‘STUDY OF DERIVATIVES’

LUDHIANA STOCK EXCHANGE LIMITED LUDHIANA

TRAINING REPORT SUBMITTED IN THE PARTIAL FULFILMENT FOR THE DEGREE OF “BACHELOR OF BUSINESS ADMINISTRATION” YEAR 2008-2009

Angel broking

SUBMITTED TO PUNJABI UNIVERSITY PATIALA

SUBMITTED BY SIMRANDEEP SINGH 6329

RIMT-INSTITUTE OF MANAGEMENT AND COMPUTER TECHNOLOGY, MANDIGOBINDGARH

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ACKNOWLEDGEMENT

“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.

Simrandeep Singh

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STUDENT DECLARATION

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)

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PREFACE
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.

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CONTENTS
CHAPTER 1 INTRODUCTION TO ORGANISATION
1 . STOCK EXCHANGE 2 . LUDHIANA STOCK EXCHANGE 3 . LSE SECURITIES LIMITED

CHAPTER 2

PROJECT OBJECTIVES A
LEARNING OBJECTIVES
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

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LIST OF TABLES

Table No.
TABLE 1.1

Title Of Table

Page No.
5

LIST OF VARIOUS STOCK EXCHANGES IN INDIA

TABLE 1.2

BOARD OF DIRECTORS ( LSE)

8

TABLE 1.3

BOARD OF DIRECTORS (LSE SECURITIES)

15

TABLE 1.4

SETTLEMENT CYCLE SCHEDULE

19

TABLE 1.5

SCHEDULE OF ANNUAL LISTING FEE

23

TABLE 1.6

ACHIEVEMENTS OF LUDHIANA STOCK EXCHANGE

30

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4 AMOUNT INVESTED IN DERIVATIVES FIGURE 4. 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 1.2 PAYOFF INDEX FUTURES (SELLER) FIGURE 2. 5 TRADED PERIOD FOR DERIVATIVE INVESTMENT FIGURE 4. 3 SEGMENT HAVING LARGE TURNOVER FIGURE 4. 7 RELATIONSHIP WITH CASH MARKET .6 PAY OFF PUT OPTION (SELLER) FIGURE 4.2 SOURCES OF FUND FOR THE YEAR 2004-05 OF LSESL FIGURE 2.LIST OF DIAGRAMS Fig.5 PUT OPTION BUYER FIGURE 2.2 PURPOSE FOR DERIVATIVE TRADING FIGURE 4.1 SOURCES OF FUND FOR THE YEAR 2005-06 FIGURE 1.1 PAYOFF INDEX FUTURES (BUYER) FIGURE 2.3 PAY OFF CALL OPTION (BUYER) FIGURE 2. 6 IMPACT ON CUSTOMER BASE FIGURE 4.1 TRADING PERIOD IN DERIVATIVES FIGURE 4. No.4 SELLER CALL OPTION FIGURE 2.

8 ACCEPTANCE BY INDIAN INVESTORS FIGURE 4. 9 SHORT COMING IN INDIAN DERIVATIVE SYSTEM FIGURE 4.FIGURE 4.10 WHICH TOOL OF DERIVATIVE IS BETTER 88 89 90 viii .

1 .

The stock exchanges are the nerve center of capital market. not only of the state of health of individual companies but also of the nation’s economy as a whole. It provides market quotation for share. Therefore. financial institutions. by providing market place quotations of the price of shares and bonds or sort of collective judgment. etc meet and where the trading of these corporate securities takes place.STOCK EXCHANGE A “STOCK EXCHANGE” is a platform where buyers and sellers of securities issued by government. the stock exchanges serve the role of barometer. It provides linkages between the savings of household sector and investment in corporate sector or economy. stock exchange is said to be a barometer of economic and financial health. aspirations and fears of people regarding the performance of the economy. Since buying and selling of different types of securities takes place in stock exchange. not only of the state of health of individual companies.e. If the speculation of investor becomes wrong then the investor loses. shares. It is an open auction market where buyers and sellers meet and evolve a competitive price for the securities. bonds etc. The stock exchange discharges three essential functions in the process of capital formation not in raising resources for the corporate sector. corporate houses. In fact. It provides necessary mobility to capital and directs the flow of capital into profitable and successful enterprises. Nobody knows what will happen even after a second. A stock exchange refers to that segment of the capital market where the securities issued by corporate entities are trade. but also of the economy as a whole. This is a market of speculations. The prices of particular securities reflect their demand and supply. It provides place for sale and purchase of securities i. 2 . debentures and bonds and serves as a role of barometer. It reflects hopes. Simultaneously reached by many buyers and sellers in the market.

o Investors and speculators. 3 .e. who want to buy and sell securities. o Trading in securities is allowed under rules and regulations of stock exchange. o Membership is must for transacting business.FEATURES OF STOCK EXCHANGE o It is the place where listed securities are bought and sold. o It is an association of persons known as members. can do so through members of stock exchanges i. brokers.

The bargained prices of buyers and sellers are recorded.The stock exchange provides a ready market for the conversion of existing securities into cash and vice versa. 4 . 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. Stock exchange protects the investor of investors through strict enforcement of rules and regulations with respect of dealings.FUNCTIONS OF STOCK EXCHANGE The stock exchange provides appropriate conditions where purchase and sale of securities takes place at reasonable and fair prices. 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. 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. Punishment (including fine. suspension) may be there if brokers adopt any malpractice in dealing with investor like charging excessively high commission etc.

Number of Investors is increasing day by day. It was a state subject and the Bombay securities contact (control) act. 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. The stock exchange is a double auction market. On the basis securities regulation. counter-bids. central legislation was proposed and a committee headed by sh. At present there are 23 recognized stock exchanges in India. During the war boom. The stock exchange operating in the 19th century was those of Bombay set up in 1875 and Ahmedabad set up in 1894.D. Ahmedabad and other centers but they were not recognized soon after it became a central subject. Under this act. offers and counter-offers.HISTORY OF STOCK EXCHANGE The trading in securities in India was started in the early of 1973. A. GORWALA went into bill for securities regulation. a number of stock exchanges were organized at Bombay. On the basis securities contracts (control) at became law in 1956. Bombay stock exchange was securities in 1927 and Ahmedabad stock exchange in 1927 and Ahmedabad stock exchange in 1937. Before the control on securities trading becomes a control on securities trading became a central subject under the constitution in 1950. 1925 used to regulate trading in securities. 5 . These were organized as voluntary non-profit making associations of brokers to regulate and protect their interests.

WHO BENEFITS FROM STOCK EXCHANGE? o INVESTORS: It provides them liquidity. o ECONOMY AND COUTRY: There is large of saving. of Investment. o COMPANIES: It provides them access to market funds. higher rating and public interests. o BROKERS: They receive commission in lien of their services to investors. higher income. marketability. safety etc. 6 . better growth moves industries.

1 S. limited by guarantee Public limited company Pvt. 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. 1930 exchange. converted into public ltd. No.LIST OF VARIOUS STOCK EXCHANGES IN INDIA TABLE 1. limited by guarantee Stock 1978 Public limited company Public limited company Non-profit Non-profit Non-profit of Type of organization exchange.P.P. limited by guarantee Co. 1 Bombay Stock exchange Name of stock exchange Years establishment 1875 Voluntary organization 2 Ahmedabad exchange 3 4 Calcutta Stock exchange M. 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. 1982 7 . limited by guarantee Public limited company Public limited company Public limited company Public limited company Co. 9 10 Cochin stock exchange U. co.

D. ESTABLISHMENT Ludhiana stock exchange was established in 1983 with 220 members by Sh. N.17 Bhuvneshwar exchange Stock 1989 Co. 1989 Kutch.D. S.P. N.D. Oswal and Sh. 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. Munjal leading industrialist to fulfill vital need of having a stock exchange in this region.T. (Over the counter exchange of India). 8 . Mumbai 1990 1991 1993 N. Haryana.D. Himachal Pradesh and J.K. LSEAL has played on important role in generating capital for the companies in states of Punjab. Co.M. PROFILE OF LUDHIANA STOCK EXCHANGE ASSOCIATION LTD. Pure demutulised 22 23 24 National Stock exchange Coimbtoor tock exchange Sikkam Stock exchang 1995 1996 1997 Pure demutualised N. B. limited by guarantee 18 Saurashtra stock exchange.C.I. limited by guarantee 19 20 21 Vadora Stock exchange Meerut Stock exchange O.

it has advisory and standing committees to assist the administration. Defaults Committee and Investor Services Committee. Gandhi Managing Director Public Representative Public Representative Public Representative Public Representative Public Representative Public Representative SEBI Nominee Director SEBI Nominee Director TABLE 1. Assistants. Rajinder Bhandari Sh. Sanjeev kumar Gupta Sh. B.GOVERNING COUNCIL.P. six are Public Representatives and one Managing Director who is also Ex-officio member of the Board. In addition. Administration of the Exchange is managed by the Managing Director who is assisted by a Company Secretary and a team of Executives. Sunil Malhotra Sh.K.2 9 . D. Technicians and sub-staff. one third of the elected the Executive Directors retire by rotation. Bains Sh. G. S.S. out of which two are Government Nominees.B. Yash Mahajan Sh. BOARD OF DIRECTORS Sh. Arbitration Committee. D. Aggarwal Sh. COMMITTEES AND ADMINISTRATION The Council of Management of the Exchange consists of eleven members. At every Annual General Meeting. The Exchange has four Statutory Committees namely Disciplinary Committee. Malhotra Sh. Harjit Singh Sidhu Prof. Tandon Sh.C. Manmohan Juneja Sh.

J&K.9154 crores during the year 2000-2001. yet it has followed a model of corporate governance. it has 344 listed companies and among them. The Investor Services Committee comprises of four public Representatives and one broker member.CORPORATE GOVERNANCE Although the Ludhiana Stock Exchange is not a listed Company. OPERATIONS OF LUDHIANA STOCK EXCHANGE TURNOVER Ludhiana Stock Exchange is one of the leading Stock Exchanges among the Regional Stock Exchanges of the country. It is headed by Sh. Malhotra. There has been a significant reduction of turnover during the financial year 2001-2002. which is evident from the composition of the Statutory Committees. the Investor Services Committee and Audit Committee. It had been generating significant amount of the business in the secondary market. It recorded a peak turnover of Rs. a legal expert. and Himachal Pradesh & Chandigarh. 10 . 220 are listed as regional companies. and has been providing trading platform for the investors situated in Punjab. D. 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. a subsidiary of Ludhiana Stock Exchange.K. Statutory Committees are represented by brokers and non-brokers in 20:80 ratios. At present. but the reduction in turnover of the Exchange has been more than adequately compensated by substantial rise in the turnover of LSE Securities Limited.

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. The Listing Department of Ludhiana Stock Exchange deals with listing of securities. Trading at NSE and BSE was commenced through the subsidiary route from September 200 and December 2000 respectively. the LSE securities LTD. post-listing compliance of the companies. further listing of issues like bonus and rights issues. The Companies desirous of listing its securities on the Exchange have to sign a Listing Agreement with the Stock Exchange. The listing section of the LSE monitors the post-listing compliance of all the listed companies and follows up with the companies. TRADING ON BIGGER STOCK EXCHANGES The exchange acquired the membership of NSE and BSE: through its subsidiary. In order to 11 . which are found deficient in compliance. which are already listed with Ludhiana Stock Exchange. has to mandatory list its shares on a Stock Exchange. coming out with an IPO.LISTING Listing is one of the major functions of a Stock Exchange wherein the securities of the Companies are enlisted for trading purpose. the Company has to ensure and report compliance of the post listing requirements. After getting the listing approval. 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. Any Company incorporated under Companies Act. 1956.

Trading through V-SAT has been smoothly conducted in October 1999. 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. 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. SCREEN BASED TRADING It was started at LSE on Nov. 1996. LSEAL HAS:OWN BUILDING LSEAL has its own six stories ultra modern building at Feroze Gandhi market at Ludhiana. 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. 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. OWN BULLETIN LESAL is continuously publishing LSEAL Bulletin at the interval of quarter. 1983. It started its operation on 16th Aug. 18. 12 .prepare for such an eventuality. It is also publishing LSE annual report which provides information to the various members and investors of stock exchanges. The requisite software is developed by CMC Ltd. the exchange has set up 30 trading terminals at remote sites and union territory of Chandigarh.

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. 1998 by becoming a participant of NSDL. to the investors and members of the general public such as prices of the scrip’s. SETTLEMENT AND CLEARING There is T+2 settlement cycle prevailing in the market. Members are given scrip wise delivery notes. The exchange introduced a computer based stock. new listings. 1998. The exchange has set up in-house DP services to facilitate trading and settlement in demat securities. DEPOSITORY SYSTEM LSE commence trading in demat shares from November 16. INVESTOR GRIEVANCES CELL LSE has made special arrangement to handle investors complaints and grievance so its premises for providing information relating to Capital market. This center has a well equipped library. book closures. Tel system for providing on line real time information through a fully automatic system. 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. 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. DP operation of the company not only 13 . Purchasing members are required to make the payment against the delivery also on aforesaid day.

14 .benefited the investors of the region but has also proved to be a source of income for the company.

65 crores.. transparent and fair manner keeping in view of the interest of investors as well as other stakeholders. 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. was incorporated in January. OBJECTIVE OF THE COMPANY LSE Securities Limited is a subsidiary of the Ludhiana Stock Exchange. who are on the board of the company as ex-officio Directors. The company since its inception has marched forward rapidly and achieved many milestones in a short span of its existence. Thus the council of management has representation of sub-brokers as well as professionals and subject specialists representing various fields of business activities. INTRODUCTION OF LSE SECURITIES LTD. LSE Securities Ltd. 15 . preference capital of Rs 7.90 lacs & the authorized capital of the company is Rs 8 crores.5. 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 has a paid –up capital of Rs. The non broker members are independent Directors of eminent status from the field of finance.PROFILE OF LSE SECURITIES LTD. which was formed with an objective to enhance business and investment opportunities for the investors and members of Ludhiana Stock Exchange at large. GOVERNMENT COUNCIL The Council of the management of the Company comprises of 12 directors of which 5 are broker members and 5 non-brokers. through innovative products by encompassing a variety of activities related to the capital market. Operations of the company are run in a professional.

at the initiative of LSEAL. 2000 respectively. 2000 and December. 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.Commenced trading operations in Capital Market Segments of BSE and NSE in September.CORPORATE MEMEBERSHIP OF NSE & BSE SEBI. The Company became the first subsidiary of any Regional Stock Exchange which commenced trading in “F&O” Segment of NSE. Commenced trading operations in Future and Options Segment of NSE in February 2002. The total turnover of the company at NSE is growing by leaps and bounds ever since in incorporation. 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. F&0 SEGMENT OF NSE LSE Securities Ltd. permitted smaller Stock Exchanges. 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. with the objective of obtaining trading rights on bigger Stock Exchanges. TRADING AT NSE AND BSE The LSE Securities Ltd. It has obtained corporate membership of both NSE and BSE in the year 2000. to trade on bigger Stock Exchanges through their subsidiary companies. There was encouraging response from the sub-brokers specially at NSE counters. the LSE Securities Limited. The Ludhiana Stock Exchange floated its subsidiary company. 16 .

P. Zahir Sh.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.A. M. CERTIFICATION IN FINANCIAL MARKET In order to provide professional services to the investors of LSE Securities Limited through its sub-brokers.C. Garg Sh. which are located outside Stock Exchange Building. Ajay Chaudhry Sh. Presently. Vijay Singhania Sh.3 DEPARTMENTS OF LSE 17 . All trading terminals for Capital Market Segment and F&O segment are being operated by the persons after having qualified the said certification. the company motivated its sub-brokers and its staff to qualify the certification in financial markets conducted by NSE. Ashwani Kumar Sh. Anurag Arora Sh. 17 sub-brokers of the company have been trading through VSAT on NSE and 10 on BSE. BOARD OF DIRECTORS Sh. Lalit Kishore Sh Sukhjiwan Rai Sh. Harjit Singh Sidhu Sh. Vinay Shrivastav Chairman Vice Chairman Director Director Director Director Public Representative Public Representative Public Representative Public Representative Public Representative TABLE 1. A.K ARORA Sh.

actually what function is performed by each and every section.G. assigned to those departments. even then all the sections are interconnected with each other. Following in the list of various departments of LSE:OPERATIONAL DEPARTMENTS 1. Clearing House 3. Market Surveillance 4. Secretarial Department. Accounting Section 6. I. There is no duplication of work. So to maintain the proper system of working of exchange. Margin Section 2. Computer Section and information System Department SERVICE DEPARTMENTS 1. But before studying the inter dependence of section) here is the details of all department i. Legal Department 2.e. Listing Section 5. (Investor Grievance Cell) 4. There is an organized network of recording of activities performed there.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. there are so many different departments in which particular functions are performed.C. MARGIN SECTION 18 . 3. Membership Department/Personnel Department All the section perform specific functions.

TYPES OF MARGINS As we have discussed earlier margins. The margin is payable in cash or in bank guarantee. So to make the transaction safe. The security deposited by a member is called Base Minimum Capital. Ultimately margin is the difference between the limit and trade done by the member. then before starting trading he is supposed to deposit some amount fixed by SEBI as security. collected from members to avoid the losses and to provide security to the investors. There are different types of margins.Margin Section is an important section. he can do so by depositing Additional Base Minimum Capital. in the mean time the rates may fluctuate which may lead to default. which is collected from brokers for the safety of transactions. daily margins are collected from brokers. This is also called loss margin. This section apart from dealing in the regulating the trading of brokers keeps a check on excessive trading in speculation. which are imposed given as follows:MARK TO MARKET MARGIN The exchange collects this margin on daily basis. When a member gets registered in the exchange and with Securities Exchange Board of India (SEBI). If any member wants to trade beyond his trading limit. calculated as the difference of his buying or selling price and closing of that scrip at the end of the day. Margin is the amount. VALUE AT RISK OR VAR MARGIN 19 . broker-wise 100% notional loss of each member for every scrip. As the transactions are to be finalized on basis. Now as SEBI’s rolling settlement prevails.

the computation of this margin is done by a software developed by CHICAGO Stock Exchange. 2001. ADDITIONAL MARGIN Thus margin is 12% would be levied over and above the VAR margin. That is on next trading day.e. demand draft or by way of direct debit to the bank account to broker. The margin brokers shall be collected by way of cheques drawn on the prescribed banks. This margin is collected from brokers on T+1 basis. PAYMENT OF MARGIN The broker's shall be required to deposit margin demanded from them by 11:00AM on T+I day.f. July.For the scrips in the compulsory rolling settlement at 99% VAR based margin system would be introduced w. 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. 02. CLEARING HOUSE 20 .

10:30A. And pay out of scrips will also on Wednesday up to 2:00 P. 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. And securities are settled by rolling settlement. AUCTION OF UNDELIVERED SCRIPS 21 .TRADING PERIOD. Means pay-in and pay-out of securities is settled on T+3 Basis would commence form 1stApril. if broker buy/sell shares on Monday then pay in of securities will be on Wednesday. in this way pay-in/pay-out of securities cycle will be completed.4 T .M.. 2002. SETTLEMENT CYCLE SCHEDULE Sr.Clearing house takes care of pay-in and pay-out securities.M. 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. 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. No.g.

Then. 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. In above example. o Downloading of receiving order. once we feed new limits the whole calculation to be done through 22 . Then it is responsibility of clearing house to settle the undelivered scrips. o Scrip wise statement Computer facilitates easily updating all automatically adopting of new rates.e. auction will start. This section is the backbone of entire stock exchange would come to halt if this department becomes inactive. COMPUTER SECTION The growing technicalities and increase in workload has enhanced the importance of computer section in Ludhiana stock exchange.In case if broker fails to deliver the scrips on T+2 delivery day. In auction price of securities may will fluctuate 20% high or low of that trading day. 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. CLOSE OUT In case the shares of particular scrips is not available on the date of auction. In this way trade in auction is settled. This department mainly referred to as EDP i. o HDFC bank entries. o And broker on sub broker wise final settlement. electronic data processing section.

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. which is a time consuming as well as space consuming and requires a lot of attention. Also volume of shares being traced is very high and increasing continuously. as each individual involved knows every relevant tilling .computer will change. Rates are updated either daily or month wise as per the requirements. CHECK AND CONTROL OVER SCRIPS AND MEMBERS This section also helps in maintaining check and control over defaulting members and scrips. the computer section switches off his terminal and same step is taken in case of defaulted scrips. MARKET SURVEILLANCE AND MONITORING SECTION 23 . MANUAL OPERATIONS It has reduced manual work. It has also eliminated approximately the need to keep check the physical reports. LINKING CHAIN This section acts as a linkage. VOLUME AND TRANSPARENCY This system is very much transparent.

o To ensure that the company listed at the LSE compiles with all the listing requirements. For providing better services to the investors the stock exchange has maintained investor protection fund. 500 is collected from each member annually. The funds of it are used for maintenance of investor service center. o To keep a record of the inquiry base of the listed companies. o LISTING SECTION 24 . 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. Rationale Behind Establishing Investors’ Grievance Cell o To safeguard the investor’s interest through investors grievance section. 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. their annual financial results and any subsequent increase in the equity base. In this fund Rs. and publication of LSE Bulletin. One more fund investor service fund has been set up. holding of seminars for investor/brokers benefit.The main task of this section is to see the market sanctity and maintenance so that the investors are not cheated. So market surveillance entails scientifically identifying points in a stock price movement or trading volumes. 20% of the listing fee is transferred to it. So the price and volume trends in stock exchange are checked for abnormalities scientifically. INVESTORS GRIEVANCE SECTION LSE has a separate investor's grievance cell. o To participate as monitoring authority in the public and right issue of the company.

Presently it is mandatory for Regional Company to get itself listed at LSE. Income and 25 . 5 crores or part there of.This department plays an important role in the Stock Exchange. as it helps the company to raise money from the capital market. 50 crores will pay additional fee of Rs. In order to get listed company should have minimum capital of Rs. Company has also to comply with the conditions enunciated in listing clause. 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. 2800 for every increase of Rs. ACCOUNTS SECTION Most of the work in account section LSE is done manually. although help is taken through computers for the purpose of making Trial Balance.) 8400 16800 28000 56000 84000 140000 TABLE 1.5 Companies which have paid up capital of more than 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. 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.

o To keep the records of all incoming and outgoing money depreciation of financial statements at the end of financial year. o To make and receive payments to the outside agencies. 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. o To disburse personnel expenses. value method in accordance with and din the manner specified in schedule XIV of the Companies Act 1956. Some of the important polices of LSE are o The company follows accrual system of accounting recognizes income and expenditure accordingly. The company has the procedure of receiving shares. No accounting entries in such transaction are made in respect of defaulting members by crediting security account and debiting member's investment a/c.Expenditure statement and Balance Sheet. these agencies include companies listed at LSE and brokers working at LSE. Functions of Accounts Section:The account section performs the following function. o Sources of funds of LSE: - 26 . o Depreciation is provided on written down. o Fixed costs are stated at historical costs less depreciation. o To get their accounts audited from the third party. The shares in such cases are valued at prices on the date of transfer deeds. o Stock/Inventory (stationery) is valued at cost. The annual report of LSE is generally published in August every year. scrips of various companies as securities against the performance of the contract.

200) p.o Membership fee from brokers at the beginning. per quarter from those members having rooms and those not having rooms all those not having rooms are charges at till rate of Rs. 1500/. comply with notice then he can be expelled.crores. o Annual fee from brokers (Rs.50 per sq. o Initial listing fee from companies i. If member fails to.pa. The members who are not having rooms are charged at the rate of Rs. 500 each) as broker member is allowed to have maximum 4 authorized representatives.mentioned charges. 5000) and their authorized representatives. 1. which are made at 1% of issue amount and minimum capital for this purpose is Rs.) o Interest earned affixed deposits.a) o Fines and penalties form brokers.a. feet and 900/. 300/(p. (Rs. feet.e. they are charged interest on due amount @ 12% p.a. Beyond it. 5000) Library charges from brokers (Rs. Billing of members is done on annual basis for annual fees and other above. o Maintenance charges Rs.a. whose area is less than 200 sq. o Water and electricity charges Rs. Rs.000/o Annual listing fee from companies. feet. o o Annual computer fee from brokers (Rs. broker member is served a show cause notice for 60 days on 1st April next year. Application Of Funds Of LSE:- 27 . 4/. still in case of nonpayment. 500 p.) o Brokers contribution to investor protection fund (Rs.per quarter which is having area of more than 200 sq. On 1st April of each year and they are to make payment in 180 days up to 30 September. 750 per quarter. o Interest income from deposits of companies for listing. 13. Such deposits are retained until there is no dispute against the company subject to the minimum of 6 months.

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. attendance leave.g. LEGAL SECTION 28 . Although the LSE. which has the additional charge of personnel. o Maintain employee record e. 3.1. o Recruitment of staff. 20% for providing services to investors out. 2. 5% of listing fees to SEBI each year. SECRETARIAL DEPARTMENT Duties and responsibilities of personnel department are mentioned as under which are discharge by the secretarial departments. (II) Security Charges (III) Telephone Charges (IV) VSAT Charges (V) Printing and stationary Salaries 4. o Other activities like staff farewell party and Diwalipuja. All activities relating personnel are carried out by the secretarial departments. 1% of listing is transferred annually to investor protection fund. has not a separate personnel departments in its organizing chart. overtime etc. or listing fee annually to investor service fund. Administrative expenses (I) Electricity Charges.

defaulting committee. 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. maintenance of attendance register. These departments also maintain records of leaves and overtime of employees. The objective of the legal section is to make effective the bylaws and regulation of the stock exchange and to see that the guidelines.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. MEMBERSHIP DEPARTMENT 29 . advocate fee etc. This department also deals with the appointment or removal of floor clerks or authorized representatives of brokers. 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. Disciplinary committee. This department carries out all activities relating to the recruitment of the personnel. whenever and wherever a vacancy arises. the legal section comes into the picture to fight for the cause of investors and against the defaulting members. Legal section also assist the member investor to settle their disputes through the arbitration committee investors grievance committee. PERSONNEL DEPARTMENT Ludhiana stock exchange does not have a personnel department in its Organization chart.

o Corporate members o Individual member Following are the requirements to be an individual member of exchange. Age Limit: Qualification: To be member of stock exchange there is age limit Minimum age is 21 yrs Maximum age is 60 yrs. To be member minimum qualification Matriculation is plus person has three-year experience interview. who will deal in securities. Directors with unlimited liability. There are two types of members in stock exchanges.e. Following requirements are for corporate members:1. Two copies of MOA & AOA. Qualification & Proof of age of at least two directors. SOURCES OF FUND FOR THE YEAR 2005-06 OF LSESL 30 . Company must be registered u/s 322 of the company Act i. The trade in market is done through the authorized members who are registered with concerned stock exchange and SEBI. Including written test and membership department deal with all above requirements of members.This department deals with membership of exchange. 2. 3.

65 (4) Profit on sale of fixed assets = SOURCES OF FUND FOR THE YEAR 2004-05 OF LSESL 31 .82% 13.1 2 3 4 5 FIGURE 1.1 SOURCES:(1) Membership Fee (2) Listing Fee (3) Interest on deposits (5) Other income = = = = 0.27 29.23% 53.03% 3.

18% 31.90% 8.83% ________ 100 ACHIEVEMENTS OF LUDHIANA STOCK EXCHANGE 32 .99% 6.2 SOURCES:1) Turnover Charge BSE 2) Turnover Charge NSE 3) Interest on Bank deposits 4) Depository Income 5) Other income = = = = = 5.10% 47.1 2 3 4 5 FIGURE 1.

Trading in F&O segment of N.E.E. rubber. Securities Ltd.M.TABLE 1. Introduction of MCX (Multi Commodity Exchange of India) MCX offers 14 different commodities such as steel. oil soil seeds. precious metal etc. 33 . blackpepper. in C.. in CM segment (Through LSEL) Introduction of Compulsory rolling settlement Complete shift of trading CM segment from ISE To LSE securities Ltd. kapas.S. a subsidiary of March 2004 LSE.S.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.E. segment (Through NSEL) Trading on B. 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. 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.

34 .

OBJECTIVES A LEARNING OBJECTIVES It includes 1 INTRODUCTION TO DERIVATIVES 2 TYPES OF DERIVATIVES 3 ECONOMIC UTILITY OF DERIVATIVES 4 OBJECTIVES OF DERIVATIVES 35 .

e. It refers to a variable.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. i. which has been derived from another variable. But derivative market is quite different from other markets as the market is used for minimizing risk arising from underlying assets. The work “derivative” originates from mathematics. which have been used in primary market. X = f(Y) Where X (dependent variable) = DERIVATIVE PRODUCT 36 .

The underlying assets can be : a. Foreign exchange rates d. O. All derivatives are based on some cash product.T. The price of these derivatives is driven from spot price of wheat. DEFINITION OF DERIVATIVE In the Indian context the securities contracts (Regulations). As a tool of risk management we can define it as.Y (independent variable) = UNDERLYING ASSET A financial derivative is a product that derives value from the market of another product. Act 1956 defines “Derivative” to include: 37 . The price of the derivative instrument is contingent on the value of underlying assets. Short term as well as long-tern bond of securities of different type issue4d by govt. Price of precious and metals gold c. e.C. money instruments for examples loan & deposits. a financial contract whose value is derived from the value of an underlying asset/derivative security”. Hence derivative market has no independent existence without an underlying asset. and companies etc. Example : Wheat farmers may wish to sell their harvest at a future date to eliminate the risk of change in price by that date. Any type of agriculture product of grain (not prevailing in India) b.

Risk instrument or contract for difference or any other form of security. A contract which derives its value from the prices of prices of underlying securities. Loan whether secured or unsecured. Share. which give rise to the risk factor. Agricultural F&O helped farmers and PROCESSORS hedge against commodity price risk. HISTORICAL ASPECT OF DERIVATIVES The need for derivatives as hedging tool was first felt in the commodities market. After the fallout of BRITAIN WOOD AGREEMENT. A security derived from a debt instrument.1. 38 . the financial markets in the world stared undergoing radical changes. This situation led to development of derivatives as effective “Risk Management tools”.

A. in 1982. AND FUNCTIONS Derivatives contracts have several variants. Looking at the liquidity market. The IMM provided an outlet for currency speculators and for those looking to reduce their currency risks. 39 . 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. Trading took place on currency. Futures. The following three categories of Participants-Hedgers.g.Derivatives trading in financial market started in 1972 when “Chicago Mercantile Exchange opened its international Monetary Market Division (IIM). The most common are FORWARDS. FUTURES. OPTIONS AND SWAPS. and Arbitrageurs. Therefore the stock index futures first emerged in U. PRODUCTS.S. the exchange rate was fixed at time of contract later on commodity future contracts was introduced then followed by interest rate futures. PARTICIPANTS. An equity fund e. which were contracts for specified quantities of given currencies. Speculators. derivatives allow corporate and institutional investors to effectively manage their portfolio of assets and liabilities through instruments like stock index futures and options.

If this expectation comes true he sells the securities at a higher price and makes a profit. Speculators : They wish to be on future movements in the price of an asset.Hedgers face risk associated with the price of an asset. TYPES OF DERIVATIVES The most commonly used derivatives contract is forwards. Thus. 40 . They use futures or options markets to reduce the risk. 2. 3. If for example. they are operation who want to eliminate the risk composing of their portfolio. A speculator may buy securities in anticipation of rise in price. where settlement takes place on a specific date in the futures at today’s pre-agreed price. Hedger :.1. futures and options: 1. Forwards : A forward contract is a customized contract between two entities. Usually the speculator does not take delivery of securities sold by him. Arbitrageurs : They are in business to take advantage of discrepancy between price in two different markets. He only receives and pays the differences between the purchase and sale prices. they see the future price of an asset getting out of line with cash price. they will take off setting positions in two markets to lock in profit.

2. 6. 5. They can be regarded as portfolios of forward’s contracts. Options : It is of two types : call and put options. These long-term option contract are popularly known as Leaps pr Long term Equity Anticipation Securities. Leaps : Normally option contracts are for a period of 1 to 12 months. 4. with the cash flow in one direction being in a different currency than those in the opposite direction. 41 . 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. Swaps : These are private agreements between two parties to exchange cash flows in the future according to a prearrange formula. Futures contracts are the special types of forward contracts in the sense that are standardized exchange traded contracts. However. exchange may introduce option contracts with a maturity period of 2-3 years. 3. 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. Equity Index Options are most popular form of baskets. Baskets : Baskets options are option on portfolio of underlying asset. at a give price on or before a given future date. The two commonly used swaps are: a) Interest rate swaps : These entail swapping both Principal and interest between the parties . Underlying asset.

The prices of derivatives converge with the prices of the underlying at the expiration of the derivative contract. 5. the underlying market. Increased volume in the cash market :.Derivatives due to their inherent nature are linked to the underlying cash markets.Derivatives have a history of attracting many bright. 3. with the cash flow in one direction being in a different currency than those in the opposite direction. With the introduction of derivative. well-educated people with an entrepreneurial. New Entrepreneurial activities :. Transfer of risk: . whereby certain players assumes the risk by receiving premium amount.Derivatives market helps increase savings and investments in the long run Transfer of risk enables market participants to expand their volume of activities. 42 . We can also term the derivative market as the insurance company. Increase in saving :. THE DERIVATIVES MARKETS PERFORM A NUMBER OF ECONOMIC FUNCTIONS: 1. Thus derivatives help in discovery of future as well current price. 4. new products and new employment opportunities. creative. the benefits of which are immense. 2.b) Currency swaps : These entail swapping both Principal and interest between the parties. witness higher trading volumes because of participation by more players who would not otherwise participate for lack of an arrangement to transfer risk.Prices in organized derivatives markets reflects the perception of market participants about the future and lead the prices of underlying to perceived future level.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. Price Discovery: .

speculators. Participants in derivative market 1. 3. Counter party risk on the part of broker. 43 . clearing bank. OBJECTIVES OF DERIVATIVE TRADING 1. Hedgers. REASON FOR STARTING DERIVATIVES 1. Stock lenders and borrowers. arbitrageurs.6. 4. Hedging: You own a stock and you are confident about the prospects of the company. Financial institutions. 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. 3. Exchange. Clearing. Unsystematic risk in the form that the price of scrip may go up or down due to “Company Specific Reasons”. Liquidity risk in the form that the particular scrip might not be traded on exchange. clearing members. trading members. Trading in controlled environment :. 2. 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. in case it ask money from us but before giving delivery of shares goes bankrupt. 2. 5.The introduction of the derivatives has shifted the trading in speculative dealings in controlled market and the counter party risk has been eliminated. 4.

You may have very strong opinion about the future market price of a particular asset based on past trends. 44 . 2. This imbalance in future and spot price gives rise to arbitrage opportunities. Various strategies designed to reduce investment risk using call option. short selling. Such insurance is known as hedging. it is good to retain the stock. or uncertainly about future income stream. To take advantage of such opinion. though fundamentals of the company will remain good. current information and future expectation. and futures are used for hedging. Likewise you may also have opinion about the overall marker trend. due to uncertainly about interest rates. In both these situations you would like to insure portfolio against any such market fall. Hedging is a tool to reduce the inherent risk in an investment. 3. Transactions made to take advantage of temporary distortions in the market are known as arbitrage transactions. therefore. Speculations: . The basic purpose of a hedge is to reduce the risk of loss. Arbitrage: . put options.You except that some adverse economic or political vent affect the marker sentiments. However.The future price of an underlying asset is function of spot price and cost of carry adjusted for any return on investment. distortions in spot prices. individual asset or the entire market (index) could be sold or purchased. prices in futures market may not truly reflect the expected spot price in future.

6. Creation of an Options Clearing Corporation (OCC) as the single guarantor of every traded option. all contracts on the options exchange should have an expiry date. This would decrease the transaction costs. For a given underlying security. members and norms to be out and followed. only the premium should be negotiated on the floor of the exchange. 5. 4. 2. Strict capital adequacy 45 . the clearing house has to bear the cost of necessary to carry out the contract. 3. Creation of a strong cash market (secondary market). a strike price. financially sound institutions. number of market makers. and a contract price.THE REQUIREMENTS FOR SETTING UP FUTURE AND OPTION TRADING ARE OUTLINES BELOW: 1. the investors move to the secondary market to book profits. Large. Uniformity of rules and regulation in all the stock exchanges. Careful selection of the regulation in all the stock exchanges. who can write the options contracts. Creation of paper-less trading and book-entry transfer system. Standardization of the terms governing the options contracts. In case of default by a party to a contract. 7. This is because after the exercise of an option contract.

46 . Strong depository : A strong depository National Securities Depositories Ltd. 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.500 crores. Large Market Capitalization: India is one of the largest market capitalized country in Asia with a market capitalization of more than 7. 2. Which means on an average every month 14% of the country market capitalization gets traded. High Liquidity: In the underlying securities the daily average traded volume in Indian capital market today is around 7. (NSDL). 4. which started functioning in the year 1997.STRENGTH OF INDIAN CAPITAL MARKET FOR INTRODUCTION OF DERIVATIVES 1. has strengthen the securities settlement in our country. A good Legal Guardian : SEBI is acting as a good legal guardian for Indian Capital Market. 5. shows high liquidity.000 crores.65. 3.

No physical delivery of share certificate so reduction in cost by stamp duty. Increase in hedger. speculator and arbitrageurs. 47 . 2. 6. 3. 4. Enhancing the yield on assets. Modifying the payment structure of assets to correspond to investor market view. 5.IMPORTANCE OF DERIVATIVES TRADING 1. which is basic need of Indian investors. Reduction of borrowing cost. It does not totally eliminate speculation.

which forecast an upturn in price. 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. Who takes a short position – agreeing to sell The mutually agreed price is known as “delivery price” or “forward price”. Who takes a long position . The two parties are : 1. but the contract takes a positive or negative value for parties as the price of underlying asset moves. It removes the future price risk. 48 . It a speculator has information or analysis. and then be can go long on the forwards market instead of cash market.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.

Lack of centralization of trading. 30. and then take a reversing transaction to book profits. wait for the price to rise. However. FUTURE CONTRACT 49 . it gives positive or negative value for contract.The speculator would go long on the forward. than a who has short position would stand to loss of Rs. Price Assets Increase Decrease & Underlying Holder & long position Positive Value Negative Value Holder & Short Position Negative Value Positive Value E. 140 per share. But later as the price & the underlying asset changes. Now if the price of share on that is Rs. (20*200) = 4000. Profit/Loss = ST-E ST = spot price on maturity date E = delivery price Limitations of forward contract 1. this is generally a relatively small proportion of the value of assets underlying the forward contract. A agrees to deliver 100 equity shares of Reliance to B on Sept. 2. long position would gain the same amount or vise versa if price quoted is less than delivery price. One party can breach its obligation. Lack of Liquidity. Speculator may well be required to deposit a margin upfront. No standardization.g. 4. . 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. 120 per share. 3.

2. Standardized contracts e. 4. reconciling and guaranteeing the trades on the future exchanges. The index futures contracts on the NSE have one moth. On the Friday following the last Thursday. There will be a different basis for each delivery month 50 . This is the last day on which the contract will be traded. a new contract having three-month expiry is introduced of trading. date of delivery. and three-month expiry cycles. Features of Future Contract 1. confirming setting. Between two parties who do not necessarily know each other. Contract cycle : The period over which the contract trades. contract size. which expire on the last Thursday of one month. Expiry Date : It is date specified in the futures contract. specific size. place and alternative asset. Thus a January expiration contract expires on the last Thursday of the January. 3. Guarantee for performance by a clearing corporation or clearing house. Future Price : The price as which the futures contract trades in the futures market. Clearing house is associated with matching. Basis : In the contract of financial futures. at the end of which it will cease to exist. It has some features of Badla also. Clearing house tries to eliminate risk of default by either party. basis can be defined as the futures price minus the spot price. registering. FUTURE TERMINOLOGY Spot Price : The price at which an asset trades in the spot market.g.It is an agreement between buyer and seller for the purchase and sale of a particular assets at a specific future date. It makes obligation on both parties to fulfill the contract. processing.

in 1982 by the “Commodity Futures Trading Commission” (CFTC) by approving the Kansas Board proposal. Index Futures began trading in India in June 2000 of Trade (KSBT)’s Futures derive its value from the underlying index-e. introduced in U. index future contracts are key contracts. This reflects that futures prices normally exceed spot prices. the margin account is adjusted to reflect the investor’s margin gain or loss depending upon the future’s closing price.S. In a normal market.for each contract. Maintenance margin : This is somewhat lower than initial margin. NSE’s futures. basis will be positive. TYPE OF FUTURE CONTRACTS Index Futures : Of the financial futures. 8090% of retail participation is expected in India because 51 .g. Contracts are based on “S & P CNX NIFTY” At present it has become the most liquid contract in the country.A. Marketing-to-market : In the futures market. This is set to ensure that the balance in the margin account never becomes negative. 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. at the end of each trading day.. 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. If the balance amount falls below the maintenance margin. the arbitrage between the futures equity market is further expected to reduce impact cost.

TREND OF BULLISH MARKET – – – – – – – 15th Feels the market will rise Buys 200 nifty contracts with expiry date . 244000 (200*1220) 31st Nifty July futures has risen to 1310 Sells off his position at 1310 Makes a profit of Rs.1 Index Loss 57 52 .31th at 1220 costing Rs. 18000 (200*90) PAYOFF INDEX FUTURES (BUYER) Profit 0 1220 FIGURE 2.

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.2 1220 Index Loss 53 59 . 244000 (200*1220) PAYOFF INDEX FUTURES (SELLER) Profit 0 FIGURE 2. 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.

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 .FORWARD VS.

No secondary market 2. The first trading is options began in Europe and U. The firm would then attempt to find a seller or writer of option either from its own client of those of other member firms. No mechanism to guarantee the writer of option would honor it In 1973. Marton. CBOE was set up specially for the purpose of trading options. the two parties have committed them self to doing something. 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. Historical background of Option: Although options have exercised for a long time. stock indices. An option gives the holder/buyers of the option the right to do something. as early as the century. In contrast. It was only in early. In April 1973. The two deficiencies in above markets were 1.OPTIONS Options are fundamentally different from forward and futures. foreign currencies and futures contracts.S. Scholes invented the Black-Scholes formula. The holder does not have committed himself to doing something. they were traded OTD. The market for options develop so rapidly that by early 80’s number of share underlying the What is Option ? 55 . It someone wanted to buy an option. Whereas it nothing (except margin requirement) to enter in to a futures he purchases of an option require an up front payment. without much knowledge of valuation. in a forward or futures contract. I”f no seller could be found. Black. he or she would contract one of the member firms. Today exchange-traded options are actively traded on stocks. the firm would undertake to write the option itself in return of price.

or owner of options) b. In this type of contract as well. Stock Options :. TYPES OF OPTION CONTRACTS 1. Index Options :. 2.An options is the right. 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. 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. Thus. but with a basic difference is that the underlying assets are individual 3. at a specified price on a before a give date in the future. buyer of the option gets the right to buy the contracts stocks for a consideration paid to the seller of the option. TYPES OF OPTIONS 56 .These are the stock exchange traded contracts whereby. 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. but not the obligation to buy to sell a specified amount (and quality) of a commodity. there are two parties: a. All option contracts are also standardized and the clearing house or the cooperation guarantees the performance of the contracts. index or financial instruments a to buy of sell a specified number of underlying futures contracts. Stock options are similar to index options. also provide a mechanism by which one can acquire a certain commodity on other assets. He does not have any obligation.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. option like futures. The buyer (or the holder.

50 Maximum Profit Potential : Unlimited. or the specific date i. Maximum Risk Potential Break Even : Limited to Rs. 50 : Rs.2340(NIFTY) at a premium of Rs. the exercise price.Buy a call with a strike of Rs . is the date of maturity.e. Call Option (Buyer) Why call option ? If u think market will rise Example .e.2390 Pay off call option (Buyer) 2340 0 50 loss FIGURE 2.3 index Call option (Seller) 57 .Call Option : It gives an owner the write to buy a specified quantity of the underlying assets at a predetermined price i.

2340(Nifty) at a premium of Rs. 2390 Desired Movement :Market will not go down Seller call option 0 1250 loss index FIGURE 2.50 Maximum Profit Potential : Rs.50 Maximum Risk Potential : Unlimited Break Even : Rs.4 Put Option 58 . Example Sell a call with a strike price of Rs.Why sell Option : If u think market will remain neutral or slightly bearish .

5 Put Option seller 59 . Break Even : 2335 Desired Movement : Bearish Put Option Buyer Profit 0 2360 index loss FIGURE 2.2360(Nifty) at a premium of Rs.25 Maximum Profit Potential : Substantial Maximum Risk Potential.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. Why Buy a Put Option (Buyer) If u think market will fall Example Buy a Put with a strike of Rs.

6 OPTION TERMINOLOGY 60 .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.2360(Nifty) at a premium of Rs. 2310 Desired Movement : Market will not go down Pay off put option (seller) profit 0 2360 index loss FIGURE 2.

the exercise date. European options: These are the options that can be exercised only on the expiration date itself. In the case of a put. 3. If the index is much higher than the strike price.1. and properties of American options are frequently deducted from those of its European counterpart. 7. 4. Strike Price : The price specified in the options contract is known as strike price or the exercise price. 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. 5. Option price : Option price is the price. the put is ITM if the index is below the strike price.e. It is also referred as option premium. which the option buyer pays to the option seller. 2. 9. 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. At-money option : (ATM) option is an option that would lead to zero cash flow if it were exercised immediately. 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. These are easier or analyze than American option. the call is set to deep ITM. American options : these are the options that can be exercised at any time upto the expiration date. Most exchange-traded options are Americans. 6. 61 . 8. An option on the index is at-themoney when the current index equals the 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. spot price>strike price). Expiration date : The date specified in the options contract is known as expiration date. the strike date or the maturity.

Out-of-the money option : (OTM) options is an option that would lead to a negative cash flow it was exercised immediately. The buyer pays the premium for the option to the seller shelter he exercise the option is not exercised. 62 . it becomes worthless and the premium becomes the profit of the seller. AMERICAN VS EUROPEAN OPTION Its owner can exercise an American option at any time on or before the expiration date. 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. This is known as the price or premium to the seller for the option.10. which is less than the strike price (spot price<strike price). If the index is much lower than the strike price. A call option on the index is OTM when the current index stands at a level. a consideration for Undertaking the obligation. 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. the put is OTM if the index is above the strike price. In the case of a put. A European style option gives the owner the right to use the option only on expiration date and not before. the call is set to be deep OTM.

Supply and demand in Secondary market 2. Volatility of underlying 5. Time to expiration 6. Dividend on underlying 63 . Exercise price 3.Factors Affecting Pricing 1. Risk free interest rate 4.

Limits are set for each CM based on his capital deposits. 4. NSCCL charges an upfront initial margin for all the open positions of a CM. NSCCL’s on-line position monitoring system monitors a CM’s open positions on a real-time basis. 2. 5. it stops that particular TM from further trading. NSCCL assists the Cm to monitor the intra-day exposure limits set up by a CM and whenever a TM exceed the limits.RISK MANAGEMENT NSCCL have developed a comprehensive risk containment mechanism for the F & O Segment. A CM may set exposure limits for a TM clearing and settling through him. Therefore. while TMS are monitored for contract-wise position limit violation. The on-line position monitoring system generates alters whenever a CM reaches a position limit set up by NSCCL. the requirements for membership in term of capital adequacy (net worth. 64 . NSCCL monitors the CMs for MTM value violation. It also follows value-at-risk (VAR) based margining through SPAN. The salient features of risk containment mechanism of the F & O segment are : 1. security deposits) are quite stringent. It specifies the initial margin requirements for each futures/options contract on a daily basis. The financial soundness of the members is the key to risk management. The difference is settled in cash on T + 1 basis. CMs are provided a trading terminal for the purpose of monitoring the open position of all the TMs clearing and setting through him. The CM in turn collects the initial margin form the TMs and their respective clients. 3. The open positions of the members are marked based on contract settlement price for each contract.

6. based on the parameters defined by SEBI. The most critical component of risk containment mechanism for F & O segment is the margining system and on-line position monitoring. Bank Guarantee in favour of NSCCL from approved banks in the specified format. PRISM uses SPAN (r) (Standard Portfolio Analysis of risk) System for the purpose of computation of on-line margins. Any failure on the part of a CM to meet with the BMC requirements 65 . MINIMUM BASE CAPITAL A clearing Member (CM) is required to meet with the Base Minimum Capital (BMC) requirements prescribed by NSCCL before activation. Position violates result in withdrawal of trading facility for all TMs a CM is case of violation by the CM. Every CM is required to maintain BMC of Rs. after activation. Rs. A member is altered of his position to enable him to adjust his exposure or bring in additional capital. Approved securities in demat form deposited with approved Custodians. The CM has also to ensure that BMC is maintained in accordance with the requirements of NSCCL at all points of time. Rs. 2. 50 lakhs with NSCCL in the following manner : 1. 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. The actual position monitoring and margining is carried out on-line through Parallel Risk Management System (PRISM).25 lakhs in the form of cash.

Bye-Laws and Regulations of NSCCL and would attract disciplinary action inter-alia including. withdrawal of trading facility and /or clearing facility. will be treated as a violation of the Rules. closing out of outstanding positions etc. 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. over and above their minimum deposit requirements. 66 . towards initial margin and / or other obligations.at any point of time.

which is a portfolio-based system. A CM is in turn required to collect the initial margin from the TMs and his respective clients. a TM should collect upfront margins from his clients. 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. in the case of futures contracts (on index or individual securities). the initial margin may be computed over a two-day time horizon. Initial margin requirements are based on 99% value at risk over a one day time horizon. 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. on an intra-day basis. Similarly. The actual margining and position monitoring is done on-line. before the commencement of trading on the next day. However. NSCCL uses the SPAN (Standard Portfolio Analysis of Risk) system for the purpose of margining. applying the appropriate statistical formula. Initial Margin NSCCL collects initial margin up-front for all open positions of a CM based on the margins computed by NSCCL-SPAN. 67 .

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. Bank Guarantee. without any setoffs between clients. Payment of Margins The initial margin is payable upfront by Clearing Members. Non-fulfillment of either the whole or part of the margin obligations will be treated as a violation of the Rules. at the Trading/Clearing Member level. Bye-Laws and Regulations of NSCCL and will attract 68 . various parameters are specified from time to time. For the purpose of SPAN Margin. Premium Margin would be charged to members.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 In Addition to Initial Margin. For proprietary positions – shall be netted at Trading/Clearing Member level without any setoffs between client and proprietary positions. Bank Guarantee. In case a trading member wishes to take additional trading positions his CM is required to provide Additional Base Capital (ABC) to NSCL. ABC can be provided by the members in the form of Cash. Fixed Deposit Receipts and approved securities. Fixed Deposit Receipts and approved securities. Initial margins can be paid by members in the form of Cash.

1996 top develop appropriate regulatory framework for derivatives trading in India. as there was no regulatory framework to govern trading of derivatives. The committee submitted its report on 17th March. did not take off. Varma. J. 69 . 1995 which withdrew the prohibition on options in securities.penal charges @ 0. deposit requirement and real time monitoring requirements. SEBI also set up a group in June 1998 under the Chairmanship of Prof. The SCRA was amended in Dec. which was submitted in October. 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. SEBI set up a 24 members committee under the Chairmanship of Dr. imposing penalties. 1999 to include derivatives within the ambit of ‘securities’ and the regulatory framework was developed for governing derivatives trading. however. 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. withdrawal of trading facilities and / or clearing facility closing out of outstanding positions. broker net worth. 1998. methodology for changing initial margins. L. The report.C. worked out the operational details of margining system. inter-alia including. 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. initiate other disciplinary action. 1998 prescribing necessary pre-conditions for introduction of derivatives trading in India. In addition NSCCL may at its discretion and without any further notice to the clearing member. The market for derivatives. Gupta on 18th November. collecting appropriate deposits.R.

and their clearing house/corporation to commence trading and settlement in approved derivatives contracts. This was followed by approval. Futures contracts on individual stocks were launched in November 2001. • • • • 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. The trading in index options commenced in June 2001. 70 . tick size and method of settlement. NSE and BE. expiry day. SEBI permitted the derivative segments of two stock exchanges. SEBI approved trading in index futures contracts based on S&P CNX Nifty and BSE-30 (Sensex) index. To begin with. bye-laws. the following four types of Derivatives are now being traded in the India Stock Market. and regulations of the respective exchanges and their clearing house/corporation duly approved by SEBI and notified in the official gazette. Trading and Settlement in derivatives contracts is done in accordance with the rule. Thus. which is the brand index of India.Derivatives trading commenced in India in June 2000 after SEBI granted the final approval to this effect in May 2000. 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. The contracts have standardized specifications like market lot. for trading in options based on these two indexes and options on individual securities.

Client Agreement : The investor should sign the Client Agreement with the broker before the broker can place any order on his behalf. 2. OPERATIONAL MECHANISM OF DERIVATIVES 1.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). Just like Index derivatives. Unique Client Identification Number : After signing the client agreement. 3. the specifications are pre-specified. The client agreement includes provisions specified by SEBI and the derivatives segment. 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. Stock Futures : Stock Futures are financial contracts where the underlying asset is an individual stock. 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. The 71 . Investors should complete all the registration formalities with the broker before commencement of trading in the derivatives market. the investors gets a unique identification number (ID). Registration with broker : The first step towards trading in the derivatives market is selection of a proper broker with whom the investor would trade. 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).

the name of the employees who would be primarily responsible for the client’s affairs. 72 . This information forms part of the Risk Disclosure document. The particulars would include his SEBI registration number. 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. which the broker issues to the client. The investor should also obtain from the broker.e. After the trade is executed. This ID is broker specific i. a contract note for the trade executed within 24 hours. 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. The contract note should be time (order receipt and order execution) and price stamped. 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. he needs to sign the client agreement with each one of them and resultantly. 6. the precise nature of his liability towards the client in respect of the business done on behalf of the investor. if the investors chooses to deal with different brokers. 4. Risk Disclosure Documents : As stipulated in the Bye-Laws provide his particulars to the investors. 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. relevant manuals. notifications.broker would key this identification number in the system at the time of placing the order on behalf of the investors. the investor can request for a copy of the trade confirmation slip generated on the systems on execution of the trade. of the derivatives segment or of any regulatory authority to the extent it governs the relationship between the broker and the client. Placing order with the broker : The investor should place orders only after understanding the monetary implications in the event of execution of the trade. Execution prices. 5. he would have different Ids.

if any. Margining System in Derivatives : The aim of margin money is to minimize the risk of default by either counter-party. the investors may change an order anytime before the same is executed on the exchange. Any profits on the contract are credited to the client’s variation margin account. b) Mark to market margin : All daily losses must be met by depositing of further collateral-known as variation margin. 8. 73 . should be separately mentioned in the contract note. the party thereto shall resolve such complaint. 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. which is required by the close of business. 9. 7. If desired. dispute by arbitrations procedure as defined in the rules and regulations and Bye-Laws of the respective exchanges. This margin is calculated by SPAN by considering the worst case scenarion. The payment of margin ensures that the risk is limited to the previous day’s price movement on each outstanding position.brokerage and other charges. Both buyer and seller have to deposited before the opening of the position in the futures transaction. 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 different types of margins are: a) Initial Margin : The basic aim of initial margin is to cover the largest potential loss in one day.

the ‘Securities’ include: 1. Shares. This is the principal Act. the rules and regulations framed there under and the rules and bye-laws of stock-exchanges. Securities contracts (Regulation) Act. Units or any other instrument issued by any collective investment scheme to the investors in such schemes. Such other instruments as may be declared by the Central Government to be securities. bonds. 74 . Derivative 3. 4. 6. 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. which governs the trading of securities in India. stock. Rights or interests in securities “Derivative” is defined to includes: • A security derived from a debt instrument.REGULATORY FRAMEWORK The trading of derivatives is governed by the provisions contained in the SC (R) A. • A contract which derives its value from the prices. As per Section 2(h). The term “securities” has been defined in the SC(R)A. debentures. share. 2. 5. the SEBI Act. risk instrument or contract differences or any other form of security. loan whether secured or unsecured. of underlying securities. or index of price. scrips. Government securities. stock or other marketable securities of a like nature in or of any incorporated company or other body corporate.

75 .Section 18A provides that notwithstanding anything contained in any other law for the time being in force. in accordance with the rules and bye-laws of such stock exchanges. contracts in derivative shall be legal and valid if such contracts are: Traded on a recognized stock exchange. Settled on the clearing house of the recognized stock exchange.

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specific procedures and technical.Discussion with experts. The study about “ANALYSIS OF DERIVATIVES MARKET” is exploratory as well as descriptive in nature .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. 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. availability of able manpower and circumstances. rather than philosophical means for getting and ordering the data prior to their logical analysis and manipulations. and journals were studied to explore more about the concerned objective and better understanding of the problem. internet surfing.

Well-selected sample may reflect fairly. which is collected and compiled for the different purpose.e.Sources of Data: The source of data includes primary and secondary data sources. 78 . accurately the characteristic of population. Data Collection Instruments The various methods of data gathering involves the use of appropriate recording forms. Primary Sources Primary data is data collected for first time specially for the purpose for which study is being conducted i. which are used in research for this study. Internet. These are called ‘tools’ or ‘instruments of data collection. Secondary Sources The secondary data is data. The chief aim of sampling is to make an inference about unknown parameters from a measurable sample statistics.. the problem under study. 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 secondary data include material collected from: Newspaper Magazine.

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 . .Sampling technique used was Snowball sampling was used for the purpose of data collection as reference was taken form sample to reach other sample. 79 . Due to constraints of cost and time. Sample Size : Sample size refers to the number of items to be selected from the universe to constitute a sample.

good it may and every study has some limitations: • • • Time is the main constraint of my study. Availability of information was not sufficient because of less awareness among investors / brokers. Sample size is not enough to have a clear opinion. however. 80 .LIMITATIONS OF THE STUDY No study is complete in itself.

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1 From my sample of 60. 21 (35%) are investing from last 2 years. 82 . 13 (22%) brokers and investors investing in derivatives from the last 1 year and less than this. 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.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.

REASONS BEHIND ITS ADOPTION purpose liquidity hedging 12% 25% speculation 40% risk management 23% Reasons behind adoption of derivatives are different by brokers. investor demand (speculation) etc. 83 . 15 (25%) due to hedging. risk management hedging. investors dealing in derivatives 14 (23%) adopt it due to characteristics of risk management. 24 (40%) for speculation and remaining 7 (12%) due to liquidity.g. Out of 60 brokers.2. investors and dealers e. liquidity.

3.3 Out of 35 informants. In which segment you have larger turnover? • • • • Capital Market Segment (20) F & O Segment. 84 . 49% and 23% have equal turnover in CM & F&O segment. 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. 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.e. 17 have largest turnover in the capital segment i. Equal in both above (15) Can’t Say.

Any Other 5 LACS 10 LACS Amount 15 9 9 Series1 27 FIGURE 4. 85 . and remaining have invested in other amounts.5 LACS . Reasons behind this is that those are investing from many years are taking the risk of investing huge amount.4 Out of my sample size 60. of brokers 15 and investors 10 5 0 2 LACS 2 LACS . 27 (45%) investors and brokers have invested 2 lacs normally. 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.4.

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of brokers 15 and investors 10 5 0 Weekly Monthly More than 1 month More than 2 months Series1 Traded Period FIGURE 4.5 13 (22% investors and brokers are investing weekly in derivatives.5 TRADED PERIOD IN DERIVATIVES Traded period for Derivative Investment 25 20 No. 23 (38%) investing monthly. 19 (32%) investing after more than 1 month and only 5 (8%) investing too late after 2 months. 87 .

000 as investment so it is basically for corporate and investment sector only not for small investors. but derivatives increase customer base of 24 (70%) which is more than half. of brokers 10 5 0 Increase Decrease Impact Remain same Series1 FIGURE 4.6 IMPACT ON CUSTOMER BASE 25 20 15 No. In investment sector need minimum of Rs. 8 (25%) said their customer base 88 .00. 3 (5%) of brokers said that it does not increase their customer base because introducing small savings as investment. 2.6 Out of 35 brokers . It is basically beneficial for those who are investing from last 2 or more years.

7 Out of 60 brokers. 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. investors 27 (45%) have the positive response towards the relation between derivative and cash market and remaining 5 (8%) has negative response. They are investing with the guidance of 89 .remains same because they have started just now for investing in derivatives in future it will increase their customer base. 7.

brokers and with the support of their close relatives those are investing for last many years. 8. 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 4.9 90 . SHORTCOMINGS IN INDIAN DERIVATIVE SYSTEM Short coming in indian derivative system 35 30 25 No. DERIVATIVES AND RISK Every broker says that there is a risk factor (upto some extent in derivatives also.

10 91 . 31 (52%) feel lack of awareness in investors about derivatives and remaining 2 (3%) market failure. investors respond towards shortage of domestic technical expertise.27 (45%) brokers. 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.. 9.

 They are investing in future contract. RESULTS / FINDINGS  Brokers not dealing in derivatives at present are also not going to adopt it in futures.  Hedging and Risk Management is the most important feature of derivatives?  It is not for small investors.  They normally invest in future contracts.  It ahs increased brokers turnovers as well as helpful in aggregate investment. These people are interested to take it in their future portfolio also.  People are not aware of derivatives.e. has not adequate knowledge about it. even people who have invested in it.  Brokers haven’t adequate knowledge about options. 50% are in the favour of index future and rests are having some different different attraction . But most of the informants i.I got mix view on this question. They consider it as a 92 . so most of them are dealing in futures only. because futures have up to some extent quality at Badla. tool of risk management.  Most of the investors are not investing in derivatives.  There is a risk factor in derivative also.

it is only for 1 to 2 or maximum for 3 months.  Commodity F & O Market has not yet been come to India.  There are less scripts under derivatives segment.  The Limited mutual faith in the parties involved.  Inadequate infrastructures.  Shortage to domestic technical expertise.  In India there cannot be a long term trading in F & O. in India even most of the people are not aware of concept derivatives.  Market failures  Scandals. so small investors are not able to come under derivative segment.e.  It hasn’t a legalized market. 2001. This will make easy to understand and take simple investor under investor base of derivative trading. in Nov.  Securities and contract’s regulations act has recognized index as a security very later i.  High margin as compared to Badla. It will take time to take position in derivative or capital market.  Large lot size. 93 .REASONS BEHIND LESS DEVELOPMENT OF F & O SEGMENT .

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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.

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5.

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.

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“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.

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mayin. ECONOMICS TIME INTERNET SITES: • • • • pdf www.com www.nseindia.historical data – business growth. 1st Edition The Indian Commodity-Derivatives Market in Operations.com .bseindia. 98 . http://www.org/ajayshah/PDFDOCS/ShahThomas2000_dfq.SIDHU Indian Capital Market 1996. Indian Securities Market – A Review.BIBLIOGRAPHY BOOKS • • • • NCFM on derivatives core modules by NSEIL.com “Derivatives in India: Frequently Asked Questions”. www. MAGAZINES & NEWSPAPER: • • NSE News.derivativesindia. H.S.

I am working on the project “STUDY OF DERIVATIVES ”. 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 .QUESTIONNAIRE Dear Respondent. I am a student of MBA . You are requested to fill in the questionnaire to enable.

In which segment you have larger turnover ? (BROKERS ONLY) a ) Capital Market Segment b) F & O Segment.000 to Rs. 00. 00. 00. c) Equal in both above d) Can’t Say. 10.000 c) Rs. 5.000 b) 2.000 to Rs. 2) What is your purpose for trading in derivatives? a) c) Hedging Risk Management b) d) Speculation Liquidity 3) .000 d) Any other amount______________ 5) How often do you trade? 100 . 00. 00.c) 2 Year d) 3 year e) More than 3 year. 5. 4) What is amount of money you are investing in normally? a) 2.

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. Which tool of derivative according to you is better? a) Index future b) Stock future c) Index option 101 . 8) What shortcomings do you feel in Indian derivative market? a) Lack of awareness among the investors about derivatives. c) If any other ___________________________ 9) . 7) What according to you is relationship between derivative market and cash market? a) Positive b) Negative c) Can’t say. b) Shortage of domestic technical expertise.

102 .d) Stock option 10) What suggestions do you want to make with regard to investors education in derivatives market in India? _____________________________________________________________ _____________________________________________________________ .