I here by declare that this project work entitled DERIVATIVES done at HYDERABAD STOCK EXCHANGE submitted by me in partial fulfillment for the award of the MASTER OF BUSINESS ADMINISTRATION, at SIDDHARTHA TECHNICAL INSTITUTE Osmania University, Hyderabad is a record of bonafide work done by me. I future declare that this work has not been copied or lent and it is not Submitted to any other University or institutions for the award of any Degree or Diploma of any other institution.

DATE: PLACE: Hyderabad.


I acknowledge my sincere thanks to management of “HYDERABAD STOCK EXCHANGE LIMITED’. I extend my thanks to principal “XYZZZ” for his support and guidance. I express my sincere thanks to librarian of stock exchange Mr.malleshwar for Providing all the necessary information. I am grateful to my friends for encouraging and supporting me all though out the project.





To achieve the object of studying the stock market data ha been collected.

Research methodology carried for this study can be two types 1. Primary 2. Secondary PRMARY The data, which is being collected for the time and it is the original data is this project the primary data has been taken from HSE staff and guide of the project. SECONDARY The secondary information is mostly from websites, books, journals, etc.


The only stock exchange operating in the 19 th century were those of Bombay set up in 1875 and Ahmedabad set up in 1894 these were organized as voluntary non-profit making organization of brokers to regulate and protect interest. Before the control insecurities trading became a central subject under the constitution in 1950, it was a state subject and the Bombay securities contract (CONTROL) Act of 1952 used to regulate trade in securities. Under this act, the Bombay stock exchange in 1927 and Ahmedabad in 1937. During the war boom, a number of stock exchanges were organized in Bombay, Ahmedabad and other centers, but they were not recognized. Soon after it became a central subject, central legislation was proposed and a committee headed by A.D. Gorwala went in to the bill for securities regulation. On the basis of committee’s recommendations and public discussions the securities contracts (regulations) Act became law in 1956.

Definition of stock exchange:
“Stock exchange means any body or individuals whether incorporated or not, constituted for the purpose of assisting, regulating or controlling the business of buying, selling or dealing in securities.” It is an association of member brokers for the purpose of self – regulation and protecting the interests of its members. It can operate only of it is recognized by the govt. Under the securities contract (regulation) Act, 1956. The recognition is granted under section 3 of the Act by the central government, ministry if finance.

Besides the above act, the securities contract (regulations) rules were also made in 1975 to regulate certain matters of trading on the stock Exchange. These are also byelaws of the exchanges, which are concerned with the following subjects. Opening / closing of the stock exchange, timing of trading, regulation of bank transfer, regulation of Badla or carryover business, control of settlement, and other activities of stock exchange, fixations of margin, fixations of market price or marking price, regulation of tarlatan business (jobbing), regulation of brokers trading, brokerage charges, trading rules on the exchange, arbitration and settlement of disputes, settlement and clearing of the trading etc.

Regulations of stock exchange:
The securities contract (regulations) is the basis for operations of the stock exchange in India. No exchange can operate legally without the government permission or recognition. Stock exchanges are give monopoly in certain areas under section 19 of the above Act to ensure that the control and regulation are facilitated. Recognition can be granted to a stock exchange provided certain are satisfied and the necessary Information is supplied to the government. Recognition can also be withdrawn, if necessary. Where there are no stock exchanges, the government can license some to the brokers to perform the functions of a stock exchange in its absence.

SEBI was set up as an autonomous regulatory authority by the Government of India in 1988 “to perform the interests of investors in securities and to promote the development of , and to regulate the securities market and for matters connected there with or incidental thereto.” It is empowered by two acts namely the SEBI act, 1992 and the securities contract (regulation) Act 1956 to perform the function of protecting investor’s rights and regulating the capital markets.

This stock exchange, Mumbai, popularly known as “BSE” was established in 1875 as “The Native share and stock brokers association” as a voluntary non-profit Making association. It has an evolved over the year into its present status as the premiere Stock exchange in the country .it may be noted that the stock exchange the oldest one in Asia, even older than the Tokyo stock exchange, which was founded in 1878. The exchange, while providing an efficient and transparent market for trading in securities, upholds the interests of the investors and insurers dressed of their grievances, whether against the companies or its own member brokers. It also strives to educate and enlighten the investors by making available necessary informative inputs and conducting investor education programmers. A governing board comprising of 9 elected directors, 2 SEBI nominees, 7 public representatives and an executive director is the apex body, which decides the policies and regulates the affairs of the exchange. The executive’s directors as the chief executive officer are responsible for the day today administration of the exchange. The average daily turnover of the exchange during the year 2000-01(April-March) was Rs 3984.19 corers and average number of Daily trades 5.69 lakes. However the average daily turn over of the exchange during the year 2001-02 has declined to R s. 1244 .10 cores and number of average daily trades during the period to 5.17 lakes. The average daily turnover of the exchange during the year 2002-03 has declined and number of average daily trades during the period is also decreased. The Ban on all deferral products like BLESS AND ALBM in the Indian capital markets by SEBI with effect from July 2,2001, abolition of account period settlements, introduction of compulsory rolling settlements in all scripts traded on the exchange with effect from Dec 31, 2001, etc., have adversely imprecated the liquidity and consequently there is a considerable decline in the daily turn over of the exchange present scenario is 110363 (laces) and number of average daily trades 1075 (laces).


In order to enable the market participants, analysts etc., to track the various ups and downs in the Indian stock market, the exchange has introduced in 1986 an equity stock index called BSE- SENSEX that subsequently became the barometer of the movements of the share prices in the Indian stock market. It is a “Market capitalization weighted” index of 30 component stocks representing a sample of large, well-established and leading companies. The base year of sensex is 1978-79. The sensex is widely reported in both domestic and international markets through print as well as electronic media. Sensex is calculated using a market capitalization weighted method. As per this methodology, the level of the index reflects the total market value of all 30-component stocks from different industries related to particular base period. The total market value of a company is determined by multiplying the price of its stocks by the number of shares outstanding. Statisticians call an all index of a set of combined variables (such as price and number of shares) a composite index. An indexed number is used to represent the results of this calculation in order to market the value easier to work with and track over a time. It much easier to graph a chart based on indexed values than one based on actual values world over majority of the well-known indices are constructed using “Market capitalization weighted method”. In practice, the daily calculation of SENSEX is done by dividing the aggregate market value of the 30 companies in the index by a number called the index Divisor. The Divisor is the only link to the original base period value of the SENSEX. The Divisor Keeps the Index comparable over a period or time and if the reference point for the entire index maintenance adjustments. SENSEX is widely used to describe the mood in the Indian stock markets. Base year average is changed has per the formula new base year average =old base year average *(new market value/old market value).

NATIONAL STOCK EXCHANGE The NSE was incorporated in Now 1992 with an equity capital of R s 25 crs. The international securities consultancy (ISC) of Hong Kong has helped in setting up NSE. ISE has prepared the detailed business plans and installation of hardware and software systems. The promotions for NSE were financial institutions, insurances companies, banks and SEBI capital market Ltd, infrastructure leasing and financial services ltd and stock holding corporation ltd. It has been set up to strengthen the move towards professionalisation of the capital market as well provided nation wide securities trading facilities to investors.

NSE is not an exchange in the traditional sense where brokers own and manage the exchange. A two tier administrative set up involving a company board and a governing aboard of the exchange envisaged. NSE is a national market for shares PSU bonds, debentures and government securities since infrastructure and trading facilities are provided. NSE-NIFTY: The NSE on April 22, 1996 launched a new equity index. The NSE-50. The new index, which replaces the existing NSE-100 index, is expected, to serve as an appropriate index for the new segment of futures and options.” Nifty” means national index for fifty stocks. The NSE-50 comprises 50 companies that represent 20 broad industry groups with An aggregate market capitalization of around R s .1,70,000 crs. All companies included in the index have a market capitalization in excess of R s 500 crs each and should have traded for 85% of trading days at an impact cost of less than 1.5%. The base period for the index is the close of prices on Nov 3, 1995, which makes one year of completion of operation of NSE‘s capital market segment. The base value of the index has been set at 1000. NSE –MIDCAP INDEX: The NSE madcap index or the junior nifty comprises 50 stocks that represent 21 a board industry groups and will provide proper representation of the madcap segment of the Indian capital market. All stocks in the index should have market capitalization of greater than R s list of 200 cores and should have traded 85% of the trading days at an impact cost of less 2.5%.

The base period for the index is Nov 4, 1996, which signifies two years for completion of operations of the capital market segment of the operations. The base value of the Index has been set at 1000. Average daily turnover of the present scenario 258212(laces) and number of averages daily trades 2160(laces) At present, there are 24 stocks exchanges recognized under the securities contracts (regulations) Act, 1956. They are

NAMEOF THE STOCK EXCHANGE Bombay stock exchange, Ahmedabad share and stock brokers association, Calcutta stock exchange associations Ltd, Delhi stock exchange association Ltd, Madras stock exchange association Ltd, Indoor stock brokers association Ltd, Bangalore stock exchange, Hyderabad stock exchange, Cochin stock exchange, Prune stock exchange, U.P. stock exchange, Ludhiana stock exchange, Jaipur stock exchange Ltd, Gauhati stock exchange Ltd, Mangalore stock exchange, Maghad stock exchange Ltd, patna, Bhuvaneshwar stock exchange association Ltd, Over the counter exchange of India, Bombay,

YEARS 1875 1957 1957 1957 1957 1958 1963 1943 1978 1982 1982 1983 1983_84 1984 1985 1986 1989 1989

Saurastra kuth stock exchange Ltd,


Vsdodard stock exchange Ltd, Coimbatore stock exchange Ltd, The meerut stock exchange, I National stock exchange, Integrated stock exchange,

1991 1991 1991 1991 1999

ORIGIN: Rapid growth in industries in the erstwhile Hyderabad State saw efforts at starting the Stock Exchange. In November, 1941 some leading bankers and brokers formed the share and stock brokers Association. In 1942, Mr. Gulab Mohammed, the Finance Minister formed a Committee for the purpose of constituting /rules and Regulations of the Stock Exchange. Sri Purushothamdas Thakurdas, president and Founder Member of the Hyderabad Stock Exchange performed the opening ceremony of the Exchange on 1411-1943 under Hyderabad Companies Act, Mr. Kamal Yar Jung Bahadur was the first President of the Exchange. The HSE started functioning under Hyderabad Securities Contract Act of No. 21 of 1352 under H.E.H. Nizam’s Government as a Company Limited by guarantee. It was the 6th Stock Exchange recognized under Securities Contract Act, after the premier Stock Exchanges, Ahmedabad, Bombay, Calcutta, Madras and Bangalore Stock Exchange. All deliveries were completed every Monday or the next working day. The Securities Contracts (Regulations) Act, 1956 was enacted by the Parliament, passed into Law and the rules were also framed in 1957. The Act and the Rules were brought into force from 20th February 1957 by the Government of India. The HSE was first recognized by the Government of India on 29th September 1958 as Securities Regulation Act was made applicable to twin cities of Hyderabad and Secunderabd from the date. In view of substantial growth in trading activities, and for the yeoman services rendered by the Exchange, the Exchange was bestowed with permanent recognition with effect from 29th September 1983. The exchange has a significant share in achievements of erstwhile State of Andhra pradesh to its present state in the matter of Industrial development.

OBJECTIVES: The Exchange was established on 18th October, 1943 with the main objective to create, protect and develop a healthy Capital Market in the State of Andhra Pradesh to effectively serve the public and Investor’s interests. The property, capital and income of the Exchange, as per the Memorandum and Articles of Association of the Exchange, shall have to be applied solely towards the promotion of the objects of the Exchange. Even in case of dissolution, the surplus funds shall have to be devoted to any activity having the same objects, as Exchange or be distributed in Charity, as may be determined by the Exchange or the High Court of judicature. Thus, in short, it is a Charitable Institution. The Hyderabad Stock Exchange Limited is now on its stride of completing its 62nd year in the history of Capital “Markets” serving the cause of saving and investments. The Exchange has made its beginning in 1943 and today occupies a prominent place among the Regional Stock Exchanges in India. The Hyderabad Stock Exchange has been promoting the mobilization of funds into the Industrial Sector for development of industrilization in the State of Andhra Pradesh. GROWTH: The Hyderabad Stock Exchange Ltd., established in 1943 as a Non profit making orgnization, catering to the needs of investing population. Started its operations in a small way in rented building in Koti area. It had shifted in Aiyangar Plaza, bank Street in 1987. In September 1989, the then Vice-President of India, Hon’ble Dr. Shankar Dayal Sharma had inaugurated the own building of the Stock Exchange at Himayatnagar, Hyderabad. Later in order to bring all the trading members under one roof, the exchange acquired still a larger premised situated 6-3-654/A, Somajiguda, Hyderabad-82, with a six storied building and a constructed area of about 4,86,842 sft (including cellar of 70, 857 sft). Considerably, there has been a tremendous perceptible growth which could be observed from the statistics. The number of members of the Exchange was 55 in 1943, 117 in 1993 and increased to 300 with 869 listed companies having paid up capital of Rs. 19128.95 crores

as on 31/03/2000. The business turnover has also substantially increased to Rs. 1636.51 crores in 2003-2004. The Exchange has got a very smooth settlement system. GOVERNING BOARD: At present the Governing Board consists of the following: MEMBERS OF THE EXCHANGE Sri Hari Narayan Rathi Sri Rajendra V. Naniwadekar Sri K. Shiva Kumar Sri R.D. Lahoti Sri Ram Swaroop Agrawal Sri Dattatray SEBI NOMINEE DIRECTORS Sri R.P. Singh, IAS Sri N.S. Ponnunambi (Govt. of India) PUBLIC NOMINEE DIRECTORS Dr. N.R. Sivaswamy (Chairman, HSE) –Former CBDT, Chariman Justice V. Bhaskara Rao- Retd. Judge High Court Sri P. Muralimohan Rao Dr. B. Brahmaiah -Mogili & Co. Chartered Accountants Professor Joint Secretary(DF) Regristrar of Companies Dept. of Defence Prodn. & Supplies, Ministry of Defence


COMPUTERIZATION: The Stock Exchange business operations are equipped with modern communication systems. Online computerization for simultaneously carrying out the trading transactions, monitoring functions have been introduced at this Exchange since 1988 and the Settlement and Delivery System has become simple and easy to the Exchange members. The HSE On- line Securities Trading System was built around the most sophisticated state of the art computers, communication systems, and the proven VECTOR Software from CMC and was one of the most powerful SBT Systems in the country, operating in a WAN environment, connected through 9.6 KBPS 2 Wire Leased Lines from the offices of the members to the office of the Stock Exchange at Somajiguda, where the Central System CHALLENGE L DESK SIDE SERVER made of Silicon Graphics (SGI Model No. D-95602-S2) was located and connected all the members who were provided with COMPAQ DESKPRO 2000/DESKTOP 5120 Computers connected through MOTOROLA 3265 v. 34 MANAGEABLE STAND ALONE MODEMS (28.8 kbps) for carrying out business from computer terminals located in the offices of the members. HSE is the only Exchange in the country which has provided infrastructure to its members for trading through WAN and leased lines from the day one. The HOST System enabled the Exchange not only to expand its operations later to other prime trading centers outside the twin cities of Hyderabad and Secunderabad but also to link itself into the Inter-connected Market System (ICMS) proposed by the Federation of Indian Stock Exchanges (FISE) to inter-connect various Regional Stock Exchanges in various states. In the age of electronic trading, On- line information on rates from other major markets was an essential input for efficiency. HSE provided on-line rates from BSE and NSE which not only enhanced the ability of HOST terminals to attract the investors but also enabled the members to avail opportunities between Exchanges.

CORPORATE DATABASE HSE has subscribed to the CMIE Corporate Database for accessing data and profiles of companies. This data can be accessed by the members, which will further enhance the information power of the members. IMPROVEMENT IN THE VOLUMES It is heartening that after implementing HOST, HSE’s daily turnover has fairly stabilized at a level of Rs. 20.00 crores this should enable in improving our ranking among Indian Stock Exchange for 14th position on 6th position. We shall continuously strive to improve upon this to ensure a premier position for.

CURRENT PLANS OF H.S.E. EXPANSION OF TRADING OPERATIONS: The Exchange has plans to expand the trading operations to other prime centers in Andhra Pradesh where the trading terminals of HOST can be installed. The HOST system will facilitate this expansion with minimum incremental investment on additional communication facilities. DEPOSITORY PARTICIPANT: The Exchange has become a Depository participant (DP) with National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL). The requisite infrastructure for NSDL is in place. Once it is fully operational, the Exchange could undertake the depository functions by operating account at Hyderabad of Investors & members of the Exchange.

FACILITY TO TRADE AT NSE, DERIVATIVES TRADING NET TRADING The Exchange has incorporated a subsidiary “H.S.E. Securities Limited” with a paid up capital of Rs. 2.00 Crores initially takes NSE membership, so that the members

of the Exchange will have access to the NSE’s Trading Screen as sub-broker, Derivatives trading and Net Trading etc., as and when commenced by NSE. The member of this Exchange will also have equal opportunity of participating in such trading like any other NSE member. COMMODITIES EXCHANGE: The Exchange by seeking the support of the State Government is planning to set up Online Commodities Exchange to trade in certain commodities since out state is in one of the major Agri Economies. In view of the networking facilities available with the exchange for online trading through WAN, The commencement of Commodities Market will ensure the optional utilization of the existing infrastructure with efficient clearing, settlement and guarantee system, delivery system, real time price and trade information dissemination system, transparency in operations and trading experience and expertise in similar business. The online commodity trading with WAN connectivity will minimize the middlemen operation and provide price support to the producers. RULES & BY-LAWS OF EXCHANGE A Stock Exchange is recognized only after the govt. is satisfied that its rules and By-Laws confirm to the conditions prescribed for ensuring for dealing and protection to investors. The rules of exchange are related in general to      The constitution of the exchange The powers of the management of its governing body and Its constitution The admission for membership The qualification for membership The expulsion

Suspension and readmission of members TRADING IN DERIVATIVES Indian securities market has indeed waited for too long for derivatives trading to emerge. Mutual fund, FIIs and other inventors who are deprived of hedging opportunities will

now have a derivatives market to bank on. First to emerge are the globally popular variety – index futures. While derivatives markets flourished in the developed world Indian markets remain deprived of financial derivatives to the beginning of this millennium. While the rest of the world progressed by leaps and bounds on the derivatives front, Indian market lagged behind. Having emerging in the market of the developed nations in the 1970s, derivatives markets grew from strength to strength. The trading volumes nearly doubled in every Three years marking it a trillion-dollar business. They became so ubiquitous that, now, one cannot think of the existence of financial markets without derivatives. Two broad approaches of SEBI is integrate the securities market at the national level, And also to diversify the trading products, so that more number of traders including Banks, financial institutions, insurance companies, mutual fund, primary dealers etc. Choose to transact through the ex change. In this context the introduction of derivatives trading through Indian stock exchange permitted by SEBI IN 2000 AD is a real landmark. SEBI first appointed the L.C Gupta Committee in 1998 to recommend the regulatory Frame work for derivatives trading and to recommend suggestive bye-laws for regulation And control of trading and settlement of derivatives contracts. The broad of SEBI in its Meeting held on May 11,1998 accepted the recommendations of the Dr L.C Gupta Committee and approved the phased introduction of derivatives trading in India beginning with Stock Index Futures. The Board also approved the “Suggestive Bye-laws” recommended by the committee for regulation and control of trading and settlement of Derivatives Contracts. SEBI subsequently appointed the J. R. Verma Committee to recommend Risk containment Measures in the Indian stock index Futures Market. The report was submitted in the same year (1998) in the month of November by the said committee. However the Securities Contracts (REGULATION) Act, 1956 (SCRA0 need amendment to include ” derivatives” in the definition of securities to enable SEBI to introduce trading in derivatives. The government in the year 1999 carried out the necessary amendment. The securities laws (amendment) bill 1999 was introduced to bring about the much-needed changes. In December 1999 the new framework has been approved. Derivatives have been accorded the statues of ‘securities’. The ban imposed on trading in derivatives way back in 1969 under a notification issued by the central government has been revoked. Therefore SEBI formulated the necessary regulation/bye-laws and intimated the stock exchange in year 2000, while derivative trading started in India at NSE in the same Year and BSE started trading in the year 2001. In this module we are covering the different types of derivative products and their features, which are traded in the stock exchanges in India.

• . In the equity markets both the national stock exchange of India Ltd. (NSE) and The stock exchange, Mumbai (BSE) was quick to apply to SEBI for setting

• • • • •

Up There derivatives segment. NSE as stated earlier commends derivatives trading in the same year i.e. 2000 AD, while BSE followed after a few months in 2001. Both the exchange have set-up an in-house segment instead of setting up a Separate exchange for derivates. NSE’s Futures & Options Segment was launched with Nifty futures as the first Production. BSE’s Derivatives Segment, started with sensex futures as its first product. Stock options and stock futures were introduced in both the Exchange in the year 2001.

Thus started trading in Derivatives in India Stock Exchanges (both BSE & NSE) Covering index options, Index Futures, and Stock Options & Futures in the wake of the new millennium in a short span of three years the volume traded in the derivatives Market has outstripped the turnover of the cash market.

Derivatives Trading in Financial Markets
Derivatives were not traded in the financial markets of the world up to the period about there decades backs, through Stock Exchange trading in securities in the cash market

came to be in vogue more than a century ago. In Indian the first Stock Exchange, BSE was established in1875. But BSE commenced trading in derivatives only from 2001.Even in the international finance/securities market the advent of derivatives as trading products was a concurrent-effect with the process of globalization and integration the national economies of the development countries beginning from the Seventies of the last Century. As volumes traded increased and as competition on turned, trade & business became more complex in the new environment. The new opportunities were matched by fresh challenges and unpredictable volatility of the trading environment. Corporate for the first time sensed the formidable risks inherent in business transactions and the unpredictability of the markets to which they are exposed. Facing multiple risks the business organization, were induced to search for new remedies, i.e. risk containment devices/instrument. Derivatives came to be the natural remedy in this context. To quote an international professional authority. “As capital markets become increasingly integrated, shocks transmit easily from one market to another. The proliferation of new instruments with has become darling of corporate, banks, institutions alike is ‘Derivatives’. To have a touch of the tree top’s view, Derivatives transaction is defined as a bilateral contract whose value is derived, from the value of an underlying asset, or reference rate, or index. Derivative transaction have evolved in the past twenty years to cover a broad range of products which include instruments like ‘forward’, ‘future’, ‘options’, ‘swaps’ covering a broad spectrum of underlying assets including exchange rates, interest rate, commodities, and equities.” Through recent in origin derivates instrument issued over the years have grown by leaps and bounds and the total amount issued globally is estimated to approach $80 trillion by the advent of the new millennium. Derivatives position has growth at compounding rate 20% since 1990. In Indian through derivatives were introduced very recently in2001, the trading turnover has already surpassed that of the equity segment. In NSE alone as per a report on ors website the total turnover of the derivates segment for the month of May 2003 stood at R s. 53424 crores. During the month of May 2003, the percentage of derivatives segment as a percentage of the cash segment was 97.68%. However in the earlier two month the turnover of Derivatives was higher than that of the cash segment.

Developments Leading to Trading of Financial Derivatives in the USA
“The pace of innovation in derivatives markets increased remarkably in the 1970s.  The first major innovation occurred in February 1972, when the Chicago

 

mercantile Exchange CME began trading futures on currencies in its International Money Market (IMM) division. This marked the first time a futures contract was written on anything other than a physical commodity. The second was in April 1973, when the CBT formed Chicago Board Options Exchange (CBOE) to trade options on common stocks. This marked the first time an option was traded on an exchange. The third major innovation occurred in October 1975, when the CBT introduced the first futures contract on an interest rare instrument – Government National Mortgage Association futures. In January 1976, the CME launched Treasury bill futures and, in August 1977, the CBT launched Treasury bond futures. The 1980s brought yet another round of important innovations. The first was the use of cash settlement. In December 1981, the IMM launched the first cash settlement contracts, the 3-months Eurodollar futures. At expiration, the Eurodollar future is settled in cash based on the interest rate prevailing for a threemonth Eurodollar time deposit. Cash settlement made feasible the introduction of derivatives on stock index futures, the second major innovation of the 1980s. in February 1982, the Kansas City Board of Trade (KCBT) listed futures on the Value Line Composite stock index, and, in April 1982, the CME listed futures on the S&P 500.these contract introductions marked the first time future that contracts were written on stock indexes. The third major innovation of the 1980s was the introduction of exchange-traded option contracts written on ‘UNDERLYING’ other than individual common stocks. The CBOE and AMEX listed interest rate options in October 1982 and the Philadelphia Stock Exchange (PHILX) listed currency options in December 1982 as also options and gold futures. In January 1983, the CME and year New York Futures Exchanges (NYFE) began to list options directly on stock index futures, and, March 1983, the CBOE began to list options on stock indexes.

These two decades if innovation has transformed the nature of derivatives trading activates on exchanges. While derivatives exchange were originally developed to help market participants manage the price risk of physical commodities, today’s trading activates is focused on hedging the financial risks associated with unanticipated price movement in stock, bonds, and currencies.

What are Derivatives?

The term “Derivatives” independent value, i.e. its value is entirely “derived” from the underlying asset. The underlying asset can be securities, commodities bullion, currency, live stock or anything else. In other words, derivative means a forward, future, option or any other hybrid contract of per determined fixed duration, linked for the purpose of contract fulfillment to the value of a specified real or financial asset or to an index of securities. The securities contracts (Regulation) Act 1956 define derivatives as under: “derivative” includesA. a securities derivatives from a debt instrument, share, lone writher secured or Unsecured, risk instrument or contract for different or any other from of security; B. a contract which derives its value from the prices, or index of price of underlying Securities;The above definition conveys 1.That derivative are financial products and derives its value from the underlying assets. 1.Derivatives is derived from another financial instrument/contract called the underlying. In the case of Nifty futures, Nifty index is the underlying.

Why Derivative
Derivatives are used – 1. By Hedgers for protecting (risk-covering) against adverse movement. Hedging is a mechanism to reduce price risk inherent in open positions. Derivatives are widely used for hedging. A Hedge can help lock in existing profits. Its purpose is to reduce the volatility of a portfolio by reducing the risk. 2. Speculators to make quick fortune by anticipating/forecasting future market movement. Hedgers with to eliminate or reduce the price risk to which they are already exposed. Speculators, on the other hand are those classes of investors who willingly take price risks to profit from price change in the underlying. While the need to provide hedging avenues by means of derivative instruments is laudable, it call for the existence of speculative traders to play the role of counter-party to the hedgers. It is for this reason that the role of speculators gains prominence in a derivatives market. 3. Arbitrageurs to earn risk-free profits by exploiting market importance. Arbitrageurs profits from price differential existing in two markets by simultaneously operating in the two different markets.

Type of Derivatives

Derivatives products initially emerged devices against fluctuations in commodity price, and commodity-linked derivatives remained the sole form of such predicts for almost three hundred years. Financial derivatives came into spotlight in the post-1970 period due to growing instability in the financial markets. However, since their emergence, these products have become very popular and by 1990s, they accounted for about two –thirds of total transactions in derivative products. In recent years, the market for financial derivatives has grown tremendously in term of variety of instruments available their complexity and also turnover. In the class of equity derivatives the world over, future and options on stock indices have gained more popularity than on individual stocks, especially among institutional investors, who are major uses of index-linked derivatives. Even small investors find these useful due to high correlation of the popular index with various portfolios and ease of use. The lower costs associated with index derivatives visà-vis derivative products based on individual securities is another reason for their growing use. The most commonly used derivatives contracts are forward, futures and options with we shall discuss in detail later. Here we take a brief look at various derivatives contracts that have come to be used. Forwards: A forward contract is a customized contract between two entities, where settlement takes place on a specific date in the future at today’s pre-agreed price. Futures: A futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. Futures contracts are special type of forward contract in the sense that the former are standardized exchange-trade contracts. Options: options are of two types- calls and put calls give the buyer right but not the obligation to buy a give quantity of the underlying asset, at a given price on or before a given future date. Puts gives the buyer the right, but not the obligation to sell a given quantity of the underlying asset at a given price on or before given date. Warrants: Options generally have lives of up to one year, the majority of option traded On options exchanges having a maximum maturity of one months. Longer-dated options are called warrants and are generally traded over-counter. Leaps: The acronym LEAPS means long-term equity anticipation securities. These are options having a maturity of up to three years.

Baskets: Basket options are options on portfolios of underlying assets. The underlying asset is usually a moving average of a basket of assets. Equity index options are a form of basket options. Swaps: swaps are private agreements between two parties to exchange cash flows in the future according to a prearranged formula. They can be regarded as portfolios of forward

contracts. The two commonly used swaps are: _Interest rate swaps: these entail swapping only the interest related cash flow between the parties in the same currency. Currency swaps: These entail swapping both principal and interest between the parties, with the case flows in one direction being in a different currency than those in the opposition direction. Swaptions: Swaptions are options to buy or sell a swap that will became operative at the expiry of the options. Thus a swaption is an option on a forward swap. Rather than have called and puts, the swaption market has receiver swaption and payer swaptions. A receiver swaptions in an option to receiver fixed and pay floating. A player swaption is an option to pay fixed and receive floating. Classification of Derivatives The derivatives can be classified as • Forwards (Currencies, Stocks, Swaps etc)

Forward contract is different from a spot truncation, where payment of price and delivery of commodity concurrently take place immediately the transaction is settled. In a forward contract the sale/purchase truncation of an asset is settled including the price payable, not for delivery/settlement at spot, but at a specified future date. India has a strong dollar-rupee forward market with contract being traded for one, two, and six-month expiration. Daily trading volume on this forward Market is around $500 million a day. Indian users of hedging services are also allowed to buy derivatives involving other currencies on foreign markets.

Futures(Currencies, Stocks, Indexes, Commodities etc A futures contract has been defined as “a standardized, exchange-traded agreement specifying a quantity and price of a particular type of commodity

(soybeans, gold, oil, etc) to be purchased or sold at a pre-determined date in the future. On contract date, delivery and physical possession take place unless the contract has been closed out futures fate also available ob various financial products and indexes today. A futures contract is thus a forward, contract, which trades on national stock exchange. this provides them transparency, liquidity, anonymity of trades, and also eliminates the counter party risks due to the guarantee provided by nationalsecurities clearing corporation limited. • Options (currencies, stocks, indexes etc). Options are the standardized financial that allows the buyer (holder) if the options, i.e. the right at the cost of options premium, not the obligation, to but (call options) or sell (put options) a specified asset at a set price on or before a specified date through exchange under stringent financial security against default. FORDWARDS CONTRACTS A forward contract is an agreement to buy or sell an asset on a specified date for a specified price. One of the parties to the contract assumes a long position and agrees to buy the underlying asset on a certain specified future date for a certain specified price. The other party assumes a short position and agrees to sell the asset on the same date for the same price. Other contract details like delivery date, the parties to the contracts negotiate price and quality bilaterally. The forward contracts are normally traded outside the exchanges. The silent futures of forward contract are: _the are bilateral contracts and hence exposed to counter-party risk. _each contract is custom designed, and hence is unique in terms of contract size, Expiration date and the asset type and quality. _the contract price is generally not available in public domain. _on the expiration date, the contract has to be settled by delivery of the asset. _if the party wishes to reverse the contract, it has to compulsorily go the same counter Party, which often results in high prices being changed. However forward contracts in certain markets have become very standardization, as in the case of foreign exchange, thereby reducing transaction cost and increasing transactions volume. This process of standardization reaches its limit in the organized

futures market .Forward contracts is very useful in hedging and speculation. The classic hedging application word is that of an exporter who expects to receive payment in dollars three Months later he is exposed to the risk of exchange rate fluctuations. By using the currency forward markets to sell dollars forward, he can lock on to a rate today and reduce his uncertainty. Similarly an importer who is required to make a payment in dollars forward if a speculator has information or analysis, which forecasts an upturn in a price, than he can go long on the forward market instead of the cash market. The speculator would go long on the forward, wait for the price to rise, and than take a reversing transaction to book profits. Speculators may well be required to deposit a margin upfront. However, this is generally a relatively small proportion of the value of the assets underlying the forward contract. The use of forward markets here supplies leverage to the speculator. Limitations Forward markets world-wide are afflicted by several problems: Lack of centralization of trading, Liquidity, and Counter party risk in the first two of these, the basic problem is that of too much flexibility and generality. The forward market is like a real estate market in that any two consenting adults can form contracts against each other. This often makes them design terms of the deal, which are very convenient in that specific situation, but makes the contracts non-tradable. Counter party risk arises from the possibility of default by any one party to the transaction. When one of the two sides to the transaction declares bankruptcy, the other suffers. Even when forward markets trade standardized contracts, and hence avoid the problem of liquidity, still the counter party risk remains a very serious issue. FUTURES Futures markets were designed to solve the problems that exist in forward markets. Futures Contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. But unlike forward contracts, the futures contracts are standardized and exchange traded. To facilitate liquidity in the future contracts, the exchange specifies certain standard quantity and quality of the underlying instrument that can be delivered, (or which can be used for reference purposes in settlement) and a standard timing of such settlement. A futures contract may be offset prior to maturity by entering into an equal and opposite transaction. More than 99% of futures transactions are offset this way. The standardized items in a futures contract are: Quantity of the underlying Quality of the underlying

The date and month of delivery The units of price quotations and minimum price changes Location of settlement. DISTINCTION BETWEEN FUTURES AND FROWARDS Forward contracts are often confused with futures contracts. The confusion is primarily Became both serve essentially the same economics of allocations risk in the presence of Future price uncertainly. However futures are a significant improvement over the forward Contracts as they eliminate counter party risk and offer more liquidity. FUTURES TERMINOLOGY Spot price: The price at which an asset trades in the spot market. Futures price: The price at which the futures contract trades in the futures market. Contract cycle: The period over which a contract trades. The index futures contracts on the NSE have one-month, two-month and three-month expiry cycle, which expire on the last Thursday of the month. Thus January expiration contract expires on the last Thursday of February. On the Friday following the last Thursday, a new contract having a three-month expiry is introduced for trading. Expiry date: It is the date specified in the futures contract. This is the last day on which the contract will be traded, at the end of which it will case to exist. Contract size: The amount of the asset that has to be delivered less than one contract. For instance, the contract size on NSE’s futures market is 200 Nifties. Basis: In the context of financial futures, basis can be defined as the futures price minus the spot price. There will be a different basis for each delivery month for each contract. In a normal market, basis will be positive. This reflects that futures prices normally Exceed spot prices. _cost of carry: the relationship between futures prices and spot prices can be summarized

In terms of what is known as the cost of carry. This measures the storage Cost plus the interest that is paid to finance the asset less the income earned on the asset. _initial margin: the amount that must be deposited in the margin account at the time a future contract is first entered into is known as initial margin. _marking-to-market: in the futures market, at the end of each trading day, the margin Account is adjusted to reflect the investor’s gain or loss depending upon the futures Closing price. This is called marking-to-market. _maintenance margin: this is somewhat lower than the initial margin. This is set to ensure That the balance in the margin account never becomes negative. If the balance in the margin account falls bellow the maintenance margin, the investor receives a margin call and is expected to top up the margin account to the initial margin level before trading commences on the next day. OPTIONS We look at the next derivative product to be traded on the NSE, namely option. Options are fundamentally different from forward and futures contracts. An option gives the holder of the option the right to do something. The holder does not have to exercise this right .in contrast, in a forward or futures contract, the two parties have committed themselves to doing something. whereas it costs nothing (except margin requirements)to enter into a futures contract, the purchase of an option requires an up-front payments. OPTIONS TERMINAOLOGY _index option: There option has theidex as the underlying. Some options are European while others are American. Like index, futures, contract, index options Contracts are also cash settled.

_stock options: stock options are options on individual stocks. option currently trade On over 500 stocks in the United States. A contract gives the holder the right to buy or sell shares at the specified prices.

_buyer of options: the buyer of an options is the one who by paying the options Premium buys the right but not the obligation to exercise his option on the seller/writer. _writer of an option: the writer of a call/put options is the one who receives the option premium and is thereby obliged to sell/buy the asset if the buyer exercises on him. There are two basic types of options, all options and put options. _call option: a call option gives the holder the right but not the obligation to buy anAsset by a certain date for a certain price. _put option: a put option gives the holder the right but not the obligation to sell an asset By a certain date for a certain price. _option price: option prices are the price, which the option buyer pays to option seller. It is also referred to as option premium. _expiration date: the date specified in the options contract is known as the expiration Date, the exercise date, the strike date or the maturity. _strike price: the price specified in the options contract is known as the strike price or the exercise price.

_American options: American options are options that can be exercised at any time up to The expiration date. Most exchange-traded options are American.

_European options: European options are options that can be exercised only on the Expiration date itself. European options are easier to analyze than American options, and Properties of American options are frequently deduced from those of its European Counterpart. _In-the-money option: an in-the money (ITM) option that would lead to a Positive cash flow to the holder if it were exercised immediately. A call option on the Index is said to be in money when the current index is stands at a level higher than the strike price, (i.e. spot price strike price). If the index is much higher than the strike price, The call is said to be deep ITM. In the case of a put is ITM if the index is bellow the strike price. _At-the-money option: an at-the money(ATM) 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 equals the strike price (i.e. spot price = strike price. _Out-of the money option: an out-of –money (OTM) option is an option that would lead to a negative cash flow it was 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 strike price). If the index is much lower than the strike price, the call is said to be deep OTM .in the case of a put, the put is OTM if the index is above the Strike price.

Trading Strategies using Futures and Option
There are a lot of practical uses of derivatives. As we have seen, derivatives can be used

for profits and hedging. We can use derivatives as a leverage tool too. Use of derivatives as leverage. You can use the derivatives market to raise fund using your stocks. Conversely, you can also lend funds against stocks. Different between badla and derivatives. The derivatives product that comes closest to Badla is futures. Futures is not badla, through a lot of people confuse it with badla. The fundamental difference is balda consisted of contango and backwardation (undha badla and vyaj badla ) in the same market. Futures is a different market segment altogether. Hence derivatives is not the same as badla, through it is similar. Raising funds from the derivatives market. This is fairly simple. Say, you have Infosys, which is trading at R s 3000. You have shares lying with you and are in urgent need of liquidity. Instead of pledging your shares and borrowing from banks at a margin, you can sell the stock at R s 3000. Suppose you need this liquidity only for a month and also do not want to party with Infosys. You can buy a 1 month future at R s 3050 After a month you get back you infosys at the cost of additional rs 50. This R s 50 is the financing cost for the liquidity.The other beauty about this is you have already locked in your purchase cost at R s 3050. This fixes your liquidity cost also and protected against further price losses. Lending funds to the market. The lending into the market is exactly the reverse of borrowing. You have money to lend. You can a stock and sell its future. Say, you buy Infosys at R s 3000 and sell a 1 month future at R s 3100. in effect what you have done is lent R s 3000 to the market for a month and earned R s 100 on it

Using speculation to make profits. When you speculate, you normally take a view on the market, either bullish or bearish. When you take a bullish view on the market, you can always sell futures and buy in the

spot market. If you take a bearish view on the market, you can buy futures and sell in the sport market. Similarly, in the option market, if you are bullish, you should buy call options. If you are bearish, you should buy put option conversely, if you are bullish, you should write put options. This is so because, in a bull market, there are lower changes of the put option being exercised and you can profit from the premium if you are bearish, you should write call option. This is so because, in a bear market, there are lower chances of the call option being exercised and you can profit from the premium. Using arbitrage to make money in derivatives market. Arbitrage is making money on price differential in different markets. For example, future is nothing but the future value of the spot price. This futures value is obtained by factoring the interest rate. But if there are differences in the money market and the interest rates change than the future price should correct itself to factor the change in interest. But if there is no factoring of this change than it present an opportunity to make money-an arbitrage opportunity. Let us take an example. Example: A stock is quoting for rs 1000. The 1 month future of this stock is at rs 1005. the risk free interest rate is 12%. What should be the trading strategy? Solution: The strategy for trading should be: Sell Spot and Buy Futures Sell the stock for rs 1000. buy the future at rs 1005. Invest the rs 1000 at 12%. The interest earned on this stock will be 1000(1+.02) (1/12) = 1009 So net gain the above strategy is rs 1009-rs 1005= rs 4 Thus one can make a risk less profit of rs 4 because of arbitrage But an important point is that this opportunity was available due to mis-pricing and the market not correcting itself. Normally, the time taken for the market to adjust to corrections is very less. So the time available for arbitrage is also less. As every one to cash in on the arbitrage, the market corrects itself.

USING FUTURE TO HEDGE POSITION. One can hedge ones by taking an opposite position in the futures market. For example, if you are sport price, the risk you carry is that of price in the future. You can lock this by

selling in the futures price. Even if the stock continues falling, your position is hedge as you have firmed the price at witch you are selling. Similarly, you want to buy a stock at a later date but face the risk of prices rising. You can hedge against this rise by buying futures. You can use a combination of futures too to hedge yourself. There is always a correlation between the index and individual stocks, this correlation may be negative or positive, but there is a correlation. This is given by the beta of the stock. In simple terms, terms, what beta indicates is the change in the price of a stock to the change in index. For examples If beta of a stock is 0.8, it means that if the index goes up by the stock goes up by 8. t will also fall a similar level when the index falls. A negative beta means that the price of the stock falls when the index rises. So, if you have a position in a stock, you can hedge the same by buying the index at times the value of the stock. Example : The beta of HPCL is 0.8. The Nifty is at 1000. If I have Rs 10000 worth of HPCL, I can hedge my position by selling 800 of Nifty. That is I well sell 8 Nifities. Scenario 1 If index rises by 10%, the value of the index becomes 8800 I e a loss of R s 800. The value of my stock however goes up by 8% I e it becomes R s 10800 I e a gain of R s 800. Thus my net position is zero and I am perfectly hedged. Scenario 2: If index falls by 10%, the value of the index becomes Rs 7200 a gain of Rs 800. But the value of the stock also falls by 8%. The value of this stock becomes Rs 9200 a loss of Rs 800Thus my net position is zero and I am perfectly hedged.But against, beta is a predicated value based on regression models. Regression is nothing but also analysis of past data. So there is a chance that the above position may not be fully hedged if the beta does not behave as per the predicated value.

Using options in trading strategy

Options are a great tool to use for trading. If you feel the market will go up. You should are a call option at a level lower than what you expect the market to go up. If you think that the market will fall, you should buy a put option at a level higher than the level to which you expect the market fall. When we say market, we mean the index. The same strategy can be used for individual stocks also. A combination of futures and options can be used too, to make profits.

Strategy fro an option writher to cover himself.
An option writer can use a combination strategy of futures and options to protect his position. The risk for an option writer arises only when the option is exercised this will be very clear with an example. Supposing I sell a call option on Satyam at a strike price of rs 300 for a premium of rs20. The risk arises only when the option is exercised. The option will be exercised when the price exceeds rs 300. I start making a loss only after the price exceeds rs 320(Strick price plus premium). More impotently, I have to deliver the stock to the opposite party. So to enable me to deliver the stock to the other party and also make entire profit on premium, I buy a future of Satyam at rs 300. This is just one leg of the risk. The earlier risk was of the called being exercised the risk now is that of the call not being exercised. In case the call is not exercised, what do I do? I will have to take delivery as I have brought a future. So minimize the risk, I buy a put option on Satyam at Rs 300. But I also need to pay a premium for buying the option. Ipay Premium of Rs 10. Now I am fully covered and my net cash flow would be.Premium earned from selling call option Rs 20. Premium paid to buy put option (Rs 10) Net cash flow Rs 10 But the above pay off will be possible only when the premium I am paying for the put Option is lower than the premium that I get for writing the call. Similarly, we can arrive at a covered position for waiting a put option two. Another interesting observation is that the above strategy in itself presents an opportunity to make money. This is so because of the premium differential in the put and the call option. So if one tracks the derivatives make on a continuous basis, one can chance upon almost risk less money making opportunities.

Other strategies using derivatives.

The other strategies are also various permutations of multiple puts, call and futures. They are also called by exotic names, but if one were to observe them closely, they are relatively simple instruments.Some of these instruments are: Butterfly spread: It is the strategy of simultaneous buying of put and call Calendar spread: An option strategy in which a short-term option is sold and a longer-term option is bought both having the same striking price. Either puts or calls may be used. Double option: An option that gives the buyers the right to buy and/or sell a futures contract, at a premium, at the strike price. Straddle: The simultaneous purchase and sale of option of the same speculation to different periods. Tandem Options: A sequence of options of the same type, with variable strike price and period. Bermuda Option: Like the location of the Bermudas, this option is located somewhere between a European style option with can be exercised only at maturity and an American style option which can be exercised any time the option holder chooses. This option can be exercise only on predetermined dates.


Derivatives are high-risk instrument and hence the exchanges have put up a lot of measures to control this risk. The most critical aspect of risk management is the daily monitoring of price and position and the margining of those positions. NSE uses the SPAN (Standard Portfolio Analysis of Risk). SPAN is a system that has origins at the Chicago Mercantile Exchange, one of the oldest derivative exchanges in the world. The objective of SPAN is to monitor the positions and determine the maximum loss that a stock can incur in a single day. This loss is covered by the exchange by imposing mark to market margins. SPAN evaluates risk scenarios, which are nothing but market conditions. The specific set of market conditions evaluated, are called the risk scenarios, and these are defined in terms of: a) How much the price of the underlying instrument is expected to change over one trading day, and b) How much the volatility of that underlying price is expected to change over one trading day? Based on the SPAN measurement, margins are imposed and risk covered. Apart from this, the exchange will have a minimum base capital of Rs. 50 lacks and brokers need to pay additional base capital if they need margins above the permissible limits.


Mark to market settlement There is daily settlement for Mark to Market. The profits/losses are computed as the difference between the trade price or the precious day’s settlement price as the case may be and the current day’s settlement price. The parties who have suffered a loss are required to pay the mark-to-market loss amount to exchange which is in turning passed on to the party who has made a profit. This is known as daily mark-to market settlement. Theoretical daily settlement price for unexpired futures contracts, which are not traded during the last half on a day, is currently the price computed as per the formula detailed below. F = S * e rt Were: F = theoretical futures price S = value of the underlying index/stock r = rate of interest (MIBOR- Mumbai Inter Bank Offer Rate) t = time to expiration Rate of interest may be the relevant MIBOR rate or such other rate as may be specified. After daily settlement, all the open positions are reset to the daily settlement price. The pay-in and payout of the mark-to-market settlement is on T+1 days (T = Trade day). The mark to market losses or profits are directly debited or credited to the broker account from where the broker passes to client account.

Final settlement On the expiry of the futures contracts, exchange market all positions to the final settlement price and the resulting profit/loss is settlement I cash. The final settlement of the future contract is similar to the daily settlement process except for the method of capon of final settlement price. The final settlement profit/loss is completed as the difference between trade price or the previous day’s settlement price, as the case may be and the final settlement price of the relevant futures contract. Final settlement loss/profit amount is debited/credited to the relevant broker’s clearing bank account on T + 1 day (T = expiry day). This is then passed on the client from the broker. Open positions in futures contracts cease to exist after their expiration day.

SETTLEMENT OF OPTIONS Daily premium settlement Premium settlement is cash settled and settlement style is premium style. The premium payable position and premium receivable position are netted across all option contract for each broker at the client level to determine the net premium payable or receivable amount, at the end of each day. The brokers who have a premium payable position are required to pay the premium amount to exchange which is in turn passed on to the members who have a premium receivable position. This is known as daily premium settlement. The brokers in turn would take from their clients. The pay-in and pay-out of the premium settlement is on T + 1) days (T = Trade day). The premium payable amount and premium receivable amount are directly debited or credited to the broker, from where it is passed on to the client. Interim Exchange Settlement for Options on Individual Securities Interim exchange settlement for Option contract on individual securities is effected for valid exercised option at in-money strike price, at the close of the trading hours, on the day of exercise. Valid exercise option contracts are assigned to short position in option contracts with the same series, on a random basis. This interim exercise settlement value is the difference between the strike price and the settlement price of the relevant option contract. Exercise settlement value is debited/credited to the relevant option broker account on T + 3 days(T = exercise date). From there it is passed on to clits. Final Exercise Settlement Final Exercise settlement is effected for option positions at in-the-money strike price existing at the close of trading hours, on the expiration day of an option contract. Long position at in-the money strike price are automatically assigned to short positions in option contracts with the same series, on a random basis. For index option individual securities, exercise style is American style. Final Exercise is Automatic on expiry of the option contracts. Exercise settlement is cash settled by debiting/crediting of the clearing account or the relevant broker with the respective Clearing Bank, from where it is passed debited/credited to the relevant broker clearing bank account on T + 1 day (T = expiry day), from where it is passed Final settlement loss/profit amount for option contracts on Individual Securities is debited/credited to the relevant broker clearing bank account on T + 3 days (T = expiry day), from where it is passed Open positions, in option contracts, cease to exist after their expiration day.

Options valuation using Black Scholes model.

The black and scholes Option Pricing model didn’t appear overnight, in fact, Fisher Black started out working to create a valuation model for stock warrants. This work involved calculating a derivative to measure how the discount rate of a warrant varies with time and stock price. The result of this calculation held a striking resemblance to a well-known heat transfer equation. Soon after this discovery, Myron Scholes joined Black and the result of their work is a startlingly accurate option pricing model. Black and Scholes can’t take all credit for their infect the model is actually an improved version of a precious model developed by A. James Boness in his Ph.D. dissertation at the University of Chicago. Black and scholes improvement on the Boness model come in the from of a proof that the risk- free interest raise is the correct discount factor, and with the absence of assumptions regarding investor’s risk preferences.

The model: C = SN (d1) – Ke {-rt} N (d2) C= Theoretical call premium S= current stock price t= time until option expiration K= option striking price r= risk-free interest rate N = Cumulative standard normal distribution D1 = in(S / K) + (r + s²/2)t
In order to under stand the model itself, we divide into two parts. The first part, SN (d1), derives the expected benefit from acquiring a stock outright. This is found by multiplying stock price [S] by the change in the call premium with respect to a change in the underlying stock price [N (d1)]. The second part of the model, Ke(-rt)N(d2), gives the present value of paying the exercise price on the expiration day. The fair market value of the call option is then calculated by taking the difference between these two parts.

Assumptions of the Black and Scholes Model

1) The stock pays no dividends during the option’s life Most companies pay dividends to their share holders, so this might see a serious limitation to the model considering the observation that higher dividend yields elicit lower call premiums. A common way of adjusting the model for this situation is subtract the discounted value of a future dividend from the stock price. 2) European exercise terms are used European exercise terms dictate that the option can only be exercised on the expiration date. American exercise term allow the option to be exercised at any time during the life of the option, making American option more valuable due to their greater flexibility. This limitation is not a major concern because very few calls are exercise before the last few days of their life. This is true because when you exercise a call early, you forfeit the remaining time value on the call and collect the intrinsic value. Towards the end of the life of a call, the remaining time value is very small, but the iatric value is the same. 1. Markets are efficient This assumption suggests that people cannot consistent predict the direction of the market or an individual stock. The market operates continuously with share price followed a continuous it process. To understand what a continues it processes, you must first known that m Markov process is “one where the observation in time period at depends only on the preceding observation”. An it process is simply a Marko process you would do so without picking the pen up from the piece of paper. 2. No commissions are charged Usually market participants do have to pay a commission to buy or sell options. Even floor traders pay some kind of free, but it is usually very small. The fees that Individual investor’s pay is more substantial and can often distort the out put of the model. Interest rate remain constant and know The Black and Scholes model uses the risk-free rate to represent this constant and known rate. In reality there is no such thing as the risk-free rate, but the discount rate on U.S. Government Treasury Bills with 30 days left until maturity is usually used to represent it. During periods of rapidly change interest rates, these 30 day rates are often subject to change, thereby violating one of the assumptions of the model.


The trading of derivatives is governed by the provisions contained in the SC(R)A, the SCBI act, the rules and regulation framed there under and the rules and bye-laws of stock exchange. Securities contracts (Regulation) Act, 1956 SC(R) A aims at preventing undesirable transactions in securities by regulating the Business of dealing therein and by providing for certain other matters connected therewith. This is the principal Act, which governs the trading of securities in India. The term “securities” has been defined in the SC(R) A. as per section 2(h), the ‘securities’ include. 1. Shares, scraps, stocks, bonds, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate. 2. Derivative 3. Units or any other instrument issued by any collective investors in such schemes To the investors in such schemes , risk Government securities. Such other instruments as may be declared by the central government to be securities rights or interests in securities. “Derivative” is defined to include: A security derived from a debt instrument, share, loan whether secured or unsecured instrument or contract for differences or any other from of security.

_A contracts which derives its value from the prices, or index of prices, of underlying Securities. Section 18 a provides that notwithstanding anything contained in any other law for the time being in force, contracts in derivative shall be legal and valid if such contracts are : -Traded on a recognized stock exchange –settled on the clearing hose of the recognized stock exchange, in accordance with the rules and bye –loss of such stock exchanges

Securities and Exchange Board of India Act, 1992

SEBI Act, 1992 provides for establishment of Securities and Exchange Board of India (SEBI) with statutory powers for (A) protecting the interests of investors in securities (B) promoting the development of the securities market and (C) regulating the securities market. Its regulatory jurisdiction extends over corporate in the issuance of capital and transfer of securities, in addition to all intermediaries and persons associated with securities market. SEBI has been obligated to perform the aforesaid functions by such measures as it thinks fit. In particular, it has powers for: _regulating the business in stock exchanges and any other securities markets _registering and regulating the working of stock brokers, sub-brokers etc. _promoting and regulating self – regulatory organizations _prohibiting fraudulent and unfair trade practices. _calling for information from, undertaking inspection, conducting inquires and audits of the stock exchanges, mutual funds and other persons associated with the securities market and intermediaries and self-regulatory organization in the securities market _performing such functions and exercising according to Securities Contracts (Regulation) Act, 1956, as may be delegated to it by the Central Government

SEBI (Stockbrokers and Sub-brokers) Regulations, 1992 In this section we shall have a look at the regulations that apply to brokers under the SEBI Regulation.


A broker is an intermediary who arranges to buy and sell securities on behalf of clients (the buyers and the seller). According to section2 (e) of the SEBI (Stock Brokers and sub brokers) Rules, 1992, a stock broker mean of a recognized stock exchange. No stock broker is allowed to buy, sell or deal in securities, unless he or she holds a certificate of registration granted by SEBI. A stock broker applies for registration to SEBI through a stock exchange or stock exchanges of which he or she is admitted as a member. SEBI may grant a certificate to a stock-broker [as per SEBI (stock Brokers and Sub-Brokers) Rules, 1992] subject to the conditions that: 1. He holds the membership of stock exchange: 2. He sell abide by the rules, regulations and buy-laws of the stock exchange or stock exchange of which he is a member: 3. In case of any change in the status and constitution, he shall obtain prior permission of SEBI to continue to buy, sell or deal in securities in any stock exchange: 4. he shall pay the amount of fees for registration in the prescribed manner: and 5. he shall take adequate steps for redressed of grievances of the investors within one month of the date of the receipt of the complaint and keep SEBI informed about the number, nature and other particulars of the complaints . as per SEBI(Stock Brokers) Regulations, 1992,SEBI shall take into account for considering the grant of a certificate all matters relating to buying, selling, or dealing in securities and in particular the following namely, whether the stock broker (a) is eligible to be admitted as a member of a stock exchange , (b) has the necessary infrastructure like adequate office space, equipment and man power to effectively discharge his activities; (c) has any past experience in the business of buying, selling or dealing in securities; (d) is subjected to disciplinary proceeding under the rules, regulations and buy-laws of a stock exchange with respect to his business as a stock-broker involving either himself or any of his partners, directors or employees.


SEBI set up a 24-member committee under the Chairmanship of Dr.L.C.Gupta to develop the appropriate regulatory framework for derivatives trading in India. The committee submitted its report in March 1998. On May 11, 1998 SEBI accepted the recommendations of the committee and approved the phased introduction of derivatives trading in India beginning with stock index futures. SEBI also approved the “suggestive bye-laws” recommended by the committee for regulation and control of trading settlement of derivatives contracts. The provision in the SC(R)A and the regulatory framework developed there under govern trading in securities . The amendment of the SC(R) A to included derivatives with in the ambit of ‘securities’ in the SC(R) A made trading in derivatives possible within the frame work of that Act. 1. Any Exchange fulfilling the eligibility criteria as prescribed in the L.C.Gupta committee report may apply to SEBI for grant of recognition under section 4 of the SC(R) A, 1956 to start trading derivatives. The derivatives exchange/segment should have a separate governing council and representation of trading /clearing members shall be limited to maximum of 30% pf the total members and will obtain prior approval of SEBI before start of trading in any derivatives contract. 2. The exchange shall have maximum 50 members. 3. The members of an existing segment of the exchange will not automatically become the members of derivatives segment. The members of the derivatives segment need to fulfill the eligibility conditions as laid down by the L.C.Gupta committee. 4. The clearing and settlement of derivatives trades shall be through a SEBI approved clearing corporations/house. Clearing corporation/house complying with the eligibility conditions as laid down by the committee have to apply to SEBI for grant of approval. 5. Derivatives brokers/dealers and clearing members are required to seek registration from SEBI. This is in additional top their registration as brokers of existing stock exchanges. The minimum net worth for clearing members of the derivatives clearing corporation/house shall be Rs. 300 lakh. The net worth of the members shall be computed as follows: _Capital + Free reserves _Less non-allowable assets viz, Fixed assets

       

Pledged securities Member’s card Non-allowable securities (unlisted securities) Bad deliveries Doubtful debts and advances Prepaid expenses Intangible asset 30% marketable securities

6. The minimum contract value shall not to be less than Rs. 2 Lakh. Exchanges should also submit details of the futures contract they propose to introduce. 7. The initial margin requirement, exposure limits linked to capital adequacy and margin demands related to the risk of loss on the position shall be prescribed by SEBI/Exchange from time to time. 8.the L .C. Gupta committee report requires strict enforcement of “know your customer” Rules and requires that every client shall be registered with the derivatives broker. the Members of the derivatives segment are also required to make their clients aware of the Risks involved in derivatives trading by issuing to the client the risk disclosure Document and obtain a copy of the same duly signed by the client. A trading members are required to have qualified approved user and sales person qho have passed a certification programmed approved by SEBI. NSE’S certification in financial markets. A critical element of financial sector reforms is the development of a pool of human resources having right skills and expertise to provide quality intermediation services in Each segment of the market. In order to dispense quality intermediation, personnel providing services need to possess requisite skills and knowledge. This is generally achieved through a system of testing and certification. Such testing and certification has assumed added significance in India as there is no formal education/training on financial Markers, especially in the area of operations. Taking into account international experience and needs of the Indian financial Market, NSE offers NCFM (NSE’ s Certification in Financial Markets) to test practical knowledge and skills that are required to operate in financial markets in a very secure and unbiased manner and to

certify personnel with a view to improve quality of intermediation. NCFM offers a comprehensive range of Modules covering many different areas in finance including a module in derivatives. The Module on derivatives has been recognized by SEBI. SEBI requires that derivative Brokers/dealers and sales persons must mandatory pass this module of the NCFM . Regulation for clearing and settlement 1. The L. C Gupta committee has recommended that the clearing corporation must perform full notation i.e. the clearing corporation should interpose itself betweenboth legs of every trade, becoming the legal counter party to both or alternatively should provide an unconditional guarantee for settlement of all trades. 2. the clearing corporation should ensure that none of the Board member has tradinginterests. 3. the definition of net-worth as prescribed by SEBI need to be incorporated in the c application/regulations of the clearing corporation. 4. the regulations relating to arbitration need to be incorporated in the clearingcorporation. 5. specific provision/chapter relating to declaration of default must be incorporated by the clearing corporation in its regulations. 6. the regulations relating to investor protection fund for the derivatives market mustbe included in the clearing corporation application/regulations. 7. the clearing corporation should have the capabilities to segregate upfront/initial margins deposited by clearing members for trades on their own account and on account of his clients. The clearing corporation shall hold the clients’ margin money in trust for the clients’ purposes only and should not allow its diversion for ant other purposes. This condition must be incorporated in the clearing corporation regulations. 8. the clearing member shall collect margins from his constituents (clients/trading members). He shall clear and settle deals in derivative contracts on behalf of the constituents only on the receipt of such minimum margin. 9. Exposure limits based on the value at risk concept will be used and the exposure limits Will be continuously monitored. These shall be within the limits prescribed by SEBI from time to time. 10. the clearing corporation must lay down a procedure for periodic review of the net worth of its members.

11. the clearing corporation must inform SEBI how it proposes to monitor the exposure of its members in the underlying market. 12. any changes in the bye-laws, rules or regulations which are covered under the “suggestive bye-laws for regulations and control of trading and settlement of derivatives contracts” would require prior approval of SEBI.

Product Specifications BSE-30 Sensex Futures • • • • • • contract size – R s . 50 times the Index Tick size – 0.1 points or R s . 5 Expiry day – last Thursday of the month Settlement basis – cash settled Contract cycle – 3 months Active contracts – 3 nearest months

Product Specifications S&P CNX Nifty Futures

• • • • • •

Contract size – R s . 200 times the Index Tick size – 0.05 points or R s. 10 Expiry day – last Thursday of the month Settlement basis – cash settled Contract cycle -3 months Active contracts -3 nearest months

Membership • Membership for the new segment in both the exchanges is not automatic and has To be separately applied fir. • • Membership is currently open on both the exchanges. All members will also have to be separately registered with SEBI before they can be accepted. Membership Criteria – National Stock Exchange (NSE) Clearing Member (CM) • • • Net worth – 300 lake Interest – free security Deposit – Rs.25 lake Collateral Security Deposit – Rs.25 lake

In addition for every TM be wishes to clear for the CM has to deposit R s . 10 lakh.

Trading Member (TM)

• • •

Net worth – R s . 100 lakh Interest – fee security Deposits – R s. 8 lakh Annul subscription fee – R s . 1 lakh

Membership Criteria – Mumbai Stock Exchange (BSE) Clearing Member (CM) • • • • • Net worth – 300 lake Interest – free Security Deposits – R s. 25 lakh Collateral Security Deposits – R s. 25 lakh Non-refundable Deposit – R s. 5 lakh Annual Subscription Fee – R s.50 thousand

In addition for every TM he wishes to clear for the CM has to deposit R s. 10 lake with The following break-up. I. Cash – R s. 2.5 lakh II. Cash Equivalents – R s. 25 lakh III. Collateral Security Deposit – R s. 5 lakh

Trading Member (TM) • • • Net worth – R s. 50 lakh Non-refundable Deposit – R s.3 lakh Annual subscription Fees – R s.25 thousand

The non-refundable fees paid by the members is exclusive and will be a total of R s. 8 Lakh if the member has both clearing and trading rights. Trading Systems • • • NSE’s trading system for it’s futures and options segment is called NEAT F&O. It is based on the NEAT system for the cash segment. BSE’s trading system for its derivatives segment is called DTSS. It is built on a Platform different from the BOLT system though most of the features are common.



LOT SIZE 750 2300 2150 200 1400 1900 550 300 550 1600 1000 1200 1800 400 1500 175 4125 650 300 400 400 1500 2000 650 600 700 100



2400 2200 2250 1250 1250 800 800 1600 1150 1100 1500 300 600 600 2800 400 600 550 600 500 1600 3800 825 800 675 550 2800 2100


OBJECTIVE The objective of this analysis is to evaluate the profit/loss position of option Holder/writer. This analysis is done based on the sample data. The sample is taken as ICICI & NTPC scripts of FEBRUARY 2006. The lot size of the scrip is 175&1625. The option contract starting period is 01/01/09 and its maturity date is on 29/01/09. As the scripts of ICICI BANK & NTPC Companies are volatile, they are chosen as the sample for analysis. The data is collected form various news papers, like Economic Times, Business standard and Business Line off course from the Hyderabad stock exchange.

LIMITATIONS:  The sample size chosen as ICICIBANK & NTPC Companies scrip’s of the month of February.  The study is confined to January month only.  The data gathered is completely restricted to the ICICIBANK & NTPC Companies scripts of Jan 09. And hence cannot be taken universal.  The opening premium is considered for calculation of profit/loss position.

The following table explained the amount transaction between the option writer and option holder. The table has various columns, which explain various factors involved in derivatives trading.

 Date - the day on which trading took place.  Closing premium – premium for that day.  Open interest – no of that did not get exercised.  Trading quantity – no of options traded on bourses on that day.  Value - total value of the options on that particular day.


Close pre

Open int

Trad qul

Volume Close Open Trade Volume pre int qul

01/01/09 23.7 02/01/09 12.10 03/01/09 8.45 04/01/09 6.6 07/02/08 16.7 08/02/06 28065 09/02/06 21.55 11/02/06 17.05 14/02/06 18 15/02/06 12.25 16/02/06 11.85 17/02/06 10.2 18/02/06 4.8 21/02/06 5.25 22/02/06 3.9 23/02/06 2.75 24/02/06 0.1

2L 2L 2L 2L 3L 3L 2L 2L 2L 2L 2L 2L 2L 2L 2L 2L 2L

17K 73K 61K 3L 3L 1L 76K 38K 36K 37K 24K 42K 42K 26K 22K

104.67 444.3 369.4 1781.5 9 2177.8 9 699.24 465.9 233.95 223.85 227.24 145.64 254.74 253.58 156.58 134.92

12 7.15 5.2 3.9 8.9

64K 73K 74K 91K

16K 18K 11K 48K 21L 1L 70K 27K 22K 25K 22K 33K 20K 23K 5K

101.86 113.81 65.45 303.35 982.03 801.27 439.61 167.9 140.34 157.49 135.33 204.79 126.14 143.57 30.42

15.85 1L 10.5 8.85 8.2 6 4.75 3 1.85 1.8 1.25 13 0.75 2L 2L 2L 2L 2L 2L 2L 2L 2L 2L


ICICI CALL OPTIONS: The above call options details have revalues that, the premium/price of the call has shown a decreasing nature as the time to expiate in decrease as but at some places there is rise the price due to increase in the index .

CA NTPC (180) Date Close pre Open int Trade qul Volume CA NTPC (190) Close pre Open int Trade qul Volume

01/02/06 5.85 02/02/06 6.25 03/02/06 04/02/06 7.9 07/02/08 8.95 08/02/06 9.9 09/02/06 12.25 11/02/06 11.15 14/02/06 15/02/06 16/02/06 17/02/06 18/02/06 21/02/06 22/02/06 14 23/02/06 19.2 24/02/06 22.5




3.1 3 2.65

12L 14L 14L 13L 12L 11L 6L 4L 4L 3L 3L

10L 3L 11L 7L 5L 11L 3L 1L 72K 2L 62K

1102.36 405.96 1362.69 864.36 545.8 1349.72 391.29 153.03 85.83 299.75 76.89

3L 3L 3L 2L 2L

3L 2L 59K 1L 2L

364.01 217.18 70.05 138.01 283.51

3.9 4.2 5.05 7.25 6.3 6.2 4.8 9.5 9.45

49K 46K 26K

10K 23K 10K

12.1 28.84 4.9

9.6 14.4 18.5

3L 3L 1L

3K 3L 13K

4.05 348.87 17.56

CA NTPC (200) Date Close pre Open int Trade qul Volume

01/02/06 1.3 02/02/06 5.50 03/02/06 1.15 04/02/06 1.65 07/02/08 2.15 08/02/06 2.45 09/02/06 3.2 11/02/06 2.85 14/02/06 2.55 15/02/06 1.7 16/02/06 4.75 17/02/06 5.15 18/02/06 2.85 21/02/06 3.45 22/02/06 3.1 23/02/06 9.35 24/02/06 11.3

7L 9L 13L 15L 17L 18L 18L 21L 21L 19L 18L 17L 17L 17L 17L 4L

3L 81K 9L 9L 6L 15L 6L 6L 3L 21L 9L 5L 5L 3L 19L 1L

374.86 98.45 1080.23 1160.9 732.2 1808.08 622.77 731.3 356.48 20565.3 1 1078.94 560.86 627.45 386.49 2405.69 179.25

NTPC CALL OPTIONS: The above call options details have revalues that, the premium/price of the call has shown a decreasing nature as the time to expiate in decrease as but at some places there is rise the price due to increase in the index .


PA ICICI (300) Date Close pre Open int Trade qul Volume PA ICICI (350) Close pre Open int Trade qul Volume

01/02/06 10.85 02/02/06 18.30 03/02/06 24.6 04/02/06 37 07/02/08 15 08/02/06 11.8 09/02/06 14.2 11/02/06 12.9 14/02/06 16/02/06 17/02/06 _ _ _ 15/02/06 14.4

51K 33K 27K 61K 29K 94K 90K _ 84K _ _ 68K 53K 1K 52K 50K

8K 33K 19K 63K 69K 50K 29K _ 21K _ _ 29K 26K 700 6K 4K

51.36 204.5 120.12 387.68 419.57 309.53 176.15 128.89

_ 34 _ _ 19.5 _ _ _ _ _ _

_ _ _ _ 18K _ _ _ _ _ _ _ _ _

_ _ _ _ _ 19K _ _ _ _ _ _ _ _ _ _ _

_ _ _ _ _ 120.85 _ _ _ _ _ _ _ _ _ _ _

18/02/06 19.2 21/02/06 11.05 22/02/06 23.75 23/02/06 8.2 24/02/06 10.75

176.86 160.71 437 34.22 25.56

_ _ _ _ _

ICICI PUT OPTIONS: The above put options details have revalues that, the premium/price of the call has shown a decreasing nature as the time to expiate in decrease as but at some places there is rise the price due to increase in the index .

PA NTPC (160) Date Close pre Open int Trade qul Volume PA NTPC (175) Close pre Open int Trade qul Volume

01/02/06 1.5 02/02/06 1.30 03/02/06 04/02/06 0.95 07/02/08 08/02/06 09/02/06 11/02/06 14/02/06 15/02/06 16/02/06 17/02/06 18/02/06 21/02/06 22/02/06 23/02/06




4.4 3.60







2.4 1.55 1.35 1.05 0.85 0.65 0.2

3L 4L 4L 5L 5L 5L 5L

2L 2L 72K 1L 1L 2L 1L

217.29 231.12 83.19 158.64 139.4 255.86 153.56

0.1 0.05

5L 5L

3K 3K

3.74 3.74

PA NTPC (170) Date Close pre Open int Trade qul Volume

01/02/06 02/02/06 03/02/06 04/02/06 07/02/08 08/02/06 09/02/06 11/02/06 14/02/06 15/02/06 16/02/06 17/02/06 18/02/06 21/02/06 22/02/06 23/02/06 24/02/06 4.8 4.6 2.5 2.6 2.05 2.9 0.6 0.5 0.65 0.65 0.2 0.1 1L 2L 3L 4L 4L 3L 7L 8L 9L 9L 10L 8L 2L 85L 3L 1L 72K 75K 5L 2L 2L 3L 68K 2L 202.14 105.01 311.15 139.44 87.43 91.68 656.32 293.76 266.3 340.95 82.04 230.34 6.90

NTPC PUT OPTIONS: The above PUT options details have revalues that, the premium/price of the call has shown a decreasing nature as the time to expiate in decrease as but at some places there is rise the price due to increase in the index .



01/01/09 02/02/06

613.95 614

612.85 594.30




03/02/06 04/02/06 07/02/06 08/02/06 09/02/06 11/02/06 14/02/06 15/02/06 16/02/06 17/02/06 18/02/06 21/02/06 22/02/06 23/02/06

603 576.01 604.05 62107 616.6 609.4 608.4 608 602 601 603 593.8 599 596

582.75 570.35 600.5 615.15 604.95 603.35 604.8 595.55 597 597.05 586.9 592.25 593.65 595.33

54L 60L 66L 66L 68L 69L 68L 62L 56L 55L 56L 43L 35L 31L

29L 24L 61L 68L 46L 24L 13L 23L 17L 9L 20L 22L 20L 20L

4139 3475 8771 9678 6630 3478 1553 3218 2475 1325 2894 3189 2809 2903









02/02/06 03/02/06 04/02/06 07/02/06 08/02/06 09/02/06 11/02/06 14/02/06 15/02/06 16/02/06 17/02/06 18/02/06 21/02/06 22/02/06 23/02/06 24/02/06

116.40 115.55 117.25 118.27 118.75 121 121.5 120.9 121 124.0 125.85 125.65 123.5 124.65 130 134.6

114.45 113.95 116.4 117.4 118.45 120.7 120.35 120.55 118.9 124.35 124.5 122.25 123.1 123.05 129.15 132.55 95L 93L 98L 96L 90L 94L 91L 86L 81L 72L 69L 59L 50L 42L 33K 24L 88L 68L 44L 94L 44L 35L 23L 54L 88L 62L 43L 29L 30L 20K 733 2005 2098 1345 2903 1365 1065 719 4749 2696 1922 1313 895 4003 6

DATE 01/01/09 02/02/06 03/02/06 04/02/06 07/02/06 08/02/06 09/02/06 11/02/06 14/02/06 15/02/06 16/02/06 17/02/06 18/02/06 21/02/06 22/02/06 23/02/06 570.60 607.15 627.95 617.95 603.45 609.05 596.40 598.40 598 586.50 593.10 592.95 594.40 SPOT PRICE 609.15 594.30


Effect of an increase in each variable on the value of the option, holding other factors constant

Call premium • • • • Sport price (S) Strike price (K) Volatility (σ) Time to expiration (t) • • Interest rates (r) Dividend (D) Increase Increase Decrease Increase Decrease Increase

Put premium Decrease Increase Increase

Increase Decrease Increase

In the nutshell, we can formulate the basic rules for options pricing as follows: For calls:  Lower the strike (exercise) price, the more valuable the call.  Different in call prices cannot exceed difference in the exercise price.  A call must be worth at least the stock price less the present value of the exercise price.  More the time till expiration, greater the call price.  More the volatility, higher the call option premium.  Higher the interest rates, more the call value.

For puts:

 Higher the exercise price, more valuable the put.  The price difference between two puts cannot exceed the different in exercise prices.  Before expiration, a put must be worth at least the difference between the exercise price and the stock price.  Longer the time to expiration, the more voluble the put.  More the volatility, higher the put premium.  Higher the interest rate, lower the put value.


15/01/09 15/01/09

600 620

596.40 596.40

12.25 6.00

612.25 626.00

-15.85 -29.6


If the OPTION is purchased on 1st Feb and as on expiry date (29/01/09) POSITION OF CALL OPTION BUYER/WRITER 1. DATE 23/02/06 23/02/06 2. STRIKE PRI CE 600 620 3. SPOT PRICE 594.40 594.40 4. PREMIUM 23.7 12.00 5. STRICK 6. SPOT – 5 PRICE +PREMIUM 623.7 -29.3 632.00 -39.6










If the OPTION is purchased on 1st Jan and as on expiry date (29/01/09) POSITION OF PUT OPTION BUYER/WRITER 1. DATE 29/01/09 29/01/09 2. STRIKE PRI CE 600 620 3. SPOT PRICE 594.40 594.40 4. PREMIUM 10.85 _ 5. STRICK PRICE -PREMIUM 589.15 620.00 6. SPOT – 5 5.25 -26.6



DATE 01/02/06 02/02/06 03/02/06 04/02/06 07/02/06 08/02/06 09/02/06 11/02/06 14/02/06 15/02/06 16/02/06 17/02/06 18/02/06 21/02/06 22/02/06 23/02/06

SPOT PRICE 114.55 114.45

117.80 118.25 119.60 122.20 121.10 119.95 118.55 123.95 124.25 121.60 122.75 122.85 129.45


11/02/06 11/02/06

115 120

121.10 121.10

6.3 2.85

121.3 122.85

-0.2 -1.75


If the OPTION is purchased on 1st Feb and as on expiry date (23/02/06) POSITION FO CALL OPTION BUYER/WRITER 1. DATE 23/02/06 23/02/06 23/02/06 2. STRIKE PRI CE 110 115 120 3. SPOT PRICE 129.45 129.45 129.45 4. PREMIUM 5.85 3.1 1.3 5. STRICK 6. SPOT – 5 PRICE +PREMIUM 115.85 13.6 118.1 121.3 11.35 8.15



11/02/06 11/02/06 11/02/06

110 115 120

121.10 121.10 121.10

_ 0.85 2.6

110 114.15 117.4

11.1 6.95 3.5


If the OPTION is purchased on 1st Feb and as on expiry date (23/02/2006)

POSITION OF PUT OPTION BUYER/WRITER 1. DATE 23/02/06 23/02/06 23/02/06 2. STRIKE PRI CE 110 115 120 3. SPOT PRICE 129.45 129.45 129.45 4. PREMIUM 1.5 4.4 _ 5. STRICK PRICE -PREMIUM 108.5 110.6 120.00 6. SPOT – 5 20.95 18.85 9.45



Derivatives market is on innovation to cash market, approximately its daily turn over reaches to equal stage of cash market. The average daily turn over of the NSE derivative segment is. Presently the available scrip sin futures and options segment are in cash market. The profit/ loss of the investor depends on the market price of the under lying asset. the investor may incur huge profit or he may incur huge loss. But in derivative segment the investor enjoys huge profit with limited down side. In cash market the investor as to pay the total money. But in derivatives the investor as to pay premium or margins which are some percentage of total money. . Derivatives are mostly used for hedging purpose. In derivatives segment the profit/loss of the option holder/option writer is purely depended on the fluctuations of the under lying assets


Derivatives market is on innovation to cash market, approximately its daily turn over reaches to equal stage of cash market. The average daily turn over of the NSE derivative segment is. Presently the available scrip sin futures and options segment are in cash market. The profit/ loss of the investor depends on the market price of the under lying asset. The investor may incur huge profit or he may incur huge loss. But in derivative segment the investor enjoys huge profit with limited down side. In cash market the investor as to pay the total money. But in derivatives the investor as to pay premium or margins which are some percentage of total money. . Derivatives are mostly used for hedging purpose. In derivatives segment the profit/loss of the option holder/option writer is purely depended on the fluctuations of the under lying assets

 at present scenario the derivatives market is increased to a grate position.

Approximately its daily turnover reaches to the equal stage of cash market, the avgas daily turnover of the NSE in derivatives market is 4,00,000(vol).  Presently the available scraps in the futures and options segment are 55.  The derivative market is newly stated in India and its is not know by every one so SEBI should take necessary actions to create awareness among investors.  In cash market the profit/loss of the investor may be unlimited, but in the derivative market.  The investor can enjoy unlimited profits and minimize the losses incurred.  In derivatives market the investors enjoys the privilege of paying less amount in case of options.  Derivatives are mostly used for hedging purpose.  In derivatives market the profit/loss of the investors depends upon the market fluctuations, especially with the prices of the securities.  In bearish market the investor is suggested to option for put options in order to minimized his losses.  In bullish market the investor is suggested to option for call options in order to maximize the profits.


BIBILOGRAPHY: BOOKS: Futures and options Future and options Vohra & bogri Mahajan.

DERIVATIVES CORE MODULE WORK BOOK NCFM(NSE’S CERTIFICATION IN FINANCIAL MARKETS) NEWS PEPERS: THE ECONOMIC TIMES BUSINESS STANDARDS BUSINESS LINE And varies newspapers. Websites: www.NSEindia.com www.BSEindia.com www.dervativesindia.com www.peninsular.com www.5paisa.com www.sify.com INDEX:

S.NO 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19



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