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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. triggered by rumors. 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 profits and losses on futures contract are settled daily. whereas futures contract are ‘marked to market’ on a daily basis. 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. 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. This means that the exchange becomes the seller to the buyer and the buyer to the seller. 4 . futures contracts are ‘marked to market’ on a periodic basis. and to prevent overreaction to real information. and maturity date. Marking-to-market: While forward contracts are settled on the maturity date. This means that the profits and losses on futures contracts are settled on a periodic basis. asset quantity. Price limits are meant to prevent panic buying or selling.
FUTURES CONTRACTS: THE GLOBAL SCENE Broadly there are two types of futures: commodity futures and financial futures. while financial futures is a futures contract in a financial instrument like Treasury bond. Futures price= Expected spot price – Expected risk premium FINANCIAL FUTURES A financial future is a futures contract on a short term interest rate (STIR). rice. A commodity futures is a futures contract in a commodity like cocoa or aluminum. oil. currency . COMMODITY FUTURES (PERISHABLE COMMODITIES) For pricing futures contracts on the basis of arbitrage. like gold.or stock index. but are often defined on an interest rate index such as 3-month sterling or US dollar LIBOR. Futures price= spot price+ present value of storage costsPresent value of convenience yield. 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. For a storable commodity buying in the spot and storing it until the expiration of the futures contract is equivalent to buying a futures contract and taking delivery at the maturity date. 5 . Contracts vary. Hence perishable commodities have to be analyzed differently. storable as well as perishable. COMMODITY FUTURES (STORABLE COMMODITIES) Futures contracts on various commodities. aluminum. cotton. the asset has to be storable. and wheat and orange juice have been in existence for nearly three centuries.
A futures contract gives the holder the obligation to buy or sell. 6 . The exchange's clearinghouse acts as counterparty on all contracts. sets margin requirements. In other words. etc. The price of the underlying asset on the delivery date is called the settlement price. or simply futures. no comparable contracts exist for other currencies. 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. converges towards the futures price on the delivery date. to buy or sell a certain underlying instrument at a certain date in the future. which differs from an options contract.In finance. effectively closing out the futures position and its contract obligations. Futures contracts. which gives the holder the right. The pre-set price is called the futures price. The settlement price. The seller delivers the commodity to the buyer. SHORT-TERM INTEREST RATE FUTURES Contract specifications An assortment of contracts. The Eurodollar contract is the linchpin of the shortend interest rate futures contracts. or. if it is a cash-settled future. but not the obligation. To exit the commitment prior to the settlement date. Other dollar-denominate short-term interest rate futures. traded on a futures exchange. normally. the owner of an options contract may exercise the contract. a futures contract is a standardized contract. then cash is transferred from the futures trader who sustained a loss to the one who made a profit. Both parties of a "futures contract" must fulfill the contract on the settlement date. are exchange traded derivatives. at a specified price.
.S.e.S. The futures price is quoted as 100 minus the annualized futures 3-month LIBOR (e. or with an international banking facility (IBF) located in the U.5 implies a futures LIBOR rate of 3.S.Eurodollar futures The Eurodollar futures market is the most widely traded money market contract in the world. Eurodollar deposits differ from domestic term deposits or certificates of deposit in the U. Thus. (ii) heterogeneity of bank credits would systematically raise questions on the quality of the delivered asset. at LIFFE in London and at SIMEX in Singapore. Basic contract specifications: The nominal contract size is $1 million and the underlying rate is the three-month LIBOR. Eurodollar contract trading is de-facto available 24 hours. a price of 96.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..5% per annum) in decimal terms. in that they are not regulated by U. Trading of Eurodollar contracts: Eurodollar contracts are now traded at the CME in Chicago. It is based on a ninetyday Eurodollar deposit. authorities and hence are not subject to reserve requirements or deposit insurance premiums. although trading in it only started as recently as 1981. 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. 7 . which is a dollar-denominate deposit with a bank or branch outside of the U. the rate at which a London bank is willing to lend dollars (i. 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).g. the offer side of the cash money market).
bond futures contracts generally allow for a range of bonds to be delivered against them. we need to understand how prices of futures contracts are related to the spot or cash market prices of the underlying asset. Plus any accrued interest on the bond: 8 . bond futures are settled at expiration with physical delivery. all with different maturities and coupons. U. bond futures positions can also be unwound prior to delivery by offsetting futures transactions. applications with contracts based on different currencies. Treasury bond futures contracts allow delivery of any U. All examples drawn below are based on the threemonth Eurodollar contract. 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. years remaining to maturity (or to first call if the bond is callable). Of course.S.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. Also unlike the T-bill futures contract.AND LONG-TERM INTEREST RATE FUTURES Contract specifications Deliverable securities: Unlike international bank futures contract. 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. few contracts actually go into delivery. Because this is more convenient for most futures users than physical delivery.S. For example. INTERMEDIATE. there may be as many as several dozen securities in the deliverable basket. Futures invoice price: When a bond is delivered into the bond futures contract. maturities or underlying asset constitute a straight-forward extension. T-bond that has at least I.
where they are traded and the description of their deliverable set.S. Treasury notes: a 10-year. For illustration purposes.S. the table below lists the main international bond futures contracts. T-bond. The basis is the difference between a bond's price and the futures invoice price (as defined above).S. Understanding the relationship between a futures contract and the deliverable basket is crucial to understanding the drive behind the arbitrage. a 5year and a 2-year contract. June.S.and long-term interest rate contracts: The U.S. They all have similar characteristics to their forerunner. In other words. was the first fut3ureo n long-tern interest rates. it is the difference in cost between 9 . T-bond contract have spread internationally. there is an arbitrage relationship which holds the prices of the T-bond futures contract to the cash market. medium. Pricing and arbitrage Cash-futures relationship: Similar to short-term interest rate contracts. The exchange will also set daily trading hours. Since then three futures contracts have been established on U. T-bonds). bond futures contracts designed along the lines of the U. The basis.Futures invoice price = futures price conversion factor + accrued interest Other contract terms: Exchanges set other futures contact terms as follows. Other U. September and December).000 for U. 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).S. Since 1932. T-bond contract are shown in parentheses for illustrative purposes. traded at the CBOT since 1977. Delivery months on bond futures contacts are quarterly (March. the concrete specifications of the U. International bond futures contracts. It is the delivery option of the short that makes valuing bond futures more complex than valuing international bank (euro) deposit futures.
deliver bond in the cash market. the gross basis must be equal to zero. and (iii) immediately deliver (receive delivery of) the cash bond against the short (long) futures position.and long-term interest rates can be offset by buying or selling bond futures contracts. Accordingly. Otherwise there would be instantaneous risk less profit opportunities. that the gross basis was negative (positive).futures invoice price = clean cash price . Then one could: (i) buy (sell) the cheapest to.(futures price conversion factor) since dirty (or full) price = clean price + accrued interest. Risk management and hedging Basic risk management functions: Bond futures are often used as a vehicle for hedging price risk or duration. 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.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. 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. we define the gross or raw basis as: Gross basis = dirty cash price . Basis arbitrate at futures expiration: At futures expiration.this conversion is performed simply by multiplying the decimal basis by 32. (ii) sell (buy) a bond futures contract. Suppose. The basis point value factor is the ratio of the change in the 10 . An excessive exposure to intermediate. The basis is generally quoted in 32nds rather than in decimal units .
they contribute dollar duration to portfolios much along the lines of the cash bond. requires by definition that not all risk be hedged.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. Bond futures. Outright trading: Bond futures by themselves don't have duration. reduces market sensitivity to rate movements and performs well in a bear market. trading on the basis of market views. But because they track the cheapest-to-deliver bond (driven by basis traders). * in combination with other bond futures contracts. 11 . or * in combination with the underlying (typically the cheapest-to-deliver bond) in what amounts to basis trades. can be traded: * outright. Shorting bond futures. but with the convenience of the futures market in terms of narrow bid/ask spreads. as was the case with international bank deposit futures. easy reversibility of positions and low cash requirements. Going long the futures is a way of extending duration: it pays when the market is rallying and rates are falling. Playing duration with futures fulfills the same objective as playing the bond market directly. using spreads or butterflies that combine longs and shorts at different points in time or across countries. Expressing a market view Types of trades: The third application of bond futures. on the contrary. to express a view on market direction. 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.
). CAD. Finally. 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. Foreign currency futures contracts are available on all major currencies against the dollar (e. there are futures 12 . average of bilateral rates against the dollar) at the CBOT. In addition.g. there are futures on a USD index (i. 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). most of which are traded at the CME and at LIFFE. etc..e. For instance. and (ii) the evolution of short-term rates. DEM. AUD. In a similar vein. SRF. 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. and in particular whether the cheapest-to-deliver goes on special in the repo market Short-term basis trading is in fact quite complex. 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.. and can be used to take on risk subject to one's views in addition to as an arbitrage play. A basis trade can -.1so be held for shorter time horizon but then the position is subject to risk at the unwind. 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. CURRENCY FUTURES Contract specifications Types of contracts. 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. JPY. GBP.
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. June. 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. For instance.. Contract specifications. the difference between forward and futures prices is less important than with interest rates..e. Conversely. in the case of currencies. i. the prices of currency futures are bound by a basic arbitrage relationship with the underlying cash market. Currency futures against the dollar. As with interest rate futures.. bilateral exchange rates between two non-dollar currencies such as on JPY/DEM. tend to have quarterly contracts with delivery in March.e. Futures are a natural instrument to express views on future exchange rate movements. However. Expressing a market view Outright trading. Conversely. long yen and short dollars) is consistent with an expectation of an appreciation of the yen relative to the dollar. going long the JPY contract (i. They tend to require actual delivery. meaning that at futures settlement the long receives the currency of denomination of the future and pays dollars). Pricing and arbitrage: International interest rate parity Overview. based on number of dollars per unit of foreign currency. 13 . by far the most prevalent. September and December.on crosses. Price quotes are on American terms. the contract should be sold if one expects the yen to appreciate more than what is expected by the market. i. shorting the contract is consistent with an expectation of a yen depreciation relative to the dollar.e. More formally. 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.
STOCK INDEX FUTURES Contract specifications The underlying instrument. not every index correspond to a well defined portfolio of stocks (for example. Stock market indexes are time series designed to track the changes in the value of hypothetical portfolios of stocks. In other words. Treatment of dividends: Stock indexes are not usually adjusted for cash dividends. only price changes. and index computation. Futures contract specifications: All futures contracts on stock indexes are settled in cash. Physical delivery of stocks against a futures contract based on an index presents intractable difficulties. 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. Though returns on stock indexes of the same country are often highly correlated over time. 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 . any cash dividends received on the portfolio are ignoring when percentage changes in most indexes are being calculated. Stock indexes differ from one to another with respect to the range of stocks covered. relative performance can vary sharply over periods such as a month or a quarter. those indexes constructed using geometric means). The most common weighting scheme is market value weighting. First. Moreover. 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. used for example in both the S&P 500 and NYSE indexes. stock weighting.
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. * NYSE composite futures (NYSE). * FT-SE 100 index (LUFFE). The value of one futures contract is $500 times the index.companies. Based on a portfolio of 20 blue-chip American stocks listed on the NYSE. The value of one futures contract is $500 times the index. * S&P 400 (CME). The value of one fuLturesc ontact is $5 times the index. Contains the prices of 1. For illustration purposes. Based on a portfolio of 225 of the largest stocks listed on the Tokyo Stock Exchange. following is a list of the main international stock indexes and futures contracts on these indexes: * S&P 500 (CME). * Nikkei 225 stock average (CME). * Value Line futures (KC). It does not correspond directly to any portfolio of stocks because of its use of geometric averaging. The value of one futures contract is $500 times the index. Based on a portfolio of all the stocks listed on the NYSE. The value of one futures contract is $500 times the index. Contracts traded. Based on a portfolio of 40 of the largest stocks listed on the Paris Stock Exchange. The index accounts for 80% of the NYSE. The value of one futures contract is GBP 25 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 FRF200 times the index. * Major market index (CME). 15 . Based on a portfolio of 400 American stocks. Based on a portfolio of 500 American stocks. *CAC-4s0t ock index (MATIF).700 American stocks. The value of one futures contract is $500 tirmes the index.
Pricing and arbitrage Like futures on fixed income instruments and currencies. in other words. attractive prices available on the futures contract. As with interest rate and currency futures stock index futures prices and forward prices may differ because mark-to-market payments on -futures introduce an element of reinvestment risk that cannot be fully hedged. Managing index fund portfolios involves considerable oversight in terms of maintaining the correct weights as prices change and reinvesting any dividends that are received. 16 . by the cash-forward relationship. Index futures can provide a means of cheaper access to such a portfolio. stock index futures prices should be related to the underlying cash market by a cost of carry relationship or. fixed-income security. The sale of stock futures against a stock portfolio creates a hedged position with returns very similar to those of a short-term. acquiring. Otherwise arbitrage trades are possible. An interesting example of users of stock futures as hedging vehicles are brokers and dealers in equities. or the difficulty of moving funds quickly and on a large scale into and out of particular stocks. or eliminating exposure to the fluctuations of overall stock market Stock index futures strategies may be preferable to other means of adjusting and managing equity exposure because of cheaper transaction costs. Risk management and hedging Overview. Stock index futures provide a means of adjusting. 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. Creating synthetic index fund portfolios: Futures can be used to create portfolios that have cash flows characteristics similar to an index fund portfolio. ease of adjusting positions (liquidity).
Since a deposit of less than 10 percent is required to purchase or sell a stock futures contract. Spreads: A wide range of speculative strategies are possible by mixing stock index futures contracts of different maturities and or different underlying indexes. and leave the returns and risk component associated with the company-specific features of the stocks in the portfolio. the different tax treatments of those returns may make it advantageous for some investors to use equity futures. 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 stock selectivity. The strategy that should be employed is to sell stock futures up to reduce or eliminate the market-related component of that portfolio's risk and returns. Stock index futures can be used to create portfolios that have cash flows characteristics similar to an index fund portfolio. All profits and losses on stock index futures are effectively treated as long-term capital gains and losses. Expressing a market view Outright trading: Futures are a natural instruments to express views on future exchange rate movements. 17 .Capitalizing on different tax treatment of futures and equities.
The same applies. For example. 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). In either case. 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.OPTIONS ON FUTURES Definition and Pricing Definition and types of options. 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 above the option's strike price. 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). Conversely. The purchaser of the option pays a market-determined price (or premium) in order to have the right --but not the obligation-. the option has no exercise value and is said to be out of the money. whichever is greater.to establish the corresponding futures position by exercising the option at some time in the future. the option has exercise value and is said to be in the money. "Moneyness" of options. for a call. 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. * A put option confers upon its holder the right to establish a short (selling) futures position. to put options 18 . If the market price of the underlying is below the call option's strike price.
Hedgers and investors might want to use options on futures rather than futures themselves for the following reaso. If the price goes against you. 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. There is no downside risk to buying an option.: *Creating asymmetric payoffs on the upside and downside. 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.Futures positions at option exercise: To summarize. which is an extension of the Black-Shoes model originally derived for pricing equity options. With a futures position. Use of options on futures versus use of futures. you let the option expire worthless and pay no more. The price you pay for having the security offered by an option 19 . if exercised. you must pay the daily settlement variation when the price goes against you. the options on futures. yields long futures Underlying instruments.
e. corporation will lose its profit margin if the yen appreciates relative to the dollar at the time the Japanese firm agrees to the contract.is the upfront premium. The Japanese company will decide at the next board meeting. or actually express views on the basis of market volatility. Hedging example: floating-rate note issuance. suppose you are negotiating with a Japanese company for electrical parts. might want to hedge market volatility. which takes place in a month.S.S. 20 . * Hedging or trading on the basis of market volatility. The U. and interest rate cap (i. you might consider selling an option and collect the premium upfront. 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. however. This is due to the fact that futures are leveraged instruments. whether to provide parts at the agreed upon prices. The volume traded on options on futures is much larger than on equivalent options on the cash instruments. Some users. Only options allow them to isolate the volatility component on the basis of which they can hedge or trade *Contingent contracts. whether futures or options on futures are utilized by traders and corporate treasurers depends on their preferences on the risk/reward structure. Options on futures can be used instead to insure against adverse interest rate moves. Trading volumes. if you are willing to accept the risk of an unlimited downside exposure. liability or cash flow being hedged is of a contingent nature. it may pay for the U. This makes options on futures easier to hedge dynamically since one does not need to worry about financing of positions in the underlying. For example. Futures are not directly affected by changes in market volatility. In this case. Options might be suitable if the asset.. For a fixed price (the option premium). Thus. Conversely. firm to hedge the contingent payable by buying options on yen futures.
and given a few applications illustrating how these contracts would be used by risk managers and investors. Some may use them to spread risk. Futures. and derivatives generally. Market liquidity: A market is liquid when traders can buy and sell without substantially moving the price against them. Liquidity is provided to a large degree by locals (individuals trading on their own capital) trading in the pit. unlike in cash markets. futures have become widely accepted by money managers. We have investigated some of the features of futures contracts. or else by major financial institutions trading in automated systems. 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 as a building-block: Futures have been a key instrument in facilitating the modem trend of separating conventional financial products into their basic 21 . 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. IMPORTANCE OF FUTURES MARKETS Summary. most of the action happens in the future. financial institutions and corporations and have been successfully integrated into risk Management and yield enhancement strategies. Because they bind buyer and seller for a pre-specified period of time. Over the last decades.Liquidity and market depth In derivatives markets. allow economic agents to fine tune the structure of their assets and liabilities to better suit their risk preferences and market expectations. explained some of the basics regarding how they are priced. Economic importance of futures. 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 are bought or sold on margin. * Prices are determined by a competitive market system (open outcry or electronic bidding). the volume of financial futures now dwarfs the volume in traditional agricultural contracts. derivatives have contributed decisively to the integration of financial markets. Futures' features. 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. they allow not only the reduction or transformation of risk faced by individual investors but also the sheer understanding and measurement of risk. The surge in financial futures.components. In so doing. Financial futures (along with options) are best viewed as building blocks. Financial management is quickly becoming an exercise in reducing financials structures into their basic elements and then reassembling them into a preferable structure. Also. *All prices and information are available continuously. 22 . * Futures are relatively inexpensive to execute (negotiable commission rates). While the following are noteworthy advantages that futures have over forwards. and as such provide for substantial leverage. Participants know all transaction prices and there are no negotiated deals and no multiple phone calls to get price quotes. In the process. it should be noted that our goal is to illustrate how futures can be used effectively as an investment alternative and as a risk transfer mechanism.
23 . *Audit systems and safeguards enforced by regulatory authorities. Futures on Individual Securities Futures on individual securities were introduced in India in 2001. EQUITY FUTURES IN INDIA Equity futures are of two types: stock index futures and futures on individual securities. 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. *Counterparty credit risk of non-performance is negligible. exchanges and futures commission merchants provide a level of integrity for the marketplace.*Positions are easy to reverse if the opinion about market conditions and prospects changes. 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. 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. Both the type of equity futures are available in India. The National Stock Exchange has a stock index futures contract based on S&P CNX Nifty Index. On the other hand. OTC trading allows more flexibility in establishing contract terms and avoids the need for daily monitoring of mark-to-market positions and margin account.
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. 24 . “A financial futures in a futures contract in a financial instrument like treasury bond.” Eg: Financial futures.2 SUBJECT BACK GROUND FOR THE STUDY Futures market plays an important role in the world of finance. Many kinds of futures instruments have been developed and the use of futures has received a great deal of attention. but it is a tool for transferring price risks associated with fluctuations in asset values. The volume of trading in financial futures dwarfs the volume in traditional agricultural contracts. Eurodollar deposits. During the last decades the financial products into their basic components. US Treasury Bills.1. Futures are not only a financing or investment vehicle. currency or stock index.
4. 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. 25 . 5.1. 6. financial institutions and corporations have been successfully integrated into risk management and yield enhancement strategies.3 NEED FOR THE STUDY The needs for the study of financial futures are: 1. Futures have become widely accepted by money managers. Financial futures have become the corner stone of financial management. 2. 3. Financial futures play a prominent role in risk management. 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,
the method of payment. contracts tend to be offered on standardized terms in terms of maturity. Currencies: yen. Contract terms. The buyer and the seller both have 29 . and Treasury bills. the time and place of delivery. Over the last two decades. The margin requirements on futures contracts make them sufficiently immune to credit risk so that credit exposure is not a significant factor in pricing. such as those based on: Money market interest rates: certificates of deposit. futures based on financial commodities have flourished. NYSE Composite. quantity and quality of the underlying to be delivered. contract size.. For this reason.gold). In addition. forward contracts tend to be traded in over-the-counter (OTC) markets. pound (against the dollar or crosses) Equity indices: S&P500. cocoa). offshore or euro-deposits (e. To ensure the liquidity of exchange-traded futures markets. In futures contracts. 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. sugar. margining requirements and trading hours.g. deutschemark. Forward vs. Nikkei 225.. This serves to reduce credit exposure to intraday price movements Tradability. Forward contracts will trade on the basis of price and credit characteristics of the counterparty. gains and losses are settled daily in the form of margin payments. Bonds and notes: Treasury securities. B.LIBOR-based). In forward markets cash changes hands only on the forward date In futures markets. there are futures on several commodity indices (like the CRB and GSCI). among other characteristics. Credit exposure. softs (coffee. Cash flows and margining. This makes futures contracts particularly well suited for trading in organized exchanges. the clearing house members and the clearinghouse itself guarantee fulfillment of futures contracts.
(ii) risk management and hedging. Financial futures can be used as devices for: (i) arbitrage or yield enhancement. Risk management. based on observed short-term price movements). rather than to each other. and futures on three-month LIBOR and on one-month LIBOR By isolating each characteristic of some underlying security with a derivative instrument.) or set up by the industry itself. there is no formal regulation of forwards nor is there a body to handle customer complaints.e. Hedging can be performed on a single tansaction (or instrument) basis or on an aggregate (portfolio or firm) basis.S. on the other hand. driven by economic conditions and trends) or technical (i. Expressing market views. 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. Regulation." to put it in more blunt terms). 30 . arbitrage. are regulated by identifiable entities which are either governmental (like the Commodity Futures Trading Commission in the U. and (iii) taking trading positions on the basis of market views (or "speculating. Since forwards are a bilaterally negotiated agreement... Examples of single transaction hedging might include anticipatory hedging for debt or equity security issuance or currency hedging for foreign trade transactions. Such trades by definition cannot (indeed. Examples of related derivatives are interest rate swaps and interest rate futures. should not) be fully hedged. 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.an exposure to the clearing house (and the clearing house to them). FINANCIAL FUTURES: USES AND USER Uses. all arbitrage risk can be eliminated.e. Exchangetraded futures. whether these are fimdamental (i.
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. Users. commodity quality or cross-country differences). the timing of expected market movements. or a combination of these. changes in the spread between market segments (e. Financial institutions. Futures can be used to express views on general market direction.basic functions. investment banks. Non-financial corporations.. fund managers and insurance companies will use futures for their thrc:. investment or borrowing activities. expressing market views is not riskless. including commercial banks.although trade construction might be such as to immunize particular kinds (or dimensions) of risk.g. 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. brokerage firms. Unlike pure arbitrage. The principal financial futures exchanges in the world are: Chicago Mcrcantile Exchange (CME. The users of financial futures are naturally given by their uses. credit.
To study the amount of risk of Financial Futures of NSE in the month of March with reference to Banking and Pharmaceutical industries.2. journals.. internet. magazines etc. 2.7 TOOLS FOR DATA COLLECTION Secondary Data: It is collected from books. Five companies from Banking and five from Pharma industry are taken for the study.5 SCOPE OF THE STUDY: This study is done mainly under the ten companies of NSE Nifty.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. 2. 32 . Secondary data is mainly used for the study. The results cannot be generalized.4 OBJECTIVES OF THE STUDY • • • To study on the financial futures with reference to NSE Nifty. To study the volatility of futures with reference to Banking and Pharmaceutical industries. 2.
8 METHOD OF ANALYSIS The formula used for calculation are: β = n * Σxy – Σx . Σy n Σ x2 – (Σx)2 X = market return For calculating ‘x’ the NSE share price is taken.9 LIMITATIONS OF THE STUDY Time constrains Geographical constraints This is restricted to Banking and Pharmaceutical Industry 33 . 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 2.2.
Dabur. subject background of the study and need for the study.2. Syndicate Bank. Ranbaxy. IOB. review of literature. CIPLA. 34 . Glaxo and Sun Pharma. Chapter 2: Research Design deals with the statement of the problem. Punajb National Bank. objectives. Chapter 3: It deals with the Company Profiles of ICCI Bank. scope of the study and about the methodology used by the study. Conclusion and Recommendations.10 CHAPTER SCHEME Chapter 1: Introduction deals with the introduction to futures. Chapter 4: This chapter deals with the Analysis and Interpretation of Data Chapter 5: It gives the Summary of Findings. Corp Bank.
CHAPTER 3 PROFILE OF COMPANIES 35 .
life and non-life insurance. K. 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. USD 5.Kamath. Bandra Kurla. Credit Cards.1 ICICI BANK ICICI Bank Type Founded Headquarters Private BSE & NSE:ICICI.3. Nachiket Mor. Mumbai and the National Stock Exchange of India Limited and its ADRs are listed on the New York Stock Exchange (NYSE). ICICI Bank's equity shares are listed in India on stock exchanges at Kolkata and Vadodara. and about 2400 ATMs. Savings. 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 .icicibank. the Stock Exchange. SBI Life (Insurance) etc. venture capital and asset management. Mumbai India N Vaghul. NYSE: IBN 1955 (as Industrial Credit and Investment Corporation of India) ICICI Bank Ltd.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. ICICI Bank has total assets of about USD 56 Billion (end-Mar 2006).V. Investment vehicles.. ICICI Bank Towers.79 billion www. Chanda Kochhar Loans. a network of over 619 branches and offices.
All this changed in 1990s. and nor was it required to comply with Indian banking requirements for liquid reserves. ICICI borrowed funds from many multilateral agencies (such as the World Bank). These funds were deployed in large corporate loans. Hong Kong.It was the first bank to offer a wide network of ATM's and had the largest network of ATM's till 2005. ICICI bank now has the largest market value of all banks in India. The bank is expanding in overseas markets. Since 2002.in particular to the steel industry. ICICI founded a separate legal entity . At the time of the reverse merger. ICICI Bank is the largest issuer of credit cards in India . The bank is aggressively targeting the NRI (Non Resident Indian) population for expanding its business. 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. car loans etc. before SBI caught up with it. The experiment was so successful that ICICI merged into ICICI Bank ("reverse merger") in 2002.taking deposits.ICICI Bank which undertook normal banking operations . It has operations in the UK. there has been a general revival in Indian industry (and metal based industry in particular). ICICI was not a bank . 37 . It is widely believed that the proportion of NPAs has come down to prudent levels (even if it were high earlier). credit cards. It has tie-ups with major banks in the US and China. Singapore and Canada. other such institutions were IDBI and SIDBI) with the objective to finance large industrial projects. there were rumours that ICICI had a large proportion of Non Performing Loans ("NPA". ICICI Bank now has the largest market share among all banks in retail or consumer financing.ICICI was established by the Government of India in the 1960s as a Financial Institution (FI. often at concessional rates. It acquired a small bank in Russia recently. as they are known in India) on its books .
Gupta Banking Insurance Capital Markets and allied industries Loans. 1969. Insurance etc. India Chairman and M. on July 19. along with 13 other major commercial banks of India.3. The Government of India nationalized the bank. S. Investment vehicles.the name you can BANK upon www. is the second largest public sector commercial bank in India with about 4500 branches and offices throughout the country.PNBIndia. Mr.. established in 1895 in Lahore by Lala Lajpat Rai. 38 .C. Savings.com Products Revenue Slogan Website Punjab National Bank (PNB). Credit Cards.32 billion (2005) .D. USD 2. 1895 (British India) New Delhi. NSE:PNB) Lahore.2 PUNJAB NATIONAL BANK Punjab National Bank Type Founded Headquarters Key people Industry Public (BSE..
Investment vehicles. along with 13 other major commercial banks of India.000.3 SYNDICATE BANK Syndicate Bank Type Founded Headquarters Public (BSE & NSE) Udupi. 80. Vaman Kudva and Dr. M. The business started with a capital of Rs. USD bil Faithful and Friendly (English) & Viswasaneeya Hitheshi (Sanskrit) syndicatebank. 1925 (as Canara Industrial and Banking Syndicate Limited) Head Office. Bajaj Allianz Life Insurance (Insurance) etc. Manipal. Savings. At the time of its establishment. Pai. The bank.Insurance. by the Government of India.in/ Key people Industry Products Revenue Slogan Website Syndicate Bank. The first branch of the bank started its operations in the year 1928 at Brahmavar in Dakshin Kannada District. is one of the oldest and major commercial bank of India. Initially the bank collected as low as 2 annas from the door steps of the depositors daily through its agents. the bank was known as Canara Industrial and Banking Syndicate Limited. A. By 1937 it had secured its membership as a Clearing House at Mumbai. 39 . Karnataka India & Corporate Office Bangalore Chairman C P SWARNKAR Banking. The primary objective of business was to extended financial assistance to local weavers. established in 1925 in Udupi (Karnataka state.3. 1969. Credit Cards. T.Capital Markets and allied industries Loans. India) by Upendra Ananth Pai. was nationalized on 19th July.
From 1953-1964. National Stock Exchange. It took over Al Shabei Finance and Exchange Co. Currently it has over 1900 branches. 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. in Doha (1983) and Musandam Exchange Co. 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. Mangalore Stock Exchange and Bangalore Stock Exchange. 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. in Muscat (1984).4 CORPORATION BANK CORPORATION BANK 40 .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. By 1989 it opened its 1500th branch at Hauz Khas. Delhi.
Karnataka state. is one of the Indian banks in public sector.92 crores as on 31 March 2005. India. and operates from several branches in India.corpbank. The bank has the distinction of the first Indian bank to publish its financial results (199899) conforming to US GAAP.176 full time employees.5 INDIAN OVERSEAS BANK IOB 41 . Credit Cards. Savings. CORPORATE OFFICE . 054. The Bank is a Public Sector Unit with 57.83 crore (2006) Rs 100. The Bank came out with its Initial Public Offer (IPO) in October 1997 and 37.Type Founded Headquarters Public (BSE. founded in 1906 in Udupi.17% of Share Capital held by the Government of India.3.27 Crore (2006) A Premier Government of India Enterprise www. etc. has currently (31 March 2004) 10. 3. Rs 862. NSE:CORPBANK) Udipi. and first day’s canvassed resources of less than one USD 1. 1906 Corporation Bank. The bank was founded with an initial capital of Rs.87% of Share Capital is presently held by the Public and Financial Institutions. 5000 (USD 100).com Key people Industry Products Revenue Net income Slogan Website Corporation Bank. Mangaladevi Temple Road Pandeshwar Mangalore 575 001 India Chairman B. The Bank’s Net Worth stood at Rs. Investment vehicles. Sambamurthy Banking Loans.
Deposits stood at Rs.23 Crs at that time. a pioneer in many fields . Insurance and Industry with the twin objectives of specializing in foreign exchange business and overseas banking. by Shri.64 Crs and Advances at Rs. 3.Banking.6.6 RANBAXY LABORATORIES 42 . Chidambaram Chettyar. IOB had the unique distinction of commencing business on 10th February 1937 (on the inaugural day itself) in three branches simultaneously . At the dawn of Independence IOB had 38 branches in India and 7 branches abroad.Ct.M.Indian Overseas Bank (IOB) was founded on February 10th 1937.M.at Karaikudi and Chennai in India and Rangoon in Burma (presently Myanmar) followed by a branch in Penang.3.
The CEO of the company is Malvinder Mohan Singh. Ranbaxy went public in 1973.com Ranbaxy Laboratories Limited is an Indian company incorporated in 1961. Chief Mentor.178 billion (2005) Employees 1100 in R&D Website www. It exports its products to 125 countries with ground operations in 46 and manufacturing facilities in seven countries. India Tejendra Khanna. CEO & MD Industry Pharmaceutical Products Generic drugs Revenue $1. Executive Vice Chairman Malvinder Mohan Singh. It is ranked among the top 10 generic companies worldwide. It is India's largest pharmaceutical company.7 CIPLA CIPLA Limited 43 . Haryana.Ranbaxy Laboratories Limited Type Public Founded 1961 Headquarters Key people Gurgaon. 3.ranbaxy. Chairman Brian Tempest.
cipla. K. something difficult elsewhere because the three patents are 44 . The company was founded in 1935 by Khwaja Abdul Hamied.000 (and beyond) to around $300 per year. By doing so Cipla has reduced the cost of providing antiretroviral to AIDS patients from $12. 1936). 24. Chairman Industry Pharmaceuticals Revenue Net income Rs. Today (2007). While this sum remains out of reach for many millions of people in 'Third World' countries. so in money terms Cipla's medicines are probably not in top spot). best-known for manufacturing economical anti-AIDS drugs. 4. The customary treatment of AIDS consists of a cocktail of three drugs.com Cipla founded as The Chemical. India Y. as measured by units produced. Cipla produces an all-in-one pill called Triomune which contains all three substances (Lamivudine. Hamied (CMD). Cipla is the world's largest manufacturer of antiretroviral drugs to fight HIV/AIDS. charitable sources often are in a position to make up the difference for destitute patients. Industrial & Pharmaceutical Laboratories is a major Indian pharmaceutical company. the founder's eldest son. and its Chairman today is Yusuf Hamied (b. distributed and sold (multinational brandname drugs are exponentially more expensive.8 billion (2005) Rs.1 billion (2005) Employees ??? Website www.Type Founded 1935 Headquarters Key people Mumbai. Cipla ignores foreign patents on these drugs where no Indian law is broken in the process. stavudine and Nevirapine).
with the name Duovir-N.held by different companies. This contains Lamivudine.8 DABUR 45 . Zidovudine and Nevirapine. 3. One more popular fixed dose combination is there.
Uttar Pradesh. Dabur Chyawanprash. with brands like Dabur Amla. Africa and Europe.03 crore Website www. Dabur has manufacturing operations in India. S. Dabur has a turnover of approximately Rs. India. Dabur operates in more than 5 countries and has sales worldwide.dabur. Hajmola & Real Revenue Rs 1375.T all over the country therein opening a new market. West Bengal. schools and call centers. Burman in 1884 as a small pharmacy in Calcutta (now Kolkata). The company headquarters are in Ghaziabad. Burman. India.Dabur Type Public (NSE. 19 billion (approx.b does toxicology tests and markets ayurvedic medicines in a scientific manner. Vatika. Hajmola & Real. Africa and the United Arab Emirates. They have researched new medicines which will find use in O.C. Personal care and Food products. Vatika. where it is registered. as well as exports to Australia.K. The company was founded by Dr. through Dabur Pharma Ltd. C. The company. 46 .com Dabur India Limited is the fourth largest FMCG Company in India with interests in Health care. near the Indian capital of New Delhi. Hospitals. In two years the growth rate expected by them to change two folds. Food Products Dabur Amla. Dabur Chyawanprash. US$ 420 million) during the fiscal year 2005-2006. Barman Industry Health Care. and is now led by his greatgrandson V. It is most famous for Dabur Chyawanprash and Hajmola. West Asia. BSE) Founded 1884 Headquarters Ghaziabad Key people V. Their growth rate rose from 10% to 40%.
a subsidiary of Dabur India is expecting to grow at 25%. Dabur foods mainly supplied beverages to institutional customers. The company was set up in 1993 and now has sales worth Rs. It will therefore increase its range of products to include tomato based products..12 billion.Dabur Foods. has project sales of Rs 100 crore in next three years. In 47 .9 SUNPHARMA Sun Pharmaceutical Industries (Sun Pharma) is a major producer of specialty pharmaceuticals and active pharmaceutical ingredients. 3.
Chief Executive Julian Heslop. gastro-intestinal/metabolic. diabetology. 3.. London.gsk.S. oncology and vaccines products.10 GLAXOSMITHKLINE GlaxoSmithKline Type Public (LSE: GSK NYSE: GSK) Founded 2000. respiratory. psychiatry.1996.2 billion (2006) £7.com GlaxoSmithKline plc (LSE: GSK NYSE: GSK) is a British based pharmaceutical. Sun Pharma acquired the U. Chief Financial Officer Industry Pharmaceutical Products www. biologicals.gsk. gastroenterology. Business Sun Pharma brands are prescribed in chronic therapy areas like cardiology. live longer" Website www. GSK is a research-based company with a wide portfolio of pharmaceutical products covering anti-infectives. United Kingdom Key people Sir Chris Gent. and healthcare company. feel better. central nervous system (CNS). Detroit-based Caraco Pharm Labs. The same year the company also acquired Dadha Pharma in Tamil Nadu. It also 48 . by merger of Glaxo Wellcome and Smith Kline Beecham Headquarters Brentford. neurology.8 billion (2006) Employees Over 100.728 (2005) Slogan "Do more. and respiratory. Chairman Jean-Pierre Garnier.com/products Revenue Net income £23.
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.
143 0.3990 53.658 -1.98 0.366 3.546 0.924 Σx = -7.139 -2.781 -1.101 3.4329 1.13 1.13* 1.337 3.56 Source: Secondary Data β = n * Σxy – Σx .591 -0.630 1.090 2.56 .343 -6.850 1.791 -1.678 0.595 -1.7693 1.453 4.979 0. Σy n Σ x2 – (Σx)2 = 21*40.7312 0.8225 2.737 0.780 -1.402 -1.329 0.1823 0.269 0.201 -0.098 1.192 -1.330 -0.82 -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 1.9063 0.-7.337 21* 163.2323 0.482 -2.532 51 .952 -0.3540 1.2410 0.8537 Σ x2 = 163.145 3.5432 0.963 4.532 21.7693 – (-7.831 4.1603 6.2222 14.057 17.291 2.389 Σy = 1.359 Σxy = 40.8032 0.728 0.612 1.0403 37.1586 6.13) 2 = 851.497 0.326 -0.427 0.098 1.3124 0.5299 0.892 -0.482 -0.314 0.347 -0.724 -0.271 16.546 1.875 0.167 -2.329 -2.138 -7.916 -0.152 -1.3806 26.6972 0.76 .175 5.297 -24.409 -0.225 -0.7662 5.835 0.-9.
3439.836 = 861.292 3388.254 Table 4.314 = 0.1 shows the beta value of ICICI futures and Nifty futures. Since the beta value is less than one.15 – 50. 52 . ICICI futures are less volatile. Therefore investment in ICICI futures is less risky.
354 -3.361 Σ x2 = 229.391 1.134 3.249 13.355 8.Table 4.593 0.588 -4.377 44.132 15.673 3.682 Y 3.760 -2.483 19.087 -1.452 11.25 15.223 -5.864 1.350 9.943 -0.490 11.604 2.485 10. Σy n Σ x2 – (Σx)2 53 .8208 42.007 3.702 38.538 4.2 ANALYSIS OF CORPORATION BANK Date 01-03-2007 02-03-2007 05-03-2007 06-03-2007 07-03-2007 08-03-2007 09-03-2007 12-03-2007 13-03-2007 14-03-2007 15-03-2007 16-03-2007 19-03-2007 20-03-2007 21-03-2007 22-03-2007 23-03-2007 26-03-2007 28-03-2007 29-03-2007 30-03-2007 X -0.214 -0.181 3.004 -1.048 -0.905 1.505 2.901 1.50 -3.906 -6.849 0.601 Σx = -7.18 XY -3.155 Σxy = 592.259 Σy = 18.937 3.028 1.250 27.865 -0.014 23.333 -3.02 Source: Secondary Data β = n * Σxy – Σx .095 13.896 -2.985 6.751 5.249 3.515 -2.919 12.394 22.907 0.295 5.381 -0.923 3.474 0.378 -3.392 0.034 -0.232 12.216 5.365 20.108 11.363 5.475 8.931 0.614 1.931 -3.369 -3.770 -3.874 1.088 13.615 -0.008 -3.202 1.613 2.388 6.333 X2 .204 12.078 -0.211 3.508 7.
492 -4.644.538 -0. Table4.404 3.2 shows the beta value of ICICI futures and Nifty futures.18 – (-7.084 0.310 Y 2.458 -0.607 0.254 4753.952 -2.218 54 .268 -0.501 4. There fore investment in Corporation Bank is high risky.313 2.574 3.3 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 0.42 .767 = 2.329 5.697 1.380 1.705 X2 .559 2.113 -1.299 -2.268 1.212 -7.747 4.e.170 2.013 = 12573.880 0.682 * 18.-140. Corporation Bank futures are highly volatile.574 2.831 -0.-7.271 0.361 1.490 -4.552 2.644 Table 4.834 4812.164 53.096 XY -0.500 0.790 27.175 0.808 -1.= 21*592.658 -0.488 10.333 21* 229.526 -1.671 6.096 1.836 0.395 -0.307 -0.349 6.396 25. Since the beta value is more than one i.076 -3.338 -5.009 1.682) 2 = 12432. 2.78 – 59.02 .303 1.275 5.
083 9.674 Σx = -8.455 -0.3 shows the beta value of IOB futures and Nifty futures.03 – (--8. 55 . There fore investment in IOB futures is less risky.-8.017 21* 138.337 3.418 -2.093 3.368 1.00 0.652 13.179 -0.663 7.63 – 77.204 -3.126 -3.299 2.902 4.802 Σ x2 = 138.208 .408 -3.634 Table 4.677 1. IOB futures are less volatile.37 = 0.214 -4.959 -1.463 2.248 .578 2821.140 -1.26 = 1789.077 Σy = -12.20-03-2007 21-03-2007 22-03-2007 23-03-2007 26-03-2007 28-03-2007 29-03-2007 30-03-2007 3.63 2898.79 2.017 11.-105.812 2.919 2.326 3.129 Σxy = 90.79) 2 = 1895.117 0.248 Source: Secondary Data β = n * Σxy – Σx . Since the beta value is less than one.389 -1.062 9.607 -1.315 0. Σy n Σ x2 – (Σx)2 = 21* 90.000 -0.79* -12.
920 6.902 4.333 0.395 -0.711 19.626 -0.126 -3.113 -1.190 4.870 7.072 1.418 -2.036 3.705 2.968 0.500 -2.321 2.088 Source: Secondary Data 56 .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 1.788 Σx = -18.015 -0.005 1.625 1.463 2.344 -2.377 7.330 9.051 14.605 24.091 -2.267 -4.490 -4.661 Y 2.Table 4.939 -0.831 -0.060 Σxy = 133.485 -0.619 5.414 X2 1.552 2.781 -4.814 0.651 42.078 -2.717 5.909 3.170 2.492 -4.787 2.018 1.836 0.952 -2.620 Σ x2 = 165.658 -0.474 0.315 0.312 0.168 6.431 -1.077 Σy = -11.791 -1.468 -0.832 -3.257 2.020 12.792 15.965 -6.114 0.214 -4.006 4.982 18.733 18.928 -0.989 XY 3.717 5.25 5.953 0.076 -3.074 5.443 -0.538 -0.088 1.957 28.759 .122 8.232 4.060 0.204 -3.145 0.
088 .114 3.989 – (-18.661* -11.130 3.105 3.719 1.661) 2 = 2794.848 .694 50.822 Table 4.339 57 .738 -1.119 8.697 28. Since the beta value is less than one in the month of March. Table 4.563 -7.680 72.23 = 2581.β = n * Σxy – Σx . the Syndicate bank futures are less volatile and the investment in syndicate bank futures is less risky.809 -3.996 3485.-212.020 3.984 0.852 3137.-18.539 = 0.5 ANALYSIS OF PUNJAB NATIONAL BANK Date 01-03-2007 02-03-2007 05-03-2007 06-03-2007 07-03-2007 X 3.362 6.832 Y 5.492 1.4 shows the beta value of Syndicate Bank futures and Nifty futures.356 XY 20.823 X2 12. Σy n Σ x2 – (Σx)2 = 21* 133.769 – 348.414 21* 165.801 -1.
394 -3.333 – 287.111 0.435 2.093 0.768 -1.472 = 2681.879 – 151.001 -1.448 8.391 5268.721 -1.873 2.579 3.955 1.929 2.859 5.955) 2 = 2832.955* 8.825 2.580 1.096 14.538 58 .435 2.143 0.929 21* 250.905 3.206 0.453 -0.980 3.811 -1.336 3.606 -1.961 2.198 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 1.103 1.863 -0.948 Σy = 8.158 4.085 0.488 4980.239 -.157 1. Σy n Σ x2 – (Σx)2 = 21* 134.934 0.240 -3.778 1.028 Σ x2 = 250.566 27.195 0.168 Σx = 16.447 3.265 3.159 Σxy = 134.814 1.669 12.198 -1.316 2.873 – (16.489 11.920 -0.271 1.173 29.732 -2.953 -1.067 4.861 = 0.052 -2.656 24.857 2.041 0.069 -1.053 3.238 6.534 -1.696 5.899 – 16.391 0.955 10.899 Source: Secondary Data β = n * Σxy – Σx .322 1.
176 -1.260 -1.636 29.710 -5. Since the beta value is less than one.485 -0.178 -0.666 -7.6 RANBAXY Source: Secondary Data 59 .381 5.645 26.125 0.446 -0.503 0.175 0.047 -0.997 -0.803 2.227 0.443 51.294 0.343 -1.942 6.380 -1.803 ΣX2=174.260 -0.957 1.664 1.226 -1.098 0.353 1.793 5.657 1.704 4.473 36.236 2.830 1.156 0.316 -1.189 3. Table.503 3.689 20.363 0.397 -0.387 2.299 -1.942 -1.5 shows the beta value of Punjab National Bank futures and Nifty futures.336 0.132 0.469 0.031 5.866 8.660 -0.83 XY -0.786 3.472 -2.696 ΣY=-0.096 -3.201 0.673 0.580 5.062 volatile and investing in Punjab National Bank futures is less risky.524 0.213 15.976 27.259 0.548 Y 1.266 3.667 0.328 -0.343 ΣX=-8. 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 -0.798 5.514 0.329 0.394 2.858 2.278 -2.189 15.024 27.063 -1.475 -5.Table 4. 4.295 -0.059 0.830 -4.089 1.926 X2 0.887 1.655 0.151 0.934 ΣXY=132.
062 .548 * -0.915 3671. Table 4. it is less volatile and investing in Ranbaxy futures is less risky.068 = 2765.387 3598.43 – 73.768 Table 4.302 – 7.β = n * Σxy – Σx .6 shows the beta value of Ranbaxy futures. Since the beta value is less than one.362 = 0.7 60 .548) 2 = 2773. Σy n Σ x2 – (Σx)2 = 21*132.926 21* 174.83 – (-8.-8.
093 0.353 -3.962 -0.719 -0.193 0.738 * -0.770 ΣXY= -19.071 0.737 0.230 0.655 0.848 ΣX2= 77.738 Y 1.261 -1.381 5.445 2.553 0.204 2.543 0.423 3.155 -0.427 -0.149 8.047 -0.031 5.358 2.294 0.152 0.368 -4.689 -0.948 7.362 -1.252 -0.847 – 6.696 ΣY= -0.672 0.687 3.189 3.492 7.957 1.114 1.626 -0.847 Source: Secondary Data β = n * Σxy – Σx .068 0. Σy n Σ x2 – (Σx)2 = 21*-19.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 3.773 0.466 -2.486 0.701 -3.096 -3.024 0.743 -11.219 11.131 2.94 X2 14.020 0.329 0.739 -3.94 61 .165 -0.176 -1.228 XY 4.447 -0.831 2.008 0.023 0.630 -0.390 -2.062 -1.261 -0.475 -5.357 -0.316 -1.981 ΣX= 6.392 0.660 -0.481 -0.974 2.744 0.020 -7.667 -1.171 -0.051 0.496 0.473 1.710 -5.676 4.088 3.005 -0.007 15.328 -0.697 -0.
387 -3.151 5.453 -1.131 2.356 -5.297 -0.256 0.803 4. this shows that when the market return of the futures is increasing its stock value is coming down.703 2.8 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 -3.956 2.472 12.554 10.218 -3.573 -3.433 -2.626 25.428 -0.678 5.663 12.718 -4.446 0.054 Y -0.7 shows the beta value of Sun Pharma’s futures.146 11.911 -2.474 11.152 -0.635 62 .089 0.572 1.382 -3.572 10.388 = -0.816 -2.500 X2 9.21* 77.228 – (6.152 -2.011 -1.489 0.957 4.173 1. Since the beta value of this future is negative.022 2.738) 2 = -416.787 .121 -1.404 -2.-6.161 -0.26 Table 4.946 -2.788 – 45.666 4.049 1.542 XY 1.756 0.090 1.751 0.592 -1.223 -1.451 1576.173 0.257 -1.870 0.40 = -410.025 3.336 1621.101 1.525 -0. Table 4.631 8.038 13.988 -3.
314 2.001 2 ΣX = 155.359 ΣX= -14.825) 2 = 1566.465 Table 4. it is less volatile and the investment in Dabur futures is less risky.-14.267 = 0.027 9.84 21* 155.001 2.780 = 1420. Since the beta value is less than one.467 -1.516 – 145. 63 .845 6.725 2.687 -2.184 19. Σy n Σ x2 – (Σx)2 = 21*74.638 3054.412 2.942 -4.825 3.22-03-2007 23-03-2007 26-03-2007 28-03-2007 29-03-2007 30-03-2007 3.596 Source: Secondary Data β = n * Σxy – Σx .362 1.510 -1.8 shows the beta value of Dabur futures and Nifty futures.907 10.023 4.559 ΣXY= 74.086 3.068 1.878 3274.311 -1.596 .212 3.193 ΣY= -9.349 -4.771 16.047 – 219.825 * -9.210 1.84 9.907 – (-14.
872 2.584 -2.390 2.764 1.147 18.731 0.046 0.557 -0.435 -3.901 0.314 X2 6.345 -5.334 2.254 1.421 2.259 2.154 0.401 0.023 6.839 -1.478 2 ΣX = 126.454 3.867 8.489 -1.201 -0.296 2.885 0.687 1.134 2.312 0.022 8.150 2.538 0.818 1.228 -2.586 -1.507 6.823 -0.692 ΣX= -7.430 2.202 9.970 -2.271 -2.392 3.416 0.112 8.624 0.043 -1.820 5.449 25.207 2.Table 4.9 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 -2.324 -0.614 0.845 10.760 0.422 2.189 Source: Secondary Data 64 .084 XY 5.653 -2.969 0.237 -0.933 9.508 0.649 1.766 ΣXY= 55.935 -0.446 -0.854 0.907 -0.189 9.096 3.322 2.384 4.066 -1.400 1.421 7.819 0.961 -3.373 1.046 -2.609 5.086 -2.820 0.108 ΣY= 1.84 Y -2.961 -1.259 2.349 0.
-7.030 0.764 65 .84) 2 = 1158.764 – 61.930 Y 1.314 21* 126.445 XY -0. Table 4.482 3.814 1.2 shows the beta value of CIPLA futures and Nifty futures.013 -1.189 .418 0.555 0.46 = 1169.84 * 1.452 Table 4. Σy n Σ x2 – (Σx)2 = 21*55.298 1.756 0.230 X2 .302 2647.0001 2.691 -0.10 GLAXO Date 01-03-2007 02-03-2007 05-03-2007 06-03-2007 07-03-2007 X -0.084 – (-7.-10.176 0.271 2586. Since the beta value is less than one. it is less volatile and investing in CIPLA futures is less risky.088 -4.232 15.539 -8.304 = 0.β = n * Σxy – Σx .120 -2.015 -1.969 .
637 2 ΣX = 95.458 7.649 0.724 1.262 -3.571 1.403 1.134 1.651 2.052 0.-109.08-03-2007 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 0.856 2.062 1.392 -3.236 ΣY= -10.507 -1.851 -1.606 -2.002 – (-10.800 -5.126 54.7015 1877.557 1.552 5.1245 1995.056 -0.045 -0.353 -2.853 = -94.0006 2.589 0.092 0.806 0. Σy n Σ x2 – (Σx)2 = 21*-9.624 ΣX= 10.706 .138 -1.856) 2 = 203.437 1.621 0.126 -1.025 0.0006 0.948 -2.386 0.052 21* 95.1392 -3.214 1.856 * -10.424 3.564 4.891 0.235 -3.055 2.10.807 -1.025 1.255 ΣXY= -9.002 1.482 -5.421 1.347 0.066 4.867 -2.132 2.042 – 117.202 2.925 1.280 3.944 -0.706 Source: Secondary Data β = n * Σxy – Σx .826 .192 1.237 3.968 2.903 0.134 -3.824 -4.142 -4.806 1.189 66 .432 5.
= -. CHAPTER 5 SUMMARY OF FINDINGS. Since the beta value is negative it shows that when market return increases. CONCLUSIONS & RECCOMMENDATIONS 67 . stock value is coming down.2 shows the beta value of Glaxo futures and Nifty futures.05044 Table 4.
investing in ICICI futures. its stock value will come down.1 FINDINGS: The major findings of the study are: 1. 3. The financial future plays an important role in NSE Nifty.5. 4. 2. It shows that when the market value is increasing. There is relationship with share price movements of the valued of NSE futures. PNB. The study shows that investing in Corporation Bank futures is high risky. 68 . Ranbaxy. The futures value of Glaxo & Sun Pharma is negative. IOB. Dabur and CIPLA futures are less risky. In the month of March 2007. Syndicate Bank.
Futures or future contract at transferable specific delivery forward contracts. or that lock in the price today of an exchange.2 CONCLUSION A financial future is a futures contract on a short term interest rate. traded on a futures exchange. to buy or sell a certain underlying instrument at a certain date in the future.5. From the banking industry futures of Icici bank. which will take place between them at some fixed future date. They are agreements between two counter parties that fix the terms of an exchange. Syndicate bank. A futures contract is a standardized contract. Indian 69 . at a specified price. Corporation bank. In finance. The study entitled ‘THE ROLE OF FINANCIAL FUTURES WITH REFERENCE TO NSE NIFTY’ was done with reference to Banking and Pharmaceutical industry.
Sun Pharma. the investment in Corporation Bank futures is highly risky. Ranbaxy. Ranbaxy.3 RECOMMENDATIONS 1. Dabur are the companies taken from the pharmaceutical industry. Dabur and CIPLA futures are less the investors can invest in these futures. Financial futures can be used to dwarfs the volume in traditional agricultural contracts. the investors should be very cautious in investing into those futures. 3. 4. Syndicate Bank. PNB. Since the volatility of ICICI futures IOB. 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. Cipla. 70 . 2.Overseas Bank and Punjab National bank are taken. In March 2007. Glaxo. 5.
BIBLIOGRAPHY 71 .
Vol. Vol. 10th edition. Journals: • DALAL STREET. ‘Investment Analysis and Portfolio Management’. Investment Journal.III. November 9. Sultan Chand Publications. 2007.March 04. No. 6th edition. 05 Feb 19. ‘Investment Management and Security analysis’.Books: • Chandra Prasanna.XXII. • Bhalla V K. 2007. • Money and Finance. 72 . Tata McGraw Hill Publishing company.
com 73 .Money control .Website: www.NSE India.com www.
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