INTRODUCTION

A derivative is a security whose value depends on the value of to gather more basic underlying variable. These are also known as contingent claims. Derivative securities have been very successful innovation in capital market. The emergence of the market for derivative products, most notably forwards, futures and options, can be traced back to the willingness of risk averse economic agents to guard themselves against uncertainties arising out of fluctuations in asset prices. By their very nature, financial markets are marked by a very high degree of volatility. Through the use of derivative products, is possible to partially or fully transfer price risks by a locking-in asset prices. As instruments of risk management, these generally do not influence the fluctuation in the underlying asset prices. However, by locking-in asset prices, derivative products minimize the impact of fluctuations in asset prices on the profitability and cash flow situation of risk-averse investor. Derivatives are risk management instruments, which drive their value form underlying asset. Underlying asset can be bullion, index; share, currency, bonds, interest etc.

NEED OF THE STUDY:

Different investment avenues are available investors. Stock market also offers good investment opportunities to the investor alike all investments, they also carry certain risks. The investor should compare the risk and expected yields after adjustment off tax on various instruments while talking investment decision the investor may seek advice from expertly and consultancy include stock brokers and analysts while making investment decisions. The objective here is to make the investor aware of the functioning of the derivatives. Derivatives act as a risk hedging tool for the investors. The objective if to help the investor in selecting the appropriate derivates instrument to the attain maximum risk and to construct the portfolio in such a manner to meet the investor should decide how best to reach the goals from the securities available. To identity investor objective constraints and performance, which help formulate the investment policy? The develop and improvement strategies in the with investment policy formulated. They will help the selection of asset classes and securities in each class depending up on their risk return attributes.

OBJECTIVES

To study the various trends in derivatives in derivative market. To study the role of derivatives in Indian financial market. To study in detail the role of futures and options. To find out profit/loss of the option holder and option writer. To study about risk management with the help of derivatives.

SCOPE OF THE STUDY:

The study is limited to Derivatives with special reference to futures and options in the Indian context; the study is not based on the international perspective of derivative markets. The study is limited to the analysis made for types of instruments of derivates each strategy is analyzed according to its risk and return characteristics and derivatives performance against the profit and policies of the company.

METHODOLOGY
To achieve the objective of studying the stock market data has been collected. Research methodology carried for this study can be two types 1. Primary data 2. Secondary data

PRIMARY DATA
The data, which is being collected for the first time and it is the original detain this project the primary data has been taken from NSE staff and guide of the project.

SECONDARY DATA
The secondary information is mostly taken from websites, books, & journals etc.

LIMITATION OF THE STUDY

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 The subject of derivative if vast it requires extension study and research to understand the debt of the various instrument operating in the market only a recent plenomore. But various international examples have also been added to make the study more comfortable. There are various other factors also which define the risk and return preference of an investor however the study was only contained towards the risk minimization and profit maximization objective of the investor. The derivative market is a dynamic one premiums, contract rates strike price fluctuate on demand and supply basis. Data related to last few trading months was only consider and interpreted.

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

Derivatives defined:
Derivative is a product whose value is derived from the value of one or more basic variables, called bases (underlying asset, index, or reference rate), in a contractual manner. The underlying asset can be equity, forex, commodity or any other asset. For example: wheat farmers may wish to sell there heaviest at a future date to eliminate the risk of a change in prices by that date. Such a transaction is an example of a derivative. The price of this derivative is driven by the spot price of wheat which is the underlying. In the Indian context the Securities Contracts (Regulation) Act, 1956(SCA) defines derivatives to include

1. A security derived from a debt instrument, share and loan whether secured or unsecured, risk instrument or contract for differences or any other form of security. 2. A contract, which derives its value from the prices, or index of prices, of underlying securities. Derivatives are securities under the SC A and hence the regulatory framework under the SC A governs the trading of derivatives.

Definitions
A Derivative can be defined as a financial instrument whose value depends on (or derives from) the value of other, more basic underlying variables. - John C. Hull A Derivative is simply a financial instrument (or even more simply an agreement between two people) which has a value determined by the price of something else. - Robert L. McDonald Derivatives are financial instruments whose value is derived from its underlying it may be stock, commodity, gold, Index, etc. Derivatives give an opportunity to buy or sell the underlying at a future date but at a pre-specified price decided at the date of entry of the contract.

Functions
The following are the various functions that are performed by the derivatives markets. They are

1. Prices in an organized derivatives market reflect the perception of market participants about the future and lead the prices of the underlying asset to the perceived future level. 2. Derivatives markets help to transfer risks from those who have them but may not like them to those who want them. 3. Derivatives market helps increase savings and investments in the long run. 4. Derivatives trading act as catalyst for new entrepreneurial activity.

Advantages
1. Transactional efficiency-greater liquidity and lower cost. 2. Price discovery-dissemination of price information 3. Risk management-transfer of risks.

Characteristics of derivatives
1. Their value is derived from an underlying instrument such as stock index, currency, etc. 2. They are vehicles for transferring risk. 3. They are leveraged instruments

Participants
There are three broad categories of participants participating in the derivative segment They are Hedgers: Hedgers are investors who would like to reduce risk. Hedges seek to protect themselves against price changes in a commodity in which they have an interest.

Speculators: Speculators bet on the future price movements of an asset. Derivatives give them an extra leverage that they can increase both the potential gains and losses. Speculators are major players in the markets, without whom the market probably would ever exist. Arbitrageurs: These are specialized in making purchase and sales in different markets at the same time and there by make profits by the differences in the prices between two countries i.e. they take the advantage of the discrepancy between prices in two different markets.

Functions
The following are the various functions that are performed by the derivatives markets. They are: Prices in an organized market reflect the perception of market participants about the future and lead the prices of the underlying asset to the perceived future level. Derivatives market help to transfer risks from those who have them but may not like them to those who want them. Derivatives markets help increase savings and investments in the long run. Derivatives trading act as a catalyst for new entrepreneurial activity.

ADVANTAGES Risk management:

Risk management is not about the elimination of risk rather it is about the management of risk. Financial derivatives provide a powerful tool for limiting risk that individual an organizations face in ordinary conduct of their business. Successful risk management with derivatives requires are

thorough understandings of principles that govern the pricing of financial derivatives. Used correctly, derivatives can save costs and increased returns. Trading Efficiency: Derivatives allow for the free trading of individual risk components, there by improving market efficiency. Traders can use a position in one or more financial derivatives as a substitute for a position in the underlying instruments. In many instances traders find financial to more attractive instrument than the underlying security is reason being the greater amounts of liquidity in the market afford by the financial derivatives and lowered transaction costs associated with a trading a financial derivative as compared to the cost of trading the underlying instrument. Speculation: Serving as a speculative tool is not the only use, and probably not the most important use, of financial derivatives. Financial derivatives are considered to be risky. However, these instrument acts as a powerful instrument for knowledgeable traders to expose themselves to properly calculated and well understood risks in pursuit of a reward i.e. profit.

Types of Derivatives
Following are the various types of derivatives:

Forwards
A forward contract is a customized contract between two entities, where settlement takes place on a specific date on the future at todays pre-agreed price.

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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 contract are special types of forward contracts in the sense that the former or standardized exchange-traded contracts.

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

Warrants
Options generally have lives up to one year, the majority of the options traded on options exchanges having a maximum maturity of 9 months. Longer- dated options are called warrants and are generally trade over-thecounter.

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

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Swaps
Swaps are private agreements between two parties to exchange cash flows in the future according to her pre-arranged 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 flows between the parties in the same currency.

Currency swaps
These entail swapping both principal and interest between the parties, with the cash flows in one direction being in a different currency than those in the opposite direction.

Swap options
Swap options are options to buy or sell a swap that will become operative at the expiry of the options. Thus a swap option is an option on a forward swap. Rather than have calls and puts, the swap options market has receiver swap options and payer swap options. A receiver swap option is an option to receive fixed and pay floating. A prayer swap option is an option to pay fixed and receive floating.

Forwards
The salient features of forward contracts are: They are bilateral contracts and hence exposed to counter-party risk. Each contract is custom designed, and hence is unique in terms of contract size, expiration date and the asset type and quality. The contract price is generally not available in public domain. On the expiration date, the contract has to be settled by delivery of the asset. If the 12

party wishes to reverse the contract, it has to compulsorily go to the same counter party, which often results in high prices being charged. Forward contracts are very useful in hedging and speculation.

Limitations of forward markets

Forward markets world-wide are afflicted by several problems: Lack of centralization of trading Liquidity, and Counter party risk is a very serious issue. The basic problem is that of too much flexibility and generality.

Futures
Defined futures: A future contract is on by which one party agrees to Buy from/Sell to the other party at a specified future time, on a asset at a price agreed at the time of the contract and payable on maturity date. The agreed price is known as the strike price. The underlying asset can be a commodity, currency debt or equity securities etc. The standardized items on a futures contract are: Quantity of the underlying Quality of the underlying The date and the month of delivery The units of price quotation and minimum price change

Distinctive future
Trade on an organized exchange

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 Standardized contract terms More liquid Requires margin payments Follows daily settlement 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. Multiplier: It is pre-determined value, used to arrive as the contract size. It is price per index point. Contract cycle: The period over which a contract trades. The index futures contracts on the NSE have one-month, two-months and three-months expiry cycles, which expire on the last Thursday of the month. Thursday, a new contract having a three-month expiry is introduced for trading. Expiry date: it is the date specified in the futures contract. This is the last day on which the contract will be traded, at the end of which it will cease to exist. Contract size: The amount of asset that has to be delivered under one contract. For instance, the contract size on NSEs futures market is 200 Nifties. Basis: In the context of financial futures, basis is the differences of 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

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Cost of carry: The relationship between futures prices and spot prices can be summarized in terms what is known as the cost of carry. This measures the storage cost plus the interest that is paid to finance the asset less the income earned on the asset. Open Interest: Total outstanding long or short positions in the market at any specific time. As total long positions for market would be equal to short positions, for which calculation of open Interest, only one side of the contract is counted. Initial margin: the amount that must be deposited in the margin account at the time a futures contract is first entered into is known as initial margin. Making-to-market: In the futures market, at the end of each trading day, the margin account is adjusted to reflect the investors 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 ensure that the balance in the margin account never becomes negative. If the balance in the 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. Cash settled: Open position at the expiry of the contract is cash settled. Physical delivery: Open position at the expiry of the contract is settled through delivery of the underlying asset. In the futures market, the physical delivery of the underlying is very rare.

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Parties in futures contracts

There are two parties in the future contract, the buyer and the seller. The buyer of the contract is one who is LONG on the futures contract and the seller of the contract is one who is SHORT on the futures contract. The payoff for the buyer and seller of the futures contracts: Pay-off for a buyer of futures:

P E2 F E1

Options
Introduction: Option is a type of a contract between two persons where one grants the other the right to buy a specific asset at a price within a specified period of time. Alternatively the contract may grant the other person the right to sell a specific asset at a price with in a specific period of time. In order to have this right, the option buyer has to pay the seller of option premium. The assets on which options can be derived are stocks, commodities, indexes, etc., and if the underlying asset is the non-financial asset the options are Nonfinancial options like Commodity options.

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Properties of options
Options have several unique properties that set them apart from other securities. The following are the properties of options. Limited loss High leverage Limited life

Distinctive features
Exchange traded with notation. Exchange defines the product same as futures. Strike price is fixed, price moves Price is always positive Nonlinear payoff Only short at risk The purchase of an option requires an up-front payment.

Elementary option strategies

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

R S E2 OTM ATM

ITM E1

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S = strike price SP = Premium/profit E1 = Spot price 1 E2 = Spot price 2

ITM = In-the-Money ATM = At-the-Money OTM = Out-of the Money SR = Profit at Spot price E2

Case1: (Strike price > Strike price) As the spot price [E1] of the underlying asset is more than strike price [S]. The buyer gets the profit increases more than [E1] then the profit also increase more than SR. Case 2: (Strike price < Strike price) As the spot price [E2] of the price underlying asset is less than strike price [S]. The buyer gets loss of [SP], if price goes down less than [E2] then also his loss is limited to his premium [SP]. Pay-off profile for seller of a call option: The pay-off of seller of the call option depends on the spot price of the underlying asset. The following graph shows the pay-off of seller of a call option.

P ATM ITM E1 SOTM R E2

S = Strike price SP = Premium/profit E1 = Spot price 1 E2 = Spot price 2

ITM = In-the-Money ATM = At-the-Money OTM = Out-of the Money SR = Profit at Spot price E2

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Case1: (Strike price < Strike price) As the spot price [E1] of the underlying asset is more than strike price [S]. The seller gets the profit of [SP], if price decreases less than [E1] then also profit of the seller does not exceed [SP]. Case 2: (Strike price > Strike price) As the spot price [E2] of the price underlying asset is more than strike price [S]. The seller gets loss of [SR], if price goes more less than [E2] then also the loss of the seller increases more than [SR]. Pay-off profile for buyer of a put option: The pay-off of seller of the call option depends on the spot price of the underlying asset. The following graph shows the pay-off of seller of a put option.

R ITM E1 S OTM ATM P ITM = In-the-Money ATM = At-the-Money OTM = Out-of the Money SR = Profit at Spot price E2 E2

S = Strike price SP = Premium/profit E1 = Spot price 1 E2 = Spot price 2

Case1: (Strike price < Strike price)

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As the spot price [E1] of the underlying asset is less than strike price [S]. The buyer gets the profit of [SR], if price decreases less than [E1] then also profit increases more than [SR]. Case 2: (Strike price > Strike price) As the spot price [E2] of the underlying asset is more than strike price [S]. The buyer gets loss of [SP], if price goes more than [E2] then the loss of the buyer is limited to his premium [SP]. Pay-off profile for seller of a put option: The pay-off of seller of the call option depends on the spot price of the underlying asset.

The following graph shows the pay-off of seller of a call option.

P ATM E1 S ITM E2

S = Strike price SP = Premium/profit E1 = Spot price 1 E2 = Spot price 2

ITM = In-the-Money ATM = At-the-Money OTM = Out-of the Money SR = Profit at Spot price E2

Case1: (Strike price < Strike price) As the spot price [E1] of the underlying asset is less than strike price [S]. The seller gets the loss of [SR], if price decreases less than [E1] then also loss exceeds more than [SR]. 20

Case 2: (Strike price > Strike price) As the spot [E2] of the price underlying asset is more than strike price [S]. The seller gets profit of [SP], if price goes more than [E2] then the profit of the seller is limited to his premium [SP].

Factors affecting the price of an option:

The following are the various factors, which affect the price of an option they are Stock price: The pay-off from a call option is the amount by which the stock price exceeds the strike price. Call options therefore become more valuable as the stock price increases and vice versa. The pay-off from a put option is the amount by which the strike price exceeds the stock price. Put option therefore become more valuable as the stock price increases and vice versa. Strike price: In the case of a call, as the strike price increases, the stock price has to make a larger upward move for the option to go In-the-money. Therefore, for a call as the strike price increases options become less valuable and strike price decreases, options become more valuable. Time to expiration: Both put and call American options become more valuable as the time to expiration increases. Volatility: The volatility of a stock price is a measure of uncertain about futures stock price movements. As volatility increases, the change of that the stock will

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do very well or very poor increases. The value of both calls and puts therefore increases as volatility increase. Risk free interest rate: The put option prices decline as the risk-free rate increase where as the prices of calls always increase as the risk-free interest increases. Dividends: Dividends have the effect of reducing the stock price on the ex-dividend date. This has a negative effect on the value of call options and a positive affect on the value of put options.

Option terminology
Strike price: The price specified in the options contract is known as the strike price or the exercise price. Option price: Option price is the price, which the option buyer pays to the option seller. It is also referred to as the 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. In-the-money option: An in-the-money (ITM) option is an 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 the money when the current index 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, the 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

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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-the-money (OTM) option is an option that would lead to a negative cash flow, if it were 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. Intrinsic value of an option: The option premium can be broken down into two components intrinsic value and time value. The intrinsic value of a call is the amount the option is ITM, if it is ITM. If the call is OTM, its intrinsic value is zero. Time value of an option: The time value of an option is the difference between its premium and its intrinsic value. Both calls and puts have time value. An option that is OTM or ATM has only time value. Usually, the to expiration, the greater is an options time value, all else equal. At expiration, an option should have no time value.

Futures and Options

Futures Futures price: Agreed-upon price at maturity. Long position: Agree to purchase. Short position: Agree to sell. Profit or loss is unlimited to both buyer and seller of the Futures.

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Stock Futures: The underlying to these contracts are the individual stocks like Satyam, Infosys, HCL, HPCL, Wipro, etc.. Index Futures: The underlying to these contracts are indices like S&P (Standard and Poors), CNX, Nifty, Sensex

Implied cost of carry:

(Future Price spot price) / spot price It indicates the notional cost the investor would have incurred in carrying the stock.

Options
Option class: All listed options of a particular type (call or put) on a particular underlying instrument. E.g.: Infosys calls or Infosys puts. Option series: All options of a given class with the same expiration date and strike price. Open interest: The total number of options contract outstanding in the market at any given point of time. Covered option: If an investor takes a position in options and also on its underlying then his position is covered. E.g.: If investor buys a put on Reliance and also possesses Reliance shares then his position is covered. This is protective in nature. Naked option: If the investor takes a position only in option with out possessing its underlying then its naked option. E.g.: If investor buys either a put or call option on Reliance with out possessing the underlying then it is a naked option. This is speculative in nature.

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Buy call Option A right to buy At set strike For an expiry Paying a price Sans a duty Settle in cash

Buy Put Option A right to sell At set strike For an expiry Paying a price Sans a duty Settle in cash

Sell Call Option A duty to buy At set strike For an expiry Receive price a

Sell Put Option A duty to At set strike For an Receive a Sans a right Settle in

Sans a right Settle in cash

Particulars Contract Size Profits Losses Type of Trade Counter party Risk Price

Futures Standardized Unlimited Unlimited Exchange traded Does not exist Margin is paid, No cost

Options Standardized Unlimited to buyer Limited to Buyer Exchange traded Does not exist Premium is paid, This is the price of the Right.

Derivatives are the contracts for a limited time period say one month, two months, and three months. The last Thursday of the month is expiry day for those contracts. The proceeding day to last Thursday of the month only trading will starts and new contracts will exist. One month trading contract is called Near month contract, Two month trading contract is called Middle month contract, and Three months trading contract is called Far month contract. At any point of time there would be three contracts of varying maturities. The maximum maturity of the month contract will be one (1) month and the maximum of a far month contract will be three (3) months. An example on PUT option:

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X buys one April month put option on NIFTY at the strike price of Rs.1470/- of Infosys at a premium of Rs.35/-. 1). If on the date of expiry the market price is less than 1470, the put option will be economically viable and hence exercised. 2). The investor will earn profits once the share price falls below Rs. 1435/(strike price premium [i.e. 1470-35). 3). Suppose price of NIFTY is at 1430 on expiry date, the investor who will get a profit of Rs.5/-, will exercise the put option. [(Strike price spot price) - premium] [(1470 = 1430) - 35]. Long on PUT (buyers perspective) Pay-off on NIFTY long put for different spot prices Strike Price 1470/ 35/Spot Premium Strike Profit/Loss Price Price 1380 35 1470 55 1390 35 1470 45 1400 35 1470 35 1410 35 1470 25 1420 35 1470 15 1430 35 1470 5 1440 35 1470 -15 1450 35 1470 -25 1460 35 1470 -35 1470 35 1470 -35 1480 35 1470 -35 1490 35 1470 -35 Premium Exercised Yes Yes Yes Yes Yes Yes Yes Yes Yes Indifferent No No

An example on CALL option: Y buys one April month call option on NIFTY at the strike price of Rs.1500/- of Infosys at a premium of Rs.35/-.

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1). If on the date of expiry the market price is more than 1500, the call option will be economically viable and hence exercised. 2). The investor will earn profits once the share price exceeds more than the Rs. 1535/- (strike price + premium [i.e. 1500+35]). 3). Suppose price of NIFTY is at 1540 on expiry date, the investor who will get a profit of Rs.5/-, will exercise the call option. [Spot price Strike price) - premium] [(1540 - 1500) - 35]. Long on Call (buyers perspective)

Pay-off on Nifty long can for different spot Prices Strike Price 1500/35/Spot Premium Strike Profit/Loss Price Price 1450 35 1500 -35 1460 35 1500 -35 1470 35 1500 -35 1480 35 1500 -35 1490 35 1500 -35 1500 35 1500 -35 1510 35 1500 -25 1520 35 1500 -15 1530 35 1500 -5 1540 35 1500 5 1550 35 1500 15 1560 35 1500 25

Premium Exercised No No No No No Indifferent Yes Yes Yes Yes Yes Yes

Protective PUT
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Long on STOCK + Long on PUT Instead of buying the stock, I can also buy a future, in which case my out flow will be limited to the margin. If price of the stock goes up by more than the premium paid then profits are unlimited. If price of the stock goes down then maximum loss is confined to the (spot price strike price + premium paid) Down side is limited and upwards unlimited.

Example: If the HCL technologies price is Rs, 140/-. Buy at Rs.130/- of April put @ 5/At Time T Price 100 110 120 130 140 150 160 170 180

Long Stock -40 -30 -20 -10 0 10 20 30 40

Long Put 25 15 5 -5 -5 -5 -5 -5 -5

Profit / Loss -15 -15 -15 -15 -5 5 15 25 35

Covered call: Long on stock + short on call Instead of buying the stock, buyer can also buy a future, in which case my outflow will be limited to the margin.

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If price of the stock goes down, the loss on stock is partially offset by premium receipt on call, if the price of the stock goes up, loss on call is offset by the gain in the stock. Example: TISCO Companys share price is Rs.860/Sell at Rs.900/- of April call of Rs.@20/-

At Time T Price 820 840 860 880 900 920 940

Long stock -40 -20 0 20 40 60 80

Short call 20 20 20 20 20 20 20

Profit / Loss -20 0 20 40 60 60 60

Example Illustration
Two parties, Jack and Jill enter into a contract to buy and sell 100 shares of Infosys at Rs 3500 each, two months down the line from the date of contract. Assuming that Jack is the buyer and Jill is the seller. In the given example, both the parties concerned have determined product, quantity of the product, price of the product and time of the delivery in advance. Delivery and payments will take place as per the terms of this contract on the designated date and place. This is a simple example of forward contract. Forward contracts are being used in India on large scale in the foreign exchange market to cover the currency risk.

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Forward contracts being negotiated by the parties on one to one basis, offer the tremendous flexibility to them to articulate the contract in terms of price, quantity, quality, delivery time and place. However, forward contracts suffer from poor liquidity and default risk.

Limitations
Limitations of forward markets Forward markets world-wide are afflicted by several problems:

Lack of centralization of trading, Illiquidity, and Counterparty 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. Counterparty 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 contacts, and hence avoid the problem of illiquidity, still the counterparty risk remains a very serious issue.

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Distinctive Future
Distinction between futures and forwards contracts Forward contracts are often confused with futures contracts. The confusion is primarily because both serve essentially the same economic functions of allocating risk in the presence of future price uncertainty. However futures are a significant improvement over the forward contracts as they eliminate counterparty risk and offer more liquidity. Distinction between futures and forwards

Futures Trade on an organized exchange Standardized contract terms Hence more liquid Requires margin payments Follows daily settlements

Forwards OTC in nature Customized contract terms hence less liquid No margin payment Settlement happens at end of period

The date and the month of delivery The units of price quotation and minimum price change Location of settlement

Future Terminology
Spot price: The price at which an asset trades in the spot market. Futures price: The price at which the futures contract trades in the futures market.

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Contract cycle: The period over which a contract trades. The index futures contracts on the NSE have one-month, two-months and three-months expiry cycles which expire on the last Thursday of the month. Thus a January expiration contract expires on the last Thursday of January and a February expiration contract ceases trading on the last Thursday of February. On the Friday following the last Thursday, a new contract having a three-month expiry is introduced for trading. Expiry date: It is the date specified in the futures contract. This is the last day on which the contract will be traded, at the end of which it will cease to exist. Contract size: The amount of asset that has to be delivered under one contract. For instance, the contract size on NSEs futures market is 200 Nifties. 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 futures contract is first entered into is known as initial margin.

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Marking-to-market: In the futures market, at the end of each trading day, the margin account is adjusted to reflect the investors 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 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.

Types of futures
Stock index futures

Stock index futures are most popular financial futures, which have been used to hedge or manage the systematic risk by the Investors of the stock market. They are called Hedgers, who own portfolio of securities and are exposed to systematic risk. Stock index is the apt hedging asset since, the rise or fall due to systematic risk is accurately shown in the stock index. Stock index futures contract is an agreement to buy or sell a specified amount of an underlying stock index traded on a regulated futures exchange for a specified price at a specified time in future. Stock index futures will require lower capital adequacy and margin requirement as compared to margins on carry forward of individual scrips. The brokerage cost on index futures will be much lower. Savings in cost is possible through reduced bid-ask spreads where stocks are traded in 33

packaged forms. The impact cost will be much lower incase of stock index futures as opposed to dealing in individual scrips. The market is conditioned to think in terms of the index and therefore, would refer trade in stock index futures. Further, the chances of manipulation are much lesser. The stock index futures are expected to be extremely liquid, given the speculative nature of our markets and overwhelming retail participation expected to be fairly high. In the near future stock index futures will definitely see incredible volumes in India. It will be a blockbuster product and is pitched to become the most liquid contract in the world in terms of contracts traded. The advantage to the equity or cash market is in the fact that they would become less volatile as most of the speculative activity would shift to stock index futures. The stock index futures market should ideally have more depth, volumes and act as a stabilizing factor for the cash market. However, it is too early to base any conclusions on the volume are to form any firm trend. The difference between stock index futures and most other financial futures contracts is that settlement is made at the value of the index at maturity of the contract. Example: If BSE Sensex is at 6800 and each point in the index equals to Rs.30, a contract struck at this level could work Rs. 204000(6800x30). If at the expiration of the contract, the BSE Sensex is at 6850, a cash settlement of Rs.1500 is required ((6850-6800) x30). Stock Futures With the purchase of futures on a security, the holder essentially makes a legally binding promise or obligation to buy the underlying security at some point in the future (the expiration date of the contract). Security futures do

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not represent ownership in a corporation and the holder is therefore not regarded as a shareholder. A futures contract represents a promise to transact at some point in the future. In this light, a promise to sell security is just as easy to make as a promise to buy security. Selling security futures without previously owning them simply obligates the trader to sell certain amount of the underlying security at some point in the future. It can be done just as easily as buying futures, which obligates the trader to buy a certain amount of the underlying security at some point in future. Example: If the current price of the ACC share is Rs.170 per share. We believe that in one month it will touch Rs.200 and we buy ACC shares. If the price really increases to Rs.200, we made profit of Rs.30 i.e. a return of 18%. If we buy ACC futures instead, we get the same position as ACC in the cash market, but we have to pay the margin not the entire amount. In the above example if the margin is 20%, we would pay only Rs.34 initially to enter into the futures contract. If ACC share goes up to Rs.200 as expected, we still earn Rs.30 as profit. Pricing futures Stock index futures began trading on NSE on the 12th June 2000. Stock futures were launched on 9th November 2001. The volumes and open, interest on this market has been steadily growing. Looking at the futures prices on NSEs market, have you ever felt the need to know whether the quoted prices are a true reflection of the price of the underlying index/stock? Have you wondered whether you could make risk-less profits by arbitraging between the underlying and futures markets? If so, you need to know the 35

cost-of-carry to understand the dynamics of pricing that constitute the estimation of fair value of futures.

The cost of carry model

We use fair value calculation of futures to decide the no-arbitrage limits on the price of a futures contract. This is the basis for the cost-of-carry where the price of the contract is defined as:

F=S+C Where: F=Futures price S=Spot price C=Holding costs or carry costs

This can also be expressed as: F=S (1 + r)T Where: r=Cost of financing T=time till expiration If F < S(1 + r)T or F > S(1 + r)T , arbitrage opportunities would exist i.e., whenever the futures price moves away from the fair value, there would be chances for arbitrage. We know what the spot and futures prices are, but what are the components of holding cost? The components of holding cost vary with contracts on different assets. At times the holding cost may even be negative. In the case

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of commodity futures, the holding cost is the cost of financing plus cost of storage and insurance purchased etc. In the case of equity futures, the holding cost is the cost of financing minus the dividends returns.

Pricing futures contracts on commodities

Let us take an example of future contracts on a commodity and work out the price of the contract. The spot price of silver is Rs.7000/kg. If the cost of financing is 15% annually, what should be the futures price of 100 gms of silver one month down the line? Let us assume that were on 1 st January 2002. How would we compute the price of a silver futures price is nothing but the spot price plus the cost-of-carry. Let us first try to work out the components of the cost-of-carry model. 1. What is the spot price of silver? The spot price of silver, S=Rs.7000/kg. 2. What is the cost of financing for a month? (1 + 0.15) 30/365. 3. What are the holding costs? Let us assume that the storage cost=0. In this case the fair value of the futures price, works out to be = Rs.708. F = S (1 + r )T + C = 700(1.15)30/365 = Rs.708 If the contract was for a three-month period i.e. expiring on 30th march, the cost of financing would increase the futures price. Therefore, the futures price would be F = 700(1.15)30/365 = Rs.724.5 On the other hand, if the one-month contract was for 10,000 kg. Of silver instead of 100 gms, then it would involve a non-zero storage cost, and the price of the futures contract would be Rs.708 plus the cost of storage.

Pricing equity index futures

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A futures contract on the stock market index gives its owner the right and obligation to buy or sell the portfolio of stocks characterized by the index. Stock index futures are cash settled; there is no delivery of the underlying stocks. The main differences between commodity and equity index futures are that: There are no costs of storage involved in holding equity. Equity comes with a dividend stream, which is a negative cost if you

are long the stock and positive costs if you are short the stock. Therefore, Cost of carry = Financing cost Dividends. Thus, a crucial aspect of dealing with equity futures as opposed to commodity futures is an accurate forecasting of dividends. The better the forecast of dividend offered by a security, the better is the estimate of the futures price.

Pricing index futures given expected dividend amount

The pricing of index futures is also based on the cost-of-carry model, where the carrying cost is the cost of financing the purchase of the portfolio underlying the index, minus the present value of dividends obtained from the stocks in the index portfolio.

Illustration
Nifty futures trade on NSE as one, two and three-month contracts. Money can be borrowed at a rate of 15% per annum. What will be the price of a new two-month futures contract on Nifty? 1. Let us assume that M&M will be declaring a divident of Rs.10 per share after 15 days of purchasing the contract. 2. 3. Current value of Nifty is 1200 and Nifty trades with a multiplier of 200. Since Nifty is traded in multiples of 200, value of the contract is 200 * 1200 = Rs. 240,000.

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4.

If M&M has a weight of 7% in Nifty, its value in Nifty is Rs.16,800 i.e. (240,000 * 0.07).

5.

If the market price of M&M is Rs.140, then a traded unit of Nifty involves 120 shares of M&M i.e.(16,800/140).

6.

To calculate the futures price, we need to reduce the cost-of-carry to the extent of dividend received. The amount of dividend received is Rs. 1200 i.e(120 * 10). The dividend

is received 15 days later and hence compounded only for the remainder of 45 days. To calculate the futures price we need to compute the amount of dividend received per unit of Nifty. Hence we divide the compounded dividend figure by 200. Thus, futures price F= 1200(1.15)60/365 (120x10(1.15)45/365)/200 = Rs.1221.80 Pricing index futures given expected dividend yield If the dividend flow throughout the year is generally uniform, i.e. if there are few historical cases of clustering of dividends in any particular month, it is useful to calculate the annual dividend yield F=S (1 + r q )T Where: F=futures price S=spot index value R=cost of financing Q=expected dividend yield T=holding period

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Example: A two-month futures contract trades on the NSE. The cost of financing is 15% and the dividend yield on Nifty is 2% annualized. The spot value of Nifty is 1200. What is the fair value of the futures contract? Fair value = 1200(1 + 0.15 0.02)60/365 = Rs. 1224.35

Definition
Option is a contract between two persons where one grants the other the right to buy a specific asset at a specific price within a stipulated time period. Alternatively the contract may grant the other person the right to sell a specific asset at a specific price within a specific time period. In order to have this right, the option buyer has to pay the seller of the option premium. The assets on which the option can be derived are stocks, commodities, indexes, etc. If the underlying asset is the financial asset, then the options are financial options like stock options, currency options, index options etc, and if the underlying is the non-financial asset the options are non-financial options like commodity options. Properties of options: Options have several unique properties that set them apart from other securities. The following are the properties of options: Limited Loss High Leverage Potential Limited Life

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Characteristics of Options
The following are the main characteristics of options: 1. Options holders do not receive any dividend or interest. 2. Options yield only capital gains. 3. Options holder can enjoy a tax advantage. 4. Options are traded on O.T.C and in all recognized stock exchanges. 5. Options holders can control their rights on the underlying asset. 6. Options create the possibility of gaining a windfall profit. 7. Options holders can enjoy a much wider risk-return combinations. 8. Options can reduce the total portfolio transaction costs.

Illustration
On 1 July 2000, S sells a call option to L for a price of Rs.3.25. Now L has the right to come to S on 31 Dec 2000 and buy 1 share of Reliance at Rs.500. Here, Rs.3.25 is the option price, Rs.500 is the exercise price and 31 Dec 2000 is the expiration date L does not have to buy 1 share of Reliance on 31 Dec 2000 at Rs.5000 from S (unlike a forward/futures contract which is binding on both sides). It is only if Reliance is above exercising the option, S is obliged to live up to his end of the deal: i.e. S stands ready to sell a share of Reliance to L at Rs.500 on 31 Dec 2000. Hence, at option expiration, there are two outcomes that are possible: an option could be profitably exercised, or it could be allowed to die unused. If the option lapses unused, then L has lost the original option price (Rs.3.25) and S has gained it. When L and S enter into a futures contract, there is not payment (other than initial margin). In contrast, the option has positive price, which is paid in full on the date that the option is purchased. Options come in two varieties European and American. In a

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European option, the holder of the option can only exercise his right (if he should so desire) on the expiration date. In an American option, he can exercise this right anytime between purchase date and the expiration date. The price of an option is determined on the secondary market. An option always has a nonnegative value: i.e., the value of an option is never negative.

History of options
Options made their first major mark in financial history during the tulipbulb mania in seventeenth century Holland. It was one of the most spectacular get rich quick binges in history. The first tulip was brought into Holland by a botany professor from Vienna. Over a decade, the tulip became the most popular and expensive item in Dutch gardens. The more popular they became, the more Tulip bulb prices began rising. That was when options came into the picture. They were initially used for hedging. By purchasing a call option on tulip bulbs, a dealer who was committed to a sales contract could be assured of obtaining a fixed number of bulbs for a set price. Similarly, tulip-bulb growers could assure themselves of selling their bulbs at a set price by purchasing put options. Later, however, speculators who found that call options were an effective vehicle for obtaining maximum possible gains on investment increasingly used options. As long as tulip prices continued to skyrocket, a call buyer would realize returns far in excess of those that could be obtained by purchasing tulip bulbs themselves. The writers of the put options also prospered as bulb prices spiraled since writers were able to keep the premiums and the options were never exercised. The tulip-bulb market collapsed in 1636 and a lot speculators lost huge sums of money. Hardest hit were put writers who were unable to meet their commitments to purchase Tulip bulbs. 42

Parties in an options contract

The following are the parties in an option contract. Buyer of the option: The buyer of an option is one who by paying the option premium buys the right but not the obligation to exercise his option on seller or writer. Writer/seller of the option: The writer or seller of a call option/put option is the one who receives the option premium and is there by obligated to sell/buy the asset if the buyer exercises the option on him.

Types of options
The options are classified in to various types on the basis of various variables. The following are the various types of options: I. On the basis of the underlying asset: On the basis of the underlying asset the options are divided into two types:

INDEX OPTIONS
Underlying assert as the index. STOCK OPTIONS: A stock option gives the buyer of the options the right to buy/sell stock at a specified price. Stock options are options on the individual stocks, there are currently more than 50 stocks, that are trading in this segment. II. On the basis of the market movement: On the basis of the market movement the options can be divided into two types. They are:

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CALL OPTION
An investor buys a call option when he seems that the stock price moves upwards. A call option gives the holder of the option the right but not the obligation to buy an asset by a certain date for a certain price.

Illustration
An investor buys 100 European call options on Infosys at the strike price of Rs3500 when the current price of the stock is Rs3400 at a premium of Rs100. If the stock price, on the day of expiry is more than Rs3600 (Strike Price + Cost incurred in form of premium paid), lets us say Rs3800, the buyer of the call option will decide to exercise his option to buy the 100 Infosys shares. If the buyer sells the shares in the market immediately, he will earn Rs200 per share as profit (or Rs20, 000 in the whole of transaction). The seller of the call will have the obligation to deliver the stock. In another scenario, if at the time of expiry stock price falls below Rs3500 say suppose it touches Rs3000, the buyer of the call option will choose to not to exercise his option. In this case the investor loses the premium paid which shall be the profit earned by the seller of the call option.

PUT OPTION
A put option is bought by an investor when he thinks that the stock price moves downwards. A put option gives the holder of the option the right but not the obligation to sell an asset by a certain date for a certain price

Illustration
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An investor buys 100 European put options on Reliance at the strike price of Rs300 when the current price of the stock is Rs280 at a premium of Rs15. If the stock price, on the day of expiry is less than Rs300 (Strike Price + cost incurred in form of premium paid), say Rs270, the buyer of the Put option will decide to exercise his option to sell the 100 Reliance shares. He will buy 100 shares of Reliance from the market @ Rs270/share and sell the same at Rs300 / share, he will earn Rs15 per share (taking premium paid into consideration), as profit or Rs1,500 in the whole of transaction. The seller of the put will have the obligation to buy the stock. In another scenario, if at the time of expiry stock price rises above Rs300 (strike price), say suppose it touches Rs320, the buyer of the put option will choose to not to exercise his option to sell as he can sell in the market at a higher rate. In this case the investor loses the premium paid which shall be the profit earned by the seller of the put option. III. On the basis of exercise of option: On the basis of the exercising of the option, the options are classified into two categories:

AMERICAN OPTION
American options are options that are exercised at any time up to the expiration date most exchanged-traded options are American

EUROPEAN OPTION
European options are options that can be exercised only on the expiration date itself. European options are easier to analyze than American options.

PLAYERS IN OPTION MAKET

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In the option markets, the players fall into four categories: The Exchanges Financial Institution Market Makers Individual(Retail) Investors

What follows is a brief overview of each group along with insights into their trading objectives and strategies.

The Exchanges
The exchange is a place where market makers and traders gather to buy and sell stocks, options, bonds, futures, and other financial instruments. Since 1973 when the Chicago Board Options Exchange first began trading options, a number of other players have emerged. At first, the exchanges each maintained separate listings and therefore didnt trade the same contracts. In recent years this has changed. Now that BSE and NSE both these exchanges list and trade the same contracts, they compete with each other. Nevertheless, even though a stock may be listed on multiple exchanges, one exchange generally handles the bulk of the volume. This would be considered the dominant exchange for that particular option. The competition between exchanges has been particularly valuable to professional traders who have created complex computer programs to monitor price discrepancies between exchanges. These discrepancies, though small, can be extraordinarily profitable for traders with the ability and speed to take advantage. More often than not, professional traders simply use multiple exchanges to get the best prices on their trades.

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Deciding between the two would be simply a matter of choosing the exchange that does the most trading in this contract. The more volume the exchange does, the more liquid the contract. Greater liquidity increases the likelihood the trade will get filled at the best price.

Financial Institutions
Financial institutions are professional investment management

companies that typically fall into several main categories: mutual funds, hedge funds, insurance companies, stock funds. In each case, these money managers control large portfolios of stocks, options, and other financial instruments. Although individual strategies differ, institutions share the same goal to outperform the market. In a very real sense, their livelihood depends on performance because the investors who make up any fund tend to a fickle group. When fund dont perform, investors are often quick to move money in search of higher returns. Where individual investors might be more likely to trade equity options related to specific stocks, fund managers often use index options to better approximate their overall portfolios. For example, a fund that invests heavily in a broad range of tech stocks will use NSE Nifty Index options rather than separate options for each stock in their portfolio. Theoretically, the performance of this index would be relatively close to the performance of a subset of comparable high tech stocks the fund manager might have in his or her portfolio.

Market Makers

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Market makers are the traders on the floor of the exchanges who create liquidity by providing two-sided markets. In each counter, the competition between market makers keeps the spread between the bid and the offer relatively narrow. Nevertheless, its the spread that partially compensates market makers for the risk of willingly taking either side of a trade. For market makers, the ideal situation would be to scalp every trade. More often than not, however, market makers dont benefit from an endless flow of perfectly offsetting for trading techniques that characterize how different market makers trade options. The same market makers depending on trading conditions may employ any or all of these techniques. Day Traders Premium Sellers Spread Traders Theoretical Traders

Day traders
Day traders, on or off the trading screen, tend to use small positions to capitalize on intra day market movement. Since their objective is not to hold a position for extended periods, day traders generally dont hedge options with the underlying stock. At the same time, they tend to be less concerned about delta, gamma, and other highly analytical aspects of option pricing.

Premium Sellers
Just like the name implies, premium sellers tend to focus their efforts selling high priced options and taking advantage of the time decay factor by buying them later at a lower price. This strategy works well in the absence of

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large, unexpected price swings but can be extremely risky when volatility skyrockets.

Spread Traders
Like other market makers, spread traders often end up with large positions but they get there by focusing on spreads. In this way, even the largest of positions will be somewhat naturally hedged. Spread traders employ a variety of strategies buying certain options and selling others to offset the risk. Floor traders primarily use some of these strategies like reversals, conversions, and boxes because they take advantage of minor price discrepancies that often only exist for seconds. However, spread traders will use strategies like butterflies, condors, call spreads, and put spreads that can be used quite effectively by individual investors.

Theoretical Traders
By readily making two-sided markets, market makers often find themselves with substantial option positions across a variety of months and strike prices. The same thing happens to theoretical traders who use complex mathematical models to sell options that are overpriced and buy options that are relatively under priced. Of the four groups, theoretical traders are often the most analytical in that they are constantly evaluating their position to determine the effects of changes in price, volatility, and time.

Individual (Retail)
As option volume increases, the role of individual investors becomes more important because they account for over 90% of the volume. Thats especially impressive when you consider that option volume in February 2000 was 56.2 million contracts an astounding 85% increase over February 1999

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The psychology of the Individual Investor

From a psychological standpoint, individual investors are in interesting group because there are probably as many strategies and objectives as there are individuals. For some, options are a means to generate additional income through relatively conservative strategies such as covered calls. For others, options in the form of protective puts provide an excellent form of insurance to lock in profits or prevent losses from new positions. More risk tolerant individuals use options for the leverage they provide. These people are willing to trade options for large percentage gains even knowing their entire investment may be on the line. In a sense, taking a position in the market automatically means that you are competing with countless investors from the categories described above. While that may be true, avoid making direct comparisons when it comes to your trading results. The only person you should compete with is yourself. As long as you are learning, improving, and having fun, it doesnt matter how the rest of the world is doing.

Pricing options
Option pricing There are two main approaches that are used to replicate an option position and, thus, price an option. The most commonly used is an analytical formula known as the Black Scholes model. The second widely used approach is a methodology known as the binomial model from Ross, Cox and Rubinstein. The binomial option-pricing model is more like process than a formula, in that it is a series of steps that can be used to price an option. Although the two pricing

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models appear to be very different, mathematicians have proven their equivalency through calculations. The Black-Scholes option pricing formulae The black-scholes option pricing model has been one of the most influential formulas in finance since its initial publication in 1973. In 1997, Myron Scholes and Robert Merton won the Nobel prize in Economics for their work in developing the formula. Unfortunately, Fischer Black, the other major contributor, passed away before the announcement of the Nobel awards. Although it has its limitations, the formula is widely used. Black and Scholes start by specifying a simple and well-known equation that models the way in which stock prices fluctuate. This equation called Geometric Brownian Motion, implies that stock returns will have lognormal distribution, meaning that the logarithm of the stocks return will follow the normal (bell shaped) distribution. Black and Scholes then propose that the options price is determined by only two variables that are allowed to change: time and the underlying stock price. The other factors the volatility, the exercise price, and the risk-free rate do affect the options price but they are not allowed to change. By forming a portfolio consisting of a long position in stock and a short position in calls, the risk of the stock is eliminated. This hedged portfolio is obtained by setting the number of shares of stock equal to the approximated change in the call price for a change in the stock price. This mix of stock and calls must be revised continuously, a process known as delta hedging.

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Black and Scholes then turn to a little-known result in a specialized field of probability known as stochastic calculus. This result defines how the option price changes in terms of combination of options and stock should grow in value at the risk-free rate. The result boundary condition on the model that requires the option price to converge to the exercise valued at expiration. The end result is the Black and Scholes model. The original Black-Scholes model is based on the following assumptions: 1. The option is European style. 2. The evolution of share prices follows a continuous random process. 3. The model is based on a lognormal distribution of stock prices. 4. No commissions or taxes are charged. 5. Short-selling is permitted and the proceeds of such a sale are immediately available for use. 6. Stock prices move in smooth increments (there are no stock market crashes or bubbles). 7. We can borrow or lend at the risk-free interest rate and this rate is constant. 8. Markets are efficient and there are no arbitrage possibilities. 9. The stock pays no dividends during the life of the options. 10. Robert Merton later modified the last assumption and introduction a

variable to the original model accounting for continuous stock dividend payments. 11. Development of the mathematics behind the formula is beyond the

scope of this reference manual. The equations below show the formula for

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pricing a European call and put option, respectively. These equations apply for a stock that pays a continuous dividend.

Where: C= is the call option price P=is the put option price S=is the stock price X=is the strike price R=is the risk-free interest rate (continuously compounded) Q=is the dividend yield (continuously compounded) T= is the time to maturity (in years) E=is the operator for the exponential function (equal to approximately 2.718) N(*) is the operator for the cumulative normal distribution function

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THE COMPANY PROFILE

The birth of Karvy was on a modest scale in 1981. It began with the vision and enterprise of a small group of practicing Chartered Accountants who founded the flagship company Karvy Consultants Limited. We started with consulting and financial accounting automation, and carved inroads into the field of registry and share accounting by 1985. Since then, we have utilized our experience and superlative expertise to go from strength to strengthto better our services, to provide new ones, to innovate, diversify and in the process, evolved Karvy as one of Indias premier integrated financial service enterprise. Thus over the last 20 years Karvy has traveled the success route, towards building a reputation as an integrated financial services provider, offering a wide spectrum of services. And we have made this journey by taking the route of quality service, path breaking innovations in service, versatility in service and finally totality in service.

KARVY is a premier integrated financial services provider and ranked among the top five in the country in all its business segments, services over 16 million individual investors in various capacities, and provides investor services to over 300 corporate, comprising the who is who of Corporate India. KARVY covers the entire spectrum of financial services such as Stock broking, Depository Participants, Distribution of financial products like mutual funds, bonds, fixed deposit, Merchant Banking & Corporate Finance, Insurance Broking, Commodities Broking, Personal Finance Advisory Services, placement of 54

equity, IPOs, among others. Karvy has a professional management team and ranks among the best in technology, operations, and more importantly, in research of various industrial segments.

Quality Policy
To achieve and retain leadership, Karvy shall aim for complete customer satisfaction, by combining its human and technological resources, to provide superior quality financial services. In the process, Karvy will strive to exceed Customer's expectations.

Quality Objectives
As per the Quality Policy, Karvy will:

Build in-house processes that will ensure transparent and harmonious relationships with its clients and investors to provide high quality of services.

Establish a partner relationship with its investor service agents and vendors that will help in keeping up its commitments to the customers.

Provide high quality of work life for all its employees and equip them with adequate knowledge & skills so as to respond to customer's needs.

Continue to uphold the values of honesty & integrity and strive to establish unparalleled standards in business ethics.

SECTOR OF KARVY 1. KARVY CONSULTANTANTS LIMITED: Deals in

Registrar and Transfer Agent.

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We have traversed wide spaces to tie up with the worlds largest transfer agent, the leading Australian company, Computer share Limited. The company that services more than 75 million shareholders across 7000 corporate clients and makes its presence felt in over 12 countries across 5 continents has entered into a 50-50 joint venture with us. With our management team completely transferred to this new entity, we will aim to enrich the financial services industry than before. The future holds new arenas of client servicing and contemporary and relevant technologies as we are geared to deliver better value and foster bigger investments in the business. The worldwide network of Computer share will hold us in good stead as we expect to adopt international standards in addition to leveraging the best of technologies from around the world.

KARVY SECURITIES LIMITED

Deals in distribution of various investment products, viz., equities, mutual funds, bonds and debentures, fixed deposits, insurance policies for the investor.

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3. KARVY INVESTOR SERVICE LIMITED

Deals in issue management, investment banking and merchant banking.

4. KARVY STOCK BROKING LIMITED

Deals in buying and selling equity shares and debentures on the National Stock Exchange(NSE), the Hyderabad Stock Exchange(HSE) and the over The Counter Exchange of India(OTCEI).

PRODUCTS & SERVICES

With greater choices comes greater value. KARVY offers you more choices by providing a wide array of products and personalized services, so you can take charge of your financial future with confidence. So whether you are a new investor or a seasoned one, we have the resources and advice you would need to make smart, well-researched investments. You have the option to choose the level support you would like from us: Invest Independently If you are an independent investor and prefer calling your own shots, you can access our extensive Market Research section for relevant, in-depth resources and support.

SERVICES

Take our advice If you are new to the world of investing, or are unable to do your own research due to time constraints, our highly experienced team of advisors will help you. get started and meet your financial goals. Day Trading If you thrive on the thrill of riding the market wave on a daily basis, we offer our Day Traders the resources you would need to strategize, buy and sell conveniently.

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KARVYs products and services are geared towards meeting your individual financial requirements. To find out more about a product / service, click on it from the menu on the left.

DEPOSITORY SERVICES
We offer Depository facilities to facilitate a seamless transaction platform as a part of our value-added services for our clients. KARVY is a depository participant with the Central Depository Services (India) Ltd. (CDSL) and National Securities Depository Ltd. (NSDL) for trading and settlement of dematerialized shares

WEALTH MANAGEMENT SERVICES

It is our aim to empower clients by helping them to diversify their investments. To this end, KARVY has added a range of products such as Mutual Funds, Insurance and online facilities to its offerings. We meet our clients on an individual basis and analyze important factors such as your risk appetite, investment horizon and your existing investments before making our recommendations as to what clients should invest in. The fund and scheme selection is then done after conducting in- depth research on parameters like risk adjusted returns, rolling returns, volatility and portfolio churn. We are also in close contact with fund houses as well as insurance agencies and are therefore always cognizant with new offerings and occurrences in the market and like to keep our clients updated on the same. Our clients can pick from Mutual Funds, IPOs, and Insurance products.Our Wealth Management Services include Portfolio Management Services (PMS)

PRODUCTS

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EQUITIES
Our experienced trading consultants and advanced trading tools will provide the support you need to achieve your long-term goals via the stock markets. We trade on the BSE, NSE and CN and our website has facilities such as live stock tickers, news updates, and more, to help our clients stay in the know. We also provide NRI specific services to meet the needs of our clients who live abroad

COMMODITIES
Indian markets have recently thrown open a new avenue for investors and traders to participate: COMMODITY DERIVATIVES. For those who want to diversify their portfolios beyond shares, bonds and real estate, commodities are the best option. Commodities actually offer immense potential to become a separate asset class for market-savvy investors, arbitrageurs and speculators. They are also easy to understand as far as fundamentals of demand and supply are concerned. Historically, pricing in commodities futures has been less volatile compared with equity and bonds, thus providing an efficient portfolio diversification option. KARVY now offers to investors a platform to trade in COMMODITY FUTURES. As a member of the Multi Commodity Exchange of India Ltd. and of the National Commodity and Derivative Exchange, we offer futures trading in 10 commodities (gold, silver, castor, soya, canola/mustard oil, crude palm oil,

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RBD palmolein and cotton) NCDEX and in gold, silver and castor seed, rubber through MCX.

MARKET RESEARCH
Information is power. At KARVY, it is also at your fingertips! KARVY is powered by a top-notch research team that penetrates and investigates the market to provide you with reliable, relevant information that helps you make intelligent investment decisions. Our commitment to keeping you updated on the latest market conditions stems from our desire to give you the option to invest in ways that are the most suitable to you. To explore our research reports in the category of your interest, please select it from the list on your right. Market Musing Company Reports Theme Based Reports Weekly Notes IPOs / FPO Sector Reports Stock Stance Pre-quarter/Updates Commodity Research Recommendation Card Pivot Points

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INVESTOR HANDBOOK Registrars and Transfer Agent

(Share transfers and communications regarding share certificates, dividends and change of address)

Purva Sharegistry (India) Pvt. Ltd.

9,ShivShaktiIndustrialEstate, Ground Floor, SitaramMiill Compound, JR Boricha Marg, Lower Parel, Mumbai-400 011. Tel No.: 23016761, Fax No.: 22626407 E-Mail: busicomp@vsnl.com

Listing of Equity Shares on Stock Exchange at

Bombay Stock Exchange Limited, Mumbai (BSE) Phiroze Jeejeebhoy Towers, Dalal Street, Mumbai 400 001

PORTFOLIO MANAGEMENT SERVICES

KARVY PMS will help you achieve your objective of preserving and growing capital by conducting a thorough analysis of your investment needs, returns expected and risk taking ability. Our focus is to craft a basket of Stocks, Bonds, and Mutual Funds through strong research and corporate interface, keeping in mind your risk-profile in specific relation with the ever.

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Investment Philosophy
We focus on a Bottom Up approach to stock picking. The stock selection process starts with fundamental analysis of companies and includes management meeting and plant visits to get a first hand feel of the company, rather than depending solely on quantitative analysis. The investment process is fairly rigorous and includes qualitative as well as quantitative criteria and builds upon the decade long experience of KARVY in Indian equity markets.

Who is it for?
Our offering is ideal for high net-worth customers Who are investing in Indian equities Who desire to create wealth over longer period Who appreciate a high level of personalized service

Benefits of being with KARVY PMS

Portfolio Management with a difference Every investor, whether individual or corporate, has unique needs based on their objectives and risk profiles. We recognize the difference and design tailored investment advice to achieve specific investment objectives. Professional Management- We offer professional management of your equity portfolio with an aim to deliver consistent returns while controlling risk. Continuous Monitoring- We recognize that portfolios need to be constantly monitored and periodically churned to optimize the results.

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Risk Control- The portfolios are managed through a strong research driven investment process with complete transparency and highest standards of service.

Transparency- You will get regular account statements and performance reports on a monthly basis/ That's not all; web-enabled access ensure that you are just a click away from all information relating to your investment.

Hassle Free Operation- Our Portfolio Management Service relieves you from all the administrative hassles of your investments. We provide periodic reporting on the performance and other aspects of your portfolio.

Dedicated Relationship Manager- Our Relationship Managers specialize in providing personal investment management services to achieve your investment objective.

Infrastructure
A corporate office and 3 divisional offices in CBD of Mumbai which houses state-of-the-art dealing room, research wing & management and back offices. All of 107 branches and franchisees are fully wired and connected to hub at corporate office at Mumbai. Add on branches also will be wired and connected to central hub Web enabled connectivity and software in place for net trading. 60 operative IDs for dealing room State of the Art accounting and billing system, on line risk management system in place with 100% redundancy back up.

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Milestones of Karvy

ANALYSIS AND INTERPRETATION GRAPH

64

DEC-2011 TO JAN-2012 FEATURES INDEX NIFTY-50

DATE 13-Dec-11 14-Dec-11 15-Dec-11 16-Dec-11 20-Dec-11 21-Dec-11 22-Dec-11 23-Dec-11 24-Dec-11 27-Dec-11 28-Dec-11 29-Dec-11 30-Dec-11 31-Dec-11 03-Jan-12 04-Jan-12 05-Jan-12 06-Jan-12 07-Jan-12 11-Jan-12 12-Jan-12 12-Jan-12 13-Jan-12 17-Jan-12 18-Jan-12 19-Jan-12 20-Jan-12 21-Jan-12 24-Jan-12 25-Jan-12 DAY MON TUE WED THU MON TUE WED THU FRI MON TUE WED THU FRI MON TUE WED THU FRI MON TUE WED THU MON TUE WED THU FRI MON TUE OPEN 4069.00 4098.60 4095.00 4136.75 4144.70 4184.25 4179.10 4271.00 4282.45 4287.55 4278.10 4166.65 4208.80 4204.40 4065.00 4937.95 4907.75 4705.00 4203.35 4093.05 4208.00 4035.05 4380.95 4279.55 4272.00 4329.00 4412.25 4340.00 4152.50 4248.70 HIGH 4110.85 4098.60 4167.75 4165.35 4197.00 4230.15 4300.05 4289.80 4357.10 4338.30 4347.00 4224.20 4244.15 4236.40 4065.00 4013.15 4908.75 4705.00 4203.35 4328.05 4357.20 4399.25 4380.95 4391.60 4359.00 4406.90 4412.25 4393.00 4268.50 4253.60 LOW 4060.20 4021.90 4095.00 4109.83 4060.85 4126.40 4179.10 4193.35 4221.60 4231.65 4142.90 4112.55 4172.00 4115.90 4825.75 4880.30 4677.00 4977.10 4448.50 4891.60 4995.80 4065.05 4071.00 4225.25 3957.75 4150.00 4045.00 4216.00 4128.00 4072.00 CLOSE 4081.50 4069.70 4138.60 4144.35 4179.40 4178.55 4274.30 4279.70 4287.85 4272.00 4156.95 4200.10 4206.80 4218.90 4935.75 4913.20 4705.30 4208.80 4899.30 4203.40 4033.45 4383.35 4274.10 4280.80 4005.25 4389.90 4270.05 4278.15 4156.75 4133.25

TABLE - 1

DECEMBER III RD WEEK GRAPH

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DATE 13-Dec-11 14-Dec-11 15-Dec-11 16-Dec-11 20-Dec-11 21-Dec-11

DAY MON TUE WED THU MON TUE

OPEN 4110.00 4080.00 4147.00 4150.00 4149.10 4185.65

HIGH 4141.50 4127.00 4178.95 4179.95 4236.00 4227.00

LOW 4097.00 4047.10 4123.00 4121.00 4060.00 4155.00

CLOSE 4120.30 4118.30 4162.95 4156.40 4220.10 4178.20

1ST MONDAY:

OPEN=4611.00 HIGH=4236.00 LOW=4047.00 CLOSE=4178.00

NIFTY SHARE VALUE

DECEMBER 3RD WEAK HIGH CLOSE

4250

4200

4150

BEP

4100

OPEN LOW

4050

4000

3950 MON 13-12-2011 TUE 14-12-2011 WED 15-12-2011

THU
16/12/2011

MON 20/12/2011

THU 21/12/2011

DATE & DAY

INTERPRETATION:
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In the above graph I calculated BEP: Breakeven point (BEP) =HIGH VALUE+LOW VALUE/2 =4236.00+4047.00/2 =8283.00 =4141.50 In this graph I observed the following fluctuations. In the period of (13-12-2011 to 21-12-2011) in these I found as BEP was 4141.00 values. Here I observed as value share is a lose of point of Nifty-50 value was (4141.00-4047.00=94) so here share value is decrease. Due to UN expected change in market, politics and lack of expects of investors. Here I observed as there is a change of Nifty-50 share value. That is period of (20-12-2011) is gos to share value high (4141.004236.00=95) so here share value is increased. And it is good signal of investment to the buyers. So here investors get more longs.

DEC-2011 TO JAN-2012 FUTURES

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DATE 13-Dec-11 14-Dec-11 15-Dec-11 16-Dec-11 20-Dec-11 21-Dec-11 22-Dec-11 23-Dec-11 24-Dec-11 27-Dec-11 28-Dec-11 29-Dec-11 30-Dec-11 31-Dec-11 03-Jan-12 04-Jan-12 05-Jan-12 06-Jan-12 07-Jan-12 11-Jan-12 12-Jan-12 12-Jan-12 13-Jan-12 17-Jan-12 18-Jan-12 19-Jan-12 20-Jan-12 21-Jan-12 24-Jan-12 25-Jan-12

DAY MON TUE WED THU MON TUE WED THU FRI MON TUE WED THU FRI MON TUE WED THU FRI MON TUE WED THU MON TUE WED THU FRI MON TUE

OPEN 4110.00 4080.00 4147.00 4150.00 4149.10 4185.65 4205.00 4170.00 4307.80 4263.10 4279.00 4150.35 4205.35 4110.40 4984.80 4931.00 4862.00 4691.00 4925.00 4080.00 4272.00 4329.00 4412.25 4340.00 4152.50 4248.70 4329.00 4412.25 4340.00 4152.50

HIGH 4141.50 4127.00 4178.95 4179.95 4236.00 4227.00 4292.75 4296.00 4331.90 4336.00 4321.65 4225.00 4542.40 4342.60 4993.80 4045.00 4927.25 4691.00 4997.50 4337.00 4359.00 4406.90 4412.25 4393.00 4268.50 4253.60 4406.90 4412.25 4393.00 4268.50

LOW 4097.00 4047.10 4123.00 4121.00 4060.00 4155.00 4203.10 4170.00 4214.25 4226.10 4141.10 4115.10 4171.25 4166.40 4831.60 4887.00 4700.00 4916.00 4420.00 4930.00 4957.75 4150.00 4045.00 4216.00 4128.00 4072.00 4150.00 4045.00 4216.00 4128.00

CLOSE 4120.30 4118.30 4162.95 4156.40 4220.10 4178.20 4264.45 4288.25 4272.80 4264.40 4160.60 4203.60 4224.75 4060.40 4947.65 4931.75 4730.35 4197.85 4894.00 4166.90 4005.25 4389.90 4270.05 4278.15 4156.75 4133.25 4389.90 4270.05 4278.15 4156.75

TABLE - 2

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DECEMBER IV TH WEEK GRAPH

DATE 22-Dec-11 23-Dec-11 24-Dec-11 27-Dec-11 28-Dec-11 29-Dec-11 DAY WED THU FRI MON TUE WED OPEN 4185.65 4205.00 4170.00 4307.80 4263.10 4279.00 HIGH 4227.00 4292.75 4296.00 4331.90 4336.00 4321.65 LOW 4155.00 4203.10 4170.00 4214.25 4226.10 4141.10 CLOSE 4178.20 4264.45 4288.25 4272.80 4264.40 4160.60

2ND MONDAY:

OPEN=4185.00 HIGH=4336.00 LOW=4141.00 CLOSE=4160.00

DECEMBER 4TH WEEK

4400

4350

NIFTY SHARE VALE

HIGH BEP
OPEN LOW & CLOSE

4300

4250

4200

4150

4100

4050

4000 WED 22/12/2011 THU 23/12/2011 FRI 24/12/2011 MON 27/12/2011 TUE 28/12/2011 WED 29/12/2011

DATE & DAY

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INTERPRETATION:
In the above graph I calculated BEP. BREAKEVEN POINT (BEP) = HIGH VALUE+LOW VALUE/2 =4336.00+4141.00/2 =8477.00/2 =4238.50

In this graph I observed the following fluctuations. In the period of (22-122011 to 29-12-2011).In these I found as BEP was 4238.00. Here I observed as value share is a high rate so Nifty-50 value was (4238.00-4336.00=98.00) share value is increased. So it is a good signal of investor to long to the shares. and I observed share value is loss of point Nifty-50 was (4238.00-4141.00=97.00) this value are investor in most loss so this is un expected changes in market and politics and lack of expects of investors.

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DEC-2011 TO JAN-2012 CONTRACT AND SWAPS

DATE 13-Dec-11 14-Dec-11 15-Dec-11 16-Dec-11 20-Dec-11 21-Dec-11 22-Dec-11 23-Dec-11 24-Dec-11 27-Dec-11 28-Dec-11 29-Dec-11 30-Dec-11 31-Dec-11 03-Jan-12 04-Jan-12 05-Jan-12 06-Jan-12 07-Jan-12 11-Jan-12 12-Jan-12 12-Jan-12 13-Jan-12 17-Jan-12 18-Jan-12 19-Jan-12 20-Jan-12 21-Jan-12 24-Jan-12 25-Jan-12 DAY MON TUE WED THU MON TUE WED THU FRI MON TUE WED THU FRI MON TUE WED THU FRI MON TUE WED THU MON TUE WED THU FRI MON TUE OPEN 4099.00 4051.05 4130.00 4138.00 4140.00 4130.00 4200.00 4249.70 4320.00 4250.00 4271.00 4199.00 4220.00 4210.60 4017.70 4945.00 4901.00 4680.00 4900.00 4105.00 4319.00 4875.00 4265.00 4298.70 4250.00 4200.00 4329.00 4412.25 4340.00 4152.50 HIGH 4130.00 4130.00 4171.00 4169.00 4227.00 4217.00 4287.00 4290.00 4333.00 4333.00 4317.00 4222.90 4240.00 4228.80 4017.70 4049.00 4927.10 4680.00 4999.00 4329.00 4348.00 4395.00 4281.00 4376.00 4265.00 4243.00 4406.90 4412.25 4393.00 4268.50 LOW 4088.10 4041.00 4115.15 4112.35 4056.95 4130.00 4192.10 4175.00 4212.00 4227.40 4141.00 4115.00 4170.00 4140.80 4834.60 4885.00 4700.00 4920.40 4400.00 4925.00 4942.20 4069.80 4026.55 4200.00 4102.15 4045.00 4150.00 4045.00 4216.00 4128.00 CLOSE 4109.75 4109.90 4151.45 4148.10 4211.20 4174.55 4261.65 4284.60 46269.65 4264.85 4161.30 4202.35 4224.25 4020.60 4951.50 4933.10 4728.95 4204.25 4885.65 4157.66 4996.25 4374.90 4252.90 4261.00 4132.00 4083.60 4389.90 4270.05 4278.15 4156.75

TABLE - 3

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JANUARY I ST & 2 ND WEEK GRAPH

DATE 30-Dec-11 31-Dec-11 3-Jan-12 4-Jan-12 5-Jan-12 6-Jan-12 DAY THU FRI MON TUE WED THU OPEN 4279.00 4150.35 4205.35 4110.40 4984.80 4931.00 HIGH 4321.65 4225.00 4542.40 4342.60 4993.80 4045.00 LOW 4141.10 4115.10 4171.25 4166.40 4831.60 4887.00 CLOSE 4160.60 4203.60 4224.75 4060.40 4947.65 4931.75

TABLE 7 3RD MONDAY : OPEN=4279.00 HIGH=4831.00 LOW=4542.00 CLOSE=4931.00 NIFTY SHARE VALUE JANUARY 1 ST & 2 ND WEEK

4600

HIGH

6400

OPEN BEP CLOSE LOW

4200

4000

3800

3600

3400 THU 30/12/2011 FRI 31/12/2011 MON 03-01-2012 TUE 04-01-2012 WED 05-01-2012 THU 06-01-2012

DATE AND DAY

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INTERPRETATION:
In the above graph I calculated BEP. BREAKEVEN POINT (BEP) = HIGH VALUE+LOW VALUE/2 =4542.00+4831.00/2 =9373.00/2 =4686.50 In this graph I observed the following fluctuations in the period of (30-12-2011 to 06-01-2012) in this period I found as BEP rate was 4686.00 values. So here I observed has value share is high rate so Nifty-50 value was (4686.00-4542.00 = 144.00). so here share value is decreased so it is a bad signal of investor so here investor get more losses and more longs. And I observed as share value is profit of point to Nifty-50 was (4686.00-4931.00=245). So here share value increased here investor gets more profits and more gains. So this is unexpected change in market and politics and lack of experts to investors.

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DEC-2011 TO JAN-2012 FORWORDS

DATE 13-Dec-11 14-Dec-11 15-Dec-11 16-Dec-11 20-Dec-11 21-Dec-11 22-Dec-11 23-Dec-11 24-Dec-11 27-Dec-11 28-Dec-11 29-Dec-11 30-Dec-11 31-Dec-11 03-Jan-12 04-Jan-12 05-Jan-12 06-Jan-12 07-Jan-12 11-Jan-12 12-Jan-12 12-Jan-12 13-Jan-12 17-Jan-12 18-Jan-12 19-Jan-12 20-Jan-12 21-Jan-12 24-Jan-12 25-Jan-12 DAY MON TUE WED THU MON TUE WED THU FRI MON TUE WED THU FRI MON TUE WED THU FRI MON TUE WED THU MON TUE WED THU FRI MON TUE OPEN 4085.00 4070.05 4123.70 4129.95 4134.00 4130.05 4200.00 4200.00 4299.00 4270.00 4280.05 4145.15 4198.00 4210.30 4000.00 4921.05 4900.00 4700.00 4058.00 4110.00 4315.00 4195.00 4200.00 4349.00 4218.05 4155.00 4329.00 4412.25 4340.00 4152.50 HIGH 4110.60 4105.00 4155.00 4157.90 4215.00 4208.00 4275.00 4279.70 4318.95 4320.05 4307.90 4214.00 4231.00 4220.00 4000.00 4044.50 4923.00 4700.00 4058.00 4329.00 4340.00 4399.60 4297.00 4389.90 4249.95 4234.00 4406.90 4412.25 4393.00 4268.50 LOW 4010.30 4035.00 4110.00 4110.00 4050.00 4121.00 4180.10 4175.00 4205.00 4215.00 4140.00 4115.00 4167.00 4140.80 4835.00 4882.05 4175.90 4950.00 4305.00 4910.00 4949.00 4150.05 4029.70 4200.10 4100.00 4049.00 4150.00 4045.00 4216.00 4128.00 CLOSE 4090.80 4100.65 4139.60 4136.25 4201.65 4162.45 4250.65 4272.35 4261.10 4255.20 4155.70 4191.35 4214.25 4040.90 4947.95 4927.75 4740.15 4195.90 4896.55 4158.35 4994.15 4377.85 4258.85 4262.40 4119.15 4066.00 4389.90 4270.05 4278.15 4156.75

TABLE - 4

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JANUARY III RD WEEK GRAPH:

DATE 7-Jan-12 10-Jan-12 11-Jan-12 12-Jan-12 13-Jan-12 17-Jan-12 DAY FRI MON TUE WED THU MON OPEN 4931.00 4862.00 4691.00 4925.00 4080.00 4272.00 HIGH 4045.00 4927.25 4691.00 4997.50 4337.00 4359.00 LOW 4887.00 4700.00 4916.00 4420.00 4930.00 4957.75 CLOSE 4931.75 4730.35 4197.85 4894.00 4166.90 4005.25

TABLE 8 4TH MONDAY: OPEN=3931.00 HIGH=4420.00 LOW=4045.00 CLOSE=4005.00 NIFTY SHARE VALUE JANUARY 3 RD WEEK

6000

6000

OPEN

HIGH

BEP LOW CLOSE

4500

4000

3000

2000

1000

0 FRI 07-01-2012 MON 10-01-2012 TUE 11-01-2012 WED 12-01-2012 THU 13-01-2012 MON 17-01-2012

DATE & DAY

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INTERPRETATION:
In the above graph I calculated BEP. BREAKEVEN POINT (BEP) = HIGH VALUE+LOW VALUE/2 =4045.00+4420.00/2 =8465.00/2 =4232.00 In this graph I observed fluctuations in the period of (07-01-2012 to 17-012012) in this graph I found as BEP was 4232.00 share value .Here I observed as a value share is high rate so Nifty-50 value was (4232.00-4420.00=188.00) so here share value is increased so it is good signal of investors so here investors gets more profits and more longs and I observed share value is Nifty-50 was (4232.00-4045.00 = 187). so here share value decreased so here investors gets more loss and more shorts. So this is unexpected changes in market and politics and lack of experts of investors.

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JANUARY IV TH WEEK GRAPH:

DATE 18-Jan-12 19-Jan-12 20-Jan-12 21-Jan-12 24-Jan-12 25-Jan-12 DAY TUE WED THU FRI MON TUE OPEN 4272.00 4329.00 4412.25 4340.00 4152.50 4248.70 HIGH 4359.00 4406.90 4412.25 4393.00 4268.50 4253.60 LOW 3957.75 4150.00 4045.00 4216.00 4128.00 4072.00 CLOSE 4005.25 4389.90 4270.05 4278.15 4156.75 4133.25

TABLE 9 5TH MONDAY: OPEN =4272.00 HIGH =4412.00 LOW =3957.00 CLOSE=4133.00

4500

NIFTY SHARE VALUE

JANUARY 4 TH WEEK

4400

HIGH OPEN BEP CLOSE

4300

4200

4100

4000

LOW
3900 3800

3700 TUE 18-01-2012 WED 19-01-2012 THU 20-01-2012 FRI 21-01-2012 MON 24-01-2012 TUE 25-01-2012

DATE & DAY

77

INTERPRETATION
In the above graph I calculated BEP. BREAKEVEN POINT (BEP) = HIGH VALUE+LOW VALUE/2 =4412.00+ 3957.00/2 =8369.00/2 =4184.00 In this graph I observed fluctuations in the period of (18-01-2012 to 25-012012) in this graph I found as BEP was 4184.00 share value .Here I observed as a value share is high rate so Nifty-50 value was (4184.00-3957.00=227.00) so here share value is decreased so here investors gets more losses and more shorts .so this is unexpected change in the market and politics and lack of expects of investors .and I observed share value is Nifty-50 was (4184.004412.00 = 228.00). So here share value increased so here investors gets more profits and more longs.

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FINDINGS
Derivatives market is an innovation to cash market. Approximately its daily turnover reaches to the equal stage of cash market. The average daily turnover of the NSE derivative segments In cash market the profit/loss of the investor depend the market price of the underlying asset. The investor may incur Hugh profit or he may incur Hugh profits or he may incur Hugh loss. But in derivatives segment the investor the investor enjoys Hugh profits with limited downside. In cash market the investor has to pay the total money, but in derivatives the investor has to pay premiums or margins, which are some percentage of total money. Derivatives are mostly used for hedging purpose. In derivative segment the profit/loss of the option writer is purely depend on the fluctuations of the underlying asset.

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SUGGESTIONS
The investors can minimize risk by investing in derivatives. The use of derivative equips the investor to face the risk, which is uncertain. Though the use of derivatives does not completely eliminate the risk, but it certainly lessens the risk . It is advisable to the investor like to invest in the derivatives market because of the greater amount of liquidity offered by the financial derivatives and the lower transaction costs associated with the trading of financial derivatives. The derivative products give the investor an option or choice whether the exercise the contract or not. Option gives the choice to the investor to either exercise his right or not. If on expiry date the investor finds that the underlying asset in the option contract is traded at a less price in the stock market then, he has the full liberty to get out of the option contract and go ahead and buy the asset from the stock market. So in case of high uncertainty the investor can go for option. However, these instruments act as a powerful instrument for knowledge traders to expose them to the properly calculated and well understood risks in pursuit of reward i.e profit.

80

CONCLUSION
Derivative have existed and evolved over a long time, with roots in commodities market .In the recent years advances in financial markets and technology have made derivatives easy for the investors. Derivatives market in India is growing rapidly unlike equity markets .Trading in derivatives require more than average understanding of finance. Being now markets. Maximum numbers of investors have not yet understood thee full implications of the trading in derivatives. SEBI should take actions to create awareness in investors about the derivative market. Introduction of derivative implies better risk management. These markets can greater depth, stability and liquidity to India capital markets. Successful risk management with derivatives requires a through understanding 0 principles that govern the pricing of financial derivatives. In order to increase the derivatives market in India SEBI should revise some of their regulation like contract size ,participation of Fill in the derivative market. Contract size should be minimized because small investor cannot afford this much of huge premiums. Derivatives are mostly used for hedging purpose. In derivative market the profit and loss of the option writer /option holder purely depends on the fluctuations of the underlying.

81

BIBLIOGRAPHY TEXT BOOKS

S.No

Name of the Author

Title of Book

Publisher

Year

EDITION

IM PANDEY

FINANCIAL MANAGEMENT

VIKAS PUBLISHING HOUSE. PVT.LTD.

2008

9TH EDITION

R MAHAJAN

FUTURES & OPTIONS

VISION BOOKS PVT.LTD

2011

3RD EDITION

DONALD E. FISCHER & J. JORDAN RONALD

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT PRENTICE HALL 1995 6TH EDITION

MAGAZINES: BUSINESS TODAY BUSINESS WORLD

WEB SITES
www.karvystock.com www.derivativesindia.com www.nseindia.com www.bseindia.com www.hseindia.com

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