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CHAPTER-1

INRODUCTION

HISTORY OF STOCK EXCHANGE

The only stock exchange operating in the 19th century were those of Bombay set
up in 1875 and Ahmadabad set up in 1894 these were organized as voluntary non-profit
making organization of brokers to regulate and protect interest. Before the control
insecurities trading became a central subject under the constitution in 1950, it was a state
subject and the Bombay securities contract (CONTROL) Act of 1952 used to regulate
trade in securities. Under this act, the Bombay stock exchange in 1927 and Ahmadabad
in 1937.

During the war boom, a number of stock exchanges were organized in Bombay,
Ahmadabad and other centers, but they were not recognized. Soon after it became a
central subject, central legislation was proposed and a committee headed by A.D. Goral
went in to the bill for securities regulation. On the basis of committee’s
recommendations and public discussions the securities contracts (regulations) Act
became law in 1956.

Definition of Stock Exchange

“Stock exchange means any body or individuals whether incorporated or not,


constituted for the purpose of assisting, regulating or controlling the business of buying,
selling or dealing in securities.” It is an association of member brokers for the purpose of
self – regulation and protecting the interests of its members. It can operate only of it is
recognized by the govt. Under the securities contract (regulation) Act, 1956. The
recognition is granted under section 3 of the Act by the central government, ministry if
finance.

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BYELAWS

Besides the above act, the securities contract (regulations) rules were also
made in 1975 to regulate certain matters of trading on the stock Exchange. These are also
byelaws of the exchanges, which are concerned with the following subjects. Opening /
closing of the stock exchange, timing of trading, regulation of bank transfer, regulation of
Badla or carryover business, control of settlement, and other activities of stock exchange,
fixations of margin, fixations of market price or marking price, regulation of tarlatan
business (jobbing), regulation of brokers trading, brokerage charges, trading rules on the
exchange, arbitration and settlement of disputes, settlement and clearing of the trading
etc.

Regulations of Stock Exchange

The securities contract (regulations) is the basis for operations of the stock
exchange in India. No exchange can operate legally without the government permission
or recognition. Stock exchanges are give monopoly in certain areas under section 19 of
the above Act to ensure that the control and regulation are facilitated. Recognition can be
granted to a stock exchange provided certain are satisfied and the necessary Information
is supplied to the government. Recognition can also be withdrawn, if necessary. Where
there are no stock exchanges, the government can license some to the brokers to perform
the functions of a stock exchange in its absence.

SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI)

SEBI was set up as an autonomous regulatory authority by the Government of India


in 1988 “to perform the interests of investors in securities and to promote the
development and to regulate the securities market and for matters connected there with
or incidental thereto.” It is empowered by two acts namely the SEBI act, 1992 and the
securities contract (regulation) Act 1956 to perform the function of protecting investor’s
rights and regulating the capital market.

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BASIC OF DERIVATIVES
The term “Derivatives” independent value, i.e. its value is entirely “derived”
from the underlying asset. The underlying asset can be securities, commodities bullion,
currency, live stock or anything else. In other words, derivative means a forward, future,
option or any other hybrid contract of per determined fixed duration, linked for the
purpose of contract fulfillment to the value of a specified real or financial asset or to an
index of securities.
The Securities Contracts (Regulation) Act 1956 Define Derivatives as Under
“Derivative” Includes
• a securities derivatives from a debt instrument, share, lone writher secured or
• unsecured, risk instrument or contract for different or any other security
• a contract which derives its value from the prices, or index of price of underlying
• Securities
The above definition conveys: Those derivatives are financial products and derive its
value from the underlying assets.
 Derivatives is derived from another financial instrument/contract called the
Underlying. In the case of Nifty futures, Nifty index is the underlying.

Significance of Derivatives
Derivatives are Used

1. By Hedgers for protecting (risk-covering) against adverse movement. Hedging is


a mechanism to reduce price risk inherent in open positions. Derivatives are
widely used for hedging. A Hedge can help lock in existing profits. Its purpose is
to reduce the volatility of a portfolio by reducing the risk.
2. Speculators to make quick fortune by anticipating/forecasting future market
movement. Hedgers with to eliminate or reduce the price risk to which they are
already exposed. Speculators, on the other hand are those classes of investors
who willingly take price risks to profit from price change in the underlying.
While the need to provide hedging avenues by means of derivative instruments is
laudable, it call for the existence of speculative traders to play the role of
counter-party to the hedgers. It is for this reason that the role of speculators gains
prominence in a derivatives market.

3. Arbitrageurs to earn risk-free profits by exploiting market importance.


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Arbitrageurs profits from price differential existing in two markets by


simultaneously operating in the two different markets.

Type of Derivatives

Derivatives products initially emerged devices against fluctuations in commodity


price, and commodity-linked derivatives remained the sole form of such predicts 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 term of variety of instruments
available their complexity and also turnover. In the class of equity derivatives the world
over, future and options on stock indices have gained more popularity than on individual
stocks, especially among institutional investors, who are major uses of index-linked
derivatives. Even small investors find these useful due to high correlation of the popular
index with various portfolios and ease of use. The lower costs associated with index
derivatives vis-à-vis derivative products based on individual securities is another reason
for their growing use. The most commonly used derivatives contracts are forward,
futures and options with we shall discuss in detail later. Here we take a brief look at
various derivatives contracts that have come to be used.

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 type of
forward contract in the sense that the former are standardized exchange-trade contracts.

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

Warrants: Options generally have lives of up to one year, the majority of option traded
on options exchanges having a maximum maturity of one month. Longer-dated options
are called warrants and are generally traded over-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


Interest Rate Swaps: these entail swapping only the interest related cash flow between
the parties in the same currency.

Currency Swaps: These entail swapping both principal and interest between the parties,
with the case flows in one direction being in a different currency than those in the
opposition direction.

Swaptions: Swaptions are options to buy or sell a swap that will became operative at the
expiry of the options. Thus a Swaptions is an option on a forward swap. Rather than have
called and puts, the swaption market has receiver swaption and payer swaptions. A
receiver swaptions in an option to receiver fixed and pay floating. A player swaption is
an option to pay fixed and receive floating.

Classification of Derivatives

The Derivatives Can be Classified as

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• Forwards (Currencies, Stocks, Swaps etc)

Forward contract is different from a spot truncation, where payment of price and
delivery of commodity concurrently take place immediately the transaction is settled. In a
forward contract the sale/purchase truncation of an asset is settled including the price
payable, not for delivery/settlement at spot, but at a specified future date. India has a
strong dollar-rupee forward market with contract being traded for one, two, and six-
month expiration. Daily trading volume on this forward Market is around $500 million a
day. Indian users of hedging services are also allowed to buy derivatives involving other
currencies on foreign markets.

• Futures(Currencies, Stocks, Indexes, Commodities etc)

A futures contract has been defined as “a standardized, exchange-traded


Agreement specifying a quantity and price of a particular type of commodity
(Soybeans, gold, oil, etc) to be purchased or sold at a pre-determined date in the
Future. On contract date, delivery and physical possession take place unless the
Contract has been closed out futures fate also available ob various financial
Products and indexes today. A futures contract is thus a forward, contract, which
trades on national stock exchange. This provides them transparency, liquidity,
anonymity of trades, and also eliminates the counter party risks due to the
guarantee provided by national securities clearing corporation limited.

• Options (Currencies, Stocks, Indexes etc)


Options are the standardized financial that allows the buyer (holder) if the
Options, i.e. the right at the cost of options premium, not the obligation, to
but (call options) or sell (put options) a specified asset at a set price on or before
a Specified date through exchange under stringent financial security against
default.

FORDWARD CONTRACTS

A forward contract is an agreement to buy or sell an asset on a specified date for a


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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, the parties to the contracts
negotiate price and quality bilaterally. The forward contracts are normally traded outside
the exchanges.
The Silent Futures of Forward Contract are
 The 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.
 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 the same
counter Party, which often results in high prices being changed.

However forward contracts in certain markets have become very standardization, as


in the case of foreign exchange, thereby reducing transaction cost and increasing
transactions volume. This process of standardization reaches its limit in the organized
futures market .Forward contracts is very useful in hedging and speculation. The classic
hedging application word is 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 markets 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 forward if a speculator has information or analysis, which forecasts an upturn in a
price, than 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.

LIMITATIONS

Forward Markets World-Wide are Afflicted by Several Problems


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Lack of centralization of trading, Liquidity, and Counter party risk in the first two
of these, the basic problem is that of too much flexibility and generality. The forward
market is like a real estate market in that any two consenting adults can form contracts
against each other. This often makes them design terms of the deal, which are very
convenient in that specific situation, but makes the contracts non-tradable. Counter party
risk arises from the possibility of default by any one party to the transaction. When one
of the two sides to the transaction declares bankruptcy, the other suffers. Even when
forward markets trade standardized contracts, and hence avoid the problem of liquidity,
still the counter party risk remains a very serious issue.

FUTURES

Futures markets were designed to solve the problems that exist in forward
markets. 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. But unlike forward contracts, the futures
contracts are standardized and exchange traded. To facilitate liquidity in the future
contracts, the exchange specifies certain 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. A futures contract may be offset
prior to maturity by entering into an equal and opposite transaction. More than 99% of
futures transactions are offset this way.

The Standardized Items in a Futures Contract are


 Quantity of the underlying
 Quality of the underlying
 The date and month of delivery
 The units of price quotations and minimum price changes
 Location of settlement.

DISTINCTION BETWEEN FUTURES AND FROWARDS


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Forward contracts are often confused with futures contracts. The confusion is
primarily Became both serve essentially the same economics of allocations risk in the
presence of Future price uncertainly. However futures are a significant improvement over
the forward Contracts as they eliminate counter party risk and offer more liquidity.

FUTURES TERMINOLOGY
Spot price: The price at which an asset trades in the spot market.
Futures price: The price at which the futures contract trades in the futures market.
Contract cycle: The period over which a contract trades. The index futures contracts on
the NSE have one-month, two-month and three-month expiry cycle, which expire on the
last Thursday of the month. Thus January expiration contract expires on the last
Thursday of February. On the Friday following the last Thursday, a new contract having
a three-month expiry is introduced for trading.
Expiry date: It is the date specified in the futures contract. This is the last day on which
the contract will be traded, at the end of which it will case to exist.
Contract size: The amount of the asset that has to be delivered less than one contract. For
instance, the contract size on NSE’s futures market is 200 Niftiest.
Basis: In the context of financial futures, basis can be defined as the futures price minus
the spot price. There will be a different basis for each delivery month for each contract.
In a normal market, basis will be positive. This reflects that futures prices normally
exceed spot prices.

 Cost of carry: the relationship between futures prices and spot prices can be
summarized.
 In terms of what is known as the cost of carry. This measures the storage Cost
plus the interest that is paid to finance the asset less the income earned on the
asset.
 Initial margin: the amount that must be deposited in the margin account at the
time a future contract is first entered into is known as initial margin.
 Marking-to-market: in the futures 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 somewhat lower than the initial margin. This is set to
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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.

OPTIONS

We look at the next derivative product to be traded on the NSE, namely option.
Options are fundamentally different from forward and futures contracts. An option gives
the holder of the option the right to do something. The holder does not have to exercise
this right .in contrast, in a forward or futures contract, the two parties have committed
themselves to doing something. whereas it costs nothing (except margin requirements)to
enter into a futures contract, the purchase of an option requires an up-front payments.

OPTIONS TERMINAOLOGY
 Index option: There option has the index as the underlying. Some options are
European while others are American. Like index, futures, contract, index options
Contracts are also cash settled.

 Stock options: stock options are options on individual stocks. option currently
trade On over 500 stocks in the United States. A contract gives the holder the
right to buy or sell shares at the specified prices.

 Buyer of options: the buyer of an options is the one who by paying the options
Premium buys the right but not the obligation to exercise his option on the
Seller / writer.

 Writer of an option: the writer of a call/put options is the one who receives the
option premium and is thereby obliged to sell/buy the asset if the buyer exercises
on him.
There are Two Basic Types of Options, Call Options and Put Options
 Call option: a call option gives the holder the right but not the obligation to buy
an Asset by a certain date for a certain price.

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 Put option: a put option gives the holder the right but not the obligation to sell
an asset by a certain date for a certain price.

 Option price: option prices are the price, which the option buyer pays to option
seller. It is also referred to as option premium.
 Expiration date: the date specified in the options contract is known as the
expiration Date, the exercise date, the strike date or the maturity.
 Strike price: the price specified in the options contract is known as the strike
price or the exercise price.
 American options: American options are options that can be exercised at any
time up to the expiration date. Most exchange-traded options are American.
 European options: European options are options that can be exercised only on
the Expiration date itself. European options are easier to analyze than American
options, and Properties of American options are frequently deduced from those
of its European Counterpart.
 In-the-money option: an in-the money (ITM) option that would lead to a
Positive cash flow to the holder if it were exercised immediately. A call option
on the Index is said to be in money when the current index is stands at a level
higher than the strike price, (i.e. spot price strike price). If the index is much
higher than the strike price, The call is said to be deep ITM. In the case of a put
is ITM if the index is below the strike price.
 At-the-money option: an at-the money (ATM) option is an option that would
lead to Zero cash flow if it were exercised immediately. An option on the index
is at-the –money when the current index equals the strike price (i.e. spot price =
strike price.
 Out-of the money option: an out-of –money (OTM) option is an option that
would lead to a negative cash flow it was exercised immediately. A call option
on the index is out-of-the-money when the current index stands at a level, which
is less than the strike Price (i.e. spot price strike price). If the index is much
lower than the strike price, the call is said to be deep OTM .in the case of a put,
the put is OTM if the index is above the Strike price.

Trading Strategies using Futures and Option

There are a lot of practical uses of derivatives. As we have seen, derivatives can be

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used for profits and hedging. We can use derivatives as a leverage tool too.

Use of Derivatives as leverage


You can use the derivatives market to raise fund using your stocks. Conversely,
you can also lend funds against stocks.

Different Between Badla and Derivatives


The derivatives product that comes closest to Badla is futures. Futures is not
badla, through a lot of people confuse it with badla. The fundamental difference is badla
consisted of contango and backwardation (undha badla and vyaj badla) in the same
market. Futures is a different market segment altogether. Hence derivatives is not the
same as badla, through it is similar.

Raising Funds from the Derivatives Market


This is fairly simple. Say, you have Infosys, which is trading at R s 3000. You
have shares lying with you and are in urgent need of liquidity. Instead of pledging your
shares and borrowing from banks at a margin, you can sell the stock at R s 3000. Suppose
you need this liquidity only for a month and also do not want to party with Infosys. You
can buy a 1 month future at R s 3050
After a month you get back you Infosys at the cost of additional rs 50. This R s 50
is the financing cost for the liquidity. The other beauty about this is you have already
locked in your purchase cost at R s 3050. This fixes your liquidity cost also and protected
against further price losses.

Lending Funds to The Market


The lending into the market is exactly the reverse of borrowing. You have money
to lend.
You can a stock and sell its future. Say, you buy Infosys at R s 3000 and sell a 1
month future at R s 3100. In effect what you have done is lent R s 3000 to the market for
a month and earned R s 100 on it.

Using Speculation to Make Profits


When you speculate, you normally take a view on the market, either bullish or

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bearish. When you take a bullish view on the market, you can always sell futures and buy
in the spot market. If you take a bearish view on the market, you can buy futures and sell
in the sport market. Similarly, in the option market, if you are bullish, you should buy
call options. If you are bearish, you should buy put option conversely, if you are bullish,
you should write put options. This is so because, in a bull market, there are lower
changes of the put option being exercised and you can profit from the premium if you are
bearish, you should write call option. This is so because, in a bear market, there are lower
chances of the call option being exercised and you can profit from the premium.

Using Arbitrage to Make Money in Derivatives Market


Arbitrage is making money on price differential in different markets. For
example, future is nothing but the future value of the spot price. This futures value is
obtained by factoring the interest rate. But if there are differences in the money market
and the interest rates change than the future price should correct itself to factor the
change in interest. But if there is no factoring of this change than it present an
opportunity to make money-an arbitrage opportunity.
Let us take an example.
Example
A stock is quoting for Rs. 1000. The 1-month future of this stock is at rs 1005. the risk
free Interest rate is 12%. What should be the trading strategy?
Solution
The strategy for trading should be: Sell Spot and Buy Futures
Sell the stock for Rs 1000. Buy the future at Rs 1005.
Invest the Rs 1000 at 12%. The interest earned on this stock will be
1000(1+.02) (1/12) = 1009
So net gain the above strategy is Rs 1009-rs 1005= Rs 4
Thus one can make a risk less profit of Rs 4 because of arbitrage. But an important point
is that this opportunity was available due to miss-pricing and the market not correcting
itself. Normally, the time taken for the market to adjust to corrections is very less. So the
time available for arbitrage is also less. As every one to cash in on the arbitrage, the
market corrects itself.
USING FUTURE TO HEDGE POSITION
One can hedge ones by taking an opposite position in the futures market. For
example, if you are sport price, the risk you carry is that of price in the future. You can
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lock this by selling in the futures price. Even if the stock continues falling, your position
is hedge as you have firmed the price at witch you are selling. Similarly, you want to buy
a stock at a later date but face the risk of prices rising. You can hedge against this rise by
buying futures. You can use a combination of futures too to hedge yourself. There is
always a correlation between the index and individual stocks, this correlation may be
negative or positive, but there is a correlation. This is given by the beta of the stock. In
simple terms, terms, what beta indicates is the change in the price of a stock to the
change in index.
For examples
If beta of a stock is 0.8, it means that if the index goes up by the stock goes up by
8. t will also fall a similar level when the index falls.
A negative beta means that the price of the stock falls when the index rises. So, if you
have a position in a stock, you can hedge the same by buying the index at times the
value of the stock.

Example: The beta of HPCL is 0.8. The Nifty is at 1000. If I have Rs 10000 worth of
HPCL, I can hedge my position by selling 800 of Nifty. That is I well sell 8 Nifities.

Scenario 1: If index rises by 10%, the value of the index becomes 8800 I e a loss of R s
800. The value of my stock however goes up by 8% I e it becomes R s 10800 I e a gain
of R s 800.Thus my net position is zero and I am perfectly hedged.

Scenario 2:If index falls by 10%, the value of the index becomes Rs 7200 a gain of Rs
800. But the value of the stock also falls by 8%. The value of this stock becomes Rs 9200
a loss of Rs 800Thus my net position is zero and I am perfectly hedged. But against, beta
is a predicated value based on regression models. Regression is nothing but also analysis
of past data. So there is a chance that the above position may not be fully hedged if the
beta does not behave as per the predicated value.

Using Options in Trading Strategy: Options are a great tool to use for trading. If you
feel the market will go up. You should are a call option at a level lower than what you
expect the market to go up. If you think that the market will fall, you should buy a put
option at a level higher than the level to which you expect the market fall. When we say
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market, we mean the index. The same strategy can be used for individual stocks also. A
combination of futures and options can be used too, to make profits.

Strategy for an option writher to cover himself

An option writer can use a combination strategy of futures and options to protect
his position. The risk for an option writer arises only when the option is exercised this
will be very clear with an example.

Supposing I sell a call option on Satyam at a strike price of Rs 300 for a premium
of rs20. The risk arises only when the option is exercised. The option will be exercised
when the price exceeds rs 300. I start making a loss only after the price exceeds Rs 320
(Strick price plus premium).

More impotently, I have to deliver the stock to the opposite party. So to enable
me to deliver the stock to the other party and also make entire profit on premium, I buy a
future of Satyam at Rs 300. This is just one leg of the risk. The earlier risk was of the
called being exercised the risk now is that of the call not being exercised. In case the call
is not exercised, what do I do?

I will have to take delivery as I have brought a future. So minimize the risk, I buy
a put option on Satyam at Rs 300. But I also need to pay a premium for buying the
option. I pay Premium of Rs 10. Now I am fully covered and my net cash flow would be.
Premium earned from selling call option Rs 20.Premium paid to buy put option (Rs 10)
Net cash flow Rs 10.

But the above pay off will be possible only when the premium I am paying for
the put Option is lower than the premium that I get for writing the call. Similarly, we can
arrive at a covered position for waiting a put option two. Another interesting observation
is that the above strategy in itself presents an opportunity to make money. This is so
because of the premium differential in the put and the call option. So if one tracks the
derivatives make on a continuous basis, one can chance upon almost risk less money
making opportunities.
Other Strategies Using Derivatives

The other strategies are also various permutations of multiple puts, call and
futures. They are also called by exotic names, but if one were to observe them closely,

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they are relatively simple instruments. Some of these instruments are

Butterfly Spread: It is the strategy of simultaneous buying of put and call

Calendar Spread: An option strategy in which a short-term option is sold and a longer-
term option is bought both having the same striking price. Either puts or calls may be
used.

Double Option: An option that gives the buyers the right to buy and/or sell a futures
contract, at a premium, at the strike price.

Straddle: The simultaneous purchase and sale of option of the same speculation to
different periods.

Tandem Options: A sequence of options of the same type, with variable strike price and
period.

Bermuda Option: Like the location of the Bermudas, this option is located somewhere
between a European style option with can be exercised only at maturity and an American
style option which can be exercised any time the option holder chooses. This option can
be exercise only on predetermined dates.

RISK MANAGEMENT IN DERIVATIVES

Derivatives are high-risk instrument and hence the exchanges have put up a lot of
measures to control this risk. The most critical aspect of risk management is the daily
monitoring of price and position and the margining of those positions.

NSE uses the SPAN (Standard Portfolio Analysis of Risk). SPAN is a system that
has origins at the Chicago Mercantile Exchange, one of the oldest derivative exchanges
in the world.

The objective of SPAN is to monitor the positions and determine the maximum
loss that a stock can incur in a single day. This loss is covered by the exchange by
imposing mark to market margins.
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SPAN evaluates risk scenarios, which are nothing but market conditions. The
specific set of market conditions evaluated, are called the risk scenarios, and these are
defined in terms of

a) How much the price of the underlying instrument is expected to change over one
trading day, and

b) How much the volatility of that underlying price is expected to change over one
trading day?

Based on the SPAN measurement, margins are imposed and risk covered. Apart
from this, the exchange will have a minimum base capital of Rs. 50 lacks and brokers
need to pay additional base capital if they need margins above the permissible limits.

SETELLEMENT OF FUTURES

Mark to Market Settlement

There is daily settlement for Mark to Market. The profits/losses are computed as
the difference between the trade price or the precious day’s settlement price as the case
may be and the current day’s settlement price. The parties who have suffered a loss are
required to pay the mark-to-market loss amount to exchange which is in turning passed
on to the party who has made a profit. This is known as daily mark-to market settlement.
Theoretical daily settlement price for unexpired futures contracts, which are not traded
during the last half on a day, is currently the price computed as per the formula detailed
below.
F = S * e rt

Where
F = theoretical futures price
S = value of the underlying index/stock
r = rate of interest (MIBOR- Mumbai Inter Bank Offer Rate)
t = time to expiration
Rate of interest may be the relevant MIBOR rate or such other rate as may be
specified. After daily settlement, all the open positions are reset to the daily settlement
price. The pay-in and payout of the mark-to-market settlement is on T+1 days (T = Trade
day). The mark to market losses or profits are directly debited or credited to the broker
account from where the broker passes to client account.
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Final Settlement

On the expiry of the futures contracts, exchange market all positions to the final
settlement price and the resulting profit/loss is settlement I cash. The final settlement of
the future contract is similar to the daily settlement process except for the method of
capon of final settlement price. The final settlement profit/loss is completed as the
difference between trade price or the previous day’s settlement price, as the case may be
and the final settlement price of the relevant futures contract.
Final settlement loss/profit amount is debited/credited to the relevant broker’s
clearing bank account on T + 1 day (T = expiry day). This is then passed on the client
from the broker. Open positions in futures contracts cease to exist after their expiration
day.

SETTLEMENT OF OPTIONS

Daily Premium Settlement

Premium settlement is cash settled and settlement style is premium style. The
premium payable position and premium receivable position are netted across all option
contract for each broker at the client level to determine the net premium payable or
receivable amount, at the end of each day.
The brokers who have a premium payable position are required to pay the
premium amount to exchange which is in turn passed on to the members who have a
premium receivable position. This is known as daily premium settlement. The brokers in
turn would take from their clients.
The pay-in and pay-out of the premium settlement is on T + 1) days (T = Trade
day). The premium payable amount and premium receivable amount are directly debited
or credited to the broker, from where it is passed on to the client.

Interim Exchange Settlement for Options on Individual Securities

Interim exchange settlement for Option contract on individual securities is


affected for valid exercised option at in-money strike price, at the close of the trading
hours, on the day of exercise. Valid exercise option contracts are assigned to short
position in option contracts with the same series, on a random basis. This interim
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exercise settlement value is the difference between the strike price and the settlement
price of the relevant option contract. Exercise settlement value is debited/credited to the
relevant option broker account on T + 3 days (T = exercise date). From there it is passed
on to clits.

Final Exercise Settlement


Final Exercise settlement is effected for option positions at in-the-money strike
price existing at the close of trading hours, on the expiration day of an option contract.
Long position at in-the money strike price are automatically assigned to short positions in
option contracts with the same series, on a random basis. For index option individual
securities, exercise style is American style. Final Exercise is Automatic on expiry of the
option contracts.
Exercise settlement is cash settled by debiting/crediting of the clearing account
or the relevant broker with the respective Clearing Bank, from where it is passed
debited/credited to the relevant broker clearing bank account on T + 1 day (T = expiry
day), from where it is passed Final settlement loss/profit amount for option contracts on
Individual Securities is debited/credited to the relevant broker clearing bank account on T
+ 3 days (T = expiry day), from where it is passed Open positions, in option contracts,
cease to exist after their expiration day.

Options valuation using Black Scholes model


The black and Scholes Option Pricing model didn’t appear overnight, in fact,
Fisher Black started out working to create a valuation model for stock warrants. This
work involved calculating a derivative to measure how the discount rate of a warrant
varies with time and stock price. The result of this calculation held a striking resemblance
to a well-known heat transfer equation. Soon after this discovery, Myron Scholes joined
Black and the result of their work is a startlingly accurate option pricing model. Black
and Scholes can’t take all credit for their infect the model is actually an improved version
of a precious model developed by A. James Boness in his Ph.D. dissertation at the
University of Chicago. Black and scholes improvement on the Bones model come in the
from of a proof that the risk- free interest raise is the correct discount factor, and with the
absence of assumptions regarding investor’s risk preferences.
The model
C = SN (d1) – Ke {-rt} N (d2)
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C= Theoretical call premium


S= current stock price
t= time until option expiration
K= option striking price
r= risk-free interest rate
N = Cumulative standard normal distribution
D1 = in(S / K) + (r + s²/2)t

In order to understand the model itself, we divide into two parts. The first part,
SN (d1), derives the expected benefit from acquiring a stock outright. This is found by
multiplying stock price [S] by the change in the call premium with respect to a change in
the underlying stock price [N (d1)]. The second part of the model, Ke(-rt)N(d2), gives the
present value of paying the exercise price on the expiration day. The fair market value of
the call option is then calculated by taking the difference between these two parts.
Assumptions of the Black and Scholes Model
1) The stock pays no dividends during the option’s life: Most companies pay
dividends to their share holders, so this might see a serious limitation to the
model considering the observation that higher dividend yields elicit lower call
premiums. A common way of adjusting the model for this situation is subtract the
discounted value of a future dividend from the stock price.
2) European exercise terms are used : European exercise terms dictate that the
option can only be exercised on the expiration date. American exercise term
allow the option to be exercised at any time during the life of the option, making
American option more valuable due to their greater flexibility. This limitation is
not a major concern because very few calls are exercise before the last few days
of their life. This is true because when you exercise a call early, you forfeit the
remaining time value on the call and collect the intrinsic value. Towards the end
of the life of a call, the remaining time value is very small, but the iatric value is
the same.
3) Markets are efficient: This assumption suggests that people cannot consistent
predict the direction of the market or an individual stock. The market operates
continuously with share price followed a continuous it process. To understand
what a continues it processes, you must first known that m Markov process is
“one where the observation in time period at depends only on the preceding
observation”. An it process is simply a Marko process you would do so without
picking the pen up from the piece of paper.
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4) No commissions are charged: Usually market participants do have to pay a


commission to buy or sell options. Even floor traders pay some kind of free, but it
is usually very small. The fees that Individual investor’s pay is more substantial
and can often distort the out put of the model.
5) Interest rates remain constant and know: The Black and Scholes model uses
the Risk-free rate to represent this constant and known rate. In reality there is no
such thing as the risk-free rate, but the discount rate on U.S. Government
Treasury Bills with 30 days left until maturity is usually used to represent it.
During periods of rapidly change interest rates, these 30 day rates are often
subject to change, thereby violating one of the assumptions of the model.

REGULARITY FRAME WORK


The trading of derivatives is governed by the provisions contained in the SC(R)A,
the SCBI act, the rules and regulation framed there under and the rules and bye-laws of
stock exchange.

Securities Contracts (Regulation) Act, 1956


SC(R) A aims at preventing undesirable transactions in securities by regulating
the Business of dealing therein and by providing for certain other matters connected
therewith. This is the principal Act, which governs the trading of securities in
India. The term “securities” has been defined in the SC(R) A. as per section 2(h), the
‘securities’ include.

1. Shares, scraps, stocks, bonds, debenture stock or other marketable securities of a like
Nature in or of any incorporated company or other body corporate. Derivative
2. Units or any other instrument issued by any collective investors in such schemes
To the investors in such schemes, risk Government securities. Such other
instruments as may be declared by the central government to be securities rights or
interests in securities. “Derivative” is defined to include: A security derived from a
debt instrument, share, loan whether secured or unsecured instrument or contract for
differences or any other from of security.
 A contracts which derives its value from the prices, or index of prices, of
Underlying Securities.
 Section 18 a provides that notwithstanding anything contained in any other
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law for the time being in force, contracts in derivative shall be legal and valid
if such contracts are :
 Traded on a recognized stock exchange – settled on the clearing hose of the
recognized stock exchange, in accordance with the rules and bye –loss of
such stock exchanges

Securities and Exchange Board of India Act, 1992


SEBI Act, 1992 provides for establishment of Securities and Exchange Board of
India (SEBI) with statutory powers for (A) protecting the interests of investors in
securities (B) promoting the development of the securities market and (C) regulating
the securities market. Its regulatory jurisdiction extends over corporate in the
issuance of capital and transfer of securities, in addition to all intermediaries and
persons associated with securities market. SEBI has been obligated to perform the
aforesaid functions by such measures as it thinks fit.

In Particular, it has Powers For


 Regulating the business in stock exchanges and any other securities markets

 Registering and regulating the working of stock brokers, sub-brokers etc.

 Promoting and regulating self – regulatory organizations

 Prohibiting fraudulent and unfair trade practices.

 Calling for information from, undertaking inspection, conducting inquires and


audits of the stock exchanges, mutual funds and other persons associated with
the securities market and intermediaries and self-regulatory organization in
the securities market

 Performing such functions and exercising according to Securities Contracts


(Regulation) Act, 1956, as may be delegated to it by the Central Government
SEBI (Stockbrokers and Sub-brokers) Regulations, 1992

In this section we shall have a look at the regulations that apply to brokers under the
SEBI Regulation.

BROKERS

A broker is an intermediary who arranges to buy and sell securities on behalf of


clients (the buyers and the seller). According to section2 (e) of the SEBI (Stock Brokers
and sub brokers) Rules, 1992, a stock broker mean of a recognized stock exchange. No

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stock broker is allowed to buy, sell or deal in securities, unless he or she holds a
certificate of registration granted by SEBI. A stock broker applies for registration to
SEBI through a stock exchange or stock exchanges of which he or she is admitted as a
member. SEBI may grant a certificate to a stock-broker [as per SEBI (stock Brokers and
Sub-Brokers) Rules, 1992] subject to the conditions that,
1. He holds the membership of stock exchange.
2. Sell abide by the rules, regulations and buy-laws of the stock exchange or stock
exchange of which he is a member.
3. In case of any change in the status and constitution, he shall obtain prior
permission of SEBI to continue to buy, sell or deal in securities in any stock
exchange.
4. He shall pay the amount of fees for registration in the prescribed manner, and
5. He shall take adequate steps for redressed of grievances of the investors within
one month of the date of the receipt of the complaint and keep SEBI informed
about the number, nature and other particulars of the complaints as per
SEBI(Stock Brokers) Regulations, 1992,SEBI shall take into account for
considering the grant of a certificate all matters relating to buying, selling, or
dealing in securities and in particular the following namely,

Whether the Stock Broker


(a) Is eligible to be admitted as a member of a stock exchange.
(b) Has the necessary infrastructure like adequate office space, equipment and man
power to effectively discharge his activities.
(c) Has any past experience in the business of buying, selling or dealing in securities.
(d) Is subjected to disciplinary proceeding under the rules, regulations and buy-laws of a
stock exchange with respect to his business as a stock-broker involving either himself
or any of his partners, directors or employees.
REGULATION FOR DERIVATIVES TRADING

SEBI set up a 24-member committee under the Chairmanship of Dr.L.C.Gupta


to develop the appropriate regulatory framework for derivatives 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
the “suggestive bye-laws” recommended by the committee for regulation and control
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of trading settlement of derivatives contracts.


The provision in the SC(R)A and the regulatory framework developed there
under govern trading in securities .
The amendment of the SC(R) A to included derivatives with in the ambit of
‘securities’ in the SC(R) A made trading in derivatives possible within the frame work of
that Act.
1. Any Exchange fulfilling the eligibility criteria as prescribed in the L.C.Gupta
Committee report may apply to SEBI for grant of recognition under section 4 of
the SC(R) A, 1956 to start trading derivatives. The derivatives exchange/segment
Should have a separate governing council and representation of trading /clearing
Members shall be limited to maximum of 30% pf the total members and will obtain
Prior approval of SEBI before start of trading in any derivatives contract.
2. The exchange shall have maximum 50 members.
3. The members of an existing segment of the exchange will not automatically become
the members of derivatives segment. The members of the derivatives segment need
to fulfill the eligibility conditions as laid down by the L.C.Gupta committee.
4. The clearing and settlement of derivatives trades shall be through a SEBI approved
clearing corporations/house. Clearing corporation/house complying with the
eligibility conditions as laid down by the committee have to apply to SEBI for grant of
approval.
5. Derivatives brokers/dealers and clearing members are required to seek registration
from SEBI. This is in additional top their registration as brokers of existing stock
exchanges. The minimum net worth for clearing members of the derivatives clearing
corporation/house shall be Rs. 300 lakh.

The Net Worth of the Members Shall be Computed as Follows

 Capital + Free reserves

 Less non-allowable assets viz,

 Fixed assets

 Pledged securities

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 Member’s card

 Non-allowable securities (unlisted securities)

 Bad deliveries

 Doubtful debts and advances

 Prepaid expenses

 Intangible asset

 30% marketable securities

6. The minimum contract value shall not to be less than Rs. 2 Lakh. Exchanges should
also submit details of the futures contract they propose to introduce.

7. The initial margin requirement, exposure limits linked to capital adequacy and
margin demands related to the risk of loss on the position shall be prescribed by
SEBI/Exchange from time to time.

8. The L .C. Gupta committee report requires strict enforcement of “know your
customer” Rules and requires that every client shall be registered with the derivative
broker. The Members of the derivatives segment are also required to make their clients
aware of the Risks involved in derivatives trading by issuing to the client the risk
disclosure Document and obtain a copy of the same duly signed by the client. A trading
members are required to have qualified approved user and sales person who have passed
a certification programmed approved by SEBI.

NSE’S CERTIFICATION IN FINANCIAL MARKETS

A critical element of financial sector reforms is the development of a pool of


human resources having right skills and expertise to provide quality intermediation
services in Each segment of the market. In order to dispense quality intermediation,
personnel providing services need to possess requisite skills and knowledge. This is
generally achieved through a system of testing and certification. Such testing and
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certification has assumed added significance in India as there is no formal


education/training on financial Markers, especially in the area of operations. Taking into
account international experience and needs of the Indian financial Market, NSE offers
NCFM (NSE’ s Certification in Financial Markets) to test practical knowledge and
skills that are required to operate in financial markets in a very secure and unbiased
manner and to certify personnel with a view to improve quality of intermediation. NCFM
offers a comprehensive range of Modules covering many different areas in finance
including a module in derivatives. The Module on derivatives has been recognized by
SEBI. SEBI requires that derivative Brokers/dealers and sales persons must mandatory
pass this module of the NCFM
.
Regulation For Clearing And Settlement

 The L. C Gupta committee has recommended that the clearing corporation


must perform full notation i.e. the clearing corporation should interpose
itself between both legs of every trade, becoming the legal counter party to
both or alternatively should provide an unconditional guarantee for
settlement of all trades.
 The clearing corporation should ensure that none of the Board member has
trading interests.
 The definition of net-worth as prescribed by SEBI need to be incorporated in
the c application/regulations of the clearing corporation.
 The regulations relating to arbitration need to be incorporated in the clearing
corporation.
 Specific provision/chapter relating to declaration of default must be
incorporated by the clearing corporation in its regulations.
 The regulations relating to investor protection fund for the derivatives market
must be included in the clearing corporation application/regulations.
 The clearing corporation should have the capabilities to segregate
upfront/initial margins deposited by clearing members for trades on their
own account and on account of his clients. The clearing corporation shall
hold the clients’ margin money in trust for the clients’ purposes only and
should not allow its diversion for ant other purposes. This condition must be
incorporated in the clearing corporation regulations.

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 The clearing member shall collect margins from his constituents


(clients/trading members). He shall clear and settle deals in derivative
contracts on behalf of the constituents only on the receipt of such minimum
margin.
 Exposure limits based on the value at risk concept will be used and the
exposure limits. Will be continuously monitored. These shall be within the
limits prescribed by SEBI from time to time.
 The clearing corporation must lay down a procedure of periodic review of
the net worth of its members.
 The clearing corporation must lay down a procedure for periodic review of
the net worth of its members.
 The clearing corporation must inform SEBI how it proposes to monitor the
exposure of its members in the underlying market.
 Any changes in the bye-laws, rules or regulations which are covered under
the “suggestive bye-laws for regulations and control of trading and
settlement of derivatives contracts” would require prior approval of SEBI.

Product Specifications BSE-30 Sensex Futures

• Contract size – R s .50 times the Index

• Tick size – 0.1 points or R s. 5

• Expiry day – last Thursday of the month

• Settlement basis – cash settled

• Contract cycle – 3 months

• Active contracts – 3 nearest months

Product Specifications S&P CNX Nifty Futures

• Contract size – R s . 200 times the Index

• Tick size – 0.05 points or R s. 10

• Expiry day – last Thursday of the month

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• Settlement basis – cash settled

• Contract cycle -3 months

• Active contracts -3 nearest months

Membership

• Membership for the new segment in both the exchanges is not automatic and has

To be separately applied fir.

• Membership is currently open on both the exchanges.

• All members will also have to be separately registered with SEBI before they can
be accepted.

Membership Criteria – National Stock Exchange (NSE)

Clearing Member (CM)

• Net worth – 300 lakh

• Interest – free security Deposit – Rs.25 lakh

• Collateral Security Deposit – Rs.25 lakh

In addition for every TM be wishes to clear for the CM has to deposit Rs.10 lakh.

Trading Member (TM)

• Net worth – R s .100 lakh

• Interest – fee security Deposits – R s. 8 lakh

• Annul subscription fee – R s .1 lakh

Membership Criteria – Mumbai Stock Exchange (BSE)

Clearing Member (CM)

• Net worth – 300 lake

• Interest – free Security Deposits – R s. 25 lakh

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• Collateral Security Deposits – R s. 25 lakh

• Non-refundable Deposit – R s. 5 lakh

• Annual Subscription Fee – R s.50 thousand

In addition for every TM he wishes to clear for the CM has to deposit R s. 10 lake with

The following break-up.

I.Cash – R s. 2.5 lakh

II.Cash Equivalents – R s. 25 lakh

III.Collateral Security Deposit – R s. 5 lakh

Trading Member (TM)

• Net worth – R s. 50 lakh

• Non-refundable Deposit – R s.3 lakh

• Annual subscription Fees – R s.25 thousand

The non-refundable fees paid by the members are exclusive and will be a total of R s. 8

Lakh if the member has both clearing and trading rights.

Trading Systems

• NSE’s trading system for it’s futures and options segment is called NEAT F&O.

• It is based on the NEAT system for the cash segment.

• BSE’s trading system for its derivatives segment is called DTSS. It is built on a
Platform different from the BOLT system though most of the features are
common

Table 1.1
LOT SIZE OF DIFFERENT COMPANIES

CODE LOT COMPANY NAME


SIZE

ACC 188 ASSOCIATES CEMENT COMPANIES


LTD.
ANDHRA BANK 2300 ANDHRA BAKS.
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ARIVENDMILLS 4300 ARIVENDMILLS LTD


BAJAJAUTO 200 BAJA AUTOMOBILES LTD.
BANK BARODA 700 BANK OF BRODA.
BANK INDIA 950 BANK OF INDIA.
BEL 138 BHARAT ELECTRICALS LTD.
BHEL 75 BHARAT HEAVY ELECTRICALS LTE.
BPCL 550 BHARAT PETROL CORPORATION LTD.
CANBK 800 CANARABANK
CIPLA 1250 CIPLA LTD.
CNXIT 1200 IT INDEX
DABUR 2700 DABUR LTD.
DRREDDY 400 DR. REDDY’S LABORATORIES LTD.
GAIL 1125 GAS AUTHORITY OF INDIA.
GRASIM 88 GRASIM AMBUJA CEMENTS LTD.
GUJAMBCEMENT 4125 GUJRAT AMBUJA CEMENTS LTD.
HCLTECH 650 HINDISTAN CORPORATION LTD
TECNO.
HDFC 75 HOUSING DEVELOPMENT FINACE
CORP.
HDFE BANK 200 HDFE BANK
HERO HONDA 400 HEROHONDA MOTARS LTD.
HINDALCO 1759 HINDUSTAN ALUMINIUM COMPANY.
HINDLEVER 2000 HINDUSTAN LEVER LTD.
HINDPETROL 1300 HINDUSTAN PETROLEUM
CORPORATIONLTD.
I-FLEX 600 I-FLEX SOLUTIONS
ICICI BANK 175 ICICI BANKING CORPORATION LTD.
INFOSYSTECH 200 INFOSYS TECHNOLOGIES LTD.

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IDBI 1200 INDUSTRIAL DEV BANK OF INDIA


IPCL 2200 INDIAN PETROALEUM CHEMICALS LTD.
ITC 1125 INDIAN TOBACCO COMPANY LTD.
MATRIX 1250 MATRIX LAB.
M&M 312 MAHENDRA &MAHENDRA LTD.
MARUTI 200 MARUTI UDYOG LTD.
MPHASIS 800 MPHASIS BFL
MTNL 1600 MAHENDRA TELECOM NIGAML LTD.
NATIONAL ALUM 575 NATIONAL ALUMINIUM COMP.
NDTV 550 NATIONAL INDEX FOR FIFTY STOCK
NIIT 1450 NATIONAL INSTITUT OF FASHION
TECH.
ONGC 225 OIL & NATURAL GAS CORPORATION.
ORIENT BANK 1200 ORIENTAL BANK.
PNB 600 PANJAB NATIONAL BANK.
POLARIS 2800 POLARIS SOFTWARE COMPANY LTD.
RANBAXY 800 RANBAXY LABORATORIES LTD.
RELIANCE 75 RELIANCE INDUSTRIES LTD.
REL 550 RELIANCE COMPUTERS SERVICES LTD.

SBIN 132 STATE BANK OF INDIA.


SCI 1200 SHIPPING CORPORATION OF INDIA.
SYNDIBANK 1900 SYNDICATE BANK
TATAMOTORS 425 TATA MOTORS
TATAPOWER 200 TATA POWER COMPANY LTD.
TATASTEEL 382 TATA STEEL COMPANY
TATATEA 275 TATA TEA LTD.
TSICO 2800 TATA IRON & STEEL COMPANY LTD.
UNION BANK 2100 UNION BANK OF INDIA.

CHAPTER-2
INDUSTAL PROFILE
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BOMBAY STOCK EXCHANGE

This stock exchange, Mumbai, popularly known as “BSE” was established in


1875 as “The Native share and stock brokers association” as a voluntary non-profit
Making association. It has an evolved over the year into its present status as the premiere
Stock exchange in the country .it may be noted that the stock exchange the oldest one in
Asia, even older than the Tokyo stock exchange, which was founded in 1878.
The exchange, while providing an efficient and transparent market for trading in
securities, upholds the interests of the investors and insurers dressed of their grievances,
whether against the companies or its own member brokers. It also strives to educate and
enlighten the investors by making available necessary informative inputs and conducting
investor education programmers.
A governing board comprising of 9 elected directors, 2 SEBI nominees, 7 public
representatives and an executive director is the apex body, which decides the policies and
regulates the affairs of the exchange.
The executive’s directors as the chief executive officer are responsible for the day
today administration of the exchange. The average daily turnover of the exchange during
the year 2000-01(April-March) was Rs 3984.19 corers and average number of Daily
trades 5.69 lakhs.
However the average daily turn over of the exchange during the year 2001-02 has
declined to R s. 1244 .10 cores and number of average daily trades during the period to
5.17 lakes.
The average daily turnover of the exchange during the year 2002-03 has declined
and number of average daily trades during the period is also decreased.

The Ban on all deferral products like BLESS AND ALBM in the Indian capital
markets by SEBI with effect from July 2, 2001, abolition of account period settlements,
introduction of compulsory rolling settlements in all scripts traded on the exchange with
effect from Dec 31, 2001, etc., have adversely imprecated the liquidity and consequently
there is a considerable decline in the daily turn over of the exchange present scenario is
110363 (laces) and number of average daily trades 1075 (laces)
BSE INDICES

In order to enable the market participants, analysts etc., to track the various ups and

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downs in the Indian stock market, the exchange has introduced in 1986 an equity stock
index called BSE- SENSEX that subsequently became the barometer of the movements
of the share prices in the Indian stock market. It is a “Market capitalization weighted”
index of 30 component stocks representing a sample of large, well-established and
leading companies. The base year of sensex is 1978-79. The sensex is widely reported in
both domestic and international markets through print as well as electronic media.
Sensex is calculated using a market capitalization weighted method. As per this
methodology, the level of the index reflects the total market value of all 30-component
stocks from different industries related to particular base period. The total market value
of a company is determined by multiplying the price of its stocks by the number of shares
outstanding. Statisticians call an all index of a set of combined variables (such as price
and number of shares) a composite index. An indexed number is used to represent the
results of this calculation in order to market the value easier to work with and track over
a time. It much easier to graph a chart based on indexed values than one based on actual
values world over majority of the well-known indices are constructed using “Market
capitalization weighted method”.
In practice, the daily calculation of SENSEX is done by dividing the aggregate
market value of the 30 companies in the index by a number called the index Divisor. The
Divisor is the only link to the original base period value of the SENSEX. The Divisor
Keeps the Index comparable over a period or time and if the reference point for the entire
index maintenance adjustments. SENSEX is widely used to describe the mood in the
Indian stock markets. Base year average is changed has per the formula new base year
average =old base year average *(new market value/old market value).

NATIONAL STOCK EXCHANGE


The NSE was incorporated in Now 1992 with an equity capital of R s 25 Crs.
The international securities consultancy (ISC) of Hong Kong has helped in setting up
NSE. ISE has prepared the detailed business plans and installation of hardware and
software systems. The promotions for NSE were financial institutions, insurances
companies, banks and SEBI capital market Ltd, infrastructure leasing and financial
services ltd and stock holding corporation ltd.
It has been set up to strengthen the move towards professionalisation of the capital
market as well provided nation wide securities trading facilities to investors.NSE is not
an exchange in the traditional sense where brokers own and manage the exchange. A two

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tier administrative set up involving a company board and a governing aboard of the
exchange envisaged. NSE is a national market for shares PSU bonds, debentures and
government securities since infrastructure and trading facilities are provided.

NSE-NIFTY

The NSE on April 22, 1996 launched a new equity index. The NSE-50. The new
index, which replaces the existing NSE-100 index, is expected, to serve as an appropriate
index for the new segment of futures and options.” Nifty” means national index for fifty
stocks.
The NSE-50 comprises 50 companies that represent 20 broad industry groups with
An aggregate market capitalization of around R s .1,70,000 crs. All companies included
in the index have a market capitalization in excess of R s 500 crs each and should have
traded for 85% of trading days at an impact cost of less than 1.5%.
The base period for the index is the close of prices on Nov 3, 1995, which makes
one year of completion of operation of NSE‘s capital market segment. The base value of
the index has been set at 1000.

NSE –MIDCAP INDEX


The NSE madcap index or the junior nifty comprises 50 stocks that represent 21
a board industry groups and will provide proper representation of the madcap segment of
the Indian capital market. All stocks in the index should have market capitalization of
greater than R s list of 200 cores and should have traded 85% of the trading days at an
impact cost of less 2.5%.

The base period for the index is Nov4, 1996, which signifies two years for
completion of operations of the capital market segment of the operations. The base value
of the Index has been set at 1000.
Average daily turnover of the present scenario 258212(laces) and number of
averages daily trades 2160(laces) At present, there are 24 stocks exchanges recognized
under the securities contracts (regulations) Act, 1956. They are

Table No: 2.1


Name of The Stock Exchanges
NAMEOF THE STOCK EXCHANGE YEARS

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Bombay stock exchange, 1875

Ahmadabad share and stock brokers association, 1957

Calcutta stock exchange associations Ltd, 1957

Delhi stock exchange association Ltd, 1957

Madras stock exchange association Ltd, 1957

Indoor stock brokers association Ltd, 1958

Bangalore stock exchange, 1963

Hyderabad stock exchange, 1943

Cochin stock exchange, 1978

Prune stock exchange, 1982

U.P. stock exchange, 1982

Ludhiana stock exchange, 1983

Jaipur stock exchange Ltd, 1984

Gauhati stock exchange Ltd, 1984

Mangalore stock exchange, 1985

Maghad stock exchange Ltd, patna, 1986

Bhuvaneshwar stock exchange association Ltd, 1989

Over the counter exchange of India, Bombay, 1989

Saurastra kuth stock exchange Ltd, 1990

Vsdodard stock exchange Ltd, 1991

Coimbatore stock exchange Ltd, 1991

The Meerut stock exchange, 1991

I National stock exchange, 1991

Integrated stock exchange, 1999

COMPANY PROFILE

THE INDIA INFOLINE LIMITED


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Origin
India Infoline Ltd., was founded in 1995 by a group of professional with
impeccable educational qualifications and professional credentials. Its institutional
investors include Intel Capital (world's) leading technology company, CDC (promoted by
UK government), ICICI, TDA and Reeshanar.
India Infoline group offers the entire gamut of investment products including
stock broking, Commodities broking, Mutual Funds, Fixed Deposits, GOI Relief bonds,
Post office savings and life Insurance. India Infoline is the leading corporate agent of
ICICI Prudential Life Insurance Co. Ltd., which is India' No. 1 Private sector life
insurance company.
www.indiainfoline.com has been the only India Website to have been listed by
none other than Forbes in it's 'Best of the Web' survey of global website, not just once but
three times in a row and counting... “A must read for investors in south Asia” is how they
choose to describe India Infoline. It has been rated as No.l the category of Business News
in Asia by Alexia rating.
Stock and Commodities broking is offered under the trade name 5paisa. India
Infoline Commodities Pvt Ltd., a wholly owned subsidiary of India Infoline Ltd., holds
membership of MCX and NCDEX

Main Objects of the Company


Main objects as contained in its Memorandum or Association are:
1. To engage or undertake software and internet based services, data processing IT
enabled services, software development services, selling advertisement space on the site,
web consulting and related services including web designing and web maintenance,
software product development and marketing, software supply services, computer
consultancy services, E-Commerce of all types including electronic financial
intermediation business and E-broking, market research, business and management
consultancy.
2. To undertake, conduct, study, carry on, help, promote any kind of research, probe,
investigation, survey, developmental work on economy, industries, corporate business
houses, agricultural and mineral, financial institutions, foreign financial institutions,
capital market on matters related to investment decisions primary equity market,
secondary equity market, debentures, bond, ventures, capital funding proposals,
competitive analysis, preparations of corporate / industry profile etc. and trade / invest in
36
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researched securities

VISION STATEMENT OF THE COMPANY


“Our vision is to be the most respected company in the financial services space In India”.

Products: the India Infoline Pvt ltd offers the following products
A. E-broking.
B. Distribution
C. Insurance
D. PMS
E. Mortgages

A. E-Broking
It refers to Electronic Broking of Equities, Derivatives and Commodities under the
brand name of 5paisa
1. Equities
2. Derivatives
3. Commodities

B. Distribution
1. Mutual funds
2. Govt of India bonds.
3. Fixed deposits

C. Insurance
1. Life insurance policies
2. General Insurance.
3. Health Insurance Policies.

THE CORPORATE STRUCTURE


The India Infoline group comprises the holding company, India Infoline Ltd,
which has 5 wholly-owned subsidiaries, engaged in distinct yet complementary
businesses which together offer a whole bouquet of products and services to make your
money grow.

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The corporate structure has evolved to comply with oddities of the regulatory
framework but still beautifully help attain synergy and allow flexibility to adapt to
dynamics of different businesses.
The parent company, India Infoline Ltd owns and managers the web properties
www.Indiainfoline.com and www.5paisa.com. It also undertakes research Customized
and off-the-shelf.
Indian Infoline Securities Pvt. Ltd. is a member of BSE, NSE and DP with
NSDL. Its business encompasses securities broking Portfolio Management services.
India Infoline.com Distribution Co. Ltd., Mobilizes Mutual Funds and other
personal investment products such as bonds, fixed deposits, etc.
India Infoline Insurance Services Ltd. Is the corporate agent of ICICI Prudential
Life Insurance, engaged in selling Life Insurance, General Insurance and Health
Insurance products.
India Infoline Commodities Pvt. Ltd. is a registered commodities broker MCX and
offers futures trading in commodities.
India Infoline Investment Services Pvt Ltd., is proving margin funding and NBFC
services to the customers of India Infoline Ltd.,

Chart No: 2.1-

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Pictorial Representation of India Infoline Ltd

Management of India Infoline Ltd.,

India Infoline is a professionally managed Company. The promoters who run the
company/s day-to-day affairs as executive directors have impeccable academic

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professional track records.


Nirmal Jain, chairman and Managing Director, is a Chartered Accountant, (All
India Rank 2); Cost Account, (All India Rank l) and has a post-graduate management
degree from IIM Ahmadabad. He had a successful career with Hindustan Lever, where
he inter alia handled Commodities trading and export business. Later he was CEO of an
equity research organization.
R. Venkataraman, Director, is armed with a post- graduate management degree
from IIM Bangalore, and an Electronics Engineering degree from IIT, Kharagpur. He
spent eight fruitful years in equity research sales and private equity with the cream of
financial houses such as ICICI group, Barclays de Zoette and G.E. Capital
The non-executive directors on the board bring a wealth of experience and
expertise.
Satpal khattar -Reeshanar investments, Singapore The key management team
comprises seasoned and qualified professionals.

Mukesh Sing- Director, India Infoline Securities Pvt Ltd.


Seshadri Bharathan- Director, India Infoline. Com Distribution Co Ltd
S Sriram- Vice President, Technology
Sandeepa Vig Arora- Vice President, Portfolio Management Services
Dharmesh Pandya- Vice President, Alternate Channel
Toral Munshi- Vice President, Research
Anil Mascarenhas- Chief Editor
Pinkesh Soni Financial controller
Harshad Apte Chief Marketing Officer

Human Resources

I. General: Management is committed to provide necessary resources which


are required as identified in documents like Quality system procedures, work
instructions and quality forms / other documents etc.
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Personnel assigned to various tasks are suitably qualified with formal job
training, education, and / or experience.
II. Competence, Awareness and Training

• The necessary competence are determines for personnel performing


work affecting product quality
• Identified and provides necessary training as and when required to the
employees to meet the customer needs.
• Evaluates the effective of training.
• Ensures that employees are aware of the relevance and importance of
their activities and how they contribute to the achievement of the quality
objectives.
• Maintains appropriate records of education, training, skills and
experience
Work Environment

It is determined and managed the work environment need to achieve conformity

to product requirements.

MISSION, VISION, CORE VALUES

Mission: To maintain the customer satisfaction level, with zero defect supply.

Vision: To become one of the best forging company in south India with press

technology

Core values

• Quality

• Service at any cost

• Cordial relation ship

• Collective team work

Organization of Employees in INDIA INFOLINE LTD along with

Minimum Competence level

The Manpower is categorized as Non-technical & Technical. In the non-technical


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category four identified levels are present. They are Manger, Asst. Manager, officer &
Assistant. Minimum competence details are given in the chart.
In the technical category C.E.O. is Chief lead a technical and a business
qualification. In the top-management category G. Manager, Dy. Gen. Manager, and Asst.
Gen. Manager levels are there, these report to C.E.O. In the middle management category
the levels are Manager, Asst. Manager, Sales manager , team manager, relationship
managers, dealers are in the Junior Management category.
The work force of consists of operators (experienced and skilled), apprentice, and
helper. The details are given in organization chart.

TRADING IN DERIVATIVES

Indian securities market has indeed waited for too long for derivatives trading to
emerge. Mutual fund, FIIs and other inventors who are deprived of hedging opportunities
will now have a derivatives market to bank on. First to emerge are the globally popular
variety – index futures.
While derivatives markets flourished in the developed world Indian markets remain
deprived of financial derivatives to the beginning of this millennium. While the rest of
the world progressed by leaps and bounds on the derivatives front, Indian market lagged
behind. Having emerging in the market of the developed nations in the 1970s, derivatives
markets grew from strength to strength. The trading volumes nearly doubled in every
Three years marking it a trillion-dollar business. They became so ubiquitous that, now,
one cannot think of the existence of financial markets without derivatives. Two broad
approaches of SEBI is integrate the securities market at the national level, And also to
diversify the trading products, so that more number of traders including Banks, financial
institutions, insurance companies, mutual fund, primary dealers etc. Choose to transact
through the ex change. In this context the introduction of derivatives trading through
Indian stock exchange permitted by SEBI IN 2000 AD is a real landmark.

SEBI first appointed the L.C Gupta Committee in 1998 to recommend the regulatory
Frame work for derivatives trading and to recommend suggestive bye-laws for regulation
And control of trading and settlement of derivatives contracts. The broad of SEBI in its
Meeting held on May 11,1998 accepted the recommendations of the Dr L.C Gupta
Committee and approved the phased introduction of derivatives trading in India
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beginning with Stock Index Futures. The Board also approved the “Suggestive Bye-
laws” recommended by the committee for regulation and control of trading and
settlement of Derivatives Contracts.

SEBI subsequently appointed the J. R. Varna Committee to recommend Risk


containment Measures in the Indian stock index Futures Market. The report was
submitted in the same year (1998) in the month of November by the said committee.

However the Securities Contracts (REGULATION) Act, 1956 (SCRA0 need


amendment to include” derivatives” in the definition of securities to enable SEBI to
introduce trading in derivatives. The government in the year 1999 carried out the
necessary amendment. The securities laws (amendment) bill 1999 was introduced to
bring about the much-needed changes. In December 1999 the new framework has been
approved. Derivatives have been accorded the statues of ‘securities’. The ban imposed on
trading in derivatives way back in 1969 under a notification issued by the central
government has been revoked. Therefore SEBI formulated the necessary regulation/bye-
laws and intimated the stock exchange in year 2000, while derivative trading started in
India at NSE in the same Year and BSE started trading in the year 2001. In this module
we are covering the different types of derivative products and their features, which are
traded in the stock exchanges in India.

EQUITY DERIVATIVES EXCHANGES IN INDIA

• . In the equity markets both the national stock exchange of India Ltd. (NSE)
and The stock exchange, Mumbai (BSE) was quick to apply to SEBI for setting
Up There derivatives segment.
• NSE as stated earlier commends derivatives trading in the same year i.e. 2000
AD, while BSE followed after a few months in 2001.

• Both the exchange have set-up an in-house segment instead of setting up a


Separate exchange for derivates.
• NSE’s Futures & Options Segment was launched with Nifty futures as the first
Production.
• BSE’s Derivatives Segment, started with sensex futures as its first product.
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• Stock options and stock futures were introduced in both the Exchange in the year
2001.

Thus started trading in Derivatives in India Stock Exchanges (both BSE & NSE)
Covering index options, Index Futures, and Stock Options & Futures in the wake of the
new millennium in a short span of three years the volume traded in the derivatives
Market has outstripped the turnover of the cash market.

Derivatives Trading in Financial Markets

Derivatives were not traded in the financial markets of the world up to the period
about there decades backs, through Stock Exchange trading in securities in the cash
market came to be in vogue more than a century ago. In Indian the first Stock Exchange,
BSE was established in1875. But BSE commenced trading in derivatives only from
2001.Even in the international finance/securities market the advent of derivatives as
trading products was a concurrent-effect with the process of globalization and integration
the national economies of the development countries beginning from the Seventies of the
last Century. As volumes traded increased and as competition on turned, trade & business
became more complex in the new environment. The new opportunities were matched by
fresh challenges and unpredictable volatility of the trading environment. Corporate for
the first time sensed the formidable risks inherent in business transactions and the
unpredictability of the markets to which they are exposed. Facing multiple risks the
business organization, were induced to search for new remedies, i.e. risk containment
devices/instrument. Derivatives came to be the natural remedy in this context. To quote
an international professional authority.
“As capital markets become increasingly integrated, shocks transmit easily from
one market to another. The proliferation of new instruments with has become darling of
corporate, banks, institutions alike is ‘Derivatives’. To have a touch of the tree top’s
view, Derivatives transaction is defined as a bilateral contract whose value is derived,
from the value of an underlying asset, or reference rate, or index.
Derivative transaction have evolved in the past twenty years to cover a broad
range of products which include instruments like ‘forward’, ‘future’, ‘options’, ‘swaps’
covering a broad spectrum of underlying assets including exchange rates, interest rate,
commodities, and equities.”
Through recent in origin derivates instrument issued over the years have grown
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by leaps and bounds and the total amount issued globally is estimated to approach $80
trillion by the advent of the new millennium. Derivatives position has growth at
compounding rate 20% since 1990. In Indian through derivatives were introduced very
recently in2001, the trading turnover has already surpassed that of the equity segment. In
NSE alone as per a report on ors website the total turnover of the derivates segment for
the month of May 2003 stood at Rs. 53424 crores. During the month of May 2003, the
percentage of derivatives segment as a percentage of the cash segment was 97.68%.
However in the earlier two month the turnover of Derivatives was higher than that of the
cash segment.

Developments Leading to Trading of Financial Derivatives in the


USA
“The pace of innovation in derivatives markets increased remarkably in the 1970s.
 The first major innovation occurred in February 1972, when the Chicago
mercantile Exchange CME began trading futures on currencies in its International
Money Market (IMM) division. This marked the first time a futures contract was
written on anything other than a physical commodity.
 The second was in April 1973, when the CBT formed Chicago Board Options
Exchange (CBOE) to trade options on common stocks. This marked the first
time an option was traded on an exchange.
 The third major innovation occurred in October 1975, when the CBT introduced
The first futures contract on an interest rare instrument – Government National
Mortgage Association futures.
 In January 1976, the CME launched Treasury bill futures and, in August 1977,
the CBT launched Treasury bond futures.
 The 1980s brought yet another round of important innovations. The first was the
use of cash settlement. In December 1981, the IMM launched the first cash
Settlement contracts, the 3-months Eurodollar futures. At expiration, the
Eurodollar future is settled in cash based on the interest rate prevailing for a
three month Eurodollar time deposit.
 Cash settlement made feasible the introduction of derivatives on stock index
futures, the second major innovation of the 1980s. in February 1982, the
Kansas City Board of Trade (KCBT) listed futures on the Value Line Composite
stock index, and, in April 1982, the CME listed futures on the S&P 500.these

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contract introductions marked the first time future that contracts were written on
stock indexes.
 The third major innovation of the 1980s was the introduction of exchange-traded
option contracts written on ‘UNDERLYING’ other than individual common
stocks. The CBOE and AMEX listed interest rate options in October 1982 and the
Philadelphia Stock Exchange (PHILX) listed currency options in December 1982
as also options and gold futures.
 In January 1983, the CME and year New York Futures Exchanges (NYFE) began
to list options directly on stock index futures, and, March 1983, the CBOE began
to list options on stock indexes.

These two decades if innovation has transformed the nature of derivatives


trading activates on exchanges. While derivatives exchange were originally
developed to help market participants manage the price risk of physical commodities,
today’s trading activates is focused on hedging the financial risks associated with
unanticipated price movement in stock, bonds, and currencies.

CHAPTER-3

RESARESH METHODLGY

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NEED FOR THE STUDY

 To Study the various trends in derivative market.

 To study the role of derivative in Indian Financial Market.


 To study in detail the role of features and options.
 To find out profit/loss of the option holder and option writer.
 To study about risk Management with the help of derivatives.

OBJECTIVES

The objective of this analysis is to evaluate the profit/loss position of option


Holder/writer. This analysis is done based on the sample data. The sample is taken as
ICICI & NTPC scripts of JUNE 2006. The lot size of the scrip is 175&1625. The option
contract starting period is 01/06/09 and its maturity date is on 29/06/09. As the scripts of
ICICI BANK & NTPC Companies are volatile, they are chosen as the sample for
analysis. The data is collected from various news papers, like Economic Times, Business
standard and Business Line off course from the Hyderabad stock exchange.

METHODOLOGY

To achieve the object of studying the stock market data has been collected from

1. Primary
2. Secondary

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PRMARY

The primary data collected from the original trade in time to time process and the
data is taken from IIFL staff and from my project guide.

SECONDARY

The secondary information is mostly from websites, books, journals, etc.

CHAPTERISATION

The study has been presents in Five chapters as flows

Chapter 1:- Introduction, Which Deals With the Importance of Derivatives.

Chapter 2:- Profile of The Company, Which Deals with Industry Profile.

Chapter 3:- Provides Research Methodology, Which Deals With Objectives, Data
Collection and Limitations.

Chapter 4:- Deals with Data presentation, Interpretation and Analysis.

Chapter5:- Deals with Conclusions, Suggestions.

LIMITATIONS

 The sample size chosen as ICICIBANK & NTPC Companies scrip’s of the month
of July.
 The study is confined to June month only.
 The data gathered is completely restricted to the ICICIBANK & NTPC

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Companies scripts of June 09. And hence cannot be taken universal.


 The opening premium is considered for calculation of profit/loss position.

CHAPTER-4

ANALYSIS

INTERDUCTION TO ANALYSIS

The following table explained the amount transaction between the option
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writer and option holder. The table has various columns, which explain various factors
involved in derivatives trading.
 Date - the day on which trading took place.
 Closing premium – premium for that day.
 Open interest – no of that did not get exercised.
 Trading quantity – no of options traded on bourses on that day.
 Value - total value of the options on that particular day.

Table No: 4.1 –CALL OPTION JUNE, 2009 ON ICICI BANK

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ICICI CALL OPTIONS

Date Close pre Open int Trad Volume Close Open Trade Volume
qul pre int qul

01/06/09 80.00 2L 17K 104.67 63.50 64K 16K


02/06/09 87.00 2L 66.35
05/06/09 106.75 2L 73K 444.3 87.60 73K 18K
06/06/09 128.50 2L 61K 369.4 93.65 74K 11K
07/06/09 82.75 3L 3L 1781.59 75.00 91K 48K
09/06/09 62.00 3L 3L 2177.89 53.00 1L 21L
12/06/09 62.00 2L 76K 465.9 43.10 2L 70K
13/06/09 68.00 2L 38K 233.95 29.65 2L 27K
14/06/09 43.00 2L 36K 223.85 34.20 2L 22K 140.34
15/06/09 57.25 2L 37K 227.24 21.20 2L 25K
16/06/09 33.45 2L 24K 145.64 27.20 2L 22K
19/06/09 39.50 2L 42K 254.74 18.80 2L 33K
20/06/09 30.60 2L 42K 253.58 10.75 2L 20K 126.14
21/06/09 19.70 2L 26K 156.58 3.15 2L 23K
22/06/09 6.20 2L 22K 134.92 3.50 2L 5K
23/06/09 7.60 2L 20K 132.96 1.05 2L 4K
27/06/09 3.60 2L 23K 130.95 0.85 2L 6K
28/06/09 10.80 2L 24K 131.92 3.30 2L 5K
29/06/09 9.25 2L 18K 128.65 0.05 2L 8K

The above call options details have revalues that, the premium/price of the
call has shown a decreasing nature as the time to expiate in decrease as but at some
places there is rise the price due to increase in the index .

Table No: 4.2 – CALL OPTION JUNE, 2009 ON NTPC

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CA NTPC (180) CA NTPC (190)

Date Close Open Trade Volume Close Open Trade Volume


pre int qul pre int qul

01/06/09 5.85 4L 2L 237.86 3.1 12L 10L 1102.36


02/06/09 6.25 3
05/06/09 2.65 14L 3L 405.96
06/06/09 7.9 3L 3L 364.01 3.9 14L 11L 1362.69
07/06/09 8.95 3L 2L 217.18 4.2 13L 7L 864.36
09/06/09 9.9 3L 59K 70.05 5.05 12L 5L 545.8
12/06/09 12.25 2L 1L 138.01 7.25 11L 11L 1349.72
13/06/09 11.15 2L 2L 283.51 6.3 6L 3L 391.29
14/06/09 6.2 4L 1L 153.03
15/06/09 4.8 4L 72K 85.83
16/06/09 9.5 3L 2L 299.75
19/06/09 9.45 3L 62K 76.89
20/06/09
21/06/09
22/06/09 14 49K 10K 12.1 9.6 3L 3K 4.05
23/06/09 19.2 46K 23K 28.84 14.4 3L 3L 348.87
27/06/09 22.5 26K 10K 4.9 18.5 1L 13K 17.56

NTPC CALL OPTIONS

The above call options details have revalues that, the premium/price of the
call has shown a decreasing nature as the time to expiate in decrease as but at some
places there is rise the price due to increase in the index .

PUT OPTIONS OF JUNE‘09


Table No: 4.3 – PUT OPTION JUNE, 2009 ON ICICI BANK

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PA ICICI (390) PA ICICI (400)

Date Close Open Trade Volume Close Open Trade Volume


pre int qul pre int qul

01/06/09 10.85 51K 8K 51.36 _ _ _ _


02/06/09 18.30 34 _ _ _
05/06/09 24.6 33K 33K 204.5 _ _ _ _
06/06/09 37 27K 19K 120.12 _ _ _ _
07/06/09 15 61K 63K 387.68 - - _ _
09/06/09 11.8 29K 69K 419.57 19.5 18K 19K 120.85
12/06/09 14.2 94K 50K 309.53 _ _ _ _
13/06/09 12.9 90K 29K 176.15 _ - _ _
14/06/09 _ _ _ _ _ _ _
15/06/09 14.4 84K 21K 128.89 _ _ _ _
16/06/09 _ _ _ _ - _ _
19/06/09 _ _ _ _ _ _ _
20/06/09 19.2 68K 29K 176.86 _ _ _ _
21/06/09 11.05 53K 26K 160.71 _ _ _ _
22/06/09 23.75 1K 700 437 _ _ _ _
23/06/09 8.2 52K 6K 34.22 _ _ _ _
27/06/09 10.75 50K 4K 25.56 _ _ _ _

ICICI PUT OPTIONS

The above put options details have revalues that, the premium/price of the
call has shown a decreasing nature as the time to expiate in decrease as but at some
places there is rise the price due to increase in the index .

Table No: 4.4 – PUT OPTION JUNE, 2009 ON NTPC

PA NTPC (160) PA NTPC (170)

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Date Close Open Trade Volume Close Open Trade Volume


pre int qul pre int qul

01/06/09 1.5 2L 1L 137.77 4.4 2L 2L 208.76


02/06/09 1.30 3.60
05/06/09
06/06/09 0.95 3L 55K 61.29 2.4 3L 2L 217.29
07/06/09 1.55 4L 2L 231.12
09/06/09 1.35 4L 72K 83.19
12/06/09 1.05 5L 1L 158.64
13/06/09 0.85 5L 1L 139.4
14/06/09 0.65 5L 2L 255.86
15/06/09
16/06/09 0.2 5L 1L 153.56
19/06/09

20/06/09
21/06/09
22/06/09 0.1 5L 3K 3.74
23/06/09 0.05 5L 3K 3.74

NTPC PUT OPTIONS

The above PUT options details have revalues that, the premium/price of the
call has shown a decreasing nature as the time to expiate in decrease as but at some
places there is rise the price due to increase in the index.

FUTURES OF JUNE‘09

Table No: 4.5 – FUTURES JUNE, 2009 ON ICICI BANK

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FUTURES FOR THE MONTH OF JUN-09 (ICICI)

DATE OPEN CLOSE OPEN INT TURN IN L NO OF CON

01/06/09 454.70 465.90 108L 17L 26812

02/06/09 468.15 470.75 105L 26831

05/06/09 486.50 497.75 114L 29L 40189

06/06/09 498.80 522.40 123L 24L 63821

07/06/09 525.20 468.60 110L 8771

09/06/09 459.95 454.90 110L 68L 63014

12/06/09 444.90 436.10 110L 46L 49409

13/06/09 435.00 423.00 114L 24L 49583

14/06/09 430.00 441.15 115L 13L 37757


15/06/09 428.90 408.20 122L 23L 50809
16/06/09 412.10 424.00 123L 17L 27879

19/06/09 421.35 413.45 120L 9L 28748

20/06/09 405.00 396.90 116L 20L 43269

21/06/09 374.70 368.40 104L 22L 76052

22/06/09 375.00 378.35 95L 20L 55638

23/06/09 372.00 363.95 85L 20L 67488

27/06/09 368.40 380.45 57L 23L 75488

28/06/09 382.00 407.50 33L 24L 55846

29/06/09 410.00 417.85 24L 20L 44256

Table: 4.6 –FUTUER JUNE,2009 ON NTPC

FURURES FOR THE MONTHOF JUN-09 (NTPC)

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DATE OPEN CLOSE OPEN INT TURN IN L NO OF CON

01/06/09 180.90 182.20 315L 13646.44 3141

02/06/09 182.80 183.95 320L 25144.70

05/06/09 184.95 180.80 312L 19420.49 733

06/06/09 180.00 176.40 320L 26255.30 2005

07/06/09 177.10 170.00 296L 31257.67 2098

09/06/09 167.45 175.20 324L 32884.12 1345

12/06/09 175.05 168.00 286L 30265.57 2903

13/06/09 164.00 164.75 289L 29679.20 1365

14/06/09 167.40 166.05 295L 25088.80 1065

15/06/09 162.50 162.05 294L 23749.49 719

16/06/09 162.20 176.15 291L 44308.00 4749

19/06/09 177.00 175.25 290L 16720.10 2696

20/06/09 172.25 182.20 318L 60257.27 1922

21/06/09 178.80 176.65 274L 64879.22 1313

22/06/09 178.00 175.30 253L 28409.57 895

23/06/09 174.05 174.30 221L 31261.29 4003

27/06/09 175.50 187.70 183L 48546.79 620

28/06/09 188.00 189.15 148L 32078.49 513

29/06/09 189.75 190.15 119L 41181.56 729

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Table No: 4.7 – Spot price of ICICI Bank

SPOT PRICE OF ICICI

DATE SPOT PRICE

01/06/09 465.90

02/06/09 470.75

05/06/09 497.75

06/06/09 522.40

07/06/09 468.60

09/06/09 454.90

12/06/09 436.10

13/06/09 423.00

14/06/09 441.15

15/06/09 408.20

16/06/09 424.00

19/06/09 413.45

20/06/09 396.90

21/06/09 368.40

22/06/09 378.35

23/06/09 363.95
27/06/09 380.45
28/06/09 408.50
29/06/09 410.00

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Table No: 4.8 - Effect of an increase in each variable on the value of the option.

Effect of an increase in each variable on the


value of the option, holding other factors
Variable constant

Call premium Put premium

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• Sport price (S) Increase Decrease

• Strike price (K) Decrease Increase

• Volatility (σ) Increase Increase

• Time to

expiration (t) Increase Increase

Increase Decrease
• Interest rates (r)
Decrease Increase
• Dividend (D)

In the nutshell, we can formulate the basic rules for options pricing as follows:

For calls

 Lower the strike (exercise) price, the more valuable the call.

 Different in call prices cannot exceed difference in the exercise price.

 A call must be worth at least the stock price less the present value of the exercise
price.

 More the time till expiration, greater the call price.

 More the volatility, higher the call option premium.

 Higher the interest rates, more the call value.

For puts

 Higher the exercise price, more valuable the put.

 The price difference between two puts cannot exceed the different in exercise

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prices.

 Before expiration, a put must be worth at least the difference between the
exercise

price and the stock price.

 Longer the time to expiration, the more voluble the put.

 More the volatility, higher the put premium.

 Higher the interest rate, lower the put value.

POSITION OF CALL OPTION BUYERS/WRITERS

1. DATE 2. STRIKE 3. SPOT 4. 5. STRICK 6. SPOT –


PRI CE PRICE PREMIUM PRICE 5
+PREMIUM

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15/06/09 400 396.40 12.25 412.25 -15.85

15/06/09 420 396.40 6.00 426.00 -30

All OPTIONS IS OUT-OF-THE-MONEY

If the OPTION is purchased on 1st June and as on expiry date (29/06/09)

POSITION OF CALL OPTION BUYER/WRITER

1. DATE 2. STRIKE 3. SPOT 4. 5. STRICK 6. SPOT –


PRI CE PRICE PREMIUM PRICE 5
+PREMIUM
23/06/09 400 394.40 23.7 423.7 -29.3

23/06/09 420 394.40 12.00 432.00 -39.6

All OPTIONS IS OUT-OF-THE-MONEY

POSITION OF PUT OPTION BUYER/WRITERS

1. DATE 2. STRIKE 3. SPOT 4. 5. STRICK 6. SPOT –


PRI CE PRICE PREMIUM PRICE 5
-PREMIUM
15/06/09 400 396.40 14.4 385.6 10.8
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15/06/09 420 396.40 _ 420 23.6

All OPTION IS OUT-OF-THE- MONEY

If the OPTION is purchased on 1st June and as on expiry date (29/06/09)

POSITION OF PUT OPTION BUYER/WRITER

1. DATE 2. STRIKE 3. SPOT 4. 5. STRICK 6. SPOT –


PRI CE PRICE PREMIUM PRICE 5
-PREMIUM
29/06/09 400 394.40 10.85 389.15 5.25

29/06/09 420 394.40 _ 420.00 -26.6

THE OPTION 600 IS OUT-OF-THE-MONEY

THE OPTION 620 IS IN-THE-MONEY.

TABLE NO: 4.9 SPOT PRICE ON NTPC

SPOT PRICE OF NTPC

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DATE SPOT PRICE

01/06/09 182.20

02/06/09 183.95

05/06/09 180.80

06/06/09 176.40

07/06/09 170.00

09/06/09 175.20

12/06/09 168.00

13/06/09 164.75

14/06/09 166.05

15/06/09 162.05

16/06/09 176.15

19/06/09 175.25

20/06/09 182.20

21/06/09 176.65

22/06/09 175.30
23/06/09 174.30
27/06/09 187.70
28/06/09 189.15
29/06/09 190.15

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POSITION OF CALL OPTION BUYER/WRITER

1. DATE 2. STRIKE 3. SPOT 4. 5. STRICK 6. SPOT –


PRI CE PRICE PREMIUM PRICE 5
+PREMIUM
11/06/09 110 121.10 11.15 121.15 -0.05

11/06/09 115 121.10 6.3 121.3 -0.2

11/06/09 120 121.10 2.85 122.85 -1.75

All OPTIONS ARE OUT-OF-THE-MONEY

If the OPTION is purchased on 1st July and as on expiry date (23/07/06)

POSITION OF CALL OPTION BUYER/WRITER


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1. DATE 2. STRIKE 3. SPOT 4. 5. STRICK 6. SPOT –


PRI CE PRICE PREMIUM PRICE 5
+PREMIUM
23/06/09 110 129.45 5.85 115.85 13.6

23/06/09 115 129.45 3.1 118.1 11.35

23/06/09 120 129.45 1.3 121.3 8.15

All OPTIONS ARE IN-THE-MONEY

POSITION OF PUT OPTION BUYER/LOWER

1. DATE 2. STRIKE 3. SPOT 4. 5. STRICK 6. SPOT –


PRI CE PRICE PREMIUM PRICE 5
-PREMIUM
11/06/09 110 121.10 _ 110 11.1

11/06/09 115 121.10 0.85 114.15 6.95

11/06/09 120 121.10 2.6 117.4 3.5

All OPTIONS ARE OUT-OF-THE-MONEY

If the OPTION is purchased on 1st July and as on expiry date (23/07/2006)

POSITION OF PUT OPTION BUYER/WRITER

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2. STRIKE 3. SPOT 4. 5. STRICK 6. SPOT –


1. DATE PRI CE PRICE PREMIUM PRICE 5
-PREMIUM
23/06/09 110 129.45 1.5 108.5 20.95

23/06/09 115 129.45 4.4 110.6 18.85

23/06/09 120 129.45 _ 120.00 9.45

ALL OPTIONS ARE OUT-OF-THE-MONEY

CHAPTER-5

SUMMARY

 Derivatives market is on innovation to cash market, approximately its daily turn


over reaches to equal stage of cash market. The average daily turn over of the
NSE derivative segment is.

 Presently the available scrip sin futures and options segment are in cash market.
The profit/ loss of the investor depends on the market price of the under lying
asset. the investor may incur huge profit or he may incur huge loss.

 But in derivative segment the investor enjoys huge profit with limited down side.

 In cash market the investor as to pay the total money. But in derivatives the
investor as to pay premium or margins which are some percentage of total
money.

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 Derivatives are mostly used for hedging purpose.

 In derivatives segment the profit/loss of the option holder/option writer is purely


depended on the fluctuations of the under lying assets

CONCLUSION

 at present scenario the derivatives market is increased to a grate position.

Approximately its daily turnover reaches to the equal stage of cash market, the

avgas daily turnover of the NSE in derivatives market is 4,00,000(vol).

 Presently the available scraps in the futures and options segment are 55.

 The derivative market is newly stated in India and its is not know by every one so

SEBI should take necessary actions to create awareness among investors.

 In cash market the profit/loss of the investor may be unlimited, but in the

Derivative market.

 The investor can enjoy unlimited profits and minimize the losses incurred.

 In derivatives market the investors enjoys the privilege of paying less amount in

case of options.

 Derivatives are mostly used for hedging purpose.

 In derivatives market the profit/loss of the investors depends upon the market

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fluctuations, especially with the prices of the securities.

 In bearish market the investor is suggested to option for put options in order to

minimized his losses.

 In bullish market the investor is suggested to option for call options in order to

maximize the profits.

BIBLIOGRAPHY

BOOKS:

Futures and options Vohra & bogri

Future and options Mahajan.

DERIVATIVES CORE MODULE WORK BOOK

NCFM (NSE’S CERTIFICATION IN FINANCIAL MARKETS)

NEWS PAPERS:

THE ECONOMIC TIMES

BUSINESS STANDARDS

BUSINESS LINE

And various newspapers.

Websites:

www.NSEindia.com

www.BSEindia.com

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www.dervativesindia.com

www.peninsular.com

www.5paisa.com

www.sify.com

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