BasiccourseonFinancialMarkets

KnowledgeispowerandthisstandsperfectlytrueintheFinancialMarkets. Marketsarechangingeverysecondandoneneedstobeupdatedonthechanging marketsandbepreparedtocombatthechallengingmarketscenarios AsaBusinessanalyst/Consultanteveryaspirantshouldbeverycrystalclearon themarketfundamentalsandshouldknowtheworkingofmarketstothecore Thismoduleisdesignedkeepinginmindthespecificrequirementsoftheclients andwouldempowertheBusinessanalystsinunderstandingthecomplete dynamicsofthemarkets Themodulestartswiththecapitalmarketoperations,Trading,settlementin EquitycashsegmentandthereaftermovingontheDerivativeconcepts,Future andoptionstradingmechanismandtheirpayoffs FurtherthemodulealsotriestocoverthedynamicsofCurrency,Commodityand forexmarketsverypractically Wehopethiswouldwillhelpyouconqueryourtargetsofexcellinginyour respectiveKeyareasandhelpingclientsinachievingtheirfinancialGoalsinthe evervolatileFinancialmarkets

WewishyouBestofLuck!

TrainingTeam CapitalViaGlobalResearchLimited

ContentsoftheModule
1. CapitalMarkets

IndianFinancialMarketsystem Depositories Secondarymarkets Marketbasics Trading Indices Clearingandsettlement

2.Derivatives Introduction ForwardContracts DerivativeSegment FutureContract OptionContract

3.Commodities

Commoditybasics CommodityVsEquityVsEquityDerivatives TypeofCommodities CommodityExchanges Factorsaffectingcommodityprices Tradingincommodities

4.CurrencyDerivatives

CurrencyBasics Currencyexchange TradingincurrencyDerivatives TradersinCurrencyDerivatives FactorsaffectingcurrencyDerivatives

5.Comex
2

CMEGroup CMEExchanges CommoditiestradedinComex/Nymex Contractspecifications

Chapter1CapitalMarkets
WhatisaFinancialMarket?
FinancialMarketslikeanyothermarketisaSystemwhereTradinginFinancial Instrumentstakesplace.ThisSystemisnowcompletelyAutomatedthrough ElectronicInterfacesandconsistsofManyBuyersandSellerswiththeirindividual ObjectiveofEnteringinFinancialMarkets.ThisSystemshouldbeaGovernment RecognizedSystem. Itisaplacewhereyougiveyourmoneytoafinancialassetwhichcanfetchyour morereturnsorsometimesmoresafetythanaconventionalBankaccount

ParticipantsinFinancialMarkets
1. 2. 3. 4. Regulator Exchanges Brokers/Intermediaries Clients 1. Regulatorisabodywhichregulatesandoverlooktothesmooth FunctioningofFinancialMarketSystems,theydorecognize,allow, disallowotherfinancialintermediariesforworkinginfinancialmarkets, redressalfortheInvestors,Creates/Modifiesrulesandregulationsin financialmarkets a. MinistryofFinance ThisisthetopmostOfficeintheCountryasfarasFinancialMattersin theCountryareconcerned.TheFinanceMinisterheadsthisOfficeand overlooksalltheFinancialParticipantsintheCountry. b. SEBI SecuritiesandExchangeBoardofIndiaistheBigBossofFinancial marketsandthemainregulatorintheCapitalMarkets,TheSEBI chairmanheadsthisinstitutionandsitsintheSEBIsheadofficein Mumbai c. RBI ReserveBankofIndiamainlycontrolstheBankingandmonetary systemsintheCountrymakingMonetarypolicies,lookingafterthe workingofBanks.TheChairmanRBIheadsthisorganizationfromhis OfficeinMumbai 4

2. ExchangesprovidesthefacilityofTradinginFinancialProductsinIndia thereare2exchangesforEquityTradingand2ExchangesforCommodity Trading EquityExchanges NSENationalStockExchange BSEBombayStockExchange CommodityExchanges MCXMultiCommodityExchange NCDEXNationalCommodityandDerivativeExchange. CurrencyExchanges MCXSX NSECurrency USE AlltheseexchangesareGovernmentrecognizedandworkonElectronicInterfaces whereinInvestorssittinginanypartofthecountrycantradethroughthese exchangesviatheElectronicInterfaceprovidedbytheexchanges 3. Brokers/Intermediariesarethebodywhichactsasainterfacebetweenthe ClientandtheFinancialSystemandfacilitatesthepropertradingin FinancialProducts.ThesearethemostimportantpartoftheFinancial MarketsSystemastheyareresponsibletoprovidetheplatformand interfacefortradingtotheInvestorsandtraders EquityandcommodityBrokers,MutualFundCompanies,MutualFund Advisors,Insurancecompanies,InsuranceAdvisors,SubBrokers,Business Franchiseeslike IndiaInfoline,JMFinancial,Sharekhan,ICICIPrudential,RelianceMoney, RelianceMutualFund,TATAAiglifeInsurance,HDFCLifeInsurance, BajajCapitaltonameaFew 4. InvestorsandTraders:Thesearethemakersofthemarket,therealend clientforwhomthewholesystemexists.Alltheproductsandsystemsin FinancialMarketsaredesignedkeepinginmindtheserealInvestorsand TradersoftheSystem.TheseCompriseofalltheIndianRetail,HNIs, InstitutionalandForeignDirectandInstitutionalClientstradinginIndian FinancialMarketsforthisCategoryofParticipantintheMarkets

DepositoriesinIndia
1.NSDL TheenactmentofDepositoriesActinAugust1996pavedthewayfor establishmentofNSDLNationalSecuritiesandDepositoryLimited,thefirst depositoryinIndia.Thisdepositorypromotedbyinstitutionsofnationalstature responsibleforeconomicdevelopmentofthecountryhassinceestablisheda nationalinfrastructureofinternationalstandardsthathandlesmostofthe securitiesheldandsettledindematerialisedformintheIndiancapitalmarket. 2.CDSLCentralDepositoryServicesLimited,CDSLwaspromotedbyBombay StockExchangeLimited(BSE)jointlywithleadingbankssuchasStateBankof India,BankofIndia,BankofBaroda,HDFCBank,StandardCharteredBank, UnionBankofIndiaandCenturionBank.CDSLreceivedthecertificateof commencementofbusinessfromSEBIinFebruary,1999.

WhatisaDematAccount?
Investorswhowishtotradeinthemarketneedtohaveademat,account.Demat accountactsasastorageplaceforthedematerializedSharesoftheInvestor,from wheretheinclusionandexclusionofsharesinonesholdingtakesplace.InIndia, thegovernmenthasmandatedtwoentitiesNationalSecuritiesDepository,or NSDL,andCentralDepositoryServices(India),orCDSLtobethecustodianof dematerializedsecurities.

SecondaryMarkets
Introduction
AsthenamesuggestsSecondaryMarketsisamarketplacewherethetradingthe stocksofthecompanytakesplaceSecondtime,earlierinprimarymarketsthe sellerwasthePromotergroupofthecompanynowheretheselleraswellasthe buyerareinvestorsasnowtheownershipoftheshareisinpublicsdomain SecondarymarketsaresynonymtoStockexchangesinIndiaasalltheSecondary marketactivitytakesplaceinStockExchanges

Whatisastockexchange?
Astockexchange,sharemarketisacorporationormutualorganizationwhich providesfacilitiesforstockbrokersandtraders,totradecompanystocksand othersecurities.Stockexchangesalsoprovidefacilitiesfortheissueand redemptionofsecuritiesaswellasotherfinancialinstrumentsandcapitalevents includingthepaymentofincomeanddividends.Thesecuritiestradedonastock exchangeinclude:sharesissuedbycompanies,unittrustsandotherpooled 6

investmentproducts,Derivativeproductandbonds.Tobeabletotradeasecurity onacertainstockexchange,ithastobelistedthere. Thereare2recognizedStockExchangesinIndiaforShareTrading 1. BSEBombayStockExchange 2. NSENationalStockExchange BSEBombayStockExchangeistheoldeststockexchangeinAsiawitharich heritage,nowspanningthreecenturiesinits133yearsofexistence.Whatisnow popularlyknownasBSEwasestablishedas"TheNativeShare&StockBrokers' Association"in1875. BSEisthefirststockexchangeinthecountrywhichobtainedpermanent recognition(in1956)fromtheGovernmentofIndiaundertheSecurities Contracts(Regulation)Act1956.BSE'spivotalandpreeminentroleinthe developmentoftheIndiancapitalmarketiswidelyrecognized.Itmigratedfrom theopenoutcrysystemtoanonlinescreenbasedorderdriventradingsystemin 1995.EarlieranAssociationOfPersons(AOP),BSEisnowacorporatisedand demutualisedentityincorporatedundertheprovisionsoftheCompaniesAct, 1956,pursuanttotheBSE(CorporatisationandDemutualisation)Scheme,2005 notifiedbytheSecuritiesandExchangeBoardofIndia(SEBI). NSENationalStockExchangeofIndiaLimitedhasgenesisinthereportofthe HighPoweredStudyGrouponEstablishmentofNewStockExchanges,which recommendedpromotionofaNationalStockExchangebyfinancialinstitutions (FIs)toprovideaccesstoinvestorsfromallacrossthecountryonanequal footing.Basedontherecommendations,NSEwaspromotedbyleadingFinancial InstitutionsatthebehestoftheGovernmentofIndiaandwasincorporatedin November1992asataxpayingcompanyunlikeotherstockexchangesinthe country. OnitsrecognitionasastockexchangeundertheSecuritiesContracts(Regulation) Act,1956inApril1993,NSEcommencedoperationsintheWholesaleDebt Market(WDM)segmentinJune1994.TheCapitalMarket(Equities)segment commencedoperationsinNovember1994andoperationsinDerivativessegment commencedinJune2000.

FunctionsofaStockExchange:
1) 2) 3) 4) 5) Providingtradingmechanismonline. Collection,displayanddistributionofdataandinformation. Toprovidelistingfacilities. Toprovideprotectiontoinvestorandregulatebrokerandparticipant. EffectiveandEfficientsettlementoftransaction. 7

TradingMechanism
BSEandNSEhasprovidedafacilityofTradingMembership,whereinallthe tradingmemberwhichareregisteredwiththerespectiveexchangesareallowed toextendtradingfacilitiesthroughtheirownCompany,whicharecommonly knownasBrokers TheExchangesprovidespecificTradingApplicationstotheTradingmembers whicharedirectlyconnectedtotheExchangeserverandfacilitatestrading mechanisminStockmarkets BOLTBOLTisasystemprovidedbyBSEonlyfortradingonBombaystock ExchangewhichisgiventotheTradingmemberoftheStockexchangefortrading purpose NEATNationalExchangeforAutomatedTradingSystemisprovidedbyNSE onlyfortradingpurposedthroughNSE ODINOpenDealerIntegratedNetwork,ThisisasoftwareDevelopedbyFinancial Technologies,thisisaapplicationplacedatbranchesoftheBrokingcompanyand facilitatesproperclientwiseRiskmanagementandorderentryinBoththe Exchanges.Aninvestorcancallorsitatthebrokersofficeandinstructthe TerminalOperatortotrade. OnlineTradingWiththeadventofComputersandNetConnectivityatcommon mansDesktopOnlineTradingisemergingasabigStepforwardintheBroking Businessasawhole.HeretheinvestorisgivenaTradingApplicationontheirend whichenablestrading,Fundtransfer,informationviewingontheInvestors Desktop.HeretheinvestordoesnothavetocallorvisittheBrokersofficetotrade inStockMarkets. EveryTradingsystemisconnectedtoExchangeserversviaBroker'sInternalserver andRiskmanagementsystem Exchangeshaveclearlyprescribedforadualpasswordmechanismwhichhasa includesaLoginandaTradingpasswordwhichexpiresevery14days Differenceb/wOnlineandOfflineTradingaccounts PointsofDifference Tradeexecution Trademode Optionsavailable Self Desktop/laptop Trading,reports,fund 8 Online Dealer Phone/physicalvisit Onlytrading Offline

transferetc Timesaving Huge Laterorderpunching

TradingandDematAccount EveryInvestor/TraderwhowishestoTradeinEquitymarketshavetoopena TradinganddemataccountviafillingaKYC(Knowyourclient)formwith necessarydocuments AtradingaccountisusedfornormalTradingofsharesandademataccountis usedforstoringthesharespurchasedviaaTradingaccount Typeofshares a.NormalShares:AllthenormalDematerialisedsharestradingintheNormal Marketsegment b.OddLotshares:Alltheshareswhicharenottradedinthemultipleof1sharein theNSECashsegment CorporateHierarchy ThetradingsystemsinStockexchangesworkonaprescribedcorporatehierarchy whichstartswithaCorporatemanagerwhichinturnmanagestheBranches, Dealers,Subbrokers,Onlineclients

 1. Acorporatemanagercanview,modifytheorders,limitsandothersetting forBranches,Dealers,SubBrokersandonlineclientsunderhim. 2. ABranchmanagerofBranchAcannotmodify/viewthedetailsofaBranch Bworkstation 3. ABranchmanagerhaving5Dealerscanmodify/viewdetailsofallthe dealers,clients,subbrokerslistedunderhisbranch 4. AdealerofBranchAcanmodify/viewordersforclients/subbrokerunder hisworkstationbutcannottinkerwithDealerBofsamebranch MarketTradingSessions CapitalMarkettradingisdividedinthreesessionsnamely a.PremarketSession:Thissessionstartsfrom9:00amto9:15am,unlikethe normaltradingsessionwheretradematchingtakesplacesimultaneously,herethe matchingtakesplacefrom9:08to9:12amoncetheordersareenteredduring 9:00amto9:07am,thepricetransitiontimeisfrom9:12to9:15am b.NormalMarketsession:Thissessionstartsfrom9:15to3:30pmwherenormal pricetimeprioritytradingmechanismisfollowed 1

c.Postclosingsession:Thissessionstartsfrom3:40to4pmandisusedtorectify anytradesexecutedwronglyinthenormalmarketsessionsubjecttobuyerand sellers,theratesdonotfluctuate Closingpricecalculation:TheclosingpricesofanEquitysharesistheweighted averagepriceoflast30minutesofthetradingsessionforthatday TypesofOrders Onthebasisofprice/quantity a.LimitOrder:Anorder(buy/sell)whichclearlyspecifiesthepriceatwhichthe traderwishestotrade b.MarketOrder:Anorderwheretraderdoesn'tspecifiesthepricesandwishesto buyatthecurrentprevailingmarketprices c.IOCorder:AnImmediateorCancelorderwhereeithertheordergets immediatelyexecutedorgetcanceled Onthebasisofclients a.'Cli'ordertype:'Cli'orclienttypeorderisanorderwhichisenteredbyaclient b.'Whs'ordertype:'Whs'orderisenteredinthewholesalesegment c.'Pro'ordertype:'Pro'orproprietaryordersareenteredbytheMemberbroker forhistradingpurposes Outstandingorder:Anypendingorderwhichisnotyetexecuted Tradeconfirmation:Aconfirmationoftradeissentbytheexchangewithatrade numberwhichprovestheexecutionoforder Ordermodification/Cancellation:Exchangesprovideafacilitytoeithermodify thepriceorquantityorcompletelycanceltheexistingpendingorder OrderMatchingcriteria Ordermatchingprocessisaprice/timepriorityordermatchingmechanism, wherepriorityisgiventopriceandthentime Ex:Trader'A'entersanorderofbuying100sharesofABC@100at9:30am Trader'B'entersanorderofbuying100sharesofABC@100.05at10am 1

HeretheorderofTrader'B'willgetthepriorityofexecutionoverTrader'A',butif thepriceofbothTraderswouldhavebeenequaltheTimeprioritywouldhave placedTrader'A'ontop Margining/Tradinglimit EveryTraderisgivenaLeverageontheamountofcashandnoncashmargin depositedwiththememberbroker,theleveragecouldrangefrom48timeson Intradaybasis Ex:Ifaclienthas50,000CreditbalanceinhisTradingaccounthecangetlimit upto4lakh(8times50,000) Brokerage EveryTrader/Investorhastopayabrokerageforeverytradeenteredviathe Tradingterminalwhetheronlineoroffline Althoughthemaximumbrokeragewhichcanbechargedshouldnotbemorethan 2.5%ofthetradingvolume Butnormallybrokerschargeabrokerageof0.01%to0.05%onIntradayTrades Brokerageof0.10%to0.50%onDeliverytrades,dependingonthevolume commitments CircuitBreakers TheExchangehasimplementedindexbasedmarketwidecircuitbreakersin compulsoryrollingsettlementwitheffectfromJuly02,2001.Inadditiontothe circuitbreakers,pricebandsarealsoapplicableonindividualsecurities. PriceBands/Marketprotection Dailypricebandsareapplicableonsecuritiesasbelow:

Dailypricebandsof2%(eitherway) Dailypricebandsof5%(eitherway) Dailypricebandsof10%(eitherway) Nopricebandsareapplicableon: scripsonwhichderivativeproductsareavailableor scripsincludedinindicesonwhichderivativeproductsareavailable.

Pricebandsof20%(eitherway)onallremainingscrips(including debentures,warrants,preferencesharesetc).

QuantityFreeze Apartfrompricesfreeze/Breakerstocksalsohavequantityfreezewhichspecifies thenumberofsharesaninvestorcanpurchase

IndexbasedMarketwideCircuitBreakers Theindexbasedmarketwidecircuitbreakersystemappliesat3stagesofthe indexmovement,eitherwayviz.at10%,15%and20%.Thesecircuitbreakers whentriggered,bringaboutacoordinatedtradinghaltinallequityandequity derivativemarketsnationwide.Themarketwidecircuitbreakersaretriggeredby movementofeithertheBSESensexortheNSES&PCNXNifty,whicheveris breachedearlier.

Incaseofa10%movementofeitheroftheseindices,therewouldbea onehourmarkethaltifthemovementtakesplacebefore1:00p.m.Incase themovementtakesplaceatorafter1:00p.m.butbefore2:30p.m.there wouldbetradinghaltforhour.Incasemovementtakesplaceatorafter 2:30p.m.therewillbenotradinghaltatthe10%levelandmarketshall continuetrading. Incaseofa15%movementofeitherindex,thereshallbeatwohourhalt ifthemovementtakesplacebefore1p.m.Ifthe15%triggerisreachedon orafter1:00p.m.butbefore2:00p.m.,thereshallbeaonehourhalt.If the15%triggerisreachedonorafter2:00p.m.thetradingshallhaltfor remainderoftheday. Incaseofa20%movementoftheindex,tradingshallbehaltedforthe remainderoftheday.

Thesepercentagesaretranslatedintoabsolutepointsofindexvariationsona quarterlybasis.Attheendofeachquarter,theseabsolutepointsofindex variationsarerevisedfortheapplicabilityforthenextquarter.Theabsolute pointsarecalculatedbasedonclosinglevelofindexonthelastdayofthetrading inaquarterandroundedofftothenearest10pointsincaseofS&PCNXNifty. Contractnotes Everyinvestorhasarighttogetacontractnotewhichislikeabillofyourtrading forthedaywhichmentionseverythingregardingthetradedoneforthedaywhich includesthenameoftheshare,quantity,timeoftrade,brokeragelevied,net 1

deliveryamount,Taxesetc.Itissuggestedthateveryinvestormustkeeptheir contractnoteswiththem IndicesandtheirImportance Indices AnIndexisusedtogiveinformationaboutthepricemovementsofproductsinthe financial,commoditiesoranyothermarkets.Financialindexesareconstructedto measurepricemovementsofstocks.Stockmarketindexesaremeanttocapture theoverallbehaviorofequitymarkets.Astockmarketindexiscreatedby selectingagroupofstocksthatarerepresentativeofthewholemarketora specifiedsectororsegmentofthemarket.AnIndexiscalculatedwithreferenceto abaseperiodandabaseindexvalue. Stockmarketindexesareusefulforavarietyofreasons.Someofthemare:

Theyprovideahistoricalcomparisonofreturnsonmoneyinvestedinthestock marketagainstotherformsofinvestmentssuchasgoldordebt. Theycanbeusedasastandardagainstwhichtocomparetheperformanceof anequityfund. Itisaleadindicatoroftheperformanceoftheoveralleconomyorasectorof theeconomy Stockindexesreflecthighlyuptodateinformation ModernfinancialapplicationssuchasIndexFunds,IndexFutures,Index Optionsplayanimportantroleinfinancialinvestmentsandriskmanagement

IndiaIndexServices&ProductsLtd.(IISL) IndiaIndexServices&ProductsLtd.(IISL)isajointventurebetweentheNational StockExchangeofIndiaLtd.(NSE)andCRISILLtd.(formerlytheCreditRating InformationServicesofIndiaLimited).IISLhasbeenformedwiththeobjectiveof providingavarietyofindicesandindexrelatedservicesandproductsforthe capitalmarkets. IISLhasaconsultingandlicensingagreementwithStandardandPoor's(S&P), theworld'sleadingproviderofinvestibleequityindices,forcobrandingIISL's equityindices.

BroadIndicesinIndia

S&PCNXNIFTY BSESENSEX 1

NIFTYJUNIOR CNX100 CNXMIDCAP ITINDEX:BSEIT,CNXIT AUTOINDEX:BSEAUTO HEALTHCAREINDEX:BSEHEALTHCARE PSUINDEX:BSEPSU OIL&GASINDEX:BSEOIL&GAS BANKINDEX:BSEBANKEX,BANKNIFTY METALINDEX:BSEMETAL CAPITALGOODSINDEX:BSECAPGOODS COMSUMERDURABLESINDEX:BSECONSDURABLES FMCGINDEX:BSEFMCG REALTYINDEX:BSEREALTY

SectoralIndices:

NIFTY:S&PCNXNiftyisaBenchmarkforNSEisawelldiversified50stock

indexaccountingfor21sectorsoftheeconomy.Itisusedforavarietyofpurposes suchasbenchmarkingfundportfolios,indexbasedderivativesandindexfunds. SENSEX:ThelaunchofSENSEXBenchmarkforBSEin1986waslaterfollowed upinJanuary1989byintroductionofBSENationalIndex(Base:198384= 100).Itcomprised100stockslistedatfivemajorstockexchangesinIndia Mumbai,Calcutta,Delhi,AhmedabadandMadras.TheBSENationalIndexwas renamedBSE100IndexfromOctober14,1996andsincethen,itisbeing calculatedtakingintoconsiderationonlythepricesofstockslistedatBSE.BSE launchedthedollarlinkedversionofBSE100indexonMay22,2006. WeightageinIndices:Everysharesintheindexhasafixedweightagewhich affectsthemovementofbroadindices GroupingofShares:Stockexchangeshasdividedthestocksinseveralgroupson thebasisoftheirmarketcapitalisation,Compliance,volatilityetc. 'A'Categoryshares:Thetop200sharesonthebasisofmeritasprescribedby BSE 'B'Categoryshares:TheremainingsharesotherthenA,ZandTcategoryshares 1

'T'Categoryshares:AlsoknownasTradetoTrade(T2T)categorysharesare thoseshareswhichcannotbetradedonanIntradayBasisintheEquitycash segment 'Z'Categoryshares:Thoseshareswhichhavefailedtocomplywithlisting requirements,failedtoresolveinvestorcomplaintsorhavenotprovidedfortheir dematerialisationofsharestoCDSL,NSDL TypesofTrades IntradayTrade:WhenaTradersquaresuphispositiononthesameTradingDay (i.e.b/w9:55amto3:30pm)anddoesnottakeanysharesfornexttrading sessioniscalledasintradayTrade Ex:Ibough100sharesofstockAat10amandsold100sharesofstockaat3:25 pm Thetradeissquareduponthesamedaynodeliveryofsharestobe takenplaceandonlytheprofitorlosthastakenplace.Sothefundseitherwillbe payedoutortheinvestor,orhehastogivethefundstotheBrokerifitsalossto him DeliveryTrade:WhenanInvestordoesnotsquareoffhistradeonthesame tradingdayiscalledaDeliveryTrade Ex:1.Ibought100sharesofStockAanddidntsoldthesharesonthesameday HereIhavetakenadeliveryof50sharesofstockA 2.Ihadaholdingof100sharesofstockAwhichIhaveboughtinprevious tradingsessionsandhavesold100sharesontodaystradingsession Therewouldbe2partiesinvolvedforclearingandSettlingthistradeTheBuyer andtheSelleroftheshares.TheSettlementprocesshereiscompletedwhenthe sharesarehandedovertothebuyerofthestockandtheSellergetsthefundsfor hisstockssoldwithin2TradingSessionsnexttotradingday.Thisisalsoknown asT+2Settlement. OnlineBackup:Everybrokerencouragestohaveabackupofalltheday's tradingandnetpositionactivities,whichcanbetakenonlineandofflineonthe Tradingsystem

ClearingandSettlement TheTradingclearingandsettlementprocesstakesplaceinT+2days(Tradedate plus2Tradingdays) Letsunderstandthiswithandexample 1

InvestorAhasbought100sharesofABCltd@100onMondaywhichisbeing soldbyInvestorB TDay(Monday):At3:30thebuyerwillreceiveacashobligationof10,000and sellerwouldreceiveashareobligationof100shares T+1Day(Tuesday):Thebuyerhastodeposit10,000tohisbrokerandseller hastotransfer100sharestothepoolAccount(ademataccountofstockbroker usedforpurposesofpoolingsharesfordeliveryobligations)ofhisbroker T+2Day(Wednesday):ThesharesandfundwouldbetransferredtoNSCCL (NationalSecuritiesclearingcorporationLimited)whichinturntransfersthe sharestobuyerbrokerandfundstosellerbroker ThiswaytheclearingandsettlementprocesstakesT+2daystocomplete Auction IncasethesellerisshortofdeliveryagainsthisshareobligationtheExchange conductsaBuyinauctiononT+5daywheretheypurchasetheshareswhichthe sellerwassupposedtotransfertothebuyer TheexchangeimposesaAuctionpenaltywhichisthe+20%ofthehighest closingpricepriortotheauctiondate BasketTrading:Abulkorderwithaminimumvaluesizeof5crore CORPORATEACTION Listedcompaniesconductseveralcorporateactionsforshareholdersduringa financialyearwhichincludesdividend,Bonus,split,merger,amalgamationetc IftheinvestorbuysthesharesbeforerecorddatethesharesisknownasCum Dividend(theinvestorwouldbeeligibletogetthedividend) IftheinvestorbuysthesharespostrecorddatetheshareisknownasExdividend orexcludingdividend

ParticipantsinaSecondaryMarket TraderOnewhoisfrequentlyinvolvedinbuying&sellingofsecurities.

DayTraderOnewhotradesandsquaresofthepositionattheendoftheday whetherlongorshort,withouttakingorgivingdelivery,suchtraderstradeson differenceinrates. InvestorPersonwhoinvestsinthemarketsforalongerterm DomesticFinancialInstitutionFinancialinstitutionmeanstheinstitutionswhich areregisteredundertherelevantactassuch;theyarecalledpillarsofeconomy. Theirprincipalfunctionistotakelongtermdepositfrompublicatlargeand providefundtomarketsaswellascompanies.E.g.UTI,IFCI,ICICIIDBI. ForeignInstitutionalInvestor(FIIs)Institutionalinvestorsfromforeigncountries registeredwithIndiawithSEBIassuch.Theyaresupposedtobebigplayersof marketcapableofbringinglargeflowsofforeigncurrency.Theyneedtoget registeredwithSEBIundersuchcategoryforduediligenceandtransparency. DepositoriesAninstitutionregisteredunderdepositoriesACT1996forholding, receivingandtransferringsecuritiesinelectronicform. BrokerIntermediaryagencywhoactonoronbehalfofhisclientwithexchange, theyareregisteredmembersofthestockexchange. MutualFundMutualfundsareprofessionallymanagedinvestmentinstitutions thatcollectthesmallsavingsofpublicatlargeandaftermakingabigcorpus underthescheme,investthatcorpusinthecapitalmarket.Theyusedtoshare theirprofitwiththeunitholders.

KeypointswhileTradinginEquitymarkets
1. 2. 3. 4. TradewithaRecognizedStockBroker. AlwaysensuretotakeContractNoteswithin24hoursoftradingDay NeverAcceptunsignedorDuplicateContractNotes. Donotgivecashforanytransactionsinmarkets,alwaysgiveA/Cpayee cheques 5. NeversignBlankChequesofDeliverySlips. 6. TheBrokercannotchargeabrokerageofmorethan2.5% 7. DonotTradeonrumors. 8. AlwayscheckontheNSEWebsitewww.nseindia.comregardinganynews forclarification 9. Doabriefresearchonthestockinwhichyouarewishingtoinvestinto 10. AlwaystradewhilekeepinginmindthefundamentalsoftheCompany 11. DonotexpectExtraordinaryreturnsfromthemarkets,Equitiesarethere foralongertimeinvestments

Chapter2DerivativeSegment
I.Introduction AssumeyouareaFarmergrowingwheatCurrentlytherateofwheatisatthe highestandyoustartsowingseedsinyoufarm,thinkingyouwouldprofithugely duetothisbullruninWheatpricesthistime.Allwasrighttillthistimeuntilu metyouUncleinthesameVillagewhotooisgrowingwheatsinceyearsandhe toldyouabouttheuncertainpricemovementsofWheatwhichresultedlotsof Farmersintohugelosses II.Forwardcontract Aforwardcontractisthesimplestmodeofaderivativetransaction.Itisan agreementtobuyorsellanasset(ofaspecifiedquantity)atacertainfuturetime foracertainprice.Nocashisexchangedwhenthecontractisenteredinto. Illustration1: ShyamwantstobuyaTV,whichcostsRs10,000buthehasnocashtobuyit outright.Hecanonlybuyit3monthshence.He,however,fearsthatpricesof televisionswillrise3monthsfromnow.Soinordertoprotecthimselffromthe riseinpricesShyamentersintoacontractwiththeTVdealerthat3monthsfrom nowhewillbuytheTVforRs10,000.WhatShyamisdoingisthatheislocking thecurrentpriceofaTVforaforwardcontract.Theforwardcontractissettledat maturity.ThedealerwilldelivertheassettoShyamattheendofthreemonths andShyaminturnwillpaycashequivalenttotheTVpriceondelivery. Illustration2: Ramisanimporterwhohastomakeapaymentforhisconsignmentinsixmonths time.Inordertomeethispaymentobligationhehastobuydollarssixmonths fromtoday.However,heisnotsurewhattheRe/$ratewillbethen.Inorderto besureofhisexpenditurehewillenterintoacontractwithabanktobuydollars sixmonthsfromnowatadecidedrate.Asheisenteringintoacontractona futuredateitisaforwardcontractandtheunderlyingsecurityistheforeign currency. Thedifferencebetweenashareandderivativeisthatshares/securitiesisanasset whilederivativeinstrumentisacontract. III.DerivativesSegment 1

DerivativesasthenamesuggestsisaninstrumentwhichisDerivedfromsome UnderlyingAssetanditsmovementdependsonthemovementoftheunderlying AssetalsoknownasSpotpriceandthefactorsaffectingtheSpotinstrument. Aderivativeisaproductwhosevalueisderivedfromthevalueofanunderlying asset,indexorreferencerate.Theunderlyingassetcanbeequity,forex, commodityoranyotherasset.Forexample,ifthesettlementpriceofaderivative isbasedonthestockpriceofastockfore.g.Infosys,whichfrequentlychangeson adailybasis,thenthederivativerisksarealsochangingonadailybasis.This meansthatderivativerisksandpositionsmustbemonitoredconstantly. DerivativeintherecentpasthavetakenafrontseatinIndianCapitalMarkets, wheretheDerivativeSegmentcontributestoalmost60%ofallthetrading VolumeintheExchanges. Aderivativetransactionhelpscoverrisk,whichwouldariseonthetradingof securitiesonwhichthederivativeisbasedandasmallinvestor, Letustakeanexampleofasimplederivativecontract:

Rambuysafuturescontract. HewillmakeaprofitofRs1000ifthepriceofInfosysrisesbyRs1000. IfthepriceisunchangedRamwillreceivenothing. IfthestockpriceofInfosysfallsbyRs800hewillloseRs800.

Aswecansee,theabovecontractdependsuponthepriceoftheInfosysscrip, whichistheunderlyingsecurity.Similarly,futurestradinghasalreadystartedin SensexfuturesandNiftyfutures.TheunderlyingsecurityinthiscaseistheBSE SensexandNSENifty. Whyhavederivatives? Derivativeshavebecomeveryimportantinthefieldfinance.Theyarevery importantfinancialinstrumentsforriskmanagementastheyallowriskstobe separatedandtraded.Derivativesareusedtoshiftriskandactasaformof insurance.Thisshiftofriskmeansthateachpartyinvolvedinthecontractshould beabletoidentifyalltherisksinvolvedbeforethecontractisagreed.Itisalso importanttorememberthatderivativesarederivedfromanunderlyingasset.This meansthatrisksintradingderivativesmaychangedependingonwhathappensto theunderlyingasset. IV.FutureContract Afuturescontractisanagreementbetweentwopartiestobuyorsellanassetata certaintimeinthefutureatacertainprice.Indexfuturesareallfuturescontracts 2

wheretheunderlyingisthestockorIndex(NiftyorSensex)andhelpsatraderto takeaviewonthemarketasawhole. Indexfuturespermitsspeculationandifatraderanticipatesamajorrallyinthe markethecansimplybuyafuturescontractandhopeforapriceriseonthe futurescontractwhentherallyoccurs.Weshalllearninsubsequentlessonshow onecanleverageonespositionbytakingpositioninthefuturesmarket. InIndiawehaveindexfuturescontractsbasedonS&PCNXNiftyandtheBSE Sensexandnear3monthsdurationcontractsareavailableatalltimes.Each contractexpiresonthelastThursdayoftheexpirymonthandsimultaneouslya newcontractisintroducedfortradingafterexpiryofacontract. IndexFuture:FuturecontractonIndices,currentlythereare5IndicesFuture ContractsonNSEDerivativeSegment,NIFTYandBankNIFTYbeingthemost tradedcontracts NIFTYFuture:NiftyfutureisthemosttradedcontractonNSEDerivative segment,withalotsizeof50shares BankNIFTY:BankNiftyfuturecontractisderivativefromtheBankniftyspot IndexwhichrepresentstheBankingsectorstocks,lotsizebeing25shares StockFuture:FuturecontractonStocks,currentlythereare218Futurecontracts onNSEDerivativesegment NocircuitLimitsisapplicableonStocksunderDerivativesegment Example: FuturescontractsinNiftyinJuly2001 Contractmonth August2008 September2008 October Expiry/settlement August28th September25th October30th

TheexpirydateofaDerivativeContractisonthelastThursdayofthemonth, ontheexpiryofthecontractthenewcontractstarts OnAugust29thanewcontractforthemonthofNovemberwillbeinitiated Contractmonth September2008 October2008 November2008 Expiry/settlement September25th October30th November27th 2

LotSize EveryDerivativeContractistradedinLots(abunchofshares)unlikethetrading inCashSegmentintheExchange.ExNiftyhasapermittedlotsizeof50andin multiplesthereof.Thislotsizecanbereviewedbytheexchangetimetotimeand ifrequiredchanged. LetssayifNIFTYistradingat4000,thetotalvalueofthecontractwouldbe 4000*50=2,00,000. Margins UnlikeinCashsegmentwhere100%paymentisrequiredontheDeliveryof shares.InFutureTradingyoucanownaContractbypayingamarginleviedonit. Ex:IfthemarginleviedonNIFTYis10%sotheamountwhichwehavetopayif NIFTYison4000is20,000(10%of2,00,000).Theactualmargininghappens onadailybasiswhileonlinepositionmonitoringisdoneonanintradaybasis. Dailymarginingisoftwotypes: 1.Initialmargins 2.Marktomarketprofit/loss Thecomputationofinitialmarginonthefuturesmarketisdoneusingtheconcept ofValueatRisk(VaR).Theinitialmarginamountislargeenoughtocoveraone daylossthatcanbeencounteredon99%ofthedays.VaRmethodologyseeksto measuretheamountofvaluethataportfoliomaystandtolosewithinacertain horizontimeperiod(onedayfortheclearingcorporation)duetopotential changesintheunderlyingassetmarketprice.Initialmarginamountcomputed usingVaRiscollectedupfront. Thedailysettlementprocesscalled"marktomarket"providesforcollectionof lossesthathavealreadyoccurred(historiclosses)whereasinitialmarginseeksto safeguardagainstpotentiallossesonoutstandingpositions.Themarktomarket settlementisdoneondailybasis. Settlements AlltradesinthefuturesmarketarecashsettledonaT+1basisandallpositions (buy/sell)whicharenotclosedoutwillbemarkedtomarket.Theclosingpriceof 2

theindexfutureswillbethedailysettlementpriceandthepositionwillbecarried tothenextdayatthesettlementprice. Themostcommonwayofliquidatinganopenpositionistoexecuteanoffsetting futurestransactionbywhichtheinitialtransactionissquaredup.Theinitialbuyer liquidateshislongpositionbysellingidenticalfuturescontract. Inindexfuturestheotherwayofsettlementiscashsettledatthefinalsettlement. Attheendofthecontractperiodthedifferencebetweenthecontractvalueand closingindexvalueispaid

Differenceb/wCashandFutureSegments Srno. 1. 2. 3. 4. 5. PointsofDifference Delivery Margin Expiry TradinginIndex Hedging FuturesSegment Thereisno Deliveryofshares Thereisanupfront andMarkto marketMargin Threemonth ExpiryCycle EffectiveTrading canbedonein Index Properand Effectivehedging throughstock& IndexContracts Intraday brokeragesis levied T+1Settlement CashSegment Deliveryofshares takesplace IfDeliveryistaken Fullpaymentistobe made NoExpiryperiod,life longholdingcanbe made Noeffectivemethod Nomeansofhedging available DeliveryBrokerageis leviedforCarrying positions T+2Settlement

6. 7.

Brokerage Settlement

AdvantagesofFuturesegment 1. LowerMargin 2. NoDeliveryobligation 3. HighLiquidity 4. Highprofitpotential 2

5. T+1settlement 6. TradinginIndexallowed RisksinFuturesegment 1. Hugelossduetoleveragepositions 2. HighVolatility 3. Difficultforretailinvestorstomanagetrades

TypesofTradesinDerivativemarkets Broadlytherecanbe3typesoftradersinaderivativeMarket a.Jobber/Speculator:ADerivativetraderwhotradesorspeculatesonadirection andhasahighriskhighreturnprofile Ex:MrAisbullishonInfosysandbuy1lotofInfosysfuture b.Arbitrageurs:Traderswhoaimtoearnriskfreeprofitbytradinginthesame securityindifferentmarkets Ex:DLFfutureforcurrentmonthisquotingat225inNSEfuturesegmentand DLFistradingat220incashsegment.Traderbuys1000sharesofDLFincash segment@220andsells1lot(1000shares)intheNSEFuturesegment,onthe expirydatebothDFLfutureandDLFspotwillbeequalgiving5Rs/sharerisk freeprofittothetrader c.Hedger:Traderswhohedgetheirunderlyingpositionincashmarketbytrading intheFuturemarketwithanaimofmitigatingtheriskinthecashsegment Ex:Traderhas1000sharesofDLF,CMP220hefearsthestockcouldfalldueto recentnewsinthestockandwantstohedgethepricerisk Hewillsell1lotofDLFinthefuturesegmentwhichhelpshimprotectthe downsideriskinthestockbyneutralisingthefallinpriceincashsegmentbythe profitinshorttradeinDLFfuture OpenInterest:Thetotalnumberofoutstandingcontractswhichareyettobe squaredoffasondate Rollover:Aprocessofsquaringoffthecurrentopenpositionandtakingthesame directionalpositioninthenextseriesoftheFuturecontract 2

BanPeriod:ExchangeshaveprescribedaMWPL(Marketwidepositionlimit)of everyfuturecontractintheExchanges,Iftheopenpositionofthecontractcrosses 95%oftheMWPLlimit.Freshpositionsintheunderlyingarebannedand penalised

OPTIONS
AswehaveseeninFuturesContractthatitrequiresheavymarginandlossesin theFuturestradingarenotlimiteditincreasestillthepositionisclosedNowwhat ifaninvestorratherthantradingthemomentumofthecontractwantstobetona particularleveloftheContractandthattoowithalimitedlosstakingcapacity, theanswerisOptions Optionsasthenamesuggestsgivesandoptiontothecontractbuyerbutnotthe obligations. LetssayoneneedsanInsuranceof1lacandhepaysapremiumof2000tothe insurancecompanyforsecuringhislifethesamehappensinoptionswepaya premiumtothecontractbuyerforabetataparticularpriceanddatetobe executedknownasstrikeprice Featuresofoptions

GivestherightbutnottheObligation HasthesamecontractcycleandunderlyingAsset(Stock&Indices)asin FutureContracts. Limitedloss,Unlimitedprofittotheoptionbuyer Fullpremiumamounthastobepaidupfront DifferentstrikepricesavailableinaparticularContractCycle UsefulinallkindsofmarketsBullish,Bearish,Volatile,Stable

TypesofOPTIONS 1.CallOptions 2.PutOptions. Calloption ACalloptionisacontractbetweentwopartiesgivingthetaker(buyer)theright, butnottheobligation,tobuyorsellaparcelofsharesatapredeterminedprice 2

possiblyon,orbeforeapredetermineddate.Toacquirethisrightthetakerpaysa premiumtothewriter(seller)ofthecontract. Forexample,aHINDUNILVRtwomonthcalloptionistradingatRs380,witha premiumofRs10.Here,thecalloptionbuyerhastherighttobuyRelianceatRs 380,wherethestrikeprice(Contractprice)isRs380andRs10isthepremium theoptionwritergets. Cashflowstatementincalloptionwithdifferentspotprice ExpectedSpotprice 360 370 380 390 395 400 PayofffromCalloption Strikeprice 380 380 380 380 380 380 Premium 10 10 10 10 10 10 Netprofitloss (10) (10) (10) 0 5 10

Here,theoptionbuyerwillchoosetoexercisehisoptiononlywhenitprofitshim todoso,theoptionservestheoptionbuyerasadeviceforlimitingpricerisk.The calloptionholdercanmakeaprofitiftheunderlyingassetincreasesinprice,but limitshislosstothecostoftheoptioniftheunderlyingassetlosesvalue. CallOptionsLong&ShortPositions Whenyouexpectpricestorise,thenyoutakealongpositionbybuyingcalls.You arebullish. Whenyouexpectpricestofall,thenyoutakeashortpositionbysellingcalls.You arebearish. PutOptions 2

APutOptiongivestheholderoftherighttosellaspecificnumberofsharesofan agreedsecurityatafixedpriceforaperiodoftime. Supposeyouwanttosell2monthRelianceatRs380withapremiumof10.Buya putoption. CashflowstatementfromPutoptionwithdifferentspotprice Expectedspotprice 360 370 380 390 PayofffromPutoption Strikeprice 380 380 380 380 Premium 10 10 10 10 Netprofit/loss 10 0 (10) (10)

PutOptionsLong&ShortPositions Whenyouexpectpricestofall,thenyoutakealongpositionbybuyingPuts.You arebearish. Whenyouexpectpricestorise,thenyoutakeashortpositionbysellingPuts.You arebullish.

Optionstyle Thereare2optionstyles a.American:Alltheoptionswhichcanbeexcercisedonorbeforetheexpirydate, currentlyIndianDerivativemarketsfollowonlyEuropeansytleofoptions, abbreviatedasCA(CallAmerican),PA(PutAmerican) 2

b.European:Alltheoptionswhichcanbeexercisedonlyontheexpiryday, currentlyboththestockandindexoptionsareinEuropeanstyle Ex:NIFTY31May20125000CE(CallEuropean),INFY31MAY20121800PE (PutEuropean) OptionBuying Anoptionbuyeristheownerofthecallandhastherightbutnottheobligationto exercise Anoptionbuyerhastopaythefullpremiumwhichisthemaximumlossthebuyer canhaveontheoption,hisriskprofileisalimitedriskpotentiallyunlimited returnreturnprofile Optionseller Oftentermedasoptionwriterhastheobligationtowardstheoptioncontractif thebuyerwishestoexercisehisright Anoptionsellerhastopayamarginalmostequaltothefuturecontractofthe contractandhasalimitedreturn,unlimitedriskprofile ExpiryandlotsizeofanoptioncontractsfallonthesamedateasoftheFuture contractoftheunderlyingwhichisthelastThursdayofthemonth Premiumisthepricepaidbythebuyerofanoptiontoowntherightofthat option,premiumhas2componentsnamelyIntrinsicvalueandtimevalue IntrinsicValueofanoption Intrinsicvalueofanoptionistherealworthofthatoptionasondateorthe amountwhichisreceivedbytheoptionbuyeriftheoptionisexcercisedtoday, Intrinsicvaluecannotbelessthan0 Timevalueofanoption Timevalueofanoptionisthecomponentchargedbythesellerfortheriskhe takesforthetimelefttoexpiryofthecontract,thisisalsoknownasriskpremium ofanoptioncontract Premium=IntrinsicValue+TimeValue IntrinsicValue=PremiumTimeValue TimeValue=PremiumIntrinsicValue 2

Thetimevaluecomponentofanoptiondecreaseseverydaytilltheexprirydate OPTIDX(optiontype)NIFTY(underlying)31MAY(expiry)5000(strike price)CE(optionstyle)@100(premium)

Moneynessofoption a.Inthemoneyoption:EveryoptionwhichhasapositiveIntrinsicvalueisanin themoneyoption Intrinsicvalueincaseof Call=Spot>Strike Put=Spot<Strike

b.Atthemoneyoption:Anoptionwherestrikeisequaltospot,thisoptionhasno intrinsicvalue Intrinsicvalueincaseof Call:Spot=Strike Put:Spot=Strike c.Outofthemoneyoption:AnoptioncontractwhereIntrinsicvalueofanoption is0 Intrinsicvalueincaseof Call=Spot<Strike Put=Spot>Strike AlsotounderstandthatanInthemoneyoptionwouldalwayscommandmore premiumcomparativelythananoutofthemoneyoptiononthesamecontract andsameexpiryperiod Thereisnorolloverinoptionscontract ReturnonInvestmentinFuturevsoptions

AssumingTrader'A'andTrader'B'arebullishonNIFTYwhichiscurrentlytrading at5000. Trader'A'buysaNIFTYfuturecontractbypaying25,000marginmoney Trader'B'buysaNIFTY5100CE@100 IftheNIFTYexpiresat5500attheendofthemonth,thepayoffswillbe, assumingniftylotsizeas50shares Trader A B Investment 25000 5000 Return 25000 15000 ROI% 100.00% 300.00%

Thissimplystatesthereturnoninvestmentinoptionsinmuchmorethanthatof Futurecontract

WhyTradeinoptions 1. LowInvestmentrequired 2. LimitedLoss 3. CantradeforBullishandBearishviews 4. NoDeliveryobligations

Chapter3Commodities
CommoditytradinglikeanyotherFinancialInstrumenttakesplacesonElectronic tradingplatformsinIndia.Commoditytradinghasgrownhugespeciallywiththe reachofTradingterminalstouchingtheremotestruralplaces. Differenceb/wEquity,EquityFutureandcommodityMarket Pointsofdifference Equity Underlying Delivery Tradetime Globalmarket linkage Stocks Compulsory 9am3:30pm Nodirectlinkage ofstocks EquityDerivative Stocks,Index Nodelivery 9am3:30pm CommodityFuture Commodity Optional 10am11:55pm

Nodirectlinkage Directlinkageof ofindividualstocks Metal,bullionand energy commodities Onlyaspeculative Canbeconsumed contract No No

Physicalpresence

Cannotbe physicallytouch, seen Yes

Dividend

Typesofcommodities a.Agriculturecommodities:Allthosecommoditieswhichareproducedvia agriculturalactivitieslikeWheat,Guar,Soyabeen,cotton,turmericetc b.BaseMetals:MetalcommoditiesusedmainlyinIndustrialproductionunitslike Copper,Zinc,Aluminium,nickel,Lead c.Preciousmetal:CommoditieswhichareusedasanInvestmentandareprecious innaturelikeGold,silver d.Energy:CommoditieswhichareusedasanEnergysourcelikeCrudeoiland naturalgas CommodityExchangesinIndia Therearemainly2commodityexchangesinIndia MCXMulticommodityExchange NCDEXNationalcommodityandderivativeexchange 3

MCXismainlyusedfortradinginMetal,preciousmetalandenergycommodities, startsfrom10:00amto11:55pm NCDEXisusedmainlyforAgriculturalrelatedcommodities,startsfrom10:00am to5:00pm ContractspecificationforMCXcommodities Commodity Gold Silver Crudeoil NaturalGas Aluminium Copper Nickel Lead Zinc Pricequotation Per10grams Per1KG Perbarrel Permmbtu Perkg Perkg Perkg Perkg Perkg 1KG 30Kgs 100barrel 1250mmbtu 5000kgs 1000kgs 250Kgs 5000kgs 5000kgs Lotsize

FactorsaffectingMCXCommodityprices a.Globalprices b.GlobalEconomicconditions c.US/UKEconomicdatas d.GlobalStocks e.Internationalevents f.OPECdecisions TradinginCommodities TradingAccount:EverytraderwhowishestotradeinIndianCommoditymarkets needtoopenaCommodityTradingaccountwithRegisteredBroker/SubBroker viafillingaKYCForm InitiailMargin:TraderswillingtotakepositionsinCommodityFuturecontracts needtopayaninitialMarginequalto48%ofthecontractvalue,Traderscanbe askedtopayadditional/specialmarginsincaseofexcessivevolatilityinthe markets MarktoMarketmargin:AdditionaltotheInitialmarginpaidatthetimeof trading,tradersalsoneedtopayanadditionalmarktomarketmarginaspertheir profit/loss 3

ExpiryinMCX:ExpiryintheMCXcontractsdependsontheInternational contractsgenerallyinthecycleofevery5 th,19th/20th,25th,30th/31stofthe month Brokerage:Normallybrokeragechargeofof0,030.003%isleviedincommodity markets PhysicalDelivery:Traderswishingtotakephysicaldeliveryincommodity contractsneedtoclearlyspecifytheirdeliveryintentbeforetheexpiryofthe contractandneedtocollectthedeliveryfromdesignateddeliverycentersof Exchanges

NCDEXExchange
NCDEXismainlyusedforAgriculturalcommoditytradingandisalsotermedasa speculator'sparadise Contractspecifications Contract Price Lotsize quotation GUARGUM JEERA PEPPER TURMERIC MENTHA CHANA SOYABEEN Refsoyoil 1quintal 1MT 1quintal 3MT 1quintal 1MT 1quintal 5MT 1kg 360kgs 1quintal 10MT 1quintal 10MT 10Kgs 10MT

Ticksize Rs10 Rs2.50 Rs5 Rs2 Rs0.10 Rs1 Rs0.50 Rs0.05 Rs1

Production Jodhpur Unjha Kochi Nizamabad Chandausi Delhi Indore Indore Akola

COTTONSeed 1quintal 10MT oilcake

1quintal=100kgs 1MT(metrictonne)=1000kgs

Chapter4CurrencyDerivatives
CurrencyDerivativestartedinIndiabackon29 thAugust2008byNSEcurrency derivativesegment,currentlythereare4contractstradedintheCurrency Derivativesegment AboutMCXSX MCXStockExchange(MCXSX),India'snewstockexchange,waslaunchedon October7,2008,undertheregulatoryframeworkofSecurities&ExchangeBoard ofIndia(SEBI).TheexchangereceivedapprovalfromSEBIandReserveBankof India(RBI)tolaunchanationwideelectronicplatformfortradingincurrency derivatives. Currencymarketisthemarketwithhugevolumeandlessspread. ClearingandSettlementisconductedthroughtheMCXSXClearingCorporation Ltd(MCXSXCCL).

CurrenciesTradedinIndianCurrencysegment USDollarIndianRupee(USDINR) EuroIndianRupee(EURINR) PoundSterlingIndianRupee(GBPINR) JapaneseYenIndianRupee(JPYINR) USDINRbeingthemostwidelytradedcurrency Expirydate:Twoworkingdayspriortothelastbusinessdayoftheexpirymonth at12noon Contractspecifications Contract Lotsize USDINR (1USD) EURINR (1EURO) GBPINR (1GBP) 1000

Ticksize 0.0025

Margin

Tradetime

1.75%onfirstday Mondayto &1%thereafter Friday,9am to5pm 2.8%onFirstday &2%thereafter Mondayto Friday,9am to5pm

1000

0.0025

1000

0.0025

3.2%onfirstday& Mondayto 2%thereafter Friday,9am to5pm 3

JPYINR (100JPY)

1000

0.0025

4.50%onfirstday Mondayto &2.30%thereafter Friday,9am to5pm

TradersinCommodityMarkets a.Importer b.Exporter c.Trader d.Speculator e.Hedger f.Arbitrageurs TrackingForeignmarkets ManufacturingPMI Unemploymentrate

Tradebalance Currentaccount ECBconference ConstructionPMI ServicePMI FinalGDPq/q RetailSalesm/m FactoryOrdersm/m Unemploymentclaims AssetPurchaseFacility OfficialBankRate PPIInputm/m HalifaxHPIm/m ClaimantCountChange 3

 CoreCPIm/m ZEWEconomicSentiment PublicSectorNetBorrowing M4moneySupply PMI:PurchasingManagers'Index PPI:ProducerPriceIndex HPI:HousingPriceIndex CPI:ConsumerPriceIndex

Chapter5Comex
CMEGroupistheworld'slargestfutureexchanges. CMEGroupInc.(CME)ownsandoperateslargederivativesandfutures exchangesinChicagoandNewYorkCity,aswellasonlinetradingplatforms. Theexchangetradedderivativecontractsincludefuturesandoptionsbasedon interestrates,equityindexes,foreignexchange,energy,agriculturalcommodities, rareandpreciousmetals,weatherandrealestate. ThecorporateworldheadquartersareintheChicagoLoopfinancialdistrict.The corporationwasformedbythe2007mergeroftheChicagoMercantileExchange (CME)andtheChicagoBoardofTrade(CBOT).OnMarch17,2008,it announceditsacquisitionofNYMEXHoldings,Inc.,parentcompanyoftheNew YorkMercantileExchangeandCommodityExchange,Inc(COMEX),whichwas formallycompletedonAugust22,2008.Thefourexchangesnowoperateas designatedcontractmarkets(DCM)oftheCMEGroup. CMEGroupincludes4designatedcontractmarkets(DCM):

CME CBOT COMEX NYMEX

Thecompany's(CMEs)twoprincipaldivisionsaretheNewYorkMercantile Exchange(NYMEX)andCommodityExchange,Inc(COMEX),onceseparately ownedexchanges. BothNYMEXandCOMEXnowoperateasdesignatedcontractmarkets(DCM)of theCMEGroup. TheothertwodesignatedcontractmarketsintheCMEGrouparetheChicago MercantileExchange(CME)andtheChicagoBoardofTrade(CBOT). CME: TheChicagoMercantileExchange(CME)(oftencalled"theChicagoMerc,"or"the Merc")isanAmericanfinancialandcommodityderivativeexchangebasedin Chicagoandlocatedat20S.WackerDrive. TheCMEwasfoundedin1898astheChicagoButterandEggBoard,an agriculturalcommoditiesexchange. 3

Originally,theexchangewasanonprofitorganization.TheMercdemutualizedin November2000,wentpublicinDecember2002,andmergedwiththeChicago BoardofTradeinJuly2007tobecomeadesignatedcontractmarketoftheCME GroupInc.,whichoperatesbothmarkets. OnAugust18,2008,shareholdersapprovedamergerwiththeNewYork MercantileExchange(NYMEX)andCOMEX.TheMerc,CBOT,NYMEXand COMEXarenowmarketsownedbytheCMEGroup.

CommoditiesmainlytradedinCME: LiveCattle FeederCattle LeanHogs Milk FrozenPorkBellies InternationalSkimmedMilkPowder(ISM) Butter SoftwoodPulp HardwoodPulp. CBOT: TheChicagoBoardofTrade(CBOT),establishedin1848,istheworld'soldest futuresandoptionsexchange.Morethan50differentoptionsandfutures contractsaretradedbyover3,600CBOTmembersthroughopenoutcryand eTrading. Volumesattheexchangein2003werearecordbreaking454millioncontracts. On12July2007,theCBOTmergedwiththeChicagoMercantileExchange(CME) toformtheCMEGroup,aCME/ChicagoBoardofTradeCompany.CBOTand threeotherexchanges(CME,NYMEX,andCOMEX)nowoperateasdesignated contractmarkets(DCM)oftheCMEGroup. CommoditiesmainlytradedinCBOT: Corn Oats Soybeans SoybeanMeal SoybeanOil Wheat Ethanol,etc. COMEX/NYMEX: 3

TheNewYorkMercantileExchange(NYMEX)isacommodityfuturesexchange ownedandoperatedbyCMEGroupofChicago.NYMEXislocatedatOneNorth EndAvenueintheWorldFinancialCenterintheBatteryParkCitysectionof Manhattan,NewYorkCity.AdditionalofficesarelocatedinBoston,Washington, D.C.,Atlanta,SanFrancisco,Dubai,London,andTokyo. TheCMEGroupstwoprincipaldivisionsaretheNewYorkMercantileExchange andCommodityExchange,Inc(COMEX),onceseparatelyownedexchanges.On March17,2008,ChicagobasedCMEGroupsignedadefinitiveagreementto acquireNYMEXHoldings,Inc.for$11.2billionincashandstockandthetakeover wascompletedinAugust2008.BothNYMEXandCOMEXnowoperateas designatedcontractmarkets(DCM)oftheCME. TheNewYorkMercantileExchangehandlesbillionsofdollarsworthofenergy products,metals,andothercommoditiesbeingboughtandsoldonthetrading floorandtheovernightelectronictradingcomputersystemsforfuturedelivery. Thepricesquotedfortransactionsontheexchangearethebasisforpricesthat peoplepayforvariouscommoditiesthroughouttheworld. MajorcommoditiestradedinCOMEX&NYMEX: Gold(COMEX) Silver(COMEX) Copper(COMEX) Crudeoil(NYMEX) Contractspecifications I.GOLD(COMEX) ProductSymbol:GC ContractSize:100troyounces PriceQuotation:U.S.DollarsandCentspertroyounce MinimumFluctuation$:0.10pertroyounce II.SILVER(Comex) ProductSymbol:SI 3

ContractSize:5,000troyounces PriceQuotation:U.S.Centspertroyounce MinimumFluctuation:OutrighttransactionsincludingEFP:$0.005pertroy ounce. Straddleorspreadtransactionsandsettlementprices:$0.001pertroyounce. III.Copper(COMEX) ProductSymbol:HG ContractSize:25,000pounds PriceQuotation:U.S.Centsperpound MinimumFluctuation:$0.05perpound IV .Crudeoil(NYMEX) ProductSymbol:CL ContractSize:1,000barrels PriceQuotation:U.S.DollarsandCentsperbarrel MinimumFluctuation:$0.01perbarrel

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