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A study on

Derivatives Analysis from the Investor Perception

Summer internship project report


Submitted to

AURORAS BUSINESS SCHOOL

In Partial Fulfilment of the summer internship programme of


Post Graduate Diploma in Management (PGDM)

By

Mr. B.Anurag Singh


DM -12- 036

Auroras Business School,


Near NIMS, Punjagutta, Hyderabad. - 500 082
Tel: 040 2335 1892, 2335 0062 - URL: www.absi.edu.in E-mail us: info@absi.edu.in
Certificate
This is to certify that the project work entitled

Derivatives Analysis from the Investor Perception


Is the bona-fide work done by

Mr. B.Anurag Singh


DM -12- 036

As a part of his curriculum of


Post Graduate Diploma in Management (PGDM),
Auroras Business School, Hyderabad.

Supervisor SIP Co-ordinator Director

Auroras Business School, Near NIMS, Punjagutta, Hyderabad. - 500 082


Tel: 040 2335 1891/92, 2335 0062/692 URL: www.absi.edu.in e-mail us: info@absi.edu.in

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DECLARATION

This is to inform that I, have completed a project work on Derivatives Analysis from the
Investor Perception while pursuing PGDM in Auroras Business School.

I hereby declare that this project report is the original work carried out by me as part of my
academic course and has not been submitted to any other University or Institution for the award
of any degree or diploma.

Name : B.Anurag Singh Signature:


Roll No. : DM-12-036 Date:

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ABSTRACT

The emergence of the market for derivatives products, most notably forwards, futures and
options, can be tracked back to the willingness of risk-averse economic agents to guard
themselves against uncertainties arising out of fluctuations in asset prices. Derivatives are risk
management instruments, which derive their value from an underlying asset. The following are
three broad categories of participants in the derivatives market Hedgers, Speculators and
Arbitragers. Prices in an organized derivatives market reflect the perception of market
participants about the future and lead the price of underlying to the perceived future level. In
recent times the Derivative markets have gained importance in terms of their vital role in the
economy. The increasing investments in stocks have attracted my interest in this area. Numerous
studies on the effects of futures and options listing on the underlying cash market volatility have
been done in the developed markets. When the derivative market was newly started in India and
it was not known by every investor, so SEBI has taken steps to create awareness among the
investors about the derivative segment. In cash market the profit/loss of the investor depends on
the market price of the underlying asset. The investor may incur huge profit or he may incur
huge loss. But in derivatives segment the investor enjoys huge profits with limited downside.
Derivatives are mostly used for hedging purpose. In order to increase the derivatives market in
India, SEBI should revise some of their regulations like contract size, participation of FII in the
derivatives market. In a nutshell the study throws a light on the derivatives market.

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ACKNOWLEDGEMENT

I would like to thank everyone who is involved in assisting me in producing this project report by
bringing out creativeness in this project.

I would like to take this opportunity to thank my project guide Prof Venugopal Rajamanuri,
Auroras Business school, for their undeterred guidance for the completion of the report.

My parents need special mention here for their constant support and love in my life. I also thank
my friends and well-wishers who have provided their whole hearted support to me in this exercise.
I believe that this effort has prepared me for taking up new challenging opportunities in future.

I hope that I can build upon the experience and knowledge that I have gained and make a valuable
contribution towards this industry.

With Regards

Mr B.Anurag Singh

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Table of Contents
S.No. Particulars Page No.

Certificate of Approval Ii

Declaration Iii

Abstract Iv

Acknowledgement V

List of tables Vi

List of figures Vii

1 Introduction to Derivatives 1

2 Review of Literature 15

3 The Company 17

4 Futures & Options segment 31

5 Data Analysis & Presentation 47

5.1 Findings 50

5.2 Interpretations 55

6 Summary, Recommendation & Conclusion 58

7 Bibliography 62

8 Appendices 63

Appendix A :An Alternative Method to Derive The Black- 64


Scholes Option Pricing Model

Appendix B 64
Derivatives and Volatility on Indian Stock Markets

Appendix C 64
Futures Trading, Information and Spot Price Volatility

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LIST OF TABLES

S.no Tables Page no


1.4.1 Companies in Derivatives market 7
1.4.2 New 16 companies in Derivatives market 11
3.10.1 Board of Directors 24
3.16.1 Financial performance of IIFL in 2006-07 25
3.16.2 Balance sheet of IIFL from 2012-2016 30
5.2.1 Cash market prices of Bharti Infratel in May 2017 51
5.2.2 Prices for call & put option 52
5.2.3 Prices with premium and volume traded of Bharti Infratel 53
5.2.4 Net-payoff for call option Holder & Writer 55
5.2.5 Net-payoff for put option Holder & Writer 58

LIST OF FIGURES

S.no Figures Page no


3.2.1 IIFL Company Structure 19
3.16.1 Graph showing Net-worth of Company 31
3.16.2 Graph showing Total Liabilities of the Company 37
3.16.3 Graph showing Total Assets of the Company 33
4.1.1 Pay-off for Buyer of Future Contract 35
4.1.2 Pay-off for Seller of Future Contract 36
4.2.1 Pay-off for Buyer of Call Option 40
4.2.2 Pay-off for Seller of Call Option 41
4.2.3 Pay-off for Buyer of Put Option 42
4.2.4 Pay-off for Seller of Put Option 43
5.2.1 Market prices of Bharti Infratel 49
5.2.5 Graph showing prices for call option 54
5.2.6 Graph showing profits to holders in call option 54
5.2.7 Graph for Amount of premium on put option 56
5.2.8 Graph showing profits to holders in Put option 57

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Chapter-1

Introduction to
Derivatives
INTRODUCTION:

The emergence of the market for derivative products, most notably forwards, futures and options,
can be traced back to the willingness of risk-averse economic agents to guard themselves against
uncertainties arising out of fluctuations in assets price. By their very nature, the financial markets
are marked by a very high degree of volatility. Through the use of derivative products, it is
possible to partially or fully transfer price risk by locking-in asset prices. As instruments of risk
management, these generally do not influence the fluctuations in the underlying asset prices.
However, by looking -in asset price, derivative products minimize the impact of fluctuations in
asset price on the profitability and cash flow situation of risk-averse investors.

Derivatives are risk management instruments, which derive their value from an
underlying asset. The underlying asset can be bullion, Index, share bonds, currency, interest etc.
Bank, securities firms, companies and investors to hedge risks, to gain access to cheaper money
and to make profit, use derivatives. Derivatives are likely to grow even at a faster rate in future.

DEFINITION:

Derivative is a product whose value is derived from the value of one or more basic variables,
called bases (underlying asset, index or reference rate), in a contractual manner. The underlying
asset can be equity, forex, commodity or any other asset.

1. A security derived from a debt instrument, share, loan whether secured or unsecured, risk
instrument or contract for difference or any other form of security.
2. A contract which derives its value from the prices, or index of prices, of underlying
securities.

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1.1 PARTICIPANTS:

The following three broad categories of participants in the Derivative market

I. HEDGERS:

Hedgers face risk associated with the price of an asset. They use futures or options markets to
reduce or eliminate this risk.
II. SPECULATORS:

Speculators wish to bet on future movement in the price of an asset. Futures and options contract
can give them an extra leverage; that is, they can increase both the potential gains and potential
losses in a speculative venture.

III. ARBITRAGEURS:

Arbitrageurs are in business to take advantage of a discrepancy between prices in two difference
markets. If, for example, they see the futures price of an asset getting out of line with the cash
price, they will take offsetting positions in the two markets to lock in profit.

1.2 FUNCTIONS OF DERIVATIVES MARKET:

The following are the various functions that are performed by the derivatives markets. They are:
Price in an organized derivative market reflect perception of market participants about the
future and lead the price of underlying to the perceived future level.
Derivatives market helps to transfer risk from those who have them but may not like them to
those who have an appetite for them.
Derivatives trading act as a catalyst for new entrepreneurial activity.
Derivatives markets help increase saving and investment in the long run.

1.3 TYPES OF DERIVATIVES:

The following are the various types of derivatives. They are:

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I. FORWARDS:

A forwards contract is a customized contract between two entities, where settlement takes place
on a specific data in the future at todays pre-agreed price

II. FUTURES:
A future contract is an agreement between two parties to buy or sell an asset at a certain time in
the future at a certain place

III. OPTIONS:

Options are of two types calls and puts. Calls give the buyers the right but not the obligation to
buy a given quantity of the underlying asset, at a given price on or before a given future date.
Puts give the buyer the right, but not the obligation to sell a given quantity of the underlying
asset at a given price on or before a given date.

IV. WARRANTS:

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

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

VI. BASKETS:

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

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VII. SWAPS :

Swaps are private agreement between two parties to exchange cash flows in the future according
to a prearranged formula. They can be regarded as portfolio of forward contracts.
The two commonly used swaps are:
o Interest rate swaps:
These entail swapping only the interest related cash flows between the two parties in the
same currency:
o Currency swaps:
These entail swapping both principle and interest between the parties, with the cash flows in
one direction being in a different currency than those in the opposite direction.

VIII. 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.

1.4 RATIONALE BEHIND THE DEVELOPMENT OF


DERIVATIVES:

Holding portfolio of securities is associated with the risk of the possibility that the investor may
realize his returns, which are much lesser than what he expected to get. There are various factors,
which affect the return:
1. Price or dividend (interest)
2. Some are internal to the firm like -

Industrial policy
Management capabilities
Consumers preference
Labor strike, etc.

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These forces are to a large extent controllable and are termed as non-Systematic
risks. An investor can easily manage such non-systematic by having a well diversified portfolio
spread across the companies, industries and groups so that a loss in one may easily be
compensated with a gain in other.

There are yet other types of influences which are external to the firm, cannot be controlled
and affect large number of securities. They are termed as systematic risk. They are:
1. Economic
2. Political
3. Sociological changes are sources of systematic risk
For instance, inflation, interest rate, etc. their effect is to cause prices of nearly all individual
stocks to move together in the same manner. We therefore quite often find stock price falling
from time to time in spite of companys earnings rising and vice versa.
Rationale behind the development of derivatives market is to manage this systematic risk,
liquidity and liquidity in the sense of being able to buy and sell relatively large amounts quickly
without substantial price concessions.
In debt market, a large position of the total risk of securities is systematic. Debt instruments are
also finite life securities with limited marketability due to their small size relative so many
common stocks. Those factors favor for the purpose of both portfolio hedging and speculation,
the introduction of a derivative security that is on some broader market rather than an individual
security.

India has vibrant securities market with strong retail participation that has rolled over the years.
It was until recently basically cash market with a facility to carry forward positions in actively
traded A group scrips from one settlement to another by paying the required margins and
borrowing some money and securities in a separate carry forward session held for this purpose.
However, a need was felt to introduce financial products like in other financial markets world
over which are characterized with high degree of derivative products in India.
Derivative products allow the user to transfer this price risk by looking in the asset price
thereby minimizing the impact of fluctuations in the asset price on his balance sheet and have
assured cash flows.
Derivative are risk management instrument, which derive their value from an underlying
asset. The underlying asset can be bullion, index, shares, bonds, currency etc.

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Derivative are risk management instrument, which derive their value from an underlying
asset. The underlying asset can be bullion, index, shares, bonds, currency etc.
Any exchange fulfilling the DERIVATIVE SEGMENT AT NATIONAL STOCK
EXCHANGE:
The derivatives segment on the exchange commenced with S&P CNX Nifty index futures
on June 12, 2000. The F & O segment of NSM provides trading facilities for the following
derivative segment:
1. Index Based Futures
2. Index Based Options
3. Individual Stock Options
4. Individual Stock Futures

COMPANY NAME CODE LOT SIZE

ABAN OFF SHORE ABAN 400


Associated Cement Co. Ltd. ACC 752
Allahabad Bank ALBK 4900
Andhra Bank ANDHRA BANK 4600
Arvin Mills Ltd. ARVINDMILL 17200
Ashok Leyland Ltd ASHOKLEY 19100
Bajaj Auto Ltd BAJAJAUTO 800
Bank of Baroda BANKBARODA 1400
Bank of India BANKINDIA 950
Bharat Electronics Ltd BEL 550
Bharat Forge Co Ltd BHARATFORG 200
Bharati Tele-Ventures Ltd BHARTI 1000
Bharat Heavy Electronics Ltd BHEL 300
Bharat Petroleum Corporation Ltd BPCL 550
Cadlla Healthcare Limited CADILAHC 500
Canara Bank CANBK 1600
Century Textiles Ltd CENTURYTEX 850
Chennai Petroleum Corp Ltd CHENNPETRO 3600
Cipla Ltd CIPLA 1250

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Cochi Refineries Ltd COCHINREFN 1300
Colgate Palmolive (I) Ltd COLGATE 1050
Dabur India Ltd DABAR 2700
GAIL (India) Ltd GAIL 1125
Great Eastern Shipping Co.Ltd GESHIPPING 1350
Glaxosmithkline Pharma Ltd GLAXO 300
Grasim Industries Ltd GRASIM 352
Gujarat Ambuja Cement Ltd GUJAMABCEM 550
HCL Technologies Ltd HCLTECH 2600
Housing Development Finance HDFC 150
Corporation Ltd
HDFC Bank Ltd HDFCBANK 400
Hero Honda Motors Ltd HEROHONDA 400
Hindalco Industries Ltd HINDALCO 7036
Hindustan Lever Ltd HINDLEVER 1000
Hindustan Petroleum Corporation HINDPERTO 1300
Ltd
ICICI Bank Ltd ICICBANK 700
Industrial development bank of IDBI 4800
India Ltd
Indian Hotel Co. Ltd INDHOTEL 7596
Indian Rayon and Industries Ltd INDRAYON 500
Infosys Technologies Ltd INFOSYSTECH 200
Indian Oversea Bank IOB 5900
Indian Oil Corporation Ltd IOC 600
ITC Ltd ITC 2250
Jet Airways (India) Ltd JETAIRWAYS 2400
Jindal Steel & Power Ltd JINDALSTEL 320
Jaiprakash Hydro-Power Ltd JPHYDRO 12500
Powergrid Corp Ltd Powergrid 3850
Lic Housing Finance Ltd LICHSGFIN 1700
Mahindra & Mahindra Ltd M&M 1248
Matrix Laboratories Ltd MATRIXLABS 1250
Managalore Refinery and MRPL 8900
Petrolchemicals
Ltd
Mahanagar Telephone Nigam Ltd MTNL 3200

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National Aluminium Co.Ltd NATIONALUM 2300
Neyveli Lignite Corporation Ltd NEYVELILIG 5900
Nicolas Piramal India Ltd NICOLASPIR 950
National Thermal Power NTPC 1625
Corporation Ltd
Oil & Natural Gas Corp.Ltd ONGC 600
Oriental Bank Of Commerce ORIENTBANK 2500
Patni Computer Sys Ltd PATNI 2600
Punjab National Bank PNB 600
Ranbaxy Laboratories Ltd RANBAXY 1600
Reliance Energy Ltd REL 550
Reliance Capital Ltd RELCAPITAL 552
Reliance Industries Ltd RELIANCE 300
Steel Authority Of India SAIL 5400
State Bank of India SBIN 264
Shipping Corporation of India Ltd SCI 4800
Siemens Ltd SIEMENS 1504
Sterlite Industries (I) Ltd STER 876
Sun Pharmaceuticals India Ltd SUNPHARMA 225
Syndicate Bank SYNDIBANK 3800
Tata Chemicals Ltd TATACHEM 2700
Tata Consultancy Services Ltd TCS 500
Tata Power Co. Ltd TATAPOWER 400
Tata Tea Ltd TATATEA 550
Tata Motors Ltd TATA MOTORS 1700
Tata Steel Co.Ltd TATA STEEL 1528
Union Bank of India UNIONBANK 2100
Unitech Ltd UNITECH 9000
Vijaya Bank VIAJYABANK 6900
Voltas Ltd VOLTAS 5400
Wipro Ltd WIPRO 1200
Wockhardt Ltd WOCKPHARMA 2400
Table 1.4.1

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Introduction of Futures & Options Contracts on 16 additional securities

In continuation to Exchange, dated April 19, 2017, the market lot for the 16 additional
securities, which are as follows:

Sr. No. Security Name Symbol Lot Size


1 Bajaj Finsery Limited BAJAJFINSV 125
2 Balkrishna Industries Limited BALKRISIND 400
3 Balrampur Chini Mills Limited BALRAMCHIN 3500
4 Berger Paints (I) Ltd BERGEPAINT 2200
5 Can Fin Homes Ltd CANFINHOME 250
Cholamandalam Investment And Finance Company
6 CHOLAFIN
Limited 500
7 Fortis Healthcare Limited FORTIS 2700
8 Godfrey Phillips India Limited GODFRYPHLP 500
9 Gujarat State Fertilizers & Chemicals Limited GSFC 4500
10 Multi Commodity Exchange Of India Limited MCX 500
11 Mahanagar Gas Ltd. MGL 600
12 Mangalore Refinery And Petrochemicals Limited MRPL 4500
13 NBCC (India) Limited NBCC 3000
14 Nestle India Limited NESTLEIND 100
15 Raymond Limited RAYMOND 800

16 V-Guard Industries Limited VGUARD 3000

No. of Strikes Provided


In the money - At the No of additional strikes
Applicable
Sr.No. Symbol money - Out of the which may be enabled
Step value
money intraday
1 BAJAJFINSV 50 10 -1- 10 10
2 BALKRISIND 50 6 -1- 6 6
3 BALRAMCHIN 5 7 -1- 7 7
4 BERGEPAINT 5 10 -1- 10 10
5 CANFINHOME 50 10 -1- 10 10
6 CHOLAFIN 20 10 -1- 10 10
7 FORTIS 5 9 -1- 9 9
Table 1.4.2

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1.5 REGULATORY FRAME WORK:

The trading of derivative is governed by the provision contained in the SC (R) A, the SBI Act,
and the regulation framed there under the rules and byelaws of stock exchanges.

Regulation for Derivative Trading:

SEBI set up a 24 member committed under Chairman of Dr.L.C.Gupta develop the appropriate
framework for derivative trading in India. The committee submitted its report in March 1998. On
May 11, 1998 SEBI accepted the recommendations of the committee and approved the phased
introduction of Derivatives trading in India beginning with Stock Index Futures. SEBI also
approved he Suggestive bye-laws recommended by the committee for regulation and control of
trading and settlement of Derivatives contracts.

The provision in the SC (R) A governs the trading in the securities. The amendment of the SC(R
) A to include DERIVATIVES within the ambit of Securities in the SC ( R ) A made trading
in Derivatives possible within the framework of the Act .
1. Eligibility criteria as prescribed in the L.C.Gupta committee report may apply to SEBI
for grant of recognition under Section 4 of the SC (R) A, 1956 at start Derivatives
Trading. The derivatives exchange/segment should have a separate governing council and
representation of trading / clearing members shall be limited to maximum of 40% of the
total members of the governing council. The exchange shall regulate the sales practices of
its members and will obtain approval of SEBI before start of Trading in any derivative
contract.
2. The exchange shall have minimum 50 members.

3. The members of an existing segment of the exchange will not automatically become the
members of the derivative segment. The members of the derivatives segment need to
fulfill the eligibility conditions as lay down by the L.C.Gupta Committee.

4. The clearing and settlement of derivatives trades shall be through a SEBI approved
Clearing House complying with the eligibility conditions as lay down By the committee
have to apply to SEBI for grant of approval.

5. Derivatives broker/dealers and Clearing members are required to seek registration from
SEBI

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6. The Minimum contract value shall not be less than Rs.2 Lakh Exchange should also
submit Details of the futures contract they purpose to introduce.

7. The trading members are required to have qualified approved user and sales person who
have passed a certification programme approved by SEBI.

1.6 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 derivative trading beginning with stock index futures.

There are many investors who are willing to trade in the derivative segment, because of
its advantages like limited loss and unlimited profit by paying the small premiums.

1.7 SCOPE OF THE STUDY:


The study is limited to Derivatives with special reference to futures and options in the
Indian context and the Hyderabad stock exchange has been taken as a representative sample for
the study. The study cant be said as totally perfect. Any alteration may come. The study has

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only made a humble attempt at evaluating derivation market only in Indian context. The study is
not based on the international perspective of derivatives markets, which exists in
NASDAQ, NYSE etc.

1.8 OBJECTIVES OF THE STUDY:

To analyze the derivatives market in India.

To analyze the operations of futures and options.

To find out the profit/loss position of the option writer and option holder.

To study about risk management with the help of derivatives.

1.9 LIMITATIONS OF THE STUDY:


The following are the limitations of this study.

The scrip chosen for analysis is BHARTI INFRATEL LTD and contract taken is MAY -
2017 30 DAYS CONTRACT
The data collected is completely restricted to the BHARTI INFRATEL LTD of MAY-
2017, hence this analysis cannot be as universal.

1.10 DESCRIPTION OF THE METHOD:

The following are the steps involved in the study.

1. Selection of the scrip:

The scrip selection is done on a random basis and the scrip selected is BHARTI
INFRATEL LTD. The lot size of the scrip is 1600. Profitability position of the option
holder and option writer is studied.

2. Data collection:

The data of the BHARTI INFRATEL LTD has been collected from the The Economic
Times and the Internet The data consists of the MAY Contract and the period of data
collection is from 01/MAY TO 31/MAY-2017.

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3. Analysis:

The analysis consists of the tabulation of the data assessing the Profitability positions of
the option holder and the option writer, representing the data with graphs and making the
interpretations using the data.

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Chapter-2
Literature Review

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Chris Gaffney (2009) notes, that the global financial markets have evolved
manifolds. In fact he explains that, the US and its currency are dominating
the world financial markets, but nations similar to that of London and Tokyo
are rapidly becoming centers of primary securities issues and secondary
market trading. In a similar fashion, investment banks, securities firms, and
futures and options exchanges have been posing challenges to commercial
banks and stock exchanges, which were once the dominant institutions.
Furthermore, the once dominant onshore market, which was subject to strict
regulation, has been overtaken by the offshore markets, which are subject to
considerably less regulation (Gaffney 2009).

Bose, Suchismita conducted research on (2006) found that Derivatives


products provide certain important economic benefits such as risk
management or redistribution of risk away from risk-averse investors
towards those more willing and able to bear risk. Derivatives also help
price discovery, i.e. The process of determining the price level for any asset
based on supply and demand. These functions of derivatives help in efficient
capital allocation in the economy. At the same time their misuse also poses
threat to the stability of the financial sector and the overall economy.

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Chapter-3
The Company iifl

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INDIAINFOLINE

India Infoline is a one-stop financial services shop, most respected for quality of its

advice, personalized service and cutting-edge technology.

Vision:

Our vision is to be the most respected company in the financial services space.

3.1 India infoline group:

The India infoline group, comprising the holding company, India infoline limited

and its wholly-owned subsidiaries, straddle the entire financial services space with

offerings ranging from Equity research, Equities and derivatives trading, commodities

trading, portfolio management services, mutual funds life insurance, fixed deposits, GOI

bonds and other small savings instruments to loan products and investment banking. India

infoline also owns and manages the websites www.indiainfoline.con and www.5paisa.com.

The company has a network of 596 branches spread across 345 cities and towns. It

has more than 500,000 customers.

3.2 India Infoline limited:

India infoline limited is listed on both the leading stock exchanges in India, viz. the

Stock Exchange, Mumbai (BSE) and the National Stock Exchange (NSE) and is also a

member of both the exchanges. It is engaged in the businesses of Equities broking, Wealth

Advisory services and Portfolio management services. It offers broking services in both

Cash and Derivatives segments of NSE as well as the cash segments of BSE. It is registered

with NSDL as well as CDSL as a depository participant, providing a one-stop solution for

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clients trading in the equities market. It has recently launched its investment banking and

institutional broking business.

Figure: 3.2.1

A SEBI authorized portfolio manager; it offers portfolio management services to

clients. These services are offered to clients as different schemes, which are based on

differing investment strategies made to reflect the varied risk-return preferences of clients.

3.4 India Infoline Media and Research Services Limited:

The content services represent a strong support that drives the broking,

commodities, mutual fund and portfolio management services businesses. Revenue

generation is through the sale of content to financial and media houses, Indian as well as

global.

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It undertakes equities research which is acknowledged by none other than Forbes

as Best of the web and a must read for investors in Asia. India info lines research is

available not just over the Internet but also on international wire services.

3.5 India Infoline Commodities Limited:

India Infoline Commodities Pvt Limited is engaged in the business of commodities


broking. Our experience in securities broking empowered us with the requisite skills and
technologies to allow us offer commodities broking as a contra-cyclical alternative to
equities broking. We enjoy memberships with the MCX and NCDEX, two leading Indian
commodities exchanges, and recently acquired
Membership of DGCX. We have a multi-channel delivery model, making it among the
select few to offer online as well as offline trading facilities.

3.6 India Infoline Marketing & Services:

India Infoline Marketing and Services Limited is the holding company of India
Infoline Insurance Services Limited and India Infoline Insurance Brokers Limited.
(a) India Infoline Insurance Services Limited is a registered Corporate Agent with the
Insurance Regulatory and Development Authority (IRDA). It is the largest Corporate
Agent for ICICI Prudential Life Insurance Co Limited, which is India's largest private Life
Insurance Company. India Infoline was the first corporate agent to get licensed by IRDA
in early 2001.
(b) India Infoline Insurance Brokers Limited India Infoline Insurance Brokers Limited is
a newly formed subsidiary which will carry out the business of Insurance broking. We
have applied to IRDA for the insurance broking license and the clearance for the same is
awaited. Post the grant of license; we propose to also commence the general insurance
distribution business.

3.7 India Infoline Investment Services Limited:

Consolidated shareholdings of all the subsidiary companies engaged in loans and


financing activities under one subsidiary. Recently, Orient Global, a

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Singapore-based investment institution invested USD 76.7 million for a 22.5% stake in

India Infoline Investment Services. This will help focused expansion and capital raising in

the said subsidiaries for various lending businesses like loans against securities, SME

financing, distribution of retail loan products, consumer finance business and housing

finance business. India Infoline Investment Services Private Limited consists of the

following step-down subsidiaries.

(a) India infoline Distribution Company Limited (distribution of retail loan products)

(b) Money line Credit Limited (consumer finance)

(c) India infoline Housing Finance Limited (housing finance).

3.8 IIFL (Asia) Private Limited:

IIFL (Asia) Private Limited is wholly owned subsidiary which has been incorporated in
Singapore to pursue financial sector activities in other Asian markets. Further to obtaining the
necessary regulatory approvals, the company has been initially capitalized at 1 million
Singapore dollars.

3.9 History

It was originally incorporated on October 18, 1995 as Probity Research and Services
Private Limited at Mumbai under the Companies Act, 1956 with Registration No: 11 93797.
We commenced our operations as an independent provider of information analysis and research
covering India businesses, financial markets and economy, to institutional customers. We
became a public limited company on April 28, 2000 and the name of the company was changed
to Probity Research and Services Limited. The name of the company was changed to India
Infoline.com on May 23, 2000 and later to India Infoline Limited on March 23, 2001.

21 | P a g e
In 1999, the company identified the potential of the Internet to cater to a mass retail
segment and transformed our business model form providing information services to institutional
customers to retail customers. Hence the company launched Internet portal,
www.indiainfoline.com and started providing news and market information, independent research,
interviews with business leaders and other specialized features.
In May 2000, the name of our company changed to India Infolline.com Limited.

In the year 2000, we leveraged our position as a provider of financial information and analysis by

diversifying into transactional services, primarily for online trading in

Shares and securities and online as well as offline distribution of personal financial products, like

Mutual funds and RBI Bonds.

Our broking service as launched under the brand name of 5paisa through our subsidiary,
India Infoline Securities Private Limited and www.5paisa.com the e-broking portal was launched
for online trading in July 2000. Besides we also offer Real time stock quotes, market news and
price charts with multiple tools for technical analysis.

In December 2000, our subsidiary, India Infoline Insurance Services Limited became a
corporate agent for ICICI Prudential Life Insurance Company Limited. And emerged as one of the
leading corporate agents for ICICI Prudential Life Insurance Company Limited.
In the year 2004, company launched Commodities broking through our subsidiary India

Infoline Commodities Private Ltd.

3.10 Board of Directors: As per Articles of Association, Board shall consist of not less than
three and not more than twelve directors. They are as follows:

S. No. Name Designation Directorships in other companies

1. Mr. Nirmal Jain Chairman and 1. India Infoline Securities Pvt. Ltd.
Managing 2. India Infoline Insurance Services
Director Ltd.
3. India Infoline Commodities Pvt. Ltd.

22 | P a g e
2. Mr.R.Venkataram Executive 1. India Infoline Insurance Services
an Director Ltd.
2. India Infoline.com Distribution
Company Ltd.
3. Mr. Sat Pal Khattar Non-Executive 1. AB Hotels Ltd.
Director 2. GTL Ltd.
3. Prime Vetcare Pvt. Ltd.

4. Mr. Sanjiv Ahuja Non-Executive 1. Pagro Foods Ltd.


Independent 2. India Infoline Insurance Services
Director Ltd.

5. Mr. Kranti Sinha Non-Executive 1. Hindustan Motors Ltd.


Independent 2. Larsen and Turbo Ltd.
Director

6. Mr. Nilesh Shivji Non-Executive 1. Alpha Garments Pvt. Ltd.


Vikamsey Independent 2. Miloni Consultants Pvt. Ltd.
Director

Table 3.10.1

3.11 Key promoters of the company

Key promoters of our company are Mr. Nirmal Jain and Mr. Venkataraman, professionals
with a good academic and work experience.
Mr. Nirmal Jain has been the chairman and Managing Director of the company since its
incorporation i.e., October 18, 1995. Mr. Jain holds a MBA degree from IIM Ahmedabad and is
a member Institute of Chartered Accountants of India and the Institute of Cost Accountants of
India. He started his career in 1989 with Hindustan Lever Limited, a subsidiary of Unilever Plc,
in their commodities trading and exports division Mr. Jain has a total experience of more than
15 years.

Mr.R.Venkataraman joined the board with effect from July 5th, 1999. He holds a B.Tech
degree in Electronics and Electrical Communications Engineering from IIT Kharagpur and an
MBA degree from IIM Bangalore. He has senior managerial positions in various divisions of
ICICI limited, including ICICI securities limited, their investment banking joint venture with
J.P.Morgan of USA. He also worked as an equity analyst with BZW and Taib Capital

23 | P a g e
Corporation Limited. He has also held the position of Assistant Vice President with GE Capital
Services India Limited in their private equity division. He has varied experience of more than 14
years in the financial services sector.

3.12 Year wise Milestones of our evolution:

October 1995 Incorporated as Probity Research and


Services Pvt. Ltd.

March 1996 Launched Probity 200, research reports on


200 leading listed Indian companies.

June 1998 Launched Probity Sector reports.


May 1999 Launched our internet portal
www.indiainfoline.com and

Changed our name to India Infoline Limited.

April 2000 Our company forayed into distribution of


Mutual funds, fixed deposits, RBI bonds .

And other small savings Products.

July 2000 Our company launched www.5paisa.com the


E-broking Portal and started online trading

With membership of BSE and NSE.

December 2000 Our company obtained corporate agency for


ICICI Prudential Life Insurance Company

Ltd.

September 2001 Our company became the Depositary


Participant of NSDL.

March 2004 Our company launched commodities trading


By taking Membership of MCX.

24 | P a g e
April 2004 Our company received license from SEBI to
Offer Portfolio Management Services.

3.13 Business

India Infoline Limited


Content related service- Equity research & Online Media Property.

India Infoline Securities Pvt. Ltd.


Equities & Derivative Broking.
Depository Services.
Portfolio Management Services.

India Infoline.com Distribution Company Ltd.


Mutual funds
RBI Bonds
Fixed Deposits etc.

India Infoline Insurance Services Ltd.


Corporate agents for ICICI Prudential Life Insurance Company Ltd.

India Infoline Commodities Pvt. Ltd.


Commodities Broking.

India Infoline Investment Services Pvt. Ltd.


Margin funding & financing.

3.14 Brokerage Services

Online Brokerage: we offer subscribers real-time trading on the NSC and BSC. Apart
from this we also offer commodities.

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Trading on the MCX and NCDEX. Customers can directly place orders to buy and sell
securities through our automated order processing system.

Offline Brokerage: We began offering offline brokerage services as a back up to our


online brokerage offering through our branches. This was mainly to address the interest
access problems faced by some of our retail customers.
Competition:

Broking: We face competition from small local brokers (traditional) and pan India
Brokers like Kotak Securities Ltd. S.S Kantilal Ishwarlal securities Ltd, India bulls
Securities Ltd, ICICI Web Trade Limited, Geojit Financial Service Ltd etc.

Distribution: We face competition from small retail distributors (typically single outlet
unorganized units), brokers who have a distribution setup, old and established distribution
companies like Blue chip corporate Investment center Limited, Bajaj capital Ltd, karvy
Securities Ltd, and banks including their PMS and wealth Management desks.

Our strength: Our strengths are content and research online technology platform and
customer services.

3.15 Products: The India Infoline pvt Ltd. offers the following products.
a. E-broking
b. Distribution
c. Insurance

a. E-broking:
1. Equities
2. Derivatives
3. Commodities

The above three are traded as 5paisa.

26 | P a g e
b. Distribution:
1. Mutual funds
2. Government of India bonds
3. Fixed deposits

c. Insurance:
1. Life insurance policies
2. Corporate sector of ICICI
3. Prudential life insurance.

3.16 Financial Performance


Key aspects of your Company's financial performance for the year 2006-07
Are tabulated below:
Table 3.16.1 (Rs. in Million)
Consolidated Parent
2007 2006 2007 2006
Sales and other income (net of
excise duty) 152,945 107,566 139,726 103,795
Profit before tax 32,988 23,779 31,762 23,404
Provision for tax 3,868 3,391 3,341 3,199
Minority interest and equity in
earnings/ (losses) of affiliates 301 287 - -
Profit for the year 29,421 20,674 28,421 20,205
Appropriations :
Interim dividend - - 7,278 -
Proposed dividend on equity
shares - - 1,459 7,129
Corporate tax on distributed
dividend - - 1,268 1,000
Transfer to general reserve - - 18,416 12,076

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When we consider the consolidated figures, we observe that Sales and other income have
risen from Rs. 107,566 Million in FY 2006 to Rs. 152,945 Million in FY 2007. Profit for
the year also has been raised from Rs. 20,674 Million in FY 2006 to Rs. 29,421 Million in
FY 2007.
Sales and profit for the year grew by 42% over the previous year.

Balance sheet of IIFL Holdings


---------------------------------In crores-----------------------------------------------------
Mar '12 Mar '13 Mar '14 Mar '15 Mar '16

Sources of funds

Total Share Capital 57.8 59.05 59.24 62.05 63.31


Equity Share Capital 57.8 59.05 59.24 62.05 63.31
Share Application Money 0 0 0.04 0 0
Reserves 1,219.48 1,250.98 1,264.22 1,338.02 1,412.58
Net worth 1,277.28 1,310.03 1,323.50 1,400.07 1,475.89
Secured Loans 16.8 0 0 50 50
Total Debt 16.8 0 0 50 50
Total Liabilities 1,294.08 1,310.03 1,323.50 1,450.07 1,525.89

Application of funds
Gross Block 122.05 122.93 1.41 1.48 1.55
Less: Accum. Depreciation 95.94 108.13 0.48 0.55 0.63
Net Block 26.11 14.8 0.93 0.93 0.92
Capital Work in Progress 0.11 0.43 0 0 1.61
Investments 1,209.26 1,292.02 1,266.21 1,378.30 1,417.35
Inventories 39.54 0 0 0 0
Sundry Debtors 252.9 165.7 0 3.28 5.24
Cash and Bank Balance 457.82 413.55 0.78 41.62 3.34
Total Current Assets 750.26 579.25 0.78 44.9 8.58
Loans and Advances 259.54 176.09 57.13 43.98 111.84
Total CA, Loans & Advances 1,009.80 755.34 57.91 88.88 120.42
Current Liabilities 947.27 747.37 0.78 17.34 9.92
Provisions 3.92 5.2 0.78 0.7 4.48

28 | P a g e
Total CL & Provisions 951.19 752.57 1.56 18.04 14.4
Net Current Assets 58.61 2.77 56.35 70.84 106.02
Total Assets 1,294.09 1,310.02 1,323.49 1,450.07 1,525.90

contingent liability
70.31 60.55 18.7 71.83 35.55

Book Value (Rs) 44.19 44.37 44.68 45.13 46.63

Table 3.16.2

Networth

1,475.89

1,400.07

1,310.03 1,323.50
1,277.28

Mar '12 Mar '13 Mar '14 Mar '15 Mar '16

Figure 3.16.1

In this graph we can see that the Net-worth has been growing from 2012 to 2016 i.e.,
1,277 to 1,475 crores.

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Total Liabilities
1,550.00

1,500.00

1,450.00

1,400.00

1,350.00

1,300.00

1,250.00

1,200.00

1,150.00
Mar '12 Mar '13 Mar '14 Mar '15 Mar '16

Figure 3.16.2

From 2012 to 2016 the total liabilities have also increased from 1,294 to 1,525 crores.

TOTAL ASSETS

1,525.90
1,450.07
1,323.49
1,310.02
1,294.09

MAR '12 MAR '13 MAR '14 MAR '15 MAR '16

Figure 3.16.3

Total assets also increased from 1,294 to 1,525 crores from 2012 to 2016.

30 | P a g e
CHAPTER-4
Futures & Options

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FUTURES
DEFINITION:

A Future contract is an agreement between two parties to buy or sell an asset at a certain time in
the future at a certain price. To facilities liquidity in the futures contract, the exchange specifies
certain standard features of the contract. The standardized items on a futures contract are:

Quantity of the underlying


Quality of the underlying
The date and the month of delivery
The units of price quotations and minimum price change
Location of settlement

4.1.1Types of futures:

On the basis of the underlying asset they derive, the futures are divided into two types:

Stock futures:

The stock futures are the futures that have the underlying asset as an index. The index futures are
also cash settled. The settlement price of the index futures shall be the closing value of the
underlying index on the expiry date of the contract.

Index futures:

The futures are the futures, which have the underlying asset as an index. The index futures are
also cash settled. The settlement price of the index futures shall be the closing value of the
underlying index on the expiry date of the contract.

4.1.2 Parties in the Futures Contract:

There are two parties in a future contract, the Buyer and the Seller. The buyer of the futures
contract is one who is LONG on the futures contract and the seller of the futures contract is one
who is SHORT on the futures contract.

32 | P a g e
The pay-off for the buyer and the seller of the futures contract are as follows.

o PAYOFF FOR A BUYER OF FUTURES:

PROFIT

LOSS

Figure: 4.1.1

CASE 1:

The buyer bought the future contract at (F); if the futures price goes to E1 then the buyer gets the
profit of (FP).

CASE 2:
The buyer get loss when the future price goes less than (F); if the futures price goes to E2 then
the buyer gets the loss of (FL).

33 | P a g e
o PAYOFF FOR A SELLER OF FUTURES:

PROFIT
LOSS

Figure: 4.1.2

F FUTURS PRICE
E1, E2 SETTLEMENT PRICE.

CASE 1:
The Seller sold the future contract at (F); if the futures price goes to E1 then the seller gets the
profit of (FP).

CASE 2:
The Seller gets loss when the future price goes greater than (F); if the futures price goes to E2
then the Seller gets the loss of (FL).

4.1.3 MARGINS:
Margins are the deposits, which reduce counter party risk, arise in a futures contract. These
margins are collected in order to eliminate the counter party risk.

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There are three types of margins:

Initial Margin:
Whenever a futures contract is signed, both buyer and seller are required to post initial margin.
Both buyer and seller are required to make security deposits that are intended to guarantee that
they will infact be able to fulfill their obligation. These deposits are Initial margin and they are
often referred as performance margins. The amount of margin is roughly 5% to 15% of total
purchase price of futures contract.

Marking to Market Margin:

The process of adjusting the equity in an investors account in order to reflect the change in
the settlement price of futures contract is known as MTM Margin.

Maintenance margin:

The investor must keep the futures account equity equal to or greater than certain percentage of
the amount deposited as Initial Margin. If the equity goes less than that percentage of Initial
margin, then the investor receives a call for an additional deposit of cash known as Maintain
Margin to bring the equity up to the Initial margin.

4.1.4 Pricing the Futures:

The fair value of the futures contract is derived from a model known as the Cost of Carry model.
This model gives the fair value of the futures contract.
Cost of Carry Model:
t
F=S (1+r-q)

Where

F- Futures Price

S- Spot price of the Underlying

r-Cost of Financing

q- Expected Dividing Yield

t- Holding Period

35 | P a g e
4.1.5 Futures terminology:

Spot price: The price at which an asset trades in the spot market

Futures price: The price at which the futures contract trades in the futures market

Contract cycle: The period over which a contract trades, the index futures contracts
on the NSE have One-month, two-months and three-month expiry cycles which expire on
the last Thursday of the month, thus a January expiration contract expires on the last
Thursday of January and a February expiration contract ceases trading on the last
Thursday of February. On the Friday following the last Thursday, a new contract having
a three-month expiry is introduced for trading.

Expiry date: It is the date specified in the futures contract. This is the last day on
which the contract will be traded, at the end of which it will cease to exist.

Contract size: The amount of the asset that as to be delivered under one contract. For
instance, the contract size on NSES futures market in 200 Niftiest.
Basis: In the context of financial futures, basis can be defined as the futures price minus
the spot price. There will be a different basis for each delivery month for each contract. In
a normal market, basis will be positive. This reflects that futures prices normally exceed
spot prices.

Cost of carry: The relationship between futures prices and spot prices can be
summarized in terms of what is known as the cost of carry. This measures the storage
cost plus the interest that is paid to finance the asset less the income earned on the asset.

Open Interest: Total outstanding long or short positions in the market at any specific
time, as total long positions for market would be equal to short positions, for calculation
of open interest, only one side of the contract is counted.

36 | P a g e
OPTIONS

DEFINITION:

The option is types of contract between two persons where one grants the other the right to
buy a specific asset at a specific price within a specified time period. Alternatively the contract
may grand other person the right to sell a specific asset at a specific price within a specific time
period. In order to have the right, the option buyer has to pay the seller of the option premium.
The asset on which option can be derived are stocks, commodities, indexes etc. if the
underlying asset is a financial asset, than the option are financial options like stock, options,
currency options, index options etc., and if the underlying asset is the non-financial asset the
option are non-financial options like commodity options.

4.2.1 PROPERTIES OF OPTIONS:


Options as several unique properties that set them apart from other securities, the following are
the properties of options:
Limited Loss
High leverage potential
Limited Life

4.2.2 PARITES IN AN OPITON CONTRACT:

1. Buyer of the option:


The buyer of the option is one who buys paying option premium buys the right but
not the obligation to exercise is option on seller/writer.

2. Writer/Seller of the option:


The writer of a call/put options is the one who receives the options premium and
is there by obligated to sell /buy the asset if the buyer exercise the option on him.

37 | P a g e
4.2.3 TYPES OF OPTIONS:

The options are classified into various types on the basis of various variables. The following are
various types of options:

I) On the basis of the underlying asset:

On the basis of the underlying asset the options are divided into two types:

INDEX OPITONS:

The index options have the underlying asset as the index.

STOCK OPTIONS:

A stock option gives the buyer of the options the right to buy/sell stock at a specified
price. Stock options are options on the individual stocks, there are currently more than 50
stocks are trading this segment.

II) On the basis of the market movement:

On the basis of the market movement the option are divided into two types. They are:

CALL OPTION:
A call option is bought buy an investor when he seems that the stock price moves
upwards. A call option gives the holder of the options the right but not the obligations
to buy asset by a certain date for a certain price.

38 | P a g e
PUT OPTION:
A put option is bought by investors when he seems that the stock price moves
downwards. A put option gives the holder of the options right but not the obligation
to sell an asset by a certain date for a certain price.

III) On the basis of exercise of options:

On the basis of the exercising of the option are divided into two types.

AMERICAN OPITON:
American options are options that can be exercise at any time up to the
expiration date, most exchange trade options are American.

EUROPEAN OPTION:

European options are options that can be exercised only on the expiration date itself.
European options are easier to analysis then American options.

o Pay-off profile for buyer of a call option:

The pay-off of a buyer options depends on the spot price of the underlying asset. The
following graph shows the pay-off of buyer of a call option:

39 | P a g e
Figure: 4.2.1

S - Strike price OTM - Out of The Money

SP - Premium/Loss ATM - At The Money

E1 - Spot price 1 ITM - In The Money

E2 - Spot price 2

SR - profit at spot price E1

CASE 1: (Spot Price > Strike Price)

As the spot price (E1) of the underlying asset is more than strike price (S). The buyer gets the
Profit of (SR), if price increase more than E1 than profit also increase more than SR.

CASE 2: (Spot Price < Strike Price)

As the spot price (E2) of the underlying asset is less than strike price (s). The buyer gets loss of
(SP), if price goes down less than E2 than also his loss is limited to his premium (SP).

o Pay-off profile for seller of a call option:


The pay-off of seller of the call option depends on the spot price of the underlying asset.
The following graph shows the pay-off of seller of a call option:

40 | P a g e
Figure: 4.2.2

S - Strike price ITM - In The Money

SP - Premium/Loss ATM - At The Money

E1 - Spot price 1 OTM - Out of The Money

E2 - Spot price 2

SR - profit at spot price E1

CASE 1: ( Spot Price < Strike Price)

As the spot price (E1) of the underlying asset is less than strike price (S). The seller gets the
Profit of (SP), if price decreases less than E1 than also profit of the seller does not exceed (SP).

CASE 2: ( Spot Price > Strike Price)


As the spot price (E2) of the underlying asset is more than strike price (S). The seller gets loss of
(SR), if price goes down less than E2 than the loss of the seller also increases more than (SR).

o Pay-off profile for buyer of a put option:


The pay-off of buyer of the option depends on the spot price of the underlying asset. The
following graph shows the payoff of the buyer of a call option:

41 | P a g e
Figure: 4.2.3
S - Strike price ITM - In The Money

SP - Premium/Loss OTM - Out of The Money

E1 - Spot price 1 ATM - At The Money

E2 - Spot price 2

SR - profit at spot price E1

CASE 1: (Spot Price < Strike Price)

As the spot price (E1) of the underlying asset is less than strike price (S). The buyer gets the
Profit of (SR), if price decreases less than E1 than the profit also increases more than (SR).

CASE 2: (Spot Price > Strike Price)


As the spot price (E2) of the underlying asset is more than strike price (S), the buyer gets loss of
(SP), if price goes more than E2 than the loss of the buyer is limited to his premium (SP).

o Pay-off profile for seller of a put option:


The pay-off of seller of the option depends on the spot price of the underlying asset. The
following graph shows the pay-off of the seller of a put option:

42 | P a g e
Figure: 4.2.4

S - Strike price ITM - In The Money

SP - Premium/Loss ATM - At The Money

E1 - Spot price 1 OTM - Out of The Money

E2 - Spot price 2

CASE 1: (Spot Price < Strike Price)


As the spot price (E1) of the underlying asset is less than strike price (S). The seller gets the
Loss of (SR), if price decreases less than E1 than the loss also increases more than (SR).
CASE 2: (Spot Price > Strike Price)
As the spot price (E2) of the underlying asset is more than strike price (S), the seller gets profit
of (SP), if price goes more than E2 than the profit of the seller is limited to his premium (SP).

4.2.4 Factors affecting the prices of an option:


The following are the various factors that affect the price of an option. They are:

43 | P a g e
Stock price:

The pay-off from a call options is the amount which the stock price exceed the strike price.
Call options therefore become more valuable stock price increases and vice versa. The pay-
off from put option is the amount; by which the strike price exceeds the stock price. Put
options therefore become more valuable as the stock price increase and vice versa.
Strike price:

In the case of a call, as the strike price increases, the stock has to make a larger upwards
move for the option to go in the money. Therefore, for a call, as the strike increase, option
become less valuable and as strike price decrease, option becomes more valuable.

Time to expiration:

Both put and call American option become more valuable as time to expiration increases.

Volatility:
The volatility of a stock price is a measure of uncertain about futures stock price movements.
As volatility increases, the chance that the stock will do very well or very poor increase. The
value of both calls and puts therefore increase as volatility increase.

Risk free interest rate:


The option prices decline as the risk free rate increase where as the price of calls always
increases the risk free interest rate increases.

Dividends:
Dividends have the effect of reducing the stock price on the ex-dividend date. This has
negative effect on the value of call option and a positive effect on the value of put options.

4.2.5 PRICING OPTIONS:

The Black Scholes Formulas for the prices of European Calls and puts on a non-dividend paying
stock are:

44 | P a g e
CALL OPITONS:

-rt
C= SN (D1)-Xe N(D2)

PUT OPITONS:

-rt
P = Xe N (-D2)-SN(-D2)

Where
C VALUE OF CALL OPTION
S SPOT PRICE OF STOCK
X- STRIKE PRICE
r - ANNUAL RISK FREE RETURN
t - CONTRACT CYCLE
sd STANDARD DEVIATION

2
ln(S/X)+(r+ v /2)t
d1 = ------------------------
sd t
d2 = d1 -sd t

4.2.6 Options Terminology:

Strike Price:

The price specified in the options contract is known as a strike price or exercise price.

Option Premium:
Options premium is the price paid by the options buyer to the option seller.

Expiration Date:
The date specified in the option contract is known as the expiration date.

45 | P a g e
In-The-Money Options:

An in the money option is an option that would lead to a positive cash inflow to the
holder if it is exercised immediately.

At-The-Money Options:

An in the money option is an option that would lead to zero cash flow if it is exercised
immediately.

Out-Of-The-Money Option:
An out of the money option is an option that would lead to a negative cash flow if it is
exercised immediately.

Intrinsic Value of an Option:


The intrinsic value of an option is ITM, if option is ITM. If the option is OTM, its
intrinsic value is ZERO.

Time Value of an Option:


The time value of an option is the difference between its premium and its intrinsic value.

46 | P a g e
CHAPTER-5
Analysis of data

47 | P a g e
5.1 ANALYSIS:

The objective of this to analysis is to evaluate the profit/loss position of option holder and option
writer. This analysis is based on the sample data, taken Bharti Infratel scrip. This analysis
considered April, May & June contract of Bharti Infratel. The lot size of Bharti Infratel is 1600.
The time period in which this analysis is done is from 03/04/2017 TO 30/06/17

5.2 Price of Bharti Infratel in the Cash Market:


MARKE MARKE MARKE
DATE DATE
PRICE PRICE DATE PRICE
3-APR-17 328.05 01-May-17 354.7 1-JUN-17 375.9
5-APR-17 338.15 02-May-17 354.2 2-JUN-17 373.85
6-APR-17 341 03-May-17 363 5-JUN-17 381.6
7-APR-17 347 04-May-17 363.35 6-JUN-17 384.35
10-APR-17 357 05-May-17 366.6 7-JUN-17 380.4
11-APR-17 355.4 08-May-17 364.45 8-JUN-17 379.5
12-APR-17 366.8 09-May-17 365.9 9-JUN-17 382.35
13-APR-17 354.9 10-May-17 366.65 12-JUN-17 383.45
17-APR-17 343.25 11-May-17 378.3 13-JUN-17 384.05
18-APR-17 338.95 12-May-17 374.7 14-JUN-17 385.7
19-APR-17 346.6 15-May-17 371.05 15-JUN-17 374.75
20-APR-17 343.6 16-May-17 376.55 16-JUN-17 374.8
21-APR-17 352.2 17-May-17 389.9 19-JUN-17 376.45
24-APR-17 358.55 18-May-17 378.9 20-JUN-17 376.8
25-APR-17 375.35 19-May-17 378.95 21-JUN-17 370.25
26-APR-17 363 22-May-17 387.95 22-JUN-17 374.15
27-APR-17 365.1 23-May-17 379.85 23-JUN-17 373.05
28-APR-17 354.8 24-May-17 369 27-JUN-17 374.8
25-May-17 373.5 28-JUN-17 378
26-May-17 369.95 29-JUN-17 377.8
29-May-17 379.35 30-JUN-17 374.1
30-May-17 372.25
31-May-17 366.6

Table: 5.2.1

48 | P a g e
When the closing price at the end of near month contract period 354.8, mid month contract
period 369.95 & far month contract period 374.1 is considered as settlement price.
The following table explains the amount of transaction between option holder and option writer.

The first, third & fifth column explains the trading date.
The second, fourth & sixth column explains the market price in cash segment on that
date.
The call column explains the call/put options which are considered. Every call/put as
three sub columns.
The first column consists of the premium value per share of the contract, second column
consist of volume of the contract, and the third column consist of total premium value
paid by the buyer.

Market price
400

390

380

370

360

350

340

330

320

310

300

290

Figure 5.2.1

49 | P a g e
CALL PRICES & PUT PRICES:

MARKET PRICE PREMIUM VOLUME ('000') TOTAL VALUE (000)


354.7 154.65 0 0
354.2 154.06 4267681 154331145.6
363 77.215 1939983 48413110.07
363.35 92.088 1316836 118126526.6
366.6 91.932 1981269 63384723.77
364.45 122.784 686159 115025647.4
365.9 153.575 2151177 128459190.9
366.65 93.108 2254910 54520413.59
378.3 123.712 3254041 119869010.4
374.7 139.6485 1559224 214625919.3
371.05 108.738 761032 76246541.91
376.55 77.9825 1346372 69996624.11
389.9 109.0005 2268036 94625296.06
378.9 124.568 2014628 96766913.76
378.95 140.5125 2031322 100260446.2
387.95 94.56 2772691 67611629.28
379.85 141.219 3811223 108744702.4
369 125.34 3134390 108650603
373.5 161.715 7287977 812246092.2
369.95 81.3 1918463 110632145.7
379.35 114.233 3887542 168960316.8
372.25 130.324 1273594 144470148.9
366.6 98.172 3613527 130542057.2
2710.437 25075665 3106509205

Table: 5.2.2

50 | P a g e
VOLUME TOTAL VALUE VOLUME TOTAL VALUE
PREMIUM ('000') (000) PREMIUM ('000') (000)
77.325 0 0 108.255 0 0
107.842 1001760 108031801.9 92.436 1001760 92598687.36
77.215 626991 48413110.07 108.101 626991 67778354.09
92.088 1282757 118126526.6 76.74 1282757 98438772.18
91.932 689474 63384723.77 76.61 689474 52820603.14
92.088 936813 86269235.54 107.436 936813 100647441.5
92.145 836459 77075514.56 92.145 836459 77075514.56
108.626 585561 63607149.19 93.108 585561 54520413.59
108.248 968936 104885384.1 108.248 968936 104885384.1
77.5825 1536901 119236621.8 108.6155 1536901 166931270.6
93.204 701195 65354178.78 93.204 701195 65354178.78
93.579 897594 83995948.93 77.9825 897594 69996624.11
109.0005 868118 94625296.06 77.8575 868118 67589497.19
93.426 776820 72575185.32 77.855 776820 60479321.1
109.2875 713534 77980347.03 93.675 713534 66840297.45
94.56 715013 67611629.28 78.8 715013 56343024.4
109.837 770043 84579212.99 94.146 770043 72496468.28
78.3375 866847 67906626.86 94.005 866847 81487952.24
80.8575 5022701 406123046.1 113.2005 5022701 568572264.6
81.3 1360789 110632145.7 113.82 1360789 154885004
114.233 1479085 168960316.8 114.233 1479085 168960316.8
81.4525 1108546 90293843.07 97.743 1108546 108352611.7
114.534 1329728 152299066.8 114.534 1329728 152299066.8
2178.7 25075665 2331966911 2212.75 25075665 2509353068

Table: 5.2.3

51 | P a g e
VOLUME VOLUME TOTAL VALUE
PREMIUM ('000') TOTAL VALUE (000) PREMIUM ('000') (000)
77.325 0 0 92.79 0 0
77.03 1001760 77165572.8 92.436 1001760 92598687.36
77.215 626991 48413110.07 77.215 626991 48413110.07
107.436 1282757 137814281.1 107.436 1282757 137814281.1
91.932 689474 63384723.77 76.61 689474 52820603.14
107.436 936813 100647441.5 92.088 936813 86269235.54
107.5025 836459 89921433.65 107.5025 836459 89921433.65
77.59 585561 45433677.99 77.59 585561 45433677.99
92.784 968936 89901757.82 92.784 968936 89901757.82
108.6155 1536901 166931270.6 93.099 1536901 143083946.2
77.67 701195 54461815.65 108.738 701195 76246541.91
77.9825 897594 69996624.11 109.1755 897594 97995273.75
109.0005 868118 94625296.06 93.429 868118 81107396.62
77.855 776820 60479321.1 93.426 776820 72575185.32
78.0625 713534 55700247.88 109.2875 713534 77980347.03
78.8 715013 56343024.4 78.8 715013 56343024.4
78.455 770043 60413723.57 94.146 770043 72496468.28
94.005 866847 81487952.24 109.6725 866847 95069277.61
80.8575 5022701 406123046.1 113.2005 5022701 568572264.6
113.82 1360789 154885004 97.56 1360789 132758574.8
97.914 1479085 144823128.7 114.233 1479085 168960316.8
81.4525 1108546 90293843.07 97.743 1108546 108352611.7
81.81 1329728 108785047.7 98.172 1329728 130542057.2
2052.5505 25075665 2258031344 2227.1335 25075665 2525256073

52 | P a g e
NET PAY OFF FOR CALL OPITON HOLDERS AND WRITERS:

1 MONTH CONTRACT EXPIRY DATE (APRIL)


spot strike VOLUME PREMIUM GROSS PROFIT TO NET PROFIT/LOSS NET PROFIT/LOSS
price price (000) ('000') HOLDER ('000') TO HOLDER ('000') TO WRITER ('000')
354.8 326 1,432 2510.437 41235.6672 38725.2302 -38725.2302
354.8 346 1,432 1832.435 12599.7872 10767.3522 -10767.3522
354.8 354 1,432 2078.7 1145.4352 -933.2648 933.2648
354.8 387 1,432 2012.75 0 -2012.75 2012.75
354.8 407 1,432 1952.5505 0 -1952.5505 1952.5505
354.8 427 1,432 2127.1335 0 -2127.1335 2127.1335

OBSERVATIONS AND FINDINGS:

1. One month contract (April-2017)

Six call options are considered with six different strike prices for Near months contract

The current market price of April (near) month on the expiry date is 354.8 and this is
considered as final settlement price.

Gross profit/loss to holder = (spot price strike price) * volume traded.

Net profit /loss to holder = Gross profit Premium paid.

The call options holders whose strike price less than the current market price are said to
be In-The-Money. The calls with strike price 326 & 346 are said to be In-The-Money,
since, if they exercise they will get profits.

The call options holders whose strike price is more than the current market price are said
to be Out-Of-The-Money. The call with strike price of 387,407 & 427 are said to be Out-
Of-The-Money, since, if they exercise, they will get losses.

The premium paid by the options holders whose strike price is near and greater than the
current price have paid Low amounts of premium than those who are far to the current
market price.

Hence when buyer enter in the contract on 3rd April 2017 and settlement on 28th April
2017 the spot market price is 354.8 and strike price is 346 and premium paid is 1832435

53 | P a g e
Call option holder: Call option writer:
Spot price 354.8 Net P/L = (gross loss + premium)
(-) Strike price 346 = - (12599787.2) + 1832435
Profit 8.8 - 10767352
Volume 1431794
Gross profit (8.8 * 1431794) = 12599787.2
Net profit (12599787.2 1832435) = 10767352

2 MONTH CONTRACT EXPIRY DATE (MAY)


Spot Strike PREMIUM GROSS PROFIT TO NET PROFIT TO NET PROFIT TO
price price VOLUME ('000') HOLDER ('000') HOLDER ('000') WRITER ('000')
369.95 326 25075.665 2710.437 1102075.477 1099365.04 -1096654.603
369.95 346 25075.665 2132.435 600562.1768 598429.7418 -596297.3068
369.95 354 25075.665 2178.7 399956.8568 397778.1568 -395599.4568
369.95 387 25075.665 2212.75 0 -2212.75 2212.75
369.95 407 25075.665 2052.551 0 -2052.5505 2052.5505
369.95 427 25075.665 2227.134 0 -2227.1335 2227.1335

OBSERVATIONS AND FINDINGS:

2. Two month contract (May-2017)

Six call options are considered with six different strike prices for Mid months contract

The current market price of May (Mid) month on the expiry date is 369.95 and this is
considered as final settlement price.

Gross profit/loss to holder = (spot price strike price) * volume traded.

Net profit /loss to holder = Gross profit Premium paid.

The calls with strike price 326,346 & 354 are said to be In-The-Money, since, if they
exercise they will get profits.

The call with strike price of 387,407 & 427 are said to be Out-Of-The-Money, since, if
they exercise, they will get losses.

54 | P a g e
The premium paid by the options holders whose strike price is in Mid and greater than
the current price have paid high amounts of premium than those who are Near to the
current market price.

Hence when buyer enter in the contract on 3rd April 2017 and settlement on 26th May
2017 the spot market price is 369.95 and strike price is 346 and premium paid is 2132435

Call option holder: Call option writer


Spot price 369.95 Net P/L = (gross loss + premium)
(-) Strike price 346 = - (600562176.75) + 2132435
Profit 23.95 = - 59842974.75
Volume 25075665
Gross profit (23.95 * 25075665) = 600562176.75
Net profit (600562176.75 2132435) = 598429741.75

3 MONTH CONTRACT EXPIRY DATE (JUNE)


Spot Strike PREMIUM GROSS PROFIT TO NET PROFIT TO NET PROFIT TO
price price VOLUME ('000') HOLDER ('000') HOLDER ('000') WRITER ('000')
374.1 326 981 2910.437 47170.0827 44259.6457 -44,260
374.1 346 981 2332.435 27556.7427 25224.3077 -25,224
374.1 354 981 2478.7 19711.4067 17232.7067 -17,233
374.1 387 981 2412.75 0 -2412.75 2412.75
374.1 407 981 2352.551 0 -2352.5505 2352.5505
374.1 427 981 2527.134 0 -2527.1335 2527.1335
Table: 5.2.4

OBSERVATIONS AND FINDINGS:

3. Three month contract (June-2017)

Six call options are considered with six different strike prices for Far months contract

The current market price of June (Far) month on the expiry date is 374.1 and this is
considered as final settlement price.

Gross profit/loss to holder = (spot price strike price) * volume traded.

Net profit /loss to holder = Gross profit Premium paid.

55 | P a g e
The calls with strike price 326,346 & 354 are said to be In-The-Money, since, if they
exercise they will get profits.

The call with strike price of 387,407 & 427 are said to be Out-Of-The-Money, since, if
they exercise, they will get losses.

The premium paid by the options holders whose strike price is Far and greater than the
current price have paid higher amounts of premium than those who are near to the
current market price.

Hence when buyer enter in the contract on 3rd April 2017 and settlement on 30th June
2017 the spot market price is 374.1 and strike price is 346 and premium paid is 2332435

Call option holder: Call option writer


Spot price 374.1 Net P/L = (gross loss + premium)
(-) Strike price 346 = - (27556742.7) + 2332435
Profit 28.1 = - 25224307.7
Volume 980667
Gross profit (28.1 * 980667) = 27556742.7
Net profit (27556742.7 2332435) = 25224307.7

GRAPH SHOWING PREMIUM TRANSACTED FOR A CALL OPTION


3500

3000

2500

2000

1500

1000

500

0
1 2 3 4 5 6

PREMIUM Near PREMIUM Mid PREMIUM Far

Figure: 5.2.5

56 | P a g e
NET PAY OFF OF PUT OPTION HOLDERS AND WRITERS:

1 MONTH CONTRACT EXPIRY DATE (APRIL)


Spot strike VOLUME PREMIUM PROFIT TO NET PROFIT TO NET PROFIT TO
price price (000) ('000') HOLDER (000) HOLDER ('000') WRITER ('000')
354.8 346 1,432 16500 0 -16500 16500
354.8 369 1,432 17000 20331.4748 3331.4748 -3331.4748
354.8 386 1,432 25000 44671.9728 19671.9728 -19671.9728
354.8 427 1,432 18000 103375.5268 85375.5268 -85375.5268
354.8 407 1,432 19500 74739.6468 55239.6468 -55239.6468
354.8 448 1,432 35840 133443.2008 97603.2008 -97603.2008

OBSERVATIONS AND FINDINGS:

1. One month contract (April-2017)

Six put options are considered with six different strike prices for Near month contract.

The current market price of April (near) month on the expiry date is Rs.354.8 and this is
considered as final settlement price.

Gross profit/loss to holder = (strike price spot price) * volume traded.

Net profit /loss to holder = Gross profit Premium paid.

The put options holders whose strike price is more than the current market price are said
to be In-The-Money. The puts with strike price 369,386,427,407,448 are said to be In-
The-Money, since, if they exercise they will get profits.

The put options holders whose strike price is less than the current market price are said to
be Out-Of-The-Money. The put with strike price 346 is said to be Out-Of-The-Money,
since, if they exercise, they will get losses.

The premium paid by the options holders whose strike price is near and lesser than the
current market price have paid high amounts of premium than those who are far to the
current market price.
Hence when the put option holder enter into a contract on 3rd April 2017 and settlement
on 28th April 2017 the spot market price is 354.8 and strike price is 369 and premium
paid is 17000.

57 | P a g e
Put option holder: Put option writer
Strike price 369 Net P/L = (gross loss + premium)
(-) Spot price 354.8 = - (20331.4748) + 17000
Profit 14.2 = - 3331.4748
Volume 1431.794
Gross profit (14.2 * 1431.794) = 20331.4748
Net profit (20033.14748 17000) = 3331.4748

2 MONTH CONTRACT EXPIRY DATE (MAY)


Spot strike VOLUME PREMIUM PROFIT TO NET PROFIT TO NET PROFIT TO
price price (000) ('000') HOLDER (000) HOLDER ('000') WRITER ('000')
369.95 346 25075.665 17300 0 -17300 17300
369.95 369 25075.665 18300 0 -18300 18300
369.95 386 25075.665 30880 402464.423 371584.4233 -371584.4233
369.95 427 25075.665 21350 1430566.69 1409216.688 -1409216.688
369.95 407 25075.665 20350 929053.388 908703.3883 -908703.3883
369.95 448 25075.665 35840 1957155.65 1921315.653 -1921315.653

OBSERVATIONS AND FINDINGS:

2. Two month contract (April-2017)

Six put options are considered with six different strike prices for Mid month contract.

The current market price of May (Mid) month on the expiry date is Rs.369.95 and this is
considered as final settlement price.

Gross profit/loss to holder = (strike price spot price) * volume traded.

Net profit /loss to holder = Gross profit Premium paid.

The put options holders whose strike price is more than the current market price are said
to be In-The-Money. The puts with strike price 386,427,407,448 are said to be In-The-
Money, since, if they exercise they will get profits.

The put options holders whose strike price is less than the current market price are said to
be Out-Of-The-Money. The put with strike price 346 & 369 is said to be Out-Of-The-
Money, since, if they exercise, they will get losses.

58 | P a g e
The premium paid by the options holders whose strike price is mid and lesser than the
current market price have paid high amounts of premium than those who are near to the
current market price.
Hence when the put option holder enter into a contract on 3rd April 2017 and settlement
on 26th May 2017 the spot market price is 369.95 and strike price is 369 and premium
paid is 18300.

Put option holder: Put option writer


Strike price 369 Net P/L = (gross profit + premium)
(-) Spot price 369.95 = (0) + 18300
Profit -0.95 = 18300
Volume 25075.665
Gross profit (not exercise)
Net loss (18300)

3 MONTH CONTRACT EXPIRY DATE (JUNE)


spot strike VOLUME PREMIUM PROFIT TO NET PROFIT TO NET PROFIT TO
price price (000) ('000') HOLDER (000) HOLDER ('000') WRITER ('000')
374.1 346 981 20200 0 -20200 20200
374.1 369 981 21400 0 -21400 21400
374.1 386 981 34985 11669.9373 -23315.0627 23315.0627
374.1 427 981 36275 51877.2843 15602.2843 -15602.2843
374.1 407 981 23654 32263.9443 8609.9443 -8609.9443
374.1 448 981 35840 72471.2913 36631.2913 -36631.2913
Table: 5.2.6
OBSERVATIONS AND FINDINGS:

3. Three month contract (June-2017)

Six put options are considered with six different strike prices for Far month contract.

The current market price of June (far) month on the expiry date is Rs.374.1 and this is
considered as final settlement price.

Gross profit/loss to holder = (strike price spot price) * volume traded.

Net profit /loss to holder = Gross profit Premium paid.

59 | P a g e
The put options holders whose strike price is more than the current market price are said
to be In-The-Money. The puts with strike price 386,427,407,448 are said to be In-The-
Money, since, if they exercise they will get profits.

The put options holders whose strike price is less than the current market price are said to
be Out-Of-The-Money. The put with strike price 346 & 369 are said to be Out-Of-The-
Money, since, if they exercise, they will get losses.

The premium paid by the options holders whose strike price is far and lesser than the
current market price have paid higher amounts of premium than those who are near to the
current market price.
Hence when the put option holder enter into a contract on 3rd April 2017 and settlement
on 30th June 2017 the spot market price is 374.1 and strike price is 369 and premium paid
is 21400.

Put option holder: Put option writer


Strike price 369 Net P/L = (gross P/L + premium)
(-) Spot price 374.1 = (0) + 21400
Profit - 5.1 = 21400
Volume 980667
Gross profit (not exercise)
Net profit (21400)

GRAPH SHOWING THE AMOUNT OF PREMIUM TRANSACTED OF PUT


OPTION
40000

30000

20000

10000

0
1 2 3 4 5 6

PREMIUM Near PREMIUM Mid PREMIUM Far

Figure: 5.2.7

60 | P a g e
Chapter-6
SUMMARY,
CONCLUSION &
RECOMMENDATION

61 | P a g e
SUMMARY:

Derivative market is an innovation to cash market. Approximately its daily turnover


reaches to the equal stage of cash market. The average daily turnover of the NSE
derivative segment is
Presently the available scrips in futures and options segment
In cash market the profit/loss of the investor depends on the market price of the
underlying asset. The investors may incur huge profits or he may incur huge losses. But it
derivatives segment the investor enjoys huge profits with limited downside.
In cash market the investor as to pay the total money, but in derivatives the investor has
to pay premium or margins, which are some percentage of total money.
Derivatives are mostly used for hedging purpose.
In the derivatives segment the profit/loss of the option holder/option writer is purely
depended on the fluctuations of the underlying asset

62 | P a g e
CONCLUSIONS;

In bullish market the call options writer incurs more losses so the investor is suggested to
go for a call option to hold, where the put options holder suffers in bullish market, so he
is suggested to write a put option.

In bearish market the call options holder will incur more losses so the investor is
suggested to go for a call options to write, where the put options writer will get more
losses, so he is suggested to hold a put options.

In the above analysis the market price of bharti infratel ltd is having low volatility, so the
call options writers enjoy more profit to holders.

63 | P a g e
RECOMMENDATIONS

The derivative market is newly started in India and it is not known by every investor, so
SEBI has to take steps to create awareness among the investors about the derivative
segment.

In order to increase the derivative market in India, SEBI should revise some of their
regulations like contract size, participation of FII in the derivative market.

Contract size should be minimized because small investor cannot afford this much of
huge premiums

SEBI has to take further steps in the risk management mechanism.

SEBI has to take measures to use effectively the derivatives segment as a tool of hedging.

64 | P a g e
Chapter-7

Bibliography

www.derivativesindia.com
www.indiainfoline.com
www.nseindia.com
www.bseindia.com
www.hseindia.org
www.5paisa.com

65 | P a g e
Chapter-8
Appendices

66 | P a g e
Appendix A: An Alternative Method to Derive the Black-Scholes Option Pricing Model

Appendix A.1: Assumptions and the Present Value of the Expected Terminal Option Price

Appendix A.2: Present Value of the Partial Expectation of the Terminal Stock Price

Appendix A.3: Present Value of the Exercise Price under Uncertainty

Black, Fischer; Myron Scholes (1973). "The Pricing of Options and Corporate
Liabilities". Journal of Political Economy. 81 (3): 637654. doi:10.1086/260062. [2]
(Black and Scholes' original paper.)

Appendix B: Bandivadekar, S. & Ghosh, S. (2003), Derivatives and Volatility on Indian Stock
Markets, RBI Occasional Papers, Vol. 24 (3), pp. 12-28.

Appendix C: Antoniou, A., and Holmes, P. (1995). Futures Trading, Information and Spot
Price Volatility: Evidence for the FTSE 100 Stock Index and Futures Contract Using GARCH,
Journal of Banking and Finance, Vol.19, pp. 117-129.

67 | P a g e