A PROJECT REPORT ON ANALYSIS OF DERIVATIVES AT

SHAREKHAN LIMITED Raigad Colony, Ghatpuri Road, Khamgoan MASTER OF BUSINESS ADMINISTRATION IN (FINANCE) SUBMITTED BY

Anup Narayanappa Sadawarte

(2011-2012)
OF

DBAR, SSGMCE, SHEGAON

A DECLARATION

I, Anup Narayanappa Sadawarte, a student of MBA hereby declare that the project report entitled ANALYSIS OF DERIVATIVES Is the authentic work done by me at SHAREKHAN LIMITED KHAMGAON. This report is being submitted in partial fulfillment of the requirement of the award of Master of Business Administration (MBA) degree.

Anup Narayanappa Sadawarte

CERTIFICATE

This is to certify that Mr. Anup Narayanappa Sadawarte, a student of Shri Sant Gajanan Maharaj College of Engineering, Shegaon has completed his project with the FINANCE DEPARTMENT of our company on

ANALYSIS OF DERIVATIVES .
The duaration of the training was from 3rd June 2011 to 18th July 2011. During the project period in our organization his performance was found to be GOOD. We wish his all the best in his future endeavors.

Date: 19/07/2011 Place: Khamgaon

For SHAREKHAN LTD.

Mr. Durgesh N. Anokar (Branch Manager)

ACKNOWLEDGEMENT

It gives me great pleasure in submitting this project report on ANALYSIS OF DERIVATIVES

I express my gratitude and heartfelt thanks to Mr. Durgesh N. Anokar senior manager (finance), for his valuable guidance and kind co-operation during the project. I also would like to thanks our HOD Prof. H. M. Jha (Bidyarthi) who is HOD of our MBA department for giving support to my project report.

I am thankful to each and every Employee of Shared Sharekhan LTD. for co-operating in their best possible manner for providing me valuable information which was tremendous useful for completion of the report.

Anup Narayanappa Sadawarte

INDEX

Sr. No Chapter 1 1.1 1.2 1.3 1.4 1.5 1.6 Chapter2 2.2 2.3 Chapter 3 Chapter 4 Chapter 5 Chapter 6 Chapter 7

Topics Introduction Object of the Project Selection Of the Topic Objective of Study Research Methodology Scope of the Study Limitation of the study Company Profile Organizational Philosophy Product of Company Analysis and Interpretation Findings Conclusion Recommendation and Suggestion Bibliography

Remark

1 INTRODUCTION

INTRODUCTION

Market potential is nothing but the finding out potential customers for the product of organisation; which gives maximum profitability. To find out market potential study of competitors; consumer behaviour; brand positioning is must which gives idea about the market scenario. Online share trading share trading is nothing but the buying and selling shares as per the market position, this is done through broker. Broker-broker is the person who brings buyer and seller together. In case of online share trading owner of particular organisation which provides facility of online share trading is

broker.Eg-www.sharekhan.com here SSKI securities limited is the broker.Acessing a internet is as easy as driving a car. One just needs to understand the basic operations of a computer. Many companies have used the internet to increase their reach to bring the convenience and access to the doorstep of the consumer. Financial service sector was no different. E-brokers have used the internet to lubricate the entire investment process so as to speed up and increase the reach of e-broking. Online trading enables one and all to make trades right from his home on air conditioned office. The ease of transaction has made it highly pragmatic. For this one must understand concept of e-broking and how it works.

E-Broking
Electronic broking is a means of buying and selling shares on the stock exchange electronically i.e. through the internet. The speed of transaction, confidentiality about the prices and ease of settlement in the paperless mode should be good reason for the retail investors to jump on the net. Online share trading is perfect combination of the medium of the net catering to real life concept. Given the trading is all about having access to multiple information sources from the organization s performance to the industrial and economical scenarios as well as processing the analytical tools to process this information, the net really is the perfect solution to investor needs.

Objective and Limitation of Project

Objective: This project titled ANALYSIS OF DERIVATIVES was aimed to deal with following aspects as under:  To study various aspect and terminology of derivative instruments  To study various Trading Strategies in Derivatives  To study overall Indian Derivatives Markets. Limitation: During the project the following limitations are found:  The major limitation of the project was time span i.e. only 2 month. So it was difficult to go in depth study in the respective subject.  It is very difficult to collect the financial data relating to the derivatives or company, because it comes under business secrecy.  The project was undertaken in the Jalgaon City, which is relatively a small city, and so that the clients very small in number. Many of the clients were not able to define the strategies used by them.

REASEARCH METHODOLOGY:

Research is a common parlance refers to a search for common knowledge. Research as a scientific and systematic search for pertinent information on a specific topic. Research is an academic activity and as such the term should be used in a technical sense. Research comprise defining and redefining problems formulating hypothesis or suggested solutions, collecting, organizing and evaluating data; making deduction and reaching conclusion and at last carefully testing conclusion to determine whether they tit the formulating hypothesis. DATA COLLECTION : The task of data collection begins after a research problem has been defined and research plan chalked out. In research data is divided into two major parts or types. 1) Primary Data 2) Secondary Data PRIMARY DATA : The data are those which are collected a fresh and for the first time and thus happen to be original in character. The primary data is collected through personal interview and also information which provided by company. ASSUMPTIONS 1) It has been assumed that sample of 100 respondents represents the whole population. 2) The information given by the customer is unbiased.

LITERATURE SURVEY Development of Working Hypothesis: The hypothesis could be developed by discussing with the concerning department heads and guides about this exploratory research and reached to the conclusion that the data is to be collected by personal interaction with the customers, asking them about the service and the improvement required. First of all they are aware of derivatives or not and then analyzing the findings to reach to the objective of research. SAMPLING SIZE: Large sample gives reliable result than small sample. However it is not feasible to target entire population or even a substantial portion to achieve a reliable result. So, in this aspect selecting the sample to study is known as sample size. Hence, for my project my sample size was 100. The sample size of 100 is not enough to draw a conclusion but as per the time assigned it was difficult to take a sample size more than 100. SAMPLING METHOD: The sampling method use for this survey is the area sampling which is a sub type of probability sampling. SECONDARY DATA : Secondary data means data that are already available i.e. they refer to the data which have already been collected and analyzed by someone else. The secondary data may either be published data or unpublished data. Secondary data collected in project through published data.  Internet  Different Books  Market Research Report

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Product Profile
Introduction to Derivative: The word DERIVATIVES is derived from the word itself derived of an underlying asset. It is a future image or copy of an underlying asset, which may be shares, stocks, commodities, stock indices, etc. A derivative is a financial product (shares, bonds) any act which is concerned with lending and borrowing (bank) does not have its value borrow the value from underlying asset/ basic variables. Derivatives is derived from the following products: A. Shares B. Debentures C. Mutual funds D. Gold E. Steel F. Interest rate G. Currencies. A derivative is a type of market where two parties are entered into a contract one is bullish and other is bearish in the market having opposite views regarding the market. There cannot be a derivative having same views about the market. In short it is like an INSURANCE market where investors cover their risk for a particular position. Derivatives are financial contracts of pre-determined fixed duration, whose values are derived from the value of an underlying primary financial instrument, commodity or index, such as: interest rates, exchange rates, commodities, and equities. Derivatives are risk-shifting instruments. Initially, they were used to reduce exposure to changes in foreign exchange rates, interest rates, or stock indexes or commonly known as risk hedging. Hedging is the most important aspect of derivatives and also its basic economic purpose. There has to be counter party to hedgers and they are speculators. Speculators don t look at derivatives as means of reducing risk but it s a business for them. Rather he accepts risks from the hedgers in pursuit of profits. Thus for a sound derivatives market, both hedgers and speculators are essential.
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A derivative trading has been a new introduction to the Indian markets. It is, in a sense promotion and acceptance of market economy, that has really contributed towards the growing awareness of risk and hence the gradual introduction of derivatives to hedge such risks. Initially a derivative was launched in America called Chicago. Then in 1999, RBI introduced derivatives in the local currency Interest Rate markets, which have not really developed, but with the gradual acceptance of the ALM guidelines by banks, there should be an instrumental product in hedging their balance sheet liabilities. First product which was launched by BSE and NSE in the derivatives market was index futures

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COMPANY PROFILE
PROFILE OF SHAREKHAN LTD. History of the organization y Founded in 1922, SSKI is one of India s Oldest Brokerage houses, having 8 decades of experience into  Institutional Broking Investment Banking Retail Broking j One of the founding Members of stock Exchange, Mumbai and Pioneer Institutional Broker. j sharekhan in the retail broking arm of SSKI, an organization with more than 80 years stock and creditability in the stock market j Sharekhan LTD formerly SSKI investor services Pvt. Ltd. Was prompted by Mr.Shripal.S.Morakhia and Mr.Shreyas.S.Morakhia. j Through sharekhan.com Co. Have been providing investors a powerful online trading platform, the latest news, research, and other knowledge-based tools for over 5 years now. j The shareholder of Sharekhan ltd. are Mr.Shripal.S.Morakhia and Mr. Shreyas.S.Morakhia. His family owns 55.41% of the paid up capital of the co. Co. Has also issued option to employees under ESOP .

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jSharekhan ltd. has a business leadership in institutional broking and investment banking. In 1984 ventured into institutional broking and corporate finance. Name of the organization: Registered office Address: Sharekhan LTD A-206 Phoenix house, Senapati Bapat Marg, Lower parel, Mumbai-400013. Directors of Sharekhan: Mr.Shripal. S .Maphia Mr.Shreyas. S. Morkhiya Mr.Tarun. P. Shah Mr. Shankar Narayan Mr. Jaydeep Arora Branch Office Address: 5,SK Open mall,Near B.Y.K College, College Road, Nashik Contact No: Branch Manager Nasik: Corporate structure: 91-253-661097075 Mr. Mandar Kashikar Shareholding Pattern 55.5% Morkhia Family (PROMOTERS) 18.5% HSBC Pvt Equity India Fund Ltd
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18.5% First Carlyle Ventures Mauritius 7.5% Intel Pacific Inc Vision and mission of organization VISION To become well respected financial service co. By assisting investors create well in stock market worldwide. MISSION To attitude to look for value, to look beyond the reams of the stock mkt., a different mindset that is not influenced by the mkt. Trends but, banks on the power of intellect. Milestones and Achievements y SSKI has been voted as the top Domestic House in reset category, twice by Euro Money Survey and 4 times by Asia Money Survey. y Over US $ 5 billions of pvt. equity deals y Pioneers of invt. Research in the Indian mkt. y Pioneers of Online Trading in India among the top 2 online trading websites in India. y Most preferred financial destinations amongst online banking customers (source: net sense 200, an independent study of financial services in India.) y Winner of the Best Financial Website Award. y CHIP- Dish net DSL Web Awards 2001. y Leading domestic player in Indian institutional business

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Current Scenario y Sharekhan is currently among India s largest broking house. It is a member of the Stock Exchange, Mumbai as well as depository participant of the National Securities Depository Ltd. And Central Depository Services Ltd. in India. Its business includes Stock Broking, depository services, portfolio mgt. , derivatives and distribution of financial products such as Mutual funds . y It is one of the India s leading brokerage houses, is the retail arm of SSKI with over 750 share shops in 290 cities and India s premier online trading portal, www.sharekhan.com , there customers enjoy multi channel access to the stock mkt. y The co s core speciality lies in the retail distribution with a large network of branches & brokers /authorised persons. Its strength lies in its invt. Research capabilities. Its research division has several analysis, continuously monitoring global, national & regional, political, economic & social situations so as to access their impact on the economy .In general, the sectors & companies are researched to help clients to give advice. y Apart from sharekhan, the SSKI group also comprises of institutional broking and corporate finance. The institutional broking division caters to domestic and foreign institutional investors, while the corporate finance division focuses on niche areas such as infrastructure, telecom and media.

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PRODUCT PORTFOLIO
SHAREKHAN SERVICES

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ORGANIZATION STRUCTURE

CEO

Securities Broking

Corporate Finance

Executives

Executives

Head of Research

Head of Sales

Executives

Executives

Independent Sector

Sales Manager

Executives

Independent Sector

Dealing Manager

Organization structure is of Head office under which there are 750Branches, In 290 cities all over India. The study was done at Jalgaon branch under branch Manager.

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DEFINATIONS OF DERIVATIVES

jAccording to JOHN C. HUL :- A derivatives can be defined as a financial instrument whose value depends on (or derives from) the values of other, more basic underlying variables.

jAccording to ROBERT L.MCDONALD :- A derivative is simply a financial instrument (or even more simply an agreement between two people) which has a value determined by the price of something else.

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HISTORY OF DERIVATIVE
Indian securities markets have indeed waited for too long for derivatives trading to emerge. Mutual Funds, Fills and other investors who are deprived of hedging opportunities will now have a derivatives market to bank on. First to emerge are the globally popular variety index futures. While derivatives markets flourished in the developed world, Indian markets remain deprived of financial derivatives to the beginning of this millennium. While the rest of the world progressed by leaps and bounds on the derivative front, Indian market lagged behind. Having emerged in the markets of the developed nations in the 1970s, derivatives markets grew from strength to strength. The trading volumes nearly doubled in every three years making it a trillion-dollar business. They became so ubiquitous that, now, one cannot think of the existence of financial markets without derivatives. Two broad approaches of SEBI is to integrate the securities market at the national level, and also to diversify the trading products, so that more number of traders including banks, financial institutions, insurance companies, mutual funds, primary dealers etc. choose to transact through the Exchanges. In this context the introduction of derivatives trading through Indian Stock Exchanges permitted by SEBI in 2000 AD is a real landmark. SEBI first appointed the L.C. Gupta Committee in 1998 to recommend the regulatory framework for derivatives trading and to recommend a suggestive bylaw for Regulation and Control of Trading and Settlement of Derivatives Contracts. The Board of SEBI in its meeting held on May 11, 1998 accepted the recommendations and approved the phased introduction of derivatives trading in India beginning with Stock Index Futures. The Board also approved the
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Suggestive Bye-laws

recommended by the committee for Regulation and

Control of Trading and Settlement of Derivatives Contracts. SEBI subsequently appointed the J.R. Varma Committee to recommend Risk Containment Measures in the Indian Stock Index Futures Market. The report was submitted in the same year (1998) in the month of November by the said committee. However the Securities Contracts (Regulation) Act, 1956 (SCRA) needed amendment to include derivatives in the definition of securities to enable SEBI to introduce trading in derivatives. The necessary amendment was carried out by the Government in the year 1999. The Securities Laws (Amendment) Bill, 1999 was introduced to bring about the much needed changes. In December 1999 the new framework has been approved. Derivatives have been accorded the status of Securities . The ban imposed on trading in derivatives way back in 1969 under a notification issued by the Central Government has been revoked. Thereafter SEBI formulated the necessary regulation/bye-laws and intimated the Stock Exchanges in the year 2000, while derivative trading started in India at NSE in the same year and BSE started trading in the year 2001.

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THE HISTORICAL IMPETUS TO THE GROWTH OF DERIVATIVES: Year 1971 1972 1973 1974 Development Collapse of Bretton Woods End of Gold Convertibility Managed Floating Rates Commodity Price Swings Innovations Chicago Mercantile Exchange Currency Futures Interest Rate Futures Growing Futures 1975 1978-79 1980-81 Volatile Interest rates European Monetary Rates Federal Reserve to Target Interest Rates Futures New York Futures Exchange London International interest in commodity

Money and not Interest Futures Exchange rates 1984-85 Reagan Recovery Currency Option Philadelphia Exchange Currency Swaps

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TYPES OF DERIVATIVE
TYPES OF DERIVATIVE

FINANCIAL DERIVATIVE

COMMODITY DERIVATIVE

FORWARD CONTRACT

FUTURE CONTRACT

OPTION CONTRACT SWAP CONTRACT

CALL

PUT

LET S HAVE BRIEF STUDY ON TYPES OF DERIVATIVES........ 1. 2. 3. 4. FORWARD CONTRACT FUTURE CONTRACT OPTION CONTRACT SWAP CONTRACT

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FORWARD CONTRACT

A forward contract is one to one, bipartite/tripartite contract. Which is to be performed mutually by the contracting parties, in future, at the terms decided upon, on the contract date? In other words, a forward contract is an agreement to buy or sell an asset on a specific future date for specific price. One of the parties to the contract assumes a long position, i.e. agrees to buy the underlying assets while the other assumes a short position, and i.e. agrees to sell the assets. As this contract is traded off the exchange & settled mutually by the contracting parties, it is called an over-the counter product. Forward contract are extensively used in India in the foreign exchange market Examples:- Mr. A(buyer) and Mr. B (seller)- who enter into a contract to buy and sell 100 units of asset X at Rs 350 per unit, at predetermined time of two months from the date of contract. Delivery & payment (settlement of transaction) will take place as per the terms of the contract on the designated date & place. This is simple example of a Forward contract FEATURES OF FORWARD CONTRACT y IT IS TRADED DIRECTLY y CONTRACT IS DIFFER FROM TRADE TO TRADE y EXAMPLE:-CURRENCY MKT IN INDIA y PRICE DISCOVERY NOT EFFICIENT, AS MARKET SCATTERD

Problems of FORWARD CONTRACT y Lake of centralization of trading y Illiquidity y Counter party risk
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y INTRODUCTION TO FUTURE CONTRACT FUTURES CONTRACT: A Future contract is a financial security, issued by an organized exchange to buy or sell a commodity, security or currency at a predetermined future date at a price agreed upon today. The agreed upon price is called the futures price. STANDARDIZED TERMS IN FUTURES y y y y Quantity of the underlying The date & month of delivery The units of price quotation & minimum changes in price Location of settlement

Futures markets were designed to solve the problems that exist in forward markets. 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. There is a multilateral contract between the buyer and seller for an underlying asset which may be financial instrument or physical commodities. But unlike forward contracts the future contracts are standardized and exchange traded. PURPOSE The primary purpose of futures market is to provide an efficient and effective mechanism for management of inherent risks, without counter-party risk. It is a derivative instrument and a type of forward contract the future contracts are affected mainly by the prices of the underlying asset. As it is a future contract the buyer and seller has to pay the margin to trade in the futures market It is essential that both the parties compulsorily discharge their respective obligations on the settlement day only, even though the payoffs are on a daily marking to market basis to avoid default risk. Hence, the gains or losses are netted off on a daily basis and each morning starts with a fresh opening value. Here both the parties face an equal amount of risk and are also required to pay upfront margins to the exchange irrespective of whether they are buyers or sellers. Index based financial futures are settled in cash unlike futures on
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individual stocks which are very rare and yet to be launched even in the US. Most of the financial futures worldwide are index based and hence the buyer never comes to know who the seller is, both due to the presence of the clearing corporation of the stock exchange in between and also due to secrecy reasons INTRODUCTION TO OPTION MARKET DEFINITION OF OPTION : An option is the right but not the Obligation to enter in to a transaction. An option is the right but not the obligation, to buy or sell something at a stated date at stated price. CALL & PUT OPTION

call

Buyer holder long

Seller writer short

Has the right but not the obligation to buy 100 shares of the underlying stock at the strike price

In obligated on demand to sell 100 shares of underlying stock at the strike price when the holders exercises

Pays the total premium

Receives the total premium

A call option is the right to buy some commodity or security at specific price called the exercise price in above figure shows the rights and obligation of the holder and writer of CALL .

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PUT

Buyer holder long

Seller writer short

1. EXPECTATION:

1. EXPECTATION:

Wants the market price of the underlying stock to rise

Wants the market price of the underlying stock to stay flat on rise

2. Reward: Potential unlimited gain when the price of the underlying stock appreciates 2. Reward: Gain ltd to the total premium received when the option was written. Keeps the premium when the market declines 3. Risk: Potential unlimited losses when the market price of the underlying stock rises.

3. Risk: Losses only the total premium paid for the call when the market price underlying stock declines.

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INTRODUCTION TO OPTIONS It is an interesting tool for small retail investors. An option is a contract, which gives the buyer (holder) the right, but not the obligation, to buy or sell specified quantity of the underlying assets, at a specific (strike) price on or before a specified time (expiration date). The underlying may be physical commodities like wheat/ rice/ cotton/ gold/ oil or financial instruments like equity stocks/ stock index/ bonds etc. TYPES OF OPTION: CALL OPTION A call option gives the holder (buyer/ one who is long call), the right to buy specified quantity of the underlying asset at the strike price on or before expiration date. The seller (one who is short call) however, has the obligation to sell the underlying asset if the buyer of the call option decides to exercise his option to buy. To acquire this right the buyer pays a premium to the writer (seller) of the contract. ILLUSTRATION Suppose in this option there are two parties one is Mahesh (call buyer) who is bullish in the market and other is Rakesh (call seller) who is bearish in the market. The current market price of RELIANCE COMPANY is Rs.600 and premium is Rs.25 1. CALL BUYER Here the Mahesh has purchase the call option with a strike price of Rs.600.The option will be exercised once the price went above 600. The premium paid by the buyer is Rs.25.The buyer will earn profit once the share price crossed to Rs.625 (strike price + premium). Suppose the stock has crossed Rs.660 the option will be exercised the buyer will purchase the RELIANCE scrip from the seller at Rs.600 and sell in the market at Rs.660.

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1. CALL SELLER:
In another scenario, if at the tie of expiry stock price falls below Rs. 600 say suppose the stock price fall to Rs.550 the buyer will choose not to exercise the option. Thus call option indicates two positions as follows:  LONG POSITION If the investor expects price to rise i.e. bullish in the market he takes a long position by buying call option.  SHORT POSITION If the investor expects price to fall i.e. bearish in the market he takes a short position by selling call option. PUT OPTION 1) A Put option gives the holder (buyer/ one who is long Put), the right to sell specified quantity of the underlying asset at the strike price on or before an expiry date. The seller of the put option (one who is short put) however, has the obligation to buy the underlying asset at the strike price if the buyer decides to exercise his option to sell. ILLUSTRATION Suppose in this option there are two parties one is Dinesh (put buyer) who is bearish in the market and other is Amit (put seller) who is bullish in the market. The current market price of TISCO COMPANY is Rs.800 and premium is Rs.2 0. PUT BUYER(Dinesh): Here the Dinesh has purchase the put option with a strike price of Rs.800.The option will be exercised once the price went below 800. The premium paid by the buyer is Rs.20.The buyer s breakeven point is Rs.780 (Strike price Premium paid). The buyer will earn profit once the share price crossed below to Rs.780. Suppose the stock has crossed Rs.700 the option will be exercised the buyer will purchase the RELIANCE scrip from the market at Rs.700and sell to the seller at Rs.800 Unlimited profit for the buyer = Rs.80 {(Strike price spot price) premium} Loss limited for the buyer up to the premium paid = 20

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PUT SELLER (Amit): In another scenario, if at the time of expiry, market price of TISCO is Rs. 900. The buyer of the Put option will choose not to exercise his option to sell as he can sell in the market at a higher rate. Unlimited loses for the seller if stock price below 780 say 750 then unlimited losses for the seller because the seller is bullish in the market = 780 - 750 = 30 Limited profit for the seller up to the premium received = 20 Thus Put option also indicates two positions as follows:  LONG POSITION If the investor expects price to fall i.e. bearish in the market he takes a long position by buying Put option.   SHORT POSITION If the investor expects price to rise i.e. bullish in the market he takes a short position by selling Put option PLAYERS IN THE OPTION MARKET: a) Developmental institutions b) Mutual Funds c) Domestic & Foreign Institutional Investors (d) Brokers e) Retail Participants

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SEBI S Regulation

1) Any Exchange fulfilling the eligibility criteria as prescribed in the L. C. Gupta committee report can 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 & of the governing council. The exchange would have to regulate the sales practices of its members & would have to obtain prior approval of SEBI before start of trading in any derivative contract. 2) The exchange should have minimum 50 members. 3) The members of an existing segment of the exchange would not automatically become the members of derivative segment. The members of the derivative segment would need to fulfill the eligibility conditions as laid down by the L. C. Gupta committee. 4) The clearing & settlement of derivatives trades would 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) Derivatives brokers/dealers & clearing members are required to seek registration from SEBI. This in addition to their registration as brokers of existing stock exchanges. The 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: y Capital + Free Reserves y Less non-allowable assets a) Fixed assets b) Pledged securities c) Member s card d) Non-allowable securities e) Bad deliveries f) Doubtful debts & advances g) Prepaid expenses h) Intangible assets
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6) 7)

8)

9)

i) 30% marketable securities The minimum contract value shall not be less than Rs. 2 lakh. Exchange have to submit details of the futures contract they propose to introduce. The initial margin requirement, exposure limits linked to capital adequacy & margin demands related to the risk of loss on the position will be prescribed by SEBI/Exchange from time to time. The L. C. Gupta committee report requires strict enforcement of Know your customer rule & requires the 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 & obtain a copy of the same duly signed by the client. The trading members are required to have qualified approved user & sales person who have passed a certification programme approved by SEBI.

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Distinguish Between Forward & future Contract :

Forward contract 1. The contract price is not publicly Disclosed &hence not transparent.

Future contract 1. The contract price is Transparent.

2. The contract is exposed to default Risk by counterparty. 3. East contract is unique in terms of size, expiration date & asset type.

2. The contract has effective Safeguards. 3. The contracts are standardized in terms of size other features.

4. The contract is exposed to the Problem of liquidity.

4. There is no liquidity problem In the contract.

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1.
2.

FINDINGS

While coming to the end of the project ANALYSIS OF DERIVATIVES I found that:

3. 4. 1. The derivatives are most modern financial instrument in hedging risk. The individuals & firms who wish to avoid or reduce risk can deal with the others who are willing to accept the risk for price. A common place where such transaction take place is called the derivative market & I also came to know that. 5. 2. Hedging is mechanism to reduce price risk inherent in open position. Derivatives are widely used for hedging. A hedger can help lock in existing profits. Its purpose is to reduce the volatility of a portfolio, by reducing risk. So we can say hedging having much more importance in Derivatives. 6. 3. The term derivative indicates that the product/contract has no independent value, i.e. it derives its value from some underlying asset can be securities, bullion, livestock. 7. 4. The selling and buying of future contract is a way of describing commitments a seller of future can sell without previously having bought, in the commodities. 8. Now a day s future contract & Option contract are mostly used in Derivative Market.

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CONCLUSION

By studying the ANALYSIS OF DERIVATIVES I found that; Derivative is an instrument whose value is derived from the value of one or more underlying which can be commodities, precious metals, currency bonds, and stock indices etc. Four common examples of Derivative instruments are forward, future option & swap. There are several risks inherent in financial transactions. Derivatives allow you to manage these risk more efficiently by unbundling the risk & allowing either hedging or taking only one or more if desired risk at a time.

A forward contract is one to one, bipartite/tripartite contract. Which is to be performed mutually by the contracting parties, in future, at the terms decided upon, on the contract date?

A Future contract is a financial security, issued by an organized exchange to buy or sell a commodity, security or currency at a predetermined future date at a price agreed upon today. The agreed upon price is called the futures price.

An option is the right but not the Obligation to enter in to a transaction. An option is the right but not the obligation, to buy or sell something at a stated date at stated price.

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BIBLIOGRAPHY

Books Magazines and newspapers :

jINDIAN FINANCIAL SYSTEM KHAN AND JAIN j ECONOMIC TIMES j TIMES OF INDIA j BUSINESS TODAY j INDIAN CAPITAL MKT jDERIVATIVE & FINANCIAL INNOVATION

WEBSITES

www.bseindia.com www.kaycee.com www.sharekhan.com

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