CHAPTER I

1. INTRODUCTION
1.1 INDUSTRY PROFILE
Stock market is a market where trading of company stocks, other securities and derivatives
takes place. Stock exchanges are corporations or mutual organizations, which are specialized in
trading stocks and securities. All sorts of company stocks are enrolled in the stock exchanges.
Some of the stock markets in India are listed below: -

• Bangalore Stock Exchange

• Mumbai (Bombay) Stock Exchange

• Calcutta Stock Exchange

• Delhi Stock Exchange

• Madras Stock Exchange

• National Stock Exchange

Mumbai (Bombay) stock exchange is India’s first stock exchange. It was founded in 1875
with total number of listed stocks being more than 6,000. In India there are total 22 stock
exchanges operating across the country. The National Stock Exchange (NSE) is situated in
Mumbai The small and medium sized companies can list their stocks in Over The Counter
Exchange of India (OTCEI).

The Securities and Exchange Board of India (SEBI) regulates the functioning of capital
market and protects the interests of the investors. It is situated in Mumbai. Some functions of
SEBI are as follows: -

• Regulation of working in stock exchanges and other securities markets.

• Registration and regulation of the operation of collective investment plans, including

mutual funds.

• Inhibition of fallacious and unfair business practices in the securities markets.

• Controlling accomplishment of shares and takeover of companies.

Stock exchange means any body of individuals, whether incorporated or not, constituted for
the purpose of regulating or controlling the business of buying, selling or dealing in securities.

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These securities include:

(i) Shares, scrip, stocks, bonds, debentures stock or other marketable securities of a like nature in
or of any incorporated company or other body corporate;

(ii) Government securities; and

(iii) Rights or interest in securities.

History of stock market in India

The working of stock exchanges in India started in 1875. BSE is the oldest stock market
in India. The history of Indian stock trading starts with 318 persons taking membership in Native
Share and Stock Brokers Association, which we now know by the name Bombay Stock
Exchange or BSE in short. In 1965, BSE got permanent recognition from the Government of
India. National Stock Exchange comes second to BSE in terms of popularity. BSE and NSE
represent themselves as synonyms of Indian stock market. The history of Indian stock market is
almost the same as the history of BSE.

There are 23 recognised stock exchanges in India Bombay Stock Exchange ,National
Stock Exchange, Ahmadabad Stock Exchange, Bangalore Stock Exchange,
Bhubaneswar Stock Exchange, Calcutta Stock Exchange, Delhi Stock Exchange,
Guwahati Stock Exchange, Hyderabad Stock Exchange ,Jaipur Stock Exchange,
Ludhiana Stock Exchange, Cochin Stock Exchange, Coimbatore Stock Exchange,
Madhya Pradesh Stock Exchange, Magadh Stock Exchange, Madras Stock Exchange,
Mangalore Stock Exchange, Meerut Stock Exchange ,OTC Exchange Of India
Pune Stock Exchange, Saurashtra Kutch Stock Exchange, Uttar Pradesh Stock Exchange,
Vadodara Stock Exchange.

1.2. COMPANY PROFILE

Name of the company : Sharekhan ltd.

Year of Establishment : 1925
Admin office : ShareKhan SSKI

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 A-206 Phoenix House
2nd floor,S.B.Marg,
Lower Parel
Mumbai - Maharashtra, INDIA- 400013

Nature of Business : Service Provider

Services : Depository Services,

Online Services and
Technical Research.
Core Services :
Equity and Derivatives trading on BSE and NSE
1. Depository Services
2. Online Trading
3. IPO Services
4. Commodity Trading on MCX and NCDEX
5. Port folio Management services.

Number of Employees : Over 3500

Revenue : Data Not Available

Website : www.sharekhan.com

Slogan : Your Guide to The Financial Jungle.

1.2.1. Background and inception of the company

Origin and Growth

Sharekhan is a retail broking arm of S.S. Kantilal Ishwarlal Investors Services Pvt. Ltd.,
An organization with more than 8 decades of trust and credibility in the stock market. Sharekhan
Ltd (Formally SSKI Investors Services Pvt Ltd.) was promoted by Mr. Shripal. S Morkharia and
Mr. Shreyas. S Morkhia. It is currently India’s largest broking house. It is a member of the stock

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exchange, Mumbai. It is a depository participant of the NSDL and CDSL. Its business includes
stock broking, depository services, portfolio management and derivatives.

The company’s core specialty lies in its retail distribution with a large network of
branches i.e. 510 share shops (retail shops) in 170 cities in India and sub-brokers/authorized
persons. Its strengths lies in its investment research capabilities. Its research division has several
analysts continuously monitoring global, national and regional political, economic and social
situations so as to assess their impact on the economy in general, the sectors so as to assess their
impact on the economy in general, the sectors and companies they research which helps them if
offering quality research and advice to clients.

The SSKI Group Comprises of Institutional broking and Corporate Finance. The
Institutional broking division caters to domestic and foreign institutional investors, while the
Corporate Finance Division focuses on niche areas such as infrastructure. Telecom and media.
SSKI has been voted as the Top Domestic Brokerage House in the research category by Euro
Money Survey and by Asia Money Survey.

For the derivates segment, to educate the potential investors towards the share market
they provide a study kit named the ‘Derivative Digest’. And for potential investors wanted to
start the trading in the share market also provided with the study kit ‘First Step to investing in the
share market’, gives them a general understanding about how the share market operates, and it
also gives an idea regarding the role of share brokers in the Capital Market.
These are the wide-raging services offered by the share khan to its customers. And most
importantly. Share Khan is blessed with well-dedicated sales wings, who are looking after the
various needs of the customers in a committed manner and which provide the customers with
tremendous amount of satisfaction and happiness about their investment.

1.2.2. Nature of the Business Carried

Sharekhan is a broking company. The company offers a complete range of pre trade,
trade and post trade service on the BSE (Bombay Stock Exchange) and the NSE (National Stock
Exchange). Whether the client come in to the company’s conventionally located officers and

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trade in a dedicated ambience or issue instructions over the phone, our highly trained team and
sophisticated equipment ensure smooth transactions and prompt service.\
• Investment Advisory Service
• Facilitation Services to Retail Investors, Corporate.
• Depository Services
• Investment options includes :
i. Online trading (Includes equity, derivatives)
ii. Commodities trading
iii. Mutual Funds
iv. Portfolio management Services

Sharekhan Branches are conceptualized to be place where investors can come in contact
with investment opportunities in an atmosphere of convenience and comfort. Our services are
available through our network of 510 Share Shops spanning 170 major towns and cities in the
country. Professional seeks to educate clients and end their confusion by custom an Investment
Plan according to the needs of clients and is also today a part of company’s induction program
advising employees on how to plan their investments.

1.2.3. VISION, MISSION & QUALITY POLICY

Vision
Sharekhan practices customer centric approach to be leading broking Firm. The Company Vision
is:
i. To be the top most company for providing investment advisory and financial planning
services in India.

ii. To be a leading investment intermediary for transaction through both online and offline
medium.

Mission

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To educate and empower the individual investor to make better investment decisions through
quality advice and superior service.
a) Educate and empower
i. Research backed advice, which is easy to understand, retail specific, and discipline.
ii. Total equity solutions for the entire investment process.
iii. Relationship management

a) Superior service
i. Integrity
ii. Transparency
iii. Professionalism
iv. Information – product, news, operations
v. Hassle free trading
vi. Enjoyable experience our goals is to accomplish top most position in both online and
offline medium of trade and also to remain a customer centric organization.

Quality objectives
Objectives represent, what needs to be accomplished in order to reach the goals.

• To increase the customer base of investors to invest in all kind of securities.

• Sharekhan has one among the largest network of outlets of the either trading firms with
180 outlets.
• To retain the existing consumers with research backed advice and personalized care the
needs of the consumer.

1.2.4. Products and service profile

The different types of products and services offered by Sharekhan Ltd. are as follows:
• Equity and derivatives trading
• Depository services

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 • Online services
• Commodities trading
• Dial-n-trade
• Portfolio management
• Share shops
• Fundamental research
• Technical research

Types of accounts in Sharekhan ltd.

Sharekhan offers two types of trading account for its clients

➢ Classic Account (which include a feature known as Fast Trade Advanced

Classic Account for the online users) and
➢ Speed Trade Account

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CLASSIC ACCOUNT

This is a product for the retail investor who is risk-averse and hence prefers to invest in
stocks selectively or who does not trade too frequently. There is no volume commitment on the
part of the client. The features of the products are as follows:

The registration charges are Rs. 750/- that is a one-time payment. With the online
package defaults demat a/c. would be opened with SSKI. For the 1st year no demat charges have
to be paid. It’s free.

The client gets exposure of up to 4 time of the deposit amount. For example if the client
has Rs. 5000/- in his/her account he/she can get the exposure up to Rs. 20,000/-

The brokerage applicable is 0.50% on delivery and 0.1 for intra day trading.

This account comes with the following features:

a. Online trading account for investing in Equities and Derivatives

b. Free trading through Phone (Dial-n-Trade)
i. Two dedicated numbers(1800-22-7500 and 39707500) for placing the
orders using cell phones or landline phones
ii.Automatic funds transfer with phone banking facilities (for Citibank and
HDFC bank customers)
iii.Simple and Secure Interactive Voice Response based system for
authentication
iv.get the trusted, professional advice of Sharekhan limited’s Tele Brokers
v.After hours order placement facility between 8.00 am and 9.30 am
c. Integration of: Online Trading +Saving Bank + Demat Account.

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 d. Instant cash transfer facility against purchase & sale of shares.
e. IPO investments.
f. Instant order and trade confirmations by e-mail.
g. Single screen interface for cash and derivatives.

SPEED TRADE ACCOUNT

This is an internet-based software application, which enables one to buy and sell in an
instant. It is ideal for active traders and jobbers who transact frequently during day’s session to
capitalize on intra-day price movement.
The company will be merging speed trade and speed trade plus. There will be a common
exe called speed. Trade which allows customers to trade on both case and F & O. account
opening fee Rs. 1000.

This account comes with the following features:

a. Instant order Execution and Confirmation.
b. Single screen trading terminal for NSE Cash, NSE F&O & BSE.
c. Technical Studies.
d. Multiple Charting.
e. Real-time streaming quotes, tic-by-tic charts.
f. Market summary (Cost traded scrip, highest value etc.)
g. Hot keys similar to broker’s terminal.
h. Alerts and reminders.
i. Back-up facility to place trades on Direct Phone lines.
j. Live market debts.
Charge structure
Fee structure for General Individual:

Charge Classic Account Speed Trade Account

Account Opening Rs. 750/= Rs. 1000/=

Intra-day – 0.10 % Intra-day - 0.10%

Brokerage
Delivery - 0.50 % Delivery - 0.50%

Depository Charges:

Account Opening Charges Rs. NIL

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 Rs. NIL first year Rs. 300/= p.a. from second
Annual Maintenance Charges
calendar year onward
SERVICE PROFILE
a. Trading Facilities:

Sharekhan as a member of NSE & BSE provides both offline and online trading facilities
nationwide for trading the securities in secondary market to its clients. The Company’s
wide network of outlets spread across the country facilities to executive the orders in
secondary market.
b. Derivatives: (Futures and Options)

The company also facilitates the trading system for trading in secondary market under
future and options segment of NSE and BSE. The equity dealers in the company will be
eager to give insights into the new sets introduction in the Indian Capital market futures
and options.
c. Depositor Services:

Sharekhan is a Depository participant of National Securities Depository Limited and

Central Depository and securities Limited. Sharekhan will open De-mat accounts, which
will investors to convert physical certificates of shares into electronic balances in an
account maintained.
d. Margin Financing:

In the present rolling settlement scenario, Sharekhan understand investor need for
additional capital availability for daily purchaser shares. It offers unique facility avail
finance, for purchasing shares at very competitive interest rates.
e. IPO’s and Mutual Funds:

Sharekhan offers the change of investing in the potentially lucrative IPO market.
Sharekhan is a distribution house for all mutual funds. This is the new scheme introduced
by the company and it also offers schemes catering to investors with varying risk return
profiles.

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f. Stock lending and Borrowing:

One can place an order of shares with Sharekhan. It is approved intermediary of the
security or lending scheme. These would be sent out the borrowers, these earnings fees
for all investor’s idle shares. Thus Sharekhan fulfils the investor need for borrowing and
lending of shares.
g. Equity Research:

Sharekhan has a highly rated research using involved in macroeconomic studies, industry
and company specific equity research. The research team’s inputs will be available as
daily trading calls, quarterly investment picks and long term investment picks, based on
the fundamentals of particular company and the industry as whole.
h. Internet Trading:

Investors can also trade their securities through this facility by logging into company’s
website. The virtual world that Sharekhan offers online trading services through.
i. Portfolio Management Services:

Sharekhan securities are a registered portfolio manager with SEBI to manage portfolios
on behalf of clients with discretionary and anon discretionary rights this service is a
provision for those who may not have the right time to manage their stocks investment or
require the service of company’s highly specialized professional team.
j. Online Trading:

Share Khan was amongst the pioneers of online trading in India and has launched
Sharekhan.com in February 2000. Since then, they have been at the forefront in
understanding customer needs, analyzing trends and brining innovation in their offerings.
They have online trading products that are customized to the habits and preferences of
investors as well as traders.

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 Features of Online Trading Products:
i. Live streaming quotes
ii. Instant order execution and conformation
iii. Price alerts
iv. Single Screen for equities and derivatives
v. Multiple market watch windows
vi. Real-time portfolio tacking

a. Other Services:

i. Free access to investment advice, from Sharekhan research team.

ii. Sharekhan “value line “ ( A monthly publication)
iii. Daily research reports and market review.
iv. Daily trading calls based technical analysis
v. Cool trading products. (Daring derivatives and market strategy)
vi. Personalized advice.
vii. Live management information.
viii.Internet based online trading session.
ix. Online BSE and NSE executions through BOLT & NEAT terminals.

Bank Connection:-
Sharekhan has affiliation with 11 banks, which allows its customers to enjoy
the facility of instant credit and transfer of funds from his savings bank account to his
Sharekhan trading account. The affiliated banks are as follows:
• HDFC BANK
• UTI BANK
• CITY BANK
• ICICI BANK
• OBC BANK
• UNION BANK
• INDUSAND BANK
• IDBI BANK
• CENTURION BANK
• AXIS BANK
• YES BANK

1.2.5. Areas of operation:

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 Sharekhan provides a wide range of services nationwide to a substantial and diversified
client base that includes retail clients, high net worth individuals, corporates and financial
institutions.
It has presence in more than 280 cities through its network of longstanding franchisees
and sub brokers.
It has its presence globally i.e in UAE also.

1.2.6. Management team

Dinesh Murikya : Owner of the company

Tarun Shah : CEO of the company

Shankar Vailaya : Director (Operations)

Jaideep Arora : Director (Products & Technology)

Pathik Gandotra : Head of Research

Rishi Kohli : Vice President of Equity Derivatives

Nikhil Vora : Vice President of Researc

1.2.7. Competitors information:

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 Sharekhan is one of the major player in on line Trading. In Mumbai the main
competitors of Sharekhan are ICICI Direct, India bulls, Kotak Securities, HDFC Securities,
Anand Rathi, Motilal Oswal, Religare securities and reliance securities.

Religare Securities:
Religare is a global financial services group with a presence across Asia, Africa,
Middle East, Europe and the Americas. In India, Religare’s largest market, the group offers a
wide array of products and services ranging from insurance, asset management, broking and
lending solutions to investment banking and wealth management. The group has also
pioneered the concept of investments in alternative asset classes such as arts and films .With
10,000 plus employees across multiple geographies, Religare serves over a million clients,
including corporates and institutions, high net worth families and individuals, and retail
investors.
Religare Enterprises Limited is part of a family of companies that fall under the
broader Religare brand, which includes other global businesses such as diagnostics, aviation
and travel, wellness retail, and IT products and solutions. A diversified financial services
group Religare Enterprises Limited (REL) offers a comprehensive suite of customer-focused
financial products and services targeted at retail investors, high net worth individuals and
corporate and institutional clients.
REL, along with its joint venture partners, offers a range of products and services in
India, including asset management, life insurance, wealth management, equity and
commodity broking, investment banking, lending services, private equity and venture capital.
Religare has also ventured into the alternative investments sphere through its holistic arts
initiative and film fund.

Kotak Securities:
Kotak Mahindra is one of India's leading financial conglomerates, offering complete
financial solutions that encompass every sphere of life. From commercial banking, to stock

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 broking, to mutual funds, to life insurance, to investment banking, the group caters to the
financial needs of individuals and corporates.
Kotak Securities Ltd., a 100 % subsidiary of Kotak Mahindra Bank is one of the
oldest and largest broking firms in the industry. Their offerings include stock broking
through the branch and Internet, Investments in IPO, Mutual funds and Portfolio
management service.

Reliance Securities Ltd:

Reliance Securities Limited is a Reliance Capital company and part of the Reliance
Anil Dhirubhai Ambani Group. “Reliance Money” is a brand owned by Reliance Capital
Limited. Reliance Securities with the permission of Reliance Capital Limited uses the
“Reliance Money” brand to market its various services.
Reliance Securities endeavours to change the way investors transact in equities
markets and avails services. It provides customers with access to Equity, Derivatives,
Portfolio Management Services, Investment Banking, Mutual Funds and IPOs. It also offers
secured online share trading platform and investment activities in secure, cost effective and
convenient manner. To enable wider participation, it also provides the convenience of trading
offline through variety of means, including Call & Trade, Branch dealing Desk and its
network of affiliates.
Reliance Money through its pan India presence with 6,233 outlets has more than 3.5
million customers. Reliance Capital is one of India's leading and fastest growing private
sector financial services companies, and ranks among the top 3 private sector financial
services and banking groups, in terms of net worth.

1.2.8. Infrastructural facilities

Sharekhan investment outlets are designed to be places where retail investors can come in
touch with investment opportunities in an atmosphere of convenience and comfort. The look and

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feel of the offices across India projects a consistent branch image for the company. The features
that enable a unique facility for retailing financial services include among others:
Easily visible branches set up in the commercial spaces of potential investment zones ranging
between 750 sft to 1000 sft.
 Most branches are located in the ground floor sporting huge glass frontage promoting
easy accessibility and reflecting our attitude of complete transparency.
 The major portion of the branch area dedicated for customer use. The furniture is in CKD
formats to add flexibility in using the branch for investor’s purposes.
 Connectivity to NSE for trading facilities.
 TV and other electronic mediums to facilitate real time update and dissemination of
information to our customers.
Each branch comprises of trained and qualified investment advisors to take care of the needs of
the customers.

1.2.9. Achievements of Sharekhan

1. Rated among the top 20 wired companies along with Reliance, HUJl, Infosys, etc by
‘Business Today’, January 2004 edition.
2. Awarded ‘Top Domestic Brokerage House’ four times by Euro money and Asia
money.
3. Pioneers of online trading in India amongst the top 3 online trading websites from
India. Most preferred financial destination amongst online broking customers.
4. Winners of “Best Financial Website” award.
5. Voted by CNBC Awaaz as the Most Preferred Stock broker in India in 2005.

1.2.10. Work flow model

At Sharekhan it’s believed that, “The clients are people, not accounts” hence successful
investment management relationship begins with a clear understanding of each client’s specific
needs, concerns and long-term objectives. Sharekhan investment philosophy applies a disciplined

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approach to building a customized strategy designed to meet customer’s individual financial
goals and tolerance for risk.

1.2.11. Future Plans and prospectus:

i. 2, 00,000 plus retail customers being serviced through centralized call centres /
web solutions.

ii. Branches / Semi branches servicing affluent / aggressive traders through high skill
financial advisor.
iii. 250 independent investment managers/ franchisee servicing 50,000 highly valued
clients
iv. New initiatives Portfolio management Services and commodities trading

CHAPTER II
McKinsey 7 s framework with special reference to organisation under study.
The 7-S model is better known as McKinsey 7-S model. This is because the two persons
who developed this model, Tom Peters and Robert Waterman, have been consultants at
McKinsey & co. at that time. They published their 7-S model in their article “Structure is not

17
organization” (1980) and in their books “The art of Japanese management” (1981) and “In search
of excellence” (1982).

The model starts on the premise that an organization is not just structure, but consists of
seven elements:

STRATEGY:

The direction and scope of the company over the long term.

STRUCTURE:

The basic organization of the company, its departments, reporting lines, areas of expertise and
responsibility.

SYSTEMS:

Formal and Informal procedures that govern everyday activity, covering everything from
management information systems, through to the systems at the point of contact with the
customer (retail systems, call centre, systems, online systems, etc).

SKILL:

The capabilities and competencies that exist within the company. What it does best.

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SHARED VALUES:

The values and beliefs of the company. Ultimately they guide employees towards ‘valued’
behaviour.

STAFF:

The company’s people resources and how they are developed, trained and motivated.

STYLE:

The leadership approach of top management and the company’s overall operating approach.

THE 7S MODEL WITH REFERENCE TO SHAREKHAN:

STRATEGY:

Sets out the vision, mission, objective and major action plans and policies of the
organization. These set out the picture of the organization in the future typically spelling out the
overall corporate strategy, the Strategic business unit strategy and functional Strategies. It can
also be defined as the choice of direction and action that the company adopts to achieve its
objective in a competitive situation. It is the first step that the company has to take in leading its
organization to ladder of success. The major areas of Strategic Goals of Sharekhan are:

Major Description
a. Market Standing Desired share of present and new markets, including areas
in which new products are needed and service goals aimed
at building customer loyalty.
b. Innovation Innovation in products/ services as well as innovation in
skill and activities required to supply them.
c. Human Resources Supply, development and performance of manager’s
employee attitudes.
d. Financial Resources Sources of capital supply and how it will be utilized.

e. Physical Resources Physical facilities and how they will be utilized in

providing services.

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 f. Productivity Efficient use of resources relatives to outcomes.

g. Social Responsibility Responsibilities in such area as concern for community and

ethical behaviour.

STRUCTURE:

Include policies and procedures that govern the way in which the organization acts within
the organization. It provides the frame work for relationship among different parts of the
organization. It sets out formal reporting relationships, mode of communication, their respective
roles and rules and regulation for carrying out different tasks. If it is not properly defined it has a
detrimental effect on the effective and efficient working because motivation and morale is low,
decision are delayed and are of poor quality the expenses rises, orders are lost due to
competition, lack of confidence etc.

Structure of any organization has to answer the following questions-

• What is basic structural form?
• How centralized versus decentralized is the organization?
• What is the relative status and power of the organization?

At sharekhan the structure is clearly defined. Sharekhan has its 620 share shops across
280 cities in India with the headquarters situated at Mumbai. The registered Office is centralized
at residency road, Bangalore. Sharekhan has its operations distributed throughout India. I.e. in
the north and southern regions. The southern region covers areas like Karnataka, Andhra
Pradesh, Kerala and Tamilnadu.These areas are managed by a Regional Branch Head who takes
care of operation in these respective areas. The organization chart for the regional office and its
branches are as follows.

ORGANISATION CHART:
HEAD OFFICE
Chairman

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 Regional Heads Zonal Heads

Regional Product
Heads

Sr. Regional Jr. Regional

Branch Relationship

Back Office
Dealers Sales Team

SYSTEMS:

Systems in their frame work stands for the rules and regulations, procedures and practices that
must be allowed to carry out the tasks in the organization. A good system adds to the efficient
and effective working of the entrepreneur. At Sharekhan in Chintamani the procedure followed is
clear, transparent and not complicated.

The information systems at the various branches of sharekhan are followed by submission of
MIS reports at end of their day to day activities. The activities of the front end operation include:

• Client Advisory Services

• Processing of demat account transactions.
• New issue promotions.
• Portfolio Management of NRI clients.
• Promotions activities for promotions of various funds (New Recommended ones).
• Finally MIS reporting of day to day transactions.

At the back office day to day operations include-

• Processing of various application forms of demat account IPO’s and forwarding the same
to the Head office.
• Providing statement of account to the investors on request.
• Addressing requests for nonpayment of sub broker’s commission.
• MIS reporting of day to day transactions.

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The Total Quality Control System of Sharekhan has created principles about its quality
philosophy-

• Create constancy of purpose and improve services for long range needs rather than short
term profitability.
• Search continually problems in the system and improve processes.
• Encourage effective two way communication and other means to drive fear throughout
the organization and help people to work more productively.
The Electronic Data Processing (EDP) department of Sharekhan takes care of both offline
and online transactions. In the online transactions, online trading takes place using neat software.
It is connected to NSDL, CDSL, NSE and BSE and helps stock brokers to trade online. The
offline is mainly connected for the purpose of conversion of physical form of shares to electronic
form.

STYLE:

Style includes Leadership style of top management and overall operating style of the
organization. Style impacts the norms people follow and they work and interact with each other
and with customers.
• How does the top management make decisions – Participatory Vs Top Down?
• How do managers spend their time in informal meetings, informal conversations, etc?

At sharekhan, they follow a very in effable style of functioning.

• Managers, staff etc are approachable (a perfect blend of formal and informal approaches).
• They follow the system of performance appraisal on 180 degree appraisal model.
Rewards are given according to the performance.
• Personal attention to the project trainees helps in creating a good image in the eyes of the
public.
• Staff has very good informal conversations that develop a sense of loyalist, motivation,
dedication within the employees.
• Emergency meetings are held where top management and employees collectively
participate- targets for the week is set, responsibilities are delegated, suggestions are
invited.

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 • There is a good cordial relation between the management and the employees which
shows a participatory leadership style is observed.

• STAFF:
The staffing procedure mainly includes how the organization has to look into its
people, their backgrounds, and competencies. Staff also includes the organization
approaches to recruitment, selection and specialization. How people developed, how
recruits are trained, socialized and integrated and how their careers are managed?
• At Sharekhan, there are around 3500 employees working across India.
• At Sharekhan, Chintamani branch there are about 10 employees.
• The candidates are recruited from diverse fields of commerce like B. Com’s,
MBA’s, ICWA’s, CA’s and CFA’s great opportunity for fresher’s and post
graduates are available.
• They are involved in all the required meetings and activities.
• The Staff are given freedom to use their innovation and creative skills.
• Get together are held for staff members to socialize.
• Staff grievances are given a listening in a year.

SKILLS:

Include distinctive competencies that reside in the organization. These can be distinctive
competencies people, management practices, systems and technology. What new capabilities the
organization needs to develop, which one does it need to unlearn to compete in future. This can
be learnt through a SWOT Analysis.

The competent skills of the people include good communication and presentation skills,
strong academic record, consistent in the performance levels etc.

SHARED VALUES:

Refers to core/ fundamental values that are widely shared in the organization and serve as
guiding principles that are important. These values have great meaning because they focus
attention and provide a broader sense and purpose. They also give a strong basis for stabilities to

23
the organization, in a rapidly changing environment by providing a basic meaning to people
working in the organization.

• Do people have a shared understanding of why a company exits?

• Do people have a shared understanding of the vision of the company?
• How do people describe the ways in which the company is distinctive?

At Sharekhan, which is primarily a client or investor oriented organization has embedded this
quality among all its member employees. The member’s work today towards the growth and
success of the unit. The employees share responsibility and protect the company’s name and
integrity. There is no sharing of confidential/ important information with the outsiders. There is
collective responsibility and accountability on the part of its members. This can be said as the
shared values of the employees of the organization.

CHAPTER III

SWOT ANALYSIS:

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A SWOT analysis is a tool, used in management and strategy formulation. It can help to identify
the Strengths, Weaknesses, Opportunities and Threats of a particular company.

Strengths and weaknesses are internal factors that create value or destroy value. They can
include assets, skills, or resources that a company has at its disposal, compared to its
competitors. They can be measured using internal assessments or external benchmarking.

Opportunities and threats are external factors that create value or destroy value. A company
cannot control them. But they emerge from either the competitive dynamics of the
industry/market or from demographic, economic, political, technical, social, legal or cultural
factors.

SWOT MATRIX:

SWOT M
INTERNAL (S)
Internal
Strengths
EXTERNAL
(O)
Strengths External SO Strategie
 Global parentage and expertise.

 Osenior
Experience ppo rtunities
management.
Use‘S’ totake
 World class technology and infrastructure.
advantageof ‘O
 Strict risk control systems.

(T)
 Fundamental and technical research.

25
External ST Strategies
Use‘S’toavoid‘T’
  Multiple products under one roof.

 Company with well diversified portfolio.

Weakness
 Many competitors.
 No direct marketing strategy.
 Payment services are not good.
 No global reach.
 Weak brand name.
Opportunities
 To grab the growing Indian market.

 Scope for taking its business overseas and going global.

 Scope for increasing its branch network especially in the important financial centres as
well as extending its physical presence in other parts of the country.
 Up gradation of the latest technology to give better and faster service to its clients

Threats
 Global economic slowdown.

 The Indian capital market is fluctuating.

 The ever increasing and challenging neck-to-neck competition specially with those
established and existing reputed stock broking companies.
 Uncertainty of the market and volatility and fluctuations in the stock prices.
 Change in customer needs, preferences and taste.
 Threat from new entrants into the field of stock broking.

CHAPTER IV
Analysis of balance sheet.

The equity share capital has remained more or less the same. There is 16.6 percentage increases
in Reserves and surplus in 2009 over the previous year. Investments increased by 50 percentage.

CHAPTER V

26
Learning experience.

The opportunity of undergoing an in plant training for one month duration is being capitalized by
me by increasing my knowledge base by working at Sharekhan.
I am privileged to highlight some of the learning experience got from this training.
• It helped to link the theories, techniques and practices of management with
different activities of the organization in trading operations

• It increased my conceptual understanding of the entire subject financial

derivatives.

• Basically stock market investments are considered to be very risky, but if the
scrip’s selected by the investor is favorable according to the market conditions
than the investor will be able to generate high profit within a short time span.

CHAPTER VI

INTRODUCTION TO THE CONCEPT

“Derivative is a product whose value is derived from the value of one or more basic
variables called bases (underlying asset, index or reference rate) in a contractual manner”.
Through the use of derivative products, it is possible to partially or fully transfer price
risks by locking-in asset prices.
As instruments of risk management, these generally do not influence the fluctuations in
the underlying asset prices. However by locking-in asset prices, derivative products minimize the
impact of fluctuations in the asset prices on the probability and cash flow situation of risk-averse
investors.

27
The wide array of risks that a business firm is exposed to may be classified into five categories:

Technological risk- arises mostly in the R&D and operations stages of the value chain.

Economic risk- stem from fluctuations in revenues and production costs.

Financial risk- arises from the volatility of interest rates, currency rates, commodity prices, and
stock prices.

Performance risk- arises when the contracting counterparties do not fulfill their obligations.

Legal and regulatory risk- arises from changes in laws and regulations.
WHY TOTAL RISK MATTERS
Modern finance theory regards hedging activities aimed at reducing total corporate as
irrelevant. Under certain plausible condition, the CAPM and Arbitrage pricing theory show that
unsystematic risk has no bearing on the required rate of return. Only systematic risk (or market
risk) is priced and, hence, has an influence on the required rate of return.
Since the price of systematic risk is identical for all the participants in the financial
market, a firm or investor does not benefit by laying it off in the financial market. Thus,
according to this line of reasoning, in an efficient financial market the expected NPV of any risk
hedging activity like taking an insurance cover or buying a forward contract is zero. Other things
being equal, a firm or investor with a high total risk exposure is likely to face financial
difficulties which tend to have a disrupting effect on the profit.

FACTORS DRIVING THE GROWTH OF DERIVATIVES.

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

28
 • Innovations in the derivatives markets.

DERIVATIVE PRODUCTS

Forwards: A forward contract is an agreement between two parties to exchange an asset for
cash at a predetermined future date called the settlement date for a price that is specified today.

Futures: A futures contract is a standardized forward contract which can be traded on organized
exchanges. In fact, a future is a standardized form of forward contract. A future is a contract or
an agreement between two parties to exchange an assets / currency or commodity at a certain
future date at an agreed price. The trader who promises to buy is said to be in ‘ long position ‘
and the party who promises to sell said be in ‘short position’.
Options: Inboard sense, an option is a claim without any liability. More specifically, an option is
a contract that gives the holder a right, without any obligation, to buy or sell an asset at an agreed
price on or before a specified period of time.

Warrants: Longer dated options which have expiry date up to one year are called warrants.

Leaps: Long Term Equity Anticipation Securities (LEAPS) are the options having a maturity of
up to 3 years.

Baskets: Baskets are the options on portfolios of underlying Assets.

Swaps: Swaps are private agreements between two parties to exchange cash flows in the future
according to pre-arranged formula.

Swaptions: (Options + Forwards) are the options on a forward Swap.

PARTICIPANTS IN DERIVATIVES MARKET:

 Hedgers
 Speculators

29
  Arbitrageurs

ECONOMIC FUNCTIONS OF THE DERIVATIVE MARKET:

 Transfer of risks.
 Discovery of future as well as current prices.
 Higher trading volumes in financial markets.
 Acts as a catalyst for new entrepreneurial activity.
 Margining, monitoring and surveillance of the activities of various participants.

A. INTRODUCTION TO FORWARDS:

Forward contracts are perhaps the oldest and simplest tools for managing financial risk. A
forward contract represents an agreement between two parties to exchange an asset for cash at a
predetermined future date called the settlement date for a price that a specified today.

For example, if you agree on Jan 1 to buy 100 bales of cotton on July 1 at a price of Rs-
800/- per bale from a cotton dealer, you have entered into a forward contract with the cotton
dealer. As per this contract, on July 1 you will have to pay Rs-80,000/- and the cotton dealer will
have to supply 100 bales.

According to this agreement, you have bought forward cotton or you are long forward
cotton, whereas the cotton dealer has sold forward cotton or is short forward cotton. No money
or cotton changes hand when the deal is signed. The forward contract only specifies the terms of
a transaction that will occur in future.

Features:

 They are bilateral contracts and hence exposed to counter party risk.

30
  Each contract is custom designed and hence is unique in terms of contract size, expiration
date and the asset type and quality.
 The contract price is generally not available in public domain.
 On the expiration date, the contract has to be settled by the delivery of the asset.
 If the party wishes to reverse the contract, it has to compulsorily go to the same counter
party, which often results in high prices being charged.
 Forward contracts are generally used in real estate, commodities, gold, foreign currency
exchange etc.

B. INTRODUCTION TO FUTURES:

A futures contract is a standardized forward contract which can be traded on organized

exchanges. It is similar to the forward contract in all the respect. In fact, a future is a
standardized form of forward contract. A future is a contract or an agreement between two
parties to exchange an assets / currency or commodity at a certain future date at an agreed price.
The trader who promises to buy is said to be in ‘ long position ‘ and the party who promises to
sell said be in ‘short position’. When a futures contract is first listed for trading by an exchange,
interested parties take long or short positions on the contract. When one trader takes a long
position on the contract for a particular price and another trader takes a short position on the
contract at the same price, it generates a trading volume of one contract. At this point there is one
contract which remains to be performed or settled through delivery of the asset in the future.
Thus, there is one open contract. This is also referred to as open interest, which is the
terminology used to describe the number of open contracts or contracts remaining to be settled in
future on any particular day.

Futures contracts are contracts specifying a standard volume of a particular currency to

be exchanged on a specific settlement date. A future contract is an agreement between a buyer
and a seller. Such a contract confers on the buyer an obligation to buy from the seller, and the
seller an obligation to sell to the buyer a specified quantity of an underlying asset at a fixed price
on or before a fixed day in future. Such a contract can be for delivery of an underlying asset.

31
 To eliminate counter party risk and guarantee traders, futures markets use a clearing
house which employs initial margin, daily market to market margin; exposures limits etc. to
ensure contract compliance and guarantee settlement. Standardized futures contracts generate
liquidity, greater transparency, fairness and efficiency. Due to these inherent advantages, futures
markets have been enormously successful in comparison with forward markets all over the
world.

Broadly there are two types of futures:

 Commodity futures
(Cocoa, Cotton, Aluminum, Gold, Crude oil, Soya bean etc)
 Financial futures
(Index futures, stock futures, debt instruments, foreign currencies, monetary
metals etc)

Features:

 Traded on an organized exchange with Notation.

 Standardized contract terms are defined by exchange.
 Requires margin payment.
 They are marked-to-market.
 Price is zero and linear payoff.
 Both long and short at risk.

The price of a futures contract is determined on the floor of the exchange by forces of demand
and supply. A margin is a deposit to be made to the clearing house by the parties entering into a
futures contract. There are three types of margins:
 Initial margin or performance margin
 Maintenance margin

32
  Variation margin
The difference between forward contract and future is that future is a standardized
contract in terms of quantity, date and delivery. It is traded on organized exchanges, so it has
secondary markets. Future contract is always settled daily, irrespective of the maturity date
which is called marking to the market.

C. INTRODUCTION TO OPTIONS:

Inboard sense, an option is a claim without any liability. More specifically, an option is a
contract that gives the holder a right, without any obligation, to buy or sell an asset at an agreed
price on or before a specified period of time.

Types of options:

1) Call option: - Gives the buyer the right, but not the obligation to buy a specific futures
contract at a predetermined price within a limited period of time.
A call option is a contract, which gives the owner the right to buy an asset for a
certain price on or before a specified date. For example, if you buy a call option on a certain
share of XYZ Company, you have the right to purchase 100 shares (assuming of course, that the
option involves 100 shares).

Suppose current share price (S) of Reliance Industries is Rs-291/-. You expect that price
in a three months period will go up Rs-300/-. But you also fear that the price may also fall below
Rs-291/-. To reduce the chance of risk and at the same time to have the opportunity of making
profit, instead of buying the share, you can buy a 3-month call option on Reliance Industries at
an agreed exercise price (E) of, say, RS-280/-. Ignoring the option premium, taxes, transaction
costs and the time value of money, the decision to exercise your option depends upon the share
price after three months. You will exercise option when the share price after three months is

33
above Rs-280/- and you will not exercise when the share price after three month is below Rs-
240/-.

Thus option should be exercised when:

Share price at expiration > Exercise price = St>E
Do not exercise option when:
Share price at expiration <= Exercise price =St<E
The value of call option at expiration is:
Value of call option at expiration= Maximum [(share price –exercise price), 0]
Ct = Max [(St – E), 0]

The expression above indicates that the value of call option at expiration is the maximum
of the share price minus the exercise price and zero. The call option holder’s opportunity to make
profit is unlimited. It depends on the actual market price of the underlying share when the option
is exercised. Greater the market value of the underlying asset, the larger is the value of the
option. The following figure shows the value of call option.

Value of call option

Exercise price
Unlimited pay off

0 Value of share

Out-of-money in the money

Fig.
1.1 Pay-off of a call option buyer

It may be observed from the above figure 1.1 that the possible outcomes can be divided
into two parts: one above the exercise price and other below the exercise price. The outcome
above the exercise price are said to be In-the-money and are beneficial to the option holder but

34
not the outcome below the exercise price. It is the exercise price that divides the good and bad
outcomes.
For the call option writer, he will gain when share price is below the strike price and will
lose when stock price is above the strike price. The call buyer’s gain is call seller’s loss. The
figure 1.2 shows the pay-off of a call option writer.

In –the- money out –of money

(Good outcome) (Bad outcome)
0
Value of share

Exercise price

Value of call option

Fig. 1.2 Pay –off of a call option writer.

2) Put option: - Gives the buyer the right, but not the obligation, to sell a specific futures
contract at a predetermined price within a limited period of time.

Put option is a contract that gives the holder a right to sell specified shares at an agreed
price on or before a given maturity. Thus, if you buy a put option on shares of XYZ Company,
you have the right to sell 100 shares of this company at the specified price at any time between
today and the specified date.
Suppose the current price (S) of
Reliance Industries is Rs. 291 and you
expect that the price will fall within a
three months. Therefore, you can buy a
3-month put option on Reliance
Industries at an agreed exercise price

35
(E), say, Rs. 295. If the price actually falls to (S t) Rs. 280 after three months, you will exercise
your option. You will buy the share for Rs. 280 from the market and deliver it to the put-option
writer to receive Rs. 295. Your gain is Rs.15 ignoring the put option premium, transaction cost
and taxes. You will not exercise if the share price rises above exercise price; the put option is
worthless and its value is zero.
Thus, exercise the put option when
Exercise price >Share price at expiration = E > St

Do not exercise put option when

Exercise price <=Share price at expiration = E<St
The value of put option at expiration will be
Value of put option at expiration= Maximum [(Exercise price –Share price), 0]

Pt = Max [(E-St), 0]

PROFIT

Limited profit

Exercise price

Value of share
0
In-the money
out-of-money

Fig. 1.3 Pay-off for a

put option buyer

The figure 1.3 shows that the

value of put option for the put option
holder depends on the value of
underlying asset .The value of put option is zero when it is out of the money. The potential profit
of the put option is limited because share price cannot fall below zero.

36
 The put option buyer’s gain is the seller’s loss. The potential loss of the put option is
limited to the exercise price. Since the buyer has to pay a premium to the seller for purchasing a
put option, the potential profit of the buyer and the potential loss of the seller will reduce by the
amount of premium. The figure 1.4 shows the pay-off for a put option seller.

0 Out-of-money in-the-money

value of share

Exercise price

Limited loss

Loss

Fig. 1.4
Pay-off for a put option
seller

OPTION
TERMINOLOGY

Index options: These

options have the index as the
underlying. In India, they have a European style settlement. Eg. Nifty options, Mini Nifty
options etc.

Stock options: Stock options are options on individual stocks. A stock option contract gives
the holder the right to buy or sell the underlying shares at the specified price. They have an
American style settlement.

Buyer of an option: The buyer of an option is the one who by paying the option premium
buys the right but not the obligation to exercise his option on the seller/writer.

37
Writer / seller of an option: The writer / seller of a call/put option is the one who receives the
option premium and is thereby obliged to sell/buy the asset if the buyer exercises on him.

Call option: A call option gives the holder the right but not the obligation to buy an asset by a
certain date for a certain price.

Put option: A put option gives the holder the right but not the obligation to sell an asset by a
certain date for a certain price.

Option price/premium: Option price is the price which the option buyer pays to the option
seller. It is also referred to as the option premium.

Expiration date: The date specified in the options contract is known as the expiration date,
the exercise date, the strike date or the maturity.

Strike price: The price specified in the options contract is known as the strike price or the
exercise price.

• In-the-money option: An in-the-money (ITM) option is an option that would lead to a

positive cashflow to the holder if it were exercised immediately. A call option on the
index is said to be in-the-money when the current index stands at a level higher than the
strike price (i.e. spot price > strike price). If the index is much higher than the strike
price, the call is said to be deep ITM. In the case of a put, the put is ITM if the index is
below the strike price.
• At-the-money option: An at-the-money (ATM) option is an option that would lead to
zero cash flow if it were exercised immediately. An option on the index is at-the-money
when the current index equals the strike price (i.e. spot price = strike price).
• Out-of-the-money option: An out-of-the-money (OTM) option is an option that would
lead to a negative cash flow if it were exercised immediately. A call option on the index
is out-of-the-money when the current index stands at a level which is less than the strike
price (i.e. spot price < strike price). If the index is much lower than the strike price, the

38
 call is said to be deep OTM. In the case of a put, the put is OTM if the index is above the
strike price.
• Intrinsic value of an option: The option premium can be broken down into two
components - intrinsic value and time value. The intrinsic value of a call is the amount
the option is ITM, if it is ITM. If the call is OTM, its intrinsic value is zero. Putting it
another way, the intrinsic value of a call is Max[0, (St — K)] which means the intrinsic
value of a call is the greater of 0 or (St — K). Similarly, the intrinsic value of a put is
Max[0, K — St],i.e. the greater of 0 or (K — St). K is the strike price and St is the spot
price.
• Time value of an option: The time value of an option is the difference between its
premium and its intrinsic value. Both calls and puts have time value. An option that is
OTM or ATM has only time value. Usually, the maximum time value exists when the
option is ATM. The longer the time to expiration, the greater is an option's time value, all
else equal. At expiration, an option should have no time value.

European Option: When an option is allowed to exercise only on the maturity date, it is called a
European Option.

American Option: When an option can be exercised any time before its maturity is called an
American Option.

TABLE 1:
Business growth of futures and options market: NSE turnover
(Rs.Cr)
AVERAGE
YEAR INDEX STOCK INDEX STOCK TOTAL DAILY
FUTURES FUTURES OPTIONS OPTIONS TURN TURN
OVER OVER
2008-09 2853615 2789329 2672532 164586.4 8480063 46087.3
2007-08 3820667 7548563 1362111 359136.6 13090478 52153.3
2006-07 2539574 3830967 791906 193795 7356242 29543
2005-06 1513755 2791697 338469 180253 4824174 19220

39
 2004-05 772147 1484056 121943 168836 2546982 10107
2003-04 554446 1305939 52816 217207 2130610 8388
2002-03 43952 286533 9246 100131 439862 1752
2001-02 21483 51515 3765 25163 101926 410
2000-01 2365 - - - 2365 11

Source: www.nseindia.com

TABLE 2:
Derivative instruments available for trade in India (NSE):
PRODUCT INDEX STOCK INDEX STOCK
SPECIFICATIONS FUTURES FUTURES OPTIONS OPTIONS
Underlying instrument S&P CNX Nifty Individual securities S&P CNX Nifty Individual securities
Security descriptor N FUTIDX NIFTY N FUTSTK N OPTIDX NIFTY N OPTSTK
Type European American
Contract size Lot size-100 As specified by Lot size- 100 As specified by
exchange exchange
Expiry day Last Thursday of the Last Thursday of the Last Thursday of the Last Thursday of the
expiry month expiry month expiry month expiry month
Price steps Re-0.05 Re-0.05 Re-0.05 Re-0.05
Trading cycle 3 months 3 months 3 months 3 months
Base price- Previous day closing Previous day closing Theoretical value Theoretical value
First day of trading Nifty value value of underlying based on Black- based on Black-
security Scholes model Scholes model
Base price- Daily settlement Daily settlement Daily closing price Daily closing price
Subsequent price price
Price bands Operating ranges are Operating ranges are Operating ranges are Operating ranges are
kept at +10 percent kept at +20 percent kept at 99% of the kept at 99% of the
base price base price
Quantity freeze 20,000 units or Lower of 1% of 20,000 units or Lower of 1% of
greater market wide position greater market wide position
limit stipulated for limit stipulated for
open positions or open positions or
Rs-5 cr. Rs-5 cr.

Settlement basis MTM & final MTM & final Cash settlement on Daily settlement on
settlement will be settlement will be T+1 basis T+1 basis and final

40
 cash settled on T+1 cash settled on T+1 on T+3 Basis.
Basis Basis
Settlement price Closing price for Closing price for Premium value for Premium value for
daily settlement and daily settlement and daily settlement and daily settlement and
closing value on the closing value on the the closing value of the closing value on
expiry day for final expiry day for final index on expiry day expiry day for final
settlement settlement for final settlement settlement
BSE also offers similar products in the derivatives segment.

6.1. STATEMENT OF THE PROBLEM:

Through the use of derivative products, it is possible to partially or fully transfer price
risks by locking-in asset prices.

As instruments of risk management, these generally do not influence the fluctuations in

the underlying asset prices. However, by locking in-asset prices, derivative products minimize
the impact of fluctuations in asset prices on the profitability and cash flow situation of risk–
averse investors. Trading in F&O should be well organized approach for the purpose of which
they are being used, be it to hedging or trading for profits. The study analyses the various
strategies that can be used by traders and investors to get maximum returns in the derivatives
market.The problem is to analyze the derivatives that are traded in India with respect to volatility
of market to minimize the risk of the investor in the derivatives market

6.2OBJECTIVES:

• To study financial derivatives as an investment alternative.

• To suggest option strategy to maximize payoff of an investor.

• To analyze various types of financial derivatives used by investors as an effective tools in

managing risk.

41
 • To analyse and recommend whether to buy stock at a reasonable price and position
yourself for a big market move.

• To suggest investors in the arena of financial derivatives market for managing risk
especially in the current recession period.

6.3. RESEARCH METHODOLOGY

The type of research is selected on the basis of problems identified. Here the research
type used is descriptive research. Descriptive research includes fact-findings and enquiries of
different kinds. The major purpose of descriptive research is a description of the state of affairs,
as it exists in the present system. In this project an attempt has been made to analyze various
option strategies in the option market and how they help to hedge the risk.

6.3.1. DATA COLLECTION:

Secondary data: is collected through text books, websites, newspapers and company brochure,
Nifty Spot Rate for the period of Dec 2008-Jan 2009

6.3.2. SAMPLING TECHNIQUE.

Tools of analysis:
The research will be conducted by using the strategies of futures, forwards and options – Bullish,
Bearish and Neutral Strategies.

6.3.3. PLAN OF ANALYSIS:

42
 The study analyses the financial instruments that can be used by the traders and investors
for hedging the risk involved in buying, holding and selling various kinds of financial assets in
derivatives market with special focus on options.

6.4. LIMITATIONS OF THE STUDY:

 The study is limited to investors of Sharekhan and its Employees.

 The strategies built are subject to Indian stock market risk and uncertain
conditions.

 The findings and suggestions are based on existing trends in the secondary
market.
 The strategy does not serve the purpose of suggesting a investor, if the investor
change his risk bearing level.

43
 CHAPTER VII

7.1DATA ANALYSIS AND INTERPRETATION:

7.1.1. RISK MANAGEMENT WITH FORWARD CONTRACTS:

Forward contracts are perhaps the oldest and simplest tools for managing financial risk. A
forward contract represents an agreement between two parties to exchange an asset for cash at a
predetermined future date called the settlement date for a price that is specified today.

Illustration with current example:

The depreciation of the Indian rupee and a strong upward movement in international gold
prices pushed the yellow metal to a record high of Rs-15,230/- per 10 grams as on Feb. 18 2009.
As investors are increasingly parking their money in gold because of a melting stock market and
erosion in the value of other financial asset classes, the market price of the gold tend to rise
further. So investor can enter in to forward contract to buy gold at a price close to current market
price say Rs-14,755/- per 10 grams to buy on Mar 2 2009. Now according to this agreement,
investor have bought forward gold or in long forward gold. Whereas the gold dealer has sold
forward gold or in short forward gold. No money or gold changes hand when the deal is signed.
The forward contract only specifies the terms of a transaction that will occur in future.

On Mar 2 2009, the contract will be settled so that investor gets the gold at a price of Rs-
14,755/- per 10 grams. If market price of the gold is higher than the contract price, the investor
gets the profit of the difference between the market and contract price or else undergoes loss if

44
the price is lower than market price. By entering into forward contract the investor can avoid the
downside risk.

Suppose if the market price of the gold touches Rs-15,665/- as projected then investor
gets a profit of Rs-910/- per 10 grams.

Risk management with forward contracts:

7.1.2. RISK MANAGEMENT WITH FUTURE CONTRACTS:

When you buy a security, you have a choice. You can buy it in the spot market and get
immediate delivery or you can buy it in the futures market and obtain deferred delivery on
specified future payment.

These differences between purchases in the spot market and futures market suggest the following
relationship between the spot and futures prices.

45
 Futures price . = spot price - PV of interest or dividend
(1+ Risk-free rate of interest) t dividend payments foregone

Broadly there are two types of futures:

 Commodity futures
(Cocoa, Cotton, Aluminum, Gold, Crude oil, Soya bean etc)
 Financial futures
(Index futures, stock futures, debt instruments, foreign currencies, monetary
Metals etc)
Fig. Risk management with futures contract

The futures contract is entered by a margin deposit which is to be made to the clearing house
by the parties as security of possible default risk in the form of 3 types of margins:
1) Initial margin (performance margin) - 5-25percent.
2) Maintenance margin (app. 75 percent of initial margin)
3) Variation margin (additional fund) - if fall below margin level, exchange issue ‘margin
call’ to deposit variation margin.

46
The future contracts are market-to-market (MTM) process.

Illustration with Current example:

Contract size=10 grams

Gold futures contract price Feb-2009- Rs-1368/-
Value of contract= 1368 x 10 = 13680/-
Initial margin = 10% (13680) = 1368/-
Maintenance margin= 75 %( 1368) = 1026/-
Suppose if the margin balance is Rs-4300/- and variation margin is Rs-130/-
Then;

Profit = margin balance- margin deposit.

=4300-(1368+130)
=2802/-

Financial futures:

The financial futures consist of index and stock futures.

The strategy of futures contracts for managing a portfolio with a higher volatility than the market
index to bring about a risk management is given as;

No of futures required = value of portfolio to be hedged X beta

Value of one future contract
Where beta = difference in the percentage change in the value of the portfolio being hedged and
% change in the index value.

47
Illustration with current example;

a) Short position:
Consider the portfolio value is Rs- 60,000/- and nifty is 3046 on Jan 3, 2009.
If the nifty down by 10%, then value of portfolio will be Rs-54,000/- and beta = 1.2

Sell 30 nifty futures @ Rs- 3046 per contract.

Buy 30 nifty futures @ Rs- 2741 per contract.

Gain= 305x30=Rs-9150/-

No. of futures required = 60,000 x 1.2

3046
= 24 no.

b) Long position: (mutual funds)

Investment scheme- Rs-50, 00,000/- and nifty- 3046 on jan3, 2009.

Nifty futures needed= 50, 00,000 = 2500 no.

2000

Conclusion: The strategy is that for managing risk of the portfolio with a higher volatility than
the market index, more futures contracts would be required to bring about a perfect hedge.

48
7.1.3. RISK MANAGEMENT WITH OPTION CONTRACTS:

DATE NIFTY SPOT RATE

16-DEC 2981

17-DEC 3041

18-DEC 2984

19-DEC 3060

20-DEC 3077

23-DEC 3039

24-DEC 2968

25-DEC 2916

28-DEC 2857

30-DEC 2922

31-DEC 2979

01-JAN 2959

02-JAN 3033

03-JAN 3046

06-JAN 3121

07-JAN 3112

08-JAN 2920

10-JAN 2873

13-JAN 2773

15-JAN 2835

16-JAN 2736

17-JAN 2828

49
 21-JAN 2796

22-JAN 2706

23-JAN 2713

28-JAN 2771

29-JAN 2849

30-JAN 2823
Table: Nifty Spot Rate for the period of Dec 2008-Jan 2009
The following strategies are analyzed for current market condition and hence forth proper
guidance is given for the investor for managing the risk.

1) LONG CALL:
Where the investor expects the price of the underlying stock to rise, the bought call can
provide leveraged exposure to the price rise. Buying a call also locks in a maximum purchase
price for the life of
When to use the long call
Market outlook Bullish the option.
Volatility
Rising
outlook

Profits and losses

The maximum loss the investor can suffer is the premium paid for the option, which will
occur if the share price at expiry is below the strike price. The investor breaks even if at expiry
the share price is equal to the strike price of the option plus the premium paid. As the share price
rises beyond this point, the potential profits of the bought call are unlimited.

Current Example:
On 24th Dec 2008, Nifty is quoting at Rs-2968/- and the January- 2950/- (strike price) call
costs Rs-80/- (premium). Buy Nifty call at 80/- Net outlay is Rs-4000/-. If the Nifty index does
go up you can close your position either by selling the option back to the market or exercising
your right to buy the underlying shares at the exercise price.

50
Possible outcome at expiry

Option worth 4000. Closing the position now will produce a net profit
Spot Rate = 3110
of 4000

Spot Rate < 2950 Option expires worthless. The loss is Rs-4000/- (premium)

Net profit = intrinsic value of (Break even = 2950+80) option i.e. by

Spot Rate > 3030
whatever amount the share price exceeds 3030/-

Graph 2: Payoff diagram of Long Call

Profit 3110

3030(Break Even)
Loss

2950(Strike Price)

Analysis of Current Example:

Date 24/12/2008 07/01/2009
Spot Price 2968 3012

From Table 1 it is observed that after 7h January market never behaved as per our
expectation. In order to minimize the loss it is better to exercise the option on 7th January, which
will result in loss of (3012-2950-80) × 50 = (900)

Interpretation:
Action 1 If you excise the option 7th January your loss will be 900
Action 2 If you do not excise the option your loss will be 4000

51
Other considerations
Time decay: Time decay works against the buyer of the call. If the expected share price rise
does not take place soon after entering the position, time decay will start to erode the value of the
option.

Strike price: The investor will usually have a choice of strike prices, and must balance the cost
of the option against the rise in share price required for the strategy to be successful. The out-of-
the money option will be the cheapest, but also requires the largest rise in share price. Many
investors regard the at-the-money option as offering the best balance of risk and reward.

Expiry month: A longer-term option allows more time for a rise in the share price to take place,
but will be more expensive than a shorter-term option. The investor needs to form a view of the
time frame over which the share price movement is expected to take place.

Follow-up action

If the share price rise takes place as expected, the call option taker must decide whether
to close out at a profit, or maintain the position in the hope of a further increase in price. The
longer the option position is left open, the greater the effect of time decay.

If the share price does not rise as expected, it is often advisable to close out the position
in order to recover some time value from the position.

If at expiry the option is in-the-money, the investor must choose whether to sell the
option or exercise it. The choice will be determined by whether the investor wants to own the
underlying shares.

2) LONG PUT:

Where the investor expects the price of the underlying stock to fall, the bought put
provides leveraged exposure to the price fall. Buying a put option is one of the few ways

52
investors can speculate on a falling share price. Put options may also be used to protect an
investor's holding in the underlying stock.

When to use the long

put
Market outlook Falling
Volatility outlook Rising
Profits and
losses

The maximum loss the investor can suffer is the premium paid for the option, which will
occur if the share price at expiry is above the strike price. The investor breaks even if at expiry
the share price is equal to the strike price of the option less the premium paid. As the share price
falls beyond this point, the potential profits of the bought put are limited only by a fall in the
share price to zero.

Example:

Situation: An investor thinks Nifty on 6th Jan, currently trading at Rs-3121/-, is overvalued and
may fall substantially. He therefore decides to buy Puts to gain exposure to its anticipated fall.

Action: On 6th January buy Nifty 2850 Put at Rs-50/- for a total consideration of Rs -2500/-.

Possible outcome at expiry

The 2850 put will be trading at Rs 100/- which gives a profit of Rs 50 (100-50) ×
Spot Price 2750
50 = 2500, if the position is closed out

Spot Price 2800 – 2850 Recover intrinsic value of premium

Spot Price >2850 The 2850 put will give loss of premium 50  50 = 2500

Graph 3: Payoff diagram of Long Put

2750

2800(Break Even)

2850 (Strike price)

53
Analysis of Current Example:

Date 06/1/2009 13/1/2009 15/1/2009

Spot Price 3121 2773 2835
From Table 1 it is observed that after 6th January market behaved as per our expectation.
In order to Maximize the profit it is better to excise the option on 13th January, which will result
in profit of (2850-2773)  500 = Rs.1350/-

Interpretation:

Action 1 If you the excise the option 13th January your profit will be 1350
Action 2 If you the excise the option 24th January your profit will be 750
Other considerations

Time decay: Time decay works against the buyer of the put. If the expected share price fall does
not take place soon after entering the position, time decay will start to erode the value of the
option.

Strike price: The investor must balance the cost of the option against the fall in share price
required for the strategy to be successful. The out-of-the money option will be the cheapest but
also requires the largest fall in share price.

If the investor is buying a put to protect a shareholding, the cost of the option must be
weighed up against the protection required. The in-the-money option locks in the highest sale
price for the underlying shares, but also is the most expensive option.

Follow-up action

If the share price fall takes place as expected, the put option taker must decide whether to
close out at a profit, or maintain the position in the hope of a further increase in price. The longer
the option position is left open, the greater the effect of time decay.

If the share price does not fall as expected, it is often advisable to close out the position in
order to recover some time value from the position.

54
 At expiry, the holder of an in-the-money put option would usually close out the position,
rather than exercising (unless they own the underlying shares). If the put has been bought to
protect a shareholding, the investor must decide whether they want continue holding the stock, in
which case the put would be sold, or sell the shares, in which case the option would be exercised.

3) SHORT CALL:

Sellers expect a gradual fall in the market and lower volatility. The optimal strike
(exercise price to sell) is dependent on one's expectation for the stock. The more bearish the
lower the
strike or When to use the short call
exercise Market outlook Neutral to mildly bearish
price should
Volatility outlook Falling
be in order
to maximize premium income.

Profits and losses

Your maximum profit depends on the underlying stock closing at or below the strike
price of the option. The potential for loss is unlimited which means it is dependant on how far
the stock is above the exercise price at expiry. In practical terms the seller of the call may not be
able to carry the position until expiry if they have insufficient margin to carry the unrealized loss
in which case the client's broker will close the position early.

Example: Situation: The Nifty stock index are currently trading at 2857 on 28th Dec.

Action: on 6th January Sell Nifty January 2850 at Rs-50/-

Possible outcome at expiry

Spot Price = 2950 The put writer will incur loss of (2950-50-2850)50=2500

Spot Price < 2850 The option will not be exercised & investor keeps the

55
 Premium = 2500

Graph 4: Payoff diagram of Short Call

Profit 2850(Strike Price)

2900 (Break Even)

Loss 2950

Analysis of Current Example:

Date 28/12/2008 10/1/2009 16/1/2009

Spot Price 2857 2873 2736
From Table 1 it is observed that after 28th Dec market behaved as per our expectation. In
order to Maximize the profit it is better to excise the option on 16th January, which will result in
profit of 50 50 =2500/-

Interpretation:

Action 1 If you the excise the option on 10th January your profit will be 1350
Action 2 If you the excise the option on 24th January your profit will be 2500
Other considerations

Time decay: Time decay works against the buyer of the put. If the expected share price fall does
not take place soon after entering the position, time decay will start to erode the value of the
option.

Strike price: The investor must balance the cost of the option against the fall in share price
required for the strategy to be successful. The out-of-the money option will be the cheapest but
also requires the largest fall in share price.

56
 If the investor is buying a put to protect a shareholding, the cost of the option must be
weighed up against the protection required. The in-the-money option locks in the highest sale
price for the underlying shares, but also is the most expensive option.

Follow-up action

If the share price fall takes place as expected, the put option taker must decide whether to
close out at a profit, or maintain the position in the hope of a further increase in price. The longer
the option position is left open, the greater the effect of time decay.

If the share price does not fall as expected, it is often advisable to close out the position in
order to recover some time value from the position.

At expiry, the holder of an in-the-money put option would usually close out the position,
rather than exercising (unless they own the underlying shares). If the put has been bought to
protect a shareholding, the investor must decide whether they want continue holding the stock, in
which case the put would be sold, or sell the shares, in which case the option would be exercised.

4) SHORT PUT:

The written put can provide the investor with extra income in flat to rising markets. It can
also be used as a way to buy stock cheaply. This strategy is generally used when the investor
expects the share price to remain steady or increase slightly over the life of the option.

When to use the short put

Market outlook Neutral to mildly bullish
Volatility outlook Falling
Profits and losses

The maximum profit the investor can make is the premium received for writing the
option, which will occur if the share price at expiry is above the strike price. The investor breaks
even if at expiry the share price is equal to the strike price of the option less the premium paid.
As the share price falls beyond this point, the potential losses of the sold put are limited only by a
fall in the share price to zero. If the investor does not close out an in-the-money put before
expiry, the option will be exercised and the investor will be required to buy the underlying stock
at the strike price of the option.

57
Example: Situation: The Nifty stock index are currently trading at 2736 on 16th January

Action: on 16th January Sell Nifty Jan 2750 put at Rs-90/-

Possible outcome at expiry

Spot Price =2750 The put writer will incur loss of (2930-90-2750) × 50 = 4500

The option will not be exercised & investor keeps the

Spot Price >2930
Premium = 4500

Graph 5: Payoff diagram of Short Put

Profit 2840 (Break Even) 2930(Strike Price)

Loss 2750

Analysis of Current Example:

Date 16/1/2009 21/1/2009

Spot Price 2736 2796
From Table 1 it is observed that after 16th January market behaved as per our expectation.
In order to Maximize the profit it is better to excise the option on 21st Jan, which will result in
profit of 90 × 50 = Rs.4500/-

Interpretation:

Action 1 If you the excise the option 21st January your profit will be 4500

58
Other considerations

Cheap stock: Many investors write put options as a way of buying stock cheaply. If the share
price falls and the option is exercised, the purchase price is effectively the strike price of the
option less the premium received - which is less then the price of the stock at the time of writing
the option. If the share price at expiry is above the strike price, the option will expire worthless.
The investor does not get to buy the stock, but has benefited from the receipt of the premium.

Time decay: Time decay works in favor of the put writer. If the stock price stays steady, the at-
the-money option will deliver the most profit to the put writer, as this is the option with the most
time value.

Exercise: The put writer must be wary of early exercise. A put option is generally more likely
than a call option to be exercised early.

Follow-up action

If at expiry the stock is trading below the strike price; the put writer will be exercised
unless the position has been closed out. As expiry approaches, the investor should consider
buying back the put if they do not want to own the stock.

Alternatively, the investor could roll the option position to a later month and possibly a
different strike price.

5) BULL SPREAD:

If the investor is not bullish enough to buy a call outright but expects the share price to
rise moderately, the bull spread is a lower cost way to gain exposure to such a market movement.
The strategy consists of the purchase of a call option and the sale of a call option with a higher
strike price.

When to use the bull spread

Market outlook moderately bullish

Volatility outlook steady to increasing

59
a. Bull call spread

Example:

Situation: On 2nd January, the spot price of Nifty is 3033. Buy 1 Nifty January 3000 call option at
Rs-30/- and sell 1 January 3050 call at Rs-05/-. Total outlay and maximum loss is 5250. Break
even is Rs-3130/- (3000+130). Maximum profit is (3050-3000-25)× 50 =1250/-.

Possible out come at expiry

Both the 3000 and 3050 calls are worthless and the maximum loss is equal to the
Spot price < 3000
net cost of establishing the spread i.e. Rs-1250/-

The 3000 call gains intrinsic value and profit is equal to the intrinsic value of the
Spot Price 3000-3050 3000 calls less the net debit of Rs-25. Maximum profit is therefore realized at
3050, the point just before which the 3050 calls may be exercised.

The position can be closed for a maximum profit of Rs-25 above 3050 i.e.
Spot price >3050
difference in intrinsic value of two calls less than net debit (50-25).

Graph 6: Payoff Diagram of Bull Spread

Profit 3050

3025(Break Even)

Loss
3000

Analysis of Current Example:

Date 02/1/2009 07/1/2009

Spot Price 3033 3112

60
 From Table 1 it is observed that after 2nd January market behaved as per our expectation. In
order to Maximize the profit it is better to exercise the option on 7th January, which will result in
profit of (3050-3000-25) × 50 = Rs.1250

Interpretation:

Action 1 If you the excise the option 7th January your profit will be 1250

b. Bull Put Spread

The bull spread can be constructed using puts instead of calls. As with the call spread, the
investor buys the lower strike option and sells the higher strike option.
The investor may decide to construct the spread in this way if the options are perceived to
be overpriced. Since entering the put spread involves selling volatility, the higher option
premiums will benefit the trader. In contrast, they make the call spread more expensive to enter.

The bull put spread can also be viewed as writing a put with protection in place against a
collapse in the market. In this case, the written put may be close to being at-the-money, with the
taken put out-of-the-money

The maximum profit from the bull put spread is the premium received when the spread is
established. The maximum loss is the difference between the strike prices less the premium
received.

Profit and Losses

While the short call reduces the risk inherent in taking an outright call it also limits the
profits that can be made. The maximum profit obtainable is the difference between the strike
prices of the two options, less the cost of the spread. Maximum profit will occur if, at expiry, the
share price is at, or above, the strike price of the sold option. If the stock rises quickly to this
level, the spread will often be unwound early in order to avoid the risk of early exercise on the
short leg. The higher delta of the long call means that the spread will increase in value as the
share price rises. The maximum loss possible is the cost of the spread and will be incurred when
the share price is at or below the strike price of the bought option at expiry.

61
Other considerations
Limited risk/limited reward: The bull spread is a cheaper strategy than simply buying a call
option. As a result, the profit potential is also reduced.

Cost of strategy: The investor must be satisfied that the cost of the spread is worth the potential
reward. Commission costs on entering and exiting will be greater for this strategy than when
buying a call outright.

Follow-up action

If the stock unexpectedly rises sharply, it may be advisable to exit the strategy once the
upper strike price is reached. Although time value is helpful around the strike price of the short
leg, unwinding the strategy early removes the risk of exercise on the short call. If the stock price
falls suddenly, the spread may be unwound before the taken call loses too much time value.

6) BEAR SPREAD:

The bear spread can be considered when the investor expects a moderate fall in the
market but is not prepared to pay to take a put outright. The strategy consists of the purchase of a
put option and the sale of a put option with a lower strike price.

When to use the bear spread

Market outlook moderately bearish

Volatility outlook steady to increasing

Profits and losses

As with the bull spread, the written leg of this strategy serves to reduce the cost of
entering the position. However it also caps the profits that can be earned. The maximum profit to
be earned is the difference between the strike prices of the two options, less the cost of the
spread.

If, at expiry, the share price has fallen to the strike price of the sold option, the maximum profit
will be earned. If the stock declines to these levels, the trader may well choose to unwind the

62
spread early, in order to avoid the possibility of excise on the short leg.
The maximum potential loss is the cost of the spread. This will occur if, at expiry, the
share price is above the exercise price of the bought option.

Possible outcome at expiry.

Both puts are worthless and the maximum loss is equal to the net cost of
spot price > Rs-2750
establishing the spread i.e. Rs-200

spot price 2750-2700 The position can be closed out for the intrinsic value of the Rs-2750 put.

The maximum potential profit of Rs200 is realized just before the level at
spot price 2700
which the 2700 put may be exercised by the holder

The position can be closed for the difference in the intrinsic value of two puts,
spot price <2700
so the profit is (2750-2700-4)× 50 = 2300

a. Bear Put spread

A bear put spread involves the purchase and sale of puts at different exercised price but
with the same expiry date. The purchase puts have higher exercise price than those written.

Situation: On 13th January spot rate of Nifty is trading at 2773. You buy 1 Nifty January 2750
put at RS-90/- and sell 1 Nifty 2700 put at Rs-86/-. Maximum profit and maximum loss Rs-200/-

Graph 7: Payoff diagram of Bear Spread

Profit 2700

2704 (Break Even)

Loss 2750

Analysis of Current Example:

Date 16/1/2009 21/1/2009 22/1/2009

63
Spot Price 2736 2796 2706
From Table 1 it is observed that after 16th January market behaved as per our expectation.
In order to Maximize the profit it is better to excise the option on 22nd January, which will result
in profit of (2750-2700-4)  50 = Rs.2300

Interpretation:

Action 1 If you the excise the option 22nd January your profit will be 2300
Action 2 If you the excise the option 21st January your loss will be 2300

b. Bear call spread

The bear spread can be constructed using calls instead of puts. As with the put spread, the
trader buys the higher strike option and sells the lower strike option. The trader may decide to
use calls instead of puts in order to take advantage of options that are viewed as overpriced.
Since the trader is selling the spread, the receipt of higher premiums is a benefit. There may also
be greater liquidity in calls than puts, giving greater flexibility when entering and exiting the
spread.

The maximum profit available is the value of the premium received. The maximum loss
is the difference between the strike prices less the premium received.

The bear call spread can be seen as writing a call with protection against an unexpected
rise in the market. In this instance, the trader may write a call around the money, and take a call
out-of-the-money, which effectively provides a ceiling to the potential loss if the market should
rise.

Other considerations

Limited risk/limited reward: The bear spread costs less to place than the outright purchase of a
put option. As a result, the potential for profit is also reduced.

Cost of strategy: The investor must be satisfied that the cost of the spread is justified by the
potential reward. Commission costs on entering and exiting can significantly reduce profitability.

Follow-up action

64
 If the stock unexpectedly falls sharply, it may be advisable to exit the strategy once the
lower strike price is reached. Time decay will benefit the spread around the lower strike price;
however the trader will usually be more concerned with avoiding exercise on the short leg.

If the stock price rises suddenly, the spread may be unwound before the taken put loses
too much time value.

CHAPTER VIII

SUMMARY OF FINDINGS:
Though forwards are not traded in the organized exchange, they are used as risk
management tools in an unorganized market especially in the commodities market without any
formal procedure.

The futures are used as an effective risk management tools in the organized stock markets
as well as commodities market. The strategy is that for managing risk of the portfolio with a
higher volatility than the market index, more futures contracts would be required to bring about a
perfect hedge.

FOR OPTIONS STRATEGIES:

65
 In Long Call, the maximum loss the investor can suffer is the premium paid for the
option, which will occur if the share price at expiry is below the strike price. The investor
breaks even if at expiry the share price is equal to the strike price of the option plus the
premium paid. As the share price rises beyond this point, the potential profits of the
bought call are unlimited.

 In Long Put, the maximum loss the investor can suffer is the premium paid for the
option, which will occur if the share price at expiry is above the strike price. The investor
breaks even if at expiry the share price is equal to the strike price of the option less the
premium paid. As the share price falls beyond this point.

 In Short Call, the maximum profit depends on the underlying stock closing at or below
the strike price of the option and will be limited premium received. The potential for loss
is unlimited which means it is dependant on how far the stock is above the exercise price
at expiry.

 In Short put, the maximum profit the investor can make is the premium received for
writing the option, which will occur if the share price at expiry is above the strike price.
The investor breaks even if at expiry the share price is equal to the strike price of the
option less the premium paid. As the share price falls beyond this point, the potential
losses of the sold put are unlimited.

 In Bull Spread, the maximum profit obtainable is the difference between the strike prices
of the two options, less the cost of the spread. The maximum loss possible is the cost of
the spread and will be incurred when the share price is at or below the strike price of the
bought option at expiry.

 In Bear Spread, the maximum profit to be earned is the difference between the strike
prices of the two options, less the cost of the spread. If, at expiry, the share price has
fallen to the strike price of the sold option, the maximum profit will be earned. The
maximum potential loss is the cost of the spread. This will occur if, at expiry, the share
price is above the exercise price of the bought option.

66
SUGGESTIONS:
In today’s world, managing risk is a daunting task. In coping with this challenge the
following inter-related suggestions need to be borne in mind.

 Align risk management with strategy.

 Proactively manage uncertainties.

 Employ a mix of real and financial methods.

 Know the limits of risk management tools.

 Learn when it is worth reducing risk.

For Option strategies:

 The Long Call strategy is generally used when you expect the share price to rise, and
volatility to increase.

 Be realistic in selecting a strike price - the out-of-the-money option will be cheapest, but
also requires a large move in the share price for the Long Call strategy to be profitable.

 In case of Long Call, if the share price does not rise as expected, it is often advisable to
close out the position in order to recover some time value from the position.

 The Long Put strategy is generally used when you expect the share price to fall, and
volatility to increase.

 In case of Long Put, if the share price fall takes place as expected, the put option taker
must decide whether to close out at a profit, or maintain the position in the hope of a
further increase in price. The longer the option position is left open, the greater the effect
of time decay.

67
 As a shareholder, it is not practical to have protection in place 12 months of the year.
This Long Put strategy is suitable for shorter periods when you fear a market downturn.

 The Short Call strategy is generally used when sellers expect a gradual fall in the market
and lower volatility.

 The Short Put strategy is generally used when the investor expects the share price to
remain steady or increase slightly over the life of the option. If at expiry the stock is
trading below the strike price, the put writer will be exercised unless the position has
been closed out.

 In case of Short Call as expiry approaches, the investor should consider buying back the
put if they do not want to own the stock. Alternatively, the investor could roll the option
position to a later month and possibly a different strike price.

 The Bull Spread strategy is generally used when an investor is expecting a limited rise in
the price of the stock.

 While using Bull Spread, be sure that the cost of the spread is justified by the potential
reward.

 The Bear Spread strategy is generally used when the investor expects a moderate fall in
the market but is not prepared to pay to take a put outright.

 While using Bear Spread, be sure that the cost of the spread is justified by the potential
reward.

 In Bear Spread, if the stock unexpectedly falls sharply, it may be advisable to exit the
strategy once the lower strike price is reached.

 In Bear Spread, if the stock price rises suddenly, the spread may be unwound before the
taken put loses too much time value.

 alternative is to vary the break-even points of the strategy by rolling one of the legs up or
down, thereby maintaining the strangle.

68
  Since of the potential for unlimited losses, be sure that the premium received is worthy of
the risk taken.

 Use the short strangle over the short straddle if you have any doubts about the market's
neutrality.

CONCLUSIONS
By analyzing all these strategies we can conclude that during bullish market outlook
Long Call, Short Put, Bull Spread and Long Strangle strategies are suitable to use. The Long Put,
Short Call and Bear Spread are best suited during bearish market condition. When you expect
market to be neutral for few forth coming days, it is better to hold on to Short put strategies.
When uncertainty about market is more it is wise to use strategies.

While using any option strategy it is also required to consider factors like Strike price,
Time decay, Cost of strategy and volatility. It is necessary to ensure that cost of strategy must be
justified by the potential reward.

To summarize the role of regulation is the cushion and help other market monitoring
mechanism such as competition or reputation to maintain a fair and orderly financial markets in
which innovation is encouraged. Its objective is thus to support and encourage all the necessary
structural changes in the products or institutions architecture that allows market participants to
increase the benefits extract from the economic functions of derivatives at controlled risk levels.
Thus, one could view the role of regulation as that of a player of last resort that guarantees that

69
the economic benefits associated to the derivative trading activity remains on the efficient
.risk/return frontier.

ANNEXURE

BALANCE SHEET

Mar ' 09 Mar ' 08 Mar ' 07

Equity Share Capital 66.29 66.08 54.40

Share Application Money 1,500.16 0.00 0.00

Preference Share Capital 25.00 0.00 0.00

Reserves & Surplus 356.19 305.24 200.89

Secured Loans 0.00 0.00 0.00

Unsecured Loans 0.00 75.40 3.50
Total 1947.64 446.72 258.79
Gross Block 3.73 0.56 0.01
Less : Revaluation Reserve 0.00 0.00 0.00

70
Less : Accumulated Depreciation 0.36 0.05 0.00

Net Block 3.37 0.51 0.01

Capital Work-in-progress 0.01 0.07 0.00

Investments 600.23 400.28 253.81

Current Assets, Loans & 554.81 21.42 7.53
Advances

Less : Current Liabilities & 9. 5 10.57 5.56

Provisions

Total Net Current Assets 545.31 10.86 1.97

Miscellaneous expenses not 0.00 0.00 0.00

written

Total 1947.64 446.72 291.79

Book Value of Unquoted 850.74 339.99 185.80
Investments

Market Value of Quoted 15.28 30.87 25.78

Investments

Contingent liabilities 685.01 120.03 60.00

Number of Equity shares 682.90 550.84 445.97

outstanding (in Lacs)

71
BIBLIOGRAPHY

1. Donald R Cooper & Pamela S Schindler, “Business Research Methods”, Tata McGraw
Hill, 8th Edition

2. N.D.Vohra & B.R.Bagri, “Future and Options”, Tata Mcgraw Hill, 3rd Edition.

3. Prasanna Chandra, “Security Analysis and Portfolio Management”, Tata McGraw Hill,
3rd Edition.

4. NCFM study material – Derivative Module.

5. www.bseindia.com

6. www.nseindia.com

7. www.sharekhan.com

8. www.strike-price-options.com

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 9. www.wikipedia.com

List of abbreviations used.

1. NSDL - NATIONAL SECURITIES DEPOSITORY LIMITED

2. CSDL - CENTRAL SECURITIES DEPOSITORY LIMITED
3. NSE - NATIONAL STOCK EXCHANGE
4. BSE - BOMBAY STOCK EXCHANGE
5. BOLT - BOMBAY ONLINE TRADING SYSTEM
6. NEAT - NATIONAL EXCHANGE FOR AUTOMATED TRADING
7. LEAPS - LONG TERM EQUITY ANTICIPATION SECURITIES
8. S&P CNX nifty - STANDARD AND POOR’S CRISIL NSE EXCHANGE 50
9. MTM - MARK TO MARKET
10. N FUTSTK - NSE FUTURE STOCKS
11. N FUTIDX NIFTY - NSE FUTURE INDEX 50
12. N OPTIDX NIFTY - NSE OPTIONS INDEX 50
13. N OPTSTK - NSE OPTIONS STOCK
14. MCX - MULTI COMMODITY EXCHANGE
15. NCDEX - NATIONAL COMMODITY AND DERIVATIES EXCHANGE
16. SEBI – SECURITIES EXCHANGE BOARD OF INDIA

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