A PROJECT REPORT ON COMPARATIVE STUDY ON EQUITIES W.R.

TO AUTO & OIL SECTORS

SUBMITTED BY

PIDUGU SANTOSH
HT No: 160710672043

Project Submitted in partial fulfillment for the award of the Degree of MASTER OF BUSINESS ADMINISTRATION By Osmania University, Hyderabad-500007

METHODIST COLLEGE OF ENGINEERING & TECHNOLOGY KING KOTI, ABIDS, HYDERABAD-500001

DEPARTMENT OF BUSINESS MANAGEMENT METHODIST COLLEGE OF ENGINEERING AND TECHNOLOGY

ACKNOWLEDGEMENT
Accomplishment of any work involves many people and this project is no exception. I take this opportunity to express my heartfelt thanks to all those who have directly or indirectly contributed to make this Project a success. I am indebted to the Management of Motilal Oswal securities Ltd., for providing me the opportunity to carry out the Project work in their esteemed organization. I take this opportunity to express my heartfelt thanks to Mr. LAXMAN and the entire Equities team at Motilal Oswal for their cooperation and support during the project. I am highly indebted to the Management of my college and H.O.D. Department of Business Management for his valuable suggestions and advice. It was great experience to work under the inspiring guidance of Mrs. Ranirajan Associate Professor, Department of Business Management. I take this opportunity to express my gratitude to his valuable advice and suggestions for completing this project.

At last, I would like to thank my family and friends of my college for the help and cooperation extended in this endeavor of mine.

DECLARATION
I hereby declare that project report entitled Equity Analysis With Respect To Auto & Oil has been carried out for Motilal Oswal Securities Ltd is an original and bonafide work undertaken by me in partial fulfillment of the requirement for Master of Business Administration (MBA), Osmania University. This project report has not been submitted to any other university for the award of degree or diploma.

(P.SA NTOSH)

TABLE OF CONTENT
1) INTRODUCTION
2) COMPANY PROFILE

Page No.

3) MARKET PROFILE

4) OBJECTIVES OF THE STUDY

5) RESEARCH METHODOLOGY

6) ANALYSIS & INTERPRETATION

7) CONCLUSION AND SUGGESTIONS

8) BIBILIOGRAPHY

LIST OF TABLES

TABLES No.
1. Pay off from Call Buying/Long 2. Pay off from Put Buying/Long 3. Effect of increase in relevant parameter option prices 4. 29-April-2010 Future INDEX NIFTY-50 5. NIFTY 5400 Call Option Table for 29-April-2010 6. NIFTY 5400 Put Option Table for 29-April-2010 7. May 2010 Contract 8. 5000 Call Option for May 2010 9. 5000 Put Option for May 2010 10. 5100 put option for May 2010 11. June 2010 Contract 12. 5100 Call Option for June 2010 13. 5100 Put Option for June 2010

PAGE

LIST OF FIGURES FIGURES No

1. Payoff for a buyer of futures 2. Payoff for a seller of futures 3. Payoff from Cal Buying/Long 4. Payoff from Put Buying/Long 5. Services of the Networth Stock Broking Company 6. 107 NSBC Branches locations throughout India

PAGE

ABSTRACT
5

The Study is based on Financial Derivatives with special

reference to Futures and Options at NETWORTH STOCK BROKING LIMITED. Derivative market has excited from centuries as need for both users and producers of natural resources to hedge against price fluctuations in underlying commodities, bonds, currencies, stocks and stock indices. In the derivatives market Future contract was designed to solve limitations that existed in Forward contract options are also play major role in derivative. In Bullish market the Call option Writer incurs more profit, where as the in Bearish market the Call option holder will incur more losses and the put option writer will get more profit so he is suggested to hold as Put option. Derivatives market is an innovation to Cash market,

approximately its daily turnover reaches to the equal stage of cash market. In Cash market the investor has to pay the total money, but in derivatives investors has to pay premiums or margins, which are some percentage of total money. Derivatives are mostly used for hedging purposes. The derivative market is newly started in India and it is not known by every investor, so SEBI has to take steps to create awareness among the investors as about the Derivatives segment.

CHAPTER -1 INTRODUCTION

INTRODUCTION
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A derivative is a security whose value depends on the value of more basic underlying variable. These are also known as contingent claims. Derivative securities have been very successful innovation in capital market. The emergence of the market for derivative products, most notably forwards, futures 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, financial markets are marked by a very high degree of volatility. Through the use of derivative products, is possible to partially or fully transfer price risks by a locking - in asset prices. fluctuation 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 investor. Derivatives are risk management instruments, which drive their value form underlying asset. Underlying asset can be bullion, index, share, bonds, currency, interest etc. As instruments of risk management, these generally do not influence the

MAIN TOPICS OF STUDY

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1. INTRODUCTION TO DERIVATIVE
The origin of derivatives can be traced back to the need of farmers to protect themselves against fluctuations in the price of their crop. From the time it was sown to the time it was ready for harvest, farmers would face price uncertainty. Through the use of simple derivative products, it was possible for the farmer to partially or fully transfer price risks by locking-in asset prices. These were simple contracts developed to meet the needs of farmers and were basically a means of reducing risk. A farmer who sowed his crop in June faced uncertainty over the price he would receive for his harvest in September. In years of scarcity, he would probably obtain attractive prices. However, during times of oversupply, he would have to dispose off his harvest at a very low price. Clearly this meant that the farmer and his family were exposed to a high risk of price uncertainty. On the other hand, a merchant with an ongoing requirement of grains too would face a price risk that of having to pay exorbitant prices during dearth, although favorable prices could be obtained during periods of oversupply. Under such circumstances, it clearly made sense for the farmer and the merchant to come together and enter into contract whereby the price of the grain to be delivered in September could be decided earlier. What they would then negotiate happened to be futures-type contract, which would enable both parties to eliminate the price risk. In 1848, the Chicago Board Of Trade, or CBOT, was established to bring farmers and merchants together. A group of traders got together and created the to-arrive contract that permitted farmers to lock into price upfront and deliver the grain later. These to-arrive contracts proved useful as a device for hedging and speculation on

price charges. These were eventually standardized, and in 1925 the first futures clearing house came into existence. Today derivatives contracts exist on variety of commodities such as corn, pepper, cotton, wheat, silver etc. Besides commodities, derivatives contracts also exist on a lot of financial underlying like stocks, interest rate, exchange rate, etc. 2. DERIVATIVE DEFINED A derivative is a product whose value is derived from the value of one or more underlying variables or assets in a contractual manner. The underlying asset can be equity, forex, commodity or any other asset. In our earlier discussion, we saw that wheat farmers may wish to sell their harvest at a future date to eliminate the risk of change in price by that date. Such a transaction is an example of a derivative. The price of this derivative is driven by the spot price of wheat which is the underlying in this case. The Forwards Contracts (Regulation) Act, 1952, regulates the forward/futures contracts in commodities all over India. As per this the Forward Markets Commission (FMC) continues to have jurisdiction over commodity futures contracts. However when derivatives trading in securities was introduced in 2001, the term security in the Securities Contracts (Regulation) Act, 1956 (SCRA), was amended to include derivative contracts in securities. Consequently, regulation of derivatives came under the purview of Securities Exchange Board of India (SEBI). We thus have separate regulatory authorities for securities and commodity derivative markets. Derivatives are securities under the SCRA and hence the trading of derivatives is governed by the regulatory framework under the SCRA. The Securities Contracts (Regulation) Act, 1956 defines derivative to include-

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A security derived from a debt instrument, share, loan whether secured or unsecured, risk instrument or contract differences or any other form of security. A contract which derives its value from the prices, or index of prices, of underlying securities. 3. TYPES OF DERIVATIVES MARKET

Exchange Traded Derivatives

Over The Counter Derivatives

National Stock Exchange

Bombay Stock Commodity & Exchange Exchange

National Derivative

Index Future Stock future

Index option

Stock option

Figure.1 Types of Derivatives Market

4. TYPES OF DERIVATIVES

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Figure.2 Types of Derivatives

(i) FORWARD CONTRACTS

A forward contract is an agreement to buy or sell an asset on a specified date for a specified price. One of the parties to the contract assumes a long position and agrees to buy the underlying asset on a certain specified future date for a certain specified price. The other party assumes a short position and agrees to sell the asset on the same date for the same price. Other contract details like delivery date, price and quantity are negotiated bilaterally by the parties to the contract. The forward contracts are n o r m a l l y traded outside the exchanges.

BASIC FEATURES OF FORWARD CONTRACT

risk. Each contract is custom designed, and hence is unique in terms of contract quality. of the asset. If the party wishes to reverse the contract, it has to compulsorily go to the same counter-party, which often results in high prices being charged. However forward contracts in certain become very standardized, exchange, transactions thereby volume. as in reducing transaction markets the case have of foreign The contract price is generally not available in public domain. On the expiration date, the contract has to be settled by delivery size, expiration date and the asset type and They are bilateral contracts and hence exposed to counter-party

costs and increasing

This process of standardization reaches its 12

limit in the organized futures market. Forward contracts are often confused with futures contracts. The confusion is primarily because both serve essentially t h e same economic fun ctions of allocating risk in the presence of future price uncertainty. However futures are a significant improvement over the forward contracts as they eliminate counterparty risk and offer more liquidity.

(ii)

FUTURE CONTRACT

In finance, a futures contract is a standardized contract, traded on a futures exchange, to buy or sell a certain underlying instrument at a certain date in the future, at a pre-set price. The future date is called the delivery date or final settlement date. The pre-set price is called the futures price. The price of the underlying asset on the delivery date is called the settlement price. The settlement price, normally, converges towards the futures price on the delivery date. A futures contract gives the holder the right and the obligation to buy or sell, which differs from an options contract, which gives the buyer the right, but not the obligation, and the option writer (seller) the obligation, but not the right. To exit the commitment, the holder of a futures position has to sell his long position or buy back his short position, effectively closing out the futures position and its contract obligations. Futures contracts are exchange traded derivatives. The exchange acts as counterparty on all contracts, sets margin requirements, etc.

BASIC FEATURES OF FUTURE CONTRACT

1. Standardization:
Futures contracts ensure their liquidity by being highly standardized, usually by specifying: The underlying. This can be anything from a barrel of sweet crude oil to a short term interest rate. 13

The type of settlement, either cash settlement or physical settlement. The amount and units of the underlying asset per contract. This can be the notional amount of bonds, a fixed number of barrels of oil, units of foreign currency, the notional amount of the deposit over which the short term interest rate is traded, etc.

The currency in which the futures contract is quoted. The grade of the deliverable. In case of bonds, this specifies which bonds can be delivered. In case of physical commodities, this specifies not only the quality of the underlying goods but also the manner and location of delivery. The delivery month.

The last trading date. Other details such as the tick, the minimum permissible price fluctuation.

2. Margin:
Although the value of a contract at time of trading should be zero, its price constantly fluctuates. This renders the owner liable to adverse changes in value, and creates a credit risk to the exchange, who always acts as counterparty. To minimize this risk, the exchange demands that contract owners post a form of collateral, commonly known as Margin requirements are waived or reduced in some cases for hedgers who have physical ownership of the covered commodity or spread traders who have offsetting contracts balancing the position. Initial Margin: is paid by both buyer and seller. It represents the loss on that contract, as determined by historical price changes, which is not likely to be exceeded on a usual day's trading. It may be 5% or 10% of total contract price. Mark to market Margin: Because a series of adverse price changes may exhaust the initial margin, a further margin, usually called variation or maintenance margin, is required by the exchange. This is calculated by the futures contract, i.e. agreeing on a price at the end of each day, called the "settlement" or mark-to-market price of the contract. 14

To understand the original practice, consider that a futures trader, when taking a position, deposits money with the exchange, called a "margin". This is intended to protect the exchange against loss. At the end of every trading day, the contract is marked to its present market value. If the trader is on the winning side of a deal, his contract has increased in value that day, and the exchange pays this profit into his account. On the other hand, if he is on the losing side, the exchange will debit his account. If he cannot pay, then the margin is used as the collateral from which the loss is paid.

3. Settlement
Settlement is the act of consummating the contract, and can be done in one of two ways, as specified per type of futures contract: Physical delivery - the amount specified of the underlying asset of the contract is delivered by the seller of the contract to the exchange, and by the exchange to the buyers of the contract. In practice, it occurs only on a minority of contracts. Most are cancelled out by purchasing a covering position - that is, buying a contract to cancel out an earlier sale (covering a short), or selling a contract to liquidate an earlier purchase (covering a long). Cash settlement - a cash payment is made based on the underlying reference rate, such as a short term interest rate index such as Euribor, or the closing value of a stock market index. A futures contract might also opt to settle against an index based on trade in a related spot market. Expiry is the time when the final prices of the future are determined. For many equity index and interest rate futures contracts, this happens on the Last Thursday of certain trading month. On this day the t+2 futures contract becomes the t forward contract.

PRICING OF FUTURE CONTRACT

In a futures contract, for no arbitrage to be possible, the price paid on delivery (the forward price) must be the same as the cost (including interest) of buying and storing the asset. In other words, the rational 15

forward price represents the expected future value of the underlying discounted at the risk free rate. Thus, for a simple, non-dividend paying asset, the value of the future/forward, discounting the present value risk-free return . , will be found by by the rate of

at time to maturity

This relationship may be modified for storage costs, dividends, dividend yields, and convenience yields. Any deviation from this equality allows for arbitrage as follows. In the case where the forward price is higher: 1. The arbitrageur sells the futures contract and buys the underlying today (on the spot market) with borrowed money. 2. On the delivery date, the arbitrageur hands over the underlying, and receives the agreed forward price. 3. He then repays the lender the borrowed amount plus interest. 4. The difference between the two amounts is the arbitrage profit. In the case where the forward price is lower: 1. The arbitrageur buys the futures contract and sells the underlying today (on the spot market); he invests the proceeds. 2. On the delivery date, he cashes in the matured investment, which has appreciated at the risk free rate. 3. He then receives the underlying and pays the agreed forward price using the matured investment. [If he was short the underlying, he returns it now.] 4. The difference between the two amounts is the arbitrage profit.

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FUNCTIONS OF DERIVATIVES MARKETS:

The following are various functions that are performed by the derivatives markets. 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) Derivatives market helps to transfer risks from those who have them but may not like them to those who have 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. 4) Speculative trades shift to a more controlled environment of derivatives market. 5) Derivatives trading acts as a catalyst for new entrepreneurial activity. 6) They often energize others to create new businesses, new products and new employment opportunities. 7) Derivatives markets help increase savings and investment in the long run. Transfer of risk enables market participants to expand their volume of activity. Derivatives thus promote economic development.

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METHODOLOGY

The following steps are involved in the study Selection of scrip: Selection of scrip is done on a random basis and the scrip selected is NIFTY 50. The lot is of 50 size, profitability position of futures, buyers and sellers & also the option holders and option writers is studied. Data Collection: The data of the NIFTY 50 has been collected from the news paper & internet. The data consist of one month contract & period of data collection is from 27th Feb. 2009 to 28th may 2009. Analysis: The analysis consist of the tabulation of the data assessing the profitability position of the fure buyers & sellers and also the option holder & the option writer representing the data with graphs and making interpretation using data.

SCOPE OF THE STUDY

The study is limited to Derivatives with special references to futures and options in the Indian context & the NIFTY 50 has been taken as a representative sample for the study. The study cant be said as totally perfect. Any alteration may occur. The study has only made humble attempt at evaluating derivatives only in India markets. The study is not based on the international perspective of derivatives which exists in DOW JONES and NASDAQ.

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OBJECTIVES OF STUDY
1. To study various trends in derivative market. 2. Comparison of the profits/losses in cash market and derivative market. 3. To find out profit/losses position of the option writer and option holder. 4. To study in detail the role of the forwards, future and options. 5. To study the role of derivatives in Indian financial market. 6. To find out the risk and returns with live trading values. 7. To know how to minimize risk by using STRATEGIES. 8. To give some live examples on options.

LIMITATIONS
The following are the limitations of the study The Scrip chosen for analysis is Nifty50 and the contract taken in February 2009 is a one month contract ending in March. The data collected is completely restricted to the NIFTY 50 hence this analysis cannot be taken universally.

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CHAPTER-2 REVIEW OF LITERATURE

DEFINITION

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Derivatives is a product whose value is derived from the one or more basic Variables, called base (underlying asset, index, or value of reference rate), in a Contractual manner. The underlying asset can be equity, forex, commodity or any other asset. In the Indian context the securities contrasts (regulation) act, 1956 (SCR Act) Defines derivative as 1) A security derived from an instrument, share, 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, or Underlying securities. Futures contracts, forward contracts, options and swaps are the most common types of derivatives. Because derivatives are just contracts, just about based on weather data, such as the amount of rain or the number of anything can be used as an underlying asset. There are even derivatives sunny days in a particular region. Derivatives are generally used to hedge risk, but can also be used for speculative purposes EVALUTION OF DERIVATIVES: Derivatives can be found throughout the history of mankind. In the Middle Ages, engaging in contracts at predetermined prices for future delivery of farming products. The new era for the derivative markets was ushered with the introduction of financial derivatives, and it continues to last to this day. Although commodity derivatives are still quite active, particularly oil and precious metals, financial derivatives dominate trading in the current derivative markets. Although the derivatives markets slowed down considerably by the end of the 20th century, that did not mean that there were not a steady offering of existing, as well as new derivative products. Derivatives exchanges also went through a period of change; some consolidated, some merged, some became for-profit institutions.

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Regardless, they all had something in commonthe need for less regulation. Aside from structural changes, some derivative exchanges also changed the way they conducted trading. Old systems of face-to-face trading on trading floors have been replaced with electronic trading, and telephone and computer networks. With the advent of Internet, electronic trading evolved into e-trading. And although trading floors still dominate derivative markets in the U.S., it is obvious that to stay competitive, the U.S. will have to eventually embrace electronic trading.

The following factors have contributed to the growth of financial derivatives 1) Increased volatility in asset prices in financial markets. 2) Increased integration of national financial markets with the international markets. 3) Marked improvement in communication facilities and sharp decline in their costs. 4) Development of more sophisticated risk management tools, providing economic agents a wider choice of risk management strategies 5) Innovations in the derivatives markets, which optimally combine the risks and returns over a large number of financial assets leading to higher returns, reduced risk as well as transactions costs as compared to individual financial assets. 6) Technology facilitates the ability to track the payoffs and risk exposures associated with a portfolio of derivative positions. 7) An important factor in the growth of derivatives market has been a variety of intellectual advances. The development of economic models for valuing derivative instruments and assessing their riskiness and the increasing sophistication of such models have played a crucial role in the growth of the market.

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PARTICIPANTS:
The following three categories of participants in the derivatives market: 1) HEDGERS 2) SPECULATORS 3) ARBITRAGEURS HEDGERS: Hedgers face risk associated with the price of an asset. They use futures or options market to reduce or eliminate this risk. Hedgers are those who protect themselves from the risk associated with the price of an asset by using derivatives. He keeps a close watch upon the prices discovered in trading and when the comfortable price is reflected according to his wants, he sells futures contracts. Hedgers use futures for protection against adverse future price movements in the underlying cash commodity. Hedgers are often businesses, or individuals, who at one point or another deal in the underlying cash commodity. SPECULATORS: Speculators are somewhat like a middle man. They are never interested in actual owing the commodity. They will just buy from one end and sell it to the other in anticipation of future price movements. They actually bet on the future movement in the price of an asset. They are the second major group of futures players. These participants include independent floor traders and investors. They handle trades for their personal clients or brokerage firms. Buying a futures contract in anticipation of price increases is known as going long. Selling a futures contract in anticipation of a price decrease is known as going short. ARBITRAGEIRS: Arbitrators are the person who takes the advantage of a discrepancy between prices in two different markets. If he finds future prices of a commodity edging out with the cash price, he will take offsetting positions in both the markets to lock in a profit. Risk less 23

Profit Making is the prime goal of Arbitrageurs. Buying in one market and selling in another, buying two products in the same market are common. They could be making money even without putting there own money in and such opportunities often come up in the market but last for very short timeframes. This is because as soon as the situation arises arbitrageurs take advantage and demand-supply forces drive the markets back to normal.

TYPES OF DERIVATIVES:
The most commonly used derivatives contracts are forwards, futures and options. Here are various derivatives contacts that have come to be used given briefly: FORWARDS FUTURES OPTIONS WARRANTS LEAPS SWAPS SWAPTIONS

FORWARDS: forward contract is a customized contract between two entities, where settlement takes place on a specific date in the future at today's pre-agreed price. Futures: A futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. Futures contracts are special types of forward contracts in the sense that the former are standardized exchange-traded contracts. Options: Options are of two types - calls and puts

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Calls option gives 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. Put option 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. Warrants: Options generally have lives of up to one year, the majority of options traded on options exchanges having a maximum maturity of nine months. Longer-dated options are called warrants and are generally traded over-the-counter. 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 LEAPS: The acronym LEAPS means Long-Term Equity Anticipation Securities. These are options having a maturity of up to three years. Swaptions: Swaptions are options to buy or sell a swap 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 market 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.

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FUTURES
DEFINITION: A future is a contract between two parties whereby the one party (the buyer) agrees to buy an underlying asset from the other party to the contract on a specific future date, and at a price determined at the close of the contract. A future is a derivative that is used to transfer the price risk of the underlying instrument from one party to another. The underlying asset can be a financial asset such as a bond, a currency such as US dollars, a commodity, etc. A future is normally classified according to the underlying instrument. Where, for instance, two parties agree to buy and sell a specific quantity of rice (of a certain quality) at a certain price on a future date, the contract will be a commodity futures contract. Where two parties agree to buy and sell bonds, this will be known as a financial futures contract, and where two parties agree to buy and sell a certain amount of foreign currency, this is a currency futures contract.

FEATURES OF FUTURES: Futures are highly standardized. The contracting parties need not pay any down payments. Hedging of price risks. They have secondary markets to. an agreement between two parties to buy and sell a standardized type and quantity of a specified underlying asset with a certain quality at a price determined at the closing of the contract on a specified date

A futures contract is thus

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Through a central exchange.

TYPES OF FUTURES:
On the basis of the underlying asset they derive, the futures are divided in to two types: 1) Stock futures: The stock futures are the futures that have the underlying asset as the individual securities. The settlement of the stock futures is of cash settlement and the settlement price of the future is the closing price of the underlying security.

2) Index futures: Index futures are the futures, which have the underlying asset as an index. The index futures are also cash settled. The settlement price of the index futures shall be the closing value of the underlying index on the expiry date of the contract. PARTIES IN FUTURES CONTRACT: There are two parties in a future contract, the buyer and seller. The buyer of the futures contract is one who LONG on the futures contract and the seller of the futures contract is who is SHORT on the futures contract. In a futures contract, both parties have an obligation, one to buy the underlying instrument The other to sell the underlying instrument.

Both the buyer and the seller can make a profit or suffer a loss, due to the fact that the contract price (at which the underlying instrument is bought and sold) is determined at closing of the contract. If the market price at the delivery date is lower than the futures contract price, the buyer suffers a loss because he could have bought the instrument in the market at a lower price. He is now obliged, according to the contract, to buy the underlying instrument at the higher price specified in the contract. The opposite applies when the market value of the underlying instrument is above the futures contract price. The buyer 27

can now buy the underlying instrument at the lower contract price, and sell the instrument immediately at the higher market price, thus making an immediate profit. The pay off for the buyer and the seller of the futures of the contracts are as follows:

PAY-OFF FOR A BUYER OF FUTURES

PROFIT P E2 E1

F
LOSS

F- FUTURES PRICE E1, E2 SETTLEMENT PRICE CASE 1:- The buyer bought the futures contract at (F); if the futures price goes to E1 then the buyer gets the profit of (FP). CASE 2:- The buyer gets loss when the future price goes less then (F), if the future price goes to E2 then the buyer gets the loss of (FL).

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PAY- OFF FOR A SELLER OF FUTURES

PROFIT P E2 E1 L

LOSS

F- FUTURES PRICE E1, E2 SETTLEMENT PRICE CASE 1:- The seller sold the future contract at (f); if the future goes to E1 then the seller gets the profit of (FP). CASE 2: - The seller gets loss when the future price goes greater than (F), if the future price goes to E2 then the seller gets the loss of (FL).

FUTURES TERMINOLOGY
Spot price: It is the price at which an asset is traded in the current market. 29

Futures price: It is the price at which the futures contract trades in the futures market. Contract cycle: It is the period over which the contract trades. The index futures contracts on the NSE have one-month; two-month and three month expiry cycle which expire on the last Thursday of the month. Thus a January expiration contract expires on the last Thursday of January and February expiration contract ceases trading on the last Thursday of February. On the Friday following the last Thursday, a new contract having a three- month expiry is introduced for trading. Expiry date: It is the date specifies in the futures contract. This is the last day on which the contract will be traded, at the end of which it will cease to exist. Contract size: The amount of asset that has to be delivered under one contract. For instance, the contract size on NSEs futures market is 50 nifties. Basis: In the context of financial futures, basis can be defined as the futures price minus the spot price. There will be a different basis for each delivery month for contract. In a normal market, basis will be positive. This reflects that futures prices normally exceed spot prices. Cost carry: The relationship between futures prices and spot prices can be summarized in terms of what is known as the cost of carry. This measures the storage cost plus the interest that is paid to finance the asset less income earned on the asset. Open Interest: Total outstanding long or short position in the market at any specific time. As total long positions in the market would be equal to short position, for calculation of open interest, only one side of the contract is counter.

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OPTIONS
DEFINITION: Option is a type of contract between two persons where one grants the other the right to buy a specific asset at a specific price within a specific time period. Alternatively the contract may grant the other person the right to sell a specific asset at a specific price within a specific time period. In order to have this right, the option buyer has to pay the seller or the option premium. The assets on which option can be derived are stocks, commodities, indexes etc. If the underlying asset is the financial asset, then the option are financial option like stock options, currency options, index options etc, and if options like commodity option. Options contracts are instruments that give the holder of the instrument the right to buy or sell the underlying asset at a predetermined price. PROPERTIES OF OPTIONS: Options have several unique properties that set them apart from other securities. The following are the properties of options: Limited Loss High Leverage Potential Limited Life

PARTIES IN AN OPTION CONTRACT: 1. Buyer of the Option: The buyer of an option is one who by paying option premium buys the right but not the obligation to exercise his option on seller/writer. 2. Writer/Seller of the Option: The writer of a call/put options is the one who receives the option premium and is there by obligated to sell/buy the asset if the buyer exercises the option on him. 31

TYPES OF OPTIONS:
The options are classified into various types on the basis of various variables. The following are the various types of options:

I). On the basis of the Underlying asset:

On the basis of the underlying asset the options are divided into two types:

INDEX OPTIONS: The Index options have the underlying asset as the index.

STOCK OPTIONS: A stock option gives the buyer of the option the right to buy/sell stock at a specified price. Stock options are options on the individual stocks, there are currently more than 50 stocks are trading in this segment.

II). On the basis of the market movement:

On the basis of the market movement the options are divided into two types. CALL OPTION:

A call options is bought by an investor when he seems that the stock price moves upwards. A call option gives the holder of the option the right but not the obligation to buy an asset by a certain date for a certain price. PUT OPTION: A put option is bought by an investor when he seems that the stock price moves downwards. A put option gives the holder of the option right but not the obligation to sell an asset by a certain date for a certain price.

III). On the basis of exercise of option:

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On the basis of the exercising of the option, the options are classified into two categories. AMERICAN OPTION: American options are options that can be exercised at any time up to the expiration date; most exchange-traded options are American. EUROPEAN OPTION: European options are options that can be exercised only on the expiration date itself. than American option. European options are easier to analyze

Call option
The following example would clarify the basics on Call Options. Illustration 1: An investor buys one European Call option on one share of Reliance Petroleum at a premium of Rs. 2 per share on 31 July. The strike price is Rs.60 and the contract matures on 30 September. The payoffs for the investor on the basis of fluctuating spot prices at any time are shown by the payoff table (Table 1). It may be clear form the graph that even in the worst case scenario, the investor would only lose a maximum of Rs.2 per share which he/she had paid for the premium. The upside to it has an unlimited profits opportunity. On the other hand the seller of the call option has a payoff chart completely reverse of the call options buyer. The maximum loss that he can have is unlimited though a profit of Rs.2 per share would be made on the premium payment by the buyer.

33

A European call option gives the following payoff to the investor: Max (S - Xt, 0). The seller gets a payoff of:-max (S - Xt, 0) or min (Xt - S, 0). Notes: S - Stock Price Xt - Exercise Price at time 't1 C - European Call Option Premium Payoff - Max (S - Xt, O)

34

Net Profit - Payoff minus 'c' Exercising the Call Option and what are its implications for the Buyer and the Seller? The Call option gives the buyer a right to buy the requisite shares on a specific date at a specific price. This puts the seller under the obligation to sell the shares on that specific date and specific price. The Call Buyer exercises his option only when he/ she feel it is profitable. This Process is called "Exercising the Option". This leads us to the fact that if the spot price is lower than the strike price then it might be profitable for the investor to buy the share in the open market and forgo the premium paid. The implications for a buyer are that it is his/her decision whether to exercise the option or not. In case the investor expects prices to rise far above the strike price in the future then he/she would surely be interested in buying call options. On the other hand, if the seller feels that his shares are not giving the desired returns and they are not going to perform any better in the future, a premium can be charged and returns from selling the call option can be used to make up for the desired returns. At the end of the options contract there is an exchange of the underlying asset. In the real world, most of the deals are closed with another counter or reverse deal. There is no

35

requirement to exchange the underlying assets then as the investor gets out of the contract just before its expiry. Put Options: The European Put Option is the reverse of the call option deal. Here, there is a contract to sell a particular number of underlying assets on a particular date at a specific price. An example would help understand the situation a little better: Illustration 2: An investor buys one European Put Option on one share of Reliance Petroleum at a premium of Rs. 2 per share on 31 July. The strike price is Rs.60 and the contract matures on 30 September. The payoff table shows the fluctuations of net profit with a change in the spot price.

The payoff for the put buyer is: max (Xt - S, 0) The payoff for a put writer is: -max (Xt - S, 0) or min(S - Xt, 0)

36

These are the two basic options that form the whole gamut of transactions in the options trading. These in combination with other derivatives create a whole world of instruments to choose form depending on the kind of requirement and the kind of market expectations. Exotic Options are often mistaken to be another kind of option. They are nothing but non-standard derivatives and are not a third type of option. Options Classifications: Options are often classified as In the money - These result in a positive cash flow towards the investor At the money - These result in a zero-cash flow to the investor Out of money - These result in a negative cash flow for the investor Example: Calls Reliance 350 Stock Series Naked Options: These are options which are not combined with an offsetting contract to cover the existing positions. 37

Covered Options: These are option contracts in which the shares are already owned by an investor (in case of covered call options) and in case the option is exercised then the offsetting of the deal can be done by selling these shares held.

OPTIONS PRICING
Prices of options are commonly depending upon six factors. Option's prices are far more complex. These are the two basic options that form the whole gamut of transactions in the options trading. These in combination with other derivatives create a whole world of instruments to choose form depending on the kind of requirement and the kind of market expectations. Exotic Options are often mistaken to be another kind of option. They are nothing but non-standard derivatives and are not a third type of option. Options undertakings: Stocks Foreign Currencies Stock Indices Commodities Others - Futures Options, are options on the futures contracts or Underlying assets are futures contracts. The futures contract generally matures shortly after the options expiration. OPTIONS PRICING Prices of options are commonly depending upon six factors. Option's prices are far more complex. The table below helps understand the affect of each of these factors and gives a broad picture of option pricing keeping all other factors constant. The table presents the case of European as well as American Options.

38

EFFECT OF INCREASE IN THE RELEVANT PARAMETRE ON OPTION PRICES

SPOT PRICES: In case of a call option the payoff for the buyer is max(S -Xt, 0) therefore, more the Spot Price more is the payoff and it is favorable for the buyer. It is the other ways round for the seller, more the Spot Price higher are the chances of his going into a loss. In case of a put Option, the payoff for the buyer is max (Xt - S, 0) therefore, more the Spot Price more are the chances of going into a loss. It is the reverse for Put Writing. STRIKE PRICE: In case of a call option the payoff for the buyer is shown above. As per this relationship a higher strike price would reduce the profits for the holder of the call option. TIME TO EXPIRATION: More the time to Expiration more favorable is the option. This can only exist in case of American option as in case of European Options the Options Contract matures only on the Date of Maturity. 39

VOLATILITY: More the volatility, higher is the probability of the option generating higher returns to the buyer. The downside in both the cases of Call and put is fixed but the gains can be unlimited. If the price falls heavily in case of a call buyer then the maximum that he loses is the premium paid and nothing more than that. More so he/ she can buy the same shares form the spot market at a lower price. Similar is the case of the put option buyer. The table shows all effects on the buyer side of the contract. RISK FREE RATE OF INTEREST: In reality the r and the stock market is inversely related. But theoretically speaking, when all other variables are fixed and interest rate increases this leads to a double effect: Increase in expected growth rate of stock prices discounting factor increases making the price fall. In case of the put option both these factors increase and lead to a decline in the put value. A higher expected growth leads to a higher price taking the buyer to the position of loss in the payoff chart. The discounting factor increases and the future value become lesser. In case of a call option these effects work in the opposite direction/The first effect is positive as at a higher value in the future the call option would be exercised and would give a profit. The second affect is negative as is that of discounting. The first effect is far more dominant than the second one, and he overall effect is favorable on the call option. DIVIDENDS: When dividends are announced then the stock prices on ex-dividend are reduced. This is favorable for the put option and unfavorable for the call option.

40

CALL OPTION: C = SN (dl)-Xe"rtN(d2) PUT OPTION: p = xe^NC-oa-SNC-oa) Where C - VALUE OF CALL OPTION S - SPOT PRICE OF STOCK X - STRIKE PRICE r - ANNUAL RISK FREE RETURN t - CONTRACT CYCLE

41

CHAPTER-3 COMPANY PROFILE

42

Incorporated in 1993, Net worth Stock Broking Limited (NSBL) has been a listed company at Bombay Stock Exchange (BSE), Mumbai since 1995. A Member, at the National Stock Exchange of India (NSE) and Bombay Stock Exchange, Mumbai (BSE) on the Capital Market and Derivatives (Futures & Options) segment, NSBL has been traditionally servicing Institutional clients and in the recent past has forayed into retail broking, establishing branches across the country. Presence is being marked in the Middle East, Europe and the United States too, as part of our attempts to cater to global markets. We are a Depository participant at Central Depository Services India (CDSL) with plans to become one at National Securities Depository (NSDL) by the end of this quarter. We have our customers participating in the booming commodities markets with our membership at the Multi Commodity Exchange of India (MCX) and National Commodity & Derivatives Exchange (NCDEX), through Networth Stock.Com Ltd. With its strong support and business units of research, distribution & advisory, NSBL aims to become a one-stop solution to the broking and investment needs of its clients, globally. Strong team of professionals experienced and qualified pool of human resources drawn from top financial service & broking houses form the backbone of our sizeable infrastructure. Highly technology oriented, the companys scalability of operations and the highest level of service standards has ensured rapid growth in the number of locations & the clients serviced in a very short span of time. Networthians, as each one of our 400 plus and ever growing team members are addressed, is a dedicated team motivated to continuously progress by imbibing the best of global practices, Indian sing such practices, and to constantly evolve a comprehensive suite of products & services trying to meet every financial / investment need of the clients. NSE CM and Derivatives Segment SEBI Regn. 1NB230638639 & 1NF230638639 BSE CM and Derivatives Segment SEBI Regn. 1NB010638634 & PMS SEBI Regn. 1NP000001371 CDSL DP SEBI Regn. IN-DP-CDSL 2512004 Commodities Trading: MCX -10585 and NCDEX - 00011 (through Networth Stock.Com Hyderabad (Somajiguda) 43

401, Dega Towers, 4th Floor, Raj Bhavan Road, Somajiguda Hyderabad - 500 082 Andhra Pradesh. Phone Nos.: 040-55560708, 55562256, and 30994985 Mumbai (MF Division) 49, Au Chambers, 4th Floor, Tamarind Lane, Fort Mumbai - 400 001 Maharashtra. Phone Nos.: 022- 22650253 Mumbai (Registered Office) 5, Church gate House, 2nd Floor, 32/ 34 Veer Nariman Road, Fort Mumbai - 400 001 Products and services portfolio With greater choices comes greater value. Networth offers you more choices by providing a wide array of products and personalized services, so you can take charge of your financial future with confidence. So whether you are a new investor or a seasoned one, we have the resources and advice you would need to make smart, well-researched investments and help you grow your Networth. 1 2 3 Retail and institutional broking Research for institutional and retail clients Distribution of financial products * Mutual funds * Insurance * NBFC Loans 4 5 7 8 PMS Corporate finance 6 Net trading Depository services Commodities Broking

44

Infrastructure 1 A corporate office and 3 divisional offices in CBD of Mumbai which houses state-of-the-art dealing room, research wing & management and back offices. 2 All of 107 branches and franchisees are fully wired and connected to hub at corporate office at Mumbai. Add on branches also will be wired and connected to central hub 3 4 Web enabled connectivity and software in place for net trading. 60 operative IDs for dealing room

5 In house technology back up team to ensure un-interrupted connectivity. 1993: Networth Started with 300 Sq.ft. of office space & 10 employees 2006: Spread over 42 cities (around 70,000 Sq.ft of office space) with over 107 branches & employee strength over 400 Market & research Focusing on your needs

45

Every investor has different needs, different preferences, and different viewpoints. Whether investor prefer to make own investment decisions or desire more in-depth assistance, company committed to providing the advice and research to help you succeed. Networth providing following services to their customers, Daily Morning Notes Reports Theme Based Reports Sector Reports Bullion Tracker Key Personnel: Mr. S P Jain CMD Networth Stock Broking Ltd. Mr. Deepak Mehta Head PMS Mr. Viral Doshi Equity Strategist 1 Mr. Vinesh Jain Asst. Fund Manager Weekly Notes Stock Stance F&O Tracker. IPOs Pre-guarter/Updates Market Musing Company

OUR GROUP COMPANIES Networth Stock Broking Ltd. [NSBL] NSBL is a member of the National Stock Exchange of India Ltd (NSE) and the Bombay Stock Exchange Ltd (BSE) in the Capital Market and Derivatives (Futures & Options) segment. NSBL has also acquired membership of the currency derivatives segment with NSE, BSE & MCX-SX. It is Depository participants with Central Depository Services India (CDSL) and National Securities Depository (India) Limited (NSDL). With a client base of over 1L loyal customers, NSBL is spread across the country though its over 300+ branches. NSBL is listed on the BSE since 1994. Net worth Wealth Solutions Ltd. [NWSL] Net worth Commodities & Investments Limited [NCIL] Net worth Soft Tech Ltd. [NSL] Ravisha Financial Services Pvt. Ltd. [RFSL] 46

Principles & Values At Net worth Stock Broking Ltd. success is built on teamwork, partnership and the diversity of the people. At the heart of our values lie diversity and inclusion. They are a fundamental part of our culture, and constitute a long-term priority in our aim to become the world's best international bank. Values

Responsive Trustworthy Creative Courageous

Approach

Participation:- Focusing on attractive, growing markets where we can leverage our relationships and expertise Competitive positioning:- Combining global capability, deep local knowledge and creativity to outperform our competitors Management Discipline:- Continuously improving the way we work, balancing the pursuit of growth with firm control of costs and risks Commitment to stakeholders

Customers:- Passionate about our customers' success, delighting them with the quality of our service Our People:- Helping our people to grow, enabling individuals to make a difference and teams to win Communities:- Trusted and caring, dedicated to making a difference Investors:- A distinctive investment delivering outstanding performance and superior returns Regulators: - Exemplary governance and ethics wherever we are.

MARKET PROFILE
47

NATIONAL STOCK EXCHANGE The National Stock Exchange of India (NSE) situated in Mumbai - is the largest and most advanced exchange with 1016 companies listed and 726 trading members. Capital market reforms in India and the launch of the Securities and Exchange Board of India (SEBI) accelerated the incorporation of the second Indian stock exchange called the National Stock Exchange (NSE) in 1992. After a few years of operations, the NSE has become the largest stock exchange in India. Three segments of the NSE trading platform were established one after another. The Wholesale Debt Market (WDM) commenced operations in June 1994 and the Capital Market (CM) segment was opened at the end of 1994. Finally, the Futures and Options segment began operating in 2000. Today the NSE takes the 14th position in the top 40 futures exchanges in the world. In 1996, the National Stock Exchange of India launched S&P CNX Nifty and CNX Junior Indices that make up 100 most liquid stocks in India. CNX Nifty is a diversified index of 50 stocks from 25 different economy sectors. The Indices are owned and managed by India Index Services and Products Ltd (IISL) that has a consulting and licensing agreement with Standard & Poor's. In 1998, the National Stock Exchange of India launched its web-site and was the first exchange in India that started trading stock on the Internet in 2000. The NSE has also proved its leadership in the Indian financial market by gaining many awards such as 'Best IT Usage Award' by Computer Society in India (in 1996 and 1997) and CHIP Web Award by CHIP magazine (1999). The NSE is owned by the group of leading financial institutions such as Indian Bank or Life Insurance Corporation of India. However, in the totally de-mutualized Exchange, the ownership as well as the

48

management does not have a right to trade on the Exchange. Only qualified traders can be involved in the securities trading. The NSE is one of the few exchanges in the world trading all types of securities on a single platform, which is divided into three segments: Wholesale Debt Market (WDM), Capital Market (CM), and Futures & Options (F&O) Market. Each segment has experienced a significant growth throughout a few years of their launch. While the WDM segment has accumulated the annual growth of over 36% since its opening in 1994, the CM segment has increased by even 61% during the same period. The National Stock Exchange of India has stringent requirements and criteria for the companies listed on the Exchange. Minimum capital requirements, project appraisal, and company's track record are just a few of the criteria. In addition, listed companies pay variable listing fees based on their corporate capital size. The National Stock Exchange of India Ltd. provides its clients with a single, fully electronic trading platform that is operated through a VSAT network. Unlike most world exchanges, the NSE uses the satellite communication system that connects traders from 345 Indian cities. The advanced technologies enable up to 6 million trades to be operated daily on the NSE trading platform. NSE Nifty: The S&P CNX Nifty (nicknamed Nifty 50 or simply Nifty), is the leading index for large companies on the National Stock Exchange of India. S&P CNX Nifty is a well diversified 50 stock index accounting for 22 sectors of the economy. It is used for a variety of purposes such as benchmarking fund portfolios, index based derivatives and index funds. Nifty was developed by the economists Ajay Shah and Susan Thomas, then at IGIDR. Later on, it came to be owned and managed by India Index Services and Products Ltd. (IISL), which is a joint venture between NSE and CRISIL. IISL is India's first specialized company focused upon the index as a core product. IISL have a consulting and licensing agreement with Standard & Poor's (S&P), who are world leaders in index services. 49

CNX stands for CRISIL NSE Indices. CNX ensures common branding of indices, to reflect the identities of both the promoters, i.e. NSE and CRISIL. Thus, 'C' stands for CRISIL, 'N' stands for NSE and X stands for Exchange or Index. The S&P prefix belongs to the US-based Standard & Poor's Financial Information Services. NSE other indices: S&P CNX Nifty CNX Nifty Junior CNX 100 S&P CNX 500 CNX Midcap S&P CNX Defty CNX Midcap 200

50

BOMBAY STOCK EXCHANGE: The Bombay Stock Exchange Limited (formerly, The Stock Exchange, Mumbai; popularly called The Bombay Stock Exchange, or BSE) is the oldest stock exchange in Asia. It is located at Dalal Street, Mumbai, India. Bombay Stock Exchange was established in 1875. There are around 5,600 Indian companies listed with the stock exchange, and has a significant trading volume. As of October2006, the market capitalization of the BSE was about Rs. 33.4 trillion (US $ 730 billion). The BSE SENSEX (Sensitive index), also called the BSE 30, is a widely used market index in India and Asia. As of 2005, it is among the 5 biggest stock exchanges in the world in terms of transactions volume. History: An informal group of 22 stockbrokers began trading under a banyan tree opposite the Town Hall of Bombay from the mid-1850s, 1875, was formally organized as the Bombay Stock Exchange (BSE).In January 1899, the stock exchange moved into the Brokers Hall after it was inaugurated by James M MacLean. After the First World War, the BSE was shifted to an old building near the Town Hall. In 1956, the Government of India recognized the Bombay Stock Exchange as the first stock exchange in the country under the Securities Contracts (Regulation) Act.1995, when it was replaced by an electronic (e.trading) system named BOLT, or the BSE Online Trading system. In 2005, the status of the exchange changed from an Association of Persons (AoP) to a fully fledged corporation under the BSE (Corporatization and Demutualization) Scheme, 2005 (and its name was changed to The Bombay Stock Exchange Limited). BSE Sensex: The BSE SENSEX (also known as the BSE 30) is a value-weighted index composed of 30 scrips, with the base April 1979 = 100. The set of companies which make up the index has been changed only a few times in the last 20 years. These companies account for around onefifth of the market capitalization of the BSE.

51

SENSEX, first compiled in 1986 was calculated on a "Market Capitalization-Weighted" methodology of 30 component stocks representing a sample of large, well-established and financially sound companies. The base year of SENSEX is 1978-79. The index is widely reported in both domestic and international markets through print as well as electronic media. SENSEX is not only scientifically designed but also based on globally accepted construction and review methodology. From September 2003, the SENSEX is calculated on a free-float market capitalization methodology. The "free-float Market Capitalization-Weighted" methodology is a widely followed index construction methodology on which majority of global equity benchmarks are based. The growth of equity markets in India has been phenomenal in the decade gone by. Right from early nineties the stock market witnessed heightened activity in terms of various bull and bear runs. More recently, the bourses in India witnessed a similar frenzy in the 'TMT' sectors. The SENSEX captured all these happenings in the most judicial manner. One can identify the booms and bust of the Indian equity market through SENSEX. The values of all BSE indices are updated every 15 seconds during the market hours and displayed through the BOLT system, BSE website and news wire agencies. SENSEX calculation: SENSEX is calculated using a "Market Capitalization-Weighted" methodology. As per this methodology, the level of index at any point of time reflects the total market value of 30 component stocks relative to a base period. (The market capitalization of a company is determined by multiplying the price of its stock by the number of shares issued by the company). An index of a set of combined variables (such as price and number of shares) is commonly referred as a 'Composite Index' by statisticians. A single indexed number is used to represent the results of this calculation in order to make the value easier to work with and track over time. It is much easier to graph a chart based on indexed values than one based on 52

actual values. The base period of SENSEX is 1978-79. The actual total market value of the stocks in the Index during the base period has been set equal to an indexed value of 100. This is often indicated by the notation 1978-79=100. The formula used to calculate the Index is fairly straightforward. However, the calculation of the adjustments to the Index (commonly called Index maintenance) is more complex. The calculation of SENSEX involves dividing the total market capitalization of 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. It keeps the Index comparable over time and is the adjustment point for all Index maintenance adjustments. During market hours, prices of the index scrips, at which latest trades are executed, are used by the trading system to calculate SENSEX every 15 seconds and disseminated in real time. During market hours, prices of the index scrips, at which trades are executed, are automatically used by the trading computer to calculate the SENSEX every 15 seconds and continuously updated on all trading workstations connected to the BSE trading computer in real time. BSE - other Indices: Apart from BSE SENSEX, which is the most popular stock index in India, BSE uses other stock indices as well: BSE 500 BSE PSU BSE MIDCAP BSE SMLCAP BSE BANKEX

53

BSE SENSEX 2009 is calculated based on the 30scrips. Those thirty scrips are as Follows: Code 500410 500103 Code 532454 500300 500010 500180 500440 Mining 500696 532174 500209 500875 532532 500510 500520 532500 532555 500312 500359 532712 500325 500390 500376 500112 500900 532540 Hindustan Unilever Ltd. ICICI Bank Ltd. Infosys Technologies Ltd. ITC Ltd. Jaiprakash Associates Ltd. Larsen & Toubro Limited Mahindra & Mahindra Ltd. Maruti Suzuki India Ltd. NTPC Ltd. ONGC Ltd. Ranbaxy Laboratories Ltd. Reliance Communications Limited Reliance Industries Ltd. Reliance Infrastructure Ltd. Satyam Computer Services Ltd. State Bank of India Tata Consultancy Services Limited 54 FMCG Finance Information Technology FMCG Housing Related Capital Goods Transport Equipments Transport Equipments Power Oil & Gas Healthcare Telecom Oil & Gas Power Information Technology Finance Information Technology Name ACC Ltd. Sector Housing Related

Bharat Heavy Electricals Ltd. Capital Goods Name Bharti Airtel Ltd. Grasim Industries Ltd. HDFC HDFC Bank Ltd. Hindalco Industries Ltd. Sector Telecom Housing Related Diversified Finance Finance Metal,Metal Products &

532868 DLF Ltd.

Sterlite Industries (India) Ltd. Metal,Metal Products & Mining

500570 500400 500470 Mining 507685

Tata Motors Ltd. Tata Power Company Ltd. Tata Steel Ltd. Wipro Ltd.

Transport Equipments Power Metal,Metal Products & Information Technology

55

CHAPTER -4

DATA ANALASYS AND INTERPRETATION

ANALYSIS AND INTERPRETATION July 2011 NIFTY FUURE CONTRACT

Symbo Date Expiry Open High Low Close

56

l NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY

1-Jul-11 4-Jul-11 5-Jul-11 6-Jul-11 7-Jul-11 8-Jul-11 11-Jul11 12-Jul11 13-Jul11 14-Jul11 15-Jul11 18-Jul11 19-Jul11 20-Jul11 21-Jul11 22-Jul11 25-Jul11 26-Jul11 27-Jul11 28-Jul11

28-Jul11 28-Jul11 28-Jul11 28-Jul11 28-Jul11 28-Jul11 28-Jul11 28-Jul11 28-Jul11 28-Jul11 28-Jul11 28-Jul11 28-Jul11 28-Jul11 28-Jul11 28-Jul11 28-Jul11 28-Jul11 28-Jul11 28-Jul11

5700. 2 5659. 9 5668 5642. 6 5649. 8 5760 5652. 15 5587. 3 5551 5574. 4 5606 5590 5662. 1 5651. 2 5559. 8 5590. 1 5630 5700 5588. 8 5500

5702 5690 5670 5667. 5 5751. 6 5760 5659 5593. 45 5609. 9 5667. 05 5640 5609 5662. 1 5658. 9 5586 5652. 8 5709. 8 5708. 9 5588. 8 5517. 05

5616. 25 5642. 3 5628. 25 5617. 5 5641 5661 5605. 1 5502. 15 5550 5546. 1 5563. 5 5560. 05 5561. 65 5554. 05 5532. 5 5573. 25 5616. 1 5555. 55 5518. 25 5473

5638. 4 5665. 85 5651. 1 5636. 65 5744. 6 5672. 3 5617. 05 5539. 95 5599. 75 5600. 25 5586. 95 5572. 75 5624. 3 5569. 55 5544. 2 5645. 55 5690. 65 5574. 35 5547. 9 5492. 7

57

5800 CALL OPTION FOR JULY 2011

Symbo Date l NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY 1-Jul-11 4-Jul-11 5-Jul-11 6-Jul-11 7-Jul-11 8-Jul-11 11-Jul11 12-Jul11 13-Jul11 14-Jul11 15-Jul11 18-Jul11 19-Jul11 20-Jul11 21-Jul11 22-Jul11 25-Jul11 26-Jul11 27-JulExpiry Strik Open High Low Close e Pric e 580 60 60 34.3 39.25 0 580 51.85 52.5 37.75 41 0 580 41.6 42 31.05 35.9 0 580 32.95 39.8 27 30.2 0 580 31.05 69.95 30.15 66.45 0 580 72 72.6 34.35 38.3 0 580 34.65 35.95 22 24.45 0 580 16.1 18.7 11.1 14.65 0 580 25 25 14.1 18.65 0 580 16.5 27.3 12.15 16.75 0 580 16.85 20.65 10.85 12.35 0 580 10.95 13.35 7.2 7.65 0 580 6.55 14.5 6.05 11.75 0 580 13.25 14.2 4.6 5.3 0 580 4.05 5.5 2.8 3.2 0 580 4.2 8.5 3.6 7.1 0 580 4.7 14.2 4.05 9.65 0 580 11 11.5 1.2 1.4 0 580 1 1.2 0.3 0.35

28-Jul-11 28-Jul-11 28-Jul-11 28-Jul-11 28-Jul-11 28-Jul-11 28-Jul-11 28-Jul-11 28-Jul-11 28-Jul-11 28-Jul-11 28-Jul-11 28-Jul-11 28-Jul-11 28-Jul-11 28-Jul-11 28-Jul-11 28-Jul-11 28-Jul-11

58

NIFTY

11 28-Jul11

28-Jul-11

0 580 0

0.15

0.15

0.05

0.05

5800 PUT OPTION FOR JULY 2011

Symbo Date Expiry Strike Open High Low Close l Price NIFTY 1-Jul28-Jul5800 162.7 215.9 158 198.2 11 11 5 5 NIFTY 4-Jul28-Jul5800 166 192.3 159.7 173.2 11 11 5 NIFTY 5-Jul28-Jul5800 170 199.8 170 181.8 11 11 5 NIFTY 6-Jul28-Jul5800 189.4 205 171.1 190.2 11 11 5 NIFTY 7-Jul28-Jul5800 182 185.1 114.8 118.9 11 11 5 NIFTY 8-Jul28-Jul5800 111.7 170.3 111.7 162.8 11 11 5 5 NIFTY 11-Jul28-Jul5800 178.8 213.8 169.5 206.6 11 11 5 5 5 NIFTY 12-Jul28-Jul5800 256 305.8 222 268.5 11 11 NIFTY 13-Jul28-Jul5800 254.1 256.6 207.1 217.2 11 11 5 5 NIFTY 14-Jul28-Jul5800 239 262.6 156.6 217.4 11 11 5 5 5 NIFTY 15-Jul28-Jul5800 200.1 244 177.4 222.6 11 11 NIFTY 18-Jul28-Jul5800 225 243.5 201.4 230.9 11 11 5 NIFTY 19-Jul28-Jul5800 230 239.5 169.9 183.2 11 11 5

59

NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY

20-Jul11 21-Jul11 22-Jul11 25-Jul11 26-Jul11 27-Jul11 28-Jul11

28-Jul11 28-Jul11 28-Jul11 28-Jul11 28-Jul11 28-Jul11 28-Jul11

5800 5800 5800 5800 5800 5800 5800

165.3 242 215 178.8 105 217 289.6 5

246 265.7 229.9 183.6 241 278.7 5 322

156 216.9 151.5 100.5 99 215.8 282

231.8 5 254.9 158.3 113.9 5 224.8 5 247.9 306.1

INTERPRETATION: In the above graph I calculated BEP. BREAKEVEN POINT (BEP) = HIGH VALUE+LOW VALUE/2 =5760+5473/2 = 11233/2 = 5616.5 In the above table I observed fluctuations in the period of (01-072011 to 28-07- 2011) in this graph I found as BEP was 5616.5 share values. Here I observed as a value share is high rate so Nifty-50 value was (5616.5 - 5760.00=143.5) so here share value is decreased so in this period of so here investors gets more losses, when goes for more longs .if investor enter for longs on 7th of May, with in short span of time investor get good profits. So this is good signal of the investors. So here I again observed nifty-50 losses of the period so here Nifty-50 share value is (5616.5-5473=143.5) so share value is increased so here investor gets more profits, when attempts for more shorts. So this is unexpected changes in market and politics and lack of experts of investors. When an investor goes for shorts in 3 levels, when compare to BEP Explaining the actual position of investor (1)Margin of Safety (M.o.S) =opening share value BEP 60

=5700-5616.5 =-83.5

So here margin of safety is less than to the BEP share value. So here investor gets some profits in shorts. (2) Margin of Safety (M.o.S) =high share value BEP =5760.00-5616.5 = 143.5 So here margin of safety is more than to the BEP share value. So here investor gets more profits and shorts at high price. (3) Margin of Safety (M.o.S) =low share value BEP = 5473 5616.5 = 143.5 So, in the above situation , after low recorded price 5473, on expiry date nifty maximum reached only 20 points more, so the max loss in the current contract is only 20 points here margin of safety is less than to the BEP so here investor gets more losses when investor goes for more shorts. What is called as Margin? Margin amount is security to the Broking firms in derivatives market trading happens on basis of margin amount, here Margin amount is investment of customers, sometimes margin may becomes zero, sometimes it may go negative values. Ex: if a Nifty contract worth is 2 lakhs, broking companies will not take total amount, normally they used to collect 15% on actual worth it means they collect only 30k. if nifty looses 600 points , margin amount becomes zero, if nifty looses more than 600 points, it comes in negative Is hedging gives the security to Margin Amount? A: Absolutely Yes When coming to may contract, there is lot of positive fluctuations (Never happen in stock market). Because of Old Govt. formation on 16th May 2009. Here , in a situation, a investor expects correction on may 13th and he had short sell nifty future on same day @ 3700 ( keep in mind

61

elections results on 16th) and Paid margin amount of 30k. and he knows that if Nifty crosses 4250 his margin becomes Zero. In above situation, to give the security to his margin amount, I am suggesting 3900 call option .on 15th may 2009 for the investment of 3500 Calculations as on 19th May 2009 Nifty future hits 4600 it means he was in loss of 900 points 900*50 = 45000 Margin amount = 30000 It means on 19th may his margin amount gone into negative of 15000 Nifty option hits 680 it means is he was in gain of 600 points 600*50 = 30000 It means after deducting the margin amount he has still 15000 positive balance with the company. Here Rs 3500 worth call option given the 30k worth security On 19th may if he sold the call option he gains 610 points and he hold the position short sell of 3700. On 22nd may he covers the nifty (3700 short) @4200, here the loss was 500 points. On 2 positions he got 110 points gain. It means here hedging given security and returns also.

25-AUGUST-2011 FUTURES INDEX NIFTY-50

Symbo Date Expiry Open High Low Close l NIFTY 29-Jul-11 25-Aug- 5479. 5531. 5456. 5488. 11 9 45 1 05 NIFTY 1-Aug-11 25-Aug- 5544. 5557. 5488 5532. 11 45 1 95 NIFTY 2-Aug-11 25-Aug- 5498. 5498. 5433. 5466. 11 7 7 15 5 NIFTY 3-Aug-11 25-Aug5418 5436. 5386. 5424. 11 6 5 4 NIFTY 4-Aug-11 25-Aug- 5424. 5440 5325. 5337. 11 5 25 2 NIFTY 5-Aug-11 25-Aug5191 5233. 5114. 5211. 11 7 7 35

62

NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY

8-Aug-11 9-Aug-11 10-Aug11 11-Aug11 12-Aug11 16-Aug11 17-Aug11 18-Aug11 19-Aug11 22-Aug11 23-Aug11 24-Aug11 25-Aug11

25-Aug11 25-Aug11 25-Aug11 25-Aug11 25-Aug11 25-Aug11 25-Aug11 25-Aug11 25-Aug11 25-Aug11 25-Aug11 25-Aug11 25-Aug11

5120. 2 4964 5223 5130 5175 5125 5039. 6 5055. 65 4870 4850 4927 4930 4901. 05

5208 5172 5223 5186. 8 5181 5139. 85 5125. 7 5075. 65 4903. 3 4921. 75 4973. 2 4961. 95 4912

5057. 3 4951 5118. 1 5122 5052 5006. 4 5014 4926. 4 4801. 1 4816. 1 4865. 1 4867. 3 4831. 1

5126. 2 5083. 4 5158. 65 5137. 25 5079. 85 5027. 7 5066. 75 4938. 05 4850. 85 4910. 45 4947. 4 4883. 85 4841. 75

NIFTY5600 CALL OPTION TABLE FOR 25-AUGUST2011

63

Symbo Date l NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY 29-Jul-11 1-Aug-11 2-Aug-11 3-Aug-11 4-Aug-11 5-Aug-11 8-Aug-11 9-Aug-11 10-Aug11 11-Aug11 12-Aug11 16-Aug11 17-Aug11 18-Aug11 19-Aug11 22-Aug11 23-Aug11 24-Aug11 25-Aug11

Expiry

25-Aug11 25-Aug11 25-Aug11 25-Aug11 25-Aug11 25-Aug11 25-Aug11 25-Aug11 25-Aug11 25-Aug11 25-Aug11 25-Aug11 25-Aug11 25-Aug11 25-Aug11 25-Aug11 25-Aug11 25-Aug11 25-Aug11

Strik Open High Low Close e Pric e 560 56 72.05 49 62.15 0 560 76 82.15 55.65 67 0 560 55 57 36.7 44.4 0 560 5 38 5 33.6 0 560 32.8 35.35 16.55 18.4 0 560 10 13 7.1 12.1 0 560 6 10.65 5.7 7.45 0 560 3 10.4 2.5 9.5 0 560 13 13.6 6.4 7.25 0 560 6.6 7.15 4.95 5.3 0 560 5.75 6.5 2.85 3.15 0 560 3.85 3.9 1.5 1.6 0 560 1.8 1.85 1.2 1.45 0 560 1.7 1.7 1.05 1.15 0 560 1 1.2 0.8 1.1 0 560 0.7 1 0.65 0.75 0 560 0.55 0.7 0.45 0.55 0 560 0.25 0.4 0.25 0.3 0 560 0.1 0.1 0.05 0.05 0

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NIFTY 5600 PUT OPTION TABLE FOR 25-AUGUST-2011

Symbo Date l NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY 29-Jul-11 1-Aug-11 2-Aug-11 3-Aug-11 4-Aug-11 5-Aug-11 8-Aug-11 9-Aug-11 10-Aug11 11-Aug11 12-Aug11 16-Aug11 17-Aug11 18-Aug11 19-Aug11 22-Aug11 23-Aug11 24-AugExpiry Strik Open High Low Close e Pric e 560 176.3 192 141.4 172.3 0 5 560 150 162 111.4 133.0 0 5 5 560 140.5 202.4 140.5 176.4 0 5 5 560 206.6 235.5 197.4 205.3 0 5 560 210.6 288.9 193 279.3 0 5 560 399.9 492.2 380 398.3 0 5 5 560 499.9 544 400 479.5 0 5 560 642.6 702 437 521.7 0 560 440 482.7 416.1 445.5 0 5 560 463.1 476.7 418.8 461.7 0 5 5 5 560 440.5 545.4 440.5 520.1 0 5 560 480 589.3 472.4 560.3 0 5 560 549.1 581.9 475 532.3 0 5 5 560 534.3 669.9 534.3 659.8 0 5 5 560 722.0 794 700 745.8 0 5 5 560 760.7 782 677.3 685.9 0 5 560 683.4 731.1 628 649 0 5 560 680.8 728.1 638 715.5

25-Aug11 25-Aug11 25-Aug11 25-Aug11 25-Aug11 25-Aug11 25-Aug11 25-Aug11 25-Aug11 25-Aug11 25-Aug11 25-Aug11 25-Aug11 25-Aug11 25-Aug11 25-Aug11 25-Aug11 25-Aug-

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NIFTY

11 25-Aug11

11 25-Aug11

0 560 0

713.6 5

5 770.7 5

688.0 5

5 762.2 5

NIFTY 5400 PUT OPTION TABLE FOR 25-AUGUST-2011

Symbo Date l NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY 29-Jul-11 1-Aug-11 2-Aug-11 3-Aug-11 4-Aug-11 5-Aug-11 8-Aug-11 9-Aug-11 10-Aug11 11-Aug11 12-AugExpiry Strik Open High Low Close e Pric e 540 109 109 58 75.7 0 540 63.8 66.25 47.25 49.95 0 540 58.6 85.9 58.6 71.2 0 540 94 105.7 81.65 86.85 0 5 540 89 140.3 78.5 132.7 0 540 200 313 200 230.3 0 540 320 362.5 231 300 0 540 452 490.9 265 343.4 0 5 540 272.0 304 245 264.5 0 5 5 540 292 294 243.0 280.5 0 5 540 259.0 353.7 255 327.5

25-Aug11 25-Aug11 25-Aug11 25-Aug11 25-Aug11 25-Aug11 25-Aug11 25-Aug11 25-Aug11 25-Aug11 25-Aug-

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NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY

11 16-Aug11 17-Aug11 18-Aug11 19-Aug11 22-Aug11 23-Aug11 24-Aug11 25-Aug11

11 25-Aug11 25-Aug11 25-Aug11 25-Aug11 25-Aug11 25-Aug11 25-Aug11 25-Aug11

0 540 0 540 0 540 0 540 0 540 0 540 0 540 0 540 0

5 272.8 5 356.6 335.1 535.5 557.3 474.4 479 492.4 5

395 392.9 472 599.2 580.8 532.9 5 529.1 571.4 5

272.6 5 281 334.1 497.1 5 480 428.2 5 438.0 5 485.7 5

5 373.7 336.0 5 458.8 5 552.6 493.4 5 451.4 5 516.4 5 557.8

OPEN = HIGH = LOW = CLOSE =

5479.9 5557.1 4801.1 4841.75

NOTE: above august contract, is linked with high volatility towards bearish zone, where PUT options will give more profit than CALL. In the above options table 5400 PUT has given nearly 1000% returns in same contract. On 1st of august 2011 nifty 5400 put option closed at 67

Rs.50. so, here investors maximum risk is only RS 50. If investor ready to bear that loss on final day it closes 557.8, so it has proved that it has given above 1000% return. Its possible only in options w.r.t volatility market conditions. INTERPRETATION: In the above graph I calculated BEP. BREAKEVEN POINT (BEP) = HIGH VALUE+LOW VALUE/2 =5557.1+4801.1/2 = 10358.2/2 = 5179.1 In this graph I observed fluctuations in the period of (29-072011 to 25-08-2011) in this graph I found as BEP was 5179.1 share value . Here I observed as a value share is high rate so Nifty-50 value was (5557.1 5179.1=378) so here share value is decreased so in this period of so here investors gets more losses, when goes for more longs .if investor enter for longs on 9th of August, with in short span of time investor get good profits. So this is good signal of the investors. So here I again observed nifty-50 losses of the period so here Nifty-50 share value is (5179.1-4801.1=378) so share value is increased so here investor gets more profits, when attempts for more shorts at BEP levels. So this is unexpected changes in market and investors have

high risk in this segment.

So here investor in the contract
2nd

Thursday was more losses.

So May contract was started 5263.8 and ending of the contract 5004 so here investor gets more losses in longs and more profits in shorts.

When an investor goes for shorts in 3 levels, when compare to BEP Explaining the actual position of investor (1)Margin of Safety (M.o.S) =opening share value BEP
68

=5263.8-5038.225 =-225.575

So here margin of safety is less than to the BEP share value. So here investor gets some profits in shorts. (2) Margin of Safety (M.o.S) =high share value BEP =5290.00-5038.225 =251.775 So here margin of safety is more than to the BEP share value. So here investor gets more profits and longs. (3) Margin of Safety (M.o.S) =low share value BEP = 4786.45 5038.225 = 251.775 So, in the above situation , after low recorded price 4786.45, nifty maximum reached 5004, so the max loss in the current contract is 217.55 here margin of safety is less than to the BEP so here investor gets more losses when investor goes for more shorts.

Hedging Hedging does not remove losses. The best that can be achieved using hedging is the removal of unwanted exposure, i.e. unnecessary risk. The hedged position will make less profit than the un-hedged position, half the time. One should not enter into a hedging strategy hoping to

69

make excess profits for sure; all that can come out of hedging is reduced risk Example for Hedging In stock market terminology Hedging means Risk Minimizing 1. A customer buys the 10 lots nifty May Future @5280 in first day of May. till end of the May he has not covered the position. In last week of May nifty has closed @5004. So the loss per lot is Approx 13800. So which instrument gives the best HEDGING for him? According to analyst words on 30th April 2010, market performance for the current contract will be based on these factors. If nifty crosses 5301, next level will be 5381 and 5450. If nifty breaks 5220 next levels will be continue in down trend, like 5150, 5080,5020,4950,4880. Where continuous down trend also not possible, there will be some ups and downs. Above I have mentioned call option table for 5000 and put option table for 5000 and 5100 for May 2010, if you observe on 3rd May 5100 put option recorded Rs55.00, assume that customer entered in this level and exits at this level. Rs310 on 25th may 2010. Here, nifty unable to break its next resistance level 4780 on the 25 th May 2010. So and recorded huge volume in open interest for 5100 puts. According to market sentiment, when a product records high volumes in open interest, probability is very less to increase. Based on above information first, customer has to exit put option from the market on 25th and has to maintain his future long position in the market.

Gain on May put option 310-55 = 255 is profit on single unit, nifty lot contains 50 units So 255*50 = 12750 is profit For the above mentioned customer May 5100 put option gives the best hedging. Because, in May future he occurred 13800 losses and in same month call option given 17600 profits. 70

End of the month still he is in loss of Rs1000 per lot, it proves that in volatility market options will give the hedging to the investors Conclusion: options will give hedging to the investment and minimizes the risk but, will not give profits. Do options always give the positive returns? A: No, sometimes, investors prefer options for investment purpose only. But investment amount becomes zero in some situations. Ex. In the above table assume that customer enter the nifty 5100put in first week, last week of the contract it became zero. So, options also fail to give positive returns.

NIFTY SEPTEMBER 2011 CONTRACT

Symbo Date Expiry Open High Low Close l NIFTY 26-Aug- 29-Sep- 4855. 4887. 4718 4748. 11 11 3 9 7 NIFTY 29-Aug- 29-Sep4805 4948 4802. 4933. 11 11 3 15 NIFTY 30-Aug- 29-Sep4976 5021. 4924 5003 11 11 55 NIFTY 2-Sep-11 29-Sep5040 5072. 4988. 5034. 11 1 8 1 NIFTY 5-Sep-11 29-Sep- 4994. 5023 4954 5010. 11 15 3

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NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY

6-Sep-11 7-Sep-11 8-Sep-11 9-Sep-11 12-Sep11 13-Sep11 14-Sep11 15-Sep11 16-Sep11 19-Sep11 20-Sep11 21-Sep11 22-Sep11 23-Sep11 26-Sep11 27-Sep11 28-Sep11 29-Sep11

29-Sep11 29-Sep11 29-Sep11 29-Sep11 29-Sep11 29-Sep11 29-Sep11 29-Sep11 29-Sep11 29-Sep11 29-Sep11 29-Sep11 29-Sep11 29-Sep11 29-Sep11 29-Sep11 29-Sep11 29-Sep11

4987 5095 5126 5150 4969. 85 4972 4948 5041 5124. 7 5055 5039 5150 5010. 1 4879 4869. 8 4909 4989 4925. 05

5072. 25 5149 5174 5154. 85 4979. 4 5040 5032. 8 5100 5155 5063 5167. 8 5173. 9 5061. 95 4935 4879 4989. 1 4995 5036. 25

4931. 9 5078. 25 5088. 35 5042. 5 4901 4903. 85 4908 4957. 2 5071 5017. 3 5035. 35 5113 4898. 15 4818. 6 4756. 1 4905. 5 4906. 2 4902. 5

5061. 1 5117. 2 5155 5052. 5 4942. 45 4941. 6 5019. 15 5081. 2 5087. 6 5037. 15 5156. 7 5141. 3 4913. 9 4870. 7 4844. 3 4977. 85 4936. 65 5019. 4

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OPEN 4855.30 LOW 4718

HIGH 5173.90 CLOSE 5019.40

5100 CALL OPTION FOR JUNE 2010 CONTRACT 5100 PUT OPTION FOR JUNE 2010 CONTRACT INTERPRETATION: In the above graph I calculated BEP BREAKEVEN POINT (BEP) = HIGH VALUE+LOW VALUE/2 = 5173.90+ 4718/2 = 9891.90/2 = 4945.95 In this graph I observed fluctuations in the period of (26-08-2011 to 29-09-2011) in this graph I found as BEP was 4945.95 share values. Here I observed as a value share is high rate so Nifty-50 value was (5173.90 4945.95=227.95) so here share value is increased so in this period of so here investors gets more profits and more longs up to the mid of the contract and less profits till end of the contract. So here I again observed nifty-50 losses of the period so here Nifty-50 share value is (4718 -4945.95 = -227.95) so share value is decreased so here investor gets more losses in shorts.

When a investor goes for shorts in 3 levels, when compare to BEP. Explaining the actual position of investor with margin of safety (1) Margin of Safety (M.o.S) =opening share value BEP . = 4855.30 4945.95 = - 90.65 So here margin of safety is less than to the BEP share value . So here investor gets some losses in shorts.

(2) Margin of Safety (M.o.S) high share value BEP 73

=5173.90 - 4945.95 =227.95 So here margin of safety is more than to the BEP share value. So here investor gets more profits and longs. (3) Margin of Safety (M.o.S) = low share value BEP = 4718 - 4945.95 = 227.95 So here margin of safety is less than to the BEP so here investor gets more losses and more shorts. How Premiums works on Options In derivatives market, customers can invest in only options also. But here the maximum risk is Premium amount paid by the investor. The options will give buying or selling right, not an obligation. Call option premium increases when market is in bullish or Positive Put option premium increases when market is in bearish or negative. The reason investors shown more interest on options: less risk with high returns. In equities investor needs to pay the total amount towards investment Ex: Ramesh buys 300 equity shares of RIL @1000 on 1st January 2012, for a target price of Rs.1200 by 28th January2010. According to his expectation target reaches to 1200, what are the returns generated by ramesh A; investment amount is 3 00 000 (1000 * 300) Sell value 3 60 000 (1200*300) Rs.60000 generated on investment, 60k is 20% on investment. In futures long / short investor no need to pay complete contract amount. Here investor has to pay 25% as margin amount. In the above example, 300 RIL shares contain one lot. Total contract value is 300000. But the margin amount is only 75000. Returns on Investment: Rs.200 growth on 300 units it means 60k profit on investment, here 60k is 80% on investment. An equity customer can invest with his investment 4 times in future, this is the one reason people shown interest on futures investment. 74

In options investor has to pay only premiums. Here premium amount is investment. Here investor gets right towards investment. Ex: in the above example, on 1000 RIL strike price investor paid Rs.25 as premium on each unit. Contract size is 300 units. Investment value is 7500. Here 7500 giving the right on 300000 contract. Here assumption of buy price is 1025, because Rs.25 premium is added in the contract. End of the contract price appreciation on RIL is 200. But here we have to take Rs.175 into consideration. Returns on investment are 175*300 = 52500, means 7 times on investment 700% profit for the given contract. In the above example if the stock price falls to Rs.500 also, the maximum loss would be only the premium. He no need to bare any extra loses. This is the only one reason, I have found in the study people shown more interest towards futures and options. Some live examples on options investment: during my study, I got an opportunity to observe some clients derivatives positions: in those NIFTY, LT, Are best examples. 1. NIFTY EXAMPLE FOR January CONTRACT 2012: On 16th January, nifty traded between 5215 to 5230, where investor expected market fall for the month below 5100.and he bought 15000 nifty 5100 puts @ 20. End of the contract nifty closes above 5300. According to put concept, if the value of underlying asset increases, put value decreases, so here end of the contract put became zero. 2. One client expected that LT share price will increases to 1800, when market trades at 1635, on 7th July 2011. He knows 3 alternative investments in the market one is buying in equities, or entering into futures contract or buying nearest call option. So, he ready to do high risk and entered into 1650 call on 07th June 2010 at Rs.35. Calculating returns on investment: On 21st July 2011 LT, reaches 1840, where he settles call option at Rs.186, return on investment is Rs.151 on each unit. Because in 186 he has to deduct his investment amount of Rs. 35, in very rare situations investors get their premium back. 75

Return on investment is 431.42%. In the above situation if investor takes any other investments like investing in equities and futures, he would not able to generate above mentioned returns.

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CHAPTER-6

FINDINGS, CONCLUSION & SUGGESIONS

FINDINGS:
1. Derivative have existed and evolved over a long time, with roots in commodities market .In the recent years advances in financial markets and technology have made derivatives easy for the investors. 2. Derivatives market in India is growing rapidly unlike equity markets. Trading in derivatives require more than average understanding of finance. Being now markets, Maximum number of investors have not 77

yet understood thee full implications of the trading in derivatives. SEBI should take actions to create awareness in investors about the derivative market. 3. Introduction of derivative implies better risk management. These markets can greater depth, stability and liquidity to India capital markets. Successful risk management with derivatives requires a thorough understanding of principles that govern the pricing of financial derivatives. 4. In order to increase the derivatives market in India SEBI should revise some of their regulation like contract size, participation of Fill in the derivative market. Contract size should be minimized because small investor cannot afford this much of huge premiums. 5. Derivatives are mostly used for hedging purpose. 6. In derivative market the profit and loss of the option writer/option holder purely depends on the fluctuations of the underlying. 7. Where investor have higher risk, is getting high returns, its clearly showing in live examples.

SUGGESSIONS
The investors can minimize risk by investing in derivatives. The use of derivative equips the investor to face the risk, which is uncertain. Though the use of derivatives does not completely eliminate the risk, but it certainly lessens the risk.

78

It is advisable to the investor to invest in the derivatives market because of the greater amount of liquidity offered by the financial derivatives and the lower transaction costs associated with the trading of financial derivatives. The derivative products give the investor an option or choice whether the exercise the contract or not. Option gives the choice to the investor to either exercise his right or not. If on expiry date the investor finds that the underlying asset in the option contract is traded at a less price in the stock market then, he has the full liberty to get out of the option contract and go ahead and buy the asset from the stock market. So in case of high uncertainty the investor can go for option. However, these instruments act as a powerful instrument for knowledge traders to expose them to the properly calculated and well understood risks in pursuit of reward i.e profit. OTHER SUGGESTIONS ARE 1. Increase in scripts under derivative segment: SEBI and the stock exchanges should constantly endeavor to Update the lists of stocks available for derivatives trading by including in the list of companies with very strong fundamentals and a history of excellent track record and also with excellent corporate governed record even while periodically deleting Companies which do not keep up their record of high disclosures And corporate governance and also those companies which may Come under any serious allegations of being associated with any Stock market scams etc 2. Physical settlement: Presently the derivatives traded are settled on cash basis on the last Thursday of each month. Thus, there is no physical delivery of the traded securities. This is one of the reasons for the Derivatives market to be dominated by speculators and big players with grossly inadequate interest shown by small investors to take advantages of the

79

derivative trading, there is a need to physical system. 3. Investor and broker education:

switch over the phases to the

This is the need of the hour. While the Indian investor is familiar With the forward trading under Badla system, the derivatives Strategies are not yet familiar to him. Like the certification of traders on the derivatives desk, there has to be an orientation program for the brokers and intermediaries can best do this job as part of service to expand the market and awareness 4. SEBI has to take steps to reduce the speculation that is going on in the market segment. 5. SEBI has to take further steps in the risk management mechanism. 6. SEBI has to take measures to use effectively the derivatives segment as tool of hedging. ROLL OVER PROCESSOR: Every script having 3 months contract cycles Current month, Next month and far month. if current month is not gives the expected returns customers are roll over their positions into next month , this roll over process they can do up to n no of months until they have margin with them STOPLOSS: Derivatives are high volatility product, to keep their margin in positive always they must use stop loss order, when they enter into the contract. When stop loss triggers, it means the investor has to book the loss.

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BIBLIOGRAPHY
81

BIBLIOGRAPHY Text Books: M.Y.Khan R. Mahajan Rene.M.Stulz : : : Indian Financial System 9th Edition Futures & Options Risk Management & Derivatives

Websites: www.indianderivatives.com www.nseindia.com www.bseindia.com www.networthdirect .com News papers: Economic Times

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Bussiness Line Times of India

83