A Report On

Derivative Markets in India: Trading, Pricing, Risk Management, Future Outlook & Investors Perception.

By, AVINASH KUMAR SINGH (Enrolment No. : - 12BSP1658)

Unicon Securities Pvt. Ltd.

A Report on

Derivative Markets in India: Trading, Pricing, Risk Management, Future Outlook & Investors Perception.
By, AVINASH KUMAR SINGH (Enrolment No. : - 12BSP1658) Unicon Securities Pvt. Ltd. A report submitted in partial fulfilment of the requirements of PGPM Program of IBS Gurgaon

Submitted to,

Faculty Guide:Prof. Bhavna Chhabra

Company Guide:Mr. Gaurav Jain

Date Of Submission:- 09/06/2013

ICFAI BUSINESS SCHOOL, GURGAON

Authorization
This is to certify that the project entitled Derivative Markets in India: Trading, Pricing, Risk Management, Future Outlook & Investors Perception is submitted in partial fulfilment of the requirement of PGPM Program of IBS Gurgaon and is a record of the bonafide work carried out by Avinash Kumar Singh of IBS, Gurgaon at, Unicon SecuritiesPvt. Ltd., C.P., New Delhi under my supervision and has not been submitted anywhere else for any other purpose.

Prof. Bhavna Chhabra (Faculty, IBS-Gurgaon)

Mr. Gaurav Jain (V.P Unicon Securities)

Gurgaon 9th June 2013

Signature:______________ Avinash Kumar Singh (12BSP1658)

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ACKNOWLEDGEMENT
First of all I am grateful to the almighty creator by whose grace I was able to complete this Summer Internship Programme. I want to convey my deepest gratitude to Prof. Bhavna Chhabra, Faculty, IBS Gurgaon for sharing her vast experience and giving her constant guidance and support. I consider it a privilege to express my gratitude to Mr. Gaurav Jain, V.P. Unicon Securities Pvt Ltd, for his support and guidance without which this project would have lost like a needle in the pile of grains. I also feel privileged to give special thanks to all the employees of Unicon Securities Pvt Ltd, especially to Mr. Mohd. Mubarak & Mr. Mohd. Kashif for sharing their experience about derivative and stock market with me. This Summer Internship programme would have been a distant dream without the support of our faculty members and supporting staffs, I would like to give them thanks for being so kind and helpful to me. I would also like to bow my head in front of my parents for their support without which I wouldnt be here. I would also like to give my thanks to my seniors for their support help and guidance without which I wouldnt have written this project correctly and efficiently. It goes without mention the support and help that my friends provided me during the whole programme so I wish for their bright future.

Gurgaon 9th June 2013

Signature:______________ Avinash Kumar Singh 12BSP1658

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Table Of Contents
Authorization..i Acknowledgement.ii Table Of Contents ........................................................................................................................................ 1 Table Of Tables:- .......................................................................................................................................... 6 Table Of Figures:-......................................................................................................................................... 8 Table Of Equations:- ...................................................................................................................................10 Executive Summary ....................................................................................................................................11 A. INTRODUCTION:- ....................................................................................................................................12 A.1. The company:- Unicon Securities Pvt. Ltd. ...........................................................................................13 A.1.1. Introduction to the Company:- ..........................................................................................................13 A.1.2. Mission of the company: ...................................................................................................................14 A.1.3. Vision of the company: .....................................................................................................................14 A.2. Literature Review:- ..............................................................................................................................15 A.3. Research Gap:- ....................................................................................................................................16 A.4. Introduction to research:- ....................................................................................................................16 A.5. Why Derivative Market? ......................................................................................................................17 A.6. The Problem Statement:- .....................................................................................................................18 A.6.1. Defining the Problem:- ......................................................................................................................18 A.7. Scope of the Project:- ..........................................................................................................................19 A.8. Importance of Project:- ........................................................................................................................19 A.9. Objectives of Project:-..........................................................................................................................19 A.10. Research Methodology:- ....................................................................................................................20 A.10.1. Method of data collection:- .........................................................................................................20 A.10.1.1. Secondary Data:- ..................................................................................................................20 A.10.1.2. Primary Data:- ......................................................................................................................20 A.10.2. Research Design:-........................................................................................................................20 A.10.3. Sampling Methodology:- .............................................................................................................20 A.10.3.1. Sampling techniques: - .........................................................................................................20 A.10.3.2. Sampling Strategy: -..............................................................................................................20 A.10.3.3. Sample Size: - .......................................................................................................................20 A.10.3.4. Population of interest:- ........................................................................................................20 A.10.4. Preparation of the questionnaire:- ..............................................................................................21 A.10.5. Method Of data Collection:- ........................................................................................................21 1|P a ge

A.10.6. Data Analysis:- ............................................................................................................................21 B. Main Text ...............................................................................................................................................22 B.1. Introduction .........................................................................................................................................23 B.1.1 Definition of Derivatives ..............................................................................................................23 B.1.2 Origin of derivatives ....................................................................................................................23 B.1.3 Derivatives in India ......................................................................................................................24 B.2. Definitions of Basic Derivatives ............................................................................................................25 B.2.1. Forwards .......................................................................................................................................26 B.2.1.1. Settlement of forward contracts .............................................................................................26 B.2.1.2. Default risk in forward contracts.............................................................................................28 B.2.2. Futures..........................................................................................................................................28 B.2.3. Options .........................................................................................................................................29 B.2.3.1. Call option ..............................................................................................................................30 B.2.3.2. Put option ..............................................................................................................................30 B.3. Applications of Derivatives ...................................................................................................................31 B.3.1. Participants in the Derivatives Market ...........................................................................................31 B.3.1.1. Hedgers ..................................................................................................................................31 B.3.1.2. Speculators ............................................................................................................................33 B.3.1.3. Arbitrageurs ...........................................................................................................................34 B.3.2. Uses of Derivatives ........................................................................................................................35 B.3.2.1. Risk management ...................................................................................................................35 B.3.2.2. Market efficiency....................................................................................................................36 B.3.2.3. Price discovery .......................................................................................................................36 B.4. Trading Futures ................................................................................................................................36 B.4.1. Pay-off of Futures ......................................................................................................................37 B.4.2. A theoretical model for Future pricing .......................................................................................38 B.5. Trading Options ...................................................................................................................................39 B.5.1. Option Pay-out ..............................................................................................................................39 B.5.1.1. A long position in a call option ................................................................................................39 B.5.1.2. A long position in a put option ................................................................................................40 B.5.1.3. A short position in a call option ..............................................................................................40 B.5.1.4. A short position in a put option ..............................................................................................40 B.5.2. Option Strategies ..........................................................................................................................43 B.5.2.1. Long option strategy...............................................................................................................43 B.5.2.2. Short options strategy ............................................................................................................45 2|P a ge

B.5.3. Determination of option prices..................................................................................................46 B.5.4. FACTORS INFLUENCING OPTION PRICES:- ..................................................................................48 B.5.5. OPTION PREMIUM vs THEORETICAL VALUE:- .............................................................................50 B.5.6. Black-Scholes model:-................................................................................................................51 B.6. Derivatives Trading On Exchange .........................................................................................................52 B.6.1. Derivatives Trading on NSE............................................................................................................52 B.6.1.1. Contract specifications for index based futures ......................................................................52 B.6.1.2. Contract specifications for index based options ......................................................................53 B.6.1.3. Contract specifications for stock based futures .......................................................................54 B.6.1.4. Contract specifications for stock based options ......................................................................54 B.7. Working at Unicon:- .............................................................................................................................55 B.7.1. Snapshot Of Learning At Unicon:- ..................................................................................................55 B.7.1.1. Options:- ................................................................................................................................55 B.7.1.2. Equity:-...................................................................................................................................56 B.7.1.3.Futures:-..................................................................................................................................57 B.7.1.4.Short Sell:-...............................................................................................................................57 B.7.1.5. Currency:- ..............................................................................................................................58 B.7.1.6. Procedure to Open DE mat And Trading Account:- .................................................................58 B.8. Recent Trends in Share markets:- .........................................................................................................67 C. Technical Analysis ...................................................................................................................................70 C.1. Introduction:-.......................................................................................................................................71 C.2. Analysis of secondary data:- .................................................................................................................71 C.2.1. Index Future Turnover & Index Nifty:- ...........................................................................................71 C.2.1.1. Comparison between Index Future Turnover and Nifty Index:- ...............................................71 C.2.1.2. Statistical analysis of Index Future Turnover and Nifty Index:- ................................................72 C.2.2. Index Option Turnover and Index Nifty:-........................................................................................74 C.2.2.1. Comparison between Index Option Turnover and Index Nifty:- ...............................................74 C.2.2.2. Statistical analysis of Option Index Turnover and Index Nifty ..................................................75 C.2.3. Stock Future Turnover and Index Nifty:- ........................................................................................77 C.2.3.1. Comparison between Stock Future Turnover And Index Nifty:- ...............................................77 C.2.3.2. Statistical Analysis Of Stock Future Turnover And Index Nifty:- ...............................................78 C.2.4. Stock Option Turnover & Index Nifty:- ...........................................................................................79 C.2.4.1. Comparison between Stock option turnover and Index nifty:- ................................................79 C.2.4.2. Statistical analysis of stock option national turnover & Nifty Index:- .......................................80 C.2.5. Stock and Index F&O and Nifty Index:- ..........................................................................................82 3|P a ge

C.2.5.1. Comparison Between Stock and Index F&O Turnover & Nifty Index:- .....................................82 C.2.5.2. Statistical Analysis of Stock and Index F&O total turnover and Nifty Index:- ............................83 C.2.6. Statistical Analysis Of F&O Daily Turnover And Daily Index Nifty:-..................................................85 C.2.7. Statistical Analysis of VIX & Index Nifty:-........................................................................................87 C.2.8. Statistical Analysis of Repo Rate & Index Nifty:- .............................................................................89 C.3.1. Analysis of Survey Data:- ...................................................................................................................90 C.3.1.1 Occupation:- ............................................................................................................................90 C.3.1.2. Gender:- .................................................................................................................................91 C.3.1.3. Qualification:-.........................................................................................................................91 C.3.1.4. Age:-.......................................................................................................................................92 C.3.1.5. Location:- ...............................................................................................................................93 C.3.1.6. Income Range.........................................................................................................................93 C.3.1.7. Placing the savings..................................................................................................................94 C.3.1.8. Percent of Savings In Savings account and Fixed deposits .......................................................95 C.3.1.9. Awareness of the respondents:- .............................................................................................96 C.3.1.10. Perception about trading in stock market:- ...........................................................................97 C.3.1.11.Rating the Various investment options:- ................................................................................98 C.3.1.12. Since when You Are Trading?..............................................................................................107 C.3.1.13. Expectations From Depository Participant Firm:- ................................................................108 C.3.1.14. Your Depository Participant Firm:- ......................................................................................109 C.3.1.15. Quality Of Service Of Different D.P. Firms:- .........................................................................110 C.3.1.16. Brokerage rate:- .................................................................................................................111 C.3.1.17. Time Dedicated to Investor:- ..............................................................................................112 C.3.1.18. Latest And Glitch Free Technology D.P.Firm:-......................................................................113 C.3.1.19. Awareness Of The D.P. Firm:- .............................................................................................114 C.3.1.20. Advice before Investing:- ....................................................................................................116 C.3.1.21. Why Small Trader Avoid Derivative Trading:- ......................................................................117 C.3.1.22. Advantages of Investing In Derivative Market:- ...................................................................118 C.3.1.23. Dis-advantage of investment in Derivative market:-............................................................119 C.3.1.24. Traded in which Of the securities:-......................................................................................121 C.3.1.25. Do you trade creating pair of Call and Put:-.........................................................................122 C.3.1.26. Participate in Derivative Market As:-...................................................................................123 C.3.1.27. Level of Satisfaction:-..........................................................................................................124 C.3.1.28. Overall Return on Investment:-...........................................................................................125 D. Conclusion & Recommendations ..........................................................................................................126 4|P a ge

D.1. Conclusion:- ...................................................................................................................................127 D.2. Recommendations:-.......................................................................................................................128 Attachments:- ...........................................................................................................................................129 Survey Questions:- ................................................................................................................................129 Bibliography .............................................................................................................................................135 Glossary:-..................................................................................................................................................136

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Table Of Tables:Table 1 - Milestones in the development of Indian derivative market ........................................... 25 Table 2 Difference between Forward & Future Contracts.............................................................. 29 Table 3 - Differences between futures and options ....................................................................... 31 Table 4 - Explanation of Payoffs for long Options .......................................................................... 40 Table 5 - Contract Specification for S&P Nifty Index Futures.......................................................... 53 Table 6 - Contract Specification for S&P CNX Nifty Options ........................................................... 53 Table 7- Contract Specification for Stock Options .......................................................................... 54 Table 8 Equity ............................................................................................................................... 56 Table 9 Currency ........................................................................................................................... 58 Table 10 - Index future Turnover and Index Nifty .......................................................................... 71 Table 11 - Correlations between index Future turnover and nifty index ....................................... 72 Table 12 Model Summary Index Future Turnover and nifty index ................................................. 73 Table 13 Anova Index Future Turnover & Nifty Index .................................................................... 73 Table 14 Coefficient Index Future Turnover & Nifty Index ............................................................. 73 Table 15 - Index Option Turnover and Nifty Index ......................................................................... 74 Table 16 - Correlations Between option index turnover and Index Nifty........................................ 75 Table 17 - Model Summary ........................................................................................................... 75 Table 18 Annova ........................................................................................................................... 76 Table 19 - Coefficients ................................................................................................................... 76 Table 20 - Stock Future Turnover And Index Nifty ......................................................................... 77 Table 21 - Correlations between Stock Future Turnover and Index Nifty ....................................... 78 Table 22 - Stock Option National Turnover & Index Nifty .............................................................. 79 Table 23 - Correlations between of stock option national turnover & Nifty Index.......................... 80 Table 24 - Model Summary of stock option national turnover & Nifty Index ................................. 80 Table 25 - ANOVA stock option national turnover & Nifty Index .................................................... 81 Table 26 - Coefficients for stock option national turnover & Nifty Index ....................................... 81 Table 27 - Stock F&O Turnover and Nifty Index ............................................................................. 82 Table 28 - Correlations of Stock and Index F&O total turnover and Nifty Index ............................. 83 Table 29 - Model Summary of Stock and Index F&O total turnover and Nifty Index....................... 83 Table 30 - ANOVA Stock and Index F&O total turnover and Nifty Index ......................................... 84 Table 31 - Coefficients Stock and Index F&O total turnover and Nifty Index .................................. 84 Table 32 - Correlation table between F&O daily Turnover & Daily index nifty ............................... 85 Table 33 - Model Summary between F&O daily Turnover & Daily index nifty ................................ 85 Table 34 - ANOVA between F&O daily Turnover & Daily index nifty .............................................. 85 Table 35 - Coefficients between F&O daily Turnover & Daily index nifty ....................................... 86 Table 36 Regression Analysis Of VIX & Index Nifty ......................................................................... 87 Table 37 Repo rate And Index Nifty ............................................................................................... 89 Table 38 frequency occupation ..................................................................................................... 90 Table 39 - Frequency Gender ........................................................................................................ 91 Table 40 - Frequency Qualification ................................................................................................ 91 Table 41 - Frequency Age .............................................................................................................. 92 Table 42 - Frequency Income range............................................................................................... 93
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Table 43 - Frequency Placing The Savings ...................................................................................... 94 Table 44 - Percent of Savings in Savings account and Fixed deposits ............................................. 95 Table 45 awareness of the respondents ........................................................................................ 96 Table 46 Frequency perception about trading in stock market ...................................................... 97 Table 47 Investment Option Equity ............................................................................................... 98 Table 48 - Investment Option Derivatives...................................................................................... 99 Table 49 - Investment Option Commodity ................................................................................... 100 Table 50 - Investment Option Fixed Deposit ................................................................................ 101 Table 51. Investment Option Mutual Funds ................................................................................ 102 Table 52 - Investment Option SIP ................................................................................................ 103 Table 53 - Investment Option Currency ....................................................................................... 104 Table 54 - Investment Option Bonds ........................................................................................... 105 Table 55 - Investment Option Savings Account ............................................................................ 106 Table 56 - since when trading...................................................................................................... 107 Table 57 - Expectation From D.P. Firm......................................................................................... 108 Table 58- D.P. Firm Of the Respondents ...................................................................................... 109 Table 59 - Rating for Quality of Service ........................................................................................ 110 Table 60 - Rating For Brokerage rate ........................................................................................... 112 Figure 43 Time dedicated To Investors Table 61 Rating Of Time dedication To investors ............ 112 Table 62 - Rate For Latest & Glitch Free Technology.................................................................... 114 Table 63 Rate For Awareness Of D.P. Firm................................................................................... 115 Table 64 Advice before Investing................................................................................................. 116 Table 65 - Why Small Traders Avoid Derivative Trading ............................................................... 117 Table 66 Advantages Of Derivative Trading ................................................................................. 118 Table 67 Dis-advantage of Investment in Derivatives Market ...................................................... 119 Table 68 Traded in which securities............................................................................................. 121 Table 69 trade creating pair of call and put ................................................................................. 122 Table 70 Participate in derivative market as ................................................................................ 123 Table 71 Overall Return On Investment ...................................................................................... 125

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Table Of Figures:Figure 1.3.1 The Parent Company & its Branches .......................................................................... 14 Figure 2 Transaction between 3 parties Futures ............................................................................ 29 Figure 3 - Payoff for Long futures .................................................................................................. 37 Figure 4 - Payoff for Short Futures................................................................................................. 38 Figure 5 - Pay -off for a buyer of a call option ................................................................................ 41 Figure 6 - Pay-off for a seller of a call option ................................................................................. 41 Figure 7 - Pay-off for a buyer of a put option ................................................................................. 42 Figure 8 - Pay-off for a seller of a put option ................................................................................. 42 Figure 9 Demat Process ................................................................................................................. 65 Figure 10 Equity Brokerage Turnover - Quarter wise ..................................................................... 67 Figure 11 Common Size analysis of Equity Volumes ...................................................................... 68 Figure 12 - Trading activity based upon Investor Class................................................................... 68 Figure 13 - Number Of Trade At NSE - Cash Segment .................................................................... 69 Figure 14 - Total No. Of Contracts at NSE & BSE - Derivatives segments ........................................ 69 Figure 15 - Graphical Plot between Index Future Turnover and Nifty Index ................................... 72 Figure 16 - Graphical Plot of Index Option Turnover and Index Nifty ............................................. 74 Figure 17- Graphical plot between Stock Future Turnover and Index Nifty .................................... 77 Figure 18 - Graphical Plot Of Stock Option National Turnover & Index Nifty .................................. 79 Figure 19 - Graphical Plot Between Stock and Index F&O Total Turnover and Nifty Index ............. 82 Figure 20 frequency Occupation ................................................................................................... 90 Figure 21 - Frequency gender ........................................................................................................ 91 Figure 22 frequency Qualification ................................................................................................. 92 Figure 23Frequency Age ................................................................................................................ 92 Figure 24 Frequency Income Range............................................................................................... 94 Figure 25 Frequency placing the savings ....................................................................................... 95 Figure 26 Frequency Percent of Savings in Savings Account and Fixed deposits ............................ 96 Figure 27 - awareness of the respondents ..................................................................................... 97 Figure 28 frequency perception about trading in stock market ..................................................... 98 Figure 29 Investment Options Equity ............................................................................................ 99 Figure 30 Investment Option Derivatives ...................................................................................... 99 Figure 31 Investment Option Commodity.................................................................................... 100 Figure 32Investment Option Fixed Deposit.................................................................................. 101 Figure 33 Investment Option Mutual Funds ................................................................................ 102 Figure 34 - Investment option SIP................................................................................................ 103 Figure 35 - Investment Option Currency ...................................................................................... 104 Figure 36- investment Option Bonds ........................................................................................... 105 Figure 37 Investment Option Savings Account ............................................................................ 106 Figure 38 since when trading ...................................................................................................... 107 Figure 39- Expectation From D.P. Firm ........................................................................................ 108 Figure 40 RESPONDENTS D.P. FIRM .......................................................................................... 109 Figure 41 quality of service ......................................................................................................... 110 Figure 42 - Brokerage Rate for different D.P. Firm ....................................................................... 111
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Figure 43 Time dedicated To Investors Table 61 Rating Of Time dedication To investors ............ 112 Figure 44 Latest And Glitch Free Technology ............................................................................... 113 Figure 45 Awareness Of The D.P. Firm ......................................................................................... 115 Figure 46 Advice Before Investing ............................................................................................... 116 Figure 47 Why Small traders Avoid Derivative Trading ................................................................ 117 Figure 48 Advantages Of Derivative Trading ................................................................................ 118 Figure 49 dis-advantage of trading in derivative market .............................................................. 120 Figure 50 Traded in which Securities ........................................................................................... 121 Figure 51 trade creating pair of call and put ................................................................................ 122 Figure 52 Participate In Derivative Market as:- ............................................................................ 123 Figure 53 Level Of Satisfaction .................................................................................................... 124 Figure 54 Overall Return On Investment ..................................................................................... 125

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Table Of Equations:Equation 1 - Long Payoff ............................................................................................................... 37 Equation 2 - Short Payoff .............................................................................................................. 37 Equation 3 - Future Pricing ............................................................................................................ 38 Equation 4 - Black-Scholes Model.................................................................................................. 51 Equation 5 Regression equation for index future turnover ............................................................ 73 Equation 6 - regression equation for index option turnover .......................................................... 76 Equation 7 - Regression Equation For Stock Option National Turnover.......................................... 81 Equation 8 regression equation for stock & index total turnover .................................................. 84 Equation 9 Regression equation for F&O daily turnover in terms of Dily Nifty Index ..................... 86 Equation 10 Regression Equation of Nifty Index ............................................................................ 88

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Executive Summary
New ideas and innovations have always been the hallmark of progress made by mankind. At every stage of development, there have been two core factors that drive man to ideas and innovation. These are increasing returns and reducing risk, in all facets of life. The financial markets are no different. The endeavour has always been to maximize returns and minimize risk. A lot of innovation goes into developing financial products centred on these two factors. It brings us into a whole new era of financial innovation. Derivatives are among the forefront of the innovations in the financial markets and aim to increase returns and reduce risk. They provide an outlet for investors to protect themselves from the vagaries of the financial markets. These instruments have been very popular with investors throughout the world. Indian financial markets have been on the ascension and catching up with global standards in financial markets. The advent of screen based trading, dematerialization, rolling settlement has put our markets on par with international markets. As a logical step to the above progress, derivative trading was introduced in the country in June 2000. Starting with index futures, we have made rapid strides and have four types of derivative products- Index future, index option, stock future and stock options. This market presents a tremendous opportunity for individual investors .The markets have performed smoothly over the last two years and has stabilized. The time is ripe for investors to make full use of the advantage offered by this market. The project Derivative Markets in India: Trading, Pricing, Risk Management, Future Outlook & Investors Perception is prepared by Avinash Kumar Singh, IBS Gurgaon while working as summer Intern in Unicon Securities Pvt Ltd. The report contains detailed analysis of derivative as a financial investment tool: definitions, pricing, and strategies involved in its trading. The report has tried to provide sufficient material to the company for increasing the level o0f awareness among its broker and customers about derivative market. The project has talked about how with little bit of knowledge and careful watch, one can make fortunes in this market. Despite having such astounding features small traders, still fears to go inside, the reasons and perceptions from investors point of view is explained in this project. Depository participant firms, one of the most important entity in the entire capital market, they are so essential for the market that one cannot even think of trading if they were not present. The learning from Unicon Securities, one of the fast growing Depository Participant firm has been bulleted in the report. Analysis of D.P. firms on the scale of Quality of service, Brokerage rate, time dedication to investors, latest & glitch free technology and awareness of the firm is done. The suggestion for Unicon on the basis of the results has been done so that the company can strengthen its strength and work over its weakness to emerge as the top most D.P. firm.
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A. INTRODUCTION:-

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A.1. The company:- Unicon Securities Pvt. Ltd. A.1.1. Introduction to the Company:-

UNICON is a financial services company which has emerged as a one-stop investment solutions provider. It was founded in 2004 by two visionary and hardworking entrepreneurs, Mr. Gajendra Nagpal and Mr. Ram M. Gupta, who possess expertise in the field of Finance. The company is headquartered in New Delhi, and has its Corporate office in Mumbai with regional offices in Kolkata, Chennai, Hyderabad and Noida UNICON is a professionally managed company led by a team with outstanding managerial acumen and cumulative experience of more than 400 man years in the financial markets The Company is supported by more than 2400 Uniconians and has an extensive network of over 323 business offices in 152 cities across India. With a customer base of over 200,000 the Unicon Group has an eye for the intricate financial needs of its clients and caters to both their short term and long term financial needs through a comprehensive bouquet of investment services. It has been founded with the aim of providing world class investing experience to the investing community. These services range from offline & online trading in equity, commodities and currency derivatives to debt markets to corporate finance and portfolio management services. The company has a sizable presence in the distribution of 3rd party financial products like mutual funds, insurance products and property broking. It also provides expert Advisory on Life Insurance, General Insurance, Mutual Funds and IPOs. The distribution network is backed by in-house back office support to provide prompt and efficient customer service The Equity broking arm UNICON Securities Pvt. Ltd offers personalized premium services on the NSE, BSE & Derivatives market. The Commodity broking arm Unicon Commodities Pvt. Ltd offers services in Commodity trading on NCDEX and MCX. The UNICON group also has a PCG division providing investments solutions for High Net Worth Individuals. The Corporate Advisory Services arm Unicon Capital Services (P) Ltd offers entire gamut of Investment Banking services to corporates. UNICON can boast of some of the most respected names in the private equity space

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like Sequoia Capitals, Nexus India Capital and Subhkam Ventures as its shareholders.

A.1.2. Mission of the company:

Unicons mission is to protect and promote the wealth of all its stakeholders by providing trustworthy, best in class financial products and services.

A.1.3. Vision of the company:

To be India's financial services company of choice recognized for its reliability, innovation, responsiveness to customers and exemplary citizenship. The Company have an excellent In-house research Department for Equity, Mutual Funds and Insurance.

Figure 1.3.1 The Parent Company & its Branches

Unicon is a customer focused financial serves organization, providing a range of investment solutions to their customers, some of which are:Equity Back Office Commodity Portfolio Management
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Distribution Fixed Income Currency Derivatives

NRI Services Investment Banking Depository

A.2. Literature Review:The studies of literature of related topics are broadly based upon volatility and inception of new trading system derivatives trading Sathya Swaroop Debasish (2009) in his study An Empirical Study on Impact of Index Futures Trading on Spot Market in India examines the effect of futures trading on spot price volatility and market efficiency of the underlying stock market. His study suggests that there is a trade-off between gains and costs associated with the introduction of derivatives trading at least on a shortterm perspective. Prof. Asani Sarkar (2006) in study Indian Derivatives Market Suggest that as derivatives markets will grow more sophisticated, greater investor awareness will become essential. NSE has programmes to inform and educate brokers, dealers, traders, and market personnel. In addition, institutions will need to devote more resources to develop the business processes and technology necessary for derivatives trading. Prof. Ashutosh Vashishtha & Mr. Satish Kumar (2010) in their study Development of financial derivatives Market in India- A case study explained how derivatives market has grown from its nascent stage to capturing almost 60 % of market share. They have used secondary data provided at NSE to comment a conclusion. In the paper Issues and concerns of commodity derivative market in India: An agenda for research, Mr. Nilanjan Ghosh(2006), discussed the micro-economics and macro-economic concerns of not only commodity derivatives but also he tried to shed some light on how the future farket of commodities would behave like. Mr. Bhagaban(2007) Das in his report An economic study of Impact of futures trading on the stability of stock index in India has done a comprehensive study on stability of NSE Sensex returns by using two statistical tests namely Kolmogorov Smirnov 2-sample test and Wilcoxon Rank Sum test, and by use of daily observations on the NSE index over the period of study is from Jan 1996 to Dec 2007.He tried to relate how things got changed when in 2001 Derivatives were introduced. Dr. (MRS.) Kamlesh Gakhar(2008), in his paper Derivatives market in India : Evolution, Trading mechanism & Future prospects has shown how the derivative market has grown in India, the paper state that marked with the ability to partially and fully transfer the risk by locking in assets prices, derivatives are gaining popularity among the investors. The paper also has shown the
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issues related to the derivative market, which when solved will boost the investors confidence to a new level. Mr. Matloob Ullah Khan, Dr. Ambrish Gupta & Dr. Sadaf Siraj(2005) in his paper Regulations and accounting treatment of future and options in Indian derivative market they discussed about the Regulation of Indian Derivative Market as per Dr. L.C. Gupta committee report and they also described accounting adjustment procedure of Future and Option at the time of payment or receipt of mark-to-market margin, initial margin, open interest as on balance sheet date, final settlement or square-up, daily settlement, at the time of default, discloser requirement and method for determination of profit or loss in multiple option situations.

A.3. Research Gap: The previous researchers had either used primary or secondary data. This report will have both primary and secondary data analysis together. Previous researchers have not shown the perception of the investor Most of the research is being done up to 2009-09, before euro zone crisis, this report will contains analysis after the Eurozone crisis. Previous researchers have done their study mostly on a section of derivatives; this will take derivative market as a whole. Previous researchers havent tried to analyse the awareness level among investors about derivative market, this report will do. Previous researchers did not have tried to analyse preference of investor in terms of fixed income and trading/investment. None of the above research has been done in relation to the point of view of a brokerage firm.

A.4. Introduction to research:Since its Inception, the stock market is all about boosting investors confidence. The same has been strengthened by introduction of Derivative trading for stocks in June, 2000. The turnover of derivatives on the NSE increased from Rs 24 billion in 2000-2001 to Rs 292,482 billion in 2010-1011, and reached Rs 313,497 billion in 2011-2012.
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India is one of the most successful developing countries in terms of a vibrant market for exchangetraded derivatives. This reiterates the strengths of the modern development in Indias securities markets, which are based on nationwide market access, anonymous electronic trading, and a predominantly retail market. There is an increasing sense that the equity derivatives market plays a major role in shaping price discovery. With such boost in the segment, it becomes very fascinating sector for many investors/traders. But as the good and evil are the opposite side of the same coin, derivative market surely has some hidden risk and concerns. It is of essence need is to analyse how trading happens in this new system of trade. What & how the price varies Special emphasis on game of premium. What are the risks involved how to tackle them and most importantly to use them for profit generation. What and how the investors see or feel about derivative markets. This report will try to shed some lights upon these issues.

A.5. Why Derivative Market?

Since its introduction in 2000, financial derivatives market in India has shown a remarkable growth both in terms of volumes and numbers of traded contracts. NSE alone accounts for 99 % of the derivatives trading in Indian markets. Comparing the trading figures of NSE and BSE, performance of BSE is not encouraging both in terms of volumes and numbers of contracts traded in all product categories and the turnover of the NSE derivatives market exceeded the turnover of the NSE cash market. Today with almost 70% of overall market capitalization, the market seems to be still way under its actual potential because of lack of knowledge and investors confidence. The reason behind choosing Derivative market lies in the fact itself that the Derivatives was introduced to increase Volume, Volatility and reducing risk factor in the market. Such an exponential boost, then also traders feels uneasy in investing in derivative market, lot of myths prevailing, many say only game of luck, why is it so??? To go in depth of these is the basic purpose of this research project, to see what present scenario is and what the perception of investors about it is.

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A.6. The Problem Statement:Since its inception in 2001 the derivative market has established records in terms of turnover and volume traded. From nothing it almost captured 70 % of total traded in capital market. So much success and still the sector remain quite a distant dream for small and marginal traded, this fact itself make people wonder why is it so?, to understand this one need to understand the concepts that how actually trade happens in derivative market, How the premium plays a role, what is investors perception about it and what lies in the future for it. Moreover as an intern in a depository participant firm, it is of great importance for me to analyse what does customer feels about the firms related to the sector, what they want in terms of quality services, timely advice, technological support, etc.

A.6.1. Defining the Problem:The research will be based upon data collected by both primary and secondary sources. Based upon primary data, the report will try to determine following:a) b) c) d) e) f) g) h) What percentage of male and female user performs derivative trading? What is the age group involved most in trading? Income range, and its percentage involved in trading? Where do the investors place their savings? What they think about various investment instruments? What they feel about derivative trading? In which of the derivative instrument they trade? Advantage & dis advantage of derivative trading, etc.

From the secondary data the project will try to shed some lights upon:A. B. C. D. E. Last 5 years growth in derivative market. Which stocks traded the most? Comparison of these top stocks traded volume with the actual share price for last 1 years. Segment wise growth of volume trade in different derivatives. Volume trade and turnover of different types of derivatives.

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A.7. Scope of the Project:The report will try to give the overview of the Derivative market segment, it would also emphasis how and why there is an exponential growth in volume of derivative trading. Not limiting to any one segment the report would give a view of derivative market as whole. By analysing the past figures and the survey data the project could be able to give a picture where the derivative market will go on and what is in it for small and medium traders.

A.8. Importance of Project:The project will help in understanding the current, past and future scenario of the Derivative market, it will also help in understanding what derivative trading is all about and in a market full of speculations how one can make money based upon calculations and strategies. The project will also help in understanding how and why the market moves, what impacts it both in terms of Bullish and Bearish behaviour. The project will be able to shed some light on Unicons perception and satisfaction level among its customers and employees.

A.9. Objectives of Project: To know about different types of Financial Derivative. To understand some of the concepts and strategies of the Derivatives Trading used by investors and brokers in day to day trading. To analyse the performance of Derivatives trading since 2001, with special reference to Future and Options. To know the volume traded in each segment in last decade and how it has grown from its nascent stage to capitalizing a total market share of almost 90%. To provide the company with detailed knowledge of derivative market which can utilized by the company as material provided to investors for better understanding the derivative segment and may help them find new potential investors and serve them in a better way. In detail study of the Options and Futures.

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A.10. Research Methodology:-

A.10.1. Method of data collection:A.10.1.1. Secondary Data:The utilization of data already collected by someone or some organization on the topic related. In this project the source of secondary data would be the websites of NSE, BSE, Moneycontrol, India Infoline, etc. In addition to it, books and journals on the topic derivatives would also be used as to collect data.
A.10.1.2. Primary Data:-

The data collected via interview and questionnaire. It will be the data collected to give better analysis and thus a better picture of the objectives of the report.

A.10.2. Research Design:As the data is both primary and secondary in nature, Exploratory and Descriptive research design is going to be used in the project. The exploratory research will give an insight on the topics concerned whereas the descriptive research will be used to determine the frequency with which something occurs.

A.10.3. Sampling Methodology:A.10.3.1. Sampling techniques: To collect primary data, questionnaire will be prepared. To draft the questionnaire the sampling techniques, which is going to be used is- combination of Nominal Scale and likert scale. A.10.3.2. Sampling Strategy: Random Sampling is done among investors to collect data. A.10.3.3. Sample Size: The sample size of primary data would be 176 respondents. A.10.3.4. Population of interest:Investors, Depository Participants and persons having knowledge of Capital market and the ones who trade in it

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A.10.4. Preparation of the questionnaire:The questionnaire contains set of questions which will be used in the collection of primary data which will further give in depth and desired citation of the problem. In the preparation of questionnaire dependent and in dependent variables are considered and according to them only the questions are formulated. For example, quality of service, brokerage rate, time dedicated, technology provided and awareness of brokerage firm are independent variable and perception and requirement of investors from their respective firms is dependent variable.

A.10.5. Method Of data Collection:The data will be collected over personal interview, over phone, online both through mail and surveys posting on trading blogs.

A.10.6. Data Analysis:To analyse the data, data analysing tools like, IBM SPSS, Minitab and Sofatab will be used. Also the statistical method that will be used would be Co-relation, Co-Variance & Factor analysis. In addition to it, Ms Excel will be used to project the data in more concise and meaningful manner via tables, charts and graph.

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B. Main Text

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B.1. Introduction

B.1.1 Definition of Derivatives

One of the most significant events in the securities markets has been the development and expansion of financial derivatives. The term derivatives is used to refer to financial instruments which derive their value from some underlying assets. The underlying assets could be equities (shares), debt (bonds, T-bills, and notes), currencies, and even indices of these various assets, such as the Nifty 50 Index. Derivatives derive their names from their respective underlying asset. Thus if a derivatives underlying asset is equity, it is called equity derivative and so on. Derivatives can be traded either on a regulated exchange, such as the NSE or off the exchanges, i.e., directly between the different parties, which is called over-the-counter (OTC) trading. (In India only exchange traded equity derivatives are permitted under the law.) The basic purpose of derivatives is to transfer the price risk (inherent in fluctuations of the asset prices) from one party to another; they facilitate the allocation of risk to those who are willing to take it. In so doing, derivatives help mitigate the risk arising from the future uncertainty of prices. For example, on November 1, 2013 a rice farmer may wish to sell his harvest at a future date (say January 1, 2013) for a pre-determined fixed price to eliminate the risk of change in prices by that date. Such a transaction is an example of a derivatives contract. The price of this derivative is driven by the spot price of rice which is the "underlying".

B.1.2 Origin of derivatives

While trading in derivatives products has grown tremendously in recent times, the earliest evidence of these types of instruments can be traced back to ancient Greece. Even though derivatives have been in existence in some form or the other since ancient times, the advent of modern day derivatives contracts is attributed to farmers need to protect themselves against a decline in crop prices due to various economic and environmental factors. Thus, derivatives contracts initially developed in commodities. The first futures contracts can be traced to the Yodoya rice market in Osaka, Japan around 1650. The farmers were afraid of rice prices falling in the future at the time of harvesting. To lock in a price (that is, to sell the rice at a predetermined fixed price in the future), the farmers entered into contracts with the buyers. These were evidently standardized contracts, much like todays futures contracts.
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In 1848, the Chicago Board of Trade (CBOT) was established to facilitate trading of forward contracts on various commodities. From then on, futures contracts on commodities have remained more or less in the same form, as we know them today.

B.1.3 Derivatives in India

In India, derivatives markets have been functioning since the nineteenth century, with organized trading in cotton through the establishment of the Cotton Trade Association in 1875. Derivatives, as exchange traded financial instruments were introduced in India in June 2000. The National Stock Exchange (NSE) is the largest exchange in India in derivatives, trading in various derivatives contracts. The first contract to be launched on NSE was the Nifty 50 index futures contract. In a span of one and a half years after the introduction of index futures, index options, stock options and stock futures were also introduced in the derivatives segment for trading. NSEs equity derivatives segment is called the Futures & Options Segment or F&O Segment. NSE also trades in Currency and Interest Rate Futures contracts under a separate segment.

A series of reforms in the financial markets paved way for the development of exchange-traded equity derivatives markets in India. In 1993, the NSE was established as an electronic, national exchange and it started operations in 1994. It improved the efficiency and transparency of the stock markets by offering a fully automated screen-based trading system with real-time price dissemination. A report on exchange traded derivatives, by the L.C. Gupta Committee, set up by the Securities and Exchange Board of India (SEBI), recommended a phased introduction of derivatives instruments with bi-level regulation (i.e., self-regulation by exchanges, with SEBI providing the overall regulatory and supervisory role). Another report, by the J.R. Varma Committee in 1998, worked out the various operational details such as margining and risk management systems for these instruments. In 1999, the Securities Contracts (Regulation) Act of 1956, or SC(R)A, was amended so that derivatives could be declared as securities. This allowed the regulatory framework for trading securities, to be extended to derivatives. The Act considers derivatives on equities to be legal and valid, but only if they are traded on exchanges. The Securities Contracts (Regulation) Act, 1956 defines "derivatives" to include:
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1. 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.

2. A contract which derives its value from the prices, or index of prices, of underlying securities. At present, the equity derivatives market is the most active derivatives market in India. Trading volumes in equity derivatives are, on an average, more than three and a half times the trading volumes in the cash equity markets.
Table 1 - Milestones in the development of Indian derivative market

November 18, 1996 May 11, 1998 May 25, 2000 June 12, 2000 June 4, 2001 July 2, 2001 November 9, 2001 August 29, 2008 August 31, 2009 February 2010 October 28, 2010 October 29, 2010

L.C. Gupta Committee set up to draft a policy framework for introducing derivatives L.C. Gupta committee submits its report on the policy framework SEBI allows exchanges to trade in index futures Trading on Nifty futures commences on the NSE Trading for Nifty options commences on the NSE Trading on Stock options commences on the NSE Trading on Stock futures commences on the NSE Currency derivatives trading commences on the NSE Interest rate derivatives trading commences on the NSE Launch of Currency Futures on additional currency pairs Introduction of European style Stock Options Introduction of Currency Options

B.2. Definitions of Basic Derivatives

There are various types of derivatives traded on exchanges across the world. They range from the very simple to the most complex products. The following are the three basic forms of derivatives, which are the building blocks for many complex derivatives instruments: Forwards Futures Options

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B.2.1. Forwards
A forward contract or simply a forward is a contract between two parties to buy or sell an asset at a certain future date for a certain price that is pre-decided on the date of the contract. The future date is referred to as expiry date and the pre-decided price is referred to as Forward Price. It may be noted that Forwards are private contracts and their terms are determined by the parties involved. A forward is thus an agreement between two parties in which one party, the buyer, enters into an agreement with the other party, the seller that he would buy from the seller an underlying asset on the expiry date at the forward price. Therefore, it is a commitment by both the parties to engage in a transaction at a later date with the price set in advance. This is different from a spot market contract, which involves immediate payment and immediate transfer of asset. The party that agrees to buy the asset on a future date is referred to as a long investor and is said to have a long position. Similarly the party that agrees to sell the asset in a future date is referred to as a short investor and is said to have a short position. The price agreed upon is called the delivery price or the Forward Price. Forward contracts are traded only in Over the Counter (OTC) market and not in stock exchanges. OTC market is a private market where individuals/institutions can trade through negotiations on a one to one basis. B.2.1.1. Settlement of forward contracts When a forward contract expires, there are two alternate arrangements possible to settle the obligation of the parties: physical settlement and cash settlement. Both types of settlements happen on the expiry date. B.2.1.1.i. Physical Settlement:A forward contract can be settled by the physical delivery of the underlying asset by a short investor (i.e. the seller) to the long investor (i.e. the buyer) and the payment of the agreed forward price by the buyer to the seller on the agreed settlement date. The following example will help us understand the physical settlement process. Illustration:Consider two parties (A and B) enter into a forward contract on 1 August, 2013 where, A agrees to deliver 1000 stocks of XYZ to B, at a price of Rs. 100 per share, on 29 th August, 2013 (the expiry date). In this contract, A, who has committed to sell 1000 stocks of XYZ at Rs. 100 per share on 29 th August, 2013 has a short position and B, who has committed to buy 1000 stocks at Rs. 100 per share is said to have a long position. In case of physical settlement, on 29th August, 2013 (expiry date), A has to actually deliver 1000 XYZ shares to B and B has to pay the price (1000 * Rs. 100 = Rs. 10,000) to A. In case A does not

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have 1000 shares to deliver on 29th August, 2013, he has to purchase it from the spot market and then deliver the stocks to B . On the expiry date the profit/loss for each party depends on the settlement price, that is, the closing price in the spot market on 29th August, 2013. The closing price on any given day is the weighted average price of the underlying during the last half an hour of trading in that day. Depending on the closing price, three different scenarios of profit/loss are possible for each party. They are as follows: Scenario I. Closing spot price on 29 August, 2013 (S T) is greater than the Forward price (FT ) Assume that the closing price of XYZ on the settlement date 29 August, 2009 is Rs. 105. Since the short investor has sold XYZ at Rs. 100 in the Forward market on 1 August, 2013, he can buy 1000 XYZ shares at Rs. 105 from the market and deliver them to the long investor. Therefore the person who has a short position makes a loss of (100 105) X 1000 = Rs. 5000. If the long investor sells the shares in the spot market immediately after receiving them, he would make an equivalent profit of (105 100 ) X 1000 = Rs. 5000. Scenario II. Closing Spot price on 29 August (S T), 2013 is the same as the Forward price (F T) The short seller will buy the stock from the market at Rs. 100 and give it to the long investor. As the settlement price is same as the Forward price, neither party will gain or lose anything. Scenario III. Closing Spot price (S T) on 29 August is less than the futures price (F T) Assume that the closing price of XYZ on 29 August, 2013 is Rs. 95. The short investor, who has sold XYZ at Rs. 100 in the Forward market on 1 August, 2013, will buy the stock from the market at Rs. 95 and deliver it to the long investor. Therefore the person who has a short position would make a profit of (100 95) X 1000 = Rs. 5000 and the person who has long position in the contract will lose an equivalent amount (Rs. 5000), if he sells the shares in the spot market immediately after receiving them. The main disadvantage of physical settlement is that it results in huge transaction costs in terms of actual purchase of securities by the party holding a short position (in this case A) and transfer of the security to the party in the long position (in this case B). Further, if the party in the long position is actually not interested in holding the security, then she will have to incur further transaction cost in disposing off the security. An alternative way of settlement, which helps in minimizing this cost, is through cash settlement. B.2.1.1.ii. Cash Settlement Cash settlement does not involve actual delivery or receipt of the security. Each party either pays (receives) cash equal to the net loss (profit) arising out of their respective position in the contract. So, in case of Scenario I mentioned above, where the spot price at the expiry date (ST) was greater than the forward price (F T), the party with the short position will have to pay an amount equivalent to the net loss to the party at the long position. In the example, A will simply pay Rs. 5000 to B on the expiry date. The opposite is the case in Scenario (III), when ST < FT. The long
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party will be at a loss and have to pay an amount equivalent to the net loss to the short party. In the example, B will have to pay Rs. 5000 to A on the expiry date. In case of Scenario (II) where S T = FT , there is no need for any party to pay anything to the other party. It should be noted that the profit and loss position in case of physical settlement and cash settlement is the same except for the transaction costs which is involved in the physical settlement. B.2.1.2. Default risk in forward contracts A drawback of forward contracts is that they are subject to default risk. Regardless of whether the contract is for physical or cash settlement, there exists a potential for one party to default, i.e. not honour the contract. It could be either the buyer or the seller. This results in the other party suffering a loss. This risk of making losses due to any of the two parties defaulting is known as counter party risk. The main reason behind such risk is the absence of any mediator between the parties, who could have undertaken the task of ensuring that both the parties fulfil their obligations arising out of the contract. Default risk is also referred to as counter party risk or credit risk.

B.2.2. Futures
Like a forward contract, a futures contract is an agreement between two parties in which the buyer agrees to buy an underlying asset from the seller, at a future date at a price that is agreed upon today. However, unlike a forward contract, a futures contract is not a private transaction but gets traded on a recognized stock exchange. In addition, a futures contract is standardized by the exchange. All the terms, other than the price, are set by the stock exchange. Also, both buyer and seller of the futures contracts are protected against the counter party risk by an entity called the Clearing Corporation. The Clearing Corporation provides this guarantee to ensure that the buyer or the seller of a futures contract does not suffer as a result of the counter party defaulting on its obligation. In case one of the parties defaults, the Clearing Corporation steps in to fulfil the obligation of this party, so that the other party does not suffer due to non-fulfilment of the contract. To be able to guarantee the fulfilment of the obligations under the contract, the Clearing Corporation holds an amount as a security from both the parties. This amount is called the Margin money and can be in the form of cash or other financial assets. Also, since the futures contracts are traded on the stock exchanges, the parties have the flexibility of closing out the contract prior to the maturity by squaring off the transactions in the market. The basic flow of a transaction between three parties, namely Buyer, Seller and Clearing Corporation is depicted in the diagram below:

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Figure 2 Transaction between 3 parties Futures

FORWARD Privately negotiated contracts Not standardized Settlement dates can be set by the parties

FUTURE Traded on an exchange Standardized contracts Fixed settlement dates as declared by the exchange Almost no counter party risk

High counter party risk

Table 2 Difference between Forward & Future Contracts

B.2.3. Options
Like forwards and futures, options are derivative instruments that provide the opportunity to buy or sell an underlying asset on a future date. An option is a derivative contract between a buyer and a seller, where one party (say First Party) gives to the other (say Second Party) the right, but not the obligation, to buy from (or sell to) the First Party the underlying asset on or before a specific day at an agreed -upon price. In return for granting the option, the party granting the option collects a payment from the other party. This payment collected is called the premium or price of the option. The right to buy or sell is held by the option buyer (also called the option holder); the party granting the right is the option seller or option writer. Unlike forwards and futures contracts, options require a cash payment (called the premium) upfront from the option buyer to the option seller. This payment is called option premium or option price. Options can be traded either on the stock exchange or in over the counter (OTC) markets. Options traded on the exchanges are backed by the Clearing Corporation thereby
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minimizing the risk arising due to default by the counter parties involved. Options traded in the OTC market however are not backed by the Clearing Corporation. There are two types of options call options and put options:B.2.3.1. Call option A call option is an option granting the right to the buyer of the option to buy the underlying asset on a specific day at an agreed upon price, but not the obligation to do so. It is the seller who grants this right to the buyer of the option. It may be noted that the person who has the right to buy the underlying asset is known as the buyer of the call option. The price at which the buyer has the right to buy the asset is agreed upon at the time of entering the contract. This price is known as the strike price of the contract (call option strike price in this case). Since the buyer of the call option has the right (but no obligation) to buy the underlying asset, he will exercise his right to buy the underlying asset if and only if the price of the underlying asset in the market is more than the strike price on or before the expiry date of the contract. The buyer of the call option does not have an obligation to buy if he does not want to. B.2.3.2. Put option A put option is a contract granting the right to the buyer of the option to sell the underlying asset on or before a specific day at an agreed upon price, but not the obligation to do so. It is the seller who grants this right to the buyer of the option. The person who has the right to sell the underlying asset is known as the buyer of the put option. The price at which the buyer has the right to sell the asset is agreed upon at the time of entering the contract. This price is known as the strike price of the contract (put option strike price in this case). Since the buyer of the put option has the right (but not the obligation) to sell the underlying asset, he will exercise his right to sell the underlying asset if and only if the price of the underlying asset in the market is less than the strike price on or before the expiry date of the contract. The buyer of the put option does not have the obligation to sell if he does not want to. Illustration Suppose A has bought a call option of 2000 shares of Hindustan Unilever Limited (HUL) at a strike price of Rs 260 per share at a premium of Rs 10. This option gives A, the buyer of the option, the right to buy 2000 shares of HUL from the seller of the option, on or before August 27, 2013 (expiry date of the option). The seller of the option has the obligation to sell 2000 shares of HUL at Rs 260 per share on or before August 27, 2013 (i.e. whenever asked by the buyer of the option). Suppose instead of buying a call, A has sold a put option on 100 Reliance Industries (RIL) shares at a strike price of Rs 2000 at a premium of Rs 8. This option is an obligation to A to buy 100 shares of Reliance Industries (RIL) at a price of Rs 2000 per share on or before August 27 (expiry date of the option) i.e., as and when asked by the buyer of the put option. It depends on the option buyer as to when he exercises the option. As stated earlier, the buyer does not have the obligation to exercise the option.

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Table 3 - Differences between futures and options

FUTURES Both the buyer and the seller are under an obligation to fulfil the contract.

The buyer and the seller have potential to make unlimited gain or loss.

The buyer and the seller are subject to unlimited risk of loss.

OPTIONS The buyer of the option has the right and not an obligation whereas the seller is under obligation to fulfil the contract if and when the buyer exercises his right. The buyer has potential to make unlimited gain while the seller has a potential to make unlimited gain .On the other hand the buyer has a limited loss potential and the seller has an unlimited loss potential. The seller is subjected to unlimited risk of losing whereas the buyer has limited potential to lose (which is the option premium).

B.3. Applications of Derivatives

B.3.1. Participants in the Derivatives Market
As equity markets developed, different categories of investors started participating in the market. In India, equity market participants currently include retail investors, corporate investors, mutual funds, banks, foreign institutional investors etc. Each of these investor categories uses the derivatives market to as a part of risk management, investment strategy or speculation. Based on the applications that derivatives are put to, these investors can be broadly classified into three groups: Hedgers Speculators, and Arbitrageurs B.3.1.1. Hedgers These investors have a position (i.e., have bought stocks) in the underlying market but are worried about a potential loss arising out of a change in the asset price in the future. Hedgers participate in the derivatives market to lock the prices at which they will be able to transact in the future. Thus, they try to avoid price risk through holding a position in the derivatives market. Different hedgers take different positions in the derivatives market based on their exposure in the underlying market. A hedger normally takes an opposite position in the derivatives market to what he has in the underlying market. Hedging in futures market can be done through two positions, viz. short hedge and long hedge.

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B.3.1.1.i. Short Hedge A short hedge involves taking a short position in the futures market. Short hedge position is taken by someone who already owns the underlying asset or is expecting a future receipt of the underlying asset. For example, an investor holding Reliance shares may be worried about adverse future price movements and may want to hedge the price risk. He can do so by holding a short position in the derivatives market. The investor can go short in Reliance futures at the NSE. This protects him from price movements in Reliance stock. In case the price of Reliance shares falls, the investor will lose money in the shares but will make up for this loss by the gain made in Reliance Futures. It should be noted that a short position holder in a futures contract makes a profit if the price of the underlying asset falls in the future. In this way, futures contract allows an investor to manage his price risk. Similarly, a sugar manufacturing company could hedge against any probable loss in the future due to a fall in the prices of sugar by holding a short position in the futures/ forwards market. If the prices of sugar fall, the company may lose on the sugar sale but the loss will be offset by profit made in the futures contract. B.3.1.1.ii. Long Hedge A long hedge involves holding a long position in the futures market. A Long position holder agrees to buy the underlying asset at the expiry date by paying the agreed futures/ forward price. This strategy is used by those who will need to acquire the underlying asset in the future. For example, a chocolate manufacturer who needs to acquire sugar in the future will be worried about any loss that may arise if the price of sugar increases in the future. To hedge against this risk, the chocolate manufacturer can hold a long position in the sugar futures. If the price of sugar rises, the chocolate manufacture may have to pay more to acquire sugar in the normal market, but he will be compensated against this loss through a profit that will arise in the futures market. Note that a long position holder in a futures contract makes a profit if the price of the underlying asset increases in the future. Long hedge strategy can also be used by those investors who desire to purchase the underlying asset at a future date (that is, when he acquires the cash to purchase the asset) but wants to lock the prevailing price in the market. This may be because he thinks that the prevailing price is very low. For example, suppose the current spot price of Wipro Ltd. is Rs. 250 per stock. An investor is expecting to have Rs. 250 at the end of the month. The investor feels that Wipro Ltd. is at a very attractive level and he may miss the opportunity to buy the stock if he waits till the end of the month. In such a case, he can buy Wipro Ltd. in the futures market. By doing so, he can lock in the price of the stock. Assuming that he buys Wipro Ltd. in the futures market at Rs. 250 there can be three probable scenarios:

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Scenario I: Price of Wipro Ltd. in the cash market on expiry date is Rs. 300. As futures price is equal to the spot price on the expiry day, the futures price of Wipro would be at Rs. 300 on expiry day. The investor can sell Wipro Ltd in the futures market at Rs. 300. By doing this, he has made a profit of 300 250 = Rs. 50 in the futures trade. He can now buy Wipro Ltd in the spot market at Rs. 300. Therefore, his total investment cost for buying one share of Wipro Ltd equals Rs.300 (price in spot market) 50 (profit in futures market) = Rs.250. This is the amount of money he was expecting to have at the end of the month. If the investor had not bought Wipro Ltd futures, he would have had only Rs. 250 and would have been unable to buy Wipro Ltd shares in the cash market. The futures contract helped him to lock in a price for the shares at Rs. 250. Scenario II: Price of Wipro Ltd in the cash market on expiry day is Rs. 250. As futures price tracks spot price, futures price would also be at Rs. 250 on expiry day. The investor will sell Wipro Ltd in the futures market at Rs. 250. By doing this, he has made Rs. 0 in the futures trade. He can buy Wipro Ltd in the spot market at Rs. 250. His total investment cost for buying one share of Wipro will be = Rs. 250 (price in spot market) + 0 (loss in futures market) = Rs. 250. Scenario III: Price of Wipro Ltd in the cash market on expiry day is Rs. 200. As futures price tracks spot price, futures price would also be at Rs. 200 on expiry day. The investor will sell Wipro Ltd in the futures market at Rs. 200. By doing this, he has made a loss of 200 250 = Rs. 50 in the futures trade. He can buy Wipro in the spot market at Rs. 200. Therefore, his total investment cost for buying one share of Wipro Ltd will be = 200 (price in spot market) + 50 (loss in futures market) = Rs. 250. Thus, in all the three scenarios, he has to pay only Rs. 250. This is an example of a Long Hedge. B.3.1.2. Speculators A Speculator is one who bets on the derivatives market based on his views on the potential movement of the underlying stock price. Speculators take large, calculated risks as they trade based on anticipated future price movements. They hope to make quick, large gains; but may not always be successful. They normally have shorter holding time for their positions as compared to hedgers. If the price of the underlying moves as per their expectation they can make large profits. However, if the price moves in the opposite direction of their assessment, the losses can also be enormous. Illustration Currently ICICI Bank Ltd (ICICI) is trading at, say, Rs. 500 in the cash market and also at Rs. 500 in the futures market (assumed values for the example only). A speculator feels that post the RBIs policy announcement, the share price of ICICI will go up. The speculator can buy the stock in the spot market or in the derivatives market. If the derivatives contract size of ICICI is 1000 and if the speculator buys one futures contract of ICICI, he is buying ICICI futures worth Rs 500 X 1000 = Rs. 5,00,000. For this he will have to pay a margin of say 20% of the contract value to the exchange.
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The margin that the speculator needs to pay to the exchange is 20% of Rs. 5,00,000 = Rs. 1,00,000. This Rs. 1,00,000 is his total investment for the futures contract. If the speculator would have invested Rs. 1,00,000 in the spot market, he could purchase only 1,00,000 / 500 = 200 shares. Let us assume that post RBI announcement price of ICICI share moves to Rs. 520. With one lakh investment each in the futures and the cash market, the profits would be: (520 500) X 1,000 = Rs. 20,000 in case of futures market and (520 500) X 200 = Rs. 4000 in the case of cash market. It should be noted that the opposite will result in case of adverse movement in stock prices, wherein the speculator will be losing more in the futures market than in the spot market. This is because the speculator can hold a larger position in the futures market where he has to pay only the margin money. B.3.1.3. Arbitrageurs Arbitrageurs attempt to profit from pricing inefficiencies in the market by making simultaneous trades that offset each other and capture a risk-free profit. An arbitrageur may also seek to make profit in case there is price discrepancy between the stock price in the cash and the derivatives markets. For example, if on 1st August, 2013 the SBI share is trading at Rs. 1780 in the cash market and the futures contract of SBI is trading at Rs. 1790, the arbitrageur would buy the SBI shares (i.e. make an investment of Rs. 1780) in the spot market and sell the same number of SBI futures contracts. On expiry day (say 24 August, 2013), the price of SBI futures contracts will close at the price at which SBI closes in the spot market. In other words, the settlement of the futures contract will happen at the closing price of the SBI shares and that is why the futures and spot prices are said to converge on the expiry day. On expiry day, the arbitrageur will sell the SBI stock in the spot market and buy the futures contract, both of which will happen at the closing price of SBI in the spot market. Since the arbitrageur has entered into off-setting positions, he will be able to earn Rs. 10 irrespective of the prevailing market price on the expiry date. There are three possible price scenarios at which SBI can close on expiry day. Following are the calculation of the the profit/ loss of the arbitrageur in each of the scenarios where he had initially (1 August) purchased SBI shares in the spot market at Rs 1780 and sold the futures contract of SBI at Rs. 1790: Scenario I: SBI shares closes at a price greater than 1780 (say Rs. 2000) in the spot market on expiry day (24 August 2013) SBI futures will close at the same price as SBI in spot market on the expiry day i.e., SBI futures will also close at Rs. 2000. The arbitrageur reverses his previous transaction entered into on 1 August 2013. Profit/ Loss ( ) in spot market = 2000 1780 = Rs. 220 Profit/ Loss ( ) in futures market = 1 790 2000 = Rs. ( ) 210
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Net profit/ Loss ( ) on both transactions combined = 220 210 = Rs. 10 profit. Scenario II: SBI shares close at Rs 1780 in the spot market on expiry day (24 August 2013) SBI futures will close at the same price as SBI in spot mar ket on expiry day i.e., SBI futures will also close at Rs 1780. The arbitrageur reverses his previous transaction entered into on 1 August 2013. Profit/ Loss ( ) in spot market = 1780 1780 = Rs 0 Profit/ Loss ( ) in futures market = 1790 1780 = Rs. 1 0 Net profit/ Loss ( ) on both transactions combined = 0 + 10 = Rs. 10 profit. Scenario III: SBI shares close at Rs. 1500 in the spot market on expiry day (24 August 2009) Here also, SBI futures will close at Rs. 1500. The arbitrageur reverses his previous transaction entered into on 1 August 2009. Profit/ Loss ( ) in spot market = 1500 1780 = Rs. ( ) 280 Profit/ Loss ( ) in futures market = 1790 1500 = Rs. 290 Net profit/ Loss ( ) on both transactions combined = ( ) 280 + 290 = Rs. 10 profit. Thus, in all three scenarios, the arbitrageur will make a profit of Rs. 10, which was the difference between the spot price of SBI and futures price of SBI, when the transaction was entered into. This is called a risk less profit since once the transaction is entered into on 1 August, 2013 (due to the price difference between spot and futures), the profit is locked. Irrespective of where the underlying share price closes on the expiry date of the contract, a profit of Rs. 10 is assured. The investment made by the arbitrageur is Rs. 1780 (when he buys SBI in the spot market). He makes this investment on 1 August 2013 and gets a return of Rs. 10 on this investment in 23 days (24 August). This means a return of 0.56% in 23 days. If we annualize this, it is a return of nearly 9% per annum. One should also note that this opportunity to make a risk-less return of 9% per annum will not always remain. The difference between the spot and futures price arose due to some inefficiency (in the market), which was exploited by the arbitrageur by buying shares in spot and selling futures. As more and more such arbitrage trades take place, the difference between spot and futures prices would narrow thereby reducing the attractiveness of further arbitrage.

B.3.2. Uses of Derivatives

B.3.2.1. Risk management The most important purpose of the derivatives market is risk management. Risk management for an investor comprises of the following three processes: Identifying the desired level of risk that the investor is willing to take on his investments; Identifying and measuring the actual level of risk that the investor is carrying; and
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Making arrangements which may include trading (buying/selling) of derivatives contracts that allow him to match the actual and desired levels of risk. B.3.2.2. Market efficiency Efficient markets are fair and competitive and do not allow an investor to make risk free profits. Derivatives assist in improving the efficiency of the markets, by providing a self-correcting mechanism. Arbitrageurs are one section of market participants who trade whenever there is an opportunity to make risk free profits till the opportunity ceases to exist. Risk free profits are not easy to make in more efficient markets. When trading occurs, there is a possibility that some amount of mispricing might occur in the markets. The arbitrageurs step in to take advantage of this mispricing by buying from the cheaper market and selling in the higher market. Their actions quickly narrow the prices and thereby reducing the inefficiencies. B.3.2.3. Price discovery One of the primary functions of derivatives markets is price discovery. They provide valuable information about the prices and expected price fluctuations of the underlying assets in two ways: First, many of these assets are traded in markets in different geographical locations. Because of this, assets may be traded at different prices in different markets. In derivatives markets, the price of the contract often serves as a proxy for the price of the underlying asset. For example, gold may trade at different prices in Mumbai and Delhi but a derivatives contract on gold would have one value and so traders in Mumbai and Delhi can validate the prices of spot markets in their respective location to see if it is cheap or expensive and trade accordingly. Second, the prices of the futures contracts serve as prices that can be used to get a sense of the market expectation of future prices. For example, say there is a company that produces sugar and expects that the production of sugar will take two months from today. As sugar prices fluctuate daily, the company does not know if after two months the price of sugar will be higher or lower than it is today. How does it predict where the price of sugar will be in future? It can do this by monitoring prices of derivatives contract on sugar (say a Sugar Forward contract). If the forward price of sugar is trading higher than the spot price that means that the market is expecting the sugar spot price to go up in future. If there were no derivatives price, it would have to wait for two months before knowing the market price of sugar on that day. Based on derivatives price the management of the sugar company can make strategic and tactical decisions of how much sugar to produce and when.

B.4. Trading Futures

To understand futures trading and profit/loss that can occur while trading, knowledge of pay -off diagrams is necessary. Pay-off refers to profit or loss in a trade. A pay-off is positive if the investor makes a profit and negative if he makes a loss. A pay-off diagram represents profit/loss in the form of a graph which has the stock price on the X axis and the profit/ loss on the Y axis. Thus, from the graph an investor can calculate the profit or loss that his position can make for different stock
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price values. Forwards and futures have same pay-offs. In other words, their profit/loss values behave in a similar fashion for different values of stock price. B.4.1. Pay-off of Futures The Pay-off of a futures contract on maturity depends on the spot price of the underlying asset at the time of maturity and the price at which the contract was initially traded. There are two positions that could be taken in a futures contract: a) Long position: one who buys the asset at the futures price (F) takes the long position and b) Short position: one who sells the asset at the futures price (F) takes the short position In general, the pay-off for a long position in a futures contract on one unit of an asset is: Long Pay -off = S T F
Equation 1 - Long Payoff

Where F is the traded futures price and S T is the spot price of the asset at expiry of the contract (that is, closing price on the expiry date). This is because the holder of the contract is obligated to buy the asset worth S T for F. Similarly, the pay-off from a short position in a futures contract on one unit of asset is: Short Pay-off = F S T
Equation 2 - Short Payoff

B.4.1.1. Pay- off diagram for a long futures position The Figure 4.1 depicts the payoff diagram for an investor who is long on a futures contract. The investor has gone long in the futures contract at a price F.

Profit

ST

Loss
Figure 3 - Payoff for Long futures

The long investor makes profits if the spot price (S T ) at expiry exceeds the futures contract price F, and makes losses if the opposite happens. In the above diagram, the slanted line is a 45 degree line, implying that for every one rupee change in the price of the underlying, the profit/ loss will change by one rupee. As can be seen from the diagram, if S T is less than F, the investor makes a
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loss and the higher the S T , the lower the loss. Similarly, if S T is greater than F, the investor makes a profit and higher the S T , the higher is the profit. B.4.1.2. Pay- off diagram for a short position Figure 4.2 is the pay-off diagram for someone who has taken a short position on a futures contract on the stock at a price F.

Profit

F ST

Loss
Figure 4 - Payoff for Short Futures

Here, the investor makes profits if the spot price (S T ) at expiry is below the futures contract price F, and makes losses if the opposite happens. Here, if S T is less than F, the investor makes a profit and the higher the S T , the lower the profit. Similarly, if S T is greater than F, the investor makes a loss and the higher the S T , the lower is the profit. As can be seen from the pay-off diagrams for futures contracts, the pay-off is depicted by a straight line (both buy and sell). Such pay-off diagrams are known as linear pay-offs. B.4.2. A theoretical model for Future pricing While futures prices in reality are determined by demand and supply, one can obtain a theoretical Futures price, using the following model:

Equation 3 - Future Pricing

Where: F = Futures price S = Spot price of the underlying asset r = Cost of financing (using continuously compounded interest rate)
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T e

= Time till expiration in years = 2.71828

Example: Security XYZ Ltd trades in the spot market at Rs. 1150. Money can be invested at 11% per annum. The fair value of a one-month futures contract on XYZ is calculated as follows:

F = SerT = 1150 * e0.11*1/12 = 1160

This model is also called the cost of carry model of pricing futures. It calculates the Fair Value of futures contract (Rs. 1160) based on the current spot price of the underlying asset (Rs. 1150), interest rate and time to maturity. Every time the market price for futures (which is determined by demand and supply) deviates from the fair value determined by using the above formula, arbitragers enter into trades to capture the arbitrage profit. For example, if the market price of the Future is higher than the fair value, the arbitrageur would sell in the futures market and buy in the spot market simultaneously and hold both trades till expiry and book riskless profit. As more and more people do this, the Future price will come down to its fair value level.

B.5. Trading Options

B.5.1. Option Pay-out
There are two sides to every option contract. On the one side is the option buyer who has taken a long position (i.e., has bought the option). On the other side is the option seller who has taken a short position (i.e., has sold the option). The seller of the option receives a premium from the buyer of the option. It may be noted that while computing profit and loss, premium has to be taken into consideration. Also, when a buyer makes profit, the seller makes a loss of equal magnitude and vice versa. B.5.1.1. A long position in a call option In this strategy, the investor has the right to buy the asset in the future at a predetermined strike price i.e., strike price (K) and the option seller has the obligation to sell the asset at the strike price (K). If the settlement price (underlying stock closing price) of the asset is above the strike price, then the call option buyer will exercise his option and buy the stock at the strike price (K). If the settlement price (underlying stock closing price) is lower than the strike price, the option buyer will not exercise the option as he can buy the same stock from the market at a price lower than the strike price.

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B.5.1.2. A long position in a put option In this strategy, the investor has bought the right to sell the underlying asset in the future at a predetermined strike price (K). If the settlement price (underlying stock closing price) at maturity is lower than the strike price, then the put option holder will exercise his option and sell the stock at the strike price (K). If the settlement price (underlying stock closing price) is higher than the strike price, the option buyer will not exercise the option as he can sell the same stock in the market at a price higher than the strike price.

B.5.1.3. A short position in a call option In this strategy, the option seller has an obligation to sell the asset at a predetermined strike price (K) if the buyer of the option chooses to exercise the option. The buyer of the option will exercise the option if the spot price at maturity is any value higher than (K). If the spot price is lower than (K), the buyer of the option will not exercise his/her option.

B.5.1.4. A short position in a put option In this strategy, the option seller has an obligation to buy the asset at a predetermined strike price (K) if the buyer of the option chooses to exercise his/her option. The buyer of the option will exercise his option to sell at (K) if the spot price at maturity is lower than (K). If the spot price is higher than (K), then the option buyer will not exercise his/her option.

Table 4 - Explanation of Payoffs for long Options

OPTION POSITION Long Call Option

BUYERS PAY-OFF Max(S T K) Premium

EXPLANATION If the closing spot price on any day or before expiry is at a value above the strike price of the option, then the option buyer can make profit equal to the difference between the spot price and the strike price; else he makes zero profit. If the closing spot price on any day or before expiry is at a value lower than the strike price of the option, then the option buyer makes profit equal to the difference between the strike and spot price; else he makes zero profit.

Long Put Option

Max(K S T ) Premium

The buyers profit is equal to the sellers loss. Therefore, in the above table the sellers loss is S T K for a short call option if the spot price closes at a value above the strike price of the option and is K ST for a short put option if the spot price closes at a value lower than the strike price of the option. The above four positions and their pay-offs are depicted in the figure below:

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Profit 5550 0 Nifty Loss

Figure 5 - Pay -off for a buyer of a call option

The figure shows the profits/losses for a buyer of a three-month Nifty 5550 call option. As can be seen, as the spot Nifty rises, the call option is in-the-money. If upon expiration, Nifty closes above the strike of 5550, the buyer would exercise his option and profit to the extent of the difference between the Nifty-close and the strike price. The profits possible on this option are potentially unlimited. However, if Nifty falls below the strike of 5550, the buyer lets the option expire. His losses are limited to the extent of the premium that he paid for buying the option.

Profit

Premium 0 5550 Nifty

Loss

Figure 6 - Pay-off for a seller of a call option

The figure shows the profits/losses for a seller of a three-month Nifty 5550 call option. As the spot Nifty rises, the call option is in-the-money and the writer starts making losses. If upon expiration,
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Nifty closes above the strike of 5550, the buyer would exercise his option on the writer who would suffer a loss to the extent of the difference between the Nifty-close and the strike price. The loss that can be incurred by the writer of the option is potentially unlimited, whereas the maximum profit is limited to the extent of the upfront option premium charged by him.

Profit 5550 0 Nifty Loss

Figure 7 - Pay-off for a buyer of a put option

The figure shows the profits/losses for a buyer of a three-month Nifty 5550 put option. As can be seen, as the spot Nifty falls, the put option is in-the-money. If upon expiration, Nifty closes below the strike of 5550, the buyer would exercise his option and profit to the extent of the difference between the strike price and Nifty-close. The profits possible on this option can be as high as the strike price. However, if Nifty rises above the strike of 5550, he lets the option expire. His losses are limited to the extent of the premium he paid for buying the option.

Profit

5550 0 Nifty Loss

Figure 8 - Pay-off for a seller of a put option

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The figure shows the profits/losses for a seller of a three-month Nifty 5550 put option. As the spot Nifty falls, the put option is in-the-money and the writer starts making losses. If upon expiration, Nifty closes below the strike of 5550, the buyer would exercise his option on the writer who would suffer a loss to the extent of the difference between the strike price and Nifty-close. The loss that can be incurred by the writer of the option is a maximum extent of the strike price (since the worst that can happen is that the asset price can fall to zero) whereas the maximum profit is limited to the extent of the upfront option premium of charged by him.

B.5.2. Option Strategies

An option strategy is implemented to try and make gains from the movement in the underlying price of an asset. As discussed above, options are derivatives that give the buyer the right to exercise the option at a future date. Unlike futures and forwards which have linear pay -offs and do not require an initial outlay (upfront payment), options have nonlinear pay-offs and do require an initial outlay (or premium). B.5.2.1. Long option strategy

A long option strategy is a strategy of buying an option according to the view on future price movement of the underlying. A person with a bullish opinion on the underlying will buy a call option on that asset/security, while a person with a bearish opinion on the underlying will buy a put option on that asset/security. An important characteristic of long option strategies is limited risk and unlimited profit potential. An option buyer can only lose the amount paid for the option premium. At the same time, theoretically, the profit potential is unlimited. B.5.2.1.i. Calls

An investor having a bullish opinion on underlying can expect to have positive returns by buying a call option on that asset/security. When a call option is purchased, the call option holder is exposed to the stock performance in the spot market without actually possessing the stock and does so for a fraction of the cost involved in purchasing the stock in the spot market. The cost incurred by the call option holder is the option premium. Thus, he can take advantage of a smaller investment and maximize his profits. Consider the purchase of a call option at the price (premium) c. ST = Spot price at time T K = Strike price
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The pay-out in two scenarios is as follows: Profit/Loss = c, if S T = K Profit/Loss = (S T - K ) c if S T = K Let us explain this with some examples. Mr. A buys a Call on an index (such as Nifty 50) with a strike price of Rs. 2000 for premium of Rs. 81. Consider the values of the index at expiration as 1800, 1900, 2100, and 2200. For S T = 1800, Profit/Loss = 0 81 = 81 (maximum loss = premium paid) For S T = 1900, Profit/Loss = 0 81 = 81 (maximum loss = premium paid) For S T = 2100, Profit/Loss = 2100 2000 81 = 19 For S T = 2200, Profit/Loss = 2200 2000 81 = 119 As we can see from the example, the maximum loss suffered by the buyer of the Call option is Rs. 81, which is the premium that he paid to buy the option. His maximum profits are unlimited and they depend on where the underlying price moves. B.5.2.1.ii. Puts An investor having a bearish opinion on the underlying can expect to have positive returns by buying a put option on that asset/security. When a put option is purchased, the put option buyer has the right to sell the stock at the strike price on or before the expiry date depending on where the underlying price is. Consider the purchase of a put option at price (premium) p. S T = Spot price at time T K = exercise price The pay-out in two scenarios is as follows: Profit/Loss = (K S T ) p if S T = K Profit/Loss = p if S T = K Let us explain this with some examples. Mr. X buys a put at a strike price of Rs. 2000 for a premium of Rs. 79. Consider the values of the index at expiration at 1800, 1900, 2100, and 2200. For S T = 1800, Profit/Loss = 2000 1800 79 = 121 For S T = 1900, Profit/Loss = 2000 1900 79 = 21 For S T = 2100, Profit/Loss = 79 (maximum loss is the premium paid) For S T = 2200, Profit/Loss = 79 (maximum loss is the premium paid)

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As we can see from the example, the maximum loss suffered by the buyer of the Put option is Rs. 79, which is the premium that he paid to buy the option. His maximum profits are unlimited and depend on where the underlying price moves. B.5.2.2. Short options strategy A short options strategy is a strategy where options are sold to make money upfront with a view that the options will expire out of money at the expiry date (i.e., the buyer of the option will not exercise the same and the seller can keep the premium). As opposed to a long options strategy, here a person with a bullish opinion on the underlying will sell a put option in the hope that prices will rise and the buyer will not exercise the option leading to profit for the seller. On the other hand, a person with a bearish view on the underlying will sell a call option in the hope that prices will fall and the buyer will not exercise the option leading to profit for the seller. As opposed to a long options strategy where the downside was limited to the price paid for the option, here the downside is unlimited and the profit is limited to the price of selling the option (the premium). B.5.2.2.i. Call An investor with a bearish opinion on the underlying can take advantage of falling stock prices by selling a call option on the asset/security. If the stock price falls, the profit to the seller will be the premium earned by selling the option. He will lose in case the stock price increases above the strike price. Consider the selling of a call option at the price (premium) c. S T = Spot price at time T K = exercise price The pay-out in two scenarios is as follows: Profit/Loss = c if S T = K Profit/Loss = c (S T K) if S T = K Now consider this example: A sells a call at a strike price of Rs 2000 for a premium of Rs 81. Consider values of index at expiration at 1800, 1900, 2100, and 2200. For S T = 1800, Profit/Loss = 81 (maximum profit = premium received) For S T = 1900, Profit/Loss = 81 (maximum profit = premium received) For S T = 2100, Profit/Loss = 81 (2100 2000) = 19 For S T =2200, Profit/Loss = 81 (2100 2200) = 119 As we can see from the example above, the maximum loss suffered by the seller of the Call option is unlimited (this is the reverse of the buyers gains). His maximum profits are limited to the premium received.

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B.5.2.2.ii. Puts An investor with a bullish opinion on the underlying can take advantage of rising prices by selling a put option on the asset/security. If the stock price rises, the profit to the seller will be the premium earned by selling the option. He will lose in case the stock price falls below the strike price. Consider the sale of a put option at the price (premium) p . S T = Spot price at time T K = exercise price The pay-out in two scenarios is as follows: Profit/Loss = p (K S T ) if S T = K Profit/Loss = p if S T = K We sell a put at a strike price of Rs. 2000 for Rs. 79. Consider values of index at expiration as 1800, 1900, 2100, and 2200. For S T = 1800, Profit/Loss = 79 (2000 1800) = () 121 For S T = 1900, Profit/Loss = 79 (2000 1900) = () 21 For S T = 2100, Profit/Loss = 79 (maximum profit = premium received) For S T = 2200, Profit/Loss = 79 (maximum profit = premium received) As we can see from the example above the maximum loss suffered by the seller of the Put option is unlimited (this is the reverse of the buyers gains). His maximum profits are limited to the premium received. B.5.3. Determination of option prices Options are derivative contracts that give the holder the right, but not the obligation, to buy or sell the underlying instrument at a specified price on or before a specified future date. Depending on the strategy, option trading can provide a variety of benefits including the security of limited risk and the advantage of leverage. Options can protect or enhance an investor's portfolio in rising, falling and neutral markets. The price, or cost, of an option is an amount of money known as the premium. The buyer pays this premium to the seller in exchange for the right granted by the option. The buyer pays the premium whether or not the option is exercised and the premium is non-refundable. The seller gets to keep the premium whether or not the option is exercised. An option premium is its cost - how much the particular option is worth to the buyer and seller. While supply and demand ultimately determine price, other factors do play a role. Option traders apply these factors to mathematical models to help determine what an option should be worth.
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OPTION PREMIUM

INTRINSIC VALUE

TIME VALUE

B.5.3.1. INTRINSIC VALUE:The intrinsic value is the difference between the underlying's price and the strike price. The intrinsic value for a call option is equal to the underlying price minus the strike price; for a put option, the intrinsic value is the strike price minus the underlying price. i.e. Intrinsic Value (Call) = Underlying Price Strike Price Intrinsic Value (Put) = Strike Price Underlying Price

The only options that have intrinsic value are those that are in-the-money. For calls, in-the-money refers to options where the exercise (or strike) price is less than the current underlying price. A put option is in-the-money if its strike price is greater than the current underlying price. i.e. In-the-Money (Call) = Strike Price < Underlying Price In-the-Money (Put) = Strike Price > Underlying Price

Any premium that is in excess of the option's intrinsic value is referred to as time value. B.5.3.2. TIME VALUE:It represents the amount of time that the option position has to become more profitable due to a favourable move in the underlying price. The more time to expiration, the greater the time value of the option. In general, investors are willing to pay a higher premium for more time, since time increases the likelihood that the position can become profitable. Time value decreases over time and decays to zero at expiration. This phenomenon is known as time decay.

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i.e. Option Premium = Intrinsic Value + Time Value

B.5.4. FACTORS INFLUENCING OPTION PRICES:The primary factors that influence option prices:i. Underlying Price ii. Expected Volatility iii. Strike Price iv. Time Until Expiration v. Interest Rate and Dividends B.5.4.1. UNDERLYING PRICE:The most influential factor on an option premium is the current market price of the underlying asset. In general, as the price of the underlying increases, call prices increase and put prices decrease. Conversely, as the price of the underlying decreases, call prices decrease and put prices increase. i.e. If underlying prices Call prices will Put prices will Increase Decrease Increase Decrease Decrease Increase

B.5.4.2. EXPECTED VOLATILITY:-

Volatility is the degree to which price moves, regardless of direction. It is a measure of the speed and magnitude of the underlying's price changes. Historical volatility refers to the actual price changes that have been observed over a specified time period. Option traders can evaluate historical volatility to determine possible volatility in the future. Implied volatility, on the other hand, is a forecast of future volatility and acts as an indicator of the current market sentiment. While implied volatility is often difficult to quantify, option premiums will generally be higher if the underlying exhibits higher volatility, because it will have higher expected price fluctuations.

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i.e. The greater the expected volatility, the higher the option value

B.5.4.3. STRIKE PRICE:The strike price determines if the option has any intrinsic value. As intrinsic value is the difference between the strike price of the option and the current price of the underlying. The premium typically increases as the option becomes further in-the-money (where the strike price becomes more favourable in relation to the current underlying price). The premium generally decreases as the option becomes more out-of-the-money (when the strike price is less favourable in relation to the underlying). i.e. Premiums increase as options become further in-themoney

B.5.4.4. TIME UNTIL EXPIRATION:The longer an option has until expiration, the greater the chance that it will end up in-the-money, or profitable. As expiration approaches, the option's time value decreases. The underlying's volatility is a factor in time value; if the underlying is highly volatile, one could reasonably expect a greater degree of price movement before expiration. The opposite holds true where the underlying typically exhibits low volatility; the time value will be lower if the underlying price is not expected to move much. i.e. The longer the time until expiration, the higher the option price The shorter the time until expiration, the lower the option price

B.5.4.5. INTEREST RATES AND DIVIDENDS:Interest rates and dividends also have small, but measurable, effects on option prices. In general, as interest rates rise, call premiums will increase and put premiums will decrease. This is because of the costs associated with owning the underlying; the purchase will incur either interest expense
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(if the money is borrowed) or lost interest income (if existing funds are used to purchase the shares). In either case, the buyer will have opportunity cost associated with the money. i.e. If interest rates Rise Fall Call prices will Increase Decrease Put prices will Decrease Increase

Dividends can affect option prices because the underlying stock's price typically drops by the amount of any cash dividend on the ex-dividend date. As a result, if the underlying's dividend increases, call prices will decrease and put prices will increase. Conversely, if the underlying's dividend decreases, call prices will increase and put prices will decrease. i.e. If dividends Rise Fall Call prices will Decrease Increase Put prices will Increase Decrease

B.5.5. OPTION PREMIUM vs THEORETICAL VALUE:The option premium is the price the option buyer pays to the seller in order to have the right granted by the option, and it is the money the seller receives in exchange for writing the option. The theoretical value of an option, on the other hand, is the estimated value of an option a price generated by means of a model. It is what an option should currently be worth using all the known inputs, such as the underlying price, strike and days until expiration. These factors often change during an option's lifetime, and some fluctuate in value on a continuing basis throughout any trading session. A pricing model will create theoretical values, but they are just that theoretical. Specific values for each factor can be used to predict an option contract's theoretical value at a given point in the future. When options are first listed on a stock, for example, the market makers will not know what sort of implied volatility to use, so they must make educated guesses (theoretical values). The implied volatility will then change based upon the supply and demand for the options. Option traders utilize various option price models to attempt to set a current theoretical value. Models use certain fixed known in the present factors such as underlying price, strike and days
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till expiration along with forecasts (or assumptions) for factors like implied volatility, to compute the theoretical value for a specific option at a certain point in time. Variables will fluctuate over the life of the option, and the option position's theoretical value will adapt to reflect these changes. B.5.6. Black-Scholes model:The Black-Scholes model for calculating the premium of an option was introduced in 1973 in a paper entitled, "The Pricing of Options and Corporate Liabilities" published in the Journal of Political Economy. The formula, developed by three economists Fischer Black, Myron Scholes and Robert Merton is perhaps the world's most well-known options pricing model. Black passed away two years before Scholes and Merton were awarded the 1997 Nobel Prize in Economics for their work in finding a new method to determine the value of derivatives. The Black-Scholes model is used to calculate the theoretical price of European put and call options, ignoring any dividends paid during the option's lifetime. While the original Black-Scholes model did not take into consideration the effects of dividends paid during the life of the option, the model can be adapted to account for dividends by determining the ex-dividend date value of the underlying stock. The model makes certain assumptions, including: The options are European and can only be exercised at expiration No dividends are paid out during the life of the option Efficient markets (i.e., market movements cannot be predicted) No commissions The risk-free rate and volatility of the underlying are known and constant Follows a lognormal distribution; that is, returns on the underlying are normally distributed.

Equation 4 - Black-Scholes Model

The formula above, takes the following variables into consideration: Current underlying price
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 Options strike price Time until expiration, expressed as a percent of a year Implied volatility Risk-free interest rates The model is essentially divided into two parts: The first part, SN(d1), multiplies the price by the change in the call premium in relation to a change in the underlying price. This part of the formula shows the expected benefit of purchasing the underlying outright. The second part, N(d2)Ke^(-rt), provides the current value of paying the exercise price upon expiration. The value of the option is calculated by taking the difference between the two parts, as shown in the equation. The mathematics involved in the formula is complicated and can be intimidating. Fortunately, however, traders and investors do not need to know or even understand the math to apply BlackScholes modelling in their own strategies. There are plenty of online calculators available do calculate the option pricing based upon this model.

B.6. Derivatives Trading On Exchange

Futures and options contracts are traded on the NSEs F&O Segment. The F&O Segment of NSE is a very liquid market clocking high turnover daily.

B.6.1. Derivatives Trading on NSE

The F&O segment on NSE provides trading facilities for the following derivative instruments: Index futures, Index options, Individual stock futures, and Individual stock options. As an investor one can invest in any of these products. All these products have different contract specifications. B.6.1.1. Contract specifications for index based futures Index futures are futures contracts on an index, like the Nifty. The underlying asset in case of index futures is the index itself. For example, Nifty futures traded in NSE track spot Nifty returns. If the Nifty index rises, so does the payoff of the long position in Nifty futures. Apart from Nifty other indices such as CNX IT, Bank Nifty etc. are also traded on the NSE. They have one-month, twomonth, and three -month expiry cycle: a one-month Nifty futures contract would expire in the current month, a two-month contract the next month, and a three -month contract the month after. All contracts expire on the last Thursday of every month, or the previous trading day if the last Thursday is a trading holiday. Thus, a September 2009 contract would expire on the last Thursday of September 2009, which would be the final settlement date of the contract. Table 6.1 summarizes contract specifications for S&P Nifty Index Futures.
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Table 5 - Contract Specification for S&P Nifty Index Futures

Underlying Exchange Of Trading Security Descriptor Contract Size Trading Cycle Expiry Day Settlement basis Settlement Price

S&p Cnx Nifty National Stock Exchange FUTIDX NIFTY Permitted lot size is 50 The volume can be only found in contracts up to 3 months. New contracts are introduced on the next trading day following the expiry of the near month contract. The last Thursday of the expiry month or the previous trading day if the last Thursday is a holiday. Mark-to-market and final settlement are cash settled on T+1 basis Daily settlement price is the closing price of the futures contracts for the trading day and the final settlement price is the value of the underlying index on the last trading day.

B.6.1.2. Contract specifications for index based options Index based options are similar to index based futures as far as the underlying is concerned i.e., in both the cases the underlying security is an Index. As the value of the index increases, the value of the call option on index increases, while put option value reduces. All index based options traded on NSE are European type options and expire on the last Thursday of the expiry month. They have expiries of one month or two months, or three months. Longer dated expiry contracts with expiries up to 5 years have also been introduced for trading. Table 6.2 summarizes contract specifications for S&P Nifty Index Options.
Table 6 - Contract Specification for S&P CNX Nifty Options

Underlying Security Descriptor Contract Size Trading Cycle Expiry Day Settlement basis Settlement Price Style Of Option

S&P CNX NIFTY OPTION NIFTY Permitted lot size is 50 The volume can be only found in contracts up to 3 months. New contracts are introduced on the next trading day following the expiry of the near month contract. The last Thursday of the expiry month or the previous trading day if the last Thursday is a holiday. Cash Settlement on T+1 basis Closing value of index on the last trading day European

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B.6.1.3. Contract specifications for stock based futures Stock based futures are futures based on individual stocks. The underlying on these futures are the individual company stocks traded on the Exchange. The expiration cycle of the stock futures is same as that of index futures. Table 6.3 summarizes the contract Specification for Stock Futures. Underlying Exchange Of Trading Security Descriptor Contract Size Trading Cycle Expiry Day Settlement basis Settlement Price Individual Securities National Stock Exchange FUTSTK Specified by the exchange and depends upon the price of the underlying stock, higher the price smaller will be the lot size and vice- versa The volume can be only found in contracts up to 3 months. New contracts are introduced on the next trading day following the expiry of the near month contract. The last Thursday of the expiry month or the previous trading day if the last Thursday is a holiday. Mark-to-market and final settlement are cash settled on T+1 basis Daily settlement price is the closing price of the futures contracts for the trading day and the final settlement price is the value of the underlying index on the last trading day.

B.6.1.4. Contract specifications for stock based options Stock based options are options for which the underlying is individual stocks. All the stock based options at the NSE have European style settlement. Table 6.4 summarizes the contract specification for Stock Options.
Table 7- Contract Specification for Stock Options

Underlying Security Descriptor Style of Option Contract Size Trading Cycle Expiry Day Settlement basis Daily Settlement Final Settlement Price

Individual Securities available for trading in cash market OPTSTK European Specified by the exchange and depends upon the price of the underlying stock, higher the price smaller will be the lot size and vice- versa The volume can be only found in contracts up to 3 months. New contracts are introduced on the next trading day following the expiry of the near month contract. The last Thursday of the expiry month or the previous trading day if the last Thursday is a holiday. Daily settlement on T+1 basis and final option exercise settlement on T+1 basis Premium Value (Net) Closing price of underlying on exercise day or on expiry day
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B.7. Working at Unicon:Unicon Investment Solution being an Depository participant firm provided ample opportunity to interact with Investors and see how trading happens in real time.

B.7.1. Snapshot Of Learning At Unicon:Index Future Margin Buy Margin Short Sell Brokerage Lot Size B.7.1.1. Options:B.7.1.1.i. Index Option:Trading on Index. Call option:Buy option, Bullish expectation, and profit when increase in index. Put option:Sell option, Bearish expectation and profit when decrease in index. Trading On premium and it is being decided by NSE. Expiry of the contract is months last Thursday. Limited loss, unlimited profit. B.7.1.1.ii. Stock Option:Trading on Stock Price. Call Option:Buy Share, Bullish expectation from share, profit when share price increases. Put Option:Sell share, bearish expectation from share, profit when share price decreases. Traded in lots, lot size depends upon the share price and is decided by NSE. Generally the greater is the stock price lower will be the lot size and vice-versa. Nifty Margin Nifty Margin Intraday 50 Index Option Premium * 50 Nifty Margin Less than Rs. 100 50 Stock Future As per Stock Lot Size As per Stock Lot Size Intraday As per Stock Price Stock Option Premium * Lot Size As per Stock Lot Size Less than Rs. 100 As per Stock Price

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B.7.1.2. Equity:Table 8 Equity

Intra-Day

Delivery / Carry-Forward

Same day Trading Get limit, Depending upon companies to companies

Less brokerage charge No actual stock purchased so nothing gets transferred to trader Demat account Have to clear or square-off before 3.15-3.30 pm No actual ownership in the traded company

More than One day Trading on actual amount from the account of trader, and if limet is given then its less than Intra-day as well as it depends upon trader to trader More brokerage charge as more time and paper work involved Actual purchase of stocks takes place and the same gets transferred to trader Demat account. Can hold the stocks as long as they want Actual ownership in the traded company

Timings:1. Stock Market:- 9:15 am to 3:30 pm 2. Currency Market:- 9:00 am to 5:00 pm 3. Commodity Market:- 10:00 am to 11:30 pm (On Saturdays till 2:00 pm) Brokerage is generally charged after day close of the market. Brokerage:1. Cash Market:{(Buy Turnover + Sell Turnover) * Brokerage} / 100} 2. Option Brokerage:On the Per lot basis, depends upon turnover of the trader. Higher the turnover lower is the brokerage being charged by the firm. For stock option brokerage is charged same as the way it is being charged for cash brokerage.
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B.7.1.3.Futures:B.7.1.3.i. Index Future:Lot size of 50, Margin on the basis of percentage of the amount multiplied by lot size. Brokerage of intraday. B.7.1.3.ii. Stock Future:Stock in lots, decided by NSE and depends upon Stock price, Larger the stock price lesser will be the lot size and vice-versa. Brokerage of intraday.

B.7.1.4.Short Sell:Selling securities that the seller doesnt own, and makes profit when the price fells, In against of short sell short-cover is done. A. Cash:Brokerage and margin Similar to intra-day. Valid till 3:30 pm during a day. B. Future:Brokerage and margin of Future buy. Valid till contract last. C. Option:i. Option Index Short Sell:Margin Depends upon NIFTY future margin. Money has to be kept against it as token money. Brokerage same as of option buy. Limited profit, unlimited loss. ii. Option stock short sell:Margin same as of Future buy. Brokerage depends upon over the money and in the money trade, but the difference is negligible.

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B.7.1.5. Currency:Trading in, US dollar:- Started in August 2008 Euro, Yen and Pond started in august 2009
Table 9 Currency

Margin Contract Size Expiry Last allowed Trade Brokerage

Currency Future 3.5% of the turn over 1000 Last working day of the month Two days before expiry Rs. 20 to 50 per lot

Currency Options Premium * Lot size 1000 Last working day of the month Two days before expiry Maximum of Rs. 20 Per Lot

B.7.1.6. Procedure to Open DE mat And Trading Account:-

To perform internet based trade in trading market one need to have a trading account and to hold shares, investments in electronic form DE mat account is needed. De-mat account can be opened with any NSE & SEBI recognized Depository Participant Firm or with banks providing DE mat account facility. PROCEDURE FOR OPENING AN ACCOUNT A demat account are opened on the same lines as that of a Bank Account. Prescribed Account opening forms are available with the DP, needs to be filled in. Standard Agreements are to be signed by the Client and the DP, which details the rights and obligations of both parties The DP officials will make available the relevant account opening form (depending on whether the client is a retail investor or corporate client/clearing member) and specify the list of documents regarding references that should be submitted along with the form. It will also give a copy of the relevant agreement to be entered with the client, in duplicate. The client will submit the duly filled in account opening form and client has to visit personally for opening the account in DP. The DP officials have to do in person verification and affix the IN PERSON VERIFICATION stamp on the account opening form. It should also furnish such documents regarding references, as specified by the DP, along with the account opening form. After executing the agreement the client has to forward it to the DP. The DP officials will verify that the account opening form is duly filled in. It will also verify the enclosed documents, if any. Incomplete forms will be forwarded to the client for rectification. For Corporate Clients, the DP officials will verify if the board resolution for the authorized signatories is enclosed.
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 In case the documents are not proper, the DP officials will reject the form and intimate the client of the same, stating the reasons for doing so. If the form is in order; the DP officials will accept the same and affix the stamp verified with original on each and every proof after seeing the original proofs. After completion of all documentation, the DP officials will verify the pan from income tax website. And affix the stamp PAN VERIFIED with date and sign on the stamp. The DP officials will enter the client details as mentioned in the account opening form in the DPM (software provided by NSDL & CDSL to the Participant) screen provided for the purpose. In case of NSDL A/c opening the SR. Assist will capture all the details in the DPM and record the clients signature (on the form) as specimen for authorizations in the future. After entering client details in the system, a client account number will be generated by the DPM. The DP officials will enter this in the account opening form. After that the officers will verify the details in the DPM captured by the SR. Assist. and activate the account. The DP officials are not allowed to give the demat a/c no to the clients until the a/c is activate, this is applicable for both NSDL & CDSL. When the demat a/c is activated the DP officials have to send the client master and the copy of agreement between DP and client at the clients address

The account holder is called 'beneficial owner' in a depository system and the account is known as 'beneficiary account'.

Features of Beneficiary Account: No minimum balance is required to be retained in a beneficiary account. An investor can close a beneficiary account with one DP and open an account with another DP. To dematerialise existing physical holdings, the beneficiary account must be opened in the same ownership pattern in which the securities are held in the physical form e.g.,if one certificate is in individual name and another certificate is jointly held by X & Y, two different accounts should be opened. However, in case of joint holders, securities can be dematerialised in the same account even though share certificates are in different sequence of names e.g., shares held in joint names of X & Y can also be dematerialised in an account opened in the names of Y & X as well by submitting an additional form (Transposition Form) alongwith Demat Request Form to the DP.However, shares held jointly by X & Y cannot be dematerialised in an account opened in the name of only X or only Y or any

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DOCUMENTS REQUIRED FOR DE MAT ACCOUNT:Proof of Identity (POI): Passport Voter ID card Driving license PAN card Identity card with applicants photograph issued by o Central or state government and its department o Statutory/regulatory authorities o Public sector undertakings o Scheduled commercial banks o Public financial institutions o College affiliated to universities

Proof of Address (POA): Ration card Passport Voter ID card Driving License Bank passbook Adhar Card Verified copies of : o Electricity bills (not more than 2 months old) o Residence landline telephone bill (not more than 2 months old) o Leave & license agreement/agreement to sell (duly attested) o Self-declaration by supreme court/high court judges, giving the new address in respect of their own accounts. Identity card with applicants photograph issued by o Central or state government and its department o Statutory/regulatory authorities o Public sector undertakings o Scheduled commercial banks o Public financial institutions o College affiliated to universities. o Copy of PAN card along with original PAN card for verification Bank details: Copy of cancelled cheque with printed name from the bank. Copy of bank passbook with name and address and copy of cancelled cheque. Bank statement with name and address (duly authorized by the bank, if statement is on plain paper) not more than 4 months old and copy of cancelled cheque of MICR & bank detail verification.
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o o o

In case of minor Date of birth certificate duly notarized Proof of address and identity documents of the guardian both minor and guardians photograph and guardian to sign across both photographs PAN card of minor as well guardian is mandatory In case of NRI Foreign address and RBI approval date attested copy of RBI approval NRO-Indian address along with proofs Bank account details In case of joint holdings In case of joint holdings, POI and POA documents alongwith PAN card must be submitted in respect of all account holders. Original documents must be taken to the DP for verification. The DP will also provide a copy of the DP-Client agreement. Account opening form require the applicants to give the following details: (a) Name(s) of account holder(s) -The investor should ensure that the name is identical to that which appears on the certificate(s) to be dematerialised. In case of joint holdings, account may be opened in any one combination, irrespective of the sequence in which names are appearing on share certificates. Investors are advised to open their account in their fully expanded name, i.e., to spell to the first name as well as the middle name. This would obviate any doubts about the veracity of the information. (b) Mailing and communication address(es) - The veracity of the applicant's address is determined through the documents submitted for verification like ration card, passport, voter ID, PAN card, driving license, bank passbook, etc. For NRI accounts, proof is required for both addresses - that of the account holder as well as the constituted attorney. For corporate accounts, a copy of Memorandum of Association, Articles of Association, Board resolution permitting opening of account, the registered address of the company have to be furnished. (c) Details of guardian in case account holder is a minor -Only a guardian can open a depository account for a minor. The guardian is required to sign the application form, and details of his name and address need to be given in addition to the details of the minor. Foreign Address and RBI approval details for NRI, FII or OCB accounts -For foreign-based applicants like NRIs, Flls, OCBs, etc., the applicant must furnish original or attested copies of the power of attorney and the approval letter from RBI permitting them to invest, as the case may be.If the account holder is an FII or an OCB, SEBI registration details along with attested copy of registration certificate issued by SEBI and authorisation letter is required. (e) Details of bank account -Details of bank account of the account holder, including the nine digit code number of the bank and branch appearing on the MICR cheques issued by

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the bank have to be filled in the application form. Companies use this information for printing them on dividend/interest warrants etc. (f) Nomination declaration - A beneficial owner can make a nomination of his account in favour of any person by filing the nomination form with his DP. Such nomination is considered to be conclusive evidence of the account holder'(s) disposition in respect of all the securities in the account for which the nomination is made. (g) Standing Instruction - a facility of standing instruction is provided to the investors for receiving securities to the credit of their accounts without giving a separate receipt instruction. The demat account cannot be operated on "either or survivor" basis like the bank account. In case of the joint account for the beneficial owners, all the joint holders have to sign the account opening form. The investor will submit to his DP the duly filled in account opening form & DP-client agreement along with the documents. The DP will verify whether the account opening form has been duly filled in or not. He will also verify the submitted documents. For corporate investors, the DP will also verify whether the board resolution for the authorized signatories has been enclosed. The DP will ensure that client's signature is recorded on the form which will serve as specimen for authorizations in future. If the application form and documents are in order, then the DP will accept them and give an acknowledgement slip duly signed and stamped to the client. The DP will execute the agreement and give a copy of it to the client.

After completion of all documentation, the DP will enter the client details as mentioned in the account opening form in the DPM (software provided by NSDL to the DP) screen provided for the purpose. After entering client details in the system, a client account number will be generated by the DPM. The DP will enter this in the account opening form.

On successful opening of the account, the DP will give: Client Id - an eight digit number to be used along with DP Id for any future transactions. Delivery Instruction slip book.

A copy of the report listing the client details captured in the DPM database to the client. The report will be generated by the DPM.

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PREREQUISITES FOR DEMATERIALISATION REQUEST The registered holder of the securities should make the request. Securities to be dematerialised must be recognised by NSDL/CDSL as eligible. In other words, only those securities whose ISIN has been activated by NSDL/CDSL, can be dematerialised. The company/issuer should have established connectivity with NSDL/CDSL. Only after such connectivity is established that the securities of that company/issuer are recognized to be "available for dematerialisation". The holder of securities should have a beneficiary account in the same name as it appears on the security certificates to be dematerialised. The request should be made in the prescribed dematerialisation request form. REASONS FOR DEMATERIALISATION REQUEST REJECTION 1. The quantity of shares mentioned in the DRF is more than the actual certificates sent. 2. The quantity of shares mentioned in the DRF is less than the actual certificates sent. 3. The certificates sent are fake. 4. The certificates sent are reported Stolen. 5. Original certificates present are those for which the duplicates have already been issued. 6. Endorsements on the certificates are forged. 7. Securities stand on a different name than those mentioned in the DRF. 8. The details mentioned on the certificates do not match with the details on the DRF, or the order of the holders name on the DRF is different from the names given on the certificates. The scrutiny by the DP is incomplete. 9. The securities attached / DRF does not pertain to the R&T Agent to whom the DRF is sent. 10. Electronic request received but physical certificates are not received with in 15 days. 11. Specimen Signature on the DRF differs from the signatures recorded with the Registrar / Transfer Agents. 12. The certificates sent have a court injunction against them

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Precautions: Corporate investors to enclose Memorandum of Association/Trust deed/Board resolution for the authorized signatories along with the account opening form. Details with respect to the bank account details of an investor must be indicated in the space provided for the same in the account opening form. If an investor is interested in availing the facility of standing instructions for credits to his account, then such instructions may be given to the DP. Otherwise, he will need to give a receipt instruction to his DP for receiving credits to his account. BENEFITS OF DEMATERIALISATION No stamp duty for transfer of securities in the Depository System. In the case of physical shares, stamp duty of 0.25% of sale value is payable on transfer of shares. Elimination of bad deliveries and all risks associated with physical certificates such as loss in transit, theft, mutilation, damage, etc. Facility for freezing/locking of investor accounts to make it non-operational for specified period. Instead of filling up transfer deed(s) a simpler form is to be given `to the DP. Facility to pledge and hypothecate securities. Pledging Dematerialised securities is easier and advantageous as compared to pledging physical shares. In respect of shares in "compulsory Demat" category, banks prefer to lend against shares held in electronic form, and offer better terms. Odd lots are not differentiated in the electronic system. Even a single share can be traded at the market rates without any reduction in realisation. Just like a bank branch, the DP will give a periodical statement of account of holdings. In addition, investor can obtain a statement of holdings as and when required for a fee. In case investor loses the statement of holdings, he can inform his DP and obtain a duplicate statement. Investor's statement of holdings cannot be used by anybody else for trading in his account. When an investor opens an account with a DP, he signs an agreement with the DP in which the DP will indemnify the investor for any mis-use of his holdings. The depository will also ensure thatthe interests of the investor are protected. Grievances, if any, against his DP will be resolved by the Depository. Every transaction in investor's account will have to be authorised by him, which ensures total control of the investor over his investment A safe and convenient way to hold securities and there is immediate transfer of securities. Change in address recorded with DP gets registered with all companies in which investor holds securities electronically eliminating the need to correspond with each of them separately. Reduction in paperwork involved in transfer of securities and Reduction in transaction cost Automatic credit into demat account of shares, arising out of bonus/split/consolidation/merger etc.
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DEMAT PROCESS The registered holder of the securities makes the request. Securities must be recognised by Depository as eligible. Client submits DRF & physical certificates to DP. DP check securities. Client defaces certificates and DP punches two holes on name of company. DP enters demat request in system for Depository. DP dispatches certificates along with DRF to R&T. Depository records the details and sends to R&T. R&T agent verifies the details and confirms to Depository. Depository credits the demat securities to BO a/c of client and intimates DP electronically. DP issues statement to client.

DEMAT -PROCESS

Demat Process: Shareholders

With Physical Certificate

Depository Participants

Shareholder goes to DP with his physical share certificates

Account Opening

Shareholder opens his account with DP.

Demat Request Form (DRF)

Shareholder fills DRF in duplicate, defaces the shares and hands over to DP

The DP sends Share certificates to R&T agent for dematerialisation

R&T Agent

Depository

DP sends information electronically to Depository

Dematerialisation

Upon confirmation of Demat by R&T Agent, the Depository confirms Dematerialisation.

Credit to the BO A/c. of the Investor

Figure 9 Demat Process

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INFORMATION NEEDED FOR DEMAT ACCOUNT An investor has to give his bank account details at the time of account opening. It is for the protection of investors interest. The bank account number will be mentioned on the interest or dividend warrant, so that such warrant cannot be encashed by anyone else. Further, cash corporate benefits such as dividend, interest will be credited to the investors account directly through the ECS (Electronic Clearing Service) facility, wherever available, by the company.

An investor can change the details of his bank account. Since in the depository system monetary benefits on the security balances are paid as per the bank account details provided by the investor at the time of account opening, the investor must ensure that any subsequent change in bank account details is informed to the DP.

An Investor should immediately inform his/her DP if the address of the investor changes, who in turn will update the records. This will obviate the need of informing different companies.

An investor can open more than one account in the same name with the same DP and also with different DPs. An investor has not to keep any minimum balance of securities in his/her accounts. Depository / DP can be chosen by investor as per convenience irrespective of the DP of the broker. The demat account must be opened in the same ownership pattern such as securities owned individually in which the securities are held in the physical form. e. g. if one share certificate is in the individual name and another certificate is jointly with somebody, two different accounts would have to be opened.

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B.8. Recent Trends in Share markets:FY12-13 continued to remain challenging for the Indian equity markets. With the domestic capital markets bound quite tightly with the global markets, the combination of weak developed markets recovery, slowing growth in emerging economies and closer to home persistently high inflation, slowing economy, weakening public finances, depreciating rupee, slowing exports and deteriorating current account deficit dampened investor sentiment. Last quarter of the FY12-13 however, a slew of reforms, proposed legislations and possible bottoming out of economic cycle buoyed investor outlook and brought some life back into the equity markets. Within the equity derivative segment, futures volumes continued their downward trend and declined by 13% (annualized) in FY12-13 when compared to FY11-12 while options volumes increased by a further 29% (annualized) over the same period.

Figure 10 Equity Brokerage Turnover - Quarter wise

In terms of volume composition, cash market trades accounted for 8% of overall volumes in FY1213 as compared to 10% in FY11-12 and 13% in FY10-11. Were the same trends to continue, cash volumes are likely to decline even in absolute number in FY12-13 when compared to the already battered volumes of FY11-12. Similarly, futures volumes constituted ~16% of overall volumes in FY12-13 when compared to 22% for FY11-12 and 29% for FY10-11. Again, on the current trajectory, it looks unlikely for the futures volumes in FY13-14 to upstage the FY11-12 levels in absolute numbers. Options volumes constitute the remainder 76% of overall volumes in FY12-13. Consequently, equity derivative volumes, led by options volumes have continued their upward surge and now account for 92% of overall exchange traded volumes in FY12-13 as compared to 90% in FY11-12 and 87% in FY10-11.

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(ICRA LIMITED, 2013)

Figure 11 Common Size analysis of Equity Volumes

Within the Options segment, the index option based on NIFTY accounted for nearly 93% of the total options volume in 9MFY12-13 as compared to 96% for FY 11-12, providing adequate liquidity and further fuelling investor appetite. However in 9MFY12-13, stock options have gathered momentum with traded volume growth of 81% (annualized) when compared to FY11-12 albeit on a smaller base. Average daily volumes (ADV) in 9MFY 12-13 (Rs 1.65 trillion) increased by 15% when compared to FY 11-12 (~Rs 1.43 trillion). ADV grew at a faster clip in Q3FY12-13 (Rs. 1.70 trillion) as compared to Q1FY12-13 (Rs 1.59 trillion).

Figure 12 - Trading activity based upon Investor Class

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In terms of trading activity in the market, the number of trades in the cash segment declined by ~17% (annualized) while average trade size remained flat when compared to FY11-12. The average trade size stood at Rs 18,950 in 9MFY12-13 as compared to Rs. 19,009 in FY11-12. Number of trades reported a decline to 1.12 billion in 9MFY 12-13.

Figure 13 - Number Of Trade At NSE - Cash Segment

Figure 14 - Total No. Of Contracts at NSE & BSE - Derivatives segments

In the derivatives segment at the exchanges, number of contracts continued to increase by ~14% (annualized) in 9MFY12-13 as compared to FY 11-12. Average trade size also reported a marginal 4% increase to ~Rs. 0.27 million per trade in 9MFY12-13 as compared to Rs 0.26 million per trade in FY 11-12.
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C. Technical Analysis

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C.1. Introduction:On the site of NSE(National Stock Exchange) all the data related to trading, stocks and stock market is arranged very beautifully under Datazone section. The real challenge arises when out of tons of data one has to find the most appropriate one. This report will try to analyse some of the data taken from NSE other variables and scales which are either not directly related or at least no seems to be related. The tools used for such analysis are MS Excel and IBM SPSS. Also the stats technique used are Correlation, Regression, Factor analysis and descriptive statistics. Also this section of the report will cover the analysis of the responses generated from survey conducted on the topic.

C.2. Analysis of secondary data:C.2.1. Index Future Turnover & Index Nifty:C.2.1.1. Comparison between Index Future Turnover and Nifty Index:Table 10 - Index future Turnover and Index Nifty

Year 2011-12 2010-11 2009-10 2008-09 2007-08 2006-07 2005-06 2004-05 2003-04 2002-03 2001-02

INDEX FUTURE Turnover (Rs. 1000cr.) 3577.99841 4356.75453 3934.38867 3570.1114 3820.66727 2539.574 1513.755 772.147 554.446 43.952 21.483

Average Index Nifty 5249.574096 5586.046654 4484.567213 1768.295885 1372.354582 1046.214458 1072.038578 1804.833004 1424.887205 1037.893825 1077.165182

Table above shows the growth in turnover for index future from year 2001 to year 2012. Also it shows the average index nifty for the same period.

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comaprision b/w index Future turnover and nifty index

6000

5000

4000

index

3000

INDEX FUTURE Turnover (Rs. 1000cr.)

2000

1000

year
Figure 15 - Graphical Plot between Index Future Turnover and Nifty Index

The Chart clearly shows the movement and growth of nifty index and index future turnover. It however, should be noted that during the year 2004-05 to year 2008-09 when the Nifty index was not moving sharply there was a boom in the turnover of the Index future. Whereas during the year 2008-09 to year 2010-11 when the nifty index had shown considerable boom the comparative growth in the turnover was not seen. C.2.1.2. Statistical analysis of Index Future Turnover and Nifty Index:Table 11 - Correlations between index Future turnover and nifty index INDEX FUTURE Turnover (Rs. 1000cr.) index nifty Pearson Correlation INDEX FUTURE Turnover (Rs. 1000cr.) Sig. (2-tailed) N Pearson Correlation index nifty Sig. (2-tailed) N 12 .690* .013 12 12 1 .690* .013 12 1

*. Correlation is significant at the 0.05 level (2-tailed).

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To check whether there is any relationship between Index futures turnover and index nifty, Correlation between them is calculated and as it can be observed from the table 2.1.2. Pearson correlation comes out to be 0.690 which shows moderate correlation. But as the significance comes out to be 0.013, which is lower than the assumed level of significance i.e. 0.05, the result of correlation is significant.
Table 12 Model Summary Index Future Turnover and nifty index Model Summary Model R R Square Adjusted R Square 1 .674
a

Std. Error of the Estimate

.454

.394

1320.57725

a. Predictors: (Constant), index nifty

The above table explains that 45.4% variance in Index future turnover is explained by Index nifty.
Table 13 Anova Index Future Turnover & Nifty Index ANOVAa Model Regression 1 Residual Total Sum of Squares 13071147.454 15695318.572 28766466.026 df 1 9 10 Mean Square 13071147.454 1743924.286 F 7.495 Sig. .023b

a. Dependent Variable: INDEX FUTURE Turnover (Rs. 1000cr.) b. Predictors: (Constant), index nifty

Table 14 Coefficient Index Future Turnover & Nifty Index Coefficientsa Model Unstandardized Coefficients Standardized Coefficients B (Constant) 1 index nifty .634 .231 .674 2.738 .023 .110 1.157 a. Dependent Variable: INDEX FUTURE Turnover (Rs. 1000cr.) 752.661 Std. Error 675.309 Beta 1.115 .294 Lower Bound -774.994 t Sig. 95.0% Confidence Interval for B Upper Bound 2280.316

Regression Equation for Index Future Turnover can be, Index Future Turnover = 752.661 + (0.634 * Index Nifty)
Equation 5 Regression equation for index future turnover

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C.2.2. Index Option Turnover and Index Nifty:C.2.2.1. Comparison between Index Option Turnover and Index Nifty:Table 15 - Index Option Turnover and Nifty Index

Year option index turnover(Rs. 1000 Cr.) index nifty 2011-12 22720.03164 5249.574096 2010-11 18365.36576 5586.046654 2009-10 8027.9642 4484.567213 2008-09 3731.50184 1768.295885 2007-08 1362.11088 1372.354582 2006-07 791.906 1046.214458 2005-06 338.469 1072.038578 2004-05 121.943 1804.833004 2003-04 52.816 1424.887205 2002-03 9.246 1037.893825 2001-02 3.765 1077.165182 Table above shows the growth in turnover for index option from year 2001 to year 2012. Also it shows the average index nifty for the same period.

25000

Comparison between Index Option Turnover and Index Nifty

otion index turnover(R s. 1000 Cr.) index nifty

20000 Index and Turnover

15000

10000

5000

0 Year
Figure 16 - Graphical Plot of Index Option Turnover and Index Nifty

Between the year 2007-08 and year 2011-12 we can see a steep increase in both the nifty index and index option turnover. This tells us that there is a possibility that both of these are correlated and thus further analysis is needed.

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C.2.2.2. Statistical analysis of Option Index Turnover and Index Nifty

Table 16 - Correlations Between option index turnover and Index Nifty

Option index turnover (Rs. 1000 Cr.) Pearson Correlation Option index turnover (Rs. 1000 Cr.) Sig. (1-tailed) N Pearson Correlation index nifty Sig. (1-tailed) N **. Correlation is significant at the 0.01 level (1-tailed). 11 .939** .000 11 1

index nifty

.939** .000 11 1

11

The table 2.2.2.1 shows the result of correlation between Option Index turnover and Index nifty. As it is clear from the table that Pearson correlation is 0.939 which denotes a very high level of correlation between them. Also the level of significance is 0.000 which is below our assumed level 0.01 , thus implying that result is significant. Thus we can easily say that there lies a high degree of correlation between option index and index nifty.
Table 17 - Model Summary

Mod el

R Square

Adjusted R Square

Std. Error of the Estimate R Square Change F

Change Statistics df1 df2 Sig. F Change 1 9 .000

Change 66.550

.939

.881

.868 2942.63369

.881

a. Predictors: (Constant), index nifty b. Dependent Variable: option index turnover (Rs. 1000 Cr.)

From the table we can see that R square (R2) is 0.881, which explains that 88.1 % variance in index option turnover, is explained by nifty index.

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Table 18 Annova

Model Regression 1 Residual Total

Sum of Squares 576265495.658 77931837.048 654197332.706

df 1 9 10

Mean Square 576265495.658 8659093.005

F 66.550

Sig. .000
b

a. Dependent Variable: option index turnover (Rs. 1000 Cr.) b. Predictors: (Constant), index nifty

The table above clearly shows that the p value is below 0.5 as it is 0.000, which signifies that the test we conducted is valid and the variance of index option turnover is dependent upon index nifty.
Table 19 - Coefficients

Model

Unstandardized Coefficients

Standardized Coefficients

Sig.

95.0% Confidence Interval for B

B (Constant) 1 index nifty 4.207 -4867.283

Std. Error 1504.787 .516

Beta -3.235 .939 8.158 .010 .000

Lower Bound -8271.347 3.041

Upper Bound -1463.219 5.374

a. Dependent Variable: option index turnover (Rs. 1000 Cr.)

From the above table we can conclude the regression equation as:-

Option index turnover = -4867.23 + (4.207 * index nifty)

Equation 6 - regression equation for index option turnover

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C.2.3. Stock Future Turnover and Index Nifty:C.2.3.1. Comparison between Stock Future Turnover And Index Nifty:Table 20 - Stock Future Turnover And Index Nifty

Year 2011-12 2010-11 2009-10 2008-09 2007-08 2006-07 2005-06 2004-05 2003-04 2002-03 2001-02

Stock Future Turnover(Rs. 1000 Cr.) 4074.67073 5495.7567 5195.24664 3479.64212 7548.56323 3830.967 2791.697 1484.056 1305.939 286.533 51.515

index nifty 5249.574096 5586.046654 4484.567213 1768.295885 1372.354582 1046.214458 1072.038578 1804.833004 1424.887205 1037.893825 1077.165182

Table above shows the growth in turnover for stock future turnover from year 2001 to year 2012. Also it shows the average index nifty for the same period.

Comparison Between Stock Future Turnover And Index Nifty

8000 7000 6000 Index Nifty 5000 4000 3000 2000 1000 0 Stock Future Turnover(Rs. 1000 Cr.) index nifty

year
Figure 17- Graphical plot between Stock Future Turnover and Index Nifty

From the above figure it can be seen that between the year 2004-05 and 2007-08 there was boom in the turnover of the stock future but from the year 2007-08 and 2008-09 , there is a steep slow decrease in the stock future turnover (this is the time of Eurozone crisis). Whereas such extreme can only be seen in index nifty during year 2008-09 to year 2010-11.

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C.2.3.2. Statistical Analysis Of Stock Future Turnover And Index Nifty:Table 21 - Correlations between Stock Future Turnover and Index Nifty

Stock Future Turnover(Rs. 1000 Cr.) Pearson Correlation Sig. (1-tailed) Stock Future Turnover(Rs. 1000 Cr.) Sum of Squares and Crossproducts Covariance N Pearson Correlation Sig. (1-tailed) Sum of Squares and Crossproducts Covariance N 1

index nifty

.475 .070

54491973.552

20025125.779

5449197.355 11 .475 .070

2002512.578 11 1

index nifty

20025125.779

32557393.194

2002512.578 11

3255739.319 11

From the above correlation table it is clear that the Pearson Correlation between Stock future turnover and Index nifty is week as the value is 0.475. Moreover as the p value comes to be 0.070, there is no significant correlation between the two. Thus no further analysis is required.

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C.2.4. Stock Option Turnover & Index Nifty:C.2.4.1. Comparison between Stock option turnover and Index nifty:Table 22 - Stock Option National Turnover & Index Nifty

Year 2012-13 2011-12 2010-11 2009-10 2008-09 2007-08 2006-07 2005-06 2004-05 2003-04 2002-03 2001-02

Stock Options Notional Turnover (Rs. 1000cr.) index nifty 2000.42729 5521.156 977.03113 5249.574 1030.34421 5586.047 506.06518 4484.567 229.22681 1768.296 359.13655 1372.355 193.795 1046.214 180.253 1072.039 168.836 1804.833 217.207 1424.887 100.131 1037.894 25.163 1077.165

Table above shows the growth in turnover for stock option national turnover from year 2001 to year 2012. Also it shows the average index nifty for the same period.

Graphical Plot Of Stock Option Turnover & Index nifty

STOCK OPTION NATIONAL TURNOVER (Rs. 1000Cr.) 6000 5000 4000 3000 2000 1000 0 Stock Options Notional Turnover (Rs. 1000cr.) index nifty

YEAR
Figure 18 - Graphical Plot Of Stock Option National Turnover & Index Nifty

From the above figure it can be seen that the stock index national turnover seems to grow with the movement with index nifty. The detailed analysis and judgement of this can be done by correlation and regression analysis of the data.

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C.2.4.2. Statistical analysis of stock option national turnover & Nifty Index:Table 23 - Correlations between of stock option national turnover & Nifty Index

Stock Options Notional Turnover (Rs. 1000cr.) Pearson Correlation Stock Options Notional Turnover (Rs. 1000cr.) index nifty Stock Options Notional Turnover (Rs. 1000cr.) index nifty Stock Options Notional Turnover (Rs. 1000cr.) index nifty 1.000 .858 . .000 12 12

index nifty .858 1.000 .000 . 12 12

Sig. (1-tailed)

From the above table it can be concluded that the stock option national turnover and index nifty exhibits high degree of correlation i.e. 0.858. Also the p value is 0.000 which signifies that the result is significant and further analysis can be done.

Table 24 - Model Summary of stock option national turnover & Nifty Index Model R R Square Adjusted R Square Std. Error of the Estimate R Square Change 1 .858a .736 .709 309.59390 .736 27.813 1 10 .000 F Change df1 df2 Sig. F Change Change Statistics

a. Predictors: (Constant), index nifty b. Dependent Variable: Stock Options Notional Turnover (Rs. 1000cr.)

From the table we can see that R square (R2) is 0.736, which explains that 73.6 % variance in stock options turnover, is explained by nifty index.

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Table 25 - ANOVA stock option national turnover & Nifty Index

Model Regression 1 Residual Total

Sum of Squares 2665813.058 958483.828 3624296.887

df 1 10 11

Mean Square 2665813.058 95848.383

F 27.813

Sig. .000
b

a. Dependent Variable: Stock Options Notional Turnover (Rs. 1000cr.) b. Predictors: (Constant), index nifty

The table above clearly shows that the p value is below 0.5 as it is 0.000, which signifies that the test we conducted is valid and the variance of stock option national turnover is dependent upon index nifty.

Table 26 - Coefficients for stock option national turnover & Nifty Index

Model

Unstandardized Coefficients

Standardized Coefficients

Sig.

95.0% Confidence Interval for B

B (Constant) 1 index nifty .253 -163.290

Std. Error 154.132 .048

Beta -1.059 .858 5.274 .314 .000

Lower Bound -506.716 .146

Upper Bound 180.137 .360

a. Dependent Variable: Stock Options Notional Turnover (Rs. 1000cr.)

From the above table we can easily derive following regression equation, Stock Option National Turnover (Rs. 1000 Cr.) = -163.290 + (0.253*Index Nifty)
Equation 7 - Regression Equation For Stock Option National Turnover

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C.2.5. Stock and Index F&O and Nifty Index:C.2.5.1. Comparison Between Stock and Index F&O Turnover & Nifty Index:Table 27 - Stock F&O Turnover and Nifty Index

Year 2012-13 2011-12 2010-11 2009-10 2008-09 2007-08 2006-07 2005-06 2004-05 2003-04 2002-03 2001-02

Stock and index F&O Total Turnover (Rs. 10000cr.) index nifty 3153.300396 5521.156 3134.973174 5249.574 2924.822109 5586.047 1766.366457 4484.567 1101.04822 1768.296 1309.047775 1372.355 735.6242 1046.214 482.4174 1072.039 254.6982 1804.833 213.061 1424.887 43.9862 1037.894 10.1926 1077.165

Table above shows the growth in turnover for stock and Index future & option total turnover from year 2001 to year 2012. Also it shows the average index nifty for the same period.

Graphical Plot Between Stock and index F&O Turnover & Nifty Index
stock and index F&O Total Turnover (Rs. 10000cr.) 6000 5000 4000 3000 2000 1000 0 stock and index F&O Total Turnover (Rs. 10000cr.) index nifty

YEAR
Figure 19 - Graphical Plot Between Stock and Index F&O Total Turnover and Nifty Index

The above figures shows that with the increase in Nifty index the turnover of stock & index future and option turnover has also increased. It would be interesting to note that this may or may not signifies direct relationship between index nifty and stock-index F&O but one thing is sure that rise in index surely attracts more money, and thus people are pouring money into it.

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C.2.5.2. Statistical Analysis of Stock and Index F&O total turnover and Nifty Index:Table 28 - Correlations of Stock and Index F&O total turnover and Nifty Index

stock and index F&O Total Turnover (Rs. 10000cr.) stock and index F&O Total Pearson Correlation Turnover (Rs. 10000cr.) index nifty stock and index F&O Total Sig. (1-tailed) Turnover (Rs. 10000cr.) index nifty stock and index F&O Total N Turnover (Rs. 10000cr.) index nifty

index nifty

1.000

.936

.936

1.000

.000

.000

12

12

12

12

From the above table it is clear that Pearson Correlation of stock & index Future and option total turnover is highly correlated with index nifty and there is strong movement in the turnover with the movement of index. This is due to the fact that the correlation between them is 0.936, which signifies quite a high degree of relation. Also the level of significance, p, is 0.000 which signifies that the results are significant and thus further analysis would be fruitful.
Table 29 - Model Summary of Stock and Index F&O total turnover and Nifty Index

Model

R Square

Adjusted R Square

Std. Error of the Estimate R Square Change

Change Statistics F Change df1 df2 Sig. F Change

.936a

.877

.864

447.04962

.877

70.974

10

.000

a. Predictors: (Constant), index nifty b. Dependent Variable: stock and index F&O Total Turnover (Rs. 10000cr.)

From the table it can be seen that the R square (R2) is 0.877, which explains that 87.7 % variance in stock & index F&O total turnover, is explained by nifty index.
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Table 30 - ANOVA Stock and Index F&O total turnover and Nifty Index

Model Regression 1 Residual Total

Sum of Squares 14184306.367 1998533.599 16182839.965

df 1 10 11

Mean Square 14184306.367 199853.360

F 70.974

Sig. .000
b

a. Dependent Variable: stock and index F&O Total Turnover (Rs. 10000cr.) b. Predictors: (Constant), index nifty

The table above clearly shows that the p value is below 0.5 as it is 0.000, which signifies that the test we conducted is valid and the variance of stock & index F&O total turnover is dependent upon index nifty.

Table 31 - Coefficients Stock and Index F&O total turnover and Nifty Index

Model

Unstandardized Coefficients

Standardized Coefficients

Sig.

95.0% Confidence Interval for B

B (Constant) 1 index nifty .583 -266.828

Std. Error 222.564 .069

Beta -1.199 .936 8.425 .258 .000

Lower Bound -762.732 .429

Upper Bound 229.075 .737

a. Dependent Variable: stock and index F&O Total Turnover (Rs. 10000cr.)

From the above table we can conclude the regression equation as:-

Stock and Index F&O total turnover = -266.828 + (0.583*Index nifty) (Rs. 1000 Cr.)
Equation 8 regression equation for stock & index total turnover

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C.2.6. Statistical Analysis Of F&O Daily Turnover And Daily Index Nifty:Table 32 - Correlation table between F&O daily Turnover & Daily index nifty

turnover F&O Pearson Correlation turnover F&O Index Nifty turnover F&O Index Nifty turnover F&O N Index Nifty 1.000 .758 . .000 2682 2682

Index Nifty .758 1.000 .000 . 2682 2682

Sig. (1-tailed)

From the above table it can be concluded that the correlation between daily F&O turnover and nifty index is 0.758, which is relatively a good degree of correlation. Thus there lies a relation between them and also the significance level is 0.000 which signifies that the results are significant and thus further analysis can be done.
Table 33 - Model Summary between F&O daily Turnover & Daily index nifty

Model

R Square

Adjusted R Square

Std. Error of the Estimate R Square Change

Change Statistics F Change df1 df2 Sig. F Change

.758

.575

.575

5921.78877

.575

3626.840

2680

.000

a. Predictors: (Constant), Index Nifty b. Dependent Variable: turnover F&O

From the above table it can be concluded that 57.5% variance in daily F&O turnover is explained by Daily Nifty Index.
Table 34 - ANOVA between F&O daily Turnover & Daily index nifty

Model Regression

Sum of Squares 127184498368.4 43 93981120380.12 2 221165618748.5 64

df 1

Mean Square 127184498368.4 43 35067582.231

F 3626.840

Sig. .000
b

Residual

2680

Total

2681

a. Dependent Variable: turnover F&O b. Predictors: (Constant), Index Nifty

The above table signifies the results of the study as p value is smaller than 0.05.
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Table 35 - Coefficients between F&O daily Turnover & Daily index nifty

Model

Unstandardized Coefficients

Standardized Coefficients

Sig.

95.0% Confidence Interval for B

B 1 Index Nifty 4.036 (Constant) -4076.278

Std. Error 241.868 .067

Beta -16.853 .758 60.223 .000 .000

Lower Bound -4550.546 3.905

Upper Bound -3602.011 4.168

a. Dependent Variable: turnover F&O

From the above table regression equation for the daily F&O turnover can be written as, F&O daily turnover = -4076.278 + (4.036*Index Nifty)
Equation 9 Regression equation for F&O daily turnover in terms of Dily Nifty Index

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C.2.7. Statistical Analysis of VIX & Index Nifty:Table 36 Regression Analysis Of VIX & Index Nifty

Descriptive Statistics Mean Index Nifty VIX 5207.4477 24.2213 Std. Deviation 633.94693 8.12084 N 1016 1016

Correlations Index Nifty Index Nifty Pearson Correlation VIX Sig. (1-tailed) Index Nifty VIX Index Nifty N VIX 1016 1016 -.832 . .000 1016 1.000 .000 . 1016 1.000 VIX -.832

Variables Entered/Removeda Model Variables Entered 1 VIX

b

Variables Removed

Method

. Enter

a. Dependent Variable: Index Nifty b. All requested variables entered.

Model Summary Model R R Square Adjusted R Square 1 .832a .692 .692 Std. Error of the Estimate 351.75515

a. Predictors: (Constant), VIX

ANOVA Model Regression 1 Residual Total Sum of Squares 282453106.546 125463928.419 407917034.965 df

Mean Square 1 282453106.546 123731.685

F 2282.787

Sig. .000
b

1014 1015

a. Dependent Variable: Index Nifty b. Predictors: (Constant), VIX

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Coefficients Model Unstandardized Coefficients

Standardized Coefficients

Sig.

B (Constant) 1 VIX -64.959 6780.837

Std. Error 34.731 1.360

Beta 195.240 -.832 -47.779 .000 .000

a. Dependent Variable: Index Nifty

From the above following can be concluded: Pearson Correlation between Volatility Index and Index Nifty is -0.832, which signifies that they are highly co-related but in a negative manner. i.e. index increases when volatility decreases. Also the significance is 0.000 which is less than 0.05 and thus results are significant R2 (R square) is 0.692, which means 69.2% of variance in nifty index is explained by volatility index. The Regression Equation for Nifty Index will be:Nifty Index = 6780.837 + (-64.959 * VIX)
Equation 10 Regression Equation of Nifty Index

Note:- Daily VIX data and Daily Nifty Close has been taken from 1st April 2009 to 31st march 2013.

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C.2.8. Statistical Analysis of Repo Rate & Index Nifty:-

Table 37 Repo rate And Index Nifty Descriptive Statistics Mean Nifty Index Repo Rate 4340.7998 6.8607 Std. Deviation 1244.42399 1.18926 N 2098 2098

Correlations Nifty Index Nifty Index Pearson Correlation Repo Rate Sig. (1-tailed) Nifty Index Repo Rate Nifty Index N Repo Rate 2098 2098 .234 . .000 2098 1.000 .000 . 2098 1.000 Repo Rate .234

From the above table it can be concluded that the Pearson Correlation between repo rate and Index Nifty is 0.234 which is very low level of correlation and thus the index nifty movements are very less co related with the repo rate. Although lower repo rate means cheaper inflow of money in the market but it doesnt affect the index in considerable proportion.

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C.3.1. Analysis of Survey Data:C.3.1.1 Occupation:-

Table 38 frequency occupation

Frequency

Percent

Valid Percent

Cumulative Percent

BUSINESSMAN STUDENT Valid SERVICE UNEMPLOYED MISSING Total

108 2 63 2 1 176

61.4 1.1 35.8 1.1 .6 100.0

61.4 1.1 35.8 1.1 .6 100.0

61.4 62.5 98.3 99.4 100.0

Figure 20 frequency Occupation

The above table and figure shows the occupation distribution of the respondents, from the illustrations its clear that 61.4 % of respondents were Businessman

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C.3.1.2. Gender:-

Table 39 - Frequency Gender GENDER Frequency Percent Valid Percent Cumulative Percent MALE Valid FEMALE Total 172 4 176 97.7 2.3 100.0 97.7 2.3 100.0 97.7 100.0

Figure 21 - Frequency gender

The above table and figure shows the percent of respondents who are male and who are female.
It can be seen that the respondents are more male than female so it can be easily concluded that trading market is more male dominated.

C.3.1.3. Qualification:Table 40 - Frequency Qualification QUALIFICATION Frequency Percent Valid Percent Cumulative Percent UNDERGRADUATE GRADUATE Valid POST GRADUATE DOCTORATE Total 1 91 83 1 176 .6 51.7 47.2 .6 100.0 .6 51.7 47.2 .6 100.0 .6 52.3 99.4 100.0

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Figure 22 frequency Qualification

The qualification level of most the respondents i.e. 98.8% of them are either graduate or are post graduate. It denotes that people with good level of education are participating in it.

C.3.1.4. Age:Table 41 - Frequency Age AGE Frequency Percent Valid Percent Cumulative Percent 20-25 Valid 26-35 36-50 Total 2 76 98 176 1.1 43.2 55.7 100.0 1.1 43.2 55.7 100.0 1.1 44.3 100.0

Figure 23Frequency Age

The above illustrations Show the percentage of respondents age, 1.1% respondents age were between 20-25, 43.2% of respondents age were between 26-35 years and 55.7 % of respondents age were between 36-35.

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C.3.1.5. Location:CURRENTLY YOU RESIDE IN Frequency Percent Valid Percent Cumulative Percent TOWN Valid CITY METRO Total 10 81 85 176 5.7 46.0 48.3 100.0 5.7 46.0 48.3 100.0 5.7 51.7 100.0

46% and 48.3 % of the respondents lives in city and metro respectively. C.3.1.6. Income Range
Table 42 - Frequency Income range INCOME RANGE: Frequency Percent Valid Percent Cumulative Percent Rs 150000 - Rs 300000 Rs 500000 - Rs 800000 Valid Rs 800000 - Rs 1200000 ABOVE Rs 1200000 Total 2 27 69 78 176 1.1 15.3 39.2 44.3 100.0 1.1 15.3 39.2 44.3 100.0 1.1 16.5 55.7 100.0

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Figure 24 Frequency Income Range

C.3.1.7. Placing the savings

Table 43 - Frequency Placing The Savings WHERE DO YOU PLACE YOUR SAVINGS? Frequency Percent Valid Percent Cumulative Percent A; B; C; D; E; F; G A; B; C; D; F; G A; B; D; E; G Valid A; B; C; D; E; G A; B; D; F; G B; D; G Total 97 5 6 4 13 51 176 55.1 2.8 3.4 2.3 7.4 29.0 100.0 55.1 2.8 3.4 2.3 7.4 29.0 100.0 55.1 58.0 61.4 63.6 71.0 100.0

Coding Used:A= IN SAVINGS ACCOUNT B= FIXED DEPOSITS C= INVESTMENT IN REAL ESTATE D= INVESTMENT IN MUTUAL FUNDS E= SYSTEMATIC INVESTMENT PLAN F= IN COMMODITIES LIKE GOLD AND SILVER G= INVESTMENT IN SHARE MARKET

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Figure 25 Frequency placing the savings

From the above illustration it can be concluded that most of the respondents diversify their portfolio as 55.1% of them place their saving in all the investment opportunities.

C.3.1.8. Percent of Savings In Savings account and Fixed deposits

Table 44 - Percent of Savings in Savings account and Fixed deposits WHAT PERCENTAGE OF YOUR SAVING YOU PUT IN SAVINGS ACCOUNT AND FIXED DEPOSITS? Frequency Percent Valid Percent Cumulative Percent 40 TO 70 % Valid 10 TO 40% 5 TO 10 % Total 1 164 11 176 .6 93.2 6.3 100.0 .6 93.2 6.3 100.0 .6 93.8 100.0

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Figure 26 Frequency Percent of Savings in Savings Account and Fixed deposits

From the above illustrations it can be seen that 93.2% of the respondents place 10 to 40 % of their savings in Savings & Fixed deposits. C.3.1.9. Awareness of the respondents:-

Table 45 awareness of the respondents DO YOU K2W IN INDIA WE HAVE 4 MAJOR EXCANGES, 1. NSE(NATIONAL STOCK EXCHANGE) 2. BSE(BOMBAY STOCK EXCHANGE) 3. MCX(MULTI COMMODITY EXCHANGE) 4. NCDEX( NATIONAL COMMODITY AND DERIVATIVE EXCHANGE) Frequency Percent Valid Percent Cumulative Percent YES Valid NO SOME OF THEM Total 154 6 16 176 87.5 3.4 9.1 100.0 87.5 3.4 9.1 100.0 87.5 90.9 100.0

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Figure 27 - awareness of the respondents

87.5 % of the respondents are aware that in India we have 4 major exchanges. C.3.1.10. Perception about trading in stock market:Table 46 Frequency perception about trading in stock market WHAT DO YOU THINK ABOUT INVESTMENT AND TRADING IN STOCK , DERIVATIVE AND COMMODITY MARKET? Frequency Percent Valid Percent Cumulative Percent A; B; C; D Valid A; C; D; E Total Missing Total System 96 79 175 1 176 54.5 44.9 99.4 .6 100.0 54.9 45.1 100.0 54.9 100.0

Coding Used:A= HIGH RISK BECAUSE OF UNCERTAINTY B= HIGH CAPITAL IS REQUIRED C= LOT OF TIME IS REQUIRED, SO TIME CONSTRAINT D= UP TO DATE KNOWLEDGE IS REQUIRED E= IT IS HIGHLY PROFITABLE 97 | P a g e

Figure 28 frequency perception about trading in stock market

54.5% of the respondents feels that trading in market is:- high risk because of uncertainty, high capital

is required, lot of time is required, so time constraint & up to date knowledge is required. Whereas 44.9 % of the respondents think that trading in market is high risk because of uncertainty, lot of time is required, so time constrain, up-to-date knowledge is required and it is highly profitable. C.3.1.11.Rating the Various investment options:C.3.1.11.i. Equity:Table 47 Investment Option Equity INVESTMENT OPTIONS EQUITY Frequency Percent Valid Percent Cumulative Percent WORSE Valid BETTER EXCELLENT Total 3 159 14 176 1.7 90.3 8.0 100.0 1.7 90.3 8.0 100.0 1.7 92.0 100.0

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Figure 29 Investment Options Equity

90.3 % respondents voted Equity as better investment option C.3.1.11.ii. Derivatives:Table 48 - Investment Option Derivatives INVESTMENT OPTIONS DERIVATIVES Frequency Percent Valid Percent Cumulative Percent MUCH WORSE SAME Valid BETTER EXCELLENT Total 1 3 79 93 176 .6 1.7 44.9 52.8 100.0 .6 1.7 44.9 52.8 100.0 .6 2.3 47.2 100.0

Figure 30 Investment Option Derivatives

44.9 % respondents voted derivatives as better investment option whereas 52.8 % voted derivatives as excellent investment option.
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C.3.1.11.iii. Commodity:-

Table 49 - Investment Option Commodity INVESTMENT OPTIONS COMMODITY Frequency Percent Valid Percent Cumulative Percent MUCH WORSE WORSE Valid SAME BETTER EXCELLENT Total 1 3 13 109 50 176 .6 1.7 7.4 61.9 28.4 100.0 .6 1.7 7.4 61.9 28.4 100.0 .6 2.3 9.7 71.6 100.0

Figure 31 Investment Option Commodity

61.9% of the respondents voted Commodity as better investment option.

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C.3.1.11.iv. Fixed Deposits:-

Table 50 - Investment Option Fixed Deposit INVESTMENT OPTION FIXED DEPODIT Frequency Percent Valid Percent Cumulative Percent

MUCH WORSE WORSE Valid SAME BETTER Total

8 165 1 2 176

4.5 93.8 .6 1.1 100.0

4.5 93.8 .6 1.1 100.0

4.5 98.3 98.9 100.0

Figure 32Investment Option Fixed Deposit

93.8 % of the respondents marked Fixed Deposit as Worse investment option.

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C.3.1.11.v. Mutual Funds:-

Table 51. Investment Option Mutual Funds INVESTMENT OPTION MUTUAL FUNDS Frequency Percent Valid Percent Cumulative Percent WORSE SAME Valid BETTER EXCELLENT Total 1 78 83 14 176 .6 44.3 47.2 8.0 100.0 .6 44.3 47.2 8.0 100.0 .6 44.9 92.0 100.0

Figure 33 Investment Option Mutual Funds

47.2% of the respondents marked Mutual Fund as better investment option whereas 44.3% marked it Neutral.
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C.3.1.11.vi. Systematic Investment Plan:-

Table 52 - Investment Option SIP INVESTMENT OPTIONS SIP Frequency Percent Valid Percent Cumulative Percent SAME Valid BETTER EXCELLENT Total 8 68 100 176 4.5 38.6 56.8 100.0 4.5 38.6 56.8 100.0 4.5 43.2 100.0

Figure 34 - Investment option SIP

56.8 % of the respondents marked Systematic Investment plan as excellent investment option.

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C.3.1.11.vii. Currency:-

Table 53 - Investment Option Currency INVESTMENT OPTIONS CURRENCY Frequency Percent Valid Percent Cumulative Percent WORSE SAME Valid BETTER EXCELLENT Total 9 9 30 128 176 5.1 5.1 17.0 72.7 100.0 5.1 5.1 17.0 72.7 100.0 5.1 10.2 27.3 100.0

Figure 35 - Investment Option Currency

72.7% of the respondents marked currency as excellent investment option.

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C.3.1.11.vii. Bonds:-

Table 54 - Investment Option Bonds INVESTMENT OPTION BONDS Frequency Percent Valid Percent Cumulative Percent WORSE Valid SAME BETTER Total 11 151 14 176 6.3 85.8 8.0 100.0 6.3 85.8 8.0 100.0 6.3 92.0 100.0

Figure 36- investment Option Bonds

85.8 % respondents marked bonds as neutral.

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C.3.1.11.viii. Savings Account:-

Table 55 - Investment Option Savings Account INVESTMENT OPTION SAVINGS ACCOUNT Frequency Percent Valid Percent Cumulative Percent MUCH WORSE WORSE Valid SAME BETTER Total 122 51 2 1 176 69.3 29.0 1.1 .6 100.0 69.3 29.0 1.1 .6 100.0 69.3 98.3 99.4 100.0

Figure 37 Investment Option Savings Account

98.3 % of the respondents have marked Savings account below average investment option.

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C.3.1.12. Since when You Are Trading?

Table 56 - since when trading SINCE WHEN YOU ARE TRADING AND INVESTING IN MARKET? Frequency Percent Valid Percent Cumulative Percent LESS THAN 1 YEAR 1 TO 3 YEARS Valid 3 TO 5 YEARS MORE THAN 5 YEARS Total 4 15 60 97 176 2.3 8.5 34.1 55.1 100.0 2.3 8.5 34.1 55.1 100.0 2.3 10.8 44.9 100.0

Figure 38 since when trading

89.2 % of the respondents were trading over 3 years.

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C.3.1.13. Expectations From Depository Participant Firm:Table 57 - Expectation From D.P. Firm YOUR EXPECTATIONS FROM YOUR DEPOSITORY PARTICIPANT FIRM:Frequency Percent Valid Percent Cumulative Percent A; B; C; D; E; F Valid A; B; C; D; E Total Missing Total System 166 9 175 1 176 94.3 5.1 99.4 .6 100.0 94.9 5.1 100.0 94.9 100.0

Coding Used:A= LOW BROKERAGE RATE B= MORE TIME DEDICATION TO YOU C= FREQUENT UPDATES D= LATEST AND GLITCH FREE TECHNOLOGY E= BETTER QUALITY OF SERVICE F= AWARENESS OF THE DEPOSITORY PARTICIPANT FIRM

Figure 39- Expectation From D.P. Firm

94.3 % of respondents want all the features (i.e. low brokerage rate, more time dedication to you,
frequent updates, latest and glitch free technology, better quality of service, awareness of the depository participant firm).

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C.3.1.14. Your Depository Participant Firm:Table 58- D.P. Firm Of the Respondents YOUR DP FIRM Frequency Percent Valid Percent Cumulative Percent SHAREKHAN INDIABULLS UNICON Valid ICICI DIRECT KOTAK SECURITIES OTHER Total 37 39 24 32 30 14 176 21.0 22.2 13.6 18.2 17.0 8.0 100.0 21.0 22.2 13.6 18.2 17.0 8.0 100.0 21.0 43.2 56.8 75.0 92.0 100.0

Figure 40 RESPONDENTS D.P. FIRM

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C.3.1.15. Quality Of Service Of Different D.P. Firms:-

Figure 41 quality of service

Table 59 - Rating for Quality of Service

Sharekhan IndiaBulls Unicon ICICI Direct Kotak Securities

Very Bad 46% 81.8% 43.6% 8% 1.1%

Bad 43.8% 16.5% 2.3% 5.1% 1.7%

Good 2.3% 1.7% 50.6% 31.8% 42.6%

Very Good 8.0% 0% 0% 48.9% 53.4%

Excellent 0% 0% 0.6% 5.7% 1.1%

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The above illustrations clearly explains that respondents are not satisfied by the quality of service from Sharekhan, Indiabulls, And Unicon D.P. firms whereas they are quite satisfied with quality of service from ICICI Direct and Kotak Securities. This result can be interpreted by Unicon investment solutions to check where they lack in terms of quality of service, can compare their service with kotak, and ICICI direct and see why they are good. Also they can compare their quality of service with sharekhan and Indiabulls to see on what grounds they are not rated good and why, then those improvements can be made in Unicon Quality of service. C.3.1.16. Brokerage rate:-

Figure 42 - Brokerage Rate for different D.P. Firm

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Table 60 - Rating For Brokerage rate

Sharekhan IndiaBulls Unicon ICICI Direct Kotak Securities

Very High 0% 0% 0% 17.6% 7.4%

High 17.0% 0% 0% 72.2% 71%

Optimal 14.8% 10.2% 0% 10.2% 15.9%

Low 68.2% 10.8% 14.8% 0% 5.7%

Very Low 0% 79.0% 85.2% 0% 0%

From the above illustration it is quite clear that Unicon leads in the terms of providing low brokerage rate with 85.2% of respondents marked its brokerage rate very low, followed by India bulls. This is the advantage Unicon securities should capitalize upon and see how they can keep up with its closest competitor Indiabulls. C.3.1.17. Time Dedicated to Investor:-

Figure 43 Time dedicated To Investors

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Table 61 Rating Of Time dedication To investors

Sharekhan IndiaBulls Unicon ICICI Direct Kotak Securities

Very Low 0% 0% 0% 0% 10.2%

Low 81.8% 15.9% 0.6% 13.1% 10.2%

Optimal 18.2% 50.6% 11.4 80.1% 79.%

High 0% 33.5% 88.1 6.8% 0.6%

Very High 0% 0% 0% 0% 0%

The take away from the above illustration is that Unicon Securities is leading in the terms of time dedication to the investors, this is an important aspect, the company should strengthens this aspect and this can lead to good business development for the company. C.3.1.18. Latest And Glitch Free Technology D.P.Firm:-

Figure 44 Latest And Glitch Free Technology

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Table 62 - Rate For Latest & Glitch Free Technology

Sharekhan Indiabulls Unicon ICICI Direct Kotak Securities

Very Bad 16.5% 19.9% 38.1% 0.6% 0%

Bad 0% 77% 60.8% 8% 0%

Good 75% 5.1% 1.1% 5.1% 7%

Very Good 8.5% 0% 0% 79.0% 84.1%

Excellent 0% 0% 0% 7.4% 11.9%

From the above illustrations the conclusion can be drawn that a major aspect Unicon securities need to improve is the letting the users enjoy a much better and glitch free technology. In todays world of Internet based trading glitches and old technology can be very risky for investors. And in sectors like derivative and intraday in matters of delay of minutes one can go from profit position to loss position. To check these Investors require better and glitch free technology.

C.3.1.19. Awareness Of The D.P. Firm:-

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Figure 45 Awareness Of The D.P. Firm

Table 63 Rate For Awareness Of D.P. Firm

Sharekhan Indiabulls Unicon ICICI Direct Kotak Securities

Very Low 0% 0% 0% 0% 0%

Low 0.6% 97.1% 30.1% 4% 0.6%

Optimal 4.5% 2.6% 68.8% 38.1% 3.4%

High 63.4% 0% 0.6% 55.7% 83.5%

Very High 41.4% 0% 0% 2.3% 12.5%

From the above illustrations it can be seen that 98.9% of respondents feel that awareness of the Unicon securities is either optimal (68.8%) or is low (30.1%). It can be a major issue, in the business of depository participant knowledge plays a major role and if the knowledge & level of awareness of the D.P. firm is not up-to-date, it leads to suffer losses for the investors and thus ultimately losing its Customers. In this regard the firm need to work on increasing the level of awareness of its brokers and can look to others D.P. firms like kotak securities how they are maintaining high level of awareness among its broker so that 96% of the respondents feel its level of awareness is above average.

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C.3.1.20. Advice before Investing:Table 64 Advice before Investing

FROM WHERE YOU PREFER ADVICE BEFORE INVESTING? Frequency Percent Valid Percent A; C; D A; B; C; D; E; F; G A; C; D; F; G A; B; C; D; E A; B; C; D; F; G Total System 80 7 6 42 34 169 7 176 % of total 96.1% 47.2% 96.1% 96.1% 4% 23.3% 23.3% 45.5 4.0 3.4 23.9 19.3 96.0 4.0 100.0 47.3 4.1 3.6 24.9 20.1 100.0 Cumulative Percent 47.3 51.5 55.0 79.9 100.0

Valid

Missing Total

Coding Used:A= BROKERAGE HOUSE B= RESEARCH ANALYST C= WEBSITE AND TRENDS D= NEWS NETWORKS E= INDEPENDENT AGENT F= WORD OF MOUTH G= RELATIVES

Figure 46 Advice Before Investing

From the above illustrations it can be seen that 96.1% of the respondents take advice from Brokerage house, Website& Trends and News Networks before investing. It is quite interesting to know the respondents take interest and try to get maximum research before investing and they feel these sources are more authenticating.
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C.3.1.21. Why Small Trader Avoid Derivative Trading:-

Table 65 - Why Small Traders Avoid Derivative Trading

WHY DO YOU THINK SMALL TRADERS AVOID DERIVATIVE TRADING? Frequency Percent Valid Percent Cumulative Percent 15.4 54.9 83.4 100.0

Q; W; E; R; T Q; W; E; T Q; W; R; T Q; W; E; R Total Missing System Total Valid

27 69 50 29 175 1 176

15.3 39.2 28.4 16.5 99.4 .6 100.0

15.4 39.4 28.6 16.6 100.0

Coding Used:Q= LACK OF KNOWLEDGE AND DIFFICULTY IN UNDERSTANDING W= SPECULATION BASED AND AND HIGHLY LEVERAGED INSTRUMENT E= REQUIRES MORE FUND BACKUP R= LACK OF TIME T= MORE COUNTER PARTY RISK

% Of Total 99.4% 99.4% 71% 31.8% 67.6%

Figure 47 Why Small traders Avoid Derivative Trading

For the above question 99.4% of the respondents marked lack of knowledge & difficulty in understanding and speculation based & high leveraged instrument as the major reason why small traders avoid derivative trading.
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However in the exchange trading Counter party risk is negligible, it is only significant in Over-thecounter or off-the-exchange trading, which is not legal in India, so this outcome doesnt signifies anything. C.3.1.22. Advantages of Investing In Derivative Market:Table 66 Advantages Of Derivative Trading WHAT DO YOU THINK ARE THE ADVANTAGES OF INVESTMENT IN DERIVATIVE MARKET? Frequency Percent Valid Percent Cumulative Percent A; B; C; E A; B; C A; B Valid A; C; D; E B; C; D; E B; C; E Total Missing Total System 9 62 40 20 28 16 175 1 176 5.1 35.2 22.7 11.4 15.9 9.1 99.4 .6 100.0 5.1 35.4 22.9 11.4 16.0 9.1 100.0 5.1 40.6 63.4 74.9 90.9 100.0

Coding Used:A= HEDGING FUNDS B= RISK CONTROL C= DIRECT INVESTMENT WITHOUT BUYING AND HOLDING ASSETS D= WORKS MORE OVER SPECULATION THAN ACTUAL SCENARIO E= LOW RISK HIGH RETURN F= SIMPLY GAME OF DEMAND AND SUPPLY

% Of Total 74.9% 88.4% 65.7% 27.3% 41.5% 0%

Figure 48 Advantages Of Derivative Trading

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From the above illustrations it is being visible that 88.4% of the respondents think risk control is the main advantage of Derivative trading, whereas 74.9% thinks that its advantage is hedging funds. The important thing to notice in this illustration that none of the respondent marked demand and supply as the advantage although in derivative prices is majorly depend upon phenomenon of demand and supply. C.3.1.23. Dis-advantage of investment in Derivative market:-

Table 67 Dis-advantage of Investment in Derivatives Market WHAT DO YOU THINK ARE THE DIS-ADVANTAGES OF INVESTMENT IN DERIVATIVE MARKET? Frequency Percent Valid Percent Cumulative Percent A; B; C; E; F A; C; E; F A; B; C; D; E; F A; C; F Valid C A; B; C; E A; C; D Total 33 33 52 176 18.8 18.8 29.5 100.0 18.8 18.8 29.5 100.0 51.7 70.5 100.0 13 4 11 30 7.4 2.3 6.3 17.0 7.4 2.3 6.3 17.0 7.4 9.7 15.9 33.0

Code used: A= BIG TRADERS AFFECTS THE MARKET B= CONTRACT IS FOR A LIMITED TIME ONLY C= LACK OF KNOWLEDGE CAN LEAD TO HUGE LOSSES

% of Total 81.2% 32.5% 100%

D= DUE TO MORE TURNOVER D.P. FIRMS PROMOTE IT TO COLLECT MORE BROKERAGE 35.8% E= LARGE FUND REQUIREMENT F= VERY DIFFICULT TO SPECULATE EVEN WITH PROPER KNOWLEDGE 34.8 33%

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Figure 49 dis-advantage of trading in derivative market

From the above Table and Figure we can see that 100% of the respondents think that lack of knowledge can leads to suffer huge losses is the major disadvantage of investment in derivative market. This disadvantage is in fact true for any of the investment except for traditional investment options like savings account and fixed deposits. Also 81.2% of the respondents think big traders affect the market as second biggest dis-advantage of investment in derivative market, which is in fact quite true as the prices are majorly determined by forces of demand and supply, big traders surely can and surely affects the prices. 35.8% of the respondents think that D.P. firms promote derivative trading un-necessarily because due to more turnovers more brokerage is required, but there is more return on investment for the traders also. 34.8% of the respondents have marked more fund requirement as the dis-advantage although margin is provided in derivative trading and in fact with less investment one can enjoy the benefits of more. But then it is true that they can suffer more losses as well. As 33% of the respondents have marked difficult to speculate with proper knowledge also, although the prices are majorly governed by forces of demand and supply speculation is also plays role in governing the price, so with proper knowledge and experience, one can make profit in this market.

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C.3.1.24. Traded in which Of the securities:Table 68 Traded in which securities IN WHICH OF THE FOLLOWING SECURITIES YOU TRADE IN DERIVATIVE MARKET? Frequency Percent Valid Percent Cumulative Percent A; B; D A; B; C; D; E; F; G A; B; D; E; F A; C; E; G A; C; D; F; G Valid A; B; C; D; E A; B; C; D; F; G A; B; C; E; F; G A; B; C; D; E; F Total 28 21 14 8 176 15.9 11.9 8.0 4.5 100.0 15.9 11.9 8.0 4.5 100.0 75.6 87.5 95.5 100.0 9 21 31 23 21 5.1 11.9 17.6 13.1 11.9 5.1 11.9 17.6 13.1 11.9 5.1 17.0 34.7 47.7 59.7

Coding Used:A= STATE BANK OF INDIA (100%) C= ICICI BANK LTD. (77.3%) E= LARSEN & TOUBRO LTD. (71.1%) G= HDFC BANK LTD. (56.9%) B= RELIANCE INDUSTRIES LTD. (75%) D= INFOSYS TECHNOLOGIES LTD. (78.9%) F= TATA STEEL LTD. (65.9%)

Figure 50 Traded in which Securities

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C.3.1.25. Do you trade creating pair of Call and Put:Table 69 trade creating pair of call and put DO YOU TRADE CREATING PAIR OF CALL AND PUT? Frequency Percent Valid Percent Cumulative Percent YES Valid NO Total 110 66 176 62.5 37.5 100.0 62.5 37.5 100.0 62.5 100.0

Figure 51 trade creating pair of call and put

One of the most commonly used strategies of derivative trading is either having Long Position of call and put of equal amount or having the short position of the same. This is in brokers language known as trading in pairs. Following example will help in understanding it, Illustration:Let us suppose Mr. A is trading in Index Option, know he is observing market for some time and he feels bullish that the market will go up but due to uncertainty he may also feels that due to environment conditions market may also falls down. In such situation if he want to invest then what will he do? Market is at 5900 now. The answers is quite simple he will see the calls and put both and try to find equal amount, lets say he find, call of 6150 is of 23 Rs. And put of 5800 at 25 Rs.. now if he purchase one lot of both, wherever the market moves for the month he will surely going to earn more than Rs. 48 he had investment. In this strategy Naked position is covered. Now as the Above table and figure shows 62.5% of the respondents covers his naked position while trading and trades in pair of call and put which indeed a smart strategy.
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C.3.1.26. Participate in Derivative Market As:Table 70 Participate in derivative market as YOU PARTICIPATE IN DERIVATIVE MARKET AS:Frequency Percent Valid Percent Cumulative Percent INVESTOR SPECULATOR Valid I'M NOT A PARTICIPANT IN DERIVATIVE MARKET HEDGER Total 40 1 1 134 176 22.7 .6 .6 76.1 100.0 22.7 .6 .6 76.1 100.0 22.7 23.3 23.9 100.0

Figure 52 Participate In Derivative Market as:-

76.1% of the investors to minimise risk and to avoid uncertainty participate in derivative market as Hedgers.

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C.3.1.27. Level of Satisfaction:-

Figure 53 Level Of Satisfaction

Very unsatisfied Unsatisfied Neutral Satisfied Very Satisfied Index F&O 0% 0.6% 5.7% 41.5% 52.3% Stock F&O 0% 0.6 7.4% 36.9% 55.1% Currency Derivatives 0% 7.4% 4.5% 4.5% 83.5% Commodity Trading 1.1% 7.4% 36.4% 55.1% 0% 93.8% of the respondents are satisfied with their investments in Index F&O. whereas 92% of respondents are satisfied with their investment in Stock F&O. 88% of respondents are satisfied with their investment in Currency derivatives but only 55.1% are satisfied with their investment in commodity trading. The less satisfaction with commodity trading is may be because of recent fall in the gold prices.

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C.3.1.28. Overall Return on Investment:Table 71 Overall Return On Investment HOW MUCH IS YOUR OVER ALL RATE OF RETURN ON INVESTMENT TILL DATE? Frequency Percent Valid Percent Cumulative Percent LESS THAN 10% 10 TO 30 % Valid 30 TO 50 % 50 TO 70% Total 9 58 31 78 176 5.1 33.0 17.6 44.3 100.0 5.1 33.0 17.6 44.3 100.0 5.1 38.1 55.7 100.0

Figure 54 Overall Return On Investment

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D. Conclusion & Recommendations

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D.1. Conclusion:The segment derivative market is such huge that one can find dedicated books on this topic, touching every aspects of derivative segment is very difficult in a report, but this report have tried covering everything one can learn, hear and see in a Depository participant firm. One of the main objectives of this report was to provide significant material to Unicon securities so that they can use to increase level of awareness among investors about derivative market in a better way, for that the report contains a detailed study of derivatives segment (emphasizing upon F&O). The derivative segment is growing and is growing exponentially. With almost accounts for 1.70 trillion the turnover of the derivative segment has reached new heights. So much growth but still small investors feel fear in investing in it. Whenever you ask any small and marginal investors why they didnt invest in derivatives they say it is a sea in which big sharks are there to engulf small investors like them. No doubt the risks are there in the derivative market; in fact it is the basic rule, higher the risk higher will be the return. From the study of derivative trading one very important take away is that never leave the position naked in derivative market because speculation is one thing that never one can be certain about. While analysing the perception of investors this fact again found to be true, those investors who had covered their position had better return on their investment and were more satisfied with their investment. The study also shown that more than 50% of the people diversify their saving instead of placing it in any one investment option which is in fact a very good strategy as combination high, low and moderate return on investment gives stability to your investment. It was revelled out of the survey that people are shifting towards better financial instruments like Systematic Investment Plan & Mutual fund where they place their money in hands of experts to invest. Also the currency segment is rated the highest, which is not at all where surprize as the movements in currency markets are not that sudden and the beta value is less so low risk low return investment. When it comes to advice 96.1% of the people take advice from newspapers, news networks and brokerage house before investing which is a good thing that people are shorting out their investment options on the advice of experts. It was surprising that 44.3% of the respondents have return on their investment between 50-70 % which is 8 to 9 times more than what they get from savings account fixed deposits and almost twice what they can get from investing in any god mutual fund. The study had revelled perception of investors towards derivative segment, hedging funds and risk control are the two most important thing investors use derivative segment for, although small investors avoid trading because they think that it is difficult to understand and knowledge about the sector is limited, also they think that since it is speculation based they could suffer huge losses.
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The derivatives as investment tool are quite promising and the growth in its turnover is definitely a strong proof of that. The future outlook of derivatives segment is quite bright with more small and marginal investors start participating in it. For that awareness and education of the investors is very important and is happening now. You can easily find forums dedicated to educate investors in different strategies, tools and for promotion of investment. This is the high time one should start learning about their investment options as financial independence is one of the most important purposes in ones life and derivative investment will surely be among the top priorities.

D.2. Recommendations:While analysing the expectations of investors from their depository participant firms, it came in the knowledge that Unicon Securities is in lead when it accounts for brokerage rate and time dedicated to investor but with latest and glitch free technologies and awareness of D.P. firm it doesnt stands good. Unicon securities should cash their strength of Low brokerage rate and more time dedication to investors and simultaneously they should strengthen their awareness level and should improve their technology. Todays time of internet based trading technological advancements is very important and the company may lose customers if their technology is not up-to-date because investors money will be on the line and because of some glitches and old technology if they lose money, it may cost Unicon losing the customers. For increasing the level of awareness among their brokers the company may adopt policy of quiz, random tests, and time to time review of their brokers. Also for quality of service the respondents have marked the company average; Unicon should also look into this and try to see where the company lacks and how to improve it. For new investors, It is recommended that try trading on NSE Paathshala
(https://plus.omnesysindia.com/NestPlus/NSE/login.jsp), it is a virtual trading platform from NSE to educate new traders about real time trading in derivatives.

Here one can apply all the strategies they learn and see if they are doing it right or wrong. For other trading options, Try using Money controls Moneybhai (http://moneybhai.moneycontrol.com/), it is also a virtual platform where except for derivatives trading in everything else is allowed with virtual money.

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Attachments:Survey Questions:-

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Bibliography
CHANDRA, P., 2008. INVESTMENT ANALYSIS and PORTFOLIO MANAGEMENT. NEW DELHI: TATA McGRAW HILL PUBLISHING COMPANY LIMITED. CHAWLA, D. & SONDHI, N., 2011. RESEARCH METHODOLOGY CONCEPTS AND CASES. NOIDA: VIKAS PUBLISHING HOUSE PVT LTD. FISCHER, D. E. & JORDAN, R. J., 2011. SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT. SIXTH ed. NEW DELHI: PEARSON. Hmlinen, M., 2002. Investment Strategies with Derivatives in UCITS -Funds Rules for risk limitation in Liechtenstein, s.l.: s.n. HULL, J. C. & BASU, S., 2011. OPTIONS, FUTURES, and OTHER DERIVATIVES. THIRD ed. NEW DELHI: PEARSON. ICRA LIMITED, 2013. INDIAN BROKERAGE INDUSTRY, Mumbai: ICRA LIMITED. Investopedia, 2013. Options Pricing: Introduction. [Online] Available at: http://www.investopedia.com/university/options-pricing/ [Accessed may-june 2013]. KELLAR, V., 2011. Moving Ahead with Exchange Reforms, Mumbai: NSE. Khan, M. U., Gupta, D. A. & Siraj, D. S., 2012. Regulation and Accounting Treatment of Future and Option in Indian Derivative Market. International Journal of Scientific and Research Publications,, 2(6), pp. 1-6. MUKTA, D., 2009. DERIVATIVE MARKET- INDIA, New DElhi: HSBC Bank. NSE, 2012. Derivatives Update, MUMBAI: NSE. NSE, n.d. NSE Datazone. [Online] Available at: http://www.nseindia.com/research/content/datazoneview.htm [Accessed may-june 2013]. PALLANT, J., 2001. S P S S S U R V I V A L M A N U A L, B u c k i n g h a m: O P E N U N I V E R S I T Y P R E S S. PRATAP, S. G., 2011. INVESTMENT BANKING. FIFTH ed. NEW DELHI: TATA McGRAW - HILL PUBLISHING COMPANY LIMITED. Sarkar, A., 2006. INDIAN DERIVATIVES MARKETS, New Delhi: Oxford University Press. Vashishtha, A. & Kumar, S., 2010. Development of Financial Derivatives Market in India- A Case. International Research Journal of Finance and Economics, pp. 16-28.

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Glossary:American Options - An option that can be at any point during the life of the contract. Most exchange-traded options are American. At-the-Money - An option whose strike price is equal to the market price of the underlying security. Call - An option that gives the holder the right to buy the underlying security at a particular price for a specified, fixed period of time. Clearing Corporation - An organization associated with an exchange to handle the confirmation, settlement and delivery of transactions, fulfilling the main obligation of ensuring transactions are made in a prompt and efficient manner. They are also referred to as "clearing firms" or "clearing houses". Correlation - In the world of finance, correlation is a statistical measure of how two securities move in relation to each other. Correlation is computed into what is known as the correlation coefficient, which ranges between -1 and +1. Perfect positive correlation (a correlation co-efficient of +1) implies that as one security moves, either up or down, the other security will move in lockstep, in the same direction. Alternatively, perfect negative correlation means that if one security moves in either direction the security that is perfectly negatively correlated will move in the opposite direction. If the correlation is 0, the movements of the securities are said to have no correlation; they are completely random. Counterparty Risk - The risk to each party of a contract that the counterparty will not live up to its contractual obligations. Counterparty risk as a risk to both parties and should be considered when evaluating a contract. Dividends - A distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders. The dividend is most often quoted in terms of the rupees amount each share receives (dividends per share). It can also be quoted in terms of a percent of the current market price, referred to as dividend yield. European Options - An option that can only be exercised during a particular time period just before its expiration. Holder - An investor who purchases an option and who makes a premium payment to the writer. In-the-Money - An option that has an intrinsic value. A call option is considered in-the-money if the underlying security is higher than the strike price. A put option is considered in-the-money if the underlying security is lower than the strike price.

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Listed Option - A put or call option that is traded on an options exchange. The terms of the option, including strike price and expiration dates, are standardized by the exchange. LEAPS (Long-term Equity Anticipation Securities) - LEAPS are publicly traded options that have expiration dates longer than one year. Naked Option - An option position in which the writer of the option does not have an offsetting position in the underlying security, thereby having no protection against adverse prices moves. Out-of-the-Money - An option with no intrinsic value that would be worthless if it expired on that day. A call option is out-of-the-money when the strike price is higher than the market price of the underlying security. A put option is out-of-the-money when the strike price is lower than the market price of the underlying security. Over-the-Counter - An option that is not traded over an exchange. An over-the-counter option is not subjected to the standardization of terms such as strike prices and expiration dates. Premium - The total cost of the option. An option holder pays a premium to the option writer in exchange for the right, but not the obligation, to exercise the option. In general, the option's premium is its intrinsic value combined with its time value. Put - An option that gives the holder the right to sell the underlying security at a particular price for a specified, fixed period of time. Strike Price - The agreed-upon price at which an option can be exercised. The strike price for a call option is the price at which the security can be bought (prior to the expiration date); the strike price for a put option is the price at which the security can be sold (before the expiration date). The strike price is sometimes called the exercise price. Writer - An investor who sells an option and who collects the premium payment from the buyer. Writers are obligated to buy or sell if the holder chooses to exercise the option.

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