DERIVATIVES MARKETS IN INDIA

ABSTRACT

Derivative markets in India is growing rapidly unlike equity markets. Trading in Derivatives require more than an average understanding of finance. Being now markets, maximum numbers of investor have not yet understand the full implication of the trading in derivatives . !BI should take actions against to create awareness in investors about the derivatives markets. Derivatives are mostly used for hedging purpose. In derivatives markets profits and loss of the writer"options holders purely depends on the fluctuations of the underlying. The investors can minimi#e the risk by investing in derivatives. The use of derivatives equips the investors to face the risk, which is uncertain. Derivatives are risky tradable instruments than equities. The derivatives products gives the investors an options or choice whether to exercise the contract are not. $resently the derivatives are traded are settled on cash basis on the last Thursday of each month. Thus, there is no physical delivery of the traded securities. This one of the reason for the derivatives markets to dominated by speculators and big players with grossly inadequate interest shown by investors to take the advantage of the derivatives trading there is a need to switch over the phases to the physical systems. %onsortiums of different companies help to have a very clear picture of change in stock prices of different companies and for examine the test of hypothesis and their behavior in markets the markets index is important measuring tool for the performance of any stock market whether it move up or down . for the markets behavior and calculations of systematic risk of securities sensex value for & ! securities are taken

TABLE OF CONTENTS

'ist of Tables 'ist of (igures %)*$T!+ , I&T+-D.%TI-& %)*$T!+ 0 +!1I!2 -( 'IT!+*T.+! %)*$T!+ 3 I&D. T+6 $+-(I'! %)*$T!+ 4 D*T* *&*'6 I : I&T!+$+!T*TI-& %)*$T!+ 8 .;;*+6 : %-&%'. I-& BIB'-<+*$)6

I II

, /00

03/45

47/89

89/5,

50/54

LIST OF TABLES 1. The futures and !t" ns %. Ca&& !t" n 'u(er !a( ff +. Se&&er !a( ff ,. Put !t" n 'u(er !a( ff #. Se&&er !a( ff

PAGE NO #$ )* )* )1 )1

LIST OF FIG-RES

PAGE NO

1. Pa( ff f r a Bu(er f futures %. Pa( ff f r a Se&&er f futures +. Futures Pa( ff ,. Pa( ff Pr f"&e f r Bu(er f a Ca&& O!t" n #. ). Pa( ff Pr f"&e f r Se&&er f a Ca&& O!t" n Pa( ff Pr f"&e f r Bu(er f a Put !t" n

+. +$ ,% ,. ,$ ,/ #*

.. Pa( ff Pr f"&e f r Se&&er f a Put !t" n

C0APTER11 INTROD-CTION

INTROD-CTION
The emergence of the market for derivatives products, most notably forwards, futures and options, can be tracked back to the willingness of risk/averse economic agents to guard themselves against uncertainties arising out of fluctuations in asset prices. By their very nature, the financial markets are marked by a very high degree of volatility. Through the use of derivative products, it is possible to partially or fully transfer price risks by locking/in asset prices. *s instruments of risk managements, these generally do not influence the fluctuations in the underlying asset prices. )owever, by locking/in asset prices, derivative product minimi#es the impact of fluctuations in asset prices on the profitability and cash flow situation of risk/ averse invertors. Derivatives are risk management instruments, which derive their value from an underlying asset. The underlying asset can be bullion, index, share, bonds, currency, interest, etc.. Banks, ecurities firms, companies and investors to hedge risks, to gain access to cheaper money and to make profit, use derivatives. Derivatives are likely to grow even at a faster rate in future. DEFINITION Derivative is a product whose value is derived from the value of an underlying asset in a contractual manner. The underlying asset can be equity, forex, commodity or any other asset. security. * contract which derives its value from the prices, or index of prices, of ecurities %ontracts =+egulation> *ct, ,?85 = %+ *ct> defines @derivativeA to secured or unsecured, risk instrument or contract for differences or any other form of

underlying securities.

EVOL-TION OF DERIVATIVES Derivatives have probably been around for as long as people have been trading with one another. (orward contracting dates back at least to the ,3 th century, and may well have been around before then. ;erchants entered into contracts with one another for future delivery of specified amount of commodities at specified price. * primary motivation for pre/arranging a buyer or seller for a stock of commodities in early forward contracts was to lessen the possibility that large swings would inhibit marketing the commodity after a harvest. The following factors have contributed to the growth of financial derivativesB ,. 0. 3. their costs. 4. 8. Development of more sophisticated risk management tools, providing economic agents a wider choice of risk management strategies Innovations in the derivatives markets, which optimally combine the risks and returns over a large number of financial assets leading to higher returns, reduced risk as well as transactions costs as compared to individual financial assets. Increased volatility in asset prices in financial markets. Increased integration of national financial markets with the international markets. ;arked improvement in communication facilities and sharp decline in

REG-LATOR2 FRAME3ORK The trading of derivatives is governed by the provisions contained in the %+*, the !BI *ct, and the regulations framed there under the rule and byelaws of stock exchanges. Re4u&at" n f r Der"5at"5e Trad"n46

!BI set up a 04 member committed under %hairmanship of Dr. '.%. <upta develop the appropriate regulatory framework for derivative trading in India. The committee submitted its report in ;arch ,??C. -n ;ay ,,, ,??C !BI accepted the recommendations of the committee and approved the phased introduction of derivatives trading in India beginning with stock index (utures. !BI also approved he @suggestive bye/lawsA recommended by the committee for regulation and control of trading and settlement of Derivative contract. The provision in the %+ *ct governs the trading in the securities. The amendment of the %T *ct to include @D!+I1*TI1! A within the ambit of securities in the %+ *ct made trading in Derivatives possible with in the framework of the *ct. ,. !ligibility criteria as prescribed in the '.%. <upta committee report may apply to !BI for <rant of recognition under section 4 of the Derivatives Trading. %+ *ct, ,?85 to start The derivative exchange"segment should have a separate

governing council and representation of trading"clearing member shall be limited to maximum 49D of the total members of the governing council. The exchange shall regulate the sales practices of its members and will obtain approval of !BI before start of Trading in any derivative contract. 0. The exchange shall have minimum 89 members. 3. The members of an existing segment of the exchange will not automatically become the members of the derivatives segment. The members of the derivatives segment need to fulfill the eligibility conditions as lay down by the '.%. <upta committee. 4. The clearing and settlement of derivatives trades shall be through a !BI approved clearing corporation"clearing house. %learing %orporation"%learing )ouse complying with the eligibility conditions as lay down By the committee have to apply to !BI for grant of approval. 8. Derivatives broker"dealers and %learing members are required to seek registration from !BI.

5. The minimum contract value shall not be less than +s.0 'akhs. !xchange should also submit details of the futures contract they purpose to introduce. 7. The trading members are require to have qualified approved user and sales persons who have passed a certification programme approved be !BI. NEED OF T0E ST-D2

The study has been done to know the different types of derivatives and also to know the derivative market in India. This study also covers the recent developments in the derivative market taking into account the trading in past years. ;any people are trading in Derivatives like Index (utures, tock (utures, Index -ptions, tock -ptions, %ommodity futures, %urrency (utures : -ptions without having proper knowledge. *ctually -ptions emerged as a )edging product, but all retail clients trading -ptions for peculation purpose. Trading in -ptions without proper skills is like going to war without <un. o everybody need to know purpose of Derivative options and how to minimi#e losses and how to maximi#e profits.

OB7ECTIVES OF T0E ST-D26

,. To study the derivatives market in India. 0. To analy#e the operations of futures and options using $*6 E -(( tables. 3. To study about risk management with the help of derivatives.

4. To evaluate the profitability of futures. Buyer and seller and also the option writer and option holder.

SCOPE OF T0E ST-D2

The proFect covers the derivatives market and its instruments. (or better understanding various strategies with different situations and actions have been given. It includes the data collected in the recent years and also the market in the derivatives in the recent years. This study extends to the trading of derivatives done in the &ational tock ;arkets. The study is limited to @DerivativesA with special reference to futures and option in the Indian context. The study canGt be said as totally perfect. *ny alteration may come. The study has only made a humble attempt at evaluation derivatives market only in India context.

LIMITAITONS OF ST-D2

1. 'I;IT!D TI;!B The time available to conduct the study was only 0 months. It being a wide topic had a limited time. %. 'I;IT!D +! -.+%! B The Derivatives E -ptions topic is a waste subFect. 1ery difficult to understand practical scenarios. 'imited resources are available to collect the information about the -ptions trading. +. 1-'*T*'IT6B hare market is so much volatile and it is difficult to forecast any thing about it whether you trade through online or offline. ,. * $!%T %-1!+*<!B ome of the aspects may not be covered in my study. I analysed only on few selected stocks like *%%, +%-;, * )-H '!6'*&D : %-*' I&DI*.

RESARC0 MET0ODOLOG2 Meth d f data 8 &&e8t" n61 The data collection methods include both primary and secondary collection methods. PRIMAR2 MET0OD6 This method includes the data collected from the personal interaction with authori#ed members of I&DI*B.'' . The lecturers delivered by the ;anagers of respective verticals 1arious books relating to the investments, capital market and other related topics Se8 ndar( s ur8es61 It is the data which has already been collected by some one or an organi#ation for some other purpose or research study .The data for study has been collected from various sourcesB Books ;aga#ines Internet sources This study is conducted for two months, i.e., Iune 09,3 : Iuly 09,3. RESEARC0 DESIGN The research is primarily both exploratory and descriptive in nature. The sources of information are both primary and secondary. The obFective of the exploratory research is to gain insights and ideas. The obFective of the descriptive research study is typically concerned with determining the frequency with which something occurs. .sing $*6 -(( graphs, I analysed +isk : +eturn of &I(T6 options trading. Tabulated all the calculations for different strike prices

Per" d f stud(6 1

C0APTER1% LITERAT-RE REVIE3

RATIONALE BE0IND T0E DEVELOPMENT OF DERIVATIVES6 )olding portfolios of securities is associated with the risk of the possibility that the investor may reali#e his returns, which would be much lesser than what he expected to get. There are various factors, which affect the returnsB ,. 0. $rice or dividend =interest> ome are internal to the firm like/ Industrial policy ;anagement capabilities %onsumerGs preference 'abour strike, etc. These forces are to a large extent controllable and are termed as non systematic risks. *n investor can easily manage such non/systematic by having a well/diversified portfolio spread across the companies, industries and groups so that a loss in one may easily be compensated with a gain in other. There are yet other of influence which are external to the firm, cannot be controlled and affect large number of securities. They are termed as systematic risk. They areB ,. !conomic 0. $olitical 3. ociological changes are sources of systematic risk. (or instance, inflation, interest rate, etc. their effect is to cause prices of nearly all/individual stocks to move together in the same manner. 2e therefore quite often find stock prices falling from time to time in spite of companyGs earning rising and vice versa.

+ational Behind the development of derivatives market is to manage this systematic risk, liquidity in the sense of being able to buy and sell relatively large amounts quickly without substantial price concession. In debt market, a large position of the total risk of securities is systematic. Debt instruments are also finite life securities with limited marketability due to their small si#e relative to many common stocks. Those factors favor for the purpose of both portfolio hedging and speculation, the introduction of a derivatives securities that is on some broader market rather than an individual security.

PARTICIPANTS6
The following three broad categories of participants in the derivatives marketB

S3APS OPTIONS F-T-RES FOR3ARDS DERIVATIVES

There are three broad categories of participants in the derivatives market. They are as followsB 1.0ed4ers6 )edgers face risk associated with the price of an asset. They futures or options markets to reduce or eliminate this risk. +isk associated with the fluctuation of

commodity prices, foreign exchanges rates, stock prices can be reduced. They are primarily used for purposes of managing risk by those managing funds.

%.S!e8u&at rs6 If hedgers are the people who wish to avoid the price risk, speculators are those who are willing to take such risk. They bet on future movements in the price of an asset. Derivatives provide them an extra leverage, i.e., they can increase both the potential gains and potential losses in a speculative venture. They may be =a> day traders or =b> position traders. They use fundamental analysis and also any other information available to form their opinions on the likely price movements.

+.Ar'"tra4eurs6 They thrive on market imperfections. *n arbitrageur profits by trading a given commodity, or other item that sells for different prices in different market. They take advantage of discrepancy between prices in two different markets. They make simultaneous purchase of securities in one market where the price thereof is low and sale in a market where the price is comparatively higher. *rbitrage may be =a> over space or =b> overtime.

SELF CLEARING MEMBER6 * %; clears and settles trades executed by him only either on his own account or on account of his clients. TRADING MEMBER CLEARING MEMBER6 Trading ;ember E %learing ;ember is a %learing ;ember who is also a Trading ;ember. Trading ;ember E %learing ;ember may clear and settle his own proprietary trades and clientGs trades as well as clear and settle for other T;s. PROFESSIONAL CLEARING MEMBER6

$rofessional %learing ;ember is a %learing ;ember who is not a Trading ;ember. Typically, banks or custodians could become a $rofessional %learing ;ember and clear and settle for Trading ;embers. FOR3ARDS6 * forward contract is a customi#ed contract between two entities, where settlement takes place on a specific date in the future at todayGs pre/agreed price. F-T-RES6 * futures contract is an agreement between two parties to buy or sell an asset at a certain time at a certain price. OPTIONS6 -ptions are of two types/calls and puts. %alls 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 give future date. $uts give the buyer the right, but not the obligation to sell a given quantity of the underlying asset at a given price on or before a given date. 3ARRANTS6 -ptions generally have lives of up to one yearJ the maFority of options traded on options exchanges having a maximum maturity of nine months. 'onger/dated options are called warrants and are generally traded over/the counter. LEAPS6 The acronym '!*$ means long/term !quity *nticipation securities. These are options having a maturity of up to three years. S3APS6 waps are private agreements between two parties to exchange cash floes in the future according to a prearranged formula. They can be regarded as portfolios of forward contracts. The two commonly used waps areB

Interest rate S9a!sB These entail swapping only the related cash flows between the parties in the same currency. Curren8( S9a!sB These entail swapping both principal and interest between the parties, with the cash flows in on direction being in a different currency than those in the opposite direction. DEFINITION OF FOR3ARD CONTRACT6 * (orward contract is an agreement to buy or sell an asset on a specified date for a specified price. -ne of the parties to the contract assumes a long position and agrees to buy the underlying asset on a certain specified future date for a certain specified price. The other party assumes a short position and agrees to sell the asset on the same date for the same price. -ther contract details like delivery date, price and quantity are negotiated bilaterally by the parties to the contract. The forward contracts are normally traded outside the exchanges. SALIENT FEAT-RES6 They are bilateral contracts and hence exposed to counter party risk. !ach contract is custom designed, and hence is unique in terms of contract si#e expiration date and the asset type and quality. The contract price is generally not available in public domain. -n the expiration date, the contract has to be settled by delivery of the asset. If the party wishes to reverse the contract, it has to compulsorily go to the same counter/party, which often results in high prices being charged. )owever, forward contracts in certain markets have become very standardi#ed, as in the case of foreign exchange, thereby reducing transaction costs and increasing transactions

volume. This process of standardi#ation reaches its limit in the organi#ed futures market. (orward contracts are very useful in hedging and speculation. The classic hedging application would be that of an exporter who expects to receive payment in dollars three months later. )e is exposed to the risk of exchange rate fluctuations. By using the currency forward market to sell dollars forward, he can lock on to a rate today and reduce his uncertainty. imilarly an importer who is required to make a payment in dollars two months hence can reduce his exposure to exchange rate fluctuations by buying dollars forward. If a speculator has information or analysis, which forecasts an upturn in a price, then he can go long on the forward, wait for the price to rise, and then take a reversing transaction to book profits. peculators may well be required to deposit a margin upfront. )owever, this is generally a relatively small proportion of the value of the assets underlying the forward contract. The use of forward markets here supplies leverage to the speculator. * forward contract for the future delivery of a particular underlying asset must have the following informationB i. ii. iii. iv. v. vi. vii. viii. ix. x. &ame of the principal party &ame of the counter party &ame of the underlying asset to be delivered *mount of contract Date of delivery $lace of delivery $rice agreed upon The date when the contract is sold The value date -ther terms and conditions. LIMITATIONS 6 'ack of centrali#ation of trading

Illiquidity, and %ounter/party risk

I:! rtan8e f Der"5at"5es6 $rovide enhanced yield on assets. +educe finding costs by borrowers ;odify payment structure of assets to correspond to investors market views, +eflects the perception of market participants about future price of assets. Increase trading volumes by increasing confidence of investors peculative tradeKs shifts to amore controlled environment. *cts as a catalyst for new entrepreneurial activity. )elps to increase savings and investment in the long run and promotes economic development as it depends on the rate of savings and investment. )elps to transfer the market risk i.e. called hedging which is a protection against losses resulting from unforeseen price and volatility changes. Thus derivatives are a very important tool of risk management.

DEFINITION OF F-T-RE CONTRACT6

* (utures contract is an agreement two parties to buy or sell an asset a certain time in the future at a certain price. To facilitate liquidity in the futures contract, the exchange specifies certain standard features of the contract. The standardi#ed items on a futures contract areB Luantity of the underlying Luality of the underlying The date and the month of delivery The units of price quotations and minimum price change 'ocation of settlement FEAT-RES OF F-T-RES6 (utures are highly standardi#ed. The contracting parties need not pay any down payments. )edging of price risks. They have secondary markets to. T2PES OF F-T-RES6 -n the basis of the underlying asset they derive, the futures are divided into two typesB ". St 8; futures6

The stock futures are the futures that have the underlying asset as the individual securities. The settlement of the stock futures is of cash settlement and the settlement

price of the future is the closing price of the underlying security.

"".

Inde< futures6

Index futures are the futures, which have the underlying asset as an Index. The Index futures are also cash settled. The settlement price of the Index futures shall be the closing value of the underlying index on the expiry date of the contract. Part"es "n the futures 8 ntra8t There are two parties in a future contract, the buyer and the seller. The buyer of the futures contract is one who is '-&< on the futures contract and the seller of the futures contract is who is )-+T on the futures contract. The pay off for the buyer and the seller of the futures of the contracts are as following figure is as follows.

PA21OFF FOR A B-2ER OF F-T-RES

( E (.T.+! $+I%!

!,, !0 E !TT'!;!&T $+I%!

CASE 161

The buyer bought the futures contract at =(>J if the future price goes to

!, then the buyer gets the profit of =($>. CASE %61 The buyer gets loss when the future price goes less then =(>, if the

future price goes to !0 then the buyer gets the loss of

PA21OFF FOR A SELLER OF F-T-RES

( E (.T.+! $+I%! !,, !0 E !TT'!;!&T $+I%! CASE 161 The seller sold the future contract at =f>J if the future goes to !, then the seller gets the profit of =($>. CASE %61 The seller gets loss when the future price goes greater than =(>, if the future price goes to !0 then the seller gets the loss of =('>. Trad"n4 In Future C ntra8tB The customer who desired to buy or sell (uture has to contact a broker or a broking firm.

%ustomers are required by the future exchange to establish a margin deposit with the respective, broker before the transaction is executed. This is called initial margin, which is between 8/09D of the value of the future contract. The margin deposit is regulated by the future exchange depending on the volatility in the price of future.

2hen the contract values moves in response to the change in the rate, gains are credited and losses are debited to the margin account.

If the account falls below a particular level know as maintenance level, the trade receives a margin call and must make up, the account equal to initial margin failing which his account is liquidates

Those who have held the positions are required to liquidate the position prior to the last trading day of the contract or the position is settled but the exchange.

*t the end of the settlement period or at the time of squaring off a transaction, the difference between the trading price and settlement prices is settled by the cash payment.

&o carry forward of a (uture contract is allowed beyond the settlement period.

Va&uat" n f Future Pr"8es6

The valuation of (utures is done using the cost of carry model. The assumptions for pricing future contracts as followsB

The markets are perfect.

There are no transaction costs. *ll the assets are infinitely divisible. Bid/*sk spreads do not exist so that is assumed that only one price prevails. There are no restrictions on short selling. *lso short sellers get to use the full proceeds of the sales.

MARGINS6 ;argins are the deposits which reduce counter party risk, arise in a futures contract. These margins are collect in order to eliminate the counter party risk. There are three types of marginsB In"t"a& Mar4"ns6 2henever a futures contract is signed, both buyer and seller are required to post initial margins. Both buyer and seller are required to make security deposits that are intended to guarantee that they will infact be able to fulfill their obligation. This deposits are initial margins and they are often referred as purchase price of futures contract. Mar;"n4 t :ar;et :ar4"ns6 The process of adFusting the equity in an investorGs account in order to reflect the change in the settlement price of futures contract is known as ;T; margin. Ma"ntenan8e :ar4"n6 The investor must keep the futures account equity equal to or grater than certain percentage of the amount deposited as initial margin. If the equity goes less than that percentage of initial margin, then the investor receives a call for an additional deposit of cash known as maintenance margin to bring the equity upto the initial margin.

R &e f Mar4"ns6 The role of margins in the futures contract is explained in the following example. sold a satyam Iune futures contract to B at +s.399J the following table shows the effect of margins on the contract. The contract si#e of satyam is ,399. The initial margin amount is say +s.09,999"/, the maintenance margin is 58Dof initial margin. F-T-RES TERMINOLOG2 S! t !r"8e6 The price at which an asset trades in the spot market. Futures !r"8e6 The price at which the futures contract trades in the futures market. C ntra8t 8(8&e6 The period over which contract trades. The index futures contracts on the & ! have one/ month, two Emonth and three/month expiry cycle which expire on the last Thursday of the month. Thus a Ianuary expiration contract expires on the last Thursday of Ianuary and a (ebruary expiration contract ceases trading on the last Thursday of (ebruary. -n the (riday following the last Thursday, a new contract having a three/month expiry is introduced for trading. E<!"r( date6 It is the date specifies in the futures contract. This is the last day on which the contract will be traded, at the end of which it will cease to exist. C ntra8t s"=e6 The amount of asset that has to be delivered under one contract. (or instance, the contract si#e on & !Gs futures market is 099 nifties.

Bas"s6 In the context of financial futures, basis can be defined as the futures price minus the spot price. There will be a different basis for each delivery month for each contract. In a normal market, basis will be positive. This reflects that futures prices normally exceed spot price C st 8arr(6 The relationship between futures prices and spot prices can be summari#ed in terms of what is known as the cost of carry. This measures the storage cost plus the interest that is paid to finance the asset less the income earned on the asset. O!en Interest6 Total outstanding long or short position in the market at any specific time. *s total long positions in the market would be equal to short positions, for calculation of open interest, only one side of the contract is counter.

F-T-RES PA2OFF +am buys a Ianuary 0998 stock futures contract of +eliance Industries =+I(> on Ianuary 94, 0998 at +s. 83C.49 from hyam. 'ets assume that transaction costs are E brokerage M 9.,D, transaction tax at 9.9,Dof futures, service tax at ,9D of brokerage amount. )ence, after considering the transaction costs the cost of acquisition for +am is +s.83?.98 and net sales reali#ation for hyam is +s.837.78, which will be their respective break/even price. If price of +I( goes above +s.83?.98, +am gains and hyam loses. If price remains below +s.837.78, +am loses and hyam gains. If price remains in the range between +s.837.78 and +s.83?.98, only the broker and the government gains and both +am : hyam lose money.

The pay/off for +am : hyam from the +eliance Industries (utures =+I(> at different prices of +I( is shown schematicallyB

15000 10000 500 0

525
1#*** 11**** 11#***

530 535

540

545 550 555

DEFINITION OF OPTION> -ption is a type of contract between two persons where one grants the other the right to buy a specific asset at a specific price within a specific time period. *lternatively the contract may grant the other person the right to sell a specific asset at a specific price within a specific time period. In order to have this right, the option buyer has to pay the seller of the option premium The assets on which option can be derived are stocks, commodities, indexes etc. If the underlying asset is the financial asset, then the option are financial option

like stock options, currency options, index options etc, and if options like commodity option. Three parties are involved in the option trading, the option seller, buyer and the broker. The option seller or writer is a person who grants some one else the option to buy or sell. )e receives a premium on its price. The option buyer pays a price to the option writer to induce him to write the option. The securities broker acts as an agent to find the option buyer and seller and receives a commission or fee for it. PROPERTIES OF OPTION6 -ptions have several unique properties that set them apart from other securities. The following are the properties of optionB 'imited 'oss )igh leverages potential 'imited 'ife

PARTIES IN AN OPTION CONTRACT6 1. Bu(er f the !t" n6

The buyer of an option is one who by paying option premium buys the right but not the obligation to exercise his option on seller"writer. %. 3r"ter?se&&er f the !t" n6

The writer of the call "put options is the one who receives the option premium and is their by obligated to sell"buy the asset if the buyer exercises the option on him. T2PES OF OPTIONS6 The options are classified into various types on the basis of various variables. The following are the various types of options. I. On the 'as"s f the under&("n4 asset6 -n the basis of the underlying asset the option are divided in to two types B INDE@ OPTIONS6 The index options have the underlying asset as the index. STOCK OPTIONS6 * stock option gives the buyer of the option the right to buy"sell stock at a specified price. tock option are options on the individual stocks, there are currently more than 89 stocks, there are currently more than 89 stocks are trading in the segment. II. On the 'as"s f the :ar;et : 5e:ents6

-n the basis of the market movements the option are divided into two types. They areB
CALL OPTION6 * call option is bought by an investor when he seems that the stock price moves upwards. * call option gives the holder of the option the right but not the obligation to buy an asset by a certain date for a certain price. The name of the company whose shares are to be bought.

The number of shares to be purchased. The purchase price or the exercise price or the strike price of the shares to be brought. The expiration date, the date on which the contract or the option expires. P-T OPTION6 * put option is bought by an investor when he seems that the stock price moves downwards. * put options gives the holder of the option right but not the obligation to sell an asset by a certain date for a certain price.

III.

The name of the company shares to be sold The number of shares to be sole The selling price or the striking price The expiration date of the option. On the 'as"s f e<er8"se f !t" n6 -n the basis of the exercising of the option, the options are classified into two categories.

AMERICAN OPTION6 *merican options are options that can be exercised at any time up to the expiration date, most exchange/traded option are *merican.

E-ROPEAN OPTION6 !uropean options are options that can be exercised only on the expiration date itself. !uropean options are easier to analy#e than *merican options.

STRATEGIES FOR INDE@ OPTIONS6

I.

Bu&&"sh 5"e9 f the :ar;et6 unlimited. It is equal to the value of index minus break/even point.

,. Buy a callB It is exercised if the index is above the strike price. The profit is

2here B!$ N premium paid O strike price. The maximum loss is limited to the premium paid. 0. ell a putB It is exercised if the index is below the strike price, the profit is limited to the premium received and the loss is equal to the difference B!$ and the index.

II.

Bu&&"sh 5"e9 'ut n t sure6

Bull call spreadB It contains of the purchase of a lower strike price call and the sale of higher strike price call, of the same month. It is excursed if the index is above the strike prices. The maximum profit is limited to the difference between the two strike prices minus the net premium paid the loss is limited to the net premium paid.

III.

Bear"sh 5"e9 f the :ar;et6

,. ell a callB It is exercised it the index is above strike price the maximum profit is limited to the premium received. The maximum loss is unlimited and equals to the value of the index minus break/even point.

0.Buy a putB It is exercised if the index is below the strike price. The maximum profit is equal to the difference between B!$ ad indexes.

PA21OFF PROFILE FOR B-2ER OF A CALL OPTION The pay/off of a buyer options depends on a spot price of a underlying asset. The following graph shows the pay/off of buyer of a call option.

/ $ / !, / !0 / + /

trike price $remium" 'oss pot price , pot price 0 $rofit at spot price !,

-T; *T; IT;

/ / /

-ut of the money *t the money In the money

CASE 1B = pot price P trike price> *s the spot price =!,> of the underlying asset is more than strike price = >. The buyer gets profit of = +>, if price increases more than !, then profit also increase more than +.

CASE %B = pot price Q trike price> *s a spot price =!0> of the underlying asset is less than strike price =s>.The buyer gets loss of = $>, if price goes down less than !0 then also his loss is limited to his premium =

PA21OFF PROFILE FOR SELLER OF A CALL OPTION The pay/off of seller of the call option depends on the spot price of the underlying asset. The following graph shows the pay/off of seller of a call optionB

/ !, / !0 / + /

trike price pot price , pot price 0 $rofit at spot price !,

IT; *T; -T;

/ / /

In the money *t the money -ut of the money

$ / $remium "profit

CASE 1B = pot price Q trike price> *s the spot price =!,> of the underlying is less than strike price = >. the seller gets the profit of = $>, if the price decreases less than !, then also profit of the seller does not exceed = $>.

CASE %B = pot price P trike price>*s the spot price =!0> of the underlying asset is more than strike price = > the seller gets loss of = +>, if price goes more than !0 then the loss of the seller also increase more than = +>.

PA21OFF PROFILE FOR B-2ER OF A P-T OPTION The pay/off of the buyer of the option depends on the spot price of the underlying asset. The following graph shows the pay/off of the buyer of a call option.

/ $ / !, / !0 / + /

trike price $remium "profit pot price , pot price 0 $rofit at spot price !,

IT; -T;

/ /

In the money -ut of the money *t the money

*T; /

CASE 1B = pot price Q trike price> *s the spot price =!,> of the underlying asset is less than strike price = >. the buyer gets the profit = +>, if price decreases less than !, then profit also increases more than = +>.

CASE %B = pot price P trike price> *s the spot price =!0> of the underlying asset is more than strike price =s>, the buyer gets loss of = $>, if price goes more than !0 than the loss of the buyer is limited to his premium = $>.

$*6/-(( $+-(I'! (-+ !''!+ -( * $.T -$TI-&

The pay/off of a seller of the option depends on the spot price of the underlying asset. The following graph shows the pay/off of seller of a put optionB

/ $ / !, / !0 / + /

trike price $remium" profit pot price , pot price 0 $rofit at spot price !,

IT;

In the money *t the money -ut of the money

*T; / -T; /

CASE 1B = pot price Q trike price> *s the spot price =!,> of the underlying asset is less than strike price = >, the seller gets the loss of = +>, if price decreases less than !, than the loss also increases more than = +>. CASE %B = pot price P trike price>

*s the spot price =!0> of the underlying asset is more than strike price = >, the seller gets profit of = $>, if price goes more than !0 than the profit of seller is limited to his premium = $>.

FACTORS AFFECTING T0E PRICE OF AN OPTION St 8; !r"8e6 The pay Eoff from a call option is a amount by which the stock price exceeds the strike price. %all options therefore become more valuable as the stock price increases and vice versa. The pay/off from a put option is the amountJ by which the strike price exceeds the stock price. $ut options therefore become more valuable as the stock price increases and vice versa. Str";e !r"8e6 In case of a call, as a strike price increases, the stock price has to make a larger upward move for the option to go in/the/money. Therefore, for a call, as the strike price increases option becomes less valuable and as strike price decreases, option become more valuable. T":e t e<!"rat" n6 Both put and call *merican options become more valuable as a time to expiration increases. V &at"&"t(6 The volatility of a stock price is measured of uncertain about future stock price movements. *s volatility increases, the chance that the stock will do very well or very poor increases. The value of both calls and puts therefore increase as volatility increase. R"s;1free "nterest rate6 The put option prices decline as the risk/free rate increases where as the prices of call always increase as the risk/free interest rate increases. D"5"dends6

Dividends have the effect of reducing the stock price on the x/ dividend rate. This has an negative effect on the value of call options and a positive effect on the value of put options. PRICING OPTIONS The black/ scholes formula for the price of !uropean calls and puts on a non/ dividend paying stock are B CALL OPTION6 C A SNBD1C1@e1r t NBD%C P-T OPTION6 P A @e1r t NB1D%C1SNB1D%C where % N 1*'.! -( %*'' -$TI-& N $-T $+I%! -( T-%H &N &-+;*' DI T+IB.TI-& 1N 1-'*TI'IT6 R N T+IH! $+I%! r N *&&.*' +I H (+!! +!T.+& t N %-&T+*%T %6%'! d, N 'n = "R> O =rO v0"0>t vS"td0 N d,/ vS"t OPTIONS TERMINOLOG2 Str";e !r"8e6 The price specified in the options contract is known as strike price or !xercise price. O!t" ns !re:"u:6

-ption premium is the price paid by the option buyer to the option seller. E<!"rat" n Date6 The date specified in the options contract is known as expiration date.

Out1 f1the1: ne( !t" n6 *n out/of/the/money option is an option that would lead to negative cash flow if it is exercised immediately. In1the1: ne( !t" n6 *n In the money option is an option that would lead to positive cash inflow to the holder if it exercised immediately. At1the1: ne( !t" n6 *n at the money option is an option that would lead to #ero cash flow if it is exercised immediately.

MONE2NESS -ut/of/the ;oney In/the/;oney *t/the/;oney

P-T OPTIONS pot $ricePexercise price pot $riceQexercise price pot $riceNexercise price

CALL OPTIONS pot $riceQexercise price pot $ricePexercise price pot $riceNexercise price

Intr"ns"8 5a&ue f !t" n6 The intrinsic value of an option is IT;, If option is IT;. If the option is -T;, its intrinsic value is #ero. %all option intrinsic value $ut option intrinsic value N N tock $rice E triking $rice triking $rice E tock $rice

T":e 5a&ue f an !t" n6 The time value of an option is the difference between its premium and its intrinsic value. Time 1alue N $remium E Intrinsic 1alue

Va&uat" n f O!t" nB -ption cannot be valued in terms of the series of inflow and outflows, required rate of return and the time pattern of inflows and outflows, in these terms because -ptions have characteristics that make them different from the securities. The valuation of an option depends upon a number of factors relating to the underlying asset and the financial market. Effe8t f D"fferent fa8t rs n the 5a&uat" n f O!t" ns6 %all -ption 1alue ,. Increase in value of underlying asset 0. !xtent of volatility in value of asset 3. Increase in strike price 4. 'onger expiration time 8. Increases in rate of Interest 5. Increase in Income from asset Increases Increases Decreases Increases Increases Decreases $ut -ption 1alue Decreases Decreases Increases Decreases Decreases Increases

L":"tat" ns6

The assumption that there are only two possibilities for the share price over next one year is impractical and hypothetical such a strategy may not work because of possibilities is reduce as the time period is shortened.

Ad5anta4es f O!t" ns 6

F&e<"'"&"t(6 -ptions offer flexibility to the buyer in form of right to buy or sell but not the obligation. Versat"&"t(6 -ption can be as conservative or as speculative as oneGs investment trategy dictates. Le5era4es6 -ptions give high leverage by investing small amount of capital in the form of premium one can take exposure in the underlying asset of much greater value.

R"s;6 $re/known maximum risk for an option buyer. Pr f"t6 'arge profit potential for limited risk to the option buyer.

Insuran8e6 !quity portfolio can be protected from a decline in the market by way of buying a protective put. This option position supplies the needed insurance to over come the uncertainty of the market place.

Se&&er Pr f"ts6 elling put options is like selling insurance to anyone who feels like earning revenues by selling insurance can set himself up to do so in the index -ptions market.

Inde< O!t" nsB

*n index option provides the buyer of the option, the right but not the obligation to buy or sell the underlying index, at a pre/determined strike price on or before the date of expiration, depending on the type of option.

Benef"ts f Inde< O!t" n6 )elp to capitali#e on an expected market move. )edge price risk of the physical stock holdings against adverse market moves. Diversified exposure to the market as a whole with a single trading decision. $redetermined maximum risk for the buyer. )igh leverage i.e., large percentage gains from relatively small, favorable percentage moves in the underlying index.

St 8; O!t" ns6
* stock option is a contact, which conveys to its holder the right, but not the obligation, to buy or sell shares of the underlying security at a specified price on or before a given date. *fter this given date, the option ceases to exist.

The caller of an option is, in turn, obligated to the sell shares to the call option buyer or buy shares from the put option buyer at the specified price within the time period. Benef"ts f St 8; O!t" ns6

$rotect stock holdings from a decline in market price by buying a put. Increase income against current stock holdings by writing a covered call. (ix buying price of a stock, by buying a call. $osition for a buy market move/even when you donGt know which way prices will move by buying a straddle or strangle. Benefit from a stock priceGs rise or fall without incurring the lost of buying or selling the stock outright by writing -ptions.

C0APTER1+ IND-STR2 PROFILE

There are stock 03 exchanges in India. The most prominent among these are Bombay tock !xchange and &ational tock !xchange, B :'a( St 8; E<8han4e6 The tock !xchange, ;umbai, popularly known as DBSEE was established in ,C78 as DThe Nat"5e Share and St 8; Br ;ers Ass 8"at" nE . It is the oldest one in *sia, even older that the Tokyo tock !xchange, which was established in ,C7C. It is a voluntary nonprofit making *ssociation of $ersons =*-$> and is currently engaged in the process of converting itself into de mutilated and corporate entity. It has evolved over the years into its present status as the premier tock !xchange in the country. It is the first tock !xchange in the %ountry to have obtained permanent recognition in ,?85 from the <ovt. of India under the ecurities %ontracts =+egulation> *ct, ,?85. Stren4ths6

)uge investor base (amiliarity of investors with BaseGs operation. 'arge nationwide network of brokers and sub brokers. ,39 yearsG experience in equity trading. !xpands its vast network to retain business.

Nat" na& St 8; E<8han4e6 It was incorporate in &ovember ,??0 with an equity capital of +s.08 %ores and promoted among others by IDBI, I%I%I, 'I%, <I% and its subsidiaries, commercial banks including tate Bank of India. It has a satellite based state/of the art networking and fully automate screen based trading. It lists companies with paid up capital of +s.,9 core or more. Stren4ths6

Transparency and &ational reach. !qual access to all members <overnment patronage : Institutional patronage $rovides avenue for investment trading )i/tech infrastructure

(IIs more comfortable with screen based trading peciali#ing in derivatives E (utures : -ptions

&ational tock !xchange operates two segments namely wholesale debt market and capital market.

,. 3DM Bwholesale debt marketC se4:ent6 The 2D; segment or the money market as it is commonly referred as, is a facility for institutions and corporate bodies to enter into high value transactions in instruments such as government securities, treasury bills, public sector nits =$ .> bonds, commercial paper certificates of deposit.

%. Ca!"ta& Mar;et Se4:ent6 The %; segment covers trading in equities, convertible debentures and retail trade in debt instruments like non/convertible debentures. exchanges are traded the & (. ecurities of medium, and large companies with nationwide investors base including securities traded on other stock

The %; segment has two sub segments namelyB

,. %ash egments 0. Derivatives egments.

Cash Mar;et Se4:ent6 pot trading takes place in this market with no forward transactions. Buying and selling of scripts is done with various motives like investments, speculation and hedging. The settlement cycle in this segment is T O 0 days for payment and receipt of funds and delivery.

Der"5at"5es Mar;et Se4:ent6 Trading in derivatives is done in this segment. * derivative security is a financial contract whose value is derived from the value of an under/lying asset. The underlying asset can be equity, forex, commodity or any other asset.

The securities contract =+egulation> *ct, ,?85 = %*> defines @derivativeA to include/

* security derived from a debt instrument, share, and loan whether secured or unsecured, risk instrument or contract for differences or any form of security. * contract, which derives its value from the prices, or index of prices, of underlying securities.

Fun8t" ns f Der"5at"5es6 1. Pr"8e d"s8 5er(6 The markets indicate what is likely to happen and thus assist in better price discovery of the future as well as current prices. %. R"s; transfer6 Derivatives instruments do not themselves involve risk they redistribute the risk between the market participants. +. Mar;et 8 :!&et" n6 2ith the introduction of derivatives the underlying market witnesses higher trading volumes.

DERIVATIES TRADING AT NSE ? BSE6 The derivatives trading on the &ational tock !xchange commenced with

:$ %&R &ifty Index futures on Iune ,3, 0999. The trading in index options commenced on Iune 4, 099, and trading in options on individual securities commenced on Iuly 0, 099,. ingle stock futures were launched on &ovember ?, 099,. The index futures and options contract on & ! is based on :$ %&R &ifty Index. %urrently, the futures contracts have a maximum of 3/months expiration cycles. Three contracts are available for trading, with , month, 0 months and 3 months expiry. * new contract is introduced on the next trading day following the expiry of the near month contract. In the B !, the trading of Derivatives is taking place with !& !R comprising 39 scripts for Index (utures and -ptions.

SFP CN@ N"ft( :$ %&R &ifty is a well/diversified 89 stock index accounting for 04 sectors of the economy. It is used for a variety of purposes such as benchmarking fund portfolios, index based derivatives and index funds. :$ %&R &ifty is owned and managed by India Index ervices and $roducts 'td =II '>, which is a Foint venture between & ! and %+I I'. II ' is IndiaGs first speciali#ed company focused upon the index as core products. II ' have a consulting and licensing agreement with tandard : $oorGs = :$>, who are world leaders in index services.

The average total traded value for the last six months of all &ifty stocks is approximately 77D of the traded value of all stocks on the & !. &ifty stocks represent about 5,D of the total market capitali#ation as on *ugust 3,,0994. Impact coast of the :$ %&R &ifty for a portfolio si#e of +s.8 million is 9.,9D :$ %&R &ifty is professionally maintained and is idea for derivatives trading.

Trad"n4 "n N"ft(

The &ational

tock !xchange o India 'imited =& !> commenced trading in

derivatives with index futures on Iune ,3,0999. The futures contracts on & ! are based on :$ %&R &ifty. The !xchange later introduced trading on index options based on &ifty on Iune 4,099,.

Ad5anta4es6 Derivatives market is mainly useful for short/term investment where there can be a profit. This is becauseJ one need not pay ,99D at the time of buying. They can pay it in the form of ;*+<I&, which depends upon market volatile position. ;arket values increases per market volatile position. The other advantage is as mentioned above &I(T6 can be traded. This is the best part of Derivative market which is even the

index can be bought and speculated. The index is &I(T6. It is tradable. This opportunity is not available is cash mark

FINANCIAL MARKETS6 (inancial markets are in the forefront in developing economics. The vibrant financial market enhances the efficiency of capital formation. bridge one set of financial intermediaries with another set of players. 2ell/developed financial markets enlarge the range of financial services. Thus, financial markets

-n the basis of the maturity period of the financial assets, the market divided intoB (I&*&%I*' 6 T!;

FINANCIAL

FINANCIAL

FINANCIAL

FINANCIAL

I& TIT.TI-&

;*+H!T

I& T+.;!&T

!+1I%!

;-&!6 ;*+H!T

%*$IT*' ;*+H!T

.norgani#ed

Organized

Stock Market

Term lending Instructions

<ilt !dged ecurities ;arket

Industrial Securitie s

Pr":ar( Mar;et

Se8 ndar( Mar;et

St 8; E<8han4es

2holesale debt ;arket segment

Ca!"ta& :ar;et

egment

Cash Se4:ent

Der"5at"5e Se4:ent

Interest rate

%all

$ut

The :a"n fun8t" ns f the f"nan8"a& :ar;ets are6 To facilitate creation and allocation of credit and liquidity. To serve as intermediaries for mobili#ation of savings. To provide financial convenience, and

 To cater to the various credits needs of the business houses.

M ne( :ar;et6
* money market is a mechanism through which short/term funds are loaned and borrowed and through which a large part of the financial transaction of a particular country of the world are cleared.The money market is divided into 3 sectorsB

Or4an"=ed se8t r is comparatively well developed in terms of organi#ed relationships and speciali#ation of functions. It consists of the +eserve Bank of India, various scheduled and non/scheduled commercial banks. The development banks, other financial institutions like 'I%, .TI, discount and finance house of India limited are all a part of the organi#ed sector.

The un r4an"=ed se8t r is more dominate in India. The only link between the organi#ed and unorgani#ed sectors is through commercial banks. It consists of the indigenous bankers, ;oneylenders, &idhis and %hit funds. The 8 !erat"5e se8t r consists of the state Ecooperative banks, primary agricultural credit societies, %entral %ooperative banks, and tate 'and Development bank

Ca!"ta& :ar;et6
%apital market is an organi#ed mechanism for effective and efficient transfer of money capital of financial resources form the investing class i.e., a body of individual or institutional savers, to the entrepreneur class i.e., a body of individual or institutions engage in industry, business or service in the private and public sectors of the economy.

Fun8t" ns f 8a!"ta& :ar;et6 ;obili#ation of &ational savings for economic development ;obili#ation and import of foreign capital and foreign investment capital plus skill to fill up the deficit in the required financial resources to maintain expected rate of economic growth.

 Direction the flow to funds of high yields and also strives for balance and diversified industriali#ation. C nst"tuents f 8a!"ta& :ar;et6 The capital market comprises of mutual funds, development banks, speciali#ed financial institutions, investment institutions, state level development banks, lease companies, financial service companies, commercial banks and other speciali#ed institutions set up for the growth of capital market like !BI, %+I I'. Instru:ents Ca!"ta& :ar;et6 !quity shares $reference shares &on/voting equity shares %umulative convertible preference hares %ompany fixed deposits, banks, and debentures, global depository receipts. The capital market is divided into two parts namely new issues market and tock market.

St 8; Mar;et6
tock markets are the secondary markets where trading in existing securities is done. 'isting of new issues for investment and disinvestments by savers"investors takes place. It imparts liquidity or encash ability to stocks and shares. tock exchange is a market in which securities are bought and sold and it is an essential component of a developed capital markets.

The securities contracts =+egulation> *ct, ,?85, defines tock !xchange as followsB @It is an association, organi#ation or body of individuals, whether incorporated or not, established for the purpose of assisting, regulating and controlling of business in buying, selling and dealing in securitiesA.

* stock exchange, thus imparts marketability and liquidity to securities, encourage investments in securities and assists corporate growth. tock exchanges are organi#ed

and regulated markets for various securities issued by corporate sector and other institutions. Chara8ter"st"8s6 *n organi#ation in the form of an association or company * governing body to supervise and control its activities * framework of rules and regulations * common meeting place for purchasers and sellers -nly members are allowed to conduct business in a stock exchange.

Fun8t" ns6 !nsures liquidity of capital $rovides ready market for securities !valuation of financial conditions and prospects of listed firms (acilitates speculation $romotes and mobili#es savings $romotes industrial growth and economic development %learing house of business information

Benef"ts f st 8; e<8han4e can be studied under the following headingsB

,. *dvantages to the companiesB +eady market for securities Increase in price Increase in goodwill *gent between companies and the investors

0. *dvantage to the Investors afety of investment and Best use of capital ;ore collateral value $ublication of price list of securities

$owerful hedge against inflation

C0APTER1, DATA ANAL2SIS AND INTERPRETATION

The obFective of this analysis is to evaluate the profit"loss position futures and options. This analysis is based on sample data taken of *%% ltd scrip. This analysis considered the &ovember contract of *%%. The lot si#e of *%% is 099, the time period in which this analysis done is from ,.95.,3 E 07.95.,3.

DATA OF ACC Ltd1 T0E F-T-RES AND OPTIONS OF T0E 7-NE MONT0 f %*1+. DATE ,/95/09,3 0/95/09,3 8/95/09,3 5/95/09,3 7/95/09,3 C/95/09,3 ?/95/09,3 ,3/95/09,3 ,3/95/09,3 ,4/95/09,3 ,8/95/09,3 ,5/95/09,3 ,?/95/09,3 09/95/09,3 0,/95/09,3 00/95/09,3 03/95/09,3 05/95/09,3 07/95/09,3 MARKET ,980.?8 ,930.78 ,99?.78 ,90,.09 ,904.88 ,987.C8 ,934.08 ,9,?.48 ,939.99 ,948.09 ,945.,9 ,93?.09 ,9C4.38 ,9C8.88 ,9C9.88 ,,94.49 ,,,3.88 ,,3C.88 ,,,3.98 F-T-RE ,94?.09 ,940.98 ,9,9.,9 ,9,C.38 ,905.38 ,987.48 ,905.89 ,90C.98 ,937.,8 ,98,.58 ,983.38 ,947.79 ,9C5.38 ,9CC.08 ,970.,3 ,,97.08 ,,90.99 ,,33.38 ,,,4.79

GRAPH SHOWING THE PRICE MOVEMENT OF FUTURE Vs MARKET

1160 1140 1120 1100 1080 1060 1040 1020 1000 980 960 940

MARKET FUTURE

OBSERVATIONS AND FINDINGS The future price of *%% 'td is moving along with the market price. If the buy price of the future is less than the settlement price, than the buyer of a future gets profit. If the selling price of the future is less than the settlement price, than the seller incur

The f && 9"n4 ta'&e e<!&a"ns the :ar;et !r"8e and !re:"u:s f 8a&&s. The first column explains trading date econd column explains the $-T market price in cash segment on that date. The third column explains call premiums amounting ,909, ,989 : ,9C9.

CALL PRICES Premium DATE ,/,,/09,3 0/95/09,3 8/95/09,3 5/95/09,3 7/95/09,3 C/95/09,3 ?/95/09,3 ,3/95/09,3 ,3/95/09,3 ,4/95/09,3 ,8/95/09,3 ,5/95/09,3 ,?/95/09,3 09/95/09,3 0,/95/09,3 00/95/09,3 03/95/09,3 05/95/09,3 07/95/09,3 MARKET PRICE ,980.?8 ,930.78 ,99?.78 ,90,.09 ,904.88 ,987.C8 ,934.08 ,9,?.48 ,939.99 ,948.09 ,945.,9 ,93?.09 ,9C4.38 ,9C8.88 ,9C9.88 ,,94.49 ,,,3.88 ,,3C.88 ,,,3.98 1*%* ,90.,8 C5.C8 89.99 79.?9 5?.09 C7.,8 79.09 88.59 8C.38 54.49 5,.C8 84.79 C,.88 7?.?9 73.38 ?,.39 ?7.C9 ,9?.48 ?0.59 1*#* C7.98 70.C8 88.79 87.59 88.58 59.?9 88.?9 40.89 44.39 4C.C8 45.,9 89.99 79.99 C8.99 80.49 57.,8 70.99 C9.49 53.89 1*$* 35.,8 59.58 05.99 34.?9 44.,8 83.?8 43.C9 3,.C9 80.C8 35.,8 48.99 4C.99 50.99 57.99 84.99 48.99 4?.79 7,.08 37.08

CALL OPTION6 B-2ER PA2S OFF *s brought , lot of *%% 'td that is 099, those who buy for ,9C9 paid 35.,8 premium per share. ettlement price is ,953.?9 (ormulaB $ay off N spot E strike premium. SELLER PA2 OFF 6 ,953.?9/,9C9 N /,5.,

because it is negative it is out of the money contract hence buyer will lose only

It is out of the money for the buyer so it is in the money for seller, hence his profit is only premium i.e..,099T35.,8N7039. P-T PRICES PREMI-MS 1*#* 7C.38 C4.59 ?9.C8 C,.48 75.39 8C.C9 57.49 5?.48 59.78 89.38 45.C8 47.49 04.89 ,9.99 09.98 ,,.09 7.,8 ,.09 ,.99

DATE ,/,,/09,3 0/95/09,3 8/95/09,3 5/95/09,3 7/95/09,3 C/95/09,3 ?/95/09,3 ,3/95/09,3 ,3/95/09,3 ,4/95/09,3 ,8/95/09,3 ,5/95/09,3 ,?/95/09,3 09/95/09,3 0,/95/09,3 00/95/09,3 03/95/09,3 05/95/09,3 07/95/09,3

MARKET PRICE ,980.?8 ,930.78 ,99?.78 ,90,.09 ,904.88 ,987.C8 ,934.08 ,9,?.48 ,939.99 ,948.09 ,945.,9 ,93?.09 ,9C4.38 ,9C8.88 ,9C9.88 ,,94.49 ,,,3.88 ,,3C.88 ,,,3.98

1*%* 53.59 5C.78 73.88 54.?9 08.99 44.?8 8,.C8 80,58 44.?9 35.99 30.79 30.59 ,8.99 ,3.08 ,,.98 8.38 0.?8 9.08 9.,8

1*$* ?4.78 ,90.09 ,,9.99 ??.?8 ?4.79 74.C8 C8.09 CC.58 7?.08 57.88 54.98 58.49 37.89 33.C9 33.98 09.79 ,4.C9 4.48 4.78

P-T OPTION6 B-2ER PA2 OFF6 Those who have purchase put option at a strike price of ,9C9, the premium payable is ?4.78. -n the expiry date the spot market price enclosed at ,953.?9 the net pay off N,953.?9/,9C9N/,5.9, and the premium already paid N ?4.78 =paid per share> ?4.78T099 N,C?89 that is buyer is getting a loss of N,C?89 SELLER PA2 OFF6 *s seller is entitled only for premium if he is in profit but seller has to borne total loss. $remium incurred is 099T?4.78N,C?8

Re&"an8e C ::un"8at" ns Future PA2 G OFF ta'&e f r the : nth f 7-NE %*1+ The below table shows the $-T and (.T.+! prices of +%-; stock from 5th Fun 09,3 to 0Cth Iun 09,3. The $ay/-ff is calculated as the difference of (uture ;ark to ;arket =; to ;> price and pot price. It is also called the basis. 2e can observe the $ay/-ff, few days it is positive and few days it is negative. -n the !R$I+6 day both the stock spot price and future price equal.

Re&"an8e C ::un"8at" ns

LOT SIHE ,***

(uture ; to ; ettle $rice 4,., 49.8 40.08 4,.7 3? 3C.5 49.0 40.38 43.0 4,.5 40., 40.48 4,.58 43.? 48., 44.7 45.08

ymbol +%-; +%-; +%-; +%-; +%-; +%-; +%-; +%-; +%-; +%-; +%-; +%-; +%-; +%-; +%-; +%-; +%-;

Date 5/Iun/,3 7/Iun/,3 C/Iun/,3 ,,/Iun/,3 ,3/Iun/,3 ,3/Iun/,3 ,4/Iun/,3 ,8/Iun/,3 ,C/Iun/,3 ,?/Iun/,3 09/Iun/,3 0,/Iun/,3 00/Iun/,3 08/Iun/,3 05/Iun/,3 07/Iun/,3 0C/Iun/,3

!xpiry 0C/Iun/,3 0C/Iun/,3 0C/Iun/,3 0C/Iun/,3 0C/Iun/,3 0C/Iun/,3 0C/Iun/,3 0C/Iun/,3 0C/Iun/,3 0C/Iun/,3 0C/Iun/,3 0C/Iun/,3 0C/Iun/,3 0C/Iun/,3 0C/Iun/,3 0C/Iun/,3 0C/Iun/,3

spot price 4,.?8 49.?8 40.98 40.,8 3?.38 3?.,8 49.78 40.4 43., 4,.4 4,.58 40.3 4,.58 43.C8 48.08 44.58 45.08

pay/off 9.C8 9.48 /9.0 9.48 9.38 9.88 9.88 9.98 /9., /9.0 /9.48 /9.,8 9 /9.98 9.,8 /9.98 9

PA2 G OFF ta'&e f OPTSTK1RCOM1%$ 7un %*1+1 #*CE The below is pay/off table of +%-; 89 %all -ption of 0C Fun 09,3 expiry. $*6/-(( N trike price E pot $rice

ymbol +%-; +%-; +%-; +%-; +%-; +%-; +%-; +%-; +%-; +%-; +%-; +%-; +%-; +%-; +%-; +%-; +%-;

Date 5/Iun/,3 7/Iun/,3 C/Iun/,3 ,,/Iun/,3 ,3/Iun/,3 ,3/Iun/,3 ,4/Iun/,3 ,8/Iun/,3 ,C/Iun/,3 ,?/Iun/,3 09/Iun/,3 0,/Iun/,3 00/Iun/,3 08/Iun/,3 05/Iun/,3 07/Iun/,3 0C/Iun/,3

!xpiry 0C/Iun/,3 0C/Iun/,3 0C/Iun/,3 0C/Iun/,3 0C/Iun/,3 0C/Iun/,3 0C/Iun/,3 0C/Iun/,3 0C/Iun/,3 0C/Iun/,3 0C/Iun/,3 0C/Iun/,3 0C/Iun/,3 0C/Iun/,3 0C/Iun/,3 0C/Iun/,3 0C/Iun/,3

trike $rice 89 89 89 89 89 89 89 89 89 89 89 89 89 89 89 89 89

$remium 9.38 9.0 9.3 9.08 9.,8 9.98 9., 9.0 9.,8 9.98 9.98 9.98 9.98 9.98 9.98 9 9

$-T $+I%! 4,.?8 49.?8 40.98 40.,8 3?.38 3?.,8 49.78 40.4 43., 4,.4 4,.58 40.3 4,.58 43.C8 48.08 44.58 45.08

Daily $*6/-(( /C.4 /?.08 /C.08 /C., /,9.C /,9.? /?.38 /7.C /7.98 /C.58 /C.4 /7.78 /C.4 /5.0 /4.C /8.38 /3.78

*lmost all the days the pay/off is negative value. -n the expiry day also the pay/off is /3.78. That is why the option premium will become U!+- at the time of expiry. ;eans investor lost entire his investment in +%-; 0C Fun 09,3 call option, as the spot price didnGt cross the strike price of option.

AS0OK LE2LAND Future PA2 G OFF ta'&e f r the : nth f 7-NE %*1+ The below table shows the $-T and (.T.+! prices of AS0OK LE2LAND stock from 5th Fun 09,3 to 0Cth Iun 09,3. The $ay/-ff is calculated as the difference of (uture ;ark to ;arket =; to ;> price and pot price. It is also called the basis. AS0OK LE2LAND LOT SIHE $***
(uture ; to ; ettle $rice ,5.0 ,5.48 ,8.?8 ,8.?8 ,8.7 ,8.7 ,5.8 ,7.8 ,7.7 ,7.88 ,C.0 ,7.78 ,5.58 ,7.0 ,7.8 ,7.5 ,7.78

ymbol * )-H'!6 * )-H'!6 * )-H'!6 * )-H'!6 * )-H'!6 * )-H'!6 * )-H'!6 * )-H'!6 * )-H'!6 * )-H'!6 * )-H'!6 * )-H'!6 * )-H'!6 * )-H'!6 * )-H'!6 * )-H'!6 * )-H'!6

Date 5/Iun/,3 7/Iun/,3 C/Iun/,3 ,,/Iun/,3 ,3/Iun/,3 ,3/Iun/,3 ,4/Iun/,3 ,8/Iun/,3 ,C/Iun/,3 ,?/Iun/,3 09/Iun/,3 0,/Iun/,3 00/Iun/,3 08/Iun/,3 05/Iun/,3 07/Iun/,3 0C/Iun/,3

!xpiry 0C/Iun/,3 0C/Iun/,3 0C/Iun/,3 0C/Iun/,3 0C/Iun/,3 0C/Iun/,3 0C/Iun/,3 0C/Iun/,3 0C/Iun/,3 0C/Iun/,3 0C/Iun/,3 0C/Iun/,3 0C/Iun/,3 0C/Iun/,3 0C/Iun/,3 0C/Iun/,3 0C/Iun/,3

spot price ,5.5 ,5.88 ,5.3 ,5.8 ,5 ,5.,8 ,5.5 ,7.48 ,7.5 ,7.8 ,C., ,7.78 ,5.5 ,7., ,7.8 ,7.8 ,7.78

pay/off 9.4 9., 9.38 9.88 9.3 9.48 9., /9.98 /9., /9.98 /9., 9 /9.98 /9., 9 /9., 9

2e can observe the $ay/-ff, few days it is positive and few days it is negative. -n the !R$I+6 day both the stock spot price and future price equal.

PA2 G OFF ta'&e f OPTSTK1 AS0OK LE2 1%$ 7un %*1+1 %*CE The below is pay/off table of AS0OK LE2LAND 09 %all -ption of 0C Fun 09,3 expiry. $*6/-(( N trike price E pot $rice
trike $rice 09 09 09 09 09 09 09 09 09 09 09 09 09 09 09 09 09 ettle $rice 9.0 9.0 9., 9.,8 9.,8 9., 9.98 9., 9.,8 9.,8 9.08 9., 9.98 9.98 9.98 9.98 9 $-T $+I%! ,5.5 ,5.88 ,5.3 ,5.8 ,5 ,5.,8 ,5.5 ,7.48 ,7.5 ,7.8 ,C., ,7.78 ,5.5 ,7., ,7.8 ,7.8 ,7.78

ymbol * )-H'!6 * )-H'!6 * )-H'!6 * )-H'!6 * )-H'!6 * )-H'!6 * )-H'!6 * )-H'!6 * )-H'!6 * )-H'!6 * )-H'!6 * )-H'!6 * )-H'!6 * )-H'!6 * )-H'!6 * )-H'!6 * )-H'!6

Date 5/Iun/,3 7/Iun/,3 C/Iun/,3 ,,/Iun/,3 ,3/Iun/,3 ,3/Iun/,3 ,4/Iun/,3 ,8/Iun/,3 ,C/Iun/,3 ,?/Iun/,3 09/Iun/,3 0,/Iun/,3 00/Iun/,3 08/Iun/,3 05/Iun/,3 07/Iun/,3 0C/Iun/,3

!xpiry 0C/Iun/,3 0C/Iun/,3 0C/Iun/,3 0C/Iun/,3 0C/Iun/,3 0C/Iun/,3 0C/Iun/,3 0C/Iun/,3 0C/Iun/,3 0C/Iun/,3 0C/Iun/,3 0C/Iun/,3 0C/Iun/,3 0C/Iun/,3 0C/Iun/,3 0C/Iun/,3 0C/Iun/,3

$*6/-(( /3.5 /3.58 /3.C /3.58 /4.,8 /3.?8 /3.48 /0.58 /0.88 /0.58 /0.,8 /0.38 /3.48 /0.?8 /0.88 /0.88 /0.08

*lmost all the days the pay/off is negative value. -n the expiry day also the pay/off is /0.08. That is why the option premium will become U!+- at the time of expiry. ;eans investor lost entire his investment in * )-H '!6 0C Fun 09,3 call option, as the spot price didnGt cross the strike price of option.

COAL INDIA Future PA2 G OFF ta'&e f r the : nth f 7-NE %*1+

The below table shows the $-T and (.T.+! prices of %-*' I&DI* stock from 5th Fun 09,3 to 0Cth Iun 09,3. The $ay/-ff is calculated as the difference of (uture ;ark to ;arket =; to ;> price and pot price. It is also called the basis.

ymbol %-*' I&DI* %-*' I&DI* %-*' I&DI* %-*' I&DI* %-*' I&DI* %-*' I&DI* %-*' I&DI* %-*' I&DI* %-*' I&DI* %-*' I&DI* %-*' I&DI* %-*' I&DI* %-*' I&DI* %-*' I&DI* %-*' I&DI* %-*' I&DI* %-*' I&DI*

Date 5/Iun/,3 7/Iun/,3 C/Iun/,3 ,,/Iun/,3 ,3/Iun/,3 ,3/Iun/,3 ,4/Iun/,3 ,8/Iun/,3 ,C/Iun/,3 ,?/Iun/,3 09/Iun/,3 0,/Iun/,3 00/Iun/,3 08/Iun/,3 05/Iun/,3 07/Iun/,3 0C/Iun/,3

!xpiry 0C/Iun/,3 0C/Iun/,3 0C/Iun/,3 0C/Iun/,3 0C/Iun/,3 0C/Iun/,3 0C/Iun/,3 0C/Iun/,3 0C/Iun/,3 0C/Iun/,3 0C/Iun/,3 0C/Iun/,3 0C/Iun/,3 0C/Iun/,3 0C/Iun/,3 0C/Iun/,3 0C/Iun/,3

(uture ; to ; ettle $rice 3,4.0 300.C8 30,.4 0??.C 0?8.98 07?.38 393.58 339.,8 343.5 308.48 349.C 38C.38 343 373.?8 379.38 3?5.C 40,.4

spot price 303., 304.? 300.,8 399.7 0?4.?8 0C,.4 394.8 30?.? 340.88 308.8 349.7 38C 340.4 373.58 37,.?8 3?C., 40,.4

pay/off C.? 0.98 9.78 9.? /9., 0.98 9.C8 /9.08 /,.98 9.98 /9., /9.38 /9.5 /9.3 ,.5 ,.3 9

2e can observe the $ay/-ff, few days it is positive and few days it is negative. -n the !R$I+6 day both the stock spot price and future price equa

PA2 G OFF ta'&e f OPTSTK1 COAL INDIA %$ 7un %*1+1 +**CE

The below is pay/off table of COAL INDIA 399 %all -ption of 0C Fun 09,3 expiry. $*6/-(( N trike price E pot $rice
trike $rice 399 399 399 399 399 399 399 399 399 399 399 399 399 399 399 399 ettle $rice 3C.3 38.3 ,7 ,7 7.8 ,4 07.? 83 33.0 44.58 8?.58 44.C8 73.C8 ,,? ?C.,8 9 $-T $+I%! 303., 304.? 300.,8 399.7 0?4.?8 0C,.4 394.8 30?.? 340.88 308.8 349.7 38C 340.4 373.58 37,.?8 3?C.,

ymbol %-*' I&DI* %-*' I&DI* %-*' I&DI* %-*' I&DI* %-*' I&DI* %-*' I&DI* %-*' I&DI* %-*' I&DI* %-*' I&DI* %-*' I&DI* %-*' I&DI* %-*' I&DI* %-*' I&DI* %-*' I&DI* %-*' I&DI* %-*' I&DI*

Date 5/Iun/,3 7/Iun/,3 C/Iun/,3 ,,/Iun/,3 ,3/Iun/,3 ,3/Iun/,3 ,4/Iun/,3 ,8/Iun/,3 ,C/Iun/,3 ,?/Iun/,3 09/Iun/,3 00/Iun/,3 08/Iun/,3 05/Iun/,3 07/Iun/,3 0C/Iun/,3

!xpiry 0C/Iun/,3 0C/Iun/,3 0C/Iun/,3 0C/Iun/,3 0C/Iun/,3 0C/Iun/,3 0C/Iun/,3 0C/Iun/,3 0C/Iun/,3 0C/Iun/,3 0C/Iun/,3 0C/Iun/,3 0C/Iun/,3 0C/Iun/,3 0C/Iun/,3 0C/Iun/,3

$*6/-(( /,8.0 /,9.4 8.,8 /,5.3 /,3.88 /30.5 /03.4 /03., ?.38 /,?.,8 /,C.?8 ,3.,8 /3,.48 /48.38 /05.0 ?C.,

*lmost all the days the pay/off is negative value. -n the expiry day also the pay/off is ?C.,. -n 5th Fun 09,3 the premium paid for the option is +s.3C.3 on expiry day the option premium is trading at ?C.,. ;eans 085 D return that investor got on this option. *s '-T IU! is ,999, his profit is ?C., E 3C.3 N 8?.C x ,999 N +s. 8?C99

C0APTER1# S-MMAR2 AND CONCL-SION

S-MMAR2
Derivates market is an innovation to cash market. *pproximately its daily turnover reaches to the equal stage of cash market. The average daily turnover of the & ! derivative segments In cash market the profit"loss of the investor depend the market price of the underlying asset. The investor may incur huge profits or he may incur huge profits or he may incur huge loss. But in derivatives segment the investor the investor enFoys huge profits with limited downside. In cash market the investor has to pay the total money, but in derivatives the investor has to pay premiums or margins, which are some percentage of total money. Derivatives are mostly used for hedging purpose. In derivative segment the profit"loss of the option writer is purely depend on the fluctuations of the underlying

CONCL-SION
In bullish market the call option writer incurs more losses so the investor is bullish market, so he is suggested to write a put option. In bearish market the call option holder will incur more losses so the investor is suggested to go for a call option to write, where as the put option writer will get more losses, so he is suggested to hold a put option. 'ack of *dequate legal framework or clear cut frame work for Derivatives is one of the prime factors responsible for the slow growth rate of derivatives trading. (or instance, the law relating to documentation and taxation is not yet settled in India.'aws must be simplified in order to make the trading of derivatives easy.

suggested to go for a call option to hold, where as the put option holder suffers in a

FINDINGS

The derivative market is newly started in India and it is not known by every investor, so !BI has to take steps to create awareness among the investors about the derivative segment. In order to increase the derivatives market in India, !BI should revise some of their regulations like contract si#e, participation of (II in the derivatives market. %ontract si#e should be minimi#ed because small investors cannot afford this much of huge premiums. !BI has to take further steps in the risk management mechanism. !BI has to take measures to use effectively the derivatives segment as a tool of hedging.

BIBLOGRAP02

BIBLOGRAP02

1.BOOKS6 (inancial ;anagement (uture and -ptions

A-T0ORS E $rasanna %handra / Iohn.c.)all

%.Ma4a="nes and 7 urna&s

Derivatives %ore ;odule 2orkbook E &%(; material The *nalyst =-%T-;B!+/0995>/&.+.$arasuraman

+.3EBSITES6 www.nseindia.com www.bseindia.com www.moneypore.com www.derivativesindia.com www.indiabulls.com