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Futures play an important role in the field of finance. Many kinds of futures instruments have been developed and the use of futures has received a great deal of attention. Futures contract like options are important derivative instruments and a major innovation in the field of risk management. FEATURES OF A FUTURES CONTRACT A futures contract is a standardized forward contract. An agreement between two parties to exchange an asset for cash for a predetermined future date for a price that is specified today represents a forward contract. The terms which are used in futures contract are: Short position: This commits the seller to deliver an item at the contracted price on maturity. Long position: This commits the buyer to purchase an item at the contracted price on maturity. DIFFERENCES BETWEEN FORWARDS AND FUTURES A standardized forward contract is a futures contract. The differences are: • A forward contract is a tailor made contract (the terms are negotiated between the buyer and the seller),whereas a futures contract is a standardized contract(quantity, date and delivery conditions are standardized). • • • While there is no secondary market for forward contracts, the futures contracts are traded on organized exchanges. Forward contracts usually end with deliveries, whereas futures contracts are settled with the differences. Usually no collateral is required for a forward contract. In a futures contract, however a margin is required.
Price limits are meant to prevent panic buying or selling. This means that the exchange becomes the seller to the buyer and the buyer to the seller. The purpose of standardization is to promote liquidity and allow parties to the futures contracts to close out their positions readily. This means that profits and losses on futures contract are settled daily. and to prevent overreaction to real information. Marking-to-market: While forward contracts are settled on the maturity date. and maturity date.• Forward contracts are settled on the maturity date. whereas futures contract are ‘marked to market’ on a daily basis. asset quantity. futures contracts are ‘marked to market’ on a periodic basis. KEY FEATURES OF FUTURES CONTRACTS The key features of future contract are: • • • • • Standardization Intermediation by the exchange Price limits Margin requirements Marking to market Standardisation: Traded futures contracts are standardized in terms of asset quality. 4 . Price limits: Futures exchanges impose limits on price movements of futures contracts. Intermediation by the Exchange: In a traded futures contract the exchange interposes itself between the buyer and the seller of the contract. triggered by rumors. This means that the profits and losses on futures contracts are settled on a periodic basis.
aluminum. oil.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. and wheat and orange juice have been in existence for nearly three centuries. storable as well as perishable. cotton. 5 . but are often defined on an interest rate index such as 3-month sterling or US dollar LIBOR. while financial futures is a futures contract in a financial instrument like Treasury bond. COMMODITY FUTURES (PERISHABLE COMMODITIES) For pricing futures contracts on the basis of arbitrage. Hence perishable commodities have to be analyzed differently. Futures price= Expected spot price – Expected risk premium FINANCIAL FUTURES A financial future is a futures contract on a short term interest rate (STIR). currency .or stock index. Contracts vary. like gold. Futures price= spot price+ present value of storage costsPresent value of convenience yield. A commodity futures is a futures contract in a commodity like cocoa or aluminum. rice. the asset has to be storable. For a storable commodity buying in the spot and storing it until the expiration of the futures contract is equivalent to buying a futures contract and taking delivery at the maturity date. The futures price of a perishable commodity is influenced by two factors mainly: the expected spot price of the underlying commodity and the risk premium associated with the futures position.
The seller delivers the commodity to the buyer. effectively closing out the futures position and its contract obligations. Both parties of a "futures contract" must fulfill the contract on the settlement date. The price of the underlying asset on the delivery date is called the settlement price. To exit the commitment prior to the settlement date. which differs from an options contract. or. Futures contracts. no comparable contracts exist for other currencies. The exchange's clearinghouse acts as counterparty on all contracts. In other words. etc. A futures contract gives the holder the obligation to buy or sell. the owner of an options contract may exercise the contract.In finance. to buy or sell a certain underlying instrument at a certain date in the future. which gives the holder the right. traded on a futures exchange. Other dollar-denominate short-term interest rate futures. converges towards the futures price on the delivery date. normally. 6 . the holder of a futures position has to offset his position by either selling a long position or buying back a short position. if it is a cash-settled future. The Eurodollar contract is the linchpin of the shortend interest rate futures contracts. at a specified price. but not the obligation. or simply futures. sets margin requirements. The pre-set price is called the futures price. The settlement price. are exchange traded derivatives. a futures contract is a standardized contract. SHORT-TERM INTEREST RATE FUTURES Contract specifications An assortment of contracts. The future date is called the delivery date or final settlement date. then cash is transferred from the futures trader who sustained a loss to the one who made a profit.
S. Contract settlement: Eurodollar contracts are settled in cash rather than with physical delivery (which would entail the short opening a time deposit on behalf of the long). the offer side of the cash money market). 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. although trading in it only started as recently as 1981.5 implies a futures LIBOR rate of 3. Eurodollar deposits differ from domestic term deposits or certificates of deposit in the U.S. which is a dollar-denominate deposit with a bank or branch outside of the U.e.Eurodollar futures The Eurodollar futures market is the most widely traded money market contract in the world. Basic contract specifications: The nominal contract size is $1 million and the underlying rate is the three-month LIBOR. Eurodollar contract trading is de-facto available 24 hours. 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. the rate at which a London bank is willing to lend dollars (i.S. in that they are not regulated by U. a price of 96.g. Thus..S. authorities and hence are not subject to reserve requirements or deposit insurance premiums. It is based on a ninetyday Eurodollar deposit. 7 . (ii) heterogeneity of bank credits would systematically raise questions on the quality of the delivered asset.. Trading of Eurodollar contracts: Eurodollar contracts are now traded at the CME in Chicago.5% per annum) in decimal terms. The futures price is quoted as 100 minus the annualized futures 3-month LIBOR (e. at LIFFE in London and at SIMEX in Singapore. or with an international banking facility (IBF) located in the U.
We will see that the market forces of arbitrage are used to price virtually all financial futures contracts. all with different maturities and coupons. Plus any accrued interest on the bond: 8 .Pricing and arbitrage: Implied forward rates In order to understand how futures prices are established. Treasury bond futures contracts allow delivery of any U. T-bond that has at least I. applications with contracts based on different currencies. Because this is more convenient for most futures users than physical delivery. there may be as many as several dozen securities in the deliverable basket. INTERMEDIATE. 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.S. Of course. we need to understand how prices of futures contracts are related to the spot or cash market prices of the underlying asset. bond futures are settled at expiration with physical delivery. Futures invoice price: When a bond is delivered into the bond futures contract.S. bond futures positions can also be unwound prior to delivery by offsetting futures transactions. maturities or underlying asset constitute a straight-forward extension. Also unlike the T-bill futures contract.AND LONG-TERM INTEREST RATE FUTURES Contract specifications Deliverable securities: Unlike international bank futures contract. years remaining to maturity (or to first call if the bond is callable). 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. bond futures contracts generally allow for a range of bonds to be delivered against them. All examples drawn below are based on the threemonth Eurodollar contract. For example. U. few contracts actually go into delivery.
the concrete specifications of the U.S.S. it is the difference in cost between 9 . September and December). the last trading date and the last delivery period (one month). The basis. Since 1932. bond futures contracts designed along the lines of the U. T-bond contract have spread internationally.S. They all have similar characteristics to their forerunner. Delivery months on bond futures contacts are quarterly (March. International bond futures contracts. Understanding the relationship between a futures contract and the deliverable basket is crucial to understanding the drive behind the arbitrage. T-bonds). a 5year and a 2-year contract. the table below lists the main international bond futures contracts. The contract size defines the par amount of the bond that is deliverable into the contract ($100. In other words.S. Pricing and arbitrage Cash-futures relationship: Similar to short-term interest rate contracts. It is the delivery option of the short that makes valuing bond futures more complex than valuing international bank (euro) deposit futures.Futures invoice price = futures price conversion factor + accrued interest Other contract terms: Exchanges set other futures contact terms as follows. medium. The exchange will also set daily trading hours. was the first fut3ureo n long-tern interest rates. Other U.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. traded at the CBOT since 1977. Since then three futures contracts have been established on U.and long-term interest rate contracts: The U. June. where they are traded and the description of their deliverable set.000 for U. T-bond contract are shown in parentheses for illustrative purposes. For illustration purposes. The basis is the difference between a bond's price and the futures invoice price (as defined above). T-bond.S.
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. Then one could: (i) buy (sell) the cheapest to. Suppose.buying the bond in the cash market and buying a futures contract on it and having it delivered into the contract at expiration. the gross basis must be equal to zero. The basis is generally quoted in 32nds rather than in decimal units . and (iii) immediately deliver (receive delivery of) the cash bond against the short (long) futures position.deliver bond in the cash market.futures invoice price = clean cash price . An excessive exposure to intermediate.this conversion is performed simply by multiplying the decimal basis by 32. for instance. Accordingly. that the gross basis was negative (positive). (ii) sell (buy) a bond futures contract. The basis point value factor is the ratio of the change in the 10 .(futures price conversion factor) since dirty (or full) price = clean price + accrued interest. we define the gross or raw basis as: Gross basis = dirty cash price .and long-term interest rates can be offset by buying or selling bond futures contracts. Basis arbitrate at futures expiration: At futures expiration. Risk management and hedging Basic risk management functions: Bond futures are often used as a vehicle for hedging price risk or duration. 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.
can be traded: * outright. trading on the basis of market views. * in combination with other bond futures contracts.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. Going long the futures is a way of extending duration: it pays when the market is rallying and rates are falling. Expressing a market view Types of trades: The third application of bond futures. or * in combination with the underlying (typically the cheapest-to-deliver bond) in what amounts to basis trades. requires by definition that not all risk be hedged. as was the case with international bank deposit futures. reduces market sensitivity to rate movements and performs well in a bear market. easy reversibility of positions and low cash requirements. 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. on the contrary. But because they track the cheapest-to-deliver bond (driven by basis traders). Outright trading: Bond futures by themselves don't have duration. they contribute dollar duration to portfolios much along the lines of the cash bond. 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. Bond futures. to express a view on market direction. 11 . using spreads or butterflies that combine longs and shorts at different points in time or across countries. Shorting bond futures.
and (ii) the evolution of short-term rates. CAD. A basis trade can -. In addition. as explained above. JPY. In a similar vein. average of bilateral rates against the dollar) at the CBOT. AUD. and in particular whether the cheapest-to-deliver goes on special in the repo market Short-term basis trading is in fact quite complex. Interpreting a bond future calendar spread as a reading on a particular segment of the yield curve is made difficult by each contracts' particular sensitivity to shifts in the cheapest-to-deliver and to changes in the repo rate on the cheapest deliver. For instance. A short-term basis position financed at an overnight rather than term rate constitutes a bet on basically two things: (i) the level of long-term rates (which determines which bond will be the cheapest-to-deliver since they each have different sensitivity to market rates according to their duration). there are futures 12 .Spread trading: As a word of caution. 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. Basis trading: Trading the basis from the long side is relatively risk less if the position is held to the futures expiration date..1so be held for shorter time horizon but then the position is subject to risk at the unwind. it should be mentioned that bond future spread or butterfly trades are less straight forward in their interpretation than similar trades with international bank deposit futures. Basis trades can be entered into directly (by playing the bond and futures markets simultaneously as discussed in Section B) or indirectly by replacing an existing long bond position with a long position in bond futures and shortterm money market investments. GBP. Foreign currency futures contracts are available on all major currencies against the dollar (e. most of which are traded at the CME and at LIFFE. DEM. SRF. Finally. CURRENCY FUTURES Contract specifications Types of contracts.).g. etc.e. and can be used to take on risk subject to one's views in addition to as an arbitrage play. there are futures on a USD index (i..
e. Contract specifications. meaning that at futures settlement the long receives the currency of denomination of the future and pays dollars).e. 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.. long yen and short dollars) is consistent with an expectation of an appreciation of the yen relative to the dollar. by far the most prevalent. More formally.. the contract should be sold if one expects the yen to appreciate more than what is expected by the market. June. the prices of currency futures are bound by a basic arbitrage relationship with the underlying cash market. the difference between forward and futures prices is less important than with interest rates. Expressing a market view Outright trading. September and December.on crosses. in the case of currencies. Futures are a natural instrument to express views on future exchange rate movements. 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. bilateral exchange rates between two non-dollar currencies such as on JPY/DEM. shorting the contract is consistent with an expectation of a yen depreciation relative to the dollar. Price quotes are on American terms. Conversely. 13 . As with interest rate futures.. They tend to require actual delivery. based on number of dollars per unit of foreign currency. However. For instance. i. Conversely. Pricing and arbitrage: International interest rate parity Overview. tend to have quarterly contracts with delivery in March.e. Arbitrage relations are cleaner with forwards than with futures because mark-to-market payments on futures introduce an element of reinvestment risk that cannot be fully hedged. i. going long the JPY contract (i.
Futures contract specifications: All futures contracts on stock indexes are settled in cash. stock weighting. any cash dividends received on the portfolio are ignoring when percentage changes in most indexes are being calculated. In other words. First. 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. those indexes constructed using geometric means). 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 . The stocks in the portfolio can have equal weights or weights that change in some way over time. Physical delivery of stocks against a futures contract based on an index presents intractable difficulties. and index computation. The most common weighting scheme is market value weighting. relative performance can vary sharply over periods such as a month or a quarter. not every index correspond to a well defined portfolio of stocks (for example. Moreover. only price changes. Treatment of dividends: Stock indexes are not usually adjusted for cash dividends. Though returns on stock indexes of the same country are often highly correlated over time. Stock indexes differ from one to another with respect to the range of stocks covered.STOCK INDEX FUTURES Contract specifications The underlying instrument. 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. 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.
Contains the prices of 1. * NYSE composite futures (NYSE). * FT-SE 100 index (LUFFE). * S&P 400 (CME). Contracts traded. The value of one futures contract is $500 times the index. The index accounts for 80% of the NYSE. The value of one futures contract is GBP 25 times the index. Based on a portfolio of 500 American stocks. The value of one futures contract is $500 times the index. For illustration purposes. 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. 15 . Based on a portfolio of 40 of the largest stocks listed on the London Stock Exchange. Based on a portfolio of 40 of the largest stocks listed on the Paris Stock Exchange. The value of one futures contract is $500 tirmes the index. * Value Line futures (KC). Based on a portfolio of 225 of the largest stocks listed on the Tokyo Stock Exchange. * Major market index (CME). The value of one futures contract is $500 times the index. Based on a portfolio of 400 American stocks. *CAC-4s0t ock index (MATIF). following is a list of the main international stock indexes and futures contracts on these indexes: * S&P 500 (CME).companies. 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. * Nikkei 225 stock average (CME). Based on a portfolio of all the stocks listed on the NYSE. 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.700 American stocks. The value of one futures contract is FRF200 times the index.
or the difficulty of moving funds quickly and on a large scale into and out of particular stocks. acquiring. Stock index futures provide a means of adjusting. 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. Index futures can provide a means of cheaper access to such a portfolio. Creating synthetic index fund portfolios: Futures can be used to create portfolios that have cash flows characteristics similar to an index fund portfolio. ease of adjusting positions (liquidity). Managing index fund portfolios involves considerable oversight in terms of maintaining the correct weights as prices change and reinvesting any dividends that are received. An interesting example of users of stock futures as hedging vehicles are brokers and dealers in equities. fixed-income security. Risk management and hedging Overview. attractive prices available on the futures contract. Otherwise arbitrage trades are possible.Pricing and arbitrage Like futures on fixed income instruments and currencies. by the cash-forward relationship. 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. 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. 16 . The sale of stock futures against a stock portfolio creates a hedged position with returns very similar to those of a short-term. in other words. stock index futures prices should be related to the underlying cash market by a cost of carry relationship or.
Stock index futures can be used to create portfolios that have cash flows characteristics similar to an index fund portfolio. and leave the returns and risk component associated with the company-specific features of the stocks in the portfolio. Capitalizing on stock selectivity. Expressing a market view Outright trading: Futures are a natural instruments to express views on future exchange rate movements. Since a deposit of less than 10 percent is required to purchase or sell a stock futures contract.Capitalizing on different tax treatment of futures and equities. the different tax treatments of those returns may make it advantageous for some investors to use equity futures. 17 . Spreads: A wide range of speculative strategies are possible by mixing stock index futures contracts of different maturities and or different underlying indexes. one can take on a considerable amount of market risk via index futures and reap the reward of being correct in a forecast of the stock market direction. The strategy that should be employed is to sell stock futures up to reduce or eliminate the market-related component of that portfolio's risk and returns. All profits and losses on stock index futures are effectively treated as long-term capital gains and losses.
to establish the corresponding futures position by exercising the option at some time in the future. the writer (or seller) of the option receives the premium when the option is issued and must stand ready to accept the corresponding futures position at any time duning the life of the option. In either case. The key to options is to understand that holding an option represents a right rather than an obligation. Conversely. for a call. For example. to put options 18 . the option has no exercise value and is said to be out of the money. whichever is greater. the futures position may be established by the option holder on any date up to a pre-determined expiration date at a pre-determined price (the strike price). * A put option confers upon its holder the right to establish a short (selling) futures position. the option has exercise value and is said to be in the money. if the market price of the underlying is above the option's strike price. The same applies. The purchaser of the option pays a market-determined price (or premium) in order to have the right --but not the obligation-. There are two types of options on futures: * A call option confers upon its holder the right to establish a long (buying) futures position. but in reverse. If the market price of the underlying is below the call option's strike price.OPTIONS ON FUTURES Definition and Pricing Definition and types of options. 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). "Moneyness" of options.
Use of options on futures versus use of futures. The price you pay for having the security offered by an option 19 .Futures positions at option exercise: To summarize. There are options on all the types (though not necessarily on all the specific contracts) of financial futures. There is no downside risk to buying an option. the options on futures. you let the option expire worthless and pay no more. if exercised. With a futures position.: *Creating asymmetric payoffs on the upside and downside. If the price goes against you. 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. yields long futures Underlying instruments. you must pay the daily settlement variation when the price goes against you. Hedgers and investors might want to use options on futures rather than futures themselves for the following reaso. Among the most liquid option contracts (and the corresponding exchanges where they are traded) are: *Short-term interest rates: Eurodollars (at the CME) *Longer-term interest rates: US Treasury bonds and notes (at the CBOT) *Currencies: Deutschemarks and Yen (at the CME) *Stock-indexes: S&P500 (at the CME) Pricing models: A commonly used pricing model for options on futures is the Black model. which is an extension of the Black-Shoes model originally derived for pricing equity options.
This is due to the fact that futures are leveraged instruments.S. and interest rate cap (i. whether to provide parts at the agreed upon prices. liability or cash flow being hedged is of a contingent nature. or actually express views on the basis of market volatility. 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. whether futures or options on futures are utilized by traders and corporate treasurers depends on their preferences on the risk/reward structure. This makes options on futures easier to hedge dynamically since one does not need to worry about financing of positions in the underlying. Only options allow them to isolate the volatility component on the basis of which they can hedge or trade *Contingent contracts. Options might be suitable if the asset. 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. which takes place in a month. Trading volumes. The Japanese company will decide at the next board meeting. it may pay for the U. 20 . For example. In this case. Options on futures can be used instead to insure against adverse interest rate moves. however. suppose you are negotiating with a Japanese company for electrical parts. if you are willing to accept the risk of an unlimited downside exposure. The U.e.S.. might want to hedge market volatility. Thus. Hedging example: floating-rate note issuance. Futures are not directly affected by changes in market volatility. For a fixed price (the option premium). Some users. Conversely. you might consider selling an option and collect the premium upfront.is the upfront premium. firm to hedge the contingent payable by buying options on yen futures. The volume traded on options on futures is much larger than on equivalent options on the cash instruments.
Liquidity is provided to a large degree by locals (individuals trading on their own capital) trading in the pit. 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. They are not per se a financing or investment vehicle but rather a tool for transferring price risks associated with fluctuations in asset values. financial institutions and corporations and have been successfully integrated into risk Management and yield enhancement strategies. unlike in cash markets. and derivatives generally. Economic importance of futures. explained some of the basics regarding how they are priced. IMPORTANCE OF FUTURES MARKETS Summary. Market liquidity: A market is liquid when traders can buy and sell without substantially moving the price against them.Liquidity and market depth In derivatives markets. or else by major financial institutions trading in automated systems. Futures. futures have become widely accepted by money managers. Liquidity typically arises when there are individuals or institutions which continuously wish to buy or sell. and given a few applications illustrating how these contracts would be used by risk managers and investors. Some may use them to spread risk. Over the last decades. We have investigated some of the features of futures contracts. 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. Because they bind buyer and seller for a pre-specified period of time. most of the action happens in the future. others to take on risk on the basis of particular market views.
Financial futures (along with options) are best viewed as building blocks. * Futures are relatively inexpensive to execute (negotiable commission rates). they allow not only the reduction or transformation of risk faced by individual investors but also the sheer understanding and measurement of risk. While the following are noteworthy advantages that futures have over forwards. the volume of financial futures now dwarfs the volume in traditional agricultural contracts. 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. 22 . 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. In so doing. Participants know all transaction prices and there are no negotiated deals and no multiple phone calls to get price quotes. and as such provide for substantial leverage. * Futures are bought or sold on margin. * Prices are determined by a competitive market system (open outcry or electronic bidding). Financial management is quickly becoming an exercise in reducing financials structures into their basic elements and then reassembling them into a preferable structure. The surge in financial futures.components. derivatives have contributed decisively to the integration of financial markets. Also. Futures' features. *All prices and information are available continuously. In the process.
exchanges and futures commission merchants provide a level of integrity for the marketplace. The list of securities in which futures contracts are permitted is specified by Securities Exchange Board of India. 23 .*Positions are easy to reverse if the opinion about market conditions and prospects changes. *Counterparty credit risk of non-performance is negligible. The Bombay Stock Exchange has a stock index futures contract based on Sensex. On the other hand. OTC trading allows more flexibility in establishing contract terms and avoids the need for daily monitoring of mark-to-market positions and margin account. Stock Index Futures The National Stock Exchange and the Bombay Stock Exchange have introduced stock index futures. Futures on Individual Securities Futures on individual securities were introduced in India in 2001. Both the type of equity futures are available in India. The National Stock Exchange has a stock index futures contract based on S&P CNX Nifty Index. Offsets of longs and shorts prevent a bloating of the balance sheet and tying up of credit lines that can become a problem with over-the-counter derivatives. EQUITY FUTURES IN INDIA Equity futures are of two types: stock index futures and futures on individual securities. The National Stock Exchange and the Bombay Stock Exchange have introduced futures on individual securities. *Audit systems and safeguards enforced by regulatory authorities.
24 . During the last decades the financial products into their basic components. Eurodollar deposits. currency or stock index. “A financial futures in a futures contract in a financial instrument like treasury bond.” Eg: Financial futures. but it is a tool for transferring price risks associated with fluctuations in asset values. US Treasury Bills.2 SUBJECT BACK GROUND FOR THE STUDY Futures market plays an important role in the world of finance.1. The volume of trading in financial futures dwarfs the volume in traditional agricultural contracts. Many kinds of futures instruments have been developed and the use of futures has received a great deal of attention. S&P index etc… Generally futures allow economic agents to fine-tune the structure of their assets and liabilities to suit their risk preferences and market expectations. Futures are not only a financing or investment vehicle.
3 NEED FOR THE STUDY The needs for the study of financial futures are: 1.1. 25 . 5. Futures are relatively in expensive to execute. Financial futures have become the corner stone of financial management. 3. 6. Futures have been a key instrument in facilitating the modern trend of separating conventional financial products into their basic components. financial institutions and corporations have been successfully integrated into risk management and yield enhancement strategies. Futures have facilitated the modern trend of separating conventional financial products into their basic components. Futures have become widely accepted by money managers. 4. Financial futures play a prominent role in risk management. 2.
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,
such as those based on: Money market interest rates: certificates of deposit. the method of payment. To ensure the liquidity of exchange-traded futures markets. The buyer and the seller both have 29 . sugar. futures based on financial commodities have flourished.. Credit exposure. Contract terms.LIBOR-based).. NYSE Composite. among other characteristics. Nikkei 225. Forward vs. Forward contracts will trade on the basis of price and credit characteristics of the counterparty. This serves to reduce credit exposure to intraday price movements Tradability. gains and losses are settled daily in the form of margin payments. contracts tend to be offered on standardized terms in terms of maturity. This makes futures contracts particularly well suited for trading in organized exchanges. For this reason.g.gold). Cash flows and margining. Bonds and notes: Treasury securities. the time and place of delivery. and Treasury bills. Over the last two decades. deutschemark. futures contracts Futures and forward contracts are similar in the sense that they both establish a price and a transaction to occur in the future. In addition. softs (coffee. Currencies: yen. there are futures on several commodity indices (like the CRB and GSCI). pound (against the dollar or crosses) Equity indices: S&P500. the clearing house members and the clearinghouse itself guarantee fulfillment of futures contracts. cocoa). margining requirements and trading hours. B. The margin requirements on futures contracts make them sufficiently immune to credit risk so that credit exposure is not a significant factor in pricing. offshore or euro-deposits (e. In forward markets cash changes hands only on the forward date In futures markets. forward contracts tend to be traded in over-the-counter (OTC) markets. quantity and quality of the underlying to be delivered. In futures contracts. contract size.
S. should not) be fully hedged. Examples of single transaction hedging might include anticipatory hedging for debt or equity security issuance or currency hedging for foreign trade transactions. 30 . Such trades by definition cannot (indeed. rather than to each other. there is no formal regulation of forwards nor is there a body to handle customer complaints. whether these are fimdamental (i. and futures on three-month LIBOR and on one-month LIBOR By isolating each characteristic of some underlying security with a derivative instrument. Exchangetraded futures.. and (iii) taking trading positions on the basis of market views (or "speculating. Risk management. driven by economic conditions and trends) or technical (i. Financial futures can be used as devices for: (i) arbitrage or yield enhancement.) or set up by the industry itself.an exposure to the clearing house (and the clearing house to them). Since forwards are a bilaterally negotiated agreement. are regulated by identifiable entities which are either governmental (like the Commodity Futures Trading Commission in the U.e.e. Expressing market views. based on observed short-term price movements).. Sometimes the prices of futures can be related as well to those of other derivatives which are based on the same (or similar) underlying commodities." to put it in more blunt terms). FINANCIAL FUTURES: USES AND USER Uses. Regulation. 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 are an efficient way of taling bets on the market on the basis of traders' views. arbitrage. all arbitrage risk can be eliminated. (ii) risk management and hedging. Hedging can be performed on a single tansaction (or instrument) basis or on an aggregate (portfolio or firm) basis. Examples of related derivatives are interest rate swaps and interest rate futures. on the other hand.
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 ..g. or a combination of these. Financial institutions. the timing of expected market movements. The principal financial futures exchanges in the world are: Chicago Mcrcantile Exchange (CME. credit. 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. brokerage firms. Users. fund managers and insurance companies will use futures for their thrc:.basic functions. changes in the spread between market segments (e. Non-financial corporations. including commercial banks. investment banks. Futures can be used to express views on general market direction. 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. Unlike pure arbitrage. commodity quality or cross-country differences). expressing market views is not riskless. investment or borrowing activities. including municipal and state organizations and foundations are more likely to use them to hedge their commercial.although trade construction might be such as to immunize particular kinds (or dimensions) of risk.
2. 2. To study the volatility of futures with reference to Banking and Pharmaceutical industries. 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..5 SCOPE OF THE STUDY: This study is done mainly under the ten companies of NSE Nifty. journals. The results cannot be generalized. Five companies from Banking and five from Pharma industry are taken for the study.7 TOOLS FOR DATA COLLECTION Secondary Data: It is collected from books. internet. magazines etc. 32 .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. Secondary data is mainly used for the study.
2.9 LIMITATIONS OF THE STUDY Time constrains Geographical constraints This is restricted to Banking and Pharmaceutical Industry 33 .8 METHOD OF ANALYSIS The formula used for calculation are: β = n * Σxy – Σx . X= closing price – opening price * 100 Opening price Y = stock return For calculating ‘y’ the NSE future value is taken Y= closing price – opening price *100 Opening price 2. Σy n Σ x2 – (Σx)2 X = market return For calculating ‘x’ the NSE share price is taken.
Corp Bank. Punajb National Bank.2. Chapter 2: Research Design deals with the statement of the problem.10 CHAPTER SCHEME Chapter 1: Introduction deals with the introduction to futures. Ranbaxy. objectives. Syndicate Bank. 34 . Chapter 4: This chapter deals with the Analysis and Interpretation of Data Chapter 5: It gives the Summary of Findings. review of literature. Conclusion and Recommendations. Glaxo and Sun Pharma. IOB. subject background of the study and need for the study. scope of the study and about the methodology used by the study. Dabur. CIPLA. Chapter 3: It deals with the Company Profiles of ICCI Bank.
CHAPTER 3 PROFILE OF COMPANIES 35 .
K. and about 2400 ATMs. USD 5. ICICI Bank has total assets of about USD 56 Billion (end-Mar 2006). ICICI Bank Towers.icicibank. Chanda Kochhar Loans. Nachiket Mor. Savings. ICICI Bank offers a wide range of banking products and financial services to corporate and retail customers through a variety of delivery channels and through its specialized subsidiaries and affiliates in the areas of investment banking. Bandra Kurla. SBI Life (Insurance) etc.79 billion www. life and non-life insurance. NYSE: IBN 1955 (as Industrial Credit and Investment Corporation of India) ICICI Bank Ltd.com Key people Products Revenue Website ICICI Bank (formerly Industrial Credit and Investment Corporation of India) is India's largest private sector bank and second largest overall. 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 . venture capital and asset management.V.Kamath. the Stock Exchange. a network of over 619 branches and offices.3. Credit Cards. ICICI Bank's equity shares are listed in India on stock exchanges at Kolkata and Vadodara. Mumbai India N Vaghul.. Investment vehicles. Mumbai and the National Stock Exchange of India Limited and its ADRs are listed on the New York Stock Exchange (NYSE).1 ICICI BANK ICICI Bank Type Founded Headquarters Private BSE & NSE:ICICI.
All this changed in 1990s. ICICI was not a bank .it could not take retail deposits. ICICI bank now has the largest market value of all banks in India. At the time of the reverse merger. car loans etc. other such institutions were IDBI and SIDBI) with the objective to finance large industrial projects. Hong Kong. as they are known in India) on its books . These funds were deployed in large corporate loans. and nor was it required to comply with Indian banking requirements for liquid reserves. often at concessional rates. credit cards. It has operations in the UK. The bank is expanding in overseas markets. ICICI founded a separate legal entity . ICICI Bank is the largest issuer of credit cards in India . The bank is aggressively targeting the NRI (Non Resident Indian) population for expanding its business. 37 . It is widely believed that the proportion of NPAs has come down to prudent levels (even if it were high earlier).ICICI Bank which undertook normal banking operations . The experiment was so successful that ICICI merged into ICICI Bank ("reverse merger") in 2002. and is widely seen as a sophisticated bank able to take on many global banks in the Indian market.taking deposits. Singapore and Canada. It acquired a small bank in Russia recently.It was the first bank to offer a wide network of ATM's and had the largest network of ATM's till 2005. It has tie-ups with major banks in the US and China.in particular to the steel industry. 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. ICICI Bank now has the largest market share among all banks in retail or consumer financing. there has been a general revival in Indian industry (and metal based industry in particular). Since 2002. there were rumours that ICICI had a large proportion of Non Performing Loans ("NPA". before SBI caught up with it.
1969. S. Savings. Investment vehicles. 1895 (British India) New Delhi.com Products Revenue Slogan Website Punjab National Bank (PNB). 38 .32 billion (2005) . USD 2. Credit Cards.Gupta Banking Insurance Capital Markets and allied industries Loans. India Chairman and M.2 PUNJAB NATIONAL BANK Punjab National Bank Type Founded Headquarters Key people Industry Public (BSE.the name you can BANK upon www.C. established in 1895 in Lahore by Lala Lajpat Rai...D. Insurance etc. The Government of India nationalized the bank. Mr. along with 13 other major commercial banks of India. is the second largest public sector commercial bank in India with about 4500 branches and offices throughout the country. on July 19.3.PNBIndia. NSE:PNB) Lahore.
in/ Key people Industry Products Revenue Slogan Website Syndicate Bank. M. USD bil Faithful and Friendly (English) & Viswasaneeya Hitheshi (Sanskrit) syndicatebank. The primary objective of business was to extended financial assistance to local weavers. Investment vehicles.3 SYNDICATE BANK Syndicate Bank Type Founded Headquarters Public (BSE & NSE) Udupi. Savings. by the Government of India. Credit Cards. The first branch of the bank started its operations in the year 1928 at Brahmavar in Dakshin Kannada District.000. Pai. The bank. Bajaj Allianz Life Insurance (Insurance) etc.Insurance. The business started with a capital of Rs. By 1937 it had secured its membership as a Clearing House at Mumbai. Vaman Kudva and Dr. 1969. was nationalized on 19th July.3. Manipal.Capital Markets and allied industries Loans. At the time of its establishment. India) by Upendra Ananth Pai. established in 1925 in Udupi (Karnataka state. Karnataka India & Corporate Office Bangalore Chairman C P SWARNKAR Banking. T. 80. A. along with 13 other major commercial banks of India. 1925 (as Canara Industrial and Banking Syndicate Limited) Head Office. is one of the oldest and major commercial bank of India. 39 . the bank was known as Canara Industrial and Banking Syndicate Limited. Initially the bank collected as low as 2 annas from the door steps of the depositors daily through its agents.
The stocks of the Syndicate Bank are listed on Bombay Stock Exchange. Mangalore Stock Exchange and Bangalore Stock Exchange. 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. It took over Al Shabei Finance and Exchange Co. 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 bank expanded its operations not only on the domestic front but also overseas. in Muscat (1984). Syndicate Bank sponsored the first regional rural bank in India by name Prathama Grameena Bank. Currently it has over 1900 branches. in Doha (1983) and Musandam Exchange Co. 20 banks merged with the Canara Industrial and Banking Syndicate Limited this included the Maharastra Apex Bank Limited and Southern India Apex Bank Limited. From 1953-1964.4 CORPORATION BANK CORPORATION BANK 40 . Delhi. By 1989 it opened its 1500th branch at Hauz Khas. National Stock Exchange.
com Key people Industry Products Revenue Net income Slogan Website Corporation Bank. India. Savings.87% of Share Capital is presently held by the Public and Financial Institutions.27 Crore (2006) A Premier Government of India Enterprise www.176 full time employees.92 crores as on 31 March 2005. The bank was founded with an initial capital of Rs. Sambamurthy Banking Loans. Credit Cards. has currently (31 March 2004) 10. 3. 5000 (USD 100). The Bank’s Net Worth stood at Rs. 1906 Corporation Bank. and operates from several branches in India. 054. The Bank came out with its Initial Public Offer (IPO) in October 1997 and 37.corpbank. The Bank is a Public Sector Unit with 57.83 crore (2006) Rs 100. The bank has the distinction of the first Indian bank to publish its financial results (199899) conforming to US GAAP. Karnataka state. and first day’s canvassed resources of less than one USD 1. etc. Investment vehicles. Mangaladevi Temple Road Pandeshwar Mangalore 575 001 India Chairman B.5 INDIAN OVERSEAS BANK IOB 41 . NSE:CORPBANK) Udipi. Rs 862. CORPORATE OFFICE . is one of the Indian banks in public sector.17% of Share Capital held by the Government of India.3. founded in 1906 in Udupi.Type Founded Headquarters Public (BSE.
6 RANBAXY LABORATORIES 42 . Deposits stood at Rs.3.64 Crs and Advances at Rs. At the dawn of Independence IOB had 38 branches in India and 7 branches abroad. Insurance and Industry with the twin objectives of specializing in foreign exchange business and overseas banking.Banking.23 Crs at that time.Ct. IOB had the unique distinction of commencing business on 10th February 1937 (on the inaugural day itself) in three branches simultaneously . 3. a pioneer in many fields .6.Indian Overseas Bank (IOB) was founded on February 10th 1937.M. Chidambaram Chettyar. by Shri.at Karaikudi and Chennai in India and Rangoon in Burma (presently Myanmar) followed by a branch in Penang.M.
Ranbaxy Laboratories Limited Type Public Founded 1961 Headquarters Key people Gurgaon. It exports its products to 125 countries with ground operations in 46 and manufacturing facilities in seven countries. India Tejendra Khanna.com Ranbaxy Laboratories Limited is an Indian company incorporated in 1961. It is India's largest pharmaceutical company. 3. The CEO of the company is Malvinder Mohan Singh. Chairman Brian Tempest. Chief Mentor.7 CIPLA CIPLA Limited 43 . CEO & MD Industry Pharmaceutical Products Generic drugs Revenue $1.ranbaxy. Ranbaxy went public in 1973. Executive Vice Chairman Malvinder Mohan Singh. It is ranked among the top 10 generic companies worldwide. Haryana.178 billion (2005) Employees 1100 in R&D Website www.
as measured by units produced. Cipla produces an all-in-one pill called Triomune which contains all three substances (Lamivudine. The company was founded in 1935 by Khwaja Abdul Hamied. K. distributed and sold (multinational brandname drugs are exponentially more expensive.cipla. While this sum remains out of reach for many millions of people in 'Third World' countries. 4. the founder's eldest son. so in money terms Cipla's medicines are probably not in top spot). Chairman Industry Pharmaceuticals Revenue Net income Rs. Today (2007). The customary treatment of AIDS consists of a cocktail of three drugs.8 billion (2005) Rs. and its Chairman today is Yusuf Hamied (b. best-known for manufacturing economical anti-AIDS drugs. Cipla is the world's largest manufacturer of antiretroviral drugs to fight HIV/AIDS. 1936).Type Founded 1935 Headquarters Key people Mumbai. 24.com Cipla founded as The Chemical. 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. Industrial & Pharmaceutical Laboratories is a major Indian pharmaceutical company.000 (and beyond) to around $300 per year. Hamied (CMD). India Y. something difficult elsewhere because the three patents are 44 . Cipla ignores foreign patents on these drugs where no Indian law is broken in the process.1 billion (2005) Employees ??? Website www. stavudine and Nevirapine).
with the name Duovir-N. 3.8 DABUR 45 . One more popular fixed dose combination is there.held by different companies. Zidovudine and Nevirapine. This contains Lamivudine.
It is most famous for Dabur Chyawanprash and Hajmola. Barman Industry Health Care. Food Products Dabur Amla. Burman in 1884 as a small pharmacy in Calcutta (now Kolkata). West Asia. In two years the growth rate expected by them to change two folds.b does toxicology tests and markets ayurvedic medicines in a scientific manner. West Bengal. Hajmola & Real Revenue Rs 1375. India. Dabur has a turnover of approximately Rs. near the Indian capital of New Delhi. 46 . BSE) Founded 1884 Headquarters Ghaziabad Key people V. Burman.T all over the country therein opening a new market. The company. and is now led by his greatgrandson V.com Dabur India Limited is the fourth largest FMCG Company in India with interests in Health care.03 crore Website www. with brands like Dabur Amla. Dabur operates in more than 5 countries and has sales worldwide. The company headquarters are in Ghaziabad. The company was founded by Dr. Uttar Pradesh. Dabur Chyawanprash. Dabur Chyawanprash. as well as exports to Australia. They have researched new medicines which will find use in O. India. Personal care and Food products. schools and call centers. 19 billion (approx. Vatika.K. Hospitals. S. where it is registered.Dabur Type Public (NSE. Their growth rate rose from 10% to 40%. Dabur has manufacturing operations in India. Africa and Europe. Hajmola & Real. Africa and the United Arab Emirates. C. US$ 420 million) during the fiscal year 2005-2006. Vatika. through Dabur Pharma Ltd.dabur.C.
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. In 47 . a subsidiary of Dabur India is expecting to grow at 25%. Dabur foods mainly supplied beverages to institutional customers.12 billion. 3. has project sales of Rs 100 crore in next three years.
Business Sun Pharma brands are prescribed in chronic therapy areas like cardiology. live longer" Website www.. neurology.com GlaxoSmithKline plc (LSE: GSK NYSE: GSK) is a British based pharmaceutical. Chief Executive Julian Heslop. GSK is a research-based company with a wide portfolio of pharmaceutical products covering anti-infectives. and healthcare company.1996.com/products Revenue Net income £23.S. central nervous system (CNS).gsk. United Kingdom Key people Sir Chris Gent.gsk.728 (2005) Slogan "Do more. 3. London. Chairman Jean-Pierre Garnier. Chief Financial Officer Industry Pharmaceutical Products www. and respiratory. Detroit-based Caraco Pharm Labs. by merger of Glaxo Wellcome and Smith Kline Beecham Headquarters Brentford. psychiatry.2 billion (2006) £7. gastroenterology.8 billion (2006) Employees Over 100. The same year the company also acquired Dadha Pharma in Tamil Nadu. gastro-intestinal/metabolic. oncology and vaccines products. feel better. Sun Pharma acquired the U. diabetology.10 GLAXOSMITHKLINE GlaxoSmithKline Type Public (LSE: GSK NYSE: GSK) Founded 2000. biologicals. respiratory. It also 48 .
nutritional drinks and over the counter (OTC) medicines 49 .has a Consumer Healthcare operation comprising leading oral healthcare products.
CHAPTER 4 DATA ANALYSIS AND INTERPRETATION Table 4.1 ANALYSIS OF ICICI BANK Date X Y X2 XY 50 .
347 -0.175 5.658 -1.366 3.3806 26.482 -2.3124 0.3990 53.82 -0.139 -2.56 Source: Secondary Data β = n * Σxy – Σx .098 1.612 1.101 3.389 Σy = 1.678 0.329 -2.13* 1.402 -1.979 0.143 0.497 0.4329 1.6972 0.5432 0.781 -1.-9.630 1.5299 0.546 1.0403 37.875 0.314 0.297 -24.13 1.924 Σx = -7.138 -7.269 0.192 -1.343 -6.13) 2 = 851.482 -0.098 1.916 -0.56 .271 16. Σy n Σ x2 – (Σx)2 = 21*40.591 -0.7693 1.427 0.952 -0.780 -1.9063 0.057 17.7312 0.8537 Σ x2 = 163.330 -0.595 -1.2222 14.337 21* 163.8032 0.329 0.152 -1.724 -0.532 51 .76 .2410 0.532 21.291 2.-7.201 -0.7662 5.225 -0.546 0.791 -1.453 4.892 -0.737 0.728 0.1823 0.963 4.326 -0.167 -2.3540 1.98 0.8225 2.1586 6.090 2.409 -0.145 3.7693 – (-7.850 1.2323 0.1603 6.359 Σxy = 40.337 3.835 0.831 4.01-03-2007 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.
292 3388.314 = 0.3439. Since the beta value is less than one. ICICI futures are less volatile. Therefore investment in ICICI futures is less risky. 52 .254 Table 4.1 shows the beta value of ICICI futures and Nifty futures.836 = 861.15 – 50.
673 3.02 Source: Secondary Data β = n * Σxy – Σx .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 -0.485 10.223 -5.515 -2.132 15.295 5.034 -0. Σy n Σ x2 – (Σx)2 53 .363 5.378 -3.702 38.907 0.008 -3.014 23.333 -3.394 22.259 Σy = 18.204 12.614 1.919 12.350 9.760 -2.906 -6.365 20.095 13.770 -3.613 2.333 X2 .588 -4.181 3.538 4.901 1.028 1.943 -0.615 -0.211 3.361 Σ x2 = 229.087 -1.250 27.232 12.474 0.985 6.849 0.865 -0.155 Σxy = 592.931 -3.25 15.593 0.078 -0.937 3.392 0.601 Σx = -7.214 -0.483 19.905 1.490 11.388 6.Table 4.381 -0.896 -2.249 13.452 11.048 -0.604 2.391 1.216 5.874 1.354 -3.8208 42.923 3.369 -3.931 0.50 -3.18 XY -3.004 -1.475 8.751 5.355 8.007 3.088 13.377 44.864 1.508 7.108 11.134 3.249 3.202 1.682 Y 3.505 2.
218 54 . 2.= 21*592.78 – 59.705 X2 .268 -0.175 0.275 5. Corporation Bank futures are highly volatile.458 -0. There fore investment in Corporation Bank is high risky.e.767 = 2.880 0.-140.164 53.313 2.338 -5.574 2.831 -0.380 1.697 1.492 -4.488 10.395 -0.013 = 12573.329 5.607 0.500 0.559 2. Since the beta value is more than one i.658 -0.02 .404 3.574 3.671 6.361 1.303 1.552 2.349 6.790 27.113 -1.396 25.538 -0.644.310 Y 2.-7.212 -7.644 Table 4.096 1.2 shows the beta value of ICICI futures and Nifty futures.333 21* 229.808 -1.084 0.271 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 0.952 -2.682) 2 = 12432.299 -2. Table4.490 -4.747 4.009 1.836 0.834 4812.307 -0.076 -3.42 .682 * 18.18 – (-7.526 -1.501 4.254 4753.268 1.170 2.096 XY -0.
79* -12.248 .083 9.677 1.179 -0.140 -1.389 -1. Σy n Σ x2 – (Σx)2 = 21* 90.000 -0.326 3.607 -1. IOB futures are less volatile. 55 .-8.062 9.03 – (--8.20-03-2007 21-03-2007 22-03-2007 23-03-2007 26-03-2007 28-03-2007 29-03-2007 30-03-2007 3.919 2.652 13.37 = 0.663 7.578 2821.017 11.408 -3.-105.463 2.79 2.299 2.337 3.204 -3.315 0.248 Source: Secondary Data β = n * Σxy – Σx .63 – 77.214 -4. There fore investment in IOB futures is less risky.902 4.077 Σy = -12.634 Table 4.208 .959 -1.812 2.63 2898.017 21* 138.093 3.802 Σ x2 = 138. Since the beta value is less than one.26 = 1789.00 0.126 -3.3 shows the beta value of IOB futures and Nifty futures.418 -2.129 Σxy = 90.117 0.455 -0.674 Σx = -8.368 1.79) 2 = 1895.
267 -4.113 -1.492 -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 1.25 5.344 -2.051 14.214 -4.836 0.377 7.982 18.965 -6.832 -3.Table 4.957 28.474 0.088 Source: Secondary Data 56 .717 5.232 4.315 0.792 15.953 0.414 X2 1.552 2.989 XY 3.431 -1.076 -3.490 -4.015 -0.395 -0.814 0.312 0.204 -3.330 9.952 -2.020 12.717 5.902 4.168 6.333 0.170 2.091 -2.538 -0.072 1.928 -0.088 1.791 -1.909 3.077 Σy = -11.939 -0.114 0.620 Σ x2 = 165.968 0.651 42.005 1.257 2.485 -0.122 8.626 -0.145 0.831 -0.781 -4.018 1.658 -0.759 .074 5.190 4.500 -2.705 2.060 Σxy = 133.463 2.126 -3.788 Σx = -18.036 3.661 Y 2.619 5.625 1.418 -2.870 7.321 2.733 18.920 6.060 0.711 19.468 -0.443 -0.006 4.078 -2.787 2.605 24.
356 XY 20.769 – 348.848 .852 3137.823 X2 12.-212.5 ANALYSIS OF PUNJAB NATIONAL BANK Date 01-03-2007 02-03-2007 05-03-2007 06-03-2007 07-03-2007 X 3.020 3.832 Y 5.105 3.088 .719 1.661) 2 = 2794. the Syndicate bank futures are less volatile and the investment in syndicate bank futures is less risky.492 1.680 72.694 50.984 0.414 21* 165.130 3.-18.362 6.23 = 2581.114 3.697 28.563 -7.β = n * Σxy – Σx .989 – (-18.738 -1.119 8.539 = 0.996 3485.801 -1. Σy n Σ x2 – (Σx)2 = 21* 133.4 shows the beta value of Syndicate Bank futures and Nifty futures.809 -3.339 57 .661* -11.822 Table 4. Since the beta value is less than one in the month of March. Table 4.
Σy n Σ x2 – (Σx)2 = 21* 134.953 -1.067 4.265 3.391 0.435 2.453 -0.435 2.899 Source: Secondary Data β = n * Σxy – Σx .394 -3.472 = 2681.879 – 151.198 -1.873 – (16.579 3.899 – 16.053 3.447 3.173 29.811 -1.069 -1.873 2.948 Σy = 8.955 10.955* 8.336 3.041 0.271 1.566 27.157 1.696 5.961 2.929 2.001 -1.240 -3.239 -.028 Σ x2 = 250.168 Σx = 16.052 -2.206 0.825 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 1.322 1.316 2.732 -2.934 0.861 = 0.955 1.606 -1.538 58 .580 1.143 0.768 -1.905 3.920 -0.778 1.158 4.198 0.333 – 287.195 0.093 0.656 24.859 5.111 0.159 Σxy = 134.980 3.929 21* 250.489 11.391 5268.103 1.814 1.534 -1.955) 2 = 2832.669 12.488 4980.721 -1.238 6.448 8.096 14.857 2.085 0.863 -0.
299 -1.472 -2.942 -1.294 0.5 shows the beta value of Punjab National Bank futures and Nifty futures.343 -1.266 3.710 -5.175 0.636 29.132 0.Table 4.997 -0. Table.213 15.443 51. Since the beta value is less than one.667 0.156 0.666 -7.830 1.793 5.062 volatile and investing in Punjab National Bank futures is less risky.329 0.503 0.485 -0.151 0.660 -0.278 -2.957 1.260 -0.336 0.548 Y 1.926 X2 0.226 -1.316 -1.514 0.803 ΣX2=174.295 -0.469 0.394 2.645 26.657 1.024 27.942 6.328 -0.446 -0.059 0.381 5.524 0.475 -5.189 3.098 0.786 3.178 -0.260 -1.387 2. 4.83 XY -0.259 0.673 0.047 -0.189 15.858 2.696 ΣY=-0.934 ΣXY=132.176 -1.201 0.227 0.380 -1.664 1.6 RANBAXY Source: Secondary Data 59 .236 2.866 8.976 27.580 5.803 2. 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 -0.397 -0.089 1.125 0.343 ΣX=-8.503 3.363 0.689 20.887 1.473 36.655 0.031 5.063 -1.830 -4.798 5.096 -3.353 1.704 4.
it is less volatile and investing in Ranbaxy futures is less risky.915 3671.302 – 7.β = n * Σxy – Σx .548) 2 = 2773.548 * -0.83 – (-8. Since the beta value is less than one.7 60 .068 = 2765.768 Table 4. Σy n Σ x2 – (Σx)2 = 21*132.387 3598.6 shows the beta value of Ranbaxy futures.362 = 0.062 .926 21* 174.43 – 73.-8. Table 4.
368 -4.358 2.390 -2.697 -0.294 0.427 -0.357 -0.738 * -0.974 2.230 0.071 0.316 -1.252 -0.687 3.228 XY 4.667 -1.738 Y 1.672 0.739 -3.204 2.689 -0.381 5.719 -0.392 0.744 0.176 -1.473 1.008 0.957 1.062 -1.630 -0.131 2.088 3.114 1.770 ΣXY= -19.445 2.165 -0.047 -0.155 -0.486 0.94 X2 14.261 -0.492 7.710 -5.676 4. Σy n Σ x2 – (Σx)2 = 21*-19.031 5.093 0.353 -3.655 0.193 0.068 0.328 -0.362 -1.SUNPHARMA Date 01-03-2007 02-03-2007 05-03-2007 06-03-2007 07-03-2007 08-03-2007 09-03-2007 12-03-2007 13-03-2007 14-03-2007 15-03-2007 16-03-2007 19-03-2007 20-03-2007 21-03-2007 22-03-2007 23-03-2007 26-03-2007 28-03-2007 29-03-2007 30-03-2007 X 3.981 ΣX= 6.737 0.020 0.847 Source: Secondary Data β = n * Σxy – Σx .219 11.466 -2.261 -1.023 0.005 -0.701 -3.096 -3.848 ΣX2= 77.696 ΣY= -0.481 -0.020 -7.051 0.024 0.447 -0.496 0.847 – 6.660 -0.475 -5.171 -0.773 0.149 8.152 0.94 61 .189 3.329 0.831 2.543 0.553 0.423 3.743 -11.626 -0.962 -0.007 15.948 7.
387 -3.525 -0.022 2.152 -2.472 12.803 4.336 1621.573 -3. this shows that when the market return of the futures is increasing its stock value is coming down.121 -1.21* 77.054 Y -0.049 1.382 -3.500 X2 9.025 3.956 2.738) 2 = -416.703 2.404 -2.663 12.101 1.7 shows the beta value of Sun Pharma’s futures.626 25.-6.678 5.451 1576.089 0.257 -1.173 1.816 -2.751 0.40 = -410.433 -2.870 0.038 13.957 4.131 2.474 11.489 0.542 XY 1.26 Table 4.146 11. Table 4.356 -5.572 10.572 1.090 1.228 – (6.011 -1.8 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 -3.388 = -0.635 62 .787 .161 -0.297 -0.592 -1.554 10.911 -2.756 0.631 8.151 5.428 -0.946 -2.152 -0.223 -1.718 -4.218 -3.453 -1.666 4. Since the beta value of this future is negative.788 – 45.446 0.173 0.256 0.988 -3.
907 10.465 Table 4.84 9.267 = 0.771 16.559 ΣXY= 74.825) 2 = 1566.687 -2.047 – 219.22-03-2007 23-03-2007 26-03-2007 28-03-2007 29-03-2007 30-03-2007 3.362 1.780 = 1420.086 3.349 -4.210 1.825 * -9.-14.510 -1.068 1.212 3. Σy n Σ x2 – (Σx)2 = 21*74.311 -1.516 – 145. Since the beta value is less than one.001 2.596 Source: Secondary Data β = n * Σxy – Σx .84 21* 155. it is less volatile and the investment in Dabur futures is less risky.001 2 ΣX = 155.412 2.193 ΣY= -9.314 2.907 – (-14.942 -4. 63 .638 3054.825 3.467 -1.023 4.845 6.596 .184 19.027 9.359 ΣX= -14.8 shows the beta value of Dabur futures and Nifty futures.878 3274.725 2.
401 0.845 10.271 -2.416 0.400 1.086 -2.614 0.043 -1.584 -2.384 4.084 XY 5.421 7.259 2.134 2.202 9.345 -5.489 -1.422 2.649 1.228 -2.478 2 ΣX = 126.854 0.324 -0.969 0.066 -1.154 0.818 1.207 2.819 0.970 -2.935 -0.885 0.508 0.254 1.Table 4.390 2.692 ΣX= -7.022 8.907 -0.189 Source: Secondary Data 64 .760 0.108 ΣY= 1.839 -1.872 2.421 2.314 X2 6.334 2.046 0.237 -0.430 2.766 ΣXY= 55.150 2.820 5.609 5.046 -2.624 0.435 -3.901 0.373 1.349 0.322 2.687 1.764 1.961 -1.84 Y -2.096 3.112 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 -2.538 0.312 0.933 9.259 2.820 0.557 -0.507 6.961 -3.731 0.201 -0.392 3.023 6.296 2.446 -0.449 25.823 -0.454 3.147 18.867 8.653 -2.586 -1.189 9.
418 0.84) 2 = 1158.0001 2.120 -2.230 X2 .2 shows the beta value of CIPLA futures and Nifty futures.84 * 1.-7.756 0.691 -0.013 -1. it is less volatile and investing in CIPLA futures is less risky.298 1.10 GLAXO Date 01-03-2007 02-03-2007 05-03-2007 06-03-2007 07-03-2007 X -0.764 – 61. Table 4.46 = 1169.539 -8.452 Table 4.314 21* 126.555 0.015 -1.969 .176 0.930 Y 1. Σy n Σ x2 – (Σx)2 = 21*55.304 = 0.482 3.-10.189 .271 2586.088 -4. Since the beta value is less than one.232 15.302 2647.445 XY -0.β = n * Σxy – Σx .814 1.084 – (-7.030 0.764 65 .
421 1.432 5.807 -1.851 -1.856 * -10.867 -2.944 -0.649 0.237 3.891 0. Σy n Σ x2 – (Σx)2 = 21*-9.507 -1.280 3.624 ΣX= 10.589 0.826 .564 4.0006 2.255 ΣXY= -9.482 -5.052 0.062 1.800 -5.853 = -94.262 -3.724 1.066 4.10.606 -2.392 -3.126 -1.055 2.142 -4.0006 0.002 1.903 0.856 2.437 1.824 -4.706 Source: Secondary Data β = n * Σxy – Σx .189 66 .806 0.552 5.214 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 0.424 3.948 -2.025 0.134 1.621 0.132 2.353 -2.968 2.706 .126 54.138 -1.025 1.052 21* 95.806 1.651 2.637 2 ΣX = 95.557 1.1392 -3.134 -3.403 1.347 0.7015 1877.092 0.1245 1995.192 1.571 1.002 – (-10.458 7.-109.856) 2 = 203.386 0.056 -0.202 2.236 ΣY= -10.042 – 117.235 -3.045 -0.925 1.
05044 Table 4.= -. Since the beta value is negative it shows that when market return increases. CONCLUSIONS & RECCOMMENDATIONS 67 . CHAPTER 5 SUMMARY OF FINDINGS. stock value is coming down.2 shows the beta value of Glaxo futures and Nifty futures.
2.5. Ranbaxy. The financial future plays an important role in NSE Nifty. 3. The futures value of Glaxo & Sun Pharma is negative. In the month of March 2007. Syndicate Bank.1 FINDINGS: The major findings of the study are: 1. Dabur and CIPLA futures are less risky. PNB. investing in ICICI futures. There is relationship with share price movements of the valued of NSE futures. It shows that when the market value is increasing. 4. IOB. 68 . its stock value will come down. The study shows that investing in Corporation Bank futures is high risky.
Indian 69 . They are agreements between two counter parties that fix the terms of an exchange. Syndicate bank. at a specified price. or that lock in the price today of an exchange. to buy or sell a certain underlying instrument at a certain date in the future. 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. In finance. Futures or future contract at transferable specific delivery forward contracts.2 CONCLUSION A financial future is a futures contract on a short term interest rate. which will take place between them at some fixed future date. traded on a futures exchange.5. Corporation bank. A futures contract is a standardized contract.
the investors should be very cautious in investing into those futures. Financial futures can be used to dwarfs the volume in traditional agricultural contracts. Syndicate Bank.3 RECOMMENDATIONS 1. Since the volatility of ICICI futures IOB. 70 . 5. 3.Overseas Bank and Punjab National bank are taken. Glaxo. 2. the investment in Corporation Bank futures is highly risky. 4. Ranbaxy. Dabur and CIPLA futures are less the investors can invest in these futures. Dabur are the companies taken from the pharmaceutical industry. Futures will helps to allow economic agents to fine tune the structures of their assets and liabilities to better suit their risk preferences and market expectations. Cipla. Ranbaxy. In March 2007. PNB. Sun Pharma.
BIBLIOGRAPHY 71 .
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