A STUDY ON CAPITAL MARKET DERIVATIVES IN INDIA INFOLINE LIMITED, VISAKHAPATNAM.

A Project report Submitted to Acharya Nagarjuna University in partial Fulfillment of the requirements for the degree of

MASTER OF BUSINESS ADMINISTRATION Submitted By SUNKARA RAJESH (Regd No.A09EM016040) (2009-11)

Under the Guidance of

Mr.P.RAJA BABU
M.Com.,M.B.A.,M.Phil.,B.L.,(P.hd)

Asst Professor(Dept of MBA) Nimra College of Business Management, Ibrahimpatnam,Vijayawada-524 456

INTRODUCTION TO DERIVATIVES

The Derivatives Market is meant as the market where exchange of derivatives takes place. Derivatives are one type of securities whose price is derived from the underlying assets. And value of these derivatives is determined by the fluctuations in the underlying assets. These underlying assets are most commonly stocks, bonds, currencies, interest rates, commodities and market indices. As Derivatives are merely contracts between two or more parties, anything like weather data or amount of rain can be used as underlying assets. The Derivatives can be classified as Future Contracts, Derivatives. Forward Contracts, Options, Swaps and Credit

Derivatives

Swaps

Options

Futures

Forwards

Int Rt Currency

Put `

Call

Security Commodity

DEFINITION OF DERIVATIVES

A security whose price is dependent upon or derived from one or more underlying assets. The derivative itself is merely a contract between two or more parties. Its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks,

bonds, commodities, currencies, interest rates and market indexes. Most derivatives are characterized by high leverage.

Futures contracts, forward contracts, options and swaps are the most common types of derivatives. Derivatives are contracts and can be used as an underlying asset. There are even derivatives based on weather data, such as the amount of rain or the number of sunny days in a particular region.

Derivatives are generally used as an instrument to hedge risk, but can also be used for speculative purposes. For example, a European investor purchasing shares of an American company off of an American exchange (using U.S. dollars to do so) would be exposed to exchangerate risk while holding that stock. To hedge this risk, the investor could purchase currency futures to lock in a specified exchange rate for the future stock sale and currency conversion back into Euros

HISTORY OF DERIVATIVES

Derivatives trading began in 1865 when the Chicago board of trade(CBOT) listed the first ³exchange traded´ derivatives contract in USA. These contracts were called ³futures contracts´. In 1919, The Chicago Butter and Egg Board, a spin off of CBOT, was recognized to allow futures trading. Its name was changed to Chicago Mercantile Exchange (CME).

The first stock index futures contract was traded at Kansas city Board of trade. Currently the most popular stock index futures contract in the world is based on the Standard & poor¶s 500 Index, traded on the CME. In April 1973, the Chicago board of Options Exchange was setup specifically for the purpose of trading in options. The market for options developed so rapidly that by early 80¶s the number of shares underlying the contracts sold each day exceeded the daily volume of shares traded on the New York Stock Exchange. And there has been no looking back ever since.

Derivatives in India
The Securities and Exchange Board of India (SEBI) allowed trading in Equities based derivatives on stock exchanges in june 2000. Accordingly The national Stock Exchange (NSE) and The Bombay Stock Exchange(BSE) introduced trading in futures on june 9, 2000 and june 12, 2000 respectively. Currently futures and options turnover on the NSE is Rs 7000 to 8000 cr

a derivative is usually a contract rather than an asset. 1999 May 24. 2000 June 9th &12th . 2001. The LC Gupta committee submitted a report on the policy frame work for index futures ard rate agreements and intrest rate waps SIMEX choose Nifty for trading futures and options on an Indian index. Derivatives in India: Chronology December 14.approximately. 1995 November 18. BSE & NSE Commenced the futures trade respectively. SEBI allowed the NSE & BSE to trade on index futures. 2000 The NSE sought sebi s permission to trade index futures. 1996 May 11. The LC Gupta committee set up to draft a policy frame work for index futures. Nifty futures trading commenced on the SGX What are derivative Derivatives is a generic term for a variety of financial instruments. In india stock index options were introduced from July 2. Essentially. this means you buy a promise to convey . 2000 May 25. 2000 September 25th. Unlike financial instruments such as stocks and bonds. 1998 July 7.

What are the Forward Contracts In finance. "A good toolbox of derivatives allows the modern investor the full range of investment strategy" and "the sophisticated management of risk. which is equal to the forward price at the time the contract is entered into. The legal terms of a contract are much more varied and flexible than the terms of property ownership. The party agreeing to buy the underlying asset in the future assumes a long position. it's this flexibility that appeals to investors. and the party agreeing to sell the asset in the future assumes a short position. in whatever form. The price of the underlying instrument. rather than the asset itself. It costs nothing to enter a forward contract. The price agreed upon is called the delivery price. This is one of the many forms of buy/sell orders where the time of trade is not the time where the securities themselves are exchanged. is paid before control of the instrument changes. which is an agreement to buy or sell an asset today. In fact.ownership of the asset. a forward contract or simply a forward is a nonstandardized contract between two parties to buy or sell an asset at a specified future time at a price agreed today. . This is in contrast to a spot contract.

The difference between the spot and the forward price is the forward premium or forward discount. A closely related contract is a futures contract. like other derivative securities. as a means of speculation. which is the price at which the asset changes hands on the spot date. Hence. Forward contracts are very similar to futures contracts. can be used to hedge risk (typically currency or exchange rate risk). except they are not exchange-traded. or defined on standardized assets. . being traded OTC. they differ in certain respects. generally considered in the form of a profit. forward contracts specification can be customized and may include mark-to-market and daily margining.The forward price of such a contract is commonly contrasted with the spot price. Forwards also typically have no interim partial settlements or "true-ups" in margin requirements like futures . by the purchasing party.such that the parties do not exchange additional property securing the party at gain and the entire unrealized gain or loss builds up while the contract is open. or loss. Forwards. However. or to allow a party to take advantage of a quality of the underlying instrument which is time-sensitive. a forward contract arrangement might call for the loss party to pledge collateral or additional collateral to better secure the party at gain.

The emergence of the derivatives markets as the effective risk management tools in 1970s and 1980s has resulted in the rapid creation of new commodity exchanges and expansion of the existing ones.1. However. It is only in the last decade that commodity futures exchanges have been actively encouraged. which exist today. the markets have not grown to significant levels as compared to developed countries. 2. the set up of national level exchanges witnessed exponential growth in trading with the turnover increasing from 5. Regulatory constraints in1960s resulted in virtual dismantling of the commodity futures market. In the commodity futures market. Over a period of time.48 lakh crores in 2008-09.Commodity Derivatives: Derivatives as a tool for managing risk first originated in the commodities markets. trading in commodity futures has been in existence from the nineteenth century with organized trading in cotton through the establishment of Cotton Trade Association in 1875.1 Commodity Exchange . The first central exchange was established in 1848 in Chicago under the name Chicago Board of Trade. have their origin in the late 19th and earlier 20th century. Evolution Of Commodity Exchanges Most of the commodity exchanges. other commodities were permitted to be traded in futures exchanges. In India.71 lakh crores in 2004-05 to52. At present. there are major commodity exchanges all over the world dealing in different types of commodities. They were then found useful as a hedging tool in financial markets as well.

Commodity exchanges are defined as centers where futures trade is organized in a wider sense. Hence. Today the farmers base their choice for next year's crop on current year's price. it is taken to include any organized market place where trade is routed through one mechanism. 2. a farmer in the southern part of India would be able to know the best price prevailing in the country which would enable him to take informed decisions.they help in price discovery as players get to set future prices which are also made available to all participants.2 Role of Commodity Exchanges Commodity exchanges provide platforms to suit the varied requirements of customers. these exchanges enable actual users (farmers. allowing effective competition among buyers and among sellers.1. Ideally this decision 17ought to be based on next year's expected price. but effectively takes place through many non-related individual transactions between different permutations of buyers and sellers.Secondly. agro processors. Futures prices on the platforms of commodity exchanges will hopefully move farmers of our country from the current 'cobweb' effect where additional acreage comes under cultivation in the year subsequent to one when a commodity had good prices. This would include auction-type exchanges. Firstly . industry where the predominant cost is commodityinput/output cost) to hedge their price risk given the un certainty . For this to happen. the concept of commodity exchanges must percolate down to the villages. consequently the next year the commodity price actually falls due to oversupply . where trade is localized. but not wholesale markets.

the phenomenon of globalization has made prices of other products such as metals. 2. etc. Thirdly. vulnerable to changes in global politics. growth paradigms. the arbitrageurs play an important role in balancing the market as arbitrage conditions.of the future . Commodity exchanges would provide a valuable hedge through the price discovery process while catering to the different kind of players in the market. policies. which would become a reality shortly. where they exist. This holds good also for non-agro products like metals or energy products as well where global forces could exert considerable influence.especially in agriculture where there is uncertainty regarding the monsoon and hence prices. Purchasers are also assured of a fixed price which is determined in advance.3 Commodity Derivative Markets in India .Lastly.It must be pointed out that while the monsoon conditions affect the prices of agro-based commodities.. thereby avoiding surprises to them. energy products. are ironed out as arbitrageurs trade with opposite positions on different platforms and hence generate opposing demand and supply forces which ultimately narrows down the gaps in prices . This would be strengthened as the world moves closer to the resolution of the WTO impasse. commodity exchanges provide liquidity and buoyancy to the system .1. Today. It must be borne in mind that commodity prices in India have always been woven firmly into the international fabric. price fluctuations in all major commodities in the country mirror both national and international factors and not merely national factors. by involving the group of investors and speculators. etc.

castor seed and cotton. many exchanges came up in different parts of the country for futures trading in various commodities. to conduct organized trading in both raw jute and jute goods. But organized futures trading in raw jute began only in 1927 with the establishment of East Indian Jute Association Ltd. Subsequently.Commodity futures markets have a long history in India. Delhi and Kolkata. was established in 1919 for futures trading in raw jute and jute goods. the most notable of which was the Chamber of Commerce at Hapur. The Bombay Cotton Exchange Ltd. several futures markets in oilseeds were functioning in Gujarat and Punjab . Cotton was the first commodity to attract futures trading in the country leading to the setting up of the Bombay Cotton Trade Association Ltd in 1875. Jaipur. Jamnagar. Before the Second World War broke out in 1939. These two associations amalgamated in 1945 to form the East India Jute & Hessian Ltd. Induce course several other exchanges were also created in the country to trade in such diverse commodities . which began futures trading in wheat in 1913 and served as the price setter in that commodity till the outbreak of the Second World War in 1939.Calcutta Hessian Exchange Ltd. Kanpur.Futures trading in wheat existed at several places in Punjab and Uttar Pradesh. which carried on futures trade in groundnut. was established in 1893 following the widespread discontent amongst leading cotton mill owners and merchants over the functioning of Bombay Cotton Trade Association. Futures trading in oilseeds started in 1900 with the establishment of the Gujarati Vyapari Mandali.Futures trading in bullion began in Mumbai in 1920 and subsequently markets came up in other centers like Rajkot.

there was the constant fear of misuse of these platforms which could be manipulated to fix prices by creating artificial scarcities. as production levels were low and had not stabilized. India was in an era of physical controls since independence and the pursuance of a mixed economy set up with socialist proclivities had ramifications on the operations of commodity markets and commodity exchanges. of India. turmeric. The Act provided for 3-tier regulatory system:(a) An association recognized by the Government of India on the recommendation of Forward Markets Commission. with the subject of `Stock Exchanges and futures markets' being brought under the Union list. potato. D. A Bill on forward contracts was referred to an expert committee headed by Prof. Government intervention was in the form of buffer stock operations. etc. responsibility for regulation of commodity futures markets devolved on Govt. regulation on trade and input prices. 1954. Forward Contracts (Regulation) Rules were notified by the Central Government in July. natural calamites and disasters . Shroff and select committees of two successive Parliaments and finally in December1952 Forward Contracts (Regulation) Act. Further.(b) The Forward Markets Commission (it was set up in September 1953) and( c ) T h e C e n t r a l G o v e r n m e n t .A. administered prices. was enacted.as pepper. Agricultural commodities were associated with the poor and were governed by policy such as Minimum Price Support and Government Procurement. restrictions on movement of goods.After independence. This was also a period which was associated with wars. 1952. sugar and gur (jaggery).

The government. raw jute and j u t e g o od s a n d s u g g e s t ed t h a t s t ep s m a y b e t a k en f o r i n t r o d u c i n g f u t u r e s t ra d i n g i n commodities. the government banned futures trading in commodities in the 1960s. in an era of uncertainty with potential volatility. rapeseed/mustard seed.N. accordingly initiated futures trading in Potato during the latter half of 1980 in quite a few markets in Punjab and Uttar Pradesh . sesame seed. onions. including cotton. Raw Jute and Jute Goods ‡ Groundnut. Hence. kapas. K.The Khusro Committee which was constituted in June 1980 had recommended reintroduction of futures trading in most of the major commodities. etc. Kapas. at appropriate time. copra and soybean and oils and oilcakes ‡ R i c e b r a n o i l ‡ Castor oil and its oilcake ‡ ‡ ‡ L i n s e e d S O i n l i v o e n r s . safflower seed.With the gradual trade and industry liberalization of the Indian economy pursuant to the adoption of the economic reform package in 1991. cottonseed.which invariably led to shortage sand price distortions. like potatoes. sunflower seed. GOI constituted another committee on Forward Markets under the chairmanship of Prof. The Committee which submitted its report in September 1994 recommended that futures trading be introduced in the following commodities :‡ B a s m a t i R i c e ‡ Cotton. Kabra.

Since financial assets are not bulky. Similarly. Physical Settlement Physical settlement involves the physical delivery of the underlying commodity. We have a brief look at these issues. due to the bulky nature of the underlying assets. most of these contracts are cash settled. This becomes an important issue to be managed. The seller intending to make delivery would have to take the commodities to the designated . Difference Between Commodity And Financial Derivatives: The basic concept of a derivative contract remains the same whether the underlying happens to be a commodity or a financial asset. may be ones in pepper to the and castor of upgraded level i n t e r n a t i o n a l futures markets. However. In the case of financial derivatives. there are some features which are very peculiar to commodity derivative markets. However. the quality of the asset underlying a contract can vary largely. On the other hand. the concept of varying quality of asset does not really exist as far as financial under lying concerned.The committee also recommended that some of the existing commodity exchanges particularly t h e seed. typically at an accredited warehouse. physical settlement in commodity derivatives creates the need for warehousing. in the case of commodities. they do not need special facility for storage even in case of physical settlement.

The discount/ premium for quality and freight costs are published by the clearinghouse before introduction . The issues faced in physical settlement are enormous. Delivery The procedure for buyer and seller regarding the physical settlement for different types of contracts is clearly specified by the Exchange. This may sound simple.Proof of physical delivery having been effected is forwarded by the seller to the clearing house and the invoice amount is credited to the seller's account . Besides state level octroi and duties have an impact on the cost of movement of goods across locations.warehouse and the buyer intending to take delivery would have to go to the designated warehouse and pick up the commodity. Delivery rate depends on the spot rate of the underlying adjusted for discount/ premium for quality and freight costs. The process of taking physical delivery incommodities is quite different from the process of taking physical delivery in financial assets. There are restrictions on interstate movement of commodities.The clearing house decides on the delivery order rate at which delivery will be settled. Buyer or his authorized representative in the presence of seller or his representative takes the physical stocks against the delivery order . but the physical settlement of commodities is a complex process. The period available for the buyer to take physical delivery is stipulated by the Exchange. There are limits on storage facilities in different states.

20 in cash . the buyer must take physical delivery of the underlying asset. For instance. The most active spot market is normally taken as the benchmark for deciding spot prices. all the positions are cash settled.20 in cash. It means that if the seller chooses to hand over the commodity instead of the difference in cash. there is a possibility of physical settlement. Cash settlement involves paying up the difference in prices between the time the contract was entered into and the time the contract was closed. he does not really have to buy the underlying stock.of the contract.120. This requires the Exchange to make an arrangement with warehouses to handle the settlements. the person who sold this futures contract at Rs. if a trader buy futures on a stock at Rs. Such warehouses have to perform the following functions:‡ . Similarly. the futures on that stock close atRs.In case of commodity derivatives however. The efficacy of the commodities settlements depends on the warehousing system available. All he has to do is pay up the loss of Rs.100 does not have to deliver the underlying stock. In case of most exchangetraded financial derivatives. Warehousing One of the main differences between financial and commodity derivative is the need for warehousing.100 and on the day of expiration. All he does is take the difference of Rs.

to buy or sell a particular commodity or financial instrument at a pre-determined price in the future. are maintained during the storage period. NCDEX has accredited over 775 delivery centers which meet the requirements for the physical holding of goods that are to be delivered on the platform. and‡ Ensure that necessary steps and precautions are taken to ensure that the quantity and grade of commodity.In India. As future trading is delivery based.Earmark separate storage areas as specified by the Exchange for storing commodities. This receipt can also be used as collateral for financing . . it is necessary to create the logistics support for the same. Futures contracts detail the quality and quantity of the underlying asset. they are standardized to facilitate trading on a futures exchange. Some futures contracts may call for physical delivery of the asset.‡ Ensure proper grading of commodities before they are stored.‡ Store commodities according to their grade specifications and validity period. while others are settled in cash. generally made on the trading floor of a futures exchange. as certified in the warehouse receipt. What are Futures A contractual agreement.

The meaning of futures is summarized as the contract made by two different parties either to purchase or sell products at a future period where the prices are pre-determined. Call option stands for the right without obligation to only buy the . is a security. which are futures and options. bonds and commodities. They are known to be the most complicated instruments in the entire financial market. An option. to buy or sell an underlying asset at a specific price on or before a certain date. There is a marked difference between futures and options.What are Options An option is a contract that gives the buyer the right. Some of the investors find them right instruments for risk management. However. but not the obligation. just like a stock or bond. Futures Vs Options Derivatives are created form the underlying asset like stocks. which increases liquidity. they are extremely important and have huge effects on financial markets and the economy Derivatives are mainly of two kinds. It is also a binding contract with strictly defined terms and properties. The meaning of options is the right without the obligation to purchase and sell underlining assets.

and the seller to sell and deliver that asset at a specific future date. The premium is the maximum that a purchaser of an option can lose. unless the holder's position is closed prior to expiration. Another key difference between options and futures is the size of the underlying position.underlining asset and the purchaser may refuse the contract prior to its maturity. Compared to the absence of upfont costs of futures. An option gives the buyer the right. Generally. an investor can enter into a futures contract with no upfront cost whereas buying an options position does require the payment of a premium. Aside from commissions. A futures contract gives the buyer the obligation to purchase a specific asset. but not the obligation to buy (or sell) a certain asset at a specific price at any time during the life of the contract. and the obligation to buy or . the underlying position is much larger for futures contracts. Put option means the opposite of call option. The main fundamental difference between options and futures lies in the obligations they put on their buyers and sellers. the option premium can be seen as the fee paid for the privilege of not being obligated to buy the underlying in the event of an adverse shift in prices.

sell this certain amount at a given price makes futures more risky for the inexperienced investor. This is the peculiarity of the term ³option´ and the price is paid at a premium. With this kind of trading. or waiting until expiry and collecting the difference between the asset price and the strike price. In the future contract. gains on futures positions are automatically 'marked to market' daily. meaning the change in the value of the positions is attributed to the futures accounts of the parties at the end of every trading day but a futures contract holder can realize gains also by going to the market and taking the opposite position. In contrast. The gain on a option can be realized in the following three ways: exercising the option when it is deep in the money. the purchaser¶s . going to the market and taking the opposite position. The final major difference between these two financial instruments is the way the gains are received by the parties. the buyer has the right without any obligation to purchase or sell the underlying asset. both the parties are engaged in a contract with obligation to purchase or sell the asset at a particular price on the day of settlement. The basic difference of futures and options is evident in the obligation present between buyers and sellers. This is a risky proposition for both the parties. In case of the option contract.

Specifically. swaps are among the most heavily traded financial contracts in the world: the total amount of interest rates and currency swaps . engineered the first swap transaction according to "When Genius Failed: The Rise and Fall of Long-Term Capital Management" by Roger Lowenstein.risk becomes limited to the payment of premium but the prospective profit is unlimited. a swap is a derivative in which counterparties exchange certain benefits of one party's financial instrument for those of the other party's financial instrument. equity price or commodity price. For example. Swaps: In finance. foreign exchange rate. Usually at the time when the contract is initiated at least one of these series of cash flows is determined by a random or uncertain variable such as an interest rate. Today. The benefits in question depend on the type of financial instruments involved. the benefits in question can be the periodic interest (or coupon) payments associated with the bonds. the two counterparties agree to exchange one stream of cash flows against another stream.D.] David Swensen. The swap agreement defines the dates when the cash flows are to be paid and the way they are calculated. The first swaps were negotiated in the early 1980s. in the case of a swap involving two bonds. a Yale Ph. at Salomon Brothers. These streams are called the legs of the swap.

a farmer may use futures or options to establish the price for his crop long before he harvests it. they see the future prices of an asset getting out of line . For example. If. They use derivatives to reduce or eliminate risk. The farmer can watch the prices discovered in trading at the CBOT and. They use derivatives to get extra leverage physical commodity take advantage. causing prices to rise and fall over the growing season. Speculators: Speculators wish to bet on the future movement in the price of an asset.outstanding is more th n $426. for example. according to International Swaps and Derivatives Association (ISDA). Arbitrators: They are in the business to take advantage of a discrepancy between prices in two different markets. will sell futures contracts to assure him of a fixed price for his crop. Various factors affect the supply and demand for that crop. when they reflect the price he wants. Participants in derivatives There are three types of traders in the Derivative market namely:Hedgers: They are in the position where they face risk associated with the price of an asset.7 trillion in 2009.

to understand the concept. but not the obligation. . to buy the underlying stocks (or shares) at a predetermined price. they will take offsetting positions in the two markets to lock in a profit. They use derivatives to get extra leverage. namely: y y Call options Put options We shall discuss both these types of options. Speculators: Speculators wish to bet on the future movement in the price of an asset. Types of Options There are two types of options. on or before a determined date. We are advised to follow the thought. The names and the prices in the illustrations below are not in real time and have only been used to help explain these options. A speculator will buy and sell in anticipation of future price movements.with the cash price. Call Options: The call options give the taker (or buyer) the right. but has no desire to actually own the physical commodity.

For this privilege. The buyer of a put has purchased a right to sell.Illustration 1: Let's say Raj purchases 1lot Satyam Computer (SATCOM) AUG 150 Call at a Premium of 8. This contract allows Raj to sell 100 shares of Infosys Technology at INR 3.00 a share for 100 shares.00 per share for 100 shares).500.00 (that is INR 200. This contract allows Raj to buy 100 shares of SATCOM at INR 150. Raj pays a fee of INR 800.Premium 200. that is INR 8. The buyer of a "call" has purchased the right to buy and for that he pays a premium. Raj pays a premium of INR 20.00. Put Options: A Put Option gives the holder the right to sell a specified number of shares of an underlying security at a fixed price for a period of time.00 per share at any time between the current date and the end of August.00 per share at any time between the current date and the end of August. To have this privilege.000. Uses of options contracts . Illustration : Let's say Raj purchases 1lot Infosys Technology Aug 3500 Put .

they can buy the equivalent market exposure for a short period of time. and 9 months. a strategy may be considered to shift the risk exposure of the portfolio.Buy time If a market participant wants or needs to defer an investment.Diversification A portfolio can be diversified by different option strategies. 6. This is also referred to as hedging. 2. Options of this . and for that matter all derivatives. calls and puts.The advantage of using options. Leverage provides the potential to make a higher return from a smaller initial outlay than investing directly in the underlying asset. 3. If a portfolio is overweight or underweight in a specific sector of the market. Leaps: As with traditional short term options. 1.Risk management Options can be used very much like insurance to protect a portfolio or to guard against extreme movement in a particular stock. LEAPS are available in two forms. is due to the leverage that they provide. with no option term lasting more than a year. Options were originally created with expiry cycles of 3.

2. The prices of derivatives converge with the prices often underlying at the expiration of the derivative contract.) The latter two are LEAPS. (The further out the expiration date.form. they were derivative instruments solely for equities. When LEAPS were first introduced in 1990. if today were November 2005. the more expensive the option. for such terms. equivalent instruments for indices have become available. For example. Thus derivatives help in discovery of future as well as current prices. LEAPS were created relatively recently and typically extend for terms of 2 years out. These are also referred to as LEAPS. Economic Function of Derivative Market 1. or 2008. Equity LEAPS always expire in January. Prices in an organized derivatives market reflect the perception of market participants about the future and lead the prices of underlying to the perceived future level. however. more recently. 2007. still constitute the vast majority of options activity. one could buy a Microsoft January call option that would expire in 2006. . The derivatives market helps to transfer risks from those who have them but may not like them to those who have an appetite for them.

With the introduction of derivatives. They often energize others to create new businesses. are linked to the underlying cash markets. due to their inherent nature. the benefit of which are immense. Margining. Speculative trades shift to a more controlled environment of derivatives market. Derivatives Impact on countries EconomyAccording to survey conducted in India regarding the sub brokers¶ opinion on the impact of derivatives market on financial market. well-educated people with an entrepreneurial attitude. In the absence of an organized derivatives market. the result obtained is given as under. new products and new employment opportunities. monitoring and surveillance of the activities of various participants become extremely difficult in these kind of mixed markets. An important incidental benefit that flows from derivatives trading is that it acts as a catalyst for new entrepreneurial activity. speculators trade in the underlying cash markets. the underlying market witnesses higher trading volumes because of participation by more players who would not otherwise participate for lack of arrangement to transfer risk. The derivatives have a history of attracting many bright. creative. Derivatives. 4.3. . 5.

speculation and arbitrage. coupled with the widespread knowledge and orientation towards equity investment and speculation. have combined to provide an environment where the .Derivative securities have penetrated the Indian stock market and it emerged that investors are using these securities for different purposes. Further. the authors identified some important policy issues such as the need to bring in more institutional participation to make the derivative market in India more efficient and to bring it in line with the best practices. Based on the survey results. some retail participation was also witnessed despite the fact that these securities are considered largely beyond the reach of retail investors (because of complexity and relatively high initial investment). Interestingly. Indian & International Derivatives 1. High net worth individuals and proprietary traders account for a large proportion of broker turnover. namely.Indian In the decade of 1990¶s revolutionary changes took place in the institutional infrastructure in India¶s equity market. risk management. These new institutional arrangements. profit enhancement. there is a need to popularize option instruments because they may prove to be a useful medium for enhancing retail participation in the derivative market. It has led to wholly new ideas in market design that has come to dominate the market.

equity spot market is now India¶s most sophisticated financial market. The index is the counter piece of portfolio analysis in modern financial economies. India¶s equity spot market is dominated by a new practice called µFutures ± Style settlement¶ or account period settlement.5 million at the NIFTY index is around 0. The index is much harder to manipulate. This state of liquidity on the equity spot market does well for the market efficiency. This is particularly important given the weaknesses of Law Enforcement in India. Stock trading is widely prevalent in India. One aspect of the sophistication of the equity market is seen in the levels of market liquidity that are now visible. hence it seems easy to think that derivatives based on individual securities could be very important. The market capitalization of the NSE-50 index is Rs.6 trillion. In its present scene. Index fluctuations affect all portfolios. trades on the largest stock exchange (NSE) are netted from Wednesday morning till Tuesday evening. which have made numerous manipulative episodes possible. The future style settlement has proved to be an ideal launching pad for the skills that are required for futures trading. which will be observed if the index futures market when trading commences.2. The market impact cost of doing program trades of Rs. This is six times larger than the market capitalization of the largest stock and 500 .2%. and only the net open position as of Tuesday evening is settled.

in so far as the µshort-squeeze¶ is not a problem.times larger than stocks such as Sterlite. It predates a modern understanding of issues in index construction and recognition of the pivotal role of the market index in modern finance. A good index is a sound trade of between diversification and liquidity. . In India the traditional index. If the stock derivatives have to come about. which are universally used with index derivatives. Membership in the NSE-50 index appeared to be a fair test of liquidity. BPL and Videocon. Cash settlements. also helps in terms of reducing the vulnerability to market manipulation. The 50 stocks in the NIFTY are assuredly the most liquid stocks in India. index derivatives are inherently less vulnerable to market manipulation. The flows of this index and the importance of the market index in modern finance motivated the development of the NSE-50 index in late 1995. this yields a 1% in the NIFTY. Many mutual funds have now adopted the NIFTY as the benchmark for their performance evaluation efforts.the BSE ± sensitive index was created by a committee of stockbrokers in 1986. the restricted to the most liquid stocks. If market manipulation is used to artificially obtain 10% move in the price of a stock with a 10% weight in the NIFTY. Thus.

Risk management of the futures clearing is more complex when options are in the picture. In fact. all attempts are being made to introduce derivative instruments in the capital market. Individuals or firms can choose to employ positions where their downside and exposure is capped by using options. Hence. .The choice of Futures vs. When portfolios contain options. the calculation of initial price requires greater skill and more powerful computers. Scope of Derivatives in India In India. the necessary groundwork for the introduction of derivatives in forex market was prepared by a highlevel expert committee appointed by the RBI. there are brighter chances of introducing derivatives on a large scale. The National Stock Exchange has been planning to introduce index-based futures. for a futures position is identical to an appropriately chosen long call and short put position. But. Options is often debated. In the forex market. The skills required for pricing options are greater than those required in pricing futures. futures position can always be created once options exist. It was headed by Mr. commonly imagined. it has not yet received the necessary permission from the securities and Exchange Board of India. A stiff net worth criteria of Rs. The difference between these instruments is smaller than.7 to 10 corers cover is proposed for members who wish to enroll for such trading.

there should be proper legislations for the effective implementation of derivative contracts. However. As it is. there is transparency with honest dealings. Sodhani. currency swaps and fixed rate agreements are available on a limited scale. They are really the risk management tools. What is more important for the success of derivatives is the prescription of proper capital adequacy norms. a few derivative products such as interest rate swaps. coupon swaps. training of financial intermediaries and the provision of well-established indices. It is easier to introduce derivatives in forex market because most of these products are OTC products (Over-the-counter) and they are highly flexible. The utility of derivatives through Hedging can be derived. Index options and index futures are basically derivate tools based on stock index. Since derivates are permitted . Committee¶s report was already submitted to the Government in 1995. derivatives have been introduced in the Indian Market in the form of index options and index futures. only when. Brokers must also be trained in the intricacies of the derivative-transactions.P. The players in the derivative market should have a sound financial base for dealing in derivative transactions.O. These are always between two parties and one among them is always a financial intermediary. Now.

rupee forward market with contracts being traded for one to six month expiration. Hence. Hence. regardless of the composition of the portfolio. derivatives available in India in foreign exchange area are also highly beneficial to the users. These are options contracts and futures contracts on a whole range of underlying products. India has a strong dollar. The members of the exchange hold . However. investors would be more interested in using index-based derivative products rather than security based derivative products. one can use them to insulate his equity portfolio against the vagaries of the market. trade in standardized derivative contracts. Every investor in the financial area is affected by index fluctuations. There are no derivatives based on interest rates in India today. Moreover. risk management using index derivatives is of far more importance than risk management using individual security options. Indian users of hedging services are allowed to buy derivatives involving other currencies on foreign markets.liffe and the Chicago Mercantile Exchange. such as Euronext.legally. International Derivatives Futures exchanges. Portfolio risk is dominated by the market risk. Daily trading volume on this forward market is around $500 million a day. Hence.

Average daily global turnover rose by two-thirds. the sum of all the long positions must be equal to the sum of all the short positions. Derivatives based on foreign-exchange contracts account for a further 10% of notional value. When a new contract is introduced. The UK remains the leading derivatives centre worldwide. (Source: Bank for International Settlements That figure grew to $81 trillion by the end of March 2008 Netting Global: OTC Derivatives Markets The notional outstanding value of OTC derivatives contracts rose by 40% from $298 trillion at end2005 to $415 trillion at end-2006. Interest rate instruments remain the key driver of trading. equity-linked and commodity contracts also . In other words. the total position in the contract is zero.544bn between April 2004 and April 2007. Therefore. When one party goes long (buys a futures contract).positions in these contracts with the exchange. accounting for 88% of UK turnover and 70% of global notional value. risk is transferred from one party to another. with credit.508bn to $2. The US is the only other major location with 24% of trading. who acts as central counterparty. from $1. another goes short (sells). The total notional amount of all the outstanding positions at the end of June 2004 stood at $53 trillion. with its share of turnover stable at 43% in 2007.

mutual funds. while other financial institutions such as hedge funds.important. metal and freight derivatives have grown rapidly in recent years.1 . The euro¶s share of interest rate derivatives turnover worldwide has risen to 39% while the US dollar has fallen to 32%: Pound sterling and yen also increased their market share over the past three years. Trading is becoming more concentrated among the largest banks. insurance companies and smaller banks have become much bigger users of derivatives. END OF CHAPTER NO. Energy.

CHAPTER NUMBER II .

OBJECTIVES AND METHODOLOGY OBJECTIVES  To study the nature and structure of the derivatives market in india.  To know the functionality of derivatives in IIFL(India Infoline Limited).  To Study abou the derivatives.  To know about the Forwards and Futures.  To know about the Options.  To Evaluate the Trading of futures and options.

The main objective of this study on futures and options and their pricing methodologies is to explain an investor about the derivatives market and in details about and their pricing. Futures further consist of stock futures and index futures, intrest rate futures and so on.

Options consist of stock options, index options etc., The pricing methodology explains each of the futures and options through cost of carry model and black Scholars model strictly speaking, the price discovery process respectively. An investor idea whether to buy those instruments or sell those instruments.

Derivatives have gained an increasing attention by academics and practitioners in recent years. However, there is relatively little evidence on the patterns of use and the property funds¶ attitudes with respect to derivatives. Therefore, this study seeks to address this shortfall and aims to examine the usage of derivatives by property funds in Australia. A survey of Australian property fund managers was undertaken. The results show that different types of property funds have dissimilar patterns of derivatives use. Besides, the results also reveal that large property funds are more likely to use derivatives. The motivation factors and risk factors for using derivatives are also identified. In addition, significant differences are found between the perceptions of derivative users and non-users. The findings have offered some insights into the knowledge base of property investors towards derivatives.

COLLECTION OF DATA The required data for analysis and study of derivatives is collected from the primary sources and secondary sources. The primary data is collected from the employees of IIFL. The primary data which is collected from the employees is from their past experiences, especially the data which is collected from the employees who are in the R&D . The Secondary data is collected from various books on

Futures and Options, the data collected from internet, from various journals published by stock exchanges in India and abroad.

SIGNIFICANCE The topic is selected to analyze the depth of the capital market, in derivatives segment. On which norms the stock exchanges list out the companies in F&O segment by studying the fundamentals of the company. Generally the stock exchanges will select the companies in the list of F & O are fundamentally very strong companies only. The main objective is to serve the investor to decide whether to invest in the company to gain good returns.

Period of Study The main aim of the study is to examine the changes in the trading and dematerialization of securities in IIFL. The study of this project is confined to two months. In first segment the data is collected from primary and secondary sources then in the second phase the data is analyzed and interpreted.

LIMITATIONS OF THE STUDY The following are the identical limitations of the study. The time period spend on the project is not sufficient to obtain the total

information about the topic. The accuracy and transparency have found at low degree in the working operations of the exchange. Scope of the study:It includes  A brief study on F&O attempted.  A part of the derivatives has dealed in detailed manner.  Index and stock options have been dealt in focused way.  The other pricing models are analysed in brief manner.  An attempt is made to dealt in all aspects in detailed manner. Chapterisation:The present study has been classified in to Six chapters.    Chapter 1: Introduction Chapter 2:Objectives and Methodology Chapter 3: Stock broking (Industry)

   Chapter 4: Company Profile Chapter 5: Analysis & Interpretation Chapter 6: Findings and suggestions .

CHAPTER .3 .

. new stock or bond issues are sold to investors via a mechanism known as underwriting. where business enterprises (companies) and governments can raise longterm funds.INDUSTRY PROFILE CAPITAL MARKETS A capital market is a market for securities (debt or equity). In primary markets. oversee the capital markets in their designated jurisdictions to ensure that investors are protected against fraud. In the secondary markets. as the raising of short-term funds takes place on other markets (e. Financial regulators. such as the UK's Financial Services Authority (FSA) or the U.g. over-the-counter. usually on a securities exchange. or elsewhere. I. among other duties.S. The capital market includes the stock market (equity securities) and the bond market (debt). the money market). Securities and Exchange Commission (SEC). existing securities are sold and bought among investors or traders. PRIMARY MARKET . Capital markets may be classified as primary markets and secondary markets. It is defined as a market in which money is provided for periods longer than a year.

The primary market is the market where the securities are sold for the first time. y The company receives the money and issues new security certificates to the investors. Companies. Therefore it is also called the new issue market (NIM). Dealers earn a commission that is built into the price of the security offering. this sale is an initial public offering (IPO). the securities are issued by the company directly to investors. y In a primary issue.The primary market is that part of the capital markets that deals with the issuance of new securities. Primary markets creates long term instruments through which corporate entities borrow from capital market. . y Primary issues are used by companies for the purpose of setting up new business or for expanding or modernizing the existing business. though it can be found in the prospectus. This is typically done through a syndicate of securities dealers. governments or public sector institutions can obtain funding through the sale of a new stock or bond issue. Features of primary markets are: y This is the market for new long term equity capital. In the case of a new stock issue. The process of selling new issues to investors is called underwriting.

this is known as "going public. stocks. METHODS IN PRIMARY MARKET Any company before initial public offer.y The primary market performs the crucial function of facilitating capital formation in the economy. The prospectus is a document which explains about the company. such as loans from financial institutions. Methods of issuing securities in the primary market are: y y y Initial public offering. the respective company will issue The PROSPECTUS. A prospectus commonly provides investors with material information about mutual funds. Preferential issue. In finance. Rights issue (for existing companies). Borrowers in the new issue market may be raising capital for converting private capital into public capital. a prospectus is a legal document that institutions and businesses use to describe the securities they are offering for participants and buyers. such as a . y The new issue market does not include certain other sources of new long term external finance. bonds and other investments." y The financial assets sold can only be redeemed by the original holder.

Initial Public Offer means 1. B. The rights issue is a special form of shelf offering or shelf registration. younger companies seeking capital to expand. such as an initial public offering. detailed information about their compensation. biographies of officers and directors. is when a company (called the issuer) issues common stock or shares to the public for the first time. a prospectus is distributed by underwriters or brokerages to potential investors. existing shareholders have the privilege to buy a specified number of new shares from the firm at a specified price within a specified time. 2. Rights Issue A rights issue is an option that a company opts for to raise capital under a seasoned equity offering of shares to raise money. a list of material properties and any other material information.description of the company's business. A rights issue is in contrast to an initial . They are often issued by smaller. which helps determine what type of security to issue (common or preferred). An initial public offering (IPO). A . but can also be done by large privately owned companies looking to become publicly traded. best offering price and time to bring it to market. In the context of an individual securities offering. financial statements. With the issued rights. In an IPO the issuer obtains the assistance of an underwriting firm. referred to simply as an "offering" or "flotation". any litigation that is taking place.

They raise additional capital by rights offerings. A rights issue is directly offered to all shareholders of record or through broker dealers of record and may be exercised in full or partially. on the open market or not at all. Considerations Before issue of Rights Issue rights the financial manager has to consider: y y y y Engaging a Dealer-Manager or Broker Dealer to manage the Offering processes Selling Group and broker dealer participation Subscription price per new share Number of new shares to be sold .g. a rights issue is a source of capital. allowing the subscription-rights holder to sell them privately. a dividend of one subscription right for one share of Common stock issued and outstanding). Subscription rights may either be transferable. and capital gains each year. because they distribute essentially all of their realized income. where shares are issued to the general public through market exchanges. A right issuance to shareholders is generally issued as a tax-free dividend on a ratio basis (e.public offering. Because the company receives shareholders' money in exchange for shares. Closed-end companies cannot retain earnings. Companies usually opt for a rights issue either when having problems raising capital through traditional means or to avoid interest charges on loans.

would literally write their names under the risk information that was written on a Lloyd's slip created for this purpose. is most often used to mean mortgage loan. . trading price of the subscription rights The effect of rights on the value of the current share The effect of rights to shareholders of record and new shareholders and rights holders UNDERWRITING Underwriting refers to the process that a large financial service provider (bank. investment house) uses to assess the eligibility of a customer to receive their products (equity capital. Mortgage A mortgage loan is a loan secured by real property through the use of a mortgage note which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan. the word mortgage alone. The name derives from the Lloyd's of London insurance market. or credit). in everyday usage. insurer. However. insurance. who would accept some of the risk on a given venture (historically a sea voyage with associated risks of shipwreck) in exchange for a premium. Financial bankers. A home buyer or builder can obtain financing (a loan) either to purchase or secure against the property from a financial institution.y y y The value of rights vs. mortgage.

and other characteristics can vary considerably. or an alternative use for an existing product or asset where the customer base is the second market (for example. is the financial market where previously issued securities and financial instruments such as stock. II. Another frequent usage of "secondary market" is to refer to loans which are sold by a mortgage bank to investors . also called aftermarket. Few individuals have enough savings or liquid funds to enable them to purchase property outright. In countries where the demand for home ownership is highest. and futures are bought and sold. strong domestic markets have developed. maturity of the loan. but a "second" or "third" market has developed for use in ethanol production). options. interest rate. SECONDARY MARKET The secondary market. The term "secondary market" is also used to refer to the market for any used goods or assets. it is normal for home purchases to be funded by a mortgage loan.such as a bank. . corn has been traditionally used primarily for food production and feedstock. method of paying off the loan. bonds. In many jurisdictions. Features of mortgage loans such as the size of the loan. either directly or indirectly through intermediaries. though not all.

or directly from the federal government in the case of treasuries.With primary issuances of securities or financial instruments. Exchanges such as the New York Stock Exchange. investors purchase these securities directly from issuers such as corporations issuing shares in an IPO or private placement. After the initial issuance. Most bonds and structured products trade ³over the counter. The secondary market for a variety of assets can vary from loans to stocks. Stock exchanges also provide facilities for issue and redemption of securities and other financial instruments.´ or by phoning the bond desk of one¶s broker-dealer. or the primary market. Securities traded on . investors can purchase from other investors in the secondary market.in this case. for stocks of publicly traded companies. Nasdaq and the American Stock Exchange provide a centralized. and from illiquid to very liquid. liquid secondary market for the investors who own stocks that trade on those exchanges. bonds. WHAT IS A STOCK EXCHANGE A stock exchange is an entity that provides services for stock brokers and traders to trade stocks. and other securities. The major stock exchanges are the most visible example of liquid secondary markets . and capital events including the payment of income and dividends. from fragmented to centralized. Loans sometimes trade online using a Loan Exchange.

a stock exchange include shares issued by companies. it must be listed there. Usually. Such trading is said to be off exchange or over-the-counter. Increasingly. This is the usual way that derivatives and bonds are traded. affect the price of stocks. as modern markets are electronic networks. nor must stock be subsequently traded on the exchange. What is meant by OTC or Off Exchange . there is a central location at least for record keeping. derivatives. Trade on an exchange is by members only. pooled investment products and bonds. A stock exchange is often the most important component of a stock market. which gives them advantages of increased speed and reduced cost of transactions. To be able to trade a security on a certain stock exchange. The initial offering of stocks and bonds to investors is by definition done in the primary market and subsequent trading is done in the secondary market. Supply and demand in stock markets is driven by various factors that. but trade is increasingly less linked to such a physical place. as in all free markets. stock exchanges are part of a global market for securities. unit trusts. There is usually no compulsion to issue stock via the stock exchange itself.

bonds.e. Bombay Stock Exchange(BSE) 2. Today. It is contrasted with exchange trading. exchanges).Over-the-counter (OTC) or off-exchange trading is to trade financial instruments such as stocks. commodities or derivatives directly between two parties. It is the world's 5th most active in terms of number of transactions .. BSE is the world's number 1 exchange in the world in terms of the number of listed companies (over 4900). National Stock Exchange(NSE) The BSE Bombay Stock Exchange is the oldest stock exchange in Asia What is now popularly known as the BSE was established as "The Native Share & Stock Brokers' Association" in 1875. which occurs via facilities constructed for the purpose of trading (i. BSE has facilitated the growth of the Indian corporate sector by providing it with an efficient capital raising platform. Over the past 135 years. The Stock Exchanges in INDIA 1. such as futures exchanges or stock exchanges.

2009). The BSE Index. is India's first and most popular Stock Market benchmark index. 2010. Futures and options on the index are also traded at BSE. And it is in the top ten of global exchanges in terms of the market capitalization of its listed companies (as of December 31. The companies listed on BSE command a total market capitalization of USD Trillion 1. which is a ISO version of BS 7799 for Information Security. BSE is the first exchange in India and the second in the world to obtain an ISO 9001:2000 certification. BSE continues to innovate: y Became the first national exchange to launch its website in Gujarati and Hindi and now Marathi . are listed on BSE and in Hong Kong. Presently. Exchange traded funds (ETF) on SENSEX. It is also the first Exchange in the country and second in the world to receive Information Security Management System Standard BS 77992-2002 certification for its BSE On-Line trading System (BOLT).handled through its electronic trading system. SENSEX. we are ISO 27001:2005 certified.28 as of Feb.

which enables exchange members to use its existing infrastructure for transaction in MF schemes. 'Advanced Stock Reach'. and 'Members' y y y y y y y y Launched 'BSE SENSEX MOBILE STREAMER' .y Purchased of Marketplace Technologies in 2009 to enhance the in-house technology development capabilities of the BSE and allow faster time-to-market for new products Launched a reporting platform for corporate bonds christened the ICDM or Indian Corporate Debt Market Acquired a 15% stake in United Stock Exchange (USE) to drive the development and growth of the currency and interest rate derivatives markets Launched 'BSE StAR MF' Mutual fund trading platform. 'SENSEX View'. 'Market Galaxy'. BSE now offers AMFI Certification for Mutual Fund Advisors through BSE Training Institute (BTI) Co-location facilities for Algorithmic trading BSE also successfully launched the BSE IPO index and PSU website BSE revamped its website with wide range of new features like 'Live streaming quotes for SENSEX companies'.

NSE has . Currency futures and options.000 terminals. With more than 10 asset classes in offering. Derivatives Market and Currency Derivatives segments including equities. equities based derivatives. NSE was promoted by leading Financial Institutions at the behest of the Government of India and was incorporated in November 1992 as a tax-paying company unlike other stock exchanges in the country. NSE has taken many initiatives to strengthen the securities industry and provides several new products like Mini Nifty. electronic market. It recommended promotion of a National Stock Exchange by financial institutions (FIs) to provide access to investors from all across the country on an equal footing.The NSE The National Stock Exchange of India Limited has genesis in the report of the High Powered Study Group on Establishment of New Stock Exchanges. Long Dated Options and Mutual Fund Service System. The National Stock Exchange (NSE) operates a nationwide. 30. Based on the recommendations. Gold ETF and Retail Government Securities. Responding to market needs.500 locations in the country and supports more than 2. Today NSE network stretches to more than 1. offering trading in Capital Market. equity based ETFs.

providing ever growing trading & investment opportunities for investors. The NSE was set-up with the main objectives of: . including license agreements covering benchmark indexes for U. Mission of NSE NSE's mission is setting the agenda for change in the securities markets in India. and Indian equities with CME Group and has also signed a Memorandum of Understanding (MOU) with Singapore Exchange (SGX) to cooperate in the development of a market for India-linked products and services to be listed on SGX. The two exchanges also will look into a bilateral securities trading link to enable investors in one country to seamlessly trade on the other country¶s exchange. NSE has made its global presence felt with crosslisting arrangements. NSE is committed to operate a market ecosystem which is transparent and at the same time offers high levels of safety.S. FIX capabilities. colocation facility and mobile trading to cater to the evolving need of the market and various categories of market participants.introduced services like DMA. integrity and corporate governance.

ensuring equal access to investors all over the country through an appropriate communication network. Promoters NSE has been promoted by leading financial institutions. and meeting the current international standards of securities markets. providing a fair. NSE is more than a mere market facilitator. enabling shorter settlement cycles and book entry settlements systems. debt instruments and hybrids. The standards set by NSE in terms of market practices and technology have become industry benchmarks and are being emulated by other market participants. insurance companies and other financial intermediaries: y y y y y y y Industrial Development Bank of India Limited Industrial Finance Corporation of India Limited Life Insurance Corporation of India State Bank of India ICICI Bank Limited IL & FS Trust Company Limited Stock Holding Corporation of India Limited . efficient and transparent securities market to investors using electronic trading systems.y y y y y establishing a nation-wide trading facility for equities. It's that force which is guiding the industry towards new horizons and greater opportunities. banks.

the SEBI Act governs all the Stock Exchanges and the Securities Transactions in India. Relatively a brief act containing 35 sections. It consists of one Chairman and five members.y y y y y y y y y y y y y SBI Capital Markets Limited Bank of Baroda Canara Bank General Insurance Corporation of India National Insurance Company Limited The New India Assurance Company Limited The Oriental Insurance Company Limited United India Insurance Company Limited Punjab National Bank Oriental Bank of Commerce Indian Bank Union Bank of India Infrastructure Development Finance Company Ltd. A Board by the name of the Securities and Exchange Board of India (SEBI) was constituted under the SEBI Act to administer its provisions. Regulatory Authorities in Capital Markets Securities Exchange Board of India(SEBI) The Securities and Exchange Board of India Act. . 1992. 1992 is having retrospective effect and is deemed to have come into force on January 30.

also to register and regulate the working of collective investment schemes including mutual funds. underwriters. Section 11 of the SEBI Act provides that to protect the interest of investors in securities and to promote the development of and to regulate the securities market by such measures. merchant bankers.One each from the department of Finance and Law of the Central Government. to conduct . The Central Government reserves the right to terminate the services of the Chairman or any member of the Board. Calcutta and Madras. registrars to an issue. bankers to an issue. to prohibit fraudulent and unfair trade practices and insider trading. to regulate takeovers. sub-brokers.. The Board decides questions in the meeting by majority vote with the Chairman having a second or casting vote. It has given power to the Board to regulate the business in Stock Exchanges. portfolio managers. investment advisers. one from the Reserve Bank of India and two other persons and having its head office in Bombay and regional offices in Delhi. share transfer agents. etc. it is the duty of the Board. register and regulate the working of stock brokers. trustees of trust deeds.

All the stock brokers. trustees of trust deed. underwriters. The Board has the power to suspend or cancel such registration. bankers to an issue. portfolio managers. giving true and full account of its activities. . The Board is also obliged to submit a report to the Central Government each year. Any one of the aggrieved by the Board's decision is entitled to appeal to the Central Government.enquiries and audits of the stock exchanges. The Board is bound by the directions vested by the Central Government from time to time on questions of policy and the Central Government reserves the right to supersede the Board. registrars to an issue. investment advisers and such other intermediary who may be associated with the Securities Markets are to register with the Board under the provisions of the Act. sub-brokers. etc. merchant bankers. share transfer agents. policies and programmers. under Section 12 of the Sebi Act.

CHAPTER .4 .

Commodities. India¶ by Finance Asia and the µMost improved brokerage. Wealth management. India¶ in the Asia Money polls. Insurance. stock markets.COMPANY PROFILE The IIFL (India Infoline) group. Investment Banking.com. IIFL has been awarded the µBest Broker. Our research is available not just over the Internet but also on international wire services like Bloomberg. economy and business. Thomson First Call and Internet Securities where it is amongst one of the most read Indian brokers. Loans. A forerunner in the field of equity research. . IIFL¶s research is acknowledged by none other than Forbes as µBest of the Web¶ and µ«a must read for investors in Asia¶. India Infoline was also adjudged as µFastest Growing Equity Broking House . IIFL recently received an in-principle approval for Securities Trading and Clearing memberships from Singapore Exchange (SGX) paving the way for IIFL to become the first Indian brokerage to get a membership of the SGX. IIFL also received membership of the Colombo Stock Exchange becoming the first foreign broker to enter Sri Lanka. BSE: 532636) and its subsidiaries. Fixed deposits. IIFL offers advice and execution platform for the entire range of financial services covering products ranging from Equities and derivatives. GoI bonds and other small savings instruments.Large firms¶ by Dun & Bradstreet.indiainfoline. IIFL owns and manages the website. comprising the holding company. which is one of India¶s leading online destinations for personal finance. Asset management. India Infoline Ltd (NSE: INDIAINFO. www. is one of the leading players in the Indian financial services space.

over the phone and at our branches. key sectors and the economy Client included leading FIIs. All our offices are connected with the corporate office in Mumbai with cutting edge networking technology.500 business locations spread over more than 500 cities and towns across India facilitates the smooth acquisition and servicing of a large customer base. Achievements 1995 y Commenced operations as an Equity Research firm 1997 y y Launched research products of leading Indian companies. banks and companies 1999 y Launched www. over a variety of mediums viz.indiainfoline. online.com 2000 y y Launched online trading through www.5paisa. The group caters to a customer base of about a million customers.com Started distribution of life insurance and mutual fund 2003 y Launched proprietary trading platform Trader Terminal for retail customers 2004 .A network of over 2.

BSE 2006 y y Acquired membership of DGCX Commenced the lending business 2007 y y Commenced institutional equities business under IIFL Formed Singapore subsidiary. IIFL (Asia) Pte Ltd 2008 y y Launched IIFL Wealth Transitioned to insurance broking model 2009 y y y Acquired registration for Housing Finance SEBI in-principle approval for Mutual Fund Obtained Venture Capital license 2010 y y Received in-principle approval for membership of the Singapore Stock Exchange Received membership of the Colombo Stock Exchange Services y Broking in Equities and derivatives in NSE & BSE y Depository services .y y Acquired commodities broking license Launched Portfolio Management Service 2005 y Maiden IPO and listed on NSE.

.y Commodities trading on MCX & NCDEX y IPO Services y Portfolio management services Competitors The following listed companies are the competetors of IIFL  ICICI Web trade  Share Khan  India Bulls  Stock Holding Corporation of India  UTI Securities  Karvy Brokerage Limited  HDFC Securities  Fortis. etc .

5 .CHAPTER.

DATA ANALYSIS AND INTERPRETATION In derivatives market the contracts are begun in the first day of the month and ends on the last Thursday of the month. Banking. IT) The companies come under the category of the above segments respectively 1)Reliance Industries 2)State Bank of India 3)Tata Motors 4)Infosys Technologies The Following are the graphs of last five years price movement of the respective shares and the volume of trades in derivative segment for the last five years is as under The analysis of SBI is as under The Lot size of SBI is :125 shares/lot . Auto.e . Now we are going to study and analyze the key companies in four segments( i.Oil.

CRR Ratios 5. 6. Interest rates of small and medium term loans 3. 1. Policies of RBI 2. Agricultural Loans 4.Weight in sensex : 5.30 points Before we are going to study the banking sector. the following factors which will make a big impact on the movement of share prices of banking and financial sector. The following is the last five years share price movement of SBI is as under . Timely rules and regulations imposed by FERA & FEMA on banking and financial sector. Central govt rules and regulations on banking and financial sector.

5 times than the price in 2006-07. the put option contracts and call option contracts are under taken in case of SBI volumes of puts and calls are shown graphically as under. because of the LAYMAN BROTHERS of AMERICA puts the insolvency petition to the House of Lords it causes the instability in the international market. . now the market is grown abnormally in 2009-10 financial year. the market is collapsed in the year 2007-08 in this year internationally the stock markets are in declining trend. at that movement.4000 3500 3000 2500 2000 1500 1000 500 0 puts(Lakhs) calls(In Lakhs) Column1 From the above graph it is understood that the share price is increased 1.

30 25 20 share price Calls(Lakhs) 10 Column1 15 5 0 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 From the above it is clear that the put options are going steadily From the financial year 2006-2009 because of market in stabilityThe market is under gone bullish rally the puts and calls in the finanancial year 2009-10 almost equally.05 points . but the calls will be very high because of rally.Reliance Industries Lot Size is : 250 shares/lot Weightage in sensex : 12. 2. at this moment the contracted of puts will have to charge high premium simultaneously the call option holder will get good profits in by paying less premium.

9 2008-09 1149.00 622.26 2007-08 1337.3 2010-11 989 968.85 831.08 2009-10 1100 961.The table which shows the prices of the reliance industries for the last five years is as under .13 Yearly low 418.00 . Financial year 2005-06 Yearly high 680.45 668.5 2006-07 1548.

in derivatives segment the scripts fundamentals are very strong. Generally the volume of trades are under taken in sensex/nifty scripts and almost in A group selective scripts. it is in average trend. The rating is very high in case of reliance industries because of its strong fundamentals and volume in trading .1800 1600 1400 1200 1000 share price 800 Column1 Column2 600 400 200 0 From the above it is clear that the movement of share price of reliance is industries is not bullish or bearish. From the .

The risk factor in reliance industries is very low. both for puts and call options. it is a very good script for both the parties in options and futures segment. The following graph which shows the movement of volume of contracts in reliance industries in puts and calls in options segment. .above graph it is clear that it is very good script for derivatives.

90 80 70 60 50 Call(Lakhs) Puts(Lakhs) 40 Column1 30 20 10 0 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 From the above graph it is clear that we understood that the puts and calls are almost equal in case of reliance industries according to the price movement of the script. in case of market correction the volume of contracts in puts is very high. However the volume is even in case if reliance industries even in case of rally and correction in . In case of State bank of India the call options volume is very high at the time of rally in the market.

2010 Even though. socio. Dividend declared@150% on 10th Aug. economic & political factors may have a big influence in the . The history of tata motors for the last five years is shown as under 1.2009 5. Because.the market. TATA MOTORS The Lot size is :250 shares/lot Weightage in sensex : 3. Dividend declared@150% on June. Dividend declared@60% on 3rd Aug.01 points. this is one of the script in SENSEX with a weightage of 3.2008 4. the share prices may vary abnormally during the financial year 2008-09. Dividend declared@150% also issued the right shares @ 6:1 ratio on June 16th. the international. 2007 3.Dividend declared@ 130% on 23rdJjune.01 points it is one of the ancient Indian company in auto segment. 2006 2. the company fundamentals and dividend history is very good.

09 1305.88 646.88 The following graph which shows the price movement (technical graph) 1400 1200 1000 800 share price 600 400 200 0 Column1 Column2 . Financial Year 2006-07 2007-08 2008-09 2009-10 2010-2011 Yearly High 903.6 Yearly Low 716 593 170 202.58 742 739.movement of the share price. The following table which shows the prices of tata motors for the last five years.96 579.

38 8.58 Puts (In Millions) 8.48 11.08 7.According to the above technical graph. the trend is bullish from the financial year 2009-10. the put option is more profitable than call options.36 8. after the fourth quarter call option is more profitable than put option. In the financial year 209-10 in the derivative segment after the issue of rights.55 9. The risk is very less in the call option and getting of profits is very high up to February Month.92 10.38 7.36 9.53 . The volume of contracts for the last five years in derivatives of tata motors is shown below Financial year 2006-07 2007-08 2008-09 2009-10 2010-11 Calls(In Millions) 6.

The following is the graph of the volumetric movement of the puts and calls of tata motors during the last five financial years Is given below 14 12 10 8 calls(In Millions) Puts (In Millions) 6 Column1 4 2 0 2006-07 2007-08 2008-20092009-10 2010-11 .

03 points.03 points The Infosys technologies is one of the leading company in the stock market. The highest weightage company in the stock market after the reliance industries.05 1145.1 1322. Financial year 2006-07 2007-08 2008-09 2009-10 2010-11 Yearly High 2275 2140 1830 2722 3453 Yearly Low 1414.4 The graphical presentation of Infosys technologies share price . The table showing the price movement of Infosys technologies during the last five years of Yearly High¶s and Low¶s is given below. it declares10 times dividing during the last five years and gives one 1:1 bonus issue. Its weightage in the stock market is 10.95 1301.4.Infosys Technologies Lot size is : 125 shares/lot Weightage of the script is 10. The company is having very good fundamentals. it plays a vital role in the software industry also in the Indian stock market.85 2584.

is shown as under: Share price 4000 3500 3000 2500 2000 Share price 1500 1000 500 0 .

98 20.32 24.82 The above figures will be shown technically is shown as under: .73 31.48 Puts (In Millions) 16.58 18.38 22.50 26.56 18.Volumetric contracts following table: Financial year 2006-07 2007-08 2008-09 2009-10 2010-11 of the last five years is shown in the Calls (In Millions) 14.16 17.

in derivatives market we . From the financial year 2008-09. Conclusion We understood from the above study of the key companies from the key sectors in Indian industry.35 30 25 20 Calls 15 Puts 10 5 0 2006-07 2007-08 2008-09 2009-10 2010-11 The above graph which shows the call option contracts are growing exponentially from the financial year 2008-09 onwards. because the risk factor in the puts is very high. the put option contracts are under down trend.

and energy products such as oil and natural gas y y Adding some of the wide variety of derivative instruments available to a traditional portfolio of investments can provide . precious and industrial metals. the hedging technique is very useful. In the hands of knowledgeable investors. Benefits of derivatives Today's sophisticated international markets have helped foster the rapid growth in derivative instruments. such as an option or a short sale. What is meant by Hedging? An investment made in order to reduce the risk of adverse price movements in a security. by taking an offsetting position in a related security. derivatives can derive profit from: y Changes in interest rates and equity markets around the world Currency exchange rate shifts Changes in global supply and demand for commodities such as agricultural products.have to minimize the risk in derivatives.

the underlying assets can be geographically dispersed. debt default. Price Discovery Futures market prices depend on a continuous flow of information from around the world and require a high degree of transparency. and generate returns that are not correlated with more traditional investments. 1. help hedge against inflation and deflation. political situations. for example) impact supply and demand of assets (commodities in particular) ± and thus the current and future prices of the underlying asset on which the derivative contract is based. Second. land reclamation and environmental health. This process is known as price discovery. having many spot (or current) prices in existence. y With some futures markets. refugee displacement. This kind of information and the way people absorb it constantly changes the price of a commodity. the price of all future contracts serve as y .global diversification in financial instruments and currencies. The price of the contract with the shortest time to expiration often serves as a proxy for the underlying asset. The two most widely recognized benefits attributed to derivative instruments are price discovery and risk management. A broad range of factors (climatic conditions.

if investors think that the markets will be volatile. This process can fall into the categories of hedging and speculation. This concept will be explained later. .prices that can be accepted by those who trade the contracts in lieu of facing the risk of uncertain future prices. This is because options are a different form of hedging in that they protect investors against losses while allowing them to participate in the asset's gains. 2. Risk management is the process of identifying the desired level of risk. but in the way the market participants view the volatility of the markets. identifying the actual level of risk and altering the latter to equal the former. the prices of options contracts will increase. Risk Management This could be the most important purpose of the derivatives market. y Options also aid in price discovery. As we will see later. not in absolute price terms.

derivatives create market efficiency. Today. hedging and speculation strategies. investors will sell the richer asset and buy the cheaper one until prices reach equilibrium. along with derivatives. are useful tools or techniques that enable companies to more effectively manage risk. investors will be neutral as to which they choose. If there is a discrepancy between the prices. investors who want exposure to the S&P 500 can buy an S&P 500 stock index fund or replicate the fund by buying S&P 500 futures and investing in risk-free bonds. 3. If the cost of implementing these two strategies is the same. They Improve Market Efficiency for the Underlying Asset For example. Derivatives Also Help Reduce Market Transaction Costs Because derivatives are a form of insurance or risk .Hedging has traditionally been defined as a strategy for reducing the risk in holding a market position while speculation referred to taking a position in the way the markets will move. In this context. Either of these methods will give them exposure to the index without the expense of purchasing all the underlying assets in the S&P 500. 4.

the cost of trading in them has to be low or investors will not find it economically sound to purchase such "insurance" for their positions.management. .

CHAPTER-6 FINDINGS AND SUGGESTIONS .