RISK-RETURN PROFILE IN FUTURES AND

OPTIONS-S&P CNX NIFTY

FOR

Ventura Securities Limited

B.V.Jagannadha Raju

Project Submitted in Partial fulfillment for the award of the degree of

MASTER OF BUSINESS ADMINISTRATION

BY

Osmania University, HYDERABAD 500007

 Certificate

This is to certify that the Dissertation entitled RISK- RETURN PROFILE IN

FUTURES AND OPTIONS-S&P CNX NIFTY., that is being submitted by
MR. in partial fulfillment of the requirements for the award of the degree of
MBA in FINANCE & MARKETING to Grahambell P.G.College is a
bonafide work carried out by him under the guidance and supervision of the
undersigned.

The results embodied in this dissertation have not been submitted to any
other university or institution for the award of any degree or diploma.

Date:

Place: Supervisor’s Signature and

designation
 DECLARATION

I here by declare that the dissertation entitled RISK- RETURN

PROFILE IN FUTURES AND OPTIONS-S&P CNX NIFTY

submitted by me in partial fulfillment of the requirements for the

award of the degree of MBA in FINANCE & MARKETING to

GRAHAMBELL P.G.COLLEGE of Management is a record of

bonafide work carried out by me.

The results embodied in this Dissertation have not been submitted to

any other University or Institution for the award of any degree or

diploma.

B.V.JAGANNADHA RAJU
 Acknowledgements

I am grateful to Mr. N.Shiva Kumar of Ventura Securities Ltd for granting me a

permission to do my project work in their esteemed organization for giving

necessary information in the department.

I would like to convey my heartiest thanks to my guide Sastry principal of our

College, Mr.Prasad of Head of Finance Department , Grahambell P.G College, for

his continuous support in making my project a successful.

I thank my family and friends for being a source of inspiration and support.

B.V.JAGANNADHA RAJU
 Table of Contents

Chapter No. Name of the concept Page No.

Introduction 1
Company profile 4
1
Overview of Financial markets 6
Objectives of the Study 16
Design of the Study 17
2
Methodology 18
Data Processing 19
Data Collection 20
3 Sources of Data 20
Methods of Data Collection 20
Interpretation 23
Findings 42
4 Conclusions and Recommendations 43
Limitations of the Study 44
Glossary 45
Bibliography 55

List of Tables, Graphs & Charts

S No. Name of the concept Page No.
1 Calculation of returns for futures and options 21
2 Graphical interpretation of futures and options 32

Abstract
Futures and Options are new to Indian financial markets and are introduced

2001-02 Financial year . Futures are financial derivatives whose risk and return

are unlimited.On the other hind options are also financial derivatives instrument.

But where as the risk is Limited to premium and the return is unlimited.

The research project titled RISK-RETURN PROFILE IN FUTURES AND

OPTIONS S&P CNX NIFTY is based on risk return caluculations in both futures

and options. These derivative instrument will not have it’s own value. But where

as the value changes depends on the underline asset price.These underline asset

may be either stock, index, influation, commodities etc.

In this case the underline assets SNP, CNX, NIFTY-50.

Risk and Returns are unlimited in Futures, but where as in options Risk is limited

to premium and the profit is Un-limited.

In this research it is found that options has given 14.19% monthly returns and

where as futures generated positive returns of 1.49%.

It is conclusions investment is invest in the options are better than the futures.

The investment is invested in the options only.

Chapter-1
 Introduction

Introduction
FUTURES

A future is an undertaking to buy or sell a standard quantity of a financial asset or

commodity at a future date and at a fixed price. Futures resemble forwards, but
are standardized contracts (ie. every futures contract has standardized terms that
dictate the size, the unit of price quotation, the delivery date and contract months)
and must be traded on a recognized exchange. Price movements are expressed in
ticks (the smallest unit of price quotation). Delivery of a future is rare. As the
delivery date draws near, most investors close out their positions by undertaking
an equal and opposite trade. The futures markets bring together hedgers who wish
to protect themselves against the rise or fall of prices, and speculators who are
trying to benefit from such movements. A clearing house acts as the counter party
in every transaction to protect against the risk of default, so the buyer and seller
do not have to deal directly with each other. Futures developed as a method for
establishing forward purchase prices and managing price instability caused by
seasonal factors in agricultural markets. Today, interest rate and stock index
futures attract the greatest volume.

OPTIONS
An option gives the buyer or holder the right, but not the obligation, to buy or sell
an underlying financial asset or commodity. Unlike futures, where the buyer has
to fulfil the contract, an option gives the choice of whether to exercise or not. An
option contract specifies a future date on or before which it can be exercised. This
date is known as the expiry date. The price of an option the 'strike' or 'exercise'
price is the price at which it can be exercised. Options are very flexible
instruments.

They allow investors to benefit from favourable price movements while limiting
the consequence of unfavourable price movements. Options holders have to pay a
'premium' for this protection as with any insurance contract. There are two kinds
of option. A call, which gives the holder the right to buy the
underlying instrument at a set exercise price, and a put, which gives the holder the
right to sell the underlying instrument at a set strike price. More than one option
transaction can be combined to create a spread. These strategies usually involve
the simultaneous purchase and sale of options with different prices, or expiry
dates, within the same class. American style options can be exercised at any time
before the expiry date, whereas European style options can be exercised only at
the specific expiry date and not before. Options can be traded on a recognized
exchange such as the Chicago Board of Trade or over the counter (OTC).

Company Profile:
COMPANY PROFILE
• Ventura Securities Ltd., is a leading stock broking organization

• Promoted and managed by professionals having exceptional knowledge of Capital

Market.

• Ventura believes in philosophy that the key to their business is service which will

result in total satisfaction to the clients.

Ventura – PROMOTERS

Sajid Malik, Director, is a member of the Institute of Chartered Accountants of

India.He has nearly fifteen years of varied experience in corporate advisory structured

finance and private equity transaction. He has an international exposure to developed

markets in Europe, US and the Far East and has been personally involved in international

equity offerings and cross border acquisitions. He is the CEO of Genesys International, a

company focused on outsourcing of GIS and engineering design services. He is a non-

executive director of Ventura Securities.

Hemant Majethia, Director is member of the Institute of Chartered Accountant

of India. He has nearly fifteen years of rich experience in the capital markets

intermediation, equity research and has a wide cross section of market relationships. Mr.

Majethia is the CEO of Ventura Securities. It was his vision to create an all India network

of brokers’ relationship and build the distribution strength of Ventura.

Company's Goal

• We aim to add value and provide our clients with an unrivalled and specialized

service which reflects the expertise and efficiency of our dedicated support teams.
History

FOUNDATION OF VENTURA

 Founded in 1994 by Chartered Accountants Sajid Malik and Hemant Majethia. They

are the first generation entrepreneurs and are the principal promoters of Ventura.

 A dedicated and efficient team of senior managers assists Mr. Majethia the CEO of

the company.

 Ventura is a full-service domestic brokerage house providing value-based advisory

services to Institutions (Foreign and Domestic), High Net Worth and Retail Investors

with its core area of operations being stock-broking.

 Ventura have considerable strength and domain knowledge in the booming

derivatives market.

 Ventura has achieved a reputation for innovative and unbiased research along with

excellent technical analysis and execution capabilities.

 Not only has Ventura provided value-added services to the gamut of India-based

funds, it has also developed the advice-driven business of high net worth and

corporate clients.

Why Ventura?

• Ventura’s services are offered under total confidentiality and integrity with the sole

purpose of maximizing returns for their clients.

• Equity Broking - Corporate Member of The Stock Exchange, Mumbai (BSE) and

National Stock Exchange of India Ltd. (NSE).

• Pan India reach - 380 terminals spread across 75 different locations, in semi urban,

urban and metropolitan areas.

• More than 100,000 retail clients serviced from the above locations

• Ventura have heavily invested in technology (customized and ready to use software)

involving front and back end operations offering seamless process and flawless

execution and raising our service levels.

• Ventura operate on an alert and well-defined system in risk management and

settlement mechanism

OFFERINGS
Research competency

• Market Outlooks and Strategy Analysis Market research at Ventura is structured to

meet a wide variety of customer needs.

• Services in this area range from the intra-day analysis of the most recent fundamental

and technical developments affecting pricing to longer-term strategic research of

supply, demand, and inventory trends.

• Along with its price forecasting capability, the Team undertakes analytical research

on hedging and trading strategies.

• The Team also publishes monographs on topics of broad interest to its customers,

such as the impact of changing accounting standards, developments in risk

management, and current hedge activities and strategic thought in the various sectors

of the market.

OVERVIEW OF FINANCIAL MARKETS

Introduction

There are 22 stock exchanges in India, the first being the Bombay Stock

Exchange (BSE), which began formal trading in 1875, making it one of the oldest
in Asia. Over the last few years, there has been a rapid change in the Indian

securities market, especially in the secondary market. Advanced technology and

online-based transactions have modernized the stock exchanges. In terms of the

number of companies listed and total market capitalization, the Indian equity

market is considered large relative to the country’s stage of economic

development. The number of listed companies increased from 5,968 in March

1990 to about 10,000 by May 1998 and market capitalization has grown almost 11

times during the same period.

The debt market, however, is almost nonexistent in India even though there has

been a large volume of Government bonds traded. Banks and financial institutions

have been holding a substantial part of these bonds as statutory liquidity

requirement.

The portfolio restrictions on financial institutions’ statutory liquidity requirement

are still in place. A primary auction market for Government securities has been

created and a primary dealer system was introduced in 1995.

There are six authorized primary dealers. Currently, there are 31 mutual funds,

out of which 21 re in the private sector. Mutual funds were opened to the private

sector in 1992. Earlier, in 1987, banks were allowed to enter this business,
breaking the monopoly of the Unit Trust of India (UTI), which maintains a

dominant position.

Before 1992, many factors obstructed the expansion of equity trading. Fresh

capital issues were controlled through the Capital Issues Control Act. Trading

practices were not transparent, and there was a large amount of insider trading.

Recognizing the importance of increasing investor protection, several measures

were enacted to improve the fairness of the capital market. The Securities and

Exchange Board of India (SEBI) was established in 1988. Despite the rules it set,

problems continued to exist, including those relating to disclosure criteria, lack of

Brokers, capital adequacy, and poor regulation of merchant bankers and

underwriters. There have been significant reforms in the regulation of the

securities market since 1992 in conjunction with overall economic and financial

reforms. In 1992, the SEBI Act was enacted giving SEBI statutory status as an

apex regulatory body. And a series of reforms was introduced to improve investor

protection, automation of stock trading, integration of national markets, and

efficiency of market operations. India has seen a tremendous change in the

secondary market for equity. Its equity market will most likely be comparable

with the world’s most advanced secondary markets within a year or two. The key

ingredients that underlie market quality in India’s equity market are:

• Exchanges based on open electronic limit order book

• Nationwide integrated market with a large number of informed traders and

fluency of short or long positions; and

• No counterparty risk.

Among the processes that have already started and are soon to be fully

implemented are electronic settlement trade and exchange-traded derivatives.

Before 1995, markets in India used open outcry, a trading process in which

traders shouted and hand signaled from within a pit. One major policy initiated by

SEBI from 1993 involved the shift of all exchanges to screen-based trading,

motivated primarily by the need for greater transparency. The first exchange to be

based on an open electronic limit order book was the National Stock Exchange

(NSE), which started trading debt instruments in June 1994 and equity in

November 1994. In March 1995, BSE shifted from open outcry to a limit order

book market. Currently, 17 of India’s stock exchanges have adopted open

electronic limit order. Before 1994, India’s stock markets were dominated by BSE

in other parts of the country.

RECENT DEVELOPMENTS AND POLICY ISSUES.

Financial industry did not have equal access to markets and was unable to

participate in forming prices, compared with market participants in Mumbai

(Bombay). As a result, the prices in markets outside Mumbai were often different

from prices in Mumbai. These pricing errors limited order flow to these markets.

Explicit nationwide connectivity and implicit movement toward one national

market has changed this situation. NSE has established satellite communications

which give all trading members of NSE equal access to the market. Similarly,

BSE and the Delhi Stock Exchange are both expanding the number of trading

terminals located all over the country. The arbitrages are eliminating pricing

discrepancies between markets.

The Indian capital market still faces many challenges if it is to promote more

efficient allocation and mobilization of capital in the economy.

Firstly, market infrastructure has to be improved as it hinders the efficient flow of

information and effective corporate governance. Accounting standards will have

to adapt to internationally accept accounting practices. The court system and legal

mechanism should be enhanced to better protect small shareholders’ rights and

their capacity to monitor corporate activities.

Secondly, the trading system has to be made more transparent. Market

information is a crucial public good that should be disclosed or made available to

all participants to achieve market efficiency. SEBI should also monitor more

closely cases of insider trading.

Thirdly, India may need further integration of the national capital market through

consolidation of stock exchanges. The trend all over the world is to consolidate

and merge existing stock exchanges. Not all of India’s 22 stock exchanges may be
able to justify their existence. There is a pressing need to develop a uniform

settlement cycle and common clearing system that will bring an end to

unnecessary speculation based on arbitrage opportunities.

Fourthly, the payment system has to be improved to better link the banking and

securities industries. India’s banking system has yet to come up with good

electronic funds transfer (EFT) solutions. EFT is important for problems such as

direct payments of dividends through bank accounts, eliminating counterparty

risk, and facilitating foreign institutional investment. The capital market cannot

thrive alone; it has to be integrated with the other segments of the financial

system. The global trend is for the elimination of the traditional wall between

banks and the securities market. Securities market development has to be

supported by overall macroeconomic and financial sector environments. Further

liberalization of interest rates, reduced fiscal deficits, fully market-based issuance

of Government securities and a more competitive banking sector will help in the

development of a sounder and a more efficient capital market in India. Capital

Market Reforms and Developments Reforms in the Capital Market Over the last

few years, SEBI has announced several far-reaching reforms to promote the

capital market and protect investor interests.

Reforms in the secondary market have focused on three main areas: structure

and functioning of stock exchanges, automation of trading and post trade systems,

and the introduction of surveillance and monitoring systems. Computerized online

trading of securities, and setting up of clearing houses or settlement guarantee

funds were made compulsory for stock exchanges. Stock exchanges were

permitted to expand their trading to locations outside their jurisdiction through

computer terminals. Thus, major stock exchanges in India have started locating

computer terminals in far-flung areas, while smaller regional exchanges are

planning to consolidate by using centralized trading under a federated structure.

Online trading systems have been introduced in almost all stock exchanges.

Trading is much more transparent and quicker than in the past. Until the early

1990s, the trading and settlement infrastructure of the Indian capital market was

poor. Trading on all stock exchanges was through open outcry, settlement systems

were paper-based, and market intermediaries were largely unregulated. The

regulatory structure was fragmented and there was neither comprehensive

registration nor an apex body of regulation of the securities market. Stock

exchanges were run as “brokers clubs” as their management was largely

composed of brokers. There was no prohibition on insider trading, or fraudulent

and unfair trade practices. Since 1992, there has been intensified market reform,

resulting in a big improvement in securities trading, especially in the secondary

market for equity. Most stock exchanges have introduced online trading and set

up clearing houses/corporations. A depository has become operational for scrip

less trading and the regulatory structure has been overhauled with most of the

powers for regulating the capital market vested with SEBI. The Indian capital

market has experienced a process of structural transformation with operations

conducted to standards equivalent to those in the developed markets. It was

opened up for investment by foreign institutional investors (FII’s) in 1992 and

Indian companies were allowed to raise resources abroad through Global

Depository Receipts (GDRs) and Foreign Currency Convertible Bonds (FCCBs).

The primary and secondary segments of the capital market expanded rapidly, with

greater institutionalization and wider participation of individual investors

accompanying this growth. However, many problems, including lack of

confidence in stock investments, institutional overlaps, and other governance

issues, remain as obstacles to the improvement of Indian capital market

efficiency.

PRIMARY MARKET

Since 1991/92, the primary market has grown fast as a result of the removal of

investment restrictions in the overall economy and a repeal of the restrictions

imposed by the Capital Issues Control Act. In 1991/92, Rs62.15 billion was raised

in the primary market. This figure rose to Rs276.21 billion in 1994/95. Since

1995/1996, however, smaller amounts have been raised due to the overall

downtrend in the market and tighter entry barriers introduced by SEBI for

investor protection .SEBI has taken several measures to improve the integrity of
the secondary market. Legislative and regulatory changes have facilitated the

corporatization of stockbrokers. Capital adequacy norms have been prescribed

and are being enforced. A mark-to-market margin and intraday trading limit have

also been imposed. Further, the stock exchanges have put in place circuit

breakers, which are applied in times of excessive volatility. The disclosure of

short sales and long purchases is now required at the end of the day to reduce

price volatility and further enhance the integrity of the secondary market.

MARK-TO-MARKET MARGIN AND INTRADAY LIMIT

Under the current clearing and settlement system, if an Indian investor buys and

subsequently sells the same number of shares of stock during a settlement period,

or sells and subsequently buys, it is not necessary to take or deliver the shares.

The difference between the selling and buying prices can be paid or received. In

other words, the squaring-off of the trading position during the same settlement

period results in non delivery of the shares that the investor traded.

Thus, possible at a relatively low cost. FII’s and domestic institutional investors

are, however, not permitted to trade without delivery, since nondelivery

transactions are limited only to individual investors. One of SEBI’s primary

concerns is the risk of settlement chaos that may be caused by an increasing

Number of no delivery transactions as the stock market becomes excessively

speculative. Accordingly, SEBI has introduced a daily mark-to-market margin

and intraday trading limit. The daily mark-to-market margin is a margin on a

broker’s daily position. The intraday trading limit is the limit to a broker’s

intraday trading volume. Every broker is subject to these requirements.

Each stock exchange may take any other measures to ensure the safety of the

market. BSE and NSE impose on members a more stringent daily margin,

including one based on concentration of business. A daily mark-to-market margin

is 100 percent of the notional loss of the stockbroker for every stock, calculated as

the difference between buying or selling price and the closing price of that stock

at the end of that day. However, there is a threshold limit of 25 percent of the base

minimum capital plus additional capital kept with the stock exchange or Rs1

million, whichever is lower. Until the notional loss exceeds the threshold limit,

the margin is not payable.

This margin is payable by a stockbroker to the stock exchange in cash or as a

bank guarantee from a scheduled commercial bank, on a net basis. It will be

released on the pay-in day for the settlement period. The margin money is held by

the exchange for 6-12 days. This cost the broker about 0.4-1.2 percent of the

notional loss, assuming that the broker’s funding cost is about 24-36 percent.

Thus, speculative trading without the delivery of shares is no longer cost-free.

Each broker’s trading volume during a day is not allowed to exceed the intraday
trading limit. This limit is 33.3 times the base minimum capital deposited with the

exchange on a gross basis, i.e., purchase plus sale. In the event of brokers wishing

to exceed this limit, they have to deposit additional capital with the exchange and

this cannot be withdrawn for six months.

Objectives of the Study:

1. Risk returns analysis of futures and options
2. Comparison of future returns with options.

Chapter-2
Design of the study

Methodology:
NSE NIFTY has taken for analyzing and comparing the risk return profile in

futures and options and caluculated the risk return monthly wise and yearly wise.

Futures and options data has been taken from 2002-2007 and caluculated the

profit and loss in Nifty futures and Options by taking the opening price and

closing price of the respective months.

To conclude rate of return calculated by using Average method on NIFTY

Futures;

The analysis is based on absolute returns rather rate of returns, because at the end

of the month out of the money options become zero. I.e here statistics (rate of

return will give wrong decision).

The entire analysis is based on comparative analysis of both Futures and

Options.

Chapter-3
 Data Processing

Data Collection:
From the NSEindia.com Data is collected related to the Futures and Options

Data Period: 2002 to 2007

SOURCES OF DATA:

Sources of Data: the main sources for the collected data are,

1. Ventura Terminal - POINTER.

2. NSEindia.com

3. Investopedia.com

Methods of Data Collection:

In these project two types of data is utilized i.e,

1. Primary data

2. Secondary date

Primary data: There is no primary data used in this analysis.

Secondary data: secondary data has been taken from nseindia.com pending

upon required information.

Data interpretation:-
Profit & Loss Calculations on NIFTY Futures-2002

Profit/Loss
S.NO Expiry Opening Closing Rs.
1 30-May-02 1104 1032.5 -71.50
1049.1
2 27-Jun-02 1038 5 11.15
1001.2
3 25-Jul-02 1063 5 -61.75
4 29-Aug-02 1054 987.2 -66.80
5 26-Sep-02 965 968.9 3.90
6 31-Oct-02 967.8 967.8 0.00
7 28-Nov-02 953 1050.5 97.50
1095.4
8 26-Dec-02 1048.55 5 46.90
Total -40.60
Percentage return -3.68
Profit & Loss Caluculations On NIFTY Futures-2003

Profit/Lo
S.NO Expiry Opening Closing ss Rs.
1 30-Jan-03 1092.75 1034.8 -57.95
2 27-Feb-03 1046.85 1053.6 6.75
3 27-Mar-03 1068.55 1002.8 -65.75
4 24-Apr-03 1002.5 929.7 -72.80
1002.2
5 29-May-03 931.25 5 71.00
1116.3
6 26-Jun-03 984.5 5 131.85
7 31-Jul-03 1114.15 1186 71.85
1341.2
8 28-Aug-03 1188 5 153.25
9 25-Sep-03 1355.8 1357.5 1.70
10 30-Oct-03 1390.5 1516.8 126.30
11 27-Nov-03 1563.5 1598 34.50
12 24-Dec-03 1624.35 1810 185.65
Total 586.35
Percentage return 53.66
Profit & Loss Caluculations On NIFTY Futures-2004

S.NO Expiry Opening Closing Profit/Loss Rs.

1 29-Jan-04 1841 1843.1 2.10
2 26-Feb-04 1814 1766.2 -47.80
3 25-Mar-04 1808.1 1704.4 -103.70
4 29-Apr-04 1748.15 1808.9 60.75
5 27-May-04 1779 1587.5 -191.50
6 24-Jun-04 1479.5 1470.5 -9.00
7 29-Jul-04 1467.2 1618.5 151.30
8 26-Aug-04 1624 1610.75 -13.25
9 30-Sep-04 1601.7 1745.15 143.45
10 28-Oct-04 1778 1800.25 22.25
11 25-Nov-04 1783.95 1901.35 117.40
12 30-Dec-04 1944.5 2060.45 115.95
Total 247.95
Percentage return 13.47
Profit & Loss Caluculations On NIFTY Futures-2005

S.NO Expiry Opening Closing Profit/Loss Rs.

1 27-Jan-05 2087 1955.3 -131.70
2 24-Feb-05 2008.65 2055.25 46.60
3 31-Mar-05 2055.95 2035.55 -20.40
4 28-Apr-05 2063.5 1941.2 -122.30
5 26-May-05 1882.55 2074.6 192.05
6 30-Jun-05 2048 2220.5 172.50
7 28-Jul-05 2206.05 2321.55 115.50
8 25-Aug-05 2296 2354.2 58.20
9 29-Sep-05 2333.5 2333.5 0.00
10 27-Oct-05 2596 2353.1 -242.90
11 24-Nov-05 2297.2 2635 337.80
12 29-Dec-05 2671.55 2821.7 150.15
Total 555.50
Percentage return 26.62
Profit & Loss Caluculations On NIFTY Futures-2006

S.NO Expiry Opening Closing Profit/Loss Rs.

1 25-Jan-06 2816.8 2940 123.20
2 23-Feb-06 2980 3061.4 81.40
3 30-Mar-06 3046 3417 371.00
4 27-Apr-06 3406.9 3508.2 101.30
5 25-May-06 3505.9 3176.9 -329.00
6 29-Jun-06 3184 2997.25 -186.75
7 27-Jul-06 3122 3156 34.00
8 31-Aug-06 3098 3098 0.00
9 28-Sep-06 3434 3572 138.00
10 26-Oct-06 3590.9 3678.2 87.30
11 30-Nov-06 3754.4 3953.8 199.40
12 28-Dec-06 4003 3971.35 -31.65
Total 588.20
Percentage return 20.88
Profit & Loss calculations on NIFTY options-2002

Option Strike & Type Opening Closing Profit/Loss Rs.

1100 19 0 -19.00
1050 19.95 0 -19.95
1050 23.95 0 -23.95
1050 3 0 -3.00
950 45 22 -23.00
950 24.65 0.85 -23.80
950 14.9 93.9 79.00
1050 19 47.5 28.50
169.45 164.25 -5.20
Total -3.07
Percentage returns -10.40
Profit & Loss caluculations on NIFTY options-2003

Option Strike & Type Opening Closing Profit/Loss Rs.

1100 18.8 0 -18.80
1050 15.6 3.3 -12.30
1050 27.5 0 -27.50
1000 16.4 0 -16.40
950 8.5 52 43.50
1500 53.5 165 111.50
1100 31 85 54.00
1200 17.95 136.25 118.30
1350 35.85 7.5 -28.35
1400 39.95 118 78.05
1550 48.8 46.35 -2.45
1600 50.5 210 159.50
Total 364.35 823.4 459.05
Percentage returns 125.99
 Profit & Loss caluculations on NIFTY options-2004

Profit/Loss
Option Strike & Type Opening Closing Rs.
1850 63 0 -63.00
1850 45 0 -45.00
1800 52 0 -52.00
1750 47.45 60 12.55
1800 41 0 -41.00
1500 49.45 0 -49.45
1450 67 170 103.00
1600 54.3 10.5 -43.80
1600 35.5 146 110.50
1750 49 51.9 2.90
1800 29.75 102.7 72.95
1950 41.5 115 73.50
Total 574.95 656.1 81.15
Percentage
returns 14.11
Profit & Loss caluculations on NIFTY options-2005

Option Strike & Type Opening Closing Profit/Loss Rs.

2100.00 33.05 0 -33.05
2000.00 47 55 8.00
2050.00 65.9 0 -65.90
2050.00 50 0 -50.00
1900.00 34.1 175.5 141.40
2050.00 39 169 130.00
2200.00 47.2 121.95 74.75
2300.00 47.1 54 6.90
2350.00 43.05 262 218.95
2600.00 56.55 0 -56.55
2300.00 61 329 268.00
2650.00 73.5 174.95 101.45
Total 597.45 1341.4 743.95
Percentage returns 124.52
Profit & Loss caluculations on NIFTY options-2006

Option Strike & Profit/Loss

Type Opening Closing Rs.
2800.00 73.6 140.15 66.55
3000.00 52.4 61.1 8.70
3050.00 79.45 336.5 257.05
3400.00 97.15 108 10.85
3500.00 94 0 -94.00
3200.00 123 0 -123.00
3100.00 130 55.55 -74.45
3100.00 105 315.55 210.55
3450.00 79 122.5 43.50
3600.00 79 76.55 -2.45
3750.00 87.1 207.9 120.80
4000.00 97.65 0 -97.65
Total 1097.35 1423.8 326.45
Percentage returns 29.75
Profit & Loss caluculations on NIFTY options-2007

Option Strike & Type Opening Closing Profit/Loss Rs.

3950.00 109.1 195 85.90
4100.00 99.2 0 -99.20
3950.00 131.95 0 -131.95
Total 340.25 195 -145.25
Percentage returns -42.69
 GRAPH-1

R ET U R N S 2 0 0 2

1 5 0 .0 0
1 0 0 .0 0
RATEOF RETURNS

5 0 .0 0
0 .0 0
- 5 0 .0 0 1 2 3 4 5 6 7 8

- 1 0 0 .0 0
M O NT HS
 GRAPH-2
S.NO MONTH FUTURES OPTIONS
1 30-May-02 -71.50 -19.00
2 27-Jun-02 11.15 -19.95
3 25-Jul-02 -61.75 -23.95
4 29-Aug-02 -66.80 -3.00
5 26-Sep-02 3.90 -23.00
6 31-Oct-02 0.00 -23.80
7 28-Nov-02 97.50 79.00
8 26-Dec-02 46.90 28.50
TOTAL -40.60 -5.20
AVERAGE -0.46 -0.38
 RETURNS-2003

200.00

150.00
RATEOFRETURN

100.00

50.00

0.00
1 2 3 4 5 6 7 8 9 10 11 12
-50.00

-100.00
MONTHS

S.NO MONTH FUTURES OPTIONS

1 30-Jan-03 -57.95 -18.80
2 27-Feb-03 6.75 -12.30
3 27-Mar-03 -65.75 -27.50
4 24-Apr-03 -72.80 -16.40
5 29-May-03 71.00 43.50
6 26-Jun-03 131.85 111.50
7 31-Jul-03 71.85 54.00
8 28-Aug-03 153.25 118.30
9 25-Sep-03 1.70 -28.35
10 30-Oct-03 126.30 78.05
11 27-Nov-03 34.50 -2.45
12 24-Dec-03 185.65 159.50
TOTAL 586.35 459.05
AVERAGE 4.47 38.25

GRAPH-3
 RETURNS2004

200.00
150.00
100.00
RATEOF RETURN

50.00
0.00
-50.00 1 2 3 4 5 6 7 8 9 10 11 12
-100.00
-150.00
-200.00
-250.00
MONTHS

S.NO MONTH FUTURES OPTIONS

1 29-Jan-04 2.10 -63.00
2 26-Feb-04 -47.80 -45.00
3 25-Mar-04 -103.70 -52.00
4 29-Apr-04 60.75 12.55
5 27-May-04 -191.50 -41.00
6 24-Jun-04 -9.00 -49.45
7 29-Jul-04 151.30 103.00
8 26-Aug-04 -13.25 -43.80
9 30-Sep-04 143.45 110.50
10 28-Oct-04 22.25 2.90
11 25-Nov-04 117.40 72.95
12 30-Dec-04 115.95 73.50
TOTAL 247.95 81.15
AVERAGE 1.12 6.76

GRAPH-4
 RETURNS20 05

400.00
300.00
RATEOF RETURN

200.00
100.00
0.00
-100.00 1 2 3 4 5 6 7 8 9 10 11 12

-200.00
-300.00
M ONT HS

S.NO MONTH FUTURES OPTIONS

1 27-Jan-05 -131.70 -33.05
2 24-Feb-05 46.60 8.00
3 31-Mar-05 -20.40 -65.90
4 28-Apr-05 -122.40 -50.00
5 26-May-05 192.05 141.40
6 30-Jun-05 172.50 130.00
7 28-Jul-05 115.50 74.75
8 25-Aug-05 58.20 6.90
9 29-Sep-05 0.00 218.95
10 27-Oct-05 -242.90 -56.55
11 24-Nov-05 337.80 268.00
12 29-Dec-05 150.15 101.45
TOTAL 555.40 743.95
AVERAGE 2.22 62.00

GRAPH-5
 RETURNS 2006

500.00
400.00
300.00
RATEOF RETURN

200.00
100.00
0.00
-100.00 1 2 3 4 5 6 7 8 9 10 11 12
-200.00
-300.00
-400.00
M ONTHS

S.NO MONTH FUTURES OPTIONS

1 25-Jan-06 123.20 66.55
2 23-Feb-06 81.40 8.70
3 30-Mar-06 371.00 257.05
4 27-Apr-06 101.30 10.85
5 25-May-06 -329.00 -94.00
6 29-Jun-06 -186.75 -123.00
7 27-Jul-06 34.00 -74.45
8 31-Aug-06 0.00 210.55
9 28-Sep-06 138.00 43.50
10 26-Oct-06 87.30 -2.45
11 30-Nov-06 199.40 120.80
12 28-Dec-06 -31.65 -97.65
TOTAL 588.20 326.45
AVERAGE 20.88 29.75

GRAPH-6
 RETURNS2007

200.00
150.00
RATEOF RETURNS

100.00
50.00

0.00
-50.00 1 2 3

-100.00
-150.00
M ONTHS

S.NO MONTH FUTURES OPTIONS

1 25-Jan-07 179.80 85.90
2 22-Feb-07 -66.20 -99.20
3 29-Mar-07 -132.90 -131.95
TOTAL -19.30 -145.25
AVERAGE -0.16 -48.42
 FUTURES PERCENTAGE OPTIONS PERCENTAGE
SI NO YEAR RETURNS RETURNS
1 2002 -0.46 -0.38
2 2003 4.47 38.25
3 2004 1.12 6.76
4 2005 2.22 62
5 2006 1.74 27.2
6 2007 -0.16 -48.72
TOTAL 8.93 85.11
AVERAGE 1.49 14.19
 Chapter-4

Findings, Limitations & Suggestions

Findings
Risk and Returns are unlimited in Futures, but where as in options Risk is limited

to premium and the profit is Un-limited.

In this research it is found that options has given 14.19% monthly returns and

where as futures generated positive returns of 1.49% per month

Conclusions & Recommendations:

It is conclusions investment is invest in the options are better than the futures.

The risk in the options is limited to premium only.

Limitations

There is no lack of buyers and sellers in the options and futures.

Trading cost is not included in the contract.

Brokerage is not included.

Glossary
FUTURES
A financial contract obligating the buyer to purchase an asset (or the seller to sell

an asset), such as a physical commodity or a financial instrument, at a

predetermined future date and price. Futures contracts detail the quality and

quantity of the underlying asset; they are standardized to facilitate trading on a

futures exchange. Some futures contracts may call for physical delivery of the

asset, while others are settled in cash. The futures markets are characterized by

the ability to use very high leverage relative to stock markets.

Futures can be used either to hedge or to speculate on the price movement of the

underlying asset. For example, a producer of corn could use futures to lock in a

certain price and reduce risk (hedge). On the other hand, anybody could speculate

on the price movement of corn by going long or short using futures.

OPTIONS

An option gives the buyer or holder the right, but not the obligation, to buy or sell

an underlying financial asset or commodity. Unlike futures, where the buyer has

to fulfil the contract, an option gives the choice of whether to exercise or not. An

option contract specifies a future date on or before which it can be exercised. This

date is known as the expiry date. The price of an option the 'strike' or 'exercise'
price is the price at which it can be exercised. Options are very flexible

instruments. They allow investors to benefit from favourable price movements

while limiting the consequence of unfavourable price movements. Options

holders have to pay a 'premium' for this protection as with any insurance contract.

There are two kinds of option. A call, which gives the holder the right to buy the

underlying instrument at a set exercise price, and a put, which gives the holder the

right to sell the underlying instrument at a set strike price. More than one option

transaction can be combined to create a spread. These strategies usually involve

the simultaneous purchase and sale of options with different prices, or expiry

dates, within the same class. American style options can be exercised at any time

before the expiry date, whereas European style options can be exercised only at

the specific expiry date and not before. Options can be traded on a recognized

exchange such as the Chicago Board of Trade or over the counter (OTC)

Strike Price

The stated price per share for which underlying stock may be purchased (for a

call) or sold (for a put) by the option holder upon exercise of the option contract.

When you exercise your option, this is the value that you get the shares for.

Option strike prices typically increment Rs 2.50 or Rs 5.00.

Call option

The period of time between the opening and closing of some future markets

wherein the prices are established through an auction process.

An option contract giving the owner the right (but not the obligation) to buy a

specified amount of an underlying security at a specified price within a specified

time.

In some exchanges, the call period is an important time in which to match and

execute a large number of orders before opening and closing.

A call becomes more valuable as the price of the underlying asset (stock)

appreciates.

Put option

An option contract giving the owner the right, but not the obligation, to sell a

specified amount of an underlying asset at a set price within a specified time. The

buyer of a put option estimates that the underlying asset will drop below the

exercise price before the expiration date.The possible payoff for a holder of a put

option contract is illustrated by the following diagram:

When an individual purchases a put, they expect the underlying asset will decline

in price. They would then profit by either selling the put options at a profit, or by

exercising the option. If an individual writes a put contract, they are estimating

the stock will not decline below the exercise price, and will not increase

significantly beyond the exercise price.

Consider if an investor purchased one put option contract for 100 shares

of ABC Co. for Rs1, or Rs100 (Rs1*100). The exercise price of the shares is Rs10

and the current ABC share price is Rs12. This contract has given the investor the

right, but not the obligation, to sell shares of ABC at Rs10.

If ABC shares drop to Rs8, the investor's put option is in-the-money and he can

close his option position by selling his contract on the open market. On the other

hand, he can purchase 100 shares of ABC at the existing market price of Rs 8,

then exercise his contract to sell the shares for Rs10. Excluding commissions, his

total profit for this position would be Rs100 [100*(Rs10 - Rs8 - Rs1)]. If the

investoralready
owned 100 shares of ABC, this is called a "married put" position and serves as a

hedge against a decline in share price.

Hedge

Making an investment to reduce the risk of adverse price movements in an asset.

Normally, a hedge consists of taking an offsetting position in a related security,

such as a futures contract.

An example of a hedge would be if you owned a stock, then sold a futures

contract stating that you will sell your stock at a set price, therefore avoiding

Investors use this strategy when they are unsure of what the market will do.

Market inflation perfect hedge reduces your risk to nothing (except for the cost of

the hedge).

Index

A statistical measure of change in an economy or a securities market. In the case

of financial markets, an index is essentially an imaginary portfolio of securities

representing a particular market or a portion of it. Each index has its own

calculation methodology and is usually expressed in terms of a change from a

base value. Thus, the percentage change is more important than the actual

numeric value. For example, knowing that a stock exchange is at, say, 5,000

doesn't tell you much. However, knowing that the index has risen 30% over the

last year to 5,000 gives a much better demonstration of performance.

The plural of index can be either "indexes" or "indices". The Standard & Poor's

500 is one of the world's best known indexes, and is the most commonly used

benchmark for the stock market. Technically, you can't actually invest in an

index. Rather, you invest in a security such as an index fund or exchange-traded

fund that attempts to track an index as closely as possible.

Index Futures

A futures contract on a stock or financial index. For each index there may be a

different multiple for determining the price of the futures contract.

For example, the S&P 500 index is one of the most widely traded index futures

contracts in the U.S. Often stock portfolio managers who want to hedge risk over

a certain period of time will use the S&P 500 index future to do so. By shorting

these contracts, stock portfolio managers can protect themselves from downside

price risk of the broader market. However, by using this hedging strategy, if

perfectly done, the manager's portfolio will not participate in any gains on the

index; instead the portfolio will lock in gains equivalent to the risk-free rate of

interest.

Alternatively stock portfolio managers can use index futures to increase their

exposure to movements in a particular index, essentially leveraging their

portfolio.
Index Option

A call or put option on a financial index.]

nvestors trading index options are essentially betting on the overall movement of

the stock market as represented by a basket of stocks. Options on the S&P 500

are some of the most actively traded options in the world.

Nifty 50

The 50 stocks that were most favored by institutional investors in the 1960s and

1970s. Companies in this group were usually characterized by consistent earnings

growth and high P/E ratios.

The nifty-50 stocks got their notoriety in the bull markets of the 1960s and early

1970s. They became known as "one-decision" stocks because investors were told

they could buy and hold forever.

Examples of nifty-50 stocks included General Electric, Coca-Cola, and IBM.

However, part of this list included companies that have been troubled in the last

decade, such as Xerox and Polaroid.

Equity

Stock or any other security representing an ownership interest.

On the balance sheet, the amount of the funds contributed by the owners (the

stockholders) plus the retained earnings (or losses). Also referred to as

"shareholder’s equity".
In the context of margin trading, the value of securities in a margin account minus

what has been borrowed from the brokerage.

In the context of real estate, the difference between the current market value of

the property and the amount the owner still owes on the mortgage. Thus, it is the

amount, if any, the owner would receive after selling a property and paying off

the mortgage.

Equity is a term whose meaning depends very much on the context. In general,

you can think of equity as ownership in any asset after all debts associated with

that asset are paid off. For example, a car or house with no outstanding debt is

considered the owner's equity since he or she can readily sell the items for

cash. Stocks are equity because they represent ownership of a company, whereas

bonds are classified as debt because they represent an obligation to pay and not

ownership of assets.

Market Value

The current quoted price at which investors buy or sell a share of common stock

or a bond at a given time. Also known as "market price"

The market capitalization plus the market value of debt. Sometimes referred to as

"total market value".

In the context of securities, market value is often different from book value

because the market takes into account future growth potential. Most investors who

use fundamental analysis to pick stocks look at a company's market value and
then determine whether or not the market value is adequate or if it's undervalued

in comparison to it's book value, net assets or some other measure.

Stock

A type of security that signifies ownership in a corporation and represents a

claim on part of the corporation's assets and earnings.

There are two main types of stock: common and preferred. Common stock usually

entitles the owner to vote at shareholders' meetings and to receive dividends.

Preferred stock generally does not have voting rights, but has a higher claim on

assets and earnings than the common shares. For example, owners of preferred

stock receive dividends before common shareholders and have priority in the

event that a company goes bankrupt and is liquidated. Also known as

"shares" or "equity".

A holder of stock (a shareholder) has a claim to a part of the corporation's assets

and earnings. In other words, a shareholder is an owner of a company. Ownership

is determined by the number of shares a person owns relative to the number of

outstanding shares. For example, if a company has 1,000 shares of stock

outstanding and one person owns 100 shares, that person would own and have

claim to 10% of the company's assets. Stocks are the foundation of nearly every

portfolio. Historically, they have outperformed most other investments over the

long run.
Shareholder

Any person, company, or other institution that owns at least 1 share in a company.

A shareholder may also be referred to as a stockholder.

Shareholders are the owners of a company. They have the potential to profit if the

company does well, but that comes with the potential to lose if the company does

poorly.

Shares

A unit of ownership interest in a corporation or financial asset. While owning

shares in a business does not mean that the shareholder has direct control over the

business's day-to-day operations, being a shareholder does entitle the possessor to

an equal distribution in any profits, if any are declared in the form of dividends.

The two main types of shares are common shares and preferred shares.

In the past, shareholders received a physical paper stock certificate that indicated

that they owned "x" shares in a company. Today, brokerages have electronic

records that show ownership details. Owning a "paperless"

share makes conducting trades a simpler and more streamlined process, which is a

far cry from the days were stock certificates needed to be taken to a

brokerage before a trade could be conducted. .While shares are often used to refer

to the stock of a corporation, shares can also represent ownership of other

classes of financial assets, such as mutual funds.

Stock Option

A privilege, sold by one party to another, that gives the buyer the right, but not the

obligation, to buy (call) or sell (put) a stock at an agreed-upon price within a

certain period or on a specific date. In the U.K., it is known as a "share option".

American options can be exercised anytime between the date of purchase and the

expiration date. European options may only be redeemed at the expiration date.

Most exchange-traded stock options are American.

Security

An instrument representing ownership (stocks), a debt agreement (bonds), or the

rights to ownership (derivatives).

A security is essentially a contract that can be assigned a value and traded.

Examples of a security include a note, stock, preferred share, bond, debenture,

option, future, swap, right, warrant, or virtually any other financial asset.

Commodity

A basic good used in commerce that is interchangeable with other commodities of

the same type. Commodities are most often used as inputs in the production of

other goods or services. The quality of a given commodity may differ slightly, but

it is essentially uniform across producers. When they are traded on an exchange,

commodities must also meet specified minimum standards, also known as a basis

grade. Any good exchanged during commerce, which includes goods traded on a

commodity exchange.
The basic idea is that there is little differentiation between a commodity coming

from one producer and the same commodity from another producer - a barrel of

oil is basically the same product, regardless of the producer. Compare this to, say,

electronics, where the quality and features of a given product will be completely

different depending on the producer. Some traditional examples of commodities

include grains, gold, beef, oil and natural gas. More recently, the definition has

expanded to include financial products such as foreign currencies and

indexes. Technological advances have also led to new types of commodities being

exchanged in the marketplace: for example, cell phone minutes and bandwidth.

The sale and purchase of commodities is usually carried out through futures

contracts on exchanges that standardize the quantity and minimum quality of the

commodity being traded. For example, the Chicago Board of Trade stipulates that

one wheat contract is for 5,000 bushels and also states what grades of wheat (e.g.

No. 2 Northern Spring) can be used to satisfy the contract.

Bibliography

1. NSEindia.com/

2. Investopedia.com

3. Glossary.reuters.com