‘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)

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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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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 1.6 PAY OFF PUT OPTION (SELLER) FIGURE 4. 7 RELATIONSHIP WITH CASH MARKET .2 PURPOSE FOR DERIVATIVE TRADING FIGURE 4.1 PAYOFF INDEX FUTURES (BUYER) FIGURE 2.4 SELLER CALL OPTION FIGURE 2. 5 TRADED PERIOD FOR DERIVATIVE INVESTMENT FIGURE 4.2 SOURCES OF FUND FOR THE YEAR 2004-05 OF LSESL FIGURE 2. 4 AMOUNT INVESTED IN DERIVATIVES FIGURE 4.LIST OF DIAGRAMS Fig.3 PAY OFF CALL OPTION (BUYER) FIGURE 2. No.1 SOURCES OF FUND FOR THE YEAR 2005-06 FIGURE 1.2 PAYOFF INDEX FUTURES (SELLER) FIGURE 2. 6 IMPACT ON CUSTOMER BASE FIGURE 4.5 PUT OPTION BUYER FIGURE 2.1 TRADING PERIOD IN DERIVATIVES FIGURE 4. 3 SEGMENT HAVING LARGE TURNOVER FIGURE 4.

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

1 .

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

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

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. 4 . 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 stock exchange provides a ready market for the conversion of existing securities into cash and vice versa. Punishment (including fine.FUNCTIONS OF STOCK EXCHANGE The stock exchange provides appropriate conditions where purchase and sale of securities takes place at reasonable and fair prices. 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 securities regulation. 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. It was a state subject and the Bombay securities contact (control) act. offers and counter-offers. A.D. Before the control on securities trading becomes a control on securities trading became a central subject under the constitution in 1950. GORWALA went into bill for securities regulation. Under this act. At present there are 23 recognized stock exchanges in India. Number of Investors is increasing day by day.HISTORY OF STOCK EXCHANGE The trading in securities in India was started in the early of 1973. On the basis securities contracts (control) at became law in 1956. Bombay stock exchange was securities in 1927 and Ahmedabad stock exchange in 1927 and Ahmedabad stock exchange in 1937. The stock exchange operating in the 19th century was those of Bombay set up in 1875 and Ahmedabad set up in 1894. The stock exchange is a double auction market. 5 . 1925 used to regulate trading in securities. counter-bids. a number of stock exchanges were organized at Bombay. These were organized as voluntary non-profit making associations of brokers to regulate and protect their interests. During the war boom. 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.

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

limited by guarantee Co. 9 10 Cochin stock exchange U.LIST OF VARIOUS STOCK EXCHANGES IN INDIA TABLE 1. 1982 7 . 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. 1 Bombay Stock exchange Name of stock exchange Years establishment 1875 Voluntary organization 2 Ahmedabad exchange 3 4 Calcutta Stock exchange M. limited by guarantee Stock 1978 Public limited company Public limited company Non-profit Non-profit Non-profit of Type of organization exchange. limited by guarantee Public limited company Pvt.1 S. Kanpur 11 12 13 14 15 16 Pune Stock exchange Ludhiana Stock exchange Jaipur Stock exchange Guahati Stock exchange Kannaar Stock exchange Magadh Stock exchange 1982 1983 1983 1984 1985 1986 Co. 1930 exchange. limited by guarantee Public limited company Public limited company Public limited company Public limited company Co.P. co. No. converted into public ltd.P.

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

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

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

LISTING Listing is one of the major functions of a Stock Exchange wherein the securities of the Companies are enlisted for trading purpose. TRADING ON BIGGER STOCK EXCHANGES The exchange acquired the membership of NSE and BSE: through its subsidiary. further listing of issues like bonus and rights issues. Trading at NSE and BSE was commenced through the subsidiary route from September 200 and December 2000 respectively. the Company has to ensure and report compliance of the post listing requirements. has to mandatory list its shares on a Stock Exchange. END OF AN ERA The management of the stock Exchange apprehended that the smaller regional stock exchanges would not be able to meet the challenges imposed by expansion of bigger stock exchanges like NSE and BSE and might end up losing their business to VSAT counters of the bigger stock exchanges. The Companies desirous of listing its securities on the Exchange have to sign a Listing Agreement with the Stock Exchange. the LSE securities LTD. which are already listed with Ludhiana Stock Exchange. After getting the listing approval. which are found deficient in compliance. Any Company incorporated under Companies Act. The Listing Department of Ludhiana Stock Exchange deals with listing of securities. 1956. 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. coming out with an IPO. post-listing compliance of the companies. In order to 11 . The listing section of the LSE monitors the post-listing compliance of all the listed companies and follows up with the companies.

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

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

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

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

The Ludhiana Stock Exchange floated its subsidiary company.Commenced trading operations in Capital Market Segments of BSE and NSE in September. 2000 and December. 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. at the initiative of LSEAL. The total turnover during the financial year 2005-06 had been Rs 4920 crores as against Rs 3833 crores during the financial year 2004-05 in Capital Market segment of BSE. to trade on bigger Stock Exchanges through their subsidiary companies. 16 . 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. F&0 SEGMENT OF NSE LSE Securities Ltd. the LSE Securities Limited. It has obtained corporate membership of both NSE and BSE in the year 2000. with the objective of obtaining trading rights on bigger Stock Exchanges. The total turnover of the company at NSE is growing by leaps and bounds ever since in incorporation. Commenced trading operations in Future and Options Segment of NSE in February 2002.CORPORATE MEMEBERSHIP OF NSE & BSE SEBI. The Company became the first subsidiary of any Regional Stock Exchange which commenced trading in “F&O” Segment of NSE. permitted smaller Stock Exchanges. There was encouraging response from the sub-brokers specially at NSE counters. TRADING AT NSE AND BSE The LSE Securities Ltd. 2000 respectively.

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

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

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

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

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

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

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

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

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

o Fixed costs are stated at historical costs less depreciation. The annual report of LSE is generally published in August every year. o Stock/Inventory (stationery) is valued at cost. The shares in such cases are valued at prices on the date of transfer deeds. o To get their accounts audited from the third party. scrips of various companies as securities against the performance of the contract. 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 Interest on funds borrowed which is attributable to construction of fixed assets and other indirect expenditure during construction is included under work in progress. value method in accordance with and din the manner specified in schedule XIV of the Companies Act 1956. Functions of Accounts Section:The account section performs the following function. The company has the procedure of receiving shares. Some of the important polices of LSE are o The company follows accrual system of accounting recognizes income and expenditure accordingly.Expenditure statement and Balance Sheet. o To keep the records of all incoming and outgoing money depreciation of financial statements at the end of financial year. o Depreciation is provided on written down. these agencies include companies listed at LSE and brokers working at LSE. o Sources of funds of LSE: - 26 . o To make and receive payments to the outside agencies. o To disburse personnel expenses.

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

1. 5% of listing fees to SEBI each year. SECRETARIAL DEPARTMENT Duties and responsibilities of personnel department are mentioned as under which are discharge by the secretarial departments. (II) Security Charges (III) Telephone Charges (IV) VSAT Charges (V) Printing and stationary Salaries 4. 1% of listing is transferred annually to investor protection fund. 20% for providing services to investors out. Administrative expenses (I) Electricity Charges. attendance leave.g. 2. or listing fee annually to investor service fund. All activities relating personnel are carried out by the secretarial departments. overtime etc. has not a separate personnel departments in its organizing chart. o Maintain employee record e. 3. which has the additional charge of personnel. Although the LSE. LEGAL SECTION 28 . o Other activities like staff farewell party and Diwalipuja. 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. o Recruitment of staff.

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

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

1 2 3 4 5 FIGURE 1.65 (4) Profit on sale of fixed assets = SOURCES OF FUND FOR THE YEAR 2004-05 OF LSESL 31 .27 29.82% 13.23% 53.03% 3.1 SOURCES:(1) Membership Fee (2) Listing Fee (3) Interest on deposits (5) Other income = = = = 0.

2 SOURCES:1) Turnover Charge BSE 2) Turnover Charge NSE 3) Interest on Bank deposits 4) Depository Income 5) Other income = = = = = 5.99% 6.10% 47.1 2 3 4 5 FIGURE 1.83% ________ 100 ACHIEVEMENTS OF LUDHIANA STOCK EXCHANGE 32 .90% 8.18% 31.

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

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. But derivative market is quite different from other markets as the market is used for minimizing risk arising from underlying assets. It refers to a variable. which have been used in primary market. which has been derived from another variable.e.5 INSTRUMENTS OF DERIVATIVE TRADING 6 RISK MANAGEMENT 7 MARGIN B ANALYSIS OF DERIVATIVES MARKET INTRODUCTION TO DERIVATIVES Primary market is used for raising money and secondary market is used for trading in the securities. The work “derivative” originates from mathematics. X = f(Y) Where X (dependent variable) = DERIVATIVE PRODUCT 36 .

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

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

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

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

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

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

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

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

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

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. A good Legal Guardian : SEBI is acting as a good legal guardian for Indian Capital Market. Which means on an average every month 14% of the country market capitalization gets traded. 2.000 crores. 5. (NSDL). High Liquidity: In the underlying securities the daily average traded volume in Indian capital market today is around 7. 3. has strengthen the securities settlement in our country. 46 . Strong depository : A strong depository National Securities Depositories Ltd.65. Large Market Capitalization: India is one of the largest market capitalized country in Asia with a market capitalization of more than 7.STRENGTH OF INDIAN CAPITAL MARKET FOR INTRODUCTION OF DERIVATIVES 1. 4. shows high liquidity.500 crores.

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

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

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

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

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

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

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. 244000 (200*1220) PAYOFF INDEX FUTURES (SELLER) Profit 0 FIGURE 2.2 1220 Index Loss 53 59 . 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.

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 .

he or she would contract one of the member firms. Whereas it nothing (except margin requirement) to enter in to a futures he purchases of an option require an up front payment. the two parties have committed them self to doing something. 1990s that a group of firms set up what is known as the “put and call brokers and dealers association” with the aim of providing a mechanism for bringing buyers and sellers together. No mechanism to guarantee the writer of option would honor it In 1973. The firm would then attempt to find a seller or writer of option either from its own client of those of other member firms. they were traded OTD. Scholes invented the Black-Scholes formula. An option gives the holder/buyers of the option the right to do something. foreign currencies and futures contracts. Historical background of Option: Although options have exercised for a long time. Black. No secondary market 2. CBOE was set up specially for the purpose of trading options. The first trading is options began in Europe and U. as early as the century. In contrast.S. In April 1973. The two deficiencies in above markets were 1. stock indices. Marton. I”f no seller could be found. in a forward or futures contract. The holder does not have committed himself to doing something. the firm would undertake to write the option itself in return of price. Today exchange-traded options are actively traded on stocks. without much knowledge of valuation.OPTIONS Options are fundamentally different from forward and futures. The market for options develop so rapidly that by early 80’s number of share underlying the What is Option ? 55 . It someone wanted to buy an option. It was only in early.

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

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

50 Maximum Profit Potential : Rs.Why sell Option : If u think market will remain neutral or slightly bearish .50 Maximum Risk Potential : Unlimited Break Even : Rs.2340(Nifty) at a premium of Rs. Example Sell a call with a strike price of Rs.4 Put Option 58 . 2390 Desired Movement :Market will not go down Seller call option 0 1250 loss index FIGURE 2.

25 Maximum Profit Potential : Substantial Maximum Risk Potential.2360(Nifty) at a premium of Rs. Why Buy a Put Option (Buyer) If u think market will fall Example Buy a Put with a strike of Rs. Break Even : 2335 Desired Movement : Bearish Put Option Buyer Profit 0 2360 index loss FIGURE 2.5 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.

2310 Desired Movement : Market will not go down Pay off put option (seller) profit 0 2360 index loss FIGURE 2.2360(Nifty) at a premium of Rs.50 Maximum Profit Potential : Rs 50 Maximum Risk Potential : Substantial Break Even : Rs.6 OPTION TERMINOLOGY 60 .Why Sell a Put Option If u think market will remain neutral or moderately bullish Example Sell a put with a strike of Rs.

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

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

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

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

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

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

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

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

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

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

Registration with broker : The first step towards trading in the derivatives market is selection of a proper broker with whom the investor would trade. The client agreement includes provisions specified by SEBI and the derivatives segment. Stock Futures : Stock Futures are financial contracts where the underlying asset is an individual stock. the specifications are pre-specified. the investors gets a unique identification number (ID). 3.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). Client Agreement : The investor should sign the Client Agreement with the broker before the broker can place any order on his behalf. Stock futures contract is an agreement to buy or sell a specified quantity of underlying equity share for a future date at a price agreed upon between the buyer and seller. The investors should also ensure to deal with a broker (member of the exchange) who is a SEBI registered broker and possesses a SEBI registration certificate. The 71 . Investors should complete all the registration formalities with the broker before commencement of trading in the derivatives market. Unique Client Identification Number : After signing the client agreement. OPERATIONAL MECHANISM OF DERIVATIVES 1. Just like Index derivatives. 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).

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

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

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

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. 75 . in accordance with the rules and bye-laws of such stock exchanges. contracts in derivative shall be legal and valid if such contracts are: Traded on a recognized stock exchange.

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rather than philosophical means for getting and ordering the data prior to their logical analysis and manipulations. The study about “ANALYSIS OF DERIVATIVES MARKET” is exploratory as well as descriptive in nature .RESEARCH METHODOLOGY Research is a procedure of logical and systematic application of the fundamentals of science to the general and overall questions of a study and scientific technique by which provide precise tools. After that questionnaire was prepared to meet the desired objective 77 . internet surfing.Discussion with experts. and journals were studied to explore more about the concerned objective and better understanding of the problem. specific procedures and technical. availability of able manpower and circumstances. Different type of research design is available depending upon the nature of research project.

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

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. Due to constraints of cost and time. Sample Size : Sample size refers to the number of items to be selected from the universe to constitute a sample.

80 . Sample size is not enough to have a clear opinion. Availability of information was not sufficient because of less awareness among investors / brokers.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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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 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. 7 (11%) are investing from last 3 years and only 6 (10%) have experience of more than 3 years of investment in derivatives. 21 (35%) are investing from last 2 years. 82 .1.

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

In which segment you have larger turnover? • • • • Capital Market Segment (20) F & O Segment.e. 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 4.3.3 Out of 35 informants. 17 have largest turnover in the capital segment i. 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. Equal in both above (15) Can’t Say. 84 . 49% and 23% have equal turnover in CM & F&O segment.

4 Out of my sample size 60.4.Any Other 5 LACS 10 LACS Amount 15 9 9 Series1 27 FIGURE 4. 9 (15%) invested between 2 lacs to 5 Lacs and 15 (25%) invested between 5 lacs to 10 lacs. 27 (45%) investors and brokers have invested 2 lacs normally. Reasons behind this is that those are investing from many years are taking the risk of investing huge amount. INVESTED AMOUNT IN DERIVATIVES Amout invested in derivatives 30 25 20 No. 85 .5 LACS . and remaining have invested in other amounts. of brokers 15 and investors 10 5 0 2 LACS 2 LACS .

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87 .5 13 (22% investors and brokers are investing weekly in derivatives. 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 4.5 TRADED PERIOD IN DERIVATIVES Traded period for Derivative Investment 25 20 No. 23 (38%) investing monthly.

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

28 (47%) are not able to say anything because they do not have proper knowledge about stock market.7 Out of 60 brokers. RELATIONSHIP WITH CASH MARKET 30 25 20 No of brokers 15 and investors 10 5 0 Positive Negative Relation Can't Say Series1 FIGURE 4.remains same because they have started just now for investing in derivatives in future it will increase their customer base. 7. They are investing with the guidance of 89 . investors 27 (45%) have the positive response towards the relation between derivative and cash market and remaining 5 (8%) has negative response.

SHORTCOMINGS IN INDIAN DERIVATIVE SYSTEM Short coming in indian derivative system 35 30 25 No. 8. 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. of brokers 20 and investors 15 10 5 0 31 27 2 domestic lack of technical awareness expertise in investors short comings market failure Series3 FIGURE 4.9 90 .

10 91 . investors respond towards shortage of domestic technical expertise. Which tool of derivative according to you is better? a) b) Index future Stock future Index option Stock option c) d) 7 12% 8 13% Index Future Stock Future 30 50% 15 25% Index Option Stock Option FIGURE 4.. 9. 31 (52%) feel lack of awareness in investors about derivatives and remaining 2 (3%) market failure.27 (45%) brokers.

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

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

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

I am a student of MBA . I am working on the project “STUDY OF DERIVATIVES ”.QUESTIONNAIRE Dear Respondent. to undertake the study on the said project NAME: OCCUPATION: ADDRESS: PHONE NO: 1) For how long you have been trading on derivatives? a) Less than 1 year b) 1 Year 99 . You are requested to fill in the questionnaire to enable.

c) 2 Year d) 3 year e) More than 3 year.000 c) Rs. 5. 00. 00. c) Equal in both above d) Can’t Say.000 to Rs. 00. 00.000 to Rs. 5.000 b) 2. 4) What is amount of money you are investing in normally? a) 2. 00.000 d) Any other amount______________ 5) How often do you trade? 100 . In which segment you have larger turnover ? (BROKERS ONLY) a ) Capital Market Segment b) F & O Segment. 10. 2) What is your purpose for trading in derivatives? a) c) Hedging Risk Management b) d) Speculation Liquidity 3) .

Which tool of derivative according to you is better? a) Index future b) Stock future c) Index option 101 . 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) . 8) What shortcomings do you feel in Indian derivative market? a) Lack of awareness among the investors about derivatives.

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