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CONTENTS OF THE TABLE
1. PROJECT ASSIGNED.
Introduction of the project. Objectives of the project.
2. CONCEPT OF STOCK MARKET.
Introduction to stock market – a global approach. History of stock market. Features and characteristics of stock market.
Future Plans for developing stock market. Various Functions performed in stock market. Performance of stock market in Indian market.
3.FINANCIAL DERIVATIVES MARKET.
Introduction. Historical aspect.
Products, participants and functions.
Derivative terminology. Reasons behind its evolution. Requirements for Future and Options. Strength of Indian capital market. Importance of derivative investment. Instruments involved in derivative. Performance in India.
4.ANALYSIS OF THE PROJECT.
Research Methodology. Graphical analysis.
5.RESULTS AND FINDINGS.
Reasons behind less development of F &O at AMRITSAR stock
6.SUGGESTIONS. 7.LIMITATIONS OF STUDY. 8.CONCLUSIONS. 9.BIBLOGRAPHY. 10.SAMPLE OF QUESTIONNAIRE.
. Because impression is usually given that losses arose from derivatives are extremely complex and difficult to understand financial strategies. Active use of derivatives instruments allows the overall business risk profile to be modified. regarding future. I have tried to give a solution to these complexities. i also find out that what would be the future of derivative market in india on the basis of interviews and observations of brokers. Under my project report. thereby providing the potential to improve earning quality by offsetting undesired risk. So after interviewing with different brokers . dealers and investors.investors and dealers. inspite of that more awareness should be done and technical expertise knowledge should be more expanded.INTRODUCTION OF THE PROJECT Derivatives have vital role to play in enhancing shareholder value by ensuring access to the cheapest source of funds. I have studied various trends that comes in the way of Derivatives market. I have find out that derivatives can indeed be used safely and successfully provided a sensible control and management strategy is established and executed.
. investors and brokers with derivatives till To get knowledge about shortcomings in indian derivative market. date. regarding derivatives market. dealers and brokers hold To know the experience of dealers.OBJECTIVES OF THE PROJECT The main objectives of my final project report are as follows: To study the various trends that comes in the way of Derivatives market To find out that what would be the future and market potential of derivative To know the awareness & familiarity investors. market in india.
international economic and financial development etc. central & state govt. & dealing in securities. It is the essential pillar of the private .INTRODUCTION TO THE STOCK EXCHANGE A stock exchange is the place where securities. Such changes are subject to secular trends set by the economic progress of the nation. all operating on the market simultaneously. and governed by the factors like general economic situation. regulating or controlling the business of buying. selling. organizations. A stock exchange is the nerve center of capital market. are bought and sold. political environment.. The Securities Contract (Regulation) Act 1956 defines stock exchange as: “A body of individuals whether incorporated or not.” A stock exchange is a platform for the trade of already issued securities through primary market. financial and monetary policies. Changes in the capital market are brought about by a complex set of factors. local bodies and foreign govt. constituted for the purpose of assisting. shares. tax changes. A stock exchange provides necessary mobility to capital and directs the flow of capital into profitable and successful enterprises. debentures and bonds of joint stock companies. semi govt.
Good returns.Future growth prospects. So. stock exchange mobilizes savings. It exerts a powerful and significant influence as a depressant or stimulant of business activity.Appreciation of capital. It reflects hopes aspiration and fears of people regarding the performance of the economy. The trade in market is through the authorized members who have duly registered with concerned stock exchange and SEBI.sector and corporate economy. . . canalizes them as securities into those enterprises which are favored by the investors on the basis of such criteria as – . but also of the nation’s economy as a whole (it measures of all the pull and pressure of securities in the market). It is the open auction market where buyers and sellers meet and involve a competitive price for the securities. . The stock exchange serves the role of barometer. not only of the state of health of individual companies.
These were organized as voluntary nonprofit making associations of brokers to regulate and protect their interests. A. It was a state subject and Bombay securities contract (control) act of 1925 used to regulate trading in securities. BSE is 129 years old. Before the control on securities trading became a central subject under the constitution in 1950. NSE is 11 years old and it brought the screen based trading system in India . Daily turnover of all the stock exchange is app.000cr. From these BSE & NSE are the two major stock exchanges and rest 21 are the regional stock exchanges.D. The only stock exchange operating in the 19th century were those of Bombay set up in 1875 and in Ahemdabad set up in 1894. 20. At present there were 23 recognized stock exchanges in India. Ahemdabad and other centers but they were not recognized soon after it became a central subject. Bombay stock exchange was recognized in 1927 and Ahemdabad stock exchange were organized at Bombay. central legislation was proposed and a committee headed by sh. Under this act.HISTORY OF STOCK EXCHANGE The trading of securities in India was started in early 1973.GORWALA went into bill for security regulation. On the basis securities contract act became law in 1956.
It is the market as well as source for the capital. • Intermediaries and products (broker. There are mainly three participants in stock exchange i. brokers. Trading in securities is allowed under rules and regulations of stock exchange. Investors and speculators. • Issuer of security (company). who want to buy and sell securities. . raise resource from the market. merchant bankers and shares.).e. It is an association of persons known as members. bonds. derivatives products etc. warrants. • Investor of security (Individual.FEATURES OF THE STOCK EXCHANGE It is a place where listed securities are bought and sold. can do so through members of stock exchange i. Membership is must for transacting business. HUF).e. Corporate and govt.
Internet trading. We think such consolidation enables optimal utilization of existing resources. This market is expected to provide liquidity in small capital . We are also planning to provide trading support to the commodities Exchanges and also consider providing hem entry into the securities industries. the business model of ISE would be the most preferred method of accessing multiple markets with low cost and high credibility of an Exchange. enhanced due to economies of scale and permit product innovation. IPO segment. in the future. etc. We are considering derivative segment through NSE and DP services initially for the participants and later for clients through CDSL and NSDL. This futuristic concept of consolidation being pursued by ISE is now being also explored by the Developed Countries. however.FUTURE PLANS OF STOCK EXCHANGE The current market scenario in the capital market is not very encouraging. Information dissemination. Distribution of mutual funds units. ISE is considering several value added services or new products which may help ISE and ISS in fulfilling the demands of low cost users. On account of this philosophy we are proposing to implement most of the new products centrally on ISE. The creation of a national market has provided the brokers of the RSEs and individual investors in the regions and opportunity approach the liquid national level market. like. a sign o any dynamic market.
FUNCTIONS OF STOCK EXCHANGE Stock Exchange Performs The Following Functions: The stock exchange provides appropriate conditions where by purchase and sale of securities takes place at reasonable and fair prices. People having surplus funds invest in the securities and these funds used for industrialization and economic development of country that leads to capital formation. . The stock exchange acts as the center of providing business information relating to enterprise whose securities are traded as the listed companies are to present their financial and other statements to it. Stock exchange protects the interest of the investors through strict enforcement of rules and regulations with respect to dealings. Punishments (including fine. The stock exchange provides a ready market for the conversion of existing securities into cash and vice-versa.companies as the other National Level markets have a higher entry norm and may not cater to this market. suspension or even expulsion of membership) may be there if broker make any malpractice in dealing with investors like charging high commissions etc.
company Public ltd. Madhya Pradesh Stock 1930 Exchange 5. 8.Pune Stock Exchange Ltd. Delhi Stock Exchange 1947 1957 1978 1982 1982 1983 guarantee Public ltd.Ludhiana Stock Exchange public ltd. Company . Voluntary Non profit org. Bangalore Stock Exchange 9. Calcutta Stock Exchange 1908 4.P. 1937 6. Company Public ltd. 1943 7. Cochin Stock Exchange 10. By By Type of Organization 3. The stock exchange provides the linkage between the savings in the household sector and the investment in corporate economy. Company guarantee Company ltd. Public ltd. Stock Exchange Ltd. Company Company ltd. Hyderabad Stock Exchange Ltd. Madras Stock Exchange Ltd. The Stock Exchange Mumbai 2. Converted into Association Ltd. ltd. Company Pvt. Ahmedabad Stock Exchange nt 1875 1897 Voluntary Non profit org. Stock exchange acts as the barometer of the country as it measures all the pulls and pressures of the securities in the market. Company Voluntary Non profit org. STOCK EXCHANGES OF INDIA Name of Stock Exchange Year of Establishme 1. 11. 12. By guarantee Public ltd.U.
marketability. 1986 (Patna) 15.D N. growth more industries and higher income.D N. By guarantee Public ltd.D ltd. 1990 19.Jaipur Stock Exchange Ltd.13. safety etc.Vadodara Stock Exchange Ltd. higher Brokers: .It provides them access to market funds. Company Company ltd. Company Company ltd. 4. 2.D N. better of investments. 18. 16. 21.D N. Investors: .There is large flow of saving.Bhubaneshwar Stock Exchange 17.D N. 3. 23. rating and public interest.They receive commission in lieu of services to Economy and Country: . By Stock 1989 Exchange Ltd.National Stock Exchange of 1994 India Ltd. . 20.Mangalore Stock Exchange Ltd.It provides them liquidity.OTC Stock Exchange of India 22.Interconnected Stock Exchange (ICSE) WHO BENEFITS FROM STOCK EXCHANGE 1. By guarantee Company guarantee N.Coimbatore Stock Exchange 1996 Ltd.SaurashtraKutch 1983 1989 Public ltd. investors.Magadh Stock Exchange Ass. Company: .Guwahati Stock Exchange 1984 14.
the two pillars for economic growth. Stock Exchange: A stock exchange. The past decade in many ways has been remarkable for securities market in India.INDUSTRY PROFILE & COMPANY PROFILE INDUSTRY PROFILE INDUSTRY OVERVIEW The securities market achieves one of the most important functions of channeling idle resources to productive resources or from less productive resources to more productive resources. to trade company stocks and other securities. This enhances savings and investments in the economy. trading volumes and turnover on stock exchanges. and investor population. Stock exchanges also provide facilities for the issue and redemption of securities. share market or bourse is a corporation or mutual organization which provides facilities for stock brokers and traders. the number of listed stocks. The market has witnessed fundamental institutional changes resulting in drastic reduction in transaction costs and significant improvements in efficiency. as well as. other financial instruments and capital events including the payment . Hence in the broader context the people who save and investors who invest focus more towards the economy’s abilities to invest and save respectively. transparency and safety. The Indian Capital Market has come a long way in this process and with a strong regulator it has been able to usher an era of a modern capital market regime. It has grown exponentially as measured in terms of amount raised from the market. market capitalization.
Such trading is said to be off exchange or overthe-counter. as modern markets are electronic networks. in 13th century Bruges. affect the price of stocks (see stock valuation). A stock exchange is often the most important component of a stock market. it has to be listed there. The securities traded on a stock exchange include: shares issued by companies. which gives them advantages Of speed and cost of transactions. . Supply and demand in stock a market is driven by various factors which. and in 1309 they institutionalized this until now informal meeting and became the "Bruges Bourse". nor must stock be subsequently traded on the exchange. The idea spread quickly around Flanders and neighboring counties and "Bourses" soon opened in Ghent and Amsterdam. as in all free markets. Increasingly. There is usually no compulsion to issue stock via the stock exchange itself.of income and dividends. Trade on an exchange is by members only. hung on the front of the house where merchants met. History of stock exchanges: In 12th century France the courratiers de change were concerned with managing and regulating the debts of agricultural communities on behalf of the banks. unit trusts and other pooled investment products and bonds. it is more likely that in the late 13th century commodity traders in Bruges gathered inside the house of a man called Van der Burse. Some stories suggest that the origins of the term "bourse" come from the Latin bursa meaning a bag because. Usually there is a central location at least for recordkeeping. However. To be able to trade a security on a certain stock exchange. The initial offering of stocks and bonds to investors is by definition done in the primary market and subsequent trading is done in the secondary market. but trade is less and less linked to such a physical place. As these men also traded in debts. the sign of a purse (or perhaps three purses). they could be called the first brokers. This is the usual way that bonds are traded. stock exchanges are part of a global market for securities.
Stock Exchange. not by a duke. the Dutch East India Company issued the first shares on the Amsterdam Stock Exchange. Genoa and Florence who also began trading in government securities during the 14th century. Mobilizing savings for investment When people draw their savings and invest in shares. In 1351.In the middle of the 13th century. this may include the following: Raising capital for businesses The Stock Exchange provides companies with the facility to raise capital for expansion through selling shares to the investing public. resulting in a stronger economic growth and higher productivity levels. There were people in Pisa. which let shareholders invest in business ventures and get a share of their profits . Verona. It was the first company to issue stocks and bonds. This was only possible because these were independent city states ruled by a council of Influential citizens. commerce and industry.or losses. which could have been consumed. increase its market share. the Venetian Government outlawed spreading rumors intended to lower the price of government funds. hedge against volatility. or acquire other necessary business assets. In 1688. The Dutch later started joint stock companies. Venetian bankers began to trade in government securities. The role of stock exchanges: Stock exchanges have multiple roles in the economy. . Facilitating company growth Companies view acquisitions as an opportunity to expand product lines. are mobilized and redirected to promote business activity with benefits for several economic sectors such as agriculture. it leads to a more rational allocation of resources because funds. In 1602. or kept in idle deposits with banks. increase distribution channels. the trading of stocks began on a stock exchange in London. A takeover bid or a merger agreement through the stock exchange is one of the simplest and most common ways for a company to grow by acquisition or fusion.
Mci world com (2002). Adelphia (2002). companies generally tend to improve on their management standards and efficiency in order to satisfy the demands of these shareholders and the more stringent rules for public corporations imposed by public stock exchanges and the government. Therefore the Stock Exchange provides the opportunity for small investors to own shares of the same companies as large investors. These bonds can be raised through the Stock Exchange whereby members of the public buy them. Webvan (2001). thus loaning money to the government. are among the most widely scrutinized by the media). although by securing such bonds with the full faith and credit of the government instead of with collateral. Government capital-raising for development projects Governments at various levels may decide to borrow money in order to finance infrastructure projects such as sewage and water treatment works or housing estates by selling another category of securities known as bonds. or paramalat(2003). the result is that the . Consequently.tel (2001). Sunbeam (2001). Creating investment opportunities for small investors As opposed to other businesses that require huge capital outlay. or otherwise by a small group of investors). Enron corporation (2001). some well-documented cases are known where it is alleged that there has been considerable slippage in corporate governance on the part of some public companies (pets. However. often owned by the company founders and/or their families and heirs. Redistribution of wealth Stocks exchanges do not exist to redistribute wealth although casual and professional stock investors through stock prices increases (that may result in capital gains for the Investor) and dividends get a chance to share in the wealth of profitable businesses. Corporate governance By having a wide and varied scope of owners. it is alleged that public companies (companies that are owned by shareholders who are members of the general public and trade shares on public exchanges) tend to have better management records than privately held companies (those companies where shares are not publicly traded.com (2000). The issuance of such municipal bonds can obviate the need to directly tax the citizens in order to finance development. investing in shares is open to both the large and small stock investors because a person buys the number of shares they can afford. One.
Major stock exchanges: Twenty Largest Stock Exchanges by Market Capitalization as of July 12. Helsinki. depression. Iceland.Government must tax the citizens or otherwise raise additional funds to make any regular coupon payments and refund the principal when the bonds mature. Therefore the movement of share prices and in general of the stock indexes can be an indicator of the general trend in the economy. An economic recession. Barometer of the economy At the stock exchange. share prices rise and fall depending. 2007 (in trillions of US dollars) • • • • • • • • • • • • NYSE Euro next Tokyo Stock Exchange NASDAQ London Stock Exchange Hong Kong Stock Exchange Toronto Stock Exchange Frankfurt Stock Exchange (Deutsche Brose) Shanghai Stock Exchange Madrid Stock Exchange (BME Spanish Exchanges) Australian Securities Exchange Swiss Exchange Nordic Stock Exchange Group OMX (Copenhagen. . on market forces. Share prices tend to rise or remain stable when companies and the economy in general show signs of stability and growth. largely. or financial crisis could eventually lead to a stock market crash.
in the country. Coimbatore. Madras and Delhi Stock Exchanges. and Surat. The other major stock exchanges are Calcutta. Indore. in terms of money and shares take place. Kanpur. where maximum transactions. Hyderabad. shares are exchange / traded or simply where buying and selling takes place. Pune. Presently. Other one at Ahmedabad.• • • • • • • • • Stockholm. Jaipur. FUNCTIONING OF STOCK EXCHANGE: . the National Stock Exchange (NSE) And Over the Counter Exchange of India (OTC). viz. Ludhiana. Riga and Vilnius Stock Exchanges) Milan Stock Exchange (Boras Italian) Bombay Stock Exchange Korea Exchange Sao Paulo Stock Exchange Bovespa National Stock Exchange of India Moscow Interbank Currency Exchange Johannesburg Securities Exchange Taiwan Stock Exchange STOCK EXCHANGE & SHARES The market or place. Bangalore. is called stock exchange or stock market. Mangalore. where securities. Bhubaneshwar. The Bombay Stock Exchange (BSE) is the largest Stock Exchange. Guwahti. the stock market in India consists of twenty three regional stock exchanges and two national exchanges. namely. Saurashtra. Patna. Tallinn. Meerut. Rajkot. Vadodara. Cochin.
The detailed and elaborate procedure of getting the shares listed on a stock exchange is monitored by SEBI. in stock exchange. GROUP "B" SHARES PRIMARY MARKET Since 1991/92.LISTING: Listing of shares. The SEBI. the primary market has grown fast as a result of the removal of investment restrictions in the overall economy and a repeal of the restrictions imposed by the Capital . These shares are frequently traded and command higher price earning multiples. means. issues guidelines and notifications. through prospectus. shall have to apply to one or more stock exchanges. the are divided into two categories: 1. A Company. with huge amount of capital. from time to time. with regard to listing of securities. 2. For these groups facility of carrying forward is not available. GROUP "A" SHARES: are referred to as “Cleaned Securities” or “specified shares". Whenever a share is moved from Group "B" to Group "An" its market price rises. Once the shares are listed. GROUP “A” SHARES 1. for shifting stocks from the non-specified list to the specified list. such shares can be bought and sold. There are some criteria and guide lines. Group "A" shares represent companies. and equally a large scope for investment. The facility for carrying forward a transaction from one account period to another is available for these shares. GROUP "B" SHARES: are referred to as. when a share is shifted from Group "A" to Group "B". likewise. which intends to issue shares. for getting its shares listed. none cleaned securities or non-specified shares. laid down by stock exchange. on a stock exchange. its market price declines.
Dealers earn a commission that is built into the price of the security offering. 3. Further. Therefore it is also called New Issue Market (NIM). This is the market for new long term capital. In 1991/92. this sale is an initial public offering (IPO). This is typically done through a syndicate of securities dealers. such as loans from financial institutions. Legislative and regulatory changes have facilitated the corporatization of stockbrokers. the stock exchanges have put in place circuit breakers. The primary is that part of the capital markets that deals with the issuance of new securities. Companies. In a primary issue. . 5. This figure rose to Rs276. Capital adequacy norms have been prescribed and are being enforced. The process of selling new issues to investors is called underwriting. 2. which are applied in times of excessive volatility. governments or public sector institutions can obtain funding through the sale of a new stock or bond issue. Since 1995/1996.SEBI has taken several measures to improve the integrity of the secondary market. Borrowers in the new issue market may be raising capital for converting private capital into public capital. this is known as ‘going public’.21 billion in 1994/95. however. The company receives the money and issue new security certificates to the investors 4. In the case of a new stock issue. A mark-to-market margin and intraday trading limit have also been imposed. Primary issues are used by companies for the purpose of setting up new business or for expanding or modernizing the existing business.Issues Control Act. though it can be found in the prospectus. The primary market performs the crucial function of facilitating capital formation in the economy. FEATURES OF PRIMARY MARKET ARE:1. 6. Rs62. The new issue market does not include certain other sources of new long term external finance.15 billion was raised in the primary market. The primary market is the market where the securities are sold for the first time. smaller amounts have been raised due to the overall downtrend in the market and tighter entry barriers introduced by SEBI for investor protection . The disclosure of short sales and long purchases is now required at the end of the day to reduce price volatility and further enhance the integrity of the secondary market. the securities are issued by the company directly to investors.
with interest. It is therefore important that the secondary market be highly liquid (Originally.Methods of issuing securities in the Primary Market 1. securities are sold by and transferred from one investor or speculator to another. Once a newly issued stock is listed on a stock exchange. a partner in a traditional partnership is only able to access his or her original investment if he or she finds another investor willing to buy . For example. investors and speculators can easily trade on the exchange. Rights Issue (For existing Companies). see History of the Stock Exchange). Secondary marketing is vital to an efficient and modern capital market. The market that exists in a new security just after the new issue.  Alternatively. the investor's desire not to tie up his or her money for a long period of time. as market makers provide bids and offers in the new stock.e. a traditional loan allows the borrower to pay back the loan. This is how stock exchanges originated. the only way to create this liquidity was for investors and speculators to meet at a fixed place regularly. secondary market can refer to the market for any kind of used goods. is often referred to as the aftermarket. secondary markets mesh the investor's preference for liquidity (i. 2. and 3. Fundamentally. Initial Public Offer. in case the investor needs it to deal with unforeseen circumstances) with the capital user's preference to be able to use the capital for an extended period of time. over a certain period. Preferential Issue Secondary market: The secondary market is the financial market for trading of securities that have already been issued in an initial private or public offering. even in cases of emergencies. For the length of that period of time. in an emergency. Likewise. Function In the secondary market. the bulk of the lender's investment is inaccessible to the lender..
With secondary markets. investors may be less likely to put their money into long-term investments. relatively easily. the private equity asset class is illiquid. the investor can sell. the private equity secondary market (also often called private equity secondary or secondary) refers to the buying and selling of pre-existing investor commitments to private equity and other alternative investment funds. 1992 which establishes SEBI to protect investors and develop and Regulate the Markets. 1956. there is no listed public market. intended to be a longterm investment for buy-and-hold investors. particularly if the loan or ownership equity has been broken into relatively small parts. With a securitized loan or equity interest (such as bonds) or tradable stocks. if their own circumstances change. Private equity secondary market In finance. For the vast Majority of private equity investments. By its nature. which sets out the code of conduct for the corporate sector in relation to issue. investors know that they can recoup some of their investment quickly. allotment and transfer of securities. and more likely to charge a higher interest rate (or demand a greater share of the profits) if they do. a significant amount of capital has been committed to dedicated secondary market funds from investors looking to increase and diversify their private equity exposure Laws governing capital market The four main legislations governing the securities market are: (a) The SEBI Act.out his or her interest in the partnership. (b) The Companies Act. This selling and buying of small parts of a larger loan Or ownership interest in a venture is called secondary market trading. (c) The Securities Contracts (Regulation) Act. his or her interest in the investment. 1957 which provide for regulation of transactions in securities through control over stock exchanges. read with the Securities Contracts (Regulation) Rules. 1956. and disclosures to be made in public issues. however there is a robust and maturing secondary market available for sellers of private equity assets. Under traditional lending and partnership arrangements. and . Driven by strong demand for private equity exposure. however. Sellers of private equity investments sell not only the investments in the fund but also their remaining unfunded commitments to the funds.
Preferred stock generally does not have voting rights. but has a higher claim on assets and earnings than the common shares. net assets or some other measure. Sometimes referred to as "total market value". In other words. For example. For example. market value is often different from book value because the market takes into account future growth potential.000 shares of stock outstanding and one person . Bankrupt and is liquidated. The SEBI Act and the Depositories Act are mostly administered by SEBI. Common stock usually entitles the owner to vote at shareholders' meetings and to receive dividends. Ownership is determined by the number of shares a person owns relative to the number of outstanding shares. In the context of securities. 1996 which provides for electronic maintenance and transfer of ownership of demat securities. There are two main types of stock: common and preferred. Regulators SEBI is the primary regulator of the Securities Market and the entities operating therein. Stock A type of security that signifies ownership in a corporation and represents a Claim on part of the corporation’s assets and earnings. owners of preferred stock receive dividends before common shareholders and have priority in the event that a company goes. A holder of stock (a shareholder) has a claim to a part of the corporation's assets and earnings. The rules under the securities laws are framed by government and regulations by SEBI. Most investors who use fundamental analysis to pick stocks look at a company's market value and then determine whether or not the market value is adequate or if it's undervalued in comparison to its book value. a shareholder is an owner of a company.(d) The Depositories Act. All these are administered by SEBI. The powers under the Companies Act relating to issue and transfer of securities and non-payment of dividend are administered by SEBI in case of listed public companies and public companies proposing to get their securities listed Market Value The current quoted price at which investors buy or sell a share of common stock or a bond at a given time. if a company has 1. Also known as "shares" or "equity". Also known as "market price” The market capitalization plus the market value of debt.
but that comes with the potential to lose if the company does poorly. such as mutual funds. forex or any other market place. being a shareholder does entitle the possessor to an equal distribution in any profits. Financial indices are created to measure price movements of stocks. a stock index is created to provide investors with the information . A shareholder may also be referred to as a stockholder. Shareholders are the owners of a company. shareholders received a physical paper stock certificate that indicated that they owned "x" shares in a company. Claim to 10% of the company’s assets Stocks are the foundation of nearly every portfolio. The two main types of shares are common shares and preferred shares. Historically. Owning a paperless share makes conducting trades a simpler and more streamlined process. They have the potential to profit if the company does well. brokerages have electronic records that show ownership details. In the past. While owning shares in a business does not mean that the shareholder has direct control over the business's day-today operations. While shares are often used to refer to the stock of a corporation. that person would own and have. commodity. company.owns 100 shares. BSE INDICES:INDEX: An Index is used to summarize the price movements of a unique set of goods in the financial. Share A unit of ownership interest in a corporation or financial asset. they have outperformed most other investments over the long run. More specifically. bonds. shares can also represent ownership of other classes of financial assets. T-bills and other type of financial securities. if any are declared in the form of dividends. Brokerage before a trade could be conducted. or other institution that 3 own at least 1 share in a company. Today. which is a far cry from the days were stock certificates needed to be taken to a. Shareholder Any person.
The base year of BSE-SENSEX is 1978-79 and the base value is 100. All leading business newspapers and the business channels report SENSEX. The total market value of a company is determined by multiplying the price of the stock by the number of shares outstanding Statisticians call the index of a set of combined variables (such as price and No. liquid and representative companies.regarding the average share price in the stock market. An indexed number is used to represent the results of this calculation in order to make the value easier to work with and track over a time. Broad indices are expected to capture the overall behavior of equity market and need to represent the return obtained by typical portfolios in the country SENSEX: SENSEX is India's first Index compiled in 1986. The Index Cell of the exchange is responsible for the day-to-day maintenance of the index within the broad index policy set by the Index Committee. It is much easier to graph a chart based on indexed values than one used on actual values. As per this methodology.component stocks from different industries related to particular base period. World over majority of the well known indices are constructed using “Market Capitalization Weighted Method”. SENSEX is regarded to be the pulse of the Indian stock market. it provides the time series data over a fairly long period of time (from 1979 onwards) to be used for various research purposes. as it is the language that all investors understand. of shares) a composite index. . Due to its wide acceptance amongst the investors. The index is widely reported in both domestic and international markets through print as well as electronic media. As the oldest index in the country. the level of the index reflects the total market value of all 30. It is a basket of 30 constituent stocks representing a sample of large. SENSEX is calculated using a market capitalization weighted method. The Index Cell ensures that the SENSEX and all other BSE indices maintain their benchmark properties by striking a delicate balance between frequent replacements in index and maintaining its historical continuity.
COMPANY PROFILE . The Divisor is the only link to the original based period value of the SENSEX. the daily calculation of SENSEX is done by dividing the aggregate market value of the 30 Companies in the index by a number called the Index Divisor.In practice. The Divisor keeps the Index comparable over a period of time and the reference point for the entire index maintenance adjustments. SENSEX is widely used to describe the mood in the Indian Stock Markets.
Each new award is a manifestation of our hard work and commitment to our clients Since inception. Retail and Financial Product Distribution. For us winning awards is a matter of pride and honour. I-Sec PD has been recognized as the ‘Best Domestic Bond House in India’ . mandates or awards. we manage them all in our quite and efficient way. Be it deals. Institutional Equities. ICICI Securities Limited assists global institutional investors to make the right decisions through insightful research coverage and a client focused Sales and Dealing team. ICICI Securities has the largest reach to the retail segment through its two pioneering bra Winning is a habit that is assiduously cultivated at ICICI Securities Limited (I-Sec).ICICI Securities Limited ICICI Securities Ltd is a premier Indian Investment Bank. with a dominant position in its core segments of its operations .Corporate Finance including Equity Capital Markets Advisory Services. I-Sec's expertise has been time and again widely recognized by both domestic and international agencies.
ICICI Securities Inc. a roster of blue-chip clients and performance second to none. 2004. Headquartered in Mumbai. I-Sec operates out of several locations in India. (NASD). the step-down wholly owned US subsidiary of the company is a member of the National Association of Securities Dealers. With a full-service portfolio. These awards are a strong testimony of our capabilities and continuing dominant position in the market. 2006 and 2007. is also registered with the Financial Services Authority. Inc. can engage in permitted activities in the U. The Corporate Finance team regularly ranks highest among the leading capital markets league tables and recently topped the Prime Database League tables for funds mobilized through equity instruments in the first half of CY 07. Today ICICI Securities is among the leading Financial Institutions both on the institutional as well as retail side. The Corporate Finance group also was awarded a runner-up Best Merchant Banker by Outlook Money in 2007. ICICI Securities Inc.2001. These activities include Dealing in Securities and Corporate Advisory Services in the United States and providing research and investment advice to US investors. The equities team was adjudged the ‘Best Indian Brokerage House-2003’ by Asiamoney.by Asiamoney for 2002. I-Sec PD has been awarded the prestigious ‘Best Bond House’ by Financeasia. 2003. securities markets.com and ICICIdirect2004.S. 2005 and 2007.com for the years . UK (FSA) and the Monetary Authority of Singapore (MAS) to carry out Corporate Advisory Services and Dealing in Securities. 2005. ICICI Securities – India’s Leading Investment Bank . nds – ICICIdirect. As a result of this membership. ICICI Securities (I-Sec) topped the Prime Database League Tables 2007 for money raised through IPOs/FPOs. we have a formidable reputation within the industry. ICICI Securities Inc..
CUSTOMERS: Value and experience. best value and delightful experience: . a roster of blue-chip clients and performance second to none. SHAREHOLDERS: High ROCE. EMPLOYEES: Rewards and growth.3 VISION MISSION AND QUALITYPOLICY: VISION: • • • • • • SHAREHOLDERS: High ROCE. EMPLOYEES: Rewards and growth. • Asset Heavy or long gestation businesses through separate JVs/group companies.A subsidiary of ICICI Bank . Institutional Equities. MISSION: • • Focus on core competence in financial services: Multiple products and diverse revenue streams ensure derisked businesses. ROE CUSTOMERS: Value and experience.the largest and most recognized private bank in India – ICICI Securities Ltd is premier Indian Investment Bank. QUALITY POLICY: • Drive customer stickiness through quality advice. Retail and Financial Product Distribution With a fullservice portfolio. we have a formidable reputation within the industry 2.Corporate Finance including Equity Capital Markets Advisory Services. ROE. with a dominant position in its core segments of its operations .
back‐office and customer service. personalized service and cutting-edge technology.4 PRODUCTS/SERVICES PROFILE Icici Securities offering a one-stop financial services shop. 2. • Wide. multi modal network serving as one stop shop to customers.• Cutting edge proprietary technology for execution. most respected for quality of its advice. SERVICE PROFILE: Other Income Financing & Investing Online Media & Content Equities PRODUCT PROFILE: Mutual Funds Life Insurance 1) EQUITIES Commodities .
which was hitherto restricted only to the institutions. Its experience in securities broking has empowered it with requisite skills and technologies. 3) RESEARCH Sound investment decisions depend upon reliable fundamental data and stock selection techniques.34bn to Rs 20. The Company was among the first to offer the facility of commodities trading in India’s young commodities market (the MCX commenced operations only in 2003). Icici Securities Equity Research is proud of its reputation for. 4) COMMODITIES Icici Securities extension into commodities trading reconciles its strategic intent to emerge as a one-stop solutions financial intermediary. This service is particularly advisable for investors who cannot afford to give time or don't have that expertise for day-to-day management of their equity. On the whole. Research for the retail investor did not exist prior to Icici Securities . The commodities market has several products with different and noncorrelated cycles.02 bn. Icici Securities invests the customer’s resources into stocks from different sectors. Average monthly turnover on the commodity exchanges increased from Rs 0. The Company’s commodities business provides a contra-cyclical alternative to equities broking. Icici Securities leveraged technology to bring the convenience of trading to the investor’s location of preference (residence or office) through computerized access. . Icici Securities made it possible for clients to view transaction costs and ledger updates in real time. the business is fairly insulated against cyclical gyrations in the business.Icici Securities provided the prospect of researched investing to its clients. depending on their risk-return profile. 2) PMS – PORTFOLIO MANAGEMENT SERVICE Portfolio Management Service is a product wherein an equity investment portfolio is created to suit the investment objectives of a client. and wants the customer to find the facts needed.
5) MORTGAGES During the year under review. No paperwork. The Company brings on board expertise in the loans business coupled with existing relationships across a number of principals in the mortgage and personal loans businesses. VAS (Value Added Service) . 6) INVEST ONLINE Icici Securities has made investing in Mutual funds and primary market so effortless. Best of the lot. no queues and No registration charges. The business is still in the investing phase and at the time of the acquisition was present only in the cities of Mumbai and Pune. 9) SMS: There are three products under SMS Service: • • • Market on the move. 7) INVEST IN MF Icici Securities offers a host of mutual fund choices under one roof. Icici Securities acquired a 75% stake in Money tree Consultancy Services to mark its foray into the business of mortgages and other loan products distribution. 8) APPLY IN IPO’S You could also invest in Initial Public Offers (IPO’s) online without going through the hassles of filling ANY application form/ paperwork. backed by indepth research and advice from research house and tools configured as investor friendly.
The Company’s entry into the insurance sector de-risked the Company from a predominant dependence on broking and equity-linked revenues. 11) WEALTH MANAGEMENT SERVICE: The company offers the customers a dedicated group for giving the most personal attention at every level. 12) NEWSLETTERS: The Icici Securities Weekly Newsletter is a flashback for the week gone by. Leader Speak and features is delivered in the client’s inbox every Friday evening. it graduated the Company into a one-stop retail financial solutions provider. The annuity based income generated from insurance intermediation result in solid core revenues across the tenure of the policy. Competitors KARVY . A weekly outlook coupled with the best of the web stories from Icici Securities and links to important investment ideas.. concurrently.10) INSURANCE: An entry into this segment helped complete the client’s product basket.
Depository Participants. As on date. Since then. we have utilized our experience and superlative expertise to go from strength to strength…to better our services. and carved inroads into the field of registry and share accounting by 1985. diversify and in the process. to innovate. Transactions. among others. across India. the Group employs 4000 plus employees. Personal Finance Advisory Services. KARVY covers the entire spectrum of financial services such as Stock broking. Distribution of financial products . operations and research of various industrial segments.mutual funds. Insurance Broking. India Infoline Ltd. The corporate structure has evolved to comply with oddities of the regulatory framework but . to provide new ones. and ranked among the top five in the country in all its business segments. and provides investor services to over 300 corporate. is a premier integrated financial services provider. equities. Mobile Alerts: Receive SMS alerts for all debits/credits as well as for any request which cannot be processed. Karvy has a professional management team and ranks among the best in technology. INDIA INFOLINE The India Infoline Group comprises the holding company.KARVY. We started with consulting and financial accounting automation. fixed deposit. Merchant Banking & Corporate Finance. placement of equity. Mobile Request: Access your demat account by sending SMS to enquire about Holdings. in over 60 locations. IPOs. bonds. The birth of Karvy was on a modest scale in 1981. Commodities Broking. Bill & ISIN details. It began with the vision and enterprise of a small group of practicing Chartered Accountants who founded the flagship company …Karvy Consultants Limited. services over 16 million individual investors in various capacities. comprising the who is who of Corporate India. which has 4 wholly-owned subsidiaries engaged in distinct yet complementary businesses which together offer a whole bouquet of products and services to make your money grow. evolved Karvy as one of India’s premier integrated financial service enterprise.
com and www.indiainfoline. Ltd. our website was included in the Top 200 Best of the Web list by Forbes Global under the Asia Investing category.indiainfoline. It bring investment advice tempered by eighty years of broking experience. Business Line and others. Launched on 11 May 1999.5paisa. The site provides quality information and analysis . With more than 240 share shops in 110 cities. We were the only website from India to be featured in any category. In May 2001.." Sharekhan Sharekhan is a India’s leading stock broker of the retail arm SSKI (Sri Shantilal Kantiwal.).indiainfoline. on the BSE and the NSE.com. and India’s premier online trading destination. In its last review.Ishwarlal Pvt. The parent company. Forbes editors have said. depository services.still beautifully help attain synergy and allow flexibility to adapt to dynamics of different businesses.earlier restricted to a few people . The company also won the Golden Mouse Award in India Internet World 2000 for the "Best Finance" site. It also undertakes research. commodities trading on the MCX and NCDEX and most importantly. Indiabulls . customized and off-the-shelf. www. an organization with over eighty years of experience in the stock market. Sharekhan’s customer enjoy multi channel access to the stock market. "www. absolutely free! The site has met with an overwhelming response and has been reviewed as the most comprehensive financial content website in India by BBC World .com is a must read for the investors in South Asia.Money Watch.to the common man. India Infoline Ltd owns and manages the web properties www.com is India’s leading and most comprehensive business and financial information website. Since then it has been nominated twice to this list.. Business World. and it offers you trade execution facilities for each as well as derivatives.
Investment Strategy: • A blend of Value and growth stocks. high weightage is towards value stock. and the consolidated net worth of the company is around USD 500 million. Objective: • To generate wealth on long term basis rather than outperform by taking higher risk. The market capitalization of Indiabulls is around USD 800 million.Indiabulls Financial Services Ltd is listed on the National Stock Exchange.50% brokerage on transactions Angel Blue-chip . Some of the large shareholders of Indiabulls are the largest financial institutions of the world such as Fidelity Funds. • Earlier identification of stock to ride through the entire investment cycle • Stock picking is based on hidden values and not the market capitalization. Lloyd George and Farallon Capital. Capital International. Indiabulls and its group companies have attracted USD 300 million of equity capital in Foreign Direct Investment (FDI) since March 2000. Goldman Sachs. Luxembourg Stock Exchange and London Stock Exchange. Bombay Stock Exchange. Merrill Lynch. Investor Profile: • The scheme would be suited for investors with medium to high risk appetite having long term perspective Fees and Charges 2% Asset Management Charges 0. PRODUCT BOUQUET Angel Oyster Bottom up concentrated portfolio with emphasis on Value Investing. • Ensuring a balanced portfolio with a relatively medium risk profile.
having long term perspective Fees and Charges • 2% Asset Management Fees • 0. The objective is to generate moderate returns by creating margin of safety. Objective: • The scheme will seek to achieve returns through deployment into Equity assets and partially hedging the portfolio using options and futures.Bottom up concentrated portfolio with Emphasis on GARP (Growth at Reasonable Price).50% Brokerage on transactions Angel Equity Derivatives Fund Bottom up concentrated portfolio with Equities and Derivatives and Emphasis on Hedging using volatility in the Markets. Objective: • The scheme will seek to achieve returns through broad based participation in equity markets by creating a diversified equity portfolio of medium to large capitalized companies • Out-performance to sensex will be the prime motive Investment Strategy: • Major proportion of large and medium capitalized stocks • Medium capitalized stocks not to exceed 25% • Sectoral exposure not to exceed 25% Investor Profile: • The scheme would be suited for investors with medium to low risk appetite. .
• Also the funds lying idle would be deployed in arbitrage between cash and future and /or place in low maturity debt funds and low risk F&O Strategies. Investment Strategy: • Investments would be in fundamentally strong Large cap and Mid Cap companies having high liquidity in Options.03% on futures Organizational structure A sound organization structure ensures a smooth progress path & achieving of milestones . • Suitable for HNI’s and Corporates who want to park money for consistent Return from the market even if market remained flat. 0.10% on Delivery and Rs. • Partial hedging of open positions would be done by writing options Investor Profile: • The scheme would be suited for investors with low to medium risk appetite.50 flat on options. Fees and Charges • 1% Asset Management Charges • 0. having long term perspective.
Affair Product domestic &global Product group Activity head Domestic & Global Reg/Br Principal office Systems Life Non-life Corporate Training Recruitment Branding Reg/Br Auto Tracto Refinance PMS Car Product Mkt Intellige nce Process Admin Accounts Regions Qualit Legal Asset Restructing Payroll Reg/Br INTRODUCTION TO DERIVATIVES .Managing Director Finance & systems S Operation & legal MIBL Marketing HR/Training/ Admn Treasury Corp.
and companies etc. .Primary market is used for raising money and secondary market is used for trading in the securities. e. All derivatives are based on some cash product. money instruments for example loan & deposits. The underlying assets can be: a.C.e. which have been used in primary market. which has been derived from another variable. c. The price of the derivative instrument is contingent on the value of underlying assets. Hence derivative market has no independent existence without an underlying asset. b. As a tool of risk management we can define it as. d. Any type of agriculture product of grain (not prevailing in India) Price of precious and metals gold Foreign exchange rates Short term as well as long-term bond of securities of different type issued by govt. It refers to a variable. The work "derivative" originates from mathematics. i. But derivative market is quite different from other markets as the market is used for minimizing risk arising from underlying assets. X = f (Y) WHERE X (dependent variable) = DERIVATIVE PRODUCT Y (independent variable) = UNDERLYING ASSET A financial derivative is a product that derives value from the market of another product. "a financial contract whose value is derived from the value of an underlying asset/derivative security".T. O.
Example: Wheat farmers may wish to sell their harvest at a future date to eliminate the risk of change in price by that date. The price of these derivatives is driven from spot price of wheat. DEFINITION OF DERIVATIVE In the Indian context the Securities contracts (Regulation), Act 1956 defines "Derivative" to include: (1) A security derived from a debt instrument, Share, Loan whether secured or unsecured, Risk instrument or contract for difference or any other form of security. A contract, which derives its value from the prices of underlying securities.
HISTORICAL ASPECT OF DERIVATIVES:
The need for derivatives as hedging tool was first felt in the commodities market. Agricultural F&O helped farmers and PROCESSORS hedge against commodity price risk. After the fallout of BRITAIN WOOD AGREEMENT, the financial markets in the world started undergoing radical changes, which give rise to the risk factor. This situation led to development of derivatives as effective "Risk Management tools". Derivative trading in financial market started in 1972 when "Chicago Mercantile Exchange opened its International Monetary Market Division (IIM). The IMM provided an outlet for currency speculators and for those looking to reduce their currency risks. Trading took place on currency. Futures, which were contracts for specified quantities of given currencies, the exchange rate was fixed at time of contract later on commodity future contracts was introduced then followed by interest rate futures. Looking at the liquidity market, derivatives allow corporate and institutional investors to effectively manage their portfolios of assets and liabilities through instruments like stock index futures and options. An equity fund e.g. can reduce its exposure to the stock market and at a relatively low cost without selling of part of its equity assets by using stock index futures or index options. Therefore the stock index futures first emerged in U.S.A. in 1982.
PRODUCTS, PARTICIPANTS AND FUNCTIONS
Derivative contracts have several variants. The most common are FORWADS, FUTURES, OPTIONS AND SWAPS. The following three categories of Participants-Hedgers, Speculators, and Arbitrageurs.
Hedgers face risk associated with the price of an asset.
They use futures or options markets to reduce the risk. Thus, they are operation who want to eliminate the risk composing of their portfolio.
They wish to be on future movements in the price of
an asset. A speculator may buy securities in anticipation of rise in price. If this expectation comes true he sells the securities at a higher price and makes a profit. Usually the speculator does not take delivery of securities sold by him. He only receives and pays the difference between the purchase and sale prices.
They are in business to take advantage of discrepancy
between price in two different markets. If for example, they see the future price of an asset getting out of line with the cash price, they will take off setting positions in two markets to lock in profit.
TYPES OF DERIVATIVES
(5) BASKETS: .The most commonly used derivative contract is forwards. at a given price on or before a given future date. (2) FUTURES: a future contract is an agreement between two parties to buy or sell an asset at a certain time the future at the certain price. However. These long-term option contracts are popularly known as Leaps or Long term Equity Anticipation Securities. (3) OPTIONS: it is of two types: call and put options. futures and options: (1) FORWARDS : a forward contract is a customized contract between two entities. PUTS give the buyer the right but not the obligation to sell a given quantity of the underlying asset at a given price on or before a given date. where settlement takes place on a specific date in the futures at today's pre-agreed price. exchange may introduce option contracts with a maturity period of 2-3 years. Futures contracts are the special types of forward contracts in the sense that are standardized exchange traded contracts. (4) LEAPS: Normally option contracts are for a period of 1 to 12 months. Underlying asset.
b) CURRENCY SWAPS: these entail swapping both Principal and interest between the parties. . with the cash flow in one direction being in a different currency than those in the opposite direction. They can be regarded as portfolios of forward's contracts. Equity Index Options are most popular form of baskets. with the cash flow in one direction being in a different currency than those in the opposite direction. (6) SWAPS: these are private agreements between two parties to exchange cash flows in the future according to a prearrange formula. The two commonly used swaps are: a) INTEREST RATE SWAPS: these entail swapping both Principal and interest between the parties.Baskets options are option on portfolio of underlying asset.
a) In cash market tangible asset are traded whereas in derivatives market contract based on tangible assets or intangible like index or rates are traded. offsetting contract or cash settlement. whereas derivative contracts on intangibles are necessarily settled in cash or through offsetting contracts. d) The cash markets always has a net long position. the derivative contracts on tangible may be settled through payment and delivery. b) The value of derivative contract is always based on and linked to the underlying asset. e) Cash asset may be meant for consumption or investment. this linkage may not be on point-to point basis. arbitration or speculation. Though. f) Derivative markets are highly leveraged and therefore could be much more riskier. whereas the net position in derivative market is always zero.Cash Vs Derivative Market The basis differences between these two may be noted as follows. Derivatives are used for hedging. . c) Cash market contracts are settled by delivery and payment or through an offsetting contract.
Thus derivatives help in discovery of future as well current prices. witness higher trading volumes because of participation by more players who would not otherwise participate for lack of an arrangement to transfer risk. creative. the benefits of which are immense. (4) Derivatives have a history of attracting many bright.THE DERIVATIVE MARKETS PERFORM A NUMBER OF ECONOMIC FUNCTIONS: (1) Prices in organized derivative markets reflect the perception of market participants about the future and lead the prices of underlying to perceived future level. (3) Derivatives due to their inherent nature are linked to the underlying cash markets. (2) The derivative market helps to transfer the risks from those who have them but may like them those who have an appetite for them. With the introduction of derivative. They often energize others to create new business. the underlying market. welleducated people with an entrepreneurial attitude. (5) Derivatives market helps increase savings and investments in the long run Transfer of risk enables market participants to expand their volume of activities. new products and new employment opportunities. . The prices of derivatives converge with the prices of the underlying at the expiration of the derivative contract.
and futures are used for hedging. However at the same time you feel that overall market may not perform as good and therefore price of your stock may also fall in line with overall marked trend. clearing bank. . trading members. speculators. • Financial institutions. OBJECTIVES OF DERIVATE TRADING (1) HEDGING: you own a stock and you are confident about the prospects of the company. Hedging is a tool to reduce the inherent risk in an investment. • Hedgers. Various strategies designed to reduce investment risk using call option. put options. arbitrageurs. Such insurance is known as hedging. You expect that some adverse economic or political event might affect the market sentiments. it is good to retain the stock. In both these situations you would like to insure your portfolio against any such market fall. The basic purpose of a hedge is to reduce the risk of loss. clearing members. • Stock lenders and borrowers.PARTICIPANTS IN DERIVATIVE MARKET • Exchange. short selling. • Clearing. therefore. though fundamentals of the company will remain good.
However. Likewise you may also have an opinion about the overall market trend. due to uncertainty about interest rates. To take advantage of such opinion. (3) SPECULATION: you may have very strong opinion about the future market price of a particular asset based on past trends. individual asset or the entire market (index) could be sold or purchased. This imbalance in future and spot price gives rise to arbitrage opportunities. or uncertainty about future income stream. . current information and future expectation.(2) ARBITRAGE: The future price of an underlying asset is function of spot price and cost of carry adjusted for any return on investment. Transaction made to take advantage of temporary distortions in the market are known as arbitrage transactions. distortions in spot prices. Position taken either in cash market of derivative market on the basis of personal opinion is known as speculation. prices in futures market may not truly reflect the expected spot price in future.
This involves Badla financiers. spot price is always less than future price. BASIS: It is difference between spot price and future price of the same asset. which is exercised. in accordance with the procedure specified in by the relevant authority from time to time. In normal markets this basis is always negative.DERIVATIVE TERMINOLOGY ASSIGNMENT: It means allocation of an option contract. BADLA: It is an indigenous mechanism of postponing the settlement of trade. stock lenders and stock traders. at the same strike price. unpredictable charges and high risk due to inadequate margining are inherent limitations of Badla. This product is peculiar to India markets. to a short position in the same opinion contract. The long buyers and short sellers may postpone settlement of their trade by making payments and giving delivery by using the services of Badla financiers and stock lenders who assume their positions for Badla charges. A positive basis provides for arbitrage opportunity. i.e. Counterparty risk. for fulfillment of the obligation. .
is known as offsetting contract. CONTRACT VALUE It is the value arrived at by multiplying the strike price of the option contract with the regular/market lot size. . It shows how the price of scrip would move with every percentage point change in the market index.BETA: It is a measure of the sensitivity of returns on scrip to return on the market index. EXERCISE: It is defined as the number of future or option contracts required be buying or selling per unit of the spot underlying position to completely hedge against the market risk of the underlying. which offsets an existing contract. Failure to pay margins may result in mandatory closure of position. OFFSETTING CONTRACT: new matching contract. Some amount of margins is collected upfront and some are collected shortly after the trade. MARGIN: It is the money collected from parties to trade to insure against the default risk.
Time value represents the cost of carrying the underlying for the option period. which he intender to sell in near future. The counterparty assumes the risk in anticipation of making gain . adjusted for any dividend and option premium. Intrinsic value is the difference between the spot price of the underlying and exercise price of the contract.OPTION PREMIUM: It is consideration paid by the option buyer to option writer. The premium has two components intrinsic value and time value. may transfer the inherent risk by selling futures today. The holder of an asset. RISK TRANSFER: It refers to hedging against the price risk through futures.
Counter party risk on the part of broker.Systematic risk in the form that the price of scrip may go up or to reason affecting the sentiment of whole market. 2.Liquidity risk in the form that the particular scrip might not be traded on exchange. down due .Mutual funds may find it difficult to invest the funds raised by them properly as the scrip in which they want to invert might not be available at the right price. 4.Unsystematic risk in the form that the price of scrip may go up or down due to “Company Specific Reasons”.REASON FOR STARTING DERIVATIVES 1. 6. in case it ask money from us but before giving delivery of shares goes bankrupt. 3.
4. 2. have a wider capital base. be actively traded. the investors move to the secondary market to book profits. who can write the options contracts. Creation of paper-less trading and a book-entry transfer system. 7. 5. Creation of a strong cash market (secondary market). and a contract price. and so on. only the premium should be negotiated on the floor of the exchange. a strike price. the clearing house has to bear the cost necessary to carry out the contract. 6. Strict capital adequacy norms to be laid out and followed. For a given underlying security. all contracts on the options exchange should have an expiry date.THE REQUIREMENTS FOR SETTING UP FUTURE AND OPTION TRADING ARE OUTLINED BELOW: 1. 3. . Creation of an Options Clearing Corporation (OCC) as the single guarantor of every traded option. Uniformity of rules and regulation in all the stock exchanges. Standardization of the terms governing the options contracts. Large. Careful selection of the securities may be listed on a National securities exchange. In case of default by a party to a contract. This would decrease the transaction costs. financially sound institutions. members and a number of market makers. This is because after the exercise of an option contract.
TRADER GUARANTEE: The first "clearing corporation" (CCL) guaranteeing trades has become fully functional from July 1996 in the form of National Securities Clearing Corporation (NSCCL) for which it does the clearing.500 crores. 2. Which means on an average every month 14% of the country market capitalization gets traded. shows high liquidity.(NSDL).000 corers. 3. which started functioning in the year 1997. A GOOD LEGAL GUARDIAN: SEBI is acting as a good legal guardian for Indian Capital market. . LARGE MARKET CAPITALIZATION: India is one of the largest market capitalized country in Asia with a market capitalization of more than 7. 4. has strengthen the securities settlement in our country. STRONG DEPOSITORY: A strong depository National Securities Depositories Ltd. 5. HIGH LIQUIDITY: In the underlying securities the daily average traded volume in Indian capital market today is around 7.65.STRENGTH OF INDIAN CAPITAL MARKET FOR INTRODUCTION OF DERIVATIVES 1.
Increase in hedger. It does not totally eliminate speculation. INSTRUMENTS OF DERIVATIVE TRADING FORWARD Derivative FUTURE OPTION SWAPS . No physical delivery of share certificate so reduction in cost by stamp duty. 2. which is basic need of Indian investors.IMPORTANCE OF DERIVATIVE TRADING 1. Reduction of borrowing cost. speculator and arbitrageurs. Enhancing the yield on assets. 3. 6. 5. Modifying the payment structure of assets to correspond to investor market view. 4.
The speculator would go long on the forward. wait for the price to rise. and then be can go long on the forward market instead of cash market. It removes the future price risk. If a speculator has information or analysis. but the contract takes a positive or negative value for parties as the price of underlying asset moves. . this is generally a relatively small proportion of the value of assets underlying the forward contract. and then take a reversing transaction to book profits. The two parties are: • Who takes a long position – agreeing to buy • Who takes a short position—agreeing to sell The mutually agreed price is known as "delivery price" or "forward price". However. which forecast an upturn in price. The delivery price is chosen in such a way that the value of contract for both parties is zero at the time of entering the contract.FORWARD CONTRACT "It is an agreement to buy/sell an asset on a certain future date at an agreed price". Speculator may well be required to deposit a margin upfront.
Profit/Loss = ST-E ST = spot price on maturity date E = delivery price . But later as the price & the underlying asset changes. 30. long position would gain the same amount or vise versa if price quoted is less than delivery price. PRICE UNDERLYING ASSETS INCREASE DECREASE & HOLDER POSITION POSITIVE & LONG HOLDER & SHORT POSITION VALUE NEGATIVE VALUE NEGATIVE VALUE POSITIVE VALUE E. Now if the price of share on that date is Rs. than a who has short position would stand to loss of Rs.EFFECT OF CHANGE IN PRICE: As mentioned above the value of such a contract in zero for both the parties. 2002 at a Rate of Rs.g. A agrees to deliver 100 equity shares of Reliance to B on Sept. 140 per share. 120 per share. it gives positive or negative value for contract. (20*200) = 4000.
2. with continuous compounding T = time of maturity. dividend in future nor having arbitrage opportunities. Lack of liquidity. To overcome this other type of derivation instrument known as "Future Contracts" were introduced. 4. One party can breach its obligation. 3. Here Price (F) = S0e rt Where F = Future Price S0 = spot price of asset R = risk free rate of interest p. . which neither expects to do not pay any.LIMITATIONS OF FORWARD CONTRACT 1.g. VALUATION OF FORWARD CONTRACT The forward contract can be put under three categories for the purpose & valuation: VALUATION OF THOSE SECURITIES PROVIDING NO INCOME Shares. Lack of centralization of trading. e. If F>S0ert In this case the investor will buy asset and take a short position in the forward contract. No standardization.a.
borrowing an amount equal to * * for "t" period at risk free rate.S0ert If F< S0ert He will long his position in forward contract. 71. When contract matures: the assets would be purchased for "F" Here profit is S0ert –F E.a. the assets will be delivered for price F and repayment will be equal to S0ert and there is net profit equal to F.41 If F = 73 Then an arbitrageur will short a contract. Repay the loan of Rs. 70. Consider a forward contract were non-dividend shares available at Rs.08 = 70 x 0202 = Rs.40.60 Thus he shorts his forward contract position."Short position is not position of investor is of seller means contract sold is greater then contract bought". borrow an amount of Rs. 70 matures in 3 months.40) 1. Risk free rate 8% p. At maturity sell it as Rs.25x0. At the time of maturity. Investor may buy the assets. thus profit is (73.71. 73 (forward contract price) and 71.g. 70 & buy share at Rs. . S0ert = 70 x [e] 0. compounded continuously.
Profit = F –(So – I) ert If F <(So-I) ert Arbitrageur can long a forward contract. 1.10) = 3654.SECURITIES PROVIDING A CERTAIN CASH INCOME If there is certain cash income to be generated on securities in future to the investor.a.8) e(0.5)(0. Solution: divided receivable after 4 months resent Value & dividend = 100x1.50 = 150xe (4/12)(0. Present Value of Dividend = Rate & Interest (continuously compounded) ~If there is no arbitrage Then F = (So – I) ert ~If F> (So –I)ert Arbitrageur can short a forward contract. Let us consider a 6-month forward contract on 100 shares at Rs. we will determine present value of income e.10)50 = Rs 50x0.31 .50=Rs. 38 each risk free of interest (compounding continuously) earn is 10% p.92x1. borrow money and buy the asset at present and at maturity asset is sold and earns profit.g.50 in 4 months.05127 F = 3842.1.88 = (3800-145. dividend is expected to a yield of Rs.9672=RS 145. short the asset a present and invest the proceeding Profit (at maturity) (So-I) ert –F E.g. in case of preference share.
which may be percentage 0 their prices. 527. as underlying assets.g. Stock underlying an under provide a. * * = 520 T =3/12 =0.04.85 .VALUATION & FORWARD CONTRACT PROVIDING A KNOWN YIELD In case of share included in portfolio companies the index. r=0.a. are expected to give dividend in course of time.a.a.. dividend yield of 4.40) (0.10-0. F = Soert E.1% p. current value of index is 520 and risk free rate of interest is 10% p. y = 0. It is assumed to be paid continuously at a rate of "Y" p.25 F = 520xe(0.25) = 520x01512 = Rs.10.
Guarantee for performance by a clearing corporation or clearing house. date of delivery. and three-month expiry . FUTURE TERMINOLOGY SPOT PRICE: the price at which an asset trades in the spot market. Clearinghouse is associated with matching. 2. registering. place and alternative asset. CONTRACT CYCLE: the period over which the contract trades. specific size. Standardized contracts e. 4. 3. confirming setting. FUTURES PRICE: the price at which the futures contract trades in the futures market. contract size. reconciling and guaranteeing the trades on the future exchanges.FUTURE CONTRACT 'It is an agreement between buyer and seller for the purchase and sale of a particular assets at a specific future date.g. It has some features of Badla also. FEATURES OF FUTURE CONTRACT: 1. The index futures contracts on the NSE have one month. It takes obligation on both parties to fulfill the contract. Clearinghouse tries to eliminate risk of default by either party. Between two parties who do not necessarily know each other. processing.
COST OF CARRY: the relation between futures price and spot price can be summarized in terms of what is known as cost of carry.cycles. basis can be defined as the futures price minus the spot price. EXPIRY DATE: it is date specified in the futures contract. . which expire on the last Thursday of the month. a new contract having three-month expiry is introduced of trading. This reflects that futures prices normally exceed spot prices. For instance. There will be a different basis for each delivery month for each contract. This measures the storage cost plus the interest that is paid to finance the assets less the incomes earned on the asset. CONTRACT SIZE: the amount of asset that has to be delivered less than one contract. in a normal market. at the end of which it will cease to exist. the contract size on NSE's futures market is Nifties. Thus a January expiration contract expires on the last Thursday of the January. This is the last day on which the contract will be traded. BASIS: in the contract of financial futures. basis will be positive. On the Friday following the last Thursday.
the margin account is adjusted to reflect the investor's margin gain or loss depending upon the future's closing price. This is set to ensure that the balance in the margin account never becomes negative. the investor receives a margin call and is expected to top up the margin account to the initial margin level before trading commences on the next day.INITIAL MARGIN: the amount that must be deposited in the margin account at a time a future contract is first entered into is known as initial margin. at the end of each trading day. If the balance amount falls below the maintenance margin. . MARKING-TO-MARKET: in the futures market. MAINTENANCE MARGIN: this is somewhat lower than initial margin.
etc. 2. Contract Life: Mostly for 90 days or less. There connot be any quality variations into these assets. 3. 4. Russell 3000. S & P 5000. Gold. US Treasury Bond Futures are of even more than 2 years 3. . Nikkie 225. Introduced by IMM (a division of CME) It Includes: 10 or 5 year treasury notes (in 1976 by I:M:M). Mini Value line Stock Index. 4. Chicago Mercantile Exchange (CME). and Cattle etc. Mostly Longer time e.g. New York Mercantile Exchange Includes: Wheat. Euro Dollars. New York: Commodity Exchange.INSTRUMENTS OF FUTURE CONTRACTS COMMODITY FUTURES 1. Canadian Dollars. Natural Gas. 2. Platinum. Quality specified FINANCIAL FUTURES 1. Maturity date is mostly non-standardized. Maturity date is standardized. British Pound. Russell 2000. Trader in American Exchanges like CBOT.
Institutional and large equity holders need portfolios hedging facility. 80-90% of retail participation is expected in India because. Impact cost will be much lower than dealing in individual scrip. the arbitrage between the futures equity market is further expected to reduce impact cost. . Index Futures began trading in India in June 2000 of Trade (KSBT)'s Futures derive its value from the underlying index-e. 4. Index future contracts are key contracts. Index derivatives are more suited to them and more cost effective than in individual stocks. 1. 2. 3. Savings in cost is possible thorough reduced bid-ask spreads where stocks are trade in package forms.TYPE OF FUTURE CONTRACTS: INDEX FUTURES & STOCK FUTURES INDEX FUTURES: Of the financial futures. introduced in U. NSE's futures. Contracts are based on "S & P CNX NIFTY" At present it has become the most liquid contract in the country. A.S. in 1982 by the "Commodity Futures Trading Commission" (CFTC) by approving the Kansas Board proposal. Pension funds in the US are known-to use stock index futures for risk hedging purpose.g. Brokerage cost is lower.
000. 2 months later the stock closes at Rs. E. 20.000 works out annual return of 12%. and the possibility of cornering is reduced. 400 on an investment of Rs. 20. . 7. OR expiration date. and hence don't suffer from settlement delays and problems related to bad delivery & forged certificates.000. Stock index.5. in Reliance SEB! Frame guidelines for its trading stock futures can be effectively used for hedging: speculation and arbitrage At present there are 31 scrips in which stock derivatives are trading. 1000 and the two month futures trades at 1006. being an average is much less volatile than individual stock prices. 010. Stock Index is difficult to manipulate as compared to individual stock prices.00. the Reliance stock traders at Rs. This implies lower capital adequacy and margin requirements.g. he makes a profit of Rs. 1. 6. He buys 100 Individual stock futures for which he buys a margin of Rs.g. INDIVIDUAL STOCK FUTURES The high level committee on capital market on 2001 decided to permit FII's to participate in "Individual Stock Futures" trading e. Index derivatives are cash settled. more so in India. Assume that the minimum contract value is Rs.
3.There is no restriction on short selling. The markets are perfect. There is no transaction cost. Bid-asks spreads do not exit so that it is assumed that only one price prevails.e. 4. (s + C – R) . Also short selling gets to use the full proceeds of the sales valuations. All the assets are infinitely divisible. Valuation of financial futures 2. This includes stock index futures. Valuation of commodity futures I. Carry type commodities Non-Carry type commodities II. 2.VALUATION OF FUTURES CONTRACTS It can be made possible on following basis: 1. VALUATION OF FINANCIAL FUTURES: Valuation of financial futures is based on following assumptions 1. In this case Price of the contract is = spot price+ Carry cost-carry returns i. The value of futures contract on a stock index may be obtained by using the "cost of carry model".
CARRY RETURNS: Dividends etc. we have F = Soe(r+s) t E. If S is the present value.a. + opportunity cost of using funds.e. Of investor for futures safety as investment alone. proportion of spot prices. of all the storage costs that may be incurred during the life of a future contract then F = (So + s)ert ~If the storage cost were proportional to price of commodity then would be the same as in case of Providing a negative yield. CARRY COST: Holding cost i.Here: SPOT PRICE: Current Price of One Unit of Deliverable asset in the Market. interest Charges etc.g. Valuation of Stock Index futures is F = S0e(r-y) t COMMODITY FUTURE'S VALUATION 1) CARRY TYPE OR INVESTMENT PURPOSE These types of commodities are held COMMODITIES VALUATION by significant number. If S represents the storage costs p. ~If storage cost is zero then F = Soert ~If any storage cost or opportunity cost then it is regarded as negative income. Let us consider a 6 months gold futures contract of 100 gm. .
12 x 0.5 S=3 x 100 e-(0. in these arbitrage arguments doesn't work investor stores these on because of its consumption value only not for investment.5) = Rs.12. which is the returns (in terms of money) that the investor realizes for carrying commodity over his short term needs. 3 per gram for the 6 monthly period to store gold and that the cost is incurred at the end of the period. 54. Valuation of non-carry commodity futures requires another concept. If the risk free rate of Interest is 12% p. 480 per gram and that it cost Rs.a. "Convenience return" or "Convenience yield".40 2) NON CARRY TYPE COMMODITITES: Consumable goods like agricultural product's futures price will not exceed the sum of spot price + Caring CostCaring Returns.53 Then F (48000 282. s=480 x 100= 48000. compounded continuously then R=0. F= (So +s) e (r-c) t S= P. 282.53)e-0.e. The financial assets have no convenience return. C=convenience cost So=Spot price .12 = Rs.Assume that the spot price is Rs.438. This is different or different investor.V. i. e = 6/12 = 0.
The investor bought futures when THE INDEX WAS AT 1220.PAY OF FOR FUTURES: (a) Payoff for buyers of futures contract-long futures Its payoff is same as payoff of a person who holds assets. Profit 1220 Nifty (underlying) Assets Loss INTERPRETATION The figure shows P/L for a long futures position. Result of holding an asset may be unlimited upside or unlimited downside. If Index If Index His futures position shows profits His futures position shows losses .
(b) Payoff for seller of futures contract-short futures It can be explained by taking an example: A speculator who sells a 2 months Nifty Index futures contracts when the nifty stands at 1220 (Nifty an underlying assets) Profit …Nifty (underlying assets) Loss INTERPRETATION: When Index moves When index movers. . Seller starts making Loss. Seller start making Profits.
FUTURES Features -Operational Mechanism -Contract Specifications -Counter party Risks -Liquidity -Price Discovery -Example -Settlement Forward Traded between two parties Differ from traded to trade Exists such risk Low Not Efficient Currency Market At end of period Future Trade on Exchange Standardised contracts No such risk High Highly Efficient Future Market Daily .FORWARD VS.
Starts in July and ends in May Seventh business day preceding the last business day of the delivery month. 2 Soft. 2 Dark Northern Spring and Price Quotation Tick Size Daily Price Limit Cents substitution and at different bushel established by the exchange. No.50 per contract) 20 cent per bushel ($1000 per contract) previous above day's or below the price settlement (expandable to 30 cent per bushel) No limit in the spot month (limit are lifted two business day before the spot month begins. Red. quarter-cents ($12. July. 2 Hard Red Winter.) One-quarter cent per bushel ($12.50 per contract. .COBOT WHEAT FUTURES CONTRACT SPECIFICATIONS Trading Unit Deliverable Grades 5000 Bushels No. September and December. No. 1 Northern Spring wheat at par and No.) Contract Months Contract Year Last Trading day March. May.
trading that contract closes in noon. Ticker Symbol W OPTIONS Options are fundamentally different from forward and futures. in a forward or futures contract. Monday through Friday.30 to 1. stock indices. the two parties have committed them self to doing something. Whereas it nothing (expect margin requirement) to enter in to a futures he purchases of an option require an up front payment. they were traded OTD.15 p. . Only the last trading day of an expiring contract. without much knowledge of valuation. In contrast.Last Delivery Day Trading Hours Last business day of the delivery month 9.m (Chicago time!. The holder does not have committed himself to doing something. Today exchange-traded options are actively traded on stocks. foreign currencies and futures contracts. An option gives the holder/buyers of the option the right to do something. HISTORICAL BACKGROUND OF OPTION: Although options have exercised for a long time.
currency. or take position in order to make profits or cover risk for a price. there has been no looking back. the firm would undertake to write the option itself in return of price.S. The firm would then attempt to find a seller or writer of option either from its own client of those of other member firms. also provide a mechanism by which one can acquire a certain commodity on other assets. 1900s that a group of firms set up what is known as the "put and call brokers and dealers association" with the aim of providing a mechanism for bringing buyers and sellers together. at a specified price on a before a give date in the future. The market for options develop so rapidly that by early 80's number of share underlying the options contract sold each day exceed the daily volume of share traded on the NYSE. there are two parties: . No secondary market No mechanism to guarantee the writer of option would honor it In 1973. CBOE was set up specially for the purpose of trading options. Since then. It was only in early. Marton. he or she would contract one of the member firms. Black.The first trading is options began in Europe and U. The two deficiencies in above markets were 1. It someone wanted to buy an option. but not the obligation to buy or sell a specified amount (and quality) of a commodity. In this type of contract as well. as early as the century. What is option? An options is the right. 2. If no seller could be found. index or financial instruments a to buy or sell a specified number of underlying futures contracts. In April 1973. Thus. Scholes invented the Black-Scholes formula. option like futures.
(a) The buyer (or the holder. or owner of options) (b) The seller (or writer of options) While the buyer take "long position" the seller take "short position" So every option contract can either be "call option" or "put option" options are created by selling and buying and for every option that is buyer and seller. OPTION BUYER SELLER RIGHT OBLIGATION TO BUY (CALL) TO SELL (PUT) TO SELL (CALL) TO BUY (PUT) .
and properties of American options are frequently deducted from those of its European counterpart.e. American options: these are the options that can be exercised at any time upto the expiration date. European options: these are the options that can be exercised only on the expiration date itself. . spot price>strike price). These are easier or analyze than American option. Expiration date: the date specified in the options contract is known as expiration date. A call option in the index is set to be in-the-money when the current index stands at a level higher than the strike price (i. Strike price: the price specified in the options contract is knows as strike price or the exercise price. the exercise date. Most exchange-traded options are Americans. Writer of an option: the writer of a call/put option is the one who receives the option premium and is thereby obliged to sell/buy the asset if the buyer exercise on him. If the index is much higher than the strike price. the strike date or the maturity. In the money option: an in the money option is an option that would lead to a positive cash flow to the holder if it will exercise immediately.OPTION TERMINOLOGY Buyer of an option: the buyer of an option is the one who by paying the option premium buys the right but not the obligation exercise his option on the seller/writer. It is also referred as option premium. Option price: option price is the price. which the option buyer pays to the option seller.
Intrinsic value of an option: the option premium can be broken into two components-intrinsic values and time value. Out-of-the money option:(OTM) option is an option that would lead to a negative cash flow it was exercised immediately. the call is set to deep ITM. If the index is much lower than the strike price. An option that is OTM or ATM has only time value. Usually the maximum time value exists when the options is ATM. Both calls and puts have time value. The longer the time to expiration. An option on the index is at-the-money when the current index equals the strike price. which is less than the strike price (spot price<strike price). the put is OTM if the index is above the strike price. Time value of an option: it is a difference between its premium and its intrinsic value. the put is ITM if the index is below the strike price. A call option on the index is OTM when the current index stands at a level. In the case of a put. The intrinsic value of a call is the amount the option is ITM. all else equal. if it is ITM. an option should have no time value. its intrinsic value is zero. At expiration. the greater is an option's time value. . In the case of a put. At-money option: (ATM) option is an option that would lead to zero cash flow if it were exercised immediately. the call is set to be deep OTM. If the call is OTM.
This is attractive to many people. or the specific date i.e. Obviously. Buying out options is buying insurance. With this he get a right to buy share on a particular date in March. The investor would naturally exercise his right if on maturity date price were below 210 and stand to gain and viceversa. CALL OPTION: It gives an owner the write to buy a specified quantity of the underling assets at a predetermined price i. 210 per share the investor get the right to sell 100 share @ 210 per share. if at the expiry date the price in market (spot price on expiry date) is above the exercise price he'll exercise his option and reverse is also true. the exercise price. PUT OPTION: It gives the holder the right to sell a specific quantity of underlying assets at an agreed price on date of maturity he gets the right to sell. . of course he is under no obligation. 210.e. is the date of maturity. To buy a put option on Nifty is to buy insurance: which reimburses the full extent to which-Nifty drops below the strike price of the put option. EXAMPLE Suppose it is January now and the investor buys a March option contract on Reliance Industries (RIL) Share with an exercise price/strike price Rs. EXAMPLE If an investor buys a March Put Option on RIL shares with an exercise price of Rs.TYPES OF OPTIONS Thus the options are of two types: CALL OPTION AND PUT OPTION.
AMERICAN Vs EUROPEAN OPTION Its owner can exercise an American option at any time on or before the expiration date. Premium/Price of an option = Intrinsic Value + Time Value Do Nothing Option to option holder matching writer. call option or it in case of . This is known as the price or premium to the seller for the option. A European style option gives the owner the right to use the option only on expiration date and not before. a consideration for Undertaking the obligation. The buyer pays the premium for the option to the seller whether he exercise the option is not exercised. OPTION PREMIUM A glance at the rights and obligation of buyer and seller reveals that option contracts are skewed. it becomes worthless and the premium becomes the profit of the seller. Close out the position by write a. Exercise the option. One way naturally wonder as to why the seller (writer) of an option would always be obliged to sell/buy an asset whereas the other party gets the right? The answer is that writer of an option receives.
Supply and demand in secondary market 2. Risk free interest rate. Exercise price 3. 4. Time to expiration 6. FACTORS AFFECTING PRICING 1. Dividend on underlying .IN-THE-MONEY AND OUT-THE-MONEY OPTIONS Condition So>E So<E So=E So =spot price Call In the money Out of the money At the money E = exercise price Put Out of the money In the money At the money Consideration for selling the option/Option Pricing/Option Premium Assumption Not transaction cost likes brokerage or commission on buying or selling. Volatility of underlying 5.
i.e How Option Work CALL OPTIONS Spot Nifty: 1100 Strike Price: 1150 Duration :3 months No. of option bought=200 Premium per option:10 Total premium paid=2000 Da y1 Da y 90 Spot Nifty:1200 Buyer exercise the option Profit: No.8000) Spot Nifty: 1000 Buyer foregoes the option Loss premium paid Rs. of option x price Differential-Premium paid=Rs.Option-to-option holder in case of—he opt for expiry date. (200x(1200-1150)2000=Rs. 2000 .
of option bought=200 Premium per option:10 Total premium paid=2000 Da y 90 Spot Nifty: 1000 Buyer foregoes the option Loss premium paid Rs. of option x price Differential-Premium paid=Rs.CALL OPTION WORK Spot Nifty:1200 Buyer exercise the option Profit: No.8000) Da y1 Spot Nifty: 1100 Strike Price: 1150 Duration :3 months No. 2000 PRICING OF OPTION AT EXPIRATION BEFORE EXPIRATION Call option At expiration Put option Before expiration Put option At expiration Call option Before . (200x(1200-1150)2000=Rs.
the call would expire unexercised. the investor can make an arbitrage profit by selling it and earning premium. equal to excess of asset price over the exercise price. If an out of money call did actually sell for a certain price. exercise it immediately at S1 and make a profit" of S1—E—C VALUE OF CALL OPTION Value . This is because no one would like to buy an asset. writer can purchase asset as S1 and give it at making a profit of (E+S1)+ premium. it'll. The buyer is unlikely to exercise option. if the call happens to be in the money. In even of (irrational) exercise of such a call. be worth its intrinsic value. the allowing seller to retain premium.expiration 1 AT EXPIRATION (a) Call option pricing at expiration: If the price of the underlying asset were lower than the exercise price on the expiration date. On the other hand. If call price <intrinsic value then he can buy call at c. which is available in the market at a lower price.
When S1<E Value of put option Value Price of share . it would have resulted in a profit to seller of option of about (E-S1) + premium. the put option will go unexercised.E Price of share Put option at expiration: When at the expiration date the price of the underlying asset is greater than exercised price. This is because there is no use of using option to sell at E when If the option were exercised.
the options call and put are usually sold for at least intrinsic valued (difference of E & S1).2. Minimum value of call is always is equal to its intrinsic value.S. greater were time value. (a) Call Option Pricing: A call option will usually sell for at least its intrinsic value. a 45 0 line starting at E. by. P=f (E. . Intrinsic value = S>E To this would be added the time value. BEFORE EXPIRATION: Before expiration. if any longer the time expiry. equal to the excess of stock price over the exercise price.T) Y Price of Call option Intrinsic Value 450 E Stock Price X In figure intrinsic value is shown.
e. higher is the time value. For in the money Put Option i.of-the money i. which is excess of exercise price over stock price. For out-the-money/at the money Put Option i. Call Option pence is out. zero intrinsic value then option price=S2B= only time value (c)Put Option Pricing It would sell for a price that is at least equal to intrinsic value. S<E P=Intrinsic value +Time Value Time Value=f (Time of Maturity) Higher the time to maturity. S>E.At Stock price S2.e.S = 0 P=Time Value b'coz intrinsic value = 0 B Price of put option Time value Value Intrinsic B1 Time Value Stock prices S1 E S2 . when option is in –the money. E.e.
98 prescribing necessary preconditions for introduction of derivatives trading in India. methodology for charging initial margins. SEBI set up a 24 members committee under the Chairmanship of Dr. The SCRA was amended in Dec. SEBI also set up a group in June 1998 under the Chairmanship of Prof. broker net worth. deposit requirement and real time monitoring requirements. L. 96 to develop appropriate regulatory framework for derivatives trading in India. The act also made it clear that derivative shall be legal and valid only it such contract are traded on a recognized stock exchange. The government also rescinded in March 2002. The committee submitted its report on 17th March. J. the committee recommended that derivatives should be declared as 'securities' so that regulatory framework applicable to trading of 'securities' could also govern trading of securities. as there was no regulatory framework to govern trading of derivatives. however. 1999 to include derivatives within the ambit of 'securities' and the regulatory framework was developed for governing derivatives trading. to recommend measures for risk containment in derivatives market in India. The report. The market for derivatives. 1998. . did not take off. Gupta on 18th November. 1995 which withdrew the prohibition on options in securities.R.C. which prohibited forward trading in securities.DERIVATIVES TRADING IN INDIA The first step towards introduction of derivatives trading in India was the promulgation of the securities laws (amendment) ordinance. worked out the operational details of margining system. thus preluding OTC derivative. Varma. the three decade old notification. which was submitted in October.
NSE and BSE. This was followed by approval. bye-laws. which is the brand index of India. and their clearing house/corporation to commence trading and settlement in approved derivatives contracts. the following five types of Derivatives are now being traded in the India Stock Market. index futures contract is an agreement to buy or sell a specified quantity of underlying index for a future date at a price agreed . for trading in options based on these two indexes and options on individual securities. Trading and Settlement in derivatives contracts is done in accordance with the rules. SEBI permitted the derivative segments of two stock exchanges.Derivatives trading commenced in India in June 2000 after SEBI granted the final approval to this effect in May 2000. * Stock Index Futures * Stock Index Options * Futures on Individual Stocks * Options on Individual Stocks * Interest Rate Derivatives INDEX FUTURES: Index futures are financial contracts for which the underlying is the cash market index like the Sensex. To begin with. Futures contracts on individual stocks were launched in November 2001. and regulations of the respective exchanges and their clearing house/corporation duly approved by SEBI and notified in the official gazette. Thus. SEBI approved trading in index futures contracts based on S & P CNX Nifty and BSE-30 (Sensex) index. The trading in index options commenced in June 2001.
STOCK FUTURES: Stock Futures are financial contracts where the underlying asset is an individual stock. STOCK OPTIONS: Stock Options are instruments whereby the right of purchase and sale is given by the option seller in consideration of a premium to the option buyer to buy or sell the underlying stock at a specific price (strike price) on or before a specific date (expiry date). tick size and method of settlement. expiry day. The contracts have standardized specifications like market lot. Stock futures contract is an agreement to buy or sell a specified quantity of underlying equity share for a future date at a price agreed upon between the buyer and seller.upon between the buyer and seller. OPERATIONAL MECHANISM FOR DERIVATIVES TRADIN . Just like Index derivatives. INTEREST RATE DERIVATIVES: The derivatives are taken on various rates of interests. the specifications are pre-specified. INDEX OPTIONS: Index Options are financial contracts whereby the right is given by the option seller in consideration of a premium to the option buyer to buy or sell the underlying index at a specific price (strike price) on or before a specific date (expiry date).
CLIENT AGREEMENT: The investor should sign the Client Agreement with the broker before the broker can place any order on his behalf. he would have different Ids. The broker would key this identification number in the system at the time of placing the order on behalf of the investor. he needs to sign the client agreement with each one of them and resultantly. 3.1. the investor gets a unique identification number (ID). This ID is broker specific i. UNIQUE CLIENT IDENTIFICATION NUMBER: After signing the client agreement. Investors should complete all the registration formalities with the broker before commencement of trading in the derivatives market. RISK DISCLOSURE DOCUMENT: As stipulated in the Bye-Laws provide his particulars to the investor. The particulars would include his SEBI registration number. 2.e. The client agreement includes provisions specified by SEBI and the derivatives segment. REGISTRATION WITH BROKER: The first step towards trading in the derivatives market is selection of a proper broker with whom the investor would trade. 4. if the investor chooses to deal with different brokers. The investor should also ensure to deal with a broker (member of the exchange) who is a SEBI registered broker and possesses a SEBI registration certificate. the name of the employees who would be primarily responsible for the client's affairs. the precise nature of his liability towards .
the investor can request for a copy of the trade confirmation slip generated on the systems on execution of the trade. If desired. if any. of the derivatives segment or of any regulatory authority to the extent it governs the relationship between the broker and the client. 5. . The contract note should be time (order receipt and order execution) and price stamped. 6. the investor may change an order anytime before the same is executed on the exchange. which the broker issues to the client. This information forms part of the Risk Disclosure document. PLACING ORDER WITH THE BROKER: The investor should place orders only after understanding the monetary implications in the event of execution of the trade. The investor should also obtain from the broker. After the trade is executed. brokerage and other charges. relevant manuals. The risk disclosure document has to be signed by the client and a copy of the same is retained by the broker for his records. a contract note for the trade executed within 24 hours. should be separately mentioned in the contract note. The broker must also apprise the investor about the risk associated with the business in derivative trading and the extent of his liability.the client in respect of the business done on behalf of the investor. Execution prices. The investor should carefully read the risk disclosure document and understand the risks involved in the derivatives trading before committing any position in the market. FREE COPY OF RELEVANT REGULATION: The client is also entitled to a free copy of the extracts of relevant provisions governing the rights and obligations of clients. notifications. circulars and any additions or amendments etc.
7. This margin is calculated by SPAN by considering the worst case scenario. the following day. Both buyer and seller have to deposited before the opening of the position in the futures transaction. which is required by the close of business. . 7. The different types of margins are: A) INITIAL MARGIN: The basic aim of initial margin is to cover the largest potential loss in one day. Any profits on the contract are credited to the client's variation margin account. MARGINING SYSTEM IN DERIVATIVES: The aim of margin money is to minimize the risk of default by either counter-party. B) MARK TO MARKET MARGIN: All daily losses must be met by depositing of further collateral-known as variation margin. INVESTOR PROTECTION FUND: The derivatives segment has established an "Investor Protection Fund" which is independent of the cash segment to protect the interest of the investors in the derivatives market. The payment of margin ensures that the risk is limited to the previous day's price movement on each outstanding position.
the party thereto shall resolve such complaint. dispute by arbitrations procedure as defined in the rules and regulations and ByeLaws of the respective exchanges. debentures. Shares. scrips. Derivative . the rules and regulations framed there under and the rules and bye-laws of stock exchanges.8. the 'Securities' include: 1. 2. The term "securities" has been defined in the SC(R)A. This is the principal Act. the SEBI Act. As per Section 2(h). ARBITRATION: In case of any dispute between the members and the clients arising out of the trading or in relation to trading/settlement. stock. Securities contracts (Regulation) Act. 1956 SC(R) A aims at preventing undesirable transactions in securities by regulating the business of dealing therein and by providing for certain other matters connected therewith. which governs the trading of securities in India. bonds. REGULATORY FRAMEWORK The trading of derivatives is governed by the provisions contained in the SC (R) A. stock or other marketable securities of a like nature in or of any incorporated company or other body corporate.
• A contract which derives its value from the prices. loan whether secured or unsecured. risk instrument or contract for differences or any other form of security. Settled on the clearinghouse of the recognized stock exchange.3. 4. contracts in derivative shall be legal and valid if such contracts are: Traded on a recognized stock exchange. . in accordance with the rules and bye-laws of such stock exchanges. Government securities. 5. Units or any other instrument issued by any collective investment scheme to the investors in such schemes. Such other instruments as may be declared by the Central Government to be securities 6. or index of price. of underlying securities. share. Section 18A provides that notwithstanding anything contained in any other law for the time being in force. Rights or interests in securities "Derivative" is defined to includes: • A security derived from a debt instrument.
C. SEBI also approved the "suggestive bye-laws" recommended by the committee for regulations and control of trading and settlement of derivatives contracts. The committee submitted its report in March 1998. The amendment of the SC(R)A to include derivatives within the ambit of 'securities' in the SC(R)A made trading in derivatives possible with in the framework of that Act. Gupta to develop the appropriate regulatory framework for derivatives trading in India. The derivatives exchange/segment should have a separate governing council and representation of trading/clearing members shall be limited to maximum of 40% of the total members of the governing council. 1998 SEBI accepted the recommendations of the committee and approved the phased introduction of derivatives trading in India beginning with stock index futures. The provisions in the SC(R)A and the regulatory framework developed there under govern trading in securities. Any Exchange fulfilling the eligibility criteria as prescribed in the LC Gupta committee report may apply to SEBI for grant of recognition under Section 4 of the SC(R)A. On May 11. 2. The exchange shall regulate the sales practices of its members and will obtain prior approval of SEBI before start of trading in any derivative contract. L. . The Exchange shall have minimum 50 members. 1. 1956 to start trading derivatives.REGULATIONS FOR DERIVATIVES TRADING SEBI set up a 24-member committee under the Chairmanship of Dr.
300 Lakh. Fixed assets Pledged securities Member's card Non-allowable securities (unlisted securities) Bad deliveries Doubtful debts and advances Prepaid expenses Intangible assets 30% marketable securities . i. Derivative brokers/dealers and clearing members are required to seek registration from SEBI. Clearing corporation/house complying with the eligibility conditions as laid down by the committee have to apply to SEBI for grant of approval. This is in addition to their registration as brokers of existing stock exchanges. 5. h. f. c. The members of the derivatives segment need to fulfill the eligibility conditions as laid down by the LC Gupta committee. e. a. d. g. The minimum networth for clearing members of the derivatives clearing corporation/house shall be Rs. The clearing and settlement of derivatives traders shall be through a SEBI approved clearing corporation/house. b. The networth of the member shall be computed as follows: • Capital + Fee reserves • Less non-allowable assets viz.3. 4. The members of an existing segment of the exchange will not atomically become the members of derivative segment.
Exchange should also submit details of the futures contract they propose to introduce. 2 Lakh. The members of the derivatives segment are also required to make their clients aware of the risks involved in derivatives trading by issuing to the client the Risk Disclosure Document and obtain a copy of the same duly signed by the client.6. The minimum contract value shall not be less than Rs. exposure limits linked to capital adequacy and margin demands related to the risk of loss on the position shall be prescribed by SEBI/Exchanges from time to time.C. The trading members are required to have qualified approved user and sales person who have passed a certification programme approved by SEBI. . 9. The L. Gupta committee report requires strict enforcement of "Know your customer" rule and requires that every client shall be registered with the derivatives broker. 7. The initial margin requirement. 8.
C. f) Existing stock exchanges with cash trading to be allowed to trade derivatives if they meet prescribed eligibility condition—importantly. b) SEBI to approve rules. 1996 to develop regulatory framework for derivatives trading in India. on use of derivatives should be removed. Varma as its Chairman to recommend measures for risk containment in the derivative market in India. This is no bring in more traders. The committee recommended introduction of derivatives market in a phased manner with the introduction of index futures and SEBI appointed a group with Prof. and a Derivatives advisory council may be created to tap outside experts for independent.C. J. L. c) SEBI need not be involved in framing exchange level regulations. e) Legal restrictions on institutions. L.DR.GUPTA COMMITTEE The Securities and exchange board of India (SEBI) appointed a committee with Dr. bye-laws and regulation of the derivatives exchange and the derivatives contracts. a separate Governing Council and at least 50 members. g) Two categories of member-clearing members and non-clearing members. including mutual funds. with the latter depending on the former for settlement of trades. The recommendations of L. .R.C. Gupta Committee at a glance: a) Stock index futures to be the starting point of equity derivatives. d) SEBI should create a special Derivatives Cell as it involves special knowledge. Gupta as its chairman in November.
h) Broker members, dealers and sales persons in the derivatives market must have passed a certificate programme to be registered with SEBI. i) Co-ordination between SEBI and the RBI of financial derivatives market must have passed a certificate programme to be registered with SEBI. j) Clearing corporation to be the center piece of the derivatives market, both for implementing the margin system and providing trade guarantee. In the near term, existing clearing corporation be allowed to participate in derivatives. For the long-term, a centralized clearing corporation has been recommended. k) Minimum networth requirement of Rs. 3 crores for participants, maximum exposure limits for each broker/dealer on gross basis and capital adequacy requirements to be prescribed. l) Mark-to-market to be collected before next day's trading starts. m) As a conservative measure, margins for derivatives purposes not to take into account positions in cash and futures market and across all stock exchanges. n) Margins to be systematically collected and not left to discretion of brokers/dealers. o) Much stricter regulation for derivatives as compared to cash trading. p) Strengthen cash market with uniform settlement cycles among all SEs and regulatory oversight. Proper supervision of sales practices with registration of every client with the dealer/broker and risk disclosure as the corner-stone.
J.R. VARMA COMMITTEE
After the submission of L.C. Gupta committee report and approval of the introduction of index futures trading by SEBI the board mandated the setting up of a group to recommend measures for risk containment in the derivative market in India. Prof. J.R. Varma was the chairman of the group.
-Volatility in India markets are high. -Volatility is not constant & varying. -There is no data on the volatility on Index futures. -Even at 99% "Value At Risk" model there could be possibility of default once in six months. -Not efficient organized arbitragers players. RECOMMENDATIONS - Only traders with high net worth be allowed to traded in Derivatives. - Imposition of VAR margin system. - Submission of periodic reports by CC and SE to SEBI. - Continuously refining of Margin system. - Daily changes in the Margins be calculated and imposed. - Proper liquid net worth. -Online position monitoring at customer, TM, CM and Market level.
NSCCL has developed a comprehensive risk containment mechanism for the F & O segment. The salient features of risk containment mechanism on the F & O segment are: 1. The financial soundness of the members is the key to risk management. Therefore, the requirements for membership in terms of capital adequacy (net worth, security deposits) are quite stringent. 2. NSCCL charges an upfront initial margin for all the open positions of a CM. It specifies the initial margin requirements for each futures/options contract on a daily basis. It also follows value-at-risk (VaR) based margining through SPAN. The CM in turn collects the initial margin from the TMs and their respective clients. 3. The open positions of the members are marked to market based on contract settlement price for each contract. The difference is settled in cash on a T + 1 basis. 4. NSCCL's on-line position monitoring system monitors a CM's open positions on a real-time basis. Limits are set for each CM based on his capital deposits. The on-line position monitoring system generates alerts whenever a CM reaches a position limit set up by NSCCL. NSCCL monitors the CMs for MTM value violation, while TMs are monitored for contract-wise position limit violation. 5. CMs are provided a trading terminal for the purpose of monitoring the open position of all the TMs clearing and settling through him. A CM may set exposure limits for a TM clearing and settling through him. NSCCL assists the CM to monitor the intra-day exposure limits set up by
Position violations result in withdrawal of trading facility for all TMs a CM is case of a violation by the CM.50 lakhs with NSCCL in the following manner: . MINIMUM BASE CAPITAL A Clearing Member (CM) is required to meet with the Base Minimum Capital (BMC) requirements prescribed by NSCCL before activation. based on the parameters defined by SEBI. The CM has also to ensure that BMC is maintained in accordance with the requirements of NSCCL at all points of time. The actual position monitoring and margining is carried out online through Parallel Risk Management System (PRISM). A member is alerted of his position to enable him to adjust his exposure or bring in additional capital. 7. after activation. it stops that particular TM from further trading. 648 crore at the end of March 2002. Every CM is required to maintain BMC of Rs. 6. The fund had a balance of Rs. PRISM uses SPAN (r) (Standard Portfolio Analysis of Risk) system for the purpose of computation of on-line margins. A separate settlement guarantee fund for this segment has been created out of the capital of members. The most critical component of risk containment mechanism for F & O segment is the margining system and on-line position monitoring.a CM and whenever a TM exceed the limits.
(1) Cash Rs. over and above their minimum deposit requirements.25 lakhs in the form of cash. withdrawal of trading facility and/ore clearing facility. will be treated as a violation of the Rules. APPROVED SECURITIES approved Custodians. Bye-Laws and Regulations of NSCCL and would attract disciplinary action inter-alia including. . (2) Rs. closing out of outstanding positions etc. ADDITIONAL BASE CAPITAL Clearing members may provide additional margin/collateral deposit (additional base capital) to NSCCL and/or may wish to retain deposits and/or such amounts which are receivable from NSCCL. towards initial margin and/ or other obligations.25 lakhs in any one form or combination of the below forms: FIXED DEPOSIT RECEIPTS (FDRs) issued by approved banks and deposited with approved Custodians or NSCCL BANK GUARANTEE in favour of NSCCL from approved banks in the specified format. in demat form deposited with Any failure on the part of a CM to meet with the BMC requirements at any point of time.
The most critical component of a risk containment mechanism for NSCCL is the online position monitoring and . The Liquid Networth maintained by CMs at any point in time should not be less than Rs. Liquid Networth Liquid Networth is computed by reducing the initial margin payable at any point deposits.50 lakhs (referred to as Minimum Liquid Net Worth).EFFECTIVE DEPOSITS / LIQUID NETWORTH Effective deposits All collateral deposits made by CMs are segregated into cash component and non-cash component. For Additional Base Capital. Non-cash component shall mean all other forms of collateral deposits like deposit of approved demat securities. in time from the effective MARGINS NSCCL has developed a comprehensive risk containment mechanism for the Futures & Options segment. cash component means cash. T-bills and dated government securities. At least 50% of the Effective Deposits should be in the form of cash. bank guarantee. fixed deposit receipts.
Similarly. The methodology for computation of Value at Risk percentage is as per the recommendations of SEBI from time to time. in the case of futures contracts (on index or individual securities).A CM is in turn required to collect the initial margin from the TMs and his respective clients.shall be netted at the level of individual client and grossed across all clients.margining system. INITIAL MARGIN REQUIREMENT FOR A MEMBER: For client positions . applying the appropriate statistical formula. where it may not be possible to collect mark to market settlement value. . the initial margin may be computed over a two-day time horizon. on an intra-day basis. The actual margining and position monitoring is done online. which is a portfolio based Initial system Margin NSCCL collects initial margin up-front for all the open positions of a CM based on the margins computed by NSCCL-SPAN . before the commencement of trading on the next day. without any setoffs between clients. at the Trading/ Clearing Member level. However. Initial margin requirements are based on 99% value at risk over a one day time horizon. a TM should collect upfront margins from his clients. NSCCL uses the SPAN (Standard Portfolio Analysis of Risk) system for the purpose of margining.
Premium Margin In addition to Initial Margin. Premium Margin would be charged to members. The premium margin is the client wise margin amount payable for the day and will be required to be paid by the buyer till the premium settlement is complete. Assignment Margin Assignment Margin is levied on a CM in addition to SPAN margin and Premium Margin. It is required to be paid on assigned positions of CMs towards Interim and Final Exercise Settlement obligations for option contracts on individual securities. . Bank Guarantee . For the purpose of SPAN Margin. Fixed Deposit Receipts and approved securities . ABC can be provided by the members in the form of Cash .shall be netted at Trading/ Clearing Member level without any setoffs between client and proprietory positions.For proprietory positions . various parameters are specified from time to time. In case a trading member wishes to take additional trading positions his CM is required to provide Additional Base Capital (ABC) to NSCCL. till such obligations are fulfilled.
Bank Guarantee. collecting appropriate deposits. Assignment margin is released to the CMs for exercise settlement pay-in. etc. PAYMENT OF MARGINS The initial margin is payable upfront by Clearing Members. initiate other disciplinary action. Fixed Deposit Receipts and approved securities . Initial margins can be paid by members in the form of Cash . imposing penalties. invoking bank guarantees/ fixed deposit receipts. In addition NSCCL may at its discretion and without any further notice to the clearing member. Bye-Laws and Regulations of NSCCL and will attract penal charges @ 0. . withdrawal of trading facilities and/ or clearing facility closing out of outstanding positions. Non-fulfillment of either the whole or part of the margin obligations will be treated as a violation of the Rules.09% per day of the amount not paid throughout the period of non-payment.The margin is charged on the Net Exercise Settlement Value payable by a Clearing Member towards Interim and Final Exercise Settlement and is deductible from the effective deposits of the Clearing Member available towards margins. inter-alia including.
The risk of each trading and clearing member is monitored on a real-time basis and alerts/disablement messages are generated if the member crosses the set limits.POSITION LIMITS. • Initial Margin Violation • Exposure Limit Violation • Trading Memberwise Position Limit Violation . VIOLATIONS & PRICE SCAN RANGE Position addition to initial margins requirements • Exposure Limits • Trading Memberwise Position Limit • Client Level Position Limits Limits Clearing Members are subject to the following exposure / position limits in • Market Wide Position Limits (for Derivative Contracts on Underlying Stocks) Collateral limit for Trading Members VIOLATIONS PRISM (Parallel Risk Management System) is the real-time position monitoring and risk management system for the Futures and Options market segment at NSCCL.
5000/. bring in additional collateral deposits by way of cash or bank guarantee or FDR or securities. may submit a written request to NSCCL to either reduce their open position or. whereby the members can give standing instructions to debit their account towards additional base capital. which the CMs . on a daily basis. In respect of violation on more than one occasion on the same day.• Client Level Position Limit Violation • Market Wide Position Limit Violation • Violation arising out of misutilisation of trading member/ constituent collaterals and/or deposits • Violation of Exercised Positions Clearing members who have violated any requirement and/ or limits. A penalty of Rs. each instance is treated as a separate violation for the purpose of calculation of penalty. NSCCL renders a service to members.is levied for each violation and is debited to the clearing account of clearing member on the next business day. details in respect of such margin amount due and collected. from the TMs/ Constituents clearing and settling through them. with respect to the trades executed/ open positions of the TMs/ Constituents. The penalty is charged to the clearing member irrespective of whether the clearing member brings in margin deposits subsequently. Clearing Members (CMs) and Trading Members (TMs) are required to collect upfront initial margins from all their Trading Members/ Constituents. CMs are required to compulsorily report.
TMs are required to report on a daily basis details in respect of such margin amount due and collected from the constituents clearing and settling through them. which the trading members have paid to the CMs. for the requirements.have paid to NSCCL. . purpose of meeting margin Similarly. with respect to the trades executed/ open positions of the constituents. and on which the CMs have allowed initial margin limit to the TMs.
RESEARCH METHODOLOGY & ANALYSIS RESEARCH METHODOLOGY Research is a procedure of logical and systematic application of the fundamentals of science to the general and overall questions of a study and scientific technique by which provide precise tolls. So survey method is used for the study. accurately the characteristic of population. Different type of research designs is available depending upon the nature of research project. Sampling Procedure The small representative selected out of large population is selected at random is called sample. The study about " Trends and future of derivatives in india " is descriptive in nature. rather than philosophical means for getting and ordering the data prior to their logical analysis and manipulation. Well-selected sample may reflect fairly. The chief aim of sampling is to make an inference about unknown parameters from a measurable sample statistics. availability of able manpower and circumstances. The statistical hypothesis relating t population. . specific procedures and technical.dealers and investors. The sample size was 60 which includes brokers.
Interview guide 3.Sources of Data: The sources of data includes primary and secondary data sources. which is collected and compiled for the different purpose. Interview schedule . These are called 'tools' or 'instruments of data collection. The secondary data include material collected from: Newspaper Magazine Internet Data collection instruments The various method of data gathering involves the use of appropriate recording forms. Primary Sources: Primary data is collected by structured questionnaire administered by sitting with guide and discussing problems. Observation 2. Collection Instruments: 1. Secondary Sources: The secondary data is data. which are used in research for this study.
The methodology used for this purpose are survey and questionable method. Interview method was used because it can be explained more easily and clearly and takes less time to answer. The instrument data collection in our study interview schedule mainly. It is assumed that the respondent have sufficient knowledge to ensure questionable. 2. . The tool for data collection translates the research objectives in to specific term/questions to the response. It is assumed that the respondent have filled right and correct option according to their view.Each tool is used for specific method of data gathering. 3. which will provide research objective. Every respondent was conducted personally with an interview schedule containing questions. It is assumed that this method is more suitable for collection of data. Methodology Assumptions: The research was based on the following assumption: 1.
21(35%) are investing from last 2 years . 13 (22%) brokers and investors investing in derivatives from last 1 year and less than this.BROKER'S PERCEPTION ABOUT DERIVATIVES (ANALYSIS) TRADING PERIOD IN DERIVATIVES Trading period in derivatives. 25 20 15 10 5 0 Less than 1 year 1 year 2 year 3 year More than 3 year 13 13 7 6 Series1 Series2 21 From my sample of 60.7 (11%) are investing from last 3 years and only 6 (10%) have experience of more than 3 years of investment in derivatives. .
liquidity.g. risk management hedging.REASONS BEHIND ITS ADOPTION Purpose for derivative Trading 3 0 2 5 2 0 1 5 1 0 5 S pe cu la tio n en t 2 4 15 1 4 7 S rie e s1 S rie e s2 0 H e dg in g Reasons behind adoption of derivatives are different by brokers. investor R is k M a n ag e m Li qu id ity .investors and dealers e.
.because derivative requires huge investment and risk also.17 (29%) feels that equities are better option for onvestment than derivativies. only 23 (38%) find derivatives as quite profitable investment.brokers can derive good return from derivatives those have surplus funds and patience for long period. EXPERIENCE WITH DERIVATIVE Out of my sample size 60. 15 (25%) due to hedging . 14 (23%) find that derivatives can’t give big profits in future. 24 (40%) for investor (client's) demand (speculation) and remaining 7 (12%) due to liquidity.demand(speculation) etc. Out of 60 brokers..remaining 6 (10%) have other opinion thatonly those investors.investors dealing in derivatives 14 (23%) adopt it due to characteristics of risk management.
ou ing 30 25 20 15 10 5 0 2 lacs 2 cs-5 la la cs 5 la cs-1 0 la cs An o e y th r S s1 erie S s2 erie S s3 erie .INVESTED AMOUNT IN DERIVATIVES Invested am nt in derivative trad .
2 5 2 0 1 5 1 0 5 0 We e kly M n ly o th M re th n o a 1m n o th M re th n o a 2m n s o th 1 3 5 2 3 1 9 S rie e s1 S rie e s2 13 (22%) investors and brokers are investing weekly in derivatives. Reason behind this is that those are investing from many years are taking the risk of investing huge amount.and remaining have invested in other amounts. .Out of my sample size 60 .9 (15%) invested between 2 lacs to 5 lacs.23 ( 38%) investing monthly.19 (32 %) investing after more than 1 month and only 5 ( 8%) investing too late after 2 months. TRADED PERIOD IN DERIVATIVES T d dp rio fo d riv tiv ra e e d r e a e in e tm n v s e t.and 15 (25%) invested between 5 lacs to 10 lacs.27 (45%) investors and brokers have invested 2 lacs normally.
it is basically beneficial for those who are investing from last 2 or more years.00. In investment sector need minimum of Rs. 2. 50 40 30 20 10 0 Increase Decrease Remain same 3 15 Series1 Series2 42 Out of 60 brokers and investors. 3 ( 5%) of brokers said that it doesn't increase their customer base because introducing small savings as investment.IMPACT ON CUSTOMER BASE Impact on customer base.000 as investment so it is basically for corporate and investment sector only not for small investors.in future it will increase their customer base. . but derivatives increases customer base of 42 (70%) wich is more than half.15 ( 25%) said their customer base remain same because they have started just now for investing in derivatives.
RELATIONSHIP WITH CASH MARKET
relation Between derivative and cash m arket.
30 20 10 0 Positiv e Negativ e Can't say 5 27 28 Series1 Series2
Out of 60 brokers,dealers 27 (45%) have the positive response toward the relation between derivative and cash market and remaining 5 (8%) has negative response. 28 (47%) are not able to say anything because they don’t have proper knowledge about stock market.they are investing with the guidance of brokers and with the support of their close relatives those are investing for last many years.
BROKER'S PERCEPTION TOWARDS INDIAN INVESTOR i.e. is settled in Indian investor psyche?
Relation am ong derivative and cash m arket.
40 30 20 10 0 Yes N o 23 Series1 37
out of total 37 (62%) of investors and dealers are saying it hasn't settled in Indian investor psyche and 23 (38%) are saying it has.
DERIVATIVES AND RISK
Every broker says that there is a risk factor (up to some extent) in derivatives also.
SHORTCOMINGS IN INDAIN DERIVATIVE SYSTEM
27 (45%) brokers,investors respond towards shortage of domestic technical expertise. 31(52%) feel lack of awareness in investor about derivatives and remaining 2 (3%) market failure.
RESULTS / FINDINGS
Brokers not dealing in derivatives at present are also not going to adopt it in near futures. Hedging & Risk Mgt. Is the most important feature of derivatives. It is not for small investors. It has increased brokers turnovers as well as helpful in aggregate investment. Brokers haven't adequate knowledge about options, so most by them are dealing in futures only. There is a risk factor in derivative also. Most of investors are not investing in derivatives.
8.People are not aware of derivatives, even people who have invested in it, hasn’t adequate knowledge about it. These people are interested to take it in their future portfolio also. They consider it as a tool of risk management. 9.They normally invest in future contracts. 10.They are investing in future contract, because futures have up to home extent similar quality as Badla.
It hasn't a legalized market. 6. The Limited mutual faith in the parties involved. this will make easy to understand and take simple investor under investor base of derivative trading. in Nov.S. At L. Commodity F & O market has not yet been come to India.e. 2001.S.E.S. the is become possible by L. At National Level 1. 7. Securities and contract's regulations act has recognized "index" as a security very later i. 5.S. 4.E. Itself (in reality).S.S. 3.REASON BEHIND LESS DEVELOPMENT OF F&O SEGMENT AT L. which is working as a broker at N. (301 members) are working as a client of LSES Ltd. It will take time to take position in derivative or capital market. 2.E. and the broker of L. So they can't trade as a broker of their client and sub-broker concept does not exist in F&O segment.E. Market failures Scandals Inadequate infrastructures .E.L.
Shortage to domestic technical expertise. 12. 200000 in starting. SCRIPS: More scrips of reputed companies etc. should be introduced in "F & O segment". 4.8.e. so small investors are not able to come under derivative segment. now same lot size amount to a much larger value. small saving class can come under F & O trading. Large lot size. SUGGESTIONS 1. in India even most of people are not aware of concept derivatives. In India there can't be a long term trading in F & O. 5. LOT SIZE: Lot size should be reduced so that the major segment of an India society i. 3. 10. TRAINING CLASSES OR SEMINARS: . 9. SUB BROKER: Sub-broker concept should be added and the actual brokers should give all rights of brokers in F & O segment also. There are less scripts under derivatives segment. 2. TRADING PERIOD: Trading period should be increased. 11. it is only for 1 to 2 or maximum for 3 months. High margin as compare to Badla. There is strong need for revision of lot sizes as the lot sizes of some of the individual scrips that were worth of Rs.
brokers. students and employees of stock exchanges. LIMITATIONS OF THE STUDY No study is complete in itself. . The first step towards it should be seminars provide to brokers & LSE employees and secondly seminar to students. Because lack of knowledge is the main reason of its less development.There should be proper classes on derivatives for investors. Availability of information was not sufficient because of less awareness among investors/brokers Study is based only on NSE because information and trading in BSE is not available here. traders. however good it may and every study has some limitations: Time is the main constraint of my study. Sample size is not enough to have a clear opinion.
I was really surprised to see during my study that a layman or a simple investor does not even know how to hedge and how to reduce risk on his portfolios. The financial derivatives came in spotlight in 1972 due to growing in stability in financial market. institutional investors.CONCLUSION On the basis of overall study on derivatives it was found that derivative products initially emerged as hedging devices against fluctuation and commodity prices and commodity linked derivatives remained the soul form of such products. But the problems confronting the derivative market segment are giving it a low customer base. No doubt that derivative growth towards the progress of economy is positive. these problems could be overcome easily . mutual funds etc. All these activities are generally performed by big individual investors. The main problems that it confronts are unawareness and bit lot sizes etc.
bseindia.by revising lot sizes and also there should be seminar and general discussions on derivatives at varied places. 2.in . INTERNET SITES www.gov. BOOKS AND ARTICLES NCFM on derivatives core module by NSEIL. MAGAZINES The Dalal Street LSE Bulletin 3.derivativeindia. The Indian Commodity-Derivatives Market in Operations.com www. BIBLIOGRAPHY 1.com www.com www.sebi.nseindia.
I am working on the project " TRENDS AND FUTURE OF DERIVATIVES IN INDIA : A DETAILED STUDY” You are requested to fill in the questionnaire to enable. I am a student of MBA 2nd year. NAME: OCCUPATION: ADDRESS: PHONE NO.: .SAMPLE OF QUESTIONNAIRE Dear Respondent. to undertake the study on the said project.
1) For how long you have been trading in derivatives? a) Less than 1 year c) 2 Year b) 1 Year d) 3 Year e) More than 3 years.000 to Rs. 2) What is your purpose for trading in derivatives? a) Hedging c) Risk Management b) Speculation d) Liquidity 3) How will you describe your experience with derivative till date? a) I find these quite profitable b) I don't find derivatives can give big profits c) I feel that equities are better than derivatives d) Any other __________________________________ 4)What is amount of money you are investing in normally? a) 2.00.00. 2. 10.000 b) Rs.00. 5.00. 5.000 to Rs.00.000 d) Any other amount____________ 5)How often do you trade? a) Weekly d) More than 2 month 6)What is your customer base with introduction of derivatives? a) Increase b) Decrease c) Remain same b) Monthly c) More than 1 month 7)What according to you is relationship between derivative market and cash market? .000 c) Rs.
c) If any other___________________________ 10) Which of following Media would you prefer the most for investor education? a) TV b) Newspaper c) Magazines 11) What suggestions do you want to make with regard to investors education in derivatives market in India? THANKS FOR YOUR COOPERATION .a) Positive b) Negative c) Can't say 8) According to you have derivatives settled in Indian investors psyche? a) Yes b) No 9)What shortcomings do you feel in Indian derivative market? a) Lack of awareness among the investors about derivatives. b) Shortage of domestic technical expertise.