A STUDY ON FINANCIAL DERIVATIVES (FUTURES & OPTIONS

)

Under the Esteemed guidance of

Lecturer of Business Management Project Report submitted in partial fulfillment for the award of Degree of
Master of Business Administration

DECLARATION

I hereby declare that this project titled “A STUDY ON FINANCIAL DERIVATIVES (FUTURES & OPTIONS)” submitted by me to the department of Business Management, XXXX, is a bonafide work undertaken by me and it is not submitted to any other university or

institution for the award of any degree /certificate or published any time before.

ABSTRACT The emergence of the market for derivatives products, most notably forwards, futures and options, can be tracked back to the willingness of riskaverse economic agents to guard themselves against uncertainties arising out of fluctuations in asset prices. Derivatives are risk management instruments, which derive their value from an underlying asset. The following are three broad categories of participants in the derivatives market Hedgers, Speculators and Arbitragers. Prices in an organized derivatives market reflect the perception of market participants about the future and lead the price of underlying to the perceived future level. In recent times the Derivative markets have gained importance in terms of their vital role in the economy. The increasing investments in stocks (domestic as well as overseas) have attracted my interest in this area. Numerous studies on the effects of futures and options listing on the underlying cash market volatility have been done in the developed markets. The derivative market is newly started in India and it is not known by every investor, so SEBI has to take

steps to create awareness among the investors about the derivative segment. In cash market the profit/loss of the investor depends on the market price of the underlying asset. The investor may incur huge profit or he may incur huge loss. But in derivatives segment the investor enjoys huge profits with limited downside. Derivatives are mostly used for hedging purpose. In order to increase the derivatives market in India, SEBI should revise some of their regulations like contract size, participation of FII in the derivatives market. In a nutshell the study throws a light on the derivatives market.

ACKNOWLEDGEMENT With the deep sense of gratitude. Head of the Department XXX for his encouragement. I would like to thank all the faculty members who have been a strong source of inspiration through out the project directly or indirectly. in successful completion of this project work. I express my gratitude to our Principal XXX for his consistent support. I wish to acknowledge the support and help extended by all the people. XXXX .

TABLE OF CONTENTS CONTENTS List of tables List of charts and figures Chapter 1: Introduction Need of the study Objectives Scope & Limitations Research methodology Chapter 2: Literature review Chapter 3: Derivatives Chapter 4: Data analysis & Interpretations Chapter 5: Recommendations and suggestions Conclusions Chapter 6: PAGE NUMBERS I II 1 2 3 4 5 6 12 49 77 79 .

2 Graph showing the price movements of ICICI Spot & Futures Graph. Graph.Bibliography 81 LIST OF GRAPHS GRAPH NO.4 Graph showing the price movements of SBI Spot & Futures Graph 5 Graph showing the price movements of YES BANK Futures Graph 6 Graph the price movements of YES BANK Spot & Futures .3 Graph showing the price movements of SBI Futures Graph.1 CONTENTS PAGE NUMBERS 60 66 68 74 76 83 Graph showing the price movements of ICICI Futures Graph.

6 Table -7 Table.LIST OF TABLES TABLE NUMBER CONTENT PAGE NUMBER Table-1 Table-2 Table-3 Table -4 Table.5 Table.8 Table -9 Table showing the market and future prices of ICICI bank Table showing the call prices of ICICI bank Table showing the put prices of ICICI bank Table showing the market and future prices of SBI Table showing the call prices of SBI Table showing the put prices of SBI Table showing the market and future prices of YES bank Table showing the call prices of YES bank Table showing the put prices of YES bank 59 62 63 64 70 72 75 78 81 .

can be tracked back to the willingness of risk-averse economic agents to guard themselves against uncertainties arising out of fluctuations in asset prices. share. Through the use of derivative products. By their very nature. As instruments of risk management. index. Derivatives are risk management instruments. by locking-in asset prices. the financial markets are marked by a very high degree of volatility. most notably forwards. it is possible to partially or fully transfer price risks by locking-in asset prices.II INTRODUCTION:- The emergence of the market for derivatives products. futures and options. these generally do not influence the fluctuations in the underlying asset prices. which derive their value from an underlying asset. derivative product minimizes the impact of fluctuations in asset prices on the profitability and cash flow situation of risk-averse investors. The underlying asset can be bullion. bonds. However. .

use derivatives. it is possible to partially or fully transfer price risks by locking-in asset prices.currency. this analysis will be of immense help to the investors. Derivatives are likely to grow even at a faster rate in future. to gain access to cheaper money and to make profit. . As the volume of trading is tremendously increasing in derivatives market. Through the use of derivative products. companies and investors to hedge risks. etc. Securities firms.. Banks. interest. NEED FOR STUDY: In recent times the Derivative markets have gained importance in terms of their vital role in the economy. The increasing investments in derivatives (domestic as well as overseas) have attracted my interest in this area.

OBJECTIVES OF THE STUDY:  To analyze the operations of futures and options.  To find the profit/loss position of futures buyer and seller and also the option writer and option holder. .  To study about risk management with the help of derivatives.

The study is not based on the international perspective of derivatives markets. which exists in NASDAQ. . Any alteration may come.SCOPE OF THE STUDY: The study is limited to “Derivatives” with special reference to futures and option in the Indian context and the Inter-Connected Stock Exchange has been taken as a representative sample for the study. The study can’t be said as totally perfect. CBOT etc. The study has only made a humble attempt at evaluation derivatives market only in India context.

 The scrip chosen for analysis is ICICI BANK. SBI & YES BANK of January 2008.LIMITATIONS OF THE STUDY: The following are the limitation of this study. SBI & YES BANK and the contract taken is January 2008 ending one –month contract.  The data collected is completely restricted to ICICI BANK. . hence this analysis cannot be taken universal.

• www. (2006) ‘Financial Markets and Services’ (third edition) Himalaya publishers .RESEARCH METHODOLOGY: Data has been collected in two ways.  BOOKS :-  Derivatives Dealers Module Work Book .com Financial news papers. Economics times.nseindia.NCFM (October 2005)  Gordon and Natarajan. These are: Secondary Method: Various portals.

The creation and empowerment of Securities and Exchange Board of India (SEBI) has helped in providing higher level accountability in the market.LITERATURE REVIEW Behaviour of Stock Market Volatility after Derivatives Golaka C Nath . . Research Paper (NSE) Financial market liberalization since early 1990s has brought about major changes in the financial markets in India.

Gupta Committee on Derivatives had recommended in December 1997 the introduction of stock index futures in .New institutions like National Stock Exchange of India (NSEIL). better corporate governance. enhancing transparency. Microstructure changes brought about reduction in transaction cost that helped investors to lock in a deal faster and cheaper. prohibiting unfair trade practices like insider trading and price rigging. Introduction of derivatives in Indian capital market was initiated by the Government through L C Gupta Committee report. etc. provided for cheaper mode of information dissemination without much time delay. The capital market witnessed a major transformation and structural change during the period. With modern technology in hand. The L. One decade of reforms saw implementation of policies that have improved transparency in the system. these institutions did set benchmarks and standards for others to follow. National Securities Clearing Corporation (NSCCL).C. The reforms process have helped to improve efficiency in information dissemination. National Securities Depository (NSDL) have been the change agents and helped cleaning the system and provided safety to investing public at large.

raising interesting issues unique to these markets. technological andsocial environments than markets in developed countries like the USA or the UK.the first place to be followed by other products once the market matures. Premalata Shenbagaraman. Research Paper (NSE) Numerous studies on the effects of futures and options listing on the underlying cash market volatility have been done in the developed markets. Emerging stock markets operate in very different economic. The studies also show that the introduction of derivative contracts improves liquidity and reduces informational asymmetries in the market. In the late nineties. political. Do Futures and Options trading increase stock market volatility? Dr. The preparation of regulatory framework for the operations of the index futures contracts took some more time and finally futures on benchmark indices were introduced in June 2000 followed by options on indices in June 2001 followed by options on individual stocks in July 2001 and finally followed by futures on individual stocks in November 2001. This paper explores the impact of the introduction of . The empirical evidence is mixed and most suggest that the introduction of derivatives do not destabilize the underlying market. many emerging and transition economies have introduced derivative contracts.

thereby enhancing their value as risk management tools . We find no evidence of any link between trading activity variables in the futures market and spot market volatility. We also examine whether greater futures trading activity (volume and open interest) is associated with greater spot market volatility. The results of this study are especially important to stock exchange officials and regulators in designing trading mechanisms and contract specifications for derivative contracts. The results suggest that futures and options trading have not led to a change in the volatility of the underlying stock index.derivative trading on cash market volatility using data on stock index futures and options contracts traded on the S & P CNX Nifty (India). but the nature of volatility seems to have changed postfutures.

DERIVATIVES .

. to gain access to cheaper money and to make profit. By their very nature. etc. Derivatives are risk management instruments. Derivatives are likely to grow even at a faster rate in future. share. currency. which derive their value from an underlying asset. companies and investors to hedge risks. interest. use derivatives. by locking-in asset prices. the financial markets are marked by a very high degree of volatility. . derivative product minimizes the impact of fluctuations in asset prices on the profitability and cash flow situation of risk-averse investors. most notably forwards. Banks. However. futures and options. The underlying asset can be bullion. can be tracked back to the willingness of risk-averse economic agents to guard themselves against uncertainties arising out of fluctuations in asset prices.DERIVATIVES:The emergence of the market for derivatives products. Through the use of derivative products. index. bonds. Securities firms. these generally do not influence the fluctuations in the underlying asset prices. As instruments of risk management. it is possible to partially or fully transfer price risks by locking-in asset prices.

the market for financial derivatives has grown tremendously in terms of variety of instruments available. they accounted for about two-thirds of total transactions in derivative products. 1956 (SCR Act) defines “derivative” to secured or unsecured. their complexity and also turnover. 2) A contract which derives its value from the prices. these products have become very popular and by 1990s. commodity or any other asset. and commodity-linked derivatives remained the sole form of such products for almost three hundred years. risk instrument or contract for differences or any other form of security. Emergence of financial derivative products Derivative products initially emerged as hedging devices against fluctuations in commodity prices. In the . Financial derivatives came into spotlight in the post-1970 period due to growing instability in the financial markets. or index of prices. of underlying securities. In recent years. forex. since their emergence. However.DEFINITION Derivative is a product whose value is derived from the value of an underlying asset in a contractual manner. The underlying asset can be equity. 1) Securities Contracts (Regulation)Act.

for. futures and options on stock indices have gained more popularity than on individual stocks. if. HEDGERS: Hedgers face risk associated with the price of an asset. example. ARBITRAGERS: Arbitrageurs are in business to take of a discrepancy between prices in two different markets. SPECULATORS: Speculators wish to bet on future movements in the price of an asset. Even small investors find these useful due to high correlation of the popular indexes with various portfolios and ease of use. they see the futures price of an asset getting out . The lower costs associated with index derivatives vis–a–vis derivative products based on individual securities is another reason for their growing use. who are major users of index-linked derivatives. especially among institutional investors. They use futures or options markets to reduce or eliminate this risk. they can increase both the potential gains and potential losses in a speculative venture. that is. PARTICIPANTS: The following three broad categories of participants in the derivatives market. Futures and options contracts can give them an extra leverage.class of equity derivatives the world over.

they will take offsetting position in the two markets to lock in a profit. They are: . They are:  Prices in an organized derivatives market reflect the perception of market participants about the future and lead the price of underlying to the perceived future level. Derivatives markets help increase saving and investment in long Derivatives trading acts as a catalyst for new entrepreneurial TYPES OF DERIVATIVES: The following are the various types of derivatives.of line with the cash price.  Derivatives market helps to transfer risks from those who have them but may not like them to those who have an appetite for them.  activity. FUNCTION OF DERIVATIVES MARKETS: The following are the various functions that are performed by the derivatives markets.  run.

Calls give the buyer the right but not the obligation to buy a given quantity of the underlying asset. OPTIONS: Options are of two types-calls and puts. at a given price on or before a given future date. the majority of options traded on options exchanges having a maximum maturity of nine months. WARRANTS: Options generally have lives of up to one year. . they are standardized and traded on exchange. but not the obligation to sell a given quantity of the underlying asset at a given price on or before a given date.FORWARDS: A forward contract is a customized contract between two entities. where settlement takes place on a specific date in the future at today’s pre-agreed price. Longer-dated options are called warrants and are generally traded over-the counter. FUTURES: A futures contract is an agreement between two parties to buy or sell an asset in a certain time at a certain price. Puts give the buyer the right.

These are options having a maturity of up to three years. The two commonly used Swaps are: a) Interest rate Swaps: These entail swapping only the related cash flows between the parties in the same currency. b) Currency Swaps: These entail swapping both principal and interest between the parties. with the cash flows in on direction being in a different currency than those in the opposite direction. BASKETS: Basket options are options on portfolios of underlying assets. They can be regarded as portfolios of forward contracts. SWAPS: Swaps are private agreements between two parties to exchange cash floes in the future according to a prearranged formula. Equity index options are a form of basket options. . The underlying asset is usually a moving average of a basket of assets.LEAPS: The acronym LEAPS means long-term Equity Anticipation securities.

which affect the returns: 1. These forces are to a large extent controllable and are termed as non systematic risks. etc.SWAPTION: Swaptions are options to buy or sell a swap that will become operative at the expiry of the options. 2. Thus a swaption is an option on a forward swap. RATIONALE BEHIND THE DELOPMENT OF DERIVATIVES: Holding portfolios of securities is associated with the risk of the possibility that the investor may realize his returns. An investor can easily manage such non-systematic by having a well- . which would be much lesser than what he expected to get. There are various factors. • • • • Price or dividend (interest) Some are internal to the firm likeIndustrial policy Management capabilities Consumer’s preference Labour strike.

Debt instruments are also finite life securities with limited marketability due to their small size relative to many common stocks. For instance. Rational Behind the development of derivatives market is to manage this systematic risk. etc. We therefore quite often find stock prices falling from time to time in spite of company’s earning rising and vice versa. cannot be controlled and affect large number of securities. Those factors favour for the . liquidity in the sense of being able to buy and sell relatively large amounts quickly without substantial price concession. a large position of the total risk of securities is systematic.diversified portfolio spread across the companies. There are yet other of influence which are external to the firm. They are: 1. industries and groups so that a loss in one may easily be compensated with a gain in other. They are termed as systematic risk. In debt market. inflation.Economic 2.Sociological changes are sources of systematic risk.Political 3. interest rate. their effect is to cause prices of nearly allindividual stocks to move together in the same manner.

the introduction of a derivatives securities that is on some broader market rather than an individual security. Gupta develop the appropriate regulatory framework for derivative trading in India. On May 11. C. REGULATORY FRAMEWORK: The trading of derivatives is governed by the provisions contained in the SC R A. .purpose of both portfolio hedging and speculation. Regulation for Derivative Trading: SEBI set up a 24 member committed under Chairmanship of Dr. The committee submitted its report in March 1998. L. and the regulations framed there under the rules and byelaws of stock exchanges. 1998 SEBI accepted the recommendations of the committee and approved the phased introduction of derivatives trading in India beginning with stock index Futures. the SEBI Act. SEBI also approved he “suggestive bye-laws” recommended by the committee for regulation and control of trading and settlement of Derivative contract.

Gupta committee. be through The clearing and settlement of derivatives trades shall a SEBI approved clearingcorporation/clearinghouse. The exchange shall have minimum 50 members. C. The members of an existing segment of the exchange will not automatically become the members of the derivatives segment.ClearingCorporation/Clearing House complying . 2. 1956 to start Derivatives Trading. Gupta committee report may apply to SEBI for grant of recognition under section 4 of the SCR Act. 4. The members of the derivatives segment need to fulfill the eligibility conditions as lay down by the L. The exchange shall regulate the sales practices of its members and will obtain approval of SEBI before start of Trading in any derivative contract.The provision in the SCR Act governs the trading in the securities. 1. 3. C. The derivative exchange/segment should have a separate governing council and representation of trading/clearing member shall be limited to maximum 40% of the total members of the governing council. Eligibility criteria as prescribed in the L. The amendment of the SCR Act to include “DERIVATIVES” within the ambit of securities in the SCR Act made trading in Derivatives possible with in the framework of the Act.

Forward contracts A forward contract is an agreement to buy or sell an asset on a specified future date for a specified price.with the eligibility conditions as lay down By the committee have to apply to SEBI for grant of approval. The trading members are required to have qualified approved user and sales persons who have passed a certification programme approved by SEBI Introduction to futures and options In recent years. In this chapter we shall study in detail these three derivative contracts. derivatives have become increasingly important in the field of finance. One of the parties to the contract assumes a . Derivatives broker/dealers and Clearing members are required to seek registration from SEBI. 7. 5. 6. Exchange should also submit details of the futures contract they purpose to introduce.2 Lakh. The Minimum contract value shall not be less than Rs. forward contracts are popular on the OTC market. While futures and options are now actively traded on many exchanges.

Each contract is custom designed. He is exposed to the risk of exchange . If the party wishes to reverse the contract. The contract price is generally not available in public domain. thereby reducing transaction costs and increasing transactions volume. The salient features of forward contracts are: They are bilateral contracts and hence exposed to counter–party risk. expiration date and the asset type and quality. and hence is unique in terms of contract size. Other contract details like delivery date. The forward contracts are normally traded outside the exchanges. price and quantity are negotiated bilaterally by the parties to the contract. as in the case of foreign exchange. which often results in high prices being charged. Forward contracts are very useful in hedging and speculation. the contract has to be settled by delivery of the asset. This process of standardization reaches its limit in the organized futures market. it has to compulsorily go to the same counterparty.long position and agrees to buy the underlying asset on a certain specified future date for a certain specified price. On the expiration date. The other party assumes a short position and agrees to sell the asset on the same date for the same price. However forward contracts in certain markets have become very standardized. The classic hedging application would be that of an exporter who expects to receive payment in dollars three months later.

rate fluctuations. Limitations of forward markets Forward markets world-wide are afflicted by several problems:  Lack of centralization of trading. and  Counterparty risk . wait for the price to rise. then he can go long on the forward market instead of the cash market. The speculator would go long on the forward. Similarly an importer who is required to make a payment in dollars two months hence can reduce his exposure to exchange rate fluctuations by buying dollars forward. which forecasts an upturn in a price. he can lock on to a rate today and reduce his uncertainty. Speculators may well be required to deposit a margin upfront. However. If a speculator has information or analysis.  Illiquidity. and then take a reversing transaction to book profits. this is generally a relatively small proportion of the value of the assets underlying the forward contract. By using the currency forward market to sell dollars forward. The use of forward markets here supplies leverage to the speculator.

and hence avoid the problem of illiquidity. This often makes them design terms of the deal which are very convenient in that specific situation. (or which can be used for . To facilitate liquidity in the futures contracts. the other suffers. It is a standardized contract with standard underlying instrument. The forward market is like a real estate market in that any two consenting adults can form contracts against each other. A futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. still the counterparty risk remains a very serious Introduction to futures Futures markets were designed to solve the problems that exist in forward markets. But unlike forward contracts. Even when forward markets trade standardized contracts.In the first two of these. the exchange specifies certain standard features of the contract. a standard quantity and quality of the underlying instrument that can be delivered. the futures contracts are standardized and exchange traded. the basic problem is that of too much flexibility and generality. Counterparty risk arises from the possibility of default by any one party to the transaction. but makes the contracts non-tradable. When one of the two sides to the transaction declares bankruptcy.

reference purposes in settlement) and a standard timing of such settlement. Distinction between futures and forwards Forward contracts are often confused with futures contracts. More than 99% of futures transactions are offset this way. The confusion is primarily because both serve essentially the same economic functions of allocating risk in the presence of future price uncertainty. A futures contract may be offset prior to maturity by entering into an equal and opposite transaction. However futures are a significant improvement over the forward contracts as they eliminate counterparty risk and .

the exchange specifies certain standard features of the contract. The standardized items on a futures contract are:    Quantity of the underlying Quality of the underlying The date and the month of delivery . Above table lists the distinction between the two INTRODUCTION TO FUTURES DEFINITION: A Futures contract is an agreement between two parties to buy or sell an asset a certain time in the future at a certain price.offer more liquidity as they are exchange traded. To facilitate liquidity in the futures contract.

The contracting parties need to pay only margin money. They have secondary markets to. TYPES OF FUTURES: On the basis of the underlying asset they derive. the financial futures are divided into two types:   Stock futures: Index futures: Parties in the futures contract: .  The units of price quotations and minimum price change Location of settlement FEATURES OF FUTURES:     Futures are highly standardized. Hedging of price risks.

The buyer of the futures contract is one who is LONG on the futures contract and the seller of the futures contract is who is SHORT on the futures contract. The pay off for the buyer and the seller of the futures of the contracts are as follows: PAY-OFF FOR A BUYER OF FUTURES: profit FP F 0 S2 FL S1 .There are two parties in a future contract. the buyer and the seller.

PAY-OFF FOR A SELLER OF FUTURES: profit FL S2 F FP loss S1 . CASE 2:-The buyer gets loss when the future price goes less then (F). if the future price goes to S2 then the buyer gets the loss of (FL).loss CASE 1:-The buyer bought the futures contract at (F). if the future price goes to S1 then the buyer gets the profit of (FP).

These deposits are initial margins. if the future goes to S1 then the seller gets the profit of (FP). CASE 2:. There are three types of margins: Initial Margins: Whenever a futures contract is signed.F – FUTURES PRICE S1. MARGINS: Margins are the deposits which reduce counter party risk. Marking to market margins: . if the future price goes to S2 then the seller gets the loss of (FL). S2 – SETTLEMENT PRICE CASE 1:.The seller sold the future contract at (F). both buyer and seller are required to post initial margins. Both buyer and seller are required to make security deposits that are intended to guarantee that they will infact be able to fulfill their obligation.arise in a futures contract. These margins are collected in order to eliminate the counter party risk.The seller gets loss when the future price goes greater than (F).

This model gives the fair value of the contract. Maintenance margin: The investor must keep the futures account equity equal to or greater than certain percentage of the amount deposited as initial margin. PRICING THE FUTURES: The Fair value of the futures contract is derived from a model knows as the cost of carry model.The process of adjusting the equity in an investor’s account in order to reflect the change in the settlement price of futures contract is known as MTM margin. Cost of Carry: F=S (1+r-q) t Where F.Spot price of the underlying r. If the equity goes less than that percentage of initial margin.Futures price S. then the investor receives a call for an additional deposit of cash known as maintenance margin to bring the equity upto the initial margin.Cost of financing .

Futures price: The price at which the futures contract trades in the futures market. two –month and three-month expiry cycle which expire on the last Thursday of the month. Thus a January expiration contract expires on the last . FUTURES TERMINOLOGY: Spot price: The price at which an asset trades in the spot market. The index futures contracts on the NSE have one.q.Expected Dividend yield t .month. Contract cycle: The period over which contract trades.Holding Period.

For instance. This is the last day on which the contract will be traded. In a normal market. at the end of which it will cease to exist. This reflects that futures prices normally exceed spot prices. basis can be defined as the futures price minus the spot price. the contract size on NSE’s futures market is 100 nifties. Contract size: The amount of asset that has to be delivered under one contract. The will be a different basis for each delivery month for each contract. basis will be positive. Expiry date: It is the date specifies in the futures contract. Basis: In the context of financial futures. a new contract having a three-month expiry is introduced for trading. Cost of carry: . On the Friday following the last Thursday.Thursday of January and a February expiration contract ceases trading on the last Thursday of February.

In order to have this right. Open Interest: Total outstanding long or short position in the market at any specific time. This measures the storage cost plus the interest that is paid to finance the asset less the income earned on the asset. for calculation of open interest. If the underlying asset is the financial asset. only one side of the contract is counter.The relationship between futures prices and spot prices can be summarized in terms of what is known as the cost of carry. then the option are financial option like . INTRODUCTION TO OPTIONS: DEFINITION Option is a type of contract between two persons where one grants the other the right to buy a specific asset at a specific price within a specific time period. The option buyer has to pay the seller of the option premium The assets on which option can be derived are stocks. commodities. indexes etc. Alternatively the contract may grant the other person the right to sell a specific asset at a specific price within a specific time period. As total long positions in the market would be equal to short positions.

PROPERTIES OF OPTION: Options have several unique properties that set them apart from other securities. currency options.stock options. and if options like commodity option. Buyer of the option: . index options etc. The following are the properties of option: • • • Limited Loss High leverages potential Limited Life PARTIES IN AN OPTION CONTRACT: 1.

On the basis of the underlying asset: On the basis of the underlying asset the option are divided in to two types : • INDEX OPTIONS The index options have the underlying asset as the index.The buyer of an option is one who by paying option premium buys the right but not the obligation to exercise his option on seller/writer. 2. • STOCK OPTIONS: . Writer/seller of the option: The writer of the call /put options is the one who receives the option premium and is their by obligated to sell/buy the asset if the buyer exercises the option on him TYPES OF OPTIONS: The options are classified into various types on the basis of various variables. The following are the various types of options. 1.

there are currently more than 150 stocks. A put options gives the holder of the option right but not the obligation to sell an asset by a certain date for a certain price. • AMERICAN OPTION: . They are: • CALL OPTION: A call option is bought by an investor when he seems that the stock price moves upwards. On the basis of exercise of option: On the basis of the exercising of the option. A call option gives the holder of the option the right but not the obligation to buy an asset by a certain date for a certain price. the options are classified into two categories. III. II. Stock option are options on the individual stocks. • PUT OPTION: A put option is bought by an investor when he seems that the stock price moves downwards. there are currently more than 150 stocks are trading in the segment.A stock option gives the buyer of the option the right to buy/sell stock at a specified price. On the basis of the market movements: On the basis of the market movements the option are divided into two types.

American options are options that can be exercised at any time up to the expiration date, all stock options at NSE are American. • EUOROPEAN OPTION: European options are options that can be exercised only on the expiration date itself. European options are easier to analyze than American options.all index options at NSE are European.

PAY-OFF PROFILE FOR BUYER OF A CALL OPTION: The pay-off of a buyer options depends on a spot price of a underlying asset. The following graph shows the pay-off of buyer of a call option.

Profit

ITM SR 0 E2 S E1

SP

OTM

ATM

loss

S

- Strike price Premium/ Loss

OTM ATM ITM

- Out of the money At the money In the money

SP -

E1 - Spot price 1 E2Spot price 2

SR- profit at spot price E1 CASE 1: (Spot price > Strike price) As the spot price (E1) of the underlying asset is more than strike price (S). the buyer gets profit of (SR), if price increases more than E1 then profit also increase more than SR.

CASE 2: (Spot price < Strike price) As a spot price (E2) of the underlying asset is less than strike price (s)

The buyer gets loss of (SP), if price goes down less than E2 then also his loss is limited to his premium (SP)

PAY-OFF PROFILE FOR SELLER OF A CALL OPTION: The pay-off of seller of the call option depends on the spot price of the underlying asset. The following graph shows the pay-off of seller of a call option:

profit SR OTM

if price goes more than E2 then the loss of the seller also increase more than (SR).Strike price ITM ATM OTM In the money At the money Out of the money SP . CASE 2: (Spot price > Strike price) As the spot price (E2) of the underlying asset is more than strike price (S) the seller gets loss of (SR). the seller gets the profit of (SP).Spot price 1 E2 .S E1 SP ITM ATM E2 loss S . .Spot price 2 SR Loss at spot price E2 CASE 1: (Spot price < Strike price) As the spot price (E1) of the underlying is less than strike price (S).Premium /profit E1 . if the price decreases less than E1 then also profit of the seller does not exceed (SP).

The following graph shows the pay-off of the buyer of a call option.PAY-OFF PROFILE FOR BUYER OF A PUT OPTION: The pay-off of the buyer of the option depends on the spot price of the underlying asset. Profit Profit SP .

CASE 2: (Spot price > Strike price) As the spot price (E2) of the underlying asset is more than strike price (s).E1 ITM SR S ATM OTM E2 loss S Strike price Premium /profit Spot price 1 Spot price 2 Profit at spot price E1 ITM OTM In the money Out of the money At the money SP E1 E2 SR - ATM - CASE 1: (Spot price < Strike price) As the spot price (E1) of the underlying asset is less than strike price (S). the buyer gets loss of (SP). the buyer gets the profit (SR). if price decreases less than E1 then profit also increases more than (SR). if price goes more than E2 than the loss of the buyer is limited to his premium (SP) .

PAY-OFF PROFILE FOR SELLER OF A PUT OPTION: The pay-off of a seller of the option depends on the spot price of the underlying asset. The following graph shows the pay-off of seller of a put option: profit SP E1 OTM SR S ATM ITM E2 .

Loss S - Strike price Premium/ profit Spot price 1 Spot price 2 Loss at spot price E1 ITM - In the money At the money Out of the money SP E1 E2 SR - ATM OTM - CASE 1: (Spot price < Strike price) As the spot price (E1) of the underlying asset is less than strike price (S). the seller gets profit of (SP). CASE 2: (Spot price > Strike price) As the spot price (E2) of the underlying asset is more than strike price (S). Factors affecting the price of an option: The following are the various factors that affect the price of an option they are: . the seller gets the loss of (SR). if price decreases less than E1 than the loss also increases more than (SR). if price goes more than E2 than the profit of seller is limited to his premium (SP).

by which the strike price exceeds the stock price. as a strike price increases. for a call. Call options therefore become more valuable as the stock price increases and vice versa. As volatility increases. option become more valuable. as the strike price increases option becomes less valuable and as strike price decreases. Therefore. Volatility: The volatility of a stock price is measured of uncertain about future stock price movements. The value of both calls and puts therefore increase as volatility increase. the stock price has to make a larger upward move for the option to go in-the-money. Risk-free interest rate: The put option prices decline as the risk-free rate increases where as the prices of call always increase as the risk-free interest rate increases.Stock price: The pay –off from a call option is a amount by which the stock price exceeds the strike price. Time to expiration: Both put and call American options become more valuable as a time to expiration increases. Strike price: In case of a call. The pay-off from a put option is the amount. Put options therefore become more valuable as the stock price increases and vice versa. . the chance that the stock will do very well or very poor increases.

scholes formula for the price of European calls and puts on a nondividend paying stock are : CALL OPTION: C = SN(D1)-Xe-r t N(D2) PUT OPTION P = Xe-r t N(-D2)-SN(-D2) Where C = VALUE OF CALL OPTION S = SPOT PRICE OF STOCK N= NORMAL DISTRIBUTION V= VOLATILITY X = STRIKE PRICE r = ANNUAL RISK FREE RETURN .Dividends: Dividends have the effect of reducing the stock price on the xdividend rate. PRICING OPTIONS The black. This has an negative effect on the value of call options and a positive effect on the value of put options.

In-the-money option: An In the money option is an option that would lead to positive cash inflow to the holder if it exercised immediately. Options premium: Option premium is the price paid by the option buyer to the option seller. Expiration Date: The date specified in the options contract is known as expiration date.t = CONTRACT CYCLE d1 = Ln (S/X) + (r+ v2/2)t d2 = d1. At-the-money option: .v\/ Options Terminology: Strike price: The price specified in the options contract is known as strike price or Exercise price.

DATA ANALYSIS AND INTERPRETATION . Out-of-the-money option: An out-of-the-money option is an option that would lead to negative cash flow if it is exercised immediately. Intrinsic value of money: The intrinsic value of an option is ITM. If the option is OTM. its intrinsic value is zero.An at the money option is an option that would lead to zero cash flow if it is exercised immediately. If option is ITM. Time value of an option: The time value of an option is the difference between its premium and its intrinsic value.

3 1322.85 1187.2 1124.25 1228.4 1147 Future price 1227.45 1131.55 1358.75 1277 1238.9 ANALYSIS OF ICICI: The objective of this analysis is to evaluate the profit/loss position of .9 1338.95 1151.05 1239.7 1228.45 1187.1 1256.3 1362.75 1332.85 1173.95 1286.75 1360.45 1167.15 1420.2 1368.95 1307.75 1267.Date 28-Dec-07 31-Dec-07 1-Jan-08 2-Jan-08 3-Jan-08 4-Jan-08 7-Jan-08 8-Jan-08 9-Jan-08 10-Jan-08 11-Jan-08 14-Jan-08 15-Jan-08 16-Jan-08 17-Jan-08 18-Jan-08 21-Jan-08 22-Jan-08 23-Jan-08 24-Jan-08 25-Jan-08 28-Jan-08 29-Jan-08 30-Jan-08 31-Jan-08 Market price 1226.5 1310.3 1223.05 1438.15 1435 1410 1352.7 1233.95 1356.3 1273.85 1156.1 1248.6 1277.1 1375.35 1134.4 1145.85 1127.7 1238.55 1339.95 1220.5 1265.85 1261.8 1358.75 1287.

The lot size of ICICI BANK is 175. This analysis is based on sample data taken of ICICI BANK scrip.futures and options. This analysis considered the Jan 2008 contract of ICICI BANK.01. .08. the time period in which this analysis done is from 27-12-2007 to 31.

15 per share.25 i.75-1227. a profit of 193.05 = -81. . So he will get a loss of 14201. So his total profit is 33897.15 * 175 If he sells on 14th Jan.5 i.e.GRAPH SHOWING THE PRICE MOVEM ENTS OF ICICI FUTURES 1500 1450 1400 1350 1300 1250 1200 1150 1100 1050 1000 ec -0 7 Ja n08 3Ja n08 7Ja n08 9Ja n 1 1 . 2008 then he will get a loss of 1145. 2007 then he will get a profit of 1420.7 i.e.05 = 193.9-1227. The following table explains the market price and premiums of calls. 193. -81. 175 futures of ICICI BANK on 28th Dec.7 per share.7 * 175 The closing price of ICICI BANK at the end of the contract period is 1147 and this is considered as settlement price.e.e.08 -J an 15 -08 -J an 17 -08 -J an 21 -08 -J an -0 23 8 -J an 25 -08 -J an 29 -08 -J an 31 -08 -J an -0 8 PRICE Future price 28 -D 1- CONTRACT DATES Graph:1 OBSERVATIONS AND FINDINGS: If a person buys 1 lot i. 2007 and sells on 31st Jan.

1230. 1260. Call options: . 1200. 1320 and 1350. 1290.• The first column explains trading date • Second column explains the SPOT market price in cash segment on that date. • The third column explains call premiums amounting at these strike prices.

6 170 140 1230 1260 39.2 50.65 62 100.55 34.5 1.9 134.15 62.2 0.45 1131.95 24.45 16.1 1248.25 17.95 1220.95 6.45 56.75 11.65 60.15 19.65 95.85 61.8 240 213.05 0.1 9.4 10.9 49.5 90 95 54 26.15 1435 1410 1352.1 104.4 22 80.7 8.55 1339.95 39.85 44.25 39.4 51.1 36.55 31.3 9.5 62 91.3 119.85 164.35 38.4 78.95 0.4 85 59.35 16.55 23.3 5 140 101 160.2 63.35 110 188.2 1124.3 1362.75 1267.5 29.25 1228.45 70.5 1 1290 1320 1350 18.95 18.2 32.6 5.45 0.95 1151.85 75.2 52.8 17.6 100 79.5 Table:2 32.05 46.2 62.05 0.15 20.15 14.25 120 100 74.45 4.7 130.7 1228.5 37.Strike prices Date 28-Dec-07 31-Dec-07 1-Jan-08 2-Jan-08 3-Jan-08 4-Jan-08 7-Jan-08 8-Jan-08 9-Jan-08 10-Jan-08 11-Jan-08 14-Jan-08 15-Jan-08 16-Jan-08 17-Jan-08 18-Jan-08 21-Jan-08 22-Jan-08 23-Jan-08 24-Jan-08 25-Jan-08 28-Jan-08 29-Jan-08 30-Jan-08 31-Jan-08 Market price 1226.7 1238.25 4.75 23.5 19.95 1286.5 44.4 22.85 68.1 24.85 1173.65 9.25 18.3 22.7 151.05 40.8 27.1 .85 30 22.65 46 25.75 45.2 1368.35 2.3 1273.3 1322.05 143.15 53.75 0.35 9.5 155 150.2 29.6 131 250.95 1356.55 60.25 24.4 1147 1200 67.3 40.9 96 134.65 44.5 26.85 33.9 75 109.05 50.45 17 12.1 91.4 1.35 42.45 1187.05 58.95 1307.2 53.85 74.15 31.0 5 128.4 140 128.9 148 107.55 88.05 39.45 12.55 10.4 140 128.85 1261.4 60 52 36.9 66 63 67.

hence the buyer is in loss.  So the buyer will lose only premium i. 39.75 i. So the total loss will be 6938. As it is out of the money for the buyer and in the money for the seller. the premium payable is 39.e. 39.OBSERVATIONS AND FINDINGS CALL OPTION BUYERS PAY OFF:  Those who have purchase call option at a strike price of 1260.65  On the expiry date the spot market price enclosed at 1147.65*175 SELLERS PAY OFF:  As Seller is entitled only for premium if he is in profit. .65 per share.e.

3 1362.05 170.7 1238.00 11.2 85.45 8 7.2 223.00 12.3 25.8 178.85 1261.25 76.4 32.05 145.55 1339.00 11.5 10 11.00 60.4 10.8 191.85 190.3 18.95 1356.7 12.05 26.75 Put options: Date 28-Dec-07 31-Dec-07 1-Jan-08 2-Jan-08 3-Jan-08 4-Jan-08 7-Jan-08 8-Jan-08 9-Jan-08 10-Jan-08 11-Jan-08 14-Jan-08 15-Jan-08 16-Jan-08 17-Jan-08 18-Jan-08 21-Jan-08 22-Jan-08 23-Jan-08 24-Jan-08 25-Jan-08 28-Jan-08 29-Jan-08 30-Jan-08 31-Jan-08 Market price 1226.15 11.95 1151.05 181.e.55 38.50 38.15 41.05 150 150 50.4 23.5 15 10 8.25 17.35 56.90 138.15 197.2 1124.90 26.00 60.05 1350 191.8 191.45 38.65 * 175 = 6938.3 35.45 13.85 190.85 135.5 50 181.05 151.25 1228.05 181.95 1286.8 37.8 191.8 191.60 12.1 22.85 190.8 191.00 8.8 191.1 1248.05 34.7 18 27.7 1228.85 190.5 110 71 99 15.15 103.95 1307.45 1187.85 43.75 3.90 138. 39.3 1273.60 70.2 1368.45 67.00 15.00 8.95 1220.4 112.85 1173.3 1322.45 145 145 145 Table:3 .8 178.6 135 135 33 30 50 85.45 1131.15 20.35 210 210 210 210 55 100 145.00 7.00 25.9 16.65 12.00 138.75 6.8 191.1 22.8 178.8 47.95 42 51 33.00 11.8 35 69.85 30 36 25.35 22.8 178.55 82 82 34.15 197.8 191.65 138.15 1435 1410 1352.8 18.05 45 45 120 120 190.00 1260 1290 1320 Strike prices 178.9 9 3.05 20.9 12 17.2 197.4 280 200 200 200 81.4 1147 1200 1230 39. So his profit is only premium i.35 19.05 25.75 12.85 190.00 36.6 32 17.2 8.00 38.75 1267.

25 Because it is positive it is in the money contract hence buyer will get more profit.00 53.05 13. incase spot price decreases. those who buy for 1200 paid 39.  Settlement price is 1147 Strike price Spot price 1200.00 Premium (-) 39. buyer’s profit will increase.OBSERVATIONS AND FINDINGS PUT OPTION BUYERS PAY OFF:  As brought 1 lot of ICICI that is 175. .00 1147. 2441.25 Buyer Profit = Rs.05 premium per share.95 x 175= 2441.

.e. than the buyer of a future gets profit.08 -J an -0 15 8 -J an 17 -08 -J an -0 21 8 -J an 23 -08 -J an -0 25 8 -J an -0 29 8 -J an 31 -08 -J an -0 8 PRICE Market price Future price 28 -D CONTRACT DATES Graph:2 OBSERVATIONS AND FINDINGS  The future price of ICICI is moving along with the market price.SELLERS PAY OFF:  It is in the money for the buyer so it is in out of the money for the seller. hence he is in loss.  The loss is equal to the profit of buyer i.  If the buy price of the future is less than the settlement price. than the seller incur losses. 2441.  If the selling price of the future is less than the settlement price. GARPH SHOWING THE PRICE MOVEMNTS OF SPOT & FUTURE 1500 1450 1400 1350 1300 1250 1200 1150 1100 1050 1000 ec -0 7 1Ja n08 3Ja n08 7Ja n08 9Ja n 1 1 .25.

the time period in which this analysis done is from 28-12-2007 to 31. The lot size of SBI is 132. This analysis is based on sample data taken of SBI scrip.08.ANALYSIS OF SBI:The objective of this analysis is to evaluate the profit/loss position of futures and options. This analysis considered the Jan 2007 contract of SBI.01. .

25 2388.25 2169.6 2434.15 2407.55 2473.75 2343.35 2408.4 2323.5 2419.35 2412.35 2196.35 2395.4 2313.35 2362.15 2454.8 2402.95 2335.3 2423.45 2416.85 2432.45 2448.5 2409.15 2137.55 2416.7 2223.55 2371.95 2167.1 2411.35 2192.Date 28-Dec-07 31-Dec-07 1-Jan-08 2-Jan-08 3-Jan-08 4-Jan-08 7-Jan-08 8-Jan-08 9-Jan-08 10-Jan-08 11-Jan-08 14-Jan-08 15-Jan-08 16-Jan-08 17-Jan-08 18-Jan-08 21-Jan-08 22-Jan-08 23-Jan-08 24-Jan-08 25-Jan-08 28-Jan-08 29-Jan-08 30-Jan-08 31-Jan-08 Market Price 2377.8 2463.7 2409.35 Future price 2413.2 2413.9 2464.9 .5 2423.3 2135.15 2478.5 2230.35 2230.5 2217.05 2370.4 2468.45 2415.15 2383.2 2316.1 2423.9 2305.55 2454.4 2421.

2008 then he will get a loss of 2169. 243. 2007 and sells on 31st Jan.7 = 243.60 i.e.8 per share. So he will get a profit of 32181.e.Table:4 GRAPH SHOWING THE PRICE MOVEMENTS OF SBI FUTURES 2500 2450 2400 2350 2300 2250 2200 2150 2100 2050 2000 08 08 08 -0 7 08 an -0 8 15 -J an -0 8 17 -J an -0 8 21 -J an -0 8 23 -J an -0 8 25 -J an -0 8 29 -J an -0 8 31 -J an -0 8 Ja nJa nJa nJa nec PRICE Future price 28 -D 11 -J 1- 3- 7- 9- CONTRACT DATES Graph:3 OBSERVATIONS AND FINDINGS: If a person buys 1 lot i.9-2413.8 * 132 . 350 futures of SBI on 28th Dec.

7 * 132 The closing price of SBI at the end of the contract period is 2167. 2370. at these strike prices. The following table explains the market price and premiums of calls.e.e. 2430. a profit of 54. So his total profit is 7220. • The third column explains call premiums amounting 2340.7 = 54. 2400. 54. • The first column explains trading date • Second column explains the SPOT market price in cash segment on that date.If he sells on 15th Jan.35 and this is considered as settlement price.4-2413.7 i. 2008 then he will get a profit of 2468. 2460 and 2490. .40 i.7 per share.

Call options:

Strike prices

Table:5

Date 28-Dec-07 31-Dec-07 1-Jan-08 2-Jan-08 3-Jan-08 4-Jan-08 7-Jan-08 8-Jan-08 9-Jan-08 10-Jan-08 11-Jan-08 14-Jan-08 15-Jan-08 16-Jan-08 17-Jan-08 18-Jan-08 21-Jan-08 22-Jan-08 23-Jan-08 24-Jan-08 25-Jan-08 28-Jan-08 29-Jan-08 30-Jan-08 31-Jan-08

Market Price 2377.55 2371.15 2383.5 2423.35 2395.25 2388.8 2402.9 2464.55 2454.5 2409.6 2434.8 2463.1 2423.45 2415.55 2416.35 2362.35 2196.15 2137.4 2323.75 2343.15 2407.4 2313.35 2230.7 2223.95 2167.35

2340 145 145 134 189.8 189.8 189.8 189.8 190 170 170 160 218.5 218.5 96 96 96 22.25 22.25 22.25 104 113.7 0 13 13 13

2370 92 92 92 92 92 92 92 92 92 190 190 190 190 98 190 190 190 190 190 190 190 0 15 15 15

2400 104.35 102.95 101.95 123.25 98.45 100.95 95.55 128.55 126.75 84 108.85 110.8 87.85 102.15 91.85 62.1 25.3 21.05 47.05 48.2 61.65 0 9 9 9

2430 108 108 108 105.8 93.6 86 88.15 118.3 121 72.25 94.95 90.2 75 95.45 80 50.55 15 15 15 40 48.75 0 0 0 0

2460 79 72 69.85 90.25 76.6 74.8 76.15 99.85 92.15 58.8 74.65 81.5 62.65 68.5 66 44 11.7 11.7 32.65 26.45 39.8 0 0 0 0

2490 68 59 59 76.55 60.05 60.05 61.1 84.8 77.45 51.85 64.85 64.8 55.3 61.95 55 30 29 10 29.3 26.3 27.65 0 0 0 0

OBSERVATIONS AND FINDINGS

CALL OPTION BUYERS PAY OFF:

Those who have purchased call option at a strike price of 2400, the premium payable is 104.35

On the expiry date the spot market price enclosed at 2167.65. As it is out of the money for the buyer and in the money for the seller, hence the buyer is in loss.

So the buyer will lose only premium i.e. 104.35 per share. So the total loss will be 13774.2 i.e. 104.35*132

SELLERS PAY OFF:

 

As Seller is entitled only for premium if he is in profit. So his profit is only premium i.e. 104.35 * 132 = 13774.2

Put options:

15 2407.15 2137.3 170 139.05 118 223.7 118 52.9 362.95 69.45 118 0 0 88 0 88 0 88 0 .05 218.45 2415.Strike prices Date 28-Dec-07 31-Dec-07 1-Jan-08 2-Jan-08 3-Jan-08 4-Jan-08 7-Jan-08 8-Jan-08 9-Jan-08 10-Jan-08 11-Jan-08 14-Jan-08 15-Jan-08 16-Jan-08 17-Jan-08 18-Jan-08 21-Jan-08 22-Jan-08 23-Jan-08 24-Jan-08 25-Jan-08 28-Jan-08 29-Jan-08 30-Jan-08 31-Jan-08 Market Price 2377.8 Table:6 90 303 90.25 2388.6 80.4 2313.05 218.15 41 44.75 2343.3 71.55 96.8 61.35 2230.95 221.6 303 84.35 2395.3 170 139.95 221.8 78.9 60 40 60 40 60 40 60 150 60 150 60 150 60 150 60 150 60 150 40 150 75.75 306.3 33.8 2402.75 306.3 170 139.55 2371.05 78 70.6 80.05 218.9 139.1 2423.5 2409.5 2423.25 303 53.95 221.95 2167.95 221.9 362.3 112.75 306.6 78 65.95 221.8 2463.35 100 135 96.55 303 86 303 87.25 59.95 221.6 80.05 218.95 221.8 118 300 118 150 118 117.05 100 75.3 0 0 61.05 218.95 303 73.05 218.8 61.7 303 56.15 2383.4 2323.95 221.95 100 125 100 128 150 150 150 150 150 150 150 150 0 0 0 0 362.55 2416.7 2223.8 303 74.9 2464.35 303 79 303 50.9 150 75.45 78 95.55 2454.6 2434.35 2340 2370 2400 2430 2460 218.9 70 170 139.35 2196.35 2362.55 299 299 299 120 120 0 0 0 0 2490 221.9 150 75.

SELLERS PAY OFF: .8 Buyer Profit = Rs.  Settlement price is 2167. incase spot price increase buyer profit also increase.65 x 132= 18829.65 Premium (-) 90.00 142.00 2167.35 Spot price Strike price 2400.OBSERVATIONS AND FINDINGS PUT OPTION BUYERS PAY OFF:  As brought 1 lot of SBI that is 132.8 Because it is positive it is in the money contract hence buyer will get more profit.35 232. those who buy for 2400 paid 90 premium per share. 18829.

 It is in the money for the buyer so it is in out of the money for the seller. than the buyer of a future gets profit.8. 18829. than the seller incur losses .  The loss is equal to the profit of buyer i. GRAPH SHOWING THE PRICE MOVEMENTS OF SPOT AND FUTURE 2500 2450 2400 2350 2300 2250 2200 2150 2100 2050 2000 ec -0 7 1Ja n08 3Ja n08 7Ja n08 9Ja n 11 -08 -J an 15 -08 -J an 17 -08 -J an -0 21 8 -J an 23 -08 -J an 25 -08 -J an -0 29 8 -J an 31 -08 -J an -0 8 PRICE Market Price Future price 28 -D CONTRACT DATES Graph:4 OBSERVATIONS AND FINDINGS  The future price of SBI is moving along with the market price. hence he is in loss.e.  If the buy price of the future is less than the settlement price.  If the selling price of the future is less than the settlement price.

.ANALYSIS OF YES BANK:The objective of this analysis is to evaluate the profit/loss position of futures and options. This analysis considered the Jan 2008 contract of YES BANK. The lot size of YES BANK is 1100. This analysis is based on sample data taken of YES BANK scrip.08.01. the time period in which this analysis done is from 28-12-2007 to 31.

1 262.3 248 227.75 230.7 258.Date 28-Dec-07 31-Dec-07 1-Jan-08 2-Jan-08 3-Jan-08 4-Jan-08 7-Jan-08 8-Jan-08 9-Jan-08 10-Jan-08 11-Jan-08 14-Jan-08 15-Jan-08 16-Jan-08 17-Jan-08 18-Jan-08 21-Jan-08 22-Jan-08 23-Jan-08 24-Jan-08 25-Jan-08 28-Jan-08 29-Jan-08 30-Jan-08 31-Jan-08 Market price 249.3 258.35 .7 260.45 251.95 241.85 268.35 242.85 261.5 242.45 future price 252.35 259.45 257.4 209.45 244.4 250.4 261.65 232.2 260.7 244.4 260.35 265.1 259.95 260.85 218.15 220.4 258.1 262.05 225.75 252.85 249.95 223.15 260.6 243.3 209.1 216.75 260.25 248.2 260.25 254 254.25 250.5 251.2 260.55 264.05 263.

Table:7 GRAPH SHOWING THE PRICE MOVEMENTS OF YES BANK FUTURES 280 270 260 250 240 230 220 210 200 ec -0 7 1Ja n08 3Ja n08 7Ja n08 9Ja n08 11 -J an -0 8 15 -J an -0 17 8 -J an -0 8 21 -J an -0 23 8 -J an -0 8 25 -J an -0 29 8 -J an -0 8 31 -J an -0 8 PRICE Future price 28 -D CONTRACT DATES Graph:5 OBSERVATIONS AND FINDINGS: .

• The third column explains call premiums amounting 230. 250. 2008 then he will get a profit of 260.15 per share.35-252.15 * 1100 If he sells on 15th Jan. 270 and 280.e. -2.75 * 1100 The closing price of YES BANK at the end of the contract period is 251.00 i.If a person buys 1 lot i.00 i. 2007 and sells on 31st Jan.25-252.45 and this is considered as settlement price. 240. . 260.75 i. a profit of 16. So he will get a loss of 2365.50 = -2. 1100 futures of YES BANK on 28th Dec.15 per share.e.e. 7.50 = 7. 2008 then he will get a loss of 250. at these strike prices. So his total loss is 8525. • The first column explains trading date • Second column explains the SPOT market price in cash segment on that date.e. The following table explains the market price and premiums of calls.

Call options: .

1 2.45 244.05 5.45 32.5 9.45 31.45 31.45 31.45 31.45 32.15 220.4 258.1 259.1 2.45 257.45 31.15 31.5 21.1 5 270 18.7 7.7 260 9 9 11.5 5.45 32.45 32.9 21.45 32.45 32.45 230 17.45 31.5 1.9 2.1 12.15 240 32.65 232.85 249.5 21.45 31.45 32.5 5.5 21.5 21.5 1.5 21.45 32.9 2.5 8 8 2.45 6.5 2.5 10.5 21.5 9.5 21.7 260.45 8 5.3 24.45 32.1 5.55 18.45 250 13.75 9 14 5.45 32.5 9.5 OBSERVATIONS AND FINDINGS .5 5 4.05 8.3 209.45 32.8 280 15 15 15 15 3 3 3 3 3 8 8 8 8 8 2 2 2 4 4 4 4 4 4 4 0.45 32.25 250.45 32.6 243.1 2.5 9.3 248 227.2 12.25 7.75 252.2 9.45 32.45 32.45 32.95 29.45 6 6 6 6 6 15.5 4.95 17.5 9.55 18.3 258.45 31.45 31.95 15.95 10.9 0.45 32.45 16.1 2.05 16.7 258.25 4 5.55 14.45 32.45 22.45 32.95 223.9 2.2 260.45 32.5 9.5 7.5 9.15 9.45 31.95 15.6 16 13 12.5 21.7 244.45 31.5 21.5 9.45 32.4 260.35 265.45 32.05 263.Strike prices Table:8 Date 28-Dec-07 31-Dec-07 1-Jan-08 2-Jan-08 3-Jan-08 4-Jan-08 7-Jan-08 8-Jan-08 9-Jan-08 10-Jan-08 11-Jan-08 14-Jan-08 15-Jan-08 16-Jan-08 17-Jan-08 18-Jan-08 21-Jan-08 22-Jan-08 23-Jan-08 24-Jan-08 25-Jan-08 28-Jan-08 29-Jan-08 30-Jan-08 31-Jan-08 Market price 249.5 7.5 21.75 260.9 2.45 251.45 32.45 31.45 32.

those who buy for 280 paid 17. 4840 Because it is positive it is in the money contract hence buyer will get more profit.45 Spot price Strike price 251.  Settlement price is 251.45 Premium (-) 17.00 21. SELLERS PAY OFF: .CALL OPTION BUYERS PAY OFF:  As brought 1 lot of YES BANK that is 1100.05 premium per share. incase spot price increase buyer profit also increase.05 4.40 x 1100= 4840 Buyer Profit = Rs.45 230.

4840.e.  The loss is equal to the profit of buyer i. It is in the money for the buyer so it is in out of the money for the seller. Put options: . hence he is in loss.

45 3.35 15.2 30.5 0 280 34.55 9.95 7.4 22.85 3.3 248 227.85 6.3 17.4 260.1 37.3 8.05 263.1 2.8 37.6 4.8 20 21.75 0.15 220.55 20.5 1.15 14.8 23.6 12.2 29.Strike prices Table:9 Date 28-Dec-07 31-Dec-07 1-Jan-08 2-Jan-08 3-Jan-08 4-Jan-08 7-Jan-08 8-Jan-08 9-Jan-08 10-Jan-08 11-Jan-08 14-Jan-08 15-Jan-08 16-Jan-08 17-Jan-08 18-Jan-08 21-Jan-08 22-Jan-08 23-Jan-08 24-Jan-08 25-Jan-08 28-Jan-08 29-Jan-08 30-Jan-08 31-Jan-08 Market price 249.75 20 15.6 21.25 250.75 260.9 23.1 40.1 28.2 15.9 5.4 28.3 2.95 10.65 46.15 14.7 260.3 5.2 3.1 9.9 6.05 1.95 31.95 4.8 25.5 34.95 23.2 260.1 259.65 8.6 1.75 252.6 25.25 39.1 25.45 257.5 3.45 35.6 4.55 24.8 49.2 1.45 16.25 69.9 16.5 12.05 3.8 52.1 0.95 19.4 6.75 11.3 258.35 10.3 3 3.6 3.15 1.65 1.3 6.6 243.15 2.4 258.95 223.75 13.85 1.1 27.7 2.25 23.6 56.8 6.45 251.65 0 250 15.3 24.3 12.8 16.55 27.9 11.7 244.6 26.05 23.1 19.25 36.8 3.75 8.45 230 6.2 10.55 59 47.75 42.45 244.5 59.05 5.6 0.35 13.75 22.8 10.85 249.8 1.25 3.1 13.15 17.55 16.15 13 13.8 7 1.55 6.75 16.7 33 49.35 265.4 10.95 6.95 0 260 20.5 0 .85 7.25 30 19.25 26.25 35.95 16.2 4.65 0 270 27.15 9.7 258.3 19 16.5 9.6 25.3 209.25 17.1 5.85 10 8.75 7.5 3.65 232.15 0 240 10.65 22.8 24.

15 per share. So the total loss will be 16665 i.OBSERVATIONS AND FINDINGS PUT OPTION BUYERS PAY OFF:  Those who have purchase put option at a strike price of 250.e.15*1100 SELLERS PAY OFF: . the premium payable is 15.45. As it is out of the money for the buyer and in the money for the seller. 15.e. hence the buyer is in loss.  So the buyer will lose only premium i.15  On the expiry date the spot market price enclosed at 251. 15.

15.e. So his profit is only premium i.15 * 1100 = 16665 GRAPH SHOWING THE PRICE M OVEMENTS OF SPOT & FUTURES 280 270 260 250 240 230 220 210 200 08 08 08 9Ja n 1 1 -0 8 -J an -0 15 8 -J an -0 17 8 -J an 21 -08 -J an -0 23 8 -J an -0 25 8 -J an 29 -08 -J an -0 31 8 -J an -0 8 Ja n-0 7 Ja nJa nec PRICE Market price Future price 28 -D 1- 3- 7- CONTRACT DATES Graph:6 OBSERVATIONS AND FINDINGS .  As Seller is entitled only for premium if he is in profit.

than the seller incur losses.  If the buy price of the future is less than the settlement price.  If the selling price of the future is less than the settlement price. The future price of YES BANK is moving along with the market price. than the buyer of a future gets profit. SUMMARY .

 Derivatives market is an innovation to cash market. but in derivatives the investor has to pay premiums or margins. Approximately its daily turnover reaches to the equal stage of cash market.  Derivatives are mostly used for hedging purpose.  In cash market the investor has to pay the total money. which are some percentage of total contract. The investor may incur huge profits or he may incur Huge losses. SUGESSTIONS . But in derivatives segment the investor enjoys huge profits with limited downside.  In derivative segment the profit/loss of the option writer purely depends on the fluctuations of the underlying asset. The average daily turnover of the NSE derivative segments  In cash market the profit/loss of the investor depends on the market price of the underlying asset.

 The derivatives market is newly started in India and it is not known by every investor.  Contract size should be minimized because small investors cannot afford this much of huge premiums. SEBI should revise some of their regulations like contract size. . participation of FII in the derivatives market.  SEBI has to take further steps in the risk management mechanism. so SEBI has to take steps to create awareness among the investors about the derivative segment.  In order to increase the derivatives market in India.  SEBI has to take measures to use effectively the derivatives segment as a tool of hedging.

CONCLUSION  In bullish market the call option writer incurs more losses so the investor is suggested to go for a call option to hold.  In bearish market the call option holder will incur more losses so the investor is suggested to go for a call option to write. where as the put option holder suffers in a bullish market.  In the above analysis the market price of YES bank is having low volatility. . so the call option writer enjoys more profits to holders. where as the put option writer will get more losses. so he is suggested to write a put option. so he is suggested to hold a put option.

htm http://www.derivativesindia/scripts/glossary/indexobasic.asp#typesofprod. (2006) ‘Financial Markets and Services’ (third edition) Himalaya publishers  WEBSITES :-     http://www.asp http://www.htm .htm http://www.NCFM (October 2005)  Gordon and Natarajan.nseindia/content/fo/fo_historicaldata.bseindia/about/derivati.BIBILOGRAPHY  BOOKS :-  Derivatives Dealers Module Work Book .nseindia/content/equities/eq_historicaldata.

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