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 is not based on the international perspective of the Derivatives Markets. any alternation may come. The study cannot be said as totally perfect.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 has only made humble attempt at evaluating Derivatives markets only in Indian context.

from Newspapers.e.5 Research Methodology The type of research adopted is descriptive in nature and the data collected for this study is the secondary data i.  As the time was limited. Magazines and Internet. . Limitations:  The study was conducted in Hyderabad only. study was confined to conceptual understanding of Derivatives market in India.

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Commodities broking. data processing IT enabled services. software product development and marketing.. It has been rated as No.1 Private sector life insurance Company.. 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. TDA and Reeshanar. GOI Relief bonds. not just once but three times in a row and counting. E-Commerce of all types including .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. a must read for investors in south Asia is how they choose to describe India info line. Stock and Commodities broking is offered under the trade name 5paisa. Its institutional investors include Intel Capital (world's) leading technology company. India info line group offers the entire gamut of investment products including stock broking. software development services. which is India' No. Fixed Deposits.l the category of Business News in Asia by Alexia rating. 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. a wholly owned subsidiary of India Infoline Ltd. Post office savings and life Insurance. ICICI.. Mutual Funds. India Infoline Commodities pvt Ltd. India Infoline is the leading corporate agent of ICICI Prudential Life Insurance Company. CDC (promoted by UK government). www.. selling advertisement space on the site.indiainfoline. To engage or undertake software and internet based services. computer consultancy services. software supply services.

foreign financial institutions. To undertake. financial institutions. 3. preparations of corporate / industry profile etc. study. PMS E. E-broking. A. debentures. capital funding proposals.8 electronic financial intermediation business and E-broking. corporate business houses. survey. Derivatives and Commodities brand name of 5paisa 1. Govt of India bonds. and trade / invest in researched securities. Distribution: 1. 2. industries. ventures. Distribution C. Insurance D. Mortgages. market research. probe. promote any kind of research. competitive analysis. agricultural and mineral. capital market on matters related to investment decisions primary equity market. developmental work on economy. Fixed deposits C. Equities 2. investigation. help. conduct. Derivatives 3. Products: the India Infoline pvt ltd offers the following products A. Mutual funds 2. carry on. B. bond. Commodities B. 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”. Insurance: under the . business and management consultancy.

India Info line Ltd. Is the corporate agent of ICICI Prudential Life Insurance. it also undertakes research. Indian Info line Securities Pvt. etc. India Infoline. Mobilizes Mutual Funds and other personal investment products such as bonds.9 1.Indiainfoline. NSE and DP with NSDL. fixed deposits. The parent company. is a member of BSE.com. engaged in engaged in distinct yet complementary businesses which together offer a whole bouquet of products and services to make your money grow. Health insurance THE CORPORATE STRUCTURE The India Info line group comprises the holding company. is a registered commodities broker MCX and offers futures trading in commodities. . which has 5 wholly-owned subsidiaries. engaged in selling Life Insurance products? India Info line Commodities Pvt. Ltd. Life insurance policies 2. 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. India Info line Insurance Services Ltd. India Info line Ltd owns and managers the web properties www. Customized and off-the-shelf. Its business encompasses securities broking Portfolio Management services.5paisa. General insurance 3.com Distribution Company.Com and www. Ltd.

Pictorial Representation of India infoline Ltd .. is proving margin funding and NBFC services to the customers of India info line Ltd..10 India info line services Pvt Ltd.

Mukesh sing Seshadri Bharathan S sriram Sandeepa Vig Arora Darmesh Pandya Toral Munshi Anil mascarenhas Pinkesh soni Harshad Apte Director. India infoline securities Pvt Ltd. Satpal khattar –Reeshanar investment. Technology Vice president. R.11 Management of India info line Ltd.(All Indian Rank 2 ). Singapore the key management team comprises seasoned and qualified professionals. India infoline is a professionally managed company /s day to day affairs as executive Directors have impeccable academic professional track record . And an Electronic engineering degree from IIT. He spent eight fruitful years in equity research sales and private equity with the cream of financial houses such as ICICI group. Alternative channel Vice president. portfolio Management Services Vice president . where he inter alia handle commodities trading and export business . The non-executive directors on the board bring a wealth of experienced and expertise.is a Chartered Account .He had successful career with Hindustan Lever . Nirmal jain . India infoline. kharagpur. Director.E capital. Research Chief Editor Financial controller Chief Marketing officer . is armed with a post-graduate management degree from IIM Bangalore. chairman and managing director .Cost Account . (All India rank 1)and has a post-graduate management degree from IIM Ahmedabad .Venkataraman Director. Barclays de Zoette and G.com distribution co Ltd Vice president.. Later he was CEO of an equity research organization.

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loan whether secure or unsecured. As instruments of risk management. which derives its value from the prices. futures and options. these generally do not influence the fluctuations underlying prices. Through of derivatives of products. share. of underlying securities. which has been derived from another variable. risk instrument or contract for differences or any other form of security. a measure of weight in pound could be derived from a measure of weight in kilograms by multiplying by two. Derivatives is a key to mastery of the topic. The word originates in mathematics and refers to a variable. Without the underlying product and market it would have no independent existence. as: A. A security derived from a debt instrument. By their very nature. derivatives products minimize the impact of fluctuations in asset prices on the profitability and cash flow situation of risk–averse investors. However.13 DERIVATIVES The emergence of the market for derivative products. or index of prices. Index or a Commodity. B. most notably forwards. . In financial sense. Without having an interest in the underlying product market. 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. Bond. can be traced back to the willingness of risk-averse economic agents to guard themselves against uncertainties arising out of fluctuations in asset prices. these are contracts that derive their value from some underlying asset. A contract. Some one may take an interest in the derivative products. DEFINITION Understanding the word itself. by locking –in asset prices. For example. Underlying asset can a Stock. Currency. the financial markets are marked by a very high degree of volatility. it is possible to partially or fully transfer price risks by locking –in asset prices.

It is so because. Suppose he buys insurance [a derivative instrument on the bike] he reduces his risk. derivatives would not create any risk. which may be a share. More over. For example. he runs a big risk. If does not take insurance. Derivatives instruments can be used to minimize risk. They simply manipulate the risks and transfer to those who are willing to bear these risks. currency. hedging through derivatives reduces the risk of owing a specified asset. actual delivery of the underlying asset is not at all essential for settlement purposes. Derivatives are used to separate risks and transfer them to parties willing to bear these risks. 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. etc. . having an insurance policy reduces the risk of owing a bike. Thus.14 IMPORTANCE OF DERIVATIVES Derivatives are becoming increasingly important in world markets as a tool for risk management. A owns a bike. Similarly. when we use derivatives for hedging. Mr.

These forces are to a large extent controllable and are termed as “Non-systematic Risks”. Political 3. There are various influences. . There are other types of influences. We therefore quite often find stock prices falling from time to time in spite of company’s earnings rising and vice –versa.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. Those are 1. being able to buy & sell relatively large amounts quickly without substantial price concessions.systematic risks by having a well-diversified portfolio spread across the companies. Their effect is to cause the prices of nearly all individual stocks to move together in the same manner. For instance inflation interest rate etc. Rational behind the development of derivatives market is to manage this systematic risk. Sum are internal to the firm bike:  Industry policy  Management capabilities  Consumer’s preference  Labour strike. Price or dividend (interest). and they are termed as “systematic risks”. An investor can easily manage such non. Sociological changes are sources of Systematic Risk. cannot be controlled. industries and groups so that a loss in one may easily be compensated with a gain in other. which are external to the firm. which affect the returns. which would be much lesser than what he expected to get. Economic 2. Liquidity means. 2. liquidity. 1. etc.

CHARACTERISTICS OF DERIVATIVES 1. a much larger portion of the total risk of securities is systematic. These factors favor for the purpose of both portfolio hedging and speculation.16 In debt market. 3. Their value is derived from an underlying instrument such as stock index. They are leveraged instruments. currency. a need was felt to introduce financial products like other financial markets in the world. 2. etc. India has vibrant securities market with strong retail participation that has evolved over the years. 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. Debt instruments are also finite life securities with limited marketability due to their small size relative to many common stocks. They are vehicles for transferring risk. . However.

Speculators. Hedgers seek to protect themselves against price changes in a commodity in which they have an interest. Arbitrageurs. Hedgers. which manages the risk. Arbitrageurs: Risk less profit making is the prime goal of arbitrageurs. 3. Speculators: They are traders with a view and objective of making profits. 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. They are willing to take risks and they bet upon whether the markets would go up or come down. . They could be making money even with out putting their own money in. 2. 1. is known as “Hedger”.17 MAJOR PLAYERS IN DERIVATIVE MARKET There are three major players in their derivatives trading. Hedgers: The party. and such opportunities often come up in the market but last for very short time frames.

They can be regarded as portfolios of forward contracts. . the majority of options traded on options exchanges having a maximum maturity of nine months. quantity. delivery.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. 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. Futures contracts are special types of forward contracts in the sense. Options generally have lives up to one year. Liquidity and default risk are very high. These are options having a maturity of up to three years. that the former are standardized exchange traded contracts. Warrants: Longer – dated options are called warrants and are generally traded over – the – counter. quality. time and place. 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. Forward contracts offer tremendous flexibility to the party’s to design the contract in terms of the price.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. The underlying asset is usually a moving average of a basket of assets. 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. LEAPS: The acronym LEAPS means Long Term Equity Anticipation Securities. Baskets: Basket options are options on portfolios of underlying assets. 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. Options: Options are two types .

Also known as default or counterpart risk. D. RISKS INVOLVED IN DERIVATIVES Derivatives are used to separate risks from traditional instruments and transfer these risks to parties willing to bear these risks. Market Risk: Market risk is a risk of financial loss as result of adverse movements of prices of the underlying asset/instrument.19 Currency swaps: These entail swapping both the principal and interest between the parties. with the cash flows in one direction being in a different currency than those in opposite direction. The fundamental risks involved in derivative business includes A.  Related to the funding of activities of the firm including derivatives. A firm faces two types of liquidity risks:  Related to liquidity of separate products. Credit Risk: This is the risk of failure of a counterpart to perform its obligation as per the contract. C. therefore the legal aspects associated with the deal should be looked into carefully. Legal Risk: Derivatives cut across judicial boundaries. . Liquidity Risk: The inability of a firm to arrange a transaction at prevailing market prices is termed as liquidity risk. it differs with different instruments. B.

If they matched the last two digits they got Rs. with the launch index Futures on sensex and nifty futures respectively. Index Options was launched in june2001.Gamblers preferred using the New York cotton price because the cotton market at home was less liquid and could easily be manipulated. to refashion its capital market to attract western investment. Fifty years ago. stock options in July 2001.for every Rupee layout. and stock futures in November 2001. Now.2Lakhs by Securities and Exchange Board of India. Over the last couple of years the National Stock Exchange has pushed derivatives trading. around the time India became independent men in mumbai gambled on the price of cotton in New York. For example sensex is 6750 then the contract value of a futures index having sensex as underlying asset . If they guessed the last number. 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. This difference of market lot arises due to a minimum specification of a contract value of Rs. They bet on the last one or two digits of the closing price on the New York cotton exchange. 2000 BSE and NSE became the first exchanges in India to introduce trading in exchange traded derivative products. A hybrid over the counter derivatives market is expected to develop along side.7/. India is about to acquire own market for risk. Derivatives Segments In NSE & BSE On June 9. emerging from a long history of stock market and foreign exchange controls.20 DERIVATIVES IN INDIA Indian capital markets hope derivatives will boost the nations economic prospects. is one of the last major economies in Asia.72/. The country. they got Rs. which was established by India's leading institutional investors in 1994 in the wake of numerous financial & stock market scandals. by using fully automated screen based exchange.

There is daily as well as final settlement.. For instance on July 1. Margins: There are two types of margins collected on the open position. viz. As long as the position is open. Contract Periods: At any point of time there will be always be available nearly 3months contract periods. the difference will be credited or debited accordingly and the position shall be brought forward to the next day at the daily settlement price. initial margin which is collected upfront and mark to market margin. For example in the month of June 2005 one can enter into their June futures contract or July futures contract or august futures contract. index futures at NSE shall be traded in multiples of 100 and a BSE in multiples of 30. Settlement: The settlement of all derivative contracts is in cash mode. if Nifty is 2100 its futures contract value will be 100x2100=210000. which is to be paid on next day. Similarly. the same will be marked to market at the daily settlement price.e. July futures contract and august futures contract respectively. Out standing positions of a contract can remain open till the last Thursday of that month. Every transaction shall be in multiples pf market lot. Thus. a new futures contract will get introduced automatically. 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. As per SEBI . June futures contract becomes invalidated and a September futures contract gets activated.21 will 30x6750 = 202500. When futures contract gets expired. Any position which remains open at the end of the final settlement day (i. last Thursday) shall closed out by the exchanged at the final settlement price which will be the closing spot value of the underlying asset. July 28 and august 25 shall be the last trading day or the final settlement date for June futures contract. The June 30.

Position limit: It refers to the maximum no of derivatives contracts on the same underlying security that one can hold or control. Therefore. fail in which the outstanding positions or required to be closed out. Members of F&O segment: There are three types of members in the futures and options segment. 3 percent notional value of gross open position in index futures and short index options contracts. banks and custodians become professional clearing members. to spread awareness among investors. The clearing members are the members of the clearing corporation who deal with payments of margin as well as final settlements. The professional clearing member is a clearing member who is not a trading member. clearing member level and market levels are different.22 guidelines it is mandatory for clients to give margins. . Trading members are the members of the derivatives segment and carrying on the transactions on the respective exchange. Typically. The position limits are applicable on the cumulative combined position in all the derivatives contracts on the same underlying at an exchange.33 times the liquid net worth of a clearing member. trading cum clearing member and professional clearing members. 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. 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. 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. It is mandatory for every member of the derivatives segment to have approved users who passed SEBI approved derivatives certification test. Position limits are imposed with a view to detect concentration of position and market manipulation. Position limits are imposed at the customer level. They are trading members.

If the chairman is broker/dealer. Position limits be used for improving market quality. which are accessible to the investors in the country. • Information about traded quantities and quotes should be disseminated by the exchange in the real time over at least two information-vending networks. • • The exchange should have at least 50 members to start derivatives trading. • 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. The members of an existing segment of the exchange will not automatically become the members of derivatives segment. then he should not carry on any broking and dealing on any exchange during his tenure.23 Regulatory Framework: Considering the constraints in infrastructure facilities the existing stock exchanges are permitted to trade derivatives subject to the following conditions. An independent clearing corporation should do the clearing of the derivative market. . • • • Trading should take place through an online screen based trading system. which monitors positions. The derivatives trading should be done in a separate segment with a separate membership. • The chairman of the governing council of the derivative division/exchange should be a member of the governing council. price and volumes in real time so as to detect market manipulations.

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that is the value of the contract is positive for him. it costs nothing to the either party to hold the long/short position. if the price of the asset prices rises sharply after the two parties have entered into the contract.e. A forward contract can therefore. This specified price referred to as the delivery price. The concept of forward price is also important. The forward price for a certain contract is defined as that delivery price which would make the value of the contract zero. the forward price and the delivery price are equal on the day that the contract is . One of the parties in a forward contract assumes a long position i. These are instruments are basically used by traders/investors in order to hedge their future risks. In other words. For example. a key determinate of the value of the contract is the market price of the underlying asset. Therefore. This delivery price is chosen so that the value of the forward contract is equal to zero for both the parties. assume a positive/negative value depending on the moments of the price of the asset.e. To explain further. the party holding the long position stands to benefit. 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.25 Forwards Forwards are the simplest and basic form of derivative contracts. The other party assumes short position i. agrees to sell the asset on the same date at the same price. A forward contract is settled at maturity. Conversely the value of the contract becomes negative for the party holding the short position. They are private agreements mainly between the financial institutions or between the financial institutions and corporate clients. agrees to buy the underlying asset on a specified future date at a specified future price. It is an agreement to buy/sell an asset at a certain in future for a certain price.

2. delivery time and place. Over the duration of the contract. Forward contracts suffer from poor liquidity and default risk. On the expiration date the contract will settle by delivery of the asset. with the terms decided today. A forward contract is a Bi-party contract. Forward Trading in Securities: The Securities Contract (amendment) Act of 1999. The lifting of ban on forward deals in securities will help to develop index futures and other types of derivatives and futures on stocks. This is a step in the right direction to promote the sophisticated market segments as in the western countries. During the past few years. it is to compulsorily go to the same counter party.26 entered into. Contract price is generally not available in public domain. there have been many healthy developments in the securities markets. which often results high prices. 4. 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. If the party wishes to reverse the contract. 3. quality. thanks to the economic and financial reforms. 6. 5. . Forward contracts offer tremendous flexibility to the parties to design the contract in terms of the price. Essential features of Forward Contracts: 1. 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. has allowed the trading in derivative products in India. to be performed in the future. quantity.

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the. Trading has also been initiated in options on futures contracts. etc. financial instruments and currencies. liquid market which futures can be bought and sold at any time like in a stock market. 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. These relate to the contractual futures. This provides a ready. Features of Futures Contracts The principal features of the contract are as fallows. currencies. futures are traded on organized exchanges with a designated physical location where trading takes place. the way the markets are organized.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. In a futures contract both these are standardized by the exchange on which the contract is traded. Organized Exchanges: Unlike forward contracts which are traded in an over. cotton. gold. option buyers participate in futures markets with different risk. However. etc. upon entering into the . A futures contract is a more organized form of a forward contract. In this. Thus. Futures in financial assets. Futures exchanges are where buyers and sellers of an expanding list of commodities. Futures contracts in physical commodities such as wheat. it is similar to a forward contract. The option buyer knows the exact risk. have existed for a long time. and interest bearing instruments like treasury bills and bonds and other innovations like futures contracts in stock indexes are relatively new developments. there are a no of differences between forwards and futures. kind of participants in the markets and the ways they use the two instruments. these are traded on organized exchanges. For instance a contract is struck between capital A and B. financial instruments and currencies come together to trade.counter market. Clearing House: The exchange acts a clearinghouse to all contracts struck on the trading floor. The futures market described as continuous auction markets and exchanges providing the latest information about supply and demand with respect to individual commodities. silver. which is unknown to the futures trader. cattle. profiles of gains and losses.

this is immediately replaced by two contracts. The advantage of this is that A and B do not have to under take any exercise to investigate each other’s credit worthiness. and seller to buyer.e. Such a stop insures the market against serious liquidity crises arising out of possible defaults by the clearing members. To achieve. 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. in most futures markets. The accounts of buyer and seller are marked to the market daily. where it is a buyer to seller. a mandatory minimum margins are obtained by the members from the customers. the commodity is actually delivered by the seller and is accepted by the buyer. at a stipulated percentage of the net purchase and sale position. In other words the exchange interposes itself in every contract and deal. 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.e. The concept of margin here is same as that of any other trade. Initial margins on both the buyer as well as the seller. i. It also guarantees financial integrity of the market. In contrast to this. actual delivery takes place in less than one percent of the contracts traded. Margins: In order to avoid unhealthy competition among clearing members in reducing margins to attract customers. The stock exchange imposes margins as fallows: 1. this most of the contracts entered into are nullified by the matching contract in the opposite direction before maturity of the first.30 records of the exchange. 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 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. one between A and the clearing house and the another between B and the clearing house. 2. to ensure performance of the contract and to cover day to day adverse fluctuations in the prices of the securities. to introduce a financial stake of the client. The margin for future contracts has two components: • • Initial margin Marking to market .

Settle price is the purchase price in the new contract for the next trading day.at –Risk”(VAR) where as the options market had SPAN based margin system”. It is important to note that through marking to market process. This is the last day on which the contract will be traded. Futures price: The price at which the futures contract trades in the futures market. This reflects that futures prices normally exceed spot prices. In formal market. basis will be positive. both the buyers and the sellers are required to put in the initial margins. debiting or crediting the client’s equity accounts with the losses/profits of the day. The concept being used by NSE to compute initial margin on the futures transactions is called “value. Base price shall be the previous day’s closing Nifty value. Futures Terminology: Spot price: The price at which an asset trades in spot market. die clearinghouse substitutes each existing futures contract with a new contract that has the settle price or the base price. 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. at the end of which it will cease to exist. The initial margin is also known as the “performance margin” and usually 5% to 15% of the purchase price of the contract. 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. For instance contract size on NSE futures market is 100 Nifties. based on which margins are sought. There ill be a different basis for each delivery month for each contract. 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. 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. Accordingly. . Marking to Market: Marking to market means.31 Initial margin: In futures contract both the buyer and seller are required to perform the contract.

However. would refer trade in stock index futures. As total long positions for market would be equal to total short positions for calculation of open Interest. 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. which have been used to hedge or manage systematic risk by the investors of the stock market. who own portfolio of securities and are exposed to systematic risk. It will be a blockbuster product and is pitched to become the most liquid contract in the world in terms of contracts traded. 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. Stock index futures will require lower capital adequacy and margin requirement as compared to margins on carry forward of individual scrip’s. The market is conditioned to think in terms of the index and therefore. used to arrive at the contract size. only one side of the contract is counted. given the speculative nature of our markets and overwhelming retail participation expected to be fairly high. Tick Size: It is the minimum price difference between two quotes of similar nature. They are called hedgers. Open Interest: Total outstanding long/short positions in the market in any specific point of time. Further. The impact cost will be much lower incase of stock index futures as opposed to dealing in individual scrips. Stock index Futures: Stock index futures are most popular financial futures. Short position: Out standing/unsettled sales position at any time point of time. Stock index is the apt hedging asset since. The brokerage cost on index futures will be much lower. The stock index futures market should ideally have more depth. volumes and act as a stabilizing factor for the cash market. In the near future stock index futures will definitely see incredible volumes in India. 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. Long position: Outstanding/Unsettled purchase position at any point of time. it is too early to base any conclusions on . the chances of manipulation are much lesser. The stock index futures are expected to be extremely liquid.32 Multiplier: it is a pre-determined value. It is the price per index point.

If at the expiration of the contract. In this light.30. a cash settlement of Rs. a return of 18%. Payoff for Futures contracts Futures contracts have linear payoffs. A futures contract represents a promise to transact at same point in the future.170 per share. If ACC share goes up to Rs. In simple words.33 the volume are to form any firm trend.200 and we buy ACC shares. Stock Futures: With the purchase of futures on a security. a contract struck at this level could work Rs.e. These linear payoffs are fascinating as they can be combined with options and the underlying to generate various complex payoffs.204000 (6800x30). the BSE sensex is at 6850. . Security futures do not represent ownership in a corporation and the holder is therefore not regarded as a shareholder. 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. Example: If the current price of the ACC share is Rs. If we buy ACC futures instead.34 initially to enter into the futures contract. we get the same position as ACC in the cash market. we still earn Rs. If the price really increases to Rs. Example: If BSE sensex is at 6800 and each point in the index equals to Rs. In the above example if the margin is 20%. 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.1500 is required (6850-6800) x30). which obligates the trader to buy a certain amount of the underlying security at some point in future. we made a profit of Rs. It can be done just as easily as buying futures. we would pay only Rs. a promise to sell security is just as easy to make as a promise to buy security. but we have to pay the margin not the entire amount.30 as profit.200 as expected.200. it means that the losses as well as profits for the buyer and the seller of a futures contract are unlimited.30 i. We believe that in one month it will touch Rs. 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).

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. 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. Payoff for a seller of Nifty futures Profit 1220 0 Nifty LOSS . He has potentially unlimited upside as well as potentially unlimited downside. the long futures position starts making profits. 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. When the index moves up. He has a potentially unlimited upside as well as potentially unlimited downside.

two and three month contracts. and when index moves up. The underlying asset in this case is the Nifty portfolio. it starts making losses. minus the present value of the dividends obtained from the stocks in the index portfolio. 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. Example Nifty futures trade on NSE as one. This is the basis for the cost-of-carry model where the price of the contract is defined as fallows. 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. 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. When the index moves down. the short futures position starts making profits. Money can be barrowed at a rate of 15% per annum.

6. Let us assume that ACC will be declaring a dividend of Rs. if there are few historical cases of clustering of dividends in any particular month.140. 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. (240000x0. To calculate the futures price we need to compute the amount of dividend received for unit of Nifty.07). The dividend is received 15 days later and hence compounded only for the remainder of 45 days. If the market price of ACC is Rs. If ACC as weight of 7% in Nifty. Thus futures price F = 1200(1.02) 60/365 = Rs.15-0.16800 i. 3. Since Nifty is traded in multiples of 200 value of the contract is 200x1200=240000.1224.e.e. Pricing index futures given expected dividend yield If the dividend flow through out the year is generally uniform.e.35 . it is useful to calculate the annual dividend yield.36 1. (16800/140). its value in Nifty is Rs. What is the fair value of the futures contract? Fair value = 1200(1+0. Current value of Nifty is 1200 and Nifty trade with a multiplier of 200. Hence.e. The spot value of Nifty is 1200.1221.15) 45/365)/200 = Rs. then a traded unit of Nifty involves 120 shares of ACC i. i. we dividend the compounded figure by 200. 5. To calculate the futures price we need to reduce the cost of carry to the extent of dividend received is Rs. (120x10). 2.1200 i. 7.15) 60/365 – (120x10(1. 4.80. The cost of financing is 15% and the dividend yield on Nifty is 2% annualized.per share after 15 days of purchasing of contract.10/.

pricing futures on that stock is very simple. . 4. the futures price F = 140 (1. where the carrying cost is the cost of financing the purchase of the stock.228. Thus. Assume that the market price of ACC is Rs. 2. compounded only for the remaining 45 days. minus the present value of the dividends obtained from the stock.15) 60/365 – 10(1.15) 45/365 = 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. The net carrying cost is the cost of financing the purchase of the stock. Let us assume that ACC will be declaring a dividend of Rs. Example: ACC futures trade on NSE as one. The dividend is received 15 days later and hence. Pricing stock futures when dividends are expected When dividends are expected during the life of futures contract. pricing involves reducing the cost of carrying to the extent of the dividends. If no dividends are expected during the life of the contract. 2. two and three month contracts.15) 60/365 = Rs. The amount of dividend received is Rs.223.133. It simply involves the multiplying the spot price by the cost of carry. Assume that the spot price of SBI is Rs. stock futures are also cash settled: There is no delivery of the underlying stock. Pricing stock futures when no dividend is expected The pricing of stock futures is also based on the cost of carry model.30.08. we need to reduce the cost of carrying to the extent of dividend received.10/. index futures.per share after 15 days pf purchasing contract. Money can be barrowed at 15% per annum. To calculate the futures price. two and three month contracts. minus the present value of the dividends obtained from the stock. 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. Like.10/-. futures price F = 228(1. Example: SBI futures trade on NSE as one.37 Pricing stock futures A futures contract on a stock gives its owner the right and the obligation to buy or sell the stocks. Thus.140/3.

38 .

In the case of the index option. Definition: An option is a derivative i. Lastly. That brokerage firm then notifies one of its customers who have written one ACC November 100 call option and exercises it. he can buy a put option meaning a right to sell an asset after a certain period of time. An investor in options has four choices before him. It is the responsibility of the OCC who over sees the obligations to fulfill the exercises. Options can be a call option (right to buy) or a put option (right to sell). . An option is valuable if and only if the prices are varying. The brokerage firm customer can be chosen in two ways. he can write a call option meaning he can sell the right to buy an asset to another investor. This margins requirement act as a performance Bond. strict margin requirement are imposed on sellers. Once a seller has written an option and a buyer has purchased that option.39 OPTIONS An option is a derivative instrument since its value is derived from the underlying asset. its value is based on the underlying index. 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. the OCC takes over it. Secondly. Because. If I want to exercise an ACC November 100-call option. Firstly. In the case of the stock option its value is based on the underlying stock (equity). My broker notifies the OCC. 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. he can write a put option meaning he can sell a right to sell to another investor.e. but not an obligation to buy or sell an asset. Options clearing corporation The Options Clearing Corporation (OCC) is guarantor of all exchange-traded options once an option transaction has been completed. It is essentially a right. Thirdly. usually three to six months. the OCC then randomly selects a brokerage firm. he can buy a call option meaning a right to buy an asset after a certain period of time. which is short one ACC stock. OCC has a certain risk that the seller of the option can’t full the contract. its value is derived from something else. An option by definition has a fixed period of life. He can be chosen at random or FIFO basis. I notify my broker.

spot price = strike price). 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. Option price: Option price is the price. Expiration date: The date specified in the option contract is known as the expiration date. . spot price > strike price). If the index is much higher than the strike price the call is said to be deep in the money. Most exchange-traded options are American. spot price < strike price). If the index is much lower than the strike price the call is said to be deep OTM.e. the put is OTM if the index is above the strike price. At-the-money option: An At-the-money option (ATM) is an option that would lead to zero cash flow if it exercised immediately. 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. 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. European options: European options are the options that can be exercised only on the expiration date itself.40 Options Terminology.e. In the case of a put option. Strike Price: The price specified in the option contract is known as the strike price or the exercise price. A call option on the index is out of he money when the current index stands at a level. the put is in the money if the index is below the strike price.e. 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. which is less than the strike price (i. An option on the index is at the money when the current index equals the strike price (I. 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. American option: American options are the options that the can be exercised at the time up to the expiration date. the straight date or the maturity date. In the case of a put. 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. which the option buyer pays to the option seller. It is also referred to as the option premium.

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.

Call Option
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.

86. the buyer lets his option un-exercised and the writer gets to keep the premium. This loss that can be incurred by the writer of the option is potentially unlimited. the buyer will exercise the option on the writer. If upon expiration Nifty closes above the strike of 1250. A put option is a contract that gives the owner the right. but not the obligation to sell a specified number of shares at a specified price on or before a specified date. 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. Higher the spot price more is the loss he makes.60. If upon expiration. The maximum profit is limited to the extent of up-front option premium Rs. Whatever is the buyer’s profit is the seller’s loss.44 Payoff for writer of call option: Short call For selling the option.60 1250 0 Nifty LOSS The figure shows the profits/losses for the seller of a three-month Nifty 1250 call option. Put option An option that gives the seller the right to sell a designated instrument is called put option. . Hence as the spot price increases the writer of the option starts making losses. the spot price exceeds the strike price. If upon expiration the spot price is less than the strike price. the writer of the option charges premium. Payoff for writer of call option Profit 86.

A put option gives the buyer the right to sell the underlying asset at the strike price specified in the option.245. At all points where spot price>exercise price. Holder by a three month put option at exercise price of Rs. there will be loss. he makes a profit. the spot price is below the strike price.. which explains In-the-money. then the holder will exercise the option.245.260. But. Following is the table.15 from the contract.45 An American put option can be exercised on or before the specified date. a European option can be exercised on the specified date only. Exercise put option Do not Exercise Exercise/Do not Exercise Example: The current price of ACC share is Rs. Lower the spot price more is the profit he makes. there will be gain. Out-of-the Money and At-the-money positions for a Put option.260. Spot price<Exercise price Spot price>Exercise price Spot price=Exercise price In-The-Money Out-of-The-Money At-The-Money . The following are the strategies adopted y the parties of a put option. The profit/loss that the buyer makes on the option depends on the spot price of the underlying. Means put option holder will buy the share for Rs. (Holder will Exercise his option only if the market price/ spot price is less than the exercise price)..250. there will be loss. he lets his option expire un-exercised. Payoff for buyer of put option: Long put. the holder will gain Rs. Conversely. If the market/Spot price of the ACC share is Rs. In the market and deliver it to the option writer for Rs. the put option writer’s profit/loss will be as follows: At all points where spot price<exercise price. If upon the expiration. A put option buyer’s profit/loss can be defined as follows: At all points where spot price<exercise price. If the spot price of the underlying is higher than the strike price. there will be profit. At all points where spot price>exercise price.

as the spot Nifty falls. if Nifty rises above the strike of 1250. Nifty closes below the strike of 1250. As the spot Nifty falls. If upon expiration. Nifty closes below the strike of 1250. the put option is In-The-Money. 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. 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. Payoff for writer of put option . the buyer would exercise his option and profit to the extent of the difference between the strike price and Nifty-close. The profits possible on this option can be as high as the strike price. As can be seen.70 Nifty Loss The figure shows the profits/losses for the buyer of a three-month Nifty 1250 put option. However. he lets the option expire. His losses are limited to the extent of the premium he paid.46 Payoff for buyer of put option Profit 1250 0 61. If upon expiration.

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. The value of the call option will increase with the rise in interest rates. Longer the time to expiration higher is the possibility of the option to be more in the money. The effect is reversed in the case of a put option. Maximum profit is limited to premium charged by him. The buyer of a put option receives exercise price and therefore as the interest increases. 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. Historical volatility estimates . the greater is the price of the option. Interest Rate: The present value of the exercise price will depend on the interest rate. They are Historical Volatility and Implied Volatility.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 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. means the value of the call option is more. If the share price is less then the exercise price then the holder of the put option will get more net pay-off. Time to Expiration: The present value of the exercise price also depends on the time to expiration of the option.47 Profit 61. the present value of the exercise price will fall. There are two different kinds of volatility. the value of the put option will decrease. Since. The more volatile the underlying security.

The following are the assumptions. but certainly does a remarkable job of pricing options within the framework of assumptions of the model. Interestingly. computed as per the following Black Scholes formula: VC =PS N (d1).D (sqrt (T)) d2= d1-S.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. There are no transaction costs and taxes. it tells us what is important and what is not. During the option period the firm should not pay any dividend. 2. 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.D (sqrt(T) VC= value of call option VP= value of put option PS= current price of the share .48 volatility based on past prices. Implied volatility starts with the option price as a given. before Black and Scholes came up with their option pricing model. It doesn’t promise to produce the exact prices that show up in the market. There are no short selling constraints and investors get full use of short sale proceeds. 4. The risk from interest rate is constant. 5. 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. The options price for a call. and works backward to ascertains the theoretical value of volatility which is equal to the market price minus any intrinsic value. The beauty of black and scholes model is that like any good model. The stock pays no dividend. Black and Scholes demonstrate that this is not true. 3. 1. 6.D)2 / 2] / S. The option must be European option.

To use the black scholes formula for index options. it is some times optimal to exercise the option just before the underlying stock goes exdividend. unlike European options. Pricing Stock Options: The Black Scholes options pricing formula that we used to price European calls and puts. S.e. risk free rate and time to expiration in the black scholes formula.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.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 . When no dividends are expected during the life of options the options can be valued simply by substituting the values of the stock price. Pricing American options becomes a little difficult because. N (d2)= after calculation of d2. American options can be exercised any time prior to expiration. However. Two – at expiration of the options contract. 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. The assumption is that the investors can purchase the underlying stocks in the exact amount necessary to replicate the index: i. when valuing options on dividend paying stocks we should consider exercised possibilities in two situations. strike price. One-just before the underlying stock goes Exdividend. Hence. make adjustments for the dividend payments received on the index stocks. 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. If the dividend payment is sufficiently smooth. stock volatility. when dividends are expected during the life of the options. index options should be valued in the way as ordinary options on common stock. with some adjustments can be used to price American calls and puts & stocks. we must however. Therefore. value normal distribution area is to be identified. value normal distribution area is to be identified.

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. .

2. In options the buyer pays the seller a premium. 4. to perform. The buyer limits the downside risk to the option premium but retain the upside potential. 5. In options premium are to be paid. 2.51 Difference between the Futures and Options Futures Options 1. In futures margins are to be paid. . 5. The buyer of an options contract can exercise the option at any time prior to expiration date. They are obligated to perform the date. Both the parties are obligated to 1. But they are less as compare to margin in futures. 3. 4. In futures either parties pay premium. The parties to the futures contract must perform at the settlement date only. The holder of the contract is exposed to the entire spectrum of downside risk and had the potential for all the upside return. They are approximately 15 to 20% on the current stock price. 3. Only the seller (writer) is obligated perform.

52 .

Interest rate swaps. Currency swaps. The currencies of the two sets of interest cash flows are the same. Interest rate swaps Interest rate swaps. The most widely prevalent swaps are 1. Such an exchange is referred to as an exchange of barrowings. ‘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. 2. as a name suggest involves an exchange of different payment streams. which are fixed and floating in nature. 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. For example. 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. The barrower might other wise as found this too expensive or even inaccessible. 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. which a permit a barrower to access one market and then exchange the liability for another type of liability. .53 Swaps Financial swaps are a funding technique. At the same time. A common explanation for the popularity of swaps concerns the concept of comparative advantage. 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. The life of the swap can range from two years to fifty years. 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. A swap transaction usually involves an intermediary who is a large international financial institution. Types of swaps: All Swaps involves exchange of a series of payments between two parties. Swaps are used to transform the fixed rate loan into a floating rate loan.

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 . If the reverse is true. Therefore.54 Usually two non-financial companies do not get in touch with each other to directly arrange a swap. 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. Also suppose that sterling rates are higher than the dollar rates. If no participants in the swaps market want to receive fixed rather than floating. They swap to achieve the desired currency to the benefit of all concerned. Example: Suppose that a company ‘A’ and company ‘B’ are offered the fixed five years rates of interest in US $ and Sterling. This creates an ideal situation for a currency swap. Swap spreads tend to fall. They are chosen such that they are equal at the exchange rate at the beginning of the life of the swap. 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. They each deal with a financial intermediary such as a bank. the swaps spread tend to rise. 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. At any given point of time. company ‘B’ does enjoy a comparative lower disadvantage in one of the markets. 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. The principal amounts are usually exchanged at the beginning and the end of the life of the swap. A point to note is that the principal must be specified at the outset for each of the currencies. the swaps spreads are determined by supply and demand. Like interest swap. Also. In real life. In both the currency markets.

36 33495.45 75081.11 15.4 25256 26499.47 21004.78 19.08 23.5 31470.09 48117.1 12.42 47597 63438.27 27358.23 25.55 23590.53 43.21 24573.07 49098.99 21.2 58724.61 40234.33 .2 12.44 24.73 10.33 22.51 15.72 27.25 9825.73 18 10.12 55350 64029.5 73359.98 28099.32 53218.32 23.12 10.16 24.73 41804.79 18.75 30677.93 19.5 35467.44 59872.11 10.72 19.89 60265.81 20.28 28.55 CURRENTLY AVAILABLE FUTURE IN NSE Span Margin:: May 30.34 48141.24 18.22 36947. 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% 20.05 TotMgnPerLt 97917.76 22.22 28146.08 55144.57 16.35 19.9 49941.31 50775.65 24695.62 24.27 24.16 16.07 24.81 66106.42 19.91 40392.51 17.49 22.82 20.13 37586.33 32.81 34.89 45815.36 54493.2 27984.53 18.

42 55616.4 30958.35 18.52 21.7 63426.24 16.51 37.31 18.39 22.38 175780.64 20.68 39998 53168.33 44017.82 30.9 30742.83 18.08 22.87 24.62 18.54 20.01 35597.89 30.61 27.85 23.5 15.77 64941.18 28.62 58316.32 20.03 33368.34 38318.22 87743.56 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 16.46 32533.37 .51 40.9 30322.25 22.29 21.61 38039.36 16.79 22.54 22.2 50167.15 30988.75 60006.49 40723.45 17.89 16.41 17.18 21.84 38.98 19.31 20.17 51318.74 27.88 22.02 55420.35 58020.06 57264.65 21.9 42607.18 21.16 46528.73 30534.72 69628 41185 34261.66 60274.44 67888.07 31861.8 24045 89014.71 19.68 24.25 53168.31 27.98 22.83 23438.32 15.75 38.52 29582.41 26.4 61719.5 35808.19 17.1 41218.05 50726.67 15.33 25.94 98318.07 17.12 20.61 22268 61256.22 15.48 63820 39324.5 46460.75 51687.

96 17.72 23.47 .19 16.22 16.13 27.6 22.04 24.25 20.45 19.95 44286.94 45192.07 20.3 15.97 30789.46 30.86 45.82 55846 38541.25 39912.27 24.25 45242.57 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 23.84 23.01 23.07 30828 38081.53 35599.36 25.73 67782.19 28.27 39687.23 23584.64 27438.38 27284.38 18.67 19.34 15.32 66925.5 35349.76 39.66 24.75 47263.25 35509.74 48797 71380.43 103176.13 47520.84 67583.64 27.82 37819.24 52943.73 46707.96 20.63 15.39 56255.12 18.73 19.58 25.7 22.05 38431.38 25.7 20.11 16.85 28.45 30114.08 28406.75 33810 21374.91 57113.15 74003.69 23.55 29849.54 39546.01 48546.19 16.99 16.13 31.1 19.13 30529.95 64386.7 15.83 54124.17 44798 91804.13 52752.19 15.3 38048.91 20.22 18.25 34802.94 49386.51 34263.78 19.15 51851.7 31.96 17.39 20.25 22.08 17.69 49565.

65 36.99 77011.19 21.56 104838.11 25.06 56013.11 40180.82 30.23 25.02 22.56 29396.15 46790.96 34464.07 42213 40240.55 23.17 17.48 22.43 34458.74 32163.11 33075.58 23.29 15.75 38084.82 18.55 29988.04 15.44 40689 31760.12 18.58 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 36.93 53535.64 20.92 46027 46115.93 22813.33 40475.63 22.53 33422.13 43652.04 91901.5 38130 22073.83 16.35 52524.58 44.42 20.66 23271.82 36.18 37495 43678.64 15.25 20.01 .72 15.79 62822.95 25.91 25.77 13.72 54736.21 16.75 26.15 20.32 21613.03 18.53 50649.74 16.4 67873.48 31.42 48003.79 15.86 60673.28 15.6 18.7 20.75 34187.74 17.04 129217.93 43661.73 27.54 15.35 20.9 28.1 31841.47 15.28 20.44 62881.27 16.63 64169.75 38216.12 47380.17 65074.7 19.64 33641.44 21788.29 22.88 103116.7 32.89 16.93 44.17 45425.

88 18.41 29.92 27.28 43576.54 27.69 65216.72 19.5 25610.81 42329.93 22.3 39333.89 27757.55 22.27 28.2 61327.21 69574.98 52847.01 42045.04 32973.03 15.2 29946 31697.22 16.67 18.94 36.95 27.32 22.7 41189.96 69537.5 19511.04 17.36 26.98 18.25 .03 18.5 29407.87 30.55 36612.73 55988.25 19.61 15.97 19.3 33.23 27933.63 69809.82 21.42 39272.91 24.44 18.77 15.2 27.27 50382.59 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 24.13 48489.12 47146.73 23.92 35664.19 25.79 15.71 16.39 27616.86 44746.5 28992.35 25524.22 45315.11 59477.63 47318.69 32.38 38933.71 21.71 28.53 37859.94 37088.99 19.97 45840.91 17.74 28863.55 62757.31 25.94 42.05 16.32 53407.54 22.72 28.05 61664.04 44482.16 49074.92 20.93 62621.83 28.86 45537.

60 .

61 .

Share price (Cash market) 28 April 28 July Rs. Net Profit = Rs. Return 18% Gain: units =m Rs.14. Net outlay is Rs.300 Option worth Rs. So.40000.40000. Action: Buy 1CIPLA calls at Rs.40 (300-260)*1000 Analysis Rises by Rs. 1. 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. Sell 1 Jan contract (expiry) 2. CIPLA is quoting at Rs. We expect the share price to rise significantly and want to make a profit from the increase.40000. Option sale = Rs.254 Rs. Premium Paid = Rs. Possible Outcome at Expiry Share price Rs.300 Option market Buy 1 July 260 call at Rs. cost = 14000. Net gain Rs. Closing the .260 (strike price) Call costs Rs.14000.14000 (14x1000).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. Market lot for CIPLA is 1000.254.14.14 (premium).46.26000. and the July Rs.

by whatever amount the share price exceeds Rs. Share price (Cash market) 28 Apr 28 July Rs. an investor takes the view that CIPLA’s share price is likely to rise over the coming months.e. Sell 1 Jan 240 call option (or) 2. the option expiry day.274.25000 (25x1000) 1.300 Option market Buy Jan 240 call @ Rs.25 for total outlay of 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. Exercise 1 Jan 240 call and purchase 1000 shares at 240000.63 position now will produce a net profit of 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.14000 (premium paid) Net profit = Intrinsic value of (Break even = 260+14) option i. Action: Buy 1 July 240-call option CIPLA at Rs. The loss is Rs. If the share price increases.254 Rs. 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.25000 and purchase share on 28th July.

46 (300-254) 1.265 Break even (240+25) Net profit = Intrinsic value of the option less cost of purchase i.265 (240+25) in three-month time.254 per share helps cash flow.265/share.25 (265-240). Sale of option Net profit = Rs.25 per share) and if the share does not rise as anticipated.240000 Net outlay Rs. Rs.60000 = Rs. Break-even value. = Rs. To hedge against a fall in share value over coming months: .64 Analysis Rises by Rs. Option purchase = Rs. Share price < 240 Option expires worthless.e. Option worth is Rs.25000 Exercise option =Rs.265 values.e. the investor has secured two major advantages. Firstly.265000 Possible outcome at Expiry Share price > Rs.25000 (Cost of purchase) This simple strategy provides investor with maximum effective buying price of Rs. Secondly. he guarantees exposure for limited outlay (i.25 rather than Rs. In gaining exposure to stock through call option. Cost of purchase = Rs. the payment of Rs. the amount by which the share price exceeds breakeven Share price = Rs.35000. the maximum loss is limited to the premium paid.25000 2. Total loss Rs.

Option expires worthless Total loss = Rs. Rs. The released money is now available for re-investment and a small proportion will fund the call purchase. . Sell the option for any intrinsic value to recover some of their cost. he does not want to miss out that profit. number of market lots = 10000/1000 = 10) 260-calls at Rs. believes that the share price may decrease soon. Sell the option for intrinsic value and take more profit.14 Rs. However.140000. the investor books profit of Rs.2554000. Share price (Cash market) 28 Apr 28 July Analysis for Rs. sell 10000 shares Buy 10 July 260 call at Possible outcome at expiry Share price < Rs.260 Option expires worthless creating maximum loss.14 worth Rs.34 Option market Rs.254 each.40x10000 = 400000 (254-214 = 40). which originally purchased at Rs. which is equal to the Share price between 260 & 274 Share price > 274 amount of premium paid.340000 (original share holding of 10000 if nor sold).254. Rs.65 Situation: An investor holding 10000 CIPLA share at Rs.140000.254 each and buy 10 (for 10000 shares.200. (Or) Exercise option.220 Fall of Rs.140000 (premium paid) instead of Rs. He has made a considerable gain of his investment and he is concerned that he should not lose any of that profit. Action: Sell 10000 CIPLA shares at Rs. if the price continues to rise instead.

over and above any dividend earnings. he decides to write call option against this shareholding. Option expires worthless Profit = Rs. He received an option premium of Rs.254.140000 (14x10000).260 each if the holder exercises the option Share price (Cash market) 28 Apr Rs.14 Income = Rs.140000 (Option Premium received) 28 July Analysis Rs.254 Option market Sell 10 July 260 calls @ Rs. 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. he does not expect their price to move very much in the next few months. in terms of premium received on writing the option (Covered short call). an investor holds 10000 shares. So.66 Short call To earn additional income from a static shareholding.254 No change in shareholding .14 and investor sells 10 contracts (one contract = 1000 shares).140000 and takes on the obligation to deliver 10000 shares at Rs. Action: The July 260 calls are trading at Rs.

420.406 per share and sell Reliance July 420 call at Rs. Buy 1000 Reliance shares at Rs. an increase of Rs.260 The holder will exercise his option. (260+14).406.420 Action.23 on the original purchase price. .274 Share price < 260 To reduce the cost of stock purchase: Situation: It is early April and Reliance share is trading at Rs. Share price 28 Apr Option market Sell 1 Reliance call at Rs. This effectively produced a total sale price of Rs.406000 Possible Outcome at Expiry Share price < Rs.406.9.9000 (1000x9) (Cash market) Rs.254 at Rs. The option will be exercised and the shares have to be sold at Rs.397 Share price > Rs. The investor as a writer will sell shares originally purchased for Rs.429.67 Possible Outcome at Expiry Share > Rs. The option expires worthless. For 1000 shares Total outlay = Rs.9 (premium) Income = Rs. thus effectively reducing the original cost of the shares to Rs. but before the end of the July he does not expect the share to go above Rs. At investor thinks that the shares have a long-term price rise potential.420 The option will not be exercised and the investor will retain both the shares and the option premium.420 (406-9).

240 The put will be trading at Rs. Possible Outcome at Expiry Share price = Rs. Net gain = Rs.270 Option market Buy 1 GAIL July put at Rs. if the .30. Net profit = Rs.20.8.270. which gives a profit of Rs. An investor thinks GAIL share is overvalued and may fall substantially.8000. from a fall in value of share price: Situation: Current price of GAIL is Rs. Total outlay = Rs.8000 Option sale = Rs.240 Analysis Fall of share price Rs.12000.12 (20-8). 28 July Rs.8 for a total consideration of Rs.20000 [Rs.260 Put at Rs. Sell 1 July contract. Share price (Cash market) 28 Apr Rs. Action: Buy 1 GAIL July Rs.20 (260-240) x 1000 (Lot)] Option purchase = Rs.8000.68 Long put Market View Action Profit Potential Loss Potential Bearish Buy a Put option Unlimited Limited To make profit. He therefore decides to buy Put option to gain exposure to its anticipated fall.20000.

Action: Buy 1000 shares of GAIL at Rs. Cost = Rs. he will buy 1000 shares for Rs. but he is concerned about its short-term performance. Rs.240. Since.8000 (premium Rs. Sale of option = Rs.8.240.8000 (8x1000) Exercise the Rs260 put option.30000.217.270 in the expectation that the share price will rise.260 put option. When the share price in cash market is Rs.27000 20 July Rs.270 each and buy one GAIL July 260 put at Rs.240 Total worth = Rs.18000 By buying the put option simultaneously the investor’s loss is decreased to Rs.8 per share) Less.240000 Analysis: In cash market the share price decreased to Rs. Then Loss = 30000 (27000-24000). the investor holds the stock.260 put option. Share price (Cash market) 28 Apr Rs.270000 Add.260000 Net Loss instead of Rs.270 buy 1000 shares at Buy 1 July Rs. Recover intrinsic value premium.260 put option. Share purchase =Rs.69 position is closed out. Buying option = Rs. he participates in any further rise in the share price above Rs.240 each in cash market and will sell the same in the options market by exercising the Rs. 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.250.8. = Rs.18000 Option market Rs. He feels that he could effort to see the shares as low as Rs. If the investor purchases the Rs.260 put @ . If the investor does not purchase the Rs.

240 puts at Rs.400000 (40x10000 shares). To buy a stock at a price which is lower than the current available price in the market. Action: The investor decides to generate some additional income on his portfolio writes 10 NIIT Rs.242. Share price (Cash market) Option market . The put option will be exercised and the stock will have to be purchased for 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.550 puts at Rs. Possible Outcome at Expiry Share price > (or) = Rs.40. In early April he feels that the share price of NIIT will either remain constant or slightly rise. Action: Sell 10 L&T July Rs. Share price < Rs.5100000 (5500000-400000).6000000. Thus he received a premium of Rs. Situation: The shares of L&T are currently trading at Rs.550 Profit = Rs.550 The investor’s expectation is correct and the put will expire unexercised.10.400000 (premium received).

230 Total outlay = Rs.242 Sell 10 July Rs.100000 Option is exercised. 28 July Rs.240 The put writer will take delivery of the stock at Rs.230 i.71 28 Apr Rs.240 puts at Rs. The option will not be exercised and the investor keeps the premium. Possible Outcome at Expiry Share price < Rs.240 market price. Rs.10 below the current Share price > Rs.e. .10.



. 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. In the recent years advances in financial markets and the technology have made derivatives easy for the investors.74 ONGC ORIENTAL BANK OF COMMERCE PATNI PUNJAB NATIONAL BANK POLARIS RANBAXY RELIANCE RELIANCE CAPITAL RELIANCE INDUSTRIES LTD. with roots in commodities market.

75 Derivatives market in India is growing rapidly unlike equity markets. Contract size should be minimized because small investor cannot afford this much of huge premiums. Being new to markets maximum number of investors have not yet understood the full implications of the trading in derivatives. participation of FII in the derivative market. SEBI should take actions to create awareness in investors about the derivative market. Successful risk management with derivatives requires a through understanding of principles that govern the pricing of financial derivatives. . These markets can give greater depth. 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. Trading in derivatives require more than average understanding of finance. Introduction of derivatives implies better risk management.

However. profit. Though the use of derivatives does not completely eliminate 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. The use of derivative equips the investor to face the risk.76 Suggestions to Investors The investors can minimize risk by investing in derivatives. Options give the choice to the investor to either exercise his right or not. So in case of high uncertainty the investor can go for options. he has the full liberty to get out of the option contract and go ahead and buy the asset from the stock market. The derivatives products give the investor an option or choice whether to exercise the contract or not. . which is uncertain. but it certainly lessens the risk. 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.e.

Khan .icicidirect.com www.77 Bibliography Indian financial system Investment management Publications of National Stock Exchange Websites www.in www.org www.com www.moneycontrol.hseindia.com www.com www.indianfoline. Bhalla .geojit.sebi.nseindia.gov.Y.com www.M.bseindia.sharekhan.com www.org .K.V.

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