A STUDY ON THE ROLE OF FINANCIAL FUTURES WITH REFERENCE TO NSE NIFTY
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.
Price limits are meant to prevent panic buying or selling. Marking-to-market: While forward contracts are settled on the maturity date. triggered by rumors.
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.
. asset quantity. futures contracts are ‘marked to market’ on a periodic basis. This means that the profits and losses on futures contracts are settled on a periodic basis. and maturity date. 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. This means that profits and losses on futures contract are settled daily. Price limits: Futures exchanges impose limits on price movements of futures contracts.•
Forward contracts are settled on the maturity date. whereas futures contract are ‘marked to market’ on a daily basis. Intermediation by the Exchange: In a traded futures contract the exchange interposes itself between the buyer and the seller of the contract. and to prevent overreaction to real information.
oil. storable as well as perishable. but are often defined on an interest rate index such as 3-month sterling or US dollar LIBOR.
COMMODITY FUTURES (STORABLE COMMODITIES) Futures contracts on various commodities. 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. currency .FUTURES CONTRACTS: THE GLOBAL SCENE Broadly there are two types of futures: commodity futures and financial futures. 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. A commodity futures is a futures contract in a commodity like cocoa or aluminum.or stock index. Futures price= spot price+ present value of storage costsPresent value of convenience yield.
. while financial futures is a futures contract in a financial instrument like Treasury bond. cotton. Contracts vary. aluminum. Hence perishable commodities have to be analyzed differently. Futures price= Expected spot price – Expected risk premium
FINANCIAL FUTURES A financial future is a futures contract on a short term interest rate (STIR). like gold. rice.
COMMODITY FUTURES (PERISHABLE COMMODITIES) For pricing futures contracts on the basis of arbitrage. the asset has to be storable. and wheat and orange juice have been in existence for nearly three centuries.
traded on a futures exchange. The future date is called the delivery date or final settlement date. The seller delivers the commodity to the buyer.In finance. Futures contracts. Both parties of a "futures contract" must fulfill the contract on the settlement date. The pre-set price is called the futures price. converges towards the futures price on the delivery date. at a specified price. or simply futures. The price of the underlying asset on the delivery date is called the settlement price. normally. no comparable contracts exist for other currencies. or. sets margin requirements. which differs from an options contract. effectively closing out the futures position and its contract obligations.
. The exchange's clearinghouse acts as counterparty on all contracts. The settlement price. but not the obligation. are exchange traded derivatives. In other words. a futures contract is a standardized contract. A futures contract gives the holder the obligation to buy or sell. if it is a cash-settled future. which gives the holder the right. to buy or sell a certain underlying instrument at a certain date in the future. the owner of an options contract may exercise the contract.
SHORT-TERM INTEREST RATE FUTURES
An assortment of contracts. Other dollar-denominate short-term interest rate futures. To exit the commitment prior to the settlement date. etc. then cash is transferred from the futures trader who sustained a loss to the one who made a profit. the holder of a futures position has to offset his position by either selling a long position or buying back a short position. The Eurodollar contract is the linchpin of the shortend interest rate futures contracts.
S. Trading of Eurodollar contracts: Eurodollar contracts are now traded at the CME in Chicago. 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). Basic contract specifications: The nominal contract size is $1 million and the underlying rate is the three-month LIBOR. which is a dollar-denominate deposit with a bank or branch outside of the U. Thus.S.Eurodollar futures
The Eurodollar futures market is the most widely traded money market contract in the world.e.. in that they are not regulated by U. (ii) heterogeneity of bank credits would systematically raise questions on the quality of the delivered asset.
. It is based on a ninetyday Eurodollar deposit.S. although trading in it only started as recently as 1981. at LIFFE in London and at SIMEX in Singapore. a price of 96.5% per annum) in decimal terms. or with an international banking facility (IBF) located in the U. Eurodollar contract trading is de-facto available 24 hours. the offer side of the cash money market). the rate at which a London bank is willing to lend dollars (i.5 implies a futures LIBOR rate of 3. The futures price is quoted as 100 minus the annualized futures 3-month LIBOR (e. authorities and hence are not subject to reserve requirements or deposit insurance premiums.g. 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.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.
Also unlike the T-bill futures contract. we need to understand how prices of futures contracts are related to the spot or cash market prices of the underlying asset. U. all with different maturities and coupons. Of course. INTERMEDIATE. Plus any accrued interest on the bond:
. We will see that the market forces of arbitrage are used to price virtually all financial futures contracts.S. the receiver of the bond pays the short an invoice price equal to the futures price times the conversion factor of the particular bond chosen by the short. bond futures contracts generally allow for a range of bonds to be delivered against them. maturities or underlying asset constitute a straight-forward extension. T-bond that has at least I. bond futures are settled at expiration with physical delivery. Because this is more convenient for most futures users than physical delivery.S. Futures invoice price: When a bond is delivered into the bond futures contract.Pricing and arbitrage: Implied forward rates
In order to understand how futures prices are established. there may be as many as several dozen securities in the deliverable basket.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. For example. few contracts actually go into delivery. Treasury bond futures contracts allow delivery of any U. years remaining to maturity (or to first call if the bond is callable). bond futures positions can also be unwound prior to delivery by offsetting futures transactions. applications with contracts based on different currencies. All examples drawn below are based on the threemonth Eurodollar contract.
it is the difference in cost between 9
. where they are traded and the description of their deliverable set. In other words. Delivery months on bond futures contacts are quarterly (March. Since 1932.S. Since then three futures contracts have been established on U. It is the delivery option of the short that makes valuing bond futures more complex than valuing international bank (euro) deposit futures. the last trading date and the last delivery period (one month). T-bond contract have spread internationally. They all have similar characteristics to their forerunner.S. traded at the CBOT since 1977.S. medium. The exchange will also set daily trading hours. T-bond contract are shown in parentheses for illustrative purposes.
Pricing and arbitrage
Cash-futures relationship: Similar to short-term interest rate contracts.S. The contract size defines the par amount of the bond that is deliverable into the contract ($100. the concrete specifications of the U. Other U. June.000 for U. a 5year and a 2-year contract.and long-term interest rate contracts: The U. For illustration purposes.S. Understanding the relationship between a futures contract and the deliverable basket is crucial to understanding the drive behind the arbitrage. International bond futures contracts. The basis is the difference between a bond's price and the futures invoice price (as defined above). T-bonds). T-bond. there is an arbitrage relationship which holds the prices of the T-bond futures contract to the cash market. bond futures contracts designed along the lines of the U. Treasury notes: a 10-year.Futures invoice price = futures price conversion factor + accrued interest Other contract terms: Exchanges set other futures contact terms as follows. The basis. September and December). was the first fut3ureo n long-tern interest rates. the table below lists the main international bond futures contracts.S.
Suppose. we define the gross or raw basis as: Gross basis = dirty cash price .
Risk management and hedging
Basic risk management functions: Bond futures are often used as a vehicle for hedging price risk or duration. The basis point value factor is the ratio of the change in the
. Accordingly.and long-term interest rates can be offset by buying or selling bond futures contracts. (ii) sell (buy) a bond futures contract. and (iii) immediately deliver (receive delivery of) the cash bond against the short (long) futures position.this conversion is performed simply by multiplying the decimal basis by 32. Basis arbitrate at futures expiration: At futures expiration. Then one could: (i) buy (sell) the cheapest to.deliver bond in the cash market. the gross basis must be equal to zero. An excessive exposure to intermediate. The basis is generally quoted in 32nds rather than in decimal units .futures invoice price = clean 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.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).(futures price conversion factor) since dirty (or full) price = clean price + accrued interest. Otherwise there would be instantaneous risk less profit opportunities. 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.
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. but with the convenience of the futures market in terms of narrow bid/ask spreads. they contribute dollar duration to portfolios much along the lines of the cash bond. But because they track the cheapest-to-deliver bond (driven by basis traders).
. trading on the basis of market views. to express a view on market direction. Going long the futures is a way of extending duration: it pays when the market is rallying and rates are falling. Bond futures. Outright trading: Bond futures by themselves don't have duration. easy reversibility of positions and low cash requirements. using spreads or butterflies that combine longs and shorts at different points in time or across countries. on the contrary. Shorting bond futures. or * in combination with the underlying (typically the cheapest-to-deliver bond) in what amounts to basis trades. * in combination with other bond futures contracts. as was the case with international bank deposit futures. can be traded: * outright.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.
Expressing a market view
Types of trades: The third application of bond futures. Playing duration with futures fulfills the same objective as playing the bond market directly. reduces market sensitivity to rate movements and performs well in a bear market. requires by definition that not all risk be hedged.
and can be used to take on risk subject to one's views in addition to as an arbitrage play. 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. For instance. cross-country spreads may be driven by differences of the duration of their respective cheapest-to-deliver bonds than by the absolute level of long-term rates. and (ii) the evolution of short-term rates. most of which are traded at the CME and at LIFFE. 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. AUD. In a similar vein.g. etc.). average of bilateral rates against the dollar) at the CBOT. JPY.e. 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).. In addition. 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. as explained above. A basis trade can -. DEM. Finally. there are futures on a USD index (i. SRF. there are futures
.1so be held for shorter time horizon but then the position is subject to risk at the unwind.. Foreign currency futures contracts are available on all major currencies against the dollar (e. and in particular whether the cheapest-to-deliver goes on special in the repo market Short-term basis trading is in fact quite complex. CURRENCY FUTURES Contract specifications Types of contracts. CAD.Spread trading: As a word of caution. GBP. Basis trading: Trading the basis from the long side is relatively risk less if the position is held to the futures expiration date.
bilateral exchange rates between two non-dollar currencies such as on JPY/DEM.e..on crosses. Conversely.. Pricing and arbitrage: International interest rate parity Overview.e. based on number of dollars per unit of foreign currency. in the case of currencies. meaning that at futures settlement the long receives the currency of denomination of the future and pays dollars). Conversely. More formally. Expressing a market view Outright trading. Contract specifications. shorting the contract is consistent with an expectation of a yen depreciation relative to the dollar. Futures are a natural instrument to express views on future exchange rate movements. going long the JPY contract (i. 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. i. However. For instance. June. September and December. They tend to require actual delivery. 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. the contract should be sold if one expects the yen to appreciate more than what is expected by the market. the difference between forward and futures prices is less important than with interest rates. by far the most prevalent. Currency futures against the dollar.
. tend to have quarterly contracts with delivery in March. As with interest rate futures. long yen and short dollars) is consistent with an expectation of an appreciation of the yen relative to the dollar.. i.e. 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. the prices of currency futures are bound by a basic arbitrage relationship with the underlying cash market.
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
. In other words. not every index correspond to a well defined portfolio of stocks (for example. This implies that percentage changes in stock indexes do not track total returns on the corresponding portfolio of stocks but. Futures contract specifications: All futures contracts on stock indexes are settled in cash. First. used for example in both the S&P 500 and NYSE indexes.STOCK INDEX FUTURES Contract specifications The underlying instrument. only price changes. Physical delivery of stocks against a futures contract based on an index presents intractable difficulties. Moreover. The most common weighting scheme is market value weighting. any cash dividends received on the portfolio are ignoring when percentage changes in most indexes are being calculated. Index construction: The weight of a stock in an index is the proportion of the portfolio tracked by the index invested in the stock. relative performance can vary sharply over periods such as a month or a quarter. Stock indexes differ from one to another with respect to the range of stocks covered. stock weighting. those indexes constructed using geometric means). Stock market indexes are time series designed to track the changes in the value of hypothetical portfolios of stocks. 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. Though returns on stock indexes of the same country are often highly correlated over time. Treatment of dividends: Stock indexes are not usually adjusted for cash dividends. and index computation. The stocks in the portfolio can have equal weights or weights that change in some way over time.
* Value Line futures (KC). * FT-SE 100 index (LUFFE). * S&P 400 (CME). The value of one futures contract is $500 tirmes 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. Contains the prices of 1. The index accounts for 80% of the NYSE.700 American stocks. The value of one futures contract is FRF200 times the index. Based on a portfolio of 400 American stocks. The value of one futures contract is $500 times the index. following is a list of the main international stock indexes and futures contracts on these indexes: * S&P 500 (CME). 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. * Major market index (CME). The value of one futures contract is $500 times the index. The value of one fuLturesc ontact is $5 times the index. Based on a portfolio of 40 of the largest stocks listed on the London Stock Exchange.companies. For illustration purposes.
. *CAC-4s0t ock index (MATIF). Based on a portfolio of 20 blue-chip American stocks listed on the NYSE. It does not correspond directly to any portfolio of stocks because of its use of geometric averaging. Based on a portfolio of 225 of the largest stocks listed on the Tokyo Stock Exchange. Based on a portfolio of 500 American stocks. Contracts traded. * NYSE composite futures (NYSE). * Nikkei 225 stock average (CME). 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. The value of one futures contract is GBP 25 times the index.
Index futures can provide a means of cheaper access to such a portfolio. or the difficulty of moving funds quickly and on a large scale into and out of particular stocks. Creating synthetic index fund portfolios: Futures can be used to create portfolios that have cash flows characteristics similar to an index fund portfolio. 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. fixed-income security. stock index futures prices should be related to the underlying cash market by a cost of carry relationship or. An interesting example of users of stock futures as hedging vehicles are brokers and dealers in equities.Pricing and arbitrage Like futures on fixed income instruments and currencies. acquiring. by the cash-forward relationship. Risk management and hedging Overview. ease of adjusting positions (liquidity). Stock index futures provide a means of adjusting. attractive prices available on the futures contract. Managing index fund portfolios involves considerable oversight in terms of maintaining the correct weights as prices change and reinvesting any dividends that are received. The sale of stock futures against a stock portfolio creates a hedged position with returns very similar to those of a short-term. Hedging stock portfolios: The objective of hedging with stock index futures is to reduce or eliminate the sensitivity of an equity portfolio to changes in the value of the underlying index. in other words.
. 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. Otherwise arbitrage trades are possible.
Expressing a market view Outright trading: Futures are a natural instruments to express views on future exchange rate movements. 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. Stock index futures can be used to create portfolios that have cash flows characteristics similar to an index fund portfolio.
. Capitalizing on stock selectivity. Since a deposit of less than 10 percent is required to purchase or sell a stock futures contract.Capitalizing on different tax treatment of futures and equities. 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. 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.
The key to options is to understand that holding an option represents a right rather than an obligation. but in reverse. the option has exercise value and is said to be in the money. 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). for a call. whichever is greater.OPTIONS ON FUTURES
Definition and Pricing
Definition and types of options.to establish the corresponding futures position by exercising the option at some time in the future. For example. if the market price of the underlying is above the option's strike price. "Moneyness" of options. 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 no exercise value and is said to be out of the money. * A put option confers upon its holder the right to establish a short (selling) futures position. the futures position may be established by the option holder on any date up to a pre-determined expiration date at a pre-determined price (the strike price). 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. In either case. If the market price of the underlying is below the call option's strike price. to put options
. The same applies. Conversely.
The price you pay for having the security offered by an option
. yield the following futures positions: bought call if exercised long futures bought put by the party short futures sold call long the short futures sold put option. if exercised. the options on futures.: *Creating asymmetric payoffs on the upside and downside. With a futures position. There are options on all the types (though not necessarily on all the specific contracts) of financial futures. If the price goes against you.Futures positions at option exercise: To summarize. 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. 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 is no downside risk to buying an option.
Use of options on futures versus use of futures. yields long futures Underlying instruments. Hedgers and investors might want to use options on futures rather than futures themselves for the following reaso. you must pay the daily settlement variation when the price goes against you.
liability or cash flow being hedged is of a contingent nature. and interest rate cap (i. * Hedging or trading on the basis of market volatility. you might consider selling an option and collect the premium upfront. suppose you are negotiating with a Japanese company for electrical parts. This is due to the fact that futures are leveraged instruments. The volume traded on options on futures is much larger than on equivalent options on the cash instruments. Trading volumes. This makes options on futures easier to hedge dynamically since one does not need to worry about financing of positions in the underlying. The Japanese company will decide at the next board meeting. might want to hedge market volatility. For example. Hedging example: floating-rate note issuance.e. whether to provide parts at the agreed upon prices.S. In this case. whether futures or options on futures are utilized by traders and corporate treasurers depends on their preferences on the risk/reward structure.S. Options might be suitable if the asset. Futures are not directly affected by changes in market volatility. 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. Thus. firm to hedge the contingent payable by buying options on yen futures.is the upfront premium. however. or actually express views on the basis of market volatility.
. if you are willing to accept the risk of an unlimited downside exposure. Some users. The U.. For a fixed price (the option premium). Conversely. Only options allow them to isolate the volatility component on the basis of which they can hedge or trade *Contingent contracts. Options on futures can be used instead to insure against adverse interest rate moves. it may pay for the U. corporation will lose its profit margin if the yen appreciates relative to the dollar at the time the Japanese firm agrees to the contract. which takes place in a month.
Market liquidity: A market is liquid when traders can buy and sell without substantially moving the price against them. Liquidity typically arises when there are individuals or institutions which continuously wish to buy or sell. 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. We have investigated some of the features of futures contracts. futures have become widely accepted by money managers.Liquidity and market depth
In derivatives markets. IMPORTANCE OF FUTURES MARKETS Summary. allow economic agents to fine tune the structure of their assets and liabilities to better suit their risk preferences and market expectations. financial institutions and corporations and have been successfully integrated into risk Management and yield enhancement strategies. explained some of the basics regarding how they are priced. Futures as a building-block: Futures have been a key instrument in facilitating the modem trend of separating conventional financial products into their basic
. and derivatives generally. Over the last decades. unlike in cash markets. Economic importance of futures. and given a few applications illustrating how these contracts would be used by risk managers and investors. or else by major financial institutions trading in automated systems. Some may use them to spread risk. Because they bind buyer and seller for a pre-specified period of time. others to take on risk on the basis of particular market views. most of the action happens in the future. 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. Liquidity is provided to a large degree by locals (individuals trading on their own capital) trading in the pit.
Futures' features. the volume of financial futures now dwarfs the volume in traditional agricultural contracts. * Futures are bought or sold on margin.
. 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. The surge in financial futures. Financial management is quickly becoming an exercise in reducing financials structures into their basic elements and then reassembling them into a preferable structure. 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. and as such provide for substantial leverage. While the following are noteworthy advantages that futures have over forwards. *All prices and information are available continuously. Participants know all transaction prices and there are no negotiated deals and no multiple phone calls to get price quotes. * Futures are relatively inexpensive to execute (negotiable commission rates). Also. they allow not only the reduction or transformation of risk faced by individual investors but also the sheer understanding and measurement of risk. derivatives have contributed decisively to the integration of financial markets. Financial futures (along with options) are best viewed as building blocks. In so doing. In the process.components. * Prices are determined by a competitive market system (open outcry or electronic bidding).
Futures on Individual Securities
Futures on individual securities were introduced in India in 2001. Both the type of equity futures are available in India. 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.
Stock Index Futures
The National Stock Exchange and the Bombay Stock Exchange have introduced stock index futures. 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. EQUITY FUTURES IN INDIA Equity futures are of two types: stock index futures and futures on individual securities. The National Stock Exchange has a stock index futures contract based on S&P CNX Nifty Index. On the other hand. The list of securities in which futures contracts are permitted is specified by Securities Exchange Board of India. OTC trading allows more flexibility in establishing contract terms and avoids the need for daily monitoring of mark-to-market positions and margin account. *Audit systems and safeguards enforced by regulatory authorities. 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.
1. currency or stock index. Many kinds of futures instruments have been developed and the use of futures has received a great deal of attention. Futures are not only a financing or investment vehicle. “A financial futures in a futures contract in a financial instrument like treasury bond.
.” Eg: Financial futures. US Treasury Bills. The volume of trading in financial futures dwarfs the volume in traditional agricultural contracts. During the last decades the financial products into their basic components.2 SUBJECT BACK GROUND FOR THE STUDY
Futures market plays an important role in the world of finance. S&P index etc… Generally futures allow economic agents to fine-tune the structure of their assets and liabilities to suit their risk preferences and market expectations. Eurodollar deposits. but it is a tool for transferring price risks associated with fluctuations in asset values.
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. 4. 5.
. Financial futures play a prominent role in risk management. 3. Futures are relatively in expensive to execute.3 NEED FOR THE STUDY
The needs for the study of financial futures are: 1. 2. 6. Financial futures have become the corner stone of financial management.1. Futures have become widely accepted by money managers.
Research Design is the basic frame work which provides the guidelines for research. The research design specifies the method for data collection analysis. There are mainly two methods of collecting data, primary and secondary data collection.
2.2 STATEMENT OF THE PROBLEM
Trading on options give lot of volatility to futures market. Futures markets becomes at times unpredictable compare to SENSEX/NIFTY movements. The researcher feels an indepth study in this area, the price movements of futures with respect to SENSEX or nifty is imperative.
2.3 REVIEW OF LITERATURE
Basic futures contract design Definition. A futures contract is a commitment to buy or sell a fixed amount of standardized commodity or financial instrument at a specified time in the future at a specified price established on the day the contract is initiated and according to the rules of the regulated exchange where the transaction occurred. Once the trade clears, the buyer and corresponding seller of the futures contract are not exposed to each other's credit ri3k. Rather, they individually look to the clearinghouse for performance, and vice versa. Futures as a derivative security. A futures contract is a financial derivative of the commodity on which it is based in the sense that it is an arrangement for exchanging money on the basis of the change in the price or yield of some underlying commodity. Timing of cash and commodity flows. Like other derivative securities, futures contract is an agreement to do something in the futures -- no goods or assets are exchanged today. A cash market transaction involves an agreement between two counterparties to buy or sell a commodity for cash today (perhaps for delivery in a couple of days). In a forward 27
market traction, delivery and settlement of the commodity for cash will occur at a single future date with no intervening cash flows. In afitres market transaction, delivery and settlement will also occur at a single future date but there will be daily (or more frequent) cash flows reflecting intervening price movements in the underlying commodity. Value of futures contracts at the time of contracting. Since there is no exchange of neither commodities nor cash payments at the time of contracting of futures contracts, such contracts must have a zero net present value at their inception. Value of futures contract as spot price changes. Once the futures contract is entered into, subsequent movements in the (spot) market price of the commodity create value for either the long futures position (i.e., the buyer) or the short futures position (i.e., the seller). For instance, a rise in the spot price of the commodity will benefit the long as he has bought the commodity under the futures contract at a fixed price and can now expect to sell it in the future at a higher price in the spot market. But since the long will not realize this gain until the settlement of the futures contract, this creates a credit exposure to the extent of the net present value of the futures contract. The futures contract will now be a positive net present value investment for the long and an obligation for the short.
Closing a futures position. A futures position can be closed out before expiration of the contract by entering into an offsetting trade in the same contract for the samne amount.. Under physical delivery, investors that are long the contract must deliver to investors short the contract the underlying commodity of the contract according to the rules on commodity quality and timing established by the exchange.. The determination of the price of the commodity at expiration on which cash settlement amounts are calculated (the final settlement price) is made by the exchange under pre-specified rules. Types of underlving_instruments. Underlying every futures contract is a relatively active cash market for an asset or good. Futures contracts were traditionally based on standard physical commodities such as grains (corn, wheat, soybeans), livestock (live cattle and hogs), energy products (crude oil, heating oil) or metals (aluminum, copper,
contracts tend to be offered on standardized terms in terms of maturity. gains and losses are settled daily in the form of margin payments. the clearing house members and the clearinghouse itself guarantee fulfillment of futures contracts. Nikkei 225. The buyer and the seller both have
. futures based on financial commodities have flourished.gold). B. the time and place of delivery. The margin requirements on futures contracts make them sufficiently immune to credit risk so that credit exposure is not a significant factor in pricing. This makes futures contracts particularly well suited for trading in organized exchanges. For this reason. deutschemark.. margining requirements and trading hours. and Treasury bills. cocoa). the method of payment. such as those based on: Money market interest rates: certificates of deposit. Over the last two decades. In futures contracts. In addition. among other characteristics.LIBOR-based). Contract terms. Credit exposure. sugar. Bonds and notes: Treasury securities. softs (coffee. contract size. there are futures on several commodity indices (like the CRB and GSCI). offshore or euro-deposits (e. quantity and quality of the underlying to be delivered. pound (against the dollar or crosses) Equity indices: S&P500.g. Cash flows and margining. Currencies: yen. 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. In forward markets cash changes hands only on the forward date In futures markets. This serves to reduce credit exposure to intraday price movements Tradability. NYSE Composite. To ensure the liquidity of exchange-traded futures markets. Forward vs. Forward contracts will trade on the basis of price and credit characteristics of the counterparty. forward contracts tend to be traded in over-the-counter (OTC) markets..
Risk management.e. there is no formal regulation of forwards nor is there a body to handle customer complaints. Hedging can be performed on a single tansaction (or instrument) basis or on an aggregate (portfolio or firm) basis." to put it in more blunt terms).
FINANCIAL FUTURES: USES AND USER Uses. Such trades by definition cannot (indeed.an exposure to the clearing house (and the clearing house to them). 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.S. Since forwards are a bilaterally negotiated agreement. arbitrage. Examples of related derivatives are interest rate swaps and interest rate futures. Financial futures can be used as devices for: (i) arbitrage or yield enhancement.) or set up by the industry itself. 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. Examples of single transaction hedging might include anticipatory hedging for debt or equity security issuance or currency hedging for foreign trade transactions. Exchangetraded futures. should not) be fully hedged. 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. driven by economic conditions and trends) or technical (i.. whether these are fimdamental (i.e. based on observed short-term price movements). Expressing market views.. Financial futures are an efficient way of taling bets on the market on the basis of traders' views. on the other hand. 30
. Regulation. (ii) risk management and hedging. 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. all arbitrage risk can be eliminated.
Users. Futures can be used to express views on general market direction. Financial institutions.. expressing market views is not riskless. The principal financial futures exchanges in the world are: Chicago Mcrcantile Exchange (CME.although trade construction might be such as to immunize particular kinds (or dimensions) of risk. fund managers and insurance companies will use futures for their thrc:. The users of financial futures are naturally given by their uses. investment or borrowing activities.g. 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
. commodity quality or cross-country differences). including municipal and state organizations and foundations are more likely to use them to hedge their commercial. including commercial banks. brokerage firms. credit. Non-financial corporations. WORLD FUTURES EXCHANGES Exchanges are formal organizations whose purpose is to concentrate order flow in order to facilitate competition and to reduce transaction costs involved in searching for counterparties. investment banks.basic functions. Individuals and locals a:e more likely to use them for speculation and arbitrage. the timing of expected market movements. Unlike pure arbitrage. changes in the spread between market segments (e. or a combination of these.
magazines etc.7 TOOLS FOR DATA COLLECTION
Secondary Data: It is collected from books. To study the volatility of futures with reference to Banking and Pharmaceutical industries. internet. 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.
. journals. Secondary data is mainly used for the study.
2.4 OBJECTIVES OF THE STUDY
• • • To study on the financial futures with reference to 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. The results cannot be generalized. To study the amount of risk of Financial Futures of NSE in the month of March with reference to Banking and Pharmaceutical industries.2.
9 LIMITATIONS OF THE STUDY
Time constrains Geographical constraints This is restricted to Banking and Pharmaceutical Industry
. Σy n Σ x2 – (Σx)2
X = market return For calculating ‘x’ the NSE share price is taken.2.8 METHOD OF ANALYSIS
The formula used for calculation are:
β = n * Σxy – Σx . 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
. Punajb National Bank. Chapter 3: It deals with the Company Profiles of ICCI Bank.2. Chapter 2: Research Design deals with the statement of the problem. Chapter 4: This chapter deals with the Analysis and Interpretation of Data Chapter 5: It gives the Summary of Findings. Glaxo and Sun Pharma.10 CHAPTER SCHEME
Chapter 1: Introduction deals with the introduction to futures. Corp Bank. Ranbaxy. Dabur. subject background of the study and need for the study. CIPLA. review of literature. scope of the study and about the methodology used by the study. Syndicate Bank. Conclusion and Recommendations. objectives.
PROFILE OF COMPANIES
ICICI Bank Towers.3.Kamath. Mumbai India N Vaghul. and about 2400 ATMs.1 ICICI BANK
Type Founded Headquarters Private BSE & NSE:ICICI. Nachiket Mor. the Stock Exchange. Mumbai and the National Stock Exchange of India Limited and its ADRs are listed on the New York Stock Exchange (NYSE). Bandra Kurla.V. ICICI Bank's equity shares are listed in India on stock exchanges at Kolkata and Vadodara. Chanda Kochhar Loans. a network of over 619 branches and offices. ICICI Bank offers a wide range of banking products and financial services to corporate and retail customers through a variety of delivery channels and through its specialized subsidiaries and affiliates in the areas of investment banking. life and non-life insurance. venture capital and asset management. SBI Life (Insurance) etc. ICICI Bank has total assets of about USD 56 Billion (end-Mar 2006). 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. Investment vehicles.79 billion www. Credit Cards.. USD 5.icicibank. 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
there were rumours that ICICI had a large proportion of Non Performing Loans ("NPA".ICICI was established by the Government of India in the 1960s as a Financial Institution (FI. ICICI bank now has the largest market value of all banks in India. ICICI borrowed funds from many multilateral agencies (such as the World Bank). ICICI Bank now has the largest market share among all banks in retail or consumer financing. All this changed in 1990s. At the time of the reverse merger. The bank is expanding in overseas markets.taking deposits. as they are known in India) on its books . The bank is aggressively targeting the NRI (Non Resident Indian) population for expanding its business. before SBI caught up with it. These funds were deployed in large corporate loans. ICICI founded a separate legal entity .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. It has operations in the UK. It is widely believed that the proportion of NPAs has come down to prudent levels (even if it were high earlier).it could not take retail deposits. credit cards. The experiment was so successful that ICICI merged into ICICI Bank ("reverse merger") in 2002.in particular to the steel industry. car loans etc. It has tie-ups with major banks in the US and China.ICICI Bank which undertook normal banking operations . It acquired a small bank in Russia recently. often at concessional rates. other such institutions were IDBI and SIDBI) with the objective to finance large industrial projects. Since 2002. Hong Kong. there has been a general revival in Indian industry (and metal based industry in particular). ICICI Bank is the largest issuer of credit cards in India .
. and nor was it required to comply with Indian banking requirements for liquid reserves. ICICI was not a bank . Singapore and Canada.
PNBIndia. 1895 (British India) New Delhi. is the second largest public sector commercial bank in India with about 4500 branches and offices throughout the country.the name you can BANK upon www.
. USD 2. along with 13 other major commercial banks of India. The Government of India nationalized the bank. S..Gupta Banking Insurance Capital Markets and allied industries Loans. Savings.32 billion (2005) . Investment vehicles.C.com
Products Revenue Slogan Website
Punjab National Bank (PNB).2 PUNJAB NATIONAL BANK
Punjab National Bank
Type Founded Headquarters Key people Industry Public (BSE. established in 1895 in Lahore by Lala Lajpat Rai. Insurance etc. 1969. Credit Cards. on July 19.3.. NSE:PNB) Lahore. India Chairman and M.D. Mr.
Investment vehicles.Insurance. Karnataka India & Corporate Office Bangalore Chairman C P SWARNKAR Banking. T.Capital Markets and allied industries Loans. USD bil Faithful and Friendly (English) & Viswasaneeya Hitheshi (Sanskrit) syndicatebank. At the time of its establishment. 80. Initially the bank collected as low as 2 annas from the door steps of the depositors daily through its agents. The business started with a capital of Rs. Vaman Kudva and Dr.000.in/
Key people Industry Products
Revenue Slogan Website
Syndicate Bank. The primary objective of business was to extended financial assistance to local weavers. 1969. The bank. Pai. M. A.3. is one of the oldest and major commercial bank of India. The first branch of the bank started its operations in the year 1928 at Brahmavar in Dakshin Kannada District. Manipal. By 1937 it had secured its membership as a Clearing House at Mumbai. by the Government of India. was nationalized on 19th July. Savings. Bajaj Allianz Life Insurance (Insurance) etc. established in 1925 in Udupi (Karnataka state.3 SYNDICATE BANK
Type Founded Headquarters Public (BSE & NSE) Udupi. along with 13 other major commercial banks of India. India) by Upendra Ananth Pai. Credit Cards. 1925 (as Canara Industrial and Banking Syndicate Limited) Head Office.
. the bank was known as Canara Industrial and Banking Syndicate Limited.
4 CORPORATION BANK CORPORATION BANK
.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. in Doha (1983) and Musandam Exchange Co. Currently it has over 1900 branches. The bank expanded its operations not only on the domestic front but also overseas. By 1989 it opened its 1500th branch at Hauz Khas. Syndicate Bank sponsored the first regional rural bank in India by name Prathama Grameena Bank. Mangalore Stock Exchange and Bangalore Stock Exchange. The stocks of the Syndicate Bank are listed on Bombay Stock Exchange.
3. Delhi. It took over Al Shabei Finance and Exchange Co. From 1953-1964. National Stock Exchange. 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 Muscat (1984). 20 banks merged with the Canara Industrial and Banking Syndicate Limited this included the Maharastra Apex Bank Limited and Southern India Apex Bank Limited.
is one of the Indian banks in public sector. Investment vehicles. The bank was founded with an initial capital of Rs.corpbank.27 Crore (2006) A Premier Government of India Enterprise www.5 INDIAN OVERSEAS BANK
3. The Bank’s Net Worth stood at Rs. The Bank came out with its Initial Public Offer (IPO) in October 1997 and 37. and first day’s canvassed resources of less than one USD 1. has currently (31 March 2004) 10. Credit Cards. 1906 Corporation Bank.176 full time employees. The bank has the distinction of the first Indian bank to publish its financial results (199899) conforming to US GAAP.17% of Share Capital held by the Government of India.com
Key people Industry Products Revenue Net income Slogan Website
Corporation Bank. CORPORATE OFFICE . etc. and operates from several branches in India. NSE:CORPBANK) Udipi.3. India.83 crore (2006) Rs 100.92 crores as on 31 March 2005. Rs 862. Karnataka state. 054. Savings.87% of Share Capital is presently held by the Public and Financial Institutions. 5000 (USD 100). Mangaladevi Temple Road Pandeshwar Mangalore 575 001 India Chairman B. Sambamurthy Banking Loans. The Bank is a Public Sector Unit with 57.Type Founded Headquarters
Public (BSE. founded in 1906 in Udupi.
Deposits stood at Rs. IOB had the unique distinction of commencing business on 10th February 1937 (on the inaugural day itself) in three branches simultaneously . by Shri.
3.Banking.3.23 Crs at that time.6.Ct.M.M.6 RANBAXY LABORATORIES
.Indian Overseas Bank (IOB) was founded on February 10th 1937. At the dawn of Independence IOB had 38 branches in India and 7 branches abroad. a pioneer in many fields .at Karaikudi and Chennai in India and Rangoon in Burma (presently Myanmar) followed by a branch in Penang. Insurance and Industry with the twin objectives of specializing in foreign exchange business and overseas banking. Chidambaram Chettyar.64 Crs and Advances at Rs.
It is ranked among the top 10 generic companies worldwide. CEO & MD Industry Pharmaceutical Products Generic drugs Revenue $1.7 CIPLA
. Haryana. Chief Mentor.ranbaxy.Ranbaxy Laboratories Limited
Type Public Founded 1961 Headquarters Key people Gurgaon. It exports its products to 125 countries with ground operations in 46 and manufacturing facilities in seven countries. The CEO of the company is Malvinder Mohan Singh.178 billion (2005) Employees 1100 in R&D Website www. India Tejendra Khanna. Executive Vice Chairman Malvinder Mohan Singh. Ranbaxy went public in 1973.com Ranbaxy Laboratories Limited is an Indian company incorporated in 1961. Chairman Brian Tempest.
3. It is India's largest pharmaceutical company.
By doing so Cipla has reduced the cost of providing antiretroviral to AIDS patients from $12. stavudine and Nevirapine). Industrial & Pharmaceutical Laboratories is a major Indian pharmaceutical company.cipla. The customary treatment of AIDS consists of a cocktail of three drugs. Cipla is the world's largest manufacturer of antiretroviral drugs to fight HIV/AIDS. Chairman
Industry Pharmaceuticals Revenue Net income Rs. 24. best-known for manufacturing economical anti-AIDS drugs. K. 4. The company was founded in 1935 by Khwaja Abdul Hamied. Cipla ignores foreign patents on these drugs where no Indian law is broken in the process. Today (2007). 1936).8 billion (2005) Rs. Hamied (CMD). Cipla produces an all-in-one pill called Triomune which contains all three substances (Lamivudine. the founder's eldest son. so in money terms Cipla's medicines are probably not in top spot).Type Founded 1935 Headquarters Key people Mumbai. India Y.1 billion (2005)
Employees ??? Website www. distributed and sold (multinational brandname drugs are exponentially more expensive. as measured by units produced. something difficult elsewhere because the three patents are
. charitable sources often are in a position to make up the difference for destitute patients. While this sum remains out of reach for many millions of people in 'Third World' countries.000 (and beyond) to around $300 per year. and its Chairman today is Yusuf Hamied (b.com Cipla founded as The Chemical.
One more popular fixed dose combination is there.8 DABUR
3. Zidovudine and Nevirapine.held by different companies. This contains Lamivudine. with the name Duovir-N.
Barman Industry Health Care. S. schools and call centers. Africa and the United Arab Emirates. Dabur Chyawanprash. India.K. Burman.C. US$ 420 million) during the fiscal year 2005-2006. Vatika. The company was founded by Dr. as well as exports to Australia. Their growth rate rose from 10% to 40%. through Dabur Pharma Ltd. West Asia. Hajmola & Real.b does toxicology tests and markets ayurvedic medicines in a scientific manner. Dabur has a turnover of approximately Rs. The company. Hajmola & Real Revenue Rs 1375. Dabur has manufacturing operations in India. near the Indian capital of New Delhi.T all over the country therein opening a new market. Uttar Pradesh. West Bengal. Vatika. where it is registered. and is now led by his greatgrandson V. 19 billion (approx. Burman in 1884 as a small pharmacy in Calcutta (now Kolkata). with brands like Dabur Amla. C. Dabur operates in more than 5 countries and has sales worldwide.03 crore Website www. Food Products Dabur Amla. BSE) Founded 1884 Headquarters Ghaziabad Key people V. Africa and Europe. It is most famous for Dabur Chyawanprash and Hajmola.com Dabur India Limited is the fourth largest FMCG Company in India with interests in Health care.Dabur
Type Public (NSE.dabur. Dabur Chyawanprash.
. In two years the growth rate expected by them to change two folds. The company headquarters are in Ghaziabad. Hospitals. Personal care and Food products. They have researched new medicines which will find use in O. India.
Sun Pharmaceutical Industries (Sun Pharma) is a major producer of specialty pharmaceuticals and active pharmaceutical ingredients.
3.Dabur Foods. It will therefore increase its range of products to include tomato based products.. Dabur foods mainly supplied beverages to institutional customers. a subsidiary of Dabur India is expecting to grow at 25%.12 billion. has project sales of Rs 100 crore in next three years. The company was set up in 1993 and now has sales worth Rs.
gastroenterology. Detroit-based Caraco Pharm Labs..com/products Revenue Net income £23. Chairman Jean-Pierre Garnier. live longer" Website www. Chief Financial Officer Industry Pharmaceutical Products www. It also
.2 billion (2006) £7. feel better. oncology and vaccines products. psychiatry.com GlaxoSmithKline plc (LSE: GSK NYSE: GSK) is a British based pharmaceutical. biologicals. GSK is a research-based company with a wide portfolio of pharmaceutical products covering anti-infectives. neurology. respiratory.10 GLAXOSMITHKLINE GlaxoSmithKline
Type Public (LSE: GSK NYSE: GSK) Founded 2000. and healthcare company. diabetology. gastro-intestinal/metabolic.728 (2005) Slogan "Do more. central nervous system (CNS). The same year the company also acquired Dadha Pharma in Tamil Nadu. Chief Executive Julian Heslop.gsk.1996.S. United Kingdom Key people Sir Chris Gent.gsk. Sun Pharma acquired the U.8 billion (2006)
Employees Over 100. London. by merger of Glaxo Wellcome and Smith Kline Beecham Headquarters Brentford. Business Sun Pharma brands are prescribed in chronic therapy areas like cardiology. and respiratory.
nutritional drinks and over the counter (OTC) medicines
.has a Consumer Healthcare operation comprising leading oral healthcare products.
DATA ANALYSIS AND INTERPRETATION
ANALYSIS OF ICICI BANK
Date X Y X2 XY
145 3.4329 1.658 -1.952 -0.201 -0.482 -0.737 0.8032 0.3990 53.892 -0.13
1.916 -0.139 -2.-9.979 0.850 1.330 -0.595 -1.5299 0.2323 0.347 -0.76 .389 Σy = 1.427 0.143 0.090 2.152 -1.409 -0.791 -1.8537 Σ x2 = 163.9063 0. Σy n Σ x2 – (Σx)2
= 21*40.781 -1.402 -1.7693
1.612 1.546 0.314 0.3124 0.098 1.225 -0.497 0.678 0.831 4.591 -0.-7.098 1.532 21.269 0.291 2.337
21* 163.057 17.7312 0.963 4.359 Σxy = 40.82 -0.101 3.482 -2.138 -7.337
3.875 0.98 0.724 -0.630 1.5432 0.192 -1.01-03-2007 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
Source: Secondary Data
β = n * Σxy – Σx .271 16.453 4.8225 2.13) 2 = 851.329 -2.835 0.0403 37.175 5.2410 0.532
.1823 0.167 -2.924 Σx = -7.1586 6.343 -6.297 -24.546 1.3806 26.56 .13* 1.780 -1.7693 – (-7.6972 0.3540 1.329 0.326 -0.7662 5.728 0.1603 6.366 3.2222 14.
3439.1 shows the beta value of ICICI futures and Nifty futures.254
Table 4.836 = 861. ICICI futures are less volatile. Therefore investment in ICICI futures is less risky.15 – 50.
.314 = 0. Since the beta value is less than one.292 3388.
333 X2 .014 23.333 -3.350 9.088 13.132 15.907 0.363 5.355 8.295 5.906 -6.259 Σy = 18.874 1.538 4.095 13.937 3.394 22.25 15.392 0.078 -0.034 -0.369 -3.485 10.216 5.919 12.381 -0.108 11.361 Σ x2 = 229.211 3.588 -4.202 1.249 13.087 -1.593 0.452 11.204 12.250 27.614 1.475 8.50 -3.249 3.849 0.354 -3.181 3.8208 42.515 -2.388 6.2
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 -0.048 -0.474 0.214 -0.365 20.604 2.615 -0.378 -3.483 19.896 -2.18 XY -3.007 3.943 -0.702 38.232 12.673 3.613 2.905 1.505 2.865 -0.751 5.931 0.931 -3.134 3.508 7.770 -3.923 3.377 44.391 1.490 11.864 1.223 -5.Table 4.155 Σxy = 592.682 Y 3.901 1.985 6. Σy n Σ x2 – (Σx)2
.601 Σx = -7.02
Source: Secondary Data
β = n * Σxy – Σx .008 -3.028 1.004 -1.760 -2.
458 -0.164 53.682 * 18.500 0.808 -1.880 0.831 -0.307 -0.084 0.299 -2.501 4.212 -7.349 6.096 1. Corporation Bank futures are highly volatile.526 -1. 2.644.02 .
Table4.013 = 12573.338 -5.790 27.682) 2 = 12432.767 = 2.268 1.552 2.218 54
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.-140.113 -1.303 1.404 3.170 2. There fore investment in Corporation Bank is high risky.644
Table 4. Since the beta value is more than one i.836 0.488 10.574 3.076 -3.658 -0.009 1.275 5.= 21*592.380 1.271 0.096 XY -0.492 -4.-7.78 – 59.834
4812.310 Y 2.697 1.559 2.175 0.952 -2.254 4753.607 0.e.333
21* 229.329 5.747 4.538 -0.396 25.671 6.18 – (-7.42 .395 -0.490 -4.2 shows the beta value of ICICI futures and Nifty futures.313 2.268 -0.705 X2 .574 2.361 1.
2898.315 0.802 Σ x2 = 138.677 1.326 3.00 0.214 -4.663 7.959 -1.140 -1.204 -3.63 – 77.652 13.129 Σxy = 90.077 Σy = -12. Σy n Σ x2 – (Σx)2
= 21* 90.-8.463 2. IOB futures are less volatile.248
Source: Secondary Data
β = n * Σxy – Σx .126 -3.812 2.455 -0.79) 2 = 1895.578 2821.79* -12.37 = 0.337 3.117 0.
.418 -2.000 -0.607 -1.248 .20-03-2007 21-03-2007 22-03-2007 23-03-2007 26-03-2007 28-03-2007 29-03-2007 30-03-2007
3.208 .389 -1.299 2.093 3.-105.368 1.083
9.3 shows the beta value of IOB futures and Nifty futures. Since the beta value is less than one.017
21* 138. There fore investment in IOB futures is less risky.017
11.674 Σx = -8.79
2.26 = 1789.03 – (--8.634
Table 4.179 -0.902 4.919 2.408 -3.062 9.
005 1.060 0.982 18.257 2.468 -0.490 -4.036 3.204 -3.733 18.190 4.832 -3.939 -0.443 -0.705 2.074 5.717 5.792 15.870 7.759 .485 -0.538 -0.006 4.928 -0.333 0.651 42.076 -3.122 8.831 -0.620 Σ x2 = 165.836 0.414 X2 1.658 -0.625 1.145 0.626 -0.781 -4.377 7.814 0.957 28.078 -2.474 0.661 Y 2.952 -2.968 0.Table 4.989 XY 3.113 -1.431 -1.018 1.552 2.267 -4.321 2.170 2.25 5.500 -2.395 -0.965 -6.020 12.711 19.051 14.114 0.717 5.920 6.902 4.953 0.492 -4.077 Σy = -11.909 3.791 -1.091 -2.168 6.214 -4.060 Σxy = 133.463 2.4
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 1.232 4.418 -2.788 Σx = -18.072 1.619 5.312 0.126 -3.344 -2.088
Source: Secondary Data
.787 2.330 9.088 1.015 -0.315 0.605 24.
Table 4.-18.848 .832 Y 5.5
ANALYSIS OF PUNJAB NATIONAL BANK
Date 01-03-2007 02-03-2007 05-03-2007 06-03-2007 07-03-2007 X 3.414
21* 165.339 57
. the Syndicate bank futures are less volatile and the investment in syndicate bank futures is less risky.105 3.989 – (-18.119 8.130 3.23 = 2581.801 -1.719 1.114 3.852 3137.539 = 0.4 shows the beta value of Syndicate Bank futures and Nifty futures.563 -7.984 0.661) 2 = 2794.362 6.738 -1.809 -3.769 – 348.492 1.823 X2 12.088 .-212.694 50.680 72.822
Table 4.356 XY 20.661* -11.020 3.697 28. Since the beta value is less than one in the month of March. Σy n Σ x2 – (Σx)2
= 21* 133.β = n * Σxy – Σx .
899 – 16.085 0.929
21* 250.825 2.173 29.955) 2 = 2832.579 3.435 2.168 Σx = 16.271 1.814 1.489 11.206 0.333 – 287.238 6.811 -1.103 1.053 3.929
2.157 1.195 0.905 3.159 Σxy = 134.322 1.448 8.873
1.955 10.566 27.948 Σy = 8.052 -2.391
5268.768 -1.001 -1.336 3. Σy n Σ x2 – (Σx)2
= 21* 134.143 0.580 1.198 -1.721 -1.069 -1.394 -3.538
.656 24.696 5.093 0.861 = 0.158 4.857 2.096 14.198 0.873 – (16.447 3.859 5.472 = 2681.778 1.606 -1.732 -2.669 12.899
Source: Secondary Data
β = n * Σxy – Σx .961 2.041 0.863 -0.435 2.265 3.980 3.028 Σ x2 = 250.391 0.316 2.067 4.111 0.955* 8.879 – 151.534 -1.488 4980.453 -0.953 -1.920 -0.239 -.240 -3.934 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
343 -1.259 0.236 2.443 51.260 -1.503 0.667 0.213 15.475 -5.636 29.830 -4.926 X2 0.125 0.316 -1.397 -0.062
volatile and investing in Punjab National Bank futures is less risky.803 ΣX2=174.089 1.363 0.704 4.798 5.645 26.934 ΣXY=132.353 1.957 1.514 0.387 2.866 8.997 -0.858 2.226 -1.666 -7.803 2.096 -3.266 3.655 0.485 -0.175 0.059 0.132 0.976 27.227 0.673 0.Table 4.260 -0.710 -5.580 5.472 -2.031 5.156 0.176 -1.793 5.664 1.336 0.294 0.83 XY -0. 4.696 ΣY=-0.942 6.381 5.201 0.660 -0.343 ΣX=-8.830 1.446 -0.5 shows the beta value of Punjab National Bank futures and Nifty futures.942 -1.024 27.394 2.295 -0.189 15.098 0.887 1.469 0.657 1.473 36.299 -1.151 0.
Table.548 Y 1.047 -0. the futures of PNB is less
Date 01-03-2007 02-03-2007 05-03-2007 06-03-2007 07-03-2007 08-03-2007 09-03-2007 12-03-2007 13-03-2007 14-03-2007 15-03-2007 16-03-2007 19-03-2007 20-03-2007 21-03-2007 22-03-2007 23-03-2007 26-03-2007 28-03-2007 29-03-2007 30-03-2007 X -0.380 -1. Since the beta value is less than one.6
Source: Secondary Data
.786 3.503 3.329 0.189 3.328 -0.278 -2.524 0.178 -0.063 -1.689 20.
302 – 7.068 = 2765.926
21* 174.43 – 73.-8.362 = 0.062 .83 – (-8.768
3671.6 shows the beta value of Ranbaxy futures. Since the beta value is less than one. Σy n Σ x2 – (Σx)2
Table 4.548 * -0. it is less volatile and investing in Ranbaxy futures is less risky.548) 2 = 2773.β = n * Σxy – Σx .387 3598.7
738 Y 1.392 0.068 0.193 0.743 -11.007 15.357 -0.473 1.543 0.358 2.368 -4.739 -3.390 -2.773 0.328 -0.672 0.020 -7.496 0.427 -0.088 3.228 XY 4.071 0.381 5.047 -0.981 ΣX= 6.492 7.962 -0.847
Source: Secondary Data
β = n * Σxy – Σx .353 -3.149 8.719 -0.176 -1.165 -0.667 -1.738 * -0.737 0.031 5.770 ΣXY= -19.152 0.697 -0.171 -0.626 -0.475 -5.701 -3.261 -0.329 0.948 7.155 -0.294 0.252 -0.744 0.362 -1.219 11.114 1.655 0.423 3.660 -0.689 -0.486 0.974 2.447 -0.062 -1.957 1.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 3.316 -1.093 0.131 2.023 0.466 -2.204 2.020 0.051 0.008 0.696 ΣY= -0.94
.676 4.261 -1. Σy n Σ x2 – (Σx)2
= 21*-19.096 -3.481 -0.553 0.230 0.710 -5.445 2.94 X2 14.005 -0.024 0.630 -0.189 3.848 ΣX2= 77.847 – 6.687 3.831 2.
089 0.433 -2.554 10.631 8.26
Table 4.956 2.751 0.8
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 -3.223 -1. Since the beta value of this future is negative.474 11.025 3.803 4.489 0.173 0.173 1.022 2.451 1576.787 .
Table 4.40 = -410.988 -3.663 12.957 4.388 = -0.678 5.-6.336
1621.666 4.500 X2 9.049 1.161 -0.131 2.7 shows the beta value of Sun Pharma’s futures.146 11.472 12.151 5.228 – (6.816 -2.572 1.21* 77.152 -2.592 -1.090 1.218 -3.635 62
.152 -0.738) 2 = -416.756 0.428 -0.525 -0.382 -3.703 2.870 0.054 Y -0.387 -3.404 -2.572 10.911 -2.453 -1.542 XY 1.101 1.446 0.257 -1.121 -1.356 -5.946 -2.788 – 45.573 -3.256 0.626 25.718 -4.297 -0. this shows that when the market return of the futures is increasing its stock value is coming down.011 -1.038 13.
210 1.412 2.907 – (-14.193 ΣY= -9.22-03-2007 23-03-2007 26-03-2007 28-03-2007 29-03-2007 30-03-2007
21* 155.467 -1.184 19.878
3274.314 2.687 -2.942 -4. Σy n Σ x2 – (Σx)2
= 21*74.516 – 145.212 3.725 2.638 3054.780 = 1420.311 -1.465
Table 4.349 -4.596
Source: Secondary Data
β = n * Σxy – Σx .359 ΣX= -14.907
3.825) 2 = 1566.596 .023 4.-14.8 shows the beta value of Dabur futures and Nifty futures.
.825 * -9.047 – 219.086 3.001 2 ΣX = 155.267 = 0.771 16.845 6. it is less volatile and the investment in Dabur futures is less risky. Since the beta value is less than one.001 2.068 1.559 ΣXY= 74.510 -1.
766 ΣXY= 55.653 -2.649 1.324 -0.557 -0.022 8.584 -2.489 -1.435 -3.446 -0.609 5.885 0.907 -0.202 9.392 3.969 0.586 -1.449 25.108 ΣY= 1.096 3.867 8.189 9.401 0.314 X2 6.207 2.201 -0.819 0.312 0.384 4.254 1.043 -1.507 6.150 2.086 -2.901 0.373 1.322 2.614 0.228 -2.760 0.872 2.430 2.845 10.933 9.508 0.823 -0.259 2.764 1.454 3.687 1.345 -5.961 -3.961 -1.820 0.818 1.334 2.478 2 ΣX = 126.134 2.066 -1.422 2.970 -2.421 7.023 6.189
Source: Secondary Data
.839 -1.296 2.400 1.046 -2.271 -2.084 XY 5.Table 4.84 Y -2.147 18.259 2.624 0.854 0.692 ΣX= -7.731 0.112 8.349 0.416 0.820 5.390 2.421 2.935 -0.538 0.154 0.046 0.9
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 -2.237 -0.
189 .969 .930 Y 1.555 0.418 0.230 X2 .298 1.030 0.β = n * Σxy – Σx .691 -0.10
Date 01-03-2007 02-03-2007 05-03-2007 06-03-2007 07-03-2007 X -0.302
2647.304 = 0.-7.084 – (-7.482 3.764 65
.232 15.-10.271 2586.46 = 1169.84) 2 = 1158. Since the beta value is less than one. Σy n Σ x2 – (Σx)2
Table 4.0001 2.756 0.452
Table 4.84 * 1. it is less volatile and investing in CIPLA futures is less risky.176 0.013 -1.314
21* 126.539 -8.2 shows the beta value of CIPLA futures and Nifty futures.764 – 61.814 1.120 -2.088 -4.445 XY -0.015 -1.
21* 95.092 0.903 0.189
Source: Secondary Data
β = n * Σxy – Σx .386 0.437 1.552 5.10.557 1.0006 0.045 -0.052
0.424 3. Σy n Σ x2 – (Σx)2
2.403 1.062 1.392 -3.126 54.851 -1.651 2.824 -4.280 3.867 -2.055 2.066 4.236 ΣY= -10.132 2.853 = -94.042 – 117.637 2 ΣX = 95.142 -4.706 .138 -1.347 0.482 -5.624 ΣX= 10.-109.807 -1.891 0.134 -3.806 0.134 1.507 -1.192 1.1245
1995.649 0.235 -3.255 ΣXY= -9.7015 1877.948 -2.925 1.432 5.856 * -10.002
1.458 7.262 -3.202 2.126 -1.968 2.564 4.0006 2.856) 2 = 203.944 -0.1392 -3.353 -2.056 -0.025 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
0.724 1.621 0.421 1.589 0.606 -2.002 – (-10.800 -5.806 1.237 3.826 .571 1.025 0.214 1.
CONCLUSIONS & RECCOMMENDATIONS
CHAPTER 5 SUMMARY OF FINDINGS. Since the beta value is negative it shows that when market return increases. stock value is coming down.2 shows the beta value of Glaxo futures and Nifty futures.= -.
5. The financial future plays an important role in NSE Nifty. There is relationship with share price movements of the valued of NSE futures. In the month of March 2007. Syndicate Bank.1 FINDINGS:
The major findings of the study are: 1. 4. PNB. Dabur and CIPLA futures are less risky. The futures value of Glaxo & Sun Pharma is negative. It shows that when the market value is increasing. investing in ICICI futures. its stock value will come down. The study shows that investing in Corporation Bank futures is high risky. 3. Ranbaxy. 2. IOB.
A futures contract is a standardized contract. In finance. Futures or future contract at transferable specific delivery forward contracts.2 CONCLUSION
A financial future is a futures contract on a short term interest rate. They are agreements between two counter parties that fix the terms of an exchange. which will take place between them at some fixed future date. From the banking industry futures of Icici bank. Syndicate bank. The study entitled ‘THE ROLE OF FINANCIAL FUTURES WITH REFERENCE TO NSE NIFTY’ was done with reference to Banking and Pharmaceutical industry. to buy or sell a certain underlying instrument at a certain date in the future. Indian 69
. traded on a futures exchange.5. Corporation bank. at a specified price. or that lock in the price today of an exchange.
Glaxo. Sun Pharma.3 RECOMMENDATIONS
1. Ranbaxy. the investment in Corporation Bank futures is highly risky. Syndicate Bank. 4. In March 2007. Dabur and CIPLA futures are less the investors can invest in these futures. the investors should be very cautious in investing into those 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. Since the volatility of ICICI futures IOB. PNB.
5. Financial futures can be used to dwarfs the volume in traditional agricultural contracts. 2. Dabur are the companies taken from the pharmaceutical industry. 3. Ranbaxy.
. Cipla.Overseas Bank and Punjab National bank are taken.
Tata McGraw Hill Publishing company. Vol. 2007. ‘Investment Management and Security analysis’.
• DALAL STREET. 2007.XXII. ‘Investment Analysis and Portfolio Management’.
. 05 Feb 19. Investment Journal. No.III.Books:
• Chandra Prasanna. November 9. • Money and Finance. 10th edition. Vol. Sultan Chand Publications. • Bhalla V K. 6th edition.March 04.
.NSE India.Money control .Website: