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LTD. Submitted in the partial fulfillment of the Requirement
of the awards of



ROLL No. 0908570009




I, ANKIT CHOUDHARY hereby declare that the project report entitled
EQUITY” is based on my own work and my indebtedness to other work/
publications, if any have been duly acknowledged at the relevant place.





To acknowledge is very great way to show your gratitude towards the persons
who have contributed in your success in one or other way.

I find words inadequate to express my gratitude to Mr. JAGDISH PALIWAL for
providing me an opportunity to carry out my winter project as such a well reputed
and leading stock broking company ANAND RATHI FINANCIAL Services

At the very outset of the training I deem it is my pious duty to express my sincere
thanks also to branch head Mr. Jagdish Paliwal for his continuous guidance and
supervision and support during the project.

I would like to thank Mr. ALOK KUMAR GUPTA (H.O.D MBA) who has guided
me for my project work and provided encouragement through out my training
This study could not have been successful without the valuable input of the
customer of ANAND RATHI.



I know that Project is for the development and enhancement of the knowledge in
this particular field. It can never be possible to make a mark in today’s
competitive era only with theoretical knowledge when industries are developing
at global level, practical knowledge of administration and management of
business is very important. Hence, practical study is of great importance to MBA

With a view to expand the boundaries of thinking, I have undergone MBA
Summer Project at Anand Rathi Financial Services Ltd I have made a
deliberate to collect the required information and fulfill project objective.



1 Industry profile 6-17

2 Company profile --------- Anand Rathi Financial 18-39
Services Ltd
3 Financial derivatives: 40-70
1. Introduction about derivatives
2 Risk Associated With Derivatives
3 Functions of derivative market
4 Participants of derivative market
5 Types of derivatives
6 Emergence of derivative trading in India
7 Introduction of forward
8 Introduction to futures
9 Introduction to options
10 Types of options
11 Pricing with regard to option
12 Difference between derivative and equity





Indian Stock Markets are one of the oldest in Asia. Its history dates back to
nearly 200 years ago.

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.

This was followed by the formation of associations /exchanges in Ahmadabad
(1894), Calcutta (1908), and Madras (1937).
In order to check such aberrations and promote a more orderly development of
the stock market, the central government introduced a legislation called the
Securities Contracts (Regulation) Act, 1956. Under this legislation, it is
mandatory on the part of stock exchanges to seek government recognition. As of
January 2002 there were 23 stock exchanges recognized by the central
Government. They are located at Ahmadabad, Bangalore, Baroda,
Bhubaneswar, Calcutta, Chennai,(the Madras stock Exchanges ), Cochin,
Coimbatore, Delhi, Guwahati, Hyderabad, Indore, Jaipur, Kanpur, Ludhiana,
Mangalore, Mumbai(the National Stock Exchange or NSE), Mumbai (The Stock
Exchange), popularly called the Bombay Stock Exchange, Mumbai
(OTCExchange of India), Mumbai (The Inter-connected Stock Exchange of
India), Patna, Pune, and Rajkot. Of course, the principle bourses are the National
Exchange and The Bombay Stock Exchange, accounting for the bulk of the
business done on the Indian stock market.


Mumbai. six public representatives and an Executive Director & Chief Executive Officer and a Chief Operating Officer. of India under the Securities Contracts (Regulation) Act. three SEBI nominees. It is the oldest one in Asia. who are from the broking comm Unity (one third of them retire ever year by rotation). which decides the policies and regulates the affairs of the Exchange. even older than the Tokyo Stock Exchange. which was established in 1878. 1956. A Governing Board having 20 directors is the apex body.BSE (BOMBAY STOCK EXCHANGE) The Stock Exchange. popularly known as "BSE" was established in 1875 as "The Native Share and Stock Brokers Association". The Governing Board consists of 9 elected directors. 7 . It is the first Stock Exchange in the Country to have obtained permanent recognition in 1956 from the Govt.

As a true neutral market. an independent and a de-mutualized exchange since inception. online multi-commodity market place. It started operations in June 1994. Subsequently it launched the Capital Market Segment in November 1994 as a trading platform for equities and the Futures and Options Segment in June 2000 for various derivative instruments. become the country’s premier exchange.NSE (NATIONAL STOCK EXCHANGE) NSE was incorporated in 1992 and was given recognition as a stock exchange in April 1993. with trading on the Wholesale Debt Market Segment. MCX (MULTI COMMODITY EXCHANGE) ‘MULTI COMMODITY EXCHANGE’ of India limited is a new order exchange with a mandate for setting up a nationwide. MCX. offering unlimited growth opportunities to commodities market participants. MCX has taken several initiatives for users in a new generation commodities futures market in the process. is all set up to introduce a state of the art. online digital exchange for commodities futures trading in the country and has accordingly initiated several steps to translate this vision into reality. 8 .

Facilities Provided By NCDEX  NCDEX has developed facility for checking of commodity and also provides a wear house facility  By collaborating with industrial partners. industrial companies. hedgers and arbitrageurs. 2003.NCDEX (NATIONAL COMMODITIES AND DERIVATIVES EXCHANGE) NCDEX started working on 15th December.  NCDEX is working with tax officer to make clear different types of sales and service taxes. In commodity market the main participants are speculators. This exchange provides facilities to their trading and clearing member at different 130 centers for contract.  To avail farmers from risk of fluctuation in prices NCDEX provides special services for agricultural.  To prepare guidelines related to special products of securitization NCDEX works with bank. news agencies. banks and developers of kiosk network NCDEX is able to provide current rates and contracts rate.  NCDEX is providing attractive products like “weather derivatives” 9 .

As a Corporation. raising funds to launch the business. their remaining share of stock will become increasingly valuable as the business grows. 10 . and each certificate represents a set number of shares. as each makes its own choice about how many pieces of ownership to divide the corporation into. the owners are not personally responsible or liable for any debts of the company if the company doesn't succeed. The expectation is that even though the owners have surrendered a portion of the company to the Public. One corporation may have only 2. such as IBM or the Ford Motor Company. The total number of shares will vary from one company to another. These are called stock certificates. Companies sell stock (pieces of ownership) to raise money and provide funding for the expansion and growth of the business. while another. Later they may choose to "incorporate". This transition from a privately held corporation to a publicly traded one is Called going public. Corporations issue official-looking sheets of paper that represent ownership of the company. The business founders give up part of their ownership in exchange for this needed cash. STOCK MARKET BASIC What are corporations? Companies are started by individuals or may be a small circle of people.500 shares. and this first sale of stock to the public is called an initial public offering. may issue over a billion Shares. They pool their money or obtain loans. A choice is made to organize the business as a sole proprietorship where one Person or a married couple owns everything. Corporations are not allowed to sell shares of stock on the open Stock market without the approval of the Securities and Exchange Commission (SEC). or as a partnership with others who may wish to invest money. or IPO.

 Why do people invest in the stock market? When you buy stock in a corporation. and a right to a share of future profits. the money received is called a "Dividend". The average investor buys stock hoping that the stock's price will rise. 11 . so the shares can be sold at a profit. When a company pays out profits to the shareholder. The potential of a small dividend check is of little concern. This will happen if more investors want to buy stock in a company than wish to sell. This gives you a vote at annual shareholder meetings. you own part of that company. most newer and smaller companies do not. What is usually responsible for increased interest in a company's stock is the prospect of the company's sales and profits going up. The corporation's board of directors choose when to declare a dividend and how much to pay. Investors take the risk of the price falling because they hope to make more money in the market than they can with safe investments such as bank CD's or government bonds. A company who is a leader in a hot industry will usually see its share price rise dramatically. Most older and larger companies pay a regular dividend.

up and down. from day to day. Primary market and Secondary market. Secondary market essentially comprises of stock exchanges. which provide platform for purchase and sale of securities by investors.What is a stock market index? In the stock market world. An index is just a benchmark or yardstick expressed as a number that makes it possible to do this comparison. the Secondary market enables the holders of securities to trade them. In India. The Securities Market consists of two segments. For e. like the market cap. The price per share. you need a way to compare the movement of the market. and from year to year. S&P CNX Nifty is the index of NSE and SENSEX is the index of BSE.g. Primary market is the place where issuers create and issue equity. debt or hybrid instruments for subscription by the public. apart from the Regional Stock 12 . viz. has nothing to do with how big a company is.

4018 crore during the preceding year.5% in 2002-03. 9644 companies were available for trading on stock exchanges at the end of March 2002. The trading platform of stock exchanges is accessible only through brokers and trading of securities is confined only to stock exchanges. It is believed that India is the largest market in the world for stock futures. there are exchanges like the National Stock Exchange (NSE) and the Over the Counter Exchange of India (OTCEI). and still higher volumes with introduction of stock options in July 2001. All the exchanges are fully computerized and offer 100% on-line trading. While NSE accounted for about 99.  Derivatives Market: Derivatives trading commenced in India in June 2000. who provide nation wide trading facilities with terminals all over the country. 442. The market witnessed higher volumes from June 2001 with introduction of index options. BSE accounted for about 0.5% of total turnover. 13 .343 crore during 2002-03 as against Rs.Exchanges established in different centers. The trading platform of the stock exchanges was accessible to 9687 members from over 400 cities on the same date. There was a spurt in volumes in November 2001 when stock futures were introduced.  Corporate Securities: The no of stock exchanges increased from 11 in 1990 to 23 now. The total exchange traded derivatives witnessed a volume of Rs.

If investors want a stock and are willing to pay more. portfolio managers. If investors are selling a stock and there aren't enough buyers. sell or deal in securities unless he holds a certificate of registration granted by SEBI under the Regulations made by SEBI ion relation to them. What a share of a company is worth on anyone day or at any one minute. No stockbrokers or sub-brokers shall buy. share transfer agents constitute the important intermediaries in the Secondary Market. sub-brokers. is determined by all investors voting with their money. the price will go down Period.  Secondary Market Intermediaries Stock brokers. 14 . The DEMAND is the number of shares investors wish to buy at exactly that same time. The SUPPLY is the number of shares offered for sale at anyone one moment. The Central Government has notified SEBI (Stock Brokers & Sub-Brokers) Rules. 1992. 1992 in exercise of the powers conferred by section 29 of SEBI Act. Supply and Demand A stock's price movement up and down until the end of the trading day is strictly a result of supply and demand. the price will go up. 1992. custodians. These rules came into effect on 20th August.

What is stock Broker? “A stock broker is one who invests other people’s money until it’s all gone. through which you can enter in the transaction with broker. the broker trade with each other through the computer network.” 15 . Buyers and sellers place their orders specifying the limits for quality and price. After fill all the formalities the firm gives you a User Id no like a bank a/c no. To start dealing with broker you have to fill a form with the broker. Broker will gives all the which one investor needed. Both the exchange have switched over from the open outcry trading system to fully automated computerized mode of trading knows as Bolt and Neat. After the advent of computerized trading the speed of trading has increased multi-fold and a fuller view of the market is available to the investors. Those that are not matched remain on the screen and is opened for future matching during the day / settlement.  Trading Through Brokers / Traditional Method of Share Trading:- Trading in the stock exchange can be conducted only through member broker in securities that are listed on the respective exchange. This is very popular concept in India for Share Trading before the facilities like on line trading introduce. Investor intending to buy/sell securities in the exchange has to do so only through a SEBI registered broker/sub-broker. In this system.

Active traders such as day traders tend to use Direct Access Brokers No.The share of trades accounted for by NSE broker 90%: The share of On line trades clocked by segment’s top five companies 16 . It wasn’t too long ago and investing was very expensive because you had to go through a full service broker which would give you advice on what to do and would charge you a hefty fee for it. 3. Discount Broker – A discount broker let’s you buy and sell stocks at a low rate but doesn’t provide any investment advice. 2. 1.Total no of share broker in the country 12687:. you tell them what you want to invest in and they will issue the buy or sell order. of stock broker in India 9368:. Full Service Broker . of sub-broker.A direct access broker lets you trade directly with the electronic communication networks (ECN’s) so you can trade faster. 46%:. American Film Maker A stock broker is a person or a firm that trades on its clients behalf. -Woody Allen. There are three different types of stock brokers.The no.A full-service broker can provide a bunch of services such as investment research advice. tax planning and retirement planning. Some stock brokers also give out financial advice that you a charged for. Direct-Access Broker.

17 .Generally there are two types of trading have been done in India which is given below: On line Trading / E – Broking / Modern Method Trading through Brokers / Traditional method of Share trading.

18 .

The entire firm activities are divided across distinct client groups: Individuals. The entire firm activities are divided across distinct client groups: Individuals. Pradeep Gupta. AnandRathi has been named The Best Domestic Private Bank in India by Asiamoney in their Fifth Annual Private Banking Poll 2009.500 professionals through out India and its international offices. Founded by Mr. high–net worth individuals and families. Anand Rathi and Mr. corporations. 19 . The firm has emerged a winner across all key segments in Asiamoney’s largest survey of high net worth individuals in India.Hong Kong & New York. while maintaining the highest standards of excellence.the group today employs over 2. Ethics and professionalism. Private Clients. while maintaining the highest standards of excellence. The firm’s philosophy is entirely client centric. with a clear focus on providing long Term value addition to clients. Private Clients. The firm’s philosophy is entirely client centric. ABOUT ANAND RATHI INTRODUCTION:- Anand Rathi is a leading full service investment bank founded in 1994 offering a wide range of financial services and wealth management solutions t institutions. Corporates and Institutions. Corporates and Institutions. The firm has rapidly expanded its footprint to over 350 locations across India with international presence in Dubai . Ethics and professionalism. The firm has emerged a winner across all key segments in Asiamoney’s largest survey of high net worth individuals in India. with a clear focus on providing long Term value addition to clients. AnandRathi has been named The Best Domestic Private Bank in India by Asiamoney in their Fifth Annual Private Banking Poll 2009.

work ethic and channels of progress. They were one of the early entrants registered as Depository Participant with NSDL (National Securities Depository Limited). 20 . It service over 1Lac customer accounts in this business spread across over 350 cities/towns in India and are ranked amongst the largest Depository Participants in the country. BSE. It has transferred this business to ANAND RATHI SECURITIES LIMITED (ARSL). Today. ANAND RATHI Private Limited has always remained at the helm of organizational affairs.ANAND RATHI consultant As the flagship company of the ANAND RATHI Group. pioneering business policies. ANAND RATHI believe that they were best positioned to venture into that activity as a Depository Participant. the first Depository in the country and then with CDSL (Central Depository Services Limited). their associate and a member of NSE. With a growing secondary market presence. MCX & NCDEX.

timely settlements. Trade execution transparency. Business Focus:- The focus of the business is the Customer – Customer service. Customer support. risk monitoring and superior service shall have topmost priority. in the best interests of all concerned. Customer relations and last but not the least Customer acquisition. Customer education. VISION STATEMENT “TO BE A SHINING EXAMPLE AS A LEADER IN INNOVATION PROFESSIONALLY” MISSION STATEMENT “TO WORK TOGETHER WITH INTEGRITY & MAKE OUR CUSTOMER FEEL VALUED” 21 .

Ajit Bhushan Director Mr.Roy Rodrigues CEO Mr. CORE VALUE “RESPECT OUR COLLEAGUE AND THE BUSINESS ITSELF” Board of Directors Of ANAND RATHI GROUP NAME POSITION Mr. P G Kakodkar Director Dr. Amit Rathi Managing Director Mr. Pardeep Gupta Co.Sujan Hajra Chief Economist Mr. Anand Rathi Founder & chairman Mr. Rajni Raikar Vice President 22 . S A Dave Direcror Mr. C D Arha Director Mr. Rakesh Rawal National Head-Welth management Mr.Founder & vice chairman Mr.Puspen Karmakar Vice President Ms.

Multi Commodity Exchange of India Limited  Member . 23 .National Commodities and Derivatives Exchange Ltd. Principal Activities Of ‘ANAND RATHI GROUP’ • ANAND RATHI Securities Private Limited – Member : National Stock Exchange of India Limited – Member : Bombay Stock Exchange Limited – Participant : National Securities Depository Limited – Participant : Central Depository Service (India) Limited • ANAND RATHI Commodities Private Limited  Member .

.ANAND RATHI Profile REGISTERED OFFICE 11th Floor.400013. Times Tower Kamala City Senapati Bapat Marg. Lower Parel. Mumbai . 0131-2605572.3291199 FAX. India MUZAFFARNAGAR BRANCH 39-A New Mandi. 0131-2605571 24 . Muzaffarnagar-251001 PH. 2600343.

Organization Chart:- Anand Rathi Branch Franchise Web Sales Sales Account Head Dealer Executive Coordinator Customer Care Receptionist 25 .

Research Based Investment Advice Training and Investment and Seminars EQUITIES Trading Services DERIVATIVES COMMODITIES Technology Based Investment Tools Integrated Demat Facility 26 . ANAND RATHI’s CORE SERVICES:- ANAND RATHI is one of India’s leading broking houses providing a complete life-cycle of investment solution.

SWOT Analysis 27 .

 Low Professionalism  Low Advertisements Opportunity:-  Large potential market for delivery and intra-day transactions.Strength:-  16 years of research and broking experience  Understandings of the markets  All financial needs under one roof  Scalable and robust infrastructure  Full fledge research unit comprising of both fundamental & technical research  Dedicated.  Up growing markets in commodity and forex trading 28 .  Open interest of the people to enter in to stock market for investing  Attract the customers who are dissatisfied with other brokers & DPs. Qualified and Loyal staff  Flexible Brokerage charges Weakness:-  Low Brand Image in the market.

A Increasing competition against other brokers & DPs.. “SERVICES of ANAND RATHI” 29 .  Poor marketing activities for making the company known among the customers. i.e. A threat of loosing clients for any kind of weakness of the company.Threats:-  Decreasing rates of brokerage in the market. low/no profit of ANAND RATHI's clients would lead them to go for other broker/DP. An Indirect threat from instable stock market.

30 .ANAND RATHI’s Services Offline Online Other Services  OFFLINE  Offline A/c is the A/c for the investors who are not familiar with the use of computer.

 The A/C opening charges applied(One time) .  Online Account Requirement for online trading Linked Bank Account • Broking Account • Linked Depository Account  Benefits of online trading Freedom from paperwork • Instant credit and transfer • Trade Anywhere • Timely Advice and access to research • Real-time portfolio tracking • After hour orders • Market Alerts • Instant quotes  Other Services: 31 .

And say your client code 32 .  Dial-n-Trade  Mutual Fund  Commodity  Derivative  Depository Participants  Distribution of Financial Services  Research Based Advices  Portfolio Management System DnT (Dial. Step1. Easy 2-step process for order placement. of branch Step2.n –Trade) Dial n Trade is the name of the phone-trading facility offered by ANAND RATHI. Enter the phone no. A call center wholly dedicated to order placement / confirmation.

market analysis and market predictions. comprising of technical analysts as well as fundamental specialists. Our highly skilled research team. constant feedback and sound advisory facilities. More importantly. Helping the customer create waves in his portfolio and empowering the investor completely is the ultimate goal. phone calls etc. SMS. by accounting for several risk factors and planning accordingly. Creating a plethora of opportunities for the customer by opening up investment vistas is backed by research-based advisory services. National Stock Exchange. one of the cornerstones of the ANAND RATHI edifice.ANAND RATHI Securities Private Limited.  Stock Broking Services We offer trading on a vast platform. chat. Bombay Stock Exchange. we make trading safe to the maximum possible extent. 33 . growth knows no limits and success recognizes no boundaries. To empower the investor further we have made serious efforts to ensure that our research calls are disseminated systematically to all our stock broking clients through various delivery channels like email. flows freely towards attaining diverse goals of the customer through varied services. Here. We are assisted in this task by our in-depth research. secure result-oriented information on market trends. MCX & NCDEX.

Investors buy a scheme if it fits in with their investment keep money liquid or give a regular income or grow the money long term. like getting a regular income now or letting the money accumulate over the long term. 34 . The AMC offers to invest the money of hundreds of investors according to a certain objective . or are they like bonds and fixed deposits? Will I lose all my money in funds or will I become an overnight millionaire? Big questions that get answer in just five minutes. Meaning: A mutual fund is a pool of money that is invested according to a common investment objective by an asset management company (AMC).MUTUAL FUNDS Introduction: Everybody talks about mutual funds. but what exactly are they? Are they like shares in a company. Investors pay a small fraction of their total funds to the AMC each year as investment management fees.

" was constituted. It is only in the last decade that commodity future exchanges have been actively encouraged. The securities market was a poor cousin of this market as there were not many papers to be traded at that time." in 1875. which carried on futures trading in groundnut. However. There were booming activities in this market and at one time as many as 110 exchanges were conducting forward trade in various commodities in the country. A future trading in oilseeds was organized in India for the first time with the setting up of Gujarati Vyapari Mandali in 1900. saw the decline of this market since the mid-1960s. in which the role of market forces for resource allocation got diminished. This coupled with the regulatory constraints in 1960s. following widespread discontent amongst leading cotton mill owners and merchants over the functioning of the Bombay Cotton Trade Association. In 1893.Commodity Organized futures market evolved in India by the setting up of "Bombay Cotton Trade Association Ltd. castor seed and cotton. the 35 . The era of widespread shortages in many essential commodities resulting in inflationary pressures and the tilt towards socialist policy. Before the Second World War broke out in 1939 several futures markets in oilseeds were functioning in Gujarat and Punjab. a separate association by the name "Bombay Cotton Exchange Ltd. resulted in virtual dismantling of the commodities future markets.

However. As instruments of risk management. most notably forwards. the financial markets are marked by a very high degree of volatility. by locking-in asset prices. futures and options. Derivative The emergence of the market for derivative products. these generally do not influence the fluctuations in the underlying asset prices. derivative products minimize the impact of fluctuations in asset prices on the profitability and cash flow situation of risk-averse investors. it is possible to partially or fully transfer price risks by locking-in asset prices. By their very nature. Through the use of derivative products. 36 . can be traced back to the willingness of risk-averse economic agents to guard themselves against uncertainties arising out of fluctuations in asset have been thin with poor liquidity and have not grown to any significant level.

Offering a wide trading platform with a dual membership at both NSDL and CDSL. ANAND RATHI set standards enabling further comfort to the investor by promoting paperless trading across the country and emerged as the top 3 Depository Participants in the country in terms of customer serviced. we are a powerful medium for trading and settlement of dematerialized 37 .Depository Participants The onset of the technology revolution in financial services Industry saw the emergence of ANAND RATHI as an electronic custodian registered with National Securities Depository Ltd (NSDL) and Central Securities Depository Ltd (CSDL).

• Web enabled service to provide state of the art service delivery  Distribution of Financial Products The paradigm shift from pure selling to knowledge based selling drives the business today. A team of professional and the latest technological expertise allocated exclusively to our demat division including technological enhancements like SPEED-e. 38 . With our wide portfolio offerings. About ANAND RATHI: • Depository participant with both NSDL and CDSL • Over 25 thousands clients being serviced from over 135 cities. A wide national network makes our efficiencies accessible to all. A 1600 team of highly qualified and dedicated professionals drawn from the best of academic and professional backgrounds are committed to maintaining high levels of client service delivery. Internet access to accounts and an easier transaction process in order to offer more convenience to individual and Corporate investors. We have established live DPMs.Shares. we occupy all segments in the retail financial services industry. make our response time quick and our delivery impeccable.

opinions etc. The market-savvy and the ignorant investors. Here we understand the customer needs and lifestyle in the context of present earnings and provide adequate advisory services that will necessarily help in creating wealth. Finapolis. provides up-dated market information on market trends. Thus empowering the investor to base every financial move on rational thought and prudent analysis and embark on the path to wealth creation. thereby providing planning and advisory services to the mass affluent. Our monthly magazine. The edge that we have over competition is our portfolio of offerings and our professional expertise. About ANAND RATHI : • Investments – Equity – Primary and Secondary – Fixed Income – Primary and Secondary – Fixed Deposits 39 . both find this service very satisfactory. investment options. besides being established as the leading procurer in all public issues. The investment planning for each customer is done with an unbiased attitude so that the service is truly customized. Judicious Planning that is customized to meet the future needs of the customer deliver a service that is exemplary. To further tap the immense growth potential in the capital markets we enhanced the scope of our retail brand.This has propelled us to a position among the top distributors for equity and debt issues with an estimated market share of 15% in terms of applications mobilized.

Tata AIG. 40 . Tata AIG. Amp Sanmar. HDFC Standard. Royal Sundaram  Portfolio Management System The company has initiated the process of obtaining permission from SEBI for rendering PMS Service to its clients. ICICI Prulife. Om Kotak. MetLife. We are planning to start PMS Service to High Net Worth individual and NRIs after obtaining the necessary regulatory clearances. – Mutual Funds • Insurance – Life : LIC. Birla Sun life – General : New India. Reliance.

41 .

These basic variable are called bases. 42 . In financial terms. derivative is not primary. which may be value of underlying asset. derivative means ‘something which is derived from another source’. foreign exchange. a reference rate etc. Therefore. THEORETICAL ASPECT INTRODUCTION: According to dictionary. and hence not independent. commodity or any asset. the underlying asset can be equity. derivative is a product whose value is derived from the value of one or more basic variables.

interest rate. Forward Others like Swaps.the value of any asset. at a future date depends upon the share’s current price. crude oil. (Standardized Options customized ) 43 NTSD TSD . FRAs etc Merchandisi Futures ng. A contract. to buy or sell an asset in future. soybean. Meaning: Derivatives are the financial contracts whose value/price is dependent on the behavior of the price of one or more basic underlying assets (often simply known as the underlying). Here. index. cotton. loan whether secured or unsecured. These contracts are legally binding agreements. Similarly. The buyer of the asset will make the cash payment at the time of delivery. the share is underlying asset. The quantity and quality of the asset is specified in the contract. or index of prices of Cash Derivatives underlying securities. sugar. For example: . 1956 (SC(R) A) defines “derivative” to include – Contracts agreement A security derived from a debt instrument. which derives its value from the prices. the future exchange rate is the derivative and the spot exchange rate is the base. The asset can be a share. In this case. share. risk instrument or contract for differences or other form of security. Derivatives are contract for future delivery of assets at price agreed at the time of the contract. made on the trading screen of stock exchanges. coffee etc. the future rate of the foreign exchange depends upon its spot rate of exchange. bond. rupee dollar exchange rate. say share of any company. In the Indian Context the Security Contracts (Regulation) Act. the current price of the share is the bases and the future value of the share is the derivative.

bonds. or hedge against risk but some were developed primarily to provide potential for high returns. stock indices. Nifty options and futures.The price of Reliance Triple Option Convertible Debentures (Reliance TOCD) used to vary with the price of Reliance shares. In the context of equity markets. the demand for 44 . are the most common and popular form of derivatives. stocks. American Depository receipts / Global Depository receipts draw their price from the underlying shares traded in India. the price of Telco warrants depends upon the price of Telco shares.In financial terms derivatives is a broad term for any instrumental whose value is derived from the value of one more underlying assets such as commodities. For example: . Although trading in agriculture and other commodities has been the deriving force behind the development of derivatives exchanges. Derivatives were developed primarily to manage offset. In addition. Reliance futures and options. etc. forex. derivatives permit corporations and institutional Investors to effectively manage their portfolios of assets and liabilities through instrument like stock index futures. loans. precious metal.

1848 45 . In recent years. currencies. these products have become very popular and by 1990s. The merchants entered into contracts with one another for future delivery of specified amount of commodities at specified price. the market for financial derivatives has grown tremendously in terms of variety of instruments available. Even small investors find these useful due to high correlation of the popular indexes with various portfolios and ease of use. However. A primary intention for contracting for future date was to keep the transaction immune to unexpected fluctuations in price. derivative products initially emerged as hedging devices against fluctuations in commodity prices. futures and options on stock indices have gained more popularity than on individual stocks.products based on financial instruments such as bond. However. Therefore. Early forward contracts in the US addressed merchants concerns about ensuring that there were buyers and sellers for commodities. who are major users of index-linked derivatives. their complexity and turnover. especially among institutional investors. In the class of equity derivatives the world over. stocks and stock indices have now for outstripped that for the commodities contracts. the concept applied to financial trade only in the post-1970 period due to growing instability in the financial markets. The history of the derivatives dates back to the time since the trading came into being. However “credit risk” remained a serious problem. since their emergence. they accounted for about two-third of the total transaction in derivative products.

The CBOT and the CME remain the two largest organized futures exchanges. DTB in Germany. The primary intention of the CBOT was to provide a centralized location known in advance for buyers and sellers to negotiate forward contracts. Trading derivatives contracts in 46 . Eurex. etc for decades in the gray market. indeed the two largest “financial” exchanges of any kind in the world today. gold. The first stock index futures contract was traded at Kansas City Board of Trade. 1865 The CBOT went one-step further and listed the first “exchange traded” derivatives contract in the US. etc. cotton. a spin-off of CBOT. futures on T-Bills and Euro-Dollar futures are the three most popular future contracts traded today. SGX in Singapore. India has been trading derivatives contract in silver. Index futures. coffee. was reorganized to allow futures trading. spices. Currently the most popular stock index futures contract in the world was based on S&P 500 index. Its name was changed to Chicago Mercantile Exchange (CME). financial futures became the most active derivatives instruments generating volumes many times more than the Commodity futures. TIFFE in Japan. Other popular international exchanges that trade derivatives are LIFFE in England. During the mid eighties. these contracts were called “future contracts” 1919 Chicago Butter and Egg & board. traded on Chicago Mercantile Exchange. and MATIF in France. A group of Chicago businessmen formed the Chicago Board of Trade (CBOT).

but as the understanding of financial markets and risked management continued to improve newer derivatives were created. Option and future are the most commonly traded derivatives. etc. now cotton and oil futures trade in Mumbai. Structured notes. The family includes the host of other product such as forward contracts. are on government bonds (to help control interest rate risk) the stock index (to help control risk that is associated with the fluctuations in the stock market) and on exchange rates (to cope with currency risk). pepper futures in Kochi. JUNE 2000 National Stock Exchange and Bombay Stock Exchange started trading in futures on Sensex and Nifty. Derivatives on stocks were traded in the form of Teji and Mandi in unorganized on exchanges. soybean futures trade in Bhopal. Options trading on Sensex and Nifty commenced in June 2001. 47 .organized market was legal before Moorage Desai’s government banned forward contracts. inverse floaters. The largest derivatives market in the world. For example. Very soon thereafter trading began on options and futures in 31 prominent stocks in the month of July and November respectively. coffee in Bangalore. caps & Floors and Collar Swaps.

48 . Risk Associated With Derivatives: While derivatives can be used to help manage risks involved in investments. the risks involved in derivatives trading are neither new nor unique – they are the same kind of risks associated with traditional bond or equity instruments. they also have risks of their own. depending on the degree of leverage and the nature of the security. The market risk of leveraged derivatives may be considerable. such as fluctuation in interest rates or currency exchange rates. However. Market Risk Derivatives exhibit price sensitivity to change in market condition.

Credit Risk Derivatives not traded on exchange are traded in the over-the-counter (OTC) market. the hedge may limit the fund’s total return. OTC instrument are subject to the risk of counter party defaults. If the anticipated risks do not develop.Liquidity Risk Most derivatives are customized instrument and could exhibit substantial liquidity risk implying they may not be sold at a reasonable price within a reasonable period. Thus. FUNCTION OF DERIVATIVES MARKET:- The derivative market performs a number of economic functions:-  Prices in an organized derivatives market reflect the perception of market participants about the future and lead the prices of underlying to the perceived future level. 49 . The prices of derivative converge with the prices of the underlying at the expiration of the derivative contract. Hedging Risk Several types of derivatives. options and forward are used as hedges to reduce specific risks. derivatives help in discovery of future as well as current prices. Liquidity may decrease or evaporate entirely during unfavorable markets. including futures.

 An important incidental benefit that flows from derivatives trading is that it acts as a catalyst for new entrepreneurial activity. Transfer of risk enables market participants to expand their volumes of activity. PARTICIPANTS OF THE DERIVATIVE MARKET:- 50 .  The derivatives market helps to transfer risks from those who have them but may not like them to those who have an appetite for them. speculators trade in the underlying cash market. the benefit of which are immense. due to their inherent nature.  Derivatives. are linked to the underlying cash market. In the absence of an organized derivative market.  Derivatives markets help increase savings and investment in the end. creative.  The derivatives have a history of attracting many bright. They often energize others to create new businesses. new products and new employment opportunities. the underlying market witnesses higher trading volumes because of the participation by more players who would not otherwise participate for lack of arrangement to transfer risk.  Speculative trades shift to a more controlled environment of derivatives market. With the introduction of the derivatives. well- educated people with an entrepreneurial attitude.

a commodity and would. In fact. On the other hand. The day traders speculate on the price movements during one trading day. or short sell. He acts as an arbitrageur when he enters in to simultaneous purchase and sale of a commodity. Hedgers Hedgers are the traders who wish to eliminate the risk (of price change) to which they are already exposed. Speculators If hedgers are the people who wish to avoid the price risk. speculators consume information. He earns risk less profit in this activity. Such opportunities do not exist for long in an efficient market. He is a speculator if he takes an open position in the price futures market or if he sells naked option contracts. By taking position. stock or other asset to take advantage of mispricing. Market participants in the future and option markets are many and they perform multiple roles. stand to lose should the prices move in the adverse direction. speculators are those who are willing to take such risk. Brokers provide services to others. depending upon their respective positions. They may take a long position on. while market makers create liquidity in the market. they feed information into prices and thus contribute to market efficiency. The speculators in the derivative markets may be either day trader or position traders. they are betting that a price would go up or they are betting that it would go down. They monitor the prices continuously and generally attempt to make profit from just a few ticks per trade. In this process. A trader acts as a hedger when he transacts in the market for price risk management. therefore. open and close position many times a day and do not carry any position at the end of the day. make forecasts about the prices and put their money in these forecasts. the position traders also 51 . These people take position in the market and assume risk to profit from fluctuations in prices.

The Institute of Chartered Accountant of India. Here some derivatives contracts that have come to be used are covered. These are done when the same securities are being quoted at different prices in the two markets.attempt to gain from price fluctuations but they keep their positions for longer durations may is for a few days. An arbitrageur profits by trading a given commodity. Arbitrageurs Arbitrageurs thrive on market imperfections. where the price thereof is comparatively higher. weeks or even months. or other item. with a view to make profit and carried on with conceived intention to derive advantage from difference in prices of securities prevailing in the two different markets” Thus. Futures and Options. TYPES OF DERIVATIVES:- The most commonly used derivatives contracts are Forward.  FORWARD:- 52 . arbitrage involves making risk-less profits by simultaneously entering into transactions in two or more markets. that sells for different prices in different markets. the word “ARBITRAGE” has been defines as follows:- “Simultaneous purchase of securities in one market where the price there of is low and sale thereof in another market.

@ Rs. A. 450 to B on 1st Sep. Ltd. agrees to buy 600 shares of Reliance Ind. buys an option to buy 600 shares of Reliance Ind. where settlement takes place on a specific date in the future at today’s pre- agreed price. For example :. without any obligation. A has the right to buy the shares on or before the specified date. @ Rs. Ltd. agrees to sell 600 shares of Reliance Ind. For example :. Ltd. In this case. A forward contract is a customized contract between two entities. Options are of 2 types: calls and puts. 1. @ 450 Rs 450 on or before 1 st Sep. but not the obligation. on 1 st Aug.A. at a given price. but he is not bound to buy the shares. to buy a given quantity of the underlying asset. on or before a given future date. on 1 st Aug. Futures contracts are special types of forward contracts in the sense that the former are standardized exchange-traded contracts. to purchase or sell an asset.A. 450 to B on 1 st sep.  OPTIONS:- Options are a right available to the buyer of the same. CALLS :- Call gives the buyer the right. 53 .  FUTURES :- A futures contact is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. It means that the buyer of the option can exercise his option but is not bound to do so. on 1 Aug.

Longer-dated options are called warrants and are generally traded over-the-counter. His position in both the type of option is exactly the reverse of that of a buyer. His buying or selling of an asset depends upon the action of buyer of the option.2. buys an option to sell 600 shares of Reliance Ind. but he is not bound to sell the shares. on 1 st Aug. These are options having a maturity of up to three years. on or before a given date. PUTS :- Put gives the buyer the right. For example :. the majority of options exchanges having a maximum maturity of nine months. Ltd.  WARRANTS :- Options generally have lives of up to one year.  LEAPS :- The acronym LEAPS means Long-Term Equity Anticipation Securities. @ Rs 450 on or before 1 st Sep. In this case.  BASKET :- 54 . but not the obligation. A has the right to sell the shares on or before the specified date.A. to sell a given quantity of the underlying asset. at a given price. In both the types of the options. the seller of the option has an obligation but not a right to buy or sell an asset.

) INTEREST RATE SWAPS:- These entail swapping only the interest related cash flows between the parties in the same currency. with the cash flows in one direction being in a different currency than those in the opposite direction.  SWAPTIONS :- Swaptions are options to buy or sell a swap that will become operative at the expiry of the options.) CURRENCY SWAPS:- These entail swapping both principal and interest between the parties. a swaptions is an option on a forward swap. They can be regarded as portfolios of forward contract. EMERGENCE OF THE DERIVATIVE TRADING IN INDIA  Approval For Derivatives Trading 55 . Rather than have calls and puts. Equity index options are a form of basket options. 2. The two commonly used swaps are as followas: 1. Thus.  SWAPS :- Swaps are private agreement between two parties to exchange cash flows in the future according to a pre arranged formula. A payer swaptions is an option to pay fixed and receive floating Out of the above-mentioned types of derivatives forward. the swaptions market has receiver swaptions and payer swaptions. A receiver swaptions is an option to receive fixed and pay floating. Basket options are options on portfolios of underlying assets are usually a moving average of a basket of assets.

deposit requirement and real . 1998 prescribing necessary pre-conditions for introduction of derivatives trading in India. The committee recommended that derivatives should be declared as ‘securities’ so that regulatory framework applicable to trading of ‘securities’ could also govern trading of securities. which was submitted in October 1998. SEBI also set up a group in June 1998 under the chairmanship of Prof. SEBI set up a 24 – member committee under the chairmanship of Dr. L. The SCRA was amended in December 1999 to include derivatives within the ambit of ‘securities’ and the regulatory framework were developed for governing derivatives trading. The repot. The act also made it clear that derivatives shall be legal and valid only if such contracts are traded on 56 .time monitoring requirements. to recommend measures for risk containment in derivative market in India. 1995.C. 1996 to develop appropriate regulatory framework for derivatives trading in India. J. The first step towards introduction of derivatives trading in India was the promulgation of the Securities Laws (Amendment) Ordinance.R.Gupta on November 18. The committee submitted its report on March 17. did not take off. however. worked out the operational details of margining system. which withdrew the prohibition on options in securities. methodology for charging initial margins. broker net worth.Verma. as there was no regulatory framework to govern trading of derivatives. The market for derivatives.

The government also rescinded in March 2000.- Forward Contracts A forward contract is an agreement to buy or sell an asset on a specified date for a specified price. thus precluding OTC derivatives. Futures contracts on individual stocks were launched in November 2001. One of the parties to the contract assumes a long position and agrees to buy underlying asset on a certain specified future date for a certain specified price. INTRODUCTION TO FORWARDS. Trading and settlement in derivatives contracts is done in accordance with the rules. SEBI permitted the derivative segment of two stock exchanges. the three – decade old notification. NSE and BSE. and their clearing house/corporation to commence trading and settlement in approved derivatives contract. a recognized stock exchange. which prohibited forward trading in securities. Derivatives trading commenced in India in June 2000 after SEBI granted the final approval to this effect in May 2000. The trading in index options commenced in June 2001. This was followed by approval for trading in options based on these two indices and options on individual securities. SEBI approved trading in index future contracts based on S&P CNX Nifty and BSE-30 (Sensex) index. The other party assumes a short position and agrees to sell the asset on the same date 57 . and regulations of the respective exchanges and their clearing house/corporation duly approved by SEBI and notified in the official gazette. byelaws. To begin with.

Even when forward markets trade standardized contracts. the basic problem is that of too much flexibility and generality. This often makes them design terms of the deal.  Counter party risk. for the same price. In the first two of these. expiration date and the asset type and quality. The parties to the contract negotiate other contracts details like delivery date. which often results in high prices being charged. and hence is unique in terms of contract size. The forward contracts are normally traded outside the exchanges. the counter party risk remains a very serious. the contract has to be settled by delivery of the asset. When one of the two sides to the transaction declares bankruptcy. the other suffers. which are very convenient in that specific situation.  Each contract is custom designed. and hence avoid the problem illiquidity. but makes the contract non-tradable. 58 . Limitation of forward market Forward market worldwide is affected by several problems:-  Lack of centralization.  If the party wishes to reverse the contract.  Illiquidity. and quantity bilaterally. The forward market is like a real estate market in that any two consenting adults can form contracts against each other.  On the expiration date. it has to compulsorily go to the same counter party. price. Salient features of forward contracts are as follows:-  They are bilateral contracts and hence exposed to counter party risk. Counter party risk arises from the possibility of default by any one party to the transaction.  The contract price is generally not available in public domain.

it enables him to hedge his risk by operating in futures market . As the terms of contracts are standardized. Futures contracts are used generally for protecting against rich of adverse price fluctuations (hedging). It is useful to the producer because investor can get an idea of the price likely to prevail at a future point of time and therefore can decide between various competing commodities.  The units of price quotation and minimum price change. Futures contract performs two important functions of price discovery and price risk management with reference to the given commodity. The future trading is very useful to the exporters as it provides an advance indication of the price likely to prevail and thereby help the exporter in quoting a realistic price and thereby secure export contract in a competitive market.  The date and month of delivery.  Location of settlement. 59 . He can do proper costing and cover his purchases by making forward contracts.  Quality of the underlying. Futures are exchange-traded contracts to sell or buy standardized financial instruments or physical commodities for delivery on a specified date at an agreed price. the best that suits him. these are generally not used for merchandizing purpose. It enables the consumer get an idea of the price at which the commodity would be available at a future point of time. The standardized items in a futures contract are:  Quantity of the underlying. It is useful to all segment of economy.INTRODUCTION TO FUTURES:- Future contract is specie of forward contract. Having entered into an export contract.

Exists. as contracts are tailor High. production and manufacturing activities. Price discovery Not efficient. FEATURE FORWARD CONTRACT FUTURE CONTRACT Operational Traded directly between two Traded on the Mechanism parties (not traded on the exchanges. are centralized and all buyers and sellers come to a common platform to discover the price. However. exchanges).e. which becomes the counter party to all the trades or unconditionally guarantees their settlement. Other benefits of futures trading are:  Price stabilization in time of violent price fluctuations.this mechanism dampens the peaks and lifts up the valleys i.. Contract Differ from trade to trade.  Facilitates lengthy and complex.  Helps balance in supply and demand position throughout the year. Liquidation Low. as contracts are Profile made contracts catering to standardized exchange the needs of the needs of the traded contracts.  Leads to integrated price structure throughout the country. as markets scattered.  Encourages competition and acts as a price barometer to farmers and other trade functionaries. Contracts are Specifications standardized contracts. the amplitude of price variation is reduced. parties. as markets are Efficient. 60 . Counter-party Exists. risk assumed by the clearing corp.

Initial margin amount computed using VaR is collected up-front.Margins The margining system is based on the J R Verma committee recommendations. The initial margin amount is large enough to cover a one-day loss that can be encountered on 99% of the days. The actual margining happens on a daily basis while online position monitoring is done on an intra day basis. 2. Settlement of Future Contract:- Futures contract has two types of settlement. which happens on a continuous basis at the end of each day. which happens on the last trading day of the futures contract. 61 . the MTM settlement. Initial margins. The computation of initial margin on the futures market is done using the concept of Value-at-risk (VaR). The mark-to-market settlement is done in cash. Daily margining is of two types: 1. VaR methodology seeks to measure the amount of value that a portfolio may stand to lose within certain horizon period (one day for the clearing corporation) due to potential changes in the underlying asset market price. The daily settlement process called “mark-to-market” provides for collection of losses that have already occurred (historic losses) whereas initial margin seeks to safeguard against potential losses on outstanding positions. Mark-to market profit/loss. and the final settlement.

This is known as daily mark-to-market settlement. The previous day’s settlement price and the current day’s settlement price for brought forward contracts. The trade price and the day’s settlement price for contracts executed during the day but not squared up. The clearing members (CMs) who have a loss are required to pay the mark-to-market (MTM) loss amount in cash which is in. NSCCL marks all positions of CM to the final settlement price and the resulting profits/losses is settled in cash. turn passed on to the CMs who have made a MTM profit. After completion of daily settlement computation. Similarly. after the close of trading hours. 2. The buy price and the sell price for the contracts executed during the day and squared up. The profits/losses are computes as a difference between: 1. all the open positions are reset to the daily settlement price. ii. FINAL SETTLEMENTS FOR FUTURES On the expiry of the future contracts. MTM Settlement All futures contact for each member is marked-to-market (MTM) to the daily settlement price of the relevant futures contract at the end of each day. The pay-in and payout of the mark-to-market settlement are affected on the day following the trade day. TMs are responsible to collect/pay/losses/profits from/to their clients by the next day. i. Final settlement loss/profits amount is 62 . CMs are responsible to collect and settle the daily MTM profits/losses incurred by the Trading members (TMs) and their clients clearing and settling through them. Such position becomes the opening positions for the next day.

To have this privilege of doing the transaction at a future only if it is a profitable.debited/credit to the relevant CM’s clearing bank account on the day following expiry day of the contract SETTLEMENT PRICES FOR FUTURES:- Daily settlement price on a trading day is the closing price of the respective future contracts on such day. Thus on the expiry of the day of the contract the option may or may not be exercised by the buyer. the buyer or holder has the right to buy the number of shares mentioned in the contract at the agreed strike price. Final settlement price is the closing price of the relevant underlying index/security in the capital market segment of NSE. The closing price of the underlying Index/security is currently its last half an hour weighted average value in the capital market segment of NSE. INTRODUCTION TO OPTIONS:- Options give the holder or buyer of the option the right to do something. The holder of the buyer does not have to exercise this right. If the option is a put option. The closing price for the future contracts is currently calculated as the last half an hour weighted average price of a contract in the F&O segment of NSE. the two parties to the contract have committed themselves to doing something at a future date. 63 . the buyer of the option has a right to sell the number of shares mentioned in the contract at the agreed strike price. In contrast. If the option is a call option. on the last trading day of the contract. the buyer of the option has to pay a premium to the seller of options. in a futures contract.

Put Options: A Put Option gives the holder of the right to sell a specific number of an agreed security at a fixed price for a period. to buy or sell a parcel of shares at a predetermined price possibly on. or before a predetermined rate. on or before a predetermined date. When you expect prices to fall. Put Options. You are bearish. Call Options 2.Long & Short Positions When you expect prices to rise. You are bullish. There are two types of options: 1. but not obligation. then you take a short position by selling Puts. Put Options Call Options: Call options give the taker the right. When you expect prices to fall. then you take a long position by buying Puts.Long & Short Positions When you expect prices to rise. to buy the underlying shares at a predetermined price. You are bullish. 64 . then you take a long position by buying calls. To acquire this right the taker pays a premium to the writer (seller) of the contract.TYPES OF OPTIONS:- An option is a contract between two parties giving the taker/buyer) the right. Call Options. You are bearish. then you take a short position by selling calls. but not the obligation.

potentially remaining neutral unlimited gains  Potentially limited losses. unlimited gains IMPORTANT CONCEPTS:- In -the. A put option is in the memory if the underlying price is below the strike price. A call option is in the memory if the underlying price is above the strike price. option: It is an option with intrinsic value. limited gains Put Option Holder (Buyer) Put Option Holder (Seller)  Pays Premium  Receives premium  Right to exercise & buy the  Obligation to buy shares if shares exercised  Profit from rising prices  Profits from rising prices or  Limited losses.Particulars Call Options Put Options If you expect a fall in price [Bearish] Short Long If you expect a rise in price [B ullish] Long Short TABLE SHOWING THE DEALING OF CALL & PUT OPTION Call Option Holder (Buyer) Call Option Writer (Seller)  Pays Premium  Receives premium  Right to exercise & buy the  Obligation to sell shares if shares exercised  Profit from rising prices  Profits from falling prices or  Limited 65 . potentially remaining neutral unlimited gains  Potentially unlimited losses.the.

money At the. If the value of the underlying asset is lower than the strike price. all of its value consists of time value.the. If the value of the underlying asset is equivalent to the strike price. the option has no intrinsic value and is an “out. Market price < strike price Out. A call option is out of the money if the stock price is below its strike” option. If the value of the underlying asset is higher than the strike” option. the option premium has an intrinsic value and is an “in.the. But of the money if the stock price is above its strike price. Market price ~ strike price” option. the call option is “” option. It is an option that has no intrinsic Market price = strike price In. the option has no intrinsic value and is “ A term that describes an option with a strike price that is equal to the current market price of the underlying” Time Value 66 .of.e.the. Market Scenario Call Option Put Option Market price > strike price In. In a put option.the. If the value of the underlying asset is equivalent to the strike price. the option has an intrinsic value and is an “ Intrinsic Value In a call option.the. if the value of the underlying asset is lower than the strike Near. the put option is at the.of.the- money” and has no intrinsic value or zero intrinsic value.of.the. if the value of the underlying asset is higher than the strike price.

Soon after this discovery. in fact. Time value reduces as the expiration draws near and on expiration day. Thus. The potential loss for the buyer of an option is limited to the amount of premium paid for the contract. Myron Scholes joined Black and the result of their work is a startlingly accurate option pricing model. intrinsic value and time value. the time value of the option is zero. as the term “premium” commonly used. It does not refer to an amount above the base price. The writer of the option. 67 . Fisher Black started out working to create a valuation model for stock warrants. The result of this calculation held a striking resemblance to a well-known heat transfer equation. Option Price An option cost or price is called “premium”. Time value is the amount an investor is willing to pay for an option. for premium received. The of an option has two important constituents. on the other hand. undertakes the risk of unlimited potential loss. This work involved calculating a derivative to measure how the discount rate of a warrant varies with time and stock price. in the hope that at some time prior to expiration its value will increase because of a favorable change in the price of the underlying asset. Option Price = Premium Price A premium is the net amount the buyer of an option pays to the seller of the option. Premium = Intrinsic value + Time PRICING WITH REGARD TO OPTIONS:- The Black and Scholes Model: The Black and Scholes Option Pricing Model didn't appear overnight.

we divide it into two parts. Black and Scholes' improvements on the Boness model come in the form of a proof that the risk-free interest rate is the correct discount factor. and with the absence of assumptions regarding investor's risk preferences. A common way of adjusting the model for this situation is to subtract the discounted value of a future dividend from the stock price. Black and Scholes Model: In order to understand the model itself. The first part. This is found by multiplying stock price [S] by the change in the call premium with respect to a change in the underlying stock price [N (d1)]. Black and Scholes can't take all credit for their work. SN [d1). in fact their model is actually an improved version of a previous model developed by A. derives the expected benefit from acquiring a stock outright. James Boness in his Ph. Assumptions of the Black and Scholes Model:- 1) The stock pays no dividends during the option's life Most companies pay dividends to their share holders. The second part of the model. 68 .D. Ke [-rt) N (d2). so this might seem a serious limitation to the model considering the observation that higher dividend yields elicit lower call premiums. The fair market value of the call option is then calculated by taking the difference between these two parts. gives the present value of paying the exercise price on the expiration day. dissertation at the University of Chicago.

69 . the remaining time value is very small. American exercise term allow the option to be exercised at any time during the life of the option." An into process is simply a Markov process in continuous time. 3) Markets are efficient This assumption suggests that people cannot consistently predict the direction of the market or an individual stock. you forfeit the remaining time value on the call and collect the intrinsic value. Even floor traders pay some kind of fee. but the intrinsic value is the same.2) European exercise terms are used European exercise terms dictate that the option can only be exercised on the expiration date. but it is usually very small. Towards the end of the life of a call. This limitation is not a major concern because very few calls are ever exercised before the last few days of their life. making American options more valuable due to their greater flexibility. The fees that Individual investor's pay is more substantial and can often distort the output of the model. This is true because when you exercise a call early. If you were to draw a continuous process you would do so without picking the pen up from the piece of paper. 4) No commissions are charged Usually market participants do have to pay a commission to buy or sell options. you must first know that a Markov process is "one where the observation in time period t depends only on the preceding observation. To understand what a continuous into process is. The market operates continuously with share prices following a continuous into process.

Government Treasury Bills with 30 days left until maturity is usually used to represent it. these 30-day rates are often subject to change. During periods of rapidly changing interest rates. 70 . returns on the underlying stock are normally distributed. It does not consider the steps along the way where there could be the possibility of early exercise of an American option.S. Advantages & Limitations:- Advantage:  The main advantage of the Black-Scholes model is speed -. which is reasonable for most assets that offer lets you calculate a very large number of option prices in a very short time. 6) Returns are log normally distributed This assumption suggests. In reality there is no such thing as the risk-free rate. but the discount rate on expiration.5) Interest rates remain constant and known The Black and Scholes model uses the risk-free rate to represent this constant and known rate. Limitation:  The Black-Scholes model has one major limitation: it cannot be used to accurately price options with an American-style exercise as it only calculates the option price at one point in time -. thereby violating one of the assumptions of the model.

In this case the call is always worth the same as its European equivalent as there is never any advantage in exercising early.  The exception to this is an American call on a non-dividend paying asset. Difference between derivative and equity DERIVATIVE EQUITY Warehousing No warehousing is No warehousing is required required Quality of Derivatives contract Equity contract don’t have underlying don’t have attribute of attribute of quality assets quality Contract life Comparatively having Having long and short 71 .  Various adjustments are sometimes made to the Black-Scholes price to enable it to approximate American option prices but these only works well within certain limits and they don't really work well for puts. they can be exercised at any time as opposed to European options which can only be exercised at expiration) this is a significant limitation. As all exchange traded equity options have American-style exercise (i.e.

30p.m 72 .m to 3. long contract life contract life Maturity date Standardized Standardized Return High Medium Risk Very High Less Liquidity Less Very high Investment Very high Low Amount Lot size Fixed by SEBI Not fixed by SEBI Time of trading 9a.m 9a.30p.m to 3.

”  Objective of the Study: 1. 73 .RESEARCH METHODOLOGY:-  Problem Statement: The topic. “AWARENESS ABOUT THE DERIVATIVE AND ITS COMPARISION WITH EQUITY. is “DERIVATIVE MARKET” in the firm so the problem statement for this study will be. To know the awareness of the Derivative Market in Surat City. To find what proportion of the population are investing in such derivatives along with their investment pattern and product preferences. 3. 2. which is selected for the study. To know which one is beneficial for the investor.

it is necessary to have some of the secondary information. Newspapers. Research Source of Data:- There are two types of sources of data which is being used for the studies:-  Primary Source of Data: Preparing a Questionnaire is collecting the primary source of data & it was collected by interviewing the investors. 74 . The type of research design applied here are “DESCRIPTIVE” as the objective is to check the position of the Derivative Market in Surat city. which is being conducted to know the awareness of the Derivative Market in the city & also doing comparison of derivatives with equity. which is collected from the following:-Books. The objectives of the study have restricted the choice of research design up to descriptive research design. etc. This survey will help the firm to know how the investors invest in the derivative segment & which factors affect their investing behavior.  Scope of the Study: The scope of the study will include the analysis of the survey.  Research Design: The research design specifies the methods and procedures for conducting a particular study. Websites. Magazines & Journals.  Secondary Source of Data: For having the detailed study about this topic.

1 Are you trading in derivative market? Objective: To know that whether the investors are trading in derivative market or not.0 data collection used id “SURVEY METHOD”.0 Total 200 100. Frequency Graph: 75 .0 the method of No 126 63.Methods of Data Collection:- The study to be conducted is about the awareness of the Derivative Market in the Frequencies Percentage Surat City so Yes 74 37. DATA ANALYSIS AND INTERPRETATION: Q.

Trading 140 126 120 percent/frequency 100 74 80 63 Frequencies 60 Percentage 37 40 20 0 Yes No Trading Inference: from the above graph out of 200 investors. {Give the rank} Objective: To know the reason why investors are not trading in trading in derivative market Frequency 76 . Q.2 Reasons for not investing in derivative market. only 37% investors means 74 respondent are trading in derivative market and 63% means 126 respondents are not trading in derivative market.

3 what is the objective of trading in derivative market? Objective: To know that why they are trading in derivative market.1 High risky 62 49.6 0 Reasons Lack of Lack of High risky Huge Other knowledge awareness amount of investment reasons Inference: From the above graphical representation you can see that 49.6 Total 126 100.2% investors think that the derivatives are high risky whereas 1.1 1713.6% investors don’t have specify their reasons for not trading in derivative market.2 50 Series1 40 26 Series2 30 20.5 investment Other 2 1.5 Series3 20 10 0 0 2 1. Q.6 Lack of awareness 19 15. Reasons Frequency Percent Lack of knowledge 26 20. Frequency Frequency Percent 77 .6 19 15.2 Huge amount of 17 13.0 Graph: Reason 70 62 60 percent/frequency 49.

Which criteria are most important for them whether derivatives are ease in transaction. or available of different contract or for the margin money. 78 .5 Total 200 100 Graph: High Return 140 126 120 percent/frequency 100 80 63 65 Frequency 60 Percent 40 32.0 Neutral 2 1.0 Some how preferred 5 2. Q .5 1 1 0 Don’t trade Not at all Neutral Some how Most preferred preferred preferred preferred Inference: From the above graph we can see that 32.5 Most preferred 65 32.5% investors are most preferred the objective of high return and 1% investors are neutral while they are trading in derivative market.0 Not at all preferred 2 1.4what are the criteria do you taken in the consideration while investing in derivative market? Objective: To know that which criteria are consider by the investors while they are investing in derivative market.5 20 2 2 5 2.Don’t trade 126 63. less costly.

0 Graph: Ease in transaction 140 126 percentage/frequency 120 100 80 63 Frequency 60 Percent 40 23 29 16 11. Frequency Frequency Percent Don’t trade 126 63.5 14.5 Total 200 100.0 Some how not 4 2.0 preferred Neutral 16 8.0 Some how preferred 23 11.5 Most preferred 29 14.0 Not at all preferred 2 1.5 20 2 1 4 2 8 0 Don’t Not at all Some Neutral Some Most trade preferred how not how preferred preferred preferred preferred 79 .

5 Total 200 100.0 Not at all preferred 1 . Objective: To know the preference of the investors while they are trading in derivative market. Frequency Frequency Percent Don’t trade 126 63.0 Most preferred 43 21.5 Some how preferred 14 7.5% investors are most preferred and 1% investors are not at all preferred the ease in transaction contract.5 Some how not preferred 1 .0 Graph: 80 . Q-5 Give your preference of trading in derivative instrument.5 Neutral 15 7.Inference: from the above graph we can conclude that out of the 200 investors 14.

Index future 140 126 percent/frequency 120 100 80 63 Frequency 60 43 Percent 40 15 7.5 20 1 0.5 0 Don’t trade Not at all Some how Neutral Some how Most preferred not preferred preferred preferred preferred Inference: From the above graph we can see that only 0.5% investors are some how preferred 21.0 Most preferred 54 27.0 Not at all preferred 4 2.7. 0.0 Some how not preferred 1 .5% are most preferred as the preference of their trading in derivative market.0 81 .5 Some how preferred 10 5.0 Total 200 100.5% investors are not at all preferred the index future.5 1 0. Frequency Frequency Percent Don’t trade 126 63.5 14 7 21.5 % investors are some how not preferred .5 Neutral 5 2. Q-6 Give your preference in term of trading in derivative market? Objective: To know the preference of the investors in term of trading in derivative market.



140 126
80 63 frequency
60 percentage
40 27
0 0 4 2 10.5 5 2.5 10 5


Not at all


how not



Inference: from the above graph we can see that 27% investors are most
preferred the intraday and 2% investors are not at all preferred the intraday.

Q-7 How much percentage of your income you trade in derivative market?
Objective: To know investors are how much percentage of their income trade in
derivative market.


Frequency Percent
Don’t trade 126 63
Less than 5% 8 4.0
5%-10% 25 12.5
11%-15% 25 12.5
16%-20% 13 6.5
More than 20% 3 1.5
Total 200 100.0



More than 20% 1.5

16%-20% 6.5

11%-15% 12.5
25 Percent
12.5 Frequency
5%-10% 25

Less than 5% 4

Don’t trade 63

0 50 100 150

Inference: From the above graph we can see that 12.5% investors are invest
5% to 10% income in the derivative market. While only 1.5% investors are
investing more than 20% of their income.

Q-8 what is the rate of return expected by you from derivative market?
Objective: To know the investors expectation towards their investment in
derivative market.


Frequency Percent
Do not trade 126 63.0
5%-9% 21 10.5
10%-13. % 22 11.0
14%-17. % 23 11.5
18%-23% 8 4.0
Total 200 100.0



rate of return expected

140 126

80 63 Frequency
60 Percent
40 21 22 23
10.5 11 11.5 8 4
Do not trade 5%-9% 10%-13. % 14%-17. % 18%-23%

Rate of return

Inference: From the above graph we can see that 11.55 investors are expect
the 14% to 17% of their investment .and 4% investors are expect the 18% to 23%
rate of return.

Q-9. You are satisfied with the current performance of the derivative market

Objective: To know that investors are satisfied with the performance of the
derivative market or not.

Frequency Percent
Do not trade 126 63.0
Strongly disagree 8 4.0
Disagree 14 7.0
Neutral 18 9.0
Agree 25 12.5
strongly agree 9 4.5
Total 200 100.0



Gender: Frequency Frequency Percent Male 157 78.5 20 0 Do not Strongly Disagree Neutral Agree strongly trade disagree agree prferred Inference: From the above Graph we can see that 12.5 9 4. Satisfaction percentage/frequency 126 140 120 100 80 63 Frequency 60 Percent 40 18 25 8 4 14 7 9 12.5% are agree for satisfaction and4% are strongly disagree.0 Graph: 85 .5 Female 43 21.5 Total 200 100.

gender 180 157 160 140 120 frequency 100 Frequency 78.5 20-25 years 61 30.0 Graph: 86 .5 31-35 years 43 21.5 26-30 years 51 25.5 80 Percent 60 43 40 21.0 Total 200 100.5 20 0 male female gender Inference: From the above graph we can see that there are 157 male investors when 43 are the female investors.5 above 35 years 42 21. AGE: Frequency Frequency Percent Below 20 years 3 1.

21.0 Total 200 100.5 Others 16 8.5% investors are below 20 years. and 21% investors are above 35 years trading in derivative market.5 Employed 82 41. Occupation: Frequency Frequency Percent Student 35 17.0 House wife 13 6.5 0 below 20 20-25 26-30 31-35 above 35 years years years years years years Inference: From the above graph we can see that out of 200 investors 1.5 21 20 Percent 15 10 5 1.0 Business 32 16.0 Professional 22 11.5 percent 25 21.30.5% investors are between 31 to35 years . age 35 30.5 30 25.5% investors are 20 to 25 years.0 Graph: 87 .

5 16 20 Percent 15 11 6. 41% are the employed. 16% are the business.5 .5 99.0 Graph: 88 . 6.5 36.5 lac 1-5 lacs 73 36.5 8 10 5 0 t d rs if e l ss en na ye he w ne ud io o ot e pl s si st us es em bu ho of pr occupation Inference: From the above graph we can see that 17.5 11-15 lacs 1 .0 100. 11% investors are the professionals.5 23.5 less than 1 d 62 31.5 98. ANNUAL INCOME Frequency Frequenc Valid Cumulative y Percent Percent Percent Vali 0 47 23.0 above Total 200 100.0 100.0 31.5% investors are students. Occupation 45 41 40 35 percentage 30 25 17. which include the retired.5 91.5 23.0 6-10 lacs 15 7. and 8% are others.0 15 lacs & 2 1.5 7. farmers and unemployed.5% investors are the housewife.0 1.0 54.

5 25 20 Percent 15 7. and 1% investors have the 15 lacks and above annual income.5 % investors have the 1to 5 lacks annual income. 0.5 10 5 0. Inference: From the above graph we can see that 23. 89 .5% investors have the 11 to 15 lacks annual income. 36.5 % investors have the 6 to 10 lacks income. annual income 40 36. 31% investors have less than 1 lack annual income.5 1 0 0 less than 1-5 lacs 6-10 lacs 11-15 15 lacs & 1 lac lacs above income in Rs.5% investors don’t have the income.5 35 31 30 percentage 23. 7.

high risky. The main objective I of trading in derivative market of the investors is getting high return. 4. Reasons for not investing in derivative market Is derivative is because lack of awareness and knowledge. Here we found that out of 200 investors 74 means 37% investors are trading in derivative market whereas 126 means 63% are not trading in derivative market. Their attractive preference is index future and index options 6. 90 . 5. Criteria for trading is considered by investors are derivatives in derivative they get margin money and derivatives are more liquid. FINDINGS 1. Most of the investors are trading intraday. 3. 2. need huge amount of investment.

8.5% investors are investing 11% to 15% of their income trading in derivative market.-most of the businessman and employed are trading in derivative market.7. 10. In terms of investment in Derivative and Equity investors have capability of taking risk. 91 . Out of 200 investors 12. 2. The awareness regarding Derivative among investor is 78 percent.12.5% are satisfied with derivative market 9.157male investors and 43 female investors out of 200 investors. CONCLUSION 1. increase the customer. 92 . Only 74 investors are trading whereas 126 are not trading . The important factor that affecting the investor decision is based on In Consult With Their Broke RECOMMENDATION 1. 3. Investors also prefer Safety and Time Factor as the important parameter for investing. 4.19 are lack of awareness so make them aware with the derivative .so attract them for trading.

4. Those who are not satisfied with the derivative by knowing their behavior of investment make them satisfied. Out of 126. And good word of mouth builds the business. BIBLIOGRAPHY 93 . 26 don’t have knowledge for derivative so provide them knowledge for trading in derivative market. Because negative word mouth of the customers fall down the business.3.

5paisa. New York. 2. Tata McGraw-Hill.  www. N D Vohra and B R Bagri.derivativeindia. On “Awareness about Derivatives and Its Comparison with Equity. “Business Research Methods”.com  www.nseindia. 2003. I had prepared this questionnaire for project work meant for educational purpose only. seventh reprint 2006 Tata McGraw-Hill Publishing Company  APPENDIX Questionnaire Myself Ankit Choudhary student of MBA studying at S. “Future and options” 2nd Edition. Eighth  www.anandrathi.mcx.D college of management studies. 94  www. Muzaffarnagar.ncdex.1. WEBSITES  www. Donald R Cooper & Pamela S Schindler.” No personal information will be disclosed in any form at  www.






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