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. The study cannot be said as totally perfect. . The study is not based on the international perspective of the Derivatives Markets.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. any alternation may come.

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

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E-Commerce of all types including . a must read for investors in south Asia is how they choose to describe India info line. CDC (promoted by UK government).. software product development and marketing. Fixed Deposits. Post office savings and life Insurance. Mutual Funds. computer consultancy services. which is India' No. TDA and Reeshanar. selling advertisement space on the site. not just once but three times in a row and counting. web consulting and related services including web designing and web maintenance. India Infoline Commodities pvt Ltd. holds membership of MCX and NCDEX Main Objects of the Company Main objects as contained in its Memorandum or Association are: 1. ICICI. To engage or undertake software and internet based 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. Commodities broking.. India Infoline is the leading corporate agent of ICICI Prudential Life Insurance Company. Its institutional investors include Intel Capital (world's) leading technology company.1 Private sector life insurance Company. www. software development services. a wholly owned subsidiary of India Infoline Ltd. GOI Relief bonds.l the category of Business News in Asia by Alexia rating.. data processing IT enabled services.. It has been rated as No. 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.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.indiainfoline. software supply services.

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

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

. 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 .

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

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Some one may take an interest in the derivative products. However. Through of derivatives of products. Index or a Commodity. derivatives products minimize the impact of fluctuations in asset prices on the profitability and cash flow situation of risk–averse investors. Without the underlying product and market it would have no independent existence. or index of prices. a measure of weight in pound could be derived from a measure of weight in kilograms by multiplying by two. By their very nature. which derives its value from the prices. futures and options. risk instrument or contract for differences or any other form of security. For example. Underlying asset can a Stock. these generally do not influence the fluctuations underlying prices. A contract. the financial markets are marked by a very high degree of volatility. A security derived from a debt instrument. Bond. of underlying securities. as: A. it is possible to partially or fully transfer price risks by locking –in asset prices. Without having an interest in the underlying product market. can be traced back to the willingness of risk-averse economic agents to guard themselves against uncertainties arising out of fluctuations in asset prices. The word originates in mathematics and refers to a variable. Currency. loan whether secure or unsecured. share. . In financial sense. by locking –in asset prices. these are contracts that derive their value from some underlying asset. most notably forwards. B. The term Derivative has been defined in Securities Contracts (Regulation) Act 1956.13 DERIVATIVES The emergence of the market for derivative products. As instruments of risk management. Derivatives is a key to mastery of the topic. which has been derived from another variable. DEFINITION Understanding the word itself. but the two are always related and may therefore interact with each other.

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

Sociological changes are sources of Systematic Risk. which affect the returns. cannot be controlled. . 1.15 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. 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. and they are termed as “systematic risks”. being able to buy & sell relatively large amounts quickly without substantial price concessions. Those are 1. Rational behind the development of derivatives market is to manage this systematic risk. Liquidity means. industries and groups so that a loss in one may easily be compensated with a gain in other. For instance inflation interest rate etc. liquidity. Economic 2. Their effect is to cause the prices of nearly all individual stocks to move together in the same manner. etc.systematic risks by having a well-diversified portfolio spread across the companies. Political 3. There are other types of influences. An investor can easily manage such non. 2. which are external to the firm. which would be much lesser than what he expected to get. There are various influences. We therefore quite often find stock prices falling from time to time in spite of company’s earnings rising and vice –versa. Price or dividend (interest).

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

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

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

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

with the launch index Futures on sensex and nifty futures respectively.Gamblers preferred using the New York cotton price because the cotton market at home was less liquid and could easily be manipulated. by using fully automated screen based exchange. emerging from a long history of stock market and foreign exchange controls. Now. which was established by India's leading institutional investors in 1994 in the wake of numerous financial & stock market scandals. This difference of market lot arises due to a minimum specification of a contract value of Rs. to refashion its capital market to attract western investment. and stock futures in November 2001. India is about to acquire own market for risk. stock options in July 2001.2Lakhs by Securities and Exchange Board of India. 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. They bet on the last one or two digits of the closing price on the New York cotton exchange. If they guessed the last number. Derivatives Segments In NSE & BSE On June 9. Fifty years ago. 2000 BSE and NSE became the first exchanges in India to introduce trading in exchange traded derivative products. is one of the last major economies in Asia. A hybrid over the counter derivatives market is expected to develop along side. For example sensex is 6750 then the contract value of a futures index having sensex as underlying asset .72/.7/.20 DERIVATIVES IN INDIA Indian capital markets hope derivatives will boost the nations economic prospects. Index Options was launched in june2001. The country. they got Rs. If they matched the last two digits they got Rs.for every Rupee layout. around the time India became independent men in mumbai gambled on the price of cotton in New York. Over the last couple of years the National Stock Exchange has pushed derivatives trading.

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

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

The exchange must have an online surveillance capability. price and volumes in real time so as to detect market manipulations. Position limits be used for improving market quality. If the chairman is broker/dealer. The derivatives trading should be done in a separate segment with a separate membership. • 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.23 Regulatory Framework: Considering the constraints in infrastructure facilities the existing stock exchanges are permitted to trade derivatives subject to the following conditions. . • The chairman of the governing council of the derivative division/exchange should be a member of the governing council. • • • Trading should take place through an online screen based trading system. The members of an existing segment of the exchange will not automatically become the members of derivatives segment. • 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. which monitors positions. which are accessible to the investors in the country. An independent clearing corporation should do the clearing of the derivative market. • • The exchange should have at least 50 members to start derivatives trading.

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a key determinate of the value of the contract is the market price of the underlying asset. assume a positive/negative value depending on the moments of the price of the asset. the forward price and the delivery price are equal on the day that the contract is . agrees to sell the asset on the same date at the same price. The concept of forward price is also important. that is the value of the contract is positive for him. For example. This specified price referred to as the delivery price.e. 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. the party holding the long position stands to benefit. A forward contract is settled at maturity. Therefore. In other words. Conversely the value of the contract becomes negative for the party holding the short position.25 Forwards Forwards are the simplest and basic form of derivative contracts. if the price of the asset prices rises sharply after the two parties have entered into the contract. The forward price for a certain contract is defined as that delivery price which would make the value of the contract zero. A forward contract can therefore. To explain further. The other party assumes short position i.e. 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. They are private agreements mainly between the financial institutions or between the financial institutions and corporate clients. It is an agreement to buy/sell an asset at a certain in future for a certain price. This delivery price is chosen so that the value of the forward contract is equal to zero for both the parties. 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.

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

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

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

. debiting or crediting the client’s equity accounts with the losses/profits of the day. Marking to Market: Marking to market means. Futures Terminology: Spot price: The price at which an asset trades in spot market.31 Initial margin: In futures contract both the buyer and seller are required to perform 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.at –Risk”(VAR) where as the options market had SPAN based margin system”. Contract Size: The amount of asset that has to be delivered under one contract. die clearinghouse substitutes each existing futures contract with a new contract that has the settle price or the base price. This is the last day on which the contract will be traded. This reflects that futures prices normally exceed spot prices. Base price shall be the previous day’s closing Nifty value. It is important to note that through marking to market process. For instance contract size on NSE futures market is 100 Nifties. 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. Settle price is the purchase price in the new contract for the next trading day. Futures price: The price at which the futures contract trades in the futures market. This measures the storage cost plus the interest that is paid to finance the asset less the income earned on the asset. 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. basis will be positive. The concept being used by NSE to compute initial margin on the futures transactions is called “value. Expiry Date: It is the date specified in the futures contract. In formal market. Basis/Spread: In the context of financial futures basis can be defined as the futures price minus the spot price. both the buyers and the sellers are required to put in the initial margins. There ill be a different basis for each delivery month for each contract. based on which margins are sought.

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

Security futures do not represent ownership in a corporation and the holder is therefore not regarded as a shareholder. it means that the losses as well as profits for the buyer and the seller of a futures contract are unlimited. a return of 18%. A futures contract represents a promise to transact at same point in the future.30 i. Example: If BSE sensex is at 6800 and each point in the index equals to Rs. the BSE sensex is at 6850. Stock Futures: With the purchase of futures on a security.200 as expected. Example: If the current price of the ACC share is Rs.170 per share. but we have to pay the margin not the entire amount.33 the volume are to form any firm trend.e. If at the expiration of the contract. we get the same position as ACC in the cash market.34 initially to enter into the futures contract. It can be done just as easily as buying futures. 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). a contract struck at this level could work Rs. 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. we made a profit of Rs. a cash settlement of Rs.200. If ACC share goes up to Rs. These linear payoffs are fascinating as they can be combined with options and the underlying to generate various complex payoffs. If we buy ACC futures instead. .204000 (6800x30).1500 is required (6850-6800) x30). In simple words. we still earn Rs.30 as profit. a promise to sell security is just as easy to make as a promise to buy security. 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. In the above example if the margin is 20%. In this light. we would pay only Rs. which obligates the trader to buy a certain amount of the underlying security at some point in future.30.200 and we buy ACC shares. Payoff for Futures contracts Futures contracts have linear payoffs. If the price really increases to Rs.

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. 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.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. He has a potentially unlimited upside as well as potentially unlimited downside. The underlying asset in this case is Nifty portfolio. He has potentially unlimited upside as well as potentially unlimited downside. Payoff for a seller of Nifty futures Profit 1220 0 Nifty LOSS . When the index moves up. the long futures position starts making profits.

and when index moves up. it starts making losses. two and three month contracts. Money can be barrowed at a rate of 15% per annum. minus the present value of the dividends obtained from the stocks in the index portfolio. Example Nifty futures trade on NSE as one. The underlying asset in this case is the Nifty portfolio. This is the basis for the cost-of-carry model where the price of the contract is defined as fallows.35 Take the case of a speculator who sells a two-month Nifty index futures contract when the Nifty stands at 1220. What will be the price of a new two-month futures contract on Nifty? . When the index moves down. 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. 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.

The cost of financing is 15% and the dividend yield on Nifty is 2% annualized.36 1.1200 i.35 . (240000x0. 5. To calculate the futures price we need to compute the amount of dividend received for unit of Nifty.10/. 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. 4.1221.e. Pricing index futures given expected dividend yield If the dividend flow through out the year is generally uniform. What is the fair value of the futures contract? Fair value = 1200(1+0. To calculate the futures price we need to reduce the cost of carry to the extent of dividend received is Rs.e.02) 60/365 = Rs. If the market price of ACC is Rs. we dividend the compounded figure by 200.e. Let us assume that ACC will be declaring a dividend of Rs.15) 60/365 – (120x10(1. The dividend is received 15 days later and hence compounded only for the remainder of 45 days. (16800/140). 6. 3. if there are few historical cases of clustering of dividends in any particular month. If ACC as weight of 7% in Nifty. Current value of Nifty is 1200 and Nifty trade with a multiplier of 200. its value in Nifty is Rs. (120x10). it is useful to calculate the annual dividend yield.140. Since Nifty is traded in multiples of 200 value of the contract is 200x1200=240000. The spot value of Nifty is 1200. 2.80.07).15) 45/365)/200 = Rs.per share after 15 days of purchasing of contract. Thus futures price F = 1200(1.1224. i. Hence.16800 i.e.15-0. 7. then a traded unit of Nifty involves 120 shares of ACC i.

15) 45/365 = Rs. Example: SBI futures trade on NSE as one. two and three month contracts.10/. 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 – 10(1. Pricing stock futures when dividends are expected When dividends are expected during the life of futures contract.37 Pricing stock futures A futures contract on a stock gives its owner the right and the obligation to buy or sell the stocks. two and three month contracts. Thus. The dividend is received 15 days later and hence. . Assume that the spot price of SBI is Rs. Example: ACC futures trade on NSE as one. To calculate the futures price.140/3. minus the present value of the dividends obtained from the stock. pricing futures on that stock is very simple.15) 60/365 = Rs.223. If no dividends are expected during the life of the contract.133. Thus. Money can be barrowed at 15% per annum.08. The amount of dividend received is Rs.228.per share after 15 days pf purchasing contract. Like. Let us assume that ACC will be declaring a dividend of Rs. compounded only for the remaining 45 days. 2. where the carrying cost is the cost of financing the purchase of the stock. It simply involves the multiplying the spot price by the cost of carry. index futures. minus the present value of the dividends obtained from the stock.30. futures price F = 228(1. stock futures are also cash settled: There is no delivery of the underlying stock.10/-. Assume that the market price of ACC is Rs. Pricing stock futures when no dividend is expected The pricing of stock futures is also based on the cost of carry model. 2. The net carrying cost is the cost of financing the purchase of the stock. 4. we need to reduce the cost of carrying to the extent of dividend received. pricing involves reducing the cost of carrying to the extent of the dividends. the futures price F = 140 (1. What will be the price of a unit of new two-month futures contract on ACC if dividends are expected during the period? 1.

38 .

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

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

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.

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

At all points where spot price>exercise price. Payoff for buyer of put option: Long put. If the market/Spot price of the ACC share is Rs. there will be gain. But. If the spot price of the underlying is higher than the strike price. there will be loss. Out-of-the Money and At-the-money positions for a Put option. the spot price is below the strike price. a European option can be exercised on the specified date only. (Holder will Exercise his option only if the market price/ spot price is less than the exercise price). the holder will gain Rs.15 from the contract. Spot price<Exercise price Spot price>Exercise price Spot price=Exercise price In-The-Money Out-of-The-Money At-The-Money . the put option writer’s profit/loss will be as follows: At all points where spot price<exercise price.245. there will be loss.260.. Exercise put option Do not Exercise Exercise/Do not Exercise Example: The current price of ACC share is Rs. Holder by a three month put option at exercise price of Rs. Conversely. he lets his option expire un-exercised.250.45 An American put option can be exercised on or before the specified date. A put option gives the buyer the right to sell the underlying asset at the strike price specified in the option. At all points where spot price>exercise price. which explains In-the-money.245.. The following are the strategies adopted y the parties of a put option. there will be profit.260. Means put option holder will buy the share for Rs. then the holder will exercise the option. Following is the table. Lower the spot price more is the profit he makes. he makes a profit. In the market and deliver it to the option writer for Rs. The profit/loss that the buyer makes on the option depends on the spot price of the underlying. 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 upon expiration. If upon expiration. 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.70 Nifty Loss The figure shows the profits/losses for the buyer of a three-month Nifty 1250 put option. he lets the option expire. Payoff for writer of put option . the put option is In-The-Money. the buyer would exercise his option and profit to the extent of the difference between the strike price and Nifty-close. Nifty closes below the strike of 1250.46 Payoff for buyer of put option Profit 1250 0 61. However. His losses are limited to the extent of the premium he paid. The profits possible on this option can be as high as the strike price. Nifty closes below the strike of 1250. As can be seen. as the spot Nifty falls. if Nifty rises above the strike of 1250. As the spot Nifty falls. 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.

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

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

If the dividend payment is sufficiently smooth. Hence. N (d2)= after calculation of d2. value normal distribution area is to be identified. value normal distribution area is to be identified.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. Therefore. Two – at expiration of the options contract.e.49 PX= exercise of the share RF= Risk free rate T= time period remaining to expiration N (d1)= after calculation of d1. The assumption is that the investors can purchase the underlying stocks in the exact amount necessary to replicate the index: i. 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. Pricing Stock Options: The Black Scholes options pricing formula that we used to price European calls and puts. make adjustments for the dividend payments received on the index stocks. One-just before the underlying stock goes Exdividend. it is some times optimal to exercise the option just before the underlying stock goes exdividend. we must however. S. strike price. index options should be valued in the way as ordinary options on common stock. 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. when dividends are expected during the life of the options. Pricing American options becomes a little difficult because. when valuing options on dividend paying stocks we should consider exercised possibilities in two situations. risk free rate and time to expiration in the black scholes formula. However. with some adjustments can be used to price American calls and puts & stocks. To use the black scholes formula for index options. stock volatility. American options can be exercised any time prior to expiration. unlike European options. 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.

.50 time to maturity from today till the expiration date. and other is a short maturity with a time to maturity from today till just before the stock goes Ex-dividend.

In futures either parties pay premium. In futures margins are to be paid. to perform. 4. 3.51 Difference between the Futures and Options Futures Options 1. 5. In options premium are to be paid. 2. 5. The parties to the futures contract must perform at the settlement date only. 3. The holder of the contract is exposed to the entire spectrum of downside risk and had the potential for all the upside return. 2. Both the parties are obligated to 1. In options the buyer pays the seller a premium. . But they are less as compare to margin in futures. They are obligated to perform the date. The buyer of an options contract can exercise the option at any time prior to expiration date. Only the seller (writer) is obligated perform. The buyer limits the downside risk to the option premium but retain the upside potential. 4. They are approximately 15 to 20% on the current stock price.

52 .

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

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

61 40234.72 27.2 27984.11 10.81 66106.07 24.55 23590.98 28099.73 10.33 22.44 59872.33 .9 49941.4 25256 26499.23 25.27 27358.08 55144.16 16.99 21.72 19.82 20.31 50775.08 23.75 30677.81 34.22 36947.62 24.27 24.32 53218.51 15.42 19.49 22.55 CURRENTLY AVAILABLE FUTURE IN NSE Span Margin:: May 30.24 18.07 49098.34 48141.5 35467.11 15.53 43. 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% 20.76 22.09 48117.89 45815.93 19.57 16.42 47597 63438.91 40392.79 18.33 32.32 23.25 9825.12 10.65 24695.2 58724.81 20.73 41804.73 18 10.53 18.2 12.89 60265.44 24.5 31470.22 28146.45 75081.12 55350 64029.21 24573.13 37586.1 12.5 73359.47 21004.05 TotMgnPerLt 97917.35 19.28 28.36 54493.78 19.51 17.16 24.36 33495.

07 31861.03 33368.48 63820 39324.41 26.39 22.5 15.15 30988.51 37.9 42607.29 21.89 16.1 41218.83 18.74 27.41 17.54 22.61 22268 61256.5 46460.4 61719.33 25.7 63426.38 175780.54 20.31 27.61 27.51 40.45 17.87 24.9 30322.25 22.25 53168.52 29582.82 30.65 21.16 46528.22 15.08 22.77 64941.67 15.88 22.5 35808.72 69628 41185 34261.62 18.9 30742.64 20.52 21.73 30534.62 58316.37 .05 50726.35 58020.17 51318.18 28.06 57264.71 19.75 60006.31 18.33 44017.94 98318.56 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 16.36 16.2 50167.61 38039.98 22.22 87743.89 30.68 24.32 20.44 67888.35 18.46 32533.18 21.12 20.98 19.84 38.18 21.42 55616.68 39998 53168.32 15.49 40723.83 23438.75 51687.66 60274.07 17.8 24045 89014.4 30958.24 16.02 55420.85 23.75 38.19 17.79 22.31 20.01 35597.34 38318.

64 27438.3 38048.07 20.91 57113.15 74003.85 28.25 34802.01 23.45 30114.25 22.51 34263.13 27.1 19.19 28.69 23.96 17.47 .43 103176.25 39912.11 16.6 22.13 47520.55 29849.38 25.96 20.95 64386.45 19.94 45192.96 17.38 18.13 31.82 37819.13 30529.19 16.36 25.12 18.15 51851.04 24.53 35599.22 16.91 20.82 55846 38541.58 25.84 67583.27 39687.05 38431.69 49565.74 48797 71380.24 52943.84 23.83 54124.73 19.25 35509.86 45.23 23584.22 18.5 35349.3 15.27 24.64 27.97 30789.19 15.63 15.39 20.38 27284.75 33810 21374.7 20.34 15.7 22.73 67782.99 16.94 49386.25 45242.13 52752.32 66925.46 30.95 44286.39 56255.08 17.25 20.75 47263.67 19.72 23.7 31.07 30828 38081.01 48546.73 46707.54 39546.76 39.57 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 23.19 16.7 15.66 24.78 19.17 44798 91804.08 28406.

74 32163.17 17.04 129217.7 32.63 22.82 18.82 36.47 15.73 27.58 23.42 48003.9 28.12 18.53 33422.75 38084.7 20.15 46790.54 15.29 15.07 42213 40240.66 23271.04 91901.12 47380.13 43652.02 22.28 15.72 15.5 38130 22073.32 21613.91 25.53 50649.56 29396.88 103116.06 56013.65 36.75 38216.64 33641.75 34187.44 62881.17 65074.83 16.93 44.48 31.15 20.28 20.86 60673.33 40475.93 53535.21 16.55 23.44 40689 31760.82 30.1 31841.58 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 36.74 16.75 26.64 20.03 18.93 22813.11 25.35 20.77 13.64 15.55 29988.56 104838.35 52524.89 16.43 34458.95 25.18 37495 43678.92 46027 46115.29 22.11 40180.17 45425.01 .7 19.93 43661.72 54736.19 21.79 62822.04 15.63 64169.42 20.48 22.23 25.6 18.99 77011.27 16.25 20.44 21788.58 44.96 34464.79 15.74 17.11 33075.4 67873.

27 28.98 52847.13 48489.54 27.73 23.11 59477.59 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 24.94 37088.05 16.74 28863.86 44746.04 32973.54 22.87 30.32 22.97 19.63 69809.2 61327.92 27.69 65216.39 27616.97 45840.99 19.96 69537.98 18.22 45315.22 16.71 28.03 15.31 25.16 49074.93 62621.5 28992.67 18.71 21.69 32.5 25610.61 15.2 29946 31697.2 27.23 27933.03 18.36 26.05 61664.86 45537.91 24.04 44482.3 39333.7 41189.42 39272.81 42329.73 55988.44 18.12 47146.55 22.79 15.28 43576.25 .21 69574.92 20.27 50382.82 21.3 33.91 17.01 42045.5 19511.5 29407.95 27.04 17.41 29.35 25524.71 16.72 28.94 36.72 19.63 47318.88 18.25 19.55 36612.83 28.19 25.55 62757.93 22.38 38933.94 42.89 27757.92 35664.53 37859.77 15.32 53407.

60 .

61 .

Share price (Cash market) 28 April 28 July Rs. Action: Buy 1CIPLA calls at Rs.14000.40000. Premium Paid = Rs. Market lot for CIPLA is 1000. and the July Rs. Return 18% Gain: units =m Rs. Net outlay is Rs.14.62 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.260 (strike price) Call costs Rs. Sell 1 Jan contract (expiry) 2. 1.14 (premium). Possible Outcome at Expiry Share price Rs.26000.40000.254. CIPLA is quoting at Rs. We expect the share price to rise significantly and want to make a profit from the increase.14. Net gain Rs.40000.300 Option market Buy 1 July 260 call at Rs. cost = 14000. Closing the . So. 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.300 Option worth Rs. Option sale = Rs.46.14000 (14x1000).40 (300-260)*1000 Analysis Rises by Rs.254 Rs. Net Profit = 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.274. If the share price increases.e. Exercise 1 Jan 240 call and purchase 1000 shares at 240000. selling the call option releases income to offset the higher share to be acquired at the exercise price that is below the share price. The loss is Rs.254 Rs. an investor takes the view that CIPLA’s share price is likely to rise over the coming months. Sell 1 Jan 240 call option (or) 2.300 Option market Buy Jan 240 call @ Rs.25 for total outlay of Rs.25000 and purchase share on 28th July. Action: Buy 1 July 240-call option CIPLA at Rs. . Share price (Cash market) 28 Apr 28 July Rs.26000 Share price<260 Share price>274 Option expires worthless.25000 (25x1000) 1. 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.63 position now will produce a net profit of Rs. the option expiry day. by whatever amount the share price exceeds Rs.

265 values.25 (265-240).25000 (Cost of purchase) This simple strategy provides investor with maximum effective buying price of Rs. Secondly. Sale of option Net profit = Rs.254 per share helps cash flow. Total loss Rs.64 Analysis Rises by Rs. he guarantees exposure for limited outlay (i. the amount by which the share price exceeds breakeven Share price = Rs. In gaining exposure to stock through call option.60000 = Rs.240000 Net outlay Rs. Rs. Firstly. the maximum loss is limited to the premium paid. the investor has secured two major advantages.25000 2. Share price < 240 Option expires worthless. = Rs.265 (240+25) in three-month time.25 per share) and if the share does not rise as anticipated. Option purchase = Rs.e.265000 Possible outcome at Expiry Share price > Rs. Option worth is Rs.35000.25 rather than Rs.25000 Exercise option =Rs.46 (300-254) 1. Cost of purchase = Rs.265 Break even (240+25) Net profit = Intrinsic value of the option less cost of purchase i.265/share.e. To hedge against a fall in share value over coming months: . Break-even value. the payment of Rs.

140000. number of market lots = 10000/1000 = 10) 260-calls at Rs. the investor books profit of Rs. . (Or) Exercise option.2554000.140000 (premium paid) instead of Rs. However. Rs.200. The released money is now available for re-investment and a small proportion will fund the call purchase.14 Rs. Sell the option for any intrinsic value to recover some of their cost. which originally purchased at Rs. if the price continues to rise instead. believes that the share price may decrease soon. which is equal to the Share price between 260 & 274 Share price > 274 amount of premium paid. Share price (Cash market) 28 Apr 28 July Analysis for Rs. he does not want to miss out that profit.254 each.254.254 each and buy 10 (for 10000 shares.65 Situation: An investor holding 10000 CIPLA share at Rs. Option expires worthless Total loss = Rs.40x10000 = 400000 (254-214 = 40).260 Option expires worthless creating maximum loss. Sell the option for intrinsic value and take more profit.14 worth Rs.340000 (original share holding of 10000 if nor sold).220 Fall of Rs. Rs.34 Option market Rs. He has made a considerable gain of his investment and he is concerned that he should not lose any of that profit. sell 10000 shares Buy 10 July 260 call at Possible outcome at expiry Share price < Rs. Action: Sell 10000 CIPLA shares at Rs.140000.

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

274 Share price < 260 To reduce the cost of stock purchase: Situation: It is early April and Reliance share is trading at Rs. The investor as a writer will sell shares originally purchased for Rs.420 (406-9). At investor thinks that the shares have a long-term price rise potential.260 The holder will exercise his option.9.420 Action. For 1000 shares Total outlay = Rs. an increase of Rs.406 per share and sell Reliance July 420 call at Rs. . The option expires worthless. thus effectively reducing the original cost of the shares to Rs.406000 Possible Outcome at Expiry Share price < Rs.67 Possible Outcome at Expiry Share > Rs.420.9000 (1000x9) (Cash market) Rs. Buy 1000 Reliance shares at Rs.420 The option will not be exercised and the investor will retain both the shares and the option premium.406.23 on the original purchase price. The option will be exercised and the shares have to be sold at Rs. (260+14). Share price 28 Apr Option market Sell 1 Reliance call at Rs. but before the end of the July he does not expect the share to go above Rs.9 (premium) Income = Rs.406.397 Share price > Rs.254 at Rs.429. This effectively produced a total sale price of Rs.

8000 Option sale = Rs. which gives a profit of Rs. Share price (Cash market) 28 Apr Rs.20 (260-240) x 1000 (Lot)] Option purchase = Rs. Total outlay = Rs. from a fall in value of share price: Situation: Current price of GAIL is Rs. Action: Buy 1 GAIL July Rs.270 Option market Buy 1 GAIL July put at Rs.20. He therefore decides to buy Put option to gain exposure to its anticipated fall.260 Put at Rs. Sell 1 July contract. if the .20000.8000.270. Possible Outcome at Expiry Share price = Rs.12 (20-8).12000. Net profit = Rs.20000 [Rs.8000.240 The put will be trading at Rs. An investor thinks GAIL share is overvalued and may fall substantially.240 Analysis Fall of share price Rs.8 for a total consideration of Rs.68 Long put Market View Action Profit Potential Loss Potential Bearish Buy a Put option Unlimited Limited To make profit. 28 July Rs.30. Net gain = Rs.8.

the investor holds the stock.69 position is closed out. he will buy 1000 shares for Rs. Since.8000 (8x1000) Exercise the Rs260 put option.240000 Analysis: In cash market the share price decreased to Rs.217. Buying option = Rs.240 each in cash market and will sell the same in the options market by exercising the Rs.30000.260 put @ . Cost = Rs. Rs.8.270 each and buy one GAIL July 260 put at Rs.8 per share) Less.18000 Option market Rs.260 put option.270 buy 1000 shares at Buy 1 July Rs.260000 Net Loss instead of Rs. Then Loss = 30000 (27000-24000).27000 20 July Rs.260 put option. He feels that he could effort to see the shares as low as Rs. When the share price in cash market is Rs. Action: Buy 1000 shares of GAIL at Rs.240.240 Total worth = Rs. If the investor does not purchase the Rs. he participates in any further rise in the share price above Rs.8.270000 Add. Share purchase =Rs.8000 (premium Rs. Share price (Cash market) 28 Apr Rs. but he is concerned about its short-term performance.260 put option.270 in the expectation that the share price will rise.250. Recover intrinsic value premium. = Rs. If the investor purchases the Rs. Sale of option = Rs.18000 By buying the put option simultaneously the investor’s loss is decreased to Rs.240. 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.

550 puts at Rs. Thus he received a premium of Rs.550 The investor’s expectation is correct and the put will expire unexercised.400000 (premium received). Action: Sell 10 L&T July Rs.242.10.40. Possible Outcome at Expiry Share price > (or) = Rs.240 puts at Rs. Share price (Cash market) Option market . 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. In early April he feels that the share price of NIIT will either remain constant or slightly rise.6000000.550 Profit = Rs.5100000 (5500000-400000). Share price < Rs.400000 (40x10000 shares). 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. Situation: The shares of L&T are currently trading at Rs.

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

In order to increase the derivatives market in India SEBI should revise some of their regulation like contract size. . 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.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. Trading in derivatives require more than average understanding of finance. Introduction of derivatives implies better risk management. These markets can give greater depth. stability and liquidity to Indian capital markets.

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. 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. So in case of high uncertainty the investor can go for options. Options give the choice to the investor to either exercise his right or not. However. . but it certainly lessens the risk. 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. Though the use of derivatives does not completely eliminate the risk. which is uncertain.e.76 Suggestions to Investors The investors can minimize risk by investing in derivatives. profit. 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.

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

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