INTRODUCTION

A derivative is a product whose value is derived from the value of an underlying asset, index or reference rate. The underlying asset can be equity, forex, commodity or any other asset. For example, if the settlement price of a derivative is based on the stock price of a stock for e.g. Infosys, which frequently changes on a daily basis, also have an impact on the derivative risks which also changes simultaneously on a daily basis. This means that derivative risks and positions must be monitored constantly. A futures contract is a type of derivative instrument, or financial contract, in which two parties agree to transact a set of financial instruments or physical commodities for future delivery at a particular price. If you buy a futures contract, you are basically agreeing to buy something that a seller has not yet produced for a set price. ut participating in the futures market does not necessarily mean that you will be responsible for receiving or delivering large inventories of physical commodities ! remember, buyers and sellers in the futures market primarily enter into futures contracts to hedge risk or speculate rather than to exchange physical goods "which is the primary activity of the cash#spot market$. That is why futures are used as financial instruments by not only producers and consumers but also speculators. The consensus in the investment world is that the futures market is a ma%or financial hub, providing an outlet for intense competition among buyers and sellers and, more importantly, providing a center to manage price risks. The futures market is extremely liquid, risky and complex by nature, but it can be understood if we break down how it functions.

!&!

NEED OF THE STUDY

ecause the futures market is both highly active and central to the global marketplace, it's a good source for vital market information and sentiment indicators. Price Discovery ! (ue to its highly competitive nature, the futures market has become an important economic tool to determine prices based on today's and tomorrow's estimated amount of supply and demand. Futures market prices depend on a continuous flow of information from around the world and thus require a high amount of transparency. Factors such as weather, war, debt default, refugee displacement, land reclamation and deforestation can all have a ma%or effect on supply and demand and, as a result, the present and future price of a commodity. This kind of information and the way people absorb it constantly changes the price of a commodity. This process is known as price discovery. Risk Reduction ! Futures markets are also a place for people to reduce risk when making purchases. )isks are reduced because the price is pre!set, therefore letting participants know how much they will need to buy or sell. This helps reduce the ultimate cost to the retail buyer because with less risk there is less of a chance that manufacturers will %ack up prices to make up for profit losses in the cash market. The present study will explain the concept of futures and its use as a risk management instrument in stock markets.

!*!

OBJECTIVES OF THE STUDY

To study the functioning of derivatives market in India. To study the concept of Futures. To present the trading procedure of futures. To understand the trading strategies using futures. To study the pay!off on futures of +(F,, I,I,I, -aruti, .AI/ and 0I1)2. To suggest recommendations for people who invest in futures.

!3!

SCOPE OF THE STUDY

The study is an overview of (erivatives markets with special reference to Futures. The .tudy can4t be said as totally perfect. The .tudy helps in understanding the different aspects of futures. Few randomly selected stocks are taken to observe the pay off on investing in different futures.

!5!

ETHODO!O"Y
All information related to the topic needs to be carefully scrutini6ed to avoid the risk of biased analysis. +aving once identified which information is relevant and need to be collected, we will have to define how this will be done. The -ethod employed in the investigation depends on the purpose and scope of the study. Rese#rc$ Desi%n& )esearch design is some statement or specification of procedures for collecting and analy6ing the information required for the solution of some specific problem. +ere, the exploratory research is used as investigation and is mainly concerned with determining the trends and returns in -utual Funds. D#t# Co''ection et$ods&

The key for creating useful system is selectivity in collection of data and linking that selectivity to the analysis and decision issue of the action to be taken. The accuracy of collected data is of great significance for drawing correct and valid conclusions from the research Sources o( In(or)#tion& (ata available in marketing research are either primary or secondary. 1rimary (ata is not included in this study, only secondary data is taken in to account since, it is a comparative analysis.

!7!

Second#ry D#t#& .econdary data can be defined as ! 8data collected by some one else for purpose other than solving the problem being investigated9. .econdary data is collected from external sources which include information from published material of .: I and some of the information is collected online. The data sources also include various books, maga6ines, newspapers, websites etc.

!;!

!I IT*TIONS

The results obtained can not be generali6ed. The study is done only for a period of 57 days. The study in other ma%or aspects can give more accurate results. .econdary (ata may not be authentic in all the cases.

!<!