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SUBMITTED TO PUNJAB TECHNICAL UNIVERSITY, JALANDHAR IN THE PARTIAL FULFILLMENT OF THE REQUIREMENT FOR THE DEGREE OF
SUBMITTED TO:-
STUDENT DECLARATION
I Vinay kumar hereby declare that In Final Project Report on Trends And Future Of Derivatives In India: A Detailed Study which is submitted in partial fulfillment of the requirements of degree of Masters Of Business Administration to Punjab Technical University, Jalandhar is my original work and not submitted for the award of any other degree, diploma, fellowship or other similar titles.
Vinay Kumar
ACKNOWLEDGEMENT
This formal piece of acknowledgement may be sufficient to express the feelings of gratitude people who have helped me in successfully completing my Final Project Report. I am grateful to Lect. Ruchi for giving me a chance to do my Final Project Report on Trends And Future Of Derivatives In India: A Detailed Study which required extensive study of various Brokers and Investors that are engaged in Derivatives investment. I feel,I shall always remain indebted to Mrs. Sarabjeet kau r(Head Of Department, Management) without whom it is being impossible to complete my project report.He gave his kind supervision,guidance,timely support and all other kind of help required in each and every moment of need. I am deeply indebted to my dear parents,friends whose blessings and inspirations have brought me up to this stage of my carreer. (VINAY KUMAR)
A stock exchange is a platform for the trade of already issued securities through primary market. It is the essential pillar of the private sector and corporate economy. It is the open auction market where buyers and sellers meet and involve a competitive price for the securities.
It reflects hopes aspiration and fears of people regarding the performance of the economy. It exerts a powerful and significant influence as a depressant or stimulant of business activity. So, stock exchange mobilizes savings, canalizes them as securities into those enterprises which are favored by the investors on the basis of such criteria as - Future growth prospects. - Good returns. - Appreciation of capital. The stock exchange serves the role of barometer, not only of the state of health of individual companies, but also of the nations economy as a whole (it measures of all the pull and pressure of securities in the market). The trade in market is through the authorized members who have duly registered with concerned stock exchange and SEBI.
market. This market is expected to provide liquidity in small capital companies as the other National Level markets have a higher entry norm and may not cater to this market.
membership) may be there if broker make any malpractice in dealing with investors like charging high commissions etc. Stock exchange acts as the barometer of the country as it measures all the pulls and pressures of the securities in the market. The stock exchange provides the linkage between the savings in the household sector and the investment in corporate economy.
3. Calcutta Stock Exchange 1908 4. Madhya Pradesh Stock 1930 Exchange 5. Madras Stock Exchange Ltd. 1937
6. Hyderabad Stock Exchange Ltd. 1943 7. Delhi Stock Exchange 1947 1957 1978 1982
Association Ltd. 8. Bangalore Stock Exchange 9. Cochin Stock Exchange 10.U.P. Stock Exchange Ltd.
1982
Company
ltd.
By
12.Ludhiana Stock Exchange 1983 13.Guwahati Stock Exchange 1984 14.Magadh Stock Exchange Ass. 1986 (Patna) 15.Jaipur Stock Exchange Ltd. 16.Bhubaneshwar Stock Exchange 17.SaurashtraKutch 1983 1989
guarantee Public ltd. Company Public ltd. Company Company ltd. By guarantee Public ltd. Company Company ltd. By guarantee Company guarantee N.D N.D N.D N.D N.D N.D ltd. By
Stock 1989
Exchange Ltd. 18.Vadodara Stock Exchange Ltd. 1990 19.National Stock Exchange of 1994 India Ltd. 20.Coimbatore Stock Exchange 1996
Ltd. 21.OTC Stock Exchange of India 22.Mangalore Stock Exchange Ltd. 23.Interconnected Stock Exchange (ICSE)
INTRODUCTION TO DERIVATIVES
Primary market is used for raising money and secondary market is used for trading in the securities, which have been used in primary market. But derivative market is quite different from other markets as the market is used for minimizing risk arising from underlying assets. The work "derivative" originates from mathematics. It refers to a variable, which has been derived from another variable. i.e. X = f (Y) WHERE X (dependent variable) = DERIVATIVE PRODUCT Y (independent variable) = UNDERLYING ASSET A financial derivative is a product that derives value from the market of another product. Hence derivative market has no independent existence without an underlying asset. The price of the derivative instrument is contingent on the value of underlying assets. As a tool of risk management we can define it as, "a financial contract whose value is derived from the value of an underlying asset/derivative security". All derivatives are based on some cash product. The underlying assets can be: a. b. c. d. e. Any type of agriculture product of grain (not prevailing in India) Price of precious and metals gold Foreign exchange rates Short term as well as long-term bond of securities of different type issued by govt. and companies etc. O.T.C. money instruments for example loan & deposits.
Example: Wheat farmers may wish to sell their harvest at a future date to eliminate the risk of change in price by that date. The price of these derivatives is driven from spot price of wheat. DEFINITION OF DERIVATIVE In the Indian context the Securities contracts (Regulation), Act 1956 defines "Derivative" to include: (1) A security derived from a debt instrument, Share, Loan whether secured or unsecured, Risk instrument or contract for difference or any other form of security. A contract, which derives its value from the prices of underlying securities.
(1)
HEDGER:
Hedgers face risk associated with the price of an asset.
They use futures or options markets to reduce the risk. Thus, they are operation who want to eliminate the risk composing of their portfolio.
(2)
SPECULATORS:
They wish to be on future movements in the price of
an asset. A speculator may buy securities in anticipation of rise in price. If this expectation comes true he sells the securities at a higher price and makes a profit. Usually the speculator does not take delivery of securities sold by him. He only receives and pays the difference between the purchase and sale prices.
(3)
ARBITRAGEURS:
They are in business to take advantage of discrepancy
between price in two different markets. If for example, they see the future price of an asset getting out of line with the cash price, they will take off setting positions in two markets to lock in profit.
TYPES OF DERIVATIVES
The most commonly used derivative contract is forwards, futures and options:
(1)
FORWARDS:
a forward contract is a customized contract
between two entities, where settlement takes place on a specific date in the futures at today's pre-agreed price.
(2)
FUTURES:
a future contract is an agreement between two
parties to buy or sell an asset at a certain time the future at the certain price. Futures contracts are the special types of forward contracts in the sense that are standardized exchange traded contracts.
(3)
OPTIONS:
it is of two types: call and put options. Underlying asset, at a given price on or before a given future date. PUTS give the buyer the right but not the obligation to sell a given quantity of the underlying asset at a given price on or before a given date.
(4) LEAPS:
Normally option contracts are for a period of 1 to 12 months. However, exchange may introduce option contracts with a maturity period of 2-3 years. These long-term option contracts are popularly known as Leaps or Long term Equity Anticipation Securities.
(5)
BASKETS:
Baskets options are option on portfolio of
underlying asset. Equity Index Options are most popular form of baskets.
(6) SWAPS:
these are private agreements between two parties to exchange cash flows in the future according to a prearrange formula. They can be regarded as portfolios of forward's contracts. The two commonly used swaps are:
CURRENCY SWAPS:
these entail swapping both Principal
and interest between the parties, with the cash flow in one direction being in a different currency than those in the opposite direction.
(2) ARBITRAGE:
The future price of an underlying asset is function of spot price and cost of carry adjusted for any return on investment. However, due to uncertainty about interest rates, distortions in spot prices, or uncertainty about future income stream, prices in futures market may not truly reflect the expected spot price in future. This imbalance in future and spot price gives rise to arbitrage opportunities. Transaction made to take advantage of temporary distortions in the market are known as arbitrage transactions.
(3) SPECULATION:
you may have very strong opinion about the future market price of a particular asset based on past trends, current information and future expectation. Likewise you may also have an opinion about the overall market trend. To take advantage of such opinion, individual asset or the entire market (index) could be sold or purchased. Position taken either in cash market of derivative market on the basis of personal opinion is known as speculation.
DERIVATIVE TERMINOLOGY
ASSIGNMENT:
It means allocation of an option contract, which is exercised, to a short position in the same opinion contract, at the same strike price, for fulfillment of the obligation, in accordance with the procedure specified in by the relevant authority from time to time.
BADLA:
It is an indigenous mechanism of postponing the settlement of trade. This product is peculiar to India markets. This involves Badla financiers, stock lenders and stock traders. The long buyers and short sellers may postpone settlement of their trade by making payments and giving delivery by using the services of Badla financiers and stock lenders who assume their positions for Badla charges. Counterparty risk, unpredictable charges and high risk due to inadequate margining are inherent limitations of Badla.
BASIS:
It is difference between spot price and future price of the same asset. In normal markets this basis is always negative, i.e. spot price is always less than future price. A positive basis provides for arbitrage opportunity.
BETA:
It is a measure of the sensitivity of returns on scrip to return on the market index. It shows how the price of scrip would move with every percentage point change in the market index.
CONTRACT VALUE
It is the value arrived at by multiplying the strike price of the option contract with the regular/market lot size.
EXERCISE:
It is defined as the number of future or option contracts required be buying or selling per unit of the spot underlying position to completely hedge against the market risk of the underlying.
MARGIN:
It is the money collected from parties to trade to insure against the default risk. Some amount of margins is collected upfront and some are collected shortly after the trade. Failure to pay margins may result in mandatory closure of position.
OFFSETTING CONTRACT:
new matching contract, which offsets an existing contract, is known as offsetting contract.
OPTION PREMIUM:
It is consideration paid by the option buyer to option writer. The premium has two components intrinsic value and time value. Intrinsic value is the difference between the spot price of the underlying and exercise price of the contract. Time value represents the cost of carrying the underlying for the option period, adjusted for any dividend and option premium.
RISK TRANSFER:
It refers to hedging against the price risk through futures. The holder of an asset, which he intender to sell in near future, may transfer the inherent risk by selling futures today. The counterparty assumes the risk in anticipation of making gain
THE REQUIREMENTS FOR SETTING UP FUTURE AND OPTION TRADING ARE OUTLINED BELOW:
1. Creation of an Options Clearing Corporation (OCC) as the single guarantor of every traded option. In case of default by a party to a contract, the clearing house has to bear the cost necessary to carry out the contract. 2. Creation of a strong cash market (secondary market). This is because after the exercise of an option contract, the investors move to the secondary market to book profits. 3. Creation of paper-less trading and a book-entry transfer system. 4. Careful selection of the securities may be listed on a National securities exchange, have a wider capital base, be actively traded, and so on. 5. Uniformity of rules and regulation in all the stock exchanges. 6. Standardization of the terms governing the options contracts. This would decrease the transaction costs, For a given underlying security, all contracts on the options exchange should have an expiry date, a strike price, and a contract price, only the premium should be negotiated on the floor of the exchange. 7. Large, financially sound institutions, members and a number of market makers, who can write the options contracts. Strict capital adequacy norms to be laid out and followed.
HIGH LIQUIDITY:
In the underlying securities the daily average traded
volume in Indian capital market today is around 7,500 crores. Which means on an average every month 14% of the country market capitalization gets traded, shows high liquidity.
3.
TRADER GUARANTEE:
The first "clearing corporation" (CCL) guaranteeing
trades has become fully functional from July 1996 in the form of National Securities Clearing Corporation (NSCCL) for which it does the clearing.
4.
STRONG DEPOSITORY:
A strong depository National Securities Depositories
Ltd.(NSDL), which started functioning in the year 1997, has strengthen the securities settlement in our country.
5.
Capital market.
FORWARD CONTRACT
"It is an agreement to buy/sell an asset on a certain future date at an agreed price". The two parties are: Who takes a long position agreeing to buy Who takes a short positionagreeing to sell The mutually agreed price is known as "delivery price" or "forward price". The delivery price is chosen in such a way that the value of contract for both parties is zero at the time of entering the contract, but the contract takes a positive or negative value for parties as the price of underlying asset moves. It removes the future price risk. If a speculator has information or analysis, which forecast an upturn in price, and then be can go long on the forward market instead of cash market. The speculator would go long on the forward, wait for the price to rise, and then take a reversing transaction to book profits. Speculator may well be required to deposit a margin upfront. However, this is generally a relatively small proportion of the value of assets underlying the forward contract.
&
NEGATIVE VALUE
POSITIVE VALUE
E.g.
A agrees to deliver 100 equity shares of Reliance to B on Sept. 30, 2002 at a Rate of Rs. 120 per share. Now if the price of share on that date is Rs. 140 per share, than a who has short position would stand to loss of Rs. (20*200) = 4000, long position would gain the same amount or vise versa if price quoted is less than delivery price. Profit/Loss = ST-E ST = spot price on maturity date E = delivery price
"Short position is not position of investor is of seller means contract sold is greater then contract bought". Investor may buy the assets, borrowing an amount equal to * * for "t" period at risk free rate. At the time of maturity, the assets will be delivered for price F and repayment will be equal to S0ert and there is net profit equal to F- S0ert
If F< S0ert
He will long his position in forward contract. When contract matures: the assets would be purchased for "F" Here profit is S0ert F
E.g.
Consider a forward contract were non-dividend shares available at Rs, 70 matures in 3 months, Risk free rate 8% p.a. compounded continuously. S0ert = 70 x [e] 0.25x0.08 = 70 x 0202 = Rs. 71.41 If F = 73 Then an arbitrageur will short a contract, borrow an amount of Rs. 70 & buy share at Rs, Repay the loan of Rs. 70. At maturity sell it as Rs. 73 (forward contract price) and 71.40, thus profit is (73- 71.40) 1.60 Thus he shorts his forward contract position.
F <(So-I) ert
Arbitrageur can long a forward contract, short the asset a present and invest the proceeding Profit (at maturity) (So-I) ert F
E.g.
Let us consider a 6-month forward contract on 100 shares at Rs. 38 each risk free of interest (compounding continuously) earn is 10% p.a. dividend is expected to a yield of Rs. 1.50 in 4 months.
100x1.50=Rs.1.50
= 150xe (4/12)(0.10)50
E.g.
Stock underlying an under provide a, dividend yield of 4.1% p.a., current value of index is 520 and risk free rate of interest is 10% p.a. r=0.10, y = 0.04, * * = 520 T =3/12 =0.25 F = 520xe(0.10-0.40) (0.25) = 520x01512 = Rs. 527.85
FUTURE CONTRACT
'It is an agreement between buyer and seller for the purchase and sale of a particular assets at a specific future date; specific size, date of delivery, place and alternative asset. It takes obligation on both parties to fulfill the contract.
FUTURE TERMINOLOGY
SPOT PRICE:
the price at which an asset trades in the spot market.
FUTURES PRICE:
the price at which the futures contract trades in the futures market.
CONTRACT CYCLE:
the period over which the contract trades. The index futures contracts on the NSE have one month, and three-month expiry
cycles, which expire on the last Thursday of the month. Thus a January expiration contract expires on the last Thursday of the January. On the Friday following the last Thursday, a new contract having three-month expiry is introduced of trading.
EXPIRY DATE:
it is date specified in the futures contract. This is the last day on which the contract will be traded, at the end of which it will cease to exist.
CONTRACT SIZE:
the amount of asset that has to be delivered less than one contract. For instance, the contract size on NSE's futures market is Nifties.
BASIS:
in the contract of financial futures, basis can be defined as the futures price minus the spot price. There will be a different basis for each delivery month for each contract. in a normal market, basis will be positive. This reflects that futures prices normally exceed spot prices.
COST OF CARRY:
the relation between futures price and spot price can be summarized in terms of what is known as cost of carry. This measures the storage cost plus the interest that is paid to finance the assets less the incomes earned on the asset.
INITIAL MARGIN:
the amount that must be deposited in the margin account at a time a future contract is first entered into is known as initial margin.
MARKING-TO-MARKET:
in the futures market, at the end of each trading day, the margin account is adjusted to reflect the investor's margin gain or loss depending upon the future's closing price.
MAINTENANCE MARGIN:
this is somewhat lower than initial margin. This is set to ensure that the balance in the margin account never becomes negative. If the balance amount falls below the maintenance margin, the investor receives a margin call and is expected to top up the margin account to the initial margin level before trading commences on the next day.
COMMODITY FUTURES
1. Trader in American Exchanges like CBOT, New York: Commodity Exchange, Chicago Mercantile Exchange (CME), New York Mercantile Exchange Includes: Wheat, Natural Gas, Platinum, Gold, and Cattle etc. 2. Contract Life: Mostly for 90 days or less. 3. Maturity date is mostly non-standardized. 4. Quality specified
FINANCIAL FUTURES
1. Introduced by IMM (a division of CME) It Includes: 10 or 5 year treasury notes (in 1976 by I:M:M), S & P 5000, Nikkie 225, Euro Dollars, British Pound, Canadian Dollars, Mini Value line Stock Index, Russell 2000, Russell 3000, etc. 2. Mostly Longer time e.g. US Treasury Bond Futures are of even more than 2 years 3. Maturity date is standardized. 4. There connot be any quality variations into these assets.
5. Stock Index is difficult to manipulate as compared to individual stock prices, more so in India, and the possibility of cornering is reduced. 6. Stock index, being an average is much less volatile than individual stock prices. This implies lower capital adequacy and margin requirements. 7. Index derivatives are cash settled, and hence don't suffer from settlement delays and problems related to bad delivery & forged certificates.
Here: SPOT PRICE: Current Price of One Unit of Deliverable asset in the Market.
COMMODITIES VALUATION
Assume that the spot price is Rs. 480 per gram and that it cost Rs. 3 per gram for the 6 monthly period to store gold and that the cost is incurred at the end of the period. If the risk free rate of Interest is 12% p.a. compounded continuously then R=0.12, s=480 x 100= 48000, e = 6/12 = 0.5 S=3 x 100 e-(0.12 x 0.5) = Rs. 282.53 Then F (48000 282.53)e-0.12 = Rs. 54,438.40
2)
product's futures price will not exceed the sum of spot price + Caring CostCaring Returns, in these arbitrage arguments doesn't work investor stores these on because of its consumption value only not for investment. Valuation of non-carry commodity futures requires another concept. i.e. "Convenience return" or "Convenience yield", which is the returns (in terms of money) that the investor realizes for carrying commodity over his short term needs. The financial assets have no convenience return. This is different or different investor. F= (So +s) e (r-c) t S= P.V. C=convenience cost So=Spot price
INTERPRETATION
The figure shows P/L for a long futures position. The investor bought futures when THE INDEX WAS AT 1220. If Index If Index His futures position shows profits His futures position shows losses
Loss INTERPRETATION: When Index moves When index movers. Seller start making Profits. Seller starts making Loss.
Forward
Traded between two parties Differ from traded to trade Exists such risk Low Not Efficient Currency Market At end of period
Future
Trade on Exchange Standardised contracts No such risk High Highly Efficient Future Market Daily
COBOT WHEAT FUTURES CONTRACT SPECIFICATIONS Trading Unit Deliverable Grades 5000 Bushels No. 1 Northern Spring wheat at par and No. 2 Soft. Red, No. 2 Hard Red Winter, No. 2 Dark Northern Spring and Price Quotation Tick Size Daily Price Limit Cents substitution and at different bushel established by the exchange. quarter-cents ($12.50 per contract.) One-quarter cent per bushel ($12.50 per contract) 20 cent per bushel ($1000 per contract) previous above day's or below the price settlement
(expandable to 30 cent per bushel) No limit in the spot month (limit are lifted two business day before the spot month begins.) Contract Months Contract Year Last Trading day March, May, July, September and December. Starts in July and ends in May Seventh business day preceding the last business day of the delivery month.
Last business day of the delivery month 9.30 to 1.15 p.m (Chicago time!, Monday through Friday, Only the last trading day of an expiring contract, trading that contract closes in noon.
Ticker Symbol
OPTIONS
Options are fundamentally different from forward and futures. An option gives the holder/buyers of the option the right to do something. The holder does not have committed himself to doing something. In contrast, in a forward or futures contract, the two parties have committed them self to doing something. Whereas it nothing (expect margin requirement) to enter in to a futures he purchases of an option require an up front payment.
The first trading is options began in Europe and U.S. as early as the century. It was only in early, 1900s that a group of firms set up what is known as the "put and call brokers and dealers association" with the aim of providing a mechanism for bringing buyers and sellers together. It someone wanted to buy an option, he or she would contract one of the member firms. The firm would then attempt to find a seller or writer of option either from its own client of those of other member firms. If no seller could be found, the firm would undertake to write the option itself in return of price. The two deficiencies in above markets were 1. 2. No secondary market No mechanism to guarantee the writer of option would honor it In 1973, Black, Marton, Scholes invented the Black-Scholes formula. In April 1973, CBOE was set up specially for the purpose of trading options. The market for options develop so rapidly that by early 80's number of share underlying the options contract sold each day exceed the daily volume of share traded on the NYSE. Since then, there has been no looking back.
What is option?
An options is the right, but not the obligation to buy or sell a specified amount (and quality) of a commodity, currency, index or financial instruments a to buy or sell a specified number of underlying futures contracts, at a specified price on a before a give date in the future. Thus, option like futures, also provide a mechanism by which one can acquire a certain commodity on other assets, or take position in order to make profits or cover risk for a price. In this type of contract as well, there are two parties:
(a) The buyer (or the holder, or owner of options) (b) The seller (or writer of options) While the buyer take "long position" the seller take "short position" So every option contract can either be "call option" or "put option" options are created by selling and buying and for every option that is buyer and seller.
OPTION
BUYER
SELLER
RIGHT
OBLIGATION
TO BUY (CALL)
TO SELL (PUT)
TO SELL (CALL)
TO BUY (PUT)
OPTION TERMINOLOGY
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 exercise his option on the seller/writer. 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 exercise on him. Option price: option price is the price, which the option buyer pays to the option seller. It is also referred as option premium. Expiration date: the date specified in the options contract is known as expiration date, the exercise date, the strike date or the maturity. Strike price: the price specified in the options contract is knows as strike price or the exercise price. American options: these are the options that can be exercised at any time upto the expiration date. Most exchange-traded options are Americans. European options: these are the options that can be exercised only on the expiration date itself. These are easier or analyze than American option, and properties of American options are frequently deducted from those of its European counterpart. In the money option: an in the money option is an option that would lead to a positive cash flow to the holder if it will exercise immediately. A call option in the index is set to be in-the-money when the current index stands at a level higher than the strike price (i.e. spot price>strike price). If the index is much higher than the strike price,
the call is set to deep ITM. In the case of a put, the put is ITM if the index is below the strike price. At-money option: (ATM) option is an option that would lead to zero cash flow if it were exercised immediately. An option on the index is at-the-money when the current index equals the strike price. Out-of-the money option:(OTM) option is an option that would lead to a negative cash flow it was exercised immediately. A call option on the index is OTM when the current index stands at a level, which is less than the strike price (spot price<strike price). If the index is much lower than the strike price, the call is set to be deep OTM. In the case of a put, the put is OTM if the index is above the strike price. Intrinsic value of an option: the option premium can be broken into two components-intrinsic values and time value. The intrinsic value of a call is the amount the option is ITM, if it is ITM. If the call is OTM, its intrinsic value is zero. Time value of an option: it is a difference between its premium and its intrinsic value. Both calls and puts have time value. An option that is OTM or ATM has only time value. Usually the maximum time value exists when the options is ATM. The longer the time to expiration, the greater is an option's time value, all else equal. At expiration, an option should have no time value.
TYPES OF OPTIONS
Thus the options are of two types: CALL OPTION AND PUT OPTION.
CALL OPTION:
It gives an owner the write to buy a specified quantity of the underling assets at a predetermined price i.e. the exercise price, or the specific date i.e. is the date of maturity.
EXAMPLE
Suppose it is January now and the investor buys a March option contract on Reliance Industries (RIL) Share with an exercise price/strike price Rs. 210. With this he get a right to buy share on a particular date in March, of course he is under no obligation. Obviously, if at the expiry date the price in market (spot price on expiry date) is above the exercise price he'll exercise his option and reverse is also true.
PUT OPTION:
It gives the holder the right to sell a specific quantity of underlying assets at an agreed price on date of maturity he gets the right to sell.
EXAMPLE
If an investor buys a March Put Option on RIL shares with an exercise price of Rs. 210 per share the investor get the right to sell 100 share @ 210 per share. The investor would naturally exercise his right if on maturity date price were below 210 and stand to gain and viceversa. Buying out options is buying insurance. To buy a put option on Nifty is to buy insurance: which reimburses the full extent to which-Nifty drops below the strike price of the put option. This is attractive to many people.
OPTION PREMIUM
A glance at the rights and obligation of buyer and seller reveals that option contracts are skewed. One way naturally wonder as to why the seller (writer) of an option would always be obliged to sell/buy an asset whereas the other party gets the right? The answer is that writer of an option receives, a consideration for Undertaking the obligation. This is known as the price or premium to the seller for the option. The buyer pays the premium for the option to the seller whether he exercise the option is not exercised, it becomes worthless and the premium becomes the profit of the seller. Premium/Price of an option = Intrinsic Value + Time Value Do Nothing Option to option holder matching writer. Exercise the option. Close out the position by write a, call option or it in case of
Consideration for selling the option/Option Pricing/Option Premium Assumption Not transaction cost likes brokerage or commission on buying or selling.
CALL OPTIONS Spot Nifty: 1100 Strike Price: 1150 Duration :3 months No. of option bought=200 Premium per option:10 Total premium paid=2000
Da y1
Da y 90
Spot Nifty:1200 Buyer exercise the option Profit: No. of option x price Differential-Premium paid=Rs. (200x(1200-1150)2000=Rs.8000)
Spot Nifty: 1000 Buyer foregoes the option Loss premium paid Rs. 2000
CALL OPTION WORK Spot Nifty:1200 Buyer exercise the option Profit: No. of option x price Differential-Premium paid=Rs. (200x(1200-1150)2000=Rs.8000)
Da y1
Spot Nifty: 1100 Strike Price: 1150 Duration :3 months No. of option bought=200 Premium per option:10 Total premium paid=2000
Da y 90
Spot Nifty: 1000 Buyer foregoes the option Loss premium paid Rs. 2000
PRICING OF OPTION
AT EXPIRATION
BEFORE EXPIRATION
expiration
Price of share
Value
Price of share
2. BEFORE EXPIRATION:
Before expiration, the options call and put are usually sold for at least intrinsic valued (difference of E & S1).
450
Stock Price
In figure intrinsic value is shown, by, a 45 0 line starting at E, equal to the excess of stock price over the exercise price.
At Stock price S 2, Call Option pence is out- of-the money i.e. zero intrinsic value then option price=S2B= only time value
For out-the-money/at the money Put Option i.e. S>E, E,S = 0 P=Time Value b'coz intrinsic value = 0
B Price of put option Time value
Derivatives trading commenced in India in June 2000 after SEBI granted the final approval to this effect in May 2000. SEBI permitted the derivative segments of two stock exchanges. NSE and BSE, and their clearing house/corporation to commence trading and settlement in approved derivatives contracts. To begin with, SEBI approved trading in index futures contracts based on S & P CNX Nifty and BSE-30 (Sensex) index. This was followed by approval, for trading in options based on these two indexes and options on individual securities. The trading in index options commenced in June 2001. Futures contracts on individual stocks were launched in November 2001. Trading and Settlement in derivatives contracts is done in accordance with the rules, bye-laws, and regulations of the respective exchanges and their clearing house/corporation duly approved by SEBI and notified in the official gazette. Thus, the following five types of Derivatives are now being traded in the India Stock Market. * Stock Index Futures * Stock Index Options * Futures on Individual Stocks * Options on Individual Stocks * Interest Rate Derivatives
INDEX FUTURES:
Index futures are financial contracts for which the underlying is the cash market index like the Sensex, which is the brand index of India. index futures contract is an agreement to buy or sell a specified quantity of underlying index for a future date at a price agreed
upon between the buyer and seller. The contracts have standardized specifications like market lot, expiry day, tick size and method of settlement.
INDEX OPTIONS:
Index Options are financial contracts whereby the right is given by the option seller in consideration of a premium to the option buyer to buy or sell the underlying index at a specific price (strike price) on or before a specific date (expiry date).
STOCK FUTURES:
Stock Futures are financial contracts where the underlying asset is an individual stock. Stock futures contract is an agreement to buy or sell a specified quantity of underlying equity share for a
future date at a price agreed upon between the buyer and seller. Just like Index derivatives, the specifications are pre-specified.
STOCK OPTIONS:
Stock Options are instruments whereby the right of purchase and sale is given by the option seller in consideration of a premium to the option buyer to buy or sell the underlying stock at a specific price (strike price) on or before a specific date (expiry date).
1.
2. CLIENT AGREEMENT: The investor should sign the Client Agreement with the broker before the broker can place any order on his behalf. The client agreement includes provisions specified by SEBI and the derivatives segment. 3. UNIQUE CLIENT IDENTIFICATION NUMBER: After signing the client agreement, the investor gets a unique identification number (ID). The broker would key this identification number in the system at the time of placing the order on behalf of the investor. This ID is broker specific i.e. if the investor chooses to deal with different brokers, he needs to sign the client agreement with each one of them and resultantly, he would have different Ids. 4. RISK DISCLOSURE DOCUMENT: As stipulated in the Bye-Laws provide his particulars to the investor. The particulars would include his SEBI registration number, the name of the employees who would be primarily responsible for the client's affairs, the precise nature of his liability towards
the client in respect of the business done on behalf of the investor. The broker must also apprise the investor about the risk associated with the business in derivative trading and the extent of his liability. This information forms part of the Risk Disclosure document, which the broker issues to the client. The investor should carefully read the risk disclosure document and understand the risks involved in the derivatives trading before committing any position in the market. The risk disclosure document has to be signed by the client and a copy of the same is retained by the broker for his records.
A) INITIAL MARGIN: The basic aim of initial margin is to cover the largest potential loss in one day. Both buyer and seller have to deposited before the opening of the position in the futures transaction. This margin is calculated by SPAN by considering the worst case scenario. B) MARK TO MARKET MARGIN: All daily losses must be met by depositing of further collateral-known as variation margin, which is required by the close of business, the following day. Any profits on the contract are credited to the client's variation margin account.
7. INVESTOR PROTECTION FUND: The derivatives segment has established an "Investor Protection Fund" which is independent of the cash segment to protect the interest of the investors in the derivatives market.
8. ARBITRATION: In case of any dispute between the members and the clients arising out of the trading or in relation to trading/settlement, the party thereto shall resolve such complaint, dispute by arbitrations procedure as defined in the rules and regulations and ByeLaws of the respective exchanges.
REGULATORY FRAMEWORK
The trading of derivatives is governed by the provisions contained in the SC (R) A, the SEBI Act, the rules and regulations framed there under and the rules and bye-laws of stock exchanges. Securities contracts (Regulation) Act, 1956 SC(R) A aims at preventing undesirable transactions in securities by regulating the business of dealing therein and by providing for certain other matters connected therewith. This is the principal Act, which governs the trading of securities in India. The term "securities" has been defined in the SC(R)A. As per Section 2(h), the 'Securities' include:
1. Shares, scrips, stock, bonds, debentures, stock or other marketable securities of a like nature in or of any incorporated company or other body corporate. 2. Derivative
3. Units or any other instrument issued by any collective investment scheme to the investors in such schemes. 4. Government securities. 5. Such other instruments as may be declared by the Central Government to be securities 6. Rights or interests in securities "Derivative" is defined to includes: A security derived from a debt instrument, share, loan whether secured or unsecured, risk instrument or contract for differences or any other form of security. A contract which derives its value from the prices, or index of price, of underlying securities. Section 18A provides that notwithstanding anything contained in any other law for the time being in force, contracts in derivative shall be legal and valid if such contracts are: Traded on a recognized stock exchange. Settled on the clearinghouse of the recognized stock exchange, in accordance with the rules and bye-laws of such stock exchanges.
3. The members of an existing segment of the exchange will not atomically become the members of derivative segment. The members of the derivatives segment need to fulfill the eligibility conditions as laid down by the LC Gupta committee. 4. The clearing and settlement of derivatives traders shall be through a SEBI approved clearing corporation/house. Clearing corporation/house complying with the eligibility conditions as laid down by the committee have to apply to SEBI for grant of approval. 5. Derivative brokers/dealers and clearing members are required to seek registration from SEBI. This is in addition to their registration as brokers of existing stock exchanges. The minimum networth for clearing members of the derivatives clearing corporation/house shall be Rs. 300 Lakh. The networth of the member shall be computed as follows: Capital + Fee reserves Less non-allowable assets viz. a. b. c. d. e. f. g. h. i. Fixed assets Pledged securities Member's card Non-allowable securities (unlisted securities) Bad deliveries Doubtful debts and advances Prepaid expenses Intangible assets 30% marketable securities
6. The minimum contract value shall not be less than Rs. 2 Lakh. Exchange should also submit details of the futures contract they propose to introduce. 7. The initial margin requirement, exposure limits linked to capital adequacy and margin demands related to the risk of loss on the position shall be prescribed by SEBI/Exchanges from time to time. 8. The L.C. Gupta committee report requires strict enforcement of "Know your customer" rule and requires that every client shall be registered with the derivatives broker. The members of the derivatives segment are also required to make their clients aware of the risks involved in derivatives trading by issuing to the client the Risk Disclosure Document and obtain a copy of the same duly signed by the client. 9. The trading members are required to have qualified approved user and sales person who have passed a certification programme approved by SEBI.
h) Broker members, dealers and sales persons in the derivatives market must have passed a certificate programme to be registered with SEBI. i) Co-ordination between SEBI and the RBI of financial derivatives market must have passed a certificate programme to be registered with SEBI. j) Clearing corporation to be the center piece of the derivatives market, both for implementing the margin system and providing trade guarantee. In the near term, existing clearing corporation be allowed to participate in derivatives. For the long-term, a centralized clearing corporation has been recommended. k) Minimum networth requirement of Rs. 3 crores for participants, maximum exposure limits for each broker/dealer on gross basis and capital adequacy requirements to be prescribed. l) Mark-to-market to be collected before next day's trading starts. m) As a conservative measure, margins for derivatives purposes not to take into account positions in cash and futures market and across all stock exchanges. n) Margins to be systematically collected and not left to discretion of brokers/dealers. o) Much stricter regulation for derivatives as compared to cash trading. p) Strengthen cash market with uniform settlement cycles among all SEs and regulatory oversight. Proper supervision of sales practices with registration of every client with the dealer/broker and risk disclosure as the corner-stone.
ASSUMPTIONS
-Volatility in India markets are high. -Volatility is not constant & varying. -There is no data on the volatility on Index futures. -Even at 99% "Value At Risk" model there could be possibility of default once in six months. -Not efficient organized arbitragers players. RECOMMENDATIONS - Only traders with high net worth be allowed to traded in Derivatives. - Imposition of VAR margin system. - Submission of periodic reports by CC and SE to SEBI. - Continuously refining of Margin system. - Daily changes in the Margins be calculated and imposed. - Proper liquid net worth. -Online position monitoring at customer, TM, CM and Market level.
RISK MANAGEMENT
NSCCL has developed a comprehensive risk containment mechanism for the F & O segment. The salient features of risk containment mechanism on the F & O segment are: 1. The financial soundness of the members is the key to risk management. Therefore, the requirements for membership in terms of capital adequacy (net worth, security deposits) are quite stringent. 2. NSCCL charges an upfront initial margin for all the open positions of a CM. It specifies the initial margin requirements for each futures/options contract on a daily basis. It also follows value-at-risk (VaR) based margining through SPAN. The CM in turn collects the initial margin from the TMs and their respective clients. 3. The open positions of the members are marked to market based on contract settlement price for each contract. The difference is settled in cash on a T + 1 basis. 4. NSCCL's on-line position monitoring system monitors a CM's open positions on a real-time basis. Limits are set for each CM based on his capital deposits. The on-line position monitoring system generates alerts whenever a CM reaches a position limit set up by NSCCL. NSCCL monitors the CMs for MTM value violation, while TMs are monitored for contract-wise position limit violation. 5. CMs are provided a trading terminal for the purpose of monitoring the open position of all the TMs clearing and settling through him. A CM may set exposure limits for a TM clearing and settling through him. NSCCL assists the CM to monitor the intra-day exposure limits set up by
a CM and whenever a TM exceed the limits, it stops that particular TM from further trading. 6. A member is alerted of his position to enable him to adjust his exposure or bring in additional capital. Position violations result in withdrawal of trading facility for all TMs a CM is case of a violation by the CM. 7. A separate settlement guarantee fund for this segment has been created out of the capital of members. The fund had a balance of Rs. 648 crore at the end of March 2002. The most critical component of risk containment mechanism for F & O segment is the margining system and on-line position monitoring. The actual position monitoring and margining is carried out online through Parallel Risk Management System (PRISM). PRISM uses SPAN (r) (Standard Portfolio Analysis of Risk) system for the purpose of computation of on-line margins, based on the parameters defined by SEBI.
(1) Cash
Rs.25
lakhs
in
the
form
of
cash.
(2) Rs.25 lakhs in any one form or combination of the below forms:
APPROVED SECURITIES
approved Custodians.
Any failure on the part of a CM to meet with the BMC requirements at any point of time, will be treated as a violation of the Rules, Bye-Laws and Regulations of NSCCL and would attract disciplinary action inter-alia including, withdrawal of trading facility and/ore clearing facility, closing out of outstanding positions etc.
margin/collateral deposit (additional base capital) to NSCCL and/or may wish to retain deposits and/or such amounts which are receivable from NSCCL, over and above their minimum deposit requirements, towards initial margin and/ or other obligations.
cash
component and
non-cash
component.
For Additional Base Capital, cash component means cash, bank guarantee, fixed deposit receipts, T-bills and dated government securities. Non-cash component shall mean all other forms of collateral deposits like deposit of approved demat securities. At least 50% of the Effective Deposits should be in the form of cash. Liquid Networth Liquid Networth is computed by reducing the initial margin payable at any point deposits. The Liquid Networth maintained by CMs at any point in time should not be less than Rs.50 lakhs (referred to as Minimum Liquid Net Worth). in time from the effective
MARGINS
NSCCL has developed a comprehensive risk containment mechanism for the Futures & Options segment. The most critical component of a risk
containment mechanism for NSCCL is the online position monitoring and margining system. The actual margining and position monitoring is done online, on an intra-day basis. NSCCL uses the SPAN (Standard Portfolio Analysis of Risk) system for the purpose of margining, which is a portfolio based Initial system Margin
NSCCL collects initial margin up-front for all the open positions of a CM based on the margins computed by NSCCL-SPAN .A CM is in turn required to collect the initial margin from the TMs and his respective clients. Similarly, a TM should collect upfront margins from his clients. Initial margin requirements are based on 99% value at risk over a one day time horizon. However, in the case of futures contracts (on index or individual securities), where it may not be possible to collect mark to market settlement value, before the commencement of trading on the next day, the initial margin may be computed over a two-day time horizon, applying the appropriate statistical formula. The methodology for computation of Value at Risk percentage is as per the recommendations of SEBI from time to time.
INITIAL MARGIN REQUIREMENT FOR A MEMBER: For client positions - shall be netted at the level of individual client and grossed across all clients, at the Trading/ Clearing Member level, without any setoffs between clients.
For proprietory positions - shall be netted at Trading/ Clearing Member level without any setoffs between client and proprietory positions. For the purpose of SPAN Margin, various parameters are specified from time to time. In case a trading member wishes to take additional trading positions his CM is required to provide Additional Base Capital (ABC) to NSCCL. ABC can be provided by the members in the form of Cash , Bank Guarantee , Fixed Deposit Receipts and approved securities .
Premium
Margin
In addition to Initial Margin, Premium Margin would be charged to members. The premium margin is the client wise margin amount payable for the day and will be required to be paid by the buyer till the premium settlement is complete.
Assignment
Margin
Assignment Margin is levied on a CM in addition to SPAN margin and Premium Margin. It is required to be paid on assigned positions of CMs towards Interim and Final Exercise Settlement obligations for option contracts on individual securities, till such obligations are fulfilled.
The margin is charged on the Net Exercise Settlement Value payable by a Clearing Member towards Interim and Final Exercise Settlement and is deductible from the effective deposits of the Clearing Member available towards margins. Assignment margin is released to the CMs for exercise settlement pay-in.
PAYMENT OF MARGINS
The initial margin is payable upfront by Clearing Members. Initial margins can be paid by members in the form of Cash , Bank Guarantee, Fixed Deposit Receipts and approved securities .
Non-fulfillment of either the whole or part of the margin obligations will be treated as a violation of the Rules, Bye-Laws and Regulations of NSCCL and will attract penal charges @ 0.09% per day of the amount not paid throughout the period of non-payment. In addition NSCCL may at its discretion and without any further notice to the clearing member, initiate other disciplinary action, inter-alia including, withdrawal of trading facilities and/ or clearing facility closing out of outstanding positions, imposing penalties, collecting appropriate deposits, invoking bank guarantees/ fixed deposit receipts, etc.
Position addition to initial margins requirements Exposure Limits Trading Memberwise Position Limit Client Level Position Limits
Limits
Market Wide Position Limits (for Derivative Contracts on Underlying Stocks) Collateral limit for Trading Members
VIOLATIONS
PRISM (Parallel Risk Management System) is the real-time position monitoring and risk management system for the Futures and Options market segment at NSCCL. The risk of each trading and clearing member is monitored on a real-time basis and alerts/disablement messages are generated if the member crosses the set limits. Initial Margin Violation Exposure Limit Violation
Trading Memberwise Position Limit Violation Client Level Position Limit Violation Market Wide Position Limit Violation Violation arising out of misutilisation of trading member/ constituent collaterals and/or deposits Violation of Exercised Positions Clearing members who have violated any requirement and/ or limits, may submit a written request to NSCCL to either reduce their open position or, bring in additional collateral deposits by way of cash or bank guarantee or FDR or securities. NSCCL renders a service to members, whereby the members can give standing instructions to debit their account towards additional base capital.
A penalty of Rs. 5000/- is levied for each violation and is debited to the clearing account of clearing member on the next business day. In respect of violation on more than one occasion on the same day, each instance is treated as a separate violation for the purpose of calculation of penalty. The penalty is charged to the clearing member irrespective of whether the clearing member brings in margin deposits subsequently. Clearing Members (CMs) and Trading Members (TMs) are required to collect upfront initial margins from all their Trading Members/ Constituents. CMs are required to compulsorily report, on a daily basis, details in respect of such margin amount due and collected, from the TMs/ Constituents clearing and settling through them, with respect to the
trades executed/ open positions of the TMs/ Constituents, which the CMs have paid to NSCCL, for the requirements. purpose of meeting margin
Similarly, TMs are required to report on a daily basis details in respect of such margin amount due and collected from the constituents clearing and settling through them, with respect to the trades executed/ open positions of the constituents, which the trading members have paid to the CMs, and on which the CMs have allowed initial margin limit to the TMs.
RESEARCH METHODOLOGY Research is a procedure of logical and systematic application of the fundamentals of science to the general and overall questions of a study and scientific technique by which provide precise tolls, specific procedures and technical, rather than philosophical means for getting and ordering the data prior to their logical analysis and manipulation. Different type of research designs is available depending upon the nature of research project, availability of able manpower and circumstances. The study about " Trends and future of derivatives in india " is descriptive in nature. So survey method is used for the study. Sampling Procedure The small representative selected out of large population is selected at random is called sample. Well-selected sample may reflect fairly, accurately the characteristic of population. The chief aim of sampling is to make an inference about unknown parameters from a
measurable sample statistics. The statistical hypothesis relating t population. The sample size was 60 which includes brokers,dealers and investors.
Sources of Data: The sources of data includes primary and secondary data sources. Primary Sources: Primary data is collected by structured questionnaire administered by sitting with guide and discussing problems. Secondary Sources: The secondary data is data, which is collected and compiled for the different purpose, which are used in research for this study. The secondary data include material collected from: Newspaper Magazine Internet Data collection instruments The various method of data gathering involves the use of appropriate recording forms. These are called 'tools' or 'instruments of data collection. Collection Instruments: 1. Observation 2. Interview guide 3. Interview schedule
Each tool is used for specific method of data gathering. The tool for data collection translates the research objectives in to specific term/questions to the response, which will provide research objective. The instrument data collection in our study interview schedule mainly. Every respondent was conducted personally with an interview
schedule containing questions. Interview method was used because it can be explained more easily and clearly and takes less time to answer. Methodology Assumptions: The research was based on the following assumption: 1. The methodology used for this purpose are survey and questionable method. It is assumed that this method is more suitable for collection of data. 2. It is assumed that the respondent have sufficient knowledge to ensure questionable. 3. It is assumed that the respondent have filled right and correct option according to their view.
From my sample of 60, 13 (22%) brokers and investors investing in derivatives from last 1 year and less than this. 21(35%) are investing from last 2 years ,7 (11%) are investing from last 3 years and only 6 (10%) have experience of more than 3 years of investment in derivatives.
24 15 14 7 Series1 Series2
0
H e dg in g
Reasons behind adoption of derivatives are different by brokers,investors and dealers e.g. liquidity, risk management hedging, investor
is
M a n ag e m
Li qu id ity
demand(speculation) etc. Out of 60 brokers,investors dealing in derivatives 14 (23%) adopt it due to characteristics of risk management, 15 (25%) due to hedging , 24 (40%) for investor (client's) demand (speculation) and remaining 7 (12%) due to liquidity.
Out of my sample size 60 ,27 (45%) investors and brokers have invested 2 lacs normally.9 (15%) invested between 2 lacs to 5 lacs.and 15 (25%) invested between 5 lacs to 10 lacs,and remaining have invested in other amounts. Reason behind this is that those are investing from many years are taking the risk of investing huge amount.
13 (22%) investors and brokers are investing weekly in derivatives,23 ( 38%) investing monthly,19 (32 %) investing after more than 1 month and only 5 ( 8%) investing too late after 2 months.
Out of 60 brokers and investors, 3 ( 5%) of brokers said that it doesn't increase their customer base because introducing small savings as investment, but derivatives increases customer base of 42 (70%) wich is more than half.it is basically beneficial for those who are investing from last 2 or more years. In investment sector need minimum of Rs. 2,00,000 as investment so it is basically for corporate and investment sector only not for small investors.15 ( 25%) said their customer base remain same because they have started just now for investing in derivatives.in future it will increase their customer base.
Out of 60 brokers,dealers 27 (45%) have the positive response toward the relation between derivative and cash market and remaining 5 (8%) has negative response. 28 (47%) are not able to say anything because they dont have proper knowledge about stock market.they are investing with the guidance of brokers and with the support of their close relatives those are investing for last many years.
BROKER'S PERCEPTION TOWARDS INDIAN INVESTOR i.e. is settled in Indian investor psyche?
Relation among derivative and cash market.
40 30 20 10 0 Yes No 23 Series1 37
out of total 37 (62%) of investors and dealers are saying it hasn't settled in Indian investor psyche and 23 (38%) are saying it has.
27 (45%) brokers,investors respond towards shortage of domestic technical expertise. 31(52%) feel lack of awareness in investor about derivatives and remaining 2 (3%) market failure.
RESULTS / FINDINGS
1. 2. 3. 4. 5. 6. 7. Brokers not dealing in derivatives at present are also not going to adopt it in near futures. Hedging & Risk Mgt. Is the most important feature of derivatives. It is not for small investors. It has increased brokers turnovers as well as helpful in aggregate investment. Brokers haven't adequate knowledge about options, so most by them are dealing in futures only. There is a risk factor in derivative also. Most of investors are not investing in derivatives.
8.People are not aware of derivatives, even people who have invested in it, hasnt adequate knowledge about it. These people are interested to take it in their future portfolio also. They consider it as a tool of risk management. 9.They normally invest in future contracts. 10.They are investing in future contract, because futures have up to home extent similar quality as Badla.
REASON BEHIND LESS DEVELOPMENT OF F&O SEGMENT AT L.S.E. At L.S.E. the is become possible by L.S.E.S.L, which is working as a broker at N.S.E. and the broker of L.S.E. (301 members) are working as a client of LSES Ltd. Itself (in reality). So they can't trade as a broker of their client and sub-broker concept does not exist in F&O segment. At National Level 1. Securities and contract's regulations act has recognized "index" as a security very later i.e. in Nov. 2001. It will take time to take position in derivative or capital market. 2. 3. 4. The Limited mutual faith in the parties involved. It hasn't a legalized market. Commodity F & O market has not yet been come to India. this will make easy to understand and take simple investor under investor base of derivative trading. 5. 6. 7. Market failures Scandals Inadequate infrastructures
Shortage to domestic technical expertise, in India even most of people are not aware of concept derivatives. Large lot size, so small investors are not able to come under derivative segment. There are less scripts under derivatives segment. High margin as compare to Badla. In India there can't be a long term trading in F & O, it is only for 1 to 2 or maximum for 3 months.
SUGGESTIONS
1.
LOT SIZE:
Lot size should be reduced so that the major segment of
an India society i.e. small saving class can come under F & O trading. There is strong need for revision of lot sizes as the lot sizes of some of the individual scrips that were worth of Rs. 200000 in starting, now same lot size amount to a much larger value.
2.
SUB BROKER:
Sub-broker concept should be added and the actual
SCRIPS:
More scrips of reputed companies etc. should be
TRADING PERIOD:
Trading period should be increased.
There should be proper classes on derivatives for investors, traders, brokers, students and employees of stock exchanges. Because lack of knowledge is the main reason of its less development. The first step towards it should be seminars provide to brokers & LSE employees and secondly seminar to students.
CONCLUSION
On the basis of overall study on derivatives it was found that derivative products initially emerged as hedging devices against fluctuation and commodity prices and commodity linked derivatives remained the soul form of such products. The financial derivatives came in spotlight in 1972 due to growing in stability in financial market. I was really surprised to see during my study that a layman or a simple investor does not even know how to hedge and how to reduce risk on his portfolios. All these activities are generally performed by big individual investors, institutional investors, mutual funds etc. No doubt that derivative growth towards the progress of economy is positive. But the problems confronting the derivative market segment are giving it a low customer base. The main problems that it confronts are unawareness and bit lot sizes etc. these problems could be overcome easily
by revising lot sizes and also there should be seminar and general discussions on derivatives at varied places.
BIBLIOGRAPHY
1. BOOKS AND ARTICLES NCFM on derivatives core module by NSEIL. The Indian Commodity-Derivatives Market in Operations. 2. MAGAZINES The Dalal Street LSE Bulletin 3. INTERNET SITES www.nseindia.com www.derivativeindia.com www.bseindia.com
www.sebi.gov.in
SAMPLE OF QUESTIONNAIRE
Dear Respondent, I am a student of MBA 2 nd year. I am working on the project " TRENDS AND FUTURE OF DERIVATIVES IN INDIA : A DETAILED STUDY You are requested to fill in the questionnaire to enable, to undertake the study on the said project. NAME: OCCUPATION: ADDRESS: PHONE NO.:
1) For how long you have been trading in derivatives? a) Less than 1 year c) 2 Year b) 1 Year d) 3 Year e) More than 3 years.
2) What is your purpose for trading in derivatives? a) Hedging c) Risk Management b) Speculation d) Liquidity
3) How will you describe your experience with derivative till date? a) I find these quite profitable b) I don't find derivatives can give big profits c) I feel that equities are better than derivatives d) Any other __________________________________ 4)What is amount of money you are investing in normally? a) 2,00,000 b) Rs. 2,00,000 to Rs. 5,00,000 c) Rs. 5,00,000 to Rs. 10,00,000 d) Any other amount____________ 5)How often do you trade? a) Weekly d) More than 2 month 6)What is your customer base with introduction of derivatives? a) Increase b) Decrease c) Remain same b) Monthly c) More than 1 month
7)What according to you is relationship between derivative market and cash market? a) Positive b) Negative c) Can't say
9)What shortcomings do you feel in Indian derivative market? a) Lack of awareness among the investors about derivatives. b) Shortage of domestic technical expertise. c) If any other___________________________ 10) Which of following Media would you prefer the most for investor education? a) TV b) Newspaper c) Magazines
11) What suggestions do you want to make with regard to investors education in derivatives market in India?