PRESENTATION OF SUMMER TRAINING PROJECT TOPIC:- DERIVATIVES F&O SEGMENT

BY:-PUNEET MOHAN Q2701B31 3020070154

INTRODUCTION TO STOCK EXCHANGE

OBJECTIVE OF PROJECT
ABOUT THE TOPIC METHEDOLOGY ANALYSIS KEY FINDINGS RECOMMENDATIONS

INTRODUCTION TO STOCK EXCHANGE

1.

Stock exchange is an institution of capital market which generate capital and provide the same.
It channelizes the household savings into investment.

2.

3.
4. 5. 6. 7.

It is the market as well as the source.

Corporate and government houses raises resources from the market. They provide finance for the productive outputs. It encourages the companies to perform in best possible way. Securities exchange board of India is monitoring authority of stock market.

OBJECTIVE OF PROJECT
1. To study the working and dynamics of various types of financial derivatives used as an investment tool by customers in the stock market.

2. To evaluate the various investment opportunities for investors.

3. To know about perception held by investors about the financial derivatives. 4. To know that how the derivatives help to reduce the risk and how they provide hedge against the risk.

DERIVATIVE
The terms Derivatives indicates that it has no independent value, i.e. its value is entirely derived from the value of underlying assets. The underlying assets can be securities, commodities, bullion, currency, live stock or anything else.

TYPES OF DERIVATIVES CONTRACTS

The most commonly used derivatives contracts are forwards and futures which shall be discuss in details in later. Here we take a brief look at various derivatives contracts that have come to be used Forwards: A forward contract is customized contract between two entities, where settlement takes place on a specific date in the future at todays preagreed price. Futures: A future contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. Future contracts are special types of forward contract in the sense that the former are standardized exchange-traded contracts. Options: Options are instruments whereby the right is given by the option seller to the option buyer to buy or sell a specific asset at a specific price on or before a specific date.

PARTICIPATION OF DERIVATIVE MARKET

There three broad categories of participants are:
PARTICIPANTS RTICIPANTS

HEDGERS HEDGERS

SPECULATORS

ARBITRAGEUR

Hedgers: They are in the position where they face risk associated with the price of an asset. They use derivatives to reduce or eliminate risk. For example, a farmer may use futures or options to establish the price of his crop long before his harvest it. when they reflect the price he wants, he will sell on a futures contracts to assure him of a fixed price of his crop. Speculators: They wish to bet on future movement in price of an asset. Future and option contracts can give them an extra leverage; that is they can increase both the potential gains and potential losses in a speculative venture. Arbitrageurs: They are in business to take advantage of a discrepancy between prices in two different markets. If, for example, they see the future price of an asset getting out of line with the cash price, they will take offsetting in the two markets to lock in a profit.

Forward / Futures Contracts

Features Operational Mechanism Forward contract Not traded on exchange Future contract Traded on exchange

Contract Differ from trade to Contracts are Specification trade. standardized contract Counterparty Exist Exists, but assumed Risk by clearing corporation/house Liquidation Poor Liquidity as Very high liquidity Profile contract are tailor as contract are maid contract standardized contracts. Price Poor; as market are Better; as Discovery fragmented. fragmented market are brought to the

METHODOLOGY
SAMPLING DESIGN Target population Type of sampling Sample size Type of research People visiting broking house in Ludhiana Region convenient sampling 100 Descriptive

ANALYSIS 1 Customers investing in stock market

Yes( 83%)

No( 17%)

In India only 2% of the household income is invested in the stock market but percentage of investment is quite high in urban market. Now as I took sample of people visiting broking houses in Ludhiana region so percentage of investment in the stock market is found to be 83% While 17% are only the visitors or they dont invest

ANALYSIS 2 Type of investment customers are looking for

long term (56%) short term (33%) Both( 11%)

Among the sample surveyed short term investment is found to be risky so customers went for long term investment as it is less risky. But only a small fraction of sample is found to be interested in both long term as well as short term investment ( short term like intraday or jobbing on speculative basis)

ANALYSIS 3 Investment instrument used by customers in Stock market

Derivatives( 39%) Cash Market( 23%) Mutual Funds( 16%) All( 22%)

Majority of the customers investing in the stock market is found to be investing in derivatives this may be due to the reason as derivatives provides greater flexibility like long and short of position, etc. this also shows the growing derivative market in India.

ANALYSIS 4 Purpose of using derivatives

Arbitrage( 20%) Hedging( 45%) Speculative( 35%)

Majority of the sample surveyed who invest in derivative market use derivative for the purpose of hedging against their portfolio to minimize the risk. While 35% of this sample investing in derivative market is found to be using derivative on speculative basis to get short term profits by exploiting variations in the prices on a daily basis Example Intraday or Jobbing. While only 20% is found to be using derivatives for arbitrage i.e. buying in N.S.E and sell in B.S.E

ANALYSIS 5 Customers knowledge level in derivatives

Very Good( 21%) Good( 41%) Moderate( 31%) nil( 7%)

Now since the fraction of sample surveyed who invest in derivative market it is now necessary to fine whether they have some knowledge of using derivatives or not as to use derivatives instruments like future and options one must know basis about them. So far the survey it is found 21% of the customers surveyed investing derivative market has a very good knowledge about derivatives i.e they know well to use derivatives against their portfolio.

ANALYSIS 6 Percentage of customers aware with the risk associated with derivatives

Yes( 93%) No( 7%)

Among the customers investing in the derivative market 93% of sample believes that they know about the risk factors associated with derivatives i.e. risk like payment of market to market due to price movements, etc. While 7% of sample investing in derivative market doesn't know about the risk factors associated with derivative market this may be due the reason as this sample may be new into the derivative market.

ANALSIS 7 Customers perception about the risk in derivatives

very risky 32% risky 41% Moderate( 22%) Not Risky( 5%)

Among the sample investing in derivative market more than 50% of the sample believe that derivative market is risky and this may be due to perception of association of derivative market and stock market and volatility associated with market that affect the market.

ANALYSIS 8 Customers preference among various Derivative instrument

Futures( 14%) Options( 32%) Both(49%) None( 5%)

Among the customer investing in derivative market 49% of the customers prefer both futures and options as an investment tool this may be due to flexibility associated with derivatives and also 32% sample think that options is a good tool to use against future reason may be small investment i.e. premium required to get a position whereas in futures Margin is required which is more than premium.

ANALYSIS 9
Customer's perception: Are derivatives Better than other financial instruments

Yes( 41%) No( 17%) Can't Say( 42%)

42% of the sample investing in derivative market can't able to say whether derivative able to provide better source of Investment option this may be due to inadequate knowledge of customers. While 41% of the sample believes that derivative provide better investment option. This may be due to the perception of customers who use derivatives for jobbing.

ANALYSIS 10 Customer's preference in future among derivatives

Index Future( 39%) Stock Futures( 40%) Can't Say( 14%) Both( 7 %)

40% of the customers investing in derivative market like to invest in stock futures this may be due to some booming sectors or stocks of growing companies. While 39% of the investors in derivative market wants to go for index futures this may because they wants hedge their portfolio or want to speculate on the volatility of indices.

ANALYSIS 11
Customer's perception: Are derivatives Creating more volatility in stock market?

Yes( 68%) No( 20%) Can't Say( 12%)

Majority of the customers investing in derivative market believe that derivative market is creating more volatility in stock market this may be due to the reason of flexibility and leverage associated with derivatives. As investors can long or short their positions by using margin amount whereas they can't do the same in cash market so because of leverage associated with derivatives it can be inferred that derivative market creates more volatility in Stock market.

ANALYSIS 12 Customer's perception: Return associated With derivatives

Very Low( 25%) Low( 24%) Moderator( 5%) High( 46%)

More than half of the customers investing in the derivative market believes that derivatives provide good returns. The reason behind may be speculative or jobbing used by investors as this strategy provides returns in a short term by making multiple trades in a day by exploiting price movements in the market.

RESEARCH FINDING
Indian derivative market is growing and attracting new investors to trade in market to make profit by exploiting price movements of stock or commodities in the stock market investors generally trade in reason behind new customers attracting towards this market is the greater flexibility and leverage provided by derivative instruments.

KEY FINDINGS
It was found that derivative market is growing with lots of new investors entering in the market. The purpose of using derivatives is mainly hedging and speculative as these strategies help in minimizing risk while speculating helps to exploit the changes in price movements in the market Investors in stock market are mostly looking for long investment. Customers dont have adequate knowledge about derivatives but they know some risk factors associated with derivatives market & found derivative market to be a risky one but at the same time customers believe derivative market can provide good returns. Some customers believe that derivatives provide a better source investment against other financial instruments while some believe they dont.

Mostly customers prefer either using both futures as well as option or just option this is because option require small investment than future. Mostly young generation who are employed is entering into this market but they dont know much about derivative instruments .

RECOMMENDATION
The target customers for the broking employed. firms should be young and

As customers are new in the derivative market and they dont have adequate knowledge about derivatives and found this market be risky but at the same time they feel this market provide good returns so a broking firm must provide support and time to time guidance to their customer while trading in the market so that they are able to sustain for long time in the market so that customer is also able to know about where their money is being invested and how safe it is. Also target those who are manufactures who use commodities like copper, gold etc and agri-products as these customers can also trade in derivatives for the purpose of hedging.