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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.
Marking-to-market: While forward contracts are settled on the maturity date. This means that the profits and losses on futures contracts are settled on a periodic basis. Price limits are meant to prevent panic buying or selling. asset quantity.• Forward contracts are settled on the maturity date. This means that profits and losses on futures contract are settled daily. whereas futures contract are ‘marked to market’ on a daily basis. and to prevent overreaction to real information. futures contracts are ‘marked to market’ on a periodic basis. 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. 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. Intermediation by the Exchange: In a traded futures contract the exchange interposes itself between the buyer and the seller of the contract. Price limits: Futures exchanges impose limits on price movements of futures contracts. 4 . triggered by rumors. and maturity date.
COMMODITY FUTURES (PERISHABLE COMMODITIES) For pricing futures contracts on the basis of arbitrage. 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. and wheat and orange juice have been in existence for nearly three centuries. storable as well as perishable.or stock index. COMMODITY FUTURES (STORABLE COMMODITIES) Futures contracts on various commodities. but are often defined on an interest rate index such as 3-month sterling or US dollar LIBOR. like gold. rice. Futures price= Expected spot price – Expected risk premium FINANCIAL FUTURES A financial future is a futures contract on a short term interest rate (STIR).FUTURES CONTRACTS: THE GLOBAL SCENE Broadly there are two types of futures: commodity futures and financial futures. while financial futures is a futures contract in a financial instrument like Treasury bond. oil. aluminum. 5 . currency . Futures price= spot price+ present value of storage costsPresent value of convenience yield. cotton. the asset has to be storable. Hence perishable commodities have to be analyzed differently. A commodity futures is a futures contract in a commodity like cocoa or aluminum. Contracts vary. 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.
but not the obligation. 6 . Both parties of a "futures contract" must fulfill the contract on the settlement date. are exchange traded derivatives. then cash is transferred from the futures trader who sustained a loss to the one who made a profit.In finance. Other dollar-denominate short-term interest rate futures. or. or simply futures. the owner of an options contract may exercise the contract. effectively closing out the futures position and its contract obligations. the holder of a futures position has to offset his position by either selling a long position or buying back a short position. etc. The future date is called the delivery date or final settlement date. Futures contracts. The pre-set price is called the futures price. The exchange's clearinghouse acts as counterparty on all contracts. The seller delivers the commodity to the buyer. The Eurodollar contract is the linchpin of the shortend interest rate futures contracts. normally. no comparable contracts exist for other currencies. a futures contract is a standardized contract. converges towards the futures price on the delivery date. To exit the commitment prior to the settlement date. In other words. to buy or sell a certain underlying instrument at a certain date in the future. which differs from an options contract. which gives the holder the right. if it is a cash-settled future. SHORT-TERM INTEREST RATE FUTURES Contract specifications An assortment of contracts. sets margin requirements. The price of the underlying asset on the delivery date is called the settlement price. The settlement price. A futures contract gives the holder the obligation to buy or sell. at a specified price. traded on a futures exchange.
which is a dollar-denominate deposit with a bank or branch outside of the U. a price of 96. 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. Thus.e. Eurodollar deposits differ from domestic term deposits or certificates of deposit in the U.. 7 . at LIFFE in London and at SIMEX in Singapore. The disadvantages of delivery in this case are of two kinds: (i) Eurodollar deposits are non-negotiable and hence delivery would bind the long to a three-month investment. the rate at which a London bank is willing to lend dollars (i.. in that they are not regulated by U. The futures price is quoted as 100 minus the annualized futures 3-month LIBOR (e.S.5% per annum) in decimal terms. Trading of Eurodollar contracts: Eurodollar contracts are now traded at the CME in Chicago. Basic contract specifications: The nominal contract size is $1 million and the underlying rate is the three-month LIBOR. although trading in it only started as recently as 1981. (ii) heterogeneity of bank credits would systematically raise questions on the quality of the delivered asset.S. the offer side of the cash money market).S.Eurodollar futures The Eurodollar futures market is the most widely traded money market contract in the world. authorities and hence are not subject to reserve requirements or deposit insurance premiums. 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). Eurodollar contract trading is de-facto available 24 hours.5 implies a futures LIBOR rate of 3. or with an international banking facility (IBF) located in the U.g.S. It is based on a ninetyday Eurodollar deposit.
We will see that the market forces of arbitrage are used to price virtually all financial futures contracts. all with different maturities and coupons. Because this is more convenient for most futures users than physical delivery. For example. Treasury bond futures contracts allow delivery of any U. T-bond that has at least I.S. few contracts actually go into delivery.Pricing and arbitrage: Implied forward rates In order to understand how futures prices are established.AND LONG-TERM INTEREST RATE FUTURES Contract specifications Deliverable securities: Unlike international bank futures contract. Of course. maturities or underlying asset constitute a straight-forward extension.S. Futures invoice price: When a bond is delivered into the bond futures contract. applications with contracts based on different currencies. All examples drawn below are based on the threemonth Eurodollar contract. bond futures positions can also be unwound prior to delivery by offsetting futures transactions. there may be as many as several dozen securities in the deliverable basket. INTERMEDIATE. 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 . U. 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. Also unlike the T-bill futures contract. bond futures contracts generally allow for a range of bonds to be delivered against them. years remaining to maturity (or to first call if the bond is callable). 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.
there is an arbitrage relationship which holds the prices of the T-bond futures contract to the cash market. a 5year and a 2-year contract. Since 1932. International bond futures contracts. Delivery months on bond futures contacts are quarterly (March. it is the difference in cost between 9 .and long-term interest rate contracts: The U. Since then three futures contracts have been established on U. the last trading date and the last delivery period (one month). The basis. 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. The exchange will also set daily trading hours. September and December).S. Treasury notes: a 10-year. T-bond contract have spread internationally.S.S. T-bond contract are shown in parentheses for illustrative purposes. In other words.S. For illustration purposes. The contract size defines the par amount of the bond that is deliverable into the contract ($100. T-bonds). traded at the CBOT since 1977. the concrete specifications of the U.S.Futures invoice price = futures price conversion factor + accrued interest Other contract terms: Exchanges set other futures contact terms as follows.S. Pricing and arbitrage Cash-futures relationship: Similar to short-term interest rate contracts. Other U.000 for U. It is the delivery option of the short that makes valuing bond futures more complex than valuing international bank (euro) deposit futures. T-bond. medium. the table below lists the main international bond futures contracts. They all have similar characteristics to their forerunner. where they are traded and the description of their deliverable set. June. The basis is the difference between a bond's price and the futures invoice price (as defined above). was the first fut3ureo n long-tern interest rates.
An excessive exposure to intermediate. and (iii) immediately deliver (receive delivery of) the cash bond against the short (long) futures position. Basis arbitrate at futures expiration: At futures expiration. Suppose. Recall that he basic formula is: Hedge ratio = scale factor x basis point value factor x volatility factor The scale factor is the ratio of the notional or principal amount of the asset being hedged and the futures contract size.and long-term interest rates can be offset by buying or selling bond futures contracts.deliver bond in the cash market. we define the gross or raw basis as: Gross basis = dirty cash price .this conversion is performed simply by multiplying the decimal basis by 32. for instance. Accordingly. Otherwise there would be instantaneous risk less profit opportunities. Then one could: (i) buy (sell) the cheapest to.futures invoice price = clean cash price . that the gross basis was negative (positive). 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. Risk management and hedging Basic risk management functions: Bond futures are often used as a vehicle for hedging price risk or duration. (ii) sell (buy) a bond futures contract.(futures price conversion factor) since dirty (or full) price = clean price + accrued interest. The basis point value factor is the ratio of the change in the 10 .buying the bond in the cash market and buying a futures contract on it and having it delivered into the contract at expiration. The basis is generally quoted in 32nds rather than in decimal units . the gross basis must be equal to zero.
Going long the futures is a way of extending duration: it pays when the market is rallying and rates are falling. requires by definition that not all risk be hedged. Playing duration with futures fulfills the same objective as playing the bond market directly. 11 . Outright trading: Bond futures by themselves don't have duration. easy reversibility of positions and low cash requirements. on the contrary. to express a view on market direction. reduces market sensitivity to rate movements and performs well in a bear market. Shorting bond futures. The volatility factor can be set to one if bond futures are used to hedge interest rate risk of roughly the same credit characteristics and in roughly the same yield curve segment. but with the convenience of the futures market in terms of narrow bid/ask spreads. Expressing a market view Types of trades: The third application of bond futures. as was the case with international bank deposit futures. * in combination with other bond futures contracts. can be traded: * outright. But because they track the cheapest-to-deliver bond (driven by basis traders).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. using spreads or butterflies that combine longs and shorts at different points in time or across countries. they contribute dollar duration to portfolios much along the lines of the cash bond. trading on the basis of market views. or * in combination with the underlying (typically the cheapest-to-deliver bond) in what amounts to basis trades. Bond futures.
. average of bilateral rates against the dollar) at the CBOT. GBP.).1so be held for shorter time horizon but then the position is subject to risk at the unwind.e. For instance. 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. Foreign currency futures contracts are available on all major currencies against the dollar (e. 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. and (ii) the evolution of short-term rates. most of which are traded at the CME and at LIFFE. and can be used to take on risk subject to one's views in addition to as an arbitrage play. A basis trade can -. In addition. there are futures on a USD index (i. CURRENCY FUTURES Contract specifications Types of contracts.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. as explained above. 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. In a similar vein. DEM. and in particular whether the cheapest-to-deliver goes on special in the repo market Short-term basis trading is in fact quite complex. there are futures 12 . Finally.g. etc. A short-term basis position financed at an overnight rather than term rate constitutes a bet on basically two things: (i) the level of long-term rates (which determines which bond will be the cheapest-to-deliver since they each have different sensitivity to market rates according to their duration).. CAD. JPY. Basis trading: Trading the basis from the long side is relatively risk less if the position is held to the futures expiration date. AUD. SRF.
the contract should be sold if one expects the yen to appreciate more than what is expected by the market. i.e.. Conversely.. More formally. June. the prices of currency futures are bound by a basic arbitrage relationship with the underlying cash market.e. However. Currency futures against the dollar. As with interest rate futures.e. Contract specifications. by far the most prevalent. in the case of currencies. the difference between forward and futures prices is less important than with interest rates. Futures are a natural instrument to express views on future exchange rate movements. For instance. They tend to require actual delivery. meaning that at futures settlement the long receives the currency of denomination of the future and pays dollars). 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.on crosses. 13 . going long the JPY contract (i. Expressing a market view Outright trading. 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. Pricing and arbitrage: International interest rate parity Overview. bilateral exchange rates between two non-dollar currencies such as on JPY/DEM. September and December. shorting the contract is consistent with an expectation of a yen depreciation relative to the dollar. Conversely. based on number of dollars per unit of foreign currency. 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. tend to have quarterly contracts with delivery in March. Price quotes are on American terms. long yen and short dollars) is consistent with an expectation of an appreciation of the yen relative to the dollar.
This implies that percentage changes in stock indexes do not track total returns on the corresponding portfolio of stocks but. Futures contract specifications: All futures contracts on stock indexes are settled in cash. Moreover. The most common weighting scheme is market value weighting.STOCK INDEX FUTURES Contract specifications The underlying instrument. used for example in both the S&P 500 and NYSE indexes. 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. those indexes constructed using geometric means). Index construction: The weight of a stock in an index is the proportion of the portfolio tracked by the index invested in the stock. stock weighting. Stock market indexes are time series designed to track the changes in the value of hypothetical portfolios of stocks. Stock indexes differ from one to another with respect to the range of stocks covered. any cash dividends received on the portfolio are ignoring when percentage changes in most indexes are being calculated. only price changes. 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 . Physical delivery of stocks against a futures contract based on an index presents intractable difficulties. Though returns on stock indexes of the same country are often highly correlated over time. In other words. Treatment of dividends: Stock indexes are not usually adjusted for cash dividends. The stocks in the portfolio can have equal weights or weights that change in some way over time. 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. and index computation.
Based on a portfolio of 225 of the largest stocks listed on the Tokyo Stock Exchange. The value of one futures contract is GBP 25 times the index.700 American stocks. The value of one futures contract is $500 times the index. Based on a portfolio of 40 of the largest stocks listed on the London Stock Exchange.companies. *CAC-4s0t ock index (MATIF). * Major market index (CME). Based on a portfolio of 20 blue-chip American stocks listed on the NYSE. The value of one futures contract is FRF200 times the index. Based on a portfolio of 500 American stocks. * FT-SE 100 index (LUFFE). 15 . Based on a portfolio of all the stocks listed on the NYSE. following is a list of the main international stock indexes and futures contracts on these indexes: * S&P 500 (CME). * Nikkei 225 stock average (CME). * Value Line futures (KC). The value of one fuLturesc ontact is $5 times the index. Contains the prices of 1. Based on a portfolio of 400 American stocks. The index accounts for 80% of the NYSE. Contracts traded. For illustration purposes. To solve these problems stock index futures contracts are settle in cash and the underlying assets are defined to be an amount of cash equal to a fixed multiple of the value of the index. Based on a portfolio of 40 of the largest stocks listed on the Paris Stock Exchange. * S&P 400 (CME). The value of one futures contract is $500 times the index. The value of one futures contract is $500 times the index. It does not correspond directly to any portfolio of stocks because of its use of geometric averaging. The value of one futures contract is $500 tirmes the index. * NYSE composite futures (NYSE). The value of one futures contract is $500 times the index.
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. 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. attractive prices available on the futures contract. The sale of stock futures against a stock portfolio creates a hedged position with returns very similar to those of a short-term. Index futures can provide a means of cheaper access to such a portfolio. 16 . An interesting example of users of stock futures as hedging vehicles are brokers and dealers in equities.Pricing and arbitrage Like futures on fixed income instruments and currencies. Risk management and hedging Overview. Otherwise arbitrage trades are possible. Creating synthetic index fund portfolios: Futures can be used to create portfolios that have cash flows characteristics similar to an index fund portfolio. by the cash-forward relationship. 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. in other words. or the difficulty of moving funds quickly and on a large scale into and out of particular stocks. fixed-income security. acquiring. stock index futures prices should be related to the underlying cash market by a cost of carry relationship or. 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.
All profits and losses on stock index futures are effectively treated as long-term capital gains and losses. Capitalizing on stock selectivity. Since a deposit of less than 10 percent is required to purchase or sell a stock futures contract. and leave the returns and risk component associated with the company-specific features of the stocks in the portfolio. the different tax treatments of those returns may make it advantageous for some investors to use equity futures. Stock index futures can be used to create portfolios that have cash flows characteristics similar to an index fund portfolio. 17 . 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.Capitalizing on different tax treatment of futures and equities. Expressing a market view Outright trading: Futures are a natural instruments to express views on future exchange rate movements. one can take on a considerable amount of market risk via index futures and reap the reward of being correct in a forecast of the stock market direction. Spreads: A wide range of speculative strategies are possible by mixing stock index futures contracts of different maturities and or different underlying indexes.
The same applies. 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. The purchaser of the option pays a market-determined price (or premium) in order to have the right --but not the obligation-.OPTIONS ON FUTURES Definition and Pricing Definition and types of options. to put options 18 . If the market price of the underlying is below the call option's strike price. 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). the option has exercise value and is said to be in the money. In either case. 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. Conversely. * A put option confers upon its holder the right to establish a short (selling) futures position. There are two types of options on futures: * A call option confers upon its holder the right to establish a long (buying) futures position.to establish the corresponding futures position by exercising the option at some time in the future. if the market price of the underlying is above the option's strike price. "Moneyness" of options. the option has no exercise value and is said to be out of the money. for a call. For example. The key to options is to understand that holding an option represents a right rather than an obligation.
: *Creating asymmetric payoffs on the upside and downside. you let the option expire worthless and pay no more.Futures positions at option exercise: To summarize. the options on futures. There are options on all the types (though not necessarily on all the specific contracts) of financial futures. With a futures position. if exercised. you must pay the daily settlement variation when the price goes against you. There is no downside risk to buying an option. yield the following futures positions: bought call if exercised long futures bought put by the party short futures sold call long the short futures sold put option. The price you pay for having the security offered by an option 19 . Use of options on futures versus use of futures. which is an extension of the Black-Shoes model originally derived for pricing equity options. If the price goes against you. Hedgers and investors might want to use options on futures rather than futures themselves for the following reaso. yields long futures Underlying instruments. Among the most liquid option contracts (and the corresponding exchanges where they are traded) are: *Short-term interest rates: Eurodollars (at the CME) *Longer-term interest rates: US Treasury bonds and notes (at the CBOT) *Currencies: Deutschemarks and Yen (at the CME) *Stock-indexes: S&P500 (at the CME) Pricing models: A commonly used pricing model for options on futures is the Black model.
Some users. if you are willing to accept the risk of an unlimited downside exposure. This makes options on futures easier to hedge dynamically since one does not need to worry about financing of positions in the underlying. Hedging example: floating-rate note issuance. Trading volumes. suppose you are negotiating with a Japanese company for electrical parts. 20 .S. you might consider selling an option and collect the premium upfront. This is due to the fact that futures are leveraged instruments. Options might be suitable if the asset.is the upfront premium. Options on futures can be used instead to insure against adverse interest rate moves. For a fixed price (the option premium).. Futures are not directly affected by changes in market volatility. * Hedging or trading on the basis of market volatility. Thus. In this case. The U. it may pay for the U. The volume traded on options on futures is much larger than on equivalent options on the cash instruments. and interest rate cap (i. Only options allow them to isolate the volatility component on the basis of which they can hedge or trade *Contingent contracts. The Japanese company will decide at the next board meeting.S.e. which takes place in a month. For example. might want to hedge market volatility. whether futures or options on futures are utilized by traders and corporate treasurers depends on their preferences on the risk/reward structure. however. firm to hedge the contingent payable by buying options on yen futures. whether to provide parts at the agreed upon prices. liability or cash flow being hedged is of a contingent nature. 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. corporation will lose its profit margin if the yen appreciates relative to the dollar at the time the Japanese firm agrees to the contract. Conversely. or actually express views on the basis of market volatility.
Futures. Liquidity is provided to a large degree by locals (individuals trading on their own capital) trading in the pit. Over the last decades. futures have become widely accepted by money managers. They are not per se a financing or investment vehicle but rather a tool for transferring price risks associated with fluctuations in asset values. Because they bind buyer and seller for a pre-specified period of time. allow economic agents to fine tune the structure of their assets and liabilities to better suit their risk preferences and market expectations. 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. others to take on risk on the basis of particular market views. explained some of the basics regarding how they are priced. Market liquidity: A market is liquid when traders can buy and sell without substantially moving the price against them.Liquidity and market depth In derivatives markets. We have investigated some of the features of futures contracts. Liquidity typically arises when there are individuals or institutions which continuously wish to buy or sell. Some may use them to spread risk. and derivatives generally. most of the action happens in the future. 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. Economic importance of futures. 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 . financial institutions and corporations and have been successfully integrated into risk Management and yield enhancement strategies. IMPORTANCE OF FUTURES MARKETS Summary. unlike in cash markets.
the volume of financial futures now dwarfs the volume in traditional agricultural contracts. While the following are noteworthy advantages that futures have over forwards. Also. * Futures are relatively inexpensive to execute (negotiable commission rates). Futures' features. 22 . * Futures are bought or sold on margin.components. and as such provide for substantial leverage. In the process. * Prices are determined by a competitive market system (open outcry or electronic bidding). In so doing. it should be noted that our goal is to illustrate how futures can be used effectively as an investment alternative and as a risk transfer mechanism. Without resorting to tedious quantification the astounding growth and importance of derivatives can be illustrated by the fact that the value of exchange-treaded Eurodollar derivatives( futures and options)i s now roughly 13 times the value of the underlying market. they allow not only the reduction or transformation of risk faced by individual investors but also the sheer understanding and measurement of risk. Financial management is quickly becoming an exercise in reducing financials structures into their basic elements and then reassembling them into a preferable structure. Participants know all transaction prices and there are no negotiated deals and no multiple phone calls to get price quotes. Financial futures (along with options) are best viewed as building blocks. The surge in financial futures. derivatives have contributed decisively to the integration of financial markets. *All prices and information are available continuously.
23 . 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. OTC trading allows more flexibility in establishing contract terms and avoids the need for daily monitoring of mark-to-market positions and margin account. The National Stock Exchange has a stock index futures contract based on S&P CNX Nifty Index. The National Stock Exchange and the Bombay Stock Exchange have introduced futures on individual securities. On the other hand. The Bombay Stock Exchange has a stock index futures contract based on Sensex. Futures on Individual Securities Futures on individual securities were introduced in India in 2001. Stock Index Futures The National Stock Exchange and the Bombay Stock Exchange have introduced stock index futures.*Positions are easy to reverse if the opinion about market conditions and prospects changes. *Counterparty credit risk of non-performance is negligible. *Audit systems and safeguards enforced by regulatory authorities. Both the type of equity futures are available in India. 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.
US Treasury Bills. Eurodollar deposits. The volume of trading in financial futures dwarfs the volume in traditional agricultural contracts.1.” Eg: Financial futures. Many kinds of futures instruments have been developed and the use of futures has received a great deal of attention. but it is a tool for transferring price risks associated with fluctuations in asset values. During the last decades the financial products into their basic components. Futures are not only a financing or investment vehicle.2 SUBJECT BACK GROUND FOR THE STUDY Futures market plays an important role in the world of finance. S&P index etc… Generally futures allow economic agents to fine-tune the structure of their assets and liabilities to suit their risk preferences and market expectations. 24 . currency or stock index. “A financial futures in a futures contract in a financial instrument like treasury bond.
3. Financial futures play a prominent role in risk management.1.3 NEED FOR THE STUDY The needs for the study of financial futures are: 1. Financial futures have become the corner stone of financial management. 4. Futures are relatively in expensive to execute. financial institutions and corporations have been successfully integrated into risk management and yield enhancement strategies. 6. Futures have been a key instrument in facilitating the modern trend of separating conventional financial products into their basic components. 2. Futures have facilitated the modern trend of separating conventional financial products into their basic components. 5. 25 . Futures have become widely accepted by money managers.
Research Design is the basic frame work which provides the guidelines for research. The research design specifies the method for data collection analysis. There are mainly two methods of collecting data, primary and secondary data collection.
2.2 STATEMENT OF THE PROBLEM
Trading on options give lot of volatility to futures market. Futures markets becomes at times unpredictable compare to SENSEX/NIFTY movements. The researcher feels an indepth study in this area, the price movements of futures with respect to SENSEX or nifty is imperative.
2.3 REVIEW OF LITERATURE
Basic futures contract design Definition. A futures contract is a commitment to buy or sell a fixed amount of standardized commodity or financial instrument at a specified time in the future at a specified price established on the day the contract is initiated and according to the rules of the regulated exchange where the transaction occurred. Once the trade clears, the buyer and corresponding seller of the futures contract are not exposed to each other's credit ri3k. Rather, they individually look to the clearinghouse for performance, and vice versa. Futures as a derivative security. A futures contract is a financial derivative of the commodity on which it is based in the sense that it is an arrangement for exchanging money on the basis of the change in the price or yield of some underlying commodity. Timing of cash and commodity flows. Like other derivative securities, futures contract is an agreement to do something in the futures -- no goods or assets are exchanged today. A cash market transaction involves an agreement between two counterparties to buy or sell a commodity for cash today (perhaps for delivery in a couple of days). In a forward 27
market traction, delivery and settlement of the commodity for cash will occur at a single future date with no intervening cash flows. In afitres market transaction, delivery and settlement will also occur at a single future date but there will be daily (or more frequent) cash flows reflecting intervening price movements in the underlying commodity. Value of futures contracts at the time of contracting. Since there is no exchange of neither commodities nor cash payments at the time of contracting of futures contracts, such contracts must have a zero net present value at their inception. Value of futures contract as spot price changes. Once the futures contract is entered into, subsequent movements in the (spot) market price of the commodity create value for either the long futures position (i.e., the buyer) or the short futures position (i.e., the seller). For instance, a rise in the spot price of the commodity will benefit the long as he has bought the commodity under the futures contract at a fixed price and can now expect to sell it in the future at a higher price in the spot market. But since the long will not realize this gain until the settlement of the futures contract, this creates a credit exposure to the extent of the net present value of the futures contract. The futures contract will now be a positive net present value investment for the long and an obligation for the short.
Closing a futures position. A futures position can be closed out before expiration of the contract by entering into an offsetting trade in the same contract for the samne amount.. Under physical delivery, investors that are long the contract must deliver to investors short the contract the underlying commodity of the contract according to the rules on commodity quality and timing established by the exchange.. The determination of the price of the commodity at expiration on which cash settlement amounts are calculated (the final settlement price) is made by the exchange under pre-specified rules. Types of underlving_instruments. Underlying every futures contract is a relatively active cash market for an asset or good. Futures contracts were traditionally based on standard physical commodities such as grains (corn, wheat, soybeans), livestock (live cattle and hogs), energy products (crude oil, heating oil) or metals (aluminum, copper,
Contract terms. pound (against the dollar or crosses) Equity indices: S&P500. Credit exposure. NYSE Composite. contracts tend to be offered on standardized terms in terms of maturity. Over the last two decades. B. deutschemark. softs (coffee. The margin requirements on futures contracts make them sufficiently immune to credit risk so that credit exposure is not a significant factor in pricing.. and Treasury bills. In forward markets cash changes hands only on the forward date In futures markets. such as those based on: Money market interest rates: certificates of deposit. offshore or euro-deposits (e. there are futures on several commodity indices (like the CRB and GSCI). quantity and quality of the underlying to be delivered. the time and place of delivery. Forward vs. Forward contracts will trade on the basis of price and credit characteristics of the counterparty. In addition.gold). contract size. sugar. futures based on financial commodities have flourished. Bonds and notes: Treasury securities.LIBOR-based). For this reason. This serves to reduce credit exposure to intraday price movements Tradability. In futures contracts.. This makes futures contracts particularly well suited for trading in organized exchanges. The buyer and the seller both have 29 . To ensure the liquidity of exchange-traded futures markets. gains and losses are settled daily in the form of margin payments. margining requirements and trading hours. the method of payment. among other characteristics. Nikkei 225.g. 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. Currencies: yen. forward contracts tend to be traded in over-the-counter (OTC) markets. cocoa). Cash flows and margining. the clearing house members and the clearinghouse itself guarantee fulfillment of futures contracts.
Expressing market views. FINANCIAL FUTURES: USES AND USER Uses.. Regulation. there is no formal regulation of forwards nor is there a body to handle customer complaints. Hedging can be performed on a single tansaction (or instrument) basis or on an aggregate (portfolio or firm) basis." to put it in more blunt terms). whether these are fimdamental (i. Financial futures can be used as devices for: (i) arbitrage or yield enhancement. Examples of related derivatives are interest rate swaps and interest rate futures. (ii) risk management and hedging. should not) be fully hedged. based on observed short-term price movements). Financial futures are an efficient way of taling bets on the market on the basis of traders' views. 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.e. and futures on three-month LIBOR and on one-month LIBOR By isolating each characteristic of some underlying security with a derivative instrument. are regulated by identifiable entities which are either governmental (like the Commodity Futures Trading Commission in the U. 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. Since forwards are a bilaterally negotiated agreement.e.. and (iii) taking trading positions on the basis of market views (or "speculating. Such trades by definition cannot (indeed. 30 . arbitrage. driven by economic conditions and trends) or technical (i. Risk management.an exposure to the clearing house (and the clearing house to them). all arbitrage risk can be eliminated. rather than to each other. on the other hand. Examples of single transaction hedging might include anticipatory hedging for debt or equity security issuance or currency hedging for foreign trade transactions. Exchangetraded futures.) or set up by the industry itself.S.
fund managers and insurance companies will use futures for their thrc:. Unlike pure arbitrage. including municipal and state organizations and foundations are more likely to use them to hedge their commercial. Users. Non-financial corporations.. WORLD FUTURES EXCHANGES Exchanges are formal organizations whose purpose is to concentrate order flow in order to facilitate competition and to reduce transaction costs involved in searching for counterparties. the timing of expected market movements. commodity quality or cross-country differences). or a combination of these. The principal financial futures exchanges in the world are: Chicago Mcrcantile Exchange (CME. changes in the spread between market segments (e. Futures can be used to express views on general market direction. or the "Merc") Chicago Board of Trade (CBOT) Tokyo International Financial Futures Exchange (TIFFE) Tokyo Stock Exchange (TSE) London Intemational Financial Futures and Options Exchange (LIFFE) Marche a Terme International de France (MATIF) in Paris Singape-e Interational Monetary Exchange (SIMEX) Deutsche Terminborse (DTB) in Frankfurt New York Futures Exchange (NYFE) Mercado Espafhol de Futuros y Opciones Financieras (MEFF) in Barcelona 31 . investment banks.basic functions. brokerage firms.although trade construction might be such as to immunize particular kinds (or dimensions) of risk. credit. including commercial banks. expressing market views is not riskless. Financial institutions. investment or borrowing activities. Individuals and locals a:e more likely to use them for speculation and arbitrage.g. The users of financial futures are naturally given by their uses.
2. journals. Secondary data is mainly used for the study. 2. The results cannot be generalized.7 TOOLS FOR DATA COLLECTION Secondary Data: It is collected from books. 2. 32 . 2.. Five companies from Banking and five from Pharma industry are taken for the study. internet.4 OBJECTIVES OF THE STUDY • • • To study on the financial futures with reference to NSE Nifty.6 RESEARCH METHODOLOGY This study entitled ‘A study on the role of Financial Futures with reference to NSE Nifty is mainly done in Banking and Pharmaceutical industry. magazines etc. To study the amount of risk of Financial Futures of NSE in the month of March with reference to Banking and Pharmaceutical industries.5 SCOPE OF THE STUDY: This study is done mainly under the ten companies of NSE Nifty. To study the volatility of futures with reference to Banking and Pharmaceutical industries.
8 METHOD OF ANALYSIS The formula used for calculation are: β = n * Σxy – Σx .2.9 LIMITATIONS OF THE STUDY Time constrains Geographical constraints This is restricted to Banking and Pharmaceutical Industry 33 . Σy n Σ x2 – (Σx)2 X = market return For calculating ‘x’ the NSE share price is taken. 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.
Conclusion and Recommendations. review of literature.10 CHAPTER SCHEME Chapter 1: Introduction deals with the introduction to futures. Glaxo and Sun Pharma. Dabur. scope of the study and about the methodology used by the study. Punajb National Bank. Chapter 2: Research Design deals with the statement of the problem. Corp Bank. Syndicate Bank. Chapter 3: It deals with the Company Profiles of ICCI Bank. Ranbaxy.2. IOB. subject background of the study and need for the study. Chapter 4: This chapter deals with the Analysis and Interpretation of Data Chapter 5: It gives the Summary of Findings. objectives. 34 . CIPLA.
CHAPTER 3 PROFILE OF COMPANIES 35 .
Chanda Kochhar Loans. the Stock Exchange. Credit Cards.3. Savings.V.Kamath. K. Mumbai India N Vaghul.79 billion www.1 ICICI BANK ICICI Bank Type Founded Headquarters Private BSE & NSE:ICICI. life and non-life insurance. ICICI Bank Towers. a network of over 619 branches and offices. ICICI Bank offers a wide range of banking products and financial services to corporate and retail customers through a variety of delivery channels and through its specialized subsidiaries and affiliates in the areas of investment banking. ICICI Bank has total assets of about USD 56 Billion (end-Mar 2006). Investment vehicles. NYSE: IBN 1955 (as Industrial Credit and Investment Corporation of India) ICICI Bank Ltd. Mumbai and the National Stock Exchange of India Limited and its ADRs are listed on the New York Stock Exchange (NYSE).icicibank.. SBI Life (Insurance) etc. Nachiket Mor. USD 5. and about 2400 ATMs. venture capital and asset management.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. ICICI Bank's equity shares are listed in India on stock exchanges at Kolkata and Vadodara. 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 . Bandra Kurla.
often at concessional rates. before SBI caught up with it. Singapore and Canada. credit cards.ICICI Bank which undertook normal banking operations . It has tie-ups with major banks in the US and China. The experiment was so successful that ICICI merged into ICICI Bank ("reverse merger") in 2002. as they are known in India) on its books . It acquired a small bank in Russia recently. there has been a general revival in Indian industry (and metal based industry in particular). The bank is expanding in overseas markets. The bank is aggressively targeting the NRI (Non Resident Indian) population for expanding its business. 37 .ICICI was established by the Government of India in the 1960s as a Financial Institution (FI. These funds were deployed in large corporate loans. All this changed in 1990s. Hong Kong. It has operations in the UK. Since 2002. ICICI bank now has the largest market value of all banks in India. It is widely believed that the proportion of NPAs has come down to prudent levels (even if it were high earlier). ICICI Bank is the largest issuer of credit cards in India . and is widely seen as a sophisticated bank able to take on many global banks in the Indian market. and nor was it required to comply with Indian banking requirements for liquid reserves.taking deposits. ICICI was not a bank .in particular to the steel industry. At the time of the reverse merger. other such institutions were IDBI and SIDBI) with the objective to finance large industrial projects.It was the first bank to offer a wide network of ATM's and had the largest network of ATM's till 2005.it could not take retail deposits. ICICI Bank now has the largest market share among all banks in retail or consumer financing. there were rumours that ICICI had a large proportion of Non Performing Loans ("NPA". ICICI borrowed funds from many multilateral agencies (such as the World Bank). car loans etc. ICICI founded a separate legal entity .
S. Investment vehicles.Gupta Banking Insurance Capital Markets and allied industries Loans. The Government of India nationalized the bank. USD 2. is the second largest public sector commercial bank in India with about 4500 branches and offices throughout the country.2 PUNJAB NATIONAL BANK Punjab National Bank Type Founded Headquarters Key people Industry Public (BSE. established in 1895 in Lahore by Lala Lajpat Rai. Savings. 1969. India Chairman and M. along with 13 other major commercial banks of India. 38 . NSE:PNB) Lahore.the name you can BANK upon www. Credit Cards.PNBIndia.C..32 billion (2005) .D.3. on July 19.com Products Revenue Slogan Website Punjab National Bank (PNB). 1895 (British India) New Delhi.. Mr. Insurance etc.
in/ Key people Industry Products Revenue Slogan Website Syndicate Bank. Karnataka India & Corporate Office Bangalore Chairman C P SWARNKAR Banking. The first branch of the bank started its operations in the year 1928 at Brahmavar in Dakshin Kannada District. was nationalized on 19th July. USD bil Faithful and Friendly (English) & Viswasaneeya Hitheshi (Sanskrit) syndicatebank. established in 1925 in Udupi (Karnataka state.3 SYNDICATE BANK Syndicate Bank Type Founded Headquarters Public (BSE & NSE) Udupi. 1969. the bank was known as Canara Industrial and Banking Syndicate Limited. By 1937 it had secured its membership as a Clearing House at Mumbai.Capital Markets and allied industries Loans. Pai. by the Government of India. India) by Upendra Ananth Pai. The bank. Bajaj Allianz Life Insurance (Insurance) etc. A. Savings.Insurance.3. 80. along with 13 other major commercial banks of India. The primary objective of business was to extended financial assistance to local weavers. Manipal.000. Credit Cards. The business started with a capital of Rs. Vaman Kudva and Dr. is one of the oldest and major commercial bank of India. Initially the bank collected as low as 2 annas from the door steps of the depositors daily through its agents. Investment vehicles. 39 . T. At the time of its establishment. 1925 (as Canara Industrial and Banking Syndicate Limited) Head Office. M.
Mangalore Stock Exchange and Bangalore Stock Exchange. in Muscat (1984). Delhi.This type of system where in the agents of the bank come doorsteps to collect deposit is still prevailing in India and is referred as Pigmy Deposit Scheme. Syndicate Bank sponsored the first regional rural bank in India by name Prathama Grameena Bank. The stocks of the Syndicate Bank are listed on Bombay Stock Exchange. From 1953-1964.4 CORPORATION BANK CORPORATION BANK 40 . It took over Al Shabei Finance and Exchange Co. National Stock Exchange. The bank expanded its operations not only on the domestic front but also overseas. in Doha (1983) and Musandam Exchange Co. Currently it has over 1900 branches. 20 banks merged with the Canara Industrial and Banking Syndicate Limited this included the Maharastra Apex Bank Limited and Southern India Apex Bank Limited. The 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. 3. By 1989 it opened its 1500th branch at Hauz Khas.
India. and operates from several branches in India. Rs 862. CORPORATE OFFICE .5 INDIAN OVERSEAS BANK IOB 41 .Type Founded Headquarters Public (BSE. Savings. NSE:CORPBANK) Udipi.17% of Share Capital held by the Government of India. The Bank came out with its Initial Public Offer (IPO) in October 1997 and 37. Credit Cards. etc. The bank has the distinction of the first Indian bank to publish its financial results (199899) conforming to US GAAP. Mangaladevi Temple Road Pandeshwar Mangalore 575 001 India Chairman B. Sambamurthy Banking Loans.27 Crore (2006) A Premier Government of India Enterprise www.176 full time employees. has currently (31 March 2004) 10. 3.corpbank. The bank was founded with an initial capital of Rs.83 crore (2006) Rs 100.com Key people Industry Products Revenue Net income Slogan Website Corporation Bank. Karnataka state. 1906 Corporation Bank.92 crores as on 31 March 2005. 054. Investment vehicles. founded in 1906 in Udupi.3. The Bank is a Public Sector Unit with 57.87% of Share Capital is presently held by the Public and Financial Institutions. and first day’s canvassed resources of less than one USD 1. The Bank’s Net Worth stood at Rs. 5000 (USD 100). is one of the Indian banks in public sector.
6 RANBAXY LABORATORIES 42 . Insurance and Industry with the twin objectives of specializing in foreign exchange business and overseas banking.64 Crs and Advances at Rs.Banking. a pioneer in many fields . Deposits stood at Rs. Chidambaram Chettyar.23 Crs at that time.3.Ct. IOB had the unique distinction of commencing business on 10th February 1937 (on the inaugural day itself) in three branches simultaneously .6.at Karaikudi and Chennai in India and Rangoon in Burma (presently Myanmar) followed by a branch in Penang.M.Indian Overseas Bank (IOB) was founded on February 10th 1937. by Shri.M. At the dawn of Independence IOB had 38 branches in India and 7 branches abroad. 3.
The CEO of the company is Malvinder Mohan Singh.com Ranbaxy Laboratories Limited is an Indian company incorporated in 1961. Haryana. Chairman Brian Tempest. Chief Mentor.178 billion (2005) Employees 1100 in R&D Website www. CEO & MD Industry Pharmaceutical Products Generic drugs Revenue $1. India Tejendra Khanna. It is ranked among the top 10 generic companies worldwide. Executive Vice Chairman Malvinder Mohan Singh.7 CIPLA CIPLA Limited 43 .ranbaxy.Ranbaxy Laboratories Limited Type Public Founded 1961 Headquarters Key people Gurgaon. It exports its products to 125 countries with ground operations in 46 and manufacturing facilities in seven countries. It is India's largest pharmaceutical company. 3. Ranbaxy went public in 1973.
Industrial & Pharmaceutical Laboratories is a major Indian pharmaceutical company. Cipla produces an all-in-one pill called Triomune which contains all three substances (Lamivudine.Type Founded 1935 Headquarters Key people Mumbai.cipla. While this sum remains out of reach for many millions of people in 'Third World' countries.com Cipla founded as The Chemical. Cipla is the world's largest manufacturer of antiretroviral drugs to fight HIV/AIDS.8 billion (2005) Rs. stavudine and Nevirapine). charitable sources often are in a position to make up the difference for destitute patients. as measured by units produced. Chairman Industry Pharmaceuticals Revenue Net income Rs. 4.000 (and beyond) to around $300 per year. 24. distributed and sold (multinational brandname drugs are exponentially more expensive. Cipla ignores foreign patents on these drugs where no Indian law is broken in the process. India Y. something difficult elsewhere because the three patents are 44 . Hamied (CMD). best-known for manufacturing economical anti-AIDS drugs. By doing so Cipla has reduced the cost of providing antiretroviral to AIDS patients from $12. K.1 billion (2005) Employees ??? Website www. so in money terms Cipla's medicines are probably not in top spot). The company was founded in 1935 by Khwaja Abdul Hamied. The customary treatment of AIDS consists of a cocktail of three drugs. 1936). the founder's eldest son. Today (2007). and its Chairman today is Yusuf Hamied (b.
held by different companies. This contains Lamivudine.8 DABUR 45 . with the name Duovir-N. 3. Zidovudine and Nevirapine. One more popular fixed dose combination is there.
Vatika. through Dabur Pharma Ltd. The company headquarters are in Ghaziabad. 46 .b does toxicology tests and markets ayurvedic medicines in a scientific manner. The company. Dabur has a turnover of approximately Rs. Burman. Dabur operates in more than 5 countries and has sales worldwide. schools and call centers. In two years the growth rate expected by them to change two folds. US$ 420 million) during the fiscal year 2005-2006. They have researched new medicines which will find use in O. Africa and the United Arab Emirates. Hospitals. Africa and Europe. S. Barman Industry Health Care. Dabur Chyawanprash.Dabur Type Public (NSE. Food Products Dabur Amla. Dabur has manufacturing operations in India. India. where it is registered. Their growth rate rose from 10% to 40%.T all over the country therein opening a new market. India. It is most famous for Dabur Chyawanprash and Hajmola. C. Burman in 1884 as a small pharmacy in Calcutta (now Kolkata). 19 billion (approx. West Bengal. Personal care and Food products. Dabur Chyawanprash.03 crore Website www. West Asia. Hajmola & Real Revenue Rs 1375. Hajmola & Real. as well as exports to Australia.K.com Dabur India Limited is the fourth largest FMCG Company in India with interests in Health care.dabur. BSE) Founded 1884 Headquarters Ghaziabad Key people V. Vatika. Uttar Pradesh. and is now led by his greatgrandson V. near the Indian capital of New Delhi.C. The company was founded by Dr. with brands like Dabur Amla.
.Dabur Foods.12 billion. Dabur foods mainly supplied beverages to institutional customers. The company was set up in 1993 and now has sales worth Rs. has project sales of Rs 100 crore in next three years.9 SUNPHARMA Sun Pharmaceutical Industries (Sun Pharma) is a major producer of specialty pharmaceuticals and active pharmaceutical ingredients. It will therefore increase its range of products to include tomato based products. a subsidiary of Dabur India is expecting to grow at 25%. 3. In 47 .
respiratory. diabetology. United Kingdom Key people Sir Chris Gent. live longer" Website www.com GlaxoSmithKline plc (LSE: GSK NYSE: GSK) is a British based pharmaceutical.8 billion (2006) Employees Over 100. gastroenterology. biologicals. and healthcare company.2 billion (2006) £7.S. Chairman Jean-Pierre Garnier.gsk.com/products Revenue Net income £23. Business Sun Pharma brands are prescribed in chronic therapy areas like cardiology.gsk.1996. Chief Financial Officer Industry Pharmaceutical Products www. London. Sun Pharma acquired the U. oncology and vaccines products. and respiratory. GSK is a research-based company with a wide portfolio of pharmaceutical products covering anti-infectives. feel better.. gastro-intestinal/metabolic. central nervous system (CNS). 3. neurology. It also 48 . psychiatry. Chief Executive Julian Heslop.728 (2005) Slogan "Do more. The same year the company also acquired Dadha Pharma in Tamil Nadu. Detroit-based Caraco Pharm Labs. by merger of Glaxo Wellcome and Smith Kline Beecham Headquarters Brentford.10 GLAXOSMITHKLINE GlaxoSmithKline Type Public (LSE: GSK NYSE: GSK) Founded 2000.
nutritional drinks and over the counter (OTC) medicines 49 .has a Consumer Healthcare operation comprising leading oral healthcare products.
1 ANALYSIS OF ICICI BANK Date X Y X2 XY 50 .CHAPTER 4 DATA ANALYSIS AND INTERPRETATION Table 4.
-9.314 0.1586 6.678 0.875 0.192 -1.139 -2.13 1.7693 1.402 -1.546 1.13* 1.101 3.347 -0.781 -1.963 4.924 Σx = -7.143 0.2323 0.737 0.7662 5.2222 14.658 -1.791 -1.3990 53.3124 0.138 -7.82 -0.979 0.329 0.4329 1.850 1.271 16.8032 0.167 -2.366 3.453 4.337 3. Σy n Σ x2 – (Σx)2 = 21*40.1823 0.56 Source: Secondary Data β = n * Σxy – Σx .145 3.497 0.780 -1.329 -2.2410 0.532 51 .1603 6.297 -24.057 17.916 -0.892 -0.269 0.409 -0.13) 2 = 851.-7.532 21.630 1.76 .5299 0.359 Σxy = 40.326 -0.291 2.591 -0.8537 Σ x2 = 163.330 -0.8225 2.3806 26.952 -0.01-03-2007 02-03-2007 05-03-2007 06-03-2007 07-03-2007 08-03-2007 09-03-2007 12-03-2007 13-03-2007 14-03-2007 15-03-2007 16-03-2007 19-03-2007 20-03-2007 21-03-2007 22-03-2007 23-03-2007 26-03-2007 28-03-2007 29-03-2007 30-03-2007 1.090 2.56 .5432 0.152 -1.482 -2.98 0.343 -6.225 -0.427 0.389 Σy = 1.612 1.7312 0.835 0.831 4.175 5.201 -0.595 -1.098 1.7693 – (-7.728 0.6972 0.0403 37.3540 1.724 -0.098 1.546 0.9063 0.337 21* 163.482 -0.
1 shows the beta value of ICICI futures and Nifty futures. Since the beta value is less than one.254 Table 4. Therefore investment in ICICI futures is less risky. 52 .836 = 861.292 3388. ICICI futures are less volatile.314 = 0.3439.15 – 50.
515 -2.250 27.538 4.508 7.377 44.259 Σy = 18.249 13.008 -3.02 Source: Secondary Data β = n * Σxy – Σx .604 2.181 3.901 1.350 9.381 -0.214 -0.028 1.361 Σ x2 = 229.485 10.211 3.014 23.474 0.232 12.849 0.452 11.388 6.132 15.202 1.8208 42.369 -3.475 8.760 -2.931 -3.155 Σxy = 592.905 1.2 ANALYSIS OF CORPORATION BANK Date 01-03-2007 02-03-2007 05-03-2007 06-03-2007 07-03-2007 08-03-2007 09-03-2007 12-03-2007 13-03-2007 14-03-2007 15-03-2007 16-03-2007 19-03-2007 20-03-2007 21-03-2007 22-03-2007 23-03-2007 26-03-2007 28-03-2007 29-03-2007 30-03-2007 X -0.007 3.615 -0.048 -0.50 -3. Σy n Σ x2 – (Σx)2 53 .295 5.088 13.391 1.378 -3.095 13.931 0.354 -3.614 1.919 12.18 XY -3.770 -3.490 11.134 3.751 5.673 3.004 -1.363 5.333 X2 .593 0.864 1.223 -5.906 -6.943 -0.365 20.505 2.702 38.896 -2.483 19.204 12.394 22.392 0.588 -4.937 3.Table 4.907 0.682 Y 3.985 6.078 -0.613 2.216 5.249 3.25 15.108 11.874 1.865 -0.087 -1.355 8.923 3.034 -0.601 Σx = -7.333 -3.
395 -0.303 1.574 2.313 2.836 0.212 -7.952 -2.254 4753.096 1.492 -4.501 4.-7.458 -0.834 4812.= 21*592.552 2. Corporation Bank futures are highly volatile.268 -0.-140.767 = 2.2 shows the beta value of ICICI futures and Nifty futures. Table4.808 -1.299 -2.380 1.682 * 18.02 .488 10.490 -4.705 X2 .42 .e.671 6.880 0.307 -0.349 6.574 3.396 25.790 27. 2.3 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 0.096 XY -0. There fore investment in Corporation Bank is high risky.013 = 12573.175 0.084 0.113 -1.658 -0.78 – 59.18 – (-7.559 2.271 0.310 Y 2.170 2.697 1. Since the beta value is more than one i.831 -0.218 54 .538 -0.644.682) 2 = 12432.076 -3.164 53.526 -1.500 0.747 4.607 0.009 1.644 Table 4.404 3.268 1.275 5.338 -5.329 5.361 1.333 21* 229.
55 .455 -0.204 -3.214 -4.408 -3. Σy n Σ x2 – (Σx)2 = 21* 90.299 2.248 .607 -1.117 0.79) 2 = 1895.802 Σ x2 = 138.126 -3.812 2.337 3. There fore investment in IOB futures is less risky.663 7.00 0.63 2898.652 13.37 = 0.179 -0.79* -12.129 Σxy = 90.-8.017 21* 138.418 -2.315 0.634 Table 4.902 4.389 -1.20-03-2007 21-03-2007 22-03-2007 23-03-2007 26-03-2007 28-03-2007 29-03-2007 30-03-2007 3.062 9. Since the beta value is less than one.674 Σx = -8. IOB futures are less volatile.79 2.3 shows the beta value of IOB futures and Nifty futures.083 9.368 1.093 3.-105.959 -1.248 Source: Secondary Data β = n * Σxy – Σx .03 – (--8.677 1.463 2.017 11.326 3.000 -0.077 Σy = -12.140 -1.578 2821.208 .63 – 77.26 = 1789.919 2.
791 -1.920 6.074 5.077 Σy = -11.114 0.870 7.626 -0.968 0.787 2.060 Σxy = 133.928 -0.836 0.705 2.321 2.711 19.490 -4.018 1.036 3.500 -2.168 6.126 -3.190 4.733 18.395 -0.113 -1.492 -4.661 Y 2.658 -0.330 9.953 0.463 2.781 -4.443 -0.315 0.957 28.204 -3.232 4.418 -2.832 -3.909 3.814 0.051 14.620 Σ x2 = 165.625 1.078 -2.072 1.Table 4.651 42.344 -2.005 1.538 -0.257 2.902 4.088 1.717 5.717 5.122 8.831 -0.145 0.485 -0.333 0.377 7.965 -6.788 Σx = -18.759 .792 15.214 -4.088 Source: Secondary Data 56 .468 -0.431 -1.982 18.076 -3.952 -2.474 0.020 12.091 -2.619 5.015 -0.060 0.170 2.605 24.25 5.267 -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 1.414 X2 1.006 4.552 2.312 0.939 -0.989 XY 3.
-18.β = n * Σxy – Σx .339 57 . Σy n Σ x2 – (Σx)2 = 21* 133.130 3.738 -1.539 = 0.984 0.4 shows the beta value of Syndicate Bank futures and Nifty futures.492 1.832 Y 5.362 6. Table 4.809 -3.852 3137.020 3.719 1.661) 2 = 2794.822 Table 4.414 21* 165.23 = 2581.088 .801 -1.661* -11.996 3485.105 3.989 – (-18.-212.769 – 348.680 72.119 8.697 28. the Syndicate bank futures are less volatile and the investment in syndicate bank futures is less risky.823 X2 12.114 3. Since the beta value is less than one in the month of March.356 XY 20.563 -7.5 ANALYSIS OF PUNJAB NATIONAL BANK Date 01-03-2007 02-03-2007 05-03-2007 06-03-2007 07-03-2007 X 3.694 50.848 .
825 2.861 = 0.863 -0.435 2.934 0.879 – 151.955) 2 = 2832.143 0.899 Source: Secondary Data β = n * Σxy – Σx .873 2.955 10.198 -1.538 58 .472 = 2681.489 11.580 1.929 2.239 -.669 12.391 0.955 1.052 -2.656 24.322 1.333 – 287.778 1.168 Σx = 16.316 2.093 0.271 1.028 Σ x2 = 250.929 21* 250.606 -1.768 -1. Σy n Σ x2 – (Σx)2 = 21* 134.195 0.859 5.488 4980.534 -1.948 Σy = 8.096 14.873 – (16.961 2.085 0.001 -1.980 3.857 2.111 0.732 -2.198 0.336 3.955* 8.206 0.391 5268.814 1.173 29.158 4.435 2.899 – 16.953 -1.041 0.067 4.08-03-2007 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 1.448 8.447 3.157 1.721 -1.905 3.238 6.159 Σxy = 134.811 -1.453 -0.103 1.579 3.240 -3.394 -3.053 3.566 27.069 -1.696 5.920 -0.265 3.
096 -3.580 5.83 XY -0.089 1.294 0.132 0.957 1.934 ΣXY=132.Table 4.063 -1.473 36.548 Y 1.266 3. 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 -0.6 RANBAXY Source: Secondary Data 59 .260 -0.175 0.062 volatile and investing in Punjab National Bank futures is less risky.887 1.176 -1.316 -1.976 27.997 -0.645 26.059 0.387 2.353 1.664 1.673 0.329 0.260 -1.942 6.047 -0.278 -2.031 5.343 -1.866 8.830 -4.125 0.178 -0.328 -0.299 -1.156 0.394 2.667 0.696 ΣY=-0.524 0.397 -0.363 0.151 0.472 -2.655 0.226 -1.503 0.475 -5. Since the beta value is less than one.798 5.189 15.295 -0.024 27.926 X2 0.213 15.446 -0.485 -0.514 0.689 20.660 -0.098 0.381 5. 4.469 0.189 3.343 ΣX=-8.227 0.5 shows the beta value of Punjab National Bank futures and Nifty futures.336 0.710 -5.236 2.636 29.259 0.858 2.803 ΣX2=174.657 1.443 51.942 -1.380 -1.503 3.201 0.704 4.793 5. Table.666 -7.786 3.830 1.803 2.
926 21* 174. Table 4. Σy n Σ x2 – (Σx)2 = 21*132.062 .768 Table 4.6 shows the beta value of Ranbaxy futures. Since the beta value is less than one.387 3598.-8.302 – 7.068 = 2765.43 – 73.83 – (-8.7 60 .β = n * Σxy – Σx . it is less volatile and investing in Ranbaxy futures is less risky.548 * -0.362 = 0.915 3671.548) 2 = 2773.
701 -3.131 2.847 Source: Secondary Data β = n * Σxy – Σx .486 0.358 2.047 -0.427 -0.261 -0.176 -1.204 2.667 -1.219 11.023 0.94 61 .024 0.962 -0.831 2.94 X2 14.068 0.737 0.447 -0.738 Y 1.096 -3.848 ΣX2= 77.261 -1.696 ΣY= -0. Σy n Σ x2 – (Σx)2 = 21*-19.744 0.492 7.473 1.974 2.655 0.294 0.155 -0.626 -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 3.672 0.020 -7.957 1.676 4.739 -3.062 -1.149 8.328 -0.423 3.031 5.230 0.252 -0.773 0.948 7.353 -3.329 0.189 3.165 -0.114 1.743 -11.390 -2.088 3.981 ΣX= 6.710 -5.005 -0.368 -4.466 -2.071 0.008 0.316 -1.093 0.687 3.719 -0.193 0.475 -5.445 2.357 -0.543 0.362 -1.660 -0.847 – 6.152 0.171 -0.392 0.481 -0.553 0.020 0.228 XY 4.697 -0.630 -0.496 0.381 5.770 ΣXY= -19.689 -0.738 * -0.007 15.051 0.
257 -1.911 -2.152 -0.946 -2.451 1576.554 10.631 8.870 0.297 -0.788 – 45.131 2.572 10.428 -0.956 2.223 -1.988 -3.666 4.7 shows the beta value of Sun Pharma’s futures.090 1.453 -1.474 11.388 = -0.-6.382 -3.089 0.542 XY 1.038 13.151 5.161 -0.663 12.011 -1.173 0.022 2.718 -4.121 -1.146 11.787 .489 0.21* 77.626 25.101 1.500 X2 9.387 -3. Table 4.803 4.228 – (6.635 62 .218 -3.525 -0.738) 2 = -416.957 4.703 2.336 1621.433 -2.26 Table 4.573 -3.446 0.404 -2.8 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 -3.751 0.572 1. this shows that when the market return of the futures is increasing its stock value is coming down.049 1.678 5.472 12.40 = -410.756 0.816 -2.592 -1.256 0.152 -2.356 -5.054 Y -0.025 3. Since the beta value of this future is negative.173 1.
311 -1.314 2.184 19.687 -2.596 .467 -1.942 -4.516 – 145.001 2. 63 . Since the beta value is less than one.068 1.878 3274.349 -4.22-03-2007 23-03-2007 26-03-2007 28-03-2007 29-03-2007 30-03-2007 3.086 3.596 Source: Secondary Data β = n * Σxy – Σx .845 6.210 1.362 1.047 – 219.359 ΣX= -14.559 ΣXY= 74.825 3.780 = 1420.023 4.-14. it is less volatile and the investment in Dabur futures is less risky.267 = 0.907 – (-14.907 10.510 -1.84 21* 155.193 ΣY= -9.465 Table 4.8 shows the beta value of Dabur futures and Nifty futures.027 9.412 2.825 * -9.212 3.825) 2 = 1566.001 2 ΣX = 155.84 9.725 2.638 3054. Σy n Σ x2 – (Σx)2 = 21*74.771 16.
901 0.373 1.933 9.147 18.390 2.839 -1.507 6.449 25.961 -1.508 0.454 3.489 -1.023 6.401 0.254 1.557 -0.202 9.043 -1.084 XY 5.150 2.086 -2.108 ΣY= 1.046 -2.421 7.538 0.961 -3.764 1.935 -0.322 2.624 0.823 -0.885 0.820 5.228 -2.84 Y -2.584 -2.384 4.766 ΣXY= 55.649 1.400 1.818 1.609 5.046 0.312 0.066 -1.201 -0.349 0.614 0.334 2.907 -0.314 X2 6.154 0.731 0.435 -3.430 2.586 -1.207 2.687 1.237 -0.478 2 ΣX = 126.345 -5.819 0.189 9.692 ΣX= -7.392 3.422 2.845 10.421 2.867 8.112 8.820 0.189 Source: Secondary Data 64 .296 2.134 2.9 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 -2.416 0.259 2.259 2.969 0.096 3.653 -2.872 2.271 -2.446 -0.Table 4.760 0.854 0.324 -0.970 -2.022 8.
120 -2.764 – 61.230 X2 .084 – (-7.0001 2.-10. Table 4.030 0.756 0.298 1.232 15.930 Y 1.10 GLAXO Date 01-03-2007 02-03-2007 05-03-2007 06-03-2007 07-03-2007 X -0. Since the beta value is less than one.555 0.013 -1.2 shows the beta value of CIPLA futures and Nifty futures.764 65 .445 XY -0.84) 2 = 1158.189 .176 0. it is less volatile and investing in CIPLA futures is less risky.β = n * Σxy – Σx .814 1.314 21* 126.-7.691 -0.969 .088 -4.539 -8.46 = 1169.482 3. Σy n Σ x2 – (Σx)2 = 21*55.304 = 0.418 0.452 Table 4.271 2586.302 2647.84 * 1.015 -1.
826 .424 3.856 2.432 5.002 – (-10.189 66 .347 0.-109.1392 -3.0006 2.651 2.08-03-2007 09-03-2007 12-03-2007 13-03-2007 14-03-2007 15-03-2007 16-03-2007 19-03-2007 20-03-2007 21-03-2007 22-03-2007 23-03-2007 26-03-2007 28-03-2007 29-03-2007 30-03-2007 0.138 -1.134 -3.025 1.482 -5.262 -3.126 -1.092 0. Σy n Σ x2 – (Σx)2 = 21*-9.353 -2.132 2.055 2.052 0.056 -0.052 21* 95.856 * -10.126 54.192 1.1245 1995.571 1.564 4.867 -2.062 1.045 -0.237 3.856) 2 = 203.403 1.042 – 117.437 1.706 Source: Secondary Data β = n * Σxy – Σx .142 -4.235 -3.7015 1877.002 1.925 1.392 -3.649 0.806 0.706 .806 1.134 1.800 -5.066 4.824 -4.589 0.948 -2.025 0.0006 0.606 -2.421 1.724 1.10.621 0.255 ΣXY= -9.214 1.853 = -94.624 ΣX= 10.458 7.552 5.851 -1.202 2.557 1.807 -1.637 2 ΣX = 95.944 -0.507 -1.280 3.903 0.891 0.386 0.968 2.236 ΣY= -10.
CONCLUSIONS & RECCOMMENDATIONS 67 .05044 Table 4. stock value is coming down. Since the beta value is negative it shows that when market return increases. CHAPTER 5 SUMMARY OF FINDINGS.= -.2 shows the beta value of Glaxo futures and Nifty futures.
5. In the month of March 2007. The study shows that investing in Corporation Bank futures is high risky. Syndicate Bank. The futures value of Glaxo & Sun Pharma is negative. 3. IOB. its stock value will come down. 68 . Ranbaxy. 2.1 FINDINGS: The major findings of the study are: 1. PNB. investing in ICICI futures. 4. The financial future plays an important role in NSE Nifty. It shows that when the market value is increasing. Dabur and CIPLA futures are less risky. There is relationship with share price movements of the valued of NSE futures.
5. or that lock in the price today of an exchange. The study entitled ‘THE ROLE OF FINANCIAL FUTURES WITH REFERENCE TO NSE NIFTY’ was done with reference to Banking and Pharmaceutical industry. A futures contract is a standardized contract. to buy or sell a certain underlying instrument at a certain date in the future. traded on a futures exchange. Corporation bank. They are agreements between two counter parties that fix the terms of an exchange. Indian 69 . 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. In finance. Syndicate bank. at a specified price.2 CONCLUSION A financial future is a futures contract on a short term interest rate.
4. 3. Financial futures can be used to dwarfs the volume in traditional agricultural contracts. Syndicate Bank. Cipla.3 RECOMMENDATIONS 1. 2. In March 2007. PNB.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. Dabur and CIPLA futures are less the investors can invest in these futures. Sun Pharma. Ranbaxy. Ranbaxy. Since the volatility of ICICI futures IOB. Glaxo. 5. the investment in Corporation Bank futures is highly risky. the investors should be very cautious in investing into those futures. 70 . Dabur are the companies taken from the pharmaceutical industry.
BIBLIOGRAPHY 71 .
Sultan Chand Publications. • Money and Finance. Investment Journal.III. Vol. 72 . Vol. Tata McGraw Hill Publishing company.March 04. 6th edition. • Bhalla V K.Books: • Chandra Prasanna. November 9. ‘Investment Analysis and Portfolio Management’. 05 Feb 19. 2007. 10th edition. No.XXII. 2007. Journals: • DALAL STREET. ‘Investment Management and Security analysis’.
Money control .com 73 .NSE India.com www.Website: www.
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