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A STUDY ON FINANCIAL DERIVATIVES (FUTURES & OPTIONS)

ABSTRACT 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. Derivatives are risk management instruments, which derive their value from an underlying asset. The following are three broad categories of participants in the derivatives market Hedgers, Speculators and Arbitragers. rices in an organi!ed

derivatives market reflect the perception of market participants about the future and lead the price of underlying to the perceived future level. "n recent times the Derivative markets have gained importance in terms of their vital role in the economy. The increasing investments in stocks #domestic as well as overseas$ have attracted my interest in this area. %umerous studies on the effects of futures and options listing on the underlying cash market volatility have been done in the developed

markets. The derivative market is newly started in "ndia and it is not known by every investor, so S&'" has to take steps to create awareness among the investors about the derivative segment. "n cash market the profit(loss of the investor depends on the market price of the underlying asset. The investor may incur huge profit or he may incur huge loss. 'ut in derivatives segment the investor en)oys huge profits with limited downside. Derivatives are mostly used for hedging purpose. "n order to increase the derivatives market in "ndia, S&'" should revise some of their regulations like contract si!e, participation of *"" in the derivatives market. "n a nutshell the study throws a light on the derivatives market.

+HA T&,-"
INTRODUCTION:-

The emergence of the market for derivatives products, most notably forwards, futures and options, can be tracked back to the willingness of riskaverse economic agents to guard themselves against uncertainties arising out of fluctuations in asset prices. 'y their very nature, the financial markets are marked by a very high degree of volatility. Through the use of derivative products, it is possible to partially or fully transfer price risks by locking-in asset prices. As instruments of risk management, these generally do not influence the fluctuations in the underlying asset prices. However, by locking-in asset prices, derivative product minimi!es the impact of fluctuations in asset prices on the profitability and cash flow situation of risk-averse investors. Derivatives are risk management instruments, which derive their value from an underlying asset. The underlying asset can be bullion, inde-, share, bonds, currency, interest, etc.. s, Securities 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.

NEED FOR STUDY. "n recent times the Derivative markets have gained importance in terms of their vital role in the economy. The increasing investments in derivatives #domestic as well as overseas$ have attracted my interest in this area. Through the use of derivative products, it is possible to partially or fully transfer price risks by locking-in asset prices. As the volume of trading is tremendously increasing in derivatives market, this analysis will be of immense help to the investors.

OBJECTIVES OF THE STUDY: To analy!e the operations of futures and options. To find the profit(loss position of futures buyer and seller and also the option writer and option holder. To study about risk management with the help of derivatives.

SCOPE OF THE STUDY: The study is limited to /Derivatives0 with special reference to futures and option in the "ndian conte-t and the "nter-+onnected Stock &-change has been taken as a representative sample for the study. The study can1t be said as totally perfect. Any alteration may come. The study has only made a humble attempt at evaluation derivatives market only in "ndia conte-t. The study is not based on the international perspective of derivatives markets, which e-ists in %ASDA2, +'3T etc. LIMITATIONS OF THE STUDY: The following are the limitation of this study. The scrip chosen for analysis is "%D"A "%*34"%& , and the contract taken is 5anuary 6789 ending one :month contract. The data collected is completely restricted to "%D"A "%*34"%& , of 5anuary 6789; hence this analysis cannot be taken universal.

RESEARCH METHODOLOGY:

Data has been collected in two ways. These are. Secon !"# Me$%o : <arious portals, www.nseindia.com *inancial news papers, &conomics times.

BOO&S :-

Derivatives Dealers =odule >ork 'ook - %+*= #3ctober 677?$ @ordon and %atara)an, #677A$ Financial Markets and Services #third edition$ Himalaya publishers

CHAPTER-II

LITERATURE REVIE'
Be%!()o*" o+ S$oc, M!",e$ Vo-!$)-)$# !+$e" De")(!$)(e.

@olaka + %athB , ,esearch aper #%S&$ *inancial market liberali!ation since early 8CC7s has brought about ma)or changes in the financial markets in "ndia. The creation and empowerment of Securities and &-change 'oard of "ndia #S&'"$ has helped in providing higher level accountability in the market. %ew institutions like %ational Stock &-change of "ndia #%S&"4$, %ational Securities +learing +orporation #%S++4$, %ational Securities Depository #%SD4$ have been the change agents and helped cleaning the system and provided safety to investing public at large. >ith modern technology in hand, these institutions did set benchmarks and standards for others to follow. =icrostructure changes brought about reduction in transaction cost that helped investors to lock in a deal faster and cheaper. 3ne decade of reforms saw implementation of policies that have improved transparency in the system, provided for cheaper mode of information dissemination without much time delay, better corporate governance, etc.

The capital market witnessed a ma)or transformation and structural change during the period. The reforms process have helped to improve efficiency in information dissemination, enhancing transparency, prohibiting unfair trade practices like insider trading and price rigging. "ntroduction of derivatives in "ndian capital market was initiated by the @overnment through 4 + @upta +ommittee report. The 4.+. @upta +ommittee on Derivatives had recommended in December 8CCD the introduction of stock inde- futures in the first place to be followed by other products once the market matures. The preparation of regulatory framework for the operations of the inde- futures contracts took some more time and finally futures on benchmark indices were introduced in 5une 6777 followed by options on indices in 5une 6778 followed by options on individual stocks in 5uly 6778 and finally followed by futures on individual stocks in %ovember 6778.

Do F*$*"e. !n O/$)on. $"! )n0 )nc"e!.e .$oc, 1!",e$ (o-!$)-)$#2 Dr. remalata ShenbagaramanB, ,esearch aper #%S&$

%umerous studies on the effects of futures and options listing on the underlying cash market volatility have been done in the developed markets. The empirical evidence is mi-ed and most suggest that the introduction of derivatives do not destabili!e the underlying market. The studies also show that the introduction of derivative contracts improves liEuidity and reduces informational asymmetries in the market. "n the late nineties, many emerging and transition economies have introduced derivative contracts, raising interesting issues uniEue to these markets. &merging stock markets operate in very different economic, political, technological andsocial environments than markets in developed countries like the FSA or the FG. This paper e-plores the impact of the introduction of derivative trading on cash market volatility using data on stock inde- futures and options contracts traded on the S H +%I %ifty

#"ndia$. The results suggest that futures and options trading have not led to a change in the volatility of the underlying stock inde-, but the nature of volatility seems to have changed post-futures. >e also e-amine whether greater futures trading activity #volume and open interest$ is associated with greater spot market volatility. >e find no evidence of any link between trading activity variables in the futures market and spot market volatility. The results of this study are especially important to stock e-change officials and regulators in

designing trading mechanisms and contract specifications for derivative contracts, thereby enhancing their value as risk management tools DERIVATIVES: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. 'y their very nature, the financial markets are marked by a very high degree of volatility. Through the use of derivative products, it is possible to partially or fully transfer price risks by locking-in asset prices. As instruments of risk management, these generally do not influence the fluctuations in the underlying asset prices. However, by locking-in asset prices, derivative product minimi!es the impact of fluctuations in asset prices on the profitability and cash flow situation of risk-averse investors. Derivatives are risk management instruments, which derive their value from an underlying asset. The underlying asset can be bullion, inde-, share, bonds, currency, interest, etc.. s, Securities 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 eEuity, fore-, commodity or any other asset. 8$ Securities +ontracts #,egulation$Act, 8C?A #S+, Act$ defines /derivative0 to secured or unsecured, risk instrument or contract for differences or any other form of security. 6$ A contract which derives its value from the prices, or indeof prices, of underlying securities. Emergence of financial derivative products Derivative products initially emerged as hedging devices against fluctuations in commodity prices, and commodity-linked derivatives remained the sole form of such products for almost three hundred years. *inancial derivatives came into spotlight in the post-8CD7 period due to growing instability in the financial markets. However, since their emergence, these products have become very popular and by 8CC7s, they accounted for about two-thirds of total transactions in derivative products. "n recent years, the market for financial derivatives has grown tremendously in terms of variety of instruments available, their comple-ity and also turnover. "n the class of eEuity derivatives the world over, futures and options on stock indices have gained more popularity than on individual stocks, especially among institutional investors, who are ma)or users of inde--linked derivatives. &ven

small investors find these useful due to high correlation of the popular inde-es with various portfolios and ease of use. The lower costs associated with inde- derivatives vis:a:vis derivative products based on individual securities is another reason for their growing use. PARTICIPANTS: The following three broad categories of participants in the derivatives market. HEDGERS: Hedgers face risk associated with the price of an asset. They use futures or options markets to reduce or eliminate this risk. SPECULATORS: Speculators wish to bet on future movements in the price of an asset. *utures and options contracts can give them an e-tra leverage; that is, they can increase both the potential gains and potential losses in a speculative venture. ARBITRAGERS. Arbitrageurs are in business to take of a discrepancy between prices in two different markets, if, for, e-ample, they see the futures price of an asset getting out of line with the cash price, they will take offsetting position in the two markets to lock in a profit. FUNCTION OF DERIVATIVES MAR&ETS.

The following are the various functions that are performed by the derivatives markets. They are. rices in an organi!ed derivatives market reflect the perception of market participants about the future and lead the price of underlying to the perceived future level. Derivatives market helps to transfer risks from those who have them but may not like them to those who have an appetite for them. activity. long run. Derivatives markets help increase saving and investment in Derivatives trading acts as a catalyst for new entrepreneurial

TYPES OF DERIVATIVES: The following are the various types of derivatives. They are. FOR'ARDS. A forward contract is a customi!ed contract between two entities, where settlement takes place on a specific date in the future at today1s pre-agreed price.

FUTURES. A futures contract is an agreement between two parties to buy or sell an asset in a certain time at a certain price, they are standardi!ed and traded on e-change. OPTIONS: 3ptions are of two types-calls and puts. +alls give the buyer the right but not the obligation to buy a given Euantity of the underlying asset, at a given price on or before a given future date. uts give the buyer the right, but not the obligation to sell a given Euantity of the underlying asset at a given price on or before a given date. 'ARRANTS. 3ptions generally have lives of up to one year; the ma)ority of options traded on options e-changes having a ma-imum maturity of nine months. 4onger-dated options are called warrants and are generally traded over-the counter. LEAPS. The acronym 4&A S means long-term &Euity Anticipation securities. These are options having a maturity of up to three years.

BAS&ETS: 'asket options are options on portfolios of underlying assets. The underlying asset is usually a moving average of a basket of assets. &Euity inde- options are a form of basket options. S'APS: Swaps are private agreements between two parties to e-change cash floes in the future according to a prearranged formula. They can be regarded as portfolios of forward contracts. The two commonly used Swaps are. !) In$e"e.$ "!$e S3!/.. These entail swapping only the related cash flows between the parties in the same currency. 4) C*""enc# S3!/.. 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. S'APTION: Swaptions are options to buy or sell a swap that will become operative at the e-piry of the options. Thus a swaption is an option on a forward swap.

RATIONALE BEHIND THE DELOPMENT OF DERIVATIVES: Holding 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 e-pected to get. There are various factors, which affect the returns. 8. 6. rice or dividend #interest$ Some are internal to the firm like"ndustrial policy =anagement capabilities +onsumer1s preference 4abour strike, etc.

These forces are to a large e-tent controllable and are termed as non systematic risks. An investor can easily manage such non-systematic by having a welldiversified 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 e-ternal to the firm, cannot be controlled and affect large number of securities. They are termed as systematic risk. They are.

8.&conomic 6. olitical 9.Sociological 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. >e therefore Euite often find stock prices falling from time to time in spite of company1s earning rising and vice versa. ,ational 'ehind the development of derivatives market is to manage this systematic risk, liEuidity in the sense of being able to buy and sell relatively large amounts Euickly without substantial price concession. "n 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 favour 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.

REGULATORY FRAME'OR&: The trading of derivatives is governed by the provisions contained in the S+ , A, the S&'" Act, and the regulations framed there under the rules and byelaws of stock e-changes. Re0*-!$)on +o" De")(!$)(e T"! )n0: S&'" set up a 6J member committed under +hairmanship of Dr. 4. +. @upta develop the appropriate regulatory framework for derivative trading in "ndia. The committee submitted its report in =arch 8CCK. 3n =ay 88, 8CCK S&'" accepted the recommendations of the committee and approved the phased introduction of derivatives trading in "ndia beginning with stock inde- *utures. S&'" also approved he /suggestive bye-laws0 recommended by the committee for regulation and control of trading and settlement of Derivative contract. The provision in the S+, Act governs the trading in the securities. The amendment of the S+, Act to include /D&,"<AT"<&S0 within the ambit of securities in the S+, Act made trading in Derivatives possible with in the framework of the Act. 8. &ligibility criteria as prescribed in the 4. +. @upta committee report may apply to S&'" for grant of recognition under section J of

the

S+,

Act,

8C?A

to

start

Derivatives

Trading.

The

derivative

e-change(segment should have a separate governing council and representation of trading(clearing member shall be limited to ma-imum J7L of the total members of the governing council. The e-change shall regulate the sales practices of its members and will obtain approval of S&'" before start of Trading in any derivative contract. 6. 9. The e-change shall have minimum ?7 members. The members of an e-isting segment of the e-change 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 4. +. @upta committee. J. shall be The clearing and settlement of derivatives trades through a S&'" approved House

clearingcorporation(clearinghouse.+learing+orporation(+learing

complying with the eligibility conditions as lay down 'y the committee have to apply to S&'" for grant of approval. ?. Derivatives broker(dealers and +learing members are reEuired to seek registration from S&'".

A.

The =inimum contract value shall not be less than ,s.6 4akh. &-change should also submit details of the futures contract they purpose to introduce.

D.

The trading members are reEuired to have Eualified approved user and sales persons who have passed a certification programme approved by S&'"

In$"o *c$)on $o +*$*"e. !n o/$)on. "n recent years, derivatives have become increasingly important in the field of finance. >hile futures and options are now actively traded on many e-changes, forward contracts are popular on the 3T+ market. "n this chapter we shall study in detail these three derivative contracts. Fo"3!" con$"!c$. A forward contract is an agreement to buy or sell an asset on a specified future date for a specified price. 3ne 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. 3ther contract details like delivery date, price and Euantity are

negotiated bilaterally by the parties to the contract. The forward contracts are normally traded outside the e-changes. The salient features of forward contracts are. They are bilateral contracts and hence e-posed to counter:party risk. &ach contract is custom designed, and hence is uniEue in terms of contract si!e, e-piration date and the asset type and Euality. The contract price is generally not available in public domain. 3n the e-piration date, the contract has to be settled by delivery of the asset. "f the party wishes to reverse the contract, it has to compulsorily go to the same counterparty, which often results in high prices being charged. However forward contracts in certain markets have become very standardi!ed, as in the case of foreign e-change, 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 e-porter who e-pects to receive payment in dollars three months later. He is e-posed to the risk of e-change rate fluctuations. 'y using the currency forward market to sell dollars forward, he can lock on to a rate today and reduce his uncertainty.

Similarly an importer who is reEuired to make a payment in dollars two months hence can reduce his e-posure to e-change rate fluctuations by buying dollars forward. "f a speculator has information or analysis, which forecasts an upturn in a price, then he can go long on the forward market instead of the cash market. The speculator would go long on the forward, wait for the price to rise, and then take a reversing transaction to book profits. Speculators may well be reEuired to deposit a margin upfront. However, this is generally a relatively small proportion of the value of the assets underlying the forward contract. The use of forward markets here supplies leverage to the speculator. L)1)$!$)on. o+ +o"3!" 1!",e$. *orward markets world-wide are afflicted by several problems. 4ack of centrali!ation of trading, "lliEuidity, and +ounterparty risk "n the first two of these, the basic problem is that of too much fle-ibility and generality. The forward market is like a real estate market in that any two consenting adults can form contracts against each other. This often

makes them design terms of the deal which are very convenient in that specific situation, but makes the contracts non-tradable. +ounterparty risk arises from the possibility of default by any one party to the transaction. >hen one of the two sides to the transaction declares ruptcy, the other suffers. &ven when forward markets trade standardi!ed contracts, and hence avoid the problem of illiEuidity, still the counterparty risk remains a very serious

CHAPTER- III
INDUSTRY PROFILE

FINANCIAL MAR&ETS
*inance is the pre-reEuisite for modern business and financial institutions play a vital role in the economic system. "t is through financial markets and institutions that the financial system of an economy works. *inancial markets refer to the institutional arrangements for dealing in financial assets and credit instruments of different types such as currency, cheEues, bank deposits, bills, bonds, eEuities, etc.

*inancial market is a broad term describing any marketplace where buyers and sellers participate in the trade of assets such as eEuities, bonds, currencies and derivatives. They are typically defined by having transparent pricing, basic regulations on trading, costs and fees and market forces determining the prices of securities that trade.

@enerally, there is no specific place or location to indicate a financial market. >herever a financial transaction takes place, it is deemed to have taken place in the financial market. Hence financial markets are pervasive in nature since financial transactions are themselves very pervasive throughout the economic system. *or instance, issue of eEuity shares, granting of loan by term lending institutions, deposit of money into a bank, purchase of debentures, sale of shares and so on.

"n a nutshell, financial markets are the credit markets catering to the various needs of the individuals, firms and institutions by facilitating buying and selling of financial assets, claims and services.

CLASSIFICATION OF FINANCIAL MAR&ETS

F)n!nc)!- 1!",e$.

O"0!n)5e 1!",e$.

Uno"0!n)5e 1!",e$.

C!/)$!- M!",e$.

Mone# M!",e$.

Mone# Len e".6 In )0en*o. B!n,e".

In *.$")!- Sec*")$)e. M!",e$

C!-- Mone# M!",e$

P")1!"# M!",e$

Co11e"c)!- B)-M!",e$

Secon !"# 1!",e$

T"e!.*"# B)-- M!",e$

Go(e"n1en$ Sec*")$)e. M!",e$ Lon0-$e"1 -o!n 1!",e$

C!/)$!- M!",e$ The capital market is a market for financial assets which have a long or indefinite maturity. @enerally, it deals with long term securities which have a period of above one year. "n the widest sense, it consists of a series of channels through which the savings of the community are made available for industrial and commercial enterprises and public authorities. As a whole, capital market facilitates raising of capital.

The ma)or functions performed by a capital market are. 8. =obili!ation of financial resources on a nation-wide scale. 6. Securing the foreign capital and know-how to fill up deficit in the reEuired resources for economic growth at a faster rate. 9. &ffective allocation of the mobili!ed financial resources, by directing the same to pro)ects yielding highest yield or to the pro)ects needed to promote balanced economic development.

+apital market consists of primary market and secondary market. Primary market: rimary market is a market for new issues or new financial claims. Hence it is also called as %ew "ssue =arket. "t basically deals with those securities which are issued to the public for the first time. The market, therefore, makes available a new block of securities for public subscription. "n other words, it deals with raising of fresh capital by companies either for cash or for consideration other than cash. The best e-ample could be "nitial ublic 3ffering #" 3$ where a firm offers shares to the public for the first time.

Secondary market: Secondary market is a market where e-isting securities are traded. "n other words, securities which have already passed through new issue market are traded in this market. @enerally, such securities are Euoted in the stock e-change and it provides a continuous and regular market for buying and selling of securities. This market consists of all stock e-changes recogni!ed by the government of "ndia.

Mone# M!",e$ =oney markets are the markets for short-term6 highly liEuid debt securities. =oney market securities are generally very safe investments which return relatively low interest rate that is most appropriate for temporary cash storage or short term time needs. "t consists of a number of sub-markets which collectively constitute the money market namely call money market, commercial bills market, acceptance market, and Treasury bill market.

De")(!$)(e. M!",e$ The derivatives market is the financial market for derivatives, financial instruments like futures contracts or options, which are derived from other forms of assets. A derivative is a security whose price is dependent upon or derived from one or more underlying assets. The derivative itself is merely a contract between two or more parties. "ts value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market inde-es. The important financial derivatives are the following.

Forwards: *orwards are the oldest of all the derivatives. A forward contract refers to an agreement between two parties to e-change an agreed Euantity of an asset for cash at a certain date in future at a predetermined price specified in that agreement. The promised asset may be currency, commodity, instrument etc.

Futures: *uture contract is very similar to a forward contract in all respects e-cepting the fact that it is completely a standardi!ed one. "t is nothing but a standardi!ed forward contract which is legally enforceable and always traded on an organi!ed e-change.

Options: A financial derivative that represents a contract sold by one party #option writer$ to another party #option holder$. The contract offers the buyer the right, but not the obligation, to buy #call$ or sell #put$ a security or other financial asset at an agreed-upon price #the strike price$ during a certain period of time or on a specific date #e-ercise date$. +all options give the option to buy at certain price, so the buyer would want the stock to go up. ut options give the option to sell at a certain price, so the buyer would want the stock to go down.

Swaps: "t is yet another e-citing trading instrument. "nfact, it is the combination of forwards by two counterparties. "t is arranged to reap the benefits arising from the fluctuations in the market : either currency market or interest rate market or any other market for that matter.

Fo"e)0n E7c%!n0e M!",e$ "t is a market in which participants are able to buy, sell, e-change and speculate on currencies. *oreign e-change markets are made up of banks, commercial companies, central banks, investment management firms, hedge funds, and retail fore- brokers and investors. The fore- market is considered to be the largest financial market in the world. "t is a worldwide decentrali!ed over-the-counter financial market for the trading of currencies. 'ecause the currency markets are large and liEuid, they are believed to be the most efficient financial markets. "t is important to reali!e that the foreign e-change market is not a single e-change, but is constructed of a global network of computers that connects participants from all parts of the world. Co11o )$)e. M!",e$ "t is a physical or virtual marketplace for buying, selling and trading raw or primary products. *or investorsM purposes there are currently about ?7 ma)or commodity markets worldwide that facilitate investment trade in nearly 877 primary commodities. +ommodities are split into two types. hard and soft commodities. Hard commodities are typically natural resources that must be mined or e-tracted #gold, rubber, oil, etc.$, whereas soft commodities are agricultural products or livestock #corn, wheat, coffee, sugar, soybeans, pork, etc.$

INDIAN FINANCIAL MAR&ETS


"ndia *inancial market is one of the oldest in the world and is considered to be the fastest growing and best among all the markets of the emerging economies.

The history of "ndian capital markets dates back 677 years toward the end of the 8Kth century when "ndia was under the rule of the &ast "ndia +ompany. The development of the capital market in "ndia concentrated around =umbai where no less than 677 to 6?7 securities brokers were active during the second half of the 8Cth century. The financial market in "ndia today is more developed than many other sectors because it was organi!ed long before with the securities e-changes of =umbai, Ahmadabad and Golkata were established as early as the 8Cth century. 'y the early 8CA7s the total number of securities e-changes in "ndia rose to eight, including =umbai, Ahmadabad and Golkata apart from =adras, Ganpur, Delhi, 'angalore and une. Today there are 68 regional securities e-changes in "ndia in addition to the centrali!ed %S& #%ational Stock &-change$ and 3T+&" #3ver the +ounter &-change of "ndia$. However the stock markets in "ndia remained stagnant due to stringent controls on the market economy that allowed only a handful of monopolies to dominate their respective sectors. The corporate sector wasnMt allowed into many industry segments, which were dominated by the state controlled public sector resulting in stagnation of

the economy right up to the early 8CC7s. Thereafter when the "ndian economy began liberali!ing and the controls began to be dismantled or eased out; the securities markets witnessed a flurry of " 31s that were launched. This resulted in many new companies across different industry segments to come up with newer products and services.

A remarkable feature of the growth of the "ndian economy in recent years has been the role played by its securities markets in assisting and fuelling that growth with money rose within the economy. This was in marked contrast to the initial phase of growth in many of the fast growing economies of &ast Asia that witnessed huge doses of *D" #*oreign Direct "nvestment$ spurring growth in their initial days of market decontrol. During this phase in "ndia much of the organi!ed sector has been affected by high growth as the financial markets played an all-inclusive role in sustaining financial resource mobili!ation. =any SFs # ublic Sector Fndertakings$ that decided to offload part of their eEuity were also helped by the well-organi!ed securities market in "ndia.

The launch of the %S& #%ational Stock &-change$ and the 3T+&" #3ver the +ounter &-change of "ndia$ during the mid 8CC7s by the government of "ndia was meant to usher in an easier and more transparent form of trading in securities. The %S& was conceived as the market for trading in the securities of companies from the large-scale sector and the 3T+&" for those from the small-scale sector. >hile the %S& has not )ust done well to grow and evolve into the virtual backbone of capital markets in "ndia the 3T+&" struggled and is yet to show any sign of growth and development. The integration of "T into the capital market infrastructure has been particularly smooth in

"ndia due to the country1s world class "T industry. This has pushed up the operational efficiency of the "ndian stock market to global standards and as a result the country has been able to capitali!e on its high growth and attract foreign capital like never before.

The regulating authority for capital markets in "ndia is the S&'" #Securities and &-change 'oard of "ndia$. S&'" came into prominence in the 8CC7s after the capital markets e-perienced some turbulence. "t had to take drastic measures to plug many loopholes that were e-ploited by certain market forces to advance their vested interests. After this initial phase of struggle S&'" has grown in strength as the regulator of "ndia1s capital markets and as one of the country1s most important institutions.

FINANCIAL MAR&ET REGULATIONS


,egulations are an absolute necessity in the face of the growing importance of capital markets throughout the world. The development of a market economy is dependent on the development of the capital market. The regulation of a capital market involves the regulation of securities; these rules enable the capital market to function more efficiently and impartially. A well regulated market has the potential to encourage additional investors to partake, and contribute in, furthering the development of the economy. The chief capital market regulatory authority is Securities and &-change 'oard of "ndia #S&'"$. SEBI is the regulator for the securities market in "ndia. "t is the ape- body to develop and regulate the stock market in "ndia "t was formed officially by the @overnment of "ndia in 8CC6 with S&'" Act 8CC6 being passed by the "ndian arliament. +haired by + ' 'have, S&'" is headEuartered in the popular business district of 'andra-Gurla comple- in =umbai, and has %orthern, &astern, Southern and >estern regional offices in %ew Delhi, Golkata, +hennai and Ahmedabad. "n place of @overnment +ontrol, a statutory and autonomous regulatory board with defined responsibilities, to cover both development H regulation of the market, and independent powers has been set up.

T%e 4!.)c o48ec$)(e. o+ $%e Bo!" 3e"e ) en$)+)e !.:


to protect the interests of investors in securities; to promote the development of Securities =arket; to regulate the securities market and

*or matters connected therewith or incidental thereto.

Since its inception S&'" has been working targeting the securities and is attending to the fulfillment of its ob)ectives with commendable !eal and de-terity. The improvements in the securities markets like capitali!ation reEuirements, margining, establishment of clearing corporations etc. reduced the risk of credit and also reduced the market.

S&'" has introduced the comprehensive regulatory measures, prescribed registration norms, the eligibility criteria, the code of obligations and the code of conduct for different intermediaries like, bankers to issue, merchant bankers, brokers and subbrokers, registrars, portfolio managers, credit rating agencies, underwriters and others. "t has framed bye-laws, risk identification and risk management systems for +learing houses of stock e-changes, surveillance system etc. which has made dealing in securities both safe and transparent to the end investor.

Another significant event is the approval of trading in stock indices #like SH +%I %ifty H Sense-$ in 6777. A market "nde- is a convenient and effective product because of the following reasons.

"t acts as a barometer for market behavior; "t is used to benchmark portfolio performance; "t is used in derivative instruments like inde- futures and inde- options; "t can be used for passive fund management as in case of "nde- *unds.

Two broad approaches of S&'" is to integrate the securities market at the national level, and also to diversify the trading products, so that there is an increase in number of traders including banks, financial institutions, insurance companies, mutual funds, primary dealers etc. to transact through the &-changes. "n this conte-t the introduction of derivatives trading through "ndian Stock &-changes permitted by S&'" in 6777 AD is a real landmark. S&'" has en)oyed success as a regulator by pushing systemic reforms aggressively and successively #e.g. the Euick movement towards making the markets electronic and paperless rolling settlement on TN6 bases$. S&'" has been active in setting up the regulations as reEuired under law.

STOC& E9CHANGES IN INDIA


Stock &-changes are an organi!ed marketplace, either corporation or mutual organi!ation, where members of the organi!ation gather to trade company stocks or other securities. The members may act either as agents for their customers, or as principals for their own accounts. As per the Securities +ontracts ,egulation Act, 8C?A a stock e-change is an association, organi!ation or body of individuals whether incorporated or not, established for the purpose of assisting, regulating and controlling business in buying, selling and dealing in securities.

Stock e-changes facilitate for the issue and redemption of securities and other financial instruments including the payment of income and dividends. The record keeping is central but trade is linked to such physical place because modern markets are computeri!ed. The trade on an e-change is only by members and stock broker do have a seat on the e-change. L).$ o+ S$oc, E7c%!n0e. )n In )! 'ombay Stock &-change %ational Stock &-change 3T+ &-change of "ndia Re0)on!- S$oc, E7c%!n0e. 8. Ahmedabad 6. 'angalore 9. 'hubaneswar J. +alcutta ?. +ochin A. +oimbatore D. Delhi K. @uwahati C. Hyderabad 87. 5aipur 88. 4udhiana 86. =adhya radesh 89. =adras 8J. =agadh 8?. =angalore 8A. =eerut 8D. une 8K. Saurashtra Gutch 8C. Fttar radesh 67. <adodara

BOMBAY STOC& E9CHANGE

A very common name for all traders in the stock market, 'S&, stands for 'ombay Stock &-change. "t is the oldest market not only in the country, but also in Asia. "n the early days, 'S& was known as OThe %ative Share H Stock 'rokers Association.O "t was established in the year 8KD? and became the first stock e-change in the country to be recogni!ed by the government. "n 8C?A, 'S& obtained a permanent recognition from the @overnment of "ndia under the Securities +ontracts #,egulation$ Act, 8C?A.

"n the past and even now, it plays a pivotal role in the development of the countryMs capital market. This is recogni!ed worldwide and its inde-, S&%S&I, is also tracked worldwide. &arlier it was an Association of ersons #A3 $, but now it is a demutualised and corporatised entity incorporated under the provisions of the +ompanies Act, 8C?A, pursuant to the 'S& #+orporatisation and Demutuali!ation$ Scheme, 677? notified by the Securities and &-change 'oard of "ndia #S&'"$.

BSE V).)on The vision of the 'ombay Stock &-change is to O&merge as the premier "ndian stock e-change by establishing global benchmarks.O

BSE M!n!0e1en$ 'ombay Stock &-change is managed professionally by 'oard of Directors. "t comprises of eminent professionals, representatives of Trading =embers and the =anaging Director. The 'oard is an inclusive one and is shaped to benefit from the market intermediaries participation.

The 'oard e-ercises complete control and formulates larger policy issues. The day-to-day operations of 'S& are managed by the =anaging Director and its school of professional as a management team.

BSE Ne$3o", The &-change reaches physically to J8D cities and towns in the country. The framework of it has been designed to safeguard market integrity and to operate with transparency. "t provides an efficient market for the trading in eEuity, debt instruments and derivatives. "ts online trading system, popularly known as '34T, is a proprietary system and it is 'S DDCC-6-6776 certified. The '34T network was e-panded, nationwide, in 8CCD. The surveillance and clearing H settlement functions of the &-change are "S3 C778.6777 certified.

BSE F!c$. 'S& as a brand is synonymous with capital markets in "ndia. The 'S& S&%S&I is the benchmark eEuity inde- that reflects the robustness of the economy and finance. "t was the : *irst in "ndia to introduce &Euity Derivatives *irst in "ndia to launch a *ree *loat "nde*irst in "ndia to launch FSP version of 'S& Sense*irst in "ndia to launch &-change &nabled "nternet Trading latform *irst in "ndia to obtain "S3 certification for Surveillance, +learing H Settlement M'S& 3n-4ine Trading System1 #'34T$ has been awarded the globally recogni!ed the "nformation Security =anagement System standard

'SDDCC-6.6776. *irst to have an e-clusive facility for financial training =oved from 3pen 3utcry to &lectronic Trading within )ust ?7 days

BSE with its long history of capital market development is fully geared to continue its contributions to further the growth of the securities markets of the country, thus helping ndia increases its sphere of influence in international financial markets!

NATIONAL STOC& E9CHANGE OF INDIA LIMITED


The %ational Stock &-change of "ndia 4imited has genesis in the report of the High owered Study @roup on &stablishment of %ew Stock &-changes, which recommended promotion of a %ational Stock &-change by financial institutions #*"1s$ to provide access to investors from all across the country on an eEual footing. 'ased on the recommendations, %S& was promoted by leading *inancial "nstitutions at the behest of the @overnment of "ndia and was incorporated in %ovember 8CC6 as a ta--paying company unlike other stock &-change in the country. 3n its recognition as a stock e-change under the Securities +ontracts #,egulation$ Act, 8C?A in April 8CC9, %S& commenced operations in the >holesale Debt =arket #>D=$ segment in 5une 8CCJ. The +apital =arket #&Euities$ segment commenced operations in %ovember 8CCJ and operations in Derivatives segment commenced in 5une 6777. NSE GROUP N!$)on!- Sec*")$)e. C-e!")n0 Co"/o"!$)on L$ : (NSCCL) "t is a wholly owned subsidiary, which was incorporated in August 8CC? and commenced clearing operations in April 8CCA. "t was formed to build confidence in clearing and settlement of securities, to promote and maintain the short and consistent settlement cycles, to provide a counter-party risk guarantee and to operate a tight risk containment system.

NSE:IT L$ : "t is also a wholly owned subsidiary of %S& and is its "T arm. This arm of the %S& is uniEuely positioned to provide products, services and solutions for the securities industry. %S&."T primarily focuses on in the area of trading, broker front-end and back-office, clearing and settlement, web-based, insurance, etc. Along with this, it also provides consultancy and implementation services in Data >arehousing, 'usiness +ontinuity lans, Site =aintenance and 'ackups, Stratus =ainframe *acility =anagement, ,eal Time =arket Analysis H *inancial %ews.

In )! In e7 Se"()ce. & P"o *c$. L$ : (IISL) "t is a )oint venture between %S& and +,"S"4 4td. to provide a variety of indices and inde- related services and products for the "ndian +apital markets. "t was set up in =ay 8CCK. ""S4 has a consulting and licensing agreement with the Standard and oorMs #SH $, worldMs leading provider of investible eEuity indices, for co-branding eEuity indices.

N!$)on!- Sec*")$)e. De/o.)$o"# L$ : (NSDL) %S& )oined hands with "D'" and FT" to promote demateriali!ation of securities. This step was taken to solve problems related to trading in physical securities. "t commenced operations in %ovember 8CCA.

NSE F!c$. "t uses satellite communication technology to energi!e participation from around J77 cities in "ndia.

%S& can handle up to 8 million trades per day. "t is one of the largest interactive <SAT based stock e-changes in the world. The %S&- network is the largest private wide area network in "ndia and the first e-tended +- 'and <SAT network in the world.

resently more than C777 users are trading on the real time-online %S& application.

Today, %S& is one of the largest e-changes in the world and still forging ahead. At %S&, we are constantly working towards creating a more transparent, vibrant and innovative capital market.

OVER THE COUNTER E9CHANGE OF INDIA


3T+&" was incorporated in 8CC7 as a section 6? company under the companies Act 8C?A and is recogni!ed as a stock e-change under section J of the securities +ontracts ,egulation Act, 8C?A. The e-change was set up to aid enterprising promotes in raising finance for new pro)ects in a cost effective manner and to provide investors with a transparent and efficient mode of trading =odeled along the lines of the %ASDA2 market of FSA, 3T+&" introduced many novel concepts to the "ndian capital markets such as screen-based nationwide trading, sponsorship of companies, market making and scrip less trading. As a measure of success of these efforts, the &-change today has 88? listings and has assisted in providing capital for enterprises that have gone on to build successful brands for themselves like <" Advanta, Sonora Tiles H 'rilliant mineral water, etc.

Nee +o" OTCEI: Studies by %ASS+3=, software technology parks of "ndia, the venture capitals funds and the government1s "T tasks *orce, as well as rising interest in "T, harmaceutical, 'iotechnology and =edia shares have repeatedly emphasi!ed the need for a national stock market for innovation and high growth companies.

"nnovative companies are critical to developing economics like "ndia, which is undergoing a ma)or technological revolution. >ith their abilities to generate employment opportunities and contribute to the economy, it is essential that these companies not only e-pand e-isting operations but also set up new units. The key issue for these companies is raising timely, cost effective and long term capital to sustain their operations and enhance growth. Such companies, particularly those that have been in operation for a short time, are unable to raise funds through the traditional financing methods, because they have not yet been evaluated by the financial world.

COMPANY PROFILE

INDIA INFOLINE LIMITED


"ndia "nfoline is a one-stop financial services shop, most respected for Euality of its information, personali!ed service and cutting-edge technology. V).)on 3ur vision is to be the most respected company in the financial services space.

In )! In+o-)ne G"o*/ The "ndia "nfoline group, comprising the holding company, "ndia "nfoline 4imited and its wholly-owned subsidiaries, include the entire financial services space with offerings ranging from &Euity research, &Euities and derivatives trading, +ommodities trading, ortfolio =anagement Services, =utual *unds, 4ife "nsurance, *i-ed deposits, @o" bonds and other small savings instruments to loan products and "nvestment banking.

"ndia "nfoline also owns and manages the websites www.indiainfoline.com and www.?paisa.com. The company has a network of over 6877 business locations #branches and sub-brokers$ spread across more than J?7 cities and towns. The group caters to appro-imately a million customers.

*ounded in 8CC? by =r. %irmal 5ain #+hairman and =anaging Director$ as an independent business research and information provider, the company gradually evolved into a one-stop financial services solutions provider.

"ndia "nfoline received registration for a housing finance company from the %ational Housing 'ank and received the Q*astest growing &Euity 'roking House - 4arge firms1 in "ndia by Dun H 'radstreet in 677C. "t also received the "nsurance broking license from ",DA; received the venture capital license; received in principle approval to sponsor a mutual fund; received Q'est broker- "ndia1 award from *inance Asia; Q=ost "mproved 'rokerage- "ndia1 award from Asia money.

COMPANY STRUCTURE "ndia "nfoline 4imited is listed on both the leading stock e-changes in "ndia, vi!. the Stock &-change, =umbai #'S&$ and the %ational Stock &-change #%S&$ and is also a member of both the e-changes. "t is engaged in the businesses of &Euities broking, >ealth Advisory Services and ortfolio =anagement Services. "t offers broking services in the +ash and Derivatives segments of the %S& as well as the +ash segment of the 'S&. "t is registered with %SD4 as well as +DS4 as a depository participant, providing a one-stop solution for clients trading in the eEuities market. "t has recently launched its "nvestment banking and "nstitutional 'roking business.

A S&'" authori!ed ortfolio =anager; it offers ortfolio =anagement Services to clients. These services are offered to clients as different schemes, which are based on differing investment strategies made to reflect the varied risk-return preferences of clients.

In )! In+o-)ne Me )! !n Re.e!"c% Se"()ce. L)1)$e The services represent a strong support that drives the broking, commodities, mutual fund and portfolio management services businesses. "t undertakes eEuities research which is acknowledged by none other than *orbes as M'est of the >ebM and MRa must read for investors in AsiaM. "ndia "nfolineMs research is available not )ust over the internet but also on international wire services like 'loomberg #+ode. ""44$, Thomson *irst +all and "nternet Securities where "ndia "nfoline is amongst the most read "ndian brokers. In )! In+o-)ne Co11o )$)e. L)1)$e : "ndia "nfoline +ommodities vt 4imited is engaged in the business of commodities

broking. Their e-perience in securities broking empowered them with the reEuisite skills and technologies to allow them to offer commodities broking as a contra-cyclical alternative to eEuities broking. "t en)oys memberships with the =+I and %+D&I, two

leading "ndian commodities e-changes, and recently acEuired membership of D@+I. "t has a multi-channel delivery model, making it among the select few to offer online as well as offline trading facilities. In )! In+o-)ne M!",e$)n0 & Se"()ce. "ndia "nfoline =arketing and Services 4imited is the holding company of "ndia "nfoline "nsurance Services 4imited and "ndia "nfoline "nsurance 'rokers 4imited. "ndia "nfoline "nsurance Services 4imited is a registered +orporate Agent with the "nsurance ,egulatory and Development Authority #",DA$. "t is the largest +orporate Agent for "+"+" rudential 4ife "nsurance +o 4imited, which is "ndiaMs largest private 4ife "nsurance +ompany. "ndia "nfoline was the first corporate agent to get licensed by ",DA in early 6778. "ndia "nfoline "nsurance 'rokers 4imited "ndia "nfoline "nsurance 'rokers 4imited is a newly formed subsidiary which will carry out the business of "nsurance broking.

In )! In+o-)ne In(e.$1en$ Se"()ce. L)1)$e +onsolidated shareholdings of all the subsidiary companies engaged in loans and financing activities under one subsidiary. ,ecently, 3rient @lobal, a Singapore-based investment institution invested FSD DA.D million for a 66.?L stake in "ndia "nfoline "nvestment Services. This will help focused e-pansion and capital raising in the said subsidiaries for various lending businesses like loans against securities, S=& financing, distribution of retail loan products, consumer finance business and housing finance

business. "ndia "nfoline "nvestment Services rivate 4imited consists of the following step-down subsidiaries. "ndia "nfoline Distribution +ompany 4imited #distribution of retail loan products$ =oneyline +redit 4imited #consumer finance$ "ndia "nfoline Housing *inance 4imited #housing finance$

IIFL (A.)!) P")(!$e L)1)$e ""*4 #Asia$ rivate 4imited is wholly owned subsidiary which has been incorporated in Singapore to pursue financial sector activities in other Asian markets. *urther to obtaining the necessary regulatory approvals, the company has been initially capitali!ed at 8 million Singapore dollars.

IIFL MANAGEMENT THE MANAGEMENT TEAM

M": N)"1!- J!)n6 C%!)"1!n & M!n!0)n0 D)"ec$o" %irmal 5ain, ='A #""=, Ahmadabad$ and a +hartered and +ost Accountant, founded "ndia1s leading financial services company "ndia "nfoline 4td. in 8CC?, providing globally acclaimed financial services in eEuities and commodities broking, life insurance and mutual funds distribution, among others.

M": R Ven,!$!"!1!n6 E7ec*$)(e D)"ec$o" , <enkataraman, co-promoter and &-ecutive Director of "ndia "nfoline 4td., is a '. Tech #&lectronics and &lectrical +ommunications &ngineering, ""T Gharagpur$ and an ='A #""= 'angalore$. He )oined the "ndia "nfoline board in 5uly 8CCC.

THE BOARD OF DIRECTORS

Apart from %irmal 5ain and , <enkataraman, the 'oard of Directors of "ndia "nfoline 4td. comprises. M": N)-e.% V),!1.e#6 In e/en en$ D)"ec$o" =r. <ikamsey, 'oard member since *ebruary 677? - a practicing +hartered Accountant and partner #Ghim)i Gunver)i H +o., +hartered Accountants$, a member firm of H4' "nternational, headed the audit department till

8CC7 and thereafter also handles financial services, consultancy, investigations, mergers and acEuisitions, valuations etc M" S!$ P!- &%!$$!"6 Non E7ec*$)(e D)"ec$o" =r Sat al Ghattar, - 'oard member since April 6778 - residential +ouncil of =inority ,ights member, +hairman of the 'oard of Trustee of Singapore 'usiness *ederation, is also a life trustee of S"%DA, a non profit body, helping the under-privileged "ndians in Singapore. He )oined the "ndia "nfoline board in April 6778. M" &"!n$) S)n%!6 In e/en en$ D)"ec$o" =r. Granti Sinha S 'oard member since 5anuary 677? S completed his masters from the Agra Fniversity and started his career as a +lass " officer with 4ife "nsurance +orporation of "ndia. M" A"*n &: P*"(!"6 In e/en en$ D)"ec$o" =r. A.G. urvar : 'oard member since =arch 677K : completed his =asters degree in commerce from Allahabad Fniversity in 8CAA and a diploma in 'usiness Administration in 8CAD.

PRODUCTS & SERVICES E;*)$)e. "ndia "nfoline provided the prospect of researched investing to its clients, which was hitherto restricted only to the institutions. ,esearch for the retail investor did not e-ist prior to "ndia "nfoline. "ndia "nfoline leveraged technology to bring the convenience of trading to the investor1s location of preference #residence or office$ through computeri!ed access. "ndia "nfoline made it possible for clients to view transaction costs and ledger updates in real time. The +ompany is among the few financial intermediaries in "ndia to offer a complement of online and offline broking. The +ompanies network of branches also allows customers to place orders on phone or visit our branches for trading. Co11o )$)e. "ndia "nfoline1s e-tension into commodities trading reconciles its strategic intent to emerge as a one stop solutions financial intermediary. "ts e-perience in securities broking has empowered it with reEuisite skills and technologies. The +ompanies commodities business provides a contra-cyclical alternative to eEuities broking. The +ompany was among the first to offer the facility of commodities trading in "ndia1s young commodities market #the =+I commenced operations in 6779$. Average monthly turnover on the commodity e-changes increased from ,s 7.9J bn to ,s 67.76 bn.

In.*"!nce

An entry into this segment helped complete the clientMs product basket; concurrently, it graduated the +ompany into a one stop retail financial solutions provider. To ensure ma-imum reach to customers across "ndia, it has employed a multi pronged approach and reaches out to customers via our %etwork, Direct and Affiliate channels. "ndia "nfoline was the first corporate in "ndia to get the agency license in early 6778.

In(e.$ On-)ne "ndia "nfoline has made investing in =utual funds and primary market so effortless. 3nly registration is needed. %o paperwork no Eueues and %o registration charges. "ndia "nfoline offers a host of mutual fund choices under one roof, backed by in-depth research and advice from research house and tools configured as investor friendly. 'e!-$% M!n!0e1en$ The key to achieving a successful "nvestment ortfolio is to have a carefully planned financial strategy based on a thorough understanding of the clientMs investment needs and risk appetite. The ""*4 rivate >ealth =anagement Team of financial e-perts will recommend an appropriate financial strategy to effectively meet customer1s investment reEuirements.

A..e$ M!n!0e1en$ "ndia "nfoline is a leading pan-"ndia mutual fund distribution house associated with leading asset management companies. "t operates primarily in the retail segment leveraging its e-isting distribution network to reach prospective clients. "t has received the in-principle approval to set up a mutual fund. Po"$+o-)o M!n!0e1en$

""*4 ortfolio =anagement Service is a product wherein an eEuity investment portfolio is created to suit the investment ob)ectives of a client. "ndia "nfoline invests the client1s resources into stocks from different sectors, depending on client1s risk-return profile. This service is particularly advisable for investors who cannot afford to give time or donMt have that e-pertise for day-to-day management of their eEuity portfolio. Ne3.-e$$e". As a subscriber to the Daily =arket Strategy, client1s get research reports of "ndia "nfoline research team on a priority basis. The "ndiainfoline >eekly %ewsletter is the flashback for the week gone by. A weekly outlook coupled with the best of the web stories from "ndiainfoline and links to important investment ideas, 4eader Speak and features is delivered in the client1s inbo- every *riday evening.

CHAPTER-IV

DATA ANALYSIS AND INTERPRETATION


D!$e 6K-Dec-86 98-Dec-86 8-5an-89 6-5an-89 9-5an-89 J-5an-89 D-5an-89 K-5an-89 C-5an-89 87-5an-89 88-5an-89 8J-5an-89 8?-5an-89 8A-5an-89 8D-5an-89 8K-5an-89 68-5an-89 66-5an-89 69-5an-89 6J-5an-89 6?-5an-89 6K-5an-89 6C-5an-89 97-5an-89 98-5an-89 M!",e$ /")ce 866A.D 869K.D 866K.D? 86AD.6? 866K.C? 86KA.9 89A6.?? 899C.C? 897D.C? 89?A.8? 8J9? 8J87 89?6.6 89AK.9 8966.8 86JK.K? 88D9.6 886J.C? 88?8.J? 8898.K? 86A8.9 86D9.C? 8667.J? 88KD.J 88JD F*$*"e /")ce 866D.7? 869C.D 8699.D? 86DD 869K.D? 86KD.?? 89?K.C 899K.? 8987.K 89?K.7? 8J9K.8? 8J67.D? 89A7.8 89D?.D? 8996.8 86?A.J? 88AD.K? 886D.K? 88?A.9? 889J.? 86A?.A 86DD.9 8669.K? 88KD.J 88J?.C

ANALYSIS OF INDIA INFOLINE:

The ob)ective of this analysis is to evaluate the profit(loss position of futures and options. This analysis is based on sample data taken of "%D"A "%*34"%& scrip. This analysis considered the 5an 677K contract of "%D"A "%*34"%& . The lot si!e of "%D"A "%*34"%& is 8D?, the time period in which this analysis done is from 6D-86-677D to 98.78.7K.

@raph.8 OBSERVATIONS AND FINDINGS: "f a person buys 8 lot i.e. 8D? futures of "%D"A "%*34"%& on 6Kth Dec, 677D and sells on 98st 5an, 677K then he will get a loss of 88J?.C-866D.7? T -K8.8? per share. So he will get a loss of 8J678.6? i.e. -K8.8? U 8D? "f he sells on 8Jth 5an, 677D then he will get a profit of 8J67.D?-866D.7? T 8C9.D i.e. a profit of 8C9.D per share. So his total profit is 99KCD.? i.e. 8C9.D U 8D?

The closing price of "%D"A "%*34"%& at the end of the contract period is 88JD and this is considered as settlement price.

The following table e-plains the market price and premiums of calls. The first column e-plains trading date Second column e-plains the S 3T market price in cash segment on that date. The third column e-plains call premiums amounting at these strike prices; 8677, 8697, 86A7, 86C7, 8967 and 89?7.

D!$e 6K-Dec-86 98-Dec-86 8-5an-89 6-5an-89 9-5an-89 J-5an-89 D-5an-89 K-5an-89 C-5an-89 87-5an-89 88-5an-89 8J-5an-89 8?-5an-89 8A-5an-89 8D-5an-89 8K-5an-89 68-5an-89 66-5an-89 69-5an-89 6J-5an-89 6?-5an-89 6K-5an-89 6C-5an-89 97-5an-89 98-5an-89

M!",e$ /")ce 866A.D 869K.D 866K.D? 86AD.6? 866K.C? 86KA.9 89A6.?? 899C.C? 897D.C? 89?A.8? 8J9? 8J87 89?6.6 89AK.9 8966.8 86JK.K? 88D9.6 886J.C? 88?8.J? 8898.K? 86A8.9 86D9.C? 8667.J? 88KD.J 88JD

<=>> AD.K? DJ.A? A6 877.C D? 87C.A 8D7 8J7 8J7 8A7.A 6?7.D 6J7 8?? 86K.J 86K.J 86K.J ?6 JJ.8? ?7.6? J7.J K7.? C8.K? JA 8K.A? 7.J?

<=?> ?9.7? ?K.J? ?A.K? D?.?? A7.8 C8.7? 8J9.9 88C.9 ? 878 898 8?8.K 689.? 8?7.7 ? 8J7 8J7 A7 9A.? 98.7? 9C.9 66 A6 A8.A? 6?.C? C.7? 7.?

<=@> 9C.A? JJ.7? 9C.6 A9.D? J?.K? AK.6? 867 877 DJ.9? 887 8KK.C 8JK 87D.? C7 C? ?J 6A.9 66.?? 69.6? 8D.7? J7.K? JJ.K 8D.J? J.? 8

<=A>

<?=>

<?B> 8K.? 8C.6? 8K.K 6D.J 66.? 6C.8? A6.9? J6.K? 99.8? ?9.8 87J.?? KK.6 ?6.A? A7.C? 9C.8? 8C.9 C.C? A.D K.A ?.8 C.D? 88.9? 6.C? 7.6 7.6

96.6? 6J.6 96.D? 69.K? 97 66.C JC.8 9A.?? 9J.? 6A.J ?8.9? 9K.A 877 DC.J K? ?C.6 A6.7? JA.A? C?.J? D7.K? 8AJ.D 897.C 89J.C CA 89J.C AA A9 AD.? 9D.C? 6J.J? 86.J? 8D 86.8 6J.?? 98.J 87.? 8.J 8.J DK.6 ?7.6 6C.8? 8J.?? 87.9? 8A.9? C.J? 8A.8? 67.6? J.7? 7.D? 7.8

OBSERVATIONS AND FINDINGS CALL OPTION BUYERS PAY OFF:

Those who have purchase call option at a strike price of 86A7, the premium payable is 9C.A?

3n the e-piry date the spot market price enclosed at 88JD. As it is out of the money for the buyer and in the money for the seller, hence the buyer is in loss.

So the buyer will lose only premium i.e. 9C.A? per share. So the total loss will be AC9K.D? i.e. 9C.A?U8D?

SELLERS PAY OFF: As Seller is entitled only for premium if he is in profit. So his profit is only premium i.e. 9C.A? U 8D? T AC9K.D?

P*$ o/$)on.:

Table.9

D!$e 6K-Dec-86 98-Dec-86 8-5an-89 6-5an-89 9-5an-89 J-5an-89 D-5an-89 K-5an-89 C-5an-89 87-5an-89 88-5an-89 8J-5an-89 8?-5an-89 8A-5an-89 8D-5an-89 8K-5an-89 68-5an-89 66-5an-89 69-5an-89 6J-5an-89 6?-5an-89 6K-5an-89 6C-5an-89 97-5an-89 98-5an-89

M!",e$ /")ce 866A.D 869K.D 866K.D? 86AD.6? 866K.C? 86KA.9 89A6.?? 899C.C? 897D.C? 89?A.8? 8J9? 8J87 89?6.6 89AK.9 8966.8 86JK.K? 88D9.6 886J.C? 88?8.J? 8898.K? 86A8.9 86D9.C? 8667.J? 88KD.J 88JD

<=>> <=?> 9C.7? 9J.J 96.8 66.A 96 8D.A? 86.J 87.8? 88.C C 9.D? 9.D? A.J? K D.9 8K.8? 879.? 887 D8 CC 8?.C 8A.D 8K 6D.? ?7 8K8.7? 8K8.7? 8K8.7? 6?.?7 9K.77 6?.77 86.A7 86.77 8?.77 88.77 88.77 88.77 D.77 K.77 K.77 9A.A7 D7.77 89K.C7 89K.C7 89K.C7 6A.9? 8C.77 9K.77 A7.77 A7.77

<=@> 8DK.K 8DK.K 8DK.K 8DK.K 8DK.K 9D.7? 67.8? 67.7? 6A.? 8? 87 K.? 87 88.6? 8D.K 9? AC.A? 89K.A 89? 89? 99 97 ?7 K?.6 K?.6

<=A> 8CD.8? 8CD.8? 8CD.8? J8.?? K6 K6 9J.K? 97 9A 6?.6 K.C 86 8D.J? 89.9 6?.J? AD.K? 89?.7? 8D7.7? 8?7 8?7 ?7.7? J? J? 867 867

<?=> 8C7.K? 8C7.K? 8C7.K? 8C7.K? 8C7.K? 8C7.K? J9.C? J6 ?8 99.D 86.D? 86.J 69.8 66.?? 9K.6? DA.7? 8?8.9? 687 687 687 687 ?? 877 8J?.7? 8J?.7?

<?B> 8C8.K 8C8.K 8C8.K 8C8.K 8C8.K 8C8.K 8C8.K 8C8.K 8C8.K JD.K 8K.9? 66.J? 9K.9 9?.9? ?A.J 886.6 669.J 6K7 677 677 677 K8.J? 8J? 8J? 8J?

OBSERVATIONS AND FINDINGS

PUT OPTION

BUYERS PAY OFF: As brought 8 lot of "%D"A "%*34"%& that is 8D?, those who buy for 8677 paid 9C.7? premium per share. Settlement price is 88JD Strike price Spot price 8677.77 88JD.77 ?9.77 remium #-$ 9C.7? 89.C? - 8D?T 6JJ8.6? 'uyer rofit T ,s. 6JJ8.6?

'ecause it is positive it is in the money contract hence buyer will get more profit, incase spot price decreases, buyer1s profit will increase.

SELLERS PAY OFF:

"t is in the money for the buyer so it is in out of the money for the seller, hence he is in loss.

The loss is eEual to the profit of buyer i.e. 6JJ8.6?.

@raph.6

OBSERVATIONS AND FINDINGS The future price of "%D"A "%*34"%& is moving along with the market price. "f the buy price of the future is less than the settlement price, than the buyer of a future gets profit. "f the selling price of the future is less than the settlement price, than the seller incur losses.

SUMMARY

Derivatives market is an innovation to cash market. Appro-imately its daily turnover reaches to the eEual stage of cash market. The average daily turnover of the %S& derivative segments

"n cash market the profit(loss of the investor depends on the market price of the underlying asset. The investor may incur huge profits or he may incur Huge losses. 'ut in derivatives segment the investor en)oys huge profits with limited downside.

"n 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 contracts.

Derivatives are mostly used for hedging purpose.

"n derivative segment the profit(loss of the option writer purely depends on the fluctuations of the underlying asset.

SUGESSTIONS

The derivatives market is newly started in "ndia and it is not known by every investor, so S&'" has to take steps to create awareness among the investors about the derivative segment.

"n order to increase the derivatives market in "ndia, S&'" should revise some of their regulations like contract si!e, participation of *"" in the derivatives market.

+ontract si!e should be minimi!ed because small investors cannot afford this much of huge premiums.

S&'" has to take further steps in the risk management mechanism.

S&'" has to take measures to use effectively the derivatives segment as a tool of hedging.

CONCLUSION

"n bullish market the call option writer incurs more losses so the investor is suggested to go for a call option to hold, where as the put option holder suffers in a bullish market, so he is suggested to write a put option.

"n 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.

"n the above analysis the market price of "ndia "nfoline is having low volatility, so the call option writer en)oys more profits to holders.

BIBILOGRAPHY

BOO&S :-

Derivatives Dealers =odule >ork 'ook - %+*= #3ctober 677?$ @ordon and %atara)an, #677A$ Financial Markets and Services #third edition$ Himalaya publishers

'EBSITES :-

http.((www.nseindia(content(fo(foVhistoricaldata.htm http.((www.nseindia(content(eEuities(eEVhistoricaldata.ht m http.((www.derivativesindia(scripts(glossary(inde-obasic.a sp http.((www.bseindia(about(derivati.aspWtypesofprod.htm

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