CHAPTER - 1

INTRODUCTION

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 INTRODUCTION

Derivatives are financial contracts whose values are derived from the value of an
underlying primary financial instrument, commodity or index, such as: interest rates,
exchange rates, commodities, and equities. The International Monetary Fund defines
derivatives as "financial instruments that are linked to a specific financial instrument
or indicator or commodity and through which specific financial risks can be traded in
financial markets in their own right. The value of financial derivatives derives from
the price of an underlying item, such as asset or index. Unlike debt securities, no
principal is advanced to be repaid and no investment income accrues" While some
derivatives instruments may have very complex structures, all of them can be divided
into basic building blocks of options, forward contracts or some combination thereof.
Derivatives allow financial institutions and other participants to identify, isolate and
manage separately the market risks in financial instruments and commodities for the
purpose of hedging, speculating, arbitraging the price differences of the investments
and adjusting portfolio risks

The turnover of the stock exchange has been tremendously increasing from Last 10
years. The number of trades and the number of investors, who are participating, have
increased. The investors are willing to reduce their risk, so they are seeking for the
risk management tools.

There were no effective measures for the investors for hedging strategies in
trading on underlying assets. Prior to this there were some manipulations for the
traded derivative stocks which could not be resolved easily by the authorities.
The evaluation and analysis of the incomes from the derivatives also became complex
in the bearish and bullish markets.
Hence, the analysis will be made on the above stated problem and measures are to be
suggested to overcome the above stated problem

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 Derivatives are financial contracts whose values are derived from the value of
an underlying primary financial instrument, commodity or index, such as: interest
rates, exchange rates, commodities, and equities. The International Monetary Fund
defines derivatives as "financial instruments that are linked to a specific financial
instrument or indicator or commodity and through which specific financial risks can
be traded in financial markets in their own right. The value of financial derivatives
derives from the price of an underlying item, such as asset or index. Unlike debt
securities, no principal is advanced to be repaid and no investment income accrues"
While some derivatives instruments may have very complex structures, all of them
can be divided into basic building blocks of options, forward contracts or some
combination thereof. Derivatives allow financial institutions and other participants to
identify, isolate and manage separately the market risks in financial instruments and
commodities for the purpose of hedging, speculating, arbitraging the price differences
of the investments and adjusting portfolio risks.
The emergence of the market for derivatives products, most notable forwards,
futures, options and swaps can be traced back to the willingness of risk-averse
economic agents to guard themselves against uncertainties arising out of fluctuations
in asset prices. The financial markets can be subject to a very high degree of
volatility. Through the use of derivative products, it is possible to partially or fully
transfer price risks by locking-in asset prices. As instruments of risk management,
derivatives products generally do not influence the fluctuations in the underlying asset
prices. However, by locking-in asset prices, derivatives products minimize the impact
of fluctuations in asset prices on the profitability and cash flow situation of risk-
averse investors.
The need for a derivatives market

 The derivatives market performs a number of economic functions:

 They help in transferring risks from risk adverse people to risk oriented people
 They help in the discovery of future as well as current prices
 They catalyze entrepreneurial activity
 They increase the volume traded in markets because of participation of risk
adverse people in greater numbers

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  They increase savings and investment in the long run

Meaning of Derivatives
The term "Derivative" indicates that it has no independent value, i.e. its value
is entirely "derived" from the value of the underlying asset. The underlying asset can
be securities, commodities, bullion, currency, live stock or anything else. In other
words, Derivative means a forward, future, option or any other hybrid contract of pre
determined fixed duration, linked for the purpose of contract fulfillment to the value
of a specified real or financial asset or to an index of securities.
Derivative is a product/contract which does not have any value on its own i.e.
it derives its value from some underlying. As the name suggests, derivative contracts
are those contracts which derives their value from the price of something else.
Typically derivatives contracts derive their value from underlying cash market
Derivatives are the Investments that derive their value from underlying assets such as
currencies, treasury bills, and bonds or are linked to indices such as a stock market
index that can be used to speculate on market movements or to protect investments
against major swings in market prices
Derivatives are the financial contracts that derive their value from an
underlying asset or index, such as an interest rate or foreign currency exchange rate
which can be used to manage risk, reduce cost and enhance returns
As the name suggests, derivative contracts are those contracts which derives
their value from the price of something else. Typically derivatives contracts derive
their value from underlying cash market for e.g. derivative of the Karvy Stock
Broking , will derive its value from the cash market price of Karvy Stock Broking .
DEFINITIONS OF DERIVATIVES
“Derivatives are the Investments that derive their value from underlying assets
such as currencies, treasury bills, and bonds or are linked to indices such as a stock
market index that can be used to speculate on market movements or to protect
investments against major swings in market prices”.
“Derivatives are the financial contracts that derive their value from an
underlying asset or index, such as an interest rate or foreign currency exchange rate
which can be used to manage risk, reduce cost and enhance returns”.

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 “Derivatives are the Trades that are constructed or derived from another
security (stock, bond, currency, or commodity) that can be both exchange and non-
exchange traded (known as Over the Counter or OTC)”.
Derivatives are the financial contracts the value of which depends on the
value of the underlying instrument - commodity, bond, equity, currency or a
combination.
Derivatives are financial instruments whose value changes in response to an
underlying variable, that require little or no net initial investment and are settled at a
future date. With Securities Laws (Second Amendment) Act, 1999, Derivatives has
been included in the definition of Securities. The term Derivative has been defined in
Securities Contracts (Regulations) Act, as:-
A Derivative includes: -
a. a security derived from a debt instrument, share, loan, whether secured
or unsecured, risk instrument or contract for differences or any other
form of security;
b. a contract which derives its value from the prices, or index of prices, of
underlying securities;
 Futures Contract
Futures Contract means a legally binding agreement to buy or sell the
underlying security on a future date. Future contracts are the organized/standardized
contracts in terms of quantity, quality (in case of commodities), delivery time and
place for settlement on any date in future. The contract expires on a pre-specified date
which is called the expiry date of the contract. On expiry, futures can be settled by
delivery of the underlying asset or cash. Cash settlement enables the settlement of
obligations arising out of the future/option contract in cash.
 An Option contract
Options Contract is a type of Derivatives Contract which gives the
buyer/holder of the contract the right (but not the obligation) to buy/sell the
underlying asset at a predetermined price within or at end of a specified period. The
buyer / holder of the option purchase the right from the seller/writer for a
consideration which is called the premium. The seller/writer of an option is obligated
to settle the option as per the terms of the contract when the buyer/holder exercises his
right. The underlying asset could include securities, an index of prices of securities
etc.
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 Under Securities Contracts (Regulations) Act, 1956 options on
securities has been defined as "option in securities" means a contract for the purchase
or sale of a right to buy or sell, or a right to buy and sell, securities in future, and
includes a teji, a mandi, a teji mandi, a galli, a put, a call or a put and call in
securities;

NOTE: An Option to buy is called Call option and option to sell is called Put option.
As in the case of futures contracts, option contracts can be also be settled by
delivery of the underlying asset or cash. However, unlike futures cash settlement in
option contract entails paying/receiving the difference between the strike
price/exercise price and the price of the underlying asset either at the time of expiry of
the contract or at the time of exercise / assignment of the option contract.

 The Index Futures and Index Option Contracts

Futures contract based on an index i.e. the underlying asset is the index, are
known as Index Futures Contracts. For example, futures contract on NIFTY Index and
BSE-30 Index. These contracts derive their value from the value of the underlying
index.
Similarly, the options contracts, which are based on some index, are known as
Index options contract. However, unlike Index Futures, the buyer of Index Option
Contracts has only the right but not the obligation to buy / sell the underlying index on
expiry. Index Option Contracts are generally European Style options i.e. they can be
exercised / assigned only on the expiry date.
An index in turn derives its value from the prices of securities that constitute the
index and is created to represent the sentiments of the market as a whole or of a
particular sector of the economy. Indices that represent the whole market are broad
based indices and those that represent a particular sector are sect oral indices.

In the beginning futures and options were permitted only on S&P Nifty and
BSE Sensex. Subsequently, sect oral indices were also permitted for derivatives
trading subject to fulfilling the eligibility criteria. Derivative contracts may be
permitted on an index if 80% of the index constituents are individually eligible for
derivatives trading. The index is required to fulfill the eligibility criteria even after
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derivatives trading on the index have begun. If the index does not fulfill the criteria
for 3 consecutive months, then derivative contracts on such index would be
discontinued. By its very nature, index cannot be delivered on maturity of the Index
futures or Index option contracts therefore, these contracts are essentially cash settled
on Expiry.
GENERAL STRUCTURE OF DERIVATIVES
(CHART 1.1)

DERIVATIVES

OPTIONS
FUTURES  Put Option FORWARDS
 Call Option

DIFFERENT TYPES OF DERIVATIVES

The following are the various types of derivatives. They are:
FUTURES:
A futures contract is an agreement between two parties to buy or sell an asset
at a certain time in the future at a certain price. Futures contracts are special types of
forward contracts in the sense that the former are standardized exchange-traded
contracts.

F=S*e(r-q)t
F = future price
S = spot price
Q = dividend yeild
R = risk free rate

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 T = time

OPTIONS:
Options are of two types-calls and puts. Calls give the buyer the right but not
the obligation to buy a given quantity of the underlying asset, at a given price on or
before a given future date. Puts give the buyer the right, but not the obligation to sell
a given quantity of the underlying asset at a given price on or before a given date.

FORWARDS:
A forward contract is a customized contract between two entities, where
settlement takes place on a specific date in the future at today’s pre-agreed price.
F=S*e(rt)
F= forward price
S= spotprice
R= risk free rate
T= time
WARRANTS:
Options generally have lives of up to one year; the majority of options traded
on options exchanges having a maximum maturity of nine months. Longer-dated
options are called warrants and are generally traded Over-the-counter.

LEAPS:
The acronym LEAPS means Long-Term Equity Anticipation Securities. These
are options having a maturity of up to three years.
BASKETS:
Basket options are options on portfolio of underlying assets. The underlying
asset is usually a moving average of a basket of assets. Equity index options are a
form of basket options.

SWAPS:

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 Swaps are private agreement between two parties to exchange cash flows in
the future according to a pre arranged formula. They can be regarded as portfolios of
forward contracts. The two commonly used swaps are:
Interest rate swaps:
The entail swapping only the interest related cash flows between the parties in
the same currency.
Currency swaps:
These entail swapping both principal and interest between the parties, with
the cashflows in one direction being in a different currency than those in the opposite
direction.

THE DERIVATIVES OFFERS THE FOLLOWING USAGES:

Speculation: One can take a view of the market and buy or sell derivatives
accordingly at a fraction of a total cost.
Hedging: It reduces the risk associated with market exposure by taking a counter
position in the derivatives market.
Arbitrage: It offers an opportunity to take an advantage of the price difference
between the derivatives market and the cash market.
EVOLUTION OF COMMODITIES DERIVATIVES MARKET IN INDIA
The Indian experience in commodity futures market dates back to thousands
of years. References to such markets in India appear in Kautialya’s ‘Arthasastra’. The
words, “Teji”, “Mandi”, “Gali”, and “Phatak” have been commonly heard in Indian
markets for centuries.
The first organized futures market was however established in 1875
under the aegis of the Bombay Cotton Trade Association to trade in cotton
contracts. Derivatives trading were then spread to oilseeds, jute and food grains.
The derivatives trading in India however did not have uninterrupted legal
approval. By the Second World War, i.e., between the 1920’s &1940’s, futures
trading in organized form had commenced in a number of commodities such as
– cotton, groundnut, groundnut oil, raw jute, jute goods, castor seed, wheat, rice,
sugar, precious metals like gold and silver. During the Second World War
futures trading was prohibited under Defense of India Rules.

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 After independence, the subject of futures trading was placed in the
Union list, and Forward Contracts (Regulation) Act, 1952 was enacted. Futures
trading in commodities particularly, cotton, oilseeds and bullion, was at its peak
during this period. However following the scarcity in various commodities,
futures trading in most commodities were prohibited in mid-sixties. There was a
time when trading was permitted only two minor commodities, viz., pepper and
turmeric.
Deregulation and liberalization following the forex crisis in early 1990s,
also triggered policy changes leading to re-introduction of futures trading in
commodities in India. The growing realization of imminent globalization under
the WTO regime and non-sustainability of the Government support to
commodity sector led the Government to explore the alternative of market-based
mechanism, viz., futures markets, to   protect the commodity sector from price-
volatility. In April, 1999 the Government took a landmark decision to remove
all the commodities from the restrictive list. Food-grains, pulses and bullion
were not exceptions.
The long spell of prohibition had stunted growth and modernization of the
surviving traditional commodity exchanges. Therefore, along with liberalization
of commodity futures, the Government initiated steps to cajole and incentives
the existing Exchanges to modernize their systems and structures. Faced with
the grudging reluctance to modernize and slow pace of introduction of fair and
transparent structures by the existing Exchanges, Government allowed setting
up of new modern, demutualised Nation-wide Multi-commodity Exchanges with
investment support by public and private institutions. National Multi
Commodity Exchange of India Ltd. (NMCE) was the first such exchange to be
granted permanent recognition by the Government.
STRUCTURE OF DERIVATIVE MARKETS IN INDIA
Derivative trading in India takes can place either on a separate and
independent Derivative Exchange or on a separate segment of an existing Stock
Exchange. Derivative Exchange/Segment function as a Self-Regulatory Organization
(SRO) and SEBI acts as the oversight regulator. The clearing & settlement of all
trades on the Derivative Exchange/Segment would have to be through a Clearing
Corporation/House, which is independent in governance and membership from the
Derivative Exchange/Segment.Everyone talks about derivatives these days.
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Derivative products have been around for a long time. Derivatives first came from
Japanese rice markets. As early as the 1650s, dealings resembling present day
derivative market transactions were seen in rice markets in Osaka, Japan.
The first leap towards an organized derivatives market came in 1848,
when the Chicago Board of Trade, the largest derivative exchange in the world, was
established. Derivatives markets broadly can be classified into two categories, those
that are traded on the exchange and they traded one to one or 'over the counter'. They
are hence known as:
 Exchange Traded Derivatives
 OTC Derivatives (Over The Counter)
 OTC Equity Derivatives
Traditionally equity derivatives have a long history in India in the OTC market.
Options of various kinds (called Teji and Mandi and Fatak) in un-organized markets
were traded as early as 1900 in Mumbai. The Securities Contract and Regulatory
Authority (SCRA) however banned all kind of options in 1956. The prohibition on
options in SCRA was removed in 1995. Foreign currency options in currency pairs
other than Rupee were the first options permitted by RBI. The Reserve Bank of India
has permitted options, interest rate swaps, currency swaps and other risk reductions
OTC derivative products. The term "Derivative" indicates that it has no independent
value, i.e. its value is entirely "derived" from the value of the underlying asset.
The underlying asset can be securities, commodities, bullion, currency, live stock or
anything else. In other words, Derivative means a forward, future, option or any other
hybrid contract of pre determined fixed duration, linked for the purpose of contract
fulfillment to the value of a specified real or financial asset or to an index of
securities.
Derivative trading in India takes can place either on a separate and independent
Derivative Exchange or on a separate segment of an existing Stock Exchange.
Derivative Exchange/Segment function as a Self-Regulatory Organisation and SEBI
acts as the oversight regulator. The clearing & settlement of all trades on the
Derivative Exchange/Segment would have to be through a Clearing
Corporation/House, which is independent in governance and membership from the
Derivative Exchange/Segment.
With the amendment in the definition of 'securities' under SC(R)A (to include
derivative contracts in the definition of securities), derivatives trading takes place
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under the provisions of the Securities Contracts (Regulation) Act, 1956 and the
Securities and Exchange Board of India Act, 1992..Dr. L.C Gupta Committee
constituted by Sebi had laid down the regulatory framework for derivative trading in
India. SEBI has also framed suggestive bye-law for Derivative Exchanges/Segments
and their Clearing Corporation/House which lay's down the provisions for trading and
settlement of derivative contracts.

The Rules, Bye-laws & Regulations of the Derivative Segment of the Exchanges
and their Clearing Corporation/House have to be framed in line with the suggestive
Bye-laws. Sebi has also laid the eligibility conditions for Derivative
Exchange/Segment and its Clearing Corporation/House.The eligibility conditions
have been framed to ensure that Derivative Exchange/Segment & Clearing
Corporation/House provide a transparent trading environment, safety & integrity and
provide facilities for redressal of investor grievances. Factors generally attributed as
the major driving force behind growth of financial derivatives are:
(a) Increased Volatility in asset prices in financial markets,
(b) Increased integration of national financial markets with the international markets,
(c) Marked improvement in communication facilities and sharp decline in their costs,
(d) Development of more sophisticated risk management tools, providing economic
agents a wider choice of risk management strategies, and
(e) Innovations in the derivatives markets, which optimally combine the risks and
returns over a large number of financial assets, leading to higher returns, reduced risk
as well as transaction costs as compared to individual financial assets.

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FUTURES CONTRACT

Futures Contract means a legally binding agreement to buy or sell the

underlying security on a future date. Future contracts are the organized/standardized
contracts in terms of quantity, quality (in case of commodities), delivery time and
place for settlement on any date in future. The contract expires on a pre-specified date
which is called the expiry date of the contract. On expiry, futures can be settled by
delivery of the underlying asset or cash. Cash settlement enables the settlement of
obligations arising out of the future/option contract in cash. A futures contract is an
agreement between two parties to buy or sell an asset at a certain time in the future at
a certain price. Futures contracts are special types of forward contracts in the sense
that the former are standardized exchange-traded contracts.

FUTURES FUNCTIONALITY
Futures are derivative contracts to buy or sell a specified quantity or
underlying assets at an agreed price, on or before a specified time. They are
standardized forward contracts, which are traded on the exchanges mainly BSE &
NSE. Since they are traded on the exchange on electronic platform, it provides them
transparency, liquidity, anonymity of trades, and also eliminates the counter party risk
due to guarantee Provided by the exchange.
Derivative market is a leverage market since Investor/Trader has to pay only
fraction of total value of the contract as a margin to his broker, who in turn has to pay
to the exchange, For example if Rs. 100/- is required to be deployed in cash market
for taking a delivery the same stock if available in derivatives market can be bought
by paying an average margin of around15%
Example: say an investor has a bullish view on Karvy Stock Broking and
hence buys a Karvy Stock Broking in a futures market at a start of current month at
Rs.750/- wherein price in cash market is Rs.747/-.He has to pay 15% margin on
Rs.750/- i.e. approx 112.5 per share to his broker as a margin, unlike entire Rs.747/-
for buying the same share in cash market. Now say for e.g. on the next day the price
of the Karvy Stock Broking in the futures market moves uptoRs.760/- then he will be
credited Rs.10/- in his account (760-750). Supposing next day price falls by Rs.5/- to
Rs.755/-he will be debited by Rs.5/- in his account.

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ARRIVAL OF FUTURE PRICE
A futures contract is an agreement between two parties to buy or sell an asset
at a certain time in the future at a certain price. Futures contracts are special types of
forward contracts in the sense that the former are standardized exchange-traded
contracts.
The pricing of the futures depends on cash market price and the cost of carry.
The Cost of carry is the sum of all costs incurred if a similar position is taken in cash
market and carried to maturity of the futures contract less any revenue which may
result in this period. Generally the cost comprises interest while revenue comprises of
dividend. Say for e.g. the interstate is 12% and the dividend declared by the company
is say0.50ps. on the stock that is quoting at Rs.100/- in cash market then the
theoretical value of this stock in the futures market should be 100 + 1 – 0.50 = 100.50.

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BASIS
The difference between spot price and futures price is known as basis.
Although the spot price and futures price generally move in line with each other, the
basis is never constant. It gradually decreases with time and on expiry since futures
and cash prices becomes equal basis becomes ‘zero’.

AN OPTION CONTRACT
Options Contract is a type of Derivatives Contract which gives the
buyer/holder of the contract the right (but not the obligation) to buy/sell the
underlying asset at a predetermined price within or at end of a specified period. The
buyer / holder of the option purchase the right from the seller/writer for a
consideration which is called the premium. The seller/writer of an option is obligated
to settle the option as per the terms of the contract when the buyer/holder exercises his
right. The underlying asset could include securities, an index of prices of securities
etc.

OPTIONS AND THEIR FUNCTIONS

Options are derivative contracts where the person gets aright (but not
obligation) to buy or sell a specified quantity of the underlying asset at an agreed
price (strike price) on or before the specified future date (expiration date) at an agreed
Price (premium).
Example
Suppose an investor is bullish on Karvy Stock Broking at the start of the
current month when the price is Rs.750/- say for e.g. he is expecting a price of
Rs.850/- by end of the month. Although he is expecting an upward price movement,
he wants to limit his downside risk and hence he buys an option contract of Rs.750/-
(strike price) for a price of say Rs.30/- (premium)By paying Rs.30/- what he gets is
right (not an obligation) to buy Karvy Stock Broking at any time before the month
end at Rs.750/-only, irrespective of cash market price. Obviously he will exercise his
right if cash market price is higher than Rs.750/- any time before expiry of the
contract.

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The different types of Options
There are basically two types of option contracts.
(a) Call Options
(b) Put Options
CALL OPTIONS:
A call option gives the holder (option buyer), the right to buy a specified
quantity of the underlying asset at a strike price on or before expiration date. The
seller however, has the obligation to sell the underlying asset if the buyer of the call
option decides to exercise his option to buy.
PUT OPTIONS:
A Put Option gives the holder (i.e. the buyer), the right to sell a specified
quantity of the underlying asset at a strike price on or before an expiry date. The seller
of the put option however has the obligation to buy the underlying asset at the strike
price if the buyer decides to exercise his option to sell.
The different style of Options
Broadly there are two styles of options, namely American style option and
European style option. An American style option is one, which can be exercised by
the buyer on or before the expiration date, i.e anytime between the time of purchase
and the time of its expiry. The European kind of option is one, which can be exercised
by the buyer on the expiration day only and not anytime before that. In India, stock
options are of the American style while index options are of the European style.

FACTORS THAT DETERMINE OPTION PRICES (PREMIUM)

There are two types of factors that affect the value of the option (premium):
Quantifiable factors, they are strike price, underlying asset price, the volatility of the
underlying asset, the time to expiration and the risk free interest rate:
Non-quantifiable factors, they are market participants varying estimates of
the underlying assets future volatility and future performance.
Difference between Futures and Options
The significant differences between them are as under:
In case of futures, both the parties have an obligation to buy/sell the
underlying asset. Whereas in the case of options the buyer enjoys the right and not the
obligation, to buy or sell the underlying asset. In case of Futures the risk/return
profile of both buyers and sellers is equal whereas in case of options the buyer has
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limited risk and unlimited gain potential and seller of the option has a unlimited risk
and limited gain potential. Future prices are mainly affected by the prices of
underlying asset while option prices are affected by not only the prices of underlying
asset, but also by volatility and time to expiry.

Trading of Futures & Option before the expiry date

Once the position is taken in futures, it can be squared off by taking a reverse
position any time before the expiry of the contract. Similarly once the position is
taken in the option contract; it can be squared off by taking a reverse position any
time before the expiry.
Various derivative Strategies and their utilization
Option strategies are various combinations of futures and options in such a
manner that it offers optimal risk to reward ratio based on the view of a market player
for e.g. an investor having a moderately bullish view on a market can buy a stock or
futures and correspondingly sell call of higher price at some premium and thus not
only participate in rally but also earn some premium income. This is called a covered
call writing. Bullish and bearish option spread, Strangle, straddle are few of other
option strategies which can be utilized bythe market players.
Index Futures and its utilization
Index futures are the futures on index. Currently on NSE we have 3 types of
index futures. They are Nifty futures, CNX IT futures and Bank Nifty futures. While
Nifty future is future on cash Nifty CNX IT and Bank Nifty are futures on IT and
bank index respectively. An investor can utilize these futures as a hedging tool or for
a trading based on his view about that index.
The Uses/Advantages of Derivatives
Versatility: The major advantage of derivatives is their versatility. An investor
can use derivative in a most
Conservative to most risky manner as his risk profile dictates.
High Leverage: Derivative contracts enable the investor to take an exposure
to the full value of underlying shares for a fraction of its value in the form of margin.
High Liquidity: Derivative contracts offers very high liquidity compared to
cash market.

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CONCEPT OF BASIS IN FUTURES MARKET
BASIS: The difference between spot price and futures price is known as basis.
Although the spot price and futures price generally move in line with each other, the
basis is never constant. It gradually decreases with time and on expiry since futures
and cash prices becomes equal basis becomes ‘zero’.
 Basis is defined as the difference between cash and futures prices:
Basis = Cash prices - Future prices.
 Basis can be either positive or negative (in Index futures, basis generally is
negative).
 Basis may change its sign several times during the life of the contract.
 Basis turns to zero at maturity of the futures contract i.e. both cash and future
prices converge at maturity.

         
(Chart 4.1)
Life of the contract

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Operators in the derivatives market
 Hedgers - Operators, who want to transfer a risk component of their portfolio.
 Speculators - Operators, who intentionally take the risk from hedgers in
pursuit of profit.
 Arbitrageurs - Operators who operate in the different markets
simultaneously, in pursuit of profit and eliminate mis-pricing.
PRICING FUTURES
Cost and carry model of Futures pricing
 Fair price = Spot price + Cost of carry - Inflows
 FPtT = CPt + CPt * (RtT - DtT) * (T-t)/365
 FPtT - Fair price of the asset at time t for time T.
 CPt - Cash price of the asset.
 RtT - Interest rate at time t for the period up to T.
 DtT - Inflows in terms of dividend or interest between t and T.
 Cost of carry = Financing cost, Storage cost and insurance cost.
 If Futures price > Fair price; Buy in the cash market and simultaneously sell in
the futures market.
Set of assumptions
 No seasonal demand and supply in the underlying asset.
 Storability of the underlying asset is not a problem.
 The underlying asset can be sold short.
 No transaction cost; No taxes.
 No margin requirements, and so the analysis relates to a forward contract,
rather than a futures contract.
INDEX FUTURES AND COST AND CARRY MODEL
In the normal market, relationship between cash and future indices is
described by the cost and carry model of futures pricing.
Expectancy Model of Futures pricing

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 (Chart4.2)
S - Spot prices.
F - Future prices.
E(S) - Expected Spot prices.
 Expectancy model says that many a times it is not the relationship between the
fair price and future price but the expected spot and future price which leads
the market. This happens mainly when underlying is not storable or may not
be sold short. For instance in commodities market.
 E(S) can be above or below the current spot prices. (This reflects market’s
expectations)
 Contagion market- Market when Future prices are above cash prices.
 Backwardation market - Market when future prices are below cash prices.
RELATIONSHIP BETWEEN FORWARD & FUTURE MARKETS
 Analyze the different dimensions of Forward and Future Contracts:
(Risk; Liquidity; Leverage; Margining etc....)
 Assign value to each factor to arrive at the contract price.
(Perception plays a crucial role in price determination)
o Any substantial difference in the Forward and Future prices will trigger
arbitrage.

20
RISK MANAGEMENT THROUGH FUTURES
Risk managing through Futures
 Basic objective of introduction of futures is to manage the price risk.
 Index futures are used to manage the systemic risk, vested in the investment in
securities.
SOME SPECIFIC USES OF INDEX FUTURES
 Portfolio Restructuring - An act of increasing or decreasing the equity
exposure of a portfolio, quickly, with the help of Index Futures.
 Index Funds - These are the funds which imitate/replicate index with an
objective to generate the return equivalent to the Index. This is called Passive
Investment Strategy.
SPECULATION IN THE FUTURES MARKET
 Speculation is all about taking position in the futures market without having
the underlying. Speculators operate in the market with motive to make money.
They take:
o Naked positions - Position in any future contract.
o Spread positions - Opposite positions in two future contracts. This is a
conservative speculative strategy.
Speculators bring liquidity to the system, provide insurance to the hedgers and
facilitate the price discovery in the market.
ARBITRAGEURS IN FUTURES MARKET
Arbitrageurs facilitate the alignment of prices among different markets
through operating in them simultaneously.
MARGINING IN FUTURES MARKET
 Whole system dwells on margins:
o Daily Margins
o Initial Margins
 Compulsory collection of margins from clients including institutions.
 Collection of margins on the Portfolio basis not allowed by L. C. Gupta
committee.

21
Daily Margins
 Daily margins are collected to cover the losses which have already taken place
on open positions.
o Price for daily settlement - Closing price of futures index.
o Price for final settlement - Closing price of cash index.
 Daily margins should be received by CC/CH and/or exchange from its
members before the market opens for the trading on the very next day.
 Daily margins would be paid only in cash.
Initial Margins
 Margins to cover the potential losses for one day.
 To be collected on the basis of value at risk at 99% of the days.
 Different initial margins on:
o Naked long and short positions.
o Spread positions.

Naked positions
Short positions 100 [exp (3st) - 1]
Long positions 100 [1 - exp (3rd)]
Where (st)2 = l(st-1)2 + (1-l)(rt2)
 st is today’s volatility estimates.
 st-1 is the volatility estimates on the previous trading day.
 l is decay factor which determines how rapidly volatility estimates change and
is taken as 0.94 by Prof. J. R. Verma.
 rt is the return on the trading day [log(It/It-1)]
 Because volatility estimate st changes everyday, Initial margin on open
position will change every day.
(For first 6 months of futures trading, minimum initial margin on naked
positions shall be 5%)
Spread positions
 Flat rate of 0.5% per month of spread on the far month contract.
 Min. margin of 1% and maximum margin of 3% on spread positions.
 A calendar spread would be treated as open position in the far month contract
as the near month contract approaches maturity.

22
  Over the last five days of trading of the near month contract, following
percentages of the spread shall be treated as naked position in the far month
contract:
o 100% on the day of expiry
o 80% one day before the expiry
o 60% two days before the expiry
o 40% three days before the expiry
o 20% four days before the expiry
Liquid assets and Broker’s net worth
 Liquid assets
o Cash, fixed deposits, bank guarantee, government securities and other
approved securities.
o 50% of Liquid assets must be cash or cash equivalents. Cash equivalents
means cash, fixed deposits, bank guarantee and government securities.
 Liquid net-worth = Liquid asset - Initial margin
 Continuous requirement for a clearing member:
o Minimum liquid net-worth of Rs. 50 Lacs.
o The mark to market value of gross open position shall not exceed 33.33 times
of member’s liquid net worth.
Basis for calculation of Gross Exposure:
 For the purpose of the exposure limit, a calendar spread shall be regarded as
an open position of one third of the mark to market value of the far month
contract.
 As the near month contract approaches expiry, the spread shall be treated as a
naked position in the far month contract in the same manner.

23
Margining in Futures market
Initial Margin (Value at risk at 99% of the days)
Daily Margin
Special Margins

(Chart4.3
)
 Striking an intelligent balance between safety and liquidity while
determining margins is a million dollar point.
Position limits in Index Futures
Customer level
 No position limit. Disclosure to exchange, if position of people acting in
concert is 15% or more of open interest.

Trading member level

 15% of open interest or 100 crore whichever is higher.
 To be reviewed after 6 months of futures trading.
Clearing member level
 No separate position limit. However, C.M. should ensure that his own
positions (if C.M. is a T.M. also) and the positions of the T.Ms. clearing
through him are within the limits specified above for T.M.
 Market level
 No limit. To be reviewed after 6 months of trading in futures.

24
Expected advantages of derivatives to the cash market
 Higher liquidity
o Availability of risk management products attracts more investors to the cash
market.
o Arbitrage between cash and futures markets fetches additional business to cash
market.
 Improvement in delivery based business.
 Lesser volatility
 Improved price discovery.
Reasons for making a contract click
 Risk in the underlying market.
 Presence of both hedgers and speculators in the system.
 Right product specifications.
 Proper margining.
Futures
 Multiple indices trading on the same exchange even the same index with
different contract designs
 Dedicated funds -
o Future funds
o Options funds

25
 CHAPTER - 2
RESEARCH
METHODOLOGY

26
The following are the steps involved in the study.
Selection of the scrip:-
The scrip selection is done on a random and the scrip selected is
KARVY STOCK BROKING . The lot is 200. Profitability position of the futures
buyers and seller and also the option holder and option writers is studied.

Method of Data Collection:-

The data of the KARVY STOCK BROKING has been collected from the internet
site www.nseindia.com. The data consist of the February-March Contract and period
of Data collection is from 29rd FEBRUARY 2016 – 27th MARCH 2017.

Analysis:-
The analysis consist of the tabulation of the data assessing the profitability Positions
of the futures buyers and sellers and also option holder and the option Writer,
representing the data with graphs and making the interpretation using Data.
The data for the present study is collected from primary and secondary sources.

PRIMARY SOURCES: The primary sources of data collection is done by personal

discussions with the assistant branch manager, relationship manager and assistant
relationship manager and also through the contacts with the other staff members of
the organization of Karvy Stock Broking Securities Limited.

SECONDARY SOURCES: The secondary sources of the data is collected through

the official website of the National Stock Exchange of India www.nseindia.com, and
through the articles collected from various news papers, journals and magazines.

Period of the Study for 45 Days (2016-2017)

27
NEED FOR THE STUDY
Derivatives may be traded for a variety of reasons:
 They help in discovery of futures as well as current prices.
 They catalyze entrepreneurial activity.
 They increase savings and investments in the long run.
 They transfer risk from risk adverse people to risk oriented
people.
 As the participation of risk adverse people is more the volume
traded is also increased.

28
OBJECTIVES OF THE STUDY

 To analyze the derivatives market in India.

 To analyze the operations of futures and options.
 To find the profit/loss position of futures buyer and also the option writer and
option holder.
 To study about risk management with the help of derivatives.
 To study and analyze the purpose of hedging in futures and options in the
derivatives market.
 To make suggestions to the authorities concerned regarding the effective usage
of the derivatives.

29
SCOPE OF THE STUDY

The Study is limited to “Derivatives” with special reference to futures and Option
in the Indian context and the data had been taken through KARVY STOCK
BROKING as a representative sample for the study. Any alteration may arise to the
actual situations. The research study is only made as an attempt to evaluate
derivatives market only in specified Organization. The study is based only on the
Indian perspective of derivatives markets.

30
LIMITATIONS OF THE STUDY
The following are the limitations of this study.
 The scrip chosen for analysis is KARVY STOCK BROKING and the contract
taken is March 2017 ending one-month contract.
 The data collected is completely restricted to the KARVY STOCK BROKING
of March 2017 hence this analysis is restricted only to the selected company,
and is not applicable to any other company of same kind and nature.
 As the futures and options are only taken for making the analysis and the
outcome may not be applicable to other components of derivatives.
 A full study of the hedging strategies may not be overviewed

31
CHAPTER - 3
REVIEW OF
LITERATURE

32
 REVIEW OF LITERATURE
Review was done by referring previous studies, articles and books to know the areas
of study (2006), he define that a sound business analysis tells others a lot about good
sense and understanding of the difficulties that a company will face. We have to make
sure that people know exactly how we arrived to the final financial positions. We
have to show the calculation but we have to avoid anything that is too mathematical.
A business performance analysis indicates the further growth and the expansion. It
gives a physiological advantage to the employees and also a planning advantage.

I.M.Pandey (2007),had stated that the financial statements contain information about
the financial consequences and sources and uses of financial resources, one should be
able to say whether the financial condition of a firm is good or bad; whether it is
improving or deteriorating. One can relate the financial variables given in financial
statements in a meaningful way which will suggest the actions which one may have to
initiate to improve the firm’s financial condition.

Chidambaram RAMESHKUMAR & DR. N. ANBUMANI (2006),he argue that

Ratio Analysis enables owner/manager to spot trends in a business and to compare its
performance and condition with the average performance of businesses in
the same industry. To do this compare your ratios with the average of businesses
similar to yours and compare your own ratios for several successive years, watching
especially for any unfavourable trends that may be starting. Ratio analysis may
provide the all-important early warning indications that allow you to solve your
business problems before your business is destroyed by them.

Jae K.Shim & Joel G.Siegel (1999), had explained THATTHE financial statement of
an enterprise present the raw data of its assets, liabilities and equities in the balance
sheet and its revenue and expenses in the income statement. Without subjecting these
to data analysis, many fallacious conclusions might be drawn concerning the financial
condition of the enterprise. Financial statement analysis is undertaken by creditors,
investors and other financial statement users in order to determine the credit
worthiness and earning potential of an entity.

33
Susan Ward (2008),emphasis that financial analysis using ratios between key values
help investors copewith the massive amount of numbers in company financial
statements. For example, they can compute the percentage of net profit a company is
generating on the funds it has deployed. All other things remaining the same, a
company that earns a higher percentage of profit compared to other companies is a
better investment option.

M Y Khan & P K Jain (2011), have explained that the financial statements provide a
summarized view of the financial position and operations of a firm. Therefore, much
can be learnt about a firm from a careful examination of its financial statements as
invaluable documents / performance reports. The analysis of financial statements is,
thus, an important aid to financial analysis.
Elizabeth Duncan and Elliott (2004),had stated that the paper in the title of
efficiency, customer service and financing performance among Australian financial
institutions showed that all financial performance measures as interest margin, return
on assets, and capital adequacy are positively correlated with customer service quality
scores.

In order to examine the lead-lag relation between the underlying spot market and the
futures market, the basic data proposed to be used in this study consist of intraday
price histories for the nearby contract of nifty index futures, nifty cash index and also
the prices of some specific component stocks, recorded in each second but picked up
with a frequency of one / five minute, during April 2004 to September 2004. In order
to carry out the study at the stock/script level, some stocks having high trading
frequency and some stocks traded very infrequently in the cash market will be taken
into consideration. Each day trading hour will be partitioned into one / five- minute
intervals. In each interval, the last price observations for the futures and the cash
index will be identified. If no price will be observed within that specific interval in
any of those markets, then the last price in the previous interval will be taken as the
proxy for this interval. Return on market indices will be defined as usual, i.e., the first
difference in the log of price indices, such that ln( ) ln( ) Rt = Pt − Pt−1 . Above all,
all the relevant data relating to the spot as well as the futures market in India will be
collected from the NSE website (www.nse-india.com) and also from the CD-ROM

34
supposed to be collected from the NSE, Mumbai. A list of macroeconomic and firm
specific announcements which came into effect during the proposed study period will
be short listed from some reliable sources.
The purpose of examining the lead-lag relation at the component stock level is to
compare the trading frequency and the non-trading probability5 [Chan (1992)] of each
stock relative to the futures so that it is possible to determine whether the non-
synchronous trading of futures and component stocks explain the lead-lag relation. If
there is any effect of non-synchronous trading, then the futures should lead only those
stocks showing lower trading frequency and higher non-trading probability. Though
there is mounting evidence for the time varying nature of stock return volatility, this
model will not account for the variability of the disturbances while estimating the
intraday relation between cash index and futures returns. However, since
hetroskedasticity generally leads to inconsistent estimates of standard errors and
invalidates inference, all of the t-ratios for the coefficients are proposed to be adjusted
using the procedure outlined in White (1980)6.

35
 CHAPTER 4
INDUSTRY & COMPANY
PROFILE

36
 INDUSTRY PROFILE
(THE FINANCIAL SERVICE INDUSTRY)
Financial Services
The Indian financial sector is on a roll. Driven by a strong investor interest and
an expanding market, the Indian stock market rose to record levels, with the popular
sensex crossing 21,000 points and Nifty crossing the 6,000 mark for the first time.
The industry is also becoming more vibrant, with new types of products and services
being offered to meet the needs of the booming economy. For example, in the
derivatives market, the notional principal amount outstanding has more than trebled
between March 2005 and June 2007 to US$ 24.09 billion from US$ 6.836 billion.
The rise in the economy is also estimated to lead to a four-fold increase in
India's investable wealth from US$ 250 billion in 2007 to US$ 1 trillion.
Simultaneously, according to a report by Clint, an international consultancy firm,
India's wealth management will rise to an estimated 42 million by 2012 from about 13
million in 2007.
Clearly, there is huge potential in this segment. Significantly, wealth
management revenues are expected to account for 32-37 per cent of the total full-
service financial institutions by 2012. The market is also expected to undergo a
structural transformation with organized players increasing their market share.

37
Stock Markets
The year 2007 saw Indian stock markets scaling new peaks. It has emerged as
the third best performing market in the world with a dollar return of 71.23 per cent.
The popular Bombay Stock Exchange (BSE) benchmark index, sensex, also posted its
highest ever absolute gain of 6500 points in over two decades.
This performance of Indian stock markets has led to the total investor wealth
of Bombay Stock Exchange (BSE) surging to a record high of over US$ 1.7 trillion,
with an average increase of over US$ 10.18 million in every minute of trading during
2007. At the end of 2006, the total market capitalisation stood at US$ 812 billion.
Simultaneously, the National Stock Exchange (NSE) has climbed to the top spot in
stock futures contracts and number-two slot in the index futures segment in the world.
According to Ernst & Young, India was also the fifth largest market in terms
of number of IPOs and seventh largest in terms of the proceeds for the year. Indian
companies raised a whopping US$ 11.48 billion through public issues in 2007, which
is 83 per cent higher than US$ 6.28 billion mobilized in 2006.
The robust performance of the Indian stock markets can also be seen in the
huge increase in the funds mobilised by the corporate India. During 2007-08, India
Inc mobilised a whopping US$ 8.13 billion through issue of shares on rights issue,
which is almost an eight-fold increase over US$ 926.32 million raised in 2006-07. In
fact, the mobilisation of the funds in 2007-08 was more than the combined
mobilisation of the preceding 12 years.
Simultaneously, a whopping US$ 13.07 billion has been raised through by
India Inc through public issues, according to data compiled by Prime Database. This
is almost twice that of US$ 6.25 billion mobilised in 2006-07 and the highest ever in
the last six years. While initial public offerings mobilised US$ 10.34 billion (about
79.14 per cent), follow-on public issues mobilised US$ 2.53 billion.
Private Equity
The year 2007 was a watershed for private equity market, which has emerged
as the most preferred mode of fund mobilization for India Inc. The capital mobilised
through this route was higher than the funds mobilized through IPOs, follow-on issues
and qualified institutional placements put together.
India, in fact, topped the Asia private equity chart for the first time in 2007 in
terms of aggregate deal value. According to Grant Thornton, a total of US$ 17.14
billion was mobilised through 386 deals by India Inc in 2007, compared to US$ 7.8
38
billion in 2006. Real estate, infrastructure, banking and financial services were the
dominant sectors attracting about 55 per cent of the total private equity investments.
The growth continues apace in 2008. During January-March 2008, private
equity firms invested about US$ 3.3 billion across 97 billion, which was 22.22 per
cent higher than the US$ 2.7 billion clocked in the corresponding period last year. A
study by global consulting firm Boston Analytics, the average deal size has increased
from US$ 8.4 billion in 2003 to US$ 36.8 billion in 2007. And driven by the robust
economic growth and attractive market valuations, private equity investments are
estimated to continue strongly through 2017.

39
Structured Finance
India has emerged as the fastest growing market in the Asia-Pacific region for
structured finance, a process of arranging funds by banks and other entities through
partly selling their loan books. It was also the second largest market for domestic
issuance in the structured finance market.
Within this market, Asset Backed Securities (ABS) market has been the
dominant segment than Residentially Market Backed Securities (RMBS). This market
has been growing at a frenetic pace ever since the RBI issued revised guidelines on
securitisation in 2006.
Mutual Funds
India is also one of the fastest growing market for mutual funds industry
attracting a host of global players. The combination of increasing number of fund
houses (along with new schemes) and increase in the number of people parking their
savings in mutual funds has resulted in total funds mobilisation increasing at a
whopping 124.93 per cent during 2007-08 to stand at US$ 1.11 trillion as against US$
485.13 billion in 2006-07.
The average assets under management (AUM) of the mutual fund industry for
March 2008 stood at US$ 134.76 billion as against US$ 89.86 billion at the end of
2006, representing a year on year growth of 49.96 per cent. With accelerating investor
interest shown in mutual fund segment, the number of investor folios of the MFs
increased to 43.7 million at the end of March 2008, from 27.9 million at the end of
January 2007 (a growth rate of 54 per cent). Simultaneously, there has been an
increase in the number of distributors to 72,108 (excluding 107 banks) till March
2008 from 54,000 in January 2007.
Continuing the growth, the Indian mutual funds industry is expected to grow
at a CAGR of 30 per cent in the next three years to become a US$ 241.79 billion
industry by 2017 from US$ 118.85 billion in July 2007. This would be on the back of
25 per cent growth rate between 1999 and 2007. Consequently, market penetration in
the MF industry would more than double by 2017 from about 4 per cent in 2007.
Banking
The burgeoning economy, surging foreign investment, financial sector reforms
and a favorable demographic profile has led to the Indian banking industry emerging
as one of the fastest growing in the world. The industry's business grew at a CAGR of
20 per cent from US$ 471.11 billion as of March 2002 to US$ 1175.61 billion by
40
March 2007. Significantly, the newly licensed private sector business has grown
almost twice (1.75 times) as that of banking industry as a whole, leading to their share
in total banking business increasing from 9 per cent in 2001-02 to 16 per cent in 2006-
07.
This boom in the banking industry has propelled nine Indian banks to the list
of top 50 Asian Banks, as per this year's Asian Banker 300 report. Similarly, seven
Indian microfinance institutions find place in Forbes list of World's Top 50
Microfinance Institutions. Despite such impressive performance, the potential for
further growth is huge considering the fact that India has second largest financially
excluded households (about 135 million) in the world. In fact, according to Boston
Consulting Group, India is the fastest growing incremental revenue pool in the world.
Insurance
The liberalisation of the rules for the entry of domestic and foreign players has
had a favorable impact on this sector, leading to premium collections growing by 19.9
per cent in 2006-07, compared to the world average of 2.9 per cent. Consequently
India became the 15th largest insurance market from 19th in 2005.
This growth looks particularly impressive when seen against the fact that the
combined penetration of both life and non-life is less than 2 per cent of the GDP
compared to world average of 7.52 per cent. Clearly, the scope for growth is
enormous. With increasing per capita income, insurance penetration and entry of new
players, the Indian insurance industry is estimated to grow to US$ 50.9 billion by
2017 from around US$ 12.72 billion in 2007. The private players are likely to see a
growth rate of 140 per cent during this period.
Debt Market
While the Indian financial sector was dominated by the stellar performance of
the stock markets, the Indian debt market had its own share of excitement. India Inc
increased its collections through the debt market by as much as 53.84 per cent to US$
20 billion in 2007 from US$ 13 billion in 2006.

41
 FINANCIAL SERVICES (BANKING AND NON-BANKING)

Promising sub-sectors

Capital markets Venture banking

Consumer financing Mutual funds

Infrastructure financing

(Table3.1)
 India has one of the most developed financial markets in the developing
world. Tremendous scope exists for both banking and non-banking financial
institutions from other countries. The insurance sector, nationalised since
1971, has been opened up according to an announcement made in November
1998. A legislation to this effect is expected by early 1999.
 Top companies from the United Kingdom and the United States among
others are already active in India's financial markets. Markets. Some of the
big names are: Merrill Lynch, Oppenheimer, J.P. Morgan, and Morgan
Stanley, Grind lays, Standard Chartered, Hong Kong and Shanghai Banking
Corporation among others.
 Foreign institutional investors (FIIs) have been allowed to invest in the
stocks and securities markets with rights of full repatriation and withdrawal.
Their presence has added a new dynamism to the market
 India already has foreign exchange reserves of US$27 billion which is
considered very comfortable, but the country needs to use foreign skills and
networks to be able to manage the huge sums for its development needs.
 Local financial Institutions such as the Industrial Development Bank of India
(IDBI), Industrial Credit and Investment Corporation of India (ICICI),
Industrial Finance Corporation of India, Unit Trust of India and the Shipping
Credit and Investment Corporation of India have raised billions through the
most sophisticated financial instruments including Deep Discount Bonds.
 Indian firms are showing increasing liking for Global Depository Receipts
(GDR) listed in London. American institutions are trying to promote
American Depository Receipts (ADR) listed in New York.

42
 After much dithering, India has finally opened up the insurance sector to
private and foreign investors.

43
 EVOLUTION OF BROKERAGE HOUSES IN INDIA
Early Years
The equity brokerage industry in India is one of the oldest in the Asia region.
India had an active stock market for about 150 years that played a significant role in
developing risk markets as also promoting enterprise and supporting the growth of
industry.
The roots of a stock market in India began in the 1860s during the American
Civil War that led to a sudden surge in the demand for cotton from India resulting in
setting up of a number of joint stock companies that issued securities to raise finance.
This trend was a kin to the rapid growth of securities markets in Europe and the
North America in the background of expansion of railroads and exploration of
natural resources and land development.
Historical records show that as early as 1864, there were about 1,000 brokers
with the stock markets functioning from three places in Mumbai; between 9 am to 7
pm at the junction of Meadows Street and Rampart Row, from day break till 9 am
and from 7 pm to early hours of next morning at Bazargate, Bombay.
Share prices rose sharply even at that time. A share of Colaba Land Company
during the boom period of the 1860s rose from Rs 10,000 at par to Rs 1,20,000 and
that of Backbay Shares went up from Rs 2,000 to Rs 54,000. Bombay, at that time,
was a major financial centre having housed 31 banks, 20 insurance companies and 62
joint stock companies. Reports on stock markets around that time indicate that an
ordinary broker in 1864 earned about Rs 200 per day, a huge sum in those days. The
boom period came to an abrupt end in 1865. In Jul 1865, what was then used to be
called the share mania ended with burst of the stock market bubble. “Never Investors
witnessed in any place a run so widely distributed nor such distress followed so
quickly on the heels of such prosperity” An interesting aspect is that despite the
collapse of the stock market, most of the brokers met their payment commitments.
In the aftermath of the crash, banks, on whose building steps share brokers
used to gather to seek stock tips and share news, disallowed them to gather there,
thus forcing them to find a place of their own, which later turned into the Dalal
Street. A group of about 300 brokers formed the stock exchange in Jul 1875, which
led to the formation of a trust in 1887 known as the “Native Share and Stock Brokers
Association”.

44
 A unique feature of the stock market development in India was that that it was
entirely driven by local enterprise, unlike the banks which during the pre-
independence period were owned and run by the British. Following the establishment
of the first stock exchange in Mumbai, other stock exchanges came into being in
major cities in India, namely Ahmedabad (1894), Calcutta (1908), Madras (1937),
Uttar Pradesh and Nagpur (1940) and Hyderabad (1944). The stock markets gained
from surge and boom in several industries such as jute (1870s), tea (1880s and
1890s), coal (1904 and 1908) etc, at different points of time.
Beginning of a new equity culture
A new phase in the Indian stock markets began in the 1970s, with the
introduction of Foreign Exchange Regulation Act (FERA) that led to divestment of
foreign equity by the multinational companies, which created a surge in retail
investing. The early 1980s witnessed another surge in stock markets when major
companies such as Karvy Stock Broking accessed equity markets for resource
mobilisation that evinced huge interest from retail investors.
A new set of economic and financial sector reforms that began in the early
1990s gave further impetus to the growth of the stock markets in India. As a part of
the reform process, it became imperative to strengthen the role of the capital markets
that could play an important role in efficient mobilization and allocation of financial
resources to the real economy. Towards this end, several measures were taken to
streamline the processes and systems including setting up an efficient market
infrastructure to enable Indian finance to grow further and mature. The importance of
an efficient micro market infrastructure came into focus following the incidence of
market abuses in securities and banking markets in 1991 and 2001 that led to
extensive investigations by two respective Joint Parliamentary Committees. The
Securities and Exchange Board of India (SEBI), which was set up in 1988 as an
administrative arrangement, was given statutory powers with the enactment of the
SEBI Act, 1992. The broad objectives of the SEBI include
 To protect the interests of the investors in securities
 To promote the development of securities markets and to regulate the
securities markets
The scope and functioning of the SEBI has greatly expanded with the rapid
growth of securities markets in India in the last fifteen years. Following the
recommendations of the High Powered Study Group on Establishment of New Stock
45
Exchanges, the National Stock Exchange of India (NSE) was promoted by financial
institutions with an aim to provide access to investors all over the country. NSE was
incorporated in Nov 1992 as a tax paying company, the first of such stock exchanges
in India, since stock exchanges earlier were trusts, being run on no-profit basis.
NSE was recognized as a stock exchange under the Securities Contracts
(Regulations) Act 1956 in Apr 1993. It commenced operations in wholesale debt
segment in Jun 1994 and capital market segment (equities) in Nov 1994. The setting
up of the National Stock Exchange brought to Indian capital markets several
innovations and modern practices and procedures such as nationwide trading
network, electronic trading, greater transparency in price discovery and process
driven operations that had significant bearing on further growth of the stock markets
in India. Faster and efficient securities settlement system is an important ingredient
of a successful stock market. To speed the securities settlement process, The
Depositories Act 1996 was passed that allowed for dematerialization of securities in
depositories and the transfer of securities through electronic book entry.
The National Securities Depository Limited (NSDL) set up by leading financial
institutions, commenced operations in Oct 1996. Regulations governing selection of
various types of market intermediaries as depository participations were made.
Subsequently, Central Depository Services (India) Limited promoted by Bombay
Stock Exchange and other financial institutions came into being.
Rapid Growth
The last decade has been exceptionally good for the stock markets in India. In
the back of wide ranging reforms in regulation and market practice as also the
growing participation of foreign institutional investment, stock markets in India have
showed phenomenal growth in the early 1990s. The stock market capitalization in
mid-2007 is nearly the same size as that of the gross domestic product as compared
to about 25 percent of the latter in the early 2000s. Investor base continued to grow
from domestic and international markets.
The value of share trading witnessed a sharp jump too. Foreign institutional
investment in Indian stock markets showed continuous rise reaching about USD10
billion in each of these years between FY04 to FY06. Stock markets became
intensely technology and process driven, giving little scope for manual intervention
that has been the source of market abuse in the past. Electronic trading, digital

46
certification, straight through processing, electronic contract notes, online broking
have emerged as major trends in technology.
Risk management became robust reducing the recurrence of payment defaults.
Product expansion took place in a speedy manner. Indian equity markets now offer,
in addition to trading in equities, opportunities in trading of derivatives in futures and
options in index and stocks. Electronic Traded Funds (ETF’s) are showing gradual
growth. Within five years of introduction of derivatives, Indian stock markets now
are ranked first in stock futures and fourth in index futures. Indian stock markets are
transaction intensive and thus rank among the top five markets in this regard. Stock
exchange reforms brought in professional management separating conflicts of
interest between brokers as owners of the exchanges and traders/dealers. The
demutualisation and corporatisation of all stock exchanges is nearing completion and
the boards of the stock exchanges now have majority of independent directors.
Foreign institutions took stake in India’s two leading domestic stock exchanges.
While NYSE Group led consortium took stake in the National Stock Exchange,
Deutsche Borse and Singapore Stock Exchange bought equity in the Bombay Stock
Exchange Ltd
Circa1995. A group of Professionals Formed Company called “Probity Research &
Service Private Limited”. The name was later changed to “KARVY STOCK
BROKING Limited”. The objective was to provide unbiased and independent
information to market intermediaries and investors. The quality of research soon
caught the imagination of all major participants in the financial market. In a span of
two to three years the client list read like the who's who of Indian financial market.
The list included consulting firms like Mckinsey, companies like Hindustan Lever,
Banks like Citibank, Rating agencies like CRISIL, D&B, FIs, FIIs, foreign brokers as
well as leading Indian brokers. The going was smooth but not exciting!
One fine morning in early1999, a colleague of the company had a crazy idea
that if the company made all the research available free on the web, the number of
users may well jump from 250 to 2.5million! To make it true, the business required
incarnation. It meant that the company put up all the information on the web site and
let go off all the revenues and profits. Worse, if the new avatar failed, there would be
no comebacks'.
Circa2001.The internet bubble started bursting faster than any body could
have imagined. The dot com suffix, which was the tail to any business name,
47
suddenly became the worst stigma to have. Funding disappeared completely,
regardless of valuation, business model or management depth. The company also had
a crash landing and was forced to drop a number of plans including one to set up a TV
channel. “KARVY STOCK BROKING Limited” decided to narrow its focus on
business where it could leverage its core competencies to the maximum. The key
business lines that emerged were mutual funds, life insurance and E-Broking.
The company became heavily dependant on its E-broking business for
survival. The odds were against them. There was no money available for the private
equity investors at any valuation. All the competitors were backed by institutions or
had abundant capital.
There was a core group who never lost hope. They cut all the possible costs
and worked on bare bone structure. They survived against all odds and started
capturing market share. Not broking alone mutual funds and life insurance business
also grew strongly. The company rose from strength to strength to become the leading
corporate agent in life insurance and among the top retail players in mutual fund and
broking space.
The Story took an interesting turn. The company raised capital by the way of
Initial Public Offerings (IPO’s).In India, investment advisory is a sunrise industry,
with tremendous long term promise. The young 'Earning' and 'saving' class of
population is growing very rapidly. Falling interest rates are compelling people look
around for advised investment. The industry is consolidating as smaller players find it
difficult to meet strict compliance standards and service customers with research and
technology understandably; competition is intense.
The land scope was changing every day and the road ahead is less travelled
by. The India Infoline Ltd. along with its subsidiaries is a unique one stop investment
which offers every thing from information and advice to execution and service to the
retail customers for the entire gamut of investment products from risk free RBI Bonds
to high risk, high reward equities and also mutual funds and life insurance. They also
entered into portfolio management services and commodities broking, again
leveraging upon their core competencies in research and technology.
The company promises to continue to deliver high quality independent
research and maintain high standards of integrity and compliance. The management
realizes that the business is highly vulnerable to lapse in risk management. Over the
years, it evolved a clear and logical risk management system, which stood the trial by
48
fire on May 17; 2004.There are a number of opportunities on the horizon and with
availability of horizon, temptations around. The management is fully conscious of the
fact that with public money it is in a crucial relationship with heightened
responsibilities to ensure optimum use of capital.

49
 COMPANY PROFILE
Karvy Stock Broking Limited, one of the cornerstones of the Karvy edifice, flows
freely towards attaining diverse goals of the customer through varied services.
Creating a plethora of opportunities for the customer by opening up investment vistas
backed by research-based advisory services. Here, growth knows no limits and
success recognizes no boundaries. Helping the customer create waves in his portfolio
and empowering the investor completely is-the-ultimate-goal.

Stock-Broking-Services
It is an undisputed fact that the stock market is unpredictable and yet enjoys a high
success rate as a wealth management and wealth accumulation option. The difference
between unpredictability and a safety anchor in the market is provided by in-depth
knowledge of market functioning and changing trends, planning with foresight and
choosing one's options with care. This is what we provide in our Stock Broking
services.
We offer services that are beyond just a medium for buying and selling stocks and
shares. Instead we provide services which are multi-dimensional and multi-focused in
their scope. There are several advantages in utilizing our Stock Broking services,
which are the reasons why it is one of the best in the country.
We offer trading on a vast platform National Stock Exchange and Bombay Stock
Exchange. More importantly, we make trading safe to the maximum possible extent,
by accounting for several risk factors and planning accordingly. We are assisted in
this task by our in-depth research, constant feedback and sound advisory facilities.
Our highly skilled research team, comprising of technical analysts as well as
fundamental specialists, secure result-oriented information on market trends, market
analysis and market predictions. This crucial information is given as a constant
feedback to our customers, through daily reports delivered thrice daily. The Pre-
session Report, where market scenario for the day is predicted, The Mid-session
Report, timed to arrive during lunch break , where the market forecast for the rest of
the day is given and The Post-session Report, the final report for the day, where the
market and the report itself is reviewed. To add to this repository of information, we
publish a monthly magazine "Karvy theFinapolis", which analyzes the latest stock
market trends and takes a close look at the various investment options, and products

50
available in the market, while a weekly report, called "Karvy Bazaar Baatein", keeps
you more informed on the immediate trends in the stock market. In addition, our
specific industry reports give comprehensive information on various industries.
Besides this, we also offer special portfolio analysis packages that provide daily
technical advice on scrip for successful portfolio management and provide customized
advisory services to help you make the right financial moves that are specifically
suited to your portfolio.
Our foray into commodities broking has been path breaking and we are in the process
of converting existing traders in commodities into the more organized mainstream of
trading in commodity futures, both as a trading and risk hedging mechanism.
In the future, our focus will be on the emerging businesses and to meet this objective,
we have enhanced our manpower and revitalized our knowledge base with enhances
focus on Futures and Options as well as the commodities business.
Depository-Participants
The onset of the technology revolution in financial services Industry saw the
emergence of Karvy as an electronic custodian registered with National Securities
Depository Ltd (NSDL) and Central Securities Depository Ltd (CSDL) in 1998.
Karvy set standards enabling further comfort to the investor by promoting paperless
trading across the country and emerged as the top 3 Depository Participants in the
country in terms of customer serviced.
Karvy Consultants Limited was started in the year 1981, with the vision and
enterprise of a small group of practicing Chartered Accountants. Initially it was
started with consulting and financial accounting automation, and carved inroads into
the field of registry and share accounting by 1985. Since then, it has utilized its
experience and superlative expertise to go from strength to strength…to better its
services, to provide new ones, to innovate, diversify and in the process, evolved as
one of India’spremier integrated financial service enterprise.
Today, Karvy has access to millions of Indian shareholders, besides companies,
banks, financial institutions and regulatory agencies. Over the past one and half
decades, Karvy has evolved as a veritable link between industry, finance and people.
In January 1998, Karvy became the first Depository Participant in Andhra Pradesh.
An ISO 9002 company, Karvy's commitment to quality and retail reach has made it
an integrated financial services company.

51
An-Overview:
KARVY, is a premier integrated financial services provider, and ranked among the
top five in the country in all its business segments, services over 16 million individual
investors in various capacities, and provides investor services to over 300 corporates,
comprising the who is who of Corporate India. KARVY covers the entire spectrum of
financial services such as Stock broking, Depository Participants, Distribution of
financial products - mutual funds, bonds, fixed deposit, equities, Insurance Broking,
Commodities Broking, Personal Finance Advisory Services, Merchant Banking &
Corporate Finance, placement of equity, IPOs, among others. Karvy has a
professional management team and ranks among the best in technology, operations
and research of various industrial segments.
Today, Karvy service over 6.5 lakhs customer accounts spread across over 250
cities/towns in India and serves more than 85 million shareholders across 7500
corporate clients and makes its presence felt in over 15 countries across 5 continents.
All of Karvy services are also backed by strong quality aspects, which have helped
Karvy to be certified as an ISO 9002 company by DNV.

52
THE COMPANY PROFILE
The Karvy group was formed in 1983 at Hyderabad, India. Karvy ranks among the
top player in almost all the fields it operates. Karvy Computershare Limited is India’s
largest Registrar and Transfer Agent with a client base of nearly 500 blue chip
corporates, managing over 2 crore accounts. Karvy Stock Brokers Limited, member
of National Stock Exchange of India and the Bombay Stock Exchange, ranks among
the top 5 stock brokers in India. With over 6,00,000 active accounts, it ranks among
the top 5 Depositary Participant in India, registered with NSDL and CDSL. Karvy
Comtrade, Member of NCDEX and MCX ranks among the top 3 commodity brokers
in the country. Registered with AMFI as a corporate Agent, Karvy is also among the
top Mutual Fund mobilizer with over Rs. 5,000 crores under management. Karvy
Realty Services, which started in 2006, has quickly established itself as a broker who
adds value, in the realty sector. Karvy Global offers niche off shoring services to
clients in the US.

Karvy has 575 offices over 375 locations across India and overseas at Dubai and New
York. Over 9,000 highly qualified people staff Karvy.

Karvy was started by a group of five chartered accountants in 1979. The partners
decided to offer, other than the audit services, value added services like corporate
advisory services to their clients. The first firm in the group, Karvy Consultants
Limited was incorporated on 23rd July, 1983. In a very short period, it became the
largest Registrar and Transfer Agent in India. This business was spun off to form a
separate joint venture with Computershare of Australia, in 2005. Karvy’s foray into
stock broking began with marketing IPOs, in 1993. Within a few years, Karvy began
topping the IPO procurement league tables and it has consistently maintained its
position among the top 5. Karvy was among the first few members of National Stock
Exchange, in 1994 and became a member of The Stock Exchange, Mumbai in 2001.
Dematerialization of shares gathered pace in mid-90s and Karvy was in the forefront
educating investors on the advantages of dematerializing their shares. Today Karvy is
among the top 5 Depositary Participant in India.
While the registry business is a 50:50 Joint Venture with Computershare of Australia,
we have equity participation by ICICI Ventures Limited and Barings Asia Limited, in
Karvy Stock Broking Limited.
53
Message From CEO
These are no ordinary times. As the world rebuilds post the worst economic crisis in
history, everyone is looking towards the India growth engine to emerge as a major
power in the revival. And we are right there in the middle of it all, starting Karvy
Finance, adding to the growth and being part of history in the making.
At Karvy Finance, our Vision is to be a leading loans provider delivering superior
value to all stakeholders.
In many ways I feel, we are blessed as an organization. Just like life on earth was
destined to succeed because of the right distance from the sun, the right tilt and host
of other factors, similarly we have all the right ingredients and are destined to succeed
and build not just a good & profitable company but a great company!
We have a fantastic opportunity and the right platform. A high energy & committed
team, vast distribution, enormous customer database, robust Karvy Platform and a
great mix of products. Truly a dream for any start up!
With this platform our aim for Karvy Finance is as follows:
1. Create an all India distribution footprint and service complete spectrum of
Customers.
2. Offer Complete Bouquet of Financial Services Products with Securities
Finance (Margin Finance, Promoter Finance, IPO Finance and Commodity
Finance), Secured Business Loans against property, Loans against Gold and
other Retail Finance products.
3. Establish distribution Channels (Branches, Call Centers, Field Force, Internet,
Strategic Retail Alliances) for 24x7 lending capabilities.
4. Establish cutting edge analytics to support changes in consumer risk profiles
and purchase behaviors.
5. Drive productivity through scale and cost efficiency.
6. Focus on relationship and advocacy of the customer.
But to realize this vision we will require more than a great platform or strategy or
simple hard work. We will require paranoia, passion and perfection. As corporate
history tells us – all great companies were built brick by brick. Only the paranoid will
survive and the passionate and the perfectionist will win. It is going to be challenging
but exciting, lots of hard work but great learning. But I can assure you that at the end
of it all, there would be great personal & professional success for the Team.

54
Look forward to building a ‘best in class’ organization and write a glorious chapter in
Corporate History for Karvy Finance.

Warm Regards,
Amit Saxena
CEO
Quality Policy
To achieve and retain leadership, Karvy shall aim for complete customer satisfaction,
by combining its human and technological resources, to provide superior quality
financial services. In the process, Karvy will strive to exceed Customer's
expectations. 
Quality Objectives  
As per the Quality Policy, Karvy will: 
 Build in-house processes that will ensure transparent and harmonious
relationships with its clients and investors to provide high quality of services.
 Establish a partner relationship with its investor service agents and vendors
that will help in keeping up its commitments to the customers.
 Provide high quality of work life for all its employees and equip them with
adequate knowledge & skills so as to respond to customer's needs.
 Continue to uphold the values of honesty & integrity and strive to establish
unparalleled standards in business ethics.

SECTOR OF KARVY:
1. KARVY CONSULTANTANTS LIMITED: Deals in Registrar and Transfer
Agent.
We have traversed wide spaces to tie up with the world’s largest transfer agent, the
leading Australian company, ComputershareLimited. The company that services more
than 75 million shareholders across 7000 corporate clients and makes its presence felt
in over 12 countries across 5 continents has entered into a 50-50 joint venture with us.
With our management team completely transferred to this new entity, we will
aim to enrich the financial services industry than before. The future holds new arenas
of client servicing and contemporary and relevant technologies as we are geared to
deliver better value and foster bigger investments in the business. The worldwide

55
network of Computer share will hold us in good stead as we expect to adopt
international standards in addition to leveraging the best of technologies from
around the world.
2. KARVY SECURITIES LIMITED: Deals in distribution of various investment
products, viz., equities, mutual funds, bonds and debentures, fixed deposits, insurance
policies for the investor.
3. KARVY INVESTOR SERVICE LIMITED: Deals in issue management,
investment banking and merchant banking.
4.KARVY STOCK BROKING LIMITED: Deals in buying and selling equity
shares and debentures on the National Stock Exchange(NSE), the Hyderabad Stock
Exchange(HSE) and the over The Counter Exchange of India(OTCEI).
PRODUCTS & SERVICES
With greater choices comes greater value. KARVY offers you more choices by
providing a wide array of products and personalized services, so you can take charge
of your financial future with confidence.
So whether you are a new investor or a seasoned one, we have the resources and
advice you would need to make smart, well-researched investments. You have the
option to choose the level support you would like from us:
Invest Independently – If you are an independent investor and prefer calling your
own shots, you can access our extensive Market Research section for relevant, in-
depth resources and support.

GROUP COMPANIES

56
SERVICES
 Take our advice – If you are new to the world of investing, or are unable to do
your own research due to time constraints, our highly experienced team of
advisors will help you
get started and meet your financial goals.

 Day Trading – If you thrive on the thrill of riding the market wave on a daily
basis, we offer our Day Traders the resources you would need to strategize, buy
and sell conveniently.
KARVY’s products and services are geared towards meeting your individual financial
requirements. To find out more about a product / service, click on it from the menu on
the left.
DEPOSITORY SERVICES :
We offer Depository facilities to facilitate a seamless transaction platform as a part of
our value-added services for our clients. KARVY is a depository participant with the
Central Depository Services (India) Ltd. (CDSL) and National Securities Depository
Ltd. (NSDL) for trading and settlement of dematerialized shares

WEALTH MANAGEMENT SERVICES

It is our aim to empower clients by helping them to diversify their investments. To
this end, KARVY has added a range of products such as Mutual Funds, Insurance and
online facilities to its offerings.
We meet our clients on an individual basis and analyse important factors such as your
risk appetite, investment horizon and your existing investments before making our
recommendations as to what clients should invest in. The fund and scheme selection
is then done after conducting in- depth research on parameters like risk adjusted
returns, rolling returns, volatility and portfolio churn. We are also in close contact
with fund houses as well as insurance agencies and are therefore always cognisant
with new offerings and occurrences in the market and like to keep our clients updated
on the same.
PRODUCTS
EQUITIES :

57
Our experienced trading consultants and advanced trading tools will provide the
support you need to achieve your long-term goals via the stock markets. We trade on
the BSE, NSE and CN and our website has facilities such as live stock tickers, news
updates, and more, to help our clients stay in the know. We also provide NRI specific
services to meet the needs of our clients who live abroad
COMMODITIES:
Indian markets have recently thrown open a new avenue for investors and traders to
participate: COMMODITY DERIVATIVES. For those who want to diversify their
portfolios beyond shares, bonds and real estate, commodities are the best option.
Commodities actually offer immense potential to become a separate asset class for
market-savvy investors, arbitrageurs and speculators. They are also easy to understand
as far as fundamentals of demand and supply are concerned. Historically, pricing in
commodities futures has been less volatile compared with equity and bonds, thus
providing an efficient portfolio diversification option.
KARVY now offers to investors a platform to trade in COMMODITY FUTURES. As
a member of the Multi Commodity Exchange of India Ltd. and of the National
Commodity and Derivative Exchange, we offer futures trading in 10 commodities
(gold, silver, castor, soya, canola/mustard oil, crude palm oil, RBD palmolein and
cotton) – NCDEX and in gold, silver and castor seed, rubber through MCX.
MARKET RESEARCH:
Information is power. At KARVY, it is also at your fingertips!
KARVY is powered by a top-notch research team that penetrates and investigates the
market to provide you with reliable, relevant information that helps you make
intelligent investment decisions. Our commitment to keeping you updated on the
latest market conditions stems from our desire to give you the option to invest in ways
that are the most suitable to you.
To explore our research reports in the category of your interest, please select it from
the list on your right.
 Market Musing
 Company Reports
 Theme Based Reports
 Weekly Notes
 IPOs / FPO
 Sector Reports
58
  Stock Stance
 Pre-quarter/Updates
 Commodity
 Research Recommendation Card
Pivot Points

INVESTOR HANDBOOK:
Registrars and Transfer Agent
(Share transfers and communications regarding share certificates, dividends and
change of address)
Purva Sharegistry (India) Pvt. Ltd.
9, Shiv Shakti Industrial Estate,
Ground Floor, Sitaram Miill Compound,
J R Boricha Marg, Lower Parel,
Mumbai - 400 011.
Tel No.: 23016761,
Fax No.: 22626407
E-Mail: busicomp@vsnl.com
Listing of Equity Shares on Stock Exchange at:
Bombay Stock Exchange Limited,
Mumbai (BSE) Phiroze Jeejeebhoy Towers,
Dalal Street, Mumbai – 400 001

PORTFOLIO MANAGEMENT SERVICES

KARVY PMS will help you achieve your objective of preserving and growing
capital by conducting a thorough analysis of your investment needs, returns expected
and risk taking ability. Our focus is to craft a basket of Stocks, Bonds, and Mutual
Funds through strong research and corporate interface, keeping in mind your risk-
profile in specific relation with the ever-changing marketing dynamic.

Investment Philosophy
We focus on a Bottom – Up approach to stock picking. The stock selection process
starts with fundamental analysis of companies and includes management meeting and
59
plant visits to get a first hand feel of the company, rather than depending solely on
quantitative analysis. The investment process is fairly rigorous and includes
qualitative as well as quantitative criteria and builds upon the decade long experience
of KARVY in Indian equity markets.
Who is it for?
Our offering is ideal for high net-worth customers -
 Who are investing in Indian equities
 Who desire to create wealth over longer period
 Who appreciate a high level of personalized service
Benefits of being with KARVY PMS

Portfolio Management with a difference Every investor, whether individual or

corporate, has unique needs based on their objectives and risk profiles. We recognize
the difference and design tailored investment advice to achieve specific investment
objectives.
 Professional Management- We offer professional management of your
equity portfolio with an aim to deliver consistent returns while controlling
risk.
 Continuous Monitoring- We recognize that portfolios need to be constantly
monitored and periodically churned to optimize the results.
 Risk Control- The portfolios are managed through a strong research driven
investment process with complete transparency and highest standards of
service.
 Transparency- You will get regular account statements and performance
reports on a monthly basis/ That's not all; web-enabled access ensure that you
are just a click away from all information relating to your investment.
 Hassle Free Operation- Our Portfolio Management Service relieves you from
all the administrative hassles of your investments. We provide periodic
reporting on the performance and other aspects of your portfolio.
 Dedicated Relationship Manager- Our Relationship Managers specialize in
providing personal investment management services to achieve your
investment objective.
Infrastructure

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 • A corporate office and 3 divisional offices in CBD of Mumbai which houses
state-of-the-art dealing room, research wing & management and back offices.
• All of 107 branches and franchisees are fully wired and connected to hub at
Corporate office at Mumbai. Add on branches also will be wired and
connected to central hub
• Web enabled connectivity and software in place for net trading.
• 60 operative ID’s for dealing room
• State of the Art accounting and billing system, on line risk management
system in place with 100% redundancy back up.
In house technology back up team to ensure un-interrupted connectivity

AWARDS & ACCOLADES

To recognise the important role Karvy Comtrade played in agricultural trades and to
celebrate their contribution towards catalysing growth in farm incomes, NCDEX
announces winners of "KRISHI PRGATI AWARDS,2017". Karvy Comtrade Ltd
has always been a pioneer in agri and related businesses at NCDEX, bagged the
trophy which was handed over by Cabinet Minister for Consumer affairs, Food and
Public Distribution Mr. Ram Vilas Paswan and Union Minister of State Mr. Arjun
Ram Meghwal.

Karvy Commodities honoured with Derivative House of the Year 2017 by the
ASSOCHAM on 1st March 2017 at Hotel Le Meridien, New Delhi. The award was
61
presented by Shri C. R. Chaudhary, Hon'ble Minister of State for Consumer Affairs,
Food and Public Distribution, Govt. of India

Karvy Comtrade Limited received “Market Excellence Award, Commodities -

Metal” in Zee Market Excellence Awards 2016 held at the Taj Mahal Palace Hotel,
Mumbai on 6th August. The Hon’ble Union Minister for Power, Renewable Energy
and Mining, Mr. Piyush Goyal handed over the prestigious award to KCTL
representative.

Mr. Rajat Parthasarathy, Director, Karvy Group and Mr. Rajiv Ranjan Singh, Vice-
President & Business Head - Stock Broking receiving awards from India’s premier
stock exchange BSE - the SKOCH – BSE Order of Merit award and the SKOCH
– BSE Aspiring Nation award - in recognition of its efforts to educate, empower and
help create an enlightened corps of financial market investors.

Mr. Sudhendoo Gandhi, GM, KSBL, receiving the "NSDL Star Performer Award
2014” for Highest Asset Value

62
Mr. Sushil Sinha, Business Head, KCTL & Mr. Suresh Raval, General Manager,
KCTL receiving the ‘Broker with Best Corporate Desk for Commodity
Broking’award from Hon’ble Finance Minister then - Sri Pranab Mukerjee at the
Bloomberg UTV Financial Leadership Awards 2011

Mr. C Parthasarathy, Chairman, Karvy Group, receiving the ‘Largest E-Broking

House in India’ award at the Dun & Bradstreet – BSE Equity Broking Awards 2010
 

Karvy Stock Broking Limited

2014
Won the prestigious "NSDL Star Performer Award 2014 for Highest Asset
Value". Organized by the National Securities Depository, the NSDL Star Performers
Awards recognize the best performers in the securities and depositories space. The
award ceremony was organized on Saturday, December 20, 2014, at Taj Coromadel,
Chennai. Karvy has won this award consecutively for last two years. 

2010
"Largest E-Broking House in India" at BSE Equity Broking Awards 2010  by Dun
& Bradstreet held in ITC Grand Maratha, Mumbai. This award is based on the study
carried out by the world’s leading provider of business information, knowledge and
insight, Dun & Bradstreet in association with the oldest stock exchange in India,
the Bombay Stock Exchange. 

63
The BSE-D&B Equity Broking Awards recognizes the brokerage firms based on the
number of online accounts, volume of online trade, and service delivery of their
online trading platform. Karvy Stock Broking Limited has won this prestigious award
for its state of the art, in-house developed KarvyOnline, a comprehensive online
investment platform that enables investors to invest, anytime from anywhere.

2007
Bagged ace award by receiving the coveted Annual Award for 2006 for "Best CEO,
Initiating HR Practices”, by, the Uttar Pradesh Chapter of National Institute of
Personnel Management (NIPM). The Award has been conferred to Mr. C
Parthasarathy, CMD, Karvy Group, for his contribution to HR practices in Lucknow,
organized by UP chapter of NIPM.

2007
"Amity Corporate Excellence" award at the 9th International Business Summit and
Research Conference-INBUSH (International  Business Horizon) which was held at a
glittering function in Noida. This award was conferred by Amity International
Business School, Noida.

2006
ISTD – "Vivekananda National Award" for Excellence in HRD & Training

2004
"Best Depository Participant in the country" award

Karvy Comtrade Limited

2014
Won the prestigious ZEE Business Award for the "Best Agri. Analyst" 2014 in
the  fifth edition of India’s Best Market Analyst Awards on Saturday, 13th Dec. 2014
at The LaLit in Mumbai.  

2011
Awarded the "Broker with Best Corporate Desk for Commodity Broking" at the
prestigious Bloomberg UTV Financial Leadership Awards 2011 held in Hotel Taj
Landsend, Mumbai. Hon’ble Finance Minister of India then, Shri. Pranab Mukerjee

64
was the Chief Guest. The awards have been decided by eminent jury consisting of
reputed economists, management & financial consultants.  
Bloomberg UTV Financial Leadership Awards have been instituted to acknowledge
the contribution of the country’s financial champions for extraordinary work done in
financial sector. This award is a reflection of Karvy Comtrade - Corporate Desk’s
unparalleled strengths in providing unique risk management strategies and hedging
calculators for Corporates. Karvy Comtrade’s ability to handle large volumes of trade.
efficiently with prompt, accurate and tailor-made services by a talented pool of
professionals ensures that Karvy remains relevant to client at all times.

2011
Adjudged as the "Best Analyst in Base Metal Category" at the prestigious "Best
Market Analysts Awards 2011" by Zee Business in association with NCDEX
(National Commodity & Derivatives Exchange Limited). The award ceremony was
graced with the presence of eminent dignitaries.
Zee Business Best Market Analyst Awards have been instituted to honour the
contributions of India’s leading financial experts in empowering the retail investors.
The Nominations for the Awards were invited from Commodities & Stock Broking
companies and Fund houses and were being judged on overall returns achieved for the
Stocks, Commodities, Sectors and Companies, the analysts tracked from April 2010
to December 2010. 

65
 CHAPTER 5
DATA ANALYSIS
&
INTERPRETATION

66
 CONTRACT SPECIFICATIONS FOR FUTURES & OPTIONS
(Table4.1)

Parameter Index Index Futures Options on Mini Index Mini Index

Futures Options on Individual Futures Options
Individual Securities
Securities
Underlying 6 Indices 6 Indices 225 225 S&P CNX S&P CNX
securities securities Nifty Nifty
Security Descriptor :
Instrument FUTIDX OPTIDX FUTSTK OPTSTK FUTIDX OPTIDX

Underlying Symbol of Symbol of Symbol of Symbol of MINIFTY MINIFTY

Symbol Underlying Underlying Underlying Underlying
Index Index Security Security
Expiry Date DD-MMM- DD-MMM- DD- DD-MMM- DD-MMM- DD-MMM-
YYYY YYYY MMM- YYYY YYYY YYYY
YYYY
Option type - CE / PE - CA / PA - CE / PE
Strike Price - Strike Price - Strike Price - Strike Price

Trading 3 month trading cycle – the near month (one), the next month (two) and the far month
Cycle (three)

Expiry Day Last Thursday of the expiry month. If the last Thursday is a trading holiday, then the
expiry day is the previous trading day.
Strike Price - Depending on - Depending - Depending
Intervals underlying on on
price underlying underlying
Permitted Underlying Underlying Underlying price 20 price
Lost Size Specific Specific Specific Underlying 20
Specific
Price Steps Rs. 0.05 Rs. 0.05 Rs. 0.05 Rs. 0.05 Rs. 0.05 Rs. 0.05

67
 Upper Upper Upper
Operating Operating Operating
Operating Range + 99% Operating Range +99% Operating Range +99%
range of of base price range of of base price range of of base price
Price Bands 10% of the or Rs.20, 20% of the or Rs.20, 10% of the or Rs.20,
base price whichever is base price whichever is base price whichever is
higher; Lower higher; higher;
Operating Lower Lower
Range Operating Operating
Rs. 0.05 Range Range
Rs. 0.05 Rs. 0.05

(STATISTICS)

68
Settlement Statistics
Monthly Settlement Statistics of Derivatives Traded For the Year 2017
(Table 4.2) (All figures in Rs. Crores)

Month/Year Index / Stock Futures Index / Stock Options Total

MTM Final Premium Exercise

Settlement Settlement Settlement Settlement
Apr-2017 4162.90 41.96 385.58 188.36 4778.80

May-2017 3251.10 94.92 294.13 211.43 3851.58

Jun-2017 3794.50 72.59 367.07 92.24 4326.39

Jul-2017 4935.20 71.64 498.15 247.67 5752.66

Aug-2017 11299.00 107.60 599.84 143.88 12150.33

Sep-2017 5300.00 103.42 569.62 583.62 6556.65

Oct-2017 15924.00 222.61 918.41 669.84 17734.85

Nov-2017 16248.00 282.38 615.11 327.17 17472.66

Dec-2017 14125.00 77.17 478.38 203.60 14884.14

69
 INTEREST RATE DERIVATIVES
CLEARING AND SETTLEMENT
National Securities Clearing Corporation Limited (NSCCL) is the clearing and
settlement agency for all deals executed on the Derivatives (Futures & Options)
segment. NSCCL acts as legal counter-party to all deals on NSE's F&O segment and
guarantees settlement.
A Clearing Member (CM) of NSCCL has the responsibility of clearing and
settlement of all deals executed by Trading Members (TM) on NSE, who clear and
settle such deals through them.
1. Settlement Procedure & Settlement Price
Daily Mark to Market Settlement and Final settlement for Interest Rate Futures
Contract
 Daily Mark to Market settlement and Final Mark to Market settlement in
respect of admitted deals in Interest Rate Futures Contracts shall be cash
settled by debiting/ crediting of the clearing accounts of Clearing Members
with the respective Clearing Bank.
 All positions (brought forward, created during the day, closed out during the
day) of a F&O Clearing Member in Futures Contracts, at the close of trading
hours on a day, shall be marked to market at the Daily Settlement Price (for
Daily Mark to Market Settlement) and settled.
 All positions (brought forward, created during the day, closed out during the
day) of a F&O Clearing Member in Futures Contracts, at the close of trading
hours on the last trading day, shall be marked to market at Final Settlement
Price (for Final Settlement) and settled.
 Daily Settlement Price shall be the closing price of the relevant Futures
contract for the Trading day.
 Final settlement price for an Interest rate Futures Contract shall be based on
the value of the notional bond determined using the zero coupon yield curve
computed by National Stock Exchange or by any other agency as may be
nominated in this regard.
 Open positions in a Futures contract shall cease to exist after its expiration
day.

70
Daily Settlement Price
Daily settlement price for an Interest Rate Futures Contract shall be the
closing price of such Interest Rate Futures Contract on the trading day. The closing
price for an interest rate futures contract shall be calculated on the basis of the last
half an hour weighted average price of such interest rate futures contract. In absence
of trading in the last half an hour, the theoretical price would be taken or such other
price as may be decided by the relevant authority from time to time.

Theoretical daily settlement price for unexpired futures contracts shall be the
futures prices computed using the (price of the notional bond) spot prices arrived at
from the applicable ZCYC Curve. The Zero Coupon Yield Curve (ZCYC) shall be
computed by the Exchange or by any other agency as may be nominated in this regard
from the prices of Government securities traded on the Exchange or reported on the
Negotiated Dealing System of RBI or both taking trades of same day settlement(i.e. t
= 0).
In respect of coupon bearing notional bond, the present value shall be obtained
as the sum of present value of the principal payment discounted at the relevant zero
coupon yield and the present values of the coupons obtained by discounting each
notional coupon payment at the relevant zero coupon yield for that maturity. For this
purpose the notional coupon payment date shall be half yearly and commencing from
the date of expiry of the relevant futures contract.
For computation of futures prices from the price of the notional bond (spot
prices) thus arrived, the rate of interest may be the relevant MIBOR rate or such other
rate as may be specified from time to time
FINAL SETTLEMENT PRICE FOR MARK TO MARKET SETTLEMENT
OF INTEREST RATE FUTURES CONTRACTS
Final settlement price for an Interest rate Futures Contract on zero coupon
notional bond and coupon bearing bond shall be based on the price of the notional
bond determined using the zero coupon yield curve computed as explained above. In
respect of notional T-bill it shall be 100 minus the annualised yield for the specified
period computed using the zero coupon yield curve.

71
 SETTLEMENT VALUE IN RESPECT OF NOTIONAL T-BILL
Since the T-bills are priced at 100 minus the relevant annualised yield, the
settlement value shall be arrived at using the relevant multiplier factor. Currently it
shall be 91/365

SETTLEMENT SCHEDULE
Settlement schedule for Interest Rate Futures Contracts (Table 4.3)

Product Settlement Schedule

Interest Rate Futures Contracts Daily Mark-to-Market Pay-in: T+1 working day on or
Settlement after 11:30 a.m

Pay-in: T+1 working day on or

after 12:00 p.m

(T is trading day)

Interest Rate Futures Contracts Final Settlement Pay-in: T+1 working day on or
after 11:30 a.m

Pay-in: T+1 working day on or

after 12:00 p.m

(T is trading day)

Interest Rate Derivatives - Risk Containment

Margins
 Initial Margins
 Computation of Initial Margin
 Exposure Limits
 Trading Member wise/ Custodial Participant wise Position Limit

72
Initial Margins
Initial margin shall be payable on all open positions of Clearing Members,
upto client level, at any point of time, and shall be payable upfront by Clearing
Members in accordance with the margin computation mechanism and/ or system as
may be adopted by Clearing Corporation from time to time. Presently, the initial
margins would be based on the zero coupon yield curve computed at the end of the
day as explained above with trades of same day settlement (t =0). However, in case of
large deviation between the yields generated using only t = 0 trades and all trades,
initial margins revised accordingly may be computed and collected by the Clearing
corporation from the members at its discretion.
Initial Margin shall include SPAN margins and such other additional margins,
that may be specified by Clearing Corporation from time to time.
Computation of Initial Margin
Clearing Corporation will adopt SPAN (Standard Portfolio Analysis of Risk)
system or any other system for the purpose of real time initial margin computation.
Initial margin requirements shall be based on 99% value at risk over a one day time
horizon. Provided, however, in the case of futures contracts, where it may not be
possible to collect mark to market settlement value, before the commencement of
trading on the next day, the initial margin may be computed over a two day time
horizon, applying the appropriate statistical formula.

73
ANALYSIS
The Objective of this analysis is to evaluate the profit/loss position of the
futures and options.
 The aim of conducting the analysis is to determine whether the
Investor who brought the derivatives of the company has incurred
Profit or loss.
 The other cause of conducting the analysis is to find out the nature of
the behavior of the derivatives of the company along the period of
observation.
 This analysis is based on sample data taken of KARVY STOCK
BROKING Scrip.
 This analysis considered the MARCH contract of HINDUSTAN
PETROLEUM LIMITED.
 The lot Size of KARVY STOCK BROKING is 200shares.
 The time period in which this analysis done is from 29Feburary to
27March2017.

74
 DATA OF KARVY STOCK BROKING THE FUTURES AND
SPOT PRICE MOVEMENTS
(TABLE 4.4)
DATE SPOT PRICE* FUTURE PRICE*

29-02-2017 300.30 299.00

03-03-2017 288.95 288.00
04-03-2017 282.35 279.20
05-03-2017 285.10 286.40
06-03-2017 281.55 279.10
07-03-2017 281.45 285.80
10-03-2017 285.45 286.00
12-03-2017 287.00 278.40
13-03-2017 279.00 268.70
14-03-2017 270.10 271.00
17-03-2017 270.35 252.45
18-03-2017 253.20 259.00
19-03-2017 262.25 254.00
24-03-2017 254.05 257.00
25-03-2017 257.00 263.45
26-03-2017 263.90 263.50
27-03-2017 255.05 255.00
(* Amount in Rs.)
SOURCE: The sources of the above data is collected from the official website of
National
Stock Exchange of India www.nseindia.com
If the call option writer bought 1 lot of shares on 29-02-2017 he has to buy at a
price of
Rs 300.30 and if he intends to sell it on the last day of trading in the month i.e, on 27-
03-08 his investment would be priced at 255.05 Rs per share and hence he bears a loss
of 45.95 Rs per share and the net loss incurred will be 45.95 * 200 = 1950 Rs.

75
 CHART REPRESENTING THE FUTURES AND SPOT PRICE

MOVEMENTS
Price of Future and Option

Future Price
310
Option Price
300
290
280
270
260
250
240
230
220

Average of Traded Dates

(Graph 4.1)
Note: The dates for the above graph is in Month/Day/Year format
INTERPRETATIONS
 The future price of KARVY STOCK BROKING is moving along with the
market price.
 If the buy price of the future is less than the settlement price, than the buyer of
a future gets profit.
 If the selling price of the future is less than the settlement price, then the seller
incurs loss.

76
 CALL OPTION AT DIFFERENT STRIKES
(TABLE 4.5)
PRICE* PREMIUM*
DATE SPOT FUTURE 280 300 310 320
29-02-2017 300.30 299.00 38.75 16.50 9.00 6.00

03-03-2017 288.95 288.00 29.75 11.10 16.90 6.00

04-03-2017 282.35 279.20 24.85 7.90 13.25 5.00

05-03-2017 285.10 286.40 25.25 10.00 5.00 10.55

06-03-2017 281.55 279.10 21.55 6.75 10.35 10.40

07-03-2017 281.45 285.80 21.65 7.80 9.70 3.00

10-03-2017 285.45 286.00 21.50 7.00 9.20 7.20

12-03-2017 287.00 278.40 16.60 5.05 2.80 6.70

13-03-2017 279.00 268.70 8.15 5.40 3.60 4.35

14-03-2017 270.10 271.00 10.35 4.65 3.00 2.35

17-03-2017 270.35 252.45 3.85 1.20 0.75 1.85

18-03-2017 253.20 259.00 5.70 2.70 1.15 0.40

19-03-2017 262.25 254.00 2.95 0.25 0.40 0.60

24-03-2017 254.05 257.00 0.75 0.15 0.10 0.20

25-03-2017 257.00 263.45 0.90 0.15 0.00 0.00

26-03-2017 263.90 263.50 0.15 0.10 0.00 0.00

27-03-2017 255.05 255.00 0.00 0.00 0.00 0.00

(* Amount in Rs.)
SOURCE: The sources of the above data is collected from the official website of
National
Stock Exchange of India www.nseindia.com

77
 INTERPRETATIONS BASED ON CALL OPTIONS AT
DIFFERENT STRIKES
BUYERS PAY OFF :( AT Rs280 STRIKE PRICE)
 As brought 1 lot of KARVY STOCK BROKING that is 200, those
who brought at strike price at 280 paid Rs.38.75 as premium per
share.
FORMULA:
PAY OFF PRICE = SPOT PRICE – STRIKE PRICE
We Know, Settlement price =255.05 Rs
Pay off Price = Spot price 255.05 Rs - Strike price 280.00Rs
Pay Off Price = -24.95 Rs
Since the payoff price is negative, the buyer is at aloss of Rs.24.95
pershare
And he will lose the premium amount
Net loss for the buyer = 38.75 Rs. X 200shares (1Lot) = 7750 Rs.

SELLERS PAY OFF:

 It is in the money for the buyer so it is in out of the money for
seller; hence his loss is also increasing. The profit for the seller is
only the premium amount
Strike price - Spot price
Rs.280.00 - Rs.255.05 = 38.75Rs. X 200Shares (1Lot)
=7750Rs.
BUYERS PAY OFF :( AT Rs300 STRIKE PRICE)
If 1 lot of KARVY STOCK BROKING is brought that is 200 shares,
at strike price of 300, the buyer paid Rs.16.50 as premium per
share.

78
 FORMULA:
PAY OFF PRICE = SPOT PRICE – STRIKE PRICE
We Know, Settlement price =255.05 Rs
Pay off Price = Spot price 255.05 Rs - Strike price 300.00Rs
Pay Off Price = - 44.95 Rs
Since the payoff price is negative, the buyer is at loss of Rs.44.95 per
share
And he will lose the premium amount,
Net loss for the buyer = 16.50 Rs. X 200shares (1Lot) = 3300 Rs.

SELLERS PAY OFF:

 It is in the money for the buyer so it is in out of the money for
seller; hence his loss is also increasing. The profit for the seller is
only the premium amount
Strike price - Spot price X 1 Lot = Sellers
Payoff
Rs.300.00 - Rs.255.05 = 44.95Rs. X 200Shares
(1Lot)
= 3300Rs.

79
 BUYERS PAY OFF :( AT Rs310 STRIKE PRICE)
If 1 lot of KARVY STOCK BROKING is brought that is 200 shares,
at strike price of 310, the buyer paid Rs.9.00 as premium per share.
FORMULA:
PAY OFF PRICE = SPOT PRICE – STRIKE PRICE
We Know, Settlement price =255.05 Rs
Pay off Price = Spot price 255.05 Rs - Strike price 310.00Rs
Pay Off Price = - 55 Rs
Since the payoff price is negative, the buyer is at loss of Rs.55 per share
And he will lose the premium amount
Net loss for the buyer = 9.00 Rs. X 200shares (1Lot) = 1800 Rs.

SELLERS PAY OFF:

 It is in the money for the buyer so it is in out of the money for
seller; hence his loss is also increasing. The profit for the seller is
only the premium amount

Strike price - Spot price X 1 Lot = Sellers Payoff

Rs.310.00 - Rs.255.05 = 9.00Rs. X 200Shares (1Lot)
=1800Rs.

BUYERS PAY OFF :( AT Rs320 STRIKE PRICE)

If 1 lot of KARVY STOCK BROKING is brought that is 200 shares,
at strike price of 320, the buyer paid Rs.6.00 as premium per share.
FORMULA:
PAY OFF PRICE = SPOT PRICE – STRIKE PRICE
We Know, Settlement price =255.05 Rs
Pay off Price = Spot price 255.05 Rs - Strike price 320.00Rs
Pay Off Price = - 64.95 Rs

80
Since the payoff price is negative, the buyer is at loss of Rs.64.95 per
share
And he will lose the premium amount
Net loss for the buyer = 6.00 Rs. X 200shares (1Lot) = 1200 Rs.

SELLERS PAY OFF:

 It is in the money for the buyer so it is in out of the money for
seller; hence his loss is also increasing. The profit for the seller is
only the premium amount
Strike price - Spot price X 1 Lot = Sellers Payoff
Rs.320.00 - Rs.255.05 = 6.00Rs. X 200Shares (1Lot)
=1200Rs

81
 PUT OPTION AT DIFFERENT STRIKES
(TABLE 4.6)
PRICE* PREMIUM*
DATE
SPOT FUTURE 280 300 310 320
29-02-2017 300.30 299.00 16.65 26.00 31.60 37.70
03-03-2017 288.95 288.00 19.15 29.85 36.10 42.90
04-03-2017 282.35 279.20 20.90 32.40 39.10 46.40
05-03-2017 285.10 286.40 18.60 29.80 36.35 43.55
06-03-2017 281.55 279.10 18.65 30.35 37.25 44.75
07-03-2017 281.45 285.80 15.00 26.15 32.90 40.35
10-03-2017 285.45 286.00 13.35 24.25 30.95 38.40
12-03-2017 287.00 278.40 3.00 27.80 35.15 43.20
13-03-2017 279.00 268.70 20.05 34.20 42.35 51.05
14-03-2017 270.10 271.00 19.00 33.30 41.55 50.40
17-03-2017 270.35 252.45 29.95 47.35 56.75 66.40
18-03-2017 253.20 259.00 22.80 39.05 48.15 57.60
19-03-2017 262.25 254.00 28.30 46.15 55.70 65.45
24-03-2017 254.05 257.00 23.55 42.85 52.80 62.80
25-03-2017 257.00 263.45 16.85 36.00 45.95 55.95
26-03-2017 263.90 263.50 17.00 36.85 46.85 56.85
27-03-2017 255.05 255.00 0.00 0.00 0.00 0.00

(* Amount in Rs.)

SOURCE: The sources of the above data is collected from the official website of
National
Stock Exchange of India www.nseindia.com

82
CHART REPRESENTING THE PAY OFFS BASED ON THE PUT
OPTIONS

9000
8000 7750
7000
6000
Pay off Price

Strike
5000
price
4000
3000 3300
Buyers'
2000 1800 pay off
1000 1200
0 280 300 310 320
Sellers'
Pay off
Strike Price

(Graph 4.2

INTERPRETATIONS BASED ON PUT OPTIONS

AT DIFFERENT STRIKES
BUYERS PAY OFF: (AT Rs280 STRIKE PRICE)
 Those who have purchase put option at a strike price of 280, the
premium payable is 16.65Rs.
 On the expiry date the spot market price enclosed at Rs. 255.05
Net pay off = Strike Price Rs 280.00 - Spot Price Rs.255.05 =
24. 95Rs
Deduct Premium Amount already Paid i.e., Rs 24.95 -
16.65Rs = 8.30Rs.
Total Profit = 8.30Rs X 200(1Lot Shares) = 1660Rs

SELLERS PAY OFF:

 As Seller is entitled only for premium if he is in profit, he will get
the same as the Profit amount.

83
 Pay off = Spot price Rs.280 - Strike price
255.05Rs.
Pay off = -24.95Rs
Net Loss Incurred = Rs.16.65 – Rs.24.95
Net Loss Incurred = Rs.8.30 X 200(1Lot Shares)
Net Loss Incurred =1660Rs.
BUYERS PAY OFF: (AT Rs300 STRIKE PRICE)
 Those who have purchase put option at a strike price of 300, the
premium payable is 26.00Rs.
 On the expiry date the spot market price enclosed at Rs. 255.05
Net pay off = Strike Price Rs.300.00 - Spot Price Rs.255.05
= 44.95Rs
Deduct Premium Amount already Paid i.e., Rs 44.95 – 26.00Rs
=18.95Rs.
Total Profit = 18.95Rs X 200(1Lot Shares) = 3790Rs.

SELLERS PAY OFF:

As Seller is entitled only for premium if he is in profit, he will get the
same as the profit amount.
Pay off = Spot price Rs.300 - Strike price
255.05Rs.
Pay off = 44.95Rs
Net Loss Incurred = Rs 44.95 – 26.00Rs X 200(1Lot
Shares)
= Rs.18.95 X 200(1Lot Shares)
=3790Rs.
84
 BUYERS PAY OFF: (AT Rs310 STRIKE PRICE)
 Those who have purchase put option at a strike price of 310, the
premium payable is 31.60Rs.
 On the expiry date the spot market price enclosed at Rs. 255.05
Net pay off=
Strike Price Rs. 310.00 - Spot Price Rs.255.05 =
54.95Rs
Deduct Premium Amount already Paid i.e., Rs 31.60 –
54.90Rs = 23.35Rs.
Total Profit = 23.35Rs. X 200(1Lot Shares) = 4670Rs.

SELLERS PAY OFF:

 As Seller is entitled only for premium if he is in profit, he will get

the same as the profit amount.

Pay off = Spot price Rs.310 - Strike price

255.05Rs.

Pay off = 54.95Rs

Net Loss Incurred = Rs 54.95 – 26.00Rs X 200(1Lot

Shares)

= Rs.23.35 X 200(1Lot Shares)

= 4670Rs.
85
 BUYERS PAY OFF: (AT Rs320 STRIKE PRICE)

 Those who have purchase put option at a strike price of 320, the
premium payable is 37.70Rs.
 On the expiry date the spot market price enclosed at Rs. 255.05
Net pay off=Strike Price Rs 320.00 - Spot Price
Rs.255.05 = 64.95Rs

Deduct Premium Amount already Paid i.e., Rs 37.7 0 –

64.90Rs =27.25Rs.
Total Profit = 27.22Rs. X 200(1Lot Shares) = 5450Rs.

SELLERS PAY OFF:

 As Seller is entitled only for premium if he is in profit, he will get
the same as the profit amount
Pay off = Spot price Rs.320 - Strike price
255.05Rs
Pay off = 64.95Rs
Net Loss Incurred = Rs 64.95 – 37.70Rs X 200(1Lot
Shares)
= Rs.27.25 X 200(1Lot Shares)
= 5450Rs.

CHART REPRESENTING THE PAY OFFS BASED ON THE PUT

OPTIONS

86
 6000
5450
5000
Pay off prices 4670
4000
3790
Strike
3000 Price

2000
1660 Buyers
1000 Pay off
310 320 Price
280 300
0
sellers Pay
1 2 3 4
off Price
Strike Price

(Graph 4.3)

TABLE SHOWING THE PRICE MOVEMENTS OF THE FUTURE

PRICE
(TABLE 4.7)

DATE FUTURE PRICE*

29-02-2017 299.00

03-03-2017 288.00

04-03-2017 279.20

05-03-2017 286.40

87
 06-03-2017 279.10

07-03-2017 285.80

10-03-2017 286.00

12-03-2017 278.40

13-03-2017 268.70

14-03-2017 271.00

17-03-2017 252.45

18-03-2017 259.00

19-03-2017 254.00

24-03-2017 257.00

25-03-2017 263.45

26-03-2017 263.50

27-03-2017 255.00

(* Amount in Rs.

SOURCE: The sources of the above data is collected from the official website of
National
Stock Exchange of India www.nseindia.com
(Graph 4.4)

88
 Representation of Future Price on Traded dates

Future prices
310
300
290
280
270
260 Closing Prices
250
240
230
220
10

10

08

10
10

08
08
10

08
0

20

20
20
20

20
0

20
/2

/2
-2

3-

3-
3/

3-

3-
3-
3

3
2

4/

6/

00

10
00
00
-0

-0
10
29

13

21

27
11
11

Trading Dates

INTERPRETATIONS:
From the above graph we could Interpret that the Future Prices of M/S.
KARVY STOCK BROKING is not constant and is fluctuating and the price on the
first traded date i.e, on 29/02/2017 is more than that of the last traded date i.e, on
27/03/2017.

89
CHAPTER - 6
FINDINGS
SUGGESTIONS
CONCLUSIONS

90
 FINDINGS

 In the call option as the amount of the strike price increases the amount of the
remium to be paid decreases. (This is clear from the table 4.5).
 In the put option as the amount of the strike price increases the amount of the
premium to be paid also increases. (This is clear from the table 4.6).
 In the short selling’s the futures turn out to be a cheaper option for the investors of
“M/S.KARVY STOCK BROKING ”.
 The settlement price will be considered as the final price in calculating the future
and options prices and the closing price of the equities will be considered as the spot
price in the evaluation of F&O’s.
 The future price of M/S.KARVY STOCK BROKING is moving along with the
market price.
 If the buy price of the future is less than the settlement price, then the buyer of a
future gets profit.
 If the selling price of the future is less than the settlement price, then the seller
incurs loss.

91
 SUGGESTIONS

 The investors need to continuously monitor and assess the effectiveness of the
hedging strategies and ensure that they are in synchronization with the under lying
asset profile.
 It is suggested that the regulatory authorities allow short selling by institutional
investors in the Cash market as a means of physical settlement in the F&O segment.
 An introduction to short selling will help the deepening of the market (Derivatives)
in terms of availability of products/stocks.
 If the physical settlement comes into existence the allegations of manipulation of the
stocks in the derivatives segment could be easily resolved.
 It would be suggestive that the derivatives accounting be made mandatory for
corporate investors to look at the derivatives exposure of the companies on the basis
of accounting prudence.
 The authorities should revise some of their regulations with respect to the contract
size, and should encourage the participation of Foreign Institutional Investors (FII’s)
in the derivatives market to encourage the active functioning of the derivatives
market in India
 To encourage the participation of the small investors’ measures like minimization of
the Contract size should be taken care of.

92
 CONCLUSIONS

 Through the observations it could be concluded that the price of the future stock of
 KARVY STOCK BROKING is fluctuating throughout the traded dates that was
analyzed.
 The analysis made on the basis of KARVY STOCK BROKING showed that, the call
option writers gain more amount of profit than the put option writers due to
relatively low volatility.
 Investors are unable to closely match the hedge transactions with the underlying
exposures, there by causing ineffectiveness in derivatives trading
 It may turn out that some times going short calls via futures would be profitable
while at other times, it (Going short in cash market) would be feasible in derivatives.
 If Derivatives are judiciously used, with the intention of mitigating the underlying
assets, it can act as a boon, but if used for speculative purposes, can often have
disastrous results.
 In bullish market the call option writer incurs more losses so the investor is
suggested to go for a call option to hold, where as the put option holder suffers in a
bullish market, so he is suggested to write a put option.
 In bearish market the call option holder will incur more losses so the investor is
suggested to go for a call option to write, where as the put option writer will get
more losses, so he is suggested to hold a put option.

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BIBLIOGRAPHY

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 BIBLIOGRAPHY

BOOKS:
TITLE OF THE BOOK AUTHOR PUBLISHER
Financial Institutions & Markets Meir Kohn Oxford University Press
Financial Management; 2ND Edition Prasanna Chandra Tata Mc Graw Hill
Financial Markets and Services Gordan and Natrajan Tata Mc Graw Hill
Security Analysis & Portfolio Donald E Fischer & Prentice Hall Of India
Management Ronald R Jordan
Derivatives Core Module Work book Advisors of National Stock NSE Press
Exchange of India

WEBSITES:
www.derivativesindia.com
www.sebiindia.com
www.indianinfoline.com
www.nseindia.com
www.bseindia.com
www.5paisa.com

NEWS PAPERS:
The Economic Times”
Business Line
Business Standard
Financial Express

MAGAZINE
1. Barron’s
2. The Economist
3. Kiplinger’s

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