22 - GAIL - GLENMARK - Final Report

DRM Group Assignment Submission: Group Number-22
A REPORT ON
ANALYSIS OF UNDERLYING ASSETS, EQUITY
FUTURES INSTRUMENTS AND OPTIONS OF
GAIL AND GLENMARK
By
Group 22
Under Supervision of
Dr. Nagaraju Thota
Course Code: FIN F311

Course Title: Derivatives & Risk Management
BIRLA INSTITUTE OF TECHNOLOGY AND SCIENCE, PILANI

HYDERABAD CAMPUS
(23rd Oct 2020)
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Group Details
Group Number: 22
S.No Name ID Contributed: Yes / No
1 Manas Tiwari 2018A4PS0971H Yes
2 Boggarapu S V Praneet 2018A4PS0026H Yes
3 Priyanshu Prakash 2018A4PS0581H Yes

4 Shubhanshu Gupta 2018A1PS0709H Yes
Instrument Details :
S.no Symbol
1. GAIL
2. GLENMARK
Note:
All the prices used are in Indian Rupee (INR)

Appropriate references have been cited wherever necessary
Terminology used: Near month written as Current month; Middle month
written as Next month
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ACKNOWLEDGEMENT
We would like to express our sincerest gratitude to Dr. Thota Nagaraju,
for giving us an opportunity to work under him for this project and also
taking his valuable time to provide us with the required guidance
wherever required. His input proved to be very vital for the project. We
would like to thank him for providing us with such a wonderful
opportunity to apply our course knowledge on real life data and get
hands on experience. We are indebted for all his help and guidance
throughout the course and this assignment.
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ABSTRACT
The primary motive of this project is to make recommendations in

relation to the financial health of the stock of GAIL India Ltd. (GAIL)
and Glenmark Pharmaceuticals Ltd. (GLENMARK). In order to do this,
the spot and future prices between 1st November ’17 to 29th October ’20
are to be analyzed on the Daily, Weekly and Monthly frequencies, so as
to find out which investing methodology will work best in ensuring
greater returns for the same amount of risk. In order to calculate the
Excess Returns, returns will be adjusted with the Treasury-Bill returns.
This is crucial as it represents the realistic picture of the situation and
helps an investor in making informed decisions. The Sharpe Ratio
calculation for each of these three frequencies will also assist us in
determining the method of investment that will provide the best returns
for the same amount of risk. Apart from the aforementioned work, Call
Options are also interpreted using their Standard Deviations so that
they can be compared with the actual quoted option prices.
All analysis has been done through extensive usage of Microsoft Excel.
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TABLE OF CONTENTS
GAIL INDIA LTD. (GAIL) 7

SECTION 1: Underlying Assets: Equity 7
1.1 Underlying equity assets introduction 8
1.4 Economic Interpretation 15
SECTION 2: Equity futures instruments 18
2.1 Introduction to Equity Futures Instrument 18
2.2 Risk Unadjusted Returns for Futures Instruments 19
Near Month 19
Next Month 21
Far Month 23
2.3 Risk Adjusted Returns for Futures Instruments 25
Near Month 25
Next Month 27
Far Month 30
SECTION 3: Comparison of equity and futures 34

SECTION 5: Liquidity Position 35
SECTION 4: Contango Trends and Frequency Analysis 36
4.1 Contango Trends 36
4.2 Frequency Analysis 38
SECTION 5: Options 38
Introduction: 38
Option Price Calculation: 39
Observation: 41
SECTION 6: Overall conclusion 42
GLENMARK PHARMACEUTICALS LTD. (GLENMARK) 45
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SECTION 1: Underlying Assets Equity 46

1.1 Underlying equity assets introduction 46
1.2 Risk Unadjusted Returns Data 50
1.3 Risk Adjusted Returns Data 52
1.4 Economic Interpretation 54
SECTION 2: Equity futures instruments 56
2.1 Introduction to Equity Futures Instrument 56
2.2 Risk Unadjusted Returns for Futures Instruments 58
Near Month 58
Next Month 59
Far Month 61
2.3 Risk Adjusted Returns for Futures Instruments 63
Near Month 63
Next Month 65
Far Month 68
SECTION 3: Comparison of equity and futures and Liquidity Positions 72
3.1 Comparison of equity and futures 72
3.2 Liquidity Position 74
SECTION 4: Contango Trends and Frequency Analysis 74
4.1 Contango Trends 74
4.2 Frequency Analysis 76
Section 5: Options 77
Introduction: 77
Option Price Calculation: 77
Observation: 79
Section 6: Overall Conclusion 82
References 84
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DRM Group Assignment Submission: Group Number
Number-22
GAIL INDIA LTD. (GAIL)
Report analysis on GAIL equity and futures Study Period:

1st Nov 2017 to 29th Oct 2020
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Number-22
SECTION 1: Underlying Assets: Equity
1.1 Underlying equity assets introduction
a. Nature of Business
GAIL is a government undertaking gas processing and distribution company.
Its business segments include Natural Gas, liquid hydrocarbon, LPG transmission and
distribution, exploration and production of city gas.
b. Ownership
Fig. 1
Ownership: Government off India
Founded by the GOI, being the promoters, the majority of ownership lies within the hands of the
Central Government (52.1%). The Foreign Institutional Investors hold up around 15.1% of the
ownership, while the other Institutional Investors like Mutu
Mutual
al Funds, Insurance companies etc,
hold up around 17.8%. The general Public owns around 4.4% of the company as can be seen in
figure 1.
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c. Commencement of Business and Performance

Gas Authority of India Ltd. was established in 1984 as a PSU under the Ministry of Petroleum
and Natural Gas. Its first responsibility was the construction, maintenance and Operation of the
HVJ pipeline project. With time, it constructed 3 LPG plants and acquired several regional
pipelines. Henceforth, GAIL began its gas transportation in various parts of the country. After
some time, it set up 9 CNG stations, thereby starting the city gas distribution in Delhi in 1997.
Today, it has diversified its business lines in petrochemical, telecom and liquid hydrocarbons
alongside gas infrastructure.
Particulars 2020 2019 2018 2017 2016
EPS 14.68 26.72 20.48 20.71 18.12
Profit 9.21 8.02 8.60 7.27 4.42

Margin (%)
Return on 9.66 9.35 7.95 6.33 4.33

Assets (%)
Table 1: Financial Ratios
The performance of the company over the last 5 years has been analyzed below:
● We see that the company has been consistently increasing it’s after tax profits
consistently for the past 5 years. This is a good indication for the company in terms of its
stocks. Higher profits attract more investors in the company.
● The increase in the Profit margin values over the year indicates the company’s ability to
manage its operation costs, and indicates that the company is able to provide services at a
better price either by increasing the total sales or by reducing the costs of production.
● The decrease in the EPS value could be explained by the current situation created by
COVID-19 and also by the stock split that was announced by the company at the start of
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the year. Overall the EPS value of the company has been increasing steadily over the
course of 4 years upto 2019.
● The return on asset values for the firm also consistently increased over the course of the
last five years. This indicates that the management of the company is utilizing the assets
effectively. The increase in the return on asset values indicates that the company is
utilizing its debt effectively.
● Increase in the ROA values implies that the company’s investment strategies are sound
and we can expect positive growth for the company.
● The retention ratios for the company are also high, which indicates that the company is
focusing on growth and may use the retained earnings to invest in future projects. Hence,
positive signs for the company are evident in the future.
d. Industry of the Business

● GAIL belongs to the Oil and Gas Industry and is India’s largest state owned company.
Being one of the 8 core industries of India, it has a vital role in influencing decision
making for different sections of the economy. GAIL owns more than two-third of the
country’s total pipeline network and sells around 60% of the country's natural gas.
● GAIL is involved in various operations under various subsidiaries such as natural gas,
LNG, liquid hydrocarbons, LPG production and transmission, petrochemicals and city
gas distributions.
● GAIL is one of the leading companies in terms of supplying gas to cities. The city gas
distribution projects were launched by GAIL in cities such as Mumbai and Delhi, as early
as the 1990s.
e. Overall Greatness of the company

● GAIL contributes around 20% of the total GDP of India. It is the largest state owned
Natural Gas processing and distribution company in the country. Being a pioneer in city
gas distribution business, it also ranks 131st in India’s most trusted brands according to
the Brand Trust Report 2014.
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● GAIL has various subsidiary companies around the world such as GAIL Global
(Singapore) Pte Ltd. in Singapore which is responsible for managing business operations
overseas such as trading LNGs and petrochemicals.
● GAIL also has global presence in countries such as the United States where it has a
subsidiary, GAIL Global (USA) Inc. in Texas, USA. It is equity partners with two
Egyptian companies, Fayum Gas Company and National Gas Company.
● The company had taken up projects of value around $ 8.1 million in activities such as
Community Development, Infrastructure, Healthcare/Medical, Skill
Development/Empowerment, Educational Aids, Environment Protection, Drinking
Water/Sanitation.
● GAIL also contributes towards social welfare of the country by taking part in activities
such as renovation and reconstruction of various public buildings.
● GAIL also contributed LPG connections to BPL families under the Rajiv Gandhi Gramin
LPG Vitrak Yojana.
● GAIL is the pioneer of city gas distribution in India. GAIL took many initiatives to
introduce PNG for households and CNG for the transport sector to address the rising
pollution levels. Pilot projects were launched in the early 1990s in two metros Delhi and
Mumbai through joint venture companies Indraprastha Gas Limited (IGL) and
Mahanagar Gas Limited (MGL) leading to the start of commercial operation of city gas
projects. The results of these ventures are quite visible through the improvement in air
quality in these cities.
1.2 Risk Unadjusted Returns
Returns Daily Weekly Monthly
Average -0.06% -0.27% -1.41%
Minimum -11.71% -21.57% -22.64%
Maximum 16.43% 17.42% 25.02%
Standard Deviation 2.30% 4.97% 8.65%
Table 2: Risk Unadjusted Returns (%) of Near Month Futures Contracts
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From the table we can see that the average returns are negative which implies that returns are not
good and there is a higher possibility of loss.
Fig. 2: Daily Risk Unadjusted Returns
Fig. 3: Weekly Risk Unadjust

Unadjusted Returns
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Fig. 4: Monthly Risk Unadjusted Returns
1.3 Risk Adjusted Returns

Average -0.08%
0.08% -0.38% -1.87%
Minimum -11.73%
11.73% -21.66% -23.06%
-
Maximum 16.41% 17.35% 24.71%
Table 3: Risk Adjusted Returns
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Fig. 5: Daily Risk Adjusted Returns
Fig. 6: Weekly Risk Adjusted Returns
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Fig. 7: Monthly Risk Adjusted Returns
1.4 Economic Interpretation
Risk-adjusted
adjusted return is a risk based profitability measurement
measurement.. We use Sharpe Ratio which shows
how much excess return we receive for the extra volatility we endure for holding a risky
ri asset.
Sharpe Ratio = (rx-rf)/stdev(x)

rf)/stdev(x)
Risk-adjusted
adjusted return is a better indicator than risk unadjusted returns because if this is negative, it
shows that the investor would be better off investing in risk free assets than investing in the
company’ss shares. It doesn’t incorporate the risk involved in security. To be profitable, the risk-
risk
adjusted returns should be positive.
Time Period Sharpe Ratio
Daily -0.48
Weekly -0.50
Monthly -0.68
Table 4: Sharpe ratio of GAIL equity shares
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Fig. 8: Sharpe ratio of various time periods

Observations:
1. The risk unadjusted returns are negative for all frequencies.
2. The risk adjusted returns are negative for all frequencies.
3. The share price has reduced over the period signified by the negative unadjusted
returns.
4. The risk unadjusted and risk adjusted graphs are very similar in shape.
5. The standard deviation, i.e. the volatility for risk adjusted returns is approximately
equal to risk unadjusted returns.
6. Annualized daily returns are greater than annualized weekly returns which in turn
are greater than annualized monthly returns for both adjusted and unadjusted
returns.
7. The volatility decreases from daily to weekly to monthly returns for both adjusted
and unadjusted risk returns.
8. The sharpe ratio is consistently neg
negative
ative for daily, weekly and month returns.
9. The sharpe ratio of monthly returns is the least followed by weekly then daily as
seen in Fig.2.
10. Volatility is also very high which indicates that a turnaround isn’t possible in
the near future.
Action:
1. Investment
ent in GAIL India Ltd. shares on a monthly basis is not advisable.
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2. Based on the Sharpe ratio calculations daily returns yield minimum loss. Thus if
an investor wants to invest in this asset he should do it on a daily basis but it is
discouraged.
3. Investors shouldn’t try to invest in this asset as the returns and Sharpe ratio are
negative.
4. Volatility is also very high which indicates that a turnaround isn’t possible in the
near future.
5. The investors are advised to invest in risk
risk-free assets like t-bills.
6. Riskk loving investors can try to short the asset.
● Reason for leap in equity share price on 20th of March 2020

2020:
If we look at the consolidated income statement we can see that GAIL had a negative tax
expense. Negative income tax may be due to a company receiv
receiving
ing a low income during a fiscal
year as a result of low business or high losses. Generally businesses in certain industries, such as
oil and gas, can enjoy tax credits that allow them to write off most operating expenses for drilling
and exploration. Due to this negative tax we can see that there was a huge rise in the net profit or
PAT, which in turn increased share prices by 16.41%.
Fig 9:: Consolidated income statement of GAIL
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● Reason for fall in equity share price on 12th of March 2020:

A petition was filed against GAIL India Ltd. in Delhi High Court- Gupta Bros. (India) vs Gail
India Limited on 12 March, 2020. It’s a case under arbitration act applying for extension of time
to resolve the dispute.
● Reason for fall in equity share price on 6th June 2020:

The Gail India Ltd stock was the top loser among the Nifty 50 stocks on 6th June 2020, declining
11.73% . Brokerages cost had cut the company’s earnings per share (EPS) estimates by 3 to 4%
for 2019-20. These cuts were prompted mainly because of the new disappointing tariff revision
for its Hazira-Vijaipur-Jagdishpur(HVJ) pipeline and HVJ upgradation of network pipelines.
SECTION 2: Equity futures instruments
2.1 Introduction to Equity Futures Instrument
a. When it started?
The NSE commenced its derivative trading in futures instruments with the launch of
index futures on June 12, 2000 with Nifty 50 as the most popular benchmark index. On
November 9, 2001, futures instruments on individual securities were introduced. Futures
and Options on individual securities are available on 175 securities stipulated by SEBI.
GAIL got its equity futures listed on NSE on 26th September, 2003.
b. Lot size and contract specifications
Lot size of GAIL is 6100 shares of FUSTK (future stock)
Symbol GAIL
Instrument FUSTK (future stock)
Lot size 6100 shares
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Price steps Rs.0.05
Price brands Operating range of 10% of the base price
Trading cycle 3 months - near, next far
Expiry date Last thursday of every month
Daily settlement price Last half hour’s weighted average price
Final settlement price Closing price of the underlying equity on

the last trading day of the contract
Table 5: contract specifications of GAIL
c. Overall greatness of the Equity Futures instrument

Current details (as on 23rd November, Expiry 28th January,2021)
● Traded Volume (contracts) -3

● Traded Value * (crores) -2.33
● Underlying value -100.5
● Open Interest -23,966,900
● Change in Open Interest % -1.25
● Settlement Price (on 23rd November 2020) -100.70
● Average Daily Volatility (6-months range) -3.25
● Annualized Volatility -45.39
2.2 Risk Unadjusted Returns for Futures Instruments
a. Near Month
It can be seen from Table 2, the negative average return on daily frequency is greater than the
weekly and monthly returns. Nevertheless, the returns in all the three frequencies being negative,
investing in near futures contracts is not recommended.
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Metric Daily Weekly Monthly
Average -0.18 -0.84 -3.41
Maximum 16.29 20.58 22.65
Minimum -51.10 -51.70 -59.17
Standard Deviation 3.06 7.20 13.48
Table 6:: Risk Unadjusted Returns (%) of Near Month Futures Contracts
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Fig 11: Weekly Risk Unadjusted Returns
Fig 12: Monthly Risk Unadjusted Returns
b. Next Month
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Average -0.18 -0.84 -3.41
Maximum 16.39 21.00 22.88
Minimum -51.12 -51.74 -59.13
Table 7:Risk
:Risk Unadjusted Returns (%) of Next Month Futures Contracts
Fig 13: Daily Risk Unadjusted Returns
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c. Far Month
Average -0.17 -0.84 -3.46
Maximum 16.39 21.00 22.88
Minimum -51.02 -51.74 -59.13
Table 8: Comparison of Daily, Weekly and Mont

Monthly Risk Unadjusted Returns (%) of Far Month Futures
Contracts
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Fig 118: Monthly Risk Unadjusted Return
2.3 Risk Adjusted Returns for Futures Instruments
a. Near Month
The Sharpe Ratio represents the return an investor can expect per unit of risk taken. It can be
seen that the sharpe ratio is maximum for the weekly frequency, followed by daily and monthly
being the least. The sharpe ratio being negative for all the three frequencie
frequencies,
s, the investor is
recommended not to invest in near month futures contracts. Rather, he must look for investment
in a risk free asset.
Average -0.19 -0.95 -3.87
Maximum 16.28 20.48 22.37
Minimum -51.12 -51.81 -59.62
Table 9: Comparison of Daily, Weekly and Monthly Risk Adjusted Returns (%) of Near Month Futures
Contracts
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Number-22
Fig 19:: Sharpe Ratio of Daily, Weekly and Monthl

Monthlyy frequencies for Near month futures contracts
Fig 20: Daily Risk Adjusted Return
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Number-22
Fig 21: Weekly Risk Adjusted Return
Fig 22: Monthly Risk Adjusted Return
b. Next Month
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The Sharpe Ratio represents the return an investor can expect per unit of risk taken.
ta It can be
seen that the sharpe ratio is maximum for the weekly frequency, followed by daily and monthly
being the least. The sharpe ratio being negative for all the three frequencies, the investor is
recommended not to invest in near month futures con
contracts.
tracts. Rather, he must look for investment
in risk free investment.
Average -0.19 -0.95 -3.87
Maximum 16.37 20.90 22.61
Minimum -51.03 -51.86 -59.58
Table 10: Comparison of Daily, Weekly and Monthly Risk Adjusted Returns (%) of Next Month Futures
Contracts
Fig 23:: Sharpe Ratio of Daily, Weekly and Monthly frequencies for Next month futures contracts
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Fig. 26: Monthly Risk Adjusted Return
c. Far Month
It can be seen from Table 5, the negative average return on daily frequency for far month
futures contracts is greater than the weekly and monthly returns. Nevertheless, the returns
in all the three frequencies being negative, investing in near futures contracts is not
recommended. The Sharpe Ratio represents the return an investor can expect per unit of
risk taken. It can be seen that the sharpe ratio is maximum for the weekly frequency,
followed by daily and monthly being the least. The sharpe ratio being negative for all the
three frequencies, the investor is recommended not to invest in near month futures
contracts. Rather, he must look for investment in risk free assets.
Average -0.19 -0.95 -3.87
Maximum 16.37 20.90 22.61
Minimum -51.03 -51.86 -59.58
Table 11: Comparison of Daily, Weekly and Monthly Risk Adjusted Returns (%) of Far Month Futures
Contracts
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Fig 27:: Sharpe Ratio of Daily, Weekly and Monthly frequencies for Next month futures contracts
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Number-22
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2.4 Economic interpretation

The Sharpe ratio is a measure of an investment’s excess return per unit of risk.

The Sharpe ratio will be used to analyze the returns in the same way as it was used in the equity
sections.
Sharpe Ratio Daily Weekly Monthly
Current Month -0.7855 -0.7541 -0.8087
Next month -0.7854 -0.7529 -0.8109
Far month -0.7481 -0.7458 -0.8248
Table 12: Sharpe Ratio for GAIL equity futures
Observations:
1) The graph for risk-adjusted and risk unadjusted returns are totally similar. There's just a
difference in the T- bill returns.
2) The annualized risk-unadjusted returns of futures are negative in all cases.
3) The annualized risk-adjusted returns of futures are negative in all cases.
4) The annualized risk-adjusted returns are lowest in the weekly returns followed by daily
then monthly returns for current and next month.
5) The annualized risk-adjusted returns are lowest in the weekly returns followed by
monthly then daily returns for far month.
6) The annualized volatility is highest in the weekly returns followed by daily then monthly
returns for call cases.
7) The annualized volatility is very high (nearly 50%)
8) Sharpe ratio is negative in all the cases.
9) Monthly returns have the lowest sharpe ratio followed by daily returns then weekly
returns.
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Actions:
1) The mean risk adjusted returns are negative in all the cases with all which implies it is
better to invest in T-bills rather than the Futures of GAIL.
2) Sharpe ratio is negative which implies it is better to invest in T-bills than the futures of
GAIL.
3) The sharpe ratio trends show that investments made on a weekly basis are preferred.
4) Investors might want to invest in futures weekly even if they want to hold them for longer
periods.
5) The risk loving investors can short the GAIL futures. The futures trader stands to profit as
long as the underlying GAIL stock price goes down which seems likely due to negative
returns. But this is highly not recommended as the volatility is very high and heavy losses
can be incurred for the short futures position if the underlying stock price rises.
SECTION 3: Comparison of equity and futures
3.1 Comparison of equity and futures

1) Unadjusted daily, weekly and monthly returns for underlying asset are greater than
compared to current, next and far months futures returns.
2) Adjusted daily, weekly and monthly returns for underlying asset are greater than
compared to current, next and far months futures returns.
3) The volatility of unadjusted equity futures returns is greater than volatility of equity stock
returns for all the cases.
4) The volatility of adjusted equity futures returns is greater than volatility of equity stock
returns for all the cases.
5) Hence investing in Equity shares is the better option compared to the futures because of
the higher returns and lower volatility.
6) The sharpe ratio of the underlying asset is far superior to the sharpe ratio of future in all
cases. Hence it is recommended that an investor should invest in underlying asset equity
shares rather than futures.
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7) From both Adjusted and Unadjusted Returns we can conclude that returns are pretty low
on an average but there are positive returns for particular periods, which can be predicted
with proper technical and fundamental analysis. Therefore, a risk neutral investor would
look to invest in Equity shares Gail India Ltd.
Sharpe Ratio Underlying Futures

Asset
Current Near Month Far Month
Month
Daily -0.480 -0.7855 -0.7541 -0.8087
Weekly -0.499 -0.7854 -0.7529 -0.8109
Monthly -0.6757 -0.7481 -0.7458 -0.8248
Table 13: Sharpe Ratio for GAIL equity futures
3.2 Liquidity Position
Month Near Next Far
Average no. of contracts 2902 660 6
Average Open Interest 21273018.96 3596542.013 73819.66
Table 14: Contracts specifications
For Underlying Stock, Average volume traded is 11142825.87 shares.
It can be seen from the table that people prefer current month contracts much more than the next
and far month contracts. This is very evident from the Open Interest, which is nothing but the
number of outstanding derivative contracts; and the Number of contracts. The OI, hence
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signifies that the near month contracts are the most liquid, followed by next and far month being
the least liquid one.
SECTION 4: Contango Trends and Frequency

Analysis
4.1 Contango Trends
Contango is a trend when the futures price of a stock is greater than its spot price prevailing in
the market.
Backwardation refers to the situation when the futures price of the stock is less than its spot
price prevailing in the market.
Futures Month % Contango % Backwardation
Near 83.784 16.216
Next 81.081 18.919
Far 86.486 13.514
Table 15: Contango trends
It was seen that out of a total trading months of 37, near month contract prices are greater than
the spot prices for 31 months; that means, around 84% contango is observed for near month
contracts. In the case of Next Month Futures Contracts, 30 out of 37 months (around 81%)
showed contango trend while the far month futures contracts showed 32 out of 37 months
(around 86%) as being contango in behavior.
Hence, overall we can say that the equity futures contracts of GAIL have shown contango
behavior during the observation period (Nov 1, 2017- Oct 29, 2020).
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Fig 31. Contango and

nd Backwardation trends of GAIL (Note: Here, F0 refers to the futures price and S0
refers to the spot price or the stock price)
Fig 32.. Price comparison of the three contracts with underlying stock
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4.2 Frequency Analysis

● Theoretically speaking, frequency does not have any significance on the returns of stock.
According to the Random Walk Theory and Efficient Market Hypothesis, stock prices are
completely random. Ignoring the transaction costs, return on the stock should be the same.
● However, from the point of view of an investor, the frequency does become an important factor
while investing.
● As the frequency increased from daily to weekly to monthly, the data shows that the volatility
given by the standard deviation in returns, also increased.
● Thus, the volatility does become an important factor to consider as it directly affects the sharpe
ratio, which gives us a real world idea about the performance of a stock.
● In the case of GAIL, we see that the returns were negative, so the frequency doesn’t really affect
our investment decision.
● For stocks with positive average returns, it is advised to invest on a monthly frequency as the
returns compounded monthly would be larger than that of daily and weekly frequency.
● For stocks with negative mean returns, like the case of GAIL, it is recommended to invest in a
risk free asset instead to avoid negative compounding.
SECTION 5: Options
Introduction:
Options are derivative financial instruments whose value is based on the price of an underlying
asset. The underlying asset could be a stock, currency, commodity or a stock index. Options give
the buyer the right, but not obligation to buy or sell the underlying instrument. Options can be
categorized into various types based on the following:
● Call and Put options: Call options give the holder of the option the right, but not the
obligation to buy the underlying asset, at a certain price (strike price) on or before the
expiry of the option contract. The writer of the option is obligated to sell the underlying
asset at the predetermined price, if the contract is exercised by the owner. Put options
give the holder the right to, but not the obligation, to sell the underlying asset at a
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predetermined price on or before the expiration date. The writer of the option will then be
obligated to buy the underlying asset, if the contract is exercised.
● American and European Options: In the European option the contract can be exercised
only at the time of maturity of the option contract. On the other hand, the American
option can be exercised at any time, on or before the expiration of the option contract.
Note: For our analysis the following details have been taken into consideration:
Sample Period: 1st July 2020 to 30th September 2020
Option Type: European Call option
Option Price Calculation:

The following steps were taken to analyse the option price for GAIL Limited:
● From the sample period, the first date, 1st July 2020, has been chosen for demonstration
of how the strike price of the option and the expiry was selected. The bhav copy for the
same was downloaded.
● The strike price for the option was selected as the middle value of all the strike prices
available, because the open interest for July 1st for options of all strike prices were zero.
For GAIL Limited there were 27 different strike prices, out of which the 14th strike price
has been selected.
K = 92.5 (Selected as mentioned above)
● The expiry of the option was the far month contract and it expired on 24th September
2020.
● The volatility of the stock returns during the sample period is calculated by taking the
standard deviation of daily returns. The volatility obtained can’t be used directly because
we first need to annualize them.
Standard Deviation = 1.88%
𝑽𝒐𝒍𝒂𝒕𝒊𝒍𝒊𝒕𝒚 (𝝈) = 𝑺. 𝑫 𝑿 √𝟐𝟓𝟐
● Volatility comes out to be 29.87% by annualizing the standard deviation.
● Calculating the u and d values for the binomial model of option pricing:
𝑢=𝑒 ,𝑑 = 𝑒
Therefore, u=1.16 and d=0.86
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● The price of the underlying asset on 1st July is 102.95. Hence the prices of the next two
nodes can be given by:
𝑆𝑢 = 𝑢 ∗ 𝑆𝑜, 𝑆𝑑 = 𝑑 ∗ 𝑆𝑜
Therefore the values of the underlying asset at the upper and lower node are 119.53 and
88.67 respectively.
● The value of the option at the upper node are calculated as:
Value at upper node = Su-So=119.53-92.5=27.03
● The value of option at the lower node is 0 because the strike price of the option (92.5) is
more than the stock price value at the lower node (88.67), and hence the option will not
be exercised.
Value at the lower node = 0
● Probability of reaching the upper node of the binomial diagram is 0.46 and is calculated
as:
∆
𝑝 = (𝑒 ^ − 𝑑)/(𝑢 − 𝑑) = 0.46
● Thus, probability of reaching the lower node the binomial diagram is 0.56 and is
calculated as:
1 − 𝑝 = 0.54
● Finally the value of option as on 1st July 2020:
𝑓 = [𝑒 (𝑝 ∗ 𝑓𝑢 + (1 − 𝑝) ∗ 𝑓𝑑]
𝑓 = 12.51
● Therefore, the theoretical value of the option on 1st July 2020 is calculated to be 12.51 by
using the formula given above.
Binomial Diagram for the Option Price Calculation:
Su=119.53
fu=27.03
So=102.95
Sd=88.67
fd=0
40
Number-22
Observation:
● We see that the actual option price on 1st July 2020 was 15.3, whereas the theoretical
the
price calculated came out to be 12.51.
● The price in both the cases may differ because the market expectations and sentiments
may be different from the theoretical calculations.
● The price of the option could be higher than the theoretical price du
duee to some positive
sentiment in the market about the underlying asset. The market participants may have
been expecting the price of the underlying asset to go up in the near future, and hence the
option may have seen a bullish trend.This led to rise in the value of the option, and hence
could be the reason why the actual option price is greater than the theoretical option
price.
● This can be confirmed by seeing the profit and loss statement for GAIL Limited during
the quarter.
● The positive sentiment about th
thee stock could be due to the increase in the profit after tax
as compared to the previous quarter. The values of PAT for GAIL rose by 385% as
compared to the previous quarter of 2020. This could be due to the easing of the
restrictions by the government aft
after the lockdown due to COVID-19.
● This positive sentiment would have drawn in investors who would have bought the stock
leading to the actual price being greater than the theoretical price.
Fig 33: Actual option price vs Theoretical option price
41
Particulars Figures
Duration (Sample Period) 1st July 2020 to 30th September 2020
Expiry of Option 24th September 2020 (Far month)
Strike Price 92.5
Type of Option Call Option
Annualized volatility in Underlying Asset 29.87%
Value of ‘u’ 1.16
Value of ‘d’ 0.86
Table 16: Options specifications
● From the graph we can see that the actual option prices closely follow the theoretical
option price, and the difference in the prices may be due to the difference in the sentiment
and expectation of the market towards the underlying stock.
● In case the sentiment towards the underlying asset is very positive this will lead to
increase in the price of the underlying asset, hence will lead to the rise in price of the
option as well, leading to the actual price being greater than the price calculated through
theoretical calculations.
● In case the sentiment towards the underlying asset is negative, this leads to decrease in
the value of the underlying asset as well as the call option. Hence, this may lead to the
actual price dipping below the theoretical price of the stock.
SECTION 6: Overall conclusion

● GAIL Limited is a good choice among investors looking for high dividends on their
investments. The company has offered high dividends to investors, with the dividends
increasing over the last three years. The capital gains on the equity and futures
instruments of GAIL Limited are not attractive as the returns on the daily, weekly and
monthly timeframes for the company for the sample period that is considered is negative.
42
● The positive sign for the investors in the company could be that the fundamentals of the
company are good. As mentioned in the introduction for GAIL, the annual profits for the
company are improving YoY, along with the ROE, implying that the company is making
effective use of shareholder’s equity.
Annualized Underlying Futures

Returns (%) Asset
Current Month Next Month Far Month
Daily -17.53% -38.131% -38.146% -37.631%
Weekly -17.86% -39.173% -39.127% -39.120%
Monthly -20.26% -37.478% -37.719% -38.122%
Table 17: Annualized returns of futures GAIL

Standard Asset
Deviation (%) Current Month Next Month Far Month
Daily 36.50% 48.545% 48.571% 50.303%
Weekly 35.82% 51.946% 51.966% 52.455%
Monthly 29.99% 46.677% 46.516% 46.218%
Table 18: Annualized Standard deviation of futures GAIL
● From the above two tables it is evident that the equity instrument of GAIL Limited has
been performing poorly for the sample period chosen. The annualized returns (risk-
adjusted) of the equity instrument are negative for all the time periods considered. So it
is not advisable to the investor to invest in the company based purely on the basis of the
risk adjusted returns of the equity instrument.
● The chances for trading in the equity instrument of GAIL is high. The equity instrument
is suitable for traders and not long term investors. Traders could use the high volatility in
the stock to make capital gains in equity instruments. High volatility in the stock implies
43
that the price of the stock fluctuates a lot. Hence the trader could buy the stock when it
dips and then sell at the highs. Another way could be to short the stock, when the price
becomes too high and then buyback when the price decreases.
● The trader should make his trades based on the various technical and fundamental
analysis techniques.
● Long term investors would not gain from investing in the stock because the returns are
always negative. They would be better off investing in the government securities as their
returns are higher than the risk adjusted returns for GAIL Limited.
● For the futures instrument for GAIL we also see similar statistics to the equity segment.
The returns on the daily, weekly and monthly frequencies are negative, so it is not
advisable for investors to invest in the futures of GAIL.
● An investor is better off investing in risk free assets or government securities instead of
investing in futures because of the negative returns.
● There is also very negligible difference between the daily, weekly and monthly frequency
returns of the futures. Hence, the investor wouldn’t gain overall by investing in futures.
● The poor performance of the instruments could be due to the recent coronavirus
pandemic that impacted the performance of a large majority of companies trading in the
equities and derivatives market.
44
GLENMARK PHARMACEUTICALS LTD.

(GLENMARK)
Report analysis on GLENMARK equity and futures Study

Period:
1st Nov 2017 to 29th Oct 2020
45
Number-22
SECTION 1: Underlying Assets Equity
1.1 Underlying equity assets iintroduction
a. Nature of Business
Glenmark Pharmaceuticals Limited is a leading global innovative pharmaceutical company
committed to enriching lives worldwide headquartered in Mumbai, India. Founded by Gracias
Saldanha in the year 1977 as a generic drug and active pharmaceutical ingredient manufacturer
with a vision of discovering possibilities and making lives better across the globe by developing
cures for unmet medical needs.. Its business is spread across the globe with the US being the
largest market followed by India.
b. Ownership
Fig 34. Shareholding pattern of GLENMARK
46
Ownership: Private (Saldanha Family Trust)

Founded by Gracias Saldanha, being a promoter, the majority of ownership lies within the hands
of the Saldanha Family Trust (45.45%). The Foreign Institutional Investors hold up around
(30.16%) of the ownership, while the other Institutional Investors like Mutual Funds, Insurance
companies etc, hold up around (12.86%). The general Public owns around (11.53%) of the
company as can be seen in the figure 2.
c. Commencement of Business and Circumstances

Glenmark Pharmaceuticals Limited was founded in 1977. The Company started its engagement
in Research & Development, manufacturing and marketing of Pharmaceutical Formulations,
domestically as well as overseas with a vision to emerge as a leading research based
pharmaceutical company and making lives of patients better across the globe with unmet medical
needs.
Particulars 2020 2019 2018 2017 2016
Net Profit 20.17 25.72 15.77 26.44 24.27

Margin
Earnings per 48.00 57.49 35.95 75.86 52.87

Share
Earnings 94.98 95.81 93.31 96.83 95.43

Retention Ratio
Return on Assets 7.14 9.46 6.64 15.28 14.67
Table 19:Performance of GLENMARK
The performance of the company Glenmark Pharmaceuticals has been analyzed below:
● We can see from the above table that the performance of Glenmark Pharmaceuticals has
declined over the past years in terms of its profitability.
47
● The Net profit margin of the company decreased during the year 2020 which was likely
due to the impact of coronavirus and its effect on the sales revenue of many companies.
● The earnings per share of the company also decreased during the last three years. The
decline in EPS could be due to the poor performance of the company in terms of
profitability in the past years. The decline in the EPS of the company may lead to the
decrease in the stock price of the company. This can be seen reflected in the stock prices
of the company over the past 5 years. It has plummeted from the highs of 1000 levels to a
current price of 480.
● The P/E of the company in the past financial year has been 8.68 which way below the
industry average of 36.52. The low P/E ratio indicates the company is a value stock.
● The high earnings retention ratio over the past five years indicates that the company
keeps most of its earnings, and does not pay out high dividends. This factor may deter an
investor looking for dividends away from the company’s stock. The investors looking for
capital gain may invest in the stock due to it being a value stock, because of the low P/E
ratio.
● The return on asset has also declined for the company over the past three years. This
indicates that the company management's investment strategy is inefficient. The poor
ROA could also be attributed to the declining profitability of the company over the years.
● With dividend benefits being very less and the fundamentals of the company
deteriorating, it would be better for the investors of the company to not invest in
Glenmark Pharmaceuticals currently. Improve in performance for the company may
attract investors in the future.
d. Industry of the Business

Glenmark Pharmaceuticals belongs to the Pharmaceutical industry and is the 4th biggest Indian
Pharmaceutical company. Being one of the 8 core industries of India, it has a vital role in
influencing decision making for different sections of the economy. It is clear that the pharma
industry has a far ranging impact on the world’s economy, with a total economic footprint of
$437 billion in terms of Gross Value Added (global GDP), which is equal to the economic output
of Argentina.
48
e. Overall Greatness of the company

● Glenmark is currently ranked 15th in India and has 8 brands among the top 300 brands of
the Indian Pharmaceutical Market. Glenmark’s brand Telma (Telmisartan) secured its
position among the Top 50 brands in IPM and is currently ranked 48th. It is currently the
4th biggest Indian Pharmaceutical company.
● Glenmark is not only successful in India but also is performing well in the U.S. markets.
It appeared in the Dow Jones Sustainability Emerging market index for the second
consecutive year in 2019.
● Glenmark Pharmaceuticals Limited featured in the th 5th Annual Inclusive Business List,
2019. Apart from this Glenmark Limited also won an award for Excellence in Safety in
Pharmaceutical Industry under the th health and safety category at the 8 ACEF Asian
Leaders Forum and Awards.
● In India Glenmark Pharmaceuticals provided over 5 million meals with a focus majorly
on undernourished children, daily wage workers and pregnant women who were
identified as the major threat toward the coronavirus.
● Glenmark Pharmaceuticals also conducted food distribution drives in the tribal areas of
Madhya Pradesh and Maharashtra. They supplied food baskets for over two months to
these communities.
● RISE Infinity Foundation, the Idobro team and Glenmark Foundation have been
providing support across 32 cities in India to vulnerable groups and frontline workers
with food and ration, travel arrangements, medicines, sanitary napkins and hygiene kits,
personal and household items, PPE kits, protective gear and more.
● Hence we see how diligently Glenmark Pharmaceuticals have been working towards
providing relief to the underprivileged communities and the frontline workers, who are
the most vulnerable during the times of coronavirus.
● Glenmark also prioritizes the health and safety of their employees. They regularly hold
safety training and programs for their employees.
● They also focus on safeguarding the environment by focusing on reducing carbon
emission and ensuring energy efficiency. They also deploy proper methods of waste
disposal, because if bio waste is disposed improperly it could be hazardous to the
community.
49
Number-22
1.2 Risk Unadjusted Returns Data

From the table we can see that the averag
averagee returns are negative which implies that returns are not
Average 0.0012% -0.0007% 0.52%
Minimum -23.06%
23.06% -24.96% -25.83%
-
Maximum 26.97% 26.97% 63.74%

Table 20: Returns of GLENMARK
Fig 35. Risk Unadjusted daily returns
50
Number-22
Fig 36. Risk Unadjusted Weekly returns
Fig 37. Risk Unadjusted Monthly returns
51
Number-22
1.3 Risk Adjusted Returns D

Data
Average 0.01% -0.11% 0.06%
Minimum --23.07% -25.05% -26.25%
Maximum 4.71% 26.90% 63.43%

Table 21: Risk Adjusted Returns Data
Fig 38. Risk Adjusted daily returns
52
Number-22
Fig 39. Risk Adjusted Weekly returns
Fig 40. Risk Adjusted Monthly returns
53
Number-22
1.4 Economic Interpretation
Risk-adjusted
adjusted return is a risk based profitability measurement
measurement.. We use Sharpe Ratio which shows
how much excess return we receive for the extra volatility you endure for holding a risky asset.
asset

rf)/stdev(x)
Risk-adjusted return is a better
etter indicator than risk unadjusted returns because if this is negative, it
shows that the investor would be better off investing in risk free assets than investing in the
company’s shares. It doesn’t incorporate the risk involved in security. To be profitable,
profi risk-
adjusted returns should be positive.
Time Period Sharpe Ratio
Daily 0.0057
Weekly -0.0021
Monthly 0.1198
Table 22
22: Sharpe ratio of Glenmark equity shares
Fig 41. Sharpe ratio of various time periods
54
Observations:
1. The share price has increased over the period signified by the positive unadjusted
returns.
2. Unadjusted weekly returns are negative whereas unadjusted daily and monthly
returns are positive.
3. Adjusted weekly returns are negative whereas unadjusted daily and monthly
returns are positive.
4. The risk unadjusted and risk adjusted graphs are very similar in shape.
5. The standard deviation, i.e. the volatility for risk adjusted returns is approximately
equal to risk unadjusted returns.
6. The annualized volatility increases from weekly to daily to monthly returns for
both risk adjusted and unadjusted returns.
7. The sharpe ratio is negative for weekly returns, Sharpe ratio for daily and monthly
returns is positive.
Action:
1. Weekly investments in Glenmark Pharmaceuticals Limited are not advisable.
2. Investors should try to invest in this asset for longer periods as the monthly sharpe
ratio is significantly higher.
3. Monthly returns are highest and have the lowest volatility. Thus investors should
invest for a long time.
4. Investors can invest on a daily basis as well as sharpe ratio is positive.
5. The investors are advised to invest in risk-free assets like t-bills if they are
looking for weekly investments.
6. Risk loving investors should have the same strategy as they do not care about the
risk and only look at returns. So they should invest in the equity for long
durations.
● Reason why Glenmark Pharmaceuticals Limited share prices fell on 23rd March,
2020:
55
The returns of Glenmark Pharmaceuticals Limited suddenly went down by 11% on 23rd
March 2020 due to the announcement of pandemic lockdown. The market mentality was
very negative and everyone started selling off their shares.
● Reason why glenmark share prices are falling consistently since July:
The share price of Glenmark Pharmaceuticals has been falling 5 percent after the US
Department of Justice charged the company with conspiring to fix prices for generic
drugs
● Reason why Glenmark Pharmaceuticals Limited shot up on 22nd of June 2020:

After the company launched the antiviral drug ‘Favipiravir’ for the treatment of mild to
moderate covid-19 patients, Glenmark Pharmaceuticals shares rose 35 percent on 22 June
2020. The first Indian company to commercially launch an antiviral medication for
Covid-19 was Glenmark Pharmaceuticals.
SECTION 2: Equity futures instruments
2.1 Introduction to Equity Futures Instrument
d. When it started?
The NSE commenced its derivative trading in futures instruments with the launch of
index futures on June 12, 2000 with Nifty 50 as the most popular benchmark index. On
November 9, 2001, futures instruments on individual securities were introduced. Futures
and Options on individual securities are available on 175 securities stipulated by SEBI.
GLENMARK got its equity futures listed on NSE on 3rd Oct 2013.
56
e. Lot size and contract specifications

Lot size of GLENMARK is 1400 shares of FUSTK (future stock)
Symbol GLENMARK
Instrument FUSTK (future stock)
Lot size 1400 shares
Price steps Rs.0.05
Price brands Operating range of 10% of the base price
Trading cycle 3 months - near, next far
Expiry date Last thursday of every month
Daily settlement price Last half hour’s weighted average price
Final settlement price Closing price of the underlying equity on

the last trading day of the contract
Table 23: Contract Specification of GLENMARK
f. Overall greatness of the Equity Futures instrument

Current details( on 23rd November, Expiry 28th January,2021)
● Traded Volume (contracts) -3

● Traded Value * (lacs) -57
● Underlying value -480.10
● Open Interest -4,473,500.00
● Change in Open Interest % -20.24%
● Settlement Price (on 23rd November 2020) -479.25
● Average Daily Volatility (6-months range) -3.94
● Annualized Volatility (%) -2.20
57
Number-22
2.2 Risk Unadjusted Returns for Futures Instruments
a. Near Month
It can be seen from Table 2, the average return on monthly frequency is greater than the weekly
and daily returns. These returns being unadjusted for risk, it’s recom
recommended
mended to first incorporate
the risk and then take an investment decision as the high raw returns of monthly frequency might
mislead the investors.
Average -0.0005 0.050 0.203
Maximum 22.2506 38.217 63.196
Minimum --23.7863 -28.608 -25.825
Table 24:: Risk Unadjusted Returns (%) of Near Month Futures Contracts
58
Number-22
Fig 44:Monthly Risk Unadjusted Returns
b. Next Month
and daily returns. These returns being unadjusted for risk, it’s recommended to first incorporate
the riskk and then take an investment decision as the high raw returns of monthly frequency might
59
Number-22
Average -0.0015 0.0187 0.234
Maximum 26.43 35.17 65.43
Minimum -23.45 -22.80 -25.71
Table 25:Risk
:Risk Unadjusted Returns (%) of Next Month Futures Contracts
60
Number-22
c. Far Month
and daily returns. These returns being unadjusted for risk, it’s recommended to first incorporate
the risk and then take an investment decision as the high raw returns of monthly frequency might
Average -0.0005 0.018 0.233
Maximum 27.322 34.45 65.54
Minimum -23.06 -22.14 -25.70
Table 26: Comparison of Daily, Weekly and Monthly Risk Unadjusted Returns (%) of Far Month Futures
Contracts
61
Number-22
62
Number-22
Fig 50: Monthly Risk Unadjusted Return
2.3 Risk Adjusted Returns for Futures Instruments
a. Near Month
It can be seen from the below table that the mean risk adjusted returns of daily frequency is
greater than that of weekly and monthly frequencies. The point to note here is that in case of risk
unadjusted
nadjusted returns, the mean return was maximum for the monthly frequency and it felt
appealing to invest on a monthly basis. But after taking into account the risk, we have a clearer
picture now.
The Sharpe Ratio represents the return an investor can expe
expect
ct per unit of risk taken. It can be
seen that the sharpe ratio is maximum for the daily frequency, followed by weekly and monthly.
The ratio being negative for all the three frequencies, the investor is recommended not to invest
in near month futures contracts.
racts. Rather, he must look for investment in a risk free asset.
Average -0.0156 -0.058 -0.256
Maximum 22.24 38.122 62.923
Minimum -23.80 -28.706 -26.129
63
Number-22
Table 27: Comparison of Daily, Weekly and Monthly Risk Adjusted Returns (%) of Near Month Futures
Contracts
Fig 51:: Sharpe Ratio of Daily, Weekly and Monthly frequencies for Near month futures contracts
Fi
64
Number-22
b. Next Month
It can be seen from the below table that the negative mean risk adjusted returns of daily
frequency is greater than that of weekly aand monthly frequencies.
65
Number-22
The sharpe ratio being negative for all the three frequencies, the investor is recommended not to
invest in next month futures contracts. Rather, he must look for investment in risk free
investment.
Average -0.0167 -0.95 -0.224
Maximum 26.42 20.90 65.16
Minimum -23.47 -51.86 -26.01
Table 28: Comparison of Daily, Weekly and Monthly Risk Adjusted Returns (%) of Next Month Futures
Contracts
Fig 55: Sharpe

arpe Ratio of Daily, Weekly and Monthly frequencies for Next month futures contracts
66
Number-22
67
Number-22
Fig. 58: Monthly Risk Adjusted Return
d. Far Month
It can be seen from Table 5, the nega
negative
tive average return on weekly frequency for far month
futures contracts is greater than the daily and monthly returns. Nevertheless, the returns in all the
three frequencies being negative, investing in near futures contracts is not recommended.
The sharpe ratio being negative for all the three frequencies, the investor is recommended not to
invest in near month futures contracts. Rather, he must look for investment in risk free assets.
Average -0.156 -0.09 -0.225
Maximum 27.314 34.361 65.27
Minimum -23.075 -22.23 -26.012
Table 29: Comparison of Daily, Weekly and Monthly Risk Adjusted Returns (%) of Far Month Futures
Contracts
68
Number-22
Fig 59:: Sharpe Ratio of Daily, Weekly and Monthly freque

frequencies
ncies for Next month futures contracts
69
Number-22
70
2.4 Economic interpretation

The Sharpe ratio is a measure of an investment’s excess return per unit of risk.

The Sharpe ratio will be used to analyze the returns in the same way as it was used in the equity
sections.
Sharpe Ratio Daily Weekly Monthly
Current Month -0.0881 -0.0592 -0.0593
Next month -0.0935 -0.0968 -0.0515
Far month -0.0872 -0.0979 -0.0518
Table 30: Sharpe Ratio for Glenmark Pharmaceuticals Limited equity futures
Observations:
1. The graph for risk-adjusted and risk unadjusted returns are totally similar. There's just a
difference in the T- bill returns.
2. The annualized risk-unadjusted monthly returns and weekly returns of futures are
positive whereas daily returns are negative.
3. The annualized volatility of the futures prices follows the same trend. The volatility is
highest in the case of monthly returns followed by weekly returns. Volatility of daily
returns are considerably lower. The volatility is very high. (nearly 50%)
4. The annualized risk adjusted returns doesn't follow the same trend i.e. highest returns
exist in case of weekly returns, then monthly returns and lastly on daily returns.
5. Average weekly and monthly unadjusted returns are giving positive yield for all three
namely current, far and next months. Average daily returns are giving negative yield for
the same.
6. Average Risk adjusted returns are negative for all the frequencies and in all the cases.
7. Sharpe ratio is negative in all the cases. It is considerably lower for weekly returns.
Sharpe ratio for daily returns is slightly higher than that of monthly returns.
71
Actions:
1. The mean risk adjusted returns are negative in all the cases with all which implies it is
better to invest in T-bills rather than the Futures of Glenmark Pharmaceuticals Limited.
2. Sharpe ratio is negative which implies it is better to invest in T-bills than the futures of
Glenmark Pharmaceuticals Limited.
3. The sharpe ratio trends show that weekly returns are significantly lower than daily and
monthly returns. Investments made on a weekly basis are strongly discouraged.
4. Sharpe ratio for daily returns is slightly higher than that of monthly returns. Hence
investors might want to invest in futures daily even if they want to hold them for longer
periods.
5. But investment in futures are discouraged altogether because of negative sharpe ratios in all
cases.
6. The risk loving investors can short the Glenmark Pharmaceuticals futures. The futures
trader stands to profit as long as the underlying Glenmarkstock price goes down which
seems likely due to negative returns. But this is highly not recommended as the volatility
is very high and heavy losses can be incurred for the short futures position if the
underlying stock price rises.
SECTION 3: Comparison of equity and futures and

Liquidity Positions
3.1 Comparison of equity and futures

1. Unadjusted daily and weekly returns on the current, next and far month futures contracts
are lesser than the corresponding adjusted returns on the shares.
2. The unadjusted monthly returns on the current, next and far month futures contracts are
greater than the corresponding adjusted returns on the shares.
3. Adjusted daily and weekly returns on the current, next and far month futures contracts
are lesser than the corresponding adjusted returns on the shares.
72
4. The adjusted monthly returns on the current, next and far month futures contracts are
greater than the corresponding adjusted returns on the shares.
5. The volatility of unadjusted equity futures returns is slightly greater than the volatility of
equity returns for both daily and weekly cases. Volatility of equity futures returns is
lesser than volatility of equity returns for monthly returns.
6. The same can be said about adjusted returns. The volatility of adjusted equity futures
returns is slightly greater than the volatility of equity returns for both daily and weekly
cases. Volatility of equity futures returns is lesser than volatility of equity returns for
monthly returns.
7. For investment on a daily or weekly basis it is better to invest in equity shares. (Higher
return and lower volatility)
8. For investment on a monthly basis it is better to invest in equity futures.(Higher return
and lower volatility)
9. From both Adjusted and Unadjusted Returns we can conclude that returns are pretty low
on an average but there are positive returns for particular periods, which can be predicted
with proper technical and fundamental analysis. Therefore, a risk neutral investor would
invest in Equity shares or the Futures of Glenmark Pharmaceuticals Limited on a monthly
basis.
Sharpe Ratio Underlying Futures

Asset
Current Next Month Far Month
Month
Daily -0.079 -0.0881 -0.0592 -0.0593
Weekly -0.129 -0.0935 -0.0968 -0.0515
Monthly 0.014 -0.0872 -0.0979 -0.0518
Table 31: Sharpe ratio of futures
73
3.2 Liquidity Position
Month Near Next Far
Average no. of contracts 2637 557.81 4.261
Average Open Interest 4694339 43690 16092
Table 32: Contract specifications
For Underlying Stock, Average volume traded is 2318637 shares.
It can be seen from the table that people prefer current month contracts much more than the next
and far month contracts. This is very evident from the Open Interest, which is nothing but the
number of outstanding derivative contracts; and the Number of contracts. The OI, hence
signifies that the near month contracts are the most liquid, followed by next and far month being
the least liquid one.
SECTION 4: Contango Trends and Frequency

Analysis
4.1 Contango Trends
Contango is a trend when the futures price of a stock is greater than its spot price prevailing in
the market.
Backwardation refers to the situation when the futures price of the stock is less than its spot
price prevailing in the market.
74
Number-22
Futures Month % Contango % Backwardation
Near 64.865 35.135
Next 62.162 37.838
Far 62.162 37.838
Table 33: Contango trends
It was seen that out of a total trading months of 37, near m

month
onth contract prices are greater than
the spot prices for 24 months; that means, around 65% contango is observed for near month
contracts. In the case of Next Month Futures Contracts, 23 out of 37 months (around 62%)
showed a contango trend. The far month futures contracts showed a similar response to the
contango behaviour as that of next month, i.e 23 out of 37 months (around 62%).
Hence, overall we can’t really say that the equity futures contracts of GAIL have shown
contango behaviour during the observa
observation period (Nov 1, 2017- Oct 29, 2020) as the
backwardation has been quite significant (around 37%) in all the three contracts.
Fig 63.. Contango and Backwardation trends of Glenmark (Note: Here, F0 refers to the futures price and
S0 refers to th
the spot price or the stock price)
75
Number-22
Fig 64.. Price comparison of the three contracts with underlying stock
4.2 Frequency Analysis

● Theoretically speaking, frequency does not have any significance on the returns of stock.
According to the Random Walk Theory and Efficient Market Hypothesis,
Hypothesis stock prices
are completely random. Ignoring the transaction costs, return on the stock should be the
same.
● However, from the point of view of an investor, the frequency does become an important
factor while investing.
● As the frequency increased from daily to weekly to monthly, the data shows that the
volatility given by the standard deviation in returns, also increased.
● Thus, the volatility does become an important factor to consider as it directly affects the
sharpe ratio,
o, which gives us a real world idea about the performance of a stock.
● In the case of Glenmark, we see that the returns were negative, so the frequency doesn’t
really affect our investment decision.
● For stocks with positive average returns, it is advised tto
o invest on a monthly frequency as
the returns compounded monthly would be larger than that of daily and weekly
frequency.
76
● For stocks with negative mean returns, like the case of Glenmark, it is recommended to
invest in a risk free asset instead to avoid negative compounding.
SECTION 5: Options
Introduction:
Options are derivative financial instruments whose value is based on the price of an underlying
asset. The underlying asset could be a stock, currency, commodity or a stock index. Options give
the buyer the right, but not obligation to buy or sell the underlying instrument. Options can be
categorized into various types based on the following:
● Call and Put options: Call options give the holder of the option the right, but not the
obligation to buy the underlying asset, at a certain price (strike price) on or before the
expiry of the option contract. The writer of the option is obligated to sell the underlying
asset at the predetermined price, if the contract is exercised by the owner. Put options
give the holder the right to, but not the obligation, to sell the underlying asset at a
predetermined price on or before the expiration date. The writer of the option will then be
obligated to buy the underlying asset, if the contract is exercised.
● American and European Options: In the European option the contract can be exercised
only at the time of maturity of the option contract. On the other hand, the American
option can be exercised at any time, on or before the expiration of the option contract.
Note: For our analysis the following details have been taken into consideration:
Sample Period: 1st July 2020 to 30th September 2020

Option Type: European Call option
Option Price Calculation:
The following steps were taken to analyse the option price for Glenmark Pharmaceuticals:
77
● From the sample period, the first date, 1st July 2020, has been chosen for demonstration
of how the strike price of the option and the expiry was selected. The bhav copy for the
same was downloaded.
● The strike price for the option was selected as the middle value of all the strike prices
available, because the open interest for July 1st for options of all strike prices were zero.
For Glenmark Pharmaceuticals there were 31 different strike prices, out of which the 14th
strike price has been selected.
K = 440 (Selected as mentioned above)
● The expiry of the option was the far month contract and it expired on 24th September
2020.
● The volatility of the stock returns during the sample period is calculated by taking the
standard deviation of daily returns. The volatility obtained can’t be used directly because
we first need to annualize them.
Standard Deviation = 2.20%
𝑽𝒐𝒍𝒂𝒕𝒊𝒍𝒊𝒕𝒚 (𝝈) = 𝑺. 𝑫 𝑿 √𝟐𝟓𝟐
● Volatility comes out to be 35.85% by annualizing the standard deviation.
● Calculating the u and d values for the binomial model of option pricing:
𝑢=𝑒 ,𝑑 = 𝑒
Therefore, u=1.19 and d=0.84
● The price of the underlying asset on 1st July is 433.02. Hence the prices of the next two
nodes can be given by:
𝑆𝑢 = 𝑢 ∗ 𝑆𝑜, 𝑆𝑑 = 𝑑 ∗ 𝑆𝑜
Therefore the values of the underlying asset at the upper and lower node are 515.45 and
363.78 respectively.
● The value of the option at the upper node are calculated as:
Value of option at upper node = Su-So=515.45-440=75.45
● The value of option at the lower node is 0 because the strike price of the option (440) is
more than the stock price value at the lower node (363.78), and hence the option will not
be exercised.
Value of option at the lower node = 0
78
● Probability of reaching the upper node of the binomial diagram is 0.46 and is calculated
as:
∆
𝑝 = (𝑒 − 𝑑)/(𝑢 − 𝑑) = 0.46
● Thus, probability of reaching the lower node the binomial diagram is 0.54 and is
calculated as:
1 − 𝑝 = 0.54
● Finally the value of option as on 1st July 2020:
𝑓 = [𝑒 (𝑝 ∗ 𝑓𝑢 + (1 − 𝑝) ∗ 𝑓𝑑]
𝑓 = 34.45
● Therefore, the theoretical value of the option on 1st July 2020 is calculated to be 34.45 by
using the formula given above.
Binomial Tree for the calculating Theoretical Option Price
Su=515.45
fu=75.45
So=433.02
Sd=363.78
fd=0
Observation:
● We see that the actual price of the option contract for Glenmark Pharmaceuticals on 1st
July 2020 was 47.45, whereas the theoretical value of the option was calculated to be
34.45.
● The difference between the actual option price and the theoretical option price could be
due to the fact that the theoretical calculations does not take into consideration the market
sentiments and expectations about the underlying asset.
79
● The price difference could be due to the sentiments in the market. Since the actual price
of the option is higher than the theoretical value the sentiments in the market about the
underlying security could be positive. The positive sentiment about the underlying asset
leads to bullish sentiment in the stock leading to the price increasing beyond the strike
price of the option. The increase in the underlying asset leads to increase in the value of
the option as well. This could be the reason for the actual price being greater than the
theoretical price of the stock.
● This assumption about the positive sentiment about the stock could be confirmed by
looking at the profit and loss statement of the company.
● The net profit or the profit after tax for the company increased as compared to the
previous quarter. The PAT for Glenmark Pharmaceuticals for the June quarter was
462.48 (in Rs. Crores), and for the previous quarter was 349.19 (in Rs. Crores).
● The net profit increased by 32.44% as compared to the previous quarter. This could have
led to the positive sentiments about the stock, leading to a bullish trend in the stock.
● Hence because of the increase in the stock price the option price would also have
increased leading to the actual option price being greater than the theoretical option price.
Particulars Figures
Duration (Sample Period) 1st July 2020 to 30th September 2020
Expiry of option 24th September 2020 (Far month)
Strike Price 440
Type of option Call Option
Annualized volatility in underlying asset 34.85%
Value of ‘u’ 1.19
Value of ‘d’ 0.84

Table 34: Options specifications
80
Number-22
Fig 65. Actual Option Price vs Theoretical Option Price
● From the graph we can see that the actual option price and the theoretical option price
follow closely. The deviations in the prices may be due to the market sentiments and
expectations of the investors based on sentiment about the underlying asset.
● In case the sentiment towards the underlying asset is very positive this will lead to
increase in the price of the underlying asset, hence will lead to the rise in price of the
option as well, leading to the actual price being greater than the price calculated through
theoretical calculations.
● In case the sentiment towards the underlying asset is negative, this leads to decrease in
the value of the underlying asset as well as the call option. Hence, this may lead to the
actual price dipping below the theoretical price of the stock.
● The huge rise in the option price during the expiry date of the option could be explained
due to a very high volatility in the derivatives market that arises during the expiry date of
the futures and options. Even the slightest news could lead to very high swings
swi in both
the direction. Even the slightest positive or negative news in the market could lead to
price movements in both the directions.
81
● The sudden jump in option price for Glenmark Pharmaceuticals could be due to the
announcement of the trials for COVID-19 vaccine and the positive sentiment in the stock
generated due to that.
SECTION 6: Overall Conclusion

● Glenmark Pharmaceuticals’ performance over the last five years has been declining in
terms of its stock price. Hence, it may not be such a good decision for an investor to park
his capital in this stock. Also, the dividends paid out by the company are very low, and
not constant, so it is not suitable even for investors looking for regular dividend
payments.
● In terms of the company's fundamentals Glenmark hasn’t been doing well, as it’s P/E is
very low when compared with its competitors in the pharmaceutical industry. (Glenmark
has a P/E of 8.68, whereas the industry average is 36.52)

Returns (%) Asset
Current Month Next Month Far Month
Daily -3.47% -3.8575% -4.1110% -2.6654%
Weekly -5.42% -2.9657% -4.5563% -4.5834%
Monthly 0.72% -3.0256% -2.6639% -3.8670%
Table 35: Annualized returns of GLENMARK

Standard Asset
Deviation (%) Current Month Next Month Far Month
Daily 43.75% 43.79% 43.97% 51.47%
Weekly 41.91% 50.11% 47.09% 46.82%
Monthly 53.05% 51.05% 51.70% 44.34%
Table 36: Annualized Standard Deviation of GLENMARK
82
● From the table containing the annualized means for the equity and future instruments for
Glenmark Pharmaceuticals, it is clear that the stock has not been not up to the mark, for
the chosen sample period.
● For the equity segment of Glenmark the performance is not too poor but not too good. If
investors want to invest their capital in the equity instrument, they should think about
investing for the longer time frame of one month. The instrument should not expect to
gain returns in the shorter time frame of daily and monthly frequency, because the
annualized mean values are negative. This implies that it is better for the investor to
invest in the government securities, instead of investing in the equity instrument of
Glenmark Pharmaceuticals.
● If the investor wants to invest he should invest for a monthly time frame in Glenmark.
● There are opportunities for a trader to have capital gain by trading Glenmark
Pharmaceuticals securities. The annualized volatility of the stock is very high as can be
seen from the table above. The high volatility implies that the price could swing between
very high and low values in a short period of time, and hence the trader would have more
chances to enter the market.
● The strategy for a trader could be to buy when the price gets too low and then sell the
stock when the price reaches the high levels. Another way could be to short the stock as
the price of the stock becomes high, and then buy the stock when price decreases.
● Trading involves high risk and traders should enter into a trade only after confirming the
move by use of technical and fundamental analysis methods.
● For the future segment of Glenmark pharmaceutical, the returns are again average and not
too bad and not too good.
● Investors should invest their money in risk free assets or government securities instead of
investing in Glenmark’s futures (for any expiry), because the risk adjusted returns for all
the three frequencies, daily, monthly and weekly are negative.
● Traders could try to make capital gains by keeping in mind the high volatility of the
future prices, by entering and exiting the market at the correct time.
● Hence, the equity and futures of Glenmark provide good opportunities for a trader to
trade because of their high volatility, but it is not recommended for a long term investor
to invest in Glenmark’s securities.
83
References
● Reason for leap in Equity share price of GAIL source

http://content.icicidirect.com/mailimages/IDirect_Gail_CoUpdate_Jun19.pdf
● NSE website: For historical price data for F&O

https://www.nseindia.com
● Yahoo Finance: For Historical price data for Underlying equity

https://in.finance.yahoo.com
● Trendlyne: For Shareholding pattern

https://trendlyne.com
● GAIL Annual Report

https://gailonline.com/pdf/InvestorsZone/AnnualReports/AnnualReport2019-20.pdf
● P/L statement of GAIL

https://www.moneycontrol.com/financials/gailindia/results/quarterly-results/GAI#GAI
● GAIL financial ratios

https://www.moneycontrol.com/financials/gailindia/ratiosVI/GAI
● Glenmark Annual Report

https://www.glenmarkpharma.com/sites/default/files/Glenmark-Sustainability-Report-
FY-2019-20.pdf
● P/L Statement of Glenmark Pharmaceuticals:

https://www.moneycontrol.com/financials/glenmarkpharma/results/quarterly-
results/gp08#gp08
84
● Reference for News:

https://www.nih.gov/news-events/news-releases/fourth-large-scale-covid-19-vaccine-
trial-begins-united-states
● Wikipedia: For company info

https://en.wikipedia.org
● Options, Futures, and Other Derivatives Book by John C. Hull
85

22 - GAIL - GLENMARK - Final Report

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DRM Group Assignment Submission: Group Number-22

Course Code: FIN F311

BIRLA INSTITUTE OF TECHNOLOGY AND SCIENCE, PILANI

(23rd Oct 2020)

S.No Name ID Contributed: Yes / No

1 Manas Tiwari 2018A4PS0971H Yes

2 Boggarapu S V Praneet 2018A4PS0026H Yes

3 Priyanshu Prakash 2018A4PS0581H Yes

All the prices used are in Indian Rupee (INR)

The primary motive of this project is to make recommendations in

GAIL INDIA LTD. (GAIL) 7

SECTION 3: Comparison of equity and futures 34

SECTION 1: Underlying Assets Equity 46

GAIL INDIA LTD. (GAIL)

Report analysis on GAIL equity and futures Study Period:

SECTION 1: Underlying Assets: Equity

1.1 Underlying equity assets introduction

c. Commencement of Business and Performance

Particulars 2020 2019 2018 2017 2016

EPS 14.68 26.72 20.48 20.71 18.12

Profit 9.21 8.02 8.60 7.27 4.42

Return on 9.66 9.35 7.95 6.33 4.33

Table 1: Financial Ratios

d. Industry of the Business

e. Overall Greatness of the company

1.2 Risk Unadjusted Returns

Returns Daily Weekly Monthly

Average -0.06% -0.27% -1.41%

Minimum -11.71% -21.57% -22.64%

Maximum 16.43% 17.42% 25.02%

Standard Deviation 2.30% 4.97% 8.65%

Table 2: Risk Unadjusted Returns (%) of Near Month Futures Contracts

Fig. 2: Daily Risk Unadjusted Returns

Fig. 3: Weekly Risk Unadjust

Fig. 4: Monthly Risk Unadjusted Returns

1.3 Risk Adjusted Returns

Returns Daily Weekly Monthly

Maximum 16.41% 17.35% 24.71%

Standard Deviation 2.30% 4.97% 8.66%

Table 3: Risk Adjusted Returns

Fig. 5: Daily Risk Adjusted Returns

Fig. 6: Weekly Risk Adjusted Returns

Fig. 7: Monthly Risk Adjusted Returns

1.4 Economic Interpretation

Sharpe Ratio = (rx-rf)/stdev(x)

Time Period Sharpe Ratio

Table 4: Sharpe ratio of GAIL equity shares

Fig. 8: Sharpe ratio of various time periods

● Reason for leap in equity share price on 20th of March 2020

Fig 9:: Consolidated income statement of GAIL

● Reason for fall in equity share price on 12th of March 2020:

● Reason for fall in equity share price on 6th June 2020:

SECTION 2: Equity futures instruments

2.1 Introduction to Equity Futures Instrument

b. Lot size and contract specifications

Lot size of GAIL is 6100 shares of FUSTK (future stock)

Instrument FUSTK (future stock)

Lot size 6100 shares

Price steps Rs.0.05

Price brands Operating range of 10% of the base price

Trading cycle 3 months - near, next far

Expiry date Last thursday of every month