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CHAPTER I

INTRODUCTION TO DERIVATIVES

A derivative security is a security whose value depends on the value of together more basic
underlying variable. These are also known as contingent claims. Derivatives securities have been
very successful in innovation in capital markets.

The emergence of the market for derivative products most notably forwards, futures and options
can be traced back to the willingness of risk -averse economic agents to guard themselves against
uncertainties arising out of fluctuations in asset prices. By their very nature, financial markets are
markets by a very high degree of volatility. Through the use of derivative products, it is possible
to partially or fully transfer price risks by locking – in asset prices. As instruments of risk
management these generally don’t influence the fluctuations in the underlying asset prices.

However, by locking-in asset prices, derivative products minimize the impact of fluctuations in
asset prices on the profitability and cash-flow situation of risk-averse investor.

Derivatives are risk management instruments which derives their value from an underlying asset.
Underlying asset can be Bullion, Index, Share, Currency, Bonds, Interest, etc.

In 1887, they formally established in Bombay, the "Native Share and Stock Brokers' Association"
(which is alternatively known as "The Stock Exchange"). In 1895, the Stock Exchange acquired a
premise in the same street and it was inaugurated in 1899. Thus, the Stock Exchange at Bombay
was consolidated.

Thus in the same way, gradually with the passage of time number of exchanges were increased
and at currently it reached to the figure of 24 stock exchanges.
OBJECTIVES OF THE STUDY:

! To understand the concept of the Financial Derivatives such as Forwards,


Futures and Options and swaps
! To find out profit/loss position of the option writer and option holder
! To study various trends in derivatives market
! To study the role of derivatives in India financial market
! To study in detail the role of futures and options
! To examine the advantages and the disadvantages of different
strategies along with situations
! To study the different ways of buying and selling of Options

SCOPE OF THE STUDY:

The study is limited to “Derivatives” With special reference to Futures and Options in the Indian
context and the IIFL has been taken as representative sample for the study.

The study cannot be said as totally perfect, any alteration may come. The study has only made
humble attempt at evaluating Derivatives markets only in Indian context. The study is not based
on the International perspective of the Derivatives markets.A securities transaction cycle is presented
above. Just because of this Transaction cycle, the whole business of Securities and Stock Broking has
emerged. And as an extension of stock broking, the business of Online Stock broking/ Online Trading/ E-
Broking has emerged.

At the end of the American Civil War, the brokers who thrived out of Civil War in 1874, found a
place in a street (now appropriately called as Dalal Street) where they would conveniently
assemble and transact business. In 1887, they formally established in Bombay, the "Native Share
and Stock Brokers' Association" (which is alternatively known as “The Stock Exchange "). In
1895, the Stock Exchange acquired a premise in the same street and it was inaugurated in 1899.
Thus, the Stock Exchange at Bombay was consolidated.
RESEARCH METHODOLOGY:

The data had been collected through primary and secondary source.
Primary data:
The data had been collected through IIFL staff.

Secondary data:
The data had been collected through Journals, News papers, and Internet.

Limitations:
! The study does not take any Nifty Index Futures and Options and International

Markets into the consideration.


! This is a study conducted within a period of 45 days.
! During this limited period of study, the study may not be a detailed, Full –

fledged and utilitarian one in all aspects.


! The study contains some assumptions based on the demands of the analysis.
! The study does not provide any predictions or forecast of the selected scripts.
! The study was conducted in Hyderabad only.
! As the time was limited, study was confined to conceptual understanding of
Derivatives market in India.