A PROJECT REPORT ON

“FINANCIAL DERIVATIVES WITH SPECIAL REFERENCE TO

FUTURES”

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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 (domestic as well as overseas) have
attractedmyinterestinthisarea.Numerousstudiesontheeffectsoffuturesandoptionslisting on the
underlying cash market volatility have been done in the developed markets. 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 derivativesegment.

In cash market, the profit/loss of the investor depends on the market price of the underlying
asset.Theinvestormayincurhugeprofitorhemayincurhugeloss.Butinderivativessegment
theinvestorenjoyshugeprofitswithlimiteddownside.Derivativesaremostlyusedforhedging
purpose. In order to increase the derivatives market in India, SEBI should revise some oftheir
regulations like contract size, participation of FII in the derivatives market. In a nutshell, the
study throws a light on the derivativesmarket.

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 CHAPTER-1
INTRODUCTION OF DERIVATIVES

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 INTRODUCTION OF DERIVATIVES
The emergence of the market for derivative products, most notably forwards, futures and
options, can be traced back to the willingness of risk-averse economic agents to guard themselves
against uncertainties arising out of fluctuations in asset prices. By their very nature, the financial
markets are marked by a very high degree of volatility. Through the use of derivative products, it is
possible to partially or fully transfer price risks by locking-in asset Prices. As instruments of risk
management, these generally do not influence the Fluctuations in the underlying asset prices.
However, by locking-in asset prices, Derivative products minimize the impact of fluctuations in
asset prices on the Profitability and cash flow situation of 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 OF DERIVATIVES:
“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.”
 Securities Contract ( regulation) Act, 1956 (SC(R) A)defines “debt instrument, share, loan
whether secured or unsecured, risk instrument or contract for differences or any other form
of security”
 A contract which derives its value from the prices, or index of prices, of underlying
securities.

HISTORY OF DERIVATIVES MARKETS:

Early forward contracts in the US addressed merchants concerns about ensuring that there were
buyers and sellers for commodities. However “credit risk” remained a serious problem. To deal
with this problem, a group of Chicago; businessmen formed theChicago Board of Trade (CBOT) in
1848. The primary intention of theCBOT was to provide a centralized location known In advance
for buyers and sellers to negotiate forward contracts. In 1865, the CBOT went one step further and
listed the first “exchange traded” derivatives Contract in the US; these contracts were called
“futures contracts”. In 1919, Chicago Butter and Egg Board, a spin-off CBOT was reorganized to
allow futures trading. Its name was changed to Chicago Mercantile Exchange (CME). The CBOT
and the CME remain the two largest organized futures exchanges, indeed the two largest “financial”

4
exchanges of any kind in the world today.
The first stock index futures contract was traded at Kansas City Board of Trade. Currently the
most popular stock index futures contract in the world is based onS&P 500 index, traded on Chicago
Mercantile Exchange. During the Mid-eighties, financial futures became the most active derivative
instruments Generating volumes many times more than the commodity futures. Index futures,
futures on T-bills and Euro-Dollar futures are the three most popular Futures contracts traded today.
Other popular international exchanges that trade derivatives are LIFFE inEngland, DTB in
Germany, SGX in Singapore, TIFFE in Japan, MATIF in France,Eurex etc.,
THE GROWTH OF DERIVATIVES MARKET:
Over the last three decades, the derivatives markets have seen a phenomenal growth. A large
variety of derivative contracts have been launched at exchanges across the world. Some of the
factors driving the growth of financial derivatives are:
 Increased volatility in asset prices in financial markets,
 Increased integration of national financial markets with the international markets,
 Marked improvement in communication facilities and sharp decline in their costs,
 Development of more sophisticated risk management tools, providing economic agents a wider
choice of risk management strategies, and
 Innovations in the derivatives markets, which optimally combine the risks and returns over a
large number of financial assets leading to higher returns, reduced risk as well as transactions
costs as compared to individual financial assets.

PARTICIPANTS IN THE DERIVATIVES MARKETS

The following three broad categories of participants:
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.
Arbitrageurs:
Arbitrageurs are in business to take advantage of a discrepancy between prices in two different
markets. If, for example they see the futures prices of an asset getting out of line with the cash

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price, they will take offsetting positions in the two markets to lock in a profit.
FUNCTIONS OF THE DERIVATIVES MARKET
In spite of the fear and criticism with which the derivative markets are commonly looked at, these
markets perform a number of economic functions.
 Price in an organized derivative markets reflect the perception of market participants about the
future and lead the prices of underlying to the perceived future level. The prices of derivatives
converge with the prices of the underlying at the Expiration of the derivative contract. Thus
derivatives help in discovery of future as well as current prices.
 The derivative markets helps to transfer risks from those who have them but may not like them
to those who have an appetite for them.
 Derivative due to their inherent nature, are linked to the underlying cash markets. With the
introduction of derivatives, the underlying market witness higher trading volumes because of
participation by more players who would not otherwise participate for lack of an arrangement to
transfer risk.
 Speculative trades shift to a more controlled environment of derivatives market. In the absence
of an organized derivatives market, speculators trade in the underlying cash markets.
Margining, monitoring and surveillance of the activities of various participants become
extremely difficult in these kinds of mixed markets.
 An important incidental benefit that flows from derivatives trading is that it acts as a catalyst for
new entrepreneurial activity. The derivatives have a history of attracting many bright, creative,
Well-educated people with an entrepreneurial attitude. They often energize others to create new
businesses, new products and new employment opportunities, the benefit of which are immense.
DERIVATIVE PRODUCTS (TYPES)
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 at a certain time in the
future at a certain price. Futures contracts are special types of forward contracts in the sense that the
former are standardized exchange-traded contracts.
Options:

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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 upto one year; the majority of options traded on options exchanges
having a maximum maturity of nine months. Longer-dated options are called warrants and are
generally traded Over-the-counter.
Leaps:
The acronym LEAPS means Long-Term Equity Anticipation Securities. These are options having a
maturity of upto three years.
Baskets:
Basket options are options on portfolio 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 agreement 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:
 Interest rate swaps:
The entail swapping only the interest related cash flows between the parties in the same currency.
 Currency swaps:
These entail swapping both principal and interest between the parties, with the cash flows in one
direction being in a different currency than those in the opposite direction.

FUTURES:
A Future contract is a contract to buy or sell a stated quantity of a commodity or a financial claim at
a specified price at a future specified date. The parties to the Future have to buy or sell the asset regardless of
what happens to its value during the intervening period or what shall be the price of the date for which the
contract is finalized.

Future Delivery Contract:

Where the physical delivery of the asset is slated for a future date and the payment to be made as agreed< it is
future delivery contract.

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 However in practice all Future are settled by the himself then it will be settled by the exchange at a specified
price and the difference is payable by or to the party. The basic motive for a Future is not the actual delivery
but the heading for future risk or speculation. Futures can be of two types:

1. Commodity Future:
These include a wide range of agricultural products and other commodities like oil, gas including
precious metals like gold, silver.

2. Financial Future:
These include financial claims such as shares, debentures, treasury bonds, and share index, foreign
exchange. Futures are traded at the organized exchanges only. The exchange provides the counter-party
guarantee through its clearinghouse and different types of margins system. Some of the centers where
Futures are traded are Chicago board of trade, Tokyo stock exchange.

FUTURE TERMINOLOGY:

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

Future Price: The price at which the Future contract trades in the future market.

Contract Cycle: The period over which a contract trades. The index Future contract on the NSE have
one-month, two months, three-month expiry cycles which expire on the last Thursday of the month. On
the Friday following the last Thursday a new contract having a three months expiry is introduced for
trading.

Expiry Date: It is the date specified in the Future contract at the end of which it will cease to exit.

Contract Size: The amount of asset that has to be delivered under on contract. For Ex: The contract size
on NSE’S Futures market is 200 niftys.

Initial Margin: The amount that must be deposited in the margin account at the time a Futures contract is
first entered in to be known as initial margin.

Marking to Market: At the end of each trading day, the margin account is adjusted to reflect the
investor’s gain or loss depending upon the Futures closing price. This is called Marking to Market.

Maintenance Margin: This is set to ensure that the balance in the margin account never becomes
negative. If the balance in the margin account falls below the maintenance margin, the investor receives a
margin call and is expected to top up the margin account to the initial margin level before trading
commences on the next day.

Hedging using Futures contract:

Hedging is the process of reducing exposure to risk. Thus a hedge is any act that reduces the price risk of a
certain position in the cash market. Future act as a hedge when a position is taken in them, which is opposite
to that of the existing or anticipated cash position.
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 In a short hedger sells Future contract when they have taken a long position on the cash asset, apprehending
that prices would fall. A loss in the cash market would result when the prices do fall, but a gain would occur
due to the short position in the Future.

In a long hedge the hedger buys Futures contract when they have taken a short position on the cash asset.
The long hedger faces the rise that prices may risk. If a price rise does not take place, the long hedger would
incur a loss in the cash good but would realize gains on the long Futures position.

When the asset whose price is to be hedge does not exactly match with the asset underlying the Futures
contract so held is called as cross hedge. Hedge ration is the number of future contacts to buy or sell per unit
of the spot good position. Optimal hedge ration depends on the extent and nature of relative price movements
of the Futures prices and the cash good prices.

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 OBJECTIVES OF THE STUDY
 To find the profit/loss position of futures buyer and seller on an asset.

 To study and analyse the purpose of hedging in future in derivatives market.

 To make suggestions to the investors regarding the effective usage of derivatives.

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 SCOPE OF THE STUDY
The Study is limited to “Derivatives” with special reference to futures. 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.

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 NEED FOR THE 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.

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 LIMITATIONS OF THE STUDY
The following are the limitation of this study.

 This study is only limited to futures in the Derivative market

 The scrip chosen for analysis is WIPRO, TCS, INFOSYS and the contract taken is May
2018 ending one –month contract. 
 The data collected is completely restricted to WIPRO, TCS, INFOSYS of May 2018; hence
this analysis cannot be taken universal 

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 RESEARCH METHODOLOGY:
Research Methodology is a systematic procedure of collecting information in order to analyse
and verify a phenomenon. the collection of information is done in two principle sources. They
are as follows

Secondary Data:

Various portals,

• www.nseindia.com

• Financial newspapers, Economics times.

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 CHAPTER-3
INDUSTRY PROFILE
COMPANY PROFILE

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 Industry profile

Structure of Indian Securities Market

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.

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Functions of Stock Exchange

1. Providing a readymarket
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 marketprices
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 trendsetc.
3. Providing facilities forworking
It provides opportunities to Jobbers and other members to perform their activities with
all their resources in the stock exchange.
4. Safeguarding activities forinvestors
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 compensationfund
It also operate a compensation fund which is always available to investors suffering
loss due due the speculating dealings in the stock exchange.
6. Creating thediscipline
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. Checkingfunctions
New securities checked before being approved and admitted to listing. Thus, stock
exchange exercises rigid control over the activities of its members.
8. Adjustment ofequilibrium
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.

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 COMPANY PROFILE

3.1 KARVY STOCK BROKING

Company:

ABOUT THE COMPANY

KARVY was established as “KARVY & Company” by 5 chartered accountants during the
year1979-80. At that time, it was confined only to audit and taxation. Later on it diversified into
financial and accounting services during the year 1981-82 with a capital of Rs.1, 50,000. KARVY
became a known name during the year 1985-86 when it forayed into capital market as registrar.

Vision of Karvy:
To achieve & sustain market leadership, Karvy shall aim for complete customer satisfaction,
by combining its human and technological resources, to provide world class quality services.
In the process Karvy shall strive to meet and exceed customer's satisfaction and set industry
standards.

About the company

The Karvy Group is today a well-diversified conglomerate. Its businesses straddle the entire
financial services spectrum as well as data processing and managing segments. Since most of its
financialserviceswereretailfocused,theneedtobuildscaleandskillinthetransactionprocessing domain
became imperative. Also during stressed environment in the financial services segment, the non-
financial businesses bring in a lot of stability to the group’sbusinesses.

Karvy’sfinancialservicesbusinessisrankedamongthetop-5inthecountryacrossitsbusiness
segments. The Group services over 70 million individual investors in various capacities, and
providesinvestorservicestoover600corporatehouses,comprisingthebestofCorporateIndia.

The Group offers stock broking, depository participant, distribution of financial products
(including mutual funds, bonds and fixed deposits), commodities broking, personal finance
advisory services, merchant banking & corporate finance, wealth management, NBFC (loans
to individuals, micro and small businesses), Data management, Forex & currencies, Registrar
Transfer agents, Data Analytics, Market Research among others. Karvy is also authorized to
provide Aadhar Card enrollment, updating and Aadhar PVC services

18
Karvy prides itself on remaining customer centric as all times through a combination of
leading edge technology, Professional management and a wide network of offices across
India.

Karvy is committed to its quest as an Equal Opportunity Employer and believes in the rights
for differently-abled persons.

Group of Companies
• Karvy Stock BrokingLTD
• Karvy ComtradeLTD
• Karvy CapitalLTD
• Karvy Investment Advisory ServicesLTD
• Karvy HoldingsLTD
• Karvy Middle EastLLC
• Karvy Realty (India)LTD
• Karvy Financial Services LTD
• Karvy Insurance RepositoryLTD
• Karvy Forex & Currencies PrivateLTD
• Karvy ConsultantsLTD
• Karvy Computershare PrivateLTD
• Karvy ComputershareW.L.L
• Karvy Data Management ServicesLTD
• Karvy Investor ServicesLTD
• Karvy InsightsLTD
• Karvy AnalyticsLTD
• Karvy Solar PowerLTD
• Karvy Global ServicesLTD
• Karvy Global Services Inc,USA
• Karvy Inc,USA

19
Awards and Accolades

• Market Excellence Award, Commodities -Metal”

• from India’s premier stock exchange BSE - the SKOCH – BSE

Order of Merit award and the SKOCH – BSE Aspiring Nation
award - in recognition of its efforts to educate, empower and help
create an enlightened corps of financialmarket

• NSDL Star Performer Award 2014” for Highest AssetValue

• Broker with Best Corporate Desk for Commodity Broking’award

• Largest E-Broking House in India’ award

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 CHAPTER-3
REVIEW OF LITERATURE

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 REVIEW OF LITERATURE

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
themselvesagainstuncertaintiesarisingoutoffluctuationsinassetprices.Bytheirverynature, 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.Asinstrumentsofriskmanagement,thesegenerallydonotinfluencethefluctuationsin the
underlying asset prices. However, by locking-in asset prices, derivative productminimizes the
impact of fluctuations in asset prices on the profitability and cash flow situation of risk-
averseinvestors.

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.
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.
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.Intheclassofequityderivativestheworldover,futuresandoptionsonstockindices
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have gained more popularity than on individual stocks, especially among institutional
investors, who are major users of index-linked derivatives. Even small investors find these
useful due to high correlation of the popular indexes with various portfolios and ease of use.
The lower costs associated with index derivatives vis–a– vis derivative products based on
individual securities is another reason for their growing use.

Derivatives Market – History & Evolution

History of Derivatives may be mapped back to the several centuries. Some of the specific
milestones in evolution of Derivatives Market Worldwide are given below:

• 12thCentury‐InEuropeantradefairs,sellerssignedcontractspromisingfuturedelivery of
the items theysold.

• 13thCentury‐TherearemanyexamplesofcontractsenteredintobyEnglishCistercian
Monasteries, who frequently sold their wool up to 20 years in advance, to foreign
merchants.

• 1634‐1637 ‐ Tulip Mania in Holland: Fortunes were lost in after a speculative boomin
tulip futuresburst.

• Late 17th Century ‐ In Japan at Dojima, near Osaka, a futures market in rice was
developed to protect rice producers from bad weather orwarfare.

• In 1848, The Chicago Board of Trade (CBOT) facilitated trading of forward contracts
on variouscommodities.

• In1865,theCBOTwentastepfurtherandlistedthefirst‘exchangetraded”derivative
contract in the US. These contracts were called ‘futurescontracts”.

• In1919,ChicagoButterandEggBoard,aspin‐offofCBOT,wasreorganisedtoallow futures
trading. Later its name was changed to Chicago Mercantile Exchange(CME).

• In 1972, Chicago Mercantile Exchange introduced International Monetary Market

(IMM), which allowed trading in currencyfutures.

• In 1973, Chicago Board Options Exchange (CBOE) became the first marketplace for
trading listedoptions.

• In1975,CBOTintroducedTreasurybillfuturescontract.Itwasthefirstsuccessfulpure
interest rate futures.

• In 1977, CBOT introduced T‐bond futurescontract.

• In 1982, CME introduced Eurodollar futures contract.

• In 1982, Kansas City Board of Trade launched the first stock indexfutures.

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 • In1983,ChicagoBoardOptionsExchange(CBOE)introducedoptiononstockindexes with
the S&P 100® (OEX) and S&P 500® (SPXSM)Indexes.
Factors influencing the growth of derivative market globally

Overthelastfourdecades,derivativesmarkethasseenaphenomenalgrowth.Manyderivative
contractswerelaunchedatexchangesacrosstheworld.Someofthefactorsdrivingthegrowth of
financial derivativesare:

• Increased fluctuations in underlying asset prices in financialmarkets.

• Integration of financial marketsglobally.

• Useoflatesttechnologyincommunicationshashelpedinreductionoftransactioncosts.

• Enhancedunderstandingofmarketparticipantsonsophisticatedriskmanagementtools to
managerisk.

• Frequent innovations in derivatives market and newer applications ofproducts

• Indian Derivatives Market

As the initial step towards introduction of derivatives trading in India, SEBI set up a 24–
member committee under the Chairmanship of Dr. L. C. Gupta on November 18, 1996 to
develop appropriate regulatory framework for derivatives trading in India. The committee
submitted its report on March 17, 1998 recommending that derivatives should be declared as
‘securities’sothatregulatoryframeworkapplicabletotradingof‘securities’couldalsogovern
trading of derivatives.

Subsequently, SEBI setupagroupinJune1998undertheChairmanshipofProf.J.R.Verma, to

recommend measures for risk containment in derivatives market in India. The committee
submitteditsreportinOctober1998.Itworkedouttheoperationaldetailsofmarginingsystem,
methodology for charging initial margins, membership details and net‐worth criterion,
deposit requirements and real time monitoring of positions requirements.

In1999,TheSecuritiesContractRegulationAct(SCRA)wasamendedtoinclude“derivatives”
within the domain of ‘securities’ and regulatory framework was developed for governing
derivatives trading. In March 2000, government repealed a three‐decade‐ old notification,
which prohibited forward trading insecurities.

24
The exchange traded derivatives started in India in June 2000 with SEBI permitting BSE and
NSE to introduce equity derivative segment. To begin with, SEBI approved trading in index
futures contracts based on CNX Nifty and BSE Sensex, which commenced trading in June
2000. Later, trading in Index options commenced in June 2001 and trading in options on
individual stocks commenced in July 2001. Futures contracts on individual stocks started in
November 2001. MCX‐ SX (renamed as MSEI) started trading in all these products (Futures
and options on index SX40 and individual stocks) in February 2013.

PRODUCTS IN DERIVATIVE MARKET

Forwards
It is a contractual agreement between two parties to buy/sell an underlying asset at a certain
futuredateforaparticularpricethatispre‐decidedonthedateofcontract.Boththecontracting parties
are committed and are obliged to honour the transaction irrespective of price of the
underlyingassetatthetimeofdelivery.Sinceforwardsarenegotiatedbetweentwoparties,the
termsandconditionsofcontractsarecustomized.TheseareOver‐the‐counter(OTC)contracts.

Futures
A futures contract is similar to a forward, except that the deal is made through an organized
and regulated exchange rather than being negotiated directly between two parties. Indeed, we
may say futures are exchange traded forward contracts.

Options
An Option is a contract that gives the right, but not an obligation, to buy or sell theunderlying
on or before a stated date and at a stated price. While buyer of option pays the premium and
buys the right, writer/seller of option receives the premium with obligation to sell/ buy the
underlying asset, if the buyer exercises hisright.

Swaps
A swap is an agreement made between two parties to exchange cash flows in the future
according to a prearranged formula. Swaps are, broadly speaking, series of forward contracts.
Swaps help market participants manage risk associated with volatile interest rates, currency
exchange rates and commodity prices.

25
Market Participants:
There are broadly three types of participants in the derivatives market ‐ hedgers, traders (also
calledspeculators)andarbitrageurs.Anindividualmayplaydifferentrolesin differentmarket
circumstances.
Hedgers:
They face risk associated with the prices of underlying assets and use derivatives to reduce
theirrisk.Corporations,investinginstitutionsandbanksallusederivativeproductstohedgeor
reduce their exposures to market variables such as interest rates, share values, bond prices,
currency exchange rates and commodityprices.
Speculators/Traders:
Theytrytopredictthefuturemovementsinprices ofunderlyingassetsand basedontheview, take
positions in derivative contracts. Derivatives are preferred over underlying asset for
tradingpurpose,astheyofferleverage,arelessexpensive(costoftransactionisgenerallylower than
that of the underlying) and are faster to execute in size (high volumesmarket).
Arbitrageurs:
Arbitrage is a deal that produces profit by exploiting a price difference in a product in two
differentmarkets.Arbitrageoriginateswhenatraderpurchasesanassetcheaplyinonelocation and
simultaneously arranges to sell it at a higher price in another location. Such opportunities
areunlikelytopersistforverylong,sincearbitrageurswouldrushintothesetransactions,thus closing
the price gap at differentlocations.

Types of Derivatives Market:

In the modern world, there is a huge variety of derivative products available. They are either
tradedonorganisedexchanges(calledexchangetradedderivatives)oragreeddirectlybetween
thecontractingcounterpartiesoverthetelephoneorthroughelectronicmedia(calledOver‐the‐
counter (OTC) derivatives). Few complex products are constructed on simple building blocks
like forwards, futures, options and swaps to cater to the specific requirements ofcustomers.

Over‐the‐counter market is not a physical marketplace but a collection of broker‐dealers

scattered across the country. Main idea of the market is more a way of doing business than a
place. Buying and selling of contracts is matched through negotiated bidding process over a
networkoftelephoneorelectronicmediathatlinkthousandsofintermediaries.OTCderivative
markets have witnessed a substantial growth over the past few years, very much contributed
by the recent developments in information technology. The OTC derivative marketshave

26
banks, financial institutions and sophisticated market participants like hedge funds,
corporations and high net‐worth individuals.
OTC derivative market is less regulated market because these transactions occur in private
among qualified counterparties, who are supposed to be capable enough to take care of
themselves.
The OTC derivatives markets – transactions among the dealing counterparties, havefollowing
features compared to exchange tradedderivatives:

• Contracts are tailor made to fit in the specific requirements of dealingcounterparties.

• The management of counter‐party (credit) risk is decentralized and located within

individualinstitutions.

• There are no formal centralized limits on individual positions, leverage, ormargining.

• Therearenoformalrulesormechanismsforriskmanagementtoensuremarketstability and
integrity, and for safeguarding the collective interest of marketparticipants.

• Transactions are private with little or no disclosure to the entiremarket.

On the contrary, exchange‐traded contracts are standardized, traded on organized exchanges

with prices determined by the interaction of buyers and sellers through anonymous auction
platform. A clearing house/ clearing corporation, guarantees contract performance (settlement
of transactions).

27
4.2 Futures
A futures contract is an agreement between two parties to buy or sell an asset at a certain
time in the future at a certain price. The futures contracts are standardized and exchange
traded. To facilitate liquidity in the futures contracts, the exchange specifies certain standard
features of the contract. It is a standardized contract with standard underlying instrument, a
standard quantity and quality of the underlying instrument that can be delivered, (or which
can be used for reference purposes in settlement) and a standard timing of such settlement.

The standardized items in a futures contract are:

 Quantity of theunderlying
 Quality of theunderlying
 The date and the month ofdelivery
 The units of price quotation and minimum pricechange
 Location ofsettlement


Futurescontractsinphysicalcommoditiessuchaswheat,cotton,gold,silver,cattle,
etc.haveexistedforalongtime.Futuresinfinancialassets,currencies,andinterest-
bearing instruments like treasury bills and bonds and other innovations like futures
contracts in stock indexes are relatively newdevelopments.

The futures market described as continuous auction markets and exchanges
providing the latest information about supply and demand with respect to individual
commodities, financial instruments and currencies, etc

Futuresexchangesarewherebuyersandsellersofanexpandinglistofcommodities;
financial instruments and currencies come together to trade. Trading has also been
initiated in options on futures contracts. Thus, option buyers participate in futures
marketswithdifferentrisk.Theoptionbuyerknowstheexactrisk,whichisunknown to the
futurestrader.

28
Future Contract
Supposeyoudecidetobuyacertainquantityofgoods.Asthebuyer,youenterintoan
agreement with the company to receive a specific quantity of goods at a certain price
every month for the next year. This contract made with the company is similar to a
futures contract, in that you have agreed to receive a product at a future date, with the
price and terms for delivery already set. You have secured your price for now and the
next year - even if the price of goods rises during that time. By entering into this
agreement with the company, you have reduced your risk of higherprices.

➢
So, a futures contract is an agreement between two parties: a short position - the party
who agrees to deliver a commodity - and a long position - the party who agrees to
receive a commodity. In every futures contract, everything is specified: the quantity and
quality of the commodity, the specific price per unit, and the date and method of
delivery. The “price” of a futures contract is represented by the agreed-upon price of the
underlying commodity or financial instrument that will be delivered in thefuture.

Features of Futures Contracts:

The principal features of the contract are as follows.

Organized Exchanges: Unlike forward contracts which are traded in an over–the -
counter market, futures are traded on organized exchanges with a designated physical
location where trading takes place. This provides a ready, liquid market which futures
can be bought and sold at any time like in a stockmarket.

Standardization: In the case of forward contracts the amount of commodities to
bedelivered and the maturity date are negotiated between the buyer and seller and can
be tailor made to buyer’s requirement. In a futures contract both these arestandardized
by the exchange on which the contract istraded.
 Clearing House: The exchange acts a clearinghouse to all contracts struck on the
tradingfloor. For instance, a contract is struck between capital A and B. upon entering
into the records of the exchange, this is immediately replaced by twocontracts, one
between A and the clearing house and another between B and the clearing house. In
otherwords,theexchangeinterposesitselfineverycontractanddeal,whereitisabuyer to
seller, and seller to buyer. The advantage of this is that A and B do not have to
undertake any exercise to investigate each other’s credit worthiness. It also guarantees
financial integrity of the market. The enforce the delivery for the delivery of contracts
held for until maturity and protects itself from default risk by imposingmargin

29
 requirements on traders and enforcing this through a system called marking – to –
market
 Actual delivery is rare: In most of the forward contracts, the commodity is delivered
bythe seller and is accepted by the buyer. Forward contracts are entered into for
acquiring or disposing of a commodity in the future for a gain at a price known today.
In contrast to this, in most futures markets, actual delivery takes place in less than one
percent of the contracts traded. Futures are used as a device to hedge against price risk
and as a way of betting against price movements rather than a means of physical
acquisition of the underlying asset. To achieve, this most of the contracts entered into
are nullified by the matching contract in the opposite direction before maturity of the
first.

 Margins: In order to avoid unhealthy competition among clearing members in

reducingmargins to attract customers, a mandatory minimum margin are obtained by
the members from the customers. Such a stop insures the market against serious
liquidity crises arising out of possible defaults by the clearing members. The members
collect margins from their clients has may be stipulated by the stock exchanges from
timetotimeandpassthemarginstotheclearinghouseonthenetbasisi.e.atastipulated
percentage of the net purchase and saleposition.

Future 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 months expiry cycles which expire on the last
Thursday of the month. Thus, a MAYuary expiration contract expires on the last Thursday of
MAYuaryandaFebruaryexpirationcontractceasestradingonthelastThursdayofFebruary.On the
Friday following the last Thursday, a new contract having a three- month expiry is introduced
fortrading.

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

30
Contract size: The amount of asset that has to be delivered under one contract. Also called
as lot size.

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.

MARGINS:
Margins are the deposits which reduce counter party risk, arise in a futures contract.
Thesemargins arecollectedinorderto eliminatethecounterpartyrisk.Therearethree types
ofmargins:

InitialMargins:
Whenever a futures contract is signed, both buyer and seller are required to post initial
margins. Both buyer and seller are required to make security deposits that are intended to
guarantee that they will in fact be able to fulfil their obligation. These deposits are initial
margins.

Marking to market margins:

The process of adjusting the equity in an investor’s 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 maintenance margin to bring the equity up to the initial margin.

31
TYPES OF FUTURES
On the basis of the underlying asset they derive, the futures are divided into two types:
• StockFutures

• IndexFutures

PARTIES IN THE FUTURES CONTRACT

There are two parties in a futures contract, the buyers 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
who is SHORT on the futures contract.

The pay-off for the buyers and the seller of the futures of the contracts are as follows:

PAY-OFF FOR A BUYER OF FUTURES

PROFIT

E2

LOSS E1

F = FUTURES PRICE

E1, E2 = SATTLEMENT PRICE

CASE 1: - The buyers bought the futures contract at (F);

if the futures Price Goes to E1 then the buyer gets the profit of (FP).

32
CASE 2: - The buyers gets loss when the futures price less then (F);
if The Futures price goes to E2 then the buyer the loss of (FL).

PAY-OFF FOR A SELLER OF FUTURES

PROFIT
E2
E1 F

LOSS

F = FUTURES PRICE

E1, E2 = SATTLEMENT PRICE

CASE 1: - The seller sold the future contract at (F); if the future 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 future price goes to E2 then the seller gets the loss of (FL).

33
HOW THE FUTURE MARKET WORKS

The futures market is a centralized marketplace for buyers and sellers from around
the world who meet and enter futures contracts. Pricing can be based on an open outcry
system, or bids and offers can be matched electronically. The futures contract will state
the price that will be paid and the date of delivery. Almost all futures contracts end
without the actual physical delivery of the commodity.

PRICING OF FUTURES
The Fair value of the futures contract is derived from a model knows as the cost of carry
model. This model gives the fair value of the contract.

Cost of Carry:

F = S (1+r-q) t

Where,
F- Futures price
S- Spot price of the underlying
r- Cost offinancing
q- Expected Dividend yield
t - HoldingPeriod.
Suppose, we buy an index in cash market at 8000 level i.e. purchase of all the stocks
constituting the index in the same proportion as they are in the index, cost of financing is
12% and the return on index is 4% per annum. Given these statistics, fair price of index
three months down the line should be:

=Spot price (1+cost of financing-holding period return) ^ (time to expiration/365)

=8000 (1+0.12-0.04) ^ (90/365)
=8,153.26
If index future is trading above 8,153, we can buy index stocks in cash market and
simultaneously sell index futures to lock the gains equivalent to the difference between
future price and future fair price (the cost of transaction, taxes, margins etc. are not
considered while calculating the future fair value).

The presence of arbitrageurs would force the price to equal the fair value of the asset. Ifthe
futurespriceislessthanthefairvalue,onecanprofitbyholdingalongpositioninthe

34
futuresandashortpositionintheunderlying.Alternatively,ifthefuturespriceismorethan thefair

value, there is ascope to make a profit by holding a short position in the futures and a long
position in the underlying. The increase in demand/ supply of the futures (and spot) contracts
will force the futures price to equal the fair value of the asset.

RELATIONSHIP OF FUTURE PRICE WITH SPOT PRICE IF FUTURE

PRICE HIGHER THAN THE CASH PRICE
Here futures price exceeds the cash price which indicates that the cost of carry is
negative and the market under such circumstances is termed as a backwardation market or
inverted market.

EXAMPLE
Suppose the RELIANCE share is trading at Rs.400 in the spot market. While RELIANCE
FUTURES are trading at Rs. 406.Thus in this circumstance the normal strategy followed by
investorsisbuytheRELIANCEinthespotmarketandsellinthefutures.Onexpiry,assuming
RELIANCEclosesatRs450,youmakeRs.50bysellingtheRELIANCEstockandloseRs.44 by
buying back the futures, which is Rs 6 overall profit in a month. Thus, Futures prices are
generally higher than the cash prices, in an overboughtmarket.

IF CASH PRICE HIGHER THAN THE FUTURE PRICE

Here cash price exceeds the futures price which indicates that the cost of carry is positive
and this market is termed as oversold market. This may be due to the fact that the market is
cash settled and not delivery settled, so the futures price is more a reflection of sentiment,
rather than that of the financing cost.
EXAMPLE
NowletusassumethattheRELIANCEshareistradingatRs.406inthespotmarket.While
RELIANCE FUTURES is trading at Rs. 400.Thus in this circumstance the normal strategy
followedbyinvestorsisbuytheRELIANCEFUTURESandselltheRELIANCEinthespot
market. So at expiry if Reliance closes at Rs 450, the investor will buy back the stock at a
lossofRs44andmakeRs50onthesettlementofthefuturesposition.Thisisappliedwhen the cost
of carry ishigh.

35
RISK MANAGING USING
FUTURES-HEDGING:
Uses of Index futures
Equity derivatives instruments facilitate trading of a component of price risk, which is
inherenttoinvestmentinsecurities.Priceriskisnothingbutchangeinthepricemovementof asset,
held by a market participant, in an unfavourabledirection.

It is possible to manage only the systematic/market risk component of the price risk using
index-basedderivativeproducts.Priortolookingatmarketriskmanagementwiththehelpof index
futures.

This risk broadly divided into two components ‐ specific risk or unsystematic risk and
market risk or systematic risk.

Unsystematic Risk
Specific risk or unsystematic risk is the component of price risk that is unique to events of
the company and/or industry. This risk is inseparable from investing in the securities.
This risk could be reduced to a certain extent by diversifying the portfolio.

Systematic Risk
An investor can diversify his portfolio and eliminate major part of price risk i.e. the
diversifiabl e/unsystematic risk but what is left is the non‐diversifiable portion or the market
risk‐called systematic risk. Variability in a security’s total returns that are directly associated
with overall movements in the general market or economy is called systematic risk. Thus,
every portf olio is exposed to market risk. This risk is separable from investment and
tradable in the market with the help of indexbased derivatives. When this particular risk is
hedged perfectly with the he lp of index‐based derivatives, only specific risk of the portfolio
remains.

Now, let us get to management of systematic risk. Assume you are having a portfolio worth
Rs.9,00,000 in cash market. You see the market may be volatile due to some reasons. You
are not comfortable with the market movement in the short run. At this point of time, you
have two options:

(1) sell the entire portfolio in the cash market and buy it again after the prices fallsand

36
 (2) As he is already protected against unsystematic risk as a result of diversification,
now he can use index futures to protect the value of his portfolio from the expected
fall in themarket.

Asaninvestor,youarecomfortablewiththesecondoption.Ifthepricesfall, youmakeloss in cash

market but make profits in futures market. If prices rise, you make profits in cash market
but losses in futuresmarket.

Now, the question arises how many contracts you have to sell to make a perfect hedge?
Perfect hedge means if you make Rs. 90,000 loss in cash market then you should make Rs.
90,000 profit in futures market. To find the number of contracts for perfect hedge ‘hedge
ratio’ is used. Hedge ratio is calculated as:

Number of contracts for perfect hedge = Vp * βp / Vi

Vp – Value of the portfolio
βp – Beta of the portfolio
Vi – Value of index futures contract
Let us assume, Beta of your portfolio is 1.3 and benchmark index level is 8000, then hedge
ratio will be (9,00,000*1.3/8000) = 146.25 indices. Assume one Futures contract has a lot
size of 75. You will have to hedge using 146.25/ 75 = 1.95 contracts. Since you cannot
hedge 1.95 contracts, you will have to hedge by 2 futures contracts. You have to pay the
broker initial margin in order to take a position in futures.

Important terms in hedging

Long hedge: Long hedge is the transaction when we hedge our position in cash market by
going long in futures market. For example, we expect to receive some funds in future and
want to invest the same amount in the securities market. We have not yet decided the
specific company/companies, where investment is to be made. We expect the market to go
up in near future and bear a risk of acquiring the securities at a higher price. We can hedge
by going long index futures today. On receipt of money, we may invest in the cash market
and simultaneously unwind corresponding index futures positions. Any loss due to
acquisition of securities at higher price, resulting from the upward movement in the market
over intermediate period, would be partially or fully compensated by the profit made on our
position in index futures.

37
Short hedge: Short Hedge is a transaction when the hedge is accomplished by going short in
futures market. For instance, assume, we have a portfolio and want to liquidate in near future
butweexpectthepricestogodowninnearfuture.Thismaygoagainstourplanandmayresult in
reduction in the portfolio value. To protect our portfolio’s value, today, we can short index
futures of equivalent amount. The amount of loss made in cash market will be partly or fully
compensated by the profits on our futurespositions.

Cross hedge: When futures contract on an asset is not available, market participants look
forward to an asset that is closely associated with their underlying and trades in the futures
market of that closely associated asset, for hedging purpose. They may trade in futures in this
asset to protect the value of their asset in cash market. This is called cross hedge.

For instance, if futures contracts on jet fuel are not available in the international markets then
hedgers may use contracts available on other energy products like crude oil, heating oil or
gasoline due to their close association with jet fuel for hedging purpose. This is an example of
cross hedge.

Arbitrage opportunities in futures market

Arbitrage is simultaneous purchase and sale of an asset or replicating asset in the market in
an attempt to profit from discrepancies in their prices. Arbitrage involves activity on one or
several instruments/assets in one or different markets, simultaneously. Important point to
understand is that in an efficient market, arbitrage opportunities may exist only for shorter
period or none at all. The moment an arbitrager spots an arbitrage opportunity, he would
initiate the arbitrage to eliminate the arbitrage opportunity.

Arbitrage occupies a prominent position in the futures world as a mechanism that keeps the
prices of futures contracts aligned properly with prices of the underlying assets. The
objective of arbitragers is to make profits without taking risk, but the complexity of activity
is such that it may result in losses as well. Well‐informed and experienced professional
traders, equipped with powerful calculating and data processing tools, normally undertake
arbitrage.

38
 CHAPTER-4

DATA ANALYSIS & INTERPRETATION OF FUTURES

39
 DATA ANALYSIS
FUTURES OF TCS:
SPOT FUTURE
TIMESTAMP PRICE PRICE RETURNS(X)
MAY
15-May-19 1322.9 1304.6 -1.38
16-May-19 1347 1341.85 -0.38
20-May-19 1351 1341.6 -0.70
21-May-19 1350 1344.9 -0.38
22-May-19 1365.15 1367.55 0.18
23-May-19 1352.75 1349.2 -0.26
24-May-19 1306.15 1312.15 0.46
27-May-19 1301.1 1300 -0.08
28-May-19 1268.9 1271.15 0.18
29-May-19 1273.85 1275.55 0.13
30-May-19 1300.15 1300.65 0.04

Return (%) = Current Price (P1) – Previous Price (P0) * 100

Previous Price (P0)

Average Return (μ) = Σx/N

Variance (σ2) = Σ (x – μ) 2 / N – 1 x = Return; μ = Average Return

Standard Deviation (σ) = √ σ2

DESCRIPTIVE STATISTICS

Mean -0.20

Standard Deviation 0.51

Sample Variance 0.26

40
 FUTURES RETURNS 2019

0.50
0.46
0.00 0.18
0.18 0.13
1 2 -0.38
3 -0.08 0.04
-0.50 4 -0.38
5 6 -0.26
7 8
-0.70 9 10 11 Series1
-1.00
-1.38
-1.50

Interpretation: The trading week showed a high and low strike prices or
exercising prices for the TCS futures .There always exist exist an impact of
price movements on open interest and contracts traded.

The future market is also influenced by cash market is also influenced by

cash market, Nifty index future, and news related to the underlying assed
or sector (Industry).

41
 FUTURES PRICES OF TCS:

FUTURE
JUNE SPOT PRICE PRICE EXPIRY_DT RETURNS(X)
31-May-19 1308.35 1305.5 27-Jun-19 -0.22
3-Jun-19 1308.45 1304 27-Jun-19 -0.34
4-Jun-19 1298.4 1297.8 27-Jun-19 -0.05
5-Jun-19 1282.8 1281.5 27-Jun-19 -0.10
6-Jun-19 1261 1260.7 27-Jun-19 -0.02
7-Jun-19 1190.2 1193.45 27-Jun-19 0.27
10-Jun-19 1176.7 1174.8 27-Jun-19 -0.16
11-Jun-19 1158.05 1158.1 27-Jun-19 0.00
12-Jun-19 1218 1213.65 27-Jun-19 -0.36
13-Jun-19 1236.7 1223.75 27-Jun-19 -1.05
14-Jun-19 1182.4 1173.25 27-Jun-19 -0.77
17-Jun-19 1178.85 1170.1 27-Jun-19 -0.74
18-Jun-19 1199.55 1195.8 27-Jun-19 -0.31
19-Jun-19 1192.75 1180.3 27-Jun-19 -1.04
20-Jun-19 1194.7 1191.55 27-Jun-19 -0.26
21-Jun-19 1187.4 1187.7 27-Jun-19 0.03
24-Jun-19 1188.3 1185.15 27-Jun-19 -0.27
25-Jun-19 1166 1159.85 27-Jun-19 -0.53
27-Jun-19 1195.85 1195.8 27-Jun-19 0.00

Return (%) = Current Price (P1) – Previous Price (P0) * 100

Previous Price (P0)

Average Return (μ) = Σx/N

Variance (σ2) = Σ (x – μ) 2 / N – 1 x = Return; μ = Average Return

Standard Deviation (σ) = √ σ2

DESCRIPTIVE STATISTICS

Mean -0.31

Standard Deviation 0.37

Sample Variance 0.13

42
 Future RETURNS(X)
1.00
0.00 -0.22 -0.05 0.27
-0.02
-0.10
-0.34 0.00
-0.16
-1.00 1 2 3 4 5 6 7 8 9 -0.36 -0.31 -0.260.03-0.27 0.00
10 -1.05
11 -0.77
12 -0.74
13 14 15 16 RETURNS(X)
-2.00 -1.04 17 18 -0.53
19 20

Interpretation: The closing price of TCS at the end of the contract period
23124/- and this is considered as settlement price.

43
FUTURES PRICES OF WIPRO: MAY -2019

Date SPOT price Future price

RETURNS(X)
1-MAY-19 1228.75 1233.75 0.41
2-MAY-19 1267.25 1277 0.77
3-MAY-19 1228.95 1238.75 0.80
4-MAY-19 1286.3 1287.55 0.10
7-MAY-19 1362.55 1358.9 -0.27
8-MAY-19 1339.95 1338.5 -0.11
9-MAY-19 1311.95 1310.8 -0.09
10-MAY-19 1356.15 1358.05 0.14
11-MAY-19 1435 1438.15 0.22
14-MAY-19 1410 1420.75 0.76
15-MAY-19 1352.2 1360.1 0.58
16-MAY-19 1368.3 1375.75 0.54
17-MAY-19 1322.1 1332.1 0.76
18-MAY-19 1248.85 1256.45 0.61
21-MAY-19 1173.2 1167.85 -0.46
22-MAY-19 1124.95 1127.85 0.26
23-MAY-19 1151.45 1156.35 0.43
24-MAY-19 1131.85 1134.5 0.23
25-MAY-19 1261.3 1265.6 0.34
28-MAY-19 1273.95 1277.3 0.26
29-MAY-19 1220.45 1223.85 0.28
30-MAY-19 1187.4 1187.4 0.00
31-MAY-19 1147 1145.9 -0.10

Return (%) = Current Price (P1) – Previous Price (P0) * 100

Previous Price (P0)

Average Return (μ) = Σx/N

Variance (σ2) = Σ (x – μ) 2 / N – 1 x = Return; μ = Average Return

Standard Deviation (σ) = √ σ2

44
 DESCRIPTIVE STATISTICS

Mean 0.26

Standard Deviation 0.34

Sample Variance 0.12

FUTURES RETURNS(X)

1.00
0.80
0.77
0.76 0.76
0.50 0.58
0.41 0.540.61
0.08 0.10 0.22 0.43
0.00 0.03 0.14 0.34
0.26 0.23 RETURNS(X)
0.26
0.28
1 3 5 7 9-0.27 -0.09
-0.11
-0.50 11 13 15 0.00
17 19 21 -0.10
23 25
-0.46

Interpretation: The future price of TCS is moving along with market price.

If the buy price of the future is less than the settlement

price than the buyer of a future gets profits.

45
 FUTURES PRICES OF WIPRO-JUNE-2019

FUTURE
Date SPOT price RETURNS(X)
PRICES
1-JUNE-19 1228.75 1223.21 -0.45
2-JUNE-19 1267.25 1243.75 -1.85
3-JUNE-19 1228.95 1257.25 2.30
4-JUNE-19 1286.3 1211.95 -5.78
7-JUNE-19 1362.55 1216.3 -10.73
8-JUNE-19 1339.95 1342.55 0.19
9-JUNE-19 1311.95 1321.95 0.76
10-JUNE-19 1356.15 1311.95 -3.26
11-JUNE-19 1435 1421.15 -0.97
14-JUNE-19 1410 1435 1.77
15-JUNE-19 1352.2 1410 4.27
16-JUNE-19 1368.3 1352.2 -1.18
17-JUNE-19 1322.1 1368.3 3.49
18-JUNE-19 1248.85 1322.1 5.87
21-JUNE-19 1173.2 1248.85 6.45
22-JUNE-19 1124.95 1173.2 4.29
23-JUNE-19 1151.45 1124.95 -2.30
24-JUNE-19 1131.85 1151.45 1.73
25-JUNE-19 1261.3 1131.85 -10.26
28-JUNE-19 1273.95 1261.3 -0.99

DESCRIPTIVE STATISTICS
Mean 0.18
Standard Deviation 4.53
Sample Variance 20.56

Return (%) = Current Price (P1) – Previous Price (P0) * 100

Previous Price (P0)

Average Return (μ) = Σx/N

Variance (σ2) = Σ (x – μ) 2 / N – 1 x = Return; μ = Average Return

Standard Deviation (σ) = √ σ2

46
 RETURNS(X)
10.00
0.00 -0.45 2.30 4.27 3.495.876.454.29
-1.85 0.76 -0.97
0.19 1.77
1 2 3 -5.78
4 5 6 7 8 9 -3.26 -1.18 1.73 4.382.783.52
-10.00 -2.30 -0.99
-10.73 10 11 12 13 14 15 RETURNS(X)
-20.00 16 17 18 19 20
21 22 23 24
-10.26

Interpretation: If the selling price of the future is less than the settlement
price than the seller incurs losses. The closing price of WIPRO at the end
of the contract period is Rs. 2624.2 and this is considered as settlement
price.

47
FUTURES PRICES OF INFOSYS-MAY-2019

Date SPOT Price Future price

RETURNS(X)
1-MAY-19 2383.5 2413.45 1.26
2-MAY-19 2423.35 2448.45 1.04
3-MAY-19 2395.25 2416.35 0.88
4-MAY-19 2388.8 2412.5 0.99
7-MAY-19 2402.9 2419.15 0.68
8-MAY-19 2464.55 2478.55 0.57
9-MAY-19 2454.5 2473.1 0.76
10-MAY-19 2409.6 2411.15 0.06
11-MAY-19 2434.8 2454.4 0.80
14-MAY-19 2463.1 2468.4 0.22
15-MAY-19 2423.45 2421.85 -0.07
16-MAY-19 2415.55 2432.3 0.69
17-MAY-19 2416.35 2423.05 0.28
18-MAY-19 2362.35 2370.35 0.34
21-MAY-19 2196.15 2192.3 -0.18
22-MAY-19 2137.4 2135.2 -0.10
23-MAY-19 2323.75 2316.95 -0.29
24-MAY-19 2343.15 2335.35 -0.33
28-MAY-19 2313.35 2305.5 -0.34
29-MAY-19 2230.7 2230.5 -0.01
30-MAY-19 2223.95 2217.25 -0.30
31-MAY-19 2167.35 2169.9 0.12

DESCRIPTIVE STUDY
Mean 0.32
Standard Deviation 0.50
Sample Variance 0.25
48
 Future RETURNS(X)

1.50
1.26
1.00 1.04 0.99
0.88
0.50 0.68 0.76 0.80
0.57 0.69
RETURNS(X)
0.34
0.00 0.06 0.22 0.28
1 3 -0.07
-0.50 5 7 9 11 13 -0.10
-0.18 -0.01 0.12
15 17 19 -0.29
-0.33
-0.3423
21 -0.30

Interpretation: If the buy price of the future is less than the

settlement price, than the buyer of a future gets profit

49
 FUTURES PRICES OF INFOSYS-JUNE-2019

Date SPOT Price FUTURE PRICE RETURNS(X)

1-JUNE-19 2383.5 2391.15 0.32

2-JUNE-19 2423.35 2445.35 0.91
3-JUNE-19 2395.25 2311.25 -3.51
4-JUNE-19 2388.8 2398.18 0.39
7-JUNE-19 2402.9 2414.1 0.47
8-JUNE-19 2464.55 2476.57 0.49
9-JUNE-19 2454.5 2463.25 0.36
10-JUNE-19 2409.6 2412.14 0.11
11-JUNE-19 2434.8 2438.78 0.16
14-JUNE-19 2463.1 2478.23 0.61
15-JUNE-19 2423.45 2432.42 0.37
16-JUNE-19 2415.55 2421.57 0.25
17-JUNE-19 2416.35 2419.32 0.12
18-JUNE-19 2362.35 2383.36 0.89
21-JUNE-19 2196.15 2113.15 -3.78
22-JUNE-19 2137.4 2142.14 0.22
23-JUNE-19 2323.75 2334.75 0.47
24-JUNE-19 2343.15 2343.15 0.00
25-JUNE-19 2411.4 2413.4 0.08
28-JUNE-19 2313.35 2316.35 0.13
29-JUNE-19 2230.7 2232.7 0.09
30-JUNE-19 2223.95 2231.45 0.34
31-JUNE-19 2167.35 2187.35 0.92

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Return (%) = Current Price (P1) – Previous Price (P0) * 100
Previous Price (P0)

Average Return (μ) = Σx/N

Variance (σ2) = Σ (x – μ) 2 / N – 1 x = Return; μ = Average Return

Standard Deviation (σ) = √ σ2

DESCRIPTIVE STUDY

Mean 0.018161

Standard Deviation 1.185684

Sample Variance 1.405847

RETURNS(X)

1.00 0.91
0.32 0.47
0.39 0.49
0.36 0.61 0.89
0.00 0.16 0.37
0.11 0.25 0.92
1 2 3 4 5 6 0.12 0.220.47 0.34
-1.00 7 8 9 10 11 12 0.000.080.130.09
13 14 15 16 17 18
19 20 21 22 23
-2.00 24
RETURNS(X)
-3.00
-3.51
-4.00
-3.78

Interpretation: If a person buy 1 lot i.e. 500 future of INFOSYS

on 01st june 2019 and sells on 31st june 2019 then he will get a
profit of Rs 28550 i.e. Rs 57.1*500.
The closing price of INFOSYS at the end of the contract period is
Rs. 983.3 and this is considered as settlement price.
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 CHAPTER-5

FINDINGS, SUGGESTIONS & CONCLUSIONS

52
 FINDINGS
 Derivatives 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

derivativesegments

 In cash market the profit/loss of the investor depends on the market price of the

underlyingasset.TheinvestormayincurhugeprofitsorhemayincurHugelosses.But in

derivatives segment the investor enjoys huge profits with limiteddownside.

 In cash market the investor has to pay the total money, but in derivatives the investor

has to pay premiums or margins, which are some percentage of totalcontract.

 Derivatives are mostly used for hedgingpurpose.

 In derivative segment the profit/loss of the option writer purely depends on the

fluctuations of the underlyingasset.

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 SUGGESTIONS

 The derivatives 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 derivatives market in India, SEBI should revise some of their

regulations like contract size, participation of FII in the derivativesmarket.

 Contract size should be minimized because small investors cannot afford this much of

hugepremiums.

 SEBI has to take further steps in the risk managementmechanism.

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

hedging.

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 CONCLUSIONS
Stockfutures arederivativecontractsthat giveyouthepowertobuyorsellaset ofstocks at a
fixed price by a certain date. Once you buy the contract, you are obligated to uphold the
terms of theagreement.
• It allows hedgers to shift risks to speculators.
• Itgivestradersanefficientideaofwhatthefuturespriceofastockorvalueofanindex is likely
tobe.
• Basedonthecurrentfutureprice,ithelpsindeterminingthefuturedemandandsupply of
theshares.
• 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.

In my Analysis the entire future stock price are moving with the market value of
underlying assets. from all companies I have chosen Wipro, TCS, and Infosys

• Infosys Future Prices are mostly more than underlying asset value so the investors
mostly makesprofits
• Where as compared to Wipro and TCS the value of future prices and value of
underlying assets are almost same the investors are making normalprofits

55
 BIBLIOGRAPHY
1. www.nseindia.com
2. www.bseindia.com
3. www.karvyonline.com

4. Economictimes.indiatimes.org
5. www.moneycontrol.com
6. Equity Derivatives Workbook (versionSep-2015)

7. Derivatives and Financial Innovations - By Manish Bansal and NavneethBansal

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