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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.
This means that the exchange becomes the seller to the buyer and the buyer to the seller. asset quantity. 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. and maturity date.• Forward contracts are settled on the maturity date. whereas futures contract are ‘marked to market’ on a daily basis. Price limits are meant to prevent panic buying or selling. and to prevent overreaction to real information. The purpose of standardization is to promote liquidity and allow parties to the futures contracts to close out their positions readily. 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. futures contracts are ‘marked to market’ on a periodic basis. Price limits: Futures exchanges impose limits on price movements of futures contracts. Marking-to-market: While forward contracts are settled on the maturity date. 4 . This means that profits and losses on futures contract are settled daily. triggered by rumors.
oil. Hence perishable commodities have to be analyzed differently.or stock index. Contracts vary. but are often defined on an interest rate index such as 3-month sterling or US dollar LIBOR. 5 . and wheat and orange juice have been in existence for nearly three centuries. while financial futures is a futures contract in a financial instrument like Treasury bond. COMMODITY FUTURES (STORABLE COMMODITIES) Futures contracts on various commodities. A commodity futures is a futures contract in a commodity like cocoa or aluminum. rice. the asset has to be storable. storable as well as perishable. COMMODITY FUTURES (PERISHABLE COMMODITIES) For pricing futures contracts on the basis of arbitrage. 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. Futures price= Expected spot price – Expected risk premium FINANCIAL FUTURES A financial future is a futures contract on a short term interest rate (STIR). like gold. cotton.FUTURES CONTRACTS: THE GLOBAL SCENE Broadly there are two types of futures: commodity futures and financial futures. Futures price= spot price+ present value of storage costsPresent value of convenience yield. 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. aluminum. currency .
traded on a futures exchange. the holder of a futures position has to offset his position by either selling a long position or buying back a short position. The settlement price. converges towards the futures price on the delivery date. but not the obligation. a futures contract is a standardized contract. which differs from an options contract. Both parties of a "futures contract" must fulfill the contract on the settlement date. or simply futures. To exit the commitment prior to the settlement date. Futures contracts. The Eurodollar contract is the linchpin of the shortend interest rate futures contracts. are exchange traded derivatives. The price of the underlying asset on the delivery date is called the settlement price. The pre-set price is called the futures price. etc. sets margin requirements.In finance. normally. Other dollar-denominate short-term interest rate futures. then cash is transferred from the futures trader who sustained a loss to the one who made a profit. which gives the holder the right. SHORT-TERM INTEREST RATE FUTURES Contract specifications An assortment of contracts. A futures contract gives the holder the obligation to buy or sell. The future date is called the delivery date or final settlement date. The seller delivers the commodity to the buyer. 6 . if it is a cash-settled future. 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. no comparable contracts exist for other currencies. The exchange's clearinghouse acts as counterparty on all contracts. In other words. at a specified price. effectively closing out the futures position and its contract obligations. or.
5% per annum) in decimal terms. Eurodollar contract trading is de-facto available 24 hours.e. in that they are not regulated by U. It is based on a ninetyday Eurodollar deposit.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. the rate at which a London bank is willing to lend dollars (i. (ii) heterogeneity of bank credits would systematically raise questions on the quality of the delivered asset.S. the offer side of the cash money market). at LIFFE in London and at SIMEX in Singapore. Thus. The futures price is quoted as 100 minus the annualized futures 3-month LIBOR (e.5 implies a futures LIBOR rate of 3. 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. Trading of Eurodollar contracts: Eurodollar contracts are now traded at the CME in Chicago. 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. 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).S.S. Eurodollar deposits differ from domestic term deposits or certificates of deposit in the U.Eurodollar futures The Eurodollar futures market is the most widely traded money market contract in the world. although trading in it only started as recently as 1981. a price of 96. or with an international banking facility (IBF) located in the U. 7 . which is a dollar-denominate deposit with a bank or branch outside of the U.g.
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. Plus any accrued interest on the bond: 8 . bond futures positions can also be unwound prior to delivery by offsetting futures transactions. U. 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.Pricing and arbitrage: Implied forward rates In order to understand how futures prices are established. We will see that the market forces of arbitrage are used to price virtually all financial futures contracts.AND LONG-TERM INTEREST RATE FUTURES Contract specifications Deliverable securities: Unlike international bank futures contract. All examples drawn below are based on the threemonth Eurodollar contract. INTERMEDIATE. we need to understand how prices of futures contracts are related to the spot or cash market prices of the underlying asset. few contracts actually go into delivery. maturities or underlying asset constitute a straight-forward extension. Futures invoice price: When a bond is delivered into the bond futures contract.S. Of course. Treasury bond futures contracts allow delivery of any U. T-bond that has at least I. Also unlike the T-bill futures contract. bond futures contracts generally allow for a range of bonds to be delivered against them. bond futures are settled at expiration with physical delivery. applications with contracts based on different currencies. Because this is more convenient for most futures users than physical delivery.S. years remaining to maturity (or to first call if the bond is callable). all with different maturities and coupons. For example. there may be as many as several dozen securities in the deliverable basket.
where they are traded and the description of their deliverable set.Futures invoice price = futures price conversion factor + accrued interest Other contract terms: Exchanges set other futures contact terms as follows. International bond futures contracts. Understanding the relationship between a futures contract and the deliverable basket is crucial to understanding the drive behind the arbitrage.000 for U. the last trading date and the last delivery period (one month). The contract size defines the par amount of the bond that is deliverable into the contract ($100. September and December).S. For illustration purposes. it is the difference in cost between 9 . bond futures contracts designed along the lines of the U. T-bond contract have spread internationally.S. traded at the CBOT since 1977. The basis is the difference between a bond's price and the futures invoice price (as defined above). They all have similar characteristics to their forerunner. the concrete specifications of the U. Delivery months on bond futures contacts are quarterly (March. 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. the table below lists the main international bond futures contracts. T-bond. was the first fut3ureo n long-tern interest rates. Since 1932.S. June. Treasury notes: a 10-year.S. T-bonds).S. T-bond contract are shown in parentheses for illustrative purposes. Pricing and arbitrage Cash-futures relationship: Similar to short-term interest rate contracts.S. there is an arbitrage relationship which holds the prices of the T-bond futures contract to the cash market. Other U. The exchange will also set daily trading hours. medium. a 5year and a 2-year contract. The basis. In other words. Since then three futures contracts have been established on U.
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. Then one could: (i) buy (sell) the cheapest to.this conversion is performed simply by multiplying the decimal basis by 32.futures invoice price = clean cash price . the gross basis must be equal to zero. Otherwise there would be instantaneous risk less profit opportunities. 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. Accordingly. 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. Suppose. The basis point value factor is the ratio of the change in the 10 . (ii) sell (buy) a bond futures contract. and (iii) immediately deliver (receive delivery of) the cash bond against the short (long) futures position.buying the bond in the cash market and buying a futures contract on it and having it delivered into the contract at expiration. for instance.deliver bond in the cash market. Basis arbitrate at futures expiration: At futures expiration. that the gross basis was negative (positive). An excessive exposure to intermediate. The basis is generally quoted in 32nds rather than in decimal units .(futures price conversion factor) since dirty (or full) price = clean price + accrued interest.
or * in combination with the underlying (typically the cheapest-to-deliver bond) in what amounts to basis trades. as was the case with international bank deposit futures. 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. on the contrary. to express a view on market direction. but with the convenience of the futures market in terms of narrow bid/ask spreads. Playing duration with futures fulfills the same objective as playing the bond market directly. reduces market sensitivity to rate movements and performs well in a bear market. easy reversibility of positions and low cash requirements. But because they track the cheapest-to-deliver bond (driven by basis traders). can be traded: * outright. using spreads or butterflies that combine longs and shorts at different points in time or across countries. Outright trading: Bond futures by themselves don't have duration. trading on the basis of market views.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. Shorting bond futures. 11 . 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. * in combination with other bond futures contracts. Bond futures. Expressing a market view Types of trades: The third application of bond futures. they contribute dollar duration to portfolios much along the lines of the cash bond.
JPY.. Foreign currency futures contracts are available on all major currencies against the dollar (e. AUD. Finally. 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. most of which are traded at the CME and at LIFFE. as explained above.1so be held for shorter time horizon but then the position is subject to risk at the unwind. etc. 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.). and (ii) the evolution of short-term rates. 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. there are futures on a USD index (i. CAD.. CURRENCY FUTURES Contract specifications Types of contracts. In addition. In a similar vein. 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).g.e. there are futures 12 . DEM. SRF. 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. and can be used to take on risk subject to one's views in addition to as an arbitrage play. Basis trading: Trading the basis from the long side is relatively risk less if the position is held to the futures expiration date.Spread trading: As a word of caution. A basis trade can -. GBP. For instance. average of bilateral rates against the dollar) at the CBOT.
i. They tend to require actual delivery. 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. the contract should be sold if one expects the yen to appreciate more than what is expected by the market.. shorting the contract is consistent with an expectation of a yen depreciation relative to the dollar. long yen and short dollars) is consistent with an expectation of an appreciation of the yen relative to the dollar. Conversely. Expressing a market view Outright trading. meaning that at futures settlement the long receives the currency of denomination of the future and pays dollars). September and December. the difference between forward and futures prices is less important than with interest rates.e. tend to have quarterly contracts with delivery in March. 13 .e. June. For instance. in the case of currencies.. the prices of currency futures are bound by a basic arbitrage relationship with the underlying cash 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.on crosses. bilateral exchange rates between two non-dollar currencies such as on JPY/DEM.. Price quotes are on American terms. Futures are a natural instrument to express views on future exchange rate movements. based on number of dollars per unit of foreign currency. More formally. Conversely. by far the most prevalent. 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. As with interest rate futures. However. Pricing and arbitrage: International interest rate parity Overview. Contract specifications.e. going long the JPY contract (i. Currency futures against the dollar.
relative performance can vary sharply over periods such as a month or a quarter. Futures contract specifications: All futures contracts on stock indexes are settled in cash. The most common weighting scheme is market value weighting. Treatment of dividends: Stock indexes are not usually adjusted for cash dividends. stock weighting. Moreover. First. and index computation. In other words.STOCK INDEX FUTURES Contract specifications The underlying instrument. any cash dividends received on the portfolio are ignoring when percentage changes in most indexes are being calculated. Physical delivery of stocks against a futures contract based on an index presents intractable difficulties. Stock indexes differ from one to another with respect to the range of stocks covered. Index construction: The weight of a stock in an index is the proportion of the portfolio tracked by the index invested in the stock. 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 . those indexes constructed using geometric means). This implies that percentage changes in stock indexes do not track total returns on the corresponding portfolio of stocks but. The stocks in the portfolio can have equal weights or weights that change in some way over time. not every index correspond to a well defined portfolio of stocks (for example. 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. Stock market indexes are time series designed to track the changes in the value of hypothetical portfolios of stocks. 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. only price changes.
* NYSE composite futures (NYSE). The value of one futures contract is $500 times the index. * Value Line futures (KC). * Major market index (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. following is a list of the main international stock indexes and futures contracts on these indexes: * S&P 500 (CME). Contracts traded. Based on a portfolio of 400 American stocks. The value of one futures contract is $500 times the index. Based on a portfolio of 500 American stocks. The index accounts for 80% of the NYSE. The value of one futures contract is $500 tirmes the index. The value of one fuLturesc ontact is $5 times the index. 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. 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). For illustration purposes.700 American stocks. It does not correspond directly to any portfolio of stocks because of its use of geometric averaging. Contains the prices of 1.companies. Based on a portfolio of 225 of the largest stocks listed on the Tokyo Stock Exchange. 15 . Based on a portfolio of all the stocks listed on the NYSE. The value of one futures contract is $500 times the index. The value of one futures contract is GBP 25 times the index. * S&P 400 (CME). * Nikkei 225 stock average (CME). * FT-SE 100 index (LUFFE).
acquiring.Pricing and arbitrage Like futures on fixed income instruments and currencies. in other words. 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. Stock index futures provide a means of adjusting. 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. attractive prices available on the futures contract. or the difficulty of moving funds quickly and on a large scale into and out of particular stocks. ease of adjusting positions (liquidity). The sale of stock futures against a stock portfolio creates a hedged position with returns very similar to those of a short-term. stock index futures prices should be related to the underlying cash market by a cost of carry relationship or. Risk management and hedging Overview. 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 . Creating synthetic index fund portfolios: Futures can be used to create portfolios that have cash flows characteristics similar to an index fund portfolio. Managing index fund portfolios involves considerable oversight in terms of maintaining the correct weights as prices change and reinvesting any dividends that are received. fixed-income security. An interesting example of users of stock futures as hedging vehicles are brokers and dealers in equities. by the cash-forward relationship. Otherwise arbitrage trades are possible. Index futures can provide a means of cheaper access to such a portfolio.
Since a deposit of less than 10 percent is required to purchase or sell a stock futures contract. the different tax treatments of those returns may make it advantageous for some investors to use equity futures. 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. Expressing a market view Outright trading: Futures are a natural instruments to express views on future exchange rate movements. 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 . Capitalizing on stock selectivity. All profits and losses on stock index futures are effectively treated as long-term capital gains and losses. and leave the returns and risk component associated with the company-specific features of the stocks in the portfolio.Capitalizing on different tax treatment of futures and equities. Stock index futures can be used to create portfolios that have cash flows characteristics similar to an index fund portfolio. Spreads: A wide range of speculative strategies are possible by mixing stock index futures contracts of different maturities and or different underlying indexes.
OPTIONS ON FUTURES Definition and Pricing Definition and types of options. for a call. 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). whichever is greater. the option has exercise value and is said to be in the money. The key to options is to understand that holding an option represents a right rather than an obligation. If the market price of the underlying is below the call option's strike price. In either case. * A put option confers upon its holder the right to establish a short (selling) futures position. 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). to put options 18 . if the market price of the underlying is above the option's strike price. 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. For example. but in reverse. The same applies. There are two types of options on futures: * A call option confers upon its holder the right to establish a long (buying) futures position.to establish the corresponding futures position by exercising the option at some time in the future. The purchaser of the option pays a market-determined price (or premium) in order to have the right --but not the obligation-. Conversely. "Moneyness" of options. the option has no exercise value and is said to be out of the money.
Hedgers and investors might want to use options on futures rather than futures themselves for the following reaso. if exercised.: *Creating asymmetric payoffs on the upside and downside.Futures positions at option exercise: To summarize. If the price goes against you. Use of options on futures versus use of futures. you must pay the daily settlement variation when the price goes against you. the options on futures. which is an extension of the Black-Shoes model originally derived for pricing equity options. yields long futures Underlying instruments. 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. There are options on all the types (though not necessarily on all the specific contracts) of financial futures. you let the option expire worthless and pay no more. With a futures position. There is no downside risk to buying an option. The price you pay for having the security offered by an option 19 .
if you are willing to accept the risk of an unlimited downside exposure.S. This makes options on futures easier to hedge dynamically since one does not need to worry about financing of positions in the underlying. whether to provide parts at the agreed upon prices. Hedging example: floating-rate note issuance. The volume traded on options on futures is much larger than on equivalent options on the cash instruments. 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.e. The Japanese company will decide at the next board meeting. however. firm to hedge the contingent payable by buying options on yen futures.. Some users. you might consider selling an option and collect the premium upfront. might want to hedge market volatility. Only options allow them to isolate the volatility component on the basis of which they can hedge or trade *Contingent contracts. The U. This is due to the fact that futures are leveraged instruments. Options on futures can be used instead to insure against adverse interest rate moves. Conversely.S. Thus. Futures are not directly affected by changes in market volatility. Trading volumes. 20 . For example. For a fixed price (the option premium). it may pay for the U. Options might be suitable if the asset.is the upfront premium. and interest rate cap (i. whether futures or options on futures are utilized by traders and corporate treasurers depends on their preferences on the risk/reward structure. corporation will lose its profit margin if the yen appreciates relative to the dollar at the time the Japanese firm agrees to the contract. which takes place in a month. liability or cash flow being hedged is of a contingent nature. * Hedging or trading on the basis of market volatility. or actually express views on the basis of market volatility. In this case. suppose you are negotiating with a Japanese company for electrical parts.
allow economic agents to fine tune the structure of their assets and liabilities to better suit their risk preferences and market expectations. We have investigated some of the features of futures contracts. futures have become widely accepted by money managers. Market liquidity: A market is liquid when traders can buy and sell without substantially moving the price against them. financial institutions and corporations and have been successfully integrated into risk Management and yield enhancement strategies. and derivatives generally. and given a few applications illustrating how these contracts would be used by risk managers and investors. others to take on risk on the basis of particular market views. Liquidity typically arises when there are individuals or institutions which continuously wish to buy or sell. 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. most of the action happens in the future.Liquidity and market depth In derivatives markets. Some may use them to spread risk. unlike in cash markets. Liquidity is provided to a large degree by locals (individuals trading on their own capital) trading in the pit. Over the last decades. Economic importance of futures. Because they bind buyer and seller for a pre-specified period of time. or else by major financial institutions trading in automated systems. Futures. explained some of the basics regarding how they are priced. They are not per se a financing or investment vehicle but rather a tool for transferring price risks associated with fluctuations in asset values. IMPORTANCE OF FUTURES MARKETS Summary. 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 .
The surge in financial futures. 22 . * Prices are determined by a competitive market system (open outcry or electronic bidding). 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. While the following are noteworthy advantages that futures have over forwards. *All prices and information are available continuously. * Futures are bought or sold on margin. 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. In the process. the volume of financial futures now dwarfs the volume in traditional agricultural contracts.components. and as such provide for substantial leverage. Also. derivatives have contributed decisively to the integration of financial markets. 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. In so doing. * Futures are relatively inexpensive to execute (negotiable commission rates). 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. Financial futures (along with options) are best viewed as building blocks.
Both the type of equity futures are available in India. exchanges and futures commission merchants provide a level of integrity for the marketplace. 23 . 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.*Positions are easy to reverse if the opinion about market conditions and prospects changes. Futures on Individual Securities Futures on individual securities were introduced in India in 2001. The Bombay Stock Exchange has a stock index futures contract based on Sensex. *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. The National Stock Exchange and the Bombay Stock Exchange have introduced futures on individual securities. On the other hand. The list of securities in which futures contracts are permitted is specified by Securities Exchange Board of India. 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. *Audit systems and safeguards enforced by regulatory authorities. The National Stock Exchange has a stock index futures contract based on S&P CNX Nifty Index.
“A financial futures in a futures contract in a financial instrument like treasury bond. 24 . US Treasury Bills. but it is a tool for transferring price risks associated with fluctuations in asset values.1. The volume of trading in financial futures dwarfs the volume in traditional agricultural contracts. 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. Eurodollar deposits.” Eg: Financial futures.2 SUBJECT BACK GROUND FOR THE STUDY Futures market plays an important role in the world of finance. Futures are not only a financing or investment vehicle. currency or stock index. During the last decades the 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. Futures are relatively in expensive to execute. financial institutions and corporations have been successfully integrated into risk management and yield enhancement strategies. 3.3 NEED FOR THE STUDY The needs for the study of financial futures are: 1. Financial futures play a prominent role in risk management.1. 6. Financial futures have become the corner stone of financial management. 2. Futures have become widely accepted by money managers. 5. 25 . 4. Futures have facilitated the modern trend of separating conventional financial products into their basic components.
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,
pound (against the dollar or crosses) Equity indices: S&P500. the method of payment. Over the last two decades. and Treasury bills. Contract terms. In forward markets cash changes hands only on the forward date In futures markets. Currencies: yen.. there are futures on several commodity indices (like the CRB and GSCI). Forward vs. forward contracts tend to be traded in over-the-counter (OTC) markets. such as those based on: Money market interest rates: certificates of deposit.LIBOR-based). gains and losses are settled daily in the form of margin payments. the time and place of delivery. The margin requirements on futures contracts make them sufficiently immune to credit risk so that credit exposure is not a significant factor in pricing. deutschemark. In futures contracts. Credit exposure. margining requirements and trading hours. offshore or euro-deposits (e. In addition. For this reason. This serves to reduce credit exposure to intraday price movements Tradability. This makes futures contracts particularly well suited for trading in organized exchanges. sugar. To ensure the liquidity of exchange-traded futures markets. Bonds and notes: Treasury securities. Cash flows and margining. 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. B. futures based on financial commodities have flourished. NYSE Composite. quantity and quality of the underlying to be delivered.. among other characteristics. Forward contracts will trade on the basis of price and credit characteristics of the counterparty. The buyer and the seller both have 29 . softs (coffee. the clearing house members and the clearinghouse itself guarantee fulfillment of futures contracts. Nikkei 225. contract size. contracts tend to be offered on standardized terms in terms of maturity.g.gold). cocoa).
e. and (iii) taking trading positions on the basis of market views (or "speculating.. FINANCIAL FUTURES: USES AND USER Uses. Risk management. whether these are fimdamental (i. Examples of related derivatives are interest rate swaps and interest rate futures. based on observed short-term price movements).e. 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. on the other hand. Regulation.S. and futures on three-month LIBOR and on one-month LIBOR By isolating each characteristic of some underlying security with a derivative instrument. 30 . (ii) risk management and hedging. Expressing market views. Hedging can be performed on a single tansaction (or instrument) basis or on an aggregate (portfolio or firm) basis. arbitrage.an exposure to the clearing house (and the clearing house to them)." to put it in more blunt terms). driven by economic conditions and trends) or technical (i. Since forwards are a bilaterally negotiated agreement. Financial futures are an efficient way of taling bets on the market on the basis of traders' views. 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. Financial futures can be used as devices for: (i) arbitrage or yield enhancement. are regulated by identifiable entities which are either governmental (like the Commodity Futures Trading Commission in the U. all arbitrage risk can be eliminated. rather than to each other.. Such trades by definition cannot (indeed. should not) be fully hedged. there is no formal regulation of forwards nor is there a body to handle customer complaints. Examples of single transaction hedging might include anticipatory hedging for debt or equity security issuance or currency hedging for foreign trade transactions.) or set up by the industry itself. Exchangetraded futures.
or a combination of these. fund managers and insurance companies will use futures for their thrc:. Futures can be used to express views on general market direction. The principal financial futures exchanges in the world are: Chicago Mcrcantile Exchange (CME. The users of financial futures are naturally given by their uses. 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. Individuals and locals a:e more likely to use them for speculation and arbitrage. investment banks. the timing of expected market movements. investment or borrowing activities. Users. changes in the spread between market segments (e. Non-financial corporations.although trade construction might be such as to immunize particular kinds (or dimensions) of risk.basic functions. commodity quality or cross-country differences).. brokerage firms. including commercial banks. Financial institutions. 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 . including municipal and state organizations and foundations are more likely to use them to hedge their commercial. credit. expressing market views is not riskless.g. Unlike pure arbitrage.
journals.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. Five companies from Banking and five from Pharma industry are taken for the study.4 OBJECTIVES OF THE STUDY • • • To study on the financial futures with reference to NSE Nifty. The results cannot be generalized. 32 . 2. Secondary data is mainly used for the study.2.7 TOOLS FOR DATA COLLECTION Secondary Data: It is collected from books. 2. magazines etc. To study the volatility of futures with reference to Banking and Pharmaceutical industries. 2.5 SCOPE OF THE STUDY: This study is done mainly under the ten companies of NSE Nifty. To study the amount of risk of Financial Futures of NSE in the month of March with reference to Banking and Pharmaceutical industries.
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 2.9 LIMITATIONS OF THE STUDY Time constrains Geographical constraints This is restricted to Banking and Pharmaceutical Industry 33 .2. Σy n Σ x2 – (Σx)2 X = market return For calculating ‘x’ the NSE share price is taken.8 METHOD OF ANALYSIS The formula used for calculation are: β = n * Σxy – Σx .
Punajb National Bank.10 CHAPTER SCHEME Chapter 1: Introduction deals with the introduction to futures. Chapter 3: It deals with the Company Profiles of ICCI Bank. Syndicate Bank. scope of the study and about the methodology used by the study. Chapter 4: This chapter deals with the Analysis and Interpretation of Data Chapter 5: It gives the Summary of Findings.2. Conclusion and Recommendations. review of literature. Ranbaxy. subject background of the study and need for the study. Dabur. CIPLA. Corp Bank. Chapter 2: Research Design deals with the statement of the problem. Glaxo and Sun Pharma. 34 . objectives. IOB.
CHAPTER 3 PROFILE OF COMPANIES 35 .
.Kamath.3.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. USD 5. Mumbai and the National Stock Exchange of India Limited and its ADRs are listed on the New York Stock Exchange (NYSE). venture capital and asset management. K. the Stock Exchange. and about 2400 ATMs.icicibank.1 ICICI BANK ICICI Bank Type Founded Headquarters Private BSE & NSE:ICICI. 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 . a network of over 619 branches and offices. life and non-life insurance. NYSE: IBN 1955 (as Industrial Credit and Investment Corporation of India) ICICI Bank Ltd. ICICI Bank Towers. Bandra Kurla. ICICI Bank has total assets of about USD 56 Billion (end-Mar 2006). 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. Nachiket Mor. SBI Life (Insurance) etc. Mumbai India N Vaghul. Credit Cards. Savings. ICICI Bank's equity shares are listed in India on stock exchanges at Kolkata and Vadodara.V. Chanda Kochhar Loans. Investment vehicles.79 billion www.
it could not take retail deposits. It has operations in the UK. credit cards. Since 2002. ICICI Bank now has the largest market share among all banks in retail or consumer financing. 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. All this changed in 1990s. ICICI Bank is the largest issuer of credit cards in India . ICICI was not a bank .taking deposits. The experiment was so successful that ICICI merged into ICICI Bank ("reverse merger") in 2002. 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. before SBI caught up with it. car loans etc.in particular to the steel industry. It acquired a small bank in Russia recently. Singapore and Canada. The bank is aggressively targeting the NRI (Non Resident Indian) population for expanding its business. there has been a general revival in Indian industry (and metal based industry in particular). and nor was it required to comply with Indian banking requirements for liquid reserves.ICICI Bank which undertook normal banking operations . 37 . other such institutions were IDBI and SIDBI) with the objective to finance large industrial projects. These funds were deployed in large corporate loans. It is widely believed that the proportion of NPAs has come down to prudent levels (even if it were high earlier). and is widely seen as a sophisticated bank able to take on many global banks in the Indian market. as they are known in India) on its books . there were rumours that ICICI had a large proportion of Non Performing Loans ("NPA".It was the first bank to offer a wide network of ATM's and had the largest network of ATM's till 2005. often at concessional rates. The bank is expanding in overseas markets. At the time of the reverse merger. ICICI founded a separate legal entity . Hong Kong.
38 . along with 13 other major commercial banks of India. India Chairman and M.D.2 PUNJAB NATIONAL BANK Punjab National Bank Type Founded Headquarters Key people Industry Public (BSE. Savings. Insurance etc. S.the name you can BANK upon www. USD 2.32 billion (2005) . is the second largest public sector commercial bank in India with about 4500 branches and offices throughout the country. The Government of India nationalized the bank.. on July 19. established in 1895 in Lahore by Lala Lajpat Rai.Gupta Banking Insurance Capital Markets and allied industries Loans..C. Investment vehicles.3.PNBIndia. 1969. Mr. NSE:PNB) Lahore. 1895 (British India) New Delhi. Credit Cards.com Products Revenue Slogan Website Punjab National Bank (PNB).
Manipal. The primary objective of business was to extended financial assistance to local weavers. established in 1925 in Udupi (Karnataka state. USD bil Faithful and Friendly (English) & Viswasaneeya Hitheshi (Sanskrit) syndicatebank. T. by the Government of India. 80. Credit Cards. the bank was known as Canara Industrial and Banking Syndicate Limited. Investment vehicles.Insurance. M.3. At the time of its establishment. The first branch of the bank started its operations in the year 1928 at Brahmavar in Dakshin Kannada District. Savings. A.000. Vaman Kudva and Dr. By 1937 it had secured its membership as a Clearing House at Mumbai.in/ Key people Industry Products Revenue Slogan Website Syndicate Bank.Capital Markets and allied industries Loans. 1969. Karnataka India & Corporate Office Bangalore Chairman C P SWARNKAR Banking. India) by Upendra Ananth Pai. The bank. Initially the bank collected as low as 2 annas from the door steps of the depositors daily through its agents. along with 13 other major commercial banks of India. Bajaj Allianz Life Insurance (Insurance) etc. 39 . Pai. 1925 (as Canara Industrial and Banking Syndicate Limited) Head Office. The business started with a capital of Rs. was nationalized on 19th July. is one of the oldest and major commercial bank of India.3 SYNDICATE BANK Syndicate Bank Type Founded Headquarters Public (BSE & NSE) Udupi.
4 CORPORATION BANK CORPORATION BANK 40 . in Muscat (1984). The bank expanded its operations not only on the domestic front but also overseas. in Doha (1983) and Musandam Exchange Co. 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. 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. Syndicate Bank sponsored the first regional rural bank in India by name Prathama Grameena Bank. 3.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. Mangalore Stock Exchange and Bangalore Stock Exchange. It took over Al Shabei Finance and Exchange Co. The stocks of the Syndicate Bank are listed on Bombay Stock Exchange. Delhi. From 1953-1964. National Stock Exchange. By 1989 it opened its 1500th branch at Hauz Khas.
5000 (USD 100).5 INDIAN OVERSEAS BANK IOB 41 . Investment vehicles. Rs 862. The bank was founded with an initial capital of Rs. 1906 Corporation Bank.3.Type Founded Headquarters Public (BSE. 3. has currently (31 March 2004) 10. Savings. and first day’s canvassed resources of less than one USD 1. NSE:CORPBANK) Udipi. India.92 crores as on 31 March 2005. founded in 1906 in Udupi. The Bank’s Net Worth stood at Rs.17% of Share Capital held by the Government of India. Karnataka state.27 Crore (2006) A Premier Government of India Enterprise www. CORPORATE OFFICE . Mangaladevi Temple Road Pandeshwar Mangalore 575 001 India Chairman B. Sambamurthy Banking Loans.corpbank.176 full time employees. etc. 054. The Bank is a Public Sector Unit with 57.com Key people Industry Products Revenue Net income Slogan Website Corporation Bank. The bank has the distinction of the first Indian bank to publish its financial results (199899) conforming to US GAAP.87% of Share Capital is presently held by the Public and Financial Institutions.83 crore (2006) Rs 100. is one of the Indian banks in public sector. The Bank came out with its Initial Public Offer (IPO) in October 1997 and 37. and operates from several branches in India. Credit Cards.
Chidambaram Chettyar.at Karaikudi and Chennai in India and Rangoon in Burma (presently Myanmar) followed by a branch in Penang.6 RANBAXY LABORATORIES 42 . a pioneer in many fields .64 Crs and Advances at Rs.3. Insurance and Industry with the twin objectives of specializing in foreign exchange business and overseas banking. IOB had the unique distinction of commencing business on 10th February 1937 (on the inaugural day itself) in three branches simultaneously .Banking. 3. Deposits stood at Rs.Ct.23 Crs at that time.M. by Shri.Indian Overseas Bank (IOB) was founded on February 10th 1937.6.M. At the dawn of Independence IOB had 38 branches in India and 7 branches abroad.
It exports its products to 125 countries with ground operations in 46 and manufacturing facilities in seven countries. The CEO of the company is Malvinder Mohan Singh. 3.178 billion (2005) Employees 1100 in R&D Website www. It is India's largest pharmaceutical company.ranbaxy. CEO & MD Industry Pharmaceutical Products Generic drugs Revenue $1.Ranbaxy Laboratories Limited Type Public Founded 1961 Headquarters Key people Gurgaon. Haryana. Chief Mentor. It is ranked among the top 10 generic companies worldwide. India Tejendra Khanna. Executive Vice Chairman Malvinder Mohan Singh.com Ranbaxy Laboratories Limited is an Indian company incorporated in 1961. Chairman Brian Tempest.7 CIPLA CIPLA Limited 43 . Ranbaxy went public in 1973.
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. The company was founded in 1935 by Khwaja Abdul Hamied. distributed and sold (multinational brandname drugs are exponentially more expensive. best-known for manufacturing economical anti-AIDS drugs. so in money terms Cipla's medicines are probably not in top spot). By doing so Cipla has reduced the cost of providing antiretroviral to AIDS patients from $12. Cipla is the world's largest manufacturer of antiretroviral drugs to fight HIV/AIDS.1 billion (2005) Employees ??? Website www. 24. charitable sources often are in a position to make up the difference for destitute patients. Cipla produces an all-in-one pill called Triomune which contains all three substances (Lamivudine.Type Founded 1935 Headquarters Key people Mumbai. While this sum remains out of reach for many millions of people in 'Third World' countries.000 (and beyond) to around $300 per year. the founder's eldest son. something difficult elsewhere because the three patents are 44 . as measured by units produced.8 billion (2005) Rs. India Y. 4. and its Chairman today is Yusuf Hamied (b. 1936).com Cipla founded as The Chemical. Today (2007). Industrial & Pharmaceutical Laboratories is a major Indian pharmaceutical company.cipla. stavudine and Nevirapine). K. Hamied (CMD). Chairman Industry Pharmaceuticals Revenue Net income Rs.
held by different companies. This contains Lamivudine.8 DABUR 45 . One more popular fixed dose combination is there. 3. Zidovudine and Nevirapine. with the name Duovir-N.
Dabur has manufacturing operations in India. near the Indian capital of New Delhi.b does toxicology tests and markets ayurvedic medicines in a scientific manner. Vatika. C. India. Burman.dabur. Barman Industry Health Care.03 crore Website www. Hospitals. Africa and the United Arab Emirates. Personal care and Food products. Burman in 1884 as a small pharmacy in Calcutta (now Kolkata). Their growth rate rose from 10% to 40%. BSE) Founded 1884 Headquarters Ghaziabad Key people V. Food Products Dabur Amla. where it is registered.com Dabur India Limited is the fourth largest FMCG Company in India with interests in Health care.C. schools and call centers. The company was founded by Dr. and is now led by his greatgrandson V. In two years the growth rate expected by them to change two folds. Vatika.K.Dabur Type Public (NSE. It is most famous for Dabur Chyawanprash and Hajmola. as well as exports to Australia. India.T all over the country therein opening a new market. West Asia. West Bengal. Hajmola & Real. Africa and Europe. Dabur Chyawanprash. Dabur operates in more than 5 countries and has sales worldwide. Hajmola & Real Revenue Rs 1375. They have researched new medicines which will find use in O. The company. US$ 420 million) during the fiscal year 2005-2006. Dabur Chyawanprash. Uttar Pradesh. S. Dabur has a turnover of approximately Rs. The company headquarters are in Ghaziabad. 19 billion (approx. 46 . with brands like Dabur Amla. through Dabur Pharma Ltd.
12 billion.Dabur Foods. The company was set up in 1993 and now has sales worth Rs. In 47 .. has project sales of Rs 100 crore in next three years. 3.9 SUNPHARMA Sun Pharmaceutical Industries (Sun Pharma) is a major producer of specialty pharmaceuticals and active pharmaceutical ingredients. It will therefore increase its range of products to include tomato based products. a subsidiary of Dabur India is expecting to grow at 25%. Dabur foods mainly supplied beverages to institutional customers.
The same year the company also acquired Dadha Pharma in Tamil Nadu. feel better.. Detroit-based Caraco Pharm Labs. and respiratory.728 (2005) Slogan "Do more.2 billion (2006) £7. oncology and vaccines products. United Kingdom Key people Sir Chris Gent. and healthcare company. Chairman Jean-Pierre Garnier. Sun Pharma acquired the U. gastroenterology. psychiatry.S. neurology. respiratory. It also 48 . live longer" Website www.1996. by merger of Glaxo Wellcome and Smith Kline Beecham Headquarters Brentford. biologicals. GSK is a research-based company with a wide portfolio of pharmaceutical products covering anti-infectives. London.gsk.8 billion (2006) Employees Over 100. 3. gastro-intestinal/metabolic. Business Sun Pharma brands are prescribed in chronic therapy areas like cardiology.com/products Revenue Net income £23.com GlaxoSmithKline plc (LSE: GSK NYSE: GSK) is a British based pharmaceutical.10 GLAXOSMITHKLINE GlaxoSmithKline Type Public (LSE: GSK NYSE: GSK) Founded 2000. Chief Executive Julian Heslop.gsk. Chief Financial Officer Industry Pharmaceutical Products www. central nervous system (CNS). diabetology.
nutritional drinks and over the counter (OTC) medicines 49 .has a Consumer Healthcare operation comprising leading oral healthcare products.
1 ANALYSIS OF ICICI BANK Date X Y X2 XY 50 .CHAPTER 4 DATA ANALYSIS AND INTERPRETATION Table 4.
2222 14.269 0.225 -0.192 -1.56 Source: Secondary Data β = n * Σxy – Σx .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 1.13* 1.9063 0.13 1.337 21* 163.143 0.3540 1.532 51 .546 1.724 -0.-9.297 -24.8537 Σ x2 = 163.3806 26.791 -1.850 1.101 3.835 0. Σy n Σ x2 – (Σx)2 = 21*40.952 -0.892 -0.152 -1.678 0.329 -2.359 Σxy = 40.979 0.963 4.781 -1.2410 0.98 0.389 Σy = 1.1823 0.3990 53.098 1.330 -0.-7.366 3.875 0.427 0.314 0.175 5.291 2.145 3.532 21.057 17.139 -2.7662 5.1603 6.82 -0.658 -1.8032 0.090 2.343 -6.0403 37.831 4.482 -2.916 -0.924 Σx = -7.6972 0.497 0.612 1.7693 1.271 16.482 -0.1586 6.167 -2.737 0.3124 0.591 -0.546 0.326 -0.76 .2323 0.402 -1.347 -0.201 -0.4329 1.595 -1.7693 – (-7.5299 0.5432 0.337 3.8225 2.56 .138 -7.728 0.780 -1.098 1.329 0.409 -0.7312 0.630 1.13) 2 = 851.453 4.
52 .1 shows the beta value of ICICI futures and Nifty futures.3439.254 Table 4. Therefore investment in ICICI futures is less risky.292 3388. Since the beta value is less than one.314 = 0.15 – 50. ICICI futures are less volatile.836 = 861.
919 12.483 19.614 1.985 6.896 -2.508 7.361 Σ x2 = 229.485 10.931 -3.604 2.874 1.381 -0.232 12.392 0.333 -3.475 8.378 -3.202 1.937 3.355 8.394 22.087 -1.50 -3.615 -0. Σy n Σ x2 – (Σx)2 53 .249 13.369 -3.249 3.751 5.452 11.007 3.223 -5.25 15.849 0.155 Σxy = 592.078 -0.295 5.901 1.601 Σx = -7.377 44.333 X2 .588 -4.905 1.682 Y 3.108 11.906 -6.770 -3.613 2.008 -3.673 3.034 -0.865 -0.216 5.864 1.088 13.048 -0.250 27.259 Σy = 18.211 3.181 3.515 -2.18 XY -3.204 12.004 -1.134 3.2 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 -0.593 0.760 -2.028 1.931 0.363 5.907 0.8208 42.132 15.02 Source: Secondary Data β = n * Σxy – Σx .095 13.505 2.391 1.365 20.923 3.214 -0.702 38.014 23.490 11.Table 4.538 4.943 -0.388 6.350 9.354 -3.474 0.
313 2.42 .-7.310 Y 2.084 0.396 25.836 0.658 -0.338 -5.488 10.076 -3.559 2.e.526 -1.767 = 2.170 2.834 4812.682) 2 = 12432.574 2.361 1.299 -2.212 -7.395 -0.705 X2 .404 3.349 6.490 -4. There fore investment in Corporation Bank is high risky.18 – (-7.= 21*592. 2.697 1.113 -1.009 1.808 -1. Table4.492 -4.671 6.164 53.-140. Since the beta value is more than one i. Corporation Bank futures are highly volatile.02 .574 3.952 -2.218 54 .831 -0.552 2.271 0.096 XY -0.644 Table 4.333 21* 229.501 4.307 -0.747 4.096 1.607 0.175 0.303 1.458 -0.790 27.268 1.254 4753.78 – 59.500 0.329 5.880 0.2 shows the beta value of ICICI futures and Nifty futures.644.268 -0.013 = 12573.380 1.275 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 0.682 * 18.538 -0.
017 11.204 -3.000 -0.63 – 77.248 .418 -2.578 2821. Since the beta value is less than one.463 2.634 Table 4.017 21* 138.26 = 1789.902 4.-8.20-03-2007 21-03-2007 22-03-2007 23-03-2007 26-03-2007 28-03-2007 29-03-2007 30-03-2007 3.140 -1.79* -12. There fore investment in IOB futures is less risky.674 Σx = -8.179 -0.663 7.37 = 0.214 -4.129 Σxy = 90.248 Source: Secondary Data β = n * Σxy – Σx .802 Σ x2 = 138.299 2.208 .00 0.79 2.117 0.812 2.093 3.083 9.-105.3 shows the beta value of IOB futures and Nifty futures.79) 2 = 1895. Σy n Σ x2 – (Σx)2 = 21* 90.652 13.077 Σy = -12.03 – (--8.63 2898.062 9.126 -3.677 1.315 0.919 2.337 3.959 -1.408 -3.607 -1.368 1. 55 .326 3.389 -1.455 -0. IOB futures are less volatile.
658 -0.836 0.076 -3.490 -4.395 -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 1.312 0.870 7.078 -2.832 -3.788 Σx = -18.232 4.651 42.418 -2.190 4.968 0.321 2.091 -2.377 7.485 -0.443 -0.330 9.113 -1.088 Source: Secondary Data 56 .114 0.620 Σ x2 = 165.020 12.792 15.344 -2.552 2.787 2.759 .717 5.25 5.625 1.831 -0.072 1.781 -4.733 18.791 -1.051 14.500 -2.060 Σxy = 133.952 -2.814 0.717 5.463 2.060 0.431 -1.965 -6.315 0.005 1.989 XY 3.939 -0.126 -3.018 1.257 2.626 -0.474 0.077 Σy = -11.204 -3.538 -0.168 6.468 -0.492 -4.074 5.619 5.953 0.267 -4.122 8.909 3.928 -0.170 2.902 4.661 Y 2.015 -0.Table 4.414 X2 1.920 6.957 28.333 0.214 -4.006 4.982 18.605 24.711 19.088 1.145 0.705 2.
130 3.020 3.356 XY 20.823 X2 12. the Syndicate bank futures are less volatile and the investment in syndicate bank futures is less risky.719 1.105 3. Since the beta value is less than one in the month of March.5 ANALYSIS OF PUNJAB NATIONAL BANK Date 01-03-2007 02-03-2007 05-03-2007 06-03-2007 07-03-2007 X 3.492 1.996 3485.694 50.697 28.-212.23 = 2581. Table 4.362 6.-18.339 57 .738 -1.β = n * Σxy – Σx .809 -3.119 8.414 21* 165.088 .989 – (-18.769 – 348.661* -11.661) 2 = 2794.801 -1.4 shows the beta value of Syndicate Bank futures and Nifty futures. Σy n Σ x2 – (Σx)2 = 21* 133.984 0.563 -7.114 3.852 3137.848 .680 72.539 = 0.832 Y 5.822 Table 4.
980 3.173 29.825 2.873 – (16.696 5.158 4.240 -3.448 8.669 12.052 -2.394 -3.534 -1.538 58 .934 0.198 -1.721 -1.955* 8.111 0.08-03-2007 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 1.732 -2.391 0.238 6.206 0.143 0.953 -1.566 27.955 1.447 3.863 -0.579 3.859 5.606 -1.271 1.168 Σx = 16.198 0.814 1.899 Source: Secondary Data β = n * Σxy – Σx .488 4980.391 5268.899 – 16.768 -1.656 24.336 3.041 0.069 -1.316 2.159 Σxy = 134.861 = 0.028 Σ x2 = 250.239 -.955) 2 = 2832.873 2.453 -0.929 2.920 -0.067 4.195 0.001 -1.103 1.580 1.955 10.435 2.322 1.435 2.085 0.472 = 2681.948 Σy = 8.879 – 151.333 – 287. Σy n Σ x2 – (Σx)2 = 21* 134.811 -1.929 21* 250.905 3.096 14.778 1.857 2.093 0.265 3.053 3.489 11.961 2.157 1.
259 0.278 -2.664 1.485 -0. Since the beta value is less than one.178 -0.660 -0. Table.548 Y 1.363 0.328 -0.024 27.336 0.381 5.299 -1.503 0.887 1.942 -1.125 0.353 1.343 -1.189 3.786 3.227 0.858 2.343 ΣX=-8.098 0.443 51.704 4.329 0. 4.213 15.176 -1.096 -3.666 -7.132 0.175 0.636 29.316 -1.5 shows the beta value of Punjab National Bank futures and Nifty futures.189 15.473 36.524 0.976 27.689 20.866 8.83 XY -0.926 X2 0.6 RANBAXY Source: Secondary Data 59 .446 -0.997 -0.063 -1.673 0.266 3.830 1.469 0.934 ΣXY=132.397 -0.655 0. 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 -0.957 1.472 -2.260 -0.201 0.089 1.047 -0.503 3.394 2.645 26.226 -1.475 -5.803 ΣX2=174.798 5.514 0.387 2.062 volatile and investing in Punjab National Bank futures is less risky.942 6.830 -4.151 0.803 2.295 -0.696 ΣY=-0.793 5.657 1.380 -1.580 5.236 2.031 5.Table 4.156 0.260 -1.059 0.294 0.667 0.710 -5.
Table 4.768 Table 4. it is less volatile and investing in Ranbaxy futures is less risky.062 . Since the beta value is less than one. Σy n Σ x2 – (Σx)2 = 21*132.43 – 73.6 shows the beta value of Ranbaxy futures.548 * -0.302 – 7.387 3598.548) 2 = 2773.926 21* 174.7 60 .β = n * Σxy – Σx .83 – (-8.362 = 0.915 3671.-8.068 = 2765.
737 0.020 0.697 -0.329 0.114 1.553 0.228 XY 4.093 0.261 -1.358 2.031 5.189 3.252 -0.701 -3.328 -0.473 1.390 -2.496 0.261 -0.176 -1.088 3.660 -0.165 -0.672 0.171 -0.486 0.831 2.957 1.667 -1.770 ΣXY= -19.193 0.696 ΣY= -0.481 -0.687 3.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 3.466 -2.381 5. Σy n Σ x2 – (Σx)2 = 21*-19.392 0.710 -5.738 Y 1.626 -0.152 0.630 -0.131 2.357 -0.316 -1.368 -4.096 -3.204 2.445 2.773 0.427 -0.024 0.008 0.94 X2 14.219 11.848 ΣX2= 77.94 61 .062 -1.689 -0.962 -0.007 15.423 3.847 – 6.068 0.743 -11.475 -5.739 -3.676 4.738 * -0.047 -0.744 0.023 0.005 -0.230 0.543 0.294 0.492 7.974 2.020 -7.149 8.981 ΣX= 6.447 -0.353 -3.071 0.655 0.155 -0.051 0.847 Source: Secondary Data β = n * Σxy – Σx .948 7.719 -0.362 -1.
297 -0.666 4.218 -3.572 10.257 -1.751 0.988 -3.8 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 -3.256 0.152 -0.-6.21* 77.40 = -410.718 -4.089 0. Table 4.489 0.803 4.387 -3.703 2.787 .121 -1.635 62 .26 Table 4.573 -3. this shows that when the market return of the futures is increasing its stock value is coming down.131 2.388 = -0.054 Y -0.161 -0.572 1.404 -2.946 -2.956 2.038 13.382 -3.542 XY 1.816 -2.738) 2 = -416.101 1.428 -0.223 -1.472 12. Since the beta value of this future is negative.626 25.554 10.451 1576.090 1.525 -0.152 -2.173 0.474 11.870 0.146 11.500 X2 9.957 4.453 -1.173 1.336 1621.011 -1.151 5.7 shows the beta value of Sun Pharma’s futures.025 3.678 5.049 1.433 -2.788 – 45.446 0.631 8.911 -2.663 12.228 – (6.356 -5.592 -1.756 0.022 2.
825 3.086 3.412 2.314 2.027 9.001 2.311 -1.267 = 0.516 – 145. 63 .84 9.193 ΣY= -9.047 – 219.22-03-2007 23-03-2007 26-03-2007 28-03-2007 29-03-2007 30-03-2007 3. it is less volatile and the investment in Dabur futures is less risky.878 3274.465 Table 4.349 -4.825 * -9.825) 2 = 1566.210 1.596 .845 6.467 -1.84 21* 155.907 – (-14. Since the beta value is less than one.510 -1.687 -2.780 = 1420.212 3.725 2.362 1.638 3054. Σy n Σ x2 – (Σx)2 = 21*74.559 ΣXY= 74.068 1.001 2 ΣX = 155.907 10.023 4.596 Source: Secondary Data β = n * Σxy – Σx .8 shows the beta value of Dabur futures and Nifty futures.184 19.-14.771 16.942 -4.359 ΣX= -14.
764 1.150 2.823 -0.147 18.314 X2 6.933 9.086 -2.507 6.624 0.649 1.043 -1.384 4.614 0.820 0.023 6.096 3.228 -2.818 1.421 7.430 2.454 3.201 -0.760 0.324 -0.766 ΣXY= 55.207 2.400 1.Table 4.108 ΣY= 1.872 2.334 2.961 -3.435 -3.421 2.022 8.345 -5.687 1.390 2.867 8.653 -2.901 0.969 0.237 -0.296 2.839 -1.401 0.489 -1.557 -0.845 10.970 -2.271 -2.422 2.259 2.538 0.154 0.820 5.586 -1.478 2 ΣX = 126.84 Y -2.449 25.046 -2.259 2.084 XY 5.508 0.885 0.189 9.202 9.392 3.416 0.312 0.692 ΣX= -7.254 1.112 8.584 -2.819 0.446 -0.322 2.134 2.935 -0.961 -1.349 0.609 5.046 0.189 Source: Secondary Data 64 .731 0.854 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 -2.907 -0.066 -1.373 1.
271 2586.764 – 61.418 0.-7.930 Y 1.298 1. it is less volatile and investing in CIPLA futures is less risky.46 = 1169.015 -1.555 0.452 Table 4. Since the beta value is less than one.-10. Σy n Σ x2 – (Σx)2 = 21*55.691 -0.304 = 0.120 -2.302 2647.314 21* 126.084 – (-7.013 -1. Table 4.445 XY -0.0001 2.10 GLAXO Date 01-03-2007 02-03-2007 05-03-2007 06-03-2007 07-03-2007 X -0.176 0.84) 2 = 1158.030 0.2 shows the beta value of CIPLA futures and Nifty futures.764 65 .230 X2 .539 -8.β = n * Σxy – Σx .482 3.756 0.814 1.189 .088 -4.232 15.84 * 1.969 .
134 1.867 -2.806 1.564 4.1245 1995. Σy n Σ x2 – (Σx)2 = 21*-9.045 -0.255 ΣXY= -9.891 0.347 0.948 -2.482 -5.968 2.624 ΣX= 10.824 -4.944 -0.800 -5.126 54.386 0.202 2.621 0.724 1.392 -3.903 0.08-03-2007 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 0.353 -2.552 5.192 1.432 5.10.437 1.606 -2.055 2.214 1.235 -3.649 0.062 1.092 0.138 -1.806 0.237 3.0006 2.424 3.262 -3.421 1.851 -1.7015 1877.1392 -3.142 -4.507 -1.052 21* 95.0006 0.807 -1.189 66 .280 3.706 .856 2.126 -1.-109.056 -0.925 1.025 1.651 2.002 1.637 2 ΣX = 95.042 – 117.002 – (-10.856 * -10.826 .134 -3.066 4.856) 2 = 203.571 1.589 0.403 1.458 7.236 ΣY= -10.132 2.853 = -94.052 0.557 1.025 0.706 Source: Secondary Data β = n * Σxy – Σx .
CONCLUSIONS & RECCOMMENDATIONS 67 .05044 Table 4.2 shows the beta value of Glaxo futures and Nifty futures. Since the beta value is negative it shows that when market return increases.= -. stock value is coming down. CHAPTER 5 SUMMARY OF FINDINGS.
3. Ranbaxy.5.1 FINDINGS: The major findings of the study are: 1. IOB. 68 . Dabur and CIPLA futures are less risky. 4. The financial future plays an important role in NSE Nifty. investing in ICICI futures. The study shows that investing in Corporation Bank futures is high risky. PNB. 2. There is relationship with share price movements of the valued of NSE futures. Syndicate Bank. its stock value will come down. The futures value of Glaxo & Sun Pharma is negative. In the month of March 2007. It shows that when the market value is increasing.
They are agreements between two counter parties that fix the terms of an exchange. Syndicate bank. which will take place between them at some fixed future date.2 CONCLUSION A financial future is a futures contract on a short term interest rate. In finance. A futures contract is a standardized contract. From the banking industry futures of Icici bank. to buy or sell a certain underlying instrument at a certain date in the future. Corporation bank. at a specified price.5. traded on a futures exchange. Indian 69 . or that lock in the price today of an exchange. Futures or future contract at transferable specific delivery forward contracts. The study entitled ‘THE ROLE OF FINANCIAL FUTURES WITH REFERENCE TO NSE NIFTY’ was done with reference to Banking and Pharmaceutical industry.
Dabur and CIPLA futures are less the investors can invest in these futures. Syndicate Bank. Dabur are the companies taken from the pharmaceutical industry. 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. Sun Pharma. the investment in Corporation Bank futures is highly risky. Glaxo. Cipla. Ranbaxy. Financial futures can be used to dwarfs the volume in traditional agricultural contracts. 3. In March 2007. 5. PNB.3 RECOMMENDATIONS 1. the investors should be very cautious in investing into those futures. 4. 70 . Since the volatility of ICICI futures IOB.Overseas Bank and Punjab National bank are taken. Ranbaxy. 2.
BIBLIOGRAPHY 71 .
III. Vol. 2007.March 04. ‘Investment Management and Security analysis’. No. Vol. 10th edition. Journals: • DALAL STREET. Tata McGraw Hill Publishing company. • Money and Finance. 2007.XXII. Investment Journal. 05 Feb 19. ‘Investment Analysis and Portfolio Management’. • Bhalla V K. 72 .Books: • Chandra Prasanna. 6th edition. November 9. Sultan Chand Publications.
NSE India.Website: www.Money control .com 73 .com www.
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