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“COMPARATIVE ANALYSIS OF EQUITY & DERIVATIVE
MARKET” SUBMITTED TO MAEER’s MIT SCHOOL OF BUSINESS BY LUCY CHATTERJEE Roll No. 260247
IN PARTIAL FULFILLMENT OF POST GRADUATE DIMPLOMA IN MANAGEMENT (PGDM)
MAEER’s MIT SCHOOL OF BUSINESS PUNE
CONTENTS Chapter No. Title
Declaration from student Certificate from organisation Certificate from Guide Acknowledgement List of Tables List of Graphs List of charts List if abbreviations Executive summary
Page No. III IV V VI VII VII VII IX X
1 1.1 1.2
Introduction Background of the study Company Profile Company History
1 6 11 11 13 13 13 14
Competitive advantage of Religare Need of the Study Objective of the Study Methodology of the Study Limitation of the Study Data Processing & Analysis Equity Benefits from equity Risk in equity investment How to overcome from risk
1.3 1.4 1.5 1.6 2 2.1
16 16 18 18
Process of diversification Selection of shares When to buy/sell shares Types of cash market margin
18 19 19 25 28 29 29 41 43 47
Derivatives Factors driving the growth of derivative Types of derivatives Types of trades I derivative Types of F& O margin Comparative analysis
Findings Practical situation Comparative analysis of the traded values in the F & O segment with Cash segment Conclusions Recommendations Bibliography
4 5 6
55 56 57
Name of the student: Lucy Chatterjee Date: iii .DECLARATION I. Lucy Chatterjee hereby declare that this project report is the record of authentic work carried out by me during the period from 2008 to 2010 and has not been submitted to any other University or Institute for the award of any degree / diploma etc. Ms.
Capt. This project has been made possible through the direct and indirect co-operation of so many people for whom by profound through appreciation the gratitude remains. vi . I take this opportunity to express my gratitude to Prof. for the partial fulfillment of the course. P. I would like to thanks to Mrs. P. First of all.Acknowledgement It gives me an immense pleasure to present this project report. Apte. Senior Relationship Management for her valuable suggestions and constructive criticisms that have acted as a guiding light for me. Priya Venkatraman. (Gp. Last not but the least. Krishnan who guided me to complete this project successfully on time and other faculty members of MITSOB for the knowledge. which I am imbibed throughout the two years of my PGDM course. I would like to dedicate this work to my parents without whose co-operation this task would have remained unachieved. I am also grateful to my guide Prof. I also acknowledge the help given to me by the people of the organization whose valuable inputs were the driving force behind this project. My deepest regards to my parents who have been always immense of inspiration & support to me forever.) D.
3 12 33 41 46 54 List of Graph Graph No.List of Table Table No. 1 2 3 4 5 Title Sensex performance Exchange traded derivatives ―Forward‖ Payoff from forward contract Exchange traded in derivative ―Option‖ Payoff from option Page no. 4 31 32 35 33 vii . 1 2 3 4 5 6 Title Performance of sensex from 1991 Client interface Distinction between futures and forward Distinction between future and option Comparative analysis Comparative analysis in the F & O segment with cash segment Page No.
List of Charts Chart No. 1 2 3 4 Title An overview of a REL Religare Financial service group overview REL vision and mission REL & its subsidiaries Page No. 7 8 9 10 viii .
List of Abbreviations Abbreviation BSE CDSL DP EPS EWMA FII‘s F&O IPO LN MTM NAV NSDL P/E ratio RBI SCRA SEBI SRO VaR FICCI Full Form Bombay stock Exchange Central depository services limited Depository Participant Earnings per share Exponentially weighted moving average Foreign institutional investors Futures & Options Initial Public Offering Natural log Mark to market Net asset value National securities depository limited Price per earnings ratio Reserve bank of India Securities contract regulation act Securities & Exchange board of India Self-regulatory organization Value at Risk Federation of Indian Chambers of Commerce and Industry ix .
EXECUTIVE SUMMARY The project is about the study of brand awareness of RELIGARE SECURIRTIES LIMITED among investors. The major findings of the project are to overview of the comparison of equity cash segment and equity derivative segment. by studying the performance of investing in equity & derivative for few months considering their analysis. The methodology of the project here is to analyze the investment opportunities available for those investors & study the returns & risk involved in various investment opportunities and also study of investment management & risk management. high return in equity but in a long time only. high return in the short term. because derivative contract is for short time for 1/2/3 months only. EPS and other things. So for that we have to study & analyze the performance of Equity & Derivative in the market. In this project I also included my practical situation during the project internship. use & margin involved in the derivatives market and also participants & terms use in derivative market. I selected area of COMPARITIVE ANALYSIS OF EQUITY & DERIVATIVE. which attract different kinds of investors to invest in equity derivative and to face high risk and get high returns. X . that how the market goes up and down and why it happens. margin & risk involved in equity. overview of the equity and F & O segment from May 2009 to June 2009. need. We know that there is a high risk. I studied as to how this company proves to an option for the investors. While in derivative there is a high risk. and types. It gives the knowledge of market position of the company. The methodology of the project here is to analyze the Equity & Derivative performance based on NAV. So this project included different types of returns.
The BOLT network was expanded nationwide in 1997. replaced its open outcry system of trading in 1995. Bombay Stock Exchange Limited (BSE) has had an interesting rise to prominence over the past 133 years. The index is widely reported in both domestic and international markets through prints as well as electronic media. BSE.1Background of the study: The oldest stock exchange in Asia (established in 1875) and the first in the country to be granted permanent recognition under the Securities Contract Regulation Act. In 2002. Till the decade of eighties. From September 2003. 2005. the name "The Stock Exchange. the exchange turned into a corporate entity from an Association of Persons (AoP) and renamed as Bombay Stock Exchange Limited. Since then. Bombay stock Exchange Limited (BSE) in 1986 came out with a stock Index that subsequently became the barometer of the Indian Stock Market. the stock market in the country has passed through both good and bad periods.1. there was no measure or scale that could precisely measure the various ups and downs in the Indian stock market. 1956. SENSEX is not only scientifically designed but also based on globally accepted construction and review methodology. with the totally automated trading through the BSE Online trading (BOLT) system. SENSEX first compiled in 1986 was calculated on a ―Market Capitalization Weighted‖ methodology of 30 component stocks representing a sample of large. . Subsequently on August 19. The base year of SENSEX is 1978-79. The ―free-float Market Capitalization-Weighted” methodology is a widely followed index construction methodology on which majority of global equity benchmarks are based. INTRODUCTION 1. The journey in the 20th century has not been an easy one. Mumbai" was changed to Bombay Stock Exchange. the SENSEX is calculated on a free-float market capitalization methodology. A lot has changed since 1875 when 318 persons became members of what today is called ―Bombay Stock Exchange Limited‖ paying a princely amount of Re 1. well established and financially sound companies. which had introduced securities trading in India.
Index-Futures was launched on SENSEX. Institutional investors. All BSE-Indices are reviewed periodically by the ―Index Committee‖ of the Exchange. the Price to Book Value Ratio and the Dividend Yield Percentage on day-to-day basis of all its major indices. The Committee frames the broad policy guidelines for the development and maintenance of all BSE indices. Department of BSE Indices of the exchange carries out the day to day maintenance of all indices and conducts research on development of new indices. The country's first derivative product i.The growth of equity markets in India has been phenomenal in the decade gone by Right from early nineties the stock market witnessed heightened activity in terms of various bull and bear runs. BSE website and news wire agencies. money managers and small investors all refer to the Sensex for their specific purposes The Sensex is in effect the substitute for the Indian stock markets. The Exchange also disseminates the Price-Earnings Ratio. . One can identify the booms and bust of the Indian equity market through SENSEX. The SENSEX captured all these happenings in the most judicial manner.e. The value of all BSE indices are every 15 seconds during the market hours and displayed through the BOLT system.
286.346.31 14.11 3.828.035.955.06 3.322 5.594.58 3.872.07 4.49 2.34 3.12 2.39 9.325.383.436.48 2.48 6.615.77 20.405.20 3.55 high 1.06 3.713.042.82 3.99 6.22 3.459.88 3.397.422.98 14.085.064.76 6.65 3.25 5.91 12.11 21.990.16 3.87 3.316.027.920.84* *As of 30/June/2009 .602.15 9.27 5.66 4.786.838.720.85 1.904.605.262.01 3.150.85 5.69 6.209.45 3.206.27 9.96 4.69 4.910.10 20.055.462.44 5.891.131.41 4.926.442.55 3.48 3.29 4.945.491.908.93 8.141 1.08 3.758.262.37 980.30 20.827.150.658.78 3.110.096.65 3.377.28 2.741.546.493.626.77 low close 947.658.87 3.31 3.50 6.227.617.38 1.617.65 3.41 3.069.90 2.49 13.49 9.33 2.943.54 3.005.957.33 2.95 5.33 9.498.114.12 3.647.01 13.972.PERFORMANCE OF SENSEX FROM 1991 Year 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Open 1.643.99 7.22 4.697.799.98 2.096.
GRAPH SHOWING SENSEX PERFORMANCE .
2COMPANY’S PROFILE .1.
personal finacial services Investment banking and institutuonal broking services. portfolio managemnt services. Having spread itself fairly well across the country and with the promises of not resting on its laurels. Religare retail network spreads across the length and the breadth of the country with it presence through more than 1. derivatives. . to wealth advisory. wealth mangement and the institutional specturm. Religare is promoted by the promotion of Ranbaxy Laboratories Limited.Company’s History Religare is one of the leading integrated financial services institutions od India.217 locations across more than 392 cities and towns. The company has a represenattive office in London. it has also aggresively started eyeing global geographies. The comapn offers large and diverse bouuet of services ranging from equties. insurance broking.Retail. The services are broadly clubbed across three key business verticals. commodities.
An Overview of a Religare Enterprise Limited Religare Enterprise Limited Fortis healthcare Limited Super Religare Laborataries Limited (formerly SRL Ranbaxy) Religare Wellness Limited (formerly Fortis Healthworld) Religare Technova Limited Religare Voyages Limited .
Religare Financial Services Group Overview:Religare Enterprise Limited Their Joint Ventures Life Insurance Business (Aegon as a Partner) Asset management business (Aegon as a Partner) Private Wealth Business (Macquire. Australian Financial Services Major As a partner) India‘s First SEBI approved Film Fund (Vistaar as a Partner) .
BRAND ESSENCE Religare is driven by ethical and dynamic processes for wealth creation. .‖ MISSION Providing financial care driven by the core values of diligence and transparency.REL Vision and Mission VISION To build Religare as a globally trusted brand in the financial services domain and present it as the ―Investment Gateway of India.
Religare Enterprises Limited. . all businesses are operated through various subsidiaries of the holding company.REL & its subsidiaries Structurally.
R-Ally Pro etc. Competitive advantage of Religare Lowest Brokerage Online Money Transfer. Daily Confirmation Calls. R-Ally Lite. Different Kinds of Accounts like. Anil Saxena. Religare Enterprises Lmited. . Religare Enterprises Limited.Top Management Team Mr. Religare Enterprises Limited.Group Chief Operating Officer. Mr. Shacindra Nath. Sunil Godhwani. Providing Funding Facility. R-Ally.Group Chief operating Officer. Mr. Daily Contract Notes.CEO & Managing Director.
Client Interface: Retail Spectrum Institutional Spectrum Positioning Wealth Spectrum Leverage reach and offer integrated product and service portfolio Leverage relationship with growing SME segment spread across India To be a client centric wealth management advisory firm for the high net worth individuals (HNIs) Products and Services Equity Trading Commodity Trading Online Investment portal Personal Financial Services Investment Solutions Insurance Loans Institutional Broking Investment Banking Insurance Advisory Portfolio Management Services Premier Client Group Services Arts Initiative International Advisory Fund Management Service (AFMS) Consumer Finance Insurance Solutions Life Insurance Non-Life Insurance .
2) Analyzing the performance of Equity and Derivative market with the help of NAV.4 OBJECTIVE OF THE STUDY Any investor‘s vision is a long term investment ad short term investment and gets high returns by bearing high risk. Company proves to an option for the investors. 1. P/E ratio etc.1. 5) How to achieve Capital appreciations. For that objective need to be climbed successfully an so objectives of this project are. 3) To know how derivatives can be use for hedging. 4) To know the outcome of Equity and Derivative. Studying the performance of investing equity & derivative for few months considering their analysis. 1) To find the RIGHT SCRIPT to buy and sell at the RIGHT TIME 2) To get good return. 1.5METHODOLOGY OF THE PROJECT Defining objective won‘t suffice unless and until a proper methodology is to achieve the objectives.3NEED OF THE STUDY Different kinds of investors to invest in equity & derivative and to face high risk and get high returns. 1) Analyzing and observing the investment opportunities. . EPS.
1. 2) Factors affecting the Market Price of Investment may be due to Market forces. performance of the companies is not possible. hence exhaustive data is not available upon which conclusions can be relied.6LIMITATIONS OF THE STUDY This project was restricted for two months. and so all the data is not available. 1) Investment in Securities carry risk so investment in Equity & Derivative is also carrying risk on the basis of the market. .
DATA PROCESSING & ANALYSIS .2.
2. Each such unit of Rs 10 is called a Share. would entitle you to Rs 400 as dividend. Benefits from Equity The benefits distributed by the company to its shareholders can be: 1) Monetary Benefits and 2) Non Monetary Benefits. Dividend: An equity shareholder has a right on the profits generated by the company. Capital Appreciation: A shareholder also benefits from capital appreciation. 1. B. A company can issue dividend in two forms: a) Interim Dividend and b) Final Dividend.000 units of Rs 10 each.000 equity shares of Rs 10 each. 00. companies at times declare an interim dividend during a financial year. 00. 00. just like interest in case of bonds or debentures. Dividend is an earning on the investment made in shares. Profits are distributed in part or in full in the form of dividends. each called a share. This is a return that you shall earn as a result of the investment made by you by subscribing to the shares of X Ltd. While final dividend is distributed only after closing of financial year. earns a profit of Rs 40 crore and decides to distribute Rs 2 to each shareholder. It is a stock or any other security representing an ownership interest. Thus. a holding of 200 shares of X Ltd. this means an increase in the value of the company usually reflected . Simply put. Hence if X Ltd. Monetary Benefits: A.000 is divided into 20. The holders of such shares are members of the company and have voting rights. the company then is said to have 20.1 Equity Total equity capital of a company is divided into equal units of small denominations. For example:In a company the total equity capital of Rs 2. It proves the ownership interest of stock holders in a company. 00.
Rather than paying dividends. A company wishing to increase its subscribed capital by allotment of further shares should first offer them to its existing shareholders. this results in an expanded capital base. Hence if X Ltd decides to issue bonus shares in a ration of 1:1. after which the company is able to perform better. Companies generally do not distribute all their profits as dividend. after which the value of each share is Rs 35. Hence. Bonuses and rights issues are two such noticeable benefits. As the companies grow. profits are re-invested in the business. However.in its share price. investments in shares also fetch some type of non-monetary benefits to a shareholder. it does not affect the wealth of shareholders. better future growth potential. if you purchase 200 shares of X Ltd at Rs 20 per share and hold the same for two years. Prima facie. Rights Issue: A rights issue involves selling of ordinary shares to the existing shareholders of the company. companies give additional shares in a pre-defined ratio. The benefit of a rights issue is that existing shareholders maintain control of the company. B. This gets reflected in the appreciation of share value. . Bonus: An issue of bonus shares is the distribution free of cost to the shareholders usually made when a company capitalizes on profits made over a period of time. This means an increase in net worth. Of course. taking the bonus into account. and an increase in the floating stock of the company. in practice. depending upon market expectations. A. every existing shareholder of X Ltd would receive one additional share free for each share held by him. the share price may rise or fall on the bonus announcement. This means that your capital has appreciated by Rs 3000. Non-Monetary Benefits: Apart from dividends and capital appreciation. Also. 2. the share price would also ideally fall by 50 percent post bonus. bonuses carry certain latent advantages such as tax benefits. which results in appreciation in the value of shares. However. etc.
Management Risk. . certain risks are essential to understand before venturing into the world of equity. you run the risk of a large magnitude. Market/ Economy Risk. diversifying across sectors and industries reaps the real benefits of diversification. Business Risk. The same logic can be extended to a sector or an industry.Risks In equity investment: Although an equity investment is the most rewarding in terms of returns generated. This is because a recession or a downtrend is not seen in all sectors together at the same time. The process of Diversification: When you hold shares in a single company. Sector specific risks get minimised when shares of other sectors are added to the portfolio. Inflation Risk. As your portfolio expands to include shares of more companies. How to overcome risks: Most risks associated with investments in shares can be reduced by using the tool of diversification. the company specific risk reduces. Purchasing shares of different companies and creating a diversified portfolio has proven to be one of the most reliable tools of risk reduction. The benefits of creating a well diversified portfolio can be gauged from the fact that as you add more shares to your portfolio. Hence any adverse event related to any one company would not expose you to immense risk. the weightage of each company‘s share gets reduced. In fact. Industry Risk. Financial Risk Exchange Rate Risk. Interest Rate Risk.
theoretically. it becomes equally important to consider ‗when‘ to buy or sell. the process of equity investing itself comes with certain inherent risks. These risks are called systematic risk as they arise from the system. major price fluctuations in equities are not uncommon. As these risks cannot be diversified. Any investor should be aware of the fact where all the investor is following i. the industry it operates in and the overall market scenario.e. which cannot be reduced by strategies such as diversification. research analysis published by the media and discussions with the company‘s management or the other experienced investors.. Sell High.However all risks cannot be reduced: Though it is possible to reduce risk. When to buy & sell shares: With high volatility prevailing in the market. It can be done by reading and assessing the company‘s annual reports. such as interest rate risk and inflation risk. . research reports published by equity research houses. which generate stock prices charts indicating upward. Therefore. That means we should buy stocks at a low price and sell them at a high price. Technical analysis: It involves studying the prices movement of the stock over an extended period of time in the past to judge the trend of the future price movement. It can be done by software programs. Fundamental analysis: It involves in –depth study and analysis of the prospective company whose shares we want to buy. Buy Low. 2. apart from ascertaining ‗which‘ stock to buy or sell. investors are rewarded for taking systematic risks for equity investment. Downward and sideways movements of the stock price over the stipulated time period. Selection of Shares: Proper selections of shares are of two types:1.
that's a bad sign. Companies are required to publish their quarterly results. Keep an eye out for these results. Earnings per Share (EPS): How well the company is doing EPS is the total earning or profits made by company (during a given period of time) calculated on per share basis. 2. This capital is subdivided into shares (or stocks). Capital: Rs 100 crore (Rs 1 billion). . it means the company is doing well. Capital is the amount the owner has in the business. If the EPS declines.When to buy Three ways by which we can figure that out what it is about this stock that makes it hot. and the price of the share will go up. If a company's EPS has grown over the years. it adds to its capital. It aims to give an exact evaluation of the returns that the company can deliver. EPS is the net profit divided by the total number of shares. As the business grows and makes profits. check for the trend in their EPS. 1. Net Profit in 2003-04: Rs 20 crore (Rs 200 million). The capital is divided into 100 million shares of Rs 10 each. EPS = net profit/ number of shares EPS = Rs 20 crore (Rs 200 million)/ 10 crore (100 million) shares = Rs 2 per share Lesson to be learnt 1. Example: Company XYZ Ltd. and the stock price falls.
Company XYZ Ltd Market price = Rs 100 EPS = Rs 2 PE ratio = 100/ 2 = 50 Company ABC Ltd Market price = Rs 200 EPS = Rs 2 PE ratio = 200/ 2 = 100 In the above cases. the market places a greater value on that stock. PE ratio is the market price of the stock divided by its EPS. That's because. which is why they buy the share. The company's PE reflects investors' expectations of future growth in the EPS. But they may have different market prices. It arrived at by dividing the closing price of a share on a particular day by EPS. A high PE company is one where investors have hopes that earnings will rise. . PE = market price/ EPS let‘s take an example of two companies.3. The ratio tends to be high in the case of highly rated shares. the PE ratio is different. both companies have the same EPS. But because their market price is different. Price earnings ratio (PE ratio): How other investors view this share An indicator of how highly a share is valued in the market. it is not so much a high or low EPS that matters as the growth in the EPS. for some reason. The average PE ratio for companies in an industry group is often given in investment journal. Two stocks may have the same EPS. Lesson to be learnt In the case of EPS.
95 Estimated EPS for 2004-05 = Rs 67 Estimated EPS for 2005-06 = Rs 90 these figures are according to brokers' consensus estimates. . It is forward looking. Forward PE = current market price/ estimated EPS for next financial year Forward PE for 2004-05 = 2043.82 = 35. gets a rehabilitation package from its bank and a new CEO.7 is not high. And we think it is a good time to buy the shares of the company now. let's take the example of Infosys Technologies. Because investors think the company will do better in the future because of the package and new leadership. This is known as the forward PE.15/ 67 = 30.15/ 56. Because stock prices are based on expectations of future earnings. that has made losses for several years. As a consequence. and its earnings will go up. a forward PE of 22. indicating that there is scope to be optimistic about the stock's price. Forward PE is the current market price divided by the estimated EPS.15 PE = Price/EPS = 2043.70 With an EPS growth of over 30%. Forward PE: Looking ahead The stock market is not nostalgic. Forward PE = Current market price/ estimate EPS for the next financial year. usually for the next financial year. analysts usually estimate the future earnings per share of a company.82 (EPS of the last four quarters) Closing price on January 6 = Rs 2043.49 Forward PE for 2005-06 = 2043.15/ 90 = 22. it sometimes happens that a sick company. the demand for the shares has gone up. To illustrate what we have been talking about. Trailing 12-month EPS = Rs 56. the company's stock shoots up. For instance.3. Suddenly.
. Keep tab on the business news to check out the company's prospects in the future When to sell Stock Reaches Fair Value or Target Price This is the easiest part of selling. We should sell when a stock reaches its fair value. Catastrophic events may force investors to sell an investment if his household is affected by it. is called ‗Stop Loss‘. However. Based on this future estimated price and our required return on our investment. things happen.Lesson to be learnt Sometimes. It is the main reason why we chose to buy it on the first place. Need the money The generally happens due to improper planning. The lower price i. Even the most carefully planned strategy may not work.e. because the market doesn't fancy them. expecting that its price will rise in the future. the price at which we are willing curtail our loss.. But sometimes. compute our target price. The target price can be computed by assessing the company‘s estimated financial performance over the next 3 to 5 years. computing its EPS and using an acceptable P/E ratio to compute the future market price. When the prices reaches Stop loss It is advisable to always consider the possibility of a loss before making our investment. We should decide how much loss we are willing to book in the stock. investors look out for a low PE stock. low PE stocks may remain low PE stocks for ages.
you might like the acquiring company but you still need to figure out the fair value of the common stock of the acquiring company. Sure. Recent example includes the emergence of pay-per click advertising by Google. We will sell our stock A and buy stock B. There are factors that we might not take into accounts when researching a particular company. For example.The book is unclean When management left their post abruptly or when the SEBI conduct a criminal investigation on a company. Any advertising business such as newspapers or cable network. Takeover news When one of your stock holding is getting bought by other companies. Sacrificing a 10% of return in order to earn a 50% return is a sensible way to do that. Other Investment Opportunity Let us consider we bought stock A and it has risen to 10% below its fair value. then it is best to sell. we noticed that stock B fallen to below 50% of our calculated fair value. the company that you hold might have to spend more money in order to fend off competition. If the acquiring company is overvalued. this new product by Google might hurt profit margins and eventually the fair value of the stock. satyam scandal. it may be time to sell. Our goal as an investor is to maximize our investment return. This is an easy decision. Our assumption may be inaccurate as a lot of fair value calculation is based on the company's balance sheet. Meanwhile. we sometimes made errors in our fair value calculation. Inaccurate Fair Value Calculation As investors. it may be time to sell. . cash flow or other financial statement published by management. New Competitors with Better Products When new competitors sprung up.
Value at Risk (VaR) margin : VaR Margin is at the heart of margining system for the cash market segment. . Types of Cash market margin 1. say that 1-day VaR is Rs.50 lakhs but its market value tomorrow is obviously not known. Its market value today is Rs.Not having a valid reason to Buy When we don't know why we bought a particular stock. When we have no valid reason to buy. This is the easiest way of losing money. what is the maximum value that an asset or portfolio may lose over the next day? Example:Suppose shares of a company bought by an investor. Mark to market Margin 1. An investor holding these shares may.4 lakhs at 99% confidence level.4 lakhs within next 1-day. This implies that under normal trading conditions the investor can. we should sell immediately. based on the statistical analysis of historical price trends and volatilities. with 99% confidence. Value at Risk (VaR) margin. Keep these three parts in mind as we give some examples of variations of the question that VaR answers: With 99% confidence. a confidence level and a loss amount (or loss percentage). A VaR statistic has three components: a time period. based on VaR methodology. say that the value of the shares would not go down by more than Rs. 2. Extreme loss margin 3. VaR is a technique used to estimate the probability of loss of value of an asset or group of assets (for example a share or a portfolio of a few shares). we won't know how much our potential return is or when we should sell it.
2008. . 94% weight is given to volatility on ‗T-1‘ day and 6% weight is given to ‗T‘ day returns. The VaR margin is collected on an upfront basis (at the time of trade).In the stock exchange scenario. How is VaR margin calculated? VaR is computed using exponentially weighted moving average (EWMA) methodology. 2008).0314) + 0.94*(Dec 31. 2009 volatility = Square root of [(0.7% How is the Extreme Loss Margin computed? The extreme loss margin aims at covering the losses that could occur outside the coverage of VaR margins. 2008 volatility)+ 0.06*(January 1.08701)* (0. 2009 = Rs. 2008. 2009 LN return)*(January 1. volatility for January 1.0314)*(0. first we need to compute day‘s return for Jan 1. 330 January 1. 2008 = 0. 360 Closing price on January 1. 2008 volatility)*(Dec 31. Use the following formula to calculate volatility for January 1. To compute.08701)] = 0. Take volatility computed as on December 31.06 (0. 2009 by using LN (close price on Jan 1. 2008 = Rs. 2009 LN return)] Example: Share of ABC Ltd Volatility on December 31. 2009 / close price on Dec 31. 2009: Square root of [0.0314 Closing price on December 31. Based on statistical analysis. a VaR Margin is a margin intended to cover the largest loss (in %) that may be faced by an investor for his / her shares (both purchases and sales) on a single day with a 99% confidence level.037 or 3.94*(0.
Example: In the Example given at question 10.75/-. In technical terms this loss is called as MTM loss and is payable by January 2. the VaR margin rate for shares of ABC Ltd.25.1%) will be taken as the Extreme Loss margin rate. As such. .000/- How is Mark-to-Market (MTM) margin computed? MTM is calculated at the end of the day on all open positions by comparing transaction price with the closing price of the share for the day.5 times standard deviation of daily LN returns is 3.at 11 am on January 1. This MTM loss is payable.10 lakhs would be 1. by taking the price data on a rolling basis for the past six months. 2008 to Rs. the total margin on the security would be 18% (13% VaR Margin + 5% Extreme Loss Margin). If close price of the shares on that day happens to be Rs.5 times the standard deviation of daily LN returns of the stock price in the last six months or 5% of the value of the position. Suppose the 1. Therefore. then the buyer faces a notional loss of Rs.The Extreme loss margin for any stock is higher of 1.on his buy position. 2008 (that is next day of the trade) before the trading begins. total margin payable (VaR margin + extreme loss margin) on a trade of Rs. 70/-.1%. 80. Then 5% (which is higher than 3. 000/ .5. was 13%. then buy position would show a further loss of Rs.000/-. Example: A buyer purchased 1000 shares @ Rs. This margin rate is fixed at the beginning of every month. 2008.100/. In case price of the share falls further by the end of January 2.
1956 (SCRA) defines "derivative" to include1. Some of the factors driving the growth of financial derivatives are: . forex. A large variety of derivative contracts have been launched at exchanges across the world. A contract which derives its value from the prices. The price of this derivative is driven by the spot price of wheat which is the "underlying". the derivatives market has seen a phenomenal growth. 2. The underlying asset can be equity. but there could still be a notional loss / gain (due to difference between the buy and sell values). of underlying securities. buy and sell quantity in a share are equal. index. called bases (underlying asset. or index of prices.Total Buy Value] . risk instrument or contract for differences or any other form of security. loan whether secured or unsecured. A security derived from a debt instrument. or reference rate).In case. such notional loss also is considered for calculating the MTM payable. commodity or any other asset. Factors driving the growth of derivatives Over the last three decades. wheat farmers may wish to sell their harvest at a future date to eliminate the risk of a change in prices by that date.[Total Sale Value (Total Sale Qty X Close price)] 2. In the Indian context the Securities Contracts (Regulation) Act. share. Derivatives are securities under the SC(R)A and hence the trading of derivatives is governed by the regulatory framework under the SC(R)A. MTM Profit/Loss = [(Total Buy Qty X Close price)] . on a given day.2 Derivatives Derivative is a product whose value is derived from the value of one or more basic variables. in a contractual manner. Such a transaction is an example of a derivative. For example. that is net quantity position is zero.
Increased integration of national financial markets with the international markets. • Each contract is custom designed. Development of more sophisticated risk management tools. One of the parties to the contract assumes a long position and agrees to buy the underlying asset on a certain specified future date for a certain specified price. price and quantity are negotiated bilaterally by the parties to the contract. The salient features of forward contracts are: • They are bilateral contracts and hence exposed to counter-party risk. expiration date and the asset type and quality. • The contract price is generally not available in public domain. The other party assumes a short position and agrees to sell the asset on the same date for the same price. Other contract details like delivery date. 2. 3. the contract has to be settled by delivery of the asset. and hence is unique in terms of contract size. which often results in high prices being charged. The forward contracts are normally traded outside the exchanges. it has to compulsorily go to the same counter-party. and 5. Marked improvement in communication facilities and sharp decline in their costs.1. providing economic agents a wider choice of risk management strategies. Types of derivatives: 1. Forward Contract: A forward contract is an agreement to buy or sell an asset on a specified date for a specified price. • If the party wishes to reverse the contract. reduced risk as well as transactions costs as compared to individual financial assets. . which optimally combine the risks and returns over a large number of financial assets leading to higher returns. 4. Innovations in the derivatives markets. • On the expiration date. Increased volatility in asset prices in financial markets.
the basic problem is that of too much flexibility and generality. Even when forward markets trade standardized contracts. Illiquidity. and Counterparty risk In the first two of these. the other suffers. Exchange Traded Derivative" Forward" 7000 amount in billion of $ 6000 5000 4000 3000 2000 1000 0 interest rate futures stock index futures Types currency futures . still the counterparty risk remains a very serious issue. Counterparty risk arises from the possibility of default by any one party to the transaction.Limitations of Forward Contract Forward markets world-wide are afflicted by several problems: Lack of centralization of trading. When one of the two sides to the transaction declares bankruptcy. and hence avoid the problem of illiquidity. The forward market is like a real estate market in that any two consenting adults can form contracts against each other. This often makes them design terms of the deal which are very convenient in that specific situation. but makes the contracts non-tradable.
the exchange specifies certain standard features of the contract.2. It is a standardized contract with standard underlying instrument. (or which can be used for reference purposes in settlement) and a standard timing of such settlement. More than 99% of futures transactions are offset this way. Future Contracts: Futures markets were designed to solve the problems that exist in forward markets. the futures contracts are standardized and exchange traded. a standard quantity and quality of the underlying instrument that can be delivered. But unlike forward contracts. A futures contract may be offset prior to maturity by entering into an equal and opposite transaction. A futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. To facilitate liquidity in the futures contracts. The standardized items in a futures contract are: Quantity of the underlying Quality of the underlying The date and the month of delivery The units of price quotation and minimum price change Location of settlement .
than we can buy the same stock for $81.00.00.X.00). let's say the current price of the stock is $80.00 (that means we hope that price will not fall lower than $81.00 = $2.00 .00 If at forward maturity the stock price falls to $78.00 . let's say $83. Similarly. the payoff from a short position is P = X .00.00 (as stated by forward contract) and after reselling it on the market our payoff will be P = $83.S. than our loss will be P = $81. where S is a spot price of the security at time of contract maturity.00 and we entered in forward contract to buy this stock in 3 months time for $81. X is the delivery price.00 .The payoff from a long position in a forward contract is P = S .$81. If after three months price is more than $81. For example.$78.00 = $3.
Expiry date: It is the date specified in the futures contract.month. Thus a January expiration contract expires on the last Thursday of January and a February expiration contract ceases trading on the last Thursday of February.month expiry is introduced for trading. at the end of which it will cease to exist. On the Friday following the last Thursday.The graphs above illustrate the forward contract payoff patterns for long and short positions. This is the last day on which the contract will be traded. Futures price: The price at which the futures contract trades in the futures market. . Contract cycle: The period over which a contract trades. two-month and three months expiry cycles which expire on the last Thursday of the month. a new contract having a three. Distinction between futures and forwards Futures Trade on an organized exchange Standardized contract terms hence more liquid Follows daily settlement Forwards OTC in nature Customised contract terms hence less liquid Settlement happens at end of period Future terminology Spot price: The price at which an asset trades in the spot market. The index futures contracts on the NSE have one.
Maintenance margin: This is somewhat lower than the initial margin. the investor receives a margin call and is expected to top up the margin account to the initial margin level before trading commences on the next day. Also called as lot size.Contract size: The amount of asset that has to be delivered less than one contract. Basis: In the context of financial futures. This measures the storage cost plus the interest that is paid to finance the asset less the income earned on the asset. If the balance in the margin account falls below the maintenance margin. There will be a different basis for each delivery month for each contract. This reflects that futures prices normally exceed spot prices. . basis will be positive. basis can be defined as the futures price minus the spot price. In a normal market. the margin account is adjusted to reflect the investor's gain or loss depending upon the futures closing price. This is called marking-to-market. Marking-to-market: In the futures market. at the end of each trading day. This is set to ensure that the balance in the margin account never becomes negative. Initial margin: The amount that must be deposited in the margin account at the time a futures contract is first entered into is known as initial margin. 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.
Whereas it costs nothing (except margin requirements) to enter into a futures contract. An option gives the holder of the option the right to do something. the purchase of an option requires an up-front payment. Exchange Traded Derivatives "options" 3500 3000 2500 2000 1500 1000 500 0 individal stock options stock index options currency options interset rate options types In billions of $ . In contrast. Option Contracts Options are fundamentally different from forward and futures contracts. The holder does not have to exercise this right. in a forward or futures contract.3. the two parties have committed themselves to doing something.
Most exchange-traded options are American. Option price/premium: Option price is the price which the option buyer pays to the option seller. Options currently trade on over 500 stocks in the United States. . European options are easier to analyze than American options. Stock options: Stock options are options on individual stoc ks. the strike date or the maturity. and properties of an American option are frequently deduced from those of its European counterpart. It is also referred to as the option premium. Strike price: The price specified in the options contract is known as the strike price or the exercise price.Option Terminology Index options: These options have the index as the underlying. · Buyer of an option: The buyer of an option is the one who by paying the option premium buys the right but not the obligation to exercise his option on the seller/writer. Expiration date: The date specified in the options contract is known as the expiration date. Like index futures contracts. Some options are European while others are American. American options: American options are options that can be exercised at any time upto the expiration date. index options contracts are also cash settled. the exercise date. European options: European options are options that can be exercised only on the expiration date itself. A contract gives the holder the right to buy or sell shares at the specified price. · Writer of an option: The writer of a call/put option is the one who receives the option premium and is thereby obliged to sell/buy the asset if the buyer exercises on him.
At-the-money option: An at-the-money (ATM) option is an option that would lead to zero cash flow if it were exercised immediately. If the index is much higher than the strike price. an option should have no time value. the put is OTM if the index is above the strike price.In-the-money option: An in-the-money (ITM) option is an option that would lead to a positive cash flow to the holder if it were exercised immediately. The longer the time to expiration. spot price >strike price). 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-the money when the current index stands at a level which is less than the strike price (i. the call is said to be deep ITM. Both calls and puts have time value. K — St]. . Putting it another way. An option that is OTM or ATM has only time value. A call option on the index is said to be in-the-money when the current index stands at a level higher than the strike price (i. its intrinsic value is zero. the greater of 0 or (K — St). spot price < strike price). In the case of a put. In the case of a put. the call is said to be deep OTM.e. the put is ITM if the index is below the strike price. K is the strike price and St is the spot price. Similarly.e. spot price = strike price). the greater is an option's time value.e. Intrinsic value of an option: The option premium can be broken down into two components intrinsic value and time value. If the call is OTM. The intrinsic value of a call is the amount the option is ITM. the maximum time value exists when the option is ATM. At expiration. the intrinsic value of a call is Max[0. Usually. Time value of an option: The time value of an option is the difference between its premium and its intrinsic value.e. (St — K)] which means the intrinsic value of a call is the greater of 0 or (St — K). all else equal. if it is ITM. An option on the index is at-the-money when the current index equals the strike price (i. If the index is much lower than the strike price. the intrinsic value of a put is Max[0.i.
This person is bearish on that asset. The writer feels that asset will devaluate over the time period of the contract. ii) Short a call:. . We feel the price will go down and we do not. Therefore we can sell the asset at a higher price than is the current market value.person buys the right (a contract) to buy an asset at a certain price. (Also gross payoff). i) Long a put:. (Net profit). Profit / payoff in Option The payoff to a derivative portfolio is the market value of the portfolio at expiration. This is a bullish position. i) Long a call:. Call option: A call option gives the holder the right but not the obligation to buy an asset by a certain date for a certain price.sell the right to someone else. We feel that the price in the future will exceed the strike price. Put option: A put option gives the holder the right but not the obligation to sell an asset by a certain date for a certain price. The profit on a derivative portfolio is the payoff less the cost of acquisition or assembling the portfolio.There are two basic types of options. call options and put options. ii) Short a put:. This is a bearish position.person sells the right ( a contract) to someone that allows them to buy to buy an asset at a certain price.Buy the right to sell an asset at a pre-determined price. This is a bullish position. We will be looking at a number of option strategies and combinations. We feel that the asset will devalue over the time of the contract. The (gross) payoff is the value (positive or negative) of the option or portfolio at maturity. This will allow them to sell the asset at a specific price.
cost of buying options or other securities+ premium received for selling options or other securities. Net profit= (gross) Payoff. . The payoff does not include the initial cost (or the initial cash inflow) at the time the portfolio was set up.
If S is a final price of the option underlying security, X is a strike price and OP is an option price, than the profit is Long Call: P = S - X - OP Short Call: P = X - S + OP Long Put: P = X - S - OP Short Put: P = S - X + OP For example, let's say the stock price is $50.00, we bought European call option with strike $53.00 and paid $2.00 for this option. If option price is less than $53.00, we will not exercise the option to buy the stock, because it doesn't make sense to buy security for higher price than it costs on the market. In this case we lose all initial investment equal to the option price $2.00. If stock price is more than $53.00, we will exercise the option. For example if the stock price is $56.00, after exercising the option and immediately reselling the acquired stock our profit will be: P = $56.00 - $53.00 - $2.00 = $1.00 if the stock price is $54.00, than the profit is: P = $54.00 - $53.00 - $2.00 = - $1.00 As we see in latter case we lose money. The reason is that increase of stock price just by $1.00 above the strike ($53.00) doesn't cover our initial investment of $2.00, although we still exercise the option to recover at least $1.00 of initial investment. If the stock price at exercise time is $55.00 than we exercise the option to cover our initial expenses(equal to option price): P = $55.00 - $53.00 - $2.00 = $0.00 This latter case corresponds to option graph intersection point with horizontal axis on the drawing above.
Distinction between futures and options
Futures Exchange traded, with novation Exchange defines the product Price is zero, strike price moves Price is zero Linear payoff Both long and short at risk Options Same as futures. Same as futures. Strike price is fixed, price moves. Price is always positive. Nonlinear payoff. Only short at risk.
Types of traders in derivative market
1. Hedgers:- Hedgers are those who protect themselves from the risk associated with the price of an asset by using derivatives. A person keeps a close watch upon the prices discovered in trading and when the comfortable price is reflected according to his wants, he sells futures contracts. In this way he gets an assured fixed price of his produce.
In general, hedgers use futures for protection against adverse future price movements in the underlying cash commodity. Hedgers are often businesses, or individuals, who at one point or another deal in the underlying cash commodity.
Take an example: A Hedger pay more to the farmer or dealer of a produce if its prices go up. For protection against higher prices of the produce, he hedges the risk exposure by buying enough future contracts of the produce to cover the amount of produce he expects to buy. Since cash and futures prices do tend to move in tandem, the futures position will profit if the price of the produce raise enough to offset cash loss on the produce.
Speculators are somewhat like a middle man. They are never interested in actual owing the commodity. They will just buy from one end and sell it to the other in anticipation of future price movements. They actually bet on the future movement in the price of an asset.
They are the second major group of futures players. These participants include independent floor traders and investors. They handle trades for their personal clients or brokerage firms . Buying a futures contract in anticipation of price increases is known as ‗going long‘. Selling a futures contract in anticipation of a price decrease is known as ‗going short‘. Speculative participation in futures trading has increased with the availability of alternative methods of participation.
Speculators have certain advantages over other investments they are as follows: If the trader‘s judgment is good, he can make more money in the futures market faster because prices tend, on average, to change more quickly than real estate or stock prices. Futures are highly leveraged investments. The trader puts up a small fraction of the value of the underlying contract as margin, yet he can ride on the full value of the contract as it moves up and down. The money he puts up is not a down payment on the underlying contract, but a performance bond. The actual value of the contract is only exchanged on those rare occasions when delivery takes place.
a person who has been officially chosen to make a decision between two people or groups who do not agree is known as Arbitrator. . The margin calculation is carried out using software called . In commodity market Arbitrators are the person who takes the advantage of a discrepancy between prices in two different markets.SPAN® (Standard Portfolio Analysis of Risk). It generates a range of scenarios and highest loss scenario is used to calculate the initial margin. he will take offsetting positions in both the markets to lock in a profit. SPAN® uses scenario based approach to arrive at margins. Types of Futures and Options Margins Margins on Futures and Options segment comprise of the following: 1) Initial Margin 2) Exposure margin In addition to these margins. If he finds future prices of a commodity edging out with the cash price. Arbitrators: According to dictionary definition. The margin is monitored and collected at the time of placing the buy / sell order.3. in respect of options contracts the following additional margins are collected 1) Premium Margin 2) Assignment Margin How is Initial Margin Computed? Initial margin for F&O segment is calculated on the basis of a portfolio (a collection of futures and option positions) based approach. It is a product developed by Chicago Mercantile Exchange (CME) and is extensively used by leading stock exchanges of the world. Moreover the commodity future investor is not charged interest on the difference between margin and the full contract value.
the exposure margin is higher of 5% or 1. if 1000 call options on ABC Ltd are purchased at Rs. Obviously. 4 times during market hours and finally at the end of the day. How is Premium and Assignment margins computed? In addition to Initial Margin. . exposure margin is also collected. then the premium margin is Rs. and the investor has no other positions. Exposure margins in respect of index futures and index option sell positions have been currently specified as 3% of the notional value. 20. higher the volatility.5 standard deviation of the LN returns of the security (in the underlying cash market) over the last 6 months period and is applied on the notional value of position. For example. The premium margin is paid by the buyers of the Options contracts and is equal to the value of the options premium multiplied by the quantity of Options purchased. The margin is to be paid at the time trade. Assignment Margin is collected on assignment from the sellers of the contracts.The SPAN® margins are revised 6 times in a day . 20/-.once at the beginning of the day. For futures on individual securities and sell positions in options on individual securities. higher the margins. a Premium Margin is charged to trading members trading in Option contracts.000. How is exposure margin computed? In addition to initial / SPAN® margin.
The reporting of collection of client level margins plays a crucial role not only in ensuring that members collect margin from clients but it also provides the clearing corporation with a record of the quantum of funds it has to keep in trust for the clients. Clearing members are required to report on a daily basis details in respect of such margin amounts due and collected from their Trading members/ clients clearing and settling through them. In the derivative markets all money paid by the client towards margins is kept in trust with the Clearing House/ Clearing Corporation and in the event of default of the Trading or Clearing Member the amounts paid by the client towards margins are segregated and not utilized towards the dues of the defaulting member. How Client Margins are computed? Client Members and Trading Member are required to collect initial margins from all their clients. The reporting of the collection of the margins by the clients is done electronically through the system at the end of each trading day.How Marked to Market Margins are computed? 1. Future contracts:. The profits/losses arising from the different between the trading price and the settlement price are collected/ given to all clearing members.The open positions (gross against clients and net of proprietary/ self trading) in the futures contracts for each member are marked to market to the daily settlement price at the end of each day is the weighted average price of the last half an hour of the futures contract. The Initial Margin is collected on an online real time basis based on the data feeds given to the system at discrete time intervals. The collection of margins at client level in the derivatives markets is essential as derivatives are leveraged products and non-collection of margins at the client level would provide zero cost leverage.the marked o market for option contracts is computed and collected as part of the Initial Margin in the form of Net Option Values. 2. Trading members are also required to report on a daily basis details of the amount due and collected from their clients. Therefore. Option contracts:. .
3 Comparative Analysis Basis Return Equity Capital appreciation Dividend Income Derivative Capital gain Price Fluctuation Market risk Credit risk Liquidity risk Settlement risk Initial margin Exposure margin Premium margin Short term (Max. 3 months) Speculations Arbitragers Hedgers Risk Company Specified Sector specified Global risk General Market Risk Types of margin VaR Extreme Loss Mark to market Duration Generally Long term (more than 1 yr) Participants Long term Investors Hedgers Safe Investors Expiry Date of contract No such things Last Thursday of any month Comparative analysis is easy to understand when we are analysis with the example of the real market situation. .2.
000/. because of the margin payment.000/. 000/.00/. 370/. 5. Second is by getting a dividend income from the holding shares. Example:There was an investor Mr. 2 lots (100 shares each) of Religare Enterprises at Rs. Now suppose if he invest in equity derivative market then he will able to purchase the shares worth Rs. Jaichand has to pay Rs.and 1 lot (70 shares) of ICICI bank at Rs. Returns Mr.00. 1.though he has capital of Rs.000/But he has to pay the full amount of money at T+3 basis. 20 ICICI bank shares of Rs.only. 00. 800/.000/. 15 Religare Enterprises Shares of Rs.each.and diversified risk so he buys different scrips. 1250 each and 10 BHEL shares of Rs. So he is able to purchase the 1 lot (100 shares) of RIL at Rs. Here Mr.as a margin money and he is able to purchase a shares worth Rs.each. So he purchases 10 RIL shares of Rs. 5.00.00. 1595/each. 800/-. 2350/. 1. Jaichand gets return on equity by two ways.and gets the delivery of the shares. 1. called as capital appreciation. Jaichand. So he has to pay the remaining amount on the 3rd day of the trading if he wants the delivery. 1. 370/. 2350/-. .in equity cash market he has to pay Rs.each. 10 Tata power shares of Rs.00.and he wants to invest it in share market. So for investing Rs.00. 00. I. 1. He has Rs. Now he has two options either to invest in equity cash market or equity derivative market (F&O).000/. 00. 10 L&T shares of Rs 800/. But he has to purchase the share in a lot size. 1. 1 lot (50 shares) of L&T at 2650/-.each.000/. Now suppose if he invest in equity cash market and buy shares of Rs.Now I would like to quote a real life example during my internship where I understood the actual comparison of equity and derivative market. One is when the share price of the holding shares will increases in futures.
There are four types of risk involved in equity derivative market. Consider the case of a counterparty who buys a complex option on European interest rates. loans. II.e. stocks. currencies etc. metal sector.In derivative market we have to calculate the market risk or mark to market risk involved in the stocks or securities.Mr. oil & gas sector. banking sector then prices of the shares will go down and vice versa.If global cues are positive then prices will increases but if global cues are not good than prices of shares will go down.. It is calculated on nontradable assets i. So generally it is for long term purpose. Company Specified risk:. Market risk:. Credit risk: It may possible in derivative contract that the counterparty may be fail to perform the contract or say defaulted then it is a risk for us. Global risk:.If the sector is not performing well i. 4. So Mr. Jaichand will not able to find a price( or a price within a reasonable tolerance in terms of the deviation from prevailing or expected prices) for one or more of its financial contracts in the secondary market. He is exposed to .e. 3. power sector.General market risk is also affect the equity cash market like inflation. Jaichand has to consider all these risk factors while dealing in the equity cash market. 1. Risk: There are four types of risk involved in equity cash market. Liquidity Risk:. Jaichand gets return on equity derivative when the future prices of the shares are increase in short term called as capital gain through price fluctuation or through options premium. Sector specified risks:. It is calculated on the tradable assets i.e. 3. banks interest rates etc.. General market risk:. 2. 2. that is the exposure to potential loss from fluctuations in market prices (as opposed to changes in credit status).If Mr.If company is not performing well than process of the shares will declining and vice versa. 1.
Then 5% (which is higher than 4. Its market value today is Rs.at the 99% confidence level. Var Margin: . exacerbated by mismatches in payment timings.1= 4. the VaR margin rate for shares of RIL was 13%. If close price of the shares on that happened to be Rs. . the total margin on the security would be 18% (13% VaR Margin + 5% Extreme Loss margin). 230/- 3. Therefore.woud be 4. Now Mr. Jaichand has to consider all these factors while dealing in the equity derivative market. Jaichand holding these shares may. 1. Mark to Market Margin:- Now Mr. 2350. say that the value of shares would not go down by more than Rs. 2009.000/.65. we do not know what would be the market value of these shares next day.5 x 3.65%) will be taken as the Extreme Loss margin rate. 1. 2350/-. So. 2009 (that is next day of the trade) before the trading begins.liquidity risk because of the possibility that he cannot find anyone to make him a price in the secondary market and because of the possibility that the price he obtains is very much against him and the theoretical price for the product.00. 500/. 500/. Settlement Risk:. 2. Extreme loss margin: . In technical term this loss is called as MTM loss and is payable by May 13. 1.within next 1-day. 4. Suppose that SD would be 1. 23. Margins: Now Mr. at 11 am on May 12.In the above situation. say that 1-day Var is Rs.000/. based on VaR methodology. Mr. 00. III.Now Mr. As such. jaichand bought shares of a company.on his buy position.The risk of non-payment of an obligation by a counterparty to a transaction. 00.Obviously.000/. This implies that under normal trading conditions the investors can with 99% confidence. total margin payable( VaR margin + extreme loss margin) on a trade of Rs. Jaichand has also seen the margin paid in the equity cash segment. then the buyer faces a notional loss of Rs. 1. Jaichand purchased 10 shares of RIL @ Rs.
then the premium margin Rs. While in derivative market investors are investing for less than one yea. Participants: Generally any long term investors can invest in equity or hedgers are investing in the equity. This MTM loss is payable by next day. V. who wants to reduce their risk. IV.000. As higher the volatility. 20. iii) Premium margin:.If 1000 call option on RIL are purchased at Rs. Duration: Generally equity market is a long term market and people invested in it for more than one year and then only they get good return on equity. 20/and Mr. price of the shares falls further by the end of May 13 2009 to Rs. Now we will consider the margin payable under the equity derivatives segment. ii) Exposure Margin:. 000/-. Any person who wants to be safe investors and wanted to earn a good amount of returns after a period of more than one year is also invested in equity. Here they get high returns on it because they are bringing high risk.In case. The margin is monitored and collected at the time of placing the buy/ sell order. 1. i) Initial Margin: The initial margin required to be paid by the investor would be equal to the highest loss the portfolio would suffer in any of the scenarios considered.Assignment Margin is collected on assignment from the sellers of the contract. . Jaichand has no other positions.Exposure margins in respect of index futures and index option sell position are 3% of the notional value. then buy postion would show a further loss of Rs. 2200/-. Generally any safe investors can invest in it because here risk is comparatively low then derivative market. generally for 2 months or 3 months. higher the initial margin. iv) Assignment Margin:.
VI. . Expiry date: It‘s a last Thursday of any month in case of a derivative market but no such things in case of an equity market.In derivative market mostly speculators and arbitragers are invested because they wanted quick money in short time period and hedgers are also invested in derivative market to reduce their risk.
65 8380. This was helped by better-than-expected corporate earnings. February saw a continuation of the rally in global risk assets that begain in December last year. together with continuing positive economic data from the US. 2011 6161. all sectors move up and down as the Budget announcements related to a specific sector are made. 2012 Feb 29. 2011 6561. Sector Performance since Previous Union Budget Index Name BSE FMCG Sector BSE Auto BSE Cons Durable BSE Healthcare BSE Tech BSE Bankex BSE IT Sector BSE Realty Index BSE PSU BSE Oil Date Feb 29.45 % Change 21.36 -7. The MSCI World Index ended February up 9.89 -1.90 4166.3%. 2012 Feb 29. On the Budget day. FINDINGS Start of 2012 turns out to be favorable for Indian stock markets as nifty rose 1000 points in two mnths.41 Feb 28. 2012 Feb 29.60 Feb 28. 2012 Feb 29.10 16.34 6106.13 0.85 Feb 28. 2011 9994.85 11840. the stock mkt reacted negatively with fall of around 200 points in nifty in the previous two sessions after the budget.92 5631.40 21. 2011 8711.06 Feb 28.8% .61 5717.31 -7. 2011 6336. huge overseas inflows and encouraging global cues.71 Feb 28.51 10.61 Feb 28. 2011 3622. However. While the jp morgan global bond index has risen just 0.81 1981. global large cap stocks performed broadly in line with small cap. the Msci emerging market index up 12. 2012 Feb 29. 2012 Close Price Date Close Price 3432. 2011 1955. 2011 .the bank of England(BOE) and the bank of japan(BOJ). 2011 11974. 2011 7764. Sector Performance The Union Budget sometimes come with good surprises and sometimes disappoints us with negative ones. 2012 Feb 29.42 8252. Further unconventional monetary policy from the European cental bank (ECB).3% year to date.16 Feb 28. while growth performed a little better than value. Supported global equity and high yield fixed income markets.04 Feb 28. 2012 Feb 29.38 1. 2012 Feb 29.3. The market picked momentum from mid of the month.82 1.04 Feb 28.61 9459. The 2012 budget was flat with hike of 2% in service tax and excise duty etc. Global stocks rallied over the month on encouraging economic data and earnings reports. 2012 Feb 29.96 3572.17 Feb 28. the market corrected soon after the announcement of budget due to absence of major policy announcements.
679.703.10 376.863.00 7.50 7.989.60 2.70 647. 2012 2280.20 3.49 .678.104.598.666.63 -15.90 1.095.30 5.227.29 12399.50 -542.080.825.971.621.82 444.405.60 4. their Net Investment Positions for those dates and Cummulative Investments as on that date in Million $ with a break up of Investments made in Equity and Debt instruments.40 2.53 196.599.30 9.955.92 434.500.028.30 1.91 174.00 4.30 1.37 Feb 28.80 2.91 -21.60 2.944. Date 29-Feb-12 28-Feb-12 27-Feb-12 24-Feb-12 23-Feb-12 22-Feb-12 21-Feb-12 17-Feb-12 15-Feb-12 14-Feb-12 13-Feb-12 10-Feb-12 09-Feb-12 08-Feb-12 07-Feb-12 06-Feb-12 03-Feb-12 02-Feb-12 01-Feb-12 Gross Purchase(Cr) 3.538.81 -9.55 422.00 1.40 3.90 3.90 2.405.450.40 2.05 232.60 594.85 198.50 Net Cummulative Investment(Cr) Investment($Mn) 650.60 343.60 1.40 3.70 2.48 Institutional Activities FII Investment Activity in February 2012 FII Activity is a date wise list of Gross Buy ( in Crores) and Sell ( in Crores) investments done by Foreign Institutional Investors.024.124.31 69.80 2.39 Feb 28.057.092.50 2.20 Gross Sale(Cr) 3.201.59 76.44 131. 2012 Feb 29.988.35 304.76 15348.10 2.80 5.893.60 4.323.134.80 3.30 2.20 3. 2011 10426.BSE Power BSE Cap Goods BSE Metal Feb 29.10 2.90 4.80 3. 2011 12052.15 294.40 3.218.50 120.30 1.39 Feb 28. 2011 2523.27 91.675.50 1.00 3.00 2.093.50 856.591.192.40 5.80 141.146.494.90 2.53 226.70 132.70 2.30 974.185.70 4.548.29 -110.90 966.954.077.00 2.134.099.079. 2012 Feb 29.00 2.40 450.50 692.80 3.509.
which will impact investors across the globe. Punj Lloyd Group has been awarded a contract for mechanical works for a value of $30. but it cut its full-year revenue outlook because of the debt crisis in Europe. The income from operations during the quarter went up by 28. central banks in both countries would get more room to ease rates. The company has reported consolidated net profit to Rs 74.694 crore from over Rs 2.795. the euro zone crisis is not over and will continue to impact investor sentiment negatively.093 crore in the same period a year ago. till it‘s resolved.9 crore in the October-December quarter of the last fiscal.888 amounting Rs 153 crore approximately from SK Engineering & Construction. However. Singapore. on higher sales. its secondbiggest market. In volatile times. While the US and France will see presidential elections. The company had clocked a net loss of Rs 59. Steel Authority of India has lined up capital expenditure (capex) of Rs 145 billion for next financial year 2012-13. the company is looking to add 5 million tonnes annual production capacity. 31 from Rs 17. This would also bring some semblance of stability in the financial markets.72 billion ($457 million) in the third quarter ended Dec. Infosys. China will see a one-in-10year leadership change.Major Corporate Events Infosys beat market forecasts with a 33 per cent rise in quarterly profit as a weak rupee boosted margins. said consolidated net profit rose to Rs 23. helped by an 8 per cent fall in the rupee. which is also listed in New York.71% to Rs 2.8 billion a year earlier. This would result in . representing nearly 50 per cent of world GDP. For starters. nearly a dozen countries will go into elections. Over the year. If the recession in Europe is fiercer than what most expect.6 crore for the third quarter ended December 31. it would be accompanied by an international credit crunch. Key Macro Developments There are a few key macro-economic developments and themes to watch for in 2012. as inflation comes down in economies like India and China. dragging both developed and developing economies into renewed global recession. German federal elections are due in February 2013. emerging market assets remain highly volatile. to raise the total capacity to 19 million tonnes per annum (MTPA) by the end of next fiscal.
as yields on bonds are higher compared to peers. and political gridlock. Falling property prices are starting a chain reaction that will have a negative effect on developers. a eurozone recession is certain. rising inequality. While its depth and length cannot be predicted.250 in 2015. Outlook The global economic outlook for 2012 isn't pretty Recession in Europe. due to a broader economic recovery and macrofinancial stabilisation. And turmoil in the Middle East is causing serious economic risks – both there and elsewhere – as geopolitical risk remains high and thus high oil prices will constrain global growth. and persistent downward pressure on real estate and financial wealth). There is evidence now that ―some of the troubled European sovereigns are selling gold stock piles for austerity and liquidity measures. and a sharp slowdown in China and in most emerging-market economies. . says Citi.inflows into both emerging market equities and bonds. The US – growing at a snail's pace since 2010 – faces considerable downside risks from the eurozone crisis. which emerged as the best asset class in 2011. investment. ongoing deleveraging in the household sector (amid weak job creation. is likely to lose some sheen as the world recovers from the current crisis. Meanwhile. Chinese leaders will be hard put to restart growth. At this point. most central banks were net buyers of gold. stagnant incomes. The construction boom is starting to stall. just as net exports have become a drag on growth. In 2011. It must also contend with significant fiscal drag. Having sought to cool the property market by reining in runaway prices. In Japan. and government revenue. sovereign-debt problems. and fiscal austerity imply a serious downturn. anaemic growth at best in the United States. Central and Eastern Europe are exposed to the eurozone. with net purchases adding upto 192 tonnes. Elsewhere among the major advanced economies. gold may correct to $1. Gold. flaws in China's growth model are becoming obvious. Latin America is exposed to lower commodity prices (as both China and the advanced economies slow). owing to weakening US and especially eurozone demand. lack of competitiveness.‖ Going by these trends. Asian economies are exposed to China. India stands to gain even within the region. a continued credit crunch. the United Kingdom is double dipping. the postearthquake recovery will fizzle out as weak governments fail to implement structural reforms. as front-loaded fiscal consolidation and eurozone exposure undermine growth.
To maintain growth. owing to past over-investment in real estate in many countries and China's surge in manufacturing investment in recent years. it's going to be a bumpy year‖. as inequality fuels popular protest around the world. Restoring robust growth is difficult enough without the ever-present spectre of deleveraging and a severe shortage of policy ammunition. fiscal policy is constrained by the rise of deficits and debts. have been postponing the serious economic. . with so many persistent tail risks and global uncertainties weighing on final demand. Private. the US. Europe. banks and financial institutions. and new fiscal rules in Europe. because not all countries can depreciate and improve net exports at the same time. policymakers are running out of options. with balance sheets of households. Currency devaluation is a zero-sum game. But. and Japan. At the same time. dealing with stock imbalances – the large debts of households. where the problems stem from insolvency – and thus creditworthiness – rather than liquidity. Likewise. Finally. over-spending countries need nominal and real depreciation to improve trade balances. As a result. and local and central governments still strained. and capital-income earners. To paraphrase Bette Davis in All About Eve. while surplus countries need to boost domestic demand. But that is the challenge that a fragile and unbalanced global economy faces in 2012. richer households.They are not alone. social and political instability could pose an additional risk to economic performance. Backstopping and bailing out financial institutions is politically unpopular. But monetary policy is increasingly ineffective in advanced economies. key current-account imbalances – between the US and China (and other emerging-market economies). On the policy side. and within the eurozone between the core and the periphery – remain large. while near-insolvent governments don't have the money to do so.and public-sector deleveraging in the advanced economies has barely begun. and with excess capacity remaining high. especially consumption. these companies' capital spending and hiring have remained muted. Moreover. Only the high-grade corporate sector has improved. fiscal. too. financial institutions. "Fasten your seatbelts. and labour-income earners have a higher marginal propensity to spend than corporations. and governments – by papering over solvency problems with financing and liquidity may eventually give way to painful and possibly disorderly restructurings. bond vigilantes. poorer individuals. Rising inequality – owing partly to job-slashing corporate restructuring – is reducing aggregate demand further. Orderly adjustment requires lower domestic demand in over-spending countries with large current-account deficits and lower trade surpluses in over-saving countries via nominal and real currency appreciation. Meanwhile. and financial reforms that are needed to restore sustainable and balanced growth. Monetary policy will be eased as inflation becomes a non-issue in advanced economies (and a lesser issue in emerging markets). because households. addressing weak competitiveness and currentaccount imbalances requires currency adjustments that may eventually lead some members to exit the eurozone.
000 From this table we can see that in practical life though equity cash segment is better than the derivatives because it involves lesser risk more numbers of investors are trading in derivatives (F& O) segment.Comparative analysis of the traded value in the F & O Segment with the cash segment F& O( turnover in crores) Cash Segment( turnover in crores) Jan 2009 Feb 2009 March 2009 April 2009 May 2009 June 2009 12.000 16.00. 000 4. 000 5. 000 6. 00. 00. 00. 000 1. 000 19. . 00. 000 12. It is a major finding of the projects shows that by 60% to 70% investors are bear more risk and traded in derivatives market because they want to earn more profits by trading in derivatives. 50. 000 6 00. 000 14. 50.00.000 18.00.00.000 2.00.
A number of cash equity markets. Cash equity turnover has fallen in the developed markets. Since 2000.do not have equity derivatives markets. Its main conclusions are: Derivatives market growth continues almost irrespective of equity cash market turnover growth. the 2 main US markets and the 2 cross-border European markets accounted for about 75% of the total.with a ratio significant differences between individual markets. CONCLUSIONS This project has covered several areas. This was most apparent in index derivatives. In single stock derivatives. but suspects that regularity barriers have effectively prevented the development.particularly in developing Asia. Equity market volume and derivative market notional value are strongly correlated. Comparison of their cash market volumes with those that do have derivative exchanges shows that the markets without derivatives are of similar size. but derivatives turnover continued to rise steeply and steadily. markets in several developing Asian countries.4. Using notional value as the measure. other markets have established niches and the dominance of the gig four is less evident. Equity derivatives businesses like interest derivatives are highly concentrated. People should learned first and then investor should consult their financial advisor before investing. If people have adequate knowledge then they can earn good return in stock market. I Am not convinced that market or infrastructure differences explain this. . which make 99% of the notional value of equity derivatives.
Speculation should be discouraged because it affects the market conditions badly and new investors are reducing their interest in the market. There must be more derivatives instruments aimed at individual investors. Because nowadays derivatives market are increasing rapidly and it plays a major role in the whole securities market. 5. RECOMMENDATIONS RBI should play a greater role in supporting Derivatives.Intraday trading should not be traded by normal man as they lose money due to volatility in the market. SEBI should conduct seminars regarding the use of derivatives to educate individual investors . F&O do cover risk of future so my advice is those have adequate knowledge should invest in F&O segment and others should start first with cash market with long term perspective. Derivatives market should be developed in order to keep it at par with other derivative market in the world. Nowadays more number of investors are shows their interest in derivatives market because it includes high return by bearing high risk. People should invest in stock market as a long term investor rather than short term because in short term risk is many and profit are less.
We can review the size of the contract from Rs. There is a need to have a smaller contract size in F & O Market. likewise it shows how people gamble and loose money in stock market this should be stopped and proper training programmes should be conducted by both exchanges so that investor are educated Margin limit by brokers should be reduced and more and more people fall in this trap they buy more shares and if share prices fall loose their hard money. Two lacs to On Lacs. Apart from hindi business news channel should be started in other language like gujarati. People feel that on future prices current price moves if future share price of particular company is up and then current share price should also be up. urdu etc. People have very little knowledge about option market which is less risky compare to future market and I think sebi should conduct seminars in this regard. . There are few business channels on equity market but they should also cover futures market a bit more as more interest lies on the future than the present and the past.
indiamart.world-exchange.com www.6.com www.bseindia.religaresecurities. Gupta Websites: www. Hull Financial Derivatives.org www.com www.John C.finpipe.nseindia.com www. BIBLIORAPHY Books: Securities Laws and Regulations of Financial Markets National Securities Depository Limited Fundamentals of Futures & Options Markets.com www.moneycontrol.com .S. L.
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