A STUDY ON THE ROLE OF FINANCIAL FUTURES WITH REFERENCE TO NSE NIFTY

CHAPTER 1

INTRODUCTION

1.1 INTRODUCTION
Futures play an important role in the field of finance. Many kinds of futures instruments have been developed and the use of futures has received a great deal of attention. Futures contract like options are important derivative instruments and a major innovation in the field of risk management. FEATURES OF A FUTURES CONTRACT A futures contract is a standardized forward contract. An agreement between two parties to exchange an asset for cash for a predetermined future date for a price that is specified today represents a forward contract. The terms which are used in futures contract are: Short position: This commits the seller to deliver an item at the contracted price on maturity. Long position: This commits the buyer to purchase an item at the contracted price on maturity. DIFFERENCES BETWEEN FORWARDS AND FUTURES A standardized forward contract is a futures contract. The differences are: A forward contract is a tailor made contract (the terms are negotiated between the buyer and the seller),whereas a futures contract is a standardized contract(quantity, date and delivery conditions are standardized). While there is no secondary market for forward contracts, the futures contracts are traded on organized exchanges. Forward contracts usually end with deliveries, whereas futures contracts are settled with the differences. Usually no collateral is required for a forward contract. In a futures contract, however a margin is required.

Forward contracts are settled on the maturity date, whereas futures contract are marked to market on a daily basis. This means that profits and losses on futures contract are settled daily.

KEY FEATURES OF FUTURES CONTRACTS The key features of future contract are: Standardization Intermediation by the exchange Price limits Margin requirements Marking to market

Standardisation: Traded futures contracts are standardized in terms of asset quality, asset quantity, and maturity date. The purpose of standardization is to promote liquidity and allow parties to the futures contracts to close out their positions readily. Intermediation by the Exchange: In a traded futures contract the exchange interposes itself between the buyer and the seller of the contract. This means that the exchange becomes the seller to the buyer and the buyer to the seller. Price limits: Futures exchanges impose limits on price movements of futures contracts. Price limits are meant to prevent panic buying or selling, triggered by rumors, and to prevent overreaction to real information. Marking-to-market: While forward contracts are settled on the maturity date, futures contracts are marked to market on a periodic basis. This means that the profits and losses on futures contracts are settled on a periodic basis.

FUTURES CONTRACTS: THE GLOBAL SCENE Broadly there are two types of futures: commodity futures and financial futures. A commodity futures is a futures contract in a commodity like cocoa or aluminum, while financial futures is a futures contract in a financial instrument like Treasury bond, currency ,or stock index.

COMMODITY FUTURES (STORABLE COMMODITIES) Futures contracts on various commodities, storable as well as perishable, like gold, oil, aluminum, cotton, rice, and wheat and orange juice have been in existence for nearly three centuries. For a storable commodity buying in the spot and storing it until the expiration of the futures contract is equivalent to buying a futures contract and taking delivery at the maturity date. Futures price= spot price+ present value of storage costsPresent value of convenience yield.

COMMODITY FUTURES (PERISHABLE COMMODITIES) For pricing futures contracts on the basis of arbitrage, the asset has to be storable. Hence perishable commodities have to be analyzed differently. The futures price of a perishable commodity is influenced by two factors mainly: the expected spot price of the underlying commodity and the risk premium associated with the futures position. Futures price= Expected spot price Expected risk premium

FINANCIAL FUTURES A financial future is a futures contract on a short term interest rate (STIR). Contracts vary, but are often defined on an interest rate index such as 3-month sterling or US dollar LIBOR.

In finance, a futures contract is a standardized contract, traded on a futures exchange, to buy or sell a certain underlying instrument at a certain date in the future, at a specified price. The future date is called the delivery date or final settlement date. The pre-set price is called the futures price. The price of the underlying asset on the delivery date is called the settlement price. The settlement price, normally, converges towards the futures price on the delivery date. A futures contract gives the holder the obligation to buy or sell, which differs from an options contract, which gives the holder the right, but not the obligation. In other words, the owner of an options contract may exercise the contract. Both parties of a "futures contract" must fulfill the contract on the settlement date. The seller delivers the commodity to the buyer, or, if it is a cash-settled future, then cash is transferred from the futures trader who sustained a loss to the one who made a profit. To exit the commitment prior to the settlement date, the holder of a futures position has to offset his position by either selling a long position or buying back a short position, effectively closing out the futures position and its contract obligations. Futures contracts, or simply futures, are exchange traded derivatives. The exchange's clearinghouse acts as counterparty on all contracts, sets margin requirements, etc.

SHORT-TERM INTEREST RATE FUTURES

Contract specifications
An assortment of contracts. The Eurodollar contract is the linchpin of the shortend interest rate futures contracts. Other dollar-denominate short-term interest rate futures; no comparable contracts exist for other currencies.

Eurodollar futures
The Eurodollar futures market is the most widely traded money market contract in the world, although trading in it only started as recently as 1981. It is based on a ninetyday Eurodollar deposit, which is a dollar-denominate deposit with a bank or branch outside of the U.S. or with an international banking facility (IBF) located in the U.S. Eurodollar deposits differ from domestic term deposits or certificates of deposit in the U.S. in that they are not regulated by U.S. authorities and hence are not subject to reserve requirements or deposit insurance premiums. The Eurodollar futures rate on any particular contract-month is essentially the 3-month LIBOR rate that is expected to prevail at the maturity of the contract. Basic contract specifications: The nominal contract size is $1 million and the underlying rate is the three-month LIBOR, the rate at which a London bank is willing to lend dollars (i.e., the offer side of the cash money market). The futures price is quoted as 100 minus the annualized futures 3-month LIBOR (e.g., a price of 96.5 implies a futures LIBOR rate of 3.5% per annum) in decimal terms. Contract settlement: Eurodollar contracts are settled in cash rather than with physical delivery (which would entail the short opening a time deposit on behalf of the long). The disadvantages of delivery in this case are of two kinds: (i) Eurodollar deposits are non-negotiable and hence delivery would bind the long to a three-month investment; (ii) heterogeneity of bank credits would systematically raise questions on the quality of the delivered asset. Trading of Eurodollar contracts: Eurodollar contracts are now traded at the CME in Chicago, at LIFFE in London and at SIMEX in Singapore. Thus, Eurodollar contract trading is de-facto available 24 hours.

Pricing and arbitrage: Implied forward rates

In order to understand how futures prices are established, we need to understand how prices of futures contracts are related to the spot or cash market prices of the underlying asset. We will see that the market forces of arbitrage are used to price virtually all financial futures contracts. All examples drawn below are based on the threemonth Eurodollar contract; applications with contracts based on different currencies, maturities or underlying asset constitute a straight-forward extension. INTERMEDIATE- AND LONG-TERM INTEREST RATE FUTURES Contract specifications Deliverable securities: Unlike international bank futures contract, bond futures are settled at expiration with physical delivery. Also unlike the T-bill futures contract, bond futures contracts generally allow for a range of bonds to be delivered against them. For example, U.S. Treasury bond futures contracts allow delivery of any U.S. T-bond that has at least I. years remaining to maturity (or to first call if the bond is callable); there may be as many as several dozen securities in the deliverable basket, all with different maturities and coupons. Delivery cycle: At futures expiration there is uncertainty not only on the actual bond that will be delivered but also on the specific timing of the delivery. Of course, bond futures positions can also be unwound prior to delivery by offsetting futures transactions. Because this is more convenient for most futures users than physical delivery, few contracts actually go into delivery. Futures invoice price: When a bond is delivered into the bond futures contract, the receiver of the bond pays the short an invoice price equal to the futures price times the conversion factor of the particular bond chosen by the short. Plus any accrued interest on the bond:

Futures invoice price = futures price conversion factor + accrued interest Other contract terms: Exchanges set other futures contact terms as follows; the concrete specifications of the U.S. T-bond contract are shown in parentheses for illustrative purposes. The contract size defines the par amount of the bond that is deliverable into the contract ($100,000 for U.S. T-bonds). Delivery months on bond futures contacts are quarterly (March, June, September and December). The exchange will also set daily trading hours, the last trading date and the last delivery period (one month). Other U.S. medium- and long-term interest rate contracts: The U.S. T-bond, traded at the CBOT since 1977, was the first fut3ureo n long-tern interest rates. Since then three futures contracts have been established on U.S. Treasury notes: a 10-year, a 5year and a 2-year contract. They all have similar characteristics to their forerunner. International bond futures contracts. Since 1932, bond futures contracts designed along the lines of the U.S. T-bond contract have spread internationally. For illustration purposes, the table below lists the main international bond futures contracts, where they are traded and the description of their deliverable set.

Pricing and arbitrage

Cash-futures relationship: Similar to short-term interest rate contracts, there is an arbitrage relationship which holds the prices of the T-bond futures contract to the cash market. Understanding the relationship between a futures contract and the deliverable basket is crucial to understanding the drive behind the arbitrage. It is the delivery option of the short that makes valuing bond futures more complex than valuing international bank (euro) deposit futures. The basis. The basis is the difference between a bond's price and the futures invoice price (as defined above). In other words, it is the difference in cost between 9

buying the bond in the cash market and buying a futures contract on it and having it delivered into the contract at expiration. Accordingly, we define the gross or raw basis as: Gross basis = dirty cash price - futures invoice price = clean cash price - (futures price conversion factor) since dirty (or full) price = clean price + accrued interest. The basis is generally quoted in 32nds rather than in decimal units - this conversion is performed simply by multiplying the decimal basis by 32. Basis arbitrate at futures expiration: At futures expiration, the gross basis must be equal to zero. Otherwise there would be instantaneous risk less profit opportunities. Suppose, for instance, that the gross basis was negative (positive). Then one could: (i) buy (sell) the cheapest to- deliver bond in the cash market; (ii) sell (buy) a bond futures contract; and (iii) immediately deliver (receive delivery of) the cash bond against the short (long) futures position.

Risk management and hedging

Basic risk management functions: Bond futures are often used as a vehicle for hedging price risk or duration. An excessive exposure to intermediate- and long-term interest rates can be offset by buying or selling bond futures contracts. Hedge ratio: The construction of the hedge ratio for bond futures follows the same logic as that for international bank futures contracts developed in Chapter 2. Recall that he basic formula is: Hedge ratio = scale factor x basis point value factor x volatility factor The scale factor is the ratio of the notional or principal amount of the asset being hedged and the futures contract size. The basis point value factor is the ratio of the change in the

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dollar value of the hedged asset to the change in the dollar value of the futures contract for a one basis point change in the interest rate. The volatility factor can be set to one if bond futures are used to hedge interest rate risk of roughly the same credit characteristics and in roughly the same yield curve segment.

Expressing a market view

Types of trades: The third application of bond futures, trading on the basis of market views, requires by definition that not all risk be hedged. Bond futures, as was the case with international bank deposit futures, can be traded: * outright, to express a view on market direction; * in combination with other bond futures contracts, using spreads or butterflies that combine longs and shorts at different points in time or across countries; or * in combination with the underlying (typically the cheapest-to-deliver bond) in what amounts to basis trades. Outright trading: Bond futures by themselves don't have duration. But because they track the cheapest-to-deliver bond (driven by basis traders), they contribute dollar duration to portfolios much along the lines of the cash bond. Going long the futures is a way of extending duration: it pays when the market is rallying and rates are falling. Shorting bond futures, on the contrary, reduces market sensitivity to rate movements and performs well in a bear market. Playing duration with futures fulfills the same objective as playing the bond market directly, but with the convenience of the futures market in terms of narrow bid/ask spreads, easy reversibility of positions and low cash requirements.

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Spread trading: As a word of caution, it should be mentioned that bond future spread or butterfly trades are less straight forward in their interpretation than similar trades with international bank deposit futures. For instance, Interpreting a bond future calendar spread as a reading on a particular segment of the yield curve is made difficult by each contracts' particular sensitivity to shifts in the cheapest-to-deliver and to changes in the repo rate on the cheapest deliver. In a similar vein, cross-country spreads may be driven by differences of the duration of their respective cheapest-to-deliver bonds than by the absolute level of long-term rates. Basis trading: Trading the basis from the long side is relatively risk less if the position is held to the futures expiration date, as explained above. A basis trade can -.1so be held for shorter time horizon but then the position is subject to risk at the unwind. A short-term basis position financed at an overnight rather than term rate constitutes a bet on basically two things: (i) the level of long-term rates (which determines which bond will be the cheapest-to-deliver since they each have different sensitivity to market rates according to their duration); and (ii) the evolution of short-term rates, and in particular whether the cheapest-to-deliver goes on special in the repo market Short-term basis trading is in fact quite complex, and can be used to take on risk subject to one's views in addition to as an arbitrage play. Basis trades can be entered into directly (by playing the bond and futures markets simultaneously as discussed in Section B) or indirectly by replacing an existing long bond position with a long position in bond futures and shortterm money market investments. CURRENCY FUTURES Contract specifications Types of contracts. Foreign currency futures contracts are available on all major currencies against the dollar (e.g., GBP, CAD, DEM, JPY, SRF, AUD, etc.), most of which are traded at the CME and at LIFFE. In addition, there are futures on a USD index (i.e., average of bilateral rates against the dollar) at the CBOT. Finally, there are futures

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on crosses, i.e., bilateral exchange rates between two non-dollar currencies such as on JPY/DEM. Contract specifications. Currency futures against the dollar, by far the most prevalent, tend to have quarterly contracts with delivery in March, June, September and December. They tend to require actual delivery, meaning that at futures settlement the long receives the currency of denomination of the future and pays dollars). Price quotes are on American terms, i.e., based on number of dollars per unit of foreign currency. Pricing and arbitrage: International interest rate parity Overview. As with interest rate futures, the prices of currency futures are bound by a basic arbitrage relationship with the underlying cash market. Arbitrage relations are cleaner with forwards than with futures because mark-to-market payments on futures introduce an element of reinvestment risk that cannot be fully hedged. However, in the case of currencies, the difference between forward and futures prices is less important than with interest rates. There is no financing bias against the long as was the case with interest rate futures if exchange rates are assumed to be uncorrelated with the level of interest rates. Expressing a market view Outright trading. Futures are a natural instrument to express views on future exchange rate movements. For instance, going long the JPY contract (i.e., long yen and short dollars) is consistent with an expectation of an appreciation of the yen relative to the dollar. Conversely, shorting the contract is consistent with an expectation of a yen depreciation relative to the dollar. More formally, one should buy the JPY contract if one expects the yen to appreciate more than what is already expected (or priced in) by the market. Conversely, the contract should be sold if one expects the yen to appreciate more than what is expected by the market.

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STOCK INDEX FUTURES Contract specifications The underlying instrument. Stock market indexes are time series designed to track the changes in the value of hypothetical portfolios of stocks. Stock indexes differ from one to another with respect to the range of stocks covered, stock weighting, and index computation. Indexes differ in composition because of the need to measure the price movements of the equity markets of different countries and different segments of each of these national equity markets. Though returns on stock indexes of the same country are often highly correlated over time, relative performance can vary sharply over periods such as a month or a quarter. Index construction: The weight of a stock in an index is the proportion of the portfolio tracked by the index invested in the stock. The stocks in the portfolio can have equal weights or weights that change in some way over time. The most common weighting scheme is market value weighting, used for example in both the S&P 500 and NYSE indexes. Treatment of dividends: Stock indexes are not usually adjusted for cash dividends. In other words, any cash dividends received on the portfolio are ignoring when percentage changes in most indexes are being calculated. This implies that percentage changes in stock indexes do not track total returns on the corresponding portfolio of stocks but, only price changes. Futures contract specifications: All futures contracts on stock indexes are settled in cash. Physical delivery of stocks against a futures contract based on an index presents intractable difficulties. First, not every index correspond to a well defined portfolio of stocks (for example, those indexes constructed using geometric means). Moreover, it is not feasible to construct a broad market value weighted portfolio that is both of manageable size to be delivered and contains whole numbers of shares for all

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companies. To solve these problems stock index futures contracts are settle in cash and the underlying assets are defined to be an amount of cash equal to a fixed multiple of the value of the index. Contracts traded. For illustration purposes, following is a list of the main international stock indexes and futures contracts on these indexes: * S&P 500 (CME). Based on a portfolio of 500 American stocks. The index accounts for 80% of the NYSE. The value of one futures contract is $500 times the index. * S&P 400 (CME). Based on a portfolio of 400 American stocks. The value of one futures contract is $500 tirmes the index. * NYSE composite futures (NYSE). Based on a portfolio of all the stocks listed on the NYSE. The value of one futures contract is $500 times the index. * Major market index (CME). Based on a portfolio of 20 blue-chip American stocks listed on the NYSE. The value of one futures contract is $500 times the index. * Value Line futures (KC). Contains the prices of 1,700 American stocks. It does not correspond directly to any portfolio of stocks because of its use of geometric averaging. The value of one futures contract is $500 times the index. * Nikkei 225 stock average (CME). Based on a portfolio of 225 of the largest stocks listed on the Tokyo Stock Exchange. The value of one fuLturesc ontact is $5 times the index. *CAC-4s0t ock index (MATIF). Based on a portfolio of 40 of the largest stocks listed on the Paris Stock Exchange. The value of one futures contract is FRF200 times the index. * FT-SE 100 index (LUFFE). Based on a portfolio of 40 of the largest stocks listed on the London Stock Exchange. The value of one futures contract is GBP 25 times the index.

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Pricing and arbitrage Like futures on fixed income instruments and currencies, stock index futures prices should be related to the underlying cash market by a cost of carry relationship or, in other words, by the cash-forward relationship. Otherwise arbitrage trades are possible. As with interest rate and currency futures stock index futures prices and forward prices may differ because mark-to-market payments on -futures introduce an element of reinvestment risk that cannot be fully hedged. Risk management and hedging Overview. Stock index futures provide a means of adjusting, acquiring, or eliminating exposure to the fluctuations of overall stock market Stock index futures strategies may be preferable to other means of adjusting and managing equity exposure because of cheaper transaction costs, attractive prices available on the futures contract, ease of adjusting positions (liquidity), or the difficulty of moving funds quickly and on a large scale into and out of particular stocks. Hedging stock portfolios: The objective of hedging with stock index futures is to reduce or eliminate the sensitivity of an equity portfolio to changes in the value of the underlying index. The sale of stock futures against a stock portfolio creates a hedged position with returns very similar to those of a short-term, fixed-income security. An interesting example of users of stock futures as hedging vehicles are brokers and dealers in equities. Creating synthetic index fund portfolios: Futures can be used to create portfolios that have cash flows characteristics similar to an index fund portfolio. Managing index fund portfolios involves considerable oversight in terms of maintaining the correct weights as prices change and reinvesting any dividends that are received. Index futures can provide a means of cheaper access to such a portfolio.

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Capitalizing on different tax treatment of futures and equities. Stock index futures can be used to create portfolios that have cash flows characteristics similar to an index fund portfolio, the different tax treatments of those returns may make it advantageous for some investors to use equity futures. All profits and losses on stock index futures are effectively treated as long-term capital gains and losses. Expressing a market view Outright trading: Futures are a natural instruments to express views on future exchange rate movements. Since a deposit of less than 10 percent is required to purchase or sell a stock futures contract, one can take on a considerable amount of market risk via index futures and reap the reward of being correct in a forecast of the stock market direction. Spreads: A wide range of speculative strategies are possible by mixing stock index futures contracts of different maturities and or different underlying indexes. Capitalizing on stock selectivity. The strategy that should be employed is to sell stock futures up to reduce or eliminate the market-related component of that portfolio's risk and returns, and leave the returns and risk component associated with the company-specific features of the stocks in the portfolio.

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OPTIONS ON FUTURES

Definition and Pricing

Definition and types of options. The key to options is to understand that holding an option represents a right rather than an obligation. There are two types of options on futures: * A call option confers upon its holder the right to establish a long (buying) futures position. * A put option confers upon its holder the right to establish a short (selling) futures position. In either case, the futures position may be established by the option holder on any date up to a pre-determined expiration date at a pre-determined price (the strike price). The purchaser of the option pays a market-determined price (or premium) in order to have the right --but not the obligation-- to establish the corresponding futures position by exercising the option at some time in the future. Conversely, the writer (or seller) of the option receives the premium when the option is issued and must stand ready to accept the corresponding futures position at any time duning the life of the option. "Moneyness" of options. The intrinsic value or moneyness of an option is the higher of its value if it were to be exercised immediately and zero (its value if it is not worth exercising), whichever is greater. For example, for a call, if the market price of the underlying is above the option's strike price, the option has exercise value and is said to be in the money. If the market price of the underlying is below the call option's strike price, the option has no exercise value and is said to be out of the money. The same applies, but in reverse, to put options

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Futures positions at option exercise: To summarize, the options on futures, if exercised, yield the following futures positions: bought call if exercised long futures bought put by the party short futures sold call long the short futures sold put option, yields long futures Underlying instruments. There are options on all the types (though not necessarily on all the specific contracts) of financial futures. Among the most liquid option contracts (and the corresponding exchanges where they are traded) are: *Short-term interest rates: Eurodollars (at the CME) *Longer-term interest rates: US Treasury bonds and notes (at the CBOT) *Currencies: Deutschemarks and Yen (at the CME) *Stock-indexes: S&P500 (at the CME) Pricing models: A commonly used pricing model for options on futures is the Black model, which is an extension of the Black-Shoes model originally derived for pricing equity options.

Use of options on futures versus use of futures. Hedgers and investors might want to use options on futures rather than futures themselves for the following reaso,: *Creating asymmetric payoffs on the upside and downside. There is no downside risk to buying an option. If the price goes against you, you let the option expire worthless and pay no more. With a futures position, you must pay the daily settlement variation when the price goes against you. The price you pay for having the security offered by an option

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is the upfront premium. Conversely, if you are willing to accept the risk of an unlimited downside exposure, you might consider selling an option and collect the premium upfront. Thus, whether futures or options on futures are utilized by traders and corporate treasurers depends on their preferences on the risk/reward structure. * Hedging or trading on the basis of market volatility. Futures are not directly affected by changes in market volatility. Some users, however, might want to hedge market volatility, or actually express views on the basis of market volatility. Only options allow them to isolate the volatility component on the basis of which they can hedge or trade *Contingent contracts. Options might be suitable if the asset, liability or cash flow being hedged is of a contingent nature. For example, suppose you are negotiating with a Japanese company for electrical parts. The Japanese company will decide at the next board meeting, which takes place in a month, whether to provide parts at the agreed upon prices. The U.S. corporation will lose its profit margin if the yen appreciates relative to the dollar at the time the Japanese firm agrees to the contract. In this case, it may pay for the U.S. firm to hedge the contingent payable by buying options on yen futures.. Hedging example: floating-rate note issuance. Options on futures can be used instead to insure against adverse interest rate moves. For a fixed price (the option premium), and interest rate cap (i.e. long a put on Eurodollars) allows the borrower to take advantage of favorable rate moves while limiting the damage done by a rises in rates. Trading volumes. The volume traded on options on futures is much larger than on equivalent options on the cash instruments. This is due to the fact that futures are leveraged instruments. This makes options on futures easier to hedge dynamically since one does not need to worry about financing of positions in the underlying.

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Liquidity and market depth

In derivatives markets, unlike in cash markets, most of the action happens in the future. Because they bind buyer and seller for a pre-specified period of time, users will only feel comfortable using derivatives markets if they are liquid and deep enough to allow investors to rebalance their portfolios in response to new information at low cost. Market liquidity: A market is liquid when traders can buy and sell without substantially moving the price against them. Liquidity typically arises when there are individuals or institutions which continuously wish to buy or sell. Liquidity is provided to a large degree by locals (individuals trading on their own capital) trading in the pit, or else by major financial institutions trading in automated systems. IMPORTANCE OF FUTURES MARKETS Summary. Over the last decades, futures have become widely accepted by money managers, financial institutions and corporations and have been successfully integrated into risk Management and yield enhancement strategies. We have investigated some of the features of futures contracts, explained some of the basics regarding how they are priced, and given a few applications illustrating how these contracts would be used by risk managers and investors. Economic importance of futures. Futures, and derivatives generally, allow economic agents to fine tune the structure of their assets and liabilities to better suit their risk preferences and market expectations. They are not per se a financing or investment vehicle but rather a tool for transferring price risks associated with fluctuations in asset values. Some may use them to spread risk, others to take on risk on the basis of particular market views. Futures as a building-block: Futures have been a key instrument in facilitating the modem trend of separating conventional financial products into their basic

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components. In so doing, they allow not only the reduction or transformation of risk faced by individual investors but also the sheer understanding and measurement of risk. Financial futures (along with options) are best viewed as building blocks. Financial management is quickly becoming an exercise in reducing financials structures into their basic elements and then reassembling them into a preferable structure. In the process, derivatives have contributed decisively to the integration of financial markets. The surge in financial futures. Without resorting to tedious quantification the astounding growth and importance of derivatives can be illustrated by the fact that the value of exchange-treaded Eurodollar derivatives( futures and options)i s now roughly 13 times the value of the underlying market. Also, the volume of financial futures now dwarfs the volume in traditional agricultural contracts. Futures' features. While the following are noteworthy advantages that futures have over forwards, it should be noted that our goal is to illustrate how futures can be used effectively as an investment alternative and as a risk transfer mechanism. * Futures are relatively inexpensive to execute (negotiable commission rates). * Futures are bought or sold on margin, and as such provide for substantial leverage. * Prices are determined by a competitive market system (open outcry or electronic bidding). *All prices and information are available continuously. Participants know all transaction prices and there are no negotiated deals and no multiple phone calls to get price quotes.

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*Positions are easy to reverse if the opinion about market conditions and prospects changes. Offsets of longs and shorts prevent a bloating of the balance sheet and tying up of credit lines that can become a problem with over-the-counter derivatives. *Audit systems and safeguards enforced by regulatory authorities, exchanges and futures commission merchants provide a level of integrity for the marketplace. *Counterparty credit risk of non-performance is negligible. On the other hand, OTC trading allows more flexibility in establishing contract terms and avoids the need for daily monitoring of mark-to-market positions and margin account. EQUITY FUTURES IN INDIA Equity futures are of two types: stock index futures and futures on individual securities. Both the type of equity futures are available in India.

Stock Index Futures

The National Stock Exchange and the Bombay Stock Exchange have introduced stock index futures. The National Stock Exchange has a stock index futures contract based on S&P CNX Nifty Index; The Bombay Stock Exchange has a stock index futures contract based on Sensex.

Futures on Individual Securities

Futures on individual securities were introduced in India in 2001. The list of securities in which futures contracts are permitted is specified by Securities Exchange Board of India. The National Stock Exchange and the Bombay Stock Exchange have introduced futures on individual securities.

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1.2 SUBJECT BACK GROUND FOR THE STUDY

Futures market plays an important role in the world of finance. Many kinds of futures instruments have been developed and the use of futures has received a great deal of attention. A financial futures in a futures contract in a financial instrument like treasury bond, currency or stock index. Eg: Financial futures, US Treasury Bills, Eurodollar deposits, S&P index etc Generally futures allow economic agents to fine-tune the structure of their assets and liabilities to suit their risk preferences and market expectations. Futures are not only a financing or investment vehicle, but it is a tool for transferring price risks associated with fluctuations in asset values. During the last decades the financial products into their basic components. The volume of trading in financial futures dwarfs the volume in traditional agricultural contracts.

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1.3 NEED FOR THE STUDY

The needs for the study of financial futures are: 1. Financial futures have become the corner stone of financial management. 2. Futures have become widely accepted by money managers, financial institutions and corporations have been successfully integrated into risk management and yield enhancement strategies. 3. Futures have been a key instrument in facilitating the modern trend of separating conventional financial products into their basic components. 4. Futures are relatively in expensive to execute. 5. Futures have facilitated the modern trend of separating conventional financial products into their basic components. 6. Financial futures play a prominent role in risk management.

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CHAPTER 2

RESEARCH DESIGN

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2.1 INTRODUCTION
Research Design is the basic frame work which provides the guidelines for research. The research design specifies the method for data collection analysis. There are mainly two methods of collecting data, primary and secondary data collection.

2.2 STATEMENT OF THE PROBLEM

Trading on options give lot of volatility to futures market. Futures markets becomes at times unpredictable compare to SENSEX/NIFTY movements. The researcher feels an indepth study in this area, the price movements of futures with respect to SENSEX or nifty is imperative.

2.3 REVIEW OF LITERATURE

Basic futures contract design Definition. A futures contract is a commitment to buy or sell a fixed amount of standardized commodity or financial instrument at a specified time in the future at a specified price established on the day the contract is initiated and according to the rules of the regulated exchange where the transaction occurred. Once the trade clears, the buyer and corresponding seller of the futures contract are not exposed to each other's credit ri3k. Rather, they individually look to the clearinghouse for performance, and vice versa. Futures as a derivative security. A futures contract is a financial derivative of the commodity on which it is based in the sense that it is an arrangement for exchanging money on the basis of the change in the price or yield of some underlying commodity. Timing of cash and commodity flows. Like other derivative securities, futures contract is an agreement to do something in the futures -- no goods or assets are exchanged today. A cash market transaction involves an agreement between two counterparties to buy or sell a commodity for cash today (perhaps for delivery in a couple of days). In a forward 27

market traction, delivery and settlement of the commodity for cash will occur at a single future date with no intervening cash flows. In afitres market transaction, delivery and settlement will also occur at a single future date but there will be daily (or more frequent) cash flows reflecting intervening price movements in the underlying commodity. Value of futures contracts at the time of contracting. Since there is no exchange of neither commodities nor cash payments at the time of contracting of futures contracts, such contracts must have a zero net present value at their inception. Value of futures contract as spot price changes. Once the futures contract is entered into, subsequent movements in the (spot) market price of the commodity create value for either the long futures position (i.e., the buyer) or the short futures position (i.e., the seller). For instance, a rise in the spot price of the commodity will benefit the long as he has bought the commodity under the futures contract at a fixed price and can now expect to sell it in the future at a higher price in the spot market. But since the long will not realize this gain until the settlement of the futures contract, this creates a credit exposure to the extent of the net present value of the futures contract. The futures contract will now be a positive net present value investment for the long and an obligation for the short.

Closing a futures position. A futures position can be closed out before expiration of the contract by entering into an offsetting trade in the same contract for the samne amount.. Under physical delivery, investors that are long the contract must deliver to investors short the contract the underlying commodity of the contract according to the rules on commodity quality and timing established by the exchange.. The determination of the price of the commodity at expiration on which cash settlement amounts are calculated (the final settlement price) is made by the exchange under pre-specified rules. Types of underlving_instruments. Underlying every futures contract is a relatively active cash market for an asset or good. Futures contracts were traditionally based on standard physical commodities such as grains (corn, wheat, soybeans), livestock (live cattle and hogs), energy products (crude oil, heating oil) or metals (aluminum, copper,

28

gold), softs (coffee, sugar, cocoa). In addition, there are futures on several commodity indices (like the CRB and GSCI). Over the last two decades, futures based on financial commodities have flourished, such as those based on: Money market interest rates: certificates of deposit, offshore or euro-deposits (e.g.,LIBOR-based), and Treasury bills. Bonds and notes: Treasury securities. Currencies: yen, deutschemark, pound (against the dollar or crosses) Equity indices: S&P500, Nikkei 225, NYSE Composite. B. Forward vs. futures contracts Futures and forward contracts are similar in the sense that they both establish a price and a transaction to occur in the future.. Cash flows and margining. In forward markets cash changes hands only on the forward date In futures markets, gains and losses are settled daily in the form of margin payments. This serves to reduce credit exposure to intraday price movements Tradability. Forward contracts will trade on the basis of price and credit characteristics of the counterparty. For this reason, forward contracts tend to be traded in over-the-counter (OTC) markets. The margin requirements on futures contracts make them sufficiently immune to credit risk so that credit exposure is not a significant factor in pricing. This makes futures contracts particularly well suited for trading in organized exchanges. Contract terms. To ensure the liquidity of exchange-traded futures markets, contracts tend to be offered on standardized terms in terms of maturity, contract size, quantity and quality of the underlying to be delivered, the time and place of delivery, the method of payment, margining requirements and trading hours, among other characteristics. Credit exposure. In futures contracts, the clearing house members and the clearinghouse itself guarantee fulfillment of futures contracts. The buyer and the seller both have

29

an exposure to the clearing house (and the clearing house to them), rather than to each other. Regulation. Since forwards are a bilaterally negotiated agreement, there is no formal regulation of forwards nor is there a body to handle customer complaints. Exchangetraded futures. on the other hand, are regulated by identifiable entities which are either governmental (like the Commodity Futures Trading Commission in the U.S.) or set up by the industry itself.

FINANCIAL FUTURES: USES AND USER Uses. Financial futures can be used as devices for: (i) arbitrage or yield enhancement, (ii) risk management and hedging, and (iii) taking trading positions on the basis of market views (or "speculating," to put it in more blunt terms). arbitrage. Sometimes the prices of futures can be related as well to those of other derivatives which are based on the same (or similar) underlying commodities. Examples of related derivatives are interest rate swaps and interest rate futures, and futures on three-month LIBOR and on one-month LIBOR By isolating each characteristic of some underlying security with a derivative instrument, all arbitrage risk can be eliminated. Risk management. Hedging can be performed on a single tansaction (or instrument) basis or on an aggregate (portfolio or firm) basis. Examples of single transaction hedging might include anticipatory hedging for debt or equity security issuance or currency hedging for foreign trade transactions. Examples of aggregate furm hedging include asset-liability gap management and portfolio duration management Financial futures are particularly apt for managing foreign currency and interest rate risk. Expressing market views. Financial futures are an efficient way of taling bets on the market on the basis of traders' views, whether these are fimdamental (i.e., driven by economic conditions and trends) or technical (i.e., based on observed short-term price movements). Such trades by definition cannot (indeed, should not) be fully hedged, 30

although trade construction might be such as to immunize particular kinds (or dimensions) of risk. Unlike pure arbitrage, expressing market views is not riskless. Futures can be used to express views on general market direction, the timing of expected market movements, changes in the spread between market segments (e.g., credit, commodity quality or cross-country differences), or a combination of these. Users. The users of financial futures are naturally given by their uses. Financial institutions, including commercial banks, brokerage firms, investment banks, fund managers and insurance companies will use futures for their thrc:- basic functions. Non-financial corporations, including municipal and state organizations and foundations are more likely to use them to hedge their commercial, investment or borrowing activities. Individuals and locals a:e more likely to use them for speculation and arbitrage. WORLD FUTURES EXCHANGES Exchanges are formal organizations whose purpose is to concentrate order flow in order to facilitate competition and to reduce transaction costs involved in searching for counterparties. The principal financial futures exchanges in the world are: Chicago Mcrcantile Exchange (CME, or the "Merc") Chicago Board of Trade (CBOT) Tokyo International Financial Futures Exchange (TIFFE) Tokyo Stock Exchange (TSE) London Intemational Financial Futures and Options Exchange (LIFFE) Marche a Terme International de France (MATIF) in Paris Singape-e Interational Monetary Exchange (SIMEX) Deutsche Terminborse (DTB) in Frankfurt New York Futures Exchange (NYFE) Mercado Espafhol de Futuros y Opciones Financieras (MEFF) in Barcelona

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2.4 OBJECTIVES OF THE STUDY

To study on the financial futures with reference to NSE Nifty. To study the volatility of futures with reference to Banking and Pharmaceutical industries. To study the amount of risk of Financial Futures of NSE in the month of March with reference to Banking and Pharmaceutical industries.

2.5 SCOPE OF THE STUDY:

This study is done mainly under the ten companies of NSE Nifty. The results cannot be generalized.

2.6 RESEARCH METHODOLOGY

This study entitled A study on the role of Financial Futures with reference to NSE Nifty is mainly done in Banking and Pharmaceutical industry. Secondary data is mainly used for the study. Five companies from Banking and five from Pharma industry are taken for the study.

2.7 TOOLS FOR DATA COLLECTION

Secondary Data: It is collected from books, journals, internet, magazines etc..

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2.8 METHOD OF ANALYSIS

The formula used for calculation are:

= n * xy x . y n x2 (x)2
X = market return For calculating x the NSE share price is taken. X= closing price opening price * 100 Opening price Y = stock return For calculating y the NSE future value is taken Y= closing price opening price *100 Opening price

2.9 LIMITATIONS OF THE STUDY

Time constrains Geographical constraints This is restricted to Banking and Pharmaceutical Industry

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2.10 CHAPTER SCHEME

Chapter 1: Introduction deals with the introduction to futures, subject background of the study and need for the study. Chapter 2: Research Design deals with the statement of the problem, review of literature, objectives, scope of the study and about the methodology used by the study. Chapter 3: It deals with the Company Profiles of ICCI Bank, Corp Bank, Punajb National Bank, Syndicate Bank, IOB, Ranbaxy, Dabur, CIPLA, Glaxo and Sun Pharma. Chapter 4: This chapter deals with the Analysis and Interpretation of Data Chapter 5: It gives the Summary of Findings, Conclusion and Recommendations.

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CHAPTER 3

PROFILE OF COMPANIES

35

3.1 ICICI BANK

ICICI Bank
Type Founded Headquarters Private BSE & NSE:ICICI, NYSE: IBN 1955 (as Industrial Credit and Investment Corporation of India) ICICI Bank Ltd., ICICI Bank Towers, Bandra Kurla, Mumbai India N Vaghul, K.V.Kamath, Nachiket Mor, Chanda Kochhar Loans, Credit Cards, Savings, Investment vehicles, SBI Life (Insurance) etc. USD 5.79 billion www.icicibank.com

Key people Products Revenue Website

ICICI Bank (formerly Industrial Credit and Investment Corporation of India) is India's largest private sector bank and second largest overall. ICICI Bank has total assets of about USD 56 Billion (end-Mar 2006), a network of over 619 branches and offices, and about 2400 ATMs. ICICI Bank offers a wide range of banking products and financial services to corporate and retail customers through a variety of delivery channels and through its specialized subsidiaries and affiliates in the areas of investment banking, life and non-life insurance, venture capital and asset management. ICICI Bank's equity shares are listed in India on stock exchanges at Kolkata and Vadodara, the Stock Exchange, Mumbai and the National Stock Exchange of India Limited and its ADRs are listed on the New York Stock Exchange (NYSE). During the year 2005 ICICI bank was involved as a defendant in cases of alleged criminal practices in its debt collection operations and alleged fraudulent tactics to sell its products 36

ICICI was established by the Government of India in the 1960s as a Financial Institution (FI, other such institutions were IDBI and SIDBI) with the objective to finance large industrial projects. ICICI was not a bank - it could not take retail deposits; and nor was it required to comply with Indian banking requirements for liquid reserves. ICICI borrowed funds from many multilateral agencies (such as the World Bank), often at concessional rates. These funds were deployed in large corporate loans. All this changed in 1990s. ICICI founded a separate legal entity - ICICI Bank which undertook normal banking operations - taking deposits, credit cards, car loans etc. The experiment was so successful that ICICI merged into ICICI Bank ("reverse merger") in 2002. At the time of the reverse merger, there were rumours that ICICI had a large proportion of Non Performing Loans ("NPA", as they are known in India) on its books - in particular to the steel industry. Since 2002, there has been a general revival in Indian industry (and metal based industry in particular). It is widely believed that the proportion of NPAs has come down to prudent levels (even if it were high earlier). ICICI Bank now has the largest market share among all banks in retail or consumer financing. ICICI Bank is the largest issuer of credit cards in India .It was the first bank to offer a wide network of ATM's and had the largest network of ATM's till 2005, before SBI caught up with it. ICICI bank now has the largest market value of all banks in India, and is widely seen as a sophisticated bank able to take on many global banks in the Indian market. The bank is expanding in overseas markets. It has operations in the UK, Hong Kong, Singapore and Canada. It acquired a small bank in Russia recently. It has tie-ups with major banks in the US and China. The bank is aggressively targeting the NRI (Non Resident Indian) population for expanding its business.

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3.2 PUNJAB NATIONAL BANK

Punjab National Bank

Type Founded Headquarters Key people Industry Public (BSE, NSE:PNB) Lahore, 1895 (British India) New Delhi, India Chairman and M.D. Mr. S.C.Gupta Banking Insurance Capital Markets and allied industries Loans, Credit Cards, Savings, Investment vehicles, Insurance etc. USD 2.32 billion (2005) ...the name you can BANK upon www.PNBIndia.com

Products Revenue Slogan Website

Punjab National Bank (PNB), established in 1895 in Lahore by Lala Lajpat Rai, is the second largest public sector commercial bank in India with about 4500 branches and offices throughout the country. The Government of India nationalized the bank, along with 13 other major commercial banks of India, on July 19, 1969.

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3.3 SYNDICATE BANK

Syndicate Bank
Type Founded Headquarters Public (BSE & NSE) Udupi, 1925 (as Canara Industrial and Banking Syndicate Limited) Head Office, Manipal, Karnataka India & Corporate Office Bangalore Chairman C P SWARNKAR Banking,Insurance,Capital Markets and allied industries Loans, Credit Cards, Savings, Investment vehicles, Bajaj Allianz Life Insurance (Insurance) etc. USD bil Faithful and Friendly (English) & Viswasaneeya Hitheshi (Sanskrit) syndicatebank.in/

Key people Industry Products

Revenue Slogan Website

Syndicate Bank, established in 1925 in Udupi (Karnataka state, India) by Upendra Ananth Pai, Vaman Kudva and Dr, T. M. A. Pai, is one of the oldest and major commercial bank of India. At the time of its establishment, the bank was known as Canara Industrial and Banking Syndicate Limited. The bank, along with 13 other major commercial banks of India, was nationalized on 19th July, 1969, by the Government of India. The business started with a capital of Rs. 80,000. The first branch of the bank started its operations in the year 1928 at Brahmavar in Dakshin Kannada District. By 1937 it had secured its membership as a Clearing House at Mumbai. The primary objective of business was to extended financial assistance to local weavers. Initially the bank collected as low as 2 annas from the door steps of the depositors daily through its agents.

39

This type of system where in the agents of the bank come doorsteps to collect deposit is still prevailing in India and is referred as Pigmy Deposit Scheme. From 1953-1964, 20 banks merged with the Canara Industrial and Banking Syndicate Limited this included the Maharastra Apex Bank Limited and Southern India Apex Bank Limited. The name of the bank was changed to Syndicate Bank Limited in the year 1963 and the head office of the bank was shifted to Manipal. The bank expanded its operations not only on the domestic front but also overseas. It took over Al Shabei Finance and Exchange Co. in Doha (1983) and Musandam Exchange Co. in Muscat (1984). By 1989 it opened its 1500th branch at Hauz Khas, Delhi. Currently it has over 1900 branches. Syndicate Bank sponsored the first regional rural bank in India by name Prathama Grameena Bank. The stocks of the Syndicate Bank are listed on Bombay Stock Exchange, National Stock Exchange, Mangalore Stock Exchange and Bangalore Stock Exchange.

3.4 CORPORATION BANK CORPORATION BANK

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Type Founded Headquarters

Public (BSE, NSE:CORPBANK) Udipi, 1906 Corporation Bank, CORPORATE OFFICE , Mangaladevi Temple Road Pandeshwar Mangalore 575 001 India Chairman B. Sambamurthy Banking Loans, Credit Cards, Savings, Investment vehicles, etc. Rs 862.83 crore (2006) Rs 100.27 Crore (2006)[1] A Premier Government of India Enterprise www.corpbank.com

Key people Industry Products Revenue Net income Slogan Website

Corporation Bank, founded in 1906 in Udupi, Karnataka state, India, is one of the Indian banks in public sector. The bank was founded with an initial capital of Rs. 5000 (USD 100), and first days canvassed resources of less than one USD 1, has currently (31 March 2004) 10,176 full time employees, and operates from several branches in India. The Bank is a Public Sector Unit with 57.17% of Share Capital held by the Government of India. The Bank came out with its Initial Public Offer (IPO) in October 1997 and 37.87% of Share Capital is presently held by the Public and Financial Institutions. The Banks Net Worth stood at Rs.3, 054.92 crores as on 31 March 2005. The bank has the distinction of the first Indian bank to publish its financial results (199899) conforming to US GAAP.

3.5 INDIAN OVERSEAS BANK

IOB

41

Indian Overseas Bank (IOB) was founded on February 10th 1937, by Shri.M.Ct.M. Chidambaram Chettyar, a pioneer in many fields - Banking, Insurance and Industry with the twin objectives of specializing in foreign exchange business and overseas banking. IOB had the unique distinction of commencing business on 10th February 1937 (on the inaugural day itself) in three branches simultaneously - at Karaikudi and Chennai in India and Rangoon in Burma (presently Myanmar) followed by a branch in Penang. At the dawn of Independence IOB had 38 branches in India and 7 branches abroad. Deposits stood at Rs.6.64 Crs and Advances at Rs.3.23 Crs at that time.

3.6 RANBAXY LABORATORIES

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Ranbaxy Laboratories Limited

Type Public Founded 1961 Headquarters Key people Gurgaon, Haryana, India Tejendra Khanna, Chairman Brian Tempest, Chief Mentor, Executive Vice Chairman Malvinder Mohan Singh, CEO & MD Industry Pharmaceutical Products Generic drugs Revenue $1.178 billion (2005) Employees 1100 in R&D Website www.ranbaxy.com Ranbaxy Laboratories Limited is an Indian company incorporated in 1961. It is India's largest pharmaceutical company. It exports its products to 125 countries with ground operations in 46 and manufacturing facilities in seven countries. It is ranked among the top 10 generic companies worldwide. The CEO of the company is Malvinder Mohan Singh. Ranbaxy went public in 1973.

3.7 CIPLA

CIPLA Limited
43

Type Founded 1935 Headquarters Key people Mumbai, India Y. K. Hamied (CMD), Chairman

Industry Pharmaceuticals Revenue Net income Rs. 24.8 billion (2005) Rs. 4.1 billion (2005)

Employees ??? Website www.cipla.com Cipla founded as The Chemical, Industrial & Pharmaceutical Laboratories is a major Indian pharmaceutical company, best-known for manufacturing economical anti-AIDS drugs. The company was founded in 1935 by Khwaja Abdul Hamied, and its Chairman today is Yusuf Hamied (b. 1936), the founder's eldest son. Today (2007), Cipla is the world's largest manufacturer of antiretroviral drugs to fight HIV/AIDS, as measured by units produced, distributed and sold (multinational brandname drugs are exponentially more expensive, so in money terms Cipla's medicines are probably not in top spot). Cipla ignores foreign patents on these drugs where no Indian law is broken in the process. By doing so Cipla has reduced the cost of providing antiretroviral to AIDS patients from $12,000 (and beyond) to around $300 per year. While this sum remains out of reach for many millions of people in 'Third World' countries, charitable sources often are in a position to make up the difference for destitute patients. The customary treatment of AIDS consists of a cocktail of three drugs. Cipla produces an all-in-one pill called Triomune which contains all three substances (Lamivudine, stavudine and Nevirapine), something difficult elsewhere because the three patents are

44

held by different companies. One more popular fixed dose combination is there, with the name Duovir-N. This contains Lamivudine, Zidovudine and Nevirapine.

3.8 DABUR

45

Dabur
Type Public (NSE, BSE) Founded 1884 Headquarters Ghaziabad Key people V. C. Barman Industry Health Care, Food Products Dabur Amla, Dabur Chyawanprash, Vatika, Hajmola & Real Revenue Rs 1375,03 crore Website www.dabur.com Dabur India Limited is the fourth largest FMCG Company in India with interests in Health care, Personal care and Food products. It is most famous for Dabur Chyawanprash and Hajmola. Dabur has a turnover of approximately Rs. 19 billion (approx. US$ 420 million) during the fiscal year 2005-2006, with brands like Dabur Amla, Dabur Chyawanprash, Vatika, Hajmola & Real. Their growth rate rose from 10% to 40%. In two years the growth rate expected by them to change two folds. Dabur operates in more than 5 countries and has sales worldwide. The company was founded by Dr. S.K. Burman in 1884 as a small pharmacy in Calcutta (now Kolkata), West Bengal, India, and is now led by his greatgrandson V.C. Burman. The company headquarters are in Ghaziabad, Uttar Pradesh, India, near the Indian capital of New Delhi, where it is registered. Dabur has manufacturing operations in India, Africa and the United Arab Emirates. Hospitals, schools and call centers, as well as exports to Australia, West Asia, Africa and Europe. The company, through Dabur Pharma Ltd.b does toxicology tests and markets ayurvedic medicines in a scientific manner. They have researched new medicines which will find use in O.T all over the country therein opening a new market.

46

Dabur Foods, a subsidiary of Dabur India is expecting to grow at 25%, has project sales of Rs 100 crore in next three years. Dabur foods mainly supplied beverages to institutional customers. It will therefore increase its range of products to include tomato based products.

3.9 SUNPHARMA
Sun Pharmaceutical Industries (Sun Pharma) is a major producer of specialty pharmaceuticals and active pharmaceutical ingredients. The company was set up in 1993 and now has sales worth Rs.12 billion.. In 47

1996, Sun Pharma acquired the U.S., Detroit-based Caraco Pharm Labs. The same year the company also acquired Dadha Pharma in Tamil Nadu. Business Sun Pharma brands are prescribed in chronic therapy areas like cardiology, psychiatry, neurology, gastroenterology, diabetology, and respiratory.

3.10 GLAXOSMITHKLINE GlaxoSmithKline

Type Public (LSE: GSK NYSE: GSK) Founded 2000, by merger of Glaxo Wellcome and Smith Kline Beecham Headquarters Brentford, London, United Kingdom Key people Sir Chris Gent, Chairman Jean-Pierre Garnier, Chief Executive Julian Heslop, Chief Financial Officer Industry Pharmaceutical Products www.gsk.com/products Revenue Net income 23.2 billion (2006) 7.8 billion (2006)

Employees Over 100,728 (2005) Slogan "Do more, feel better, live longer" Website www.gsk.com GlaxoSmithKline plc (LSE: GSK NYSE: GSK) is a British based pharmaceutical, biologicals, and healthcare company. GSK is a research-based company with a wide portfolio of pharmaceutical products covering anti-infectives, central nervous system (CNS), respiratory, gastro-intestinal/metabolic, oncology and vaccines products. It also

48

has a Consumer Healthcare operation comprising leading oral healthcare products, nutritional drinks and over the counter (OTC) medicines

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CHAPTER 4

DATA ANALYSIS AND INTERPRETATION

Table 4.1

ANALYSIS OF ICICI BANK

Date X Y X2 XY

50

01-03-2007 02-03-2007 05-03-2007 06-03-2007 07-03-2007 08-03-2007 09-03-2007 12-03-2007 13-03-2007 14-03-2007 15-03-2007 16-03-2007 19-03-2007 20-03-2007 21-03-2007 22-03-2007 23-03-2007 26-03-2007 28-03-2007 29-03-2007 30-03-2007

1.82 -0.835 0.737 0.343 -6.101 3.850 1.497 0.427 0.728 0.595 -1.329 -2.409 -0.658 -1.175 5.138 -7.291 2.482 -2.591 -0.952 -0.482 -0.924 x = -7.13

1.098 1.098 1.329 0.167 -2.831 4.192 -1.546 0.630 1.225 -0.152 -1.781 -1.546 1.330 -0.453 4.145 3.347 -0.791 -1.780 -1.201 -0.678 0.389 y = 1.337

3.3124 0.6972 0.5432 0.0403 37.2222 14.8225 2.2410 0.1823 0.5299 0.3540 1.7662 5.8032 0.4329 1.3806 26.3990 53.1586 6.1603 6.7312 0.9063 0.2323 0.8537 x2 = 163.7693

1.98 0.916 -0.979 0.057 17.271 16.139 -2.314 0.269 0.892 -0.090 2.366 3.724 -0.875 0.532 21.297 -24.402 -1.963 4.612 1.143 0.326 -0.359 xy = 40.56

Source: Secondary Data

= n * xy x . y n x2 (x)2
= 21*40.56 - -7.13* 1.337

21* 163.7693 (-7.13) 2 = 851.76 - -9.532

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3439.15 50.836 = 861.292 3388.314 = 0.254

Table 4.1 shows the beta value of ICICI futures and Nifty futures. Since the beta value is less than one, ICICI futures are less volatile. Therefore investment in ICICI futures is less risky.

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Table 4.2

ANALYSIS OF CORPORATION BANK

Date 01-03-2007 02-03-2007 05-03-2007 06-03-2007 07-03-2007 08-03-2007 09-03-2007 12-03-2007 13-03-2007 14-03-2007 15-03-2007 16-03-2007 19-03-2007 20-03-2007 21-03-2007 22-03-2007 23-03-2007 26-03-2007 28-03-2007 29-03-2007 30-03-2007 X -0.906 -6.50 -3.931 -3.354 -3.673 3.333 -3.369 -3.078 -0.087 -1.770 -3.905 1.901 1.614 1.538 4.505 2.388 6.181 3.515 -2.864 1.381 -0.601 x = -7.682 Y 3.588 -4.214 -0.378 -3.008 -3.923 3.896 -2.004 -1.931 0.392 0.223 -5.874 1.593 0.919 12.363 5.211 3.508 7.134 3.760 -2.048 -0.615 -0.259 y = 18.333 X2 .8208 42.25 15.452 11.249 13.490 11.108 11.350 9.474 0.007 3.132 15.249 3.613 2.604 2.365 20.295 5.702 38.204 12.355 8.202 1.907 0.361 x2 = 229.18 XY -3.250 27.391 1.485 10.088 13.232 12.985 6.751 5.943 -0.034 -0.394 22.937 3.028 1.483 19.014 23.475 8.377 44.095 13.216 5.865 -0.849 0.155 xy = 592.02

Source: Secondary Data

= n * xy x . y n x2 (x)2
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= 21*592.02 - -7.682 * 18.333

21* 229.18 (-7.682) 2 = 12432.42 - -140.834

4812.78 59.013 = 12573.254 4753.767 = 2.644

Table 4.2 shows the beta value of ICICI futures and Nifty futures. Since the beta value is more than one i.e. 2.644, Corporation Bank futures are highly volatile. There fore investment in Corporation Bank is high risky.

Table4.3

ANALYSIS OF INDIAN OVERSEAS BANK (IOB)

Date 01-03-2007 02-03-2007 05-03-2007 06-03-2007 07-03-2007 08-03-2007 09-03-2007 12-03-2007 13-03-2007 14-03-2007 15-03-2007 16-03-2007 19-03-2007 X 0.096 1.338 -5.212 -7.299 -2.361 1.808 -1.084 0.574 2.313 2.526 -1.303 1.268 -0.310 Y 2.831 -0.658 -0.076 -3.492 -4.552 2.490 -4.113 -1.170 2.836 0.952 -2.538 -0.395 -0.705 X2 .009 1.790 27.164 53.275 5.574 3.268 1.175 0.329 5.349 6.380 1.697 1.607 0.096 XY -0.271 0.880 0.396 25.488 10.747 4.501 4.458 -0.671 6.559 2.404 3.307 -0.500 0.218 54

20-03-2007 21-03-2007 22-03-2007 23-03-2007 26-03-2007 28-03-2007 29-03-2007 30-03-2007

3.326 3.000 -0.607 -1.140 -1.677 1.455 -0.959 -1.674 x = -8.79

2.902 4.463 2.204 -3.214 -4.418 -2.126 -3.315 0.077 y = -12.017

11.062 9.00 0.368 1.299 2.812 2.117 0.919 2.802 x2 = 138.083

9.652 13.389 -1.337 3.663 7.408 -3.093 3.179 -0.129 xy = 90.248

Source: Secondary Data

= n * xy x . y n x2 (x)2
= 21* 90.248 - -8.79* -12.017

21* 138.03 (--8.79) 2 = 1895.208 - -105.63

2898.63 77.26 = 1789.578 2821.37 = 0.634

Table 4.3 shows the beta value of IOB futures and Nifty futures. Since the beta value is less than one, IOB futures are less volatile. There fore investment in IOB futures is less risky.

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Table 4.4

ANALYSIS OF SYNDICATE BANK

Date 01-03-2007 02-03-2007 05-03-2007 06-03-2007 07-03-2007 08-03-2007 09-03-2007 12-03-2007 13-03-2007 14-03-2007 15-03-2007 16-03-2007 19-03-2007 20-03-2007 21-03-2007 22-03-2007 23-03-2007 26-03-2007 28-03-2007 29-03-2007 30-03-2007 X 1.091 -2.232 4.344 -2.781 -4.257 2.832 -3.485 -0.787 2.443 -0.078 -2.015 -0.791 -1.018 1.939 -0.072 1.267 -4.965 -6.500 -2.431 -1.953 0.788 x = -18.661 Y 2.831 -0.658 -0.076 -3.492 -4.552 2.490 -4.113 -1.170 2.836 0.952 -2.538 -0.395 -0.705 2.902 4.463 2.204 -3.214 -4.418 -2.126 -3.315 0.077 y = -11.414 X2 1.190 4.982 18.870 7.733 18.122 8.020 12.145 0.619 5.968 0.006 4.060 0.625 1.036 3.759 .005 1.605 24.651 42.25 5.909 3.814 0.620 x2 = 165.989 XY 3.088 1.468 -0.330 9.711 19.377 7.051 14.333 0.920 6.928 -0.074 5.114 0.312 0.717 5.626 -0.321 2.792 15.957 28.717 5.168 6.474 0.060 xy = 133.088

Source: Secondary Data

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 = n * xy x . y n x2 (x)2
= 21* 133.088 - -18.661* -11.414

21* 165.989 (-18.661) 2 = 2794.848 - -212.996

3485.769 348.23 = 2581.852 3137.539 = 0.822

Table 4.4 shows the beta value of Syndicate Bank futures and Nifty futures. Since the beta value is less than one in the month of March, the Syndicate bank futures are less volatile and the investment in syndicate bank futures is less risky.

Table 4.5

ANALYSIS OF PUNJAB NATIONAL BANK

Date 01-03-2007 02-03-2007 05-03-2007 06-03-2007 07-03-2007 X 3.563 -7.119 8.492 1.738 -1.832 Y 5.809 -3.984 0.719 1.801 -1.823 X2 12.694 50.680 72.114 3.020 3.356 XY 20.697 28.362 6.105 3.130 3.339 57

08-03-2007 09-03-2007 12-03-2007 13-03-2007 14-03-2007 15-03-2007 16-03-2007 19-03-2007 20-03-2007 21-03-2007 22-03-2007 23-03-2007 26-03-2007 28-03-2007 29-03-2007 30-03-2007

1.721 -1.453 -0.322 1.198 -1.606 -1.953 -1.391 0.580 1.857 2.859 5.447 3.534 -1.052 -2.158 4.920 -0.168 x = 16.955

1.732 -2.093 0.825 2.768 -1.394 -3.195 0.143 0.271 1.053 3.696 5.001 -1.069 -1.811 -1.435 2.863 -0.948 y = 8.929

2.961 2.111 0.103 1.435 2.579 3.814 1.934 0.336 3.448 8.173 29.669 12.489 11.067 4.656 24.206 0.028 x2 = 250.873

2.980 3.041 0.265 3.316 2.238 6.239 -.198 0.157 1.955 10.566 27.240 -3.778 1.905 3.096 14.085 0.159 xy = 134.899

Source: Secondary Data

= n * xy x . y n x2 (x)2
= 21* 134.899 16.955* 8.929

21* 250.873 (16.955) 2 = 2832.879 151.391

5268.333 287.472 = 2681.488 4980.861 = 0.538

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Table 4.5 shows the beta value of Punjab National Bank futures and Nifty futures. Since the beta value is less than one, the futures of PNB is less
Date 01-03-2007 02-03-2007 05-03-2007 06-03-2007 07-03-2007 08-03-2007 09-03-2007 12-03-2007 13-03-2007 14-03-2007 15-03-2007 16-03-2007 19-03-2007 20-03-2007 21-03-2007 22-03-2007 23-03-2007 26-03-2007 28-03-2007 29-03-2007 30-03-2007 X -0.363 0.666 -7.178 -0.830 -4.580 5.278 -2.380 -1.295 -0.942 -1.343 -1.503 0.397 -0.798 5.472 -2.485 -0.299 -1.226 -1.786 3.957 1.353 1.343 X=-8.548 Y 1.294 0.710 -5.047 -0.475 -5.381 5.096 -3.446 -0.260 -1.059 0.176 -1.673 0.655 0.031 5.063 -1.660 -0.328 -0.316 -1.189 3.858 2.329 0.696 Y=-0.926 X2 0.132 0.443 51.524 0.689 20.976 27.793 5.664 1.667 0.887 1.803 2.259 0.156 0.636 29.942 6.175 0.089 1.503 3.189 15.657 1.830 1.803 X2=174.83 XY -0.469 0.473 36.227 0.394 2.645 26.866 8.201 0.336 0.997 -0.236 2.514 0.260 -0.024 27.704 4.125 0.098 0.387 2.213 15.266 3.151 0.934 XY=132.062

volatile and investing in Punjab National Bank futures is less risky.

Table. 4.6

RANBAXY

Source: Secondary Data

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 = n * xy x . y n x2 (x)2
= 21*132.062 - -8.548 * -0.926

21* 174.83 (-8.548) 2 = 2773.302 7.915

3671.43 73.068 = 2765.387 3598.362 = 0.768

Table 4.6 shows the beta value of Ranbaxy futures. Since the beta value is less than one, it is less volatile and investing in Ranbaxy futures is less risky.

Table 4.7

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SUNPHARMA
Date 01-03-2007 02-03-2007 05-03-2007 06-03-2007 07-03-2007 08-03-2007 09-03-2007 12-03-2007 13-03-2007 14-03-2007 15-03-2007 16-03-2007 19-03-2007 20-03-2007 21-03-2007 22-03-2007 23-03-2007 26-03-2007 28-03-2007 29-03-2007 30-03-2007 X 3.831 2.005 -0.737 0.744 0.626 -0.093 0.974 2.687 3.390 -2.689 -0.697 -0.261 -0.667 -1.481 -0.152 0.155 -0.362 -1.466 -2.962 -0.088 3.981 X= 6.738 Y 1.294 0.710 -5.047 -0.475 -5.381 5.096 -3.447 -0.261 -1.071 0.176 -1.672 0.655 0.031 5.062 -1.660 -0.328 -0.316 -1.189 3.358 2.329 0.696 Y= -0.94 X2 14.676 4.020 0.543 0.553 0.392 0.008 0.948 7.219 11.492 7.230 0.486 0.068 0.445 2.193 0.023 0.024 0.131 2.149 8.773 0.007 15.848 X2= 77.228 XY 4.957 1.423 3.719 -0.353 -3.368 -4.739 -3.357 -0.701 -3.630 -0.473 1.165 -0.171 -0.020 -7.496 0.252 -0.051 0.114 1.743 -11.427 -0.204 2.770 XY= -19.847

Source: Secondary Data

= n * xy x . y n x2 (x)2
= 21*-19.847 6.738 * -0.94

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21* 77.228 (6.738) 2 = -416.787 - -6.336

1621.788 45.40 = -410.451 1576.388 = -0.26

Table 4.7 shows the beta value of Sun Pharmas futures. Since the beta value of this future is negative, this shows that when the market return of the futures is increasing its stock value is coming down.

Table 4.8

DABUR
Date 01-03-2007 02-03-2007 05-03-2007 06-03-2007 07-03-2007 08-03-2007 09-03-2007 12-03-2007 13-03-2007 14-03-2007 15-03-2007 16-03-2007 19-03-2007 20-03-2007 21-03-2007 X -3.131 2.152 -2,946 -2.256 0.870 0.382 -3.387 -3.489 0.223 -1.011 -1.573 -3.428 -0.816 -2.151 5.054 Y -0.433 -2.218 -3.446 0.404 -2.956 2.718 -4.121 -1.297 -0.453 -1.161 -0.988 -3.090 1.257 -1.703 2.500 X2 9.803 4.631 8.678 5.089 0.756 0.146 11.472 12.173 0.049 1.022 2.474 11.751 0.666 4.626 25.542 XY 1.356 -5.572 10.152 -0.911 -2.572 1.038 13.957 4.525 -0.101 1.173 1.554 10.592 -1.025 3.663 12.635 62

22-03-2007 23-03-2007 26-03-2007 28-03-2007 29-03-2007 30-03-2007

3.068 1.687 -2.467 -1.942 -4.023 4.359 X= -14.825

3.362 1.311 -1.510 -1.210 1.001 2.193 Y= -9.84

9.412 2.845 6.086 3.771 16.184 19.001 2 X = 155.907

10.314 2.212 3.725 2.349 -4.027 9.559 XY= 74.596

Source: Secondary Data

= n * xy x . y n x2 (x)2
= 21*74.596 - -14.825 * -9.84

21* 155.907 (-14.825) 2 = 1566.516 145.878

3274.047 219.780 = 1420.638 3054.267 = 0.465

Table 4.8 shows the beta value of Dabur futures and Nifty futures. Since the beta value is less than one, it is less volatile and the investment in Dabur futures is less risky.

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Table 4.9

CIPLA
Date 01-03-2007 02-03-2007 05-03-2007 06-03-2007 07-03-2007 08-03-2007 09-03-2007 12-03-2007 13-03-2007 14-03-2007 15-03-2007 16-03-2007 19-03-2007 20-03-2007 21-03-2007 22-03-2007 23-03-2007 26-03-2007 28-03-2007 29-03-2007 30-03-2007 X -2.586 -1.228 -2.557 -0.384 4.254 1.961 -3.312 0.150 2.624 0.435 -3.066 -1.349 0.334 2.901 0.649 1.422 2.970 -2.345 -5.086 -2.935 -0.692 X= -7.84 Y -2.271 -2.324 -0.322 2.430 2.259 2.653 -2.764 1.731 0.839 -1.043 -1.046 -2.046 0.401 0.818 1.907 -0.296 2.489 -1.446 -0.508 0.961 -1.108 Y= 1.314 X2 6.687 1.507 6.538 0.147 18.096 3.845 10.969 0.023 6.885 0.189 9.400 1.819 0.112 8.416 0.421 2.022 8.820 5.449 25.867 8.614 0.478 2 X = 126.084 XY 5.872 2.854 0.823 -0.933 9.609 5.202 9.154 0.259 2.201 -0.454 3.207 2.760 0.134 2.373 1.237 -0.421 7.392 3.390 2.584 -2.820 0.766 XY= 55.189

Source: Secondary Data

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 = n * xy x . y n x2 (x)2
= 21*55.189 - -7.84 * 1.314

21* 126.084 (-7.84) 2 = 1158.969 - -10.302

2647.764 61.46 = 1169.271 2586.304 = 0.452

Table 4.2 shows the beta value of CIPLA futures and Nifty futures. Since the beta value is less than one, it is less volatile and investing in CIPLA futures is less risky.

Table 4.10

GLAXO
Date 01-03-2007 02-03-2007 05-03-2007 06-03-2007 07-03-2007 X -0.013 -1.555 0.176 0.482 3.930 Y 1.814 1.088 -4.298 1.120 -2.230 X2 .0001 2.418 0.030 0.232 15.445 XY -0.015 -1.691 -0.756 0.539 -8.764 65

08-03-2007 09-03-2007 12-03-2007 13-03-2007 14-03-2007 15-03-2007 16-03-2007 19-03-2007 20-03-2007 21-03-2007 22-03-2007 23-03-2007 26-03-2007 28-03-2007 29-03-2007 30-03-2007

0.589 0.806 0.025 1.557 1.903 0.025 0.851 -1.192 1.045 -0.944 -0.807 -1.458 7.353 -2.138 -1.403 1.624 X= 10.856

2.142 -4.202 2.214 1.437 1.606 -2.507 -1.824 -4.392 -3.1392 -3.132 2.134 1.925 1.948 -2.564 4.134 -3.236 Y= -10.052

0.347 0.649 0.0006 2.424 3.621 0.0006 0.724 1.421 1.092 0.891 0.651 2.126 54.066 4.571 1.968 2.637 2 X = 95.002

1.262 -3.386 0.055 2.237 3.056 -0.062 1.552 5.235 -3.280 3.126 -1.867 -2.806 1.432 5.482 -5.800 -5.255 XY= -9.706

Source: Secondary Data

= n * xy x . y n x2 (x)2
= 21*-9.706 - 10.856 * -10.052

21* 95.002 (-10.856) 2 = 203.826 - -109.1245

1995.042 117.853 = -94.7015 1877.189

66

= -.05044

Table 4.2 shows the beta value of Glaxo futures and Nifty futures. Since the beta value is negative it shows that when market return increases, stock value is coming down.

CHAPTER 5 SUMMARY OF FINDINGS, CONCLUSIONS & RECCOMMENDATIONS

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5.1 FINDINGS:
The major findings of the study are: 1. In the month of March 2007, investing in ICICI futures, IOB, Syndicate Bank, PNB, Ranbaxy, Dabur and CIPLA futures are less risky. 2. The study shows that investing in Corporation Bank futures is high risky. 3. The futures value of Glaxo & Sun Pharma is negative. It shows that when the market value is increasing, its stock value will come down. 4. The financial future plays an important role in NSE Nifty. There is relationship with share price movements of the valued of NSE futures.

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5.2 CONCLUSION
A financial future is a futures contract on a short term interest rate. In finance, A futures contract is a standardized contract, traded on a futures exchange, to buy or sell a certain underlying instrument at a certain date in the future, at a specified price. Futures or future contract at transferable specific delivery forward contracts. They are agreements between two counter parties that fix the terms of an exchange, or that lock in the price today of an exchange, which will take place between them at some fixed future date. The study entitled THE ROLE OF FINANCIAL FUTURES WITH REFERENCE TO NSE NIFTY was done with reference to Banking and Pharmaceutical industry. From the banking industry futures of Icici bank, Corporation bank, Syndicate bank, Indian 69

Overseas Bank and Punjab National bank are taken. Ranbaxy, Glaxo, Cipla, Sun Pharma, Dabur are the companies taken from the pharmaceutical industry.

5.3 RECOMMENDATIONS
1. Since the volatility of ICICI futures IOB, Syndicate Bank, PNB, Ranbaxy, Dabur and CIPLA futures are less the investors can invest in these futures. 2. In March 2007, the investment in Corporation Bank futures is highly risky, the investors should be very cautious in investing into those futures. 3. Financial futures can be used to dwarfs the volume in traditional agricultural contracts. 4. Futures will helps to allow economic agents to fine tune the structures of their assets and liabilities to better suit their risk preferences and market expectations.

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BIBLIOGRAPHY

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Books:
Chandra Prasanna, Investment Analysis and Portfolio Management, Tata McGraw Hill Publishing company, 6th edition. Bhalla V K, Investment Management and Security analysis, Sultan Chand Publications, 10th edition.

Journals:
DALAL STREET, Investment Journal, Vol.XXII, No. 05 Feb 19- March 04, 2007. Money and Finance, Vol.III, November 9, 2007.

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Website:
www.NSE India.com www.Money control .com

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