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2hese securities include:

CHAPTER I

1. INTRODUCTION

%i& Shares, scrip, stocks, bonds, debentures stock or other marketable securities of a like nature in or of any incorporated company or other body corporate5 Stock market is a market where trading of company stocks, other securities and derivatives takes place. Stock exchanges are corporations or mutual organizations, which are specialized in %ii& 6overnment securities5 and trading stocks and securities. All sorts of company stocks are enrolled in the stock exchanges. Some of the stock markets in India are listed below: %iii& 4ights or interest in securities. ! "angalore Stock #xchange ! $umbai History of stock %"ombay& market i Stock I !ia#xchange working of#xchange stock exchanges in India started in +,-.. "S# is the oldest stock market ! 2he 'alcutta Stock in India. 2he history of Indian stock trading starts with 7+, persons taking membership in )ative ! (elhi Stock #xchange Share and Stock "rokers Association, which we now know by the name "ombay Stock ! $adras Stock #xchange #xchange or "S# in short. In +8/., "S# got permanent recognition from the 6overnment of ! )ational )ational Stock #xchange India. Stock #xchange comes second to "S# in terms of popularity. "S# and )S# represent themselves as stock synonyms of Indian stock first market. 2he history of Indian stock in market $umbai %"ombay& exchange is India*s stock exchange. It was founded +,-.is almost the same as the of "S#. with total number of history listed stocks being more than /,000. In India there are total 11 stock exchanges operating across the country. 2he )ational #xchange %)S#& is ,)ational situated in 2here are 17 recognised stock exchanges in India Stock "ombay Stock #xchange $umbai 2he small and medium sized companies can list their stocks in 3ver 2he 'ounter Stock #xchange, Ahmadabad Stock #xchange, "angalore Stock #xchange, #xchange of India %32'#I&. "hubaneswar Stock #xchange, 'alcutta Stock #xchange, (elhi Stock #xchange, 6uwahati Stock #xchange, 9yderabad Stock ,:aipur Stock #xchange, 2he Securities and #xchange "oard of#xchange India %S#"I& regulates the functioning of capital ;udhiana Stock #xchange, 'ochin Stock #xchange, 'oimbatore Stock #xchange, market and protects the interests of the investors. It is situated in $umbai. Some functions of $adhya Stock #xchange, $agadh Stock #xchange, $adras Stock #xchange, S#"I are<radesh as follows: $angalore Stock #xchange, $eerut Stock #xchange ,32' #xchange 3f India ! 4egulation of working in stock exchanges and other securities markets. <une Stock #xchange, Saurashtra =utch Stock #xchange, >ttar <radesh Stock #xchange, ! 4egistration and regulation of the operation of collective investment plans, including ?adodara Stock #xchange. mutual funds. ! ! Inhibition of fallacious and unfair business practices in the securities markets. 1.". CO#PANY PROFILE 'ontrolling accomplishment of shares and takeover of companies.

1.1 INDUSTRY PROFILE

)ame of the company : Sharekhan ltd. Stock exchange means any body of individuals, whether incorporated or not, constituted for @ear of #stablishment : +81. the purpose of regulating or controlling the business of buying, selling or dealing in securities. Admin office : Share=han SS=I + 1

A 10/ <hoenix 9ouse nd floor,S.".$arg, 1 ;ower <arel $umbai $aharashtra, I)(IA A000+7 )ature of "usiness Services 2echnical 4esearch. 'ore Services : : Service <rovider (epository Services, 3nline Services and : +. (epository Services 1. 3nline 2rading 7. I<3 Services A. 'ommodity 2rading on $'C and )'(#C .. <ort folio $anagement services. )umber of #mployees : 4evenue Debsite Slogan : : : 3ver 7.00 (ata )ot Available www.sharekhan.com @our 6uide to 2he Einancial :ungle.

#Buity and (erivatives trading on "S# and )S#

1.".1. $ack%ro& ! a ! i ce'tio of t(e com'a y

Ori%i a ! )ro*t( Sharekhan is a retail broking arm of S.S. =antilal Ishwarlal Investors Services <vt. ;td., An organization with more than , decades of trust and credibility in the stock market. Sharekhan ;td %Eormally SS=I Investors Services <vt ;td.& was promoted by $r. Shripal. S $orkharia and $r. Shreyas. S $orkhia. It is currently India*s largest broking house. It is a member of the stock 7

exchange, $umbai. It is a depository participant of the )S(; and '(S;. Its business includes stock broking, depository services, portfolio management and derivatives. 2he company*s core specialty lies in its retail distribution with a large network of branches i.e. .+0 share shops %retail shops& in +-0 cities in India and sub brokersFauthorized persons. Its strengths lies in its investment research capabilities. Its research division has several analysts continuously monitoring global, national and regional political, economic and social situations so as to assess their impact on the economy in general, the sectors so as to assess their impact on the economy in general, the sectors and companies they research which helps them if offering Buality research and advice to clients. 2he SS=I 6roup 'omprises of Institutional broking and 'orporate Einance. 2he Institutional broking division caters to domestic and foreign institutional investors, while the 'orporate Einance (ivision focuses on niche areas such as infrastructure. 2elecom and media. SS=I has been voted as the To' Domestic $rokera%e Ho&se in the research category by E&ro #o ey S&r+ey a ! ,y Asia #o ey S&r+ey.

Eor the derivates segment, to educate the potential investors towards the share market they provide a study kit named the G(erivative (igest*. And for potential investors wanted to start the trading in the share market also provided with the study kit GEirst Step to investing in the share market*, gives them a general understanding about how the share market operates, and it also gives an idea regarding the role of share brokers in the 'apital $arket. 2hese are the wide raging services offered by the share khan to its customers. And most importantly. Share =han is blessed with well dedicated sales wings, who are looking after the various needs of the customers in a committed manner and which provide the customers with tremendous amount of satisfaction and happiness about their investment.

1.".". Nat&re of t(e $&si ess Carrie!


Sharekhan is a broking company. 2he company offers a complete range of pre trade, trade and post trade service on the "S# %"ombay Stock #xchange& and the )S# %)ational Stock #xchange&. Dhether the client come in to the company*s conventionally located officers and A

trade in a dedicated ambience or issue instructions over the phone, our highly trained team and sophisticated eBuipment ensure smooth transactions and prompt service.H ! ! ! ! Investment Advisory Service Eacilitation Services to 4etail Investors, 'orporate. (epository Services Investment options includes : i. 3nline trading %Includes eBuity, derivatives& ii. 'ommodities trading iii. $utual Eunds iv. <ortfolio management Services Sharekhan "ranches are conceptualized to be place where investors can come in contact with investment opportunities in an atmosphere of convenience and comfort. 3ur services are available through our network of .+0 Share Shops spanning +-0 maIor towns and cities in the country. <rofessional seeks to educate clients and end their confusion by custom an Investment <lan according to the needs of clients and is also today a part of company*s induction program advising employees on how to plan their investments.

1.".-. .ISION/ #ISSION 0 1UALITY POLICY .isio


Sharekhan practices customer centric approach to be leading broking Eirm. 2he 'ompany ?ision is: i. 2o be the top most company for providing investment advisory and financial planning services in India. ii. 2o be a leading investment intermediary for transaction through both online and offline medium.

#issio
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2o educate and empower the individual investor to make better investment decisions through Buality advice and superior service. a& #ducate and empower i. 4esearch backed advice, which is easy to understand, retail specific, and discipline. ii. 2otal eBuity solutions for the entire investment process. iii. 4elationship management a& Superior service i. Integrity ii. 2ransparency iii. <rofessionalism iv. Information J product, news, operations v. 9assle free trading vi. #nIoyable experience our goals is to accomplish top most position in both online and offline medium of trade and also to remain a customer centric organization.

1&a2ity o,3ecti+es
3bIectives represent, what needs to be accomplished in order to reach the goals. ! ! ! 2o increase the customer base of investors to invest in all kind of securities. Sharekhan has one among the largest network of outlets of the either trading firms with +,0 outlets. 2o retain the existing consumers with research backed advice and personalized care the needs of the consumer.

1.".4. Pro!&cts a ! ser+ice 'rofi2e


2he different types of products and services offered by Sharekhan ;td. are as follows: ! ! #Buity and derivatives trading (epository services /

! ! ! ! ! ! !

3nline services 'ommodities trading (ial n trade <ortfolio management Share shops Eundamental research 2echnical research

Ty'es of acco& ts i S(arek(a 2t!.


Sharekhan offers two types of trading account for its clients
'lassic Account %which include a feature known as East 2rade Advanced 'lassic Account for the online users& and Speed 2rade Account

CLASSIC ACCOUNT

2his is a product for the retail investor who is risk averse and hence prefers to invest in stocks selectively or who does not trade too freBuently. 2here is no volume commitment on the part of the client. 2he features of the products are as follows: 2he registration charges are 4s. -.0F that is a one time payment. Dith the online package defaults demat aFc. would be opened with SS=I. Eor the + to be paid. It*s free. 2he client gets exposure of up to A time of the deposit amount. Eor example if the client has 4s. .000F in hisFher account heFshe can get the exposure up to 4s. 10,000F 2he brokerage applicable is 0..0K on delivery and 0.+ for intra day trading.
st

year no demat charges have

2his account comes with the following features: a. 3nline trading account for investing in #Buities and (erivatives b. Eree trading through <hone %(ial n 2rade& i. 2wo dedicated numbers%+,00 11 -.00 and 78-0-.00& for placing the orders using cell phones or landline phones ii.Automatic funds transfer with phone banking facilities %for 'itibank and 9(E' bank customers& iii.Simple and Secure Interactive ?oice 4esponse based system for authentication iv.get the trusted, professional advice of Sharekhan limited*s 2ele "rokers v.After hours order placement facility between ,.00 am and 8.70 am c. Integration of: 3nline 2rading LSaving "ank L (emat Account. ,

d. Instant cash transfer facility against purchase M sale of shares. e. I<3 investments. f. Instant order and trade confirmations by e mail. g. Single screen interface for cash and derivatives.

SPEED TRADE ACCOUNT


2his is an internet based software application, which enables one to buy and sell in an instant. It is ideal for active traders and Iobbers who transact freBuently during day*s session to capitalize on intra day price movement. 2he company will be merging speed trade and speed trade plus. 2here will be a common exe called speed. 2rade which allows customers to trade on both case and E M 3. account opening fee 4s. +000. 2his account comes with the following features: a. Instant order #xecution and 'onfirmation. b. Single screen trading terminal for )S# 'ash, )S# EM3 M "S#. c. 2echnical Studies. d. $ultiple 'harting. e. 4eal time streaming Buotes, tic by tic charts. f. $arket summary %'ost traded scrip, highest value etc.& g. 9ot keys similar to broker*s terminal. h. Alerts and reminders. i. "ack up facility to place trades on (irect <hone lines. I. ;ive market debts.

C(ar%e str&ct&re
Eee structure for 6eneral Individual: C(ar%e C2assic Acco& t S'ee! Tra!e Acco& t Acco& t O'e i % 4s. -.0FN 4s. +000FN Intra day J 0.+0 K (elivery 0..0 K Intra day 0.+0K (elivery 0..0K

$rokera%e (epository 'harges:

Acco& t O'e i % C(ar%es 8

4s. )I;

&a2 #ai te a ce C(ar%es

4s. )I; first year 4s. 700FN p.a. from second calendar year onward

SER.ICE PROFILE
a. Tra!i % Faci2ities5 Sharekhan as a member of )S# M "S# provides both offline and online trading facilities nationwide for trading the securities in secondary market to its clients. 2he 'ompany*s wide network of outlets spread across the country facilities to executive the orders in secondary market. ,. Deri+ati+es5 6F&t&res a ! O'tio s7 2he company also facilitates the trading system for trading in secondary market under future and options segment of )S# and "S#. 2he eBuity dealers in the company will be eager to give insights into the new sets introduction in the Indian 'apital market futures and options. c. De'ositor Ser+ices5 Sharekhan is a (epository participant of )ational Securities (epository ;imited and 'entral (epository and securities ;imited. Sharekhan will open (e mat accounts, which will investors to convert physical certificates of shares into electronic balances in an account maintained. d. #ar%i Fi a ci % : In the present rolling settlement scenario, Sharekhan understand investor need for additional capital availability for daily purchaser shares. It offers uniBue facility avail finance, for purchasing shares at very competitive interest rates. e. IPO8s a ! #&t&a2 F& !s5 Sharekhan offers the change of investing in the potentially lucrative I<3 market. Sharekhan is a distribution house for all mutual funds. 2his is the new scheme introduced by the company and it also offers schemes catering to investors with varying risk return profiles.

+0

f. Stock 2e !i % a ! $orro*i %5 3ne can place an order of shares with Sharekhan. It is approved intermediary of the security or lending scheme. 2hese would be sent out the borrowers, these earnings fees for all investor*s idle shares. 2hus Sharekhan fulfils the investor need for borrowing and lending of shares. g. E9&ity Researc( : Sharekhan has a highly rated research using involved in macroeconomic studies, industry and company specific eBuity research. 2he research team*s inputs will be available as daily trading calls, Buarterly investment picks and long term investment picks, based on the fundamentals of particular company and the industry as whole. (. I ter et Tra!i %5 Investors can also trade their securities through this facility by logging into company*s website. 2he virtual world that Sharekhan offers online trading services through. i. Portfo2io #a a%eme t Ser+ices5 Sharekhan securities are a registered portfolio manager with S#"I to manage portfolios on behalf of clients with discretionary and anon discretionary rights this service is a provision for those who may not have the right time to manage their stocks investment or reBuire the service of company*s highly specialized professional team. 3. O 2i e Tra!i %5 Share =han was amongst the pioneers of online trading in India and has launched Sharekhan.com in Eebruary 1000. Since then, they have been at the forefront in understanding customer needs, analyzing trends and brining innovation in their offerings. 2hey have online trading products that are customized to the habits and preferences of investors as well as traders.

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Feat&res of O 2i e Tra!i % Pro!&cts5 i. ;ive streaming Buotes ii. Instant order execution and conformation iii. <rice alerts iv. Single Screen for eBuities and derivatives v. $ultiple market watch windows vi. 4eal time portfolio tacking a. Ot(er Ser+ices5 i. Eree access to investment advice, from Sharekhan research team. ii. Sharekhan Ovalue line O % A monthly publication& iii. (aily research reports and market review. iv. (aily trading calls based technical analysis v. 'ool trading products. %(aring derivatives and market strategy& vi. <ersonalized advice. vii. ;ive management information. viii.Internet based online trading session. ix. 3nline "S# and )S# executions through "3;2 M )#A2 terminals.

$a k Co

ectio 5:

S(arek(a has affiliation with ++ banks, which allows its customers to enIoy the facility of instant credit and transfer of funds from his savings bank account to his Sharekhan trading account. 2he affiliated banks are as follows: ! 9(E' "A)= ! >2I "A)= ! 'I2@ "A)= ! I'I'I "A)= ! 3"' "A)= ! >)I3) "A)= ! I)(>SA)( "A)= ! I("I "A)= ! '#)2>4I3) "A)= ! ACIS "A)= ! @#S "A)=

1.".;. Areas of o'eratio 5


+1

Sharekhan provides a wide range of services nationwide to a substantial and diversified client base that includes retail clients, high net worth individuals, corporates and financial institutions. It has presence in more than 1,0 cities through its network of longstanding franchisees and sub brokers. It has its presence globally i.e in >A# also.

1.".<. #a a%eme t team


(inesh $urikya : 3wner of the company

2arun Shah

'#3 of the company

Shankar ?ailaya

(irector %3perations&

:aideep Arora

(irector %<roducts M 2echnology&

<athik 6andotra

9ead of 4esearch

4ishi =ohli

?ice <resident of #Buity (erivatives

)ikhil ?ora

?ice <resident of 4esearc

1.".=. Com'etitors i formatio 5

+7

S(arek(a is one of the maIor player in on line 2rading. In $umbai the main competitors of Sharekhan are I'I'I (irect, India bulls, =otak Securities, 9(E' Securities, Anand 4athi, $otilal 3swal, 4eligare securities and reliance securities.
Re2i%are Sec&rities5

4eligare is a global financial services group with a presence across Asia, Africa, $iddle #ast, #urope and the Americas. In India, 4eligare*s largest market, the group offers a wide array of products and services ranging from insurance, asset management, broking and lending solutions to investment banking and wealth management. 2he group has also pioneered the concept of investments in alternative asset classes such as arts and films .Dith +0,000 plus employees across multiple geographies, 4eligare serves over a million clients, including corporates and institutions, high net worth families and individuals, and retail investors. 4eligare #nterprises ;imited is part of a family of companies that fall under the broader 4eligare brand, which includes other global businesses such as diagnostics, aviation and travel, wellness retail, and I2 products and solutions. A diversified financial services group 4eligare #nterprises ;imited %4#;& offers a comprehensive suite of customer focused financial products and services targeted at retail investors, high net worth individuals and corporate and institutional clients. 4#;, along with its Ioint venture partners, offers a range of products and services in India, including asset management, life insurance, wealth management, eBuity and commodity broking, investment banking, lending services, private eBuity and venture capital. 4eligare has also ventured into the alternative investments sphere through its holistic arts initiative and film fund.

>otak Sec&rities5 =otak $ahindra is one of IndiaPs leading financial conglomerates, offering complete financial solutions that encompass every sphere of life. Erom commercial banking, to stock +A

broking, to mutual funds, to life insurance, to investment banking, the group caters to the financial needs of individuals and corporates. =otak Securities ;td., a +00 K subsidiary of =otak $ahindra "ank is one of the oldest and largest broking firms in the industry. 2heir offerings include stock broking through the branch and Internet, Investments in I<3, $utual funds and <ortfolio management service. Re2ia ce Sec&rities Lt!5 4eliance Securities ;imited is a 4eliance 'apital company and part of the 4eliance Anil (hirubhai Ambani 6roup. O4eliance $oneyQ is a brand owned by 4eliance 'apital ;imited. 4eliance Securities with the permission of 4eliance 'apital ;imited uses the O4eliance $oneyQ brand to market its various services. 4eliance Securities endeavours to change the way investors transact in eBuities markets and avails services. It provides customers with access to #Buity, (erivatives, <ortfolio $anagement Services, Investment "anking, $utual Eunds and I<3s. It also offers secured online share trading platform and investment activities in secure, cost effective and convenient manner. 2o enable wider participation, it also provides the convenience of trading offline through variety of means, including 'all M 2rade, "ranch dealing (esk and its network of affiliates. 4eliance $oney through its pan India presence with /,177 outlets has more than 7.. million customers. 4eliance 'apital is one of IndiaPs leading and fastest growing private sector financial services companies, and ranks among the top 7 private sector financial services and banking groups, in terms of net worth.

1.".?. I frastr&ct&ra2 faci2ities


Sharekhan investment outlets are designed to be places where retail investors can come in touch with investment opportunities in an atmosphere of convenience and comfort. 2he look and

+.

feel of the offices across India proIects a consistent branch image for the company. 2he features that enable a uniBue facility for retailing financial services include among others: #asily visible branches set up in the commercial spaces of potential investment zones ranging between -.0 sft to +000 sft. $ost branches are located in the ground floor sporting huge glass frontage promoting easy accessibility and reflecting our attitude of complete transparency. 2he maIor portion of the branch area dedicated for customer use. 2he furniture is in '=( formats to add flexibility in using the branch for investor*s purposes. 'onnectivity to )S# for trading facilities. 2? and other electronic mediums to facilitate real time update and dissemination of information to our customers. #ach branch comprises of trained and Bualified investment advisors to take care of the needs of the customers.

1.".@. Ac(ie+eme ts of S(arek(a


+. 4ated among the top 10 wired companies along with 4eliance, 9>:l, Infosys, etc by G"usiness 2oday*, :anuary 100A edition. 1. Awarded G2op (omestic "rokerage 9ouse* four times by #uro money and Asia money. 7. <ioneers of online trading in India amongst the top 7 online trading websites from India. $ost preferred financial destination amongst online broking customers. A. Dinners of O"est Einancial DebsiteQ award. .. ?oted by ')"' Awaaz as the $ost <referred Stock broker in India in 100..

1.".1A. Bork f2o* mo!e2


At Sharekhan it*s believed that, O2he clients are people, not accountsQ hence successful investment management relationship begins with a clear understanding of each client*s specific needs, concerns and long term obIectives. Sharekhan investment philosophy applies a disciplined

+/

approach to building a customized strategy designed to meet customer*s individual financial goals and tolerance for risk.

1.".11. F&t&re P2a s a ! 'ros'ect&s5


i. 1, 00,000 plus retail customers being serviced through centralized call centres F web solutions. ii. "ranches F Semi branches servicing affluent F aggressive traders through high skill financial advisor. iii. 1.0 independent investment managersF franchisee servicing .0,000 highly valued clients iv. )ew initiatives <ortfolio management Services and commodities trading

CHAPTER II #c>i sey = s frame*ork *it( s'ecia2 refere ce to or%a isatio & !er st&!y.
2he - S model is better known as $c=insey - S model. 2his is because the two persons who developed this model, 2om <eters and 4obert Daterman, have been consultants at $c=insey M co. at that time. 2hey published their - S model in their article OStructure is not

+-

organizationQ %+8,0& and in their books O2he art of :apanese managementQ %+8,+& and OIn search of excellenceQ %+8,1&.

2he model starts on the premise that an organization is not Iust structure, but consists of seven elements:

STRATE)Y : 2he direction and scope of the company over the long term. STRUCTURE : 2he basic organization of the company, its departments, reporting lines, areas of expertise and responsibility.

SYSTE#S : Eormal and Informal procedures that govern everyday activity, covering everything from management information systems, through to the systems at the point of contact with the customer %retail systems, call centre, systems, online systems, etc&. S>ILL : 2he capabilities and competencies that exist within the company. Dhat it does best. +,

SHARED .ALUES : 2he values and beliefs of the company. >ltimately they guide employees towards Gvalued* behaviour. STAFF : 2he company*s people resources and how they are developed, trained and motivated. STYLE : 2he leadership approach of top management and the company*s overall operating approach.

THE =S #ODEL BITH REFERENCE TO SHARE>HAN5


STRATE)Y5 Sets out the vision, mission, obIective and maIor action plans and policies of the organization. 2hese set out the picture of the organization in the future typically spelling out the overall corporate strategy, the Strategic business unit strategy and functional Strategies. It can also be defined as the choice of direction and action that the company adopts to achieve its obIective in a competitive situation. It is the first step that the company has to take in leading its organization to ladder of success. 2he maIor areas of Strategic 6oals of Sharekhan are:

$aIor (escription a. $arket Standing (esired share of present and new markets, including areas in which new products are needed and service goals aimed at building customer loyalty. b. Innovation Innovation in productsF services as well as innovation in skill and activities reBuired to supply them. c. 9uman 4esources Supply, development and performance of manager*s employee attitudes. d. Einancial 4esources Sources of capital supply and how it will be utilized.

e. <hysical 4esources <hysical facilities and how they will be utilized in providing services. +8

f. <roductivity #fficient use of resources relatives to outcomes.

g. Social 4esponsibility 4esponsibilities in such area as concern for community and ethical behaviour.

STRUCTURE5 Include policies and procedures that govern the way in which the organization acts within the organization. It provides the frame work for relationship among different parts of the organization. It sets out formal reporting relationships, mode of communication, their respective roles and rules and regulation for carrying out different tasks. If it is not properly defined it has a detrimental effect on the effective and efficient working because motivation and morale is low, decision are delayed and are of poor Buality the expenses rises, orders are lost due to competition, lack of confidence etc. Structure of any organization has to answer the following Buestions ! !
!

Dhat is basic structural formR 9ow centralized versus decentralized is the organizationR Dhat is the relative status and power of
the organizationR

At sharekhan the structure is clearly defined. Sharekhan has its /10 share shops across 1,0 cities in India with the headBuarters situated at $umbai. 2he registered 3ffice is centralized at residency road, "angalore. Sharekhan has its operations distributed throughout India. I.e. in the north and southern regions. 2he southern region covers areas like =arnataka, Andhra <radesh, =erala and 2amilnadu.2hese areas are managed by a 4egional "ranch 9ead who takes care of operation in these respective areas. 2he organization chart for the regional office and its branches are as follows. OR)ANISATION CHART5

9#A( 3EEI'#
'hairman

10

4egional 9eads 4egional <roduct 9eads "ranch 4elationship

Sonal 9eads

Sr. 4egional :r. 4egional

"ack 3ffice (ealers SYSTE#S5 Systems in their frame work stands for the rules and regulations, procedures and practices that must be allowed to carry out the tasks in the organization. A good system adds to the efficient and effective working of the entrepreneur. At Sharekhan in 'hintamani the procedure followed is clear, transparent and not complicated. 2he information systems at the various branches of sharekhan are followed by submission of $IS reports at end of their day to day activities. 2he activities of the front end operation include: ! ! ! ! ! ! 'lient Advisory Services <rocessing of demat account transactions. )ew issue promotions. <ortfolio $anagement of )4I clients. <romotions activities for promotions of various funds %)ew 4ecommended ones&. Einally $IS reporting of day to day transactions. Sales 2eam

At the back office day to day operations include ! ! ! ! <rocessing of various application forms of demat account I<3*s and forwarding the same to the 9ead office. <roviding statement of account to the investors on reBuest. Addressing reBuests for nonpayment of sub broker*s commission. $IS reporting of day to day transactions.

1+

2he 2otal Tuality 'ontrol System of Sharekhan has created principles about its Buality philosophy ! ! ! 'reate constancy of purpose and improve services for long range needs rather than short term profitability. Search continually problems in the system and improve processes. #ncourage effective two way communication and other means to drive fear throughout the organization and help people to work more productively. 2he #lectronic (ata <rocessing %#(<& department of Sharekhan takes care of both offline and online transactions. In the online transactions, online trading takes place using neat software. It is connected to )S(;, '(S;, )S# and "S# and helps stock brokers to trade online. 2he offline is mainly connected for the purpose of conversion of physical form of shares to electronic form. STYLE5 Style includes ;eadership style of top management and overall operating style of the organization. Style impacts the norms people follow and they work and interact with each other and with customers. ! ! 9ow does the top management make decisions J <articipatory ?s 2op (ownR 9ow do managers spend their time in informal meetings, informal conversations, etcR

At sharekhan, they follow a very in effable style of functioning. ! ! !


!

$anagers, staff etc are approachable %a perfect blend of formal and informal approaches&. 2hey follow the system of performance appraisal on +,0 degree appraisal model. 4ewards are given according to the performance. <ersonal attention to the proIect trainees helps in creating a good image in the eyes of the public. Staff has very good informal conversations that develop a sense of loyalist, motivation, dedication within the employees. #mergency meetings are held where top management and employees collectively participate targets for the week is set, responsibilities are delegated, suggestions are invited.

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2here is a good cordial relation between the management and the employees which shows a participatory leadership style is observed.

STAFF5 2he staffing procedure mainly includes how the organization has to look into its people, their backgrounds, and competencies. Staff also includes the organization approaches to recruitment, selection and specialization. 9ow people developed, how recruits are trained, socialized and integrated and how their careers are managedR ! ! ! At Sharekhan, there are around 7.00 employees working across India. At Sharekhan, 'hintamani branch there are about +0 employees. 2he candidates are recruited from diverse fields of commerce like ". 'om*s, $"A*s, I'DA*s, 'A*s and 'EA*s great opportunity for fresher*s and post graduates are available. ! ! ! ! 2hey are involved in all the reBuired meetings and activities. 2he Staff are given freedom to use their innovation and creative skills. 6et together are held for staff members to socialize. Staff grievances are given a listening in a year.

S>ILLS5 Include distinctive competencies that reside in the organization. 2hese can be distinctive competencies people, management practices, systems and technology. Dhat new capabilities the organization needs to develop, which one does it need to unlearn to compete in future. 2his can be learnt through a SD32 Analysis. 2he competent skills of the people include good communication and presentation skills, strong academic record, consistent in the performance levels etc. SHARED .ALUES5 4efers to coreF fundamental values that are widely shared in the organization and serve as guiding principles that are important. 2hese values have great meaning because they focus attention and provide a broader sense and purpose. 2hey also give a strong basis for stabilities to

17

the organization, in a rapidly changing environment by providing a basic meaning to people working in the organization. ! ! ! (o people have a shared understanding of why a company exitsR (o people have a shared understanding of the vision of the companyR 9ow do people describe the ways in which the company is distinctiveR

At Sharekhan, which is primarily a client or investor oriented organization has embedded this Buality among all its member employees. 2he member*s work today towards the growth and success of the unit. 2he employees share responsibility and protect the company*s name and integrity. 2here is no sharing of confidentialF important information with the outsiders. 2here is collective responsibility and accountability on the part of its members. 2his can be said as the shared values of the employees of the organization.

CHAPTER III SBOT ANALYSIS5

1A

A SD32 analysis is a tool, used in management and strategy formulation. It can help to identify the Strengths, Deaknesses, 3pportunities and 2hreats of a particular company. Strengths and weaknesses are internal factors that create value or destroy value. 2hey can include assets, skills, or resources that a company has at its disposal, compared to its competitors. 2hey can be measured using internal assessments or external benchmarking. 3pportunities and threats are external factors that create value or destroy value. A company cannot control them. "ut they emerge from either the competitive dynamics of the industryFmarket or from demographic, economic, political, technical, social, legal or cultural factors.

SBOT #ATRIC5

SBOT #atriD
INTERNAL

%S& Internal Strengths

%D& Internal Deakness

ECTERNAL %3&
Stre %t(s 6lobal parentage and expertise.

#xternal 3pportunities #xperience senior management.


Dorld class technology and infrastructure. Strict risk control systems. Eundamental and technical research.

SO Strate%ies Use ES8 to take a!+a ta%e of EO

BO Strate%ies Take a!+a ta%e of EO8 ,y o+ercomi % EB8 BT Strate%ies #i imiFe EB8 a ! a+oi! ET8

%2&
1.

#xternal 2hreats

ST Strate%ies Use ES8 to a+oi! ET8

$ultiple products under one roof. 'ompany with well diversified portfolio.

Beak ess $any competitors. )o direct marketing strategy. <ayment services are not good.
)o global reach. Deak brand name.

O''ort& ities 2o grab the growing Indian market. Scope for taking its business overseas and going global. Scope for increasing its branch network especially in the important financial centres as well as extending its physical presence in other parts of the country. >p gradation of the latest technology to give better and faster service to its clients T(reats 6lobal economic slowdown. 2he Indian capital market is fluctuating. 2he ever increasing and challenging neck to neck competition specially with those established and existing reputed stock broking companies. >ncertainty of the market and volatility and fluctuations in the stock prices. 'hange in customer needs, preferences and taste. 2hreat from new entrants into the field of stock broking.

CHAPTER I. A a2ysis of ,a2a ce s(eet.


2he eBuity share capital has remained more or less the same. 2here is +/./ percentage increases in 4 eserves and surplus in 1008 over the previous year. Investments increased by .0 percentage.

CHAPTER .
1/

Lear i % eD'erie ce.


2he opportunity of undergoing an in plant training for one month duration is being capitalized by me by increasing my knowledge base by working at Sharekhan. I am privileged to highlight some of the learning experience got from this training. ! It helped to link the theories, techniBues and practices of management with different activities of the organization in trading operations ! ! It increased my conceptual understanding of the entire subIect financial derivatives. "asically stock market investments are considered to be very risky, but if the scrip*s selected by the investor is favorable according to the market conditions than the investor will be able to generate high profit within a short time span.

CHAPTER .I INTRODUCTION TO THE CONCEPT

O(erivative is a product whose value is derived from the value of one or more basic variables called bases %underlying asset, index or reference rate& in a contractual mannerQ. 2hrough the use of derivative products, it is possible to partially or fully transfer price risks by locking in asset prices. As instruments of risk management, these generally do not influence the fluctuations in the underlying asset prices. 9owever by locking in asset prices, derivative products minimize the impact of fluctuations in the asset prices on the probability and cash flow situation of risk averse investors.

1-

2he wide array of risks that a business firm is exposed to may be classified into five categories:

Tec( o2o%ica2 risk: arises mostly in the 4M( and operations stages of the value chain. Eco omic risk: stem from fluctuations in revenues and production costs. Fi a cia2 risk: arises from the volatility of interest rates, currency rates, commodity prices, and stock prices. Performa ce risk: arises when the contracting counterparties do not fulfill their obligations. Le%a2 a ! re%&2atory risk: arises from changes in laws and regulations. BHY TOTAL RIS> #ATTERS $odern finance theory regards hedging activities aimed at reducing total corporate as irrelevant. >nder certain plausible condition, the 'A<$ and Arbitrage pricing theory show that unsystematic risk has no bearing on the reBuired rate of return. 3nly systematic risk %or market risk& is priced and, hence, has an influence on the reBuired rate of return. Since the price of systematic risk is identical for all the participants in the financial market, a firm or investor does not benefit by laying it off in the financial market. 2hus, according to this line of reasoning, in an efficient financial market the expected )<? of any risk hedging activity like taking an insurance cover or buying a forward contract is zero. 3ther things being eBual, a firm or investor with a high total risk exposure is likely to face financial difficulties which tend to have a disrupting effect on the profit.

FACTORS DRI.IN) THE )ROBTH OF DERI.ATI.E ! ! ! ! Increased volatility in asset prices.

S.

Increased integration of national financial markets with the international markets. $arked improvement in communication facilities and sharp decline in their costs. (evelopment of more sophisticated risk management tools, proving economic agents a wider choice of risk management strategies and 1,

Innovations in the derivatives markets.

DERI.ATI.E PRODUCTS For*ar!s5 A forward contract is an agreement between two parties to exchange an asset for cash at a predetermined future date called the settlement date for a price that is specified today. F&t&res5 A futures contract is a standardized forward contract which can be traded on organized exchanges. In fact, a future is a standardized form of forward contract. A future is a contract or an agreement between two parties to exchange an assets F currency or commodity at a certain future date at an agreed price. 2he trader who promises to buy is said to be in G long position G and the party who promises to sell said be in Gshort position*. O'tio s5 Inboard sense, an option is a claim without any liability. $ore specifically, an option is a contract that gives the holder a right, without any obligation, to buy or sell an asset at an agreed price on or before a specified period of time. Barra ts5 ;onger dated options which have expiry date up to one year are called warrants. Lea's5 ;ong 2erm #Buity Anticipation Securities %;#A<S& are the options having a maturity of up to 7 years. $askets5 "askets are the options on portfolios of underlying Assets. S*a's5 Swaps are private agreements between two parties to exchange cash flows in the future according to pre arranged formula. S*a'tio s5 %3ptions L Eorwards& are the options on a forward Swap.

PARTICIPANTS IN DERI.ATI.ES #AR>ET5 9edgers Speculators 18

Arbitrageurs ECONO#IC FUNCTIONS OF THE DERI.ATI.E #AR>ET5 2ransfer of risks. (iscovery of future as well as current prices. 9igher trading volumes in financial markets. Acts as a catalyst for new entrepreneurial activity. $argining, monitoring and surveillance of the activities of various participants.

A. INTRODUCTION TO FORBARDS5 Eorward contracts are perhaps the oldest and simplest tools for managing financial risk. A forward contract represents an agreement between two parties to exchange an asset for cash at a predetermined future date called the settlement date for a price that a specified today. Eor example, if you agree on :an + to buy +00 bales of cotton on :uly + at a price of 4s ,00F per bale from a cotton dealer, you have entered into a forward contract with the cotton dealer. As per this contract, on :uly + you will have to pay 4s ,0,000F and the cotton dealer will have to supply +00 bales. According to this agreement, you have bought forward cotton or you are long forward cotton, whereas the cotton dealer has sold forward cotton or is short forward cotton. )o money or cotton changes hand when the deal is signed. 2he forward contract only specifies the terms of a transaction that will occur in future.

Feat&res : 2hey are bilateral contracts and hence exposed to counter party risk.

70

#ach contract is custom designed and hence is uniBue in terms of contract size, expiration date and the asset type and Buality. 2he contract price is generally not available in public domain. 3n the expiration date, the contract has to be settled by the delivery of the asset. If the party wishes to reverse the contract, it has to compulsorily go to the same counter party, which often results in high prices being charged. Eorward contracts are generally used in real estate, commodities, gold, foreign currency exchange etc.

$. INTRODUCTION TO FUTURES5 A futures contract is a standardized forward contract which can be traded on organized exchanges. It is similar to the forward contract in all the respect. In fact, a future is a standardized form of forward contract. A future is a contract or an agreement between two parties to exchange an assets F currency or commodity at a certain future date at an agreed price. 2he trader who promises to buy is said to be in G long position G and the party who promises to sell said be in Gshort position* . Dhen a futures contract is first listed for trading by an exchange, interested parties take long or short positions on the contract. Dhen one trader takes a long position on the contract for a particular price and another trader takes a short position on the contract at the same price, it generates a trading volume of one contract. At this point there is one contract which remains to be performed or settled through delivery of the asset in the future. 2hus, there is one open contract. 2his is also referred to as open interest, which is the terminology used to describe the number of open contracts or contracts remaining to be settled in future on any particular day. Eutures contracts are contracts specifying a standard volume of a particular currency to be exchanged on a specific settlement date. A future contract is an agreement between a buyer and a seller. Such a contract confers on the buyer an obligation to buy from the seller, and the seller an obligation to sell to the buyer a specified Buantity of an underlying asset at a fixed price on or before a fixed day in future. Such a contract can be for delivery of an underlying asset. 7+

2o eliminate counter party risk and guarantee traders, futures markets use a clearing house which employs initial margin, daily market to market margin5 exposures limits etc. to ensure contract compliance and guarantee settlement. Standardized futures contracts generate liBuidity, greater transparency, fairness and efficiency. (ue to these inherent advantages, futures markets have been enormously successful in comparison with forward markets all over the world.

"roadly there are two types of futures: 'ommodity futures %'ocoa, 'otton, Aluminum, 6old, 'rude oil, Soya bean etc& Einancial futures %Index futures, stock futures, debt instruments, foreign currencies, monetary metals etc& Feat&res5 2raded on an organized exchange with )otation. Standardized contract terms are defined by exchange. 4eBuires margin payment. 2hey are marked to market. <rice is zero and linear payoff. "oth long and short at risk. 2he price of a futures contract is determined on the floor of the exchange by forces of demand and supply. A margin is a deposit to be made to the clearing house by the parties entering into a futures contract. 2here are three types of margins: Initial margin or performance margin $aintenance margin 71

?ariation margin 2he difference between forward contract and future is that future is a standardized contract in terms of Buantity, date and delivery. It is traded on organized exchanges, so it has secondary markets. Euture contract is always settled daily, irrespective of the maturity date which is called marking to the market.

C. INTRODUCTION TO OPTIONS5 Inboard sense, an option is a claim without any liability. $ore specifically, an option is a contract that gives the holder a right, without any obligation, to buy or sell an asset at an agreed price on or before a specified period of time. Ty'es of o'tio s5 +& Ca22 o'tio : 6ives the buyer the right, but not the obligation to buy a specific futures

contract at a predetermined price within a limited period of time. A call option is a contract, which gives the owner the right to buy an asset for a certain price on or before a specified date. Eor example, if you buy a call option on a certain share of C@S 'ompany, you have the right to purchase +00 shares %assuming of course, that the option involves +00 shares&. Suppose current share price %S& of 4eliance Industries is 4s 18+F . @ou expect that price in a three months period will go up 4s 700F . "ut you also fear that the price may also fall below 4s 18+F . 2o reduce the chance of risk and at the same time to have the opportunity of making profit, instead of buying the share, you can buy a 7 month call option on 4eliance Industries at an agreed exercise price %#& of, say, 4S 1,0F . Ignoring the option premium, taxes, transaction costs and the time value of money, the decision to exercise your option depends upon the share price after three months. @ou will exercise option when the share price after three months is

77

above 4s 1,0F and you will not exercise when the share price after three month is below 4s 1A0F . 2hus option should be exercised when: Share price at expiration U #xercise price N S (o not exercise option when: Share price at expiration VN #xercise price NS 2he value of call option at expiration is: ?alue of call option at expirationN $aximum W%share price Jexercise price&, 0X 't N $ax W%S t J #&, 0X 2he expression above indicates that the value of call option at expiration is the maximum of the share price minus the exercise price and zero. 2he call option holder*s opportunity to make profit is unlimited. It depends on the actual market price of the underlying share when the option is exercised. 6reater the market value of the underlying asset, the larger is the value of the option. 2he following figure shows the value of call option. ?alue of call option
t t

U# V#

#xercise price >nlimited pay off 0 3ut of money in the money Eig. +.+ <ay off of a call option buyer It may be observed from the above figure +.+ that the possible outcomes can be divided into two parts: one above the exercise price and other below the exercise price. 2he outcome above the exercise price are said to be In the money and are beneficial to the option holder but ?alue of share

7A

not the outcome below the exercise price. It is the exercise price that divides the good and bad outcomes. Eor the call option writer, he will gain when share price is below the strike price and will lose when stock price is above the strike price. 2he call buyer*s gain is call seller*s loss. 2he figure +.1 shows the pay off of a call option writer.

In Jthe money out Jof money %6ood outcome& %"ad outcome& 0 ?alue of share #xercise price

?alue of call option Eig. +.1 <ay Joff of a call option writer. 1& P&t o'tio : 6ives the buyer the right, but not the obligation, to sell a specific futures contract at a predetermined price within a limited period of time. <ut option is a contract that gives the holder a right to sell specified shares at an agreed price on or before a given maturity. 2hus, if you buy a put option on shares of C@S 'ompany, you have the right to sell +00 shares of this company at the specified price at any time between today and the specified date. Suppose the current price %S& of 4eliance Industries is 4s. 18+ and you expect that the price will fall within a three months. 2herefore, you can buy a 7 month put option on 4eliance Industries at an agreed exercise price 7.

%#&, say, 4s. 18.. If the price actually falls to %S

& 4s. 1,0 after three months, you will exercise

your option. @ou will buy the share for 4s. 1,0 from the market and deliver it to the put option writer to receive 4s. 18.. @our gain is 4s.+. ignoring the put option premium, transaction cost and taxes. @ou will not exercise if the share price rises above exercise price5 the put option is worthless and its value is zero. 2hus, exercise the put option when #xercise price UShare price at expiration N # U S (o not exercise put option when #xercise price VNShare price at expiration N #VS 2he value of put option at expiration will be ?alue of put option at expirationN $aximum W%#xercise price JShare price&, 0X <t N $ax W%# S <43EI2 ;imited profit #xercise price ?alue of share 0 In the money out of money &, 0X
t t

Eig. +.7 <ay off for a put option buyer 2he figure +.7 shows that the value of put option for the put option holder depends on the value of underlying asset .2he value of put option is zero when it is out of the money. 2he potential profit of the put option is limited because share price cannot fall below zero. 7/

2he put option buyer*s gain is the seller*s loss. 2he potential loss of the put option is limited to the exercise price. Since the buyer has to pay a premium to the seller for purchasing a put option, the potential profit of the buyer and the potential loss of the seller will reduce by the amount of premium. 2he figure +.A shows the pay off for a put option seller.

3ut of money in the money value of share

#xercise price ;imited loss ;oss Eig. <ay off for a put option seller OPTION TER#INOLO)Y I !eD o'tio s5 2hese the +.A

options have the index as underlying. In India, they have a #uropean style settlement. #g. )ifty options, $ini )ifty options etc. Stock o'tio s5 Stock options are options on individual stocks. A stock option contract gives the holder the right to buy or sell the underlying shares at the specified price. 2hey have an American style settlement. $&yer of a o'tio 5 2he buyer of an option is the one who by paying the option premium

buys the right but not the obligation to exercise his option on the sellerFwriter.

7-

Briter G se22er of a o'tio 5

2he writer F seller of a callFput option is the one who receives the

option premium and is thereby obliged to sellFbuy the asset if the buyer exercises on him. Ca22 o'tio 5 A call option gives the holder the right but not the obligation to buy an asset by a certain date for a certain price. P&t o'tio 5 A put option gives the holder the right but not the obligation to sell an asset by a certain date for a certain price. O'tio 'riceG'remi&m5 3ption price is the price which the option buyer pays to the option

seller. It is also referred to as the option premium. ED'iratio !ate5 2he date specified in the options contract is known as the expiration date, the exercise date, the strike date or the maturity. Strike 'rice5 2he price specified in the options contract is known as the strike price or the exercise price.

I :t(e: mo ey o'tio : An in the money %I2$& option is an option that would lead to a positive cashflow to the holder if it were exercised immediately. A call option on the index is said to be in the money when the current index stands at a level higher than the strike price %i.e. spot price U strike price&. If the index is much higher than the strike price, the call is said to be deep I2$. In the case of a put, the put is I2$ if the index is below the strike price. At:t(e:mo ey o'tio : An at the money %A2$& option is an option that would lead to

zero cash flow if it were exercised immediately. An option on the index is at the money when the current index eBuals the strike price %i.e. spot price N strike price&.
!

O&t:of:t(e:mo ey o'tio

: An out of the money %32$& option is an option that would

lead to a negative cash flow if it were exercised immediately. A call option on the index is out of the money when the current index stands at a level which is less than the strike price %i.e. spot price V strike price&. If the index is much lower than the strike price, the

7,

call is said to be deep 32$. In the case of a put, the put is 32$ if the index is above the strike price.
!

I tri sic +a2&e of a components

o'tio : 2he option premium can be broken down into two

intrinsic value and time value. 2he intrinsic value of a call is the amount

the option is I2$, if it is I2$. If the call is 32$, its intrinsic value is zero. <utting it another way, the intrinsic value of a call is $axW0, %St Y =&X which means the intrinsic value of a call is the greater of 0 or %St Y =&. Similarly, the intrinsic value of a put is $axW0, = Y StX,i.e. the greater of 0 or %= Y St&. = is the strike price and St is the spot price.
!

Time +a2&e of a

o'tio

: 2he time value of an option is the difference between its

premium and its intrinsic value. "oth calls and puts have time value. An option that is 32$ or A2$ has only time value. >sually, the maximum time value exists when the option is A2$. 2he longer the time to expiration, the greater is an optionPs time value, all else eBual. At expiration, an option should have no time value.

E&ro'ea O'tio #uropean 3ption. America O'tio American 3ption. TA$LE 15

: Dhen an option is allowed to exercise only on the maturity date, it is called a

: Dhen an option can be exercised any time before its maturity is called an

$&si ess %ro*t( of f&t&res a ! o'tio s market5 NSE t&r o+er 6Rs.Cr7
A.ERA)E YEAR INDEC FUTURES 100, 100100/ 100. STOC> FUTURES INDEC OPTIONS STOC> OPTIONS TOTAL TURN O.ER 08 1,.7/+. 1-,8718 1/-1.71 +/A.,/.A ,A,00/7 A/0,-.7 0, 7,10//- -.A,./7 +7/1+++ 7.8+7/./ +7080A-, .1+.7.7 0- 1.78.-A 7,708/- -8+80/ +87-8. -7./1A1 18.A7 0/ +.+7-.. 1-8+/8- 77,A/8 +,01.7 A,1A+-A +8110 DAILY TURN O.ER

78

100A 1007 1001 100+ 1000

0. --1+A- +A,A0./ +1+8A7 +/,,7/ 1.A/8,1 +0+00A ..AAA/ +70.878 .1,+/ 1+-10- 1+70/+0 ,7,, 07 A78.1 1,/.77 81A/ +00+7+ A78,/1 +-.1 01 1+A,7 .+.+. 7-/. 1.+/7 +0+81/ A+0 0+ 17/. 17/. ++

Source: www.nseindia.com

TA$LE "5

Deri+ati+e i str&me ts a+ai2a,2e for tra!e i I !ia 6NSE75


PRODUCT SPECIFICATIONS U !er2yi % i str&me t Sec&rity !escri'tor Ty'e Co tract siFe ED'iry !ay Price ste's Tra!i % cyc2e $ase 'rice: First !ay of tra!i % $ase 'rice: S&,se9&e t Price ,a !s INDEC FUTURES STOC> FUTURES INDEC OPTIONS STOC> OPTIONS

SM< ')C )ifty Individual securities SM< ')C )ifty Individual securities ) E>2I(C )IE2@ ) E>2S2= ) 3<2I(C )IE2@ ) 3<2S2= #uropean American ;ot size +00 As specified by ;ot size +00 As specified by ;ast 2hursday of the exchange ;ast 2hursday of the ;ast 2hursday of the expiry month exchange ;ast 2hursday of the expiry month

expiry month expiry month 4e 0.0. 4e 0.0. 4e 0.0. 4e 0.0. 7 months 7 months 7 months 7 months <revious day closing <revious day closing )ifty value (aily settlement price 3perating ranges are kept at L+0 percent value of underlying security (aily settlement price 3perating ranges are kept at L10 percent ;ower of +K of market wide position limit stipulated for open positions or 4s . cr.

2heoretical value based on "lack

2heoretical value based on "lack

Scholes model Scholes model (aily closing price (aily closing price 3perating ranges are kept at 88K of the base price 10,000 units or greater 3perating ranges are kept at 88K of the base price ;ower of +K of market wide position limit stipulated for open positions or 4s . cr. 'ash settlement on 2L+ basis (aily settlement on 2L+ basis and final

1&a tity freeFe

10,000 units or greater

Sett2eme t ,asis

$2$ M final settlement will be

$2$ M final settlement will be

A0

cash settled on 2L+

cash settled on 2L+ "asis 'losing price for daily settlement and closing value on the expiry day for final settlement <remium value for daily settlement and the closing value of index on expiry day for final settlement

on 2L7 "asis. <remium value for daily settlement and the closing value on expiry day for final settlement

Sett2eme t 'rice

"asis 'losing price for daily settlement and closing value on the expiry day for final settlement

"S# also offers similar products in the derivatives segment.

<.1. STATE#ENT OF THE PRO$LE#5

2hrough the use of derivative products, it is possible to partially or fully transfer price risks by locking in asset prices.

As instruments of risk management, these generally do not influence the fluctuations in the underlying asset prices. 9owever, by locking in asset prices, derivative products minimize the impact of fluctuations in asset prices on the profitability and cash flow situation of riskJ averse investors. 2rading in EM3 should be well organized approach for the purpose of which they are being used, be it to hedging or trading for profits. 2he study analyses the various strategies that can be used by traders and investors to get maximum returns in the derivatives market.2he problem is to analyze the derivatives that are traded in India with respect to volatility of market to minimize the risk of the investor in the derivatives market

<."O$HECTI.ES5

2o study financial derivatives as an investment alternative.

2o suggest option strategy to maximize payoff of an investor.

2o analyze various types of financial derivatives used by investors as an effective tools in managing risk.

A+

2o analyse and recommend whether to buy stock at a reasonable price and position yourself for a big market move.

2o suggest investors in the arena of financial derivatives market for managing risk especially in the current recession period.

<.-. RESEARCH #ETHODOLO)Y


2he type of research is selected on the basis of problems identified. 9ere the research type used is descriptive research. (escriptive research includes fact findings and enBuiries of different kinds. 2he maIor purpose of descriptive research is a description of the state of affairs, as it exists in the present system. In this proIect an attempt has been made to analyze various option strategies in the option market and how they help to hedge the risk.

<.-.1. DATA COLLECTION5


Seco !ary !ata5 is collected through text books, websites, newspapers and company brochure, )ifty Spot 4ate for the period of (ec 100, :an 1008

<.-.". SA#PLIN) TECHNI1UE .


Too2s of a a2ysis5 2he research will be conducted by using the strategies of futures, forwards and options J "ullish, "earish and )eutral Strategies.

<.-.-. PLAN OF ANALYSIS5

A1

2he study analyses the financial instruments that can be used by the traders and investors for hedging the risk involved in buying, holding and selling various kinds of financial assets in derivatives market with special focus on options.

<.4. LI#ITATIONS OF THE STUDY5


2he study is limited to investors of Sharekhan and its #mployees. 2he strategies built are subIect to Indian stock market risk and uncertain conditions. 2he findings and suggestions are based on existing trends in the secondary market. 2he strategy does not serve the purpose of suggesting a investor, if the investor change his risk bearing level.

A7

CHAPTER .II =.1DATA ANALYSIS AND INTERPRETATION5


=.1.1. RIS> #ANA)E#ENT BITH FORBARD CONTRACTS5

Eorward contracts are perhaps the oldest and simplest tools for managing financial risk. A forward contract represents an agreement between two parties to exchange an asset for cash at a predetermined future date called the settlement date for a price that is specified today.

Illustration with current example:

2he depreciation of the Indian rupee and a strong upward movement in international gold prices pushed the yellow metal to a record high of 4s +.,170F per +0 grams as on Eeb. +, 1008. As investors are increasingly parking their money in gold because of a melting stock market and erosion in the value of other financial asset classes, the market price of the gold tend to rise further. So investor can enter in to forward contract to buy gold at a price close to current market price say 4s +A,-..F per +0 grams to buy on $ar 1 1008. )ow according to this agreement, investor have bought forward gold or in long forward gold. Dhereas the gold dealer has sold forward gold or in short forward gold. )o money or gold changes hand when the deal is signed. 2he forward contract only specifies the terms of a transaction that will occur in future.

3n $ar 1 1008, the contract will be settled so that investor gets the gold at a price of 4s +A,-..F per +0 grams. If market price of the gold is higher than the contract price, the investor gets the profit of the difference between the market and contract price or else undergoes loss if

AA

the price is lower than market price. "y entering into forward contract the investor can avoid the downside risk.

Suppose if the market price of the gold touches 4s +.,//.F as proIected then investor gets a profit of 4s 8+0F per +0 grams.

Risk ma a%eme t *it( for*ar! co tracts5

=.1.". RIS> #ANA)E#ENT BITH FUTURE CONTRACTS5 Dhen you buy a security, you have a choice. @ou can buy it in the spot market and get immediate delivery or you can buy it in the futures market and obtain deferred delivery on specified future payment. 2hese differences between purchases in the spot market and futures market suggest the following relationship between the spot and futures prices. A.

Eutures. price N spot price <? of interest or dividend %+L 4isk free rate of interest& t dividend payments foregone

"roadly there are two types of futures: 'ommodity futures %'ocoa, 'otton, Aluminum, 6old, 'rude oil, Soya bean etc& Einancial futures %Index futures, stock futures, debt instruments, foreign currencies, monetary $etals etc& Eig. 4isk management with futures contract

2he futures contract is entered by a margin deposit which is to be made to the clearing house by the parties as security of possible default risk in the form of 7 types of margins: +& Initial margin %performance margin& . 1.percent. 1& $aintenance margin %app. -. percent of initial margin& 7& ?ariation margin %additional fund& call* to deposit variation margin. A/ if fall below margin level, exchange issue Gmargin

2he future contracts are market to market %$2$& process.

Illustration with 'urrent example: 'ontract sizeN+0 grams 6old futures contract price Eeb 1008 4s +7/,F ?alue of contractN +7/, x +0 N +7/,0F Initial margin N +0K %+7/,0& N +7/,F $aintenance marginN -. K% +7/,& N +01/F Suppose if the margin balance is 4s A700F and variation margin is 4s +70F 2hen5 <rofit N margin balance margin deposit. NA700 %+7/,L+70& N1,01F Fi a cia2 f&t&res5 2he financial futures consist of index and stock futures. 2he strategy of futures contracts for managing a portfolio with a higher volatility than the market index to bring about a risk management is given as5 )o of futures reBuired N value of portfolio to be hedged C beta ?alue of one future contract Dhere beta N difference in the percentage change in the value of the portfolio being hedged and K change in the index value.

A-

Illustration with current example5 a7 S(ort 'ositio 5 'onsider the portfolio value is 4s /0,000F and nifty is 70A/ on :an 7, 1008. If the nifty down by +0K, then value of portfolio will be 4s .A,000F and beta N +.1 Sell 70 nifty futures Z 4s 70A/ per contract. "uy 70 nifty futures Z 4s 1-A+ per contract. 6ainN 70.x70N4s 8+.0F )o. of futures reBuired N /0,000 N 1A no. ,7 Lo % 'ositio : %mutual funds& Investment scheme 4s .0, 00,000F and nifty 70A/ on Ian7, 1008. )ifty futures neededN .0, 00,000 1000 'onclusion: 2he strategy is that for managing risk of the portfolio with a higher volatility than the market index, more futures contracts would be reBuired to bring about a perfect hedge. N 1.00 no. x +.1

70A/

A,

=.1.- .RIS> #ANA)E#ENT BITH OPTION CONTRACTS5 DATE NIFTY SPOT RATE +/ (#' 18,+ +- (#' 70A+ +, (#' 18,A +8 (#' 70/0 10 (#' 70-17 (#' 7078 1A (#' 18/, 1. (#' 18+/ 1, (#' 1,.70 (#' 1811 7+ (#' 18-8 0+ :A) 18.8 01 :A) 7077 07 :A) 70A/ 0/ :A) 7+1+ 0- :A) 7++1 0, :A) 1810 +0 :A) 1,-7 +7 :A) 1--7 +. :A) 1,7. +/ :A) 1-7/ +- :A) 1,1, A8

1+ :A) 1-8/ 11 :A) 1-0/ 17 :A) 1-+7 1, :A) 1--+ 18 :A) 1,A8 70 :A) 1,17
2able: )ifty Spot 4ate for the period of (ec 100, :an 1008

2he following strategies are analyzed for current market condition and hence forth proper guidance is given for the investor for managing the risk. 17 LON) CALL5 Dhere the investor expects the price of the underlying stock to rise, the bought call can provide leveraged exposure to the price rise. "uying a call also locks in a maximum purchase Dhen to use the long call $arket outlook "ullish ?olatility outlook 4ising price for the life of the option.

Profits a ! 2osses 2he maximum loss the investor can suffer is the premium paid for the option, which will occur if the share price at expiry is below the strike price. 2he investor breaks even if at expiry the share price is eBual to the strike price of the option plus the premium paid. As the share price rises beyond this point, the potential profits of the bought call are unlimited.

C&rre t EDam'2e5

3n 1Ath (ec 100,, )ifty is Buoting at 4s 18/,F and the :anuary 18.0F %strike price& call costs 4s ,0F %premium&. "uy )ifty call at ,0F )et outlay is 4s A000F . If the )ifty index does go up you can close your position either by selling the option back to the market or exercising your right to buy the underlying shares at the exercise price.

.0

<ossible outcome at expiry Spot 4ate N 7++0 3ption worth A000. 'losing the position now will produce a net profit of A000 Spot 4ate V 18.0 3ption expires worthless. 2he loss is 4s A000F %premium& Spot 4ate U 7070 )et profit N intrinsic value of %"reak even N 18.0L,0& option i.e. by whatever amount the share price exceeds 7070F )ra'( "5 Payoff !ia%ram of Lo % Ca22

<rofit 7070%"reak #ven& ;oss 18.0%Strike <rice&

7++0

Analysis of 'urrent #xample: Date S'ot Price 1AF+1F100, 0-F0+F1008 18/, 70+1

Erom 2able + it is observed that after will result in loss of %70+1 18.0 ,0& Interpretation: Action + If you excise the option th

:anuary market never behaved as per our


th

expectation. In order to minimize the loss it is better to exercise the option on [ .0 N %800&

:anuary, which

:anuary your loss will be 800

Action 1 If you do not excise the option your loss will be A000

.+

Ot(er co si!eratio s Time !ecay5 2ime decay works against the buyer of the call. If the expected share price rise does not take place soon after entering the position, time decay will start to erode the value of the option. Strike 'rice5 2he investor will usually have a choice of strike prices, and must balance the cost of the option against the rise in share price reBuired for the strategy to be successful. 2he out of the money option will be the cheapest, but also reBuires the largest rise in share price. $any investors regard the at the money option as offering the best balance of risk and reward. ED'iry mo t(5 A longer term option allows more time for a rise in the share price to take place, but will be more expensive than a shorter term option. 2he investor needs to form a view of the time frame over which the share price movement is expected to take place.

Fo22o*:&' actio If the share price rise takes place as expected, the call option taker must decide whether to close out at a profit, or maintain the position in the hope of a further increase in price. 2he longer the option position is left open, the greater the effect of time decay. If the share price does not rise as expected, it is often advisable to close out the position in order to recover some time value from the position. If at expiry the option is in the money, the investor must choose whether to sell the option or exercise it. 2he choice will be determined by whether the investor wants to own the underlying shares.

"7 LON) PUT5 Dhere the investor expects the price of the underlying stock to fall, the bought put provides leveraged exposure to the price fall. "uying a put option is one of the few ways

.1

investors can speculate on a falling share price. <ut options may also be used to protect an investorPs holding in the underlying stock. When to use the long put $arket outlook Ealling Profits a ! 2osses 2he maximum loss the investor can suffer is the premium paid for the option, which will occur if the share price at expiry is above the strike price. 2he investor breaks even if at expiry the share price is eBual to the strike price of the option less the premium paid. As the share price falls beyond this point, the potential profits of the bought put are limited only by a fall in the share price to zero. EDam'2e5 Situation :An investor thinks )ifty on /
th

?olatility outlook 4ising

:an, currently trading at 4s 7+1+F , is overvalued and

may fall substantially. 9e therefore decides to buy <uts to gain exposure to its anticipated fall. Action: 3n / th :anuary buy )ifty 1,.0 <ut at 4s .0F for a total consideration of 4s 1.00F . <ossible outcome at expiry
Spot <rice 1-.0 2he 1,.0 put will be trading at 4s +00F which gives a profit of 4s .0 %+00 .0& .0 N 1.00, if the position is closed out Spot <rice [

1,00 J 1,.0 4ecover intrinsic value of premium 2he 1,.0 put will give loss of premium .0
.0 N 1.00

Spot <rice U1,.0

6raph 7: <ayoff diagram of ;ong <ut

1-.0 1,00%"reak #ven& 1,.0 %Strike price&

.7

Analysis of 'urrent #xample: (ate 0/F+F1008 +7F+F1008 +.F+F1008 Spot <rice 7+1+ 1--7 1,7. Erom 2able + it is observed that after / in profit of %1,.0 1--7& .00 N 4s.+7.0F I ter'retatio 5 Action + If you the excise the option +7 Action 1 If you the excise the option 1A Ot(er co si!eratio s Time !ecay5 2ime decay works against the buyer of the put. If the expected share price fall does not take place soon after entering the position, time decay will start to erode the value of the option. Strike 'rice5 2he investor must balance the cost of the option against the fall in share price reBuired for the strategy to be successful. 2he out of the money option will be the cheapest but also reBuires the largest fall in share price. If the investor is buying a put to protect a shareholding, the cost of the option must be weighed up against the protection reBuired. 2he in the money option locks in the highest sale price for the underlying shares, but also is the most expensive option. Fo22o*:&' actio If the share price fall takes place as expected, the put option taker must decide whether to close out at a profit, or maintain the position in the hope of a further increase in price. 2he longer the option position is left open, the greater the effect of time decay. If the share price does not fall as expected, it is often advisable to close out the position in order to recover some time value from the position.
th th

:anuary market behaved as per our expectation.


th

In order to $aximize the profit it is better to excise the option on +7

:anuary, which will result

:anuary your profit will be +7.0 :anuary your profit will be -.0

th

.A

At expiry, the holder of an in the money put option would usually close out the position, rather than exercising %unless they own the underlying shares&. If the put has been bought to protect a shareholding, the investor must decide whether they want continue holding the stock, in which case the put would be sold, or sell the shares, in which case the option would be exercised. -7 SHORT CALL 5 Sellers expect a gradual fall in the market and lower volatility. 2he optimal strike %exercise price to sell& is dependent on onePs expectation for the stock. 2he more bearish the lower the strike or exercise price should be in order When to use the short call $arket outlook )eutral to mildly bearish ?olatility outlook Ealling

to maximize premium income.

Profits a ! 2osses @our maximum profit depends on the underlying stock closing at or below the strike price of the option. 2he potential for loss is unlimited which means it is dependant on how far the stock is above the exercise price at expiry. In practical terms the seller of the call may not be able to carry the position until expiry if they have insufficient margin to carry the unrealized loss in which case the clientPs broker will close the position early.

EDam'2e5 Situation: 2he )ifty stock index are currently trading at 1,.- on 1, Action: on / th :anuary Sell )ifty :anuary 1,.0 at 4s .0F
<ossible outcome at expiry Spot <rice N 18.0 2he put writer will incur loss of %18.0 .0 1,.0&.0N1.00 Spot <rice V 1,.0 2he option will not be exercised M investor keeps the

th

(ec.

..

<remium N 1.00

)ra'( 45 Payoff !ia%ram of S(ort Ca22

<rofit

1,.0%Strike <rice&

1800 %"reak #ven&

;oss Analysis of 'urrent #xample: (ate 1,F+1F100, +0F+F1008 +/F+F1008 Spot <rice 1,.- 1,-7 1-7/ Erom 2able + it is observed that after 1, profit of .0 .0 N1.00F I ter'retatio 5 Action + If you the excise the option on +0 Action 1 If you the excise the option on 1A Ot(er co si!eratio s
th th

18.0

(ec market behaved as per our expectation. In


th

order to $aximize the profit it is better to excise the option on +/

:anuary, which will result in

:anuary your profit will be +7.0 :anuary your profit will be 1.00

th

Time !ecay5 2ime decay works against the buyer of the put. If the expected share price fall does not take place soon after entering the position, time decay will start to erode the value of the option. Strike 'rice5 2he investor must balance the cost of the option against the fall in share price reBuired for the strategy to be successful. 2he out of the money option will be the cheapest but also reBuires the largest fall in share price.

./

If the investor is buying a put to protect a shareholding, the cost of the option must be weighed up against the protection reBuired. 2he in the money option locks in the highest sale price for the underlying shares, but also is the most expensive option. Fo22o*:&' actio If the share price fall takes place as expected, the put option taker must decide whether to close out at a profit, or maintain the position in the hope of a further increase in price. 2he longer the option position is left open, the greater the effect of time decay. If the share price does not fall as expected, it is often advisable to close out the position in order to recover some time value from the position. At expiry, the holder of an in the money put option would usually close out the position, rather than exercising %unless they own the underlying shares&. If the put has been bought to protect a shareholding, the investor must decide whether they want continue holding the stock, in which case the put would be sold, or sell the shares, in which case the option would be exercised. 47 SHORT PUT5 2he written put can provide the investor with extra income in flat to rising markets. It can also be used as a way to buy stock cheaply. 2his strategy is generally used when the investor expects the share price to remain steady or increase slightly over the life of the option. Dhen to use the short put $arket outlook )eutral to mildly bullish ?olatility outlook Ealling Profits a ! 2osses 2he maximum profit the investor can make is the premium received for writing the option, which will occur if the share price at expiry is above the strike price. 2he investor breaks even if at expiry the share price is eBual to the strike price of the option less the premium paid. As the share price falls beyond this point, the potential losses of the sold put are limited only by a fall in the share price to zero. If the investor does not close out an in the money put before expiry, the option will be exercised and the investor will be reBuired to buy the underlying stock at the strike price of the option.

.-

EDam'2e5 Situation: 2he )ifty stock index are currently trading at 1-7/ on +/ Action: on +/ th :anuary Sell )ifty :an 1-.0 put at 4s 80F

th

:anuary

<ossible outcome at expiry Spot <rice N1-.0 2he put writer will incur loss of %1870 80 1-.0& Spot <rice U1870 [ .0 N A.00

2he option will not be exercised M investor keeps the <remium N A.00

6raph .: <ayoff diagram of Short <ut

<rofit

1,A0 %"reak #ven&

1870%Strike <rice&

;oss

1-.0

Analysis of 'urrent #xample: (ate +/F+F1008 1+F+F1008 Spot <rice 1-7/ 1-8/ Erom 2able + it is observed that after +/ profit of 80 [ .0 N 4s.A.00F
th

:anuary market behaved as per our expectation.


st

In order to $aximize the profit it is better to excise the option on 1+

:an, which will result in

I ter'retatio 5 Action + If you the excise the option 1+


st

:anuary your profit will be A.00

.,

Ot(er co si!eratio s C(ea' stock5 $any investors write put options as a way of buying stock cheaply. If the share price falls and the option is exercised, the purchase price is effectively the strike price of the option less the premium received which is less then the price of the stock at the time of writing the option. If the share price at expiry is above the strike price, the option will expire worthless. 2he investor does not get to buy the stock, but has benefited from the receipt of the premium. Time !ecay5 2ime decay works in favor of the put writer. If the stock price stays steady, the at the money option will deliver the most profit to the put writer, as this is the option with the most time value. EDercise5 2he put writer must be wary of early exercise. A put option is generally more likely than a call option to be exercised early.

Fo22o*:&' actio If at expiry the stock is trading below the strike price5 the put writer will be exercised unless the position has been closed out. As expiry approaches, the investor should consider buying back the put if they do not want to own the stock. Alternatively, the investor could roll the option position to a later month and possibly a different strike price.

;7 $ULL SPREAD5 If the investor is not bullish enough to buy a call outright but expects the share price to rise moderately, the bull spread is a lower cost way to gain exposure to such a market movement. 2he strategy consists of the purchase of a call option and the sale of a call option with a higher strike price. When to use the bull spread $arket outlook moderately bullish ?olatility outlook steady to increasing .8

a. $&22 ca22 s'rea! EDam'2e5 Situation: 3n 1 nd :anuary, the spot price of )ifty is 7077. "uy + )ifty :anuary 7000 call option at 4s 70F and sell + :anuary 70.0 call at 4s 0.F . 2otal outlay and maximum loss is .1.0. "reak even is 4s 7+70F %7000L+70&. $aximum profit is %70.0 7000 1.& [ .0 N+1.0F .

<ossible out come at expiry Spot price V 7000 "oth the 7000 and 70.0 calls are worthless and the maximum loss is eBual to the net cost of establishing the spread i.e. 4s +1.0F 2he 7000 call gains intrinsic value and profit is eBual to the intrinsic value of the 7000 calls less the net debit of 4s 1.. $aximum profit is therefore realized at 70.0, the point Iust before which the 70.0 calls may be exercised.

Spot <rice 7000 70.0

Spot price U70.0 2he position can be closed for a maximum profit of 4s 1. above 70.0 i.e. difference in intrinsic value of two calls less than net debit %.0 1.&.

6raph /: <ayoff (iagram of "ull Spread

<rofit

70.0

701.%"reak #ven& ;oss 7000

Analysis of 'urrent #xample: (ate 01F+F1008 0-F+F1008 Spot <rice 7077 7++1 /0

Erom 2able + it is observed that after 1 profit of %70.0 7000 1.& [ .0 N 4s.+1.0

nd

:anuary market behaved as per our expectation. In


th

order to $aximize the profit it is better to exercise the option on -

:anuary, which will result in

I ter'retatio 5 Action + If you the excise the option th

:anuary your profit will be +1.0

,. $&22 P&t S'rea! 2he bull spread can be constructed using puts instead of calls. As with the call spread, the investor buys the lower strike option and sells the higher strike option. 2he investor may decide to construct the spread in this way if the options are perceived to be overpriced. Since entering the put spread involves selling volatility, the higher option premiums will benefit the trader. In contrast, they make the call spread more expensive to enter.

2he bull put spread can also be viewed as writing a put with protection in place against a collapse in the market. In this case, the written put may be close to being at the money, with the taken put out of the money 2he maximum profit from the bull put spread is the premium received when the spread is established. 2he maximum loss is the difference between the strike prices less the premium received. Profit a ! Losses Dhile the short call reduces the risk inherent in taking an outright call it also limits the profits that can be made. 2he maximum profit obtainable is the difference between the strike prices of the two options, less the cost of the spread. $aximum profit will occur if, at expiry, the share price is at, or above, the strike price of the sold option. If the stock rises Buickly to this level, the spread will often be unwound early in order to avoid the risk of early exercise on the short leg. 2he higher delta of the long call means that the spread will increase in value as the share price rises. 2he maximum loss possible is the cost of the spread and will be incurred when the share price is at or below the strike price of the bought option at expiry. /+

Ot(er co si!eratio s Limite! riskG2imite! re*ar!5 2he bull spread is a cheaper strategy than simply buying a call option. As a result, the profit potential is also reduced. Cost of strate%y5 2he investor must be satisfied that the cost of the spread is worth the potential reward. 'ommission costs on entering and exiting will be greater for this strategy than when buying a call outright. Fo22o*:&' actio If the stock unexpectedly rises sharply, it may be advisable to exit the strategy once the upper strike price is reached. Although time value is helpful around the strike price of the short leg, unwinding the strategy early removes the risk of exercise on the short call. If the stock price falls suddenly, the spread may be unwound before the taken call loses too much time value. <7 $EAR SPREAD5 2he bear spread can be considered when the investor expects a moderate fall in the market but is not prepared to pay to take a put outright. 2he strategy consists of the purchase of a put option and the sale of a put option with a lower strike price. When to use the bear spread $arket outlook moderately bearish ?olatility outlook steady to increasing

Profits a ! 2osses As with the bull spread, the written leg of this strategy serves to reduce the cost of entering the position. 9owever it also caps the profits that can be earned. 2he maximum profit to be earned is the difference between the strike prices of the two options, less the cost of the spread. If, at expiry, the share price has fallen to the strike price of the sold option, the maximum profit will be earned. If the stock declines to these levels, the trader may well choose to unwind the /1

spread early, in order to avoid the possibility of excise on the short leg. 2he maximum potential loss is the cost of the spread. 2his will occur if, at expiry, the share price is above the exercise price of the bought option.

<ossible outcome at expiry. spot price U 4s 1-.0 "oth puts are worthless and the maximum loss is eBual to the net cost of establishing the spread i.e. 4s 100 spot price 1-.0 1-00 2he position can be closed out for the intrinsic value of the 4s 1-.0 put. spot price 1-00 2he maximum potential profit of 4s100 is realized Iust before the level at which the 1-00 put may be exercised by the holder spot price V1-00 2he position can be closed for the difference in the intrinsic value of two puts, so the profit is %1-.0 1-00 A& [ .0 N 1700

a. $ear P&t s'rea! A bear put spread involves the purchase and sale of puts at different exercised price but with the same expiry date. 2he purchase puts have higher exercise price than those written. Situation :3n +7
th

:anuary spot rate of )ifty is trading at 1--7. @ou buy + )ifty :anuary 1-.0

put at 4S 80F and sell + )ifty 1-00 put at 4s ,/F . $aximum profit and maximum loss 4s 100F 6raph -: <ayoff diagram of "ear Spread

<rofit

1-00

1-0A %"reak #ven& ;oss 1-.0

Analysis of 'urrent #xample: (ate +/F+F1008 1+F+F1008 11F+F1008

/7

Spot <rice 1-7/ 1-8/ 1-0/ Erom 2able + it is observed that after +/ in profit of %1-.0 1-00 A& .0 N 4s.1700 I ter'retatio 5 Action + If you the excise the option 11 Action 1 If you the excise the option 1+
nd th

:anuary market behaved as per our expectation.


nd

In order to $aximize the profit it is better to excise the option on 11

:anuary, which will result

:anuary your profit will be 1700

st

:anuary your loss will be 1700

,. $ear ca22 s'rea! 2he bear spread can be constructed using calls instead of puts. As with the put spread, the trader buys the higher strike option and sells the lower strike option. 2he trader may decide to use calls instead of puts in order to take advantage of options that are viewed as overpriced. Since the trader is selling the spread, the receipt of higher premiums is a benefit. 2here may also be greater liBuidity in calls than puts, giving greater flexibility when entering and exiting the spread. 2he maximum profit available is the value of the premium received. 2he maximum loss is the difference between the strike prices less the premium received. 2he bear call spread can be seen as writing a call with protection against an unexpected rise in the market. In this instance, the trader may write a call around the money, and take a call out of the money, which effectively provides a ceiling to the potential loss if the market should rise.

Ot(er co si!eratio s Limite! riskG2imite! re*ar!5 2he bear spread costs less to place than the outright purchase of a

put option. As a result, the potential for profit is also reduced. Cost of strate%y5 2he investor must be satisfied that the cost of the spread is Iustified by the potential reward. 'ommission costs on entering and exiting can significantly reduce profitability. Fo22o*:&' actio /A

If the stock unexpectedly falls sharply, it may be advisable to exit the strategy once the lower strike price is reached. 2ime decay will benefit the spread around the lower strike price5 however the trader will usually be more concerned with avoiding exercise on the short leg. If the stock price rises suddenly, the spread may be unwound before the taken put loses too much time value.

CHAPTER .III SU##ARY OF FINDIN)S5


2hough forwards are not traded in the organized exchange, they are used as risk management tools in an unorganized market especially in the commodities market without any formal procedure. 2he futures are used as an effective risk management tools in the organized stock markets as well as commodities market. 2he strategy is that for managing risk of the portfolio with a higher volatility than the market index, more futures contracts would be reBuired to bring about a perfect hedge.

FOR OPTIONS STRATE )IES5

/.

In

Lo % Ca22 , the maximum loss the investor can suffer is the premium paid for the option, which will occur if the share price at expiry is below the strike price. 2he investor breaks even if at expiry the share price is eBual to the strike price of the option plus the premium paid. As the share price rises beyond this point, the potential profits of the bought call are unlimited.

In

Lo % P&t , the maximum loss the investor can suffer is the premium paid for the option, which will occur if the share price at expiry is above the strike price. 2he investor breaks even if at expiry the share price is eBual to the strike price of the option less the premium paid. As the share price falls beyond this point.

In

S(ort Ca22/ the maximum profit depends on the underlying stock closing at or below the strike price of the option and will be limited premium received. 2he potential for loss is unlimited which means it is dependant on how far the stock is above the exercise price at expiry.

In

S(ort '&t , the maximum profit the investor can make is the premium received for writing the option, which will occur if the share price at expiry is above the strike price. 2he investor breaks even if at expiry the share price is eBual to the strike price of the option less the premium paid. As the share price falls beyond this point, the potential losses of the sold put are unlimited.

In

$&22 S'rea! , the maximum profit obtainable is the difference between the strike prices of the two options, less the cost of the spread. 2he maximum loss possible is the cost of the spread and will be incurred when the share price is at or below the strike price of the bought option at expiry.

In

$ear S'rea! , the maximum profit to be earned is the difference between the strike prices of the two options, less the cost of the spread. If, at expiry, the share price has fallen to the strike price of the sold option, the maximum profit will be earned. 2he maximum potential loss is the cost of the spread. 2his will occur if, at expiry, the share price is above the exercise price of the bought option.

//

SU))ESTIONS5
In today*s world, managing risk is a daunting task. In coping with this challenge the following inter related suggestions need to be borne in mind. Align risk management with strategy. <roactively manage uncertainties. #mploy a mix of real and financial methods. =now the limits of risk management tools. ;earn when it is worth reducing risk.

For O'tio strate%ies5


2he Lo % Ca22

strategy is generally used when you expect the share price to rise, and

volatility to increase. "e realistic in selecting a strike price the out of the money option will be cheapest, but also reBuires a large move in the share price for the ;ong 'all strategy to be profitable.

In case of ;ong 'all, if the share price does not rise as expected, it is often advisable to close out the position in order to recover some time value from the position.

2he

Lo % P&t strategy is generally used when you expect the share price to fall, and volatility to increase.

In case of ;ong <ut, if the share price fall takes place as expected, the put option taker must decide whether to close out at a profit, or maintain the position in the hope of a further increase in price. 2he longer the option position is left open, the greater the effect of time decay.

/-

As a shareholder, it is not practical to have protection in place +1 months of the year. 2his ;ong <ut strategy is suitable for shorter periods when you fear a market downturn.

2he

S(ort Ca22 strategy is generally used when sellers expect a gradual fall in the market and lower volatility.

2he

S(ort P&t strategy is generally used when the investor expects the share price to remain steady or increase slightly over the life of the option. If at expiry the stock is trading below the strike price, the put writer will be exercised unless the position has been closed out.

In case of Short 'all as expiry approaches, the investor should consider buying back the put if they do not want to own the stock. Alternatively, the investor could roll the option position to a later month and possibly a different strike price.

2he

$&22 S'rea! strategy is generally used when an investor is expecting a limited rise in the price of the stock.

Dhile using "ull Spread, be sure that the cost of the spread is Iustified by the potential reward.

2he

$ear S'rea! strategy is generally used when the investor expects a moderate fall in the market but is not prepared to pay to take a put outright.

Dhile using "ear Spread, be sure that the cost of the spread is Iustified by the potential reward.

In "ear Spread, if the stock unexpectedly falls sharply, it may be advisable to exit the strategy once the lower strike price is reached. In "ear Spread, if the stock price rises suddenly, the spread may be unwound before the taken put loses too much time value. alternative is to vary the break even points of the strategy by rolling one of the legs up or down, thereby maintaining the strangle.

/,

Since of the potential for unlimited losses, be sure that the premium received is worthy of the risk taken. >se the short strangle over the short straddle if you have any doubts about the marketPs neutrality.

CONCLUSIONS
"y analyzing all these strategies we can conclude that during bullish market outlook ;ong 'all, Short <ut, "ull Spread and ;ong Strangle strategies are suitable to use. 2he ;ong <ut, Short 'all and "ear Spread are best suited during bearish market condition. Dhen you expect market to be neutral for few forth coming days, it is better to hold on to Short put strategies. Dhen uncertainty about market is more it is wise to use strategies. Dhile using any option strategy it is also reBuired to consider factors like Strike price, 2ime decay, 'ost of strategy and volatility. It is necessary to ensure that cost of strategy must be Iustified by the potential reward. 2o summarize the role of regulation is the cushion and help other market monitoring mechanism such as competition or reputation to maintain a fair and orderly financial markets in which innovation is encouraged. Its obIective is thus to support and encourage all the necessary structural changes in the products or institutions architecture that allows market participants to increase the benefits extract from the economic functions of derivatives at controlled risk levels. 2hus, one could view the role of regulation as that of a player of last resort that guarantees that /8

the economic benefits associated to the derivative trading activity remains on the efficient .riskFreturn frontier.

ANNECURE
$ALANCE SHEET #ar I A@ #ar I A? #ar I A= #Buity Share 'apital //.18 //.0, .A.A0 Share Application $oney +,.00.+/ 0.00 0.00 <reference Share 'apital 1..00 0.00 0.00 4eserves M Surplus 7./.+8 70..1A 100.,8 Secured ;oans 0.00 0.00 0.00 >nsecured ;oans 0.00 -..A0 7..0 2otal 6ross "lock 7.-7 0../ 0.0+ ;ess : 4evaluation 4eserve 0.00 0.00 0.00 +8A-./A AA/.-1 1.,.-8

-0

;ess : Accumulated (epreciation 0.7/ 0.0. 0.00

)et "lock 'apital Dork in progress 0.0+ 0.0- 0.00 Investments /00.17 A00.1, 1.7.,+ 'urrent Assets, ;oans M Advances ;ess : 'urrent ;iabilities M <rovisions

7.7- 0..+ 0.0+

..A.,+ 1+.A1 -..7

8. . +0..- .../

2otal )et 'urrent Assets .A..7+ +0.,/ +.8$iscellaneous expenses not written 2otal "ook ?alue of >nBuoted Investments 0.00 0.00 0.00

+8A-./A AA/.-1 18+.-8 ,.0.-A 778.88 +,..,0

$arket ?alue of Tuoted Investments 'ontingent liabilities /,..0+ +10.07 /0.00 )umber of #Buity shares outstanding %in ;acs&

+..1, 70.,- 1..-,

/,1.80 ..0.,A AA..8-

-+

$I$LIO)RAPHY
+. (onald 4 'ooper M <amela S Schindler, O"usiness 4esearch $ethodsQ, 2ata $c6raw 9ill, ,th #dition 1. ).(.?ohra M ".4."agri, OEuture and 3ptionsQ, 2ata $cgraw 9ill, 7 #dition.

rd

7. <rasanna 'handra, OSecurity Analysis and <ortfolio $anagementQ, 2ata $c6raw 9ill, 7rd #dition. A. )'E$ study material J (erivative $odule.

.. www.bseindia.com /. www.nseindia.com -. www.sharekhan.com ,. www.strike price options.com

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8. www.wikipedia.com

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