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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.
• Forward contracts are settled on the maturity date. This means that profits and losses on futures contract are settled daily. This means that the exchange becomes the seller to the buyer and the buyer to the seller. 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. Intermediation by the Exchange: In a traded futures contract the exchange interposes itself between the buyer and the seller of the contract. triggered by rumors. asset quantity. Marking-to-market: While forward contracts are settled on the maturity date. Price limits: Futures exchanges impose limits on price movements of futures contracts. The purpose of standardization is to promote liquidity and allow parties to the futures contracts to close out their positions readily. whereas futures contract are ‘marked to market’ on a daily basis. 4 . futures contracts are ‘marked to market’ on a periodic basis. This means that the profits and losses on futures contracts are settled on a periodic basis. Price limits are meant to prevent panic buying or selling. and maturity date. and to prevent overreaction to real information.
like gold. oil. 5 . currency . cotton. and wheat and orange juice have been in existence for nearly three centuries. Futures price= spot price+ present value of storage costsPresent value of convenience yield. COMMODITY FUTURES (STORABLE COMMODITIES) Futures contracts on various commodities. COMMODITY FUTURES (PERISHABLE COMMODITIES) For pricing futures contracts on the basis of arbitrage. Hence perishable commodities have to be analyzed differently. but are often defined on an interest rate index such as 3-month sterling or US dollar LIBOR. storable as well as perishable. while financial futures is a futures contract in a financial instrument like Treasury bond. 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. aluminum. rice. A commodity futures is a futures contract in a commodity like cocoa or aluminum. Futures price= Expected spot price – Expected risk premium FINANCIAL FUTURES A financial future is a futures contract on a short term interest rate (STIR). 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.FUTURES CONTRACTS: THE GLOBAL SCENE Broadly there are two types of futures: commodity futures and financial futures. Contracts vary. the asset has to be storable.or stock index.
or simply futures. converges towards the futures price on the delivery date. The price of the underlying asset on the delivery date is called the settlement price. Futures contracts. sets margin requirements. The exchange's clearinghouse acts as counterparty on all contracts. traded on a futures exchange. The seller delivers the commodity to the buyer. The pre-set price is called the futures price. but not the obligation. which differs from an options contract. Both parties of a "futures contract" must fulfill the contract on the settlement date. which gives the holder the right. the holder of a futures position has to offset his position by either selling a long position or buying back a short position. The future date is called the delivery date or final settlement date. at a specified price. The Eurodollar contract is the linchpin of the shortend interest rate futures contracts. then cash is transferred from the futures trader who sustained a loss to the one who made a profit. To exit the commitment prior to the settlement date. no comparable contracts exist for other currencies. 6 . In other words. a futures contract is a standardized contract. Other dollar-denominate short-term interest rate futures. A futures contract gives the holder the obligation to buy or sell. to buy or sell a certain underlying instrument at a certain date in the future. the owner of an options contract may exercise the contract. etc. are exchange traded derivatives. effectively closing out the futures position and its contract obligations. The settlement price. normally. SHORT-TERM INTEREST RATE FUTURES Contract specifications An assortment of contracts.In finance. or. if it is a cash-settled future.
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. although trading in it only started as recently as 1981.S. which is a dollar-denominate deposit with a bank or branch outside of the U. Eurodollar contract trading is de-facto available 24 hours.5% per annum) in decimal terms. a price of 96. the offer side of the cash money market).S. 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.Eurodollar futures The Eurodollar futures market is the most widely traded money market contract in the world.S. or with an international banking facility (IBF) located in the U. the rate at which a London bank is willing to lend dollars (i.S. Thus. 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). Eurodollar deposits differ from domestic term deposits or certificates of deposit in the U. The futures price is quoted as 100 minus the annualized futures 3-month LIBOR (e. 7 . (ii) heterogeneity of bank credits would systematically raise questions on the quality of the delivered asset. in that they are not regulated by U. at LIFFE in London and at SIMEX in Singapore.5 implies a futures LIBOR rate of 3.e. Basic contract specifications: The nominal contract size is $1 million and the underlying rate is the three-month LIBOR.. authorities and hence are not subject to reserve requirements or deposit insurance premiums.g. It is based on a ninetyday Eurodollar deposit.. Trading of Eurodollar contracts: Eurodollar contracts are now traded at the CME in Chicago.
T-bond that has at least I. maturities or underlying asset constitute a straight-forward extension. we need to understand how prices of futures contracts are related to the spot or cash market prices of the underlying asset. Of course.Pricing and arbitrage: Implied forward rates In order to understand how futures prices are established. few contracts actually go into delivery. bond futures are settled at expiration with physical delivery.S. applications with contracts based on different currencies. INTERMEDIATE. there may be as many as several dozen securities in the deliverable basket. all with different maturities and coupons. 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. Futures invoice price: When a bond is delivered into the bond futures contract.S.AND LONG-TERM INTEREST RATE FUTURES Contract specifications Deliverable securities: Unlike international bank futures contract. Treasury bond futures contracts allow delivery of any U. bond futures contracts generally allow for a range of bonds to be delivered against them. All examples drawn below are based on the threemonth Eurodollar contract. We will see that the market forces of arbitrage are used to price virtually all financial futures contracts. U. Plus any accrued interest on the bond: 8 . bond futures positions can also be unwound prior to delivery by offsetting futures transactions. Because this is more convenient for most futures users than physical delivery. years remaining to maturity (or to first call if the bond is callable). 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. Also unlike the T-bill futures contract. For example.
T-bond contract are shown in parentheses for illustrative purposes. Understanding the relationship between a futures contract and the deliverable basket is crucial to understanding the drive behind the arbitrage. Since then three futures contracts have been established on U. Other U. the table below lists the main international bond futures contracts. Treasury notes: a 10-year. The basis. They all have similar characteristics to their forerunner.S.S. it is the difference in cost between 9 . bond futures contracts designed along the lines of the U. The basis is the difference between a bond's price and the futures invoice price (as defined above). It is the delivery option of the short that makes valuing bond futures more complex than valuing international bank (euro) deposit futures. In other words. a 5year and a 2-year contract. medium.S. traded at the CBOT since 1977.Futures invoice price = futures price conversion factor + accrued interest Other contract terms: Exchanges set other futures contact terms as follows. was the first fut3ureo n long-tern interest rates. T-bond contract have spread internationally.S. The exchange will also set daily trading hours. there is an arbitrage relationship which holds the prices of the T-bond futures contract to the cash market. T-bonds).and long-term interest rate contracts: The U. the concrete specifications of the U. For illustration purposes. International bond futures contracts.S. Pricing and arbitrage Cash-futures relationship: Similar to short-term interest rate contracts. where they are traded and the description of their deliverable set. Delivery months on bond futures contacts are quarterly (March.000 for U. June.S. The contract size defines the par amount of the bond that is deliverable into the contract ($100. the last trading date and the last delivery period (one month). T-bond. September and December). Since 1932.
Accordingly.futures invoice price = clean cash price . Then one could: (i) buy (sell) the cheapest to.this conversion is performed simply by multiplying the decimal basis by 32. for instance.(futures price conversion factor) since dirty (or full) price = clean price + accrued interest. and (iii) immediately deliver (receive delivery of) the cash bond against the short (long) futures position. Otherwise there would be instantaneous risk less profit opportunities. Suppose. that the gross basis was negative (positive). The basis is generally quoted in 32nds rather than in decimal units . Basis arbitrate at futures expiration: At futures expiration. An excessive exposure to intermediate. 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. the gross basis must be equal to zero. 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.buying the bond in the cash market and buying a futures contract on it and having it delivered into the contract at expiration. we define the gross or raw basis as: Gross basis = dirty cash price .deliver bond in the cash market. The basis point value factor is the ratio of the change in the 10 . 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. (ii) sell (buy) a bond futures contract.
11 . * in combination with other bond futures contracts. Playing duration with futures fulfills the same objective as playing the bond market directly. trading on the basis of market views. requires by definition that not all risk be hedged. Going long the futures is a way of extending duration: it pays when the market is rallying and rates are falling. but with the convenience of the futures market in terms of narrow bid/ask spreads. Bond futures. as was the case with international bank deposit futures. Outright trading: Bond futures by themselves don't have duration. or * in combination with the underlying (typically the cheapest-to-deliver bond) in what amounts to basis trades. they contribute dollar duration to portfolios much along the lines of the cash bond. can be traded: * outright. on the contrary. easy reversibility of positions and low cash requirements. Expressing a market view Types of trades: The third application of bond futures. reduces market sensitivity to rate movements and performs well in a bear market. using spreads or butterflies that combine longs and shorts at different points in time or across countries. 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. But because they track the cheapest-to-deliver bond (driven by basis traders). 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. to express a view on market direction.
g. 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. DEM. most of which are traded at the CME and at LIFFE. 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.1so be held for shorter time horizon but then the position is subject to risk at the unwind. Finally. 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. Foreign currency futures contracts are available on all major currencies against the dollar (e. and in particular whether the cheapest-to-deliver goes on special in the repo market Short-term basis trading is in fact quite complex. there are futures 12 . CAD. A basis trade can -. AUD. Basis trading: Trading the basis from the long side is relatively risk less if the position is held to the futures expiration date. JPY. 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). average of bilateral rates against the dollar) at the CBOT. SRF. there are futures on a USD index (i. In addition. and can be used to take on risk subject to one's views in addition to as an arbitrage play.).Spread trading: As a word of caution. In a similar vein.e. CURRENCY FUTURES Contract specifications Types of contracts.. For instance. GBP. and (ii) the evolution of short-term rates. etc. as explained above. 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..
Futures are a natural instrument to express views on future exchange rate movements. meaning that at futures settlement the long receives the currency of denomination of the future and pays dollars). tend to have quarterly contracts with delivery in March.. 13 . Expressing a market view Outright trading.. bilateral exchange rates between two non-dollar currencies such as on JPY/DEM. They tend to require actual delivery. by far the most prevalent. Pricing and arbitrage: International interest rate parity Overview. the contract should be sold if one expects the yen to appreciate more than what is expected by the market. 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. Currency futures against the dollar. based on number of dollars per unit of foreign currency. Conversely. 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. Conversely. June.. i. i. More formally. As with interest rate futures. 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.on crosses. long yen and short dollars) is consistent with an expectation of an appreciation of the yen relative to the dollar. in the case of currencies. the prices of currency futures are bound by a basic arbitrage relationship with the underlying cash market. For instance.e. Contract specifications. However. September and December. the difference between forward and futures prices is less important than with interest rates. shorting the contract is consistent with an expectation of a yen depreciation relative to the dollar. Price quotes are on American terms.e.e. going long the JPY contract (i.
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 . Index construction: The weight of a stock in an index is the proportion of the portfolio tracked by the index invested in the stock. not every index correspond to a well defined portfolio of stocks (for example. those indexes constructed using geometric means). Stock market indexes are time series designed to track the changes in the value of hypothetical portfolios of stocks.STOCK INDEX FUTURES Contract specifications The underlying instrument. In other words. Physical delivery of stocks against a futures contract based on an index presents intractable difficulties. The most common weighting scheme is market value weighting. Treatment of dividends: Stock indexes are not usually adjusted for cash dividends. Futures contract specifications: All futures contracts on stock indexes are settled in cash. and index computation. used for example in both the S&P 500 and NYSE indexes. Stock indexes differ from one to another with respect to the range of stocks covered. only price changes. This implies that percentage changes in stock indexes do not track total returns on the corresponding portfolio of stocks but. Moreover. stock weighting. The stocks in the portfolio can have equal weights or weights that change in some way over time. 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. any cash dividends received on the portfolio are ignoring when percentage changes in most indexes are being calculated. Though returns on stock indexes of the same country are often highly correlated over time. relative performance can vary sharply over periods such as a month or a quarter. First.
* NYSE composite futures (NYSE). * Nikkei 225 stock average (CME). * Major market index (CME). Based on a portfolio of 225 of the largest stocks listed on the Tokyo Stock Exchange. The value of one futures contract is $500 times the index. following is a list of the main international stock indexes and futures contracts on these indexes: * S&P 500 (CME). For illustration purposes. * S&P 400 (CME). 15 . It does not correspond directly to any portfolio of stocks because of its use of geometric averaging. Based on a portfolio of 400 American stocks. The value of one fuLturesc ontact is $5 times the index. The index accounts for 80% of the NYSE. Based on a portfolio of all the stocks listed on the NYSE. Contains the prices of 1. * FT-SE 100 index (LUFFE). Based on a portfolio of 40 of the largest stocks listed on the London Stock Exchange. The value of one futures contract is $500 times the index. The value of one futures contract is GBP 25 times the index. 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. * Value Line futures (KC). The value of one futures contract is $500 tirmes the index. Based on a portfolio of 500 American stocks.700 American stocks. Based on a portfolio of 40 of the largest stocks listed on the Paris Stock Exchange. Based on a portfolio of 20 blue-chip American stocks listed on the NYSE. The value of one futures contract is FRF200 times the index. *CAC-4s0t ock index (MATIF). The value of one futures contract is $500 times the index. The value of one futures contract is $500 times the index.companies. Contracts traded.
An interesting example of users of stock futures as hedging vehicles are brokers and dealers in equities. acquiring. Managing index fund portfolios involves considerable oversight in terms of maintaining the correct weights as prices change and reinvesting any dividends that are received. ease of adjusting positions (liquidity). stock index futures prices should be related to the underlying cash market by a cost of carry relationship or. 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. Index futures can provide a means of cheaper access to such a portfolio. fixed-income security.Pricing and arbitrage Like futures on fixed income instruments and currencies. The sale of stock futures against a stock portfolio creates a hedged position with returns very similar to those of a short-term. 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. 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. Creating synthetic index fund portfolios: Futures can be used to create portfolios that have cash flows characteristics similar to an index fund portfolio. or the difficulty of moving funds quickly and on a large scale into and out of particular stocks. by the cash-forward relationship. 16 . in other words. Otherwise arbitrage trades are possible. Risk management and hedging Overview. attractive prices available on the futures contract. Stock index futures provide a means of adjusting.
Since a deposit of less than 10 percent is required to purchase or sell a stock futures contract. and leave the returns and risk component associated with the company-specific features of the stocks in the portfolio. Expressing a market view Outright trading: Futures are a natural instruments to express views on future exchange rate movements. Stock index futures can be used to create portfolios that have cash flows characteristics similar to an index fund portfolio. 17 . 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. Capitalizing on stock selectivity. 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.Capitalizing on different tax treatment of futures and equities. Spreads: A wide range of speculative strategies are possible by mixing stock index futures contracts of different maturities and or different underlying indexes. 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.
The key to options is to understand that holding an option represents a right rather than an obligation.to establish the corresponding futures position by exercising the option at some time in the future. 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). * A put option confers upon its holder the right to establish a short (selling) futures position.OPTIONS ON FUTURES Definition and Pricing Definition and types of options. but in reverse. There are two types of options on futures: * A call option confers upon its holder the right to establish a long (buying) futures position. for a call. to put options 18 . Conversely. The same applies. whichever is greater. if the market price of the underlying is above the option's strike price. the option has no exercise value and is said to be out of the money. In either case. If the market price of the underlying is below the call option's strike price. For example. the option has exercise value and is said to be in the money. The purchaser of the option pays a market-determined price (or premium) in order to have the right --but not the obligation-. 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. "Moneyness" of options. 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).
: *Creating asymmetric payoffs on the upside and downside. you must pay the daily settlement variation when the price goes against you. if exercised. There is no downside risk to buying an option. Hedgers and investors might want to use options on futures rather than futures themselves for the following reaso. you let the option expire worthless and pay no more.Futures positions at option exercise: To summarize. which is an extension of the Black-Shoes model originally derived for pricing equity options. the options on futures. 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. If the price goes against you. There are options on all the types (though not necessarily on all the specific contracts) of financial futures. 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. With a futures position. yields long futures Underlying instruments. Use of options on futures versus use of futures. The price you pay for having the security offered by an option 19 .
and interest rate cap (i. whether to provide parts at the agreed upon prices. liability or cash flow being hedged is of a contingent nature. The volume traded on options on futures is much larger than on equivalent options on the cash instruments.S. 20 . 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. Some users. Futures are not directly affected by changes in market volatility. For a fixed price (the option premium). Only options allow them to isolate the volatility component on the basis of which they can hedge or trade *Contingent contracts. The U. might want to hedge market volatility. Thus. you might consider selling an option and collect the premium upfront.. firm to hedge the contingent payable by buying options on yen futures.is the upfront premium.e. Trading volumes. which takes place in a month. This is due to the fact that futures are leveraged instruments. it may pay for the U. Conversely. In this case. * Hedging or trading on the basis of market volatility. For example. whether futures or options on futures are utilized by traders and corporate treasurers depends on their preferences on the risk/reward structure. or actually express views on the basis of market volatility. Hedging example: floating-rate note issuance.S. The Japanese company will decide at the next board meeting. if you are willing to accept the risk of an unlimited downside exposure. corporation will lose its profit margin if the yen appreciates relative to the dollar at the time the Japanese firm agrees to the contract. Options on futures can be used instead to insure against adverse interest rate moves. This makes options on futures easier to hedge dynamically since one does not need to worry about financing of positions in the underlying. suppose you are negotiating with a Japanese company for electrical parts. Options might be suitable if the asset. however.
Some may use them to spread risk. Liquidity typically arises when there are individuals or institutions which continuously wish to buy or sell. We have investigated some of the features of futures contracts. Liquidity is provided to a large degree by locals (individuals trading on their own capital) trading in the pit. Economic importance of futures. most of the action happens in the future. financial institutions and corporations and have been successfully integrated into risk Management and yield enhancement strategies. explained some of the basics regarding how they are priced. 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. 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 . unlike in cash markets. or else by major financial institutions trading in automated systems. Market liquidity: A market is liquid when traders can buy and sell without substantially moving the price against them. futures have become widely accepted by money managers. and given a few applications illustrating how these contracts would be used by risk managers and investors. and derivatives generally. others to take on risk on the basis of particular market views. They are not per se a financing or investment vehicle but rather a tool for transferring price risks associated with fluctuations in asset values. Futures. allow economic agents to fine tune the structure of their assets and liabilities to better suit their risk preferences and market expectations.Liquidity and market depth In derivatives markets. Over the last decades. Because they bind buyer and seller for a pre-specified period of time. IMPORTANCE OF FUTURES MARKETS Summary.
Financial management is quickly becoming an exercise in reducing financials structures into their basic elements and then reassembling them into a preferable structure. Futures' features. the volume of financial futures now dwarfs the volume in traditional agricultural contracts. While the following are noteworthy advantages that futures have over forwards. derivatives have contributed decisively to the integration of financial markets. Participants know all transaction prices and there are no negotiated deals and no multiple phone calls to get price quotes. * Prices are determined by a competitive market system (open outcry or electronic bidding). they allow not only the reduction or transformation of risk faced by individual investors but also the sheer understanding and measurement of risk. * 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. *All prices and information are available continuously. * Futures are bought or sold on margin. Also. In so doing. The surge in financial futures. Financial futures (along with options) are best viewed as building blocks. 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.components. and as such provide for substantial leverage. In the process. 22 .
Futures on Individual Securities Futures on individual securities were introduced in India in 2001. exchanges and futures commission merchants provide a level of integrity for the marketplace. *Audit systems and safeguards enforced by regulatory authorities. Both the type of equity futures are available in India. EQUITY FUTURES IN INDIA Equity futures are of two types: stock index futures and futures on individual securities. OTC trading allows more flexibility in establishing contract terms and avoids the need for daily monitoring of mark-to-market positions and margin account. The list of securities in which futures contracts are permitted is specified by Securities Exchange Board of India. Stock Index Futures The National Stock Exchange and the Bombay Stock Exchange have introduced stock index futures.*Positions are easy to reverse if the opinion about market conditions and prospects changes. 23 . *Counterparty credit risk of non-performance is negligible. 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. The National Stock Exchange and the Bombay Stock Exchange have introduced futures on individual securities. The National Stock Exchange has a stock index futures contract based on S&P CNX Nifty Index.
but it is a tool for transferring price risks associated with fluctuations in asset values.1. Many kinds of futures instruments have been developed and the use of futures has received a great deal of attention. 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. “A financial futures in a futures contract in a financial instrument like treasury bond. Futures are not only a financing or investment vehicle. 24 .” Eg: Financial futures.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. Eurodollar deposits. currency or stock index. The volume of trading in financial futures dwarfs the volume in traditional agricultural contracts. US Treasury Bills.
Futures have become widely accepted by money managers. 5. Financial futures play a prominent role in risk management. Futures have been a key instrument in facilitating the modern trend of separating conventional financial products into their basic components. 3. Financial futures have become the corner stone of financial management. 2. Futures are relatively in expensive to execute. financial institutions and corporations have been successfully integrated into risk management and yield enhancement strategies. 4. 25 . Futures have facilitated the modern trend of separating conventional financial products into their basic components. 6.3 NEED FOR THE STUDY The needs for the study of financial futures are: 1.1.
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,
This makes futures contracts particularly well suited for trading in organized exchanges.. For this reason. the clearing house members and the clearinghouse itself guarantee fulfillment of futures contracts.gold). quantity and quality of the underlying to be delivered. B. cocoa). Forward vs. pound (against the dollar or crosses) Equity indices: S&P500. This serves to reduce credit exposure to intraday price movements Tradability. there are futures on several commodity indices (like the CRB and GSCI). among other characteristics..g. deutschemark. Contract terms. Bonds and notes: Treasury securities. Over the last two decades. Forward contracts will trade on the basis of price and credit characteristics of the counterparty. softs (coffee. futures based on financial commodities have flourished. In forward markets cash changes hands only on the forward date In futures markets. contract size. forward contracts tend to be traded in over-the-counter (OTC) markets. and Treasury bills. the method of payment. Nikkei 225. margining requirements and trading hours. such as those based on: Money market interest rates: certificates of deposit. In futures contracts. Cash flows and margining. contracts tend to be offered on standardized terms in terms of maturity.LIBOR-based). The buyer and the seller both have 29 . sugar. Credit exposure. To ensure the liquidity of exchange-traded futures markets. NYSE Composite. 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. the time and place of delivery. gains and losses are settled daily in the form of margin payments. The margin requirements on futures contracts make them sufficiently immune to credit risk so that credit exposure is not a significant factor in pricing. Currencies: yen. In addition. offshore or euro-deposits (e.
driven by economic conditions and trends) or technical (i. Since forwards are a bilaterally negotiated agreement..e. all arbitrage risk can be eliminated. Expressing market views.) or set up by the industry itself. 30 . are regulated by identifiable entities which are either governmental (like the Commodity Futures Trading Commission in the U.an exposure to the clearing house (and the clearing house to them). there is no formal regulation of forwards nor is there a body to handle customer complaints.. Regulation. on the other hand. 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 (iii) taking trading positions on the basis of market views (or "speculating. Financial futures can be used as devices for: (i) arbitrage or yield enhancement. Financial futures are an efficient way of taling bets on the market on the basis of traders' views. Examples of related derivatives are interest rate swaps and interest rate futures. based on observed short-term price movements). Examples of single transaction hedging might include anticipatory hedging for debt or equity security issuance or currency hedging for foreign trade transactions. Hedging can be performed on a single tansaction (or instrument) basis or on an aggregate (portfolio or firm) basis.S. Risk management." to put it in more blunt terms).e. FINANCIAL FUTURES: USES AND USER Uses. arbitrage. whether these are fimdamental (i. rather than to each other. Exchangetraded futures. Such trades by definition cannot (indeed. 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 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. should not) be fully hedged. (ii) risk management and hedging.
although trade construction might be such as to immunize particular kinds (or dimensions) of risk. brokerage firms. commodity quality or cross-country differences).basic functions. Non-financial corporations. The users of financial futures are naturally given by their uses. fund managers and insurance companies will use futures for their thrc:. Financial institutions. 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. changes in the spread between market segments (e. credit. investment banks. or a combination of these. Users. including commercial banks. including municipal and state organizations and foundations are more likely to use them to hedge their commercial. The principal financial futures exchanges in the world are: Chicago Mcrcantile Exchange (CME.. Individuals and locals a:e more likely to use them for speculation and arbitrage.g. expressing market views is not riskless. Futures can be used to express views on general market direction. 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 . investment or borrowing activities. Unlike pure arbitrage. the timing of expected market movements.
Five companies from Banking and five from Pharma industry are taken for the study. 2.2. 32 .5 SCOPE OF THE STUDY: This study is done mainly under the ten companies of NSE Nifty. To study the volatility of futures with reference to Banking and Pharmaceutical industries.4 OBJECTIVES OF THE STUDY • • • To study on the financial futures with reference to NSE Nifty. journals. To study the amount of risk of Financial Futures of NSE in the month of March with reference to Banking and Pharmaceutical industries. magazines etc.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. The results cannot be generalized. 2. Secondary data is mainly used for the study. internet.. 2.7 TOOLS FOR DATA COLLECTION Secondary Data: It is collected from books.
Σy n Σ x2 – (Σx)2 X = market return For calculating ‘x’ the NSE share price is taken.2.9 LIMITATIONS OF THE STUDY Time constrains Geographical constraints This is restricted to Banking and Pharmaceutical Industry 33 . 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 .
Chapter 4: This chapter deals with the Analysis and Interpretation of Data Chapter 5: It gives the Summary of Findings. objectives. Glaxo and Sun Pharma. Punajb National Bank. Chapter 2: Research Design deals with the statement of the problem. CIPLA. Conclusion and Recommendations.2. IOB. Ranbaxy. review of literature. subject background of the study and need for the study. 34 . Corp Bank. Dabur. Syndicate Bank. Chapter 3: It deals with the Company Profiles of ICCI Bank.10 CHAPTER SCHEME Chapter 1: Introduction deals with the introduction to futures. scope of the study and about the methodology used by the study.
CHAPTER 3 PROFILE OF COMPANIES 35 .
and about 2400 ATMs. 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. Credit Cards. 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 .1 ICICI BANK ICICI Bank Type Founded Headquarters Private BSE & NSE:ICICI. a network of over 619 branches and offices. venture capital and asset management.3. the Stock Exchange.Kamath. USD 5. 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. Chanda Kochhar Loans.79 billion www. Investment vehicles. Savings. Mumbai India N Vaghul. SBI Life (Insurance) etc. Nachiket Mor. Bandra Kurla. ICICI Bank has total assets of about USD 56 Billion (end-Mar 2006). Mumbai and the National Stock Exchange of India Limited and its ADRs are listed on the New York Stock Exchange (NYSE). ICICI Bank Towers. life and non-life insurance.V.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. K.icicibank..
The experiment was so successful that ICICI merged into ICICI Bank ("reverse merger") in 2002. 37 . All this changed in 1990s. other such institutions were IDBI and SIDBI) with the objective to finance large industrial projects. ICICI founded a separate legal entity .taking deposits. The bank is aggressively targeting the NRI (Non Resident Indian) population for expanding its business. ICICI Bank now has the largest market share among all banks in retail or consumer financing. before SBI caught up with it. and is widely seen as a sophisticated bank able to take on many global banks in the Indian market.it could not take retail deposits. there has been a general revival in Indian industry (and metal based industry in particular). These funds were deployed in large corporate loans. It acquired a small bank in Russia recently. there were rumours that ICICI had a large proportion of Non Performing Loans ("NPA". ICICI borrowed funds from many multilateral agencies (such as the World Bank). as they are known in India) on its books . ICICI bank now has the largest market value of all banks in India. Hong Kong. Singapore and Canada.It was the first bank to offer a wide network of ATM's and had the largest network of ATM's till 2005. car loans etc. ICICI Bank is the largest issuer of credit cards in India .ICICI was established by the Government of India in the 1960s as a Financial Institution (FI. It has tie-ups with major banks in the US and China. The bank is expanding in overseas markets. ICICI was not a bank . credit cards. often at concessional rates. It is widely believed that the proportion of NPAs has come down to prudent levels (even if it were high earlier). Since 2002. It has operations in the UK.in particular to the steel industry.ICICI Bank which undertook normal banking operations . At the time of the reverse merger. and nor was it required to comply with Indian banking requirements for liquid reserves.
32 billion (2005) . The Government of India nationalized the bank.3.the name you can BANK upon www.. Credit Cards. Investment vehicles.C. Mr. 38 . along with 13 other major commercial banks of India. on July 19. is the second largest public sector commercial bank in India with about 4500 branches and offices throughout the country.PNBIndia. 1895 (British India) New Delhi.Gupta Banking Insurance Capital Markets and allied industries Loans.com Products Revenue Slogan Website Punjab National Bank (PNB). Savings. NSE:PNB) Lahore. USD 2.2 PUNJAB NATIONAL BANK Punjab National Bank Type Founded Headquarters Key people Industry Public (BSE. S.D. Insurance etc.. established in 1895 in Lahore by Lala Lajpat Rai. India Chairman and M. 1969.
3 SYNDICATE BANK Syndicate Bank Type Founded Headquarters Public (BSE & NSE) Udupi. Initially the bank collected as low as 2 annas from the door steps of the depositors daily through its agents. 39 . 1969. Karnataka India & Corporate Office Bangalore Chairman C P SWARNKAR Banking. the bank was known as Canara Industrial and Banking Syndicate Limited. is one of the oldest and major commercial bank of India. 1925 (as Canara Industrial and Banking Syndicate Limited) Head Office. USD bil Faithful and Friendly (English) & Viswasaneeya Hitheshi (Sanskrit) syndicatebank. The business started with a capital of Rs. India) by Upendra Ananth Pai. Credit Cards. A.3.Capital Markets and allied industries Loans. T. The first branch of the bank started its operations in the year 1928 at Brahmavar in Dakshin Kannada District. The primary objective of business was to extended financial assistance to local weavers. Investment vehicles. The bank. Pai. Bajaj Allianz Life Insurance (Insurance) etc. was nationalized on 19th July. by the Government of India.000. established in 1925 in Udupi (Karnataka state. along with 13 other major commercial banks of India. Savings. 80. At the time of its establishment. M. Vaman Kudva and Dr.Insurance.in/ Key people Industry Products Revenue Slogan Website Syndicate Bank. By 1937 it had secured its membership as a Clearing House at Mumbai. Manipal.
From 1953-1964.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. Syndicate Bank sponsored the first regional rural bank in India by name Prathama Grameena Bank. By 1989 it opened its 1500th branch at Hauz Khas. National Stock Exchange. Delhi.4 CORPORATION BANK CORPORATION BANK 40 . Currently it has over 1900 branches. 20 banks merged with the Canara Industrial and Banking Syndicate Limited this included the Maharastra Apex Bank Limited and Southern India Apex Bank Limited. in Doha (1983) and Musandam Exchange Co. The stocks of the Syndicate Bank are listed on Bombay Stock Exchange. The bank expanded its operations not only on the domestic front but also overseas. Mangalore Stock Exchange and Bangalore Stock Exchange. It took over Al Shabei Finance and Exchange Co. in Muscat (1984). 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. 3.
Mangaladevi Temple Road Pandeshwar Mangalore 575 001 India Chairman B.92 crores as on 31 March 2005. Savings. 1906 Corporation Bank. Karnataka state.Type Founded Headquarters Public (BSE. etc. Investment vehicles.3. The Bank came out with its Initial Public Offer (IPO) in October 1997 and 37. NSE:CORPBANK) Udipi. has currently (31 March 2004) 10. and first day’s canvassed resources of less than one USD 1. is one of the Indian banks in public sector.17% of Share Capital held by the Government of India.176 full time employees. 3. Credit Cards. The bank has the distinction of the first Indian bank to publish its financial results (199899) conforming to US GAAP. 054.com Key people Industry Products Revenue Net income Slogan Website Corporation Bank. The Bank’s Net Worth stood at Rs.5 INDIAN OVERSEAS BANK IOB 41 . and operates from several branches in India. The Bank is a Public Sector Unit with 57. CORPORATE OFFICE .87% of Share Capital is presently held by the Public and Financial Institutions.corpbank. The bank was founded with an initial capital of Rs. Sambamurthy Banking Loans. India. Rs 862. 5000 (USD 100).27 Crore (2006) A Premier Government of India Enterprise www. founded in 1906 in Udupi.83 crore (2006) Rs 100.
Chidambaram Chettyar.23 Crs at that time.M. a pioneer in many fields . IOB had the unique distinction of commencing business on 10th February 1937 (on the inaugural day itself) in three branches simultaneously . Insurance and Industry with the twin objectives of specializing in foreign exchange business and overseas banking.at Karaikudi and Chennai in India and Rangoon in Burma (presently Myanmar) followed by a branch in Penang.64 Crs and Advances at Rs.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. by Shri.6.Ct.3. 3.6 RANBAXY LABORATORIES 42 . Deposits stood at Rs.M.Banking.
Chairman Brian Tempest.ranbaxy. Chief Mentor. Ranbaxy went public in 1973. Haryana. Executive Vice Chairman Malvinder Mohan Singh. India Tejendra Khanna. It is India's largest pharmaceutical company. It exports its products to 125 countries with ground operations in 46 and manufacturing facilities in seven countries.com Ranbaxy Laboratories Limited is an Indian company incorporated in 1961.Ranbaxy Laboratories Limited Type Public Founded 1961 Headquarters Key people Gurgaon. It is ranked among the top 10 generic companies worldwide.7 CIPLA CIPLA Limited 43 . The CEO of the company is Malvinder Mohan Singh.178 billion (2005) Employees 1100 in R&D Website www. 3. CEO & MD Industry Pharmaceutical Products Generic drugs Revenue $1.
com Cipla founded as The Chemical. distributed and sold (multinational brandname drugs are exponentially more expensive. Cipla produces an all-in-one pill called Triomune which contains all three substances (Lamivudine. Hamied (CMD). 24. Cipla is the world's largest manufacturer of antiretroviral drugs to fight HIV/AIDS. 4. By doing so Cipla has reduced the cost of providing antiretroviral to AIDS patients from $12.cipla. charitable sources often are in a position to make up the difference for destitute patients. Cipla ignores foreign patents on these drugs where no Indian law is broken in the process. Today (2007). and its Chairman today is Yusuf Hamied (b.000 (and beyond) to around $300 per year. Industrial & Pharmaceutical Laboratories is a major Indian pharmaceutical company. K. so in money terms Cipla's medicines are probably not in top spot). The customary treatment of AIDS consists of a cocktail of three drugs.8 billion (2005) Rs. something difficult elsewhere because the three patents are 44 . stavudine and Nevirapine). Chairman Industry Pharmaceuticals Revenue Net income Rs. While this sum remains out of reach for many millions of people in 'Third World' countries. as measured by units produced. India Y. The company was founded in 1935 by Khwaja Abdul Hamied.1 billion (2005) Employees ??? Website www. best-known for manufacturing economical anti-AIDS drugs.Type Founded 1935 Headquarters Key people Mumbai. 1936). the founder's eldest son.
Zidovudine and Nevirapine. with the name Duovir-N. One more popular fixed dose combination is there. This contains Lamivudine.held by different companies. 3.8 DABUR 45 .
as well as exports to Australia. India. It is most famous for Dabur Chyawanprash and Hajmola. 46 .b does toxicology tests and markets ayurvedic medicines in a scientific manner. Dabur has manufacturing operations in India. The company. US$ 420 million) during the fiscal year 2005-2006. India. Burman in 1884 as a small pharmacy in Calcutta (now Kolkata). Dabur Chyawanprash. where it is registered.K. Africa and the United Arab Emirates. In two years the growth rate expected by them to change two folds.03 crore Website www. The company was founded by Dr.C. The company headquarters are in Ghaziabad. near the Indian capital of New Delhi. Hajmola & Real Revenue Rs 1375. Dabur operates in more than 5 countries and has sales worldwide.Dabur Type Public (NSE. 19 billion (approx. schools and call centers. Hospitals. Africa and Europe. Their growth rate rose from 10% to 40%. and is now led by his greatgrandson V. BSE) Founded 1884 Headquarters Ghaziabad Key people V. Uttar Pradesh. Dabur has a turnover of approximately Rs. with brands like Dabur Amla. Hajmola & Real. Barman Industry Health Care. West Asia. West Bengal.dabur.com Dabur India Limited is the fourth largest FMCG Company in India with interests in Health care. Food Products Dabur Amla. Vatika. Dabur Chyawanprash.T all over the country therein opening a new market. C. S. through Dabur Pharma Ltd. Vatika. Personal care and Food products. They have researched new medicines which will find use in O. Burman.
9 SUNPHARMA Sun Pharmaceutical Industries (Sun Pharma) is a major producer of specialty pharmaceuticals and active pharmaceutical ingredients.12 billion.Dabur Foods. The company was set up in 1993 and now has sales worth Rs. Dabur foods mainly supplied beverages to institutional customers. In 47 . 3. a subsidiary of Dabur India is expecting to grow at 25%. It will therefore increase its range of products to include tomato based products.. has project sales of Rs 100 crore in next three years.
com GlaxoSmithKline plc (LSE: GSK NYSE: GSK) is a British based pharmaceutical. respiratory. diabetology. London. GSK is a research-based company with a wide portfolio of pharmaceutical products covering anti-infectives. Chief Financial Officer Industry Pharmaceutical Products www.. Business Sun Pharma brands are prescribed in chronic therapy areas like cardiology. live longer" Website www.10 GLAXOSMITHKLINE GlaxoSmithKline Type Public (LSE: GSK NYSE: GSK) Founded 2000. oncology and vaccines products. and respiratory. Chairman Jean-Pierre Garnier. Chief Executive Julian Heslop.gsk. United Kingdom Key people Sir Chris Gent. It also 48 .S. and healthcare company. psychiatry. 3. biologicals. neurology.1996. by merger of Glaxo Wellcome and Smith Kline Beecham Headquarters Brentford. central nervous system (CNS).com/products Revenue Net income £23. Detroit-based Caraco Pharm Labs.gsk. The same year the company also acquired Dadha Pharma in Tamil Nadu.2 billion (2006) £7.8 billion (2006) Employees Over 100. gastroenterology. gastro-intestinal/metabolic.728 (2005) Slogan "Do more. Sun Pharma acquired the U. feel better.
has a Consumer Healthcare operation comprising leading oral healthcare products. nutritional drinks and over the counter (OTC) medicines 49 .
CHAPTER 4 DATA ANALYSIS AND INTERPRETATION Table 4.1 ANALYSIS OF ICICI BANK Date X Y X2 XY 50 .
482 -0.7693 – (-7.225 -0.269 0.8537 Σ x2 = 163.532 51 .3124 0.139 -2.409 -0.831 4.8225 2.337 21* 163.791 -1.402 -1.-7.1586 6.098 1.7693 1.658 -1.13* 1.630 1.76 .057 17.343 -6.1823 0.916 -0.56 Source: Secondary Data β = n * Σxy – Σx .924 Σx = -7.13) 2 = 851.875 0.01-03-2007 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 1.453 4.591 -0.5432 0.152 -1.82 -0.612 1.330 -0.7312 0.389 Σy = 1.098 1.5299 0.979 0.427 0.737 0.359 Σxy = 40.8032 0.101 3.366 3.835 0.329 -2.963 4.175 5. Σy n Σ x2 – (Σx)2 = 21*40.314 0.98 0.724 -0.291 2.347 -0.090 2.145 3.-9.7662 5.326 -0.138 -7.482 -2.0403 37.13 1.167 -2.2410 0.3806 26.595 -1.143 0.952 -0.4329 1.297 -24.6972 0.850 1.3990 53.546 1.329 0.2323 0.56 .271 16.201 -0.546 0.9063 0.532 21.780 -1.892 -0.2222 14.728 0.3540 1.678 0.781 -1.337 3.192 -1.1603 6.497 0.
52 .314 = 0.3439.254 Table 4.15 – 50. Therefore investment in ICICI futures is less risky.1 shows the beta value of ICICI futures and Nifty futures.836 = 861.292 3388. ICICI futures are less volatile. Since the beta value is less than one.
369 -3.392 0.614 1.8208 42.760 -2.931 -3.931 0.538 4.363 5.475 8.008 -3.865 -0.004 -1.50 -3.249 3.702 38.508 7.355 8.211 3.378 -3.485 10.078 -0.333 -3.452 11.388 6.232 12.896 -2.901 1.515 -2.088 13.682 Y 3.204 12.202 1.593 0.905 1.134 3.770 -3.250 27.095 13.014 23.028 1.919 12.849 0.108 11.864 1.490 11.365 20.751 5.943 -0.985 6.907 0.02 Source: Secondary Data β = n * Σxy – Σx .673 3.048 -0.216 5.350 9.214 -0.615 -0.874 1.181 3.259 Σy = 18.505 2.923 3.087 -1.391 1.394 22.223 -5.155 Σxy = 592.604 2.2 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 -0.295 5.906 -6.Table 4.132 15.601 Σx = -7.381 -0.377 44.613 2.034 -0.588 -4.333 X2 . Σy n Σ x2 – (Σx)2 53 .483 19.354 -3.007 3.18 XY -3.25 15.249 13.937 3.474 0.361 Σ x2 = 229.
552 2.607 0.170 2.299 -2.084 0.458 -0.682) 2 = 12432.268 -0.705 X2 .538 -0.490 -4.767 = 2.380 1.559 2. There fore investment in Corporation Bank is high risky.488 10.113 -1.500 0.658 -0.78 – 59.42 .313 2.361 1.e.404 3.880 0.164 53.831 -0.644.076 -3.952 -2.271 0.218 54 .671 6.333 21* 229.644 Table 4.574 2.501 4.275 5.-140.790 27.349 6.009 1.2 shows the beta value of ICICI futures and Nifty futures.310 Y 2.307 -0.212 -7.3 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 0.526 -1.096 XY -0.747 4.303 1.697 1. Since the beta value is more than one i. 2.268 1.18 – (-7.175 0.338 -5.395 -0.682 * 18.096 1. Corporation Bank futures are highly volatile. Table4.= 21*592.-7.836 0.013 = 12573.254 4753.396 25.329 5.02 .574 3.834 4812.808 -1.492 -4.
129 Σxy = 90.062 9.337 3.663 7.117 0.179 -0.63 2898.315 0. There fore investment in IOB futures is less risky.299 2.3 shows the beta value of IOB futures and Nifty futures.248 .326 3.79 2.000 -0.79) 2 = 1895. 55 .-8.368 1.37 = 0.214 -4.389 -1.017 21* 138.902 4.20-03-2007 21-03-2007 22-03-2007 23-03-2007 26-03-2007 28-03-2007 29-03-2007 30-03-2007 3.126 -3.140 -1.455 -0.677 1.812 2.959 -1.578 2821.204 -3.03 – (--8.208 .634 Table 4.083 9.077 Σy = -12.248 Source: Secondary Data β = n * Σxy – Σx .093 3.919 2.463 2.674 Σx = -8. Since the beta value is less than one.63 – 77.00 0.017 11.408 -3.26 = 1789.-105. IOB futures are less volatile. Σy n Σ x2 – (Σx)2 = 21* 90.802 Σ x2 = 138.652 13.79* -12.418 -2.607 -1.
330 9.957 28.257 2.902 4.418 -2.939 -0.005 1.982 18.414 X2 1.552 2.920 6.651 42.051 14.468 -0.072 1.989 XY 3.781 -4.625 1.443 -0.759 .485 -0.088 1.267 -4.791 -1.190 4.792 15.870 7.661 Y 2.015 -0.832 -3.091 -2.312 0.814 0.952 -2.463 2.538 -0.25 5.605 24.333 0.395 -0.078 -2.006 4.145 0.Table 4.076 -3.060 Σxy = 133.909 3.620 Σ x2 = 165.315 0.126 -3.928 -0.733 18.170 2.344 -2.020 12.490 -4.717 5.431 -1.113 -1.492 -4.711 19.122 8.321 2.836 0.074 5.968 0.168 6.060 0.018 1.232 4.788 Σx = -18.036 3.965 -6.214 -4.831 -0.658 -0.077 Σy = -11.114 0.705 2.626 -0.500 -2.787 2.204 -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 1.717 5.088 Source: Secondary Data 56 .953 0.377 7.619 5.474 0.
130 3.719 1.114 3.492 1. Since the beta value is less than one in the month of March.769 – 348.996 3485.848 .362 6.661) 2 = 2794.809 -3.4 shows the beta value of Syndicate Bank futures and Nifty futures.-212.105 3.661* -11.989 – (-18.5 ANALYSIS OF PUNJAB NATIONAL BANK Date 01-03-2007 02-03-2007 05-03-2007 06-03-2007 07-03-2007 X 3.356 XY 20.694 50. Σy n Σ x2 – (Σx)2 = 21* 133.984 0.801 -1.β = n * Σxy – Σx . Table 4.822 Table 4.852 3137. the Syndicate bank futures are less volatile and the investment in syndicate bank futures is less risky.563 -7.23 = 2581.339 57 .088 .119 8.738 -1.-18.414 21* 165.697 28.539 = 0.680 72.020 3.832 Y 5.823 X2 12.
394 -3.206 0.920 -0.905 3.534 -1.053 3.198 0.732 -2.157 1.159 Σxy = 134.489 11.448 8.899 – 16.656 24.934 0.447 3.948 Σy = 8.238 6.955) 2 = 2832.899 Source: Secondary Data β = n * Σxy – Σx .028 Σ x2 = 250.240 -3.696 5.001 -1.435 2.265 3.143 0.980 3.168 Σx = 16.069 -1.333 – 287.929 2.195 0.857 2.814 1.322 1.778 1.336 3.579 3.538 58 .955 1.859 5.961 2.391 5268.096 14.811 -1. Σy n Σ x2 – (Σx)2 = 21* 134.873 2.580 1.158 4.879 – 151.085 0.488 4980.391 0.606 -1.669 12.566 27.316 2.825 2.768 -1.173 29.453 -0.111 0.953 -1.955 10.955* 8.08-03-2007 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 1.239 -.929 21* 250.861 = 0.198 -1.863 -0.052 -2.472 = 2681.041 0.103 1.873 – (16.721 -1.435 2.067 4.093 0.271 1.
667 0.062 volatile and investing in Punjab National Bank futures is less risky.472 -2.786 3.363 0.485 -0.266 3.132 0.657 1.524 0.213 15.475 -5.096 -3.704 4.Table 4.858 2.689 20.673 0.926 X2 0.260 -0.189 15.660 -0.503 0.503 3.934 ΣXY=132.343 -1.176 -1.830 1.798 5.446 -0.299 -1.803 2.031 5.696 ΣY=-0.089 1.473 36.175 0.227 0.469 0.260 -1.329 0.328 -0.236 2.710 -5.666 -7.887 1.336 0.830 -4.655 0.316 -1.063 -1.636 29.226 -1.397 -0.83 XY -0.793 5.803 ΣX2=174.645 26.295 -0.156 0.5 shows the beta value of Punjab National Bank futures and Nifty futures.580 5. Since the beta value is less than one.514 0.387 2.259 0. Table.278 -2.024 27.178 -0.548 Y 1.098 0.942 -1.6 RANBAXY Source: Secondary Data 59 .866 8.343 ΣX=-8.125 0.047 -0.294 0.201 0.997 -0. 4.059 0.151 0.189 3.394 2.957 1.443 51. 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 -0.381 5.942 6.380 -1.353 1.976 27.664 1.
β = n * Σxy – Σx . Table 4.768 Table 4.068 = 2765.548) 2 = 2773.7 60 .6 shows the beta value of Ranbaxy futures.83 – (-8. Σy n Σ x2 – (Σx)2 = 21*132.302 – 7.387 3598. it is less volatile and investing in Ranbaxy futures is less risky.548 * -0.926 21* 174.-8.362 = 0.915 3671.43 – 73. Since the beta value is less than one.062 .
466 -2.152 0.381 5.962 -0.486 0.051 0.475 -5.062 -1.353 -3.630 -0.007 15.847 – 6.739 -3.738 * -0.228 XY 4.114 1.427 -0.171 -0.088 3.697 -0.738 Y 1.005 -0.189 3.672 0.329 0.328 -0.230 0.020 0.94 X2 14.701 -3.719 -0.974 2.362 -1.031 5.94 61 .770 ΣXY= -19.445 2.068 0.423 3.093 0.155 -0.687 3.020 -7.024 0. Σy n Σ x2 – (Σx)2 = 21*-19.957 1.149 8.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 3.193 0.492 7.096 -3.676 4.981 ΣX= 6.848 ΣX2= 77.948 7.496 0.252 -0.165 -0.071 0.219 11.316 -1.655 0.392 0.543 0.047 -0.847 Source: Secondary Data β = n * Σxy – Σx .831 2.473 1.710 -5.743 -11.689 -0.294 0.131 2.176 -1.696 ΣY= -0.358 2.744 0.737 0.261 -1.667 -1.008 0.481 -0.023 0.773 0.390 -2.204 2.626 -0.368 -4.261 -0.660 -0.357 -0.447 -0.553 0.
626 25.956 2.525 -0.121 -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 -3.257 -1. this shows that when the market return of the futures is increasing its stock value is coming down.049 1.751 0.161 -0.7 shows the beta value of Sun Pharma’s futures.40 = -410.025 3.542 XY 1.635 62 .256 0.451 1576. Since the beta value of this future is negative.474 11.146 11.787 .718 -4.703 2.446 0.816 -2.803 4.151 5.433 -2.152 -2.738) 2 = -416.090 1.788 – 45.26 Table 4.054 Y -0.152 -0.428 -0.911 -2.101 1.223 -1.011 -1.131 2.173 1.21* 77.957 4.756 0.218 -3.678 5.382 -3. Table 4.297 -0.022 2.663 12.336 1621.173 0.572 10.228 – (6.666 4.500 X2 9.404 -2.489 0.038 13.631 8.573 -3.472 12.387 -3.592 -1.988 -3.453 -1.572 1.946 -2.554 10.-6.089 0.870 0.356 -5.388 = -0.
725 2.001 2.825 3.907 10.311 -1.825) 2 = 1566.596 .467 -1.-14.184 19.687 -2.349 -4.001 2 ΣX = 155.845 6. Σy n Σ x2 – (Σx)2 = 21*74.907 – (-14.210 1.086 3. 63 .878 3274. Since the beta value is less than one.068 1.825 * -9.465 Table 4.8 shows the beta value of Dabur futures and Nifty futures.047 – 219.22-03-2007 23-03-2007 26-03-2007 28-03-2007 29-03-2007 30-03-2007 3.267 = 0. it is less volatile and the investment in Dabur futures is less risky.027 9.212 3.510 -1.596 Source: Secondary Data β = n * Σxy – Σx .359 ΣX= -14.84 9.314 2.023 4.412 2.638 3054.559 ΣXY= 74.362 1.942 -4.771 16.84 21* 155.780 = 1420.516 – 145.193 ΣY= -9.
961 -1.435 -3.334 2.392 3.207 2.189 Source: Secondary Data 64 .845 10.421 7.322 2.312 0.046 -2.9 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 -2.454 3.766 ΣXY= 55.349 0.112 8.854 0.043 -1.489 -1.557 -0.649 1.022 8.907 -0.820 0.324 -0.201 -0.507 6.508 0.134 2.538 0.84 Y -2.609 5.108 ΣY= 1.154 0.373 1.421 2.731 0.687 1.086 -2.390 2.839 -1.430 2.653 -2.820 5.202 9.345 -5.401 0.764 1.237 -0.189 9.416 0.046 0.254 1.Table 4.314 X2 6.819 0.422 2.823 -0.614 0.066 -1.586 -1.872 2.384 4.478 2 ΣX = 126.760 0.692 ΣX= -7.147 18.885 0.023 6.901 0.933 9.446 -0.584 -2.228 -2.271 -2.259 2.961 -3.969 0.296 2.259 2.935 -0.449 25.624 0.818 1.150 2.970 -2.084 XY 5.096 3.867 8.400 1.
298 1.764 – 61.418 0.969 .-10.304 = 0. Table 4.230 X2 .189 .482 3.10 GLAXO Date 01-03-2007 02-03-2007 05-03-2007 06-03-2007 07-03-2007 X -0.120 -2.764 65 . Since the beta value is less than one.814 1.-7.314 21* 126.84) 2 = 1158.088 -4.555 0.015 -1.176 0.2 shows the beta value of CIPLA futures and Nifty futures.271 2586. it is less volatile and investing in CIPLA futures is less risky.302 2647.013 -1.0001 2.β = n * Σxy – Σx .452 Table 4.691 -0.84 * 1.930 Y 1.232 15.084 – (-7.539 -8.756 0.030 0. Σy n Σ x2 – (Σx)2 = 21*55.445 XY -0.46 = 1169.
552 5.262 -3.1392 -3.621 0.045 -0.255 ΣXY= -9.968 2.856 * -10.458 7.386 0.062 1.237 3.392 -3.189 66 .424 3.948 -2.437 1.353 -2.403 1.055 2.856 2.800 -5.807 -1.002 – (-10.507 -1.624 ΣX= 10.002 1.7015 1877.138 -1.891 0.557 1.0006 2.042 – 117.649 0.025 0.0006 0.867 -2.826 .564 4.606 -2.202 2.421 1.142 -4.-109.944 -0.126 -1.126 54.589 0.092 0.192 1.482 -5.025 1.052 0.851 -1.134 1.432 5.806 1.280 3.853 = -94.347 0. Σy n Σ x2 – (Σx)2 = 21*-9.132 2.806 0.571 1.706 Source: Secondary Data β = n * Σxy – Σx .236 ΣY= -10.925 1.724 1.903 0.651 2.056 -0.856) 2 = 203.824 -4.134 -3.052 21* 95.235 -3.637 2 ΣX = 95.214 1.706 .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 0.066 4.10.1245 1995.
CHAPTER 5 SUMMARY OF FINDINGS. CONCLUSIONS & RECCOMMENDATIONS 67 .05044 Table 4. Since the beta value is negative it shows that when market return increases.= -.2 shows the beta value of Glaxo futures and Nifty futures. stock value is coming down.
5. PNB. 3. The futures value of Glaxo & Sun Pharma is negative. 68 . It shows that when the market value is increasing.1 FINDINGS: The major findings of the study are: 1. 2. The financial future plays an important role in NSE Nifty. Syndicate Bank. There is relationship with share price movements of the valued of NSE futures. In the month of March 2007. The study shows that investing in Corporation Bank futures is high risky. IOB. Ranbaxy. 4. Dabur and CIPLA futures are less risky. its stock value will come down. investing in ICICI futures.
2 CONCLUSION A financial future is a futures contract on a short term interest rate. to buy or sell a certain underlying instrument at a certain date in the future.5. Indian 69 . Futures or future contract at transferable specific delivery forward contracts. traded on a futures exchange. Corporation bank. at a specified price. The study entitled ‘THE ROLE OF FINANCIAL FUTURES WITH REFERENCE TO NSE NIFTY’ was done with reference to Banking and Pharmaceutical industry. which will take place between them at some fixed future date. or that lock in the price today of an exchange. A futures contract is a standardized contract. They are agreements between two counter parties that fix the terms of an exchange. Syndicate bank. From the banking industry futures of Icici bank. In finance.
Ranbaxy. Sun Pharma. Dabur are the companies taken from the pharmaceutical industry. Dabur and CIPLA futures are less the investors can invest in these futures. Syndicate Bank. 4.3 RECOMMENDATIONS 1. 70 . Ranbaxy. Glaxo. Since the volatility of ICICI futures IOB. 3. 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. the investment in Corporation Bank futures is highly risky. PNB. 2. 5. In March 2007. Financial futures can be used to dwarfs the volume in traditional agricultural contracts. Cipla. the investors should be very cautious in investing into those futures.Overseas Bank and Punjab National bank are taken.
BIBLIOGRAPHY 71 .
Vol. 2007. Sultan Chand Publications. Journals: • DALAL STREET.XXII. November 9. Investment Journal. • Bhalla V K.March 04. 10th edition.III. 72 . 6th edition.Books: • Chandra Prasanna. No. 2007. Tata McGraw Hill Publishing company. Vol. ‘Investment Analysis and Portfolio Management’. • Money and Finance. 05 Feb 19. ‘Investment Management and Security analysis’.
Website: www.Money control .com www.NSE India.com 73 .