INTRODUCTION

In the last 20 years derivatives have become increasingly important in the world of
finance. Futures and options are now trader actively on many exchanges through out world.
Forward contracts, swaps and many different types of options are regularly trade an out side
exchanges by financial institutions, fund managers and corporate treasures in what is termed
over – the – counter market. Derivatives sometimes added to a bond or a stock issue.
A derivative can be defined as a financial instrument whose value depends on (or derives
from) the value of other, more basic underlying variables. Very often the variables underlying
derivatives are the prices of traded assets. A stock option, for example, is derivative whose value
is dependent on price of stock. However derivative can be dependent on almost any variable
from the price of hogs to the amount of snow falling at certain ski resort
There have been many developments in the derivatives markets. There is now active
trading in credit derivatives, electricity derivatives, weather derivatives, and insurance
derivatives. Much new type of interest rate, foreign exchange and equity derivative products has
been credited. There have many new ideas in risk management and risk measurement. Analysis
have also become more aware of the need to analyze what are known as real option (these are
options acquired by a company when it invests in real assets such as real estates, plant and
equipment)
In this derivatives take first look at forwards, futures, options markets and provide an
over view of how there used by hedgers, speculators and arbitrageurs.
A derivative exchange is market where individual trade standardized contracts that have
been defined by the exchange. Derivatives exchanges have existed for long time. The Chicago
Board of Trade (CBOT, www.cbot.com) was established in 1848 to bring the farmers and
merchants together. Initially its main task was to standardize the quantities and qualities of grains
that were traded. With in few years the first future – type contract was developed. It was known
as to – arrive contract. Speculators soon became interested in the contract and found trading the
contract to be an attractive alternative to trading the grain itself. A rival future exchange, the
Chicago Mercantile Exchange (CME, www.cme.com) was established in 1919. Now futures
exchanges exist all over the world.

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 The Chicago Board Option Exchange (CBOE, www.cboe.com) standard treading call
options contract on 16 stocks in 1973 options had been traded prior to 1973 but the CBOE
succeeded in creating an orderly market with well-defined contracts. Put option contract started
trading on the exchange in 1977. The CBOE now trades options on over 1200 stocks and many
different stocks indices. Like futures, options have proved to be very popular contracts. Many
other exchange through out the world now trade options. The underlying assets include foreign
currencies and future contracts as well as stocks and stocks indices.
Traditionally derivatives traders have met on floor of an exchange and used shouting and
a complicated set of hand signals to indicate the trades they would like to carry out. This is
known as the open outcry system. In recent years exchanges have increasingly moved from the
open outcry system to electronic trading. The letter involves traders entering they desired trades
at keyboard and a computer being used to much buyer and seller. They seem little doubt that
eventually all exchanges will use electronic trading.

Economic liberalization has accelerated the pace of development in the derivatives market,
which has undergone a sea change during the last two decades. In India, the role of derivative
market in mobilizing and canalizing private capital for the economic development of the country
has increased over the years, and the derivative market itself has undergone structural
transformation with the introduction of Derivatives trading in Indian market.

Only recently Derivatives trading and Options, and Futures has emerged as separate academic
discipline in India. Derivative trading process has now become an integral part of financial
literature. The number of books available is much too complex as they discuss the subject at an
advanced level, incorporating quantitative analysis of a high order.

This study provides a compact yet comprehensive treatment of the fundamental principles and
theories of Futures, Options and other Derivatives. Numerical examples are used, wherever
necessary, to illustrate the application of principles and theories. But the discussion in this study

2
is descriptive rather than quantitative, so that it is intelligible even to common man who has little
knowledge of the intricacies of financial arithmetic.

The study report provides a basic understanding of Derivative and Futures, Options. The total
study report is organized in to different chapters. It begins with introduction, concepts, and
different aspects, trading strategies of future and options and over all explanation on Futures,
Options and Derivatives.

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 OBJECTIVE OF THE STUDY

• To study the role of derivatives in Indian financial markets.

• To study various trends in market.
• To study the role of stock exchange with emphasis on Hyderabad Stock Exchange.
• To make decisions of the holders regarding risk, safety and a host of other consideration.
• To study the in detail the role of Future & Option.

• To take decision of the holders recording risk, return and other considerations.

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 NEED FOR THE STUDY

Future and forward markets have existed in India for a very long time. yet
there are professionals in the field of finance talking negatively about these instruments. The
reason why I bring it up again is that it is very important to understand what the old system was
verse the new the old system were based on trust. They were closed group system and hence
deviation from truly competitive markets. Such closed group are vulnerable to problem when the
demand of the economy reach beyond the capacity of the group and the group has expended
without open and transparent criteria for entry, the net work of trust gets disrupted, with the
result that the system is disrupted by frauds.

On the other hand, the modern marketplace of future and option trading,
having well developed risk management, transparent rules for entry and stringent regulation, is
faceless. That the old type system had to transformed into a new is definitely clear they have
played a very important role in the past. In is merely that had to be transformed to modern
markets to keep up with the demand of the times.

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 METHODOLOGY OF THE STUDY

The present data is based upon Primary and Secondary data.

Primary source:

• Data given at training classes at Hyderabad Stock Exchange.

• Date collected from Internet.

Secondary source:

• Data collected from library at HSE.

• Data collected from Journals magazines, newspapers.
• Data collected from the reference books.

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 LIMITATIONS:

• The scope of the study is limited to Indian markets only

• The study on derivative requires in depth analysis time limitation was a big constraint
• The concept of derivatives is at introduction stage.
• Various models of derivatives calculations require on depth calculations.

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 INDUSTRY PROFILE
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 association of member brokers for the purpose of self-regulation and protecting the

interests of its member.

It can operate only if it is recognized by the Government under the securities contracts

(regulation) Act, 1956. The recognition is granted under section 3 of the Act by the Central

Government, Ministry of Finance.

BYE - 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 without the government permission or recognition;
stock exchanges are given monopoly in certain areas under section 19 of the above Act to ensure
that the control and regulation are facilitated. Recognition can be granted to a stock exchange

8
provide certain conditions are satisfied and the necessary information is supplied to the
Government. Recognition can also be withdrawn, if necessary. Where there are no stock
exchanges, the government can license some of the brokers to perform the functions of a stock
exchange in its absence.

SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI):

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

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

HISTORY OF STOCK EXCHANGE:

The only stock exchange operating in the 19th century were those of Bombay set up in

1878 and Ahmedabad set up in 1894. These were organized as voluntary on-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 of 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. 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.

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 BOMBAY STOCK EXCHANGE

This 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 an evolved over the years into its present status as the premiere 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 the 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 programmes.

A governing board comprising of 9 elected Directors, 2 SEBI nominees, 7 Public

representatives and an executive director is the apex body, which decides the policies and

regulates the affairs of the exchange.

The Executive Director as the Chief Executive Officer is responsible for the day today

administration of the exchange. The average daily Turnover of the Exchange during the Year

2000-01 April to March was 3984.19 Crs. the average number of daily traders 5.69 Lacks and

2001-02 the average daily turnover 1244.10 Crs. the average daily trader during the period 5.17

Lacks.

Abolition of account period settlements, introduction of compulsory rolling settlements in

all scripts traded on the exchanges w.e.f. December 31st 2001 etc., have adversely impacted the

liquidity and consequently there is a considerable decline in the daily turn over at the exchange.

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BSE INDICIES

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.

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 is the

only link to the original base period value of the SENSEX. The Divisor keeps the index

comparable over a period of time and if the reference point for the 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)

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NATIONAL STOCK EXCHANGE

The NSE was incorporated in November 1992 with an equity capital of Rs. 25 Crs. The
international securities consultancy (ISC) of Honkong has helped in setting up NSE, ISC has
prepared the detailed business plans and installation of hardware and software systems. The
promotions for NSE were financial institutions, insurances companies, banks and SEBI capital
market ltd., infrastructure leasing and financial services ltd and stock holding corporation ltd.

It has been set up strengthen the move towards professionalisation of the capital
Market as well as provide nation wide securities trading facilities to investors.

NSE is not an exchange in the traditional sense where brokers own and manage the
exchange. A two tier administrative set up involving a company board and a governing aboard
of the exchange is envisaged.

NSE is a national market for shares PSU bonds, debentures and government securities
since infrastructure and trading facilities are provided.
NSC – NIFTY:

The NSE on April 22nd 1996 launched a new equity index. 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 options.

“Nifty” means National Index for Fifty Stocks.

The NSE-50 Comprises 50 companies that represent 20 broad industry groups with an aggregate
market capitalization of around Rs. 1,70,000 Crs. All companies included in the index have a
market capitalization in excess of 500 Crs. Each and should have traded for 85% of trading days
at an impact cost of less extra 1.5%.

The base period for index is the close of prices on November 3rd 1995, which makes one

year of completion of operation of NSE’s capital market segment. The base value of the index

has been set at 1000.

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NSE – MIDCAP INDEX:

The NSE madcap index or the Junior Nifty comprises 50 stocks that represents 21 broad

industry groups and will provide proper representation of the madcap segment of the Indian

capital market. All stock in the index should have market capitalization of greater than 200 Crs.

and should have traded 85% of the trading days at an impact cost of less 2.5%.

The base period for the index is November 4th 1995, 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 lacks and number of average

daily traders 2,160 Laces.

OVER THE COUNTER EXCHANGE OF INDIA

OTCEI was incorporated under section 25 of the Companies Act in Oct 1990 and started

functioning from September 1992. OTCEI has been setup to meet a long felt need for a second

tier market where companies will small paid up capital with less than onerous could have the

advantage if listing.

It was promoted by All India financial institutions, Merchant banks, Subsidiaries of

public sector banks, and established as a recognized stock exchange under sec 4 of Securities

contracts (Regulation) Act.

OTC exchange is now nation wide and operated for more than 400 cities in India through

the nation wide information dissemination network, Internet. Any city in India can receive the

scrip prices of OTCEI in text. Scrip prices are generated by OTCEI’s central computer Bombay

and than broadcast on in text.

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 At present, there are 24 stock exchanges recognized under the securities contract

(Regulation) Act, 1956. They are:

NAME OF THE STOCK EXCHANGE YEAR

Bombay Stock Exchange 1875
Ahmedabad Share And Stock Brokers Association 1957
Calcutta Stock Exchange Association Ltd., 1957
Delhi Stock Exchange Association Ltd. 1957
Madras Stock Exchange Association Ltd. 1957
Indore Stock Brokers Association. 1958
Bangalore Stock Exchange 1963
Hyderabad Stock Exchange 1943
Cochin Stock Exchange 1978
Pune Stock Exchange Ltd. 1982
U.P.Stock Exchange Association Ltd. 1982
Ludiana Stock Exchange Association Ltd. 1983
Jaipur Stock Exchange Ltd. 1983-84
Gauthathi Stock Exchange Ltd. 1984
Mangalore Stock Exchange Ltd. 1985
Maghad Stock Exchange Ltd., Patna. 1986
Bhubaneshwar Stock Exchange Association Ltd. 1989
Over The Counter Exchange of India, Bombay 1989
Saurashtra Kutch Stock Exchange Ltd. 1990
Vsdodar Stock Exchange Ltd. 1991
Coimbatore Stock Exchange Ltd. 1991
The Meerut Stock Exchange Ltd. 1991
National Stock Exchange Ltd. 1991
Intergrated Stock Exchange. 1999

COMPANY PROFILE
HYDERABAD STOCK EXCHANGE

ORIGIN:
Rapid growth in industries in the erstwhile Hyderabad State saw efforts at starting the
Stock Exchange. In November 1941 some leading bankers and brokers formed the share and
stock Brokers Association. In 1942, Mr.Gulab Mohammed, the Finance Minister formed a
Committee for the purpose of constituting Rules and Regulations of the Stock Exchange. Sri

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purushothamdas Thakurdas, President and Founder Member of the Hyderabad Stock Exchange
performed the opening ceremony of the Exchange on 14.11.1943 under Hyderabad Companies
Act, Mr.Kamal Yar Jung Bahadur was the first President of the Exchange. The HSC started
functioning under Hyderabad Securities Contract Act of No.21 of 1352 under H.E.H. Nizam’s
Government as a Company Limited by guarantee. It was the 6 th Stock Exchange recognized
under Securities Contract Act, after the Premier Stock Exchanges, Ahmedabad, Bombay,
Calcutta, Madras and Bangalore stock Exchange. All deliveries were completed every Monday
or the next working day.
The Securities Contracts (Regulation) Act, 1956 was enacted by the Parliament, passed
into Law and the rules were also framed in 1957. The Government of India brought the Act and
the Rules into force from 20th February 1957.
The HSE was first recognized by the Government of India on 29th September 1958 as
Securities Regulation Act was made applicable to twin cities of Hyderabad and Secunderabad
from that date. In view of substantial growth in trading activities, and for the yeoman services
rendered by the Exchange, the Exchange was bestowed with permanent recognition with effect
from 29th September 1983.
The Exchange has a significant share in achievements of erstwhile State of Andhra
Pradesh to its present state in the matter of Industrial development.

OBJECTIVES

The Exchange was established on 18th October 1943 with the main objective to create,

protect and develop a healthy Capital Market in the State of Andhra Pradesh to effectively serve

the Public and Investor’s interests.

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 The property, capital and income of the Exchange, as per the Memorandum and Articles

of Association of the Exchange, shall have to be applied solely towards the promotion of the

objects of the Exchange. Even in case of dissolution, the surplus funds shall have to be devoted

to any activity having the same objects, as Exchange or be distributed in Charity, as may be

determined by the Exchange or the High Court of judicature. Thus, in short, it is a Charitable

Institution.

The Hyderabad Stock Exchange Limited is now on its stride of completing its 62nd year in

the history of Capital ‘Markets’ serving the cause of saving and investments. The Exchange has

made its beginning in 1943 and today occupies a prominent place among the Regional Stock

Exchange in India. The Hyderabad Stock Exchange has been promoting the mobilization of

funds into the Industrial sector for development of industrialization in the State of Andhra

Pradesh.

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GROWTH

The Hyderabad Stock Exchange Ltd., established in 1943 as a Non-profit making

Organization, Catering to the needs of investing population started its operations in a small way

in a rented building in Koti area. It had shifted into Aiyangar Plaza, Bank Street in 1987. In

September 1989, the then Vice-President of India, Hon’ble Dr. Shankar Dayal Sharma had

inaugurated the own building of the Stock Exchange at Himayathnagar, Hyderabad. Later in

order to bring all the trading members under one roof, the exchange acquired still a larger

premises situated 6-3-654/A ; Somajiguda, Hyderabad – 82, with a six storied building and a

constructed area of about 4,86,842 sft. (Including cellar of 70,857sft.). Considerably, there has

been a tremendous perceptible growth, which could be observed from the statistics.

The number of members of the Exchange was 55 in 1943, 117 in 1993 and increased to

300 with 869 listed companies having paid up capital of Rs.19128.95 crores as on 31/03/2000.

The business turnover has also substantially increased to Rs.1236.51 crores in 1999-2000. The

Exchange has got a very smooth settlement system.

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GOVERNING BOARD

At present, the Governing Board consists of the following:

MEMBERS OF THE EXCHANGE

Sri Hari Narayan Rathi

Sri Rajendra V.Naniwadekar
Sri K.Shiva Kumar
Sri R.D.Lahoti
Sri Ram Swaroop Agrawal
Sri Dattatray

SEBI NOMINEE DIRECTORS

Sri N.S.Ponnunambi Registrar of Companies

[Govt. of India.]

PUBLIC NOMINEE DIRECTORS

Dr. N.R.Sivaswamy (Chairman, HSE) Formar CBDT Chairman

Justice V.Bhaskara Rao Retd. Judge High Court.
Sri P.Murali Mohan Rao Mogili & Co. – Charted Accountants
Dr. B.Brahmaiah G.M. JNIDB

EXECUTIVE DIRECTOR

Sri S. SARVESHWAR REDDY

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COMPUTERIZATION

The Stock Exchange business operations are equipped with modern communication

systems. Online computerization for simultaneously carrying out the trading transactions,

monitoring functions have been introduced at this Exchange since 1988 and the Settlement and

Delivery System has become simple and easy to the Exchange members.

The HSE On-line Securities Trading System was built around the most sophisticated state

of the art computers, communication systems, and the proven VECTOR Software from CMC

and was one of the most powerful SBT Systems in the country, operating in a WAN

environment, connected through 9.6 KBPS 2 wire Leased Lines from the offices of the members

to the office of the Stock Exchange at Somajiguda, where the Central System CHALLENGE – L

DESK SIDE SERVER made of Silicon Graphics (SGI Model No. D-95602-S2) was located and

connected all the members who were provided with COMPAQ DESKPRO 2000/DESKTOP

5120 Computers connected through MOTOROLA 3265 v.34 MANAGEABLE STAND ALONE

MODEMS (28.8 kbps) for carrying out business from computer terminals located in the offices

of the members.

HSE is the only Exchange in the country, which has provided infrastructure to its

members for trading through WAN and Leased Lines from the day one.

The HOST System enabled the Exchange not only to expand its operations later to other

prime trading centers outside the twin cities of Hyderabad and Secunderabad but also to link

itself into the Inter-connected Market System (ICMS) proposed by the Federation of Indian

Stock Exchanges (FISE) to Inter-connect Various Regional Stock Exchanges in various States.

In the age of electronic trading on – line information on rates from other major markets was an

essential input for efficiency. HSE provided On-line rates from BSE and NSE which not only

19
enhanced the ability of HOST terminals to attract the investors but also enabled the members to

avail arbitraging opportunities between Exchanges.

CLEARING HOUSE

The Exchange set-up a Clearing House to collect the Securities from all the Members and

distribute to each member all the securities due in respect of every settlement. The whole of the

operations of the Clearing House were also computerized. At present through DP all the

settlement obligations are met.

INTER – CONNECTED MARKET SYSTEM (ICMS)

The HSE was the convener of a Committee constituted by the Federation of Indian Stock

Exchanges for Implementing an Inter – Connected Market System (ICMS). In which the Screen

Based trading systems of various Stock Exchanges was Inter – Connected to create a large

National Market. SEBI welcomed the creation of ICMS.

The HOST provided the network for HSE to hook itself into ISE. The ISE provided the

members of HSE and their Investors, access to a large national network of Stock Exchanges.

The Inter - Connected Stock Exchange is a National Exchange and all HSE Members

could have trading terminals with access to the National Market without any fee, which was a

boon to the Members of an Exchange/Exchanges to have the trading rights on a National

Exchange (ISE), without any fee or expenditure.

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ON – LINE SURVEILLANCE

HSE pays special attention to Market Surveillance and monitoring exposures of the

members, particularly the mark to market losses. By taking prompt steps to collect the margins

for mark to market losses, the risk of default by members is avoided. It is heartening that there

have been no defaults by members in any settlement since the introduction of Screen Based

Trading.

The Exchange restricted the effective trading volume and linked to the capital deposited

with the Exchange, to obviate defaults and losses and contain speculation:

BASE GROSS INTRA – DAY

MINIMUM CAPITAL EXPOSURE LIMITS TRADING LIMITS
Rs. 4.00 lacks Rs. 40.00 lacks Rs. 132.00 lacks

ADDITIONAL CAPITAL

Up to

BASE GROSS INTRA – DAY

MINIMUM CAPITAL EXPOSURE LIMITS TRADING LIMITS
Rs. 6.00 lacks Rs. 60.00 lacks Rs. 132.00 lacks

FURTHER ADDITIONAL CAPITAL

Up to

BASE GROSS INTRA – DAY

MINIMUM CAPITAL EXPOSURE LIMITS TRADING LIMITS
Rs. 8.00 lacks Rs. 48.00 lacks Rs. 96.00 lacks

IMPROVEMENT IN THE VOLUMES

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 It is heartening that after implementing HOST, HSE’s daily turnover has fairly stabilized

at a level of Rs. 20.00 Crs. This should enable in improving our ranking among Indian Stock

Exchanges for 14th position to 6th position. We shall continuously strive to improve upon this to

ensure a premier position for our Exchange and its members and to render excellent services to

investors in this region.

The number of transactions, turnovers of the Exchange, number of listed companies and

the paid up capital listed have grown up substantially as may be seen from the following figures.

NO.OF TURNOVER LISTED PAIDUP CAPITAL

YEAR
TRANSACTIONS (Rs. IN CRORES) COMPANIES (Rs. IN CRORES)
1991-92 515.949 587.75 236 2740.56
1992-93 421.985 676.00 275 10228.48
1993-94 603.635 984.46 372 13156.15
1994-95 860.642 1160.48 668 18588.71
1995-96 721.521 1107.30 727 20159.31
1996-97 240.640 479.98 851 22050.69
1997-98 427.830 1860.86 852 18705.10
1998-99 513.168 1269.90 856 18753.93
1999-00 513.440 1236.51 869 19128.95
2000-01 427.205 977.83 934 14717.08
2001-02 34.474 41.26* 932 13616.12
2002-03 4.203 4.58 928 -
2003-04 2.277 2.73 856 22126.65
2004-05 4.401 14.13 820 14456.95
* Indicates: Since trading is mostly done on NSE Segment through HSE’s.

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CORPORATE DATABASE

HSE Subscribed to the CMIE Corporate Database for accessing data and profiles of

companies. This data could be accessed by the members, which further enhanced the information

powder of the members.

SETTLEMENT GUARANTEE FUND

The Exchange has introduced Trade Guarantee Fund on 25/01/2000. This will insulate

the trading member from the counter – party risks while trading with another member. The

trading member and his investors will be assured of the timely completion of the pay – out of

funds and securities not withstanding the default, if any, of any trading member of the Exchange.

The shortfalls, if any, arising from the default of any member will be met out of the Settlement

Guarantee Fund. Several pay – ins worth of crores of rupees in all the settlements have been

successfully completed after the introduction of Settlement Guarantee Fund, without utilizing

any amount from the Settlement Guarantee Fund.

The Settlement Guarantee Fund will be a major step in re-building this confidence of the

members and the investors in HSE. The settlement Trade Guarantee Fund had a corpus of

Rs.2.00 crores initially which would be raised in the future suitably.

The Trade Guarantee Fund had strict rules and regulations to be complied with by the

members to avail the guarantee facility. The HOST system facilitated monitoring the

compliance of members. In respect of such rules and regulations.

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CURRENT DIVERSIFICATIONS

1. DEPOSITORY PARTICIPANT

The Exchange has also become a Depository Participant with National Securities

Depository Limited (NSDL) and Central Depository Services Limited (CDSL). Our own DP is

fully operational and the execution time will come down substantially. The depository functions

are undertaken by the Exchange by opening the accounts at Hyderabad of investors, members of

the Exchange and other Exchanges. The trades of all the Exchanges having On-line trading

which get into National depository can also be settled at Hyderabad by this exchange itself. In

short all the trades of all the investors and members of any Exchange at Hyderabad in

dematerialized securities can be settled by the Exchange itself as a participant of NSDL and

CDSL. The Exchange has about 15,000 B.O.accounts

2. FLOATING OF A SUBSIDIARY COMPANY FOR THE MEMBERSHIP OF MAJOR

STOCK EXCHANGE OF THE COUNTRY.

The Exchange had floated a Subsidiary Company in the name and style of M/s. HSE

Securities Limited for obtaining the Membership of NSE and BSE. The Subsidiary had obtained

membership of both NSE and BSE. About 113 Sub-brokers may register with HSES, of which

about 75 sub-brokers are active. Turnover details are furnished here under.

NSE Cash NSE F&O BSE

Year
(Rs. In Lakhs) (Rs. In Lakhs) (Rs. In Lakhs)
2001-02 338236.81 -- --
2002-03 426143.50 16657.08 --
2003-04 617808.46 312203.56 17558.59
2004-05 484189.11 354370.71 39519.96

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3. FACILITY TO TRADE AT NSE, DERIVATIVES TRADING, NET TRADING ETC

The Exchange has incorporated a Subsidiary “HSE Securities Limited” with a paid up

capital of Rs.2.50 Crs. Initially to take NSE Membership, so that the members of the exchange

will have access to the NSE’s Trading Screen as Sub-brokers, Derivatives Trading and Net

Trading etc. The Members of this Exchange will also have equal opportunity in such trading like

any other NSE member.

25
DERIVATIVES

The emergence of the market for derivative products, most notably forwards, future and

options, can be traced back to the willingness of risk-averse economic agents to guard

themselves against uncertainties arising out of fluctuations in asset prices. By their very nature,

the financial markets are marked very high degree of volatility. Through the use of derivative

products, it is possible to partially or fully transfer price risks by locking-in asset prices. As

instruments of risk management, these generally do not influence the fluctuations in the

underlying asset prices. However, by locking-in asset prices, derivative products minimize the

impact of fluctuations in asset prices on the profitability and cash flow situation of risk-averse

investors.

Derivatives are risk management instruments, which derive their value from an

underlying asset. The underlying asset can be bullion, index, share, bonds, currency, interest etc.

Annual turnover of the derivatives is increasing each year from 1986 onwards.

Year Annual Turnover

1986 146 Millions

1992 453 Millions

1998 1329 Millions

2002 & 2003 it has reached to equivalent stage of cash market.

Derivatives are used by banks, securities firms, companies and investors to hedge risks,

to gain access to cheaper money and to make profits Derivatives are likely to grow even at a

faster rate in future they are first of all cheaper to world have met the increasing volume of

products tailored to the needs of particular customers, trading in derivatives has increased even

in the over the counter markets.

26
 In Britain unit trusts allowed t o invest in futures & options. The capital adequacy norms

for banks in the European Economic Community demand less capital to hedge or speculate

through derivatives than to carry underlying assets. Derivatives are weighted lightly than other

assets that appear on bank balance sheets. The size of these off balance sheets, which include

derivatives, is more than seven times as large as balance sheet items at some American banks

causing concern to regulators.

DEFINITION

Derivative is a product whose value is derived from the value of one or more basic

variables, called bases (underlying asset, index, or reference rate), in a contractual manner. The

underlying asset can be equity, forex, commodity or any other asset.

In the Indian context the Securities Contracts (Regulation) Act, 1956 (SC( R)A) defines

“Derivative” to include-

1. A security derived from a debt instrument, share, and loan whether secured or unsecured,
risk instrument or contract for differences or any other form of security.

2. A contract which derives its value from the prices, or index of prices, of underlying
securities.

Derivatives are the securities under the SC(R) A and hence the trading of derivatives is
governed by the regulatory framework under the SC(R) A

PRODUCTS
Derivative contracts have several variants. The most common variants are forwards,
futures, options and swaps.

27
PARTICIPANTS

The following three broad categories of participants who trade in the derivatives market:

1.Hedgers
2.Speculators and
3.Arbitrageurs

1. Hedgers: Hedgers face risk associated with the price of an asset. They use futures or
Options market to reduce or eliminate this risk.
2. Speculators: Speculators wish to bet on future movements in the price of an asset.
Futures and Options contracts can give them an extra leverage; that is, they can
increase both the potential gains and potential losses in a speculative venture.
3. Arbitrageurs: Arbitrageurs are in business to take advantage of a discrepancy between
prices in two different markets.
For example, they see the futures price of an asset getting out of line with the cash
price, they will take offsetting positions in the two markets to lock in a profit.

FUNCTIONS

The derivatives market performs a number of economic functions. They are:

1. Prices in an organized derivatives market reflect the perception of market participants about
the future and lead the prices of underlying to the perceived future level.
2. The derivatives market helps to transfer risks from those who have them but may not like them
to those who have an appetite for them.
3. Derivatives, due to their inherent nature, are linked to the underlying cash markets. With the
introduction of derivatives, the underlying market witnesses higher trading volumes because of
participation by more players who would not otherwise participate for lack of an arrangement to
transfer risk.

28
4. Speculative trades shift to a more controlled environment of derivatives market. In the
absence of an organized derivatives market, speculators trade in the underlying cash market.
5. An important incidental benefit that flows from derivatives trading is that it acts as a Catalyst
for new entrepreneurial activity.
6. Derivatives markets help increase savings and investment in the long run. Transfer of risk
enables market participants to expand their volume of activity.

TYPES OF DERIVATIVES
The most commonly used derivatives contracts are forwards, futures and options. Here various
derivatives contracts that have come to be used are given briefly:

1. Forwards
2. Futures
3. Options
4. Warrants
5. LEAPS
6. Baskets
7. Swaps
8. Swaptions

1. Forwards: A forward contract is customized contract between two entities, where settlement
takes place on a specific data in the future at today’s pre-agreed price.

2. 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.

3. Options: options are of two types – calls and puts.

Calls give the buyer the right but not the obligation to buy a given quantity of the underlying
asset, at a given price on or before a given future date.

Puts give the buyer the right, but not the obligation to sell a given quantity of the underlying
asset at a given price on or before a given date.

29
4. Warrants: Options generally have two lives of upto one year, the majority of options traded
on options exchanges having a minimum maturity of nine months. Longer-dated options are
called warrants and are generally traded over-the-counter.

5. LEAPS: The acronym LEAPS means Long-term equity Anticipation Securities. These are
options having a maturity of upto three years.

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

7. Swaps: Swaps are private agreements between two parties to exchange cash flows in the
future according to a prearranged formula. They can be regarded as portfolios of forward
contracts. The two commonly used swaps are:

• 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 principal and interest between the parties,
with the cash flows in one direction being in a different currency than those in the opposite
direction

8. Swaptions: Swaptions are options to buy or sell that will become operative at the expiry of the
options. Thus a swaption is an option on a forward swap. Rather than have calls and puts, the
swaptions markets has receiver swaptions and payer swaptions. A receiver swaption is an option
to receive fixed and pay floating. A payer swaption is an option to pay fixed and receive
floating.

CHARACTERISTICS OF DERIVATIVES

1. Their value is derived from an underlying instrument such as stock index, currency etc.

2. There are vehicles for transferring risk.

3. They are leveraged instruments.

30
RATIONAL BEHIND THE DEVELOPMENT OF DERIVATIVES:

Holding portfolio of securities is associated with the risk of the possibility that the
investor may realize his returns which would be much lesser than what he expected to get. There
are various influences which affect the returns:

1. Price or dividend (interest).

1. Some are internal to the firm like –

- Industrial policy
- Management Capabilities
- Consumer’s preference
- Labor strike, etc.

These forces are to a large extent controllable and are termed as non-systematic risks.
Such non-systematic risks can easily be managed by an investor by having a well diversified
portfolio spread across the companies, industries and groups so that a loss in one may easily be
compensated with a gain in other.

There are yet other types of influences which are external to the firm, cannot be
controlled and affect large numbers of securities. They are termed as systematic risk. Those are

1. Economic
2. Political
3. Sociological changes are sources of systematic risk.

For instance, inflation, and interest rate etc. Their effect is to cause prices of nearly all
individual stocks to move together in the same manner. We therefore quite often find stock
prices falling from time to time in spite of company’s earnings rising and vice versa.

Rational behind the development of derivatives market is to manage this systematic risk,
liquidity. Liquidity is the sense of being able to buy and sell relatively large amounts quickly
with out substantial price concessions.

31
 In debt market, a much proportion of the total risk of securities is systematic. Debt
instruments are also finite life securities with limited marketability due to their small size relative
to many common stocks. These factors favor for the purpose of both portfolio hedging and
speculation. The introduction of a derivative security that is based on some brooder market
rather than an individual security.

India has vibrant securities market with strong retail participation that has evolved over
the years it was until recently basically cash market with a facility to carry forward positions in
actively traded ‘A’ group scrips from one settlement to another by paying the required margins
and borrowing money & securities in a separate carry forward session held for this purpose.
However, a need was felt to introduce financial products like in other financial markets world
over which are characterized with high degree of derivatives product in India.

Derivative products allow the user to transfer this price risk by locking in the asset price
there by minimizing the impact of fluctuations in the asset price on this balance sheet and have
assured cash flows.

Derivative are risk management instruments, which derive their value from an underlying
asset. The underlying asset can be bullion, index, shares, bonds currency etc.

Derivatives market in India

Approval for derivatives trading

The first step towards introduction of derivatives trading in India was the promulgation of the
Securities Laws (Amendment) Ordinance, 1995, which withdrew the prohibition on options
in securities.
The market for derivatives, however, did not take off, as there was no regulatory framework to
govern trading of derivatives.

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REGULATORY FRAME WORK – L.C.GUPTA COMMITTEE

SEBI set up a 24 – members committee under the Chairmanship of Dr.L.C.Gupta on November

18, 1996 to develop appropriate regulatory framework for derivatives trading in India. The
committee submitted its report on March 17, 1998 prescribing necessary pre-conditions for
introduction of derivatives trading in India.
SEBI also approved the “suggestive bye-laws” recommended by the committee for regulation
and control of trading and settlement of derivatives contracts.

The committee recommended

 Derivatives should be declared as ‘securities’ so that regulatory framework applicable to

trading of ‘securities’ could also govern trading of securities.
The provisions in the SC(R )A and the regulatory framework developed there
under govern trading in securities

 Any Exchange fulfilling the eligibility criteria as prescribed in the L.C.Gupta committee
report may apply to SEBI for grant of recognition under Section 4 of the SC( R)A, 1956
to start trading derivatives. The derivatives exchange/segment should have a separate
governing council and representation of trading/clearing members shall be limited to
maximum of 40% of the total members of the governing council. The Exchange shall
regulate the sales practices of its members and will obtain prior approval of SEBI before
start of trading in any derivative contract.
 The Exchange shall have minimum 50 members.
 The members of an existing segment of the exchange will not automatically become the
members of derivative segment. The members of the derivative segment need to fulfill
the eligibility conditions as laid down by the L.C.Gupta committee.
 The clearing and settlement of derivatives trades shall be through a SEBI approved
clearing corporation/house. Clearing corporations/houses complying with the eligibility
conditions as laid down by the committee have to apply to SEBI for grant of approval.
 Derivative brokers/dealers and clearing members are required to seek registration from
SEBI. This is in addition to their registration as brokers of existing stock exchanges. The

33
 minimum net worth for clearing members of the derivatives clearing corporation/house
shall be Rs.300 Lakh.

The net worth of the member shall be computed as follows:

 Capital + Free Reserves
 Less non-allowable assets Viz.,
• Fixed Assets
• Pledged Securities
• Member’s Card
• Non-allowable securities (Unlisted Securities)
• Bad deliveries
• Doubtful debts and advances
• Prepaid expenses
• Intangible assets
• 30% marketable securities
 The minimum contract value shall not be less than Rs.2 Lakh.
Exchanges should also submit
Details of the futures contract they propose to introduce.
 The initial margin requirement, exposure limits linked to capital adequacy and margin
demands related to the risk of loss on the position shall be prescribed by SEBI/Exchange
from time to time.
 The L.C.Gupta committee report requires strict enforcement of “Know your customer” rule
and requires that every client shall be registered with the derivatives broker. The members of
the derivatives segment are also required to make their clients aware of the risks involved in
derivatives trading by issuing to the client the Risk Disclosure Document and obtain a copy
of the same duly Signed by the client.
 The trading members are required to have qualified approved user and sales person who have
passed a certification programme approved by SEBI.

34
SEBI also set up a group in June 1998 under the Chairmanship of Prof. J.R.Varma, to
recommend measures:

For risk containment in derivatives market in India. The report, which was submitted in October
1998, worked out the operational details of margining system, methodology for charging initial
margins, broker net worth, deposit requirement and real- time monitoring requirements.

Derivatives Trading in India

Derivatives trading commenced in India in June 2000 after SEBI granted the final approval to
this effect in May 2000.

SEBI permitted the derivative segments of two stock exchanges,

 NSE - CNX NIFTY
 BSE - SENSEX

This was followed by approval for trading in options based on these two indexes and options on
individual securities.
Index Options: The Trading in index options commenced in June 2001 and
Individual security options: The trading in options on individual securities commenced in July
2001.
Futures contracts on individual stocks were launched in November 2001.

DERIVATIVES INSTRUMENTS IN INDIA

The first derivative product to be introduced in the Indian securities market is going to be
“INDEX FUTURE”. In the world, first index futures were traded in U.S. on Kansas City Board
of Trade (KCBT) on Value Line Arithmetic Index (VLAI) in 1982.

Organized exchanges began trading options on equities in 1973, where as exchange

traded debt options did not appear until 1982, on the other hand fixed income futures began
trading in 1975, but equity related futures did not begin until 1982.

35
DERIVATIVES SEGMENT IN BSE & NSE

On June 9,2000 BSE & NSE became the first exchanges in India to introduce trading in
exchange traded derivative product with the launch of index futures on scene and Nifty futures
respectively.
Index futures were follows by launch of index options in June 2001, stock options in July
2001 and stock futures in Nov 2001. Presently stock futures and options available on 41 well-
capitalized and actively traded scrips mandated by SEBI.
Nifty is the underlying asset of the Index Futures at the Futures & Options segment of
NSE with a market lot of 200 and the BSE 30 Sensex is the underlying stock index with the
market lot of 50. This difference of market lot arises due to a minimum specification of a
contract value of Rs.2 lakes by Securities Exchange Board of India. A contract value is contract
Index lied by its market lot. For e.g. If Sensex is 6000 then the contract value of a futures Index
having Sensex as underlying asset will be 50*6400=Rs.3,20,000. Similarly if Nifty is 2040, its
futures contract value will be 200*2040=Rs.4,08, 000.
Every transaction shall be in multiple of market lot. Thus, Index futures at NSE shall be
traded in multiples of 200 and at BSE in multiple of 50.

CONTRACT PERIODS:

At any point of time there will always be available near three months contract periods.
For e.g. in the month of June 2004 one can enter into either June Futures contract or July Futures
contract or August Futures Contract. The last Thursday of the month specified in the contract
shall be the final settlement date for that contract at both NSE as well BSE. Thus June 29, July
27 and August 31 shall be the last trading day or the final settlement date for June Futures
contract, July Futures Contract and August Futures Contract respectively.

When one futures contract gets expired, a new futures contract will get introduced
automatically. For instance, on 30th June, June futures contract becomes invalidated and a
September Future Contract gets activated.

36
SETTLEMENT:
Settlement of all Derivatives trades is in cash mode. These is Daily as well as Final
Settlement.
Outstanding positions of a contract can remain open till the last Thursday of that month.
As long as the position is open, the same will be marked to Market at the Daily Settlement Price,
the difference will be credited or debited accordingly and the position shall be brought forward
to the next day at the daily settlement price. Any position which remains open at the end of the
final settlement day (i.e., last Thursday) shall be closed out by the Exchange at the Final
Settlement Price which will be the closing spot value of the underlying (Nifty or Sensex, or
respective stocks as the case may be).
MARGINS:
In order to avoid unhealthy competition among clearing members in reduce margins for
attract customers, a mandatory minimum margin is obtained by the members from the customers.
Such a step insures the market against serious liquidity crisis arising out of possible defaults by
the clearing members owing to insufficient margin retention.
In order to secure their own interest as well as that of the entire system responsible for
smooth functioning of the market, comprising the stock exchanges, clearing houses an the banks
involved, the members collect margins from their clients as may be stipulated by the stock
exchanges from time to time. The members pass the margins to the clearing house on the net
basis, i.e. at a stipulated percentage of the net of purchase and sale position while they collect the
margins from clients on gross basis, i.e. separately on purchase an sales.
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 sellers 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
fluctuation in the prices of the securities bought. The margin paid by the investor is placed at the
disposal of the clearing house through brokerage firms.

37
The margin for futures contracts has two components:

• Initial margin, and

• Mark – to – market

Initial Margin

In the futures contract both the buyer and the seller are required to perform the contract.
Accordingly, both the buyers and the sellers are required to put in the initial margins. The initial
margin is also know as the performance margin and is 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 future transactions is
called “Value – at – Risk” (VAR) whereas the options market had “SPAN based margin system”

Marking to Market

Marking to the market means, debiting or crediting the client’s accounts with the losses
or gains of the day, based on which, margins are sought or released.

It is important to note that through marking to market process, the 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.

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MEMBERS OF F&O SEGMENT:

There are three types of Members in the Futures and Options Segment – Trading
Members, Trading cum Clearing Members and Professional Clearing Members.
Trading Members are the members of Derivatives Segment and carry on the transaction
on the respective Exchange.
The Clearing Members are the members of the Clearing Corporation who deal with
payments of margin as well as final settlement.
The Trading Member can deal with regard to payments of margin and final settlement
with the clearing corporation only through a Clearing Member.
It is mandatory for every member of the Derivatives Segment to have approved users
who has passed SEBI approved Derivatives Certification Test. To spread the awareness about
Derivatives amongst investors.

EXPOSURE LIMIT:

The national value of gross open positions at any point in time for index futures and short
index option contracts shall not exceed 33 1/3 times the liquid net worth of a member.

In case of single stock futures & all short stock option contracts, the national value of
grass open positions at any point in time shall not exceed 20 times the liquid net worth of a
member.

This is assured by collecting /adjusting 3% of the national value of gross open position in
index futures & short index option contracts, and 5% of the national value of gross open position
in single stock futures & short option contracts.

39
POSITION LIMIT:

It refers to the maximum number of derivative contracts on the same underlying security
that one can hold or control.

Position limits are imposed with a view to deter & detect concentration of position and
market manipulation. The position limits are applicable on the cumulative combined position in
all the derivative contracts on the same underlying at an exchange.

Position limits are imposed at the customer level, trading level, clearing member level, &
market level are different.

REGULATORY FRAME WORK:

The trading of derivatives is governed by the provisions contained in the SC( R )A,
the SEBI Act, the rules and regulations framed there under and the rules and bye-laws of stock
exchange.

Securities Contracts (Regulation) Act, 1956

SC(R) A aims at preventing undesirable transactions in securities by regulating the

business of dealing therein and by providing for certain other matters connected therewith. This
is the principal Act, which governs the trading of securities in India. The term “Securities” has
been defined in the SC(R) A. As per Section 2(h), the “Securities: include:

1. Shares, scrips, stocks, bonds, debentures, debenture stock or other marketable Securities of a
like nature in or of any incorporated company or other body corporate.

2. Derivative

3. Units or any other instrument issued by any collective investment scheme to the investors in
such schemes.

4. Government securities

5. Such other instruments as may be declared by the Central Government to be Securities

6. Rights or interests in securities.

40
“Derivative” is defined to include:

• A Security derived from a debt instrument from a debt instrument, share, loan whether
secured or unsecured, risk instrument or contract for differences or nay other form of
security.

• A contract which derives its value from the prices, or index of prices, of underlying
securities.

Section 18A provides that notwithstanding anything contained in any other law for the time
being in force, contracts in derivative shall be legal and valid if such contracts are:

• Traded on a recognized stock exchange

• Settled on the clearing house of the recognized stock exchange, in accordance with the
rules and bye-laws of such stock exchanges.

Regulation for Derivatives Trading

SEBI set up a 24-members committee under Chairmanship of Dr.L.C.Gupta to develop

the appropriate regulatory framework for derivatives trading in India. The committee submitted
its report in March 1998. on May 11, 1998 SEBI accepted the recommendations of the
committee and approved the phased introduction of derivatives trading in India beginning with
stock index futures. SEBI also approved the “suggestive bye-laws” recommended by the
committee for regulation and control of trading and settlement of derivatives contracts.

The provisions in the SC( R)A and the regulatory framework developed there under
govern trading in securities. The amendment of the SC( R)A to include derivatives within the
ambit of ‘securities’ in the SC( R)A made trading in derivatives possible within the framework
of the Act.

41
1. Any exchange fulfilling the eligibility criteria as prescribed in the L.C.Gupta Committee
report may apply to SEBI for grant of recognition under Section 4 of the SC( R)A, 1956 to start
trading derivatives. The derivatives exchange/segment should have a separate governing council
and representation of trading/clearing members shall be limited to maximum of 40% of the total
members of the governing council. The exchange shall regulate the sales practices of its
members and will obtain approval of SEBI before start of trading in any derivative contract.

2. The exchange shall have minimum 50 Members.

3. The members of an existing segment of the exchange will not automatically become the
members of derivative segment. The members of the derivative segment need to fulfill the
eligibility conditions as laid down by the L.C.Gupta committee.

4. The clearing and settlement of derivatives trades shall be through a SEBI approved clearing
corporation/house. Clearing corporation/houses complying with the eligibility conditions as laid
down by the committee have to apply to SEBI for grant of approval.

5. Derivative brokers/dealers and clearing members are required to seek registration from
SEBI.

6. The minimum contract value shall not be less than Rs.2Lakh. Exchanges should also submit
details of the futures contract they propose to introduce.

7. The trading members are required to have qualified approved used and sales person who have
passed a certification programmed approved by SEBI.

While from the purely regulatory angle, a separate exchange for trading would be a better
arrangement. Considering the constraints in infrastructure facilities, the existing stock(cash)
exchanges may also be permitted to trade derivatives subject to the following conditions.

42
 Trading should take place through an on-line screen based trading system.

 An independent clearing corporation should do the clearing of the derivative market.

 The exchange must have an online surveillance capability which monitors positions, price
and volumes in real time so as to deter market manipulation price and position limits
should be used for improving market quality.

 Information about trades quantities, and quotes should be disseminated by the exchange
in the real time over at least two information vending networks which are accessible to
investors in the country.

 The exchange should have at least 50 members to start derivatives trading.

 The derivatives trading should be done in a separate segment with separate membership;
That is, all members of the cash market would not automatically become members of the
derivatives market.

 The derivatives market should have a separate governing council which should not have
representative of trading by clearing members beyond whatever percentage SEBI may
prescribe after reviewing the working of the present governance system of exchanges.

 The chairman of the governing council of the derivative division / exchange should be a
member of the governing council. If the chairman is broker / dealer, then he should not
carry on any broking or dealing on any exchange during his tenure.

 No trading/clearing member should be allowed simultaneously to be on the governing

council both derivatives market and cash market.

43
Derivatives instruments which are widely been used in India:

1. Futures
2. Options

FUTURES

Futures contract is a firm legal commitment between a buyer & seller in which they agree
to exchange something at a specified price at the end of a designated period of time. The buyer
agrees to take delivery of something and the seller agrees to make delivery.

STOCK INDEX FUTURES

Stock Index futures are the most popular financial futures, which have been used to
hedge or manage the systematic risk by the investors of Stock Market. They are called hedgers
who own portfolio of securities and are exposed to the 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 for settlement at a
specified time future.

Stock index futures will require lower capital adequacy and margin requirements as
compared to margins on carry forward of individual scrips. The brokerage costs 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 in case of stock index futures as opposed
to dealing in individual scrips. The market is conditioned to think in terms of the index and
therefore would prefer to trade in stock index futures. Further, the chances of manipulation are
much lesser.

44
 The Stock Index futures are expected to be extremely liquid given the speculative nature
of out markets and the overwhelming retail participation 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
number of contracts traded if not in terms of notional value. 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 as a stabilizing factor for the cash market. However, it is too early to
base any conclusions on the volume or 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.

Example:
If the BSE stock index is at 6500 and each point in the index equals to Rs.50, a contract
struck at this level could be worth 3,25,000(6500*50). If at the expiration of the contract, the
BSE stock index is at 6600, a cash settlement of Rs.5000 is required (6600-6500)*50). No
physical delivery of stocks is made in order to ensure that sufficient funds are available for
settlement.

MARGIN EFFECT (MARK TO MARGIN)

Example:
Mr. XYZ purchases Sensex Future Contract on 1st April 2004:
June 2003 Series 1Contract @ Rs.4800
Mr.XYZ will be required to pay an Initial Margin before entering into these transactions.
Suppose the Initial Margin is 6%, the amount of Margin will come to Rs.2, 40,000 (50 Units per
Contract on the Bombay Stock Exchange). If the daily settlement prices of the above Sensex
Futures were as follows:

01/04/4 4820
02/04/04 4750
06/04/04 4780
08/04/04 4850

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 The amount of ‘Mark-to-Market Margin Money’ Sensex receivable/payable due to
increase/decrease in daily settlement prices is as below. Please note that one Contract on the
Bombay Stock Exchange implies 50 underlying.
Units of the Sensex.
1st April 2004 Mr.receive Rs.1000.
5th April 2004 Mr.pays Rs.2500.
6th April 2004 Mr.XYZ pays Rs.1000.
7th April 2004 Mr.XYZ receive Rs.2500.
The amount of ‘Mark-to-Market Margin Money’ received/paid will be credited/debited to
‘Mark-to-Market Margin Account’ on a day-to-day basis.

FUTURES TERMINOLOGY
Contract Size – The value of the contract at a specific level of Index. It is Index level *
Multiplier.
Multiplier – It is a 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.
Contract Month – The month in which the contract will expire.
Expiry Day – The last day on which the contract is available for trading.
Open Interest – Total outstanding long or short positions in the market at any specific point in
time. As total long positions for market would be equal to total short positions, for calculation of
open Interest, only one side of the contracts is counted.
Volume – No. Of contracts traded during a specific period of time. During a day, during a week
or during a month.
Long Position – Outstanding/unsettled purchase position at any point of time.
Short Position – Outstanding/unsettled Sales position at any point of time.
Open Position – Outstanding/unsettled long or short position at any point of time.
Physical Delivery – Open position at the expiry of the contract is settled through delivery of the
underlying. In futures market, delivery is low.

46
Cash Settlement – Open position at the expiry of the contract is settled in cash. These contracts
Alternative Delivery Procedure (ADP) – Open position at the expiry of the contract is settled by
two parties – one buyer and one seller, at the terms other than defined by the exchange. World
wide a significant portion of the energy and energy related contracts (crude oil, heating and gas
online oil) are settled through Alternative Delivery Procedure.
STOCK FEATURES:
If the current price of the Reliance share is Rs.530 per share. We believe that in one
month it will touch Rs.600. and we buy Reliance shares. If price really increase to Rs.600, we
made of profit of Rs.70 i.e. a return of 13%.
If we buy Reliance futures instead, we get the same position as Reliance in the cash
market, but we have to pay the margin not the entire amount. In the above example if the margin
is 20%, we would pay only Rs.84. If Reliance goes up Rs.600, we will still earn Rs.70 as profit.
Now that translates into a fabulous return of 83% in one month.
RISKS:
The risks are that losses will be get leveraged or multiplied in the as profit do. For
example, if Reliance drops from Rs.530 to Rs.500, you would make a loss of Rs.30. The Rs.30
loss would translate to a 5.5% loss in the cash market and a 35% (30/84*100) loss in the futures
market.
It is very easy to reduce / minimize such losses if we keep a sharp eye on the market.
Suppose, we are bullish and we hence buy Reliance futures. But Reliance futures start moving
down after we have bought.
We can square up our position at any point of time thereafter. We can buy at 10:30 in the
morning and sell off at 11:00 on the same day. There is no restriction at all. Thus, by squaring
up early enough we could steam our possible losses. Futures expire on the last Thursday of the
month. For example January futures will be expiring on 31st January (last Thursday).
A part from leverage, A great advantage of Futures (at the moment) is that they are not
linked to ‘delivery’. This means, we can sell Futures (short sell) of Reliance even if we do not
have any shares of Reliance. Thus, we can benefit from a downturn as well as from an upturn.
If we predict an upturn, we should buy Futures and if we predict a downturn, we can always sell
Futures – thus we can make money in a falling market as well as in a rising one.

47
Example:

If Reliance is quoting at Rs.550 in the cash market and one month Reliance futures are
quoting at Rs.560 in the futures market, we can earn Rs.10 as difference. We will then buy
Reliance in the cash market and at the same time, sell Reliance one month futures. On or around
the expiry day (last Thursday of each month), we will square up both the positions, i.e. we will
sell Reliance in the cash market and buy futures. The two prices will be the same (or very nearly
the same) as cash and futures prices will converge on expiry. It does not matter to us what the
price is we will make out profit of Rs.10 anyway.
For example, if the price is Rs.575, we will make a profit of Rs.25 on selling out Cash
market Reliance and a loss of Rs.15 on buying back Reliance futures. The net profit is Rs.10.
On the other hand, if the price is Rs.525, we make a loss of Rs.25 on selling Cash market
Reliance and a profit of Rs.35 on Reliance futures. The net profit remains Rs.10. Our
investment in this transaction will be Rs.550 on cash market Reliance plus a margin of say 20%
on Reliance futures (say Rs.110 approx). Thus an investment of Rs.660 has generated a return of
Rs.10 i.e.1.5% per month or 18.18% per annum. Now take a situation where only 15 days are
left for expiry and we spot the same opportunity as above. We will still generate Rs.10, which
will translate into a return of 3% per month or 36.36% per annum. In this manner, we will
generate returns whenever the futures prices are above cash market prices.
Suppose we have 1,200 Shares of Reliance which is currently quoting at Rs.530 per share
– a total value of Rs.6.36 lakes. We need cash, but protect the upside profits. All we need to do
is – one – sell out shares in the cash market and get paid the Rs.6.36 lakes and – two – buy
Reliance (one month) futures in the derivatives market. The futures position will keep out profits
intact, if the share price moves up.
The futures will expire on the last Thursday of the month. On the last Thursday (or
before that at any convenient time), we should reverse the transaction i.e. we will sell our
Reliance futures and buy back Reliance Shares.

48
 OPTIONS

An option agreement is a contract in which the writer of the option grants the buyer of the
option the right to purchase from or sell to the writer a designated instrument at a specific price
within a specified period of time.

Certain options are short term in nature and are issued by investors, another group of
options are long-term in nature and are issued by companies.

OPTIONS TERMINOLOGY:

I. Call Option: A call is an option contract giving the buyer the right to purchase the stock.
II. Put Option: A put is an option contract giving the buyer the right to sell the stock.
III. Expiration Date: It is the date on which the option contract expires.
IV. Strike Price: It is the price at which the buyer of a option contract can purchase or sell
the stock during the life of the option.
V. Premium: Is the price the buyer pays the writer for an option Contract.
VI. Writer: The term writer is synonymous to the seller of the option contract.
VII. Holder: The term is synonymous to the buyer of the option contract.
VIII. Straddle: A Straddle is combination of put and call giving the buyer the right to either
buy or sell stock at the exercise price.
IX. Strip: A strip is two puts and one call at the same period.
X. Strap: A strap is two calls and one put at the same strike price for the same period.
XI. Spread: A spread consists of a put and a call option on the same security for the same
time period at different exercise prices.

49
 The option holder will exercise his option when doing so provides him a benefit over
buying or selling the underlying asset from the market at the prevailing price. These are three
possibilities.

1. In the Money: An option is said to be in the money when it is advantageous to exercise it.
2. Out of the Money: The option is out of money if it not advantageous to exercise it.
3. At the Money: If the option holder does not lose or gain whether he exercises his option or
buys or sells the asset from the market, the option is said to be at the money. The exchanges
initially created three expiration cycles for all listed options and each issue was assigned to one
of these three cycles.
 January, April, July, October.
 February, March, August, November.
 March, June, September, and December.
In India, all the F & O contracts whether on indices or individual stocks are available for one
or two or three months series and they expire on the Thursday of the concerned month.

CALL OPTION:
An option that grants the buyer the right to purchase a designated instrument is called a
call options. A call option is a contract that gives its owner the right, but not the obligation, to
buy a specified price on or before a specified date.
An American call option can be exercised on or before the specified date only European
options 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 he does not, and it is called a Naked call.
Example:
The current share price(s) of Sathyam Computers Ltd share is Rs.420 Holder expect that
price in a three month period (st) will go up to Rs.500 but holder do fear that the price may also
fall below the Rs.420.

50
 To reduce the chance of holder risk and at the same to have an opportunity of making
profit, instead of buying the share holder can buy a three month call option on satyam share at an
agreed exercise price (E) of say Rs.400.

1) If the price of the share is Rs.500. Then holder will exercise option since holder
get a share worth Rs.500 by paying an exercise price of Rs.400. Holder will
gain Rs.100 the value of call option at expiration is Rs.100 Holder call option
is in the money at maturity.

2) If the price of the share is Rs.380 then holder will not exercise the option. Holder
gains nothing. It is out of the money at expiration.

TABLE WHICH EXPLAINS THE IN THE MONEY, OUT THE MONEY, AT THE
MONEY

For Call Option:

Exercise call option St>E In the money
Do not exercise call option St<=E Out of the money
Exercise/Do not exercise St=E At the money

Value of the call option is ©=Max {(st-E), 0}

* * NOTE:: Ignoring the premium, taxes, transaction cost.

51
PAY OFF OF A CALL OPTION BUYER:

The call buyer’s potential pay off is unlimited once the of the share goes beyond the
exercise price. If the share price is on or below the exercise price the call buyer will not exercise
his option. Thus his pay off will be zero since the option is worth nothing.

The outcomes can be divided into two parts. One above the exercise price and other
below the exercise price. The out comes above exercise price are said to be in the money and are
beneficial to the option holder but not the outcomes below the exercise price. The exercise price
that divides the good an bad outcomes.
Call Option
Value of the

Exercise Price Unlimited Pay-off

Potential

Out of the money In the money

(bad outcomes) (good outcomes)

52
PAY OFF OF CALL OPTION WRITER:

The call buyer’s gain is call seller’s loss. The seller of the call option will not incur any
loss when the price of the share is less than the exercise price since the buyer will not exercise
his option. However, if the share prices rises and beyond the exercise prices the potential loss of
the call seller is very high.

Good out Bad out Comes

Value of the
Share

Loss
Exercise Price

Value of the
Call Option

Example:

The share of cilpa computers is selling for Rs.250 amity buys a 3-months call option at a
premium of Rs.10. The exercise price Rs.275. The pay off of amity is explained by following
figure for different share prices.

53
CALL OPTION SELLER’S PAY-OFF:

Seller inflow
Call Premium Net Pay-off
Share Price Exercise Price
220 Not exercised 10 +10
240 Not exercised 10 +10
250 Not exercised 10 +10
275 Not exercised 10 +10
290 275 10 -5

CALL OPTION BUYER’S PAY-OFF:

Buyer’s inflow Seller inflow

Call Premium Net Pay-off
Share Price Sale of share Exercise Price
220 ------ Not exercised 10 -10
240 ------ Not exercised 10 10
250 ------ Not exercised 10 -10
275 ------ Not exercised 10 -10
290 290 275 10 +5
300 300 275 10 +15

54
PROFIT/LOSS POSITION OF CALL OPTIONS:

20
Writers Profit Line
10

245 250 255 260 265 270 275 280 290

-10 Stock Price

(Expiration date)

-20 Buyer’s Profit Line

55
PUT OPTION:

An option that grants the buyer the right to sell a designated instrument is called put
option. An put option is a contract that gives its owner the right, but not the obligation, to sell a
specified number of shares of equity stock at a specified price on or before a specified date.

An American put option can be exercised on or before the specified date only. An
European put options can be exercised on the specified date only.

Example:
The current price of ‘Hillshire(s) ids Rs.50 Holder buy a 3-month put option at exercise
price(E) Rs.60.
(Holder will exercise his option only if the market price is less than the exercise price.)

If the market price of the share is Rs.45 and the holder will exercise the options Means
option holder will buy the share for Rs.45 from the market and deliver it to the put option seller
(writer) to receive Rs.60. The holder gain is Rs.15.

Exercise put option St<E In the money

Do not exercise put option St>E Out of the money
Exercise/Do not exercise St=E At the money

St = Market value of Stock

E = Exercise price/strike price.
**Note: ignore premium, taxes, transaction cost.

56
PAY OFF OF A PUT OPTION BUYER:

The potential profit of put option buyer is limited since share price cannot fall below
zero. The value of the put is ‘0’ when it is out of the money. The exercise price is the dividing
point between good and bad out comes.
Value of the put option

Limited Profit

Value of the Share

Good out comes Bad out comes

57
PAY OFF FOR A PUT OPTION SELLER:

Potential loss of a put option seller the buyer has to pay a premium to the seller for purchasing a
put option, the potential profit of the buyer and potential loss of the seller will reduce by the
amount of premium.

Bad out comes Good out comes

Loss

Limited Loss

Value of the put option

Example:

Hair hopes that the price of the ‘HLL’ will fall after 3-months therefore he purchase a put
option on HLL share with a maturity of 3 months at premium of Rs.5. The exercise price is
Rs.30. The current market price is Rs.28. Then the following table explains the profit and loss
of Hair and put seller if the price of the share at the time of maturity of the option turn out to be.

58
PAY OFF OF A PUT OPTION BUYER:

Share Price 18 25 28 30 40
Exercise option 30 30 30 Not exercised Not exercised
Put option 5 5 5 5 5
Purchase of share 18 25 28 - -
Net pay-off 7 0 -3 -5 -5

PAY OFF OF A PUT OPTION SELLER:

Share price Sale of share Exercise option Premium Net pay-off

18 18 30 5 -7
25 25 30 5 0
28 28 30 5 3
30 - Not exercised 5 5
40 - Not exercised 5 5

59
PROFIT / LOSS POSITION OF PUT OPTION:

6 Writer’s
Profit/loss line
3 18 25 28 30 40

-3 Stock price
(at maturity date)
-6

-9

Buyer’s profit/loss line

FACTORS DETERMINIG OPTION VALUE

1. Exercise Price and Share Price

2. Volatility of Returns on Share

3. Time to Expiration.

4. Interest Rates

EXERCISE PRICE AND SHARE PRICE

If the share price more than exercise price than the holder of the call option will get more
net payoff. Means the value of the call option is more. If the share price less than exercise price
then the holder of the put option will get more net pay off.

60
INTEREST RATE

The present value of the exercise price will depend on the interest rate. The value of the
call option will increases with the rising interest rate 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
the exercise price and therefore as the interest rate increases, 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 time to expiration is longer and
consequently the value of the option will be higher further, the possibility of share price
increasing with volatility increase if the time to expiration is longer the time to expiration, higher
the possibility of the option to be more in the money.

61
 OPTION VALUATION

BLACK SCHOLES PRICING MODEL:

The principle that options can completely eliminate market risk from a stock portfolio is
the basis of Black Scholes formula in 1973. The Black Scholes model is a mathematical
explanation of binomial Mosel, which was not even discovered at the time.
Black Scholes applied stochastic calculus to measure both the value and risk of an option
in relation to its underlying stock. The Mosel assumes that the stock price follows one particular
type of pricing process must be unchanging over time.
It was noted earlier that an option price is determined by exercise price, time to
expiration, risk free rate and parameters defining the volatility of the stock prices. The
relationship between the stock and the option value is effectively linear so that gains and losses
are exactly offset.

The assumptions of Block Scholes model are:

1. Capital markets are perfect. There is no transaction cost or taxes, these are no short selling
constraints and investors get full use of short sale proceeds all assets are infinitely divisible.
2. The stock pays no dividends.
3. Markets are always open and trading is continuous.

The options price for a Call, computed as per the following Black Scholes formula:
C = S * N (d1) – K * e- rt * N (d2)
And the price for a Put is: P = K * e- rt * N (-d2) – S * N (-d1)
Where:
d1 = [In (S / X) + (r + s2 / 2) * t] / s * sqrt(t)
d2 = [In (S / X) + (r + s2 / 2) * t] / s * sqrt(t)
=d1 – s * sqrt(t)

62
C = Price of a call option
P = Price of a put option
S = Price of the underlying asset (Current stock price)
K = Strike price of the option
r = rate of interest
t = time to expiration
s = volatility of the underlying
E = exponential term.

• N represents a standard normal distribution with mean = 0 and standard deviatin = 1

• In represents the natural logarithm of a number Natural logarithms are based on the constant
e(2.71828182845904)
• Rate of interest may be the relevant MIBOR rate or such other rate as may be specified.
• The value of the option is independent of expected returns.
• The volatility “s” is the standard deviations of the stocks annual return which is found by
taking daily or weekly observations of the market prices.

DIFFERENCE BETWEEN FUTURES & OPTION

 The first day total turnover of the stock futures is Rs.89.15crores.

The first day total turnover of the stock options is Rs.8.46crores.
 After on week the turnover of the stock futures increased to Rs.160.60crores
Where as the stock option increased to Rs.10crores.
 Stock options are increased to Rs.30crores turnover for this positions it taken one month
duration. Stock are increased to Rs.170crores turnover in four months & it is equal to the
turnover of stock futures.

63
 FUTURES OPTIONS
1. Both the parties are obligated to 1. Only the seller (writer) is obligated to
perform. perform.
2. With futures premium is paid by either 2. With options, the buyer pays the seller
party. a premium.
3. The parties to a futures contract must 3. The buyer of an options contract can
perform at the settlement date only. They exercise any time prior to expiration date.
are not obligated to perform before that
date.
4. The holder of the contract is exposed 4. The buyer limits the downside risk to
to the entire spectrum of downside risk the option premium but retain the upside
and had the potential for all upside return. potential.
5. In futures margins to be paid. They 5. In options premiums to be paid. But
are approximate 15-20% on the current they are very less as compared to the
stock price. margins

EXAMPLE:

The current market price of reddy’s lab is Rs.1000 strike price Rs.1050 premium for call
option is Rs.50, If the share price increased to Rs.1200 at the maturity date, the profit is
200% on premium.

If the shares are bought in futures, (with close position) 15% (~=Rs.150) margin to be
paid. If the share price increases to Rs.1200 at the maturity date. The profit is 133% on
margin.

64
LOT SIZES OF DIFFERENT COMPANIES

CODE LOT SIZE COMPANY NAME

ACC 750 ASSOCIATED CEMENT COMPANIES LTD.
ANDHRA BANK 4500 ANDHRA BAN
ARVIND MILLS 2150 ARVIND MILLS LTD
BAJAJA AUTO 200 BABAJ AUTOMOBILES LTD
BANK BARODA 1400 BANK OF BARODA
BANK INDIA 1900 BANK OF INDIA
BEL 550 BHARAT ELECTRICALS LTD.
BHEL 300 BHARAT HEAVY ELECTRICALS LTD.
BPCL 550 BHARAT PETROL CORPORATION LTD.
CANBK 1600 CANARA BANK
CIPLA 1000 CIPLA LTD.
CNXIT 100 IT INDEX.
DRREDDY 400 DR.REDDY’S LABORATRIES LTD.
GAIL 1500 GAS AUTHORITY OF INDIA LTD.
GRASIM 175 GRASIM INDUSTRIES LTD.
GUJAMBCEMENT 4125 GUJARAT AMBUJA CEMENTS LTD.
HCLTECH 650 HINDUSTAN CORPORATION LTD TECHNO.
HDFC 300 HOUSING DEVELOPMENT FINANCE CORP.
HDFCBANK 400 HDFC BANK
HEROHONDA 400 HERO HONDA MOTORS LTD.
HINDALCO 150 HINDUSTAN ALUMIUM COMPANY.
HINDLEVER 2000 HINDUSTAN LEVER LTD.
HINDPETRO 650 HINDUSTAN PETROLIUM CORPORATION L
I-FLEX 600 I-FLEX
ICICI BANK 700 ICICI BANKING CORPORATION LTD.
INFOSYSTCH 100 INFOSYS TECHNOLOGIES LTD.
IOC 600 INDIAN OIL CORPORATION
IPCL 2200 INDIAN PETROLIUM CHEMICALS CORP.LT
ITC 150 INDIAN TOBACCO COMPANY LTD.
M&M 625 MAHENDRA & MAHENDRA LTD.
MARUTI 800 MARUTI UDYOG LTD.
MTNL 1600 MAHANAGAR TLECOM NIGAM LTD.
NATIONALALUM 1150 NATIONAL ALUMINIUM COMPANY.
NIFTY 200 NATIONAL INDEX FOR FIFTY STOCKS
ONGC 300 OIL & NATURAL GAS CORPORATION.
ORIENTBANK 600 ORIENTAL BANK
PNB 600 PUNJAB NATIONAL BANK
POLARIS 2800 POLARIS SOFTWARE COMPANY LTD.
RANBAXY 200 RANBAXY LABORATARIES LTD.
RELIANC 600 RELIANCE INDUSTRIES LTD.
REL 550 RELIANCE COMPUTERS SERVICES LTD
SATYAMCOMP 600 SATYAM COMPUTERS LTD.

65
SBIN 500 STATE BANK OF INDIA.
SCI 1600 SHIPPING CORPORATION OF INDIA.
SYNDIBANK 3800 SYNDICATE BANK.
TATA MOTORS 825 TATA MOTORS
TATA POWER 800 TATA POWER COMPANY LTD.
TATA TEA 550 TATA TEA LTD.
TISCO 675 TATA IRON & STEEL COMPANY LTD.
UNIONBANK 2100 UNION BANK OF INDIA
WIPRO 300 WESTERN INDIAN-VEG PRODUCTS LTD
RELCAPITAL 1300 RELIANCE CAPITAL
MATRIX 1250 MATRIX LIMITED
NATIONAL THARMAL POWER
NTPC 3250
CORPORTION

RELIANCE INDUSTRIES – INDIA’S LARGEST PRIVATE

SECTOR COMPANY

Description of Group’s Business:

The Reliance Group founded by Dhirubhai H.Ambani (1932-2002) is India’s largest
business house with total revenues of Rs.80,000crore (US$16.8billion), cash profit of over
Rs.9,800crore (US$2.1billion), net profit of over Rs.4,700crore (US$ 990million) and
exports of Rs.11,900crore (US$ 2.5 billion).
The group’s activities span exploration and production (E&P) of oil and gas, refining and
marketing, petrochemicals (polyester, polymers, and intermediates), textiles, financial
services and insurance, power, telecom and infocom initiatives. Reliance has emerged as
India’s Most Admired Business House, for the third successive year in a TNS Mode survey
for 2003.

BOARD OF DIRECTORS
Mukesh D.Ambani Chairman & Managing Director
Anil D.Ambani Vice Chairman & Managing Director
Nikhil R.Meswani Executive Director
Hitel R.Meswani Executive Director

66
H.S.Kohli Executive Director
Ramniklal H.Ambani
Mansingh L.Bhakta
T.Ramesh U.Pai
Yogendra P.Trivedi
Dr.D.V.Kapur

67
The Reliance Group Companies include:

1. Reliance Industries Limited

2. Reliance Capital Limited
3. Reliance Capital Mutual Fund Limited
4. Reliance Industrial Infrastructure Limited
5. Reliance Telecom Limited
6. Reliance Infocomm Limited
7. Reliance General Insurance Company Limited
8. Indian Petrochemicals Corporation Ltd.
9. Reliance Energy Limited.
10. Reliance Life Sciences.

68
 HIGHLIGHTS (2004-05)

 HIGHLIGHTS FIRST PRIVATE SECTOR COMPANY IN INDIA TO RECORD A

NET PROFIT OF US DOLLAR OVER 1 BILLION.
 NET PROFIT OF RS 7,572 CRORES (US $ 1,182MILLION) FOR THE YEAR, AN
INCREASE OF 42.89%
 NET PROFIT OF RS.5,299 CRORES (US $ 1,212 MILLION) BEFORE
EXTRAORDINARY ITEMS FOR THE YEAR, AN INCREASE OF 29%
 NET PROFIT OF RS.7, 275 CRORES (US $ 1,760 MILLION) FOR THE YEAR, AN
INCREASE OF 42.89%
 EARNING PER SHARE (EPS) OF RS.54.20 (US $ 1.26)

69
 HIGHLIGHTS (2003-04)

 HIGHLIGHTS FIRST PRIVATE SECTOR COMPANY IN INDIA TO RECORD A

NET PROFIT OF US DOLLAR OVER 1 BILLION.
 NET PROFIT OF RS 5169 CRORES (US $ 1,182MILLION) FOR THE YEAR, AN
INCREASE OF 29%
 NET PROFIT OF RS.5,299 CRORES (US $ 1,212 MILLION) BEFORE
EXTRAORDINARY ITEMS FOR THE YEAR, AN INCREASE OF 29%
 NET PROFIT OF RS.5160 CRORES (US $ 1,180 MILLION) FOR THE YEAR, AN
INCREASE OF 26%
 EARNING PER SHARE (EPS) OF RS.36.80 (US $ 0.84)
 CASH PROFIT OF RS.9,197 CRORES (US $ 2,104 MILLION) FOR YEAR, AN
INCREASE OF 22%
 NET PROFIT OF RS.1, 419 CRORES (US$ 325 MILLION) FOR THE QUARTER, AN
INCREASE OF 29%
 GROSS TURNOVER OF RS.74,418 CRORES (US $ 17,022 MILLION) FOR THE
YEAR, AN INCREASE OF 14%
 EXPORTS OF RS.14, 969 CRORES (US $ 3,434 MILLION), AN INCREASE OF 30%
 DIVIDEND OF 52.50%, PAYOUT OF RS.825 CRORES (US $ 189 MILLION)
REFINERY OPERATED AT 109%, PROCESSED 29.6 MILLION TONNES.
 TOTAL ASSETS AT RS.71,157 CRORES (US $ 16,277 MILLION)

Mumbai, 29th April 2004 – Reliance Industries Ltd. Has announced its audited results for
the year ended March 31, 2004. Gross Turnover (Turnover and Interdivisional
Transfers) of Rs.74,418 Crores (US $ 17,022 million). Net profit of Rs.5,160 Crores (US
$ 1,180 million) – The highest in the private sector.

70
AUDITED CONSOLIDATED FINANCIAL RESULTS FOR THE YEAR ENDED
31ST MARCH 2004 (Rs. in crores, except per share)
YEAR ENDED 31ST
SR.NO. PARTICULARS
MARCH
2004 2003
1. Gross Turnover (Turnover and Inter divisional transfer) 74,642 76,164
Less: Inter divisional transfer 18,171 14,965
Turnover 56,471 50,108
Less: Excise Duty recovered on sales 4,445 4,198
Net Turnover 52,026 45,910
2. Other Income 1,099 806
3. Share in income of Associates 58 80
Total Expenditure:
i. Increase / decrease in stock trade 605 (2,435)
4. ii. Consumption of raw – materials 34,923 34,278
iii. Staff cost 668 652
iv. Other expenditure 5,847 5,032
5. Interest 1,440 1,559
6. Depreciation 3,251 2,837
7. Profit before extra – ordinary items 6,449 4,873
8. Extra – ordinary item (139) -
9. Profit before tax 6,310 4,873
10. Provision for Current tax 351 246
11. Provision for Deferred tax 790 624
12. Net profit (Before adjustment for minority interest) 5,169 4,003
13. Share of loss transferred to minority - -
14. Net profit (After adjustment for minority interest) 5,169 4,003
15. Paid up equity share capital, equity shares of Rs.10/- each 1,396 1,396
Earnings per share ( of Rs.10)
16. Basic 36.9 28.5
Diluted 36.9 28.5

71
FINANCIAL RESULTS FOR THE YEAR ENDED 31ST MARCH 2005 (Rs. in crores,
except per share)
YEAR ENDED 31ST
PARTICULARS
MARCH
2005 2004
Gross Sales 73,164 56,247
Less: Excise Duty 7,113 4,445
Net Sales 66,051 51,802
Add: Other Incomes 1,450 1130
Total Incomes 67,501 52,940
Less: Expenditure 53,239 41,818
Operating Profit 14,262 11,122
Less: Interest 1,469 1,435
Gross Profit 12,793 9,687
Less: Depreciation 3,724 3,247
Profit Before Tax 9,069 6,440
Less: Tax 1,467 1,441
Profit After Tax 7,572 5,299
Net profit 7,572 5,299
Equity Capital 13,941
Reserves & Surplus 36,280

72
The performance highlights of Reliance Industries Limited for the year ended 31 st March
2004 & 2005:

• Gross Sales of Rs.73,164 crores (US $17,014 million) against Rs.56,247 crores for the
previous year, an increase of 30%

• Turnover of Rs.56,247 crores (US$ 12,866 million) in 2004 Rs.50,096 crores for the
previous year, an increase of 12%

• Operating Income (PBDIT) increased to Rs.14,262 crores (US$ 3,316 million) as against
Rs.11,122 crores for the previous year, an increase of 28%

• Gross profit (before depreciation and deferred tax) of Rs.12,793 crores (US$ 2,975
million) against Rs.9,687 crores for the previous year, an increase of 32%

• Net Profit of Rs.7,572 crores (US$ 1760 million) against Rs.5,299 crores for the previous
year, an increase of 42.89%

• Total Assets stood at Rs.71,157 crores (US $ 7,881 million) as against Rs.30,326 crores,
an increase of 14%. The total paid up equity share capital stood at Rs.1,396 crores (US $
319 million)

• Earnings Per Share (EPS) for the year is Rs.54.20 (US $ 1.26)

• Dividend increased to 52.50%, payout of Rs.825 crores (US $ 189 million) for last year.

• The company’s contribution of Oil & Gas and petrochemicals, including toll conversion,
increased to 12.4 million tones during the year 2004 against 11.8 million tones for the
previous year, representing a growth of 4%.

• The Company’s refinery operated at 109% capacity utilization and processed 29.6 million
tones of crude during the 2004.

• Exports including deemed exports were Rs.14,969 crores (US $ 3,424 million) in
2004 Rs. 11,510 crores for the previous year, an increase of 30%.

• The Company’s operations have helped the nation save precious foreign exchange to the
tune of Rs.26,134 crores (US $ 5,978 million) in 2004.

• The Net Profit of the Company after the subsidiary and associate companies is Rs.7,572
crores (US $ 1,760 million)

73
 ANALYSIS

An option agreement is a contract in which the writer of the option grants the buyer of the
option the right to purchase from or sell to the writer a designated instrument at a specific price
within a specified period of time.

OBJECTIVE:
The objective of this analysis is to evaluate the profit/loss position of Option Holder &
Option Writer. This analysis done based on the sample data. The Sample data taken as Reliance
scrips of April – 2005. The lost size of the Reliance scrips is 600. The Options contract starting
period is 01/04/05 and maturity date is 28/04/05. The Reliance scrips will have a good volatility,
so that are chosen for sample data. The primary data of Reliance Options is collected from
various Newspapers, like Business standard, Economic times. The various Call/Put Options of
Reliance scrips available in the market. Those are

Call options (Strike price) Put options (Strike price)

520 CA 480 PA
540 CA 500 PA
560 CA 520 PA
580 CA 540 PA
600 CA 560 PA
620 CA 580 PA
640 CA 600 PA
660 CA 620 PA

74
Example: For 520 CA, 460.00 is the strike price & CA means Call America.
For 520 PA, 460.00 is the strike price & PA means Put America.
Call / Put America can be exercised on or before maturity period.

The following graph explains the current market price (change of volatility) of Reliance
shares in April 2005.

Market prices of Reliance Scrips

580 1.2
575
570
565 1
560
555 0.8
550
545
540 0.6
535
530
525 0.4
520
515 0.2
510
505
500 0
1 4 5 6 7 8 11 12 13 15 18 19 20 21 22 25 26 27 28
Date

75
LIMITATIONS:

 The sample size chosen as Reliance scrips of the month of April – 2005.
 The study is confined to April – 2005 only.
 The data gathered is completely restricted to the reliance scrips of April –2005 and hence
cannot be taken universal.

The following tables explain the amount of transactions between the Option holder & Option
writer. Table 1 Explains the various factors involved in option contracts, like premium,
volume, the current market price on that particular date, strike etc.

 The first column explains the trading date.

 The second column explains the current market price of particular date.
 The third column explains the Call/Put options, which are available in the market.
Every Call/Put option column is having three sub columns.
 The first column consists of the volume of the contracts, second column consists of
premium value per share on that particular date and third column consists of the total
premium value received by option writer on particular date.

76
 RELIANCE CALL OPTIONS Dtd:01-04-2005 TO 28.04.2005.
Call option ---- 500 CA 520 CA
Current Market No. of No. of
Date Premium Value Premium Value
Price contracts Contracts
1-April-05 568.65 5 63.00 315 58 52.90 3068.20
4-April-05 568.50 5 69.50 347.50 20 49.90 998
5-April-05 558.80 0 0.00 0.00 1 43.70 43.70
6-April-05 574.15 0 0.00 0.00 1 48.30 48.30
7-April-05 567.50 0 0.00 0.00 6 50.20 301.20
8-April-05 559.00 0 0.00 0.00 0 0 0
11-April-05 550.10 0 0.00 0.00 6 34.00 204
12-April-05 551.90 0 0.00 0.00 0 0 0
13-April-05 547.75 0 0.00 0.00 1 29 29
15-April-05 531.15 0 0.00 0.00 68 18.50 1258
18-April-05 520.65 0 0.00 0.00 302 11 11
19-April-05 515.50 7 20.65 144.55 572 9.70 5548.40
20-April-05 532.15 32 35.90 789.80 468 18.05 8447.40
1426.0
21-April-05 543.75 31 46 261 27.50 7177.50
0
22-April-05 547.55 1 50 50.00 196 29.20 5723.20
25-April-05 546.75 0 46.95 0.00 62 29.95 1856.90
26-April-05 548.65 0 47.70 0.00 110 31.90 3509.00
27-April-05 539.85 19 38.80 737.20 459 18.35 8422.65
28-April-05 543.85 0 0 0 189 24.40 4611.60

Call option ---- 540 CA 560 CA

Date Current No. of Premium Value No. of Premium Value
Market Contracts Contracts

77
 Price
1-April-05 568.65 278 36.50 10147.00 980 23.45 22981.00
4-April-05 568.50 132 34.95 46134.40 517 21.35 11037.95
5-April-05 558.80 49 26.90 1318.10 618 15.30 9455.40
6-April-05 574.15 68 38.85 2641.80 634 23.35 14803.90
7-April-05 567.50 21 31.80 667.80 319 19.20 6124.80
8-April-05 559.00 76 26.85 2040.60 1319 14.25 18795.75
11-April-05 550.10 78 19.10 1489.80 331 9.15 3028.65
12-April-05 551.90 131 19.65 2574.15 358 9.30 3329.40
13-April-05 547.75 136 16.60 2257.60 310 6.90 2139.00
15-April-05 531.15 536 7.60 4073.60 461 3.15 1452.15
18-April-05 520.65 271 3.93 1070.45 90 1.85 166.50
19-April-05 515.50 373 3.35 1249.55 138 1.30 179.40
20-April-05 532.15 399 7.15 2852.85 144 2.35 338.40
21-April-05 543.75 873 12.15 10606.95 345 4.45 1535.25
22-April-05 547.55 680 13.50 9180.00 274 4.30 1178.20
25-April-05 546.75 397 12.20 4843.40 192 3.70 710.40
26-April-05 548.65 565 13.50 7627.50 342 5.10 1744.20
27-April-05 539.85 1506 4.45 6701.70 2567 0.65 1668.55
28-April-05 543.85 1375 3.05 4193.75 113 0.05 5.65

Call option ---- 580 CA 600 CA

Current
No. of No. of
Date Market Premium Value Premium Value
Contracts Contracts
Price
1-April-05 568.65 374 14.00 5236.00 143 8.05 1165.45
4-April-05 568.50 378 11.95 4517.10 294 6.30 1852.20
5-April-05 558.80 200 8.45 1690.00 85 4.95 420.75
6-April-05 574.15 681 12.05 8206.05 195 6.20 1209.00
7-April-05 567.50 352 9.85 3467.20 103 5.20 535.60
8-April-05 559.00 298 6.65 1981.70 149 3.20 476.80
11-April-05 550.10 128 3.90 499.20 67 2.00 134.00
12-April-05 551.90 65 4.10 266.50 30 1.75 52.50
13-April-05 547.75 100 2.95 295.00 34 1.25 42.50
15-April-05 531.15 93 1.65 153.45 38 0.90 34.20
18-April-05 520.65 25 1.00 25.00 12 0.70 8.40
19-April-05 515.50 67 0.85 56.95 10 0.60 6.00
20-April-05 532.15 25 1.00 25.00 20 0.75 15.00

78
21-April-05 543.75 48 1.45 69.60 16 0.50 8.00
22-April-05 547.55 51 1.35 68.85 11 0.55 6.05
25-April-05 546.75 29 1.05 30.45 17 0.45 7.65
26-April-05 548.65 63 1.10 69.30 15 0.40 6.00
27-April-05 539.85 280 0.20 56.00 3 0.20 0.60
28-April-05 543.85 27 0.05 1.35 1 0.20 0.20

Call option ---- 620 CA 640 CA

Current
No. of No. of
Date Market Premium Value Premium Value
Contracts Contracts
Price
1-April-05 568.65 2 0.90 7.80 9 2.10 18.90
4-April-05 568.50 25 3.00 75 1 1.75 1.75
5-April-05 558.80 6 1.75 10.50 0 0.00 0.00
6-April-05 574.15 21 2.50 52.50 0 0.00 0.00
7-April-05 567.50 17 3.00 51.00 0 0.00 0.00
8-April-05 559.00 2 1.95 3.90 0 0.00 0.00
11-April-05 550.10 2 1.30 2.60 0 0.00 0.00
12-April-05 551.90 5 1.00 5.00 0 0.00 0.00
13-April-05 547.75 2 0.75 1.50 0 0.00 0.00
15-April-05 531.15 0 0.00 0.00 0 0.00 0.00
18-April-05 520.65 0 0.00 0.00 0 0.00 0.00
19-April-05 515.50 12 0.12 6.00 0 0.00 0.00
20-April-05 532.15 0 0.00 0.00 0 0.00 0.00
21-April-05 543.75 0 0.00 0.00 0 0.00 0.00
22-April-05 547.55 6 0.60 0.90 1 2.00 2.00
25-April-05 546.75 0 0.00 0.00 0 0.00 0.00
26-April-05 548.65 0 0.00 0.00 0 0.00 0.00
27-April-05 539.85 1 0.10 0.10 0 0.00 0.00
28-April-05 543.85 0 0.00 0.00 0 0.00 0.00

79
 Call option ---- 660 CA
Current
No. of
Date Market Premium Value
Contracts
Price
1-April-05 568.65 0 0 0.00
4-April-05 568.50 0 0 0.00
5-April-05 558.80 0 0 0.00
6-April-05 574.15 0 0 0.00
7-April-05 567.50 0 0 0.00
8-April-05 559.00 0 0 0.00
11-April-05 550.10 0 0 0.00
12-April-05 551.90 0 0 0.00
13-April-05 547.75 0 0 0.00
15-April-05 531.15 0 0 0.00
18-April-05 520.65 0 0 0.00
19-April-05 515.50 0 0 0.00
20-April-05 532.15 0 0 0.00
21-April-05 543.75 0 0 0.00
22-April-05 547.55 1 2.55 2.55
25-April-05 546.75 0 0 0.00
26-April-05 548.65 0 0 0.00
27-April-05 539.85 0 0 0.00
28-April-05 543.85 0 0

80
 RELIANCE PUT OPTIONS Dtd:01-04-2005 TO 28.04.2005.
Put option ---- 480 PA 500 PA
Current Market No. of No. of
Date Premium Value Premium Value
Price Contracts Contracts
1-April-05 568.65 0 0 0.00 0 0.00 0.00
4-April-05 568.50 0 0 0.00 2 2.20 4.40
5-April-05 558.80 0 0 0.00 1 2.90 2.90
6-April-05 574.15 0 0 0.00 0 0.00 0.00
7-April-05 567.50 0 0 0.00 1 1.90 1.90
8-April-05 559.00 0 0 0.00 1 2.50 2.50
11-April-05 550.10 0 0 0.00 3 2 6.00
12-April-05 551.90 0 0 0.00 0 0 0.00
13-April-05 547.75 0 0 0.00 1 2 2.00
15-April-05 531.15 0 0 0.00 0 3 27.00
18-April-05 520.65 2 2.90 5.80 15 4.95 74.25
19-April-05 515.50 0 0 0.00 42 5.50 231.00
20-April-05 532.15 0 0 0.00 75 2.50 187.50
21-April-05 543.75 0 0 0.00 20 1.25 35.00
22-April-05 547.55 0 0 0.00 7 0.95 6.65
25-April-05 546.75 0 0 0.00 4 0.50 2.00
26-April-05 548.65 0 0 0.00 0 0.00 0.00
27-April-05 539.85 0 0 0.00 20 0.00 14.00
28-April-05 543.85 0 0 0.00 0 0.00 0.00

81
 Put option ---- 520 PA 540 PA
Current
No. of No. of
Date Market Premium Value Premium Value
Contracts Contracts
Price
1-April-05 568.65 36 3.35 126 7.85 82 656.00
4-April-05 568.50 10 3.50 35 6.35 86 559.00
5-April-05 558.80 5 3.50 17.50 7.85 75 532.50
6-April-05 574.15 8 2.50 20.00 4.25 63 4.00
7-April-05 567.50 3 2.45 7.35 4.80 24 4.80
8-April-05 559.00 10 3.25 32.50 7.15 79 7.00
11-April-05 550.10 11 3.60 34.10 9.20 116 9.45
12-April-05 551.90 11 3.50 38.50 7.55 109 7.75
13-April-05 547.75 9 3.60 32.40 8.95 131 8.75
15-April-05 531.15 76 7.10. 600.40 17.10 265 17.50
18-April-05 520.65 156 10.35 1700.40 22.80 139 23.50
19-April-05 515.50 296 13.75 4173.60 27.60 97 28.00
20-April-05 532.15 270 6.55 1620.00 14.45 38 14.00
21-April-05 543.75 217 3.10 661.85 8.40 517 8.50
22-April-05 547.55 102 1.15 219.30 5.90 474 6.55
25-April-05 546.75 51 1.25 63.75 5.20 258 5.05
26-April-05 548.65 128 1.15 160 4.80 332 4.20
27-April-05 539.85 234 1.20 280.80 5.35 1582 7.00
28-April-05 543.85 10 0 0 0 900 0.005

Put option ---- 560 PA 580 PA

Current
No. of No. of
Date Market Premium Value Premium Value
Contracts Contracts
Price
1-April-05 568.65 176 15.05 2646.80 2 23.20 46.40
4-April-05 568.50 146 13.05 1905.30 4 22.50 90.00

82
 5-April-05 558.80 158 17.05 2693.90 1 30.00 30.00
6-April-05 574.15 215 9.35 2010.25 20 18.45 369.00
7-April-05 567.50 148 11.90 1761.20 54 24.45 1320.30
8-April-05 559.00 324 14.80 4795.20 4 29.00 216.00
11-April-05 550.10 191 19.00 3629.00 27 33.15 905.85
12-April-05 551.90 48 17.40 835.20 3 34.10 102.30
13-April-05 547.75 122 19.25 2348.50 6 0.00 0.00
15-April-05 531.15 146 32.50 4745.00 5 51.00 255.00
18-April-05 520.65 61 40.05 2479.65 0 0.00 0.00
19-April-05 515.50 12 47.35 570.60 1 60.00 60.00
20-April-05 532.15 16 31.15 498.40 0 0.00 0.00
21-April-05 543.75 25 22.00 550.00 0 0.00 0.00
22-April-05 547.55 17 16.10 273.70 0 0.00 0.00
25-April-05 546.75 7 16.05 112.35 0 0.00 0.00
26-April-05 548.65 11 16.55 182.05 0 0.00 0.00
27-April-05 539.85 50 20.75 10437.25 4 29.00 116.00
28-April-05 543.85 0 0 0.00 0 0.00 0.00

Put option ---- 600 PA 620 PA

Current
No. of No. of
Date Market Premium Value Premium Value
Contracts Contracts
Price
1-April-05 568.65 0 0 0.00 0 0.00 0.00
4-April-05 568.50 9 40.25 362.25 0 0.00 0.00
5-April-05 558.80 0 0.00 0.00 0 0.00 0.00
6-April-05 574.15 5 31.00 155.00 10 10 100.00
7-April-05 567.50 6 29.90 179.40 0 0.00 0.00
8-April-05 559.00 1 56.09 56.00 4 20 80.00
11-April-05 550.10 0 0.00 0.00 0 0.00 0.00
12-April-05 551.90 0 0.00 0.00 0 0.00 0.00
13-April-05 547.75 0 0.00 0.00 0 0.00 0.00
15-April-05 531.15 0 0.00 0.00 0 0.00 0.00

83
18-April-05 520.65 0 0.00 0.00 0 0.00 0.00
19-April-05 515.50 0 0.00 0.00 0 0.00 0.00
20-April-05 532.15 0 0.00 0.00 0 0.00 0.00
21-April-05 543.75 0 0.00 0.00 0 0.00 0.00
22-April-05 547.55 0 0.00 0.00 0 0.00 0.00
25-April-05 546.75 0 0.00 0.00 0 0.00 0.00
26-April-05 548.65 0 0.00 0.00 0 0.00 0.00
27-April-05 539.85 0 0.00 0.00 0 0.00 0.00
28-April-05 543.85 0 0.00 0.00 0 0.00 0.00

Tables of Net Pay-off of option holder & writer explain the profit/loss position of option
holder & option writer in Reliance scrips dated 1st April 2005 to 28th April 2005.

FOR CALL OPTIONS

NET PAY-OFF OF CALL OPTION HOLDER AND WRITER

Current Call Options Volume Net pay-off
Profit of a Net pay-off
market (Strike (No. of Premium of Writer
Holder of Holder
price Price) Contracts)
543.80 500 90 418.15 3942.00 3523.85 -3523.85
543.80 520 2780 526.75 66164 65637.25 -65637.28
543.80 540 7944 332.10 30187.20 29855.10 -29855.10
543.80 560 8864 169.15 0.00 -143765.95 143765.95
543.80 580 3284 83.60 0.00 -118797.20 118797.20
543.80 600 1243 44.15 0.00 -69812.45 69812.45
543.80 620 102 20.40 0.00 -7752.00 7752.00
543.80 640 11 5.85 0.00 -1063.35 1063.35
543.80 660 1 2.55 0.00 -113.65 113.65

 Generally for the Call options the current market price of the scrip should be greater than
the strike price then only the Call option holder will get profits

84
  In this analysis the Call option holders of Reliance scrips whose strike prices are less than
the current market price, they will get profits.
 The current market price on exercise date ( last Thursday of the month) is Rs.543.80
 The Call option holders whose strike prices are greater than the current market price, they
lost their premiums, which are paid initially to the option writer.
 The Call option holders whose strike prices are 500, 520,540 are said to be In-the Money.
Because if they exercise their Call options on maturity date they will get profits.
 The remained Call options holders whose strike prices are 560,580,600,620,640 and 660
are said to the Out-of-the-Money. Because if they exercise their Call options on
exercise date they will get losses.
Tables of Net Pay-off of option holder & writer explain the profit/loss position of option
holder & option writer in Reliance scrips dated 1st April 2005 to 28th April 2005.

FOR PUT OPTIONS

NET PAY-OFF OF PUT OPTION HOLDER AND WRITER

Current Put Options Net pay-off

Per Profit of a Net pay-off
market (Strike Volume of Writer
Contract Holder of Holder
price Price)
543.80 480 2 2.90 0 -124.70 124.70
543.80 500 191 32.85 0 -8332.95 8332.95
543.80 520 1633 75.65 0 -3879.75 38789.75
543.80 540 5367 177.20 0 -20217.40 20217.40
543.80 560 2326 379.35 37681.20 37301.85 -37301.85
543.80 580 125 355.25 4525.00 4169.75 -4169.75
543.80 600 21 157.15 1180.20 1023.05 -1023.05
543.80 620 14 30.00 1066.80 1036.80 -1036.80

 Generally for the Put options the current market price of the scrip should be less than the
strike price then only the Put option holder will get profits
 In this analysis the Put option holders of Reliance scrips whose strike prices are greater
than the current market price, they will get profits.
 The current market price on exercise date (last Thursday of the month) is Rs.530.30
 The Put option holders whose strike prices are less than the current market price, they lost
their premiums, which are paid initially to the option writer.

85
 The Put option holders whose strike prices are 560,580,600 and 620 are said to be
In-the Money. Because if they exercise their Put options on maturity date they will get
profits.
 The remained Put options holders whose strike prices are 480,500,520,540 are said to the
Out-of-the-Money. Because if they exercise their Put options on exercise date they will
get losses.

86
 Volume in Reliance Call Option
Dt: 01/04/05 - 28/04/05

10000
9000
8000
7000
OPEN INTEREST

6000
5000 Open Interest
4000
3000
2000
1000
0
500 520 540 560 580 600 620 640 660
CALL OPTION

87
 Premium received by Reliance call option holders

600

500

400
PREMIUM

300 PREMIUM

200

100

0
500 520 540 560 580 600 620 640 660

CALL OPTION

88
 Open interest in Reliance Put Option
Dt: 01/04/05 - 28/04/05

6000

5000
OPEN INTEREST

4000

3000 Open Interest

2000

1000

0
480 500 520 540 560 580 600 620
PUT OPTION

89
 Premium received by Reliance Put Option holders

400

350

300

250
PREMIUM

200 PREMIUM

150

100

50

0
480 500 520 540 560 580 600 620
PUT OPTION

FINDINGS

 At present scenario the Derivative market is increased to a great position. Approximate

its daily turnover reaches to the equal stage of cash market. The average daily turnover
of the NSE in Derivatives market is Rs.3,80,000 (lacks).

 Presently the available scrips in Futures and options segment are 55 Scrips.

90
 The derivatives market is newly started in India and it is not known by every people so
SEBI should take actions to create the awareness in the people about this Derivatives
market.

 In order to increase the derivatives market in India the SEBI should revise some of their
regulations like contract size, participation of FII in the Derivatives market. Contract size
should be minimized because small investor cannot afford this much of huge premiums.

 In cash market the profit/loss of the investor is depends on the current market price, i.e.
the investor may get unlimited profits & at the same time he may get unlimited losses.
But in Derivatives market the investor can enjoy unlimited profits by bearing limited
losses.

 In cash market the investor has to pay the total money, but in Derivatives the investor has
to pay premiums or margins, which are some percentage of total money.

 Derivatives are mostly used for Hedging purpose.

 In derivatives market the profit/loss position of option holder & option writer is purely
depends on the market fluctuations. However both will enjoy the profits/losses.

SUGGESTIONS

 Derivatives are mostly used for Hedging purpose

 In the above analysis we can observe that the Reliance scrips are having low volatility
market situations so the option writers of Reliance scrips will enjoy more profits than
option holders. of these also purchase the same they too can send profits.

91
 Even though the market is favor to the option writer, at the end of the month premiums
are affected because of the expiration time.
 In Bullish market the Call option writer will get more losses so the investor is suggested
to go for a Call option holder and the Put option holder will get more losses so the
investor suggested opting as a Put option writer.

 In Bearish market the Call option holder will get more losses so the investor is suggested
to go for a Call option writer and the Put option writer will get more losses so the investor
suggested opting as a Put option holder.

92
 CONCLUSIONS

Derivative market is found to be very attractive these days as it has a low volatility. Even
if with the point of investment they are with less investments. Profit will be more and risk will be
les in case of these derivates. Primarily options and futures are more favours these days. Options
are right but not obligation. Where as futures are forward contracts with future date and daily
closing pay off instruments. Now-a-days familiarity in stocks and Derivates being improving and
exchanges and busy with these operations. Hyderabad Stock exchange presently working at full
pace is a good financial market for the investors. The process and mechanism by H.S.E is well
and business is very satisfaction.

93
 BIBLIOGRAPHY

Derivatives core module workbook. NCF (NSE’s Certificate in Financial Market)

 FUTURS AND OPTIONS MARKETS JOHN C.HULL.

 INVESTMENT WILLIAMS.F.SHARPE
 SECURITIES ANALYSIS AND PORTFLIO MANAGEMENT
 FINANCIAL MANAGEMENT I.M.PANDEY.

WEBSITES:

 www.derivativesindia.com
 www.nseindia.com
 www.bseindia.com
 www.indiafoline.com
 www.sebi.gov.in
 www.ril.com
 www.bseindia.com
 www.888option.com

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