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LUDHIANA STOCK EXCHANGE LIMITED LUDHIANA
TRAINING REPORT SUBMITTED IN THE PARTIAL FULFILMENT FOR THE DEGREE OF “BACHELOR OF BUSINESS ADMINISTRATION” YEAR 2008-2009
SUBMITTED TO PUNJABI UNIVERSITY PATIALA
SUBMITTED BY SIMRANDEEP SINGH 6329
RIMT-INSTITUTE OF MANAGEMENT AND COMPUTER TECHNOLOGY, MANDIGOBINDGARH
“Our personalities are based on the foundation of education imparted by our teachers who are next to god.” I acknowledge our deepest sense of gratitude and sincere feeling of indebtedness to my major advisor, Mr. Shammi Kholi, under whose guidance I was able to complete my project. Without their immaculate and intellectual guidance, sustained efforts and encouraging attitude, it would have been difficult to achieve the results in such a short span of time. I am grateful to Mr. H.S. Sidhu (Managing Director) of LSE for permitting me to take the training at LSE Ltd. I also want to express our sincere gratitude to Mr. J.S. Arneja (Senior Manager &Training In charge) and all the staff members of LSE for spending time and valuable information they have shared with me and helped me in my project to be a success. The acknowledgement would not be completed without expressing my thanks to the faculty of my college for showing me the right path and guided me to solve my problems. I extent my gratitude to our Director Mr. B.S. Bhatia and all the related teachers. The help and cooperation they offered at each stage of my study is ineffable. Their valuable suggestions and constant encouragement made this study interesting and useful. Finally, I would like to acknowledge the support I got from my parents and God. It was their blessing that kept me motivated throughout till the completion of the project.
I here by Declare that study of ‘Study of Derivatives’ Has been exclusively done by us for the degree of BACHELOR OF BUSINESS ADMINISTRATION And not for any other degree, Diploma or fellowship. This is our own study done under the guidance of manager of the company. I hereby declare that the contents of this report are true and best to my knowledge.
Place: LUDHIANA (SIMRANDEEP SINGH)
One should always work with an objective in its mind. To accomplish that objective efficient management of material, time and financial resources is very important. Above this coordination is must that determines the degree of success. Awareness at each level of life is necessary for a human being keeping all this is view in this report on “Study of Derivatives’’. The rounded encouraging support by Mr. JS Arneja towards this report has created in me confidence regarding the approval of the subject matter. I feel that it was a great opportunity for me to spend time in LSE and getting myself aware of the ups and downs of capital market. So would like to say that this report is a result of an assignment, to improve myself and gain confidence.
CHAPTER 1 INTRODUCTION TO ORGANISATION
1 . STOCK EXCHANGE 2 . LUDHIANA STOCK EXCHANGE 3 . LSE SECURITIES LIMITED
PROJECT OBJECTIVES A
1 INTRODUCTION TO DERIVATIVES
2 TYPES OF DERIVATIVES 3 ECONOMIC UTILITY OF DERIVATIVES 4 OBJECTIVES OF DERIVATIVES 5 INSTRUMENTS OF DERIVATIVE TRADING 6 RISK MANAGEMENT 7 MARGIN
B CHAPTER 3 CHAPTER 4 CHAPTER 5
ANALYSIS OF DERIVATIVES
RESEARCH METHODOLOGY DATA ANALYSIS AND INTERPRETATION SUGGESTIONS AND CONCLUSIONS
BIBLIOGARPHY AND ANNEXURES
LIST OF TABLES
Title Of Table
LIST OF VARIOUS STOCK EXCHANGES IN INDIA
BOARD OF DIRECTORS ( LSE)
BOARD OF DIRECTORS (LSE SECURITIES)
SETTLEMENT CYCLE SCHEDULE
SCHEDULE OF ANNUAL LISTING FEE
ACHIEVEMENTS OF LUDHIANA STOCK EXCHANGE
6 IMPACT ON CUSTOMER BASE FIGURE 4.2 PAYOFF INDEX FUTURES (SELLER) FIGURE 2. 5 TRADED PERIOD FOR DERIVATIVE INVESTMENT FIGURE 4. 4 AMOUNT INVESTED IN DERIVATIVES FIGURE 4.1 SOURCES OF FUND FOR THE YEAR 2005-06 FIGURE 1.1 PAYOFF INDEX FUTURES (BUYER) FIGURE 2.2 SOURCES OF FUND FOR THE YEAR 2004-05 OF LSESL FIGURE 2. 3 SEGMENT HAVING LARGE TURNOVER FIGURE 4.1 TRADING PERIOD IN DERIVATIVES FIGURE 4.2 PURPOSE FOR DERIVATIVE TRADING FIGURE 4.6 PAY OFF PUT OPTION (SELLER) FIGURE 4.LIST OF DIAGRAMS Fig. Title of the Diagram OF LSESL Page No 28 29 50 51 55 56 57 58 81 82 83 84 85 86 87 vii FIGURE 1. No.4 SELLER CALL OPTION FIGURE 2.3 PAY OFF CALL OPTION (BUYER) FIGURE 2.5 PUT OPTION BUYER FIGURE 2. 7 RELATIONSHIP WITH CASH MARKET .
9 SHORT COMING IN INDIAN DERIVATIVE SYSTEM FIGURE 4. 8 ACCEPTANCE BY INDIAN INVESTORS FIGURE 4.FIGURE 4.10 WHICH TOOL OF DERIVATIVE IS BETTER 88 89 90 viii .
It reflects hopes. the stock exchanges serve the role of barometer. corporate houses. Simultaneously reached by many buyers and sellers in the market. The stock exchanges are the nerve center of capital market. stock exchange is said to be a barometer of economic and financial health. If the speculation of investor becomes wrong then the investor loses. A stock exchange refers to that segment of the capital market where the securities issued by corporate entities are trade. shares. debentures and bonds and serves as a role of barometer. It is an open auction market where buyers and sellers meet and evolve a competitive price for the securities. It provides linkages between the savings of household sector and investment in corporate sector or economy. etc meet and where the trading of these corporate securities takes place. bonds etc. not only of the state of health of individual companies. financial institutions. aspirations and fears of people regarding the performance of the economy. The stock exchange discharges three essential functions in the process of capital formation not in raising resources for the corporate sector. not only of the state of health of individual companies but also of the nation’s economy as a whole. Nobody knows what will happen even after a second. by providing market place quotations of the price of shares and bonds or sort of collective judgment. This is a market of speculations. 2 . It provides market quotation for share. It provides place for sale and purchase of securities i.e. In fact. Since buying and selling of different types of securities takes place in stock exchange.STOCK EXCHANGE A “STOCK EXCHANGE” is a platform where buyers and sellers of securities issued by government. It provides necessary mobility to capital and directs the flow of capital into profitable and successful enterprises. Therefore. but also of the economy as a whole. The prices of particular securities reflect their demand and supply.
o It is an association of persons known as members. o Membership is must for transacting business. brokers. can do so through members of stock exchanges i.e.FEATURES OF STOCK EXCHANGE o It is the place where listed securities are bought and sold. o Trading in securities is allowed under rules and regulations of stock exchange. 3 . o Investors and speculators. who want to buy and sell securities.
Stock exchange protects the investor of investors through strict enforcement of rules and regulations with respect of dealings. Punishment (including fine. The bargained prices of buyers and sellers are recorded. People having surplus funds invest in securities and these funds are securities and these funds are used for industrialized and economic development of the country that leads to capital formation. 4 .FUNCTIONS OF STOCK EXCHANGE The stock exchange provides appropriate conditions where purchase and sale of securities takes place at reasonable and fair prices.The stock exchange provides a ready market for the conversion of existing securities into cash and vice versa. The stock exchange acts as the center of providing business information relating to the enterprise whose securities are traded as the listed companies are to present their financial and other statements to it. suspension) may be there if brokers adopt any malpractice in dealing with investor like charging excessively high commission etc. on the basis of which each investor is able to evaluate the securities held by him and thus knows the worth of his holdings at a particular time.
These were organized as voluntary non-profit making associations of brokers to regulate and protect their interests. counter-bids. On the basis securities regulation. Number of Investors is increasing day by day. Ahmedabad and other centers but they were not recognized soon after it became a central subject. GORWALA went into bill for securities regulation. During the war boom. The stock exchange is a double auction market. 1925 used to regulate trading in securities. The stock exchange operating in the 19th century was those of Bombay set up in 1875 and Ahmedabad set up in 1894. Before the control on securities trading becomes a control on securities trading became a central subject under the constitution in 1950. Quite distinct from the common market in which only one seller and many buyers in a stock exchange a number of potential buyers and potential sellers co-exist all competing both among themselves and with one another in making bids. It was a state subject and the Bombay securities contact (control) act. At present there are 23 recognized stock exchanges in India. Bombay stock exchange was securities in 1927 and Ahmedabad stock exchange in 1927 and Ahmedabad stock exchange in 1937. a number of stock exchanges were organized at Bombay.HISTORY OF STOCK EXCHANGE The trading in securities in India was started in the early of 1973. 5 . A.D. On the basis securities contracts (control) at became law in 1956. central legislation was proposed and a committee headed by sh. Under this act. offers and counter-offers.
o ECONOMY AND COUTRY: There is large of saving. safety etc. o COMPANIES: It provides them access to market funds. o BROKERS: They receive commission in lien of their services to investors. marketability. better growth moves industries. higher rating and public interests. higher income. 6 .WHO BENEFITS FROM STOCK EXCHANGE? o INVESTORS: It provides them liquidity. of Investment.
limited by guarantee Public limited company Pvt.P. limited by guarantee Public limited company Public limited company Public limited company Public limited company Co. limited by guarantee Co. Kanpur 11 12 13 14 15 16 Pune Stock exchange Ludhiana Stock exchange Jaipur Stock exchange Guahati Stock exchange Kannaar Stock exchange Magadh Stock exchange 1982 1983 1983 1984 1985 1986 Co. converted into public ltd. 1982 7 . No. 9 10 Cochin stock exchange U. Indore 5 6 7 8 Madras Stock exchange Hyderabad Stock exchange Delhi Stock exchange Bangalore Stock exchange 1937 1943 1947 1957 Stock 1908 Stock 1897 Voluntary organization Public limited company Voluntary organization Co.P. 1 Bombay Stock exchange Name of stock exchange Years establishment 1875 Voluntary organization 2 Ahmedabad exchange 3 4 Calcutta Stock exchange M.LIST OF VARIOUS STOCK EXCHANGES IN INDIA TABLE 1. co. 1930 exchange. limited by guarantee Stock 1978 Public limited company Public limited company Non-profit Non-profit Non-profit of Type of organization exchange.1 S.
M.T. 8 . limited by guarantee 19 20 21 Vadora Stock exchange Meerut Stock exchange O. ESTABLISHMENT Ludhiana stock exchange was established in 1983 with 220 members by Sh. N.D. Haryana.17 Bhuvneshwar exchange Stock 1989 Co. limited by guarantee 18 Saurashtra stock exchange.D. (Over the counter exchange of India). Co. Mumbai 1990 1991 1993 N. N. Munjal leading industrialist to fulfill vital need of having a stock exchange in this region. LSEAL has played on important role in generating capital for the companies in states of Punjab. B. 1989 Kutch. Himachal Pradesh and J.P.C. Pure demutulised 22 23 24 National Stock exchange Coimbtoor tock exchange Sikkam Stock exchang 1995 1996 1997 Pure demutualised N. Oswal and Sh. PROFILE OF LUDHIANA STOCK EXCHANGE ASSOCIATION LTD.D. Since its inception LSEAL has grown phenomenally switched from manual trading to screen based training on November 18th 1996 and number of listed companies increased from 160 in 90’s to 437 as on 31st march of which 286 are regional and 131 are non regional.K.I.D. S.
In addition.2 9 . Technicians and sub-staff. BOARD OF DIRECTORS Sh.GOVERNING COUNCIL. Aggarwal Sh. Sunil Malhotra Sh. it has advisory and standing committees to assist the administration.C. S. Bains Sh. Defaults Committee and Investor Services Committee. COMMITTEES AND ADMINISTRATION The Council of Management of the Exchange consists of eleven members. Administration of the Exchange is managed by the Managing Director who is assisted by a Company Secretary and a team of Executives. Arbitration Committee. Tandon Sh. Harjit Singh Sidhu Prof. Rajinder Bhandari Sh.K. D. Sanjeev kumar Gupta Sh. D.P. Malhotra Sh. Manmohan Juneja Sh. G. The Exchange has four Statutory Committees namely Disciplinary Committee. Gandhi Managing Director Public Representative Public Representative Public Representative Public Representative Public Representative Public Representative SEBI Nominee Director SEBI Nominee Director TABLE 1. out of which two are Government Nominees. Yash Mahajan Sh. Assistants.S.B. one third of the elected the Executive Directors retire by rotation. six are Public Representatives and one Managing Director who is also Ex-officio member of the Board. At every Annual General Meeting. B.
and Himachal Pradesh & Chandigarh. J&K. The structural changes that took place in the recent past in the Capital Market of the country had a negative impact on the trading volume of the regional Stock Exchanges. the Investor Services Committee and Audit Committee. and has been providing trading platform for the investors situated in Punjab. OPERATIONS OF LUDHIANA STOCK EXCHANGE TURNOVER Ludhiana Stock Exchange is one of the leading Stock Exchanges among the Regional Stock Exchanges of the country. a subsidiary of Ludhiana Stock Exchange. There has been a significant reduction of turnover during the financial year 2001-2002. It recorded a peak turnover of Rs. yet it has followed a model of corporate governance.CORPORATE GOVERNANCE Although the Ludhiana Stock Exchange is not a listed Company. D. Malhotra. but the reduction in turnover of the Exchange has been more than adequately compensated by substantial rise in the turnover of LSE Securities Limited. Statutory Committees are represented by brokers and non-brokers in 20:80 ratios.K. The Investor Services Committee comprises of four public Representatives and one broker member.9154 crores during the year 2000-2001. a legal expert. It had been generating significant amount of the business in the secondary market. It is headed by Sh. 10 . it has 344 listed companies and among them. 220 are listed as regional companies. which is evident from the composition of the Statutory Committees. At present.
END OF AN ERA The management of the stock Exchange apprehended that the smaller regional stock exchanges would not be able to meet the challenges imposed by expansion of bigger stock exchanges like NSE and BSE and might end up losing their business to VSAT counters of the bigger stock exchanges.LISTING Listing is one of the major functions of a Stock Exchange wherein the securities of the Companies are enlisted for trading purpose. coming out with an IPO. the LSE securities LTD. After getting the listing approval. 1956. Trading at NSE and BSE was commenced through the subsidiary route from September 200 and December 2000 respectively. Any Company incorporated under Companies Act. The Companies desirous of listing its securities on the Exchange have to sign a Listing Agreement with the Stock Exchange. which are already listed with Ludhiana Stock Exchange. The Listing Department of Ludhiana Stock Exchange deals with listing of securities. which are found deficient in compliance. TRADING ON BIGGER STOCK EXCHANGES The exchange acquired the membership of NSE and BSE: through its subsidiary. further listing of issues like bonus and rights issues. with the objective of providing an enabling mechanism to its member brokers to trade on NSE and BSE as a sub brokers of LSE securities Limited. In order to 11 . post-listing compliance of the companies. The listing section of the LSE monitors the post-listing compliance of all the listed companies and follows up with the companies. the Company has to ensure and report compliance of the post listing requirements. has to mandatory list its shares on a Stock Exchange.
the exchange has set up 30 trading terminals at remote sites and union territory of Chandigarh. Trading through V-SAT has been smoothly conducted in October 1999. OWN BULLETIN LESAL is continuously publishing LSEAL Bulletin at the interval of quarter. ON LINE TRADING THROUGH VSAT LSEAL has chalked out an ambitious program to expand online trading through V-SAT to untie other than Ludhiana and plans to take the trading facility to doorstep of investors in this year. This screen Based Trading is based on VECTOR (Versatile Engine for Centralized Trading and on line reporting System) this system displays funds with respect of opening prices of the stock exchanges as well as the last traded prices. It started its operation on 16th Aug. SCREEN BASED TRADING It was started at LSE on Nov. It is also publishing LSE annual report which provides information to the various members and investors of stock exchanges.prepare for such an eventuality. 18. 1996. The Board of Directors of LSE have approved the plan for expansion of online trading through VSAT with the object of broad base business opportunities to the investor and members. LSEAL HAS:OWN BUILDING LSEAL has its own six stories ultra modern building at Feroze Gandhi market at Ludhiana. stock exchanges set up a broking armed in the name of LSE Securities Ltd (a subsidiary company of stock exchange) in January 2000 and built infrastructure and IT based sophisticated systems to enable its members and investors to trade on NSE and BSE through the subsidiary route. 1983. The requisite software is developed by CMC Ltd. 12 .
to the investors and members of the general public such as prices of the scrip’s. DEPOSITORY SYSTEM LSE commence trading in demat shares from November 16. This center has a well equipped library. Purchasing members are required to make the payment against the delivery also on aforesaid day. The exchange introduced a computer based stock. SETTLEMENT AND CLEARING There is T+2 settlement cycle prevailing in the market. DP operation of the company not only 13 . 1998 by becoming a participant of NSDL. Centre is also equipped with a screen for providing ‘live’ rates of trading at NSE and BSE DEPOSITORY PARTICIPANT SERVICE The company is the DP of NSE and is the only depository in the region having on line real time connectivity with NSDL. new issuers etc. INVESTOR GRIEVANCES CELL LSE has made special arrangement to handle investors complaints and grievance so its premises for providing information relating to Capital market. The exchange has set up in-house DP services to facilitate trading and settlement in demat securities. Members are given scrip wise delivery notes. Tel system for providing on line real time information through a fully automatic system. book closures. The members are required to deposit scrip’s sold by them to the clearing house on the second working day following the day of transaction. 1998. new listings.SETTLEMENT GUARANTEE FUND It provides guarantee to all genuine based trading system of the stock exchange and was implemented a settlement guarantee fund with effect from 6 th April.
14 .benefited the investors of the region but has also proved to be a source of income for the company.
5.65 crores.PROFILE OF LSE SECURITIES LTD..90 lacs & the authorized capital of the company is Rs 8 crores. 15 . through innovative products by encompassing a variety of activities related to the capital market. GOVERNMENT COUNCIL The Council of the management of the Company comprises of 12 directors of which 5 are broker members and 5 non-brokers. LSE Securities Ltd. Operations of the company are run in a professional. transparent and fair manner keeping in view of the interest of investors as well as other stakeholders. law and management and remaining two are Executive Officer of the holding company (Ludhiana Stock Exchange) and Chief Executive officer of the company. The company since its inception has marched forward rapidly and achieved many milestones in a short span of its existence. INTRODUCTION OF LSE SECURITIES LTD. The non broker members are independent Directors of eminent status from the field of finance. was incorporated in January. OBJECTIVE OF THE COMPANY LSE Securities Limited is a subsidiary of the Ludhiana Stock Exchange. 2000 with a view to revive the capital market in the region and for taking full advantage of the emerging opportunities being provided by expansion of bigger stock exchanges like NSE and BSE. preference capital of Rs 7. which was formed with an objective to enhance business and investment opportunities for the investors and members of Ludhiana Stock Exchange at large. who are on the board of the company as ex-officio Directors. Thus the council of management has representation of sub-brokers as well as professionals and subject specialists representing various fields of business activities. The company has a paid –up capital of Rs.
The Ludhiana Stock Exchange floated its subsidiary company. There was encouraging response from the sub-brokers specially at NSE counters.CORPORATE MEMEBERSHIP OF NSE & BSE SEBI. permitted smaller Stock Exchanges. The total turnover of the company at NSE is growing by leaps and bounds ever since in incorporation. It has obtained corporate membership of both NSE and BSE in the year 2000. at the initiative of LSEAL. The total turnover during the financial year 2005-06 had been Rs 4920 crores as against Rs 3833 crores during the financial year 2004-05 in Capital Market segment of BSE. During the financial year 2005-06 turnover had been Rs 8613 crores as against Rs 7987 crores during the financial year 2004-05 in Capital Market segment of NSE. 16 .Commenced trading operations in Capital Market Segments of BSE and NSE in September. 2000 respectively. TRADING AT NSE AND BSE The LSE Securities Ltd. F&0 SEGMENT OF NSE LSE Securities Ltd. The Company became the first subsidiary of any Regional Stock Exchange which commenced trading in “F&O” Segment of NSE. Response to trading facilities in the “F&O” segment of NSE has been very encouraging and volumes generated in this segment soon exceeded those in “Capital Market” segment. 2000 and December. with the objective of obtaining trading rights on bigger Stock Exchanges. Commenced trading operations in Future and Options Segment of NSE in February 2002. to trade on bigger Stock Exchanges through their subsidiary companies. the LSE Securities Limited.
Lalit Kishore Sh Sukhjiwan Rai Sh. Zahir Sh.C. Vinay Shrivastav Chairman Vice Chairman Director Director Director Director Public Representative Public Representative Public Representative Public Representative Public Representative TABLE 1. Presently. All trading terminals for Capital Market Segment and F&O segment are being operated by the persons after having qualified the said certification.TRADING THROUGH V-SATs The LSE Securities Limited has also provided facility to its sub-brokers for trading on NSE and BSE through VSAT counters. M.3 DEPARTMENTS OF LSE 17 . Anurag Arora Sh.A. the company motivated its sub-brokers and its staff to qualify the certification in financial markets conducted by NSE. CERTIFICATION IN FINANCIAL MARKET In order to provide professional services to the investors of LSE Securities Limited through its sub-brokers. 17 sub-brokers of the company have been trading through VSAT on NSE and 10 on BSE. BOARD OF DIRECTORS Sh. Ashwani Kumar Sh. Ajay Chaudhry Sh. which are located outside Stock Exchange Building. Harjit Singh Sidhu Sh. Garg Sh. P. Vijay Singhania Sh. A.K ARORA Sh.
actually what function is performed by each and every section. Accounting Section 6. There is an organized network of recording of activities performed there. even then all the sections are interconnected with each other. MARGIN SECTION 18 . So to maintain the proper system of working of exchange.C. I. Following in the list of various departments of LSE:OPERATIONAL DEPARTMENTS 1. Margin Section 2. Legal Department 2. There is no duplication of work. Secretarial Department. Computer Section and information System Department SERVICE DEPARTMENTS 1. (Investor Grievance Cell) 4. there are so many different departments in which particular functions are performed.G. But before studying the inter dependence of section) here is the details of all department i. Clearing House 3. Market Surveillance 4. Membership Department/Personnel Department All the section perform specific functions. Listing Section 5. 3.The main aim of LUDHIANA STOCK EXCHANGE is to ensure the safety and security to the investments of the investors and to provide the proper services under the prescribed guidelines of SE 131. assigned to those departments.e.
which are imposed given as follows:MARK TO MARKET MARGIN The exchange collects this margin on daily basis.Margin Section is an important section. This section apart from dealing in the regulating the trading of brokers keeps a check on excessive trading in speculation. collected from members to avoid the losses and to provide security to the investors. Margin is the amount. he can do so by depositing Additional Base Minimum Capital. then before starting trading he is supposed to deposit some amount fixed by SEBI as security. calculated as the difference of his buying or selling price and closing of that scrip at the end of the day. The security deposited by a member is called Base Minimum Capital. When a member gets registered in the exchange and with Securities Exchange Board of India (SEBI). daily margins are collected from brokers. which is collected from brokers for the safety of transactions. There are different types of margins. This is also called loss margin. broker-wise 100% notional loss of each member for every scrip. The margin is payable in cash or in bank guarantee. VALUE AT RISK OR VAR MARGIN 19 . If any member wants to trade beyond his trading limit. So to make the transaction safe. in the mean time the rates may fluctuate which may lead to default. As the transactions are to be finalized on basis. Now as SEBI’s rolling settlement prevails. TYPES OF MARGINS As we have discussed earlier margins. Ultimately margin is the difference between the limit and trade done by the member.
The margin brokers shall be collected by way of cheques drawn on the prescribed banks.For the scrips in the compulsory rolling settlement at 99% VAR based margin system would be introduced w. 2001. That is on next trading day. 02. SPECIAL MARGIN The brokers will be required to deposit margin as per the percentage prescribed by stock exchange in this regard from time to time. the computation of this margin is done by a software developed by CHICAGO Stock Exchange. ADDITIONAL MARGIN Thus margin is 12% would be levied over and above the VAR margin. July.f.e. This margin is collected from brokers on T+1 basis. CLEARING HOUSE 20 . PAYMENT OF MARGIN The broker's shall be required to deposit margin demanded from them by 11:00AM on T+I day. demand draft or by way of direct debit to the bank account to broker.
And pay out of scrips will also on Wednesday up to 2:00 P. Means pay-in and pay-out of securities is settled on T+3 Basis would commence form 1stApril.Clearing house takes care of pay-in and pay-out securities. No.TRADING PERIOD. 10:30A.4 T . PAY IN/PAYOUT OF SECURITIES On trading day brokers buy and sold the securities or scrips and pay-In and pay out of securities will be completed on T+2 basis e. SETTLEMENT CYCLE SCHEDULE Sr. 1 2 3 Day T T+2 T+3 Description of Activity Trade Trade Date Securities and funds pay-in and pay-out Auction of shortage in delivery TABLE 1..g. in this way pay-in/pay-out of securities cycle will be completed. 2002. AUCTION OF UNDELIVERED SCRIPS 21 . if broker buy/sell shares on Monday then pay in of securities will be on Wednesday. SEBI decide the following activity schedule for exchanges for the T+3 rolling settlement. At this time there is weekly trading system (Monday to Friday) prevails.M.M. And securities are settled by rolling settlement.
Then. CLOSE OUT In case the shares of particular scrips is not available on the date of auction.In case if broker fails to deliver the scrips on T+2 delivery day. o Downloading of receiving order. COMPUTER SECTION The growing technicalities and increase in workload has enhanced the importance of computer section in Ludhiana stock exchange. electronic data processing section. o Scrip wise statement Computer facilitates easily updating all automatically adopting of new rates. In auction price of securities may will fluctuate 20% high or low of that trading day. Then it is responsibility of clearing house to settle the undelivered scrips. In this way trade in auction is settled. This department mainly referred to as EDP i. once we feed new limits the whole calculation to be done through 22 .e. In above example. Then it is obligation of solicitor (exchange) to give monetary benefit to initiator (buyer) against the default of defaulter of securities in this manner settlement schedule has completed. auction will start. auction of pending securities will be conducted on Thursday. It prepares several reports namely: o Scrip wise statement of each member for each settlement period o Sub broker wise delivery bill receive order (after payout) o Downloading of delivery order. o And broker on sub broker wise final settlement. This section is the backbone of entire stock exchange would come to halt if this department becomes inactive. o HDFC bank entries.
which is a time consuming as well as space consuming and requires a lot of attention. the computer section switches off his terminal and same step is taken in case of defaulted scrips. Also volume of shares being traced is very high and increasing continuously. It has also eliminated approximately the need to keep check the physical reports. In case the member crosses his limit of trading according to his deposited amount. which links each and every department of the LSE with another and hence helps in working as a whole. CHECK AND CONTROL OVER SCRIPS AND MEMBERS This section also helps in maintaining check and control over defaulting members and scrips. MANUAL OPERATIONS It has reduced manual work.computer will change. Rates are updated either daily or month wise as per the requirements. LINKING CHAIN This section acts as a linkage. as each individual involved knows every relevant tilling . VOLUME AND TRANSPARENCY This system is very much transparent. MARKET SURVEILLANCE AND MONITORING SECTION 23 .
500 is collected from each member annually. INVESTORS GRIEVANCE SECTION LSE has a separate investor's grievance cell. One more fund investor service fund has been set up. their annual financial results and any subsequent increase in the equity base. In this fund Rs. The funds of it are used for maintenance of investor service center. So market surveillance entails scientifically identifying points in a stock price movement or trading volumes. 20% of the listing fee is transferred to it. o To keep a record of the inquiry base of the listed companies.The main task of this section is to see the market sanctity and maintenance so that the investors are not cheated. holding of seminars for investor/brokers benefit. o To participate as monitoring authority in the public and right issue of the company. Rationale Behind Establishing Investors’ Grievance Cell o To safeguard the investor’s interest through investors grievance section. For providing better services to the investors the stock exchange has maintained investor protection fund. which receives complaints from investors and follows up the complaints with companies and member broker to ensure their satisfactory redressal. which don't match with the company's fundamentals. o To ensure that the company listed at the LSE compiles with all the listing requirements. So the price and volume trends in stock exchange are checked for abnormalities scientifically. and publication of LSE Bulletin. Apart from this one percent of the total listing fee collected and ten percent interest covered on company deposits is also transferred to the investor protection fund. o LISTING SECTION 24 .
2800 for every increase of Rs. The annual listing fees referred to above are applicable only if the exchange is a Regional Stock Exchange otherwise the fees will be 50% of the fees indicated above. Presently it is mandatory for Regional Company to get itself listed at LSE. 5 crores or part there of. as it helps the company to raise money from the capital market. 50 crores will pay additional fee of Rs. Company has also to comply with the conditions enunciated in listing clause. although help is taken through computers for the purpose of making Trial Balance. 3 crores and at least 25% of its equity should be offered to the public for the listing company is also required to make a deposit 1 % issue price with the stock Exchange and it can not be released before the expiry of six months provided there is a compliance of prelistings and post-listing requirements of the company. The schedule of annual Listing fee and up front listing fee payable triennially is given below: Paid up capital Upto 1 crores 1 to 5 crores 5 to 10 crores 10 to 20 crores 20 to 30 crores Above 50 crores Annual Listing Fee (Rs. ACCOUNTS SECTION Most of the work in account section LSE is done manually.This department plays an important role in the Stock Exchange.) 8400 16800 28000 56000 84000 140000 TABLE 1.5 Companies which have paid up capital of more than Rs. Income and 25 . In order to get listed company should have minimum capital of Rs.
o Fixed costs are stated at historical costs less depreciation. o Interest on funds borrowed which is attributable to construction of fixed assets and other indirect expenditure during construction is included under work in progress. No accounting entries in such transaction are made in respect of defaulting members by crediting security account and debiting member's investment a/c. these agencies include companies listed at LSE and brokers working at LSE.Expenditure statement and Balance Sheet. The company has the procedure of receiving shares. The shares in such cases are valued at prices on the date of transfer deeds. o To keep the records of all incoming and outgoing money depreciation of financial statements at the end of financial year. The annual report of LSE is generally published in August every year. o Depreciation is provided on written down. o To make and receive payments to the outside agencies. o To get their accounts audited from the third party. Functions of Accounts Section:The account section performs the following function. value method in accordance with and din the manner specified in schedule XIV of the Companies Act 1956. o Stock/Inventory (stationery) is valued at cost. o Sources of funds of LSE: - 26 . o To disburse personnel expenses. Some of the important polices of LSE are o The company follows accrual system of accounting recognizes income and expenditure accordingly. scrips of various companies as securities against the performance of the contract.
Beyond it. 500 p. 1500/. (Rs.crores. per quarter from those members having rooms and those not having rooms all those not having rooms are charges at till rate of Rs. 4/. The members who are not having rooms are charged at the rate of Rs. o Interest income from deposits of companies for listing. Billing of members is done on annual basis for annual fees and other above. feet and 900/.e. which are made at 1% of issue amount and minimum capital for this purpose is Rs.000/o Annual listing fee from companies. 300/(p. 750 per quarter. Rs. On 1st April of each year and they are to make payment in 180 days up to 30 September. If member fails to. 5000) and their authorized representatives. still in case of nonpayment. 5000) Library charges from brokers (Rs. Application Of Funds Of LSE:- 27 .a.per quarter which is having area of more than 200 sq. 13.) o Brokers contribution to investor protection fund (Rs. o Annual fee from brokers (Rs. 1.a) o Fines and penalties form brokers. feet. feet. broker member is served a show cause notice for 60 days on 1st April next year. comply with notice then he can be expelled.a. Such deposits are retained until there is no dispute against the company subject to the minimum of 6 months. whose area is less than 200 sq. o Water and electricity charges Rs. 500 each) as broker member is allowed to have maximum 4 authorized representatives.a.o Membership fee from brokers at the beginning. 200) p.pa. they are charged interest on due amount @ 12% p. o Initial listing fee from companies i. o Maintenance charges Rs.50 per sq.) o Interest earned affixed deposits.mentioned charges. o o Annual computer fee from brokers (Rs.
All activities relating personnel are carried out by the secretarial departments. Administrative expenses (I) Electricity Charges. o Maintain employee record e. overtime etc. 2. has not a separate personnel departments in its organizing chart. 5% of listing fees to SEBI each year.g. 3. 1% of listing is transferred annually to investor protection fund. or listing fee annually to investor service fund. SECRETARIAL DEPARTMENT Duties and responsibilities of personnel department are mentioned as under which are discharge by the secretarial departments. o Recruitment of staff. (II) Security Charges (III) Telephone Charges (IV) VSAT Charges (V) Printing and stationary Salaries 4. Although the LSE. o Other activities like staff farewell party and Diwalipuja.1. 20% for providing services to investors out. LEGAL SECTION 28 . which has the additional charge of personnel. attendance leave. o Maintain employee service book up to date and other detail as per the requirements to auditors at the time of inspection (From date of joining registration) o Employee welfare scheme like loans.
circular and any amendments in rules made by the SEBI are enforced at appropriate time so that the future complications may be reduced or avoided. These departments also maintain records of leaves and overtime of employees. Disciplinary committee. This department carries out all activities relating to the recruitment of the personnel. MEMBERSHIP DEPARTMENT 29 . whenever and wherever a vacancy arises. This department also deals with the appointment or removal of floor clerks or authorized representatives of brokers. PERSONNEL DEPARTMENT Ludhiana stock exchange does not have a personnel department in its Organization chart. the legal section comes into the picture to fight for the cause of investors and against the defaulting members. maintenance of attendance register. defaulting committee. advocate fee etc. As the name legal section suggests it is clearly mentioned and understood that each of every matter involving legality is to be solved by the legal department.When two broker or outside clients do not settle their claims in between themselves and move to court. so that there maybe settled at the earlier without incurring heavy due on amount regarding court fee. The objective of the legal section is to make effective the bylaws and regulation of the stock exchange and to see that the guidelines. Legal section also assist the member investor to settle their disputes through the arbitration committee investors grievance committee.
The trade in market is done through the authorized members who are registered with concerned stock exchange and SEBI. Directors with unlimited liability. There are two types of members in stock exchanges. Following requirements are for corporate members:1. o Corporate members o Individual member Following are the requirements to be an individual member of exchange.This department deals with membership of exchange. Including written test and membership department deal with all above requirements of members. SOURCES OF FUND FOR THE YEAR 2005-06 OF LSESL 30 . 3. who will deal in securities. Two copies of MOA & AOA. 2. To be member minimum qualification Matriculation is plus person has three-year experience interview.e. Age Limit: Qualification: To be member of stock exchange there is age limit Minimum age is 21 yrs Maximum age is 60 yrs. Company must be registered u/s 322 of the company Act i. Qualification & Proof of age of at least two directors.
27 29.23% 53.1 SOURCES:(1) Membership Fee (2) Listing Fee (3) Interest on deposits (5) Other income = = = = 0.03% 3.82% 13.1 2 3 4 5 FIGURE 1.65 (4) Profit on sale of fixed assets = SOURCES OF FUND FOR THE YEAR 2004-05 OF LSESL 31 .
1 2 3 4 5 FIGURE 1.83% ________ 100 ACHIEVEMENTS OF LUDHIANA STOCK EXCHANGE 32 .10% 47.99% 6.2 SOURCES:1) Turnover Charge BSE 2) Turnover Charge NSE 3) Interest on Bank deposits 4) Depository Income 5) Other income = = = = = 5.90% 8.18% 31.
TABLE 1. in C.S.E.E. kapas. Introduction of MCX (Multi Commodity Exchange of India) MCX offers 14 different commodities such as steel. rubber. segment (Through NSEL) Trading on B. oil soil seeds.6 Oct 1981 Aug 1983 Aug 1983 Nov 1996 April 1998 Incorporation of Stock Exchange Commencement of operations Shifting of operation to own building Online Screen Trading Modified carry forward system (MCTS) Nov 1998 Sep 1999 Jan 2000 Aug 2000 Dec 2000 Sep 2000 July 2001 January 2002 Feb 2002 April 2002 April 2003 Oct 2003 and settlement gurantee fund..S. blackpepper. Trading in F&O segment of N. Trading and settlement in demat scrips Trading at remote sites through VSAT counters Introduction of rolling settlement Commencement of online real time depository services Trading on N.S. Securities Ltd. in CM segment (Through LSEL) Introduction of Compulsory rolling settlement Complete shift of trading CM segment from ISE To LSE securities Ltd. precious metal etc. Rolling settlement cycle prevailing at LSE on T+3 basis Rolling settlement cycle prevailing at LSE on T+2 cycle Incorporation of LSE commodities trading services Ltd. a subsidiary of March 2004 LSE.M. 33 .E.
OBJECTIVES A LEARNING OBJECTIVES It includes 1 INTRODUCTION TO DERIVATIVES 2 TYPES OF DERIVATIVES 3 ECONOMIC UTILITY OF DERIVATIVES 4 OBJECTIVES OF DERIVATIVES 35 .
But derivative market is quite different from other markets as the market is used for minimizing risk arising from underlying assets. X = f(Y) Where X (dependent variable) = DERIVATIVE PRODUCT 36 .5 INSTRUMENTS OF DERIVATIVE TRADING 6 RISK MANAGEMENT 7 MARGIN B ANALYSIS OF DERIVATIVES MARKET INTRODUCTION TO DERIVATIVES Primary market is used for raising money and secondary market is used for trading in the securities. The work “derivative” originates from mathematics. i.e. It refers to a variable. which has been derived from another variable. which have been used in primary market.
The price of these derivatives is driven from spot price of wheat. Example : Wheat farmers may wish to sell their harvest at a future date to eliminate the risk of change in price by that date. All derivatives are based on some cash product.T. Hence derivative market has no independent existence without an underlying asset. a financial contract whose value is derived from the value of an underlying asset/derivative security”. Act 1956 defines “Derivative” to include: 37 . Short term as well as long-tern bond of securities of different type issue4d by govt. DEFINITION OF DERIVATIVE In the Indian context the securities contracts (Regulations). The underlying assets can be : a. money instruments for examples loan & deposits. Price of precious and metals gold c. Any type of agriculture product of grain (not prevailing in India) b. As a tool of risk management we can define it as. O. e. and companies etc.C. The price of the derivative instrument is contingent on the value of underlying assets.Y (independent variable) = UNDERLYING ASSET A financial derivative is a product that derives value from the market of another product. Foreign exchange rates d.
which give rise to the risk factor. Loan whether secured or unsecured. Agricultural F&O helped farmers and PROCESSORS hedge against commodity price risk.1. After the fallout of BRITAIN WOOD AGREEMENT. This situation led to development of derivatives as effective “Risk Management tools”. Share. Risk instrument or contract for difference or any other form of security. A security derived from a debt instrument. A contract which derives its value from the prices of prices of underlying securities. HISTORICAL ASPECT OF DERIVATIVES The need for derivatives as hedging tool was first felt in the commodities market. the financial markets in the world stared undergoing radical changes. 38 .
PRODUCTS. Speculators. Futures. 39 . The following three categories of Participants-Hedgers. Looking at the liquidity market. Therefore the stock index futures first emerged in U. The most common are FORWARDS. Trading took place on currency.S. the exchange rate was fixed at time of contract later on commodity future contracts was introduced then followed by interest rate futures. and Arbitrageurs. FUTURES. which were contracts for specified quantities of given currencies. An equity fund e. in 1982. The IMM provided an outlet for currency speculators and for those looking to reduce their currency risks.A. PARTICIPANTS. can reduce its exposure to the stock market and at a relatively low cost without selling of part of its equity assets by using stock index futures or index options. OPTIONS AND SWAPS. derivatives allow corporate and institutional investors to effectively manage their portfolio of assets and liabilities through instruments like stock index futures and options.g. AND FUNCTIONS Derivatives contracts have several variants.Derivatives trading in financial market started in 1972 when “Chicago Mercantile Exchange opened its international Monetary Market Division (IIM).
40 . 3. futures and options: 1. they are operation who want to eliminate the risk composing of their portfolio. TYPES OF DERIVATIVES The most commonly used derivatives contract is forwards. Arbitrageurs : They are in business to take advantage of discrepancy between price in two different markets. Forwards : A forward contract is a customized contract between two entities. He only receives and pays the differences between the purchase and sale prices.Hedgers face risk associated with the price of an asset. 2. If for example. they see the future price of an asset getting out of line with cash price.1. they will take off setting positions in two markets to lock in profit. They use futures or options markets to reduce the risk. where settlement takes place on a specific date in the futures at today’s pre-agreed price. Speculators : They wish to be on future movements in the price of an asset. Usually the speculator does not take delivery of securities sold by him. If this expectation comes true he sells the securities at a higher price and makes a profit. Hedger :. Thus. A speculator may buy securities in anticipation of rise in price.
They can be regarded as portfolios of forward’s contracts. The two commonly used swaps are: a) Interest rate swaps : These entail swapping both Principal and interest between the parties . Options : It is of two types : call and put options. with the cash flow in one direction being in a different currency than those in the opposite direction. 4. However. 6. 41 . Futures contracts are the special types of forward contracts in the sense that are standardized exchange traded contracts. Futures : A future contract is an agreement between two parties to buy or sell an asset at a certain time the future at the certain price.2. Equity Index Options are most popular form of baskets. Leaps : Normally option contracts are for a period of 1 to 12 months. Underlying asset. Baskets : Baskets options are option on portfolio of underlying asset. These long-term option contract are popularly known as Leaps pr Long term Equity Anticipation Securities. PUTS give the buyer the right but not the obligation to sell a give quantity of the underlying asset at a given price on or before a given date. Swaps : These are private agreements between two parties to exchange cash flows in the future according to a prearrange formula. 5. exchange may introduce option contracts with a maturity period of 2-3 years. 3. at a give price on or before a given future date.
Derivatives market helps increase savings and investments in the long run Transfer of risk enables market participants to expand their volume of activities. 5.Prices in organized derivatives markets reflects the perception of market participants about the future and lead the prices of underlying to perceived future level.Derivatives have a history of attracting many bright. The prices of derivatives converge with the prices of the underlying at the expiration of the derivative contract. with the cash flow in one direction being in a different currency than those in the opposite direction. the underlying market.Derivatives due to their inherent nature are linked to the underlying cash markets.b) Currency swaps : These entail swapping both Principal and interest between the parties. well-educated people with an entrepreneurial. Increased volume in the cash market :. We can also term the derivative market as the insurance company. new products and new employment opportunities. THE DERIVATIVES MARKETS PERFORM A NUMBER OF ECONOMIC FUNCTIONS: 1. 3. New Entrepreneurial activities :. Increase in saving :. 2. Price Discovery: . 42 . 4. witness higher trading volumes because of participation by more players who would not otherwise participate for lack of an arrangement to transfer risk.The derivative market helps to transfer to the risks from those who have them but may like them those who have an appetite for them. With the introduction of derivative. Thus derivatives help in discovery of future as well current price. creative. whereby certain players assumes the risk by receiving premium amount. Transfer of risk: . the benefits of which are immense.
Mutual funds may find it difficult to invest the funds raised by them properly as the scrip in which they want to invert might not be available at the right price. OBJECTIVES OF DERIVATIVE TRADING 1.6. Hedgers. Counter party risk on the part of broker. Hedging: You own a stock and you are confident about the prospects of the company. trading members. 2. 4. Exchange. Liquidity risk in the form that the particular scrip might not be traded on exchange. Stock lenders and borrowers. However at the same time you feel that overall market may not perform as good and therefore price of your stock may also fall in line with overall marked trend. clearing bank. Unsystematic risk in the form that the price of scrip may go up or down due to “Company Specific Reasons”. Participants in derivative market 1. 3. Trading in controlled environment :. 2. REASON FOR STARTING DERIVATIVES 1. 3. 43 . speculators. in case it ask money from us but before giving delivery of shares goes bankrupt.The introduction of the derivatives has shifted the trading in speculative dealings in controlled market and the counter party risk has been eliminated. arbitrageurs. Financial institutions. clearing members. 5. 4. Clearing.
The basic purpose of a hedge is to reduce the risk of loss. short selling. it is good to retain the stock. Hedging is a tool to reduce the inherent risk in an investment. and futures are used for hedging.The future price of an underlying asset is function of spot price and cost of carry adjusted for any return on investment. Likewise you may also have opinion about the overall marker trend. therefore. distortions in spot prices. put options. or uncertainly about future income stream. In both these situations you would like to insure portfolio against any such market fall. though fundamentals of the company will remain good. Transactions made to take advantage of temporary distortions in the market are known as arbitrage transactions. Speculations: . To take advantage of such opinion. Various strategies designed to reduce investment risk using call option. Arbitrage: . individual asset or the entire market (index) could be sold or purchased. However. current information and future expectation. due to uncertainly about interest rates. 2. 44 .You may have very strong opinion about the future market price of a particular asset based on past trends. This imbalance in future and spot price gives rise to arbitrage opportunities. prices in futures market may not truly reflect the expected spot price in future.You except that some adverse economic or political vent affect the marker sentiments. 3. Such insurance is known as hedging.
6.THE REQUIREMENTS FOR SETTING UP FUTURE AND OPTION TRADING ARE OUTLINES BELOW: 1. 4. and a contract price. Uniformity of rules and regulation in all the stock exchanges. Strict capital adequacy 45 . Large. This would decrease the transaction costs. For a given underlying security. Standardization of the terms governing the options contracts. number of market makers. the clearing house has to bear the cost of necessary to carry out the contract. who can write the options contracts. financially sound institutions. 2. 7. 3. This is because after the exercise of an option contract. Creation of a strong cash market (secondary market). In case of default by a party to a contract. only the premium should be negotiated on the floor of the exchange. the investors move to the secondary market to book profits. 5. Creation of paper-less trading and book-entry transfer system. a strike price. all contracts on the options exchange should have an expiry date. Careful selection of the regulation in all the stock exchanges. Creation of an Options Clearing Corporation (OCC) as the single guarantor of every traded option. members and norms to be out and followed.
65.500 crores.000 crores. 4.STRENGTH OF INDIAN CAPITAL MARKET FOR INTRODUCTION OF DERIVATIVES 1. 5. shows high liquidity. (NSDL). Strong depository : A strong depository National Securities Depositories Ltd. 3. 46 . A good Legal Guardian : SEBI is acting as a good legal guardian for Indian Capital Market. which started functioning in the year 1997. Large Market Capitalization: India is one of the largest market capitalized country in Asia with a market capitalization of more than 7. Trader Guarantee: The first “clearing corporation” (CC) guaranteeing trades has become fully functional from July 1996 in the form of National Securities Clearing Corporation (NSCCL) for which it does the clearing. has strengthen the securities settlement in our country. High Liquidity: In the underlying securities the daily average traded volume in Indian capital market today is around 7. 2. Which means on an average every month 14% of the country market capitalization gets traded.
6. Reduction of borrowing cost. Modifying the payment structure of assets to correspond to investor market view. speculator and arbitrageurs. 5. 3.IMPORTANCE OF DERIVATIVES TRADING 1. 2. No physical delivery of share certificate so reduction in cost by stamp duty. It does not totally eliminate speculation. 4. Enhancing the yield on assets. 47 . Increase in hedger. which is basic need of Indian investors.
It removes the future price risk. It a speculator has information or analysis. and then be can go long on the forwards market instead of cash market. The delivery price is chosen in such a way that the value of contract for both parties is zero at the time of entering the contract.INSTRUMENTS OF DERIVATIVE TRADING Forward Derivative Future Option FORWARD CONTRACTS “It is an agreement to buy/sell an asset on a certain future date at an agreed price”.agreeing to buy 2. Who takes a short position – agreeing to sell The mutually agreed price is known as “delivery price” or “forward price”. but the contract takes a positive or negative value for parties as the price of underlying asset moves. The two parties are : 1. 48 . which forecast an upturn in price. Who takes a long position .
3. 30. Lack of Liquidity. 120 per share. Effect of change in price : As mentioned above the value of such a contract in zero for both the parties. 2002 at a Rate of Rs.The speculator would go long on the forward. 140 per share. A agrees to deliver 100 equity shares of Reliance to B on Sept. Lack of centralization of trading. it gives positive or negative value for contract. Speculator may well be required to deposit a margin upfront. One party can breach its obligation. (20*200) = 4000. 2. 4. No standardization. FUTURE CONTRACT 49 . wait for the price to rise. . Price Assets Increase Decrease & Underlying Holder & long position Positive Value Negative Value Holder & Short Position Negative Value Positive Value E. long position would gain the same amount or vise versa if price quoted is less than delivery price. Profit/Loss = ST-E ST = spot price on maturity date E = delivery price Limitations of forward contract 1. However. this is generally a relatively small proportion of the value of assets underlying the forward contract. But later as the price & the underlying asset changes. than a who has short position would stand to loss of Rs.g. and then take a reversing transaction to book profits. Now if the price of share on that is Rs.
reconciling and guaranteeing the trades on the future exchanges. Standardized contracts e. contract size. There will be a different basis for each delivery month 50 . 3. It makes obligation on both parties to fulfill the contract. FUTURE TERMINOLOGY Spot Price : The price at which an asset trades in the spot market. Clearing house is associated with matching. Contract cycle : The period over which the contract trades. Features of Future Contract 1. place and alternative asset. Between two parties who do not necessarily know each other. Basis : In the contract of financial futures. Expiry Date : It is date specified in the futures contract. Thus a January expiration contract expires on the last Thursday of the January. Guarantee for performance by a clearing corporation or clearing house. processing. Clearing house tries to eliminate risk of default by either party.g. The index futures contracts on the NSE have one moth. a new contract having three-month expiry is introduced of trading. which expire on the last Thursday of one month. date of delivery. specific size.It is an agreement between buyer and seller for the purchase and sale of a particular assets at a specific future date. at the end of which it will cease to exist. This is the last day on which the contract will be traded. registering. 4. It has some features of Badla also. On the Friday following the last Thursday. and three-month expiry cycles. 2. confirming setting. Future Price : The price as which the futures contract trades in the futures market. basis can be defined as the futures price minus the spot price.
at the end of each trading day. TYPE OF FUTURE CONTRACTS Index Futures : Of the financial futures. the arbitrage between the futures equity market is further expected to reduce impact cost. index future contracts are key contracts. Index Futures began trading in India in June 2000 of Trade (KSBT)’s Futures derive its value from the underlying index-e.A. the investor receives a margin call and is expected to top up the margin account to the initial margin level before trading commences on the next day. the margin account is adjusted to reflect the investor’s margin gain or loss depending upon the future’s closing price. Initial margin : The amount that must be deposited in the margin account at a time a future contract is first entered into is known as initial margin. This is set to ensure that the balance in the margin account never becomes negative. in 1982 by the “Commodity Futures Trading Commission” (CFTC) by approving the Kansas Board proposal. Maintenance margin : This is somewhat lower than initial margin.for each contract.g. Marketing-to-market : In the futures market.S.. NSE’s futures. In a normal market. Contracts are based on “S & P CNX NIFTY” At present it has become the most liquid contract in the country. introduced in U. If the balance amount falls below the maintenance margin. basis will be positive. 8090% of retail participation is expected in India because 51 . This reflects that futures prices normally exceed spot prices.
1 Index Loss 57 52 . 18000 (200*90) PAYOFF INDEX FUTURES (BUYER) Profit 0 1220 FIGURE 2. 244000 (200*1220) 31st Nifty July futures has risen to 1310 Sells off his position at 1310 Makes a profit of Rs.TREND OF BULLISH MARKET – – – – – – – 15th Feels the market will rise Buys 200 nifty contracts with expiry date .31th at 1220 costing Rs.
TREND OF BEARISH MARKET F 15th – – – – F 31st – – – Suppose Nifty July futures has fallen to 1150 Squares off his position at 1150 Makes a profit of Rs. 14000 (200*70) feels the market will fall Sells 200 Nifties July Contract Nifty July contract is trading at 1220 His position is worth Rs. 244000 (200*1220) PAYOFF INDEX FUTURES (SELLER) Profit 0 FIGURE 2.2 1220 Index Loss 53 59 .
FORWARD VS. FUTURES Features -Operational Mechanism -Contract Specifications -Counter party Risks -Liquidity -Price Discovery -Settlement Margin Forward Traded between two parties Differ from traded to trade Exists such risk Low Not Efficient At end of period No such margin Future Trade on Exchange Standardized Contracts No such risk High Highly Efficient Daily Margin required for trading 54 .
Today exchange-traded options are actively traded on stocks. The first trading is options began in Europe and U. Scholes invented the Black-Scholes formula. The firm would then attempt to find a seller or writer of option either from its own client of those of other member firms. Historical background of Option: Although options have exercised for a long time. in a forward or futures contract. as early as the century. I”f no seller could be found. 1990s that a group of firms set up what is known as the “put and call brokers and dealers association” with the aim of providing a mechanism for bringing buyers and sellers together. Black.S.OPTIONS Options are fundamentally different from forward and futures. The holder does not have committed himself to doing something. the two parties have committed them self to doing something. foreign currencies and futures contracts. without much knowledge of valuation. The two deficiencies in above markets were 1. stock indices. An option gives the holder/buyers of the option the right to do something. It someone wanted to buy an option. Marton. No secondary market 2. The market for options develop so rapidly that by early 80’s number of share underlying the What is Option ? 55 . In contrast. CBOE was set up specially for the purpose of trading options. he or she would contract one of the member firms. the firm would undertake to write the option itself in return of price. It was only in early. No mechanism to guarantee the writer of option would honor it In 1973. In April 1973. they were traded OTD. Whereas it nothing (except margin requirement) to enter in to a futures he purchases of an option require an up front payment.
index or financial instruments a to buy of sell a specified number of underlying futures contracts. at a specified price on a before a give date in the future. All option contracts are also standardized and the clearing house or the cooperation guarantees the performance of the contracts. there are two parties: a. 2. but with a basic difference is that the underlying assets are individual 3. option like futures. He does not have any obligation. TYPES OF OPTIONS 56 . also provide a mechanism by which one can acquire a certain commodity on other assets. or owner of options) b.Index options are also financial exchange traded contracts with the underlying assets as the index. or take position in order to make profits or cover risk for a price.These are the stock exchange traded contracts whereby. Stock Options :. Index Options :. whereby the buyer of the options acquire the right to buy or sell predefined quantity of the index for a consideration paid to the seller or the writer of the option. The buyer (or the holder. In this type of contract as well. buyer of the option gets the right to buy the contracts stocks for a consideration paid to the seller of the option. but not the obligation to buy to sell a specified amount (and quality) of a commodity. but on the other hand the writer (seller) of the option is under the obligation to honour the contract since he has received the premium in lieu of the obligations. Thus. Stock options are similar to index options.An options is the right. The seller (or writer of options) While the buyer take “long position” the seller take “short position” So every option contract can either be “call option” or “put option” options are created by selling and buying and for every option that is buyer and seller. TYPES OF OPTION CONTRACTS 1.
e. or the specific date i.3 index Call option (Seller) 57 .e.2390 Pay off call option (Buyer) 2340 0 50 loss FIGURE 2. Maximum Risk Potential Break Even : Limited to Rs. Call Option (Buyer) Why call option ? If u think market will rise Example . the exercise price.Call Option : It gives an owner the write to buy a specified quantity of the underlying assets at a predetermined price i.Buy a call with a strike of Rs . is the date of maturity. 50 : Rs.2340(NIFTY) at a premium of Rs. 50 Maximum Profit Potential : Unlimited.
Why sell Option : If u think market will remain neutral or slightly bearish .4 Put Option 58 .50 Maximum Profit Potential : Rs. 2390 Desired Movement :Market will not go down Seller call option 0 1250 loss index FIGURE 2.2340(Nifty) at a premium of Rs. Example Sell a call with a strike price of Rs.50 Maximum Risk Potential : Unlimited Break Even : Rs.
5 Put Option seller 59 .2360(Nifty) at a premium of Rs. Break Even : 2335 Desired Movement : Bearish Put Option Buyer Profit 0 2360 index loss FIGURE 2. Why Buy a Put Option (Buyer) If u think market will fall Example Buy a Put with a strike of Rs.It gives the holder the right to sell a specific quantity of underlying asses at an agreed price on date of maturity he gets the right to sell.25 Maximum Profit Potential : Substantial Maximum Risk Potential.
Why Sell a Put Option If u think market will remain neutral or moderately bullish Example Sell a put with a strike of Rs.50 Maximum Profit Potential : Rs 50 Maximum Risk Potential : Substantial Break Even : Rs. 2310 Desired Movement : Market will not go down Pay off put option (seller) profit 0 2360 index loss FIGURE 2.2360(Nifty) at a premium of Rs.6 OPTION TERMINOLOGY 60 .
61 . the strike date or the maturity. 5. It is also referred as option premium. A call option in the index is set to be in-the-money when the current index stands at a level higher than the strike price (i. 4. Strike Price : The price specified in the options contract is known as strike price or the exercise price.1. 7. the put is ITM if the index is below the strike price. 3. the call is set to deep ITM. 6. In the case of a put. 8. and properties of American options are frequently deducted from those of its European counterpart. These are easier or analyze than American option. If the index is much higher than the strike price. 9. Most exchange-traded options are Americans. American options : these are the options that can be exercised at any time upto the expiration date. Writer of an option : The writer of a call/put option is the one who receives the option premium and is thereby obliged to sell/buy the asset if the buyer exercise on him. An option on the index is at-themoney when the current index equals the strike price. At-money option : (ATM) option is an option that would lead to zero cash flow if it were exercised immediately. In the money option : An in the money option is an option that would lead to a positive cash flow to the holder if it will exercise immediately. spot price>strike price). Buyer of an option : The buyer of an option is the one who by paying the option premium buys the right but not the obligation exercise his option on the seller/writer. Option price : Option price is the price.e. which the option buyer pays to the option seller. Expiration date : The date specified in the options contract is known as expiration date. the exercise date. European options: These are the options that can be exercised only on the expiration date itself. 2.
The buyer pays the premium for the option to the seller shelter he exercise the option is not exercised. In the case of a put. the call is set to be deep OTM. One way naturally wonder as to why the seller (writer) of an option would always be obliged to sell/buy an asset whereas the other party gets the right. 62 . a consideration for Undertaking the obligation. This is known as the price or premium to the seller for the option. Out-of-the money option : (OTM) options is an option that would lead to a negative cash flow it was exercised immediately. AMERICAN VS EUROPEAN OPTION Its owner can exercise an American option at any time on or before the expiration date. it becomes worthless and the premium becomes the profit of the seller. If the index is much lower than the strike price. Option Premium A glance at the rights and obligations of buyer and seller reveals that option contracts are skewed. The answer is that writer of an option receives.10. which is less than the strike price (spot price<strike price). A call option on the index is OTM when the current index stands at a level. the put is OTM if the index is above the strike price. A European style option gives the owner the right to use the option only on expiration date and not before.
Supply and demand in Secondary market 2.Factors Affecting Pricing 1. Dividend on underlying 63 . Time to expiration 6. Risk free interest rate 4. Volatility of underlying 5. Exercise price 3.
Therefore. The open positions of the members are marked based on contract settlement price for each contract. The CM in turn collects the initial margin form the TMs and their respective clients. NSCCL monitors the CMs for MTM value violation. Limits are set for each CM based on his capital deposits. 64 . 3. The salient features of risk containment mechanism of the F & O segment are : 1. The on-line position monitoring system generates alters whenever a CM reaches a position limit set up by NSCCL. while TMS are monitored for contract-wise position limit violation. The difference is settled in cash on T + 1 basis. the requirements for membership in term of capital adequacy (net worth. 4. It also follows value-at-risk (VAR) based margining through SPAN. 5. The financial soundness of the members is the key to risk management. security deposits) are quite stringent. It specifies the initial margin requirements for each futures/options contract on a daily basis. NSCCL charges an upfront initial margin for all the open positions of a CM. it stops that particular TM from further trading. 2. A CM may set exposure limits for a TM clearing and settling through him. NSCCL’s on-line position monitoring system monitors a CM’s open positions on a real-time basis.RISK MANAGEMENT NSCCL have developed a comprehensive risk containment mechanism for the F & O Segment. NSCCL assists the Cm to monitor the intra-day exposure limits set up by a CM and whenever a TM exceed the limits. CMs are provided a trading terminal for the purpose of monitoring the open position of all the TMs clearing and setting through him.
25 lakhs in any one form or combination of the below forms: Cash Fixed Deposit Receipts (FDRs) issued by approved banks and deposited with approved Custodians or NSCCL. 50 lakhs with NSCCL in the following manner : 1.6. Position violates result in withdrawal of trading facility for all TMs a CM is case of violation by the CM. Bank Guarantee in favour of NSCCL from approved banks in the specified format. Approved securities in demat form deposited with approved Custodians.25 lakhs in the form of cash. Any failure on the part of a CM to meet with the BMC requirements 65 . Rs. The most critical component of risk containment mechanism for F & O segment is the margining system and on-line position monitoring. MINIMUM BASE CAPITAL A clearing Member (CM) is required to meet with the Base Minimum Capital (BMC) requirements prescribed by NSCCL before activation. A member is altered of his position to enable him to adjust his exposure or bring in additional capital. Every CM is required to maintain BMC of Rs. The actual position monitoring and margining is carried out on-line through Parallel Risk Management System (PRISM). The CM has also to ensure that BMC is maintained in accordance with the requirements of NSCCL at all points of time. based on the parameters defined by SEBI. 2. Rs. PRISM uses SPAN (r) (Standard Portfolio Analysis of risk) System for the purpose of computation of on-line margins. after activation.
Additional Base Capital Clearing members may provide additional margin/collateral deposit (additional base capital) to NSCCL and/or may wish to retain deposits and/or such amounts which are receivable from NSCCL. 66 . closing out of outstanding positions etc. withdrawal of trading facility and /or clearing facility. Bye-Laws and Regulations of NSCCL and would attract disciplinary action inter-alia including.at any point of time. towards initial margin and / or other obligations. will be treated as a violation of the Rules. over and above their minimum deposit requirements.
Similarly. NSCCL uses the SPAN (Standard Portfolio Analysis of Risk) system for the purpose of margining. The methodology for computations of Value at Risk percentage is as per the recommendations of SEBI from time to time. where it may not be possible to collect mark to market settlement value. which is a portfolio-based system. before the commencement of trading on the next day. The most critical component of a risk containment mechanism for NSCCL is the online position monitoring and margining system.MARGINS NSCCL has developed a comprehensive risk containment mechanism for the Futures & Options segment. on an intra-day basis. applying the appropriate statistical formula. However. in the case of futures contracts (on index or individual securities). 67 . the initial margin may be computed over a two-day time horizon. Initial Margin NSCCL collects initial margin up-front for all open positions of a CM based on the margins computed by NSCCL-SPAN. Initial margin requirements are based on 99% value at risk over a one day time horizon. a TM should collect upfront margins from his clients. The actual margining and position monitoring is done on-line. A CM is in turn required to collect the initial margin from the TMs and his respective clients.
Bank Guarantee. Bye-Laws and Regulations of NSCCL and will attract 68 . For the purpose of SPAN Margin. Non-fulfillment of either the whole or part of the margin obligations will be treated as a violation of the Rules. The premium margin is the client wise margin amount payable for the day and will be required to be paid by the buyer till the premium settlement is complete. Fixed Deposit Receipts and approved securities. Initial margins can be paid by members in the form of Cash. Fixed Deposit Receipts and approved securities. Bank Guarantee. Premium Margin In Addition to Initial Margin. at the Trading/Clearing Member level. In case a trading member wishes to take additional trading positions his CM is required to provide Additional Base Capital (ABC) to NSCL.Initial margin requirement for a member: For client positions – shall be netted at the level of individual client and grossed across all clients. Premium Margin would be charged to members. Payment of Margins The initial margin is payable upfront by Clearing Members. without any setoffs between clients. For proprietary positions – shall be netted at Trading/Clearing Member level without any setoffs between client and proprietary positions. various parameters are specified from time to time. ABC can be provided by the members in the form of Cash.
The committee submitted its report on 17th March. however. Varma. invoking bank guarantees / fixed deposit receipts etc DERIVATIVES TRADING IN INDIA The first step towards introduction of derivatives trading in India was the promulgation of the securities laws (amendment) ordinance. Gupta on 18th November. deposit requirement and real time monitoring requirements. broker net worth. SEBI set up a 24 members committee under the Chairmanship of Dr.R. SEBI also set up a group in June 1998 under the Chairmanship of Prof.penal charges @ 0. J. The market for derivatives. The committee recommended that derivatives should be declared as ‘securities’ so that regulatory framework applicable to trading of ‘securities’ could also govern trading of securities. The SCRA was amended in Dec. initiate other disciplinary action. 1999 to include derivatives within the ambit of ‘securities’ and the regulatory framework was developed for governing derivatives trading. worked out the operational details of margining system. The report.C. collecting appropriate deposits. 1998 prescribing necessary pre-conditions for introduction of derivatives trading in India. did not take off. 1996 top develop appropriate regulatory framework for derivatives trading in India. In addition NSCCL may at its discretion and without any further notice to the clearing member. withdrawal of trading facilities and / or clearing facility closing out of outstanding positions. methodology for changing initial margins. 1998. as there was no regulatory framework to govern trading of derivatives. which was submitted in October. L. to recommend measures for risk containment in derivatives market in India.09% per day of the amount not paid throughout the period of non-payment. inter-alia including. imposing penalties. 1995 which withdrew the prohibition on options in securities. 69 .
The trading in index options commenced in June 2001. which is the brand index of India. Futures contracts on individual stocks were launched in November 2001. bye-laws. the following four types of Derivatives are now being traded in the India Stock Market. This was followed by approval. Index futures contract is an agreement to buy or sell a specified quantity of underlying index for a future date at a price agreed upon between the buyer and seller. expiry day. and their clearing house/corporation to commence trading and settlement in approved derivatives contracts. Trading and Settlement in derivatives contracts is done in accordance with the rule. To begin with. SEBI approved trading in index futures contracts based on S&P CNX Nifty and BSE-30 (Sensex) index.Derivatives trading commenced in India in June 2000 after SEBI granted the final approval to this effect in May 2000. NSE and BE. The contracts have standardized specifications like market lot. SEBI permitted the derivative segments of two stock exchanges. Thus. for trading in options based on these two indexes and options on individual securities. • • • • Index Futures Index Options Stocks Future Stock Options Index Futures : Index futures are financial contracts for which the underlying is the cash market index like the Sensex. tick size and method of settlement. 70 . and regulations of the respective exchanges and their clearing house/corporation duly approved by SEBI and notified in the official gazette.
The investors should also ensure to deal with a broker (member of the exchange) who is a SEBI registered broker and possesses a SEBI registration certificate. Stock futures contract is an agreement to buy or sell a specified quantity of underlying equity share for a future date at a price agreed upon between the buyer and seller. The client agreement includes provisions specified by SEBI and the derivatives segment. Stock Options : Stock Options are instruments whereby the right of purchase and sale is given by the option seller in consideration of a premium to the option buyer to buy or sell the underlying stock at a specific price (strike price) on or before a specific date (expiry date). Registration with broker : The first step towards trading in the derivatives market is selection of a proper broker with whom the investor would trade. Client Agreement : The investor should sign the Client Agreement with the broker before the broker can place any order on his behalf. Unique Client Identification Number : After signing the client agreement. the investors gets a unique identification number (ID). Investors should complete all the registration formalities with the broker before commencement of trading in the derivatives market. 2. The 71 . 3. the specifications are pre-specified. Just like Index derivatives.Index Options : Index Options are financial contracts whereby the right is given by the option seller in consideration of a premium to the option buyer to buy or sell the underlying index at a specific price (strike price) on or before a specific date (expiry date). Stock Futures : Stock Futures are financial contracts where the underlying asset is an individual stock. OPERATIONAL MECHANISM OF DERIVATIVES 1.
This ID is broker specific i. if the investors chooses to deal with different brokers. which the broker issues to the client. The investor should also obtain from the broker. The broker must also apprise the investor about the risk associated with the business in derivative trading and the extent of his liability. circulars and any additions or amendments etc. 5. he would have different Ids. Placing order with the broker : The investor should place orders only after understanding the monetary implications in the event of execution of the trade. a contract note for the trade executed within 24 hours. This information forms part of the Risk Disclosure document. 4. Execution prices.broker would key this identification number in the system at the time of placing the order on behalf of the investors. the name of the employees who would be primarily responsible for the client’s affairs. Free Copy of Relevant Regulations : The client is also entitled to a free copy of the extracts or relevant provisions governing the rights and obligations of clients. After the trade is executed. The risk disclosure document has to be sign3ed by the client and a copy of the same is retained by the broker for his records. 72 . The particulars would include his SEBI registration number. he needs to sign the client agreement with each one of them and resultantly. of the derivatives segment or of any regulatory authority to the extent it governs the relationship between the broker and the client. 6. notifications. the precise nature of his liability towards the client in respect of the business done on behalf of the investor.e. the investor can request for a copy of the trade confirmation slip generated on the systems on execution of the trade. The investor should carefully read the risk disclosure document and understand the risks involved in the derivatives trading before committing any position in the market. The contract note should be time (order receipt and order execution) and price stamped. relevant manuals. Risk Disclosure Documents : As stipulated in the Bye-Laws provide his particulars to the investors.
7. the investors may change an order anytime before the same is executed on the exchange. if any. If desired. Both buyer and seller have to deposited before the opening of the position in the futures transaction. Margining System in Derivatives : The aim of margin money is to minimize the risk of default by either counter-party. 73 . which is required by the close of business. Investors Protection Fund: The derivatives segment has established an “Investors Protection Fund” which is independent of the cash segment to protect the interest of the investors in the derivatives market. dispute by arbitrations procedure as defined in the rules and regulations and Bye-Laws of the respective exchanges. the party thereto shall resolve such complaint. Arbitration : In case of any dispute between the members and the clients arising out of the trading or in relation to trading/settlement. the following day. The payment of margin ensures that the risk is limited to the previous day’s price movement on each outstanding position. 9. The different types of margins are: a) Initial Margin : The basic aim of initial margin is to cover the largest potential loss in one day. b) Mark to market margin : All daily losses must be met by depositing of further collateral-known as variation margin. should be separately mentioned in the contract note. 8.brokerage and other charges. This margin is calculated by SPAN by considering the worst case scenarion. Any profits on the contract are credited to the client’s variation margin account.
or index of price. Derivative 3. This is the principal Act. Securities contracts (Regulation) Act. 6. 2. of underlying securities. 5.REGULATORY FRAMEWORK The trading of derivatives is governed by the provisions contained in the SC (R) A. stock or other marketable securities of a like nature in or of any incorporated company or other body corporate. Rights or interests in securities “Derivative” is defined to includes: • A security derived from a debt instrument. 4. the rules and regulations framed there under and the rules and bye-laws of stock-exchanges. loan whether secured or unsecured. As per Section 2(h). scrips. 74 . bonds. risk instrument or contract differences or any other form of security. Shares. Government securities. The term “securities” has been defined in the SC(R)A. Such other instruments as may be declared by the Central Government to be securities. debentures. which governs the trading of securities in India. Units or any other instrument issued by any collective investment scheme to the investors in such schemes. stock. • A contract which derives its value from the prices. the ‘Securities’ include: 1. the SEBI Act. share. 1956 SC(R) A aims at preventing undesiarable transactions in securities by regulating the business of dealing therein and by providing for certain other matters connected therewith.
75 . contracts in derivative shall be legal and valid if such contracts are: Traded on a recognized stock exchange.Section 18A provides that notwithstanding anything contained in any other law for the time being in force. Settled on the clearing house of the recognized stock exchange. in accordance with the rules and bye-laws of such stock exchanges.
Discussion with experts. After that questionnaire was prepared to meet the desired objective 77 . Different type of research design is available depending upon the nature of research project. and journals were studied to explore more about the concerned objective and better understanding of the problem.RESEARCH METHODOLOGY Research is a procedure of logical and systematic application of the fundamentals of science to the general and overall questions of a study and scientific technique by which provide precise tools. internet surfing. rather than philosophical means for getting and ordering the data prior to their logical analysis and manipulations. availability of able manpower and circumstances. specific procedures and technical. The study about “ANALYSIS OF DERIVATIVES MARKET” is exploratory as well as descriptive in nature .
78 . Primary Sources Primary data is data collected for first time specially for the purpose for which study is being conducted i. Data Collection Instruments The various methods of data gathering involves the use of appropriate recording forms. The secondary data include material collected from: Newspaper Magazine. Well-selected sample may reflect fairly. the problem under study.. accurately the characteristic of population.Sources of Data: The source of data includes primary and secondary data sources. which is collected and compiled for the different purpose.e. Internet. Data was collected through structured questionnaire administered by sitting with guide and discussing problems Sampling Technique The small representative selected out of large population is selected at random is called sample. The chief aim of sampling is to make an inference about unknown parameters from a measurable sample statistics. which are used in research for this study. These are called ‘tools’ or ‘instruments of data collection. Secondary Sources The secondary data is data.
Due to constraints of cost and time. 79 .Sampling technique used was Snowball sampling was used for the purpose of data collection as reference was taken form sample to reach other sample. . the sample size selected for the research is 25 investors and 35 brokers Sampling Unit : The sampling unit was the person who had an account and was investing in stock market and broker who were trading in stock market . Sample Size : Sample size refers to the number of items to be selected from the universe to constitute a sample.
LIMITATIONS OF THE STUDY No study is complete in itself. Availability of information was not sufficient because of less awareness among investors / brokers. Sample size is not enough to have a clear opinion. good it may and every study has some limitations: • • • Time is the main constraint of my study. 80 . however.
of brokers 15 and investors 10 5 0 Less than 1 year 1 year 2 years 3 years More than 3 years Series1 PERIOD FIGURE 4. 82 . 7 (11%) are investing from last 3 years and only 6 (10%) have experience of more than 3 years of investment in derivatives. TRADING PERIOD IN DERIVATIVES 25 20 No.1. 13 (22%) brokers and investors investing in derivatives from the last 1 year and less than this.1 From my sample of 60. 21 (35%) are investing from last 2 years.
Out of 60 brokers. risk management hedging. investors and dealers e. liquidity. REASONS BEHIND ITS ADOPTION purpose liquidity hedging 12% 25% speculation 40% risk management 23% Reasons behind adoption of derivatives are different by brokers. 24 (40%) for speculation and remaining 7 (12%) due to liquidity.g. investors dealing in derivatives 14 (23%) adopt it due to characteristics of risk management. investor demand (speculation) etc.2. 83 . 15 (25%) due to hedging.
In which segment you have larger turnover? • • • • Capital Market Segment (20) F & O Segment. 17 have largest turnover in the capital segment i. segment having large turnover 6 17% 4 11% 17 49% CM SEGMENT EQUAL IN F&O & CM F& O Segment 8 23% Can't Say FIGURE 4. 84 .3 Out of 35 informants. No informants have its largest turnover in F & O segment because the investor are very less aware about the derivatives and they do not know about the derivative trading as they much know about the CM Segment. 49% and 23% have equal turnover in CM & F&O segment.3. Equal in both above (15) Can’t Say.e.
of brokers 15 and investors 10 5 0 2 LACS 2 LACS .Any Other 5 LACS 10 LACS Amount 15 9 9 Series1 27 FIGURE 4. 27 (45%) investors and brokers have invested 2 lacs normally.4 Out of my sample size 60. Reasons behind this is that those are investing from many years are taking the risk of investing huge amount. 9 (15%) invested between 2 lacs to 5 Lacs and 15 (25%) invested between 5 lacs to 10 lacs. INVESTED AMOUNT IN DERIVATIVES Amout invested in derivatives 30 25 20 No. 85 .4.5 LACS . and remaining have invested in other amounts.
19 (32%) investing after more than 1 month and only 5 (8%) investing too late after 2 months.5 TRADED PERIOD IN DERIVATIVES Traded period for Derivative Investment 25 20 No. 23 (38%) investing monthly. 87 .5 13 (22% investors and brokers are investing weekly in derivatives. of brokers 15 and investors 10 5 0 Weekly Monthly More than 1 month More than 2 months Series1 Traded Period FIGURE 4.
8 (25%) said their customer base 88 .000 as investment so it is basically for corporate and investment sector only not for small investors.6 Out of 35 brokers . but derivatives increase customer base of 24 (70%) which is more than half.6 IMPACT ON CUSTOMER BASE 25 20 15 No. It is basically beneficial for those who are investing from last 2 or more years.00. of brokers 10 5 0 Increase Decrease Impact Remain same Series1 FIGURE 4. 2. 3 (5%) of brokers said that it does not increase their customer base because introducing small savings as investment. In investment sector need minimum of Rs.
RELATIONSHIP WITH CASH MARKET 30 25 20 No of brokers 15 and investors 10 5 0 Positive Negative Relation Can't Say Series1 FIGURE 4. 28 (47%) are not able to say anything because they do not have proper knowledge about stock market.7 Out of 60 brokers. They are investing with the guidance of 89 . 7.remains same because they have started just now for investing in derivatives in future it will increase their customer base. investors 27 (45%) have the positive response towards the relation between derivative and cash market and remaining 5 (8%) has negative response.
DERIVATIVES AND RISK Every broker says that there is a risk factor (upto some extent in derivatives also.9 90 . 8.brokers and with the support of their close relatives those are investing for last many years. of brokers 20 and investors 15 10 5 0 31 27 2 domestic lack of technical awareness expertise in investors short comings market failure Series3 FIGURE 4. SHORTCOMINGS IN INDIAN DERIVATIVE SYSTEM Short coming in indian derivative system 35 30 25 No.
10 91 .. 9.27 (45%) brokers. 31 (52%) feel lack of awareness in investors about derivatives and remaining 2 (3%) market failure. investors respond towards shortage of domestic technical expertise. Which tool of derivative according to you is better? a) b) Index future Stock future Index option Stock option c) d) 7 12% 8 13% Index Future Stock Future 30 50% 15 25% Index Option Stock Option FIGURE 4.
Most of the investors are not investing in derivatives. 50% are in the favour of index future and rests are having some different different attraction . tool of risk management.I got mix view on this question. RESULTS / FINDINGS Brokers not dealing in derivatives at present are also not going to adopt it in futures. so most of them are dealing in futures only. because futures have up to some extent quality at Badla.e. It ahs increased brokers turnovers as well as helpful in aggregate investment. There is a risk factor in derivative also. They normally invest in future contracts. Brokers haven’t adequate knowledge about options. has not adequate knowledge about it. These people are interested to take it in their future portfolio also. But most of the informants i. They consider it as a 92 . They are investing in future contract. Hedging and Risk Management is the most important feature of derivatives? It is not for small investors. even people who have invested in it. People are not aware of derivatives.
in India even most of the people are not aware of concept derivatives. In India there cannot be a long term trading in F & O. The Limited mutual faith in the parties involved. Market failures Scandals. It hasn’t a legalized market. so small investors are not able to come under derivative segment. 2001.e. There are less scripts under derivatives segment. it is only for 1 to 2 or maximum for 3 months. It will take time to take position in derivative or capital market.REASONS BEHIND LESS DEVELOPMENT OF F & O SEGMENT . in Nov. Inadequate infrastructures. Commodity F & O Market has not yet been come to India. High margin as compared to Badla. Securities and contract’s regulations act has recognized index as a security very later i. Shortage to domestic technical expertise. 93 . Large lot size. This will make easy to understand and take simple investor under investor base of derivative trading.
SUGGESTIONS 1. LOT SIZE: Lot size should be reduced so that the major segment of an Indian society i.e. small saving class can come under F & O trading. There is strong need for revision of lot sizes as the lot sizes of some of the individual scrips that were worth of Rs. 200000 in starting, now same lot size amount to a much larger value. 2. SUB BROKERS Sub-broker concept should be added and the actual brokers should give all rights of brokers in F & O segment also. 3. SCRIPS: More scrips of reputed companies etc. should be introduced in “F & O Segment”. 4. TRADING PERIOD Trading period should be increased.
TRAINING CLASSES OR SEMINARS There should be proper classes on derivatives for investors,
traders, brokers, students and employees of stock exchanges. Because lack of knowledge is the main reason of its less development. The first step towards it should be seminars provided to brokers and LSE employees and secondly seminar to students.
CONCLUSION On the basis of overall study on derivatives it was found that derivative products initially emerged as hedging devices against fluctuation and commodity prices and commodity linked derivatives remained the soul form of such products. The financial derivatives came in spotlight in 1972 due o growing instability in financial market. I was really surprised to see during my study that a layman or a simple investor does not even know how to hedge and how to reduce risk on his portfolios. All these activities are generally performed by big individual investors, mutual funds etc. No doubt that derivative growth towards the progress of economy is positive. But the problem confronting the derivative market segment are giving it a low customer base. The main problem that it confronts are unawareness and bit lot sizes etc. these problems could be overcome easily by revising lot sizes and also there should be seminar and general discussions on derivatives at varied places.
“We view them as time bombs both for the parties that deal in them and the economic system. In our view derivatives are financial weapons of mass destruction (WMD), carrying dangers that, while now latent, are potentially lethal.” Warren Buffet.
com “Derivatives in India: Frequently Asked Questions”. 1st Edition The Indian Commodity-Derivatives Market in Operations.bseindia.mayin.org/ajayshah/PDFDOCS/ShahThomas2000_dfq.com www. Indian Securities Market – A Review.derivativesindia. H.historical data – business growth.com .nseindia. http://www.SIDHU Indian Capital Market 1996.BIBLIOGRAPHY BOOKS • • • • NCFM on derivatives core modules by NSEIL.S. 98 . www. ECONOMICS TIME INTERNET SITES: • • • • pdf www. MAGAZINES & NEWSPAPER: • • NSE News.
to undertake the study on the said project NAME: OCCUPATION: ADDRESS: PHONE NO: 1) For how long you have been trading on derivatives? a) Less than 1 year b) 1 Year 99 . You are requested to fill in the questionnaire to enable.QUESTIONNAIRE Dear Respondent. I am working on the project “STUDY OF DERIVATIVES ”. I am a student of MBA .
In which segment you have larger turnover ? (BROKERS ONLY) a ) Capital Market Segment b) F & O Segment. 2) What is your purpose for trading in derivatives? a) c) Hedging Risk Management b) d) Speculation Liquidity 3) . 00. 00. 5. 10.000 c) Rs. c) Equal in both above d) Can’t Say.c) 2 Year d) 3 year e) More than 3 year.000 to Rs. 4) What is amount of money you are investing in normally? a) 2. 00. 00. 5.000 b) 2. 00.000 to Rs.000 d) Any other amount______________ 5) How often do you trade? 100 .
b) Shortage of domestic technical expertise. c) If any other ___________________________ 9) . Which tool of derivative according to you is better? a) Index future b) Stock future c) Index option 101 . 7) What according to you is relationship between derivative market and cash market? a) Positive b) Negative c) Can’t say. 8) What shortcomings do you feel in Indian derivative market? a) Lack of awareness among the investors about derivatives.a) Weekly b) Monthly c) More than 1 month d) More than 2 month 6) What is your customer base with introduction of derivatives? (FOR BROKERS) a) Increase b) Decrease c) Remains same.
d) Stock option 10) What suggestions do you want to make with regard to investors education in derivatives market in India? _____________________________________________________________ _____________________________________________________________ . 102 .