Derivatives Sridhar

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“A STUDY ON TRADING ON DERIVATIVES AND OPERATIONS OF

FUTURES AND OPTIONS WITH SPECIAL REFERENCE TO INDIA
INFOLINE, HYDERABAD.”
By
BAJJURI SRIDHAR
Reg. No. 5131
Of
VISHWA VISHWANI INSTITUTE OF SYSTEMS AND
MANAGEMENT
Under the Guidance of
M. MADANA MOHAN
Associate Professor
A PROJECT REPORT
Submitted to the
FACULTY OF BUSINESS MANAGEMENT
In partial fulfillment of the requirements

For the award of the
POST GRADUATE DIPLOMA IN MANAGEMENT
July 2010
VISHWA VISHWANI INSTITUTE OF SYSTEMS & MANAGEMENT

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DECLARATION
I Bajjuri Sridhar, Reg. No. 5131 hereby declare that this summer project titled “A
STUDY ON TRADING ON DERIVATIVES AND OPERATIONS OF FUTURES
AND OPTIONS WITH SPECIAL REFERENCE TO INDIA INFOLINE AT
THARNAKA, HYDERABAD” is an original work carried out by me, under the
guidance of M. Madana Mohan, Associate Professor. The report submitted by me is a
bonafied work carried by me of my own efforts and it has not been submitted to any
other University or published any time before.
Signature of the student
(BAJJURI SRIDHAR)
Date:
Place: Hyderabad

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BONAFIDE CERTIFICATE
Certified that this summer project titled “A STUDY ON TRADING ON

DERIVATIVES AND OPERATIONS OF FUTURES AND OPTIONS WITH
SPECIAL REFERENCE TO INDIA INFOLINE AT THARNAKA,
HYDERABAD” is the bonafied work of “BAJJURI SRIDHAR”, who carried out the
research under my supervision, certified further, that to the best of my knowledge the
work reported here is does not form part of any other thesis or dissertation on the basis
of which a degree or award was conferred on an earlier occasion on this or any
candidate.
Signature of the Faculty Guide
(M. MADANA MOHAN)
Date:
Place: Hyderabad

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ACKNOWLEDGEMENT
It is a great sense of satisfaction and a matter of privilege to me to work at India

infoline, tharnaka, Hyderabad. I wish to express my heartiest thanks to trading
Organization Division for providing me the opportunity to undergo training in the
esteemed organization. Under such a nice environment, systematic work approach and
target oriented task management of this division provided me with the much-desired
training experience.
I sincerely record my appreciation to all, who have contributed in preparing this report
with suggestions and critical evaluation.
I Express My deep sense of gratitude to the Marketing manager of India Infoline Mr.
Vishwanath, Who extended support to me for successfully completion of the project.
I express my deep sense of gratitude to the officers of India Infoline Mr. Venkat Rao
(Relationship Manager), Mr. Sunil Kumar (Sales Manager), who provides me the
complete information for completing the project well in time.
I am very much grateful to our faculty Guide (VVISM, Hyderabad) Prof. M. Madana
Mohan for his valuable guidance provided me for completion of project.
I am thankful to the other Employees at INDIA INFOLINE Ltd., Tharnaka. For
providing me all the information and help I required for the completion of this project.
Last but not the least I want to thanks my college, VVISM, Hyderabad that provided
me this opportunity to interact so closely with this organization.
(BAJJURI SRIDHAR)

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ABSTRACT
DERIVATIVES MARKET (FUTURES AND OPTIONS) WITH SPECIAL

REFERENCE TO INDIA INFOLINE are the cooperative sector company and one of
the best brokage company in India.
This report contains trading performance during the period of May 28 to July 1.The
study covers the derivative market in recent days.
To know the liquidity, Solvency, Earning, Market position and profitability of the
company (ICICI, SBI, YES BANK).
Financial performance of the Saras Bhilwara dairy in the current year is quite
impressive. Sales of the current year increase as comparison to last year due to
awareness of the product. Gross profits, Net profit, operating profit of the company are
high as comparison to all other company in the industry. Liquidity position and solvency
condition is sounder of the company. While in turnover, company’s debtor turnover is
also in good positions that indicate speed of their collection.
Methodology is a systematic and objective process of identifying and formulating the
problem by setting objectives and methods for collecting, editing, calculating,
evaluating, analyzing, interpreting and presenting data in order to find justified
solutions. The Current Position is analyzed and new ideas are suggested to improve the
current condition.

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TABLE OF CONTENTS
CHAPTERNO. TITLE PAGE NO.

I 5
ABSTRACT
II 7
LIST OF TABLES
III 8
LIST OF FIGURES
CHAPTER1 INTRODUCTION 9
13-15
OBJECTIVES, NEED, SCOPE, LIMITATIONS
CHAPTER 2 METHODOLOGY 16
CHAPTER 3
3.1 COMPANY OVERVIEW 16
3.2 INDUSTRY OVERVIEW 18
LITERATURE REVIEW 22
CHAPTER 4 DATA ANALYSIS AND INTERPRETATION 49
CHAPTER 5 72-74
FINDINGS, RECOMMENDATIONS &
CONCLUSION
75
GLOSSARY
80
BIBLIOGRAPHY
81
APPENDIX
LIST OF TABLES
TABLE NO. TITLE PAGE NO.

TABLE 1 THE PRICE MOVEMENTS OF ICICI 51
FUTUTRES
TABLE 2 CALL OPTIONS PRICES OF ICICI 53

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TABLE 3 PUT OPTIONS PRICES IF ICICI 55

THE PRICE MOVEMENTS OF SBI 58
TABLE 4
FUTUTRES
TABLE 5 CALL OPTIONS PRICES OF SBI 61
TABLE 6 PUT OPTIONS PRICES IF SBI 63
THE PRICE MOVEMENTS OF YES 66
TABLE 7
FUTUTRES
TABLE 8 CALL OPTIONS PRICES OF YES 68
TABLE 9 PUT OPTIONS PRICES IF YES 70
LIST OF FIGURES
GRAPH CONTENTS PAGE NUMBERS

NO.
Graph.1 Graph showing the price movements of ICICI 52
Futures
Graph.2 Graph showing the price movements of ICICI Spot & 57
Futures
Graph.3 Graph showing the price movements of SBI 59

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Futures
Graph.4 Graph showing the price movements of SBI Spot & 64
Futures
Graph 5 Graph showing the price movements of YES BANK 67
Futures
Graph 6 Graph the price movements of YES BANK Spot & 72
Futures
Graph 5.1 NSE scrip’s 81
Graph 5.2 NSE and BSE scrip’s 82
Graph 5.3 Buy order form 83
Graph 5.4 Sell order form 84
Graph 5.5 Trade book 85
CHAPTER NO. 1
1.1 INTRODUCTION
Derivatives are products whose value is derived from one or more variables called
bases. These bases can be underling asset such as foreign currency, stock or
commodity, bases or reference rates such as LIBOR or US treasury rate etc. Example,
an Indian exporter in anticipation of the riceipt of dollar denominated export proceeds
may wish to sell dollars at a future date to eliminate the risk of exchange rate volatility
by the data. Such transactions are called derivatives, with the spot price of dollar being
the underlying asset.

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Derivatives thus have no value of their own but derive it from the asset that is being
dealt with under the derivative contract. A financial manager can hedge himself from
the risk of a loss in the price of a commodity or stock by buying a derivative contract.
Thus derivative contracts acquire their value from the spot price of the asset that is
covered by the contract.
The primary purposes of a derivative contract is to transfer “risk” from one

party to another i.e. risk in a financial sense is transfer from a party that is willing to
take it on. Here, the risk that is being dealt with is that of price risk. The transfer of
such a risk can therefore be speculative in nature or act as a hedge against price
movement in a current or anticipated physical position.
Derivatives or derivative securities are contracts which are written between two
parties (counterparties) and whose value is derived from the value of underlying
widely-held and easily marketable assets such as agricultural and other physical
(tangible) commodities or currencies or short term and long-term and long term
financial instruments or intangible things like commodities price index (inflation rate),
equity price index or bond piece index. The counterparties to such contracts are those
other than the original issuer (holder) of the underlying asset.
Derivatives are also known as “deferred delivery or deferred payment instruments”. In

a sense, they are similar to securitized assets, but unlike the latter, they are not the
obligations which are backed by the original issuer of the underlying asset or security.
It is easier to take a short position in derivatives than in other possible to combine them
to match specific requirements, i.e., they are more easily amenable to financial
engineering.
The values of derivatives and those of their underlying assets are closely related.
Usually, in trading derivatives, the taking or making of delivery of underlying assets is
not involved; the transactions are mostly settled by taking offsetting positions in the

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derivatives themselves. There is, therefore, no effective limit on the quantity of claims
which can be traded in respect of underlying assets. Derivatives are “off balance sheet”
instruments, a fact that is said to obscure the leverage and financial might they give to
the party. They are mostly secondary market instruments and have little usefulness in
mobilizing fresh capital by the companies (warrants, convertibles being the exceptions).
Although the standardized, general, exchange-traded derivatives are being contracts
which are in vogue and which expose the users to operational risk, counterparty risk,
liquidity risk, and legal risk. There is also an uncertainty about the regulatory status of
such derivatives.
There are bewilderingly complex varieties of derivatives already in existence,
and the markets are innovating newer and newer ones continuously: plain, simple or
straightforward, composite, joint or hybrid, synthetic, leveraged, mildly leveraged,
customized or OTC-traded, standardized or organized-exchange traded. Although we
are not going to discuss all of them, the names of certain derivatives may be noted here:
futures, options, range forward and ratio range forward options, swaps, warrants,
convertible bonds, credit derivatives, captions, swaptions, futures options, the ratio
swaps, periodic floors, spread lock one and two, treasury-linked swaps, wedding bands
three and six, inverse floaters, index amortizing swaps, and so on; because of their
complexity, derivatives have become a continuing pain for the accounting person and a
true mind-bender for anyone trying to value them.
The turnover of the stock exchanges has been tremendously increasing from last
10 years. The number of trades and the number of investors, who are participating,
have increased. The investors are willing to reduce their risk, so they are seeking for
the risk management tools. Mutual funds, FIIs and other investors who are deprived of
hedging (i.e. risk reducing) opportunities will now have a derivatives market to bank
on.
While derivatives markets flourished in the developed world, Indian markets

remain deprived of financial derivatives to the beginning of this millennium. While the
rest of the world progressed by leaps and bounds on the derivatives front, Indian market

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lagged behind. Having emerged in the markets of the developed nations in the 1970s,
derivatives markets grew from strength to strength. The trading volumes nearly
doubled in every three years making it a trillion-dollar business. They became so
ubiquitous that, now, one cannot think of the existence of financial markets without
derivatives.
Two broad approaches of SEBI is to integrate the securities market at the

national level, and to diversify the trading products, so the more number of traders
including banks, financial institutions, insurance companies, mutual funds, primary
dealers etc., choose to transact through the exchanges. In this context the introduction
of derivatives trading through Indian Stock Exchanges permitted by SEBI exchange in
the year 2000 is a real landmark.
Prior to SEBI abolishing the BADLA system, the investors had this system as a
source of reducing the risk, as it has many problems like no strong margining system,
unclear expiration date and generating counter party risk. In view of this problem SEBI
abolished the BADLA system.
After the abolition of the BADLA system, the investors are seeking for a
hedging system, which could reduce their portfolio risk. SEBI thought the introduction
of the derivatives trading, as a first step it has set up a 24 member committee under the
chairmanship of Dr.L.C.Gupta to develop the appropriate regulatory framework for
derivative trading in India, SEBI accepted the recommendations of the committee on
May 11, 1998 and approved the phased introduction of the derivatives trading
beginning with stock index futures. The Board also approved the “suggestive bye-
laws” recommended for regulation and control of trading and settlement of derivatives
contracts.
However the securities contracts (regulation) act, 1956 (SCRA) needed
amendment to include “derivatives” in the definition of securities to enable SEBI to
introduce trading in derivatives. The government in the year 1999 carried out the
necessary amendment. The securities Laws (Amendment) bill 1999 was introduced to

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bring about the much needed changes. In December 1999 the new framework has been
approved derivatives have been accorded the status of ‘securities’. The ban imposed on
trading in derivatives way back in 1999 under a notification issued by the central
Government has been revoked. Thereafter SEBI formulated the necessary
regulations/bye-laws and started in India at NSE in the same year and BSE started in
the year 2001. In this module we are covering the different types of derivatives
products and their features, which are traded in the stock exchanges in India.
NATURE OF THE PROBLEM:

The turnover of the stock exchanges has been tremendously increasing from last 10
years. The number of trades and the number of investors, who are participating, have
increased. The investors are willing to reduce their risk, so they are seeking for the risk
management tools.
Prior to SEBI abolishing the BADLA system, the investors had this
system as a source of reducing the risk, as it has many problems like no strong
margining system, unclear expiration date and generating counter party risk. In view of
this problem SEBI abolished the BADLA system.
After the abolition of the BADLA system, the investors are seeking for a
hedging system, which could reduce their portfolio risk. SEBI thought the introduction
of the derivatives trading, as a first step it has set up a 24 member committee under the
chairmanship of Dr.L.C.Gupta to develop the appropriate regulatory framework for
derivative trading in India, SEBI accepted the recommendations of the committee on
May 11, 1998 and approved the phased introduction of the derivatives trading
beginning with stock index futures.
SCOPE OF THE STUDY
Introduction of derivatives in the Indian capital market is the beginning of a new era,
which is truly exciting. Derivatives, worldwide are recognized risk management

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products. These products have a long history in India, in the unorganized sector,
especially in currency and commodity markets. The availability of these products on
organized exchanges has provided the market participants with broad based risk
management tools.
• 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 days and also the market in the
derivatives in the recent days.
• The study is limited to “Derivative Market” With reference to the Indian context
and `the India Infoline has been taken as representative sample for the study.
• The study cannot be said as totally perfect, any alteration may come.
• The study has only made humble attempt at evaluating the Derivatives Markets
only in Indian Context.
OBJECTIVES OF THE STUDY
 To find the different types of derivatives and also to know the derivative market in
India.
 To analyze the recent developments in the derivative market taking into accounts the
trading in past years.
 To find the trading on derivatives and their use in the stock markets and operations of
futures and options
 To know the outcome of Derivative market prices of Futures and Options.
NEED OF THE STUDY

• It helps the researcher to construct a diversified portfolio.
• Provide an insight on return and risk analysis.

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• Different kinds of investors to invest in derivative and to face high risk and get
high returns.
• Studying the performance of investing derivative for few months considering
their analysis.
LIMITATIONS
Despite of the training my level best, there were still some limitation which I think
remains there to draw fruitful conclusion. There were some practical problem which
come across and could not be properly death with
• The advisory services being promised by the brokers would be of little use to
investors looking for an insight into the market.
• Customers are not willing to open the demat account because of high price to
open demat account.
• And India infoline charging more price to open demat account compared to
other stock broking companies.
• There is confusion to buy put option or call option in derivative shares
• It is difficult to estimate the futures
CHAPTER NO 3
RESEARCH METHODOLOGY
METHODOLOGY OF THE STUDY
The data collection methods include both primary and secondary collection methods.
ACTUAL COLLECTION OF DATA
Data Collection from secondary Sources

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Secondary data were gathered from numerous sources. While preparation of this project
report, the secondary data have been collected through:
• Data was generated from general library research sources, textbooks, trade
journals, articles from newspaper, treasury management, brochures, by india
infoline trading terminal and Internet web site
www.nseindia.com
www.indiainfoloine.com
www.bseindia.com
www.google.com
www.commodityindia.com
CHAPTER 4
4.1 COMPANY PROFILE
Date of Establishment 1995

Revenue112.862 (USD in Millions)
Market Cap 26304.8769 (Rs. in Millions)
Corporate Address75 Nirlon Complex, Off Western Express Highway, Goregaon (E)
Mumbai-400053,Maharashtra.
www.indiainfoline.com
Management Details

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Chairperson- Nirmal Jain

MD- Nirmal Jain
Directors - A K Purwar, Falguni Sanghvi, Kapil Krishan, Kranti Sinha, Nilesh
Vikamsey, Nirmal Jain, R Venkataraman, Sat Pal Khattar, Sunil Lotke
Business Operation Finance - Stock Broking
Background
India Infoline (IIL) is engaged in business of equities broking, wealth advisory services
and portfolio management services. The company was incorporated in October 1995 as
Probity Research & Services and later in April 2000 the name was changed to India
Infoline.com. Then in March 2001 the company again changed its name to India
Infoline.
The company is part of India Infoline Group.
Financials Total Income - Rs. 5716.359805 Million (year ending Mar 2010)
Net Profit - Rs. 1058.253789 Million (year ending Mar 2010)
Company Secretary Sunil Lotke

Bankers Auditors Sharp & Tannan Associates
Company history
India Infoline (IIL) is engaged in business of equities broking, wealth advisory services
and portfolio management services. The company was incorporated in October 1995 as
Probity Research & Services and later in April 2000 the name was changed to India
Infoline.com. Then in March 2001 the company again changed its name to India
Infoline.
The company is part of India Infoline Group. It has pan- India presence through its
distribution network of 607 branches, 151 franchisees located in 346 cities. The
company also has presence in Dubai, New York and Singapore.

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IIFL operates portals such as www.indiainfoline.com and www.5paisa.com.
Products and Services
India Infoline provides a gamut of financial products and services. The company offers
broking services in the Cash and Derivatives segments of the NSE and BSE.
India Infoline Media and Research Services- This company offers content support to
India Infoline in area of broking, commodities, mutual fund and portfolio management
services.
India Infoline Commodities- This Company is engaged in broking services for

commodities segment.
India Infoline Marketing & Services- This is holding company of India Infoline
Insurance Services and India Infoline Insurance Brokers. The company is the largest
Corporate Agent for ICICI Prudential Life Insurance Company. It is also engaged in
insurance broking.
India Infoline Investment Services- This subsidiary is engaged in business such as loans
against securities, SME financing, distribution of retail loan products, consumer finance
business and housing finance business.
IIFL (Asia) Pte- This subsidiary is engaged in carrying out financial sector activities in
other Asian markets.
Awards
India Infoline has been awarded the ‘Best Broker in India’ by Finance Asia.
Company’s Rs. 5 billion short-term debt programme has received an A1+ rating from
ICRA. This reflects highest -credit-quality of short-term debt instruments.
Outlook

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India Infoline has received approval from SEBI for sponsoring mutual fund. Through
this, the company wants to expand its product offerings.
B) FINANCE
Capital structure
Authorized Issued
Period -PAIDUP-
Instrument Capital Capital
From To (Rs. cr) (Rs. cr) Shares (no’s) Face Value Capital
2008 2009 Equity Share100 56.68 283400000 2 56.68
2008 2010 Equity Share100 57.1 57102933 10 57.1
2005 2010 Equity Share80 50.17 50167198 10 50.17
2005 2005 Equity Share80 45.1 45100851 10 45.1
2004 2005 Equity Share45 31.62 31621862 10 31.62
2003 2004 Equity Share35 26.42 26421862 10 26.42
C).The competitors
The big competitor of India info line is share khan
1) India bulls
2) India Infoline
3) HSBC Invest
4) Motilal Oswal F
5) Future Capital
6) Geojit BNP
7) Delta Corp
8) Nalwa Sons Inv
D).The customer
Products:
The India Infoline pvt ltd offers the following products

I. E-broking.

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II. Distribution
III. Insurance
IV. PMS
V. Mortgages
VI.
E). SWOT ANALYSIS
Strengths
• Original research
• Integrated technology platform
• “one stop shop”
• Pan-India distribution network
• India infoloine.com and 5paisa.com have developed into brands
Weakness
• Lack of banking arm all to complete the bank broker depository chain
• Insignificant presence in institutional segment
Opportunities
• Changing the demographics with higher disposable income and increasingly

complex financial instruments will drive demand for investment advisory
services
• Rapid penetration of internet and computers means that technology enabled
financial services will gain market share
Threats

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• Economic slowdown
• Volatile movement in indices and events like may 17 2004.
• Stock market falls will have a cascading effect on our mutual fund mobilization.
• Increase/decrease in interest rates can effect our debt/ income fund mobilization.
• Future changes in personnel taxation rules can impact insurance sales
INDIA INFOLINE Ltd.
• INDIA INFOLINE Ltd. is India's leading stock broking house with a market
share of around 8.5 % as on 31st March. INDIA INFOLINE Ltd. has been the
largest in IPO distribution.
• The accolades that INDIA INFOLINE has been graced with include:
• Prime Ranking Award (2003-04) - Largest Distributor of IPO's
• Finance Asia Award (2004) - India's best Equity House
• Finance Asia Award (2005)-Best Broker in India
• Euro money Award (2005)-Best Equities House in India
• Finance Asia Award (2005) - Best Broker in India
• Euro money Award (2005) - Best Provider of Portfolio Management:

Equities
Who’s who?
S.No Name Designation

1 Nirmal Jain Chairman
2 R Venkataraman Executive Director
3 Sat Pal Khattar Non Executive Director
4 Kapil Krishan Chief Financial Officer

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5 Nilesh Vikamsey Independent Director
6 Kranti Sinha Independent Director
7 A K Purwar Independent Director
8 Mukesh Sing- Director, India Infoline Securities Pvt Ltd.

9 Seshadri Bharathan- Director, India Infoline. Com Distribution
10 S Sriram- Vice President, Technology
11 Sandeepa Vig Aurora- Vice President, Portfolio Managements
12 Dharmesh Pandya- Vice President, Alternate Channel
13 Toral Munshi- Vice President, Research
14 Anil Mascarenhas- Chief Editor
15 Pinkesh Soni Financial controller
16 Harshad Apte Chief Marketing Officer
4.3 REVIEW OF LITERATURE

INTRODUCTION OF DERIVATIVES
Financial derivatives are so effective in reducing risk because they enable financial
Institutions to hedge that is, engage in a financial transaction that reduces or eliminates
risk. When a financial institution has bought an asset, it is said to have taken a long
position, and this exposes the institution to risk if the returns on the asset are uncertain.
Conversely, if it has sold an asset that it has agreed to deliver to another party at a
Future date, it is said to have taken a short position, and this can also expose the
Institution to risk. Financial derivatives can be used to reduce risk by invoking the
following basic principle of hedging :Hedging risk involves engaging in a financial
transaction that offsets a long position by taking an additional short position, or offsets

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a short position by taking an additional long position. In other words, if a financial

institution has bought a security and has therefore taken a long position, it conducts a
hedge by contracting to sell that security (take a short position) at some future date.
Alternatively, if it has taken a short position by selling a security that it needs to deliver
at a future date, then it conducts a hedge by contracting to buy that security (take a long
position)at a future date. We look at how this principle can be applied using forward
and futures
PARTICIPANTS OF DERIVATIVE
There are three broad categories of participants –hedgers, speculators and arbitrageurs.
hedgers face risk associated with the price of an assets. They use futures or options
markets to reduce or eliminate this risk. Speculates wish to bet on future movement in
the price of an asset. features and options contracts cangue them an extra leverage;they
can increase both the potential gains and losses in a speculative venture. Arbitrageurs
are in business to take advantage of a discrepancy between prices in two different
markets.
Derivative products initially emerged, as hedging devices against fluctuation in

commodity prices and commodity-linked derivatives remained the sole form of such
products for almost three hundred days. In recent days, the market for financial
derivative has grown tremendously in terms of variety of instruments available. The
emergence of the market for derivative products, most notable 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.
Though the use of derivative products, it is possible to partially or fully transfer price
riks by locking in asset prices. as instrument of risk management , these generally do
not influence the fluctuations in the underlying asset prices.
DEFINITIONS

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According to JOHN C. HUL “A derivatives can be defined as a financial instrument

whose Value depends on (or derives from) the values of other, more basic underlying
variables.”
According to ROBERT L. MCDONALD “A derivative is simply a financial instrument

(or even more simply an agreement between two people) which has a value determined
by the price of something else.
With Securities Laws (Second Amendment) Act,1999, Derivatives has been included in
the definition of Securities. The term Derivative has been defined in Securities
Contracts
A Derivative includes: -
a. a security derived from a debt instrument, share, loan, whether secured or unsecured,
risk Instrument or contract for differences or any other form of security;
b. contract which derives its value from the prices, or index of prices, of underlying
securities.
Derivatives were developed primarily to manage, offset or hedge against risk but some
were
Developed primarily to provide the potential for high returns.
FACTERS AFFECTING GROWTH OF DERIVATIVE
Growth of derivative is affected by a number of factors; some of the important factors

are started below.
1. Increased volatility in asset prices in financial markets
2. Increased integration of national financial markets with the international markets.
3. Marked improvement in communication facilities and sharp decline in their costs.

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4. Development of more sophisticated risk management tools, providing economic

agents,
a wider choice of risk management strategies.
5. Innovation in the derivative markets, which optimally combine the risk and
returns,
Reduced risk as well as transaction costs as compared to individual financial assets.
TYPE OF DERIVATIVES
One of classifying derivatives is as,
COMMODITY DERIVATIVE
These deals with commodities like suger, gold, wheat, pepper etc..thus, futures or
options on gold, sugar, pepper, jute etc are commodity derivatives.
FINANCIAL DERIVATIVE
Futures or options or swaps on currencies, gift edged securities, stocks and shares,
stock market indices, cost of living indices etc are financial derivatives.
Another way of classifying derivatives.

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BASIC DERIVATIVES
They are forward /futures contracts and option contracts.
COMPLEX DERIVATIVE
Other derivative, such as swaps are complex

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A) OPTIONS:
The concept of options is not new one. In Fact, options have been in use for centuries.
The idea of an option existed in ancient Greece and Rome. The Romans wrote options
on the cargo that were transported by their ship. In the 17th century, there was an active
option markets in Holland. In fact, options were used in a large measure in the .tulip
bulb mania. Of that century. However, in the absence of mechanism to guarantee the
performance of the contract, the refusal of many put option writers to take delivery of
the tulip bulb and pay the high prices of the bulb they had originally agreed to, led to
bursting of the bulb bubble during the winter of 1637.A number of speculators were
wiped out in the process.
In India, options on stocks of companies were illegal until 25th January 1995 according
to sec. 20 of Securities Contracts (Regulation) Act, 1956. When Securities Laws
(Amendment) Act, 1956 deleted sec. 20, thus making the introduction of options as
legal act. An options contract is an agreement between a buyer and a seller. Such a
contract confers on the buyer a right but not an obligation to buy or sell a specified
quantity of the underlying asset at a fixed price on or up to a fixed day in the future on a
payment of a premium to the seller. The premium paid by the buyer to the seller is the
price of an option contract Options on a futures contract have added a new dimension to
future trading like futures options provide price protection against adverse price move.
Present day options trading on the floor of an exchange began in April 1973. When the
Chicago Board of trade created the Chicago Board Options Exchange (CBOE) for the
sole purpose of trading Options on a limited number of NEW YORK STOCK
EXCHAGE listed equities.
B) FORWARDS:
A forward is an agreement between two parties to exchange an agreed quantity of asset

at a specified future date at a predetermined price specified in the agreements. The
parties concerned agree the settlement date and price in advance. The promised asset
may be currency, commodity, instrument etc. It is the oldest type of all the derivatives.

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The party who promises to buy but he specified asset at an agreed price at a fixed future
date is said to be in the .Long position and the party who promises to sell at an agreed
price at a future date is said to be in short position..
C) FUTURES:
It is similar to the forward contract in all the respect. In fact, a future is a standardized
form of forward contract. A future is a contract or an agreement between two parties to
exchange assets / currency or commodity at a certain future date at an agreed price. The
trader who promises to buy is said to be in. long position. And the party who promises
to sell said be in .short position..
Futures contracts are contracts specifying a standard volume of a particular currency to
be exchanged on a specific settlement date. A future contract is an agreement between a
buyer and a seller. Such a contract confers on the buyer an obligation to buy from the
seller, and the seller an obligation to sell to the buyer a specified quantity of an
underlying asset at a fixed price on or before a fixed day in future. Such a contract can
be for delivery of an underlying asset.
To eliminate counter party risk and guarantee traders, futures markets use a clearing
house which employs initial margin, daily market to market margin, exposures limits
etc. to ensure contract compliance and guarantee settlement standardized futures
contracts generate liquidity. In addition, due to these instruments being traded on
recognized exchange’s results in greater transparency, fairness and efficiency. Due to
these inherent advantages, futures markets have been enormously successful in
comparison with forward markets all over the world
The difference between forward contract and future is that future is a standardized
contract in terms of quantity, date and delivery. It is traded on organized exchanges. So
it has secondary markets. Future contract is always settled daily, irrespective of the
maturity date, which is called marking to the market.
D) SWAP:

28
Swap is an agreement between two parties to exchange one set of financial obligations
with other. It is widely used throughout the world but is recent in India. Swap may be
interest swap or currency swaps. Swaps give companies extra flexibility to exploit their
comparative advantage in
their respective borrowing markets. Swaps allow companies to focus on their
comparative advantage in borrowing in a single currency in the short end of the
maturity spectrum vs. the long-end of the maturity spectrum. Swaps allow companies to
exploit advantages across a matrix of currencies and maturities.
DERIVATIVES MARKET IN INDIA
Prior to liberalization, in India financial markets, there were only a few financial
products and the stringent regulatory products and the stringent regulation environment
also eluded any possibility of development of a derivatives market in country. All
Indian corporate were mainly relying on term lending institution for meeting their
project financing or any other financing requirements and on commercial banks for
meeting working capital finance requirement. Commercial banks are on their assets and
liabilities. The only derivative product they were aware of is the foreign exchange
forward contract. But this scenario changed in the post liberalization period.
Conservative Indian business practitioners began to take a different view of various
aspects of their operations to remain competitive. Financial risks were given adequate
attention and .treasury function. has assumed a significance role in all major corporate
since then. Initially, banks were allowed to pass on gains arising out of cancellation of
forward’s contracts to the customers and customers were permitted to cancel and re-
book the forward contracts. This remarkable change was followed by the introduction
of cross currency forward contacts. But the major milestone in developing forex
derivatives market in India was the introduction of cross currency options. The RBI.s
objective of introducing cross currency options was to provide a complicated hedging
strategy for the corporate in their risk management activities. The concept of

29
derivatives is of course not new to the Indian market. Though derivatives in the
financial markets have nothing to talk about home, in the commodity markets they have
a long history of over hundred days. In 1875, the first commodity futures exchange was
set up in Mumbai under the guidance of Bombay Cotton Traders Association. A
clearinghouse for clearing and settlement of these traders was set up in 1918. Over a
period of twenty days during 1900-1920, other futures markets were set up in various
places. Futures market in raw jute in Kolkata (1912), wheat futures market in Hapur
(1913), and bullion futures market in Mumbai (1920). When it comes to financial
markets, derivatives in equities claim a long existence. The official history of Bombay
Stock Exchange (then known as Native Share and Stock Brokers Association) reveals
that the concept of options existed since 1898 as is reflected from a quote given by one
of the MPs-.India being the original home of options, a native broker would give a few
points to the brokers of the other nations in the manipulation of puts and calls..
However, such an early expertise gained by Indian traders in derivatives trading has
come to an end with the Government of India’s ban on forward contract during the
1960.s on the ground of their intrinsic undesirability. But ironically, the same were
reintroduced by the government in the 1980.s as essential instruments for eliminating
wide fluctuations in prices and more so because of the World Bank. UNCTAD report,
which strongly urged the Indian government to start futures trading in major cash crops,
especially in view of India’s entry to WTO. With the world embracing the derivative
trading on large scale, the Indian market obviously cannot remain aloof, especially after
liberalization has been set in motion. Now we are in the threshold of introducing
trading in derivatives, beginning with the stock index futures to be well set for the
introduction of derivative trading. With L.C. Gupta committee having recently
submitted its report on the subject, SEBI is engaged in the process of assessing the
feasibility and desirability of introducing such trading.
The NSE and BSE are two exchanges on which financial derivatives are traded. The
combined notional values of the daily volumes on both the bourses stand at around RS.
150000cr. In developed markets trading in the derivatives segment are thrice as large as
in the cash markets. In India, the figure is hardly 20% of cash markets. Quite clearly

30
our derivative markets have a long way to go. According to the Executive Director of
Association of NSE Member of India
(Amni), Vinod Jain. Volumes in derivatives segment are stagnating due to lack of
growth in the number of markets participants. Besides these products are still to catch
up with the masses who are keeping away from this segment due to lack of
understanding of the products and high contract price.
a) COMMODITIES DERIVATIVES MARKETS
In order to give more thrust on agricultural sector, the National Agricultural Policy,
2000 has envisaged and domestic market reforms and dismantling of all controls and
regulations in agricultural commodity markets. It has also proposed to extend the
coverage of futures markets to minimize the wide fluctuations in commodity market
prices and for hedging the risk from price fluctuations. As a result of these
recommendations, there are presently, 15 exchanges carrying out futures trading in as
many as 30 commodity items. Out to these, two exchanges viz.
IPSTA, Cochin and the Bombay Commodity Exchange (BCE) Ltd.; have been
upgraded to international exchanged to deal international contracts in peeper and castor
oil respectively. Moreover, permission has been given to two more exchange viz. the
First Commodities Exchange of India Ltd., Kochi (for copra/coconut, its oil and
oilcake), and Keshave Commodity Exchange Ltd., Delhi (for potato), where futures
trading started very recently.
The government has also permitted four exchange viz., EICA, Mumbai. The Central
Gujarat Cotton Dealers Association, Vadodara; The South India cotton Association
Coimbatore; and the Ahmadabad Cotton Merchants Association, Ahmadabad, for
conducting forward (non-transferable specific delivery) contracts in cotton. Lately as
part of further liberalization of trade in agriculture and dismantling of ECA, 1955
futures trade in sugar has been permitted and three new exchanges viz., Commodities
Limited, Mumbai; NCS InfoTech Ltd., Hyderabad; and E-Sugar India.com, Mumbai
have been given approval for conducting sugar futures (Ministry of Food and

31
Consumer Affairs, 1999). In the recent past, the GOI has set up a committee to explore
and appraise matters important to the establishment and financing of the proposed
national commodity exchange for the nationwide trading of commodity futures
contracts. The usage of warehouse receipts as a means for delivery of commodities
under the contracts is also being explored. The warehouse receipts system has been
operationalized in COFEI (coffee futures exchange of India) with effect from 1998. The
Government of India is on the move to establish a system of warehouse receipts in
other commodity stock exchanges at various places of the country.
Besides these domestic developments, during 1998, Reserve Bank of India permitted
the Indian Corporate Sector to access the exchanges subject to certain conditions with a
view to enable domestic metal manufacturers to compete with global players. The de-
regulation of oil-imports being on the cards, government should create the right
atmosphere for oil sector to participate in the international oil-derivatives Markets.
Despite these developments, there are still many impediments that hold back the
farming community from entering the futures market and reap full benefits. Brief
descriptions of commodity exchanges are those which trade in particular commodities,
neglecting the trade of securities, stock index futures and options etc. In the middle of
19th century in the United States, businessmen began organizing market forums to
make the buying and selling of commodities easier. These central marketplaces
provided a place for buyers and sellers to meet, set quality and quantity standards, and
establish rules of business.
Agricultural commodities were mostly traded but as long as there are buyers and
sellers, any commodity can be traded. In 1872, a group of Manhattan dairy merchants
got together to bring chaotic condition in New York market to a system in terms of
storage, pricing, and transfer of agricultural products.
In 1933, during the Great Depression, the Commodity Exchange, Inc. was established
in New York through the merger of four small exchanges . the National Metal

32
Exchange, the Rubber Exchange of New York, the National Raw Silk Exchange, and
the New York Hide Exchange.
The major commodity markets are in the United Kingdom and in the USA. In India
there are 25 recognized future exchanges, of which there are three national level
multicommodity exchanges. After a gap of almost three decades, Government of India
has allowed forward transactions in commodities through Online Commodity
Exchanges, a modification of traditional business known as Adhat and Vayda Vyapar to
facilitate better risk coverage and delivery of commodities. The three exchanges are:
• National Commodity & Derivatives Exchange Limited (NCDEX)

• Multi Commodity Exchange of India Limited (MCX)
• National Multi-Commodity Exchange of India Limited (NMCEIL)
All the exchanges have been set up under overall control of Forward Market
Commission (FMC) of Government of India.
National Commodity & Derivatives Exchange Limited (NCDEX)

National Commodity & Derivatives Exchange Limited (NCDEX) located in Mumbai is
a public limited company incorporated on April 23, 2003 under the Companies Act,
1956 and had commenced its operations on December 15, 2003.This is the only
commodity exchange in the country promoted by national level institutions. It is
promoted by ICICI Bank Limited, Life Insurance Corporation of India (LIC), National
Bank for Agriculture and Rural Development (NABARD) and National Stock
Exchange of India Limited (NSE). It is a professionally managed online multi
commodity exchange. NCDEX is regulated by Forward Market Commission and is
subjected to various laws of the land like the Companies Act, Stamp Act, Contracts
Act, Forward Commission (Regulation) Act and various other legislations.
Multi Commodity Exchange of India Limited (MCX)

33
Headquartered in Mumbai Multi Commodity Exchange of India Limited (MCX), is an

independent and de-mutulised exchange with a permanent recognition from
Government of India. Key shareholders of MCX are Financial Technologies (India)
Ltd., State Bank of India, Union Bank of India, Corporation Bank, Bank of India and
Canara Bank. MCXfacilitates online trading, clearing and settlement operations for
commodity futures markets across the country.
MCX started offering trade in November 2003 and has built strategic alliances with
Bombay Bullion Association, Bombay Metal Exchange, and Solvent Extractors.
Association of India, Pulses Importers Association and Shetkari Sanghatana.
National Multi-Commodity Exchange of India Limited (NMCEIL)
National Multi Commodity Exchange of India Limited (NMCEIL) is the first

demutualized, Electronic Multi-Commodity Exchange in India. On 25th July, 2001, it
was granted approval by the Government to organize trading in the edible oil complex.
It has operationalised from November 26, 2002. Central Warehousing Corporation Ltd.,
Gujarat State Agricultural Marketing Board and Neptune Overseas Limited are
supporting it. It got its recognition in October 2002.
Commodity exchange in India plays an important role where the prices of any
commodity are not fixed, in an organized way. Earlier only the buyer of produce and its
seller in the market judged upon the prices. Others never had a say. Today, commodity
exchanges are purely speculative in nature. Before discovering the price, they reach to
the producers, end-users, and even the retail investors, at a grassroots level. It brings a
price transparency and risk management in the vital market.
A big difference between a typical auction, where a single auctioneer announces the
bids and the Exchange is that people are not only competing to buy but also to sell. By
Exchange rules and by law, no one can bid under a higher bid, and no one can offer to

34
sell higher than someone else lower offer. That keeps the market as efficient as
possible, and keeps the traders on their toes to make sure no one gets the purchase or
sale before they do. Brief descriptions of commodity exchanges are those which trade
in particular commodities, neglecting the trade of securities, stock index futures and
options etc.
In the middle of 19th century in the United States, businessmen began organizing
market forums to make the buying and selling of commodities easier. These central
marketplaces provided a place for buyers and sellers to meet, set quality and quantity
standards, and establish rules of business.
Agricultural commodities were mostly traded but as long as there are buyers and
sellers, any commodity can be traded. In 1872, a group of Manhattan dairy merchants
got together to bring chaotic condition in New York market to a system in terms of
storage, pricing, and transfer of agricultural products.
b) CURRENCY DERIVATIVES
Foreign exchange derivatives market is one of the oldest derivatives markets in India.
Presently, India has got a well-established dollar-rupee forward market with contrast
traded for one month, two months and three months expiration. Currency derivatives
markets have begun to evolve with the allowing of banks to pass on the gains upon
cancellation of a forward to the customer and permitting customer to cancel and rebook
forward contracts.
Introduction of cross currency options can be considered as another major step towards
developing forex derivatives markets in India. Today, Indian corporate are permitted to
purchase cross currency options to hedge exposures arising out of trade. Authorized
dealers who offer these products have to necessarily cover their exposure in
international markets i.e., they shall not carry the risk in their own books. Cross
currency options are essentially meant for buying or selling any foreign currency in
terms of US dollar. They are therefore, useful only to those traders who invoice their

35
exports and imports in currencies other than US dollar or for corporate who borrow in
currencies other than US dollar. As against this, majority of Indian trade is invoiced in
the US dollars. Thus, they have almost no relevance in the Indian context.
Indian banks are allowed to use the foreign currency interest rate swaps, forward rate
agreements/interest rate options/swaps, and forward rate agreements/interest rate
option/swaption/caps/floors to hedge interest rate and currency mismatch in their
balance sheets. Resident and the non-resident clients are also permitted to use the above
products as hedges for liabilities on their balance sheets.
Here it is worth remembering that globally, foreign exchange traders are becoming as
common as stock traders. But in India, forex dealers still play second fiddle to stock
traders and merely meet the needs of the exporters deposits. This may be due to their
risk averting behavior and perhaps lack of proper research. Such being the position of
the forex market, it is too premature to expect that once, foreign currency-Indian rupee
options are introduced, the market will pick up momentum.
This is all the more essential in a market where exchange rates though stated to be
market determined, are often found influenced by RBI.s intervention in the exchange
market. As a result, exchange rate movements hardly obey the principle of interest rate
differentials. The incongruence in the domestic money rates as derived from the
USD/INR forwards yield curve supports this assertion. For example, the one-year
domestic term money is around 6-6.25% whereas that of the one-year implied forward
rate is around 5.40%. In such a scenario, it is difficult for a currency trader to take a
firm view on the exchange rate movement.
c) STOCK MARKET DERIVATIVES

Today trading on the spot market for equity in India has always been a futures market
with weekly/fortnightly settlements. These markets features the risks and difficulties of
futures market, But without the gains in price discovery and hedging services that come
with separation the spot market from the futures market. India’s primary market is
acquainted with two types of derivatives.

36
• Convertible bonds
• Warrants
As these warrants are listed and traded, it could be said that options market of a limited
sort already exist in our market. Besides, a wide range of interesting derivatives
markets exists in the informal sector. Contracts such as bhav-bhav, teji-mandi, etc. are
traded in these markets. These informal markets enjoy a very limited participation and
have their presence outside the conventional institutions of India’s financial system.
The first step towards introduction of derivatives trading in India in its current format
was the promulgation of the securities laws (Amendment) Ordinance, 1995 that
withdrew the prohibition on options in securities. The real push to derivatives market in
India was however given by the SEBI. The security market watchdog, in November
1996 by setting up a committee under the chairmanship of Dr L C Gupta to develop
.appropriate regulatory framework for derivatives trading in India..
In 2000, SEBI permitted NSE and BSE to commence 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.
Futures contracts on Individual stocks were launched on November 9, 2001. Trading
and settlement is done in accordance with the rules of the respective exchanges. But the
trading volumes were initially quite modest.
This could be due to -----
• Initially, few members have been permitted by SEBI to trade on derivatives;

• FII.S, MFS have been allowed to have a very limited participation;
• Mandatory requirements for brokerage firms to have .SEBI approved-
certification test-passed. Brokers for undertaking derivatives trading. And
• Lack of clarity on taxation and accounting aspects under derivatives trading.

37
The current trading behavior in the derivatives segments reveals that single stock
futures continues to account for sizeable proportion. A recent press report indicates that
futures in Indian exchanges have reached global volumes. One possible reason for such
skewed behavior of the traders could be that futures closely resemble the erstwhile
badla system. Such distortions are not however in the interest of the market. SEBI has
permitted trading in options and futures on individual stocks, but not on all the listed
stocks. It was very selective, stocks that are said to be highly volatile with a low market
capitalization are not allowed for option trading. This act of SEBI is strongly resented
by a section of the market. Their argument is that equity options are indispensable to
investors who need to protect their investment from volatility. The higher the volatility
of a stock the more necessary it is to list options on that stock. They are highly vocal in
arguing that SEBI should design an effective monitoring, surveillance and risk
management system at the level of the exchanges and clearing house to avert and
manage the default risks that are likely to arise owing to high volatility in low market
capital stocks instead of simply banning trading in options on them. SEBI needs to
examine these arguments. It may have to take a stand to nip in the bud all kinds of
manipulations by handling out severe punishments to all such erring companies.
Today, mutual funds are permitted to use equity derivatives products for hedging and
portfolio rebalancing.. However, such usage is not favored by fund managers as they
strongly apprehend that the dividing line between hedging and speculation being thin,
they may always get exposed to the questioning by the regulatory authorities.
d) CREDIT DERIVATIVES AND OTHERS

A credit derivative is a financial transaction whose pay-off depends on whether or not a
credit event occurs. A credit event can be:
• Bankruptcy
• Default
• Upgrade
• Downgrade
• Interest rate movement

38
• Mortgage defaults
• Unforeseen pay-offs
A credit derivative, like any other derivative, derives it.s value from an case is the
credit. In the event of the underlying asset failing to perform as expected, credit
derivatives, ensures that someone other than the principal lender absorbs the resulting
financial loss. Credit derivatives market in India though could be said as non-existent
holds huge potential. Some of the important factors/situation such as opening up of the
insurance sector to foreign private players, relief to investors, tax benefits to corporate,
proxy hedgers etc., could provide the momentum to the credit derivatives market in
India, boosting yields and bringing down risk for both the corporates and banks.
Secondly, Indian banking system is saddled with huge NPA.s, which it is of course,
eagerly trying to get rid off. The mounting pressure on profitability is making banks
more credit-averse. In such a situation, if markets can offer .credit-insurance. In the
form of derivatives, everyone would jump for it.
TYPES OF OPTIONS
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

39
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.
The price at which option is exercised is called an exercise price or a strike price. The
asset on which the call or put option is created is referred to as the underlying asset.
Depending on when an option can be exercised, it is classified as follows:
• European Option: When an option is allowed to exercise only on the maturity

date, it is called a European Option.
• American Option: When an option can be exercised any time before its
maturity is called an American Option.
• Capped Option: When an option is allowed to exercise only during a specified
period of time prior to its expiration unless the option reaches the cap value
prior to expiration in which the option is automatically exercised. The holder of
an option has to pay a price for obtaining a call or put option. The price will
have to be paid whether the holder exercises his option and it is called option
premium.
Factors Determining the Option Value:
The precise location of the option value depends on five key factors:
• Exercise price
• Expiration date
• Stock price
• Stock price variability
• Interest rate

40
Exercise Price: Other things being constant, higher the exercise price, the lower the
value of call option. It should be remembered that the value of call option could never
be negative; regardless of how high the exercise price is set.
Expiration Date:
Other things being constant, the longer the time to expiration date, the more valuable
the call option. Consider two American calls with maturities of one year and two days.
The two-year call obviously is more valuable than one-year call because it gives its
holder one more year within which it can be exercised.
Stock Price: The value of a call option, other things being constant, increases with the
stock price.
Stock Price Variability: A call option has value when there is possibility that the stock
price exceeds the exercise price before the expiration date. Other things being equal, the
higher the variability of the stock price, the greater the likelihood that stock price will
exceed the exercise.
REASONS FOR USING OPTIONS
The reasons for using options on futures are reflected in the structure of an option
contract.
1) An option, when purchased gives the buyer the right, but not the obligation, to buy or
sell a specific amount of a specific commodity at a specific price within a specific
period of time.
2) The decision to exercise the option is entirely that of the buyer.
3) The purchaser of the options can lose no more than the initial amount of money
invested (premium).
4) An option buyer is never subject to margin calls. This enables the purchaser to
maintain a market position, despite any adverse moves without putting up additional
funds.
MOTIVES for BUYING and SELLING OPTIONS

41
One may be buyer or seller of call or put option for a variety of reasons. A call option
buyer for e.g. is bullish that he is or she believes the price of the underlying futures
contract will rise. If price do rise, the call option buyer has three course of action
available.
First is to exercise the option and acquires the underlying futures contract at the strike
price
Second is to offset the long call position with a sale and realize a profit.
Third is to let the option expires worthless and forfeit the unrealized profit.
The seller of the call option expects futures prices to remain relatively stable or to
decline modestly. If prices remain stable, the receipt of the option premium enhances
the rate of return on a covered position. If prices decline, selling the call against a long
futures position enables the writer to use the premium as a cushion to provide
protection to the extent of the premium received. For instance, if T-bond futures were
purchased at 80.00 and call option with an 80.00 strike price were sold for 2.00, T-bond
futures could decline to the 78.00 levels before there would be a net loss in the position.
However, T-bond futures rise to 82.00 the call option seller forfeits the opportunity for
profit because the buyer would likely exercise the call against him and acquire a future
position at 80.00(strike price).
The perspective of the put buyer and put seller are completely different. The buyer of
the put option believes for the underlying futures will decline for e.g.: - if a TBond put
option with a strike price of 82.00 is purchased for 2.00 while T-Bond futures also are
at 82.00, the put option will be profitable for the purchaser to exercise if T-Bond futures
decline below 80.00
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

42
as a ‘SWAP’. In case of swap, only the payment flows are exchanged and not the
principle amount. The two commonly used swaps are:
INTEREST RATE SWAPS:
Interest rate swaps is an arrangement by which one party agrees to exchange his series
of fixed rate interest payments to a party in exchange for his variable rate interest
payments. The fixed rate payer takes a short position in the forward contract whereas
the floating rate payer takes a long position in the forward contract.
CURRENCY SWAPS:
Currency swaps is an arrangement in which both the principle amount and the interest
on loan in one currency are swapped for the principle and the interest payments on loan
in another currency. The parties to the swap contract of currency generally hail from
two different countries. This arrangement allows the counter parties to borrow easily
and cheaply in their home currencies. Under a currency swap, cash flows to be
exchanged are determined at the spot rate at a time when swap is done. Such cash flows
are supposed to remain unaffected by subsequent changes in the exchange rates.
FINANCIAL SWAP:
Financial swaps constitute a funding technique which permit a borrower to access one
market and then exchange the liability for another type of liability. It also allows the
investors to exchange one type of asset for another type of asset with a preferred
income stream.
OTHER KINDS OF DERIVATIVES

The other kind of derivatives, which are not, much popular are as follows:
BASKETS -
Baskets options are option on portfolio of underlying asset. Equity Index Options are
most popular form of baskets
LEAPS -

43
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 days. 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.
Types of traders in a derivatives market
Hedgers, speculators and arbitrators are the types of traders in derivatives market.
Hedgers:
Hedgers are those who protect themselves from the risk associated with the price of an
asset by using derivatives. A person keeps a close watch upon the prices discovered in
trading and when the comfortable price is reflected according to his wants, he sells
futures contracts. In this way he gets an assured fixed price of his produce.
In general, hedgers use futures for protection against adverse future price movements in
the underlying cash commodity. Hedgers are often businesses, or individuals, who at
one point or another deal in the underlying cash commodity.
Take an example: A Hedger pays more to the farmer or dealer of a produce if its prices
go up. For protection against higher prices of the produce, he hedges the risk exposure
by buying enough future contracts of the produce to cover the amount of produce he
expects to buy. Since cash and futures prices do tend to move in tandem, the futures

44
position will profit if the price of the produce rise enough to offset cash loss on the
produce.
Speculators:
Speculators are somewhat like a middleman. They are never interested in actual owing
the commodity. They will just buy from one end and sell it to the other in anticipation
of future price movements. They actually bet on the future movement in the price of an
asset. They are the second major group of futures players. These participants include
independent floor traders and investors. They handle trades for their personal clients or
brokerage firms. Buying a futures contract in anticipation of price increases is known as
.going long.. Selling a futures contract in anticipation of a price decrease is known as
.going short.. Speculative participation in futures trading has increased with the
availability of alternative methods of participation.
Speculators have certain advantages over other investments they are as follows:
If the trader’s judgment is good, he can make more money in the futures market faster
because prices tend, on average, to change more quickly than real estate or stock prices.
Futures are highly leveraged investments. The trader puts up a small fraction of the
value of the underlying contract as margin, yet he can ride on the full value of the
contract as it moves up and down. The money he puts up is not a down payment on the
underlying contract, but a performance bond. The actual value of the contract is only
exchanged on those rare occasions when delivery takes place.
Arbitrators:
According to dictionary definition, a person who has been officially chosen to make a
decision between two people or groups who do not agree is known as Arbitrator. In
commodity market Arbitrators are the person who takes the advantage of a discrepancy
between prices in two different markets. If he finds future prices of a commodity
edging out with the cash price, he will take offsetting positions in both the markets to

45
lock in a profit. Moreover the commodity futures investor is not charged interest on the
difference between margin and the full contract value.
TRADING INTRODUCTION
The futures & Options trading system of NSE, called NEAT-F&O trading system,
provides a fully automated screen-based trading for Nifty futures & options and stock
futures & Options on a nationwide basis as well as an online monitoring and
surveillance mechanism. It supports an order driven market and provides complete
transparency of trading operations. It is similar to that of trading of equities in the cash
market segment.
The software for the F&O market has been developed to facilitate efficient and
transparent trading in futures and options instruments. Keeping in view the familiarity
of trading members with the current capital market trading system, modifications have
been performed in the existing capital market trading system so as to make it suitable
for trading futures and options.
On starting NEAT (National Exchange for Automatic Trading) Application, the log
on (Pass Word) Screen Appears with the Following Details.
1) User ID
2) Trading Member ID
3) Password – NEAT CM (default Pass word)
4) New Pass Word
Note: - 1) User ID is a Unique
2) Trading Member ID is Unique & Function; it is Common for all user of the
Trading Member
3) New password – Minimum 6 Characteristic, Maximum 8 characteristics only 3
attempts are accepted by the user to enter the password’ to open the Screen
4) If password is forgotten the User required to inform the Exchange in writing to
reset the Password.

46
TRADING NETWORK

47
SATELLITE
HUB ANTENNA
NSE MAIN FRAME
BROKER’S PREMISES
Participants in Security Market

48
1) Stock Exchange (registered in SEBI)-23 Stock Exchanges

2) Depositaries (NSDL,CDSL)-2 Depositaries
3) Listed Securities-9,413
4) Registered Brokers-9,519
5) FIIs-502
Highest Investor Population
State Total No. Investors % of Investors in India
Maharashtra 9.11 Lakhs 28.50
Gujarat 5.36 Lakhs 16.75
Delhi 3.25 Lakhs 10.10%
Tamilnadu 2.30 Lakhs 7.205
West Bengal 2.14 Lakhs 6.75%
Andhr a Pradesh 1.94 Lakhs 6.05%

49
CHAPTER 4
ANALYSIS AND INTERPRETATION:

FUTURES:
Futures are legally binding agreement to buy or sell an asset at a

certain time in the future at a certain price.
FORMULA:
T
Fo = So (1+r-d)
So = closing price of a market on that day.
r = Rate of return
d = Dividend
T = Time period
OPTIONS:
Profit of the holder = (Spot Price – Strike Price) –Premium*
(Lot Size) in case of call option.

50
Profit of the holder = Premium* (Lost Size) in case of Put
Option.
ANALYSIS OF ICICI:
The objective of this analysis is to evaluate the profit/loss position of futures and
options. This analysis is based on sample data taken of ICICI BANK scrip. This
analysis considered the Jun 2010 contract of ICICI BANK. The lot size of ICICI
Date Market price Future price BANK is 175,
the time period
28-May-10 1226.7 1227.05
31-May-10 1238.7 1239.7 in which this
1-June-10 1228.75 1233.75 analysis done is
2-June-10 1267.25 1277
from 27-05-
3-June-10 1228.95 1238.75
4-June-10 1286.3 1287.55 2010 to 1.07.10.
7-June-10 1362.55 1358.9
8-June-10 1339.95 1338.5
9-June-10 1307.95 1310.8
10-June-10 1356.15 1358.05
11-June-10 1435 1438.15
14-June-10 1410 1420.75
15-June-10 1352.2 1360.1
16-June-10 1368.3 1375.75
17-June-10 1322.1 1332.1
18-June-10 1248.85 1256.45
21-June-10 1173.2 1167.85
22-June-10 1124.95 1127.85
23-June-10 1151.45 1156.35
24-June-10 1131.85 1134.5
25-June-10 1261.3 1265.6
28-June-10 1273.95 1277.3
29-June-10 1220.45 1223.85
30-June-10 1187.4 1187.4
1-July-10 1147 1145.9

51
Graph: 1
FINDINGS
If a person buys 1 lot i.e. 175 futures of ICICI BANK on 28th May, 2010 and sells on 1 st
July 2010 then he will get a loss of 1145.9-1227.05 = -81.15 per share. So he will get a loss
of 14201.25 i.e. -81.15 * 175
If he sells on 14th June, 2010 then he will get a profit of 1420.75-1227.05 = 193.7 i.e. a
profit of 193.7 per share. So his total profit is 33897.5 i.e. 193.7 * 175
The closing price of ICICI BANK at the end of the contract period is 1147 and this is
considered as settlement price.
The following table explains the market price and premiums of calls.

52
• The first column explains trading date

• Second column explains the SPOT market price in cash segment on that date.
• The third column explains call premiums amounting at these strike prices; 1200, 1230,
Date Market price 1200 1230 1260 1290 1320 1350
28-May-10 1226.7 67.85 53.05 39.65 32.25 24.2 18.5

31-May-10 1238.7 74.65 58.45 44.05 32.75 23.85 19.25
1-June-10 1228.75 62 56.85 39.2 30 22.9 18.8
2-June-10 1267.25 100.9 75.55 63.75 49.1 36.55 27.4
3-June-10 1228.95 75 60.1 45.85 34.5 26.4 22.5
4-June-10 1286.3 109.6 91.05 68.25 51.35 38.6 29.15
7-June-10 1362.55 170 143.3 120 Strike prices
100 79.4 62.35
8-June-10 1339.95 140 119.35 100 85 59.2 42.85
9-June-10 1307.95 140 101 74.35 62.05 46.65 33.15
10-June-10 1356.15 160.6 131 110 95.45 70.85 53.1
11-June-10 1435 250.7 151.8 188.9 164.7 130.9 104.55
14-June-10 1410 240 213.5 148 134.9 96 88.2
15-June-10 1352.2 155 150.05 107.5 134.9 66 52.65
16-June-10 1368.3 128.4 140 90 63 78.2 60.95
17-June-10 1322.1 128.4 140 95 67.5 50.2 39.15
18-June-10 1248.85 128.4 60 54 37.95 29.15 19.3
21-June-10 1173.2 52 36.5 26.3 24.45 14.55 9.95
22-June-10 1124.95 44.15 31.05 22.55 12.45 10.35 6.7
23-June-10 1151.45 50.25 39.3 23.25 17 16.35 8.6
24-June-10 1131.85 40.4 22 17.05 12.1 9.45 5.1
25-June-10 1261.3 80.5 62 40.85 24.55 16.15 9.75
28-June-10 1273.95 91.85 61.65 44.8 31.4 20.25 11.35
29-June-10 1220.45 46 25.95 17.45 10.5 4.05 2.95
30-June-10 1187.4 18.65 9.05 4.5 1.4 0.75 0.2
1-July-10 1147 0.45 0.5 1 1.4 0.1 0.2
1260, 1290, 1320 and 1350.
Call options:

53
CALL OPTION
BUYERS PAY OFF:
 Those who have purchase call option at a strike price of 1260, the premium
payable is 39.65
 On the expiry date the spot market price enclosed at 1147. As it is out of the
money for the buyer and in the money for the seller, hence the buyer is in loss.
 So the buyer will lose only premium i.e. 39.65 per share.
So the total loss will be 6938.75 i.e. 39.65*175
SELLERS PAY OFF:

 As Seller is entitled only for premium if he is in profit.
 So his profit is only premium i.e. 39.65 * 175 = 6938.75
Put options:
Strike prices

54
28-May-10 1226.7 39.05 181.05 178.8 197.15 190.85 191.8

31-May-10 1238.7 34.4 181.05 178.8 197.15 190.85 191.8
1-June-10 1228.75 32.1 181.05 178.8 197.15 190.85 191.8
2-June-10 1267.25 22.6 25.50 178.8 41.55 190.85 191.8
3-June-10 1228.95 32 38.00 178.8 82 190.85 191.8
4-June-10 1286.3 17.65 25.00 37.05 82 190.85 191.8
7-June-10 1362.55 12.4 12.60 20.15 34.85 43.95 191.8
8-June-10 1339.95 10.15 12.00 20.05 30 42 191.8
9-June-10 1307.95 11.9 15.00 26.5 36 51 191.8
10-June-10 1356.15 9 11.00 15 25.2 33.7 47.8
11-June-10 1435 3.75 11.00 10 8.9 12.75 18.35
14-June-10 1410 3.75 11.00 8.5 12 12.4 22.45
15-June-10 1352.2 6.45 7.00 10 17.45 23.1 38.3
16-June-10 1368.3 8 8.00 11.25 13.3 22.55 35.35
17-June-10 1322.1 7.3 8.00 17.8 25.45 38.25 56.4
18-June-10 1248.85 18.15 36.60 35 67.85 76.05 112.2
21-June-10 1173.2 103.5 70.00 69.65 135.05 151.35 223.4
22-June-10 1124.95 110 138.90 138.6 170.05 210 280
23-June-10 1151.45 71 138.90 135 150 210 200
24-June-10 1131.85 99 138.90 135 150 210 200
25-June-10 1261.3 15.9 26.35 33 50.05 210 200
28-June-10 1273.95 16.7 19.00 30 45 55 81.45
29-June-10 1220.45 18 38.00 50 45 100 145
30-June-10 1187.4 27.5 60.00 85.2 120 145.05 145
1-July-10 1147 50 60.00 85.2 120 145.05 145
PUT OPTION
BUYERS PAY OFF:

 As brought 1 lot of ICICI that is 175, those who buy for 1200 paid 39.05 premium per
share.
 Settlement price is 1147
Strike price 1200.00
Spot price (-) 1147.00

55
53.00
Premium (-) 39.05
13.95 x 175= 2441.25
Buyer Profit = Rs. 2441.25
Because it is positive it is in the money contract hence buyer will get more profit,
incase spot price decreases, buyer’s profit will increase.
SELLERS PAY OFF:
 It is in the money for the buyer so it is in out of the money for the seller, hence
he is in loss.
 The loss is equal to the profit of buyer i.e. 2441.25.
GARPH SHOWING THE PRICE MOVEMNTS OF SPOT & FUTURE
1500
1450
1400
PRICE
1350
1300 Market price
1250
1200 Future price
1150
1100
1050
1000
1- 10
15 -10
17 -10
21 -10
23 -10
25 -10
29 -10
31 -10
0
3- 10
10
9- 10
11 -10
-1
-
n-
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7-
28
CONTRACT DATES
Graph: 2
INTERPRETATION:

56
 The future price of ICICI is moving along with the market price.
 If the buy price of the future is less than the settlement price, than the buyer of a
future gets profit.
 If the selling price of the future is less than the settlement price, than the seller
incur losses.
ANALYSIS OF SBI:-
options. This analysis is based on sample data taken of SBI scrip. This analysis
considered the jun 2010 contract of SBI. The lot size of SBI is 132, the time period in
which this analysis done is from 28-05-2010 to 1-07-10.

57
Date Market Price Future price

Table: 4
28-May-10 2377.55 2413.7

31-May-10 2371.15 2409.2
1-June-10 2383.5 2413.45
2-June-10 2423.35 2448.45
3-June-10 2395.25 2416.35
4-June-10 2388.8 2412.5
7-June-10 2402.9 2419.15
8-June-10 2464.55 2478.55
9-June-10 2454.5 2473.1
10-June-10 2409.6 2411.15
11-June-10 2434.8 2454.4
14-June-10 2463.1 2468.4
15-June-10 2423.45 2421.85
16-June-10 2415.55 2432.3
17-June-10 2416.35 2423.05
18-June-10 2362.35 2370.35
21-June-10 2196.15 2192.3
22-June-10 2137.4 2135.2
23-June-10 2323.75 2316.95
24-June-10 2343.15 2335.35
25-June-10 2407.4 2408.9
28-June-10 2313.35 2305.5
29-June-10 2230.7 2230.5
30-June-10 2223.95 2217.25
1-July-10 2167.35 2169.9

58
Graph: 3
FINDING:
If a person buys 1 lot i.e. 350 futures of SBI on 28 th May , 2010 and sells on 1st July, 2010
then he will get a loss of 2169.9-2413.7 = 243.8 per share. So he will get a profit of
32181.60 i.e. 243.8 * 132
If he sells on 15th Jan, 2010 then he will get a profit of 2468.4-2413.7 = 54.7 i.e. a profit of
54.7 per share. So his total profit is 7220.40 i.e. 54.7 * 132

59
The closing price of SBI at the end of the contract period is 2167.35 and this is considered
as settlement price.
2400, 2430, 2460 and 2490.
Call options:

60
Strike prices
Date Market Price 2340 2370 2400 2430 2460 2490
28-May-10 2377.55 145 92 104.35 108 79 68

31-May-10 2371.15 145 92 102.95 108 72 59
1-June-10 2383.5 134 92 101.95 108 69.85 59
2-June-10 2423.35 189.8 92 123.25 105.8 90.25 76.55
3-June-10 2395.25 189.8 92 98.45 93.6 76.6 60.05
4-June-10 2388.8 189.8 92 100.95 86 74.8 60.05
7-June-10 2402.9 189.8 92 95.55 88.15 76.15 61.1
8-June-10 2464.55 190 92 128.55 118.3 99.85 84.8
9-June-10 2454.5 170 92 126.75 121 92.15 77.45
10-June-10 2409.6 170 190 84 72.25 58.8 51.85
11-June-10 2434.8 160 190 108.85 94.95 74.65 64.85
14-June-10 2463.1 218.5 190 110.8 90.2 81.5 64.8
15-June-10 2423.45 218.5 190 87.85 75 62.65 55.3
16-June-10 2415.55 96 98 102.15 95.45 68.5 61.95
17-June-10 2416.35 96 190 91.85 80 66 55
18-June-10 2362.35 96 190 62.1 50.55 44 30
21-June-10 2196.15 22.25 190 25.3 15 11.7 29
22-June-10 2137.4 22.25 190 21.05 15 11.7 10
23-June-10 2323.75 22.25 190 47.05 15 32.65 29.3
24-June-10 2343.15 104 190 48.2 40 26.45 26.3
25-June-10 2407.4 113.7 190 61.65 48.75 39.8 27.65
28-June-10 2313.35 0 0 0 0 0 0
29-June-10 2230.7 13 15 9 0 0 0
30-June-10 2223.95 13 15 9 0 0 0
1-July-10 2167.35 13 15 9 0 0 0
CALL OPTION
BUYERS PAY OFF:
 Those who have purchased call option at a strike price of 2400, the premium
payable is 104.35

61
 On the expiry date the spot market price enclosed at 2167.65. As it is out of the
So the total loss will be 13774.2 i.e. 104.35*132
SELLERS PAY OFF:

 So his profit is only premium i.e. 104.35 * 132 = 13774.2
Put Options:

62
Table 5
PUT OPTION
Date Market Price 2340 2370 2400 2430 2460 2490
28-May-10 2377.55 362.75 306.9 90 303 218.05 221.95

31-May-10 2371.15 362.75 306.9 90.6 303 218.05 221.95
1-June-10 2383.5 362.75 306.9 84.95 303 218.05 221.95
2-June-10 2423.35 60 40 73.55 303 218.05 221.95
3-June-10 2395.25 60 40 86 303 218.05 221.95
4-June-10 2388.8 60 40 87.35 303 218.05 221.95
7-June-10 2402.9 60 150 79 303 218.05 221.95
8-June-10 2464.55 60 150 50.7 303 100 221.95
9-June-10 2454.5 60 150 56.8 303 75.3 221.95
10-June-10 2409.6 60 150 74.25 303 112.8 100
11-June-10 2434.8 60 150 53.15 41 78.3 125
14-June-10 2463.1 60 150 44.25 59.95 71.35 100
15-June-10 2423.45 40 150 69.6 78 100 128
16-June-10 2415.55 75.9 150 65.05 78 135 150
17-June-10 2416.35 75.9 150 70.45 78 96.55 150
18-June-10 2362.35 75.9 70 95.05 118 96.55 150
21-June-10 2196.15 170 139.3 223.8 118 299 150
22-June-10 2137.4 170 139.3 300 118 299 150
23-June-10 2323.75 170 139.3 150 118 299 150
24-June-10 2343.15 170 139.3 117.7 118 120 150
25-June-10 2407.4 33.9 139.3 52.45 118 120 150
28-June-10 2313.35 0 0 0 0 0 0
29-June-10 2230.7 61.6 80.8 88 0 0 0
30-June-10 2223.95 61.6 80.8 88 0 0 0
1-July-10 2167.35 61.6 80.8 88 0 0 0
BUYERS PAY OFF:

 As brought 1 lot of SBI that is 132, those who buy for 2400 paid 90 premium per share.
 Settlement price is 2167.35
Spot price 2400.00
Strike price (-) 2167.35
232.65
Premium (-) 90.00

63
142.65 x 132= 18829.8

Buyer Profit = Rs. 18829.8
incase spot price increase buyer profit also increase.
SELLERS PAY OFF:

he is in loss.
 The loss is equal to the profit of buyer i.e. 18829.8.
GRAPH SHOWING THE PRICE MOVEMENTS OF SPOT AND FUTURE
2500
2450
2400
PRICE
2350
2300 Market Price
2250
2200 Future price
2150
2100
2050
2000
0
1- 10
10
7- 10
9- 10
11 -10
15 -10
17 -10
21 -10
23 -10
25 -10
0
31 n-1
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-1
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9-
3-
28
u2
CONTRACT DATES
Graph: 4
INTERPRETATION
 The future price of SBI is moving along with the market price.
future gets profit.

64
incur losses
ANALYSIS OF YES BANK

65
options. This analysis is based on sample data taken of YES BANK scrip. This analysis
considered the Jun 2010 contract of YES BANK. The lot size of YES BANK is 1100,
the time period in which this analysis done is from 28-05-2010 to 1.07.10.
Date Market price future price
28-May-10 249.85 252.5

31-May-10 249.3 251.15
1-June-10 258.35 260.85
2-June-10 265.75 268.1
3-June-10 260.7 262.85
4-June-10 260.05 261.55
7-June-10 263.4 264.4
8-June-10 260.2 261.1
9-June-10 260.1 262.2
10-June-10 259.4 260.2
11-June-10 258.45 260.35
14-June-10 257.7 259.95
15-June-10 258.25 260.25
16-June-10 250.75 `254
17-June-10 252.3 254.25
18-June-10 248 248.05
21-June-10 227.3 225.4
22-June-10 209.95 209.85
23-June-10 223.15 218.1
24-June-10 220.65 216.75
25-June-10 232.6 230.5
28-June-10 243.7 242.35
29-June-10 244.45 242.95
30-June-10 244.45 241.4
1-July-10 251.45 250.35

66
Graph: 5

67
FINDINGS AND INTERPRETATIONS:

If a person buys 1 lot i.e. 1100 futures of YES BANK on 28th May, 2010 and sells on 1st
July, 2010 then he will get a loss of 250.35-252.50 = -2.15 per share. So he will get a loss
of 2365.00 i.e. -2.15 * 1100
If he sells on 15th Jun, 2010 then he will get a profit of 260.25-252.50 = 7.75 i.e. a profit of
16.15 per share. So his total loss is 8525.00 i.e. 7.75 * 1100
The closing price of YES BANK at the end of the contract period is 251.45 and this is
considered as settlement price.
250, 260, 270 and 280.
Call options:

68
Strike prices
28-May-10 249.85 17.05 32.45 13.1 9 18.55 15

31-May-10 249.3 16.45 32.45 12.45 9 18.55 15
1-June-10 258.35 22.15 32.45 16.3 11.6 18.55 15
2-June-10 265.75 31.45 32.45 24.9 16 14.5 15
3-June-10 260.7 31.45 32.45 21.5 13 5.1 3
4-June-10 260.05 31.45 32.45 21.5 12.2 5.15 3
7-June-10 263.4 31.45 32.45 21.5 12.2 9.25 3
8-June-10 260.2 31.45 32.45 21.5 9.95 7.45 3
9-June-10 260.1 31.45 32.45 21.5 10.95 6.45 3
10-June-10 259.4 31.45 32.45 21.5 17.5 8 8
11-June-10 258.45 31.45 32.45 21.5 10.75 5.05 8
14-June-10 257.7 31.45 32.45 21.5 9 5.05 8
15-June-10 258.25 31.45 32.45 21.5 14 8.25 8
16-June-10 250.75 31.45 32.45 21.5 5.7 4 8
17-June-10 252.3 31.45 32.45 21.5 7.5 5.5 2
18-June-10 248 31.45 32.45 9.5 7.5 5.5 2
21-June-10 227.3 6 32.45 9.5 7.5 1.5 2
22-June-10 209.95 6 32.45 9.5 8 1.5 4
23-June-10 223.15 6 32.45 9.5 8 4.5 4
24-June-10 220.65 6 32.45 9.5 2.1 2.9 4
25-June-10 232.6 6 32.45 9.5 2.1 2.9 4
28-June-10 243.7 15.95 32.45 9.5 2.1 2.9 4
29-June-10 244.45 15.95 32.45 9.5 2.1 2.9 4
30-June-10 244.45 15.95 32.45 5 2.1 2.9 4
1-July-10 251.45 29.15 32.45 4.7 5 0.8 0.5
CALL OPTION
BUYERS PAY OFF:
 As brought 1 lot of YES BANK that is 1100, those who buy for 280 paid 17.05
premiums per share.
 Settlement price is 251.45

69
Spot price 251.45

Strike price (-) 230.00
21.45
Premium (-) 17.05
4.40 x 1100= 4840
Buyer Profit = Rs. 4840
incase spot price increase buyer profit also increase.
SELLERS PAY OFF:

he is in loss.
 The loss is equal to the profit of buyer i.e. 4840.
Put Option:

70
28-May-10 249.85 6.95 10.55 15.15 20.75 27.25 34.5

31-May-10 249.3 6.2 9.75 14.35 20 26.6 34.1
1-June-10 258.35 4.3 7.05 10.75 15.5 21.25 27.9
2-June-10 265.75 3 5.1 8.1 12.1 17.1 23.1
3-June-10 260.7 3.45 5.9 9.3 13.75 19.3 25.8
4-June-10 260.05 3.15 5.5 8.9 13.4 19 25.65
7-June-10 263.4 2.1 3.95 6.85 10.9 16.15 22.55
8-June-10 260.2 2.2 4.25 7.4 11.75 17.45 24.25
9-June-10 260.1 1.85 3.8 6.85 11.2 16.9 23.8
10-June-10 259.4 1.65 3.5 6.55 10.95 16.75 23.8
11-June-10 258.45 1.5 3.3 6.3 10.8 16.8 24.05
14-June-10 257.7 1.1 2.7 5.6 10.15 16.35 23.95
15-June-10 258.25 0.8 2.2 4.95 9.35 15.55 23.2
16-June-10 250.75 1.6 3.85 7.8 13.6 20.95 29.55
17-June-10 252.3 1.15 3.05 6.65 12.15 19.4 27.95
18-June-10 248 1.5 3.95 8.3 14.7 22.75 31.8
21-June-10 227.3 9.75 16.2 24.1 33 42.5 52.25
22-June-10 209.95 22.15 30.8 40.1 49.8 59.65 69.6
23-June-10 223.15 13 20 28.25 37.25 46.8 56.55
24-June-10 220.65 13.8 21.3 30 39.4 49.1 59
25-June-10 232.6 7 12.6 19.85 28.3 37.6 47.25
28-June-10 243.7 1.6 4.6 10 17.55 26.6 36.25
29-June-10 244.45 0.75 3.05 8.3 16.2 25.6 35.45
30-June-10 244.45 0.15 1.65 6.95 15.65 25.5 35.5
1-July-10 251.45 0 0 0 0 0 0
PUT OPTION
BUYERS PAY OFF:
 Those who have purchase put option at a strike price of 250, the premium
payable is 15.15

71
 On the expiry date the spot market price enclosed at 251.45. As it is out of the
So the total loss will be 16665 i.e. 15.15*1100
SELLERS PAY OFF:

 So his profit is only premium i.e. 15.15 * 1100 = 16665

72
GRAPH SHOWING THE PRICE MOVEMENTS OF SPOT & FUTURES
280
270
260
PRICE
250
Market price
240
Future price
230
220
210
200
0
0
0
10
0
-1
-1
-1
-1
-1
-1
-1
-1
-1
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9-
1-
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7-
11
15
17
21
23
25
31
28
CONTRACT DATES
ec
D
th
zz
z zz
zz
zz
zz

zz
zz
z
7z
ay
M
73
Graph: 6
INTERPRETATION:
 The future price of YES BANK is moving along with the market price.
future gets profit.
incur losses.
CHAPTER 5
5.1 FINDINGS
• The major factors that influence the futures and options market are
the cash market, foreign institutional investor involvement, News
related to the underlying asset, national and international markets,
Researchers view etc.

74
• If the trader is not sure about the direction of the movement of the profits of the
current position, he can counter position in the future contract and reduces the level
of risks.
• In general, the anticipation of the strategies purely for return enhancement is a

risky affair, because, if the anticipation about the performance of the market and the
underlying goes wrong, the position taker would end up in higher losses.
• In cash market the profit/loss is limited but where in future and

option an investor can enjoy unlimited profit/loss.
• At present scenario the derivatives market is increased to a great

position. Its daily turnover reaches to the equal stage of cash market.
The average daily turnover of the NSE in derivative is eight lacks
volume.
• The derivatives are mainly used for hedging purpose.
• In cash market the investor has to pay the total money, but in
derivatives has to pay the premiums or margins, which are some
percentage of the total money.
5.2 SUGGESTION AND RECOMMENDATIONS
• A lot more awareness needed about the stock market and investment pattern, both
in spot and future market. The working of BSE Training Institute and NSE
Institutes are apprehensible in this regard.

75
• In a bearish market it is suggested to an investor to opt for put option

in order to minimize Profits.
• In a bullish market it is suggested to an investor to apt for call option

in order to maximize Profits.
• The hedger will have to be a strategic thinker and also one who think positively. He
should be able to comprehend market trends and fluctuations. Otherwise, the
strategies adopted by him earn losses.
• It is suggested to an investor to keep in mind the time or expiry

duration of futures and options contract before trading. The lengthy
time, the risk is low and profit making. The fewer time may be high
risk and chances of loss making.
• Contract size should be minimized because small investors cannot

afford this much of huge premiums.
• It is recommended that SEBI should take measures in improving awareness about

the futures and options market as it is launched very recently.
CONCLUSIONS
• In terms of the growth of derivatives market, and the variety of derivatives

users, the Indian market has equaled or exceeded many other regional market.
While the growth is being spearheaded mainly by retail investor, private sector

76
institutions and large corporation, smaller companies and state-owned

institutions are gradually getting into the act. Foreign brokers such as JP
Morgan chase are boosting their presence in india in reaction to growth in
derivatives. The variety of instruments available for trading is also expanding.
• The above analysis Futures and Options of ICICI, SBI AND YES BANK had
shown a positive market in the MONTH.
• We should understand derivative market then we should invest in derivative
• As Indian derivative markets grow more sophisticated, greater investor

awareness will become essential. NSE has programs to inform and educate
brokers, traders, and market personnel. In Indian, institutions will need to
devote more resources to develop the business processes and technology
necessary for derivatives trading.
• We should know what all companies and sectors are involved in trading and
what are the shortcut names of it.

77
Glossary
Arbitrage – The simultaneous purchase and sale of a commodity or financial

instrument in different markets to take advantage of a price or exchange rate
discrepancy.
Calendar Spread – An option strategy in which a short term option is sold and a
longer term option is bought both having the same striking price. Either puts or calls
may be used.
Call Option – An option that gives the buyer right to buy a future contract at a
premium, at the strike price.
Currency Swap – A Swap in which the counter parties exchange equal amounts of
two currencies at the spot exchange rate.
Derivative – A derivative is an instrument whose value derived from the value of one
or more underlying assets, which can be commodities, precious metals, currency,
bonds, stocks, stock indices, etc. derivatives involves the trading of rights or obligations
based on the underlying assets, but do not directly transfer the property.
Double Option – An option that gives the buyer the right to buy and or sell a future
contract, at a premium, at a strike price.
Futures Contract– A legally binding agreement for the purpose and a sell of a
commodity, index or financial instrument sometime in the future.
Hedge Fund – A large pool of private money and asset managed aggressively and
often riskily on any future exchange, mostly for short term gain

78
In-the-money option – An option with intrinsic value, a Call option is in the money if
its strike price is below the current price of the underlying futures contract and the put
option is in the money if it is above the underlying.
Margin call – A demand from a clearing house to a clearing member or from a broker
to a customer bring deposits up to a required minimum level to guarantee performance
at ruling prices.
Option – it gives the buyer the right, but not the obligation, to buy or sell stock at a set.
Price on or before a given date. Investors who purchase call options but the stock will
be worth more than the price set by the option (strike price), plus the price they paid for
the option itself. Buyer of put option bet the stock price will go down below the price
set by the option.
Out-of-the-money option – An option with no intrinsic value, a call option is out of

Money if its strike price is above the underlying and a put
option is so if it is below the underlying.
Premium – The price of an option contract, determined on the exchange, which the
buyer of the option pays to the option writer for the rights to the option contract.
Spread – The difference between the bid and asked prices in any market.
Stop loss orders – An order place in the market to buy or sell to close out an open
position on order to limit losses when market moves the wrong way.
Swap – An agreement to exchange on currency on index return for another, the

exchange on fixed interest payments for a floating rates payments or the exchange of an
equity index return for a floating interest rate.

79
Underlying – The currency, commodity, security or any other instrument that forms
the basis of a future or a option contract.
Writer – The person who originates the option contract by promising to perform the
certain obligation in return for the price of the option. Also known as the option writer.
All or noting option – An option with a fixed, predetermined payoff if the underlying
instrument is at or beyond the strike price at expiration.
Average option – A path dependent option that calculates the average of the path
traversed by the asset, arithmetic or weighted. The payoff therefore the difference
between the average price of the underlying asset, over the life of option and the
exercise price of the option.
Basket option – A third party option covered warrant on a basket of underlying stocks,
Currencies or commodities.
Bermuda option – Like the location of the Bermudas, this option located somewhere
between a European style options, this can be exercised only at maturity and an
American style option which can be exercised any time.
Option holders choose – this option can be exercisable only on predetermined dates.
Compound options – This is simply an option on an existing option such as a call on a

Call a put on a put etc, a call on a put etc.
Cross-currency options – An out performance option stock at an exchange rate

between two currencies.

80
Digital options – These are options that can be structured as a “one touch” barrier,
“double no touch” barrier and: all nothing “call/puts”. The “one touch” digital provides
an immediate payoff if the currency hits your selected price barrier chosen at outset.
The “double no touch” provides a payoff upon expiration if the currency does not touch
both the upper and lower price. Barrier selected at the outset. The call/put “all or
nothing” digital option provides a payoff upon expiration if your option finishes in the
money.
Knock-in-options – There are two kinds of known in options, 1) up and in, 2) down
and. in. with known in options, the buyer starts out without a vanilla option. If the
buyer has selected an upper price barrier and the currency hits that level; it creates the
vanilla option with maturity date and strike price agreed upon at the outset. This would
be called an up and in. the down and in option is the same as the up and in, expect the
currency has to reach a lower barrier. Upon hitting the chosen lower price level, it
creates the vanilla option.
Multi-index option – An out performance option with a payoff determined by the

deference in performance of two or more indices.
Out performance option – An option with a payoff based on the amount by which one
of two underlying instruments or indices out performs the other.
Quantity adjusting option – This is an option design to eliminate the currency risk by
fix effectively hedging it. It evolves combining an equity option and incorporating a
predetermined rate.
Example: if the holder has in the money Nikkei index call option expiration, the quanto
option terms would trigger by covering the yen proceeds into dollar which was
specified at the outset in the quanto option contract. The rate is agreed upon at the
beginning without the quantity of course, since this is an unknown at the time.

81
Secondary currency option – An option with a payoff in a difference currency than

the underling’s trading currency.
Swaption – An option to enter into a Swap contract.
Up-and-out-option – The call pays of early exercise price trigger is hit. The put
expires. Worthless if the market price of the underlying risks is above a predetermined
expiration price.
Zero strike price option – An option with an exercise price of zero, or close to zero,
traded on exchanges were there is transfer tax, owner restriction or other obstacle to the
transfer of the underlying.

82
5.4 BIBILIOGRAPHY
BOOKS:
• Derivatives Dealers Module Work Book - NCFM (October 2005)
• Gordon and Natarajan, (2006) ‘Financial Markets and Services’ (third edition)
Himalaya publishers.
• Introduction to Futures and Options Markets (3rd Edition) by John Hull (2003).
• Derivatives: The Tools That Changed Finance by Phelim P. Boyle (2005).
WEBSITES
• www.derivativesindia.com
• www.indiainfoline.com
• www.nseindia.com
• www.bseindia.com
• www.5paisa.com
• www.google.com
• www.yahoo.com

83
5.5 APPENDIX
MARKET WATCH WINDOWS
BLUE COLOUR INDICATE SHARE VALUE INCREASE

RED COLOUR INDICATE SHARE VALUE DECREASE
NSE SCRIP’S
Figure 5.1

84
NSE & BSE SCRIP’S
Figure 5.2

85
BUY ORDER FORM
Figure 5.3

86
SELL ORDER FORM
Figure 5.4

87
TRADE BOOK
Figure 5.5

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1

“A STUDY ON TRADING ON DERIVATIVES AND OPERATIONS OF

Under the Guidance of

FACULTY OF BUSINESS MANAGEMENT

In partial fulfillment of the requirements

POST GRADUATE DIPLOMA IN MANAGEMENT

VISHWA VISHWANI INSTITUTE OF SYSTEMS & MANAGEMENT

Signature of the student

VISHWA VISHWANI INSTITUTE OF SYSTEMS & MANAGEMENT

Certified that this summer project titled “A STUDY ON TRADING ON

Signature of the Faculty Guide

(M. MADANA MOHAN)

VISHWA VISHWANI INSTITUTE OF SYSTEMS & MANAGEMENT

It is a great sense of satisfaction and a matter of privilege to me to work at India

VISHWA VISHWANI INSTITUTE OF SYSTEMS & MANAGEMENT

DERIVATIVES MARKET (FUTURES AND OPTIONS) WITH SPECIAL

VISHWA VISHWANI INSTITUTE OF SYSTEMS & MANAGEMENT

CHAPTERNO. TITLE PAGE NO.

TABLE NO. TITLE PAGE NO.

VISHWA VISHWANI INSTITUTE OF SYSTEMS & MANAGEMENT

TABLE 3 PUT OPTIONS PRICES IF ICICI 55

GRAPH CONTENTS PAGE NUMBERS

VISHWA VISHWANI INSTITUTE OF SYSTEMS & MANAGEMENT

VISHWA VISHWANI INSTITUTE OF SYSTEMS & MANAGEMENT

The primary purposes of a derivative contract is to transfer “risk” from one

Derivatives are also known as “deferred delivery or deferred payment instruments”. In

VISHWA VISHWANI INSTITUTE OF SYSTEMS & MANAGEMENT

While derivatives markets flourished in the developed world, Indian markets

VISHWA VISHWANI INSTITUTE OF SYSTEMS & MANAGEMENT

Two broad approaches of SEBI is to integrate the securities market at the

VISHWA VISHWANI INSTITUTE OF SYSTEMS & MANAGEMENT

NATURE OF THE PROBLEM:

SCOPE OF THE STUDY

VISHWA VISHWANI INSTITUTE OF SYSTEMS & MANAGEMENT

OBJECTIVES OF THE STUDY

NEED OF THE STUDY

VISHWA VISHWANI INSTITUTE OF SYSTEMS & MANAGEMENT

• There is confusion to buy put option or call option in derivative shares

• It is difficult to estimate the futures

METHODOLOGY OF THE STUDY

ACTUAL COLLECTION OF DATA

Data Collection from secondary Sources

VISHWA VISHWANI INSTITUTE OF SYSTEMS & MANAGEMENT

Date of Establishment 1995

VISHWA VISHWANI INSTITUTE OF SYSTEMS & MANAGEMENT

Chairperson- Nirmal Jain

Business Operation Finance - Stock Broking

The company is part of India Infoline Group.

Company Secretary Sunil Lotke

VISHWA VISHWANI INSTITUTE OF SYSTEMS & MANAGEMENT

IIFL operates portals such as www.indiainfoline.com and www.5paisa.com.

Products and Services

India Infoline Commodities- This Company is engaged in broking services for

VISHWA VISHWANI INSTITUTE OF SYSTEMS & MANAGEMENT

The India Infoline pvt ltd offers the following products

VISHWA VISHWANI INSTITUTE OF SYSTEMS & MANAGEMENT

E). SWOT ANALYSIS

• Changing the demographics with higher disposable income and increasingly

VISHWA VISHWANI INSTITUTE OF SYSTEMS & MANAGEMENT

INDIA INFOLINE Ltd.

• Prime Ranking Award (2003-04) - Largest Distributor of IPO's

• Finance Asia Award (2004) - India's best Equity House

• Finance Asia Award (2005)-Best Broker in India