Futures play an important role in the field of finance. Many kinds of futures instruments have been developed and the use of futures has received a great deal of attention. Futures contract like options are important derivative instruments and a major innovation in the field of risk management. FEATURES OF A FUTURES CONTRACT A futures contract is a standardized forward contract. An agreement between two parties to exchange an asset for cash for a predetermined future date for a price that is specified today represents a forward contract. The terms which are used in futures contract are: Short position: This commits the seller to deliver an item at the contracted price on maturity. Long position: This commits the buyer to purchase an item at the contracted price on maturity. DIFFERENCES BETWEEN FORWARDS AND FUTURES A standardized forward contract is a futures contract. The differences are: • A forward contract is a tailor made contract (the terms are negotiated between the buyer and the seller),whereas a futures contract is a standardized contract(quantity, date and delivery conditions are standardized). • • • While there is no secondary market for forward contracts, the futures contracts are traded on organized exchanges. Forward contracts usually end with deliveries, whereas futures contracts are settled with the differences. Usually no collateral is required for a forward contract. In a futures contract, however a margin is required.


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

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

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

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

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

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

The basis is generally quoted in 32nds rather than in decimal units . for instance.and long-term interest rates can be offset by buying or selling bond futures contracts. (ii) sell (buy) a bond futures contract.deliver bond in the cash market.futures invoice price = clean cash price . that the gross basis was negative (positive). 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. Accordingly. Otherwise there would be instantaneous risk less profit opportunities. Suppose. The basis point value factor is the ratio of the change in the 10 . An excessive exposure to intermediate. 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. Risk management and hedging Basic risk management functions: Bond futures are often used as a vehicle for hedging price risk or duration.(futures price conversion factor) since dirty (or full) price = clean price + accrued interest. Basis arbitrate at futures expiration: At futures expiration. we define the gross or raw basis as: Gross basis = dirty cash price . the gross basis must be equal to zero. Then one could: (i) buy (sell) the cheapest to. 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.

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

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

tend to have quarterly contracts with delivery in March. going long the JPY contract (i. Pricing and arbitrage: International interest rate parity Overview. Expressing a market view Outright trading. 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.e.e. Conversely. September and December. the difference between forward and futures prices is less important than with interest rates. 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...e. They tend to require actual delivery.. More formally. June. bilateral exchange rates between two non-dollar currencies such as on JPY/DEM. Futures are a natural instrument to express views on future exchange rate movements. i. 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. However. Conversely. 13 . in the case of currencies. by far the most prevalent. i. the contract should be sold if one expects the yen to appreciate more than what is expected by the market.on crosses. long yen and short dollars) is consistent with an expectation of an appreciation of the yen relative to the dollar. meaning that at futures settlement the long receives the currency of denomination of the future and pays dollars). based on number of dollars per unit of foreign currency. For instance. shorting the contract is consistent with an expectation of a yen depreciation relative to the dollar. Price quotes are on American terms. Currency futures against the dollar. Contract specifications.

stock weighting. 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. This implies that percentage changes in stock indexes do not track total returns on the corresponding portfolio of stocks but. used for example in both the S&P 500 and NYSE indexes. any cash dividends received on the portfolio are ignoring when percentage changes in most indexes are being calculated. relative performance can vary sharply over periods such as a month or a quarter. Moreover. only price changes. those indexes constructed using geometric means). The most common weighting scheme is market value weighting. 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. Stock indexes differ from one to another with respect to the range of stocks covered. and index computation. The stocks in the portfolio can have equal weights or weights that change in some way over time. 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 . not every index correspond to a well defined portfolio of stocks (for example. Physical delivery of stocks against a futures contract based on an index presents intractable difficulties. 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. Index construction: The weight of a stock in an index is the proportion of the portfolio tracked by the index invested in the stock. In other words. First.

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

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

and leave the returns and risk component associated with the company-specific features of the stocks in the portfolio. 17 . 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. 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. Spreads: A wide range of speculative strategies are possible by mixing stock index futures contracts of different maturities and or different underlying indexes. Expressing a market view Outright trading: Futures are a natural instruments to express views on future exchange rate movements. one can take on a considerable amount of market risk via index futures and reap the reward of being correct in a forecast of the stock market direction.Capitalizing on different tax treatment of futures and equities. the different tax treatments of those returns may make it advantageous for some investors to use equity futures. All profits and losses on stock index futures are effectively treated as long-term capital gains and losses.

The purchaser of the option pays a market-determined price (or premium) in order to have the right --but not the obligation-. If the market price of the underlying is below the call option's strike price. but in reverse. the option has exercise value and is said to be in the money. the writer (or seller) of the option receives the premium when the option is issued and must stand ready to accept the corresponding futures position at any time duning the life of the option. for a call.OPTIONS ON FUTURES Definition and Pricing Definition and types of options. whichever is greater. the futures position may be established by the option holder on any date up to a pre-determined expiration date at a pre-determined price (the strike price). to put options 18 . The intrinsic value or moneyness of an option is the higher of its value if it were to be exercised immediately and zero (its value if it is not worth exercising). Conversely.to establish the corresponding futures position by exercising the option at some time in the future. In either case. The same applies. if the market price of the underlying is above the option's strike price. * A put option confers upon its holder the right to establish a short (selling) futures position. 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 key to options is to understand that holding an option represents a right rather than an obligation. For example. "Moneyness" of options. the option has no exercise value and is said to be out of the money.

you must pay the daily settlement variation when the price goes against you. The price you pay for having the security offered by an option 19 . if exercised. you let the option expire worthless and pay no more. 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. Hedgers and investors might want to use options on futures rather than futures themselves for the following reaso.: *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. Use of options on futures versus use of futures. which is an extension of the Black-Shoes model originally derived for pricing equity options.Futures positions at option exercise: To summarize. There is no downside risk to buying an option. If the price goes against you. the options on futures. yields long futures Underlying instruments. Among the most liquid option contracts (and the corresponding exchanges where they are traded) are: *Short-term interest rates: Eurodollars (at the CME) *Longer-term interest rates: US Treasury bonds and notes (at the CBOT) *Currencies: Deutschemarks and Yen (at the CME) *Stock-indexes: S&P500 (at the CME) Pricing models: A commonly used pricing model for options on futures is the Black model.

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

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

Financial futures (along with options) are best viewed as building blocks. Also. they allow not only the reduction or transformation of risk faced by individual investors but also the sheer understanding and measurement of risk. In the process. In so doing.components. Participants know all transaction prices and there are no negotiated deals and no multiple phone calls to get price quotes. the volume of financial futures now dwarfs the volume in traditional agricultural contracts. * Futures are bought or sold on margin. Futures' features. The surge in financial futures. * Futures are relatively inexpensive to execute (negotiable commission rates). Financial management is quickly becoming an exercise in reducing financials structures into their basic elements and then reassembling them into a preferable structure. 22 . *All prices and information are available continuously. derivatives have contributed decisively to the integration of financial markets. While the following are noteworthy advantages that futures have over forwards. * Prices are determined by a competitive market system (open outcry or electronic bidding). 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. 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. and as such provide for substantial leverage.

The Bombay Stock Exchange has a stock index futures contract based on Sensex. OTC trading allows more flexibility in establishing contract terms and avoids the need for daily monitoring of mark-to-market positions and margin account. *Counterparty credit risk of non-performance is negligible. Offsets of longs and shorts prevent a bloating of the balance sheet and tying up of credit lines that can become a problem with over-the-counter derivatives. 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 has a stock index futures contract based on S&P CNX Nifty Index. Futures on Individual Securities Futures on individual securities were introduced in India in 2001. 23 . exchanges and futures commission merchants provide a level of integrity for the marketplace. *Audit systems and safeguards enforced by regulatory authorities. Stock Index Futures The National Stock Exchange and the Bombay Stock Exchange have introduced stock index futures. On the other hand. The list of securities in which futures contracts are permitted is specified by Securities Exchange Board of India. Both the type of equity futures are available in India. The National Stock Exchange and the Bombay Stock Exchange have introduced futures on individual securities.

1. “A financial futures in a futures contract in a financial instrument like treasury bond. US Treasury Bills. 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. Many kinds of futures instruments have been developed and the use of futures has received a great deal of attention. but it is a tool for transferring price risks associated with fluctuations in asset values. 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. currency or stock index. Futures are not only a financing or investment vehicle. The volume of trading in financial futures dwarfs the volume in traditional agricultural contracts. 24 .” Eg: Financial futures.

5. 4. 2. Financial futures have become the corner stone of financial management. Futures have been a key instrument in facilitating the modern trend of separating conventional financial products into their basic components. Financial futures play a prominent role in risk management. financial institutions and corporations have been successfully integrated into risk management and yield enhancement strategies.3 NEED FOR THE STUDY The needs for the study of financial futures are: 1. 3. Futures have facilitated the modern trend of separating conventional financial products into their basic components.1. Futures have become widely accepted by money managers. 6. 25 . Futures are relatively in expensive to execute.




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,


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

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

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

4 OBJECTIVES OF THE STUDY • • • To study on the financial futures with reference to NSE Nifty. To study the amount of risk of Financial Futures of NSE in the month of March with reference to Banking and Pharmaceutical industries. internet.5 SCOPE OF THE STUDY: This study is done mainly under the ten companies of NSE Nifty. 2. 32 . 2.. magazines etc.7 TOOLS FOR DATA COLLECTION Secondary Data: It is collected from books.2. Secondary data is mainly used for the study. The results cannot be generalized. To study the volatility of futures with reference to Banking and Pharmaceutical industries. journals.6 RESEARCH METHODOLOGY This study entitled ‘A study on the role of Financial Futures with reference to NSE Nifty is mainly done in Banking and Pharmaceutical industry. Five companies from Banking and five from Pharma industry are taken for the study. 2.

9 LIMITATIONS OF THE STUDY Time constrains Geographical constraints This is restricted to Banking and Pharmaceutical Industry 33 . Σy n Σ x2 – (Σx)2 X = market return For calculating ‘x’ the NSE share price is taken.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 2.8 METHOD OF ANALYSIS The formula used for calculation are: β = n * Σxy – Σx .

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


K.79 billion www. the Stock Exchange. Savings. Mumbai India N Vaghul. ICICI Bank Towers. Credit Cards. venture capital and asset management.icicibank.V. During the year 2005 ICICI bank was involved as a defendant in cases of alleged criminal practices in its debt collection operations and alleged fraudulent tactics to sell its products 36 .. a network of over 619 branches and offices. and about 2400 ATMs.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.1 ICICI BANK ICICI Bank Type Founded Headquarters Private BSE & NSE:ICICI. life and non-life insurance. USD 5. Chanda Kochhar Loans.3. Investment vehicles. 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. Mumbai and the National Stock Exchange of India Limited and its ADRs are listed on the New York Stock Exchange (NYSE). ICICI Bank's equity shares are listed in India on stock exchanges at Kolkata and Vadodara. SBI Life (Insurance) etc. 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. Bandra Kurla. Nachiket Mor.Kamath.

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

S. Credit Cards. Insurance etc. The Government of India nationalized the bank.. USD 2. Savings. Investment vehicles. Mr. 1895 (British India) New Delhi. India Chairman and M. 38 .2 PUNJAB NATIONAL BANK Punjab National Bank Type Founded Headquarters Key people Industry Public (BSE. on July 19.PNBIndia.com Products Revenue Slogan Website Punjab National Bank (PNB).the name you can BANK upon www..3.D. established in 1895 in Lahore by Lala Lajpat Rai. along with 13 other major commercial banks of India.C. is the second largest public sector commercial bank in India with about 4500 branches and offices throughout the country. 1969.32 billion (2005) .Gupta Banking Insurance Capital Markets and allied industries Loans. NSE:PNB) Lahore.

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

National Stock Exchange. in Doha (1983) and Musandam Exchange Co. The stocks of the Syndicate Bank are listed on Bombay Stock Exchange. 3. 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.4 CORPORATION BANK CORPORATION BANK 40 . Mangalore Stock Exchange and Bangalore Stock Exchange. By 1989 it opened its 1500th branch at Hauz Khas.This type of system where in the agents of the bank come doorsteps to collect deposit is still prevailing in India and is referred as Pigmy Deposit Scheme. Syndicate Bank sponsored the first regional rural bank in India by name Prathama Grameena Bank. 20 banks merged with the Canara Industrial and Banking Syndicate Limited this included the Maharastra Apex Bank Limited and Southern India Apex Bank Limited. It took over Al Shabei Finance and Exchange Co. Currently it has over 1900 branches. From 1953-1964. in Muscat (1984). The bank expanded its operations not only on the domestic front but also overseas. Delhi.

and first day’s canvassed resources of less than one USD 1.176 full time employees.87% of Share Capital is presently held by the Public and Financial Institutions.corpbank.17% of Share Capital held by the Government of India. The Bank is a Public Sector Unit with 57. Rs 862. Mangaladevi Temple Road Pandeshwar Mangalore 575 001 India Chairman B. NSE:CORPBANK) Udipi.com Key people Industry Products Revenue Net income Slogan Website Corporation Bank. has currently (31 March 2004) 10. Sambamurthy Banking Loans. The bank was founded with an initial capital of Rs.83 crore (2006) Rs 100. The Bank came out with its Initial Public Offer (IPO) in October 1997 and 37.92 crores as on 31 March 2005. The bank has the distinction of the first Indian bank to publish its financial results (199899) conforming to US GAAP. Credit Cards. 1906 Corporation Bank. Investment vehicles. 5000 (USD 100). etc. India. 3.27 Crore (2006)[1] A Premier Government of India Enterprise www. 054. and operates from several branches in India. CORPORATE OFFICE . Savings. founded in 1906 in Udupi. The Bank’s Net Worth stood at Rs. is one of the Indian banks in public sector.Type Founded Headquarters Public (BSE. Karnataka state.3.5 INDIAN OVERSEAS BANK IOB 41 .

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

178 billion (2005) Employees 1100 in R&D Website www. CEO & MD Industry Pharmaceutical Products Generic drugs Revenue $1.com Ranbaxy Laboratories Limited is an Indian company incorporated in 1961.ranbaxy. It exports its products to 125 countries with ground operations in 46 and manufacturing facilities in seven countries. India Tejendra Khanna. Chairman Brian Tempest. It is India's largest pharmaceutical company.Ranbaxy Laboratories Limited Type Public Founded 1961 Headquarters Key people Gurgaon. It is ranked among the top 10 generic companies worldwide. The CEO of the company is Malvinder Mohan Singh. 3. Haryana. Executive Vice Chairman Malvinder Mohan Singh. Chief Mentor. Ranbaxy went public in 1973.7 CIPLA CIPLA Limited 43 .

K. India Y. The customary treatment of AIDS consists of a cocktail of three drugs. 1936). so in money terms Cipla's medicines are probably not in top spot). Cipla ignores foreign patents on these drugs where no Indian law is broken in the process. as measured by units produced. Cipla is the world's largest manufacturer of antiretroviral drugs to fight HIV/AIDS. The company was founded in 1935 by Khwaja Abdul Hamied. best-known for manufacturing economical anti-AIDS drugs. Chairman Industry Pharmaceuticals Revenue Net income Rs. stavudine and Nevirapine).Type Founded 1935 Headquarters Key people Mumbai.cipla. 24.8 billion (2005) Rs. Cipla produces an all-in-one pill called Triomune which contains all three substances (Lamivudine. While this sum remains out of reach for many millions of people in 'Third World' countries. Today (2007). Industrial & Pharmaceutical Laboratories is a major Indian pharmaceutical company. and its Chairman today is Yusuf Hamied (b.1 billion (2005) Employees ??? Website www.com Cipla founded as The Chemical. the founder's eldest son. By doing so Cipla has reduced the cost of providing antiretroviral to AIDS patients from $12.000 (and beyond) to around $300 per year. Hamied (CMD). charitable sources often are in a position to make up the difference for destitute patients. something difficult elsewhere because the three patents are 44 . distributed and sold (multinational brandname drugs are exponentially more expensive. 4.

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

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

a subsidiary of Dabur India is expecting to grow at 25%. 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. has project sales of Rs 100 crore in next three years.Dabur Foods.. In 47 . The company was set up in 1993 and now has sales worth Rs.12 billion. It will therefore increase its range of products to include tomato based products. 3.

London. Business Sun Pharma brands are prescribed in chronic therapy areas like cardiology. Chief Financial Officer Industry Pharmaceutical Products www. live longer" Website www.gsk.1996. Chairman Jean-Pierre Garnier. Chief Executive Julian Heslop.. feel better. and healthcare company. The same year the company also acquired Dadha Pharma in Tamil Nadu. GSK is a research-based company with a wide portfolio of pharmaceutical products covering anti-infectives. gastro-intestinal/metabolic. by merger of Glaxo Wellcome and Smith Kline Beecham Headquarters Brentford.2 billion (2006) £7.10 GLAXOSMITHKLINE GlaxoSmithKline Type Public (LSE: GSK NYSE: GSK) Founded 2000. respiratory. United Kingdom Key people Sir Chris Gent.S. neurology. Sun Pharma acquired the U. 3. central nervous system (CNS). biologicals. and respiratory.gsk. gastroenterology.com GlaxoSmithKline plc (LSE: GSK NYSE: GSK) is a British based pharmaceutical. oncology and vaccines products. psychiatry.728 (2005) Slogan "Do more. It also 48 .com/products Revenue Net income £23.8 billion (2006) Employees Over 100. diabetology. Detroit-based Caraco Pharm Labs.

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


924 Σx = -7.979 0.175 5.145 3.090 2.4329 1.13) 2 = 851.01-03-2007 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 1.546 1.167 -2.402 -1.330 -0.76 .875 0.835 0.271 16.630 1.56 Source: Secondary Data β = n * Σxy – Σx .724 -0.13 1.1603 6.152 -1.409 -0.7693 – (-7.314 0.3806 26.7312 0.269 0.225 -0.098 1.1586 6.343 -6.337 3.389 Σy = 1.9063 0.337 21* 163.892 -0.8225 2.482 -0.850 1.101 3.595 -1.366 3.2323 0.192 -1.56 .1823 0.781 -1.8537 Σ x2 = 163.916 -0.201 -0.612 1.359 Σxy = 40.13* 1.2410 0.82 -0.326 -0.6972 0.963 4.791 -1.98 0.780 -1.329 0.2222 14.7693 1.678 0. Σy n Σ x2 – (Σx)2 = 21*40.658 -1.143 0.591 -0.138 -7.5299 0.291 2.737 0.098 1.8032 0.3124 0.329 -2.497 0.831 4.482 -2.057 17.139 -2.427 0.5432 0.3540 1.347 -0.7662 5.952 -0.546 0.453 4.532 51 .532 21.-9.0403 37.3990 53.728 0.-7.297 -24.

ICICI futures are less volatile. Since the beta value is less than one.1 shows the beta value of ICICI futures and Nifty futures. Therefore investment in ICICI futures is less risky.836 = 861.314 = 0.292 3388.3439.254 Table 4.15 – 50. 52 .

028 1.923 3.004 -1.008 -3.485 10.007 3.682 Y 3.095 13.048 -0.214 -0.874 1.702 38.365 20.354 -3.901 1.985 6.363 5.615 -0.249 3.377 44.474 0.391 1.2 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 -0.508 7.751 5.593 0.515 -2.392 0.088 13.333 -3.931 0.381 -0.931 -3.388 6.249 13.155 Σxy = 592.50 -3.943 -0.849 0.232 12.108 11.216 5.211 3.864 1.355 8.250 27.078 -0.604 2.361 Σ x2 = 229.673 3.896 -2.907 0.588 -4.475 8.18 XY -3.760 -2.865 -0.Table 4.295 5.014 23.505 2.538 4.350 9.452 11.937 3.132 15.223 -5.378 -3.259 Σy = 18.134 3.333 X2 . Σy n Σ x2 – (Σx)2 53 .394 22.906 -6.02 Source: Secondary Data β = n * Σxy – Σx .613 2.614 1.8208 42.905 1.490 11.204 12.770 -3.369 -3.601 Σx = -7.087 -1.483 19.181 3.919 12.25 15.202 1.034 -0.

009 1.396 25. Since the beta value is more than one i.-140.559 2.084 0.3 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 0.831 -0.096 1.607 0.e.= 21*592.395 -0.275 5.492 -4.013 = 12573.310 Y 2.02 .164 53.552 2.790 27.78 – 59.488 10.705 X2 .658 -0.682 * 18.268 -0.808 -1.268 1.767 = 2. 2.218 54 .671 6.526 -1.500 0.299 -2. Corporation Bank futures are highly volatile.076 -3.644 Table 4.333 21* 229.175 0.574 2.834 4812.747 4.-7.313 2.697 1.574 3.096 XY -0.349 6.644.380 1.329 5.254 4753.338 -5.404 3.361 1.490 -4.212 -7. There fore investment in Corporation Bank is high risky.538 -0.2 shows the beta value of ICICI futures and Nifty futures.880 0.18 – (-7.307 -0.170 2. Table4.836 0.271 0.501 4.458 -0.952 -2.113 -1.682) 2 = 12432.303 1.42 .

-8.368 1.455 -0.389 -1.959 -1.63 – 77.63 2898.607 -1.062 9. IOB futures are less volatile.919 2.117 0.00 0.3 shows the beta value of IOB futures and Nifty futures.126 -3.017 21* 138.248 Source: Secondary Data β = n * Σxy – Σx .326 3.337 3.634 Table 4.802 Σ x2 = 138.204 -3.463 2.79* -12.179 -0.677 1.03 – (--8.299 2.017 11.000 -0.077 Σy = -12.083 9.578 2821.248 .140 -1.79) 2 = 1895.418 -2.663 7.315 0.37 = 0.129 Σxy = 90.812 2.652 13. Since the beta value is less than one.79 2.093 3.902 4.214 -4. 55 . Σy n Σ x2 – (Σx)2 = 21* 90.20-03-2007 21-03-2007 22-03-2007 23-03-2007 26-03-2007 28-03-2007 29-03-2007 30-03-2007 3.208 .408 -3.-105. There fore investment in IOB futures is less risky.26 = 1789.674 Σx = -8.

204 -3.060 0.312 0.651 42.060 Σxy = 133.832 -3.005 1.538 -0.333 0.711 19.658 -0.909 3.232 4.619 5.418 -2.015 -0.965 -6.792 15.552 2.122 8.902 4.500 -2.787 2.831 -0.4 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 1.968 0.020 12.836 0.492 -4.321 2.091 -2.791 -1.344 -2.431 -1.626 -0.474 0.145 0.036 3.076 -3.605 24.443 -0.661 Y 2.705 2.620 Σ x2 = 165.126 -3.814 0.939 -0.952 -2.190 4.088 Source: Secondary Data 56 .920 6.759 .018 1.953 0.989 XY 3.257 2.781 -4.330 9.077 Σy = -11.625 1.717 5.982 18.214 -4.074 5.395 -0.468 -0.788 Σx = -18.414 X2 1.088 1.957 28.072 1.168 6.870 7.267 -4.463 2.733 18.078 -2.051 14.114 0.Table 4.006 4.928 -0.490 -4.377 7.113 -1.25 5.315 0.170 2.485 -0.717 5.

Σy n Σ x2 – (Σx)2 = 21* 133.809 -3.23 = 2581.852 3137.362 6.823 X2 12.996 3485.-18.989 – (-18.661) 2 = 2794.088 .130 3.020 3.5 ANALYSIS OF PUNJAB NATIONAL BANK Date 01-03-2007 02-03-2007 05-03-2007 06-03-2007 07-03-2007 X 3. Since the beta value is less than one in the month of March.801 -1.719 1.4 shows the beta value of Syndicate Bank futures and Nifty futures.769 – 348.822 Table 4.114 3.492 1.339 57 .-212.356 XY 20.661* -11.119 8.414 21* 165.697 28. Table 4.984 0.694 50.β = n * Σxy – Σx .105 3. the Syndicate bank futures are less volatile and the investment in syndicate bank futures is less risky.680 72.848 .539 = 0.563 -7.738 -1.832 Y 5.

111 0.899 Source: Secondary Data β = n * Σxy – Σx .394 -3.920 -0.435 2.448 8.157 1.489 11.239 -.953 -1.198 0.955* 8.08-03-2007 09-03-2007 12-03-2007 13-03-2007 14-03-2007 15-03-2007 16-03-2007 19-03-2007 20-03-2007 21-03-2007 22-03-2007 23-03-2007 26-03-2007 28-03-2007 29-03-2007 30-03-2007 1.861 = 0.696 5.238 6.863 -0.955) 2 = 2832.488 4980.316 2.778 1.472 = 2681.096 14.980 3.859 5.580 1.566 27.067 4.240 -3.391 5268.001 -1.028 Σ x2 = 250.093 0.961 2.814 1.143 0.879 – 151.732 -2.721 -1.825 2.158 4.453 -0.053 3.195 0.168 Σx = 16.206 0.905 3.052 -2.103 1.534 -1.656 24.857 2.579 3.198 -1.159 Σxy = 134.811 -1.929 2.873 2.955 1.435 2.538 58 .085 0.899 – 16.322 1.069 -1.873 – (16. Σy n Σ x2 – (Σx)2 = 21* 134.669 12.265 3.391 0.336 3.333 – 287.948 Σy = 8.447 3.768 -1.929 21* 250.041 0.606 -1.271 1.934 0.955 10.173 29.

259 0.976 27.260 -0.934 ΣXY=132.803 ΣX2=174.125 0.667 0.636 29.475 -5.957 1.660 -0.175 0.213 15.472 -2.098 0.858 2.524 0.329 0.227 0.189 15.343 -1.047 -0.446 -0. Table.997 -0.689 20.381 5.394 2.096 -3.336 0.704 4.6 RANBAXY Source: Secondary Data 59 .328 -0.132 0.793 5.942 6.696 ΣY=-0.156 0.387 2.514 0.089 1.226 -1.473 36.189 3.666 -7.397 -0.548 Y 1.Table 4.063 -1. 4.664 1.645 26.294 0. Since the beta value is less than one.353 1.803 2.485 -0.503 0.236 2.83 XY -0.5 shows the beta value of Punjab National Bank futures and Nifty futures.260 -1.380 -1.786 3.830 1.503 3.866 8.673 0.343 ΣX=-8.031 5.830 -4.278 -2.295 -0.363 0.024 27.178 -0.798 5.887 1.176 -1.062 volatile and investing in Punjab National Bank futures is less risky.443 51.657 1. 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 -0.580 5.655 0.151 0.926 X2 0.201 0.942 -1.266 3.710 -5.299 -1.059 0.469 0.316 -1.

915 3671.548) 2 = 2773.068 = 2765.43 – 73.768 Table 4.302 – 7.548 * -0. it is less volatile and investing in Ranbaxy futures is less risky. Since the beta value is less than one.362 = 0.7 60 .387 3598.-8.83 – (-8.β = n * Σxy – Σx . Σy n Σ x2 – (Σx)2 = 21*132.6 shows the beta value of Ranbaxy futures.062 . Table 4.926 21* 174.

831 2.486 0.189 3.131 2.176 -1.466 -2.051 0.024 0.152 0.738 * -0.847 – 6.739 -3.687 3.701 -3.114 1.94 61 .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. Σy n Σ x2 – (Σx)2 = 21*-19.626 -0.770 ΣXY= -19.423 3.962 -0.165 -0.261 -1.660 -0.676 4.773 0.252 -0.655 0.957 1.008 0.020 0.219 11.357 -0.697 -0.553 0.743 -11.481 -0.020 -7.068 0.031 5.294 0.093 0.719 -0.689 -0.062 -1.737 0.672 0.171 -0.368 -4.005 -0.228 XY 4.630 -0.696 ΣY= -0.473 1.353 -3.427 -0.023 0.328 -0.981 ΣX= 6.358 2.710 -5.475 -5.155 -0.071 0.316 -1.329 0.496 0.948 7.492 7.94 X2 14.088 3.261 -0.445 2.543 0.847 Source: Secondary Data β = n * Σxy – Σx .381 5.390 -2.193 0.007 15.447 -0.392 0.738 Y 1.744 0.204 2.047 -0.096 -3.149 8.974 2.230 0.667 -1.362 -1.848 ΣX2= 77.

223 -1.756 0.382 -3.500 X2 9.404 -2.022 2.121 -1.453 -1.592 -1.428 -0.8 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 -3.572 10.911 -2.946 -2.816 -2.542 XY 1.049 1.152 -2.21* 77.297 -0.957 4.388 = -0.666 4.131 2.025 3.718 -4.663 12.433 -2.26 Table 4.090 1.089 0.788 – 45.218 -3.787 .554 10.173 1.-6.803 4.573 -3.472 12.146 11.161 -0.631 8.751 0.101 1.956 2.474 11.336 1621.173 0.054 Y -0.703 2. Since the beta value of this future is negative.988 -3.387 -3.152 -0.626 25.228 – (6.635 62 .356 -5.446 0.572 1.738) 2 = -416.678 5.7 shows the beta value of Sun Pharma’s futures.257 -1.256 0.451 1576.40 = -410.011 -1.525 -0.038 13. this shows that when the market return of the futures is increasing its stock value is coming down.870 0. Table 4.489 0.151 5.

068 1.825 3.184 19.510 -1. 63 .771 16.516 – 145.907 – (-14.825) 2 = 1566.212 3.725 2.942 -4.465 Table 4.559 ΣXY= 74.362 1.001 2 ΣX = 155.359 ΣX= -14.467 -1.023 4.349 -4.311 -1.845 6.210 1.193 ΣY= -9.638 3054.314 2.22-03-2007 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.687 -2. it is less volatile and the investment in Dabur futures is less risky.047 – 219.596 .027 9. Since the beta value is less than one.84 9.412 2.780 = 1420.001 2.84 21* 155.086 3.267 = 0.878 3274.825 * -9.907 10.-14. Σy n Σ x2 – (Σx)2 = 21*74.596 Source: Secondary Data β = n * Σxy – Σx .

108 ΣY= 1.820 5.189 Source: Secondary Data 64 .901 0.820 0.557 -0.760 0.322 2.819 0.454 3.296 2.154 0.818 1.478 2 ΣX = 126.228 -2.969 0.854 0.653 -2.692 ΣX= -7.845 10.624 0.314 X2 6.112 8.259 2.84 Y -2.586 -1.970 -2.201 -0.430 2.043 -1.839 -1.400 1.084 XY 5.933 9.961 -3.614 0.349 0.086 -2.885 0.446 -0.449 25.421 7.416 0.731 0.766 ΣXY= 55.324 -0.023 6.687 1.584 -2.134 2.189 9.823 -0.384 4.508 0.489 -1.935 -0.Table 4.237 -0.373 1.150 2.649 1.422 2.392 3.259 2.022 8.207 2.421 2.435 -3.764 1.096 3.271 -2.312 0.961 -1.046 -2.390 2.334 2.066 -1.609 5.538 0.046 0.401 0.345 -5.507 6.202 9.867 8.147 18.872 2.907 -0.254 1.9 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.

232 15. it is less volatile and investing in CIPLA futures is less risky.-10.-7.189 . Since the beta value is less than one.314 21* 126.756 0.298 1.691 -0.084 – (-7.0001 2.302 2647.088 -4.482 3.418 0.10 GLAXO Date 01-03-2007 02-03-2007 05-03-2007 06-03-2007 07-03-2007 X -0.930 Y 1.764 – 61.β = n * Σxy – Σx .452 Table 4. Table 4.013 -1.814 1.120 -2.969 . Σy n Σ x2 – (Σx)2 = 21*55.46 = 1169.230 X2 .764 65 .539 -8.030 0.84 * 1.304 = 0.2 shows the beta value of CIPLA futures and Nifty futures.555 0.445 XY -0.176 0.271 2586.015 -1.84) 2 = 1158.

424 3.806 0.347 0.891 0.826 .066 4.903 0.142 -4.649 0.968 2.08-03-2007 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 0.458 7.724 1.589 0.621 0.1245 1995.606 -2.437 1.189 66 .192 1.706 Source: Secondary Data β = n * Σxy – Σx .262 -3.421 1.025 1.056 -0.052 0.-109.856 2.353 -2.062 1.092 0.214 1.002 1.552 5.045 -0.126 54.564 4.403 1.925 1.055 2.432 5.571 1.132 2.236 ΣY= -10.202 2.651 2.507 -1.7015 1877.624 ΣX= 10.856) 2 = 203.042 – 117.10.948 -2.867 -2.002 – (-10.138 -1.706 .280 3. Σy n Σ x2 – (Σx)2 = 21*-9.944 -0.807 -1.557 1.856 * -10.824 -4.853 = -94.237 3.637 2 ΣX = 95.052 21* 95.134 -3.392 -3.025 0.851 -1.800 -5.806 1.235 -3.126 -1.134 1.482 -5.255 ΣXY= -9.0006 0.1392 -3.386 0.0006 2.

= -. stock value is coming down. CONCLUSIONS & RECCOMMENDATIONS 67 .05044 Table 4. Since the beta value is negative it shows that when market return increases.2 shows the beta value of Glaxo futures and Nifty futures. CHAPTER 5 SUMMARY OF FINDINGS.

4. IOB. PNB. 2. Ranbaxy. There is relationship with share price movements of the valued of NSE futures. The financial future plays an important role in NSE Nifty. The futures value of Glaxo & Sun Pharma is negative. 68 . The study shows that investing in Corporation Bank futures is high risky. Dabur and CIPLA futures are less risky. Syndicate Bank. In the month of March 2007.1 FINDINGS: The major findings of the study are: 1.5. investing in ICICI futures. 3. It shows that when the market value is increasing. its stock value will come down.

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

Dabur and CIPLA futures are less the investors can invest in these futures. 4. 70 . Dabur are the companies taken from the pharmaceutical industry. the investment in Corporation Bank futures is highly risky. Glaxo. In March 2007. PNB. the investors should be very cautious in investing into those futures. 3. Ranbaxy. 5. Sun Pharma.3 RECOMMENDATIONS 1. Syndicate Bank. Futures will helps to allow economic agents to fine tune the structures of their assets and liabilities to better suit their risk preferences and market expectations. Cipla. Financial futures can be used to dwarfs the volume in traditional agricultural contracts. Since the volatility of ICICI futures IOB. Ranbaxy. 2.Overseas Bank and Punjab National bank are taken.


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

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

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