June 11, 2009.
Similarly from June 11 to June 13 the open interest for futures has increased but
this is due to bearishness so one can buy put option or sell call option.
72
CONCLUSION
There are many indicators which can be used while trading in derivative
market but widely used & more effective are open interest & put call ratio.
Investors can study both together & can arrive at meaningful trend. These
indicators can also be jointly used with technical analysis indicators to find
out profitable buying & selling points.
Trading strategy can be framed by individual taking several considerations

like view for the market-bullish, bearish or uncertain, type of trader-hedger,
speculator or arbitrageur, risk appetite, period of investment, type of
analysis-fundamental or technical analysis etc.But important thing is to
minimize loss & take the right opportunity. Now a day markets are very
volatile, so it is in the interest of investors to frame volatile market strategies
as stated above rather than to have one view. Investors should have
constant look on the market to execute opportunistic strategies which gives
fix amount of profit irrespective of market fluctuations. Investors rather than
keeping one view bullish or bearish its better to have volatile market strategy
with limited loss and limited profits.
73
BIBLIOGRAPHY
BOOKS:
OPTIONS AND FUTURES IN INDIAN PERSPECTIVE
D. C. PATWARI
OPTIONS, FUTURES AND OTHER DERIVATIVES
JOHN C. HULL
TECHNICAL ANALYSIS OF FUTURES MARKET
JOHN MURPHY
FUTURES AND OPTIONS
N.D. VOHRA & B.R. BAGRI
WEB SITES:
www.sebi.com
www.bseindia.com
www.nseindia.com
www.derivativesindia.com
www.hathwaysecurities.com
www.moneycontrol.com
www.arcadiastock.com
www.anagram.com
SOFTWARE:
CAPITALINE NEO
ODIEN DIET OF NSE
74
75
GLOSSARY
American-style Option: An option contract that may be exercised at any time
between the date of purchase and the expiration date.
At-the-money: Option whose exercise price is the same as the market price of the
underlying asset.
Bear: Someone who thinks market prices will decline.
Bull: Someone who thinks market prices will rise.
Call: An option contract granting the purchaser the right to buy the underlying
instruments at the agreed strike price. A call obliges the seller to sell the underlying
instrument at the agreed strike price, if the option is assigned to him.
Cash settlement: Settlement of a contract by payment or receipt of a settlement

amount instead of the physical delivery of the underlying asset.
Closing: Conducting a transaction, which offsets the original trade and liquidates
an existing position.
Contract unit: The number of units of the underlying instrument on which the
contract bears, i.e. contract size. This may vary according to the underlying on
which the contract bears.
European-style options: An option that can be exercised by the buyer only on the
contract expiration date.
76
Exercise: A decision, reserved for the option holder, to request execution of the
contract.
Expiration date: The date on which the option contract expires.
Hedge: A conservative strategy used to limit investment loss by effecting a

transaction, which offsets an existing position.
Holder: The party who purchased an option.
In-the-money: A call is said to be "in-the-money" when the value of the

underlying instrument is greater than the option strike price. A put is "in-themoney" when its strike price is greater than the value of the underlying instrument.
Intrinsic value: The intrinsic value of an option is the difference between the
actual price of the underlying security and the strike price of the option. The
intrinsic value of an option reflects the effective financial advantage that would
result from the immediate exercise of that option.
Liquidity: Market situation in which quick purchase or sale of a security is possible

without causing substantial changes in prices.
Long position: An investors position where the number of contracts bought

exceeds the number of contracts sold. He is a net holder.
Lot size: Number of contract you want to buy or sell
Maintenance Margin: A set minimum margin that a customer must maintain in

his margin account.
77
Mark-To-Market: Valuation of a financial instrument according to the current

trading value (price) on the exchange.
Open interest: The number of outstanding option contracts in the exchange

market or in a particular class or series.
Option: A contract that conveys the right, but not the obligation, to buy or sell a
particular item at a certain price for a limited time. Only the seller of the option is
obligated to perform.
Out-of-the-money: A call is "out-of-the-money" when the value of the underlying

instrument is less than the option strike price. A put is "out-of-the-money" when its
strike price is less than the value of the underlying instrument.
Premium: The price of an optionthe sum of money that the option buyer pays
and the option seller receives for the rights granted by the option.
Put: An option contract granting the purchaser the right to sell the underlying
instruments at the agreed strike price. A put obliges the seller to purchase the
underlying instrument at the agreed strike price, if the option is assigned to him.
Short position: An investors position where the number of contracts sold exceeds
the number of contracts bought. The person is a net seller.
Spot Price: Refers to the underlying current market price.
Strike price or exercise price: The price at which the option holder may purchase
(in case of call) or sell (in case of put) the underlying instrument.
78
Time value: It is determined by the remaining lifespan of the option, the volatility
and the cost of refinancing the underlying asset (interest rates).
Time value = option price - intrinsic value
Underlying asset, underlying instrument: The instrument (shares, bonds, stock

index) that can be purchased (in case of call) or sold (in case of a put) by a buyer
who exercises his option.
Volatility: It is a measure for the fluctuation range of the underlying price. The
greater the volatility, the higher the option price.
79

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PROJECT REPORT ON

A Study about investment & transition in Indian

MASTER OF MANAGEMENT STUDIES (MMS)

SINHGAN INSTITUTE OF BUSINESS MANAGEMENT

UNDER THE GUIDANCE OF

A Study about investment & transition in Indian derivative

SINHGAN INSTITUTE OF BUSINESS MANAGEMENT

fulfillment of Masters of Management Studies (M.M.S.) Semester IV examination.

One of the interesting developments in financial markets over the last 15 to 20

In this report we have included history of Derivatives. Than we have included

INTRODUCTION TO INDIAN CAPITAL MARKET

STOCK MARKET DERIVATIVES

CH. 1 INTRODUCTION TO INDIAN CAPITAL MARKET

PAST OF SHARE MARKET

They help in the discovery of future as well as current prices.

They catalyze entrepreneurial activity.

They increase savings and investment in the long run.

Factors driving the growth of financial derivatives

Increased volatility in asset prices in financial markets,

Increased integration of national financial markets with the international

Marked improvement in communication facilities and sharp decline in their

Development of more sophisticated risk management tools, providing

Innovations in the derivatives markets, which optimally combine the risks

A derivative is a financial instrument whose value depends on the value of other,

A forward contract is a particularly simple derivative. It is an agreement to buy or

A futures contract is an agreement between two parties to buy or sell an asset at a

Types of Traders in Derivatives Market:

CH 3 DEVELOPMENT OF DERIVATIVES MARKET

Measures specified by SEBI to protect the rights of investor in

Various stock market web sites

CH 5 Stock Market Derivatives

Futures & Options

Instruments available in India

S&P CNX Nifty

Last Thursday of the

Permitted lot size is

BSE also offers similar products in the derivatives segment

Minimum contract size

The Standing Committee on Finance, a Parliamentary Committee, at

Lot size of a contract

Lot size refers to number of underlying securities in one contract.

Introduction of futures in India

also established. These 'forwards' were forerunners to the present day

The group of metallurgical commodities includes the metals and the

Interest Bearing Assets

In the 1970's when freely floating exchange rates were established it

In the absence of futures trading, certain operators- either on their own or in

Are entered into through exchange, traded on exchange and clearing

Frequently used terms in futures market

Concept of basis in futures market

Basis is defined as the difference between cash and futures prices:

Why Sensex Futures?

Index futures have lower brokerage costs.

Interpreting Futures Data

Derivatives market data is available on the Derivatives Trading and

Theoretical way of Pricing Index Futures

S&P CNX Nifty Futures

The underlying index is S&P CNX NIFTY.

Futures on Individual Securities

DIFFERENCE BETWEEN FUTURES AND OPTIONS

DIFFERENCE BETWEEN FORWARD AND FUTURES CONTRACTS

Decided by buyer and