Professional Documents
Culture Documents
1.1 INTRODUCTION
more basic underlying variable. These are also known as contingent claims. Derivatives
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
their very nature, financial markets are market by a very high degree of volatility. Though
the use of derivative products, it is possible to partially or fully transfer price risks by
investor.
Derivatives are risk management instruments which derives their value from an
underlying asset. Underlying asset can be Bullion, Index, Share, Currency, Bonds,
Interest, etc.
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TYPES OF DERIVATIVES
Future contract:
Forward contract:
Options:
An option is a right but not the obligation to buy or sell an agreed amount of a
Swaps: A swap is a derivative in which two counterparties agree to exchange one stream
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An individual or a firm may have to face a large amount risk in the international
markets. Hence it becomes necessary to look for other sources whereby this need can be
met. Different types of derivatives have really proved to be given a sharp focus as these
instruments are offering less risk when compared to the other types of securities in the
market.
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To understand the investors profitability who invests in stock futures and stock
options.
A special study on stock futures and stock options of SBI, DLF & AXIS BANK.
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The study is limited to “Derivatives” With special reference to Futures and Options in the
Indian context and the Indiabulls has been taken as representative sample for the study.
The study cannot be said as totally perfect, any alteration may come. The study has only
made humble attempt at evaluating Derivatives Markets only in Indian Context. The
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The methodology adopted for the purpose of project study was collected from both
PRIMARY DATA
Primary sources of data are collected through personal interaction with concern
SECONDARY DATA
1. A number of books have been referred for primary and secondary markets
concept.
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DERIVATIVES
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, the financial markets are marked by a very high degree of volatility. Through of
in asset prices. As instruments of risk management, these generally do not influence the
fluctuations underlying prices. However, by locking –in asset prices, derivatives products
minimize the impact of fluctuations in asset prices on the profitability and cash flow
DEFINITION
Understanding the word itself, Derivatives is a key to mastery of the topic. The word
originates in mathematics and refers to a variable, which has been derived from another
variable. For example, a measure of weight in pound could be derived from a measure of
In financial sense, these are contracts that derive their value from some underlying asset.
Without the underlying product and market it would have no independent existence.
Underlying asset can a Stock, Bond, Currency, Index or a Commodity. Some one may
take an interest in the derivative products. Without having an interest in the underlying
product market, but the two are always related and may therefore interact with each other.
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The term Derivative has been defined in Securities Contracts (Regulation) Act 1956, as:
unsecured, risk instrument or contract for differences or any other form of security.
A contract, which derives its value from the prices, or index of prices, of
underlying securities.
1. Hedgers.
2. Speculators.
3. Arbitrageurs.
HEDGERS:
The party, which manages the risk, is known as “Hedger”. Hedgers seek to protect
SPECULATORS:
They are traders with a view and objective of making profits. They are willing to
take risks and they bet upon whether the markets would go up or come down.
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ARBITRAGEURS:
Risk less profit making is the prime goal of arbitrageurs. They could be making
money even with out putting their own money in, and such opportunities often come up
in the market but last for very short time frames. They are specialized in making
purchases and sales in different markets at the same time and profits by the difference in
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2.2 FUTURES
The future contract is an agreement between two parties two buy or sell an asset
at a certain specified time in future for certain specified price. In this, it is similar to a
forward contract. A futures contract is a more organized form of a forward contract; these
forwards and futures. These relate to the contractual futures, the way the markets are
organized, profiles of gains and losses, kind of participants in the markets and the ways
cattle, etc. have existed for a long time. Futures in financial assets, currencies, and
interest bearing instruments like treasury bills and bonds and other innovations like
providing the latest information about supply and demand with respect to individual
commodities, financial instruments and currencies, etc. Futures exchanges are where
currencies come together to trade. Trading has also been initiated in options on futures
contracts. Thus, option buyers participate in futures markets with different risk. The
option buyer knows the exact risk, which is unknown to the futures trader.
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ORGANIZED EXCHANGES:
Unlike forward contracts which are traded in an over- the- counter market, futures
are traded on organized exchanges with a designated physical location where trading
takes place. This provides a ready, liquid market which futures can be bought and sold at
STANDARDIZATION:
the maturity date are negotiated between the buyer and seller and can be
tailor made to buyer’s requirement. In a futures contract both these are standardized by
CLEARING HOUSE:
The exchange acts a clearinghouse to all contracts struck on the trading floor. For
instance a contract is struck between capital A and B. upon entering into the records of
the exchange, this is immediately replaced by two contracts, one between A and the
clearing house and another between B and the clearing house. In other words the
exchange interposes itself in every contract and deal, where it is a buyer to seller, and
seller to buyer. The advantage of this is that A and B do not have to under take any
exercise to investigate each other’s credit worthiness. It also guarantees financial integrity
of the market. The enforces the delivery for the delivery of contracts held for until
maturity and protects itself from default risk by imposing margin requirements on traders
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In most of the forward contracts, the commodity is actually delivered by the seller
and is accepted by the buyer. Forward contracts are entered into for acquiring or
disposing of a commodity in the future for a gain at a price known today. In contrast to
this, in most futures markets, actual delivery takes place in less than one percent of the
contracts traded. Futures are used as a device to hedge against price risk and as a way of
betting against price movements rather than a means of physical acquisition of the
underlying asset. To achieve, this most of the contracts entered into are nullified by the
MARGINS:
members from the customers. Such a stop insures the market against serious liquidity
crises arising out of possible defaults by the clearing members. The members collect
margins from their clients has may be stipulated by the stock exchanges from time to
time and pass the margins to the clearing house on the net basis i.e. at a stipulated
2. The accounts of buyer and seller are marked to the market daily.
The concept of margin here is same as that of any other trade, i.e. to introduce a
financial stake of the client, to ensure performance of the contract and to cover day to day
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Initial margin
Marking to market
INITIAL MARGIN:
In futures contract both the buyer and seller are required to perform the contract.
Accordingly, both the buyers and the sellers are required to put in the initial margins. The
initial margin is also known as the “performance margin” and usually 5% to 15% of the
purchase price of the contract. The margin is set by the stock exchange keeping in view
the volume of business and size of transactions as well as operative risks of the market in
general.
The concept being used by NSE to compute initial margin on the futures
transactions is called “value- at –Risk” (VAR) where as the options market had SPAN
MARKING TO MARKET:
Marking to market means, debiting or crediting the client’s equity accounts with
substitutes each existing futures contract with a new contract that has the settle price or
the base price. Base price shall be the previous day’s closing Nifty value. Settle price is
the purchase price in the new contract for the next trading day.
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FUTURES TERMINOLOGY:
Futures price: The price at which the futures contract trades in the futures market.
Expiry Date: It is the 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 under one contract. For
Basis/Spread:
In the context of financial futures basis can be defined as the futures price minus
the spot price. There ill be a different basis for each delivery month for each contract. In
formal market, basis will be positive. This reflects that futures prices normally exceed
spot prices.
Cost of 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 the income earned on the asset.
Multiplier:
It is a pre-determined value, used to arrive at the contract size. It is the price per
index point.
Tick Size: It is the minimum price difference between two quotes of similar nature.
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Open Interest:
Total outstanding long/short positions in the market in any specific point of time.
As total long positions for market would be equal to total short positions for calculation
Short position: Out standing/unsettled sales position at any time point of time.
INDEX FUTURES:
Stock Index futures are most popular financial futures, which have been used to
hedge or manage systematic risk by the investors of the stock market. They are called
hedgers, who own portfolio of securities and are exposed to systematic risk. Stock index
is the apt hedging asset since, the rise or fall due to systematic risk is accurately shown in
the stock index. Stock index futures contract is an agreement to buy or sell a specified
Stock index futures will require lower capital adequacy and margin requirement
index futures will be much lower. Savings in cost is possible through reduced bid-ask
spreads where stocks are traded in packaged forms. The impact cost will be much lower
incase of stock index futures as opposed to dealing in individual scrips. The market is
conditioned to think in terms of the index and therefore, would refer trade in stock index
The stock index futures are expected to be extremely liquid, given the speculative nature
of our markets and overwhelming retail participation expected to be fairly high. In the
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near future stock index futures will definitely see incredible volumes in India. It will be a
blockbuster product and is pitched to become the most liquid contract in the world in
terms of contracts traded. The advantage to the equity or cash market is in the fact that
they would become less volatile as most of the speculative activity would shift to stock
index futures. The stock index futures market should ideally have more depth, volumes
and act as a stabilizing factor for the cash market. However, it is too early to base any
conclusions on the volume are to form any firm trend. The difference between stock
index futures and most other financial futures contracts is that settlement is made at the
Example:
If NSE NIFTY is at 5800 and each point in the index equals to Rs.50, a contract
struck at this level could work Rs.290000 (5800x50). If at the expiration of the contract,
the NSE NIFTY is at 5900, a cash settlement of Rs.5000 is required (5900-5800) x50).
STOCK FUTURES:
With the purchase of futures on a security, the holder essentially makes a legally
binding promise or obligation to buy the underlying security at same point in the future
(the expiration date of the contract). Security futures do not represent ownership in a
this light, a promise to sell security is just as easy to make as a promise to buy security.
Selling security futures without previously owing them simply obligates the trader to sell
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Example:
If the current price of the GMRINFRA share is Rs.170 per share. We believe that
in one month it will touch Rs.200 and we buy GMRINFRA shares. If the price really
ACC in the cash market, but we have to pay the margin not the entire amount. In the
above example if the margin is 20%, we would pay only Rs.34 per share initially to enter
into the futures contract. If GMRINFRA share goes up to Rs.200 as expected, we still
Futures contracts have linear payoffs. In simple words, it means that the losses
as well as profits for the buyer and the seller of a futures contract are unlimited. These
linear payoffs are fascinating as they can be combined with options and the underlying to
The payoff for a person who buys a futures contract is similar to the payoff for a
person who holds an asset. He has a potentially unlimited upside as well as potentially
unlimited downside.
Take the case of a speculator who buys a two-month Nifty index futures
contract when Nifty stands at 4800. The underlying asset in this case is Nifty portfolio.
When the index moves up, the long futures position starts making profits, and when index
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Profit
4800
0 Nifty
LOSS
The payoff for a person who sells a futures contract is similar to the payoff for a
person who shorts an asset. He has potentially unlimited upside as well as potentially
unlimited downside.
Profit
4800
0 Nifty
Loss
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Take the case of a speculator who sells a two-month Nifty index futures contract when
the Nifty stands at 4800. The underlying asset in this case is the Nifty portfolio. When the
index moves down, the short futures position starts making profits, and when index
PRICING FUTURES
We use fair value calculation of futures to decide the no arbitrage limits on the
price of the futures contract. This is the basis for the cost-of-carry model where the price
F=S+C
Where
F Futures
S Spot price
F = S (1+r) T
Where
r Cost of financing
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The pricing of index futures is also based on the cost of carry model where the
carrying cost is the cost of financing the purchase of the portfolio underlying the index,
minus the present value of the dividends obtained from the stocks in the index portfolio.
Example
Nifty futures trade on NSE as one, two and three month contracts. Money can be
barrowed at a rate of 15% per annum. What will be the price of a new two-month futures
contract on Nifty?
1. Let us assume that ACC will be declaring a dividend of Rs.10/- per share after 15
2. Current value of Nifty is 1200 and Nifty trade with a multiplier of 200.
200x1200=240000.
(240000x0.07).
5. If the market price of ACC is Rs.140, then a traded unit of Nifty involves 120
6. To calculate the futures price we need to reduce the cost of carry to the extent of
dividend received is Rs.1200 i.e. (120x10). The dividend is received 15 days later
and hence compounded only for the remainder of 45 days. To calculate the futures
price we need to compute the amount of dividend received for unit of Nifty.
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If the dividend flow through out the year is generally uniform, i.e. if there are few
F = S (1+ r-q) T
Where
F Futures price
r Cost of financing
T Holding period
Example:
A two-month futures contract trades on the NSE. The cost of financing is 15% and the
dividend yield on Nifty is 2% annualized. The spot value of Nifty is 1200. What is the
A futures contract on a stock gives its owner the right and the obligation to buy or
sell the stocks. Like, index futures, stock futures are also cash settled: There is no
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The pricing of stock futures is also based on the cost of carry model, where the
carrying cost is the cost of financing the purchase of the stock, minus the present value of
the dividends obtained from the stock. If no dividends are expected during the life of the
contract, pricing futures on that stock is very simple. It simply involves the multiplying
Example:
SBI futures trade on NSE as one, two and three month contracts. Money can be barrowed
at 15% per annum. What will be the price of a unit of new two-month futures contract on
When dividends are expected during the life of futures contract, pricing involves
reducing the cost of carrying to the extent of the dividends. The net carrying cost is the
cost of financing the purchase of the stock, minus the present value of the dividends
Example:
ACC futures trade on NSE as one, two and three month contracts.
What will be the price of a unit of new two-month futures contract on ACC if dividends
1. Let us assume that ACC will be declaring a dividend of Rs.10/- per share after 15
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3. To calculate the futures price, we need to reduce the cost of carrying to the extent
received 15 days later and hence, compounded only for the remaining 45 days.
4. Thus, the futures price F = 140 (1.15) 60/365 – 10(1.15) 45/365 = Rs.133.08.
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2.3 OPTIONS
An option is a derivative instrument since its value is derived from the underlying
asset. It is essentially a right, but not an obligation to buy or sell an asset. Options can be
a call option (right to buy) or a put option (right to sell). An option is valuable if and only
An option by definition has a fixed period of life, usually three to six months. An
option is a wasting asset in the sense that the value of an option diminishes has the date of
An investor in options has four choices before him. Firstly, he can buy a call option
meaning a right to buy an asset after a certain period of time. Secondly, he can buy a put
option meaning a right to sell an asset after a certain period of time. Thirdly, he can write
a call option meaning he can sell the right to buy an asset to another investor. Lastly, he
can write a put option meaning he can sell a right to sell to another investor. Out of the
above four cases in the first two cases the investor has to pay an option premium while in
DEFINITION:
An option is a derivative i.e. its value is derived from something else. In the case
of the stock option its value is based on the underlying stock (equity). In the case of the
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options once an option transaction has been completed. Once a seller has written an
option and a buyer has purchased that option, the OCC takes over it. It is the
responsibility of the OCC who over sees the obligations to fulfill the exercises. If I want
to exercise an ACC November 100-call option, I notify my broker. My broker notifies the
OCC, the OCC then randomly selects a brokerage firm, which is short one ACC stock.
That brokerage firm then notifies one of its customers who have written one ACC
November 100 call option and exercises it. The brokerage firm customer can be chosen in
two ways. He can be chosen at random or FIFO basis. Because, OCC has a certain risk
that the seller of the option can’t full the contract, strict margin requirement are imposed
on sellers. This margins requirement act as a performance Bond. It assures that OCC will
OPTIONS TERMINOLOGY.
CALL OPTION:
A call option gives the holder the right but not the obligation to buy an asset by a
PUT OPTION:
A put option gives the holder the right but the not the obligation to sell an asset by
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OPTION PRICE:
Option price is the price, which the option buyer pays to the option seller. It is
EXPIRATION DATE:
The date specified in the option contract is known as the expiration date, the
STRIKE PRICE:
The price specified in the option contract is known as the strike price or the
exercise price.
AMERICAN OPTION:
American options are the options that the can be exercised at the time up to the
EUROPEAN OPTIONS:
European options are the options that can be exercised only on the expiration date
itself. European options are easier to analyze that the American options and properties of
an American option are frequently deduced from those of its European counter part.
IN-THE-MONEY OPTION:
flow to the holder if it were exercised immediately. A call option in the index is said to be
in the money when the current index stands at higher level that the strike price (i.e. spot
price > strike price). If the index is much higher than the strike price the call is said to be
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deep in the money. In the case of a put option, the put is in the money if the index is
AT-THE-MONEY OPTION:
An At-the-money option (ATM) is an option that would lead to zero cash flow if
it exercised immediately. An option on the index is at the money when the current index
OUT-OF-THE-MONEY OPTION:
An out of the money (OTM) option is an option that would lead to a negative cash
flow if it were exercised immediately. A call option on the index is out of he money when
the current index stands at a level, which is less than the strike price (i.e. spot price <
strike price). If the index is much lower than the strike price the call is said to be deep
OTM. In the case of a put, the put is OTM if the index is above the strike price.
It is one of the components of option premium. The intrinsic value of a call is the
amount the option is in the money, if it is in the money. If the call is out of the money, its
intrinsic value is Zero. For example X, take that ABC November-call option. If ABC is
trading at 102 and the call option is priced at 2, the intrinsic value is 2. If ABC
November-100 put is trading at 97 the intrinsic value of the put option is 3. If ABC stock
was trading at 99 an ABC November call would have no intrinsic value and conversely if
ABC stock was trading at 101 an ABC November-100 put option would have no intrinsic
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The value of an option is the difference between its premium and its intrinsic
value. Both calls and puts time value. An option that is OTM or ATM has only time
value. Usually, the maximum time value exists when the option is ATM. The longer the
time to expiration, the greater is an options time value. At expiration an option should
CHARACTERISTICS OF OPTIONS
4. Options holders are traded an O.T.C and in all recognized stock exchanges.
9. Options enable with the investors to gain a better return with a limited amount of
investment.
CALL OPTION
An option that grants the buyer the right to purchase a designed instrument is
called a call option. A call option is contract that gives its owner the right but not the
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An American call option can be exercised on or before the specified date. But, a
The writer of the call option may not own the shares for which the call is written.
If he owns the shares it is a ‘Covered Call’ and if he des not owns the shares it is a
‘Naked call’
STRATEGIES:
The following are the strategies adopted by the parties of a call option. Assuming
that brokerage, commission, margins, premium, transaction costs and taxes are ignored.
At all points where spot price < exercise price, here will be loss.
At all points where spot prices > exercise price, there will be profit.
Call Option buyer’s losses are limited and profits are unlimited.
At all points where spot prices < exercise price, there will be profit
At all points where spot prices > exercise price, there will be loss
Call Option writer’s profits are limited and losses are unlimited.
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Example:
The current price of RPL share is Rs.260. Holder expect that price in a three
month period will go up to Rs.300 but, holder do fear that the price may fall down below
Rs.260.
To reduce the chance of holder risk and at the same time, to have an
opportunity of making profit, instead of buying the share, the holder can buy a three-
1. If the price of the share is Rs.300. then holder will exercise the option since he
get a share worth Rs.300. by paying a exercise price of Rs.250. holder will
2. If the price of the share is Rs.220. then holder will not exercise the option.
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The profit/loss that the buyer makes on the option depends on the spot price of the
underlying. If upon expiration, the spot price exceeds the strike price, he makes a profit.
Higher the spot price more is the profit he makes. If the spot price of the underlying is
less than the strike price, he lets his option un-exercise. His loss in this case is the
Profit
4850
0 Nifty
86.
Loss
The figure shows the profit the profits/losses for the buyer of the three-month Nifty
4850(underlying) call option. As can be seen, as the spot nifty rises, the call option is In-
The-money. If upon expiration Nifty closes above the strike of 4850, the buyer would
exercise his option and profit to the extent of the difference between the Nifty-close and
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strike price. However, if Nifty falls below the strike of 4850, he lets the option expire and
For selling the option, the writer of the option charges premium. Whatever is the
buyer’s profit is the seller’s loss. If upon expiration, the spot price exceeds the strike
price, the buyer will exercise the option on the writer. Hence as the spot price increases
the writer of the option starts making losses. Higher the spot price more is the loss he
makes. If upon expiration the spot price is less than the strike price, the buyer lets his
Profit
86.60
4850
0 Nifty
Loss
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The figure shows the profits/losses for the seller of a three-month Nifty 4850 call
option. If upon expiration Nifty closes above the strike of 4850, the buyer would exercise
his option on the writer would suffer a loss to the extent of the difference between the
Nifty-close and the strike price. This loss that can be incurred by the writer of the option
is potentially unlimited. The maximum profit is limited to the extent of up-front option
premium Rs.86.60.
PUT OPTION
An option that gives the seller the right to sell a designated instrument is called
put option. A put option is a contract that gives the owner the right, but not the obligation
An American put option can be exercised on or before the specified date. But, a
The following are the strategies adopted by the parties of a put option.
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Following is the table, which explains In-the-money, Out-of-the Money and At-the-
Example:
The current price of RPL share is Rs.250. Holder by a three month put option at
exercise price of Rs.260. (Holder will Exercise his option only if the market price/ spot
then the holder will exercise the option. Means put option holder will buy the share for
Rs.245. In the market and deliver it to the option writer for Rs.260. the holder will gain
A put option gives the buyer the right to sell the underlying asset at the strike
price specified in the option. The profit/loss that the buyer makes on the option depends
on the spot price of the underlying. If upon the expiration, the spot price is below the
strike price, he makes a profit. Lower the spot price more is the profit he makes. If the
spot price of the underlying is higher than the strike price, he lets his option expire un-
exercised.
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Profit
4850
61.70 Nifty
Loss
The figure shows the profits/losses for the buyer of a three-month Nifty 4850
put option. As can be seen, as the spot Nifty falls, the put option is In-The-Money. If
upon expiration, Nifty closes below the strike of 4850, the buyer would exercise his
option and profit to the extent of the difference between the strike price and Nifty-close.
The profits possible on this option can be as high as the strike price. However, if Nifty
rises above the strike of 1250, he lets the option expire. His losses are limited to the
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The figure below shows the profit/losses for the seller/writer of a three-month
put option. As the spot Nifty falls, the put option is In-The-Money and the writer starts
making losses. If upon expiration, Nifty closes below the strike of 4850, the buyer would
exercise his option on writer who would suffer losses to the extent of the difference
Profit
61.70
4850
0 Nifty
Loss
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The loss that can be incurred by the writer of the option is to a maximum extent
PRICING OPTIONS
If the share price is more than the exercise price then the holder of the call
option will get more net payoff, means the value of the call option is more. If the share
price is less then the exercise price then the holder of the put option will get more net
pay-off.
INTEREST RATE:
The present value of the exercise price will depend on the interest rate. The
value of the call option will increase with the rise in interest rates. Since, the present
value of the exercise price will fall. The effect is reversed in the case of a put option. The
buyer of a put option receives exercise price and therefore as the interest increases, the
TIME TO EXPIRATION:
The present value of the exercise price also depends on the time to expiration of
the option. The present value of the exercise price will be less if the time to expiration is
longer and consequently value of the option will be higher. Longer the time to expiration
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VOLATILITY:
The volatility part of the pricing model is used to measure fluctuations expected
in the value of the underlying security or period of time. The more volatile the underlying
security, the greater is the price of the option. There are two different kinds of volatility.
estimates volatility based on past prices. Implied volatility starts with the option price as
a given, and works backward to ascertains the theoretical value of volatility which is
The principle that options can completely eliminate market risk from a stock
portfolio is the basis of Black Scholes pricing model in 1973. Interestingly, before Black
and Scholes came up with their option pricing model, there was a wide spread belief that
the expected growth of the underlying ought to effect the option price. Black and Scholes
demonstrate that this is not true. The beauty of black and scholes model is that like any
good model, it tells us what is important and what is not. It doesn’t promise to produce
the exact prices that show up in the market, but certainly does a remarkable job of pricing
4. The stock pays no dividend. During the option period the firm should not pay any
dividend.
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6. There are no short selling constraints and investors get full use of short sale
proceeds.
The options price for a call, computed as per the following Black Scholes formula:
Where
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Under the assumptions of Black Scholes options pricing model, index options
should be valued in the way as ordinary options on common stock. The assumption is that
the investors can purchase the underlying stocks in the exact amount necessary to
replicate the index: i.e. stocks are infinitely divisible and that the index follows a
diffusion process such that the continuously compounded returns distribution of the index
is normally distributed. To use the black scholes formula for index options, we must
however, make adjustments for the dividend payments received on the index stocks. If
the dividend payment is sufficiently smooth, this merely involves the replacing the
current index value S in the model with S/eqT where q is the annual dividend and T is the
The Black Scholes options pricing formula that we used to price European calls
and puts, with some adjustments can be used to price American calls and puts & stocks.
Pricing American options becomes a little difficult because, unlike European options,
American options can be exercised any time prior to expiration. When no dividends are
expected during the life of options the options can be valued simply by substituting the
values of the stock price, strike price, stock volatility, risk free rate and time to expiration
in the black scholes formula. However, when dividends are expected during the life of the
options, it is some times optimal to exercise the option just before the underlying stock
goes ex-dividend. Hence, when valuing options on dividend paying stocks we should
consider exercised possibilities in two situations. One-just before the underlying stock
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option on a dividend paying stock today is like owing to options one in long maturity
option with a time to maturity from today till the expiration date, and other is a short
maturity with a time to maturity from today till just before the stock goes Ex-dividend.
Futures Options
1. Both the parties are obligated to 1. Only the seller (writer) is
must perform at the settlement can exercise the option at any time
LITERATURE:1
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Futures Trading and Volatility: A Case of S&P CNX Nifty Stocks and Stock
Futures:
This paper focuses on the volatile behavior in the equity market in individual stocks
after the introduction of futures trading on individual stocks. One of the innovations in
the financial markets in recent years has been the introduction of derivatives with the
introduction of stock index futures. Futures and options play an important role in price
discovery, portfolio diversification and hedging. This paper examines the stock market
volatility of individual stocks listed on the S&P CNX Nifty index after the introduction of
futures trading. It uses the family of GARCH techniques to capture the time-varying
nature of volatility and volatility clustering phenomenon in the data. The empirical
evidence suggests that in most of the stocks, there is no significant change in the
LITERATURE:2
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The present paper investigates the impact of index derivatives on the return,
efficiency and volatility of the S & P Nifty. For this purpose, the daily opening and
closing price data of the S & P Nifty with other proxy variable have been collected and
analyzed using before and after control sample technique. The results of the study
indicate increased market efficiency and reduced volatility with no price change in the
LITERATURE:3
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Stock price index futures and options are contracts that allow effective
buying and selling an extremely well diversified portfolio stocks. They are also
opportunities, chances to make investment decision based on the opinion of the overall
stock market. Stock index futures and option are powerful and versatile instruments,
whether you intend to risk your own capital for investment reward or wish to insulate
your investment capital from risk. This paper describes about the versatility of S & P 500
stock index futures and options. The Chicago Mercantile Exchange have enjoyed
LITERATURE:4
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on the trading volume, variance and price of the underlying shares. The impact of
derivatives trading on the underlying stock market has been widely documented in the
returns (for instance, mean and variance) during expiration and non-expiration days have
been advanced as an evidence for the destabilization effect (or lack there of) of derivative
instruments. The earlier studies have, however, drawn their conclusions without
rigorously modelling the underlying stochastic data generation process. Given that the
statistical properties mentioned before are merely traits of the asset returns, this approach
can lead to spurious results if analyzed in isolation of the underlying process. We propose
to address this crucial shortcoming by examining the expiration day effect from a
both daily and high frequency (5 min and 10 min) data on S&P CNX Nifty Index. Our
central finding using intra-day data is that while there is no pressure – downward or
upward – on index returns, the volatility is indeed significantly affected by the expiration
of contracts.
LITERATURE:5
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(www.indiastudychannel.com)
ABSTRACT
on the volatility of Indian stock market (an emerging stock market). It examines the
theme that the introduction of derivatives in the stock market in India would reduce the
volatility (risk) in the stock market. NSE Nifty 50 index has been used as a proxy of stock
market return. GARCH technique has been employed in the analysis. The conditional
volatility of intraday market returns before and after the introduction of derivatives
products are estimated with the (GARCH) model. The Finding suggests that a derivative
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1875 as “the native share and stock brokers association”; as a voluntary non-profit
making association. It has an evolved over the years into its present status as the premiere
stock exchange in the country. It may be noted that the stock exchange is the older on in
Asia, even older than the Tokyo stock exchange, which was founded in 1878.
The exchange, while providing as an efficient and transparent market for trading
in securities, upholds the interest of the investors and ensures redressed of their
grievances, weather against the companies or this own member brokers, it also strives to
educate and enlighten the investors by making available necessary informative inputs and
representatives and an executive director is the apex body, which decides the policies and
The executive director as the chief executive officer is responsible for the day
today administration of the exchange. The average daily turnover of the exchange during
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the year 2000-01 (April-March) was Rs. 3984.19 crores and average number of daily
The average daily turn over of the exchange during the year 2002-03 has declined
and number of average daily trades during the period is also decreased.
The ban on all deferral products like BLESS ANDALBM in the Indian capital
markets by SEBI with effect from July 2, 2001 abolition of account period settlements,
introduction of compulsory rolling settlements in all scripts traded on the exchanges with
compulsory rolling settlements in all scripts traded on the exchange with effect from
December 31, 2001 etc. Have adversely impacted the liquidity and consequently there is
a considerable decline in the daily turnover at the exchange. The average daily turnover
of the exchanges present scenario is 110363 (Lakhs) and number of average daily trades
1057 (Lakhs).
BSE INDICES:
In order to enable the market participants, analysts etc.. to track the various tips
and downs in the Indian stock market, the exchanges has introduced in 1986 an equity-
stock index called BSE- SENSEX that subsequently became the barometer of the
moments of the share prices in the Indian stock market. It is a “market capitalization
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established and leading companies. The sensex is widely reported in both domestic and
methodology, the level of the index reflects the total market value of all 30 – components
stocks from different industry related to determined by multiplying the price of its stock
variables (such as price and number of shares) a composite index. An indexed number is
used to represent the results of this calculation in order to make the value easier to work
with a track over a time. It is much easier to graph a chart based on indexed values than
one based on actual values world over majority of the well known indices are constructed
market value of the 30 as 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. The divisor
deeps the index comparable over a period or time and if the reference point for the entire
index maintenance adjustments. SENSEX is widely used to describe the kook in the
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Base year average is changed as per the formula new base year average= old year
The NSE was incorporated in Nov 1992 with an equity capital of Rs.25 crores.
The international security constancy (ISC) of Hong Kong has helped in setting up NSL-
ISC has prepared the detailed business plan and installation of hard ware and soft ware
systems. The promotions for NSE were financial institutions, insurance companies, banks
and SEBI capital market Ltd, infrastructure leasing and financial services ltd and stock
capital market as well as provides nation wide securities trading facilities to investors.
NSE is not an exchange in the striding sense where brokers owned and manage the
NSE is a notional market for shares PSU bonds, debentures and government
NSE NIFTY:
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The NSE on April 22, 1996 launched a new equity indeed. The NSE-50 the new
index, which replaces the existing NSE-100 index, is expected to serve as an appropriate
included in the index have a market capitalization in excess of Rs. 500 crores each and
should have traded for 85% of trading days at an impact cost of less than 1.5%
corporation ltd. 85% of the base period for the index is the close of prices on Nov 3 rd
1995. which makes one year of completion of operation of NSE’s capital market
segment. The base value of the index has been set at 1000.
The NSE midcap index or the junior nifty comprises fifty stocks those represents
21 abroad industry groups and will provide proper representation of the midcap segment
of the Indian capital market. All stocks in the index should have market capitalization of
greater than Rs.200 crores and should have traded 85% of the trading day at an impact
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The base period for the index is Nov 4 th,1996, which signifies 2 years of
completion of operations of the capital market segment of the operations. The base value
MIDCAP NSE:
Average daily turnover of the present scenario 258212 (Lakhs) and number of
At present there are 24 stock exchanges recognized under the securities contract
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Indiabulls Group is one of the top business house in the country with business interests in
Sectors.Indiabulls Group companies are listed in Indian and overseas financial markets.
To be the largest and most profitable financial services organization in Indian retail
market and become one stop shop for all non banking financial products and services for
Rapidly increase the number of client relationships by providing a broad array of product
Indiabulls Group has four separately listed companies with subsidiaries which
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Indiabulls Financial Services Limited was incorporated on January 10, 2000 as M/s Orbis
Infotech Private Limited at New Delhi under the Companies Act, 1956. The name of
company was changed to M/s. Indiabulls Financial Services Private Limited on March
16, 2001. In the year 2004, Indiabulls came up with it own public issue & became a
public limited company on February 27, 2004. The name of company was changed to
The company was promoted by three engineers from IIT Delhi, and has attracted
more than Rs.700 million as investments from venture capital, private equity and
institutional investors and has developed significant relationships with large commercial
banks such as Citibank, HDFC Bank, Union Bank, ICICI Bank, ABN Amro Bank,
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The company headquarters are co-located in Mumbai and Delhi, allowing it to access the
two most important regions for Indian financial markets, The marketing and sales efforts
are headquartered out of Mumbai, with a regional headquarter in Delhi. Back office, risk
management, internal finances etc. are headquartered out of Delhi/NCR allowing the
Market capitalization:
Net worth:
Highest Ratings from CRISIL. CRISIL is India's leading Ratings, Research, Risk and
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Commercial Vehicle
Commercial Credit
Life Insurance
Advisory Services
IPO Financing
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STRATEGIC UPDATES
Indiabulls Financial Services limited (IBFSL) completed the de-merger of its real estate
business into a separate publicly traded company, (IBREL) unlocked over Rs. 10000
DE-MERGER:
Services Limited has been notified as a ‘Financial Institution’ for the purpose of
SARFAESI Act, 2002. This notification is being effectively used by the Company to
entered into an MOU with Sogecap, the insurance arm of Societe Generale (SocGen) for
its upcoming life insurance joint venture. Sogecap will invest Rs.150 crore to subscribe to
COMMODITIES EXCHANGE:
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Indiabulls Financial Services Limited has entered into a MOU with MMTC
Exchange with 26% ownership with MMTC. Ministry of Commerce, Govt. of India has
given its in-principle approval and the formal approval of the Forward Markets
Commission is awaited.
company to manage mutual funds and has applied to SEBI for its approval and the same
is awaited.
Indiabulls stepped into the real estate market as Indiabulls Real Estate Limited
(IREL) in 2005. A joint venture between Indiabulls and a US based investment major
Farallon Capital Management LLC resulted in bringing FDI (Foreign Direct Investment)
for the first time in the Indian Real Estate Market. Another joint venture amongst
Indiabulls and DLF, Kenneth Builders and Developers (KBD), has brought up projects
OUR PROJECTS:
million dollars.
Jupiter Mills
Elphinstone Mills
Sonepat Township
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Castlewood
Raigarh SEZ
Gurgaon Housing
Nashik SEZ
Chennai Housing
Thane SEZ
Chennai Township
Mumbai Township
The products and services offered include securities, credit services, demat account for
share trading, mutual fund news, commodity and review along with technical analysis of
the market.
Commodities Limited (ICL). It deals in research work and formation of reports on agri-
commodites and metals. ICL has one of the largest retail branch networks in the country.
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Equity Analysis
Depository Services
Sales Force in Indiabulls securities Limited is divided into two groups. i.e. Online &
Offline
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EVP's Name
Mukherjee
(Online)
Managing Mahrashtra and Managing West
Managing NCR and UP,
Goa, Kerala, Karnataka, Bengal,
Region Punjab,Haryana,Uttranchal,
Andhra Pradesh Orissa, Bihar and
Rajasthan and Gujarat
and Tamil Nadu Jharkhand
of gurgaon
Clients
Client Helpline Number 0124 – 4572444
39407777
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Branch
Branch Helpline Number 0124-3989444
Queries E-mail at
Funds related funds@indiabulls.com
Reallocation related reallocate@indiabulls.com
Documents related documents@indiabulls.com
MILESTONES ACHIEVED
Amongst the first to develop in-house real-time CTCL (computer to computer link) with
NSE.
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CORPORATE INFORMATION
Registered Office
Website: www.indiabulls.com
Corporate Offices
MUMBAI – 400005
“Indiabulls House”
GURGOAN – 122001.
ORGANISATIONAL STRUCTURE
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4.1 FUTURES
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2500
2000
1500
1000
500
0
0 0 0 0 0 0 0 0 0
201 2 01 201 201 201 201 201 201 201
/ 3/ / / / / / / /
27 2/ 10 17 24 /3 10 17 24
1/ 2/ 2/ 2/ 3 3/ 3/ 3/
INTERPRETATION:
If a person buys a future of SBI on 27th January 2010 and sells on 25th March 2010 then
If he sells on 19th February 2010 then he will get a loss of 1968-1909=59 per share.
If the person sells it on 8th March 2010 then he will get a profit of 2071.85-1968=103.85
per share
The closing price of SBI at the end of the contract period is 2049.5 and this is considered
as settlement price.
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1400
1200
1000
800
600
400
200
0
0 10 010 010 010 010 010 010 010 010 010 010 010 010
1 -2 2/2 2/2 2/2 2-2 2-2 2-2 2-2 3/2 3/2 3/2 3-2 3-2
/ / / / / /
7-0 1 5 9 5-0 8-0 3-0 6-0 4 9 12 7-0 2-0
2 1 1 2 2 1 2
INTERPRETATION
If a person buys a future of AXIS BANK on 27th January 2010 and sells on 25th March
If he sells on 18th March 2010 then he will get a max profit of 1165.60-970=195.6 per
share.
The closing price of AXIS BANK at the end of the contract period is 1155.30 and this is
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330
320
310
300
290
280
270
260
010 010 010 010 010 010 010 010 010 010 010 010 010 010 010 010
2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2
2/ 2/ 2/ 2- 2- 2- 2- 2- /3/ /3/ /3/ /3/ 03- 03- 03- 03-
6/ 9/ 11/ 6-0 8-0 2-0 4-0 6-0 3 5 9 11 5- 7- 9- 3-
1 1 2 2 2 1 1 1 2
INTERPRETATION
If a person buys a future of DLF on 6th February 2010 and sells on 25th March 2010 then
If he sells on 8th March 2010 then he will get a profit of 317.90-316.20=1.7 per share.
The closing price of DLF at the end of the contract period is 298.50 and this is considered
as settlement price.
4.2 OPTIONS
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INTERPRETATION :
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To make a profit from an expected increase in the price of an underlying share during
option’s life:
market)
st
1 Feb Rs.2016.85 2000 51.85 Buy 1 March 2000 Call @
Rs.51.85
25th Mar Rs. 2049.55 2000 49.55 1. Sell 1 Mar contract (expiry)
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INTERPRETATION
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Share price
>strike)
Analysis .
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INTERPRETATION
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To make a profit from an expected increase in the price of an underlying share during
option’s life:
market)
th
27 Rs.970 1050 40.00 Buy 1 March 2000 Call @
January Rs.40.00
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INTERPRETATION
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Share price
Rs.120.00.
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INTERPRETATION
To make a profit from an expected increase in the price of an underlying share during
option’s life:
market)
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Rs.48.20
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INTERPRETATION
Share price
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<strike)
Analysis Fall by 17.7
5.1 SUMMARY
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. Derivatives are risk management
instruments, which drive their value form underlying asset. Underlying asset can be
The study is done in order to understand the concept of stock futures and stock
options. It helps to understand the investors profitability who invests in stock futures and
stock options.
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5.2 FINDINGS
1. The share price movement of SBI and AXIS BANK is in upward slope.
2. In the above cases the buyers of Futures and call option gets profit and the buyers of
4. In the case of DLF the buyers of Futures and Call option gets loss and the buyers of
5. In the initial days of the contract the prices of SBI shares fall and they raise in the
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6. Comparing to other two companies share price movements, DLF share price
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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
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 transactions costs
The derivatives products give the investor an option or choice whether to exercise the
contract or not. Options give the choice to the investor to either exercise his right or not.
If an 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
expose them to the properly calculated and well understood risks in pursuit of reward i.e.
profit.
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5.4 CONCLUSION
Derivatives have existed and evolved over a long time, with roots in commodities market.
In the recent years advances in financial markets and the technology have made
derivatives require more than average understanding of finance. Being new to markets
maximum number of investors have not yet understood the full implications of the
trading in derivatives. SEBI should take actions to create awareness in investors about the
derivative market.
Introduction of derivatives implies better risk management. These markets can give
greater depth, stability and liquidity to Indian capital markets. Successful risk
In order to increase the derivatives market in India SEBI should revise some of their
regulation like contract size, participation of FII in the derivative market. Contract size
should be minimized because small investor cannot afford this much of huge premiums.
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BIBLIOGRAPHY
BOOKS:
2. Mishkin.F.S, and Eakin S.G., Financial Markets and Institutions, 5th edition,
3. Gordon and Natarajan, Financial Markets and Services, 3rd edition, Himalaya
2006.
JOURNALS:
of Finance, Vol.25(May,1970)
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NEWSPAPERS:
1. Economic Times
2. Business line
3. Times of India
4. Business Standard
5. The Financial Express
WEB SITES:
1. http://www.indiabulls.com
2. http:// www.countercurents.org
3. http://www.equitymaster.com
4. http://www.bseindia.com/equityinfo
5. http://www.financial-dictionary
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