‘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

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TABLE 1.6

ACHIEVEMENTS OF LUDHIANA STOCK EXCHANGE

30

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1 TRADING PERIOD IN DERIVATIVES FIGURE 4. No. 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 1.4 SELLER CALL OPTION FIGURE 2. 5 TRADED PERIOD FOR DERIVATIVE INVESTMENT FIGURE 4.6 PAY OFF PUT OPTION (SELLER) FIGURE 4.2 SOURCES OF FUND FOR THE YEAR 2004-05 OF LSESL FIGURE 2.1 SOURCES OF FUND FOR THE YEAR 2005-06 FIGURE 1. 3 SEGMENT HAVING LARGE TURNOVER FIGURE 4.1 PAYOFF INDEX FUTURES (BUYER) FIGURE 2. 6 IMPACT ON CUSTOMER BASE FIGURE 4. 7 RELATIONSHIP WITH CASH MARKET .2 PURPOSE FOR DERIVATIVE TRADING FIGURE 4.2 PAYOFF INDEX FUTURES (SELLER) FIGURE 2.LIST OF DIAGRAMS Fig.5 PUT OPTION BUYER FIGURE 2.3 PAY OFF CALL OPTION (BUYER) FIGURE 2.

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

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

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

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

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

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

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

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

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

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

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

the exchange has set up 30 trading terminals at remote sites and union territory of Chandigarh. SCREEN BASED TRADING It was started at LSE on Nov. Trading through V-SAT has been smoothly conducted in October 1999. This screen Based Trading is based on VECTOR (Versatile Engine for Centralized Trading and on line reporting System) this system displays funds with respect of opening prices of the stock exchanges as well as the last traded prices. It started its operation on 16th Aug. 1996. 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. 1983. 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. 18.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. LSEAL HAS:OWN BUILDING LSEAL has its own six stories ultra modern building at Feroze Gandhi market at Ludhiana. 12 . OWN BULLETIN LESAL is continuously publishing LSEAL Bulletin at the interval of quarter. 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.

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

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

through innovative products by encompassing a variety of activities related to the capital market. The company since its inception has marched forward rapidly and achieved many milestones in a short span of its existence. OBJECTIVE OF THE COMPANY LSE Securities Limited is a subsidiary of the Ludhiana Stock Exchange. transparent and fair manner keeping in view of the interest of investors as well as other stakeholders. The company has a paid –up capital of Rs. Operations of the company are run in a professional. preference capital of Rs 7. 15 . was incorporated in January. who are on the board of the company as ex-officio Directors. 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. The non broker members are independent Directors of eminent status from the field of finance. GOVERNMENT COUNCIL The Council of the management of the Company comprises of 12 directors of which 5 are broker members and 5 non-brokers. Thus the council of management has representation of sub-brokers as well as professionals and subject specialists representing various fields of business activities.65 crores. law and management and remaining two are Executive Officer of the holding company (Ludhiana Stock Exchange) and Chief Executive officer of the company. INTRODUCTION OF LSE SECURITIES LTD.5..90 lacs & the authorized capital of the company is Rs 8 crores.PROFILE OF LSE SECURITIES LTD. 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.

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

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

Following in the list of various departments of LSE:OPERATIONAL DEPARTMENTS 1. assigned to those departments. But before studying the inter dependence of section) here is the details of all department i.G. There is no duplication of work. So to maintain the proper system of working of exchange. Legal Department 2. there are so many different departments in which particular functions are performed. Secretarial Department. Computer Section and information System Department SERVICE DEPARTMENTS 1. Clearing House 3.The main aim of LUDHIANA STOCK EXCHANGE is to ensure the safety and security to the investments of the investors and to provide the proper services under the prescribed guidelines of SE 131. actually what function is performed by each and every section.C. Listing Section 5. even then all the sections are interconnected with each other. Margin Section 2. There is an organized network of recording of activities performed there.e. I. (Investor Grievance Cell) 4. 3. Market Surveillance 4. Membership Department/Personnel Department All the section perform specific functions. Accounting Section 6. MARGIN SECTION 18 .

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

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

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

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. COMPUTER SECTION The growing technicalities and increase in workload has enhanced the importance of computer section in Ludhiana stock exchange. 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. once we feed new limits the whole calculation to be done through 22 . o HDFC bank entries. In above example.e. electronic data processing section. This department mainly referred to as EDP i. o Scrip wise statement Computer facilitates easily updating all automatically adopting of new rates. o And broker on sub broker wise final settlement. auction of pending securities will be conducted on Thursday. In auction price of securities may will fluctuate 20% high or low of that trading day. This section is the backbone of entire stock exchange would come to halt if this department becomes inactive. auction will start. 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. o Downloading of receiving order.In case if broker fails to deliver the scrips on T+2 delivery day. Then. Then it is responsibility of clearing house to settle the undelivered scrips.

Rates are updated either daily or month wise as per the requirements. as each individual involved knows every relevant tilling . In case the member crosses his limit of trading according to his deposited amount. which links each and every department of the LSE with another and hence helps in working as a whole. CHECK AND CONTROL OVER SCRIPS AND MEMBERS This section also helps in maintaining check and control over defaulting members and scrips. 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. VOLUME AND TRANSPARENCY This system is very much transparent. LINKING CHAIN This section acts as a linkage. the computer section switches off his terminal and same step is taken in case of defaulted scrips. MARKET SURVEILLANCE AND MONITORING SECTION 23 .computer will change. MANUAL OPERATIONS It has reduced manual work. It has also eliminated approximately the need to keep check the physical reports.

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

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. ACCOUNTS SECTION Most of the work in account section LSE is done manually. 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. Presently it is mandatory for Regional Company to get itself listed at LSE. In order to get listed company should have minimum capital of Rs. 50 crores will pay additional fee of Rs. although help is taken through computers for the purpose of making Trial Balance. 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.5 Companies which have paid up capital of more than Rs. as it helps the company to raise money from the capital market.) 8400 16800 28000 56000 84000 140000 TABLE 1.This department plays an important role in the Stock Exchange. 5 crores or part there of. 2800 for every increase of Rs. Income and 25 . Company has also to comply with the conditions enunciated in listing clause.

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

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

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

so that there maybe settled at the earlier without incurring heavy due on amount regarding court fee. 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. Disciplinary committee. This department also deals with the appointment or removal of floor clerks or authorized representatives of brokers. Legal section also assist the member investor to settle their disputes through the arbitration committee investors grievance committee.When two broker or outside clients do not settle their claims in between themselves and move to court. The objective of the legal section is to make effective the bylaws and regulation of the stock exchange and to see that the guidelines. 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. defaulting committee. advocate fee etc. This department carries out all activities relating to the recruitment of the personnel. PERSONNEL DEPARTMENT Ludhiana stock exchange does not have a personnel department in its Organization chart. maintenance of attendance register. MEMBERSHIP DEPARTMENT 29 . These departments also maintain records of leaves and overtime of employees. 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.

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

27 29.23% 53.82% 13.65 (4) Profit on sale of fixed assets = SOURCES OF FUND FOR THE YEAR 2004-05 OF LSESL 31 .03% 3.1 2 3 4 5 FIGURE 1.1 SOURCES:(1) Membership Fee (2) Listing Fee (3) Interest on deposits (5) Other income = = = = 0.

1 2 3 4 5 FIGURE 1.99% 6.90% 8.2 SOURCES:1) Turnover Charge BSE 2) Turnover Charge NSE 3) Interest on Bank deposits 4) Depository Income 5) Other income = = = = = 5.83% ________ 100 ACHIEVEMENTS OF LUDHIANA STOCK EXCHANGE 32 .18% 31.10% 47.

E.E. 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. Securities Ltd. 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. Trading in F&O segment of N.E. 33 . precious metal etc. oil soil seeds..S. a subsidiary of March 2004 LSE. Introduction of MCX (Multi Commodity Exchange of India) MCX offers 14 different commodities such as steel.6 Oct 1981 Aug 1983 Aug 1983 Nov 1996 April 1998 Incorporation of Stock Exchange Commencement of operations Shifting of operation to own building Online Screen Trading Modified carry forward system (MCTS) Nov 1998 Sep 1999 Jan 2000 Aug 2000 Dec 2000 Sep 2000 July 2001 January 2002 Feb 2002 April 2002 April 2003 Oct 2003 and settlement gurantee fund.S. kapas.S.M. blackpepper. rubber. in C. segment (Through NSEL) Trading on B. in CM segment (Through LSEL) Introduction of Compulsory rolling settlement Complete shift of trading CM segment from ISE To LSE securities Ltd.TABLE 1.

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 .

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

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

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

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

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

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

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

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

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

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

Strong depository : A strong depository National Securities Depositories Ltd. 3.65.STRENGTH OF INDIAN CAPITAL MARKET FOR INTRODUCTION OF DERIVATIVES 1. High Liquidity: In the underlying securities the daily average traded volume in Indian capital market today is around 7.500 crores.000 crores. 4. which started functioning in the year 1997. 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. 46 . Large Market Capitalization: India is one of the largest market capitalized country in Asia with a market capitalization of more than 7. (NSDL). 2. A good Legal Guardian : SEBI is acting as a good legal guardian for Indian Capital Market. shows high liquidity. Which means on an average every month 14% of the country market capitalization gets traded. 5. has strengthen the securities settlement in our country.

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

The delivery price is chosen in such a way that the value of contract for both parties is zero at the time of entering the contract.INSTRUMENTS OF DERIVATIVE TRADING Forward Derivative Future Option FORWARD CONTRACTS “It is an agreement to buy/sell an asset on a certain future date at an agreed price”. which forecast an upturn in price. The two parties are : 1. 48 . Who takes a short position – agreeing to sell The mutually agreed price is known as “delivery price” or “forward price”.agreeing to buy 2. but the contract takes a positive or negative value for parties as the price of underlying asset moves. It removes the future price risk. and then be can go long on the forwards market instead of cash market. Who takes a long position . It a speculator has information or analysis.

2. Lack of centralization of trading. 140 per share. . 2002 at a Rate of Rs. Profit/Loss = ST-E ST = spot price on maturity date E = delivery price Limitations of forward contract 1. Speculator may well be required to deposit a margin upfront. it gives positive or negative value for contract. But later as the price & the underlying asset changes. Price Assets Increase Decrease & Underlying Holder & long position Positive Value Negative Value Holder & Short Position Negative Value Positive Value E. Now if the price of share on that is Rs. wait for the price to rise. this is generally a relatively small proportion of the value of assets underlying the forward contract. 30. However. (20*200) = 4000.The speculator would go long on the forward. One party can breach its obligation. 120 per share. FUTURE CONTRACT 49 . and then take a reversing transaction to book profits. long position would gain the same amount or vise versa if price quoted is less than delivery price. No standardization. A agrees to deliver 100 equity shares of Reliance to B on Sept. 3. 4. Lack of Liquidity.g. Effect of change in price : As mentioned above the value of such a contract in zero for both the parties. than a who has short position would stand to loss of Rs.

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

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

18000 (200*90) PAYOFF INDEX FUTURES (BUYER) Profit 0 1220 FIGURE 2.1 Index Loss 57 52 . 244000 (200*1220) 31st Nifty July futures has risen to 1310 Sells off his position at 1310 Makes a profit of Rs.TREND OF BULLISH MARKET – – – – – – – 15th Feels the market will rise Buys 200 nifty contracts with expiry date .31th at 1220 costing Rs.

TREND OF BEARISH MARKET F 15th – – – – F 31st – – – Suppose Nifty July futures has fallen to 1150 Squares off his position at 1150 Makes a profit of Rs. 14000 (200*70) feels the market will fall Sells 200 Nifties July Contract Nifty July contract is trading at 1220 His position is worth Rs.2 1220 Index Loss 53 59 . 244000 (200*1220) PAYOFF INDEX FUTURES (SELLER) Profit 0 FIGURE 2.

FORWARD VS. FUTURES Features -Operational Mechanism -Contract Specifications -Counter party Risks -Liquidity -Price Discovery -Settlement Margin Forward Traded between two parties Differ from traded to trade Exists such risk Low Not Efficient At end of period No such margin Future Trade on Exchange Standardized Contracts No such risk High Highly Efficient Daily Margin required for trading 54 .

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

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

2340(NIFTY) at a premium of Rs. the exercise price.3 index Call option (Seller) 57 . Maximum Risk Potential Break Even : Limited to Rs. 50 : Rs.Buy a call with a strike of Rs .Call Option : It gives an owner the write to buy a specified quantity of the underlying assets at a predetermined price i. or the specific date i.e. 50 Maximum Profit Potential : Unlimited. is the date of maturity.e. Call Option (Buyer) Why call option ? If u think market will rise Example .2390 Pay off call option (Buyer) 2340 0 50 loss FIGURE 2.

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

5 Put Option seller 59 .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.2360(Nifty) at a premium of Rs.25 Maximum Profit Potential : Substantial Maximum Risk Potential. Break Even : 2335 Desired Movement : Bearish Put Option Buyer Profit 0 2360 index loss FIGURE 2.

6 OPTION TERMINOLOGY 60 .50 Maximum Profit Potential : Rs 50 Maximum Risk Potential : Substantial Break Even : Rs.2360(Nifty) at a premium of Rs.Why Sell a Put Option If u think market will remain neutral or moderately bullish Example Sell a put with a strike of Rs. 2310 Desired Movement : Market will not go down Pay off put option (seller) profit 0 2360 index loss FIGURE 2.

7. 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. An option on the index is at-themoney when the current index equals the strike price. and properties of American options are frequently deducted from those of its European counterpart. the call is set to deep ITM. 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. European options: These are the options that can be exercised only on the expiration date itself. 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. 2. 8.1. the exercise date. Most exchange-traded options are Americans. At-money option : (ATM) option is an option that would lead to zero cash flow if it were exercised immediately. 9. American options : these are the options that can be exercised at any time upto the expiration date. If the index is much higher than the strike price. 4. 5. 3.e. 6. the put is ITM if the index is below the strike price. spot price>strike price). Buyer of an option : The buyer of an option is the one who by paying the option premium buys the right but not the obligation exercise his option on the seller/writer. It is also referred as option premium. Expiration date : The date specified in the options contract is known as expiration date. These are easier or analyze than American option. In the case of a put. Option price : Option price is the price. 61 . Strike Price : The price specified in the options contract is known as strike price or the exercise price. which the option buyer pays to the option seller. the strike date or the maturity.

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

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

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

The actual position monitoring and margining is carried out on-line through Parallel Risk Management System (PRISM). The most critical component of risk containment mechanism for F & O segment is the margining system and on-line position monitoring. 50 lakhs with NSCCL in the following manner : 1. Rs. A member is altered of his position to enable him to adjust his exposure or bring in additional capital. 2.6. PRISM uses SPAN (r) (Standard Portfolio Analysis of risk) System for the purpose of computation of on-line margins. Position violates result in withdrawal of trading facility for all TMs a CM is case of violation by the CM. after activation.25 lakhs in the form of cash. Bank Guarantee in favour of NSCCL from approved banks in the specified format. Every CM is required to maintain BMC of Rs. 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. 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. Any failure on the part of a CM to meet with the BMC requirements 65 . based on the parameters defined by SEBI. Rs. MINIMUM BASE CAPITAL A clearing Member (CM) is required to meet with the Base Minimum Capital (BMC) requirements prescribed by NSCCL before activation.

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

Initial Margin NSCCL collects initial margin up-front for all open positions of a CM based on the margins computed by NSCCL-SPAN. 67 .MARGINS NSCCL has developed a comprehensive risk containment mechanism for the Futures & Options segment. the initial margin may be computed over a two-day time horizon. A CM is in turn required to collect the initial margin from the TMs and his respective clients. applying the appropriate statistical formula. Similarly. The methodology for computations of Value at Risk percentage is as per the recommendations of SEBI from time to time. The actual margining and position monitoring is done on-line. a TM should collect upfront margins from his clients. which is a portfolio-based system. However. where it may not be possible to collect mark to market settlement value. NSCCL uses the SPAN (Standard Portfolio Analysis of Risk) system for the purpose of margining. Initial margin requirements are based on 99% value at risk over a one day time horizon. before the commencement of trading on the next day. The most critical component of a risk containment mechanism for NSCCL is the online position monitoring and margining system. on an intra-day basis. in the case of futures contracts (on index or individual securities).

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

which was submitted in October. J. The report. initiate other disciplinary action. 1996 top develop appropriate regulatory framework for derivatives trading in India. however. as there was no regulatory framework to govern trading of derivatives. 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. 1998 prescribing necessary pre-conditions for introduction of derivatives trading in India. methodology for changing initial margins. L. 1995 which withdrew the prohibition on options in securities. 69 . deposit requirement and real time monitoring requirements. imposing penalties. The market for derivatives. 1999 to include derivatives within the ambit of ‘securities’ and the regulatory framework was developed for governing derivatives trading.R.penal charges @ 0. to recommend measures for risk containment in derivatives market in India. SEBI also set up a group in June 1998 under the Chairmanship of Prof. 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.09% per day of the amount not paid throughout the period of non-payment. did not take off. broker net worth. The SCRA was amended in Dec. inter-alia including. withdrawal of trading facilities and / or clearing facility closing out of outstanding positions.C. Gupta on 18th November. worked out the operational details of margining system. Varma. 1998. SEBI set up a 24 members committee under the Chairmanship of Dr. In addition NSCCL may at its discretion and without any further notice to the clearing member. collecting appropriate deposits. The committee submitted its report on 17th March.

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

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

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

should be separately mentioned in the contract note. the investors may change an order anytime before the same is executed on the exchange. 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. 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. Both buyer and seller have to deposited before the opening of the position in the futures transaction. If desired. the following day. b) Mark to market margin : All daily losses must be met by depositing of further collateral-known as variation margin. 73 . dispute by arbitrations procedure as defined in the rules and regulations and Bye-Laws of the respective exchanges. the party thereto shall resolve such complaint. Arbitration : In case of any dispute between the members and the clients arising out of the trading or in relation to trading/settlement. This margin is calculated by SPAN by considering the worst case scenarion. 7. Margining System in Derivatives : The aim of margin money is to minimize the risk of default by either counter-party. if any. Any profits on the contract are credited to the client’s variation margin account.brokerage and other charges. The payment of margin ensures that the risk is limited to the previous day’s price movement on each outstanding position. 9. 8.

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

contracts in derivative shall be legal and valid if such contracts are: Traded on a recognized stock exchange. 75 . Settled on the clearing house of the recognized stock exchange.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.

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After that questionnaire was prepared to meet the desired objective 77 . specific procedures and technical. rather than philosophical means for getting and ordering the data prior to their logical analysis and manipulations. Different type of research design is available depending upon the nature of research project. and journals were studied to explore more about the concerned objective and better understanding of the problem. The study about “ANALYSIS OF DERIVATIVES MARKET” is exploratory as well as descriptive in nature . internet surfing.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.Discussion with experts. availability of able manpower and circumstances.

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

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

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

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1 From my sample of 60.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. 21 (35%) are investing from last 2 years. 7 (11%) are investing from last 3 years and only 6 (10%) have experience of more than 3 years of investment in derivatives. 13 (22%) brokers and investors investing in derivatives from the last 1 year and less than this. TRADING PERIOD IN DERIVATIVES 25 20 No.1. 82 .

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

Equal in both above (15) Can’t Say. 49% and 23% have equal turnover in CM & F&O segment. 17 have largest turnover in the capital segment i. 84 .3 Out of 35 informants.3. In which segment you have larger turnover? • • • • Capital Market Segment (20) F & O 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. 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.

of brokers 15 and investors 10 5 0 2 LACS 2 LACS . INVESTED AMOUNT IN DERIVATIVES Amout invested in derivatives 30 25 20 No. 85 .Any Other 5 LACS 10 LACS Amount 15 9 9 Series1 27 FIGURE 4.5 LACS . Reasons behind this is that those are investing from many years are taking the risk of investing huge amount. and remaining have invested in other amounts. 27 (45%) investors and brokers have invested 2 lacs normally.4 Out of my sample size 60. 9 (15%) invested between 2 lacs to 5 Lacs and 15 (25%) invested between 5 lacs to 10 lacs.4.

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87 .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. of brokers 15 and investors 10 5 0 Weekly Monthly More than 1 month More than 2 months Series1 Traded Period FIGURE 4.

00. but derivatives increase customer base of 24 (70%) which is more than half.6 Out of 35 brokers . of brokers 10 5 0 Increase Decrease Impact Remain same Series1 FIGURE 4. 3 (5%) of brokers said that it does not increase their customer base because introducing small savings as investment.000 as investment so it is basically for corporate and investment sector only not for small investors. In investment sector need minimum of Rs. 2. It is basically beneficial for those who are investing from last 2 or more years.6 IMPACT ON CUSTOMER BASE 25 20 15 No. 8 (25%) said their customer base 88 .

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. investors 27 (45%) have the positive response towards the relation between derivative and cash market and remaining 5 (8%) has negative response.7 Out of 60 brokers. 28 (47%) are not able to say anything because they do not have proper knowledge about stock market. 7. 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.

8.9 90 . DERIVATIVES AND RISK Every broker says that there is a risk factor (upto some extent in derivatives also.brokers and with the support of their close relatives those are investing for last many years. SHORTCOMINGS IN INDIAN DERIVATIVE SYSTEM Short coming in indian derivative system 35 30 25 No. 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.

9.27 (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. 31 (52%) feel lack of awareness in investors about derivatives and remaining 2 (3%) market failure.10 91 .. investors respond towards shortage of domestic technical expertise.

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

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

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

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

In which segment you have larger turnover ? (BROKERS ONLY) a ) Capital Market Segment b) F & O Segment. 00.000 d) Any other amount______________ 5) How often do you trade? 100 . 00. 2) What is your purpose for trading in derivatives? a) c) Hedging Risk Management b) d) Speculation Liquidity 3) . c) Equal in both above d) Can’t Say. 00. 5.000 b) 2. 5.000 to Rs. 00. 4) What is amount of money you are investing in normally? a) 2.000 to Rs. 10.c) 2 Year d) 3 year e) More than 3 year. 00.000 c) Rs.

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. b) Shortage of domestic technical expertise. 7) What according to you is relationship between derivative market and cash market? a) Positive b) Negative c) Can’t say.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. c) If any other ___________________________ 9) .

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