Professional Documents
Culture Documents
ON
VINAY KUMAR
M.B.A 4th year
ROLL NO - 80608317058
STUDENT DECLARATION
Vinay Kumar
ACKNOWLEDGEMENT
(VINAY KUMAR)
CONTENTS OF THE TABLE
1. PROJECT ASSIGNED.
Introduction of the project.
Objectives of the project.
Derivative terminology.
Reasons behind its evolution.
Requirements for Future and Options.
Strength of Indian capital market.
Importance of derivative investment.
Instruments involved in derivative.
Performance in India.
Regulatory framework.
exchange.
6.SUGGESTIONS.
7.LIMITATIONS OF STUDY.
8.CONCLUSIONS.
9.BIBLOGRAPHY.
10.SAMPLE OF QUESTIONNAIRE.
INTRODUCTION OF THE PROJECT
Derivatives have vital role to play in enhancing shareholder value by ensuring access
to the cheapest source of funds. Active use of derivatives instruments allows the
overall business risk profile to be modified, thereby providing the potential to improve
earning quality by offsetting undesired risk.
Under my project report, I have studied various trends that comes in
the way of Derivatives market. Because impression is usually given that losses arose
from derivatives are extremely complex and difficult to understand financial
strategies. So after interviewing with different brokers ,investors and dealers, I have
tried to give a solution to these complexities.
i also find out that what would be the future of derivative market
in india on the basis of interviews and observations of brokers, dealers and investors.
regarding future, I have find out that derivatives can indeed be used safely and
successfully provided a sensible control and management strategy is established and
executed. inspite of that more awareness should be done and technical expertise
knowledge should be more expanded.
OBJECTIVES OF THE PROJECT
A stock exchange is the place where securities, shares, debentures and bonds
of joint stock companies, central & state govt., semi govt. organizations,
local bodies and foreign govt. are bought and sold. A stock exchange is the
nerve center of capital market. Changes in the capital market are brought
about by a complex set of factors, all operating on the market
simultaneously. Such changes are subject to secular trends set by the
economic progress of the nation, and governed by the factors like general
economic situation, financial and monetary policies, tax changes, political
environment, international economic and financial development etc. A stock
exchange provides necessary mobility to capital and directs the flow of
capital into profitable and successful enterprises.
The trading of securities in India was started in early 1973. The only stock
exchange operating in the 19th century were those of Bombay set up in 1875
and in Ahemdabad set up in 1894. These were organized as voluntary non-
profit making associations of brokers to regulate and protect their interests.
Before the control on securities trading became a central subject under the
constitution in 1950. It was a state subject and Bombay securities contract
(control) act of 1925 used to regulate trading in securities. Under this act,
Bombay stock exchange was recognized in 1927 and Ahemdabad stock
exchange were organized at Bombay, Ahemdabad and other centers but they
were not recognized soon after it became a central subject, central legislation
was proposed and a committee headed by sh. A.D.GORWALA went into
bill for security regulation. On the basis securities contract act became law in
1956.
At present there were 23 recognized stock exchanges in
India. From these BSE & NSE are the two major stock exchanges and
rest 21 are the regional stock exchanges. Daily turnover of all the stock
exchange is app. 20,000cr. BSE is 129 years old. NSE is 11 years old and it
brought the screen based trading system in India
FEATURES OF THE STOCK EXCHANGE
The current market scenario in the capital market is not very encouraging,
however, in the future; the business model of ISE would be the most
preferred method of accessing multiple markets with low cost and high
credibility of an Exchange. ISE is considering several value added services
or new products which may help ISE and ISS in fulfilling the demands of
low cost users. We are considering derivative segment through NSE and DP
services initially for the participants and later for clients through CDSL and
NSDL. This futuristic concept of consolidation being pursued by ISE is now
being also explored by the Developed Countries. We think such
consolidation enables optimal utilization of existing resources, enhanced due
to economies of scale and permit product innovation, a sign o any dynamic
market. On account of this philosophy we are proposing to implement most
of the new products centrally on ISE, like, Internet trading, IPO segment,
Distribution of mutual funds units, Information dissemination, etc. We are
also planning to provide trading support to the commodities Exchanges and
also consider providing hem entry into the securities industries. The creation
of a national market has provided the brokers of the RSEs and individual
investors in the regions and opportunity approach the liquid national level
market. This market is expected to provide liquidity in small capital
companies as the other National Level markets have a higher entry norm and
may not cater to this market.
Primary market is used for raising money and secondary market is used for
trading in the securities, which have been used in primary market. But
derivative market is quite different from other markets as the market is used
for minimizing risk arising from underlying assets.
The work "derivative" originates from mathematics. It refers to
a variable, which has been derived from another variable.
i.e. X = f (Y)
WHERE X (dependent variable) = DERIVATIVE PRODUCT
Y (independent variable) = UNDERLYING ASSET
A financial derivative is a product that derives value from the
market of another product. Hence derivative market has no independent
existence without an underlying asset. The price of the derivative instrument
is contingent on the value of underlying assets.
As a tool of risk management we can define it as, "a financial
contract whose value is derived from the value of an underlying
asset/derivative security". All derivatives are based on some cash product.
The underlying assets can be:
a. Any type of agriculture product of grain (not prevailing in India)
b. Price of precious and metals gold
c. Foreign exchange rates
d. Short term as well as long-term bond of securities of different type
issued by govt. and companies etc.
e. O.T.C. money instruments for example loan & deposits.
Example: Wheat farmers may wish to sell their harvest at a future date to
eliminate the risk of change in price by that date. The price of these
derivatives is driven from spot price of wheat.
DEFINITION OF DERIVATIVE
In the Indian context the Securities contracts (Regulation), Act 1956 defines
"Derivative" to include:
(1) A security derived from a debt instrument, Share, Loan whether
secured or unsecured, Risk instrument or contract for difference or
any other form of security.
A contract, which derives its value from the prices of underlying securities.
HISTORICAL ASPECT OF DERIVATIVES:
The need for derivatives as hedging tool was first felt in the
commodities market. Agricultural F&O helped farmers and PROCESSORS
hedge against commodity price risk. After the fallout of BRITAIN WOOD
AGREEMENT, the financial markets in the world started undergoing radical
changes, which give rise to the risk factor. This situation led to development
of derivatives as effective "Risk Management tools".
Derivative trading in financial market started in 1972 when "Chicago
Mercantile Exchange opened its International Monetary Market Division
(IIM). The IMM provided an outlet for currency speculators and for those
looking to reduce their currency risks. Trading took place on currency.
Futures, which were contracts for specified quantities of given currencies,
the exchange rate was fixed at time of contract later on commodity future
contracts was introduced then followed by interest rate futures.
Looking at the liquidity market, derivatives allow corporate and
institutional investors to effectively manage their portfolios of assets and
liabilities through instruments like stock index futures and options. An
equity fund e.g. can reduce its exposure to the stock market and at a
relatively low cost without selling of part of its equity assets by using stock
index futures or index options. Therefore the stock index futures first
emerged in U.S.A. in 1982.
PRODUCTS, PARTICIPANTS AND FUNCTIONS
(1) HEDGER:
Hedgers face risk associated with the price of an asset.
They use futures or options markets to reduce the risk. Thus, they are
operation who want to eliminate the risk composing of their portfolio.
(2) SPECULATORS:
They wish to be on future movements in the price of
an asset. A speculator may buy securities in anticipation of rise in price.
If this expectation comes true he sells the securities at a higher price and
makes a profit. Usually the speculator does not take delivery of securities
sold by him. He only receives and pays the difference between the
purchase and sale prices.
(3) ARBITRAGEURS:
They are in business to take advantage of discrepancy
between price 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 off
setting positions in two markets to lock in profit.
TYPES OF DERIVATIVES
(1) HEDGING:
you own a stock and you are confident about the
prospects of the company. However at the same time you feel that overall
market may not perform as good and therefore price of your stock may
also fall in line with overall marked trend.
You expect that some adverse economic or political
event might affect the market sentiments, though fundamentals of the
company will remain good, therefore, it is good to retain the stock.
In both these situations you would like to insure your portfolio against any
such market fall. Such insurance is known as hedging.
Hedging is a tool to reduce the inherent risk in an
investment. Various strategies designed to reduce investment risk using call
option, put options, short selling, and futures are used for hedging. The basic
purpose of a hedge is to reduce the risk of loss.
(2) ARBITRAGE:
(3) SPECULATION:
ASSIGNMENT:
It means allocation of an option contract, which is
exercised, to a short position in the same opinion contract, at the same strike
price, for fulfillment of the obligation, in accordance with the procedure
specified in by the relevant authority from time to time.
BADLA:
It is an indigenous mechanism of postponing the
settlement of trade. This product is peculiar to India markets. This involves
Badla financiers, stock lenders and stock traders. The long buyers and short
sellers may postpone settlement of their trade by making payments and
giving delivery by using the services of Badla financiers and stock lenders
who assume their positions for Badla charges. Counterparty risk,
unpredictable charges and high risk due to inadequate margining are
inherent limitations of Badla.
BASIS:
It is difference between spot price and future price of
the same asset. In normal markets this basis is always negative, i.e. spot
price is always less than future price. A positive basis provides for arbitrage
opportunity.
BETA:
It is a measure of the sensitivity of returns on scrip to
return on the market index. It shows how the price of scrip would move with
every percentage point change in the market index.
CONTRACT VALUE
It is the value arrived at by multiplying the strike price
of the option contract with the regular/market lot size.
EXERCISE:
It is defined as the number of future or option contracts
required be buying or selling per unit of the spot underlying position to
completely hedge against the market risk of the underlying.
MARGIN:
It is the money collected from parties to trade to insure
against the default risk. Some amount of margins is collected upfront and
some are collected shortly after the trade. Failure to pay margins may result
in mandatory closure of position.
OFFSETTING CONTRACT:
new matching contract, which offsets an existing contract,
is known as offsetting contract.
OPTION PREMIUM:
It is consideration paid by the option buyer to
option writer. The premium has two components intrinsic value and time
value. Intrinsic value is the difference between the spot price of the
underlying and exercise price of the contract. Time value represents the cost
of carrying the underlying for the option period, adjusted for any dividend
and option premium.
RISK TRANSFER:
It refers to hedging against the price risk through
futures. The holder of an asset, which he intender to sell in near future, may
transfer the inherent risk by selling futures today. The counterparty assumes
the risk in anticipation of making gain
REASON FOR STARTING DERIVATIVES
1.Counter party risk on the part of broker, in case it ask money from us but
before giving delivery of shares goes bankrupt.
2.Liquidity risk in the form that the particular scrip might not be traded on
exchange.
3.Unsystematic risk in the form that the price of scrip may go up or down
due to “Company Specific Reasons”.
4.Mutual funds may find it difficult to invest the funds raised by them
properly as the scrip in which they want to invert might not be available at
the right price.
6.Systematic risk in the form that the price of scrip may go up or down due
to reason affecting the sentiment of whole market.
THE REQUIREMENTS FOR SETTING UP FUTURE AND
OPTION TRADING ARE OUTLINED BELOW:
Derivative FUTURE
OPTION
SWAPS
FORWARD CONTRACT
E.g.
A agrees to deliver 100 equity shares of Reliance to B on Sept. 30,
2002 at a Rate of Rs. 120 per share. Now if the price of share on that date is
Rs. 140 per share, than a who has short position would stand to loss of Rs.
(20*200) = 4000, long position would gain the same amount or vise versa if
price quoted is less than delivery price.
Profit/Loss = ST-E
ST = spot price on maturity date
E = delivery price
LIMITATIONS OF FORWARD CONTRACT
1. No standardization.
2. One party can breach its obligation.
3. Lack of centralization of trading.
4. Lack of liquidity.
To overcome this other type of derivation instrument known as
"Future Contracts" were introduced.
If F< S0ert
He will long his position in forward contract. When contract
matures: the assets would be purchased for "F" Here profit is S0ert –F
E.g.
Consider a forward contract were non-dividend shares available at
Rs, 70 matures in 3 months, Risk free rate 8% p.a. compounded
continuously.
S0ert = 70 x [e] 0.25x0.08
= 70 x 0202
= Rs. 71.41
If F = 73
Then an arbitrageur will short a contract, borrow an amount of Rs. 70 & buy
share at Rs,
Repay the loan of Rs. 70. At maturity sell it as Rs. 73 (forward contract
price) and 71.40, thus profit is (73- 71.40) 1.60
Thus he shorts his forward contract position.
SECURITIES PROVIDING A CERTAIN CASH INCOME
If there is certain cash income to be generated on securities in future to the
investor, we will determine present value of income e.g. in case of
preference share.
Present Value of Dividend = Rate & Interest (continuously compounded)
~If there is no arbitrage
Then F = (So – I) ert
~If F> (So –I)ert
Arbitrageur can short a forward contract, borrow money and buy the
asset at present and at maturity asset is sold and earns profit.
Profit = F –(So – I) ert
If
F <(So-I) ert
Arbitrageur can long a forward contract, short the asset a present and invest
the proceeding
Profit (at maturity) (So-I) ert –F
E.g.
Let us consider a 6-month forward contract on 100 shares at
Rs. 38 each risk free of interest (compounding continuously) earn is 10%
p.a. dividend is expected to a yield of Rs. 1.50 in 4 months.
Solution: divided receivable after 4 months = 100x1.50=Rs.1.50
resent Value & dividend = 150xe (4/12)(0.10)50
= Rs 50x0.9672=RS 145.88
= (3800-145.8) e(0.5)(0.10)
= 3654.92x1.05127
F = 3842.31
VALUATION & FORWARD CONTRACT PROVIDING A
KNOWN YIELD
In case of share included in portfolio companies the
index, as underlying assets, are expected to give dividend in course of time,
which may be percentage 0 their prices. It is assumed to be paid
continuously at a rate of "Y" p.a.
F = Soert
E.g.
Stock underlying an under provide a, dividend yield of 4.1% p.a.,
current value of index is 520 and risk free rate of interest is 10% p.a.
r=0.10, y = 0.04, * * = 520 T =3/12 =0.25
F = 520xe(0.10-0.40) (0.25)
= 520x01512 = Rs. 527.85
FUTURE CONTRACT
'It is an agreement between buyer and seller for the purchase and sale of a
particular assets at a specific future date; specific size, date of delivery, place
and alternative asset. It takes obligation on both parties to fulfill the contract.
FUTURE TERMINOLOGY
SPOT PRICE:
the price at which an asset trades in the spot market.
FUTURES PRICE:
the price at which the futures contract trades in the futures
market.
CONTRACT CYCLE:
the period over which the contract trades. The index
futures contracts on the NSE have one month, and three-month expiry
cycles, which expire on the last Thursday of the month. Thus a January
expiration contract expires on the last Thursday of the January. On the
Friday following the last Thursday, a new contract having three-month
expiry is introduced of trading.
EXPIRY DATE:
it is date specified 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 less than
one contract. For instance, the contract size on NSE's futures market is
Nifties.
BASIS:
in the contract 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 each contract. in a normal market, basis
will be positive. This reflects that futures prices normally exceed spot prices.
COST OF CARRY:
the relation between futures price and spot price can
be summarized in terms of what is known as cost of carry. This measures the
storage cost plus the interest that is paid to finance the assets less the
incomes earned on the asset.
INITIAL MARGIN:
the amount that must be deposited in the margin
account at a time a future contract is first entered into is known as initial
margin.
MARKING-TO-MARKET:
in the futures market, at the end of each trading
day, the margin account is adjusted to reflect the investor's margin gain or
loss depending upon the future's closing price.
MAINTENANCE MARGIN:
this is somewhat lower than initial margin. This is
set to ensure that the balance in the margin account never becomes negative.
If the balance amount falls below the maintenance margin, the investor
receives a margin call and is expected to top up the margin account to the
initial margin level before trading commences on the next day.
INSTRUMENTS OF FUTURE CONTRACTS
COMMODITY FUTURES
1. Trader in American Exchanges like CBOT, New York: Commodity
Exchange, Chicago Mercantile Exchange (CME), New York
Mercantile Exchange Includes: Wheat, Natural Gas, Platinum, Gold,
and Cattle etc.
2. Contract Life: Mostly for 90 days or less.
3. Maturity date is mostly non-standardized.
4. Quality specified
FINANCIAL FUTURES
INDEX FUTURES:
Of the financial futures, Index future contracts are key
contracts, introduced in U.S. A, in 1982 by the "Commodity Futures Trading
Commission" (CFTC) by approving the Kansas Board proposal. Index
Futures began trading in India in June 2000 of Trade (KSBT)'s Futures
derive its value from the underlying index-e.g. NSE's futures. Contracts are
based on "S & P CNX NIFTY"
At present it has become the most liquid contract in the
country, the arbitrage between the futures equity market is further expected
to reduce impact cost. 80-90% of retail participation is expected in India
because.
1. Brokerage cost is lower.
2. Savings in cost is possible thorough reduced bid-ask spreads where
stocks are trade in package forms.
3. Impact cost will be much lower than dealing in individual scrip.
4. Institutional and large equity holders need portfolios hedging facility.
Index derivatives are more suited to them and more cost effective than
in individual stocks. Pension funds in the US are known-to use stock
index futures for risk hedging purpose.
5. Stock Index is difficult to manipulate as compared to individual stock
prices, more so in India, and the possibility of cornering is reduced.
6. Stock index, being an average is much less volatile than individual
stock prices. This implies lower capital adequacy and margin
requirements.
7. Index derivatives are cash settled, and hence don't suffer from
settlement delays and problems related to bad delivery & forged
certificates.
1220
Nifty (underlying)
Assets
Loss
INTERPRETATION
The figure shows P/L for a long futures position. The investor bought futures
when THE INDEX WAS AT 1220.
Profit
…Nifty (underlying assets)
Loss
INTERPRETATION:
When Index moves Seller start making Profits.
OPTIONS
Options are fundamentally different from forward and futures. An option
gives the holder/buyers of the option the right to do something. The holder
does not have committed himself to doing something. In contrast, in a
forward or futures contract, the two parties have committed them self to
doing something. Whereas it nothing (expect margin requirement) to enter in
to a futures he purchases of an option require an up front payment.
Although options have exercised for a long time, they were traded OTD,
without much knowledge of valuation. Today exchange-traded options are
actively traded on stocks, stock indices, foreign currencies and futures
contracts.
The first trading is options began in Europe
and U.S. as early as the century. It was only in early, 1900s that a group of
firms set up what is known as the "put and call brokers and dealers
association" with the aim of providing a mechanism for bringing buyers and
sellers together. It someone wanted to buy an option, he or she would
contract one of the member firms. The firm would then attempt to find a
seller or writer of option either from its own client of those of other member
firms. If no seller could be found, the firm would undertake to write the
option itself in return of price. The two deficiencies in above markets were
1. No secondary market
2. No mechanism to guarantee the writer of option would honor it
In 1973, Black, Marton, Scholes invented the
Black-Scholes formula. In April 1973, CBOE was set up specially for the
purpose of trading options. The market for options develop so rapidly that
by early 80's number of share underlying the options contract sold each day
exceed the daily volume of share traded on the NYSE. Since then, there has
been no looking back.
What is option?
An options is the right, but not the obligation to buy or sell a specified
amount (and quality) of a commodity, currency, index or financial
instruments a to buy or sell a specified number of underlying futures
contracts, at a specified price on a before a give date in the future.
Thus, option like futures, also provide a mechanism
by which one can acquire a certain commodity on other assets, or take
position in order to make profits or cover risk for a price. In this type of
contract as well, there are two parties:
(a) The buyer (or the holder, or owner of options)
(b) The seller (or writer of options)
While the buyer take "long position" the seller take
"short position"
So every option contract can either be "call option" or
"put option" options are created by selling and buying and for every option
that is buyer and seller.
OPTION
BUYER SELLER
RIGHT OBLIGATION
OPTION PREMIUM
A glance at the rights and obligation of buyer and seller reveals that option
contracts are skewed. One way naturally wonder as to why the seller (writer)
of an option would always be obliged to sell/buy an asset whereas the other
party gets the right? The answer is that writer of an option receives, a
consideration for
Undertaking the obligation. This is known as the price or
premium to the seller for the option.
The buyer pays the premium for the option to the seller
whether he exercise the option is not exercised, it becomes worthless and the
premium becomes the profit of the seller.
Premium/Price of an option = Intrinsic Value + Time Value
Do Nothing
Spot Nifty:1200
Buyer exercise the option
Spot Nifty: 1100 Profit: No. of option x price
Strike Price: 1150 Differential-Premium
Da Da paid=Rs. (200x(1200-1150)-
Duration :3 months
y1 y 2000=Rs.8000)
No. of option
90
bought=200
Premium per option:10
Total premium
paid=2000
PRICING OF OPTION
1 AT EXPIRATION
(a) Call option pricing at expiration:
If the price of the underlying asset were
lower than the exercise price on the expiration date, the call would expire
unexercised. This is because no one would like to buy an asset, which is
available in the market at a lower price. If an out of money call did actually
sell for a certain price, the investor can make an arbitrage profit by selling it
and earning premium.
The buyer is unlikely to exercise option, the
allowing seller to retain premium. In even of (irrational) exercise of such a
call, writer can purchase asset as S1 and give it at making a profit of (E+S1)+
premium.
On the other hand, if the call happens to be in
the money, it'll, be worth its intrinsic value, equal to excess of asset price
over the exercise price. If call price <intrinsic value then he can buy call at c,
exercise it immediately at S1 and make a profit" of S1—E—C
Value
E Price of share
Price of share
2. BEFORE EXPIRATION:
Before expiration, the options call and put are usually sold for at least
intrinsic valued (difference of E & S1).
(a) Call Option Pricing:
A call option will usually sell for at least its
intrinsic value, Minimum value of call is always is equal to its intrinsic
value. Intrinsic value = S>E
To this would be added the time value, if any longer the time expiry, greater
were time value.
P=f (E,S,T)
Y
Intrinsic Value
450
E Stock Price X
B Time value
Price of put option
Value
Intrinsic B1 Time Value
Stock prices
S1 E S2
DERIVATIVES TRADING IN INDIA
future date at a price agreed upon between the buyer and seller. Just like
Index derivatives, the specifications are pre-specified.
STOCK OPTIONS:
Stock Options are instruments whereby the right
of purchase and sale is given by the option seller in consideration of a
premium to the option buyer to buy or sell the underlying stock at a specific
price (strike price) on or before a specific date (expiry date).
A) INITIAL MARGIN:
The basic aim of initial margin is to cover the
largest potential loss in one day. Both buyer and seller have to deposited
before the opening of the position in the futures transaction. This margin is
calculated by SPAN by considering the worst case scenario.
B) MARK TO MARKET MARGIN:
All daily losses must be met by depositing of further
collateral-known as variation margin, which is required by the close of
business, the following day. Any profits on the contract are credited to the
client's variation margin account.
REGULATORY FRAMEWORK
After the submission of L.C. Gupta committee report and approval of the
introduction of index futures trading by SEBI the board mandated the setting
up of a group to recommend measures for risk containment in the derivative
market in India. Prof. J.R. Varma was the chairman of the group.
ASSUMPTIONS
Liquid Networth
MARGINS
NSCCL has developed a comprehensive risk containment mechanism for the
Futures & Options segment. The most critical component of a risk
containment mechanism for NSCCL is the online position monitoring and
margining system. The actual margining and position monitoring is done on-
line, on an intra-day basis. NSCCL uses the SPAN (Standard Portfolio
Analysis of Risk) system for the purpose of margining, which is a portfolio
based system
Initial Margin
NSCCL collects initial margin up-front for all the open positions of a
CM based on the margins computed by NSCCL-SPAN .A CM is in turn
required to collect the initial margin from the TMs and his respective clients.
Similarly, a TM should collect upfront margins from his clients.
Premium Margin
Assignment Margin
PAYMENT OF MARGINS
The initial margin is payable upfront by Clearing Members. Initial margins
can be paid by members in the form of Cash , Bank Guarantee, Fixed
Deposit Receipts and approved securities .
Position Limits
Clearing Members are subject to the following exposure / position limits in
addition to initial margins requirements
• Exposure Limits
• Trading Memberwise Position Limit
• Client Level Position Limits
• Market Wide Position Limits (for Derivative Contracts on Underlying
Stocks) Collateral limit for Trading Members
VIOLATIONS
RESEARCH METHODOLOGY
Sampling Procedure
The small representative selected out of large
population is selected at random is called sample. Well-selected sample may
reflect fairly, accurately the characteristic of population. The chief aim of
sampling is to make an inference about unknown parameters from a
measurable sample statistics. The statistical hypothesis relating t population.
The sample size was 60 which includes brokers,dealers and investors.
Sources of Data:
The sources of data includes primary and secondary data
sources.
Primary Sources:
Primary data is collected by structured questionnaire
administered by sitting with guide and discussing problems.
Secondary Sources:
The secondary data is data, which is collected and compiled for
the different purpose, which are used in research for this study.
The secondary data include material collected from:
Newspaper
Magazine
Internet
Data collection instruments
The various method of data gathering involves the use of
appropriate recording forms. These are called 'tools' or 'instruments of data
collection.
Collection Instruments:
1. Observation
2. Interview guide
3. Interview schedule
Each tool is used for specific method of data gathering. The
tool for data collection translates the research objectives in to specific
term/questions to the response, which will provide research objective.
The instrument data collection in our study interview schedule
mainly. Every respondent was conducted personally with an interview
25
21
20
15 13 13 Series1
10 Series2
7 6
5
0
Less 1 year 2 year 3 year More
than 1 than 3
year year
30
24
25
20
15 14 Series1
15
Series2
10 7
5
0
t
en
n
g
ity
tio
em
in
id
la
dg
qu
u
na
e
ec
Li
H
a
p
M
S
k
is
R
30
25
20 Series1
15 Series2
10 Series3
0
2 lacs 2lacs-5 5 lacs-10 Any other
lacs lacs
Out of my sample size 60 ,27 (45%) investors and brokers have invested 2
lacs normally.9 (15%) invested between 2 lacs to 5 lacs.and 15 (25%)
invested between 5 lacs to 10 lacs,and remaining have invested in other
amounts. Reason behind this is that those are investing from many years are
taking the risk of investing huge amount.
Tradedperiodfor derivative
investment.
25 23
19
20
15 13 Series1
10 Series2
5
5
0
Weekly Monthly More than More than
1 month 2 months
50 42
40
30 Series1
20 15 Series2
10 3
0
27 28
30
20 Series1
10 5 Series2
0
Positive Negative Can't say
out of total 37 (62%) of investors and dealers are saying it hasn't settled in
Indian investor psyche and 23 (38%) are saying it has.
RESULTS / FINDINGS
1. Brokers not dealing in derivatives at present are also not going to
adopt it in near futures.
2. Hedging & Risk Mgt. Is the most important feature of derivatives.
3. It is not for small investors.
4. It has increased brokers turnovers as well as helpful in aggregate
investment.
5. Brokers haven't adequate knowledge about options, so most by them
are dealing in futures only.
6. There is a risk factor in derivative also.
7. Most of investors are not investing in derivatives.
8.People are not aware of derivatives, even people who have invested in it,
hasn’t adequate knowledge about it. These people are interested to take it in
their future portfolio also. They consider it as a tool of risk management.
9.They normally invest in future contracts.
10.They are investing in future contract, because futures have up to home
extent similar quality as Badla.
REASON BEHIND LESS DEVELOPMENT OF F&O SEGMENT AT
L.S.E.
At L.S.E. the is become possible by L.S.E.S.L, which is working
as a broker at N.S.E. and the broker of L.S.E. (301 members) are working as
a client of LSES Ltd. Itself (in reality). So they can't trade as a broker of
their client and sub-broker concept does not exist in F&O segment.
At National Level
1. Securities and contract's regulations act has recognized "index" as a
security very later i.e. in Nov. 2001. It will take time to take position in
derivative or capital market.
2. The Limited mutual faith in the parties involved.
3. It hasn't a legalized market.
4. Commodity F & O market has not yet been come to India. this will
make easy to understand and take simple investor under investor base of
derivative trading.
5. Market failures
6. Scandals
7. Inadequate infrastructures
8. Shortage to domestic technical expertise, in India even most of people
are not aware of concept derivatives.
9. Large lot size, so small investors are not able to come under derivative
segment.
10. There are less scripts under derivatives segment.
11. High margin as compare to Badla.
12. In India there can't be a long term trading in F & O, it is only for 1 to
2 or maximum for 3 months.
SUGGESTIONS
1. LOT SIZE:
Lot size should be reduced so that the major segment of
an India society i.e. small saving class can come under F & O trading.
There is strong need for revision of lot sizes as the lot sizes of some of
the individual scrips that were worth of Rs. 200000 in starting, now same
lot size amount to a much larger value.
2. SUB BROKER:
Sub-broker concept should be added and the actual
brokers should give all rights of brokers in F & O segment also.
3. SCRIPS:
More scrips of reputed companies etc. should be
introduced in "F & O segment".
4. TRADING PERIOD:
Trading period should be increased.
5. TRAINING CLASSES OR SEMINARS:
There should be proper classes on derivatives for
investors, traders, brokers, students and employees of stock exchanges.
Because lack of knowledge is the main reason of its less development.
The first step towards it should be seminars provide to brokers & LSE
employees and secondly seminar to students.
No study is complete in itself, however good it may and every study has
some limitations:
Time is the main constraint of my study.
Availability of information was not sufficient because of less
awareness among investors/brokers
Study is based only on NSE because information and trading in BSE
is not available here.
Sample size is not enough to have a clear opinion.
CONCLUSION
BIBLIOGRAPHY
1. BOOKS AND ARTICLES
NCFM on derivatives core module by NSEIL.
The Indian Commodity-Derivatives Market in Operations.
2. MAGAZINES
The Dalal Street
LSE Bulletin
3. INTERNET SITES
www.nseindia.com
www.derivativeindia.com
www.bseindia.com
www.sebi.gov.in
SAMPLE OF QUESTIONNAIRE
Dear Respondent,
NAME:
OCCUPATION:
ADDRESS:
PHONE NO.:
1) For how long you have been trading in derivatives?
a) Less than 1 year b) 1 Year
c) 2 Year d) 3 Year e) More than 3 years.
3) How will you describe your experience with derivative till date?
a) I find these quite profitable
b) I don't find derivatives can give big profits
c) I feel that equities are better than derivatives
d) Any other __________________________________
10) Which of following Media would you prefer the most for investor
education?
a) TV b) Newspaper c) Magazines