This action might not be possible to undo. Are you sure you want to continue?
A derivative security is a security whose value depends on the value of together more basic underlying variable these are also known as contingent claims. Securities have been very successful in innovation in capital markets.
The emergence of the market for derivatives product most notably forward, future and option can be traced back to willingness of risk averse economic agents to guard themselves against uncertain arising out of fluctuation in asset prices. By their very nature, financial markets are market by a very high degree of volatility. Though the use of derivatives products, it is possible to partially or fully transfer price risks by locking in asset prices. As instrument of risk management these generally don’t influence the fluctuation in underlying asset prices.
However, by locking-in asset prices, derivatives products minimize the impact of fluctuation in assets prices on the profitability and cash- flow situation of risk-averse investor. Derivatives are risk management instruments which derives their value from an underlying asset. Underlying assets can be bullion, index, share, currency, bonds, interest, etc.
Objectives of the Study
To understand the concept of the Financial Derivatives such as Futures and Options. To examine the advantage and the disadvantages of different strategies along with situations. To study the different ways of buying and selling of Options.
. The study has only made humble attempt at evaluating Derivatives markets only in Indian context.4 SCOPE OF THE STUDY The study is limited to “Derivatives” with special reference to future and option in the Indian context and the India info line has been taken as representative sample for the study. The study cannot be said as totally perfect. any alternation may come. The study is not based on the international perspective of the Derivatives Markets.
from Newspapers. . As the time was limited.5 Research Methodology The type of research adopted is descriptive in nature and the data collected for this study is the secondary data i. Limitations: The study was conducted in Hyderabad only.e. Magazines and Internet. study was confined to conceptual understanding of Derivatives market in India.
computer consultancy services. E-Commerce of all types including .. ICICI. CDC (promoted by UK government). Stock and Commodities broking is offered under the trade name 5paisa. India info line group offers the entire gamut of investment products including stock broking. To engage or undertake software and internet based services. data processing IT enabled services. a wholly owned subsidiary of India Infoline Ltd. Fixed Deposits.1 Private sector life insurance Company.7 THE INDIA INFOLINE LIMITED Origin: India info line was founded in 1995 by a group of professional with impeccable educational qualifications and professional credentials.. www. India Infoline is the leading corporate agent of ICICI Prudential Life Insurance Company.. Commodities broking. selling advertisement space on the site. GOI Relief bonds. TDA and Reeshanar. Post office savings and life Insurance. Its institutional investors include Intel Capital (world's) leading technology company.indiainfoline. not just once but three times in a row and counting.. India Infoline Commodities pvt Ltd. web consulting and related services including web designing and web maintenance. holds membership of MCX and NCDEX Main Objects of the Company Main objects as contained in its Memorandum or Association are: 1. It has been rated as No.l the category of Business News in Asia by Alexia rating. software supply services. Com has been the only India Website to have been listed by none other than Forbes in it's 'Best of the Web' survey of global website. which is India' No. software product development and marketing. Mutual Funds. software development services. a must read for investors in south Asia is how they choose to describe India info line.
and trade / invest in researched securities. Equities 2. E-broking. promote any kind of research. debentures. 3. Distribution C. financial institutions. help. Govt of India bonds. Fixed deposits C. To undertake. Insurance D. PMS E. 2. bond. Mutual funds 2. Derivatives 3. secondary equity market. E-Broking: It refers to Electronic Broking of Equities. VISION STATEMENT OF THE COMPANY: “our vision is to be the most respected company in the financial services space in India”. A. probe. Distribution: 1. B. competitive analysis. ventures. business and management consultancy. capital market on matters related to investment decisions primary equity market. corporate business houses. investigation. agricultural and mineral. Mortgages. developmental work on economy.8 electronic financial intermediation business and E-broking. Commodities B. conduct. industries. Derivatives and Commodities brand name of 5paisa 1. survey. Products: the India Infoline pvt ltd offers the following products A. foreign financial institutions. carry on. Insurance: under the . study. market research. preparations of corporate / industry profile etc. capital funding proposals.
is a member of BSE. India Info line Ltd owns and managers the web properties www.com Distribution Company.Com and www. Indian Info line Securities Pvt. India Infoline. Ltd. General insurance 3. India Info line Ltd.9 1. Mobilizes Mutual Funds and other personal investment products such as bonds. The parent company. Ltd. is a registered commodities broker MCX and offers futures trading in commodities. Customized and off-the-shelf. Life insurance policies 2. engaged in engaged in distinct yet complementary businesses which together offer a whole bouquet of products and services to make your money grow. NSE and DP with NSDL. The corporate structure has evolved to comply with oddities of the regulatory framework but still beautifully help attain synergy and allow flexibility to adapt to dynamics of different businesses. .com.Indiainfoline. India Info line Insurance Services Ltd. Its business encompasses securities broking Portfolio Management services. fixed deposits. etc. it also undertakes research. which has 5 wholly-owned subsidiaries. Health insurance THE CORPORATE STRUCTURE The India Info line group comprises the holding company.5paisa. Is the corporate agent of ICICI Prudential Life Insurance. engaged in selling Life Insurance products? India Info line Commodities Pvt.
is proving margin funding and NBFC services to the customers of India info line Ltd...10 India info line services Pvt Ltd. Pictorial Representation of India infoline Ltd .
Venkataraman Director. is armed with a post-graduate management degree from IIM Bangalore.Cost Account . portfolio Management Services Vice president . The non-executive directors on the board bring a wealth of experienced and expertise. India infoline.. Singapore the key management team comprises seasoned and qualified professionals.He had successful career with Hindustan Lever . Alternative channel Vice president. India infoline securities Pvt Ltd. Satpal khattar –Reeshanar investment. chairman and managing director .E capital. kharagpur. Research Chief Editor Financial controller Chief Marketing officer . (All India rank 1)and has a post-graduate management degree from IIM Ahmedabad . Director. R. Nirmal jain .com distribution co Ltd Vice president. Later he was CEO of an equity research organization. Barclays de Zoette and G.(All Indian Rank 2 ). And an Electronic engineering degree from IIT.11 Management of India info line Ltd. He spent eight fruitful years in equity research sales and private equity with the cream of financial houses such as ICICI group.is a Chartered Account . India infoline is a professionally managed company /s day to day affairs as executive Directors have impeccable academic professional track record . where he inter alia handle commodities trading and export business . Mukesh sing Seshadri Bharathan S sriram Sandeepa Vig Arora Darmesh Pandya Toral Munshi Anil mascarenhas Pinkesh soni Harshad Apte Director. Technology Vice president.
However. futures and options. A security derived from a debt instrument. share.13 DERIVATIVES The emergence of the market for derivative products. Currency. risk instrument or contract for differences or any other form of security. By their very nature. most notably forwards. DEFINITION Understanding the word itself. which derives its value from the prices. . Index or a Commodity. the financial markets are marked by a very high degree of volatility. Underlying asset can a Stock. or index of prices. as: A. Without having an interest in the underlying product market. these generally do not influence the fluctuations underlying prices. but the two are always related and may therefore interact with each other. The term Derivative has been defined in Securities Contracts (Regulation) Act 1956. can be traced back to the willingness of risk-averse economic agents to guard themselves against uncertainties arising out of fluctuations in asset prices. by locking –in asset prices. Through of derivatives of products. these are contracts that derive their value from some underlying asset. For example. B. The word originates in mathematics and refers to a variable. loan whether secure or unsecured. a measure of weight in pound could be derived from a measure of weight in kilograms by multiplying by two. Without the underlying product and market it would have no independent existence. In financial sense. derivatives products minimize the impact of fluctuations in asset prices on the profitability and cash flow situation of risk–averse investors. Bond. of underlying securities. A contract. it is possible to partially or fully transfer price risks by locking –in asset prices. which has been derived from another variable. Some one may take an interest in the derivative products. Derivatives is a key to mastery of the topic. As instruments of risk management.
For example. Mr. having an insurance policy reduces the risk of owing a bike. The kind of hedging that can be obtained by using derivatives is cheaper and more convenient than what could be obtained by using cash instruments. Derivatives instruments can be used to minimize risk. They simply manipulate the risks and transfer to those who are willing to bear these risks. hedging through derivatives reduces the risk of owing a specified asset. which may be a share. he runs a big risk. If does not take insurance.14 IMPORTANCE OF DERIVATIVES Derivatives are becoming increasingly important in world markets as a tool for risk management. when we use derivatives for hedging. actual delivery of the underlying asset is not at all essential for settlement purposes. derivatives would not create any risk. A owns a bike. It is so because. Suppose he buys insurance [a derivative instrument on the bike] he reduces his risk. Derivatives are used to separate risks and transfer them to parties willing to bear these risks. Thus. etc. . currency. Similarly. More over.
There are various influences. For instance inflation interest rate etc. These forces are to a large extent controllable and are termed as “Non-systematic Risks”. Sum are internal to the firm bike: Industry policy Management capabilities Consumer’s preference Labour strike. 1. Sociological changes are sources of Systematic Risk.15 RATIONALE BEHIND THE DEVELOPMENT OF DERIVATIVES Holding portfolio of securities is associated with the risk of the possibility that the investor may realize his returns. Their effect is to cause the prices of nearly all individual stocks to move together in the same manner. 2.systematic risks by having a well-diversified portfolio spread across the companies. There are other types of influences. An investor can easily manage such non. Rational behind the development of derivatives market is to manage this systematic risk. Liquidity means. liquidity. and they are termed as “systematic risks”. Those are 1. industries and groups so that a loss in one may easily be compensated with a gain in other. Price or dividend (interest). We therefore quite often find stock prices falling from time to time in spite of company’s earnings rising and vice –versa. etc. Economic 2. . Political 3. which would be much lesser than what he expected to get. being able to buy & sell relatively large amounts quickly without substantial price concessions. cannot be controlled. which are external to the firm. which affect the returns.
However. It was until recently a cash market with facility to carry forward positions in actively traded “A” group scrips from one settlement to another by paying the required margins and barrowing money and securities in a separate carry forward sessions held for this purpose. a need was felt to introduce financial products like other financial markets in the world. 2.16 In debt market. . 3. Their value is derived from an underlying instrument such as stock index. CHARACTERISTICS OF DERIVATIVES 1. India has vibrant securities market with strong retail participation that has evolved over the years. They are vehicles for transferring risk. Debt instruments are also finite life securities with limited marketability due to their small size relative to many common stocks. a much larger portion of the total risk of securities is systematic. They are leveraged instruments. etc. currency. These factors favor for the purpose of both portfolio hedging and speculation.
which manages the risk. . Arbitrageurs. They are willing to take risks and they bet upon whether the markets would go up or come down. Hedgers. 2. Arbitrageurs: Risk less profit making is the prime goal of arbitrageurs. and such opportunities often come up in the market but last for very short time frames. 3. Speculators. Hedgers seek to protect themselves against price changes in a commodity in which they have an interest. 1.17 MAJOR PLAYERS IN DERIVATIVE MARKET There are three major players in their derivatives trading. Speculators: They are traders with a view and objective of making profits. They could be making money even with out putting their own money in. is known as “Hedger”. They are specialized in making purchases and sales in different markets at the same time and profits by the difference in prices between the two centers. Hedgers: The party.
Equity index options are a form of basket options Swaps: Swaps are private agreements between two parties to exchange cash flows in the future according to a pre-arranged formula. that the former are standardized exchange traded contracts. Futures: A futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. The underlying asset is usually a moving average of a basket of assets.Calls and Puts. The two commonly used swaps are: Interest rare swaps: These entail swapping only the interest related cash flows between the parties in the same currency. Futures contracts are special types of forward contracts in the sense. Forward contracts offer tremendous flexibility to the party’s to design the contract in terms of the price. delivery. the majority of options traded on options exchanges having a maximum maturity of nine months. Calls give the buyer the right but not the obligation to buy a given quantity of the underlying asset at a given price on or before a given future date. . Liquidity and default risk are very high. Options generally have lives up to one year. LEAPS: The acronym LEAPS means Long Term Equity Anticipation Securities. Options: Options are two types . Baskets: Basket options are options on portfolios of underlying assets. time and place. Puts give the buyer the right but not the obligation to sell a given quantity of the underlying asset at a given price on or before a given date. quantity. They can be regarded as portfolios of forward contracts. quality. Warrants: Longer – dated options are called warrants and are generally traded over – the – counter.18 TYPES OF DERIVATIVES Most commonly used derivative contracts are: Forwards: A forward contract is a customized contract between two entities where settlement takes place on a specific date in the futures at today’s pre-agreed price. These are options having a maturity of up to three years.
RISKS INVOLVED IN DERIVATIVES Derivatives are used to separate risks from traditional instruments and transfer these risks to parties willing to bear these risks. Liquidity Risk: The inability of a firm to arrange a transaction at prevailing market prices is termed as liquidity risk. Credit Risk: This is the risk of failure of a counterpart to perform its obligation as per the contract. The fundamental risks involved in derivative business includes A. therefore the legal aspects associated with the deal should be looked into carefully. A firm faces two types of liquidity risks: Related to liquidity of separate products. with the cash flows in one direction being in a different currency than those in opposite direction. Also known as default or counterpart risk. C. D. Market Risk: Market risk is a risk of financial loss as result of adverse movements of prices of the underlying asset/instrument. . Legal Risk: Derivatives cut across judicial boundaries. Related to the funding of activities of the firm including derivatives. B.19 Currency swaps: These entail swapping both the principal and interest between the parties. it differs with different instruments.
is one of the last major economies in Asia. which was established by India's leading institutional investors in 1994 in the wake of numerous financial & stock market scandals. Index Options was launched in june2001. around the time India became independent men in mumbai gambled on the price of cotton in New York. with the launch index Futures on sensex and nifty futures respectively. They bet on the last one or two digits of the closing price on the New York cotton exchange.for every Rupee layout. by using fully automated screen based exchange. they got Rs.7/. Derivatives Segments In NSE & BSE On June 9. Now. If they guessed the last number. stock options in July 2001.72/. For example sensex is 6750 then the contract value of a futures index having sensex as underlying asset .2Lakhs by Securities and Exchange Board of India. The country. This difference of market lot arises due to a minimum specification of a contract value of Rs.Gamblers preferred using the New York cotton price because the cotton market at home was less liquid and could easily be manipulated. emerging from a long history of stock market and foreign exchange controls. to refashion its capital market to attract western investment.20 DERIVATIVES IN INDIA Indian capital markets hope derivatives will boost the nations economic prospects. A hybrid over the counter derivatives market is expected to develop along side. and stock futures in November 2001. If they matched the last two digits they got Rs. Over the last couple of years the National Stock Exchange has pushed derivatives trading. 2000 BSE and NSE became the first exchanges in India to introduce trading in exchange traded derivative products. Fifty years ago. NIFTY is the underlying asset of the index futures at the futures and options segment of NSE with a market lot of 100 and BSE 30 sensex is the underlying stock index in BSE with a market lot of 30. India is about to acquire own market for risk.
The June 30.e. As long as the position is open. the difference will be credited or debited accordingly and the position shall be brought forward to the next day at the daily settlement price. Out standing positions of a contract can remain open till the last Thursday of that month.. initial margin which is collected upfront and mark to market margin. Margins: There are two types of margins collected on the open position. July 28 and august 25 shall be the last trading day or the final settlement date for June futures contract. last Thursday) shall closed out by the exchanged at the final settlement price which will be the closing spot value of the underlying asset. There is daily as well as final settlement. Thus. Contract Periods: At any point of time there will be always be available nearly 3months contract periods. Every transaction shall be in multiples pf market lot. a new futures contract will get introduced automatically. index futures at NSE shall be traded in multiples of 100 and a BSE in multiples of 30. When futures contract gets expired. if Nifty is 2100 its futures contract value will be 100x2100=210000. viz. June futures contract becomes invalidated and a September futures contract gets activated. Any position which remains open at the end of the final settlement day (i. For instance on July 1. The last Thursday of the month specified in the contract shall be the final settlement date for the contract at both NSE as well as BSE. the same will be marked to market at the daily settlement price. which is to be paid on next day.21 will 30x6750 = 202500. For example in the month of June 2005 one can enter into their June futures contract or July futures contract or august futures contract. As per SEBI . Settlement: The settlement of all derivative contracts is in cash mode. Similarly. July futures contract and august futures contract respectively.
Position limits are imposed at the customer level. Trading members are the members of the derivatives segment and carrying on the transactions on the respective exchange. It is mandatory for every member of the derivatives segment to have approved users who passed SEBI approved derivatives certification test. Exposure limit: The national value of gross open positions at any point in time for index futures and short index option contract shall not exceed 33.33 times the liquid net worth of a clearing member. Position limit: It refers to the maximum no of derivatives contracts on the same underlying security that one can hold or control. In case of futures and options contract on stocks the notional value of futures contracts and short option position any time shall not exceed 20 times the liquid net worth of the member. They are trading members. clearing member level and market levels are different.22 guidelines it is mandatory for clients to give margins. banks and custodians become professional clearing members. The professional clearing member is a clearing member who is not a trading member. The clearing members are the members of the clearing corporation who deal with payments of margin as well as final settlements. . Typically. 3 percent notional value of gross open position in index futures and short index options contracts. Members of F&O segment: There are three types of members in the futures and options segment. trading cum clearing member and professional clearing members. Therefore. and 5 percent of notional value of futures and short option position in stocks is additionally adjusted from the liquid net worth of a clearing member on a real time basis. fail in which the outstanding positions or required to be closed out. to spread awareness among investors. Position limits are imposed with a view to detect concentration of position and market manipulation. The position limits are applicable on the cumulative combined position in all the derivatives contracts on the same underlying at an exchange.
23 Regulatory Framework: Considering the constraints in infrastructure facilities the existing stock exchanges are permitted to trade derivatives subject to the following conditions. • The derivatives market should have a separate governing council and representation of trading/clearing members shall be limited to maximum of 40% of total members of the governing council. The exchange must have an online surveillance capability. Position limits be used for improving market quality. An independent clearing corporation should do the clearing of the derivative market. • Information about traded quantities and quotes should be disseminated by the exchange in the real time over at least two information-vending networks. then he should not carry on any broking and dealing on any exchange during his tenure. • • The exchange should have at least 50 members to start derivatives trading. price and volumes in real time so as to detect market manipulations. If the chairman is broker/dealer. which are accessible to the investors in the country. which monitors positions. The members of an existing segment of the exchange will not automatically become the members of derivatives segment. • • • Trading should take place through an online screen based trading system. • The chairman of the governing council of the derivative division/exchange should be a member of the governing council. The derivatives trading should be done in a separate segment with a separate membership. .
it costs nothing to the either party to hold the long/short position. One of the parties in a forward contract assumes a long position i. Therefore. The other party assumes short position i. In other words. A forward contract can therefore. a key determinate of the value of the contract is the market price of the underlying asset. This specified price referred to as the delivery price. assume a positive/negative value depending on the moments of the price of the asset. The forward price for a certain contract is defined as that delivery price which would make the value of the contract zero. agrees to sell the asset on the same date at the same price. The holder of the short position delivers the asset to the holder of the long position in return for cash at the agreed upon rate. Conversely the value of the contract becomes negative for the party holding the short position. These are instruments are basically used by traders/investors in order to hedge their future risks. agrees to buy the underlying asset on a specified future date at a specified future price. This delivery price is chosen so that the value of the forward contract is equal to zero for both the parties. that is the value of the contract is positive for him. the party holding the long position stands to benefit. It is an agreement to buy/sell an asset at a certain in future for a certain price. For example. A forward contract is settled at maturity. To explain further.e. if the price of the asset prices rises sharply after the two parties have entered into the contract. The concept of forward price is also important.25 Forwards Forwards are the simplest and basic form of derivative contracts.e. the forward price and the delivery price are equal on the day that the contract is . They are private agreements mainly between the financial institutions or between the financial institutions and corporate clients.
Contract price is generally not available in public domain. delivery time and place. On the expiration date the contract will settle by delivery of the asset. which often results high prices. It may be recalled that the ban on forward trading in securities was imposed in 1986 to curb certain unhealthy trade practices and trends in the securities market. 4. quality. Forward Trading in Securities: The Securities Contract (amendment) Act of 1999. 6. The lifting of ban on forward deals in securities will help to develop index futures and other types of derivatives and futures on stocks. A forward contract is a Bi-party contract. there have been many healthy developments in the securities markets. has allowed the trading in derivative products in India. If the party wishes to reverse the contract. 3. the forward price is liable to change while the delivery price remains the same. Has a further step to widen and deepen the securities market the government has notified that with effect from March 1 st 2000 the ban on forward trading in shares and securities is lifted to facilitate trading in forwards and futures. to be performed in the future. quantity. Over the duration of the contract. Forward contracts suffer from poor liquidity and default risk. Forward contracts offer tremendous flexibility to the parties to design the contract in terms of the price. 5. . This is a step in the right direction to promote the sophisticated market segments as in the western countries. with the terms decided today. During the past few years.26 entered into. Essential features of Forward Contracts: 1. thanks to the economic and financial reforms. 2. it is to compulsorily go to the same counter party.
these are traded on organized exchanges.the. Organized Exchanges: Unlike forward contracts which are traded in an over. upon entering into the . futures are traded on organized exchanges with a designated physical location where trading takes place. have existed for a long time. liquid market which futures can be bought and sold at any time like in a stock market. The futures market described as continuous auction markets and exchanges providing the latest information about supply and demand with respect to individual commodities. Futures in financial assets. Futures exchanges are where buyers and sellers of an expanding list of commodities.counter market. silver. the way the markets are organized. it is similar to a forward contract. financial instruments and currencies come together to trade. which is unknown to the futures trader.29 FUTURES The future contract is an agreement between two parties two buy or sell an asset at a certain specified time in future for certain specified price. Standardization: In the case of forward contracts the amount of commodities to be delivered and the maturity date are negotiated between the buyer and seller and can be tailor made to buyer’s requirement. cotton. profiles of gains and losses. currencies. and interest bearing instruments like treasury bills and bonds and other innovations like futures contracts in stock indexes are relatively new developments. However. This provides a ready. Futures contracts in physical commodities such as wheat. etc. there are a no of differences between forwards and futures. These relate to the contractual futures. Clearing House: The exchange acts a clearinghouse to all contracts struck on the trading floor. gold. Thus. cattle. option buyers participate in futures markets with different risk. etc. kind of participants in the markets and the ways they use the two instruments. In this. Features of Futures Contracts The principal features of the contract are as fallows. The option buyer knows the exact risk. A futures contract is a more organized form of a forward contract. Trading has also been initiated in options on futures contracts. financial instruments and currencies. For instance a contract is struck between capital A and B. In a futures contract both these are standardized by the exchange on which the contract is traded.
e. Actual delivery is rare: In most of the forward contracts. Forward contracts are entered into for acquiring or disposing of a commodity in the future for a gain at a price known today. Initial margins on both the buyer as well as the seller. a mandatory minimum margins are obtained by the members from the customers. one between A and the clearing house and the another between B and the clearing house. this most of the contracts entered into are nullified by the matching contract in the opposite direction before maturity of the first. this is immediately replaced by two contracts. to introduce a financial stake of the client. The members collect margins from their clients has may be stipulated by the stock exchanges from time to time and pass the margins to the clearing house on the net basis i. To achieve. The concept of margin here is same as that of any other trade. Such a stop insures the market against serious liquidity crises arising out of possible defaults by the clearing members. Futures are used as a device to hedge against price risk and as a way of betting against price movements rather than a means of physical acquisition of the underlying asset. The advantage of this is that A and B do not have to under take any exercise to investigate each other’s credit worthiness. at a stipulated percentage of the net purchase and sale position. Margins: In order to avoid unhealthy competition among clearing members in reducing margins to attract customers. and seller to buyer. i. where it is a buyer to seller. The margin for future contracts has two components: • • Initial margin Marking to market . The accounts of buyer and seller are marked to the market daily. In contrast to this. to ensure performance of the contract and to cover day to day adverse fluctuations in the prices of the securities. In other words the exchange interposes itself in every contract and deal. actual delivery takes place in less than one percent of the contracts traded.30 records of the exchange. 2. The stock exchange imposes margins as fallows: 1. The enforces the delivery for the delivery of contracts held for until maturity and protects itself from default risk by imposing margin requirements on traders and enforcing this through a system called marking – to – market. the commodity is actually delivered by the seller and is accepted by the buyer.e. in most futures markets. It also guarantees financial integrity of the market.
The margin is set by the stock exchange keeping in view the volume of business and size of transactions as well as operative risks of the market in general. die clearinghouse substitutes each existing futures contract with a new contract that has the settle price or the base price. . The initial margin is also known as the “performance margin” and usually 5% to 15% of the purchase price of the contract. at the end of which it will cease to exist. debiting or crediting the client’s equity accounts with the losses/profits of the day. It is important to note that through marking to market process. Accordingly.31 Initial margin: In futures contract both the buyer and seller are required to perform the contract. There ill be a different basis for each delivery month for each contract. Futures Terminology: Spot price: The price at which an asset trades in spot market. both the buyers and the sellers are required to put in the initial margins. Basis/Spread: In the context of financial futures basis can be defined as the futures price minus the spot price. Contract Size: The amount of asset that has to be delivered under one contract. This is the last day on which the contract will be traded. basis will be positive. In formal market.at –Risk”(VAR) where as the options market had SPAN based margin system”. For instance contract size on NSE futures market is 100 Nifties. Base price shall be the previous day’s closing Nifty value. This reflects that futures prices normally exceed spot prices. based on which margins are sought. The concept being used by NSE to compute initial margin on the futures transactions is called “value. Cost of Carry: The relationship between futures prices and spot prices can be summarized in terms of what is known as the cost of carry. Settle price is the purchase price in the new contract for the next trading day. Marking to Market: Marking to market means. Expiry Date: It is the date specified in the futures contract. This measures the storage cost plus the interest that is paid to finance the asset less the income earned on the asset. Futures price: The price at which the futures contract trades in the futures market.
the chances of manipulation are much lesser. In the near future stock index futures will definitely see incredible volumes in India. Stock index futures will require lower capital adequacy and margin requirement as compared to margins on carry forward of individual scrip’s. Long position: Outstanding/Unsettled purchase position at any point of time. Short position: Out standing/unsettled sales position at any time point of time. would refer trade in stock index futures. Tick Size: It is the minimum price difference between two quotes of similar nature. given the speculative nature of our markets and overwhelming retail participation expected to be fairly high. The advantage to the equity or cash market is in the fact that they would become less volatile as most of the speculative activity would shift to stock index futures. The market is conditioned to think in terms of the index and therefore. only one side of the contract is counted. However. The stock index futures market should ideally have more depth. The impact cost will be much lower incase of stock index futures as opposed to dealing in individual scrips. Stock index is the apt hedging asset since. used to arrive at the contract size.32 Multiplier: it is a pre-determined value. volumes and act as a stabilizing factor for the cash market. Stock index Futures: Stock index futures are most popular financial futures. It is the price per index point. The stock index futures are expected to be extremely liquid. It will be a blockbuster product and is pitched to become the most liquid contract in the world in terms of contracts traded. Savings in cost is possible through reduced bid-ask spreads where stocks are traded in packaged forms. the rise or fall due to systematic risk is accurately shown in the stock index. who own portfolio of securities and are exposed to systematic risk. Stock index futures contract is an agreement to buy or sell a specified amount of an underlying stock traded on a regulated futures exchange for a specified price at a specified time in future. Further. it is too early to base any conclusions on . Open Interest: Total outstanding long/short positions in the market in any specific point of time. which have been used to hedge or manage systematic risk by the investors of the stock market. As total long positions for market would be equal to total short positions for calculation of open Interest. They are called hedgers. The brokerage cost on index futures will be much lower.
A futures contract represents a promise to transact at same point in the future.200 as expected.30. Stock Futures: With the purchase of futures on a security. It can be done just as easily as buying futures.30 i. The difference between stock index futures and most other financial futures contracts is that settlement is made at the value of the index at maturity of the contract. the BSE sensex is at 6850. the holder essentially makes a legally binding promise or obligation to buy the underlying security at same point in the future (the expiration date of the contract). we get the same position as ACC in the cash market.34 initially to enter into the futures contract. Example: If the current price of the ACC share is Rs. Payoff for Futures contracts Futures contracts have linear payoffs. We believe that in one month it will touch Rs.33 the volume are to form any firm trend.1500 is required (6850-6800) x30). we made a profit of Rs.e. it means that the losses as well as profits for the buyer and the seller of a futures contract are unlimited. Example: If BSE sensex is at 6800 and each point in the index equals to Rs. Security futures do not represent ownership in a corporation and the holder is therefore not regarded as a shareholder.170 per share. a promise to sell security is just as easy to make as a promise to buy security. In this light. we still earn Rs.30 as profit. a contract struck at this level could work Rs. If the price really increases to Rs. we would pay only Rs. In the above example if the margin is 20%. If we buy ACC futures instead. a cash settlement of Rs. If at the expiration of the contract. In simple words.204000 (6800x30). which obligates the trader to buy a certain amount of the underlying security at some point in future. Selling security futures without previously owing them simply obligates the trader to sell a certain amount of the underlying security at same point in the future. but we have to pay the margin not the entire amount. If ACC share goes up to Rs. a return of 18%. . These linear payoffs are fascinating as they can be combined with options and the underlying to generate various complex payoffs.200.200 and we buy ACC shares.
He has potentially unlimited upside as well as potentially unlimited downside. Payoff for a seller of Nifty futures Profit 1220 0 Nifty LOSS . The underlying asset in this case is Nifty portfolio. and when index moves down it starts making losses. Take the case of a speculator who buys a two-month Nifty index futures contract when Nifty stands at 1220. the long futures position starts making profits. Payoff for a buyer of Nifty futures profit 1220 0 Nifty LOSS Payoff for seller of futures: Short futures The payoff for a person who sells a futures contract is similar to the payoff for a person who shorts an asset. He has a potentially unlimited upside as well as potentially unlimited downside. When the index moves up.34 Payoff for buyer of futures: Long futures The payoff for a person who buys a futures contract is similar to the payoff for a person who holds an asset.
Example Nifty futures trade on NSE as one. the short futures position starts making profits. PRICING FUTURES Cost of Carry Model: We use fair value calculation of futures to decide the no arbitrage limits on the price of the futures contract. The underlying asset in this case is the Nifty portfolio. F=S+C Where F Futures S Spot price C Holding cost or Carry cost This can also be expressed as F = S (1+r) T Where r Cost of financing T Time till expiration Pricing index futures given expected dividend amount: The pricing of index futures is also based on the cost of carry model where the carrying cost is the cost of financing the purchase of the portfolio underlying the index. This is the basis for the cost-of-carry model where the price of the contract is defined as fallows. it starts making losses. What will be the price of a new two-month futures contract on Nifty? .35 Take the case of a speculator who sells a two-month Nifty index futures contract when the Nifty stands at 1220. Money can be barrowed at a rate of 15% per annum. and when index moves up. two and three month contracts. When the index moves down. minus the present value of the dividends obtained from the stocks in the index portfolio.
e. The cost of financing is 15% and the dividend yield on Nifty is 2% annualized.e. 3.10/. if there are few historical cases of clustering of dividends in any particular month. F = S (1+ r-q) T Where F Futures price S Spot index value r Cost of financing q Expected dividend yield T Holding period Example: A two-month futures contract trades on the NSE. it is useful to calculate the annual dividend yield. Hence. To calculate the futures price we need to compute the amount of dividend received for unit of Nifty.02) 60/365 = Rs. Thus futures price F = 1200(1. 2. (120x10).1221.per share after 15 days of purchasing of contract.07). If the market price of ACC is Rs. i. (240000x0. (16800/140). we dividend the compounded figure by 200. Current value of Nifty is 1200 and Nifty trade with a multiplier of 200.1200 i. then a traded unit of Nifty involves 120 shares of ACC i. Since Nifty is traded in multiples of 200 value of the contract is 200x1200=240000.80. If ACC as weight of 7% in Nifty.36 1. The spot value of Nifty is 1200. Pricing index futures given expected dividend yield If the dividend flow through out the year is generally uniform.1224.140. To calculate the futures price we need to reduce the cost of carry to the extent of dividend received is Rs.35 . Let us assume that ACC will be declaring a dividend of Rs.e.e.15) 45/365)/200 = Rs.16800 i. its value in Nifty is Rs. 5. The dividend is received 15 days later and hence compounded only for the remainder of 45 days.15-0. 6. 4. What is the fair value of the futures contract? Fair value = 1200(1+0. 7.15) 60/365 – (120x10(1.
It simply involves the multiplying the spot price by the cost of carry. Assume that the spot price of SBI is Rs. What will be the price of a unit of new two-month futures contract on ACC if dividends are expected during the period? 1.08. If no dividends are expected during the life of the contract. Thus.15) 60/365 – 10(1. the futures price F = 140 (1. Like. compounded only for the remaining 45 days. Let us assume that ACC will be declaring a dividend of Rs. futures price F = 228(1. The amount of dividend received is Rs. Pricing stock futures when no dividend is expected The pricing of stock futures is also based on the cost of carry model. The dividend is received 15 days later and hence.223.37 Pricing stock futures A futures contract on a stock gives its owner the right and the obligation to buy or sell the stocks. pricing futures on that stock is very simple. we need to reduce the cost of carrying to the extent of dividend received. two and three month contracts. pricing involves reducing the cost of carrying to the extent of the dividends. .per share after 15 days pf purchasing contract. minus the present value of the dividends obtained from the stock.228. To calculate the futures price. where the carrying cost is the cost of financing the purchase of the stock.15) 45/365 = Rs. Assume that the market price of ACC is Rs. index futures. Thus. 4. 2. What will be the price of a unit of new two-month futures contract on SBI if no dividends are expected during the period? 1.15) 60/365 = Rs.10/-.30. Example: SBI futures trade on NSE as one. Pricing stock futures when dividends are expected When dividends are expected during the life of futures contract. minus the present value of the dividends obtained from the stock. stock futures are also cash settled: There is no delivery of the underlying stock. Example: ACC futures trade on NSE as one. Money can be barrowed at 15% per annum.10/.140/3.133. two and three month contracts. The net carrying cost is the cost of financing the purchase of the stock. 2.
He can be chosen at random or FIFO basis. its value is derived from something else. the OCC takes over it. he can buy a call option meaning a right to buy an asset after a certain period of time.39 OPTIONS An option is a derivative instrument since its value is derived from the underlying asset. In the case of the index option. the OCC then randomly selects a brokerage firm. Lastly. he can write a call option meaning he can sell the right to buy an asset to another investor. he can write a put option meaning he can sell a right to sell to another investor. strict margin requirement are imposed on sellers. An option by definition has a fixed period of life. but not an obligation to buy or sell an asset. Because. In the case of the stock option its value is based on the underlying stock (equity). Secondly. Out of the above four cases in the first two cases the investor has to pay an option premium while in the last two cases the investors receives an option premium. Definition: An option is a derivative i. . OCC has a certain risk that the seller of the option can’t full the contract. he can buy a put option meaning a right to sell an asset after a certain period of time. If I want to exercise an ACC November 100-call option. An investor in options has four choices before him. usually three to six months. I notify my broker. Options can be a call option (right to buy) or a put option (right to sell). This margins requirement act as a performance Bond. An option is a wasting asset in the sense that the value of an option diminishes has the date of maturity approaches and on the date of maturity it is equal to zero. It assures that OCC will get its money. It is essentially a right. its value is based on the underlying index. which is short one ACC stock. An option is valuable if and only if the prices are varying. Options clearing corporation The Options Clearing Corporation (OCC) is guarantor of all exchange-traded options once an option transaction has been completed. Thirdly. That brokerage firm then notifies one of its customers who have written one ACC November 100 call option and exercises it. My broker notifies the OCC.e. The brokerage firm customer can be chosen in two ways. It is the responsibility of the OCC who over sees the obligations to fulfill the exercises. Firstly. Once a seller has written an option and a buyer has purchased that option.
American option: American options are the options that the can be exercised at the time up to the expiration date. It is also referred to as the option premium. In the case of a put. A call option on the index is out of he money when the current index stands at a level. European options: European options are the options that can be exercised only on the expiration date itself.e. If the index is much higher than the strike price the call is said to be deep in the money. At-the-money option: An At-the-money option (ATM) is an option that would lead to zero cash flow if it exercised immediately. European options are easier to analyze that the American options and properties of an American option are frequently deduced from those of its European counter part. Option price: Option price is the price. A call option in the index is said to be in the money when the current index stands at higher level that the strike price (i. If the index is much lower than the strike price the call is said to be deep OTM. spot price < strike price). Put option: A put option gives the holder the right but the not the obligation to sell an asset by a certain date for a certain price. Expiration date: The date specified in the option contract is known as the expiration date.e. 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. Strike Price: The price specified in the option contract is known as the strike price or the exercise price. spot price = strike price). which the option buyer pays to the option seller. the exercise date. 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. In-the-money option: An in-the-money option (ITM) is an option that would lead to a positive cash flow to the holder if it were exercised immediately. In the case of a put option.40 Options Terminology. Most exchange-traded options are American. the put is in the money if the index is below the strike price. An option on the index is at the money when the current index equals the strike price (I. the put is OTM if the index is above the strike price. . the straight date or the maturity date.e. spot price > strike price). which is less than the strike price (i.
41 Intrinsic value of an option: It is one of the components of option premium. The intrinsic value of a call is the amount the option is in the money, if it is in the money. If the call is out of the money, its intrinsic value is Zero. For example X, take that ABC November-call option. If ABC is trading at 102 and the call option is priced at 2, the intrinsic value is 2. If ABC November-100 put is trading at 97 the intrinsic value of the put option is 3. If ABC stock was trading at 99 an ABC November call would have no intrinsic value and conversely if ABC stock was trading at 101 an ABC November-100 put option would have no intrinsic value. An option must be in the money to have intrinsic value. Time value of an option: The value of an option is the difference between its premium and its intrinsic value. Both calls and puts 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 options time value. At expiration an option should have no time value. Characteristics of Options The following are the main characteristics of options: 1. Options holders do not receive any dividend or interest. 2. Options only capital gains. 3. Options holder can enjoy a tax advantage. 4. Options holders are traded an O.T.C and in all recognized stock exchanges. 5. Options holders can controls their rights on the underlying asset. 6. Options create the possibility of gaining a windfall profit. 7. Options holders can enjoy a much wider risk-return combinations. 8. Options can reduce the total portfolio transaction costs. 9. Options enable with the investors to gain a better return with a limited amount of investment.
An option that grants the buyer the right to purchase a designed instrument is called a call option. A call option is contract that gives its owner the right but not the obligation, to buy a specified asset at specified prices on or before a specified date.
42 An American call option can be exercised on or before the specified date. But, a European option can be exercised on the specified date only. The writer of the call option may not own the shares for which the call is written. If he owns the shares it is a ‘Covered Call’ and if he des not owns the shares it is a ‘Naked call’ Strategies: The following are the strategies adopted by the parties of a call option. Assuming that brokerage, commission, margins, premium, transaction costs and taxes are ignored. A call option buyer’s profit/loss can be defined as follows: At all points where spot price < exercise price, here will be loss. At all points where spot prices > exercise price, there will be profit. Call Option buyer’s losses are limited and profits are unlimited. Conversely, the call option writer’s profits/loss will be as follows: At all points where spot prices < exercise price, there will be profit At all points where spot prices > exercise price, there will be loss Call Option writer’s profits are limited and losses are unlimited. Following is the table, which explains In the-money, Out-of-the-money and At-the-money position for a Call option. Exercise call option Do not exercise Exercise/Do not exercise Example: The current price of ACC share is Rs.260. Holder expect that price in a three month period will go up to Rs.300 but, holder do fear that the price may fall down below Rs.260. To reduce the chance of holder risk and at the same time, to have an opportunity of making profit, instead of buying the share, the holder can buy a three-month call option on ACC share at an agreed exercise price of Rs.250. Spot price>Exercise price Spot price<Exercise price Spot price=Exercise price In-The-Money Out-of the-Money At-The-Money
43 1. If the price of the share is Rs.300. then holder will exercise the option since he get a share worth Rs.300. by paying a exercise price of Rs.250. holder will gain Rs.50. Holder’s call option is In-The-Money at maturity. 2. If the price of the share is Rs.220. then holder will not exercise the option. Holder will gain nothing. It is Out-of-the-Money at maturity. Payoff for buyer of call option: Long call The profit/loss that the buyer makes on the option depends on the spot price of the underlying. If upon expiration, the spot price exceeds the strike price, he makes a profit. Higher the spot price, more is the profit he makes. If the spot price of the underlying is less than the strike price, he lets his option un-exercise. His loss in this case is the premium he paid for buying the option. Payoff for buyer of call option
The figure shows the profit the profits/losses for the buyer of the three-month Nifty 1250(underlying) call option. As can be seen, as the spot nifty rises, the call option is InThe-money. If upon expiration Nifty closes above the strike of 1250, the buyer would exercise his option and profit to the extent of the difference between the Nifty-close and strike price. However, if Nifty falls below the strike of 1250, he lets the option expire and his losses are limited to the premium he paid i.e. 86.60.
Payoff for writer of call option Profit 86. A put option is a contract that gives the owner the right.86. This loss that can be incurred by the writer of the option is potentially unlimited. . the buyer would exercise his option on the writer would suffer a loss to the extent of the difference between the Nifty-close and the strike price. Put option An option that gives the seller the right to sell a designated instrument is called put option. but not the obligation to sell a specified number of shares at a specified price on or before a specified date. If upon expiration.60 1250 0 Nifty LOSS The figure shows the profits/losses for the seller of a three-month Nifty 1250 call option. the buyer will exercise the option on the writer. If upon expiration the spot price is less than the strike price. Higher the spot price more is the loss he makes. the writer of the option charges premium.60. Whatever is the buyer’s profit is the seller’s loss. The maximum profit is limited to the extent of up-front option premium Rs. If upon expiration Nifty closes above the strike of 1250. the buyer lets his option un-exercised and the writer gets to keep the premium.44 Payoff for writer of call option: Short call For selling the option. Hence as the spot price increases the writer of the option starts making losses. the spot price exceeds the strike price.
Conversely. (Holder will Exercise his option only if the market price/ spot price is less than the exercise price). In the market and deliver it to the option writer for Rs.45 An American put option can be exercised on or before the specified date. the holder will gain Rs. But. there will be gain. If the spot price of the underlying is higher than the strike price.260. there will be loss. there will be profit. Payoff for buyer of put option: Long put. The profit/loss that the buyer makes on the option depends on the spot price of the underlying.250.260. Holder by a three month put option at exercise price of Rs. Lower the spot price more is the profit he makes. If upon the expiration.245. Spot price<Exercise price Spot price>Exercise price Spot price=Exercise price In-The-Money Out-of-The-Money At-The-Money . he lets his option expire un-exercised. Following is the table.15 from the contract. then the holder will exercise the option. there will be loss. a European option can be exercised on the specified date only. the spot price is below the strike price. Out-of-the Money and At-the-money positions for a Put option. the put option writer’s profit/loss will be as follows: At all points where spot price<exercise price. Exercise put option Do not Exercise Exercise/Do not Exercise Example: The current price of ACC share is Rs. Means put option holder will buy the share for Rs. A put option gives the buyer the right to sell the underlying asset at the strike price specified in the option. If the market/Spot price of the ACC share is Rs. At all points where spot price>exercise price. he makes a profit... A put option buyer’s profit/loss can be defined as follows: At all points where spot price<exercise price.245. The following are the strategies adopted y the parties of a put option. which explains In-the-money. At all points where spot price>exercise price.
The profits possible on this option can be as high as the strike price. Payoff for writer of put option . If upon expiration. His losses are limited to the extent of the premium he paid. However. As can be seen. if Nifty rises above the strike of 1250. the put option is In-The-Money.70 Nifty Loss The figure shows the profits/losses for the buyer of a three-month Nifty 1250 put option. the buyer would exercise his option on writer who would suffer losses to the extent of the difference between the strike price and Nifty-close. he lets the option expire. Nifty closes below the strike of 1250. as the spot Nifty falls. the buyer would exercise his option and profit to the extent of the difference between the strike price and Nifty-close. As the spot Nifty falls.46 Payoff for buyer of put option Profit 1250 0 61. If upon expiration. the put option is In-The-Money and the writer starts making losses. Payoff for writer of put option: Short put The figure below shows the profit/losses for the seller/writer of a three-month put option. Nifty closes below the strike of 1250.
the present value of the exercise price will fall. The more volatile the underlying security. The effect is reversed in the case of a put option. Historical volatility estimates . The value of the call option will increase with the rise in interest rates. the value of the put option will decrease. Interest Rate: The present value of the exercise price will depend on the interest rate. They are Historical Volatility and Implied Volatility. Longer the time to expiration higher is the possibility of the option to be more in the money. If the share price is less then the exercise price then the holder of the put option will get more net pay-off. Pricing Options Factors determining options value: Exercise price and Share price: If the share price is more than the exercise price then the holder of the call option will get more net payoff.70 1250 0 Nifty Loss The loss that can be incurred by the writer of the option is to a maximum extent of strike price. The buyer of a put option receives exercise price and therefore as the interest increases.47 Profit 61. There are two different kinds of volatility. Time to Expiration: The present value of the exercise price also depends on the time to expiration of the option. Since. The present value of the exercise price will be less if the time to expiration is longer and consequently value of the option will be higher. the greater is the price of the option. means the value of the call option is more. Maximum profit is limited to premium charged by him. Volatility: The volatility part of the pricing model is used to measure fluctuations expected in the value of the underlying security or period of time.
During the option period the firm should not pay any dividend. it tells us what is important and what is not. 3.PX/(e (RF)(T)) N (d2) The value of Put option as per Black scholes formula: VP=PX/(e (RF)(T)) N (-d2 )-PS N (-d1) Where d1= In [PS/PX]+T[RF+(S.D (sqrt (T)) d2= d1-S. 2. There are no short selling constraints and investors get full use of short sale proceeds. there was a wide spread belief that the expected growth of the underlying ought to effect the option price. The markets are always open and trading is continues. There are no transaction costs and taxes. The stock pays no dividend. The option must be European option. The following are the assumptions. before Black and Scholes came up with their option pricing model. 6. It doesn’t promise to produce the exact prices that show up in the market. The risk from interest rate is constant. but certainly does a remarkable job of pricing options within the framework of assumptions of the model. The beauty of black and scholes model is that like any good model. 5.D)2 / 2] / S. Implied volatility starts with the option price as a given. Black scholes pricing models: The principle that options can completely eliminate market risk from a stock portfolio is the basis of Black Scholes pricing model in 1973. 1. Black and Scholes demonstrate that this is not true. computed as per the following Black Scholes formula: VC =PS N (d1). 4.D (sqrt(T) VC= value of call option VP= value of put option PS= current price of the share . The options price for a call. Interestingly. and works backward to ascertains the theoretical value of volatility which is equal to the market price minus any intrinsic value.48 volatility based on past prices.
When no dividends are expected during the life of options the options can be valued simply by substituting the values of the stock price. we must however. Pricing American options becomes a little difficult because. with some adjustments can be used to price American calls and puts & stocks. value normal distribution area is to be identified. American options can be exercised any time prior to expiration. To use the black scholes formula for index options. strike price.49 PX= exercise of the share RF= Risk free rate T= time period remaining to expiration N (d1)= after calculation of d1. owing an option on a dividend paying stock today is like owing to options one in long maturity option with a .D= risk rate of the share In = Natural log value of ratio of PS and PX Pricing Index Option: Under the assumptions of Black Scholes options pricing model. One-just before the underlying stock goes Exdividend. stock volatility. when dividends are expected during the life of the options. If the dividend payment is sufficiently smooth. Two – at expiration of the options contract. stocks are infinitely divisible and that the index follows a diffusion process such that the continuously compounded returns distribution of the index is normally distributed. index options should be valued in the way as ordinary options on common stock. Therefore. The assumption is that the investors can purchase the underlying stocks in the exact amount necessary to replicate the index: i. N (d2)= after calculation of d2. Pricing Stock Options: The Black Scholes options pricing formula that we used to price European calls and puts. this merely involves the replacing the current index value S in the model with S/eqT where q is the annual dividend and T is the time of expiration in years.e. S. risk free rate and time to expiration in the black scholes formula. when valuing options on dividend paying stocks we should consider exercised possibilities in two situations. make adjustments for the dividend payments received on the index stocks. value normal distribution area is to be identified. Hence. it is some times optimal to exercise the option just before the underlying stock goes exdividend. However. unlike European options.
and other is a short maturity with a time to maturity from today till just before the stock goes Ex-dividend. .50 time to maturity from today till the expiration date.
In futures margins are to be paid. to perform. 2. They are approximately 15 to 20% on the current stock price. 4. In options premium are to be paid. 5. They are obligated to perform the date.51 Difference between the Futures and Options Futures Options 1. In futures either parties pay premium. 3. 2. The buyer limits the downside risk to the option premium but retain the upside potential. The holder of the contract is exposed to the entire spectrum of downside risk and had the potential for all the upside return. 5. Only the seller (writer) is obligated perform. 4. 3. In options the buyer pays the seller a premium. But they are less as compare to margin in futures. Both the parties are obligated to 1. The parties to the futures contract must perform at the settlement date only. The buyer of an options contract can exercise the option at any time prior to expiration date. .
The life of the swap can range from two years to fifty years. which a permit a barrower to access one market and then exchange the liability for another type of liability. Global financial markets present barrowers and investors with a variety of financing and investment vehicles in terms of currency and type of coupon – fixed or floating. A swap transaction usually involves an intermediary who is a large international financial institution.53 Swaps Financial swaps are a funding technique. The two payment streams estimated to have identical present values at the outset when discounted at the respective cost of funds in the relevant markets. Currency swaps. 2. Types of swaps: All Swaps involves exchange of a series of payments between two parties. The barrower might other wise as found this too expensive or even inaccessible. Interest rate swaps Interest rate swaps. Interest rate swaps. ‘B’ to pay the other party ‘A’ cash flows equal to interest at a pre-determined fixed rate on a notional principal for a number of years. . The most widely prevalent swaps are 1. A common explanation for the popularity of swaps concerns the concept of comparative advantage. The basis principle is that some companies have a comparative advantage when barrowing in fixed markets while other companies have a comparative advantage in floating markets. Swaps are used to transform the fixed rate loan into a floating rate loan. Such an exchange is referred to as an exchange of barrowings. The currencies of the two sets of interest cash flows are the same. It must be noted that the swaps by themselves are not a funding instrument: They are device to obtain the desired form of financing indirectly. which are fixed and floating in nature. For example. At the same time. as a name suggest involves an exchange of different payment streams. party ‘A’ agrees to pay ‘B’ cash flows equal to interest at a floating rate on the same notional principal for the same period of time.
They each deal with a financial intermediary such as a bank. If the reverse is true. Like interest swap. Swap spreads tend to fall. Therefore.54 Usually two non-financial companies do not get in touch with each other to directly arrange a swap. They swap to achieve the desired currency to the benefit of all concerned. The principal amounts are usually exchanged at the beginning and the end of the life of the swap. company ‘B’ does enjoy a comparative lower disadvantage in one of the markets. A point to note is that the principal must be specified at the outset for each of the currencies. though company ‘A’ has a better deal. it is difficult to envisage a situation where two companies contact a financial institution at a exactly same with a proposal to take opposite positions in the same swap. At any given point of time. the swaps spreads are determined by supply and demand. What is important to the trader who structures the swap deal is that the difference in the rates offered to the companies on both currencies is not same. They are chosen such that they are equal at the exchange rate at the beginning of the life of the swap. Example: Suppose that a company ‘A’ and company ‘B’ are offered the fixed five years rates of interest in US $ and Sterling. the swaps spread tend to rise. Also suppose that sterling rates are higher than the dollar rates. The deal could be structured such that the company ‘B’ barrows in the market in which it has a lower disadvantage and company ‘A’ in which it has a higher advantage. In both the currency markets. In real life. If no participants in the swaps market want to receive fixed rather than floating. Currency Swaps Currency swaps involves exchanging principal and fixed interest payments on a loan in one currency for principal and fixed interest payments on an approximately equivalent loan in another currency. company ‘A’ a better credit worthiness then company ‘B’ as it is offered better rates on both dollar and sterling. This creates an ideal situation for a currency swap. currency swaps are frequently ware housed by financial institutions that carefully monitor their exposure in various currencies so that they can change hedge currency risk . Also.
22 36947.08 55144.73 18 10.34 48141.73 41804.55 23590.42 47597 63438.62 24.53 18.4 25256 26499.65 24695.5 73359.33 22.27 24.11 15.81 34.1 12. 2008 Symbol Mlot LUPIN M&M MAHLIFE PFC PNB POLARIS POWERGRID PRAJIND PUNJLLOYD PURVA SASKEN BALLARPUR BAJAJ-AUTO MAHSEAMLES CNX100 CNXIT JUNIOR MINIFTY NFTYMCAP50 NIFTY WOCKPHARMA WWIL YESBANK ZEEL VOLTAS WELGUJ WIPRO TATASTEEL TATATEA TATAMOTORS TATAPOWER TCS TECHM TITAN TRIVENI TTML TULIP TVSMOTOR ULTRACEMCO UNIONBANK 700 312 350 1200 600 2800 1925 1100 750 500 1100 7300 200 600 50 50 25 20 75 50 600 3150 1100 700 900 800 600 382 275 412 200 250 200 206 1925 5225 250 2950 400 2100 TotMgn% 20.25 9825.81 20.9 49941.27 27358.23 25.36 54493.2 27984.11 10.09 48117.57 16.07 49098.36 33495.82 20.99 21.45 75081.78 19.91 40392.21 24573.33 .5 31470.12 55350 64029.89 60265.51 17.79 18.93 19.89 45815.2 12.2 58724.42 19.98 28099.47 21004.73 10.51 15.28 28.44 59872.81 66106.5 35467.35 19.32 23.53 43.75 30677.16 16.22 28146.44 24.61 40234.24 18.32 53218.16 24.08 23.13 37586.76 22.33 32.31 50775.05 TotMgnPerLt 97917.12 10.72 19.49 22.55 CURRENTLY AVAILABLE FUTURE IN NSE Span Margin:: May 30.72 27.07 24.
85 23.61 22268 61256.02 55420.38 175780.25 53168.52 29582.07 31861.62 18.68 24.16 46528.2 50167.77 64941.34 38318.75 38.9 30322.18 21.64 20.83 18.74 27.66 60274.52 21.5 46460.9 42607.75 60006.19 17.06 57264.31 18.73 30534.32 20.25 22.31 20.88 22.9 30742.49 40723.35 58020.51 40.48 63820 39324.54 20.22 15.41 26.56 UNIPHOS UNITECH VIJAYABANK STAR STER STERLINBIO STRTECH SUNPHARMA SUNTV SUZLON SYNDIBANK TATACHEM TATACOMM SESAGOA SHREECEM SIEMENS SKUMARSYNF SOBHA SRF SATYAMCOMP SBIN SCI ROLTA RPL RPOWER SAIL RECLTD REDINGTON RELINFRA RELCAPITAL RELIANCE RENUKA RNRL RAJESHEXPO RANBAXY RCOM NUCLEUS OMAXE ONGC ORCHIDCHEM ORIENTBANK PANTALOONR PARSVNATH PATELENG PATNI PENINLAND PETRONET MARUTI MATRIXLABS MCDOWELL-N 700 900 3450 850 219 2500 1050 225 1000 1000 1900 675 525 75 200 376 1900 350 1500 600 132 800 900 1675 500 1350 1950 500 138 138 75 5000 1788 1650 800 350 550 650 225 1050 1200 500 700 250 650 2750 2200 200 1250 125 16.37 .29 21.08 22.33 44017.22 87743.62 58316.87 24.67 15.05 50726.79 22.42 55616.7 63426.33 25.5 35808.94 98318.24 16.54 22.82 30.44 67888.89 16.65 21.71 19.07 17.45 17.89 30.98 22.4 61719.41 17.12 20.35 18.4 30958.61 27.32 15.36 16.17 51318.72 69628 41185 34261.39 22.83 23438.31 27.75 51687.01 35597.98 19.61 38039.51 37.84 38.1 41218.68 39998 53168.18 21.46 32533.8 24045 89014.15 30988.03 33368.5 15.18 28.
19 16.27 24.38 27284.73 67782.64 27.13 31.94 49386.75 47263.99 16.08 28406.78 19.51 34263.01 23.34 15.19 15.3 38048.43 103176.25 35509.95 44286.45 30114.69 49565.85 28.13 27.13 52752.22 18.19 28.75 33810 21374.94 45192.69 23.27 39687.96 17.15 51851.97 30789.23 23584.7 31.7 22.38 25.3 15.7 20.38 18.84 67583.25 45242.04 24.12 18.58 25.83 54124.53 35599.01 48546.32 66925.36 25.84 23.82 55846 38541.73 46707.07 30828 38081.5 35349.96 17.63 15.96 20.7 15.39 56255.25 20.82 37819.67 19.91 57113.6 22.64 27438.47 .11 16.07 20.74 48797 71380.46 30.95 64386.19 16.13 47520.57 MOSERBAER INFOSYSTCH IOB IOC IRB ISPATIND ITC JINDALSAW JINDALSTEL JPASSOCIAT JPHYDRO JSTAINLESS JSWSTEEL KESORAMIND KOTAKBANK KPIT KTKBANK IVRCLINFRA IVRPRIME J&KBANK JETAIRWAYS IDBI IDEA IDFC IFCI INDHOTEL INDIACEM INDIAINFO INDIANB INDUSINDBK GDL GESHIP GITANJALI GLAXO GMRINFRA GNFC GRASIM GTL GTOFFSHORE GUJALKALI HAVELLS HCC HCLTECH HDFC HDFCBANK HDIL HEROHONDA HINDALCO HINDOILEXP HINDPETRO 825 200 1475 600 1100 4150 1125 250 160 750 3125 1000 275 500 275 1650 1250 500 800 300 400 1200 2700 1475 1970 1899 725 250 1100 1925 2500 600 500 300 1250 1475 88 750 250 1400 400 1400 650 75 200 400 400 1595 1600 1300 23.86 45.1 19.13 30529.08 17.39 20.72 23.25 34802.73 19.25 22.76 39.55 29849.66 24.15 74003.24 52943.05 38431.91 20.54 39546.22 16.25 39912.17 44798 91804.45 19.
25 20.95 25.86 60673.17 17.15 20.89 16.93 22813.53 33422.75 26.64 20.11 40180.17 45425.72 15.72 54736.01 .17 65074.79 62822.13 43652.74 16.06 56013.29 22.11 25.5 38130 22073.07 42213 40240.18 37495 43678.9 28.7 32.11 33075.48 31.44 40689 31760.93 53535.92 46027 46115.43 34458.58 23.83 16.96 34464.15 46790.44 62881.82 36.82 30.66 23271.23 25.12 47380.99 77011.28 20.1 31841.63 64169.55 23.7 19.12 18.21 16.04 129217.58 HINDUJAVEN HINDUNILVR HINDZINC HOTELEELA HTMTGLOBAL I-FLEX BEML BHARATFORG BHARTIARTL BHEL BHUSANSTL BINDALAGRO BIOCON BIRLAJUTE BOMDYEING BONGAIREFN BOSCHLTD BPCL GAIL IBN18 BANKNIFTY BRFL BRIGADE CAIRN CANBK CENTRALBK CENTURYTEX CESC CHAMBLFERT CHENNPETRO CIPLA CMC COLPAL CORPBANK CROMPGREAV CUMMINSIND DABUR DCB DENABANK DIVISLAB DLF DRREDDY EDELWEISS EDUCOMP EKC ESCORTS ESSAROIL FEDERALBNK FINANTECH 3IINFOTECH 500 1000 250 3750 500 150 125 1000 250 75 250 4950 450 850 300 2250 50 550 750 1250 25 1150 550 1250 800 2000 212 550 3450 900 1250 200 550 600 500 475 2700 1400 2625 155 400 400 250 75 1000 2400 1412 851 150 2700 36.42 48003.56 29396.77 13.32 21613.42 20.48 22.93 44.65 36.58 44.74 32163.29 15.64 33641.47 15.75 34187.4 67873.79 15.64 15.91 25.27 16.19 21.03 18.73 27.7 20.35 20.33 40475.28 15.93 43661.55 29988.75 38084.6 18.35 52524.82 18.56 104838.44 21788.74 17.88 103116.75 38216.63 22.04 15.53 50649.54 15.04 91901.02 22.
55 62757.42 39272.5 25610.87 30.05 61664.71 21.19 25.3 33.2 29946 31697.11 59477.03 18.61 15.32 22.96 69537.63 47318.94 36.54 27.01 42045.16 49074.81 42329.69 65216.72 28.94 42.93 22.86 45537.7 41189.97 19.27 28.88 18.12 47146.69 32.31 25.95 27.3 39333.82 21.59 ABAN ABB ABIRLANUVO ACC ADLABSFILM AIAENG AIRDECCAN ALBK ALOKTEXT AMBUJACEM AMTEKAUTO ANDHRABANK ANSALINFRA APIL APTECHT ARVINDMILL ASHOKLEY AUROPHARMA AXISBANK BAJAJHIND BAJAJHLDNG BALRAMCHIN BANKBARODA BANKINDIA BATAINDIA BEL NIITTECH NTPC MPHASIS MRPL ICICIBANK MTNL NAGARCONST NAGARFERT NATIONALUM NAUKRI NDTV NETWORK18 NEYVELILIG NICOLASPIR NIITLTD LAXMIMACH LICHSGFIN LITL LT 50 250 200 188 225 200 850 2450 3350 2062 600 2300 1300 200 650 4300 4775 700 225 950 250 2400 700 950 1050 138 1200 1625 800 2225 175 1600 1000 3500 575 150 550 500 1475 750 1450 100 850 425 50 24.22 16.2 61327.28 43576.99 19.77 15.13 48489.32 53407.27 50382.04 44482.98 52847.67 18.73 55988.92 20.92 27.71 28.22 45315.41 29.91 24.54 22.71 16.2 27.93 62621.04 32973.25 .35 25524.04 17.94 37088.55 36612.39 27616.89 27757.25 19.86 44746.44 18.21 69574.5 29407.63 69809.92 35664.83 28.05 16.79 15.23 27933.5 28992.38 38933.98 18.73 23.03 15.36 26.72 19.53 37859.55 22.74 28863.91 17.97 45840.5 19511.
14000.14000 (14x1000).14. Net outlay is Rs.62 BASIC OPTION STRATEGIES Long call Market View Action Profit Potential Loss Potential Bullish Buy a call option Unlimited Limited To make a profit from an expected increase in the price of an underlying share during option’s life: Situation: On 28th April.46.14.40 (300-260)*1000 Analysis Rises by Rs.14 (premium). Share price (Cash market) 28 April 28 July Rs. and the July Rs. So. CIPLA is quoting at Rs.26000. If CIPLA shares go up we can close the position either by selling the option back to the market or exercising the right to buy the underlying shares at the exercise price. Action: Buy 1CIPLA calls at Rs. Return 18% Gain: units =m Rs.300 Option worth Rs. cost = 14000. Closing the . Possible Outcome at Expiry Share price Rs.40000. Option sale = Rs. We expect the share price to rise significantly and want to make a profit from the increase.40000. Net gain Rs.300 Option market Buy 1 July 260 call at Rs.260 (strike price) Call costs Rs.254.40000. 1. Net Profit = Rs. Market lot for CIPLA is 1000. Sell 1 Jan contract (expiry) 2.254 Rs. Premium Paid = Rs.
300 Option market Buy Jan 240 call @ Rs. To establish a maximum cost at which to purchase shares at a lesser date if funds are not available immediately: Situation: On 28th April. the option expiry day. by whatever amount the share price exceeds Rs.e.25000 (25x1000) 1.254 Rs.274. The loss is Rs. Sell 1 Jan 240 call option (or) 2. He does not have the sufficient funds to buy the shares and decides to again exposure to the stocks and therefore participate in the rise by buying a call option.26000 Share price<260 Share price>274 Option expires worthless. If the share price increases.25000 and purchase share on 28th July.14000 (premium paid) Net profit = Intrinsic value of (Break even = 260+14) option i. an investor takes the view that CIPLA’s share price is likely to rise over the coming months. Exercise 1 Jan 240 call and purchase 1000 shares at 240000.25 for total outlay of Rs. .63 position now will produce a net profit of Rs. Action: Buy 1 July 240-call option CIPLA at Rs. Share price (Cash market) 28 Apr 28 July Rs. selling the call option releases income to offset the higher share to be acquired at the exercise price that is below the share price.
60000 = Rs.25 per share) and if the share does not rise as anticipated.265000 Possible outcome at Expiry Share price > Rs.265 Break even (240+25) Net profit = Intrinsic value of the option less cost of purchase i.25 rather than Rs.240000 Net outlay Rs. Break-even value.35000.254 per share helps cash flow. Total loss Rs.25000 Exercise option =Rs.25 (265-240).e. In gaining exposure to stock through call option. he guarantees exposure for limited outlay (i. the investor has secured two major advantages. the payment of Rs.e. Option worth is Rs.64 Analysis Rises by Rs. the maximum loss is limited to the premium paid. the amount by which the share price exceeds breakeven Share price = Rs. = Rs.265 values.265 (240+25) in three-month time.265/share. Rs. Sale of option Net profit = Rs.25000 2. Firstly. To hedge against a fall in share value over coming months: . Cost of purchase = Rs. Secondly. Option purchase = Rs.25000 (Cost of purchase) This simple strategy provides investor with maximum effective buying price of Rs.46 (300-254) 1. Share price < 240 Option expires worthless.
He has made a considerable gain of his investment and he is concerned that he should not lose any of that profit.140000. The released money is now available for re-investment and a small proportion will fund the call purchase. believes that the share price may decrease soon.340000 (original share holding of 10000 if nor sold). sell 10000 shares Buy 10 July 260 call at Possible outcome at expiry Share price < Rs. However.40x10000 = 400000 (254-214 = 40).254.14 worth Rs. Action: Sell 10000 CIPLA shares at Rs. number of market lots = 10000/1000 = 10) 260-calls at Rs. Rs. Share price (Cash market) 28 Apr 28 July Analysis for Rs. if the price continues to rise instead.254 each. he does not want to miss out that profit.14 Rs.140000 (premium paid) instead of Rs. which is equal to the Share price between 260 & 274 Share price > 274 amount of premium paid.260 Option expires worthless creating maximum loss. (Or) Exercise option. Sell the option for any intrinsic value to recover some of their cost. the investor books profit of Rs.65 Situation: An investor holding 10000 CIPLA share at Rs.254 each and buy 10 (for 10000 shares. Sell the option for intrinsic value and take more profit. Rs.220 Fall of Rs.34 Option market Rs.2554000. . Option expires worthless Total loss = Rs. which originally purchased at Rs.140000.200.
140000 (14x10000). He received an option premium of Rs.66 Short call To earn additional income from a static shareholding.260 each if the holder exercises the option Share price (Cash market) 28 Apr Rs.14 and investor sells 10 contracts (one contract = 1000 shares). he does not expect their price to move very much in the next few months. an investor holds 10000 shares. Market View Action: Profit Potential Loss Potential Bullish Sell call against an existing shareholding Limited Limited Situation: On 28th April CIPLA share is trading at Rs.14 Income = Rs.254. he decides to write call option against this shareholding.254 No change in shareholding . Action: The July 260 calls are trading at Rs.254 Option market Sell 10 July 260 calls @ Rs. Option expires worthless Profit = Rs.140000 (Option Premium received) 28 July Analysis Rs. So.140000 and takes on the obligation to deliver 10000 shares at Rs. over and above any dividend earnings. in terms of premium received on writing the option (Covered short call).
420. The option expires worthless.254 at Rs. .420 (406-9). This effectively produced a total sale price of Rs.9 (premium) Income = Rs.397 Share price > Rs.23 on the original purchase price. (260+14). For 1000 shares Total outlay = Rs. Share price 28 Apr Option market Sell 1 Reliance call at Rs. At investor thinks that the shares have a long-term price rise potential. Buy 1000 Reliance shares at Rs.429.67 Possible Outcome at Expiry Share > Rs.406000 Possible Outcome at Expiry Share price < Rs.406.406. an increase of Rs.260 The holder will exercise his option.274 Share price < 260 To reduce the cost of stock purchase: Situation: It is early April and Reliance share is trading at Rs. thus effectively reducing the original cost of the shares to Rs.9. The investor as a writer will sell shares originally purchased for Rs. but before the end of the July he does not expect the share to go above Rs.420 Action.406 per share and sell Reliance July 420 call at Rs. The option will be exercised and the shares have to be sold at Rs.420 The option will not be exercised and the investor will retain both the shares and the option premium.9000 (1000x9) (Cash market) Rs.
20000 [Rs.8.20000. Possible Outcome at Expiry Share price = Rs.12 (20-8). An investor thinks GAIL share is overvalued and may fall substantially.260 Put at Rs. Action: Buy 1 GAIL July Rs. if the . 28 July Rs.240 The put will be trading at Rs.8000. He therefore decides to buy Put option to gain exposure to its anticipated fall.8 for a total consideration of Rs.8000. Total outlay = Rs.68 Long put Market View Action Profit Potential Loss Potential Bearish Buy a Put option Unlimited Limited To make profit.270 Option market Buy 1 GAIL July put at Rs. Net profit = Rs.8000 Option sale = Rs. Sell 1 July contract.270.30.12000. Share price (Cash market) 28 Apr Rs.240 Analysis Fall of share price Rs.20 (260-240) x 1000 (Lot)] Option purchase = Rs. Net gain = Rs. which gives a profit of Rs.20. from a fall in value of share price: Situation: Current price of GAIL is Rs.
Since. Rs.270 in the expectation that the share price will rise. Sale of option = Rs.8 per share) Less.8000 (8x1000) Exercise the Rs260 put option.260 put option. but he is concerned about its short-term performance. Buying option = Rs.240000 Analysis: In cash market the share price decreased to Rs. Action: Buy 1000 shares of GAIL at Rs.8000 (premium Rs.18000 By buying the put option simultaneously the investor’s loss is decreased to Rs. Share purchase =Rs.240.270 each and buy one GAIL July 260 put at Rs.260 put option.240. If the investor purchases the Rs. He feels that he could effort to see the shares as low as Rs.240 each in cash market and will sell the same in the options market by exercising the Rs.240 Total worth = Rs.8.260 put option. Share price (Cash market) 28 Apr Rs.217.69 position is closed out.250.260000 Net Loss instead of Rs.18000 Option market Rs.260 put @ . = Rs.8. he participates in any further rise in the share price above Rs.27000 20 July Rs.30000.270000 Add. Then Loss = 30000 (27000-24000). the investor holds the stock. Share price between 240 & 260 Protect a share purchase by simultaneously buying put options: Situation: An investor wants to buy GAIL shares at the current price of Rs. When the share price in cash market is Rs.270 buy 1000 shares at Buy 1 July Rs. Recover intrinsic value premium. Cost = Rs. he will buy 1000 shares for Rs. If the investor does not purchase the Rs.
40. To buy a stock at a price which is lower than the current available price in the market.240 puts at Rs. Share price < Rs. In early April he feels that the share price of NIIT will either remain constant or slightly rise.242.400000 (premium received). Possible Outcome at Expiry Share price > (or) = Rs.550 The investor’s expectation is correct and the put will expire unexercised.5100000 (5500000-400000).550 Profit = Rs.70 Short put Market View Action Profit Potential Loss Potential Bearish Sell put option Limited Unlimited To generate earnings on portfolio of shares: Situation: An investor owns 10000 shares of NIIT and also has cash holding of around Rs.400000 (40x10000 shares).6000000. Action: The investor decides to generate some additional income on his portfolio writes 10 NIIT Rs. The put option will be exercised and the stock will have to be purchased for Rs.550 puts at Rs. Action: Sell 10 L&T July Rs. Situation: The shares of L&T are currently trading at Rs. Thus he received a premium of Rs. Share price (Cash market) Option market .10.
230 i. Possible Outcome at Expiry Share price < Rs.71 28 Apr Rs.10 below the current Share price > Rs.242 Sell 10 July Rs.100000 Option is exercised.240 The put writer will take delivery of the stock at Rs.240 puts at Rs.10. .230 Total outlay = Rs.240 market price.e. 28 July Rs. The option will not be exercised and the investor keeps the premium. Rs.
ALBK ANDHRABANK ARVINDMILLS ASHOKLEYLAND BAJAJ AUTO BANK OF BARODA BANK OF INDIA BHARAT ELECTRICALS BHARATFORG BHARTI BHEL BPCL CADILAHC CANARA BANK CENTURY TEXTILES CHENNAI PETRO CIPLA COCHIN REFINARY COLGATE DABUR Dr. REDDY GAIL GE SHIPPING GLAXO GRASIM Market Lot 100 100 200 750 2450 2300 2150 9550 200 1400 1900 550 200 1000 300 550 500 1600 850 950 1000 1300 1050 1800 200 1500 1350 300 175 .72 LOT SIZES OF DIFFERENT COMPANIES Index/Scrip CNXIT NIFTY ABB ASSOCIATED CEMENT COMPANIES.LTD.
73 GUJARATH AMBUJA CEMENT HCL TECH HDFC HDFC BANK HERO HONDA HINDALCO HLL HPCL I-FLEX ICICI BANK IDBI INDHOTEL INDRAYON INFOSYS INDIAN OVERSEAS BANK INDIAN OIL CORPORATION IPCL ITC JET AIRWAYS JINDAL STEEL JP HYDRO KIRLOSKCUM LIC HOUSING FINANCE M&M MARUTI UDYOG MATRIX LABS MRPL MTNL NALCO NEYVELI LIGNITE NICOLASPIR NTPC 550 650 300 400 400 150 2000 650 300 700 2400 350 500 100 2950 600 1100 150 200 250 6250 1900 850 625 400 1250 4450 1600 1150 2950 950 3250 .
74 ONGC ORIENTAL BANK OF COMMERCE PATNI PUNJAB NATIONAL BANK POLARIS RANBAXY RELIANCE RELIANCE CAPITAL RELIANCE INDUSTRIES LTD. In the recent years advances in financial markets and the technology have made derivatives easy for the investors. . SATYAM STATE BANK OF INDIA SCI SIEMENS STER SUN PHARMA SYNDICATE BANK TATA CHEMICALS TATA MOTORS TATA POWER TATA TEA TATA CONSULTANCT SERVICES TISCO UNION BANK OF INDIA UTI BANK VIJAYA BANK VSNL WIPRO WOCKPHARMA 300 600 650 600 1400 200 550 1100 600 600 500 1600 150 350 450 3800 1350 825 800 550 250 675 2100 900 3450 1050 300 600 CONCLUSION Derivatives have existed and evolved over a long time. with roots in commodities market.
SEBI should take actions to create awareness in investors about the derivative market. participation of FII in the derivative market. Trading in derivatives require more than average understanding of finance. Introduction of derivatives implies better risk management. Being new to markets maximum number of investors have not yet understood the full implications of the trading in derivatives. These markets can give greater depth. Successful risk management with derivatives requires a through understanding of principles that govern the pricing of financial derivatives. . In order to increase the derivatives market in India SEBI should revise some of their regulation like contract size. stability and liquidity to Indian capital markets. Contract size should be minimized because small investor cannot afford this much of huge premiums.75 Derivatives market in India is growing rapidly unlike equity markets.
profit. The derivatives products give the investor an option or choice whether to exercise the contract or not. he has the full liberty to get out of the option contract and go ahead and buy the asset from the stock market. Though the use of derivatives does not completely eliminate the risk. The use of derivative equips the investor to face the risk. However. Options give the choice to the investor to either exercise his right or not. but it certainly lessens the risk. these instruments act as a powerful instrument for knowledgeable traders to expose them to the properly calculated and well understood risks in pursuit of reward i. If an expiry date the investor finds that the underlying asset in the option contract is traded at a less price in the stock market then. which is uncertain.76 Suggestions to Investors The investors can minimize risk by investing in derivatives.e. So in case of high uncertainty the investor can go for options. It is advisable to the investor to invest in the derivatives market because of the greater amount of liquidity offered by the financial derivatives and the lower transactions costs associated with the trading of financial derivatives. .
sharekhan.org .geojit.77 Bibliography Indian financial system Investment management Publications of National Stock Exchange Websites www.bseindia.M.sebi.com www.org www.icicidirect.V.K.Y.gov. Bhalla .nseindia.in www.hseindia.com www.com www.moneycontrol.com www.com www.com www.indianfoline. Khan .
This action might not be possible to undo. Are you sure you want to continue?
We've moved you to where you read on your other device.
Get the full title to continue listening from where you left off, or restart the preview.