P. 1
Risk Management in Equity Derivative Market by Ashish Pugalia

Risk Management in Equity Derivative Market by Ashish Pugalia

|Views: 475|Likes:
Published by ashishpugalia8455
To identify, understand and analyze the strategy which helps to minimize the Risk in the Indian Equity Derivative Market.
To identify, understand and analyze the strategy which helps to minimize the Risk in the Indian Equity Derivative Market.

More info:

Published by: ashishpugalia8455 on Aug 12, 2009
Copyright:Attribution Non-commercial

Availability:

Read on Scribd mobile: iPhone, iPad and Android.
download as PDF, TXT or read online from Scribd
See more
See less

07/27/2013

pdf

text

original

Sections

A REPORT Risk Management in Equity Derivative Market ON

Risk Management in Equity Derivative Market

By

Ashish Dilipkumar Pugalia (08BS0002411)

5/21/2009 1

Risk Management in Equity Derivative Market

A REPORT ON

“RISK MANAGEMENT IN EQUITY DERIVATIVE MARKET”

Submitted By: Ashish Dilipkumar Pugalia Enrollment No: 08BS0002411 INDIA INFOLINE LIMITED

A report submitted in partial fulfillment of the requirement of MBA program of ICFAI Business School, Ahmedabad

Faculty Guide

Company Guide

Prof. Bharat Kantharia
Date: 21sh May, 2009

Mr. Chintan Shah

2

Risk Management in Equity Derivative Market

ACKNOWLEDGEMENT
I take this opportunity to thank all those who have helped and inspired me during the course of time of this project without which the successful completion of the project would not have been possible. Firstly, I take this opportunity to thank Prof. P. Bala Bhaskaran (Director, IBS Ahmedabad), who has always stood by me and encouraged me to embark on the path of learning. I wish to convey my special thanks to Mr. Dhiraj Chaudhary (AVP), Mr. Ishwarsinh Rajpurohit (Territory Manager), my company project guide Mr. Chintan Shah (Sales Manager) and team members Mr. Mohan Mevada (RM) and Mr. Mitesh Gandhi (RM) who have helped me directly or indirectly in my difficulties at India Infoline Ltd., Area Office, Surat. who have been a constant source of inspiration and encouragement to me. I wish to express my deepest and most sincere thanks to my Faculty Guide, Prof. Bharat Kantharia, who has continuously guided me throughout this project. Last but not the least I would like to thank my fellow management trainees from IBS, Ahmedabad. By interacting with them, I was able to generate more meaningful ideas that have enabled me to further complete this project successfully.

Ashish Pugalia 08BS0002411

3

Risk Management in Equity Derivative Market

TABLE OF CONTENT
Acknowledgment………………………………………………………………….3 Abstract……………………………………………………………………………6 Executive Summary………………………………………….……………………7 Introduction……………………………………………………………………….8     Objective of the Project……………………….………………….………….8 Benefit for India Infoline Ltd…………………………...…………………...8 Limitation of the Project………………………………..…..……………….8 Methodology……………………………………………….………………..9

Company Profile………………………………………………………………...10 Indian Equity Market…………………………………………………………...12  Derivatives…………………………………………………………………13  Participants in Derivative Market………………………………………….14 Types of Derivative Market……………….…………………………………….17  Forward Contract…………………..………….……………………………17  Future Contract……………………..………….…………………………...18  Options……………………………………………………………………..10 Options Strategies…………………………………..……………………………23           Buy Future……………………………………...…………………………..23 Sell Future……………………………………...…………………………..24 Buy Call. …………………………………….…..…………………………25 Buy Put…………………………………………..…………………………26 Sell Call…………………………………………….………………………28 Sell Put……………………………………………………………………..30 Bull Spread(Call) ……………………………………..……………………31 Bull spread (Put)……………………………………………………………33 Bear Spread (Call)………………………………………………………….34 Bear Spread (Put) ……………………………………….…………………35
4

Risk Management in Equity Derivative Market

     

Buy Straddle ……………………………………………………………….36 Sell Straddle ……………………………………...………………………..37 Buy Strangle ……………………………………....……………………….39 Sell Strangle ……………………………………….………………………40 Long Butterfly ……………………………………..………………………42 Short Butterfly ……………………………………..………………………43

Black Scholes Options Pricing Model………………..…………………………46 Findings.……………………………………………...…………………………..51 Conclusions ………………………………………………………………………52 Recommendations ……….………………………………………………………54 References ……………………………………………………………………….55 Annexure ………………………...………………………………………………56 Glossary …………………………...……………………………………………..70

5

Risk Management in Equity Derivative Market

ABSTRACT
Derivative Market is high risk high return segment of an equity market. The past decade has witnessed a massive growth in the use of financial derivatives by a wide range of corporate and financial institutions. This growth has run in parallel with the increasing direct reliance of companies on the capital market as the major source of long term funding. In this respect, derivatives have a vital role to play in enhancing shareholder value by ensuring access to the cheapest source of funds. During this project I got to know different ways or different strategies by using which investor can minimize the loss. An individual always faces the problem as to which strategy investor should use in different market condition. During this course of Internship I had gather a good knowledge of cash and derivative market. This knowledge was helpful in my project to achieve the objective. I had applied 10 strategies during trading hour on investor from this 10 strategies, 8 strategies was turned out in profit whereas remaining 2 strategies is in loss. By using Black Schole model I had calculate the option prices from which the investor or RM will get to know whether to buy the option or not. So that investor gets the signal of risk while investing in the option market.

6

Risk Management in Equity Derivative Market

EXECUTIVE SUMMARY
This is the report submitted by Ashish Dilipkumar Pugalia studying at Icfai Business School; Ahmedabad, in the partial fulfillment of the requirement of MBA Program, carried at India Infoline Ltd, Surat. India Infoline Limited is engaged in providing financial services all across the country and is regarded as the BEST broking houses in India. The project is on ―Risk Management in Equity Derivative Market‖ and the objective of the project is to identify, understand and analyze the strategy which helps to minimize the Risk in the Indian Equity Derivative Market. Using the model generated at the end of the project will helpful for the investor by indicating whether to invest in the option or not. Equity market reforms are a major constituent of the overall economic reforms in India and considering the growing surge in the broking firm, the objective of the project is such set so that it enables to capture the skills required for forming the bases of the organization. To achieve the objectives of the project, training was undergone in to gain practical knowledge and learn about derivatives and its applications and also to know the behaviors of investor during trading hours. The training enabled to learn the concepts of the derivatives and the importance of various tools that were used to undergo the activities to invest in equity market.

7

Risk Management in Equity Derivative Market

INTRODUCTION
OBJECTIVE OF THE PROJECT:
To learn the basics of secondary market. It includes learning various terminologies used for day-to-day trading. To learn about derivatives and its application. To identify, understand and analyze the strategy which helps to minimize the Risk in the Indian Equity Derivative Market. To implement strategies on investor portfolio and measures the profit and loss after implementing the strategies.

BENEFIT FOR INDIA INFOLINE LTD:
Before trading hour all RM read the Research report of the company to know the current day strategy with help of this strategies RM can able to know the strategy which will ultimately benefit for the investor. As per the condition of the market RM will be able to identify which will be the strategies for the current market condition to implement in the option market.

LIMITATIONS OF STUDY:
Some of the major limitations of this study are as follows: a) This study is limited to the Equity derivative market. We are not taking commodity market, which can also be used as a risk marketing tool in derivative market. b) My study is to reduce/minimize the risk in derivative market but we can just minimize or reduce the risk, and can’t make it to zero.

8

Risk Management in Equity Derivative Market

c) Brokerage and other charges like security transaction tax and service tax are not considered while investing which sometimes form a very important part

METHODOLOGY: Secondary Source
a) Websites b) Books c) Data from India Infoline d) Articles

9

Risk Management in Equity Derivative Market

COMPANY PROFILE
“India Infoline Securities Pvt. Ltd.” “Knowledge is power and power brings security. Risk is a very relative term and changes with every individual and situation. Financial management is not just about managing risk but also managing knowledge and finally deriving answers that generate wealth, security and trust.”

VISION
Vision is to be the most respected company in the financial services space. To be the premier provider of investment advisory and financial planning services in India.

PUNCH LINE
―IT’S ALL ABOUT MONEY, HONEY!‖.

OBJECTIVE
To provide unbiased and independent information to market intermediaries and investors.

BUSINESS DESCRIPTION
The India Infoline group, comprising the holding company, India Infoline Limited and its wholly-owned subsidiaries, straddle the entire financial services space with offerings ranging from Equity research, Equities and derivatives trading, Commodities trading, Portfolio Management Services, Mutual Funds, Life Insurance, Fixed deposits, Gold, bonds and other small savings instruments to loan

10

Risk Management in Equity Derivative Market

products and Investment banking. India Infoline also owns and manages the websites www.indiainfoline.com and www.5paisa.com . The company has a network of 596 branches spread across 345 cities and towns. It has more than 500,000 customers.

BUSINESS STRUCTURE OF INDIA INFOLINE LIMITED

MANAGEMENT TEAM AT INFOLINE LIMITED
Mr. Nirmal Jain Mr. R. Venkataraman Mr. Nilesh Vikamsey Mr. Sat Pal Khattar Mr. Kranti Sinha & Mr. Arun K. Purvar Chairman & Managing Director Executive Director Independent Director Non Executive Director Independent Director

11

Risk Management in Equity Derivative Market

INDIAN EQUITY MARKET
The Indian Equity Market is also known as Indian share market or Indian stock market. The Indian market of equities is transacted on the basis of two major stock indices, National Stock Exchange of India Ltd. (NSE) and The Bombay Stock Exchange (BSE). Indian Equity Market at present is a lucrative field for the investors and investing in Indian stocks are profitable for not only the long and medium-term investors, but also the position traders, short-term swing traders and for intra-day traders. In terms of market capitalization, there are over 2500 companies in the BSE chart list. Generally the bigger companies are listed with the NSE and the BSE, but there is the OTCEI or the Over the Counter Exchange of India, which lists the medium and small sized companies. There is the SEBI or the Securities and Exchange Board of India which supervises the functioning of the stock markets in India.

The growing financial capital markets of India being encouraged by domestic and foreign investments is becoming a profitable business more with each day. If all the economic parameters are unchanged Indian Equity Market will be conducive for the growth of private equities and this will lead to an overall improvement in the Indian economy.

12

Risk Management in Equity Derivative Market

DERIVATES
In finance, "Derivatives are financial instruments whose price and value derive from the value of assets underlying them". In other words, they are "financial contracts whose values derive from the value of underlying stocks, bonds, currencies, commodities, etc." Examples of the assets which can be referenced by a derivatives contract are diverse and may be anything from bars of gold (commodity derivatives), to stocks (equity derivatives), interest rates (interest rate derivatives), currency exchange rates (currency derivatives), credit risk of third party obligors (credit derivatives) and even the weather (weather derivatives) Derivatives can be based on different types of assets such as commodities, equities or bonds, interest rates, exchange rates, or indices (such as a stock market index, consumer price index (CPI) — see inflation derivatives — or even an index of weather conditions, or other derivatives). Their performance can determine both the amount and the timing of the payoffs. The main use of derivatives is to either remove risk or take on risk depending if one were a hedger or a speculator. The diverse range of potential underlying assets and payoff alternatives leads to a huge range of derivatives contracts available to be traded in the market. The main types of derivatives are futures, forwards, options and swaps.

THE NEED FOR THE DERIVATIVE MARKET
The derivates market performs a number of economic functions They help in transferring risks averse people to risk oriented people They help in the discovery of future as well as current prices They catalyze entrepreneurial activity

13

Risk Management in Equity Derivative Market

They increase the volume traded in markets because of participation of risk averse people in greater numbers They increase savings and investments in the long run.

FACTORS

DRIVING

THE

GROWTH

OF

FINANCIAL

DERIVATIVES
1. Increased volatility in asset prices in financial markets. 2. Increased integration of national financial markets with the international markets. 3. Marked improvement in communication facilities and sharp decline in their costs. 4. Development of more sophisticated risk management tools, providing economic agents a wider choice of risk management strategies, and 5. Innovations in the derivatives markets, which optimally combine the risks and returns over a large number of financial assets leading to higher returns, reduced risk as well as transactions costs as compared to individual financial assets.

PARTICIPANTS IN A DERIVATIVE MARKET
HEDGERS: Hedgers use futures or options markets to reduce or eliminate the risk associated with price of an asset. For example, the farmers and the miller both reduce a risk and acquire a risk when they sign the future contract: The farmer reduces the risk by the way that the prices of wheat will fall below the price specified in the contract and acquires the risk that the price of wheat will rise above the price specified in the contract. The miller, on the other hand, acquires the risk that the price of wheat will rise above the

14

Risk Management in Equity Derivative Market

price specifies in the contract. In this way, on party is the insurer (i.e. risk taker) for one type of risk and the counterparty is the insurer (i.e. risk taker) for another type of risk. SPECULATORS: Speculators use futures and options contracts to get extra leverage in betting on future movements in the price of an asset. They can increase both the potential gains and potential losses by usage of derivatives in a speculative venture. Speculators do not aim to minimize risk but rather to benefit from the inherently risky nature of the futures market. They aims to profit from the very price change. Hedgers want to minimize their risk no matter what they’re investing in, while speculators want to increase their risk and therefore maximize their profits. ARBITRAGEURS: Arbitrageurs are in business to take advantage of a discrepancy between prices in two different markets. If, for example, they see the futures price of an asset getting out of line with the cash price, they will take offsetting positions in the two markets to lock in a profit. The simultaneous purchase and sale of an asset in order to profit from a difference in the price. This usually takes place on different exchanges or market places. Arbitrageurs are also known as a ―Riskless Profit‖. For example: Say a domestic stock also trades on a foreign exchange in another country, where it hasn’t adjusted for the constantly changing exchange rate. A trader purchases the stock where it is undervalued and short sells the stock where it is overvalued, thus profiting from the differences.

15

Risk Management in Equity Derivative Market

RISK IN DERIVATIVE MARKET
Risk is defined as the chance that an investment's actual return will be different than expected. This includes the possibility of losing some or all of the original investment. In risk, the possible outcomes of all the possible events are listed. Once the events are listed subjectively, the derived probabilities can be assigned to the entire possible events. Risk consists of two components, the systematic risk and unsystematic risk. The systematic risk is caused by factors external to the particular company and uncontrollable by the company. The systematic risk affects the market as a whole. In the case of unsystematic risk the factors are specific, unique and related to the particular industry or company.

16

Risk Management in Equity Derivative Market

TYPE OF DERIVATIVES
FORWARD CONTRACT
A forward contract is an agreement between two parties to buy or sell an asset (which can be of any kind) at a pre-agreed future point in time. Therefore, the trade date and delivery date are separated. It is used to control and hedge risk, for example currency exposure risk (e.g. forward contracts on USD or EUR) or commodity prices (e.g. forward contracts on oil). One party agrees to sell, the other to buy, for a forward price agreed in advance. In a forward transaction, no actual cash changes hands. The forward price of such a contract is commonly contrasted with the spot price, which is the price at which the asset changes hands (on the spot date, usually two business days). The difference between the spot and the forward price is the forward premium or forward discount. For example, Jewelry manufacturer Goldbuyer agrees to buy gold at Rs. 600 (the forward or delivery date) from gold mining concern Goldseller. No money changes hands between Goldbuyer and Goldseller at the time the forward contract is created. Rather, Goldbuyer’s payoff depends on the spot price at the time of delivery. Suppose that the spot price reaches Rs. 610 at the delivery date. Then Goldbuyer gains Rs. 10 on his forward position (i.e. the difference between the spot and forward prices) by taking delivery of the gold at Rs. 600.

17

Risk Management in Equity Derivative Market

FUTURE CONTRACT
In finance, a futures contract is a standardized contract, traded on a futures exchange, to buy or sell a certain underlying instrument at a certain date in the future, at a specified price. The future date is called the delivery date or final settlement date. The pre-set price is called the futures price. The price of the underlying asset on the delivery date is called the settlement price. A futures contract gives the holder the obligation to buy or sell, which differs from an options contract, which gives the holder the right, but not the obligation. In other words, the owner of an options contract may exercise the contract. Both parties of a "futures contract" must fulfill the contract on the settlement date. The seller delivers the commodity to the buyer, or, if it is a cash-settled future, then cash is transferred from the futures trader who sustained a loss to the one who made a profit. To exit the commitment prior to the settlement date, the holder of a futures position has to offset his position by either selling a long position or buying back a short position, effectively closing out the futures position and its contract obligations. A Futures contract is similar to a Forward contract, with some expectations. Futures contracts are traded on exchange markets, whereas forward contracts typically trade on OTC (over-the-counter) markets. Also, futures contracts are settled daily (marked-to-market), whereas forwards are settled only at expiration.

18

Risk Management in Equity Derivative Market

Growth in Future Market
40000000 35000000 Turnover in Lacs 30000000 50.00% 80.00% 70.00% 60.00%

25000000
20000000 15000000 10000000

40.00% 30.00% 20.00% 10.00% 0.00%

50000000

-10.00% FY '06 0.00% FY '07 252213791 67.68% FY '08 375083148.8 48.72% FY '09 334703318.1 -10.77%

0

-20.00%

TURNOVER IN LACS 150415342.6 % GROWTH

Source: nseindia.com

Note: FY ’06 is taken as a base year to calculate the growth in the progressive FY

19

Risk Management in Equity Derivative Market

OPTIONS
Options are financial instruments that convey the right, but not the obligation, to engage in a future transaction on some underlying security. For example, buying a call option provides the right to buy a specified amount of a security at a set strike price at some time on or before expiration, while buying a put option provides the right to sell. Upon the option holder's choice to exercise the option, the party that sold, or wrote, the option must fulfill the terms of the contract. For example, Jewelry manufacturer Goldbuyer agrees to buy gold at Rs. 600 (the forward or delivery date) from gold mining concern Goldseller. Suppose that Goldbuyer belives that there is some chance for the spot price to fall below Rs.600, so that he losses on his forward position. To limit his loss, Goldbuyer could purchase a call option for Rs. 5 (the option price or premium) at a strike or exercise price of Rs. 600 with an expiration date three months from now. The call option gives Goldbuyer the right (but not the obligation) to buy gold at the strike price on the expiration date. Then, if the spot price indeed declines, he could choose not to exercise the option, and his loss would be limited to the purchase price of Rs. 5. Alternatively, Goldbuyer may anticipate that the spot price is very likely to decline, and attempt to profit from such an eventuality by buying a put option, giving him the right to sell gold at the strike price on the expiration date.

20

Risk Management in Equity Derivative Market

OPTIONS

CALL OPTION

PUT OPTION

BUY

SELL

BUY

SELL

WORKING OF OPTIONS
1. Options give you the right to buy or sell an underlying instrument. 2. If you buy an option, you are not obligated to buy or sell the underlying instrument; you simply have the right to. 3. If you sell an option and the option is exercised, you are obligated to deliver the underlying asset (call) or take delivery of the underlying asset (put) at the strike price of the option regardless of the current price of the underlying asset. 4. Options are good for a specified period of time, after which they expire and you lose your right to buy or sell the underlying instrument at the specified price. 5. Options when bought are done so at a debit to the buyer. 6. Options when sold are done so by giving a credit to the seller.

21

Risk Management in Equity Derivative Market

7. Options are available in several strike prices representing the price of the underlying instrument. 8. The cost of an option is referred to as the option premium. The price reflects a variety of factors including the current price of the underlying asset, the strike price of the option, the time remaining until expiration, and volatility. 9. Options are not available on every stock. There are approximately 2,200 stocks with tradable options. Each stock option represents 100 shares of a company's stock.

40000000 35000000 30000000

Growth in Option Market

200.00% 180.00% 160.00%

Turnover in Lacs

140.00%

25000000
20000000 15000000 10000000

120.00% 100.00% 80.00% 60.00% 40.00%

50000000 0

20.00% FY '06 0.00% FY '07 79186585.37 133.96% FY '08 136203241.5 72.00% FY '09 372950866.4 173.82% 0.00%

Turnover in Lacs 33845850.03

% Growth

Source: nseindia.com
Note: FY ’06 is taken as a base year to calculate the growth in the progressive FY

22

Risk Management in Equity Derivative Market

OPTIONS STRATEGIES
Future Market
There is direct relationship between the Cash and Future market of any scrip. Direct relationship in this scenario doesn’t mean that there will be same changes in price in both cash and future market. These relationships indicate that future value of any scrip is derived from the cash market of that particular scrip. Investor before investing in any future scrip look at the price change in the cash market so that while investing in any of the future scrip investor is aware about the somewhat changes in the cash market of that scrip.

BUY FUTURE
Graph shown below is the example of % change of Reliance future price with the % change of the Reliance cash market. In this graph one get to know that from 6 th April to 15th April, 2009 there is more or less same changes of the price changes is taken place.

Reliance Future and Cash market relationship
8 6 % Change

4
2 0 -2

6-Apr-09
CASH -0.016705882

8-Apr-09
3.15 3.242210464

9-Apr-09
0.623529412 0.649617872

13-Apr-09
2.223529412 2.016460905

15-Apr-09
3.323529412 3.283362728

FUTURE -1.396237507

23

Risk Management in Equity Derivative Market

SELL FUTURE
Graph shown below is the changes in the price of future and cash market of the INFOSYSTCH. In graph there is a decline in the price of future and cash market from 6th April to 15th April, 2009 which indicates that if there is holding of the INFOSYSTCH future scrip then an investor must sell the future scrip in between the given date to reduce the loss in future.

INFOSYSTCH future cash market relationship
2 1 0 % change -1 -2 -3 -4 -5 -6

6-Apr-09
CASH -2.023211502 -2.832773858

8-Apr-09
0.769097523 0.428170172

9-Apr-09
0.133088738 0.356237583

13-Apr-09
-1.233449477 -1.061862026

15-Apr-09
-2.696864111 -2.524491334

FUTURE

24

Risk Management in Equity Derivative Market

BUY CALL
Strategy View Investor thinks that the market will rise significantly in the short-term. Strategy Implementation Call options are bought with a strike price of a. The more bullish the investor is, the higher the strike price should be.
Profit

Stock Price Loss

Example Exercise price (a) Size of the contract

Rs. 120 100 share

Price of the share of the date of the Rs. 124.5 contract Price of option on the date of contract Rs.10

25

Risk Management in Equity Derivative Market

Possible price of the share 100 110 120 130 140 150 160

Investor exercise position -1000 -1000 -1000 0 1000 2000 3000

Stock price

Payoff long call

from

Net Total pay off payoff

profit= –

premium X >10 10 0 X >10-10 = X >0 10 – 10 = 0 -10

S1 >130 S1=130 S1=<120

S1-120 130 – 120 Not exercised

BUY PUT
Strategy View Investor thinks that the market will fall significantly in the short-term. . Strategy Implementation Put option is bought with a strike price of a. The more bearish the investor is, the lower the strike price should be.

26

Risk Management in Equity Derivative Market

Exercise price Size of the contract Share price on the date of the contract Price of put option on the date of contract Example Exercise price Size of the contract

Rs.110 100 share Rs 112 Rs.7.50

Rs.110 100 share Rs 112

Share price on the date of the contract

Price of put option on the date of Rs.7.50 contract Option premium paid = 7.5*100 =750 Amount to be paid for the share = 110*100 =11000 Market value of the share = 100*100 =10000 Net profit (loss) = -750+ 11000 -10000 = 250 (profit) Possible price of the share 80 90 100 110 120 130 140 Investor position +2250 +1250 +250 -750 -750 -750 -750

27

Risk Management in Equity Derivative Market

Stock price

Payoff long put

from

Net Total pay off payoff premium 0 +7.50 -7.50

profit= -

S1>110 S1=102.50 S1<102.50

0 not exercise -102.50+110

-7.50+7.50 =0 X>7.50-7.50= X>0

-X <102.50+110 X >7.50

SELL CALL
Strategy View Investor is certain that the market will not rise and is unsure/ unconcerned whether it will fall. Strategy Implementation Call option is sold with a strike price of a. If the investor is very certain of his view then at-themoney options should be sold, if less certain, then out-of-the-money ones should be sold.

28

Risk Management in Equity Derivative Market

Example Exercise price (a) Size of the contract Price of the share of the date of the contract Price of option on the date of contract Rs. 120 100 share Rs. 124.5 Rs.10

Possible price of the share 100 110 120 130 140 150 160

Investor exercise position +1000 +1000 +1000 0 -1000 -2000 -3000 Net Total pay off payoff premium -X <0 10 0 -X-10 = -X <0 10 – 10 = 0 10 profit= +

Stock price

Payoff short call 130-S1 130 – 120

from

S1 >130 S1=130 S1<130

No exercise

29

Risk Management in Equity Derivative Market

SELL PUT
Strategy View Investor is certain that the market will not go down, but unsure/unconcerned about whether it will rise. Strategy Implementation Put options are sold with a strike price a. If an investor is very bullish, then in-the-money puts would be sold.

Example Exercise price Size of the contract Rs.110 100 share

Share price on the date of the Rs 112 contract Price of put option on the date of Rs.7.50 contract Option premium received = 7.5*100 =750 Amount to be paid for the share = 110*100 =11000 Market value of the share = 100*100 =10000 Net profit (loss) = 750- 11000 +10000 = 250 (loss)

30

Risk Management in Equity Derivative Market

Possible price of the share 80 90 100 110 120 130 140

Investor position -2250 -1250 -250 750 750 750 750

Stock price

Payoff short put

from

Net Total pay off payoff premium 0 -7.50 X <-7.50 7.50

profit= +

S1>110 S1=102.50 S1<102.50

0 not exercise 102.50-110 X <102.50-110

-7.50+7.50 =0 X<-7.50+7.50= X<0

BULL SPREAD (CALL)
Strategy View Investor thinks that the market will not fall, but wants to cap the risk. Conservative strategy for one who thinks that the market is more likely to rise than fall.

31

Risk Management in Equity Derivative Market

Strategy Implementation Call option is bought with a strike price of a and another call option sold with a strike of b,
E1

E2

Stock price

Profit/loss of Long call Profit/loss of short call

Investor before investing in any of the call or put option looks at the future price of that scrip then takes the decision to invest in any of the call or put option. Here investor invests in Reliance Industry. Future price of Reliance on 9th of April is Rs. 1701 Type of Option Strike Price Premium on 9th April,2009 Buy Call Sell Call 1650 1800 Paid Rs.132 Receives Rs.50

On 15th April, 2009 investor exercises this option Profit/ Loss on Buy Call = Sell price- Buy price = 208.40-132 = 76.40 (Profit) Profit/Loss on Sell Call = Sell Price-Buy Price = 50-94.35 = -44.35 (Loss) Net Profit/Loss = Profit on Buy call + Loss on Sell call = 76.40 + (-44.35) = 32.05 (Profit)

32

Risk Management in Equity Derivative Market

BULL SPREAD (PUT)
Strategy View Investor thinks that the market will not fall, but wants to cap the risk. Conservative strategy for one who thinks that the market is more likely to rise than fall. Strategy Implementation Put option is bought with a strike of a and another put sold with a strike of b, producing a net initial credit. Here investor invests in Reliance Industry. Future price of Reliance on 6 th of April is Rs. 1701.
Profit/loss of

Type of the option

Premium on Strike Price option April) 1650 Paid 57.85 Received Rs. 90 Rs. (6th

Profit/loss of Long call short call

Put purchase


E1


E2 Stock price

Put sold

1740

On 15th April, 2009 investor exercises this option Profit/ Loss on Buy Put = Sell price- Buy price = 23.75-57.85 = -34.10 (Loss) Profit/Loss on Sell Put = Sell Price-Buy Price = 90-41.45 = 48.55 (Profit)

33

Risk Management in Equity Derivative Market

Net Profit/Loss = Loss on Buy Put + Profit on Sell Put = -34.10 + 48.55 = 14.45 (Profit)

BEAR SPREAD (CALL)
Strategy View Investor thinks that the market will not rise, but wants to cap the risk. Conservative strategy for one who thinks that the market is more likely to fall than rise. Strategy Implementation Call option is sold with a strike price of a and another call option bought with a strike of b Investor before investing in any of the call or put option looks at the future price of that scrip then takes the decision to invest in any of the call or put option. Here investor invests in INFOSYSTCH. Future price of INFOSYSTCH on 6 th of April is Rs. 1460. Type of the Exercise price of Premium option Call purchase Call sold the option 1470 on option Paid 41.35 Received Rs. 100 Rs.
7 • 0 0 0 0 0 •
Stock price Profit/ loss from short call Profit/ loss from Long call

1380

34

Risk Management in Equity Derivative Market

On 15th April, 2009 investor exercises this option Profit/ Loss on Buy Call = Sell price- Buy price = 13.25 – 41.35 = -28.10 (Loss) Profit/Loss on Sell Call = Sell Price-Buy Price = 100 – 43.15 = 56.85 (Profit) Net Profit/Loss = Loss on Buy call + Profit on Sell call = -28.10 + 56.85 = 28.75 (Profit)

BEAR SPREAD (PUT)
Strategy View Investor thinks that the market will not rise, but wants to cap the risk. Conservative strategy for one who thinks that the market is more likely to fall than rise. Strategy Implementation Put option is sold with a strike of a and another put bought with a strike of b.
Profit/ loss from short call Profit/ loss from Long call

60

70

Stock price

35

Risk Management in Equity Derivative Market

Type option

of

the

Strike Price 1440 1350

Premium on option Paid Rs. 58.50 Received Rs. 30

Put purchase Put sold

On 15th April, 2009 investor exercises this option Profit/ Loss on Buy Put = Sell price- Buy price = 90 – 58.50 = 31.50(Profit) Profit/Loss on Sell Put = Sell Price-Buy Price = 30 – 31.85 = -1.85 (Loss) Net Profit/Loss = Profit on Buy put + Loss on Sell put = 31.50 + (-1.85) = 29.65 (Profit)

BUY STRADDLE
Strategy View Investor thinks that the market will be very volatile in the short-term. Strategy Implementation Call option and put option are bought with The same strike price a.
E Stock price profit

loss 36

Risk Management in Equity Derivative Market

Here investor invests in Nifty. Future price of Nifty on 6 th of April is Rs. 3281.50. Type of Option Strike Price Premium on 6th April,2009 Buy PUT Buy CALL 3300 3300 Paid Rs.125.50 Paid Rs. 104.50

On 15th April, 2009 investor exercises this option Profit/ Loss on Buy Put = Sell price- Buy price = 44.50 – 125.50 = -81 (Loss) Profit/Loss on Sell Call = Sell Price-Buy Price = 238.20 – 104.50 = 133.70 (Profit) Net Profit/Loss = Loss on Buy put + Profit on Sell call = (-81) + 133.70 = 52.20 (Profit)

SELL STRADDLE
Strategy View Investor is certain that the market will not be very volatile (will neither go up nor down very much). Strategy Implementation A call option and a put option are sold with the same strike price a. Here investor invests in RNRL. Future price of RNRL on 6 th of April is Rs. 50.90.
b• a• •c

37

Risk Management in Equity Derivative Market

Type of Option

Strike Price

Premium on 6th April,2009

Sell CALL Sell PUT

55 55

Receives Rs. 3 Receives Rs. 5.70

On 15th April, 2009 investor exercises this option Profit/ Loss on Sell Call = Sell price- Buy price = 3 – 9.50 = -6.50 (Loss) Profit/Loss on Sell Put = Sell Price-Buy Price = 5.70 – 2.25 = 3.45(Profit) Net Profit/Loss = Loss on sell call + Profit on sell put = (-6.50) + 3.45 = -3.05 (Loss) The Reason benefit the Loss in this strategy is that on 6th April, 2009 the opening price of RNRL was Rs. 50.90. Future market of RNRL as on 15 th April closed at Rs. 62.25 Date 6-Apr-09 8-Apr-09 9-Apr-09 13-Apr-09 15-Apr-09 Open 50.90 50.05 56.75 56.75 57 Close 52.65 55.6 56.30 57.85 62.25 Change (%) 3.43 5.79 1.37 3.04 8.6

38

Risk Management in Equity Derivative Market

BUY STRANGLE
Strategy View Investor thinks that the market will be very volatile in the short-term [this is similar to the buy straddle but the premium paid here is less] Strategy Implementation Put option is bought with a strike a and a call
Profit / loss from put option profit

option is bought with a strike b.
Profit / loss from call option • E1 • E2

Stock price

loss

Here investor invests in DLF. Future price of RNRL on 6 th of April is Rs. 243.05 Premium on 6th April,2009 Buy CALL Buy PUT 190 220 Paid Rs. 17 Paid Rs. 9

Type of Option

Strike Price

On 15th April, 2009 investor exercises this option Profit/ Loss on Buy Call = Sell price- Buy price = 40.80 - 17 = 23.80 (Profit)

39

Risk Management in Equity Derivative Market

Profit/Loss on Buy Put = Sell Price-Buy Price = 5.35 – 9 = 3.65(Loss) Net Profit/Loss = Loss on buy call + Profit on buy put = 23.80 – 3.65 = 20.15 (Profit)

SELL STRANGLE
Strategy View The investor thinks that the market will not be volatile within a broadish band. Strategy Implementation Put option is sold with a strike price of a and a call option is sold with the higher strike price b

c•

• a

• b

• d

Here investor invests in ICICIBANK. Future price of ICICIBANK on 6 th of April is Rs. 370. Investor think that the future price of this scrip will move in the range of Rs.360 – Rs.410 investor estimate this range by looking at the opening price of the ICICIBANK.

40

Risk Management in Equity Derivative Market

Type of Option

Strike Price

Premium on 6th April,2009

Sell CALL Sell PUT

410 360

Receives Rs. 14 Receives Rs. 21

On 15th April, 2009 investor exercises this option Profit/ Loss on Sell Call = Sell price- Buy price = 14 – 48 = -34 (Loss) Profit/Loss on Sell Put = Sell Price-Buy Price = 21 – 4.4 = 16.60(Profit) Net Profit/Loss = Loss on sell call + Profit on sell put = (-34) + 16.60 = 17.40 (Loss) The Reason benefit the Loss in this strategy is that on 6th April, 2009 the opening price of RNRL was Rs. 370. Future market of ICICIBANK as on 15 th April closed at Rs. 445.05 Date 6-Apr-09 8-Apr-09 9-Apr-09 13-Apr-09 15-Apr-09 Open 370 378.35 397.25 416.35 445.05 Close 375.85 378.35 397.25 416.35 445.05 Change (%) 1.58 0.67 5.10 5.16 7.75

41

Risk Management in Equity Derivative Market

LONG BUTTERFLY
Strategy View Investor thinks that the market will not be volatile, but wants to cap the downside risk. . Strategy Implementation Call option with low strike b bought and 2 call options with medium strike a sold and call option with high strike c bought.
Profit/Loss from Short calls Profit/Loss from Profit/Loss from long calls Long calls

• d b•

a•

• • e c

Here investor invests in RELIANCE. Premium on 6th April,2009 Buy CALL Sell 2 CALL 1680 1710 Paid Rs. 85 Receives Rs. (76*2) = Rs. 152 Buy CALL 1740 Paid Rs. 53

Type of Option

Strike Price

On 15th April, 2009 investor exercises this option Profit/ Loss on Buy Call = Sell price- Buy price = 85 - 175 = 90 (Profit)

42

Risk Management in Equity Derivative Market

Profit/Loss on Sell of 2 Call = Sell Price-Buy Price = (76*2) – (155.65*2) = -159.30 (Loss) Profit/ Loss on Buy Call = Sell price- Buy price = 134.50 - 53 = 81.50 (Profit)

Net Profit/Loss = Profit on buy call + Loss on sell of 2 call + Profit on buy call = 90 + (-159.30) + 81.50 = 12.20 (Profit)

SHORT BUTTERFLY
Strategy View Investor mildly thinks that the market will be volatile. Strategy Implementation Call option is sold with strike b, two call options are
profit E1 E3

bought with strike a and a call option is sold with strike c.

• b

a

• c

E2 loss 43

Risk Management in Equity Derivative Market

Here investor invests in INFOSYSTCH Premium on 6th April,2009 Receives Rs. 100 Paid Rs. (29.85 *2) = Rs. 59.70 Sell CALL 1440 Receives Rs. 65

Type of Option Sell CALL Buy 2 CALL

Strike Price 1380 1410

On 15th April, 2009 investor exercises this option Profit/ Loss on Sell Call = Sell price- Buy price = 100 – 43.15 = 56.85 (Profit) Profit/Loss on Buy of 2 Call = Sell Price-Buy Price = (29.85*2) – (71.15*2) = -82.60 (Loss) Profit/ Loss on Sell Call = Sell price- Buy price = 65 – 19.70 = 45.30 (Profit)

Net Profit/Loss = Profit on sell call + Loss on buy of 2 call + Profit on sell call = 56.85 + (-82.60) + 45.30 = 19.55 (Profit)

Out of the 10 strategies, 8 strategies are turn out in profit for the investor and 2 strategies are in loss beard by the investor at India Infoline Limited.

44

Risk Management in Equity Derivative Market

Strategy Bull Spread (Call) Bull Spread (Put) Bear Spread (Call) Bear Spread (Put) Buy Straddle Sell Straddle Buy Strangle Sell Strangle Long Butterfly Short Butterfly

Profit/ Loss (Rs.) Profit – Rs. 29.10 Profit – Rs. 14.45 Profit – Rs. 28.75 Profit – Rs. 29.65 Profit – Rs. 52.20 Loss – Rs. 3.05 Profit – Rs. 20.15 Loss – Rs. 17.40 Profit – Rs. 12.20 Profit – Rs. 19.55

45

Risk Management in Equity Derivative Market

BLACK SCHOLES OPTION PRICING MODEL
The Black Shcoles Model is one of the most import concepts in modern financial theory. It was developed in 1973 by Fisher Black, Robert Merton and Myron Scholes and is still widely used today, and regarded as one of the best ways of determining fair prices of options. The Black-Scholes option pricing formula prices European put or call options on a stock that does not pay a dividend or make other distribution. The formula assumes the underlying stock prices follow a constant volatility. The Black-Scholes formulas for the prices of European calls and puts on a nondividend paying stock are: C= S0 N(d1) – E e-rt N(d2) P= E e-rtN(-d2) – S0 N(-d1) Where, d1 = ln(S0 / E) + (r + 0.5s2)t s t1/2 d2 = d1 – s t1/2 The Greeks – Delta, Gamma, Vega, Theta and Rho – for the CALL are: Delta = N (d1) Gamma = s N (d1) S0 s t1/2 Vega = S0 N (d1) t1/2

46

Risk Management in Equity Derivative Market

Theta = - S0 N (d1) s – r E e-rt N (d2) 2 t1/2 Rho = E t e-rt N (d2) Where, N denotes the standard normal The Greeks – Delta, Gamma, Vega, Theta and Rho – for the PUT are: Delta = N (d1) – 1 Gamma = s N (d1) S0 s t1/2 Vega = S0 N (d1) t1/2 Theta = - S0 N (d1) s + r E e-rt N (-d2) 2 t1/2 Rho = -E t e-rt N (-d2) Also, C = Current value of the Call option P = Current value of the Put option r = continuously compounded risk-free rate of interest S0 = Current price of the option E = Exercise price of the option t = time remaining before the expiration date (expressed as the fraction of a year)

47

Risk Management in Equity Derivative Market

s = standard deviation of the continuously compounded annual rate of return ln(S0 / E) = natural logarithm of (S0 / E) N (d) = value of the cumulative normal distribution evaluated at d.

Assumption underlying Black and Scholes Model
1. The option being values is a European style option, with no possibility of an early exercise. Comparable American call options are more valuable because they provide greater flexibility of exercise. 2. There are no transaction (dealing) costs and there are no taxes. 3. The risk-free interest rate is known and constant over the life of the option. 4. The market is an efficient one. This implies that as a rule, the people cannot predict the direction of the market or any individual stock. 5. The underlying security pays no dividends during the life of the option. 6. The volatility of the underlying instrument is known and is constant over the life of the option. 7. The distribution of the possible share prices at the end of a period of time is log normal or, in other words, a share’s continuously compounded rate of return follows a normal distribution.

48

Risk Management in Equity Derivative Market

In this model I had generated different sheet and named them as per the condition of the market. In each sheet, by using Black & Schole Model I had calculated Option price, Delta, Gamma, Vega, Theta and Rho which will helpful for India Infoline Ltd. These calculations are both for CALL and PUT option. As per the model, the option prices calculated are the European option prices. This calculated option prices are the theoretical option prices.  While investing in the option market if the theoretical (calculated) option prices are more than the current prices then the investor will get to know that there is risk in investing such option.

49

Risk Management in Equity Derivative Market

If the theoretical (calculated) option prices are less than the current then by using this one can invest in the option market.

Beside the calculation of option prices in the figure there is a calculation of profit and loss booked by the investor in the option market. If an investor or the RM enter the Quantity, Buy and Sell price then one can easily get to know whether profit or loss. For an Investor or RM, this model is very easy to understand because the names of the sheet indicate the condition of the market. Next thing is that whatever is the condition of the market if an Investor or RM investor forget what to do in a particular strategy whether to buy or sell the call or put option at same or different strike price then one can see the condition in each sheet whether to buy or sell call or put option at same or different strike price. At the same time what is the profit/ Loss investor has booked by investing in the option market can easily identify.

50

Risk Management in Equity Derivative Market

FINDINGS
Sentiments Sub-sentiments
Bullish
Very Bullish

Strategy
Buy Call

Diagrams

Moderately Bullish + Certain that the market will not fall Moderately Bullish + fairly certain that the market will not fall

Sell Put

Bull Spread (Call) or Bull Spreads (Put) Buy Put

Bearish

Very Bearish

Certain that the market will not rise

Sell Call

Moderately Bearish + Fairly certain that the market will not rise

Bear Spread (Call) or Bear Spread (Put) Sell Straddle

Neutral

Expect prices to fluctuate in very narrow range Prices might fluctuate in a broader range

Sell Strangle

Moderately certain that prices will not fluctuate much

Long Butterfly

Volatile

Expect prices to be very volatile

Buy Straddle

Expect prices to be volatile

Buy Strangle

Moderately expect prices to be volatile

Short Butterfly

51

Risk Management in Equity Derivative Market

CONCLUSIONS
The project provided me with an insight into deeper areas of the derivative market. While doing the project I was exposed to various new terminologies and newer methods of handling investments. I want to conclude this project by dividing the option strategies into Bullish, Bearish and Neutral & by analyzing which strategies give more profit as per the market condition.

BULLISH STRATEGIES
A. Buy Call: This strategy is very easy to implement and give good amount of return if price increase. Here maximum loss is only the premium paid. B. Buy Futures: Futures has given large amount of profits as compared to options strategies but at the same time risk associated with it also very high. C. Bull Spread (Call): It provides limited profits and limited loss. If Index/ Scrip goes up then one can have profits and vice-versa. This strategy should be use when expected volatility in the market is less. D. Bull Spread (Put): It provides limited profit and limited loss. The maximum gain can be net premium received in this strategy. E. Sell Put: In this strategy maximum profit is premium received and loss is unlimited. If a person expects bullish view then he may go with this strategy but this strategy is quite risky.

52

Risk Management in Equity Derivative Market

NEUTRAL STRATEGIES
F. Buy Straddle: This strategy should only be used when expected volatility is very high and market outlook is not known. If scrip remains at the same price then loss will be maximum G. Buy Strangle: This strategy should be used in very volatile market. H. Sell Strangle: This strategy should be used when volatility is very less. I. Long Butterfly: In this strategy there is very minimum risk and limited profit. This strategy should be used when proper strike prices are available to make this strategy. J. Short Butterfly: This strategy led to profit when volatility is very high in the option market. K. Sell Straddle: When investor want more returns at higher risk then he may go with this strategy. IF suddenly the volatility increases at a very high rate then huge losses may occur.

BEARISH STRATEGIES
L. Buy Put: This strategy should be used when investors perceive that the option price will go down. M. Sell Future: This strategy can be use to hedge or it can be use as a speculative strategy when option market is expected to fall. N. Bear Spread (Put) & Bear Spread (Call): This strategy involves very less risk & bearish outlook. So for those investors who expect the option prices will go down but they are not sure about it then they may use this strategy. O. Sell Call: In this strategy maximum profit earned and maximum loss is unlimited. So less risk takers should select very lower strike price while selecting this strategy.

53

Risk Management in Equity Derivative Market

RECOMMENDATIONS
After studying about financial derivatives and different derivative strategies following recommendations are suggested: Many strategies like straddle, strip, strangle and butterfly. Depend upon volatility of scrip or index and give returns accordingly. So volatility should be forecasted before forming any strategy. Fundamental and Technical analysis of the scrip or index should be doen before formulating any strategy. Specific strategy should be used according to the purpose of investor instead of investing haphazardly in futures and options. Derivative market is highly ill- famed among the investor. Thus it is required to provide in depth knowledge of the market to investors. Strategies should be evaluated daily for better returns and less risk. Theoretical price of an option should be found out using option pricing model (Black & Scholes) and those options whose price is less than theoretical price should be used for formulation of strategy. By using a hedging strategy an investor can recover some of his losses and can also make profit. When the movement and volatility of market or scrip is not known at that time investor should use hedging strategies. Investor should make strategy according to position cash market and accordingly make strategy.

54

Risk Management in Equity Derivative Market

REFERENCES
Books
(a) Options, futures and Other Derivatives by JOHN C. HULL (b) NCFM Derivative Market (dealers) Module (c) ―Future and Option‖ second edition Tata McGraw- Hill by N D VOHRA, B R Bagri

Websites
(a) www.nseindia.com (b) www.moneysonteol.com (c) www.bseindia.com (d) www.indiainfoline.com (e) www.investopedia.com (f) http://www.cboe.com/Strategies/EquityOptions/BuyingCalls/Part1.aspx (g) http://www.quickmba.com/finance/black-scholes/ (h) http://www.riskglossary.com/link/black_scholes_1973.htm

55

Risk Management in Equity Derivative Market

ANNEXURE
Instrument Symbol Date
6-AprFUTSTK DLF 09 8-AprFUTSTK DLF 09 9-AprFUTSTK DLF 09 13-AprFUTSTK DLF 09 15-AprFUTSTK DLF 09

Expiry
30-Apr09 30-Apr09 30-Apr09 30-Apr09 30-Apr09

Open
206.7

High
221.8

Low
198.1

Close
201.1

193

209.9

186

207.85

213

220.4

201.1

214.85

216

232.45

212.3

228.8

221

253.25

219

243.6

DLF Future (SOURCE: nseindia.com)

Strike Instrument Symbol Option Date
6-AprOPTSTK DLF PA 09 8-AprOPTSTK DLF PA 09 9-AprOPTSTK DLF PA 09 13-AprOPTSTK DLF PA 09 15-AprOPTSTK DLF PA 09

Expiry
30-Apr09 30-Apr09 30-Apr09 30-Apr09 30-Apr09

Price
190

Open
9

High
18

Low
9

Close
16.9

190

19

21.85

12.2

12.8

190

11.1

14

9

10.65

190

10.4

10.5

7.7

8.3

190

7.5

8

4.25

5.35

DLF PUT (STRIKE PRICE: 190) (SOURCE: nseindia.com)

56

Risk Management in Equity Derivative Market Strike Instrument Symbol Option Date
6-AprOPTSTK DLF CA 09 8-AprOPTSTK DLF CA 09 9-AprOPTSTK DLF CA 09 13-AprOPTSTK DLF CA 09 15-AprOPTSTK DLF CA 09

Expiry
30-Apr09 30-Apr09 30-Apr09 30-Apr09 30-Apr09

Price
220

Open
17

High
20

Low
13

Close
15

220

5.3

18

5.3

16.95

220

20.8

21.9

13.5

18.25

220

18.1

29

17.05

26.75

220

21.7

45.35

21.7

40.8

DLF CALL (STRIKE PRICE: 220) (SOURCE: nseindia.com)

Instrument Symbol
FUTSTK ICICIBANK

Date
6-Apr09 8-Apr-

Expiry
30-Apr09 30-Apr09 30-Apr09 30-Apr09 30-Apr09

Open
370

High
382

Low
363.7

Close
375.85

FUTSTK

ICICIBANK

09 9-Apr-

358.3

381.35

350

378.35

FUTSTK

ICICIBANK

09 13-Apr-

384.5

402.35

372

397.25

FUTSTK

ICICIBANK

09 15-Apr-

405

422.8

404

416.35

FUTSTK

ICICIBANK

09

417

454.75

403.55

445.05

ICICIBANK FUTURE (SOURCE: nseindia.com)

57

Risk Management in Equity Derivative Market Strike Instrument Symbol
OPTSTK ICICIBANK

Option Date
6-AprCA 09 8-Apr-

Expiry
30-Apr09 30-Apr09 30-Apr09 30-Apr09 30-Apr09

Price
410

Open
14

High
14.85

Low
10.95

Close
14.4

OPTSTK

ICICIBANK

CA

09 9-Apr-

410

9

14.75

8

13.2

OPTSTK

ICICIBANK

CA

09 13-Apr-

410

13.25

22

11

20.1

OPTSTK

ICICIBANK

CA

09 15-Apr-

410

25.4

33.5

25.05

29.1

OPTSTK

ICICIBANK

CA

09

410

26.45

50

25

48

ICICIBANK CALL (STRIKE PRICE: 410) (SOURCE: nseindia.com)

Strike Instrument Symbol Option Date 6-AprOPTSTK ICICIBANK PA 09 8-AprOPTSTK ICICIBANK PA 09 9-AprOPTSTK ICICIBANK PA 09 13-AprOPTSTK ICICIBANK PA 09 15-AprOPTSTK ICICIBANK PA 09 Expiry 30-Apr09 30-Apr09 30-Apr09 30-Apr09 30-Apr09 360 8.1 9.7 3.5 4.4 360 6.25 8.25 6.25 7.55 360 15.75 20 9.95 11.1 360 25 28 15 16.65 360 21 24.3 17.5 20 Price Open High Low Close

ICICIBANK PUT (STRIKE PRICE: 360) (SOURCE: nseindia.com)

58

Risk Management in Equity Derivative Market
Instrument Symbol Date 6-AprFUTSTK RNRL 09 8-AprFUTSTK RNRL 09 9-AprFUTSTK RNRL 09 13-AprFUTSTK RNRL 09 15-AprFUTSTK RNRL 09 Expiry 30-Apr09 30-Apr09 30-Apr09 30-Apr09 30-Apr09 57 62.8 56.3 62.25 56.75 59.75 56.5 57.85 56.75 58.45 55.1 56.3 50.05 56.7 49 55.6 50.9 53.3 49.05 52.65 Open High Low Close

RNRL FUTURE (SOURCE: nseindia.com)

Strike Instrument Symbol Option Date 6-AprOPTSTK RNRL CA 09 8-AprOPTSTK RNRL CA 09 9-AprOPTSTK RNRL CA 09 13-AprOPTSTK RNRL CA 09 15-AprOPTSTK RNRL CA 09 Expiry 30-Apr09 30-Apr09 30-Apr09 30-Apr09 30-Apr09 55 6.05 9.9 6.05 9.5 55 5.85 7.75 5.5 6.55 55 5.9 7.25 5.25 5.8 55 2.8 6.25 2.8 5.5 55 3 4.25 2.4 3.9 Price Open High Low Close

RNRL CALL (STRIKE PRICE: 55) (SOURCE: nseindia.com)

59

Risk Management in Equity Derivative Market
Strike Instrument Symbol Option Date 6-AprOPTSTK RNRL PA 09 8-AprOPTSTK RNRL PA 09 9-AprOPTSTK RNRL PA 09 13-AprOPTSTK RNRL PA 09 15-AprOPTSTK RNRL PA 09 Expiry 30-Apr09 30-Apr09 30-Apr09 30-Apr09 30-Apr09 55 3.8 3.8 2.1 2.25 55 3.4 4 2.95 3.55 55 4.5 5.25 4 4.5 55 5.25 6.05 4.8 5.25 55 5.7 5.7 5.7 5.7 Price Open High Low Close

RNRL PUT (STRIKE PRICE: 55) (SOURCE: nseindia.com)

Instrument

Symbol

Date 6-Apr-

Expiry 30-Apr09 30-Apr09 30-Apr09 30-Apr09 30-Apr09

Open

High

Low

Close

FUTIDX

NIFTY

09 8-Apr-

3281.15

3305.8

3227

3260.25

FUTIDX

NIFTY

09 9-Apr-

3180

3368.8

3157.5

3355.5

FUTIDX

NIFTY

09 13-Apr-

3409.25

3409.25

3308.6

3355.4

FUTIDX

NIFTY

09 15-Apr-

3385

3432.9

3337.3

3390.9

FUTIDX

NIFTY

09

3345

3507.8

3325

3492.9

NIFTY FUTURE (SOURCE: nseindia.com)

60

Risk Management in Equity Derivative Market
Strike Instrument Symbol Option Date 6-AprOPTIDX NIFTY CE 09 8-AprOPTIDX NIFTY CE 09 9-AprOPTIDX NIFTY CE 09 13-AprOPTIDX NIFTY CE 09 15-AprOPTIDX NIFTY CE 09 Expiry 30-Apr09 30-Apr09 30-Apr09 30-Apr09 30-Apr09 3300 139.4 248.75 118.1 238.2 3300 155.1 193.15 127.5 161.1 3300 165 178 115.1 140.8 3300 60 154.25 52 145.8 3300 104.3 119.7 80.5 93.75 Price Open High Low Close

NIFTY CALL (STRKE PRICE: 3300) (SOURCE: nseindia.com)

Strike Instrument Symbol Option Date 6-AprOPTIDX NIFTY PE 09 8-AprOPTIDX NIFTY PE 09 9-AprOPTIDX NIFTY PE 09 13-AprOPTIDX NIFTY PE 09 15-AprOPTIDX NIFTY PE 09 Expiry 30-Apr09 30-Apr09 30-Apr09 30-Apr09 30-Apr09 3300 90 95.8 41.25 44.5 3300 71 94.5 61.3 73.6 3300 79.8 109.6 71 87.1 3300 189 195 85 92.15 3300 125.5 153.1 112.55 134.6 Price Open High Low Close

NIFTY PUT (STRKE PRICE: 3300) (SOURCE: nseindia.com)

61

Risk Management in Equity Derivative Market
Instrument Symbol Date 6-AprFUTSTK INFOSYSTCH 09 8-AprFUTSTK INFOSYSTCH 09 9-AprFUTSTK INFOSYSTCH 09 13-AprFUTSTK INFOSYSTCH 09 15-AprFUTSTK INFOSYSTCH 09 Expiry 30-Apr09 30-Apr09 30-Apr09 30-Apr09 30-Apr09 1360 1386 1310 1377.45 1449 1466.35 1382 1414.3 1458.9 1458.9 1397.65 1429.8 1392 1431.2 1361.3 1424.6 1459.7 1462 1389.1 1418.35 Open High Low Close

INFOSYSTCH FUTURE (SOURCE: nseindia.com)

Strike Instrument Symbol Option Date 6-AprOPTSTK INFOSYSTCH CA 09 8-AprOPTSTK INFOSYSTCH CA 09 9-AprOPTSTK INFOSYSTCH CA 09 13-AprOPTSTK INFOSYSTCH CA 09 15-AprOPTSTK INFOSYSTCH CA 09 Expiry 30-Apr09 30-Apr09 30-Apr09 30-Apr09 30-Apr09 1380 35 47.95 25.65 43.15 1380 116 116 67.25 82 1380 75 99.7 75 92.6 1380 56.1 96 53.1 89.15 1380 100 100 67.25 85.7 Price Open High Low Close

INFOSYSTCH CALL (STRIKE PRICE: 1380) (SOURCE: nseindia.com)

62

Risk Management in Equity Derivative Market
Strike Instrument Symbol Option Date 6-AprOPTSTK INFOSYSTCH CA 09 8-AprOPTSTK INFOSYSTCH CA 09 9-AprOPTSTK INFOSYSTCH CA 09 13-AprOPTSTK INFOSYSTCH CA 09 15-AprOPTSTK INFOSYSTCH CA 09 Expiry 30-Apr09 30-Apr09 30-Apr09 30-Apr09 30-Apr09 1410 33.1 33.1 16.15 29.85 1410 70 75 50.25 64.25 1410 63.2 77.05 57 70.95 1410 51.6 79 40.1 72.1 1410 71.15 82 52 67.7 Price Open High Low Close

INFOSYSTCH CALL (STRIKE PRICE: 1410) (SOURCE: nseindia.com)

Strike Instrument Symbol Option Date 6-AprOPTSTK INFOSYSTCH CA 09 8-AprOPTSTK INFOSYSTCH CA 09 9-AprOPTSTK INFOSYSTCH CA 09 13-AprOPTSTK INFOSYSTCH CA 09 15-AprOPTSTK INFOSYSTCH CA 09 Expiry 30-Apr09 30-Apr09 30-Apr09 30-Apr09 30-Apr09 1440 20 23.9 12.5 19.7 1440 70 70 40 49.75 1440 50 64 41.3 54.3 1440 35 59.5 31.5 56.75 1440 65 70 40 53.35 Price Open High Low Close

INFOSYSTCH CALL (STRIKE PRICE: 1440) (SOURCE: nseindia.com)

63

Risk Management in Equity Derivative Market
Strike Instrument Symbol Option Date 6-AprOPTSTK INFOSYSTCH CA 09 8-AprOPTSTK INFOSYSTCH CA 09 9-AprOPTSTK INFOSYSTCH CA 09 13-AprOPTSTK INFOSYSTCH CA 09 15-AprOPTSTK INFOSYSTCH CA 09 Expiry 30-Apr09 30-Apr09 30-Apr09 30-Apr09 30-Apr09 1470 13.05 16 7.3 13.25 1470 47 50 25.25 38.3 1470 35.3 45 34 41.9 1470 24.5 46.25 24.5 43.4 1470 41.35 55 28.55 39.35 Price Open High Low Close

INFOSYSTCH CALL (STRIKE PRICE: 1470) (SOURCE: nseindia.com)

Strike Instrument Symbol Option Date 6-AprOPTSTK INFOSYSTCH PA 09 8-AprOPTSTK INFOSYSTCH PA 09 9-AprOPTSTK INFOSYSTCH PA 09 13-AprOPTSTK INFOSYSTCH PA 09 Expiry 30-Apr09 30-Apr09 30-Apr09 30-Apr09 1350 30 46 30 36.55 1350 32 40.5 25 27.5 1350 42.1 60 31.1 33.8 1350 30 43.7 26 35.35 Price Open High Low Close

15-Apr- 30-AprOPTSTK INFOSYSTCH PA 09 09 1350 71 72.1 28.2 31.85

INFOSYSTCH PUT (STRIKE PRICE: 1350) (SOURCE: nseindia.com)

64

Risk Management in Equity Derivative Market Strike Instrument Symbol Option Date Expiry Price Open High Low Close

6-Apr- 30-AprOPTSTK INFOSYSTCH PA 09 09 1440 58.5 80 58.5 72.1

8-Apr- 30-AprOPTSTK INFOSYSTCH PA 09 09 1440 90.15 102 67.8 68.15

9-Apr- 30-AprOPTSTK INFOSYSTCH PA 09 09 1440 65.8 68.5 61 65.7

13-Apr- 30-AprOPTSTK INFOSYSTCH PA 09 09 1440 81 89 69.9 79.95

15-Apr- 30-AprOPTSTK INFOSYSTCH PA 09 09 1440 140 140 90 90

INFOSYSTCH PUT (STRIKE PRICE: 1440) (SOURCE: nseindia.com)

Instrument Symbol

Date

Expiry

Open

High

Low

Close

6-Apr- 30-AprFUTSTK RELIANCE 09 09 1701 1725 1651.25 1677.25

8-Apr- 30-AprFUTSTK RELIANCE 09 09 1630.3 1742.9 1613.65 1732.4

9-Apr- 30-AprFUTSTK RELIANCE 09 09 1755.4 1776 1710 1743.45

13-Apr- 30-AprFUTSTK RELIANCE 09 09 1755.5 1796 1729 1777.75

15-Apr- 30-AprFUTSTK RELIANCE 09 09 1748 1844 1741 1833.6

RELIANCE FUTURE (SOURCE: nseindia.com)

65

Risk Management in Equity Derivative Market
Strike Instrument Symbol Option Date 6-AprOPTSTK RELIANCE CA 09 8-AprOPTSTK RELIANCE CA 09 9-AprOPTSTK RELIANCE CA 09 13-AprOPTSTK RELIANCE CA 09 15-AprOPTSTK RELIANCE CA 09 Expiry 30-Apr09 30-Apr09 30-Apr09 30-Apr09 30-Apr09 1650 170.5 219.9 164 208.4 1650 126.25 172 126.25 161.9 1650 132 160 123.9 131.2 1650 60 136 59.5 129.75 1650 134.95 134.95 76 94.65 Price Open High Low Close

RELIANCE CALL (STRIKE PRICE: 1650) (SOURCE: nseindia.com)

Strike Instrument Symbol Option Date 6-AprOPTSTK RELIANCE CA 09 8-AprOPTSTK RELIANCE CA 09 9-AprOPTSTK RELIANCE CA 09 13-AprOPTSTK RELIANCE CA 09 15-AprOPTSTK RELIANCE CA 09 Expiry 30-Apr09 30-Apr09 30-Apr09 30-Apr09 30-Apr09 1680 115 180 115 175 1680 110 150 106.95 139 1680 115 135 99 116.3 1680 50 115 46.15 108.15 1680 85 106 64 78.1 Price Open High Low Close

RELIANCE CALL (STRIKE PRICE: 1680) (SOURCE: nseindia.com)

66

Risk Management in Equity Derivative Market
Strike Instrument Symbol Option Date 6-AprOPTSTK RELIANCE CA 09 8-AprOPTSTK RELIANCE CA 09 9-AprOPTSTK RELIANCE CA 09 13-AprOPTSTK RELIANCE CA 09 15-AprOPTSTK RELIANCE CA 09 Expiry 30-Apr09 30-Apr09 30-Apr09 30-Apr09 30-Apr09 1710 99 160 90 155.65 1710 118 128 86 112.85 1710 105 115 78.25 94 1710 42 97 36.45 90.35 1710 76 89 55.1 65.05 Price Open High Low Close

RELIANCE CALL (STRIKE PRICE: 1710) (SOURCE: nseindia.com)

Strike Instrument Symbol Option Date 6-AprOPTSTK RELIANCE CA 09 8-AprOPTSTK RELIANCE CA 09 9-AprOPTSTK RELIANCE CA 09 13-AprOPTSTK RELIANCE CA 09 15-AprOPTSTK RELIANCE CA 09 Expiry 30-Apr09 30-Apr09 30-Apr09 30-Apr09 30-Apr09 1740 83 140 74.15 134.5 1740 90 106 70 96.55 1740 85 95 63 78.5 1740 32 79.9 26 75.1 1740 53 73 45 52.4 Price Open High Low Close

RELIANCE CALL (STRIKE PRICE: 1740) (SOURCE: nseindia.com)

67

Risk Management in Equity Derivative Market
Strike Instrument Symbol Option Date 9-AprOPTSTK RELIANCE CA 09 13-AprOPTSTK RELIANCE CA 09 15-AprOPTSTK RELIANCE CA 09 Expiry 30-Apr09 30-Apr09 30-Apr09 1800 45 99.95 45 94.35 1800 52.45 73.95 45 65.15 1800 50 66.9 40.05 52 Price Open High Low Close

RELIANCE CALL (STRIKE PRICE: 1800) (SOURCE: nseindia.com)

Strike Instrument Symbol Option Date 6-AprOPTSTK RELIANCE PA 09 8-AprOPTSTK RELIANCE PA 09 9-AprOPTSTK RELIANCE PA 09 13-AprOPTSTK RELIANCE PA 09 15-AprOPTSTK RELIANCE PA 09 Expiry 30-Apr09 30-Apr09 30-Apr09 30-Apr09 30-Apr09 1650 38 42 21 23.75 1650 38 48.7 30.3 33.5 1650 40 56.95 36.05 42.5 1650 80 95.9 45 48.7 1650 57.85 77.5 53 68.75 Price Open High Low Close

RELIANCE PUT (STRIKE PRICE: 1650) (SOURCE: nseindia.com)

68

Risk Management in Equity Derivative Market
Strike Instrument Symbol Option Date 6-AprOPTSTK RELIANCE PA 09 Expiry 30-Apr09 1740 90 128 90 113.7 Price Open High Low Close

8-Apr- 30-AprOPTSTK RELIANCE PA 09 09 1740 115.2 115.2 77 83.15

9-Apr- 30-AprOPTSTK RELIANCE PA 09 09 1740 75 92 61.15 77.4

13-Apr- 30-AprOPTSTK RELIANCE PA 09 09 1740 70 84.2 53 60.4

15-Apr- 30-AprOPTSTK RELIANCE PA 09 09 1740 74 74 39 41.45

RELIANCE PUT (STRIKE PRICE: 1740) (SOURCE: nseindia.com)

69

Risk Management in Equity Derivative Market

GLOSSARY
Technical Terms used in the Project:
Call Option: A call option gives the holder the right but not the obligation to buy an asset by a certain date for a certain price. Put Option: A put option gives the holder the right but not the obligation to sell an asset by a certain date for a certain price. Long Position: Long position in a derivatives contract means outstanding purchase obligations in respect of a permitted derivatives contract at any point of time. Option Price/ Premium: Option price is the price which the option buyer pays to the option seller. It is also referred to as the option premium. Expiration Date: The date specified in the options contract is known as the expiration date, the exercise date, the strike date or the maturity. Strike Price: The price specified in the options contract is known as the strike price or the exercise price. Delta: Delta is the rate of change of option price with respect to the price of the underlying asset. For example, the delta of a stock is 1. It is the slope of the curve that relates the option price to the price of the underlying asset. Suppose the Delta of a call option on a stock is 0.5. This means that when the stock price changes by one, the option price changes by about 0.5, or 50% of the change in the stock price.

70

Risk Management in Equity Derivative Market

Gamma: Gamma is the rate of change of the option’s Delta with respect to the price of the underlying asset. In other words, it is the second derivative of the option price with respect to price of the underlying asset. Theta: Theta of the portfolio of options is the rate of change of the value of the portfolio with respect to the passage of time with all else remaining the same. Theta is also referred to as the time decay with all else remaining the same. Vega: The Vega of the portfolio of derivatives is the rate of change in the value of the portfolio with respect to the volatility of the underlying asset. If Vega is high in the absolute terms, the portfolio’s value is very sensitive to small changes in volatility. If Vega is low in absolute terms, volatility changes have relatively little impact on the value of the portfolio. Rho: The Rho of a portfolio of option is the rate of change of the value of the portfolio with respect to the interest rate. It measures the sensitivity of the value to interest rates.

71

You're Reading a Free Preview

Download
scribd
/*********** DO NOT ALTER ANYTHING BELOW THIS LINE ! ************/ var s_code=s.t();if(s_code)document.write(s_code)//-->