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Futures play an important role in the field of finance. Many kinds of futures instruments have been developed and the use of futures has received a great deal of attention. Futures contract like options are important derivative instruments and a major innovation in the field of risk management. FEATURES OF A FUTURES CONTRACT A futures contract is a standardized forward contract. An agreement between two parties to exchange an asset for cash for a predetermined future date for a price that is specified today represents a forward contract. The terms which are used in futures contract are: Short position: This commits the seller to deliver an item at the contracted price on maturity. Long position: This commits the buyer to purchase an item at the contracted price on maturity. DIFFERENCES BETWEEN FORWARDS AND FUTURES A standardized forward contract is a futures contract. The differences are: • A forward contract is a tailor made contract (the terms are negotiated between the buyer and the seller),whereas a futures contract is a standardized contract(quantity, date and delivery conditions are standardized). • • • While there is no secondary market for forward contracts, the futures contracts are traded on organized exchanges. Forward contracts usually end with deliveries, whereas futures contracts are settled with the differences. Usually no collateral is required for a forward contract. In a futures contract, however a margin is required.
The purpose of standardization is to promote liquidity and allow parties to the futures contracts to close out their positions readily. 4 . futures contracts are ‘marked to market’ on a periodic basis. asset quantity. triggered by rumors. Marking-to-market: While forward contracts are settled on the maturity date. This means that the exchange becomes the seller to the buyer and the buyer to the seller. Price limits: Futures exchanges impose limits on price movements of futures contracts. and to prevent overreaction to real information. Intermediation by the Exchange: In a traded futures contract the exchange interposes itself between the buyer and the seller of the contract. This means that the profits and losses on futures contracts are settled on a periodic basis. whereas futures contract are ‘marked to market’ on a daily basis. and maturity date. Price limits are meant to prevent panic buying or selling.• Forward contracts are settled on the maturity date. KEY FEATURES OF FUTURES CONTRACTS The key features of future contract are: • • • • • Standardization Intermediation by the exchange Price limits Margin requirements Marking to market Standardisation: Traded futures contracts are standardized in terms of asset quality. This means that profits and losses on futures contract are settled daily.
COMMODITY FUTURES (STORABLE COMMODITIES) Futures contracts on various commodities. Futures price= spot price+ present value of storage costsPresent value of convenience yield. but are often defined on an interest rate index such as 3-month sterling or US dollar LIBOR. A commodity futures is a futures contract in a commodity like cocoa or aluminum. storable as well as perishable. cotton. currency . Hence perishable commodities have to be analyzed differently. COMMODITY FUTURES (PERISHABLE COMMODITIES) For pricing futures contracts on the basis of arbitrage. For a storable commodity buying in the spot and storing it until the expiration of the futures contract is equivalent to buying a futures contract and taking delivery at the maturity date. 5 . Futures price= Expected spot price – Expected risk premium FINANCIAL FUTURES A financial future is a futures contract on a short term interest rate (STIR).FUTURES CONTRACTS: THE GLOBAL SCENE Broadly there are two types of futures: commodity futures and financial futures. while financial futures is a futures contract in a financial instrument like Treasury bond. Contracts vary. The futures price of a perishable commodity is influenced by two factors mainly: the expected spot price of the underlying commodity and the risk premium associated with the futures position. like gold. and wheat and orange juice have been in existence for nearly three centuries. rice.or stock index. oil. the asset has to be storable. aluminum.
at a specified price. The exchange's clearinghouse acts as counterparty on all contracts. etc. which gives the holder the right. or. The pre-set price is called the futures price. traded on a futures exchange. 6 . Futures contracts. A futures contract gives the holder the obligation to buy or sell. the owner of an options contract may exercise the contract. The settlement price. In other words. The seller delivers the commodity to the buyer. converges towards the futures price on the delivery date. The Eurodollar contract is the linchpin of the shortend interest rate futures contracts. no comparable contracts exist for other currencies. then cash is transferred from the futures trader who sustained a loss to the one who made a profit. normally. a futures contract is a standardized contract. The future date is called the delivery date or final settlement date. Other dollar-denominate short-term interest rate futures. sets margin requirements. or simply futures. The price of the underlying asset on the delivery date is called the settlement price. but not the obligation. if it is a cash-settled future. which differs from an options contract. SHORT-TERM INTEREST RATE FUTURES Contract specifications An assortment of contracts. to buy or sell a certain underlying instrument at a certain date in the future. are exchange traded derivatives. To exit the commitment prior to the settlement date.In finance. effectively closing out the futures position and its contract obligations. the holder of a futures position has to offset his position by either selling a long position or buying back a short position. Both parties of a "futures contract" must fulfill the contract on the settlement date.
7 . Eurodollar deposits differ from domestic term deposits or certificates of deposit in the U. authorities and hence are not subject to reserve requirements or deposit insurance premiums. Basic contract specifications: The nominal contract size is $1 million and the underlying rate is the three-month LIBOR. or with an international banking facility (IBF) located in the U.e. Trading of Eurodollar contracts: Eurodollar contracts are now traded at the CME in Chicago.Eurodollar futures The Eurodollar futures market is the most widely traded money market contract in the world.S. the offer side of the cash money market). in that they are not regulated by U. Contract settlement: Eurodollar contracts are settled in cash rather than with physical delivery (which would entail the short opening a time deposit on behalf of the long). The futures price is quoted as 100 minus the annualized futures 3-month LIBOR (e. although trading in it only started as recently as 1981.5 implies a futures LIBOR rate of 3..S.g.. Eurodollar contract trading is de-facto available 24 hours. It is based on a ninetyday Eurodollar deposit. at LIFFE in London and at SIMEX in Singapore.S. The disadvantages of delivery in this case are of two kinds: (i) Eurodollar deposits are non-negotiable and hence delivery would bind the long to a three-month investment. a price of 96. Thus. (ii) heterogeneity of bank credits would systematically raise questions on the quality of the delivered asset. the rate at which a London bank is willing to lend dollars (i. which is a dollar-denominate deposit with a bank or branch outside of the U.5% per annum) in decimal terms. The Eurodollar futures rate on any particular contract-month is essentially the 3-month LIBOR rate that is expected to prevail at the maturity of the contract.S.
the receiver of the bond pays the short an invoice price equal to the futures price times the conversion factor of the particular bond chosen by the short.AND LONG-TERM INTEREST RATE FUTURES Contract specifications Deliverable securities: Unlike international bank futures contract. few contracts actually go into delivery. bond futures positions can also be unwound prior to delivery by offsetting futures transactions. bond futures contracts generally allow for a range of bonds to be delivered against them. years remaining to maturity (or to first call if the bond is callable). INTERMEDIATE.Pricing and arbitrage: Implied forward rates In order to understand how futures prices are established. Also unlike the T-bill futures contract. We will see that the market forces of arbitrage are used to price virtually all financial futures contracts. Delivery cycle: At futures expiration there is uncertainty not only on the actual bond that will be delivered but also on the specific timing of the delivery. there may be as many as several dozen securities in the deliverable basket. U. All examples drawn below are based on the threemonth Eurodollar contract. we need to understand how prices of futures contracts are related to the spot or cash market prices of the underlying asset. maturities or underlying asset constitute a straight-forward extension. For example.S. T-bond that has at least I. Futures invoice price: When a bond is delivered into the bond futures contract. bond futures are settled at expiration with physical delivery. Because this is more convenient for most futures users than physical delivery. all with different maturities and coupons. Of course. Plus any accrued interest on the bond: 8 .S. Treasury bond futures contracts allow delivery of any U. applications with contracts based on different currencies.
September and December). International bond futures contracts.S. June. The basis is the difference between a bond's price and the futures invoice price (as defined above).000 for U.S. T-bond contract are shown in parentheses for illustrative purposes. The basis. a 5year and a 2-year contract. where they are traded and the description of their deliverable set. Since 1932. T-bond. The exchange will also set daily trading hours.S. Pricing and arbitrage Cash-futures relationship: Similar to short-term interest rate contracts. Treasury notes: a 10-year. it is the difference in cost between 9 . the table below lists the main international bond futures contracts.Futures invoice price = futures price conversion factor + accrued interest Other contract terms: Exchanges set other futures contact terms as follows. bond futures contracts designed along the lines of the U.S.S. It is the delivery option of the short that makes valuing bond futures more complex than valuing international bank (euro) deposit futures.and long-term interest rate contracts: The U. Since then three futures contracts have been established on U. medium. traded at the CBOT since 1977. In other words. T-bond contract have spread internationally. They all have similar characteristics to their forerunner. The contract size defines the par amount of the bond that is deliverable into the contract ($100. was the first fut3ureo n long-tern interest rates. Delivery months on bond futures contacts are quarterly (March. the last trading date and the last delivery period (one month). the concrete specifications of the U. For illustration purposes. T-bonds). Understanding the relationship between a futures contract and the deliverable basket is crucial to understanding the drive behind the arbitrage. there is an arbitrage relationship which holds the prices of the T-bond futures contract to the cash market. Other U.S.
The basis point value factor is the ratio of the change in the 10 . the gross basis must be equal to zero. Basis arbitrate at futures expiration: At futures expiration. for instance. The basis is generally quoted in 32nds rather than in decimal units . and (iii) immediately deliver (receive delivery of) the cash bond against the short (long) futures position. Accordingly. Otherwise there would be instantaneous risk less profit opportunities. (ii) sell (buy) a bond futures contract.buying the bond in the cash market and buying a futures contract on it and having it delivered into the contract at expiration. Recall that he basic formula is: Hedge ratio = scale factor x basis point value factor x volatility factor The scale factor is the ratio of the notional or principal amount of the asset being hedged and the futures contract size. that the gross basis was negative (positive). we define the gross or raw basis as: Gross basis = dirty cash price . Hedge ratio: The construction of the hedge ratio for bond futures follows the same logic as that for international bank futures contracts developed in Chapter 2.deliver bond in the cash market.futures invoice price = clean cash price .(futures price conversion factor) since dirty (or full) price = clean price + accrued interest. An excessive exposure to intermediate.this conversion is performed simply by multiplying the decimal basis by 32. Then one could: (i) buy (sell) the cheapest to. Risk management and hedging Basic risk management functions: Bond futures are often used as a vehicle for hedging price risk or duration.and long-term interest rates can be offset by buying or selling bond futures contracts. Suppose.
reduces market sensitivity to rate movements and performs well in a bear market. Shorting bond futures.dollar value of the hedged asset to the change in the dollar value of the futures contract for a one basis point change in the interest rate. trading on the basis of market views. or * in combination with the underlying (typically the cheapest-to-deliver bond) in what amounts to basis trades. Expressing a market view Types of trades: The third application of bond futures. requires by definition that not all risk be hedged. to express a view on market direction. Playing duration with futures fulfills the same objective as playing the bond market directly. * in combination with other bond futures contracts. as was the case with international bank deposit futures. on the contrary. Outright trading: Bond futures by themselves don't have duration. But because they track the cheapest-to-deliver bond (driven by basis traders). Bond futures. easy reversibility of positions and low cash requirements. using spreads or butterflies that combine longs and shorts at different points in time or across countries. but with the convenience of the futures market in terms of narrow bid/ask spreads. they contribute dollar duration to portfolios much along the lines of the cash bond. The volatility factor can be set to one if bond futures are used to hedge interest rate risk of roughly the same credit characteristics and in roughly the same yield curve segment. Going long the futures is a way of extending duration: it pays when the market is rallying and rates are falling. 11 . can be traded: * outright.
Spread trading: As a word of caution.g. Basis trades can be entered into directly (by playing the bond and futures markets simultaneously as discussed in Section B) or indirectly by replacing an existing long bond position with a long position in bond futures and shortterm money market investments. and in particular whether the cheapest-to-deliver goes on special in the repo market Short-term basis trading is in fact quite complex. A basis trade can -. In addition. Basis trading: Trading the basis from the long side is relatively risk less if the position is held to the futures expiration date.. For instance. A short-term basis position financed at an overnight rather than term rate constitutes a bet on basically two things: (i) the level of long-term rates (which determines which bond will be the cheapest-to-deliver since they each have different sensitivity to market rates according to their duration). as explained above.e. most of which are traded at the CME and at LIFFE. there are futures on a USD index (i. and (ii) the evolution of short-term rates. Finally.1so be held for shorter time horizon but then the position is subject to risk at the unwind..). cross-country spreads may be driven by differences of the duration of their respective cheapest-to-deliver bonds than by the absolute level of long-term rates. SRF. there are futures 12 . Interpreting a bond future calendar spread as a reading on a particular segment of the yield curve is made difficult by each contracts' particular sensitivity to shifts in the cheapest-to-deliver and to changes in the repo rate on the cheapest deliver. average of bilateral rates against the dollar) at the CBOT. and can be used to take on risk subject to one's views in addition to as an arbitrage play. AUD. Foreign currency futures contracts are available on all major currencies against the dollar (e. JPY. In a similar vein. GBP. CURRENCY FUTURES Contract specifications Types of contracts. DEM. etc. it should be mentioned that bond future spread or butterfly trades are less straight forward in their interpretation than similar trades with international bank deposit futures. CAD.
bilateral exchange rates between two non-dollar currencies such as on JPY/DEM. Expressing a market view Outright trading. Currency futures against the dollar. They tend to require actual delivery. June..e. tend to have quarterly contracts with delivery in March. There is no financing bias against the long as was the case with interest rate futures if exchange rates are assumed to be uncorrelated with the level of interest rates.. For instance. Conversely.on crosses. Conversely. Futures are a natural instrument to express views on future exchange rate movements. However. i. More formally. in the case of currencies. the prices of currency futures are bound by a basic arbitrage relationship with the underlying cash market. based on number of dollars per unit of foreign currency. shorting the contract is consistent with an expectation of a yen depreciation relative to the dollar. the contract should be sold if one expects the yen to appreciate more than what is expected by the market. September and December. Arbitrage relations are cleaner with forwards than with futures because mark-to-market payments on futures introduce an element of reinvestment risk that cannot be fully hedged. Contract specifications.e. Price quotes are on American terms. the difference between forward and futures prices is less important than with interest rates..e. meaning that at futures settlement the long receives the currency of denomination of the future and pays dollars). by far the most prevalent. 13 . As with interest rate futures. Pricing and arbitrage: International interest rate parity Overview. i. going long the JPY contract (i. one should buy the JPY contract if one expects the yen to appreciate more than what is already expected (or priced in) by the market. long yen and short dollars) is consistent with an expectation of an appreciation of the yen relative to the dollar.
it is not feasible to construct a broad market value weighted portfolio that is both of manageable size to be delivered and contains whole numbers of shares for all 14 . In other words. used for example in both the S&P 500 and NYSE indexes. Though returns on stock indexes of the same country are often highly correlated over time. This implies that percentage changes in stock indexes do not track total returns on the corresponding portfolio of stocks but. stock weighting. any cash dividends received on the portfolio are ignoring when percentage changes in most indexes are being calculated.STOCK INDEX FUTURES Contract specifications The underlying instrument. those indexes constructed using geometric means). and index computation. Futures contract specifications: All futures contracts on stock indexes are settled in cash. not every index correspond to a well defined portfolio of stocks (for example. only price changes. Index construction: The weight of a stock in an index is the proportion of the portfolio tracked by the index invested in the stock. First. The stocks in the portfolio can have equal weights or weights that change in some way over time. Stock market indexes are time series designed to track the changes in the value of hypothetical portfolios of stocks. Moreover. Stock indexes differ from one to another with respect to the range of stocks covered. The most common weighting scheme is market value weighting. Physical delivery of stocks against a futures contract based on an index presents intractable difficulties. Treatment of dividends: Stock indexes are not usually adjusted for cash dividends. relative performance can vary sharply over periods such as a month or a quarter. Indexes differ in composition because of the need to measure the price movements of the equity markets of different countries and different segments of each of these national equity markets.
The value of one futures contract is FRF200 times the index. Based on a portfolio of 20 blue-chip American stocks listed on the NYSE. * Major market index (CME). Contracts traded. * S&P 400 (CME). *CAC-4s0t ock index (MATIF). Based on a portfolio of all the stocks listed on the NYSE.companies. The value of one futures contract is $500 times the index. The value of one futures contract is $500 times the index. The value of one futures contract is GBP 25 times the index. The value of one futures contract is $500 times the index. It does not correspond directly to any portfolio of stocks because of its use of geometric averaging. The value of one fuLturesc ontact is $5 times the index. * Nikkei 225 stock average (CME). * Value Line futures (KC). Based on a portfolio of 40 of the largest stocks listed on the London Stock Exchange.700 American stocks. The value of one futures contract is $500 times the index. The index accounts for 80% of the NYSE. Based on a portfolio of 225 of the largest stocks listed on the Tokyo Stock Exchange. Based on a portfolio of 400 American stocks. Based on a portfolio of 40 of the largest stocks listed on the Paris Stock Exchange. following is a list of the main international stock indexes and futures contracts on these indexes: * S&P 500 (CME). To solve these problems stock index futures contracts are settle in cash and the underlying assets are defined to be an amount of cash equal to a fixed multiple of the value of the index. * FT-SE 100 index (LUFFE). * NYSE composite futures (NYSE). Based on a portfolio of 500 American stocks. The value of one futures contract is $500 tirmes the index. 15 . For illustration purposes. Contains the prices of 1.
ease of adjusting positions (liquidity). stock index futures prices should be related to the underlying cash market by a cost of carry relationship or. in other words.Pricing and arbitrage Like futures on fixed income instruments and currencies. Managing index fund portfolios involves considerable oversight in terms of maintaining the correct weights as prices change and reinvesting any dividends that are received. Creating synthetic index fund portfolios: Futures can be used to create portfolios that have cash flows characteristics similar to an index fund portfolio. An interesting example of users of stock futures as hedging vehicles are brokers and dealers in equities. Hedging stock portfolios: The objective of hedging with stock index futures is to reduce or eliminate the sensitivity of an equity portfolio to changes in the value of the underlying index. Risk management and hedging Overview. Otherwise arbitrage trades are possible. Index futures can provide a means of cheaper access to such a portfolio. by the cash-forward relationship. The sale of stock futures against a stock portfolio creates a hedged position with returns very similar to those of a short-term. fixed-income security. Stock index futures provide a means of adjusting. attractive prices available on the futures contract. As with interest rate and currency futures stock index futures prices and forward prices may differ because mark-to-market payments on -futures introduce an element of reinvestment risk that cannot be fully hedged. 16 . or the difficulty of moving funds quickly and on a large scale into and out of particular stocks. or eliminating exposure to the fluctuations of overall stock market Stock index futures strategies may be preferable to other means of adjusting and managing equity exposure because of cheaper transaction costs. acquiring.
Expressing a market view Outright trading: Futures are a natural instruments to express views on future exchange rate movements. and leave the returns and risk component associated with the company-specific features of the stocks in the portfolio. the different tax treatments of those returns may make it advantageous for some investors to use equity futures. All profits and losses on stock index futures are effectively treated as long-term capital gains and losses.Capitalizing on different tax treatment of futures and equities. one can take on a considerable amount of market risk via index futures and reap the reward of being correct in a forecast of the stock market direction. Spreads: A wide range of speculative strategies are possible by mixing stock index futures contracts of different maturities and or different underlying indexes. Stock index futures can be used to create portfolios that have cash flows characteristics similar to an index fund portfolio. Capitalizing on stock selectivity. The strategy that should be employed is to sell stock futures up to reduce or eliminate the market-related component of that portfolio's risk and returns. 17 . Since a deposit of less than 10 percent is required to purchase or sell a stock futures contract.
For example. The purchaser of the option pays a market-determined price (or premium) in order to have the right --but not the obligation-. Conversely. for a call. If the market price of the underlying is below the call option's strike price. whichever is greater. * A put option confers upon its holder the right to establish a short (selling) futures position. to put options 18 . the futures position may be established by the option holder on any date up to a pre-determined expiration date at a pre-determined price (the strike price). There are two types of options on futures: * A call option confers upon its holder the right to establish a long (buying) futures position.OPTIONS ON FUTURES Definition and Pricing Definition and types of options. "Moneyness" of options. The key to options is to understand that holding an option represents a right rather than an obligation. The intrinsic value or moneyness of an option is the higher of its value if it were to be exercised immediately and zero (its value if it is not worth exercising). In either case. The same applies. if the market price of the underlying is above the option's strike price. the option has exercise value and is said to be in the money.to establish the corresponding futures position by exercising the option at some time in the future. the option has no exercise value and is said to be out of the money. the writer (or seller) of the option receives the premium when the option is issued and must stand ready to accept the corresponding futures position at any time duning the life of the option. but in reverse.
The price you pay for having the security offered by an option 19 . With a futures position. There are options on all the types (though not necessarily on all the specific contracts) of financial futures. If the price goes against you. you must pay the daily settlement variation when the price goes against you. Hedgers and investors might want to use options on futures rather than futures themselves for the following reaso. Among the most liquid option contracts (and the corresponding exchanges where they are traded) are: *Short-term interest rates: Eurodollars (at the CME) *Longer-term interest rates: US Treasury bonds and notes (at the CBOT) *Currencies: Deutschemarks and Yen (at the CME) *Stock-indexes: S&P500 (at the CME) Pricing models: A commonly used pricing model for options on futures is the Black model. yield the following futures positions: bought call if exercised long futures bought put by the party short futures sold call long the short futures sold put option. the options on futures. There is no downside risk to buying an option. you let the option expire worthless and pay no more. yields long futures Underlying instruments. Use of options on futures versus use of futures.: *Creating asymmetric payoffs on the upside and downside. if exercised. which is an extension of the Black-Shoes model originally derived for pricing equity options.Futures positions at option exercise: To summarize.
Thus. The volume traded on options on futures is much larger than on equivalent options on the cash instruments. This makes options on futures easier to hedge dynamically since one does not need to worry about financing of positions in the underlying. if you are willing to accept the risk of an unlimited downside exposure. and interest rate cap (i. liability or cash flow being hedged is of a contingent nature. corporation will lose its profit margin if the yen appreciates relative to the dollar at the time the Japanese firm agrees to the contract.S. 20 . The U. might want to hedge market volatility. which takes place in a month. or actually express views on the basis of market volatility.is the upfront premium. Trading volumes. firm to hedge the contingent payable by buying options on yen futures. Only options allow them to isolate the volatility component on the basis of which they can hedge or trade *Contingent contracts. * Hedging or trading on the basis of market volatility.S. you might consider selling an option and collect the premium upfront. Some users. For example. suppose you are negotiating with a Japanese company for electrical parts. whether to provide parts at the agreed upon prices.e. Hedging example: floating-rate note issuance. it may pay for the U. This is due to the fact that futures are leveraged instruments. The Japanese company will decide at the next board meeting. Futures are not directly affected by changes in market volatility. whether futures or options on futures are utilized by traders and corporate treasurers depends on their preferences on the risk/reward structure. however. Conversely.. Options on futures can be used instead to insure against adverse interest rate moves. Options might be suitable if the asset. In this case. long a put on Eurodollars) allows the borrower to take advantage of favorable rate moves while limiting the damage done by a rises in rates. For a fixed price (the option premium).
Liquidity is provided to a large degree by locals (individuals trading on their own capital) trading in the pit. Economic importance of futures. IMPORTANCE OF FUTURES MARKETS Summary. most of the action happens in the future. Futures. Over the last decades. and given a few applications illustrating how these contracts would be used by risk managers and investors. They are not per se a financing or investment vehicle but rather a tool for transferring price risks associated with fluctuations in asset values. allow economic agents to fine tune the structure of their assets and liabilities to better suit their risk preferences and market expectations. users will only feel comfortable using derivatives markets if they are liquid and deep enough to allow investors to rebalance their portfolios in response to new information at low cost. Because they bind buyer and seller for a pre-specified period of time. Market liquidity: A market is liquid when traders can buy and sell without substantially moving the price against them. unlike in cash markets. or else by major financial institutions trading in automated systems. others to take on risk on the basis of particular market views. and derivatives generally. explained some of the basics regarding how they are priced. Liquidity typically arises when there are individuals or institutions which continuously wish to buy or sell. Some may use them to spread risk. financial institutions and corporations and have been successfully integrated into risk Management and yield enhancement strategies.Liquidity and market depth In derivatives markets. Futures as a building-block: Futures have been a key instrument in facilitating the modem trend of separating conventional financial products into their basic 21 . We have investigated some of the features of futures contracts. futures have become widely accepted by money managers.
In so doing. derivatives have contributed decisively to the integration of financial markets. Futures' features. * Prices are determined by a competitive market system (open outcry or electronic bidding).components. Also. 22 . The surge in financial futures. and as such provide for substantial leverage. Financial management is quickly becoming an exercise in reducing financials structures into their basic elements and then reassembling them into a preferable structure. While the following are noteworthy advantages that futures have over forwards. * Futures are bought or sold on margin. they allow not only the reduction or transformation of risk faced by individual investors but also the sheer understanding and measurement of risk. Participants know all transaction prices and there are no negotiated deals and no multiple phone calls to get price quotes. the volume of financial futures now dwarfs the volume in traditional agricultural contracts. * Futures are relatively inexpensive to execute (negotiable commission rates). Without resorting to tedious quantification the astounding growth and importance of derivatives can be illustrated by the fact that the value of exchange-treaded Eurodollar derivatives( futures and options)i s now roughly 13 times the value of the underlying market. In the process. it should be noted that our goal is to illustrate how futures can be used effectively as an investment alternative and as a risk transfer mechanism. Financial futures (along with options) are best viewed as building blocks. *All prices and information are available continuously.
23 . *Audit systems and safeguards enforced by regulatory authorities. *Counterparty credit risk of non-performance is negligible. Stock Index Futures The National Stock Exchange and the Bombay Stock Exchange have introduced stock index futures. Futures on Individual Securities Futures on individual securities were introduced in India in 2001.*Positions are easy to reverse if the opinion about market conditions and prospects changes. The National Stock Exchange and the Bombay Stock Exchange have introduced futures on individual securities. Offsets of longs and shorts prevent a bloating of the balance sheet and tying up of credit lines that can become a problem with over-the-counter derivatives. On the other hand. The Bombay Stock Exchange has a stock index futures contract based on Sensex. OTC trading allows more flexibility in establishing contract terms and avoids the need for daily monitoring of mark-to-market positions and margin account. EQUITY FUTURES IN INDIA Equity futures are of two types: stock index futures and futures on individual securities. Both the type of equity futures are available in India. exchanges and futures commission merchants provide a level of integrity for the marketplace. The National Stock Exchange has a stock index futures contract based on S&P CNX Nifty Index. The list of securities in which futures contracts are permitted is specified by Securities Exchange Board of India.
24 . Many kinds of futures instruments have been developed and the use of futures has received a great deal of attention. US Treasury Bills. Eurodollar deposits. Futures are not only a financing or investment vehicle. S&P index etc… Generally futures allow economic agents to fine-tune the structure of their assets and liabilities to suit their risk preferences and market expectations. The volume of trading in financial futures dwarfs the volume in traditional agricultural contracts. but it is a tool for transferring price risks associated with fluctuations in asset values.1.2 SUBJECT BACK GROUND FOR THE STUDY Futures market plays an important role in the world of finance. During the last decades the financial products into their basic components. currency or stock index. “A financial futures in a futures contract in a financial instrument like treasury bond.” Eg: Financial futures.
1. Financial futures have become the corner stone of financial management. Futures have facilitated the modern trend of separating conventional financial products into their basic components. Futures have been a key instrument in facilitating the modern trend of separating conventional financial products into their basic components. financial institutions and corporations have been successfully integrated into risk management and yield enhancement strategies. 5.3 NEED FOR THE STUDY The needs for the study of financial futures are: 1. 3. 2. Futures are relatively in expensive to execute. 25 . Financial futures play a prominent role in risk management. 6. 4. Futures have become widely accepted by money managers.
Research Design is the basic frame work which provides the guidelines for research. The research design specifies the method for data collection analysis. There are mainly two methods of collecting data, primary and secondary data collection.
2.2 STATEMENT OF THE PROBLEM
Trading on options give lot of volatility to futures market. Futures markets becomes at times unpredictable compare to SENSEX/NIFTY movements. The researcher feels an indepth study in this area, the price movements of futures with respect to SENSEX or nifty is imperative.
2.3 REVIEW OF LITERATURE
Basic futures contract design Definition. A futures contract is a commitment to buy or sell a fixed amount of standardized commodity or financial instrument at a specified time in the future at a specified price established on the day the contract is initiated and according to the rules of the regulated exchange where the transaction occurred. Once the trade clears, the buyer and corresponding seller of the futures contract are not exposed to each other's credit ri3k. Rather, they individually look to the clearinghouse for performance, and vice versa. Futures as a derivative security. A futures contract is a financial derivative of the commodity on which it is based in the sense that it is an arrangement for exchanging money on the basis of the change in the price or yield of some underlying commodity. Timing of cash and commodity flows. Like other derivative securities, futures contract is an agreement to do something in the futures -- no goods or assets are exchanged today. A cash market transaction involves an agreement between two counterparties to buy or sell a commodity for cash today (perhaps for delivery in a couple of days). In a forward 27
market traction, delivery and settlement of the commodity for cash will occur at a single future date with no intervening cash flows. In afitres market transaction, delivery and settlement will also occur at a single future date but there will be daily (or more frequent) cash flows reflecting intervening price movements in the underlying commodity. Value of futures contracts at the time of contracting. Since there is no exchange of neither commodities nor cash payments at the time of contracting of futures contracts, such contracts must have a zero net present value at their inception. Value of futures contract as spot price changes. Once the futures contract is entered into, subsequent movements in the (spot) market price of the commodity create value for either the long futures position (i.e., the buyer) or the short futures position (i.e., the seller). For instance, a rise in the spot price of the commodity will benefit the long as he has bought the commodity under the futures contract at a fixed price and can now expect to sell it in the future at a higher price in the spot market. But since the long will not realize this gain until the settlement of the futures contract, this creates a credit exposure to the extent of the net present value of the futures contract. The futures contract will now be a positive net present value investment for the long and an obligation for the short.
Closing a futures position. A futures position can be closed out before expiration of the contract by entering into an offsetting trade in the same contract for the samne amount.. Under physical delivery, investors that are long the contract must deliver to investors short the contract the underlying commodity of the contract according to the rules on commodity quality and timing established by the exchange.. The determination of the price of the commodity at expiration on which cash settlement amounts are calculated (the final settlement price) is made by the exchange under pre-specified rules. Types of underlving_instruments. Underlying every futures contract is a relatively active cash market for an asset or good. Futures contracts were traditionally based on standard physical commodities such as grains (corn, wheat, soybeans), livestock (live cattle and hogs), energy products (crude oil, heating oil) or metals (aluminum, copper,
deutschemark..g. quantity and quality of the underlying to be delivered.gold). among other characteristics. Contract terms. sugar. there are futures on several commodity indices (like the CRB and GSCI). the method of payment. Currencies: yen. the clearing house members and the clearinghouse itself guarantee fulfillment of futures contracts. Nikkei 225. futures based on financial commodities have flourished. Over the last two decades.LIBOR-based). and Treasury bills. futures contracts Futures and forward contracts are similar in the sense that they both establish a price and a transaction to occur in the future. forward contracts tend to be traded in over-the-counter (OTC) markets. gains and losses are settled daily in the form of margin payments. NYSE Composite. This serves to reduce credit exposure to intraday price movements Tradability. To ensure the liquidity of exchange-traded futures markets. the time and place of delivery. softs (coffee. In futures contracts. Cash flows and margining. contracts tend to be offered on standardized terms in terms of maturity. cocoa). contract size.. The margin requirements on futures contracts make them sufficiently immune to credit risk so that credit exposure is not a significant factor in pricing. offshore or euro-deposits (e. This makes futures contracts particularly well suited for trading in organized exchanges. margining requirements and trading hours. Forward contracts will trade on the basis of price and credit characteristics of the counterparty. The buyer and the seller both have 29 . Bonds and notes: Treasury securities. Forward vs. For this reason. B. pound (against the dollar or crosses) Equity indices: S&P500. Credit exposure. In forward markets cash changes hands only on the forward date In futures markets. In addition. such as those based on: Money market interest rates: certificates of deposit.
e. are regulated by identifiable entities which are either governmental (like the Commodity Futures Trading Commission in the U. Examples of related derivatives are interest rate swaps and interest rate futures.an exposure to the clearing house (and the clearing house to them). Expressing market views. Since forwards are a bilaterally negotiated agreement. 30 . Risk management.S. Such trades by definition cannot (indeed. (ii) risk management and hedging.." to put it in more blunt terms). FINANCIAL FUTURES: USES AND USER Uses. on the other hand. Hedging can be performed on a single tansaction (or instrument) basis or on an aggregate (portfolio or firm) basis. should not) be fully hedged.) or set up by the industry itself. and (iii) taking trading positions on the basis of market views (or "speculating. rather than to each other. based on observed short-term price movements). Financial futures can be used as devices for: (i) arbitrage or yield enhancement.e. Exchangetraded futures. Financial futures are an efficient way of taling bets on the market on the basis of traders' views. Regulation. Sometimes the prices of futures can be related as well to those of other derivatives which are based on the same (or similar) underlying commodities. and futures on three-month LIBOR and on one-month LIBOR By isolating each characteristic of some underlying security with a derivative instrument. Examples of single transaction hedging might include anticipatory hedging for debt or equity security issuance or currency hedging for foreign trade transactions. driven by economic conditions and trends) or technical (i. Examples of aggregate furm hedging include asset-liability gap management and portfolio duration management Financial futures are particularly apt for managing foreign currency and interest rate risk. there is no formal regulation of forwards nor is there a body to handle customer complaints. arbitrage. all arbitrage risk can be eliminated.. whether these are fimdamental (i.
Individuals and locals a:e more likely to use them for speculation and arbitrage. or a combination of these. Financial institutions. expressing market views is not riskless. the timing of expected market movements.g. changes in the spread between market segments (e. including municipal and state organizations and foundations are more likely to use them to hedge their commercial. Futures can be used to express views on general market direction. investment or borrowing activities. Users.. investment banks. or the "Merc") Chicago Board of Trade (CBOT) Tokyo International Financial Futures Exchange (TIFFE) Tokyo Stock Exchange (TSE) London Intemational Financial Futures and Options Exchange (LIFFE) Marche a Terme International de France (MATIF) in Paris Singape-e Interational Monetary Exchange (SIMEX) Deutsche Terminborse (DTB) in Frankfurt New York Futures Exchange (NYFE) Mercado Espafhol de Futuros y Opciones Financieras (MEFF) in Barcelona 31 . credit. commodity quality or cross-country differences).basic functions. brokerage firms. Non-financial corporations. WORLD FUTURES EXCHANGES Exchanges are formal organizations whose purpose is to concentrate order flow in order to facilitate competition and to reduce transaction costs involved in searching for counterparties. The users of financial futures are naturally given by their uses. Unlike pure arbitrage.although trade construction might be such as to immunize particular kinds (or dimensions) of risk. The principal financial futures exchanges in the world are: Chicago Mcrcantile Exchange (CME. including commercial banks. fund managers and insurance companies will use futures for their thrc:.
2. 32 . magazines etc.. To study the amount of risk of Financial Futures of NSE in the month of March with reference to Banking and Pharmaceutical industries.5 SCOPE OF THE STUDY: This study is done mainly under the ten companies of NSE Nifty. Five companies from Banking and five from Pharma industry are taken for the study.6 RESEARCH METHODOLOGY This study entitled ‘A study on the role of Financial Futures with reference to NSE Nifty is mainly done in Banking and Pharmaceutical industry. internet. To study the volatility of futures with reference to Banking and Pharmaceutical industries.2. The results cannot be generalized.4 OBJECTIVES OF THE STUDY • • • To study on the financial futures with reference to NSE Nifty. journals. 2.7 TOOLS FOR DATA COLLECTION Secondary Data: It is collected from books. 2. Secondary data is mainly used for the study.
Σy n Σ x2 – (Σx)2 X = market return For calculating ‘x’ the NSE share price is taken.9 LIMITATIONS OF THE STUDY Time constrains Geographical constraints This is restricted to Banking and Pharmaceutical Industry 33 .2. X= closing price – opening price * 100 Opening price Y = stock return For calculating ‘y’ the NSE future value is taken Y= closing price – opening price *100 Opening price 2.8 METHOD OF ANALYSIS The formula used for calculation are: β = n * Σxy – Σx .
subject background of the study and need for the study. Corp Bank. 34 . Syndicate Bank. scope of the study and about the methodology used by the study. CIPLA. Punajb National Bank. Glaxo and Sun Pharma. Chapter 3: It deals with the Company Profiles of ICCI Bank. objectives. Dabur. Ranbaxy.2. Conclusion and Recommendations.10 CHAPTER SCHEME Chapter 1: Introduction deals with the introduction to futures. review of literature. Chapter 4: This chapter deals with the Analysis and Interpretation of Data Chapter 5: It gives the Summary of Findings. Chapter 2: Research Design deals with the statement of the problem. IOB.
CHAPTER 3 PROFILE OF COMPANIES 35 .
USD 5. ICICI Bank Towers..Kamath. Chanda Kochhar Loans. Investment vehicles.1 ICICI BANK ICICI Bank Type Founded Headquarters Private BSE & NSE:ICICI. ICICI Bank has total assets of about USD 56 Billion (end-Mar 2006). Savings. Mumbai India N Vaghul. ICICI Bank offers a wide range of banking products and financial services to corporate and retail customers through a variety of delivery channels and through its specialized subsidiaries and affiliates in the areas of investment banking. life and non-life insurance.com Key people Products Revenue Website ICICI Bank (formerly Industrial Credit and Investment Corporation of India) is India's largest private sector bank and second largest overall. Nachiket Mor. the Stock Exchange. During the year 2005 ICICI bank was involved as a defendant in cases of alleged criminal practices in its debt collection operations and alleged fraudulent tactics to sell its products 36 . Bandra Kurla.icicibank. K.79 billion www.3. and about 2400 ATMs. a network of over 619 branches and offices. SBI Life (Insurance) etc. venture capital and asset management. Mumbai and the National Stock Exchange of India Limited and its ADRs are listed on the New York Stock Exchange (NYSE). NYSE: IBN 1955 (as Industrial Credit and Investment Corporation of India) ICICI Bank Ltd. ICICI Bank's equity shares are listed in India on stock exchanges at Kolkata and Vadodara.V. Credit Cards.
and is widely seen as a sophisticated bank able to take on many global banks in the Indian market. car loans etc. ICICI Bank is the largest issuer of credit cards in India . Hong Kong. It has operations in the UK. The bank is expanding in overseas markets. ICICI Bank now has the largest market share among all banks in retail or consumer financing.ICICI Bank which undertook normal banking operations . The bank is aggressively targeting the NRI (Non Resident Indian) population for expanding its business. All this changed in 1990s. ICICI bank now has the largest market value of all banks in India. It has tie-ups with major banks in the US and China. there were rumours that ICICI had a large proportion of Non Performing Loans ("NPA". Singapore and Canada. before SBI caught up with it.in particular to the steel industry. often at concessional rates. 37 . It acquired a small bank in Russia recently. ICICI was not a bank . These funds were deployed in large corporate loans. ICICI borrowed funds from many multilateral agencies (such as the World Bank).ICICI was established by the Government of India in the 1960s as a Financial Institution (FI. and nor was it required to comply with Indian banking requirements for liquid reserves. ICICI founded a separate legal entity . there has been a general revival in Indian industry (and metal based industry in particular).it could not take retail deposits. It is widely believed that the proportion of NPAs has come down to prudent levels (even if it were high earlier). At the time of the reverse merger. Since 2002. The experiment was so successful that ICICI merged into ICICI Bank ("reverse merger") in 2002. as they are known in India) on its books .It was the first bank to offer a wide network of ATM's and had the largest network of ATM's till 2005.taking deposits. other such institutions were IDBI and SIDBI) with the objective to finance large industrial projects. credit cards.
NSE:PNB) Lahore. on July 19.PNBIndia.com Products Revenue Slogan Website Punjab National Bank (PNB). The Government of India nationalized the bank. along with 13 other major commercial banks of India.D. USD 2.. India Chairman and M.32 billion (2005) . Insurance etc.2 PUNJAB NATIONAL BANK Punjab National Bank Type Founded Headquarters Key people Industry Public (BSE. 1895 (British India) New Delhi. Mr.Gupta Banking Insurance Capital Markets and allied industries Loans. established in 1895 in Lahore by Lala Lajpat Rai. S. 1969. Credit Cards.. Savings. is the second largest public sector commercial bank in India with about 4500 branches and offices throughout the country.3. 38 .C. Investment vehicles.the name you can BANK upon www.
Credit Cards.000. M. The business started with a capital of Rs. established in 1925 in Udupi (Karnataka state. By 1937 it had secured its membership as a Clearing House at Mumbai. Initially the bank collected as low as 2 annas from the door steps of the depositors daily through its agents.Insurance.in/ Key people Industry Products Revenue Slogan Website Syndicate Bank. the bank was known as Canara Industrial and Banking Syndicate Limited. Pai. along with 13 other major commercial banks of India. by the Government of India. The bank. The primary objective of business was to extended financial assistance to local weavers.3 SYNDICATE BANK Syndicate Bank Type Founded Headquarters Public (BSE & NSE) Udupi. T. USD bil Faithful and Friendly (English) & Viswasaneeya Hitheshi (Sanskrit) syndicatebank.3. The first branch of the bank started its operations in the year 1928 at Brahmavar in Dakshin Kannada District. Investment vehicles. 1969. 39 . 80. Karnataka India & Corporate Office Bangalore Chairman C P SWARNKAR Banking. A. is one of the oldest and major commercial bank of India. At the time of its establishment.Capital Markets and allied industries Loans. Bajaj Allianz Life Insurance (Insurance) etc. India) by Upendra Ananth Pai. Savings. Vaman Kudva and Dr. was nationalized on 19th July. 1925 (as Canara Industrial and Banking Syndicate Limited) Head Office. Manipal.
in Muscat (1984). By 1989 it opened its 1500th branch at Hauz Khas. 20 banks merged with the Canara Industrial and Banking Syndicate Limited this included the Maharastra Apex Bank Limited and Southern India Apex Bank Limited. National Stock Exchange. Syndicate Bank sponsored the first regional rural bank in India by name Prathama Grameena Bank. From 1953-1964. Delhi.This type of system where in the agents of the bank come doorsteps to collect deposit is still prevailing in India and is referred as Pigmy Deposit Scheme. The name of the bank was changed to Syndicate Bank Limited in the year 1963 and the head office of the bank was shifted to Manipal. Mangalore Stock Exchange and Bangalore Stock Exchange. in Doha (1983) and Musandam Exchange Co. It took over Al Shabei Finance and Exchange Co. 3. The stocks of the Syndicate Bank are listed on Bombay Stock Exchange. Currently it has over 1900 branches. The bank expanded its operations not only on the domestic front but also overseas.4 CORPORATION BANK CORPORATION BANK 40 .
Credit Cards. 1906 Corporation Bank. and operates from several branches in India. founded in 1906 in Udupi.27 Crore (2006) A Premier Government of India Enterprise www. Mangaladevi Temple Road Pandeshwar Mangalore 575 001 India Chairman B. The Bank is a Public Sector Unit with 57.87% of Share Capital is presently held by the Public and Financial Institutions. Karnataka state. 054. CORPORATE OFFICE . Savings.83 crore (2006) Rs 100. The Bank came out with its Initial Public Offer (IPO) in October 1997 and 37. 5000 (USD 100). Investment vehicles. has currently (31 March 2004) 10. The bank was founded with an initial capital of Rs.com Key people Industry Products Revenue Net income Slogan Website Corporation Bank. 3.5 INDIAN OVERSEAS BANK IOB 41 .corpbank. NSE:CORPBANK) Udipi. etc. and first day’s canvassed resources of less than one USD 1.176 full time employees. India. Rs 862. The bank has the distinction of the first Indian bank to publish its financial results (199899) conforming to US GAAP.Type Founded Headquarters Public (BSE.3.17% of Share Capital held by the Government of India. Sambamurthy Banking Loans.92 crores as on 31 March 2005. is one of the Indian banks in public sector. The Bank’s Net Worth stood at Rs.
64 Crs and Advances at Rs.6. a pioneer in many fields .Ct.M. Deposits stood at Rs.Banking.3.23 Crs at that time. 3.at Karaikudi and Chennai in India and Rangoon in Burma (presently Myanmar) followed by a branch in Penang. IOB had the unique distinction of commencing business on 10th February 1937 (on the inaugural day itself) in three branches simultaneously .M.Indian Overseas Bank (IOB) was founded on February 10th 1937. At the dawn of Independence IOB had 38 branches in India and 7 branches abroad.6 RANBAXY LABORATORIES 42 . Chidambaram Chettyar. by Shri. Insurance and Industry with the twin objectives of specializing in foreign exchange business and overseas banking.
7 CIPLA CIPLA Limited 43 . The CEO of the company is Malvinder Mohan Singh. 3. Chief Mentor.178 billion (2005) Employees 1100 in R&D Website www.Ranbaxy Laboratories Limited Type Public Founded 1961 Headquarters Key people Gurgaon. CEO & MD Industry Pharmaceutical Products Generic drugs Revenue $1. Ranbaxy went public in 1973. Executive Vice Chairman Malvinder Mohan Singh. Chairman Brian Tempest. It exports its products to 125 countries with ground operations in 46 and manufacturing facilities in seven countries. India Tejendra Khanna.com Ranbaxy Laboratories Limited is an Indian company incorporated in 1961.ranbaxy. It is India's largest pharmaceutical company. Haryana. It is ranked among the top 10 generic companies worldwide.
Type Founded 1935 Headquarters Key people Mumbai. Hamied (CMD). 1936). stavudine and Nevirapine).cipla. Industrial & Pharmaceutical Laboratories is a major Indian pharmaceutical company. something difficult elsewhere because the three patents are 44 .1 billion (2005) Employees ??? Website www.8 billion (2005) Rs. so in money terms Cipla's medicines are probably not in top spot). Today (2007). Cipla ignores foreign patents on these drugs where no Indian law is broken in the process. The customary treatment of AIDS consists of a cocktail of three drugs. 24. best-known for manufacturing economical anti-AIDS drugs. While this sum remains out of reach for many millions of people in 'Third World' countries. K. Cipla is the world's largest manufacturer of antiretroviral drugs to fight HIV/AIDS. Cipla produces an all-in-one pill called Triomune which contains all three substances (Lamivudine. By doing so Cipla has reduced the cost of providing antiretroviral to AIDS patients from $12. charitable sources often are in a position to make up the difference for destitute patients.000 (and beyond) to around $300 per year. and its Chairman today is Yusuf Hamied (b. Chairman Industry Pharmaceuticals Revenue Net income Rs. India Y. as measured by units produced. the founder's eldest son. distributed and sold (multinational brandname drugs are exponentially more expensive. 4. The company was founded in 1935 by Khwaja Abdul Hamied.com Cipla founded as The Chemical.
held by different companies. 3. This contains Lamivudine. Zidovudine and Nevirapine. with the name Duovir-N.8 DABUR 45 . One more popular fixed dose combination is there.
with brands like Dabur Amla. 46 . It is most famous for Dabur Chyawanprash and Hajmola. S. Burman. Dabur Chyawanprash. where it is registered. near the Indian capital of New Delhi.b does toxicology tests and markets ayurvedic medicines in a scientific manner. The company. Dabur Chyawanprash. through Dabur Pharma Ltd. Barman Industry Health Care.C. US$ 420 million) during the fiscal year 2005-2006. Food Products Dabur Amla.com Dabur India Limited is the fourth largest FMCG Company in India with interests in Health care.dabur. Dabur has a turnover of approximately Rs. Uttar Pradesh. Dabur has manufacturing operations in India.K. and is now led by his greatgrandson V. Africa and the United Arab Emirates. as well as exports to Australia. Vatika. Hajmola & Real. Hospitals. Their growth rate rose from 10% to 40%. They have researched new medicines which will find use in O. India.03 crore Website www. BSE) Founded 1884 Headquarters Ghaziabad Key people V. The company headquarters are in Ghaziabad. Dabur operates in more than 5 countries and has sales worldwide. C.T all over the country therein opening a new market. 19 billion (approx.Dabur Type Public (NSE. The company was founded by Dr. schools and call centers. Personal care and Food products. Hajmola & Real Revenue Rs 1375. Burman in 1884 as a small pharmacy in Calcutta (now Kolkata). Vatika. In two years the growth rate expected by them to change two folds. West Bengal. India. West Asia. Africa and Europe.
a subsidiary of Dabur India is expecting to grow at 25%.9 SUNPHARMA Sun Pharmaceutical Industries (Sun Pharma) is a major producer of specialty pharmaceuticals and active pharmaceutical ingredients. The company was set up in 1993 and now has sales worth Rs.. has project sales of Rs 100 crore in next three years.12 billion. Dabur foods mainly supplied beverages to institutional customers.Dabur Foods. In 47 . It will therefore increase its range of products to include tomato based products. 3.
8 billion (2006) Employees Over 100. London. Detroit-based Caraco Pharm Labs. respiratory. United Kingdom Key people Sir Chris Gent.com GlaxoSmithKline plc (LSE: GSK NYSE: GSK) is a British based pharmaceutical.10 GLAXOSMITHKLINE GlaxoSmithKline Type Public (LSE: GSK NYSE: GSK) Founded 2000. psychiatry. 3. diabetology. Chief Executive Julian Heslop. The same year the company also acquired Dadha Pharma in Tamil Nadu. central nervous system (CNS).728 (2005) Slogan "Do more. Business Sun Pharma brands are prescribed in chronic therapy areas like cardiology.. GSK is a research-based company with a wide portfolio of pharmaceutical products covering anti-infectives.gsk. Sun Pharma acquired the U. biologicals.S.1996.com/products Revenue Net income £23. Chairman Jean-Pierre Garnier. oncology and vaccines products. gastroenterology.2 billion (2006) £7. feel better. It also 48 . by merger of Glaxo Wellcome and Smith Kline Beecham Headquarters Brentford.gsk. live longer" Website www. and respiratory. neurology. gastro-intestinal/metabolic. and healthcare company. Chief Financial Officer Industry Pharmaceutical Products www.
nutritional drinks and over the counter (OTC) medicines 49 .has a Consumer Healthcare operation comprising leading oral healthcare products.
CHAPTER 4 DATA ANALYSIS AND INTERPRETATION Table 4.1 ANALYSIS OF ICICI BANK Date X Y X2 XY 50 .
9063 0.835 0.8225 2.56 .359 Σxy = 40.1603 6.269 0.678 0.4329 1.2323 0.963 4.402 -1.76 .728 0.532 21.13 1.330 -0.366 3.3990 53.1586 6.167 -2.658 -1.831 4.82 -0.924 Σx = -7.892 -0.201 -0.8032 0.314 0.791 -1.7312 0.409 -0.7693 – (-7.8537 Σ x2 = 163.952 -0.595 -1.724 -0.139 -2.737 0.612 1.979 0.326 -0. Σy n Σ x2 – (Σx)2 = 21*40.101 3.098 1.532 51 .271 16.297 -24.090 2.01-03-2007 02-03-2007 05-03-2007 06-03-2007 07-03-2007 08-03-2007 09-03-2007 12-03-2007 13-03-2007 14-03-2007 15-03-2007 16-03-2007 19-03-2007 20-03-2007 21-03-2007 22-03-2007 23-03-2007 26-03-2007 28-03-2007 29-03-2007 30-03-2007 1.916 -0.453 4.337 21* 163.630 1.780 -1.546 1.850 1.3124 0.13) 2 = 851.143 0.0403 37.591 -0.546 0.-7.98 0.13* 1.389 Σy = 1.5299 0.2410 0.482 -0.057 17.56 Source: Secondary Data β = n * Σxy – Σx .781 -1.5432 0.7662 5.225 -0.175 5.482 -2.875 0.329 -2.497 0.138 -7.192 -1.7693 1.6972 0.291 2.337 3.3540 1.152 -1.098 1.347 -0.329 0.3806 26.145 3.2222 14.1823 0.343 -6.427 0.-9.
254 Table 4. Therefore investment in ICICI futures is less risky.1 shows the beta value of ICICI futures and Nifty futures.3439.314 = 0. 52 . ICICI futures are less volatile.15 – 50.292 3388.836 = 861. Since the beta value is less than one.
673 3.028 1.896 -2.905 1.682 Y 3.008 -3.333 -3.614 1.505 2.18 XY -3.004 -1.388 6.007 3.250 27.485 10.864 1.615 -0.108 11.508 7.355 8.702 38.202 1.223 -5.760 -2.181 3.087 -1.613 2.593 0.211 3.515 -2.132 15.849 0.906 -6.931 -3.Table 4.2 ANALYSIS OF CORPORATION BANK Date 01-03-2007 02-03-2007 05-03-2007 06-03-2007 07-03-2007 08-03-2007 09-03-2007 12-03-2007 13-03-2007 14-03-2007 15-03-2007 16-03-2007 19-03-2007 20-03-2007 21-03-2007 22-03-2007 23-03-2007 26-03-2007 28-03-2007 29-03-2007 30-03-2007 X -0.214 -0.295 5.034 -0.088 13.770 -3.394 22.8208 42.923 3.865 -0.204 12.259 Σy = 18.155 Σxy = 592.078 -0.216 5.014 23.350 9.392 0.377 44.874 1.919 12.354 -3.931 0.901 1.907 0. Σy n Σ x2 – (Σx)2 53 .363 5.474 0.249 3.490 11.369 -3.02 Source: Secondary Data β = n * Σxy – Σx .333 X2 .604 2.365 20.601 Σx = -7.751 5.381 -0.937 3.588 -4.985 6.475 8.134 3.048 -0.483 19.249 13.361 Σ x2 = 229.378 -3.943 -0.25 15.452 11.232 12.538 4.391 1.095 13.50 -3.
333 21* 229. There fore investment in Corporation Bank is high risky.2 shows the beta value of ICICI futures and Nifty futures.175 0.254 4753.113 -1.303 1.-140.574 2.313 2.880 0.218 54 .501 4.396 25.096 XY -0. 2.164 53.705 X2 .338 -5.836 0.395 -0.682) 2 = 12432.076 -3.361 1.329 5.3 ANALYSIS OF INDIAN OVERSEAS BANK (IOB) Date 01-03-2007 02-03-2007 05-03-2007 06-03-2007 07-03-2007 08-03-2007 09-03-2007 12-03-2007 13-03-2007 14-03-2007 15-03-2007 16-03-2007 19-03-2007 X 0.500 0.682 * 18.490 -4.307 -0.268 -0.538 -0.18 – (-7.831 -0.084 0.952 -2.271 0.349 6.013 = 12573.458 -0. Table4.275 5.170 2.492 -4.-7.526 -1.78 – 59.574 3.790 27.644.552 2. Corporation Bank futures are highly volatile.009 1.212 -7.767 = 2. Since the beta value is more than one i.e.747 4.559 2.834 4812.42 .310 Y 2.= 21*592.404 3.658 -0.02 .268 1.697 1.607 0.644 Table 4.299 -2.808 -1.380 1.096 1.488 10.671 6.
03 – (--8.663 7.140 -1.802 Σ x2 = 138.26 = 1789.389 -1. There fore investment in IOB futures is less risky.248 Source: Secondary Data β = n * Σxy – Σx .129 Σxy = 90.408 -3.315 0.418 -2.919 2.674 Σx = -8.062 9.607 -1. Since the beta value is less than one.077 Σy = -12.204 -3.-8.455 -0.63 – 77.093 3.337 3.677 1.299 2.37 = 0.652 13.00 0.-105.578 2821.000 -0.248 .20-03-2007 21-03-2007 22-03-2007 23-03-2007 26-03-2007 28-03-2007 29-03-2007 30-03-2007 3.117 0.63 2898.902 4.79 2.083 9.463 2.368 1. IOB futures are less volatile.017 21* 138.959 -1.3 shows the beta value of IOB futures and Nifty futures.126 -3.017 11.79* -12.812 2.326 3.208 .179 -0.214 -4. 55 . Σy n Σ x2 – (Σx)2 = 21* 90.79) 2 = 1895.634 Table 4.
333 0.982 18.072 1.076 -3.492 -4.168 6.088 1.791 -1.077 Σy = -11.619 5.060 0.953 0.020 12.651 42.605 24.717 5.113 -1.939 -0.832 -3.787 2.485 -0.418 -2.377 7.902 4.431 -1.078 -2.463 2.005 1.214 -4.711 19.232 4.920 6.315 0.831 -0.114 0.626 -0.928 -0.267 -4.661 Y 2.25 5.490 -4.414 X2 1.474 0.814 0.036 3.4 ANALYSIS OF SYNDICATE BANK Date 01-03-2007 02-03-2007 05-03-2007 06-03-2007 07-03-2007 08-03-2007 09-03-2007 12-03-2007 13-03-2007 14-03-2007 15-03-2007 16-03-2007 19-03-2007 20-03-2007 21-03-2007 22-03-2007 23-03-2007 26-03-2007 28-03-2007 29-03-2007 30-03-2007 X 1.552 2.145 0.870 7.968 0.658 -0.018 1.957 28.705 2.015 -0.395 -0.781 -4.788 Σx = -18.792 15.088 Source: Secondary Data 56 .759 .330 9.170 2.443 -0.126 -3.500 -2.060 Σxy = 133.836 0.989 XY 3.091 -2.620 Σ x2 = 165.538 -0.965 -6.122 8.952 -2.051 14.909 3.204 -3.321 2.468 -0.733 18.190 4.006 4.Table 4.625 1.312 0.074 5.257 2.344 -2.717 5.
β = n * Σxy – Σx .694 50.563 -7.738 -1.130 3.5 ANALYSIS OF PUNJAB NATIONAL BANK Date 01-03-2007 02-03-2007 05-03-2007 06-03-2007 07-03-2007 X 3.719 1.-18.356 XY 20.414 21* 165. the Syndicate bank futures are less volatile and the investment in syndicate bank futures is less risky. Table 4.-212.984 0.680 72. Since the beta value is less than one in the month of March.114 3.105 3.852 3137.996 3485.697 28.4 shows the beta value of Syndicate Bank futures and Nifty futures.088 .661* -11.801 -1.848 .020 3.989 – (-18.492 1.823 X2 12.362 6.539 = 0. Σy n Σ x2 – (Σx)2 = 21* 133.832 Y 5.339 57 .23 = 2581.119 8.809 -3.661) 2 = 2794.769 – 348.822 Table 4.
980 3.157 1.158 4.453 -0.336 3.873 – (16.948 Σy = 8.239 -.08-03-2007 09-03-2007 12-03-2007 13-03-2007 14-03-2007 15-03-2007 16-03-2007 19-03-2007 20-03-2007 21-03-2007 22-03-2007 23-03-2007 26-03-2007 28-03-2007 29-03-2007 30-03-2007 1.721 -1.240 -3.041 0.096 14.053 3.333 – 287. Σy n Σ x2 – (Σx)2 = 21* 134.861 = 0.825 2.656 24.028 Σ x2 = 250.899 Source: Secondary Data β = n * Σxy – Σx .955* 8.435 2.447 3.955 10.472 = 2681.961 2.934 0.696 5.859 5.732 -2.768 -1.488 4980.103 1.391 0.778 1.857 2.052 -2.929 21* 250.811 -1.580 1.238 6.198 0.873 2.168 Σx = 16.669 12.322 1.067 4.538 58 .953 -1.879 – 151.920 -0.271 1.391 5268.955) 2 = 2832.955 1.905 3.085 0.863 -0.899 – 16.069 -1.198 -1.159 Σxy = 134.489 11.001 -1.814 1.448 8.579 3.929 2.143 0.606 -1.534 -1.173 29.566 27.195 0.093 0.206 0.394 -3.111 0.265 3.316 2.435 2.
636 29.830 1.942 -1.343 -1.227 0.176 -1.178 -0.096 -3.156 0.394 2.934 ΣXY=132. Table.473 36.201 0.858 2.664 1.089 1.381 5.446 -0.469 0.660 -0.514 0.213 15.151 0.328 -0.259 0.316 -1.336 0.503 0.047 -0.689 20.798 5.830 -4.343 ΣX=-8.710 -5.866 8.266 3.063 -1.657 1.353 1.397 -0.260 -0.673 0.226 -1.260 -1.363 0.887 1.387 2.485 -0.278 -2. Since the beta value is less than one.793 5.696 ΣY=-0.524 0.236 2.5 shows the beta value of Punjab National Bank futures and Nifty futures.645 26.666 -7.132 0. 4.580 5.299 -1.175 0.443 51.059 0.997 -0.704 4.024 27.548 Y 1.957 1. the futures of PNB is less Date 01-03-2007 02-03-2007 05-03-2007 06-03-2007 07-03-2007 08-03-2007 09-03-2007 12-03-2007 13-03-2007 14-03-2007 15-03-2007 16-03-2007 19-03-2007 20-03-2007 21-03-2007 22-03-2007 23-03-2007 26-03-2007 28-03-2007 29-03-2007 30-03-2007 X -0.667 0.803 ΣX2=174.926 X2 0.329 0.6 RANBAXY Source: Secondary Data 59 .189 3.976 27.098 0.803 2.294 0.062 volatile and investing in Punjab National Bank futures is less risky.295 -0.786 3.380 -1.Table 4.475 -5.83 XY -0.942 6.503 3.655 0.472 -2.031 5.125 0.189 15.
768 Table 4. Table 4.7 60 .915 3671.926 21* 174. Since the beta value is less than one.43 – 73. Σy n Σ x2 – (Σx)2 = 21*132.6 shows the beta value of Ranbaxy futures.-8. it is less volatile and investing in Ranbaxy futures is less risky.387 3598.068 = 2765.β = n * Σxy – Σx .83 – (-8.548 * -0.062 .548) 2 = 2773.362 = 0.302 – 7.
626 -0.047 -0.689 -0.981 ΣX= 6.738 * -0.948 7.696 ΣY= -0.445 2.193 0.316 -1.660 -0.701 -3.630 -0.204 2.261 -0.427 -0.176 -1. Σy n Σ x2 – (Σx)2 = 21*-19.496 0.152 0.957 1.737 0.294 0.329 0.023 0.847 – 6.831 2.024 0.390 -2.219 11.481 -0.473 1.719 -0.770 ΣXY= -19.381 5.171 -0.773 0.088 3.847 Source: Secondary Data β = n * Σxy – Σx .131 2.155 -0.093 0.020 -7.068 0.744 0.230 0.071 0.051 0.362 -1.096 -3.392 0.447 -0.423 3.252 -0.710 -5.672 0.676 4.974 2.687 3.94 61 .368 -4.492 7.358 2.486 0.328 -0.466 -2.543 0.738 Y 1.149 8.008 0.353 -3.553 0.697 -0.667 -1.739 -3.228 XY 4.743 -11.SUNPHARMA Date 01-03-2007 02-03-2007 05-03-2007 06-03-2007 07-03-2007 08-03-2007 09-03-2007 12-03-2007 13-03-2007 14-03-2007 15-03-2007 16-03-2007 19-03-2007 20-03-2007 21-03-2007 22-03-2007 23-03-2007 26-03-2007 28-03-2007 29-03-2007 30-03-2007 X 3.357 -0.962 -0.261 -1.114 1.005 -0.031 5.020 0.062 -1.007 15.94 X2 14.165 -0.655 0.848 ΣX2= 77.475 -5.189 3.
40 = -410.022 2.554 10.626 25.803 4.500 X2 9.297 -0.572 10.573 -3.173 0.173 1.751 0.988 -3.738) 2 = -416.957 4.21* 77.572 1.451 1576.956 2.635 62 .025 3.946 -2.038 13.146 11.356 -5.756 0.678 5.446 0.542 XY 1.257 -1.404 -2.489 0.26 Table 4.218 -3.336 1621.089 0.453 -1.151 5.911 -2.388 = -0.-6.152 -2.382 -3.474 11. Since the beta value of this future is negative.101 1.8 DABUR Date 01-03-2007 02-03-2007 05-03-2007 06-03-2007 07-03-2007 08-03-2007 09-03-2007 12-03-2007 13-03-2007 14-03-2007 15-03-2007 16-03-2007 19-03-2007 20-03-2007 21-03-2007 X -3.592 -1.788 – 45.054 Y -0.718 -4.703 2.228 – (6. Table 4.161 -0. this shows that when the market return of the futures is increasing its stock value is coming down.787 .870 0.7 shows the beta value of Sun Pharma’s futures.011 -1.049 1.223 -1.387 -3.428 -0.816 -2.663 12.131 2.472 12.121 -1.666 4.433 -2.525 -0.152 -0.090 1.256 0.631 8.
212 3.510 -1.878 3274.349 -4. Since the beta value is less than one.907 10.780 = 1420.825 3.22-03-2007 23-03-2007 26-03-2007 28-03-2007 29-03-2007 30-03-2007 3.359 ΣX= -14.311 -1.047 – 219.907 – (-14.942 -4.596 Source: Secondary Data β = n * Σxy – Σx .559 ΣXY= 74.001 2. Σy n Σ x2 – (Σx)2 = 21*74.84 9.210 1.845 6.771 16.8 shows the beta value of Dabur futures and Nifty futures.086 3.001 2 ΣX = 155.516 – 145.412 2.193 ΣY= -9.596 .725 2.687 -2.825 * -9.-14.068 1. it is less volatile and the investment in Dabur futures is less risky.184 19.362 1.023 4.825) 2 = 1566.638 3054.467 -1.465 Table 4.267 = 0. 63 .314 2.027 9.84 21* 155.
430 2.384 4.254 1.454 3.961 -3.112 8.349 0.557 -0.259 2.624 0.134 2.421 2.538 0.228 -2.421 7.820 5.084 XY 5.334 2.237 -0.373 1.271 -2.023 6.416 0.086 -2.435 -3.687 1.933 9.764 1.296 2.147 18.096 3.446 -0.108 ΣY= 1.901 0.345 -5.478 2 ΣX = 126.046 -2.907 -0.614 0.322 2.Table 4.390 2.818 1.449 25.154 0.935 -0.9 CIPLA Date 01-03-2007 02-03-2007 05-03-2007 06-03-2007 07-03-2007 08-03-2007 09-03-2007 12-03-2007 13-03-2007 14-03-2007 15-03-2007 16-03-2007 19-03-2007 20-03-2007 21-03-2007 22-03-2007 23-03-2007 26-03-2007 28-03-2007 29-03-2007 30-03-2007 X -2.823 -0.867 8.845 10.609 5.839 -1.872 2.022 8.400 1.692 ΣX= -7.150 2.507 6.201 -0.066 -1.489 -1.961 -1.189 9.046 0.649 1.760 0.84 Y -2.324 -0.586 -1.820 0.854 0.401 0.653 -2.969 0.731 0.312 0.043 -1.970 -2.584 -2.819 0.885 0.508 0.422 2.189 Source: Secondary Data 64 .766 ΣXY= 55.314 X2 6.259 2.207 2.202 9.392 3.
298 1.230 X2 .84) 2 = 1158.314 21* 126.015 -1.013 -1.969 .088 -4.764 65 .302 2647.539 -8.445 XY -0.-10.-7.482 3.189 .271 2586.46 = 1169.120 -2.176 0. Table 4.452 Table 4.930 Y 1.2 shows the beta value of CIPLA futures and Nifty futures.030 0.β = n * Σxy – Σx .764 – 61.84 * 1.691 -0.814 1.10 GLAXO Date 01-03-2007 02-03-2007 05-03-2007 06-03-2007 07-03-2007 X -0.756 0.0001 2.084 – (-7.418 0.304 = 0.232 15. Since the beta value is less than one. it is less volatile and investing in CIPLA futures is less risky. Σy n Σ x2 – (Σx)2 = 21*55.555 0.
392 -3.706 .437 1.1392 -3.7015 1877.903 0.134 1.507 -1.10.255 ΣXY= -9.826 .202 2.236 ΣY= -10.806 0.867 -2.138 -1.925 1.552 5.557 1.624 ΣX= 10.0006 2.052 21* 95.002 – (-10.403 1.353 -2.948 -2.706 Source: Secondary Data β = n * Σxy – Σx .651 2.424 3.066 4.856 2.045 -0.002 1.421 1.856 * -10.571 1. Σy n Σ x2 – (Σx)2 = 21*-9.432 5.807 -1.052 0.564 4.280 3.800 -5.482 -5.134 -3.192 1.08-03-2007 09-03-2007 12-03-2007 13-03-2007 14-03-2007 15-03-2007 16-03-2007 19-03-2007 20-03-2007 21-03-2007 22-03-2007 23-03-2007 26-03-2007 28-03-2007 29-03-2007 30-03-2007 0.589 0.347 0.851 -1.606 -2.944 -0.637 2 ΣX = 95.649 0.853 = -94.806 1.-109.055 2.132 2.724 1.0006 0.856) 2 = 203.062 1.025 0.262 -3.042 – 117.458 7.056 -0.142 -4.126 54.386 0.891 0.189 66 .092 0.025 1.126 -1.214 1.968 2.1245 1995.237 3.824 -4.621 0.235 -3.
= -. stock value is coming down. CONCLUSIONS & RECCOMMENDATIONS 67 .2 shows the beta value of Glaxo futures and Nifty futures.05044 Table 4. Since the beta value is negative it shows that when market return increases. CHAPTER 5 SUMMARY OF FINDINGS.
68 . 3. In the month of March 2007. Dabur and CIPLA futures are less risky. The financial future plays an important role in NSE Nifty. It shows that when the market value is increasing. PNB. IOB. The futures value of Glaxo & Sun Pharma is negative. The study shows that investing in Corporation Bank futures is high risky. its stock value will come down. investing in ICICI futures. Syndicate Bank. 2. 4.5. Ranbaxy.1 FINDINGS: The major findings of the study are: 1. There is relationship with share price movements of the valued of NSE futures.
or that lock in the price today of an exchange. From the banking industry futures of Icici bank. The study entitled ‘THE ROLE OF FINANCIAL FUTURES WITH REFERENCE TO NSE NIFTY’ was done with reference to Banking and Pharmaceutical industry. A futures contract is a standardized contract.2 CONCLUSION A financial future is a futures contract on a short term interest rate. Syndicate bank.5. to buy or sell a certain underlying instrument at a certain date in the future. They are agreements between two counter parties that fix the terms of an exchange. Futures or future contract at transferable specific delivery forward contracts. Indian 69 . at a specified price. In finance. Corporation bank. which will take place between them at some fixed future date. traded on a futures exchange.
Futures will helps to allow economic agents to fine tune the structures of their assets and liabilities to better suit their risk preferences and market expectations. Glaxo. Sun Pharma. Since the volatility of ICICI futures IOB. Ranbaxy. In March 2007. Financial futures can be used to dwarfs the volume in traditional agricultural contracts. Dabur are the companies taken from the pharmaceutical industry. 2. Syndicate Bank.Overseas Bank and Punjab National bank are taken. 4.3 RECOMMENDATIONS 1. 5. 70 . PNB. Dabur and CIPLA futures are less the investors can invest in these futures. the investors should be very cautious in investing into those futures. Cipla. 3. the investment in Corporation Bank futures is highly risky. Ranbaxy.
BIBLIOGRAPHY 71 .
• Bhalla V K. Vol. 10th edition. 05 Feb 19.Books: • Chandra Prasanna. ‘Investment Management and Security analysis’. Vol. 2007. Journals: • DALAL STREET.XXII.III. ‘Investment Analysis and Portfolio Management’. No. 72 . November 9.March 04. 6th edition. • Money and Finance. Investment Journal. Sultan Chand Publications. 2007. Tata McGraw Hill Publishing company.
com www.com 73 .Website: www.NSE India.Money control .
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