Beruflich Dokumente
Kultur Dokumente
The project covers the derivatives market and its instruments. For better understanding
various strategies with different situations and actions have been given. It includes the data
collected in the recent years and also the market in the derivatives in the recent years. This
study extends to the trading of derivatives done in the National Stock Markets.
LIMITAITONS OF STUDY:
The time available to conduct the study was only 2 months. It being a wide topic had a
limited time.
Limited resources are available to collect the information about the commodity trading.
The study is conducted in Mumbai only.
Some of the aspects may not be covered in my study.
LITERATURE REVIEW
The emergence of the market for derivative products, most notably forwards, futures
and options, can be traced back to the willingness of risk-averse economic agents to guard
themselves against uncertainties arising out of fluctuations in asset prices. By their very nature,
the financial markets are marked by a very high degree of volatility. Through the use of
derivative products, it is possible to partially or fully transfer price risks by locking-in asset
prices. As instruments of risk management, these generally do not influence the fluctuations in
the underlying asset prices. However, by locking-in asset prices, derivative products minimize
the impact of fluctuations in asset prices on the profitability and cash flow situation of riskaverse investors.
Derivative products initially emerged, as hedging devices against fluctuations in
commodity prices and commodity-linked derivatives remained the sole form of such products
for almost three hundred years. The financial derivatives came into spotlight in post-1970
period due to growing instability in the financial markets. However, since their emergence,
these products have become very popular and by 1990s, they accounted for about two-thirds
of total transactions in derivative products. In recent years, the market for financial derivatives
has grown tremendously both in terms of variety of instruments available, their complexity and
also turnover. In the class of equity derivatives, futures and options on stock indices have
gained more popularity than on individual stocks, especially among institutional investors, who
are major users of index-linked derivatives.
Even small investors find these useful due to high correlation of the popular indices with
various portfolios and ease of use. The lower costs associated with index derivatives vis-vis
derivative products based on individual securities is another reason for their growing use.
As in the present scenario, Derivative Trading is fast gaining momentum, I have chosen
this topic.
RESEARCH METHODOLOGY
PRIMARY DATA:
Primary data was collected through Structured Questionnaire/Interview
method from the field work. Primary data was also collected directly from the
investors.
SECONDARY DATA:
Secondary data that were collected through survey, published mater ials,
newspaper, books, etc.
Sample Size:
120 investors.
INTRODUCTION
The origin of derivatives can be traced back to the need of farmers to protect themselves
against fluctuations in the price of their crop. From the time it was sown to the time it was
ready for harvest, farmers would face price uncertainty. Through the use of simple derivative
products, it was possible for the farmer to partially or fully transfer price risks by locking-in
asset prices. These were simple contracts developed to meet the needs of farmers and were
basically a means of reducing risk.
A farmer who sowed his crop in June faced uncertainty over the price he would receive
for his harvest in September. In years of scarcity, he would probably obtain attractive prices.
However, during times of oversupply, he would have to dispose off his harvest at a very low
price. Clearly this meant that the farmer and his family were exposed to a high risk of price
uncertainty.
On the other hand, a merchant with an ongoing requirement of grains too would face a
price risk that of having to pay exorbitant prices during dearth, although favourable prices could
be obtained during periods of oversupply. Under such circumstances, it clearly made sense for
the farmer and the merchant to come together and enter into contract whereby the price of the
grain to be delivered in September could be decided earlier. What they would then negotiate
happened to be futures-type contract, which would enable both parties to eliminate the price
risk.
In 1848, the Chicago Board Of Trade, or CBOT, was established to bring farmers and
merchants together. A group of traders got together and created the to-arrive contract that
permitted farmers to lock into price upfront and deliver the grain later. These to-arrive contracts
proved useful as a device for hedging and speculation on price charges. These were eventually
standardized, and in 1925 the first futures clearing house came into existence.
DERIVATIVE DEFINED
A derivative is a product whose value is derived from the value of one or more
underlying variables or assets in a contractual manner. The underlying asset can be equity,
forex, commodity or any other asset. In our earlier discussion, we saw that wheat farmers may
wish to sell their harvest at a future date to eliminate the risk of change in price by that date.
Such a transaction is an example of a derivative. The price of this derivative is driven by the
spot price of wheat which is the underlying in this case.
The Forwards Contracts (Regulation) Act, 1952, regulates the forward/futures contracts
in commodities all over India. As per this the Forward Markets Commission (FMC) continues
to have jurisdiction over commodity futures contracts. However when derivatives trading in
securities was introduced in 2001, the term security in the Securities Contracts (Regulation)
Act, 1956 (SCRA), was amended to include derivative contracts in securities. Consequently,
regulation of derivatives came under the purview of Securities Exchange Board of India
(SEBI). We thus have separate regulatory authorities for securities and commodity derivative
markets.
Derivatives are securities under the SCRA and hence the trading of derivatives is governed
by the regulatory framework under the SCRA. The Securities Contracts (Regulation) Act, 1956
defines derivative to includeA security derived from a debt instrument, share, loan whether secured or unsecured,
risk instrument or contract differences or any other form of security.
A contract which derives its value from the prices, or index of prices, of underlying
securities.
National Stock
Exchange
Index Future
Bombay Stock
Exchange
Index option
Stock option
Stock future
TYPES OF DERIVATIVES
Derivatives
Future
Option
Forward
Swaps
FORWARD CONTRACTS
size,
On the expiration date, the contract has to be settled by delivery of the asset.
If the party wishes to reverse the contract, it has to compulsorily go to the same counterparty, whi ch often results in high prices being charged.
However forward contracts incertain
the
case
of
foreign
exchange,
thereby
reducing transaction
transactions volume. This process of standardization reaches its limit in the organized
futures market. Forward contracts are often confused with futures contracts. The confusion
is primarily becaus e both serve essentially t he same economic functi ons
of
allocating risk in the presence of future price uncertainty. However futures are a significant
improvement over the forward contracts as they eliminate counterparty risk and
offer more liquidity.
FUTURE CONTRACT
In finance, a futures contract is a standardized contract, traded on a futures exchange, to buy or
sell a certain underlying instrument at a certain date in the future, at a pre-set price. The future
date is called the delivery date or final settlement date. The pre-set price is called the futures
price. The price of the underlying asset on the delivery date is called the settlement price. The
settlement price, normally, converges towards the futures price on the delivery date.
A futures contract gives the holder the right and the obligation to buy or sell, which
differs from an options contract, which gives the buyer the right, but not the obligation, and the
option writer (seller) the obligation, but not the right. To exit the commitment, the holder of a
futures position has to sell his long position or buy back his short position, effectively closing
out the futures position and its contract obligations. Futures contracts are exchange traded
derivatives. The exchange acts as counterparty on all contracts, sets margin requirements, etc.
BASIC FEATURES OF FUTURE CONTRACT
1. Standardization:
Futures contracts ensure their liquidity by being highly standardized, usually by specifying:
The underlying. This can be anything from a barrel of sweet crude oil to a short term
interest rate.
The amount and units of the underlying asset per contract. This can be the notional
amount of bonds, a fixed number of barrels of oil, units of foreign currency, the notional
amount of the deposit over which the short term interest rate is traded, etc.
The grade of the deliverable. In case of bonds, this specifies which bonds can be
delivered. In case of physical commodities, this specifies not only the quality of the
underlying goods but also the manner and location of delivery. The delivery month.
Other details such as the tick, the minimum permissible price fluctuation.
10
2. Margin:
Although the value of a contract at time of trading should be zero, its price constantly
fluctuates. This renders the owner liable to adverse changes in value, and creates a credit risk
to the exchange, who always acts as counterparty. To minimize this risk, the exchange demands
that contract owners post a form of collateral, commonly known as Margin requirements are
waived or reduced in some cases for hedgers who have physical ownership of the covered
commodity or spread traders who have offsetting contracts balancing the position.
Initial Margin: is paid by both buyer and seller. It represents the loss on that contract, as
determined by historical price changes, which is not likely to be exceeded on a usual day's
trading. It may be 5% or 10% of total contract price.
Mark to market Margin: Because a series of adverse price changes may exhaust the initial
margin, a further margin, usually called variation or maintenance margin, is required by the
exchange. This is calculated by the futures contract, i.e. agreeing on a price at the end of each
day, called the "settlement" or mark-to-market price of the contract.
To understand the original practice, consider that a futures trader, when taking a position,
deposits money with the exchange, called a "margin". This is intended to protect the exchange
against loss. At the end of every trading day, the contract is marked to its present market value.
If the trader is on the winning side of a deal, his contract has increased in value that day, and
the exchange pays this profit into his account. On the other hand, if he is on the losing side, the
exchange will debit his account. If he cannot pay, then the margin is used as the collateral from
which the loss is paid.
3. Settlement
Settlement is the act of consummating the contract, and can be done in one of two ways,
as specified per type of futures contract:
Physical delivery - the amount specified of the underlying asset of the contract is
delivered by the seller of the contract to the exchange, and by the exchange to the buyers
of the contract. In practice, it occurs only on a minority of contracts. Most are cancelled
out by purchasing a covering position - that is, buying a contract to cancel out an earlier
sale (covering a short), or selling a contract to liquidate an earlier purchase (covering a
long).
Cash settlement - a cash payment is made based on the underlying reference rate, such as
a short term interest rate index such as Euribor, or the closing value of a stock market
11
index. A futures contract might also opt to settle against an index based on trade in a
related spot market.
Expiry is the time when the final prices of the future are determined. For many equity index
and interest rate futures contracts, this happens on the Last Thursday of certain trading month.
On this day the t+2 futures contract becomes the t forward contract.
PRICING OF FUTURE CONTRACT
In a futures contract, for no arbitrage to be possible, the price paid on delivery (the forward
price) must be the same as the cost (including interest) of buying and storing the asset. In other
words, the rational forward price represents the expected future value of the underlying
discounted at the risk free rate. Thus, for a simple, non-dividend paying asset, the value of the
future/forward,
at time to maturity
This relationship may be modified for storage costs, dividends, dividend yields, and
convenience yields. Any deviation from this equality allows for arbitrage as follows.
In the case where the forward price is higher:
1. The arbitrageur sells the futures contract and buys the underlying today (on the spot
market) with borrowed money.
2. On the delivery date, the arbitrageur hands over the underlying, and receives the agreed
forward price.
3. He then repays the lender the borrowed amount plus interest.
4. The difference between the two amounts is the arbitrage profit.
FEATURE
FORWARD CONTRACT
FUTURE CONTRACT
Operational
Mechanism
Contract
Exists.
Specifications
Counter-party
risk
all
the
trades
or
unconditionally
Liquidation
Profile
Price discovery
Examples
13
OPTIONS A derivative transaction that gives the option holder the right but not the obligation to
buy or sell the underlying asset at a price, called the strike price, during a period or on a specific
date in exchange for payment of a premium is known as option. Underlying asset refers to
any asset that is traded. The price at which the underlying is traded is called the strike price.
There are two types of options i.e., CALL OPTION & PUT OPTION.
CALL OPTION:
A contract that gives its owner the right but not the obligation to buy an underlying
asset-stock or any financial asset, at a specified price on or before a specified date is known as
a Call option. The owner makes a profit provided he sells at a higher current price and buys
at a lower future price.
PUT OPTION:
A contract that gives its owner the right but not the obligation to sell an underlying
asset-stock or any financial asset, at a specified price on or before a specified date is known as
a Put option. The owner makes a profit provided he buys at a lower current price and sells at
a higher future price. Hence, no option will be exercised if the future price does not increase.
Put and calls are almost always written on equities, although occasionally preference
shares, bonds and warrants become the subject of options.
14
SWAPS Swaps are transactions which obligates the two parties to the contract to exchange a
series of cash flows at specified intervals known as payment or settlement dates. They can be
regarded as portfolios of forward's contracts. A contract whereby two parties agree to exchange
(swap) payments, based on some notional principle amount is called as a SWAP. In case of
swap, only the payment flows are exchanged and not the principle amount. The two commonly
used swaps are:
CURRENCY SWAPS:
Currency swaps is an arrangement in which both the principle amount and the interest
on loan in one currency are swapped for the principle and the interest payments on loan in
another currency. The parties to the swap contract of currency generally hail from two different
countries. This arrangement allows the counter parties to borrow easily and cheaply in their
home currencies. Under a currency swap, cash flows to be exchanged are determined at the
spot rate at a time when swap is done. Such cash flows are supposed to remain unaffected by
subsequent changes in the exchange rates.
FINANCIAL SWAP:
Financial swaps constitute a funding technique which permit a borrower to access one
market and then exchange the liability for another type of liability. It also allows the investors
to exchange one type of asset for another type of asset with a preferred income stream.
15
BASKETS Baskets options are option on portfolio of underlying asset. Equity Index Options are
most popular form of baskets.
LEAPS Normally option contracts are for a period of 1 to 12 months. However, exchange may
introduce option contracts with a maturity period of 2-3 years. These long-term option contracts
are popularly known as Leaps or Long term Equity Anticipation Securities.
WARRANTS Options generally have lives of up to one year, the majority of options traded on options
exchanges having a maximum maturity of nine months. Longer-dated options are called
warrants and are generally traded over-the-counter.
SWAPTIONS Swaptions are options to buy or sell a swap that will become operative at the expiry of
the options. Thus a swaption is an option on a forward swap. Rather than have calls and puts,
the swaptions market has receiver swaptions and payer swaptions. A receiver swaption is an
option to receive fixed and pay floating. A payer swaption is an option to pay fixed and receive
floating.
16
18 November 1996 SEBI setup L.C.Gupta Committee to draft a policy framework for
index futures.
11 May 1998
7 July 1999
24 May 2000
25 May 2000
9 June 2000
12 June 2000
17
day-to-day
life
for
ordinary
people
in
major
part
of
the
world.
Until the advent of NSE, the Indian capital market had no access to the latest trading methods
and was using traditional outdated methods of trading. There was a huge gap between the
investors aspirations of the markets and the available means of trading. The opening of Indian
economy has precipitated the process of integration of Indias financial markets with the
international financial markets. Introduction of risk management instruments in India has
gained momentum in last few years thanks to Reserve Bank of Indias efforts in allowing
forward contracts, cross currency options etc. which have developed into a very large market.
Disasters prove that derivatives are very risky and highly leveraged instruments.
Derivatives are complex and exotic instruments that Indian investors will find difficulty
in understanding
18
Derivatives
increase
speculation
and
do
not
serve
any
economic
purpose:
Numerous studies of derivatives activity have led to a broad consensus, both in the private and
public sectors that derivatives provide numerous and substantial benefits to the users.
Derivatives are a low-cost, effective method for users to hedge and manage their exposures to
interest rates, commodity prices or exchange rates. The need for derivatives as hedging tool
was felt first in the commodities market. Agricultural futures and options helped farmers and
processors hedge against commodity price risk. After the fallout of Bretton wood agreement,
the financial markets in the world started undergoing radical changes. This period is marked
by remarkable innovations in the financial markets such as introduction of floating rates for the
currencies, increased trading in variety of derivatives instruments, on-line trading in the capital
markets, etc. As the complexity of instruments increased many folds, the accompanying risk
factors grew in gigantic proportions. This situation led to development derivatives as effective
risk management tools for the market participants.
Looking at the equity market, derivatives allow corporations and institutional investors to
effectively manage their portfolios of assets and liabilities through instruments like stock index
futures and options. An equity fund, for example, can reduce its exposure to the stock market
quickly and at a relatively low cost without selling off part of its equity assets by using stock
index futures or index options.
By providing investors and issuers with a wider array of tools for managing risks and
raising capital, derivatives improve the allocation of credit and the sharing of risk in the global
economy, lowering the cost of capital formation and stimulating economic growth. Now that
world markets for trade and finance have become more integrated, derivatives have
strengthened these important linkages between global markets, increasing market liquidity and
efficiency and facilitating the flow of trade and finance
19
High Liquidity
underlying
in
INDIAN SCENARIO
India is one of the largest market-capitalised countries in
Asia with a market capitalisation of more than Rs.765000
crores.
Trade guarantee
A Strong Depository
Figure 3.3a
Speculators
Existing
Approach
1) Deliver based
Trading, margin
trading & carry
forward transactions.
2) Buy Index Futures
hold till expiry.
SYSTEM
Peril &Prize
1) Both profit &
loss to extent of
price change.
New
Approach
Peril &Prize
1)Buy &Sell stocks 1)Maximum
on delivery basis
loss possible
2) Buy Call &Put
to premium
by paying
paid
premium
Advantages
Greater Leverage as to pay only the premium.
Greater variety of strike price options at a given time.
Figure 3.3b
Arbitrageurs
Existing
SYSTEM
New
Approach
Peril &Prize Approach
Peril &Prize
1) Buying Stocks in 1) Make money
1) B Group more
1) Risk free
one and selling in
whichever way
promising as still
game.
another exchange.
the Market moves. in weekly settlement
forward transactions.
2) Cash &Carry
2) If Future Contract
arbitrage continues
more or less than Fair price
21
Figure 3.3c
Hedgers
Existing
SYSTEM
New
Approach
Peril &Prize
Approach
Peril &Prize
1) Difficult to
1) No Leverage
1)Fix price today to buy 1) Additional
offload holding
available risk
latter by paying premium.
cost is only
during adverse
reward dependant 2)For Long, buy ATM Put
premium.
market conditions
on market prices
Option. If market goes up,
as circuit filters
long position benefit else
limit to curtail losses.
exercise the option.
3)Sell deep OTM call option
with underlying shares, earn
premium + profit with increase prcie
Advantages
Availability of Leverage
Figure 3.3d
Small Investors
Existing
Approach
1) If Bullish buy
stocks else sell it.
SYSTEM
Peril &Prize
1) Plain Buy/Sell
implies unlimited
profit/loss.
New
Approach
1) Buy Call/Put options
based on market outlook
2) Hedge position if
holding underlying
stock
Advantages
Losses Protected.
22
Peril &Prize
1) Downside
remains
protected &
upside
unlimited.
The OTC derivatives markets have the following features compared to exchange-traded
derivatives:
1. The management of counter-party (credit) risk is decentralized and located within
individual institutions,
2. There are no formal centralized limits on individual positions, leverage, or margining,
3. There are no formal rules for risk and burden-sharing,
4. There are no formal rules or mechanisms for ensuring market stability and integrity,
and for safeguarding the collective interests of market participants, and
5. The OTC contracts are generally not regulated by a regulatory authority and the
exchanges self-regulatory organization, although they are affected indirectly by
national legal systems, banking supervision and market surveillance.
Some of the features of OTC derivatives markets embody risks to financial market stability.
The following features of OTC derivatives markets can give rise to instability in institutions,
markets, and the international financial system: (i) the dynamic nature of gross credit
exposures; (ii) information asymmetries; (iii) the effects of OTC derivative activities on
available aggregate credit; (iv) the high concentration of OTC derivative activities in major
institutions; and (v) the central role of OTC derivatives markets in the global financial system.
Instability arises when shocks, such as counter-party credit events and sharp movements in
asset prices that underlie derivative contracts, occur which significantly alter the perceptions
of current and potential future credit exposures. When asset prices change rapidly, the size and
23
configuration of counter-party exposures can become unsustainably large and provoke a rapid
unwinding of positions.
There has been some progress in addressing these risks and perceptions. However, the progress
has been limited in implementing reforms in risk management, including counter-party,
liquidity and operational risks, and OTC derivatives markets continue to pose a threat to
international financial stability. The problem is more acute as heavy reliance on OTC
derivatives creates the possibility of systemic financial events, which fall outside the more
formal clearing house structures. Moreover, those who provide OTC derivative products, hedge
their risks through the use of exchange traded derivatives. In view of the inherent risks
associated with OTC derivatives, and their dependence on exchange traded derivatives, Indian
law considers them illegal.
24
Prices are generally determined by market forces. In a market, consumers have demand and
producers or suppliers have supply, and the collective interaction of demand and supply in
the market determines the price. These factors are constantly interacting in the market causing
changes in the price over a short period of time. Such changes in the price are known as price
volatility. This has three factors: the speed of price changes, the frequency of price changes
and the magnitude of price changes.
The changes in demand and supply influencing factors culminate in market adjustments
through price changes. These price changes expose individuals, producing firms and
governments to significant risks. The breakdown of the BRETTON WOODS agreement
brought an end to the stabilising role of fixed exchange rates and the gold convertibility of the
dollars. The globalisation of the markets and rapid industrialisation of many underdeveloped
countries brought a new scale and dimension to the markets. Nations that were poor suddenly
became a major source of supply of goods. The Mexican crisis in the south east-Asian currency
crisis of 1990s has also brought the price volatility factor on the surface. The advent of
telecommunication and data processing bought information very quickly to the markets.
Information which would have taken months to impact the market earlier can now be obtained
in matter of moments.
Even equity holders are exposed to price risk of corporate share fluctuates rapidly.
25
These price volatility risks pushed the use of derivatives like futures and options increasingly
as these instruments can be used as hedge to protect against adverse price changes in
commodity, foreign exchange, equity shares and bonds.
In Indian context, south East Asian currencies crisis of 1997 had affected the competitiveness
of our products vis--vis depreciated currencies. Export of certain goods from India declined
because of this crisis. Steel industry in 1998 suffered its worst set back due to cheap import of
steel from south East Asian countries. Suddenly blue chip companies had turned in to red. The
fear of china devaluing its currency created instability in Indian exports. Thus, it is evident that
globalisation of industrial and financial activities necessitates use of derivatives to guard
against future losses. This factor alone has contributed to the growth of derivatives to a
significant extent.
increase volatility, derivatives and risk management products become that much more
important.
27
BENEFITS OF DERIVATIVES
Derivative markets help investors in many different ways:
1.]
RISK MANAGEMENT
Futures and options contract can be used for altering the risk of investing in spot market.
For instance, consider an investor who owns an asset. He will always be worried that the price
may fall before he can sell the asset. He can protect himself by selling a futures contract, or by
buying a Put option. If the spot price falls, the short hedgers will gain in the futures market, as
you will see later. This will help offset their losses in the spot market. Similarly, if the spot
price falls below the exercise price, the put option can always be exercised.
2.]
PRICE DISCOVERY
Price discovery refers to the markets ability to determine true equilibrium prices.
Futures prices are believed to contain information about future spot prices and help in
disseminating such information. As we have seen, futures markets provide a low cost trading
mechanism. Thus information pertaining to supply and demand easily percolates into such
markets. Accurate prices are essential for ensuring the correct allocation of resources in a free
market economy. Options markets provide information about the volatility or risk of the
underlying asset.
3.]
OPERATIONAL ADVANTAGES
As opposed to spot markets, derivatives markets involve lower transaction costs.
Secondly, they offer greater liquidity. Large spot transactions can often lead to significant price
changes. However, futures markets tend to be more liquid than spot markets, because herein
you can take large positions by depositing relatively small margins. Consequently, a large
position in derivatives markets is relatively easier to take and has less of a price impact as
opposed to a transaction of the same magnitude in the spot market. Finally, it is easier to take
a short position in derivatives markets than it is to sell short in spot markets.
4.]
MARKET EFFICIENCY
The availability of derivatives makes markets more efficient; spot, futures and options
markets are inextricably linked. Since it is easier and cheaper to trade in derivatives, it is
28
possible to exploit arbitrage opportunities quickly and to keep prices in alignment. Hence these
markets help to ensure that prices reflect true values.
5.]
EASE OF SPECULATION
Derivative markets provide speculators with a cheaper alternative to engaging in spot
transactions. Also, the amount of capital required to take a comparable position is less in this
case. This is important because facilitation of speculation is critical for ensuring free and fair
markets. Speculators always take calculated risks. A speculator will accept a level of risk only
if he is convinced that the associated expected return is commensurate with the risk that he is
taking.
The prices of derivatives converge with the prices of the underlying at the expiration of
derivative contract. Thus derivatives help in discovery of future as well as current
prices.
An important incidental benefit that flows from derivatives trading is that it acts as a
catalyst for new entrepreneurial activity.
Derivatives markets help increase savings and investment in the long run. Transfer of
risk enables market participants to expand their volume of activity.
29
DATA INTERPRETATION
1. Age?
4% 16%
17%
under 25
25-35
22%
41%
35-45
45-55
above 55
2. Gender?
8%
Male
Female
92%
30
3. Educational qualifications?
6%
1%
36%
HSC
Graduate
Post-graduate
Technical Education
57%
4. Occupation?
11%
3%
31%
1%
Student
Housewife
Working executive
Entrepreneur
Retired
54%
31
5. Annual Income?
13%
1 lac 3 lac
11%
48%
3 lac 5 lac
10%
5 lac 10 lac
18%
Above 10 lac
32
8%
5%
33%
10%
Friends
Relatives
Financial Adviser
Media
Stock Broker
44%
According to majority of respondents i.e. 44% their relatives introduced them with
the share market, 33% respondents entered into share market because of their
friends, 10% respondents entered through financial advisers, 8% people followed
media for introducing themselves with share market and only 5% people
introduced to share market by stock broker.
33
42%
48%
10%
34
7%
16%
20%
1-3 years
4-6 years
27%
7-9 years
30%
35
16%
27%
29%
28%
36
3%
8%
10% 2%
Return
Liquidity
Safety
Low risk
77%
Others
37
18%
37%
28%
17%
37% respondents invest in options on individual stocks. 28% invest in stock index
options. Out of remaining respondents 18% invest in stock index futures & 17%
in futures on individual stock.
38
4%5% 12%
Market Trend
Profitability
28%
Economic Condition
Industry Condition
51%
Others
39
12%
Broking Tips
6%
36%
Fundamental Analysis
Technical Analysis
39%
7%
Random
Majority of respondents i.e. 39% use the tool of fundamental analysis & only 6%
respondents investing on the basis of broking tips.
14%
19%
5% -10%
18%
10%
11% - 15%
16% - 20%
21% -25%
Above 25%
39%
Majority of respondents i.e. 39% believe that expected rate of return from
derivatives market will be 16 to 20 %
40
24%
15%
Up to 5%
5% - 10%
18%
13%
10% - 20%
20% - 30%
Above 30%
30%
3%3%
22%
Panic
Fear
Confident
4%
68%
Hope
Patience
41
20%
Book profit
41%
39%
Majority of respondents i.e. 41% book profit if futures and options moves as you
expect.
8%
Book loss
Wait for profit
92%
Majority of respondents i.e. 92% will wait for profit if futures and options moves
against their position.
42
27%
53%
No effect
20%
Majority of respondents i.e. 53% believe that there will be no effect on stopping
mini-nifty contract trading.
21%
40%
6%
33%
Majority of respondents i.e. 40% believe that trading in derivatives will grow very
fast in future.
43
1. Derivative market is growing very fast in the Indian Economy. The turnover
of Derivative Market is increasing year by year in the Indias largest stock
exchange NSE. In the case of index future there is a phenomenal increase
in the number of contracts. But whereas the turnover is declined
considerably. In the case of stock future there was a slow increase observed
in the number of contracts whereas a decline was also observed in its
turnover. In the case of index option there was a huge increase observed
both in the number of contracts and turnover.
2. After analysing data it is clear that the main factors that are driving the
growth of Derivative Market are Market improvement in communication
facilities as well as long term saving & investment is also possible through
entering into Derivative Contract. So these factors encourage the Derivative
Market in India.
3. It encourages entrepreneurship in India. It encourages the investor to take
more risk & earn more return. So in this way it helps the Indian Economy
by developing entrepreneurship. Derivative Market is more regulated &
standardized so in this way it provides a more controlled environment. In
nutshell, we can say that the rule of High risk & High return apply in
Derivatives. If we are able to take more risk then we can earn more profit
under Derivatives.
44
RECOMMENDATIONS
45
BIBLIOGRAPHY
Books referred:
Options Futures, and other Derivatives by John C Hull
Derivatives FAQ by Ajay Shah
NSEs Certification in Financial Markets: - Derivatives Core module
Financial Markets & Services by Gordon & Natarajan
Websites visited:
www.nse-india.com
www.bseindia.com
www.sebi.gov.in
www.ncdex.com
www.google.com
www.derivativesindia.com
46
Questionnaire
(Please tick the appropriate option)
1. Age?
Under 25
25-35
35-45
Above 55
45-55
2. Gender?
Male
Female
3. Educational qualifications?
H.S.C
Graduate
Post-graduate
Technical Education
4. Occupation?
Student
Housewife
Working executive
Entrepreneur
Retired
5. Annual Income?
Less than 1,00,000
1,00,000 3,00,000
3,00,000 5,00,000
5,00,000 10,00,000
Above 10,00,000
6. Who introduced you to share market?
Friends
Relatives
Financial Adviser
Media
Stock Broker
7. What is your preferred investment horizon?
Short term investment
Both
8. Your experience in stock trading?
Less than 1 year
1-3 years
4-6 years
7-9 years
47
1-3 years
4-6 years
Liquidity
Safety
Low risk
Others
11. Which type of derivative option you use for investment?
Stock index futures
Profitability
Economic Condition
Industry Condition
Others
13. Which tools do you used while trading in derivative market?
Based on News
Broking Tips
Fundamental Analysis
Technical Analysis
Random
14. What is the expected Rate of return from derivative market?
5% -10%
11% - 15%
16% - 20%
21% -25%
Above 25%
15. Percentage of stock market investment invested in derivatives market?
Up to 5%
5% - 10%
10% - 20%
20% - 30%
Above 30%
16. If market reverses against your position, what is your response?
Panic
Fear
Confident
Hope
Patience
48
17. If Futures & Options moves as you expected, what do you do?
Book profit
19. What is your take on SEBIs recent move on stopping Mini -NIFTY
contracts trading?
Good move to protect small investors
Will affect investors perception towards F&O
No effect
20. Do you expect that the trading in derivatives in India will
Grow very fast
Grow Moderately
Grow slow
49