A

DISSERTATION REPORT

ON

“A STUDY ON FINANCIAL DERIVATIVES (FUTURE AND OPTION)”

SUBMITTED TO

SAVITRIBAI PHULE PUNE UNIVERSITY

THE PARTIAL FULFILLMENT OF THE REQUIREMENT OF

MASTER BUSINESS ADMINISTRATION (M.B.A)

(FINANCE)

SUBMITTED BY

MR. JUNED BHAIYA SHAIKH

UNDER THE GUIDANCE OF

PROF: N. M. NAIR

2017-19

THROUGH

AMRUTVAHINI INSTITUTE OF BUSINESS MANAGEMENT

&ADMINISTRATION AMRUTNAGAR, SANGAMNER DIST-
AHEMEDNAGAR

Amrutvahini Sheti & Shikshan Vikas Sanstha’s

 Amrutvahini Institute of Management &
Business Administration, Sangamner
(Affiliated to Savitribai Phule Pune University and Approved by AICTE New Delhi)
ISO 9001: 2015 Certified Institute

Ref.AIMBA/ Date

CERTIFICATE
This is to certify that the Dissertation entitled “A Study on financial derivatives
(future and option)” in the partial fulfillment of requirement of Master’s Degree
in Business Administration Programmed of Savitribai Phule Pune University
(SPPU), embodies the bonafide work carried out by Mr. Juned Bhaiya Shaikh

We find the work complete, comprehensive and of significantly high standard to

warrant its presentation for the purpose of MBA examination

This is his original dissertation work carried out under the guidance and
supervision of dissertation guide.

DISSERTATION GUIDE DIRECTOR

Prof. N.M.Nair Dr. B.M. LONDHE

EXAMINER

(SAVITRIBAI PHULE PUNE UNIVERSITY)

Amrutnagar, Post: Sangamner (S.K)- 422608, Tal : Sangamner, Dist : Ahmednagar

(M.S)
Phone (O)-(02425) 259015 / 259255 Fax : (02425)259015
E-mail: directoraimba@yahoo.in Website:-www.amrutimba.org
 DECLARATION

I JUNED BHAIYA SHAIKH of MBA hereby declare that the dissertation

work on “A STUDY ON FINANCIAL DERIVATIVES (FUTURE AND
OPTION)” which has been submitted to University Of Pune , is an original
work of the undersigned and has not been reproduced from any sources
and has not been submitted to any University.

Date: JUNED SHAIKH

Place: SANGAMNER.
 ACKNOWLEDGEMENTS

Before go to the documentation part of the dissertation, first it is necessary to say

“Thanks you” to all those personalities, who guides to us during the period of completion of
this dissertation work.

First I say thanks to our respected Director Dr. B. M. Londhe who always inspire
&cheers us for achieving the goals & objectives. I would like to thank all those persons under
whose guidelines and suggestions I got an opportunity to discharge my duties &
responsibility. I also thank to the all teaching &non-teaching staff members, who guides &
cooperates us directly or indirectly for completion of this dissertation report.

I express our special & sincere thanks to Prof. N. M. Nair who guides us start from
the dissertation up to successful completion of this dissertation. Without his guidance, the
dissertation will not be a reality.

We also express our gratitude to all the relatives & friends, who’s moral support
increases our patience & efficiency. Last but not least, our lovable thanks go to our beloved
parents, whose blessings boost our mind and keep our spirit high.

Mr. Juned Shaikh

Place:-

Date:-

Chapter No. INDEX Page No.

1 Introduction 1-3
2 Literature Review 4-12

3 Industry Profile 13-19

4 Theoretical Background 20-27

5 Research Methodology 28-31
6 Data Analysis & Interpretation 32-41
7 Findings 42-43
8 Conclusion 44-45
9 Suggestion 46-47
10 Bibliography 48-49
 CHAPTER-1
INTRODUCTION

1
 Financial derivatives are financial instruments that are linked to a specific financial
instrument or indicator or commodity, and through which specific financial risks can be
traded in financial markets in their own right. Transactions in financial derivatives should be
treated as separate transactions rather than as integral parts of the value of underlying
transactions to which they may be linked. The value of a financial derivative derives from the
price of an underlying item, such as an asset or index. Unlike debt instruments, no principal
amount is advanced to be repaid and no investment income accrues. Financial derivatives are
used for a number of purposes including risk management, hedging, arbitrage between
markets, and speculation.

Financial derivatives enable parties to trade specific financial risks such as interest rate risk,
currency, equity and commodity price risk, and credit risk, etc. to other entities who are more
willing, or better suited, to take or manage these risks, typically, but not always, without
trading in a primary asset or commodity. The risk embodied in a derivatives contract can be
traded either by trading the contract itself, such as with options, or by creating a new contract
which embodies risk characteristics that match, in a countervailing manner, those of the
existing contract owned. This latter activity is termed offsetability1, and occurs in forward
markets. Offset ability means that it will often be possible to eliminate the risk associated
with the derivative by creating a new, but “reverse”, contract that has characteristics that
countervail the risk of the first derivative. Buying the new derivative is the functional
equivalent of selling the first derivative, as the result is the elimination of risk. The ability to
offset the risk on the market is therefore considered the equivalent of tradability in
demonstrating value. The outlay that would be required to offset the existing derivative
contract represents its value -- actual offsetting is not required to demonstrate value.

Financial derivatives contracts are usually settled by net payments of cash, often before
maturity for exchange traded contracts such as commodity futures. Cash settlement is a
logical consequence of the use of financial derivatives to trade risk independently of
ownership of an underlying item. However, some financial derivative contracts, particularly
involving foreign currency, are associated with transactions in the underlying item.

The value of the financial derivative derives from the price of the underlying item: the
reference price. Because the future reference price is not known with certainty, the value of

2
the financial derivative at maturity can only be anticipated, or estimated. The reference price
may relate to a commodity, a financial instrument, an interest rate, an exchange rate, and
another derivative, a spread between two prices, an index or basket of prices. An observable
market price or index for the underlying item is essential for calculating the value of any
financial derivative -- if there is no observable prevailing market price for the underlying
item, it cannot be regarded as a financial asset.
Transactions in financial derivatives should be treated as separate transactions, rather than as
integral parts of the value of underlying transactions to which they may be linked. This is
because a different institutional unit will be the party to the derivative transaction from that
for the underlying transaction. However, embedded derivatives should not be separately
identified and valued from the primary instrument.

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. By their very
nature, the financial markets are marked by a very high degree of volatility. Through the use
of derivative products, it is possible to partially or fully transfer price risks by locking-in asset
prices. As instruments of risk management, these generally do not influence the fluctuations
in the underlying asset prices. However, by locking-in asset prices, derivative product
minimizes the impact of fluctuations in asset prices on the profitability and cash flow
situation of risk-averse investors. Stock futures are derivative contracts that give you the
power to buy or sell a set of stocks at a fixed price by a certain date. Once you buy the
contract, you are obligated to uphold the terms of the agreement. • It allows hedgers to shift
risks to speculators. • It gives traders an efficient idea of what the futures price of a stock or
value of an index is likely to be. • Based on the current future price, it helps in determining
the future demand and supply of the shares. • Since it is based on margin trading, it allows
small speculators to participate and trade in the futures market by paying a small margin
instead of the entire value of physical holdings.

3
 CHAPTER-2
LITERATURE REVIEW

The working paper of IMF research department “Time varying risk premier in

4
Futures market” (1990) undertakes an econometric investigation into the presence of risk
Premium in commodity futures market. The statistical tests are derived from a formal
Model of asset pricing and are applied to futures prices in variety of commodity markets.
The results suggest that for several commodities there is evidence of a time varying risk
Premium: particularly in futures contracts maturing six months ahead. The complications
Of the study for the efficiency of the futures market and the costs of using these markets for
Hedging are also noted.

Stoll and Whaley (1990) empirically examine the temporal relation between the
Price movements of index futures contracts and stocks in the process the paper provides
Insights on the volatility of index futures verses stock indexes and the extent to which
Futures overshoot true values. This study investigates the time series properties of 5 minute
Intraday returns of stock index and stock index futures contracts and finds that S &P 500
And index futures returns tend to lead stock market returns by about 5 minutes but
Occasionally as long as 10 minutes or more even after stock index returns have been
Purged of infrequent trading effects.

Bassembindes and Seguin (1993) explore the relations between volume volatility
And market depth in 8 physical financial futures market. Evidence suggests that linking
Volatility to total volume does not extract all information. The relation is asymmetric and
The impact of positive unexpected volume shocks on volatility is larger than the impact of
Negative shocks. Finally consistent with theories of market depth, the study shows large
Open interest mitigates volatility.

Abha (1996) examines the behavior and reaction of the Indian investor regarding
The introduction of options trading in India as an alternative to the badla system. The major
Emphasis of the study has been on whether the Indian market has the infrastructure to
Introduce options trading, whether common investor has the knowledge of options trading

5
And to what extent he is familiar with the strategies that are available to optimize the
Returns. A survey of 120 investors were conducted and finding exhibits that more than 80
% of the respondents believe that badla system ensures higher liquidity than options
System. 98 % believe that badla system is more speculator friendly than options system.
But 94% believe that badla system is more risky than options. People prefer options
Because of its transparency.

Raju et.al (1998) evaluates the most popular indices available in India to find out
Their suitability for the purpose of introducing index futures trading. „BSE National index‟
Turns out to be the most suitable index out of the available indices, for introduction of
Index futures considering the hedging effectiveness supplemented by its characteristics of
Difficulty in manipulation. The impact of futures trading on the spot prices is also analyzed
Using the experience of other markets.

Rambhia (2002) makes a comparison between stock futures and badla and also
Between options and futures. It points out that a large number of investors still find it
Simpler to take positions in futures rather than combining options. The study also
Highlights that the introduction of stock futures in November 2001 has made the entire
Family of derivatives products including Nifty, Sensex futures, Sensex options, Nifty
Futures and Nifty options available to investors.

Bir Singh (2004) attempts to understand the price risks of agricultural and derived
Commodities, with a view to justify the use of futures markets for individual commodities.
The hedging performance has been investigated to know the usefulness of futures market
To discover prices, manage uncertainty and to improve the performance of agricultural
Commodities. The study compares between basis risk and price risk and week form
Efficiency of futures market is tested using cointegration technique. It also measures
Minimum risk hedge ratio and hedging effectiveness of futures market and determines the

6
Futures price volatility along with futures trading and price volatility.

Chan and Lin (2004) examine all the four index futures contracts available on the
Taiwan futures exchange to investigate the price discovery of the Taiwan index futures
Market. Empirical results show that the interaction patterns between index futures and spot
Prices of these four systems are different. While index futures contracts are faster in
Updating prices and disseminate more information in the TX, MTx and TE systems. The TF
Index futures do not dominate the process of information transmission.

Sah Narayan (2006) tests whether futures trading is going towards hedging price
Risk or towards fulfilling the speculative desires of sophisticated traders. The author uses
Daily data collected from NSE from June 12 2000 to March 25 2004 for a new month
Contract. He employs ordinary least square for empirical analysis. The results established
That futures trading are moving towards satisfying the speculative desires of investors
Rather than hedging price risks.

Buraschi and Jiltsov (2006) provide option pricing and volume implications for an
Economy with heterogeneous agents who face model uncertainty and have different beliefs
On expected returns. Market incompleteness makes options non redundant, while
Heterogeneity creates a link between differences in beliefs and option volumes. An
Empirical test is conducted using S&P 500 index option data. The survey data are used to
Build an index of dispersion in beliefs and find that a model that takes information
Heterogeneity into account can explain dynamics of option volume.

Naresh.G in his thesis (2007) tries to examine the effectiveness of Black Scholes
Option pricing model, put call parity relationship and their fairness. It also compares
Implied volatility for selected stocks and volatility disclosed by NSE on the underlying

7
Security. Another area of concern was to ascertain the views of market participants on the
Regulatory structure and trading system. Stocks of 15 different companies were selected for
Analysis. The following were the major findings
- exists significant difference between the fair price calculated using the Black
Scholes option pricing and market price at 1% level of significance
- There is significant difference between the calculated implied volatility and actual
Volatility
- Based on the survey conducted, mean scores of market participants on regulatory
Aspects such as investor protection, position limits, contracts on new indices, use of
Derivatives by mutual funds are above 3.5 which indicates satisfaction on these aspects.
- Factor analysis shows that 11 factors explains about 70.2%
- There is significant difference among market participants based on their years of
Experience, margin call, tax treatment etc.

Baric and Supriya (2007) explore the functional relationship between the trading
Value and the trading price of Nifty futures. It also attempts to understand the relationships
In different economic situations. The present study uses both high frequency and daily data
For S&P CNX Nifty index futures contract from Dec 2 2002 to Nov 30 2004. Six variables
Namely total trading value, traded price, best buy order limit price, best sell order limit
Price; ideal value and fair value are identified for the study.

Barik and Supriya (2007) examine the signaling effect of the efficient pricing and
Efficient order entry system on trading in Nifty index futures market. The GARCH 2
Staged model is used in this study. Results indicate that the Nifty futures market is not a
Perfect market rather it is a monopoly. The market is inefficient due to the asymmetric
Information. Arbitrages make risky profits at the cost of other market participants. Efficient
Pricing and efficient order entry system are therefore good signaling devices which ensure
Efficient valuation.

8
Bir Singh (2007) expresses futures market as the nerve center for collection and
Discrimination of information about the agents‟ expectations of futures cash market. The
Paper investigates the Hessian cash price variability before and after the introduction of
Futures trading to ascertain whether the futures market helps in reducing the intra seasonal
Price fluctuations. This paper is seeking to show how the influence of Hessian futures
Market has led to reduce cash market volatility. Result suggests that futures market maybe
Indeed viable policy maker to reduce uncertainty in agricultural markets. The futures
Market through its information role may vastly improve the storage across the seasons
Thereby stabilizing cash prices.

Floros (2007) examines the relation between price and open interest in the Greek
Stock index futures market. The focus is on GARCH effects and the long run information
Role of open interest. The results shows that current open interest helps in explaining
GARCH effects, while a negative impact on returns is reported. Further more evidence
From the cointegration tests shows that there is a long run relation between open interest
And futures price. This suggests that one can use the information of open interest to predict
Futures prices in the long-run. These findings are strongly recommended to financial
Managers dealing with Greek stock index future.

Geetha (2007) investigates the long- run and short- run relationship among selected
Asian stock index futures market that is Malaysia, Singapore, Taiwan, Hong Kong.
Johansson’s cointegration test has been used to study the long run equilibrium relationship
Among the 4 stock index futures markets. Hence potential for risk minimization through
Diversification of index futures across these markets is less for investors for long holding
Periods. The error correction term revealed that the Taiwan stock index futures markets
Place a leading role in driving the movements of other markets towards the long run
Equilibrium. Since the 4 stock index futures markets are co integrated, causal relations
Among these variables are examined with Vector Error Correction Model which allows the
Combinational short-run and long-run dynamic adjustments among these variables.

9
Junpan et.al (2007) presents strong evidence that option trading volume contains
Information about future stock prices. Taking advantage of a unique data set, they
Construct put call ratios from option volume initiated by buyers to open new positions.
Stocks with low put call ratios outperform stocks with high put call ratios by more than 40
Basis points on the next day and more than 1% over the next week. Partitioning our option
Signals into components that are publicly and no publicly observable, we find that the
Economic source of this predictability is nonpublic information possessed by option
Traders rather than making inefficiency. We also find greater predictability for stocks with
Higher connections of informed traders and from option contracts with greater leverage.

Mukherjee et.al (2007) explains that by open interest and volume based predictors,
The study reinvestigates the impact of two option market non price variables in predicting
The future price movements in underlying cash market over a period of time. Though being
Insignificant just after its initiation the open interest based predictors are found to be
Statistically significant even more than the volume based predictors, in the later periods.
The most interesting finding is that hedging, the basic purpose of introducing such
Instruments has been shifted towards speculation or more generally as a simple investment
Strategy in subsequent periods. It has also been found that the option expiration effect
Would not arise exactly on the expiration date, but starts at least from previous five days up
To the date of expiration

Reddy (2007) investigates the price open interest relationship for stock index
Futures. The paper focuses on increase in the futures price along with increase in the open
Interest. It confirms an uptrend and decrease in the open interest represents liquidation or
Profit booking. The present paper also contains hypothesis the change in futures price has

10
Direct relationship with the movement in open interest. This is tested in case of stocks on
ONGC, Reliance, Statham and SBI. Tata motors, Tisco, Tata Power and Maruthi. Period
Of study is one and half years from April 2004 to Sept 2005. The study is based on Index
Futures and stock futures.

Sharma and Sahi (2007) focus on investor’s perception regarding the financial
Derivatives especially futures and options and the various risk hedging strategies. An
Attempt has been made to check the extent of awareness of these new instrument used in
The securities market. The sampling technique used was non probabilistic convenience
Sampling techniques. In order to analyses the data collected the statistical tools like factor
Analysis and Chi-square were used. Apart from this weighted average score is also being
Used for analysis.

Sehgal and N. Vijayakumar (2007) attempt to examine the relationship between the
Stock market characteristics and the option market liquidity using data for equity options
And underlying stocks, in the Indian context. It was found that while option liquidity is
Positively related to stock price liquidity and stock return volatility is inversely related to
Uncertainty in the information environment measured by company’s size.

Dhananjay (2007) writes to raise the ordinary investors‟ awareness about the
Fundamentals of various derivative products on BSE and NSE and procedures of their
Trading. It gives an overview of index on BSE and NSE which covers what is Sensex and
How it is calculated and underlying stocks on Nifty. Stock futures and pricing of stock
Futures and past trend in futures are also being discussed.

Ghosh (2007) gives a brief description about how futures are helpful to business
Firms. Introduction deals with reason for futures being used in hedging in financial

11
Transactions different orders like customer order, market order, limit order, market of
Touched order, no order, fill or kill order are also discussed in this article.

Jose (2007) explains the immense liquidity and popularity of markets in stock
Index futures. The different types of stock index futures like capitalization weight index,
Price weight index, equal weight index, accumulation index etc. are all mentioned.
Characteristics of S&P global index constituents are explained. Article also gives a brief
Description about stock exchanges in Canada, Australia, Japan, Hong Kong, China, India,
Taiwan and European stock index. In the end it explains how index futures can help
Investors in emerging markets. It concludes that knowledge and the skill of transacting and
Formulating trading strategies is important

Lakonishok et.al (2007) uses a unique option data set to provide detailed
Descriptive statistics on the purchased and written open interest and open buy and sell
Volume of several classes of investors. It also shows that volatility through straddles and
Strangles accounts for a small fraction of option trading volume. A large percent of call
Writing is passed of covered call positions. Finally the paper finds that during the stock
Market bubble of the late 1990s and early 2000s, the least sophisticated investors in the
Data set have substantially increased their purchases calls on growth but not on value
Stocks.

12
 CHAPTER-3
INDUSTRY PROFILE

13
A Profile of Indian Stock Market
Structure of Indian Securities Market

14
Primary Market
The primary market is where securities are created. It's in this market that firms sell (float)
new stocks and bonds to the public for the first time. For our purposes, you can think of the
primary market as the market where an initial public offering (IPO) takes place. Simply put,
an IPO occurs when a private company sells stocks to the public for the first time. The
primary market is also the market where governments or public sector institutions raise
money through bond offerings.
Secondary Market
Secondary market is an equity trading avenue in which already existing/pre- issued securities
are traded amongst investors. Secondary market could be either auction or dealer market.
While stock exchange is the part of an auction market, Over-the-Counter (OTC) is a part of
the dealer market.

Functions of Stock Exchange

1. Providing a ready market the organization of stock exchange provides a ready market to
speculators and investors in industrial enterprises. It thus, enables the public to buy and sell
securities already in issue.

2. Providing a quoting market prices it makes possible the determination of supply and
demand on price. The very sensitive pricing mechanism and the constant quoting of market
price allows investors to always be aware of values. This enables the production of various
indexes which indicate trends etc.

3. Providing facilities for working it provides opportunities to Jobbers and other members to
perform their activities with all their resources in the stock exchange.

4. Safeguarding activities for investors the stock exchange renders safeguarding activities for
investors which enables them to make a fair judgment of a securities. Therefore, directors
have to disclose all material facts to their respective shareholders. Thus, innocent investors
may be safeguard from the clever brokers.

5. operating a compensation fund it also operate a compensation fund which is always

available to investors suffering loss due due the speculating dealings in the stock exchange.

15
6. Creating the discipline its members controlled under rigid set of rules designed to protect
the general public and its members. Thus, this tendency creates the discipline among its
members in social life also.

7. Checking functions new securities checked before being approved and admitted to listing.
Thus, stock exchange exercises rigid control over the activities of its members.

8. Adjustment of equilibrium The investors in the stock exchange promote the adjustment of
equilibrium of demand and supply of a particular stock and thus prevent the tendency of
fluctuation in the prices of shares.

9. Maintenance of liquidity: - The bank and insurance companies purchase large number of
securities from the stock exchange. These securities are marketable and can be turned into
cash at any time. Therefore banks prefer to keep securities instead of cash in their reserve.
This it facilities the banking system to maintain liquidity by procuring the marketable
securities.

10. Promotion of the habit of saving: - Stock exchange provide a place for saving to public.
Thus, it creates the habit of thrift and investment among the public. This habit leads to
investment of funds incorporate or government securities. The funds placed at the disposal of
companies are used by them for productive purposes.

11. Refining and advancing the industry: - Stock exchange advances the trade, commerce
and industry in the country. It provides opportunity to capital to flow into the most productive
channels. Thus, the flow of capital from unproductive field to productive field helps to refine
the large-scale enterprises.
12. Promotion of capital formation: - It plays an important part in capital formation in the
country. Its publicity regarding various industrial securities makes even disinterested people
feel interested in investment.

13. Increasing Govt. Funds:-The govt. can undertake projects of national importance and
social value by raising funds through sale of its securities on stock exchange. According to

16
MARSHAL "Stock exchange are not merely the chief theaters of business transaction, they
are also barometers which indicate the general conditions of the atmosphere of business."

Role of Stock Exchanges

Stock exchanges have multiple roles in the economy. This may include the following:
Raising capital for businesses
A stock exchange provides companies with the facility to raise capital for expansion through
selling shares to the investing public.

Mobilizing savings for investment: - When people draw their savings and invest in shares
(through an IPO or the issuance of new company shares of an already listed company), it
usually leads to rational allocation of resources because funds, which could have been
consumed, or kept in idle deposits with banks, are mobilized and redirected to help
companies' management boards finance their organizations. This may promote business
activity with benefits for several economic sectors such as agriculture, commerce and
industry, resulting in stronger economic growth and higher productivity levels of firms.

Facilitating company growth: - Companies view acquisitions as an opportunity to expand

product lines, increase distribution channels, hedge against volatility, increase their market
share, or acquire other necessary business assets. A takeover bid or a merger agreement
through the stock market is one of the simplest and most common ways for a company to
grow by acquisition or fusion.

Profit sharing :- Both casual and professional stock investors, as large as institutional
investors or as small as an ordinary middle-class family, through dividends and stock price
increases that may result in capital gains, share in the wealth of profitable businesses.
Unprofitable and troubled businesses may result in capital losses for shareholders.

Corporate governance’s- By having a wide and varied scope of owners, companies

generally tend to improve management standards and efficiency to satisfy the demands of
these shareholders and the more stringent rules for public corporations imposed by public
stock exchanges and the government. Consequently, it is alleged that public companies
(companies that are owned by shareholders who are members of the general public and trade
shares on public exchanges) tend to have better management records than privately held

17
companies (those companies where shares are not publicly traded, often owned by the
company founders, their families and heirs, or otherwise by a small group of investors).
Despite this claim, some well- documented cases are known where it is alleged that there has
been considerable slippage in corporate governance on the part of some public companies.
The dot-com bubbles in the late 1990s, and the subprime mortgage crisis in 2007–08, are
classical examples of corporate mismanagement.

Creating investment opportunities for small investors: - As opposed to other businesses

that require huge capital outlay, investing in shares is open to both the large and small stock
investors because a person buys the number of shares they can afford. Therefore, the Stock
Exchange provides the opportunity for small investors to own shares of the same companies
as large investors. Government capital-raising for development projects Governments at
various levels may decide to borrow money to finance infrastructure projects such as sewage
and water treatment works or housing estates by selling another category of securities known
as bonds. These bonds can be raised through the stock exchange whereby members of the
public buy them, thus loaning money to the government. The issuance of such bonds can
obviate, in the short term, direct taxation of citizens to finance development—though by
securing such bonds with the full faith and credit of the government instead of with collateral,
the government must eventually tax citizens or otherwise raise additional funds to make any
regular coupon payments and refund the principal when the bonds mature. Barometer of the
economy at the stock exchange, share prices rise and fall depending, largely, on economic
forces. Share prices tend to rise or remain stable when companies and the economy in general
show signs of stability and growth. An economic recession, depression, or financial crisis
could eventually lead to a stock market crash. Therefore, the movement of share prices and in
general of the stock indexes can be an indicator of the general trend in the economy.
Main Stock exchanges in India
Bombay Stock Exchange
The Bombay Stock Exchange (BSE) is an Indian stock exchange located at Dalai Street,
Mumbai (formerly Bombay), Maharashtra, India.
Established in 1875, the BSE is Asia’s first stock exchange, It claims to be the world's fastest
stock exchange, with a median trade speed of 6 microseconds, The BSE is the world's 11th
largest stock exchange with an overall market capitalization of $1.83 Trillion as of March,
2017. More than 5500 companies are publicly listed on the BSE

18
National Stock Exchanges The National Stock Exchange of India Limited (NSE) is the
leading stock exchange of India, located in Mumbai. NSE was established in 1992 as the first
demutualized electronic exchange in the country. NSE was the first exchange in the country
to provide a modern, fully automated screen-based electronic trading system which offered
easy trading facility to the investors spread across the length and breadth of the country.
National Stock Exchange has a total market capitalization of more than US$1.41 trillion,
making it the world’s 12th-largest stock exchange as of March 2016. NSE's flagship index,
the NIFTY 50, the 51 stock index (50 companies with 51 securities inclusive of DVR), is
used extensively by investors in India and around the world as a barometer of the Indian
capital markets. However, only about 4% of the Indian economy / GDP is derived from the
stock exchanges in India.

19
 CHAPTER-4
THEORETICAL
BACKGROUND

20
DERIVATIVES:-
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. By their very
nature, the financial markets are marked by a very high degree of volatility. Through the use
of derivative products, it is possible to partially or fully transfer price risks by locking-in asset
prices. As instruments of risk management, these generally do not influence the fluctuations
in the underlying asset prices. However, by locking-in asset prices, derivative product
minimizes the impact of fluctuations in asset prices 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... Banks, 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 an underlying asset in a
contractual manner. The underlying asset can be equity, forex, commodity or any other asset.
1) Securities Contracts (Regulation) Act, 1956 (SCR Act) defines “derivative” to secured or
unsecured, risk instrument or contract for differences or any other form of security.
2) A contract which derives its value from the prices, or index of prices, of underlying
securities.
Emergence of financial derivative products
Derivative products initially emerged as hedging devices against fluctuations in commodity
prices, and commodity-linked derivatives remained the sole form of such products for almost
three hundred years. Financial derivatives came into spotlight in the post-1970 period due to
growing instability in the financial markets. However, since their emergence, these products
have become very popular and by 1990s, they accounted for about two-thirds of total
transactions in derivative products. In recent years, the market for financial derivatives has
grown tremendously in terms of variety of instruments available, their complexity and also
turnover. In the class of equity derivatives the world over, futures and options on stock
indices have gained more popularity than on individual stocks, especially among institutional
investors, who are major users of index-linked derivatives. Even small investors find these

21
useful due to high correlation of the popular indexes with various portfolios and ease of use.
The lower costs associated with index derivatives vies–a–vies derivative products based on
individual securities is another reason for their growing use.

PARTICIPANTS:
The following three broad categories of participants in the derivatives market.

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

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

ARBITRAGERS:
Arbitrageurs are in business to take of a discrepancy between prices in two different markets,
if, for, example, they see the futures price of an asset getting out of line with the cash price,
they will take offsetting position in the two markets to lock in a profit.

FUNCTION OF DERIVATIVES MARKETS:

The following are the various functions that are performed by the derivatives markets. They
are:
 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.
 Derivatives market helps to transfer risks from those who have them but may not like them
to those who have an appetite for them.
 Derivatives trading acts as a catalyst for new entrepreneurial activity.
 Derivatives markets help increase saving and investment in long run.

22
TYPES OF DERIVATIVES:
The following are the various types of derivatives. They are:
FORWARDS:
A forward contract is a customized contract between two entities, where settlement takes
place on a specific date in the future at today’s pre-agreed price.

FUTURES:
A futures contract is an agreement between two parties to buy or sell an asset in a certain time
at a certain price, they are standardized and traded on exchange.

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

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

LEAPS:
The acronym LEAPS means long-term Equity Anticipation securities. These are options
having a maturity of up to three years.

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

SWAPS:
Swaps are private agreements between two parties to exchange cash flows in the future
according to a prearranged formula. They can be regarded as portfolios of forward contracts.
The two commonly used Swaps are:

23
a) Interest rate Swaps:
These entail swapping only the related cash flows between the parties in the same
currency.

b) Currency Swaps:
These entail swapping both principal and interest between the parties, with the cash flows
in on direction being in a different currency than those in the opposite direction.

SWAPTION:
Swaption 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.

RATIONALE BEHIND THE DELOPMENT OF DERIVATIVES:

Holding portfolios of securities is associated with the risk of the possibility that the investor
may realize his returns, which would be much lesser than what he expected to get. There are
various factors, which affect the returns:
1. Price or dividend (interest)
2. Some are internal to the firm like-
• Industrial policy
• Management capabilities
• Consumer’s preference
• Labor strike, etc.

These forces are to a large extent controllable and are termed as nonsystematic 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 of influence 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

24
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 prices falling
from time to time in spite of company’s earnings rising and vice versa.
Rational Behind the development of derivatives market is to manage this systematic risk,
liquidity in the sense of being able to buy and sell relatively large amounts quickly without
substantial price concession.
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 to many common stocks. Those factors favor for the purpose of both portfolio
hedging and speculation, the introduction of a derivatives securities that is on some broader
market rather than an individual security.

REGULATORY FRAMEWORK:
The trading of derivatives is governed by the provisions contained in the SC R A, the SEBI
Act, and the regulations framed there under the rules and byelaws of stock exchanges.
Regulation for Derivative Trading:
SEBI set up a 24 member committed under Chairmanship of Dr. L. C. Gupta develop the
appropriate regulatory 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 Derivative contract.
The provision in the SCR Act governs the trading in the securities. The amendment of the
SCR Act to include “DERIVATIVES” within the ambit of securities in the SCR Act 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 SCR Act, 1956 to start Derivatives Trading. The
derivative exchange/segment should have a separate governing council and representation of
trading/clearing member shall be limited to maximum 40% of the total members of the

25
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 derivatives 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 corporation/clearinghouse Clearing Corporation/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.
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 persons who
have passed a certification programmer approved by SEBI

Introduction to futures and options

In recent years, derivatives have become increasingly important in the field of finance. While
futures and options are now actively traded on many exchanges, forward contracts are
popular on the OTC market. In this chapter we shall study in detail these three derivative
contracts.
Forward contracts
A forward contract is an agreement to buy or sell an asset on a specified future date for a
specified price. One of the parties to the contract assumes a long position and agrees to buy
the underlying asset on a certain specified future date for a certain specified price. The other
party assumes a short position and agrees to sell the asset on the same date for the same price.
Other contract details like delivery date, price and quantity are negotiated bilaterally by the
parties to the contract. The forward contracts are normally traded outside the exchanges. The
salient features of forward contracts are:
They are bilateral contracts and hence exposed to counter–party risk.
Each contract is custom designed, and hence is unique in terms of contract size, expiration
date and the asset type and quality.
The contract price is generally not available in public domain.

26
On the expiration date, the contract has to be settled by delivery of the asset.
If the party wishes to reverse the contract, it has to compulsorily go to the same counterparty,
which often results in high prices being charged.
However forward contracts in certain markets have become very standardized, as in the case
of foreign exchange, thereby reducing transaction costs and increasing transactions volume.
This process of standardization reaches its limit in the organized futures market.
Forward contracts are very useful in hedging and speculation. The classic hedging application
would be that of an exporter who expects to receive payment in dollars three months later. He
is exposed to the risk of exchange rate fluctuations. By using the currency forward market to
sell dollars forward, he can lock on to a rate today and reduce his uncertainty. Similarly an
importer who is required to make a payment in dollars two months hence can reduce his
exposure to exchange rate fluctuations by buying dollars forward.
If a speculator has information or analysis, which forecasts an upturn in a price, then he can
go long on the forward market instead of the cash market. The speculator would go long on
the forward, wait for the price to rise, and then take a reversing transaction to book profits.
Speculators may well be required to deposit a margin upfront. However, this is generally a
relatively small proportion of the value of the assets underlying the forward contract. The use

of forward markets here supplies leverage to the speculator.

27
 CHAPTER-5

RESEARCH
METHODOLOGY

28
 Introduction

Research

Research concern itself with obtaining information through empirical observation that can be
used to systematically develop logically related proposition so as to attempt to establish
causal relationship among variable.

According to Redman and Mary (1923), research is a “systematized effort to gain new
knowledge”.

Thus, research is an original addition to the available knowledge, which contributes to its
further advancement. it is an attempt to pursue truth through the methods of study,
observation, comparison and experiment. In sum, research is the search for knowledge, using
objective and systematic methods to find solution to a problem. And objective of research is
to find answers to the questions by applying scientific procedures.

Research methods/ Methodology:

Research methods include all those methods that are adopted for conducting research. Thus,
research techniques or methods are the methods that the researchers adopt for conducting the
research studies.

There are two main approaches to research, namely quantitative and qualitative approach in
study sued survey design involving both quantitative and qualitative approaches. The
quantitative approach involves the collection of quantitative data, which are put to rigorous
quantitative analysis in a formal and rigid manner. And qualitative approach uses the method
of subjective assessment of opinions, behavior and attitudes.

29
Meaning of data:-
Research is nothing but search for knowledge. Research can be defined as a scientific and
systematic search for pertinent information on a specific topic. Research is an art of scientific
investigation. Research Methodology is a way to solve the research problem. It may be
understood as a science of studying how research is done scientifically. In research
methodology collecting the data is very important step. Data is classified in two types as
primary data and secondary data.

Collection of Data:-
Data means facts. Data are those things from which conclusion may be drawn in the form of
figures or in words.
Collection of data is essential part of research. The task of data collection start after the
objective of the study and research design had been decide in red to measure properties. I
collect unit of analysis for observation and study & that is understood as the research data.

Analytical Research:-
The research has to use facts or information already available and analyze these to make
critical evaluation of the material.

Two Types of Data Research:-

1) Primary data:-
2) Secondary data:-

1) Primary data:-Primary data was collected through the personal interview and discussion
and meeting with the various department heads concern authority. Preplanned structured
questionnaire was use to collect the requisite data, the concern department which were
important from, study point of view.

30
2) Secondary data:-Secondary data is the data that are already available i.e. they refer to the
data which have already been collected and analyzed the by someone. After doing the data
collection in primary data, the researcher did the collection through the secondary data.
In this there are several types such as:-
A) Books

B) Internet

 OBJECTIVES OF THE PROJECT:

 To know the operational concepts of financial derivatives.

 To analyze the operations of futures and options.
 To study about risk management with the help of derivatives.

 SCOPE OF THE STUDY:

The study is limited to “Derivatives” with special reference to futures and option in the Indian
context and the Inter-Connected Stock Exchange has been taken as a representative sample for
the study. The study can’t be said as totally perfect. Any alteration may come. The study has
only made a humble attempt at evaluation derivatives market only in India context. The study is
not based on the international perspective of derivatives markets, which exists in NASDAQ,
CBOT etc.

 NEED FOR STUDY:

In recent times the Derivative markets have gained importance in terms of their vital role in the
economy. The increasing investments in derivatives (domestic as well as overseas) have
attracted my interest in this area. Through the use of derivative products, it is possible to
partially or fully transfer price risks by locking-in asset prices. As the volume of trading is
tremendously increasing in derivatives market, this analysis will be of immense help to the
investors.

31
 CHAPTER-6
DATA ANALYSIS &
INTERPRITATION

32
FUTURE PROFIT AND LOSS PROFILE

LONG FUTURE

The outcome for a buyer or seller of a future when it reaches its expiry date is driven by the
price of the underlying asset at that time. Because the market price can vary, this is known as
the ‘market risk’. A futures buyer commits to buy at a pre-agreed price (eg, £115) and will
make a profit as long as the underlying asset is trading above this price at expiry. This can be
represented graphically as follows:

Profit

Price of underlying at expiry

115

115

Loss

As shown, the risk to the buyer of a futures contract is maximized when the value of the
underlying at expiry falls to zero. In that case, the buyer would pay the pre-agreed sum
(£115) for an asset worth nothing, losing the £115. The reward to the buyer is, theoretically,
unlimited - the higher the price of the underlying at expiry, the higher the profit made by the
futures buyer.

33
Short future

Because the seller of a future is the other side of the transaction from the buyer of the future,
the outcome is a mirror image of the outcome for the buyer. It is driven by the price of the
underlying asset at expiry and a profit is made if the underlying asset’s price falls below the
pre-agreed level. A loss will be made if the underlying asset at expiry is priced above the pre-
agreed futures price. This can be represented graphically as follows:

Profit

115

115 price of underlying at expiry

Loss

The risk to the seller of a futures contract is, theoretically, unlimited. As the price of the
underlying asset rises above the pre-agreed level at expiry, the futures seller suffers loss since
he must pay the higher market price and sell at the lower pre-agreed price to the futures
buyer. The futures seller’s reward increases as the price of the underlying asset falls below
the pre-agreed level and is limited to the futures price, where the seller can deliver the
underlying asset that has cost nothing in exchange for the pre-agreed futures price.

In addition to the market risk, there is another risk that arises on futures contracts. Whenever
a buyer or seller enters into a futures contract, there is a risk that the other side (the
counterparty) of the contract does not or cannot honour their obligations. This is known as
‘counterparty risk’.

As will be developed later in this workbook, counterparty risk exists between:

• The broker and their client; and

• The broker and the clearing house.

34
Option

A call option is an option to buy an asset (the underlying) for a specified price (the strike or
exercise price), on or before a specified date. Remember this by thinking that the buyer can
call away the asset from the seller.

A put option is an option to sell an asset for a specified price on or before a specified date.
Remember this by thinking that the buyer can put the asset on to someone else (the seller of
the option), demanding the pre-agreed sum in exchange.

The following examples are based on American-style options on the shares of two fictional
companies - ABC plc. And XYZ plc.

1. Buying a call

e.g., March ABC plc. 700 Call @ 30

The buyer of the option pays the premium (30), which is the amount due per share, quoted in
pence to the seller. The buyer is the holder of the option (and said to be long a call). The
holder now has the right, but not the obligation, to buy one share in ABC plc for 700 pence.
He can do this at any point on any business day during the published trading times until the
defined time on the expiry day in March. The option premium is paid up-front and is non-
returnable. As will be developed later in this workbook, the premium is paid by the buyer via
his broker and then on to the clearing house for the account of the counterparty’s broker.

What happens at expiry?

It will depend on the price of ABC shares on the expiry day.

• If the share price prevailing in the market is below 700 pence, the option is worthless and
the holder will abandon the option. Would you pay 700p for the share if you could buy it for
less in the market?

• If the prevailing share price is above 700p, the holder has the right to buy the shares for
700p, a lower price than in the cash market. He will, therefore, exercise the option paying
700p for the share and then may sell it in the market for the higher price. Even if the market
price is 701p the option is worth exercising as the holder will make a profit of 1p, which can
then be used to offset the up-front cost of the premium.

The potential for gain or loss can be represented diagrammatically, with profit or loss shown
on the Y axis and the price of the underlying at expiry on the X axis.

35
Profit buying a call

700p 730p

Price of underlying at expiry

30

Loss

In summary:

• The maximum cost to the buyer is limited to the premium paid, which is paid regardless of
the outcome at expiry.

• A net profit will be made by the buyer if the profit on exercise exceeds the premium paid.

• The breakeven point is strike plus premium.

• The maximum potential profit is unlimited as the long call option will become increasingly
valuable to the buyer as the share price rises above the exercise price.

36
2. Selling a call

e.g., March ABC plc. 700 Call @ 30

The seller of the option immediately receives the premium (30p) from the buyer, which is the
amount due per share. The seller is now under an obligation to supply the share should the
holder of the option decide to exercise at any time up to and including expiry (as it is an
American-style exercise).

What happens at expiry?

• If the share price prevailing in the market is below 700p, as indicated in the first example,
the holder will abandon the option and the seller/writer will no longer hold any obligation.
The premium has already been received and provides the seller’s profit.

• If the prevailing share price is above 700p, the holder will exercise the option against the
writer. The writer is obliged to deliver the share for 700p. He may not already own the share
and have to acquire it in the market at a higher price and take the loss. As long as the loss is
lower than the premium received, the writer will still make an overall profit.

Profit

Selling a call

30 700p 730p

Price of underlying at expiry

Loss

37
In summary:

• The maximum loss for the seller is potentially unlimited.

• A net loss will be made by the seller if the loss on exercise exceeds the premium already
received.

• The seller’s breakeven point is strike plus premium.

• The seller's maximum potential profit is limited to the premium received.

3. Buying a put

e.g., March XYZ plc 450 put @ 17

Similarly to the earlier examples, the buyer of the option pays the premium (this time, say,
17p) to the seller and becomes the holder of the put option (he is now long a put). The holder
now has the right to sell one share in XYZ plc for 450p, again under American-style terms.

What happens at expiry?

It will depend on the price of XYZ shares on expiry day.

If the share price is above 450p, the holder will abandon the option. The option is worthless.
Would you sell the share for 450 pence if you could sell it for more in the market?

• If the share price is below 450p, the holder can buy the share in the cash market at the lower
price, then exercise the option at the 450p strike price, thus selling the share at the higher
price (450p) to make a profit. Even if the market price is 449p, the option is worth exercising
as the holder will make a profit of 1p, which can then be used to offset the cost of the original
premium.

38
Profit Buying a put

433p 450p

Price of underlying

At expiry

17p

Loss

In summary:

• The maximum loss to the buyer is limited to the premium paid.

• A net profit will be made by the buyer if the profit on exercise exceeds the premium paid.

• The breakeven point is strike less premium.

• Maximum potential profit will arise if the share price falls to zero, and is the strike price
less the premium.

39
4. Selling a put

e.g., March XYZ plc. 450 Put @ 17

The seller of the option receives the premium (17p) from the option buyer and is the writer of
the option. The writer is now under an obligation to buy XYZ plc. Shares for 450p each if the
holder decides to exercise.

What happens at expiry?

As you might by now expect, it will depend on the price of XYZ shares on expiry day.

• If the share price is above 450p, the holder will abandon the option (as he can receive a
higher price in the market for the share, as explained earlier).

• If the share price is below 450, the holder will exercise the option (as the holder can achieve
a higher price by exercising than is possible in the market). The option writer will be obliged
to buy the share for 450 and sell it on in the market at the lower price and take the loss. As
long as the loss is lower than the premium received, the writer will still make an overall
profit.

Profit selling a put

433p 450p

17p

40
In summary:

• The seller’s maximum profit is limited to the premium received.

• A net loss will be made by the seller if the loss on exercise exceeds the premium received.

• The seller’s breakeven point is strike less premium.

• Maximum potential loss will arise if the share price falls to zero, and is the strike price less
the premium.

Risk and reward summary

The following table summarizes the potential risks and rewards that arise in each of the four
option positions.

Position Risk Reward

Long call Limited to premium Unlimited
Short call Unlimited Limited to premium
Long put Limited to premium Strike less premium (asset price
would have to fall to zero)
Short put Strike less premium (asset price Limited to premium
would have to fall to zero)

Profit and loss calculator

The following table provides the formulae for calculating the profit or loss made on each of
the four positions at expiry.

Long call

Short call

Long put

Short put

41
Expiry price <strike

Loss = premium

Profit = premium

Gain/(loss) = (Strike – expiry price)

– premium
Gain/(loss) = (Expiry price – strike)

+ premium

Expiry price >strike

Gain/(loss)=(Expiryprice–
strike) –premium

Gain/(loss) = (Strike – expiry

price) + premium

Loss = premium

Profit = premium

42
 CHAPTER-7
FINDINGS

FINDINGS

 Long future shown, the risk to the buyer of a futures contract is maximized when the
value of the underlying at expiry falls to zero

 As the price of the underlying asset rises above the pre-agreed level at expiry, the
futures seller suffers loss since he must pay the higher market price and sell at the
lower pre-agreed price to the futures buyer.

 The maximum potential profit is unlimited as the long call option will become
increasingly valuable to the buyer as the share price rises above the exercise price

 The maximum loss for the seller is potentially unlimited

43
 Maximum potential profit will arise if the share price falls to zero, and is the strike
price less the premium

 The seller’s maximum profit is limited to the premium received

44
CHAPTER-8
CONCLUSION

45
 CONCLUSION

The introduction of financial derivatives and specially the equity derivatives on the exchange traded
platform have revolutionized the landscape of financial industry across the globe. The Equity
derivatives have gained extremely significant place among all the financial products. Derivatives are
risk management tools that help in effective management of risk by various stakeholders. Derivatives
are used to transfer risk, from the risk averse to the one who is willing to accept it at a cost.

SEBI has laid down the criteria for forming equity derivatives exchanges and clearing corporations,
market structure, risk management system, sales practices, client registrations, trade guarantee fund,
investor grievances, arbitration mechanism, margining system, collateral management, capital
management, admission of brokers, net-worth criteria, position limits, inspection of brokers, product
specifications and corporate actions etc. SEBI has also made changes in the risk management
framework, collateral management, client registrations etc as and when the need arose. SEBI as a
regulatory body has played very important role in developing the equity derivatives market in India.
The regulatory body has also ensured putting in place a robust risk management system that the
equity derivatives market in India has been less prone to manipulation.

SEBI has also allowed introduction of new products such as stock futures, stock options, mini
derivatives contracts on indexes, long dated options, interest rate futures, currency futures, physical
settlement of stock options and futures, derivative contracts on foreign indices on Indian Exchanges
etc in order to provide a further fillip to the market and ensure that the market keeps pace with
global developments.

46
 CHAPTER-9
SUGGESTIONS

47
 SUGGESTIONS

 SEBI has to take step to create awareness among the investors about the
derivative segment In order to increase derivative market in India, SEBI should
revise some of their regulation like contract size participation of FII in the
derivative market.

 Contract size should be minimize because small investors cannot afford this
much of huge premiums.

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

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

48
 CHAPTER-10
BIBLIOGRAPHY

49
 Bibliography

1. www.nseindia.com

2. www.bseindia.com

3. Economictimes.indiatimes.org

4. www.moneycontrol.com

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