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INTRODUCTION OF DERIVATIVES:

The first step towards introduction of financial derivatives trading in India was the
promulgation of the Securities Laws (Amendment) Ordinance, 1995. It provided for
withdrawal of prohibition on options in securities.

The last decade, beginning the year 2000, saw lifting of ban on futures trading in many
commodities. Around the same period, national electronic commodity exchanges were also
set up.

Derivatives trading commenced in India in June 2000 after SEBI granted the final
approval to this effect in May 2001 on the recommendation of L. C Gupta committee.
Securities and Exchange Board of India (SEBI) permitted the derivative segments of two
stock exchanges, NSE and BSE and their clearing house/corporation to commence trading
and settlement in approved derivatives contracts.

Initially, SEBI approved trading in index futures contracts based on various stock
market indices such The National Stock Exchange (NSE), located in Bombay is the first
screen based automated stock exchange. It was set up in 1993 to encourage stock exchange
reform through system modernization and competition. It opened for trading in mid-1994 and
today accounts for 99% market shares of derivatives trading in India.

Bombay Stock Exchange (BSE), which is Asia's Oldest Broking House, was
established in 1875 in Mumbai. It is also called as Dalal Street. The BSE Index, called the
Sensex, is calculated by Free Float Method by including scripts of top 30companies selected
on the market capitalization criterion. 21 International Research Journal of Finance and
Economics - Issue 37 (2010)as, S&P CNX, Nifty and Sensex. Subsequently, index-based
trading was permitted in options as well as individual securities.

The trading in BSE Sensex options commenced on June 4, 2001 and the trading in
options on individual securities commenced in July 2001. Futures contracts on individual
stocks were launched in November 2001. The derivatives trading on NSE commenced with
S&P CNX Nifty Index futures on June 12, 2000. The trading in index options commenced on
June 4, 2001 and trading in options on individual securities commenced on July 2, 2001.
Single stock futures were launched on November 9, 2001. The index futures and options

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contract on NSE are based on S&P CNX. In June 2003, NSE introduced Interest Rate Futures
which were subsequently banned due to pricing issue.

The emergence of the market for derivative products, most notably forwards, futures
and options, can be traced back to the willingness of risk averse economic agents to guard
themselves against uncertainties arising out of fluctuations in asset prices. By their very
nature, the financial markets are marked by very high degrees of volatility. Through the use
of derivative products, it is possible to partially or fully transfer price risks by locking-in asset
Prices. As instruments of risk management, these generally do not influence the Fluctuations
in the underlying asset prices. However, by locking in asset prices, Derivative products
minimize the impact of fluctuations in asset prices on the profitability and cash flow situation
or risk-averse investors.

Derivatives are risk management instruments, which derive their value from an
underlying asset. The underlying asset can be bullion, index, share, bonds, Currency, Interest,
etc., Banks, Securities firms, Companies and investors to hedge risks, to gain access to
cheaper money and to make profit, use derivatives. Derivatives are likely to grow even at a
faster rate in future.

 DEFINITION OF DERIVATIVES:

“Derivative is a product whose value is derived from the value of an underlying asset
in a contractual manner. The underlying asset can be Equity, Forex, Commodity or any other
asset”.

 Securities Contract (Regulation) Act, 1956 (SC® A) defines “ debt instrument,
share, loan whether secured or unsecured, risk instrument or contract for
differences or any other form of security”
 A contract which derives its value from the prices, or index of prices, of
underlying securities.

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2. HISTORY OF DERIVATIVES MARKETS:

Early forward contracts in the US addressed merchants concerns about ensuring that
there were buyers and sellers for commodities. However “Credit Risk” remained a serous
problem. To deal with this problem, a group of Chicago, Businessmen formed the Chicago
Board of Trade (CBOT) in 1848. The primary intention of the CBOT was to provide a
centralized location known in advance for buyers and sellers to negotiate forward contracts.
In 1865 the CBOT went one step further and listed the first “Exchange Traded” derivatives
Contract in the US; these contracts were called “Futures Contracts”. In 1919 Chicago Butter
and Egg Board, a spin-off CBOT was reorganized to allow futures trading. Its name was
changed to Chicago Mercantile Exchange (CME). The CBOT and the CME remain the two
largest organized futures exchanges, indeed the two largest “Financial” exchanges of any
kind in the world today.

The first stock index futures contract was traded at Kansas City Board of Trade.
Currently the most popular stock index futures contract in the world is based on S&P 500
Index traded on Chicago Mercantile Exchange. During the Mid eighties, financial futures
became the most active derivative instruments Generating columns many times more than the
commodity futures. Index futures, futures on T-Bills and Euro-Dollar futures are the three
most popular futures contract traded today. Other popular international exchanges that trade
derivatives are LIFFE in England, DTB in Germany, SGX in Singapore, TIFFE in Japan,
MATIF in France, Eurex etc.

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3. GROWTH OF DERIVATIVES MARKET:

Over the last three decades, the derivatives markets have seen a phenomenal growth.
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:

 Increased volatility in asset prices in financial markets.
 Increased integration of national financial markets with the international markets.
 Marked improvement in communication facilities and sharp decline in their costs.
 Development of more sophisticated risk management tolls, providing economic
agents a wider choice of risk management strategies, and

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

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4. DERIVATIVE PRODUCTS (TYPES):

The following are the various types of derivatives. They are:

 Forwards:

A forward contract is a customized contract between two entities, where settlement
takes places 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 pri9ce. 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. Calls give the buyer the right but not the
obligation to buy a given quantity of the underlying asset, at a given price on or before a
given future date. Puts give the buyer the right, but not the obligation to sell a given quantity
of the underlying asset at a given price on or before a given date.

 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.

 Leaps:

The acronym LEAPS means Long-team Equity anticipation Securities. These are
options having a maturity of up to three years.

 Baskets:

Baskets options are options on portfolio of underlying assets. The underlying asset is
usually a moving average of a basket of assets. Equity index options are a form of basket
options.

 Swaps:

Swaps are private agreement between two parties to exchange cash flows in the future
according to a prearranged formula. They can be regarded as portfolios of forward contracts.

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6 | Page . However. Forward contracts are very similar to futures contracts. as a means of speculation. The forward price of such a contract is commonly contrasted with the spot price. or defined on standardized assets. A closely related contract is a futures contract. in whatever form. or loss. or to allow a party to take advantage of a quality of the underlying instrument which is time-sensitive. The price agreed upon is called the delivery price. which is an agreement to buy or sell an asset today. they differ in certain respects. This is in contrast to a spot contract. generally considered in the form of a profit. and the party agreeing to sell the asset in the future assumes a short position. Hence. The price of the underlying instrument. Forwards also typically have no interim partial settlements or "true- ups" in margin requirements like futures – such that the parties do not exchange additional property securing the party at gain and the entire unrealized gain or loss builds up while the contract is open. is paid before control of the instrument changes. forward contracts specification can be customized and may include mark-to-market and daily margining. a forward contract or simply a forward is a non- standardized contract between two parties to buy or sell an asset at a specified future time at a price agreed today. Forward contract: In finance and economics. Forwards. It costs nothing to enter a forward contract. like other derivative securities. This is one of the many forms of buy/sell orders where the time of trade is not the time where the securities themselves are exchanged. can be used to hedge risk (typically currency or exchange rate risk). which is equal to the forward price at the time the contract is entered into. a forward contract arrangement might call for the loss party to pledge collateral or additional collateral to better secure the party at gain. being traded OTC. The party agreeing to buy the underlying asset in the future assumes a long position. by the purchasing party. The difference between the spot and the forward price is the forward premium or forward discount. except they are not exchange-traded. which is the price at which the asset changes hands on the spot date.

000. Andy and Bob have entered into a forward contract. as they do not wish to be exposed to exchange rate risk over a period of time. where one party opens a forward contract to buy or sell a currency (ex. 7 | Page .000.000. Bob will make a profit of $6. Currency forwards are also similar. the buy forward is opened because the investor will actually need Canadian dollars at a future date such as to pay a debt owed that is denominated in Canadian dollars.000. expecting the exchange rate to move favourably to generate a gain on closing the contract. and an actual profit of $4. one party gains and the counterparty loses as one currency strengthens against the other. Bob. As the exchange rate between U. the party opening a forward does so. Conversely. At the end of one year. In contrast. Other times.000.S.000 and immediately sells to the market for $110. Sometimes. because he is buying the underlying. Andy has made a potential loss of $6. not because they need Canadian dollars nor because they are hedging currency risk. suppose that the current market valuation of Andy's house is $110. suppose that Andy currently owns a $100. At the same time. is said to have entered a long forward contract. one need only to recognize that Bob can buy from Andy for $104.000. How a forward contract works: Suppose that Bob wants to buy a house a year from now. but because they are speculating on the currency. Andy will have the short forward contract. Both parties could enter into a forward contract with each other. Bob has made the difference in profit. To see why this is so. Then.000. a contract to buy Canadian dollars) to expire/settle at a future date.000 house that he wishes to sell a year from now. because Andy is obliged to sell to Bob for only $104. dollars and Canadian dollars fluctuates between the trade date and the earlier of the date at which the contract is closed or the expiration date. Suppose that they both agree on the sale price in one year's time of $104.

suppose now that the initial price of Andy's house is $100. The terminology reflects the expectations of the parties -. The contracts are traded on a futures exchange. is said to be "long". while the seller hopes or expects that it will decrease. the buy/sell terminology is a linguistic convenience reflecting the position each party is taking (long or short). But since Andy knows that he can immediately sell for $100. the underlying asset to a futures contract may not be traditional commodities at all – that is. the delivery date.the buyer hopes or expects that the asset price is going to increase. The party agreeing to buy the underlying asset in the future i. securities or financial instruments and intangible assets or referenced items such as stock indexes and interest rates.  Example of how forward prices should be agreed upon- Continuing on the example above.000 and that Bob enters into a forward contract to buy the house one year from today. So Andy would want at least $104. a futures contract is a standardized contract between two parties to exchange a specified asset of standardized quantity and quality for a price agreed today (the futures price or the strike price) with delivery occurring at a specified future date. the "seller" of the contract. Suppose that the risk free rate of return R (the bank rate) for one year is 4%.e. risk free. for financial futures the underlying asset or item can be currencies.000 one year from now for the contract to be worthwhile for him – the opportunity cost will be covered. Then the money in the bank would grow to $104. Note that the contract itself costs nothing to enter. and the party agreeing to sell the asset in the future i. In many cases.000. is said to be "short".  Futures contract: In finance and economics. he wants to be compensated for the delayed sale. the "buyer" of the contract. 8 | Page .000 and place the proceeds in the bank.e.

Futures are traded in the following markets: Foreign exchange market. This process is known as marking to market. both parties of a futures contract must fulfil the contract on the delivery date. then cash is transferred from the futures trader who sustained a loss to the one who made a profit. Thus on the delivery date. since the futures price will generally change daily. While the futures contract specifies a trade taking place in the future. as on the exchange. Trading on commodities began in Japan in the 18th century with the trading of rice and silk. Trading in the US began in the mid 19th 9 | Page . A forward is like a futures contract in that it specifies the exchange of goods for a specified price at a specified future date. If the margin account goes below a certain value. Futures contracts and exchanges There are many different kinds of futures contracts. Nor is the contract standardized. To exit the commitment prior to the settlement date. However. a forward is not traded on an exchange and thus does not have the interim partial payments due to marking to market. Soft Commodities market. then a margin call is made and the account owner must replenish the margin account. The seller delivers the underlying asset to the buyer. the difference in the prior agreed-upon price and the daily futures price is settled daily also. The exchange will draw money out of one party's margin account and put it into the other's so that each party has the appropriate daily loss or profit. the holder of a futures position can close out its contract obligations by taking the opposite position on another futures contract on the same asset and settlement date. Money market. Additionally. if it is a cash-settled futures contract. the purpose of the futures exchange institution is to act as intermediary and minimize the risk of default by either party. Equity market. Thus the exchange requires both parties to put up an initial amount of cash. or. reflecting the many different kinds of "tradable" assets about which the contract may be based such as commodities. Unlike an option. Bond market. currencies or intangibles such as interest rates and indexes. the margin. securities (such as single-stock futures). A closely related contract is a forward contract. and similarly in Holland with tulip bulbs. the amount exchanged is not the specified price on the contract but the spot value (since any gain or loss has already been previously settled by marking to market). The difference in futures prices is then a profit or loss.

= Traders in futures Futures traders are traditionally placed in one of two groups: hedgers. energy. exchange trading has expanded to include metals. who have an interest in the underlying asset (which could include an intangible such as an index or interest rate) and are seeking to hedge out the risk of price changes. Options on futures In many cases. Although contract trading began with traditional commodities such as grains.century. equities and equity indexes. options are traded on futures. A put is the option to sell a futures contract. In other words. the investor is seeking exposure to the asset in a long futures or the opposite effect via a short futures contract. currency and currency indexes. meat and livestock. These forward contracts were private contracts between buyers and sellers and became the forerunner to today's exchange-traded futures contracts. while they have no practical use for or intent to actually take or make delivery of the underlying asset. sometimes called simply "futures options". For both. and a call is the option to buy a futures contract. Futures are often used since they are delta one instruments. when central grain markets were established and a marketplace was created for farmers to bring their commodities and sell them either for immediate delivery (also called spot or cash market) or for forward delivery. and speculators. who seek to make a profit by predicting market moves and opening a derivative contract related to the asset "on paper". 10 | P a g e . government interest rates and private interest rates. the option strike price is the specified futures price at which the future is traded if the option is exercised.

FUTURES FORWARDS 1.Hence less liquid 4.Calls and options on futures may be priced similarly to those on traded assets by using an extension of the Black-Scholes formula.OTC in nature Exchange 2. namely Black's formula for futures. Thus futures have significantly less credit risk.Futures are margined. Hence more liquid 3. while forwards are customized and face non-exchange counterparty. . Standardized contract terms 2. they are different in two main respects: -Futures are exchange-traded. while forwards are not.Customized Contract terms 3. and have different funding. The price of an option is determined by supply and demand principles and consists of the option premium. or the price paid to the option seller for offering the option and taking on risk. while forwards are traded over-the-counter.Settlement happens at end of period FEATURES OF FUTURES  Futures are highly standardized 11 | P a g e . Requires margin payment 4. Investors can either take on the role of option seller/option writer or the option buyer. Thus futures are standardized and face an exchange. Follows daily Settlement 5.No Margin Payment 5. Futures versus forwards While futures and forward contracts are both contracts to deliver an asset on a future date at a prearranged price. Trade on an Organized 1. Option sellers are generally seen as taking on more risk because they are contractually obligated to take the opposite futures position if the options buyer exercises his or her right to the futures position specified in the option.

arise in a futures contract. then the investor receives a call for an additional deposit of cash known as maintenance margin to bring the equity up to the initial margin.  Mark to market margins: The process of adjusting the equity in an investor’s account in order to reflect the change in the settlement price of futures contract is known as MTM Margin. both buyer and seller are required to post initial margins. There are three types of margins:  Initial Margins: Whenever a future contract is signed.  Options: 12 | P a g e .  The contracting parties need not pay any down payment  Hedging of price risks  They have secondary markets to. If the equity goes less than that percentage of initial margin. Both buyers and seller are required to make security deposits that are intended to guarantee that they will infect be able to fulfil their obligation. These deposits are initial margins and they are often referred as purchase price of futures contract.  MARGINS: Margins are the deposits which reduce counter party risk. These margins are collect in order to eliminate the counter party risk.  Maintenance margin: The investor must keep the futures account equity equal to or grater than certain percentage of the amount deposited as initial margin.

options are very complex and require a great deal of observation and maintenance. For stock options. currency. the amount is usually 100 shares. meaning that the writer already owns the security underlying the option. like stocks. Option contracts. For the holder. However. the writer is responsible for fulfilling the terms of the contract by delivering the shares to the appropriate party. at a specified price (the strike price) during a specified period of time is called an option. options allow the holder to control equity in a limited capacity for a fraction of what the shares would cost. the potential loss is unlimited unless the contract is covered. In addition. Risk is limited to the option premium (except when writing options for a security that is not already owned). known as the writer. When an option is not exercised. called the holder. The difference can be invested elsewhere until the option is exercised. If the option contract is exercised. In the case of a security that cannot be delivered such as an index. the costs of trading options (including both commissions and the bid/ask spread) is higher on a percentage basis than trading the underlying stock. the potential loss is limited to the price paid to acquire the option and the possible gain is unlimited. The right. Each option contract has a buyer. or debt. Option contracts are most frequently as either leverage or protection. to buy (for a call option) or sell (for a put option) a specific amount of a given stock. and a seller. As protection. No shares change hands and the money spent to purchase the option is lost. options can guard against price fluctuations in the near term because they provide the right acquire the underlying stock at a fixed price for a limited time. index. As leverage. it expires. are therefore said to have an asymmetrical payoff pattern. commodity. For the writer. but not the obligation. the contract is settled in cash. Application of option contract in unilateral contracts 13 | P a g e .

he 14 | P a g e . It was only in the early 1900s that a group of firms set up what was known as the put and call Brokers and Dealers Association with the aim of providing a mechanism for bringing buyers and sellers together. So. but an option contract can either be implicitly created instantaneously at the beginning of performance (the Restatement view) or after some "substantial performance. but as the name suggests. HISTORY OF OPTIONS: Although options have existed for a long time. Once the promisee performed completely. the promisor seeks acceptance by performance from the promisee." It has been hypothesized that option contracts could help allow free market roads to be constructed without resorting to eminent domain. The option contract provides an important role in unilateral contracts. as the road company could make option contracts with many landowners. if a promisee provides 99% of the performance sought. the promisee still retains the "option" of not completing performance. the classical contract view was that a contract is not formed until the performance that the promisor seeks is completely performed. a promisor can revoke his offer for the contract at any point prior to the promise’s complete performance. and eventually consummate the purchase of parcels comprising the contiguous route needed to build the road. If someone wanted to buy an option. This is because the consideration for the contract was the performance of the promisee. the condition is satisfied and a contract is formed and only the promisor is bound to his promise. An option contract can provide some security to the promisee in the above scenario. In this scenario. The promisor has maximum protection and the promisee has maximum risk in this scenario. the promisor could then revoke without any remedy for the promisee. With classical unilateral contracts. Basically. Essentially. the consideration is provided by the promise’s beginning of performance. once a promisee begins performance. Case law differs from jurisdiction to jurisdiction. The promisor impliedly promises not to revoke the offer and the promisee impliedly promises to furnish complete performance. A problem arises with unilateral contracts because of the late formation of the contract. The first trading in options began in Europe and the US as early as the seventeenth century. they wee traded OTC. an option contract is implicitly created between the promisor and the promisee. without much knowledge of valuation. In unilateral contracts.

there was no mechanism to guarantee that the writer of the option would honor the contract. a call buyer would realize returns far in excess of those that could be obtained by purchasing tulip bulbs themselves. however. The writers of the put options also prospered as bulb prices spiraled since writers were able to keep the premiums and the options were never exercised. CBOE was set up specifically for the purpose of trading options. The following are the properties of option:  Limited Loss  High leverages potential  Limited Life PARTIES IN AN OPTION CONTRACT: There are two participants in Option Contract. the more Tulip bulb prices began rising. The more popular they became. Similarly. Later. the number of shares underlying the option contract sold each day exceeded the daily volume of shares traded on the NYSE. As long as tulip prices continued to skyrocket. The tulip-bulb market collapsed in 1636 and a lot of speculators lost huge sums of money. In April 1973. tulip-bulb growers could assure themselves of selling their bulbs at a set price by purchasing put options. there was no secondary market and second. the firm would undertake to write the option itself in return for a price. the tulip became the most popular and expensive item in Dutch gardens. Since then. Over a decade. Merton and Scholes invented the famed Black-Scholes formula. there has been no looking back. Hardest hit were put writers who were unable to meet heir commitments to purchase Tulip bulbs PROPERTIES OF OPTION Options have several unique properties that set them apart from other securities. They were initially used for hedging. This market however suffered from two deficiencies. Option made their first major mark in financial history during the tulip-bulb mania in seventeenth-century Holland. Black. First. It was one of the most spectacular get rich quick binges in history. The first tulip was brought Into Holland by a botany professor from Vienna. In 1973. If no seller could be found. That was when options came into the picture. By purchasing a call option on tulip bulbs. 15 | P a g e . a dealer who was committed to a sales contract could be assured of obtaining a fixed number of bulbs for a set price.or she would contact one of the member firms. options were increasingly used by speculators who found that call options were an effective vehicle for obtaining maximum possible gains on investment. The market for option developed so rapidly that by early’ 80s.

Like index futures contracts. index options contracts are also cash settled. Options currently trade on over 500 stocks in the United States. Buyer/Holder/Owner of an Option: The Buyer of an Option is the one who by paying the option premium buys the right but not the obligation o exercise his option on the seller/writer. Some options are European while others are American.  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.  On the basis of the underlying asset: On the basis of the underlying asset the option are divided into two types:  Index options: These options have the index as the underlying. 16 | P a g e . the options are classified into two Categories.  Stock options: Stock Options are options on individual stocks.  Seller/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. TYPES OF OPTIONS The Options are classified into various types on the basis of various variables. They are:  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.  On the basis of the market movements: On the basis of the market movements the option are divided into two types. On the basis of exercise of option: On the basis of the exercise of the Option.  3. The following are the various types of options. A contract gives the holder the right to buy or sell shares at the specified price. It is brought by an investor when he seems that the stock price moves upwards. It is brought by an investor when he seems that the stock price moves downwards.

Call options therefore become more valuable as the stock price increases and vice versa. As volatility increases. Put options therefore become more valuable as the stock price increases and vice versa. Therefore. the stock price has to make a larger upward move for the option to go in-the-money.  Risk-free interest rate: 17 | P a g e .  Volatility: The volatility of a stock price is measured of uncertain about future stock price movements.  Strike price: In case of a call.  Time to expiration: Both put and call American options become more valuable as a time to expiration increase. as a strike price increase. FACTORS AFFECTING THE PRICE OF AN OPTION: The following are the various factors that affect the price of an option they are:  Stock Price: The pay-off from a call option is an amount by which the stock price exceeds the strike price. by which the strike price exceeds the stock price. European options are easier to analyze than American options. option become more valuable. The value of both calls and puts therefore increases as volatility increase. Most exchange-traded options are American  European Option: European options are options that can be exercised only on the expiration date itself. The pay-off from a put option is the amount. the chance that the stock will do very well or very poor increases.  American Option: American options are options that can be exercised at any time up to the expiration date. as the strike price increases option becomes less valuable and as strike price decreases. and properties of an American option are frequently deduced from those of its European counterpart. for a call.

Exchange traded. Same as futures 3. Same as futures 2. A swap is 18 | P a g e . the strike date or the maturity. Exchange defines the product 2. Both long and short at risk 6. Price is Zero 4. Nonlinear payoff 6. DISTINCTION BETWEEN FUTURES AND OPTIONS FUTURES OPTIONS 1. OPTIONS TERMINOLOGY  Option price/premium: Option price is the price which the option buyer pays to the option seller. Only short at risk  Swap: A swap is nothing but a barter or exchange but it plays a very important role in international finance. It is also referred to as the option premium. price moves 4. Strike price is fixed.  Expiration date: The date specified in the options contract is known as the expiration date. Price is always positive 5. the exercise date. Price is zero. strike price moves 3. with Innovation 1.  Strike price: The price specified in the option contract is known as the strike price or the exercise price. The put option prices decline as the risk-free rate increases where as the price of call always increases as the risk – free interest rate increases. Linear payoff 5. A swap is the exchange of one set of cash flows for another.

An interest rate swap generally involves one set of payments determined by the Eurodollar (LIBOR) rate. although. Additionally.a contract between two parties in which the first party promises to make a payment to the second and the second party promises to make a payment to the first. Different formulas are used to determine what the two sets of payments will be. there will be a spread of a pre-determined amount of basis points. The notional principal is the exchange of interest payments based on face value.e. Classification of swaps is done on the basis of what the payments are based on. Interest rate swaps: The interest rate swap is the most frequently used swap. this can also be variable. Sometimes payments tied to floating rates are used for interest rate swaps. although. The different types of swaps are as follows. the party making a loss pays the loss amount to the party making a profit. Only one party makes a payment. Both payments take place on specified dates. This is just one type of interest rate swap. it can be pegged to other rates. Currency swaps: 19 | P a g e . The other set is fixed at an agreed-upon rate. Here the loss amount will be equal to the profit amount. This other agreed upon rate usually corresponds to the yield on a Treasury Note with a comparable maturity. On the day of each payment. the party who owes more to the other makes a net payment i. The notional principal itself is not exchanged.

interest rate swaps help exchange a fixed rate of interest with a variable rate. E. Swaps are not traded or listed on exchange but they do have an informal market and are traded among dealers. the company would enter into a swap whereby it receives payment linked to commodity prices and pays a fixed rate in exchange. Cracking spread which indicates the spread between crude prices and refined product prices significantly affect the margins of oil refineries) A Company that uses commodities as input may find its profits becoming very volatile if the commodity prices become volatile. Currency swaps help eliminate the differences between international capital markets. Commodity swaps: In commodity swaps. but not the obligation to enter into a swap at a later date. An option on a swap gives the party the right. Interest rates swaps help eliminate barriers caused by regulatory structures. Commodities are physical assets such as metals. A currency swap is an agreement between two parties in which one party promises to make payments in one currency and the other promises to make payments in another currency. The needs of the parties in a swap transaction are diametrically different. which can be effectively combined with other type of derivative instruments.g.g. In such cases. energy stores and food including cattle. in a commodity swap. While currency swaps result in exchange of one currency with another. A swap is a contract. a party may agree to exchange cash flows linked to prices of oil for a fixed cash flow. the cash flows to be exchanged are linked to commodity prices. Currency swaps are similar yet notably different from interest rate swaps and are often combined with interest rate swaps. This is particularly so when the output prices may not change as frequently as the commodity prices change. A producer of a commodity may want to reduce the variability of his revenues by being a receiver of a fixed rate in exchange for a rate linked to the commodity prices. Commodity swaps are used for hedging against o Fluctuations in commodity prices or o Fluctuations in spreads between final product and raw material prices (E. 20 | P a g e .

The total return is the capital gain or loss. he retains a voting right on the shares. The parties have exposure to the return of the underlying 21 | P a g e . promising to buy it back at market price at a future date. then party ‘A’ receives this amount from party ‘B’.popular commodity swap Oil – popular commodity swap Equity swaps: Under an equity swap.Gold. which are limited only by the imagination of financial engineers and the desire of corporate treasurers and fund managers for exotic structures. because the buyer pays a premium and in return. in exchange. Other variations: There are myriad different variations on the vanilla swap structure. the shareholder effectively sells his holdings to a bank. and party ‘B’ makes periodic interest payments. A total return swap is a swap in which party ‘A’ pays the total return of an asset. However. bankruptcy or even just having its credit rating downgraded. receives a sum of money if one of the events specified in the contract occur. Note that if the total return is negative. the credit event that triggers the payoff can be a company undergoing restructuring. Unlike an actual insurance contract the buyer is allowed to profit from the contract and may also cover an asset to which the buyer has no direct exposure. Less commonly. Credit default swaps: A credit default swap (CDS) is a swap contract in which the buyer of the CDS makes a series of payments to the seller and. CDS contracts have been compared with insurance.goes into default (fails to pay). plus any interest or dividend payments. receives a payoff if an instrument - typically a bond or loan .

a CMS.-also referred to as a forward start swap.stock or index. It is suitable to those customers of banks who want to manage the interest rate risk involved in predicted funding requirement. A Zero coupon swap is of use to those entities which have their liabilities denominated in floating rates but at the same time would like to conserve cash for operational purposes. A Forward swap is an agreement created through the synthesis of two swaps differing in duration for the purpose of fulfilling the specific time-frame needs of an investor. An option on a swap is called a swaption. An Accreting swap is used by banks which have agreed to lend increasing sums over time to its customers so that they may fund projects. without having to hold the underlying assets. is a swap that allows the purchaser to fix the duration of received flows on a swap. and a deferred start swap. delayed start swap. A Deferred rate swap is particularly attractive to those users of funds that need funds immediately but do not consider the current rates of interest very attractive and feel that the rates may fall in future. An Amortising swap is usually an interest rate swap in which the notional principal for the interest payments declines during the life of the swap. Components of swap price There are four major components of a swap price: 22 | P a g e . These provide one party with the right but not the obligation at a future time to enter into a swap. or investment programs. The profit or loss of party ‘B’ is the same for him as actually owning the underlying asset. perhaps at a rate tied to the prepayment of a mortgage or to an interest rate benchmark such as the LIBOR. A variance swap is an over-the-counter instrument that allows one to speculate on or hedge risks associated with the magnitude of movement.

g. In this way they attempt to protect themselves against the risk of an unfavourable price change in the interim.  Transaction Costs: Transaction costs include the cost of hedging a swap. Bill. For doing so the bank must obtain funds. Based upon the credit rating of the counterparty a spread would have to be incorporated. Yield on 91 day T.g. Or hedgers may use futures to lock in an acceptable 23 | P a g e . Bill . Now in order to hedge the bank would go long on a 91 day T. Bill.. plays an important role in swaps pricing.9.5%  Credit Risk: Credit risk must also be built into the swap pricing. which is function of supply and demand. which has a floating obligation of 91 days T.  Liquidity: Liquidity. They may be quoted as a spread over the yield on these benchmark instruments or on an absolute interest rate basis. Say for e. In the Indian markets the common benchmarks are MIBOR. PARTICIPANT IN DERIVATIVES MARKET:  Hedgers: Hedgers are individuals and firms that make purchases and sales in the futures market solely for the purpose of establishing a known price level--weeks or months in advance--for something they later intend to buy or sell in the cash market (such as at a grain elevator or in the bond market).5% for an AAA ratin 5. 91. 14.Repo rate) – 10% The transaction cost in this case would involve 0. It may be difficult to have counterparties for long duration swaps. The transaction cost would thus involve such a difference. it would be 0. CP rates and PLR rates. especially so in India.5% Cost of fund (e. Say in case of a bank. Benchmark price: Swap rates are based on a series of benchmark instruments. This is also affected by the swap duration. 182 & 364 day T- bills.

These participants include independent 24 | P a g e . If. They are never interested in actual owing the commodity. Had the price of gold declined instead of risen. however.margin between their purchase cost and their selling price. say. Borrowers can hedge against higher interest rates.  Speculators: Speculators are somewhat like a middle man. Between now and then. In effect. A cattle feeder can hedge against a decline in livestock prices and a meat packer or supermarket chain can hedge against an increase in livestock prices. To lock in the price level at which gold is presently being quoted for delivery in six months. and those who anticipate having money to invest can hedge against an increase in the over-all level of stock prices. And the list goes on. Consider this example: A jewellery manufacturer will need to buy additional gold from his supplier in six months. he buys a futures contract at a price of. They are the second major group of futures players. the cash market price of gold has risen to $370. They actually bet on the future movement in the price of an asset. The number and variety of hedging possibilities is practically limitless. and lenders against lower interest rates. That could be a problem because he has already published his catalogue for a year ahead. he will have to pay his supplier that amount to acquire gold. the hedge provided insurance against an increase in the price of gold. However. The risk of loss exists in futures and options trading. It locked in a net cost of $350. Whatever the hedging strategy. The details of hedging can be somewhat complex but the principle is simple. $350 an ounce. he would have incurred a loss on his futures position but this would have been offset by the lower cost of acquiring gold in the cash market. six months later. he fears the price of gold may increase. regardless of what happened to the cash market price of gold. Investors can hedge against an overall decline in stock prices. Past performance is not necessarily indicative of future results. the extra $20 an ounce cost will be offset by a $20 an ounce profit when the futures contract bought at $350 is sold for $370. the common denominator is that hedgers willingly give up the opportunity to benefit from favourable price changes in order to achieve protection against unfavourable price changes. They will just buy from one end and sell it to the other in anticipation of future price movements.

Buying a futures contract in anticipation of price increases is known as ‘going long’. for example. thus capturing risk-free profits as the prices on the two exchanges converge. 2. 25 | P a g e . The money he puts up is not a down payment on the underlying contract.floor traders and investors. on average. he can make more money in the futures market faster because prices tend. seek out price discrepancies between stocks listed on more than one exchange. but a performance bond. They handle trades for their personal clients or brokerage firms.  Arbitrageurs: A type of investor who attempts to profit from price differences in the market by making simultaneous trades that offset each other and capturing risk-free profits. to change more quickly than real estate or stock prices. and buy the undervalued shares on one exchange while short selling the same number of overvalued shares on another exchange. The trader puts up a small fraction of the value of the underlying contract as margin. Futures are highly leveraged investments. An arbitrageur would. Speculators have certain advantages over other investors they are as follows: 1. The actual value of the contract is only exchanged on those rare occasions when delivery takes place. Selling a futures contract in anticipation of a price decrease is known as ‘going short’. yet he can ride on the full value of the contract as it moves up and down. If the trader’s judgement is good.

ADVANTAGE OF THE DERIVATIVE MARKET: Today's sophisticated international markets have helped foster the rapid growth in derivative instruments. In the hands of knowledgeable investors. In reality. for a profit of ¥200. But more complicated foreign exchange arbitrages. derivatives can derive profit from: -Changes in interest rates and equity markets around the world -Currency exchange rate shifts 26 | P a g e . Converting ¥1000 to $12 in Tokyo and converting that $12 into ¥1200 in London. 6. Suppose that the exchange rates (after taking out the fees for making the exchange) in London are £5 = $10 = ¥1000 and the exchange rates in Tokyo are ¥1000 = $12 = £6. this "triangle arbitrage" is so simple that it almost never occurs. would be arbitrage. such as the spot-forward arbitrage are much more common.

Risk management is the process of identifying the desired level of risk. the underlying assets can be geographically dispersed. and energy products such as oil and natural gas Adding some of the wide variety of derivative instruments available to a traditional portfolio of investments can provide global diversification in financial instruments and currencies. but in the way the market participants view the volatility of the markets. for example) impact supply and demand of assets (commodities in particular) . Options also aid in price discovery. identifying the actual level of risk and altering the latter to equal the former. not in absolute price terms.  Risk Management: This could be the most important purpose of the derivatives market. With some futures markets. having many spot (or current) prices in existence. help hedge against inflation and deflation. A broad range of factors (climatic conditions. The price of the contract with the shortest time to expiration often serves as a proxy for the underlying asset.  Price Discovery: Futures market prices depend on a continuous flow of information from around the world and require a high degree of transparency. This is because options are a different form of hedging in that they protect investors against losses while allowing them to participate in the asset's gains.and thus the current and future prices of the underlying asset on which the derivative contract is based. precious and industrial metals. land reclamation and environmental health. This kind of information and the way people absorb it constantly changes the price of a commodity. refugee displacement. political situations. debt default. This process can fall into the categories of hedging and speculation. -Changes in global supply and demand for commodities such as agricultural products. This process is known as price discovery. The two most widely recognized benefits attributed to derivative instruments are price discovery and risk management. and generate returns that are not correlated with more traditional investments. Hedging has traditionally been defined as a strategy for reducing the risk in holding a market position while speculation referred to taking a position in the way the markets will 27 | P a g e .

Derivatives are fast catching up in the developing countries as well. In India also derivatives have registered a substantial growth.  Help Reduce Market Transaction Costs Because derivatives are a form of insurance or risk management. If the cost of implementing these two strategies is the same. investors will be neutral as to which they choose. derivatives create market efficiency. In this context. investors will sell the richer asset and buy the cheaper one until prices reach equilibrium.  Improve Market Efficiency for the Underlying Asset: For example. the cost of trading in them has to be low or investors will not find it economically sound to purchase such "insurance" for their positions 7. Today. Either of these methods will give them exposure to the index without the expense of purchasing all the underlying assets in the S&P 500. Europe and Japan. hedging and speculation strategies. along with derivatives. If there is a discrepancy between the prices. FEATURE OF THE DERIVATIVES MARKET: The derivatives market has grown rapidly since it’s inception. 28 | P a g e . are useful tools or techniques that enable companies to more effectively manage risk. Today derivatives account for nearly 75% of market transactions in the USA. investors who want exposure to the S&P 500 can buy an S&P 500 stock index fund or replicate the fund by buying S&P 500 futures and investing in risk-free bonds.move.

a trader has very little to lose and a lot to gain.  Price in an organized derivative markets reflect the perception of market participants about the future and lead the prices of underlying to the perceived future level. The value of underlying assets of derivatives is more than US $16 trillion which is almost 3 times the value of stocks traded at the NYSE and twice the size of the US GDP. This insurgent growth is expected to continue at this pace or faster as markets continue to get more advanced and developed. these markets perform a number of economic functions. Although commodity derivatives existed since centuries ago. FUNCTIONS OF THE DERIVATIVES MARKET: In spite of the fear and criticism with which the derivative markets are commonly looked at. As derivatives are excellent hedging devices. 8. It is this feature of the derivative which will ensure it grows and takes over 90% of market transactions in the near future. One can only keep guessing and making arbitrary assumptions about the value of underlying assets that will be traded in the future. the market for financial derivatives has now grown tremendously both in terms of variety of instruments and turnover. The prices 29 | P a g e .

With the introduction of derivatives. In view of this problem SEBI abolished the BADLA system. who are participating. The derivatives have a history of attracting many bright. The investors are willing to reduce their risk. Well-educated people with an entrepreneurial attitude. NATURE OF THE PROBLEM: The turnover of the stock exchange has been tremendously increasing from last 10 Years.  An important incidental benefit that flows from derivatives trading is that is acts as a catalyst for new entrepreneurial activity. In the absence of an organized derivatives market. creative.  The derivative markets helps to transfer risks from those who have them but may not like them to those who have an appetite for them. have increased. unclear expiration date and generating counter party risk. Thus derivatives help in discovery of future as well as current prices. 30 | P a g e . of derivatives converge with the prices of the underlying at the expiration of the derivative contract. the underlying market witness higher trading volumes because of participation by more players who would not otherwise participate for lack of an arrangement to transfer risk.  Speculative trades shift to a more controlled environment of derivatives market. Monitoring and Surveillance of the activities of various participants become extremely difficult in these kinds of mixed markets. Prior to SEBI abolishing the BADLA system. speculators trade in the underlying cash markets. The number of trades and the number of investors. the investors had this system as a source of reducing the risk.  Derivative due to their inherent nature. are linked to the underlying cash markets. 9. so they are seeking for the risk management tools. as it has many problems like no strong margining system. Margining.

SEBI accepted the recommendation of the committee on May – 11. etc. which would be much lesser than what he expected to get. There are many investors who are willing to trade in the derivatives segment. Gupta to develop the appropriate Framework for derivatives trading in India. which could reduce their portfolio risk. as a first step it has set up a 24 Member committee under the chairmanship of Dr.C. L. because of its advantages like limited loss unlimited profit by paying the small premiums. SEBI thought the Introduction of the derivatives trading. the investors are seeking for a Hedging system. 10.DEVLOPMENT OF DERIVATIVES MARKET: Holding portfolios of Securities is associate with the risk of the possibility that the investor may realize his returns. 31 | P a g e . There are various factors. 1998 and approved the phase introduction of the Derivatives trading beginning with stock index futures. After the abolition of the BADLA system. which affect the returns:  Price or dividend (interest)  Some are internal to the firm like-  Industrial Policy  Management Capabilities  Consumer’s preference  Labour strike.

inflation. We therefore quite often find stock prices falling from time to time in spite of company’s earnings rising and vice versa. liquidity in the sense of being able to buy and sell relatively large amounts quickly without substantial price concession. Some of the world’s leading exchanges for the exchange traded derivatives are:  Chicago Mercantile exchange (CME) and London International Financial Futures Exchange (LIFE) (for currency & Interest Futures).  Chicago Mercantile Exchange (CME) and London Metal Exchange (LME) (for Commodities) 32 | P a g e . Rational Behind the development of derivatives market is to manage this systematic risk.GLOBAL DERIVATIVES MARKET: The global financial centers such as Chicago. New York. These forces are to a large extent controllable and are termed as non systematic risks. Those factors favour for the purpose of both portfolio hedging and speculation. cannot be controlled and affect large number of securities. 11. They are termed as systematic risk. Tokyo and London dominate the trading in derivatives. a large position of the total risk of securities is systematic. Debt instruments are also finite life securities with limited marketability due to their small size relative to many common sticks. An investor can easily manage such non-systematic by having a Well-diversified portfolio spread across the companies. industries and groups so that a loss in one may easily be compensated with a gain in other. the introduction of a derivatives securities that is on some broader market rather than an individual security. For instance. They are:  Economic  Political  Sociological changes are sources of systematic risk. London Stock Exchange (LSE) & Chicago Board Options Exchange (CBOE) (for currency & Interest Futures).  New York Stock Exchange (NYSE) and London Stock Exchange (LSE) (for equity derivatives). their effect is to cause prices if nearly All individual stocks to move together in the same manner. interest rate.  Philadelphia Stock Exchange (PSE). In debt market. There are yet other of influence which are external to the firm. etc.

perhaps making this not only the first derivative but the first default on a derivative. Derivatives trading in an exchange environment and with trading rules can be traced back to Venice in the 12th Century. These exchanges account for a large portion of the trading volume in the respective derivatives segment. Jacob ended up with two wives. Laban required Jacob to marry his older daughter Leah. His prospective father-in-law.C. bigamy being allowed in those days. twelve sons. however.350 years ago from Aristotle who discussed a case of market manipulation through the use of derivatives on olive oil press capacity in Chapter 9 of his Politics. Trading was originally in forward contracts. he purchased another option. In 1972. Derivatives trading in the same era also occurred in Mesopotamia. Japan. Forward contracts were standard at the time . who became the patriarchs of the twelve tribes of Israel. The United States followed in the early 1800s. shipments and securities in Amsterdam after 1595. which obligated him to the marriages but that does not matter. The Japanese traded futures- like contracts on warehouse receipts or rice in the 1700s. requiring seven more years of labour. So derivatives were around before the time of Christ. in what is now called Bahrain Island in the Arab Gulf. the first contract (on corn) was written on March 13.C.. In 1865. Some argue that Jacob really had forward contracts.  HISTORY OF DERIVATIVES GLOBALLY: To start we need to go back to the Bible. believed to be about the year 1700 B.In 1848. reneged. Around 580 B. Thales the Milesian purchased options on olive presses and made a fortune off of a bumper crop in olives. standardized futures contracts were introduced. Jacob married Leah. A more literary reference comes some 2. but because he preferred Rachel. Jacob did derivatives. made consignment transactions for goods to be sold in India..Dojima Rice Exchange was established in 1710 in Osaka. The first known instance of derivatives trading dates to 2000 B. the International Monetary Market 33 | P a g e . one way or the other. 1851. when merchants.C. Jacob purchased an option costing him seven years of labour that granted him the right to marry Laban's daughter Rachel. Forward and options contracts were traded on commodities. the Chicago Board of Trade (CBOT) was formed. In Genesis Chapter 29. and finally married Rachel.

and Swiss franc. a regional market was founded in continuously since then. with 1 month. Mexican peso. Three contracts are available for trading. the derivatives contracts have a maximum of 3-Months expiration cycles. NSE’S DERIVATIVES MARKET: The derivatives trading on the NSE commenced with S & P CNX Nifty index Futures on June 12. today the Minneapolis Grain Exchange (MGEX) is the only exchange for hard red spring wheat futures and options. The 1970s saw the development of the financial futures contracts. Canadian dollar. Japanese yen. A new contact is introduced on the next trading day following of the near month contract. 34 | P a g e . In 1881. Today. 2000. 2001 and trading in options on individual securities commence on July 2. 2 month and 3 month expiry. both in terms of volume and turnover. 12. 2001 Single stock futures were launched on November 9. division of the Chicago Mercantile Exchange. the futures market shave far outgrown their agricultural origins. 2001. Currently. was formed to offer futures contracts in foreign currencies: British pound. Today. The trading in index options commenced on June 4. NSE is the largest derivatives exchange in India. German mark. which allowed trading in the future value of interest rates.(IMM).

REGULATORY FRAMEWORK: The trading of derivatives is governed by the provisions contained in the SC (R) A. L.C GUPTA to develop the appropriate regulatory framework for derivatives trading in India.  Regulation for derivatives trading: SEBI set up a 24-members committee under the Chairmanship of Dr. the rules and regulations framed there under and the rules and bye-laws of stock exchanges. In this chapter we look at the broad regulatory framework for derivatives trading and the requirement to become a member and an authorized dealer of the F & O segment and the position limits as they apply to various participants. the SEBI Act. On May 11.13. 35 | P a g e . 1998 SEBI accepted the recommendations of the committee and approved the phased introduction of derivatives trading in India beginning with stock index futures..

The am Endment of the SC (R) A to include derivatives within the ambit of “securities” in the SC (R) a made trading in derivatives possible within the framework of that Act. The members of the derivative segment would need to fulfil the eligibility conditions as laid down by the L.  The clearing and settlement of derivatives trades would be through a SEBI approved clearing corporation / house.Gupta Committee report can apply to SEBI for grant of recognition under Section 4 of the SC (R) A. The net worth of the member shall be computed as follows.  The members of an existing segment of the exchange would not automatically become the members of derivative segment.  Any Exchange fulfilling the eligibility criteria as prescribed in the L.  Derivatives brokers / dealers and clearing members are required to seek registration from SEBI.C. The provision in the SC(R) A and the regulatory framework developed there under govern trading in securities. The derivatives  Exchange / segment should have a separate governing council and representation of trading / clearing members shall be limited to maximum of 40% of the total members of the governing council. 1956 to start trading derivatives.  Capital + Free Reserves  Less non-allowable assets viz. This is in addition to their registration as brokers of existing stock exchanges.. The exchange would have to regulate the sales practices of its members and would have to obtain prior approval of SEBI before start of trading in any derivative contract.C.300 Lakhs. Clearing corporations/ houses complying with the eligibility as laid down by the committee have to apply to SEBI for grant of approval. Gupta committee.  Fixed assets  Pledged securities  Member’s card  Non – allowable securities (Unlisted securities)  Bad deliveries  Doubtful debts and advances  Prepaid expenses  Intangible assets 36 | P a g e . The minimum net worth for clearing members of the derivatives clearing corporation / house shall be Rs.  The exchange should have minimum 50 Members.

 The minimum contact value shall not be less than Rs.  The trading members are required to have qualified approved user and sales person who have passed a certification programmed approved by SEBI. Gupta committee report requires strict enforcement of “Know your customer” rule and requires that every client shall be registered with the derivatives broker.  The initial margin requirement. ELIGIBILITY OF ANY STOCK TO ENTER IN DERIVATIVES MARKET:  Non Promoter holding (Free float capitalization) not less than Rs. The members of the derivatives segment are also required to make their clients aware of the risks involved in derivatives trading by issuing to the clients the Risk Disclosure and obtain a copy of the same duly signed by the clients. Exchanges have to submit details of the futures contract they propose to introduce. exposure limits linked to capital adequacy and margin demands related to the risk of loss on the position will be prescribed by SEBI / Exchanged from time to time. 14. 750 Crores from last 6 Months.  The L.  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%  BETA not more than 4 (previous last 6 Months) 37 | P a g e .2 Lakhs.C.

2000 and the name of the Company was changed to Probity Research and Services Limited. 2000 and later to India Infoline Limited on March23. These activities were carried on by our wholly owned subsidiaries. to institutional Customers. the name of our Company was changed to India Infoline. Over a period of time. financial markets and economy. like Mutual funds and RBI Bonds.com Limited on May 23.com in May 1999 and started providing news and market information. The name of the company was changed to India infoline.indianfoline. We commenced our operations as an independent provider of information. Hence we launched our Internet portal.com Limited to reflect the transformation of our business. In 1999. 11 93797. we identified the potential of the Internet to cater to a mass retail segment and transformed our business model from providing information services to institutional customers to retail customers. we leveraged our position as a provider of Financial information and analysis by diversifying into transactional services. 2001. primarily for online trading in shares and securities and online as well as offline distribution of personal financial products. In May 2000. 1956 with Registration No. www. 1995 as Probilty Research and Services private limited at Mumbai under the Companies Act. We were originally incorporated on October 18. In the year 2000. We became a public limited company on April 28. COMPANY PROFILE  INDIA INFOLINE LTD. interviews with business leaders and other specialized features. 38 | P a g e . we have emerged as one of the leading business and financial information services provider in India.15. analysis and research covering Indian business. independent research.

At the time of our acquisition.    Reason for Change: Requirement of more floor space: The instances when the name of the Company was changed are cited below: Previous name New Name Probity Research and Probity Research and Services Private-Limited Services Limited Probity Research and India Infoline. Acquisition of Agri Marketing Services limited (Agri) In March 2000.Our broking services was launched under the brand name of 5paisa. It combined competitive brokerage rates and research. Agri was a direct selling agent of personal financial products including mutual funds.482 of our equity shares.000 square feet of office space located throughout India. Serving more than 30. the e-broking portal.com Limited Services Limited India Infoline. India. approximately 180 employees. 2005 we have 73 brnaches across 36 locations in India.com Limited India Infoline Limited Date of Change Reason for change 39 | P a g e .com through our subsidiary. Our India Infoline Branches collectively occupy an additional 10.5paisa. as on March 31. market news and price chars with multiple tools for technical analysis. corporate bonds and post-office instruments. India Infoline Securities Private Limited and www. we also offer real time stock quotes. supported by Internet technology Besides investment advice from an experienced team of research analysts.com Distribution Company Limited.000 customers with a staff of. After the acquisition. we changed the company name to India Infoline. fixed deposits. we acquired 100% of the equity shares of Agri Marketing services Limited.    Facilities: Out main offices are located in approximately 4. from their owners in exchange for the issuance of 508. was launched for online trading in July 2000.com.000 square feet of office space located in Mumbai. Agri operated 32 branches in South and West India.

launched archives. Enam Financial Consultants Private Ltd would be the sole book running lead manager to the issue while Intimate Spectrum Registry Ltd is the registrar to the issue. 2004 -Acquired commodities broking license. 1999- -Restructured the business model to embrace the internet. The company is coming out with public issue of 1. -India Infoline public issue gets 6. banks. 2000 to focus on the retail financial intermediary business through an online set-up Milestones: 1995- -Incorporated as an equity research and consulting firm with a client base that included leading FIIs. 2000 Conversion from Private Limited to Public Limited Company May 23. Acknowledged by Forbes as ‘Best of the Web’ and ‘…must read for investors’. 2005 -Listed on the Indian stock markets -India Infoline fixes a price band between Rs 70 and Rs 80 for its forthcoming public issue. launched online equity trading.April 28. launched Portfolio Management service. -IIL appoints R Mohan as VP -India Infoline Ltd has informed that the Company has entered into a advertising agreement with Times Group where in the Company and other group companies 40 | P a g e .6 times oversubscription. entered life insurance distribution as a corporate agent. consulting firms and Corporate. The issue is slated to open on April 21 and close on April 27. 2000- -Commenced the distribution of personal financial products.com mobilized capital from reputed private equity investors.indianfoline.18 crore shares with a face value of Rs 10 through the book building route.

would spend about Rupees Thirty Crores over the next 5 years in print as well as non print media of The Times Group. received the venture capital license. DGCX software -Acquired membership of DGCX. Falguni Sanghvi has been appointed as the Company Secretary with effect from October 07. as an independent director on the Board of the Company. raised over USD 300mn in the group. ‘Most Improved Brokerage-India’ award from Asia money. 2008 -The Company has splits its face value from Rs 10/. received ‘Fastest growing Equity Broking house. received ‘Best broker-India’ award from Finance Asia. Company Secretary and Compliance Officer of the Company. launched investment banking services 2007 -Launched a proprietary trading platform. 2008 -Launched wealth management services under the ‘IIFL Wealth’ brand. 41 | P a g e . -India Infoline Ltd has informed that the Board of Directors of the Company have vide circular resolution passed on March 10. formed a Singapore subsidiary.K. -India Infoline to buy 75-pc stake in Money tree 2006 -India Infoline launches exclusive SMS Value Added Service -India infoline enters into strategic agreement with Saraswat Bank -India Infoline to launch stock trading on cell phones -India Infoline to roll out MCX. NCDEX. received the Insurance broking license from IRDA. A. -India Infoline Ltd has informed that pursuant to the resignation of Mr.to Rs 2/- 2009 -Received registration for a housing finance company from the National Housing Bank. 2008 approved the appointment of Mr. set up Indian Infoline Private Equity fund. received in principle approval to sponsor a mutual fund. launched consumer finance business under the ‘Money line’ brand. Purwar. Nimish Mehata. Ms. inducted and institutional equites team. ex-Chairman of the State Bank of India.

50 Gujarat 5.11 Lakhs 28.30 Lakhs 7.205 West Bengal 2.14 Lakhs 6.75 Andhra Pradesh 1.HIGHEST INVESTOR POPULATION IN DERIVATIVES: State Total No.25 Lakhs 10.16. Investors % of Investors in India Maharashtra 9.94 Lakhs 6.05 42 | P a g e .75 Delhi 3.36 Lakhs 16.10 Chennai 2.

O.of options that did not get exercised Traded Quantity .No.The day on which the trading took place Closing premium .of futures and options traded on that day.LOT SIZES OF SELECTED COMPANIES FOR ANALYSIS: CODE LOT SIZE COMPANY NAME ACC 750 Associates Cement Companies Ltd ARVIND MILLS 2150 Arvind Mills Ltd.No.Premium for that day. The table has various columns. BHEL 300 Bharat Heavy Electrical Ltd.The price of the futures at the end of the trading day 43 | P a g e .C .17. The following tables explain about the table that took place in futures and options between 25/02/2010 to 29/02/2010.No. Closing price .of contracts traded on that day. Date . Open interest . N. which explains various factors involved in derivative trading.

CALCULATION OF RATE OF RETURN:  ANALYSIS AND INTERPRETATION:    FUTURES: Futures are legally binding agreement to buy or sell an asset at a certain time in the future at a certain price.18.  FORMULA: Fo = So (1 + r-d) T So = closing price of a market on that day. r = Rate of return d = Dividend T = Time period 44 | P a g e .

1 691.50 806.1 698.85 8168 891 2270 90154.1 812.60 755. FUTURES OF ACC CEMENTS: Table – I High Low Close Open Int Trd Qty N.34 768.1 818. 23.05.95 7322 1012 3482 89881.80 591.05.40 1800 1943 2591 89858.54 1 26.00 790.05.21 1 24.05. Rs ('000) ('000) . Rs.32 1 25.30 589.20 1785 1465 1953 90132.65 7146 986 2781 88582.82 1 27. 45 | P a g e .C Date FO Rs.1 827.O.45 712.50 616.00 598.00 810.04 1 The above table has been given in the following graph.05.

decrease in open interest and reduction in value and volume of futures.11 89000 25.Source FUTURES PRICE OF ACC 90500 23. Low Rs.11 88500 26.O.05.05.05.11 90000 89500 24. FO Int ('000) 46 | P a g e .05.C.11 88000 87500 FO The data has been collected BUSINESS STANDARED (Paper) and Online Trading of INDIA INFOLIONE LTD INTERPRETATION: It is observed from the above mentioned table that the future price (FO) has increased tremendously due to increase in closing price. Close Rs Open Trd Qty N.  FUTURES OF ARVIND MILLS: Table – 2 Date High Rs.

11 96.05. Picture – 2 FUTURES PRICE OF ARVIND MILLS 1520 23.65 94.05.10 95.11 95.90 10636 3053 1420 1467.11 1460 27.05.50 95.70 95.05.70 94.00 13360 5334 2481 1515.05.25 9129 4444 2067 1488.  FUTURES OF BHEL: Table – 3 47 | P a g e . ('000) 23.85 96.05.25 94.4 25.40 98.6 27.11 1480 26.05.05.10 92.3 24.11 96.11 96.11 100.3 26.05.11 24.11 1500 25.11 1440 FO Source: The data has been collected BUSINESS STANDARDS (paper) and Online Trading of INDIA INFOLINE LTD. INTERPRETATION: The above graph shows that the future price (FO) has been decrease due to decrease in closing price and decrease in open interest and it is observed that increase in volume and value.05.40 97.9 The above table has been given in the following graph.45 3038 5771 2684 1475.95 5609 3990 1856 1483.

05.C. Close Rs Int N. Picture – 3 FUTURES PRICE OF BHEL 225000 23.11 2260. FO ('000) ('000) 23.00 2223.05.00 1995.05.11 2405.05.11 24. INTERPRETATION: From the above mentioned table it is observed that the future price (FO) has shown fluctuation due to fluctuation in closing price and volume. They are CALL OPTION and PUT OPTION: 48 | P a g e .11 205000 FO Source: The data has been collected BUSINESS STANDARDS (paper) and Online Trading of INDIA INFOLINE LTD.00 462 1400 4667 219881 The above table has been given in the following graph.00 2300.11 2057.60 1257 1508 5025 218096 26. value is increase and it is observed that open interest is decrease.05.75 1586 1405 4682 212665 25.05.00 2350.11 2335. OPTIONS DERIVATIVES: Options are two types. 19.11 220000 25.40 2192 988 3293 218768 24.00 2006.00 2038. Open Trd Qty Date High Rs.11 2010.05.05.10 871 934 6147 222906 27.00 2024.11 210000 27.O.00 1978. Low Rs.05.11 215000 26.05.00 2221.00 2210.

 CALL OPTION: A Call option is bought by an investor when he seems that the stock price moves upwards. SUMMARY: Project deals with five chapters 49 | P a g e . A call option gives the holder of the option the right but not the obligation to buy an asset by an certain date for a certain price.  PUT OPTION: 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 the right but not the obligation to sell asset by an certain date for a certain price. 20.

futures and options. methodology and limitations of the project. The Indian broking industry is one of the oldest trading industries that have been around even before the establishment of the BSE in 1875. 1956 with Registration No. 2001. Futures: 50 | P a g e . We became a public limited company on April 28. to institutional Customers. Despite passing through number of changes in the post liberalization period. most notably forwards. 1995 as Probilty Research and Services private limited at Mumbai under the Companies Act. Commodity or any other asset”. The underlying asset can be Equity. 2000 and the name of the Company was changed to Probity Research and Services Limited. 11 93797. can be traced back to the willingness of risk averse economic agents to guard themselves against uncertainties arising out of fluctuations in asset prices. Chapter III – deals with the review of literature for derivative (future & options) “Derivative is a product whose value is derived from the value of an underlying asset in a contractual manner.com Limited on May 23.Chapter I.deals with introduction. the industry has found its way onwards sustainable growth. We were originally incorporated on October 18. The name of the company was changed to India infoline. objectives. Forex. analysis and research covering Indian business. financial markets and economy. We commenced our operations as an independent provider of information.deals with the company profile and industry profile. Chapter II. 2000 and later to India Infoline Limited on March23. need. The emergence of the market for derivative products.

21 FINDINGS: 51 | P a g e . 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 pri9ce. Puts give the buyer the right. findings. Options: Options are of two types-calls and puts.deals with the summary. but not the obligation to sell a given quantity of the underlying asset at a given price on or before a given dateChapter VI. Calls give the buyer the right but not the obligation to buy a given quantity of the underlying asset. Chapter V.deals with the data analysis and interpretation. suggestions and conclusion. at a given price on or before a given future date. Futures contracts are special types of forward contracts in the sense that the former are standardized exchange-traded contracts.

 Application of future. 22. which are some percentage of the total money. SUGGESTIONS:  In a bearish market it is suggested to an investor to opt for put option in order to minimize profits.  The major factors that influence the futures and options market are the cash market.  In a bullish market it is suggested to an investor to apt for call option in order to maximize profits. foreign institutional investor involvement.  At present scenario the derivatives market is increased to a great position. 52 | P a g e . Its daily turnover reaches to the equal stage of cash market. ARVINDMILLS AND BHEL had shown a positive market in the week.  In cash market the profit / loss is limited but where in future and option an investor can enjoy unlimited profit / loss. Researchers view etc. but in derivatives has to pay the premiums or margins. Speculation and Arbitrage.  The derivatives are mainly used for hedging purpose.  Different tools of Hedging. News related to the underlying asset. The above analysis of futures and options of ACC. The average daily turnover of the NSE in derivative is four lacks volume.  In cash market the investor has to pay the total money. forward and option.  It is recommended that SEBI should take measures in improving awareness about the future and option market as it is launched vary recently. national and international markets.

In derivative segment the profit/loss of the option writer is purely depend on the fluctuations of the underlying asset. The lengthy time. It is recommended to SEBI to take actions in trading of futures and options in other regional exchanges.  At present futures and options are traded on NSE. 23.  Contract sixe should be minimized because small investors cannot afford this much of huge premiums.CONCLUSION: Derivatives are mostly used for hedging purpose. During the study of the option and future trading in India we found that the trading of the option and future (stock and index) rapidly growing till 2008 and then decline for the one year and then increase. The decline year was basically the 2008-09 because of the slow down 53 | P a g e .  SEBI should conduct seminars regarding the use of derivatives to educate individual investors.  SEBI has to take further steps in the risk management mechanism. the risk is low and profit making. The fewer time may be high risk and chances of loss making. It is suggested to an investor to keep in mind the time or expiry duration of futures and options contract before trading.

Wikipedia.bseindia.kotiksecurities. BIBLIOGRAPHY: WEBSITES 1. WWW. www. WWW.com 6. This trend is basically very popular in India during these year so many persons trading by option and future in Indian market. WWW. www.eurojournals.com 54 | P a g e . WWW.com 4.derivativesindia.com 3.com 5.investopedia.com 2.com 7.in this year and then increase by the speed.nseindian. www. 24.

www.scribd. www.unitedfutures.Prasanna Chandra JOURNALS: FINANCIAL EXPRESS 55 | P a g e .com 9.8.com Books: FINANCIAL MANAGEMENT – Prasanna Chandra DERIVATES CORE MODULE – NCFM MATERIAL SAPM .