This action might not be possible to undo. Are you sure you want to continue?
GENEVA FINEPUNCH ENCLOSURES LMITED, BANGALORE
Submitted in partial fulfillment of the requirement for the award of Degree of
Master of Business Administration
By P. BHANUPRIYA
Regd. No: 230598005
DEPARTMENT OF MANAGEMENT STUDIES
KMM INSTITUTE OF POST GRADUATE STUDIES
(Affiliated to Sri Venkateswara University, Tirupati) TIRUPATI-517 102 DECEMBER – 2005
KMM INSTITUTE OF POST GRADUATE STUDIES
(Affiliated to Sri Venkateswara University, Tirupati) TIRUPATI – 517 102.
DEPARTMENT OF MANAGEMENT STUDIES
REGISTERED NO:-230598005 This is to certify that the report entitled A STUDY ON WORKING CAPITAL MANAGEMENT AT GENEVA FINEPUNCH ENCLOSURES LIMITED, BANGALORE Submitted by P. BHANUPRIYA in partial fulfillment of the requirements for the award of the degree of Master of Business Administration under our supervision and guidance in the III semester of course, during the academic year 2005 - 2006.
HEAD OF THE DEPARTMENT
I would like to gratefully acknowledge the help of Mr. Gopi, Sr. HR Executive, GENEVA FINEPUNCH ENCLOSURES LIMITED, Bangalore, for giving an opportunity to finish the project in his esteemed organization. I wish to record my grateful thanks to Mr. Balaprasad, Assistant General Manager, Finance, GFEL, Bangalore, project external guide, for his constant help and advice and showing the light in all doubts during the project. I would like to thank Mr. K.V.S.N. Jawahar Babu, Principal, KMM Institute of Post Graduate Studies for his constant inspiration and support to complete this project. I express my gratitude to Mr. K. Tharaka Rami Reddy, Head of the Department, Department of Management Studies, KMMIPS for his valuable suggestions and guidance at all stages. My heartful thanks to Mrs. K. Selvi, internal Project Guide, who made my work easier and productive. Last but not least, special thanks to my parents and my friends for their whole hearted help and support towards the successful completion of the project work and in bringing out this project report. I thank to GENEVA FINEPUNCH ENCLOSURES LIMITED.
LIST OF TABLES S.15 Title Statement showing changes working capital for the year 1999 – 2000 Statement showing changes working capital for the year 2000. 13.14 4.10 4. Table no.7 4.4 4.5 4. 12. 6.12 4.8 4. 14. 4. 4.3 4. 8.2001 Statement showing changes working capital for the year 2001 – 2002 Statement showing changes working capital for the year 2002 – 2003 Statement showing changes working capital for the year 2003 – 2004 Composition of quick assets Composition of current ratio Composition of networking capital Composition of quick ratio Composition of absolute quick ratio Composition of cash turnover ratio Composition of current assets turn over ratio Composition of inventory ratio Composition of Debtors turnover ratio Composition of working capital turnover ratio Page. 11. 5. No 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 4 .13 4. 7.9 4. No 1.6 4. 3.2 4.1 4. 2. 10.11 4. 15. 9.
Chapter No. Title Acknowledgements List of tables 1 INTRODUCTION 1.2 Research Methodology. 1.2.1 Need for the study 1.2.2 Objective of the study 1.2.3 Scope of the study 1.2.4 Limitations of the study 1.2.5 Research design. 1.2.5 (a) Data collection source. 1.2.5 (b) Data Sources 1.2.5 (c) Research Tools 1.2.5 (d) Hypothesis 2 3 4 5. 6 7 PROFILES 2.1 Company Profile REVIEW OF LITERATURE DATA ANALYSIS AND INTERPRETATION TESTING OF HYPOTHESIS FINDINGS SUGGESTIONS Annexure Annual Reports Bibliography Page No i ii 1 19 19 19 19 20 20 20 20 20 21 22 22 26 35 50 54 55 56 57 67
I hereby declare that the project report entitle “ A STUDY ON WORKING CAPITAL MANAGEMENT AT GENEVA FINEPUNCH ENCLOSURES LIMITED”, BANGALORE, submitted in partial fulfillment of the requirements for the award of the degree of “MASTER OF BUSINESS ADMINISTRATION” from KMM INSTITUTE OF POST GRADUATE STUDIES, tirupati Affiliated to Sri Venkateswara University, Tirupati is an original exercise done by me. The findings and recommendations in this work are based on the information collected by me.
Working capital sources A prudent financial manager is always, interested in obtaining the correct amount of the working capital of the right time, at a reasonable cost and at the best possible favourable terms in making any final choice as regards to sources of working capital the relative cost of financing dependability upon source flexibility in financial planning must be given due weightage.
4. Sale of shares Sale of Debentures. Assistance Loans from Directors. Long – term Loans. Govt. 9. Public Deposits Customer’s Credit. 3. 4. 2. etc. 3. Bank Credit. 8 . 8. Trade credit Credit papers. Depreciation funds Provision for Taxation Accred Expenses 1. The above said Source of Working Capital are now briefly explained below. Security of Employees. 2.Working capital management Long term sources 1. Short term sources 1. 7. Factoring. 3. 2. 5. Ploughing back of profits. 6.
Sale of Fixed Assets : Any idle fixed assets can be sold out and sale proceeds can be utilized for financing the Working Capital requirements. It is a regular and cheapest source of Working Capital as it does not involve any explicit of capital. Along with it. Right Debentures have also been very popular in India since 1978. 4. Term Loans : 9 . 1.Financing of Long-term Working Capital : The Long-term Working Capital requirements include the Working Capital and the regular Working Capital. 5. 3. Sale of Debentures : Debentures are also an important source of long-term Working Capital because they are fixed cost source. 2. Ploughing Back of Profits : A Part of the earned profits may be ploughed back by the firm in meeting their working capital requirements. the minimum level of investment in various Current Assets also determines the requirements of Long-term Working Capital. Share Capital: A Part of Long-term Working Capital can be financed with the Share Capital. This Capital can be conveniently financed by the following sources.
10 .The loans raised for a period varying from 3 to 5-7 years are also important sources for Working Capital. This type of finance is ordinarily repayable capital or enterprise.
External Sources : Trade Credit: One of the most important forms of short term finance is the trade credit extended by one business enterprise to another on the purchase and sale of goods and equipment. (b) 1. Accrued Expenses : The firm can postpone the payment of expenses for short period. Hence these accred expenses also constitute an important source of Working Capital. Some authors of business finance do not accept them as a source of funds but it is not reasonable. Provision for Taxation : The provision for taxation can also be used by the companies as a source of Working Capital during the intermittent period. (a) 1. purchasing on furnishing a 11 . Normally. The use of trade credit has increased in recent years due mainly perhaps use of trade squeeze. the duration of such requirements does not exceed beyond a year The source of Short-term Working Capital may be Internal as well as External. 2. The trade credit may also assume three forms: Purchase on open account.Financing of Short-term Working Capital: This Category of funds covers the need of working capital for financing day-to-day business requirements. Internal Sources : Depreciation Funds : The Depreciation Funds constitute important source of Working Capital. 3.
Bank Credit: Commercial Banks are also principal sources of Working Capital. bills of exchange and Promissary notes of shorter duration varying between a month and six months are used.t. 3. Customer's Credit: Advance may also be obtained on contracts entered into by the enterprise. cash credit. They provide Working Capital in a number of ways such as overdrafts. Government Assistance : 12 . The customers are often asked to make some advance payment in cash in lieu of a contract of purchase. It is also comparatively cheap. 6. These papers are discounted with a bank and capital can be arranged.c. 2. Due to shortage of Bank Credit in recent past. 5. Bills Payable). the importance of public deposits has increased. line of credit. term loand. Such advance can be utilized in purchasing Raw-material paying wages and so on.. 4.pronote for specified period and purchase on trade acceptance (i. e. Credit Papers : In the category of credit papers. Public Deposits : Public Deposits are also an important source short-term and medium-term finance. They have been very popular among Indian Companies during last years. Accommodation bills an important method such finance.e. compared with other methods of borrowing this is the most flexible source because when the debt is no longer required it can be quickly and early reduced.
Factoring : Factoring involves raising funds on the security of the company's debts.. is neither inadequate nor 13 . 8. managing directors.Some times. 7. Loans from Directors etc. The Basic object of Working Capital Management is to manage the firms current assets and current liabilities in such a way that a satisfactory level of working capital is maintained i..e. The prime object of management is to make profit. smooth flow of funds is very necessary to maintain the health of the enterprise.. Loans can also be obtained from other fellow companies working within the same group. MANAGEMENT OF WORKING CAPITAL : Working Capital is the Life blood of every Organization just as Circulation of blood is very necessary in the human body to maintain life. so that cash in received earlier than of the company's liquidity position. no interest is charged on them. Whether or not this accomplished in most Business depends largely on the manner in which the Working Capital is administered. The importance of working capital can be very well explained in the words of "HUSBAND AND DOCKERY". These loans are often obtained at almost negligible rates of interest. central and state governments also provides short term finance on easy terms. etc. Governments subsidies are also one of the main financial assistance provided by the government. : An enterprise can also obtain loans from its officers. But this finance is not cheap in comparison to bank credit etc. Some times. directors.
This time period is simply known as the working capital cycle of the firm. Further more its ability to prosper will be largely determined by the composition of the Current Assets pool. Paucity of Working Capital not only impairs the firm's profitability but also results in production interruptions and inefficiencies. we can say that the succeeds of any enterprise is largely depends upon the efficient management of its working capital. For this purpose he should always aware about the stock levels of the Organization and changing market conditions.excessive. It should have adequate Working Capital to run its Business Operations. AFFECTS OF WORKING CAPITAL : The firm should maintain a sound working capital. the duration time required to complete the sequence of events in called as 'operating cycle'. The Current Assets should be sufficient enough to cover current liabilities in order to maintain a reasonable safety margin. An efficient Financial Manager should manage a balanced Working Capital position. Therefore. Debtors and finally again cash. Excessive Working Capital means idle funds which earn no profits for the firm. 14 . He should always maintain sufficient permanent Working Capital to meet the sudden demands from the Customers. As a matter of fact. a Business can not survive in the absence of a satisfactory ratio between its Current Assets and Current Liabilities. In a manufacturing firm. Both Excessive as well as Inadequate Working Capital positions are dangerous from the firm's point of view.
INTRODUCTION 15 .
OBJECTIVES This project has been taken up to study the Derivatives Futures and Option in detail with the idea of suggesting the strategies in this markets and an Technical analysis of oil sector using graphs and suggesting the buy or sell decision to the investor by using: 1. Graphs 16 . Budget 3. Sector Financial report 2. Individual performances 4.
The suggestions made is only the individual perception and its not ultimate decision SOURCES OF DATA Primary data was collected from the respondents who are trading in Indian Markets. where as the prices of oil depends on various other factors like climatic conditions.LIMITATIONS 1. 3. supply. The Technical Analysis of Oil sector is restricted only to Indian markets. The data was sorted to find out the various factors that help in suggesting the decision taking for the individuals to buy and sell in this sector. Demand and supply of the oil. Secondary data was provided by the organization and was gathered from the official websites of the respective organizations. Only the major factors like demand. International body for determining prices like OPEC. 2. budget impact on this sector government support and Future Prospects of this sector have been studied. Information about the history and various factors affecting the price performance has been studied from various Internet sites. 17 .
An effort has been made to suggest decision making for the individual. 18 . Further Technical analysis has been used to study the prices of oil companies and their future tendencies. which will be helpful for trading in Indian markets.RESEARCH METHODOLOGY Information from various sites was first analyzed to perform the technical analysis of major players in oil sector in an order. Various online reports have been studied to and have been combined to form a general analysis.
COMPANY PROFILE 19 .
We passionately believe in the Smart Investor who wants to make his own educated investment choices and demands world class access to a full range of services and products ranging from Equities to Insurance. intelligent analytics. offers buy and sell recommendations on India's leading companies. Indiabulls is a full service investment firm offering clients access to a tremendous range of financial services from 77 locations across 64 cities. We have a strong team of over 750 Client Relationship Managers focused on serving your unique needs. provides our clients with real-time service. futures. Our world-class infrastructure. We are proud to introduce to you Indiabulls Professional Network that offers real-time prices. intelligent analytics. detailed data and news. As we've expanded and developed to serve the needs of all kinds of investors. multi-channel & 24/7 access to all information and products. and electronic trading capabilities.Indiabulls Financial Services Limited Promoted by three IIT graduates it was started in the year 2008 and it is one of the first companies to offer investors an Internet trading platform. Today backed by the strong technology team the company has expanded and offers a bouquet of financial products and services ranging from equity. combined with the highest level of integrity. right at your finger-tips. 20 . right at your finger-tips. and electronic trading capabilities. This powerful technology is complemented by our knowledgeable and customer focused Relationship Managers who are available to help with your financial planning and investment needs. built with tens of crores of investment. equity analysis. we've been guided by one underlying philosophy: you come first. PHILOSOPHY YOU COME FIRST We have created a unique organization that is designed for you – the Smart Investor –. This powerful technology is complemented by our knowledgeable and customer focused Relationship Managers. detailed data and news. services and professionalism. Indiabulls derives most of its revenues from the brokerage business. options and wholesale debt market. PRODUCTS AND SERVICES Indiabulls offers a full range of financial services and products ranging from Equities to Insurance to enhance your wealth and hence achieve your financial goals. Now recently to its list of services it has added credit system to its investors and clients. Our Indiabulls Professional Network offers real-time prices.
active traders & Non-Resident Indians. ISSUE SUMMARY: Type Public issue.Indiabulls' Relationship Managers are available to you to help with your financial planning and investment needs. Rajiv Rattan and Saurabh Mittal 44. Indiabulls provides full access to all products and services through multi-channels. Equities & Derivatives Comprehensive services for independent investors. To provide the highest possible quality of service. DSP Merrill Lynch BSE & NSE Price Rs 16-Rs 19 per share Rs 2 Listing Face value Promoters Sameer Gehlaut.18 million Promoters post issue holding Issue Closes Issue Opens September 6. 100% book building Rs 435 m to Rs 517 m Min. subscription 365 equity shares Size Lead Managers SBI Capital Markets. 2004 September 10. Indiabulls Equity Analysis Premium research on 401+ companies updated daily. 2004 21 .7% Shares on offer 27. Depository Services Value added services for seamless delivery. Insurance Take care of your life while you take care of business.
880 25% 365 equity shares Rs 50. BUSINESS Indiabulls is essentially engaged in providing financial services in equity. 22 . derivatives and debt markets. depository for listed shares. For the purpose of inorganic growth by way of acquiring strategic stake in other companies and further investment in subsidiary company Indiabulls Securities Limited (ISL).ISSUE SRUCTURE QIBs Number of shares % of net offer to public (non-employees)* Minimum Bid/Application size Maximum Bid/Application size 13.001 Not exceeding the size of the issue Retail Portion 6.000 OBJECTIVE To promote new business activities like retail finance and asset management.880 25% Rs 50.759 50% Rs 50. To upgrade fixed infrastructure (like installing Virtual Private Network (VPN) to connect branches) and opening another 75 branches by the end of calendar year 2006. equity research and other non banking financial services.593. mutual fund advisory. The company's other financial services include distributorship of insurance products.796. The graphs below indicate the breakup of the revenues from its online and offline brokerage businesses.796.001 Not exceeding the size of the issue Non-Institutional Investors 6. The company operates through a network of 75 branches spread across the country.
However. All the three promoters of the company are engineering graduates while Saurabh Mittal is a management graduate as well. As far as size of the business is concerned. Rajiv Rattan and Saurabh Mittal will have a post issue holding of 11. the overall revenues from the brokerage business were Rs 695 m in FY04. This highlights the long-term potential for the sector. debt. i.e.1% respectively.Brokerage business (both online as well as offline) accounts for nearly all of the company's revenues from operations. The Indian equity markets have grown from strength to strength in the last decade with combined daily volumes of all segments on the BSE and the NSE touching Rs 232 bn in April 2004. while the overall revenues from operations were to the tune of Rs 696 m. its fortunes are very much dependent on the performance of the capital markets. from Rs 5 bn in FY96. SECTOR Since Indiabulls derives most of its revenues from the brokerage business. While Sameer Gehlaut will have a 23. in absolute terms.5% and 10.0% stake in the company post the IPO. 23 . it is only about 1. Rajiv Rattan and Saurabh Mittal are the promoters of Indiabulls Financial Services Limited.9% as compared to an estimated 52% (including indirect ownership by way of mutual funds) of all households in the US. if one were to compare the percentage of all households in India that are invested in the stock markets. Total shareholders in the country are over 20 m (2% of population) and this is the third largest after the US and Japan. PROMOTERS Sameer Gehlaut. offline contribution stands at 65%. derivative and equity markets. While the online segment contributes 35% of brokerage revenues.
DERIVATIVES DERIVATIVES 25 .
coffee. index. Recently futures contracts various commodities were allowed to be 26 . Although trading in agriculture and other commodities has been the driving force behind the development of Derivatives market in India. These assets can be anything ranging from share. collars. The price of curd depends upon the price of milk. soyabean. the price of the Reliance Triple Option Convertible debentures (Reliance TOCD) varies upon the price of the Reliance Shares. and supply of milk. Derivatives can of different types like forwards. stocks and stock indices had outstripped the commodities markets. Satyam and Infosys Traded on stock exchanges in NASDAQ of USA. draw their values from the prices of shares traded in India. The American Depository Receipts (ADR) and Global Depository Receipts (GDR) Of ICICI. Example: A very simple example of derivative is curd. bond. spices. swaps. Derivatives on stocks were traded in the form of Teji and mandi in unorganized markets. History of Derivatives The Derivatives market has existed from centuries as need for both users and producers of natural resources to hedge against price fluctuations in underlying commodities. The most popular derivative instruments are futures and options. which is derivative of milk. India has been trading in derivatives market in Silver. It is considered important because of its underlying asset. gold. Derivative on its own does not have any value. caps. floor etc. coffee etc. option. similarly the price of TELCO Warrants depends upon the price of the TELCO shares. cotton. the demand for products based on financial instruments – such as bond. currencies. Similarly in mutual funds the prices of mutual fund units depends upon the prices of portfolio of securities under that scheme. cotton and in oil markets for decades gray market. Derivative is an financial contract whose price/value is dependent upon price of one or more basic underlying asset. which in turn depends upon the demand. sugar crude. futures. rupee dollar exchange rate. Trading in derivatives market was legal before Morarji Desai’s Government had banned forward contracts.A Derivative is a financial instrument that derives its value from an underlying asset. these contracts are legally binding agreements made on trading screens of stock exchanges to buy or sell an asset in the future. Let’s see it in this way.
Futures. Coffee futures in Bangalore etc. they accounted for about two-thirds of total transactions in derivatives products. who are major users of indexlinked derivatives. In June 2000. their complexity and also turnover. National stock exchange and Bombay stock exchange started trading in futures in Sensex and Nifty. Even small investors find these useful due to high correlation of popular indices with various portfolios and ease of use. In class of equity derivatives. Financial derivatives are instruments that their value from financial assets. Derivatives products initially emerged has hedging devices against fluctuations in commodity prices and commodity linked derivatives remained the sole form of such products for almost three hundred years. especially among the institutional investors. Pepper futures in Kochi. However these products became very popular and by 1990s. Options trading on Sensex and Nifty commenced in June 2001.on various exchanges. In recent years. due to the in stability in the financial markets. Marked improvement in communication facilities and sharp decline in their costs. the market for financial derivatives has grown tremendously both in terms of variety of instruments available. For Example Cotton and Oil futures were traded in Mumbai. Soya bean futures in Bhopal. Increased integration of national financial markets with the international markets. bonds. The following factors have been driving the growth of financial derivatives: Increased volatility in asset prices in financial markets. Very soon thereafter trading began on futures and options on 31 prominent stocks in the month of July and November respectively. currently there are 41 stocks trading in NSE derivatives and the list keeps growing. These Derivatives can be Forward rate agreements. Options. 27 . futures and options on stock indices have gained more popularity than on individual stocks. currency etc. These assets can be stocks. As stated earlier the most traded instruments are futures and options. The financial derivatives came into spotlight in post 1970 period. and Swaps.
For example. futures and options. one can buy a one-month future of Reliance at Rs.49/$. If there is any change in the interest. Here we take a brief look at various derivatives contracts that have come to be used. if you will the stock price of Reliance is expected to go up to Rs. Hedgers: People who buy or sell to minimize their losses. leading to higher returns. and Innovations in the derivatives markets. then the importer can minimize his losses by buying a currency future at Rs. 350 and make profits. 400 in one month. For example. reduced risks as well as transactions costs as compared to individual financial assets. 28 . Development of more sophisticated risk management tools. it presents an arbitrage opportunity. which we shall discuss in detail later. Basically. Players in the Market The following are the players in the Derivatives markets: Speculators: People who buy or sell in the market to make profits. an importer has to pay US $ to buy goods and rupee is expected to fall to Rs. Arbitrageurs: People who buy or sell to make money on price differentials in different markets. Forwards: A forward contract is a customized contract between two entities. For example.48/$. a futures price is simply the current price plus the interest cost.50/$ from Rs. which optimally combine the risks and returns over a large number of financial assets. We will examine this in detail when we look at futures in a separate chapter. where settlement takes place on specific date in the future at today’s pre-agreed price. every investor assumes one or more of the above and derivatives are a very good option for him. providing economic agents a wider choice of risk management strategies. Types of Derivatives The most commonly used derivatives contracts are forwards.
Warrants: Options generally have lives of unto one year. Swaptions: Swaptions are options to buy or sell a swap that will become operative at the expiry date of the options. Longer-dated options are called warrants and are generally traded over the years. Currency swaps: These entail swapping both principal and interest between the parties. but not the obligation to sell a given quantity of the underlying asset at a given price on or before a given date. Baskets: Basket options are on portfolios of underlying assets. The two commonly used swaps are: Interest rate swaps: These entail swapping only the interest related cash flows between the parties in the same currency. the swaptions market has receiver swaptions and payer swaptions. with the cash flows in one direction being in a different currency than those in the opposite direction. The underlying asset is usually a moving average or a basket of assets. the majority of options traded on options exchanges having a maximum maturity of nine months. Options: Options are of two types Call option Put option Call option gives the buyer the right but not the obligation to buy a given quantity of the underlying asset. Futures contracts are special types of forward contracts in the sense that the former are standardized exchange-traded contracts. Thus a swaption is an option on a forward swap. Put option gives the buyer the right. Swaps: Swaps are private agreements between two parties to exchange cash flows in the future according to a prearranged formula. at a given price on or before a given future date. They can be regarded as portfolios of forward contracts. Rather than have calls and puts. 29 . A receiver swaption is an option to pay fixed and receive floating. Equity index options are a form of basket options.Futures: A futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price.
FORWARD 30 MARKETS .
derivatives have become increasingly important in the field of finance. Here we shall study in detail about these three derivative contracts. One party to the contract assumes a long position and agrees to buy the underlying asset on a certain specified future date for a certain specified future time. FORWARD CONTRACTS: A Forward contract is an agreement to buy or sell an asset on a specified date for a specified price. corporate and exporters being the market.Introduction to Forwards In the recent years. The rupee-dollar exchange rate is a big forward contract market in India with banks. The other party assumes a short position and agrees to sell the asset on the same date for the same price. While futures and options are now actively traded on many exchanges. financial institutions. To be more clear and precise about the forward contracts is a which is customized contract between the buyer and the seller where settlement takes place on a specific date in future at a price agreed today. forward contracts are popular on the OTC market. 31 .
e. you will now entitled to your gains.Salient features of Forward contracts: The main features of Forward contracts are as follows: Θ It is a negotiated contract between two parties and hence exposed to counter party risk. In case B defaults you are exposed to counter party Risk i.as a gain. and 32 . The counter party being in a monopoly situation can command the price he wants. Θ A contract has to be settled in delivery or cash on expiration date.20. 20 & B Loose Rs. asset type. he can lock on to the rate today and reduce his uncertainty. the exchange gives a counter guarantee even if the counter party defaults you will receive Rs. Limitations of Forward markets: Forward markets world-wide are afflicted by several problems: Lack of centralization of trading Illiquidity. After 1 month it is trading at Rs.120. He is exposed to risk of exchange rate fluctuations. Example: Trade takes place between A&B@ 100 to buy & sell x commodity. Θ In case one of the two parties wishes to reverse a contract. The classic hedging application would be that of an exporter who expects to receive payment in dollars three months later. asset quality etc. he has to compulsorily go to the other party. Θ Each contract is custom designed and hence unique in terms of contract size. Forward contracts are very useful in hedging and speculation. In case of Future. By using the currency forward market to sell dollars forward.20/. Similarly an importer who is required to make a payment in dollars two months hence can reduce his exposure to exchange rate fluctuations by buying dollars forward. If A was the buyer he would gain Rest. expiration date.
but makes the contracts nontradable. Counter party risk The basic problem with first two situations is that of too much flexibility. The forward contracts two consenting adults can form contracts against each other. this situation arises when party is declared bankrupt. Counterparty risk arises from the possibility of default by any one party to the transaction. 33 . This counterparty still remains a serious problem. This often leads to deal with a very convenient terms in that specific situation.
FUTURES MARKETS Introduction to Futures contracts: 34 .
the minimum quantity you can buy or sell. the tick size is 5 paisa per share or (1200*0. Futures contract is an agreement between two parties to buy or sell an asset at a certain time in future at a certain price. It is a standardized contract with standard underlying instrument. The asset can be share. 35 . sugar. It has gained its momentum in recent years.e. bond. To facilitate liquidity in the futures contract. is 1. The following are the Standard terms in any Futures contract: Quantity of the underlying asset Quality of the underlying asset (not required in case of financial futures) Expiration date The unit of price quotation (not the price) Minimum fluctuation in price (tick size) Settlement style Example: when you are dealing in March 2002 Satyam futures contract. the contract would expiry on March 28. 2002. It is one of the most popular types of contracts for the traders in the world. cotton. soybean. the price is quoted per share. coffee etc. rupee-dollar exchange rate. the exchange specifies certain standard features of the contract.200 shares of Satyam. interest rate. i. the contract would be settled in cash and the closing price in the cash market on expiry date would be the settlement price. you know that the market lot.05) = Rs 60 per contract/ market lot. FUTURES CONTRACT: Futures contract was designed to solve limitations that existed in forward contracts. crude oil. after forwards contract were banned in some parts of the world. index.In the Derivatives market Futures contract is most actively traded contract. To make it simple Futures are exchange-traded contracts to buy or sell an asset in future at a price agreed upon today.
Initial margin: The amount deposited in the margin account. Counter Party Risk: In forward contracts there is a risk of counter party default. In case of futures the exchange becomes counter party to each trade and guarantees settlement. Terms of forward contracts are negotiated between the buyer and the seller. Contract cycle: The period over which a contract trades. the margin account is adjusted to reflect the investors gain or loss depending upon the futures closing price. A futures contract can be reversed on the screen of the exchange as the latter is the counter party to all futures trades. • PRICING FUTURES THEORYTICALY: 36 . so that it never shows negative balance. at the end of each trading day.Differentiation between Forward and Future contracts: The following are points of difference between forwards and futures contract. Standardized contract: Forward contracts are customized while futures contracts are standardized. Basis: It is the difference between future price and the spot price. Liquidity: Futures are much more liquid and their price is transparent as their price and volumes are reported in the media. Squaring off: A forward contract can be reversed with only the same counterparty with whom it was entered into. While the terms of futures contracts are decided by the exchange on which these are traded. Future price: The price at which the futures contract trades in the futures market. Customized vs. Terminology used in Futures market: The terminologies used in futures market are as follows: • • • • • • Spot price: The price at which an asset trades in the spot market. Marking to market: In the futures market. This is called as marking to market. Maintenance margin: It is the minimum margin the investor has to keep in his account. Popularly termed as spread among the trading community. when the future contract is first entered.
The cost typically includes interest cost in case of financial futures (insurance and storage costs are also considered in case of commodity futures). The cost of carry for one month would be about Rs 3. One month Nifty future should quote at about 1111. the arbitragers would step in and reduce the extra premium commanded by the future due to demand. above Rs. Futures Price = Spot Price + Cost of Carry The Cost of Carry is the sum of all costs incurred if a similar position is taken in cash market and carried to expiry of the futures contract less any revenue that may arise out of holding the asset. As such a Reliance future contract with one-month maturity should quote at nearly Rs303.g. Example: Suppose Reliance shares are quoting at Rs 300 in the cash market. 37 . Every time a Stock Future trades over and above its cost of carry i. Please note that futures are not about predicting future prices of the underlying assets. The interest rate is about 12% per annum.The theoretical price of a futures contract is spot price of the underlying plus the cost of carry. vice-versa for the discount. Revenue may be in the form of dividend. thus futures and cash prices start converging. E. meaning below or above the theoretical price. Though one can calculate the theoretical price. In general. On expiry date. However it has been observed on several occasions that futures quote at a discount or premium to their theoretical price. When the future contract approaches expiry date. the cost of carry reduces as the time to expiry reduces. Hence creating a risk free arbitrage. Similarly Nifty level in the cash market is about 1100. futures price should equal cash market price.e. This is due to demand-supply pressures.: would buy in the cash market and sell the equal amount in the future. the actual price may vary depending upon the demand and supply of the underlying asset.
The difference between the trade price and the settlement price is ultimately your profit/loss. The aforesaid methodology is not final yet.g. This position in the cash segment would merge with any other position the buyer/seller has. Index based Derivatives would continue to be settled in cash 38 . Or else he would be required to deliver/receive the underlying shares on the settlement day (e. In case of delivery based settlement Stock-based derivatives are expected to be settled in delivery. T+2) in the cash segment. In case the buyer/seller wants he can square up this position by selling/buying the shares. The closing price in the cash segment is considered as the settlement price. On expiry of the futures contract. You can call exchanges and me to know the exact methodology once the regulator. the buyer/seller of the future would receive a long/short position at the closing price in the cash segment on the next trading day. Sebi guidelines in this regard are awaited.Settlement in Futures markets: Presently both stock and index futures are settled in cash.
USAGE of Futures contracts: You can do directional trading using futures. In case you are bullish on the underlying stock or index, you can simply buy futures on stock/index. Similarly if you are bearish on the underlying, you can sell futures on stock/index. There are eight basic modes of trading on the index futures market:
H1 Long stock, short Nifty futures H2 Short stock, long Nifty futures H3 Have portfolio, short Nifty futures H4 Have funds, long Nifty futures
S1 Bullish index, long Nifty futures S2 Bearish index, short Nifty futures
A1 Have funds, lend them to market A2 Have securities, lend to the market
Advantages of trading in Index futures: 40
After listening to the news and other happenings in the economy, you take a view that the market would go up. You substantiate your view after talking to your near and dear ones. When the market opens, you express your view by buying ABC stock. The whole market goes up as you expected but the price of ABC stock falls due to some bad news related to the company. This means that while your view was correct, its expression was wrong. Using Nifty/Sensex futures you can express your view on the market as a whole. In this case you take only market risk without exposing yourself to any company specific risk. Though trading on Nifty or Sensex might not give you a very high return as trading in stock can, yet at the same time your risk is also limited as index movements are smooth, less volatile with unwanted swings. When trading futures in cash the biggest advantage of futures is that you can short sell without having stock and you can carry your position for a long time, which is not possible in the cash segment because of rolling settlement. Conversely you can buy futures and carry the position for a long time without taking delivery, unlike in the cash segment where you have to take delivery because of rolling settlement. Further futures positions are leveraged positions, meaning you can take an Rs 100 position by paying Rs 25 margin and daily mark-to-market loss, if any. This can enhance the return on capital deployed. For example, you expect an Rs 100 stock to go up by Rs 10. One way is to buy the stock in the cash segment by paying Rs 100. You make Rs 10 on investment of Rs 100, giving about 10% returns. Alternatively you take futures position in the stock by paying about Rs 30 toward initial and mark-to-market margin. You make Rs 10 on investment of Rs 30, i.e. about 33% returns. Please note that taking leveraged position is very risky, you can even lose your full capital in case the price moves against your position. You can square up your future at any time once you have initiated the position, you need not wait until its expiry you can book profits or cut losses. One can use volume and open interest rates to predict the movement of the market this is done like this, the total outstanding position in the market is called open interest. In case volumes 41
one needs to take help of charts. The dividend amount is less than 10% of the market price of Reliance. the interest rate should be taken as net of dividend yield. In case the volumes are sluggish and the open interest is almost constant. it suggests that more and more market participants are keeping their positions outstanding.e. Rs 5. While calculating the theoretical price of a futures contract. Reliance declares 50% dividend. if the dividend is more than 10% of the market price of the stock on the day of dividend announcement.are rising and the open interest is also increasing. This implies that the market participants are expecting a big move in the price of the underlying. so the exchange would not adjust the position. the price of futures does get affected by the announcement of such exceptional dividends. the futures price is adjusted. So on announcement of the dividend. However to find in which direction this move would be. i. This implies sideways price movement in the underlying. For example: the current lot size of Cipla is 200. You are long on 200 shares of Cipla and the settlement price of Cipla on cum-bonus day is Rs 42 . As such the market adjusts this dividend in the market price and the futures price goes down by Rs 5 to Rs 299. The exchanges roll over the positions from lastcum-dividend day to the ex-dividend day by reducing the settlement price by dividend. However as per the policy of Sebi and stock exchanges. When Corporate Dividends are announced: In the event of such corporate announcements. Suppose Reliance is trading at Rs 300 and a two-month Reliance future which has 45 days to maturity is trading at Rs 304. the futures price should be discounted by the dividend amount. Suppose Cipla announces a bonus of 1:1. the exchanges adjust the position such that economical value of your position on cum-benefit and on ex-benefit day is the same. In case of Bonus the lot size of the stock that gives bonus gets adjusted according to the ratio of the bonus. The position is transferred from cum-bonus to ex-bonus day by adjusting the settlement price to neutralize the effect of bonus. In such a case. it suggests that a lot of day trading is taking place.
Beta is crucial in deciding how much position should be taken in index futures to hedge the cash market position. Using stock futures you would virtually sell your stock and buy it back without losing it.2 lakh. Suppose you have a long position in ABB worth Rs 2 lakh. Therefore to hedge your position in ABB you need to sell one contract of Nifty futures. 43 . Please remember that a hedge is not a device to maximize profits. One option is to sell the stock and buy it back after two to three weeks. you make profit out of your short position in the futures.e. worth Rs 2. you might have lost the value too without hedging. Before we go any further. This transaction is much more economical as it does not involve cost of transferring the stock to and from depository account. In case the stock price falls. You might say that if the stock had moved up. On ex-bonus day your position becomes long on 400 shares at Rs 500. This involves a heavy transaction cost and issue of capital gain taxes. Suppose Nifty futures are trading at 1100 and the market lot for Nifty futures is 200.1. the beta of this stock is 2. Beta of a stock is nothing but the movement of the stock relative to the index. it is a device to minimize losses. So suppose a stock X moves up by 2% when the Nifty moves up by 1% and it goes down by 2% when the Nifty falls by 1%.2 lakh. To hedge this position in the cash market you need to take an opposite position in Nifty futures worth 1.000. Thereafter the lot size of Cipla would be 400. Hedging of stock positions using futures: Suppose you are holding a stock that has futures on it and for two to three weeks the stock does not look good to you. You can hedge your cash market position in stocks that do not have stock futures by using index futures. However it is also true that in case of a fall. The beta of ABB is 1. i. Alternatively you can sell futures on the stock to hedge your position in the stock.1 x 2. You do not want to lose the stock but at the same time you want to hedge against the expected adverse price movement of the stock for two to three weeks. we need to understand the term called beta. a hedge does not result in better outcome but in predictable outcome.1. As they say. you would have made profit without hedging. Then each market lot of Nifty is worth Rs 2.
In this case your hedging position of one contract is not sufficient and you will be under hedged. Pay Rs 300 to take delivery of Satyam stock in cash market. when the futures stock is going down in futures market but going up in the cash segment then we can do the following: 44 . incase Satyam moves up. Using stock futures you can deploy this money to earn risk-free interest. Demystifying Stock Futures Here we try to solve some myths about futures • When some liquid money is available to you and you are trying to buy future stocks for risk free interest. you can earn risk-free interest by following the steps mentioned below: Buy Satyam in cash market at Rs 300 and simultaneously sell Satyam future at Rs 305. Need to have mark-to-mark margins in your account. It is very difficult (in fact impossible) to get perfect hedge but one can improve the perfection by adjusting the position in Nifty futures from time to time. So. If required the future position can be rolled over to the next month position with a difference of Rs 4-5. On expiry of Satyam future contract. Suppose you want to hedge your position in ABB for 15 days and during those 15 days ABB becomes very volatile and the beta goes up as high as 1. Hedging is like marriage and one should not expect it to be perfect.300 = 5 on Rs 300 for one month. Deliver the Satyam stock. Suppose Satyam is quoting at Rs 300 in the cash segment and one-month future is quoting at 305. any deviation of beta makes the hedge imperfect. you earn Rs 305 .5. the short position would be transferred to your account in the cash segment and a delivery order would be issued against you. The beta taken in the calculation of the position of Nifty futures is historical and there is no guarantee that it will be the same in future. • The above example was about how earn risk free interest when liquid cash is available with you. Whatever happens to the price of Satyam.Hedging with index futures are not perfect. This roll-over process can continue till you want to get your money back.
Follow the steps mentioned below to raise money against your ACC shares. you lose Rs 152 – 150 = 2 to raise money against your shares as cost. Whatever happens to the price of SBI. Follow the steps mentioned below to make risk-free money. Receive Rs 205 and make delivery of SBI stock in the cash market. • Can borrow against the future stock and that is the advantage of futures. that is when the difference between the futures and cash prices comes down. Please note that there is the risk of 45 . the long position would be transferred to your account in the cash segment and a receive order would be issued to you. one can buy cash and short futures. Conversely when the futures are quoting at a discount to the theoretical price. Sell SBI in the cash market at Rs 205 and simultaneously buy SBI future at 200. Instead of going to the banker and complying with a whole lot of formalities. Get your SBI stock back. Whatever happens to the price of ACC. Suppose ACC is quoting at Rs 150 in the cash segment and one-month ACC futures are quoting at 152.Suppose one-month SBI future is quoting at 200 while SBI is quoting at Rs 205 in the cash segment. Get your ACC stock back. • You might have seen that spot price and future price varies in the intra day trading. in that case you can do arbitrage to raise money in that situations. When the futures are quoting at a premium to their theoretical price. that is the difference between the futures and cash prices goes up. you earn Rs 205 – 200 = 5 on your stock. the long position would be transferred to your account in the cash segment and a receive order would be issued to you. On expiry of the ACC futures contract. Sell ACC in the cash market at Rs 150 and simultaneously buy ACC futures at 152. When the prices come in line. This way it is possible to take advantage of fluctuations in the basis. reverse the positions. you can in fact just call me to help you raise money against your shares using futures. When the prices come in line. one can sell cash and buy futures. On expiry of the SBI future contract. Receive Rs 150 and make delivery of ACC stock in the cash market. reverse the positions.
46 .execution of order. Also you need to decide the arbitration band depending on the transaction cost you bear.
On the other hand. namely Options. Options are fundamentally different from Forward and Futures contracts. coffee etc.OPTION MARKET Introduction to Options Market: In this section. the holder does not have to exercise this price. An option gives the holder the right do something. index. OPTIONS MARKET: Options are contracts that give the buyers the right (but not the obligation) to buy or sell a specified quantity of certain underlying asset at a specified price on or before a specified date. we look at the next Derivative product to be traded at NSE. cotton. The underlying asset can be share. soybean. interest rate. sugar. the seller is under obligation to perform the contract (buy or sell the underlying). rupee-dollar exchange rate. 47 . crude oil. bond.
You have the right to buy Hindustan Lever shares at Rs250 per share. The railways on the other hand have an obligation to carry the passenger if he decides to travel and refund his money if he decides not to travel. Premium: The consideration paid by the buyer for the right. 2002 whenever asked.000 shares of Hindustan Lever at Rs 250 per share on or before March 28.000 shares of Hindustan Lever at Rs250 per share on or before March 28. Options currently traded on more than 500 stocks in the United States. Option Terminology: There are some basic terminologies used in options. he can cancel the ticket and get a refund. In case the travel does not materialize. a passenger has an option to travel.000 shares. Example 2: Suppose you have a right to buy 1. 2002. by booking ticket he has hedged his position in case he has to travel as anticipated. The option gives you the right to buy 1. In other words you are a buyer of a call option on Hindustan Lever. Some options are European options while others are American options. which is analogous to the premium paid in an option contract.For example: A railway ticket is an option in daily life. The passenger on the other hand. 48 . Option holder: Buyer if the option who has the right. Option writer: Seller of the option who has the obligation. which is the cancellation fee. Stock option: Stock options are options on individual stocks. they are as follows: Index option: These options have the index as the underlying. Using the ticket. But he has to pay a cancellation fee. Put option: The option that gives the holder the right to sell. The contract gives the holder the right to buy or sell shares. Call option: Option that gives the holder the right to buy. Indexed option contracts settled in cash. In case he decides not to travel. The seller of this call option who has given you the right to buy from him is under obligation to sell 1. he can get out of the position by canceling the ticket at a cost. In case he does not then they get the cancellation fee. In case the passenger decides to travel the railways get the ticket fare.
In other words you are a buyer of a call option on Hindustan Lever. But if the spot price is lower than the strike price the holder can simply ignore the option. The seller of this call option who has given you the right to buy from him is under obligation to sell 1. There can be two types of option pay off. Here the profits for the option holder are unlimited while the losses are limited. European option: These are option that can be exercised only on the expiration date. Put Option: 49 . In other words. 2002 whenever asked. The option holder will make money if the spot price is higher than the strike price. How money is made in the option market? The money made in the option market is known as option pay off. Out of money: It is an option that would lead to loss if exercised immediately. Call option Put option Call option: A call option gives the holder the right to buy shares. The option gives you the right to buy 1. American option: These are options that are exercised at any point till the expiration date.000 shares. The seller of this call option who has given you the right to buy from him is under obligation to sell 200 units of Nifty.000 shares of Hindustan Lever at Rs250 per share on or before March 28. Example2: Assume you have the right to buy 200 Nifty units at 1100. At the money: It is an option that would even the holder’s option if exercised immediately. you are a buyer of a call option on Nifty. Example1: Suppose you have a right to buy 1. The pay off assumes that the option holder will buy at the strike price and sell immediately at the spot price. 2002. You have the right to buy Hindustan Lever shares at Rs250 per share.000 shares of Hindustan Lever at Rs250 per share on or before March 28. In the money: It is an option that would lead to profits if it were exercised immediately. You have the right to buy 200 units of Nifty at 1100. The option gives you the right to buy 200 Nifty units.
2002 whenever asked. The option gives you the right to sell 1. But if the spot price is higher than the strike price. You have the right to sell Bharat Heavy Electrical shares at Rs140 per share. But if the spot price falls dramatically then he can make wind fall profits. You have the right to sell 200 units of Nifty at 1200.600 shares of Bharat Heavy Electrical at Rs 140 per share on or before March 28. Who decides the strike price? The exchanges decide the strike price at which call and put options are traded. In case the last Thursday of a month is a holiday. It is expected that once these contracts become liquid. Thus the profits of the option holder are unlimited and his losses are capped to the extent of the premium.600 shares. March 28. 50 . the option holder will simply ignore the option. The option gives you the right to sell 200 Nifty units.The put option gives the right to sell. The buyer enjoys the right and the seller is under obligation to fulfill the right till the option contract expires. the exchanges would introduce contracts of longer-term expiry/maturity. Option contracts have an expiry date specified by exchanges. The pay off assumes that the option holder will buy at spot price and sell at strike price.and three-month contracts available presently. There are one-. The seller of this call option who has given you the right to sell to him is under obligation to buy 200 units of nifty. Example2: Suppose you have the right to sell 200 Nifty units at 1200. In other words you are a buyer of a put option on Nifty. 2002 is the expiry date in the aforesaid example. Example1: Suppose you have the right to sell 1. it will be beneficial to sell it in the market. last Thursday of the contract month is the expiry day. 2002.600 shares of Bharat Heavy Electricals at Rs140 per share on or before March 28. two. However you must check with the dealer about the expiry date before placing the order for buying or selling options. Normally as per the contract specifications of options given by the National Stock Exchange and Bombay Stock Exchange. In other words you are a buyer of a put option on Bharat Heavy Electrical. the previous business day is considered as the expiry day. The option holder will make money if the spot price is lower than the strike price. The seller of this put option who has given you the right to sell to him is under obligation to buy 1.
Instead you can buy an option and square up the position by selling the identical option (same expiry and same strike) at any time before the contract expires. For example the strike price interval for Bharat Heavy Electricals is Rs10. Strike price intervals specified by the exchanges: Strike price intervals specified by the exchanges are as follows: Price level of Underlying Less than or equal to 50 Above 50 to 250 Above 250 to 500 Above 500 to 1000 Above 1000 to 2500 Above 2500 Options Market Process: Call and put options are traded on-line on the trading screens of the National Stock Exchange and Bombay Stock Exchange like any other securities.0 30. limit and stop loss order etc. and Rs190 etc. 51 Strike Price Interval (in Rs) 2. Rs170. the exchanges specify the strike price interval for different levels of underling prices. This means that there would be strike prices available with an interval of Rs10. You can place market. You can modify or delete your pending orders.0 10. You are not compelled to wait till expiry of the option once you have bought or sold an option. meaning the difference between one strike price and the next strike price over and below it.Generally to simplify matters. The difference between the selling and buying prices is your profit/loss. Rs180.0 50.0 . You can see the best five orders by price and quantity.5 5. Typically you can see options on Bharat Heavy Electricals with strike prices of Rs150.0 20. The price of options is decided between the buyers and sellers on the trading screens of the exchanges in a transparent manner. The process is similar to that of trading in shares. The whole process is similar to that of trading in shares. You can buy first and sell later or you can initiate your position by selling and then buying—there is no restriction on direction. Rs160. You can sell an option and square up the position by buying an identical option.
Volatility of the price of underlying stock or index Adjust the price for dividend expected during the term of the option to arrive at fine prices. Consider this: suppose a stock is trading at Rs70. An opposite short position at effectively the strike price would be transferred in the cash segment in the account of the seller of the call option who has obligation to sell. 10% and 5% respectively. he receives the difference between the spot price and the strike price in cash. a long position of the underlying stock effectively at the strike price would be transferred in the cash segment in the account of the buyer of the call option who has the right to buy. Strike price/exercise price of the option 3. Rs90 and Rs100. the call option would expire worthless. This means that on exercise of a call option. Risk-free rate of interest 5. If the stock price were to finish at Rs110 or Rs120. The seller of the option pays this difference. 15%. you would gain Rs10 and Rs20 respectively. Time to expiration of the option 4. What would be your expected return if you were the buyer of a call option with a strike price of Rs100? If the stock price were to finish at Rs80. Rs100. Similarly on exercise 52 . Rs110 and Rs120 are 25%.Factors affecting the price of option: There are five fundamental factors that affect the price of an option. These are: 1. Your expected return from the call would be: (40%*0)+(25%*0)+(15%*0)+(10%*10)+(5%*20) = 11. This means that you would like to pay anything less than Rs11 for this option to make a profit and the seller would always like to get anything more than Rs11 for giving you this option. Similarly the probabilities of the price being Rs90. There is 40% probability that the stock price would move to Rs80. Price of the underlying stock or index 2. Settlement: Presently stock options are settled in cash. This means that when the buyer of the option exercises an option. It is expected that stock options would be settled by delivery of the underlying stock.
a short position in the underlying stock effectively at the strike price would be transferred in the cash segment in the account of the buyer of the put option who has the right to sell. Premium Varying with the Price of the Option: 53 .and out-of-the-money options? The following graph shows how the premium of 30-day maturity. An opposite long position at effectively the strike price would be transferred in the cash segment in the account of the seller of the put option who has the obligation to buy. in. However guidelines in this regard are awaited from SEBI. As the spot price rises above the strike price. Study the price movement of the option carefully. Please check the exact method of delivery-based settlement once the regulator and exchanges announce it. Varying time value for at-. the option is at the money. You would find that the time value is the highest when the spot price is equal to the strike price.of a put option. the option becomes in the money and its intrinsic value increases but its time value decreases. Rs260 strike price call option on Reliance varies with the movement of the spot price of Reliance. the option becomes out of the money and its intrinsic value becomes zero while its time value decreases. In the same way as the spot price falls below the strike price.
in case the price of the underlying moves in his favour. He has unlimited potential to profit if the price of the underlying moves in his favour. to the extent of the premium paid. He has limited potential to profit.The buyers of longer maturity options enjoy the right to longer duration and the sellers are subject to risk of price movement of the underlying during a longer term. both the buyer and the seller are under obligation to fulfill the contract. They have unlimited potential to gain if the price of the underlying moves in their favour. But a limited potential to lose. Similarly the seller of the option is under obligation. to the extent of the premium received. Difference between Options and Futures: In case of futures. since the price of both call and put options increases as the time to expiry increases. in case the price of the underlying moves against the view taken. the buyer of the option has the right and not the obligation.and 30-day maturity. Rs260 strike price call options on Reliance when the spot price of Reliance is Rs260. In case of options. they are subject to unlimited risk of losing if the price of the underlying moves against their views. Thus he enjoys an asymmetric risk profile. The following graph shows the prices of 15. On the contrary. But an unlimited risk of losing in case the price of the underlying moves against the view taken. 54 . however.
Deep out-of-the-money options are less sensitive in comparison to at-the-money and deep in-the-money options.5. DELTA of an Option and its Significances: For a given price of underlying.PRICE BEHEVIOUR OF AN OPTION OR GREEK OPTION: We need to understand and appreciate various option Greeks like delta.5 for near/at the. Conversely as the option becomes out of the money. In other words. The delta of an option tells you by how much the premium of the option would increase or decrease for a unit change in the price of the underlying. time to maturity and volatility. risk-free interest rate. delta measures the sensitivity of options with respect to change in the price of the underlying. the premium of the option would change by 50 paise for an Rs1 change in the price of the underlying. strike price. Some people refer to delta as 0 to 100 numbers. theta. gamma. The Delta is an important piece of information for a option Buyer because it can tell him much of an option & buyer he can expect for short-term moves by the underlying stock. Delta is about 0. Volatility and Number of days. vega and rho to completely comprehend the behavior of option prices. the delta of an option is a theoretical number. the value of delta increases.money options. 55 . As the option becomes in the money. For example. Delta is positive for a bullish position (long call and short put) as the value of the position increases with rise in the price of the underlying. If any of the above factors changes. the value of delta also changes. This can help the Buyer of an option which call / Put option should be bought. The factors that can change the Delta of an option are Stock price. Delta varies from 0 to 1 for call options and from –1 to 0 for put options. the value of delta decreases. for an option with delta of 0. Delta is negative for a bearish position (short call and long put) as the value of the position decreases with rise in the price of the underlying.
This means that if the price of Infosys and the other parameters like volatility remain the same and one day passes. Theta is always negative for the buyer of an option. Like the other Greek terms you can calculate theta using option calculator.THETA of an option and its Significance: The theta of an option is an extremely significant theoretical number for an option trader. 56 . The following graph would make it clearer. volatility is 50% and the risk-free interest rate is 8%. Theta tells you how much value the option would lose after one day. time decay of option premium is very steep near expiry of the option. the value of this option would reduce by Rs4.5 when Infosys is quoting at Rs3. as the value of the position of the seller increases as the value of the option goes down with time.900. Further.900 is 4. else sell it off. as the value of the option goes down each day if his view is not realised.5. If the rate of appreciation is more than that of depreciation hold the option. with all the other parameters remaining the same. Consider options as depreciating assets because of time decay and appreciating due to favorable price movements. Conversely theta is always positive for the seller of an option. Suppose the theta of Infosys 30-day call option with a strike price of Rs3.
Vega indicates how much the option premium would change for a unit change in annual volatility of the underlying. the underlying price is almost in the same range while the premium of the option has increased. for the buyer it is advantageous if the volatility increases after he has bought the option. 57 .6 and its premium is Rs15 when volatility of the underlying is 35%. time to expiry. Vega is positive for a long position (long call and long put) and negative for a short position (short call and short put). Suppose the vega of an option is 0. As the volatility increases to 36%.6. volatility and interest rate etc. Sometimes you might have observed that though seven to ten days have passed after you bought an option.VEGA of an Option and its Significance: Vega is also a theoretical number that can be calculated using an option calculator for a given set of values of underlying price. for the seller any increase in volatility is dangerous as the probability of his option getting in the money increases with any rise in volatility. This clearly indicates that volatility of the underlying might have increased. the premium of the option would change upward to Rs15. strike price. Simply put. On the other hand.
Feeding the price of underlying. so the rate of change in the premium has increased. The new delta of the option at changed underlying price is 0.54. buy a call option on that stock. When you are very bullish on the market as a whole.04 and its delta is 0. buy a call option on indices (Nifty/Sensex). risk-free interest rate. Gamma does not matter much for options with long maturity.GAMMA of an option and its Significances: Gamma is a sophisticated concept. For example. When you are very bullish on a particular stock. Delta tells you how much the premium would change. then gamma is acceleration. However for options with short maturity. If I were to explain in very simple terms: if delta is velocity. the delta of the option would change to 0.04 = 0. as it is important too. the gamma of an option is a theoretical number. gamma is high and the value of the options changes very fast with swings in the underlying prices. You need patience to understand it. buy a call option.54. assume the gamma of an option is 0. Like delta. 58 . The gamma of an option tells you how much the delta of an option would increase or decrease for a unit change in the price of the underlying. time to maturity and volatility. Gamma is positive for long positions (long call and long put) and negative for short positions (short call and short put). strike price.5 + 0. STRATEGY IN THE OPTION MARKET: When Bullish When you are very bullish. gamma changes delta and tells you how much the next premium change would be for a unit price change in the price of the underlying. For a unit change in the price of the underlying.5.
the value of the position erodes. At expiration the break-even underlying price is the strike price plus premium paid for buying the option. If volatility increases. sell a call option on index. When you firmly believe that a particular stock is not going to rise. if the underlying price is below the strike price at expiry of the option.The more bullish you are. You can book profit by selling the same option at higher price whenever you think that the underlying price has come to the level you expected. Time decay characteristic: options are wasting assets in the hands of a buyer. Upside potential: The price of the option increases as the price of the underlying rises. When NO Rise When you firmly believe that the underlying is not going to rise. sell call option on that stock. Downside risk: your loss is limited to the premium you have paid. The maximum you can lose is the premium. the more out of the money (higher strike price) should be the option you buy. if volatility decreases. Sell out-of-the-money (higher strike price) options if you are only somewhat convinced. sell at-the-money options if you are very confident that the underlying would remain at the current level or fall. When you firmly believe that index (Nifty/Sensex) is not going to rise. erosion hastens. 59 . erosion slows down. No other position gives you as much leveraged advantage in a rising market with limited downside. As time passes. sell a call option.
Such a position must be monitored closely. When you are very bearish on a particular stock. Downside risk: the price of the option increases as the underlying rises. You get maximum profit if the option is at the money. buy a put option. As time passes. Maximum profit is realised if the underlying price is below the strike price. The more bearish you are. No other position gives you as much leveraged advantage in a falling market with limited down side. buy put option on indices (Nifty/Sensex). You can cut your losses by buying the same option if you think that your view is going wrong. Losses keep on increasing as the underlying rises and are virtually unlimited. At expiration the breakeven is strike price plus premium. the more out of the money (lower strike price) should be the option you buy. Time decay characteristic: options are growing assets in the hands of a seller.Upside potential: your profit is limited to the premium received. the value of position increases as the option loses its time value. 60 . When you are very bearish on the market as a whole. buy put option on that stock. When Bearish When you are very bearish.
the value of the position erodes. erosion hastens. 61 . sell a put option on the index. When NO Fall When you firmly believe that the underlying is not going to fall.Upside potential: the price of the option increases as the price of the underlying falls. if the underlying price is above the strike price at expiry of the option. If the volatility increases. sell a put option. You can square up your position by selling the same option at a higher price whenever you think that the underlying price has come to the level you expected. Time decay characteristic: options are wasting assets in the hands of a buyer. When you firmly believe that a particular stock is not going to fall. The maximum you can lose is the premium. sell put option on that stock. sell at-the-money options if you are very confident that the underlying would remain at the current level or rise. When you firmly believe that index (Nifty/Sensex) is not going to fall. Downside risk: your loss is limited to the premium you have paid. if the volatility decreases. At expiration the break-even underlying price is the strike price minus premium paid for buying the option. erosion slows. Sell out-of-the-money (lower strike price) options if you are only somewhat convinced. As time passes.
Strategy implementation: a call option is bought with a lower strike price and another call option is sold with a higher strike price. 62 . Or a put option is bought with a lower strike price and another put sold with a higher strike price. Maximum profit is realised if the underlying price is above the strike price. producing a net initial debit. producing a net initial credit. At expiration the breakeven is strike price minus premium. Time decay characteristic: options are growing assets in the hands of a seller.Upside potential: your profit is limited to the premium received. Such a position must be monitored closely. Bull Spread is the best strategy. Maximum profit is realised if the option is at the money. Downside risk: the price of the option increases as the underlying falls. the value of the position increases as the option loses its time value. As time passes. Losses keep on increasing as the underlying falls and are virtually unlimited. You can cut your losses by buying the same option if you think that your view is going to be wrong. Moderately Bullish When you think the underlying index or stock will go up somewhat or is at least more likely to rise than fall.
producing net initial debit. Puts: net initial credit. producing a net initial credit or a put option is sold with a lower strike price and another put bought with a higher strike. Time decay characteristic: time value erosion is not too significant because of balanced position. Maximum profit if underlying price at expiry is above the higher strike. Downside risk: loss is limited. Calls: net initial debit. Puts: difference between strikes minus initial credit. Maximum loss if the underlying price at expiry is below the lower strike. Strategy implementation: a call option is sold with a lower strike price and another call option is bought with a higher strike price. 63 . Moderately Bearish When you think the underlying index or stock will go down somewhat or is at least more likely to fall than rise.Upside potential: profit is limited. Calls: difference between strikes minus initial debit. Bear Spread is the best strategy.
Calls: difference between strikes minus initial credit. Puts: difference between strikes minus initial debit. Time decay characteristic: time value erosion is not too significant because of balanced position. Maximum profit if the market is below the lower strike at expiry. Calls: net initial credit. Downside risk: profit is limited.Upside potential: profit is limited. Puts: net initial debit Maximum loss if the market is above the higher strike at expiry. 64 .
figures for proved reserves for crude oil are about 0. PLAYERS: The major players in this segment are: 65 . In India. the estimated life is about 61 years. the largest source of energy.7 TMT and the estimated life stands at about 19 years while for natural gas the life is about 27 years with reserves of about 0. is a key feed stock for petroleum products. it is estimated that the reserves will last for another 41 years. at the current proved reserves of 156 trillion cubic meter (TCM). Globally.OIL SECTOR ANALYSIS INTRODUCTION Crude oil.76 TCM. In case of natural gas. at the current estimates of proved reserves of 142.7 thousand million tonnes (TMT).
In the four rounds of the policy. ONGC is the major producer. there is still political intervention in the pricing of certain petroleum products. GAIL is currently the monopoly player in the transmission and distribution of natural gas. In case of natural gas. For instance. Power and Fertilizer together contribute nearly 70% of the demand for natural gas. GOVERNMENT SUPPORT: Government initiated a new exploration and licensing policy (NELP) to increase competition in exploration front open to all. the country still witnesses shortage in supply of natural gas by around 86 MMSCMD (million metric standard cubic meters of gas) per day. Refining sector got deregulated in FY99 whereas marketing sector deregulation began to take shape on 1st April 2003. Total refining capacity of the country stands at about 124 MMTPA (million metric tonnes per annum) as in 2004.IOC ONGC HPCL BPCL Independent refineries have now become subsidiaries of these bigger players. The user industries here are mainly power. Also. petrochemicals. so far the government has signed 90 contracts involving an investment of US$ 4. The government is further planning to introduce NELP V in the next couple of months. PROCESS: 66 . However. Reliance has recently struck huge amount of natural gas. companies having invested Rs 20 bn in upstream. downstream or other energy sources are now eligible to apply for retail petroleum marketing rights. IOC dominates the refining capacity with a total share of nearly 41% of the current refining capacity. pharmaceuticals and utilities. However. fertilizers.4 bn. Gujarat Gas is also another player in the regional domain and is present mainly in retail side. subsidy on LPG and PDS kerosene still continues and would be phased out in next 2 to 3 years. accounting for about 90% of the supplies.
which are further marketed. since crude availability of country is only about 30% of the requirements. After extracting the crude oil from the reserves. Petroleum products are obtained through a two-stage process: distillation and chemical processing. It takes about Rs 5 bn . Distillation involves breaking crude oil into light distillate. Also the petroleum products are a commodity product. Chemical processing is done to add value to products.Rs 10 bn per m tonnes to set up a refinery.There are three stages in the process. OPEC has the power to manipulate prices. Barriers to entry: Capital intensive. it is processed in refinery to yield various petroleum products. The new players wanting to enter the retail segment need to pump in a minimum of Rs 20 bn in the sector in order to be eligible for the retail marketing business. Bargaining power of Customers: Currently low. Demand: Demand for petroleum products is relatively inelastic. ONGC and Oil India dominate the upstream segment. Also. 67 . But in future it is expected that there may be price differential in these products on account of increasing competition and this would lead to higher bargaining power to the consumers. the size of refinery and its location matter for the viability of refinery. remaining 70% is imported. Bargaining power of Suppliers: High. KEY POINTS IN THIS SECTOR: Supply: While domestic players supply about 30% of crude oil required. upstream: exploration and downstream: refining and marketing. medium distillate and heavy distillate. The per capita consumption of India is one of the lowest in the world and demand is expected to remain stagnant going forward. Together they contribute 87% of India's oil production. Petroleum products are in surplus.
Exports of products were at a record high and touched Rs 163 bn in FY04. Highlights of the Financial Year 2004: The following is some of the highlights of this Sector in the year 2004: India's oil demand jumped 16% in FY04 in value terms from US$ 15. ONGC.3 bn. it actually did not happen. The last two years has witnessed India converting into a product surplus nation. since the rupee strengthened during the same period. Although ONGC is allowed to sell crude oil at global prices. with substantial increase in private competition. the oil PSUs have formed a cartel. consumption of petroleum products increased from 104 MT in FY03 to 108 MT in FY04. Crude oil prices rose sharply on account of various reasons like geopolitical tensions in the Middle East. Refining capacity of the country in FY04 stood at about 124 MMTPA.4 bn in FY04. while product imports increased by 14% during the same period. In volume terms.3 bn. low inventories coupled with high demand in the US and the higher demand from China. PSU players have taken up many 68 . However.8 bn to US$ 18. this scenario is likely to change. as the companies continue to set prices.Competition: Although the government has opened up the sector to private players. Although post-dismantling. Crude oil production in India stood at 33 MMT while petroleum products production was up 8% to 122 MT as opposed to 113 MT in FY03. As a result of increase in global crude prices. the net impact was 10% from Rs 850 bn to Rs 935. MRPL and Numaligarh to enter into marketing segment. prices of major products such as petrol. it had to bear a subsidy burden on LPG and kerosene to the tune of Rs 27 bn. diesel. India's oil import bill surged by 16% in FY04 from US$ 18 bn in FY03 to US$ 20. This can be seen from the fact that the petrol and diesel prices have risen by about 22% and 27% respectively in FY03 as a result of crude prices increasing by about 45%. thanks to additional refining capacities being added by Reliance Industries and other major players in the sector. In order to gear up. Reliance. However. LPG and kerosene are government controlled and to that extent. companies were free to mark product prices in line with international crude prices. Government awarded licenses to Shell.
Reliance. etc. and one-stop shopping points. the companies are planning to expand their refining capacities. the same would be around 25. Although demand for petrol and diesel shall remain flat in the domestic markets. In the next 2 years. The companies have built up non-fuel business portfolios like ATMs. The union cabinet approved the Petroleum Regulatory Bill.000 retail outlets. Marketing aspect of the business saw multiple initiatives like premium petrol. Recent discoveries by ONGC. The bill is expected to be placed before the parliament for approval shortly. Vehicle accessories. Discoveries by ONGC and other players are expected to increase the supply side in long term. any success in deep-sea exploration and coal bed methane blocks might change the equation significantly in the long term. would further increase supply side. Reliance hit upon 14 trillion cubic feet of gas reserves in KG Basin and plans to begin commercial production by FY06. The oil companies faced losses to the tune of Rs 36 bn in FY04 on account of sale of LPG and kerosene at subsidized rates. etc.000 with private players accounting for about nearly 2. It is expected that the refining capacity would increase by about 40 MMTPA in the next three years. Cairn Energy. LPG is likely to witness double digit growth as more and more people shift from kerosene to LPG as a major source of cooking medium. the refineries shall resort to exports markets. While demand for petrol and diesel is likely to remain flat in the next few years. Future Prospects in this Sector: The following is the prospects in this Sector: Increased thrust on exploration in terms of competitive bidding in NELP. 5 Kg LPG cylinders can be seen to increase rural reach. 69 . slogans. Anticipating this. This apart.500 outlets by that time. encouraging companies to buy equity investments abroad would lead to higher crude oil production going forward. which provide for the establishment of a Petroleum Refining and Marketing Regulatory Board. We have about 20.initiatives. In case of LPG.
910. Brand differentiation and pricing differential would increase and customer bargaining power would increase. which poses lot of potential in terms of natural gas. companies have started focusing on exports and this would see a healthy growth going forward.0 14.229 11. the government has signed nearly 90 contracts with investments to the tune of US$ 4.8 2. Sector Financial Report Summary: 31/03/2002 31/03/2003 31/03/2004 12 12 12 SALES SALES GROWTH GROSS PROFIT Rs m % % 70 2. whereas IOC is also planning to enter into exploration and petrochemicals segment and the latter has set up a war chest of US$ 2 bn to acquire medium and small exploration companies.341 6. Fifth round of NELP is expected shortly. Currently.4 bn. Indian companies are realizing the potential of integration (upstream and downstream) and are also planning to integrate themselves. The government has opened up coal bed methane blocks. With increasing competition.0 14. GOI has also encouraged companies to acquire equity investments abroad. automated petrol pumps would soon be seen across the country with various services being offered as a rider on the petrol pumps. While HPBL and BPCL plans to enter into exploration.347.Given the current oversupply scenario.4 .746. A one-time commodity product is now realized more as a branded one with each company trying to distinguish their products from one another.600 17.5 2. They have started taking control in their hands from the existing dealer owned network. In the earlier four rounds. 75% of the retail outlets in case of HPCL and BPCL are company owned and operated and this is likely to increase further. PSU marketing companies have taken a lot of initiatives to prepare for the foreseen competition. ONGC eyes to enter in the refining and marketing segment.
0 0.792.774 75.9 8.3 20.350 4.0 25.2 0.4 1.7 20.223.MARGIN PAT PAT GROWTH WORKING CAPITAL TO SALES ROCE RONW DEBT TO EQUITY RATIO MKT CAP MKT CAP / SALES ENTERPRISE VALUE P/E RATIO PRICE/BOOK VALUE RATIO Rs m % % % % x Rs m x Rs m x x 120.057 5.2 93.0 27.388 0.1 131.5 29.1 266.4 1.8 2.3 1.043.681 7.861 8.9 2.4 1.246 0.3 0.1 212.545 0.819 0.7 24.4 10.2 Budget 2005-06 Energy 71 .3 213.
Realizations for ONGC are likely to decline as a result of lower customs duties on crude oil. Customs and excise duties on LPG and kerosene eliminated. as it would help reduce under-recoveries on these two highly subsidized products. customs duties and transportation costs directly add to the margins and a reduction of the same is likely to reduce margins. thereby affecting import parity crude oil prices. as it is likely to help reduce the import parity cost of crude at the refinery gate. Budget Measures Customs duties on crude oil halved to 5% from 10%. Budget Impact The reduction in customs duties on crude oil is likely to have a positive impact on the downstream oil refining and marketing companies. Customs duties on all other petroleum products other than above. The required effect of these measures was to bring in more transparency. Sector Outlook While the oil marketing companies had a forgettable FY05 on the back of rising product costs at the refinery gate on one hand and lack of freedom to increase product prices in the domestic market. taking into consideration the landed costs of products (notional imports) as a result of which.The Indian petroleum sector has witnessed major shifts in policy matters over the last few years with the dismantling of the APM and entry of private players into retail marketing business. the measures announced by the FM in the 72 . diesel and all other petroleum products are likely to reduce the protection enjoyed by the refineries as a result of which realizations are likely to have a negative impact. being reduced to 10% from 20%. however. Also having a positive impact on these companies is the elimination of customs and excise duties on LPG and kerosene. Excise duties on petrol and diesel to be fixed as a combination of ad-valorem and specific duties. It should be noted that petroleum products are priced at the refinery gate. Cess on petrol and diesel to be increased by 50 paise per litre. not much has changed with the government still in control of product prices. Customs duties on petrol and diesel reduced to 10% from 20%. Elimination of customs duties on LPG and kerosene and the reduction of duties on petrol.
2% cess levied on all taxes including excise. As a result prices customs duty reduced of LPG cylinder increased from 25% to 5%. domestic & foreign E&P companies Halve customs duty to 10% on fuels like furnace oil & LSHS Budget over the years Budget 2002-03 Schedule date for deregulations of petroleum products to be adhered (April 2002) Budget 2003-04 Excise duty on kerosene reduced from 8% to 4%. by Rs 40 per cylinder and kerosene by Rs 1. Budget 2004-05 Excise duty on LNG (liquefied natural gas) exempted. albeit at a lower rate. Higher thrust on concrete Such subsidies to be roads in road projects and reduced over a 3-5 year lower excise duty on cars time frame. No credit of cess on motor spirit.current budget are a big positive as it would help reduce costs while at the same time. Halve customs duty on crude & naphtha from 10% to 5% Reduce excise duty on LPG & SKO Allow 50% deduction on profits for drilling firms. and kerosene to continue. refining margins are likely to decline as a result of lower duty protection in the face of reduced customs duties. and CV's 73 . Industry Wish List Specific duties on refinery products instead of advalorem. expand marketing margins. Countervailing duty (CVD) exemption to continue. On the other hand. high-speed diesel and light diesel oil.5/litre. Existing exemption on naphtha/LNG used for generating synthetic gas or ammonia for manufacture of Heavy 50p cess on diesel to be levied to fund additional Subsidy on essential outlays on infrastructure commodities notably LPG projects. This Capital goods imports for included the freight LNG (liquefied natural subsidy to far-flung gas) degasification plants places.
Key Negatives Demand for petroleum products continues to be low while refining capacities are being hiked resulting in surplus products.Cess on crude increased from Rs 900/tonne to Rs 1800/ tonne. Subsidies on LPG and kerosene are likely to play havoc on oil marketing companies as government extends the phasing out of the subsidies by one more year. water extended to naphtha/LNG for generation of steam. Rationalization of tariffs on key petroleum products such as MS (petrol) and gradual phasing out of subsidies is expected to provide a big boost for players in the sector. Key Positives Change in the current price revision policy from fortnightly to monthly or quarterly would result in higher stability. Entry of private players in the marketing segment likely to result in high competition and better quality products resulting in benefits to the consumers. Only certain products such as aviation turbine fuel (ATF) and LPG have registered better growth Delay in the appointment of the independent petroleum regulator may hamper operational freedom and players will continue to dependent on the government for policy related issues.000 per unit reduced from 16% to 8%. 74 . Excise duty on gas stoves with a maximum retail price of Rs 2. as it will positively affect marketing margins in the medium term. Sharp spurt in crude prices have a negative impact on the players' margins in the short term. Approval to acquire oil fields abroad shall help reduce import dependence and at the same time induce better technology as Indian majors compete in the global arena. as product prices have a tendency to increase gradually due to political ramifications.
SECTOR TECHNICAL ANALYSIS 75 .
Analysis is mainly done in two ways 1. The fundamental analyst tries to determine what the intrinsic value of a stock's underlying business is by looking at its financial statements and its competitive position within its industry. If this intrinsic value is greater than the market price of the stock.Introduction Analysis means to study the behavior of the all participants. the company has greater earning potential than its stock price would indicate. which focuses on stockprice movements instead of underlying earnings potential Fundamental analysis takes the external factors into consideration that could affect the commodity. In other words. 76 . FUNDAMENTAL ANALYSIS Fundamental analysis asserts that a Commodity’s price is determined by the future course of its earnings and dividends. Fundamental analysis is the antithesis of technical analysis. Technical analysis 1. Fundamental analysis 2. the stock is said to be undervalued. with the help of analysis we make profits in the commodity markets.
Stemming either directly or indirectly from the Dow Theory. a picture truly is worth a thousand words. His focus on the basics of security price movement gave rise to a completely new method of analyzing the markets. This is done by comparing current price action (i. technical analysis is the study of prices.e. IMPORTANT ASPECTS OF TECHNICAL ANALYSIS Charts The foundation of technical analysis is the chart. these roots include such principles as the trending nature of prices. and support/resistance.2. prices discounting all known information. with charts being the primary tool. confirmation and divergence. Simply put. Charles Dow's contribution to modern-day technical analysis cannot be understated. And of course. The term "technical analysis" is a complicated sounding name for a very basic approach to investing.. the widely followed Dow Jones Industrial Average is a direct offspring of the Dow theory. current expectations) with historical price action to predict a reasonable outcome. TECHNICAL ANALYSIS Technical analysis is the process of analyzing a security's historical prices in an effort to determine probable future prices. volume mirroring changes in price. In this case. Types of charts Line chart 77 . The roots of modern-day technical analysis stem from the Dow theory developed around 1900 by Charles Dow.
easy to understand view of price. the single line represents the closing price on each day. Line charts are typically displayed using closing prices. It can’t show the open. and the bottom of the bar represents the lowest price that it traded. It provides an uncluttered. If opening prices are available. a tick on the left side of the bar signifies them. These American Bar Charts are better than line charts Disadvantage Difficult to recognize the open and closing prices 78 . A line chart's strength comes from its simplicity. It can’t show the real things.American Bar charts Japanese candlestick charts Line charts A line chart is the simplest type of chart. 2. high. Bar charts are the most popular type of security chart. A closing "tick" is displayed on the right side of the bar to designate the last price that the security traded. The top of each vertical bar represents the highest price that the commodity traded during the period. close and high prices. American Bar charts A bar chart displays open (if available). and closing prices. low. Disadvantages 1.
. a change in investor expectations). Body of the candle represents in blue color.e. But candle contains body in between high and low prices. Trends The market lies between two lines. Bear candle means opening price is higher than the closing price. close. upper line is called resistance and the lower line is called support. There are two types of candles 1. then that candle is called DOWSY.Japanese candlestick chart Japanese candlestick chart is same as bar charts. high and low prices of the commodity. Body of the candle represents in red color. it also displays the open. Resistance is a price where maximum participants of the market feel is good sell. Support is a price where maximum participants of the market feel is good buy. Bull candle 2. " A trend represents a consistent change in prices (i. Bear candle Bull candle means opening price is lower than the closing price. If open and close is same then there is no body. Trends differ from support/resistance levels in that trends represent change. whereas support/resistance levels represent barriers to change”. Types of trends 79 .
but it is formed when market is coming down. which direct the market to the opposite side after the formation of the pattern. Down trend is the price movement where the market finds consecutive lower support and lower resistance decreasing at a uniform rate. • Reversal head and shoulders is same as head and shoulders. If market breaks the neckline it comes down to nearly length of the head from the neckline. left shoulder is lower than head and right shoulder is higher than left shoulder and both left and right shoulder are lower than head. Continuous pattern Reversal pattern is a pattern. 80 . Reversal pattern 2. Straight line trend is the price movement where the market finds equal support and equal resistance. Types • Head and shoulders is look like a mountains. It is formed when markets is going up only.• • • Up trend Down trend Straight line trend Up trend is the price of movement where the market finds consecutive higher support and higher resistance increasing at a uniform rate. Patterns There are two types of patterns 1.
which direct the market to the same side after the formation of the pattern. it is one of the important reversal pattern. 81 . in this formation the resistance is constant. • • Round top is observed after significant up movement. Continuous pattern is a pattern. a pennant should be broken or crashed before it completes 70% of the distance. i. in this pattern the resistance and the support are parallel.• Double top is formed only after significant up movement. • Double bottom is formed only after significant down movement. here the breaks resistance line it goes up to two times of the distance between support and resistance. resistance is parallel to x-axis and support is increasing. the market brakes before it completes 70% of the distance of the length between starting point of resistance and support. this is same as double top. the two tops are equal.e. if the market breaks support line it comes down nearly two times of the distance between support line and resistance line. Round bottom is observed after significant down movement. Types • Upward triangle is observed after significant up movement. if the market is going up then the resistance of the pennant is continuous decreasing and support is increasing and vice versa. • Pennant is observed only after a significant up movement or down movement.
• Moving average 82 .• Downward triangle is observed after significant down movement. the market brakes before it completes 70% of the distance of the length between starting point of resistance and support. it looks like a small up ward trend. Bearish flag leads the market further down wards. this indicator is use to just conformation of the market. but market always trades closer to the support. Types • Relative strength index (RSI) It lies between zero (0) to Hundred (100). • Bearish flag is observed after a significant downward movement. it looks like a small down ward trend. in this formation support is parallel to x-axis and resistance is decreasing. The result is a value that is used to anticipate future changes in prices. Below 20% is called over sold condition and above 80% is called over bought condition. Indicators An indicator is a mathematical calculation that can be applied to a commodity price and/or volume fields. Indicators are also called as Tolls. • Bullish flag is observed after a significant upward movement. but market always trades closer to the resistance. Bullish flag leads the market further upwards.
Moving average line works as a resistance line when the market is been traded below that line and it works as a support line when the market is been traded above that line.Moving average is a calculation that can be performed on a commodity price to yield a value that can be used to anticipate future changes in prices. ANALYSIS 83 . • Moving average convergence or divergence When short term line breaks long term line upwards then market is expected to goes up and if short term line breaks long term line downwards then market is expected to goes down.
implying a reserve to production ratio of over 15 years. accounting for nearly 90% of India's proven reserves. The proven reserves at the end of FY04 stood at nearly 424 MMT (million metric tonnes). At the current rate of production.In this Oil sector there are four major Players: ONGC HPCL BPCL IOC The following is the technical analysis of these companies using their Financial reports. the company accounts for nearly 80% of the production of oil and gas in the country. 84 . while that of gas is to the tune of 347 BCM (billion cubic meters) sufficient to last over the next 14 years. Studying graph movements and the government initiation in this sector. TECHNICAL ANALYSIS: OIL AND NATURAL GAS CORPORATION (ONGC) ONGC is the country's largest oil and gas E&P (exploration and production) company.
9%) 851.605 948/522 85 .9%) 13.0 (1.215.1 65.Price Info BSE NSE P/E* EPS (31/03/2004) Market Cap* 52-Wk H/L* As on 06/05/2005 ONGC v/s NSE INDEX Rs Rs x Rs Rs m Rs 852.5 (1.0 1.
This will help us in short term period. For example if you invest Rs 100 in Nifty it will fetch you Rs 112 and if you invest in ONGC during in this period it will fetch you Rs 102.By comparing the price change of ONGC with the price change of NIFTY we can get the trend price of share with respect to NIFTY. ONGC Moving Averages 86 .
500 retail outlets spread across the 87 . By comparing the 30 days moving averages and the ONGC closing price during this period I say that the ONGC has out performed in this Short Period of 30 Days. Apart from the 13 MMTPA (million tonnes per annum) of refining capacity.From the above Graph of moving Averages. it has strong retail presence with over 5. it gives the sign of buying when the graph is moving up and a sign of selling when it moves downwards. It suggest us that when we buy ONGC at Rs 710 and sell them at Rs 830. HINDUSTAN PETROLEUM CORPORATION LIMITED (HPCL) Hindustan Petroleum Corporation Limited (HPCL) is the second largest oil refining and marketing company.
Going forward.country.3 (0.7%) 5. it plans to increase its refining capacity from the current 13. Price Info BSE NSE P/E* EPS (31/03/2004) Market Cap* 52-Wk H/L* As on 06/05/2005 Rs Rs x Rs Rs m Rs 324.9%) 326.028 487/226 HPCL v/s NSE INDEX 88 .7 110.7 (1.5% market share in the fast growing LPG business catering to nearly 20 m customers.6 57. the company has nearly 24. It has nearly 25% market share in petrol and a healthy 20% market share in diesel sales.2 MMTPA. Further.0 MMTPA to nearly 16.
HPCL Moving Averages: 89 . For example if you invest Rs 100 in Nifty it will fetch you Rs 115 and if you invest in HPCL during in this period it will fetch you Rs 72. This will help us in short term period.HPCL NIFTY By comparing the price change of HPCL with the price change of NIFTY we can get the trend price of share with respect to NIFTY.
BPCL's current refining capacity stands at 8. By comparing the 30 days moving averages and the HPCL closing price during this period I say that the HPCL has out performed in this Short Period of 30 Days. BHARAT PETROLEUM CORPORATION LIMITED (BPCL) Bharat Petroleum Corporation Ltd. It suggest us that when we buy HPCL at Rs 330 and sell them at Rs 420. it gives the sign of buying when the graph is moving up and a sign of selling when it moves downwards.From the above Graph of moving Averages. (BPCL) is one of the leading integrated oil refining and marketing companies in India.5 90 .
2 59.800 LPG distributors across the country.4 109. It has around 4.5 (0.MTPA and the company plans to expand it to 12 MTPA by FY05.000 retail outlets in the current financial year in anticipation of intensifying competition with the entry of private and foreign players post APM deregulation.850 retail outlets and 1.5%) 6.4%) 366. Price Info BSE NSE P/E* EPS (31/03/2004) Market Cap* 52-Wk H/L* As on 06/05/2005 Rs Rs x Rs Rs m Rs 366. BPCL has aggressive plans to set up another 1.950 479/215 BPCL v/s NSE INDEX 91 .5 (0.
For example if you invest Rs 100 in Nifty it will fetch you Rs 115 and if you invest in BPCL during in this period it will fetch you Rs 85. BPCL Moving Averages 92 .BPCL NIFTY By comparing the price change of BPCL with the price change of NIFTY we can get the trend price of share with respect to NIFTY. This will help us in short term period.
From the above Graph of moving Averages. It accounts for 42% of the total domestic refining capacity and its pipeline network has a capacity of about 52 MTPA. INDIAN OIL CORPORATION (IOC) IOC is India’s biggest refining and marketing player (about 48% market share in retailing). By comparing the 30 days moving averages and the HPCL closing price during this period I say that the HPCL has out performed in this Short Period of 30 Days. It suggest us that when we buy HPCL at Rs 350 and sell them at Rs 470. it gives the sign of buying when the graph is moving up and a sign of selling when it moves downwards. Its distribution network consists of 9.138 93 .
2%) 449.5 m LPG customers.5 523.322 546/275 IOC v/s NSE INDEX 94 .1 (0.1 63.4%) 7. Price Info BSE NSE P/E* EPS (31/03/2004) Market Cap* 52-Wk H/L* As on 06/05/2005 Rs Rs x Rs Rs m Rs 448.0 (0.retail outlets and along with IBP. it is the largest player in the business. controls over 50% of the outlets in the country. With over 37.
IOC Moving Averages 95 . For example if you invest Rs 100 in Nifty it will fetch you Rs 115 and if you invest in IOC during in this period it will fetch you Rs 85. This will help us in short term period.IOC NIFTY By comparing the price change of IOC with the price change of NIFTY we can get the trend price of share with respect to NIFTY.
It suggest us that when we buy IOC at Rs 380 and sell them at Rs 530. it gives the sign of buying when the graph is moving up and a sign of selling when it moves downwards. By comparing the 30 days moving averages and the IOC closing price during this period I say that the IOC has out performed in this Short Period of 30 Days. 96 .From the above Graph of moving Averages.
. 97 . FINDINGS AND SUGGESTIONS FINDINGS • As per the Indian petroleum minister the prices of the petrol have to be raised in the coming months.
Investing in the derivatives market is the safe of playing for the beginners. Technical analysis: ONGC HPCL BPCL IOC Hold Sell Sell Hold BIBLIOGRAPHY NCFM Derivatives Module www. Most of the Indian investors act on their own sentiments for major part of their investments. The gap between the demand and supply is more than expected.ShareKhan.• • • • Buying in the cash markets and hedging them in futures and options is fruitful for the individual investors.com/Derivatives Derivatives Digest “Futures and Options” by Vora and Bagri 98 . Should take initiative for reducing the demand and supply gap. SUGGESTION Government should take steps along with the international body for reducing the barrel prices.
cboe.com www.com www.liffe.com www.equiymaster.indiainfoline.com www. “Options.numa. Futures and Other Derivatives” by John C.valuenotes.com 99 .com www. Hull www.com www.investopedia.
This action might not be possible to undo. Are you sure you want to continue?
We've moved you to where you read on your other device.
Get the full title to continue reading from where you left off, or restart the preview.