SUMMER TRANING PROJECT ON “HEDGING RISK THROUGH DERIVATIVES” And “EQUITY ANALYSIS”

FOR PARTIAL FULFILLMENT OF THE REQUIRMENT OF MBF PROGRAME OF INDIAN INSTITUTE OF FINANCE

Submitted To: Prof. J.D. Agarwal Indian Institute of Finance

Submitted By: Sumati Sethia (4108168168)

Sumati Sethia/4108168168/MBF/Indian Institute of Finance

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ACKNOWLEDGEMENT

It gives me great satisfaction on completion of Summer Internship Projects entitled “Hedging Risk through Derivatives” and “Equity Analysis”. On the submission of my project report I would like to express my sincere gratitude to my guide Prof. J.D. Agarwal (Chairman, Indian Institute of Finance) for mentoring me and taking active interest throughout the project and for sharing his insights on the topics and for being a constant source of inspiration & courage during the entire project work. He was always available, correcting mistakes, intelligently directing me to proper sources of information advising to aim for simplicity, brevity, clarity and accuracy. I would like to give special thanks to all faculty staff and I would also like express my sincere gratitude to Prof. Aman Agarwal (Vice Chairman), Mr. Puspendar Singh (Professor), Mr. Pankaj Jain (Professor), Indian Institute of Finance. I am indeed thankful to them for their valuable guidance. I would also like to express my special thanks to the Mr. Mahesh C. Gupta (Chairman), Mr. Suman (Company Secretary), SMC Global Securities Limited and Mr. Anil Singhania (Senior Manager - Distribution) for appointing me as project trainee and for his help & co-operation during the Project work. I would like to thank the entire team of SMC Global Securities Limited, for sharing their immense experience and extending their support in carrying out this project work. I am greatly acknowledged for their kind help.

Sumati Sethia/4108168168/MBF/Indian Institute of Finance

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CERTIFICATE

This is to certify that “Hedging Risk through Derivatives” and “Equity Research” was carried out by Sumati Sethia as a part of the requirements of management of business finance (MBF) fourth semester program. This study is being submitted for approval to the Indian institute of finance. I declare that the form and contents of the above mentioned project are original and have not been submitted in a part or full, for any other degree or diploma of this or any other organization/ institute/ university.

Signature.......................................... Name................................................ Enrolment No...................................

Sumati Sethia/4108168168/MBF/Indian Institute of Finance

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Chapter three deals with Different type of Derivatives Instruments wiz... Chapter four deals with the Analysis and Interpretation of Derivative Instruments and how they are used to hedge risk..PREFACE As a part of MBF program............... Name.... 4..... Chapter four also includes the equity analysis........... It also discuss about Capital Markets.... Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 4 of 190 .. 5.. It also discusses the about the trading strategy by the help of examples.................... Chapter deals with the summary of major findings... suggestion and limitations of the study......... My project is divided into five chapters and they are given as under. 2....... Chapter two deals with the review of “Hedging Risk through Derivatives”..... In this part fundamental and technical analysis of five equity shares has been done.... Chapter one of this study contains.... concept of Financial Market.... Enrolment No.. 1.. a student has pursued a project duly approved by the director of the institute........ Future trading & Option trading......... As derivatives are the instruments which are generally used for hedging by an investor. I had the privilege of undertaking projects on “Hedging Risk through Derivatives” and “Equity Research”........ It discuss about the introduction of the financial market and basic terminology of financial market. discussion of results..... 3.... Signature......

EXECUTIVE SYNOPSIS Trainee : Sumati Sethia Organization : SMC Global Securities Limited Educational Institute : Management of business finance (MBF) 2008-10 Indian Institute of Finance. Darya Ganj. Netaji Subhash Marg. New Delhi .110002 Sr. Relationship Manager Address : Company Guide : Topic : “Equity Research and Hedging Risk through Derivatives” Duration : 8 Weeks (20th April 09 –19th June 09) Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 5 of 190 . Greater Noida 9B.

In addition to the above objectives. 1. To examine the different strategy which are used by the investors for the purpose of hedging risk. To understand the concept of valuating a company on the basis of its financials. 4. To evaluate the performance of selected equity shares in terms of risk and future returns. 2. 2. 1. following secondary objectives are also there.OBJECTIVES: The present study includes different strategy of derivatives used in present scenario. To understand the basic terminology behind working of capital market. 3. To study the recent and proposed Derivative Instrument and there usage. To evaluate the shares pattern on the basis of technical analysis. Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 6 of 190 . A comprehensive study is proposed with the following objectives. In order to appraise the equity shares I have conducted a study of five different companies.

At the same time I am trying to analyze some top notch companies to make sure that the companies selected for investing money are really worth to invest in a large amount. The focus in this project is on Hedging Risk through Derivatives and Equity Analysis. All this has been done with the help of Annual report. It also explains about the different stock markets working in India and about their different Indices. Second part of project is as important as Project I. Daryaganj (New Delhi). Application of these ways to analyze stocks is yet to be done. It’s about the ways in which investors can invest in stock market. This work is a detailed study of stock market and stocks. because whole project contains the work which is carried out by me in these two months of summer training and I am glad to present it in my summer training project. Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 7 of 190 . The project had been carried out at SMC Global Securities Limited.ABSTRACT This project had been initiated for the purpose of acquainting me with. The first half of the project which contains Project IHedging Risk through Derivatives examines the working of a stock market and the role of the Regulatory Authority in maintaining the proper working of stock markets and how one can hedge risk using derivative instruments. right from the basics of the financial terminology used in the stock markets. which I have tried to put across. it’s in progress. This risk arises due to number of reasons. I have tried to explain the entire cash and derivative market in detail with the help of live examples. Quarterly results and daily news. I have carried out two projects in my summer training. The initial phase of the document explains what I have understood about the functioning of stock market. The second part of the project deals with Equity Analysis work which is Project II. further up to gaining in depth knowledge of all the issues concerning the management of various risks faced by Investors and brokerage companies. All these calculations give a better insight to my work. The project is divided into two parts. includes both fundamental analysis and technical analysis. The entire work has not been done till date.

............................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................... 39 Long-term returns: ...........................................................................................................38 DIFFERENCE BETWEEN A BROKER AND A DP ....................................................................... PORTFOLIO AND PORTFOLIO MANAGEMENT ... INTRODUCTION .............................. 44 Inputs to decisions................................................................................................................................................................................... 44 Rebalancing ....................................................................................................................................38 4.............................................................................................................................................................................................................................................................................................................................................................................................................. 19 SMC GLOBAL SECURITIES LIMITED .............................. 40 5......................................................................................................................................................................22 ACHIEVEMENT BY SMC:...................................................................................................................................................................................................................... 44 Focus ..................................................30 Technical Analysis .................................................................................................................................................................................................................................... 27 STOCK MARKET ........................................................................................ 40 Diversification: ....................19 VISION: .................................................................................................................................................................................................................................................................................27 STOCK EXCHANGE ........................................................................................................................... 44 Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 8 of 190 ...................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................... 16 CHAPTER ..................................................................................................................................................................42 DIFFERENCES IN ASSET ALLOCATION AND RISK ALLOCATION ............ 27 WHAT IS A SHARE?.......................................................................................................35 INITIAL PUBLIC OFFERINGS:............................ RISK ALLOCATION: ...........................................................................................................................................................................30 ANALYSIS TOOLS: ......................................................21 PRODUCTS AND SERVICES: ......................24 CONTACT US:............................................................................................................... 39 PORTFOLIO: ........................................................................... 42 ASSET VS..... 44 Goal .............44 Asset allocation ..1 INTRODUCTION……………………………………………………………………………………………………18 2................... ABOUT SMC GLOABL SECURITIES..................................................37 DEMAT FORM OF SHARES................................................................................................................................................................................................................................................................................................................................ 31 Fundamental Analysis ................. 44 Risk allocation ..................................................32 NSE (NATIONAL STOCK EXCHANGE): ............ RISK ALLOCATION AND THE RATIOS .............34 BSE (BOMBAY STOCK EXCHANGE): ..........28 RISKS INVOLVED IN STOCK MARKET................ 28 PRIMARY AND SECONDARY MARKETS .............................. 31 SEBI (SECURITIES AND EXCHANGE BOARD OF INDIA) ......TABLE OF CONTENTS 1............................................... INTRODUCTION TO STOCK MARKET .......25 3........................................................................................................................39 PORTFOLIO MANAGEMENT:......................................................................39 Asset allocation: ....................................................................................................................................................................

.........................................................................60 Types of Derivatives: ......................76 Overview .............................................................................................................. 65 VARIOUS FUNDAMENTAL INDICATORS: ................................................................................................... 68 COST OF CARRY: ................................................................................. buy futures:................................... 78 Participants in the Options Market: .............................................................. 67 VARIOUS TECHNICAL INDICATORS: ....64 APPLICATION OF FUTURES: .................................................................................50 HEDGING ........................... 66 B........ sell futures: ...........................................................................................................................................................................................Rebalancing ......................................................................................................................................................................................................50 CHAPTER ........................................................ Industry Analysis ..............................................................................................................................................................................................……………….................................................... 47 M-squared: .............................. 75 OPTIONS: .....................................3 RESEARCH METHODOLOGY………………………………………………………………………………................................................2 REVIEW OF LITERATURE……………………………………………………………………................................................................................................................................................................................................................. 48 6...........................................................................................................................................................................................................................49 CURRENCY RISK ............................................................................................................................................................................................................................................................. 73 Playing with futures:............................................................................................................................................. 64 FUTURE TRADING: ................................. 61 Determining Fair Value: ................................................................................ 79 Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 9 of 190 .................................................................................................................................................................................................. Company Analysis ............................................................................................................................................................................................................................................ 71 PUT-CALL RATIO: .............................................................................................................................................................................................................................. 77 Option Terminology: ....................................................... Economic Cycle .................................................................................................................................................................................... UNDERSTANDING STOCK MARKET RISK .............................................................................................. 77 Intrinsic value of an option: ......................................................................................................................................................................................................................................................................................................................................................................................................................... 60 VALUATION: .................................................................................................................................................................................................................................................................... 66 A........................................................................................................................................................................ 45 Advantages of Risk Allocation: ...................................................................................................51 CHAPTER ...................................................................................................................................................63 FUTURES: ..................................................................................................61 Determining the Market Price: .....................49 BUSINESS RISK ...........................................................................................................................................50 BETA ...........................................65 Derivative Stock Market Indicators: ............................................................................................................................... 46 Sharpe ratio: .................... 47 Information ratio: ..59 DERIVATIVES: ............................................................................. 66 C.......................... 49 MARKET RISK ......................................................................................................................................................................................................................................................................................................................... 61 FUTURE TRADING PARAMETERS:............... 67 OPEN INTEREST: .................................................. 67 VOLUMES: ............................................................................................................................................. 75 Short security............................................................................49 INFLATION RISK ............................................................................................................................................................. 75 Long security....................62 DERIVATIVES INSTRUMENT: ............................................................................................. 76 Option buyers: ........

..................................................................................................... 103 Relative Strength Index (RSI): ........................................................ 85 Profit from buying a put: ... 93 Underlying Security ..................................................................................................................................................................................................................................................................... 82 Buy puts when market is expected to fall:..................................... 94 Time to Expiration ..................................... 81 Pricing and Information Sharing: ............................................................................................................ 82 Sell Calls when market is expected to fall: .................................................................................................................................................................. 81 Insurance and Hedging ........................................................................................................................................................................................................................................................... EQUITY ANALYSIS:............................................................................................................................................................................ 87 The Buy-Write Strategy: ..........................................................................................................................99 TECHNICAL ANALYSIS OF EQUITY SHARES: ..................................................119 Analysis: ....................................................................................................................................................................................................... 93 Option Valuation Variables: .................................................................... 80 Usages: ................................... 94 Variables’ Affect on Option price:.......................................................................................................................................................................................................................................................................................119 VIRTUAL FUTURE TRADING: ................................................................................ 115 CHAPTER ................................................... 82 Sell puts when market is rising: ...................................................................................OPTION PRICING:....... 86 Loss from selling a put: ..............................................................................................................................................................................................133 Stock Information: ............................................................... 133 Financial Statement Summary: ............................................................................................................................................................................................................ 83 Different Option Strategy:.............129 Analysis: .......................................................................................................................................... 82 Playing with options:.................................................................................................................................................................................. 84 Profit from buying a call: ...................................................................................................................................................................................................... 88 The Straddles: ............................................................................................................................................................................................................................................................................................................................................... 82 Buy calls when Market is rising:........................................................................................ 95 7.. 135 GMR INFRASTRUCTURE LIMITED: ........................................................................ 110 Williams’ %R: ................................................................................................................................................... 94 Risk-free rate ............................................................................................................................................................................................................................................................101 Moving Average Convergence/Divergence (MACD): . 91 Synthetic Long Put Position: .................................... 93 Strike price ..................................................................................................................................................................................................................4 ANALYSIS & INTERPRETATIONS…………………………………………………………………………................................................................................................................................................................................................................................................................................................................................. 81 Speculation and Arbitrage: ................................................................................................................................................... 93 Volatility ... 130 FUNDAMENTAL ANALYSIS:..................................................................................................................................................... 133 Company’s Basic Information: ................................. 128 VIRTUAL OPTION TRADING: ............ 113 Ease of Movement: .......................................................................................................................................................................: .................................................................................................................................................................................................... 134 DLF INDIA LTD..................................................... 89 Synthetic Long Call Position: ................................................................................. 84 Loss from selling a call: ..................................................................................................................................................................................................................................................... 96 FUNDAMENTAL ANALYSIS: .......................................................... 92 Option Valuation: ........................................................................................................................................................................... 138 Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 10 of 190 ........................................................................................

...................................................................................................................... 165 GMR Infrastructure Ltd.164 DLF India Ltd........................JP ASSOCIATE LIMITED: ...............................................................................................180 CHAPTER ......................................................................................................................................................................... 182 SUGGESTIONS: .................................................................................................................................................................................................................................................................................................5 CONCLUTIONS & SUGGESTIONS…………………………………………………………………………181 8...................................................................................... 11........................................................................... 187 Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 11 of 190 .................................... 147 Analysis: .............................................................................................................................................................. 186 BIBLIOGRAPHY ......... 158 TECHNICAL ANALYSIS BY CHARTS: .......................................................................: ..................................................................................: ......................................................... 185 LIMITATIONS: ............................................................................. 9........................................ 141 UNITECH LIMITED: .............................................................................................................................................: ................................................................................................................................ 151 Sensex Watch ..................................................................................... 168 JaiPrakash Associate Ltd.................................. 10.................................... 144 RELAINCE INDUSTRIAL INFRASTRUCTURE LIMITED: ................................................................................................. 177 RATING OF COMPANIES ON THE BASIS OF TECHNICAL ANALYSIS: ............................................................................................................................. 152 Nifty Watch ............................................................................ 171 Unitech Ltd............................................................ 150 TECHNICAL ANALYSIS: .. CONCLUSION......................................: ................: ................................................................. 174 Reliance Industrial Infrastructure Ltd...................151 SENSEX AND NIFTY WATCH: ...........................

2 2. OPTION TRADING: 2.3 2.3 2.8 UNITECH LTD.1 DIFFERENT OPTION STRATEGY 2.1 TECHNICAL INDICATOR 1. PRICE AND VOLUMN ON MARKET PUT – CALL RATIO EFFECT ON MARKET Page No.1 NIFTY 3.4 MINI NIFTY 3. 3.1.1.1.1.3 BANK NIFTY 3.1. 65 67 68 69 75 76 84 84 85 86 87 89 119 119 120 121 122 123 124 125 126 3.2 CNX IT 3.1. VIRTUAL FUTURE TRADING: 3. Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 12 of 190 .6 GMR INFRASTRUCTURE LTD.5 PROFIT FROM BUYING A CALL LOSS FROM SELLING A CALL PROFIT FROM BUYING A PUT LOSS FROM SELLING A PUT THE STRADDLES OPEN INTERSET EFFECT OF OI.1 1.1.5 DLF INDIA LTD.1 2. FUTURE TRADING: 1.7 JP ASSOCIATE LTD. 3.2 1. 3.Table of Content (Tables): 1.1.4 2.

1 FUNDAMENTAL ANALYSIS 5.2 5.2.4 RATING OF THE COMPANIES Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 13 of 190 .3 TECHNICAL ANALYSIS 5. VIRTUAL OPTION TRADING: 4.1 5.3.2.2.2 FUNDAMENTAL ANALYSIS 5.5 DLF INDIA LIMITED GMR IFRASTRUCTURE LIMITED JP ASSOCIATE LIMITED UNITECH LIMITED RELAINCE INDUSTRIAL INFRASTRUCTURE LTD.1.2 ANALYSIS 5.1 NIFTY 127 129 129 4.2.2.3 5.1.9 RELAINCE INDUSTRIAL INFRASTRUCTURE LTD.1 5.2 5. 4.3 COMPANY’S BASIC INFORMATION INCOME STATEMENT REPORT CARD 131 133 133 134 134 135 135 138 141 144 147 151 152 158 180 5.3.1 5.3. 5.1.2 SENSEX WATCH NIFTY WATCH 5. EQUTIY RESEARCH: 5.4 5.

1.3 1.1.1.6 2. OPTION TRADING: 1.1 TECHNICAL INDICATORS 2.3 2.Table of Content (Charts): 1.1.1.7 2.1.5 2.1 1.1.1.2 1.6 1. 76 84 84 85 86 87 88 90 91 92 96 101 104 105 105 106 107 107 112 113 2. EQUITY RESEARCH 2.1 2.1.1.8 PROFIT FROM BUYING A CALL LOSS FROM SELLING A CALL PROFIT FROM BUYING A PUT LOSS FROM SELLING A PUT BUY – WRITE STRATEGY THE STRADDLES SYNTHETIC LONG CALL POSITION SYNTHETIC LONG PUT POSITION Page No.1.1.1.5 1.1 DIFFERENT OPTION STRATEGY 1.4 1.4 2.2 2.1.8 POSITIVE DIVERGENCE (MACD) BULLISH MOVING AVERAGE CROSSOVER BULLISH CENTERLINE CROSSOVER (MACD) BEARISH MOVING AVERAGE CROSSOVER BEARISH CENTERLINE CROSSOVER (MACD) CENTER LINE CROSSOVER (RSI) WILLIAMS’ %R INDICATOR WILLIAMS’ %R TREND Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 14 of 190 .1.1.7 1.

2.4 SENSEX WATCH SENSEX TECHNICAL CHART WITH INDICATORS NIFTY WATCH NIFTY TECHNICAL CHART WITH INDICATORS 2.1.5 DLF INDIA LIMITED GMR INFRASTRUCTURE LIMITED JP ASSOCIATE LIMITED UNITECH LIMITED RELAINCE IND.1 2.1 2. LIMITED 164 165 168 171 174 177 Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 15 of 190 .2.3.3.3 2.3 2.2 2.3.3.2 2.3 TECHNICAL ANALYSIS BY CHARTS 2.2.4 2.2. INFRA.2 TECHNICAL ANALYSIS 2.3.9 EASE OF MOVEMENT (EXAMPLE) 115 151 152 157 158 163 2.2.

com. Hedgers always keep risk involved in mind and try to minimize it using different strategies. There are two reasons for this Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 16 of 190 . The future prospects of a company can also seen using this analysis. Stocks are just like gamble for those who don’t know how to invest. it was a slow moving market. EPS will be used. It helps me track all the historic information about companies and to track the current trends of the market and stocks.icharts.nseindia. apart from that value at risk is another factor that helps one in making decisions. They are the speculators. For my understanding I referred to a book Fundamental and Technical Analysis of Equity Shares.moneycontrol. It also has detailed study of some companies that would help one to compare those companies and decide which is better to invest in. INTRODUCTION The time one talks about stock market. The market behaves differently to different people. This was that book that actually helps me understanding the analysis Part.in proved to be a great help for me. Initially I have tried to show how people suffer losses and make gains in the absence of analysis and then come understanding those strategies that would help one to gain profit. I have tried to show all combinations that can be used for analyzing the equity. And I have not been able to keep a track of all those companies because banking sector is a toughest sector as far as equity analysis is concerned.com and www. It helps one to take out his money with sufficient if not unlimited profits. For speculators it can be risky. price to operating profits. For all the data collection www. NSE’s site www. and market trend came unexpectedly. So it's high time when everybody should look at trend of the markets and stocks. For this some ratios like PE ratio. One can hedge risk using derivative instruments whether using future trading or option trading. The only limitation of this project is that in initial phases I have chosen companies of banking sector. who mostly lose the most. When I started to learn Equity Analysis at that time the stock market was going through its Fluctuating phase.1. another word also clicks and that is risk. If I talk about wise people these are always hedgers. price to sales. Investor can surely take out profit from market very easily by just Analyzing the current situation through Fundamental and Technical Analysis. People have lost their millions in this stock market.

But before I give all the details it's important to know what are stocks. This may be a major limitation of this project. The companies I have decided to choose for analysis are some top notch companies though there are some midcaps too but they are very few and banking sector has lot more things to do in equity analysis. Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 17 of 190 .It's was really not possible to analyze 30 of companies. The project begins with stock market its scenario and gives explanation why people prefer investing in Indian markets. I have tried to cover everything but due to time constraint I have to limit its study. And then it shifts to its major focus risk with each step I have understood it better. Derivatives and Analysis are huge project to understand. The following work is the detailed explanation of my work.

CHAPTER – ONE INTRODUCTION Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 18 of 190 .

depository services. Cochin. SMC has expanded its domestic & international operations. Currently. Capital Gain Bonds. Ahmadabad Jaipur. Bangalore. averaging over 3. with a pan-India presence.000 satisfied investors. SMC has plans to grow its network to 2.50. It basically deals in Mutual Fund. The company has expanded internationally and has established office in Dubai Gold and Commodities Exchange (DGCX). Over the years. I am working for SMC Global Securities Limited which is one of the leading companies of financial services.50.000 offices across 500+ cities in the next 3 years. derivatives.2. NABARD Bonds and Life and General Insurance. Its products and Services include Institutional and retail brokerage of equity. Existing network includes regional offices at Mumbai. wealth advisory. IPOs and mutual funds distribution. a leading financial services provider in India is a vertically integrated investment solutions company. equity and commodity research. So I would like you to have a look at the profile of the company SMC Global Securities Limited SMC: A ONE STOP INVESTMENT SHOP SMC Group. Fixed Deposit Schemes. commodity. online trading.000 trades per day.000 employees & one of the largest retail network in India currently serving the financial needs of more than 5. investment banking. SMC has a highly efficient workforce of over 4. Hyderabad and 1500+ offices across 375+ cities in India. ABOUT SMC GLOABL SECURITIES It's one of the leading firms in financial services in India. SMC is one of the most active trading organizations in India. Portfolio management. insurance broking. Kolkata. currency. Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 19 of 190 . GOI Taxable Bonds. Chennai. clearing services.

honesty & integrity and commitment for excellence. Mr. Subhash Chand Agarwal and Mr. with a rich experience of more than 20 years in the capital market."THE STRENGTH OF A TREE IS IN DIRECT PROPORTION TO THE STRENGTH OF ITS ROOTS" Mr. Agarwal transparency. Gupta Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 20 of 190 . Professionally both are chartered accountants. To shape their vision into a reality they watered the sapling nourished with it their with principles their rock of solid Mr. Their exceptional leadership skills. justifying the words that “the future belongs to those who believe in the beauty of their dreams”. Mahesh Chand Gupta are the visionaries who planted the sapling of the “Kalpavriksha” called SMC. Mahesh C. outstanding commitment and disciplined style of working have fostered SMC into a financial hub. Subhash C.

INTEGRITY AND HONESTY: Integrity. through superior efficiency and complete transparency. Main Focus: Investor Care Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 21 of 190 . OUR APPROACH: VALUE FOR INVESTOR’S TRUST: SMC values the trust reposed in by the clients and is committed to uphold it at all cost. with relentless focus on investor care. which has been built over years by giving personalized attention.Vision: OUR VISION is to be a global major in providing complete investment solutions. honesty and transparency are the underlying principles in all our dealings. NETWORK WHICH WORKS: SMC has a vast network extending to 375+ cities/towns ensuring easy accessibility. PERSONALISZED ATTENTION: The most valued asset is our relationship with the clients. RESEARCH BASED ADVISORY SERVICES: SMC offers proactive and timely world class research based advice and guidance to its clients to enable them to take informed decisions. convenience and hassle free trading experience.

BSE (F&O & Currency).e. charts. integrated trading application for fast.Investment at your finger tips Products and Services: Equity & Derivative Trading: SMC Trading Platform offers online equity & derivative trading facilities for investors who are looking for the ease and convenience and hassle free trading experience. Commodity Trading: SMC is a member of 3 major national level commodity exchanges. National Commodity and Derivative Exchange (NCDEX). Clearing Services: Being a clearing member in NSE(F&O & Currency). We provide ODIN Application. advice. i. You can also trade through us on phone by calling our designated representatives in the branches where you are registered as a client. SMC have spread our wings globally by acquiring Membership of Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 22 of 190 . You can also trade through our branch network by registering with us as our client. and online assistance helps you to take informed decisions. In this segment. MCX and NMCE. which is a high -end. You can now trade in the NSE and BSE simultaneously from any destination at your convenience. place orders and watch the confirmation. NCDEX and DGCX. MCX. You can get Real-Time streaming quotes. We use technology using ODIN application to provide you with live Trading Terminals. all on a single screen. Multi Commodity Exchange (MCX) and National Multi Commodity Exchange of India (NMCE) offers you trading platform of NCDEX. research. You can access a multitude of resources like live quotes. SMC is clearing massive volumes of trades of our trading members in this segment. MCX-SX. efficient and reliable execution of trades.

To ensure easy accessibility to back office accounting reports to our clients. we have offered facilities to view various user friendly. Shortly we will be providing the facility of online investment in Mutual Funds and IPOs Online back office support: To provide robust back office support backed by excellent accounting standards to our branches we have ensured connectivity through FTP and . We are empanelled with both NCDEX & MCX. hi-tech in house R&D wing with some of the best people. IPOs and Mutual Funds. We have one of the most advanced. We are one of the leading DP and enjoy the trust of more than 5. easily comprehendible back office reports. secure and hassle free alternative to holding the securities and commodities in physical form. SMC Research Based Advisory Services: Our massive R&D facility caters to the need of Investors. Distribution of Mutual Funds & IPOs: SMC offers distribution and collection services of various schemes of all Major Fund houses and IPOs through its mammoth network of branches across India.net based Application. We are one of the few Depository Participants offering depository facilities for commodities. We provide trading platform to trade in DGCX and also clear trades of trading members being a clearing member. We offer proactive and timely world class research based advice and guidance to our clients so that they can take informed decisions.Dubai Gold and Commodities Exchange. Commodities. SMC Depository: We are ISO 9001:2000 certified DP for shares and commodities.5 Lac investors. We have a distinction of being leading distributors of IPOs. We offer a quick. process and technology resources providing complete research solutions on Equity. Franklyn Templeton etc. Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 23 of 190 . We are registered with all major Fund Houses including Fidelity. We assure you a hassle free and pleasant transaction experience when you invest in mutual funds and IPOs through us. who are continuously in need of opportunities for striking rich rewards on their investment. SMC is registered with AMFI as an approved distributor of Mutual Funds.

2008) • • • 5th largest sub-broker network in the country (Source: Dun and Bradstreet. We believe that a well-informed investor is an empowered investor. 2006-07. in the CNBC Optimix Financial Services Award 2008 under the "National Level Retail Category". (Source: Prime Data Rankings) Awarded the Fastest Growing Retail Distribution Network (Source: Business Sphere. We also seek your feedback on our services in these Investor meets. • One of the first financial firms in India to expand operations in the lucrative gulf market. 2008) • Awarded the Major Volume Driver by BSE for the Third year in a row i.SMC Investor Awareness Forum: Our dedicated team of professionals is conducting investor meet/seminars across India . Achievement by SMC: "AN ACHIEVEMENT IS BONDAGE. 2007) 2nd largest distributors of IPO in Retail. 2005-06 and 2004-05 (Awarded to top 10 Brokers) • Nominated among the top 3. IT OBLIGES ONE TO A HIGHER ACHIEVEMENT" • • ISO 9001:2000 certified DP for both shares and commodities 4th largest broking house of India in terms of trading terminals (Source: Dun and Bradstreet.e. by acquiring valuable license for trading and clearing with Dubai gold and commodities exchange (DGCX) • Amongst a Elite group of brokers having proprietary desk for doing risk-free arbitrage in commodities • First trade on DGCX for silver and First currency trade for rupee-dollar Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 24 of 190 .

: 91-33-39847000 Fax: 91-33-39847004 Email: kolkata@smcindiaonline. Daryaganj. New Delhi-110005 Tel. Gate No-4.REGIONAL OFFICES Delhi-Daryaganj 8B. 2nd Floor.: 91-44-42108069. The contact addresses of SMC Regional offices. Lady Desikachari Road. E-mail: smcmumbai@smcindiaonline. Mookambika Complex No 4. New Delhi-110002. Poddar Court. Dheeraj Sagar.CORPORATE OFFICE 11/6B. 42088256 Fax: 91-44-24661798 E-mail: mylapore@smcindiaonline. Mumbai-400064.: 91-11-30111000 Fax: 91-11-25754365 E-mail:smc@smcindiaonline. Contact Us: SMC .com Mumbai 1st Floor. Opp. Mylapore.: Tel: 91-22-67341600. Goregaon Sports Club.com SMC .SMC's diverse network ensures that its investors avail of prompt services whenever they might need them.: 91-11-30111333 Fax: 91-11-23263297 E-mail: smc@smcindiaonline. 9B & 17. Netaji Subhash Marg. 4th Floor. Pusa Road. Shanti Chamber. SMC has a presence in all the major cities of the country. Tel.com Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 25 of 190 . Chennai-600004 Tel.com Chennai 2A. Link Road Malad(W). Tel. across India are given below. Kolkata-700001 Tel. Fax: Fax: 91-22-28805606. Rabindra Sarani.com Kolkata 18.

PROJECT – I HEDGING RISK THROUGH DERIVATIVES Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 26 of 190 .

it is referred to as "listed". This can be illustrated by an example: Suppose a company has a mining lease over an area with some rich ore deposits. and through growth in the value of the shares. bonds. interested investors can become part-owners of the company by buying ‘shares’. which is a sort of advertisement informing people about the prospects of the company and inviting them to invest some money in it. After that we can easily understand the concept of derivatives segment. or association which hosts a market where stocks. Buyers and sellers come together to trade during specific hours on business days. financial sector of India. If the company operates at a profit. Stock Market A stock market (also known as a stock exchange) has two main functions. and commodities are traded. On the other hand. The first function is to provide companies with a way of issuing shares to people who want to invest in the company. The second function of the stock market. related to the first. if the price of the product dips). INTRODUCTION TO STOCK MARKET Before Moving to stock market’s derivative segment we need to understand the basics of stock market. is to provide a venue for the buying and selling of shares. When the company is ‘floated’ (established) on the stock market. The company issues a prospectus. Stock Exchange An exchange is an institution.. One way to raise money is through the stock market. Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 27 of 190 . the shareholders will probably lose money. Exchanges impose rules and regulations on the firms and brokers that are involved with them.g. Stock exchanges. but it doesn’t have any equipment. To buy the equipment it needs money. It wants to exploit these deposits.3. etc. options and futures. If a particular company is traded on an exchange. organization. shareholders benefit in two ways – through the issuing of dividends in the form of cash or more shares. Companies that have shares traded OTC are usually smaller and riskier because they do not meet the requirements to be listed on a stock exchange. if the company does not operate at a profit (e. Intro to stock market includes working of stock market. Companies that are not listed on a stock exchange are sold OTC (short for Over-The-Counter).

Most trading is done in the secondary market. A market is primary if the proceeds of sales go to the issuer of the securities sold. In Secondary market share are traded between two investors.e. By owning a share you can earn a portion in the firm and by selling shares you get capital gain. A share is issued by a company or can be purchased from the stock market. which entitles its holder to be one of the owners of the company.10 to the public at a higher price. Generally.10 though not always offered to the public at this price. a share or stock is a document solely to stocks is so common that it almost replaces the word stock itself. Primary Market Market for new issues of securities. Secondary Market The market where securities are traded after they are initially offered in the primary market is known as secondary market. The promoter takes up at least 50 per cent of the shares in the issue.What Is A Share? In finance a share is a unit of account for various financial instruments including stocks. So. As per the SEBI guidelines. In simple Words. The promoter company has a 3 years consistent record of profitable working. mutual funds. The difference between the offer price and the face value is called the premium. new companies can offer shares to the public at a premium provided: 1. you also run a risk of making a capital loss if you have sold the share at a price below your buying price. PRIMARY AND SECONDARY MARKETS There are two ways for investors to get shares from the primary and secondary markets. bonds. 2. Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 28 of 190 . In primary markets. your return is the dividend plus the capital gain. Companies can offer a share with a face value of Rs. It is issued by a company. securities are bought by way of public issue directly from the company. where previously issued securities are bought and sold. the value as in a balance sheet) of Rs. limited partnerships. as distinguished from the Secondary Market. most shares have a face value (i. However.

premium is credited to reserves and surplus and it does not increase the equity. counting on that historical rise in market equity. existing companies can make a premium issue without the above restrictions. This approach can be dangerous. Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 29 of 190 .3. are attempting to profit on just those short-term price fluctuations. companies realize that it’s easy to command a high premium. even devastating. which simply means they buy shares of some company and hold onto them for a long time. He’s not generally concerned about short-term fluctuations in prices. The prospectus should provide justification for the propose premium. The amount of time an active trader holds onto an asset is very short: in many cases minutes. In a buoyant stock market when good shares trade at very high prices. An investor relies mostly on Fundamental Analysis. All parties applying to the issue should be offered the same instrument at the same terms. Traders. The biggest difference between them is the length of time you hold onto the assets. As far as accounting is concerned. On the other hand. Thus the companies seek to make premium issues. on the other hand. A company’s aim is to raise money and simultaneously serve the equity capital. which is the analytical method of predicting long-term prospects of a particular asset. you can make a comfortable living as a Trader. especially regarding the premium. in an extremely volatile market such as today’s BSE or NSE Indexes Show. An investor is more interested in the long-term appreciation of his assets. or sometimes seconds. Most investors adopt a “buy and hold” approach to assets. What most investors need to remember is this: investing is not about weathering storms with your “beloved” company – it’s about making money. If you can catch just two index points on an average day. 4. because he’ll ride them out over the long haul.

along with the stock prices. But on the way down. If the stock is fairly valued. people start to pull money out of the market and into bonds. 4. so that pushes prices down. Do not put more than 10% of your money into any one stock Do not own more than 2-3 stocks in any industry Buy your stocks over time. Plus the cost of business goes up. False: The only thing true about this is that young people have time on their side if they lose all their money. 3. especially if it has broken previous highs. When interest rates rise. Tips to Lower your Risk: 1. there are no unhappy owners who want to dump it. you must assume High Risks. You can Hedge Inflation with Stocks. it should continue to rise. so corporate earnings go down. Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 30 of 190 . If they follow the tips above. Analysis Tools: Analysis tools have very important in capital market. Young People can afford to take High Risk. But young people have little disposable income to risk losing. you have no idea how much further it may fall. they can make money over many years. Young people have the time to be patient. not all at once Buy stocks with consistent and predictable earnings growth Buy stocks with growth rates greater than the total of inflation and interest rates Use stop-loss orders to limit your risk 2. If a stock is rising. Buy Stocks on the Way Down and Sell on the Way Up.Risks Involved In Stock Market To make Money in the Stock Market. As these tools are generally used for purpose of calculating market price. False: People believe that a falling stock is cheap and a rising stock is too expensive.

Fundamental analysis is carried out by taking expected EPS and expected earning into consideration with Discounted Future Cash Flows. without even understanding what the company does.. Fundamental analysis can be contrasted with 'technical analysis’. to identify patterns. It involves making both quantitative and qualitative judgments about a company.Technical Analysis It is a method of evaluating future security prices and market directions based on statistical analysis of variables such as trading volume. the sector it's in. or the economy as a whole. trends etc. Technical analysis helps to understand the pattern or trend of the market or of the particular stock/script. price changes. Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 31 of 190 . Fundamental Analysis Fundamental analysis looks at a share’s market price in light of the company’s underlying business proposition and financial situation. which seeks to make judgments about the performance of a share based solely on its historic price behavior and without referring to the underlying business. Now technical stock analysis is virtually non-existent. until it was decided that their success rate is no better than chance. There are many instances of investors successfully trading a security using only their knowledge of the security's chart.the attempt to look for numerical trends in a random function. It is a stock market term meaning. The stock market used to be filled with technical analysts deciding what to buy and sell.

prescribed registration norms. bankers to issue. establishment of clearing corporations etc. In place of Government Control. merchant bankers. surveillance system etc. risk identification and risk management systems for Clearing houses of stock exchanges. The basic objectives of the Board were identified as: To protect the interests of investors in securities. SEBI has introduced the comprehensive regulatory measures. which has made dealing in securities both safe and transparent to the end investor. To regulate the securities market and For matters connected therewith or incidental thereto. The improvements in the securities markets like capitalization requirements. To promote the development of Securities Market.SEBI (Securities and Exchange Board of India) In 1988 the Securities and Exchange Board of India (SEBI) was established by the Government of India through an executive resolution. the eligibility criteria. A market Index is a convenient and effective product because of the following reasons: Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 32 of 190 . the code of obligations and the code of conduct for different intermediaries like. portfolio managers. statutory and autonomous regulatory boards with defined responsibilities. Paradoxically this is a positive outcome of the Securities Scam of 1990-91. credit rating agencies. registrars. reduced the risk of credit and also reduced the market. Another significant event is the approval of trading in stock indices (like S&P CNX Nifty & Sensex) in 2000. and was subsequently upgraded as a fully autonomous body (a statutory Board) in the year 1992 with the passing of the Securities and Exchange Board of India Act (SEBI Act) on 30th January 1992. underwriters and others. margining. It has framed bye-laws. to cover both development & regulation of the market. Since its inception SEBI has been working targeting the securities and is attending to the fulfillment of its objectives with commendable zeal and dexterity. and independent powers have been set up. brokers and sub-brokers.

However the Securities Contracts (Regulation) Act. SEBI then appointed the J. It is used in derivative instruments like index futures and index options. SEBI appointed the L. The necessary amendment was then carried out by the Government in 1999. C. It can be used for passive fund management as in case of Index Funds. mutual funds. The Board of SEBI in its meeting held on May 11. Thereafter SEBI formulated the necessary regulations/bye-laws and intimated the Stock Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 33 of 190 . Derivatives have been accorded the status of `Securities'. insurance companies.It acts as a barometer for market behavior. It is used to benchmark portfolio performance. and also to diversify the trading products. The Securities Laws (Amendment) Bill. The Board also approved the "Suggestive Byelaws" as recommended by the Dr LC Gupta Committee for Regulation and Control of Trading and Settlement of Derivatives Contracts. The report was submitted in November 1998. so that there is an increase in number of traders including banks. 1956 (SCRA) required amendment to include "derivatives" in the definition of securities to enable SEBI to introduce trading in derivatives. financial institutions. Two broad approaches: SEBI is to integrate the securities market at the national level. The ban imposed on trading in derivatives in 1969 under a notification issued by the Central Government was revoked. to transact through the Exchanges. Verma Committee to recommend Risk Containment Measures (RCM) in the Indian Stock Index Futures Market. 1998 accepted the recommendations of the committee and approved the phased introduction of derivatives trading in India beginning with Stock Index Futures. In December 1999 the new framework was approved. R. Gupta Committee in 1998 to recommend the regulatory framework for derivatives trading and suggest bye-laws for Regulation and Control of Trading and Settlement of Derivatives Contracts. 1999 was introduced. and primary dealers etc. In this context the introduction of derivatives trading through Indian Stock Exchanges permitted by SEBI in 2000 AD is a real landmark.

for both equities and derivative trading. cover more than 1500 cities across India. 2799 in total. Markets Currently. it was recognized as a stock exchange under the Securities Contracts (Regulation) Act. As of 2006. insurance companies and other financial intermediaries in India but its ownership and management operate as separate entities. The Capital Market (Equities) segment of the NSE commenced operations in November 1994. The derivative trading started in India at NSE in 2000 and BSE started trading in the year 2001. NSE commenced operations in the Wholesale Debt Market (WDM) segment in June 1994. NSE is mutually-owned by a set of leading financial institutions.[4]It is the second fastest growing stock exchange in the world with a recorded growth of 16.46 trillion. the equity market capitalization of the companies listed on the NSE was US$ 1. while operations in the Derivatives segment commenced in June 2000. the NSE VSAT terminals. 1956. and was incorporated in November 1992 as a tax-paying company.Exchanges in 2000. NSE is the third largest Stock Exchange in the world in terms of the number of trades in equities. NSE and the Bombay Stock Exchange are the two most significant stock exchanges in India. NSE (National Stock Exchange): The National Stock Exchange of India Limited (NSE). banks. The National Stock Exchange of India was promoted by leading Financial institutions at the behest of the Government of India.6%. In October 2007. Though a number of other exchanges exist. making it the second largest stock exchange in South Asia. is a Mumbai-based stock exchange. and between them are responsible for the vast majority of share transactions. It is the large stock exchange in India in terms daily turnover and number of trades. In April 1993. NSE has the following major segments of the capital market: Equity Futures and Options Retail Debt Market Wholesale Debt Market Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 34 of 190 .

1956. pursuant to the BSE (Corporatization and Demutualization) Scheme. the Exchange is now a demutualised and corporatized entity incorporated under the provisions of the Companies Act. giving it one of the highest per hour rates of trading in the world. The BSE accounts for over two thirds of the total trading volume in the country. There are around 3. The BSE `Sensex' is a widely used market index for the BSE. Earlier an Association of Persons (AOP).The Exchange's pivotal and pre-eminent role in the development of the Indian capital market is widely recognized and its index. Popularly known as "BSE".500 companies in the country which are listed and have a serious trading volume.000 deals are executed on a daily basis.000 stocks listed. the trading rights and ownership rights have been de-linked effectively addressing concerns regarding perceived and real conflicts of interest. it was established as "The Native Share & Stock Brokers Association" in 1875.NSE Indices S&P CNX Nifty CNX Nifty Junior CNX IT Bank Nifty Mininifty CNX 100 CNX Midcap BSE (Bombay Stock Exchange): Bombay Stock Exchange Limited is the oldest stock exchange in Asia with a rich heritage. The Board Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 35 of 190 . It is the first stock exchange in the country to obtain permanent recognition in 1956 from the Government of India under the Securities Contracts (Regulation) Act. The market capitalization of the BSE is Rs. Approximately 70. The Exchange is professionally managed under the overall direction of the Board of Directors. 2005 notified by the Securities and Exchange Board of India (SEBI). Mumbai's (earlier known as Bombay). With demutualization. Of the 22 stock exchanges in the country.5 trillion. SENSEX. Bombay Stock Exchange is the largest. is tracked worldwide. with over 6. 1956.

debt instruments and derivatives. The surveillance and clearing & settlement functions of the Exchange are ISO 9001:2000 certified.comprises eminent professionals.Other Indices Apart from BSE SENSEX. The Exchange provides an efficient and transparent market for trading in equity. representatives of Trading Members and the Managing Director of the Exchange. The systems and processes of the Exchange are designed to safeguard market integrity and enhance transparency in operations. BSE uses other stock indices as well: BSE 100 BSE 200 BSE PSU BSE MIDCAP BSE SMLCAP BSE BANKEX Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 36 of 190 . The committees constituted by the Board are broad-based. The BSE's On Line Trading System (BOLT) is a proprietary system of the Exchange and is BS 7799-2-2002 certified. In terms of organization structure. the trading volumes on the Exchange showed robust growth. BSE . The Exchange has a nation-wide reach with a presence in 417 cities and towns of India. the Board formulates larger policy issues and exercises overall control. which is the most popular stock index in India. The day-to-day operations of the Exchange are managed by the Managing Director and a management team of professionals. The Board is inclusive and is designed to benefit from the participation of market intermediaries. During the year 2004-2005.

Under the 90% scheme. This Initial Public Offering can be made through the fixed price method. book building method or a combination of both. rights issue or private placement. Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 37 of 190 . In case the issuer chooses to issue securities through the book building route then as per SEBI guidelines. this percentage would be 90 and 10 respectively. an issuer company can issue securities in the following manner: 100% of the net offer to the public through the book building route.BSE CAPITAL GOODS BSE AUTO BSE DOLLEX 200 BSE REALTY BSE TECH Initial Public Offerings: Corporate may raise capital in the primary market by way of an initial public offer. 75% of the net offer to the public through the book building process and 25% through the fixed price portion. An Initial Public Offer (IPO) is the selling of securities to the public in the primary market.

Just as you have to open an account with a bank if you want to save your money. Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 38 of 190 . Just like a bank passbook or statement. nobody wants physical shares any more. you need to open a demat account if you want to buy or sell stocks So it is just like a bank account where actual money is replaced by shares. If you wish to have securities in demat mode. you need to indicate the name of the depository and also of the depository participant with whom you have depository account in your application. So a demat account is a must for trading and investing. practically all trades have to be settled in dematerialized form. They are all held electronically in your account. 200 of GMR Infra and 100 of RIL. As you buy and sell the shares. Although the market regulator. Difference between a Broker and a DP A broker is separate from a DP.Demat Form of Shares There are two forms of shares physical or dematerialized (demat) shares. you have the choice to receive the securities in either mode. the Securities and Exchange Board of India (SEBI). All these will show in your demat account. Let's say your portfolio of shares looks like this: 150 of DLF. has allowed trades of up to 500 shares to be settled in physical form. It is. So you don't have to possess any physical certificates showing that you own these shares. the DP will provide you with periodic statements of holdings and transactions. make cheque payments etc. forged or stolen. to open your demat account. as are many brokers. who buys and sells shares on his behalf and on behalf of his clients. Nowadays. they are adjusted in your account. however desirable that you hold securities in demat form as physical securities carry the risk of being fake. A broker is a member of the stock exchange. Though the company is under obligation to offer the securities in both physical and demat mode. 50 of Axis Bank. You have to approach the DPs (they are like bank branches). Most banks are also DP participants. Broker can also provides the facility of DP but he need to take a permission of either NSDL or CDSL two DP service provider in india. Is a demat account a must? Nowadays. A DP will just give you an account to hold those shares in dematerlized form.

thus. futures contracts. when to purchase them. By owning several assets. production facilities. Typically the expected return from portfolios of different asset bundles are compared. given the goals of the portfolio owner and changing economic conditions. The unique goals and circumstances of the investor must also be considered. whilst a private individual may make use of the services of a financial advisor or a financial institution which offers portfolio management services. the skill of a successful investment manager resides in constructing the asset allocation. Arguably. how many to purchase. and separately the Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 39 of 190 . and what assets to divest. bonds.e. Asset classes exhibit different market dynamics. and different interaction effects. the standard deviation of the return). the allocation of monies among asset classes will have a significant effect on the performance of the fund.4. Holding a portfolio is part of an investment and risk-limiting strategy called diversification. real estate. In building up an investment portfolio a financial institution will typically conduct its own investment analysis. These decisions always involve some sort of performance measurement. PORTFOLIO AND PORTFOLIO MANAGEMENT Portfolio: A portfolio is an appropriate mix of or collection of investments held by an institution or a private individual. or any other item that is expected to retain its value. Portfolio Management: Portfolio management involves deciding what assets to include in the portfolio. The assets in the portfolio could include stocks. gold certificates. Asset allocation: The different asset classes and the exercise of allocating funds among these assets (and among individual securities within each asset class) is what investment management firms are paid for. most typically expected return on the portfolio. Some research suggested that allocation among asset classes have more predictive power than the choice of individual holdings in determining portfolio return. Some investors are more risk averse than others. and the risk associated with this return (i. warrants. certain types of risk (in particular specific risk) can be reduced. options. Selection involves deciding what assets to purchase.

so as to outperform certain benchmarks (e. related to hedging. Spread the portfolio among multiple investment vehicles. mutual funds. returns are decent no matter the weather. small cap. bonds. over very long holding periods (eg. Long-term returns: It is important to look at the evidence on the long-term returns to different assets. diversification minimizes the risk from any one investment. but poor performance when the weather is sunny. and large Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 40 of 190 .g. it will have strong performance during the rainy season. A simple example of diversification is this one.. the investment should be split between the companies.individual holdings. The reverse occurs if the portfolio is only invested in the sunscreen company. To minimize the weather-dependent risk in the example portfolio. There are three primary strategies used in improving diversification: 1. balanced funds. For example. and bonds have generated higher returns than cash. If a portfolio is completely invested in the company that sells umbrellas. including growth funds. and cash. and to holding period returns (the returns that accrue on average over different lengths of investment). 10+ years) in most countries. rather than alternating between excellent and terrible. Diversification: Diversification in finance is a risk management technique. bond and stock indices). With this diversified portfolio. that mixes a wide variety of investments within a portfolio. index funds. this is because equities are riskier (more volatile) than bonds which are themselves more risky than cash. but will tank when clouds roll in. Because the fluctuations of a single security have less impact on a diverse portfolio. the peer group of competing funds. such as stocks. On a particular island the entire economy consists of two companies: one that sells umbrellas and another that sells sunscreen. 2. Vary the risk in the securities. equities have generated higher returns than bonds. A portfolio can also be diversified into different mutual fund investment strategies. According to financial theory. the alternative investment: the portfolio will be high performance when the sun is out.

cap funds. When a portfolio includes investments with varied risk levels, large losses in one area are offset by other areas. 3. Vary your securities by industry, or even by geography. This will minimize the impact of industry- or location-specific risks. The example portfolio above was diversified by investing in both umbrellas and sunscreen. Another practical application of this kind of diversification is mixing investments between domestic and international funds. By choosing funds in many countries, events within any one country's economy have less effect on the overall portfolio.

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5. RISK ALLOCATION AND THE RATIOS
In a sense, “risk allocation” – also referred to as “risk budgeting” – is another step in the evolution of investment management practices. In the mid-1900’s, the dominant investment style was “asset selection” (also known as “picking winners”). Investors tried to select stocks and other assets with high expected returns and low risk (i.e., low variance or returns). Modern portfolio theory revolutionized investing by making clear the importance of correlations of asset returns, in addition to expected returns and the variance of returns. By the 1970’s, the dominant investment style had become “asset allocations”. Investors tried to hold “efficient portfolios” – portfolios of assets with low correlations – so that all but the market risk would be diversified away. This gave rise to the common practice of managing to some benchmark portfolio. With the rise in benchmarking, the task of an active portfolio manager was to “beat the index”. Clearly, one way to beat the index was to take on more risk than in the index – a tactic not necessarily in line with the wishes of the investor. Risk allocation emerged in the late 1990’s, in response to concerns about the level or risk being accepted in the portfolio and as a consequence of the development of risk measurement and management tools. While the phrase “risk allocation” seems to mean different things to different people, it can be defined broadly as an investment style where allocations are based on the asset’s risk contribution to the portfolio, as well as on the asset’s expected return. In this regards, it is a direct application of the original Markowitz (1952) perspective on portfolio construction, where both risk and return expectations play explicit roles in the asset allocation process. Under risk allocation, the task of the active portfolio managers is to “beat the index” without taking more risk than the index.

Asset vs. Risk Allocation:
As described by Rawls & Izakson (1999), differences between asset allocation and risk allocation can be highlighted by examining the investment portfolio management process. In the initial stages of the process, the differences between an asset allocator and a risk budgeter are

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relatively limited. They are primarily related to different emphasis on, and measurement of, the risk characteristics of the asset classes: Defining the “feasible set” – the set of asset classes that could be included in the portfolio. Both the asset allocator and the risk budgeter would determine the relevant characteristics – expected returns, expected volatilities and expected covariance’s – for each asset class. While both the asset allocator and the risk budgeter are interested in reliable estimates of expected returns, the risk budgeter will have a stronger incentive to obtain careful estimates of the volatilities and co variances of each of the asset classes. For example, the two might differ with respect to the horizon over which the volatilities and correlations are gauged. Since asset allocators often use a relatively long history to form a baseline for expected return, they are likely to use this long history to form baseline estimates of the volatility and covariance for each asset class. However, because volatility and covariance tend to have strong autoregressive conditional heteroscedasticity characteristics, the risk budgeter will put more weight on the recent behavior of the asset classes in estimating volatilities and covariance. Choosing initial asset allocations The initial asset allocation should be some optimization between risk and expected risk. Asset allocators often centered the allocation on generally accepted allocations for a portfolio with the desired level of risk (say, 40% debt and 60% equity). In contrast, the risk budgeter might use something like a value-at-risk assessment to determine the risk tolerance.

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The constraint is that the total portfolio risk is limited Goal desired return on assets. as total risk is what is important Focus composition of the parts of the portfolio Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 44 of 190 .Differences in Asset Allocation and Risk Allocation Asset allocation An allocation of assets across a set of different classes such that the portfolio targets achieve a Risk allocation An allocation of risk across assets such that the portfolio achieves a desired return on the risk taken. The constraint is that the allocations weights sum to one Rebalances when dollar Rebalances when total portfolio risk deviates from target More emphasis on volatility and correlation Monitors forecast errors in volatility and correlation in addition to gains and losses Rebalancing values of positions deviate from target Most emphasis on expected Inputs to decisions return Monitors actual dollar Monitoring the allocations increase/decrease in portfolio value. Typically ignores forecast errors on volatility and correlation Focuses only on the Focuses on overall portfolio.

(While this may be the case in asset allocation. even if there are no significant changes in the allocations. regards the allocations as the portfolio’s exposures to risk and return. the actual amount of risk that the investor is taking. and can result in significant changes in the riskiness of the portfolio. the portfolio would lose no more than 10% over a month horizon.) More noticeable differences between the asset allocator and risk budgeter come in the monitoring and rebalancing of the portfolio. at a 95% confidence level. Rebalancing: The asset allocator rebalances positions when return fluctuations cause them to deviate too far from the original levels. the asset allocator monitors risk exposures (increases and decreases in the values of the positions). The risk budgeter. Thus. and will therefore rebalance in response to changes in the short-term conditional volatility and correlations of the assets. The risk budgeter worries not only about changes in risk exposures but also about changes in the volatilities and correlations.Suppose the risk allocator determines that. with reasonably stable asset allocations. Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 45 of 190 . This exposes the investor to more or less risk than was originally desired. the initial asset allocations are made to maximize the return for this level of portfolio risk. is fluctuation with market conditions. The risk allocator them implicitly defines a 6% monthly standard deviation as a risk tolerance for the portfolio. Monitoring: Over time. The risk allocator recognizes that volatilities and correlations often move faster than portfolio values. on the other hand. and the maximum loss they might incur. Thus risk allocation makes it explicit that the initial asset allocation derives from a carefully defined risk tolerance of the investor. Given the determination of the risk tolerance. it is generally implicit rather than explicit. fluctuations in volatilities and correlations of the asset classes will mean the riskiness (volatility) of the portfolio fluctuates over time. As a result. The risk budgeter alters allocations to keep the overall portfolio risk at the level defined as tolerable for the investor.

maintaining the desired risk level drives the asset allocation. the risk budgeter may see low correlation investments in a different light than another investor. Because risk budgeters focus on the risk of the total portfolio. Using these as new forecasts. small allocations to such investments can actually reduce the total risk of the portfolio through diversification. Because the constraint is simply that the total risk of the portfolio must stay at or below a targeted level. This would probably involve shifting the allocation towards bonds. Such investments are also attractive to the extent that they provide “risk room” for the risk budgeter to search out additional small investments in a high-risk/high-return class.g. increased attention is paid to low correlation investments (e. this risk is typically not correlated with the equity market risk of a typical portfolio.. not the other way around. Then suppose that market conditions changed – the conditional volatility of stocks increases and the correlation between stocks and bonds increases slightly. This results in an increase in the VAR to the investor for a one-in-20-month loss of 13. the risk budgeter discovers that the current asset allocation leads to an expected monthly standard deviation of the portfolio of 8%. Consequently. as discussed above. Because of the low correlation. market-neutral strategies or currency and commodity plays). Thus. Advantages of Risk Allocation: A risk allocation strategy can free the manager to look for alternative investments that might increase the expected return of the portfolio.2% rather than the 10% they desired. or possibly shifting some of the assets into cash. rather than the risk of each asset class. an important difference between asset allocation and risk allocation is the direction of causality: under risk allocation. While these investments may have reasonably high return variability. the risk budgeter changes the asset allocations to keep the risk of the portfolio at an expected standard deviation of 6% a month.Suppose an initial allocation of 60% equities and 40% bonds produced the desired portfolio standard deviation of 6% a month. The focus of the risk allocator is on earning an expected return on a targeted level of risk for the portfolio. Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 46 of 190 . while the asset allocator focuses on earnings and expected return on the assets.

Measures used to evaluate risk-adjusted performance:
Sharpe ratio:
The most widely used of the risk-adjusted performance measure, this ratio – created by Nobel laureate and winner of Risk’s Lifetime Achievement Award 2001, William Sharpe (1996) – provides a measure of the excess return earned relative to the risk accepted – “reward per unit of risk”. It is defined as the portfolio return (Rp) less the risk-free return (Rf) divided by the Standard deviation of the portfolio returns (σp):

Rp– Rf σp

It is an ideal measure for looking at the risks of entire portfolios, but is less suited for looking at individual asset classes within a portfolio, as it does not take into account the correlations.

Information ratio:
Also suggested by Sharpe (1981), this measure of risk-adjusted performance compares the performance of a portfolio to that of its benchmark. It is defined as the excess return over some selected benchmark (Rp – RB) divided by the standard deviation of those excess returns (σ(P-B)):

Rp – RB

σ(P-B)

Thus it measures the extra return one earns over the benchmark relative to the extra risk taken. It is analogous to a Sharpe ratio where the baseline is a predefined benchmark portfolio rather than the risk-free rate. While it forces managers to outperform a benchmark without taking much

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risk, it suffers in that it cannot highlight attractive opportunities to trade-off risk and return on the downside.

M-squared:
In contrast to the unit less Sharpe and information ratios, the measure proposed by Leah Modigliani and Nobel laureate Franco Modigliani (1997) expresses risk-adjusted performance as a return. M2 is the rate of return the portfolio (P) would have earned had it been leveraged or deleveraged to create a portfolio (P’), the risk of which would match that of the appropriate benchmark (σB). Using the style of the preceding measures, the return per unit of risk being considered in M2 is:

Rp’ – Rf σB

Or, as shown by Coleman & Siegel (2000), M2 could be written as:

σB (Rp – Rf) M2 = σP + Rf = (Sharpe ratio X σB) + Rf

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6. UNDERSTANDING STOCK MARKET RISK
As a long term investor, one needs to understand several different kinds of risk:

Market Risk
Market risk is the risk associated with fluctuations in stock prices. This is the first risk many people think of when they think of the stock market. Many factors can cause stock prices to fluctuate. Examples include actual or anticipated developments within a particular company or industry; changes in the outlook for the economy as a whole; or shifts in investor attitude toward the stock market in general. Downward and upward trends in stock prices can occur over short or extended periods, and can have a very significant affect on the value of an investment. There are two ways to reduce market risk. One is to diversify your investments among different kinds of assets: divide your money among fixed-income and growth investments, for example. The second way is to steadily invest on a regular basis and ignore market ups and downs and focus on long-term results.

Inflation Risk
Inflation, defined as a persistent increase in prices, is a serious risk for any long-term investor. Historically, inflation in the United States has averaged 3.1%, offsetting most of the returns from investment in cash reserves and bonds, but less than half of that of stocks. Because stocks' real returns are often generally higher than inflation, stocks offer a way to help protect your money against inflation risk. If your principal doesn't grow, you can't possibly stay ahead of inflation. A good way to reduce inflation risk is to invest in growth assets like stocks.

Business Risk
Business risk is the risk of losing your money in an investment that seemed like a winner but wasn't. It is the specific risk associated with the underlying business of the issuer of a particular stock, bond, or other investment. If the company's product suddenly loses value, the value of your investment declines. You can reduce business risk by diversifying your investments.

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apart from that there are other methods with the help of which risk is minimized. A portfolio of high beta stocks in a down market can create extreme downward movements. After looking at all the risks one thing is very clear that controlling price fluctuations is not in our hand. Our major job is to maximize our returns keeping all the above risks in mind. The best that can be achieved using hedging is the removal of unwanted exposure. and even consider some hedging of exposure. This is done by hedging funds in market in way that maximizes the returns. Technology generally has a high beta while Utilities have low betas. To an American. Hedging The word hedge literally means to surround in a way as to provide complete protection. If a stock moves more than the market. but what the stock is worth in terms of dollars. while up-markets can cause tremendous performance.Currency Risk Currency risk is the risk associated with the price fluctuations in the dollar value of international stocks due to changing currency exchange rates. Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 50 of 190 . half the time. the value of any stock held internationally is not what the stock is worth in its domestic market. The hedged position will make less profit than the no hedged position. the market. If a market is demonstrating extreme risk. A hedge is an investment that is taken out specifically to reduce or cancel out the risk in another investment. Beta This refers to how a stock moves vs. it has a high beta. Creating portfolios wisely is another method of risk hedging. while still allowing the business to profit from an investment activity. Defining it in simple words ‘Hedging’ is a strategy designed to minimize exposure to an unwanted risk. One should not enter into the hedging strategy hoping to make excess profits for sure. If it moves less than the market it has a low beta. All above are different types of risks that influence the stock market. lower the beta of your portfolio. But one thing has to be kept in mind hedging does not always make money. it is wise to raise cash.

CHAPTER – TWO REVIEW OF LITERATURE Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 51 of 190 .

how and how much they hedge depends on how they are compensated. This suggests a need to rethink past empirical research documenting the importance of firms’ derivative use. currency exchange rates. we report the magnitude of their risk exposure hedged by financial derivatives. Risk Measurement and Hedging: With and without Derivatives. If interest rates. Petersen and S. Managerial incentives also play a role. The other firm uses a combination of operating and financial decisions. the median firm's derivatives portfolio. By Mitchell A. but no derivatives. How much do firms hedge with derivatives? By Wayne Guay and S. P Kothari Abstract For 234 large non-financial corporation’s using derivatives. but completely different. and other benchmarks. and operating and investing cash flows. Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 52 of 190 . generates $15 million in cash and $31 million in value. and commodity prices change simultaneously by three standard deviations. Ramu Thiagarajan Abstract This paper examines a setting in which the derivatives strategies of two firms are known. Although risk-averse managers have an incentive to reduce risk. One firm aggressively hedges its risk using derivatives. at most. to manage its risk. These amounts are modest relative to firm size. The different choice of methods is a result of different abilities to adjust operating costs and different needs for investment capital. Corporate derivatives use appears to be a small piece of non-financial firms’ overall risk profile.Review of Literature of Derivatives: 1. 2.

3. The problem is solved in closed form. Why Firms Use Currency Derivatives. Minton and Catherine Schrand Abstract We examine the use of currency derivatives in order to differentiate among existing theories of hedging behavior. Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 53 of 190 . they enable investors to disentangle the simultaneous exposure to diffusive and jump risks in the stock market. Calibrating to the S&P 500 index and options markets. and as a means of exposure to jump risk. Firms with greater growth opportunities and tighter financial constraints are more likely to use currency derivatives. Firms with extensive foreign exchange-rate exposure and economies of scale in hedging activities are also more likely to use currency derivatives. As a means of exposure to volatility risk. by Christopher Geczy. Bernadette A. we find sizable portfolio improvement from derivatives investing. Dynamic derivative strategies. derivatives enable non-myopic investors to exploit the time-varying opportunity set. This result suggests that firms might use derivatives to reduce cash flow variation that might otherwise preclude firms from investing in valuable growth opportunities. 4. the source of foreign exchange-rate exposure is an important factor in the choice among types of currency derivatives. Finally. by Jun Liu and Jun Pan Abstract We study optimal investment strategies given investor access not only to bond and stock markets but also to the derivatives market. Derivatives extend the risk and return tradeoffs associated with stochastic volatility and price jumps.

To satiate this heightened Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 54 of 190 . The sheer explosive growth in volume of total derivative contracts outstanding validates the heightened interest of Indian markets for such products. Two types of credit risks are considered. but in the wrong hands. Indian markets are increasingly using highly complex hedging strategies with the help of exotic derivative instruments. by Kalpit Rajkumar Lodha Abstract: Derivatives are like aircraft: In the right hands.'Structure & Financial Concerns' an Indian Perspective. last couple of years have seen the Indian Financial Market being increasingly exposed to global market factors and are faced by rising levels of complexity of risks." Arbitragefree valuation techniques are then employed. To mitigate the effect of those underlying risks. Jarrow and Stuart M.5. Due to the increased effects of globalisation. Pricing Derivatives on Financial Securities Subject to Credit Risk by Robert A. 6. or incompetently handled. We apply the foreign currency analogy of Jarrow and Turnbull (1991) to decompose the dollar payoff from a risky security into a certain payoff and a "spot exchange rate. they are dangerous. Derivatives in Indian Financial Market . such as swaps and caps. they are wonderful vehicles. The first is where the asset underlying the derivative security may default. The second is where the writer of the derivative security may default. This methodology can be applied to corporate debt and over the counter derivatives. Turnbull Abstract This article provides a new methodology for pricing and hedging derivative securities involving credit risk.

among other things. at present. particularly with companies with a sense of responsibility and circumspection that would avoid. banks have readily agreed to structure and offer these contracts to their corporate clients by focusing more on the returns rather than stressing on the potential down-side risks. Pricing Derivatives on Financial Securities Subject to Credit Risk. However. Putting the right prevarication strategy in place is only half the battle won. by Robert A. and no easy way for their financial advisers to get the information needed to advise their clients properly. companies need to continuously monitor and assess the effectiveness of the hedging strategies and ensure that they are in sync with the underlying risk profile. for investors to make reasoned decisions about whether to accept the exposure to derivatives. a technical area the details of which are all too easy to forget when not dealt with frequently. There is no way. Then they will be equipped to educate their clients and help them make appropriate choices of funds. Under such circumstances. this is easier said than done. it has become imperative for Indian Financial Market to adopt and demonstrate a pro-active (but disciplined) approach towards financial risk management. banks should undertake derivative transactions. However. Futures can be used to leverage portfolios. Turnbull Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 55 of 190 . many planners and advisers will have to refresh their knowledge of derivatives.interest for derivative instruments. Review of Literature of Equity Research: 7. mis-selling. But these and other instruments can be used in more dangerous ways. fully cognizant of what the derivatives in their funds bring to the table in terms of risk and return. Jarrow and Stuart M. Before the fund watchers begin to gather and publish this information.

" Arbitragefree valuation techniques are then employed. indicating little support for the idea that the signals capture information about multiple-year-ahead earnings not immediately impounded in price or about long-term shifts in firm risk. Significant abnormal returns to the fundamental strategy are not earned after the end of one year of return cumulation.2 percent. Moreover. Additional analysis on a holdout sample suggests that Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 56 of 190 . effective tax rates. gross margins. by Jeffery S. We apply the foreign currency analogy of Jarrow and Turnbull (1991) to decompose the dollar payoff from a risky security into a certain payoff and a "spot exchange rate. selling expenses. 8. accounts receivables. such as swaps and caps. Abarbanell and Brian J. capital expenditures. a significant portion of the abnormal returns is generated around subsequent earnings announcements.Abstract: This article provides a new methodology for pricing and hedging derivative securities involving credit risk. Using a collection of signals that reflect traditional rules of fundamental analysis related to contemporaneous changes in inventories. we form portfolios that earn an average 12-month cumulative sizeadjusted abnormal return of 13. These findings are consistent with the underlying focus of fundamental analysis on the prediction of earnings. and labor force sales productivity. inventory methods. This methodology can be applied to corporate debt and over the counter derivatives. Two types of credit risks are considered. Bushee American Accounting Association. audit qualifications. Abnormal Returns to a Fundamental Analysis Strategy. We find evidence that the fundamental signals provide information about future returns that is associated with future earnings news. The second is where the writer of the derivative security may default. Abstract: We examine whether the application of fundamental analysis can yield significant abnormal returns. The first is where the asset underlying the derivative security may default.

of Technology. crossed by the plane of cracking and their positions with regard to this plane are assessed by a statistical analysis. and then cover their positions as the ratios mean-revert. The general relations between stresses and displacements for a unit crack area are obtained by integrating all particle Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 57 of 190 . Dechow. Research Engr. This relation is derived for one particle projecting from one of the crack faces with an arbitrary diameter and an arbitrary embedment depth. The relation between displacements and stresses across the crack faces are defined to be a function of deformation and sliding at particle level.g. Lisa Meulbroek and Richard G. Univ. (Sr.the strategy continues to generate abnormal returns in a period subsequent to the introduction of the fundamental signals in the literature. Sloan Abstract: Firms with low ratios of fundamentals (such as earning and book values) to market values are known to have systematically lower future stock returns. 10.. fundamental analysis. We document that short-sellers position themselves in the stock of such firms. Fundamental Analysis of aggregate interlock by Joost C. Our evidence is consistent with short-sellers using information in these ratios to take positions in stocks with lower expected future returns. The most probable distribution of aggregate particles. Hutton. Amy P. 9. Short-sellers. The Netherlands) Abstract: A model for aggregate interlock has been developed based on the behavior of micro scale. Walraven. We also show that short-sellers refine their trading strategies to minimize transactions costs and maximize their investment returns. firms with prior bad news).. and stock returns by Patricia M. Delft. and contextual analyses indicate that the strategy performs better for certain types of firms (e.

further analysis of the mechanism of aggregate interlock has been carried out. Using this model. Collectively.contributions. We show that extreme performers share many common market-related attributes. we define the context for analysis by identifying extreme performers. Beneish. C. Charles M. Specifically. The model proves to give adequate results. explaining tendencies observed in tests of other investigators. 11. these results illustrate the usefulness of conducting fundamental analysis in context. compared with experiments. In the first stage. in the second stage we develop a context-specific forecasting model to separate winners from losers. carried out on several types of (cracked) concrete. and that the incremental forecasting power of accounting variables with respect to future returns increases after controlling for these attributes. we use a two-stage approach to predict firms that are about to experience an extreme (up or down) price movement in the next quarter. Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 58 of 190 . Lee and Robin L. Contextual Fundamental Analysis Through the Prediction of Extreme Returns. by Messod D. Tarpley Abstract: This study examines the usefulness of contextual fundamental analysis for the prediction of extreme stock returns.

CHAPTER – THREE RESEARCH METHODOLOGY Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 59 of 190 .

and exotic options are almost always traded in this way. forward rate agreements. The diverse range of potential underlying assets and payoff alternatives leads to a huge range of derivatives contracts available to be traded in the market. which are distinguished by the way that they are traded in market: Over-the-counter (OTC) derivatives are contracts that are traded directly between two parties. options and swaps. interest rates. Chicago Mercantile Exchange and the Chicago Board of Trade. Exchange-traded derivatives are those derivatives products that are traded via Derivatives exchanges. consumer price index (CPI) or an index of weather conditions). shares or bonds). and takes Initial margin from both sides of the trade to act as a guarantee. Types of Derivatives: OTC And Exchange Traded: Broadly speaking there are two distinct groups of derivative contracts. or indices (such as a stock market index.PROJECT – I HEDGING RISK THROUGH DERIVATIVES Derivatives: A derivative is a generic term for specific types of investments from which payoffs over time are derived from the performance of assets (such as commodities. The world's largest derivatives exchanges (by number of transactions) are the Korea Exchange (which lists KOSPI Index Futures & Options). The main types of derivatives are futures. The OTC derivatives market is huge. Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 60 of 190 . exchange rates. A derivatives exchange acts as an intermediary to all transactions. Products such as swaps. without going through an exchange or other intermediary. forwards. This performance can determine both the amount and the timing of the payoffs. Eurex (which lists a wide range of European products such as interest rate & index products).

a rational and unbiased estimate of the contract's fundamental value Determining the Market Price: For exchange traded derivatives. Complications can arise with OTC or floor-traded contracts though. and partly because there are often many different variables to consider. Determining Fair Value: The fair value of a derivatives contract is often complex. as trading are handled manually. making it difficult to automatically broadcast prices. based on all the current bids and offers placed on that particular contract at any one time). i. the price at which traders are willing to buy or sell the contract Fair value or the theoretical price. partly because of the immense variation in the contracts. where the two parties agree to exchange cash flows Valuation: Two common measures of value are: Market price.e. Swaps. Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 61 of 190 . there is no central exchange to collate and disseminate prices. In particular with OTC contracts. i.Common Contract Types There are three major classes of derivatives: Futures/Forwards. Options which are contracts that give the buyer the right (but not the obligation) to buy or sell an asset at a specified future date. market price is usually transparent (often published in real-time by the exchange.e. which are contracts to buy or sell an asset at a specified future date.

the contracts expire on the previous trading day. there will be 3 contracts available for trading in the market i. This way.05. typically expressed as a stochastic process. The permitted lot size for futures contracts & options contracts shall be the same for a given underlying or such lot size as may be stipulated by the Exchange from time to time. the next month (two) and the far month (three). at any point in time.Fair valuation of derivatives is a central topic of financial mathematics. meaning that no risk less profits can be made by trading in assets. Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 62 of 190 . If the last Thursday is a trading holiday. Future Trading Parameters: Contract Specifications: Trading Cycle: S&P CNX Nifty futures contracts have a maximum of 3-month trading cycle .e.. one mid month and one far month duration respectively. Crucial to the valuation of derivatives is also the stochastic of the underlying assets.the near month (one). A new contract is introduced on the trading day following the expiry of the near month contract. 2 lakhs at the time of introduction.0. Trading Parameters: Contract size: The value of the futures contracts on Nifty may not be less than Rs. Expiry Date: S&P CNX Nifty futures contracts expire on the last Thursday of the expiry month. Price Steps: The price step in respect of S&P CNX Nifty futures contracts is Re. where "fair" refers to the absence of arbitrage. one near month. The new contract will be introduced for three month duration.

Warrants: Longer-dated options are called warrants and are generally traded over the counter. Options: An Option is an agreement between a buyer and a seller that gives the buyer the right. Futures: 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. members would be required to confirm to the Exchange that there is no inadvertent error in the order entry and that the order is genuine. The two commonly used swaps are: Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 63 of 190 . DERIVATIVES INSTRUMENT: Derivative contracts have several variants. Swaps: Swaps are private agreements between two parties to exchange cash flows in the future. Price bands: There are no day minimum/maximum price ranges applicable for S&P CNX Nifty futures contracts.Base Prices: Base price of S&P CNX Nifty futures contracts on the first day of trading would be theoretical futures price. However. to require the seller to perform certain specified obligations. through exercise. The base price of the contracts on subsequent trading days would be the daily settlement price of the futures contracts. futures. options and swaps. in order to prevent erroneous order entry by trading members. The most common variants are forwards. Brief overview is as under. Futures contracts are special types of forward contracts that are standardized exchange-traded contracts. Forwards: A forward contract is a customized contract between two entities.10 %. operating ranges are kept at +/. In respect of orders which have come under price freeze. where settlement takes place on a specific date in the future at today’s pre-agreed place. On such confirmation the Exchange may approve such order.

his futures position starts making profit.e. unnecessary risk. From all these types mentioned above. he’ll sell the stocks. If an investor is bullish he will buy the stocks and if he is bearish. what an investor can do is Buy Spot and Sell Futures or Buy cash and Sell futures. Futures and Options are dealt in detail. • Currency swaps: These entail swapping both principal and interest between the parties with the cash flows in one direction being in a different currency than those in the opposite direction. buy spot and sell futures. APPLICATION OF FUTURES: Hedging: Hedging is the removal of unwanted exposure i. Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 64 of 190 . If index or stock price goes down. This is explained in detail after concept of options. he/she has unlimited profits and limited losses. Speculation: Speculation is done on the view of the direction of the market.500. buy futures and sell spot. arbitrage opportunities arise. Long Futures: Buying the futures and if that stock/future value increases after the exercise price.480 and its futures price is quoted at Rs. Whenever future’s price is overpriced than spot price.• Interest rate swaps: These entail swapping the interest related cash flows between the parties in the same currency. For example-Let say Telco is trading presently at Rs. FUTURES: A future contract is traded at some point in the future. And whenever future’s price is under priced than spot price. Arbitrage: Whenever the future price substantially deviates whether upside or downside from the spot price. Short Futures: Selling the futures when an investor thinks markets will not move up. This is mainly done by selling futures.

Profit will be 0 from cash and Rs.20 In nutshell.20 from futures. Thus net profit is Rs. Profit will be Rs. According to the dictionary. Future Trading: Derivative Stock Market Indicators: That part of project deals with evaluating various types of stock market indicators by working on various scripts.480. Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 65 of 190 .460. Investors are able to understand what the indicators are saying about a particular firms stock value or growth prospects and will be able to make solid decisions which are sure to bring in profits over the long term. In all above three situations. whether markets are moving or not. The above-explained strategies are market-neutralizing strategies.30 from cash and -10 from futures market. or moving up or moving down. Investors who are able to grasp what these factors are will be more likely to achieve success when buying and selling stocks in either a bull market or a bear market. Thus net profit is Rs. There are a number of factors at play when it comes to the rise and fall of stock prices on any given trading day. the profit earned is same.510.There can be three cases in all: 1) If price of that script Telco remains same let say at Rs. Arbitrage is the simultaneous purchase of one asset against the sale of the same or equivalent asset in two different markets to create a risk less profit due to price discrepancies.20 2) If price of that script Telco let say rises to Rs. Thus net profit is Rs.40 from futures market and -20 from cash market. a stock market indicator refers to anything used to project future financial or economic trends. Stock market indicators are extremely important in the process of determining the viability of purchasing stocks of a particular company.20 3) If price of that script Telco let say falls to Rs. Profit will be Rs.

employment. 2. time matrix and moreover patience to deal with. diverse factors. Importance of the industry can never be understood. Business or economic cycle has direct impact on industry and individual companies. State of industry will affect company performance. Investors should disinvest just before or during a boom. Moreover portfolio should be diversified properly so as to minimize risk and to avoid unlimited losses. value and time. 2. Value is based by financial performance and financial prospects Most of the time stock markets are wrong – either euphoric or paranoid. We should able to learn emotion. which can never be fully known or understood. demand and profitability. recovery. VARIOUS FUNDAMENTAL INDICATORS: A. Four stages of economic cycle are depression. boom and recession. These are entrepreneurial or sunrise. Investors should determine the stage of the economic cycle before investing. B. We do not know what will be the price tomorrow (or next month or next year). stabilization or maturity and decline or sunset stages. So many things have to be taken into view to say something about the stock market.Basic approaches to investing: Fundamental approach Technical approach Sentimental approach Stock prices are influenced by various factors like emotion. Industry Analysis 1. 3. It affects investment decisions. money. Economic Cycle 1. expansion or growth. value. Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 66 of 190 . So we need to clear with our fundamentals. Price is influenced by thousands of unpredictable. It is important to determine cycle.

For example. OPEN INTEREST: Open Interest is the outstanding position in the Futures and Options segment. 5. vice versa. VARIOUS TECHNICAL INDICATORS: Derivative instruments have various types of technical indicators that I have come across areOpen interest Volumes Cost of carry Put call ratio Indicators are described here briefly and further discussion is done how to analyze them. One unit of open interest represents always two parties. it decreases when a buyer sells/closes a put or call position. Exports oriented industries currently favored by “the government”. ratios and cash flow.8 crore. the results.either puts or calls . Company Analysis 1. Investors should purchase in the first two stages and disinvest at the maturity stage. It is safer to invest in industries not subject to government controls. 2. C. Results of cyclical industries are volatile. First stage of fundamental analysis is company analysis.that have not been exercised. 6.3. if the Open Interest in TISCO Futures is Rs. the open interest is the number of open contracts . Open interest increases when a buyer opens a put or call position and. 1 buyer (long) and 1 seller (short). It is better to invest in evergreen industries. it implies that buyers and sellers who have transacted till this moment and have not yet squared up their positions have these many transactions open at the moment. Areas to be examined are the company. 7. closed or expired on a particular day. For a given option. 4. Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 67 of 190 . Investors should consider competition as the greater the competition the lower the profits.

and trading volume is 1. Date Trading Activity A buys 1 options and B sells 1 Open Interest Volume May 1st options contract C buys 5 options and D sells 5 1 1 May 2nd options contracts A sell his 1 options and D buys 1 6 5 May 3rd options contract E buys 5 options from C who sells 5 1 May 4th Source: Self Generated 5 options contracts 5 5 On May 1. In the table below I have taken various option positions that buyers and sellers hold on 4 consecutive days to explain the concepts clearly. On May 3. but let us first understand concept of open interest and volumes in relations to options and then I’ll further elaborate how they can be used for technical analysis part. Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 68 of 190 . trading volume increases by 5. A takes an offsetting position and therefore open interest is reduced by 1. A buys an option which leaves an open interest 1 & also creates trading volume of 1. E simply replaces C and therefore open interest does not change.VOLUMES: Volumes are total amount of quantity traded that day. C and D create trading volume of 5 and there are also 5 more options left open. On May 2. Futures volumes are important indicators for derivatives. On May 4.

the market is weak. they are buying at lower prices or they are building short positions which may indicate market is not that much weaker. the market is weak as people are building at lower level. because here even at higher price. Price fluctuation will not be very high. Price Volume Open Interest Market ↑ ↑ ↓ ↓ Source: Self Generated ↑ ↓ ↑ ↓ ↑ ↓ ↑ ↓ Strong Weak Weak (Not much) Strong If prices are up and volume and open interest are rising. people buying power is very strong which indicates that they are very bullish about the script. If prices are down and volume and open interest are rising. Open Interest is the total number of outstanding contracts.So in nutshell we can say that Volume measures the number of contracts that exchanged hands during the trading session. Some of the important conclusions that can be said by analyzing various scripts are. It gauges market participation. Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 69 of 190 . If prices are up and volume and open interest are declining. It measures market activity. as people have started building profits or they are exiting their existing position. the market is strong.

the market is strong as this indicates people are exiting their existing positions and rolling over to next month or fresh buyers may enter into the market next day Other things. Consider the average Volumes of the last fortnight and any Volume level higher than 20% of the average should be considered significant.If prices are down and volume and open interest are declining. if the price has risen. it implies the market is getting weaker. Other things that can be kept in mind are as follows: We can also look for divergence between price direction and volume. (Here Significant volume is based on the average volumes seen in that scrip during that relevant period. In short. In a bear market. One more thing can be done with volumes. On the other hand. if the average futures volume on TISCO has been Rs. but Volumes have not been strong. So these things can predict day-to-day movements for various scripts for most of the time. which can be useful In a bull market. If you find that the price has risen on a particular day and the Volumes on that day are also significant then the rise in the price can be understood as a strong trend. if the market makes new highs while volume falls short of the previous high.10 crore and on that day a Volume of Rs. volume has a tendency to increase on rallies and to decrease on reactions.20 crore was seen with a rising price. then the rising trend might not be strong enough which might imply that the rise might be negated tomorrow. fewer buyers are willing to enter the market at current price levels. For instance.) Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 70 of 190 . For example. volume has a tendency to increase on declines and decrease on rallies This can be useful in case of future stocks only that too to some extent because this cannot be always true as stock market depends on various factors as discussed above. one would believe that it is a strong Volume.

From this background. Further. This can be more clearly explained by taking the example of commodities market. In case this happens. Basis can become positive.But for analyzing Options volumes following things should be kept in mind The general market practice is to assume that Call Writers are relatively skilled players who know how to read the market better and that Call Buyers are relatively simple investors. Call Volumes would imply bearishness and vice versa. This understanding might not be always correct and hence one needs to exercise judgment. many Writers might hedge themselves using Futures. generally based on a premium to the front month.e. Basis = Spot price . Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 71 of 190 . storage. the Call Writers might convert to Call Buyers. The difference between the prevailing spot price of an asset and the futures price is known as the basis. then basis becomes positive and the market under such circumstances is termed as a backwardation market or inverted market. Thus. is known as a contango market. in a bullish market. This cost is priced into a future month contract. Such a market. COST OF CARRY: The cost of carry is the cost of holding a particular amount of a physical commodity. i. i. in which the basis is decided solely by the cost-of-carry. For example. Call Writers are neutral to bearish while Put Writers are neutral to bullish. A Call Writer might buy Futures if the market starts moving up substantially and create an upward hedge on the stock.e. the cost of capital and the cost of warehousing. the spot price is less than the futures price (which includes the full cost-ofcarry) and accordingly the basis would be negative. the spot price can exceed the futures price only if there are factors other than the cost of carry to influence the futures price.Futures price In a normal market.

If some person A is certain that the demand-supply position of wheat is such that three months from now. there might be factors other than cost-of-carry. say. However. he will hire a go down.7. The process of the basis-approaching zero is called convergence. As already explained above. There would be a tendency for the Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 72 of 190 .157. pay interest on the money invested in the stock as well as pay incidental charges in holding the inventory. For this purpose. Suppose the current spot price is Rs. Logically. like. the number of buyers would increase. Now. which may influence this relationship. he should be tempted to buy wheat now and sell the stock after three months at a higher price.e.150 and the carrying costs aggregate Rs. in addition to carrying costs. The current spot price would keep on increasing till the anticipated future spot price becomes equal to the current spot price plus the carrying costs. the current spot price also starts climbing. the spot and futures prices converge as the date of expiry of the contract approaches. As the current demand for wheat increases because of this information. Let us assume that he buys a unit of wheat at Rs. the future spot price tends to equal the current spot price plus the carrying costs. if others also have the same information that the wheat price is likely to go up beyond the carrying costs. the price of wheat is likely to go up. i.Basis will approach zero towards the expiry of the contract..7 per unit. stock the inventory. he would have to be sure that spot price of wheat. handling charges. is Futures price = Spot price + Carrying cost — Returns (dividends. the ‘carrying costs’. The cost-of-carry model in financial futures. etc. especially in financial futures in which there may be carry-returns like dividends.160.) Let us take an example to understand this relationship. etc. three months from now should be more than Rs. the relationship between futures prices and cash prices is determined by the cost-of-carry. The predicted futures price. thus. As we have already seen. insurance charges. to earn profit.150 and carrying costs are Rs. collectively called. 90 days from now is Rs.

therefore.150 to Rs. open interest. So cost of carry value tells how much interest investors are ready to pay to acquire that very position of futures equivalent to cash market position. neither the buyer nor the seller would be interested in futures trading. If cost of carry is negative it can be said that futures are being traded at discount. the current spot price would tend towards a level where there is no profit or loss situation for both the buyers and the sellers alike.e.153. No. it is a good sign. They are asIf cost of carry is high for a particular stock. is that in a perfectly predictable and certain market. we have to look into other factor like how nifty moved from previous day. so price may negate next day in spite of rising. Like we can calculate ratio of open interest puts and calls. Increase in cost of carry along with increase in open interest indicates accumulation of long positions. or what was change in COC from previous day to next day like for example if price. Thus. what was value of cost of carry. Some of the indications can be given by this value also. The conclusion. Note.It is not necessary that if price is decreasing and open interest and volume will go parallel like they will increase or decrease. PUT-CALL RATIO: This ratio can be used in terms of open interest and volumes both. so it means futures are already trading into discount. number of put contracts Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 73 of 190 . as any increase beyond this level would mean a loss in the transaction.current spot price to rise from Rs. And same thing can be done for volumes i. Of contracts is decreasing its written that market should be strong but if cost of carry is very low or negative for that day and that of Nifty too. Cost of carry is very high near the month of expiry (whatever scripts I have noted) refer to annexure as investors have to pay higher interest for securing futures position as fewer days are left for expiry.

Call buyers benefit from rising prices. than put/call OI will decrease put/call volume will increase. Put/Call Volume Ratio is a measure of sentiment.call volume ratio of that particular stock is also rising. But if calls are constant let say and people have liquidate their put positions. and that cannot be discussed also. how many puts and calls have been bought or sold. Here we have to look at the 21-day average call volume in relation to the 21-day average put volume. Like for which strike price. we can do is to View large out-of-the-money open interest strikes as potential key points for the stock. calls contracts bought. Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 74 of 190 . or how many positions have been covered up. one can view that as a sign of momentum. then charts will not match with each other. A declining OIR indicates that call open interest is building relative to put open interest. If a stock is expected to stop at a key level and it doesn't. This means Puts have seen increased volume and it is translating into open interest. One should note that it does not tell you whether these newly opened positions are regular buyers or writers. Puts offer a buyer the chance to profit if the underlying stock or index drops. We generally interpret this as rising pessimism. We generally interpret this as rising optimism. A rising OIR indicates that put open interest is building relative to call open interest. indicating that traders are opening new positions. whether it is up or down. With this one more thing. Since one will never have perfect information. The put/call open interest ratio is calculated using the first three calendar months of data. for which put. Apart from this we can do one more thing. The call strike with the largest amount of open interest is referred to as the "peak call strike" and the put strike with the largest amount of open interest is referred to as the "peak put strike". Many times we can find that the OIR and volume charts match up and confirm each other. Now let say put. We can find open interest and volume for every strike of option and we can see what is peak one.bought vs.call open interest is rising. all one can do is make some assumptions based on experience.

This way he would not only be able to minimize his loss but also make profits Short security.We can indicate this discussion by following table: High call option open interest High put option open interest High Call Volumes High Put Volumes Source: Self Generated Bearish view Bullish view Bearish view Bullish view So we can say that put/call ratio is not a strong indicator. in this case take on a short future position. But it gives somewhat picture of market and scripts. but it can judge market sentiments taking short view.iam discussing here the case of investor who holds the share of a company and gets uncomfortable with the market movements in the short run. This will be explained later with the help of real examples. buy futures: This is exactly opposite case. I have attached excel sheet (both calculation one & final data assembled) in which various indicators that I mentioned have been calculated and analysis part for some script is written so as to know how to interpret results with conclusions I have made above. Both will move in opposite direction. sell futures: I would explain it with the help of an example. Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 75 of 190 . These indicators can help to some extent and are not 100 % correct every time. All he needs to do is to enter an offsetting stock future position. With security future he can minimize his price risk. Playing with futures:Long security. In the absence of stock futures he would either suffer the discomfort of a price fall or sell the security in anticipation of market. As the price of stock will fall the value of his holdings would go down and value of his future contract will rise. as already discussed stock market movements depend on diverse factors that cannot be understand fully.

to sell the underlying asset at a pre-specified price on or before a specified date A call option is like a rain check. By the time you get to the store. to purchase the underlying asset at a pre-specified price on or before a specified date A put option is a financial instrument that gives the buyer the right. the item is sold out. Most of the portfolio risk is accounted by index fluctuations hence a position LONG PORTFOLIO +SHORT NIFTY is one tenth risky as LONG portfolio position. OPTIONS: Overview What is an option? A call option is a financial instrument that gives the buyer the right. You now hold a call option on the product with the strike price equal to the sale price and an intrinsic value equal to the difference between the regular and sale prices. but not the obligation. you would let the rain check expire and buy the item at the lower price. if the price of the product is lowered further before you return. However. This is true for all portfolios. Options are contracts: The option contract specifies: • • • The underlying instrument The quantity to be delivered The price at which delivery occurs Page 76 of 190 Sumati Sethia/4108168168/MBF/Indian Institute of Finance . the manager offers you a rain check to buy the product at the sale price when it is back in stock. Suppose you spot an ad in the newspaper for an item you really want. You do so only at your own option. but not the obligation. In fact. Note that you do not have to use the rain check.Index portfolios can be very effective to get rid of market risk of a portfolio every portfolio contains a hidden risk or market exposure.

Option Terminology: Strike (Exercise) Price . this means the third Friday. For equity options this is the price per share.this is the price at which the underlying security can be bought or sold. Note that the worst that can happen to an option buyer is that she loses 100% of the premium. the buyer can let the option expire if they so desire. The total cost is the premium times the number of shares (usually 100). Expiration Date – This is the date by which the option must be exercised.• The date that the contract expires Three parties to each contract • • • The Buyer The Writer (seller) The clearinghouse Option buyers: The purchaser of an option contract is buying the right to exercise the option against the seller. The price paid for this right is the option premium. In practice. Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 77 of 190 . Premium . For stock options. The timing of the exercise privilege depends on the type of option: • • American-style options can be exercised any time before expiration European-style options may only be exercised during a short window before expiration Purchasing this right conveys no obligations. this is usually the Saturday following the third Friday of the month.the price which is paid for the option.

options which can be exercised before expiration. • Out-of-the-Money – o For a call this is when the stock price is below the strike price.Moneyness – This describes whether the option currently has an intrinsic value above 0 or not: • In-the-Money – o For a call this is when the stock price exceeds the strike price. the market value of an option is the sum of the intrinsic value and the time value. Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 78 of 190 . you would lose the time value. You’d be better off to sell the option. American-style . S . Before expiration. Since options can always be sold (not necessarily exercised) before expiration. the value of an option is its intrinsic value. o For a put this is when the stock price is below the strike price. X .X) IV = max(0. o For a put this is when the stock price exceeds the strike price.S) At expiration. collect the premium.options which cannot be exercised before expiration. Intrinsic value of an option: The intrinsic value of an option is the profit (not net profit!) that would be received if the option were exercised immediately: • • For call options: For put options: IV = max(0. European-style . it is almost never optimal to exercise them early. If you did so. and then take your position in the underlying security.

Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 79 of 190 . For example. to require the seller to perform certain specified obligations. Call holders and put holders (buyers) are not obligated to buy or sell. an option on a piece of property gives the buyer the right. through exercise. Option buyer knows the maximum risk beforehand. Participants in the Options Market: There are four types of participants in options markets depending on the position they take: Buyers of calls Sellers of calls Buyers of puts Sellers of puts People who buy options are called holders and those who sell options are called Writers. then he or she is not obligated to do anything. to purchase the property during a stated period of time at a stipulated price. The buyer has purchased the option to carry out a certain transaction in the future and hence the name Some of the key advantages are: It is a highly leveraged product as minimum amount of capital required is less. When an option expires. if it is not in the buyer's best interest to exercise the option. buyers are said to have long positions. furthermore. and sellers are said to have short positions.An Option is an agreement between a buyer and a seller that gives the buyer the right. Option buyer has the potential of unlimited profits and limited risk. One can protect his equity portfolio from a decline in the market by speculating and hedging which is the main purpose of using hedging. but not the obligation. Also. They have the choice to exercise their rights if they choose.

Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 80 of 190 . if an asset’s value is Rs. are obligated to buy or sell.Amount of uncertainty associated with the asset’s expected return. As the expiration date approaches. are time to expiration and the strike price (this is assuming that investor have already chosen the security on which you're going to trade the option). however.Call writers and put writers (sellers).525 or Rs.The amount of time left before the option expires. So Black Scholes calculator mainly does Option Pricing The five basic components of option pricing include the following: Underlying Asset Price-The price of the underlying stock or index the option is written on. the chances of the option gaining in value become lower and lower because the underlying security has less time in which to make a major up or down move.500 today. and next month the price is estimated to be either Rs. Option Strike Price . Because of this. then the amount of uncertainty here is very high. This means that a seller may be required to make good on a promise to buy or sell. The price of an option decreases as it approaches its expiration date. Asset Volatility .475. the more volatile the security.This is the price at which the option can be exercised. All of these factors play an important role in determining every option’s price. the higher the volatility the more expensive the option will be. The only two factors that an investor has any control over. This uncertainty of return is one of the main drivers of option prices. In general. Risk-free rate . Time to Expiration . the greater chance that it will deliver large returns for the option holder). however. For example.The rate of return that may be earned without bearing any risk also comes into play when pricing options. OPTION PRICING: Option pricing is determined using a complex differential equation formulated by Myron Scholes and Fischer Black in 1973. the option price will be high as well (after all.

they have profited from the real market from the sale of their crops. and to lock in material costs. cash. speculators may trade with other speculators as well as with hedgers. simply betting on the direction of the underlying security). the speculator will make a profit if the price rises. Speculation and Arbitrage: Of course. the value of speculative trading is far higher than the value of true hedge trading. when they have lost out in the derivatives market.Usages: Insurance and Hedging One use of derivatives is as a tool to transfer risk. Contrary to popular belief. This is an example of a situation where both parties in a financial markets transaction benefit. The farmer knows for certain the revenue he will get for the crop that he will grow. or to create a synthetic short position. In addition to directional plays (i. 90% of all derivatives revenue produced by derivatives sellers is for this kind of cost. but also risks making a loss if the price falls. accounts receivable and accounts payable planning. derivatives traders may also look for arbitrage opportunities between different derivatives on identical or closely related underlying securities. In this case. Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 81 of 190 . farmers can sell futures contracts on a crop to a speculator before the harvest. In most financial derivatives markets. as the result of a hedge. This technique is commonly used when speculating with traded options. The farmer offloads (or hedges) the risk that the price will rise or fall. For example. and not a means to generate non-operating revenues. As well as outright speculation. Other uses of derivatives are to gain an economic exposure to an underlying security in situations where direct ownership of the underlying is too costly or is prohibited by legal or regulatory restrictions.e. financial markets are not always a zero-sum game. Another example is the company General Electric. The program is strictly for forecasted and highly anticipated needs. It is not unknown for farmers to walk away smiling. This company uses derivatives to "match funding" (GE web cast on derivatives) to mitigate interest rate and currency risk. speculators can use derivatives to place bets on the volatility of the underlying security. and the speculator accepts the risk with the possibility of a large reward.

Speculative trading in derivatives gained a great deal of notoriety in 1995 when Nick Leeson, a trader at Barings Bank, made poor and unauthorized investments in index futures. Through a combination of poor judgment on his part, lack of oversight by management, a naive regulatory environment and unfortunate outside events, Leeson incurred a 1.3 billion dollar loss that bankrupted the century’s old financial institution.

Pricing and Information Sharing:
Futures markets are unusually efficient at gathering and processing information, and are often an extremely accurate predictor of events such as interest rate movements and oil price movements. DARPA also examined the idea of developing a futures market for world events, the Policy Analysis Market, with the idea of predicting terrorism amongst other things. The idea was halted due to political uproar, as it was pointed out that terrorists could trade on the market and directly profit from their activities.

Playing with options:Buy puts when market is expected to fall:
As an owner of stocks or equity portfolio, sometimes one may have a view that market will fall in near future. To protect the value of stock from falling below a particular level, one has to buy right number of puts at right strike price. If one is concerned only about the value of particular stock one has to buy puts of only that particular stock, if it's about the entire portfolio it's better to buy index puts. When the value of the stock falls it will lose value and the put options will gain value. This is how hedging can be done through puts

Sell puts when market is rising:
This is also done the way hedging has been done above.

Buy calls when Market is rising:
Buy calls or sell puts are same but the only difference is when the market falls down instead of uptrend the puts value goes down quickly but calls value goes down slowly. So if one is sure about market movement than only one should sell puts or anyway one should buy calls for hedging purpose. While investing in calls and puts investor should keep risk in mind.

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Sell Calls when market is expected to fall:
Selling a call option in bullish market is as risky as selling a put option in a bearish market. Inventor should sell calls when only is sure about market correction anyway he should buy puts if he is expecting a fall down in market but not fully sure about his idea. Selling or Buying the Puts & Calls provides security to investor to hedge his portfolio risk. But Playing with option is not an easy task to do for a novice investor as one need to understand, how it works and how one can hedge his portfolio using these tools. Option trading may be helpful for an investor at some point of time but it is not an accurate tool to hedge a portfolio. Risk associated with option trading may differ from investor to investor as one might be a regular investor who has good knowledge about option trading but at the same time other might be novice. Apart from derivatives there are some other ways using which hedging is done generally. Some people feel that derivatives are risky. I won’t say this is true for options, but when it comes to futures I believe to an extent their statement is true. Apart from derivatives there are two other ways to hedge risk and these are listed as under: Short sell when you have holdings of a particular stock-say you have holdings of a particular share, the market value of the share is expected to fall, and it’s time to short sell your stock. It’s better to explain it with the help of an example. Say I have a stock worth rs.345 and its value fall to340, at this price I short sell some amount of shares, if the value of a stock falls further buys it. And then the entire stock can be sold, making profits, this would give an average buying price. And in other case also it will release average value. Average buying is another way –if you decide to buy 100 shares of a company it's better to buy them in shifts. By this I want to say that twenty at one time, 20 next time and so on.

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Different Option Strategy: Profit from buying a call:
Example: If the market price of a share is 50 rupees and call option strike price of Rs. 50 is traded at Rs. 3.27 for 3 months expiry. Then the expected returns from call option are as follows: Lot size Call Premium 3.27 80 Expiry date Strike price Market price Loss/Gain 3 Months 50 10 -261.60 3 Months 50 20 -261.60 3 Months 50 30 -261.60 3 Months 50 40 -261.60 3 Months 50 50 -261.60 3 Months 50 60 538.40 3 Months 50 70 1338.40 3 Months 50 80 2138.40 3 Months 50 90 2938.40 3 Months 50 100 3738.40 Table: 1 Expected return from Option. Source: Self Generated
4000 3500 3000 2500 i f r P 2000 1500 1000 Strike price = 50 Market price = 50 Time= 90 days

Profit 500
0 -500 -1000 0 10 20 30 40 50 60 70 80 90 100

Stock Price at Expiration

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Source: Source: Book Option Trading B Loss from selling a call: Example: If the market price of a share is 50 rupees and call option strike price of Rs.60 3 Months 50 40 261. Then the expected returns from call option are as follows: Lot size Call Premium 3.40 3 Months 50 70 -1338.40 3 Months 50 80 -2138.27 for 3 months expiry.60 3 Months 50 60 -538. Source: Self Generated 1000 500 0 -500 -1000 i f r P -1500 -2000 Strike price = 50 Market price = 50 Time = 90 days Call Price = 3.60 3 Months 50 20 261.60 3 Months 50 50 261. 3.27 Profit -2500 -3000 -3500 -4000 0 10 20 30 40 50 60 70 80 90 100 Stock Price at Expiration Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 85 of 190 .27 80 Expiry date Strike price Market price Loss/Gain 3 Months 50 10 261.40 Table: 2 Expected return from Option.40 3 Months 50 100 -3738. 50 is traded at Rs.40 3 Months 50 90 -2938.60 3 Months 50 30 261.

2.65 for 3 months expiry. Source: Self Generated 4000 3500 3000 2500 i f r P 2000 1500 Strike price = 50 Market price = 50 Time = 90 days Put Price = 2.00 3 Months 50 90 -265. Then the expected returns from call option are as follows: Put Premium Lot size 2.00 3 Months 50 40 735.Source: Book Option Trading Profit from buying a put: Example: If the market price of a share is 50 rupees and put option strike price of Rs.00 3 Months 50 70 -265.00 Table: 3 Expected return from Option.00 3 Months 50 80 -265.65 100 Expiry date Strike price Market price Loss/Gain 3 Months 50 10 3735. 50 is traded at Rs.00 3 Months 50 60 -265.00 3 Months 50 30 1735.00 3 Months 50 50 -265.65 Profit 1000 500 0 -500 0 10 20 30 40 50 60 70 80 90 100 Stock Price at Expiration Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 86 of 190 .00 3 Months 50 20 2735.00 3 Months 50 100 -265.

65 Stock Price at Expiration Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 87 of 190 .00 3 Months 50 50 265.00 3 Months 50 80 265.00 Table: 4 Expected return from Option. Source: Self Generated 500 0 -500 -1000 Profit r P -1500 -2000 -2500 -3000 -3500 -4000 0 10 Source: Self Generated 20 30 40 50 60 70 80 90 100 Strike price = 50 Market price = 50 Time= 90 days Put Price = 2.65 100 Expiry date Strike price Market price Loss/Gain 3 Months 50 10 -3735.00 3 Months 50 40 -735.00 3 Months 50 30 -1735. Then the expected returns from call option are as follows: Put Premium Lot size 2.Source: Book Option Trading Loss from selling a put: Example: If the market price of a share is 50 rupees and put option strike price of Rs.00 3 Months 50 60 265.00 3 Months 50 90 265.65 for 3 months expiry.00 3 Months 50 70 265. 2. 50 is traded at Rs.00 3 Months 50 100 265.00 3 Months 50 20 -2735.

Source: Book Option Trading The Buy-Write Strategy: This strategy is more conservative than simply owning the stock It can be used to generate extra income from stock investments In this strategy we buy the stock and write a call Example: Suppose you buy a call option and stock at the same time. Here is an example of that strategy and expected return of that strategy is as follow: 5000 4000 3000 2000 1000 i f r P 0 Strike Price = 50 Market Price = 50 Time = 90 days Profit -1000 -2000 -3000 -4000 -5000 0 10 20 30 40 50 60 70 80 90 100 Stock Price at Expiration Stock Profit Call Profit Strategy Profit Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 88 of 190 .

00 3 Months 50 40 -327 735 408.00 3 Months 50 50 -327 -265 -592.00 3 Months 50 90 3673 -265 3408.00 3 Months 50 100 4673 -265 4408.00 3 Months 50 30 -327 1735 1408.65 Strike price Market price Lot size 100 Loss/Gain Total Loss/Gain Call Put 3 Months 50 10 -327 3735 3408.27 2.00 Table: 5 Expected return or Gain/Loss on Option Trading Source: Self Generated Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 89 of 190 . we profit if the stock moves a lot in either direction If we sell a straddle.00 3 Months 50 60 673 -265 408.27 and put at 2.00 3 Months 50 20 -327 2735 2408.00 3 Months 50 80 2673 -265 2408.65 you can hedge your risk to some extent.00 3 Months 50 70 1673 -265 1408. we profit if the stock doesn’t move much in either direction This straddle consists of buying (or selling) both a put and call at the money Example: Suppose you buy a Call and Put Option at the same time. Here is an example of that strategy and loss/gain of that strategy is shown below: Call Premium Put Premium Expiry date 3. Like in example if you buy call at 3.Source: Book Option Trading The Straddles: If we buy a straddle.

Buy Put Short Call — Sell Put.27 Profit 500 0 -500 -1000 0 10 20 30 40 50 60 70 80 90 100 Stock Price at Expiration Source: Book Option Strategy Put Profit Call Profit Strategy Profit Synthetic Securities: With appropriate combinations of the stock and options. Buy Stock Long Put — Buy Call. calls. we can create a set of cash flows that are identical to puts.4000 3500 3000 2500 i o r P 2000 1500 1000 Strike price = 50 Market price = 50 Time = 90 days Call Price = 3. Sell Put Long Call — Buy Put. Sell Stock Short Put — Sell Call. or the stock We can create synthetic: • • • • • • Long Stock — Buy Call. Buy Stock Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 90 of 190 . Sell Stock Short Stock — Sell Call.

and borrowing the strike price at the risk-free rate until expiration 5000 4000 3000 2000 1000 i f r P 0 -1000 -2000 -3000 -4000 -5000 0 10 20 30 40 50 60 70 80 90 100 S trike price= 50 Market price = 50 Time = 90 days Call Price = 3.27 Profit Stock Price at Expiration Put Profit Source: Book Option Strategy Stock Profit Borrow at Risk-free Strategy Profit Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 91 of 190 . buying the stock.The reasons that this works requires knowledge of Put-Call Parity Synthetic Long Call Position: We can create a synthetic long position in a call by buying a put.

27 Put Price = 2. and lending the strike price at the risk-free rate until expiration.Free Strategy Profit Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 92 of 190 . selling the stock.65 Stock Price at Expiration Stock Profit Source: Book Option Strategy Call Profit Lend at Risk.Synthetic Long Put Position: We can create a synthetic long position in a put by buying a call. P = C − S + Xe − rt 5000 4000 3000 2000 1000 i f r P 0 -1000 Profit -2000 -3000 -4000 -5000 0 10 20 30 40 50 60 70 80 90 100 Strike price= 50 Market price = 50 Time = 90 day Call Price = 3.

the higher the price of the underlying security. the Black-Scholes OPM. The most famous (and first successful) option pricing model. but every underlying security has several strikes for each expiration month Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 93 of 190 . the higher the value of the put. was derived by eliminating all possibilities of arbitrage. For a put option.Option Valuation: The value of an option is the present value of its intrinsic value at expiration. Unfortunately. Strike price The strike (exercise) price is fixed for the life of the option. there is no way to know this intrinsic value in advance. the lower the price of the underlying security. For a call option. Note that the Black-Scholes models work only for European-style options Option Valuation Variables: There are five variables in the Black-Scholes OPM (in order of importance): • • • • • Price of underlying security Strike price Annual volatility (standard deviation) Time to expiration Risk-free interest rate Underlying Security The current price of the underlying security is the most important variable. the higher the value of the call.

the higher the strike price. This is because there is a greater chance that the option will expire in-the-money with a longer time to expiration. Therefore. when interest rates rise. Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 94 of 190 . call options increase in value and put options decrease in value. but because the time to expiration is usually less than 9 months (with the exception of LEAPs). the higher the strike price. effectively decreases the strike price. For a put.For a call. when it increases. The risk-free rate. the discount is small and has only a tiny effect on the value of the option. longer times to expiration increase the value of all options. Volatility Volatility is measured as the annualized standard deviation of the returns on the underlying security. Risk-free rate The risk-free rate of interest is the least important of the variables. Time to Expiration The time to expiration is measured as the fraction of a year. the lower the value of the call. As with volatility. It is used to discount the strike price. the higher the value of the put. All options increase in value as volatility increases. This is due to the fact that options with higher volatility have a greater chance of expiring in-the-money. and interest rates are usually fairly low.

Variables’ Affect on Option price: Source: Self Generated Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 95 of 190 .

PROJECT – II EQUITY RESEARCH 7. Trends 'are your friend' and sentiment changes predate and predict trend changes. Profits can be made by trading the mispriced security and then waiting for the market to recognize its "mistake" and reprice the security. so fundamental analysis is a waste of time. Technical analysis maintains that all information is reflected already in the stock price. Their price predictions are only extrapolations from historical price patterns. 2. Investors' emotional responses to price movements lead to recognizable price chart patterns. Fundamental analysis maintains that markets may misprice a security in the short run but that the "correct" price will eventually be reached. Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 96 of 190 . EQUITY ANALYSIS:EQUITY ANALYSIS TOOLS: Analysis is a tool to determine the good and bad of one company by the way of checking each and everything from financial statement to future prospect of that company. Technical analysis does not care what the 'value' of a stock is. The objective of the equity analysis is to determine what stock to buy and at what price and for that investor may use one method out of two available methods or he can use both the methods at the same time. 1.

Investors can use both these different but somewhat complementary methods for stock picking. believing that 'it's hard to fall out of a ditch'. creating opportunities for profits. 7) Managers may also include fundamental factors along with technical factors into computer models (quantitative analysis). so they lower their risk and probability of wipe-out. The value comes from fundamental analysis. Top-down and Bottom-up Investors can use either a top-down or bottom-up approach for equity analysis. not a weighing machine". Fundamental analysis allows you to make your own decision on value. 3) Managers may also consider the economic cycle in determining whether conditions are 'right' to buy fundamentally suitable companies. 4) Contrarian investors distinguish "in the short run. 5) Value investors restrict their attention to under-valued companies. 6) Managers may use fundamental analysis to determine future growth rates for buying high priced growth stocks. Even 'bad' companies' stock goes up and down. Many technical investors use fundamentals to limit their universe of possible stock to 'good' companies. Fundamental analysis lets them find 'good' companies. and ignore the market. 2) Managers may use fundamental analysis to correctly value 'good' and 'bad' companies. Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 97 of 190 . 1) Buy and hold investors believe that latching onto good businesses allows the investor's asset to grow with the business. Investors may use fundamental analysis within different portfolio management styles. Many fundamental investors use technical’s for deciding entry and exit points. The choice of stock analysis is determined by the investor's belief in the different paradigms for "how the stock market works". the market is a voting machine.

including both international and national economic indicators. such as GDP growth rates. new equity issues and capital financing. and energy prices. There are two types of analytical model to find the future share price of a company: 1) Fundamental Analysis 2) Technical Analysis Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 98 of 190 . productivity. Only then does he narrow his search to the best business in that area. the effects of competing products. Procedures The analysis of a business' health starts with financial statement analysis that includes ratios. and entry or exit from the industry. along with the eventual sale price. which calculates the present value of the future 1) Dividends received by the investor. It looks at dividends paid. interest rates. exchange rates. The foremost is the discounted cash flow model. foreign competition. The determined growth rates (of income and cash) and risk levels (to determine the discount rate) are used in various valuation models. operating cash flow. inflation.The top-down investor starts his analysis with global economics. regardless of their industry/region and look for financial of that company and look if the is good for investment or not. The bottom-up investor starts with specific businesses. price levels. Add all the discounted value to get the future price of the company’s share and look how much one is going to get if he invest in company’s share at this point of time. (Gordon model) 2) Earnings of the company or 3) Cash flows of the company. He or she narrows his search down to regional/industry analysis of total sales. The earnings estimates and growth rate projections and others can be considered either 'fundamental' (they are facts) or 'technical' (they are investor sentiment) based on your perception of their validity. It starts with a narrow approach and sometime ends with nothing.

To start finding out the intrinsic value. Find out as much as possible about the company and its products. All this seems simple. If the “intrinsic/real value” of a stock is above the current market price. the market price of a stock tends to move towards its “real value” or “intrinsic value”. General Strategy To a fundamentalist. you have to analyze firm you are interested in. If the intrinsic value of a stock was below the market price. you will be able to compare this price to the market price of the company and decide whether you want to buy it (or sell it if you already own that stock). the investor would purchase the stock because he knows that the stock price would rise and move towards its “intrinsic or real value”. Now the next obvious question is how do you find out what the intrinsic value of a company is? Once you know this. First of all we prepare a due diligence report of the company and check if the item shown in financial statement are true/correct or not. history of performance. brand name etc. growth potential. After you analyzed the overall economy. low cost producer. changes in government policies etc. and economy-wide changes. the fundamentalist analyzer makes an examination of the current and future overall health of the economy as a whole.Fundamental Analysis: Fundamental Analysis Definition Fundamental analysis is a stock valuation method that uses financial and economic analysis to predict the movement of stock prices. Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 99 of 190 . You should analyze factors that give the firm a competitive advantage in its sector such as management experience. The fundamental information that is analyzed can include a company's financial reports. and non-financial information such as estimates of the growth of demand for products sold by the company. industry comparisons. the investor would sell the stock because he knows that the stock price is going to fall and come closer to its intrinsic value.

you will be in a much better position to decide whether the price of the company’s stock is going to go up or down and by that way you can make profit out of it.1) Do they have any “core competency” or “fundamental strength” that puts them ahead of all the other competing firms? 2) What advantage do they have over their competing firms? 3) Do they have a strong market presence and market share? 4) Or do they constantly have to employ a large part of their profits and resources in marketing and finding new customers and fighting for market share? After you understand the company & what they do. Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 100 of 190 . how they relate to the market and their customers.

using price charts. These shifts in the fundamental equation cause price changes. is simply a short-cut form of fundamental analysis. and other factors affecting a stock’s price movement Makes a buy/sell decision based on those factors • • The world of technical analysis is huge Hundreds of different patterns and indicators investors claim to be successful Method of evaluating securities by analyzing statistics generated by • • • Market activity Past Prices Volume WHAT IS CHART ANALYSIS? Chart analysis (also called technical analysis) is the study of market action. The chartist is quickly able to profit from these price changes without necessarily knowing the specific reasons causing them. either up or down. natural disasters. Chart analysis. The cornerstone of the technical philosophy is the belief that all of the factors that influence market price—fundamental information. which are readily apparent on a price chart. falling prices would mean that supply exceeds demand. patterns. The chartist simply reasons that rising prices are indicative of a bullish fundamental situation and that falling prices reflect bearish fundamentals. where demand exceeds supply. trends. The impact of these external factors will quickly show up in some form of price movement.TECHNICAL ANALYSIS OF EQUITY SHARES: Technical Analysis is: Looks for peaks. In other words. bottoms. Consider the following: A rising price reflects bullish fundamentals. to forecast future price direction. political events. Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 101 of 190 . therefore. identifying a bearish fundamental situation. and psychological factors— are quickly discounted in market activity.

Chart action. To put it bluntly. In financial markets. let’s take a look at charting theory itself. by contrast. Technical or chart analysis. there are two methods of forecasting available to the market analyst—the fundamental and the technical. however. or in conjunction with fundamental information. step is market timing. can alert a fundamental analyst to the fact that something important is happening beneath the surface and encourage closer market analysis. For reasons that will soon become apparent. timing is almost purely technical in nature. is only the first step in the decision-making process. Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 102 of 190 . it can be seen that the application of charting principles becomes absolutely essential at some point in the decision making process. For short-term traders. While fundamental analysis studies the reasons or causes for prices going up or down. Therefore. minor price moves can have a dramatic impact on trading performance. most important step in the decision making process. Fundamental analysis is based on the traditional study of supply and demand factors that cause market prices to rise or fall. timing is everything in the stock market. Having established its value. Market Timing The second. and changes in the money supply. To accomplish that task. Charting can be used by itself with no fundamental input. Price forecasting. and often the more difficult. WHY IS CHART ANALYSIS SO IMPORTANT? Successful participation in the financial markets virtually demands some mastery of chart analysis. This being the case. on a market forecast. Whether the market participant is a short-term trader or long-term investor. in one form or another. That’s where the study of price charts comes in. Chart analysis is extremely useful in the price-forecasting process.Another advantage of chart analysis is that the market price itself is usually a leading indicator of the known fundamentals. technical analysis studies the effect. the price movement itself. therefore. trade deficits. the precise timing of entry and exit points is an indispensable aspect of any market commitment. is based on the study of the market action itself. the fundamentalist would look at such things as corporate earnings. The intention of this approach is to arrive at an Estimate of the intrinsic value of a market in order to determine if the market is over or under-valued. price forecasting is usually the first. Consider the fact that all decisions in various markets are based.

Moving Average Convergence/Divergence (MACD): Introduction: Moving Average Convergence/Divergence (MACD) is one of the simplest and most reliable indicators available. Downward momentum is accelerating. And their usages are also explained in this project.Technical Indicator: Before moving to technical analysis we need to understand the basics of technical analysis we need to understand what does an indicator means and what its usage while doing technical analysis. indicating a bearish period of trading. And also need to know which indicator to use and at what time. then the negative gap between the faster moving average (blue) and the slower moving average (red) is expanding. For the purpose of understanding some of indicators are explained in this project. The resulting plot forms a line that oscillates above and below zero. Some of the indicators which are used by me are explained below. Positive momentum is increasing. But before moving to these indicators we need to understand the basic charting style and for that purpose I have taken SENSEX and NIFTY’s data for the year 2009. indicating a bullish period for the price plot. If MACD is positive and rising. MACD uses moving averages. A positive MACD indicates that the 12-day EMA is trading above the 26-day EMA. without any upper or lower limits. These lagging indicators are turned into a momentum oscillator by subtracting the longer moving average from the shorter moving average. Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 103 of 190 . A negative MACD indicates that the 12-day EMA is trading below the 26-day EMA. This indicates that the rate-of-change of the faster moving average is higher than the rate-of-change for the slower moving average. MACD is a centered oscillator and the guidelines for using centered oscillators apply. then the gap between the 12-day EMA and the 26-day EMA is widening. to include some trend-following characteristics. If MACD is negative and declining further. MACD centerline crossovers occur when the faster moving average crosses the slower moving average. which are lagging indicators. What Does MACD Do? MACD measures the difference between two Exponential Moving Averages (EMAs).

Bullish signals and Bearish signals. these crossovers can lead to whipsaws and many false signals. 1 .icharts.in Bullish Moving Average Crossover: Bullish Moving Average Crossover occurs when MACD moves above its 9-day EMA.Bullish Centerline Crossover Positive Divergence: A Positive Divergence occurs when MACD begins to advance and the security is still in a downtrend and makes a lower reaction low. Positive Divergences are probably the least common of the three signals. and lead to the biggest moves. or trigger line.MACD has two type of signals wiz. Bullish Signals: MACD generates bearish signals from three main sources. If not used in conjunction with other technical analysis tools. MACD can either form as a series of higher Lows or a second Low that is higher than the previous Low. but are usually the most reliable.Positive Divergence 2.Bullish Moving Average Crossover 3. Bullish Moving Average Crossovers are used Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 104 of 190 . Bullish Moving Average Crossovers are probably the most common signals and as such are the least reliable. Source: www.

moving average crossover are probably the second most common signals.in Bullish Centerline Crossover: A Bullish Centerline Crossover occurs when MACD moves above the zero line and into positive territory. the Bullish Centerline Crossover can act as a confirmation signal. This is a clear indication that momentum has changed from negative to positive or from bearish to bullish. Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 105 of 190 .occasionally to confirm a positive divergence. Of the three signals. After a Positive Divergence and Bullish Centerline Crossover. Source: www.icharts. A positive divergence can be considered valid when a Bullish Moving Average Crossover occurs after the MACD Line makes its second "higher Low".

Source: www. Negative Divergences are probably the least common of the three signals. and the MACD declines. and can warn of an impending peak. but also they produce the most false signals. Negative Divergence 2.Bearish Signals: MACD generates bearish signals from three main sources. These signals are mirror reflections of the bullish signals: 1. moving average crossovers should be confirmed with other signals to avoid whipsaws and false readings. but are usually the most reliable.icharts.in Bearish Moving Average Crossover: The most common signal for MACD is the moving average crossover. Bearish Centerline Crossover Negative Divergence: A Negative Divergence forms when the security advances or moves sideways. As such. Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 106 of 190 . Bearish Moving Average Crossover 3. Not only are these signals the most common. A Bearish Moving Average Crossover occurs when MACD declines below its 9-day EMA. The Negative Divergence in MACD can take the form of either a lower High or a straight decline.

icharts. at least for the short term.Source: www. momentum. Once MACD crosses into negative territory. or confirm a prior signal such as a moving average crossover or negative divergence.in Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 107 of 190 . This is a clear indication that momentum has changed from positive to negative or from bullish to bearish. has turned bearish.in Bearish Centerline Crossover: A Bearish Centerline Crossover occurs when MACD moves below zero and into negative territory.icharts. Source: www. The centerline crossover can act as an independent signal.

Peak-trough Divergences usually cover a longer time frame than slant divergences. A bullish signal is generated when a Positive Divergence forms and there is a Bullish Centerline Crossover. two types of divergences have been identified: the slant divergence and the peak-trough divergence. Generally speaking. On a daily chart. The use of moving averages ensures that the indicator will eventually follow the movements of the underlying security. As a trend-following indicator. a peak-trough divergence can cover a time frame as short as two weeks or as long as several months. By using Exponential Moving Averages (EMAs). it will not be wrong for very long. A Negative Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 108 of 190 . 2) Peak-Trough Divergence: A peak-trough divergence occurs when at least two peaks or two troughs develop in one direction to form the divergence. as opposed to Simple Moving Averages (SMAs). MACD Benefits: One of the primary benefits of MACD is that it incorporates aspects of both momentum and trend in one indicator. Divergences can take many forms and varying degrees. 1) Slant Divergence: A Slant Divergence forms when there is a continuous and relatively smooth move in one direction (up or down) to form the divergence. A bearish signal is generated when there is a Negative Divergence and a Bearish Centerline Crossover. As a momentum indicator. MACD divergences can be key factors in predicting a trend change.Signals: The main signal generated by the MACD-Histogram is a divergence followed by a moving average crossover. MACD has the ability to foreshadow moves in the underlying security. A series of two or more rising troughs (higher lows) can form a Positive Divergence and a series of two or more declining peaks (lower highs) can form a Negative Divergence. Keep in mind that a centerline crossover for the MACDHistogram represents a moving average crossover for the MACD. some of the lag has been taken out. Slant Divergences generally cover a shorter time frame than divergences formed with two peaks or two troughs.

MACD represents the convergence and divergence of two moving averages. One solution to this problem is the use of the MACD-Histogram. For volatile stocks. MACD calculates the absolute difference between two moving averages and not the percentage difference. any combination of moving averages can be used. weekly or monthly charts. For weekly charts. Moving averages. Given that level of flexibility. MACD Drawbacks: One of the beneficial aspects of the MACD is also one of its drawbacks.Divergence signals that bullish momentum is waning. objectives and risk tolerance. Even though MACD represents the difference between two moving averages. MACD can be applied to daily. The standard setting for MACD is the difference between the 12 and 26-period EMA. each individual should adjust the MACD to suit his or her own trading style. the difference (both positive and negative) between the two moving averages is destined to grow. slower moving averages may be needed to help smooth the data. especially for stocks that have grown exponentially. there can still be some lag in the indicator itself. Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 109 of 190 . and there could be a potential change in trend from bullish to bearish. are lagging indicators. MACD is calculated by subtracting one moving average from the other. MACD does not have any upper or lower limits to bind its movement. MACD is not particularly good for identifying overbought and oversold levels. This makes it difficult to compare MACD levels over a long period of time. a faster set of moving averages may be appropriate. As a security increases in price. This can serve as an alert for traders to take some profits in long positions. exponential or weighted. The set of moving averages used in MACD can be tailored for each individual security. or for aggressive traders to consider initiating a short position. However. This is more likely to be the case with weekly charts than daily charts. be they simple. MACD can continue to overextend beyond historical extremes. Even though it is possible to identify levels that historically represent overbought and oversold levels.

The first RSI value is an estimate subsequent values improve on that estimate. Welles Wilder and introduced in his 1978 book. the number of time periods to use in the calculation. The next values for the "averages" are calculated by taking the previous value. Similarly. (Note: 14 is the standard number of periods used when calculating the RSI. adding in the next Gain (or Loss). If a different number is specified. multiplying it by 13. just substitute that number in for "14" throughout this discussion. New Concepts in Technical Trading Systems. and then dividing by 14. It takes a single parameter. first find the magnitude of all gains and losses for the 14 periods prior to the time where you wish to start the calculation. Finally. the First Average Gain is calculated as the total of all gains during the past 14 periods divided by 14. The RSI compares the magnitude of a stock's recent gains to the magnitude of its recent losses and turns that information into a number that ranges from 0 to 100.(100 / RS + 1). The RS value is simply the Average Gain divided by the Average Loss for each period. You should calculate at least 14 values prior to the start of any values that you will rely on .going back 28+ periods is even better.Relative Strength Index (RSI): Introduction: Developed by J. the First Average Loss is calculated as the total magnitude of all losses during the past 14 periods divided by 14. Usually 14 days are taken as parameter and author also recommend 14 days.) It is important to understand that the RSI is a "running" calculation and the accuracy of the calculation depends on how long ago the calculations started. Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 110 of 190 . the Relative Strength Index (RSI) is an extremely useful and popular momentum oscillator. the RSI is simply the RS converted into an oscillator that goes between zero and 100 using this formula: 100 . To calculate RSI values for a given dataset. To start the running calculation.

the underlying stock will often reverse its direction soon after such a divergence. Some traders identify the long-term trend and then use extreme readings for entry points. As in that example. divergences that occur after an overbought or oversold reading usually provide more reliable signals. For example. Because of how the RSI is constructed. Divergences: Buy and sell signals can also be generated by looking for positive and negative divergences between the RSI and the underlying stock. a reading above 50 indicates that average gains are higher than average losses and a reading below 50 indicates that losses are winning the battle. Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 111 of 190 . if the RSI falls below 70. Centerline Crossover: The centerline for RSI is 50. Readings above and below can give the indicator a bullish or bearish tilt. Generally. If the long-term trend is bullish. Some traders look for a move above 50 to confirm bullish signals or a move below 50 to confirm bearish signals.Use: Overbought/Oversold: Wilder recommended using 70 and 30 and overbought and oversold levels respectively. 55. then oversold readings could mark potential entry points. On the whole. Conversely. if the RSI rises above 30 it is considered bullish for the underlying stock. consider a falling stock whose RSI rises from a low point of (for example) 15 back up to say. it is a bearish signal.

RSI moved back above 50 and into overbought territory in March. A negative divergence formed in March and marked the high in the upper fifties. Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 112 of 190 . The next extreme reading (overbought) occurred after a large advance that peaked in Dec.icharts.Example: Source: www. The next oversold reading occurred in Feb. RSI reached overbought levels in late Dec and moved below 50 by the second week of Jan.in The DELL example shows a number of extreme readings as well as a negative divergence. RSI reached oversold for a brief moment to mark the low around 38. for another brief moment and marked the low around 35. By the end of Feb. In Oct.

So this tool was very helpful in current market situation. Williams’ %R indicator gives easily interpreted buy and sells signals.Williams’ %R: Williams’ %R is an overbought and oversold technical indicator that can give easy to interpret buy and sell signals. then buy. Williams %R Sell Signal: Sell when the Williams %R indicator is above the overbought line (80) and then falls below the 80 line.in Williams %R Buy Signal: When the Williams %R indicator is below the oversold line (20) and it rises to cross over the 20 line. In addition to giving clear buy and sell signals. the Williams %R indicator can help identify strong trends. William’s %R is very similar to the Stochastic Fast indicator. Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 113 of 190 .icharts. But it is only important in choppy market conditions cause in rally market it fails to indicate the turnaround in rally. as is demonstrated in the chart below: Source: www. this is discussed on the next page.

in As the chart illustrate.icharts. Nevertheless. fails to go below 20). when the Williams %R indicator stays in the overbought area (above 80) and any attempt at a downturn fails to send the indicator into oversold territory (i. and also informs traders whether or not a market is likely overbought. fails to go above 80).e. The Williams %R is a versatile technical indicator used by many. then the downtrend is strong and a trader should not go long the market. oversold. Williams’ %R indicator works in a fluctuating market condition where markets are unexpected and can go either side. when the Williams % R indicator stays in the oversold area (below 20) and any bullish rally barely registers with the Williams %R (i. the indicator gives easily interpreted buy and sells signal. or trending strongly. However. The following chart illustrates Williams’ % R's ability to detect such trends: Source: www. non-trending markets. leading to losses. the Williams % R indicator does give tell tale signs of strong trends that can easily be identified by traders for profit.Williams’ %R and Trends: The Williams % R indicator is extremely useful and profitable during sideways. during trends. Generally we use 14 days Williams’ %R for medium term period and 3 days Williams’ %R for short term periods. Similarly. the Williams % R indicator does not fare as well. Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 114 of 190 .e. then the uptrend is strong and a trader should not go short.

Go short when Ease of Movement crosses to below zero (from above). Example: Coca Cola Corporation plotted with Ease of Movement indicator smoothed by a 10 day exponential moving average. Go long when Ease of Movement crosses to above zero (from below). 2) High negative values when prices move down on light volume.Ease of Movement: Ease of Movement was developed by Richard W Arms and performs a similar function to Equivolume charts. Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 115 of 190 . They are more effective in a trending market. It highlights the relationship between volume and price changes and is particularly useful for assessing the strength of a trend. Trading Signals: Signals are normally taken from an exponential moving average plotted on the Ease of Movement indicator. 3) Low values if price is not moving or if it takes heavy volume to move prices. signaling distribution or accumulation. The indicator shows: 1) High positive values when prices move upward on light volume.

Generally a value greater than zero is an indication that the stock is being accumulated (bought) and negative values are used to signal increased selling pressure. Go long [L]: Ease of Movement crosses to above zero.in Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 116 of 190 .in Go long [L]: Ease of Movement crosses to above zero. Strong negative numbers indicate that price is moving downward on low volume.icharts. Go short [S]: Ease of Movement crosses to below zero. Go short [S]: Ease of Movement crosses to below zero. A high positive value appears when prices move upward on low volume. Go long [L]: Ease of Movement crosses to above zero.icharts. Go short [S]: Note that we are whipsawed more frequently in a ranging market. This indicator attempts to identify the amount of volume required to move prices. What Does Ease Of Movement Mean? A technical momentum indicator that is used to illustrate the relationship between the rate of an asset's price change and its volume. Source: www.Source: www.

Transaction signals can be generated when the indicator crosses over a 9-day moving average. Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 117 of 190 . Indicators are generally used by the technical experts to forecast the market price of shares on the basis of historical prices. which is similar to other indicators like the MACD. Above mentioned are the indicators which I have used for my study “Technical Analysis of Equity Shares.” You will come to know about the concepts of technical analysis when only you go through the study. Traders use the smoothed version of this indicator in an attempt to eliminate false signals. but are generally made when the indicator crosses over the zero line.Explanation of Ease of Movement: A moving average of the indicator can be added to act as a trigger line.

CHAPTER – FOUR ANALYSIS & INTERPRETATION Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 118 of 190 .

00 1.00 1.1 4533.00 58.000.00 1.000.00 -421.35 4536.005.000.750.55 4642.00 1.3 4506.7 4270.65 4254.00 1.00 80.000.500.250.000.000.250.00 593.750.00 Lot Size 50 No.00 958.00 50.00 -317.00 -246.25 4245.00 -474.750.750.00 Net Gain/Loss 2754344.00 1.05 4540.00 44.000.00 1.527.250.00 286.00 37.000.00 -445.000.00 30/07/2009 4.00 1.750.537.500.00 500.2 4241.05 4264.500.15 4660.24 Total Margin Paid 3230344.500.000 Total Worth 22.750.00 -491.00 -476.00 -175.00 29.00 -447.000.00 -877.000 Span Margin* 11.00 298.750.05 4323.00 108.544. of Lot 100 Total No.00 -445.250.500.15 4365.00 144.00 -66.3 4664.00 1.720.500.05 4247.00 -504.617.00 -364. Source: Self Generated Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 119 of 190 .750.00 -90.00 272.85 4440.000.00 527.250.750.00 -445.00 1.00 -55.259.00 * Margin is variable item and changes on daily basis.520.45 4309 4259.9 4305.250.250.250.00 230.00 982.750.3 4592.85 4333.750.00 2813828.000.076.000.250.206.276.00 950.685.264.250.Virtual Future Trading: Nifty Date of Purchase: 1-Jun-09 Settlement Date 25/06/2009 4.8 4528.000.55 4534.750.250.00 812.000.500.2 4596.250.00 138.500.00 312.00 1.5 4588.500.00 1.000 22.750.00 -365.00 Net Account Status Daily Account Status 1.000.00 814.35 4433.750.750.250.8 4236.00 -53.000.603.00 547.00 1.24 Exposure Margin 3.500.250.00 -438.00 483.00 -781.750.750.00 966.7 MTM G/L 5000.00 484.00 1.070.750.95 4551.000.250.246.6 4353.00 -842.000.226.00 Margin Money In account 1.8 4544. of shares 5.00 945.00 1.00 -792.000.250.00 223.000.00 -159.250.250.00 -433.750.00 -83.422.55 4585.00 586.25 4582.500.00 59.85 4499.000.00 3235328.000.000.750.65 4559.750.00 -268.75 4648 4593.00 996.250.500.500.000 Date 1-Jun-09 2-Jun-09 3-Jun-09 4-Jun-09 5-Jun-09 8-Jun-09 9-Jun-09 10-Jun-09 11-Jun-09 12-Jun-09 15-Jun-09 16-Jun-09 17-Jun-09 18-Jun-09 19-Jun-09 22-Jun-09 23-Jun-09 24-Jun-09 25-Jun-09 Closing Price 4538 4530.00 -273.00 Total Margin* 14.250.476.00 -38.00 -438.

85 3481.000.15 3304.00 1.000.000.00 270.250.9 3562.500.000.004.623.256.004.500.750.734.00 0.000.314.000.35 3468.25 3483.00 0.033.000.040.00 3.00 -176.00 1.500.00 254.00 32.750.00 Span Margin* 11.859.000.000.00 1.004.8 2808.250.250.00 1.9 3307.500.433.000.65 3407.250.65 3492.045.321.455.00 -420.500.115.750.00 1.500.00 1.298.500.000.00 1.000.000.000.00 0.000.8 2808.00 1.75 3578.004.45 3644.00 1.500.004.85 3490 3406 3400.00 0.500.250.00 0.500.00 5.973.500.000.2 3504.75 3356.000.00 4.250.00 1.00 0.00 0.410.00 3696486.00 -413.000.000.750.00 -228.00 4.00 1.000 Total Worth 16.00 383.00 1.000 Date 1-Jun-09 2-Jun-09 3-Jun-09 4-Jun-09 5-Jun-09 8-Jun-09 9-Jun-09 10-Jun-09 11-Jun-09 12-Jun-09 15-Jun-09 16-Jun-09 17-Jun-09 18-Jun-09 19-Jun-09 22-Jun-09 23-Jun-09 24-Jun-09 25-Jun-09 Closing Price 3297.031.549.7 3384.00 1.750.00 1.00 1.00 2.05 3492.000.808.00 229.000.CNX IT Date of Purchase: 1-Jun-09 Settlement Date 25/06/2009 3.00 4.00 -35.00 Lot Size 50 No.00 140.6 3310.8 2808.000.490.8 2808.00 2.00 46. Source: Self Generated Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 120 of 190 .00 2.000.115.00 -112.293.000.00 -12.990.250.260.500. of shares 5.000.8 2808.00 0.402.250.004.250.00 968.00 3.000.00 332.250.00 1.8 3414.00 3.00 1.00 5882556.00 532.00 0.7 MTM G/L -500.00 -106.750.318.500.00 30.00 4.00 30/07/2009 2. of Lot 100 Total No.00 Net Account Status Daily Account Status 999.00 48.00 2.588.004.250.000.00 -424.00 4.495.00 40.750.000.000.00 14.00 4.00 Total Margin* 14.00 1564056.35 3422.75 3415.00 1.00 Margin Money In account 1.851.962.00 4.260.00 4.8 3660 3660 3499 3431 3431 3481.750.369.00 -289.063.3 3469.000.00 Net Gain/Loss 859.14 Total Margin Paid 1836986.581.00 1.00 -805.750.250.9 2808.000.00 -27.5 3507 3471.750.00 5.00 4.00 -340.00 1.750.369.250.8 2808.00 4.00 1.00 * Margin is variable item and changes on daily basis.500.14 Exposure Margin 3.971.500.750.925.

750.00 -836.864.500.520.00 -552.00 -175.000.95 7223.00 561.00 -233.05 7304.500.1 7123.00 921.000.00 -1.145.00 876.00 6007838.250.00 36.00 1.4 7060.00 597.95 7286.00 573.00 -812.00 -967. of shares 5.00 111.750.00 563.250.000.500.750.00 722.00 999. Source: Self Generated Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 121 of 190 .65 7283.00 -544.500.00 -33.00 5912588.19 Total Margin Paid 5912588.65 7301.55 7056.00 -988.00 Lot Size 50 No.750.00 -17.55 7288.00 30/07/2009 7.BANK NIFTY Date of Purchase: 1-Jun-09 Settlement Date 25/06/2009 7.00 756.00 -1.750.750.000.250.000.7 7068.000.00 -203.750.00 349.00 * Margin is variable item and changes on daily basis.6 7279.00 Net Gain/Loss -904.00 597.95 7063.000.750.000.250.85 7292.750.00 209.00 -215.00 6028588.45 7110.00 5.000.000.25 7216.304.250.00 203.00 1.250.00 896.00 -884.000.083.00 369.500.000 Total Worth 36.00 913.00 -1.00 Net Account Status Daily Account Status 997.25 7301.750.000.000.00 38.00 -145.750.500.00 989.00 31.00 Total Margin* 16.750.19 Exposure Margin 3.250.00 -30.250.250.00 -627.00 -197.00 -318.35 7064.1 7282.35 7223.00 943.500.00 -286.000.500.00 116.000 Date 1-Jun-09 2-Jun-09 3-Jun-09 4-Jun-09 5-Jun-09 8-Jun-09 9-Jun-09 10-Jun-09 11-Jun-09 12-Jun-09 15-Jun-09 16-Jun-09 17-Jun-09 18-Jun-09 19-Jun-09 22-Jun-09 23-Jun-09 24-Jun-09 25-Jun-09 Closing Price 7303.250.85 7173.750.45 7212.00 4.2 6906.500.7 7087.00 879.35 7177.000.500.750.1 7127.750.750.00 986.500. of Lot 100 Total No.500.00 1.250.197.500.000.00 125.250.00 859.00 577.00 -1.500.35 7057.00 543.864.000.500.00 -106.00 173.25 6910.00 -84.750.500.00 -389.15 7129.520.250.00 955.250.250.00 11.000.500.9 7220.304.00 -19.3 7275.2 MTM G/L -2250.00 110.750.00 1.3 7111.00 -392.00 894.00 -67.00 -238.00 581.9 7040.500.500.250.3 7279.250.00 Margin Money In account 1.750.45 7105.750.092.500.00 95.026.000.250.8 7046.00 -76.00 951.00 500.500.00 -759.35 7075 7219.500.00 Span Margin* 13.250.

250.750.6 4536.000.65 4596.00 -437.35 4664.750.00 991.257.00 963.750.250.00 -436.00 -88.00 -429.500.00 28.250.250.2 4263.00 -441.7 4304.250.00 312.000.690. of shares 5.00 1.750.250.500.00 -494.00 57.500.750. of Lot 100 Total No.00 1.00 -321.250.000.00 -462.500.85 4435.00 3276945.750.250.500.15 4551.250.00 -249.000 Date 1-Jun-09 2-Jun-09 3-Jun-09 4-Jun-09 5-Jun-09 8-Jun-09 9-Jun-09 10-Jun-09 11-Jun-09 12-Jun-09 15-Jun-09 16-Jun-09 17-Jun-09 18-Jun-09 19-Jun-09 22-Jun-09 23-Jun-09 24-Jun-09 25-Jun-09 Closing Price 4537.250.00 485.000 Total Worth 22.65 4503.750.000.05 4252.15 4592.250.00 54.45 4534.000.750.000.00 945.000.613.250.00 -769.00 -506.00 Total Margin* 14.55 4442.500.00 488.00 1.75 4240.00 -436.500.00 1.00 300.000. Source: Self Generated Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 122 of 190 .00 573.00 1.00 86.25 4246.061.00 -36.750.00 282.545.00 153.538.00 816.00 Lot Size 50 No.000.00 -271.500.9 4236.00 -487.500.500.500.500.505.250.238.9 4323.00 65.85 4355.250.00 582.750.00 980.500.00 1.203.00 -868.750.00 2847445.00 545.250.750.00 -70.42 Exposure Margin 3.25 4270.00 27.250.00 -166.00 792.725.15 4363.000.068.35 4592.42 Total Margin Paid 3271898.500.00 Net Account Status Daily Account Status 998.00 535.00 -370.750.750.7 4333.00 Net Gain/Loss 2784648.253.9 4259.00 1.25 4581.000.75 4643 4588.750.00 -58.00 Span Margin* 11.65 4249.00 1.5 4308.750.00 1.00 954.75 4501.MINI NIFTY Date of Purchase: 1-Jun-09 Settlement Date 25/06/2009 4.00 -446.00 91.500.00 1.000.525.75 4530.000.250.000.00 30/07/2009 4.250.00 1.7 4539.750.05 4533.250.2 4528.00 1.00 1.00 -371.00 -267.500.00 -788.000.00 971.00 -35.00 -854.00 275.500.216.500.00 -462.25 4585.750.45 4646.6 4557.500.00 -19.00 -91.00 -180.65 4660.750.500.274.1 MTM G/L -1250.00 225.487.00 1.750.55 4541.250.00 -456.409.250.597.00 32.250.750.750.00 * Margin is variable item and changes on daily basis.00 232.750.00 138.00 943.00 Margin Money In account 1.00 22.

00 -20.00 -26.00 941.750.00 -24.35 MTM G/L -3000.250.00 -115.00 934.000.00 947.00 697.00 -201.250.00 -80.4 404.00 1294715.000.00 2.017.95 399.000.250.00 Span Margin* 26.000.85 349.3 330.2 398.000.00 -40.000.000.4 321.250.00 879.00 44.001.00 687.00 603.250.250.050.00 179.35 417.00 767.00 -43.000.250.000.00 541.00 86.00 1.500.8 322.00 -111.00 895.25 402.500.00 -20.00 544.000.000 Date 1-Jun-09 1-Jun-09 1-Jun-09 1-Jun-09 1-Jun-09 1-Jun-09 1-Jun-09 1-Jun-09 1-Jun-09 1-Jun-09 1-Jun-09 1-Jun-09 1-Jun-09 1-Jun-09 1-Jun-09 1-Jun-09 1-Jun-09 1-Jun-09 1-Jun-09 Closing Price 413.85 364.00 * Margin is variable item and changes on daily basis. Source: Self Generated Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 123 of 190 .05 318.000.500.500.500.500.00 30/07/2009 410.00 -44.00 560.73 Total Margin Paid 760311.00 -46.000.00 24.4 354.250.75 322.750.00 919.000.00 -49.000.000.00 43.00 588.500.500.027.00 950.00 Lot Size 50 No.00 1.250.000.250.85 331.750.250.00 716.00 976.00 517.250.00 Margin Money In account 1.000.00 536.000.00 1.00 752965.00 19.00 -51.55 405.750.6 389.750.00 1.750.00 779.2 364.000.2 415.000.8 367.070.00 173.00 603.750.00 17.000.000 Total Worth 2.00 -82.500.00 19.000.00 -53.750.8 389 365.500.2 320. Date of Purchase: 1-Jun-09 Settlement Date 25/06/2009 414.00 754.9 317.00 -113.55 406.750.00 -459.25 317.750.00 526.750.00 964.00 565.750.000.00 550.00 -110.250.9 395.00 Total Margin* 36.750.00 -9.500.00 908.00 Net Account Status Daily Account Status 997.45 351.750.250.00 516.500.000.00 -28.55 393.00 1276311.250.4 353.00 -27.000.750.8 332.75 323.2 410.00 -209.00 704.00 774.00 941.73 Exposure Margin 10.500.95 400.15 402. of shares 5.250.00 544.7 322 330.00 961.000.250.750.750.00 -39.000.750.15 315.000.000.750.00 594.00 -38. of Lot 100 Total No.00 -8.00 76.00 Net Gain/Loss -484.00 -29.DLF INDIA LTD.000.750.

05 162.750.00 24.00 979.00 914.00 952.750.00 -20.250.25 173.000.000 Total Worth 880.250.00 834.002.750.5 173.00 Total Margin* 31.8 146.00 -43.00 Span Margin* 21.00 -62.3 166.016.000.250.00 855.GMR INFRASTRUCTURE LTD.500.500.750.00 880.00 -36.15 165.00 198.00 -42.000.750.00 816.750.00 818.500.500.011.000.500.000.00 804.00 -2.35 135.500.00 917.00 -60.00 976.15 151.55 143.000.00 30/07/2009 175.85 138.00 854.55 159.00 -3.000.7 175.00 -1.00 987.750.00 877.750.00 1078400.9 157.500.250.750.750.750.000.250.250.250.9 139.250.05 157.00 819.00 -34.45 141.000 Date 1-Jun-09 2-Jun-09 3-Jun-09 4-Jun-09 5-Jun-09 8-Jun-09 9-Jun-09 10-Jun-09 11-Jun-09 12-Jun-09 15-Jun-09 16-Jun-09 17-Jun-09 18-Jun-09 19-Jun-09 22-Jun-09 23-Jun-09 24-Jun-09 25-Jun-09 Closing Price 176.250.000.00 274400.00 4.00 981.00 1.00 2.6 146. Date of Purchase: 1-Jun-09 Settlement Date 25/06/2009 176.750.000.00 2.250.750.500.750.250.500.00 -22.00 -17.750.00 -21.00 993.250.250.00 835.00 834.00 9.00 19.00 3.500.8 139.00 793.00 38.00 -12.36 Exposure Margin 10.500.35 139.00 -25.000.00 853.00 1.8 MTM G/L 250.00 12.00 1.500.00 856.00 907.1 142.00 821.00 21.1 142.05 173.00 * Margin is variable item and changes on daily basis.00 22.8 145.000.65 178.000.250.00 -34.500.00 930.250.00 911.750.00 Net Account Status Daily Account Status 1.250.00 950.00 -65.00 Margin Money In account 1.00 24.2 170.000.250.3 171. of shares 5.00 918.000.000.36 Total Margin Paid 275968.00 -500.00 20.00 37.500.00 Net Gain/Loss 1069468.75 134.750.00 915.8 158.000.000. of Lot 100 Total No.00 -39.000.00 814.00 -20.00 837.4 147.000.00 -64.00 987.35 158.5 171. Source: Self Generated Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 124 of 190 .000.250.500.500.750.00 Lot Size 50 No.250.500.00 817.4 178.00 -18.500.55 161.45 139.00 206.95 158.250.00 4.000.250.000.65 137.35 151.00 875.00 934.

9 233.500.00 906.00 -5.00 43.9 217.15 202.6 224.500.00 909.00 18.250.000.3 217 224.00 974.00 1.500.2 191.00 854.500.00 46.000.00 1.500.500.750.65 225.00 968.65 190.00 123.00 Total Margin* 34.00 Margin Money In account 1. Date of Purchase: 1-Jun-09 Settlement Date 25/06/2009 220.00 39.250.9 207.059.95 207.750.750.00 60.00 1.000.00 -21.00 -20.750.750.250.00 930.000.00 983.000.00 852.00 -5.00 1.2 201.250.250.00 1374109.500.00 923.500.5 221.500.750.00 1367880.500.500.00 -43.063.00 48.250.000.250.00 -6.00 -8.6 210.00 22.00 -73.6 231.00 992.7 215.250.58 Total Margin Paid 380380.00 87.000. of Lot 100 Total No.250.100.00 121.500.00 8.000.750.500.00 -3.00 -69.000.00 54.00 953.000.500.105.55 202.2 219.00 -6.00 -14.00 43.00 Span Margin* 24.00 * Margin is variable item and changes on daily basis.00 89.250.00 910.000.00 1.001.000.00 968.750.00 1.021.JP ASSOCIATE LTD. Source: Self Generated Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 125 of 190 .00 -9.00 969.95 214.018.750.000.7 210.00 1.054.00 500.00 Net Account Status Daily Account Status 1.028.250.018.250.00 38.00 1.250.500.500.019.500.000.500.00 969.000.65 216.7 219.05 213.00 1.500.00 -76.000.000.4 MTM G/L 3250.000 Date 1-Jun-09 2-Jun-09 3-Jun-09 4-Jun-09 5-Jun-09 8-Jun-09 9-Jun-09 10-Jun-09 11-Jun-09 12-Jun-09 15-Jun-09 16-Jun-09 17-Jun-09 18-Jun-09 19-Jun-09 22-Jun-09 23-Jun-09 24-Jun-09 25-Jun-09 Closing Price 220.00 7.15 224.00 946.58 Exposure Margin 10.00 Lot Size 50 No.000.250.00 -9.00 Net Gain/Loss -12.4 202.00 -22.000 Total Worth 1.750.250.000.00 1.00 52.35 233 231.9 201.00 977.00 906.00 59.9 219.00 921.500.026.00 1.250.00 900.00 980.500.00 1.25 215.500.85 205.8 214.000.750.250.00 999.500.500.00 30/07/2009 221.00 1.065.750.00 -44.00 -68.500.6 224.500.00 382109.00 987.00 938.95 204.000.000.00 994.65 225.3 200.4 213.00 902. of shares 5.250.003.750.

6 78.00 978.00 19.000.75 76.250.00 -5.250.00 919.000.034.00 951.05 97.500.00 961. Source: Self Generated Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 126 of 190 .004.4 80.00 -26.00 991.250.00 -3.00 -66.500.00 13.50 1131393.250.000.250.00 20.00 * Margin is variable item and changes on daily basis. of shares 5.00 990.500.00 933.00 -2.95 86.000.00 27.750.000.500.00 932.UNITECH LTD.85 86.00 -36.00 -250.00 470.00 936.007.250.500.250.250.00 918.00 1.000.00 23.00 966.000.00 Span Margin* 30.500.000 Date 1-Jun-09 2-Jun-09 3-Jun-09 4-Jun-09 5-Jun-09 8-Jun-09 9-Jun-09 10-Jun-09 11-Jun-09 12-Jun-09 15-Jun-09 16-Jun-09 17-Jun-09 18-Jun-09 19-Jun-09 22-Jun-09 23-Jun-09 24-Jun-09 25-Jun-09 Closing Price 92.25 89 88.00 970.1 83.45 82.00 927.000.000.00 942.250.000.00 978.750.750.00 -14.5 MTM G/L 7250.05 98.00 1.7 86.00 Net Account Status Daily Account Status 1.500.19 Exposure Margin 10.000.00 -36.000.00 -1.00 955.00 5.00 1.00 3.05 95.85 77.021.00 922.3 78.250.65 77.00 931.00 21.85 84.00 -4.250.00 1.00 -1. of Lot 100 Total No.00 30/07/2009 94.750.750.00 990.00 15.00 912.25 97.4 87 89.00 -9.500.19 Total Margin Paid 182864.250.00 977.05 89.750.750.000.00 963.7 87.00 Net Gain/Loss -44.750.2 88.500.250.00 -68.000.8 98.8 86.00 Margin Money In account 1.00 948.250.250.00 980.250.250.750.000.00 4.500.000.3 89.035.750.95 92.00 15.00 Lot Size 50 No.00 11.00 9.000.00 -5.3 83.00 1.000.00 -15.250.00 -52.250.00 17.00 -27.00 -1.500.00 975.05 92.00 1138114.750.250.500.00 948.500.000 Total Worth 455.45 92.020.250.00 21.250.00 -11.000.6 84.00 994.250.75 77.00 4.00 Total Margin* 40.00 -1.5 77.4 80.250.00 1.750.75 76.750.00 964.000.00 -3.005.00 969.500. Date of Purchase: 1-Jun-09 Settlement Date 25/06/2009 91.018.250.2 82.000.250.1 94.00 1.00 989.000.50 188893.250.500.000.250.

8 1109.412.9 1018.4 1159.05 1130.RELIANCE INDUSTRIAL INFRASTRUCTURE LTD.250.00 1.000 Total Worth 5.750.364.00 244.00 1.00 -165.00 * Margin is variable item and changes on daily basis.00 Net Gain/Loss 1911450.00 230.00 674.00 -46.25 1011.750.35 1044.001.750.00 320.000.250.00 1.85 1252.8 1128.6 1047.00 -1.00 919.00 949.250.750. of Lot 100 Total No.3 1016.1 1242.005.500.000.750.05 1235.05 969.00 792.00 -251.00 48.000. Date of Purchase: 1-Jun-09 Settlement Date 25/06/2009 1.15 1025.00 -308.000.000.00 Date 1-Jun-09 2-Jun-09 3-Jun-09 4-Jun-09 5-Jun-09 8-Jun-09 9-Jun-09 10-Jun-09 11-Jun-09 12-Jun-09 15-Jun-09 16-Jun-09 17-Jun-09 18-Jun-09 19-Jun-09 22-Jun-09 23-Jun-09 24-Jun-09 25-Jun-09 Closing Price 1171.750.00 157.000.325.500.00 803.250.00 385.00 Net Account Status Daily Account Status 1.6 1017.104.00 -312.000 Margin Money In account 1.00 276.00 -550.500.6 1020.85 1153.00 -860.00 Span Margin* 22.500.000.00 -127.500.000.00 134.00 -231.00 38.250. Source: Self Generated Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 127 of 190 .000.250.500.00 1.750.00 Total Margin* 32.00 Lot Size 50 No.00 -16.00 236.00 1.000.000.170. of shares 5.250.70 Total Margin Paid 1912950.00 253.750.750.00 698.500.250.000.250.00 70.00 205.500.70 Exposure Margin 10.00 371.7 MTM G/L 5250.00 417.250.55 1190.850.250.

Calculation of Mark to Mark Loss/Gain is done by a simple formula: (Today’s Settlement price – Previous day Settlement price) * Lot Size By applying this formula we can easily calculate the mark to mark loss/gain which to be paid by an investor on a daily basis. As we already understand the virtual working of future trading. Future trading is generally used by portfolio manager to hedge the fluctuation risk in share price. Generally manager used to use some strategies which are as follow: 1. 2. 3. Future derivative are the most tradable instrument in the Indian capital market and the best instrument to hedge risk.Analysis: Derivatives (as we have already understood) are a tool to hedge risk of a portfolio or of an individual investor. It gives liquidity into the Indian capital market. There might be other way round like if the price of security increases then the gain on margin money would be credited to the trading account. Calculation of settlement is done by the exchange. It is not possible to show actual trading of futures as the margin money changes on daily basis and calculation of Mark to mark Loss/Gain is done on the daily basis. Calculation of settlement price is done by taking last half an hour prices of trading hours. Future derivative is the most important tool in Indian stock market. Buy this month future and sell next month future of that share. Derivatives are generally used by portfolio managers to hedge their client’s portfolio from risk because they are investing a huge amount and lit bit of risk would give a huge amount of loss to their clients. Volume and time into consideration and then calculated the weighted average price which is known as settlement price. This has been already shown in the virtual future trading. In bullish market buy future only and in bearish market sell future only. Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 128 of 190 . Buy share in cash market and sell future of that share.

0) Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 129 of 190 .Option Trading: Virtual Option Trading: NIFTY: Date Buy / Sell Buy Strike Price 280 Call Rate 12 Lot Size 50 Lot Expiry 29/5/09 10 25/06/09 Instrument Symbol Option OPTSTK OPTSTK OPTSTK OPTSTK OPTSTK OPTSTK OPTSTK OPTSTK OPTSTK OPTSTK OPTSTK OPTSTK OPTSTK OPTSTK OPTSTK OPTSTK Nifty Nifty Nifty Nifty Nifty Nifty Nifty Nifty Nifty Nifty Nifty Nifty Nifty Nifty Nifty Nifty CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA Date 29/05 29/05 29/05 29/05 29/05 29/05 29/05 29/05 29/05 29/05 29/05 29/05 29/05 29/05 29/05 29/05 Expiry Strike Price Buy Rate Sell Rate Investment 25/06 25/06 25/06 25/06 25/06 25/06 25/06 25/06 25/06 25/06 25/06 25/06 25/06 25/06 25/06 25/06 4300 4300 4300 4300 4300 4300 4300 4300 4300 4300 4300 4300 4300 4300 4300 4300 145 (72500.

In volatile market buy and call at the same time. In option there is nothing like mark to mark loss/gain like in future derivatives. 5. Here in option one is only liable to pay premium price which is determined by the demand and supply of the respective security. In bullish market buy call or sell put. 6. Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 130 of 190 . In Bullish market sell call and buy future of that share. 2.nseindia.OPTSTK OPTSTK OPTSTK Nifty Nifty Nifty CA CA CA 29/05 29/05 29/05 25/06 25/06 25/06 4300 4300 4300 - 35 17500 Net profit from option trading Source: Self Generated (55. Here I have shown only one virtual trading example but for the purpose of my understanding I have carried out many actual trading on my client’s behalf. Some of the strategies generally used by the investor are as follow: 1. Bearish market sell put/buy call and sell future of that share.0) Data source: www. 4. In bearish market buy put or sell call. 3.com Analysis: By analyzing the option instrument one can find that option are the cheapest instrument in terms of hedge risk. Where I have used almost all strategies which I have mentioned in my project. Option trading is also used to hedge risk but portfolio manager generally avoid to use option instrument because they are short term instrument and return is also less as compared to future instrument. Some time investors buy or sell naked call/put.000.

because here even at higher price. the market is strong. people buying power is very strong which indicates that they are very bullish about the script. • If prices are down and volume and open interest are declining. the market is weak as people are building at lower level.Some of the important conclusions that can be said by analyzing various scripts are: Price Volume Open Interest Market Strong Weak Weak (Not much) Strong Source: Self Generated • If prices are up and volume and open interest are rising. the market is strong as this indicates people are exiting their existing positions and rolling over to next month or fresh buyers may enter into the market next day Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 131 of 190 . as people have started building profits or they are exiting their existing position. the market is weak. they are buying at lower prices or they are building short positions which may indicate market is not that much weaker. Price fluctuation will not be very high. • If prices are up and volume and open interest are declining. • If prices are down and volume and open interest are rising.

It’s always said that prevention is better than cure. This work is still in progress. by this I mean it's better to first look at the stock see its market value and then buy it. one basic thing is that one should invest wisely. which can be useful • In a bull market. after that company and last one is ratio analysis. Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 132 of 190 . Hedging is not the only way to minimize risk. Keeping that in mind I decided to do fundamental analysis that begins with economy then comes industry.Other things. • In a bear market. volume has a tendency to increase on declines and decrease on rallies This can be useful in case of future stocks only that too to some extent because this cannot be always true as stock market depends on various factors as discussed above. So these things can predict day-to-day movements for various scripts for most of the time. volume has a tendency to increase on rallies and to decrease on reactions.

38 17.84 9.56 6. I have choosen five realty & infrastructure companies in total and currently working on it.FUNDAMENTAL ANALYSIS: Stock Information: For the purpose of equity analysis. Company’s Basic Information: Company Name DLF Limited GMR Infrastructure Limited JaiPrakash Associates Limited Unitech Limited Reliance Industrial Infrastructure Ltd.60 10.76 40. which I have completed. Stock Name** DLF GMRINFRA JPASSOCIAT UNITECH RIIL Face Value 2 2 2 2 10 Series EQ EQ EQ EQ EQ ISIN Code INE271C01023 INE776C01021 INE455F01025 INE694A01020 INE046A01015 Security Margin/VaR* 23.28 36.87 Extreme Loss Rate* 9.24 20. Calculations which have been done for company specific are true and the data has been collected from the official website of the company and from the official websites of the NSE and BSE. The detailed view of my research work.68 26. Other information regarding market price. is presented in this project with other important information related to company’s financials.08 30. Margin Rate and Security Code are taken from Official Website of NSE.56 29.20 10. which is related to the financials of the company.64 Applicable Margin Rate 32. * VaR and ELR are of specific date and changes on daily basis.94 24. ISIN Code.51 ** Stock name given are of NSE and are different for BSE. Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 133 of 190 . is taken from annual report of the company. Stock Information.

28 10 28.29 1547.98 897. 09 Mar.90 1809.54 25.92 GMR Infra (08-09) 159. Report card: Unitech PE ratio EPS (Rs) Sales (Rs crore) Face Value (Rs) Net profit margin (%) Last bonus Last dividend (%) Return on average equity 18.56 1852.96 103.66 RIIL (08-09) 80 28. 09 8/6/2009 Mar.51 20 15. 09 Mar.rediff.05 14.66 26/06/09 Mar. 08 Data Source: www.69 9.99 97.07 26/06/09 Mar. 09 Dec. 09 23/04/09 Mar.18 1.67 2 14.67 JP Associate (08-09) 5764.91 0.11 26/06/09 Mar.12 55.com Source: Self Generated Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 134 of 190 .12 1:01 5 48.34 739. 09 Mar.01 Unitech (08-09) 1852. 09 Mar.44 35 16.29 100 22. 09 Mar. 08 35. 08 67. 08 Mar.07 4.84 DLF 26/06/09 Mar.59 2 59. 09 Mar.money.20 121.93 34.81 22. 08 GMR infra 254. 08 JP Associate 29. 09 Mar.25 602.33 7.88 18.53 2 40.59 RIIL 26/06/09 Mar.28 1586.54 2.48 Source: Self Generated Data Source: SMC Global Securities Ltd.50 1718.25 2 30.66 739.18 215.) -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- DLF (08-09) Net Sales Other Income PBDIT PAT Net Profit 2833. 09 Mar.151.83 1250.Financial Statement Summary: Income Statement: (Value in Cr. 09 Mar. 09 4/6/2008 Mar.66 1049. 09 28/05/07 25/06/09 Mar.

FUNDAMENTAL ANALYSIS: DLF INDIA LTD.54% -73.69% 17.28% Beta Alpha 1. WACC may be defined as weighted average cost of all finance instruments (Equity. Debt and Retained earnings) which are used by company in its capital structure.08707 Data Source: SMC Global Securities Ltd. This sensitivity is called as Beta.18% 2009 51.: BETA: Step: 1 Calculation of Beta value is the first step in the process of calculating intrinsic value of share.193186 -0.50% 2008 -52. Beta is nothing but how sensitive a share price is to the market movement. Source: Self Generated WACC: Step: 2 Calculation of weighted average cost of capital (WACC) is the second step in this process. Calculation of WACC is done using MS Excel: Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 135 of 190 .71% 84. Calculation of Beta Value is done using MS Excel: Calculation of Beta Value: Year INDEX STOCK 2007 46.

After discounting the cash flow of the company.193 18% 19.776. Source: Self Generated 16.93% 1. Intrinsic value may be defined as Real worth of the company on the basis of future growth and cash flow.80 0. I calculated the intrinsic value of the company.79% Calculation of Intrinsic Value: Step: 3 Calculation of the discounted cash flow (DCF) is the last step of this Process.58 0.03 0. Calculation of Intrinsic value is done using MS Excel: Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 136 of 190 .17 weighted average cost of capital Data Source: SMC Global Securities Ltd.Calculation of WACC: Calculation of Weighted average Cost of Capital Cost of debt 16% Risk free return Beta Market return Required rate of return Retained Earnings Weight of debt Weight of equity Weight of Retained Earning 8% 1.

40 103.5 34.3 0 1910.Calculation of Intrinsic Value: Discounted cash flow Projections of Company financials Periods Growth in Net Profit Net Profits Depreciation Other write offs Net Change In working capital Free cash Flows Discount Rate Discounted Cash Flow (Fair Market Capitalization) Stocks Intrinsic Value No.79% 21836.68% 24.6 1789.20% 14.4 141.5 2.6 123.03% -1.71% 18.4 1.2 12.7 0 0 1717.4 2654. of Shares Outstanding Data Source: SMC Global Securities Ltd.9 2231. Source: Self Generated Value in Cr.4 114.5 28.3313 128. DLF INDIA LIMITED 09E 10E 11E 12E 13E -39.95% 1579.48 1703.560.3 16.08 170.4 109.3 0 2357.6 0 0 2796 BUY HOLD SELL Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 137 of 190 .

0832 (0. Calculation of Beta Value is done using MS Excel: Calculation of Beta Value: INDEX STOCK Year 2006 46.1391) Data Source: SMC Global Securities Ltd.98% 2008 -52.71% -30.69% 78.32% 65. Source: Self Generated WACC: Step: 2 Calculation of weighted average cost of capital (WACC) is the second step in this process. WACC may be defined as weighted average cost of all finance instruments (Equity. Beta is nothing but how sensitive a share price is to the market movement. This sensitivity is called as Beta. Debt and Retained earnings) which are used by company in its capital structure.95% Beta Alpha 1.08% 2009 51.54% -69.GMR INFRASTRUCTURE LIMITED: BETA: Step: 1 Calculation of Beta value is the first step in the process of calculating intrinsic value of share.33% 2007 46. Calculation of WACC is done using MS Excel: Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 138 of 190 .

10 0. Calculation of Intrinsic value is done using MS Excel: Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 139 of 190 .83% 3. Intrinsic value may be defined as Real worth of the company on the basis of future growth and cash flow.08 0. I calculated the intrinsic value of the company.Calculation of WACC: Calculation of Weighted average Cost of Capital Cost of debt 16% Risk free return Beta Market return Required rate of return Retained Earnings Weight of debt Weight of equity Weight of Retained Earning 8% 1.931.74 0.82 weighted average cost of capital Data Source: SMC Global Securities Ltd. After discounting the cash flow of the company. Source: Self Generated 18.083 18% 18.58% Calculation of Intrinsic Value: Step: 3 Calculation of the discounted cash flow (DCF) is the last step of this Process.

94 205.38 388. of Shares Outstanding Data Source: SMC Global Securities Ltd.33% 40.23 0 0 102.4 386.23% 145.00 182.9 0.12 0 0 0 0 0 0 0 0 145.00% 33.Calculation of Intrinsic Value: Discounted cash flow Projections of Company financials Periods Growth in Net Profit Net Profits depreciation Other write offs Net Change In working capital Free cash Flows Discount Rate Discounted Cash Flow (Fair Market Capitalization) Stocks Intrinsic Value No.58% 2549.45% 42.02 BUY HOLD SELL Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 140 of 190 .07 10E 11E 12E 13E 42.3 0.34 0.64 0. GMR INFRASTRUCTURE LIMITED 09E 102.33385 14.5 290.53 18.14 291. Source: Self Generated Value in Cr.98 1.6 204.

35% 109. This sensitivity is called as Beta.70% 153.82% 46.51% -80.1048 Data Source: SMC Global Securities Ltd. Debt and Retained earnings) which are used by company in its capital structure. Calculation of WACC is done using MS Excel: Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 141 of 190 .JP ASSOCIATE LIMITED: BETA: Step: 1 Calculation of Beta value is the first step in the process of calculating intrinsic value of share.39% Beta Alpha 1. Source: Self Generated WACC: Step: 2 Calculation of weighted average cost of capital (WACC) is the second step in this process.43% 41.03% 87.22% -41.71% -52. WACC may be defined as weighted average cost of all finance instruments (Equity.5492 0.32% 46.69% STOCK 62.54% 51. Calculation of Beta Value is done using MS Excel: Calculation of Beta Value: Year 2004 2005 2006 2007 2008 2009 INDEX 12. Beta is nothing but how sensitive a share price is to the market movement.

13 weighted average cost of capital 17. After discounting the cash flow of the company.49% 1. Source: Self Generated Calculation of Intrinsic Value: Step: 3 Calculation of the discounted cash flow (DCF) is the last step of this Process.84 0. Calculation of Intrinsic value is done using MS Excel: Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 142 of 190 .549 18% 23. Intrinsic value may be defined as Real worth of the company on the basis of future growth and cash flow.61% Data Source: SMC Global Securities Ltd.22 0.312.Calculation of WACC: Calculation of Weighted average Cost of Capital Cost of debt 17% Risk free return Beta Market return Required rate of return Retained Earnings Weight of debt Weight of equity Weight of Retained Earning 8% 1. I calculated the intrinsic value of the company.02 0.

9 378.Calculation of Intrinsic Value: Discounted cash flow Projections of Company financials Periods Growth in Net Profit Net Profits depreciation Other write offs Net Change In working capital Free cash Flows Discount Rate Discounted Cash Flow (Fair Market Capitalization) Stocks Intrinsic Value No. of Shares Outstanding 09E 47.3 506.81 3492.38 Value in Cr.96 Data Source: SMC Global Securities Ltd.7 567.5855 213.21 0 1274.4 0.6 628.9 2864.32 2913. JP ASSOICATE LIMITED 10E 11E 12E 13E 40.26 0 0 0 0 1668.24% 38.10% 1256.26 117.71 17.3 412. Source: Self Generated BUY HOLD SELL Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 143 of 190 .05% 35.18 0.5 2345.12 0.6 0.61% 25031.46% 895.31 0.25% 22.88 2241.4 1734.

UNITECH LIMITED: BETA:
Step: 1 Calculation of Beta value is the first step in the process of calculating intrinsic value of share. Beta is nothing but how sensitive a share price is to the market movement. This sensitivity is called as Beta. Calculation of Beta Value is done using MS Excel:

Calculation of Beta Value:
Year INDEX STOCK 2003 72.55% 170.38% 2004 12.43% 161.79% 2005 41.82% 209.46% 2006 46.32% -53.93% 2007 46.71% 5.00% 2008 -52.54% -91.80% 2009 51.69% 86.10% Beta Alpha 1.4794329 0.2328721

Data Source: SMC Global Securities Ltd. Source: Self Generated

WACC:
Step: 2 Calculation of weighted average cost of capital (WACC) is the second step in this process. WACC may be defined as weighted average cost of all finance instruments (Equity, Debt and Retained earnings) which are used by company in its capital structure.

Calculation of WACC is done using MS Excel: Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 144 of 190

Calculation of WACC: Calculation of Weighted average Cost of Capital Cost of debt 17% Risk free return Beta Market return Required rate of return Retained Earnings Weight of debt Weight of equity Weight of Retained Earning 8% 1.479 18% 22.79% 820.48 0.88 0.04 0.09

weighted average cost of capital
Data Source: SMC Global Securities Ltd. Source: Self Generated

17.72%

Calculation of Intrinsic Value:
Step: 3 Calculation of the discounted cash flow (DCF) is the last step of this Process. After discounting the cash flow of the company, I calculated the intrinsic value of the company. Intrinsic value may be defined as Real worth of the company on the basis of future growth and cash flow.

Calculation of Intrinsic value is done using MS Excel:

Sumati Sethia/4108168168/MBF/Indian Institute of Finance

Page 145 of 190

Calculation of Intrinsic Value: Discounted cash flow Projections of Company financials Periods Growth in Net Profit Net Profits depreciation Other write offs Net Change In working capital Free cash Flows Discount Rate Discounted Cash Flow (Fair Market Capitalization) Stocks Intrinsic Value No. of Shares Outstanding
Data Source: SMC Global Securities Ltd. Source: Self Generated

Value in Cr.
UNITECH LIMITED 09E -28% 750 10.5 0 0 760.5 17.72% 10207.3231 62.88 162.34 11E 12E 13E 4.59% 21.79% 25.06% 27.34% 715.6 871.5 1089.9 1387.9 10.9 11.8 13.4 15.4 0 0 0 0 0 0 0 0 726.5 883.3 1103.3 1403.3 10E

BUY

HOLD

SELL

Sumati Sethia/4108168168/MBF/Indian Institute of Finance

Page 146 of 190

Beta is nothing but how sensitive a share price is to the market movement.4224 0. Calculation of Beta Value is done using MS Excel: Calculation of Beta Value: Year INDEX STOCK 2003 72. Source: Self Generated WACC: Step: 2 Calculation of weighted average cost of capital (WACC) is the second step in this process.49% Beta Alpha 2. Calculation of WACC is done using MS Excel: Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 147 of 190 .19% 2007 46.82% 302.43% -8.69% 165.71% 309.47% 2006 46.55% 113.72% 2009 51. WACC may be defined as weighted average cost of all finance instruments (Equity. Debt and Retained earnings) which are used by company in its capital structure.RELAINCE INDUSTRIAL INFRASTRUCTURE LIMITED: BETA: Step: 1 Calculation of Beta value is the first step in the process of calculating intrinsic value of share.81% 2005 41.54% -83.88% 2008 -52. This sensitivity is called as Beta.99% 2004 12.32% 78.4957 Data Source: SMC Global Securities Ltd.

After discounting the cash flow of the company. I calculated the intrinsic value of the company.04 0.01% Calculation of Intrinsic Value: Step: 3 Calculation of the discounted cash flow (DCF) is the last step of this Process.09 weighted average cost of capital Data Source: SMC Global Securities Ltd.48 0. Source: Self Generated 18.Calculation of WACC: Calculation of Weighted average Cost of Capital Cost of debt 16% Risk free return Beta Market return Required rate of return Retained Earnings Weight of debt Weight of equity Weight of Retained Earning 8% 2.422 18% 32. Calculation of Intrinsic value is done using MS Excel: Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 148 of 190 .22% 820.88 0. Intrinsic value may be defined as Real worth of the company on the basis of future growth and cash flow.

91196 272.4 4.52% 21.01% 410.73 38.18 18.13 1.51 10E 11E 12E 13E 17.5 33.Calculation of Intrinsic Value: Discounted cash flow Projections of Company financials Periods Growth in Net Profit Net Profits depreciation Other write offs Net Change In working capital Free cash Flows Discount Rate Discounted Cash Flow (Fair Market Capitalization) Stocks Intrinsic Value No.33% 27.9 4.02 0 0 0 0 0 0 0 0 31. Source: Self Generated Value in Cr.3 50.23 5.82% 26. of Shares Outstanding Data Source: SMC Global Securities Ltd.5 42.62 47. INFRA.39% 23.75 56.92 BUY HOLD SELL Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 149 of 190 .78 0 0 28.12 5. LIMITED 09E 7.27% 20.45 6. RELIANCE IND.

HOLD or SELL. While calculating the intrinsic value one need to predict the net profit. and for the calculation of intrinsic value no. growth and cost of capital into consideration. 10 to 2 Rs. depreciation and change in working capital which are the most important figure for the calculation of intrinsic value. But still it contains the genuine work done by me on fundamental research. Fundamental analysis is nothing but a tool to calculate the intrinsic value of a share price taking company’s future cash flow. Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 150 of 190 . It may differ from analyst to analyst. While calculating the WACC the average market return is only on assumption basis. Taking this limitation into consideration some part of project has been modified. The project contains one major limitation which mainly affect the calculation part of project is data availability and future projects. The intrinsic value calculated for the GMR Infra is very low because the company has already split its share from face value of Rs. These suggestion may vary from actual cause the data’s are predicted and not have any back support. On the basis of intrinsic value the position of company’s share has been described and suggestion has been made regarding BUY. of shares outstanding play a very crucial role. In chapter 4th and section Equity Research I have calculated the intrinsic value of five different companies on their future earnings.Analysis: As we have already discussed about fundamental analysis in detail and now I am trying to analyze what we have already discuss so far.

Charting is tool to convert hectic price changes into a smooth curve so that one can easily understand the market. Closing prices and date has been at Y axis and X axis respectively. As we have seen that market till 2008 has remain volatile and negative sentiment has keep its grip on market for long time but from April 2009 the market became favorable to investors and it’s constantly giving returns. but it was true. But SENSEX turns back and reach to a level of 15200 in June which itself is not believable. with day’s high and low. Like as SENSEX. Month they are very hectic for market where market goes down from 10200 to 8400 and at that point of time market are looking bearish and investor guessing a plunge in share market and expecting a level of 6500 in near future. But still if we look at the Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 151 of 190 . But if look at the last someday NIFTY is losing more than SENSEX. But if we talk about Jan and Feb. Nifty is losing more than SENSEX and the reason being 20 extra companies are getting more correction than the common 30 companies. Now we come to the part of understanding the market and its movement. That’s means absolute 50% return which is just in 3 month is very difficult to get in any other form of investment even difficult to get in mutual fund schemes. Looking at the prices is and predicting anything is a very difficult task to do but the same prices are taken in chart format it became very easy to analyze the market. NIFTY also touches its low of 2539 on 6 mar 2009 and after that it reach to its high of 4688 in June 2009. If we talk about NIFTY it is also showing same pattern as SENSEX but it is moving smoothly than SENSEX prices. If we talk about market return it gain almost 100% from its low but in last month it has increase by more than 50%. Market got momentum from April 2009 and till date it’s on its higher side of 2009. which indicate fluctuation in intraday. For that purpose I have taken price changes on daily basis.TECHNICAL ANALYSIS: SENSEX AND NIFTY WATCH: Before moving to technical analysis I would like to tell you something about SENSEX and NIFTY and their performance in past 6 months. And chart has been made taking these prices into consideration. First looking at SENSEX we can find that its touches its intraday low of 8047 on 6 mar 2009 and after that it didn’t look back for that level and constantly gain till the 15000 level in June 2009.

158.22 10.59 9.59 9.017.128.34 8.36 9.943.015.55 9.51 9.22 8.977.589.331.23 9.236.024.04 9.33 9.123.60 8.61 Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 152 of 190 .762.30 9.86 10.31 9.06 10.15 8.580.12 9.58 9.04 8.674.99 9.258.637.95 8.05 9.54 9.40 8.55 8.08 9.247.24 9.07 9.973.86 8.100.412.913.822.50 9.46 9.958.213.graph or chart its showing the same trend and one might see same trend for SENSEX and NIFTY in near future.96 9.56 9.11 10.08 9.36 9.164.39 9.14 9.406.74 9.44 8.78 8.098.20 9.438.381.149.56 8.52 9.392.540.707.995.72 8.111.96 9.21 9.601.60 9.60 9.11 High 9.68 9.58 8.35 9.090.78 8.631.053.275.695.647.52 8.789.048.202.62 9.49 9.13 9.28 10.004.510.83 9.042.150.69 8.65 9.00 9.28 9.305.97 8.92 9.273.76 9.459.89 9.06 9.261.424.788.15 9.863.85 9.11 Low 9.905.93 9.47 9.75 9.619.207.86 9.36 9.711.445.342.97 9.125.316.858.434.257.18 9.40 9.57 9.45 8.363.31 8.033.97 9.08 9.63 8.10 8.65 9.17 8.066.59 9.161.84 9.95 9.021.78 8.469.56 9.279.32 8.409.734.902.06 8.97 9.071.125.55 8.66 Close 9.648.80 9.164.47 9.034.943.84 8.12 10.069.92 9.47 9.65 9.359.159.379.586.64 9.59 9.56 8.68 9.465.329.70 10.856.241.891.046.60 10.03 9.Mar 2009 Date 1-Jan-09 2-Jan-09 5-Jan-09 6-Jan-09 7-Jan-09 9-Jan-09 12-Jan-09 13-Jan-09 14-Jan-09 15-Jan-09 16-Jan-09 19-Jan-09 20-Jan-09 21-Jan-09 22-Jan-09 23-Jan-09 27-Jan-09 28-Jan-09 29-Jan-09 30-Jan-09 2-Feb-09 3-Feb-09 4-Feb-09 5-Feb-09 6-Feb-09 9-Feb-09 10-Feb-09 11-Feb-09 12-Feb-09 13-Feb-09 16-Feb-09 17-Feb-09 18-Feb-09 19-Feb-09 20-Feb-09 24-Feb-09 25-Feb-09 26-Feb-09 27-Feb-09 Open 9.051.540.32 8.74 9.201.16 9.363.47 9.47 9.944.630.250.813.75 9.31 8.728.087.637.905.56 9. Sensex Watch SENSEX watch for Year 2009 Jan .077.954.994.939.070.804.76 8.00 9.334.38 10.306.370.699.226.998.00 9.72 9.927.17 10.323.21 8.87 9.583.110.424.900.803.88 9.111.113.70 9.38 9.300.042.66 8.09 9.559.040.944.67 10.109.13 9.40 9.31 8.54 9.57 8.634.843.159.724.88 9.035.90 8.903.335.946.921.338.720.992.462.302.213.35 8.45 9.922.04 9.779.78 9.329.58 9.38 9.321.82 9.49 9.78 9.270.85 9.510.47 9.879.618.93 8.

943.88 8.45 9.424.30 9.40 9.390.902.325.793.061.49 8.023.951.966.01 8.999.446.956.001.17 8.568.454.003.12 9.607.com 8.29 8.50 Source: Self Generated Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 153 of 190 .21 8.97 8.667.35 9.563.61 8.82 8.49 9.47 10.98 9.03 8.30 9.259.04 9.535.442.bseindia.427.127.73 9.77 8.75 8.93 10.942.88 8.22 8.25 8.36 10.583.03 8.02 9.762.04 8.706.274.955.402.00 9.74 8.040.64 9.40 8.024.697.480.439.71 8.14 9.801.68 9.82 8.22 8.74 8.78 8.708.74 8.520.34 9.68 9.549.79 8.75 8.69 9.160.21 8.047.826.036.52 8.30 9.739.430.09 9.086.274.547.30 9.80 9.22 8.197.78 8.756.46 9.54 8.900.471.13 9.166.46 8.633.913.902.10 8.951.08 8.535.10 10.120.739.793.06 8.93 9.040.89 8.75 8.21 8.863.762.2-Mar-09 3-Mar-09 4-Mar-09 5-Mar-09 6-Mar-09 9-Mar-09 12-Mar-09 13-Mar-09 16-Mar-09 17-Mar-09 18-Mar-09 19-Mar-09 20-Mar-09 23-Mar-09 24-Mar-09 25-Mar-09 26-Mar-09 27-Mar-09 30-Mar-09 31-Mar-09 Source: www.20 8.32 8.35 9.259.46 8.480.373.21 8.90 10.635.976.343.347.110.699.52 9.103.39 8.24 8.473.501.048.96 9.92 8.867.

546.99 10.283.54 10.91 10.765.22 10.023.10 11.83 10.75 11.800.25 10.87 10.39 10.967.209.817.12 10.84 10.06 11.33 11.87 10.371.362.54 11.25 11.901.50 10.961.97 11.22 11.55 10.25 10.com Open 9.107.655.203.758.10 10.87 10.60 10.348.78 10.534.66 11.22 11.56 11.841.876.916.31 10.44 10.15 10.83 10.070.56 11.968.348.29 10.82 11.967.337.068.58 10.348.375.25 Source: Self Generated Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 154 of 190 .967.534.22 10.97 11.86 10.73 10.83 10.96 10.71 11.66 10.25 11.28 11.001.932.134.410.34 11.25 Close 9.87 10.23 11.83 10.715.14 11.149.803.367.805.979.778.091.05 11.April 2009 Date 1-Apr-09 2-Apr-09 3-Apr-09 6-Apr-09 7-Apr-09 8-Apr-09 9-Apr-09 10-Apr-09 13-Apr-09 14-Apr-09 15-Apr-09 16-Apr-09 17-Apr-09 20-Apr-09 21-Apr-09 22-Apr-09 23-Apr-09 24-Apr-09 27-Apr-09 28-Apr-09 29-Apr-09 30-Apr-09 Source: www.88 11.09 10.42 11.08 10.237.967.403.34 10.47 11.284.067.803.403.339.40 11.898.25 Low 9.96 10.967.742.83 10.47 10.348.803.036.86 10.171.403.329.89 10.065.85 11.900.534.403.86 11.719.764.946.654.803.75 11.43 10.107.069.87 10.11 10.521.348.534.76 11.403.bseindia.24 11.803.47 11.77 10.091.534.745.863.28 10.99 11.358.11 10.492.86 10.18 10.371.947.22 10.432.86 10.430.921.25 High 9.25 10.176.57 11.

06 11.49 13.988.13 13.54 14.043.143.780.46 14.43 13.04 11.296.39 13.25 12.948.44 11.625.10 12.026.87 Close 11.060.589.872.21 14.24 12.84 13.13 11.com Open 11.780.112.899.159.41 11.161.078.064.23 14.54 14.25 11.04 14.887.682.66 13.929.93 14.611.704.985.134.24 11.736.934.75 12.54 13.272.403.06 13.03 12.28 Low 11.403.635.629.97 12.70 13.51 13.May 2009 Date 1-May-09 4-May-09 5-May-09 6-May-09 7-May-09 8-May-09 11-May-09 12-May-09 13-May-09 14-May-09 15-May-09 18-May-09 19-May-09 20-May-09 21-May-09 22-May-09 25-May-09 26-May-09 27-May-09 28-May-09 29-May-09 Source: www.63 12.10 13.82 14.37 11.819.158.976.41 14.765.65 11.319.479.22 13.88 11.91 12.99 12.39 14.90 12.51 14.25 12.21 14.319.930.51 12.405.913.39 11.284.757.116.663.03 14.109.935.695.54 13.981.774.30 13.028.180.479.79 13.86 12.948.131.834.bseindia.64 14.518.625.78 14.197.43 11.997.403.230.73 14.30 11.302.122.15 13.25 11.41 14.019.75 12.377.74 12.403.284.70 13.01 14.69 12.876.092.25 13.936.07 12.621.991.089.43 11.97 11.42 14.219.94 11.62 14.93 11.38 13.95 12.727.25 Source: Self Generated Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 155 of 190 .87 High 11.52 11.635.952.173.256.23 14.08 11.194.88 12.100.60 12.201.

755.655.526.200.521.568.608.447.600.97 14.022.008.161.040.43 15.875.31 15.36 15.30 15.902.02 14.24 15.153.840.265.466.52 14.22 15.978.94 14.870.26 14.665.93 14.168.bseindia.39 14.08 Low 14.195.55 14.237.00 15.892.60 14.98 High 14.81 15.51 14.90 15.321.261.127.046.43 14.92 15.906.599.630.47 15.53 14.98 15.03 15.74 15.580.23 14.446.993.25 14.618.788.957.05 14.63 14.77 Close 14.82 15.522.411.73 14.68 15.03 15.23 14.559.27 14.807.62 14.517.026.188.604.733.82 15.168.996.746.50 14.18 15.81 14.89 Source: www.503.18 15.59 14.179.19 14.84 14.103.73 15.874.49 14.994.257.69 15.21 14.June 2009 Date 1-Jun-09 2-Jun-09 3-Jun-09 4-Jun-09 5-Jun-09 8-Jun-09 9-Jun-09 10-Jun-09 11-Jun-09 12-Jun-09 15-Jun-09 16-Jun-09 17-Jun-09 18-Jun-09 19-Jun-09 Open 14.91 14.83 14.81 15.28 14.240.621.08 15.30 15.com Source: Self Generated Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 156 of 190 .91 14.174.

If we are good at interpreting chart then we can interpret the prices easily but one need to be very specific while choosing the indicators.SENSEX Technical Chart with Indicators: Source: www. Some bit of correction is also required for a new bull run. Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 157 of 190 . but now it has gone below its 3 months support line 20 EMA line. Now market is looking negative for sometime of period but prices can bounce back due to expiry of June future but I am not expecting fresh buy at this point of time. At first glance see two indicator first one is EMA (exponential moving average) and second one is MACD (moving average convergence and divergence). Market is feeling pressure because of uncertainty of budget and it will remain volatile until budget declared.icharts.in First of all we need to understand the basics of technical analysis which is been given at the later part of the project. Looking at the indicator we can see that prices are getting support at 20 days EMA. which is for short term period.

05 2771.45 3046.6 2853.9 2777.85 2839.05 2780.25 2748.7 2802.15 2611.45 2731.7 2893.3 2855.7 2828.35 2843.15 2789.4 2937.4 2832.3 3034.2 2789.8 2852.3 3021.2 2796.2 2819.75 3121.45 2831.55 2896.5 3112.35 2848.75 2957.15 2713.8 2678.8 2748.1 2888.95 2868.75 2724.9 2758 2690.65 2840.35 2797.25 2733.2 2854.5 2802.65 2806.4 2714.85 2765.4 2645.7 2789.9 2708.9 2780.7 2842.55 2720.85 2869.75 2953.7 2842.6 2886.45 2686.35 2824.15 2776.4 2701.4 2873 2773.05 2872.3 2835.6 2795.25 2832.95 High 3039.7 2933 2927.5 2925.3 2744.7 2754.45 3056.45 2733.85 3131.75 2877.2 2842.65 2674.2 2810.3 2737.3 2677.45 2846.75 2779.6 3058.8 2920.2 2816.3 2737 2828.45 2762.1 2849.7 2752.7 2764.5 2655.Mar 2009 Date 1-Jan-09 2-Jan-09 5-Jan-09 6-Jan-09 7-Jan-09 9-Jan-09 12-Jan-09 13-Jan-09 14-Jan-09 15-Jan-09 16-Jan-09 19-Jan-09 20-Jan-09 21-Jan-09 22-Jan-09 23-Jan-09 27-Jan-09 28-Jan-09 29-Jan-09 30-Jan-09 2-Feb-09 3-Feb-09 4-Feb-09 5-Feb-09 6-Feb-09 9-Feb-09 10-Feb-09 11-Feb-09 12-Feb-09 13-Feb-09 16-Feb-09 17-Feb-09 18-Feb-09 19-Feb-09 20-Feb-09 24-Feb-09 25-Feb-09 26-Feb-09 27-Feb-09 2-Mar-09 3-Mar-09 4-Mar-09 Open 2963.65 2767.05 2948.6 2709.Nifty Watch NIFTY Watch for year 2009 Jan .2 Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 158 of 190 .35 2774.25 2765.25 3079.65 2763.4 2896.7 2705.5 2785.85 2775 2748.35 2849.05 2843.55 2771.2 2802.15 2891.9 2803.75 3121.8 3056.6 2672.1 2919.7 Low 2963.9 2762.1 2744.9 2787.95 Close 3033.65 2685.95 2948.65 2783.4 2661.85 2755.35 2773.35 2736.6 2622.1 2760.2 2681.95 2874.1 2757.55 2733.95 2835.8 2787.3 2736.6 2706.55 2611.2 2929.65 2868.9 2934.5 2939 2969.95 3141.2 2785.45 3112.4 2873.5 2823.55 2777.2 2764.3 2746.5 2770.45 2659.05 2919.55 2611.25 2853.5 2776.8 2766.5 2926.3 2736.85 2778.5 2780.15 2789.85 2881 2873.8 2919.6 2688.8 3147.

35 3110.6 2701.15 2807.35 3082.5 3103.25 2914.65 2978.25 3055.3 2982.45 2555.9 2962.95 Source: Self Generated Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 159 of 190 .7 2984.15 2573.7 2752.6 2574.4 2996.4 3108.6 2836.05 2822.1 2726.35 2773.4 2576.05 2807.1 2949.35 2807.6 2716.25 2923.8 2982.7 2620.15 2617.5 2616.25 2777.1 2574.25 3108.65 2797.25 2771.9 2938.05 2776.8 2938.2 3054.7 2807.05 2939.com 2645.15 3020.15 2781.75 2981.3 2564.95 2805.7 2663.1 2539.25 2646.45 2719.5-Mar-09 6-Mar-09 9-Mar-09 12-Mar-09 13-Mar-09 16-Mar-09 17-Mar-09 18-Mar-09 19-Mar-09 20-Mar-09 23-Mar-09 24-Mar-09 25-Mar-09 26-Mar-09 27-Mar-09 30-Mar-09 31-Mar-09 Source: www.75 2620.45 2794.35 3123.1 2621.5 2923.4 2966.nseindia.95 2738.9 2628.25 3079.9 2576.25 2816.5 2616.65 2807.35 2757.75 3017.25 2757.

3 3469.nseindia.4 3377.7 3480.05 3211.75 3470 3362.1 3439.35 3473.4 Low 2965.25 3489.3 3330.1 3414.45 3484.3 3228.95 3342.35 3346 3342.1 3365.5 3366.5 3423.5 3384.April 2009 Date 1-Apr-09 2-Apr-09 6-Apr-09 8-Apr-09 9-Apr-09 13-Apr-09 15-Apr-09 16-Apr-09 17-Apr-09 20-Apr-09 21-Apr-09 22-Apr-09 23-Apr-09 24-Apr-09 27-Apr-09 28-Apr-09 29-Apr-09 Source: www.6 3484.5 3402.55 3511.2 3359.15 3417.6 3330.15 3311.35 3149.85 3061.05 3401.35 3517.35 3296.7 3061.15 3369.95 Source: Self Generated Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 160 of 190 .85 3441.05 3256.5 3371.9 3357.7 3401.7 Close 3060.2 3381.05 3382.25 3339.05 3211.3 3351.35 3211.6 3342.8 3497.45 3309.9 3310.9 3435.8 3354.6 3481.35 3369.5 3384.75 3376.85 3364.75 3303.25 3307.35 3255.65 High 3069.25 3471.com Open 3023.9 3491.05 3334.95 3486.3 3423.

3 4276.8 3615.45 3671.2 3717.55 3534.1 4239.7 3664.5 4237.85 4488.65 3617.6 3597.15 4324.5 3682.7 4276.25 4254.2 3691.65 3709.com Open 3478.15 4318.9 3625.1 4092.75 3554.85 3673.nseindia.15 3582.55 4117.65 4244.6 3681.7 3554.95 Source: Self Generated Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 161 of 190 .05 4256.May 2009 Date 4-May-09 5-May-09 6-May-09 7-May-09 8-May-09 11-May-09 12-May-09 13-May-09 14-May-09 15-May-09 18-May-09 19-May-09 20-May-09 21-May-09 22-May-09 25-May-09 26-May-09 27-May-09 28-May-09 29-May-09 Source: www.3 4509.05 3692.7 4199.85 3534.65 4323.75 3631.55 4116.65 3668.95 4318.7 3618.25 4115.5 4270.15 4340.85 4205.5 3662 3617.25 3593.15 4167.2 4155.4 4362.2 3537.85 4319 4249.85 4238.25 3660.9 3686.9 3597.75 3608.05 4337.85 3673.75 Close 3654 3661.05 Low 3478.05 4286.2 3610.25 4384.05 3711.35 4211.45 4270.15 3681.1 3635.3 4210.45 4354.85 4340.75 4270.75 High 3664.05 3683.9 4238.1 4448.6 3631.9 3620.

8 4356.2 4352.55 4693.7 4657.1 4314.9 4550.3 High 4545.1 4515.6 4453.2 4636.15 4469.15 4251.95 4517.75 4551.45 4561.3 4326.4 4530.3 4478.55 4584.25 4218.8 4222.2 4223.7 4572.2 4601.5 4530.7 4583.7 4586.65 4365.8 4375.25 4267.95 4404.65 4478.25 4530.95 4332.4 4562.45 4525.65 4586.9 4143.35 4427.3 4573.3 4247.95 4679.6 4235.25 Close 4529.4 4574.4 4637.3 4582.35 4352.6 4405.9 4525.4 4484 4517.June 2009 Date 1-Jun-09 2-Jun-09 3-Jun-09 4-Jun-09 5-Jun-09 8-Jun-09 9-Jun-09 10-Jun-09 11-Jun-09 12-Jun-09 15-Jun-09 16-Jun-09 17-Jun-09 18-Jun-09 19-Jun-09 22-Jun-09 23-Jun-09 24-Jun-09 Source: www.85 4611.9 4582.com Open 4450.9 4429.4 4451.95 Source: Self Generated Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 162 of 190 .95 4251.45 4688.15 4566.15 4206.05 4537.25 4637.nseindia.4 4586.45 4307 Low 4450.25 4247 4292.1 4551.7 4221.4 4313.95 4655.

NIFTY is looking weak for short term but we talk about long term it’s still strong to hold the upper prices and may touch 5K mark at the end of 2009. which indicate for long term. Reason being this is SENSEX is having 30 companies which are also there in NIFTY 50 companies. Nifty too is having support at 20 days EMA or even at 20 days WMA (Weighted moving average). But for now NIFTY may see a level of 4000 mark upto mid July. But it may get support from the 4100 mark. If we talk about resistance level Nifty may have a resistance at 4350 for short term.NIFTY Technical Chart with Indicators: Source: www. I am Bullish for long term but have negative thinking for short term.icharts.in If we talk about NIFTY and SENSEX both moves in same direction and almost with same percentage. Now prices have moves below its EMA 20 but still above 50 EMA. Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 163 of 190 .

These technical tools are very useful at this point of time because they are 80% correct in these types of volatile and choppy conditions. Charts are from date Mar. RSI and Ease of Movement. For the data collection I have used www. which I am going to use in this part of project. 22 2009 to June. Technical analysis is nothing but to understand the basics of charting and trending.icharts. Tools which are used in this project are William %R. In this part of project analysis of these companies has been done on the basis of charts and any detail regarding company’s prices are of mine and the level & prices which I have suggested might get wrong. Basic terms which are used for the purpose of Technical Analysis are: EMA: Exponential Moving Average WMA: Weighted Moving Average MACD: Moving Average Convergence and Divergence (Faster Moving average) (Red Line) EXP: Slower Moving Average (Blue Line) RSI: Relative Strength Index EMA (Close. 21 2009. 20): 20 days EMA Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 164 of 190 . MACD. I have choosen five companies for technical analysis and analysis of these companies has been done using chart and tools.Technical Analysis by Charts: Now we have understood the basic terminology of technical analysis.in and the data or the charts are for 3 months.

Before knowing this basic information we cannot analysis a company properly. closing date.in Firstly looking at the chart.DLF India Ltd. chart’s duration and indicators because these information are very essential cause one should know which company one is looking for and which industry it belongs to. chart type. we should look at the chart’s basic information like company’s name.: Source: www. Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 165 of 190 .icharts.

8 .If look you at the chart at a glance you will find three separate indicators and one price chart with three indicators. Williams’ %R works properly in fluctuating market condition However. It’s a 3 days Williams’ %R which is an indicator of short term.5 Now if we look at Williams’ %R it is currently at a level of -59.264. MACD is a good indicator for every kind of market situations. But if we look at the price trend with WMA indicator we will find share price of DLF has already cross down the WMA level. which itself indicate negativity in stock price. Here the market conditions are suitable for Williams’ %R. four in total. It only shows the change in trend due to change moving averages of the stock prices. Support Level Price: 287.230. When red line (faster moving Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 166 of 190 . now prices are looking for new support level because earlier support of 20 days WMA support level has broken down for short term of period that’s why a correction in share prices is expected in last week of June 2009 and first week of July 2009. So it’s a best indicator for analysis for now. So it shows that for short term period share price is looking little bit negative but still positive for long term. if we look at the support and resistance level we will find 20 days WMA is resistance level and 50 days EMA is support level for Prices. every time when it touches or crosses the -20 level mark it again come back to the range of -80 and again bounce back to -20 level but some time it moves down back before reaching the level of -20 or above. Currently this indicator is indicating negative sign for this stock for short term period. If we look at the indicator chart.353.8 and last day it gains marginally. But now the time has changed.4 . First of all we will start from price chart where we can see that last closing price is 330. If we look at two month ago share prices of DLF which is getting support are at 20 days WMA and at 20 days EMA but now it has breached the level of 20 days WMA and 20 days EMA. if market is moving in trend it will show false indication of sell at some point of time.78.9 Resistance Level Price: 330. Last two to three months was very fruitful to share market as market increased more than 50% in just 3 months of time period. Currently it is ranging below 20 days EMA but above the 50 days EMA.7 .8 .368. Now.

It is currently at level of 46.66 and moving from 70 marks to 30 marks. Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 167 of 190 . If DLF’s RSI touches the level of 30 marks it would probably the best time to enter into the DLF’s share. Currently it is red is below the blue line as it has already crossed the blue line from above and indicating negative signs of changes. 70 marks level is overbought situation and 30 marks level is oversold situation. As red line has crossed the blue line from above the prices will go down until red line comes above again from below.average) crosses blue line (slower moving average) from above it indicates a downturn but when it crosses from below it indicates the uptrend in the prices. So investor should keep track on it before investing. It shows negativity for short term horizon. RSI (14) indicator indicate for medium term horizon.

Prices are changing positively from last two to three months.GMR Infrastructure Ltd.3. it itself indicates a negative sign. First of all we will start from price chart where we can see that last closing price is 147. Currently it is ranging below 20 days EMA but above the 50 days EMA.in Looking at the chart at a glance. But if we look at the price trend with WMA indicator we will find share price of GMR has already crossed down the WMA price and 20 days EMA.: Source: www. So it indicates negatively for Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 168 of 190 .icharts.

3 . we follow a pattern that past trends repeats itself in near future.109. It touches a high of approx 180 and a low of 90 in 3 month’s period.88. it’s getting support at 20 days WMA and at 20 days EMA.short term horizon but I am still bullish on GMR Infra because it is working in infrastructure sector and government has plans to boost infrastructure in India. It’s a 3 days Williams’ %R which is an indicator of short term. After March it has gain almost 100% and prices has doubled.2 . If we look at the indicator. Like Ease of Movement.4 .122.5 Now if we look at Williams’ %R it is currently at a level of -39. Currently indicator is indicating some bit of positive signs but other indicators are showing negative sign for the same. 9 days EMA is considered as Faster MA and 26 days EMA is slower MA.157. Here the market conditions are suitable for Williams’ %R. MACD has two EMA generally 26 days and 9 days. When red line (faster moving average) crosses blue line (slower moving average) from above it indicates a downturn but when it crosses from below it indicates the uptrend in the prices. Momentum Oscillators and many more. Now if we look at the support and resistance level. correction in share prices and market is expected in last week of June 2009 and in first week of July 2009. MACD which is generally used by every analyst shows the indication of change in trend of stock.166.7 Resistance Level Price: 153. Other indicators which are not shown in this project are also indicating negative sign for short term period.4 . Two month ago if we look at the share price of GMR. which indicates some bit of positivity in stock price but still it is looking negative in medium term. Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 169 of 190 . every time when it touches or crosses the -20 level mark it again come back to the range of -80 and again bounce back to -20 level but some time it moves down back before reaching the level of -20 or above. Support Level Price: 139. But for now it has breached the level of 20 days WMA and 20 days EMA.

So investor should keep track on it before investing.Currently red line is below the blue line and indicating negative signs of changes. It is currently at level of 47.82 and moving from 70 marks to 30 marks. RSI (14) indicator indicate for medium term horizon. It shows negativity for medium term horizon. GMR’s RSI would probably touch the level of 30 marks and that time would be the best time to enter because GMR is looking strong from both fundamental and technical point of view. 70 marks level is overbought situation and 30 marks level is oversold situation. As red line has crossed the blue line from above the prices will go down until it cuts from below or it reaches at the level of zero (0). Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 170 of 190 .

But if we look at the price trend with WMA indicator.icharts. we will find share price of JP Associate has already crossed down the 20 days WMA and 20 days EMA but still far above from Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 171 of 190 . 235 and currently ranging near to its three months high but still below 20 days EMA and 20 days WMA. It has its 3 month high of approx.in Last closing price of JP Associate on 19 June 2009 is 200.JaiPrakash Associate Ltd.3.: Source: www.

01.38 and creating a gap of -5. which indicates some bit of positivity in stock price but still it is looking negative in medium term. For the purpose of analysis I have taken two EMA 26 days and 9 days in MACD indicator.237.171. Support Level Price: 187. But if we talk about the support level and resistance level they will support it from going down in long term.5 Now we take a look at Williams’ %R which is currently at a level of -63. Momentum Oscillators and many more.220.4 . As far as Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 172 of 190 .7 Resistance Level Price: 211. It indicate fresh buy for short term period. it is a good share to buy at this point of time.85 is below the blue line (slower moving average) which is at 17. If we look at the indicator. Here the market condition is something like latter condition where it would come down before reaching -20 levels. When red line (faster moving average) crosses blue line (slower MA) from above it indicates a downturn but when it crosses from below it indicates the uptrend in the prices. every time when it touches or crosses the -20 level mark it again come back to the range of -80 and again bounce back to -20 level but some time it moves down back before reaching the level of -20 or above.its 50 days EMA. Other indicators which are not shown in this project are also taken into consideration for the purpose of technical analysis is like Ease of Movement. MACD which is generally used by every analyst for the purpose of technical analysis shows the change in trend of stock prices. Currently red line (faster moving average) is at 11.148. 9 days EMA is considered as Faster MA and 26 days EMA is slower MA.4 . market is looking negative but indicators are positive. which is a good indication for the company’s share price.528 which is known as Divergence. Currently indicator is indicating some bit of fresh buy signs but other indicators are showing negative sign for fresh buy.7 . However.6 . It indicates negatively for short term horizon but if one takes a long term view.

Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 173 of 190 .01. 70 marks level is an overbought situation where investor feels that share is overvalued due to excess buy and 30 marks level is oversold situation where investor feels that prices are undervalued due to oversold conditions. Currently if we talk about JP it would be better to wait for a while and let the prices come down. It shows negativity for medium term horizon. It is currently at level of 53. RSI (14) indicator is for the purpose of short to medium term horizon.prices are concern this indicator has little bit to do with the prices it only shows the change in trend of the share prices. So investor should keep track on it before investing.

: Source: www. market condition is not supportive and even Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 174 of 190 .icharts.in Unitech India Ltd.Unitech Ltd. a fundamentally strong company but what if we look about the technical aspect. Fundamentally strong company can be week at some point of time where economic condition is not supportive.

1 – 51. Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 175 of 190 . MACD is generally used for the purpose of technical analysis.4 . it is a good share to buy at this point time too.25. Sometimes it gives false indication of positive trend but in reality there is nothing like positive trend.43. Elliot Waves and many more.12 indicates some bit of positivity in stock price for short term but still it is looking negative in medium term. However. Support Level Price: 68.86. So you need to analyze a stock before investment to get fruitful returns. 99 and currently ranging near to its three months high but still below 20 days WMA and near to its 20 days EMA.6 which is known as Negative Divergence.159 is below the blue line (slower moving average) which is at 7. In past it got support from 20 days WMA but currently 20 days WMA is around 86.1 and closing price as on 19 June 2009 is 80. for short term horizon Unitech is not a better mode of investment but if one takes a long term view. It indicates that. Currently indicator is indicating some bit of fresh buy signs but looking at the other indicators it would be a foolishness to buy fresh share at this level of market. Other indicators which are not shown in this project are also taken into consideration for the purpose of technical analysis is like Ease of Movement.company’s historical data are not supportive. As far as support level and resistance level is concerned both are normal and showing nothing extra ordinary about the share.4 Resistance Level Price: 81.7 . Unitech has its 3 month high of approx. market is looking negative but indicators are positive.91.1 . Momentum Oscillators. Currently red line (faster moving average) is at 5.759 and creating a gap of -2. As far as prices are concern this indicator has little bit to do with the prices it only works with other indicator. indicate the change in trend of stock prices but it is least reliable until it is used with other technical indicators.4 Looking at Williams’ %R which is currently at a level of -63. We can call it as a helping indicator to others.

If any negative news comes market will discount it very quickly.RSI (14) indicator is used for short to medium term horizon. As 70 marks level is an overbought situation where investor feels that share is overvalued due to excess buy and 30 marks level is oversold situation where investor feels that prices are undervalued due to oversold conditions. It shows negativity for medium term. RSI is around 52 and very near to its overbought level.38. Investor should analyze a share before investing. Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 176 of 190 . Currently if we talk about Unitech it is on the verge of fall down. It is currently at level of 52.

: Source: www.Reliance Industrial Infrastructure Ltd. At that point of time if prices further goes down than it’s became necessary to take the help of technical analysis.in Reliance Industrial Infrastructure Ltd. Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 177 of 190 . a Mukesh Dhirubhai Ambani group company with very strong fundamental. Sometimes in market due to speculations the price of share goes below its fundamental price. (RIIL).icharts.

3 .3 .4 Resistance Level Price: 1075 -1100. Other indicators which are not shown in this project are also taken into consideration for the purpose of technical analysis is like Ease of Movement. As far as prices are concern this indicator has little bit to do with the prices it works with other indicator. Sometimes it gives false indication of positive trend but in reality its nothing like positive movement.1150. Support Level Price: 950.7 Williams’ %R indicates buy and sell signals which is currently at a level of -65. which is feeling some bit of heat.895. In every market condition we can have support level and resistance level whether it’s very low or not. Looking at the current Williams’ %R graph one can think for some bit of fresh buy but looking at the other indicators and market condition. Right now MACD indicator is showing -29. Indian market condition is not looking so good even foreign markets are not supportive. Elliot Waves and many more. If we look at past record we will find 20 days WMA as a supportive line. It indicates WMA as a supportive line but now the prices has slipped below the WMA line and from last 5 to 10 days it’s getting resistance over there and if we talk about the support level it’s also near to its resistance level.7 .RIIL currently trading at 1040 and it is near to its 20 days WMA and 20 days EMA. Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 178 of 190 . Momentum Oscillators.62 indicates some bit of positivity in stock price for short term but still it is looking negative in medium term. MACD is generally used for the purpose of technical analysis. However. indicate the change in trend of stock prices but it is least reliable until it is used with other technical indicators. every time when there is a correction in the market then the share prices got support to its 20 days WMA and 20 days EMA. it might be worthless to buy fresh share at this level. But right there is no sign of increase in divergence.9 divergences but if it increases from this level it would be harmful for the share price.801. We can call it as a helping indicator to others.

We can also take RSI (3) for short term period but here Williams’ %R (3) has been taken so there is no need of RSI (3) because both indicators are same as far as working and analysis is concerned.29. Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 179 of 190 . Currently if we look at the indicator it’s showing mixed indication and one should use wait & watch policy and should look for intraday trading with stop loss. It is currently at level of 52.RSI (14) indicator is used for short to medium term horizon. It shows negative indication for medium term. It only shows the overbought and oversold condition nothing in relation to the exact share price.

Company Name GMR Infrastructure Limited JP Associate Limited Unitech Limited Reliance Industrial Infrastructure limited DLF India Ltd.Rating of Companies on the basis of Technical Analysis: Now we have properly examined these shares with the help of technical indicators. which can have a huge impact on share prices. same condition is with fundamental indicators. Rating Meter Short Term Long Term Table: 1 – Rating of companies Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 180 of 190 . Some of the factors which are important are: 1) Current economic condition 2) Current market condition 3) Global market perspective 4) Other investment opportunities Only looking at the charts you cannot predict the share price accurately because technical indicators are unable to show the change in trend. If these five companies are taken into consideration and are only investment options available to an investor then we can rate them on the basis of their future performance. It gives the mixed results so before making investment of your valuable money into share market you should also need to analyze the other factors with these technical indicators. With the help of fundamental indicators technical indicators works properly.

CHAPTER – FIVE CONCLUSION & SUGGESTIONS Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 181 of 190 .

While doing equity research many problems come to way but still I manage to complete it by time. In this part of project I have taken NSE indices with five companies for the purpose of hedging risk and have shown the virtual stock trading analysis. EPS (Actual earning). R (Security Return). CONCLUSION Project which are carried by me are “HEDGING RISK THROUGH DERIVATIVES” and “EQUITY ANALYSIS”. Second Project “equity analysis” which is very specific for me and I have put a lot of time in doing equity research. Stocks and their relative study can be done using β (Risk Factor). 3) Opportunities for the industry in which company is working. 2) Future earnings of the company. How much change a share value have compared to change in index value. Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 182 of 190 . Risk is also a measure of company’s future value. Time is the main factor while doing summer training but I have successfully completed these projects. Live examples are given for the purpose of understanding. But high beta companies has more return compared to low beta companies in a bullish market but at the same time has high risk of loss in bearish market. Higher the beta higher the risk. lower the beta lower the risk. which includes both future trading and option trading. For that purpose I have choosen National Stock Exchange for my project work. Here I have choosen five companies for the purpose of equity research and all five are of Realty and infrastructure sector.8. Both are very specific and different from each other. (β) Beta is a measure of risk. Starting with my first project “hedging risk through derivatives” I started working on F&O segment in share market only not for commodities market. But risk is a technical tool to analyze the market value of the share. P/E Ratio (Price earnings Ratio) and other factors which are also important for analysis are: 1) Future prospect of the company. 4) Economic condition of the country. which shows how sensitive a share value is to its Index value.

As Stock market is one of the most volatile markets in a country and has high risk involved in investment but still has fruitful returns. some are for change in trend for short term like Ease of Movement. It shows how market has worked in the conditions which are prevailing right now in the economy. Support level shows the bottom value at which the share price may get support and resistance level shows the highest value at which price may touch and every time when a support level or a resistance level is broken new levels are calculated. most of the time losses occur due to the speculation done by the investor. Technical analysis works on the basis of past data and trends. Relative Strength Index (RSI). Technical analysis tools are helpful for every type of investor as it gives the price for intraday. The 20 indicators which are generally used are for different market conditions and for different time period. at the same time some are generally used for weekly price prediction like simple charts and candlestick charts. In order to gain profits amid speculation is to look at the technical indicators and charts. If look for the total technical indicators there might be 100’s of indicator available but analyst don’t use them in practical. Some indicator works for fluctuating market like Williams’ %R. in the past. Financial modeling may be one of the very helpful tools in evaluating the price and risk involved in a share.Further detailed study of market can be done using specified ratios. Technical analysis feels that price always follows the same pattern and trend as it was shown in the past. which can give good return with low risk factor. Relative study can be done to see. in which stock investor must invest. But it might not be helpful every time. It helps investor to know about the best company in the sector/segment. Ratios are also helpful in comparison of peers companies of the same industry with the specified company. which are mentioned in this project earlier. Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 183 of 190 . so that it can maximize its return Vis-à-vis low risk. There are 20 to 30 odd indicators which analyst usually use for the purpose of technical analysis. Technical Indicator always provides two prices which are known as Support level and Resistance level. for short term and for short to medium term. which are very helpful in predicting the share prices on the basis of historical prices and trends.

Fundamental analysis is helpful when price are moving in trend and there is no sign of speculation in the market. So with the good knowledge of analysis you need some bit of luck too. FII and Institutional investors always looks for the fundamental price of the company instead of technical price because they have their view for long term and fundamental analysis fulfill that requirement. where there was an upper circuit in market on the next day of election’s result declaration. Fundamental analysis shows the sign of change in trend but technical analysis shows the trends pattern. Both the indicators are looking for a turnaround in the market but speculation does it other way around. It is not so perfect for long term analysis. This type of situation may be seen in the recent past too. But still fundamental analysis has lots of importance in analyzing the share prices as it let us know the book value and the real worth of the company. Technical analysis tools are helpful in short term and in intraday trading. he should look at both fundamental price for long term and technical price for intraday/short term of period. Some time both indicators fail to do correct analysis.Technical analysis is very helpful at the time of fluctuating market but not the fundamental analysis. If investor wants to have fruitful profit from market. Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 184 of 190 .

But it is not good for the trending market because the risk is already less in trending market. For the purpose of research company should be taken of that sector in which you have good knowledge and where you can predict the future profits of the company. Hedging should be done in a volatile market so the risk can be minimized. For the purpose of equity research one must take 8 to 10 companies so that the actual trend of that sector can be determined and the comparison of the companies can be done correctly. Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 185 of 190 . Old data might not help to do Equity Analysis. 4. SUGGESTIONS: 1. Company data taken for the purpose of research should be of current year or of previous year.9. market sentiment and global market conditions other than the variables which are mentioned in the project. 3. While doing project on hedging you must take other variables into consideration like investor’s response. For the purpose of intrinsic value calculation one must look at the fundamental value instead of technical value. 2. 6. 5.

Time seems to be one of the biggest limitations. As financial results of June 2009 has not yet published in company’s website and not even in the stock exchange’s website. But we had a restricted time frame. In project one “Hedging risk through derivatives”. more the time devoted the better might be the findings. For the Purpose of Equity Analysis I have choosen only 4-5 companies but there are more 20-25 companies in these sectors. it’s impossible to show actual trading and actual functioning of these instruments. Some of the research report which have been prepared using excel sheet cannot be added to this project. Company was unwilling to divulge information. LIMITATIONS: Data available for the purpose of research is not sufficient to carry out fundamental analysis of a company. Data collected for the purpose of Equity Analysis may differ from websites to websites. Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 186 of 190 . which was a hindrance for the research process. The project required a thorough study of the various areas of the Derivatives and Equity Research and hence.10.

Vikas Publishing House – 10th Edition Hull John C.Financial Management.11.Investment valuation – Tata McGraw Hill . o Van Horne.McGraw Hill Publishers – 3rd Edition o o o o o o o o o Brown Reilly – Investment Analysis and Portfolio Management – 7th Edition CFA. Essential of Financial Management.Fundamentals of Corporate Finance. BIBLIOGRAPHY The books referred for the project work are: o o Agarwal J.GrawHill Publishers – 3rd Edition Pandey I. – Option.Corporate Finance – Thomson Publishers.2nd Edition Khan M.Y & Jain P. & Ethardt Michael C. Prentice Hall of India. E. Future and Other Derivatives – Prentice hall – 5th Edition Murphy John J. Myers.Analysis of Equity Investments: Valuation Damodaran Aswath .11th Edition o Brealey. 2nd ed. Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 187 of 190 . 1974. – Charting Made Easy – Marketplace Books – 2nd Edition Steve Nison – Candlestick Charting Techniques – 1st Edition Damodaran Aswath – Security Analysis For Investment and Corporate Finance – Tata McGrawHill Publishers – 2nd Edition o Walker.D – Securities analysis – IIF Publication .W. James C-Financial Management &Policy-Prentice Hall Of India.Delhi 2005 Brigham Eugene F.. New Delhi. Marcus..K. M.Financial management – Tata Mc.

561-571. 1970 An Analysis of portfolio maintenance strategies. March 2008. 14-20. New Delhi. risk and timing. o o Bogle. 1. and Agarwal Aman. “ Money Laundering The Real Estate Bubble” Finance India Vol. 1968 Evaluation of prospective investment performance. o Bauman. 94-100. D. pp. Journal of Portfolio Management 18(). W. 198. Vol. XXII No. Vol.Tata McGraw-Hill. D. Davanzo. o Dietz. 837-838. o Agarwal. 1987 Performance fees for investment management. Journal of Finance 23(2). “ Literature in Finance”. 2004. J. 1977 Portfolio performance and the "cost" of timing decisions. o Barnea. and Agarwal. o Agarwal J. R A and S C Myers. Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 188 of 190 . and D. Delhi 2004. D. and S.. E. D. o Agarwal. Peter. IIF Publication. 150-157. Financial Analysts Journal 43(1). 267-275. 1992 Selecting equity mutual funds. o Evans. Principles of Corporate Finance. o Grant.o Brealey. Journal of Business Research 7(). Logue. and Agarwal. pp. Delhi. 230. L. 1 Corporate Finance.. J. III. Nesbitt. E. A. IIF Publication. S.1997. 1976 Stock trading and portfolio performance. J. J. “Literature in Finance”. Journal of Finance 25(3). Aman. Journal of Finance 23(2). 276-295. 1968 Components of a measurement model: Rate of return. Financial & Markets. L. Journal of Finance 32(3). Aman.

Journal of Business 39(1). 66-86. and the evaluation of investment performance. 1969 Does "good portfolio management" exist?. 2008-09 JP ASSOCIATE LIMITED. 2008-09 RELIANCE INDUSTRIAL INFRASTRUCTURE LIMITED. 1968 Mutual fund performance and the theory of capital asset pricing: Reply. 29-34. Journal of Business 42(2). 2008-09 GMR INFRASTRUCTURE LIMITED. 11191131. Annul Report & Financial Statement. William F. 235-236. the pricing of capital assets.Sharpe. Annul Report & Financial Statement..o Grant. Journal of Finance 33(4). 1975 Adjusting for risk in performance measurement. Journal of Business 46(1). Black. Journal of Portfolio Management 1(2). 1966 Mutual fund performance. o Treynor. o o o o o DLF INDIA LIMITED. Annul Report & Financial Statement. 1969 Risk. Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 189 of 190 . B308-B324. Journal of Business 41(2). and F. o Jensen. J. William F. J. o Simon. Annual Report & Financial Statement. 1978 Market timing and portfolio management. 119. William F. Management Science 15(6). D. Annul Report & Financial Statement. 167-247. Michael. 2008-09 UNITECH LIMITED. 2008-09 o Sharpe. o Sharpe. 1973 How to use security analysis to improve portfolio selection. L.

com o www.icharts.money.The web sites referred are as follows: o www.nseindia.com o www.jilindia.com o www.sebi.gmrgroup.myiris.co.google.equitymaster.in o www.google.com Sumati Sethia/4108168168/MBF/Indian Institute of Finance Page 190 of 190 .moneycontrol.com o www.com o www.economictimes.riil.bseindia.co.com o www.com o www.rediff.wikipedia.in o www.iif.finance.in o www.com o www.com o ww.com o www.edu/ o www.com o www.finance.com o www.com o www.in o www.yahoofinance.com o www.unitechgroup.dlf.yahoo.

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