CHAPTER-I

INTRODUCTION

INTRODUCTION
1

The origin of derivatives can be traced back to the need of farmers to protect
themselves against fluctuations in the price of their crop. From the time it was sown to
the time it was ready for harvest, farmers would face price uncertainty. Through the use
of simple derivative products, it was possible for the farmer to partially or fully transfer
price risks by locking-in asset prices. These were simple contracts developed to meet the
needs of farmers and were basically a means of reducing risk.
A farmer who sowed his crop in June faced uncertainty over the price he would
receive for his harvest in September. In years of scarcity, he would probably obtain
attractive prices. However, during times of oversupply, he would have to dispose off his
harvest at a very low price. Clearly this meant that the farmer and his family were
exposed to a high risk of price uncertainty.
In 1848, the Chicago Board Of Trade, or CBOT, was established to bring farmers
and merchants together. A group of traders got together and created the to-arrive
contract that permitted farmers to lock into price upfront and deliver the grain later. These
to-arrive contracts proved useful as a device for hedging and speculation on price
charges. These were eventually standardized, and in 1925 the first futures clearing house
came into existence.
Today derivatives contracts exist on variety of commodities such as corn, pepper,
cotton, wheat, silver etc. Besides commodities, derivatives contracts also exist on a lot of
financial underlying like stocks, interest rate, exchange rate, etc.

OBJECTIVES OF THE STUDY:

1. To understand what kind of decisions will give better returns at the time of
INFOSYS results and to estimate risk involved in this process.
2. To analyze INFOSYS, after 4th quarter results with live examples, and evaluating
performance of NIFTY, in increased inflation period.
3. Based on above three objectives to give a suggestion that whether equity
investments are better or derivatives investment better in special situation.
4. To study the option strategies available in derivatives market
5. To study the impact of option strategies and pricing of derivatives.

6. To mesure the performance of option strategies in derivative market.

7. To know the return of various investments in derivatives market.

SCOPE OF THE STUDY

The project covers the derivatives market and its instruments. For better
understanding various strategies with different situations and actions have been given.
It includes the data collected in the recent years and also the market in the derivatives
in the recent years. This study extends to the trading of derivatives done in the
National Stock Exchange.

NEED OF THE STUDY :

The study has been done to know the different types of derivatives and also to know
the derivative market in India. This study also covers how risk minimizes through
derivatives with the help of options in equity segment, as a financial advisor able to
understand risk minimization with examples.
Through this study I came to know the trading done in derivatives and their use in
special situations.

RESARCH METHODOLOGY
Method of data collection:Secondary sources:It is the data which has already been collected by someone or an organization for some
other purpose or research study .The data for study has been collected from various
sources:

Books

Journals

News pares & electronic media

Internet sources

Time:
3 months
Statistical Tools Used:
Simple tools like bar graphs, tabulation, line diagrams have been used.

LIMITATIONS OF THE STUDY:

1. The analysis purely based on secondary data, no primary data was taken into
consideration, only live values of the year 2014(March, April)-2014(May) were
considered.
2. Study was limited to only few special situations in the market, so because of time
constraint not able to evaluate all the companies and sectors.
3. Sample size restricted to only two sectors and two stocks
4. Some of the aspects may not be covered in my study.

CHAPTER -II
REVIEW OF LITERATURE

DEFINITION
8

Derivatives is a product whose value is derived from the one or more basic
Variables, called base (underlying asset, index, or value of reference rate), in a
Contractual manner. The underlying asset can be equity, forex, commodity or any other
asset.
In the Indian context the securities contrasts (regulation) act, 1956 (SCR Act)
Defines derivative as
1)

A security derived from an instrument, share, loan whether secured or unsecured, risk
instrument or contract for differences or any other form of security.

2)

A contract, which derives its value from the prices, or index of prices, or Underlying
securities.
Futures contracts, forward contracts, options and swaps are the most common types
of derivatives. Because derivatives are just contracts, just about based on weather data,
such as the amount of rain or the number of anything can be used as an underlying asset.
There are even derivatives sunny days in a particular region. Derivatives are generally
used to hedge risk, but can also be used for speculative purposes

Types of Derivatives Market

Exchange Traded Derivatives

National Stock
Exchange

Index Future

Over the Counter Derivatives

Bombay Stock

National Commodity & Exchange

Derivative Exchange

Index option Stock option

F-1: Types of Derivatives Market

Types of Derivatives

F.2 Types of Derivatives

10

Stock future

TYPES OF DERIVATIVES:
The most commonly used derivatives contracts are forwards, futures and options. Here
are various derivatives contacts that have come to be used given briefly:

FORWARDS

FUTURES

OPTIONS

WARRANTS

LEAPS

SWAPS

SWAPTIONS

FORWARDS: 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 types of
forward contracts in the sense that the former are standardized exchange-traded contracts.
Options: Options are of two types - calls and puts
Warrants: Options generally have lives of up to one year, the majority of options traded
on options exchanges having a maximum maturity of nine months. Longer-dated options
are called warrants and are generally traded over-the-counter.
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 flows
between the parties in the same currency.

11

Currency swaps: These entail swapping both principal and interest between the
parties, with the cash flows in one direction being in a different currency than those in the
opposite direction
LEAPS: The acronym LEAPS means Long-Term Equity Anticipation Securities. These
are options having a maturity of up to three years.
Swaptions: Swaptions are options to buy or sell a swap that will become operative at the
expiry of the options. Thus a swaption is an option on a forward swap. Rather than have
calls and puts, the swaptions market has receiver swaptions and payer swaptions. A
receiver swaption is an option to receive fixed and pay floating. A payer swaption is an
option to pay fixed and receive floating.
EVALUTION OF DERIVATIVES:
Derivatives can be found throughout the history of mankind. In the Middle Ages,
engaging in contracts at predetermined prices for future delivery of farming products. The
new era for the derivative markets was ushered with the introduction of financial
derivatives, and it continues to last to this day. Although commodity derivatives are still
quite active, particularly oil and precious metals, financial derivatives dominate trading in
the current derivative markets.
Although the derivatives markets slowed down considerably by the end of the 20th
century, that did not mean that there were not a steady offering of existing, as well as new
derivative products. Derivatives exchanges also went through a period of change; some
consolidated, some merged, some became for-profit institutions. Regardless, they all had
something in commonthe need for less regulation.
Aside from structural changes, some derivative exchanges also changed the way they
conducted trading. Old systems of face-to-face trading on trading floors have been
replaced with electronic trading, and telephone and computer networks. With the advent
of Internet, electronic trading evolved into e-trading. And although trading floors still
dominate derivative markets in the U.S., it is obvious that to stay competitive, the U.S.
will have to eventually embrace electronic trading.
12

The following factors have contributed to the growth of financial derivatives

1) Increased volatility in asset prices in financial markets.
2) Increased integration of national financial markets with the international markets.
3) Marked improvement in communication facilities and sharp decline in their costs.
4) Development of more sophisticated risk management tools, providing economic
agents a wider choice of risk management strategies
5) Innovations in the derivatives markets, which optimally combine the risks and
returns over a large number of financial assets leading to higher returns, reduced
risk as well as transactions costs as compared to individual financial assets.
6) Technology facilitates the ability to track the payoffs and risk exposures
associated with a portfolio of derivative positions.
(i)

Future Contract
In finance, a futures contract is a standardized contract, traded on a futures
exchange, to buy or sell a certain underlying instrument at a certain date in the
future, at a pre-set price. The future date is called the delivery date or final
settlement date. The pre-set price is called the futures price. The price of the
underlying asset on the delivery date is called the settlement price.

Basic features of Future Contract

1. Standardization:
Futures contracts ensure their liquidity by being highly standardized, usually by specifying:

The underlying. This can be anything from a barrel of sweet crude oil to a short
term interest rate.

The type of settlement, either cash settlement or physical settlement.

The amount and units of the underlying asset per contract.

The currency in which the futures contract is quoted.

The grade of the deliverable. In case of bonds, this specifies which bonds can be
delivered. In case of physical commodities, this specifies not only the quality of
13

the underlying goods but also the manner and location of delivery. The delivery
month.

The last trading date.

Other details such as the tick, the minimum permissible price fluctuation.

2. Margin:
Although the value of a contract at time of trading should be zero, its price constantly
fluctuates. This renders the owner liable to adverse changes in value, and creates a credit
risk to the exchange, who always acts as counterparty. To minimize this risk, the
exchange demands that contract owners post a form of collateral, commonly known as
Margin requirements are waived or reduced in some cases for hedgers who have physical
ownership of the covered commodity or spread traders who have offsetting contracts
balancing the position.
Initial Margin: is paid by both buyer and seller. It represents the loss on that contract, as
determined by historical price changes, which is not likely to be exceeded on a usual
day's trading. It may be 5% or 10% of total contract price.
Mark to market Margin: Because a series of adverse price changes may exhaust the initial
margin, a further margin, usually called variation or maintenance margin, is required by
the exchange. This is calculated by the futures contract, i.e. agreeing on a price at the end
of each day, called the "settlement" or mark-to-market price of the contract.
3. Settlement
Settlement is the act of consummating the contract, and can be done in one of two ways,
as specified per type of futures contract:

Physical delivery -

Cash settlement

Expiry
14

Pricing of Future Contract:

In a futures contract, for no arbitrage to be possible, the price paid on delivery (the forward price)
must be the same as the cost (including interest) of buying and storing the asset. In other words,
the rational forward price represents the expected future value of the underlying discounted at the
risk free rate. Thus, for a simple, non-dividend paying asset, the value of the future/forward,
, will be found by discounting the present value

at time

to maturity

by the rate of

risk-free return .

This relationship may be modified for storage costs, dividends, dividend yields, and
convenience yields. Any deviation from this equality allows for arbitrage as follows.
In the case where the forward price is higher:
1. The arbitrageur sells the futures contract and buys the underlying today (on the
spot market) with borrowed money.
2. On the delivery date, the arbitrageur hands over the underlying, and receives the
agreed forward price.
3. He then repays the lender the borrowed amount plus interest.
4. The difference between the two amounts is the arbitrage profit.

15

Distinction between Futures and Forwards Contracts

FEATURE

FORWARD CONTRACT

FUTURE CONTRACT

Operational

Traded directly between two Traded on the exchanges.

Mechanism

parties (not traded on the

exchanges).

Contract

Differ from trade to trade.

Contracts are standardized contracts.

Exists.

Exists. However, assumed by the clearing

Specifications
Counter-party
risk

corp., which becomes the counter party to

all

the

trades

or

unconditionally

guarantees their settlement.

Liquidation

Low, as contracts are tailor High,

as contracts

are

Profile

made contracts catering to the exchange traded contracts.

standardized

needs of the needs of the

parties.
Price discovery

Not efficient, as markets are Efficient, as markets are centralized and

scattered.

all buyers and sellers come to a common

platform to discover the price.

Examples

Currency market in India.

Commodities, futures, Index Futures and

Individual stock Futures in India.

T1: Distinction between Futures and Forwards Contracts

PARTICIPANTS:
The following three categories of participants in the derivatives market:
16

1) HEDGERS
2) SPECULATORS
3) ARBITRAGEURS
HEDGERS: Hedgers face risk associated with the price of an asset. They use futures or
options market to reduce or eliminate this risk.
Hedgers are those who protect themselves from the risk associated with the price of an
asset by using derivatives. He keeps a close watch upon the prices discovered in trading
and when the comfortable price is reflected according to his wants, he sells futures
contracts.
SPECULATORS: Speculators are somewhat like a middle man. They are never
interested in actual owing the commodity. They will just buy from one end and sell it to
the other in anticipation of future price movements. They actually bet on the future
movement in the price of an asset. They are the second major group of futures players.
These participants include independent floor traders and investors.
ARBITRAGEIRS: Arbitrators are the person who takes the advantage of a discrepancy
between prices in two different markets. If he finds future prices of a commodity edging
out with the cash price, he will take offsetting positions in both the markets to lock in a
profit. Risk less Profit Making is the prime goal of Arbitrageurs. Buying in one market
and selling in another, buying two products in the same market are common.
ELIGIBILITY OF ANY STOCK TO ENTER IN DERIVATIVES MARKET
Non Promoter holding ( free float capitalization ) not less than Rs. 750
Crores from last 6 months
Daily Average Trading value not less than 5 Crores in last 6 Months
At least 90% of Trading days in last 6 months
Non Promoter Holding at least 30%

17

FUTURES
DEFINITION:
A future is a contract between two parties whereby the one party (the buyer) agrees to
buy an underlying asset from the other party to the contract on a specific future date, and
at a price determined at the close of the contract. A future is a derivative that is used to
transfer the price risk of the underlying instrument from one party to another.
The underlying asset can be a financial asset such as a bond, a currency such as US
dollars, a commodity, etc.
A future is normally classified according to the underlying instrument. Where, for
instance, two parties agree to buy and sell a specific quantity of rice (of a certain quality)
at a certain price on a future date, the contract will be a commodity futures contract.
Where two parties agree to buy and sell bonds, this will be known as a financial futures
contract, and where two parties agree to buy and sell a certain amount of foreign
currency, this is a currency futures contract.
FEATURES OF FUTURES:

Futures are highly standardized.

The contracting parties need not pay any down payments.

Hedging of price risks.

They have secondary markets to.

A futures contract is thus

an agreement between two parties

to buy and sell

a standardized type and quantity

of a specified underlying asset

with a certain quality

at a price determined at the closing of the contract

18

on a specified date

Through a central exchange.

TYPES OF FUTURES:
On the basis of the underlying asset they derive, the futures are divided in to two types:

1) Stock futures:
The stock futures are the futures that have the underlying asset as the individual
securities. The settlement of the stock futures is of cash settlement and the settlement
price of the future is the closing price of the underlying security.

2) Index futures:
Index futures are the futures, which have the underlying asset as an index. The index
futures are also cash settled. The settlement price of the index futures shall be the closing
value of the underlying index on the expiry date of the contract.
PARTIES IN FUTURES CONTRACT:
There are two parties in a future contract, the buyer and seller. The buyer of the futures
contract is one who LONG on the futures contract and the seller of the futures contract is
who is SHORT on the futures contract.
In a futures contract, both parties have an obligation,

one to buy the underlying instrument

The other to sell the underlying instrument.

19

FUTURES TERMINOLOGY
Spot price:
It is the price at which an asset is traded in the current market.
Futures price:
It is the price at which the futures contract trades in the futures market.
Contract cycle:
It is the period over which the 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 a January expiration contract expires on the last Thursday
of January and February expiration contract ceases trading on the last Thursday of
February. On the Friday following the last Thursday, a new contract having a threemonth expiry is introduced for trading.
Expiry date:
It is the date specifies in the futures contract. This is the last day on which the
contract will be traded, at the end of which it will cease to exist.
Contract size:
The amount of asset that has to be delivered under one contract. For instance, the
contract size on NSEs futures market is 50 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 contract. In a
normal market, basis will be positive. This reflects that futures prices normally exceed
spot prices.
Cost carry:
20

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 income earned on the asset.
Open Interest:
Total outstanding long or short position in the market at any specific time. As total
long positions in the market would be equal to short position, for calculation of open
interest, only one side of the contract is counter.

OPTIONS
DEFINITION:
Option is a type of contract between two persons where one grants the other the right
to buy a specific asset at a specific price within a specific time period. Alternatively the
contract may grant the other person the right to sell a specific asset at a specific price
within a specific time period. In order to have this right, the option buyer has to pay the
seller or the option premium.
The assets on which option can be derived are stocks, commodities, indexes etc. If the
underlying asset is the financial asset, then the option are financial option like stock
options, currency options, index options etc, and if options like commodity option.
PROPERTIES OF OPTIONS:
Options have several unique properties that set them apart from other securities. The
following are the properties of options:

Limited Loss

High Leverage Potential

Limited Life
PARTIES IN AN OPTION CONTRACT:
1. Buyer of the Option:
21

The buyer of an option is one who by paying option premium buys the right but not the
obligation to exercise his option on seller/writer.
2. Writer/Seller of the Option:
The writer of a call/put options is the one who receives the option premium and is there
by obligated to sell/buy the asset if the buyer exercises the option on him.
TYPES OF OPTIONS:
The options are classified into various types on the basis of various variables. The
following are the various types of options:

I). On the basis of the Underlying asset:

On the basis of the underlying asset the options are divided into two types:

INDEX OPTIONS: The Index options have the underlying asset as the index.

STOCK OPTIONS: A stock option gives the buyer of the option the right to
buy/sell stock at a specified price. Stock options are options on the individual
stocks, there are currently more than 50 stocks are trading in this segment.

II). On the basis of the market movement:

On the basis of the market movement the options are divided into two types.

CALL OPTION:
A call options is bought by an investor when he seems that the

stock price moves upwards. A call option gives the holder of the option the right but not
the obligation to buy an asset by a certain date for a certain price.

PUT OPTION:

22

A put option is bought by an investor when he seems that the

stock price moves downwards. A put option gives the holder of the option right but not
the obligation to sell an asset by a certain date for a certain price.

III). On the basis of exercise of option:

On the basis of the exercising of the option, the options are classified into two categories.

AMERICAN OPTION:
American options are options that can be exercised at any time up to the expiration
date; most exchange-traded options are American.

EUROPEAN OPTION:
European options are options that can be exercised only on the expiration date
itself. European options are easier to analyze than American option.
DISTINCTION BETWEEN FUTURES AND OPTIONS

FUTURES

OPTIONS

1. Exchange traded, with

1. Same as futures

Negation
2. Exchange defines

the

product
3. Price is zero, strike

2. Same as futures

3. Strike price is fixed, price

price moves
4. Price is Zero
5. Linear payoff

moves
4. Price is always positive
5. Nonlinear payoff
6. Only short at risk

6. Both long and short at

risk
23

Options Classifications: Options are often classified as

In the money - These result in a positive cash flow towards the investor
At the money - These result in a zero-cash flow to the investor
Out of money - These result in a negative cash flow for the investor
OPTIONS PRICING
Prices of options are commonly depending upon six factors. Option's prices are
far more complex. These are the two basic options that form the whole gamut of
transactions in the options trading. These in combination with other derivatives create a
whole world of instruments to choose form depending on the kind of requirement and the
kind of market expectations. Exotic Options are often mistaken to be another kind of
option. They are nothing but non-standard derivatives and are not a third type of option.
24

Options undertakings:
Stocks
Foreign Currencies
Stock Indices
Commodities
Others
SPOT PRICES: In case of a call option the payoff for the buyer is max(S -Xt, 0)
therefore, more the Spot Price more is the payoff and it is favorable for the buyer. It is the
other ways round for the seller, more the Spot Price higher are the chances of his going
into a loss.
In case of a put Option, the payoff for the buyer is max (Xt - S, 0) therefore, more the
Spot Price more are the chances of going into a loss. It is the reverse for Put Writing.
STRIKE PRICE: In case of a call option the payoff for the buyer is shown above. As
per this relationship a higher strike price would reduce the profits for the holder of the
call option.
TIME TO EXPIRATION: More the time to Expiration more favorable is the option.
This can only exist in case of American option as in case of European Options the
Options Contract matures only on the Date of Maturity.
VOLATILITY: More the volatility, higher is the probability of the option generating
higher returns to the buyer. The downside in both the cases of Call and put is fixed but the
gains can be unlimited. If the price falls heavily in case of a call buyer then the maximum
that he loses is the premium paid and nothing more than that. More so he/ she can buy the
same shares form the spot market at a lower price.
RISK FREE RATE OF INTEREST: In reality the r and the stock market is inversely
related. But theoretically speaking, when all other variables are fixed and interest rate
25

increases this leads to a double effect: Increase in expected growth rate of stock prices
discounting factor increases making the price fall.
In case of the put option both these factors increase and lead to a decline in the put value.
A higher expected growth leads to a higher price taking the buyer to the position of loss
in the payoff chart. The discounting factor increases and the future value become lesser.
DIVIDENDS: When dividends are announced then the stock prices on ex-dividend are
reduced. This is favorable for the put option and unfavorable for the call option.
CALL OPTION:
C = S.N(dl)-Xe-rt .N(d2)

PUT OPTION:
P =C0 + Xe-rt -S
Where
C0 - VALUE OF CALL OPTION
S - SPOT PRICE OF STOCK
X - STRIKE PRICE / EXCERSISE PRICE
r - ANNUAL RISK FREE RETURN
t - CONTRACT CYCLE / TIME TO EXPIRATION

26

27

CHAPTER-III
COMPANY PROFILE
& INDUSTRY PROFILE

28

ABOUT US:
The IIFL Group is a leading financial services company in India, promoted by first
generation entrepreneurs. We have a diversified business model that includes credit and
finance, wealth management, financial product distribution, asset management, capital
market advisory and investment banking.
We have a largely retail focussed model, servicing over 2 million customers, including
several lakh first-time customers for mutual funds, insurance and consumer credit. This
has been achieved due to our extensive distribution reach of close to 4,000 business
locations and also innovative methods like seminar sales and use of mobile vans for
marketing in smaller areas.
Our evolution from an entrepreneurial start-up to a market leadership position is a story
of steady growth by adapting to the changing environment, without losing the focus on
our core domain of financial services. Our NBFC and lending business accounts for 68%
of our consolidated income in FY13 and has a diversified product portfolio rather than
remaining a mono-line NBFC. We are a leader in distribution of life insurance and mutual
funds among non-bank entities. Although the share of equity broking in total income was
only 13% in FY13, IIFL continues to remain a leading player in both, retail and
institutional space.

Vision

To become the most respected company in the financial services space in India

Values

Values are IIFL are summarized in one acronym: GIFTS

Growth with focused team of dynamic professionals

Integrity in all aspects of business no compromise in any situation

Fairness in all our dealings employees, customers, vendors and shareholders all
included
29

Transparency in what we do and in how and why we do it

Service orientation is our core value, imbibed by all sales as well as support teams

Promoters (Hint: - CEO, Directors)

Board Of Directors
Mr. Nirmal Jain
Chairman
Mr. R. Venkataraman
Managing Director
Mr. Nilesh Vikamsey
Independent Director
Mr. Kranti Sinha
Independent Director
Mr. A. K. Purwar
Independent Director
Sunil Kaul
Independent Director
Core Management Team
Bharat Parajia
MD, IIFL (Asia) Pte Ltd.
Pratima Ram
CEO, Credit & Finance
Karan Bhagat
MD, IIFL Wealth Management Ltd.
H. Nemkumar
President, Institutional Equities
Aniruddha Dange
President, Institutional Equities
Vasudev Jagannath
President, Institutional Equities
Nipun Goel
President, Investment Banking
Mukesh Kumar Singh
President, Insurance
Prasanth Prabhakaran
President, Retail Broking
R. Mohan
Chief Compliance Officer
Narendra Jain
Chief Operating Officer
Pallab Mukherji
President, Human Resource
Sankarson Banerjee
Chief Information Officer

30

Business strategy

Steady growth by adapting to the changing environment, without losing the focus
on our core domain of financial services

De-risked business through multiple products and diversified revenue stream

Knowledge is the key to power superior financial decisions

Keep costs low and continuously strive for innovation

Customer strategy

Remain largely a retail focused organisation, driving stickiness through

knowledge and quality service

Cater to untapped areas in semi-urban and rural areas, which is relatively safe
from cut-throat competition

Target the micro, small and medium enterprises mushrooming across the country
through a cluster approach for lending business

Use wide multi-modal network serving as one-stop shop to customers

People strategy

Attract the best talent and driven people

Ensure conducive merit environment

Liberal ownership-sharing

Our logo

31

The Shree Yantra is regarded in India as the most powerful and mystically beautiful of all
yantras (Sanskrit word for a symbol used to focus the mind). It predates the Vedas and is
supposed to be the favourite Yantra of Lakshmi, the Goddess of Wealth and Prosperity.
This powerful symbol, said to promote harmony and tranquility as well, has endured for
many centuries. IIFL is engaged in the business of creating wealth and the adoption of the
Shree Yantra as its logo was but natural.

PRODUCT & SERVICES

We are a one-stop financial services shop, most respected for quality of its advice,
personalized service and cutting-edge technology.

Equities

IIFL is a member of BSE and NSE registered with NSDL and CDSL as a depository
participant and provides broking services in the cash, derivatives and currency segments,
online and offline. IIFL is a dominant player in the retail as well as institutional segments
of the market. It recently became the first Indian broker to get a membership of the
Colombo Stock Exchange and is also the first Indian broker to have received an inprinciple approval for membership of the Singapore Stock Exchange. IIFLs Trader
Terminal, its proprietary trading platform, is widely acknowledged as one of the best
available for retail investors. Investors opt for IIFL given its unique combination of
superior Service, cutting-edge proprietary Technology, Advice powered by worldacclaimed research and its unparalleled Reach owing to its over 2500 business locations
across over 500 cities in India.

IIFL received the BQ1 broker grading (highest grading) from CRISIL. The assigned
grading reflects an effective external interface, robust systems framework and strong risk
management. The grading also reflects IIFLs healthy regulatory compliance track record
32

and adequate credit risk profile.

IIFLs analyst team won Zee Business Indias best market analysts awards 2009 for
being the best in the Oil and Gas and Commodities sectors and a finalist in the Banking
and IT sectors.

IIFL has rapidly emerged as one of the premier institutional equities houses in India with
a team of over 25 research analysts, a full-fledged sales and trading team coupled with an
experienced investment banking team.

The Institutional equities business conducted a very successful Enterprising India global
investors conference in Mumbai in March 2010, which was attended by funds with
aggregate AUM over US$5 trillion and CEOs and other executives representing
corporates with a combined market capitalization of over US$500 billion. The Discover
Sri Lanka global investors conference, held in Colombo in July 2010, was attended by
more than 50 leading global and major local investors and 25 Sri Lankan corporates,
along with senior Government officials.

Contact Us for Retail broking

Email: info@5pmail.com
Tel: +91-44- 40071000

Contact Us for Institutional Equities

Email: info@iiflcap.com
Tel: +91-22-46464600
Website: http://www.iiflcap.com

33

Commodities
IIFL offers commodities trading to its customers vide its membership of the MCX and the
NCDEX. Our domain knowledge and data based on in depth research of complex
paradigms of commodity kinetics, offers our customers a unique insight into behavioral
patterns of these markets. Our customers are ideally positioned to make informed
investment decisions with a high probability of success.

Contact Us for Commodities

Email: comm@indiainfoline.com
Tel: +91-22-40077105

India Infoline Commodities Ltd

143, MGR Road, Perungudi,
Chennai, Tamil Nadu - 600 096

Credit and finance

IIFL offers a wide array of secured loan products. Currently, secured loans (mortgage
loans, margin funding, loans against shares) comprise 94% of the loan book. The
Company has discontinued its unsecured products. It has robust credit processes and
collections mechanism resulting in overall NPAs of less than 1%. The Company has
deployed proprietary loan-processing software to enable stringent credit checks while
ensuring fast application processing. Recently the company has also launched Loans
against Gold.
Contact Us for Loans
Email: reach@moneylineindia.com
Tel: +91-22- 28710625

Insurance
34

IIFL entered the insurance distribution business in 2000 as ICICI Prudential Life
Insurance Co. Ltds corporate agent. Later, it became an Insurance broker in October
2008 in line with its strategy to have an open architecture model. The Company now
distributes products of major insurance companies through its subsidiary India Infoline
Insurance Brokers Ltd. Customers can choose from a wide bouquet of products from
several insurance companies including Max New York Life Insurance, MetLife, Reliance
Life Insurance, Bajaj Allianz Life, Birla Sunlife, Life Insurance Corporation, Kotak Life
Insurance and others.

Wealth Management Service

IIFL offers private wealth advisory services to high-net-worth individuals (HNI) and
corporate clients under the IIFL Private Wealth brand. IIFL Private Wealth is managed
by a qualified team of MBAs from IIMs and premier institutes with relevant industry
experience. The team advises clients across asset classes like sovereign and quasisovereign debt, corporate and collateralised debt, direct equity, ETFs and mutual funds,
third party PMS, derivative strategies, real estate and private equity. It has developed
innovative products structured on the fixed income side.

It also has tied up with Interactive Brokers LLC to strengthen its execution platform and
provide investors with a global investment platform.

Contact Us for Wealth Management Services

Email: acquisitions@iiflw.com
Tel: +91-22-3958 5704 / +91 9004094893

Investment Banking
IIFLs investment banking division was launched in 2006. The business leverages upon
its strength of research and placement capabilities of the institutional and retail sales
teams. Our experienced investment banking team possesses the skill-set to manage all
kinds of investment banking transactions. Our close interaction with investors as well as
35

corporates helps us understand and offer tailor-made solutions to fulfill requirements.

The Company possesses strong placement capabilities across institutional, HNI and retail
investors. This makes it possible for the team to place large issues with marquee
investors.

In FY10, the team advised and managed more than 10 transactions including four IPOs
and four Qualified Institutions Placements

Contact Us for Investment Banking

Email: info.ib@iiflcap.com
Tel: +91-22-4646 4600

JOURNEY

2014

The biggest AIF and all time high income and profits

We launched AIF raising Rs6.28bn, the largest AIF fund in India, till date. Over the
years, our business model has been de-risked and is no longer dependent on cyclical
capital markets. Reported all time high income of Rs26.65bn and PAT of Rs2.79bn.

36

2013

Announcing the Real Estate Fund

A debt and equity linked investment instrument, this fund's focus is on

affordable residential segments in the top seven cities in India. The maiden fund
raised Rs5bn, as testimony to customer's trust.

2012

The Launch of IIFL Mutual Fund

We incorporated the IIFL Asset Management company, and in doing so, ensured our
coverage of the entire gamut of financial services.

2010

Beyond Borders
IIFL became the first Indian broker to register on the Colombo Stock Exchange. In
the same year, IIFL received in-principle approval for membership of the Singapore
Stock Exchange.

2009

Enterprising India
Our first global investor conference, Enterprising India, held in 2009-10, received an
overwhelming response. It was attended by 450 fund managers, 67 corporates and
thought leaders like Jim Walker, David Bloom and Brahma Chellany among others.

37

2008

Launched IIFL Private Wealth Management

IIFL Wealths business model, in contrast to the traditional industry's practice of
driving revenues through distribution and commission, focuses on advisory fees as
core income, ensuring alignment of interests with those of our clients. Meanwhile, we
transitioned from a corporate agent to insurance broking.

2007

From retail to wholesale Institutional Equities begins with a bang

A high profile institutional team from the then leading foreign brokerage house joined
us in what was a first deal of its kind in the Indian broking industry, making IIFL the
port of first call for FIIs and Mutual Funds.

2006

Commenced our lending business

This was another major move for our group from fee-based to fund-based business.
From a modest beginning with all processes and controls, the NBFC was later to
become the most dominant business line.

2005 Our Maiden IPO the tipping point

Listing on the NSE and BSE gave impetus and momentum to expansion, scaling up
and funding. It was again full steam ahead. The IPO was at Rs15.2(adjusted for split)
and shareholders have received Rs15.7 by way of dividend. The price was Rs60.65 as
at FY13 end.

38

2004

Our commodities license

We were again at the forefront to offer commodities broking to retail investors. A

coincidence may be, but this was when our magical linkage between transactional and
advisory expertise began.

Awards
Best Customer Service in Financial Services, 2014 - Retailer Customer Service
Awards
Best Commodities Investment, 2013 Euro Money
Top Performer, Equity (FI Category), 2013 BSE
Best Broking House with Global Presence, 2012 & 2013 D&B
No. 1 in Fixed Income Portfolio Management in India, 2013 Euro Money
- Awarded "The Best Wealth Management House" in india.
- Forbes rates www.indiainfoline.com as the "Best of the Web" and recommends "...must
read for investors"
- Awarded "Most Improved brokerage" in india by AsiaMoney as a part of its survey of
brokerages in countries across Asia for 2008
- Awarded "Best Broker-India" by FiananceAsia as a part of its survey of financial
services firms across Asia for 2008.

39

Corporate Structure

FINANCIAL REVIEW
IIFL Consolidated H1FY14 Net Profit at `130 Cr, up 10% yoy;
Income at `1,360 Cr, up 10% yoy
Half Year Results (consolidated) for April - Sept 2014 (H1FY14)
Income for the half year at `1,360 Cr up 10% yoy
Earnings before Interest, Depreciation and Tax was at `778 Cr, up 29% yoy
Profit after Tax at `130 Cr, up 9.8% yoy
Quarter Results (consolidated) for July - Sept 2014 (Q2FY14)
Income for the quarter at `683 Cr up 5% yoy, marginally up qoq
Earnings before Interest, Depreciation and Tax was at `402 Cr, up 29% yoy and up 7%
qoq
Profit after Tax at `66 Cr, marginally up yoy and up 5% qoq
We have a track record of uninterrupted profits and dividends since listing.
40

Revenues

EBIDTA

PAT

Networth

41

ROE

Segmental revenue split

Segmental cap employed

42

Location

Mumbai

Corporate office

IIFL Centre, Lower Parel

IIFL House, Sun Infotech Park, Road No. 16V, Plot No. B-23,

Registered office
Year

Thane Industrial Area, Wagle Estate,Thane,Maharashtra 400604

of

incorporation
Industry

1995
Financial Services
Credit & Finance, Wealth Management, Financial Product

Key businesses

Distribution, Capital Market Related

Employees

14,000+

Business locations

Around 4,000 locations in 900 cities and towns

Sri Lanka, Singapore, Dubai, New York, Mauritius, UK, Hong

Global reach

Kong, Switzerland

Listings

NSE, BSE

Listing date

17 May, 2005

Registrars

Link Intime India Pvt. Ltd.

Short
rating

term

debt

CRISIL A1+ & ICRA (A1+)

43

Long

term

debt

rating
Domains

ICRA(AA) & Brickwork BWR AA (Outlook: Stable).

www.indiainfoline.com,

www.iiflfinance.com,

www.ttweb.indiainfoline.com, www.flame.org.in

ISIN code

INE530B01024

Bloomberg code

IIFL IN EQUITY

Reuters code

IIFL.BO

Latest Financial Information (Hint :- How the company is perfuming in the recent
years) - IT IS NOT COMPULSORY

44

BROKERAGE SERVICES
Online Brokerage: We offer subscribers real time trading on the NSE and BSE Apart
from this we also offer commodities
Trading on the MCX and NCDEX. Customer can directly place orders to buy and sell
securities through our automated order processing system.
Offline Brokerage: We began offering offline brokerage service as a back upto our
online brokerage offering through our branches. This was mainly to address the internet
access problem faced by some of our retail customers.
Competition

45

Broking: we face competition from small retail distributors (traditional) and pan India
brokers like Kotak Securities Ltd S.S Kantilal Ishwarlal securities Ltd, India bulls
Securities Ltd, ICICI Web Trade limited, Geojit, financial Services Ltd etc.
Distribution: we face competition from small retail distributors (typically single outlet
unorganized units), brokers who have a distribution set, old and established distribution
companies like blue chip Corporate Investment Center Limited, Bajaj Capital Ltd, Karvy
Securities Ltd, and banks including their PMS and Wealth Management desks.
Our strength: our strengths are our contents and research online technology and
customers services.
COMPETITORS OF TARNAKA BRANCH

Share khan

SBI

Religare

Indian bulls

Karvy.

46

CHAPTER-IV
DATA ANALYSIS
& INTERPRETATION

47

HISTORICAL DATA OF NIFTY

Symbol
NIFTY
NIFTY
NIFTY
NIFTY
NIFTY
NIFTY
NIFTY
NIFTY
NIFTY
NIFTY
NIFTY
NIFTY
NIFTY
NIFTY
NIFTY
NIFTY
NIFTY
NIFTY
NIFTY
NIFTY
NIFTY
NIFTY
NIFTY
NIFTY
NIFTY
NIFTY
NIFTY
NIFTY
NIFTY
NIFTY
NIFTY
NIFTY
NIFTY
NIFTY
NIFTY
NIFTY
NIFTY
NIFTY
NIFTY
NIFTY

Date
1-Apr-14
4-Apr-14
5-Apr-14
6-Apr-14
7-Apr-14
8-Apr-14
11-Apr-14
13-Apr-14
15-Apr-14
18-Apr-14
19-Apr-14
20-Apr-14
21-Apr-14
25-Apr-14
26-Apr-14
27-Apr-14
28-Apr-14
29-Apr-14
2-May-14
3-May-14
4-May-14
5-May-14
6-May-14
9-May-14
10-May-14
11-May-14
12-May-14
13-May-14
16-May-14
17-May-14
18-May-14
19-May-14
20-May-14
23-May-14
24-May-14
25-May-14
26-May-14
27-May-14
30-May-14
31-May-14

Open
5920
5913
5972.5
5960
5913.2
5947
5858
5790
5942
5822
5750
5825.55
5925
5944.5
5905
5944.5
5883.4
5815.8
5799
5714.75
5556.9
5520.45
5490
5590
5566.55
5555
5549.8
5500
5540
5495
5470.1
5449
5445
5453.8
5382
5359
5368.8
5415
5497
5485.25

High
5920
5984.65
5972.5
6000
5960.4
5955.3
5872
5980
5950
5951
5811
5908.05
5964.85
5959
5945
5951.2
5889.95
5841.7
5800.35
5739
5604
5575.75
5583
5668.8
5614
5589.7
5588.85
5634.95
5559
5534
5474
5458.45
5529.4
5453.8
5419
5378.8
5408.9
5482
5497
5563.45

48

Low
5870
5883
5903
5912
5913
5862
5828
5783.05
5856.1
5760
5740.55
5802
5914.3
5916.5
5830
5858.8
5815.55
5733.35
5717
5574
5523.05
5455.55
5477.25
5512.5
5528.5
5535
5485
5479.7
5492
5436.35
5410.5
5415.45
5436.65
5368.05
5358
5320
5349.95
5415
5441
5480.15

Close
5890.85
5973.4
5964.8
5941.4
5931.85
5879.35
5834.55
5968.05
5865.35
5766.1
5792
5902.5
5938.7
5925.55
5921.15
5875.05
5824.1
5764
5739.85
5582.7
5551.25
5469.75
5567.45
5570.3
5555.8
5578.1
5494.3
5572.1
5502.25
5459.05
5434.8
5433.1
5491.3
5385.85
5383.95
5343.65
5390.65
5466.35
5466.85
5554.9

NIFTY APRIL & MAY 2014

INTERPRETATION: The above graphs and tabulations indicating performance of
index for the April to May 2014, where one can observes growth in first week, later on
we can see negative fluctuations till end of the April contract. When analyzing factors for
this increased inflation is one of the major factors.
To have inflation figures for end of May 2014. When compare to 2014 the growth of
inflation is 21.18%. When analyzed increased inflation in India, the direct impact we can
see in banking index as negative.
Based on inflation data and increased interest rates for the last quarter by RBI, if an
investor wants to sell banking stocks, for the given period, investors will have more
returns when they have shorts in the market in banking stocks.
When analyzing April Nifty performance:
The index started at 5890 on 1st April 2014 and on 5th April recorded high of 5964 and not
able to support at that levels and has shown continuous fall in the same month itself and
closed least value 5554.9, here nifty moved into bearish more than 10%. The major
reason for the fall is inflation and increased interest rates.

49

Historical Data of Infosystech

Symbol
INFOSYSTCH
INFOSYSTCH
INFOSYSTCH
INFOSYSTCH
INFOSYSTCH
INFOSYSTCH
INFOSYSTCH
INFOSYSTCH
INFOSYSTCH
INFOSYSTCH
INFOSYSTCH
INFOSYSTCH
INFOSYSTCH
INFOSYSTCH
INFOSYSTCH
INFOSYSTCH
INFOSYSTCH
INFOSYSTCH
INFOSYSTCH
INFOSYSTCH
INFOSYSTCH
INFOSYSTCH
INFOSYSTCH
INFOSYSTCH
INFOSYSTCH
INFOSYSTCH
INFOSYSTCH
INFOSYSTCH
INFOSYSTCH
INFOSYSTCH
INFOSYSTCH
INFOSYSTCH
INFOSYSTCH
INFOSYSTCH
INFOSYSTCH
INFOSYSTCH
INFOSYSTCH

Date
1-Apr-14
4-Apr-14
5-Apr-14
6-Apr-14
7-Apr-14
8-Apr-14
11-Apr-14
13-Apr-14
15-Apr-14
18-Apr-14
19-Apr-14
20-Apr-14
21-Apr-14
25-Apr-14
26-Apr-14
27-Apr-14
28-Apr-14
29-Apr-14
2-May-14
3-May-14
4-May-14
5-May-14
6-May-14
9-May-14
10-May-14
11-May-14
12-May-14
13-May-14
16-May-14
17-May-14
18-May-14
19-May-14
20-May-14
23-May-14
24-May-14
25-May-14
26-May-14

Open
3257.2
3259.85
3277.2
3291.3
3270
3268.85
3220
3216.15
3310
2949.65
2900
2910
2394
2920
2944.65
2952.25
2945
2915.15
2925
2912.65
2879
2850
2835.3
2890
2888
2878.8
2878.95
2862
2860
2900
2829
2830.35
2823.05
2822.8
2823.65
2809
2789.5

GRAPH: Infosystech

50

High
3262.7
3315.95
3306.2
3314.6
3280
3271
3271
3333
3310
2979.65
2937
2935
2949
2965
2956.95
2962.8
2956.75
2926
2932
2944.8
2890.9
2864.5
2889.7
2900
2914
2905.8
2894.7
2901.9
2863.95
2900
2869.9
2842.05
2848
2835.95
2841.85
2810
2797.95

Low
3219.9
3259.85
3251
3270.15
3257.25
3228
3201.2
3216.15
2991.4
2903
2887.1
2897.9
2394
2916
2921.3
2943.05
2925
2875
2905.2
2882.45
2835.05
2818
2835.3
2852.15
2859.1
2875
2858
2858.1
2832.55
2820.05
2790
2816.65
2815.05
2809
2817.7
2744.35
2752.5

Close
3242.9
3305.7
3296.85
3293.5
3260.85
3242.85
3254.45
3322.6
3002.45
2912
2897.9
2914.45
2919.2
2943.5
2944.75
2951.65
2930.7
2891.55
2918.2
2893.75
2854.5
2827.75
2873
2890.25
2872.9
2889.75
2865.45
2871.5
2836.55
2837.6
2827.4
2828.5
2836.6
2819.25
2823.6
2774.9
2773.3

Infosystech Future

CASE 1: explaining about when expected fall in Infosystech results stocks for the
particular period what kind of strategies will give best returns with minimum risk.
The above graph indicating performance of INFOSYSTECH for the April 2014, when
comparing with the index with Infosystech, it has recorded life time high in the first
week of November as 3303.5 and one can observe fall till end of the contract. When
expected this kind of situations in the market, an investor can enter into put option by
doing less risk for more returns.
The below tabulation showing working of INFOSYSTECH put option when
INFOSYSTECH performed in negative trend.

INFOSYS 3300 PUT OPTION

Strike
Symbol
INFOSYSTCH
INFOSYSTCH
INFOSYSTCH
INFOSYSTCH
INFOSYSTCH
INFOSYSTCH
INFOSYSTCH

Date
1-Apr-14
4-Apr-14
5-Apr-14
6-Apr-14
7-Apr-14
8-Apr-14
11-Apr-14

Expiry
28-Apr-14
28-Apr-14
28-Apr-14
28-Apr-14
28-Apr-14
28-Apr-14
28-Apr-14

Price
3300
3300
3300
3300
3300
3300
3300

51

Open
131.5
97
101
90
105
108.95
124.45

High
131.5
105.7
115
98.45
106.8
118.9
124.45

Low
131.5
79
85.4
80
95
104
94

Close
131.5
86
86.85
89.3
102.95
108.75
103.9

INFOSYSTCH
INFOSYSTCH
INFOSYSTCH
INFOSYSTCH
INFOSYSTCH
INFOSYSTCH
INFOSYSTCH
INFOSYSTCH
INFOSYSTCH
INFOSYSTCH

13-Apr-14
15-Apr-14
18-Apr-14
19-Apr-14
20-Apr-14
21-Apr-14
25-Apr-14
26-Apr-14
27-Apr-14
28-Apr-14

28-Apr-14
28-Apr-14
28-Apr-14
28-Apr-14
28-Apr-14
28-Apr-14
28-Apr-14
28-Apr-14
28-Apr-14
28-Apr-14

3300
3300
3300
3300
3300
3300
3300
3300
3300
3300

Strategy: Long Put strategy

52

101
69.2
372.25
401.05
378.45
385.7
358.7
355.45
335.9
350

101
309
386.95
408.35
395
386
364.65
356.35
350.95
373.25

59.05
69
327.2
372
374.25
364
330
355.4
335.9
350

64
296.65
385.4
398.2
380
377.35
349.35
356.35
339.3
368.25

Strategy : Buy Put Option

Current Infosystech

3302

Put Option

Strike Price (Rs.)

3400

Mr. XYZ Pays

Premium (Rs.)

69.0

Break Even Point (Rs.) [(Strike Price - Premium)]

3231

The payoff schedule

On expiry Infosys closes at

Net Payoff from Put option (Rs.)

3100

231.55

3200

131.55

3300

31.55

3331.0

3400

-69

3500

-69

3600

-69

3700

-69

53

EXPLAINING LONG PUT STRATEGY WITH LIVE EXAMPLE:

Long put: meaning of long put equal to buying a put, a put gives right to sell, but
not have any obligation. We can use long put in two ways.
1. Exclusively for investment.
2. For hedging.
1. Exclusively for investment: when a product working as investment, it can give
profit as well as loss also. But here loss is limited and profit is unlimited.
Ex: on 14th April client code 142555 entered into Infosys 3300 put option at
Rs.69.0 when Infosys trading CMP of 3302. Lot size of Infosys is 125units. Total
investment is 8625 (125*69.0)
Profit and loss on long call:
On last day of the contract (29-Apr-2014), client closed the put premium at
Rs.368, where he got Profit of Rs 300. The above example is proving that an
option can work as pure investment product. An investment can give profit as well
as loss; in the above situation the product has given Profit.

Unlimited Profit

Limited loss
The payoff Chart Long
Put

54

Data analysis & interpretation: with current data we can see more than one
combination to find return and risk.
1st combination: explaining how PUTs trading with high premium in starting week of the
month, and if entered with those premiums what would be the result at the end of
contract.
In the above tabulations I have taken April INFOSYSTECH future and 3100 PUT option
On 1st day of INFOSYSTECH future contract closed at 3238 and INFOSYSTECH 3100
Put option closed at 37, in second day INFOSYSTECH increased by Rs.65, but here put
option also increased by Rs.12, generally if stock increases put price decreases, in this
type of situations put created demand means, more chances to fall the INFOSYSTECH
stock.
When investor observes this type of combination in the market, instead of entering with
high premiums, he has to wait for two to three days, because in contract starting days
options trades with higher premium.
Assume that on second day of contract sold INFOSYSTECH future at 3303 and waits till
end of the contract investor gains Rs.377 (3303-2928).
Assume that entered in put option on same day with Rs.244.80 and closed position on last
day of contract at 250, here profit is Rs.5 equal to 2% on investment.
This combination explaining even stocks falls also, some times will not give more
returns, when analyzing reason for this entering with high premiums is one of the major
reasons.
In the above example buying a put means, it gives a selling right and assumption of
selling is strike price minus premium.
In the above example entered INFOSYSTECH 3100 strike price put option entered in
Rs.150, it means assumption of selling is 2974. This assumption, when INFOSYSTECH
trading at 3303on second day of April contract.
55

In the above examples PUT is high premium means assumption of selling is lower levels
so, here put has given least profit and future has given more profit.
2nd Combination:
Here, when options trading with high premiums, investors has to wait for some time.
Assume that on 5th day of contract future sold at 3261, by keeping 100000 margin and put
needs 7500 investment same day (60*125).
Working of returns:
INFOSYSTECH Future:
Future closed at 2928. On last day, profit on lot is Rs.333 (3261-2928)
Total return on investment = 333*125 = 41625.00
INFOSYSTECH Put option:
SBIN put closed at 250 on last day profit on lot is Rs.133 (170-37)
Total return on investment = 133*125 = 16625
The above combinations showing two different performances, and educating investors
about impact of high premiums in the starting week of the contract.

56

INFOSYS 3300 CALL OPTION

Strike
Symbol
INFOSYSTCH
INFOSYSTCH
INFOSYSTCH
INFOSYSTCH
INFOSYSTCH
INFOSYSTCH
INFOSYSTCH
INFOSYSTCH
INFOSYSTCH
INFOSYSTCH
INFOSYSTCH
INFOSYSTCH
INFOSYSTCH
INFOSYSTCH
INFOSYSTCH
INFOSYSTCH
INFOSYSTCH

Date
1-Apr-14
4-Apr-14
5-Apr-14
6-Apr-14
7-Apr-14
8-Apr-14
11-Apr-14
13-Apr-14
15-Apr-14
18-Apr-14
19-Apr-14
20-Apr-14
21-Apr-14
25-Apr-14
26-Apr-14
27-Apr-14
28-Apr-14

Expiry
28-Apr-14
28-Apr-14
28-Apr-14
28-Apr-14
28-Apr-14
28-Apr-14
28-Apr-14
28-Apr-14
28-Apr-14
28-Apr-14
28-Apr-14
28-Apr-14
28-Apr-14
28-Apr-14
28-Apr-14
28-Apr-14
28-Apr-14

Price
3300
3300
3300
3300
3300
3300
3300
3300
3300
3300
3300
3300
3300
3300
3300
3300
3300

Open
70
74
85.15
80
71.35
64.65
41.3
42.35
78.55
9
3.95
3.5
1.05
0.25
0.35
0.3
0.1

High
75
94.4
91.8
93.35
72.9
67
65.5
92.85
78.55
9
4.5
3.5
1.5
1
0.65
0.45
0.25

Low
58.1
70
63.05
70
62.5
46
34.2
37.1
9
3.65
2
1.25
0.95
0.05
0.35
0.15
0.05

Close
61.95
85.8
87.25
80.9
64.8
53.7
56.6
84.95
9.6
3.95
2.25
1.5
1.05
0.75
0.4
0.3
0.05

Table: INFOSYS 3300 CALL OPTION

LONG CALL STRATEGY:Strategy :Long call Option

Call Option

Current Infosystech

3302

Strike Price (Rs.)

3300
57

Mr. XYZ Pays

Premium (Rs.)

78.55

Break Even Point (Rs.) [(Strike Price+ Premium)]

3378.55

The payoff Schedule

On expiry Nifty closes at

Net Payoff from Call Option (Rs.)

3100

-78.55

3200

-78.55

3300

-78.55

3378.55

3400

21.45

3500

121.45

3600

221.45

58

Unlimited Profit
Unlimited
Profit
Limited Loss

The payoff chart (Long Call)

EXPLAINING LONG CALL STRATEGY WITH LIVE EXAMPLE:

Long call:

Meaning of long call equal to buying a call, a call gives right to buy, but not have
any obligation. We can use long call in two ways.
1. Exclusively for investment.
2. For hedging.
1. Exclusively for investment: when a product working as investment, it can give
profit as well as loss also. But here loss is limited and profit is unlimited.
Ex: on 14th April client code 142555 entered into Infosys 3300 call option at
Rs.78.55 when Infosys trading CMP of 3302. Lot size of Infosys is 125units.
Total investment is 9818.75 (125*78.55)
Profit and loss on long call:
On last day of the contract (29-Apr-2014), client closed the call at Rs.0, where he
got loss of Rs 78.55. The above example is proving that an option can work as
pure investment product. An investment can give profit as well as loss; in the
59

above situation the product has given loss. An investment can give loss also, but
here only the premium is the loss.

Analysis: previous eight years history has proved that maximum times Infosys shown
positive performance on share price before results and negative performance after results.
If an investor wants to invest for short term, when he has bullish view on a stock he can
have three options,
1. Buying equity shares
2. Buying a future
3. Buying a call option
But option one and two linked with high investments and risk is also high, but the main
objective, with minimum risk, investor should gain more returns than 1st and 2nd options.
Buying a call in special situation, loss is only the premium paid by the investor.
Ex: Based above tabulation, if investor entered into 3300 Infosys April call option with
premium of Rs.85 on starting day of month contract, the profit and loss would be as
mentioned below on after results of contract.
After results day of contract Infosys 3300 call option settlement price is 9.6 and the
approximate loss are 75.4 which are equal to 84.647% for the given period.

60

Loss% = total loss on investment *100

investment

= 74.5 *100
85
= 87.647% approximately

Conclusion: the above example proving in special situations options will give the best
returns than any other product. In the above 3 options, no product can gives more than
100% returns, i.e., concluding options are best investment.

61

SHORT CALL STRATEGY

Strategy : Sell Call Option
Current Infosystech
Call Option

Strike Price (Rs.)

Mr. XYZ receives

Premium (Rs.)

3300

78.54

Break Even Point (Rs.)

3378.54
(Strike Price +Premium)

The payoff schedule

On expiry Nifty closes at

Net Payoff from the Call Options(Rs.)

3000

78.54

3100

78.54

3200

78.54

3300

78.54

3378.54

3400

-21.46

3500

-131.46

3600

-221.46

Limited Profit
62

The Payoff Chart (Short

Unlimited

Selling an option is high risk, here option writer/seller have the obligation to bear unwanted
exposure. Another bearish strategy is to sell a call Option. As a call Seller, you will receive
Premium. For example, if you sell INFOHSYSTECH April 3300 call Option for Rs 78.54; on 15 th
April 2014 you will earn an Income of Rs 78.54 on the day of the transaction. You will however
face a risk that you might have to pay the difference between 3300 and the closing price of
INFOHSYSTECH scrip on the last Thursday of APRIL. For example, if INFOHSYSTECH were
to close on that day at Rs 2928.8, you will be asked to pay Rs 372.2. After setting of the Premium
received of Rs 78.54, the net loss will be Rs 294. If on the other hand, INFOHSYSTECH closes
above Rs 3300 (as per your bearish view), the entire income of Rs 150 would belong to you.
As a call Seller, you are required to put up Margins. These margins are calculated by the
exchange using a software program called Span. The margins are likely to be between 20 to 35%
of the Contract Value. As a call Seller, you have a limited profit, unlimited loss profile which is a
high risk strategy. If time passes and INFOHSYSTECH remains wherever it is (say Rs 2750), you
will be very happy. Passage of time helps the Sellers as value of the Option declines over time.
Explaining above strategy with live example. Client 142444 sold INFOHSYSTECH call on 15 th
April at Rs 78.4, when stock trading at 3300. Working profit and loss for his strategy
Table showing price records for INFOHSYSTECH 3300 April 2014 CALL OPTION
63

Symbol

Date

Expiry

Strike

Open

High

Low

Close

Price
INFOSYSTCH

15-Apr-14

28-Apr-14

3300

78.55

78.55

9.6

INFOSYSTCH

21-Apr-14

28-Apr-14

3300

1.05

1.5

0.95

1.05

INFOSYSTCH

28-Apr-14

28-Apr-14

3300

0.1

0.25

0.05

0.05

According to above details client got the loss of Rs 294 due to fall down in the market and he is
being as a call seller.

64

SHORT PUT STRATEGY

The payoff schedule
On expiry Infosystech Closes at

Net Payoff from the Put Option (Rs.)

2900

-330.8

3000

-230.8

3100

-140.8

3200

-30.8

3230.8

3300

69.2

3400

69.2

3500

69.2

Selling an option is high risk, here option writer/seller have the obligation to bear unwanted
exposure. Another bullish strategy is to sell a Put Option. As a Put Seller, you will receive
Premium. For example, if you sell INFOSYSTECH April 3300 Put Option for Rs 69; you will
earn an Income of Rs 69 on the day of the transaction. You will however face a risk that you
might have to pay the difference between 3300 and the closing price of INFOSYSTECH scrip on
the last Thursday of January. For example, if INFOSYTECH were to close on that day at Rs
3100, you will be asked to pay Rs 131. After setting of the Premium received of Rs 69, the net
loss will be Rs 131. If on the other hand, INFOSYSTECH closes above Rs 3300 (as per your
bullish view), the entire income of Rs 131 would belong to you.
As a Put Seller, you are required to put up Margins. These margins are calculated by the exchange
using a software program called Span. The margins are likely to be between 20 to 25% of the
Contract Value. As a Put Seller, you have a limited profit, unlimited loss profile which is a high
risk strategy.

65

CHAPTER-V
FINDINGS, CONCLUSIONS
& SUGGESTIONS

66

FINDINGS:
1) Derivative market is growing very fast in the Indian Economy. The turnover of
Derivative Market is increasing year by year in the Indias largest stock exchange
NSE. In the case of index future there is a phenomenal increase in the number of
contracts. But whereas the turnover is declined considerably. In the case of stock
future there was a slow increase observed in the number of contracts whereas a
decline was also observed in its turnover. In the case of index option there was a
huge increase observed both in the number of contracts and turnover.
2) After analyzing data it is clear that the main factors that are driving the growth of
Derivative Market are Market improvement in communication facilities as well as
long term saving & investment is also possible through entering into Derivative
Contract. So these factors encourage the Derivative Market in India.
3) Impact of inflation interest rates and financial results fluctuate stock market
operations, few sectors shown positive and few performs in negative.
4) Increased inflation is negative impact on banking and decreased inflation positive
impact on banking, proved in April, May banking index.
5) Options trades with high premiums in starting week of contract, and given
example, if entered with high premium what would be the disadvantage.
6) In high volatility markets options will give more returns with less risk.
7) In the month of April 2014, Infosys call option given 84.67% loss
8) On 13th January, Infosys announced financial results, and before announcing the
result day i.e. 15th April every investor and every financial advisor in the company
have bearish view on the stock based on historical performance on results day.
9) In the month of December Banking shown negative and IT shown positive
performance. Sometimes these two sectors showing positive correlation and
sometimes negative correlation.
67

10) IT sector has international exposure, few of Indian IT stocks trades in

international markets also, so the impact will be there in IT sector.
11) Derivatives give best return when compared to equity market, but have high risk
also.

SUGGESTIONS:
Speculation should be discouraged. There must be more derivative instruments aimed at
individual investors. SEBI should conduct seminars regarding the use of derivatives to
educate individual investors.
1. Derivative market is highly ill- famed among the investor. Thus it is required to
provide in depth knowledge of the market to investors.
2. Strategies should be evaluated daily for better returns and less risk.
3. Theoretical price of an option should be found out using option pricing models
and those options whose price is less than theoretical price should be used for
formulation of strategy.
4. By using a hedging strategy an investor can recover some of his losses and can
also make profit.
5. When the movement and volatility of market or scrip is not known at that time
investor should use only options

68

CONCLUSION:
Although derivative market is growing in a faster rate still it is not so popular in Indian
financial market. Due to lack of awareness or risk averseness, Indian investors dont
show interest to use derivatives to hedge in equity market. Notwithstanding the
endorsement of derivatives by financial economists and business persons, there is a
widespread belief among regulators, bureaucrats and politicians that derivatives are
employed mainly for speculation purposes, and they accentuate the volatility of the
underlying cash markets.
Many in the profession, however, disagree vehemently with the view that derivatives
accentuate volatility in the cash markets. On the contrary volatility in the underlying cash
market declines with the introduction of derivatives. Since hedging opportunities prove
valuable only if the underlying cash markets are volatile, derivatives are introduced only
when the underlying asset prices become more volatile.

69

70

BIBLIOGRAPHY

Text Books:
Prasanna chandra

Financial Risk Management & Derivatives

M.Y.Khan

Indian Financial System 9th Edition

R. Mahajan

Futures & Options

Rene.M.Stulz

Risk Management & Derivatives

Websites:
www.indianderivatives.com
www.nseindia.com
www.bseindia.com
www.networthdirect .com

News papers:
Economic Times
Business Line
Times of India

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