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.


KEY FEATURES OF FUTURES CONTRACTS The key features of future contract are: • • • • • Standardization Intermediation by the exchange Price limits Margin requirements Marking to market Standardisation: Traded futures contracts are standardized in terms of asset quality. This means that the profits and losses on futures contracts are settled on a periodic basis. Price limits: Futures exchanges impose limits on price movements of futures contracts. Intermediation by the Exchange: In a traded futures contract the exchange interposes itself between the buyer and the seller of the contract.• Forward contracts are settled on the maturity date. and maturity date. and to prevent overreaction to real information. whereas futures contract are ‘marked to market’ on a daily basis. triggered by rumors. asset quantity. Marking-to-market: While forward contracts are settled on the maturity date. futures contracts are ‘marked to market’ on a periodic basis. 4 . 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. Price limits are meant to prevent panic buying or selling. This means that profits and losses on futures contract are settled daily.

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. and wheat and orange juice have been in existence for nearly three centuries.FUTURES CONTRACTS: THE GLOBAL SCENE Broadly there are two types of futures: commodity futures and financial futures. cotton. the asset has to be storable. 5 . Futures price= Expected spot price – Expected risk premium FINANCIAL FUTURES A financial future is a futures contract on a short term interest rate (STIR). rice.or stock index. COMMODITY FUTURES (PERISHABLE COMMODITIES) For pricing futures contracts on the basis of arbitrage. Contracts vary. but are often defined on an interest rate index such as 3-month sterling or US dollar LIBOR. aluminum. COMMODITY FUTURES (STORABLE COMMODITIES) Futures contracts on various commodities. currency . A commodity futures is a futures contract in a commodity like cocoa or aluminum. Hence perishable commodities have to be analyzed differently. storable as well as perishable. while financial futures is a futures contract in a financial instrument like Treasury bond. oil. like gold.

then cash is transferred from the futures trader who sustained a loss to the one who made a profit. The exchange's clearinghouse acts as counterparty on all contracts. or simply futures. SHORT-TERM INTEREST RATE FUTURES Contract specifications An assortment of contracts. In other words. but not the obligation.In finance. sets margin requirements. no comparable contracts exist for other currencies. The settlement price. Both parties of a "futures contract" must fulfill the contract on the settlement date. are exchange traded derivatives. normally. The Eurodollar contract is the linchpin of the shortend interest rate futures contracts. which differs from an options contract. Futures contracts. A futures contract gives the holder the obligation to buy or sell. Other dollar-denominate short-term interest rate futures. the owner of an options contract may exercise the contract. effectively closing out the futures position and its contract obligations. 6 . The future date is called the delivery date or final settlement date. or. to buy or sell a certain underlying instrument at a certain date in the future. at a specified price. traded on a futures exchange. a futures contract is a standardized contract. The price of the underlying asset on the delivery date is called the settlement price. The seller delivers the commodity to the buyer. etc. if it is a cash-settled future. The pre-set price is called the futures price. the holder of a futures position has to offset his position by either selling a long position or buying back a short position. converges towards the futures price on the delivery date. To exit the commitment prior to the settlement date. which gives the holder the right.

Trading of Eurodollar contracts: Eurodollar contracts are now traded at the CME in Chicago. Eurodollar contract trading is de-facto available 24 hours. Thus.S. The futures price is quoted as 100 minus the annualized futures 3-month LIBOR (e..g.S.e. in that they are not regulated by U.S. at LIFFE in London and at SIMEX in Singapore. which is a dollar-denominate deposit with a bank or branch outside of the U. It is based on a ninetyday Eurodollar deposit. 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). 7 .5% per annum) in decimal terms. or with an international banking facility (IBF) located in the U. the offer side of the cash money market). Basic contract specifications: The nominal contract size is $1 million and the underlying rate is the three-month LIBOR.S. the rate at which a London bank is willing to lend dollars (i.5 implies a futures LIBOR rate of 3.. Eurodollar deposits differ from domestic term deposits or certificates of deposit in the U. 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. (ii) heterogeneity of bank credits would systematically raise questions on the quality of the delivered asset. 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. authorities and hence are not subject to reserve requirements or deposit insurance premiums.Eurodollar futures The Eurodollar futures market is the most widely traded money market contract in the world. a price of 96. although trading in it only started as recently as 1981.

For example. we need to understand how prices of futures contracts are related to the spot or cash market prices of the underlying asset. Because this is more convenient for most futures users than physical delivery. bond futures contracts generally allow for a range of bonds to be delivered against them. bond futures positions can also be unwound prior to delivery by offsetting futures transactions. bond futures are settled at expiration with physical delivery. All examples drawn below are based on the threemonth Eurodollar contract. Futures invoice price: When a bond is delivered into the bond futures contract. Of course. We will see that the market forces of arbitrage are used to price virtually all financial futures contracts. Plus any accrued interest on the bond: 8 . maturities or underlying asset constitute a straight-forward extension.S.S.AND LONG-TERM INTEREST RATE FUTURES Contract specifications Deliverable securities: Unlike international bank futures 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. few contracts actually go into delivery. U. there may be as many as several dozen securities in the deliverable basket. 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. applications with contracts based on different currencies. INTERMEDIATE. T-bond that has at least I. years remaining to maturity (or to first call if the bond is callable). all with different maturities and coupons. Also unlike the T-bill futures contract. Treasury bond futures contracts allow delivery of any U.Pricing and arbitrage: Implied forward rates In order to understand how futures prices are established.

Pricing and arbitrage Cash-futures relationship: Similar to short-term interest rate contracts. Since then three futures contracts have been established on U. bond futures contracts designed along the lines of the U. For illustration purposes. International bond futures contracts. T-bond. Since 1932. June. Treasury notes: a 10-year. In other words.S. The basis is the difference between a bond's price and the futures invoice price (as defined above).and long-term interest rate contracts: The U. September and December). T-bonds). The contract size defines the par amount of the bond that is deliverable into the contract ($100. there is an arbitrage relationship which holds the prices of the T-bond futures contract to the cash market.000 for U. it is the difference in cost between 9 . It is the delivery option of the short that makes valuing bond futures more complex than valuing international bank (euro) deposit futures. T-bond contract are shown in parentheses for illustrative purposes. where they are traded and the description of their deliverable set.S.S. Understanding the relationship between a futures contract and the deliverable basket is crucial to understanding the drive behind the arbitrage.Futures invoice price = futures price conversion factor + accrued interest Other contract terms: Exchanges set other futures contact terms as follows. T-bond contract have spread internationally. the table below lists the main international bond futures contracts. They all have similar characteristics to their forerunner. Delivery months on bond futures contacts are quarterly (March. the concrete specifications of the U. The exchange will also set daily trading hours.S. Other U. medium. was the first fut3ureo n long-tern interest rates. the last trading date and the last delivery period (one month).S.S. a 5year and a 2-year contract. traded at the CBOT since 1977. The basis.

deliver bond in the cash market. An excessive exposure to intermediate.futures invoice price = clean cash price . the gross basis must be equal to zero.this conversion is performed simply by multiplying the decimal basis by 32. The basis is generally quoted in 32nds rather than in decimal units . 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. Risk management and hedging Basic risk management functions: Bond futures are often used as a vehicle for hedging price risk or duration. Then one could: (i) buy (sell) the cheapest to.and long-term interest rates can be offset by buying or selling bond futures contracts. Recall that he basic formula is: Hedge ratio = scale factor x basis point value factor x volatility factor The scale factor is the ratio of the notional or principal amount of the asset being hedged and the futures contract size.buying the bond in the cash market and buying a futures contract on it and having it delivered into the contract at expiration. for instance. that the gross basis was negative (positive). Otherwise there would be instantaneous risk less profit opportunities. and (iii) immediately deliver (receive delivery of) the cash bond against the short (long) futures position. Suppose.(futures price conversion factor) since dirty (or full) price = clean price + accrued interest. The basis point value factor is the ratio of the change in the 10 . Basis arbitrate at futures expiration: At futures expiration. (ii) sell (buy) a bond futures contract. Accordingly.

using spreads or butterflies that combine longs and shorts at different points in time or across countries. on the contrary. reduces market sensitivity to rate movements and performs well in a bear market. Outright trading: Bond futures by themselves don't have duration. to express a view on market direction. Playing duration with futures fulfills the same objective as playing the bond market directly. 11 . they contribute dollar duration to portfolios much along the lines of the cash bond. The volatility factor can be set to one if bond futures are used to hedge interest rate risk of roughly the same credit characteristics and in roughly the same yield curve segment. 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. as was the case with international bank deposit futures. Expressing a market view Types of trades: The third application of bond futures. * in combination with other bond futures contracts. can be traded: * outright. Shorting bond futures. requires by definition that not all risk be hedged. easy reversibility of positions and low cash requirements. but with the convenience of the futures market in terms of narrow bid/ask spreads. Going long the futures is a way of extending duration: it pays when the market is rallying and rates are falling. or * in combination with the underlying (typically the cheapest-to-deliver bond) in what amounts to basis trades. But because they track the cheapest-to-deliver bond (driven by basis traders). Bond futures.

. In a similar vein.g. Interpreting a bond future calendar spread as a reading on a particular segment of the yield curve is made difficult by each contracts' particular sensitivity to shifts in the cheapest-to-deliver and to changes in the repo rate on the cheapest deliver. For instance. Basis trading: Trading the basis from the long side is relatively risk less if the position is held to the futures expiration date. 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. GBP. A basis trade can -.). most of which are traded at the CME and at LIFFE.1so be held for shorter time horizon but then the position is subject to risk at the unwind.e. and in particular whether the cheapest-to-deliver goes on special in the repo market Short-term basis trading is in fact quite complex. In addition. average of bilateral rates against the dollar) at the CBOT. CURRENCY FUTURES Contract specifications Types of contracts. Finally. 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..Spread trading: As a word of caution. CAD. as explained above. DEM. AUD. and can be used to take on risk subject to one's views in addition to as an arbitrage play. JPY. etc. there are futures 12 . 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). there are futures on a USD index (i. 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 (ii) the evolution of short-term rates. SRF.

the contract should be sold if one expects the yen to appreciate more than what is expected by the market. based on number of dollars per unit of foreign currency. Currency futures against the dollar.. going long the JPY contract (i. bilateral exchange rates between two non-dollar currencies such as on JPY/DEM. 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.. the prices of currency futures are bound by a basic arbitrage relationship with the underlying cash market. in the case of currencies.e. the difference between forward and futures prices is less important than with interest rates. meaning that at futures settlement the long receives the currency of denomination of the future and pays dollars). There is no financing bias against the long as was the case with interest rate futures if exchange rates are assumed to be uncorrelated with the level of interest rates. Conversely. June. Contract specifications. Conversely. by far the most prevalent.. More formally. i. They tend to require actual delivery. tend to have quarterly contracts with delivery in March.on crosses. As with interest rate futures. one should buy the JPY contract if one expects the yen to appreciate more than what is already expected (or priced in) by the market. Price quotes are on American terms. Pricing and arbitrage: International interest rate parity Overview. Futures are a natural instrument to express views on future exchange rate movements. September and December. Arbitrage relations are cleaner with forwards than with futures because mark-to-market payments on futures introduce an element of reinvestment risk that cannot be fully hedged. i.e. Expressing a market view Outright trading.e. However. 13 . For instance.

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. Treatment of dividends: Stock indexes are not usually adjusted for cash dividends. Physical delivery of stocks against a futures contract based on an index presents intractable difficulties. First. used for example in both the S&P 500 and NYSE indexes. and index computation. Stock indexes differ from one to another with respect to the range of stocks covered. not every index correspond to a well defined portfolio of stocks (for example. Moreover. In other words. any cash dividends received on the portfolio are ignoring when percentage changes in most indexes are being calculated. stock weighting. Though returns on stock indexes of the same country are often highly correlated over time. Indexes differ in composition because of the need to measure the price movements of the equity markets of different countries and different segments of each of these national equity markets. relative performance can vary sharply over periods such as a month or a quarter. Index construction: The weight of a stock in an index is the proportion of the portfolio tracked by the index invested in the stock. Stock market indexes are time series designed to track the changes in the value of hypothetical portfolios of stocks. Futures contract specifications: All futures contracts on stock indexes are settled in cash.STOCK INDEX FUTURES Contract specifications The underlying instrument. The most common weighting scheme is market value weighting. only price changes.

The value of one futures contract is GBP 25 times the index.companies. Based on a portfolio of all the stocks listed on the NYSE. Based on a portfolio of 500 American stocks. * Major market index (CME). Contains the prices of 1. For illustration purposes. The value of one futures contract is $500 times the index.700 American stocks. 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. Based on a portfolio of 40 of the largest stocks listed on the London Stock Exchange. *CAC-4s0t ock index (MATIF). The value of one fuLturesc ontact is $5 times the index. 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. The value of one futures contract is $500 times the index. Contracts traded. * FT-SE 100 index (LUFFE). The value of one futures contract is FRF200 times the index. It does not correspond directly to any portfolio of stocks because of its use of geometric averaging. * S&P 400 (CME). The value of one futures contract is $500 times the index. Based on a portfolio of 225 of the largest stocks listed on the Tokyo Stock Exchange. The value of one futures contract is $500 tirmes the index. 15 . Based on a portfolio of 20 blue-chip American stocks listed on the NYSE. * NYSE composite futures (NYSE). The index accounts for 80% of the NYSE. following is a list of the main international stock indexes and futures contracts on these indexes: * S&P 500 (CME). Based on a portfolio of 400 American stocks. * Value Line futures (KC). * Nikkei 225 stock average (CME).

acquiring. 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. fixed-income security. Stock index futures provide a means of adjusting. Index futures can provide a means of cheaper access to such a portfolio. ease of adjusting positions (liquidity). stock index futures prices should be related to the underlying cash market by a cost of carry relationship or. 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. Managing index fund portfolios involves considerable oversight in terms of maintaining the correct weights as prices change and reinvesting any dividends that are received. by the cash-forward relationship. Creating synthetic index fund portfolios: Futures can be used to create portfolios that have cash flows characteristics similar to an index fund portfolio. Risk management and hedging Overview. or the difficulty of moving funds quickly and on a large scale into and out of particular stocks.Pricing and arbitrage Like futures on fixed income instruments and currencies. The sale of stock futures against a stock portfolio creates a hedged position with returns very similar to those of a short-term. 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. in other words. Otherwise arbitrage trades are possible. An interesting example of users of stock futures as hedging vehicles are brokers and dealers in equities. 16 .

Spreads: A wide range of speculative strategies are possible by mixing stock index futures contracts of different maturities and or different underlying indexes. 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. 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. All profits and losses on stock index futures are effectively treated as long-term capital gains and losses.Capitalizing on different tax treatment of futures and equities. Since a deposit of less than 10 percent is required to purchase or sell a stock futures contract. 17 . Stock index futures can be used to create portfolios that have cash flows characteristics similar to an index fund portfolio. Expressing a market view Outright trading: Futures are a natural instruments to express views on future exchange rate movements. Capitalizing on stock selectivity. the different tax treatments of those returns may make it advantageous for some investors to use equity futures. and leave the returns and risk component associated with the company-specific features of the stocks in the portfolio.

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. Conversely. if the market price of the underlying is above the option's strike price. "Moneyness" of options. * A put option confers upon its holder the right to establish a short (selling) futures position. whichever is greater. There are two types of options on futures: * A call option confers upon its holder the right to establish a long (buying) futures position. 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 exercise value and is said to be in the money. In either case.to establish the corresponding futures position by exercising the option at some time in the future. 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).OPTIONS ON FUTURES Definition and Pricing Definition and types of options. but in reverse. The key to options is to understand that holding an option represents a right rather than an obligation. the option has no exercise value and is said to be out of the money. to put options 18 . If the market price of the underlying is below the call option's strike price. The same applies. 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).

yields long futures Underlying instruments. you must pay the daily settlement variation when the price goes against you. If the price goes against you. if exercised. 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. 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.Futures positions at option exercise: To summarize. With a futures position. Use of options on futures versus use of futures. There is no downside risk to buying an option. which is an extension of the Black-Shoes model originally derived for pricing equity options. you let the option expire worthless and pay no more. There are options on all the types (though not necessarily on all the specific contracts) of financial futures.: *Creating asymmetric payoffs on the upside and downside. The price you pay for having the security offered by an option 19 . the options on futures. Hedgers and investors might want to use options on futures rather than futures themselves for the following reaso.

S. if you are willing to accept the risk of an unlimited downside exposure. 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. Only options allow them to isolate the volatility component on the basis of which they can hedge or trade *Contingent contracts. This is due to the fact that futures are leveraged instruments. For a fixed price (the option premium). whether to provide parts at the agreed upon prices. and interest rate cap (i. you might consider selling an option and collect the premium upfront.. 20 . however. Trading volumes. For example.is the upfront premium. it may pay for the U. The Japanese company will decide at the next board meeting. which takes place in a month. 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. The U. might want to hedge market volatility.S. This makes options on futures easier to hedge dynamically since one does not need to worry about financing of positions in the underlying. liability or cash flow being hedged is of a contingent nature. Hedging example: floating-rate note issuance.e. In this case. corporation will lose its profit margin if the yen appreciates relative to the dollar at the time the Japanese firm agrees to the contract. Conversely. or actually express views on the basis of market volatility. Thus. The volume traded on options on futures is much larger than on equivalent options on the cash instruments. firm to hedge the contingent payable by buying options on yen futures. * Hedging or trading on the basis of market volatility. Options might be suitable if the asset. Futures are not directly affected by changes in market volatility. suppose you are negotiating with a Japanese company for electrical parts. Some users.

Liquidity and market depth In derivatives markets. They are not per se a financing or investment vehicle but rather a tool for transferring price risks associated with fluctuations in asset values. 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. and given a few applications illustrating how these contracts would be used by risk managers and investors. and derivatives generally. others to take on risk on the basis of particular market views. Futures. 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 . Market liquidity: A market is liquid when traders can buy and sell without substantially moving the price against them. unlike in cash markets. Economic importance of futures. financial institutions and corporations and have been successfully integrated into risk Management and yield enhancement strategies. IMPORTANCE OF FUTURES MARKETS Summary. most of the action happens in the future. explained some of the basics regarding how they are priced. futures have become widely accepted by money managers. Liquidity typically arises when there are individuals or institutions which continuously wish to buy or sell. 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. Because they bind buyer and seller for a pre-specified period of time. Liquidity is provided to a large degree by locals (individuals trading on their own capital) trading in the pit. Some may use them to spread risk. or else by major financial institutions trading in automated systems. Over the last decades.

In the process. 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. * Prices are determined by a competitive market system (open outcry or electronic bidding). *All prices and information are available continuously. 22 . In so doing. Financial management is quickly becoming an exercise in reducing financials structures into their basic elements and then reassembling them into a preferable structure. * Futures are bought or sold on margin. derivatives have contributed decisively to the integration of financial markets. 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. * Futures are relatively inexpensive to execute (negotiable commission rates). The surge in financial futures. the volume of financial futures now dwarfs the volume in traditional agricultural contracts. Also. Financial futures (along with options) are best viewed as building blocks. Participants know all transaction prices and there are no negotiated deals and no multiple phone calls to get price quotes. and as such provide for substantial leverage.components. While the following are noteworthy advantages that futures have over forwards. Futures' features.

Futures on Individual Securities Futures on individual securities were introduced in India in 2001. *Audit systems and safeguards enforced by regulatory authorities. 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. The National Stock Exchange and the Bombay Stock Exchange have introduced futures on individual securities. The National Stock Exchange has a stock index futures contract based on S&P CNX Nifty Index. OTC trading allows more flexibility in establishing contract terms and avoids the need for daily monitoring of mark-to-market positions and margin account. Both the type of equity futures are available in India. On the other hand. 23 . exchanges and futures commission merchants provide a level of integrity for the marketplace. 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. *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 list of securities in which futures contracts are permitted is specified by Securities Exchange Board of India. The Bombay Stock Exchange has a stock index futures contract based on Sensex.

US Treasury Bills.2 SUBJECT BACK GROUND FOR THE STUDY Futures market plays an important role in the world of finance. but it is a tool for transferring price risks associated with fluctuations in asset values. currency or stock index. “A financial futures in a futures contract in a financial instrument like treasury bond. Eurodollar deposits.1. During the last decades the financial products into their basic components. 24 . Many kinds of futures instruments have been developed and the use of futures has received a great deal of attention.” Eg: Financial futures. 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. Futures are not only a financing or investment vehicle. The volume of trading in financial futures dwarfs the volume in traditional agricultural contracts.

Futures are relatively in expensive to execute. Financial futures play a prominent role in risk management. 2. 6. Futures have facilitated the modern trend of separating conventional financial products into their basic components. Futures have been a key instrument in facilitating the modern trend of separating conventional financial products into their basic components. financial institutions and corporations have been successfully integrated into risk management and yield enhancement strategies. 25 . Financial futures have become the corner stone of financial management. 4. 5. Futures have become widely accepted by money managers.1. 3.3 NEED FOR THE STUDY The needs for the study of financial futures are: 1.




Research Design is the basic frame work which provides the guidelines for research. The research design specifies the method for data collection analysis. There are mainly two methods of collecting data, primary and secondary data collection.

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.

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,


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.gold). Over the last two decades. Forward vs. contracts tend to be offered on standardized terms in terms of maturity. and Treasury bills. there are futures on several commodity indices (like the CRB and GSCI). The buyer and the seller both have 29 . In forward markets cash changes hands only on the forward date In futures markets. NYSE Composite. Credit exposure. sugar.g. such as those based on: Money market interest rates: certificates of deposit. deutschemark. gains and losses are settled daily in the form of margin payments. In addition. Forward contracts will trade on the basis of price and credit characteristics of the counterparty. Bonds and notes: Treasury securities.LIBOR-based). Currencies: yen. offshore or euro-deposits (e. To ensure the liquidity of exchange-traded futures markets. The margin requirements on futures contracts make them sufficiently immune to credit risk so that credit exposure is not a significant factor in pricing. contract size.. quantity and quality of the underlying to be delivered. B.. the clearing house members and the clearinghouse itself guarantee fulfillment of futures contracts. softs (coffee. For this reason. Cash flows and margining. futures based on financial commodities have flourished. the method of payment. pound (against the dollar or crosses) Equity indices: S&P500. margining requirements and trading hours. This makes futures contracts particularly well suited for trading in organized exchanges. among other characteristics. This serves to reduce credit exposure to intraday price movements Tradability. In futures contracts. Nikkei 225. the time and place of delivery. Contract terms. forward contracts tend to be traded in over-the-counter (OTC) markets. cocoa).

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).. and (iii) taking trading positions on the basis of market views (or "speculating. FINANCIAL FUTURES: USES AND USER Uses..e. Exchangetraded futures." to put it in more blunt terms). based on observed short-term price movements). driven by economic conditions and trends) or technical (i. (ii) risk management and hedging. Since forwards are a bilaterally negotiated agreement. arbitrage.S.e. Regulation. Examples of related derivatives are interest rate swaps and interest rate futures. should not) be fully hedged. Such trades by definition cannot (indeed. are regulated by identifiable entities which are either governmental (like the Commodity Futures Trading Commission in the U. whether these are fimdamental (i. 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. Examples of single transaction hedging might include anticipatory hedging for debt or equity security issuance or currency hedging for foreign trade transactions. all arbitrage risk can be eliminated. rather than to each other. Expressing market views. on the other hand. Hedging can be performed on a single tansaction (or instrument) basis or on an aggregate (portfolio or firm) basis.) or set up by the industry itself. Financial futures can be used as devices for: (i) arbitrage or yield enhancement. 30 . there is no formal regulation of forwards nor is there a body to handle customer complaints. and futures on three-month LIBOR and on one-month LIBOR By isolating each characteristic of some underlying security with a derivative instrument. Financial futures are an efficient way of taling bets on the market on the basis of traders' views. Risk management.

Individuals and locals a:e more likely to use them for speculation and arbitrage.basic functions.although trade construction might be such as to immunize particular kinds (or dimensions) of risk.g. Financial institutions. including municipal and state organizations and foundations are more likely to use them to hedge their commercial. Users. investment banks. or the "Merc") Chicago Board of Trade (CBOT) Tokyo International Financial Futures Exchange (TIFFE) Tokyo Stock Exchange (TSE) London Intemational Financial Futures and Options Exchange (LIFFE) Marche a Terme International de France (MATIF) in Paris Singape-e Interational Monetary Exchange (SIMEX) Deutsche Terminborse (DTB) in Frankfurt New York Futures Exchange (NYFE) Mercado Espafhol de Futuros y Opciones Financieras (MEFF) in Barcelona 31 . Unlike pure arbitrage. including commercial banks. or a combination of these. commodity quality or cross-country differences). credit. Non-financial corporations. investment or borrowing activities. 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. Futures can be used to express views on general market direction. fund managers and insurance companies will use futures for their thrc:.. expressing market views is not riskless. The users of financial futures are naturally given by their uses. the timing of expected market movements. changes in the spread between market segments (e. brokerage firms. The principal financial futures exchanges in the world are: Chicago Mcrcantile Exchange (CME.

2. journals.2. 32 . 2.7 TOOLS FOR DATA COLLECTION Secondary Data: It is collected from books.4 OBJECTIVES OF THE STUDY • • • To study on the financial futures with reference to NSE Nifty. internet. 2. To study the amount of risk of Financial Futures of NSE in the month of March with reference to Banking and Pharmaceutical industries. Secondary data is mainly used for the study. The results cannot be generalized.. Five companies from Banking and five from Pharma industry are taken for the study.6 RESEARCH METHODOLOGY This study entitled ‘A study on the role of Financial Futures with reference to NSE Nifty is mainly done in Banking and Pharmaceutical industry. To study the volatility of futures with reference to Banking and Pharmaceutical industries.5 SCOPE OF THE STUDY: This study is done mainly under the ten companies of NSE Nifty. magazines etc.

2. X= closing price – opening price * 100 Opening price Y = stock return For calculating ‘y’ the NSE future value is taken Y= closing price – opening price *100 Opening price 2. 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 .9 LIMITATIONS OF THE STUDY Time constrains Geographical constraints This is restricted to Banking and Pharmaceutical Industry 33 .

Chapter 2: Research Design deals with the statement of the problem.10 CHAPTER SCHEME Chapter 1: Introduction deals with the introduction to futures. Syndicate Bank. Corp Bank. Conclusion and Recommendations. Dabur. Punajb National Bank. Chapter 3: It deals with the Company Profiles of ICCI Bank. Chapter 4: This chapter deals with the Analysis and Interpretation of Data Chapter 5: It gives the Summary of Findings. Ranbaxy. review of literature. Glaxo and Sun Pharma. scope of the study and about the methodology used by the study. objectives. IOB. 34 .2. CIPLA. subject background of the study and need for the study.


NYSE: IBN 1955 (as Industrial Credit and Investment Corporation of India) ICICI Bank Ltd. Credit Cards.1 ICICI BANK ICICI Bank Type Founded Headquarters Private BSE & NSE:ICICI.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. Mumbai India N Vaghul. life and non-life insurance.. venture capital and asset management.Kamath.V. ICICI Bank's equity shares are listed in India on stock exchanges at Kolkata and Vadodara.79 billion www. 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 . Investment vehicles. Bandra Kurla.3. Nachiket Mor. K. Savings. ICICI Bank has total assets of about USD 56 Billion (end-Mar 2006). SBI Life (Insurance) etc. USD 5. Mumbai and the National Stock Exchange of India Limited and its ADRs are listed on the New York Stock Exchange (NYSE). ICICI Bank Towers. 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. a network of over 619 branches and offices.icicibank. the Stock Exchange. Chanda Kochhar Loans. and about 2400 ATMs.

It has tie-ups with major banks in the US and China. It has operations in the UK. there has been a general revival in Indian industry (and metal based industry in particular).in particular to the steel industry. The bank is expanding in overseas markets. before SBI caught up with it.ICICI Bank which undertook normal banking operations . All this changed in 1990s. car loans etc. 37 . and nor was it required to comply with Indian banking requirements for liquid reserves.it could not take retail deposits. The bank is aggressively targeting the NRI (Non Resident Indian) population for expanding its business. It is widely believed that the proportion of NPAs has come down to prudent levels (even if it were high earlier). The experiment was so successful that ICICI merged into ICICI Bank ("reverse merger") in 2002. It acquired a small bank in Russia recently. credit cards. often at concessional rates.It was the first bank to offer a wide network of ATM's and had the largest network of ATM's till 2005. and is widely seen as a sophisticated bank able to take on many global banks in the Indian market.ICICI was established by the Government of India in the 1960s as a Financial Institution (FI. ICICI was not a bank . other such institutions were IDBI and SIDBI) with the objective to finance large industrial projects. 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 bank now has the largest market value of all banks in India. there were rumours that ICICI had a large proportion of Non Performing Loans ("NPA". ICICI founded a separate legal entity . Since 2002. ICICI Bank is the largest issuer of credit cards in India . Singapore and Canada. At the time of the reverse merger. as they are known in India) on its books . Hong Kong.taking deposits. These funds were deployed in large corporate loans.

Investment vehicles. NSE:PNB) Lahore. 1895 (British India) New Delhi. S. Insurance etc.. USD 2. Savings. is the second largest public sector commercial bank in India with about 4500 branches and offices throughout the country.C.3.the name you can BANK upon www.32 billion (2005) ..2 PUNJAB NATIONAL BANK Punjab National Bank Type Founded Headquarters Key people Industry Public (BSE. The Government of India nationalized the bank. India Chairman and M. 38 .PNBIndia.D. 1969. Credit Cards. along with 13 other major commercial banks of India. on July 19.com Products Revenue Slogan Website Punjab National Bank (PNB).Gupta Banking Insurance Capital Markets and allied industries Loans. established in 1895 in Lahore by Lala Lajpat Rai. Mr.

3 SYNDICATE BANK Syndicate Bank Type Founded Headquarters Public (BSE & NSE) Udupi. The business started with a capital of Rs. 1925 (as Canara Industrial and Banking Syndicate Limited) Head Office. The bank. A. The first branch of the bank started its operations in the year 1928 at Brahmavar in Dakshin Kannada District. Karnataka India & Corporate Office Bangalore Chairman C P SWARNKAR Banking.3. Vaman Kudva and Dr. The primary objective of business was to extended financial assistance to local weavers. Credit Cards.000.in/ Key people Industry Products Revenue Slogan Website Syndicate Bank. USD bil Faithful and Friendly (English) & Viswasaneeya Hitheshi (Sanskrit) syndicatebank. Investment vehicles. By 1937 it had secured its membership as a Clearing House at Mumbai. At the time of its establishment. along with 13 other major commercial banks of India. the bank was known as Canara Industrial and Banking Syndicate Limited. is one of the oldest and major commercial bank of India. India) by Upendra Ananth Pai. Pai. 1969. 80. was nationalized on 19th July. Initially the bank collected as low as 2 annas from the door steps of the depositors daily through its agents. Bajaj Allianz Life Insurance (Insurance) etc. 39 . by the Government of India. established in 1925 in Udupi (Karnataka state. Savings. Manipal.Insurance. M. T.Capital Markets and allied industries Loans.

The bank expanded its operations not only on the domestic front but also overseas. 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. Delhi. Currently it has over 1900 branches. It took over Al Shabei Finance and Exchange Co. Syndicate Bank sponsored the first regional rural bank in India by name Prathama Grameena Bank. From 1953-1964. Mangalore Stock Exchange and Bangalore Stock Exchange. National Stock Exchange. By 1989 it opened its 1500th branch at Hauz Khas. 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. in Muscat (1984). 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. The stocks of the Syndicate Bank are listed on Bombay Stock Exchange.4 CORPORATION BANK CORPORATION BANK 40 .

etc.87% of Share Capital is presently held by the Public and Financial Institutions. India. The bank has the distinction of the first Indian bank to publish its financial results (199899) conforming to US GAAP. Mangaladevi Temple Road Pandeshwar Mangalore 575 001 India Chairman B.com Key people Industry Products Revenue Net income Slogan Website Corporation Bank. Savings. 1906 Corporation Bank.83 crore (2006) Rs 100.Type Founded Headquarters Public (BSE. 5000 (USD 100). and first day’s canvassed resources of less than one USD 1.92 crores as on 31 March 2005. Karnataka state. The Bank came out with its Initial Public Offer (IPO) in October 1997 and 37. 3. CORPORATE OFFICE . The Bank is a Public Sector Unit with 57. has currently (31 March 2004) 10.176 full time employees. NSE:CORPBANK) Udipi.27 Crore (2006)[1] A Premier Government of India Enterprise www. Rs 862.3. and operates from several branches in India.17% of Share Capital held by the Government of India. Investment vehicles. founded in 1906 in Udupi. The bank was founded with an initial capital of Rs.corpbank.5 INDIAN OVERSEAS BANK IOB 41 . Sambamurthy Banking Loans. The Bank’s Net Worth stood at Rs. is one of the Indian banks in public sector. Credit Cards. 054.

6. Chidambaram Chettyar. by Shri.64 Crs and Advances at Rs. At the dawn of Independence IOB had 38 branches in India and 7 branches abroad.3. Insurance and Industry with the twin objectives of specializing in foreign exchange business and overseas banking. 3.6 RANBAXY LABORATORIES 42 . IOB had the unique distinction of commencing business on 10th February 1937 (on the inaugural day itself) in three branches simultaneously .Ct.Indian Overseas Bank (IOB) was founded on February 10th 1937. Deposits stood at Rs.at Karaikudi and Chennai in India and Rangoon in Burma (presently Myanmar) followed by a branch in Penang.23 Crs at that time.M.M. a pioneer in many fields .Banking.

It is ranked among the top 10 generic companies worldwide.ranbaxy. Chief Mentor. Chairman Brian Tempest. Executive Vice Chairman Malvinder Mohan Singh. It exports its products to 125 countries with ground operations in 46 and manufacturing facilities in seven countries.7 CIPLA CIPLA Limited 43 . It is India's largest pharmaceutical company. 3.Ranbaxy Laboratories Limited Type Public Founded 1961 Headquarters Key people Gurgaon. India Tejendra Khanna. Ranbaxy went public in 1973.178 billion (2005) Employees 1100 in R&D Website www. Haryana. CEO & MD Industry Pharmaceutical Products Generic drugs Revenue $1. The CEO of the company is Malvinder Mohan Singh.com Ranbaxy Laboratories Limited is an Indian company incorporated in 1961.

8 billion (2005) Rs. Cipla is the world's largest manufacturer of antiretroviral drugs to fight HIV/AIDS. Chairman Industry Pharmaceuticals Revenue Net income Rs.com Cipla founded as The Chemical. Industrial & Pharmaceutical Laboratories is a major Indian pharmaceutical company. and its Chairman today is Yusuf Hamied (b. The customary treatment of AIDS consists of a cocktail of three drugs. By doing so Cipla has reduced the cost of providing antiretroviral to AIDS patients from $12. distributed and sold (multinational brandname drugs are exponentially more expensive. Cipla ignores foreign patents on these drugs where no Indian law is broken in the process. 24.1 billion (2005) Employees ??? Website www. Hamied (CMD). Cipla produces an all-in-one pill called Triomune which contains all three substances (Lamivudine. best-known for manufacturing economical anti-AIDS drugs.Type Founded 1935 Headquarters Key people Mumbai. the founder's eldest son.000 (and beyond) to around $300 per year. stavudine and Nevirapine). Today (2007). While this sum remains out of reach for many millions of people in 'Third World' countries. The company was founded in 1935 by Khwaja Abdul Hamied. 1936). as measured by units produced.cipla. charitable sources often are in a position to make up the difference for destitute patients. something difficult elsewhere because the three patents are 44 . India Y. 4. so in money terms Cipla's medicines are probably not in top spot). K.

8 DABUR 45 . This contains Lamivudine. with the name Duovir-N. 3.held by different companies. One more popular fixed dose combination is there. Zidovudine and Nevirapine.

They have researched new medicines which will find use in O. India. Dabur has manufacturing operations in India. Dabur Chyawanprash. Personal care and Food products. near the Indian capital of New Delhi. Burman in 1884 as a small pharmacy in Calcutta (now Kolkata). Uttar Pradesh. Barman Industry Health Care. and is now led by his greatgrandson V. West Bengal. The company headquarters are in Ghaziabad. Dabur has a turnover of approximately Rs. Hospitals. as well as exports to Australia.K. S.T all over the country therein opening a new market. 19 billion (approx. Their growth rate rose from 10% to 40%. Vatika. The company.03 crore Website www.b does toxicology tests and markets ayurvedic medicines in a scientific manner. Food Products Dabur Amla. Africa and Europe. Hajmola & Real.com Dabur India Limited is the fourth largest FMCG Company in India with interests in Health care. India. Dabur Chyawanprash. 46 .C. through Dabur Pharma Ltd. The company was founded by Dr. Africa and the United Arab Emirates. BSE) Founded 1884 Headquarters Ghaziabad Key people V. schools and call centers.Dabur Type Public (NSE. Hajmola & Real Revenue Rs 1375. Vatika. C. Burman. US$ 420 million) during the fiscal year 2005-2006. Dabur operates in more than 5 countries and has sales worldwide. with brands like Dabur Amla. West Asia. where it is registered. In two years the growth rate expected by them to change two folds.dabur. It is most famous for Dabur Chyawanprash and Hajmola.

It will therefore increase its range of products to include tomato based products. has project sales of Rs 100 crore in next three years. In 47 .. a subsidiary of Dabur India is expecting to grow at 25%. 3. Dabur foods mainly supplied beverages to institutional customers.9 SUNPHARMA Sun Pharmaceutical Industries (Sun Pharma) is a major producer of specialty pharmaceuticals and active pharmaceutical ingredients.12 billion.Dabur Foods. The company was set up in 1993 and now has sales worth Rs.

Detroit-based Caraco Pharm Labs. oncology and vaccines products. 3. live longer" Website www. It also 48 .1996.10 GLAXOSMITHKLINE GlaxoSmithKline Type Public (LSE: GSK NYSE: GSK) Founded 2000. neurology.2 billion (2006) £7.728 (2005) Slogan "Do more. central nervous system (CNS). by merger of Glaxo Wellcome and Smith Kline Beecham Headquarters Brentford.gsk. Chief Financial Officer Industry Pharmaceutical Products www.. GSK is a research-based company with a wide portfolio of pharmaceutical products covering anti-infectives. gastroenterology. and respiratory. psychiatry. respiratory. Business Sun Pharma brands are prescribed in chronic therapy areas like cardiology. diabetology. London. Sun Pharma acquired the U. Chief Executive Julian Heslop.8 billion (2006) Employees Over 100. biologicals.com GlaxoSmithKline plc (LSE: GSK NYSE: GSK) is a British based pharmaceutical. feel better. Chairman Jean-Pierre Garnier.com/products Revenue Net income £23. The same year the company also acquired Dadha Pharma in Tamil Nadu. United Kingdom Key people Sir Chris Gent. and healthcare company.gsk. gastro-intestinal/metabolic.S.

nutritional drinks and over the counter (OTC) medicines 49 .has a Consumer Healthcare operation comprising leading oral healthcare products.


781 -1.831 4.850 1.337 21* 163.532 51 .098 1.8537 Σ x2 = 163.2410 0.2323 0.875 0.7693 – (-7.343 -6.13* 1.409 -0.297 -24.7693 1.98 0.314 0.271 16.359 Σxy = 40.8225 2.225 -0.3990 53.192 -1.-9.482 -2.791 -1.979 0.724 -0.0403 37.138 -7.7312 0.678 0.152 -1.145 3.546 0. Σy n Σ x2 – (Σx)2 = 21*40.658 -1.780 -1.389 Σy = 1.5432 0.630 1.329 0.057 17.453 4.546 1.497 0.201 -0.482 -0.612 1.9063 0.-7.330 -0.402 -1.924 Σx = -7.329 -2.963 4.3124 0.952 -0.098 1.291 2.101 3.01-03-2007 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 1.3540 1.326 -0.3806 26.13) 2 = 851.2222 14.143 0.892 -0.1603 6.427 0.737 0.8032 0.591 -0.7662 5.347 -0.835 0.5299 0.532 21.728 0.13 1.595 -1.82 -0.175 5.916 -0.76 .56 .139 -2.1586 6.1823 0.269 0.6972 0.337 3.366 3.4329 1.56 Source: Secondary Data β = n * Σxy – Σx .167 -2.090 2.

3439. 52 .836 = 861. Since the beta value is less than one. Therefore investment in ICICI futures is less risky.314 = 0. ICICI futures are less volatile.292 3388.254 Table 4.15 – 50.1 shows the beta value of ICICI futures and Nifty futures.

673 3.682 Y 3.361 Σ x2 = 229.295 5.088 13.937 3.Table 4.538 4.259 Σy = 18.896 -2.034 -0.355 8.615 -0.078 -0.004 -1.760 -2.095 13.232 12.702 38.108 11.363 5.378 -3.50 -3.770 -3.014 23.508 7.216 5.485 10.865 -0.249 3.613 2.369 -3.048 -0.901 1.905 1.604 2.874 1.087 -1.028 1.864 1.392 0.223 -5.923 3. Σy n Σ x2 – (Σx)2 53 .008 -3.601 Σx = -7.388 6.943 -0.202 1.333 X2 .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 -0.333 -3.155 Σxy = 592.751 5.931 -3.505 2.8208 42.18 XY -3.906 -6.181 3.204 12.354 -3.132 15.919 12.211 3.214 -0.475 8.931 0.25 15.350 9.907 0.985 6.849 0.394 22.007 3.588 -4.02 Source: Secondary Data β = n * Σxy – Σx .391 1.377 44.483 19.515 -2.593 0.452 11.474 0.249 13.490 11.614 1.250 27.365 20.134 3.381 -0.

113 -1.880 0.271 0.170 2.313 2.682) 2 = 12432.552 2.076 -3.18 – (-7.644.671 6.607 0.836 0.361 1.218 54 .559 2.396 25.767 = 2.333 21* 229.808 -1.009 1.-140.404 3.2 shows the beta value of ICICI futures and Nifty futures.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 0.268 1.013 = 12573.658 -0. Corporation Bank futures are highly volatile.831 -0.096 1.349 6.747 4. 2.682 * 18.175 0. Table4.310 Y 2.-7.= 21*592.492 -4.164 53.644 Table 4.78 – 59.501 4.458 -0.790 27.526 -1.500 0.697 1.096 XY -0.329 5.212 -7.303 1.307 -0.e.275 5.42 .574 2.490 -4. Since the beta value is more than one i.084 0.02 .299 -2.395 -0.488 10.538 -0.574 3. There fore investment in Corporation Bank is high risky.952 -2.705 X2 .834 4812.380 1.254 4753.338 -5.268 -0.

214 -4.79* -12.248 . Since the beta value is less than one.00 0.326 3.418 -2.607 -1.26 = 1789.248 Source: Secondary Data β = n * Σxy – Σx .674 Σx = -8.337 3.79 2.455 -0.017 11.129 Σxy = 90.634 Table 4.083 9.902 4.578 2821.093 3.204 -3.63 2898.062 9.299 2.919 2. There fore investment in IOB futures is less risky.03 – (--8.-8.408 -3.000 -0.663 7.463 2.117 0.-105.077 Σy = -12.389 -1.79) 2 = 1895.652 13. 55 .677 1.20-03-2007 21-03-2007 22-03-2007 23-03-2007 26-03-2007 28-03-2007 29-03-2007 30-03-2007 3.3 shows the beta value of IOB futures and Nifty futures.179 -0.368 1.140 -1.126 -3.802 Σ x2 = 138.959 -1.63 – 77.017 21* 138.812 2.315 0. IOB futures are less volatile.208 . Σy n Σ x2 – (Σx)2 = 21* 90.37 = 0.

920 6.414 X2 1.832 -3.717 5.474 0.791 -1.619 5.661 Y 2.968 0.500 -2.982 18.315 0.076 -3.267 -4.078 -2.989 XY 3.060 0.492 -4.113 -1.468 -0.705 2.626 -0.074 5.072 1.395 -0.168 6.965 -6.625 1.953 0.25 5.418 -2.036 3.344 -2.051 14.020 12.717 5.060 Σxy = 133.015 -0.870 7.733 18.490 -4.651 42.902 4.836 0.605 24.957 28.170 2.333 0.928 -0.091 -2.005 1.443 -0.788 Σx = -18.787 2.952 -2.620 Σ x2 = 165.088 Source: Secondary Data 56 .006 4.122 8.781 -4.330 9.463 2.018 1.321 2.552 2.257 2.145 0.939 -0.214 -4.4 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 1.126 -3.088 1.831 -0.759 .Table 4.377 7.204 -3.711 19.485 -0.792 15.658 -0.538 -0.114 0.077 Σy = -11.190 4.814 0.312 0.909 3.431 -1.232 4.

339 57 .809 -3.-18.697 28.738 -1.020 3.β = n * Σxy – Σx . Σy n Σ x2 – (Σx)2 = 21* 133.823 X2 12.822 Table 4.661* -11.694 50.984 0.801 -1.356 XY 20.563 -7.23 = 2581.130 3.680 72. Table 4. Since the beta value is less than one in the month of March.4 shows the beta value of Syndicate Bank futures and Nifty futures.362 6.539 = 0.5 ANALYSIS OF PUNJAB NATIONAL BANK Date 01-03-2007 02-03-2007 05-03-2007 06-03-2007 07-03-2007 X 3.832 Y 5.088 .114 3.852 3137.105 3.492 1.989 – (-18. the Syndicate bank futures are less volatile and the investment in syndicate bank futures is less risky.848 .661) 2 = 2794.996 3485.-212.119 8.719 1.769 – 348.414 21* 165.

265 3.566 27.472 = 2681.488 4980.08-03-2007 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 1.489 11.168 Σx = 16.041 0.934 0.656 24.953 -1.435 2.721 -1.825 2.873 2.052 -2.111 0.053 3.859 5.238 6.534 -1.394 -3.001 -1.899 Source: Secondary Data β = n * Σxy – Σx .879 – 151.980 3.316 2.093 0.028 Σ x2 = 250.955* 8.955 10.811 -1.814 1.157 1.271 1.448 8.333 – 287.239 -.857 2.863 -0.143 0.580 1. Σy n Σ x2 – (Σx)2 = 21* 134.579 3.961 2.159 Σxy = 134.920 -0.198 0.899 – 16.069 -1.929 21* 250.435 2.085 0.606 -1.955 1.103 1.206 0.195 0.873 – (16.948 Σy = 8.391 5268.391 0.158 4.240 -3.173 29.322 1.096 14.447 3.929 2.067 4.336 3.198 -1.768 -1.669 12.696 5.905 3.732 -2.861 = 0.955) 2 = 2832.778 1.538 58 .453 -0.

363 0.666 -7.803 2.047 -0.175 0.226 -1.469 0.Table 4.942 6.278 -2.957 1.657 1.294 0.696 ΣY=-0.132 0.316 -1.664 1.156 0.096 -3.031 5.503 3.858 2.343 ΣX=-8.260 -0.793 5.397 -0.6 RANBAXY Source: Secondary Data 59 .803 ΣX2=174.343 -1.189 15. 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 -0.5 shows the beta value of Punjab National Bank futures and Nifty futures. 4.786 3.485 -0.336 0.503 0. Since the beta value is less than one.227 0.645 26.548 Y 1.866 8.704 4.380 -1.830 -4.446 -0.394 2.830 1.667 0.83 XY -0.472 -2.201 0.655 0.178 -0.926 X2 0.024 27.098 0.660 -0.260 -1.942 -1.259 0.934 ΣXY=132.475 -5.997 -0.443 51. Table.353 1.328 -0.213 15.887 1.125 0.266 3.636 29.329 0.514 0.151 0.059 0.189 3.236 2.295 -0.063 -1.673 0.381 5.798 5.473 36.387 2.062 volatile and investing in Punjab National Bank futures is less risky.710 -5.299 -1.176 -1.580 5.089 1.689 20.524 0.976 27.

6 shows the beta value of Ranbaxy futures.83 – (-8.768 Table 4. Table 4.068 = 2765.43 – 73.548) 2 = 2773. Since the beta value is less than one. Σy n Σ x2 – (Σx)2 = 21*132.-8.7 60 .362 = 0.062 .302 – 7.β = n * Σxy – Σx .915 3671.926 21* 174. it is less volatile and investing in Ranbaxy futures is less risky.548 * -0.387 3598.

024 0.660 -0.007 15.316 -1.739 -3.447 -0.974 2.390 -2.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 3.948 7.381 5.630 -0.294 0.193 0.131 2.088 3.152 0.553 0.655 0.427 -0.626 -0.466 -2.687 3.737 0.020 -7.696 ΣY= -0.719 -0.165 -0.008 0.171 -0.423 3.676 4.261 -1.051 0.023 0. Σy n Σ x2 – (Σx)2 = 21*-19.475 -5.068 0.445 2.155 -0.847 Source: Secondary Data β = n * Σxy – Σx .94 X2 14.047 -0.710 -5.228 XY 4.481 -0.353 -3.848 ΣX2= 77.020 0.204 2.770 ΣXY= -19.357 -0.368 -4.667 -1.358 2.486 0.672 0.962 -0.261 -0.492 7.329 0.189 3.149 8.176 -1.743 -11.847 – 6.005 -0.062 -1.219 11.738 * -0.773 0.744 0.252 -0.957 1.093 0.94 61 .230 0.831 2.096 -3.738 Y 1.473 1.114 1.392 0.981 ΣX= 6.031 5.701 -3.071 0.697 -0.543 0.362 -1.328 -0.496 0.689 -0.

988 -3.572 10.8 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 -3.161 -0.404 -2.626 25.554 10.474 11.256 0.572 1. Table 4.336 1621.911 -2.787 .956 2.173 0.038 13.453 -1.121 -1.816 -2.297 -0. Since the beta value of this future is negative.631 8.635 62 .257 -1.718 -4.40 = -410. this shows that when the market return of the futures is increasing its stock value is coming down.788 – 45.666 4.131 2.146 11.022 2.218 -3.21* 77.101 1.025 3.946 -2.472 12.573 -3.803 4.151 5.542 XY 1.011 -1.446 0.703 2.228 – (6.500 X2 9.451 1576.387 -3.678 5.356 -5.054 Y -0.223 -1.152 -0.957 4.433 -2.089 0.738) 2 = -416.388 = -0.489 0.525 -0.-6.173 1.870 0.428 -0.090 1.26 Table 4.152 -2.756 0.7 shows the beta value of Sun Pharma’s futures.592 -1.382 -3.049 1.663 12.751 0.

359 ΣX= -14.001 2 ΣX = 155.068 1.907 – (-14.184 19.023 4.559 ΣXY= 74.465 Table 4.349 -4.311 -1. 63 .510 -1.84 9.22-03-2007 23-03-2007 26-03-2007 28-03-2007 29-03-2007 30-03-2007 3.8 shows the beta value of Dabur futures and Nifty futures.942 -4.001 2.193 ΣY= -9.210 1.047 – 219.362 1.267 = 0. Σy n Σ x2 – (Σx)2 = 21*74.-14.412 2.825 3.314 2.596 Source: Secondary Data β = n * Σxy – Σx .84 21* 155.780 = 1420.516 – 145.596 .638 3054.687 -2.825 * -9.845 6.825) 2 = 1566.771 16.086 3.878 3274.027 9.725 2.212 3. it is less volatile and the investment in Dabur futures is less risky.467 -1.907 10. Since the beta value is less than one.

731 0.416 0.854 0.096 3.228 -2.760 0.189 Source: Secondary Data 64 .819 0.022 8.653 -2.907 -0.872 2.390 2.430 2.969 0.046 -2.766 ΣXY= 55.046 0.508 0.271 -2.538 0.935 -0.933 9.202 9.692 ΣX= -7.584 -2.649 1.823 -0.334 2.401 0.421 2.839 -1.764 1.586 -1.066 -1.201 -0.449 25.609 5.134 2.422 2.086 -2.9 CIPLA Date 01-03-2007 02-03-2007 05-03-2007 06-03-2007 07-03-2007 08-03-2007 09-03-2007 12-03-2007 13-03-2007 14-03-2007 15-03-2007 16-03-2007 19-03-2007 20-03-2007 21-03-2007 22-03-2007 23-03-2007 26-03-2007 28-03-2007 29-03-2007 30-03-2007 X -2.970 -2.885 0.489 -1.023 6.421 7.507 6.314 X2 6.373 1.147 18.446 -0.108 ΣY= 1.478 2 ΣX = 126.84 Y -2.150 2.400 1.Table 4.901 0.867 8.043 -1.322 2.435 -3.259 2.392 3.259 2.237 -0.207 2.154 0.084 XY 5.345 -5.189 9.820 5.961 -3.845 10.112 8.687 1.296 2.820 0.349 0.818 1.312 0.384 4.614 0.624 0.454 3.961 -1.254 1.324 -0.557 -0.

298 1.930 Y 1.189 .304 = 0.10 GLAXO Date 01-03-2007 02-03-2007 05-03-2007 06-03-2007 07-03-2007 X -0.445 XY -0.0001 2. Table 4.482 3.691 -0.176 0.539 -8.271 2586.814 1.030 0.764 – 61. it is less volatile and investing in CIPLA futures is less risky.2 shows the beta value of CIPLA futures and Nifty futures.452 Table 4.120 -2.β = n * Σxy – Σx .555 0.314 21* 126.969 .764 65 .088 -4.084 – (-7.-7.-10. Since the beta value is less than one.756 0.013 -1. Σy n Σ x2 – (Σx)2 = 21*55.84 * 1.418 0.015 -1.84) 2 = 1158.302 2647.46 = 1169.232 15.230 X2 .

134 -3.824 -4.807 -1.856 * -10.0006 0.856) 2 = 203.052 0.056 -0.948 -2.392 -3.066 4.002 1.800 -5.192 1.944 -0.1245 1995.706 .0006 2.891 0.025 0.237 3.386 0.132 2.851 -1.092 0.606 -2.045 -0.055 2.806 1.052 21* 95.138 -1.557 1.649 0.856 2.002 – (-10.482 -5.458 7.347 0.1392 -3.589 0.925 1.853 = -94.126 -1.042 – 117.142 -4.651 2.10.421 1.432 5.867 -2.025 1.624 ΣX= 10.621 0.826 .637 2 ΣX = 95.507 -1.08-03-2007 09-03-2007 12-03-2007 13-03-2007 14-03-2007 15-03-2007 16-03-2007 19-03-2007 20-03-2007 21-03-2007 22-03-2007 23-03-2007 26-03-2007 28-03-2007 29-03-2007 30-03-2007 0.564 4.235 -3.403 1.424 3.202 2.262 -3.903 0.236 ΣY= -10.353 -2.189 66 .571 1.706 Source: Secondary Data β = n * Σxy – Σx .7015 1877.552 5.-109.134 1.280 3.255 ΣXY= -9.437 1.968 2.724 1. Σy n Σ x2 – (Σx)2 = 21*-9.214 1.126 54.062 1.806 0.

stock value is coming down.05044 Table 4.2 shows the beta value of Glaxo futures and Nifty futures.= -. CHAPTER 5 SUMMARY OF FINDINGS. Since the beta value is negative it shows that when market return increases. CONCLUSIONS & RECCOMMENDATIONS 67 .

The financial future plays an important role in NSE Nifty. 3.5.1 FINDINGS: The major findings of the study are: 1. Syndicate Bank. investing in ICICI futures. The study shows that investing in Corporation Bank futures is high risky. 68 . There is relationship with share price movements of the valued of NSE futures. 4. Ranbaxy. Dabur and CIPLA futures are less risky. It shows that when the market value is increasing. its stock value will come down. The futures value of Glaxo & Sun Pharma is negative. In the month of March 2007. IOB. PNB. 2.

From the banking industry futures of Icici bank. A futures contract is a standardized contract. They are agreements between two counter parties that fix the terms of an exchange. Futures or future contract at transferable specific delivery forward contracts. to buy or sell a certain underlying instrument at a certain date in the future. which will take place between them at some fixed future date. The study entitled ‘THE ROLE OF FINANCIAL FUTURES WITH REFERENCE TO NSE NIFTY’ was done with reference to Banking and Pharmaceutical industry.5. at a specified price. Corporation bank. or that lock in the price today of an exchange. In finance. Syndicate bank.2 CONCLUSION A financial future is a futures contract on a short term interest rate. Indian 69 . traded on a futures exchange.

Glaxo.3 RECOMMENDATIONS 1.Overseas Bank and Punjab National bank are taken. Financial futures can be used to dwarfs the volume in traditional agricultural contracts. Syndicate Bank. Dabur are the companies taken from the pharmaceutical industry. the investors should be very cautious in investing into those futures. 5. 2. PNB. 4. Ranbaxy. Cipla. 3. the investment in Corporation Bank futures is highly risky. 70 . Since the volatility of ICICI futures IOB. In March 2007. Ranbaxy. Sun Pharma. Dabur and CIPLA futures are less the investors can invest in these futures. 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.


XXII. Vol. No. • Money and Finance. ‘Investment Analysis and Portfolio Management’. Tata McGraw Hill Publishing company. ‘Investment Management and Security analysis’. Sultan Chand Publications.Books: • Chandra Prasanna. • Bhalla V K. 72 .March 04. Journals: • DALAL STREET. 6th edition. November 9. 05 Feb 19. 10th edition. Investment Journal.III. 2007. 2007. Vol.

Website: www.Money control .com 73 .NSE India.com www.

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