A STUDY ON THE ROLE OF FINANCIAL FUTURES WITH REFERENCE TO NSE NIFTY

CHAPTER 1

INTRODUCTION

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1.1 INTRODUCTION
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.

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

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

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

in that they are not regulated by U. (ii) heterogeneity of bank credits would systematically raise questions on the quality of the delivered asset. Thus.S. authorities and hence are not subject to reserve requirements or deposit insurance premiums. the offer side of the cash money market). or with an international banking facility (IBF) located in the U. a price of 96. It is based on a ninetyday Eurodollar deposit. the rate at which a London bank is willing to lend dollars (i..5 implies a futures LIBOR rate of 3.5% per annum) in decimal terms. Eurodollar deposits differ from domestic term deposits or certificates of deposit in the U. Trading of Eurodollar contracts: Eurodollar contracts are now traded at the CME in Chicago. The futures price is quoted as 100 minus the annualized futures 3-month LIBOR (e.Eurodollar futures The Eurodollar futures market is the most widely traded money market contract in the world. at LIFFE in London and at SIMEX in Singapore. 7 . although trading in it only started as recently as 1981.e.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.S..g. Basic contract specifications: The nominal contract size is $1 million and the underlying rate is the three-month LIBOR. 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. 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).S. Eurodollar contract trading is de-facto available 24 hours. which is a dollar-denominate deposit with a bank or branch outside of the U.

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

Delivery months on bond futures contacts are quarterly (March. They all have similar characteristics to their forerunner. The exchange will also set daily trading hours. It is the delivery option of the short that makes valuing bond futures more complex than valuing international bank (euro) deposit futures. June. was the first fut3ureo n long-tern interest rates. traded at the CBOT since 1977.and long-term interest rate contracts: The U. the table below lists the main international bond futures contracts. where they are traded and the description of their deliverable set.S. it is the difference in cost between 9 . In other words. T-bond contract are shown in parentheses for illustrative purposes.S. there is an arbitrage relationship which holds the prices of the T-bond futures contract to the cash market. Treasury notes: a 10-year.S. bond futures contracts designed along the lines of the U. Understanding the relationship between a futures contract and the deliverable basket is crucial to understanding the drive behind the arbitrage.S. September and December). Pricing and arbitrage Cash-futures relationship: Similar to short-term interest rate contracts. Since 1932.000 for U. International bond futures contracts.Futures invoice price = futures price conversion factor + accrued interest Other contract terms: Exchanges set other futures contact terms as follows.S. a 5year and a 2-year contract. Since then three futures contracts have been established on U. The basis. T-bonds). the concrete specifications of the U. The contract size defines the par amount of the bond that is deliverable into the contract ($100. The basis is the difference between a bond's price and the futures invoice price (as defined above).S. T-bond contract have spread internationally. the last trading date and the last delivery period (one month). Other U. medium. For illustration purposes. T-bond.

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

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

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

However.e. long yen and short dollars) is consistent with an expectation of an appreciation of the yen relative to the dollar. based on number of dollars per unit of foreign currency. For instance. Currency futures against the dollar. shorting the contract is consistent with an expectation of a yen depreciation relative to the dollar. the prices of currency futures are bound by a basic arbitrage relationship with the underlying cash market. in the case of currencies. the difference between forward and futures prices is less important than with interest rates.e. Conversely. More formally. 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. the contract should be sold if one expects the yen to appreciate more than what is expected by the market.. As with interest rate futures.e. Futures are a natural instrument to express views on future exchange rate movements. i. going long the JPY contract (i. They tend to require actual delivery. Contract specifications. Price quotes are on American terms.. 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. tend to have quarterly contracts with delivery in March. Conversely. Pricing and arbitrage: International interest rate parity Overview. September and December. June. Arbitrage relations are cleaner with forwards than with futures because mark-to-market payments on futures introduce an element of reinvestment risk that cannot be fully hedged.on crosses.. Expressing a market view Outright trading. 13 . bilateral exchange rates between two non-dollar currencies such as on JPY/DEM. i. meaning that at futures settlement the long receives the currency of denomination of the future and pays dollars). by far the most prevalent.

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

Based on a portfolio of 500 American stocks. Based on a portfolio of all the stocks listed on the NYSE. The index accounts for 80% of the NYSE. The value of one futures contract is GBP 25 times the index. * Value Line futures (KC). 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. *CAC-4s0t ock index (MATIF). The value of one futures contract is $500 times the index. 15 . For illustration purposes. * Major market index (CME). Based on a portfolio of 400 American stocks. The value of one futures contract is FRF200 times the index. Contracts traded. * Nikkei 225 stock average (CME). The value of one futures contract is $500 tirmes the index. * NYSE composite futures (NYSE).companies.700 American stocks. Based on a portfolio of 40 of the largest stocks listed on the Paris Stock Exchange. following is a list of the main international stock indexes and futures contracts on these indexes: * S&P 500 (CME). 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. Based on a portfolio of 20 blue-chip American stocks listed on the NYSE. The value of one fuLturesc ontact is $5 times the index. Based on a portfolio of 40 of the largest stocks listed on the London Stock Exchange. Based on a portfolio of 225 of the largest stocks listed on the Tokyo Stock Exchange. * S&P 400 (CME). The value of one futures contract is $500 times the index. * FT-SE 100 index (LUFFE). The value of one futures contract is $500 times the index. Contains the prices of 1.

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

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

if the market price of the underlying is above the option's strike price.to establish the corresponding futures position by exercising the option at some time in the future. * A put option confers upon its holder the right to establish a short (selling) futures position. The purchaser of the option pays a market-determined price (or premium) in order to have the right --but not the obligation-. The same applies. In either case. "Moneyness" of options. the futures position may be established by the option holder on any date up to a pre-determined expiration date at a pre-determined price (the strike price).OPTIONS ON FUTURES Definition and Pricing Definition and types of options. whichever is greater. If the market price of the underlying is below the call option's strike price. for a call. The key to options is to understand that holding an option represents a right rather than an obligation. the option has no exercise value and is said to be out of the money. 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 option has exercise value and is said to be in the money. 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). but in reverse. Conversely. For example. There are two types of options on futures: * A call option confers upon its holder the right to establish a long (buying) futures position.

There is no downside risk to buying an option. Among the most liquid option contracts (and the corresponding exchanges where they are traded) are: *Short-term interest rates: Eurodollars (at the CME) *Longer-term interest rates: US Treasury bonds and notes (at the CBOT) *Currencies: Deutschemarks and Yen (at the CME) *Stock-indexes: S&P500 (at the CME) Pricing models: A commonly used pricing model for options on futures is the Black model. Use of options on futures versus use of futures. The price you pay for having the security offered by an option 19 . There are options on all the types (though not necessarily on all the specific contracts) of financial futures. the options on futures. 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. With a futures position. you let the option expire worthless and pay no more. yields long futures Underlying instruments.: *Creating asymmetric payoffs on the upside and downside. you must pay the daily settlement variation when the price goes against you. If the price goes against you. which is an extension of the Black-Shoes model originally derived for pricing equity options. if exercised.Futures positions at option exercise: To summarize. Hedgers and investors might want to use options on futures rather than futures themselves for the following reaso.

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

Futures. users will only feel comfortable using derivatives markets if they are liquid and deep enough to allow investors to rebalance their portfolios in response to new information at low cost. They are not per se a financing or investment vehicle but rather a tool for transferring price risks associated with fluctuations in asset values. and given a few applications illustrating how these contracts would be used by risk managers and investors. or else by major financial institutions trading in automated systems. Over the last decades. Liquidity is provided to a large degree by locals (individuals trading on their own capital) trading in the pit. Some may use them to spread risk. explained some of the basics regarding how they are priced. Futures as a building-block: Futures have been a key instrument in facilitating the modem trend of separating conventional financial products into their basic 21 . 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. others to take on risk on the basis of particular market views. most of the action happens in the future. Liquidity typically arises when there are individuals or institutions which continuously wish to buy or sell.Liquidity and market depth In derivatives markets. Economic importance of futures. IMPORTANCE OF FUTURES MARKETS Summary. and derivatives generally. allow economic agents to fine tune the structure of their assets and liabilities to better suit their risk preferences and market expectations. Market liquidity: A market is liquid when traders can buy and sell without substantially moving the price against them. futures have become widely accepted by money managers. unlike in cash markets. We have investigated some of the features of futures contracts.

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

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

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

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

CHAPTER 2

RESEARCH DESIGN

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

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

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

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

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

28

sugar. Forward contracts will trade on the basis of price and credit characteristics of the counterparty. B. For this reason. To ensure the liquidity of exchange-traded futures markets. deutschemark. In addition. NYSE Composite. the clearing house members and the clearinghouse itself guarantee fulfillment of futures contracts. the time and place of delivery. Bonds and notes: Treasury securities. Credit exposure. cocoa). In futures contracts.g. among other characteristics. 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. contract size.LIBOR-based). and Treasury bills. Contract terms. such as those based on: Money market interest rates: certificates of deposit. the method of payment. pound (against the dollar or crosses) Equity indices: S&P500. This serves to reduce credit exposure to intraday price movements Tradability. gains and losses are settled daily in the form of margin payments. This makes futures contracts particularly well suited for trading in organized exchanges. margining requirements and trading hours.. The buyer and the seller both have 29 . quantity and quality of the underlying to be delivered. contracts tend to be offered on standardized terms in terms of maturity. 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. offshore or euro-deposits (e. softs (coffee. Currencies: yen. Cash flows and margining. there are futures on several commodity indices (like the CRB and GSCI).gold). In forward markets cash changes hands only on the forward date In futures markets. Forward vs. futures based on financial commodities have flourished. forward contracts tend to be traded in over-the-counter (OTC) markets. Nikkei 225.

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

investment banks. the timing of expected market movements. changes in the spread between market segments (e.although trade construction might be such as to immunize particular kinds (or dimensions) of risk. 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. Financial institutions. commodity quality or cross-country differences). fund managers and insurance companies will use futures for their thrc:.basic functions. expressing market views is not riskless. Individuals and locals a:e more likely to use them for speculation and arbitrage. 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 . Futures can be used to express views on general market direction. The principal financial futures exchanges in the world are: Chicago Mcrcantile Exchange (CME. credit. investment or borrowing activities.g. The users of financial futures are naturally given by their uses. brokerage firms. Non-financial corporations. Unlike pure arbitrage. including commercial banks. or a combination of these. Users. including municipal and state organizations and foundations are more likely to use them to hedge their commercial..

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

X= closing price – opening price * 100 Opening price Y = stock return For calculating ‘y’ the NSE future value is taken Y= closing price – opening price *100 Opening price 2. Σy n Σ x2 – (Σx)2 X = market return For calculating ‘x’ the NSE share price is taken.9 LIMITATIONS OF THE STUDY Time constrains Geographical constraints This is restricted to Banking and Pharmaceutical Industry 33 .2.8 METHOD OF ANALYSIS The formula used for calculation are: β = n * Σxy – Σx .

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

CHAPTER 3 PROFILE OF COMPANIES 35 .

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

ICICI Bank which undertook normal banking operations . The experiment was so successful that ICICI merged into ICICI Bank ("reverse merger") in 2002. It has operations in the UK. Hong Kong. It acquired a small bank in Russia recently. Since 2002.taking deposits. car loans etc. ICICI borrowed funds from many multilateral agencies (such as the World Bank).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.It was the first bank to offer a wide network of ATM's and had the largest network of ATM's till 2005. before SBI caught up with it. These funds were deployed in large corporate loans. At the time of the reverse merger. ICICI founded a separate legal entity . 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. there were rumours that ICICI had a large proportion of Non Performing Loans ("NPA". 37 . often at concessional rates. ICICI was not a bank . The bank is aggressively targeting the NRI (Non Resident Indian) population for expanding its business. It has tie-ups with major banks in the US and China. as they are known in India) on its books .ICICI was established by the Government of India in the 1960s as a Financial Institution (FI. 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. The bank is expanding in overseas markets. credit cards. All this changed in 1990s. ICICI bank now has the largest market value of all banks in India. Singapore and Canada. It is widely believed that the proportion of NPAs has come down to prudent levels (even if it were high earlier). there has been a general revival in Indian industry (and metal based industry in particular).in particular to the steel industry.

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

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

Delhi. 3.This type of system where in the agents of the bank come doorsteps to collect deposit is still prevailing in India and is referred as Pigmy Deposit Scheme. By 1989 it opened its 1500th branch at Hauz Khas. Currently it has over 1900 branches.4 CORPORATION BANK CORPORATION BANK 40 . Mangalore Stock Exchange and Bangalore Stock Exchange. in Doha (1983) and Musandam Exchange Co. The bank expanded its operations not only on the domestic front but also overseas. The name of the bank was changed to Syndicate Bank Limited in the year 1963 and the head office of the bank was shifted to Manipal. 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. From 1953-1964. in Muscat (1984). The stocks of the Syndicate Bank are listed on Bombay Stock Exchange. It took over Al Shabei Finance and Exchange Co. National Stock Exchange.

corpbank.3.87% of Share Capital is presently held by the Public and Financial Institutions.83 crore (2006) Rs 100. NSE:CORPBANK) Udipi.com Key people Industry Products Revenue Net income Slogan Website Corporation Bank. Rs 862.Type Founded Headquarters Public (BSE. India. The bank was founded with an initial capital of Rs. Mangaladevi Temple Road Pandeshwar Mangalore 575 001 India Chairman B. and first day’s canvassed resources of less than one USD 1. has currently (31 March 2004) 10. 3.92 crores as on 31 March 2005.17% of Share Capital held by the Government of India. Savings. The Bank’s Net Worth stood at Rs.176 full time employees. 5000 (USD 100). and operates from several branches in India. founded in 1906 in Udupi. Sambamurthy Banking Loans.5 INDIAN OVERSEAS BANK IOB 41 . 1906 Corporation Bank.27 Crore (2006)[1] A Premier Government of India Enterprise www. The bank has the distinction of the first Indian bank to publish its financial results (199899) conforming to US GAAP. Credit Cards. The Bank came out with its Initial Public Offer (IPO) in October 1997 and 37. is one of the Indian banks in public sector. The Bank is a Public Sector Unit with 57. etc. Investment vehicles. Karnataka state. 054. CORPORATE OFFICE .

Deposits stood at Rs.64 Crs and Advances at Rs.at Karaikudi and Chennai in India and Rangoon in Burma (presently Myanmar) followed by a branch in Penang.M. a pioneer in many fields .M.3. by Shri. Chidambaram Chettyar.23 Crs at that time.6 RANBAXY LABORATORIES 42 .Banking. At the dawn of Independence IOB had 38 branches in India and 7 branches abroad. IOB had the unique distinction of commencing business on 10th February 1937 (on the inaugural day itself) in three branches simultaneously .Ct. Insurance and Industry with the twin objectives of specializing in foreign exchange business and overseas banking.Indian Overseas Bank (IOB) was founded on February 10th 1937.6. 3.

178 billion (2005) Employees 1100 in R&D Website www. It exports its products to 125 countries with ground operations in 46 and manufacturing facilities in seven countries. Ranbaxy went public in 1973. CEO & MD Industry Pharmaceutical Products Generic drugs Revenue $1.com Ranbaxy Laboratories Limited is an Indian company incorporated in 1961. The CEO of the company is Malvinder Mohan Singh. Executive Vice Chairman Malvinder Mohan Singh. 3. Chairman Brian Tempest. It is ranked among the top 10 generic companies worldwide. Haryana.ranbaxy.Ranbaxy Laboratories Limited Type Public Founded 1961 Headquarters Key people Gurgaon. India Tejendra Khanna. It is India's largest pharmaceutical company. Chief Mentor.7 CIPLA CIPLA Limited 43 .

Today (2007). The company was founded in 1935 by Khwaja Abdul Hamied.000 (and beyond) to around $300 per year. The customary treatment of AIDS consists of a cocktail of three drugs. distributed and sold (multinational brandname drugs are exponentially more expensive. Industrial & Pharmaceutical Laboratories is a major Indian pharmaceutical company. Cipla produces an all-in-one pill called Triomune which contains all three substances (Lamivudine. Cipla is the world's largest manufacturer of antiretroviral drugs to fight HIV/AIDS. and its Chairman today is Yusuf Hamied (b. best-known for manufacturing economical anti-AIDS drugs. something difficult elsewhere because the three patents are 44 .com Cipla founded as The Chemical. Chairman Industry Pharmaceuticals Revenue Net income Rs.8 billion (2005) Rs. so in money terms Cipla's medicines are probably not in top spot). charitable sources often are in a position to make up the difference for destitute patients. K. Hamied (CMD). stavudine and Nevirapine).1 billion (2005) Employees ??? Website www. 1936). as measured by units produced. 24.Type Founded 1935 Headquarters Key people Mumbai. the founder's eldest son. By doing so Cipla has reduced the cost of providing antiretroviral to AIDS patients from $12. While this sum remains out of reach for many millions of people in 'Third World' countries. Cipla ignores foreign patents on these drugs where no Indian law is broken in the process.cipla. India Y. 4.

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

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

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

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

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

CHAPTER 4 DATA ANALYSIS AND INTERPRETATION Table 4.1 ANALYSIS OF ICICI BANK Date X Y X2 XY 50 .

2222 14.143 0.892 -0.389 Σy = 1.952 -0.291 2.152 -1.402 -1.791 -1.831 4.546 0.979 0.314 0.269 0.728 0.678 0.482 -2.7693 – (-7.532 51 .724 -0.347 -0.201 -0.271 16.366 3.01-03-2007 02-03-2007 05-03-2007 06-03-2007 07-03-2007 08-03-2007 09-03-2007 12-03-2007 13-03-2007 14-03-2007 15-03-2007 16-03-2007 19-03-2007 20-03-2007 21-03-2007 22-03-2007 23-03-2007 26-03-2007 28-03-2007 29-03-2007 30-03-2007 1.138 -7.359 Σxy = 40.835 0.098 1.924 Σx = -7.337 3.139 -2.5432 0.145 3.4329 1.13) 2 = 851.7662 5.3806 26.175 5.1603 6.3124 0.82 -0.595 -1.7312 0.7693 1.6972 0.780 -1.297 -24.482 -0.326 -0.630 1.1823 0.8537 Σ x2 = 163.329 -2.2323 0.090 2.5299 0.225 -0.497 0. Σy n Σ x2 – (Σx)2 = 21*40.76 .-7.337 21* 163.8032 0.612 1.13* 1.546 1.781 -1.0403 37.329 0.3990 53.409 -0.330 -0.3540 1.532 21.963 4.427 0.98 0.8225 2.737 0.167 -2.850 1.56 .658 -1.875 0.343 -6.916 -0.56 Source: Secondary Data β = n * Σxy – Σx .1586 6.101 3.9063 0.591 -0.057 17.-9.453 4.2410 0.13 1.192 -1.098 1.

Therefore investment in ICICI futures is less risky.292 3388.3439.15 – 50.254 Table 4.1 shows the beta value of ICICI futures and Nifty futures. Since the beta value is less than one.314 = 0. 52 .836 = 861. ICICI futures are less volatile.

475 8.985 6.923 3.259 Σy = 18.702 38.394 22.155 Σxy = 592.223 -5.505 2.682 Y 3.377 44.108 11.937 3.874 1.901 1.614 1.363 5.18 XY -3.378 -3.919 12.333 X2 .232 12. Σy n Σ x2 – (Σx)2 53 .392 0.365 20.088 13.865 -0.078 -0.50 -3.25 15.593 0.350 9.907 0.354 -3.211 3.508 7.216 5.004 -1.760 -2.849 0.381 -0.214 -0.048 -0.355 8.249 3.388 6.8208 42.943 -0.295 5.007 3.204 12.008 -3.604 2.Table 4.864 1.613 2.588 -4.485 10.014 23.202 1.250 27.391 1.361 Σ x2 = 229.673 3.490 11.452 11.515 -2.249 13.770 -3.538 4.601 Σx = -7.034 -0.906 -6.087 -1.095 13.2 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 -0.931 0.931 -3.474 0.134 3.483 19.181 3.905 1.02 Source: Secondary Data β = n * Σxy – Σx .028 1.615 -0.333 -3.369 -3.896 -2.132 15.751 5.

395 -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 0.834 4812.767 = 2.559 2.329 5.313 2.671 6.307 -0.02 .009 1.836 0.574 2.78 – 59.500 0.013 = 12573.175 0.254 4753. Since the beta value is more than one i.697 1.164 53.538 -0. There fore investment in Corporation Bank is high risky. 2.747 4. Corporation Bank futures are highly volatile.349 6.574 3.= 21*592.-7.096 XY -0. Table4.113 -1.084 0.492 -4.42 .644 Table 4.488 10.380 1.501 4.790 27.404 3.310 Y 2.682 * 18.658 -0.526 -1.361 1.831 -0.e.338 -5.880 0.076 -3.275 5.2 shows the beta value of ICICI futures and Nifty futures.705 X2 .682) 2 = 12432.-140.808 -1.268 1.644.096 1.18 – (-7.299 -2.212 -7.396 25.333 21* 229.552 2.607 0.303 1.218 54 .268 -0.170 2.952 -2.271 0.490 -4.458 -0.

634 Table 4.3 shows the beta value of IOB futures and Nifty futures.117 0.03 – (--8.418 -2.368 1.578 2821.812 2.79* -12.959 -1.017 21* 138.902 4.652 13. There fore investment in IOB futures is less risky.208 .674 Σx = -8. Since the beta value is less than one.63 – 77.20-03-2007 21-03-2007 22-03-2007 23-03-2007 26-03-2007 28-03-2007 29-03-2007 30-03-2007 3.663 7.455 -0.214 -4. 55 .802 Σ x2 = 138.126 -3.140 -1.017 11.463 2.248 .129 Σxy = 90.299 2.389 -1.37 = 0.-8.326 3.083 9.179 -0.000 -0.63 2898. Σy n Σ x2 – (Σx)2 = 21* 90.677 1.-105.248 Source: Secondary Data β = n * Σxy – Σx .26 = 1789.337 3.00 0.204 -3.077 Σy = -12.79 2.919 2.607 -1.093 3.408 -3.79) 2 = 1895.315 0.062 9. IOB futures are less volatile.

232 4.490 -4.463 2.791 -1.939 -0.015 -0.651 42.078 -2.953 0.321 2.060 Σxy = 133.443 -0.414 X2 1.051 14.832 -3.333 0.312 0.122 8.788 Σx = -18.344 -2.952 -2.Table 4.005 1.267 -4.315 0.168 6.077 Σy = -11.989 XY 3.957 28.020 12.088 Source: Secondary Data 56 .330 9.418 -2.25 5.395 -0.076 -3.920 6.626 -0.538 -0.717 5.485 -0.500 -2.968 0.870 7.787 2.965 -6.902 4.4 ANALYSIS OF SYNDICATE BANK Date 01-03-2007 02-03-2007 05-03-2007 06-03-2007 07-03-2007 08-03-2007 09-03-2007 12-03-2007 13-03-2007 14-03-2007 15-03-2007 16-03-2007 19-03-2007 20-03-2007 21-03-2007 22-03-2007 23-03-2007 26-03-2007 28-03-2007 29-03-2007 30-03-2007 X 1.705 2.733 18.619 5.018 1.036 3.113 -1.474 0.468 -0.781 -4.190 4.605 24.552 2.909 3.928 -0.145 0.661 Y 2.717 5.114 0.711 19.006 4.088 1.170 2.836 0.377 7.792 15.204 -3.126 -3.492 -4.982 18.658 -0.831 -0.759 .814 0.214 -4.625 1.074 5.072 1.091 -2.060 0.620 Σ x2 = 165.257 2.431 -1.

661) 2 = 2794.848 .823 X2 12. Since the beta value is less than one in the month of March.020 3.23 = 2581.832 Y 5.719 1. Σy n Σ x2 – (Σx)2 = 21* 133.119 8.088 .563 -7.339 57 .984 0.114 3.105 3.492 1.769 – 348.362 6.697 28.β = n * Σxy – Σx .989 – (-18.694 50.809 -3. the Syndicate bank futures are less volatile and the investment in syndicate bank futures is less risky.539 = 0. Table 4.5 ANALYSIS OF PUNJAB NATIONAL BANK Date 01-03-2007 02-03-2007 05-03-2007 06-03-2007 07-03-2007 X 3.130 3.356 XY 20.4 shows the beta value of Syndicate Bank futures and Nifty futures.822 Table 4.-212.414 21* 165.801 -1.996 3485.-18.852 3137.738 -1.661* -11.680 72.

905 3.067 4.435 2.173 29.955 1.143 0.579 3.240 -3.920 -0.271 1.333 – 287.453 -0.085 0.472 = 2681.955* 8.873 – (16.961 2.955) 2 = 2832.580 1.103 1.488 4980.934 0.566 27.239 -.053 3.879 – 151.096 14.656 24.814 1.08-03-2007 09-03-2007 12-03-2007 13-03-2007 14-03-2007 15-03-2007 16-03-2007 19-03-2007 20-03-2007 21-03-2007 22-03-2007 23-03-2007 26-03-2007 28-03-2007 29-03-2007 30-03-2007 1.069 -1.447 3.873 2.111 0.732 -2.778 1.041 0.899 Source: Secondary Data β = n * Σxy – Σx .435 2.859 5.391 0.696 5.825 2.768 -1.721 -1.929 21* 250.899 – 16.206 0.863 -0. Σy n Σ x2 – (Σx)2 = 21* 134.980 3.489 11.861 = 0.534 -1.157 1.198 -1.606 -1.168 Σx = 16.028 Σ x2 = 250.394 -3.195 0.322 1.448 8.811 -1.953 -1.948 Σy = 8.316 2.955 10.265 3.336 3.093 0.857 2.159 Σxy = 134.391 5268.001 -1.929 2.198 0.669 12.052 -2.158 4.538 58 .238 6.

380 -1.636 29.710 -5.926 X2 0.503 3.059 0.6 RANBAXY Source: Secondary Data 59 .343 ΣX=-8.798 5.189 15.062 volatile and investing in Punjab National Bank futures is less risky.957 1.151 0.942 6.089 1.473 36.660 -0. the futures of PNB is less Date 01-03-2007 02-03-2007 05-03-2007 06-03-2007 07-03-2007 08-03-2007 09-03-2007 12-03-2007 13-03-2007 14-03-2007 15-03-2007 16-03-2007 19-03-2007 20-03-2007 21-03-2007 22-03-2007 23-03-2007 26-03-2007 28-03-2007 29-03-2007 30-03-2007 X -0.472 -2.295 -0.667 0.887 1.696 ΣY=-0.063 -1.83 XY -0.803 2.397 -0.299 -1.934 ΣXY=132.548 Y 1.803 ΣX2=174.942 -1.645 26.178 -0.866 8.673 0.047 -0.031 5.704 4.353 1.260 -1.830 -4.793 5.786 3.503 0.657 1.226 -1.125 0. 4.236 2.316 -1.266 3.469 0.446 -0.175 0.098 0.096 -3.201 0.024 27.363 0.336 0.394 2.278 -2.227 0.858 2.329 0.485 -0.997 -0.132 0.328 -0. Since the beta value is less than one. Table.655 0.5 shows the beta value of Punjab National Bank futures and Nifty futures.387 2.156 0.381 5.689 20.189 3.514 0.475 -5.443 51.294 0.176 -1.Table 4.213 15.830 1.259 0.580 5.976 27.260 -0.664 1.666 -7.343 -1.524 0.

Since the beta value is less than one. Σy n Σ x2 – (Σx)2 = 21*132.362 = 0.062 .387 3598.-8.302 – 7.548) 2 = 2773.6 shows the beta value of Ranbaxy futures.926 21* 174.83 – (-8.068 = 2765.7 60 .β = n * Σxy – Σx .43 – 73.548 * -0. Table 4. it is less volatile and investing in Ranbaxy futures is less risky.768 Table 4.915 3671.

024 0.176 -1.974 2.020 -7. Σy n Σ x2 – (Σx)2 = 21*-19.252 -0.738 Y 1.189 3.626 -0.701 -3.392 0.447 -0.94 X2 14.689 -0.071 0.481 -0.031 5.445 2.131 2.096 -3.848 ΣX2= 77.492 7.390 -2.962 -0.473 1.466 -2.329 0.261 -1.047 -0.155 -0.358 2.062 -1.294 0.667 -1.773 0.744 0.051 0.676 4.219 11.770 ΣXY= -19.486 0.630 -0.831 2.328 -0.152 0.697 -0.007 15.672 0.228 XY 4.165 -0.847 Source: Secondary Data β = n * Σxy – Σx .204 2.427 -0.357 -0.738 * -0.171 -0.847 – 6.362 -1.261 -0.005 -0.94 61 .368 -4.696 ΣY= -0.710 -5.381 5.088 3.423 3.719 -0.739 -3.020 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 3.496 0.687 3.093 0.353 -3.655 0.737 0.981 ΣX= 6.114 1.149 8.230 0.957 1.660 -0.743 -11.316 -1.023 0.475 -5.948 7.193 0.068 0.553 0.543 0.008 0.

957 4.257 -1.573 -3.8 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 -3.472 12.816 -2. Since the beta value of this future is negative.946 -2.151 5.666 4.663 12.7 shows the beta value of Sun Pharma’s futures. Table 4.988 -3.146 11.751 0.870 0.173 1.022 2.223 -1.356 -5.297 -0.554 10.756 0.256 0.489 0.718 -4.572 10.500 X2 9.474 11.089 0.21* 77. this shows that when the market return of the futures is increasing its stock value is coming down.388 = -0.218 -3.404 -2.152 -0.453 -1.382 -3.635 62 .387 -3.572 1.428 -0.525 -0.446 0.131 2.228 – (6.40 = -410.433 -2.956 2.-6.038 13.26 Table 4.738) 2 = -416.788 – 45.025 3.054 Y -0.121 -1.451 1576.787 .161 -0.631 8.542 XY 1.626 25.678 5.703 2.152 -2.090 1.803 4.101 1.049 1.173 0.336 1621.911 -2.011 -1.592 -1.

027 9.-14.311 -1.878 3274.314 2.210 1.687 -2.412 2. Since the beta value is less than one.780 = 1420.596 Source: Secondary Data β = n * Σxy – Σx .942 -4.725 2.510 -1.22-03-2007 23-03-2007 26-03-2007 28-03-2007 29-03-2007 30-03-2007 3.068 1.465 Table 4.193 ΣY= -9.023 4. Σy n Σ x2 – (Σx)2 = 21*74.845 6.516 – 145.559 ΣXY= 74.8 shows the beta value of Dabur futures and Nifty futures.467 -1.825) 2 = 1566. 63 .047 – 219.086 3.267 = 0.362 1.907 10.907 – (-14.359 ΣX= -14.001 2.184 19.349 -4. it is less volatile and the investment in Dabur futures is less risky.596 .771 16.84 9.638 3054.212 3.001 2 ΣX = 155.825 3.84 21* 155.825 * -9.

933 9.400 1.687 1.334 2.609 5.653 -2.421 2.969 0.760 0.854 0.819 0.416 0.254 1.401 0.430 2.435 -3.961 -3.096 3.764 1.390 2.820 5.507 6.421 7.345 -5.449 25.731 0.147 18.818 1.538 0.046 -2.349 0.901 0.201 -0.935 -0.9 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 -2.508 0.228 -2.586 -1.207 2.112 8.086 -2.885 0.324 -0.478 2 ΣX = 126.872 2.189 Source: Secondary Data 64 .557 -0.259 2.961 -1.584 -2.154 0.043 -1.066 -1.624 0.384 4.692 ΣX= -7.373 1.108 ΣY= 1.150 2.454 3.259 2.392 3.867 8.084 XY 5.907 -0.970 -2.271 -2.845 10.312 0.134 2.046 0.422 2.766 ΣXY= 55.237 -0.446 -0.649 1.189 9.614 0.314 X2 6.Table 4.022 8.84 Y -2.296 2.202 9.023 6.839 -1.820 0.823 -0.322 2.489 -1.

084 – (-7.298 1.969 .-7.2 shows the beta value of CIPLA futures and Nifty futures.418 0.555 0.539 -8.930 Y 1.271 2586.46 = 1169. it is less volatile and investing in CIPLA futures is less risky.-10.230 X2 .030 0.691 -0.015 -1.84 * 1.10 GLAXO Date 01-03-2007 02-03-2007 05-03-2007 06-03-2007 07-03-2007 X -0.764 – 61.232 15.304 = 0.764 65 .189 . Table 4.445 XY -0. Σy n Σ x2 – (Σx)2 = 21*55.β = n * Σxy – Σx . Since the beta value is less than one.0001 2.482 3.088 -4.013 -1.120 -2.452 Table 4.314 21* 126.302 2647.814 1.756 0.176 0.84) 2 = 1158.

800 -5.706 .236 ΣY= -10.347 0.062 1.042 – 117.851 -1.706 Source: Secondary Data β = n * Σxy – Σx .002 – (-10.621 0.891 0.824 -4.557 1.651 2.045 -0.052 21* 95.564 4.1392 -3.1245 1995.237 3.853 = -94.637 2 ΣX = 95. Σy n Σ x2 – (Σx)2 = 21*-9.948 -2.255 ΣXY= -9.925 1.458 7.624 ΣX= 10.856) 2 = 203.649 0.437 1.08-03-2007 09-03-2007 12-03-2007 13-03-2007 14-03-2007 15-03-2007 16-03-2007 19-03-2007 20-03-2007 21-03-2007 22-03-2007 23-03-2007 26-03-2007 28-03-2007 29-03-2007 30-03-2007 0.806 0.807 -1.055 2.189 66 .589 0.806 1.262 -3.126 -1.826 .066 4.025 1.552 5.482 -5.134 -3.856 2.025 0.856 * -10.353 -2.424 3.132 2.235 -3.214 1.138 -1.867 -2.10.0006 0.903 0.571 1.052 0.392 -3.280 3.056 -0.403 1.192 1.968 2.-109.202 2.142 -4.606 -2.432 5.724 1.092 0.507 -1.944 -0.386 0.7015 1877.421 1.0006 2.134 1.002 1.126 54.

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

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

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

5. the investment in Corporation Bank futures is highly risky. Glaxo. Ranbaxy. Syndicate Bank. Since the volatility of ICICI futures IOB. In March 2007. 2.3 RECOMMENDATIONS 1. Cipla. Dabur and CIPLA futures are less the investors can invest in these futures. 3. Dabur are the companies taken from the pharmaceutical industry. 4. Sun Pharma. the investors should be very cautious in investing into those futures. PNB. Financial futures can be used to dwarfs the volume in traditional agricultural contracts. 70 .Overseas Bank and Punjab National bank are taken. 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. Ranbaxy.

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