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MARKET-
INDIA
L.C 01695
SHIVAMOGGA
A Project Report On
DERIVATIVES
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L.C 01695
SHIVAMOGGA
A PROJECT REPORT ON DERIVATIVES MARKET IN INDIA Submitted By
NIRANJAN KUMAR C V
Reg. No. 510740335
Internal guide:
Mr. Kaleemulla Khan
External guide:
Branch Manager KARVY STOCK BROKING
A Project Report Submitted in partial fulfillment of the requirement for the degree of Master of Business Administration of SIKKIM MANIPAL UNIVERSITY, INDIA
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DECLARATION
I here by declare that the project report entitled Derivatives Market In India has been prepared by me under the guidance of Mr. Kaleemulla Khan Dept of Management, Hoysala College, shivammoga.
This project report has been submitted to SIKKIM MANIPAL UNIVERSITY in the partial fulfillment of requirement for the award of Degree of Master of Business Management Information Technology.
I also declare that this report has not been submitted any other university for the award of any Degree or Diploma.
Date: Place: Shivammoga Signature of the student (Mr. Niranjan Kumar C V) Reg. No.510819849
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CERTIFICATE
NIRANJAN KUMAR C V
Reg. No. 510740335
Entitled
A PROJECT REPORT ON DERIVATIVES MARKET IN INDIA
with special reference to KARVY STOCK BROKING is approved and is acceptable in quality and form.
Internal Examiner
External Examiner
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BONAFIDE CERTIFICATE
STUDIES, SHIVAMOGGA
STUDYING IN
2009 2010
with special reference to KARVY STOCK BROKING is prepared by her in partial fulfillment of MBA(IT) Course.
Date :
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Place :
GUIDE CERTIFICATE
This is to certify that the Project Report entitled A STUDY ON DRIVATIVES MARKET IN INDIA with special reference to KARVY STOCK BROKING, SHIVAMOGGA Submitted in partial fulfillment of the requirements for the degree of Masters of Business Administration of Sikkim Manipal University of Health, Medical and Technological Sciences.
Mr.NIRANJAN KUMAR C V has worked under my supervision and guidance and that no part of this report has been submitted for the award of any other degree, Diploma, Fellowship or Other similar titles or prizes and that the work has not been published in any journal or Magazine.
Certified
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(Mr.somsundram)
Karvy Stock Brocking 308, 15th Cross, 5th Phase, J. P. Nagar, Ring Road, Bangalore - 560078 Date: 03/12/2009
This is to certify that Mr. Niranjan Kumar C V Final Year student of Hoysala College of Management and IT Studies, Shivamoga has successfully completed the project report Derivatives Market In India from 21st April 2009 to 20th December, 2009.
During the project he was found sincere and hardworking and it took him little time to understand the procedures and policies of the company.
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ACKNOWLEDGEMENT
I express my sincere thanks to SIKKIM MANIPAL UNIVERSITY for making a source of inspiration all along our management career.
I express my sincere thanks to my guide Mr.SOMSUNDRAM, faculty Member, Hoysala College of Management & IT Studies, Shivamogga and external guide Mr. Naveen Kumar, Branch Manager, karvy stock broking for giving me their valuable guidance and timely support to complete this project successfully. I express my sincere thanks to our Principal Dr. D.M. BASAVARAJU for giving me permission to do this project report.
Last but not least, I am thankful to my friends & faculties of HCMIT who helped me directly and indirectly in the completion of this project work. I also thank to all the family members who have helped me in many ways to complete this study successfully.
Date :
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Place:
PART-A
COMPANY PROFILE
KARVY- Comtrade Limited
It is a venture of the prestigious Karvy group. With well established presence in the multifarious facets of the modern financial services industry from stock broking to registry services, it is indeed a pleasure for them to make foray into the commodities derivatives market which opens yet another door for them to deliver their service to the beloved customers and the investor public at large. With the high quality infrastructure already in place and a committed Government providing continuous impetus, it is the responsibility of the company, the intermediaries to deliver these benefits at the door-steps of the esteemed customers. With the expertise in financial services, existence across the lengths and breadths of the country and an enviable technological edge, they are all set to bring the pleasure of investing in this burgeoning market, which they touch upon the lives of a vast majority of the population from the farmer to the corporate alike. They are confident that the commodity futures can be a good value addition to customer portfolio. The company provides investment, advisory and brokerage services in Indian Commodities Markets. And most importantly, they offer a wide reach through their branch network of over 225 branches located across 180 cities. As the flagship company of the Karvy Group, Karvy Consultants Limited has always remained at the helm of organizational affairs, pioneering business policies, work ethic and channels of progress. Having emerged as a leader in the registry business, the first of the businesses that they ventured into, they have now transferred this business into a joint venture with Computershare Limited of Australia, the worlds largest registrar. With the advent of depositories in the Indian capital market and the relationships that they have created in the registry business,
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they believe that they are best positioned to venture into this activity as a Depository Participant. They are one of the early entrants registered as Depository Participant with NSDL (National Securities Depository Limited), the first Depository in the country and then with CDSL (Central Depository Services Limited). Today, they service over 6 lakhs customer accounts in this business spread across over 250 cities/towns in India and are ranked amongst the largest Depository Participants in the country. With a growing secondary market presence, they have transferred this business to Karvy Stock Broking Limited (KSBL), they are a associate and a member of NSE, BSE and HSE.
Member - National Stock Exchange (NSE), The Bombay Stock Exchange (BSE), and The Hyderabad Stock Exchange (HSE). Karvy Stock Broking Limited, one of the cornerstones of the Karvy edifice, flows freely towards attaining diverse goals of the customer through varied services. Creating a plethora of opportunities for the customer by opening up investment vistas backed by research-based advisory services. Here, growth knows no limits and success recognizes no boundaries. Helping the customer create waves in his portfolio and empowering the investor completely is the ultimate goal. It is an undisputed fact that the stock market is unpredictable and yet enjoys a high success rate as a wealth management and wealth accumulation option. The difference between unpredictability and a safety anchor in the market is provided by in-depth knowledge of market functioning and changing trends, planning with foresight and choosing one options with care. This is what they provide in their Stock Broking services. They offer services that are beyond just a medium for buying and selling stocks and shares. Instead they provide services which are multi dimensional and multi-focused
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in their scope. There are several advantages in utilizing their Stock Broking services, which are the reasons why it is one of the best in the country.
The paradigm shift from pure selling to knowledge based selling drives the business today. With their wide portfolio offerings, they occupy all segments in the retail financial services industry. A 1600 team of highly qualified and dedicated professionals drawn from the best of academic and professional backgrounds are committed to maintaining high levels of client service delivery. This has propelled them to a position among the top distributors for equity and debt issues with an estimated market share of 15% in terms of applications mobilized, besides being established as the leading procurer in all public issues. To further tap the immense growth potential in the capital markets they enhanced the scope of their retail brand, Karvy the Finapolis , thereby providing planning and advisory services to the mass affluent. Here they understand the customer needs and lifestyle in the context of present earnings and provide adequate advisory services that will necessarily help in creating wealth. Judicious planning that is customized to meet the future needs of the customer deliver a service that is exemplary. The market-savvy and the ignorant investors, both find this service very satisfactory. The edge that they have over competition is their portfolio of offerings and their professional expertise. The investment planning for each customer is done with an unbiased attitude so that the service is truly customized. Their monthly magazine, Finapolis, provides up-dated market information on market trends, investment options, opinions etc. Thus empowering the investor to base every financial move on rational thought and prudent analysis and embark on the path to wealth creation.
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They have traversed wide spaces to tie up with the worlds largest transfer agent, the leading Australian company, Computershare 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 them. With their management team completely transferred to this new entity, they will aim to enrich the financial services industry than before. The future holds new arenas of client servicing and contemporary and relevant technologies as they are geared to deliver better value and foster bigger investments in the business. The worldwide network of Computer share will hold them in good stead as they expect to adopt international standards in addition to leveraging the best of technologies from around the world. Excellence has to be the order of the day when two companies with such similar ideologies of growth, vision and competence, get together.
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In re-engineering and managing processes or delivering new efficiencies, their service meets up to the most stringent of international standards. Their outsourcing models are designed for the global customer and are backed by sound corporate and operations philosophies, and domain expertise. Providing productivity improvements, operational cost control, cost savings, improved accountability and a whole gamut of other advantages. They operate in the core market segments that have emerging requirements for specialized services. Their wide vertical market coverage includes Banking, Financial and Insurance Services (BFIS), Retail and Merchandising, Leisure and Entertainment, Energy and Utility and Healthcare.
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Part-B
PROJECT OVERVIEW
The research on the general study of derivatives market has been conducted to improve the knowledge about the derivatives market and its performance in India. However another problem was that beyond better performance many traders are not trading derivatives. Hence the research has been conducted to study the attitude of the investors and traders. The derivatives market is booming in India and shows better performance year by year. The research has been conducted in Karvy Comtrade Ltd, which works on derivatives. 10 investors have been selected for the research on their easy availability. The results show that lack of knowledge, fear and motivation are the main factors leading the investors and the traders to step aside of the derivatives market. Hence there is a need of improving marketing strategies to motivate them to invest in derivative market. However a Derivative can be defined as a financial instrument whose value depends on the values of others, more basic underlying variables. The research how to trade and what are formalities to be accomplished to trade in the derivatives market. The methodology adopted for the research on the basis of sampling design and selection of respondents is clear. Hence the results are better and can be easily acceptable. This research comes across the meaning of derivatives, the trading system and guides to play safely in the market. It would motivate the common people to trade in the derivatives market as it explains the risks in the market and give suggestions to overcome those risks. This report also explains the settlement procedures, the charges involved and process of trading. Hence it enhances the confidence level and persuades to invest or trade in the derivative market
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INTRODUCTION TO PROJECT
As a part of our curriculum, this project aims to study A GENERAL STUDY ON DERIVATIVES MARKET IN INDIA. The study was conducted in Shimoga. This study mainly helps to know the trading system of derivatives market and its consequences. It creates awareness about the market and persuades to trade in a safe manner. This study also come across various problems faced by the traders of derivatives market and provides some suggestions to overcome it. The study has been conducted under the guidance and assistance of company guide and the staff members of Karvy the finapolis, shimoga and also under the faculty members of our college. The stock market took a diversified step by the way of trading through the Derivatives. Lot of people with lack of knowledge and fear step back to trade in Derivatives. The trading mechanism is such that a win-lose situation as one has to incur the loss and the latter gains which is unlike the equity market. The basic information about the market is provided in the latter part of this thesis. However let us have a look at the research information proposed to be carried out.
Listing the objectives of the study The objectives are clear and the problem is recognized. The main of the study is to improve the knowledge in the derivatives market and to assist others who wish to trade in such market. Preparing the questionnaire
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Open ended questionnaire are prepared for the purpose of the study as the there is less chances to be biased. The questionnaire prepared to the staff of market and the traders are different. However they are enclosed at the end of the report.
Collection of the secondary data The secondary data is collected by referring books, magazines and internet. The basic knowledge about the market has been collected through books, current news and other information were collected through the internet.
Analysis of secondary data Comparison of the secondary data is done. Screening of the various data collected. The non useful data collected are screened and the data that to be collected for primary data are planned.
Collection of Primary data The interaction with company guide and investors helped for the collection of the primary data. The study of secondary data helped for the collection of some useful data here.
Evaluation of the primary data After the collection of the primary data, comparison between the primary data with secondary data is made to know the reliability and accuracy of the data collected.
Suggestions from faculty guide The suggestion from the college faculty guide is taken and it helped for the follow ups of the research. It also helped for the clear flow of the research conducted.
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Preparing the research report Finally the report of the research has been drawn which conveys about the research.
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And reported just today, Lehman Brothers is now on the edge, due to exposure to derivatives. Derivatives are the Elephant in the Living Room The subprime mortgage crisis is bad, and is hurting many people, and slowing the economy. High oil and food prices are bad, and are hurting many people, and bringing down the economy. But -- according to top insiders -- derivatives are the elephant in the room . . . the single largest threat to the U.S. and world economy. One reason is that, according to Paul Volcker, the former chairman of the Federal Reserve, the entire modern financial system is based upon derivatives, and the financial system today is entirely different from the traditional American or global financial system because derivatives - a relatively new concept - now underly the entire fabric of the financial system. In short, many of the people who know the most about derivatives say that the current system is a house of cards built upon derivatives. Moreover, as mentioned above, the subprime and derivatives crises are closely linked. Similarly, Britian's New Statesman newspaper links derivatives and rising food and commodity prices: "This latest food emergency has developed in an incredibly short space of time - essentially over the past 18 months. The reason for food "shortages" is speculation in commodity futures following the collapse of the financial derivatives markets. Desperate for quick returns, dealers are taking trillions of dollars out of equities and mortgage bonds and ploughing them into food and raw materials. It's called the "commodities super-cycle" on Wall Street, and it is likely to cause starvation on an epic scale. The rocketing price of wheat, soybeans, sugar, coffee - you name it - is a direct result of debt defaults that have caused financial panic in the west and encouraged investors to seek "stores of value". These range from gold and oil at one end to corn, cocoa and cattle at the other; speculators are even placing bets on water prices." Hiding the Ball And yet banks and financial houses have hidden their derivatives exposure off the balance sheets. No wonder almost no one understands derivatives:
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"Not only [world's richest man] Warren Buffett, but Bond King Bill Gross, our Fed Chairman Ben Bernanke, the Treasury Secretary Henry Paulson and the rest of America's leaders can't 'figure out'" the derivatives market. Indeed, the government may have actively helped to hide the the derivatives mess since at least 2006. For example, according to Business Week: "President George W. Bush has bestowed on his intelligence czar, John Negroponte, broad authority, in the name of national security, to excuse publicly traded companies from their usual accounting and securities-disclosure obligations." Former fed chairman Alan Greenspan has been a huge booster for and defender of derivatives since 1999 or before (and see this). Did you know that the same guy that pushed subprime loans has also aggressively pushed derivatives for many years? And the other regulatory agencies and Congress have taken a totally hands-off approach towards derivatives. How Big a Problem? How big is the derivatives market? Worldwide, it is $596 TRILLION dollars *. The derivatives market dwarfs the real market for goods and services, and acts likes an unregulated black market. As one writer put it: "Its all smoke and mirrors. The financial system has decoupled from the productive elements of the economy and is now beginning to show disturbing signs of instability." And its not just the U.S. Derivatives salesmen have sold these babies all over the world. Because banks, financial institutions and governments world-wide have bought significant derivatives, the fall out will not be limited solely to the U.S. See this and this. If the derivatives market is truly unwinding, as my investment advisor friend and some of the top industry insiders say, we could be in for a very bumpy ride.
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SCOPE:
It is important to note that GOLD is traded more in the derivatives market. Some details about it is provided. Gold is a unique asset based on few basic characteristics. First, it is primarily a monetary asset, and partly a commodity. The distinction between gold and commodities is important. Gold has maintained its value in after-inflation terms over the long run, while commodities have declined.
Timeless and Very Timely Investment For thousands of years, gold has been prized for its rarity, its beauty, and above all, for its unique characteristics as a store of value. Nations may rise and fall, currencies come and go, but gold endures. In todays uncertain climate, many investors turn to gold because it is an important and secure asset that can be tapped at any time, under virtually any circumstances. But there is another side to gold that is equally important, and that is its day-to-day performance as a stabilizing influence for investment portfolios. These advantages are currently attracting considerable attention from financial professionals and sophisticated investors worldwide.
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Diversification helps protect your portfolio against fluctuations in the value of any one-asset class. Gold is an ideal diversifier, because the economic forces that determine the price of gold are different from, and in many cases opposed to, the forces that influence most financial assets.
Gold is the ideal gift In many cultures, gold serves as a family treasure or a wealth transfer vehicle that is passed on from generation to generation. Gold bullion coins make excellent gifts for birthdays, graduations, weddings, holidays and other occasions. They are appreciated as much for their intrinsic value as for their mystical appeal and beauty. And because gold is available in a wide range of sizes and denominations, you dont need to be wealthy to give the gift of gold.
Gold is highly liquid Gold can be readily bought or sold 24 hours a day, in large denominations and at narrow spreads. This cannot be said of most other investments, including stocks of the worlds largest corporations. Gold is also more liquid than many alternative assets such as venture capital, real estate, and timberland. Gold proved to be the most effective means of raising cash during the 1987 stock market crash, and again during the 1997/98 Asian debt crisis. So holding a portion of your portfolio in gold can be invaluable in moments when cash is essential, whether for margin calls or other needs.
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Import of gold by banks authorized by the RBI has succeeded to a large extent in curbing illegal operations in gold and in foreign exchange markets. It has also resulted in reducing the disparity between international and domestic prices of gold from 57 per cent during 1986 to 1991 to 8.5 percent in 2001. The import duty on gold, which was Rs.220 per ten grams up to January 1999, was increased toRs.400 per ten grams, and with effect from April 2001 has been reduced to Rs.250 per ten grams. The estimates of duty realized from gold imports indicate an annual amount varying from about Rs. 1,000 to Rs. 2,000 crore per annum since 1997. Even though the country consumes more than 800 tons of the metal every year, the system of assaying and hallmarking has not gained the desired importance. The low quality of gold jewels being sold in the country and the resultant losses being incurred by the consumers are being recognized now. Recent surveys conducted by the Bureau of Indian Standards (BIS) jointly with Central Consumer Protection Council in 5 major cities reveal that more than 80 per cent of the jewels being sold in the market were of lower purity than claimed and charged for. In some cases, the gold articles sold were 38.6 per cent short in purity in monetary terms. The low purity results in a loss of around 16 per cent to gold jewels. In the recent past, RBI has been actively pursuing the issue of upgrading the quality of trade and products through a system of assaying and hallmarking with Government of India and BIS. The major objectives of introducing a proper assaying and hallmarking system in the country are enabling consumer protection, developing export competitiveness of the gold jewels industry, introducing gold based financial products, which will help in mopping up the vast dormant gold resources with the domestic sector and developing India into a leading gold market centre in the world. The Government of India announced the Gold Deposit Scheme in 1999 and RBI issued guidelines to the banks intending to launch the scheme in October 1999. Five banks have launched their schemes under the guidelines and the quantum of gold mobilized so far has been about 7 tonnes. Unfortunately, the scheme has not evoked the expected response. A number of reasons can be cited for the low response, prominent among them being depositors losing the making charges spent on jewels (as the banks would convert them into primary form before accepting as deposits),
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the low carat of jewels, low rate of return on deposit (as seen by the depositors) and the absence of any amnesty. However numerous data were covered on the study was covered under the study of the derivatives market in India. Howver the clearing and settlement of the futures and options have to seen. They are as follows;
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Settlement of Index Options Contract In the index option contract the premium has to be paid or received is calculated for each CM after netting the positions at the end of each day. The CM who has to pay the premium has to pay to NSCCL and this is adjusted with those who have to receive the premium. This is known as daily premium settlement. On the expiry day of the options contract, NSCCL will determine the outstanding in the money contracts based on the final settlement price and resulting profit or loss will be settled in cash. The final settlement price is the closing value of the underlying index price on the expiration day of the contract. The final settlement profit or loss will be the difference between the stock price and the final settlement price of the relevant index option contract. Final settlement profit or loss amount is credited or debited to the relevant CMs clearing bank account on the day next the expiry day.
Settlement of Options Contract on Individual Securities The premium to be paid or received is netted across all option contracts on individual securities at the client level to determine the net premium payable or receivable at the end of each day. The settlement procedure is similar to that of the index option contracts. Interim exercise settlement price is the clearing price of the underlying security on the exercise day. The settlement value is the difference between the strike price and the exercise settlement price of the option contract. The exercise settlement value is debited or credited to the CMs clearing bank account on the third day of the exercise day. However besides the second largest populated country India is not seen in top list of commodity exchange. The main reason is that lack of knowledge and many people are risk averse. The commodities are traded world wide but the farmers are not interested to trade in the derivatives market. There is lack of motivation for our farmers to trade in derivatives. Apart from these the investors tend to invest in
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equities rather than derivatives. Hence Indian Derivatives market is not performing up to the mark. Apart from it is should be noted that the brokers receive message from the market very fastly. So they can guide the investors to earn better profits. The online traders do not get such information and may end up by huge losses.
METHODOLOGY
Sampling design:
The sample selected for the purpose of research is the investors who trade frequently and staff of the Karvy comtrade. The karvy comtrade posses nearly 2000 to 3000 investors, among nearly 800 trade in derivatives. The intra day transactions are carried by nearly 20 people and only 10 people are considered as active customers.
Type of sampling
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Convenience sampling which is a type of non probability sampling is carried while selection of samples. The selection of investors from the population based on their easy availability and accessibility to the researcher has been taken.
Time The time taken for the research is a long time. Under various circumstances the same questions were asked and the responses were not changed. Hence there was no time constraint or the influence of time upon the investors.
Prior knowledge The investors were not new to the market. They have seen the ups and down since many years. Hence the prior knowledge of respondents was good.
Research design
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Experience survey The research can be categorized under the experience survey as it conducted to gain additional knowledge on derivatives market as a lot of important information is not freely available. The handful of secondary data is available on the subject but it is not sufficient to trade in the derivatives market. However at first the objectives of the study was listed and then the secondary data was collected and then it was analyzed, prepared the questionnaire, interaction with company guide, investors which was the primary data collected. After the collection of the primary data, compared the primary data with secondary data and the evaluation of the primary data is carried out to know the reliability and accuracy of the data collected. However the suggestions from faculty guide has been taken and prepared the research report
Questionnaire design
(The questionnaire is enclosed under the section Annexure) Probing was made when felt necessary. The following are decision taken to collect the information required
Required information: The research objectives were clear before conducting the research. While framing questionnaire it was ensured that the questions are designed to draw information that will fulfill research objectives.
Target respondents Before conducting research it was decided that the target respondents to be the frequent investors or speculators as they possess more knowledge about trading.
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This was a crucial step because target respondents becomes important as the task of developing a questionnaire that will be suitable to all cross sectional groups of a diversified investors.
Data that was gathered In short, the common information collected from the investors who stands of the opinion that the require of investment is more in currency market and commodity market. The loss incurred or the profit earned is huge amount. A small changes in the value of gold or currencies subject huge loss. Hence the risk is more in options of derivatives market under gold or currency. Many investors show less interest to trade in futures and even on commodities as such.
Sources from which the data was collected Both the primary data and secondary data are the sources of data collection. Through the primary data information regarding investors attitude towards the investment in derivatives market is studied and through the secondary data the details of
derivatives market is collected.
Data collection
Time of data collection The time for the collection of secondary information around 15 days and for the primary data 45 days
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The market was showing a positive response and the investors were showing keen interest in investment. The affect of recession was not in light as many companies showed better profits. Moreover there was hike in the prices of commodities as well.
Human resource in the research One person to conduct the research under the guidance of the company guide and faculty guide
Training We were well trained during our SIP as it was just like a research. The faculty guide and company guide are trained as per the institution and company norms respectively.
Data analysis
Data handling The secondary data collected are screened and then the primary data has been collected. It was important to acquire knowledge on the derivatives at first and then follow the primary research. The data collected are not mismanaged and are true information as they are collected from the popular sources. The investors are of speculative in nature who posses good knowledge about the market. Ground work A clear ground work has been done to pursue the research as the objectives were clear. On the basis of the objectives the secondary data were collected. Contacting the company guide and investors was a major ground work in the research. The permission to conduct the research was taken from the college and company.
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LIMITATIONS
Various sites have been referred to collect the secondary data. But some sites provided wrong data, the genuine of the data was not good.
The books referred failed to provide complete details and hence it made to refer more books and web sites.
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The investors have good knowledge about trading but they lack the theoretical knowledge. They were speculative in nature and they had good knowledge on the time of changes in the prices.
It is assumed that as the market was positive and hence they were showing keen interest in trading. But the same sort of attitude may not be hoped when the market performance is not up to the mark.
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The future market is 5 20 times that of the spot market. The following table depicts the following:
Market
Annual
Physical 3 times multiple 5 (Rs in Cr) 120000 180000 1500000 1500000 3300000 13200 multiple (Rs in Cr) 200000 300000 2500000 2500000 5500000 22000
times
Trade (Rs . Cr) Bullion Metals Agriculture Energy Total Per day 40000 60000 500000 500000 1100000 4400
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The investor who likes to trade in derivatives market has to open an account with the broker. The Karvy comtrade ltd, charges Rs 2000 to open an I zone account from which the investor can trade in both equity market and derivatives market. After opening the account by submitting his documents, it will be forwarded to the Head Quarters of Karvy comtrade ltd, which is located in Hyderabad. It analysis the document and his account. The initial margin is fixed which is 5% to 10% of the contract value. Code will be given on the account for the accessability of trading for the investor. The investor has to trade on this code, where the commission charges apply on code basis. The code will be forwarded to regional office. The investor can trade after the completion of the above process. When a contract takes place he has give 0.05% commission to Karvy comtrade ltd.
Safety measures
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In the interest of our own safety, it is important to trade only through registered members since the commodity exchanges have jurisdiction over them in terms of their own rules, bye laws, etc and can therefore, play a role in resolving investor grievances or even take action against the members if necessary. The exchange has no jurisdiction over entities who are not their members.
Be familiar with FMC guidelines and rules, regulations, byelaws, circulars, etc. of MCX.
Be familiar with FMC guidelines and rules, bye laws, etc. of the exchange to have an adequate understanding of the legal framework under which the commodity futures are traded. This would be useful in terms of giving you a better understanding of the procedures relating to trading, clearing and settlement, your rights as investor, etc.
Be sure while taking an informed decision. Read the product note available on the exchange website to understand the commodity specifications. Keep track of Government policy announcements such as the Minimum Support Price, Export/Import policy, etc, which have a significant impact on the prices of commodities. Also keep track of exchange announcements made through circulars regarding the methodology of computation of due date rates, launch of new contracts, etc. Understand the commodity thoroughly. Study historical and seasonal price movements of the commodity.
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Thoroughly understand the delivery and settlement procedure which differs from commodity to commodity in terms of quality implications, place of delivery, options, penalties, margins, etc. This information is given in the product note available on the website. Understanding of delivery would help in avoiding rejection of your delivery.
Before initiating a trade, ascertain whether the price of the commodity is inclusive or exclusive of various taxes applicable at the delivery centre at the given point of time.
Be aware of implications of various taxes such as Sales tax, Service tax, VAT, etc. Make sure that you understand and comply with accounting standards for derivatives.
Pay all applicable margins. Collect / pay mark-to-market margins on a daily basis.
Pay all the applicable margins on your futures position to the member. Also, collect or pay (as the case may be) mark-to-market margins from/to the member which are required to be settled on a daily basis.
Insist on documentation with the member such as Member Client agreement, and Know Your Client.
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Enter into an agreement with the member since that would ensure that you have recourse to all the investor protection mechanisms of the exchange. Co-operate with the member in filling up the 'Know Your Client form. This form has been devised to ensure that a member knows all his clients properly, and you are thus protected from the risk which may arise out of a member having unsuitable clients. Only clients with pan numbers are allowed to trade on commodity exchanges.
The Risk Disclosure Document provides valuable insight into the risk associated with futures trading. It is therefore, in your interest to carefully read and understand this document.
Insist on signed Contract Notes containing all relevant information such as Member Registration Number, Order Details, Trade Rate, Quantity, etc.
Insist on signed contract notes with all the relevant information for all your trades. The contract note is a proof of the transaction between you and the member and is absolutely essential for you to be able to approach the exchange for redressal of your complaints, availing arbitration mechanisms, etc.
Take a receipt from your members for collateral deposited with them.
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Monitor your account with the member properly by insisting on a periodical statement of your ledger account.
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Trading system
The best five buy and sell orders for every contract available for trading are visible to the market and orders are matched based on price time priority logic. Orders can be placed with time conditions and/ or price conditions
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Time related Conditions DAY order- A Day order is valid for the day on which it is entered. If the order is not matched during the day, the order gets cancelled automatically at the end of the trading day.
GTC - A Good Till Cancelled (GTC) order is an order that remains in the system until the expiry of the respective contract in which it is entered or until when the same is cancelled by the member.
GTD - A Good Till Date (GTD) order is valid till the date specified by the member. After the specified date the unexecuted orders get automatically cancelled by the system.
IOC - An Immediate or Cancel (IOC) order allows a member to execute the orders as soon as the same is placed in the market, failing which the order will get cancelled immediately
Price Conditions
Limit Order The order wherein the price is to be specified while placing the same. Market Order The order at the best available price at the time of placing the same.
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Trade timings
Special Session (order cancellation session) is held to cancel the pending orders prior to opening of market
Normal Session:
Monday through Friday: 10:00 a.m. to 11:30 p.m. (up to 11:55 p.m. on account of day light savings typically between every November and March of the following year)
Saturdays: 10:00 a.m. to 2:00 p.m. Agri-commodities are available for futures trading up to 5:00 p.m. whereas non agricommodities (bullions, metals, energy products) are available up to 11:30 pm / 11.55pm.
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Trading Holidays
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 Mahashivratri Id-E-Milad Good Friday / Holi (1 st Day) Ambedkar Jayanti Mahavir Jayanti Maharashtra Day Buddha Purnima Independence Day Ganesh Chathurthi Ramzan Id / Gandhi Jayanti Dasera Diwali (Laxmi Pujan) Diwali ( Bhaubeez) Gurunanak Jayanti Bakri-Id Christmas
The Exchange may alter / change any of the above Holidays, for which a separate circular will be issued in advance.
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User Id cancellation
Increase/ Decrease in Maximum Order Size of trade Increase/ Decrease in Turnover limit
Trading rules
The Derivatives Trading at BSE takes place through a fully automated screen-based trading platform called DTSS (Derivatives Trading and Settlement System).The DTSS is designed to allow trading on a real-time basis. In addition to generating trades by matching opposite orders, the DTSS also generates various reports for the member participants.
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Order Matching Rules Order Matching takes place after order acceptance wherein the system searches for an opposite matching order. If a match is found, a trade is generated. The order against which the trade has been generated is removed from the system. In case the order is not exhausted further matching orders are searched for and trades generated till the order gets exhausted or no more match-able orders are found. If the order is not entirely exhausted, the system retains the order in the pending order book. Matching of the orders is in the priority of price and timestamp. A unique trade-id is generated for each trade and the entire information of the trade is sent to the relevant Members. Order Conditions The derivatives market is order driven i.e. the traders can place only orders in the system. Following are the order types allowed for the derivative products. These order types have characteristics similar to the ones in the cash market.
Limit Order An order for buying or selling at a limit price or better, if possible. Any unexecuted portion of the order remains as a pending order till it is matched or its duration expires. An order that becomes a limit order only when the market trades at a specified price.
Market Order An order for buying or selling at the best price prevailing in the market at the time of submission of the order.
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There are two types of Market Orders Partial Fill Rest Kill (PF): execute the available quantity and kill any unexecuted portion. Partial Fill Rest Convert (PC): execute the available quantity and convert any unexecuted portion into a limit order at the traded price.
All orders have the following attributes Order Type (Limit / Market PF/Market PC/ Stop Loss) Asset Code, Product Type, Maturity, Call/Put and Strike Price Buy/Sell Indicator Order Quantity Price Client Type (Propritory / Institutional / Normal) Client Code Order Retention Type (GFD / GTD / GTC) Good For Day (GFD) - The lifetime of the order is that trading session Good Till Date (GTD) - The life of the order is till the number of days as specified by the Order Retention Period. Good Till Cancelled (GTC) - The order if not traded will remain in the system till it is cancelled or the series expires, whichever is earlier.
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Order Retention Period (in calendar days) : This field is enabled only if the value of the previous attribute is GTD. It specifies the number of days the order is to be retained. Protection Points Protection Points : This is a field relevant in Market Orders and Stop Loss orders. The value enterable will be in absolute underlying points and specifies the band from the touchline price or the trigger price within which the market order or the stop loss order respectively can be traded. Risk Reducing Orders (Y/N) When a Member's collateral falls below 50 lacs, he will be allowed to put only risk reducing orders and will not be allowed to take any fresh positions. It is not essentially a type of order but a mode into which the Member is put into when he violates his collateral limit. A Member who has entered the risk-reducing mode will be allowed to put only one risk reducing order at a time
(1) Commodity exchanges are trading in futures contracts on those commodities, which have some regional relevance. It is not going to be as easy as a share of a company to get listed in a different exchange.
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(3) Commodity exchange members are stakeholders in those commodities where in stock exchange members were never the owners of the stock to control where the stock should get traded.
(4) Importance of commodity exchanges are linked to the stakeholders of that particular commodity wherein success of a stock exchange is more on transparency and low transaction cost. Above reasons are possibilities; national level exchanges could encourage the existing commodity exchanges and their members to the national stream. Such exchanges and members are of relevance to the Indian economy as a whole and for the success of commodity futures in particular.
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Trading Member A Trading Member should be an existing Member of BSE cash segment. A Trading Member has only trading rights but no clearing rights. He has to associate with a Clearing Member to clear his trades. Trading-Cum-Clearing Member A Trading-cum-Clearing Member should be an existing Member of BSE cash segment. A TCM can trade and clear his trades. In addition, he can also clear the trades of his associate Trading Members. Professional Clearing Member / Custodial Clearing Member: A Professional Clearing Member need not be a Member of BSE cash segment. A PCM has no trading rights and has only clearing rights i.e. he just clears the trades of his associate Trading Members & institutional clients. Limited Trading Member
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A Limited Trading Member need not be a Member of BSE cash segment. A LTM has only trading rights and no clearing rights. He has to associate with a Clearing Member has to clear his trades. Self Clearing Member A Self Clearing Member should be an existing Member of the BSE cash segment. An SCM can clear and settle trades on his own account or on account of his client only and not for any other Trading Member.
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FINANCIAL REQUIREMENT AND FEE CHART FOR MEMBERS OF BSE DERIVATIVES SEGMENT
Sl No
Particulars
TM
LTM
of Stock Others
25
10
25
2 Security Deposit Interest Free Cash Cash/Cash Equivalents (#) Approved Securities Total Processing Fees Annual Charges (*) One Time Charges Exchange Fee (Refundable Deposit) 2.5 2.5 50 _ 0.50 5 2.5 2.5 2.5 7.5 _ 0.25 _ 2.5 2.5 2.5 7.5 _ 0.25 _ 2.5 2.5 2.5 7.5 _ 0.25 _
3 4 5
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Just as SEBI regulates the stock exchanges, the derivatives market are regulated by the FMC (Forward Market Commission). The FCM works under the purview of the Ministry of Food, Agriculture and Public Distribution
Pepper, red chilly, jeera, turmeric, cardamom, coriander Steel long, steel flat, copper, nickel, tin, steel ingots, zinc, aluminium Kapas, long staple cotton, medium staple cotton Chana, urad, yellow peas, tur, masur Rice, basmati rice, wheat, maize, sarbati rice. Crude oil, furnace oil, natural gas, heating oil Rubber, guar seed, guargum, cashew, cashew kernel, sugar, gur, coffee, silk
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Open
High
Low
Settle
Change
Life time High low 245 220 215 230 225 250
2 2 3 3 -5 -3
The first column gives the maturity of the contract that is the month in which the contract will expire. The second column, OPEN denotes the price for the first trade on that particular trading day. The third and the fourth column HIGH and LOW denotes the highest and lowes price at which a particular contract traded on that day. The fifth column SETTLE stands for the settlement price. It is determined by the settlement committee by using a formula which considers the prices at which trading took place during the last few minutes of the closing time. The sixth column CHANGE represents the difference between todays settlement price and yesterdays settlement price. It can be positive or negative. The HIGH and the LOW in the seventh column denotes the highest and the lowest ever price at which the contract was traded till date. The last column OPEN INTEREST denotes the cumulative number of contracts that are due to delivery. In other words it is the number of futures contract that has to be settled on or before expiry date.
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Market segments
2002-03 (Rs
2003-04 in (Rs
2004-05 in (Rs in
Government Securities Market Forex Market Total Stock Market Turnover (I+ II) National Stock Exchange (a+b) a)Cash b)Derivatives Bombay Stock Exchange (a+b) a)Cash b)Derivatives Commodities Market
crores) crores) crores) 1,544,376 2,518,322 2,827,872 658,035 1,374,405 1,057,854 617,989 439,865 316,551 314,073 2,478 NA 2,318,531 3,745,507 3,230,002 1,099,534 2,130,468 515,505 503,053 12,452 130,215 3,867,936 4,160,702 3,641,672 1,147,027 2,494,645 519,030 499,503 19,527 500,000
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Multi Commodity Exchange (MCX) located at Mumbai. National Commodity and Derivatives Exchange Ltd (NCDEX) located at Mumbai. National Board of Trade (NBOT) located at Indore. National Multi Commodity Exchange (NMCE) located at Ahmedabad.
CLEARING COUNCIL
Non-Executive Chairman - Public Representative - Mr. Jagdish Kapoor Managing Director & Chief Executive Officer - Mr. Madhu Kannan Chief Operating Officer - Mr. M. L. Soneji
FINDINGS
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The research has helped to gain knowledge over various aspects in the derivatives market. Various changes has been seen in the derivatives market. The Indian market is performing well in these days. The stock exchange Mumbai created history by launching the first exchange traded financial derivatives product in India, the Sensex Futures. The trading was inaugurated by Prof. J R Varma, member of SEBI and chairman of committee responsible for formulation of risk containment measures for the derivatives market. The first historical trade of 5 contracts of June series was done on June 9, 2000 at 9.55.03 am between M/s Kaji & Maulik Securities Pvt. Ltd and M/s Emkay Share & Stock Brokers Ltd., @ 4755 However the following are the findings of the research
Commodity futures help us to procure or sell the commodities at a price decided month before the actual transaction, so risk on any fluctuation in prices may be a minimized.
By taking positions in the futures one can effectively lock in the price at which he wish to sell his produce.
One can store the underlying commodities in exchange approved warehouse and sell in the futures to realize the future value of the commodity.
Selling commodity in futures contract can give assured demand at the time of harvest.
One can fix the rate of commodities to purchase in future before itself. For instance if an industrialist want to purchase raw materials and there is a
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scenario of increase in prices for it, he can fix a price for the raw materials now itself.
One can avoid risk of short supply of raw materials by buying a commodity futures contract by which he is assured of supply of a fixed quantity of materials at a pre decided price at the appointed time.
In the derivatives market, the commodity prices are less volatile than the stock prices and hence it is relatively safer.
As many of the commodities are prices on International standards there is ample scope for manipulation.
There will be a doubt on the physical deliveries of the commodities traded through the exchange among many common people. Of course the exchanges in order to maintain the futures prices in line with spot market, have made provisions of settlement of contracts by physical deliveries.
There is no need of paying the sales tax if the trade is squared off, however the sales tax is applicable only in case of trade which result into delivery.
Options in goods are prohibited under section 19 of the Forward Contracts (Regulation) Act, 1952.
India is a signatory of WTO, as such the producers and traders have opportunities to explore the global market.
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FCI Food Corporation of India is working with storage of commodities where many farmers and traders have considered it as a failure. Futures market will produce their own kind of smoothing between the present and the future. If the future price is high and the present price is low, an arbitrager will buy today and sell in the future, if the future price is low the arbitrageur will buy in the futures market. These activities produce their own "optimal" buffer stocks, smooth prices. They also work very effectively when there is trade in agricultural commodities, arbitrageurs on the futures market will use imports and exports to smooth Indian prices using foreign spot markets.
In case of any dispute with a Member regarding the trades, a client holding a valid contract note has the right to obtain redressal as per the byelaws of the Exchange, including arbitration.
The risk of loss in case of options is high. A small drop of prices could account of large amount of loss to the investors.
Many respondents wish to trade in futures as it is of less risk. But the respondents who can considered as speculators wish to trade in options.
The minimum price needed to trade in commodity market is Rs 15000/-. The investors need to deposit initial margin which is between 5% to 10% of the contract and also pay the broker while opening an account which is around Rs.2000/-. It seems to be burden on the prospective investors who wish to trade in derivatives and hence they step aside.
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The experienced investors would like to trade privately that is on line trading and other open the account with brokers and trade.
The returns from derivatives market are free from the direct influence of the equity and debt market which means that they are capable of being used as effective hedging instruments providing better diversification
The margins in the commodity futures market are less than the F&O section of the equity market.
SUGGESTIONS / RECOMMENDATION
The derivatives helps to transfer the risk of the people, the discovery of the anticipated prices are made. Derivatives promote the investment and saving in the long run. Retail investors (including small brokerages trading for themselves) are the major participants in equity derivatives, accounting for about 60% of turnover in October 2005, according to NSE. There were several changes in the trading system due to the globalization in India and hence responding to the changes the several Nation wide Multi Commodity Exchange [NMCE] was set up in the year 2002 by the usage of modern practices such as electronic trading and clearing. The Government of India has constituted a committee to explore and evaluate issues pertinent to the establishment and funding of the proposed national commodity
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exchange for the nationwide trading of commodity futures contracts, and the other institutions and institutional processes such as warehousing and clearing houses.
The charges implied has to be lowered down Market information and market knowledge has to be provided to the common man Motivate the farmers to trade in futures to sell their commodities Enlighten the general traders about the market Motivate the general traders to trade in derivatives market The restriction on traders and the brokers have to minimized Tax reduction or exemption is to be provided. Financial assistance may be given to farmers to trade in futures. Government should interfere if in case any manipulations takes place while trading international. Timely research should be conducted to see the performance of the derivatives market. This enables to overcome the hurdles and assure better performance.
CONCLUSION
In India Derivative Market plays a major role in the development of the Nation. Recently SEBI has started CURRENCY MARKET which can be considered as a milestone achieved. It is said that a lot of risk is associated in the currency market. The research objectives are fulfilled except the placement in the finance sector which is hoped on the positive side. Learning and improving my knowledge in the field of derivatives was the main aim of the study. By pursuing the research it was known about the scope of Derivatives Market, formalities to be accomplished to trade in this market, the wideness of differentiation of this market from the other financial markets, the investors attitude and their speculations, practical trading in
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this market, the calculations pertaining to derivatives market, the loopholes in this market, the contribution of this market to National Income of India and was to give some suggestions for the improvement of the derivatives market. By referring the books, internet, magazine I came to know what exactly the derivatives market mean, need for the derivatives market, participants in the Derivatives Market, types of Derivatives, differences between the futures and forward contracts, difference between Futures and Options, history of Derivatives Market in India, factors leading for the Growth of Derivatives, Derivatives Users, Derivatives Instruments Traded in India, Associated risks while trading in derivatives and much more theoretical aspects. The methodology adopted was right as the investors were of speculative in nature and some were inactive traders. The sampling design, Convenience sampling, Criteria for selection of samples was good. The survey can which can be considered as an experience survey would provide better information for the readers of the report. The Questionnaire design which was drafted on the basis of Required
information, Target respondents can be recognized by the company. The data was
collected both from the primary source and secondary source. The limitations of the methodology is also discussed which enhance my professionalism. In the results and analysis I have given details on the Steps to Trading, Safety measures Structure of Commodity Market, Trading system, Trade timings, Trading related documents, Trading rules, National Commodity Exchanges and Regional Commodity Exchanges, Steps to become a member of derivative segment in BSE, Types of Memberships in the BSE Derivatives Segment, FINANCIAL REQUIREMENT AND FEE CHART FOR MEMBERS OF BSE DERIVATIVES SEGMENT, Trading Holidays, Regulators of derivatives market in India, Interpretation of futures price quotations has been discussed. On seeing the results and analysis it can be understood that the derivatives market is booming and showing better performances year by year. Hence it can said that this report furnishes important information about the derivatives market and will be helpful for the readers, company. The students who
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wish to improve their knowledge can follow this report. The survey was conducted for a long period comprising of 3 months. The time the survey was conducted the market was positive and hence the attitude of the customers is not a very reliable factor. However the details regarding the derivatives market, the company profile, the members, trading tactics possess better weightage. I would like to conclude the report saying that the derivates market is booming in India and hence it is better to invest or trade in derivatives. Before ending up I would like to thank my Parents, college staff and company staff for providing support throughout the project
PART-C
APPENDICES
Specific Research Questions and why these have been selected and pursued
Questions to investors: How would you define a derivative market? How does this market differ from the equity market? What are the formalities you come across to trade in this market?
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Are you an active trader in the market? (Probing: if yes, how frequently you trade, if no the reason is asked)
What are the risk associated while trading in the market? What is the good time to trade in the derivatives market? Do derivatives yield better? (Probing: if yes, how much percentage in an average you earn in it)
Do you think derivatives market needs more development or marketing? What are the tactics you follow to be on a safer side? Your suggestions
FORMULAE
Basis Current cash price Futures price Naked put writing A (out of money)
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1st method Option Premium * Number of Shares + .20 {(Market Value)( Number of Shares)} Number of Shares (Stock Price Exercise Price) 2nd method Number of Shares * Option Premium + .10 [(Stock Price)( Number of Shares)] B (In the money option) Option Premium * Number of Shares + .20 (Stock Price) (Number of Shares)
GLOSSARY
Arbitrageurs They make business to take advantage of a discrepancy between prices in two different markets. Baskets Basket options are options on portfolios of underlying assets. Compliance Risk Compliance risk is the risk to earnings or capital arising from violations, or nonconformance with, laws, rules, regulations, prescribed practices, or ethical standards. Credit risk Credit risk is the risk to earnings or capital of an obligor's failure to meet the terms of any contract with the bank or otherwise to perform as agreed. 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. Forward contract It is a simple derivative. A forward contract is a customized contract between two entities, where settlement takes place on a specific date in the future at todays pre-agreed price. Futures:
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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. Hedgers It is an act, whereby an investor seeks to protect a position or anticipated position in the spot market by using the opposite position in derivatives. Interest rate swaps These entail swapping only the interest related cash flows between the parties in the same currency. Leaps The acronym LEAPS means Long-Term Equity Anticipation Securities. These are options having a maturity of up to three years. Liquidity risk Liquidity risk is the risk to earnings or capital from a banks inability to meet its obligations when they come due, without incurring unacceptable losses. 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 Over The Counter Market (OTC). It is a telephone and computer linked network of dealers. The trading usually takes place between two financial institutions or between financial institution and one of its corporate clients. Price Risk Price risk is the risk to earnings or capital arising from changes in the value of portfolios of financial instruments. Reputation Risk Reputation risk is the risk to earnings or capital arising from negative public opinion. Speculators These are the trades who trade in the futures or options with a view to make profit from the subsequent price movements. Strategic risk
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It is the risk to earnings or capital arising from adverse business decisions or improper implementation of those decisions. Swaps Swaps are private agreements between two parties to exchange cash flows in the future according to a prearranged formula. Swaptions Swaptions are options to buy or sell a swap that will become operative at the expiry of the options. Warrants Longer dated options are called warrants and are generally traded over the counter.
QUESTIONNAIRE
1. Who are the participants in the derivatives market?
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4. Which of the following exchanges was the first to start trading financial futures?
6. Which of the following prices is used to compute MTM of a future contract in case it is not traded on a given day?
7. Which of the following option contracts are compulsorily settled on exercise date?
8. How much the initial margin amount is large enough to cover one-day losses?
9. The dealer / broker and sales persons in the F&O segment shall be required to pass which of the following examinations?
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13. Who identifies the buyer to whom the delivery notice is assigned?
REFERENCES
Financial Management
Options, futures and Other derivatives. (Fifth edition, author John C Hull). www.nseindia.com
Commodity Derivatives Market in India: Development, Regulation and Future Prospects. Author - Narender L. Ahuja. Pdf file.
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www.mcxindia.com
www.bseindia.com
www.indianmba.com
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