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Jaypee Business School A constituent of Jaypee Institute of Information Technology University A-10, Sector 62, Noida (UP) India

201 307 www.jbs.ac.in Managing

Risk through hedging

In futures and options

Corporate Internship Report Internship Report submitted as a partial requirement for the award of the two year Master of Business Administration Programme MBA 2010-12 Name: NIKHIL DANG Telephone: +91-9910483832 E-mail: dang.nikhil90@yahoo.com

Karvy Stock Broking Limited Corporate Internship Supervisor Name: Mr. VAIBHAV DUA Contact details: +91-9711555137 Mailing Address: ba-knagar@karvy.com JBS-Faculty Supervisor: Mrs JHUMUR SENGUPTA Start Date for Internship: 29h APRIL 2011 End Date for Internship: 18th JUNE 2011 Report Date: 1st JULY 2010

Self Certification by the Intern

I hereby certify that I, NIKHIL DANG have successfully completed my internship with Karvy Stock Broking Limited in the month of June 2010 from 29 th APRIL 2011 to 18th JUNE 2011. This is also to certify that this report is an original product and no unfair means like copying etc have been used for its completion.

Name: NIKHIL DANG Signature: Date: 1st JULY 2011

Certification from the Organization

ACKNOWLEDGEMENT
It gives me great pleasure in acknowledging the invaluable assistance expended to me by various personalities in the successful completion of this report. I wish to express my gratitude to all the people involved in the completion of the report. They have been a constant source of support for me.

I would like to thank the team of Karvy Stock Broking Limited who accepted me in spite of my inexperience in the field and gave me the opportunity to work with them. I would like to express my deep sense of gratitude towards my corporate internship supervisor Mr. Jitendra Rai Singhania (Regional Head- Karvy Fortune) for his ideas, encouragement and guidance in all phases of my internship. He not only showed me the right direction but also tried to provide me with all the necessary resources. I am highly grateful for all the time and effort he has put in for discussions and reviews. I would also like to show my gratitude to my faculty supervisor Prof JHUMUR SEN GUPTA for giving me directions and guidelines at the time when most needed and for helping me in my internship in every suitable manner. Last but not least I wish to avail this opportunity to express a sense of gratitude and love to my friends and my beloved parents for their support, strength and help.

Signature of the Student: Name of the Student: Date: 1st JULY 2011

NIKHIL DANG 10609158

TABLE OF CONTENTS

S.no 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11.


12.

Contents
Executive Summary Objectives of the study Company Profile Industry Analysis Financial Analysis Introduction to derivatives Hedging Conclusion Recommendation Key Learnings Annexure
Reference

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EXECUTIVE SUMMARY
India is a large and growing economy with rapidly expanding financial services sector. The sector has witnessed a transformation over the last decade because of the economic liberalization, which started in 1991. The Indian capital markets have undergone a substantial change over the last decade. India is now placed among the mature markets of the world. With over 20 million shareholders, India has the third largest investor base in the world after USA and Japan.

Karvy is Indias leading Financial Services Company having over 800 branches & business associates in all over India. Karvy serves the financial needs of more than 12,50,000 customers with its wide range of financial services and products from securities, derivatives trading, depositary services, research & advisory services, registration & transfer services, loan against shares and mortgage & housing finance.

My Internship consisted of the Training on Dealing with futures and option, Hedging methodologies in combination with futures and options and online trading. The best learning experience was that I started from the very basics of stock market, which helped me understand things easily at every point of time. I also worked on the UID project launched by the GOVT. OF INDIA which has been bagged by Karvy. Under this I approached some potential trustworthy facilitators who can help the company in expanding this project.

OBJECTIVES OF THE STUDY


To analyze the growth of derivative market in India. To study the strategies of future and options trading. To understand the effectiveness of hedging.

SCOPE OF THE STUDY


The scope of the study is clearly seen as it helps in understanding the various derivatives markets. It helps to evaluate the effectiveness of hedging in the derivative trading. The study reveals some vital information regarding reduction of market risk and maximizing profit before applying investment strategies.

COMPANY PROFILE
Karvy was established as Karvy and company by five Chartered Accountants during the year 1979-80, and then its work was confined to audit and taxation only. The birth of Karvy was on a modest scale in 1981. It began with the vision and enterprise of a small group of practicing Chartered Accountants who founded the flagship company Karvy Consultants Limited. Karvy Consultants Limited was established in 1982 at Hydrabad. At initial stage it was very small in size and started with a capital of Rs.1,50,000. Karvy became a known name during the year 1985-86 when it forayed into capital market as registrar. All along, Karvys strong work ethics and professional background leveraged with Information Technology enabled it to deliver quality to the individual. A decade of commitment, professional integrity and vision helped Karvy achieving a leadership position in its field when it handled largest number of corporate and retail that proved to be a sound business synergy. Karvy has been a customer centric company since its inception. It offers a single platform servicing multiple financial instruments in its bid to offer complete financial solutions to the varying needs of both corporate and retail investors, where an extensive range of services are provided with great volume-management capability. Today, Karvy has access to millions of Indian shareholders, besides companies, banks, financial institutions and regulatory agencies. Over the past one and half decades, Karvy has evolved as a veritable link between industry, finance and people.

KARVY, is a premier integrated financial services provider, and ranked among the top five in the country in all its business segments, services over 16 million individual investors in various capacities, and provides investor services to over 300 corporates, comprising the who is who of Corporate India.

ORGANIZATION

Now Karvy group consists of 8 highly renowned entities which are as follow:

1.

: The first securities registry to receive ISO 9002 certification in

India. Registered with SEBI as Category I Registrar, is Number 1 Registrar in the Country. The award of being Most Admired Registrar is one among many of the acknowledgements we received for our customer friendly and competent services.

2.

: Karvy Stock Broking Ltd. consists of five units namely stock

broking servics, depository participant, advisory services, distribution of financial products, advisory services and private client goups.

3.

: It is registered with SEBI as a category 1 merchant banker. Its

clientele includesinclude leading corporate, State Governments, foreign institutional investors, public and private sector companies and banks, in Indian and global markets.

4.

: Karvy insurance broking ltd is also a part of karvy stock broking

ltd. At Karvy Insurance Broking Limited both life and non-life insurance products are provided to retail individuals, high net-worth clients and corporates.

5.

The company provides investment, advisory and brokerage

services in Indian Commodities Markets. And most importantly, it offer a wide reach through our branch network of over 225 branches located across 180 cities.

6.

: Karvy Global is a leading business and knowledge process

outsourcing Services Company offering creative business solutions to clients globally. It operates in banking and financial services, inurance, healthcare and pharmaceuticals, media , telecom and technology. It has its sales and business development office in New York, USA and the offshore global delivery center in Hyderabad, India

7.

: Karvy Realty (India) Limited is engaged in the business of real Buying/ selling/ renting of properties Identifying valuable investments opportunities in the real estate sector Facilitating financial support for real estate and investments in properties Real estate portfolio advisory services

estate and property services offering:

8.

: It is a joint venture between Computershare, Australia and Karvy

Consultants Limited, India in the registry management services industry.

Why should investors choose for Karvy?


Experience KARVY group has more than two decades of trust and credibility in the Indian stock market. Karvy Stock Brokers Limited, member of National Stock Exchange of India and the Bombay Stock Exchange, ranks among the top 5 stock brokers in India. With over 6,00,000 active accounts, it ranks among the top 5 Depositary Participant in India, registered with NSDL and CDSL. Technology With their online trading account one can buy and sell shares in an instant from any PC with an internet connection. Customers get access to the powerful online trading tools that will help them to take complete control over their investment in shares. Accessibility Karvy provides ADVICE, EDUCATION, TOOLS AND EXECUTION services for investors. These services are accessible through many centers across the country (Over 375 locations in 150 cities), over the Internet (through the website www.karvyonline.com) as well as over the Voice Tool.

VISION STATEMENT:
Karvys aspiration of establishing itself as an integrated financial services co is propelled by a vision that is shared by the entire work force. Towards this end Karvy is dedicated itself to:

Having a single minded focus on investor services. Establish as a house hold name for financial services. Set industrial standards. Stock Broking 10% + share in cash markets F & O double the cash volumes (around 6%) Activate BSE so as to reach 5% share

MISSION:
Our mission is to be a leading, preferred, services provider to our customer and we aim to achieve this leadership position by an innovative, enterprising and technology driven Organization, which will set the highest standards of service and business ethics.

Spectrum of services offered by Karvy:


Karvy being the top registrar and transfer agent, functions as registrar in most of the issues in the country. Talking about the mutual fund services offered by karvy, we can get the products of 33 AMCs over here. it deals in both closed ended funds as well as open ended too. Now one must be thinking why to get the mutual funds from karvy instead of getting it directly from AMCs???we have great reasons for it: the first one being ; if we avail the services of karvy then we can get the information about all the AMCs and their products at a single place along with expert recommendations whereas at an AMC we can get information about the products of that specific AMC only. And the second being wide network of karvy.nowadays we can find karvy offices at remote areas too.

KARVY STOCK BROKING LIMITED

Karvy Stock Broking Limited, one of the cornerstones of the Karvy edifice, flows freely towards attaining diverse goals of the customer through varied services. Here, growth knows no limits and success recognizes no boundaries. Helping the customer create waves in his portfolio and empowering the investor completely is the ultimate goal. We offer services that are beyond just a medium for buying and selling stocks and shares. Instead we provide services which are multi dimensional and multi-focused in their scope. The company help for customers to create effect on portfolio and achieve the final goal by provide a monthly magazine which gives up-dated market information on market trends, investment options.

SERVICES
Stock broking service Karvy offer services that are beyond just a medium for buying and selling stocks and shares. Instead we provide services which are multi dimensional and multi-focused in their scope. There are several advantages in utilizing our Stock Broking services, which are the reasons why it is one of the best in the country. It offers trading on a vast platform. The in-depth research and highly skilled research team, comprising of technical analysts as well as fundamental specialists gives information on market trends, market analysis. Depository Participant The onset of the technology revolution in financial services Industry saw the emergence of Karvy as an electronic custodian registered with National Securities Depository Ltd (NSDL) and Central Securities Depository Ltd (CSDL) in 1998. Financial product distribution With the wide portfolio offerings, Karvy also occupy all segments in the retail financial services industry. A 1600 team of highly qualified and dedicated professionals drawn from the best of academic and professional backgrounds are committed to maintaining high levels of client service delivery. udicious planning that is customized to meet the

future needs of the customer deliver a service that is exemplary. The market-savvy and the ignorant investors, both find this service very satisfactory. Advisory Services

Under the retail brand Karvy the Finapolis', it deliver advisory services to a crosssection of customers. The service is backed by a team of dedicated and expert professionals with varied experience and background in handling investment portfolios. They are continually engaged in designing the right investment portfolio for each customer according to individual needs and budget considerations with a comprehensive support system that focuses on trading customers' portfolios and providing valuable inputs, monitoring and managing the portfolio through varied technological initiatives. This is made possible by the expertise we have gained in the business over the years. Private Client Group This specialized division was set up to cater to the high net worth individuals and institutional clients keeping in mind that they require a different kind of financial planning and management that will augment not just existing finances but their life-style as well. Here we follow a hard-nosed business approach with the soft touch of dedicated customer care and personalized attention. For this purpose we offer a comprehensive and personalized service that encompasses planning and protection of finances, planning of business needs and retirement needs and a host of other services, all provided on a oneto-one basis. Products: MUTUAL FUNDS: A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is then invested in capital market

instruments such as shares, debentures and other securities. The income earned through these investments and the capital appreciation realized is shared by its unit holders in proportion to the number of units owned by them. INSURANCE: It is a system to make large financial losses more affordable by pooling the risks of many individuals and business entities and transferring them to an insurance company or other large group in return for a premium. At KARVY, the company has tie-ups with many insurance companies nsurance are of two types: a) Life Insurance b) General Insurance EQUITIES: Equity participation of clients is the daily earning of the company. People participate in intraday trades, Short, Medium and Long term investing to plan for their financial goals. The company is listed member of National Stock Exchange (NSE). It has terminals at all outlets and helps it customers participate in the stock market trades. DERIVATIVES A derivative is a product whose value is derived from the value of an underlying asset, index or reference rate. The underlying asset can be equity, forex, commodity or any other asset. For example, if the settlement price of a derivative is based on the stock price of a stock for e.g. Infosys, which frequently changes on a daily basis, then the derivative risks are also changing on a daily basis. Very often, the variables underlying the derivative securities are the prices of traded securities

Achivements:

Among the top 5 stock brokers in India (4% of NSE volumes) India's No. 1 Registrar & Securities Transfer Agents Among the top 3 Depository Participants Largest Network of Branches & Business Associates ISO 9002 certified operations by DNV Among top 10 Investment bankers Largest Distributor of Financial Products Adjudged as one of the top 50 IT uses in India by MIS Asia Full Fledged IT driven operations

LEADERSHIP POSITIONS:
Leading stock broker Largest retail broker (Over 160,000 trades per day representing over 5.5% of NSE trades) over 700 terminals Around 4.5% share of daily NSE Cash market volumes and 2% of F&O volumes Over Rs. 6.5Bn turnover per day Strong research team and emerging as a leading research house Over 250,000 customers Leading depository participant Servicing through 380+ branches Over 740,000 active DP customers Amongst the largest DP in the country Over Rs. 250 Bn. in custody Technology driven online service at branch level

Leading IPO distributor Largest retail distributor for IPOs (over 17% share of retail volumes in 2003 to 2005) Extensive use of Karvys broking network for IPO book building process Over 8,000 active business associates in addition to 300+ branch network Over 1,600 executives in sales and customer service

SWOT ANALYSIS:

Strength: Good research team. Dedicated employees. Strong customer relationship. Strong brand name. Wide spread branches and brokers network.. Weakness: Technology need to be upgraded. Not enough advertisement. Opportunity: Growing IPO issues. Positive outlook of people towards financial products. Growing consumer awareness about equity related product.

Threat: Market uncertainty. Galloping competition. Broad economic factors like inflation, etc. International disruptions.

PRODUCT RANGE OF KARVY STOCK BROKING


This is a User Friendly Product which allows the client to trade through website www.karvyonline.com and is suitable for the retail investors who is risk-averse.

I-zone account

Features Online trading account for investing in Equity and Derivatives via www.karvyonline.com Live Terminal and Single terminal for NSE Cash, NSE F&O & BSE. Integration of On-line trading, Saving Bank and Demat Account. Instant cash transfer facility against purchase & sale of shares. Competitive transaction charges. Instant order and trade confirmation by E-mail.

GOTX

GOTX is an internet-based software application that enables you to buy and sell in an instant. It is ideal for active traders and jobbers who transact frequently during days session to capitalize on intra-day price movement. Features Instant order Execution and Confirmation. Single screen trading terminal for NSE Cash, NSE F&O & BSE. Technical Studies.

Multiple Charting.

IPO ON-LINE

Customers can apply to all the forthcoming IPOs online. This is quite hassle-free, paperless and time saving. Simply allocate fund to IPO Account, Apply for the IPO and Sit Back & Relax. CHARGE STRUCTURE Charge Account Opening Annual Maintenance charges Brokerage * Taxes as per govt. Documents required for opening Demat + I-zone account: Copy of PAN Card Copy of address proof Last 3 months bank statement Electronic Confirmation No. Slip Cancelled Cheque Demat + I-zone Account Rs. 650 Rs.375 Intra-day 0.03 % Delivery - 0.30 % Gotx Account NIL Intra-day - 0.03% I-zone Account Rs.650 Rs.400 Intra-day-0.03%

Delivery - 0.30% Delivery - 0.30%

FEES TO BE PAID FOR FRANCHISEE,REMISER AND AUTHORIZED PERSON Franchisee Remiser Authorized person Registration fee Rs.27500 Rs.27500 Rs.10000 Security deposit Rs.1.5 lacs Rs.50,000 Brokerage Share 60%-Franchisee 40%-Karvy 40%-Remiser 60%-Karvy 20%-Authorized person 80%-Karvy

INDUSTRY ANALYSIS
Companies in the industry1. Karvy Stock Broking Ltd.-

Karvy Stock Broking Ltd. is a member of NSE and BSE. It is one of the leading Depository Participants in India which is registered with NSDL and CDSL. KSBL offers trading on a vast platform; National Stock Exchange and Bombay Stock Exchange. It makes trading safe to the maximum possible extent, by accounting for several risk factors and planning accordingly. It is assisted in this task by its in-depth research, constant feedback and sound advisory facilities.

2. Sharekhan Stock Trading / Sharekhan Demat / Sharekhan Brokerage-

Sharekhan is online stock trading company of SSKI Group, provider of India-based investment banking and corporate finance service. ShareKhan is one of the largest stock broking houses in the country. S.S. Kantilal Ishwarlal Securities Limited (SSKI) has been among Indias leading broking houses for more than a century.

3. Indiabulls Stock Trading / Indiabulls Demat / Indiabulls Brokerage-

Indiabulls is India's leading Financial Services and Real Estate Company having presence over 414 locations in more than 124 cities. Indiabulls Financial Services Ltd is listed on the National Stock Exchange, Bombay Stock Exchange, Luxembourg Stock Exchange and London Stock Exchange.

4. Motilal Oswal Securities Stock Trading / Motilal Oswal Securities

Motilal Oswal Securities Ltd is a well diversified financial services firm offering a range of financial products and services such as Wealth Management, Broking & Distribution, Commodity Broking, Portfolio Management Services, Institutional Equities, Private Equity, Investment Banking Services and Principal Strategies.

5. ICICIDirect Stock Trading / ICICIDirect Demat / ICICIDirect Brokerage-

ICICIDirect (or ICICIDirect.com) is stock trading company of ICICI Bank. Along with stock trading and trading in derivatives in BSE and NSE, it also provides facility to invest in IPOs, Mutual Funds and Bonds. Trading is available in BSE and NSE.

Comparion on the basis of Brokerage fees charged


Broker Brokerage for delivery Brokerage for Intraday trading

Karvy Stock Broking

0.30%

0.03%

Motilal Oswal

0.30% - 0.50%

0.03% - 0.15%

Sharekhan

0.03% - 0.50% 0.03% - 0.10%

5 paisa

0.25% - 0.85%

0.07%

Angel Broking

0.50%

0.02% - 0.03%

ICICI direct

0.75%

0.15%

Indiabulls

0.25% - 0.50%

0.05% - 0.10%

HDFC Securities

0.50%

0.15%

Religare

0.20% - 0.30%

0.02% - 0.03%

Indiainfoline

0.50%

0.10%

Reliance Money

0.01%

0.01%

ICICI Direct charges the maximum brokerage of 0.75% for delivery mode trading. For intraday trading, ICICI Direct and HDFC Securities charge the maximum brokerage of 0.15%

Comparative Analysis of Competitors CHARGE SCHEDULE


PARAMETER First year Demat AMC ICICI DIRECT 750 750 SHAREKHAN INDIABULLS RELIANCE 0 450 500+700 software 550 MONEY for 500 Lifetime free KARVY 650 425

Delivery

40 to 85 bps

50 bps

20 bps 2 bps

30 to 55 bps 3 to 5 bps

Brokerage Intraday/Futures 20 to 42.5 10 bps bps Options Margin Trade Demat Upfront Brokerage Payment Brokerage Negotiable 10 to 15 bps Included in Charged brokerage separately Charged separately

Charged separately

Included brokerage

in

Market Size
The Indian broking industry is reasonably large and fragmented with 9,000 odd brokers in the cash segment and around 24,000 sub-brokers.

Growth Trends and Performance


It was another good year for global capitalism.The US turned in stronger returns than the rest of the globe.US stocks clocked in a total return of 17.9 percent, as measured by the Wilshire 5000 index, the broadest measure of US stocks. By contrast, the S&P 500 total return was only 15.1 percent. The S&P 500 comprises about 75 percent of the US stock market.Returns across the globe, a combination of US and international stocks, returned 14.9 percent as measured by the MSCI All World Investable Market Index.

While the global financial crisis continues to be devastating to world economies, world stock markets seem to have nearly recovered. The BSE Sensex jumped 3,044.28 points or 17.43% in calender 2010. The S&P CNX Nifty surged 933.45 points or 17.94% in 2010, as foreign funds made record purchases of Indian stocks.Foreign funds bought shares worth a massive Rs 2352.70 crore on Thursday, 30 December 2010. The inflow reached Rs 2049.60 crore in December 2010 and Rs 133266 crore in calendar 2010.

10 major Global Stock Exchanges (market capitalization as on August 2009)

Stock Exchange Johannesburg Securities Exchange NASDAQ So Paulo Stock Exchange Toronto Stock Exchange New York Stock Exchange Australian Securities Exchange Bombay Stock Exchange Hong Kong Stock Exchange Korea Exchange National Stock Exchange of India

Capitalization (US$ mn) 690,797.5 2,847,535.2 1,032,518.4 1,432,877.0 10,842,001.9 1,066,513.2 1,082,572.0 1,945,517.7 727,125.3 1,019,109.0

Foreign Trade Policy


Foreign companies are now permitted to have a majority stake in their Indian affiliates except in a few restricted industries. In certain specific industries, foreigners can even have holding up to 100 per cent.

Foreign Institutional Investors (FII) upon registration with the Securities and Exchange Board of India (SEBI) and the Reserve Bank of India (RBI) are allowed to operate in Indian stock exchanges subject to the guidelines issued for the purpose by SEBI.

Legal/Regulatory Issues
Capital Issues (Control) Act, 1947
The Act had its origin during the war in 1943 when the objective was to channel resources to support the war effort. It was retained with some modifications as a means of controlling the raising of capital by companies and to ensure that national resources were channeled into proper lines, i.e., for desirable purposes to serve goals and priorities of the government, and to protect the interests of investors. Under the Act, any firm wishing to issue securities had to obtain approval from the Central Government, which also determined the amount, type and price of the issue. As a part of the liberalization process, the Act was repealed in 1992 paving way for market determined allocation of resources.

Securities Contracts (Regulation) Act, 1956


It provides for direct and indirect control of virtually all aspects of securities trading and the running of stock exchanges and aims to prevent undesirable transactions in securities. It gives Central Government regulatory jurisdiction over (a) stock exchanges through a process of recognition and continued supervision, (b) contracts in securities, and (c) listing of securities on stock exchanges. As a condition of recognition, a stock exchange complies with conditions prescribed by Central Government.

SEBI Act, 1992


The SEBI Act, 1992 was enacted to empower SEBI with statutory powers for (a) protecting the interests of investors in securities, (b) promoting the development of the securities market, and (c) regulating the securities market. Its regulatory jurisdiction extends over corporates in the issuance of capital and transfer of securities, in addition to all intermediaries and persons associated with securities market. It can conduct enquiries, audits and inspection of all concerned and adjudicate offences under the Act. It has powers to register and regulate all market intermediaries and also to penalize them in case of violations of the provisions of the Act, Rules and Regulations made thereunder. SEBI has full autonomy and authority to regulate and develop an orderly securities market.

Technology
Technology has been the backbone of the Exchange. Providing the services to the investing community and the market participants using technology at the cheapest possible cost has beenits main thrust. NSE chose to harness technology in creating a new market design. It believes that technology provides the necessary impetus for the organization to retain its competitive edge and ensure timeliness and satisfaction in customer service. The exchange operates and manages a nationwide network. This network includes 9 POPs (Points of Presence) setup across the country and catering to 3070+ leased lines. What is Stock Market???

The stock market system is an avenue of how to trade stock for listed corporations. As a corporation is formed, its initial shareholders are able to acquire shares of stock from the point of subscription when a company is created. When a company starts to be traded to

the public, the primary market comes in where those who subscribe to the initial public offering (IPO) takes on the shares of stock sold from point of IPO. When those who bought into a company at IPO point of view decides to sell their shares of stock to other people, they can do so by going to the stock market. The stock market is a secondary market for securities trading wherein original or secondary holders of a companys shares of stock can sell their stocks to other individuals within the frame work of the stock market system.

PRIMARY & SECONDARY MARKET


There are two ways for investors to get shares from the primary and secondary markets. In primary markets, securities are bought by way of public issue directly from the company. In Secondary market share are traded between two investors. Primary Market: Market for new issues of securities, as distinguished from the Secondary Market, where previously issued securities are bought and sold. Secondary Market: The market where securities are traded after they are initially offered in the primary market. Most trading is done in the secondary market.

Stock Market of India


In earlier times, buyers and sellers used to assemble at stock exchanges to make a transaction but now with the dawn of IT, most of the operations are done electronically and the stock markets have become almost paperless. Now investors dont have to gather at the Exchanges, and can trade freely from their home or office over the phone or through Internet. One of the oldest stock markets in Asia, the Indian Stock Markets have a 200 years old history

Trading Pattern of the Indian Stock Market Indian Stock Exchanges allow trading of securities of only those public limited companies that are listed on the Exchange(s). They are divided into two categories:

Types of Transactions The flowchart below describes the types of transactions that can be carried out on the Indian stock exchanges:

Indian stock exchange allows a member broker to perform following activities: 1. Act as an agent, 2. Buy and sell securities for his clients and charge commission for the same, 3. Act as a trader or dealer as a principal, 4. Buy and sell securities on his own account and risk.

Over The Counter Exchange of India (OTCEI) Traditionally, trading in Stock Exchanges in India followed a conventional style where people used to gather at the Exchange and bids and offers were made by open outcry. This age-old trading mechanism in the Indian stock markets used to create many functional inefficiencies. Lack of liquidity and transparency, long settlement periods and benami transactions are a few examples that adversely affected investors. In order to overcome these inefficiencies, OTCEI was incorporated in 1990 under the Companies Act 1956. OTCEI is the first screen based nationwide stock exchange in India created by Unit Trust of India, Industrial Credit and Investment Corporation of India, Industrial Development Bank of India, SBI Capital Markets, Industrial Finance Corporation of

India, General Insurance Corporation and its subsidiaries and CanBank Financial Services.

MAIN PLAYERS IN THE INDIA STOCK MARKET National Stock Exchange


In order to lift the Indian stock market trading system on par with the international standards. On the basis of the recommendations of high powered Pherwani Committee, the National Stock Exchange was incorporated in 1992 by Industrial Development Bank of India, Industrial Credit and Investment Corporation of India, Industrial Finance Corporation of India, all Insurance Corporations, selected commercial banks and others. NSE provides exposure to investors in two types of markets, namely: 1. Wholesale debt market 2. Capital market Wholesale Debt Market - Similar to money market operations, debt market operations involve institutional investors and corporate bodies entering into transactions of high value in financial instrumets like treasury bills, government securities, commercial papers etc. Trading at NSE 1. Fully automated screen-based trading mechanism 2. Strictly follows the principle of an order-driven market 3. Trading members are linked through a communication network 4. This network allows them to execute trade from their offices 5. The prices at which the buyer and seller are willing to transact will appear on the screen Bombay Stock Exchange (BSE)

The Bombay Stock Exchange (BSE) and the National Stock Exchange of India Limited (NSE) are the two primary exchanges in India. In addition, there are 22 Regional Stock exchanges. However, the BSE and NSE have established themselves as the two leading exchanges and account for about 80% of the equity volume traded in India. The NSE and BSE are equal in size in terms of daily traded volume. Most key stocks are traded on both the exchanges and hence the investor could buy on either of the exchanges. Both exchanges have a different settlement cycle, which allows investors to shift their position on the bourses. The primary index of BSE in BSE Sensex comprises 30 stocks. NSE has the S&P NSE 50 Index (Nifty), which consists of fifty stocks.

Stock Market Index


Its ironical that something as huge as a stock market which should be stable as it represents the economy of a nation, is actually extremely volatile since it is driven more by the sentiments of the people Stock Market is a place where the stocks of a listed company are traded. A single figure that sums up the overall performance of the market on a daily basis is the Stock Index. A good Stock Index captures the movement of the well diversified and highly liquid stocks. For a lay man it is the pulse rate of the economy. Index movements reflect the changing expectations of the stock market about future dividends of the corporate sector. The index is calculated by finding the weighted average of the prices of the most actively traded companies in the market, where the weights are generally in proportion to the market capitalization of the company.

Types of Indexes available:-

Broad-Market Index: This consists of all the large, liquid stocks of the
country and becomes the benchmark for the entire capital market of the country. An example for this is the S&P CNX 500.

Specialized Index: We can either have Industry or Sector specific Index for
any particular sector of the economy which then serves as the benchmark for that particular industry or we can have an index for the highly liquid stocks. Taking an example for an industry specific index we have the S&P Banking Index which is a capitalization-weighted index of 26 domestic equities traded on the New York Stock Exchange and NASDAQ,

Determinants of a Stock Index


Following parameters should be taken into picture before one constructs a stock index: Liquidity Liquidity of stocks as measured by the impact cost criterion which determines the cost faced when actually trading the index. For example if the current market price of a stock is Rs 200 and a trader purchases it at Rs 202 (due to involved transaction costs) then the market impact cost is 1% and the stock is considered highly liquid for lower impact cost. Diversification Diversification, by putting stocks of various sectors that reflect the economy, is used to cancel out stock noise which is essentially the individual stock fluctuations and to reduce investors risks. An index must thus have a balanced representation of all sectors. Optimum size - More stocks lead to greater diversification but the limiting factor is the size of the index. Increasing number of stocks in an index from 10 to say 30 gives a sharp reduction in risks but increasing the number beyond a point does very little in risk reduction. Further it might lead to addition of illiquid stocks. For example, the optimal size for BSE Sensex is 30.

Market Capitalization: The index should include primarily the stocks of companies that have significant market capitalization with respect to the index such that any major change in the price of the stock is reflected in the index. For example in BSE 30 Index, the scrip must have a minimum of 0.5% of the market capitalization of the Index.

SCOPE OF INDIAN MARKET


Times are really quite exciting; an ever increasing plethora of events followed the global financial crisis. With globalization and innovation in the financial markets at its peak - it is very essential to study the market risks and requirements. Over the years, the India stock market has undergone major changes to remain at par with the global peers. With global trade and finance getting more dynamic day by day, the India stock market is not far behind to experience these developments. This has helped the financial structure of India get more innovative

RATIO ANALYSIS
LIQUIDITY RATIOSLiquidity refers to the ability of a firm to meet its obligations in short run, usually one year. Liquidity ratios are generally based on the relationship between current assets (the source for meeting short term obligations) and current liabilities.

CURRENT RATIO The ratio is mainly used to give an idea of the company's ability
to pay back its short-term liabilities (debt and payables) with its short-term assets (cash, inventory, receivables). The higher the current ratio, the more capable the company is of paying its obligations.

CURRENT RATIO =

CURRENT ASSETS CURRENT LIABILITIES

CURRENT RATIO Mar' 2008 INDIABULLS SECURITIES MOTILAL OSWAL FINANCIAL SERVICES 1.16 12.91 Mar'2009 1.22 11.42 Mar' 2010 0.93 7.37

Current ratio for Motilal Oswal Financial Services has been very high in the previous year 200. Though in 2009, it has reduced from 12.91 to 11.42, it still remains a very high figure. This indicates that the company has greater short term solvency. Indiabulls Securities possesses current assets that are almost twice its current liabilities. But current assets with Motilal Oswals are far greater than its current liabilities. Both the companies maintain more than the satisfactory margin of current assets over current liabilities. Short term creditors of the company are primarily interested in knowing the companys ability to pay its short
term creditors as and when they become due.

CASH RATIO - The cash ratio is the most stringent and conservative of the three
short-term liquidity ratios (current, quick and cash). It only looks at the most liquid short-term assets of the company, which are those that can be most easily used to pay off current obligations.

CASH RATIO = CASH & BANK BALANCE + CURRENT INVESTMENTS CURRENT LIABILITIES

CASH RATIO Mar' 2008 INDIABULLS SECURITIES MOTILAL OSWAL FINANCIAL SERVICES 1.41 1.97 Mar'2009 2.6 0.048 Mar' 2010 1.78 5.21

The cash ratio for Indiabulls decrease in 2010 after increasing in 2009. The company possesses enough cash to meet its short term obligations.

The cash ratio for Motilal Oswals significantly increased in the year 2010 as compared to year 2008-09. But this ratio also suffered a fall in 2009 as against the year 2008. Motilal Oswals also have enough ready cash to meet its short term obligations. Moreover the company also has an opportunity to invest this ready cash into revenue generating purposes.

PROFITABILITY RATIOSProfitability reflects the final result of business operations. There are two types of profitability ratios: Profit margin ratios show the relationship between profit and sales. Rate of return ratios reflect the relationship between profit and investment.

NET PROFIT RATIO- This ratio measures the rate of net profit earned on sales.
It reflects efficiency with which a firm produces its products as well as pricing. It is better to have high net profit ratio for a company because it indicates higher profitability for the company.

NET OPERATING PROFIT NET PROFIT RATIO = NET SALES

NET PROFIT RATIO Mar' 2008 INDIABULLS SECURITIES MOTILAL OSWAL FINANCIAL SERVICES 67.86% 79.27% Mar'2009 8.01% 92.99% Mar' 2010 37.51% 91.97%

Net profit ratio for Indiabulls has increase considerably as compared to the previous year 2008-09 when it increased. This increase is due to gain in operating profit and sales while operating profit increased by greater proportion. This decrease in operating profit may be due to increase in cost of sales or due to decrease in sales revenue owing to fall in selling price while expenses increased. For Motilal Oswals, the ratio has increased annually for the three consecutive years. It measures the overall efficiency of management. But this may not be a true picture and the increased ratio may be due to increase in sales without a corresponding increase in cost of goods sold.

Return on Equity ratio- is perhaps the most important of all the


financial ratios to investors in the company. It measures the return on the money the investors have put into the company. This is the ratio potential investors look at when deciding whether or not to invest in the company

RETURN ON EQUITY Mar' 2008 Mar'2009 Mar' 2010 INDIABULLS SECURITIES MOTILAL OSWAL SERVICES 69.10% FINANCIAL 4.32% 10.45% 8.95% -4.65% 27.76%

It had a poor Return on Equity of 4.32 % in 2008 but it increased gradually to 10.45 in 2009 and then to 27.76% in 2010 which shows that the companys ability to generate profit from its investors money has improved a lot in this period.

For Indiabulls, Return on Equity from 69.10% in 2008 to -4.65% in 2009 which shows that the companys ability to generate profit from its assets had improved in this 1 year. However, it got up to 27.76% in 2010 which means the company lost its ability to generate profit from its assets quite a lot

LEVERAGE RATIOSFinancial Leverage refers to the use of debt finance. Leverage Ratios help in assessing the risk arising from the use of debt capital.

DEBT EQUITY RATIO- The debt equity ratio shows the relative contributions of
creditors and owners. The lower the debt equity ratio, the higher the degree of protection enjoyed by the creditors.

DEBT DEBT EQUITY RATIO = EQUITY


DEBT EQUITY RATIO Mar' 2008 INDIABULLS SECURITIES MOTILAL OSWAL FINANCIAL SERVICES 1.07 Mar'2009 0.41 Mar' 2010 1.45 0.13

Debt equity ratio for Indiabulls increased in the year 2010 as compared to the year 2009. This ratio increased due to greater proportionate increase in debt as against a minimal increase in equity. In 2010, the ratio increase from 0.41 to 1.45 this increase was due to increase in debt as well as the equity but the increase in 2010 was lower than increase in 2009. There is no debt in Motilal Oswal during 2008 to 2009. It is a company financed wholly from its internal equity but in 2010 ratio is 0.13.

DEBT RATIO- A ratio that indicates what proportion of debt a company has
relative to its assets. The measure gives an idea to the leverage of the company along with the potential risks the company faces in terms of its debt-load.

DEBT RATIO = TOTAL DEBT TOTAL ASSET

DEBT RATIO

Mar' 2008

Mar'2009

Mar' 2010

INDIABULLS SECURITIES MOTILAL OSWAL FINANCIAL SERVICES

0.510

0.277

0.591 0.111

Debt ratio in 2010 increased when compared to the same in 2008-09 but experienced an increase in 2008. This decrease is because the amount of borrowings with the company in 2009 decreased against the borrowings in 2008. Also the total assets possessed decreased i.e. the proportion of debt relative to its assets reduced by approximately 50% of what it was in 2008. Motilal Oswal is a self sustained company and possesses no borrowings. It is a company wholly financed from its internal equity.

ACTIVITY RATIOActivity ratios help investors evaluate a firms ability to effectively and efficiently manage its operations and assets. These ratios are based on the relationship between the level of activity, represented by sales or cost of goods sold, and the levels of various assets.

CAPITAL TURNOVER RATIO- Capital turnover is used to calculate


the rate of return on common equity, and is a measure of how well a company uses its stockholders' equity to generate revenue. The higher the ratio is, the more efficiently a company is using its capital.

CAPITAL TURNOVER RATIO =

COST OF SALES

CAPITAL EMPLOYED

Mar' 2008

Mar'2009

Mar' 2010

INDIABULLS SECURITIES MOTILAL OSWAL FINANCIAL SERVICES

1.19 0.019

0.89 0.025

1.12 0.0009

Capital turnover ratio for Indiabulls declined in 2009 as against 2008. Though the ratio improved in the previous year 2010 but it still remained lower than what the company realized in 2008. However it has been comparatively successful in making efficient use of financial resources at its disposal. Whereas Capital turnover ratio for Motilal Oswals stands out to be very low. Moreover it declined in 2010 by a significant value.

NET WORKING CAPITAL TURNOVER RATIO A Company uses


working capital (current assets - current liabilities) to fund operations and purchase inventory. These operations and inventory are then converted into sales revenue for the company. The working capital turnover ratio is used to analyze the relationship between the money used to fund operations and the sales generated from these operations..

NET WORKING CAPITAL TURNOVER RATIO= COST OF SALES/ NET WORKING CAPITAL

NET WORKING CAPITAL TURNOVER RATIO

Mar' 2008

Mar'2009

Mar' 20010

INDIABULLS SECURITIES

1.69

1.05

1.5

MOTILAL OSWAL FINANCIAL SERVICES

0.019

0.025

0.0009

Net working capital turnover for Indiabulls increase in 2010 as compared to the same in 2008. Both the net sales and the net working capital gain in 2010. Even though it declined internally, it still remained a high ratio in comparison to the ratio realized by Motilal Oswals whose ratio stands at significantly lower levels. A higher ratio here indicates efficient use of working capital and quick turnover of current assets. While lower ratio indicates low turnover of these assets.

INTRODUCTION TO DERIVATIVES
A derivative is a product whose value is derived from the value of one or more basic variables called bases (underlying assets index) in a contractual manner. The underlying assets can be equity, forex, commodity, bullion or any other assets. The emergence of the market for derivative products, most notably forwards, future & option can be traced back to the willingness of risk adverse economic agent to guard themselves against uncertainties arising out of fluctuations in asset prices. By their very nature, the financial markets are marked by a very high degree of volatility. Through the use of derivatives products, it is possible to partially or fully transfer price risks by locking in asset price. The emergence of the market for derivative products can be traced back to the willingness of risk averse economic agent to guard themselves against uncertainties arising out of fluctuations in asset prices. By their very nature, the financial markets are marked by a very high degree of volatility. Through the use of derivatives products, it is possible to partially or fully transfer price risks by locking in asset price.

The financial derivatives came into spotlight in post- 1970 period due to growing instability in the financial markets. However, since their emergence, these products have

become very popular and by 1990s, they accounted for about two third of total transactions in the derivatives products.

For example, wheat farmers may wish to sell their harvest at a future date to eliminate the risk of a change in prices by that date. Such a transaction is an example of derivative. The price of this derivative is driven by the spot price of wheat, which is the underlying. In recent years, the market for financial derivatives has grown tremendously both in terms of variety of instruments available, their complexity and also turnover. The factors generally attributed as the major driving force behind growth of financial derivatives are: a) Increased volatility in asset prices in financial markets. b) Increased integration of national financial markets with the international markets. c) Marked improvement in communication facilities and sharp decline in their costs. d) Development of more sophisticated risk management tools, providing economic agents a wider choice of risk management strategies.

The need for a derivatives market: The derivatives market performs a number of economic functions: They help in transferring risks from risk a verse people to risk oriented people. They help in the discovery of future as well as current prices. They catalyze entrepreneurial activity. They increase the volume traded in markets because of participation of risk adverse people in greater numbers. They increase savings and investment in the long run. Participants: - The following three broad categories of participants: hedgers, speculators and arbitrageurs trade in the derivatives market.

Hedgers- face risk associated with the price of an asset. They use futures and options market to reduce or eliminate this risk associated with price of an asset. Speculators wish to bet on future movements in the price of an asset. Future and Option contracts can give them an extra leverage. They can increase both the potential gains and potential losses in a speculative venture.

Arbitrageurs are in business to take advantage of a discrepancy between prices in two different markets. If, for instance they see the future price of an asset getting out of line with the cash price, they will take offsetting positions in the two markets to lock in a profit.

Types of derivatives:1) Forwards:- A forward contract is a customized contract between two entities, where settlement takes place on a specified date in the future at todays pre-agreed price. 2) Futures: - A future contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. Future contracts are special types forward contracts in the sense that the former are standardized exchange traded contracts. 3) Options are of two types- Calls and Puts. Call gives the buyer the right but not the obligation to buy a given quantity of the underlying assets, at a given price on or before a given future date. Put gives the buyer the right but not the obligation to sell a given quantity of the underlying assets at a given price on or before a given date.

4) Warrants: - Option generally has lives of up to one year; the majority of options traded on options exchanges having maximum maturity of nine months. Longer dated options are called warrants and are generally traded over the counter. 5) Leaps: The acronyms LEAPS means long term equity anticipation securities. These are options having a maturity of up to three years. 6) Baskets: Baskets options are option on portfolios of underlying assets. The underlying asset is usually a moving average or a basket of assets. 7) Swaps: - Swaps are private agreement between two parties to exchange cash flows in the future according to a prearranged formula. They can be regarded as portfolios of forward contracts. The two commonly used swaps are;-

Forwards
A Forward contract is an agreement to buy or sell an asset on a specified date for a specified price. One of the parties to the contract assumes a long position and agrees to buy the underlying asset on certain specified price. The other party assumes a short position and agrees to sell the asset on the same date for the same price. Other contract details like delivery date, price and quantity are negotiated bilaterally by the parties to the contract. The forward contracts are normally traded outside the exchanges. The salient features of forward contracts are: They are bilateral contracts and hence exposed to counter party risk. Each contract is custom designed, and hence is unique in terms of contract size, expiration date and the asset type and quality. The contract price is generally not available in public domain. On the expiration date, the contract has been settled by delivery of the assets If the party wishers to reverse the contract, he has to compulsory go to the same counterparty, which often results in high prices being charged.

Future: Future as per the stock market definition it is a contract between the buyer and
seller to settle or execute a trade in some future date at a pre agreed price. For example If you bought 100 shares of Tatasteel at 575 with the condition that the trade will be settled 3 months from now then it is called a future contract. Once the contract is formed then both the parties need to obligate the contract till the end of the contract period in daily basis by the process of Mark to Market Margin procedure. Refer the previous example of Tatasteel if Tatasteel fall by Rs10 today then for 100 shares you need to pay 100X10=Rs1000 to the seller . This amount Rs1000 is called the mark to market margin. one most important thing is this trade is going to happen in some future date so both you and the seller need to pay some initial margin on the trade value to the person who regulated this trading activity. In our case the stock exchange and the broker is regulating the trade hence you need to pay the margin to your stock broker.

Futures terminology:
1) Spot price: The price at which an asset trades in the spot market. 2) Futures price: The price at which the futures contract trades in the futures market. 3) Contract cycle: The period over which contract trades. The index future contract on the NSE have one month, two month and three month expire cycles Which expires on the last Thursday of the month. 4) Expiry date: It is the date specified in the futures contract. Thus is the last date on which the contract will be traded at the end or which it will cease to exist.

5) Contract size: The amount of asset that has to be delivered less than one contract. 6) Basis: In the context of financial futures, basis can be defined on the future price minus the spot price. There is a different basis for each delivery month for each contact. In a normal market basis is positive. 7) Cost of carry: the relationship between futures price and spot price can be summarized in terms of what is known as the cost of carry.

Major Advantages of Futures Trading over Stock Trading


Margin is available: In future trading you get margin to buy (but can hold only up to maximum of 3 months), while in stock trading you must have that much of amount in your account to buy. For example - If you plan to buy stock XYZ at Rs. 100 and quantity 1000 shares then you have to pay 1 lakh rupees (RS 100 x1000 qty). But if you plan to buy XYZ future contract and that contract lot size has 1000 quantity of shares then instead of paying 1 lakh rupees you have to pay just 20% to 30% of whole amount which comes to 20 thousand to 30 thousand rupees. In short in future trading you have to pay just 20% to 30% of the whole amount what you pay if you buy stock of that price. But limitation for this is your expiry period. Means if you bought future of one month expiry then you have to square off within that one month likewise you can buy maximum of three months expiry. Possible to do short selling :You can short sell futures- You can sell futures without buying them which is called short selling and later buy within your expiry period, to cover up your positions. This is not possible in stocks. You cant sell stocks before buying them in delivery (you can do in intraday). You can short sell futures and can cover off within your expiry period.

For example - If expiry period of your future contract is of 1 month then you have time frame of one month to cover off your order like wise if your future expiry period is of two months then you have time frame of two months and this continues till three months and not more then three months. In short selling of futures also you get margin as you get in buying of futures

Disadvantages of Future Trading over Stock Trading


Limitation on holding: If you buy or sell a future contract then you have limitation of time frame to square off your position before expiry date. For example - If you buy or sell future contract of one month expiry period then you have to square off your position before your expiry date of that month, so in this example you got one month period. So likewise if you go for two month expiry period then you get 2 months and if you go for three month expiry then you will get 3 month expiry period to square off your position.

Level of Risk: Due to margin facility in future trading you may earn huge profit by investing fewer amounts but at the contrary side if your trade goes wrong then you may have to suffer huge loss.

Options
Option is a legal contract in which the writer of the option grants to the buyer, the right to purchase from or sell to the writer a designated instrument or a scrip at a specified price within a specified period of time. Parties involved 1. buyer of the asset 2. exchange 3. seller of the asset

Options are of two types1. Call Option 2. Put Option 1. Call option - A call option gives the option holder a right to buy an asset at a certain price within a specified period of time. A call option buyer is said to have a long position. 2. Put option - A put option gives the option holder a right to sell an asset at a certain price within a specified period of time. A put option holder is said to have a short positions.

Options terminologies;
Index option: these options have the index as the underlying. Some options are European, American. E.g. index futures contracts, index options contracts are also settled. Stock option: stock options are options on individual stock. Options currently trade on over 500 stocks in the US. 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 to exercise his option on the seller\writer. Writer of an option: the writer of a call\put is the one who receives the option premium and is thereby obliged to sell \buy the asset if the buyer wishes to exercise his option. Option price: it is the price which the option buyer pays to the option seller. It is also referred as the option premium. Expiration date: the date specified in the options contract is known as expiration date, the exercise date, the striker date or the maturity. Strike price: the price specified in the options contract

Options strategies

1. Long Call: A long call can be an ideal tool for investors who wish to participate from an upward price movement in the underlying stock. 2. Long Put: A long put can be an ideal tool for an investor who wishes to participate profitably from a downward price move in the underlying stock. 3. Married Put: An investor purchasing a put while at the same time purchasing an equivalent number of shares of the underlying stock is establishing a married put position- a hedging strategy with a name from an old IRS ruling. 4. Protective Put: An investor who purchases a put option while holding shares of the underlying stock from a previous purchase is employing a protective put. 5. Covered Call: The covered call is a strategy in which an investor writes a call option contract while at the same time owning an equivalent number of shares of the underlying stock. If this stock is purchased simultaneously with writing the call contract the strategy is commonly referred to as a buy-write. If the shares are already held from a previous purchase it is commonly referred to an overwrite. 6. Cash Secured Put: According to the terms of a put contract, a put writer is obligated to purchase an equivalent number of underlying shares at the puts strike price if assigned an exercise notice on the written contract. Many investors write puts because they are willing to be assigned and acquire shares of the underlying stock in exchange for the premium received from the puts sales. For this discussion, a put writers position will be considered as cash-secured if he has on deposit with his brokerage firm a cash amount sufficient to cover such a purchase of all option contracts. Advantages of Options: i) The option holders loss is limited to the extent of premium paid at the time of entering Into the options contract.

ii) The holder/writer of the options has many strategies available before them to be chosen upon. iii) Forwards / futures contracts impose an obligation to perform whereas the option do not impose such obligations iv) No margins required for many kinds of strategies. v) The options have certain favorable characteristics. They limit the downside risk without limiting the upside. It is quiet obvious that there is a price which has to be paid for this any way, which is known as the option premium. Disadvantages of Options: i) Options premium can be quiet high during volatile market condition. ii) There is more liquidity in futures contract than most of the options contract. Entry and exit of some markets are difficult. iii) There are more complex factors affecting premium prices for options. Volatility and time to expiration are often more important than price movement. iv) Many options contract expire weeks before the underlying futures. This can be often occur close to the final trading day of futures.

HEDGING Hedging
Hedging is nothing but a mechanism to reduce or control risks involved in capital market. Various risk involved in capital market:a) Price risk b) Liquidity risk c) Operational risk Hedging plays an important role to combat these risks. In a simple example, a miller may buy wheat that is to be converted into flour. At the same time, the miller will contract to sell an equal amount of wheat, which the miller does not presently own, to another trader. The miller agrees to deliver the second lot of wheat at the time flour is ready for market and at the price current at the time of the

agreement. If the price of the wheat declines during the period between the millers purchase of the grain and the flours entrance onto the market, there will also be a resulting drop in the price of the flour. That loss must be sustained by the miller. However, since the miller has a contract to sell the wheat at the older, higher price, the miller makes up for this loss on the flour sale by the gain on the wheat sales.

Terms in Hedging Long Hedge: Long hedge is the transaction when we hedge our position in cash market by going long in derivatives market. For example, let us assume that we are going to receive funds in the near future and we want to invest it into the capital market. Also we expect the market to go up in the near future, which is not desirable for us as we would have to invest more money. The risk can be hedged by making use of derivatives such as F & O. Short Hedge: Short hedge is the hedge accomplished by going short in the derivatives market. For example, we have a portfolio which we want to liquidate in the near future. Meanwhile prices of the scrip may go down, which is not favorable for us. Thus to protect our portfolio value we can go short in the derivative market.

HEDGING WITH FUTURES


Buy futures for a month and sell futures in the same scrip for another month, i.e. hedging within a month. Example: Buy futures of June and sell futures of July. Buy delivery and sell futures for same quantity, i.e. hedging for one month.

MECHANICS OF HEDGING THROUGH OPTIONS

Hedging through options is a simple process. Deciding on Call or Put options (i.e. whether to buy or sell a currency) Determining number of contracts. Selecting an acceptable exercise price, pay premium and conclude the contract. On maturity, if market rate is less favorable, exercise option under contract and if market rate is favorable, ignore the contract and buy or sell in the market.

HEDGING WITH OPTIONS


Buying both a call and a put option. Selling both call and put option. Buy a call option for one strike price and sell another call option for some different strike price.

ANALYSIS AND INTERPRETATION CASE I


Mr. Bhandari bought 675 shares of Tisco few days before the budget @Rs. 350/- per share, as general expectation from the budget was that it will be an infrastructure of development focused budget. He was also bullish on Tisco. However Mr. Bhandari wanted to hedge against any downward movement of Tisco in the market. SOLUTION There are following alternatives for Mr. Bhandari to hedge his position: i. Long put strategy ii. iii. Protection put strategy Bear put spread strategy

Since Mr. Bhandari has to protect his 675 shares of Tisco so in this case, to hedge against any downward movement of Tisco, Mr. Bhandari will opt protective put strategy. So he should buy 1 lot of put option of Rs.350/- strike price @ Rs.10/- premium at the same time. Now the total cost of Bhandari is:-

Bought Tisco @Rs.350/- share Cost of 1 lot of Tisco put option @Rs.10/-

= 2,36,250/= 6,750 2,43,000/-

ANALYSIS S.NO. 1 2 3 4 5 6 7 8 9 STOCK PRICE 320 330 340 350 360 370 380 390 400 STOCK VALUE 2,16,000 2,22,750 2,29,500 2,36,250 2,43,000 2,49,750 2,56,500 2,63,250 2,70,000 PUT VALUE 20,250 13,500 6,750 0 0 0 0 0 0 COST OF PREMIUM 6,750 6,750 6,750 6,750 6,750 6,750 6,750 6,750 6,750 RETURN (6,750) (6,750) (6,750) (6,750) Nil 6,750 13500 20,250 27,000

INTERPRETATION 1) The stock value is arrived at as (stock value x 675 shares). 2) If the stock price is below Rs.350/- in the spot market, the put option will be executed. Thus put value is arrived as : ( strike price stock price ) x 675 3) If the stock price goes below from Rs.360/- loss is limit to the extent of its premium amount (Rs.10/-), or Rs.6750/-. 4) If the stock price goes up from Rs.360/- it can fetch unlimited profit as stock price keeps going up.

CASE II
Mr. Bhalgat was mildly bullish on Bank of India. He already got 1900 shares of Bank of India @Rs.110/- shares few days back. Though Mr. Bhagat, bullish on Bank of India, wanted to hedge against any downside movement of Bank of India due to budget related volatility. SOLUTION That time Bank of India was trading around Rs.120-30 range. There are following alternatives for Mr. Bhalgat to hedge his position i. Long put strategy ii. iii. Protection put strategy Bear call spread strategy

Since Mr. Bhalgat is mildly bullish on BOI, he will opt Bull call spread strategy as the best strategy, following things might be suggesteda) Buy a July call option of BOI for I lot of strike price Rs.120/- shares, at a premium of Rs.12/-share. b) Sell a July call option for 1 lot of BOI Rs.140/- strike price at a premium of Rs.2/shares. COSTS Buying lot of call option of BOI (1900 x 12) ( - ) selling 1 lot of call option of BOI (1900 x 2)

= =

22,800/3,800/19,000/-

ANALYSIS S.NO. 1 2 3 4 5 6 7 8 STOCK PRICE 90 100 110 120 130 140 150 160 STOCK VALUE 1,71,000 1,90,000 2,09,000 2,28,000 2,47,000 2,66,000 2,85,000 3,04,000 BOUGHT CALL VALUE 0 0 0 0 19,000 38,000 57,000 76,000 SOLD CALL VALUE 0 0 0 0 0 0 19,000 38,000 COST OF PREMIUM 19,000 19,000 19,000 19,000 19,000 19,000 19,000 19,000 RETURN (19,000) (19,000) (19,000) Nil 19,000 38,000 38,000 38,000

INTERPRETATION 1) Stock price is arrived at as (stock price x 1900. 2) At any price above Rs.120/- shares bought call value is arrived at as {(stock price 120) x 1900}. 3) At any price above Rs.140/- share), sold call value is arrived at as {(stock price 140) x 1900}. 4) Return is maximum loss Rs.19,000 and maximum profit Rs.38,000.

CASE III
Mr. Sonagra is a regular mid to long term investor. In the beginning of the month of the July he had not enough money in hand to invest in shares. He was supposed to get money at the end of the month. However he is bearish on Titan. He want to buy Titan but not after few days as it could lead to a loss of thousands.

SOLUTION Since Mr. Sonagra has not sufficient amount to invest in shares, he will adopt only Long call strategy to hedge his position. In such circumstance Mr. Sonagra will buy 1 lot (800 shares) of call option at a premium of Rs.10/- per share the strike price of which is Rs.510/-. Cost for 1 lot of Titan in call option will be 800 x 10 = Rs.8,000/-

ANALYSIS S.NO. 1 2 3 4 5 6 7 8 STOCK PRICE 480 490 500 510 520 530 540 550 STOCK VALUE 3,84,000 3,92,000 4,00,000 4,08,000 4,16,000 4,24,000 4,32,000 4,40,000 COST OF PREMIUM 8,000 8,000 8,000 8,000 8,000 8,000 8,000 8,000 VALUE OF CALL OPTION 0 0 0 0 10 20 30

INTERPRETATION 1) Though Mr. Sonagra bought a call option of a strike price of Rs.150/-, he expects that stock price will go up. 2) No matter how much stock price goes up more he can fetch profit more, became he can purchase at a fix stock price of Rs.510/-.

3) If the stock price goes down, call option will not be executed, because purchasing a lot in Rs.510/- in downward movement does not sound reasonable. 4) In downward movement his loss will be limit to the extent of premium amount (Rs.8,000). 5) While in upward movement his profit will be unlimited as the price goes up deducting (premium+ stock price).

FINDINGS
CASE I
1) As the stock price go down value of put option increases. 2) Breakeven point (B.E.P.) for Mr. Bhandari in Rs. 360/- share or Rs. 2,43,000/3) Loss in limit to the extent of its premium 4) As the stock price goes up value of put option loses its significance 5) If the put option is not executed till its expiration period it will automatically repudiate.

CASE II
1) As the value of stock price goes up from strike price the bought call value and sold call value increases. 2) Rs.120/- share or Rs.2,28,000/- is the breakeven point for Mr.Bhagat. 3) Mr.Bhagat made limit his profit and loss by buying and selling 1 lot of call option simultaneously. 4) As the stock price goes down from its strike price the value of call option loses its significance.

CASE III

1) Mr. Sonagra should be quite sure that the value of stock price will increase in coming future. 2) He will fetch profit when market will be at bullish by purchasing the shares @ Rs.510/- share and selling it in more that Rs.520/- in spot market. 3) Mr. Sonagra has been given right but not obligation to buy shares @ Rs.510/- in lieu of Rs.10/- per share as premium whatever market condition may be. 4) The value of call option become insignificant if stock price goes below from Rs.510/-.

SUGGESTION
CASE I
I. II. Mr. Bhandari should be very conscious about premium rate and expiration period before opting put option. If the stock price starts to decline he should not execute his put option immediately because in a any of the lower cases he will lose Rs.6750/- while he may fetch profit in going up of stock price after downward movement.

CASE II
I. Mr. Bhagat should adopt this strategy only in that case, when he is quite sure that profit is not possible after a certain extent.

CASE III
I. II. Mr. Sonagra should buy September call option instead of July call option, because during this gap stock price must go up. When stock price reaches up to its highest level he should execute his call option.

KEY LEARNINGS

Learned how to trade via Karvys online trading platform GOTX. Role of major indexes i.e. NSE and BSE in Indian stock market. Franchisee and remisership business plans and their documentation required. How to open I-zone account, formalities and documents required. Learned few of the hedging strategies commonly used by investors. Gained basic knowledge about the derivatives market.

References
http://www.the-finapolis.com/ http://www.karvy.com http://www.mutualfundsindia.com/ http://www.valuresearchonline.com/ http://www.moneycontrol.com/ http://www.morningstar.com/ http://finance.yahoo.com/ http://economictimes.indiatimes.com/ http://money.rediff.com/ http://www.bseindia.com/ http://www.nseindia.com/