Professional Documents
Culture Documents
1
NAME OF THE CHAPTER PAGE NO.
1. EXECUTIVE SUMMARY
INTRODUCTION
2. TITAL OF STUDY
OBJECT OF STUDY
NEED AND SCOPE OF STUDY
REVIEW OF LITRETURE
COMPANY PROFILE
INTRODUCTION OF COMPANY
3. BACKGROUND
ORGNISATION CHART
CHIEF MANUFACTURE ACTIVITY
AWARD & ACHIVEMENT
RESEARCH METHODOLOGY
INTRODUCTION OF TOPIC
5. DEFINATION
CONCEPT
RELETIVE DATA
CONCLUSION
7.
REFERANCE / BIBLIOGRAPHY
9.
EXECUTIVE SUMMARY
New ideas and innovations have always been the hallmark of progress made by mankind. At
every stage of development, there have been two core factors that drives man to ideas and
innovation. These are increasing returns and reducing risk, in all facets of life.
Derivatives are among the forefront of the innovations in the financial markets and aim to
increase returns and reduce risk. They provide an outlet for investors to protect themselves
from the vagaries of the financial markets. These instruments have been very popular with
investors all over the world.
Indian financial markets have been on the ascension and catching up with global standards in
financial markets. The advent of screen based trading, dematerialization, rolling settlement
has put our markets on par with international markets.
As a logical step to the above progress, derivative trading was introduced in the country in
June 2000. Starting with index futures, we have made rapid strides and have four types of
derivative products- Index future, index option, stock future and stock options. Today, there
are 30 stocks on which one can have futures and options, apart from the index futures and
options.
This market presents a tremendous opportunity for individual investors .The markets have
performed smoothly over the last two years and has stabilized. The time is ripe for investors
to make full use of the advantage offered by this market.
We have tried to present in a lucid and simple manner, the derivatives market, so that the
individual investor is educated and equipped to become a dominant player in the market
Firstly I am briefing the current Indian market and comparing it with it past. I am also giving
brief data about foreign market. Then at the last I am giving my suggestions and
recommendations.
With over 25 million shareholders, India has the third largest investor base in the world after
USA and Japan. Over 7500 companies are listed on the Indian stock exchanges (more than
the number of companies listed in developed markets of Japan, UK, Germany, France,
Australia, Switzerland, Canada and Hong Kong.). The Indian capital market is significant in
terms of the degree of development, volume of trading, transparency and its tremendous
growth potential.
The Total Turnover of Indian Financial Markets crossed US$ 2256 billion in 2006 – An
increase of 82% from US $ 1237 billion in 2004 in a short span of 2 years only. Turnover in
the Spot and Derivatives segment both in NSE & BSE was higher by 45% into 2006 as
compared to 2005. With daily average volume of US $ 9.4 billion, the Sensex has posted
excellent returns in the recent years.
Currently the market cap of the Sensex as on July 4th, 2009 was Rs 48.4 Lakh Corer with a
P/E of more than 20.
Derivatives trading in the stock market have been a subject of enthusiasm of research in the
field of finance the most desired instruments that allow market participants to manage risk in
the modern securities trading are known as derivatives. The derivatives are defined as the
future contracts whose value depends upon the underlying assets. If derivatives are
introduced in the stock market, the underlying asset may be anything as component of stock
market like, stock prices or market indices, interest rates, etc. The main logic behind
derivatives trading is that derivatives reduce the risk by providing an additional channel to
invest with lower trading cost and it facilitates the investors to extend their settlement through
the future contracts. It provides extra liquidity in the stock market.
INTRODUCTION
TITLE OF THE STUDY: -“A study on derivative market with reference to Motilal
oswal Securities Ltd. market ltd, Nagpur”
To analyze the performance of Derivatives Trading since 2010 with special reference to
To plan different strategies used in Futures and Options to minimize the losses of
clients
.To shows that losses can be minimized even if the market is falling.
the derivative market in India. This study also covers the recent developments in the
derivative market taking into account the trading in past years. Through this study I
came to know the trading done in derivatives and their use in the stock markets.
The project covers the derivatives market and its instruments. For better understanding
various strategies with different situations and actions have been given. It includes the
data collected in the recent years and also the market in the derivatives in the recent years.
This study extends to the trading of derivatives done in the National Stock Markets.
LITERATURE REVIEW:-
The emergence of the market for derivative products, most notably forwards, futures and
options, can be traced back to the willingness of risk-averse economic agents to guard
themselves against uncertainties arising out of fluctuations in asset prices. By their very
nature, the financial markets are marked by a very high degree of volatility. Through the use
of derivative products, it is possible to partially or fully transfer price risks by locking-in asset
prices. As instruments of risk management, these generally do not influence the fluctuations
in the underlying asset prices. However, by locking-in asset prices, derivative products
minimize the impact of fluctuations in asset prices on the profitability and cash flow situation
of risk-averse investors.
Even small investors find these useful due to high correlation of the popular indices with
various portfolios and ease of use. The lower costs associated with index derivatives vis-vis
derivative products based on individual securities is another reason for their growing use.
The story of Motilal Oswal Securities Ltd goes back many years, when Mr. Motilal Oswal
and Mr. Raamdeo Agrawal met each other as students in a Mumbai suburban hostel in the
early eighties. Both the young chartered accountants hailing from a rural & an unpretentious
background had a common dream viz 'to build a professional organization with strong value
systems, to provide reliable & honest investment advice to investors'. Thus was born their
first enterprise called "Prudential Portfolio Services" in 1987.
Motilal Oswal Securities Ltd. was founded in 1987 as a small sub-broking unit, with just two
people running the show. Focus on customer-first-attitude, ethical and transparent business
practices, respect for professionalism, research-based value investing and implementation of
cutting-edge technology has enabled us to blossom into an almost 2000 member team. Today
we are a well diversified financial services firm offering a range of financial products and
services such as Wealth Management , Broking & Distribution, Commodity Broking,
Portfolio Management Services , Institutional Equities, Private Equity, Investment Banking
Services and Principal Strategies.
We have a diversified client base that includes retail customers (including High Net worth
Individuals), mutual funds , foreign institutional investors, financial institutions and corporate
clients. We are headquartered in Mumbai and as of December 31st, 2010, had a network
spread over 595 cities and towns comprising 1,568 Business Locations operated by our
Business Partners and us. As at December 31st, 2010, we had 693,978 registered customers
2. BACKGROUND
In 2006, the company entered Private Equity and Investment Banking business. In the same
year, Motilal Oswal group acquired South Indian brokerage] firm – Peninsular Capital
Markets The company tied up with State Bank of India and Punjab National Bank in 2006
and 2007 to offer online trading to its customers. 2008 saw the company create one of India's
largest Equity Dealing & Advisory rooms, spread over 26,000 sq ft (2,400 m2) in Malad,
Mumbai.
In January 2010, Motilal Oswal Financial Services (through its subsidiary Motilal Oswal
Securities Ltd.) received the final certificate of registration approval from Securities and
Exchange Board of India (SEBI) to set up a mutual fund business in the country.
3. ORGANISATION STRUCTURE
MISSION STATEMENT:-
“To be a well-respected and preferred global financial services or generation enabling wealth
creation for all our customers.”
Today MOSL is a well diversified financial services firm offering a range of financial
products and services such as
Wealth Management
Broking & Distribution
Commodity Broking
Portfolio Management Services
Institutional Equities
Private Equity
Investment Banking Services and
Principal Strategies
Motilal Oswal Financial Services net profit rises 23.70% in the December 2010
quarters 19.17% to Rs 18.46
Net profit of Motilal oswal financial services rose 23.70% to Rs 10.91 core in the quarter
ended December 2010 as against Rs.8.82 core during the previous quarter ended
december2009. Sales rose 19.17% to Rs 18.46corer in the quarter ended December 2010 As
against Rs.15.49 chore during the previous quarter ended December 2009
In the considered result, the company reported net profit after minority interest of Rs.42.42
corer in the quarter ended December 2010 as against Rs. 37.10 corer during the previous
quarter ended December 2009. Sales reported to Rs.161.84 corer in the quarter December
2010 as agents Rs.151.74 corer during the previous quarter ended december2009.
NP 10.91 8.82 24
MOSL has a diversified client base that includes retail customers (including High Net worth
Individuals), mutual funds, foreign institutional investors, financial institutions and corporate
clients. MOSL are headquartered in Mumbai and as of March 31st, 2009, had a network
spread over 548 cities and towns comprising 1,289 Business Locations operated by our
Business Partners and us. As at March 31st, 2009, we had 541372 registered customers.
In 2006, the Company placed 9.48% of its equity with two leading private equity investors
based out of the US – New Vernon Private Equity Limited and Bessemer Venture Partners.
The company got listed on BSE and NSE on September 9, 2007. The issue which was priced
at Rs.825 per share (face value Rs.5 per share) got overwhelming response and was
subscribed 27.18 times in turbulent market conditions. The issue gave a return of 21% on the
date of listing.
As of end of financial year 2008, the group net worth was Rs.7 bn. and market capitalization
as of March 31, 2008 was Rs.19 bn.
For year ended March 2008, the company showed a strong top line growth of 91% to Rs.7 bn.
as Compared to Rs.3.68 bn. last year. New businesses like investment banking, asset
management and fund based activities have contributed to this growth.
Credit rating agency Crisis has assigned the highest rating of P1+ to the Company’s short-
term debt program. Shareholding Pattern at on 31st December 08 As of December 31st,
2008; the total shareholding of the Promoter and Promoter Group stood at 70.37%. The
shareholding of institutions stood at 10.07% and non-institutions at 19.56%.Their Business
Streams Our businesses and primary products and services are:
Wealth Management
Financial planning for individual, family and business wealth creation and management
needs. These are provided to customers through our Wealth Management service called
‘Purple’
We offer these services through our branches, Business Partner locations, the internet and
mobile channels. We also have strategic tie-ups with State Bank of India and IDBI Bank to
offer our online trading platform to its customers.
Through Motilal Oswal Commodities Broker (P) Ltd our fully owned subsidiary; we provide
commodity trading facilities and related products and services on MCX and NCDEX.
Besides access to the best of research in the form of Daily Fundamentals & Technical
Reports on highly traded commodities, our clients also get access to our exclusive
Customized Trading Advice on both the trading platforms. We offer these services through
our branches, Business Partner locations, the internet and mobile channels
Motilal Oswal Portfolio Management Services offer a range of investments solutions through
discretionary services. We at Motilal Oswal have helped create wealth for our customers
through our Portfolio Management Services. Our knowledge of the markets together with our
understanding of our customers and their risk profiles has helped us design a range of
portfolio offerings for our clients. These include the Value Strategy, Bulls Eye Strategy,
Trillion Dollar Opportunity Strategy and Focused Strategy Series I. As of March 31st, 2009,
the Assets Under Management of our various portfolio schemes stood at Rs.4.77 bn.
Motilal Oswal group has applied to the regulatory bodies for a license to operate as a
Domestic Asset Management Company (Mutual Fund) and we expect to begin operations
soon.
Institutional Equities
We offer equity broking services in the cash and derivative segments to institutional clients in
India and overseas. These clients include companies, mutual funds, banks, financial
institutions, insurance companies, and FIIs. As at March 31st, 2009, we were empanelled
with over 300 institutional clients including 200 FIIs. We service these clients through
dedicated sales teams across different time zones.
Investment Banking
We offer financial advisory services relating to mergers and acquisitions (domestic and cross-
border), divestitures, restructurings and spin-offs through Motilal Oswal Investment Advisors
Private Ltd. (MOIAPL)
We also offer capital raising and other investment banking services such as the management
MOIAPL has closed 23 transactions in 2007-08 worth US$ 1.8 billion and had 18 mandates
in hand as at March 31, 2008.
Private Equity
In 2006, our private equity subsidiary, Motilal Oswal Private Equity Advisors Private Ltd
(MOPEAPL) was appointed as the investment manager and advisor to a private equity fund,
India Business Excellence Fund, which was launched with a target of raising US$100
million.
The fund is aimed at providing growth capital to small and medium enterprises in India, with
investments typically in the range of US$3 million to US$7 million.
MOPEAPL will manage and advise the fund and other private equity funds, which may be
raised in the future. In its final closing, in December 2007, the fund obtained commitments of
US$125 man (Rs.4, 875 men) from investors in India and overseas. The Fund has deployed/
committed $ 58 man across 8 deals.
MOPEAPL has recently launched an INR 750 cores domestic Real Estate Private Equity
Fund called “India Realty Excellence Fund” sponsored by Motilal Oswal Financial Services
Ltd.
Focus on Research
Research is the solid foundation on which Motilal Oswal Securities advice is based. Almost
10% of revenue is invested on equity research and we hire and train the best resources to
become advisors. At present we have 22 equity analysts researching over 27 sectors. From a
fundamental, technical and derivatives research perspective; Motilal Oswal's research reports
have received wide coverage in the media (over a 1000 mentions last year). Our consistent
efforts towards quality equity research has reflected in an increase in the ratings and rankings
across various categories in the Asia Money Brokers Poll over the years
Our unique Wealth Creation Study, authored by Mr. Raamdeo Agrawal, Managing Director,
In 2006, the Company placed 9.48% of its equity with two leading private equity investors
based out of the US – New Vernon Private Equity Limited and Bessemer Venture Partners.
The company got listed on BSE and NSE on September 9, 2007. The issue which was priced
at Rs.825 per share (face value Rs.5 per share) got overwhelming response and was
subscribed 27.18 times in turbulent market conditions. The issue gave a return of 21% on the
data listing. As of end of financial year 2008, the group net worth was Rs.7 bn. and market
capitalization as of March 31, 2008 was Rs.19 bn.
For year ended March 2008, the company showed a strong top line growth of 91% to Rs.7 bn.
as
Compared to Rs.3.68 bn. last year. New businesses like investment banking, asset
management and fund based activities have contributed to this growth.
Credit rating agency Crisis has assigned the highest rating of P1+ to the Company’s short-
term debt program.
Motilal Oswal Financial Services has received many accolades in the year gone by. Some of
them are:
CNBC TV18 awarded Motilal Oswal the Best Performing Equity Broker Award in
2010
Motilal Oswal IB team won the Asia Pacific Cross Border Deal of the year award in
2010 and the CEO Ashutosh Maheshvari got India M&A Investment Banker of the
Year award
Motilal Oswal Securities Ltd. rated as No.1 Broker in ET Now - Stamina Analyst
Awards 2009
MOSL was 'Rated No.1 – Best recommendations Mid & Small Caps' and won awards
in 3 out of 4 categories at the Stamina India Broker Rankings 2009 from Thomson
Reuters.
MOSL awarded the Nasscom - CNBC TV 18 IT User Award – 2008.
MOSL awarded 'The Best Franchisor in Financial Services' by Franchisee. World
Magazine 2008 for the second consecutive year.
D & B. Survey 2007 rates MOSL as India's top second Broking House in terms of
total number of trading terminals. Private Equ Background
Wealth Management,
Broking & Distribution,
Commodity Broking,
Services Portfolio Management Services,
Institutional Equities,
Private Equity,
Investment Banking Services & Principal Strategies
Website www.motilaloswal.com
2. Secondary data:-
PRIMARY DATA:-
In the first phase we are trained and they teach us different things about futures and
options market.
After that I have gone through the data related to Futures and Options market to
understand the main problem that people were facing during recession and due to that
were not able to cope up with their losses.
I’ve understood that people were in losses because they were looking Futures as an
investment segment but not as a hedging tool and they were not aware of options
market.
Then after that we have applied, different hedging strategies on the data of recession
period related to Futures and Options segment that could be used there to minimize
the losses.
The next part knows the pattern of the Index based Futures and Options market. How they
move with the correspondence to the market movement and also the economy.
SECONDARY DATA:-
It is the data which has already been collected by someone or an organization for some other
purpose or research study .The data for study has been collected from various sources:
Books
Journals
Magazines
Internet sources
Secondary sources:-
It is the data which has already been collected by some one or an organization for some
other purpose or research study .The data for study has been collected from various sources:
Books
Journals
Magazines
Internet sources
After collecting the Secondary data the next phase will be collection of primary data using
Questionnaires.
The questionnaire will be filled by around 50 people who will be mainly from Delhi/NCR
region.
The sample will consist of people who are employed or work as free lancers dealing in
derivative market to know their perception towards investment in derivative market.
The data collected will be then entered into MS Excel for analysis of the data collected from
the questionnaire.
2. SAMPLING TETCHINESS:-
Initially, a rough draft was prepared a pilot study was done to check the accuracy of the
Questionnaire and certain changes were done to prepare the final questionnaire to make it more
judgmental.
A) SAMPLING AREA: - The area of the research was National Capital Region (NCR).
The respondents who were asked to fill out the questionnaire in the National Capital Region are the
sampling units. These respondents comprise of the persons dealing in derivative market. The people
have been interviewed in the open market, in front of the companies, telephonic interviews and
through other sources also
E) RESEARCH INSTRUMENT:-
Non probability
The non –probability respondents have been researched by selecting the persons who do the
trading in derivative market. Those persons who do not trade in derivative market have not been
interviewed.
The research is primarily both exploratory and descriptive in nature. The sources of information
are both primary and secondary. The secondary data has been taken by referring to various
magazines, newspapers, internal sources and internet to get the figures required for the research
purposes. The objective of the exploratory research is to gain insights and ideas. The objective of the
descriptive research study is typically concerned with determining the frequency with which
something occurs. A well structured questionnaire was prepared for the primary research and
personal interviews were conducted to collect the responses of the target population.
Time:
2 months
Statistical Tools Used:
Simple tools like bar graphs, tabulation, line diagrams have been used.
Outsource marketing questionnaire design to Outsoure2india and get access to proficient and
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questionnaires.
We have a team of qualified marketing questionnaire design experts who are skilled in
designing ideal questionnaires. Apart from designing questionnaires, we also have expertise
in devising questions that can help you get the answers that you require.
There are different types of questions that can be put forth to a large audience. The key to
getting the right data depends on the questions that are asked. We have knowledge and
expertise in the different types of questions in questionnaire design.
Closed format questions are questions that include multiple choice answers. Multiple choice
questions fall under the category of closed format questions. These multiple choices could
3. LEADING QUESTIONS
Leading questions are questions that force your audience for a particular type of answer. In a
leading question, all the answers would be equally likely. An example of a leading question
would be a question that would have choices such as, fair, good, great, poor, superb, excellent
etc. By asking a question and then giving answers such as these, you will be able to get an
opinion from your audience.
4. IMPORTANCE QUESTIONS
In importance questions, the respondents are usually asked to rate the importance of a
particular issue, on a rating scale of 1-5. These questions can help you grasp what are the
things that hold importance to your respondents. Importance questions can also help you
make business critical decisions.
Likert questions can help you ascertain how strongly your respondent agrees with a particular
statement. Likert questions can also help you assess how your customers feel towards a
certain issue, product or service.
6. DICHOTOMOUS QUESTIONS
Dichotomous questions are simple questions that ask respondents to just answer yes or no.
One major drawback of a dichotomous question is that it cannot analyze any of the answers
between yes and no.
7. BIPOLAR QUESTIONS
Bipolar questions are questions that have two extreme answers. The respondent is asked to
mark his/her responses between the two opposite ends of the scale.
In rating scale questions, the respondent is asked to rate a particular issue on a scale that
ranges from poor to good. Rating scale questions usually have an even number of choices, so
that respondents are not given the choice of an middle option.
Buying propensity questions are questions that try to assess the future intentions of
customers. These questions ask respondents if they want to buy a particular product, what
requirements they want to be addressed and whether they would buy such a product in the
future.
3. Limitation of study:-
1. LIMITED TIME:
The time available to conduct the study was only 2 months. It being a wide topic had a
limited time.
2. LIMITED RESOURCES:
Limited resources are available to collect the information about the commodity trading.
3. VOLATALITY:
1. PERSONAL BIAS
2. TIME LIMIT
3. ARE
4. SAMPLE SIZE:
5. LACK OF EXPERTISE
The origin of derivatives can be traced back to the need of farmers to protect themselves
against fluctuations in the price of their crop. From the time it was sown to the time it was
ready for harvest, farmers would face price uncertainty. Through the use of simple derivative
products, it was possible for the farmer to partially or fully transfer price risks by locking-in
asset prices. These were simple contracts developed to meet the needs of farmers and were
basically a means of reducing risk.
A farmer who sowed his crop in June faced uncertainty over the price he would receive for
his harvest in September. In years of scarcity, he would probably obtain attractive prices.
However, during times of oversupply, he would have to dispose off his harvest at a very low
price. Clearly this meant that the farmer and his family were exposed to a high risk of price
uncertainty.
On the other hand, a merchant with an ongoing requirement of grains too would face a price
risk that of having to pay exorbitant prices during dearth, although favorable prices could be
obtained during periods of oversupply. Under such circumstances, it clearly made sense for
the farmer and the merchant to come together and enter into contract whereby the price of the
grain to be delivered in September could be decided earlier. What they would then negotiate
happened to be futures-type contract, which would enable both parties to eliminate the price
risk.
In 1848, the Chicago Board Of Trade, or CBOT, was established to bring farmers and
merchants together. A group of traders got together and created the ‘to-arrive’ contract that
permitted farmers to lock into price upfront and deliver the grain later. These to-arrive
contracts proved useful as a device for hedging and speculation on price charges. These were
eventually standardized, and in 1925 the first futures clearing house came into existence.
2. DERIVATIVE DEFINED
A derivative is a product whose value is derived from the value of one or more underlying
variables or assets in a contractual manner. The underlying asset can be equity, forex,
commodity or any other asset. In our earlier discussion, we saw that wheat farmers may wish
to sell their harvest at a future date to eliminate the risk of change in price by that date. Such
a transaction is an example of a derivative. The price of this derivative is driven by the spot
price of wheat which is the “underlying” in this case.
The Forwards Contracts (Regulation) Act, 1952, regulates the forward/futures contracts
in commodities all over India. As per this the Forward Markets Commission (FMC)
continues to have jurisdiction over commodity futures contracts. However when derivatives
trading in securities was introduced in 2001, the term “security” in the Securities Contracts
(Regulation) Act, 1956 (SCRA), was amended to include derivative contracts in securities.
Consequently, regulation of derivatives came under the purview of Securities Exchange
Board of India (SEBI). We thus have separate regulatory authorities for securities and
commodity derivative markets.
Derivatives are securities under the SCRA and hence the trading of derivatives is
governed by the regulatory framework under the SCRA. The Securities Contracts
(Regulation) Act, 1956 defines “derivative” to include-
A security derived from a debt instrument, share, loan whether secured or unsecured, risk
instrument or contract differences or any other form of security.
A contract which derives its value from the prices, or index of prices, of underlying
securities.
Definition:
A derivative is a product whose value is derived from the value of one or more underlying
variables or assets in a contractual manner. The underlying asset can be equity, forex,
A security derived from a debt instrument, share, loan whether secured or unsecured,
risk instrument or contract differences or any other form of security.
A contract which derives its value from the prices, or index of prices, of underlying
securities.
The relationship between the underlying and the derivative (e.g. forward, option,
swap)
The type of underlying (e.g. equity derivatives, foreign exchange derivatives, interest
rate derivatives or credit derivatives)
The market in which they trade (e.g., exchange traded or over-the-counter)
HISTORY OF DERIVATIVES:
The history of derivatives is quite colorful and surprisingly a lot longer than
most people think. Forward delivery contracts, stating what is to be delivered for a fixed price
at a specified place on a specified date, existed in ancient Greece and Rome. Roman
emperors entered forward contracts to provide the masses with their supply of Egyptian grain.
These contracts were also undertaken between farmers and merchants to eliminate risk
arising out of uncertain future prices of grains. Thus, forward contracts have existed for
centuries for hedging price risk.
The first organized commodity exchange came into existence in the early 1700’s
in Japan. The first formal commodities exchange, the Chicago Board of Trade (CBOT), was
formed in 1848 in the US to deal with the problem of ‘credit risk’ and to provide centralized
location to negotiate forward contracts. From ‘forward’ trading in commodities emerged the
commodity ‘futures’. The first type of futures contract was called ‘to arrive at’. Trading in
futures began on the CBOT in the 1860’s. In 1865, CBOT listed the first ‘exchange traded’
derivatives contract, known as the futures contracts. Futures trading grew out of the need for
hedging the price risk involved in many commercial operations. The Chicago Mercantile
Exchange (CME), a spin-off of CBOT, was formed in 1919, though it did exist before in
1874 under the names of ‘Chicago Produce Exchange’ (CPE) and ‘Chicago Egg and Butter
Board’ (CEBB). The first financial futures to emerge were the currency in 1972 in the US.
Options are as old as futures. Their history also dates back to ancient Greece and Rome.
Options are very popular with speculators in the tulip craze of seventeenth century Holland.
Tulips, the brightly colored flowers, were a symbol of affluence; owing to a high demand,
tulip bulb prices shot up. Dutch growers and dealers traded in tulip bulb options. There was
so much speculation that people even mortgaged their homes and businesses. These
speculators were wiped out when the tulip craze collapsed in 1637 as there was no
mechanism to guarantee the performance of the option terms.
The first call and put options were invented by an American financier,
Russell Sage, in 1872. These options were traded over the counter. Agricultural commodities
options were traded in the nineteenth century in England and the US. Options on shares were
available in the US on the over the counter (OTC) market only until 1973 without much
knowledge of valuation. A group of firms known as Put and Call brokers and Dealers
Association was set up in early 1900’s to provide a mechanism for bringing buyers and
sellers together.
On April 26, 1973, the Chicago Board options Exchange (CBOE) was set up
at CBOT for the purpose of trading stock options. It was in 1973 again that black, Merton,
and Scholes invented the famous Black-Scholes Option Formula. This model helped in
assessing the fair price of an option which led to an increased interest in trading of options.
With the options markets becoming increasingly popular, the American Stock Exchange
(AMEX) and the Philadelphia Stock Exchange (PHLX) began trading in options in 1975.
The market for futures and options grew at a rapid pace in the eighties and nineties. The
collapse of the Bretton Woods regime of fixed parties and the introduction of floating rates
The CBOT and the CME are two largest financial exchanges in the world on which futures
contracts are traded. The CBOT now offers 48 futures and option contracts (with the annual
volume at more than 211 million in 2001).The CBOE is the largest exchange for trading
stock options. The CBOE trades options on the S&P 100 and the S&P 500 stock indices. The
Philadelphia Stock Exchange is the premier exchange for trading foreign options. The most
traded stock indices include S&P 500, the Dow Jones Industrial Average, the Nasdaq 100,
and the Nikkei 225. The US indices and the Nikkei 225 trade almost round the clock. The
N225 is also traded on the Chicago Mercantile Exchange.
DERIVATIVES IN INDIA
In India, derivatives markets have been functioning since the nineteenth century, with
organized trading in cotton through the establishment of the Cotton Trade Association in
1875. Derivatives, as exchange traded financial instruments were introduced in India in June
2000. The National Stock Exchange (NSE) is the largest exchange in India in derivatives,
trading in various derivatives contracts. The first contract to be launched on NSE was the
Nifty 50 index futures contract. In a span of one and a half years after the introduction of
index futures, index options, stock options and stock futures were also introduced in the
derivatives segment for trading. NSE’s equity derivatives segment is called the Futures &
Options Segment or F&O Segment. NSE also trades in Currency and Interest Rate Futures
contracts under a separate segment.
A series of reforms in the financial markets paved way for the development of exchange-
traded equity derivatives markets in India. In 1993, the NSE was established as an electronic,
national exchange and it started operations in 1994.
A security derived from a debt instrument, share, loan whether secured or unsecured,
risk instrument, or contract for differences or any other form of security.
Price volatility
A price is what one pays to acquire or use something of value. There is a price to be paid for
the purchase of food grain, oil, petrol, metal, etc. the price one pays for use of a unit of
another person’s money is called interest rate. And the price one pays in one’s own currency
for a unit of another currency is called as an exchange rate.
Prices are generally determined by market forces. In a market, consumers have ‘demand’ and
producers or suppliers have ‘supply’, and the collective interaction of demand and supply in
the market determines the price. These factors are constantly interacting in the market
causing changes in the price over a short period of time. Such changes in the price are known
as ‘price volatility’. This has three factors: the speed of price changes, the frequency of price
changes and the magnitude of price changes.
The changes in demand and supply influencing factors culminate in market adjustments
through price changes. These price changes expose individuals, producing firms and
governments to significant risks. The globalisation of the markets and rapid industrialisation
of many underdeveloped countries brought a new scale and dimension to the markets.
Nations that were poor suddenly became a major source of supply of goods. The advent of
telecommunication and data processing bought information very quickly to the markets.
Information which would have taken months to impact the market earlier can now be
obtained in matter of moments.
These price volatility risks pushed the use of derivatives like futures and options increasingly
as these instruments can be used as hedge to protect against adverse price changes in
commodity, foreign exchange, equity shares and bonds.
Globalisation has increased the size of markets and as greatly enhanced competition .it has
benefited consumers who cannot obtain better quality goods at a lower cost. It has also
exposed the modern business to significant risks and, in many cases, led to cut profit margins
In Indian context, south East Asian currencies crisis of 1997 had affected the competitiveness
of our products vis-à-vis depreciated currencies. Export of certain goods from India declined
because of this crisis. Steel industry in 1998 suffered its worst set back due to cheap import of
steel from south East Asian countries. Suddenly blue chip companies had turned in to red.
The fear of china devaluing its currency created instability in Indian exports. Thus, it is
evident that globalisation of industrial and financial activities necessitates use of derivatives
to guard against future losses. This factor alone has contributed to the growth of derivatives
to a significant extent.
Technological advances
Advances in financial theories gave birth to derivatives. Initially forward contracts in its
traditional form, was the only hedging tool available. Option pricing models developed by
Black and Scholes in 1973 were used to determine prices of call and put options. In late
BENEFITS OF DERIVATIVES
Risk management
Futures and options contract can be used for altering the risk of investing in spot market. For
instance, consider an investor who owns an asset. He will always be worried that the price
may fall before he can sell the asset. He can protect himself by selling a futures contract, or
by buying a Put option. If the spot price falls, the short hedgers will gain in the futures
market, as you will see later. This will help offset their losses in the spot market. Similarly, if
the spot price falls below the exercise price, the put option can always be exercised.
Price discovery
Price discovery refers to the markets ability to determine true equilibrium prices. Futures
prices are believed to contain information about future spot prices and help in disseminating
such information. As we have seen, futures markets provide a low cost trading mechanism.
Thus information pertaining to supply and demand easily percolates into such markets.
Accurate prices are essential for ensuring the correct allocation of resources in a free market
economy. Options markets provide information about the volatility or risk of the underlying
asset.
Operational advantages
As opposed to spot markets, derivatives markets involve lower transaction costs. Secondly,
they offer greater liquidity. Large spot transactions can often lead to significant price
changes. However, futures markets tend to be more liquid than spot markets, because herein
you can take large positions by depositing relatively small margins. Consequently, a large
position in derivatives markets is relatively easier to take and has less of a price impact as
Ease of speculation
Derivative markets provide speculators with a cheaper alternative to engaging in spot
transactions. Also, the amount of capital required to take a comparable position is less in this
case. This is important because facilitation of speculation is critical for ensuring free and fair
markets. Speculators always take calculated risks. A speculator will accept a level of risk
only if he is convinced that the associated expected return is commensurate with the risk that
he is taking.
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Types of Derivatives
There are various types of derivatives traded on exchanges across the world. They range from
the very simple to the most complex products. The following are the three basic forms of
derivatives, which are the building blocks for many complex derivatives instruments:
Forwards
Futures
Options
Swaps
1.Forwards
FORWARD CONTRACTS
• Each contract is custom designed, and hence is unique in terms of contract size,
expiration date and the asset type and quality.
• On the expiration date, the contract has to be settled by delivery of the asset.
• If the party wishes to reverse the contract, it has to compulsorily go to the same
counter-party, which often results in high prices being charged.
Physical Settlement
A forward contract can be settled by the physical delivery of the underlying asset by a short
investor (i.e. the seller) to the long investor (i.e. the buyer) and the payment of the agreed
forward price by the buyer to the seller on the agreed settlement date. The following example
will help us understand the physical settlement process.
Example:-
Consider two parties (A and B) enter into a forward contract on 1 August, 2009 where, A
agrees to deliver 1000 stocks of Unitech to B, at a price of Rs. 100 per share, on 29 th
August, 2009 (the expiry date). In this contract, A, who has committed to sell 1000 stocks of
Unites at Rs. 100 per share on 29th August, 2009 has a short position and B, who has
committed to buy 1000 stocks at Rs. 100 per share is said to have a long position.
In case of physical settlement, on 29th August, 2009 (expiry date), A has to actually deliver
1000 Unites shares to B and B has to pay the price (1000 * Rs. 100 = Rs. 10,000) to A. In
case A does not have 1000 shares to deliver on 29th August, 2009, he has to purchase it from
the spot market and then deliver the stocks to B. On the expiry date the profit/loss for each
party depends on the settlement price, that is, the closing price in the spot market on 29th
August, 2009. The closing price on any given day is the weighted average price of the
underlying during the last half an hour of trading in that day. Depending on the closing price,
three different scenarios of profit/loss are possible for each party. They are as follows:
Scenario I
Closing spot price on 29 August, 2009 (S T) is greater than the Forward price (FT)
Assume that the closing price of Unites on the settlement date 29 August, 2009 is Rs. 105.
Since the short investor has sold Unites at Rs. 100 in the Forward market on 1 August, 2009,
he can buy 1000 Unites shares at Rs. 105 from the market and deliver them to the long
investor. Therefore the person who has a short position makes a loss of (100 – 105) X 1000 =
Rs. 5000. If the long investor sells the shares in the spot market immediately after receiving
them, he would make an equivalent profit of (105 – 100) X 1000 = Rs. 5000.
Scenario II
Closing Spot price on 29 August (S T), 2009 is the same as the Forward price (FT)
Scenario III
Assume that the closing price of Unites on 29 August, 2009 is Rs. 95. The short investor,
who has sold Unites at Rs. 100 in the Forward market on 1 August, 2009, will buy the stock
from the market at Rs. 95 and deliver it to the long investor. Therefore the person who has a
short position would make a profit of (100 – 95) X 1000 = Rs. 5000 and the person who has
long position in the contract will lose an equivalent amount (Rs. 5000), if he sells the shares
in the spot market immediately after receiving them.
The main disadvantage of physical settlement is that it results in huge transaction costs in
terms of actual purchase of securities by the party holding a short position (in this case A)
and transfer of the security to the party in the long position (in this case B). Further, if the
party in the long position is actually not interested in holding the security, then she will have
to incur further transaction cost in disposing off the security. An alternative way of
settlement, which helps in minimizing this cost, is through cash settlement.
Cash Settlement
Cash settlement does not involve actual delivery or receipt of the security. Each party either
pays (receives) cash equal to the net loss (profit) arising out of their respective position in the
contract. So, in case of Scenario I mentioned above, where the spot price at the expiry date
(ST) was greater than the forward price (FT), the party with the short position will have to
pay an amount equivalent to the net loss to the party at the long position. In our example, A
will simply pay Rs. 5000 to B on the expiry date. The opposite is the case in Scenario (III),
when ST < FT. The long party will be at a loss and have to pay an amount equivalent to the
net loss to the short party. In our example, B will have to pay Rs. 5000 to A on the expiry
date. In case of Scenario (II) where S T = FT, there is no need for any party to pay anything
to the other party.
Please note that the profit and loss position in case of physical settlement and cash settlement
is the same except for the transaction costs which is involved in the physical settlement.
A drawback of forward contracts is that they are subject to default risk. Regardless of
whether the contract is for physical or cash settlement, there exists a potential for one party to
default, i.e. not honour the contract. It could be either the buyer or the seller. This results in
the other party suffering a loss. This risk of making losses due to any of the two parties
defaulting is known as counter party risk. The main reason behind such risk is the absence of
any mediator between the parties, who could have undertaken the task of ensuring that both
Futures
Like a forward contract, a futures contract is an agreement between two parties in which the
buyer agrees to buy an underlying asset from the seller, at a future date at a price that is
agreed upon today. However, unlike a forward contract, a futures contract is not a private
transaction but gets traded on a recognized stock exchange. In addition, a futures contract is
standardized by the exchange. All the terms, other than the price, are set by the stock
exchange (rather than by individual parties as in the case of a forward contract). Also, both
buyer and seller of the futures contracts are protected against the counter party risk by an
entity called the Clearing Corporation.
The Clearing Corporation provides this guarantee to ensure that the buyer or the seller of a
futures contract does not suffer as a result of the counter party defaulting on its obligation. In
case one of the parties defaults, the Clearing Corporation steps in to fulfil the obligation of
this party, so that the other party does not suffer due to non-fulfilment of the contract.
To be able to guarantee the fulfilment of the obligations under the contract, the Clearing
Corporation holds an amount as a security from both the parties. This amount is called the
Margin money and can be in the form of cash or other financial assets. Also, since the futures
contracts are traded on the stock exchanges, the parties have the flexibility of closing out the
contract prior to the maturity by squaring off the transactions in the market.
The basic flow of a transaction between three parties, namely Buyer, Seller and Clearing
Trading Futures
To
1. Standardization:
Futures contracts ensure their liquidity by being highly standardized, usually by specifying:
The underlying. This can be anything from a barrel of sweet crude oil to a short term
interest rate.
The type of settlement, either cash settlement or physical settlement.
The amount and units of the underlying asset per contract. This can be the notional
amount of bonds, a fixed number of barrels of oil, units of foreign currency, the
notional amount of the deposit over which the short term interest rate is traded, etc.
The currency in which the futures contract is quoted.
The grade of the deliverable. In case of bonds, this specifies which bonds can be
delivered. In case of physical commodities, this specifies not only the quality of the
underlying goods but also the manner and location of delivery. The delivery month.
The last trading date.
Other details such as the tick, the minimum permissible price fluctuation.
2. Margin:
Although the value of a contract at time of trading should be zero, its price constantly
fluctuates. This renders the owner liable to adverse changes in value, and creates a credit risk
to the exchange, who always acts as counterparty. To minimize this risk, the exchange
demands that contract owners post a form of collateral, commonly known as Margin
requirements are waived or reduced in some cases for hedgers who have physical ownership
of the covered commodity or spread traders who have offsetting contracts balancing the
position.
3. Settlement
Settlement is the act of consummating the contract, and can be done in one of two ways, as
specified per type of futures contract:
Physical delivery - the amount specified of the underlying asset of the contract is
delivered by the seller of the contract to the exchange, and by the exchange to the
buyers of the contract. In practice, it occurs only on a minority of contracts. Most are
cancelled out by purchasing a covering position - that is, buying a contract to cancel
out an earlier sale (covering a short), or selling a contract to liquidate an earlier
purchase (covering a long).
Cash settlement - a cash payment is made based on the underlying reference rate,
such as a short term interest rate index such as Euribor, or the closing value of a stock
market index. A futures contract might also opt to settle against an index based on
trade in a related spot market.
Expiry is the time when the final prices of the future are determined. For many equity index
and interest rate futures contracts, this happens on the Last Thursday of certain trading
month. On this day the t+2 futures contract becomes the t forward contract.
This relationship may be modified for storage costs, dividends, dividend yields, and
convenience yields. Any deviation from this equality allows for arbitrage as follows.
In the case where the forward price is higher:
1. The arbitrageur sells the futures contract and buys the underlying today (on the spot
market) with borrowed money.
2. On the delivery date, the arbitrageur hands over the underlying, and receives the
agreed forward price.
3. He then repays the lender the borrowed amount plus interest.
4. The difference between the two amounts is the arbitrage profit.
In the case where the forward price is lower:
1. The arbitrageur buys the futures contract and sells the underlying today (on the spot
market); he invests the proceeds.
2. On the delivery date, he cashes in the matured investment, which has appreciated at
the risk free rate.
3. He then receives the underlying and pays the agreed forward price using the matured
investment. [If he was short the underlying, he returns it now.]
4. The difference between the two amounts is the arbitrage profit.
Contract
Differ from trade to trade. Contracts are standardized contracts.
Specifications
Options
Like forwards and futures, options are derivative instruments that provide the opportunity to
buy or sell an underlying asset on a future date.
An option is a derivative contract between a buyer and a seller, where one party (say First
Party) gives to the other (say Second Party) the right, but not the obligation, to buy from (or
sell to) the First Party the underlying asset on or before a specific day at an agreed -upon
price. In return for granting the option, the party granting the option collects a payment from
the other party. This payment collected is called the “premium” or price of the option.
The right to buy or sell is held by the “option buyer” (also called the option holder); the party
granting the right is the “option seller” or “option writer”. Unlike forwards and futures
contracts, options require a cash payment (called the premium) upfront from the option buyer
to the option seller. This payment is called option premium or option price. Options can be
There are two types of options call options and put options which are explained below:
Call option
A call option is an option granting the right to the buyer of the option to buy the underlying
asset on a specific day at an agreed upon price, but not the obligation to do so. It is the seller
who grants this right to the buyer of the option. It may be noted that the person who has the
right to buy the underlying asset is known as the “buyer of the call option”. The price at
which the buyer has the right to buy the asset is agreed upon at the time of entering the
contract. This price is known as the strike price of the contract (call option strike price in this
case). Since the buyer of the call option has the right (but no obligation) to buy the underlying
asset, he will exercise his right to buy the underlying asset if and only if the price of the
underlying asset in the market is more than the strike price on or before the expiry date of the
contract. The buyer of the call option does not have an obligation to buy if he does not want
to.
Put option
A put option is a contract granting the right to the buyer of the option to sell the underlying
asset on or before a specific day at an agreed upon price, but not the obligation to do so. It is
the seller who grants this right to the buyer of the option. The person who has the right to sell
the underlying asset is known as the “buyer of the put option”. The price at which the buyer
has the right to sell the asset is agreed upon at the time of entering the contract. This price is
known as the strike price of the contract (put option strike price in this case). Since the buyer
of the put option has the right (but not the obligation) to sell the underlying asset, he will
exercise his right to sell the underlying asset if and only if the price of the underlying asset in
the market is less than the strike price on or before the expiry date of the contract. The buyer
of the put option does not have the obligation to sell if he does not want to.
Example:-
Suppose A has “bought a call option” of 2000 shares of Hindustan Unilever Limited (HLL) at
a strike price of Rs 260 per share at a premium of Rs 10. This option gives A, the buyer of the
option, the right to buy 2000 shares of HLL from the seller of the option, on or before August
27, 2009 (expiry date of the option). The seller of the option has the obligation to sell 2000
shares of HLL at Rs 260 per share on or before August 27, 2009 (i.e. whenever asked by the
buyer of the option). Suppose instead of buying a call, A has “sold a put option” on 100
Reliance Industries (RIL) shares at a strike price of Rs 2000 at a premium of Rs 8. This
option is an obligation to A to buy 100 shares of Reliance Industries (RIL) at a price of Rs
Trading Options
Option Payout
There are two sides to every option contract. On the one side is the option buyer who has
taken a long position (i.e., has bought the option). On the other side is the option seller who
has taken a short position (i.e., has sold the option). The seller of the option receives a
premium from the buyer of the option. It may be noted that while computing profit and loss,
premium has to be taken into consideration. Also, when a buyer makes profit, the seller
makes a loss of equal magnitude and vice versa. In this section, we will discuss payouts for
various strategies using options.
In this strategy, the investor has the right to buy the asset in the future at a predetermined
strike price i.e., strike price (K) and the option seller has the obligation to sell the asset at the
strike price (K). If the settlement price (underlying stock closing price) of the asset is above
the strike price, then the call option buyer will exercise his option and buy the stock at the
strike price (K). If the settlement price (underlying stock closing price) is lower than the
strike price, the option buyer will not exercise the option as he can buy the same stock from
the market at a price lower than the strike price.
In this strategy, the investor has bought the right to sell the underlying asset in the future at a
predetermined strike price (K). If the settlement price (underlying stock closing price) at
maturity is lower than the strike price, then the put option holder will exercise his option and
sell the stock at the strike price (K). If the settlement price (underlying stoc k closing price) is
higher than the strike price, the option buyer will not exercise the option as he can sell the
same stock in the market at a price higher than the strike price.
In this strategy, the option seller has an obligation to sell the asset at a predetermined strike
price (K) if the buyer of the option chooses to exercise the option. The buyer of the option
In this strategy, the option seller has an obligation to buy the asset at a predetermined strike
price (K) if the buyer of the option chooses to exercise his/her option. The buyer of the option
will exercise his option to sell at (K) if the spot price at maturity is lower than (K). If the spot
price is higher than (K), then the option buyer will not exercise his/her option.
Moneyless of an Option
“Moneyless” of an option indicates whether an option is worth exercising or not i.e. if the
option is exercised by the buyer of the option whether he will receive money or not.
“Moneyless” of an option at any given time depends on where the spot price of the
underlying is at that point of time relative to the strike price. The premium paid is not taken
into consideration while calculating moneyless of an Option, since the premium once paid is
a sunk cost and the profitability from exercising the option does not depend on the size
of the premium. Therefore, the decision (of the buyer of the option) whether to exercise the
option or not is not affected by the size of the premium. The following three terms are used
to define the moneyless of an option.
In-the-money option
An at-the-money-option is one in which the spot price of the underlying is equal to the strike
price. It is at the stage where with any movement in the spot price of the underlying, the
option will either become in-the-money or out-of-the-money.
SWAPS -
Swaps are transactions which obligates the two parties to the contract to exchange a series of
cash flows at specified intervals known as payment or settlement dates. They can be regarded
as portfolios of forward's contracts. A contract whereby two parties agree to exchange (swap)
payments, based on some notional principle amount is called as a ‘SWAP’. In case of swap,
only the payment flows are exchanged and not the principle amount. The two commonly used
swaps are:
Interest rate swaps is an arrangement by which one party agrees to exchange his series of
fixed rate interest payments to a party in exchange for his variable rate interest payments. The
fixed rate payer takes a short position in the forward contract whereas the floating rate payer
takes a long position in the forward contract.
CURRENCY SWAPS:
Currency swaps is an arrangement in which both the principle amount and the interest on
loan in one currency are swapped for the principle and the interest payments on loan in
another currency. The parties to the swap contract of currency generally hail from two
different countries. This arrangement allows the counter parties to borrow easily and cheaply
in their home currencies. Under a currency swap, cash flows to be exchanged are determined
at the spot rate at a time when swap is done. Such cash flows are supposed to remain
unaffected by subsequent changes in the exchange rates.
FINANCIAL SWAP:
Financial swaps constitute a funding technique which permit a borrower to access one market
and then exchange the liability for another type of liability. It also allows the investors to
exchange one type of asset for another type of asset with a preferred income stream.
5. BASKETS -
Baskets options are option on portfolio of underlying asset. Equity Index Options are most
popular form of baskets.
6. LEAPS -
7. WARRANTS -
Options generally have lives of up to one year, the majority of options traded on options
exchanges having a maximum maturity of nine months. Longer-dated options are called
warrants and are generally traded over-the-counter.
8. SWAPTIONS -
Swaptions are options to buy or sell a swap that will become operative at the expiry of the
options. Thus a swaption is an option on a forward swap. Rather than have calls and puts, the
swaptions market has receiver swaptions and payer swaptions. A receiver swaption is an
option to receive fixed and pay floating. A payer swaption is an option to pay fixed and
receive floating.
NSE trades in futures and options (F&O) contracts on its F&O Segment. Its derivatives
markets clock daily volumes of Rs 60,000 crore on an average.
The F&O segment on NSE provides trading facilities for the following derivative
instruments:
Index futures,
Index options,
Individual stock futures, and
Individual stock options.
Index futures are futures contracts on an index, like the Nifty. The underlying asset in case of
index futures is the index itself. For example, Nifty futures traded in NSE track spot Nifty
returns. If the Nifty index rises, so does the pay off of the long position in Nifty futures.
Apart from Nifty, CNX IT, Bank Nifty, CNX Nifty Junior, CNX 100, Nifty Midcap 50 and
Mini Nifty 50 futures contracts are also traded on the NSE. They have one-month, two
-month, and three - month expiry cycle. All contracts expire on the last Thursday of every
month, or the previous trading day if the last Thursday is a trading holiday. Thus, a
September 2009 contract would expire on the last Thursday of September 2009, which
would be the final settlement date of the contract.
Underlying
S&P CNX Nifty
Index
Exchange of
trading
National Stock Exchange of India Limited
The future contracts have a maximum of three month trading cycle - the near
Trading
month, the next month, and the far month. New contract are introduced
Cycle
on the next trading day following the expiry of the near month contract.
Expiry Day The last Thursday of the expiry month or the previous trading day if
the last Thursday is a trading holiday
Daily Settlement price is the closing price of the futures contracts for the
Settlement
trading day and the final settlement price is the value of the underlying index
Price
on the last trading day
Index based options are similar to index based futures as far as the underlying is concerned
i.e., in both the cases the underlying security is an Index. As the value of the index increases,
the value of the call option on index increases, while put option value reduces. All index
based options traded on NSE are European type options and expire on the last Thursday of
the exp iry month. They have expiries of one month or two months, or three months. Longer
dated expiry contracts with expiries up to 3.5 years have also been introduced for trading.
Security
Descriptor OPTIDX NIFTY
The last Thursday of the expiry month or the previous trading day if
Expiry Day
the last Thursday is a trading holiday
Settlement
Cash Settlement on T+1 basis
Basis
Style of
European
Option
Daily
Not Applicable
Settlement
Final
Settlement
Stock based futures are futures based on individual stocks. The underlying on these futures
are the individual company stocks traded on the Exchange. The expiration cycle of the stock
futures is same as that of index futures.
Underlying
Individual Securities
Trading The futures contracts have a maximum of three month trading cycle - the
Cycle near month, the next month, and the far month. New contracts are introduced
on the next trading day following the expiry of the near month contract
The last Thursday of the expiry month or the previous day if Thursday is a
Expiry Day
trading holiday
Settlement
Mark to market and final settlement is cash settled on T+1 basis
Basis
Daily settlement price is the closing price of the futures contracts for the
Settlement
trading day and the final settlement price is the closing price of the
Price
underlying security on the last trading day.
Stock based options are options for which the underlying is individual stocks. As opposed to
index based options, all the stock based options at the NSE have American style settlement.
Security
OPTSTK
Descriptor
Style of
Option
American
Expiry Day The last Thursday of the expiry month or the previous trading day if
the last Thursday is a trading holiday
Daily
Premium value (net)
Settlement
Final
Settlement Closing price of underlying on exercise day or on expiry day
price
The Board at its meeting on November 29, 2002 had desired that a quarterly report be
submitted to the Board on the developments in the derivative market. Accordingly, this
memorandum presents a status report for the quarter July-September 2008-09 on the
developments in the derivative market.
During July-September 2008-09, the turnover at BSE was Rs.1,510 crore, which was
insignificant as compared to that of NSE at Rs. 3,315,491 crore.
Futures (Index Future + Stock Future) constituted 67.20% of the total number of
contracts traded in the F&O Segment. Stock Future and Index Future accounted for
35.26% and 31.94% respectively.
Turnover at F&O segment was 4.19 times that of its cash segment.
Reliance, Reliance Capital Ltd, Reliance Petro. Ltd, State Bank of India and ICICI
Bank Ltd were the most actively traded scrips in the derivatives segment.
Together they contributed 25.12% of derivatives turnover in individual stocks.
No.of No.of
PRODUCT Turnover Turnover
Contracts Contracts
(Rs. ‘000) (Rs. ‘000)
(Lakh) (Lakh)
Single Stock
514.5 1,093.1 599.0 1,039.3
Future
Market Share ( %)
Turnover in F&O as
multiple of turnover in
cash segment 3.26 4.19
- Reliance - Reliance
F&O Segment
active scrips in
- Reliance Capital Ltd - State Bank of India
the F&O Segment
Contribution of
the above f iv e to
total derivatives
turnover (%)
23.72 25.12
Client (excluding
(avg. of three monthsin
FII
59.77 60.17
trades)
Index futures
2008-09 4116649
2007-08 156598579
2006-07 81487424
2005-06 58537886
2004-05 21635449
2003-04 17191668
2002-03 2126763
2001-02 1025588
160000000
140000000 2008-09
2007-08
120000000
2006-07
100000000
2005-06
80000000
2004-05
60000000
2003-04
40000000
2002-03
20000000
2001-02
0
year
Interpretation
From the data and the bar diagram above, there is high business growth in the derivative
segment in India. In the year 2001-02, the number of contracts in Index Future were 1025588
where as a significant increase of 4116679 is observed in the year 2008-09.
2008-09 925679.96
2007-08 3820667.27
2006-07 2539574
2005-06 1513755
2004-05 772147
2003-04 554446
2002-03 43952
2001-02 21483
4000000
3500000 2008-09
3000000 2007-08
2500000 2006-07
2005-06
2000000
2004-05
1500000
2003-04
1000000
2002-03
500000
2001-02
0
year
Interpretation
From the data and above bar chart, there is high turn over in the derivative segment in India.
In the year 2001-02 the turnover of index future was 21483 where as a huge increase of
92567996 in the year 2008-09 are observed.
2007-08 203587952
2006-07 104955401
2005-06 80905493
2004-05 47043066
2003-04 32368842
2002-03 10676843
2001-02 1957856
2000-01 -
250000000
200000000 2008-09
2007-08
2006-07
150000000
2005-06
2004-05
100000000
2003-04
2002-03
50000000
2001-02
0
year
Interpretation:
From the data and bar diagram above there were no stock futures available but in the year
2001-02, it predominently increased to 1957856. Then there was a huge increase of 20, 35,
and 87,952 in the year 2007-08 but there was a steady decline to 51449737 in the year 2008-
09.
Year Turnover
(Rs. Crores)
2008-09 1093048.26
2007-08 7548563.23
2006-07 3830967
2005-06 2791697
2004-05 1484056
2003-04 1305939
2002-03 286533
2001-02 51515
2000-01 -
8000000
2008-09
7000000
2007-08
6000000
2006-07
5000000
2005-06
4000000 2004-05
3000000 2003-04
2000000 2002-03
1000000 2001-02
0 2000-01
year
Interpretation
From the data and bar chart above, there were no stock futures available in the year 2000-01.
There was a steady increase of stock future 51515 in the year 2001-02. but in the year there
Index options
Year No. of contracts
2008-09 24008627
2007-08 55366038
2006-07 25157438
2005-06 12935116
2004-05 3293558
2003-04 1732414
2002-03 442241
2001-02 175900
2000-01 -
50000000 2008-09
2007-08
40000000 2006-07
2005-06
30000000
2004-05
20000000 2003-04
2002-03
10000000
2001-02
0
year
Interpretation
From the data and bar chart above, the no of contracts of index option was nil in the year
2000-2001. But there was a predominant increase of 1,75,900 in the year 2001-2002. In the
year 2007-2008 there was a huge increase in the index option contracts to 55366038 and a
decline of 24008627 in the year 2008-2009.
2008-09 71340.02
2007-08 1362110.88
2006-07 791906
2005-06 338469
2004-05 121943
2003-04 52816
2002-03 9246
2000-01 -
1400000
2008-09
1200000
2007-08
1000000
2006-07
800000
2005-06
600000 2004-05
400000 2003-04
2002-03
200000
2001-02
0
year
Interpretation
From the data and bar chart above, there was no turnover in the year 2000-2001 for Index
option. It slowly started increasing in the year 2000-2001 to 3765.But in the year 2007-2008
there was a huge increase of 1362110.088 and a sudden decline to 71340.02 observed in
2008-2009.
Stock options
2007-08 9460631
2006-07 5283310
2004-05 5045112
2003-04 5583071
2002-03 3523062
2001-02 1037529
2000-01 -
10000000
9000000
2008-09
8000000
2007-08
7000000
2006-07
6000000
2005-06
5000000
4000000 2004-05
3000000 2003-04
2000000 2002-03
1000000 2001-02
0
year
Interpretation
From the data and bar chart above the no of contracts of stock option in the year 2000-2001
was nil. But there was a huge increase of 1037529 observed in the year 2001-2002. It was
9460631 which was the the highest in the year 2007-2008. But a gradual decline of 2546175
in the year 2008-2009.
2007-08 359136.55
2006-07 193795
2005-06 180253
2004-05 168836
2003-04 217207
2002-03 100131
2001-02 25163
2000-01 -
400000
350000 2008-09
300000 2007-08
250000 2006-07
2005-06
200000
2004-05
150000
2003-04
100000
2002-03
50000
2001-02
0
year
Interpretation
From the chart and the bar diagram above the stock option turnover in the year 2000-2001
was nil. There was a slow increase of 25163 in the year 2001-2002. But a phenomenal
increase of 359136.55 in the year 2007-2008, and a decline of 58355.03 in the year 2008-
2009.
60000
2000-2001
50000 2001-2002
2002-2003
40000
2003-2004
30000 2004-2005
20000 2005-2006
2006-2007
10000 2007-2008
0 2008-2009
year
Interpretation
From the data and bar chart above the overall trading turnover in the year 2000-2001 was as
low as 2365 but a predominant increase of 2648403.30 observed in the year 2008-2009.
Under graduate 6
Graduate 10
Post graduate 23
Professional 11
Under graduate
Graduate
Post graduate
Profesional
below 1,50,000 1
1,50,000-3,00,000 9
3,00,000-5,00,000 14
above 5,00,000 26
above 5,00,000
3,00,000-5,00,000
NO. OF RESULT
1,50,000-3,00,000
below 1,50,000
0 5 10 15 20 25 30
Q. Normally what percentage of your monthly household income could be available for
investment
No. of
Investment result
Between 5% to 10% 2
Between 5% to 10%
Between 11% to 15%
Between 16% to 20%
Between 21% to 25%
More than 25%
retirement planning
building up a corpus for charity
future education of children
other
No.of
Risk in stock market result
Uncertainty of returns
Others
No. of result
25
20
15
10
No. of result
5
0
No.of
Reasons result
Increase speculation 2
Risk control 9
More stable 1
No. of Result
30
20
10
0
No. of Result
No. of
Participation as Result
investor 23
Speculator 2
Broker/Dealer 8
Hedger 17
Q. From where you prefer to take advice before investing in derivative market?
No. of
Advice From Result
Brokerage houses 15
Research analyst 7
Websites 2
News Networks 23
Others 3
Others
News Networks
No. of Result
Websites
Research analyst
Brokerage houses
0 5 10 15 20 25
No. of
Participate in Result
Future on individual
stock 6
Currency futures 9
Options on individual
stock 3
Q. What contract maturity period would interest you for trading in?
25
20
15
10
0
1 month 2 month 3 month 6 month 9 month 12 month
Regularly
11-50 times
0 5 10 15 20 25
No.of
Result of investment result
Great results 4
Disappointed 22
Great results
Moderate but acceptable
Disappointed
Q. What is best describes the overall approach to invest as a mean of achieving investors
goals.
INTERPRETATION
Most of the investors who invest in derivatives market are post graduate.
Investors who invest in derivative market have a income of above 5,00,000
Investors generally perceive slump in stock market kind of risk while investing in
derivative market.
People are generally not investing in derivative market due to lack of knowledge and
difficulty in understanding and it is very risky also.
Most of investor purpose of investing in derivative market is to hedge their fund.
People generally participate in derivative market as a investor or hedger.
People generally prefer to take advice from news network before investing in
derivative market.
Most of investors participate in stock index futures.
From this survey we come to know that most of investors make a contract of 3 month
maturity period.
Investors invest regularly in derivative market.
The result of investment in derivative market is generally moderate but acceptable.
Derivative market is growing very fast in the Indian Economy. The turnover of
Derivative Market is increasing year by year in the India’s largest stock exchange
NSE. In the case of index future there is a phenomenal increase in the number of
contracts. But whereas the turnover is declined considerably. In the case of stock
future there was a slow increase observed in the number of contracts whereas a
decline was also observed in its turnover. In the case of index option there was a huge
increase observed both in the number of contracts and turnover.
After analyzing data it is clear that the main factors that are driving the growth of
Derivative Market are Market improvement in communication facilities as well as
long term saving & investment is also possible through entering into Derivative
Contract. So these factors encourage the Derivative Market in India.
It encourages entrepreneurship in India. It encourages the investor to take more risk &
earn more return. So in this way it helps the Indian Economy by developing
entrepreneurship. Derivative Market is more regulated & standardized so in this way
it provides a more controlled environment. In nutshell, we can say that the rule of
High risk & High return apply in Derivatives. If we are able to take more risk then we
can earn more profit under Derivatives.
Commodity derivatives have a crucial role to play in the price risk management
process for the commodities in which it deals. And it can be extremely beneficial in
agriculture-dominated economy, like India, as the commodity market also involves
agricultural produce. Derivatives like forwards, futures, options, swaps etc are
extensively used in the country. However, the commodity derivatives have been
utilized in a very limited scale. Only forwards and futures trading are permitted in
certain commodity items.
A knowledge need to be spread concerning the risk and return of the derivative
market.
More variation in stock index future need to be made looking a demand side of
investors.
SEBI should conduct seminars regarding the use of derivatives to educate individual
investors.
REFERANCE / BIBLIOGRAPHY
Books referred:
Reports:
Websites visited:
1) www.Motilaloswal.com
2) www.nseindia.com
3) www.moneycontrol.com
4) www.derivativesindia.com
5) www.sebi.gov.in
6) )www.google.com
ANNEXTURE
FOR
Sir/Ma’am,
NAME- __________________________________________________
CONTACT- ______________________________________________
GENDER-________________________________________________
OCCUPATION-___________________________________________
1. Educational Qualification
Undergraduate Graduate
2. Income Range:
3. Normally what percentage of your monthly household income could be available for
investment?
Retirement Planning
5. What kind of risk do you perceive while investing in the stock market?
6. Why people do not invest in derivative market? (Rank your preference 1-4)
Increase speculation
Risk control
More stable
Investor Speculator
Broker/Dealer Hedger
9. From where you prefer to take advice before investing in derivative market?
Currency futures
1 month 2 month
3 month 6 month
9 month 12 month
13. Which of the following statements best describes your overall approach to invest as a
mean of achieving your goals?
principal.
principal fluctuation.
fluctuation.
Great results
Disappointed