Professional Documents
Culture Documents
(SIXTH SEMESTER)
T.Y.B.F.M
A PROJECT ON:
ACADEMIC YEAR:
2020-2021
SUBMITTED BY:
PROJECT GUIDE:
DATE OF SUBMISSION:
MUMBAI – 400049
DECLARATION
Wherever the data/information has been taken from any books or other
sources, the same has been mentioned in the bibliography.
STUDENT SIGNATURE
ABHISHEK CHATURVEDI
(PROF.JASLEEN KAUR)
(PROF.JASLEEN KAUR)
ACKNOWLEDGEMENT
I take this opportunity with great pleasure to present before you this project
on “FINANCIAL INSTRUMENTS OF INDIA” which is a result of co-
operation and hard work. I would like to express my deep sense of gratitude
towards all those people without whose guidance and inspiration this project
would never be fulfilled.
Any accomplishment requires the efforts of many people and this project is
not different. I find great pleasure in expressing my deepest sense of
gratitude towards my project guide “PROF. MRS JASLEEN KAUR” whose
guidance and inspiration right from the conceptualization to the finishing
stages proved to be very essential and valuable in the completion of the
project.
I would like to thank the library staff and my classmates for their invaluable
suggestions and guidance for my project work. Last but not the least; I’d like
to thank my parents without whose co-operation and support it would’ve
been impossible for me to complete the project.
FINANCIAL
INSTRUMENTS OF INDIA
INDEX
1. Introduction 1
4. Foreign Exchange 15
10. Conclusion 59
11. Bibliography 60
The purpose of doing this project is to study the various financial instruments
used in India, to identify each instrument’s importance, its specific individuality
and its relation with the other financial instruments. Under this project I am going
to introduce the main concept of financial instruments. My major focus is on all
the frequently used financial instruments in India. We’ll get to know about
different types of instruments used in the Indian Financial Market which Include
equities, bonds, deposits etc. These instruments are studied based on their value
and the importance that they hold in the market. I will do analysis on Equity and
Debt Instruments and study the difference between the two of them. I will also try
covering up other important terms like Foreign Exchange, Cash Market and
Derivatives Market in India. We’ll learn the difference between cash and
derivatives market and also get to know about the top 10 companies in India like
Reliance Industries, HDFC Bank etc. and valuate it with the help of market
capitalization. In the end I will analyze some important questions and interpret
the following with the help of a survey of my own.
This project is undertaken to study and analyze the financial Instruments that are
used in India with a view to get a better and thorough knowledge of them and the
Indian Financial Market where these instruments are used.
INTRODUCTION
In India, many families save money on a monthly basis from their income mainly
to secure their future. Putting ones money in savings account or locker will not
help the money to multiply. One can multiply their money by Investing. An
individual can invest money in various financial instruments which are available
in India.
Financial Instruments
Financial instruments act as channels to invest the money. There are various
financial instruments available on the market currently. It acts as a tool to raise
funds. For investment purpose, there are many ways to save money. An investor
has to choose the best investment option to fetch the best return on the invested
money.
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Meaning
Financial instruments mean any contract that gives rise to a financial asset of
one entity and a financial liability or equity instrument of another entity.
This project presents an overview of financial instruments in India. The four main
classes of financial instrument that investors make use of to achieve either
income or capital growth are equities, also known as stocks or shares; debt
instruments, also known as bonds or bills; cash; and derivatives. Equities and
debt instruments are collectively known as securities. For there to be any
securities for the investor to invest in, some organization, such as a company, a
bank, a government or a supranational institution, has to issue securities.
Securities issuers are the other main customer group. The securities are issued
to provide capital for a business or to fund government expenditure when the
issuer of the security is a government.
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TYPES OF FINANCIAL INSTRUMENTS IN INDIA
Rahul has just completed his graduation and has started working in an
organization where he has completed nine months. After paying off his remaining
education loan he has now saved a corpus which he wants to invest but he is not
aware of the possible options. So, he asks his friend Sameer for help. Sameer is
a financial planner by profession. Rahul asks Sameer to help him in investing in
Financial Instruments and also explain the types so that he can select the ones
most suitable to him.
“A financial instrument is any contract that gives rise to a financial asset of one
entity and a financial liability or equity instruments of another entity.”
These instruments can be divided into two types of cash instrument and
derivative instruments or can be divided based on asset class like debt
instrument or equity instrument. The third unique category is of foreign exchange
instruments.
Below table summarizes all the financial instruments based on types and asset
classes –
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Following are the types of financial instruments in India-
1. Equities
It is a type of security that represents the ownership of a company.
Equities are traded in stock markets. It can also be purchased through
Initial Public Offerings (IPO), whenever a company issues shares to the
public for the first time. In India, share trading actively happens in stock
exchanges; prominent ones are BSE (Bombay Stock Exchange) and NSE
(National Stock Exchange). It is one of the best options to invest in
equities over an extended period as it will fetch good returns. It is also
subject to market-related risk, and one needs to do thorough research
before investing in equities. Equity shares constitute permanent capital for
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the firm and it cannot be redeemed during the lifetime of the company and
as per the Companies Act of 1956, a company cannot purchase its own
shares during its existence. At the time of liquidation, the equity
shareholders can demand the refund of their capital amount and the same
will be paid after meeting all other prior claim including preference
shareholders.
2. Mutual Funds
In India, Mutual Funds are top-rated because the initial investment amount is
very less and the risk is diversified. Mutual funds allow a group of individuals to
invest their money together. The investment avenue is famous because of cost-
efficiency, risk-diversification, professional management and sound regulation.
The minimum amount to be invested can be as small as INR 500, and the
frequency of investment is usually monthly or quarterly.
Mutual fund is type of financial intermediary that pools the fund of investors who
seek the same general financial objectives and invests them in a number of
different types of financial claims (eg. Equity shares, bonds and other money
market instruments.
The availability of varied portfolio objectives are classified into seven broad
categories i.e.
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i. Growth
ii. Income
iii. Balanced
v. Gilt
3. Bonds
Bonds are fixed income instruments which are issued to raise working capital.
Both private entities, such as companies, financial institutions, and the central
and state government institutions issue this to raise funds. The bonds issued by
the government carries the lower rate of risk but guarantees returns. The bonds
issued by private institutions have high risks. Bonds are used by companies,
municipalities, states, and sovereign governments to finance projects and
operations. Owners of bonds are debtholders, or creditors, of the issuer.
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4. Deposits
A deposit is the act of placing cash (or cash equivalent) with some entity, most
commonly with a financial institution, such as a bank.
The deposit is a credit for the party (individual or organization) who placed it, and
it may be taken back (withdrawn) in accordance with the terms agreed at time of
deposit, transferred to some other party, or used for a purchase at a later date.
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5. Cash and Cash Equivalents
These are relatively safe and highly liquid investment options. All the securities
that can be immediately converted into cash within three months are known as
cash and cash equivalents.
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Equity vs Debt Instruments
As an investor, we should know the ins and outs of the different financial assets
and then choose that which suits our goals. So, Capital is the
basic requirement of every business organization, to fulfill the long term and short
term financial needs. To raise capital, an enterprise either used owned sources
or borrowed ones. Owned capital can be in the form of equity, whereas borrowed
capital refers to the company’s owed funds or say debt. The equity and debt
investments come with different high returns and risk levels.
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Meaning and definition of Equity Instruments:
Equity instrument (stock or share) allows the investor to buy an ownership stake
in the company. Equity refers to the Net Worth of the company. It is the source of
permanent capital. It is the owner’s funds which are divided into some shares.
Fortunes can make or lost with equity investments. Any stock market can be
volatile, with rapid changes in share values.
Often, these wide price swings do not base on the solidity of the organization
backing them up but on political, social, or governmental issues in the home
country of the corporation. Equity investments are a classic example of taking on
a higher risk of loss in return for potentially higher rewards. Equity instruments
are papers that demonstrate an ownership interest in a business.
Equity holders incur greater risk than debt holders because equity holders do not
enjoy priority in a bankruptcy proceeding. However, equity holders earn greater
returns if the business succeeds. Where credit instruments provide set payments
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over a set period, equity instruments typically provide a variable return based on
the business’ success. Therefore, if the business does extraordinarily well, equity
investors may see a much healthier return than creditors.
Money raised by the company in the form of borrowed capital is known as Debt.
It represents that the company owes money to another person or entity. They are
less volatile than common stocks, with fewer highs and lows than the stock
market.
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The bond and mortgage market historically experiences fewer price changes, for
better or worse, than stocks. Also, should a corporation be liquidated,
bondholders are paid first. Mortgage investments, like other debt instruments,
come with stated interest rates and are backed up by real estate collateral. Debt
instruments are the instruments that are used by the companies to provide
finance (short term or long term) for their growth, investments, and
future planning and come with an agreement to repay the same within the
stipulated period.
1] Meaning:
Equity instruments allow a company to raise money without incurring debt, and
they have used the holders to give money in exchange for a portion of the
company. It funds raised by the company by issuing shares knows as Equity.
While Debt instruments are assets that require a fixed payment to the holder,
they are mortgages and government bonds. It funds owed by the company
towards another party knows as Debt.
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2] Nature:
Equity instruments are the nature of return Variable and irregular, In contrast to
the return on equity calls a dividend which is an appropriation of profit. While
Debt instruments are the nature of return Fixed and regular, and Return on debt
knows as interest which is a charge against profit.
3] Legal:
4] Types:
Equity instruments are the types of investment in Shares and Stocks. While Debt
instruments are the types of investment in Term loans, Debentures, Bonds, etc.
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5] Goals:
6] Risk:
After meaning, nature, legal, types, goals etc. the last and one of the most
important comparisons between equity instruments and debt instruments is the
risk.
Equity instruments are the types of investment in the long term, so that high risk.
While Debt instruments are the types of investment in the comparatively short
term, so that low and less risk.
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Foreign Exchange
The forex market is the largest, most liquid market in the world, with trillions of
dollars changing hands every day.1 There is no centralized location, rather the
forex market is an electronic network of banks, brokers, institutions, and
individual traders (mostly trading through brokers or banks).
There will also be a price associated with each pair, such as 1.2569. If this price
was associated with the USD/CAD pair it means that it costs 1.2569 CAD to buy
one USD. If the price increases to 1.3336, then it now costs 1.3336 CAD to buy
one USD. The USD has increased in value (CAD decrease) because it now costs
more CAD to buy one USD.
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In the forex market currencies trade in lots, called micro, mini, and standard lots.
A micro lot is 1000 worth of a given currency, a mini lot is 10,000, and a standard
lot is 100,000. This is different than when you go to a bank and want $450
exchanged for your trip. When trading in the electronic forex market, trades take
place in set blocks of currency, but you can trade as many blocks as you like. For
example, you can trade seven micro lots (7,000) or three mini lots (30,000) or 75
standard lots (7,500,000), for example.
The largest trading centers are London, New York, Singapore, and Tokyo.
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Trading in the Foreign Exchange Market
The market is open 24 hours a day, five days a week across major financial
centers across the globe. This means that you can buy or sell currencies at any
time during the day.
The foreign exchange market isn't exactly a one-stop shop. There are a whole
variety of different avenues that an investor can go through in order to execute
forex trades. You can go through different dealers or through different financial
centers which use a host of electronic networks.
When you're making trades in the forex market, you're basically buying or selling
the currency of a particular country. But there's no physical exchange of money
from one hand to another. That's contrary to what happens at a foreign exchange
kiosk—think of a tourist visiting Times Square in New York City from Japan. He
may be converting his (physical) yen to actual U.S. dollar cash (and may be
charged a commission fee to do so) so he can spend his money while he's
traveling.
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Differences in the Forex Markets
There are some fundamental differences between foreign exchange and other
markets. First of all, there are fewer rules, which means investors aren't held to
as strict standards or regulations as those in the stock, futures
or options markets. That means there are no clearing houses and no central
bodies that oversee the forex market.
Second, since trades don't take place on a traditional exchange, you won't find
the same fees or commissions that you would on another market. Next, there's
no cut-off as to when you can and cannot trade. Because the market is open 24
hours a day, you can trade at any time of day. Finally, because it's such a liquid
market, you can get in and out whenever you want and you can buy as much
currency as you can afford.
The U.S. dollar is the most actively traded currency. The most common pairs are
the USD versus the euro, Japanese yen, British pound and Australian dollar.
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Trading pairs that do not include the dollar are referred to as crosses. The most
common crosses are the euro versus the pound and yen.
The spot market can be very volatile. Movement in the short term is dominated
by technical trading, which focuses on direction and speed of movement. People
who focus on technical, are often referred to as chartists. Long-term currency
moves are driven by fundamental factors such as relative interest rates and
economic growth.
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may indeed ease its monetary policy. That causes the exchange rate for the euro
to fall to 1.10 versus the dollar. It creates a profit for the trader of $5,000.
By shorting €100,000, the trader took in $115,000 for the short-sale. When the
euro fell, and the trader covered their short, it cost the trader only $110,000 to
repurchase the currency. The difference between the money received on the
short-sale and the buy to cover is the profit. Had the euro strengthened versus
the dollar, it would have resulted in a loss.
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Cash Market In India
Cash markets are also known as spot markets, because their transactions are
settled "on the spot." The opposite of a cash market is a futures market, where
buyers pay for the right to receive a good, such as a barrel of oil, at a specified
date in the future.
They are the opposite of a futures market, in which investors purchase the right
to take possession at some future date.
Stock exchanges are primarily cash markets, because shares are exchanged for
cash at the point of sale.
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Understanding Cash Markets
Cash markets can take place either on a regulated exchange, such as a stock
market, or in relatively unregulated over-the-counter (OTC) transactions. While
regulated exchanges offer institutional protections that can protect against
counterparty risks, OTC markets allow the parties involved to customize their
contracts. Futures markets are conducted exclusively on exchanges,
while forward contracts—typically used in foreign exchange transactions—are
traded on OTC markets.
Sometimes, the line between cash markets and futures markets can get blurred.
For example, stock exchanges like the New York Stock Exchange (NYSE) are
mostly cash markets, but they also facilitate trading of derivative products which
are not settled on the spot. Therefore, depending on the underlying assets being
traded, the NYSE and other exchanges can also operate as a futures market.
In deciding between cash and futures markets, investors will also consider the
costs of transacting in each marketplace. For most commodities, the cost of
purchasing that commodity in the spot market is lower than its cost in the futures
market. This is because there are costs associated with taking physical
possession of the commodity, such as storage costs and insurance.
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due to the various derivative markets, which have become increasingly large and
liquid in recent years.
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Derivatives Market in India
The Indian derivatives market is in existence for very long. In the derivatives
market, we deal with derivative securities. In the Indian derivatives market, trade
takes place with the help of derivative securities. Such derivative securities or
instruments are forward, futures options and swaps. Participants in derivatives
securities not only trade in these simple derivative securities but also trade hybrid
derivative instrument.
What Is a Derivative?
A derivative is a financial security with a value that is reliant upon or derived
from, an underlying asset or group of assets—a benchmark. The derivative itself
is a contract between two or more parties, and the derivative derives its price
from fluctuations in the underlying asset.
The most common underlying assets for derivatives are stocks, bonds,
commodities, currencies, interest rates, and market indexes. These assets are
commonly purchased through brokerages.
Originally, derivatives were used to ensure balanced exchange rates for goods
traded internationally. With the differing values of national currencies,
international traders needed a system to account for differences. Today,
derivatives are based upon a wide variety of transactions and have many more
uses. There are even derivatives based on weather data, such as the amount of
rain or the number of sunny days in a region.
For example, imagine a European investor, whose investment accounts are all
denominated in euros (EUR). This investor purchases shares of a U.S. company
through a U.S. exchange using U.S. dollars (USD). Now the investor is exposed
to exchange-rate risk while holding that stock. Exchange-rate risk the threat that
the value of the euro will increase in relation to the USD. If the value of the euro
rises, any profits the investor realizes upon selling the stock become less
valuable when they are converted into euros.
To hedge this risk, the investor could purchase a currency derivative to lock in a
specific exchange rate. Derivatives that could be used to hedge this kind of risk
include currency futures and currency swaps.
A speculator who expects the euro to appreciate compared to the dollar could
profit by using a derivative that rises in value with the euro. When using
derivatives to speculate on the price movement of an underlying asset, the
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investor does not need to have a holding or portfolio presence in the underlying
asset.
Derivatives are securities that derive their value from an underlying asset or
benchmark.
Most derivatives are not traded on exchanges and are used by institutions to
hedge risk or speculate on price changes in the underlying asset.
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Futures
Futures contracts—also known simply as futures—are an agreement between
two parties for the purchase and delivery of an asset at an agreed upon price at a
future date. Futures trade on an exchange, and the contracts are standardized.
Traders will use a futures contract to hedge their risk or speculate on the price of
an underlying asset. The parties involved in the futures transaction are obligated
to fulfill a commitment to buy or sell the underlying asset.
For example, say that Nov. 6, 2019, Company-A buys a futures contract for oil at
a price of $62.22 per barrel that expires Dec. 19, 2019. The company does this
because it needs oil in December and is concerned that the price will rise before
the company needs to buy. Buying an oil futures contract hedges the company's
risk because the seller on the other side of the contract is obligated to deliver oil
to Company-A for $62.22 per barrel once the contract has expired. Assume oil
prices rise to $80 per barrel by Dec. 19, 2019. Company-A can accept delivery of
the oil from the seller of the futures contract, but if it no longer needs the oil, it
can also sell the contract before expiration and keep the profits.
In this example, it is possible that both the futures buyer and seller were hedging
risk. Company-A needed oil in the future and wanted to offset the risk that the
price may rise in December with a long position in an oil futures contract. The
seller could be an oil company that was concerned about falling oil prices and
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wanted to eliminate that risk by selling or "shorting" a futures contract that fixed
the price it would get in December.
It is also possible that the seller or buyer—or both—of the oil futures parties were
speculators with the opposite opinion about the direction of December oil. If the
parties involved in the futures contract were speculators, it is unlikely that either
of them would want to make arrangements for delivery of several barrels of crude
oil. Speculators can end their obligation to purchase or deliver the underlying
commodity by closing—unwinding—their contract before expiration with an
offsetting contract.
For example, the futures contract for West Texas Intermediate (WTI) oil trades
on the CME represents 1,000 barrels of oil. If the price of oil rose from $62.22 to
$80 per barrel, the trader with the long position—the buyer—in the futures
contract would have profited $17,780 [($80 - $62.22) X 1,000 = $17,780]. The
trader with the short position—the seller—in the contract would have a loss of
$17,780.
Not all futures contracts are settled at expiration by delivering the underlying
asset. Many derivatives are cash-settled, which means that the gain or loss in the
trade is simply an accounting cash flow to the trader's brokerage account.
Futures contracts that are cash settled include many interest rate futures, stock
index futures, and more unusual instruments like volatility futures or weather
futures.
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Forwards
Forward contracts, known simply as forwards, are similar to futures, but do not
trade on an exchange, only over-the-counter. When a forward contract is
created, the buyer and seller may have customized the terms, size and
settlement process for the derivative. As OTC products, forward contracts carry a
greater degree of counterparty risk for both buyers and sellers.
Counterparty risks are a kind of credit risk in that the buyer or seller may not be
able to live up to the obligations outlined in the contract. If one party of the
contract becomes insolvent, the other party may have no recourse and could
lose the value of its position. Once created, the parties in a forward contract can
offset their position with other counterparties, which can increase the potential for
counterparty risks as more traders become involved in the same contract.
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Swaps
Swaps are another common type of derivative, often used to exchange one kind
of cash flow with another. For example, a trader might use an interest rate
swap to switch from a variable interest rate loan to a fixed interest rate loan, or
vice versa.
Imagine that Company XYZ has borrowed $1,000,000 and pays a variable rate of
interest on the loan that is currently 6%. XYZ may be concerned about rising
interest rates that will increase the costs of this loan or encounter a lender that is
reluctant to extend more credit while the company has this variable rate risk.
Assume that XYZ creates a swap with Company QRS, which is willing to
exchange the payments owed on the variable rate loan for the payments owed
on a fixed rate loan of 7%. That means that XYZ will pay 7% to QRS on its
$1,000,000 principal, and QRS will pay XYZ 6% interest on the same principal.
At the beginning of the swap, XYZ will just pay QRS the 1% difference between
the two swap rates.
If interest rates fall so that the variable rate on the original loan is now 5%,
Company XYZ will have to pay Company QRS the 2% difference on the loan. If
interest rates rise to 8%, then QRS would have to pay XYZ the 1% difference
between the two swap rates. Regardless of how interest rates change, the swap
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has achieved XYZ's original objective of turning a variable rate loan into a fixed
rate loan.
Swaps can also be constructed to exchange currency exchange rate risk or the
risk of default on a loan or cash flows from other business activities. Swaps
related to the cash flows and potential defaults of mortgage bonds are an
extremely popular kind of derivative—a bit too popular. In the past. It was the
counterparty risk of swaps like this that eventually spiraled into the credit crisis of
2008.
Options
An options contract is similar to a futures contract in that it is an agreement
between two parties to buy or sell an asset at a predetermined future date for a
specific price. The key difference between options and futures is that, with an
option, the buyer is not obliged to exercise their agreement to buy or sell. It is an
opportunity only, not an obligation—futures are obligations. As with futures,
options may be used to hedge or speculate on the price of the underlying asset.
Imagine an investor owns 100 shares of a stock worth $50 per share they believe
the stock's value will rise in the future. However, this investor is concerned about
potential risks and decides to hedge their position with an option. The investor
could buy a put option that gives them the right to sell 100 shares of the
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underlying stock for $50 per share—known as the strike price—until a specific
day in the future—known as the expiration date.
Assume that the stock falls in value to $40 per share by expiration and the put
option buyer decides to exercise their option and sell the stock for the original
strike price of $50 per share. If the put option cost the investor $200 to purchase,
then they have only lost the cost of the option because the strike price was equal
to the price of the stock when they originally bought the put. A strategy like this is
called a protective put because it hedges the stock's downside risk.
Alternatively, assume an investor does not own the stock that is currently worth
$50 per share. However, they believe that the stock will rise in value over the
next month. This investor could buy a call option that gives them the right to buy
the stock for $50 before or at expiration. Assume that this call option cost $200
and the stock rose to $60 before expiration. The call buyer can now exercise
their option and buy a stock worth $60 per share for the $50 strike price, which is
an initial profit of $10 per share. A call option represents 100 shares, so the real
profit is $1,000 less the cost of the option—the premium—and any brokerage
commission fees.
In both the examples, the put and call option sellers are obligated to fulfill their
side of the contract if the call or put option buyer chooses to exercise
the contract. However, if a stock's price is above the strike price at expiration, the
put will be worthless and the seller—the option writer—gets to keep the premium
as the option expires. If the stock's price is below the strike price at expiration,
the call will be worthless and the call seller will keep the premium. Some options
can be exercised before expiration. These are known as American-style options,
but their use and early exercise are rare.
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Real World Example of Derivatives
Many derivative instruments are leveraged. That means a small amount of
capital is required to have an interest in a large amount of value in the underlying
asset.
For example, an investor who expects the Sensex to rise in value could buy a
futures contract based on that venerable equity index of the largest Indian
publicly traded companies. The notional value of a futures contract on the
Sensex is 268500 rupees.
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Origin of the derivatives market in India
Derivatives market in India has a history dating back in 1875. The Bombay
Cotton Trading Association started future trading in this year. History suggests
that by 1900 India became one of the world’s largest futures trading industry.
However after independence, in 1952, the government of India officially put a ban
on cash settlement and options trading. This ban on commodities future trading
was uplift in the year 2000. The creation of National Electronics Commodity
Exchange made it possible.
Over the BSE, forward trading was there in the form of Badla trading, but formally
derivatives trading kicked started in its present form after 2001 only. The NSE
started trading in CNX Nifty index futures on June 12, 2000, based on CNX Nifty
50 index
Suppose you need to buy some gold ornaments say from a local jewelry
manufacturer Gold Inc. Further, assume you need these gold ornaments some 3
months later in the month of October. You agree to buy the gold ornaments at
INR 32000 per 10 gram on 15 October 2018. The current price, however, is INR
31800 per gram.
This illustrates a forward contract. Please note that during the agreement there is
no money transaction between you and Gold Inc. Thus during the time of the
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creation of the forward contract no monetary transaction takes place. The profit
or loss to the Gold Inc. depends rather, on the spot price on the delivery date.
Now assume that the spot price on delivery day becomes INR 32100 per 10
gram. In this situation, Gold Inc will lose INR 100 per 10 gram and you will benefit
the same on your forward contract. Thus, the difference between the spot and
forward prices on the delivery day is the profit/loss to the buyer/seller.
Along with some exception to forward contracts, there are future contracts. What
makes future differ forward contracts is that we trade future on stock exchanges
while forward on the OTC market. OTC or the over the counter market is a
marketplace for typically forward contracts.
Consider the same example. Let us now suppose that the seller Gold Inc.
believes that the spot price may rise above INR 32000 per 10 gram during
the forward contract agreement with you. So to limit loss, Gold Inc. purchases a
call option for Rs. 105 at the exercise price of INR 32000 per 10 gram with the
three months expiration date.
The exercise price is technically known as a strike price. Similarly, the price of
the call option is technically known as the option price or the premium.
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Actually, the call option gives the seller the right to buy the gold at the strike price
on the expiration date. However, there is no obligation to buy on the expiration
date. He may or may not exercise his right on the expiration date.
For instance, if the spot price decline below INR 31800 our Gold Inc will choose
not to exercise the option. In this way, his loss would be limited to the premium of
INR 105 per 10 gram.
In an alternative situation, when you expect the price to fall below the spot price
in the future, you have the option to purchase put options. Buying a put option
provides you the advantage to sell at the strike price on the expiration date. Here
also you have no obligation to exercise your right.
Further, it also allows to carry forward the positions to the next settlement cycle.
There was no fixed expiration date, contract terms for such carryover
transactions. Also, no standard margin requirement was there. Moreover, earlier
such transactions were carryforward indefinitely. But this was later fixed for a
maximum period of 90 days.
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The SEBI put a complete ban on Badla trading in 2001 with the introduction of
futures trading.
In India, derivatives instruments are available for stocks, currency, bonds, and
commodities. The NSE, the Bombay Stock Exchange, the Multi Commodity
Exchange are the main exchanges which facilitate derivatives trading. While
MCX purely deals with commodities, NSE and BSE deal exclusively in stocks.
However, you can trade in various currency derivatives on any of the three
exchanges. Also, derivatives product for bonds is part of National Stocks
Exchange exchange.
The product family of the derivatives market in stocks segment includes stocks
future and options. Similarly, there are derivatives product for indices and
includes index future and options. Further, commodities derivatives products
comprise commodities future.
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Cash v/s Derivatives
Two of the most popular places to trade and invest in the capital markets is the
cash segment or the futures segment also called the derivatives segment. There
are plenty of differences between the cash segment of the capital market and the
futures segment. Here are few of the easy to understand differences.
1) Ownership
When you buy shares in the cash market and take delivery, you are the owner of
these shares or you are a shareholder, until you sell the shares. You can never
be a shareholder when you trade in the derivatives segment of the capital
market. This is because you just hold positional stocks, which you have to
square-off at the end of the settlement.
2) Holding period
When you buy shares in the cash segment, you can hold the shares for life. This
is not true in the case of the futures market, where you have to settle the contract
within three months at the very maximum. In fact, when you buy shares in the
cash segment they can also be trans-generational, that is they can be transferred
from one generation to the other.
3) Dividends
When you buy shares in the cash segment, you normally take delivery and are a
owner. Hence, you are entitled to dividends that companies pay. No such luck
when you buy any derivatives contract. This is not only true in the case of
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dividends, but, also other corporate benefits like rights shhares, bonus shares
etc.
4) Risk
Both, cash and futures markets pose risk, but the risk in the case of futures can
be higher, because you have to settle the contract within a specified period and
book losses. In the case of shares bought in the cash market, you can hold onto
them for an indefinite period and can hence sell when prices are higher.
6) Lots vs shares
In the derivatives segment you buy a lot, while in the cash segment you buy
shares.
7) Margin money
In the derivatives segment you pay only margin money for example, if you buy 1
lot of Punjab National Bank (4000 shares) you just pay 15 to 20 per cent of the
cost of the 4,000 shares and not the entire amount. That is not true in the case of
cash segment, where you have to pay the entire amount and not only margin.
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To help you understand the difference between cash and derivatives market
better, please read the following table
Every company operating in India works extremely hard to get better in terms of
the quality and customer satisfaction that they provide through its products or
services. An organization is generally evaluated on different parameters such as
assets, profits, sales, market value, share price, etc. and is ranked accordingly.
However, when we talk about the size of a company, one of the biggest factors to
look at is its market capitalization.
In this post, we are going to discuss the ten biggest public companies in India
based on their latest market capitalization.
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Market capitalization is the aggregate valuation of the company based on its
current share price and the total number of outstanding stocks. It is calculated by
Just by looking at the share price, you cannot judge the size of a company. For
example, here are the share price of two companies from the automobile sector.
2. MRF – Rs 59,798
If you just look at the share prices, you might think that MRF’s share price is quite
large compared to Maruti Suzuki, and hence, it may be bigger.
However, the total number of outstanding shares of Maruti Suzuki is much large
compared to MRF. Maruti Suzuki has around 30.2 Crore shares while MRF has
0.42 crores shares. Therefore, the market capitalization of Maruti Suzuki is Rs
213,785 Crores while the market capitalization of MRF is Rs 25,115 Crores.
Therefore, Maruti Suzuki is a bigger company compared to MRF.
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1. Reliance Industries
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2. Tata Consultancy Services (TCS)
3. HDFC Bank
As of June 2019, it had a base of 1,04,154 permanent employees with 5,130
branches across 2,764 cities. It is India’s largest private sector lender by assets
and market capitalization. It has a market capitalization value of Rs. 6,78,909
Crores with a current price of Rs. 1,233.
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4. Hindustan Unilever (HUL)
5. Infosys
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It is the second-largest Indian IT company after Tata Consultancy Services with
its headquarters in Bangalore, Karnataka, India. The market capitalization value
of Infosys is Rs. 47,1431.68 Crores with a current price of Rs. 1,106.8.
6. HDFC
HDFC also has a presence in banking, life and general insurance, asset
management, venture capital, realty, education, deposits, and education loans.
The market capitalization value of HDFC is Rs. 3,51,555.95 Crores with a current
price of Rs. 1,957.65.
7. ICICI Bank
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ICICI Bank has 4867 branches and 14367 ATMs across India and has a
presence in 17 countries including India as of March 31, 2018. The market
capitalization value of ICICI bank is Rs. 2,76,902.79 crores with a current price of
Rs. 401.5.
In February 2003, Kotak Mahindra Finance Ltd. (KMFL), the group’s flagship
company, received a banking license from the RBI. It offers banking products
and financial services in the areas of personal finance, investment banking,
general insurance, life insurance, and wealth management. It is the thrid largest
Indian private sector bank by market capitalization value of Rs. 2,61,250.38
crores with a current price of Rs. 1,319.85.
9. HCL Technologies
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10. Bharti Airtel
Market capitalization value of Bharti Airtel is Rs. 2,31,970.3 crores with a current
price of Rs. 425.2.
For this particular section we made a short survey which was filled by
some classmates, family members and friends studying finance.
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Interpret:
The above response says that 52.6% people use the internet for more than 6
hours a day whereas 36.8% people use the internet for 2-4 hours a day and only
10.5% people use the internet for 4-6 hours a day.
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Interpretation:
The above response says that 26.3% people use internet to buy and sell
financial instruments, 31.6% people use internet to listen to music and watch
videos, 31.6% people use the internet for social networking sites and 10.5%
people use the internet for E-mail.
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Interpretation:
The above response says that 31.6% people not likely invest in stock market,
21.6% people very likely invest in stock market, 21.1% people most likely invest
in stock market, and 26.3% have never invested in stock market.
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Interpretation:
The above response says that 42.1% people prefer to buy stocks of reliance
industries, 26.3% people prefer to buy other stocks, 15.8% people prefer to buy
stocks of HDFC Bank, 10.5% people prefer to buy stocks of Hindustan Unilever
and 5.3% people prefer to buy stocks of Kotak Mahindra Bank.
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Interpretation:
The above response says that 52.6% people prefer both the instruments, 31.6%
people prefer equity instruments more and 15.8% people prefer debt instruments
more.
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Interpretation:
The above response says that 57.9% people think that the current economy is
affecting the Indian Financial Market very much, 21.1% think that the current
economy is affecting the Indian Financial Market
Q7) Do you know about RBI's new window for retail investors to
buy-sell govt. bonds?
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Interpretation:
The above response says that 47.4% people don’t know about RBI’s new
window for retail investors to buy-sell govt. bonds, 31.6% people know about it
and 21.1% might know about it.
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Interpretation:
The above response says that 84.2% people think lockdown has affected the
buying and selling of financial instruments, 10.5% people think that it has not and
5.3% people think that it might have.
56
Interpretation:
The above response says that 57.9 % people prefer both, 31.6% people find
hedging better and only 10.5 % people find arbitrage better.
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Interpretation:
The above response says that 57.9% people are aged 20, 10.5% people are
aged 19, 10.5% people are aged 21, 10.5% people are aged 23, 5.3% people
are aged 24 and 5.3% people are aged 26
Conclusion
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So overall we have been introduced to the concept of Financial Instruments in
India, Its various type which include,
Equities
Mutual Funds
Bonds
Deposits
Cash and cash equivalents
Learned the difference between Equity and Debt Instruments, got to know about
Important terms like,
We also learned the difference between cash market and derivatives market,
studied about the top 10 companies in India with the help of market
capitalization, analysed some important questions and interpreted the following
with the help of a survey.
In the end, with the help of this project, we can conclude that financial
instruments prove to be of great value and importance in a developing country
like India. The scope and structure of it is rather a vast and dynamic concept
which requires thorough and professional management and study in order to gain
efficiently out of it
Bibliography
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Websites:
www.investopedia.com
www.proschoolonline.com
www.economictimes.com
www.groww.in
www.tradebrains.in
www.goodreturns.com
www.livemint.com
www.rmoneyindia.com
www.ilearnlot.com
Research Paper:
Books:
Survey:
Questionnaire (Annexure)
Questionnaire (Annexure)
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Q1) How often do you use the internet?
E-mail
Social networking sites
Buying and selling of financial instruments
Listening to music and watching videos
Most likely
Very likely
Not likely
I have never invested
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Reliance Industries
HDFC Bank
Hindustan Unilever
Kotak Mahindra Bank
Bajaj Finance
Bharti Airtel
Others
Equity Instruments
Debt Instruments
Both
Q6) How much is the current economy affecting the Indian Financial
Market?
Very Much
Very Less
Not Much, Not Less
Q7) Do you know about RBI's new window for retail investors to buy-
sell govt. bonds?
Yes
No
Maybe
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Q8) Has Lockdown affected the buying and selling of financial
instruments?
Yes
No
Maybe
Arbitrage
Hedging
Both
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