Final Project | Financial Markets | Derivative (Finance)




Particulars of the Contents

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Executive Summary Introduction Company profile Research Design

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Analysis and Interpretation










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Executive Summary Derivative security or derivative is a contract which specifies the right or obligation between two parties to receive or deliver future cash flows (or exchange of other securities or assets) based on some future event. Another way of defining a derivative is that it is a security whose value is determined (derived) from one or more other securities, commodities, or events. The value is influenced by the features of the derivative contract, which may include the timing of the contract fulfillment, the value of the underlying security or commodity, and other factors such as volatility. The payments between the parties may be determined by the future changes of:

 The price of some other, independently traded asset in the future (e.g., a common stock)  The level of some index (e.g., a stock index or heating-degree-days)  The occurrence of some well-specified event (e.g., a company defaulting)

Some derivatives are the right to buy or sell the underlying security or commodity at some point in the future for a predetermined price. If the price of the underlying security or commodity moves into the right Direction, the owner of the derivative makes money; otherwise, they lose money. Depending on the definition of the contract, the potential loss or gain may be much higher than if they had traded the underlying security or commodity directly.

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CLASSIFICATION OF DERIVATIVES: Derivatives are basically classified based upon the mechanism that is used to trade on them. They are:  Over the Counter derivatives  Exchange traded derivatives The OTC derivatives are between two private parties and are designed to suit the requirements of the parties concerned. The Exchange traded ones are standardized ones where the exchange sets the standards for trading by providing the contract specifications and the clearing corporation provides the trade guarantee and the settlement activities Common examples of derivatives are:  Forward contracts  Futures contracts  Options such as stock options  Swaps

Justification  This study will provide cause and effect of volatility in options trading.  It can be a yard stick for the share holder to take the advantage of differences in option pricing.  It can also serve companies objective of providing accurate investment information to its investor.

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who borrow or use the money. That means persons having excess of money lend it to those who need money to fulfill their requirement.3 KET Money Market The money market is a market for short-term funds. Similarly. The financial markets act as a link between these two different groups. financial institutions and other intermediaries who are linked by a formal trading rules and communication network for trading the various financial assets and credit instruments. one who invest money or lend money and the others. (e) It ensures low cost of transactions and information. which deals in financial assets whose period of maturity is upto one year. (c) It provides security to dealings in financial assets. (b) It provides pricing information resulting from the interaction between buyers and sellers in the market when they trade the financial assets. It facilitates this function by acting as an intermediary between the borrowers and lenders of money. how these two groups meet and transact with each other. (d) It ensures liquidity by providing a mechanism for an investor to sell the financial assets. we find two different groups. and (b) Capital Market. MARKETS Types Of Financial Market CIAL A financial market consists of two major segments: (a) Money Market. Let us discuss these two types of markets in detail. These financial instruments are close substitute of [Type text] Page 4 . the capital market handles the medium term and long-term credit. So. It consists of individual investors. Let us now see the main functions of financial market. financial market may be defined as „a transmission mechanism between investors (or lenders) and the borrowers (or users) through which transfer of funds is facilitated‟. So. etc. money always flows from surplus sector to deficit sector. Now you think. While the money market deals in short-term credit. (a) It provides facilities for interaction between the investors and the borrowers.INTRODUCTION Financial Market We know that. in business sectors the surplus money flows from the investors or lenders to the businessmen for the purpose of production or sale of goods and services. commercial paper. It should be noted that money market does not deal in cash or money as such but simply provides a market for credit instruments such as bills of exchange. promissory notes. treasury bills.

(c) Commercial Paper: Commercial paper (CP) is a popular instrument for financing working capital requirements of companies. So the difference between the issue price and the face value of the treasury bill represents the interest on the investment. Co-operative banks. and other specialised financial institutions. The Reserve Bank of India is the leader of the money market in India. MONEY MARKET INSTRUMENTS Following are some of the important money market instruments or securities. co-operatives and companies. These instruments help the business units. etc. GIC. The Indian money market consists of Reserve Bank of India. These can be issued to individuals. (b) Treasury Bill: A treasury bill is a promissory note issued by the RBI to meet the short-term requirement of funds. Money market does not imply to any specific market place. The CP is an unsecured instrument issued in the form of promissory note. Financial institutions and corporations normally play major role in the Treasury bill market. Commercial papers are transferable by endorsement and delivery. (a) Call Money: Call money is mainly used by the banks to meet their temporary requirement of cash. and redeemed at face value. Rather it refers to the whole networks of financial institutions dealing in short-term funds. These bills are normally issued at a price less than their face It is repayable on demand and its maturity period varies in between one day to a fortnight. It can be issued for period ranging from 15 days to one year. The rate of interest paid on call money loan is known as call rate. other organisations and the Government to borrow the funds to meet their short-term requirement. The maturity period of CDs ranges from 91 days to one year. UTI. fax or Internet. which are freely transferable from one party to another. [Type text] Page 5 . that means. which provides an outlet to lenders and a source of supply for such funds to borrowers. This instrument was introduced in 1990 to enable the corporate borrowers to raise short-term funds. (d) Certificate of Deposit: Certificate of Deposit (CDs) are short-term instruments issued by Commercial Banks and Special Financial Institutions (SFIs). Banks. These bills are secured instruments and are issued for a period of not exceeding 364 days. Some Non-Banking Financial Companies (NBFCs) and financial institutions like LIC. Commercial banks. Most of the money market transactions are taken place on telephone. also operate in the Indian money market. at any time the holder of treasury bills can transfer of or get it discounted from RBI. They borrow and lend money from each other normally on a daily basis. Treasury bills are highly liquid instruments. The highly reputed companies (Blue Chip companies) are the major player of commercial paper market.

So trade bill is an instrument. The primary market deals with new or fresh issue of securities and is. NTPC and the private sector companies like Tata Consultancy Services (TCS). SECONDARY MARKET The secondary market known as stock market or stock exchange plays an equally important role [Type text] Page 6 . bonds. You must have learnt about many initial public offers (IPOs) made recently by a number of public sector undertakings such as ONGC. etc.(e) Trade Bill: Normally the traders buy goods from the wholesalers or manufactures on credit. When trade bills are accepted by Commercial Banks it is known as Commercial Bills. which facilitate the procurement of long-term funds by companies by making fresh issue of shares and debentures. whereas the secondary market provides a place for purchase and sale of existing securities and is often termed as stock market or stock exchange. Jet-Airways and so on. On maturity the bank gets the payment from the drawee i. This trade bill can now be discounted with a bank before its maturity. In the present chapter let us discuss about the market for trading of securities. Biocon. if necessary. When buyer accepts the bill it becomes a negotiable instrument and is termed as bill of exchange or trade bill. therefore. It is an institutional arrangement for borrowing medium and long-term funds and which provides facilities for marketing and trading of securities. The sellers get payment after the end of the credit period. subsequently for the expansion of business.. brokers. So it constitutes all long-term borrowings from banks and financial institutions. also known as new issue market. But if any seller does not want to wait or in immediate need of money he/she can draw a bill of exchange in favour of the buyer.e. GAIL. relatives and financial institutions or by making public issue. the companies have to follow a well-established legal procedure and involve a number of intermediaries such as underwriters. In any case. The market where securities are traded known as Securities market. It consists of two different segments namely primary and secondary market. the buyer of goods. Capital Market Capital Market may be defined as a market dealing in medium and long-term funds. etc. You know that companies make fresh issue of shares and/or debentures at their formation stage and. PRIMARY MARKET The Primary Market consists of arrangements. who form an integral part of the primary market. which enables the drawer of the bill to get funds for short period to meet the working capital needs. borrowings from foreign markets and raising of capital by issue various securities such as shares debentures. It is usually done through private placement to friends.

IFCI. fully automated screen-based trading and nation-wide coverage. LIC etc. BSE and NSE are the two Stock Exchanges. and in the secondary market you have all these and the stockbrokers who are members of the stock exchange who facilitate the trading. A number of unorganised stock exchanges also functioned in the country without any formal set-up and were known as kerb market. IDBI. and debentures are traded regularly with high degree of transparency and security. On this stock exchange. It provides a place where these securities can be encashed without any difficulty and delay. which included the abolition of the office of the Controller of Capital [Type text] Page 7 . It helps entrepreneurs in raising finances for their new projects in a cost effective manner. The major players in the primary market are merchant bankers. The number of stock exchanges in India went upto 7 by 1939 and it increased to 21 by 1945 on account of heavy speculation activity during Second World War. certain shares and debentures listed with other stock exchanges in India and the units of UTI and other mutual funds are also allowed to be traded on OTCEI as permitted securities. It has been noticed that.25 crore. It provides for nation-wide online ringless trading with 20 plus representative offices in all major cities of the country. At present we have 23 stock exchanges in the country. the most prominent stock exchange that came up is National Stock Exchange (NSE). It is also based in Mumbai and was promoted by the leading financial institutions in India. In fact. It was followed by Ahmedabad Stock Exchange in 1894 and Kolkata Stock Exchange in 1908. mutual funds. This stock exchange has a corporate structure. It was also promoted by the financial institutions like UTI. the Government of India initiated several capital market reforms. an active secondary market facilitates the growth of primary market as the investors in the primary market are assured of a continuous market for liquidity of their holdings. which enjoy nation-wide coverage and handle most of the business in securities in the country.30 lakh and less than Rs. of late. It was incorporated in 1992 and commenced operations in 1994. ICICI. the turnover at this stock exchange has considerably reduced and steps have been afoot to revitalise it. as of now. Indian Stock Exchange The first organised stock exchange in India was started in Mumbai known as Bombay Stock Exchange (BSE). in September 1992 specially to cater to small and medium sized companies with equity capital of more than Rs. Of these. and the individual investors. Another stock exchange that needs special mention is Over The Counter Exchange of India (OTCEI). securities of those companies can be traded which are exclusively listed on OTCEI only. Role Of SEBI As part of economic reforms programme started in June 1991. It is an organised market where shares. In addition. The Security Contracts (Regulation) Act was passed in 1956 for recognition and regulation of Stock Exchanges in India. financial mobilising long-term funds by providing the necessary liquidity to holdings in shares and debentures. In fact.

6. The payments between the parties may be determined by the future changes of:  The price of some other. 1956 as may be delegated to it by the Central Government. which may include the timing of the contract fulfillment. and other factors such as volatility. Regulating the business in stock exchanges and any other securities market 2. Regulating substantial acquisition of shares and takeover of companies. or events. 7. 4. 1947 and the Securities Contracts (Regulation) Act. and 8. Calling for information. The value is influenced by the features of the derivative contract. Promoting and regulating self regulatory organizations. promoting investors education and training of intermediaries.g. undertaking inspection. 5.. conducting inquiries and audit of stock exchanges. (b) promoting the development of securities market. Performing such functions and exercising such powers under the provisions of the Capital Issues (Control) Act. (c) regulating the securities market. commodities. DERIVATIVES Derivative security or derivative is a contract which specifies the right or obligation between two parties to receive or deliver future cash flows (or exchange of other securities or assets) based on some future event. and intermediaries and self regulation organizations in the stock market. independently traded asset in the future (e.Issues (CCI) and granting statutory recognition to Securities Exchange Board of India (SEBI) in 1992 for: (a) protecting the interest of investors in securities. Registering and regulating the working of various intermediaries and mutual funds 3. Prohibiting insider trading and unfair trade practices. the value of the underlying security or commodity. Another way of defining a derivative is that it is a security whose value is determined (derived) from one or more other securities. SEBI has been vested with necessary powers concerning various aspects of capital market such as: 1. a Common stock) [Type text] Page 8 . and (d) matters connected there with or incidental thereto.

. they lose money.g. Types of derivative are:1. a company defaulting) Some derivatives are the right to buy or sell the underlying security or commodity at some point in the future for a predetermined price. Future 3. a stock index or heating-degree-days)  The occurrence of some well-specified event (e.. Forward 2. Swap [Type text] Page 9 . Options 4. otherwise. The level of some index (e. If the price of the underlying security or commodity moves into the right direction. Depending on the definition of the contract.g. the potential loss or gain may be much higher than if they had traded the underlying security or commodity directly. the owner of the derivative makes money.

trading in securities is screen based. The secondary market provides a trading place for the securities already issued to be bought and sold. advertisements and brokers reach the investors. The public sector consisting of central and state governments. The primary market deals with the issue of new instruments by the corporate sector such as equity shares. which they lend to borrowers in the corporate and public sector whose requirement of funds far exceeds their savings. dealers and does not refer to a physical location. Screen based trading eliminates the need of trading floor. [Type text] Page 10 . the Indian financial system consists of the money market and capital market. A financial market consists of investors or buyers. An active secondary market actually promotes the growth of the primary market and capital formation because investors in the primary market are assured of a continuous market and they can liquidate their investments in the stock exchange. It also provides liquidity to the initial buyers in the primary market to re-offer the securities to any interested buyer at a price.INDIAN CAPITAL MARKET The function of the financial market is to facilitate the transfer of funds from surplus sectors (lenders) to deficit sector (borrowers). The capital market consists of primary market and secondary market segments. Normally. sellers. if mutually accepted. statutory and other authorities such as state electricity boards and port trust also issue bonds. The secondary market or stock exchange where existing securities are traded is an auction arena. Screen based trading has also made an appearance in India. The primary market in which public issue of securities is made through a prospectus is a retail market and there is no physical location. The secondary markets consist of 23 stock exchanges including the NSE and OTCEI and Inter Connected Stock Exchanges of India ltd. various public sector industrial units (PSUs). preference shares and debentures. Direct mailing. household has excess of funds or savings. As elsewhere in the world. Since 1995.

Innovations NSE pioneering efforts include:   Being the first national. NSE is mutually-owned by a set of leading financial institutions. an index of fifty major stocks weighted by market capitalization. 2799 in total.59 trillion and over 1. Setting up the first clearing corporation "National Securities Clearing Corporation Ltd. NSE has a market capitalization of around US$1. for both equities and derivative trading. known as the NSE NIFTY (National Stock Exchange fifty). insurance companies and other financial intermediaries in India but its ownership and management operate as separate entities. Though a number of other exchanges exist. The Capital market (Equities) segment of the NSE commenced operations in November 1994. It is the second fastest growing stock exchange in the world with a recorded growth of 16. 1956. India. the NSE VSAT terminals. Page 11 [Type text] . and was incorporated in November 1992 as a tax-paying company. There are at least 2 foreign investors NYSE Euronext and Goldman Sachs who have taken a stake in the NSE. It is the 9th largest stock exchange in the world by market capitalization and largest in India by daily turnover and number of trades. while operations in the Derivatives segment commenced in June 2000. NSE is the third largest Stock Exchange in the world in terms of the number of trades in equities. existent market and new market structures have followed the "NSE" model. Origins The National Stock Exchange of India was promoted by leading financial institutions at the behest of the Government of India. NSE and the Bombay Stock Exchange are the two most significant stock exchanges in India and between them are responsible for the vast majority of share transactions. it was recognized as a stock exchange under the Securities Contracts (Regulation) Act. Since the success of the NSE.NSE India The National Stock Exchange (NSE) (Hindi: राष्ट्रीय शेअर बाजार Rashtriya Śhare Bāzaār) is a stock exchange located at Mumbai. banks.552 listings as of December 2010. electronic limit order book (LOB) exchange to trade securities in India." in India. In April 1993.6%. cover more than 1500 cities across India. The NSE's key index is the S&P CNX Nifty. anonymous. NSE commenced operations in the Wholesale Debt Market (WDM) segment in June 1994. derivatives market) trades in India. NSCCL was a landmark in providing innovation on all spot equity market (and later. As of 2006.

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Co-promoting and setting up of National Securities Depository Limited, first depository in India Setting up of S&P CNX Nifty. NSE pioneered commencement of Internet Trading in February 2000, which led to the wide popularization of the NSE in the broker community. Being the first exchange that, in 1996, proposed exchange traded derivatives, particularly on an equity index, in India. After four years of policy and regulatory debate and formulation, the NSE was permitted to start trading equity derivatives Being the first and the only exchange to trade GOLD ETFs (exchange traded funds) in India. NSE has also launched the NSE-CNBC-TV18 media centre in association with CNBCTV18. NSE.IT Limited, setup in 1999, is a 100% subsidiary of the National Stock Exchange of India. A Vertical Specialist Enterprise, NSE.IT offers end-to-end Information Technology (IT) products, solutions and services. NSE (National Stock Exchange) was the first exchange in the world to use satellite communication technology for trading, using a client server based system called National Exchange for Automated Trading (NEAT). For all trades entered into NEAT system, there is uniform response time of less than one second.

Currently, NSE has the following major segments of the capital market:
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Equity Futures and Options Retail Debt Market Wholesale Debt Market Currency futures MUTUAL FUND STOCKS LENDING & BORROWING

August 2008 Currency derivatives were introduced in India with the launch of Currency Futures in USD INR by NSE. Currently it has also launched currency futures in EURO, POUND & YEN. Interest Rate Futures was introduced for the first time in India by NSE on 31 August 2009, exactly after one year of the launch of Currency Futures. NSE became the first stock exchange to get approval for Interest rate futures as recommended by SEBI-RBI committee, on 31 August 2009, a futures contract based on 7% 10 Year GOI bond (NOTIONAL) was launched with quarterly maturities.

Working Hours

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NSE's normal trading sessions are conducted from 9:15 am India Time to 3:30 pm India Time on all days of the week except Saturdays, Sundays and Official Holidays declared by the Exchange (or by the Government of India) in advance. The exchange, in association with BSE (Bombay Stock Exchange Ltd.), is thinking of revising its timings from 9.00 am India Time to 5.00 pm India Time. There were System Testing going on and opinions, suggestions or feedback on the New Proposed Timings are being invited from the brokers across India. And finally on 18 November 2009 regulator decided to drop their ambitious goal of longest Asia Trading Hours due to strong opposition from its members. On 16 December 2009, NSE announced that it would advance the market opening to 9:00 am from 18 December 2009. So NSE trading hours will be from 9.00 am till 3:30 pm India Time. However, on 17 December 2009, after strong protests from brokers, the Exchange decided to postpone the change in trading hours till 4 Jan 2010. NSE new market timing from 4 Jan 2010 is 9:00 am till 3:30 pm India Time.

Derivative Products in NSE S&P CNX Nifty : Futures | Options Mini derivative contracts : Futures | Options CNXIT : Futures | Options BANK Nifty : Futures | Options Nifty Midcap 50 : Futures | Options Individual Securities : Futures | Options

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NSE Group




DotEx Intl. Ltd. IISL NSE.IT

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the first Clearing Corporation Introduction of centralized insurance cover for all trading members Establishment of Investor Protection Fund Became largest stock exchange in the country Commencement of clearing and settlement by NSCCL Launch of S&P CNX Nifty Establishment of Settlement Guarantee Fund Setting up of National Securities Depository Limited. India Index Services & Products Limited (IISL) Launch of NSE's Web-site: www. first depository in India. co-promoted by NSE Best IT Usage award by Computer Society of India Commencement of trading/settlement in dematerialized securities Dataquest award for Top IT User Launch of CNX Nifty Junior Regional clearing facility goes live Best IT Usage award by Computer Society of India Promotion of joint venture.NSE Milestones November 1992 April 1993 May 1993 June 1994 November 1994 March 1995 April 1995 June 1995 July 1995 October 1995 April 1996 April 1996 June 1996 November 1996 November 1996 December 1996 December 1996 December 1996 February 1997 November 1997 May 1998 May 1998 [Type text] Incorporation Recognition as a stock exchange Formulation of business plan Wholesale Debt Market segment goes live Capital Market (Equities) segment goes live Establishment of Investor Grievance Cell Establishment of Page 15 .

CRISIL announce launch of NSE launches derivatives on Nifty Junior & CNX 100 NSE launches derivatives on Nifty Midcap 50 Page 16 .IT Launch of NSE Research Initiative Commencement of Internet Trading Commencement of Derivatives Trading (Index Futures) Launch of 'Zero Coupon Yield Curve' Launch of Broker Plaza by Dotex International. New Delhi Launch of Futures & options in BANK Nifty Index 'Derivative Exchange of the Year'. Commencement of WAP trading Commencement of trading in Index Options Commencement of trading in Options on Individual Securities Commencement of trading in Futures on Individual Securities Launch of NSE VaR for Government Securities Launch of Exchange Traded Funds (ETFs) NSE wins the Wharton-Infosys Business Transformation Award in the Organization-wide Transformation category Launch of NSE Government Securities Index Commencement of trading in Retail Debt Market Launch of Interest Rate Futures Launch of Futures & options in CNXIT Index Launch of STP Interoperability Launch of NSE‟s electronic interface for listed companies „India Innovation Award‟ by EMPI Business School.July 1998 August 1998 February 1999 April 1999 October 1999 January 2000 February 2000 June 2000 September 2000 November 2000 December 2000 June 2001 July 2001 November 2001 December 2001 January 2002 May 2002 October 2002 January 2003 June 2003 August 2003 June 2004 August 2004 March 2005 June 2005 December 2006 January 2007 March 2007 June 2007 October 2007 [Type text] Launch of NSE's Certification Programme in Financial Market CYBER CORPORATE OF THE YEAR 1998 award Launch of Automated Lending and Borrowing Mechanism CHIP Web Award by CHIP magazine Setting up of NSE. by Asia Risk magazine Launch of NSE – CNBC TV 18 media centre NSE. and I-flex Solutions Ltd.IT Ltd. a joint venture between NSE.

SGX product cross listing agreement Financial Derivative Exchange of the Year Award' by Asian Banker Commencement of trading of S&P CNX Nifty Futures on CME Real Time dissemination of India VIX.January 2008 March 2008 April 2008 April 2008 August 2008 August 2009 November 2009 December 2009 February 2010 March 2010 April 2010 July 19. 2010 November 9. LOI signed with London Stock Exchange Group Introduction of Call auction in Pre-open session Introduction of European Style Stock Options Introduction of Currency Options on USD INR Launch of mobile trading for all investors December 29. 2010 October 29.CME Group & NSE . 2010 October 28. 2010 July 28. 2010 July 19. 2010 Introduction of Mini Nifty derivative contracts on 1st January 2008 Introduction of long term option contracts on S&P CNX Nifty Index Launch of India VIX Launch of Securities Lending & Borrowing Scheme Launch of Currency Derivatives Launch of Interest Rate Futures Launch of Mutual Fund Service System Commencement of settlement of corporate bonds Launch of Currency Futures on additional currency pairs NSE. 2010 NSCCL Rated “CCR AAA” for third consecutive year January 05. 2010 October 12. 2011 NSE receives Financial Inclusion Award [Type text] Page 17 .

Today it supports more than 2500 VSATs and 3000 leased lines across the country.Ends. NSE InfoTech Services Ltd. capacity enhancement measures were taken up in regard to the trading systems so as to effectively meet the requirements of increased users and associated trading loads. Each trading member trades on the NSE with other members through a PC located in the trading member's office. The NSE. SQL/ORACLE FORMS Front . procured from HP for the back office processing. Currency Derivatives. NSE is one of the largest interactive VSAT based stock exchanges in the world. all trading information is stored in an in-memory database to achieve minimum response time and maximum system availability for users. The trading server software runs on OpenVOS based fault tolerant STRATUS main frame computer hosted on the Intel Platform while the client software runs on Microsoft Windows is the largest private wide area network in the country and the first extended C. and to provide for new business opportunities. At the server end. The trading members on the various market segments such as CM. developments in information.25 protocol earlier. The telecommunications network is the backbone of the automated trading system has been upgraded to use the more popular and modern IP Protocol which was using X. communication and network technologies have created paradigm shifts in the securities market operations.Technology Used By NSE Across the globe. NEAT is a state-of-the-art client server based application. SLBM. bring about innovations in products and services. NSE set up a separate company. have wider reach and provide a better mechanism for trade and post trade execution. F&O. Technology has enabled organizations to build new sources of competitive advantage. With upgradtion of trading hardware.Band VSAT network in the world. etc. In the recent past. Stock exchanges all over the world have realized the potential of IT and have moved over to electronic trading systems. NSE stresses on innovation and sustained investment in technology to remain ahead of competition. Currently more than 10000 users are trading on the real time-online NSE application. which provides a platform for taking up all IT related assignments of NSE. NSE's IT set-up is the largest by any company in India. It uses satellite communication technology to energize participation from around 200 cities spread all over the country. TAP facilitates IT Infrastructure consolidation and routes the orders and trades between Client and Server in an optimized protocol. NSE believes that technology will continue to provide the necessary impetus for the organisation to retain its competitive edge and ensure timeliness and satisfaction in customer service. WDM. MF and IPO are linked to the central computer at the NSE through dedicated leased lines and VSAT terminals. In recognition of the fact that technology will continue to redefine the shape of the securities industry. which are cheaper. Between the NEAT client and server there is another layer called the Trading Access Point (TAP). In order to capitalize on in-house expertise in technology. have [Type text] Page 18 . The latest software platforms like ORACLE RDBMS. The Exchange uses powerful UNIX servers. NSE today can handle up to 15 million trades per day in Capital Market segment. a corporate network has been implemented. Calcutta and Chennai. There are over 500 server class computer systems which include non-stop fault-tolerant Stratus servers and high end UNIX servers. In an ongoing effort to improve NSE's infrastructure. design and development of in-house systems and design and implementation of telecommunication solutions. a shared web infrastructure. NSE today allows members to provide internet trading facility to their clients through the use of NOW (NSE on web). NSE has its online presence at www. connecting all the offices at Mumbai. The website displays its live stock quotes which are updated online and corporate announcements. The Exchange currently manages its data centre operations. Members. Issuers and other market participants. Delhi. [Type text] Page 19 . system and database administration. The website has been designed to cater to the needs of Investors.been used for the Exchange applications. operational under one roof to support the NSE applications. This corporate network enables speedy inter-office communications and data and voice connectivity between offices. This coupled with the nationwide VSAT network makes NSE the country's largest Information Technology user.

Initial margin requirement for a member:  For client positions .is netted at the level of individual client and grossed across all clients. Initial Margin a. However. The most critical component of a risk containment mechanism for NSCCL is the online position monitoring and margining system. Initial margin requirements are based on 99% value at risk over a one day time horizon. NSCCL uses the SPAN® (Standard Portfolio Analysis of Risk) system for the purpose of margining. applying the appropriate statistical formula. The methodology for computation of Value at Risk percentage is as per the recommendations of SEBI from time to time. Similarly. the initial margin is computed over a two-day time horizon. where it may not be possible to collect mark to market settlement value. without any setoffs between clients.Risk Management Through Margins Margins NSCCL has developed a comprehensive risk containment mechanism for the Futures & Options segment. Span Margin NSCCL collects initial margin up-front for all the open positions of a CM based on the margins computed by NSCCL-SPAN®.is netted at Trading/ Clearing Member level without Page 20  [Type text] . at the Trading/ Clearing Member level. which is a portfolio based system. before the commencement of trading on the next day. For proprietary positions . A CM is in turn required to collect the initial margin from the TMs and his respective clients. a TM should collect upfront margins from his clients. in the case of futures contracts (on index or individual securities). The actual margining and position monitoring is done on-line. on an intra-day basis.

Premium Margin In addition to Span Margin. The Assignment Margin is the net exercise settlement value payable by a Clearing Member towards interim and final exercise settlement and is deducted from the effective deposits of the Clearing Member available towards margins. For Index options and Index futures contracts: 3% of the notional value of a futures contract. Premium Margin is charged to members. It is levied on assigned positions of CMs towards interim and final exercise settlement obligations for option contracts on index and individual securities till the payin towards exercise settlement is complete. various parameters are specified from time to time.For a futures contract – the contract value at last traded price/ closing price. For the purpose of SPAN Margin. For option contracts and Futures Contract on individual Securities: The higher of 5% or 1. In case a trading member wishes to take additional trading positions his CM is required to provide Additional Base Capital (ABC) to NSCCL. ii.any setoffs between client and proprietary positions. The premium margin is the client wise premium amount payable by the buyer of the option and is levied till the completion of pay-in towards the premium settlement. Assignment margin is released to the CMs for exercise settlement pay-in. For this purpose notional value means: . The standard deviation of daily logarithmic returns of prices in the underlying stock in the cash market in the last six months is computed on a rolling and monthly basis at the end of each month.5 standard deviation of the notional value of gross open position in futures on individual securities and gross short open positions in options on individual securities in a particular underlying. Assignment Margin Assignment Margin is levied on a CM in addition to SPAN margin and Premium Margin. Bank Guarantee. b. Fixed Deposit Receipts and approved securities. ABC can be provided by the members in the form of Cash. [Type text] Page 21 . c. Initial Margin requirement = Total SPAN Margin Requirement + Buy Premium + Assignment Margin Exposure Margin The exposure margins for options and futures contracts on index are as follows: i. In case of options it is charged only on short positions and is 3% of the notional value of open positions.

The calendar spread position is granted calendar spread treatment till the expiry of the near month contract. 2. Clearing – Computing obligations of all his TM's i. their clients‟ trades as well as trades of other TM‟s & Custodial Participants Professional Clearing Member (PCM) A CM who is not a TM. Settlement . Primarily. determining positions to settle. Clearing & Settlement (Derivatives) National Securities Clearing Corporation Limited (NSCCL) is the clearing and settlement agency for all deals executed on the Derivatives (Futures & Options) segment. In case of calendar spread positions in futures contract. the CM performs the following functions: 1. Risk Management – Setting position limits based on upfront deposits / margins for each TM and monitoring positions on a continuous basis.e. Typically banks or custodians could become a PCM and clear and settle for TM‟s as well as of the Custodial Participants Self Clearing Member (SCM) A Clearing Member who is also a TM. A Clearing Member (CM) of NSCCL has the responsibility of clearing and settlement of all deals executed by Trading Members (TM) on NSE. in the underlying market. Clearing Members 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. Types of Clearing Members  Trading Member Clearing Member (TM-CM) A Clearing Member who is also a TM. based on the last available closing price. Such CMs may clear and settle their own proprietary trades. Only funds settlement is allowed at present in Index as well as Stock futures and options contracts 3. exposure margins are levied on one third of the value of open position of the far month futures contract. Such CMs may clear and settle only their own proprietary trades and their clients‟ trades but cannot clear and settle trades of other TM‟s. NSCCL acts as legal counter-party to all deals on NSE's F&O segment and guarantees settlement. .   [Type text] Page 22 . who clear and settle such deals through them.Performing actual settlement..For an options contract – the value of an equivalent number of shares as conveyed by the options contract.

Axis Bank Ltd. 50 lakhs to NSCCL which forms part of the security deposit of the CM Additional incremental deposits of Rs. reporting of balances and other information as may be [Type text] Page 23 .. Citibank 5. for settling funds and other obligations to the Clearing Corporation including payments of margins and penal charges. Deposit of Rs. Standard Chartered Bank 12. Kotak Mahindra Bank 11. Further. Union Bank of India. 7.  Clearing Account Every Clearing Member is required to maintain and operate a primary clearing account with any one of the empanelled clearing banks at the designated clearing bank branches.e. every clearing member can maintain and operate additional clearing accounts exclusively for the purpose of enhancement of collaterals. The primary clearing account is to be used exclusively for clearing operations i. Clearing Banks NSCCL has empanelled 13 clearing banks namely 1. IndusInd Bank 10. IDBI Bank 9.Clearing Member Eligibility Norms    Net worth of at least Rs. All the credits and debits other than collateral enhancement specified by the member shall be routed through the primary clearing account Clearing Members are required to authorise the Clearing Bank to access their clearing accounts for debiting and crediting their accounts. The net worth requirement for a CM who clears and settles only deals executed by him is Rs.10 lakhs to NSCCL for each additional TM in case the CM undertakes to clear and settle deals for other TMs. HDFC Bank 6. Hongkong & Shanghai Banking Corporation Ltd. A Clearing member having funds obligation to pay shall ensure availability of sufficient clear balance in the clearing account on or before the stipulated funds pay-in day and the stipulated time.300 lakhs. ICICI Bank 8. Canara Bank 4. 2. 100 lakhs. Bank of India 3. State Bank of India 13. Every Clearing Member is required to maintain and operate clearing accounts with any of the empanelled clearing banks at the designated clearing bank branches. The clearing accounts are to be used exclusively for clearing & settlement operations.

sell) and client positions are calculated on gross of net positions of each client i. For a CM . For example.XYZ.required by NSCCL from time to time as per the specified format. Open Position Open position for the proprietary positions are calculated separately from client position.e. a buy trade is off-set by a sell trade and a sell trade is off-set by a buy trade. Clearing members shall not seek to close or de-activate the clearing account without the prior written consent of the Clearing Corporation Clearing Mechanism A Clearing Member's open position is arrived by aggregating the open position of all the Trading Members (TM) and all custodial participants clearing through him. A Clearing member can deposit funds into this accounts in any form. TMs are required to identify them as proprietary (if they are own trades) or client (if entered on behalf of clients) through 'Pro / Cli' indicator provided in the order entry screen. b. but can withdraw funds from these accounts only in self-name. The proprietary positions are calculated on net basis (buy . with TMs clearing through him ..ABC and PQR Proprietary Position TM Security Buy Qty Sell Qty Net Qty Buy Qty Client 1 Sell Qty Net Qty Buy Qty Client 2 Sell Qty Net Qty 2000 Net Member Long 6000 NIFTY ABC January contract NIFTY PQR January contract 4000 2000 2000 3000 1000 2000 4000 2000 Long 1000 2000 3000 (1000) 2000 1000 1000 1000 2000 (1000) Short 2000 XYZ‟s open position for Nifty January contract is: Member ABC [Type text] Long Position Short Position 6000 0 Page 24 . a. The Clearing Bank will debit/ credit the clearing account of clearing members as per instructions received from the Clearing Corporation. A TM's open position in turn includes his proprietary open position and clients‟ open positions. Proprietary / Clients‟ Open Position While entering orders on the trading system.

Futures Contracts Daily on Index or Settlement Individual Security Un-expired illiquid Daily futures contracts Settlement Futures Contracts on Index or Individual Securities Options Contracts on Index and Individual Securities Final Settlement Closing price of such underlying security (or Final Exercise index) on the last trading day of the options Settlement contract. (closing price for a futures contract shall be calculated on the basis of the last half an hour weighted average price of such contract) Theoretical Price computed as per formula F=S * ert Closing price of the relevant underlying index / security in the Capital Market segment of NSE. inthe-money. This will facilitate in retaining the relative status of positions viz.30 a. Settlement Price Product Settlement Schedule Closing price of the futures contracts on the trading day. on the last trading day of the futures contracts.PQR Total for XYZ 1000 7000 2000 2000 Settlement Schedule The settlement of trades is on T+1 working day basis. shall continue to remain the same as far as possible. Corporate Actions Adjustment The basis for any adjustment for corporate actions shall be such that the value of the position of the market participants.m. at-the-money and out-of-money. This will also address issues related to exercise and assignments. Members with a funds pay-in obligation are required to have clear funds in their primary clearing account on or before 10. Corporate Actions to be adjusted [Type text] Page 25 . on the cum and ex-dates for the corporate action. on the settlement day. The payout of funds is credited to the primary clearing account of the members thereafter.

over 10% of the market price of the underlying stock. Time of Adjustment Any adjustment for corporate actions would be carried out on the last day on which a security is traded on a cum basis in the underlying equities market. The adjustments for corporate actions would be carried out on all open positions. Methodology for adjustment the methodology to be followed for adjustment of various corporate actions to be carried out are as follows: A. the market price would mean the closing price of the scrip on the day previous to the date on which the announcement of the dividend is made by the Company after the meeting of the Board of Directors. Stock Splits and Consolidations Dividends 1. based on the nature of the corporate action. 2.e. For extra-ordinary dividends. B. the Strike Price would be adjusted. Adjustment Adjustments may entail modifications to positions and / or contract specifications as listed below. The cash benefit declared by the issuer of capital is cash dividend. Bonus. after the close of trading hours. such that the basic premise of adjustment laid down above is satisfied: a) Strike Price b) Position c) Market Lot / Multiplier The adjustments would be carried out on any or all of the above. above 10% of the market value of the underlying security. and * Secured Premium Notes (SPNs) among others.the corporate actions may be broadly classified under stock benefits and cash benefits. in cases where the announcement of dividend is made after the close of [Type text] Page 26 . The various stock benefits declared by the issuer of capital are: * Bonus * Rights * Merger / De-merger * Amalgamation * Splits * Consolidations * Hive-off * Warrants. Dividends which are below 10% of the market value of the underlying stock would be deemed to be ordinary dividends and no adjustment in the Strike Price would be made for ordinary dividends.). However. To decide whether the dividend is "extra-ordinary" (i.

3. The settlement price shall be the closing price of the underlying on the last cum-date.07% Chargeable to Clearing Member Clearing Member Clearing Members Page 27 [Type text] . C. Un-expired contracts outstanding as on the last cum-date would be compulsorily settled at the settlement price. Penalties The following penal charges are levied for failure to pay funds/ settlement obligations: Penal Charges a penal charge will be levied on the amount in default as per the byelaws relating to failure to meet obligations by any Clearing hours. On the announcement of the record date for the merger. the exact date of expiration (Last Cum-date) would be informed to members. the same day's closing price would be taken as the market price. if the shareholders of the company in the AGM change the rate of dividend declared by the Board of Directors.5 lakhs Security deposit shortage Shortage of Capital cushion Penalty Charge per day 0. then to decide whether the dividend is extra-ordinary or not would be based on the rate of dividend communicated to the exchange after AGM and the closing price of the scrip on the day previous to the date of the AGM. no fresh contracts on Futures and Options would be introduced on the underlying. Mergers 1. Further. 4.07% 0. The revised strike prices would be applicable from the ex-dividend date specified by the exchange. that will cease to exist subsequent to the merger. outstanding at the close of business on the last cum-date would be cancelled by the Exchange. GTC/GTD orders for the futures & options contracts on the underlying.07% 0. the total dividend amount (special and / or ordinary) would be reduced from all the strike prices of the option contracts on that stock. 3. 2. In case of declaration of “extra-ordinary " dividend by any company. 4. After the announcement of the Record Date. Type of Default Overnight settlement shortage of value more than Rs.

Violations if any by the custodial participants shall be treated in line with those by the trading member and accordingly action shall be initiated against the concerned clearing member.

Short Reporting of Margins in Client Margin Reporting Files Penalty is levied in case of short reporting by trading/clearing member per instance. The amount of penalty varies as per the percentage of short reporting done by member

Percentage of short reporting (In terms of value) < 1% >1% but less than or equal to 10% >10% but less than or equal to 20% >20% but less than or equal to 100% No action

Penalty per instance

Reprimand Letter with no penalty Rs.500 or 0.05% of the shortage amount whichever is higher subject to maximum of Rs.50000 Rs.1000 or 0.1% of the shortage amount whichever is higher subject to maximum of Rs.100000

All instances of non-reporting are considered as 100% short reporting and the penalty as applicable is charged on these instances in respect of short reporting. Additionally in respect of members who have reported short collection of margins / not reported margin collections on more than three occasions in any calendar month, the penalty computation from the fourth instance onwards is escalated by a multiple as mentioned below:

Category More than 10% to 49.99% 50% to 79.99% 80% to100% 1.1 1.2 1.3


Penalty and penal charges for margin/limit violation Penalty for margin / limit violation is levied on a monthly basis based on slabs as mentioned below or such other amount as specified by the Clearing Corporation from time to time.

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Instances of Disablement 1st instance 2nd to 5th instance of disablement 6th to 10th instance of disablement 11th instance onwards 0.07% per day

Penalty to be levied

0.07% per day + Rs.5,000/- per instance from 2nd to 5th instance 0.07% per day + Rs.20,000/- ( for 2nd to 5th instance) + Rs.10000/per instance from 6th to 10th instance 0.07% per day + Rs.70, 000/- (for 2nd to 10th instance) + Rs.10, 000/- per instance from 11th instance onwards. Additionally, the member will be referred to the Disciplinary Action Committee for suitable action.

Instances as mentioned above refer to all disablements during market hours in a calendar month. The penal charge of 0.07% per day is applicable on all disablements due to margin violation anytime during the day. FII/Mutual Fund position limit violation, In case of violation of FII/Mutual Fund limits a penalty of Rs. 5,000/- would be levied for each instance of violation. Client wise/NRI/sub account of FII/scheme of MF position limit violation In case of open position of any Client/NRI/sub-account of FII/scheme of MF exceeding the specified limit following penalty would be charged on the clearing member for each day of violation: 1% of the value of the quantity in violation (i.e., excess quantity over the allowed quantity, valued at the closing price of the security in the normal market of the Capital Market segment of the Exchange) per client or Rs.1,00,000 per client, whichever is lower, subject to a minimum penalty of Rs.5,000/- per violation / per client. When the client level/NRI/sub-account of FII/scheme of mutual fund violation is on account of open position exceeding 5% of the open interest, a penalty of Rs.5000 per instance would be levied to the clearing member.
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Market wide Position Limit violation At the end of each day during which the ban on fresh positions is in force for any security, when any member or client has increased his existing positions or has created a new position in that security the client/trading members will be subject to a penalty 1% of the value of increased position subject to a minimum of Rs.5000 and maximum of Rs.100000. The positions, for this purpose, will be valued at the underlying close price.

Securities Transaction Tax
STT Computation As per the Finance Act 2004, and modified by Finance Act 2008 (18 of 2008) STT on the transactions executed on the Exchange shall be as under: SI.No. A A B C Taxable securities transaction B Sale of an option in securities Sale of a futures in securities New rate from Payable by 01.06.2008 C 0.017 per cent 0.017 per cent D Seller Purchaser Seller

Sale of an option in securities, where option is exercised 0.125 per cent

a. Value of taxable securities transaction relating to an “option in securities” shall be the option premium, in case of sale of an option in securities. b. Value of taxable securities transaction relating to an “option in securities” shall be the settlement price, in case of sale of an option in securities, where option is exercised. The following procedure is adopted by the Exchange in respect of the calculation and collection of STT: 1. STT is applicable on all sell transactions for both futures and option contracts. 2. For the purpose of STT, each futures trade is valued at the actual traded price and option trade is valued at premium. On this value, the STT rate as prescribed is applied to determine the STT liability. In case of final exercise of an option contract STT is levied on settlement price on the day of exercise if the option contract is in the money. 3. STT payable by the clearing member is the sum total of STT payable by all trading members clearing under him. The trading member‟s liability is the aggregate STT liability of clients trading through him.

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client wise STT liability and also the detailed computations for determining the client wise STT liability. [Type text] Page 31 . .Information to members a report is provided to the members at the end of each trading day. trading member wise STT liability. The report contains information on the total STT liability.

Indices [Type text] Page 32 .

Some of the popular ETF's available for trading on NSE are:   NIFTYBEES . including:      S&P CNX Nifty(Standard & Poor's CRISIL NSE Index) CNX Nifty Junior CNX 100 (= S&P CNX Nifty + CNX Nifty Junior) S&P CNX 500 (= CNX 100 + 400 major players across 72 industries) CNX Midcap (introduced on 18 July 2005 replacing CNX Midcap 200) Exchange Traded Funds on NSE NSE has a number of exchanges.Graph of S&P CNX Nifty from January 1997 to March 2011 NSE also set up as index services firm known as India Index Services & Products Limited (IISL) and has launched several stock indices. [Type text] Page 33 . These are typically index funds and GOLD ETFs.ETF based on Gold prices.ETF based on NIFTY index Nifty BEES Live quote Gold Bees . Tracks the price of Gold. Each unit is equivalent to 1 gm of gold and bears the price of 1gm of gold.

The Sharyans Group has an impressive portfolio of businesses under its fold which mainly fall under the real estate and financial services categories. Derivatives and IPO. In time Spectrum Commodities Pvt. Ltd. Under the banner of the Sharyans Group. Ltd... ITI FSL has been set up to engage in:        Stock Broking Institutional Broking Derivatives including Currency Derivatives Depository Services Distribution of Investment Products Distribution of Insurance Commodities Broking* Forex Spot Broking  [Type text] Page 34 . ITIFSL.. Ltd. In time Spectrum Finmart Pvt. In time Spectrum Securities Ltd. ITIAI Investment Advisory Services Pvt.. originally promoted by the Investment Trust of India. ITIFSL will soon touch the pinnacles of success in the financial services industry by being a dominant force in the broking as well as the distribution arena. The prominent subsidiaries of this Group are Prebone Yamane (Country’s largest debt broking company). Sharyans Wealth Management Pvt. and Collin Stewart India Ltd. is now a part of the Sharyans Group.. Mutual Fund.COMPANY PROFILE With an unblemished and reputed track record. Ltd. ITI is a knowledge center where it provides knowledge on Equity Commodity. ITIFSL is emerging as one of the top most wealth management companies in India with a presence in over 120 branches across the country. COMPANIES BUSINESS With the objective to tap the growing potential in our capital markets. ITIFSL is all set to become an imposing wealth management firm in the country by giving the best to its clients and ensuring customer delight..

ITIFSL has over 120 Branch Offices spread across the country to offer better reach and service to the investor.MISSION AND VISION: Miss ion: ITI FSL's mission is to deliver value with commitment. Emerging as one of the front-line Brokerage Houses and a dominant force in the Distribution arena. Our presence Headquartered in Chennai. Creator. we are continuously engaged in the assessment of market conditions to balance risk and reward so as to optimize returns to our investors. Wealth Manager and to deliver the Highest Standards of Service to customers and be Prominent in the horde of Finance Companies offering similar services".. The company currently marks its presence in the following regions:          Andhra Pradesh Delhi Karnataka Maharashtra Gujarat Madhya Pradesh Tamil Nadu Pondicherry West Bengal PRODUCT AND SERVICES The company deals with wide variety of product and service which are stated as follow:     Equity and Derivatives Commodities Depository Institutional and NRI Page 35 [Type text] . "To be the most Preferred Financial Advisor. Vision. ITI FSL has a growing network of offices across several states to ensure easy accessibility to our clients wherever they are.

commodities are an excellent option.  Investment and Advisory Research Equity And Derivatives Equity and derivatives go hand in hand as they help maximize return and minimize risk at the same time! ITI clients are assisted in protecting the downside risk to their portfolio using appropriate combination of options. prices in commodities futures have been less volatile compared with equity and bonds. ITI ensures that you get the one of the finest trading experiences through:     A high level of personalized and confidential service Secure . thus providing an efficient portfolio diversification option.integrated broking system Powerful research and analytic All member having immense experience and each of them being professionally certified by the National stock exchange. bonds and real estate. It provides clients with an effective platform to participate and trade in Commodities with both the leading Commodity Exchanges of the country. Commodities are one of the easiest investment avenues to understand as they are based on the fundamentals of demand and supply. ITI helps investors understand the risks and advantages of trading in commodities futures before take they take the big leap. ITI commodity services are a class apart and the following features differentiate our services from others:  Streaming quotes and live update Page 36 [Type text] . Historically. Our advisory is skilled to help you in maximizing your gains from your existing corpus using numerous strategies based on the direction and intensity of the views. COMMODITY TRADING Commodities are now an asset class! For those who want to diversify their portfolios beyond shares.

ITI is being recognized as the broker of choice among various institutional investors Some of our esteemed clients include:    Indian overseas bank Power trading company limited Star health and allied insurance company limited [Type text] Page 37 . Precious metal and Energy product. prompt and efficient depository process. Corporate clients and Overseas Corporate Bodies With our dedicated and superior quality service to our clients. secure and transparent environment. which include FIIs. Depository Services provided by ITI include:       Account opening Dematerialization Rematerialization Account transfer Pledging Nominee INSTITUTIONAL AND NRI SERVICES Dedicated institutional desks at Mumbai and Chennai cater to our rapidly growing Institutional clientele. There are two main reasons why you should use ITI’s DP services:  ITI ensure that its client focus on investment and trading decision rather than drudgery of operational and transaction process  ITI offer risk free. Mutual Funds. Banks. Insurance Companies. Depository Service ITI is a depository participant with Central Depository Services (India) Limited (CDSL) and uses the latest in technology to deliver DP Services in a hassle free.   Relationship management desk Educating clients on commodity future market Research on agro Commodities.

opening of NRI bank account. Company offer advice on and help invest in the following products:       Mutual fund Insurance. The Research Team comprises of competent professionals with vast experience.NRI service The NRI Services' Department is an exclusive arm of ITI dedicated to impart professional advice to NRIs the world over. retirement & non-life Bonds Deposits IPO Small saving instrument Research Our primary strengths lie in research and operational efficiency. risk profiles and investment goals to provide the best advice. Our certified Investment Advisory Managers strive to understand each individual client’s needs. and insurance to recommend financial options to clients in accordance with their short-term and long-term goals. Apart from advising. demat account and trading account NRI’s. tax planning and child education & welfare planning. ' Our exclusive single-window NRI Services’ Department integrates and simplifies multiple processes into one . tax laws. These experts use their knowledge of investments. Some of ITI research reports are as follow: [Type text] Page 38 . They also regularly monitor report and recommend changes based on the performance of the portfolio. Some of the issues that the specialists address are general investments. insightful analytical abilities and high standards of integrity. The day-to-day operations are managed by some of the best professionals in the industry having in-depth understanding of underlying market trends and sound business practices. they help clients build and track their investments. NRO’s (Non-Resident of Indian Origin) and OCB’s (Overseas Corporate Bodies) can now exploit multiple opportunities to profit from India's NRI-friendly investment environment and a booming Indian econo Investment Advisory ITI has a dedicated team of professionals handling the investment advisory services of the firm.

[Type text] Page 39 . Debt market in terms of:  Top gainers and losers  Weekly gainer and loser  Historical returns  Index mover  Volume topper  Value topper  Bulk deals  Block deals  Sector watch It also provides News and Research for the investor which includes following point:  News analysis  Corporate information  Corporate announcement  Research notes  Financial calculator  Technical call  Technical charts They also take care of investor grievances by providing mail ids for complaint related to Transaction. Currency Derivative.           Economic outlook and updates Sector and company reports Technical recommendation Daily market report Daily technical outlook Reports on new fund offering Weekly debt report Monthly newsletter Monthly four pagers-ITI wealth wise Weekly analysis of mutual fund ITI also offer daily technical calls through SMS to our client free of charge. Mutual fund.IPO Insurance. DP etc. Commodity. ITI deals in providing market updates for Equity.

equity driving preference Tactical measures such as promotional / pricing schemes [Type text] Page 40 .itifinancial. The reasons behind the preferences for brands were unveiled by examining the following:    Tangible features of product / service Softer.ACHIEVEMENTS AND AWARDS WON BY ITI  ITI. intangible features like imagery.  ITIs online trading and investment site www. in the Investment Advisors category.  India internet World 2008 for the “Best Finance” site.  Rated among the top 20 wired companies along with RELIANCE. 21 products and services across 21 major cities. and INFOSYSetc. This was India‟s largest Customer Study initiated by CNBC Awaaz and conducted by AC Nielson covering 7000 respondents. the retail broking is one of the largest stock broking houses in the country. has won the prestigious Awaaz Consumer Vote Awards 2005 for the Most Preferred Stock Broking Brand in India. was launched in 2000.  ORG Marg award by CNBC. by Business Today. ITIs ground network includes over 250 centers across 123 cities in India and having around 120000 customers and an equal number of demat customers.


And to know which option combination strategy would be suitable when market moves up or down. Settlement. It also compares the returns and investment between portfolios of scrip‟s and option. Covering Positions. who actually bet on the direction of price movements. which have maximum profits. This Study can also be extended to other scrip‟s and hence forth find the option combination which is most profitable. It should give the pay-off for not only individual options but also for combination of options. While profits could be extremely high. potential for losses are also large. This project shows how options are useful especially for speculators. Positioning.  To reduce Risk involved in Markets due to various factors like Timing.  Compare investment and returns associated with the options trading in banking stocks. RESEARCH DESIGN STATEMENT OF PROBLEM This project studies about option derivatives. Objectives of study  Find appropriate options in banking stocks which are most profitable during the period of April and May 2011. SCOPE OF THE STUDY The study tries to find the best option combination for the script. [Type text] Page 42 .The Service Delivery Model of ITI is a blend of both tradition and technology. Carry forward. A model is to be developed which helps in trading in option derivative market.

The very basic purpose of this is to gain an insight and provide an overview of the study carried on. Various tabulations will be used to explain the findings clearly. Secondary Da ta: S e co n d ar y d at a i s co l l e ct e d t h r o u gh T e x t Bo o k s . In C a s e o f c o m p a n i e s : 1 5 c o m p a n i e s .RESEARCH METHODOLOGY Tools of Data Coll ecti on P r i ma r y D a t a : P ri m ar y d at a i s co l l ec t ed t h ro u gh i n t erv i ewi n g t h e s t af f o f Ko t ak S ecu ri t i es an d Li v e C ap i t al M ar k et D at a. S a mp l e S i z e : 1 . PLAN OF ANALYSIS: The collected information will be tabulated and analyzed in detail. 2 . . Theoretical background is one of the important parts of the project. [Type text] Page 43 . All options will be selected from National Stock Exchange. W eb s i t es an d C o m p an y Br ochu re . 1 0 r e s p o n d e n t s o f IT I S e c u r i t i e s . It will help me to gain strong theoretical basis of the option trading. SAMPLING PLAN   Put and call options of the banking stocks with strike price and expiry date.

by nature. commodities. Till the mid – 1980's. Derivatives are products whose values are derived from one or more basic variables called bases. 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 liberalized policy being followed by the Government of India and the gradual withdrawal of the procurement and distribution channel necessitated setting in place a market mechanism to perform the economic functions of price discovery and risk management. To reduce this risk. all of them can be divided into basic building blocks of options. including forwards. fix prices. as a more liberalized environment affords greater scope for financial innovation at the same time financial markets are. The value of financial derivatives derives from the price of an underlying item.DERIVATIVES MARKET EMERGENCE OF DERIVATIVES MARKET With globalization of the financial sector. India is traditionally an agriculture country with strong government intervention. futures. and options. [Type text] Page 44 . such as asset or index. impose import-export restrictions. Derivatives allow financial institutions and other participants to identify. and equities. Derivatives include a wide assortment of financial contracts. arbitraging price differences and adjusting portfolio risks. extremely volatile and hence the risk factor is an important concern for financial agents. etc. Unlike debt securities. speculating. such as: interest rates. financial innovation in India has picked up and it is expected to grow in the years to come. the concept of derivatives comes into the picture. the Indian financial system did not see much innovation. swaps. exchange rates. Derivatives are financial contracts whose values are derived from the value of an underlying primary financial instrument. Government arbitrates to maintain buffer stocks. forward contracts or some combination thereof. commodity or index. In the last 18 years. no principal is advanced to be repaid and no investment income accrues." While some derivatives instruments may have very complex structures. isolate and manage separately the market risks in financial instruments and commodities for the purpose of hedging. it's time to recast the architecture of the financial market.

derivatives products generally do not influence the fluctuations in the underlying asset prices. Development of exchange-traded derivatives Derivatives have probably been around for as long as people have been trading with one another. As instruments of risk management. (c) Marked improvement in communication facilities and sharp decline in their costs. providing economic agents a wider choice of risk management strategies. and (e) Innovations in the derivatives markets.The emergence of the market for derivatives products. However. [Type text] Page 45 . Through the use of derivative products. Merchants entered into contracts with one another for future delivery of specified amount of commodities at specified price. reduced risk as well as transaction costs as compared to individual financial assets. most notable forwards. By their very nature. (b) Increased integration of national financial markets with the international markets. (d) Development of more sophisticated risk management tools. Factors generally attributed as the major driving force behind growth of financial derivatives are: (a) Increased Volatility in asset prices in financial markets. by locking-in asset prices. the financial markets can be subject to a very high degree of volatility. and May well have been around before then. it is possible to partially or fully transfer price risks by locking-in asset prices. Forward contracting dates back at least to the 12th century. futures. derivatives products minimize the impact of fluctuations in asset prices on the profitability and cash flow situation of risk-averse investors. which optimally combine the risks and returns over a large number of financial assets. 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. leading to higher returns. A primary motivation for pre-arranging a buyer or seller for a stock of commodities in early forward contracts was to lessen the possibility that large swings would inhibit marketing the commodity after a harvest.

however. the Bombay Stock Exchange (BSE) introduced India's first derivative instrument . Derivatives trading commenced in India in June 2000 after SEBI granted the final approval in May 2000. NSE and BSE. did not take off. and their clearing house/corporation to commence trading and settlement in approved derivative contracts. SEBI permitted the derivative segments of two stock exchanges. SEBI set up a 24-member committee under the Chairmanship of Dr.The trading in [Type text] Page 46 . 2000. The committee recommended that derivatives should be declared as 'securities' so that regulatory framework applicable to trading of 'securities' could also govern trading of securities. the Securities Contract Regulation Act (SCRA) was amended in 1999 to include derivatives within the scope of securities. which withdrew the prohibition on options in securities.the BSE30 (Sensex) index futures.the near month (one). L.C. SEBI was given more powers and it starts regulating the stock exchanges in a professional manner by gradually introducing reforms in trading. The responsibility of clearing and settlement of all trades on the exchange was given to the clearing house which was to be governed independently. The National Stock Exchange (NSE) followed a few days later. and a regulatory framework for administering derivatives trading was laid out. The act granted legality to exchange-traded derivatives. The first step towards introduction of derivatives trading in India was the promulgation of the Securities Laws (Amendments) Ordinance. On June 9. viz. It allowed derivatives trading either on a separate and independent derivatives exchange or on a separate segment of an existing stock exchange. Gupta on 18th November 1996 to develop appropriate regulatory framework for derivatives trading in India. The market for derivatives. 2000. It was introduced with three month trading cycle . Introduction of derivatives was made in a phase manner allowing investors and traders sufficient time to get used to the new financial instruments. The derivatives exchange had to function as a self-regulatory organization (SRO) and SEBI acted as its regulator. Following the committee's recommendations. as there was no Regulatory framework to govern trading of derivatives. 1995. by launching the S&P CNX Nifty index futures on June 12.DERIVATIVES MARKET IN INDIA Derivatives markets have had a slow start in India. the next month (two) and the far month (three). but not OTC (over the counter) derivatives.

The pros and cons of introducing derivatives trading were debated intensely. a depository and a clearing house facility. For instance. The lack of transparency and inadequate infrastructure of the Indian stock markets were cited as reasons to avoid derivatives trading. Their involvement had been very low due to the absence of derivatives for hedging risk. there was no consensus of opinion on the issue among industry analysts and the media. and regulations of the respective exchanges and their clearing house/corporation duly approved by SEBI and notified in the official gazette. SEBI/RBI approved the trading in interest rate derivatives instruments and NSE introduced trading in futures contract on June 24. In spite of the opposition.index options commenced in June 2001 and trading in options on individual securities commenced in July 2001. Futures contracts on individual stock were launched in November 2001. and soon the turnover of the NSE and BSE derivatives markets exceeded the turnover of the NSE and BSE cash markets. the value of the NSE and BSE derivatives markets was Rs. Derivatives were also considered risky for retail investors because of their poor knowledge about their operation. In June 2003. the small number of institutional players and the absence of a regulatory framework caused further delays. the path for derivatives trading was cleared with the introduction of Securities Laws (Amendment) Bill in Parliament in 1998. 2003 on 91 day Notional T-bills. The main purpose of this plan was to encourage greater participation of foreign institutional investors (FIIs) in the Indian stock exchanges. The introduction of derivatives was delayed for some more time as the infrastructure for it had to be set up. [Type text] Page 47 .5 billion (bn) whereas the value of the NSE and BSE cash markets was only Rs. Trading in derivatives gained substantial popularity. Derivatives contracts are traded and settled in accordance with the rules. Derivatives trading eventually started in June 2000. In addition. The plan to introduce derivatives in India was initially mooted by the National Stock Exchange (NSE) in 1995. bylaws.3278. in the month of January 2004.1998. However. Derivatives trading required a computer-based trading system. problems such as low market capitalization of the Indian stock markets.89 bn. The introduction of derivatives was well received by stock market players.

The combined notional values of the daily volumes on both the bourses stand at around RS. In developed markets trading in the derivatives segment are thrice as large as in the cash markets.index futures. index options and individual stock futures and options which were limited to certain select stocks. While such locking may not be extremely profitable the extent of loss is known and can be minimized. In India. Quite clearly our derivative markets have a long way to go. The NSE and BSE are two exchanges on which financial derivatives are traded. They increase the volume traded in markets because of participation of risk adverse people in greater numbers 5. industry analysts felt that the derivatives market had not yet realized its full potential. The need for a derivatives market The derivatives market performs a number of economic functions: 1. the figure is hardly 20% of cash markets. 1) Hedgers: Hedgers enter the derivatives market to lock-in their prices to avoid exposure to adverse movements in the price of an asset. potential for losses are also large.400 cr.In spite of these encouraging developments. They increase savings and investment in the long run people Types of investors trade in derivatives markets. They catalyze entrepreneurial activity 4. [Type text] Page 48 . 2) Speculators: Speculators take positions in the market. They actually bet on the direction of price movements. While profits could be extremely high. Analysts pointed out that the equity derivative markets on the BSE and NSE had been limited to only four products . They help in transferring risks from risk adverse people to risk oriented people 2. They help in the discovery of future as well as current prices 3.

examples are: Measured by national statistical agencies FORWARD CONTRACTS A forward contract is a particularly simple derivative. It is an agreement to buy or to sell an asset at a certain future time for a certain price.3) Arbitrageurs: Arbitrageurs enter simultaneously into contracts in two or more markets to lock in risk less profit. [Type text] Page 49 . CLASSIFICATION OF DERIVATIVES: Derivatives are basically classified based upon the mechanism that is used to trade on them. They are: The OTC derivatives are between two private parties and are designed to suit the requirements of the parties concerned. In India such gains are minimal as price differences on NSE and the BSE are extremely small. It is not normally traded on exchange. The Exchange traded ones are standardized ones where the exchange sets the standards for trading by providing the contract specifications and the clearing corporation provides the trade guarantee and the settlement activities Common examples of derivatives are: Some less common. The contract is usually between two financial institutions and one of its corporate clients. but economically intriguing.

it has to compulsorily go to the same counter party. As already mentioned. At the time the contract is entered into the price is chosen so that the value of the forward contract to both parties is zero. if the price of the asset rises sharply soon after the initiation of contract.One of the parties to a forward contract assumes a long position and agrees to buy the underlying asset on a certain specified future date for a certain specified price. a forward contract is worth zero when it is first entered into. The holder of short position delivers the asset to the holder of long position in return for a cash amount equal to delivery price. expiration date and the asset type and quality. depending on movements in the price of the asset. A key variable determining the value of a forward contract at any given time is the market price of the asset.  The contract price is generally not available in public domain.  Each contract is custom designed. and hence is unique in terms of contract size. A forward contract is settled at maturity.  In case. Later it can have a positive or negative value. a contract to buy or sell an asset of any kind at a pre-agreed future point in time that has been standardized for a wide range of uses. which being in a monopoly situation can command the price it wants. The main features of forward contracts are  They are bilateral contracts and hence exposed to counter-party risk. This means that it costs nothing to take either a long or short position. FUTURES CONTRACT A futures contract is a form of forward contract. The other party assumes a short position and agrees to sell the asset on the same date for the same price. the value of a long position in the forward contract becomes positive and value of a short position of a forward contract becomes negative. The specified price in a forward contract will be referred to as the delivery price.  The contract has to be settled by delivery of the asset on expiration date. the party wishes to reverse the contract. It is [Type text] Page 50 . For example.

Investors can close out the contract at any time prior to the contract's delivery date. [Type text] Page 51 . To make trading possible. An interest rate future is a futures contract with an interest bearing instrument as the underlying asset. The types of futures that are traded fall into four fundamentally different categories. As the two parties to the contract do not necessarily know each other. foreign currency. A commodity futures contract is an agreement between two parties to buy or sell a specified quantity and quality of commodity at a certain time in future at a certain price agreed at the time of entering into the contract on the commodity futures exchange. attempt to profit from rising or falling exchange rates. an interest-earning asset or an index. Treasury-bond futures. usually a stock index. Futures may also differ from forwards in terms of margin and delivery requirements. The futures can be on the interbank cash rate or on the forward exchange rate of the currency. A currency future is a transferable futures contract that fixes the price at which a foreign currency can be bought or sold at a specified future date. For example. LIBOR futures.traded on a futures exchange. by incurring a risk. the exchange also provides the mechanism which gives the two parties guarantee that the contract will be honored. the exchange specifies certain standardized features of the contract. Examples include Treasury-bill futures. Euro dollar futures. Currency futures are quoted in US-dollars per unit of foreign currency. The coffee buyer could have a mutually agreed contract with the seller (Forward Contract) or he / she could buy a contract through a regulated market like the Coffee Futures Exchange India Limited (COFEI). Coffee grower may enter into a contract with a wholesale buyer to sell Coffee at a particular price on a future date. The National Stock Exchange and the Bombay Stock Exchange offer such facilities for trading Futures and Option contracts an underlying financial instrument like stocks/shares. The underlying asset traded may be a physical commodity. Investors use these financial future contracts to hedge against foreign exchange risk. These financial derivatives can also be used to speculate and.

and mode of settlement. at or before a specified date. The seller of the option. it acts as buyer to seller and as a seller to the buyer and guarantees the trades. the only benefit of entering into a Forwards contract comes from the flexibility of having tailor-made contracts. Counter party risk (of non-delivery / nonpayment) is also eliminated in the Futures market as the designated clearing house becomes counter party to each trade that is. or an obligation which is activated if the buyer exercises that right. expiry. Forward contracts are mutually agreed between two parties. from the other party (the seller). product type. Futures markets. therefore. Contracts on Futures markets are fixed in terms of contract size. product quality. but not the obligation. has a contingent liability. to buy or sell a specified asset at a specified price. [Type text] Page 52 . Forwards are important as prices in Forward markets serve as indicator of Futures prices.The attributes in which the futures contracts differ from forwards are: Attributes Contract type Forwards Privately traded Futures Exchange traded Contract term Price transparency Price discovery Liquidity Credit Risk Customized Poor Poor Poor High Standard Good Good Good Low Futures contracts are traded on an exchange. Yet. provide liquidity as contracts are traded on a broader client base. INTRODUCTION TO OPTION Definition An option is a contract between two parties in which one party (the buyer) has the right. however. As expected.

This relationship can remain in place until the options exercised or. the Chicago Board Options Exchange (CBOE). being contracts at law. An innovation of great significance occurred in 1973 when a new exchange. not exercised prior to or on the expiration date). allowed to lapse (i. was opened. This fee is called the premium. create a legal relationship between the buyer and the seller of the option contract. The buyer of the option is protected from unfavorable market movements but is still able to profit from movements in the buyer‟s favor. This feature of an option contract distinguishes it from other instruments. in which both parties to the contract have an obligation to transact at some time in the future. Options.The important feature is that the buyer of the option is not obliged to complete the deal and will do so only if changes in price make it profitable to do so.e. offering exchange-traded options on US listed equity stocks. only one party (the seller) has an obligation to transact. Alternatively. it is possible for the two parties to the contract to enter into an „opposite‟ contract and for these contracts to be offset against each other. such as forward contracts or futures contracts. alternatively. Types of Options: Options have a long history. [Type text] Page 53 . In an option contract. The risk of loss is carried by the seller. who charges the buyer a fee for taking on this risk. Options on equity stocks were available on the London Stock Exchange more than a century ago. These were „principal-to-principal‟ option arrangements and such instruments continued to develop on equity stocks in centers such as London and New York into the 1970s. but this is only if the other party (the buyer) requires him to do so. The CBOE was the world‟s first formalized options market. The act of enforcing the buyer‟s rights under an option contract is termed exercising the option.

The other important function performed by the clearing house is novation. ET options transactions are settled through a clearing house. Trader transacts deals through a combination of hand signals and speech. This is the process whereby the nexus between the two original contracting parties is broken. debt instruments and stock index instruments (traded on various exchanges) and on various futures contracts – financial. It also supervises the collection and disbursement of premiums and margins. nor in fact are parties to an original contract obliged to return to each other to complete or unwind the contract. where there National Stock Exchange has had a screen-based trading system since inception. there are over-the-counter (OTC) options.A number of US and overseas stock exchanges emulated the CBOE market. Over-the-counter (OTC) Options: [Type text] Page 54 . This standardization makes it easy for market participants to deal in these instruments because there is no need for discussion or negotiations to determine the contract specifications – the only item for negotiation is the price. Equity options and future options are the types of ET options most commonly traded on an exchange. Around the globe. Exchange-traded (ET) Options: ET options. This promoted the liquidity of the market since a large number of only a limited range of contracts are being traded at any one time. However. Trading of options on most exchanges is based on the system of „open outcry‟ on a physical trading floor. are options that originate and are traded on a formalized exchange. currencies. agricultural and metals (traded on various futures exchanges). The clearing house tracks the positions outstanding and monitors contracts as they pass between participants. Thus. there is now a trend towards electronic trading systems and it is expected that these will ultimately supersede the physical trading floor. The clearing house then becomes the buyer to the seller and the seller to the buyer. In addition to exchange-traded (ET) options. as the name suggests. among the first of these being the Australian Stock Exchange which initiated a similar market on Australian listed equity stocks in 1976. Options traded on an exchange are highly standardized as to the type and maturity of the underlying instrument. associated with (although not necessarily owned by) the exchange. the identity of the other party to an ET option contract is no longer of importance. there now exists a great diversity of exchange-traded options markets on equities. This is the case in India.

but rather. OTC options are not. irrespective of the financial strength of the buyer or seller. there are four important factors to consider: „Fit‟ with exact client requirements: ET options are standardized while OTC options can be tailored to match exactly a party‟s requirements. Traders control this risk through credit assessments of counterparties and the setting of exposure limits. gold). stock indices. The contracts are not standardized in terms of quantity. there is no clearing house for OTC options. Essentially. equities. This lack of standardization has benefits in that the specification can more exactly meet the needs of the parties. client relationships. Valuation: ET option prices are publicly available financial information. valuing the tailor-made specific option contract is not such a straightforward process. Key Elements of an Option: There are five key elements of an exchange-traded option contract: types of options – whether it is a put or a call option underlying asset – instrument on which the option is based [Type text] Page 55 . OTC option can involve higher credit risk because exposure is directly to the counterparty and there is no system of deposits or margins or a guarantee fund. The trader of an OTC option must request a financial institution which deals in the relevant market to value the contract for him. delivery date or term to maturity. Credit dimensions: ET options are guaranteed by clearing houses. Usually. Instead. traders can easily value their portfolio of options contracts by reference to their current price. an OTC option is a tailor-made options agreement between two or more parties. OTC markets exist in commodities (e. etc. Choosing Between ET and OTC Options: In choosing between ET and OTC options. participants arrange deals through face-to-face meetings or more commonly on the telephone. In the OTC market.g. This being the case. factors such as the institution‟s own book. In the OTC market. the option price is market-determined. small accounts are not encouraged and prices may not reflect underlying supply and demand conditions. debt instruments and foreign exchange. Pricing factors: In the case of ET options.OTC options are not traded at a centralized market place or through a formalized trading system. As a result.

the buyer and the seller of the option. called the strike price.How call option works? Suppose you are interested in buying 100 shares of a company. If. for example. The buyer of the option has the right but not the obligation to buy an agreed quantity of a particular commodity or financial instrument (the underlying instrument) from the seller of the option at a certain time for a certain price (the strike price). which can be Right to buy the underlying asset. but you would have no other liability.strike price – the price at which the option may be exercised expiry date and exercise style premium – the cost of the option OPTION TYPES Option type defines the nature of buyer‟s right. In this way. I am thinking of buying 100 shares of Coca Cola from you at the price of 52. If you decide not to use the option to buy the stock. Would that be OK?” Of course what you have in mind is the following. called the option premium. and left a security deposit for it. which is called the call option. you would give up your security deposit. or Right to sell the underlying asset which is called the put option. the money would be used to insure that you could. Call options are like security deposits. However I want to decide whether to actually buy it or not at the end of this month. A Call option is an option to buy a stock at a specific price on or before a certain date. If you never returned. When you buy a Call option. rent that property at the price agreed upon when you returned. the price you pay for it. Simple Call Option example . [Type text] Page 56 . The seller assumes the corresponding obligations. secures your right to buy that certain stock at a specified price. For the sake of this example let us say that the company is Coca Cola and the current price of its stock is 50. Call options usually increase in value as the value of the underlying instrument increases. in fact. CALL OPTION A call option is a financial contract between two parties. your only cost is the option premium. and you are not obligated to. However instead of just buying the shares from the market what you do is the following: You contact your friend Ram and tell him "Hey Ram. you wanted to rent a certain property.

the underlying. has the right. If this happens. Put Option A put option is a contract between two parties to exchange an asset. Ram will keep this money irrespective of whether you exercise your option of going ahead with the deal or not. You on the other hand are the buyer of the call option and have no obligation. then you will buy the shares from Ram at 52 in which case you will gain by simply buying from Ram at 52 and selling it in the market at the price which is above 52. the expiry or maturity. while the other party. "damages" your asset. and thus. Deals of this type have a name. In this way. the strike. but not an obligation. In order to make the above deal 'fair' from the viewpoint of Ram you agree to pay ram 2 per share. you can use your policy to regain the insured value of the car. the insurance company keeps your premium in return for taking on the risk. for a specified amount of cash. After all. to sell the asset at the strike price by the future date. 200 in total. Ram. A Put options are options to sell a stock at a specific price on or before a certain date. If something happens which causes the stock price to fall. by a predetermined future date. In this way. If the stock price remains below 52 then you simply won‟t buy the shares from him. what you are asking Ram is the 'option' to buy those shares from him . i. The price of 52. Ram will be at a loss in this situation.risk of being at a loss if the price rises above 52. You are buying the call simply have the option to buy the shares. at which you would like to buy (or rather would like to have the option to buy) the shares is called the strike price of this deal. Put options are like insurance policies. you pay a premium and are. hence. the put option gains in value as the value of the underlying instrument decreases. If you buy a new car. protected if the asset is damaged in an accident.If the stock price rises above 52. One party.e.they are called a Call are not making any commitment. you [Type text] Page 57 . the seller of the call option has the obligation to sell his shares even if the price rises above 52 in which case you would definitely buy it from him. If all goes well and the insurance is not needed. the seller. you can "insure" a stock by fixing a selling price. With a Put option. This is the (risk) premium or the money you are paying Ram for the risk he is willing to take . Ram is selling (or writing) the call option to you for a price of 2 per share. has the obligation to buy the asset at the strike price if the buyer exercises the option. the buyer of the put. and then buy auto insurance on the car.

buying a Call. This is just like the margin money you pay while buying or selling a futures contract and as explained in the post on futures trading. Ram. 48 is the strike price of the Put Option. your only cost is the premium.can exercise your option and sell it at its "insured" price level. They do not pay any margin. you the seller or writers of the Put Option have the obligation to buy the shares at the strike price. writing a call. you do not deal with any person 'personally'. 3. You are writing or selling a Put Option to Ram. In this case." then you do not need to use the insurance. and there is no "damage. the buyer of the Put Option has the option to sell the shares to you. Options trading are directly or automatically carried through at the stock exchange. and.How put option works? Let us consider a situation where now Ram wants the option to sell you his 100 shares of Coca Cola at 48. to allow investors ways to manage risk. Difference between above option examples and 'real life options' The above examples illustrate the basic ideas underlying. 2. He agrees to pay you 2 per share in order to be able to have the 'option' to sell you his 100 shares at the end of the month. 1. writing a Put and selling a Put. The buyers of Call and Put options on the other hand are not taking any risk. decided by the stock exchange. He has no obligation. in which case you will be at a loss by buying the shares from him at a price above the market price and he will be relatively better off rather than selling the shares in the market. In this case Ram is buying a Put Option from you. It is the risk premium. once again. The writers or sellers of Call and the Put option are the ones who are taking the risk and hence have to pay 'margin' amount to the stock exchange as a form of guarantee. Of course what he has in mind is that he will sell them to you if the price falls below 48. If the price of your stock goes up. They simply pay the Options premium [Type text] Page 58 . This is the primary function of listed options. Here are some key points to remember about real life options trading. The stock exchange acts as a 'guaranteer' to make sure the deal goes through. The 2 he is willing to pay you is all yours to keep irrespective of whether Ram exercises the option or not. In real life you sell (or write) and buy call & put options directly on the stock exchange instead of 'informally dealing' with your friend. Each Options contract for a particular stock has a specified LOT SIZE. Simple Put Option Example .

Marke t Expecta tion Ma rket expected to be bullish . Profi t and loss character istics at expiry: [Type text] Page 59 . S ell call at higher strike ( B). Th e sprea d h a s th e a d va nta ge o f being ch ea per to esta blish than the purchase of a single call. as the prem ium received from the sold call reduces the overall cost.PAY-OFFS FOR OPTION CONTRACTS 1) Long Call Spread Construc tion Buy a call (A). Enter when the stock p rice is in be tween the two strike pric es. The spread offers a limited prof it potential if the underly ing rises and a l imited loss if the under lying fa lls.

00 Jan Call option @ Rs.194.00 Sell 200. B r e a k .14.70 [Type text] Page 60 . Simulation Reliance Natural R esources Limited [RNRL] Lot size: 7150 Style: Amer ican Construc tion Entry 03rd January 2008 Stock Price a t Rs.85 Buy 190.00 Jan Call opti on @ Rs.228.e v e n : R e a c h ed wh e n t h e u n d e r l y i n g i s a b o v e s t r i k e A b y t h e s a m e a m ou n t a s t h e n e t cost of establishing the position. L o s s : L im i t e d t o a n y i n i t i a l p r e m i u m p a i d i n e s t a b l i s h i n g t h e p o s i t i o n .P rofi t: Limited to the differenc e be tween the t wo strikes minus net pr emium cost.00 Exit 09th January 2008 Stock Price a t Rs. Maximum profit occurs where the underlying rises to the level of the higher strike B or above. M a x i m um l o s s o c c u r s where the underlying f alls to the level of the lower strike A or be low.11.

0 0] Net Profit Rs. 1 .Sell 190. 22/share Profit made on using Strategy [Profi t/share x Lot size ] Rs.39.00 Jan Call option @ Rs.00 Jan Call opti on @ Rs.47 [58.00 [22.00 x 7150] 2) Short Put Spread Construc tion [Type text] Page 61 .300.58.57.00-11.00 Jan Call option: Loss Rs.00 Buy 200.0 0] 200.00-39.25 [14.00 Jan Call option: Profit Rs .00 Eff ective Pro fit/Loss 190.

Th e sp read offers a limited profit potential if the underly ing rises and a limited loss if the underlying falls. Th e Sh o rt Pu t a t B a im s to ta k e a d v a ntage o f a bu llish m a rk et and the prem ium gained affords som e downside protec tion wi th a Long Put at A . B rea k .ev en: Rea ch ed wh en th e u nd erly ing is b elo w str ik e B by th e sa m e a m o u nt a s ‘ th e net credit of es tablishing the position. Simulation Reliance Natural R esources Limited [RNRL] Lot size: 7150 Style: Amer ican Construc tion Entry 10th January 2008 [Type text] Page 62 . buy put at a lower strike (A). Profi t and loss character istics at expiry: P rofi t: Limited to the net premium credited. Marke t Expecta tion Ma rk et expected to be bu llish .Sell a put (B). Enter when the stock p rice is in be tween two strike pr ices. M aximum profit occurs where underlying rises to the level of the higher strike B or above. L o ss: Ma xim um lo ss o cc u rs wh ere th e u nd erly ing fa l ls to th e lev e l o f th e lo wer s trik e A o r below.

00-1 1.15 Buy 200.20 x 7150] 3) Short Call Spread [Type text] Page 63 .00 Eff ective Pro fit/Loss 200.12.00 Exit 14th January 2008 Stock Price a t Rs.930.00] Net Profit Rs.00 Jan Put option: L oss Rs.00 [27.0 0] 220.00 Jan Put opti on @ Rs.208.00 [10.00 Jan Put opti on @ Rs.00 Sell [6.222.00 Jan Put opti on @ Rs.6.20-12.27. 7 2.20 Buy 220.00 Jan Put option: Profit Rs . 10.00 Jan Put opti on @ Rs.20/share Profit made on using Strategy (Profi t/share x Lot size) Rs.16.05 Sell 200.Stock Price a t Rs.

Construc tion Sell a call (A) . L o s s : L im i t e d t o t h e d i f f e r e n c e b e t w e e n t h e t w o s t r i k e s m i n u s t h e n e t c r e d i t r e c e i v e d i n establi shing the positio n. The spread offers a limited profit i f the underlyi ng falls and a limited loss exposure if th e underlying rises. buy call at higher strike ( B). Marke t Expecta tion Market expect ed to be bearish. Simulation [Type text] Page 64 . Maximum loss occurs where the underlying rise s to the leve l o f the higher strike B or above. The Short Call at A aims to take a dvantage of a bearish market and the premium gained affords some upside protect ion with a Long Call at B.e v e n : R e a c h ed wh e n t h e u n d e r l y i n g i s a b o v e s t r i k e p r i c e A b y t h e s a m e am o u n t a s t h e net credi t of es tablishin g the position. B r e a k . M a x i m u m p r o f i t o c c u r s w h e r e u n d e r l y i n g f a l l s to the level of the lowe r strike A or be low. Profi t & loss character ist ics at expiry: P r o f i t: L im i t e d t o t h e n e t p r e m i u m c r e d i t e d .

3 5 Sell 2700.108.00 [9.00 Jan Call option @ Rs.0 0-7.00 Jan Call option: Profit R s.00 Jan Call option @ Rs.7 0 Buy 2700.41.00 Jan Call option @ Rs.50] [Type text] Page 65 .00-50.7.1764.00 Jan Call option: Loss Rs.00 Sell 2500.50.00 Buy 2500.00 Jan Call option @ Rs. 00] 2500.50 [116.00 Exit 21st January 2008 Stock Price a t Rs.9.116.2485.Reliance Energy Limite d [REL] Lot size: 550 Style: Amer ican Construc tion Entry 11th January 2008 Stock Price a t Rs.50 Eff ective Pro fit/Loss 2700.

00 [67. Marke t Expecta tion Market expec ted to be bearish.Net Profit Rs. Profi t & loss character ist ics at expiry: [Type text] Page 66 .125. as the pre mium received from the sold put reduces the overall cost. The spread has th e advantage of being cheaper to es tablish than the purchase of a single put. 3 7. se ll put a t lower s trike ( A).50/share Profit made on using Strategy (Profi t/share x Lot size) Rs.50 x 550] 4) Long Put Spread Construc tion Buy a put (B). The sprea d offers a limi ted loss e xposure if the underlyi ng rises and a limit ed profit i f the underlying falls. 67.

10 Exit 21st January 2008 Stock Price a t Rs.1.00 Jan Put opti on @ Rs. Ma x im um lo ss o ccu rs where the underlying ri ses to the level of the higher strike B or above.00 Buy 190.00 Jan Put opti on @ Rs.00 [Type text] Page 67 . Simulation Ma h a na ga r Teleph o ne N ig a m L im ited [MTN L ] Lot size: 1600 Style: Amer ican Construc tion Entry 0 3 r d J a n u a ry 2 0 0 8 Stock Price a t Rs.e v e n : R e a c h ed wh e n t h e u n d e r l y i n g i s b e l o w s t r i k e p r i c e B b y t h e s a m e am o u n t a s t h e net cost of e stablishing the position.P rofi t: Limited to the differenc e be tween the t wo strikes minus net pr emium cost.2. L o ss: L im ited to th e ini tia l pr em iu m pa id in es ta blish ing th e po sitio n.211. Maximum profit occurs where und erlying falls to the level of the lower strike A o r below.20 Sell 180.141. B r e a k .

Second. and the seller a corresponding short position.Sell 190. the distinguishing feature of option is the right-without-obligation for the buyer.) [Type text] Page 68 . who is "long a put". not the underlying asset.18.760.00 [16.10 x 1600] Option Feature In other contracts. For example. the focus is on underlying asset and each counterpart has right and obligation to perform.00 Jan Put option: L oss Rs.00 Jan Put opti on @ Rs.80 Buy 180. in futures contract.37.80-2 . the right and obligation to sell. with buyer taking the right without obligation and seller taking the obligation without right.00 [37.00 Eff ective Pro fit/Loss 190. and what the seller sells is the right. and seller. not the underlying asset. Thus.20.00 ] Net Profit Rs.90 [1. the right and obligation are separated.35.10/share Profit made on using Strategy (Profi t/share x Lot size) Rs.10-20. The primary focus is on right and obligation not on underlying asset.20] 180.00 Jan Put option: Profit Rs . 16. OPTION FRAMEWORKS The buyer assumes a long position. Option contract differs from others in two respects. 2 5. (Thus the seller of a call is "short a call" and has the obligation to sell to the holder.00 Jan Put opti on @ Rs. The writer of a put is "on the short side of the position". and has the obligation to buy from the taker of the put option. what the buyer buys is the right. the buyer has the right and obligation to buy. who is "long of a call option" and who has the right to buy. In option contract.

see strike price. Where the seller does not own the underlying on which he has written the option. Option can be in-the-money. [Type text] Page 69 . which decreases. the risk for the writer of a call option is unlimited. depending on the combination of derivative features used. His potential gain is theoretically unlimited. The maximum loss for the writer of a put option is equal to the strike price. he is called a "naked writer". an option writer who owns the underlying instrument has created a covered position.where exercise is on a fixed maturity date.The option style will affect the terms and valuation. However. The seller guarantees the exchange that he can fulfill his obligation if the buyer chooses to execute.which allows exercise before the maturity date – or European style . The risk for the option holder is limited: he cannot lose more than the premium paid as he can "abandon the option". Buyers and sellers of option do not (usually) interact directly. the closer the option is to its expiry date. In" has an intrinsic value of zero. he can always meet his obligations by using the actual underlying. The "in-the money" option has a positive intrinsic value. The risk taken on can be anywhere from zero to infinite. at-the-money or out-of-the-money. European contracts are easier to value and therefore to price. option in "at-the-money" or "out-of the. Generally the contract will either be American style . and has created a "naked position". OPTION USES One can combine option and other derivatives in a process known as financial engineering to control the risk in a given transaction. Additional to the intrinsic value an option has a time value. The contract can also be on an exotic option. the option exchange acts as intermediary and quotes the market price of the option.

For example buying an at-the-money call option for $2 per share for a total of $200 on a security priced at $20. will lead to a 100% return on premium if the option is exercised when the underlying security's price has risen by $2. Additionally. immediate or cancel. Because one can use option to assume risk. Good-tilldate. order and trade management it provides tremendous flexibility to users in terms of kinds orders that can be placed on the system. [Type text] Page 70 . limit/market price. It is similar to that of trading of equities in the cash market segment. The greater leverage comes at the cost of greater risk of losing 100% of the option premium if the underlying security does not rise in price. called NEAT-F&O trading system. The clearing members (CM) use the trader work station for the purpose of monitoring the trading members whom they clear the trades. The payoff to purchasing an option can be much greater than by purchasing the underlying instrument directly. the option holder reduces the risk he bears by paying the option seller a premium to assume it. When using option for insurance. It supports an anonymous order driven market which provides complete transparency of trading operations and operates on strict price-time priority. whereas buying the security directly for $20 per share. TRADING MECHANISM The future and option trading system of NSE. order matching. they can enter and set limits to positions. would have lead to a 10% return. Various conditions like Good-till-day. The NEAT F&O trading system is accessed by two type users. which trading member can take.By using option. The Trading Members have access to functions such as order entry. one can purchase option to create leverage. stop losses can be built into order. provides a fully automated screen –based trading for Nifty futures & option and stock future& option on nationwide basis and an online monitoring and surveillance mechanism. one party transfers (buys or sells) risk to or from another. Good –till cancelled.

PREMIUM The cost associated with a derivative contract. Early exercise of American options may be warranted by arbitrage. European Style option contracts can be closed out early. However.GLOSSARY AMERICAN STYLE OPTION An option that can be exercised at any time from inception as opposed to a European Style option which can only be exercised at expiry. mimicking the early exercise property of American style options in most cases. mimicking the early exercise property of American style options in most cases. EXERCISE PRICE The exercise price is the price at which a call's (put's) buyer can buy (or sell) the underlying instrument. European Style option contracts can be closed out early. EUROPEAN STYLE OPTION An option that can be exercised only at expiry as opposed to an American Style option that can be exercised at any time from inception of the contract. MARGIN A credit-enhancement provision to master agreements and individual transactions in which one counterparty agrees to post a deposit of cash or other liquid financial instruments with the entity selling it a financial instrument that places some obligation on the entity posting the margin. STRIKE PRICE [Type text] Page 71 . it also applies to off-market forward contracts. It usually applies to options contracts. referring to the combination of intrinsic value and time value.

00 1050.00 1000.00 36.50 12.40 50.50 25.00 2350 280.00 56.00 Most Active Bank Put Inst Type OPTSTK OPTIDX OPTIDX OPTSTK OPTSTK OPTIDX OPTIDX Exp Date 30-June-11 30-June-11 30-June-11 30-June-11 30-June-11 30-June-11 30-June-11 Underlying Bank Nifty SBIN ICICI BANK HDFC BANK YES BANK AXIS BANK PNB Option Type PA PE PE PA PA PE PE Strike Price 10800 2200. Most Active Bank Call Inst Type OPTSTK OPTIDX OPTIDX OPTSTK OPTSTK OPTIDX OPTIDX Exp Date 30-June-11 30-June-11 30-June-11 30-June-11 30-June-11 30-June-11 30-June-11 Underlying Bank Nifty SBIN ICICI BANK HDFC BANK YES BANK AXIS BANK AXIS BANK Option Type CA CE CE CA CA CE CE Strike Price 10800 2200.00 45.00 Last Price 210.00 1050.40 32.00 1200.90 48.00 Last Price 254.00 1200.00 48.00 1000.70 [Type text] Page 72 .85 15.The price at which the holder of a derivative contract exercises his right if it is economic to do so at the appropriate point in time as delineated in the financial product's contract.00 2350 280.00 54.00 37.

stand to lose should the prices move in the adverse direction. they feed information into prices and thus contribute to market efficiency. or other item. Arbitrageurs: Arbitragers thrive on market imperfections. or may hold spread positions. the speculators consume information make forecasts about the prices and put their money in these forecasts. Option Writer: The seller of the option is called option writer. Option Holder: The buyer of the option is called option holder. Exercise price: Excise Price is the price at which the underlying shares are bought (calls) or sold (puts) and cover a range of prices at set intervals above and below the current price of the stock or index. Thus. that sells for different prices in different markets. they are betting that a price would go up or they are betting that it would go down. arbitrage involves making risk-less profit by simultaneously entering into transaction in two or more markets. by taking positions. a commodity would. These are the people who take positions in the market and assume risks to profit from fluctuations in prices. In this process. An arbitrageur profits by trading a given commodity. Speculators: If hedgers are the people who wish to avoid the price risk. [Type text] Page 73 . Depending on their perceptions. therefore.TRADERS IN OPTIONS MARKET Hedgers: Hedgers are the traders who wish to eliminate the risk of (price change) to which they are already exposed. they may take long or short positions on futures and/or options. speculators are those who are willing to take such risk. In fact. They make a long position on. short sell.

It can be considered as the value of the continuing exposure to the movement in the underlying product price that the option provides. Options provide leverage because they trade for a fraction of the price of the underlying shares. Option premiums are calculated based on models that take these factors into account and take the guesswork out of valuing options. Intrinsic value of an option: [Type text] Page 74 . It varies as the underlying security‟s price fluctuates as well as with the passage of time. dividends and interest rates. Time decay: Time decay is the cost of holding an option from one day to the next. volatility of the underlying product price. The most common models are the Black & Scholes and the Binomial option pricing models. Time value of an option: Time value of an option is the value over and above intrinsic value that the market places on the option. The price that the market puts on this time value depends on a number of factors: time to expiry.Premium: Premium is the term used for the price of an option. As options exist for a limited time only their value diminishes as the expiry approaches in much the same way as insurance policies lose value as they come to an end. The premium is dependent on other factors including the volatility of the underlying security. risk free interest rates and expected dividends. Time decay is quantifiable and is known by the Greek term "theta". Leverage: Leverage is the feature of options that allows for higher returns from movements in the underlying shares trading options rather than the underlying shares themselves.

000 shares of stock and are holding that stock in your brokerage account.of-the-money option has zero intrinsic value. and are holding that right in your brokerage account. if you have purchased the right to buy 1000 shares of a stock. it is a major factor in determining an options premium. If you have purchased 1. as the volatility of an underlying stock increases. Intrinsic value of in-the-money call option = underlying product price .money. In return. For example.The intrinsic value of an option is the amount an option holder can realize by exercising the option immediately. When you are long an equity option contract: contract Short: With respect to this section's usage of the word. Intrinsic value of in-the-money put option = strike price . If you have purchased the right to sell 1000 shares of a stock. and are holding that right in your account. or elsewhere. If the owner exercises the option.000 shares of stock. Long: "Long" describes a position (in stock and/or options) in which you have purchased and own that security in your brokerage account. and vice versa. you are long 1. the higher the premium because there is a greater possibility that the option will move in-the. you are long a put contract. Thus. The higher the volatility of the underlying stock. Volatility Volatility is the tendency of the underlying securities price to fluctuate up and down. Generally. An out. you [Type text] Page 75 . It reflects a price changes magnitude. you are long a call contract.underlying product price.strike price. it does not imply a bias toward price movement in one direction or the other. the premiums of both calls and puts overlying that stock increase. Intrinsic value is always positive or zero. short describes a position in options in which you have written a contract (sold one that you did not own). you now have the obligations inherent in the terms of that option contract.

In the case of a put. you are short a call contract. Out-the –money option: An in-the-money option (ITM) is an option that would lead to a negative cash flow to the holder if it were excised immediately. the put is at ITM if the index is below the strike price.e. An option index is at the money when the current index equals to strike price (i. In the case of a put. The writer of an option collects and keeps the premium received from its initial sale. limited by the fact that the stock cannot fall below zero in price. which is than the strike price (i. Although technically limited. the writer of) an equity option contract: You can be assigned an exercise notice at any time during the life of the option contract. spot price = strike price).. All option writers should be aware that assignment prior to expiration is a distinct possibility. creating it. A call option on the index is said to be out-the-money when the current index stands at a level. this potential loss could still be quite large if the underlying stock declines significantly in price. A call option on the index is said to be in-the-money when the current index stands at a higher level than the strike price (i.have an obligation to meet.e. you are short a put contract. in a sense. If you have sold the right to buy 1000 shares of a stock to someone else. When you write an option contract you are.e. At-the –money option: An at-the-money (ATM) option is an option that would lead to zero cash flow if it were excised immediately. [Type text] Page 76 . the put is at OTM if the index is above the strike price. spot price < strike price).e. spot price > strike price). In-the –money option: An in-the-money option (ITM) is an option that would lead to a positive cash flow to the holder if it were excised immediately. If you have sold the right to sell 1000 shares of a stock to someone else. When you are short (i.

the strategy has a limited downside (i. the Call and the Put premium) and unlimited upside potential. [Type text] Page 77 . Since the initial cost of a Strangle is cheaper than a Straddle. for a Strangle to make money it would require greater movement on the upside or downside for the stock/ index than it would for a Straddle. This strategy involves the simultaneous buying of a slightly out-of -the. As with a Straddle.e. the returns could potentially be higher. However. where generally ATM strikes are (OTM) put and a slightly out-of-the-money M) call of the same underlying stock/index and expiration data. Here again the investor is directional neutral but is looking for an increased volatility in the stock/index and the prices moving significantly in either direction. Since OTM options are purchased for both Calls and Puts it makes the cost of executing a Strangle cheaper as compared to a Straddle. LONG STRANGLE A Strangle is a slight modification to the Straddle to make it cheaper to execute.ANALYSIS AND INTERPRETATION OPTION STRATEGIES 1.

An investor. Nifty Put for a premium of Rs. Mr. paid Reward : Unlimited Strategy: Buy OTM Put + Buy OTM call Breakeven:  Upper Breakeven Point = Strike Price of Long call + Net Premium Paid Lower Breakeven Point = Strike Price of Long Put.) 43 4766 4300 Mr. executes a Long Strangle by buying an Rs.) 4500 4700  Mr.Net Premium Paid Nifty Index Current Value Buy call Option Strike Price (Rs.) Break Even Pont (Rs.) Buy Put Option Strike Price (Rs.4300 volatility in the near term. The net debit taken to enter the trade is Rs.) 23 Break Even Point (Rs. experience very high levels of A. A pays Premium (Rs.) 4234 [Type text] Page 78 . Which is also his maxi mum Risk : Limited to the initial premium possible loss. A pays Premium (Rs.66.43.23 and an Rs4700 Nifty Call for Rs.When to Use: The investor thinks Example that the underlying stock/ index will Suppose nifty is at 4500 in May.

The Payoff Schedule On expiry Nifty closes at 3800 3900 4000 4100 4200 4300 4400 4500 4600 4700 4766 4800 4900 5000 5100 5200 5300 Net Payoff from Put Net Payoff from Call Purchased (Rs.) purchased (Rs) 477 377 277 177 77 43 -23 -23 -23 -23 -23 -23 -23 -23 -23 -23 -23 -43 -43 -43 -43 -43 -43 -43 -43 -43 -43 23 57 157 257 357 457 557 Net Payoff (Rs.) 434 334 234 134 34 0 -66 -66 -66 -66 0 34 134 234 334 434 534 [Type text] Page 79 .

25) * 50 = 3337. When Nifty Index reached at 3410 the premium on purchase of nifty call option (Strike price = 3400) increased from Rs.80 to Rs.44.25 where lot size is 50.40.90 to Rs. 40.80 where lot size is 50. Calculation: Call option (Strike price = 3400): (111. Again simultaneously purchasing 1 lot of call option of nifty slightly out of money (OTM) at strike price is 3400 at a premium of Rs.Example: Nifty Index Trading at 3200 Purchased Put option of nifty slightly out of money (OTM) at strike price of 3000 at a premium of Rs.44.111 and simultaneously the premium price of put option nifty decreased from Rs.5 [Type text] Page 80 .5 .45.5 Put option (Strike price = 3000): (16.5.80) * 50 = (1215) PROFIT (Rs) 2122.40.16.

Let us try and understand this with an example. the investor makes the maximum loss (cost of the trade) and if the stock price rises to the higher (sold) strike. If the stock price falls to the lower (bought) strike. BULL CALL SPREAD STRATEGY: BUY CALL OPTION. and selling another out-of –the money (OTM) call option. The net effect of the strategy is to bring down the cost and breakeven on a buy Call (Long call) Strategy. because the investor will make a profit only when the stock price/index rises. [Type text] Page 81 . the investor makes the maximum profit. Both calls must have the same underlying security and expiration month. Often the call with the lower strike price will be inthe-money while the call with the higher strike price is out-in-the money. This strategy is exercised when investor is moderately bullish to bullish.2. SELL CALL OPTION A buy call spread is constructed by buying an in-the-money (ITM) call option.

35. XYZ Receives Break-Even.10 Reward: Limited to the difference between the two strikes minus net premium cost. XYZ buys a Nifty Call with a strike price Rs.40 Net Premium Paid (Rs.) Break Even Pont (Rs. Strategy: Buy a call with a lower strike (ITM) + Maximum loss occurs Sell a call with a higher strike (OTM) where the underlying falls to the level of the lower strike or below.135.) 170.) Option Mr.05 which is also his maximum initial premium paid in loss.40.) 35.) 135. Mr. the Risk: Limited to any net debit here is Rs.170.45 and he sells a Nifty call option with a strike price Rs. Nifty index Current Value 4191.When to use: investor is Example : moderately bullish. Buy ITM Call Strike Price(Rs.point(BEP): Strike Price of Purchased call + Net Debit Paid Premium (Rs.) Strike Price (Rs. XYZ Pays Sell OTM Call Option Mr. establishing the position.4400 at a premium of Rs. Maximum profit occurs where the underlying rises to the lever of the higher strike or above.4100 at a premium of Rs.45 4400 4100 Premium (Rs.05 4235.05 [Type text] Page 82 .

00 4600.95 164.95 164.55 829.00 3900.40 35.45 -170.40 35.00 4700.55 629.40 35.45 -70.55 929.45 -170.40 29.45 -170.40 35.40 35.60 -464.60 -164.) sold (Rs) -170.45 -35.95 164.60 -364.00 4235.05 -135.40 35.00 3700.05 -135.05 0 64.45 -170.55 529.05 -135.55 729.00 4900.55 329.00 4000.05 -135.95 164.55 129.00 4500.45 -170.00 Net Payoff from call Net Payoff from Call Purchased (Rs.95 164.40 35.55 429.60 664.05 -135.95 164.05 -135.00 4800.95 164.00 4400.40 35.00 4100.55 35.55 229.00 4200.60 -264.00 5100.00 5200.95 164.40 -64.40 35.60 764.00 5000.The Payoff Schedule On expiry Nifty closes at 3500.60 Net Payoff (Rs.95 164.45 -170.05 -135.05 4300.40 35.60 -564.) -135.00 3600.95 [Type text] Page 83 .00 3800.

50 where lot size is 50.The Bull Call Spread Strategy has brought the breakeven point down (if only the Rs. When Nifty Index reached at 3410 the premium on purchase of nifty call option (Strike price = 3200) increased from Rs. reduced the loss on the trade (if only the Rs.5) PROFIT 2837.5 [Type text] Page 84 .45 i.126.4270.126.50 to Rs.111 where lot size is 50.126. Calculation: Call option (Strike price = 3200): (250.25 .4100 strike price Call was purchased the breakeven point would have been Rs. However.44.111) * 50 = (3337.170.4150 strike price Call was purchased the loss would have been Rs.50) * 50 = 6175 Put option (Strike price = 3000): (44. Again simultaneously selling 1 lot of call option of nifty out of money (OTM) at strike price is 3400 at a premium of Rs. the premium of the Call purchased).170.e. Example: Nifty Index Trading at 3200 Purchased 1 lot of call option of nifty slightly in the money (ITM) at strike price of 3200 at a premium of Rs.4100 strike price call was purchased the cost of the trade would have been Rs.45).25.250 and simultaneously the premium price of put option nifty decreased from Rs.111 to Rs.45) reduced the cost of the trade (if only the Rs. the strategy also has limited gains and is therefore ideal when markets are moderately bullish.

[Type text] Page 85 . But the strategy is not Buy Call option Strategy. dividends. You wish you had some insurance against the price fall.3. and at the same time insuring against an adverse price moment. Here you have taken an exposure to an underlying stock with the aim of holding it and reaping the benefits of price rise. BUY PUT In this strategy. You have caped your loss in this manner because the put option stops your further losses. In simple buying of a Call Option. exercise the put option (remember put is right to sell). we purchase a stock since we fill about it. there is no underlying position in the Stock but is entered into only to take advantage of price moment in the underlying stock. This gives you the right to sell the stock at certain which is the strike price. In case the price of the stock rises you get the full of the price rise. bonus rights etc. It is a strategy with a limited loss and (after subtracting the put premium) unlimited profit (from the stock price rise). In case the price of the stock falls. SYNTHETIC LONG CALL: BUY STOCK. So buy a put on the stock. The result of this strategy looks like a call option Buy strategy and therefore is called a synthetic call. But what if the price of the stock went down. The strike price can be the price at which you bought the stock (ATM Strike price) or slightly below (OTM strike price).

He Buys ABC Ltd. XYZ IS BULLISH ABOUT ABC Ltd. XYZ pays ) Current market price of ABC Ltd .(RS) 4000 Risk: Losses limited to stock price + put premium – put Strike Price. Put option with a strike price Rs. Reward : Profit potential is unlimited Put option Break-even Point : Put Strike + put Premium + Stock Price –Put Strike Price Strike Price (Rs) 3900 Buy Put (Mr. At Current Market price of ABC Ltd.When to use: when ownership is desired of stock yet investor is concerned about near term down side risk.80 (Rs) (Put Strike Price + Put Premium + Stock Price – Put Strike Price )* * Break Even is form the point of view of Mr. he buys an ABC Ltd. (his Risk). XYZ. XYZ pays ) Premium (Rs) 143.80 expiring on 31st July. Strategy : Buy Stock + Buy Put Option Buy Stocks (Mr. 143.80 Break Even Point 4143.3900 (OTM) at a premium of RS. He has to recover the cost of the put option purchase price+ the stock price break even. [Type text] Page 86 . Stock. The outlook is conservatively bullish Example: Mr.

80 + Rs4000 – Rs.243.80 per put.80 Maximum Gain Unlimited (as the stock rises) Breakeven Put Strike + Put Premium + Stock Price – Put Strike Rs.4000 Buy 100 shares of the Stock at Rs.4000 + Rs.4000 Buy 100 Put Options with Price of Rs.80/- Maximum Loss Stock Price + Put Premium – Put Strike Rs.4.4000 + Rs.3900 Rs.3900 at a premium of Rs. Net Debit (payout) Stock Bought + Premium Paid Rs.4143. Is trading at Rs. – Rs.80 Rs.Example: ABC LTD.143.3900 = Rs.3900 + Rs.143.80 [Type text] Page 87 .

80 -143.00 4143.) on expiry) 3400.) -600.The Pay off schedule ABC Ltd.80 200.00 -200.20 656.80 -143.20 256.00 -400.80 Net Payoff (Rs.80 0 56.00 4600.00 Payoff from the Stock (Rs.00 4800.80 -243.00 4400.80 -143.) -243.00 600.80 4200.00 0 143.00 3600.20 [Type text] Page 88 .00 3800.00 Net Payoff from the Put Option (Rs.00 800.80 143.00 4000.80 -143.80 -143.00 400.20 156.20 -43.80 -243. closes at (Rs.80 -143.20 456.) 356.

When Nifty Index reached at 3410 the premium price of put option nifty decreased from Rs.ANALYSIS: This is a low risk strategy. Calculation: NIFTY FUTURES : (3410. A good strategy when you buy a stock for medium or long term.8335 Page 89 .3219 where lot size is 50.80 where lot size is 50.5 – 40.80) * 50 = (1215) PROFIT [Type text] Rs.40. with the aim of protecting any downside risk. This is a strategy which limits the loss in case of fall in market but the potential profit remains unlimited when the stock price rises.16.50. Again simultaneously purchasing 1 lot of put option of nifty out of money (OTM) at strike price is 3000 at a premium of Rs.40. The pay-off resembles a Call Option buy and is therefore called as Synthetic Long Call Example: Nifty Index Trading at 3200 Purchased 1 lot of nifty futures at Rs.3219) * 50 = 9550 Put option (Strike price = 3000): (16.80 to Rs.

If the stock/index rise then the breakeven is the lower strike plus the net credit. Otherwise he could make loss. The strategy requires the investor to buy out-of the-money (OTM) call option while simultaneously selling in the money (ITM) call options on the same underlying stock index. The maximum loss is the difference in strikes less the net credit received. This strategy call also be done with both OTM calls with the Call purchased being higher OTM strike than the Call sold. In this strategy the investor receives a net credit because the call he buys is of a higher strike price than the Call sold. [Type text] Page 90 .4. the investor makes a profit. Let us understand this with an example. BEAR CALL SPREAD STRATEGY: SELL ITM CALL. Provided the stock remains below that level. If the stock/ index fall both Calls will expire worthless and the investor can retain the net credit. The concept is to protect the downside of a Call Sold by buying a Call of a higher strike price to insure the Call sold. BUY OTM CALL The Bear Call Spread strategy can be adopted when the investor fells that the stock/ index is either range bound or falling.

e.2600 at a premium of Rs.) 2600 Option Mr.When to use: When Example: the Investor is mildly Mr.49 Risk: Limited to the Difference between the two strikes minus the net premium.2800 at a premium of Rs. XYZ Premium (Rs. Strategy: Sell a Call with lower strike (ITM) + Buy a Call with a higher strike (OTM) Nifty index Current Value 2694 Sell ITM Call Strike Price (Rs.) 2800 Option Mr.) Even 105 Break Even Point: Lower Strike + Net credit Point 2705 [Type text] Page 91 .) Break (Rs.) 49 Net premium received (Rs. Reward: Limited to the net premium received for the position i. He sells an ITM call option on with strike price of Rs. premium received for the short call minus the premium paid for the Long call.) 154 Receives Buy OTM Call Strike Price (Rs. XYZ is bearish on Nifty.154 and buys an OTM call option bearish market with strike price Rs. XYZ pays Premium (Rs.

) 154 154 154 154 154 154 54 49 -46 -146 -246 -346 -446 -546 Net Payoff from Call bought (Rs.On expiry Nifty Closes at 2100 2200 2300 2400 2500 2600 2700 2705 2800 2900 3000 3100 3200 3300 Net Payoff from Call Sold (Rs.) 105 105 105 105 105 105 5 0 -95 -95 -95 -95 -95 -95 The strategy earns a net income for the investor as well as limits the downside risk of a Call sold. [Type text] Page 92 .) -49 -49 -49 -49 -49 -49 -49 -49 -49 51 151 251 351 451 Net Payoff (Rs.

This strategy creates a net debit for the investor. SELL PUT This strategy requires the investor to buy an in-the money (higher) put option and sell an out-of –the-money (lower) put option on the same stock with the same expiration date. The strategy needs a Bearish outlook since the investor will make money only when the stock price/ index fall. BEAR PUT SPREAD STRATEGY: BUY PUT. risk and raise breakeven point (from Put exercise point of view). If the stock price increases above the in-the-money (higher) put option strike price at the expiration date. While the Puts sold will reduce the investors costs. then the investor reaches maximum profits. The net effect of the strategy is to bring down the cost and raise the breakeven on buying a Put (Long Put).5. [Type text] Page 93 . The both Puts will have the effect of capping the investor‟s downside. If the stock price closes below the out-of – the –money (lower) put option strike price of the expiration date. then the investor has a maximum loss potential of the net debit.

I.2600 at a premium Rs.e. the premium paid for long position less premium received for short position. He buys one Nifty ITM Put with a strike price Rs.) 2720 [Type text] Page 94 .When to use: When you are moderately bearish on market direction Risk: Limited to the net amount paid for the spread.2800 at a Premium of Rs.) 80 Break Even Point (Rs. Reward: Limited to the difference between the two strike prices minus the net premium paid for the position Break Even Point: Strike Price of Long Put – Net Premium Paid Example: Nifty is presently at 2694.) Strike Price (Rs. XYZ receives Strike Price (Rs.) 2800 132 2600 52 Net Premium Paid (Rs. XYZ expects Nifty to fall.) Premium (Rs.) Premium (Rs. Mr. XYZ pays Sell OTM Put Option Mr.132 and sells one Nifty OTM Put with strike price Rs.52 Strategy: Buy a Put with a higher strike (ITM) + SELL A PUT with a lower strike (OTM) Nifty index Current Value 2694 Buy ITM Put Option Mr.

reduced the cost of the trade (if only the Rs.2800 strike price Put was purchased the loss would have been Rs.) bought (Rs.) 468 368 268 168 68 -52 -32 -132 -132 -132 -132 -348 -248 -148 -48 52 52 52 52 52 52 52 120 120 120 120 120 0 20 -80 -80 -80 -80 The Bear Put Spread Strategy has raised the breakeven point (if only the Rs.132 i. [Type text] Page 95 .) Sold (Rs.2668). reduced the loss on the trade (if only the Rs.e. the premium of the Put purchased. the strategy also has limited gains and is therefore ideal when markets are moderately bearish.2800 strike price Put was Purchased the cost of the trade would have been Rs.The payoff schedule On expiry Nifty Closes at 2200 2300 2400 2500 2600 2720 2700 2800 2900 3000 3100 Net Payoff from Call Net Payoff from Call Net Payoff (Rs.2800 strike price Put was purchased the breakeven point would have been Rs. However.132).

The initial margin requirement for writing options and buying or selling futures becomes very high.  About fifty percent of the business in stock market derivatives belongs to these brokers.  More individual investor should come to Future and Options segment. 2 laces by SEBI which is very high for small investors.  The Derivatives market is developing in India. This has been pegged at Rs. It has great future as several measures are being taken to develop the market.  The second factor is. -. Factors Which Hinder the Growth of Derivatives Market in India  The first and foremost factor which hinders the growth of derivatives market in India is the minimum size of contract for futures & options contracts. Regulatory authority should come out with regulation which create interest for attract investor.FINDINGS From the report we come to know several things about Derivatives Market.  The market is dominated by few large players. Also the initial margin is as high as 15 to 20 percent in case of some scrip‟s. [Type text] Page 96 .  Other problem in Derivatives trading is.the initial investment required for entering into derivatives contracts.the contracts have to be settled in cash only. There is no physical delivery facility available for settlement of Derivatives contracts. These players are large brokers. -.  This denotes an absence of knowledge among traders.

o By providing more information about Deri vatives and the Stra tegies of O p tio n s o n th e c o m p a ny ’ s w ebs ite. Etc.  The appropriate O ption Strateg ies that sui ts th e market conditions sh ould be adopted based on the market i nformation and the tec hnical analysis as they are subjec t to [Type text] Page 97 . Ther efo re the inves tors have to be educated through training programs. It can be done by fo llowing ways: o By conducting seminars.  The contract‟s value of Rs.  This study reveals that most of the investors are unaware of the strateg ies followed i n o p tio n s m a rk et a n d th e a w a ren es s is lim ite d to p eo p le a t w o rk in br o k in g h o u s es a nd to those who do technical analysis. I would like to give the following recommendation which will be useful for the development of derivatives market in India and also will be useful to the future investor who would like to invest on the basis of the trends in the option market. SUGGESTIONS From the study of the findings and conclusions I have arrived at on the basis of the data collected by me and preparation of charts. I summarize my recommendation in the following points:  Option market has surpassed the cash market in terms of turnover but it much behind the turnover in developed market like USA.  SEBI should strengthen its efforts to educate investor about the Derivatives Market in India along with its other programs of education investors. The market is dominated by few large players. 200000/. UK. Some steps should be taken to encourage wider very high for retail investor so measures are needed to reduce that limit so that wider participation from retail investor can be encouraged.

 India is one of the most successful developing countries in terms of a vibrant market for derivatives. rolling settlement. There is unawareness regarding derivatives in case of individual. The Derivatives market is developing in India. banks and mutual funds are major players on the equity derivatives market. no weekly settlement. [Type text] Page 98 . . It has great future as several measures are being taken to develop the market. anonymous electronic trading. Internationally.  The new world of the equity market is working out very well: no badla.m a rk et im perfectio n.  The market is dominated by few large players. This episode reiterates the strengths of the modern development of India‟s securities markets. and options. individuals have displayed intellectual capacity and a speed of exploiting new ideas which has just not been found with finance companies. and a predominantly retail market.  As with most of the financial sector innovations of the last decade. futures. T h is will h elp to d eriv e m a xim um pro fits o u t of th e po sitio ns taken for hedging or tra ding for profits. individual investors are not having enough knowledge for derivatives market. Generally. which are based on nationwide market access. CONCLUSION  From the report I come to know several things about Derivatives Market.

derivativesindia.nseindia. BIBLIOGRAPHY For preparation of this project report we have collected information from various sources like visiting various  www.   www.bseindia. I have found the there exist a positive relationship between the Put-Call Open Interest Ratio and Cash Market Books Referred: [Type text] Page 99 . referring to journals. For gathering information we have also referred to various books on “Futures & Options” written and published by different authors and publications. Following are some of the major sources we have referred to for getting information: Web Sites Referred:  www.  I cannot define the exact relationship between the Put-Call Volume Ratio and Cash Market Price.ITI. It means that rise in Put-Call Open Interest Ratio shows bearish outlook over the Cash Market Price. It is desirable to have Put-Call Open Interest Ratio below 0.

C. Bagri  Options And Futures – In Indian Perspective By: D.D. Future And Options By: N. Vohra And B.R. Patwari [Type text] Page 100 .

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