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.


triggered by rumors. and maturity date. asset quantity. whereas futures contract are ‘marked to market’ on a daily basis. and to prevent overreaction to real information. 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.• Forward contracts are settled on the maturity date. This means that the profits and losses on futures contracts are settled on a periodic basis. Price limits are meant to prevent panic buying or selling. This means that profits and losses on futures contract are settled daily. The purpose of standardization is to promote liquidity and allow parties to the futures contracts to close out their positions readily. This means that the exchange becomes the seller to the buyer and the buyer to the seller. 4 . 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. Marking-to-market: While forward contracts are settled on the maturity date. Price limits: Futures exchanges impose limits on price movements of futures contracts.

but are often defined on an interest rate index such as 3-month sterling or US dollar LIBOR. 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. aluminum. Futures price= Expected spot price – Expected risk premium FINANCIAL FUTURES A financial future is a futures contract on a short term interest rate (STIR). 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. Hence perishable commodities have to be analyzed differently. while financial futures is a futures contract in a financial instrument like Treasury bond. 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. the asset has to be storable. cotton. oil. Contracts vary. currency .or stock index. 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. COMMODITY FUTURES (STORABLE COMMODITIES) Futures contracts on various commodities. A commodity futures is a futures contract in a commodity like cocoa or aluminum. storable as well as perishable. 5 . rice. like gold.

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

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

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

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

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

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

CURRENCY FUTURES Contract specifications Types of contracts.Spread trading: As a word of caution. 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. JPY. Finally. cross-country spreads may be driven by differences of the duration of their respective cheapest-to-deliver bonds than by the absolute level of long-term rates. Foreign currency futures contracts are available on all major currencies against the dollar (e. Basis trading: Trading the basis from the long side is relatively risk less if the position is held to the futures expiration date.. In a similar vein. etc. there are futures on a USD index (i. and (ii) the evolution of short-term rates. A basis trade can -.e. DEM. 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. AUD. SRF. and can be used to take on risk subject to one's views in addition to as an arbitrage play.1so be held for shorter time horizon but then the position is subject to risk at the unwind. 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. GBP. A short-term basis position financed at an overnight rather than term rate constitutes a bet on basically two things: (i) the level of long-term rates (which determines which bond will be the cheapest-to-deliver since they each have different sensitivity to market rates according to their duration). most of which are traded at the CME and at LIFFE. For instance.).. there are futures 12 . CAD. as explained above.g. In addition. and in particular whether the cheapest-to-deliver goes on special in the repo market Short-term basis trading is in fact quite complex. average of bilateral rates against the dollar) at the CBOT.

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

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

* S&P 400 (CME). * Value Line futures (KC). The value of one futures contract is $500 tirmes the index. * Major market index (CME). following is a list of the main international stock indexes and futures contracts on these indexes: * S&P 500 (CME). 15 . * Nikkei 225 stock average (CME). Based on a portfolio of all the stocks listed on the NYSE. The value of one futures contract is GBP 25 times the index. The value of one fuLturesc ontact is $5 times the index. *CAC-4s0t ock index (MATIF). Based on a portfolio of 400 American stocks. * FT-SE 100 index (LUFFE). Based on a portfolio of 500 American stocks. Based on a portfolio of 40 of the largest stocks listed on the London Stock Exchange. * NYSE composite futures (NYSE). Contains the prices of 1.700 American stocks. The value of one futures contract is $500 times the index. For illustration purposes.companies. The value of one futures contract is $500 times the index. The value of one futures contract is $500 times the index. The value of one futures contract is FRF200 times the index. Contracts traded. To solve these problems stock index futures contracts are settle in cash and the underlying assets are defined to be an amount of cash equal to a fixed multiple of the value of the index. Based on a portfolio of 40 of the largest stocks listed on the Paris Stock Exchange. Based on a portfolio of 225 of the largest stocks listed on the Tokyo Stock Exchange. The index accounts for 80% of the NYSE. It does not correspond directly to any portfolio of stocks because of its use of geometric averaging. The value of one futures contract is $500 times the index. Based on a portfolio of 20 blue-chip American stocks listed on the NYSE.

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

17 . 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. All profits and losses on stock index futures are effectively treated as long-term capital gains and losses.Capitalizing on different tax treatment of futures and equities. 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. Since a deposit of less than 10 percent is required to purchase or sell a stock futures contract. one can take on a considerable amount of market risk via index futures and reap the reward of being correct in a forecast of the stock market direction. Capitalizing on stock selectivity. the different tax treatments of those returns may make it advantageous for some investors to use equity futures. Expressing a market view Outright trading: Futures are a natural instruments to express views on future exchange rate movements.

"Moneyness" of options. 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. The same applies. The key to options is to understand that holding an option represents a right rather than an obligation. 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). There are two types of options on futures: * A call option confers upon its holder the right to establish a long (buying) futures position. for a call. to put options 18 .OPTIONS ON FUTURES Definition and Pricing Definition and types of options. the option has exercise value and is said to be in the money. The purchaser of the option pays a market-determined price (or premium) in order to have the right --but not the obligation-. For example. Conversely. if the market price of the underlying is above the option's strike price. 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). whichever is greater. If the market price of the underlying is below the call option's strike price. but in reverse.to establish the corresponding futures position by exercising the option at some time in the future. In either case.

yields long futures Underlying instruments. the options on futures. 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.: *Creating asymmetric payoffs on the upside and downside. which is an extension of the Black-Shoes model originally derived for pricing equity options. If the price goes against you. With a futures position. you must pay the daily settlement variation when the price goes against you. you let the option expire worthless and pay no more. There is no downside risk to buying 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. Hedgers and investors might want to use options on futures rather than futures themselves for the following reaso. 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.Futures positions at option exercise: To summarize. if exercised. The price you pay for having the security offered by an option 19 .

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

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

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

EQUITY FUTURES IN INDIA Equity futures are of two types: stock index futures and futures on individual securities. The list of securities in which futures contracts are permitted is specified by Securities Exchange Board of India. 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. Futures on Individual Securities Futures on individual securities were introduced in India in 2001. *Audit systems and safeguards enforced by regulatory authorities. exchanges and futures commission merchants provide a level of integrity for the marketplace. *Counterparty credit risk of non-performance is negligible. The National Stock Exchange and the Bombay Stock Exchange have introduced futures on individual securities. Both the type of equity futures are available in India. The Bombay Stock Exchange has a stock index futures contract based on Sensex. Stock Index Futures The National Stock Exchange and the Bombay Stock Exchange have introduced stock index futures. OTC trading allows more flexibility in establishing contract terms and avoids the need for daily monitoring of mark-to-market positions and margin account. The National Stock Exchange has a stock index futures contract based on S&P CNX Nifty Index.*Positions are easy to reverse if the opinion about market conditions and prospects changes. On the other hand. 23 .

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

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




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

Trading on options give lot of volatility to futures market. Futures markets becomes at times unpredictable compare to SENSEX/NIFTY movements. The researcher feels an indepth study in this area, the price movements of futures with respect to SENSEX or nifty is imperative.

Basic futures contract design Definition. A futures contract is a commitment to buy or sell a fixed amount of standardized commodity or financial instrument at a specified time in the future at a specified price established on the day the contract is initiated and according to the rules of the regulated exchange where the transaction occurred. Once the trade clears, the buyer and corresponding seller of the futures contract are not exposed to each other's credit ri3k. Rather, they individually look to the clearinghouse for performance, and vice versa. Futures as a derivative security. A futures contract is a financial derivative of the commodity on which it is based in the sense that it is an arrangement for exchanging money on the basis of the change in the price or yield of some underlying commodity. Timing of cash and commodity flows. Like other derivative securities, futures contract is an agreement to do something in the futures -- no goods or assets are exchanged today. A cash market transaction involves an agreement between two counterparties to buy or sell a commodity for cash today (perhaps for delivery in a couple of days). In a forward 27

market traction, delivery and settlement of the commodity for cash will occur at a single future date with no intervening cash flows. In afitres market transaction, delivery and settlement will also occur at a single future date but there will be daily (or more frequent) cash flows reflecting intervening price movements in the underlying commodity. Value of futures contracts at the time of contracting. Since there is no exchange of neither commodities nor cash payments at the time of contracting of futures contracts, such contracts must have a zero net present value at their inception. Value of futures contract as spot price changes. Once the futures contract is entered into, subsequent movements in the (spot) market price of the commodity create value for either the long futures position (i.e., the buyer) or the short futures position (i.e., the seller). For instance, a rise in the spot price of the commodity will benefit the long as he has bought the commodity under the futures contract at a fixed price and can now expect to sell it in the future at a higher price in the spot market. But since the long will not realize this gain until the settlement of the futures contract, this creates a credit exposure to the extent of the net present value of the futures contract. The futures contract will now be a positive net present value investment for the long and an obligation for the short.

Closing a futures position. A futures position can be closed out before expiration of the contract by entering into an offsetting trade in the same contract for the samne amount.. Under physical delivery, investors that are long the contract must deliver to investors short the contract the underlying commodity of the contract according to the rules on commodity quality and timing established by the exchange.. The determination of the price of the commodity at expiration on which cash settlement amounts are calculated (the final settlement price) is made by the exchange under pre-specified rules. Types of underlving_instruments. Underlying every futures contract is a relatively active cash market for an asset or good. Futures contracts were traditionally based on standard physical commodities such as grains (corn, wheat, soybeans), livestock (live cattle and hogs), energy products (crude oil, heating oil) or metals (aluminum, copper,


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

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

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

6 RESEARCH METHODOLOGY This study entitled ‘A study on the role of Financial Futures with reference to NSE Nifty is mainly done in Banking and Pharmaceutical industry. 2. 32 . 2. To study the volatility of futures with reference to Banking and Pharmaceutical industries.2. 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.4 OBJECTIVES OF THE STUDY • • • To study on the financial futures with reference to NSE Nifty. 2. journals. internet.7 TOOLS FOR DATA COLLECTION Secondary Data: It is collected from books.5 SCOPE OF THE STUDY: This study is done mainly under the ten companies of NSE Nifty. Secondary data is mainly used for the study. Five companies from Banking and five from Pharma industry are taken for the study.. magazines etc.

8 METHOD OF ANALYSIS The formula used for calculation are: β = n * Σxy – Σx .9 LIMITATIONS OF THE STUDY Time constrains Geographical constraints This is restricted to Banking and Pharmaceutical Industry 33 . 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.

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


USD 5. During the year 2005 ICICI bank was involved as a defendant in cases of alleged criminal practices in its debt collection operations and alleged fraudulent tactics to sell its products 36 . Investment vehicles. ICICI Bank's equity shares are listed in India on stock exchanges at Kolkata and Vadodara. SBI Life (Insurance) etc.icicibank. Mumbai and the National Stock Exchange of India Limited and its ADRs are listed on the New York Stock Exchange (NYSE).Kamath. the Stock Exchange. and about 2400 ATMs. NYSE: IBN 1955 (as Industrial Credit and Investment Corporation of India) ICICI Bank Ltd.. K. ICICI Bank Towers. Savings.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. Nachiket Mor. 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. Credit Cards. ICICI Bank has total assets of about USD 56 Billion (end-Mar 2006).1 ICICI BANK ICICI Bank Type Founded Headquarters Private BSE & NSE:ICICI. Mumbai India N Vaghul. venture capital and asset management. life and non-life insurance. a network of over 619 branches and offices. Chanda Kochhar Loans. Bandra Kurla.3.V.79 billion www.

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

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

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

in Doha (1983) and Musandam Exchange Co. From 1953-1964.4 CORPORATION BANK CORPORATION BANK 40 . Currently it has over 1900 branches. Mangalore Stock Exchange and Bangalore Stock Exchange. Delhi. 3. 20 banks merged with the Canara Industrial and Banking Syndicate Limited this included the Maharastra Apex Bank Limited and Southern India Apex Bank Limited. The bank expanded its operations not only on the domestic front but also overseas. It took over Al Shabei Finance and Exchange Co.This type of system where in the agents of the bank come doorsteps to collect deposit is still prevailing in India and is referred as Pigmy Deposit Scheme. By 1989 it opened its 1500th branch at Hauz Khas. National Stock Exchange. in Muscat (1984). Syndicate Bank sponsored the first regional rural bank in India by name Prathama Grameena Bank. 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. The stocks of the Syndicate Bank are listed on Bombay Stock Exchange.

NSE:CORPBANK) Udipi.Type Founded Headquarters Public (BSE. Investment vehicles.5 INDIAN OVERSEAS BANK IOB 41 . 1906 Corporation Bank. CORPORATE OFFICE . 5000 (USD 100). has currently (31 March 2004) 10.com Key people Industry Products Revenue Net income Slogan Website Corporation Bank.17% of Share Capital held by the Government of India.27 Crore (2006)[1] A Premier Government of India Enterprise www. and first day’s canvassed resources of less than one USD 1. India. The Bank’s Net Worth stood at Rs. Mangaladevi Temple Road Pandeshwar Mangalore 575 001 India Chairman B. is one of the Indian banks in public sector. Credit Cards. Karnataka state. founded in 1906 in Udupi. The Bank is a Public Sector Unit with 57. and operates from several branches in India. The Bank came out with its Initial Public Offer (IPO) in October 1997 and 37. 054.corpbank. Sambamurthy Banking Loans. Savings.176 full time employees. etc.3. 3.83 crore (2006) Rs 100.92 crores as on 31 March 2005. Rs 862. The bank was founded with an initial capital of Rs.87% of Share Capital is presently held by the Public and Financial Institutions. The bank has the distinction of the first Indian bank to publish its financial results (199899) conforming to US GAAP.

Chidambaram Chettyar. 3. Insurance and Industry with the twin objectives of specializing in foreign exchange business and overseas banking.6 RANBAXY LABORATORIES 42 . IOB had the unique distinction of commencing business on 10th February 1937 (on the inaugural day itself) in three branches simultaneously .at Karaikudi and Chennai in India and Rangoon in Burma (presently Myanmar) followed by a branch in Penang.Ct.M.M.3.64 Crs and Advances at Rs. by Shri.Indian Overseas Bank (IOB) was founded on February 10th 1937. Deposits stood at Rs. At the dawn of Independence IOB had 38 branches in India and 7 branches abroad. a pioneer in many fields .Banking.23 Crs at that time.6.

com Ranbaxy Laboratories Limited is an Indian company incorporated in 1961. Chairman Brian Tempest.Ranbaxy Laboratories Limited Type Public Founded 1961 Headquarters Key people Gurgaon. Chief Mentor. The CEO of the company is Malvinder Mohan Singh.ranbaxy. It is ranked among the top 10 generic companies worldwide. India Tejendra Khanna. 3.178 billion (2005) Employees 1100 in R&D Website www. Ranbaxy went public in 1973. CEO & MD Industry Pharmaceutical Products Generic drugs Revenue $1. Haryana. It is India's largest pharmaceutical company.7 CIPLA CIPLA Limited 43 . It exports its products to 125 countries with ground operations in 46 and manufacturing facilities in seven countries. Executive Vice Chairman Malvinder Mohan Singh.

1936). as measured by units produced. Chairman Industry Pharmaceuticals Revenue Net income Rs.Type Founded 1935 Headquarters Key people Mumbai. Industrial & Pharmaceutical Laboratories is a major Indian pharmaceutical company. best-known for manufacturing economical anti-AIDS drugs. India Y. 24. the founder's eldest son. Cipla ignores foreign patents on these drugs where no Indian law is broken in the process. The customary treatment of AIDS consists of a cocktail of three drugs.com Cipla founded as The Chemical. K. Hamied (CMD).000 (and beyond) to around $300 per year. Cipla produces an all-in-one pill called Triomune which contains all three substances (Lamivudine. charitable sources often are in a position to make up the difference for destitute patients. By doing so Cipla has reduced the cost of providing antiretroviral to AIDS patients from $12.8 billion (2005) Rs. Today (2007). The company was founded in 1935 by Khwaja Abdul Hamied.cipla. and its Chairman today is Yusuf Hamied (b. something difficult elsewhere because the three patents are 44 . While this sum remains out of reach for many millions of people in 'Third World' countries. so in money terms Cipla's medicines are probably not in top spot). stavudine and Nevirapine). distributed and sold (multinational brandname drugs are exponentially more expensive. 4. Cipla is the world's largest manufacturer of antiretroviral drugs to fight HIV/AIDS.1 billion (2005) Employees ??? Website www.

held by different companies. One more popular fixed dose combination is there. with the name Duovir-N. 3.8 DABUR 45 . This contains Lamivudine. Zidovudine and Nevirapine.

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

3.9 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 mainly supplied beverages to institutional customers. a subsidiary of Dabur India is expecting to grow at 25%. It will therefore increase its range of products to include tomato based products. The company was set up in 1993 and now has sales worth Rs.Dabur Foods. In 47 ..12 billion.

com GlaxoSmithKline plc (LSE: GSK NYSE: GSK) is a British based pharmaceutical. and respiratory.1996. gastro-intestinal/metabolic. and healthcare company. United Kingdom Key people Sir Chris Gent.10 GLAXOSMITHKLINE GlaxoSmithKline Type Public (LSE: GSK NYSE: GSK) Founded 2000. Chairman Jean-Pierre Garnier. feel better. diabetology. psychiatry. Detroit-based Caraco Pharm Labs.gsk. London.2 billion (2006) £7. GSK is a research-based company with a wide portfolio of pharmaceutical products covering anti-infectives. respiratory. It also 48 . neurology.gsk. biologicals.S. gastroenterology. by merger of Glaxo Wellcome and Smith Kline Beecham Headquarters Brentford.728 (2005) Slogan "Do more. live longer" Website www. 3. Sun Pharma acquired the U. Chief Financial Officer Industry Pharmaceutical Products www. central nervous system (CNS). oncology and vaccines products.com/products Revenue Net income £23. The same year the company also acquired Dadha Pharma in Tamil Nadu.. Chief Executive Julian Heslop.8 billion (2006) Employees Over 100. Business Sun Pharma brands are prescribed in chronic therapy areas like cardiology.

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


892 -0.98 0.402 -1.916 -0.347 -0.1603 6.145 3.532 51 .337 21* 163.497 0.780 -1.152 -1.2323 0.82 -0.138 -7.875 0.330 -0.8537 Σ x2 = 163.13* 1.831 4.389 Σy = 1.427 0.1586 6.835 0.7662 5.56 Source: Secondary Data β = n * Σxy – Σx .0403 37.546 0.359 Σxy = 40.2410 0.7693 1.8032 0.167 -2.201 -0.329 0.175 5.3806 26.1823 0.225 -0.-7.737 0.5432 0.781 -1.139 -2.952 -0.9063 0.850 1.366 3.409 -0.326 -0.546 1.098 1.6972 0.595 -1.269 0.678 0.658 -1.482 -2.3124 0.01-03-2007 02-03-2007 05-03-2007 06-03-2007 07-03-2007 08-03-2007 09-03-2007 12-03-2007 13-03-2007 14-03-2007 15-03-2007 16-03-2007 19-03-2007 20-03-2007 21-03-2007 22-03-2007 23-03-2007 26-03-2007 28-03-2007 29-03-2007 30-03-2007 1.143 0.-9.612 1.591 -0.101 3. Σy n Σ x2 – (Σx)2 = 21*40.532 21.329 -2.13 1.271 16.728 0.3990 53.963 4.5299 0.453 4.098 1.76 .343 -6.4329 1.924 Σx = -7.8225 2.13) 2 = 851.3540 1.724 -0.979 0.192 -1.291 2.2222 14.314 0.297 -24.057 17.56 .337 3.791 -1.7693 – (-7.482 -0.630 1.090 2.7312 0.

Since the beta value is less than one.836 = 861.314 = 0.15 – 50.3439. Therefore investment in ICICI futures is less risky.254 Table 4.1 shows the beta value of ICICI futures and Nifty futures.292 3388. 52 . ICICI futures are less volatile.

378 -3.538 4.365 20.8208 42.751 5.250 27.007 3.907 0.614 1.682 Y 3.078 -0.088 13.505 2.204 12.008 -3.134 3.391 1.369 -3.211 3.028 1.906 -6.18 XY -3.087 -1.849 0.943 -0.2 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 -0.601 Σx = -7.388 6.108 11.508 7.604 2.896 -2.702 38.048 -0.295 5.223 -5.452 11.905 1.485 10.361 Σ x2 = 229.014 23.615 -0.034 -0.931 0.475 8.181 3.377 44.613 2.004 -1.760 -2.392 0.381 -0.354 -3.901 1.Table 4.355 8.202 1.50 -3.919 12.593 0.363 5.333 X2 .216 5.249 3.132 15.249 13.931 -3.770 -3.483 19.232 12.490 11. Σy n Σ x2 – (Σx)2 53 .923 3.155 Σxy = 592.02 Source: Secondary Data β = n * Σxy – Σx .350 9.937 3.673 3.515 -2.333 -3.25 15.588 -4.394 22.985 6.259 Σy = 18.095 13.214 -0.874 1.865 -0.474 0.864 1.

218 54 .013 = 12573. Since the beta value is more than one i.303 1.500 0.380 1.682 * 18.271 0.574 3.096 XY -0.096 1.349 6.552 2.310 Y 2.834 4812.831 -0.492 -4.084 0.836 0.395 -0.170 2.175 0.559 2.747 4.644.488 10.671 6.307 -0.361 1.790 27.767 = 2.e. Table4.338 -5.574 2.526 -1.212 -7.333 21* 229. Corporation Bank futures are highly volatile. 2.-7.254 4753.42 .458 -0.299 -2. There fore investment in Corporation Bank is high risky.697 1.329 5.268 -0.404 3.275 5.78 – 59.268 1.-140.490 -4.313 2.880 0.607 0.952 -2.808 -1.3 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 0.396 25.682) 2 = 12432.644 Table 4.009 1.164 53.2 shows the beta value of ICICI futures and Nifty futures.02 .18 – (-7.501 4.538 -0.= 21*592.705 X2 .076 -3.113 -1.658 -0.

919 2.337 3.-8.959 -1.315 0.79 2.802 Σ x2 = 138.368 1.326 3.214 -4.179 -0.37 = 0.63 2898.208 . There fore investment in IOB futures is less risky.79) 2 = 1895.463 2. IOB futures are less volatile.000 -0.674 Σx = -8.652 13.248 Source: Secondary Data β = n * Σxy – Σx .63 – 77.634 Table 4.20-03-2007 21-03-2007 22-03-2007 23-03-2007 26-03-2007 28-03-2007 29-03-2007 30-03-2007 3.299 2.093 3.902 4. 55 .79* -12.140 -1.812 2.663 7.204 -3.117 0.126 -3.607 -1.-105.389 -1. Since the beta value is less than one.00 0.418 -2.408 -3.677 1.017 11. Σy n Σ x2 – (Σx)2 = 21* 90.03 – (--8.083 9.578 2821.129 Σxy = 90.455 -0.26 = 1789.248 .017 21* 138.077 Σy = -12.062 9.3 shows the beta value of IOB futures and Nifty futures.

204 -3.902 4.077 Σy = -11.920 6.078 -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 1.126 -3.315 0.781 -4.705 2.051 14.952 -2.788 Σx = -18.015 -0.122 8.074 5.214 -4.113 -1.870 7.170 2.474 0.939 -0.377 7.267 -4.626 -0.928 -0.431 -1.018 1.020 12.492 -4.625 1.321 2.651 42.088 1.717 5.005 1.711 19.145 0.076 -3.25 5.909 3.060 0.Table 4.814 0.312 0.831 -0.733 18.344 -2.443 -0.333 0.658 -0.006 4.965 -6.190 4.414 X2 1.661 Y 2.072 1.759 .953 0.957 28.395 -0.619 5.060 Σxy = 133.091 -2.168 6.463 2.538 -0.552 2.791 -1.490 -4.968 0.605 24.257 2.982 18.114 0.418 -2.620 Σ x2 = 165.232 4.036 3.717 5.836 0.330 9.787 2.468 -0.485 -0.088 Source: Secondary Data 56 .500 -2.989 XY 3.832 -3.792 15.

105 3.661) 2 = 2794. Since the beta value is less than one in the month of March. Σy n Σ x2 – (Σx)2 = 21* 133.661* -11.848 .563 -7.769 – 348.5 ANALYSIS OF PUNJAB NATIONAL BANK Date 01-03-2007 02-03-2007 05-03-2007 06-03-2007 07-03-2007 X 3.680 72.539 = 0.356 XY 20.4 shows the beta value of Syndicate Bank futures and Nifty futures.697 28.088 .984 0.-212.801 -1.694 50.832 Y 5. the Syndicate bank futures are less volatile and the investment in syndicate bank futures is less risky.996 3485.114 3.414 21* 165.130 3.989 – (-18.-18.119 8.738 -1.339 57 .β = n * Σxy – Σx .809 -3. Table 4.719 1.852 3137.23 = 2581.822 Table 4.492 1.020 3.362 6.823 X2 12.

489 11.534 -1.732 -2.067 4.085 0.579 3.905 3.472 = 2681.239 -.052 -2.566 27.721 -1. Σy n Σ x2 – (Σx)2 = 21* 134.240 -3.778 1.173 29.001 -1.053 3.157 1.859 5.448 8.948 Σy = 8.879 – 151.447 3.961 2.195 0.198 0.863 -0.580 1.669 12.316 2.391 5268.435 2.322 1.656 24.899 Source: Secondary Data β = n * Σxy – Σx .929 21* 250.768 -1.920 -0.103 1.873 2.696 5.159 Σxy = 134.333 – 287.206 0.955* 8.814 1.825 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 1.435 2.606 -1.394 -3.265 3.271 1.955 1.899 – 16.955) 2 = 2832.198 -1.929 2.953 -1.158 4.096 14.168 Σx = 16.488 4980.873 – (16.336 3.069 -1.811 -1.041 0.980 3.857 2.111 0.143 0.028 Σ x2 = 250.934 0.238 6.861 = 0.955 10.093 0.538 58 .391 0.453 -0.

343 -1.6 RANBAXY Source: Secondary Data 59 .524 0.645 26.673 0.942 6. Table.278 -2.059 0.689 20.997 -0.201 0.655 0.514 0.189 3.Table 4.381 5.226 -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 -0.934 ΣXY=132.062 volatile and investing in Punjab National Bank futures is less risky.548 Y 1.5 shows the beta value of Punjab National Bank futures and Nifty futures.485 -0. 4.475 -5.353 1.704 4.786 3.830 1.336 0.664 1.798 5.299 -1.710 -5.176 -1.096 -3.793 5.660 -0.926 X2 0.446 -0.858 2.236 2.942 -1.976 27.125 0.657 1.830 -4.156 0.636 29.024 27.667 0.503 0.957 1.031 5.178 -0.83 XY -0.295 -0.472 -2.316 -1.666 -7.363 0.175 0.503 3.803 ΣX2=174.063 -1.151 0.259 0.189 15.866 8.887 1.266 3.696 ΣY=-0.047 -0. Since the beta value is less than one.089 1.329 0.098 0.443 51.387 2.580 5.469 0.380 -1.294 0.260 -1.227 0.473 36.328 -0.132 0.213 15.803 2.343 ΣX=-8.397 -0.260 -0.394 2.

Since the beta value is less than one. it is less volatile and investing in Ranbaxy futures is less risky.926 21* 174.7 60 .915 3671.-8.302 – 7.768 Table 4.548 * -0. Table 4. Σy n Σ x2 – (Σx)2 = 21*132.83 – (-8.062 .β = n * Σxy – Σx .6 shows the beta value of Ranbaxy futures.362 = 0.43 – 73.387 3598.548) 2 = 2773.068 = 2765.

051 0.770 ΣXY= -19.024 0.219 11.228 XY 4.701 -3.737 0.031 5.114 1.427 -0.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 3.047 -0.230 0.486 0.316 -1.738 Y 1.155 -0. Σy n Σ x2 – (Σx)2 = 21*-19.630 -0.445 2.848 ΣX2= 77.626 -0.847 – 6.193 0.667 -1.261 -1.543 0.023 0.447 -0.020 -7.328 -0.062 -1.088 3.093 0.423 3.096 -3.390 -2.466 -2.131 2.739 -3.962 -0.672 0.362 -1.689 -0.171 -0.831 2.710 -5.294 0.553 0.496 0.381 5.189 3.353 -3.358 2.948 7.068 0.071 0.473 1.261 -0.329 0.368 -4.392 0.719 -0.492 7.481 -0.696 ΣY= -0.149 8.020 0.204 2.94 61 .152 0.008 0.974 2.687 3.475 -5.005 -0.697 -0.773 0.660 -0.165 -0.94 X2 14.738 * -0.847 Source: Secondary Data β = n * Σxy – Σx .676 4.743 -11.252 -0.176 -1.744 0.655 0.957 1.981 ΣX= 6.007 15.357 -0.

173 0.356 -5.011 -1.146 11.572 10.957 4.025 3.988 -3.446 0.956 2. Since the beta value of this future is negative.554 10.223 -1.635 62 .228 – (6.336 1621.542 XY 1.121 -1.703 2.428 -0.573 -3.387 -3.525 -0.038 13.489 0.40 = -410.8 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 -3.049 1.788 – 45.751 0.152 -0.911 -2.453 -1.946 -2.054 Y -0.451 1576.257 -1.787 .756 0.592 -1.090 1.-6.404 -2.382 -3.7 shows the beta value of Sun Pharma’s futures.21* 77.718 -4.26 Table 4.256 0.572 1.173 1. Table 4.666 4.297 -0.803 4.101 1.738) 2 = -416.022 2.474 11.631 8.089 0.870 0.663 12.151 5.626 25.472 12.388 = -0.816 -2.161 -0.500 X2 9.152 -2.131 2.678 5.433 -2. this shows that when the market return of the futures is increasing its stock value is coming down.218 -3.

907 – (-14.687 -2.942 -4.22-03-2007 23-03-2007 26-03-2007 28-03-2007 29-03-2007 30-03-2007 3.184 19.725 2.907 10.362 1. Σy n Σ x2 – (Σx)2 = 21*74.84 21* 155.510 -1.314 2.825 * -9.001 2 ΣX = 155.068 1.412 2.212 3.267 = 0.845 6.193 ΣY= -9.467 -1.559 ΣXY= 74.596 .210 1.84 9.001 2.023 4.771 16.-14.780 = 1420.825 3.047 – 219.311 -1.596 Source: Secondary Data β = n * Σxy – Σx .359 ΣX= -14.878 3274.349 -4. Since the beta value is less than one. it is less volatile and the investment in Dabur futures is less risky.465 Table 4.8 shows the beta value of Dabur futures and Nifty futures.638 3054.086 3. 63 .516 – 145.027 9.825) 2 = 1566.

766 ΣXY= 55.189 9.489 -1.134 2.349 0.687 1.867 8.254 1.207 2.422 2.046 0.507 6.189 Source: Secondary Data 64 .271 -2.023 6.933 9.400 1.296 2.586 -1.259 2.373 1.435 -3.935 -0.446 -0.961 -3.478 2 ΣX = 126.970 -2.390 2.237 -0.872 2.147 18.84 Y -2.614 0.845 10.324 -0.312 0.907 -0.108 ΣY= 1.046 -2.820 0.201 -0.430 2.885 0.653 -2.392 3.609 5.692 ΣX= -7.322 2.819 0.839 -1.314 X2 6.384 4.066 -1.416 0.760 0.969 0.096 3.624 0.823 -0.454 3.150 2.508 0.401 0.084 XY 5.421 2.557 -0.820 5.112 8.9 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 -2.154 0.202 9.731 0.854 0.345 -5.334 2.259 2.086 -2.228 -2.043 -1.Table 4.818 1.901 0.649 1.961 -1.449 25.022 8.421 7.764 1.538 0.584 -2.

304 = 0.10 GLAXO Date 01-03-2007 02-03-2007 05-03-2007 06-03-2007 07-03-2007 X -0. it is less volatile and investing in CIPLA futures is less risky.46 = 1169.2 shows the beta value of CIPLA futures and Nifty futures.539 -8.445 XY -0.814 1.302 2647.015 -1.452 Table 4.084 – (-7.298 1.030 0.189 . Since the beta value is less than one.764 65 . Table 4.088 -4.271 2586.230 X2 .232 15.482 3.-10.930 Y 1.764 – 61.84 * 1.756 0.314 21* 126.β = n * Σxy – Σx .120 -2.013 -1.84) 2 = 1158.969 .176 0.-7.0001 2.555 0.691 -0. Σy n Σ x2 – (Σx)2 = 21*55.418 0.

236 ΣY= -10.624 ΣX= 10.944 -0.621 0.1245 1995.856 2.891 0.052 0.424 3.925 1.0006 0.651 2.189 66 .432 5.856) 2 = 203.807 -1.867 -2.482 -5.-109.192 1.280 3.706 Source: Secondary Data β = n * Σxy – Σx .826 .235 -3.948 -2.386 0.126 -1.237 3.056 -0.903 0.403 1.806 0.045 -0.649 0.392 -3.062 1.134 -3.637 2 ΣX = 95.458 7.025 1.055 2.025 0.10.08-03-2007 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 0.968 2. Σy n Σ x2 – (Σx)2 = 21*-9.564 4.824 -4.800 -5.606 -2.132 2.7015 1877.571 1.353 -2.552 5.421 1.002 – (-10.706 .557 1.066 4.202 2.052 21* 95.589 0.214 1.0006 2.126 54.806 1.851 -1.507 -1.255 ΣXY= -9.138 -1.853 = -94.262 -3.347 0.724 1.437 1.134 1.856 * -10.042 – 117.142 -4.002 1.092 0.1392 -3.

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

The futures value of Glaxo & Sun Pharma is negative. Dabur and CIPLA futures are less risky. It shows that when the market value is increasing.5. Syndicate Bank. IOB. 68 . 4. its stock value will come down. In the month of March 2007. Ranbaxy. PNB.1 FINDINGS: The major findings of the study are: 1. There is relationship with share price movements of the valued of NSE futures. 3. The study shows that investing in Corporation Bank futures is high risky. 2. The financial future plays an important role in NSE Nifty. investing in ICICI futures.

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

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


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

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

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