Jaypee Business School
A constituent of Jaypee Institute of Information Technology University A-10, Sector 62, Noida (UP) India 201 307 www.jbs.ac.in

Hedging Strategy Through Futures And Options

Internship Report submitted as a partial requirement for the award of the two year Master of Business Administration Programme MBA 2009-11

Name: Aditya Ahuja Telephone: 9540322377 E-mail: adityahuja@gmail.com

Corporate Internship Supervisor Name: Mr. Jitendra Rai Singhania Designation: Regional Business Head (Karvy Fortune) Contact details: 9212386311 Mailing Address: jitendra.r@karvy.com JBS-Faculty Supervisor: Dr. Hima Gupta

Start Date for Internship: 19th April End Date for Internship: 16th June

Report Date: 5th of July Self Certification by the Intern
I hereby certify that I, Mr.Aditya Ahuja have successfully completed my internship with “Karvy Stock Broking Limited” in the month of June-2010 from (19th of April to 16th of June). This is also to certify that this report is an original product and no unfair means like copying etc have been used for its completion.

Name: Aditya Ahuja Signature: Date: 23rd June 2010

Page 2

Certificate from the Corporate Internship Providing Organization
This is to certify that Mr Aditya Ahuja has successfully completed his internship with us in the month of June-2010 from (19th of April to 16th of June). We wish him all the best for all his future endeavors.

Name of the Supervisor: Mr.Jitendra RaiSinghania Signature: Date: 23rd June 2010

Page 3

Page 4 . the same happened with me during this project. who have helped me in the successful completion of this project. The immense help and support received from Karvy stock broking limited overwhelmed me during the project. I am grateful to Mr.Acknowledgement Sometimes words fall short to show gratitude. My sincere gratitude to Mr. Jitendra Rai Singhania and all of the Associate members of New Delhi branch. I am highly indebted to Mr. who has provided me with the necessary information and his valuable suggestion and comments on bringing out this report in the best possible way. Jitendra Rai Singhania (Regional Business Head-Karvy Fortune) for providing me with an opportunity to work with Karvy stock broking limited. Jitendra Rai Singhania. Regional Business Head-Karvy Fortune and company project guide.

........ 5 Executive Summary……………………………………………………………….... 7-8 College Profile………………………………………………………………………….………………....4145 Futures and Trading In Futures Segment….................. 4 Table of Contents……………………………………………………………....... 9-12 Company’s Profile………………………………………………………………………..57-58 What is Hedge Fund……………………………………………………………………. 6 Objective of the Study (Research Methodology)………………………………………... …………......TABLE OF CONTENTS Self certification By the Intern………………………………………………………… 2 Certificate from the Organization……………………………………………………… 3 Acknowledgement…………………………………………...………………………………………………………………....69-70 References………………………………………………………………………………70-71 Strategies…………………………………………………………………………............52-54 Option 56 Hedging…………………………………………………………………………………...34-40 Introduction on Derivative………………………………………………………………......................45-52 What are Options………………………………………………………………………..................29-34 Indian Brokerage Industry……………………………………………………………….........68-69 Suggestions and Conclusion……………………………………………………………........55- Page 5 .13-28 About Stock Market………………………………………………………………………2829 Stock Index……………………………………………………………………………….........58-59 Analysis and Interpretation………………………………………………………………60-67 Findings…...

Derivatives are an important tool to hedge the risk or position by dint 0f Future & option market. One can have brief knowledge about derivatives and its hedging strategies using Futures and Options and all its basics through the project. This project as a whole can be divided into two parts: • The project gives an insight about derivatives and its various aspects. Page 6 . The language has been kept simple so that even a layman could understand. This project has been conducted at Karvy. Delhi to the best of my effort and determination.Executive Summary This project has been a great learning experience for me.  All the topics have been covered in a very systematic way. Hedging is nothing but to control or eliminate the risk to a certain extent. at the same time it gave me enough scope to implement my analytical ability. My entire project report revolves around Derivatives as a tool of Hedging. It is purely based on whatever I learned at karvy.

Internet. To understand scope of derivatives in capital market Research Approach: Data collection: 1) Primary Data: . Page 7 . News Channels. Newspapers.RESEARCH METHODOLOGY Objective Primary: 1) To understand about derivative market 2) To study how does a derivative has the risk or position 3) To know why the derivatives is considered safer then the cash market Secondary: 1. Books. 2) Secondary Data: .Formal and Informal Discussion with the company guide and clients of the company. TV channels.

Research Problem: There are very few ways for hedging price risk or price volatility in equity markets and derivatives is one of them. 3) Since options are widely used for hedging. 2) As the company guide was very busy in his exhausting work schedule very less guidance was available. which is very confidential for the company. a huge difficulty was faced in getting the data. only the options cases have been taken into the consideration in my research. Scope of study: 1) As derivatives are very vast subject the scope of research is limited to the financial derivatives viz. future & options. Limitation: 1) As research required detail information of portfolios of clients. My study is to see how derivatives are used for hedging price risk in equity market. 2) Forwards has been kept out of the scope of this research. Page 8 .

passionate and market centric professionals who can manage human resources.About Jaypee Business school Jaypee Business School is the latest manifestation of the vision of our Revered Founder.’ JBS has state of the art infrastructure and highly competent and dedicated faculty for the MBA programme. The mission of JBS is ‘to prepare and produce competent. The programme aims to develop a competent cadre of business executives to meet the country’s growing requirements for trained personnel’s in the field of management. a constituent of Jaypee Institute of Information Technology (Deemed University) was started in the year 2007. The syllabi for MBA compare favorably with the syllabi of some of the world’s best Business Schools. business operations and ensure world class quality practices. The ability to put in sustained and disciplined hard work Page 9 . The Jaypee Business School (JBS). aims at providing a comprehensive coverage incorporating all the important areas and disciplines in management and inculcates a professional approach to business amongst the potential managers. It has made good progress in a short span of less than 3 years. MBA Programme At JBS The JBS MBA programme. a six trimester general management programme. Hon’ble Shri Jaiprakash Gaur ji.

The syllabi for MBA compare favorably with the syllabi of some of the world’s best Business Schools. a six trimester general management programme. with an annual turnover of over 6500 Crores (US$ 1. A typical trimester is designed to be intensive with an emphasis on regular and continuous work. Corporate Profile of Jaypee Group The Jaypee Group. MBA Programme At JBS The JBS MBA programme. Short Term Training Programmes. The Evaluation System is accordingly designed to encourage this concept. The ability to put in sustained and disciplined hard work over a sufficient length of time is one of the key factors to success in professional life. Consulting and Research etc. aims at providing a comprehensive coverage incorporating all the important areas and disciplines in management and inculcates a professional approach to business amongst the potential managers.over a sufficient length of time is one of the key factors to success in professional life. The Page 10 .5b). is an infrastructure conglomerate with a strong belief in the country’s huge potential. The Evaluation System is accordingly designed to encourage this concept. Future Prospects of JBS Future Programme includes the following: • • Three-year Part Time MBA Programme. A typical trimester is designed to be intensive with an emphasis on regular and continuous work.

Cement. The group companies have been well entrenched in infrastructure projects for over four decades. Cement Jaypee Cement. Central. Power. Expressways. Real Estate. Power Transmission and also forayed into Wind Power. Hospitality and Education (not for profit). and Western regions of the country. the third largest cement player in the country with an aggregate capacity of 14.70 MTPA is poised to be a 30 MTPA cement producer by 2011 with Captive Thermal Power plants totaling 342 MW. Engineering and Construction The Engineering & Construction wing of the group is an acknowledged leader in the construction of multi-purpose river valley and hydropower projects and has the unique distinction of completing various projects in different capacities in the 10th five year plan to provide 7880 MW of hydropower to the nation. The group’s commitment is to grow with a human face.Group’s business interests are in Engineering & Construction. has initiated its entry into Thermal Power Generation. it focuses on all round growth. With 700 MW of hydropower generating capacity. Group’s indomitable spirit and uncompromising execution capability has made it complete some of the largest projects in India as on date. it is the largest private sector hydropower producer and poised to be 13470 MW power entities by 2018. Power The Group. Southern. through expansion in the Northern. after having established a strong presence in the Hydro-Power Sector. Empowered with self belief & determination to excel and make the organization contribute in Nation building through entrepreneurial daring. Expressways Page 11 . being an integrated power player in the country. Eastern.

2 Polytechnics. The group supports various educational initiatives at all levels of the learning curve through Jaiprakash Sewa Sansthan (JSS) . The Group will also construct state-of-the-art Formula-I racing tracks in Greater Noida. The System plans to take the vision of service to society through quality education to another plane Page 12 . The Group is also constructing a boutique spa cum resort at Greater Noida. Jaypee Greens. 165 Km long 6/8 lane super expressway between Greater Noida and Agra (Yamuna Expressway Project) to usher growth and development across rural India.000 students. 3 ITIs.The Group is poised to complete by December 2010. JUIT and JIET). landscaped parks and lakes along with an integrated sports club. Jaypee Greens has launched ‘Wish Town’ in Noida. and 3 Universities (JIIT. Hospitality The hospitality division owns and operates four 5-star hotels. a historic residential township stated to be India’s largest township development on over 1162 acres. New Delhi and one each in Agra and Mussoorie. The hotels have a total capacity of 644 rooms. Today with 17 schools. Education It is the belief of the Founder Chairman that imparting quality education is the best service that an organization can provide to the society’. Ribbon development shall take place along Yamuna Expressway at 5 locations with integrated townships to be constructed on 2500 hectares (6250 acres) of land Real Estate A premium 452 lifestyle real estate destinations.a not-for-profit trust. Greater Noida offers luxury villas and apartments with an 18-hole Greg Norman Signature golf course. two in the national capital. THE Jaypee Education System is touching the lives of over 25.

000 students over the next 5-year period.by expanding its infrastructure to provide education to approximately 100. Organization overview Introduction: “Success is a journey. empathy and humility. which is today known as Karvy. to provide world class quality services. Back in the year 1981.” If we look for example to prove this quote then we can find many but there is none like that of Karvy. integrity. commitment. learning and innovation. Success sutras of Karvy: The success sutra of karvy is driven by 8 success sutras adopted by it namely trust. enterprise. five people created history by establishing the Karvy and co. In the process karvy shall strive to meet And exceed customer’s satisfaction and set industry standards. not a destination. karvy shall aim for complete customer satisfaction. hard work and tem play. by combining its human and technological resources. Vision of Karvy: To achieve and sustain market market leadership. the largest financial service provider of India. These are the values that bind success with karvy. dedication. Page 13 .

e. and we aim to achieve this leadership position by building an innovative. One year Page 14 . and technology driven organization which will set the highest standards of service and business ethics. It added the feather of stock broking into its cap. Karvy became a known name during the year 1985-86 when it forayed into capital market as registrar. and then its work was confined to audit and taxation only. At the same time it became the member of Hyderabad Stock Exchange through associate firm Karvy Securities Ltd and then Karvy never looked back. it entered into retail stock broking in the year 1990.. It went on adding services one after another. Under this section we will see that how this “Karvy And Company” of 1980 became “Karvy” of 2010. entered into financial product distribution services in the year 1993. Later on it diversified into financial and accounting services during the year 1981-82 with a capital of Rs. Evolution of KARVY: It is well said that success is a journey not a destination and we can see it being proved by Karvy.” Company overview: Karvy was established as Karvy and company by five Chartered Accountants during the year 1979-80. Karvy investor service centers were set up in the year 1992. Karvy which already enjoyed a wide network through its investor service centers. The turning point came in the year 1989 when it decided to enter into one of the not only emerging rather potential field too i.150000. it achieved its first milestone after its first investment in technology. stock broking. enterprising.Mission Statement: “Our mission is to be a leading and preferred service provider to our customers. Karvy blossomed with the setting up of its first branch at Mumbai during the year 1987-88.

.. Year 2005 saw Karvy establishing a separate branch for its insurance services under the head “Karvy Insurance Broking Ltd” and in the same year.so why the largest financial service provider of India should lag behind? Hence. it stepped into corporate finance and investment banking in the year 1995. Then in the year 2002 it launched its PCG (Private Client Group) which looks after its High Net worth Individuals . Karvy again hit the limelight by becoming the first registrar in the country to be awarded ISO 9002 in the year 1997.com . It was a decade which saw many Indian companies going global….e. we can see now karvy being established as the largest financial service provider of the country.more and Karvy was now dealing into mutual fund services too in the year 1994 but it didn’t stopped there.e. Then it stepped into the other most happening sector i. is Number 1 Registrar in the Page 15 . Now Karvy group consists of 8 highly renowned entities which are as follow: 1.karvy.the finapolis: your personal finance advisor”. Then it entered into insurance services in the year 2001 with the launch of its retail arm “karvy.and maintain their portfolio and provides them with other financial services.the year 2004 also saw Karvy entering into commodities marketing through Karvy Comtrade. : The first securities registry to receive ISO 9002 certification in India. after being impressed with the rapid growth of Karvy Stock Broking Limited. In the year 2006. Registered with SEBI as Category I Registrar. hence. In the year 2003. Karvy launched “Karvy Global Services Limited” after entering into a joint venture with Computer share. PCG group of Hong Kong acquired 25% stake at KSBL. IT enabled services by establishing its own BPO units and at a gap of just 1 year it took the path of EBusiness through its website www. karvy entered into one of the hottest sector of present time i. Karvy’s strategy has always been being the first entrant in the market. real estate through Karvy realty& services (India) ltd. Australia in the year 2004. it commenced secondary debt and WDM trading.

in Indian and global markets. healthcare and pharmaceuticals. media . Its clientele includesinclude leading corporate. : It is registered with SEBI as a category 1 merchant banker. State Governments. 4. It operates in banking and financial services. : Karvy Stock Broking Ltd. depository participant. high net-worth clients and corporates. It has its sales and business development office in New York. advisory and brokerage services in Indian Commodities Markets. advisory services. advisory services and private client goups. : Karvy Global is a leading business and knowledge process outsourcing Services Company offering creative business solutions to clients globally. : The company provides investment. USA and the offshore global delivery center in Hyderabad. : Karvy insurance broking ltd is also a part of karvy stock broking ltd. 3. 5. consists of five units namely stock broking servics. foreign institutional investors. 6. India 7. it offer a wide reach through our branch network of over 225 branches located across 180 cities. public and private sector companies and banks. At Karvy Insurance Broking Limited both life and non-life insurance products are provided to retail individuals.Country. distribution of financial products. The award of being ‘Most Admired’ Registrar is one among many of the acknowledgements we received for our customer friendly and competent services. inurance. And most importantly. telecom and technology. 2. : Karvy Realty (India) Limited is engaged in the business of real estate and property services offering: Page 16 .

. Parthasarthy. Mr. finance & accounting. Mr M. : It is a joint venture between Computershare. India in the registry management services industry. And finally the BPO services are managed by karvy global services ltd. Potluri as directors. and karvy global services ltd. Ramakrishna and Mr. training & development. Prasad V. the chairman being Mr. Organization structure of Karvy: Talking about the organization structure of karvy. depository. distribution. karvy investors services ltd.• • • • Buying/ selling/ renting of properties Identifying valuable investments opportunities in the real estate sector Facilitating financial support for real estate and investments in properties Real estate portfolio advisory services 8. C. Yugandhar as the managing director. M. technology services and corporate quality. karvy stock broking ltd. research. Karvy stock broking ltd heads its another branch too ie. The services offered by KSBL are: stock broking. group human resources. karvy computershares limited. personal client group and institutional desk. Australia and Karvy Consultants Limited. it can be presented as: Page 17 . Summarizing it in a diagram.S. Karvy insurance broking ltd. we have the board of directors as the supreme governing body . share registry and issue registry whereas merchant banking is looked after by karvy investor services ltd. karvy comtrade. Karvy computershare private limited facilitates mutual fund services. Karvy group being the flagship company looks after the functional departments such as corporate affairs.. The board of directors head the karvy group.

Now one must be thinking why to get the mutual funds from karvy instead of getting it directly from AMCs???we have great reasons for it: the first one being .Spectrum of services offered by Karvy: Karvy being the top registrar and transfer agent. it deals in both closed ended funds as well as open ended too. functions as registrar in most of the issues in the country. And the second being wide network of karvy…. Talking about the mutual fund services offered by karvy. we can get the products of 33 AMCs over here. Page 18 . if we avail the services of karvy then we can get the information about all the AMCs and their products at a single place along with expert recommendations whereas at an AMC we can get information about the products of that specific AMC only.nowadays we can find karvy offices at remote areas too.

Along with these. It offers e-business through internet through its website: karvy.cutting techniques and minimization of avoidable costs. karvy is very well handling the role of depository participant. it also provides its various services through SMSes.and here at karvy everybody tries their best to offer excellent services to its clientele through its offerings maintaining the karvy culture which includes: 1. we cant ignore any of the aspects of our business…. Karvy believes in being updated always.so there’s a offering for everybody…everyone’s welcome at Karvy. So it is always ready to use latest technologies so that its clients always be in touch with the latest happenings along with karvy. Controlled and low cost service culture: Karvy is there to serve its client at the minimum possible cost. Being registered with both the depositories i. Page 19 . Karvy’s services are not limited to its investors only rather its offerings are for its corporate clients and distributors too. Why should investors choose for Karvy? Excellence is next to nothing . NSDL (national securities depository ltd) and CDSL (central depository services ltd).. 2. Other than it. it is very well aware of the fact that in this era of neck to neck competition. Adherence to strict time schedule: Karvy knows that time is money and tries it best to finish the task within the stipulated time schedule.com. it has the unique distinction of operating its activities on a large scale which benefits all the parties cordially. It controls cost by its various cost.e. Large volume processing capability: Being the largest financial service provider in the country. 3. Its wide network also facilitates it in distribution of retail financial products. karvy can have access to both.

Professionally managed by qualified and trained manpower. whenever needed. so it can easily pool up its resources for accomplishment of its goals. Thus it enjoys its presence everywhere and coordinates among itself in solving the queries and in responding to any situation. 6. 5. Uniquely structured in-house software and hardware department 3. 6. Query handling within 48 hrs. and even in the case when they have huge targets just as we saw few years back. Page 20 . 5. 4. Tata group pooling its resources to acquire Corus. How karvy achieved it? The core competency of karvy lies in the following points due to which it enjoys a competitive edge over its competitors. so the karvy people establishes good coordination with independent entities too. Unique work culture of working 7 days a week in 3 shifts. Strong secretarial. Expertise in coordinating multi-location responses: Karvy has got a wide network and hence one can find its branches at most of the places in India.4. Pooling of group resources: Karvy group consists of eight subsidiaries.: The work culture of karvy and the ethics followed inside karvy makes its workforce compatible with everybody. 2. Unmatched network spreading all over India. The groups can help each other whenever there are peaks and lows. accounting and audit systems. The following culture adopted by karvy makes it all time favorite among its clientele: 1.Expertise in managing independent entities such as banks. post-office etc.

2. Be it a retail investor investing Rs.everybody is heading towards karvy for their wealth maximization. now it is: 1. But success didn’t came to Karvy at a flow.How Achievements sounds synonymous to Karvy: The landmarks achieved by Karvy very well define its success story. let’s have a look at the clientele of karvy: According to the data published in year 2007. Clientele of Karvy: Karvy’s culture has helped karvy in achieving such a distinct position in the market where it can boast of its huge client base. 500 in a SIP in Reliance mutual fund or be it the largest corporate house of the country: Reliance industries. 9. Among the top 3 depository participants. Amongst the top 5 stock broker. 7. Amongst top 10 investment bankers. 8. ISO 9002 certified operations by DNV. Largest network of branches & business associates. Full. 6.1 registrar & securities transfer agent. In the previous pages. India’s no. the largest financial intermediary of India.fledged IT driven operation. we learnt how a company started by five chartered accountants. the hard work and dedication of its workforce made it what it is today…gradually it achieved the following landmarks and now it has became what we call the Karvy group. karvy stock broking ltd. Adjudged as one of the top 50 IT users in India by MIS south Asia. 4. Largest independent distributor for financial products. Operates through more than 12000 terminals. more than 290000 accounts are maintained and Page 21 . named as Karvy and company turned into today’s Karvy Group. 3. 5.

LIC. KARVY at northern zone: Karvy stock Broking Ltd at Arunachal Building. IDBI. it manages over 750 public/ right issues at the same time. Glenmark. Morgan Stanley. Kotak Mahindra Bank.TATA consultancy services. UTI mutual fund etc.14% market share of NSE.commands over 3. Principal Mutual Fund. Bharti Televenture. Karvy is a member of three stock exchanges of India: National Stock Exchange (NSE). Karvy has zonal offices at Lucknow. Jitendra Rai Singhania is heading the northern zone. Each zonal office has got its own zonal heads. Karvy being a depository participant with both NSDL and CDSL manages more than 700000 accounts from more than 380 locations. The distribution services have access to more than Rs. Infotech. so there is a special reference to working of Karvy at Northern Zone and stock market in particular. Barakhamba Road which is established as the regional head office. Rajasthan. Patni Computers. Page 22 . 3M. Infosys Technologies. Hindustan Unilever. CRISIL. IOC. Marico Industries. Since the project was carried on in Delhi. Talking about the zonal offices. Bombay Stock Exchange (BSE) and Hyderabad Stock Exchange (HSE). Thus in total karvy serves over 16 million investors and 300 corporates. it is managing over 16 million portfolios as registrar. Wipro. IPCL. Talking about the registry services.40 billion Assets under Management. Duetsche Mutual Fund. Presently Mr. Chandigarh. Yogokawa. If we took a look at some of the top corporate houses availing the services of karvy then we have: Reliance.

Paschim Vihar 8. Rajendra Place 10. Janakpuri 5. Ansal Chamber. Nehru Place 7. Distt. there exists a coordinator. Moti Nagar 6. Suneja Tower I. then there exist eleven branches of karvy at New Delhi. Bahadurshah Zafar Marg. ITO 4. Vishal Bhavan. Between each level of the hierarchy. Rohini Page 23 . Nanda Devi Tower.Hierarchical Structure in diagram: The above diagram shows the hierarchy of Karvy stock broking ltd. Karvy at New Delhi: Now if we look at karvy’s branch offices at Delhi. who acts as the facilitator between the different heads. Vikrant Tower. D. Centre. Preet Vihar 9. Bhikajikama Place 3. Jitendra Rai Singhania) is the supreme in the northern region. which are as follow: 1. Savitri Sadan. under whom the various zonal heads operate and under these zonal heads. Arunachal Building. Shivaji Marg.Market.D. It can be easily depicted from the diagram that the regional head (presently Mr. Barakhaba Road 2. the branch heads operate.

Sector-B. Vasant Kunj Structure according to the Products offered by Karvy: REGIONAL HEADS PRODUC T HEADS HEA Realty Debt divisi on Mutua l funds Insura nce brokin g comm oditie s Stock brokin g Depos itory partici pant Merch ant & inv.ba nking PMS Page 24 .11.

The Depository system in India links Issuers. strategy reports etc. However. Mutual Fund Advisory Service at Karvy guides you through this maze and ensures that your investments are backed by our quality research. Our demat services has innovated over time and we provide online access to account statements and transaction alerts through SMS to its clients. Our demat services business has the distinction of having all its operations ISO 9001: 2000 certified with state-of-the-art technology and operations capabilities. with more and more funds flooding the market. We. National level Depositories.Mutual fund Services Investment is the stepping stone to achieving one's financial dreams. at Karvy help you to reach your goals by offering: • • • • Products of 33 AMCs Research reports (existing funds & NFOs. Our demat services are accessible through any of our network of over 575 branches / investor service centers located in over 375 cities and towns across the country. Depository Participants and Clearing Houses / Clearing Corporation of Stock Exchanges. Mutual funds offer an opportune way to long-term wealth creation. the task of selecting the most suitable scheme gets even more complicated.) Customized mutual fund portfolios Portfolio revision (depending on changing market outlook and evolving trends) Depository Services SERVICES KARVY Stock Broking Limited provides depository services to investors as a Depository Participant with the National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL). Page 25 .

Page 26 . insurance is no more seen as only a tax saving product but also as an investment product. high net-worth clients and corporates. With Indian markets seeing a sea change. We provide the following services: • • • • • • • Dematerialization of Shares Rematerialization of Shares Transfer of Shares Pledging of Shares Electronic Custodial Services Maintenance of Beneficial Holdings Electronic Credit Against Corporate Actions Insurance Broking Services At Karvy Insurance Broking (P) Ltd. personalized service is provided here by a dedicated team committed in giving hassle-free service to the clients.KARVY Demat services offer you a secure. Our wide national network. we are in a position to provide tailor made policies for different segments of customers. further supports these advantages. Further. convenient and paperless way to keep track of your investments in shares and other security instruments over time. we would be positioned to provide the best of the products available in this business to our customers. we provide both life and non-life insurance products to retail individuals. With the opening up of the insurance sector and with a large number of private players in the business. By setting up a separate entity. In our journey to emerge as a personal finance advisor. without the hassle of handling paper based transcripts. spanning the length and breadth of India. both in terms of investment pattern and attitude of investors. we will be better positioned to leverage our relationships with the product providers and place the requirements of our customers appropriately with the product providers.

This service primarily meant for HNIs (High Networth Individuals) offers customers a wide range of schemes. GreenWallet is an endeavour specially designed by Karvy to enhance the wealth of a niche segment of investors. medium and large capitalized companies. technical analysts and fundamental specialists. Karvy offers qualitative insights into the market scenario on various industry segments.Portfolio Management Service In today's intricate and volatile market your investment requires constant monitoring and attention. WHAT IS PMS? PMS gives investors access to an institutional process of money management it provides a customized solution by matching the unique circumstances and objectives of each investor. With a proven track record of providing the best Page 27 . Wealth creation based on disciplined investment process is the crux of PMS Effective diversification helps reduce portfolio volatility and enhances risk-adjusted returns over long term PMS gives investor direct ownership of the individual securities in the portfolio Research With a full fledged research team comprising of qualified professionals. The demand made on your time and energy by other business may not leave you with capacity to attend to your personal portfolio with the degree of care you deem appropriate. We at KARVY understand your situation and offer PMS services taking the same level of care and attention you would devote to monitoring your portfolio. These unique schemes seek to achieve higher returns through broad based participation in equity markets. This is achieved by creating a diversified equity portfolio of small.

they can do so by going to the stock market. its initial shareholders are able to acquire shares of stock from the point of subscription when a company is created. As a corporation is formed. The stock market has buyers of stocks or those who wants to own a part of the company but wasn’t able to do so during the initial public offerings made by the company to the public when it has decided to list itself as a publicly listed company. the primary market comes in where those who subscribe to the initial public offering (IPO) takes on the shares of stock sold from point of IPO.value for money. Karvy’s research aims at giving investors that extra edge to make smarter investments. When a company starts to be traded to the public. Research Capability: • • • • Karvy research was rated in Asiamoney for its IT and Mid cap coverage Karvy has research experience of more than nine years The research department comprises of 20 research analysts The analysts experience ranges from 3 to 18 years ALL ABOUT STOCK MARKET The stock market system is an avenue of how to trade stock for listed corporations. The stock market is a secondary market for securities trading wherein original or secondary holders of a company’s shares of stock can sell their stocks to other individuals within the frame work of the stock market system. When those who bought into a company at IPO point of view decides to sell their shares of stock to other people. The secondary market or the stock market allows other individuals to sell shares of the company when the initial shareholders may have realized that they want to sell their shares after gaining either significant profit or realized significant loss from point of acquiring a company from its IPO price Page 28 .

securities are bought by way of public issue directly from the company. the Stock Exchange. is actually extremely volatile since it is driven more by the sentiments of the people“ Stock Market is a place where the stocks of a listed company are traded. A good Stock Index captures the movement of the well diversified and highly liquid stocks. The other major exchange is the National Stock Exchange of India Limited (NSE) and was incorporated in November Page 29 .PRIMARY & SECONDARY MARKET There are two ways for investors to get shares from the primary and secondary markets. Stock Market Index “It’s ironical that something as huge as a stock market which should be stable as it represents the economy of a nation. was established in 1875 as "The Native Share and Stockbrokers Association" (a voluntary non-profit making association) and is now popularly known as the Bombay Stock Exchange (BSE). where the weights are generally in proportion to the market capitalization of the company. as distinguished from the Secondary Market. A single figure that sums up the overall performance of the market on a daily basis is the Stock Index. In Secondary market share are traded between two investors. Most trading is done in the secondary market. Mumbai. Secondary Market: The market where securities are traded after they are initially offered in the primary market. Index movements reflect the changing expectations of the stock market about future dividends of the corporate sector. The index is calculated by finding the weighted average of the prices of the most actively traded companies in the market. For a lay man it is the pulse rate of the economy. But when and where did it all start? In India. Primary Market: Market for new issues of securities. where previously issued securities are bought and sold. In primary markets.

9% of the trading done in India. Page 30 . Taking an example for an industry specific index we have the S&P Banking Index which is a capitalization-weighted index of 26 domestic equities traded on the New York Stock Exchange and NASDAQ. An example for this is the S&P CNX 500. by putting stocks of various sectors that reflect  the economy. An index must thus have a balanced representation of all sectors. For example if the current market price of a stock is Rs 200 and a trader purchases it at Rs 202 (due to involved transaction costs) then the market impact cost is 1% and the stock is considered highly liquid for lower impact cost.  Specialized Index: We can either have Industry or Sector specific Index for any particular sector of the economy which then serves as the benchmark for that particular industry or we can have an index for the highly liquid stocks.1992. Types of Indexes available: Broad-Market Index: This consists of all the large. Diversification – Diversification. Similarly. Combined the two trading zones are responsible for 99. is used to cancel out stock noise which is essentially the individual stock fluctuations and to reduce investor’s risks. liquid stocks of the country and becomes the benchmark for the entire capital market of the country. The S&P CNX Nifty is a relevant example for an index composed of highly liquid stocks Determinants of a Stock Index Following parameters should be taken into picture before one constructs a stock index:  Liquidity – Liquidity of stocks as measured by the “impact cost” criterion which determines the cost faced when actually trading the index. The stocks in the Index are highcapitalization stocks representing a sector of the S&P 500.

Every stock primarily moves for two reasons: The news about the  company and the news about the country.x Base Value (Base Market Capitalization) Where: CMS = Sum of (current market price * outstanding shares) of all securities in the index Page 31 . Further it might lead to addition of illiquid stocks. Optimum size . Market Capitalization Weighted: The equity price is weighted by the market capitalization of the company. The various methods of averaging employed are: 1. the scrip must have a minimum of 0. Market Capitalization: The index should include primarily the stocks of  companies that have significant market capitalization with respect to the index such that any major change in the price of the stock is reflected in the index. Hence each constituent stock in the index affects the index value in proportion to the market value of all outstanding shares. the optimal size for BSE Sensex is 30. Price Weighted: The weights assigned are proportional to the stock prices.5% of the market capitalization of the Index. (Current market capitalization) Index = ---------------------------------------. For example in BSE 30 Index.More stocks lead to greater diversification but the limiting factor is the size of the index. that is the news of the economy and the effect of the former is knocked out by proper averaging. For example. Averaging . Increasing number of stocks in an index from 10 to say 30 gives a sharp reduction in risks but increasing the number beyond a point does very little in risk reduction. 2. An ideal index is affected only by the latter.

etc. Gujrat Ambuja Cements. Presently the following are the constituent companies: ACC.e. 2. it helps a company answer questions like is it the right time to take out an IPO. ICICI Bank. researched and publicly documented rules for this purpose. Equal Weighted: The weights are equal and assigned irrespective of both markets Capitalization or price Index revision is done periodically taking into consideration the factors mentioned above. MTNL. ITC. Since the Index is an indicator of the overall mood of the investors in the secondary market. SBI. to obtain changes to the index set. RIL. Hindalco. It is backed by solid economic research and three extremely respected organizations (NSE. Zee Telefilms. These rules are applied regularly. Ranbaxy. (IISL). Dr. the portfolio returns of the index funds is same as that of the Index. Hero Honda. It is a highly diversified index. L&T.BMS = Sum of (market price * issue size) of all securities as on base date. Bajaj Auto. Sensex (BSE 30): The index includes 30 companies which figure in top 100 in terms of market capitalization and are also among the leaders in their industry groups. TELCO and Satyam. Grasim. accurately reflecting the overall market conditions and is composed of 50 liquid stocks. Reddy’s Lab. HCL Tech. Page 32 . Infosys. CRISIL and S&P). it is ensured that the value of the index does not change significantly after the revision of the index set. Glaxo. Colgate Palmolive. CIPLA. Castrol.. TISCO. 1. Nestle India. Signals from the Stock Index The Index finds uses in various fields starting from economic research to helping investors choose appropriate portfolio for investment. BHEL. Standard and Poor’s CRISIL NSE Exchange NIFTY S&P CNX NIFTY is an S&P endorsed Stock Index owned by the India Index Services Ltd. The relevant index body makes clear. For example the index funds are funds that passively invest in the market i. RPL. how to price the issue. BSES. HPCL. HLL. However.

Any downturn in the market would be reinforced by the collective action of the investors to hedge against any losses and get out of the market. However. This will automatically lead to the stock prices crashing. The stock index is often more a representation of investors’ perceptions (noise element) rather than real news. This would further depress the market.It acts as a signal to the government of the ‘feel good’ factor prevailing in the economy. Page 33 . This herd mentality is often used to the advantage of speculators. The Stock Index can often also act as a trigger to herd mentality. it leads to a self fulfilling prophecy. The dot com bubble of 2000 is a case in point. the performance of the stock market right after the introduction of the budget gives an immediate feedback to the Finance Minister about the acceptability of the budget. As much as the finance ministry may want to ignore it. The speculator buys long thus creating waves in the market that the stock he is investing in is ‘hot’. Inclusion of such stocks leads to problems of stale prices. the market index is a double edged sword. Illiquid stock is one which is not actively traded in the market or has been lying dormant for a long time. it is riddled with imperfections which can often confuse rather than help. Thus it can be seen that though the index is a popular investor’s guide. The basic problem arises due to imperfect information reflected by the inclusion of illiquid stocks in the calculation of the index. Thus everyone would follow suit giving the speculator a good short term profit margin. Suppose an investor thinks that the stock of the company is going to go down and this feeling prevails across the market then everyone would want to get out of the company’s stock. There are processes afoot to reduce the pure noise element and speculative margin of the index. There was a rush of investment in anything even remotely connected with information-technology driving up the stock prices way above what they should have been according to their P/E ratios. bid-ask bounce and ease in manipulation. The index popularly used in India is the NSE CNX Nifty. Because the index is influenced by expectations of the future performance of the stocks.

with competition driving down the brokerage fee.  Hence to make an index useful. Indian Equity Brokerage Industry Profile While regulation and reforms have made major improvements in the quality of the equity markets in India. Stale prices: A stock index is supposed to represent the state of the stock market at the closing time (3:30 pm in NSE) on a particular day. Large and fixed commissions have been replaced by wafer thin margins. There have also been major changes in the way business is conducted. Long settlement cycles and large scale bad deliveries are a thing of the past with the advent of T+2 settlement cycle and dematerialization. However the last traded price of an illiquid stock (if included in the index) may be even a week old thus distorting the index. Thus even when no news is breaking. the `bid-ask bounce' is about prices bouncing up and down between bid and ask. A prudent investor is one who exercises caution while interpreting the market index. its rapid growth and development are largely due to strong and efficient market intermediation. the broking industry today is one of the most transparent and compliance oriented businesses. when a stock price is not changing. in some cases. in less than five years of its introduction. adherence to regulation and compliance has vastly Page 34 . Technology has emerged as the key driver of business and investment advice has become research based. India ranks amongst the top five countries globally in this segment. the Indian brokerage industry has undergone a dramatic transformation. At the same time. taking into account all its inconsistencies. This is an example of the proactive and progressive nature of the Indian brokerage industry. In the last decade. From being made of close groups. Such changes are spurious in nature. to a few basis points. The robustness of the Indian markets today is attributable to a healthy blend of the quality of market structure and efficient intermediation. there has to be continuous evaluation of the stocks listed and any stock which remains inactive for a period of time should be de-listed or removed from the index. Bid-ask bounce: Illiquid stocks have a wide bid-ask spread. Even as several countries are instituting procedures to commence equity derivative markets.

2. Investor protection has assumed significance. foreign firms are showing increasing interest in taking equity stakes in domestic broking firms. the range of products and services will widen further. Major developments in equity brokerage industry in India: 1. corporate nature of the memberships is enabling broking firms to expand the realm of their operations into other exchanges as also other product offerings. With proliferation of new markets and products. In the background of growing opportunities for investors to invest in India as also abroad. most probably commodities futures. and so has providing them with education and awareness. The scope of services have enhanced from being equity products to a wide range of financial services. and some even go to the extent of creating niche services such as a brokerage firm offering art advisory services. Memberships range from cash market to derivatives to commodities and a few broking firms are making forays into obtaining memberships in exchanges outside the country subject to their availability and eligibility. offers portfolio management services. In the offing will be interesting opportunities that might arise in the exchange enabled corporate bond trading. distributes mutual funds and insurance and also offers personal loans for housing. Wider product offerings: The product offerings of brokerage firms today go much beyond the traditional trading of equities. and the scope of functioning of the brokerage firms has transformed from that of being a family run business to that of professional organized function that lays greater emphasis on observance of market principles and best practices. exchange traded funds. consumptions and other related loans. soon after its commencement Page 35 . Greater need for capitalization has induced several firms to access the capital market.increased. A typical brokerage firm today offers trading in equities and derivatives. Corporate memberships: There is a growing surge of corporate memberships (92% in NSE and 75% in BSE).

there are some which are creating niche services that attract Page 36 . The research and advice are made online giving ready and real time access to market research for investors and clients. which might lead to creating of greater interest in investing in brokerage firms by entities in India and abroad. With buoyancy of the stock markets and the rising prospects of several well organized broking firms. 6. Since the banking system is not fully integrated with the securities markets. The recent past witnessed several leading brokerage firms accessing capital markets for financial resources with success. brokerage firms face limitations in raising financial resources for business and expansion. Foreign firms picked up stake in some of the leading brokerage firms. Accessing equity capital markets: Access to reliable financial resources has been one of the major constraints faced by the equity brokerage industry in India since long. 5. Specialized services/niche broking: While supermarkets approach are adopted in general by broking firms. market tips to becoming extensively research oriented and governed by fundamentals and technical factors.and futures trading that might be introduced in the near future in the areas of interest rates and Indian currency. 4. paving the way for stronger brokerage entities and possible scope for consolidation in the future. Foreign collaborations and joint ventures: The way the brokerage industry is run and the manner in which several of them pursued growth and development attracted foreign financial institutions and investment banks to buy stakes in domestic brokerage firms. important opportunity to access capital markets for resource mobilization has become available. 3. thus making research important brand equity for the brokerage firms. Greater reliance on research: Client advising in India has graduated from personal insights. Vast progress has been made in developing company research and refining methods in technical and fundamental analysis.

8. With the nature of markets and products becoming more complex. Some others have dedicated online broking portals.a particular client group such as day traders. 9. it becomes imperative for the broking firms to keep their staff continuously updated with latest development in practices and procedures. Keen competition has emerged in online broking services. it is mandated for certain types of dealers/brokers to seek specific certification and examinations that will make them eligible to carry business or trade. 7. A wide range of incentives are being created and offered by online brokerage firms to attract larger number of clients. Focus on training and skill sets: Brokerage firms are giving importance and significance to aspects such as training on skill sets that could prove to be beneficial in the long run. Many brokerage firms are investing time. Moreover. Online broking: Several brokers are extending benefits of online trading through creation of separate windows. and providing complete range of research and other support to back up this function. Compliance oriented: With stringent regulatory norms in operation. Emergence of online broking enabled reduction in transaction costs and costs of trading. arbitrage trading. money and resources to create efficient and effective compliance and reporting systems that will help them in avoiding costly mistakes and possible market abuses. broking industry is giving greater emphasis on regulatory compliance and observance of market principles and codes of conduct. with some of these offering trading services at the cost of a few basis points or costs which are fixed in nature irrespective of the volume of trading conducted. investing in small cap stocks etc. Brokerage firms now have a compliance officer who is responsible for all compliance related aspects and for interacting with clients and other stake holders on aspects of regulation and compliance. Greater emphasis on aspects such as research and analysis is giving scope for in-depth training and skills sets on topics Page 37 .

Capital Adequacy: Capital adequacy has emerged as an important determinant that governs the scope of business in the financial sector. smaller firms might find it constrained to make right type of investments that will help in business growth and promotion of investor interests. Numerous small firms operate in this space. economic and financial forecasting and company research. 11.such as trading programs. valuations. but in future more tighter norms of capital adequacy might come into force as a part of the prudential norms in the financial sector. Current requirements stipulation capital adequacy in regard to trading exposure. Given the nature of the brokerage industry being very dynamic. changes could be rapid and so as the challenges that emerge from time to time. which is a global trend as well. Emerging challenges and outlook for the brokerage industry: Brokerage firms in India made much progress in pursuing growth and building professionalism in operations. In this background. From owners to traders: A fundamental change that has taken place in the equity brokerage industry. 10. 13. A brief description on some of the prospects and challenges of the brokerage firms are discussed below. 12. Demutualization is providing balanced welfare gains to both the stock exchanges and the members with the former being able to run as corporations and the latter being able to avoid conflict of interests that sometimes came as a major deterrent for the long term growth of the industry. it becomes imperative for the brokerage Page 38 . is the transformation of broking from owners of the stock exchange to traders of the stock market. Demutualization and corporatization of stock exchanges bifurcated the ownership and trading rights with brokers vested only with the later and ownership being widely distributed. Given the growing importance of technology in operations and increasing emphasis on regulatory compliance. Fragmentation: Indian brokerage industry is highly fragmented.

Global Opportunities: Broking in the future will increasingly become international in character with the stock markets being open for domestic and international investors including institutions and individuals. In view of several of common features prevailing in the markets. expertise and market Page 39 . distribution of insurance products. 16. Opportunities from regional finance: Regional economic integration such as that under the European Union and the ASEAN have greatly benefited businesses in the individual countries with cross border opportunities that helped to expand the scope and significance of the business. new market segments will come into force. Global firms with higher levels of capital. 15. and as the market momentum continues. South Asian economic integration will provide greater opportunities for broking firms in India to pursue cross border business. broking firms will have an opportunity to introduce a wider number of products. it would be easier to make progress in this regard. which could benefit the domestic brokerage firms. wealth management.firms to focus on raising capital resources that will enable to give continuous thrust and focus on business growth. mutual funds etc. Keeping abreast with developments in international markets as also familiarization with global standards in broking operations and assimilating major practices and procedures will become relevant for the domestic brokerage firms. Initial measures to promote South Asian economic integration is being made by governments in the region first at the political level to be followed up in regard to financial markets. 17. in the last three to four years. as also opportunities for investing abroad. For instance. 14. if they are well prepared. Product Dynamics: As domestic finance matures and greater flow of cross border flows continue. Competition from foreign firms: Surging markets and growing opportunities will attract a number of international firms that will increase the pace of competition. brokerage firms had newer opportunities in the form of commodities futures.

these products have become very popular and by 1990s. future & option can be traced back to the willingness of risk adverse economic agent to guard themselves against uncertainties arising out of fluctuations in asset prices. Investor Protection: Issues of investor interest and protection will assume centre stage. Such a transaction is an example of derivative. Firms found not having suitable infrastructure and processes to ensure investor safety and protection will encounter constraints from regulation as also class action suits that investors might bring against erring firms. However. commodity. Derivative introduction: A derivative is a product whose value is derived from the value of one or more basic variables called bases (underlying assets index) in a contractual manner. The financial derivatives came into spotlight in post. forex. By their very nature. the financial markets are marked by a very high degree of volatility.1970 period due to growing instability in the financial markets. they accounted for about two third of total Page 40 . The emergence of the market for derivative products. Domestic broking firms should always give due focus to emerging trends in competition and prepare accordingly. The underlying assets can be equity. bullion or any other assets. most notably forwards. The price of this derivative is driven by the spot price of wheat. For example. since their emergence. it is possible to partially or fully transfer price risks by locking in asset price. Through the use of derivatives products. The nature of penalties and punitive damages would become more severe. 18. wheat farmers may wish to sell their harvest at a future date to eliminate the risk of a change in prices by that date. It is important for brokerage firms to establish strong and streamlined systems and procedures for ensuring investor safety and protection. which is the “underlying”.experience will bring dramatic changes in the brokerage industry space which the local firms should be able to absorb and compete.

Future and Option contracts can give them an extra leverage. Speculators and Arbitrageurs trade in the derivatives market.  Innovations in the derivatives markets. In recent years. The factors generally attributed as the major driving force behind growth of Financial derivatives are:  Increased volatility in asset prices in financial markets. Participants: . their complexity and also turnover. that 19s they can increase both the potential gains and potential losses in a speculative venture.  Marked improvement in communication facilities and sharp decline in their costs. the market for financial derivatives has grown tremendously both in terms of variety of instruments available.  Development of more sophisticated risk management tools. They use futures and Options market to reduce or eliminate this risk. Hedgers: . which optimally combine the risks and returns over a large number of financial assets.  Increased integration of national financial markets with the international markets. Arbitrageurs – They are in business to take advantage of a discrepancy between prices Page 41 .The following three broad categories of participants hedgers. Speculators –They wish to bet on future movements in the price of an asset.They face risk associated with the price of an asset.transactions in the derivatives products. providing economic agents a wider choice of risk management strategies. reduced risks as well as financial costs as compared to individual financial assets. leading to higher returns.

 Call gives the buyer the right but not the obligation to buy a given quantity of the underlying assets. they will take offsetting positions in the two markets to lock in a profit. 1) Forwards:.A forward contract is a customized contract between two entities. If.  Put gives the buyer the right but not the obligation to sell a given quantity of the underlying assets at a given price on or before a given date. for instance they see the future price of an asset getting out of line with the cash price. Types of derivatives:The most commonly used derivatives contracts are forwards.In two different markets. Future contracts are special type’s forward contracts in the sense that the former are standardized exchange traded contracts. Here I look a brief look at various derivatives contracts that have come to be used. at a given price on or before a given future date.A future contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. the majority of options traded on options exchanges having maximum maturity of nine months. 4) Warrants: . where settlement takes place on a specified date in the future at today’s pre-agreed price. future and options. 5) Leaps: The acronyms LEAPS means long term equity anticipation securities.Calls and Puts.Option generally has lives of up to one year. Page 42 . 3) Options are of two types. Longer dated options are called warrants and are generally traded over the counter. 2) Futures: . These are options having a maturity of up to three years.

One of the parties to the contract assumes a long position and agrees to buy the underlying asset on certain specified price. he has to compulsory go to the same counterparty.Swaps are private agreement between two parties to exchange cash flows in the future according to a prearranged formula. The underlying asset is usually a moving average or a basket of assets.- a) Interest Rate Swaps b) Currency Swaps Forwards A Forward contract is an agreement to buy or sell an asset on a specified date for a specified price. and hence is unique in terms of contract size. price and quantity are negotiated bilaterally by the parties to the contract.6) Baskets: Baskets options are option on portfolios of underlying assets. c) The contract price is generally not available in public domain. d) On the expiration date. Page 43 . b) Each contract is custom designed. They can be regarded as portfolios of forward contracts. The salient features of forward contracts are: a) They are bilateral contracts and hence exposed to counter party risk. which often results in high prices being charged. the contract has been settled by delivery of the assets e) If the party wishers to reverse the contract. 7) Swaps: . expiration date and the asset type and quality. Other contract details like delivery date. The other party assumes a short position and agrees to sell the asset on the same date for the same price. The two commonly used swaps are. The forward contracts are normally traded outside the exchanges.

and Counterparty risk Futures: Definition : A future contract can be defined as a standardized agreement between the buyer and seller in terms of which the seller is obligated to deliver the specified asset to the buyer on a specified date and the buyer is obligated to pay the seller then prevailing future price in exchange of the delivery of the asset. By using the currency forward market to sell dollars forward. he can lock on to a rate today and reduce his uncertainties. Buyer of the asset 2.Forward contracts are very useful in hedging and speculating the classic hedging application would be that of an exporter who expects to receive payment in dollar three months later. Despite it forward market world-wide are afflicted by several problems: • • • Lack of centralization of trading Illiquidity. Parties involved: 1. Exchange Page 44 . He is exposed to the risk of exchange rate fluctuations. Similarly an importer who is required to make a payment in dollars two months hence can reduce his exposure to exchange rate fluctuation by buying dollar forward.

But unlike forward contracts. Page 45 . two month and three month expire cycles Which expires on the last Thursday of the month. A future contract may be offset prior to maturity by entering into an equal and opposite transaction. There is a different basis for each delivery month for each contact. 5) Contract size: The amount of asset that has to be delivered less than one contract. Futures terminology: 1) Spot price: The price at which an asset trades in the spot market. To facilitate liquidity in the futures contract the exchange specified certain standard features of the contract. Thus is the last date on which the contract will be traded at the end or which it will cease to exist.3. 4) Expiry date: It is the date specified in the futures contract. a standard quantity and quality of the underlying instrument that can be delivered and a standard timing of such settlement. In a normal market basis is positive. basis can be defined on the future price minus the spot price. 3) Contract cycle: The period over which contract trades. More than 99% of futures transactions are offset this way. Seller of the asset. It is a standardized contract with standard underlying instrument. 6) Basis: In the context of financial futures. A futures market is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. the future contracts are standardized and exchange traded. The futures markets were designed to solve the problem that exists in forward markets. 2) Futures price: The price at which the futures contract trades in the futures market. The index future contract on the NSE have one month.

10) Maintenance margin: this is somewhat lower than the initial margin. But he does not have this much amount to invest.g. Now in futures market he will buy one July lot 650 shares of Reliance by paying a premium around only 15% of total amount. This is set to ensure that the balance in the margin account never becomes negative. This is very useful for these investors.7) Cost of carry: the relationship between futures price and spot price can be summarized in terms of what is known as the cost of carry. 9) Marking to margin: in the futures market at the end of each trading day the margin account in adjusted to reflect the investor’s gain or loss depending upon the futures closing price. In future contracts they pay only a certain margin and enter into trading. Trading in the futures segment It is traded basically on NSE. who do not have entire amount to invest. wishes to buy 650 shares of Reliance @ Rs 350 per share. It operates in T+1 basis. For this he will have to invest 650*350 = 227500. Page 46 . 8) Initial margin: the amount that must be deposited in the margin account at the time of a futures contract is first entered into it is known as initial margin. In this case the total cost of Mr. who trades in cash market. Unlike cash segment.:’ Mr. Margins are pre-decided as per the lot size. a certain margin in paid is futures segment. X for 1 lot of Reliance will be only Rs 34125. X. For e.

: Mr. Futures derivatives trading: Future trading can be done on stocks as well as on Indices like IT index. However he does not want to take risk of downward movement. Page 47 .suppose this is month of October then you have to buy till maximum month of December expiry and you have to sell it within last Thursday of December month. In this case Mr. If you buy October month expiry future contract then you have to sell it within last Thursday of October month. means a trader has to settle his position everyday. he imposed a stop loss at Rs 310 per share. Likewise you can buy two months and three months expiry period future contract.Future contract get expires at every last Thursday of every month. after the market price of the security reaches or crosses a threshold price.The main drawback of this trading in that it acts in T+1 basis. however he can fetch unlimited profit as price keeps going up.g. In simple language one future contract is group of stocks (one lot) which has to be bought with certain expiry period and has to be sold (squared off) within that expiry period. E. Suppose if you buy futures of Wipro of one month expiry then you have to sell it within that one month period. You can sell anytime between these periods. called trigger price. until he closes his trading in particular scrip. Auto index. Stock future trading: Let’s first understand what the meaning of futures trading is. X made his limit by Rs 10 per share. Pharma index etc. Risk also can be hedged in futures market by imposing “stop loss” Stop loss: This facility allows the investor to release an order into the system. You can buy maximum of three month expiry period. For example . X bought 1 July lot of Cipla at Rs 320 per share by paying 15% margin. Important .

You can also buy and sell or sell and buy future contract on the same day of any expiry month. or you can hold as long as you want but remember to square off before expiry date. Selling future contract before buying is called short selling. Its not compulsion that you have to square off your positions on the expiry date or wait till the expiry period but in fact you can square off at any time even. Generally most of the traders/investors trade or invest on current month future or second month future contract and you may see very low volumes on last month means third month expiry . The margin (in other words price of one lot size) varies on daily basis based on its stocks closing price. This is called as day trading or intraday in futures. two month and three month and not more then of three month. For example Reliance Industries future lot size has 150 quantities of shares while a Tata Consultancy service has 250 shares. at the same day. Most of the times on 3rd month expiry future you may see very less trading volumes. Short selling is allowed in futures trading.Successful trading in futures Future or derivative trading is the process of buying or selling stock future or index future for a certain period of time and squaring off before the expiry date. Expiry period can be of one month. Major Advantages of Futures Trading over Stock Trading Page 48 . In the same manner all futures have different lot sizes decided by SEBI (Securities Exchange Board of India). Lot size (group of stocks in one future contract) varies from future to future contract.

Margin is available: In future trading you get margin to buy (but can hold only up to maximum of 3 months), while in stock trading you must have that much of amount in your account to buy. For example - If you plan to buy stock XYZ at Rs. 100 and quantity 1000 shares then you have to pay 1 lakh rupees (RS 100 x1000 qty). But if you plan to buy XYZ future contract and that contract lot size has 1000 quantity of shares then instead of paying 1 lakh rupees you have to pay just 20% to 30% of whole amount which comes to 20 thousand to 30 thousand rupees. In short in future trading you have to pay just 20% to 30% of the whole amount what you pay if you buy stock of that price. But limitation for this is your expiry period. Means if you bought future of one month expiry then you have to square off within that one month likewise you can buy maximum of three months expiry. Possible to do short selling :You can short sell futures- You can sell futures without buying them which is called short selling and later buy within your expiry period, to cover up your positions. This is not possible in stocks. You can’t sell stocks before buying them in delivery (you can do in intraday). You can short sell futures and can cover off within your expiry period. For example - If expiry period of your future contract is of 1 month then you have time frame of one month to cover off your order like wise if your future expiry period is of two months then you have time frame of two months and this continues till three months and not more then three months. In short selling of futures also you get margin as you get in buying of futures. Brokerages are low: Brokerages offered for future trading are less as compared to stock delivery trading.

Page 49

Disadvantages of Future Trading over Stock Trading
Limitation on holding: If you buy or sell a future contract then you have limitation of time frame to square off your position before expiry date. For example - If you buy or sell future contract of one month expiry period then you have to square off your position before your expiry date of that month, so in this example you got one month period. So likewise if you go for two month expiry period then you get 2 months and if you go for three month expiry then you will get 3 month expiry period to square off your position.

Level of Risk: Due to margin facility in future trading you may earn huge profit by investing fewer amounts but at the contrary side if your trade goes wrong then you may have to suffer huge loss. Limitation on stocks: You can’t do future trading on all stocks. You can only do on listed stocks on Nifty and Jr. Nifty.

Important points to Remember while doing future trading
• First of all you have to decide whether you want to buy stock derivatives or index derivative. After this you have to select the expiry period. Once you buy certain expiry period then you have to sell (cover off) your order before that period. Its no need to wait till the expiry period, you can even square off on the Page 50

same day (if you are getting profit) or anytime whenever you feel to book profit, no compulsion to cover off your order on the last day of expiry. • • • Check out for Futures current market price. Futures Lot Size (number of shares in that particular Lot). Futures Lot price (this is the amount you must have in your account to buy one lot of future) also called as margin amount. • Selection of expiry period - you want to trade on expiry of one month, two month or last 3rd month. • No need to wait till expiry period can book profit wherever applicable.

Method of Short Selling
Short selling (selling before buying in future trading) In future trading you can do short selling and buy (cover) later when price comes down from your selling price you can short sell stock future as well as index future. But again same restriction will apply and that is of expiry period.

Definition: Option is a legal contract in which the writer of the option grants to the buyer, the right to purchase from or sell to the writer a designated instrument or a scrip at a specified price within a specified period of time. Parties involved: 1) Buyer of the asset Page 51

 Index option: These options have the index as the underlying. Some options are European.g.g.: X purchases a call option from Y of REL it means Y gives the right to purchase REL at a fix strike price within a certain period. An option gives the holder of the option the right to do something.  Where as a put option gives the holder the right but not the obligation to sell an asset by a certain date for a certain price. American.2) Exchange 3) Seller of the asset Options are fundamentally different from forwards and futures contracts. the two parties have committed themselves to doing something. E.  Stock option: Stock options are options on individual stock. In contrast. in a forward or futures contract. The holder does not have to exercise this right. Options terminology. There are two types of options: 1) call option 2) put option  A call option gives the holder the right but nit the obligation to buy an asset by a certain price. – index futures contracts. index options contracts are also settled. Options currently trade on over 500 stocks in the US. E. Page 52 .

It is also referred as the option premium.  Strike price: The price specified in the options contract.e.  In the money option : A call option on the index is said to be in the money when the current value of index at a level higher than the strike price(i. A call option on the index is said to be out-of-the-money when the value of current index stands at a level which is less than the strike price (i. An option on the index is at-the-money when the value of current index equals the strike price (i.  Expiration date: The date specified in the options contract is known as expiration date. spot price < strike price) Page 53 . spot price = strike price)  Out-of-the-money option: An out-of-money (OTM) option is an option that would lead to a negative cash flow it was exercised immediately. Buyer of an option: The buyer of an option is the one who by paying the option premium buys the right but not the obligation to exercise his option on the seller\writer.e. spot price>strike price )  At-the-money option: An at-the-money (ATM) option is an option that would lead to zero cash flow if it were exercised immediately.  Writer of an option: The writer of a call\put is the one who receives the option premium and is thereby obliged to sell \buy the asset if the buyer wishes to exercise his option.  Option price: It is the price which the option buyer pays to the option seller. the striker date or the maturity.e. the exercise date.

2. 6. Many investors write puts because they are willing to be assigned and acquire shares of the underlying stock in Page 54 . a put writer is obligated to purchase an equivalent number of underlying shares at the put’s strike price if assigned an exercise notice on the written contract. Long Put: A long put can be an ideal tool for an investor who wishes to participate profitably from a downward price move in the underlying stock. Cash Secured Put: According to the terms of a put contract.a hedging strategy with a name from an old IRS ruling. 3. Married Put: An investor purchasing a put while at the same time purchasing an equivalent number of shares of the underlying stock is establishing a “married put” position. If this stock is purchased simultaneously with writing the call contract the strategy is commonly referred to as a buy-write. There are certain strategies which are considered before hedging the positions or risks by the investors: Options strategies 1. Long Call: A long call can be an ideal tool for investors who wish to participate from an upward price movement in the underlying stock. 4. 5. Covered Call: The covered call is a strategy in which an investor writes a call option contract while at the same time owning an equivalent number of shares of the underlying stock. If the shares are already held from a previous purchase it is commonly referred to an overwrite.Since hedging is mostly done by means of option nowadays. Protective Put: An investor who purchases a put option while holding shares of the underlying stock from a previous purchase is employing a “protective put”.

exchange for the premium received from the put’s sales. Bull Call Spread: Establishing a bull call spread involves the purchase of a call option on a particular underlying stock. a put writer’s position will be considered as “cash-secured” if he has on deposit with his brokerage firm a cash amount sufficient to cover such a purchase of all option contracts. Caller: A caller can be established by holding shares of an underlying stock. the put and the call are both out-of. and have the same expiration month. while simultaneously writing a call option on the same underlying stock with the same expiration month. Generally. but with a lower strike price. and are always the same number of contracts. 9. For this discussion. Page 55 . and are always the same number of contracts.the-money when this combination is established. purchasing a protective put and writing a covered call on that stock. at a higher strike price. 7. Bear Put Spread: Establishing a bear put spread involves the purchase of a put option on a particular underlying stock. while simultaneously writing a put option on the same underlying stock with the same expiration month. Both the buy and the sell sides of this spread are opening transactions. Both the buy and the sell sides of this spread are opening transactions. 8. The option portions of this strategy are referred to as a combination.

HEDGING Page 56 .

How to determine the hedging strategies To determine the strategy of choice when hedging we must first understand what is hedging and hedge fund. Hedging Hedging is nothing but a mechanism to reduce or control risks involved in capital market. to another trader. there will also be a resulting drop in the price of flour. Hedging shows its colors only case of losses by limiting it. That loss must be sustained by the miller. which the miller does not presently own. a miller may buy wheat that is to be converted into flour. sine the miller has Page 57 . At the same time. It so happens that sometime despite imposing hedging inventers may fetch unlimited profit in that case hedging does not bear fruit. the miller will contract to sell an equal amount of wheat. Hedging does not mean to maximize return. The miller agrees to deliver the second lot of wheat at the time the flour is ready for market and at the price current at the time of the agreement. In a simple example. However. Various risk involved in capital market:a) Price risk b) Liquidity risk c) Operational risk Hedging plays an important role to combat these risks. If the price of wheat decline during the period between the miller’s purchase of the grain and the flour’s entrance onto the market.

The risk can be hedged by making use of derivatives such as F & O.a contract to sell wheat at the older. Cross hedge: When derivatives of the underlying assets we have. for hedging against prices of it we may use crude oil derivatives which are related with the Jet prices Hedge Fund: Definition: Hedge funds definition says these funds are meant to hedge the investment through various techniques from the potential fluctuations in terms of losses in the Page 58 . For example. derivatives on Jet fuel are not available in the market. Also we expect the market to go up in the near future. we use derivatives on any other related underlying. This is called as cross hedge. higher price. the miller makes up for this loss on the flour sale by the gain on the wheat sales. For example. which is not favorable for us. let us assume that we are going to receive funds in the near future and we want to invest it into the capital market. Thus to protect our portfolio value we can go short in the derivative market. we have a portfolio which we want to liquidate in the near future. Short Hedge: Short hedge is the hedge accomplished by going short in the derivatives market. which is not desirable for us as we would have to invest more money. Terms in Hedging Long Hedge: Long hedge is the transaction when we hedge our position in cash market by going long in derivatives market. that are available. Meanwhile prices of the scrip may go down. For example. are not available.

valuations and returns. bonus returns. The hedge funds history actually dates back to 1949 with credit to Alfred Winslow Jones for inventing hedge funds investing fund. These are a form of private investment funds at the cost of a performance fee and open to only a limited investors group. Page 59 . The hedge funds database is managed regularly to keep track of the investment patterns of the market. The hedge fund statistics include a careful research on all these factors to avoid any kind of fraud in the valuations. The market failures do not affect hedge fund investors and hedge fund managers due to the liquidity leverage they bring. Hedge funds were demystified in the Indian markets only recently when the market opened up to newer investment opportunities. Hedge funds in US are open to only a few accredited investors. quotes. The hedge fund strategies include a lot of assets and are thus defined clearly and with utmost care. Hedge funds explained the growth of short positions in the markets. This type of hedge funds accounting is achieved by:  Investing in the safer areas that are less likely to be affected by drop in markets  Marketing through derivative methods as opposed to direct market exposure  Holding defensive instruments like cash in times of market failure  By taking short as well as long market positions and negating the market exposure Hedge Funds in India Hedge Funds in India are among relatively new investment opportunities. The hedge funds returns do net get affected by the direction of the underlying market. The hedge fund manager or administrator acts as an analyst keeping track of the hedge funds news.markets. These hedge funds basics qualify them to be exempted from direct regulations of the state.

Being an extremely complicated investment solution. to hedge against any downward movement of Tisco. Bhandari wanted to hedge against any downward movement of Tisco in the Market. He was also on Tisco.premium at the same time. The hedge fun investor is determined on the basis of the NAV (Net Asset Value) of the company or their businesses. Solution There are following Alternatives for Mr. 350/.Hedge funds in also available in forms like hedge fund ETF and hedge funds real estate. Mr. So he should buy 1 lot of put option of Rs. hedge fund employment is limited with only the privileged ones having the optimum hedge fund education get the opportunity to serve as hedge funds managers. Bhandari bought 675 shares of Tisco few days before the budget @ Rs. these offer investment opportunities in real estate markets with higher liquidity.strike price @ Rs. the hedge fund managers are amongst the most well paid in the industry. However Mr. Hedge funds ETF is a form of mutual fund that offers more flexibility and for real estate hedge funds. Now the total cost of Bhandari is:Page 60 . Analysis and Interpretation CASE I Mr. 10/.per share. 350/. as general expectation from the budget was that it will be an infrastructure of development focused budget. The bonus and perks of the industry are also innumerable. Bhandari to hedge his position i) ii) iii) Long put strategy Protection put strategy Bear put spread strategy Since Mr. Since the hedge funds are basically a product for the richest of the rich who wish to remain rich with no direct effects from the crash of the local market. Bhandari will opt protective put strategy. Bhandari has to protect his 675 shares of Tisco so in this case.

43.000/- = = 2.share Cost of 1 lot of Tisco put option @ Rs.250/6. 350/.750/- Analysis Page 61 .Bought Tisco @ Rs. 10/2. 36.

There are following Alternatives for Mr. Though Mr.Interpretation: 1) 2) 3) 4) The stock value arrived at as (stock value x 675shares). wanted to hedge against any downside movement of Bank of India due to budget related volatility.360/. Bhalgat.110/. Bhalgat was mildly bullish on Bank of India. Bhalgat to hedge his position iv) Long put strategy Page 62 . bullish on Bank of India. Solution That time Bank of India was trading around Rs. keeps going up.350/.10/-).360/. or Rs.Shares few days back.it can fetch unlimited profit as stock price executed. He already got 1900 shares of Bank of India @ rs. the put option will be If the stock price goes below from Rs.120 – 130 range.in the spot market. Case II Mr. If the stock price is below Rs. Thus put value is arrived at as (Strike price – stock price) x 675 premium amount (Rs.6750/-.loss is limit to the extent of its If the stock price goes up from Rs.

000 (19. Bhalgat is mildly bullish on BOI. 120/.000 38. he will opt call spread strategy as the best strategy.000 76.No Stock Price 1 2 3 4 5 6 7 8 90 100 110 120 130 140 150 160 Stock Value 1.000 Page 63 . at a premium of Rs.000) Nil 19.85.shares.v) vi) Protection Put strategy Bear call spread strategy Since Mr.000 Bought Call Value 0 0 0 0 19.66.000 3.share.000 38.000 19.000 2. 12/.000 38.000 2.000 Sold Call Value 0 0 0 0 0 0 19.000 2.47.000 19.000 19. b) Sell a July call option for one lot of Bank of India Rs. following things might be suggested – a) Buy a July call option of Bank of India for 1 lot of strike price Rs.800/- Analysis S.000 19.71.04.strike price at a premium of Rs.000 57.800/3.000 38.share.000 2.000 2. 2/.28.) selling 1 lot of call option of BOI 19.000 19.09.000 Cost of Return Premium 19.90.000 1.000) (19.000 19. 140/.000) (19. Costs Buying 1 lot of call option of BOI (1900 x 12) ( .000 38.000 19.000/= = 22.

19. sold call value is arrived at as {(stock price – 140) x 1900}. Return is maximum loss Rs. Sonagra is a regular mid to long term investor. 140/.510/-.share. Sonagra has not sufficient amount to invest in shares.000 and maximum profit Rs. In the beginning of the month of the July he had not enough money in hand to invest in shares.10/.Sonagra will buy one lot (800 shares) of call option at a premium of Rs.000. At any price above Rs. Solution Since Mr.shares bought call value is arrived at as {(stock price – 120) x 1900}. He was supposed to get money at the end of the month. 8. he will adopt only Long call strategy to hedge his position. Cost for 1 lot of Titan in call option will be 800 x 10 = Rs.per share the strike price of which is Rs. He want to buy Titan but not after few days as it could lead to a loss of thousands.Interpretation 1) 2) 3) Stock price is arrived at as (stock price x 1900) At any price above Rs. However he was bearish on Titan. In such circumstance Mr. Case III Mr. 38. 120/.000/- Page 64 .

he expects that stock price will go up.Sonagra bought a call option of a strike price of Rs.150/-. No matter how much stock price goes up stock price goes up more he can fetch profit more. became he can purchase at a fix stock price of Rs. Page 65 .Analysis Interpretation i) ii) Though Mr.510/-.

620. iv) v) In downward movement his loss will be limit to the extent of premium amount (Rs.620. 620/(550 x 620) ( + ) buying of 1 lot of put option @ Rs.41. because purchasing a lot in Rs.8. in such circumstance Mr. Due to market sentiments and his personal study he was bearish on REL. While in upward movement his profit will be unlimited as the price goes up deducting (premium + strike price). Now the total cost of Mr. ix) Bear put spread strategy Since Mr.000). Pandit has to protect its 550 shares of REL.510/. Case IV Mr.iii) If the stock price goes down.000/- Analysis Page 66 . (Lot size = 550) Solution There are following Alternatives for Mr. 10/. 10/. Pandit will be:Buying of 550 shares of REL @ Rs.share ( 10 x 550 ) 3.Pandit was holding 550 shares of Reliance Energy Ltd.in downward movement does not sound reasonable.46. strike price which is Rs. which he had purchased @ Rs. call option will not be executed. (REL).per share.500/= 3. Pandit will prefer to buy 1 lot of put option at a premium of lets assume Rs.500/= 5. In the fear of losing he wanted to hedge against downfall in the prices of REL.Pandit to hedge his position vii) Long put strategy viii) Protection put strategy.

(cost price) the loss is limit to the extent of its premium means Rs.500 5.500/-.500 (5.500) Nil 5.of can fetch unlimited profit an stock price keeps going up and put option will not be executed.68.000 5.500 3. If the stock price goes up from Rs.000 1 2 3 4 5 6 7 8 9 590 600 610 620 630 640 650 660 670 Interpretation i) ii) Stock Value is arrived at as (stock price x 550 shares ) If the stock price goes below from Rs.630/.63.52. The put value iii) iv) is arrived at as ( strike price – stock price ) x 550 If the stock price goes below from Rs.500) (5.5.put option is executed.500) (5.500 3.35.500 3.500 Bought Put Value 16.500 5.500 11.000 16.620/.500 5.000 3.500 11.No Stock Price Stock Value 3.500 5.46.500 5.500 22.000 3.24.000 3.500 5.500 0 0 0 0 0 0 Cost of Return Premium 5.500 3.000 3.500 5.S. Page 67 .41.57.500 5.30.500) (5.630/.

share or Rs.510/. 360/. iv) As the stock price goes down from its strike price the value of call option loses its significance.share or Rs. 43.E. iv) As the stock price goes up value of put option loses its significance.FINDING Findings CASE I i) As the stock price goes down value of put option increases.000/iii) Loss in limit to the extent of its premium. iii) Mr.in spot market. CASE II i) As the value of stock price goes up from strike price the bought call value and sold call value increases.Bhalgat.P.28.2. 2. CASE III i) Mr.share and selling it in more that Rs. Bhandari in Rs.is the Break Even point (B.P) for Mr. ii) Break Even point (B.E. ii) Rs. ii) He will fetch profit when market will be at bullish by purchasing the shares @ Rs. Page 68 .Bhalgat made limit his profit and loss by buying and selling 1 lot of call option simultaneously.) for Mr. v) If the put option is not executed till its expiration period it will automatically repudiate.000/.Sonagra should be quite sure that the value of stock price will increase in coming future.520/.120/.

Case II ii) Mr.10/. when he is quite sure that profit is not possible after a certain extent. If the stock price starts to decline he should not execute his put option immediately because in any low cases he will lose Rs. because during this gap stock price must go up. iv) The value of call option become insignificant if stock price goes below Rs.Pandit. ii) Rs.6. iii) When stock price reaches up to its highest level he should execute his call option. Page 69 .per share as premium whatever market condition may be.46.500/. SUGGESTION & CONCLUSION Suggestion Case I i) ii) Mr.is the Break Even point for Mr.while he may fetch profit in going up of stock price after downward movement.Sonagra has been given right but not obligation to buy shares @ Rs.in lieu of Rs.Sonagra should buy September call option instead of July call option. 750/.share or Rs. Bhandari should be very conscious about premium rate and expiration period before opting put option. iv) Here loss is limit to the extent of its premium amount.630/. v) If the put option is not executed till its expiration period it in automatically repudiated.510/-.3.Bhalgat should adopt this strategy only in that case. Case III ii) Mr.iii) Mr.510/. iii) As the stock price goes up form its strike price put option become insignificant. from Case IV i) As the stock price decreases the value of bought put option increases.

Stick price and Expiration period plays important role in hedging. References http://www. Conclusion i) ii) iii) iv) v) vi) vii) viii) ix) Derivatives are the best tool for hedging the position or risk. 5.com Page 70 . he should not execute his put option immediately. Pandit should be very conscious about premium rate and expiration period of option. Purchaser of a call option always hopes that the stock prices will go up. Individuals use generally stock option to hedge risks.com/ http://www. ii) If the stock price starts to decline. because in any low cases he will lose Rs.Case IV i) Mr. Fund managers use basically use index option to hedge their position.500/. Individuals use option in speculative manner. General Suggestion It is humbly suggested to all the clients of Motilal Oswal Securities Ahmednagar that they develop their knowledge in future & option market because it is only the way by dint of which risk or position and they should always consider the rolling settlement of period.while he may fetch profit in going up of stock price after downward movement.the-finapolis. Purchaser of the put option always hopes that stock prices will go down. There is wide scope of derivatives markets. Hedging is basically done in option market.karvy.

investopedia.indiatimes.com/ http://www.mutualfundsindia.com/ http://finance.valuresearchonline.morningstar.moneycontrol.bseindia.com/ http://www.com/ http://www.com/ http://www.rediff.com/ http://economictimes.yahoo.com/ http://www.nseindia.com/ http://money.http://www.com/ http://www.com/ Page 71 .

Sign up to vote on this title
UsefulNot useful