CONTENTS

Chapter No.

Title
Declaration from student
Certificate from
organisation
Certificate from Guide
Acknowledgement
List of Tables
List of Graphs
List of charts
List if abbreviations
Executive summary

1
1.1
1.2

Introduction
Background of the study
Company Profile
 Company History

 Top management

1.3
1.4
1.5
1.6
2
2.1

 Competitive
advantage of
Religare
Need of the Study
Objective of the Study
Methodology of the Study
Limitation of the Study
Data Processing &
Analysis
Equity
 Benefits from
equity
 Risk in equity
investment
 How to overcome

Page No.
III
IV
V
VI
VII
VII
VII
IX
X
1
6
11
11
13
13
13
14

16
16
18
18

from risk
 Process of
diversification
 Selection of shares
 When to buy/sell
shares
 Types of cash
market margin

2.2



2.3
3

18
19
19
25

Derivatives
Factors driving the
growth of
derivative
Types of
derivatives
Types of trades I
derivative
Types of F& O
margin

28
29

Comparative
analysis

47

Findings
 Practical situation
 Comparative
analysis of the
traded values in the
F & O segment
with Cash segment

29
41
43

52
54

4

Conclusions

55

5

Recommendations

56

6

Bibliography

57

DECLARATION
I, Ms.

Lucy Chatterjee

hereby declare that this project report is the record of authentic work
carried out by me during the period from 2008 to 2010 and has not been
submitted to any other University or Institute for the award of any
degree / diploma etc.

Name of the student: Lucy Chatterjee
Date:

I also acknowledge the help given to me by the people of the organization whose valuable inputs were the driving force behind this project. This project has been made possible through the direct and indirect co-operation of so many people for whom by profound through appreciation the gratitude remains. Priya Venkatraman. I would like to thanks to Mrs. First of all. My deepest regards to my parents who have been always immense of inspiration & support to me forever. Krishnan who guided me to complete this project successfully on time and other faculty members of MITSOB for the knowledge. I take this opportunity to express my gratitude to Prof. . P. I would like to dedicate this work to my parents without whose co-operation this task would have remained unachieved.) D. Last not but the least. Apte. for the partial fulfillment of the course. (Gp. Senior Relationship Management for her valuable suggestions and constructive criticisms that have acted as a guiding light for me. Capt. which I am imbibed throughout the two years of my PGDM course.iii Acknowledgement It gives me an immense pleasure to present this project report. I am also grateful to my guide Prof. P.

1 2 Sensex performance Exchange traded derivatives “Forward” Payoff from forward contract Exchange traded in derivative “Option” Payoff from option 4 31 3 4 5 32 35 33 . Title Page no. 1 2 3 4 5 6 Title Performance of sensex from 1991 Client interface Distinction between futures and forward Distinction between future and option Comparative analysis Comparative analysis in the F & O segment with cash segment Page No. 3 12 33 41 46 54 List of Graph Graph No.vi List of Table Table No.

vii List of Charts Chart No. Title Page No. 1 2 An overview of a REL Religare Financial service group overview REL vision and mission REL & its subsidiaries 7 8 3 4 9 10 .

viii List of Abbreviations Abbreviation Full Form BSE CDSL DP EPS EWMA FII’s F&O IPO LN MTM NAV NSDL P/E ratio RBI SCRA SEBI SRO VaR FICCI Bombay stock Exchange Central depository services limited Depository Participant Earnings per share Exponentially weighted moving average Foreign institutional investors Futures & Options Initial Public Offering Natural log Mark to market Net asset value National securities depository limited Price per earnings ratio Reserve bank of India Securities contract regulation act Securities & Exchange board of India Self-regulatory organization Value at Risk Federation of Indian Chambers of Commerce and Industry .

ix

EXECUTIVE SUMMARY
The project is about the study of brand awareness of RELIGARE SECURIRTIES LIMITED
among investors. It gives the knowledge of market position of the company. I studied as to how
this company proves to an option for the investors, by studying the performance of investing in
equity & derivative for few months considering their analysis. I selected area of COMPARITIVE
ANALYSIS OF EQUITY & DERIVATIVE, which attract different kinds of investors to invest in
equity derivative and to face high risk and get high returns. The major findings of the project are
to overview of the comparison of equity cash segment and equity derivative segment, overview
of the equity and F & O segment from May 2009 to June 2009. The methodology of the project
here is to analyze the Equity & Derivative performance based on NAV, EPS and other things. In
this project I also included my practical situation during the project internship, that how the
market goes up and down and why it happens.
The methodology of the project here is to analyze the investment opportunities available for
those investors & study the returns & risk involved in various investment opportunities and also
study of investment management & risk management. So for that we have to study & analyze the
performance of Equity & Derivative in the market. We know that there is a high risk, high return
in equity but in a long time only. While in derivative there is a high risk, high return in the short
term, because derivative contract is for short time for 1/2/3 months only. So this project included
different types of returns, margin & risk involved in equity, and types, need, use & margin
involved in the derivatives market and also participants & terms use in derivative market.

X

1. INTRODUCTION
1.1Background of the study:
The oldest stock exchange in Asia (established in 1875) and the first in the country to be granted
permanent recognition under the Securities Contract Regulation Act, 1956, Bombay Stock
Exchange Limited (BSE) has had an interesting rise to prominence over the past 133 years. A lot
has changed since 1875 when 318 persons became members of what today is called “Bombay
Stock Exchange Limited” paying a princely amount of Re 1. In 2002, the name "The Stock
Exchange, Mumbai" was changed to Bombay Stock Exchange. Subsequently on August 19,
2005, the exchange turned into a corporate entity from an Association of Persons (AoP) and
renamed as Bombay Stock Exchange Limited.
BSE, which had introduced securities trading in India, replaced its open outcry system of trading
in 1995, with the totally automated trading through the BSE Online trading (BOLT) system. The
BOLT network was expanded nationwide in 1997.
Since then, the stock market in the country has passed through both good and bad periods. The
journey in the 20th century has not been an easy one. Till the decade of eighties, there was no
measure or scale that could precisely measure the various ups and downs in the Indian stock
market. Bombay stock Exchange Limited (BSE) in 1986 came out with a stock Index that
subsequently became the barometer of the Indian Stock Market.
SENSEX first compiled in 1986 was calculated on a “Market Capitalization Weighted”
methodology of 30 component stocks representing a sample of large, well established and
financially sound companies. The base year of SENSEX is 1978-79. The index is widely
reported in both domestic and international markets through prints as well as electronic media.
SENSEX is not only scientifically designed but also based on globally accepted construction and
review methodology. From September 2003, the SENSEX is calculated on a free-float market

capitalization methodology. The “free-float Market Capitalization-Weighted” methodology is a
widely followed index construction methodology on which majority of global equity benchmarks
are based.
The growth of equity markets in India has been phenomenal in the decade gone by Right from
early nineties the stock market witnessed heightened activity in terms of various bull and bear
runs. The SENSEX captured all these happenings in the most judicial manner. One can identify
the booms and bust of the Indian equity market through SENSEX.
The Exchange also disseminates the Price-Earnings Ratio, the Price to Book Value Ratio and the
Dividend Yield Percentage on day-to-day basis of all its major indices.
The value of all BSE indices are every 15 seconds during the market hours and displayed
through the BOLT system. BSE website and news wire agencies.
All BSE-Indices are reviewed periodically by the “Index Committee” of the Exchange. The
Committee frames the broad policy guidelines for the development and maintenance of all BSE
indices. Department of BSE Indices of the exchange carries out the day to day maintenance of all
indices and conducts research on development of new indices.
Institutional investors, money managers and small investors all refer to the Sensex for their
specific purposes The Sensex is in effect the substitute for the Indian stock markets. The
country's first derivative product i.e. Index-Futures was launched on SENSEX.

PERFORMANCE OF SENSEX FROM 1991

98 14. 85 5. 15 9.096. 99 9.069.77 20.943.908.459. 27 5.799.891.741.945. 65 3.758. 22 4.20 low 947.546.1 41 1.31 6. close 1.462. 91 20.005. 01 3. 44 4.150. 48 980.3 3 3.955.9 3 13.11 21.602.346.8 5 2. 66 4.838.422.872.626.904. 33 2. 48 2. 87 2.972.605.2 0 3.0 6 3.713.0 6 3.920.828. 54 3.30 20.9 8 3. 49 13.658. 38 1.262. 31 3.6 9 9. 95 5.110.617.227. 07 4. 08 3.617. 69 4.32 high 1. 45 2.209.2 8 5.1 2 3. 78 3. 22 3.096.055. 48 6.926.085.4 9 3.442.3 7 3.990.9 0 3. 16 3. 34 3.027. 55 2. 65 2. 50 6.03 5.10 7. 11 3.49 8. 25 3.491. 87 3.150.286.131.064.82 7.658. 41 4.Ye ar 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 Open 1. 65 3.322 5.594. 58 3.697.957. 76 6.436. 49 9.397. 99 6.405.377.383.3 .786.9 GRAPH SHOWING 6 SENSEX PERFORMANCE 6.262.042. 88 2.647. 12 3. 01 12.615.8 *As of 30/June/2009 2 3.643.114. 29 4.910.4 1 5. 33 8.

2COMPANY’S PROFILE .1.

The company has a represenattive office in London. personal finacial services Investment banking and institutuonal broking services. Religare retail network spreads across the length and the breadth of the country with it presence through more than 1.217 locations across more than 392 cities and towns.Retail. wealth mangement and the institutional specturm. An Overview of a Religare Enterprise Limited . it has also aggresively started eyeing global geographies. commodities.Company’s History Religare is one of the leading integrated financial services institutions od India. portfolio managemnt services. to wealth advisory. Religare is promoted by the promotion of Ranbaxy Laboratories Limited. The comapn offers large and diverse bouuet of services ranging from equties. derivatives. insurance broking. The services are broadly clubbed across three key business verticals. Having spread itself fairly well across the country and with the promises of not resting on its laurels.

Healthcare Religare Enterprise Limited Super Religare Laborataries Limited (formerly SRL Ranbaxy) Fortis healthcare Limited Religare Wellness Limited (formerly Fortis Healthworld) Religare Technova Limited Religare Voyages Limited .

Religare Financial Services Group Overview:Religare Enterprise Limited Their Joint Ventures Life Insurance Business (Aegon as a Partner) Private Wealth Business (Macquire. Australian Financial Services Major As a partner) Asset management business (Aegon as a Partner) India’s First SEBI approved Film Fund (Vistaar as a Partner) .

Religare is driven by ethical and dynamic processes for wealth creation. .” Providing financial care driven by the core values of diligence and transparency.REL Vision and Mission VISION MISSION BRAND ESSENCE To build Religare as a globally trusted brand in the financial services domain and present it as the “Investment Gateway of India.

  REL & its subsidiaries Structurally. . all businesses are operated through various subsidiaries of the holding company. Religare Enterprises Limited.

. Mr. R-Ally. Sunil Godhwani. Religare Enterprises Limited.  Daily Contract Notes. Shacindra Nath. R-Ally Pro etc.Group Chief Operating Officer.CEO & Managing Director. Anil Saxena. Top Management Team Mr.Group Chief operating Officer. Mr. Religare Enterprises Limited. Competitive advantage of Religare  Lowest Brokerage  Online Money Transfer. Religare Enterprises Lmited.  Providing Funding Facility. R-Ally Lite.  Different Kinds of Accounts like.  Daily Confirmation Calls.

  Client Interface: Retail Spectrum Institutional Spectrum Wealth Spectrum Positioning Leverage reach and offer integrated product and service portfolio Leverage relationship with growing SME segment spread across India To be a client centric wealth management advisory firm for the high net worth individuals (HNIs) Products and Services  Equity Trading  Commodity Trading  Online Investment portal  Personal Financial Services - Investment Solutions - Insurance - Loans  Consumer Finance  Insurance Solutions - Life Insurance  Institutional Broking    Investment Banking Portfolio Management Services  Insurance Advisory Premier Client Group Services  Arts Initiative  International Advisory Fund Management Service (AFMS) .

.4 OBJECTIVE OF THE STUDY Any investor’s vision is a long term investment ad short term investment and gets high returns by bearing high risk. For that objective need to be climbed successfully an so objectives of this project are. 1.- Non-Life Insurance 1.  Studying the performance of investing equity & derivative for few months considering their analysis. 1) To find the RIGHT SCRIPT to buy and sell at the RIGHT TIME 2) To get good return.  Company proves to an option for the investors.3NEED OF THE STUDY  Different kinds of investors to invest in equity & derivative and to face high risk and get high returns.

6LIMITATIONS OF THE STUDY This project was restricted for two months. 1. performance of the companies is not possible. EPS. hence exhaustive data is not available upon which conclusions can be relied. 1) Investment in Securities carry risk so investment in Equity & Derivative is also carrying risk on the basis of the market. 1) Analyzing and observing the investment opportunities. . 1. 4) To know the outcome of Equity and Derivative.3) To know how derivatives can be use for hedging. 5) How to achieve Capital appreciations. P/E ratio etc. 2) Analyzing the performance of Equity and Derivative market with the help of NAV. 2) Factors affecting the Market Price of Investment may be due to Market forces.5METHODOLOGY OF THE PROJECT Defining objective won’t suffice unless and until a proper methodology is to achieve the objectives. and so all the data is not available.

2. DATA PROCESSING & ANALYSIS .

Thus.  It is a stock or any other security representing an ownership interest. 00. 00. each called a share.000 equity shares of Rs 10 each.2.1 Equity Total equity capital of a company is divided into equal units of small denominations. Each such unit of Rs 10 is called a Share.000 units of Rs 10 each. For example:In a company the total equity capital of Rs 2. . The holders of such shares are members of the company and have voting rights. 00. Benefits from Equity The benefits distributed by the company to its shareholders can be: 1) Monetary Benefits and 2) Non Monetary Benefits. 00.000 is divided into 20.  It proves the ownership interest of stock holders in a company. the company then is said to have 20.

in practice. Hence if X Ltd. would entitle you to Rs 400 as dividend. Bonuses and rights issues are two such noticeable benefits. profits are re-invested in the business. earns a profit of Rs 40 crore and decides to distribute Rs 2 to each shareholder. bonuses carry certain latent advantages such as tax benefits. Companies generally do not distribute all their profits as dividend. A company can issue dividend in two forms: a) Interim Dividend and b) Final Dividend. better future growth potential. While final dividend is distributed only after closing of financial year. Prima facie. Hence. Dividend: An equity shareholder has a right on the profits generated by the company. and an increase in the floating stock of the company. etc. this means an increase in the value of the company usually reflected in its share price. Dividend is an earning on the investment made in shares. Bonus: An issue of bonus shares is the distribution free of cost to the shareholders usually made when a company capitalizes on profits made over a period of time. just like interest in case of bonds or debentures. Non-Monetary Benefits: Apart from dividends and capital appreciation. Monetary Benefits: A. This is a return that you shall earn as a result of the investment made by you by subscribing to the shares of X Ltd. after which the value of each share is Rs 35. a holding of 200 shares of X Ltd. 2. However. This means that your capital has appreciated by Rs 3000. Simply put. it does not affect the wealth of shareholders. investments in shares also fetch some type of non-monetary benefits to a shareholder. Rather than paying dividends.1. A. if you purchase 200 shares of X Ltd at Rs 20 per share and hold the same for two years. companies give additional shares in a pre-defined ratio. Capital Appreciation: A shareholder also benefits from capital appreciation. Profits are distributed in part or in full in the form of dividends. which results in appreciation in the value of shares. Hence . This means an increase in net worth. companies at times declare an interim dividend during a financial year. B. As the companies grow.

every existing shareholder of X Ltd would receive one additional share free for each share held by him. the share price may rise or fall on the bonus announcement. this results in an expanded capital base. Industry Risk.if X Ltd decides to issue bonus shares in a ration of 1:1. taking the bonus into account. Risks In equity investment: Although an equity investment is the most rewarding in terms of returns generated. This gets reflected in the appreciation of share value. Interest Rate Risk. Business Risk. the share price would also ideally fall by 50 percent post bonus. B. Also. Rights Issue: A rights issue involves selling of ordinary shares to the existing shareholders of the company. The benefit of a rights issue is that existing shareholders maintain control of the company. Of course.         Market/ Economy Risk. Financial Risk Exchange Rate Risk. Inflation Risk. A company wishing to increase its subscribed capital by allotment of further shares should first offer them to its existing shareholders. How to overcome risks: . Management Risk. However. certain risks are essential to understand before venturing into the world of equity. after which the company is able to perform better. depending upon market expectations.

which cannot be reduced by strategies such as diversification. The benefits of creating a well diversified portfolio can be gauged from the fact that as you add more shares to your portfolio. diversifying across sectors and industries reaps the real benefits of diversification. theoretically. The same logic can be extended to a sector or an industry. the weightage of each company’s share gets reduced. the company specific risk reduces. Selection of Shares: Proper selections of shares are of two types:1. research reports published by equity research houses. Sector specific risks get minimised when shares of other sectors are added to the portfolio. As your portfolio expands to include shares of more companies. This is because a recession or a downtrend is not seen in all sectors together at the same time. As these risks cannot be diversified. These risks are called systematic risk as they arise from the system. The process of Diversification: When you hold shares in a single company. It can be done by reading and assessing the company’s annual reports. investors are rewarded for taking systematic risks for equity investment. Hence any adverse event related to any one company would not expose you to immense risk. However all risks cannot be reduced: Though it is possible to reduce risk. the industry it operates in and the overall market scenario. you run the risk of a large magnitude.Most risks associated with investments in shares can be reduced by using the tool of diversification. such as interest rate risk and inflation risk. Purchasing shares of different companies and creating a diversified portfolio has proven to be one of the most reliable tools of risk reduction. Fundamental analysis: It involves in –depth study and analysis of the prospective company whose shares we want to buy. research analysis published by the media and discussions with the company’s management or the other experienced investors. the process of equity investing itself comes with certain inherent risks. In fact. .

Buy Low. . This capital is subdivided into shares (or stocks). major price fluctuations in equities are not uncommon. EPS is the net profit divided by the total number of shares.2. which generate stock prices charts indicating upward. Earnings per Share (EPS): How well the company is doing EPS is the total earning or profits made by company (during a given period of time) calculated on per share basis. Capital: Rs 100 crore (Rs 1 billion). Any investor should be aware of the fact where all the investor is following i.. Downward and sideways movements of the stock price over the stipulated time period. It can be done by software programs. That means we should buy stocks at a low price and sell them at a high price. 1. Therefore.e. As the business grows and makes profits. it becomes equally important to consider ‘when’ to buy or sell. When to buy Three ways by which we can figure that out what it is about this stock that makes it hot. Example: Company XYZ Ltd. When to buy & sell shares: With high volatility prevailing in the market. it adds to its capital. It aims to give an exact evaluation of the returns that the company can deliver. Net Profit in 2003-04: Rs 20 crore (Rs 200 million). Sell High. apart from ascertaining ‘which’ stock to buy or sell. The capital is divided into 100 million shares of Rs 10 each. Technical analysis: It involves studying the prices movement of the stock over an extended period of time in the past to judge the trend of the future price movement. Capital is the amount the owner has in the business.

that's a bad sign. Company XYZ Ltd Market price = Rs 100 EPS = Rs 2 PE ratio = 100/ 2 = 50 . The average PE ratio for companies in an industry group is often given in investment journal. and the price of the share will go up. Price earnings ratio (PE ratio): How other investors view this share An indicator of how highly a share is valued in the market. Companies are required to publish their quarterly results. That's because. the market places a greater value on that stock. The ratio tends to be high in the case of highly rated shares. If the EPS declines. it means the company is doing well. It arrived at by dividing the closing price of a share on a particular day by EPS. for some reason. check for the trend in their EPS. 2. Keep an eye out for these results. If a company's EPS has grown over the years.EPS = net profit/ number of shares EPS = Rs 20 crore (Rs 200 million)/ 10 crore (100 million) shares = Rs 2 per share Lesson to be learnt 1. Two stocks may have the same EPS. PE = market price/ EPS let’s take an example of two companies. and the stock price falls. 3. But they may have different market prices. PE ratio is the market price of the stock divided by its EPS.

But because their market price is different. 3. the PE ratio is different. For instance. Forward PE: Looking ahead The stock market is not nostalgic. And we think it is a good time to buy the shares of the company now. Suddenly. . the company's stock shoots up.Company ABC Ltd Market price = Rs 200 EPS = Rs 2 PE ratio = 200/ 2 = 100 In the above cases. To illustrate what we have been talking about. the demand for the shares has gone up. Because stock prices are based on expectations of future earnings. As a consequence. This is known as the forward PE. It is forward looking. Lesson to be learnt  In the case of EPS. Forward PE is the current market price divided by the estimated EPS. usually for the next financial year. it is not so much a high or low EPS that matters as the growth in the EPS. Forward PE = Current market price/ estimate EPS for the next financial year. that has made losses for several years. Because investors think the company will do better in the future because of the package and new leadership. A high PE company is one where investors have hopes that earnings will rise. and its earnings will go up. both companies have the same EPS. The company's PE reflects investors' expectations of future growth in the EPS. gets a rehabilitation package from its bank and a new CEO. let's take the example of Infosys Technologies. which is why they buy the share. it sometimes happens that a sick company. analysts usually estimate the future earnings per share of a company.

15/ 90 = 22.15/ 67 = 30.7 is not high.82 = 35.Trailing 12-month EPS = Rs 56. Lesson to be learnt  Sometimes. The target price can be computed by assessing the company’s estimated financial performance over the next 3 to 5 years.95 Estimated EPS for 2004-05 = Rs 67 Estimated EPS for 2005-06 = Rs 90 these figures are according to brokers' consensus estimates.15 PE = Price/EPS = 2043. investors look out for a low PE stock.  Keep tab on the business news to check out the company's prospects in the future When to sell Stock Reaches Fair Value or Target Price This is the easiest part of selling. Forward PE = current market price/ estimated EPS for next financial year Forward PE for 2004-05 = 2043. expecting that its price will rise in the future.70 With an EPS growth of over 30%. But sometimes. a forward PE of 22. computing its EPS and using an acceptable P/E ratio to compute the .15/ 56. low PE stocks may remain low PE stocks for ages. because the market doesn't fancy them. It is the main reason why we chose to buy it on the first place.49 Forward PE for 2005-06 = 2043. indicating that there is scope to be optimistic about the stock's price. We should sell when a stock reaches its fair value.82 (EPS of the last four quarters) Closing price on January 6 = Rs 2043.

The lower price i.e. is called ‘Stop Loss’. it may be time to sell. Catastrophic events may force investors to sell an investment if his household is affected by it.future market price. the price at which we are willing curtail our loss. Even the most carefully planned strategy may not work. . then it is best to sell. We should decide how much loss we are willing to book in the stock. Takeover news When one of your stock holding is getting bought by other companies. Sure. Need the money The generally happens due to improper planning. we noticed that stock B fallen to below 50% of our calculated fair value. However. compute our target price. The book is unclean When management left their post abruptly or when the SEBI conduct a criminal investigation on a company.. Based on this future estimated price and our required return on our investment. cash flow or other financial statement published by management. Meanwhile. you might like the acquiring company but you still need to figure out the fair value of the common stock of the acquiring company. it may be time to sell. things happen. Other Investment Opportunity Let us consider we bought stock A and it has risen to 10% below its fair value. If the acquiring company is overvalued. This is an easy decision. Our assumption may be inaccurate as a lot of fair value calculation is based on the company's balance sheet. When the prices reaches Stop loss It is advisable to always consider the possibility of a loss before making our investment.

Value at Risk (VaR) margin : VaR Margin is at the heart of margining system for the cash market segment. VaR is a technique used to estimate the probability of loss of value of an asset or group of assets (for example a share or a portfolio of a few shares). this new product by Google might hurt profit margins and eventually the fair value of the stock. the company that you hold might have to spend more money in order to fend off competition. For example. Types of Cash market margin 1. we should sell immediately. There are factors that we might not take into accounts when researching a particular company. Inaccurate Fair Value Calculation As investors. 2. we won't know how much our potential return is or when we should sell it. a confidence level and a loss amount . based on the statistical analysis of historical price trends and volatilities. Mark to market Margin 1. When we have no valid reason to buy. This is the easiest way of losing money. Any advertising business such as newspapers or cable network. satyam scandal. New Competitors with Better Products When new competitors sprung up. A VaR statistic has three components: a time period. Value at Risk (VaR) margin. Extreme loss margin 3. Recent example includes the emergence of pay-per click advertising by Google. Sacrificing a 10% of return in order to earn a 50% return is a sensible way to do that. Not having a valid reason to Buy When we don't know why we bought a particular stock. we sometimes made errors in our fair value calculation. Our goal as an investor is to maximize our investment return.We will sell our stock A and buy stock B.

06*(January 1. volatility for January 1. Based on statistical analysis.4 lakhs at 99% confidence level. 2009 LN return)*(January 1. based on VaR methodology. Its market value today is Rs. 2009 / close price on Dec 31. 2009 by using LN (close price on Jan 1. say that the value of the shares would not go down by more than Rs. 2008. say that 1-day VaR is Rs. 2008. first we need to compute day’s return for Jan 1.(or loss percentage). a VaR Margin is a margin intended to cover the largest loss (in %) that may be faced by an investor for his / her shares (both purchases and sales) on a single day with a 99% confidence level. 2008 volatility)*(Dec 31.50 lakhs but its market value tomorrow is obviously not known. Use the following formula to calculate volatility for January 1. 2008 volatility)+ 0. In the stock exchange scenario. To compute. what is the maximum value that an asset or portfolio may lose over the next day? Example:Suppose shares of a company bought by an investor. This implies that under normal trading conditions the investor can. 2009: Square root of [0. 2009 LN return)] . 2008). with 99% confidence. How is VaR margin calculated? VaR is computed using exponentially weighted moving average (EWMA) methodology. Keep these three parts in mind as we give some examples of variations of the question that VaR answers:  With 99% confidence. Take volatility computed as on December 31.94*(Dec 31. 94% weight is given to volatility on ‘T-1’ day and 6% weight is given to ‘T’ day returns.4 lakhs within next 1-day. The VaR margin is collected on an upfront basis (at the time of trade). An investor holding these shares may.

Then 5% (which is higher than 3.000/- How is Mark-to-Market (MTM) margin computed? .94*(0. The Extreme loss margin for any stock is higher of 1.1%.08701)] = 0. 2009 = Rs. 2008 = 0.10 lakhs would be 1. was 13%. total margin payable (VaR margin + extreme loss margin) on a trade of Rs. Example: In the Example given at question 10. Suppose the 1. 2008 = Rs.5 times standard deviation of daily LN returns is 3. 2009 volatility = Square root of [(0. 360 Closing price on January 1.08701)* (0. 80. the total margin on the security would be 18% (13% VaR Margin + 5% Extreme Loss Margin). by taking the price data on a rolling basis for the past six months.5 times the standard deviation of daily LN returns of the stock price in the last six months or 5% of the value of the position. Therefore.1%) will be taken as the Extreme Loss margin rate. 330 January 1.0314)*(0.037 or 3.7% How is the Extreme Loss Margin computed? The extreme loss margin aims at covering the losses that could occur outside the coverage of VaR margins.0314) + 0.06 (0. As such. This margin rate is fixed at the beginning of every month.Example: Share of ABC Ltd Volatility on December 31.0314 Closing price on December 31. the VaR margin rate for shares of ABC Ltd.

[Total Sale Value (Total Sale Qty X Close price)] 2. For example.on his buy position. 000/ . called bases (underlying asset.75/-. commodity or any other asset. or reference rate). in a contractual manner. wheat farmers may wish to sell their harvest at a future date to eliminate the risk of a change in prices by that date.MTM is calculated at the end of the day on all open positions by comparing transaction price with the closing price of the share for the day.Total Buy Value] . index. Example: A buyer purchased 1000 shares @ Rs. In case. then buy position would show a further loss of Rs. MTM Profit/Loss = [(Total Buy Qty X Close price)] . In case price of the share falls further by the end of January 2.000/-. 2008 to Rs.100/. Such a transaction is an example of a derivative. that is net quantity position is zero. forex. The price of this derivative is driven by the spot price of wheat which is the "underlying".25. but there could still be a notional loss / gain (due to difference between the buy and sell values).5. 2008 (that is next day of the trade) before the trading begins. 70/-.2 Derivatives Derivative is a product whose value is derived from the value of one or more basic variables. then the buyer faces a notional loss of Rs. The underlying asset can be equity. . In technical terms this loss is called as MTM loss and is payable by January 2. This MTM loss is payable. If close price of the shares on that day happens to be Rs. 2008. buy and sell quantity in a share are equal. such notional loss also is considered for calculating the MTM payable. on a given day.at 11 am on January 1.

3. risk instrument or contract for differences or any other form of security. Increased integration of national financial markets with the international markets. The forward contracts are normally traded outside the exchanges. The other party assumes a short position and agrees to sell the asset on the same date for the same price.In the Indian context the Securities Contracts (Regulation) Act. A contract which derives its value from the prices. 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. Types of derivatives: 1. Forward Contract: A forward contract is an agreement to buy or sell an asset on a specified date for a specified price. Other contract details like delivery date. providing economic agents a wider choice of risk management strategies. Increased volatility in asset prices in financial markets. loan whether secured or unsecured. Innovations in the derivatives markets. 2. reduced risk as well as transactions costs as compared to individual financial assets. Factors driving the growth of derivatives Over the last three decades. and 5. . A large variety of derivative contracts have been launched at exchanges across the world. Some of the factors driving the growth of financial derivatives are: 1. or index of prices. Derivatives are securities under the SC(R)A and hence the trading of derivatives is governed by the regulatory framework under the SC(R)A. A security derived from a debt instrument. 1956 (SCRA) defines "derivative" to include1. Development of more sophisticated risk management tools. the derivatives market has seen a phenomenal growth. share. of underlying securities. which optimally combine the risks and returns over a large number of financial assets leading to higher returns. Marked improvement in communication facilities and sharp decline in their costs. price and quantity are negotiated bilaterally by the parties to the contract. 2. 4.

. still the counterparty risk remains a very serious issue. Limitations of Forward Contract Forward markets world-wide are afflicted by several problems:  Lack of centralization of trading. and  Counterparty risk In the first two of these. When one of the two sides to the transaction declares bankruptcy. Even when forward markets trade standardized contracts. • If the party wishes to reverse the contract. The forward market is like a real estate market in that any two consenting adults can form contracts against each other.  Illiquidity. the contract has to be settled by delivery of the asset. • Each contract is custom designed.The salient features of forward contracts are: • They are bilateral contracts and hence exposed to counter-party risk. • The contract price is generally not available in public domain. and hence is unique in terms of contract size. and hence avoid the problem of illiquidity. the basic problem is that of too much flexibility and generality. but makes the contracts non-tradable. • On the expiration date. which often results in high prices being charged. expiration date and the asset type and quality. it has to compulsorily go to the same counter-party. the other suffers. This often makes them design terms of the deal which are very convenient in that specific situation. Counterparty risk arises from the possibility of default by any one party to the transaction.

More than 99% of futures transactions are offset this way. the exchange specifies certain standard features of the contract. To facilitate liquidity in the futures contracts.Exchange Traded Derivative" Forward" amount in billion of $ 7000 6000 5000 4000 3000 2000 1000 0 Types 2. But unlike forward contracts. the futures contracts are standardized and exchange traded. The standardized items in a futures contract are:     Quantity of the underlying Quality of the underlying The date and the month of delivery The units of price quotation and minimum price change . Future Contracts: Futures markets were designed to solve the problems that exist in forward markets. 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. a standard quantity and quality of the underlying instrument that can be delivered. A futures contract may be offset prior to maturity by entering into an equal and opposite transaction. It is a standardized contract with standard underlying instrument. (or which can be used for reference purposes in settlement) and a standard timing of such settlement.

00 and we entered in forward contract to buy this stock in 3 months time for $81.00.00 = $2.$81.00 . X is the delivery price. If after three months price is more than $81.00.00.00 (that means we hope that price will not fall lower than $81.00 (as stated by forward contract) and after reselling it on the market our payoff will be P = $83.S.X.00 If at forward maturity the stock price falls to $78. let's say the current price of the stock is $80. Similarly. than our loss will be . than we can buy the same stock for $81. For example.00). the payoff from a short position is P = X . where S is a spot price of the security at time of contract maturity. let's say $83. Location of settlement The payoff from a long position in a forward contract is P = S .

On the Friday following the last Thursday.00 The graphs above illustrate the forward contract payoff patterns for long and short positions.00 . This is the last day on which the contract will be traded.month expiry is introduced for trading.P = $81. The index futures contracts on the NSE have one.month.00 = $3.$78. . a new contract having a three. two-month and three months expiry cycles which expire on the last Thursday of the month. at the end of which it will cease to exist. Thus a January expiration contract expires on the last Thursday of January and a February expiration contract ceases trading on the last Thursday of February. Expiry date: It is the date specified in the futures contract. Contract cycle: The period over which a contract trades. Futures price: The price at which the futures contract trades in the futures market. Distinction between futures and forwards Futures Trade on an organized exchange Standardized contract terms hence more liquid Follows daily settlement Forwards OTC in nature Customised contract terms hence less liquid Settlement happens at end of period Future terminology Spot price: The price at which an asset trades in the spot market.

If the balance in the margin account falls below the maintenance margin. . at the end of each trading day. Initial margin: The amount that must be deposited in the margin account at the time a futures contract is first entered into is known as initial margin. In a normal market.Contract size: The amount of asset that has to be delivered less than one contract. 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. the margin account is adjusted to reflect the investor's gain or loss depending upon the futures closing price. Marking-to-market: In the futures market. This reflects that futures prices normally exceed spot prices. Maintenance margin: This is somewhat lower than the initial margin. Also called as lot size. This measures the storage cost plus the interest that is paid to finance the asset less the income earned on the asset. This is set to ensure that the balance in the margin account never becomes negative. basis can be defined as the futures price minus the spot price. This is called marking-to-market. Basis: In the context of financial futures. basis will be positive. There will be a different basis for each delivery month for each contract. 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.

The holder does not have to exercise this right. An option gives the holder of the option the right to do something. Exchange Traded Derivatives "options" 3500 3000 2500 2000 1500 1000 500 0 types In billions of $ . the two parties have committed themselves to doing something. Option Contracts Options are fundamentally different from forward and futures contracts.3. In contrast. the purchase of an option requires an up-front payment. in a forward or futures contract. Whereas it costs nothing (except margin requirements) to enter into a futures contract.

Most exchange-traded options are American. the strike date or the maturity. 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. Stock options: Stock options are options on individual stoc ks. and properties of an American option are frequently deduced from those of its European counterpart. · Buyer of an option: The buyer of an option is the one who by paying the option premium buys the right but not the obligation to exercise his option on the seller/writer. Option price/premium: Option price is the price which the option buyer pays to the option seller. index options contracts are also cash settled. American options: American options are options that can be exercised at any time upto the expiration date. Options currently trade on over 500 stocks in the United States. the exercise date. . A contract gives the holder the right to buy or sell shares at the specified price. Expiration date: The date specified in the options contract is known as the expiration date.Option Terminology Index options: These options have the index as the underlying. Strike price: The price specified in the options contract is known as the strike price or the exercise price. · Writer of an option: The writer of a call/put option is the one who receives the option premium and is thereby obliged to sell/buy the asset if the buyer exercises on him. It is also referred to as the option premium. Some options are European while others are American. Like index futures contracts.

spot price < strike price). the maximum time value exists when the option is ATM.e. the call is said to be deep ITM. its intrinsic value is zero. The intrinsic value of a call is the amount the option is ITM.i. Intrinsic value of an option: The option premium can be broken down into two components intrinsic value and time value. Usually. Putting it another way. If the index is much higher than the strike price. K — St]. 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. 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. all else equal. A call option on the index is said to be in-the-money when the current index stands at a level higher than the strike price (i. Both calls and puts have time value.In-the-money option: An in-the-money (ITM) option is an option that would lead to a positive cash flow to the holder if it were exercised immediately. the greater of 0 or (K — St). In the case of a put.e. the intrinsic value of a put is Max[0. the put is ITM if the index is below the strike price. spot price >strike price). (St — K)] which means the intrinsic value of a call is the greater of 0 or (St — K). the intrinsic value of a call is Max[0. . an option should have no time value. Time value of an option: The time value of an option is the difference between its premium and its intrinsic value. At expiration. K is the strike price and St is the spot price. An option that is OTM or ATM has only time value. In the case of a put.e. The longer the time to expiration. Similarly.e. the greater is an option's time value. spot price = strike price). if it is ITM. If the index is much lower than the strike price. An option on the index is at-the-money when the current index equals the strike price (i. the put is OTM if the index is above the strike price. the call is said to be deep OTM. If the call is OTM. Out-of-the-money option: An out-of-the-money (OTM) option is an option that would lead to a negative cash flow if it were exercised immediately.

 The payoff does not include the initial cost (or the initial cash inflow) at the time the portfolio was set up.  The (gross) payoff is the value (positive or negative) of the option or portfolio at maturity.sell the right to someone else. Therefore we can sell the asset at a ii) higher price than is the current market value. 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. This will allow them to sell the asset at a specific price.  We will be looking at a number of option strategies and combinations. Profit / payoff in Option  The payoff to a derivative portfolio is the market value of the portfolio at expiration. The writer feels that asset will devaluate over the time period of the contract. Short a put:. This is a bearish position. This is a bullish position. We feel that the price in the future will exceed the strike price. We feel that the asset will devalue over the time of the contract. (Also gross payoff). i) Long a put:. This person is bearish on that asset. (Net profit). This is a bullish position.person sells the right ( a contract) to someone that allows them to buy to buy an asset at a certain price.person buys the right (a contract) to buy an asset at a certain price.  The profit on a derivative portfolio is the payoff less the cost of acquisition or assembling the portfolio. ii) Short a call:. . Call option: A call option gives the holder the right but not the obligation to buy an asset by a certain date for a certain price. We feel the price will go down and we do not.There are two basic types of options. i) Long a call:.Buy the right to sell an asset at a pre-determined price. call options and put options.

X is a strike price and OP is an option price. If S is a final price of the option underlying security.cost of buying options or other securities+ premium received for selling options or other securities. than the profit is . Net profit= (gross) Payoff.

00 As we see in latter case we lose money. because it doesn't make sense to buy security for higher price than it costs on the market. The reason is that increase of stock price just by $1.00 = $1. For example if the stock price is $56.00 if the stock price is $54. If option price is less than $53.00.00 This latter case corresponds to option graph intersection point with horizontal axis on the drawing above.00 for this option.00.00 above the strike ($53. let's say the stock price is $50. we will not exercise the option to buy the stock. we will exercise the option. If stock price is more than $53. If the stock price at exercise time is $55. we bought European call option with strike $53.Long Call: P = S .00 .00 = .$2.00 = $0.S . after exercising the option and immediately reselling the acquired stock our profit will be: P = $56.00 than we exercise the option to cover our initial expenses(equal to option price): P = $55.$2.$2.00.00 .00. Distinction between futures and options .$53.OP Short Put: P = S . than the profit is: P = $54.00.00 .X + OP For example.00 and paid $2.00 of initial investment.00.$53. although we still exercise the option to recover at least $1.S + OP Long Put: P = X .OP Short Call: P = X .X .00 .$53.$1.00 . In this case we lose all initial investment equal to the option price $2.00) doesn't cover our initial investment of $2.00 .00.

Hedgers are those who protect themselves from the risk associated with the price of an asset by using derivatives. Only short at risk. hedgers use futures for protection against adverse future price movements in the underlying cash commodity. They actually bet on the future movement in the price of an asset. A person keeps a close watch upon the prices discovered in trading and when the comfortable price is reflected according to his wants. Speculators: Speculators are somewhat like a middle man. Price is always positive. Types of traders in derivative market 1. Take an example: A Hedger pay more to the farmer or dealer of a produce if its prices go up. the futures position will profit if the price of the produce raise enough to offset cash loss on the produce. price moves. 2. he hedges the risk exposure by buying enough future contracts of the produce to cover the amount of produce he expects to buy. Hedgers:. he sells futures contracts. Hedgers are often businesses. Same as futures. Nonlinear payoff. Strike price is fixed. or individuals. who at one point or another deal in the underlying cash commodity. with novation Exchange defines the product Price is zero. They are never interested in actual owing the commodity. strike price moves Price is zero Linear payoff Both long and short at risk Options Same as futures. They will just buy from one end and sell it to the other in anticipation of future price movements. . In general. For protection against higher prices of the produce. Since cash and futures prices do tend to move in tandem.Futures Exchange traded. In this way he gets an assured fixed price of his produce.

Selling a futures contract in anticipation of a price decrease is known as ‘going short’. Buying a futures contract in anticipation of price increases is known as ‘going long’. he can make more money in the futures market faster because prices tend. The actual value of the contract is only exchanged on those rare occasions when delivery takes place. yet he can ride on the full value of the contract as it moves up and down. These participants include independent floor traders and investors. 3. a person who has been officially chosen to make a .  Futures are highly leveraged investments. Speculative participation in futures trading has increased with the availability of alternative methods of participation. to change more quickly than real estate or stock prices. The money he puts up is not a down payment on the underlying contract. The trader puts up a small fraction of the value of the underlying contract as margin. Speculators have certain advantages over other investments they are as follows:  If the trader’s judgment is good. They handle trades for their personal clients or brokerage firms . on average.They are the second major group of futures players. but a performance bond. Arbitrators: According to dictionary definition.

4 times during market hours and finally at the end of the day. higher the margins. It is a product developed by Chicago Mercantile Exchange (CME) and is extensively used by leading stock exchanges of the world. Obviously.once at the beginning of the day. It generates a range of scenarios and highest loss scenario is used to calculate the initial margin. The margin calculation is carried out using software called .decision between two people or groups who do not agree is known as Arbitrator. higher the volatility. he will take offsetting positions in both the markets to lock in a profit. The SPAN® margins are revised 6 times in a day . If he finds future prices of a commodity edging out with the cash price.SPAN® (Standard Portfolio Analysis of Risk). Types of Futures and Options Margins Margins on Futures and Options segment comprise of the following: 1) Initial Margin 2) Exposure margin In addition to these margins. In commodity market Arbitrators are the person who takes the advantage of a discrepancy between prices in two different markets. SPAN® uses scenario based approach to arrive at margins. in respect of options contracts the following additional margins are collected 1) Premium Margin 2) Assignment Margin How is Initial Margin Computed? Initial margin for F&O segment is calculated on the basis of a portfolio (a collection of futures and option positions) based approach. Moreover the commodity future investor is not charged interest on the difference between margin and the full contract value. . The margin is monitored and collected at the time of placing the buy / sell order.

then the premium margin is Rs.How is exposure margin computed? In addition to initial / SPAN® margin. if 1000 call options on ABC Ltd are purchased at Rs. 20/-. For example. For futures on individual securities and sell positions in options on individual securities. The premium margin is paid by the buyers of the Options contracts and is equal to the value of the options premium multiplied by the quantity of Options purchased. Assignment Margin is collected on assignment from the sellers of the contracts. Exposure margins in respect of index futures and index option sell positions have been currently specified as 3% of the notional value. a Premium Margin is charged to trading members trading in Option contracts. How Marked to Market Margins are computed? . 20. How is Premium and Assignment margins computed? In addition to Initial Margin. The margin is to be paid at the time trade. the exposure margin is higher of 5% or 1.000.5 standard deviation of the LN returns of the security (in the underlying cash market) over the last 6 months period and is applied on the notional value of position. and the investor has no other positions. exposure margin is also collected.

3 Comparative Analysis . The profits/losses arising from the different between the trading price and the settlement price are collected/ given to all clearing members.The open positions (gross against clients and net of proprietary/ self trading) in the futures contracts for each member are marked to market to the daily settlement price at the end of each day is the weighted average price of the last half an hour of the futures contract. Therefore. Option contracts:. The reporting of collection of client level margins plays a crucial role not only in ensuring that members collect margin from clients but it also provides the clearing corporation with a record of the quantum of funds it has to keep in trust for the clients. How Client Margins are computed? Client Members and Trading Member are required to collect initial margins from all their clients. The collection of margins at client level in the derivatives markets is essential as derivatives are leveraged products and non-collection of margins at the client level would provide zero cost leverage. Future contracts:.1.the marked o market for option contracts is computed and collected as part of the Initial Margin in the form of Net Option Values. 2. The reporting of the collection of the margins by the clients is done electronically through the system at the end of each trading day. Trading members are also required to report on a daily basis details of the amount due and collected from their clients. The Initial Margin is collected on an online real time basis based on the data feeds given to the system at discrete time intervals. Clearing members are required to report on a daily basis details in respect of such margin amounts due and collected from their Trading members/ clients clearing and settling through them. In the derivative markets all money paid by the client towards margins is kept in trust with the Clearing House/ Clearing Corporation and in the event of default of the Trading or Clearing Member the amounts paid by the client towards margins are segregated and not utilized towards the dues of the defaulting member. 2.

3 months) Speculations Hedgers Arbitragers Safe Investors Hedgers No such things Last Thursday of any month Types of margin Expiry Date of contract Comparative analysis is easy to understand when we are analysis with the example of the real market situation. Example:- .Basis Return Equity Capital appreciation Derivative Capital gain Risk Dividend Income Company Specified Price Fluctuation Market risk Sector specified Credit risk Global risk Liquidity risk General Market Risk VaR Settlement risk Initial margin Extreme Loss Exposure margin Duration Mark to market Generally Long term Premium margin Short term Participants (more than 1 yr) Long term Investors (Max. Now I would like to quote a real life example during my internship where I understood the actual comparison of equity and derivative market.

But he has to purchase the share in a lot size.000/.and diversified risk so he buys different scrips. 1.in equity cash market he has to pay Rs. 2 lots (100 shares each) of Religare Enterprises at Rs. I. II. So he purchases 10 RIL shares of Rs.000/But he has to pay the full amount of money at T+3 basis. 15 Religare Enterprises Shares of Rs.00. Mr.000/.00/. 1 lot (50 shares) of L&T at 2650/-. Jaichand has to pay Rs.though he has capital of Rs. 1250 each and 10 BHEL shares of Rs. 20 ICICI bank shares of Rs. Jaichand gets return on equity by two ways. 1595/each.and he wants to invest it in share market. 1. 1.each. So he is able to purchase the 1 lot (100 shares) of RIL at Rs. Second is by getting a dividend income from the holding shares.00.00. 2350/-. Risk: There are four types of risk involved in equity cash market. 5. 10 Tata power shares of Rs. 800/-.and 1 lot (70 shares) of ICICI bank at Rs. 5. 000/. 1. Jaichand gets return on equity derivative when the future prices of the shares are increase in short term called as capital gain through price fluctuation or through options premium. 2350/. 370/.as a margin money and he is able to purchase a shares worth Rs. Now suppose if he invest in equity derivative market then he will able to purchase the shares worth Rs.each. Returns Mr. 00. 800/.each.each. 10 L&T shares of Rs 800/.only. because of the margin payment. So for investing Rs. Now he has two options either to invest in equity cash market or equity derivative market (F&O). called as capital appreciation.000/. Now suppose if he invest in equity cash market and buy shares of Rs.00.000/.There was an investor Mr. 1. 370/. He has Rs.and gets the delivery of the shares. Jaichand. 00.000/. 00. Here Mr.00. . One is when the share price of the holding shares will increases in futures. So he has to pay the remaining amount on the 3rd day of the trading if he wants the delivery. 1.

e. .e. So generally it is for long term purpose. loans. It is calculated on nontradable assets i.If company is not performing well than process of the shares will declining and vice versa. oil & gas sector.In derivative market we have to calculate the market risk or mark to market risk involved in the stocks or securities. 3. 4. So Mr. that is the exposure to potential loss from fluctuations in market prices (as opposed to changes in credit status). 2. metal sector. Jaichand will not able to find a price( or a price within a reasonable tolerance in terms of the deviation from prevailing or expected prices) for one or more of its financial contracts in the secondary market. Market risk:. currencies etc. power sector. Consider the case of a counterparty who buys a complex option on European interest rates. There are four types of risk involved in equity derivative market.1. stocks. Credit risk: It may possible in derivative contract that the counterparty may be fail to perform the contract or say defaulted then it is a risk for us. 4. Jaichand has to consider all these risk factors while dealing in the equity cash market.The risk of non-payment of an obligation by a counterparty to a transaction. He is exposed to liquidity risk because of the possibility that he cannot find anyone to make him a price in the secondary market and because of the possibility that the price he obtains is very much against him and the theoretical price for the product. 3. It is calculated on the tradable assets i.. Liquidity Risk:.General market risk is also affect the equity cash market like inflation. Global risk:. 1. banking sector then prices of the shares will go down and vice versa. General market risk:. 2. Company Specified risk:. Settlement Risk:.If Mr.If the sector is not performing well i..If global cues are positive then prices will increases but if global cues are not good than prices of shares will go down. banks interest rates etc. exacerbated by mismatches in payment timings. Sector specified risks:.e.

In technical term this loss is called as MTM loss and is payable by May 13. This implies that under normal trading conditions the investors can with 99% confidence. Then 5% (which is higher than 4. III. Jaichand purchased 10 shares of RIL @ Rs. the total margin on the security would be 18% (13% VaR Margin + 5% Extreme Loss margin). 000/-.woud be 4.65%) will be taken as the Extreme Loss margin rate. Suppose that SD would be 1. 1. at 11 am on May 12. Jaichand has also seen the margin paid in the equity cash segment.000/. then buy postion would show a further loss of Rs.on his buy position. 1. Jaichand holding these shares may.Obviously. This MTM loss is payable by next day. total margin payable( VaR margin + extreme loss margin) on a trade of Rs. If close price of the shares on that happened to be Rs. 500/. 1. Jaichand has to consider all these factors while dealing in the equity derivative market. then the buyer faces a notional loss of Rs. 00. Therefore.5 x 3. 230/3.within next 1-day. jaichand bought shares of a company.In the above situation. 2009 (that is next day of the trade) before the trading begins.000/. 1. Now we will consider the margin payable under the equity derivatives segment. 2350/-. Its market value today is Rs.000/. 2200/-.65. Mark to Market Margin:- Now Mr. 2.00. we do not know what would be the market value of these shares next day. say that the value of shares would not go down by more than Rs. 00. Var Margin: . price of the shares falls further by the end of May 13 2009 to Rs. the VaR margin rate for shares of RIL was 13%. say that 1-day Var is Rs. Extreme loss margin: . 2009.So. In case. 23. . Margins: Now Mr. 1.Now Mr. Mr. As such.1= 4. Now Mr.at the 99% confidence level. 500/. 2350. based on VaR methodology.

then the premium margin Rs. As higher the volatility. Participants: Generally any long term investors can invest in equity or hedgers are investing in the equity.If 1000 call option on RIL are purchased at Rs. iv) Assignment Margin:. In derivative market mostly speculators and arbitragers are invested because they wanted quick money in short time period and hedgers are also invested in derivative market to reduce their risk. ii) Exposure Margin:. higher the initial margin. IV. 20. V.Assignment Margin is collected on assignment from the sellers of the contract. Any person who wants to be safe investors and wanted to earn a good amount of returns after a period of more than one year is also invested in equity. iii) Premium margin:. Here they get high returns on it because they are bringing high risk.000. Jaichand has no other positions. Duration: Generally equity market is a long term market and people invested in it for more than one year and then only they get good return on equity. 20/and Mr. While in derivative market investors are investing for less than one yea. Generally any safe investors can invest in it because here risk is comparatively low then derivative market. generally for 2 months or 3 months. who wants to reduce their risk.i) Initial Margin: The initial margin required to be paid by the investor would be equal to the highest loss the portfolio would suffer in any of the scenarios considered. .Exposure margins in respect of index futures and index option sell position are 3% of the notional value. The margin is monitored and collected at the time of placing the buy/ sell order.

Expiry date: It’s a last Thursday of any month in case of a derivative market but no such things in case of an equity market.VI. 3. FINDINGS Practical situation .

Global stocks rallied over the month on encouraging economic data and earnings reports. The Sensex settled the month with a gain of 8. However. which posted gains of over 20%. gaining 9.74% and 8. The BSE Mid and Small caps performance was in line with their larger counterparts. Intense buying spree was seen in Auto.70%. End of June 2009 turned out to be favorable for Indian stock markets. The MSCI AC World Index gained 8. huge overseas inflows and encouraging global cues. The buoyancy in the market continued in the second half helping the BSE Sensex to touch highest in more than a year towards the month end. the market corrected soon after the announcement of budget due to absence of major policy announcements. The performance of Indian markets was in line with the global counterparts. Metal. On the whole.05%. the market closed on a strong note. the market picked momentum from mid of the month. where as the MSCI Emerging Markets Index climbed 10. However. Institutional Activities . The sentiments remained negative during following few sessions.86% during the month.11% respectively over the month.12%. Realty.During my training internship I had experience of real practical situation in the stock Market and in an Organization. FMCG and IT indices. This was helped by better-thanexpected corporate earnings. Teck. Sector Performance All the BSE Sectoral indices wrapped the month with gains except Capital Goods. while the Nifty registered a rise of 8. The first few sessions saw optimism in the market on the hope that the government will make policy announcements in the budget. Health Care and Consumer Durable indices were among other top gainers whereas Oil & Gas index posted a marginal rise over the month.

policy announcements from the government and key economic data.40 bn) during the month. the Indian markets will be driven by the progress of monsoon.56 mn).250 crores (USD 2.800 crores (USD • 12. Major Corporate Events Infosys Technologies announced a 17.625 crores (USD 2. The exit strategy of the central banks will also have bearing on the global markets. Total income for the quarter slipped 21.63% over the month to USD 69.825.7%. Of the total capex plan. Exports growth continued to drop for a ninth consecutive month. Core sectors registered a growth of 6.757 crores (USD 6.658 crores (USD 554. Overall quarterly corporate . oil prices slipped marginally 0. with a growth of 2.527 crores (USD 318. Rs 10. Outlook On the international front.636 crores (USD 758. Income from operations for the quarter climbed 12. China and Japan.73% y-o-y to Rs 5.81 billion.59 mn). technology up-gradation and sustenance. Meanwhile.70% to USD 12. The domestic MFs were also net buyers with inflows of Rs 1. in rupee terms.45 a barrel. On the other hand.14 bn).28% y-o-y rise in • consolidated net profit for the quarter ended June 2009 to Rs 1.The FIIs flow remained positive in equities with net inflows of Rs 11. Consolidated revenues for the quarter climbed 12% y-o-y to Rs 2.5% for June 2009.10 bn) will be spent during 2009-10. Reliance Industries reported a drop of 11. exports plunged 27. It includes ongoing modernization and expansion. it dropped 17. It reported a 27% y-o-y rise in consolidated profit after tax for the quarter ended June 2009 to Rs 125 crores (USD 26.53% y-o-y in • net profit for the quarter ended June 2009 to Rs 3.83 bn). Steel Authority of India earmarked Rs 59.60 mn).1 mn).40% to Rs 61.14 bn) during the month. Key Macro Developments Industrial production continued to remain positive in May 2009. value addition. however. Punj Lloyd along with its group companies bagged orders • worth Rs 10.217 crores during June 2009. the markets will track developments and key economic data from US.50 crores (USD 381 mn) during the month.64% y-o-y to Rs 32. In dollar terms.472 crores (USD 1.000 crores (USD 2.48 bn) capex plan.

000 18. 50.00. 000 4. 000 6 00. The market is now hoping for better earnings growth prospects for FY2010.00.00.00. The manufacturing growth has also started showing signs of improvement. CONCLUSIONS . 000 crores) 2. with signs of economic recovery in developed countries and improvement in risk appetite globally. This coupled with encouraging earnings outlook for FY2010. provides good opportunity for investors to take active participation in the market and increase the equity allocation from long term perspective.000 1. 50. Comparative analysis of the traded value in the F & O Segment with the cash segment F& O( turnover in crores) Cash Segment( turnover in Jan 2009 12. 000 14. 000 Feb 2009 March 2009 April 2009 May 2009 June 2009 12. 000 From this table we can see that in practical life though equity cash segment is better than the derivatives because it involves lesser risk more numbers of investors are trading in derivatives (F& O) segment. 00. It is a major finding of the projects shows that by 60% to 70% investors are bear more risk and traded in derivatives market because they want to earn more profits by trading in derivatives. 000 5. Now. 00. 000 19. 00.00. the funds will flow in the emerging markets like India in search of higher growth.earnings performance was better than the market expectations. 4.000 16. 000 6. 00.

do not have equity derivatives markets. This was most apparent in index derivatives. Using notional value as the measure.  A number of cash equity markets. the 2 main US markets and the 2 cross-border European markets accounted for about 75% of the total. RECOMMENDATIONS . which make 99% of the notional value of equity derivatives. but derivatives turnover continued to rise steeply and steadily. but suspects that regularity barriers have effectively prevented the development.with a ratio significant differences between individual markets. markets in several developing Asian countries.This project has covered several areas. Comparison of their cash market volumes with those that do have derivative exchanges shows that the markets without derivatives are of similar size.  Equity derivatives businesses like interest derivatives are highly concentrated.  Equity market volume and derivative market notional value are strongly correlated. other markets have established niches and the dominance of the gig four is less evident. I Am not convinced that market or infrastructure differences explain this. In single stock derivatives.particularly in developing Asia. Since 2000. 5. Its main conclusions are:  Derivatives market growth continues almost irrespective of equity cash market turnover growth. Cash equity turnover has fallen in the developed markets.

 There must be more derivatives instruments aimed at individual investors. Nowadays more number of investors are shows their interest in derivatives market because it includes high return by bearing high risk. Two lacs to On Lacs. 6. Because nowadays derivatives market are increasing rapidly and it plays a major role in the whole securities market.  Speculation should be discouraged because it affects the market conditions badly and new investors are reducing their interest in the market. We can review the size of the contract from Rs. RBI should play a greater role in supporting Derivatives.  Derivatives market should be developed in order to keep it at par with other derivative market in the world. 73% of the respondents also held the same view. BIBLIORAPHY . In the FICCI survey.  SEBI should conduct seminars regarding the use of derivatives to educate individual investors  There is a need to have a smaller contract size in F & O Market.

L.com  www.bseindia.indiamart.finpipe.com .Books: Securities Laws and Regulations of Financial Markets  National Securities Depository Limited  Fundamentals of Futures & Options Markets.nseindia.S.John C.com  www.org  www.com  www.com  www.religaresecurities.com  www.moneycontrol.world-exchange. Gupta Websites: www. Hull  Financial Derivatives.