PROJECT REPORT

ON
“DERIVATIVES STUDY ON

” (FUTURES AND OPTIONS)

AT
MONEY INVESTMENT SOLUTENS

Submitted to the Osmania University

MASTER OF BUSINESS ADMINISTRATION

(Finance)

Submitted by
SYED MONIS HUSSAIN
(05206114)

MESCO INSTITUTE OF MANAGEMENT &COMPUTER SCIENCE

(Affiliated to Osmania University)
Mustaidpura, Karwan, Hyderabad.
(2006-2008)
 DECLARATION

I hereby state that the project report titled “DERIVATIVES STUDYON”

(FUTURES AND OPTIONS) at Money Investment solutions; submitted by
me in partial fulfillment of the requirement for the award of the degree of
Master of Business Administration (Finance) by Osmania University,
Hyderabad is my original work and has not been submitted to any other
University/Institution for the award of any degree or diploma.

Place: Hyderabad Syed Monis Hussain

Date: (052060114)
 CONTENTS

SR.NO CHAPTER NO: PAGE NO

(1) Introduction 0-1

Objectives of the study
Limitations of the study

(2) Research Methodology 2

Period of study
Sources of data
Selection of Companies

(3) Stock Exchange 3-12

History
SEBI (Securities Exchange Board of India)
Profile of BSE (Bombay Stock Exchange)
Profile of NSE (National Stock Exchange)

(4) Company profile MIS 13-20

(Money Investment Solution)

(5) Derivatives 21-33

(6) Futures 34-44

(7) Options 45-57

(8) Analysis 58-81

(9) Conclusions & Suggestions 82-84

Bibliography
INTRODUCTION

Religare, is one o
company offers a
verticals –retail ,w
from equities , co
management serv
 MONEY INVESTMENT SOLUTIONS

MIS is incorporated by expert professionals keeping in view the

challenging needs arising out of Stock Market’s Broking-business in India
and especially in Hyderabad. In a very short span of time the company has
been acclaimed as a Quality Service provider by making available
exclusive knowledge & information of Indian (Equity) SHARE MARKET,
with RELIGARE

MIS Money Investment Solutions which deals in various Financial Services like Stock
Market, Commodities, Mutual Fund, Insurance, Project Management and many
more.

MIS has well laid Trading center equipped with state of-the-art infrastructure backed by
technicians who are well trained and are in a position to meet any challenge with great
proficiency and high productivity. and by motivating them we will be boosting our
already flourishing business in this cutthroat competitive market and also to reach out to
the remotest customers to give them the best customer satisfaction. The objective of the
company is to provide quality services without any compromise. The trading center is
centrally located in the fastest growing area of the city at Gachibowli Main Road,
Tolichowki, which makes it accessible for most of the customers/ investor in Hyderabad
with ultra modern facilities and infrastructure.

When any of our esteemed customer/ investor walks into our trading
center the customer support executive will immediately attend to the
customer regarding the kind of service required, provide information
about share market, and give products range, so as to save the
inconvenience, and will immediately attend to the problem with great
professionalism, to achieve the ultimate in customer satisfaction which is
synonymous to our reputation of the past and the present.
 13

Vision:
“To build Money Investment solutions as a globally trusted brand in the financial
services domain and present it as the Investment Gate of India”

Mission:
“Providing financial care driven by the core values of diligence & transparency”

Brand Essence:
“Driven by ethical and dynamic processes for wealth creation”

“Money is the heart of our business. Whether it is deploying your surplus funds or
raising funds for your needs we empower your needs we empower you, with an array of
financial services.”

14
 C

Objectives of the study

• Under stand the concept of derivatives

• The functioning of futures and options in financial market

• To examine the advantages and disadvantages of different strategies along with

situations.

• To study the different ways of buying and selling of options.

Limitations:

• For The study purpose 5 companies have been taken.

• As the time limited, study was confined to conceptual under standing of

Derivatives market in India.

• Data collection was strictly confined to secondary source no primary data

• Associated with the project work.

• Study is limited to period from 2008.

1
 Research Methodology

Sources of Data Collection:- The methodology adopted or employed in this study was
mostly on secondary data collection i.e.,
• Companies monthly Reports

• Information from Internet

• Publications

• Information provided by Money Investment solution

Period of Study:

For different companies, financial data has been collected from the year 2007.

Selection of companies:

Companies selected for analysis are-

• Associates cement companies’ ltd.

• Arvind mills ltd

• Bharat heavy Electricals ltd

• Maruthi udyog ltd

• Tata consultany services

• Fedral Bank

• GAIL
2
 STOCK EXCHANGE

• History:
The only stock exchange operating in the 19th century wee those of Bombay set up in
1875 and Ahmedabad set up in 1894. These were organized as voluntary non-profit
making association of brokers to regulate and protect their interests. Before the control
on securities trading became a central subject under the constitution in 1950, it was a
state subject and the Bombay securities contracts (control) Act if 1925 used to regulate
trading in securities. Under this Act, The Bombay Stock Exchange was recognized in
1927 and Ahmedabad in 1937.

During the war boom, a number of stock exchanges were organized even in Bombay,
Ahmedabad and other centers, but they were not recognized. Soon after it became a
central subject, central legislation was proposed and a committee headed by A.D.Gorwala
went into the bill for securities regulation. On the basis of the committee’s
recommendations and public discussion, the securities contracts (regulation) Act became
law in 1956.

DEFINITION OF STOCK EXCHANGE

“Stock Exchange means any body or individuals whether incorporated or not,

constituted for the purpose of assisting, regulating or controlling the business of buying,
selling or dealing in securities.”

It is an association of member brokers for the purpose of self-regulation and

protecting the interests of its members.

It can operate only if it is recognized by the government under the securities contacts
(regulation) Act, 1956. The recognition is granted under section 3 of the Act by the
central government, ministry of Finance.
 3

BY LAWS:

Besides the above act, the securities contracts (regulation) rules were also made in
1957 to regulate certain matters of trading on the stock exchanges. There are also bylaws
of the exchanges, which are concerned with the following subjects:
Opening/closing of the Stock exchanges, timing of trading, regulation of blank transfers,
regulation of badla or carryover business, control of the settlement and other activities of
the stock Exchange, fixation of margins, fixation of market prices or making up prices.
Regulation of taravani business (jobbing), etc; regulation of brokers trading, brokerage
charges, trading rules on the exchange, arbitration and settlement of disputes, settlement
and clearing of the trading etc.

REGULATION OF STOCK EXCHANGE:

The Securities contracts (regulation) act is the basis for operations of the Stock
Exchanges in India. No exchange can operate legally with out the government
permission or recognition. Stock Exchanges are given monopoly in certain areas under
section 19 of the anove Act to ensure that the control and regulation are facilitated.
Recognition can also be withdrawn, if necessary where there is no Stock Exchanges in its
absence.

SECURITIES AND EXCHANGE BORD OF INDIA (SEBI)

SEBI was setup as an autonomous regulatory authority by the Government of India in

1988 to protect the interests of investors in securities and to promote the development and
to regulate the securities market and for matters connected there with or incidental there
to . It is empowered by two acts namely SEBI Act, 1992 and Securities contract
(regulation) Act,1956 to perform the function of protecting investor’s rights and
regulating the capital markets.
 4

BOMBAY STOCK EXCHANGE

The Stock Exchange, Mumbai popularly known as “BSE” was established in 1875 as
“The Native share and stock Brokers association”, as a voluntary non-profit making
association. It has evolved over the years into its present status as the premier Stock
Exchange in the country. It may be noted that the Stock Exchanges the oldest one in
Asia, even older than the Tokyo Stock Exchange, which was founded in 1878.

The exchange, while providing an efficient and transparent market for trading in
securities, upholds the interests of then investors and ensures redressed of their
grievances, whether against the companies or its own member brokers. It also strives to
educate and enlighten the investors by making available necessary informative inputs and
conducting investor education programmers.

A governing board having 20 directors is the apex body, which decides the policies
and regulates the affairs of the exchange. The Governing body consists of 9 elected
directors, 3 SEBI nominees, 6 public representatives and an Executive director & Chief
Executive Officer and a Chief Operating Officer.

The Executive director as the chief executive officer is responsible for the day-to-day
administration of the exchange. The average daily turnover of the exchange during the
year 2000-01 (April-March) was Rs. 3984.19 Crs and average number of daily trades
5.69 lacs.

However the average daily turn over of the exchange during the year 2001-02 has
declined to Rs. 1248.10 Crs and number of average daily trades during the period to 5.17
lacs.

The average daily turn over pf the exchange during the year 2002-03 has declined and
number of average daily trades during the period is also decreased.

The Ban on all deferral products like BLESS and ALBM in the Indian capital markets
by SEBI w.e.f July 2, 2001 abolition of account period settlements, introduction
 5

of compulsory rolling settlements in all scrips traded on the exchanges w.e.f Dec 31,
2001 etc., have adversely impacted the liquidity and consequently there is considerable
decline in the daily turn over at the exchange. The average daily turn over of the
exchange present scenario is 110363 (lacs) and number of average daily trades 1057
(lacs).

BSE INDICES
In order to enable the market participants, analysts etc. to track the various ups and
downs in the Indian Stock market, the exchange has introduced in 1986 an equity stock
index called BSE-SENSEX that subsequently became the barometer of the moments of
the share prices in the Indian Stock Market. It is a “Market capitalization-weighted”
Index of 30 component stocks representing a sample of large, well-established and
leading companies. The base year of Sensex is 1978-79. The Sensex is widely reported
in both domestic and international markets through print as well as electronic media.

Sensex is calculated using a market capitalization weighted capitalization weighted

method. As per this methodology, the level of the index reflects the total market value of
all 30-component stocks from different industries related to particular base period. The
total market value of a company is determined by multiplying the price of its stock by the
number of shares outstanding. Statiscians call an index of a set off combined variables
(such as price and number of shares) a composite Index. An indexed number is used to
represent the results of this calculation in order to make the values than one based on
actual values world over majority of the well-known Indices are constructed using
‘market capitalization weighted method’.

In practice, the daily calculation of SENSEX is done by dividing the aggregate

market value of the 30 companies in the Index by a number called the Index Divisor. The
divisor keeps the index comparable over a period of time and if the reference point for
 6

entire Index maintenance adjustments. Sensex is widely used to describe the mood in the
Indian Stock Markets. Base year average is changed as per the formula:
New base year average = old base year average*(new market value/ old market
value)

NATIONAL STOCK EXCHANE

The organization
The National Stock Exchange of India Limited has genesis in the report of the
High powered study Group on Establishment of New stock Exchange, which
recommended promotion of a The National Stock Exchange by financial institutions to
provide access to investors from all across the country on an equal footing. Based on the
recommendations, NSE was promoted by leading Financial Institutions at the best of the
Government of India and was incorporated in November 1992 as a tax paying company
unlike other stock exchanges in the country.

On its recognition as a stock exchange under the securities Contracts (Regulation)

Act, 1956 in April 1993, NSE commenced operations in the Wholesale Debt Market
(WDM) segment in June 1994. The capital market (Equity) segment commenced
operations in November 1994 and operations in Derivatives segment commenced in June
2000.

NSE MILSTONES:
November 1992 Incorporation
April 1993 Recognition as a stock exchange
May 1993 Formulation of business plan?
June 1994 wholesale debt market segment goes live
November 1994 Capital Market (Equities) segment goes live
March 1995 Establishment of Investor Grievance cell
April 1995 Establishment of NSCCL, the first clearing corporation
June 1995 Introduction of centralized insurance cover for all trading members
July 1995 Establishment of Investor Protection Fund
October1995 Became largest stock exchange in the country
April 1996 Commencement of clearing and settlement by NSCCL
April 1996 Launch of S&P CNX Nifty
June 1996 Establishment of Settlement Guarantee Fund
 7

November 1996 Setting up of National Securities Depository Limited, first depository in

India, co-promoted by NSE
November 1996 Best IT Usage award by Computer Society of India
December1996 Commencement of trading/settlement in dematerialized securities
December1996 Dataquest award for Top IT User
December1996 Launch of CNX Nifty Junior
February 1997 Regional clearing facility goes live
November1997 Best IT Usage award by Computer Society of India
May 1998 Promotion of Joint Venture, India Index Service & Products Limited
May 1998 Launch of NSE’s Web-site www.nse.co.in
July 1998 Launch of NSE’s Certification Programme in Financial Market
August 1998 CYBER CORPORATE OF THE YEAR 1998 award
February 1998 Launch of Automated Leading and Borrowing Mechanism
April 1999 CHIP Web Award by CHIP magazine
October 1999 Setting up of NSE.IT
January 2000 Launch of NSE Research Initiative
February 2000 Commencement of Internet Trading
June 2000 Commencement of Derivatives Trading (Index Futures)
September 2000 Launch of ‘Zero Coupon Yield Curve’
November 2000 Launch of broker Plaza by Dotex International, a joint venture
Between NSE.IT Ltd. And i-flex Solutions Ltd.
December 2000 Commencement of WAP trading
June 2001 Commencement of trading in Index Options
July 2001 Commencement of trading in Option on Individual Securities
November 2001 Commencement of trading in Futures on Individual Securities
December 2001 Launch of NSE Government Securities Index
January 2002 Launch of Exchange Traded Funds
May 2002 NSE wins the Wharton-Infosys Business Transformation Award in
The Organization-wide Transformation category
October 2002 Launch of NSE Government Securities Index
January 2002 Commencement of trading in Retail Debt Market
June 2003 Launch of Interest Rate Futures
August 2003 Launch of Futures & Options in CNXIT Index
June 2004 Launch of STP Interoperability
August 2004 Launch of NSE’s electronic interface for listed companies

Facts & Figures

AT A GLANCE:

CAPITAL MARKET (EQUITIES) SEGMENT

Number of VSAT’s March 31, 2005 2,829
Number of cities covered March 31, 2005 345
Settlement Guarantee Fund March 31, 2004 Rs.1550.90
Investor Protection Fund (CM and F&O) March 31, 2005
Number of securities available for trading March 31, 2005
 8

Record number of trades January 05, 2005 28,49,987

Record daily turn over (quantity) January 05, 2005 6757 lakhs
Record daily tour over (Value) February 28, 2001 10,366.52 Cr
Record market capitalization March 09, 2005 16,72,448 Cr
Record Value of S&P CNX Nifty index March 09, 2005 2,183.45
Record value of CNX Nifty junior index February 23, 2000 5,365.90
Record pay-in/pay-out (Rollin Settlement)
Funds pay-in/pay-out February 05, 2004 685.76 Cr
Securities pay-in/pay-out (Value) January 13, 2004 1884.09 Cr
Securities pay-in/pay-out (Quantity) August 21, 2003 1470 lakhs

Settlement Date

DERIVATIVES (F&O) SEGMENT

No. of cities covered March 31, 2005 316
Settlement Guarantee Fund March 31, 2004 4356.85 Cr
Record daily turnover (value) January 28, 2004 21,921.34 Cr

WHOLESALE DEBT SEGMENT

Number of securities available for trading March 31, 2005 3,098
Record daily turnover (value) August 25, 2003 13,911.57 Cr

Our Technology:
Across the globe, developments in information, communication and network
Technologies have crated paradigm shifts in the securities market operations.
Technology has enabled organizations to build new sources of competitive advantage,
bring about innovations in products and services, and to provide for new business
opportunities. Stock exchanges all over the world have realized the potential of IT and
have moved over to electronic trading systems, which are cheaper, have wider reach and
provide a better mechanism for trade and post trade execution.

NSE believes that technology will continue to provide the necessary impetus for the
organization to retain its competitive edge and ensure timeliness and satisfaction in
customer service. In recognition of the fact that technology will continue to redefine the
shape of the securities industry, NSE stresses on innovation and sustained investment in
technology to remain ahead of competition. NSE IT setup is the largest by and company
in India. It uses satellite communication technology to energize participation
Form around 400 cities spread all over the country. In the recent past, capacity
 9

enhancement measures were taken up in regard to the trading systems so as to effectively

meet the requirements of increased users and associated trading loads. With up gradation
of trading hardware, NSE can handle up to 1 million trades per day. NSE has also put in
place NIBIS (NSE’s Internet Based Information System) for on-line real time
dissemination of trading information over the Internet. In order to capitalize on in house
expertise in technology, NSE set up a separate company, NSE.IT, in October 1999. This I
expertise to provide a platform for taking up new IT assignments both within and outside
India and attaining global exposure.
NEAT us a state-of- the –art client server based application. At the server end, all
trading information is stored in an in-memory database to achieve minimum response
time and maximum system availability for users. The trading server software runs on a
fault tolerant STRAUTS mainframe computer while the client software runs under
Windows on PCs
The telecommunications network uses x.25 protocol and is the backbone of the
automated trading system. Each trading member trades on the NSE with other members
through a PC located in the trading member’s office, any where in India. The Trading
members on the wholesale Debt Market segment are linked to the central computer at the
NSE through dedicated 64kbps leased lines and VSAT terminals. These leased lines are
multiplexed using dedicated 2 mbps, optical-fiber links. The WDM participants connect
to the trading system through dial-up links.
The exchange uses powerful RISC based UNIX servers, procured from Digital and
HP for the back office processing. The
Latest software platforms like ORACLES 7, RDBMS, and GUPTA- SQL/ORACLE
FORMS
4.5 Front- Ends, etc.; have been for the exchange applications. The Exchange currently
manages its data center operations, system and database administration, design and
development of in –house systems and design and implementation of telecommunication
solutions.
NSE is one of the largest interactive VSAT based Stock Exchanges in the world.
Today it supports more than 3000 VSAT’s and is expected to grow to more than
4000VSATs in the next year. The NSE –network is the largest private wide area network
in the country and the first extended C-B and VSAT network in the world. Currently
more than 9000 users are trading on the real time – online NSE application. There are
over 15
 10

Large computer systems, which include non-stop fault-tolerant computers and high-end
UNIX servers, operational under one roof to support the NSE applications. This coupled
with the nation wide VSAT network makes NSE the country’s largest Information
technology user.
In an ongoing effort to improve NSE’s infrastructure, a corporate network has been
implemented, connecting all the offices at Mumbai, Delhi, Calcutta and Chennai. This
corporate network enables speedy inter-office communications and data and voce
Connectivity between offices.
In keeping with the trend, NSE has gone online on the Internet. Apart from having a
2mbps link to VSNL and our own domain for internal browsing and e-mail purposes, we
have also set up our own Website. Currently, NSE is displaying its live stock quotes on
the website (www.nseindia.com) which are updated online

NSE-NIFTY
The NSE on April22,1996 launched a new equity Index. The NSE-50. The NSE-
50. The new Index which replaces the existing NSE-100 Index, is expected to serve as an
appropriate Index for the new segment of futures and option. ”NIFTY” means Nations
Index for Fifty stocks. The NSE-50 comprises 50 companies that represent 20 broad
Industry groups with an aggregate market capitalization of around Rs.1, 70000crs. All
companies included in the Index have a market capitalization excess of Rs.500crs each
and should have traded for 85% of trading days at an impact cost of less than 1.5%

NSE- MIDCAP INDEX

The NSE madcap Index or the Nifty comprises 50 socks that represent 21 boards
Industry groups and will provide proper representation of the madcap segment of the
Indian capital market. All stocks in the Index Should Have market capitalization of
greater than Rs.200crs and should have traded 85% of the trading days at an impact cost
of less 2.5%.
 11

The base period for the index is Nov 4, 1996 which signifies two years for completion of
operations of the capital market segment of the operations. The base value of the Index
has been set at 1000.
Average daily turnover of the present scenario 2,58,212 (Laces) and number of
average daily trades 2160 (Laces).
At present, there are 24 Stock Exchanges recognized under the Securities Contract
(Regulation) Act, 1956. They are:-

NAME OF THE STOCK YEAR

EXCHANGE
Bombay Stock Exchange 1875
Ahmedabad share and stock brokers 1957
Association Ltd.
Calcutta stock exchange Association ltd 1957
Delhi stock exchange Association ltd 1957
Madras stock exchange Association ltd 1958
Indore stock exchange Association ltd 1968
Bangalore stock exchange 1943
Hyderabad stock exchange 1978
Cochin stock exchange 1982
Pune stock exchange ltd 1982
U.P stock exchange Association ltd 1983
Ludhiana stock exchange Association 1983
Jaipur Stock exchange ltd 1984
Gauhathi stock exchange ltd 1985
Manglore stock the exchange ltd 1986
Maghad stock exchange Association ltd 1989
Bhubaneshwar stock exchange 1989
Association ltd
Over the counter exchange of India, 1990
Bombay
Saurasthra Kutch Stock Exchange ltd 1991
C Stock exchange ltd 1991
Coimbatore Stock exchange ltd 1991
The Meerut Stock exchange ltd 1991
National Stock exchange ltd 1991
Integrated Stock exchange ltd 1999
12
 MONEY INVESTMENT SOLUTIONS
MIS is incorporated by expert professionals keeping in view the
challenging needs arising out of Stock Market’s Broking-business in India
and especially in Hyderabad. In a very short span of time the company has
been acclaimed as a Quality Service provider by making available
exclusive knowledge & information of Indian (Equity) SHARE MARKET,
with RELIGARE

MIS Money Investment Solutions which deals in various Financial Services like Stock
Market, Commodities, Mutual Fund, Insurance, Project Management and many
more.

MIS has well laid Trading center equipped with state of-the-art infrastructure backed by
technicians who are well trained and are in a position to meet any challenge with great
proficiency and high productivity. and by motivating them we will be boosting our
already flourishing business in this cutthroat competitive market and also to reach out to
the remotest customers to give them the best customer satisfaction. The objective of the
company is to provide quality services without any compromise. The trading center is
centrally located in the fastest growing area of the city at Gachibowli Main Road,
Tolichowki, which makes it accessible for most of the customers/ investor in Hyderabad
with ultra modern facilities and infrastructure.

When any of our esteemed customer/ investor walks into our trading
center the customer support executive will immediately attend to the
customer regarding the kind of service required, provide information
about share market, and give products range, so as to save the
inconvenience, and will immediately attend to the problem with great
professionalism, to achieve the ultimate in customer satisfaction which is
synonymous to our reputation of the past and the present.
 13

Vision:
“To build Money Investment solutions as a globally trusted brand in the financial
services domain and present it as the Investment Gate of India”

Mission:
“Providing financial care driven by the core values of diligence & transparency”

Brand Essence:
“Driven by ethical and dynamic processes for wealth creation”

“Money is the heart of our business. Whether it is deploying your surplus funds or
raising funds for your needs we empower your needs we empower you, with an array of
financial services.”
 14

Our Mission:
To achieve success by

Profi
t
      
Monitory 
Plan
 For
Client’sGrowt
h

Providing 
Information, 
Knowledge, 
Personal Attention 
&Service.
Money making Ideas & Advice,
 Powered by World Class 
Research 
 15

The name Money itself shows how important it is for our life. Money is used as a mode
of exchange. To fulfill our daily requirements, we need money and also for better future.
We may satisfy our daily needs with our current earnings, what about those things which
we want but we can’t fulfill due to lack of Earnings or Resources. Here, we have
tremendous plans and schemes which increase your income and also sources. MONEY
INVESTMENT SOLUTIONS came into existence to provide knowledge and
information through extensive research by skilled professionals.

We give personalized premium service on the NSE, BSE, Derivative, Commodities

(NCDEX and MCX) and Mutual Funds, IPO’s in association with “RELIGARE
Securities Ltd”. With our sophisticated technology you can trade through your
computer and if you want human touch you can also deal through our Relationship
Managers.

We also give personalized services on Insurance (Life & General) in association with
ICICI PRUDENTIAL “ Priority Cirlce”
 16

The financial plans we develop for clients include the following where appropriate:

· Net worth statement we’ll create a document that specifies your assets and liabilities and
pinpoints where you stand in the wealth-accumulation process.

· Current position evaluation we’re professionals at making financial assessments. We'll

analyze and evaluate all of your current positions and specify an action plan for now and
the future.

· Life insurance review and recommendations Are you under-insured, over-insured, or just
right? We'll provide well-grounded assessments that help you answer these questions and
more.

· Retirement plan When do you want to retire or have other options? What level of annual
income in today's rupees do you want at retirement? We'll create a plan that takes the
financial mystery out of retirement and helps you make well-grounded assessments about
your future.

· Education plan We work with you to develop specific answers to questions like: How
much will it cost to help fund our children's education at a Indian or foreign university?
What should we be doing now to take care of it?

· Cash Flow Statement How much are you currently saving? We will analyze your income
and expenses to determine how much money you can save towards your financial goals.
This often leads to the development and implementation of a personalized budget.

· Real estate acquisition strategies thinking about buying a home or some income
property? We'll design an action plan that includes real estate acquisition, retirement
and education planning along with other concerns appropriate to your situation.

· Estate planning Is your will current? Do you understand the tremendous value of a
living trust to those who survive you? For the sake of those you care about, call us
for an informational meeting with a qualified lawyer at no cost or obligation.
Contact us at your convenience to learn more about how our Financial Planning services
can help you live a more harmonious and satisfying life.
All of our actions in our Financial Planning and Investment Management
engagements are guided by four principles:
1. Conflict-Free
2. Active Management
3. Liquidity and Flexibility
4. Personal Care
 17

Conflict-Free

“We take a ‘conflict-free’ approach to everything we do to ensure that our only

consideration in analyzing and recommending specific actions is helping our clients
accomplish their financial and personal objectives. Many investment advisors offer
commission-based services. We believe such an approach inevitably breeds conflicts of
interest. First, firms selling commission-based services are compensated by the
investments or products they recommend and implement. Second, these firms’
commissions are immediately subtracted from an investment—regardless of whether or
not wealth has been created for the investor. Our business exists to help clients steward
their resources and improve their quality of life. As such, we offer our investment
management and financial planning services on a “fee-only” basis, meaning we are not
compensated by the investments or products we recommend and implement. Our “fee-
only” policy eliminates potential conflicts of interest and ensures that our clients’
investments are dedicated entirely to building wealth.”

Active Management

“We believe that the ability to make rapid assessments and take action quickly is
fundamental to delivering exceptional performance—especially in a rapidly changing
marketplace. As such, we take care to assess the investments in our clients' portfolios,
and the market as a whole, with frequency and rigor.”

Liquidity & Flexibility

“We believe no-load mutual funds offer the best wealth building strategy. Liquidity and
flexibility are fundamental to effective money management. Conversely, we believe that
any investment strategy or tool that limits a client's ability to change direction, or
penalizes the client for doing so, must be approached with extreme caution. As such, we
strongly urge clients to favor those strategies and investment tools that afford them
flexibility to change course as their goals and situations change. We dissuade clients from
insurance or annuity-based approaches, which can lock people into specific investments
for long periods of time and severely penalize those who seek to change direction.”
 18

PRODUCTS OF MIS

EQUITY SHARES:
Equity shares are commonly referred to common stock or ordinary shares. Even
share capital of a company is divided into a number of small units of equal value called
shares.

DERIVATIVES (F&O)
The value of which is entirely “derived” from the value of underlying asset like
securities, commodities, bullion, currency, live stock, etc. is termed as “Derivatives”. It
is any hybrid contract of pre determined fixed duration like forward, future, option, etc.
link for the purpose of contract fulfillment to the value of specified real or financial asset
or to an index of securities.

COMMODITIES:
Articles of commerce or products that can be used for commerce. In a narrow
sense products traded on an authorized commodity exchange. Types of commodities
include agricultural products, metals, petroleum, foreign currencies, financial instruments
and indexes to name a few. With futures, you trade in a commodity which you don’t own,
with a small amount of margin money, and can thus get a bigger bang for the buck. The
trick is to know when you should buy or sell, at what price, on what delivery schedule.
Price are pegged to international markets (NYMEX, CBOT, CME, LME etc.): They are
there fore not vulnerable to manipulation by few operators.
 19

MUTUAL FUNDS:
A portfolio of stocks, bonds, or other securities administered by a team of one or
more mangers from an investment company who make buy and sell decisions on
component securities. Capital is contributed by smaller investors who buy shares in the
mutual fund rather than the individual stocks and bonds in its portfolio. The return on the
fund’s holdings is distributed back to its contributors, or share holders, minus various
fees and commissions. This system allows small investors to participate in the reduced
risk of a large and diverse portfolio that they could not other wise build themselves. They
also have the benefit of professional managers overseeing their money who have the time
and expertise to analyze and pick securities.

LIFE INSURANCE:
We know it well that we can’t insure our life to any one but we can insured our
current financial position for future uncertainties means to meet our future financial
uncertainties which may be with our personnel life or with our family, to protect our
family form future financial uncertainties we have to take financial assurance. Which
make them to live safely in future.

PROJECT MANAGEMENT:
Providing project reports on different Businesses, which helps and guides for
future growth of your current business. Evaluation of your current business and
promotional tools your business.

PORTFOLIO MANAGEMENT SERVICE:

When it comes to managing your hard-earned money, leave it to the experts. With
a little help from us, your portfolio can consistently earn market-beating returns. Choose
from our suite of schemes.
20
 DERIVATIVES

The term” Derivatives” indicates that it has no independent value, that

Value is entirely derived from the value of the underlying asset. The underlying asset can
be securities, commodities, bullion, currency, live stock or any thing duration, linked for
the purpose of contract fulfillment to the value of a specified real or financial asset or to
an index of securities.

According to Securities Laws (Second Amendment) Act,1999 , Derivatives has

been included in the definition of securities The term Derivative has been defined in
Securities contracts (Regulations) Act.; as:-

“A security derived from a debt instrument, share, loan, whether secured or

unsecured, risk instrument or contract for differences or any other from of security”

“A contact which derives its value from the prices or prices, of underlying
securities”

“Derivate means forward future or option contract of predetermined fixed duration,

linked for the purpose of contract fulfillment to the value of specified role or financial
asset or to an index security.”
 21

MAJOR PLAYERS IN DERIVATIVE MARKET:

There are three major players in the derivatives trading.

1. Hedgers
2. Speculators
3. Arbitrageurs

Hedgers:
The party, which manages the risk, is known as “Hedger”. Hedgers seek to
protect themselves against price changes in a commodity in which they have an interest.

Speculators:
They are traders with a view and objective of making profits. They are willing to
take risks and they bet upon whether the markets would go up or come down.

Arbitrageurs:
Risk less profit making is the prime goal of arbitrageurs. They could be making
money even with out putting their own money in, and such opportunities often come up
in the market but last for very short time frame. They are specialized in making
purchases and sales in different market at the same time and profits by the difference in
prices between the two centers.
 21

THE DERIVATIVE PERFORMS A NUMBER OF ECONOMIC FUNTIONS:

• They help in transferring risk from risk adverse people to risk oriented people.
• They help in the discovery of future as well as current policies.
• They catalyze entrepreneurial activity.
• They increase the volume traded in market be can of participation of risk adverse
people is greater number.
• They increase savings and investment is long run.

Stock options and stock futures were introduced in both the exchange in 2001.
This started trading in derivatives in NDIAN stock exchange both NSE&BSE
considering index options, index futures stock options and stock futures at in the wake of
the new millennium. In short span of three years the volume traded in the derivative
market has out stripped the turn over of the cash market.

CHARACTERISTICS OF DERIVATIVES:

• Their value is derived from an underlying instrument such as stock index

Currency, etc
• They are vehicles for transferring risk.
• They are leveraged instruments.

TYPES OF DERIVATIVES:

Most commonly used derivative contracts are:

Forwards:
A forward contract is a customized contract between two entities where
settlement takes place on a specific date in the future at today’s pre-agreed price.
Forward contracts offer tremendous flexibility to the party’s to design the contract in
terms of the price, quantity, quality, delivery, time and place. Liquidity and default risk
are very high.
 22

Futures:
A futures contract is an agreement between two parties to buy or sell an asset at a
certain time in the future at a certain price. Futures contracts are special types of forward
contracts in the sense, that the former are standardized exchange traded contracts.

OPTIONS:
Options are two types- call and puts. Calls give the buyer the right but not the
obligation to buy a given quantity of the underlying asset at a given price on or before a
given quantity of the underlying asset at a given price on or before a given date.

WARRANTS:
Longer-date options are called warrants and arte generally traded over the
counter. Options generally have lives up to one year the majority of options traded on
options exchanges having a maximum maturity of nine months

.
LEAPS:
The acronym LEAPS means Long Term Equity Anticipation Securities. These
are options having a maturity of up to three years.

BASKETS:
Basket options are options on portfolios of underlying assets. The underlying
asset is usually a moving average of a basket of asset. Equity index options are a form of
basket options.

SWAPS:
Swaps are private agreement between two parties to exchange cash flows in the
future according to a pre-arranged formula. They can be regarded as portfolios of
forward contracts. The two commonly used swaps are:
 23

INTEREST RATE SWAPS:

These entail swapping only the interest related cash flows between the parties in
the same currency

CURRENCY SWAPS:
These entail swapping both the principal and interest between the parties, with the
cash flows in one direction being in a different currency than those in opposite direction.

RISK INVOLVED IN DERIVATIVES:

Derivatives are used to separate risks from traditions instruments and transfer
these risks to parties willing to bear these risks. The fundamental risks involved in
derivative business includes

A) CREDIT RISK:
This is the risk of failure of a counterpart to perform its obligation as per the
contract. Also known as default or default or counterpart risk, it differs with different
instruments.

B) MARKET RISK:
Market risk is a risk of financial loss as result of adverse movements of prices of
the underlying asset/instrument.

C) LIQUIDITY RISK:
The inability of a firm to arrange a transaction at prevailing market prices is
termed as liquidity risk, a firm face two types of liquidity risks:

• Related to liquidity of separate products.

• Related to the funding of activities of the firm including derivatives

 24

D) LEGAL RISK
Derivatives cut across judicial boundaries; there the legal aspects associated with
the deal should be looked into carefully.

REGULATORY FRAMWORK
• Appointed DR.L.C.GUPTA as chairman
• On 18th November 1996 by (SEBI)
• To develop appropriate regulatory frame work for derivatives trading
• To focus on financial derivatives and in particular, equity derivatives
• Submitted its report in March 1998
• Approved by SEBI in may and circulated in June 1998

REPORT SUMMARY
• Substantive report
• Suggestive bye-laws for regulation and control of treading and settlement of
derivatives contracts

LEGAL AMENDMENTS:-
• Securities contract Regulation Act
• Derivatives contract declared as a security in Dec 1999
Notification in June 1969 under section 16 of SCRA banning forward trading
revoked in March 2000

SURVERY RESULTS
COMMITTEE CONDUCTED A SURVEY AMONGST:
Brokers 67
Mutual funds 10
Banks/fish 14
Falls 12
Merchant banks 9
_________
TOTAL 112
 25

• Wide recognition of need for derivatives

• 70% respondents indicated hedging as their activity

• Equity, Interest Rate and Currency derivative products

• Stock index futures most preferred

• Stock index options second preference

• Options on individual stocks third preference

• 39% speculation/ dealing

• 64% broking

• 36% option writing

• Multiple responses were permitted in the questionnaire

• 3 month futures were most preferred

• American Option were preferred over European options

• 33% expected fast growth in derivatives segment

• 41% expected moderate growth

• 16% expected slow growth

DERIVATIVES EXCHANGES:-

• Existing exchanges may start Derivative segments or separate exchanges may be

Set up
• Online screen trading with disaster recovery site

• Per half hour capacity should be 4-5 times the anticipated peak load

• Intendment clearing corporation/House

• Online surveillance capability

 26

• Real-time information dissemination over rate least 2 network

• Minimum 50 members

• Separate membership for derivative segment no automatic member ship

• Separate governing council and for derivatives segment

• Common governing council and governing Board member not allowed

• Percentage of broker members in the council to be prescribed by SEBI

• Chairmen cannot carry on broking/dealing business during his term

• Arbitration and investor grievances cells in 4 regions

• Adequate inspection capability

REGULATORY RECOMMENDATIONS:-

• Emphasis on exchange level regulation

• SEBI to act as regulator of last resort

• systems for proof and fail proof regulation

• All members to be inspected

• SEBI will approve rules, bye-laws and regulations

• New derivative contracts to be approved by SEBI

• Exchange to provide full details of proposed contract

• Economic purposes of the contract

• Likely contribution to the markets development

• Safeguards incorporated for investor protection and fair trading

 27

ENTRY RULES:-
• No automatic entry

• Capital adequacy higher than cash market

• Clearing and non clearing members

• Minimum net worth Rs. 300 lakes

• Option writers-higher deposits

• Broker member, sales persons and dealers to pass a certification program

• Registration with SEBI in addition to registration with exchange Brokerage

• Prices on the system shall be exclusive of brokerage

• Maximum brokerage rates shall be prescribed by the exchange

• Brokerage to be separately indicated in the contract not fair trading

MARGINS FROM CLIENTS:-

• Margins to be collected form all clients/ trading members

• Daily margins to be further collected

• Right of clearing member to close out positions of clients/TMs not paying daily
margins

• Losses if any to be charged to clients /TMs and adjusted against margins

DERIVATIVES MARKETS:-

Derivatives market broadly can be classified into tow categories, those that are
traded on the exchange and the traded one to one or over the counter
They are hence known as

 Exchange Traded Derivatives

  OTC Derivatives (Over The Counter)

28

OTC EQITY DETRIVATIVES:-

• Traditionally equity derivatives have a long history in India in the OTC markets

• Options of various kinds called (Teri and Mandy and Fatal) in unorganized
markets were traded as early as 1900 in Mumbai

• The SCRA however banned all kind of options in 1956

DERIVATIVE MARKETS TODAY

• The prohibition on options in SCRA was removed in 1995. Foreign currency

options in
• Currency pairs other than Rupee were the first options permitted by RBI

• The Reserve Bank of India has permitted options, interest rate swaps, currency
swaps and their risk reductions OTC derivative products.

• Besides the forward market in currencies has been a vibrant market in India for
several decades

• In addition the forward Markets commission has allowed the setting up of

commodities futures exchanges. Today we have 18 commodities exchange most
of which trade futures.

E.g. The India Pepper and Spice Traders Association (IPSTA) and the Coffee
Owners Futures Exchange of India (COFEI)

• In 2000 an amendment to the SCRA expanded the definition of securities to

included Derivatives there by enabling stoke exchange to trade derivative
products.

• The year2000 will herald the introduction of exchange traded equity derivatives in
India for the first time
 29

Equity derivatives Exchange in India:-

• In the equity markets both the national stock Exchange of India Ltd.
(NSE) and The Stock Exchange, Mumbai (BSE) have applied to SEBI for setting
up their derivatives segments.

• The exchange are expected to start trading in Stock Index

Futures by mid-May 2000

BSE and NSE’s Plans:-

• Both the exchange has set-up an in-house segment instead of setting up a separate
exchange for derivatives.

• Bse’s Derivatives segment will start with sensex futures, as its first product.

• NSE Futures and Options segment will be launched with Nifty futures as the first
product.

Product Specifications BSE-30 Sensex futures:-

• Contract size Rs.50 times the Index

• Tick Size-0.1 points or Rs.5

• Expiry day-last Thursday of the month

• Settlement basis-cash settled

• Contract cycle-3 months

• Active contract-3 nearest months

Product Specifications S & P CNX Nifty Futures:-

• Contract Size-Rs.200 times the Index

• Tick Size-0.05 points or Rs. 10

• Expiry day – last Thursday of the month

• Settlement basis – cash settled

 • Contract cycle- 3 months

• Active contracts- 3 nearest months

30

Membership

• Membership for the new segment in both the exchange is not automatic and has to
be separately applied for.

• Membership is currently open on both exchanges,

• All members will also have to be separately registered with SEBI before they can
be accepted.

NSE
Clearing Member (CM)

• Net worth -300lakh

• Interest- free security Deposits- Rs.25lakh.

• Collateral security Deposit – Rs 25lakh

In addition for every TM he wishes to clear for the CM has to deposit Rs.10 lakh
Trading Member(TM)

• Net worth-Rs. 100 lakhs.

• Interest-Free security Deposit- Rs.8 lakh.

• Annual subscription Free – Rs. 1 lakh.

BSE

Clearing Member (CM)

• Net worth-Rs.300lakh.

• Interest-Free security Deposit- Rs.25lakh.

• Collateral security Deposit- Rs25lakh.

• Non-refundable deposit-Rs25lakh.
 • Annual subscription Free – Rs.50 thousand.

31

In addition for ever TM he wishes to clear for the CM has to Deposit Rs.10lakh with the
following Break-up

• Cash – Rs.2.5lakh.

• Cash equivalent_Rs.25lakh.

• Collateral security Deposit- Rs.5lakh.

Trading Member(TM)
• Net worth – Rs.50lakh.

• Non-refundable deposit- Rs.3lakh

• Annual subscription Fees- Rs.25 thousand

The Non-refundable fee paid by the members is exclusive and will be a total of Rs.8
lakes if the member has both Clearing and trading rights
Trading systems

• NSE Trading system for it’s futures and options segment is called NEAT F&O. It
is based on the NEAT system for the cash segment

• BSE’s trading system for its derivatives segment is called DTSS It is built on a
platform different from the BOLT system though most of the features are
common.

settlement and Risk Management systems

• systems for settlement and risk management are required to satisfy the conditions
specified by the L.C Gupta Committee and the JR. Verma committee

• These include upfront margins, daily settlement, online surveillance and position
monitoring and risk management using the Value-at-Risk concept.
 32

CERTIFICATION PROGRAM’S

• The NSE certification programmed is called NCFM (NSE’S Certification in

Financial Markets.). NSE has outsourced training for this to various institutes
round the country

• The BSE certification programmed is called BCDE (BSE’s certification for the
Derivatives Exchange). BSE conducts its own training run by its training
institute.

• Both these programmers are approved by SEBI

RULES AND LAWS:

• Both the BSE and the NSE have been give in principal approval on their rule and
laws by SEBI

• According it the SEBI chairman the Gazette notification of the by laws after the
final approval is expected to be completed by May 2000.

Trading is expected to start by mid-June 2000.

 33

FUTURES
A future contract is an agreement between two parties two buy or sell an asset at a
certain specified time in future for certain specified price. In this, it is similar to a
forward contract. A futures contract is a more organized form of a forward contract;
these are traded on organized exchange. However, there are a no of differences between
forward and futures. These relate to the contractual futures, the way the markets are
organized, profiles of gains and losses, kinds of participants in the markets and the ways
in which they use the two instruments.

Futures contracts in physical commodities such as wheat, cotton, corn, gold,

silver, cattle, and ext. have existed for a long time. Futures in financial assets, currencies
and interest bearing instruments like Treasury bill and bonds and other innovations like
futures contracts in stock indexes are relatively new developments.

The futures market described as continuous auction markets and exchange providing the
latest information about supply and demand with respect to individual commodities,
financial instruments and currencies, futures exchanges are where buyers and sellers of
an expanding list of commodities; financial instruments and currencies come option
buyers participate in futures markets with different risk. The option buyer knows the
exact risk, which is unknown to the futures trader.

FEATURES OF FUTURES CONTRACTS:

The principal features of the contract are as follows

Organized Exchange:
Unlike forward contracts which are traded in an over –the –counter
market, futures are traded on organized exchange with a designated physical location
where trading takes place. This provides a ready, liquid market in which futures can be
bought and sold market.
34
 Questionnaire

1. Name:
2. Age (Please tick): a) 21-30 b) 31-45 c) 45-60 d) 60 and
above
3. Education Qualification:
4. Occupation:

a) Business b) Govt. Employee c) Public Sector

d) private sector e) Consultancy
5. Address:________________________________________________________
____________________________________________________________________
____________________________________________________________________
_____________________________e-mail
Id:_________________________________Contact
No._____________________
6. Martial Status a) Married b) Unmarried
7. Income (annual)?(Please tick)

a) Less than 1,00,000 b) 1,00,001 – 2,00,000

c) 2,00,001 - 5,00,000 d) Above
5,00,000
8. Savings (in percentage)?
a) 0–20 b) 21– 40 c) 41–60 d) 60-80 e) 80-100
9. Where have you invested your savings?
a) Bank Deposit b) Property c) Shares d) Mutual Fund
e) Insurance f) Others (specify)
10. Approximate return (in %) on the investment you
have made?___________________
11. Please rate the following factors as per their importance
in your investment decision? (on a scale of 1-4)
a) Safety
b) Liquidity
c) Capital appreciation d) Tax Saving
12. We are attempting to measure corporate awareness
and interest in Mutual Fund investment?(Please tick below)

Have you heard of it?

Are you having
investmen
ts in
any
schemes?
a) Alliance Mutual Fund
b) SBI Mutual Fund
c) ICICI Pru Mutual Fund
d) Franklyn Templeton Mutual Fund
e) DSP Merillynch Mutual Fund
f) Sundaram Mutual Fund
g) Birla Sunlife Mutual Fund
h) HDFC Mutual Fund
i) BOB Mutual Fund
j) Morgan Stanley Mutual Fund
k) IDBI Mutual Fund
l) Any other Schemes(Please mention the
name)_______________________________

13. How important are the following factors in your choice of

a mutual fund organization?

Factors Very Imp Imp Less Imp Not Imp.

a. Capital appreciation
b. Better annual Return
c. Friends’ suggestion
d. Agents’ advice
e. Advertising
f. Reputation/Popularity

14. Can you indicate roughly your investment in SBI and other
Mutual Funds and shares(in Rs.)?(Please tick):
 SBI MF Other MF
Shares/Debentures
a. Nil
b. less than 50,000
c. 50,001-100,000
d. 100,001- 500,000
e. 500,001- 10,00,000
f. 10,00,000- 50,00,000
g. 50,00,000-100,00,000
h. More than100,00,000
15. Where would you like to invest in Mutual Fund?

a) Debt Fund b) Equity Fund c) Both

16. Did the investments in funds comply with your objectives

or goals set by you?(please tick)

a) Yes b) No

17. How safe in your opinion are the following type of

investments ? (Please tick)
Absolutely Reasonably
Somewhat Very Don’t
safe safe
unsafe unsafe Know
a) MF Taxgain
b) MF index
c) MF income Scheme
d) MF growth scheme
e) MF equity scheme
f) MF debt scheme
g) MF balanced scheme
h) MF gilt scheme
i) MF children scheme
18. How far are you satisfied with agents’ services for
SBI mutual funds in respect of the following/ (Please tick):
V. Satisfied Satisfied Not
satisfied Dissatisfied
a) with guidance and advice
 b) with knowledgeof tax laws
c) promptness noticing new schemes
d) Sorting out your complaints
e) Integrity/Dependability
19. What are your suggestions for company? Please
specify below
_______________________________________________________________________
_______________________________________________

Survey Findings
Q1. Do you invest regularly?

Yes 89
No 11
Total 100

YES
NO

Investors in Mutual Fund:

Particulars In Percentage
Investors 18
Non Investors 82
 In Percentage

Investors
Non Investors

It has been observed that approximately 89% of the correspondents

invest in some or the other financial instrument. Though the
percentage of choice of investment may vary due to different factors
such as age, education, risk etc. Out of which only 18% do invest in
mutual funds. AMC needs to concentrate over their promotional
activity to pull the surplus money of a large mass of Non investors to
invest in mutual fund. A major chunk who have been interviewed it
has been observed have some kind of insurance policy. It has also
been observed that though LIC is a public sector undertaking, people
of all ages have more faith in it as compared to other private sector
companies.
Age Preferences:

Standardization:
In the case of forward contracts the amount of commodities to be
delivered and the maturity date are negotiated between the buyer and seller and can be
tailor made to buyer’s requirements. In a futures contract both these are standardized by
the exchange on which the contract is traded.

Clearing House:
The exchange acts a clearing house to all contract struck on the trading
floor. For instance a contract is struck between capital A and B. Upon entering into the
records of the exchange, this is immediately replaced by two contracts, one between A
and the clearing house other between B and the deal. Where it is a buyer to seller, and
seller to buyer. The advantage of this is that A and B do not have to under take any
exercise to investigate each other’s credit worthiness. It also guarantees financial
integrity of the market. The enforces the delivery for the delivery of contracts held for
until maturity and protects itself from default risk by imposing margin requirements on
traders and enforcing this through a system called marking to-market
Actual delivery is rate:
In most of the forward contracts, the commodity is actually
delivered by the seller and is accepted by the buyer. Forward contracts are entered into
for acquiring or disposing of a commodity in the future a gain at a price known today. In
contract to this, in most futures markets, actual delivery takes place in less than one
percent of the contracts traded. Futures are used as device to hedge against price risk and
as a way of betting against price movements rather than a means of physical acquisition
of the underlying asset. To achieve, this most of the contract entered into are nullified by
the matching contract in the opposite direction before maturity of the first.

35

Margins:
In order to avoid unhealthy competition among clearing members in reducing
margins to attract customers, a mandatory minimum margins are obtained by the
members from the customers. Such insures the market against serious liquidity arising
out of possible defaults by the clearing members. The members collect margins from
their clients has may be stipulated by the stock exchanges from time to time and pass the
margins to the clearing house on the net basis i.e. at a stipulated percentage of the net
purchase and sale position.

The stock exchange imposes margins as follows:-

1. Initial margins on both the buyer as well as the seller

2. The accounts of buyer and seller are marked to the market daily.
The concept of margin here is same as that of any other trade, i.e. to introduce a
financial stake of the client, to ensure performance of the contract and to cover day to day
adverse fluctuations in the prices of the securities.
The margin for future contracts has two components:-

1. Initial margin
2. marking to market

Initial margin:
In futures contract both the buyer and seller are required to perform the
contract. Accordingly, both the buyer and seller are required to put in the initial margins.
The initial margin is also known as the “Performance margin” and usually 5% to 15% of
the purchase price of the contract. The margin is set by the stock exchange keeping in
view the volume of business and size of transactions as well as operative risks of the
market in general.

The concept being used by NSE to compute initial margin on the futures transactions I
called “Value at Risk” (VAR) where as the options market had “SPAN based margin
system”

36

Marking to Market

Marking to market means, debiting or, crediting the client’s equity

accounts with the losses/profits of the day, based on which margins are sought.

It is important to note that through marking to market process, die clearing

house substitutes each existing futures contract with a new contract that has the settle
price or the base price. Base price shall be the previous day’s closing Nifty value. Settle
price is the purchase price in the new contract for the next trading day.

FUTURES TERINOLOGY
Spot price:-The price at which an asset trades in spot market.

Futures prices:-the price at which the futures contract trades in the futures market.

Expiry date:-It is the date specified in the futures contract. This is the lat day on which
the contract will be traded, at the end of which it will cease to exist.
Contract size:-The amount of asset that has to be delivered under one contract. For
instance contract size on NSE futures market is 100 Nifities
.
Basis/spread:-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 normal market, basis will be positive. This reflects that futures prices
normally exceed spot prices.

Cost of carry:-the relationship between futures prices and spot prices can be summarized
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.

Multiplier:-It is pre-determined value, used to arrive at the contract size. It is the price
per index point.

Tick size:-It is the minimum price difference between two quotes of similar nature.

Open interest:-Total outstanding long/shot positions in the market in any specific point

Long position:-Out standing /Unsettled purchase position at any point of time

37

Short position:-out standing /Unsettled sale position at any point of time

Contract Month:-The month in which the contract will expire.

Volume:-No of contracts traded during a specific period of time, during a day during a
week or during a month.

Physical deliver:-Open position at the expiry of the contract is settled through delivery
of the underlying. In futures market, delivery is low.

Cash settlement:-Open position in the expiry of the contract is settled in cash. These
contacts are designated as cash settled contracts. Index futures full in this category.

STOCK INDEX FUTURES:-

Stock Index futures are most are most popular financial futures, which have
been used to hedge or manage the systematic risk by the3 investors of the stock market.
They called Hedgers, who own portfolio of securities and exposed to systematic risk.
Stock index is the apt hedging asset since, the rise or fall due to systematic risk is
accurately shown in the stock index. Stock index futures contract is an agreement to buy
or sell a specified amount of an underlying stock index traded on a regulated futures
exchange for a specified price at a specified time in future.

Stock index futures will require lower capital adequacy and margin requirement
as compared to margins on carry forward of individual scrip’s. The brokerage cost on
index futures will be much lower. Savings in cost is possible through reduced bid-ask
spreads where stocks are traded in packaged forms. The impact cost will be much lower
incase of stock index futures as opposed to dealing in individual scraps. The market is
conditioned to think in terms of the index and there fore, would refer trade in stock index
futures. Futures, the chances of manipulation are much lesser.

The stock index futures are expected to be extremely liquid, given the speculative
nature of the our markets and overwhelming retail predication expected to be fairly high.
In the near future stock index futures will definitely see incredible volumes in India. It
will be a blockbuster product and is pitched to become the most liquid contract in the
world in terms of contract traded. The advantage to the equity or cash market is in the
fact that they would become less volatile as most of the speculative activity would shift to
stock index futures. The stock index futures market should ideally have more depth,
volumes and act a stabilizing factor for the cash market. However, it is too early to base
any conclusion on the volume are to form any firm trend. The difference between stock
index futures and most other financial futures contracts is that settlement is made at the
value of the index at maturity of the contract.

38

Example: If BSE Sensex is at 6800 and each point in the index equals to Rs. 30, a
contract struck at this level could work Rs.204000 (6800*30). If at the expiration of the
contract, the BSE Sensex is at 6850, a cash settlement of Rs.1500 is required (6850-
6800)*30).

STOCK FUTURES:-
With the purchase of futures on a security, the essentially makes a legally
binding promise or obligation to buy the underlying security at some point in the future
(The expiration date of the contract). Security futures do not represent ownership in a
corporation and the holder is therefore not regarded as a share holder.

A futures contract represents a promise to transact at some point in the future. In

this light, a promise to sell security is just as easy to make as a promise to buy security.
Selling security futures without previously owning them simply obligates the trader to
sell a certain amount of the underlying security at some point in the future. It can be
done just as easily as buying futures, which obligates the trader to buy a certain amount
of the underlying security at some in future.
 Example: If the current price of the ACC share is Rs.270 per share. We believe
that in one month it will touch Rs. 300 and we buy ACC shares. If the price really
increases to Rs.300, we made a profit of Rs.30 i.e. a return of 18%.

If we buy ACC futures instead, we get the same position as ACC in the cash
market, but we have to pay the margin not the entire amount. In the above example if the
margin were 20% we would pay only Rs.54 initially to enter into the futures contract. If
ACC share goes up to Rs. 200 as expected, we still earn Rs.30 as profit.

39

PAYOFF FOR FUTURES CONTRACTS:-

Futures contracts have liner payoffs. In simple words, it means that the losses as
well as profits for the buyer and the seller of a futures contract are unlimited. These liner
payoffs are fascinating as they can be combined with options and the underlying to
generate various complex payoffs.

Payoff for buyer of futures:-Long futures

The payoff for a person who buys a futures contract is similar to the pay off for a
person who holds an asset. He has a potentially unlimited upside as well as potentially
unlimited downside.

Take the case of a speculator who buys a two-month Nifty index futures contract
when Nifty stands at 1220. The underlying asset in this case is Nifty portfolio. When the
index moves up, the long futures position starts making profits, and when index moves
down it starts making losses.
 40

Payoff for seller of futures: short futures

The pay off for a person who sells a futures contract is similar to the payoff for a person
who shorts an asset. He has potentially unlimited upside as well as potentially unlimited
downside.
 Take the case of a speculator who sells a two month Nifty index futures contract
when the Nifty stands at 1220. The underlying asset in this case is the Nifty portfolio.
When the index moves down, the short futures position starts making profits, and when
index makes up, it starts making losses.

PRICING FUTURES:-
Cost of carry model:-
We use fair value calculation of futures to decide the no arbitrage limits on the
price of the futures contract. This is the basis for the cost-of carry model where the price
of the contract is defined as follows.

F=S+C
Where
F Futures price
S spot price
C Holding cost or Carrie cost
This can also be expressed as

41

F=S (1+r) T
Where
r Cost of financing
T Time till expiration
Pricing index futures given expected dividend amount:-
The pricing of index futures is also based on the cost of carry model where the
minus the present value of the dividends obtained from the stocks in the index portfolio.

Example:
Nifty futures trade on NSE as one, two and three month contracts. Money can be
barrowed at a rate of 15% per annum. What will be the price of a new two-month futures
contract on nifty?

1. Let us assume that ACC will be declaring a dividend of Rs.10 per share after 15
Days of purchasing of contract
2. Current value of Nifty is 1200 and Nifty trade with a multiplier of 200
3. Since Nifty is traded in multiples of 200 value of the contract is
200*1200=240000
4. If ACC as weight of 7% in nifty , its ;value in Nifty is Rs. 16800 i.e (240000*.07)
5. If the market price of ACC is Rs.140, then a traded Unit of Nifty involves
120 shares of ACC i.e.(16800/140)

To calculate the futures price we need to reduce the cost of carry to the extent of
dividend received is Rs. 1200 i.e. (120*10). The dividend is received 15 days later and
hence compounded only for the remainder of 45 days. To calculate the futures price we
need to compute the amount of dividend received for unit of Nifty. Hence, we divided
the compounded figure by 200.
6. Thus futures prices.

F=1200(1.15)60/365-(120*10(1.15)45/365)/200=Rs.1221.80

Pricing index futures given expected dividend yield

42

If the dividend flow through out the year is generally uniform, i.e. if there are few
historical cases of clustering of dividends in any particular month, it is useful to calculate
the annual dividend yield.

F=S (1+r-q) T
Where
F future price
S spot price
R cost of financing
Q expected dividend yield
T Holding period

Example: A two-month futures contract trades on the NSE. The cost of financing
is 15% and the dividend yield on Nifty is 2% annualized. The spot value of Nifty is
1200. What is the fair value of the futures contract?

Pricing stock futures:-

A futures contract on a stock gives its owner the right and the obligation to buy or
sell the stocks. Like index futures, stock futures are also cash settled. There is no
delivery of the underleaying stock. Pricing stock futures when no dividend is expected

The pricing of stock futures is also based on the cost carry model, where the
carrying cost is the cost of financing the purchase of the stock, minus the present value of
the dividends obtained from the sock. If no dividends are expected during the life of the
contract, pricing futures on the stock is very simple. It simply involves the multiplying
the spot price by the cost of carry.

Example: SBI futures trade on NSE as one, two and three month contracts. Money can
be barrowed at 15% per annum. What will be the price of a unit new two –month futures
contact on SEBI if no dividends are expected during the period?

43

1. Assume that the spot price of SBI is Rs.288

2. Thus, futures price F=288(1.5)60/365=Rs.233.30

When dividends are expected during the life of futures contract, pricing involves
reducing the cost of varying to the extent of the dividends. The net carrying cost is the
cost of financing the purchase of the stock, minus the present value of the dividends
obtained from the stock.
Example: ACC futures trade on NSE as one, two and three month contracts.
What will be the price of a unit of new two-month futures contract on ACC if
dividends are expected during the period?

1. Let us assume that ACC will be declaring a dividend of Rs.10 per share after
15days purchasing contract.
2. Assume that the market price of ACC IS Rs.140/-
3. To calculate the futures price, we need to reduce the cost of carrying to the extent
of dividend received 15 days later and hence, compounded only for the remaining
45 days.
4. Thus, the futures price
5. F=140(1.15)60/365-10(1.15)45/365=Rs.133.08

44
OPTONS
 An option is a derivatives instrument since its value is derived from the
underlying asset. It is essentially a right, but not an obligation to buy or sell an asset.
Options can be a call option (right to buy) or put option (right to sell). An option is
valuable if and only if the prices are varying.

An option definition has a fixed period of life, usually three to six months. An
option is a wasting asset in the sense that the value of an option diminishes has the date of
maturity approaches and on the date off maturity it is equal to Zero.

An investor in option has four choices before him. Firstly, he can buy a call
option meaning a right to buy an asset after a certain period of time. Secondly, he can
buy a put option meaning a right to sell an asset after a certain period of time. Thirdly, he
can write a call option meaning he can sell the right to buy an asset to another investor.
Lastly, he can write a put option meaning he can sell a right to sell to another investor.
Out of the above for cases in the first two cases the investor has to pay an option
premium while in the last two cases the investors receives an option premium.

Definition:- An option is a derivative i.e. its value is derived from something else. In the
case o f the stock option its value is based on the underlying stock equity. In the case of
the index option, its value is based on the underlying index.

Option clearing corporation:-

The option clearing corporation (OCC) is guarantor of all exchange- traded
options once an option transaction has been completed. Once a seller has written an
option and a buyer has purchased that option, the OCC takes over it. It is the
responsibility of the OCC who over sees the obligations to fulfill the exercises. If I want
to exercise an ACC November 100 call option, I notify my broker. My broker notifies
the OCC, the OCC then randomly selects a brokerage firm, which is short one ACC
November 100-call option means it must come up with 100 shares of ACC stock. That
brokerage firm then notifies one

45

Of its customers who have written one ACC November 100 cell option and exercise it.
The brokerage firm customer can be chosen in two ways. He can be chosen at random or
FIFO basis. Because, OCC has a certain risk that the seller of the option cant full the
contact, strict margin requirement are imposed on seller. This margin requirement acts as
a performance Bond. It assures that OCC will get its money.

Options Terminology:-
Call option:-A call option gives the holder the right but not the obligation to buy an asset
by a certain date for a certain price.
Put option:-A put option gives the holder the right but not the obligation to sell an asset
by a certain date for a certain price
Option price:-Option price is the price, which the option buyer pays to the option seller.
It is also referred to as the option premium.
Expiration date:-The date specified in the option contract is known as the expiration
date, the exercise date, the straight date or the maturity date.
Strike price:-The price specified in the option contract is known as the strike price or the
exercise price
American option:-American options are the options that the can be exercised at any time
up to the expiration date. Most exchange- traded options are American.
European options:- European options are the options that can be exercised only on the
expiration date it self European options are easier to analyze than the American option,
and properties of an American option are frequently deduced from those of its European
counter part
In-the-money option:-An In-the-money option (ITM) is an option that would lead to a
positive case flow to the holder if it were exercised immediately. A call option in the
index is said to be in the money when the current index stands at higher level than the
strike price (i.e. spot price> strike price). If the index is much higher than the strike price
the call is said to be deep in the money. In the case of a put option, the put is in the
money if the index is below the strike price

46

At-the-money option:-An At-the-money option (ATM) is an option that would lead to

Zero cash flow if it were exercised immediately. An option on the index is at the money
when the current index equals the strike price (i.e. spot price=strike price).
Out-of-the-money option:-An out of the money (0TM) option is an option that would
lead to a negative cash flow if it were exercised immediately. A call option on the index
is out of the money when the current index stands at a level, which is less than the strike
price (i.e. spot price < strike price). If the index is much lower than the strike price the
call is said be deep OTM. In the case of a put, the put is OTM if the index is above the
strike price.

Intrinsic value of on option:-It is one the components of option premium. The intrinsic
value of a call is the amount the option is in the money, if it is in the money. If the call is
out of the money, its intrinsic value is zero. For example X, take that ABC November
call option. If ABC is trading at 102 and the call option is priced at 2, the intrinsic value
is 2, if ABC November-100 put is trading at 97 the intrinsic value of put option is 3. If
ABC stock were trading at 99, an ABC November call would have no intrinsic value and
conversely if ABC stock were trading at 101 an ABC November 100 put options would
have no intrinsic value. An option must be in the money to have intrinsic value.
Time ha s only time value. Usually, the maximum time value exits when the option is
ATM. The longer the time to

Characteristics of options:-
The following are the main characteristics of option:
1. Options holders do not receive any dividend or interest.
2. Options yield only capital gains
3. Options holder can enjoy a tax advantage.
4. Options are traded on O>T>C and in all recognized stock exchanges.
5. Options holders can control their rights on the underlying asset.
6. Options holder can enjoy a much wider risk-return combinations.
7. Options can reduce the total portfolio transaction costs.
8. Options can reduce the total portfolio transaction costs.
9. Options enable with the investors to gain a better return with a limited amount of
investment.

47

Call Option:-
 An option that grants the buyer the right to purchase a designated instrument is called a
call option. A call option is contract that gives its owner the right but not the obligation;
on buy a specified asset at specified price on or before a specified date.

An American call option can be exercised on or before the specified date. But, a
European option can be exercised on the specified date only;
The writer of the call option may or may not own the shares for which the call is written.
If he owns the shares it is a ‘Covered call’ if he does not own the shares it is a ‘Naked
call’

Strategies:- The following are the strategies adopted by the parties of a call option.
Assuming that brokerage, commissions, margins, premium, transaction coasts and taxes
are ignored

A call option buyer’s profit/ loss can be defined as follows:

At all points where spot price< exercise price, there will be loss.
At all points where spot price> exercise price, there will be profit
Call Option buyer’s losses are limited and profits are unlimited.

Conversely, the call option writer’s profit/loss will be as follows:

At all points where sport price< exercise price, there will be loss.
At all points where spot price> exercise price, there will be profit
Call option writer’s profits are limited and losses are unlimited.

Following is the table, which explains In-the-money, Out-of-the-money and At-the-

money positions for a call option.

48

Exercise call option Spot price>Exercise price In-the-money

Do not exercise Spot price<Exercise price Out-of-the-money
Exercise/do not exercise Spot price=Exercise price At-the-money

Example:
The current price of ACC share is Rs.260.holder expect that price in a three
month period will go up to Rs.300 but, holder do fear that the price may fall down below
Rs.260. to reduce the chance of holder risk and at the same time, to have an opportunity
of making profit, instead of buying the share, the holder can buy three-month call option
on ACC share at an agreed exercise price of Rs.250

1. If the price of the share is Rs.300 then holder will exercise the option since he get
a share worth Rs.300 by paying a exercise price of Rs.250 holder will gain Rs.50.
Holders call option is In-the-money at maturity.
2. If the price of the share is Rs.200 then holder will not exercise the option. Holder
will gain nothing. It is Out-of-the-money at maturity.

Payoff for buyer of call option: Long call

The profit/loss that the buyer makes on the option depends on the spot price of the
underlying. If upon expiration, the spot price exceeds the strike price, he makes a profit.
Higher the spot price more is the profit he makes. If the spot price of the underlying is
less than the strike price, he lets his option un-exercise. His loss in this case is the
premium he paid for buying the option.

49

The figure shows the profits/losses for the buyer of the three-month Nifty 1250
underlying call option. As can be seen, as the spot nifty rises the call option is in the
money. If upon expiration Nifty closes above the strike of 1250, the buyer would
exercise his option and profit to the extent of the difference between the Nifty-close and
strike price However if Nifty falls below the strike of 1250, he lets the option expire and
his losses airs limited to the premium he paid i.e86.60.

Pay off writer of call option:- short call

For selling the option, the writer of the option changes premium, whatever is the buyer’s
profit is the seller’s loss. If up bon expiration, the spot price exceeds the strike price, the
buyer will exercise the option on the writer. Hence as the spot price increases the writer
of the option starts making losses. Higher the spot price more is the loss he makes. If
upon expitation the spot price is less than the strike price, the buyer lets his option un-
exercised and the writer gets to keep the premium.

Pay off for writer of call option

The figure shows the profits/losses for the seller of a three-month Nifty 1250 call option.
If upon expiration Nifty closes above the strike of 1250, the buyer would exercise his
option on the writer would suffer a loss to the difference between the nifty-close and the

50

strike price. This loss that can be incurred by the writer of the option is potentially
unlimited. The maximum profit is limited to the extent of up-font option premium
Rs.86.60
Put Option:-
An option that gives the seller the right to sell designated instrument is called put
option is a contract that gives the owner the right, but not the obligation to sell a specified
number of shares at a specified price on or before a specified date.
At American put option can be exercised on or before the specified date. But a
European option can be exercised on the specified date only.

The following are the strategies adopted by the parties of put option:-
A put option buyer profit/loss can be defined as follows:
At all options where spot price < exercise price, there will be gain.
At all options where spot price > exercise price, there will be loss.

Conversely, the put option writers profit/loss will be as follows:

At all points where spot price< exercise there will be loss
At all points where spot > exercise price there will be profit.
Following is the3e table, which explains In-the-money, Out-of-the=money and At-the-
money position for a put option.

Exercise Put option Spot price<Exercise price In-the-money

Do not exercise Spot price>Exercise price Out-of-the-money
Exercise/do not exercise Spot price=Exercise price At-the-money

Example:
The current price of ACC share is Rs.250 Holder buy a three month put option at
exercise price of Rs.260(holder will exercise his option only if the marker price/spot price
of the ACC share is Rs.245, then the holder will exercise the option. Means put option
holder will buy the share for Rs245, in the market and deliver it to the put option writer
for Rs.260, the holder will gain Rs.15. from the contract.

51

Payoff buyer of put option: long put

A put option gives the buyer the right to sell the underlying asset at the strike
price specified in the option. The profit/loss that the buyer makes on the option depends
on the spot price of the underlying. If upon the expiration, the spot price is below the
strike price, he makes a profit. Lower the spot price more is the profit he makes. If the
spot price of the underlying is higher than the strike price, he lets his option expire un
exercised.

The figure shows the profits/losses for the buyer of a three-month Nifty 1250 put option.
As can be seen, as the spot Nifty falls, the put option is in the money. If up on expiration,
Nifty closes below the strike of 1250, the buyer would exercise his option and profit to
the extent of the difference between the strike piece and Nifty-close. The profits possible
on this option can be as high as the strike price. However if Nifty rises above the strike
of 1250, he lets the option expire. His losses are limited to the extent of the premium he
paid.

52

Pay off for writer of put option:

 The figure below shows below shows the profits/losses for the seller/writer of a
three-month put option. As the spot Nifty falls, the put option is In-the-money and the
writer starts making losses. If upon expiration, Nifty closes below the strike of 1250, the
buyer would exercise this option on writer who would suffer losses to the extent of the
difference between the strike price and nifty-close.

Pay for writer of put option

The loss that can be incurred by the writer of the option is to a maximum extent of strike
price. Maximum profit is limited to premium charged by him.

53

Pricing options:

Factor determining options value:

 Exercise price and share price:-If the share price is more than the exercise price
then the holder of the call option will get more net payoff, means the value of the call
option is more. If the share price is less than the exercise price then the holder of the put
option will get more net pay-off.

Interest rate:-The present value of the exercise price will depend on the interest
rate. The value of the call option will increase with the rise in interest rates. Since, the
present value of the exercise price will fall. The effect is reversed in the case of a put
option. The buyer of a put option receives exercise price and therefore as the interests,
the value of the put option will decrease.

Time to expiration:-The present value of the exercise price also depends on the time
to expiration of the option. The present value of the exercise price will be less if the time
to expiration is longer and consequently value of the option will be higher. Longer the
time to expiration higher is the possibility of the option to be more in the money.

Volatility:-The volatility part of the pricing model is used to measure the

fluctuations expected in the value of the underlying security or period of time. The more
volatility the underlying security, the greater is the price of the option. There are two
different kinds of volatility. They are historical volatility and implied volatility.
Historical volatility estimates volatility based on past prices. Implied volatility starts
with the option price as a given, and works backward to ascertain the theoretical value of
volatility which is equal to the market price minus any intrinsic value.

54

Black scholes pricing model:-

The principle that options can completely eliminate market risk from a
stock portfolio is the basis of Black Scholes pricing model in 1973. Interestingly, before
Black and Scholes came up with their option pricing model, there was a wide spread
belief that the expected growth of the underlying ought ton effect the option price. Black
and Scholes demonstrate that this is not true. The beauty of black and scholes model is
that like any good model, it tells us what is important and what is not. It doesn’t promise
to produce the exact prices that shows up in the market, but certainly does a remarkable
job of pricing options with the framework of assumptions of model.

The following are the assumptions:

1. There are no transaction costs and taxes

2. The risk from interest rate is constant
3. The markets are always open and trading is continues.
4. The stock pays no dividend. During the option period the firm should not pay any
dividend.
5. The option must be a European option.
6. There are no short selling constraints and investors get use of short sale proceeds.
The options price for a call computed
The options price for a call computed (per the following Black Scholes formula:
VC=Ps N (d1) - Px / (e (RF) (T) N (d2)

The value of put option as per Black scholes formula:

Up=Px / (e (RF) (T) N (-d2)-Ps N (-d1)
Where
D1 = In [Ps/Px] +T [RF+ (S.D)2/2]/S.D (sqrt (T)
D2=d1-S.D (sqrt (T))
Vc= Value of Call option
Vp= Value of Put option
Ps= Current price of the share
Px = exercise of the share
RF=Risk free rate
T= Time period remaining to expiration

55

The value of put option as per Black scholes formula:

N (d1) = after calculation of d1 value, normal distribution are is to be identified.
N (d2) = after calculation of d2 value, normal distribution area is to be identified
S.D = Risk rate of the share ratio
In=Natural log value of ratio of Ps and Px

Pricing Index Options:-

Under the assumptions of Black Scholes options pricing model, Index options should
be valued in the way as ordinary options on common stock. The assumption is that the
investors can purchase the underlying stocks in the exact amount necessary to replicate
the index. I.e. Stocks are infinitely divisible and that the index follows diffusion process
such that the continuously compounded returns distribution of the index is normally
distributed. To use the black scholes formula for index options we must however, make
adjustments for the dividend payments received on the index stocks. If the dividend
payment is sufficiently smooth, this involves the replacing the current index value S in
the model with S/ e qt where q is the annual dividend and T is the item to expiration in
years.

Pricing Stock Option:-

The Black Scholes options pricing formula that we used to price European calls and
Puts, with some adjustments can be used to price American calls and puts& stocks.
Pricing American option becomes a little difficult because, Unlike European options,
American options can be exercised any time prior to expiration. When no dividend are
expected during the life of options the option can be valued simply by substituting the
value of the stock price, strike price, stock volatility , risk free rate and time to expiration
in the black Scholes formula. However, when dividends are expected during he life of
the options, it is some times optimal to exercise the option just before the underlying
stocks goes ex-dividend. Hence, when valuing options on dividend paying stocks we
should consider exercise possibilities in two situations. One –just before the underlying
stock goes Ex-dividend Two-at expiration of the option contract. There fore owning an
option on a dividend paying stock today is like owning two options one in long maturity
option with a time to maturity form today till the Expiration date, and other is a short
maturity option with a time to maturity form today till just before the stock goes Ex-
dividend.

56
 Difference between futures &options

Futures Options
1.Both the parties are obligated to 1.Only the seller is obligated to perform
perform
2. In options the buyer pays the seller a
2. In futures either parties pay premium.
premium.

3. The parties to the futures contract 3. The buyer of an options contract Can
must perform at eh settlement date exercise the option any time prior to
only. They are not obligated to expiration date.
perform before the date.

4. The holder of the contract is exposed 4. The buyer limits downside risk to the
to the entire spectrum of downside risk option premium, but retains the upside
and had the potential for all the upside potential.
return.

5. In futures margins are to be paid. 25. In option premium are to be paid.

They are approximately 15 to 20% on But they are less as compared to
the current stock price. Perform margins in futures.

57
 LOT SIZE OF LISTED COMPANIES

COMPANY NAME CODE LOT SIZE

ABB ltd. ABB 200
Associated Cement co. ltd. ACC 750
Allahabad Bank ALBK 2450
Ashok Leyland Ltd. ASHOKLEY 9550
Arvind Mill Ltd ARVINDMILL 2150
Bajaj auto Ltd. BAJAJAUTO 200
Bank of Baroda BANKBARODA 1400
Bank of India BANKINDIA 1900
Bharat Electronics Ltd. BEL 550
Bharat Forge co Ltd. BHARATFORG 200
Bharat Tele-Ventures Ltd. BHARTI 1000
Bharat Heavy Electricals BHEL 300
Ltd.
Bharat Petroleum BPCL 550
corporation Ltd.
Cadila Healthcare Limited CADILAHC 200
Canara Bank CANBK 500
Centurey Textiles Ltd. CENTURYTEX 850
Chennai Petroleum corp. CHENNPETRO 950
Cipla Ltd. CIPLA 1000
Kochi Refineries Ltd. COCHINREFN 1300
Colgate Palmolive Ltd. COLGATE 1050
Dabur India Ltd. DABUR 1800
GAIL (India) Ltd. GAIL 1500
Great Eastern shipping co. GESHIPPING 1350
Glasosmithkline pharma co. GLAXO 300
Grasim Industries Ltd. GRASIM 175
Gujarat Ambuja Cement co. GUJAMBCEM 550
HCL Technologies Ltd. HCLTECH 650
Housing Development HDFC 300
finance corporation Ltd.
HDFC Bank Ltd. HDFCBANK 400
Hero Honda Motors Ltd. HEROHONDA 400
Hindalco Industries Ltd. HINDLCO 150
Hindustan Petroleum HINDPETRO 650
Corporation Ltd.
ICICI Bank Ltd. ICICIBANK 700
IDBI Ltd. IDBI 2400
Indian Hotels Co. Ltd. INDHOTEL 350
Indian Rayon and Industries INDRAYON 500
Infosys Technologies Ltd. INFOSYSTCH 100

58

Indian Overseas Bank IOB 2950

Indian Oil Corporation Ltd. IOC 600
ITC Ltd. ITC 150
Jet Airways (Indian) Ltd. JETAIRWAYS 200
Jindal Steel & Power Ltd. JINDALSTEL 250
Jaiprakash Hydro-Power JPHYDRO 6250
Cummins India Ltd. KIRLOSKCUM 1900
LIC Housing Finance Ltd. LICHSGFIN 850
Mahindra & Mahindra Ltd. M&M 625
Matrix Laboratories Ltd. MATRIXLABS 1250
Manglore Refinery and MRPL 4450
Petrochemicals Ltd.
Mahanagar Telephone MTNL 1600
Nigam Ltd.
National Aluminium Co. NATIONALUM 1150
Ltd.
Neyveli Lignite Corporation NEYVELILIG 2950
Nicolas Priramal India Ltd. NICOLASPIR 950
NTPC Ltd. NTPC 3250
ONGC Ltd. ONGC 300
Oriental Bank of Commerce ORIENTBANK 600
Patni Computer Sys Ltd. PATNI 650
Punjab National Bank PNB 600
Ranbaxy Laboratories Ltd. RANBAXY 200
Reliance Energy Ltd. REL 550
Reliance Capital Ltd. RELCAPITAL 1100
Reliance Industries Ltd. RELIANCE 600
Satyam Computer Ltd. SATYAMCOMP 600
State Bank of India SBIN 500
Shipping Corporation of SCI 1600
India Ltd.
Siemens Ltd. SIEMENS 150
Sterlite Industries Ltd. STER 350
Sun Pharmaceuticals India. SUNPHARMA 450
Tata Chemicals Ltd. TATACHEM 1350
Tata Consultancy Services TCS 250
Ltd.
Tata Power Co. Ltd. TATAPOWER 800
Tata Tea Ltd. TATATEA 550
Tata Motors Ltd. TATAMOTORS 825
Tata Iron and Steel Co. Ltd. TISCO 675
Union Bank of India UNIONBANK 2100
UTI Bank Ltd. UTIBANK 900
Vijaya Bank VIJAYABANK 3450

59

LOT SIZE OF SELECTED COMPANIES FOR ANALYSIS

 CODE LOT SIZE COMPANY NAME
ACC 750 Associates Cement
companies ltd.
TCS 250 Tata consultancy services

FEDRAL BANK 200 Fedral bank of India Ltd.

GAIL 1500 Authority of India ltd.

BHEL 300
Bharat Heavy Electricals
ltd.

The following tables explain about the trades that took place in futures and options
between 21/01/08 to 25/01/08. The table has various columns, which explain various
factors involved in Derivating trading.

• Date- the day on which trading took place

• Closing premium- premium for that day

• Open interest- No. Options that did not get exercised

• N.O.C – No of contracts traded on that day

• Closing price- The price of the Futures at the end of the trading day.

60

FUTURES OF ACC CEMENTS

 Date Open High Low Close Open N.O.C
dd/mm/yy Rs Rs. Rs. Rs. Int(‘000)
21-07-08 860 866 662 738.10 3361 2972
22-07-08 650 725 600 711.25 2787 3513
23-07-08 738 800 690 750.45 2565 2035
24-07-08 761 803 742 797.45 2472 1398
25-07-08 779 782 741 761.70 2280 1820

C losing Price Movements of ACC Open interest

820 4000
800 3500
780 3000
760 2500
Clos ing 2000
740 Open Int
Rs 1500
720
700 1000
680 500
660 0

-0 08

1- 8
08
08

08
08

08

08

23 200

24 200

0
22 -20

25 -20
20
20

20
20

20

20

1-

1-
1

1
1-

1-

1-

1-

1-

-0
-0

-0

-0
-0

-0

-0

-0

-0

21
21

22

23

24

25

No of contracts traded per day

4000
3500
3000
2500
2000 Area 1
1500
1000
500
0
21- 22- 23- 24- 25-
01- 01- 01- 01- 01-
2008 2008 2008 2008 2008

61

FINDINGS:
 • The price rose from738.10 on first day to 21 January, where it stood at 797.45 as
high. As the players in the market with an intention to short or correct the market,
the player’s showed a bearish attitude for the next day where the price fell to 711
and immediately rose to 750.45. Later being the last trading day of the week
again the players became bears as to keep a negative for the next week, which
surge the price to 761.70 for the last day of the trading week.

• In the trading week most of the players closed up their contracts to make profit.
As the price was low, the open interest was low and the no. of contracts traded
declined to 1398.

• There always exist an impact of price movements on open interest and contracts
traded. The futures market is also influenced by cash market, NIFTY index
future, and news related to the underlying assed or sector (industry), FII’S
involvement, national and international affairs etc.

62

FUTURES OF TCS
Date Open High Low Close Open N.O.C
dd/mm/yy Rs Rs. Rs. Rs. Int(‘000)
21-07-08 900 909 813 835.85 5302 6135
22-07-08 810 849 670 798.20 4555 6752
23-07-08 888 888 770 864.40 4339 3978
24-07-08 862 867 821 852 3326 2918
25-07-08 889 939 872 931 3612 3989

Closing Price Movements of TCS Open interest

900 6000
880 5000
860 4000
840 Clos ing
820 3000 Open Int
Rs 2000
800
780 1000
760
740 0

-0 08

1- 8
08
08

08
08

08

08

23 200

24 200

0
22 -20

25 -20
20
20

20
20

20

20

1-

1-
1

1
1-

1-

1-

1-

1-

-0
-0

-0

-0
-0

-0

-0

-0

-0

21
21

22

23

24

25

No of contracts traded per day

8000
7000
6000
5000
4000 Price
3000
2000
1000
0
21- 22- 23- 24- 25-
01- 01- 01- 01- 01-
2008 2008 2008 2008 2008

63

FINDINGS:

• The week showed a buy and buy for the TCS stock futures. Since the beginning
 Of the trading day of the week the figures had been representing a continuous bullish

Market for the TCS. The software sector is considered to be one of most eye watch

For investors for investing.

64

FUTURES OF FEDRAL BANK

Date Open High Low Close Open N.O.C

dd/mm/yy Rs Rs. Rs. Rs. Int(‘000)
21-01-08 319 323 281 305.20 1656 470
22-01-08 251 285 245 266.40 1528 381
23-01-08 275 312 273 301.26 1448 195
24-01-08 315 331 314 329.10 1077 348
25-01-08 314 318 308 310 876 86

Closing Price Movements of Fedral Bank Open interest

350 2000
300 1500
250
200 Clos ing 1000 Open Int
150 Rs
100 500
50
0 0

-0 08

1- 8
08
08

08

08

08

08

23 200

24 200

0
22 -20

25 -20
20
20

20
20

20

20

1-

1-
1

1
1-

1-

1-

1-

1-

-0
-0

-0

-0
-0

-0

-0

-0

-0

21
21

22

23

24

25

No of contracts traded per day

500
400
300
Price
200
100
0
21- 22- 23- 24- 25-
01- 01- 01- 01- 01-
2008 2008 2008 2008 2008

65

FINDINGS:
• After the market is quite relieved by the fall in the discount on the NIFT in the
futures and options segment, which was used by players to short the market. The
market showed a positive upward movement in F&O segment and cash market
during the first day of the week.

• The future of Fedral bank had shown a bears way till 25th of the week whose
impact shown on the open interest and contracts traded.

• The market for Fedral bank on the day of the trading week showed decline in the
closing price when compare with the weeks high price. The Open interest closed
at 876 with lowest 86 contracts on the last trading day of the week.

66

FUTURES OF GAIL
Date Open High Low Close Open N.O.C
dd/mm/yy Rs Rs. Rs. Rs. Int(‘000)
21-01-08 472 472 390 417.55 6395 3749
22-01-08 401 410 335 398.30 5135 2974
23-01-08 420 451 370 444.40 4493 2122
24-01-08 406 450 406 440.15 3875 2257
25-01-08 417 423 396 421.05 3109 1667

Closing Price Movements of GAIL Open interest

450 7000
440 6000
430 5000
420 Clos ing 4000
410 3000 Open Int
Rs
400 2000
390 1000
380
370 0

-0 08

1- 8
08
08

08
08

08

08

23 200

24 200

0
22 -20

25 -20
20
20

20
20

20

20

1-

1-
1

1
1-

1-

1-

1-

1-

-0
-0

-0

-0
-0

-0

-0

-0

-0

21
21

22

23

24

25

No of contracts traded per day

4000
3500
3000
2500
2000 Price
1500
1000
500
0
21- 22- 23- 24- 25-
01- 01- 01- 01- 01-
2008 2008 2008 2008 2008

67

FINDINGS:
• The price gradually rose from on the day to 417.55, where it stood at 444.40 as
high. As the players in the market with an intention to short or correct the market,
the players showed a bearish attitude for the next day the price fell to 440.15.

• The no. of contract hit the peak of 3749 and declined to1667 because of players at
the point sold or closes up their contracts as a fear of fall or slows down in
market.

68

FUTURES OF BHEL
 Date Open High Low Close Open N.O.C
dd/mm/yy Rs Rs. Rs. Rs. Int(‘000)
21-01-08 2031 2301 1997 2119.20 3297 18828
22-01-08 1802 2090 1700 1988.30 2719 18469
23-01-08 2080 2278 2033 2138 2576 10377
24-01-08 2080 2099 2033 2087.60 1849 9982
25-01-08 2074 2099 2035 2072.60 1800 5865

Closing Price Movements of BHEL Open interest

3000 3500
3000
2500
2500
2000 2000
Clos ing
1500 1500 Open Int
Rs
1000 1000
500 500
0 0

-0 08

1- 8
08
08

08
08

08

08

23 200

24 200

0
22 -20

25 -20
20
20

20
20

20

20

1-

1-
1

1
1-

1-

1-
1-

1-

-0
-0

-0

-0
-0

-0

-0
-0

-0

21
21

22

23

24

25

No of contracts traded per day

20000
15000

10000 Price

5000

0
8

8
08

08
22 200

24 200

25 200
20

20
1-

1-

1-
1-

1-
-0

-0

-0
-0

-0
21

23

69

FINDINGS:
• The trading week showed a high and low strike prices or exercising prices for the
BHEL futures.

• The open interests shown bears market because of the huge correction done by FII
(Foreign Institutional Investors) in flows.

• The number of contracts traded High at 18828 and low at 5865.

70
 CONCLUSIONS

• Derivatives are mostly used for hedging purpose.

• In cash market the profit or loss of the investor depends on the current market
price, i.e. the investor or may get unlimited profitless, but in derivative market the
investor can enjoy unlimited profits by bearing limited losses.

• At present scenario the derivative market is increased to a great position the total
turnover of futures & options segment of the exchange in NSE around
Rs.22603.75Cr

• Index futures saw a trading volume of Rs.8082.77 Cr arising getting traded at a

national values of Rs.1799.41Cr in NSE.

• In the cash market 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.

• In derivatives market in the total profit loss position of option holder and option
writer purely depends on the market fluctuations. However both will enjoy the
profit losses.

82

SUGGESTIONS
• Trading procedures should be simplified all exchanges.
• Sub brokers should be introduced in the derivative markets also.

• In bullish market the call option writer will get more losses so the inviter is
suggested to get.

• For a call option holder and input option will get more losses so the inviter are
suggested to options input option writer.

• In British market the call option holder will get more losses sot he invested is
suggested to get for a call option holder and the put holder will get more losses
the inviter are suggested to opt put option writer.

• Contract size should be minimized because small investors are unable to effected
this huge.

• Lot sizes.

• SEBI as to make steps to reduce the speculation that is going on in the derivatives
market.

• SEBI as to make take further steps in the risk management mechanism.

• Investor must be aware of effective tools of shifting disk that is hedging.

83

BIBLIOGRAPHY
Indian financial system _______ M.Y. Khan

Investment Management _______ V.K. Bhalla

Options, futures & Other Derivatives ________ John.C.Hull

Website:-

www.Derivatives India.com

www.bseindia.com

www.nseindia.com

www.CBOT.com

www.google.com

84