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Particulars of the Contents
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Executive Summary Introduction Company profile Research Design
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Analysis and Interpretation
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.
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.
the capital market handles the medium term and long-term credit. treasury bills. promissory notes. who borrow or use the money.INTRODUCTION Financial Market We know that. So. we find two different groups. So. These financial instruments are close substitute of [Type text] Page 4 . money always flows from surplus sector to deficit sector. MARKETS Types Of Financial Market CIAL A financial market consists of two major segments: (a) Money Market. (d) It ensures liquidity by providing a mechanism for an investor to sell the financial assets. 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‟. Let us now see the main functions of financial market. Similarly. While the money market deals in short-term credit. 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. commercial paper. It consists of individual investors. which deals in financial assets whose period of maturity is upto one year.3 KET Money Market The money market is a market for short-term funds. 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. Now you think. (e) It ensures low cost of transactions and information. etc. It facilitates this function by acting as an intermediary between the borrowers and lenders of money. 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. and (b) Capital Market. (a) It provides facilities for interaction between the investors and the borrowers. The financial markets act as a link between these two different groups. how these two groups meet and transact with each other. one who invest money or lend money and the others. Let us discuss these two types of markets in detail. That means persons having excess of money lend it to those who need money to fulfill their requirement. (b) It provides pricing information resulting from the interaction between buyers and sellers in the market when they trade the financial assets. (c) It provides security to dealings in financial assets.
[Type text] Page 5 . Rather it refers to the whole networks of financial institutions dealing in short-term funds. It can be issued for period ranging from 15 days to one year. The Reserve Bank of India is the leader of the money market in India. The highly reputed companies (Blue Chip companies) are the major player of commercial paper market. Banks. These instruments help the business units. (c) Commercial Paper: Commercial paper (CP) is a popular instrument for financing working capital requirements of companies.money. Financial institutions and corporations normally play major role in the Treasury bill market. (d) Certificate of Deposit: Certificate of Deposit (CDs) are short-term instruments issued by Commercial Banks and Special Financial Institutions (SFIs). These bills are normally issued at a price less than their face value. The maturity period of CDs ranges from 91 days to one year. These bills are secured instruments and are issued for a period of not exceeding 364 days. Money market does not imply to any specific market place. fax or Internet. Commercial banks. (b) Treasury Bill: A treasury bill is a promissory note issued by the RBI to meet the short-term requirement of funds. that means. which provides an outlet to lenders and a source of supply for such funds to borrowers. which are freely transferable from one party to another. and other specialised financial institutions. It is repayable on demand and its maturity period varies in between one day to a fortnight. These can be issued to individuals. Most of the money market transactions are taken place on telephone. MONEY MARKET INSTRUMENTS Following are some of the important money market instruments or securities. etc. other organisations and the Government to borrow the funds to meet their short-term requirement. co-operatives and companies. The Indian money market consists of Reserve Bank of India. The CP is an unsecured instrument issued in the form of promissory note. UTI. The rate of interest paid on call money loan is known as call rate. also operate in the Indian money market. and redeemed at face value. Some Non-Banking Financial Companies (NBFCs) and financial institutions like LIC. (a) Call Money: Call money is mainly used by the banks to meet their temporary requirement of cash. Commercial papers are transferable by endorsement and delivery. They borrow and lend money from each other normally on a daily basis. Treasury bills are highly liquid instruments. at any time the holder of treasury bills can transfer of or get it discounted from RBI. Co-operative banks. GIC. This instrument was introduced in 1990 to enable the corporate borrowers to raise short-term funds. So the difference between the issue price and the face value of the treasury bill represents the interest on the investment.
borrowings from foreign markets and raising of capital by issue various securities such as shares debentures. NTPC and the private sector companies like Tata Consultancy Services (TCS). whereas the secondary market provides a place for purchase and sale of existing securities and is often termed as stock market or stock exchange. It consists of two different segments namely primary and secondary market.e.(e) Trade Bill: Normally the traders buy goods from the wholesalers or manufactures on credit. In the present chapter let us discuss about the market for trading of securities. In any case. This trade bill can now be discounted with a bank before its maturity. also known as new issue market. bonds. the buyer of goods. You must have learnt about many initial public offers (IPOs) made recently by a number of public sector undertakings such as ONGC. etc. GAIL. On maturity the bank gets the payment from the drawee i. the companies have to follow a well-established legal procedure and involve a number of intermediaries such as underwriters. PRIMARY MARKET The Primary Market consists of arrangements. which facilitate the procurement of long-term funds by companies by making fresh issue of shares and debentures. The primary market deals with new or fresh issue of securities and is. therefore.. if necessary. brokers. When buyer accepts the bill it becomes a negotiable instrument and is termed as bill of exchange or trade bill. The sellers get payment after the end of the credit period. relatives and financial institutions or by making public issue. So it constitutes all long-term borrowings from banks and financial institutions. When trade bills are accepted by Commercial Banks it is known as Commercial Bills. who form an integral part of the primary market. subsequently for the expansion of business. Capital Market Capital Market may be defined as a market dealing in medium and long-term funds. SECONDARY MARKET The secondary market known as stock market or stock exchange plays an equally important role [Type text] Page 6 . Jet-Airways and so on. 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. which enables the drawer of the bill to get funds for short period to meet the working capital needs. So trade bill is an instrument. You know that companies make fresh issue of shares and/or debentures at their formation stage and. The market where securities are traded known as Securities market. It is usually done through private placement to friends. Biocon. It is an institutional arrangement for borrowing medium and long-term funds and which provides facilities for marketing and trading of securities. etc.
the most prominent stock exchange that came up is National Stock Exchange (NSE). IDBI. of late. It helps entrepreneurs in raising finances for their new projects in a cost effective manner. It is an organised market where shares.25 crore. which included the abolition of the office of the Controller of Capital [Type text] Page 7 . in September 1992 specially to cater to small and medium sized companies with equity capital of more than Rs. fully automated screen-based trading and nation-wide coverage. LIC etc. It has been noticed that. Indian Stock Exchange The first organised stock exchange in India was started in Mumbai known as Bombay Stock Exchange (BSE). The Security Contracts (Regulation) Act was passed in 1956 for recognition and regulation of Stock Exchanges in India. and debentures are traded regularly with high degree of transparency and security. mutual funds. which enjoy nation-wide coverage and handle most of the business in securities in the country.30 lakh and less than Rs. On this stock exchange. the Government of India initiated several capital market reforms. A number of unorganised stock exchanges also functioned in the country without any formal set-up and were known as kerb market. securities of those companies can be traded which are exclusively listed on OTCEI only. as of now.in mobilising long-term funds by providing the necessary liquidity to holdings in shares and debentures. In addition. Another stock exchange that needs special mention is Over The Counter Exchange of India (OTCEI). and the individual investors. and in the secondary market you have all these and the stockbrokers who are members of the stock exchange who facilitate the trading. financial institutions. It was also promoted by the financial institutions like UTI. It provides for nation-wide online ringless trading with 20 plus representative offices in all major cities of the country. 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. This stock exchange has a corporate structure. Role Of SEBI As part of economic reforms programme started in June 1991. IFCI. the turnover at this stock exchange has considerably reduced and steps have been afoot to revitalise it. The major players in the primary market are merchant bankers. In fact. BSE and NSE are the two Stock Exchanges. In fact. It was followed by Ahmedabad Stock Exchange in 1894 and Kolkata Stock Exchange in 1908. 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. ICICI. At present we have 23 stock exchanges in the country. 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. It is also based in Mumbai and was promoted by the leading financial institutions in India. It provides a place where these securities can be encashed without any difficulty and delay. Of these. It was incorporated in 1992 and commenced operations in 1994.
(c) regulating the securities market. the value of the underlying security or commodity. SEBI has been vested with necessary powers concerning various aspects of capital market such as: 1. and (d) matters connected there with or incidental thereto. Another way of defining a derivative is that it is a security whose value is determined (derived) from one or more other securities. Regulating substantial acquisition of shares and takeover of companies. conducting inquiries and audit of stock exchanges. 4. commodities. promoting investors education and training of intermediaries. The value is influenced by the features of the derivative contract. and other factors such as volatility. and 8. Calling for information. 6. 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.. Prohibiting insider trading and unfair trade practices. The payments between the parties may be determined by the future changes of: The price of some other. which may include the timing of the contract fulfillment. Promoting and regulating self regulatory organizations. 1947 and the Securities Contracts (Regulation) Act. or events. undertaking inspection. Performing such functions and exercising such powers under the provisions of the Capital Issues (Control) Act. Registering and regulating the working of various intermediaries and mutual funds 3. a Common stock) [Type text] Page 8 . independently traded asset in the future (e.g. 5. 1956 as may be delegated to it by the Central Government. Regulating the business in stock exchanges and any other securities market 2.Issues (CCI) and granting statutory recognition to Securities Exchange Board of India (SEBI) in 1992 for: (a) protecting the interest of investors in securities. and intermediaries and self regulation organizations in the stock market. 7. (b) promoting the development of securities market.
Options 4. Depending on the definition of the contract.. Future 3.. the potential loss or gain may be much higher than if they had traded the underlying security or commodity directly. Forward 2. 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. Swap [Type text] Page 9 . they lose money. If the price of the underlying security or commodity moves into the right direction. The level of some index (e.g.g. otherwise. Types of derivative are:1. the owner of the derivative makes money. a stock index or heating-degree-days) The occurrence of some well-specified event (e.
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. sellers. A financial market consists of investors or buyers. It also provides liquidity to the initial buyers in the primary market to re-offer the securities to any interested buyer at a price. [Type text] Page 10 . The secondary market provides a trading place for the securities already issued to be bought and sold. Screen based trading eliminates the need of trading floor. dealers and does not refer to a physical location. Direct mailing. which they lend to borrowers in the corporate and public sector whose requirement of funds far exceeds their savings. the Indian financial system consists of the money market and capital market. if mutually accepted. statutory and other authorities such as state electricity boards and port trust also issue bonds.INDIAN CAPITAL MARKET The function of the financial market is to facilitate the transfer of funds from surplus sectors (lenders) to deficit sector (borrowers). various public sector industrial units (PSUs). Screen based trading has also made an appearance in India. advertisements and brokers reach the investors. 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. 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. trading in securities is screen based. The capital market consists of primary market and secondary market segments. As elsewhere in the world. preference shares and debentures. Since 1995. The secondary market or stock exchange where existing securities are traded is an auction arena. Normally. household has excess of funds or savings.
India. Setting up the first clearing corporation "National Securities Clearing Corporation Ltd. 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. The Capital market (Equities) segment of the NSE commenced operations in November 1994. NSCCL was a landmark in providing innovation on all spot equity market (and later. NSE is mutually-owned by a set of leading financial institutions. existent market and new market structures have followed the "NSE" model. NSE is the third largest Stock Exchange in the world in terms of the number of trades in equities. Since the success of the NSE. It is the second fastest growing stock exchange in the world with a recorded growth of 16. Page 11 [Type text] . Innovations NSE pioneering efforts include: Being the first national.NSE India The National Stock Exchange (NSE) (Hindi: राष्ट्रीय शेअर बाजार Rashtriya Śhare Bāzaār) is a stock exchange located at Mumbai. There are at least 2 foreign investors NYSE Euronext and Goldman Sachs who have taken a stake in the NSE. anonymous. the NSE VSAT terminals. for both equities and derivative trading.59 trillion and over 1. NSE has a market capitalization of around US$1. In April 1993. it was recognized as a stock exchange under the Securities Contracts (Regulation) Act. insurance companies and other financial intermediaries in India but its ownership and management operate as separate entities. electronic limit order book (LOB) exchange to trade securities in India. banks. an index of fifty major stocks weighted by market capitalization. Though a number of other exchanges exist.552 listings as of December 2010. The NSE's key index is the S&P CNX Nifty. known as the NSE NIFTY (National Stock Exchange fifty).6%. It is the 9th largest stock exchange in the world by market capitalization and largest in India by daily turnover and number of trades. 2799 in total. and was incorporated in November 1992 as a tax-paying company." in India. cover more than 1500 cities across India. NSE commenced operations in the Wholesale Debt Market (WDM) segment in June 1994. 1956. As of 2006. while operations in the Derivatives segment commenced in June 2000. derivatives market) trades in India.
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:
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.
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
DotEx Intl. Ltd. IISL NSE.IT
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.co. India Index Services & Products Limited (IISL) Launch of NSE's Web-site: www.nse. first depository in India. 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.in Page 15 .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 NSCCL.
IT Ltd. a joint venture between NSE.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. CRISIL announce launch of IndiaBondWatch. by Asia Risk magazine Launch of NSE – CNBC TV 18 media centre NSE. New Delhi Launch of Futures & options in BANK Nifty Index 'Derivative Exchange of the Year'.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. and I-flex Solutions Ltd. 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.com NSE launches derivatives on Nifty Junior & CNX 100 NSE launches derivatives on Nifty Midcap 50 Page 16 .
2010 July 19. 2010 October 28. 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 NSCCL Rated “CCR AAA” for third consecutive year January 05. 2010 October 12. 2011 NSE receives Financial Inclusion Award [Type text] Page 17 .January 2008 March 2008 April 2008 April 2008 August 2008 August 2009 November 2009 December 2009 February 2010 March 2010 April 2010 July 19.CME Group & NSE . 2010 October 29. 2010 July 28. 2010 November 9. 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.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.
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.Band VSAT network in the world. Currently more than 10000 users are trading on the real time-online NSE application. which are cheaper. Stock exchanges all over the world have realized the potential of IT and have moved over to electronic trading systems. which provides a platform for taking up all IT related assignments of NSE. 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. developments in information. NSE's IT set-up is the largest by any company in India. communication and network technologies have created paradigm shifts in the securities market operations. WDM. all trading information is stored in an in-memory database to achieve minimum response time and maximum system availability for users. procured from HP for the back office processing.Ends.25 protocol earlier. The Exchange uses powerful UNIX servers. In recognition of the fact that technology will continue to redefine the shape of the securities industry. NSE today can handle up to 15 million trades per day in Capital Market segment. and to provide for new business opportunities. SQL/ORACLE FORMS Front . Today it supports more than 2500 VSATs and 3000 leased lines across the country. TAP facilitates IT Infrastructure consolidation and routes the orders and trades between Client and Server in an optimized protocol. The latest software platforms like ORACLE RDBMS. NSE set up a separate company. NSE InfoTech Services Ltd. It uses satellite communication technology to energize participation from around 200 cities spread all over the country. At the server end. Between the NEAT client and server there is another layer called the Trading Access Point (TAP). bring about innovations in products and services. F&O. have wider reach and provide a better mechanism for trade and post trade execution. The NSE. The trading members on the various market segments such as CM. have [Type text] Page 18 . NEAT is a state-of-the-art client server based application. SLBM. Each trading member trades on the NSE with other members through a PC located in the trading member's office.Technology Used By NSE Across the globe. etc. NSE is one of the largest interactive VSAT based stock exchanges in the world. With upgradtion of trading hardware. Technology has enabled organizations to build new sources of competitive advantage. In the recent past. NSE stresses on innovation and sustained investment in technology to remain ahead of competition. 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. 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 Platform. Currency Derivatives.network is the largest private wide area network in the country and the first extended C. In order to capitalize on in-house expertise in technology. MF and IPO are linked to the central computer at the NSE through dedicated leased lines and VSAT terminals.
The website has been designed to cater to the needs of Investors. a shared web infrastructure. [Type text] Page 19 . The Exchange currently manages its data centre operations. There are over 500 server class computer systems which include non-stop fault-tolerant Stratus servers and high end UNIX servers.com. NSE today allows members to provide internet trading facility to their clients through the use of NOW (NSE on web). connecting all the offices at Mumbai. operational under one roof to support the NSE applications. The website displays its live stock quotes which are updated online and corporate announcements. NSE has its online presence at www.nseindia. In an ongoing effort to improve NSE's infrastructure. This coupled with the nationwide VSAT network makes NSE the country's largest Information Technology user. Delhi. Issuers and other market participants. system and database administration. design and development of in-house systems and design and implementation of telecommunication solutions.been used for the Exchange applications. Members. a corporate network has been implemented. Calcutta and Chennai. This corporate network enables speedy inter-office communications and data and voice connectivity between offices.
For proprietary positions . a TM should collect upfront margins from his clients. NSCCL uses the SPAN® (Standard Portfolio Analysis of Risk) system for the purpose of margining. where it may not be possible to collect mark to market settlement value. in the case of futures contracts (on index or individual securities). before the commencement of trading on the next day. at the Trading/ Clearing Member level. The most critical component of a risk containment mechanism for NSCCL is the online position monitoring and margining system. However. which is a portfolio based system. applying the appropriate statistical formula. Similarly. A CM is in turn required to collect the initial margin from the TMs and his respective clients. The methodology for computation of Value at Risk percentage is as per the recommendations of SEBI from time to time.is netted at Trading/ Clearing Member level without Page 20 [Type text] .is netted at the level of individual client and grossed across all clients. on an intra-day basis.Risk Management Through Margins Margins NSCCL has developed a comprehensive risk containment mechanism for the Futures & Options segment. without any setoffs between clients. Span Margin NSCCL collects initial margin up-front for all the open positions of a CM based on the margins computed by NSCCL-SPAN®. the initial margin is computed over a two-day time horizon. Initial Margin a. Initial margin requirements are based on 99% value at risk over a one day time horizon. Initial margin requirement for a member: For client positions . The actual margining and position monitoring is done on-line.
Fixed Deposit Receipts and approved securities. Bank Guarantee. For Index options and Index futures contracts: 3% of the notional value of a futures contract. For this purpose notional value means: . 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 a trading member wishes to take additional trading positions his CM is required to provide Additional Base Capital (ABC) to NSCCL.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. ABC can be provided by the members in the form of Cash. 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. b. For the purpose of SPAN Margin. ii. [Type text] Page 21 . c. various parameters are specified from time to time. Assignment margin is released to the CMs for exercise settlement pay-in.any setoffs between client and proprietary positions.For a futures contract – the contract value at last traded price/ closing price. Assignment Margin Assignment Margin is levied on a CM in addition to SPAN margin and Premium Margin. In case of options it is charged only on short positions and is 3% of the notional value of open positions. Premium Margin is charged to members. 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. Premium Margin In addition to Span Margin. 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. For option contracts and Futures Contract on individual Securities: The higher of 5% or 1. 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.
A Clearing Member (CM) of NSCCL has the responsibility of clearing and settlement of all deals executed by Trading Members (TM) on NSE. based on the last available closing price. Such CMs may clear and settle their own proprietary trades. In case of calendar spread positions in futures contract. their clients‟ trades as well as trades of other TM‟s & Custodial Participants Professional Clearing Member (PCM) A CM who is not a TM. 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.For an options contract – the value of an equivalent number of shares as conveyed by the options contract.. the CM performs the following functions: 1. 2. who clear and settle such deals through them. .e. 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. who clear and settle such deals through them. NSCCL acts as legal counter-party to all deals on NSE's F&O segment and guarantees settlement. [Type text] Page 22 .Performing actual settlement. Only funds settlement is allowed at present in Index as well as Stock futures and options contracts 3. determining positions to settle. Risk Management – Setting position limits based on upfront deposits / margins for each TM and monitoring positions on a continuous basis. Clearing – Computing obligations of all his TM's i. in the underlying market. Primarily. Types of Clearing Members Trading Member Clearing Member (TM-CM) A Clearing Member who is also a TM. 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. exposure margins are levied on one third of the value of open position of the far month futures contract. Settlement . 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. The calendar spread position is granted calendar spread treatment till the expiry of the near month contract.
Deposit of Rs. Axis Bank Ltd. reporting of balances and other information as may be [Type text] Page 23 . every clearing member can maintain and operate additional clearing accounts exclusively for the purpose of enhancement of collaterals. Bank of India 3. The net worth requirement for a CM who clears and settles only deals executed by him is Rs.. Every Clearing Member is required to maintain and operate clearing accounts with any of the empanelled clearing banks at the designated clearing bank branches. State Bank of India 13. ICICI Bank 8. IndusInd Bank 10. for settling funds and other obligations to the Clearing Corporation including payments of margins and penal charges. Union Bank of India.Clearing Member Eligibility Norms Net worth of at least Rs. Canara Bank 4. 100 lakhs. Citibank 5. HDFC Bank 6. 7. Hongkong & Shanghai Banking Corporation Ltd. 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. IDBI Bank 9.e. Kotak Mahindra Bank 11. The primary clearing account is to be used exclusively for clearing operations i. Further. 50 lakhs to NSCCL which forms part of the security deposit of the CM Additional incremental deposits of Rs. 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. Standard Chartered Bank 12. The clearing accounts are to be used exclusively for clearing & settlement operations.10 lakhs to NSCCL for each additional TM in case the CM undertakes to clear and settle deals for other TMs. Clearing Banks NSCCL has empanelled 13 clearing banks namely 1. 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.300 lakhs. 2.
Open Position Open position for the proprietary positions are calculated separately from client position. but can withdraw funds from these accounts only in self-name. b. Proprietary / Clients‟ Open Position While entering orders on the trading system. For a CM .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 . The Clearing Bank will debit/ credit the clearing account of clearing members as per instructions received from the Clearing Corporation. a buy trade is off-set by a sell trade and a sell trade is off-set by a buy trade. a. For example.sell) and client positions are calculated on gross of net positions of each client i.e. 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 TM's open position in turn includes his proprietary open position and clients‟ open positions. 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..XYZ. A Clearing member can deposit funds into this accounts in any form. with TMs clearing through him .required by NSCCL from time to time as per the specified format. The proprietary positions are calculated on net basis (buy .
Corporate Actions Adjustment The basis for any adjustment for corporate actions shall be such that the value of the position of the market participants. The payout of funds is credited to the primary clearing account of the members thereafter. Settlement Price Product Settlement Schedule Closing price of the futures contracts on the trading day. This will also address issues related to exercise and assignments. on the settlement day. This will facilitate in retaining the relative status of positions viz.30 a. Corporate Actions to be adjusted [Type text] Page 25 .m. 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. shall continue to remain the same as far as possible. on the last trading day of the futures contracts. inthe-money. on the cum and ex-dates for the corporate action. at-the-money and out-of-money. Members with a funds pay-in obligation are required to have clear funds in their primary clearing account on or before 10.PQR Total for XYZ 1000 7000 2000 2000 Settlement Schedule The settlement of trades is on T+1 working day basis. (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.
in cases where the announcement of dividend is made after the close of [Type text] Page 26 . and * Secured Premium Notes (SPNs) among others. 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. Methodology for adjustment the methodology to be followed for adjustment of various corporate actions to be carried out are as follows: A. 2. The various stock benefits declared by the issuer of capital are: * Bonus * Rights * Merger / De-merger * Amalgamation * Splits * Consolidations * Hive-off * Warrants. based on the nature of the corporate action. Adjustment Adjustments may entail modifications to positions and / or contract specifications as listed below. 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 cash benefit declared by the issuer of capital is cash dividend.).the corporate actions may be broadly classified under stock benefits and cash benefits. over 10% of the market price of the underlying stock. the Strike Price would be adjusted.e. To decide whether the dividend is "extra-ordinary" (i. B. Bonus. after the close of trading hours. The adjustments for corporate actions would be carried out on all open positions. For extra-ordinary dividends. above 10% of the market value of the underlying security. 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. 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. Stock Splits and Consolidations Dividends 1.
C.07% 0. The settlement price shall be the closing price of the underlying on the last cum-date. 2.07% 0. In case of declaration of “extra-ordinary " dividend by any company. the exact date of expiration (Last Cum-date) would be informed to members. Un-expired contracts outstanding as on the last cum-date would be compulsorily settled at the settlement price. the total dividend amount (special and / or ordinary) would be reduced from all the strike prices of the option contracts on that stock. 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 Member. the same day's closing price would be taken as the market price. Mergers 1. After the announcement of the Record Date. 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. On the announcement of the record date for the merger. 3.07% Chargeable to Clearing Member Clearing Member Clearing Members Page 27 [Type text] .5 lakhs Security deposit shortage Shortage of Capital cushion Penalty Charge per day 0. no fresh contracts on Futures and Options would be introduced on the underlying. 4. 3. if the shareholders of the company in the AGM change the rate of dividend declared by the Board of Directors.market hours. GTC/GTD orders for the futures & options contracts on the underlying. Type of Default Overnight settlement shortage of value more than Rs. that will cease to exist subsequent to the merger. Further. 4. The revised strike prices would be applicable from the ex-dividend date specified by the exchange. outstanding at the close of business on the last cum-date would be cancelled by the Exchange.
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.
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.
. The report contains information on the total STT liability. client wise STT liability and also the detailed computations for determining the client wise STT liability. trading member wise STT liability.Information to members a report is provided to the members at the end of each trading day. [Type text] Page 31 .
Indices [Type text] Page 32 .
ETF based on Gold prices. Tracks the price of Gold. Each unit is equivalent to 1 gm of gold and bears the price of 1gm of gold. These are typically index funds and GOLD ETFs. Some of the popular ETF's available for trading on NSE are: NIFTYBEES . [Type text] Page 33 . 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.ETF based on NIFTY index Nifty BEES Live quote Gold Bees .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.
The prominent subsidiaries of this Group are Prebone Yamane (Country’s largest debt broking company).. ITIFSL. Ltd. Under the banner of the Sharyans Group. ITIFSL is emerging as one of the top most wealth management companies in India with a presence in over 120 branches across the country... Mutual Fund. ITI is a knowledge center where it provides knowledge on Equity Commodity. and Collin Stewart India Ltd. In time Spectrum Securities Ltd. 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. Ltd. ITIAI Investment Advisory Services Pvt.. COMPANIES BUSINESS With the objective to tap the growing potential in our capital markets. Sharyans Wealth Management Pvt. Derivatives and IPO. Ltd. Ltd. is now a part of the Sharyans Group. 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.COMPANY PROFILE With an unblemished and reputed track record. In time Spectrum Finmart Pvt.. originally promoted by the Investment Trust of India. 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 . The Sharyans Group has an impressive portfolio of businesses under its fold which mainly fall under the real estate and financial services categories.. In time Spectrum Commodities Pvt.
Emerging as one of the front-line Brokerage Houses and a dominant force in the Distribution arena. "To be the most Preferred Financial Advisor.. Creator. ITI FSL has a growing network of offices across several states to ensure easy accessibility to our clients wherever they are. we are continuously engaged in the assessment of market conditions to balance risk and reward so as to optimize returns to our investors. Vision. Our presence Headquartered in Chennai. 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] . Wealth Manager and to deliver the Highest Standards of Service to customers and be Prominent in the horde of Finance Companies offering similar services".MISSION AND VISION: Miss ion: ITI FSL's mission is to deliver value with commitment. ITIFSL has over 120 Branch Offices spread across the country to offer better reach and service to the investor.
integrated broking system Powerful research and analytic All member having immense experience and each of them being professionally certified by the National stock exchange. prices in commodities futures have been less volatile compared with equity and bonds. It provides clients with an effective platform to participate and trade in Commodities with both the leading Commodity Exchanges of the country. thus providing an efficient portfolio diversification option. bonds and real estate. COMMODITY TRADING Commodities are now an asset class! For those who want to diversify their portfolios beyond shares. commodities are an excellent option. 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. 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] . 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. ITI ensures that you get the one of the finest trading experiences through: A high level of personalized and confidential service Secure . Commodities are one of the easiest investment avenues to understand as they are based on the fundamentals of demand and supply. Historically. ITI helps investors understand the risks and advantages of trading in commodities futures before take they take the big leap.
Precious metal and Energy product. 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. Mutual Funds. 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. Corporate clients and Overseas Corporate Bodies With our dedicated and superior quality service to our clients. which include FIIs. Insurance Companies. Banks. 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. prompt and efficient depository process. 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 . secure and transparent environment. Relationship management desk Educating clients on commodity future market Research on agro Commodities.
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.life & non-life Bonds Deposits IPO Small saving instrument Research Our primary strengths lie in research and operational efficiency. Company offer advice on and help invest in the following products: Mutual fund Insurance. Apart from advising. Some of the issues that the specialists address are general investments. demat account and trading account NRI’s. They also regularly monitor report and recommend changes based on the performance of the portfolio. Our certified Investment Advisory Managers strive to understand each individual client’s needs.NRI service The NRI Services' Department is an exclusive arm of ITI dedicated to impart professional advice to NRIs the world over. Some of ITI research reports are as follow: [Type text] Page 38 . 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. and insurance to recommend financial options to clients in accordance with their short-term and long-term goals. ' Our exclusive single-window NRI Services’ Department integrates and simplifies multiple processes into one . The Research Team comprises of competent professionals with vast experience. insightful analytical abilities and high standards of integrity. tax planning and child education & welfare planning. retirement planning. risk profiles and investment goals to provide the best advice. they help clients build and track their investments. tax laws. These experts use their knowledge of investments.opening of NRI bank account.
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. DP etc. ITI deals in providing market updates for Equity. Mutual fund. [Type text] Page 39 .IPO Insurance. 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. Commodity. Currency Derivative.
in the Investment Advisors category. HLL. 21 products and services across 21 major cities.com was launched in 2000. intangible features like imagery. India internet World 2008 for the “Best Finance” site. by Business Today. ITIs online trading and investment site www. ITIs ground network includes over 250 centers across 123 cities in India and having around 120000 customers and an equal number of demat customers. ORG Marg award by CNBC.ACHIEVEMENTS AND AWARDS WON BY ITI ITI. The reasons behind the preferences for brands were unveiled by examining the following: Tangible features of product / service Softer. equity driving preference Tactical measures such as promotional / pricing schemes [Type text] Page 40 .itifinancial. Rated among the top 20 wired companies along with RELIANCE. 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. and INFOSYSetc. has won the prestigious Awaaz Consumer Vote Awards 2005 for the Most Preferred Stock Broking Brand in India.
WORK FLOW MODEL CUSTOMER OVERVIEW CALL DESK ONLINE DESK SALES REP APPLICATION PROCESSING GENERATION OF CLASSIC A/C PORTFOLIO ANALYSIS & RESEARCH PAYMENT FOR INVESTMENT IN DP A/C TRADING THROUGH ITI HOLDINGS & STATEMENTS RETURNS CUSTOMER SERVICE [Type text] Page 41 .
[Type text] Page 42 . This project shows how options are useful especially for speculators.The Service Delivery Model of ITI is a blend of both tradition and technology. And to know which option combination strategy would be suitable when market moves up or down. Objectives of study Find appropriate options in banking stocks which are most profitable during the period of April and May 2011. potential for losses are also large. RESEARCH DESIGN STATEMENT OF PROBLEM This project studies about option derivatives. Carry forward. 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. SCOPE OF THE STUDY The study tries to find the best option combination for the script. Settlement. which have maximum profits. Compare investment and returns associated with the options trading in banking stocks. Positioning. It should give the pay-off for not only individual options but also for combination of options. To reduce Risk involved in Markets due to various factors like Timing. A model is to be developed which helps in trading in option derivative market. This Study can also be extended to other scrip‟s and hence forth find the option combination which is most profitable. While profits could be extremely high.
PLAN OF ANALYSIS: The collected information will be tabulated and analyzed in detail. Various tabulations will be used to explain the findings clearly. It will help me to gain strong theoretical basis of the option trading. [Type text] Page 43 . 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 . 2 . Theoretical background is one of the important parts of the project.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. SAMPLING PLAN Put and call options of the banking stocks with strike price and expiry date. The very basic purpose of this is to gain an insight and provide an overview of the study carried on. 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 . S a mp l e S i z e : 1 . W eb s i t es an d C o m p an y Br ochu re . All options will be selected from National Stock Exchange. 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 . .
including forwards. such as asset or index. extremely volatile and hence the risk factor is an important concern for financial agents. by nature. it's time to recast the architecture of the financial market. Derivatives are financial contracts whose values are derived from the value of an underlying primary financial instrument. futures. commodity or index.DERIVATIVES MARKET EMERGENCE OF DERIVATIVES MARKET With globalization of the financial sector. impose import-export restrictions. all of them can be divided into basic building blocks of options. financial innovation in India has picked up and it is expected to grow in the years to come." 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. Derivatives are products whose values are derived from one or more basic variables called bases. speculating. the Indian financial system did not see much innovation. Till the mid – 1980's. the concept of derivatives comes into the picture. as a more liberalized environment affords greater scope for financial innovation at the same time financial markets are. exchange rates. fix prices. Derivatives allow financial institutions and other participants to identify. etc. To reduce this risk. Unlike debt securities. India is traditionally an agriculture country with strong government intervention. Government arbitrates to maintain buffer stocks. such as: interest rates. The International Monetary Fund defines derivatives as "financial instruments that are linked to a specific financial instrument or indicator or commodity and through which specific financial risks can be traded in financial markets in their own right. The value of financial derivatives derives from the price of an underlying item. Derivatives include a wide assortment of financial contracts. and options. [Type text] Page 44 . no principal is advanced to be repaid and no investment income accrues. 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. commodities. arbitraging price differences and adjusting portfolio risks. swaps. and equities. forward contracts or some combination thereof. In the last 18 years.
(d) Development of more sophisticated risk management tools. Through the use of derivative products. [Type text] Page 45 . by locking-in asset prices. Development of exchange-traded derivatives Derivatives have probably been around for as long as people have been trading with one another. and May well have been around before then. derivatives products generally do not influence the fluctuations in the underlying asset prices. reduced risk as well as transaction costs as compared to individual financial assets.The emergence of the market for derivatives products. and (e) Innovations in the derivatives markets. most notable forwards. Forward contracting dates back at least to the 12th century. Factors generally attributed as the major driving force behind growth of financial derivatives are: (a) Increased Volatility in asset prices in financial markets. 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. which optimally combine the risks and returns over a large number of financial assets. (b) Increased integration of national financial markets with the international markets. Merchants entered into contracts with one another for future delivery of specified amount of commodities at specified price. leading to higher returns. the financial markets can be subject to a very high degree of volatility. futures. (c) Marked improvement in communication facilities and sharp decline in their costs. As instruments of risk management. By their very nature. it is possible to partially or fully transfer price risks by locking-in asset prices. derivatives products minimize the impact of fluctuations in asset prices on the profitability and cash flow situation of risk-averse investors. 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. providing economic agents a wider choice of risk management strategies. However.
by launching the S&P CNX Nifty index futures on June 12. and their clearing house/corporation to commence trading and settlement in approved derivative contracts.The trading in [Type text] Page 46 . the next month (two) and the far month (three). The responsibility of clearing and settlement of all trades on the exchange was given to the clearing house which was to be governed independently. Derivatives trading commenced in India in June 2000 after SEBI granted the final approval in May 2000. NSE and BSE. 1995. SEBI permitted the derivative segments of two stock exchanges. The National Stock Exchange (NSE) followed a few days later. did not take off. the Securities Contract Regulation Act (SCRA) was amended in 1999 to include derivatives within the scope of securities. L. The market for derivatives. Gupta on 18th November 1996 to develop appropriate regulatory framework for derivatives trading in India. however.the near month (one).DERIVATIVES MARKET IN INDIA Derivatives markets have had a slow start in India. SEBI set up a 24-member committee under the Chairmanship of Dr. The derivatives exchange had to function as a self-regulatory organization (SRO) and SEBI acted as its regulator. Following the committee's recommendations.the BSE30 (Sensex) index futures. It was introduced with three month trading cycle . It allowed derivatives trading either on a separate and independent derivatives exchange or on a separate segment of an existing stock exchange.C. The act granted legality to exchange-traded derivatives. which withdrew the prohibition on options in securities. viz. 2000. the Bombay Stock Exchange (BSE) introduced India's first derivative instrument . Introduction of derivatives was made in a phase manner allowing investors and traders sufficient time to get used to the new financial instruments. The first step towards introduction of derivatives trading in India was the promulgation of the Securities Laws (Amendments) Ordinance. as there was no Regulatory framework to govern trading of derivatives. SEBI was given more powers and it starts regulating the stock exchanges in a professional manner by gradually introducing reforms in trading. but not OTC (over the counter) derivatives. 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. 2000. On June 9. and a regulatory framework for administering derivatives trading was laid out.
Their involvement had been very low due to the absence of derivatives for hedging risk. In spite of the opposition. Derivatives trading eventually started in June 2000. Derivatives were also considered risky for retail investors because of their poor knowledge about their operation. in the month of January 2004. the value of the NSE and BSE derivatives markets was Rs. The lack of transparency and inadequate infrastructure of the Indian stock markets were cited as reasons to avoid derivatives trading. The introduction of derivatives was well received by stock market players. Derivatives contracts are traded and settled in accordance with the rules. For instance. 2003 on 91 day Notional T-bills. the small number of institutional players and the absence of a regulatory framework caused further delays. and regulations of the respective exchanges and their clearing house/corporation duly approved by SEBI and notified in the official gazette. Futures contracts on individual stock were launched in November 2001. The introduction of derivatives was delayed for some more time as the infrastructure for it had to be set up. bylaws. Derivatives trading required a computer-based trading system. The pros and cons of introducing derivatives trading were debated intensely.index options commenced in June 2001 and trading in options on individual securities commenced in July 2001. Trading in derivatives gained substantial popularity. In addition. a depository and a clearing house facility.5 billion (bn) whereas the value of the NSE and BSE cash markets was only Rs.89 bn. The main purpose of this plan was to encourage greater participation of foreign institutional investors (FIIs) in the Indian stock exchanges. The plan to introduce derivatives in India was initially mooted by the National Stock Exchange (NSE) in 1995. In June 2003. problems such as low market capitalization of the Indian stock markets. [Type text] Page 47 . there was no consensus of opinion on the issue among industry analysts and the media. the path for derivatives trading was cleared with the introduction of Securities Laws (Amendment) Bill in Parliament in 1998. However.3278.1998. and soon the turnover of the NSE and BSE derivatives markets exceeded the turnover of the NSE and BSE cash markets. SEBI/RBI approved the trading in interest rate derivatives instruments and NSE introduced trading in futures contract on June 24.
industry analysts felt that the derivatives market had not yet realized its full potential. While profits could be extremely high. the figure is hardly 20% of cash markets. [Type text] Page 48 . They increase the volume traded in markets because of participation of risk adverse people in greater numbers 5. Analysts pointed out that the equity derivative markets on the BSE and NSE had been limited to only four products . The combined notional values of the daily volumes on both the bourses stand at around RS. They help in the discovery of future as well as current prices 3. They catalyze entrepreneurial activity 4. 1) Hedgers: Hedgers enter the derivatives market to lock-in their prices to avoid exposure to adverse movements in the price of an asset.400 cr. In developed markets trading in the derivatives segment are thrice as large as in the cash markets. They increase savings and investment in the long run people Types of investors trade in derivatives markets. They help in transferring risks from risk adverse people to risk oriented people 2. They actually bet on the direction of price movements. index options and individual stock futures and options which were limited to certain select stocks.In spite of these encouraging developments. The NSE and BSE are two exchanges on which financial derivatives are traded. The need for a derivatives market The derivatives market performs a number of economic functions: 1. In India.index futures. potential for losses are also large. Quite clearly our derivative markets have a long way to go. 2) Speculators: Speculators take positions in the market. While such locking may not be extremely profitable the extent of loss is known and can be minimized.
examples are: Measured by national statistical agencies FORWARD CONTRACTS A forward contract is a particularly simple derivative. but economically intriguing. They are: 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: Some less common. CLASSIFICATION OF DERIVATIVES: Derivatives are basically classified based upon the mechanism that is used to trade on them. It is not normally traded on exchange. [Type text] Page 49 . In India such gains are minimal as price differences on NSE and the BSE are extremely small. 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. The contract is usually between two financial institutions and one of its corporate clients.
and hence is unique in terms of contract size. The specified price in a forward contract will be referred to as the delivery price. it has to compulsorily go to the same counter party. It is [Type text] Page 50 . Each contract is custom designed. if the price of the asset rises sharply soon after the initiation of contract. FUTURES CONTRACT A futures contract is a form of forward contract. The main features of forward contracts are They are bilateral contracts and hence exposed to counter-party risk. depending on movements in the price of the asset. which being in a monopoly situation can command the price it wants. the party wishes to reverse the contract. Later it can have a positive or negative value. 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. the value of a long position in the forward contract becomes positive and value of a short position of a forward contract becomes negative. 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. expiration date and the asset type and quality. For example. a forward contract is worth zero when it is first entered into. A forward contract is settled at maturity. The contract has to be settled by delivery of the asset on expiration date. A key variable determining the value of a forward contract at any given time is the market price of the asset.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. As already mentioned. In case. The contract price is generally not available in public domain. The other party assumes a short position and agrees to sell the asset on the same date for the same price. The holder of short position delivers the asset to the holder of long position in return for a cash amount equal to delivery price. This means that it costs nothing to take either a long or short position.
The futures can be on the interbank cash rate or on the forward exchange rate of the currency. Futures may also differ from forwards in terms of margin and delivery requirements. the exchange specifies certain standardized features of the contract. Euro dollar futures. attempt to profit from rising or falling exchange rates. The types of futures that are traded fall into four fundamentally different categories. Treasury-bond futures. Currency futures are quoted in US-dollars per unit of foreign currency. the exchange also provides the mechanism which gives the two parties guarantee that the contract will be honored. To make trading possible. Examples include Treasury-bill futures. foreign currency. An interest rate future is a futures contract with an interest bearing instrument as the underlying asset. LIBOR futures. The underlying asset traded may be a physical commodity. For example. 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. by incurring a risk. These financial derivatives can also be used to speculate and. Investors use these financial future contracts to hedge against foreign exchange risk. As the two parties to the contract do not necessarily know each other. 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. 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. [Type text] Page 51 . an interest-earning asset or an index. 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). Investors can close out the contract at any time prior to the contract's delivery date. Coffee grower may enter into a contract with a wholesale buyer to sell Coffee at a particular price on a future date.traded on a futures exchange. usually a stock index.
at or before a specified date. As expected. 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. [Type text] Page 52 . The seller of the option. Futures markets. however.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. 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. product type. to buy or sell a specified asset at a specified price. expiry. has a contingent liability. and mode of settlement. but not the obligation. Yet. it acts as buyer to seller and as a seller to the buyer and guarantees the trades. Forwards are important as prices in Forward markets serve as indicator of Futures prices. or an obligation which is activated if the buyer exercises that right. Contracts on Futures markets are fixed in terms of contract size. from the other party (the seller). product quality. therefore. Forward contracts are mutually agreed between two parties. the only benefit of entering into a Forwards contract comes from the flexibility of having tailor-made contracts.
but this is only if the other party (the buyer) requires him to do so. This relationship can remain in place until the options exercised or. such as forward contracts or futures contracts. [Type text] Page 53 . The act of enforcing the buyer‟s rights under an option contract is termed exercising the option. offering exchange-traded options on US listed equity stocks.e. 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. not exercised prior to or on the expiration date). create a legal relationship between the buyer and the seller of the option contract. Alternatively. This fee is called the premium. who charges the buyer a fee for taking on this risk. In an option contract. allowed to lapse (i. The buyer of the option is protected from unfavorable market movements but is still able to profit from movements in the buyer‟s favor. being contracts at law. The CBOE was the world‟s first formalized options market. only one party (the seller) has an obligation to transact. Options. the Chicago Board Options Exchange (CBOE). Types of Options: Options have a long history. in which both parties to the contract have an obligation to transact at some time in the future. was opened. The risk of loss is carried by the seller. alternatively. Options on equity stocks were available on the London Stock Exchange more than a century ago. This feature of an option contract distinguishes it from other instruments. An innovation of great significance occurred in 1973 when a new exchange.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. 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.
Thus. The clearing house tracks the positions outstanding and monitors contracts as they pass between participants. among the first of these being the Australian Stock Exchange which initiated a similar market on Australian listed equity stocks in 1976. The other important function performed by the clearing house is novation. where there National Stock Exchange has had a screen-based trading system since inception. Equity options and future options are the types of ET options most commonly traded on an exchange. there now exists a great diversity of exchange-traded options markets on equities. Options traded on an exchange are highly standardized as to the type and maturity of the underlying instrument. 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. In addition to exchange-traded (ET) options. 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. The clearing house then becomes the buyer to the seller and the seller to the buyer. Trader transacts deals through a combination of hand signals and speech. Trading of options on most exchanges is based on the system of „open outcry‟ on a physical trading floor. Around the globe. the identity of the other party to an ET option contract is no longer of importance. currencies. are options that originate and are traded on a formalized exchange. This is the process whereby the nexus between the two original contracting parties is broken. agricultural and metals (traded on various futures exchanges). 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. associated with (although not necessarily owned by) the exchange. there are over-the-counter (OTC) options. Exchange-traded (ET) Options: ET options. ET options transactions are settled through a clearing house.A number of US and overseas stock exchanges emulated the CBOE market. debt instruments and stock index instruments (traded on various exchanges) and on various futures contracts – financial. This is the case in India. there is now a trend towards electronic trading systems and it is expected that these will ultimately supersede the physical trading floor. as the name suggests.
This being the case. equities. Choosing Between ET and OTC Options: In choosing between ET and OTC options. The contracts are not standardized in terms of quantity. The trader of an OTC option must request a financial institution which deals in the relevant market to value the contract for him. traders can easily value their portfolio of options contracts by reference to their current price. Essentially. Instead.OTC options are not traded at a centralized market place or through a formalized trading system. an OTC option is a tailor-made options agreement between two or more parties. OTC markets exist in commodities (e. 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. As a result. Usually. In the OTC market. Valuation: ET option prices are publicly available financial information. stock indices. there is no clearing house for OTC options. debt instruments and foreign exchange. participants arrange deals through face-to-face meetings or more commonly on the telephone. gold). client relationships. Pricing factors: In the case of ET options. Credit dimensions: ET options are guaranteed by clearing houses. the option price is market-determined. OTC options are not. valuing the tailor-made specific option contract is not such a straightforward process. but rather. This lack of standardization has benefits in that the specification can more exactly meet the needs of the parties. In the OTC market.g. Traders control this risk through credit assessments of counterparties and the setting of exposure limits. factors such as the institution‟s own book. etc. delivery date or term to maturity. 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 . small accounts are not encouraged and prices may not reflect underlying supply and demand conditions. irrespective of the financial strength of the buyer or seller. 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.
For the sake of this example let us say that the company is Coca Cola and the current price of its stock is 50. I am thinking of buying 100 shares of Coca Cola from you at the price of 52. called the strike price. Call options are like security deposits. However I want to decide whether to actually buy it or not at the end of this month. In this way. and you are not obligated to. If you never returned. rent that property at the price agreed upon when you returned. If you decide not to use the option to buy the stock. called the option premium. 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. secures your right to buy that certain stock at a specified price. Call options usually increase in value as the value of the underlying instrument increases. you would give up your security deposit. The seller assumes the corresponding obligations.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. you wanted to rent a certain property. If. your only cost is the option premium. [Type text] Page 56 .How call option works? Suppose you are interested in buying 100 shares of a company. and left a security deposit for it. CALL OPTION A call option is a financial contract between two parties. for example. When you buy a Call option. the price you pay for it. but you would have no other liability. A Call option is an option to buy a stock at a specific price on or before a certain date. or Right to sell the underlying asset which is called the put option. the money would be used to insure that you could. which can be Right to buy the underlying asset. in fact. which is called the call option. Simple Call Option example . the buyer and the seller of the option. 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). Would that be OK?” Of course what you have in mind is the following.
has the right. you can use your policy to regain the insured value of the car. the strike. Put Option A put option is a contract between two parties to exchange an asset.risk of being at a loss if the price rises above 52. the insurance company keeps your premium in return for taking on the risk. has the obligation to buy the asset at the strike price if the buyer exercises the option. 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. for a specified amount of cash. you [Type text] Page 57 . If you buy a new car. In this way. "damages" your asset.you simply have the option to buy the shares. A Put options are options to sell a stock at a specific price on or before a certain date. the seller. the expiry or maturity. you can "insure" a stock by fixing a selling price. Ram. Ram is selling (or writing) the call option to you for a price of 2 per share. protected if the asset is damaged in an accident. The price of 52. You on the other hand are the buyer of the call option and have no obligation. This is the (risk) premium or the money you are paying Ram for the risk he is willing to take . the buyer of the put.If the stock price rises above 52. hence. If all goes well and the insurance is not needed. and then buy auto insurance on the car. what you are asking Ram is the 'option' to buy those shares from him . Ram will keep this money irrespective of whether you exercise your option of going ahead with the deal or not. i. to sell the asset at the strike price by the future date. In order to make the above deal 'fair' from the viewpoint of Ram you agree to pay ram 2 per share. Put options are like insurance policies. If something happens which causes the stock price to fall. With a Put option. If the stock price remains below 52 then you simply won‟t buy the shares from him. Ram will be at a loss in this situation. 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. In this way. the underlying. You are buying the call option. but not an obligation. If this happens.they are called a Call Option. One party. while the other party.e. After all. 200 in total. the put option gains in value as the value of the underlying instrument decreases.you are not making any commitment. by a predetermined future date. Deals of this type have a name. and thus. you pay a premium and are. 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.
you do not deal with any person 'personally'. In this case. The 2 he is willing to pay you is all yours to keep irrespective of whether Ram exercises the option or not. They do not pay any margin. 48 is the strike price of the Put Option. 2. It is the risk premium. you the seller or writers of the Put Option have the obligation to buy the shares at the strike price. 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. 1. In real life you sell (or write) and buy call & put options directly on the stock exchange instead of 'informally dealing' with your friend. In this case Ram is buying a Put Option from you. Each Options contract for a particular stock has a specified LOT SIZE. 3.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. Here are some key points to remember about real life options trading. They simply pay the Options premium [Type text] Page 58 . This is the primary function of listed options. Of course what he has in mind is that he will sell them to you if the price falls below 48. He has no obligation. If the price of your stock goes up. once again. writing a call. writing a Put and selling a Put. the buyer of the Put Option has the option to sell the shares to you. and. 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. Difference between above option examples and 'real life options' The above examples illustrate the basic ideas underlying. The buyers of Call and Put options on the other hand are not taking any risk. and there is no "damage. decided by the stock exchange. 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." then you do not need to use the insurance. to allow investors ways to manage risk. You are writing or selling a Put Option to Ram. buying a Call. The stock exchange acts as a 'guaranteer' to make sure the deal goes through.can exercise your option and sell it at its "insured" price level. Ram. Options trading are directly or automatically carried through at the stock exchange. Simple Put Option Example . 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. your only cost is the premium.
Marke t Expecta tion Ma rket expected to be bullish . 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). 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. 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. S ell call at higher strike ( B). Profi t and loss character istics at expiry: [Type text] Page 59 .
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. 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.85 Buy 190.00 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.194.11. Simulation Reliance Natural R esources Limited [RNRL] Lot size: 7150 Style: Amer ican Construc tion Entry 03rd January 2008 Stock Price a t Rs.70 [Type text] Page 60 . B r e a k .00 Jan Call option @ Rs.P rofi t: Limited to the differenc e be tween the t wo strikes minus net pr emium cost. 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 .228.00 Jan Call opti on @ Rs.00 Sell 200.14.
00 Eff ective Pro fit/Loss 190.58.0 0] Net Profit Rs.00 [22.39.Sell 190.00 Buy 200.25 [14. 1 .300. 22/share Profit made on using Strategy [Profi t/share x Lot size ] Rs.00 Jan Call option @ Rs.00-11.57.0 0] 200.00 Jan Call option: Profit Rs .00-39.00 Jan Call option: Loss Rs.47 [58.00 x 7150] 2) Short Put Spread Construc tion [Type text] Page 61 .00 Jan Call opti on @ Rs.
buy put at a lower strike (A).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. Marke t Expecta tion Ma rk et expected to be bu llish . 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. Simulation Reliance Natural R esources Limited [RNRL] Lot size: 7150 Style: Amer ican Construc tion Entry 10th January 2008 [Type text] Page 62 . Profi t and loss character istics at expiry: P rofi t: Limited to the net premium credited.Sell a put (B). 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 . 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.
00 Jan Put opti on @ Rs.930.0 0] 220.20 Buy 220.00 Jan Put opti on @ Rs.00 Jan Put opti on @ Rs.5. 7 2.Stock Price a t Rs.12.00 Exit 14th January 2008 Stock Price a t Rs.00] Net Profit Rs.00 Jan Put opti on @ Rs.20-12.00-1 1.00 Eff ective Pro fit/Loss 200.20 x 7150] 3) Short Call Spread [Type text] Page 63 .00 [10.00 Jan Put option: Profit Rs .222.11.15 Buy 200.00 Sell 18.104.22.168.80 [6.00 [27. 10.20/share Profit made on using Strategy (Profi t/share x Lot size) Rs.05 Sell 200.00 Jan Put option: L oss Rs.208.
B r e a k . 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 . Maximum loss occurs where the underlying rise s to the leve l o f the higher strike B or above. Simulation [Type text] Page 64 . Marke t Expecta tion Market expect ed to be bearish.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. 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. buy call at higher strike ( 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. 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.
116.3 5 Sell 2700.00 [9.0 0-7.108.00 Jan Call option @ Rs.7 0 Buy 2700.1764. 00] 2500.00-50.9.00 Jan Call option: Profit R s.00 Buy 2500.7.41.50.00 Exit 21st January 2008 Stock Price a t Rs.50 [116.50] [Type text] Page 65 .50 Eff ective Pro fit/Loss 2700.00 Sell 2500.00 Jan Call option: Loss Rs.00 Jan Call option @ Rs.2485.00 Jan Call option @ Rs.00 Jan Call option @ Rs.Reliance Energy Limite d [REL] Lot size: 550 Style: Amer ican Construc tion Entry 11th January 2008 Stock Price a t Rs.
se ll put a t lower s trike ( A).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 7.50 x 550] 4) Long Put Spread Construc tion Buy a put (B).00 [67. Marke t Expecta tion Market expec ted to be bearish. Profi t & loss character ist ics at expiry: [Type text] Page 66 . 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.Net Profit Rs. 67.50/share Profit made on using Strategy (Profi t/share x Lot size) 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. 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.20 Sell 180. Maximum profit occurs where und erlying falls to the level of the lower strike A o r below.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.00 Buy 190.211. 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.00 [Type text] Page 67 .2.141.10 Exit 21st January 2008 Stock Price a t Rs. B r e a k .P rofi t: Limited to the differenc e be tween the t wo strikes minus net pr emium cost.00 Jan Put opti on @ Rs.00 Jan Put opti on @ Rs.1.
the right and obligation to sell.00 Jan Put option: Profit Rs .18. Option contract differs from others in two respects.760.10/share Profit made on using Strategy (Profi t/share x Lot size) Rs.00 Jan Put opti on @ Rs.00 ] Net Profit Rs. and seller. who is "long a put".35. who is "long of a call option" and who has the right to buy. For example.10 x 1600] Option Feature In other contracts. in futures contract.90 [1. the buyer has the right and obligation to buy.) [Type text] Page 68 . the focus is on underlying asset and each counterpart has right and obligation to perform.00 [16. and has the obligation to buy from the taker of the put option. In option contract.80 Buy 180.10-20. 2 5.37. OPTION FRAMEWORKS The buyer assumes a long position. Second.80-2 .20] 180. The primary focus is on right and obligation not on underlying asset.00 Eff ective Pro fit/Loss 190. The writer of a put is "on the short side of the position". the right and obligation are separated. not the underlying asset. 16. with buyer taking the right without obligation and seller taking the obligation without right.00 Jan Put option: L oss Rs. what the buyer buys is the right.00 [37. (Thus the seller of a call is "short a call" and has the obligation to sell to the holder.20.00 Jan Put opti on @ Rs. not the underlying asset.Sell 190. and the seller a corresponding short position. Thus. and what the seller sells is the right. the distinguishing feature of option is the right-without-obligation for the buyer.
Additional to the intrinsic value an option has a time value. Buyers and sellers of option do not (usually) interact directly. an option writer who owns the underlying instrument has created a covered position. The maximum loss for the writer of a put option is equal to the strike price.The option style will affect the terms and valuation.money" has an intrinsic value of zero. The risk for the option holder is limited: he cannot lose more than the premium paid as he can "abandon the option". and has created a "naked position". see strike price. he is called a "naked writer". the risk for the writer of a call option is unlimited. The "in-the money" option has a positive intrinsic value. the option exchange acts as intermediary and quotes the market price of the option. at-the-money or out-of-the-money. However. which decreases. Generally the contract will either be American style . European contracts are easier to value and therefore to price. His potential gain is theoretically unlimited. The risk taken on can be anywhere from zero to infinite. Option can be in-the-money. In general. The contract can also be on an exotic option. [Type text] Page 69 . OPTION USES One can combine option and other derivatives in a process known as financial engineering to control the risk in a given transaction. the closer the option is to its expiry date.where exercise is on a fixed maturity date. he can always meet his obligations by using the actual underlying. Where the seller does not own the underlying on which he has written the option. option in "at-the-money" or "out-of the.which allows exercise before the maturity date – or European style . The seller guarantees the exchange that he can fulfill his obligation if the buyer chooses to execute. depending on the combination of derivative features used.
The NEAT F&O trading system is accessed by two type users. Good –till cancelled. Additionally. It supports an anonymous order driven market which provides complete transparency of trading operations and operates on strict price-time priority. they can enter and set limits to positions. stop losses can be built into order. which trading member can take. limit/market price. When using option for insurance. It is similar to that of trading of equities in the cash market segment. called NEAT-F&O trading system. [Type text] Page 70 . The clearing members (CM) use the trader work station for the purpose of monitoring the trading members whom they clear the trades. immediate or cancel. TRADING MECHANISM The future and option trading system of NSE. Various conditions like Good-till-day. Because one can use option to assume risk. order matching. 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. The Trading Members have access to functions such as order entry. 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. For example buying an at-the-money call option for $2 per share for a total of $200 on a security priced at $20. one can purchase option to create leverage. order and trade management it provides tremendous flexibility to users in terms of kinds orders that can be placed on the system.By using option. will lead to a 100% return on premium if the option is exercised when the underlying security's price has risen by $2. Good-tilldate. would have lead to a 10% return. 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. whereas buying the security directly for $20 per share.
However. EXERCISE PRICE The exercise price is the price at which a call's (put's) buyer can buy (or sell) the underlying instrument. Early exercise of American options may be warranted by arbitrage. European Style option contracts can be closed out early. mimicking the early exercise property of American style options in most cases. mimicking the early exercise property of American style options in most cases. It usually applies to options contracts. STRIKE PRICE [Type text] Page 71 . referring to the combination of intrinsic value and time value. 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. it also applies to off-market forward contracts. 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. PREMIUM The cost associated with a derivative contract.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.
70 [Type text] Page 72 .40 32. 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 1200.00 36.00 1000.50 25.00 56.00 54.00 48.40 50.00 2350 280.00 1050.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.50 12.00 45.00 1200.85 15.00 37.00 2350 280.00 Last Price 210.00 1050.90 48.00 Last Price 254.00 1000.00 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.
Option Writer: The seller of the option is called option writer. speculators are those who are willing to take such risk. Thus. therefore. Option Holder: The buyer of the option is called option holder. by taking positions. 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. a commodity would. or other item. the speculators consume information make forecasts about the prices and put their money in these forecasts. or may hold spread positions. they feed information into prices and thus contribute to market efficiency. These are the people who take positions in the market and assume risks to profit from fluctuations in prices.TRADERS IN OPTIONS MARKET Hedgers: Hedgers are the traders who wish to eliminate the risk of (price change) to which they are already exposed. arbitrage involves making risk-less profit by simultaneously entering into transaction in two or more markets. [Type text] Page 73 . they may take long or short positions on futures and/or options. 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. Speculators: If hedgers are the people who wish to avoid the price risk. short sell. Arbitrageurs: Arbitragers thrive on market imperfections. stand to lose should the prices move in the adverse direction. An arbitrageur profits by trading a given commodity. They make a long position on. In fact. Depending on their perceptions. In this process.
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.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. volatility of the underlying product price. risk free interest rates and expected dividends. Options provide leverage because they trade for a fraction of the price of the underlying shares. 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 most common models are the Black & Scholes and the Binomial option pricing models. It varies as the underlying security‟s price fluctuates as well as with the passage of time. dividends and interest rates. The premium is dependent on other factors including the volatility of the underlying security. The price that the market puts on this time value depends on a number of factors: time to expiry. Intrinsic value of an option: [Type text] Page 74 . It can be considered as the value of the continuing exposure to the movement in the underlying product price that the option provides. Time decay: Time decay is the cost of holding an option from one day to the next. Option premiums are calculated based on models that take these factors into account and take the guesswork out of valuing options. Time decay is quantifiable and is known by the Greek term "theta".
It reflects a price changes magnitude. short describes a position in options in which you have written a contract (sold one that you did not own). and vice versa. you are long a put contract. An out. Intrinsic value of in-the-money put option = strike price .000 shares of stock and are holding that stock in your brokerage account. as the volatility of an underlying stock increases. Intrinsic value of in-the-money call option = underlying product price . you [Type text] Page 75 . you are long 1.strike price.000 shares of stock. or elsewhere. the higher the premium because there is a greater possibility that the option will move in-the. the premiums of both calls and puts overlying that stock increase. Intrinsic value is always positive or zero. If you have purchased 1. The higher the volatility of the underlying stock.underlying product price. it does not imply a bias toward price movement in one direction or the other.The intrinsic value of an option is the amount an option holder can realize by exercising the option immediately. if you have purchased the right to buy 1000 shares of a stock. If you have purchased the right to sell 1000 shares of a stock. Thus.of-the-money option has zero intrinsic value. If the owner exercises the option. In return. you now have the obligations inherent in the terms of that option contract. For example. Volatility Volatility is the tendency of the underlying securities price to fluctuate up and down. Generally.money. Long: "Long" describes a position (in stock and/or options) in which you have purchased and own that security in your brokerage account. and are holding that right in your account. When you are long an equity option contract: contract Short: With respect to this section's usage of the word. it is a major factor in determining an options premium. you are long a call contract. and are holding that right in your brokerage account.
spot price < strike price). In the case of a put. you are short a put contract. All option writers should be aware that assignment prior to expiration is a distinct possibility. in a sense. Although technically limited. 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 . 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 buy 1000 shares of a stock to someone else. In the case of a put.e. the writer of) an equity option contract: You can be assigned an exercise notice at any time during the life of the option contract. If you have sold the right to sell 1000 shares of a stock to someone else. A call option on the index is said to be out-the-money when the current index stands at a level. An option index is at the money when the current index equals to strike price (i. you are short a call contract. which is than the strike price (i.. limited by the fact that the stock cannot fall below zero in price.e. 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. When you write an option contract you are. creating it.have an obligation to meet. the put is at OTM if the index is above the strike price.e. 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. The writer of an option collects and keeps the premium received from its initial sale. the put is at ITM if the index is below the strike price. this potential loss could still be quite large if the underlying stock declines significantly in price. When you are short (i. spot price > strike price).e.
the strategy has a limited downside (i. 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.money (OTM) put and a slightly out-of-the-money M) call of the same underlying stock/index and expiration data. Since OTM options are purchased for both Calls and Puts it makes the cost of executing a Strangle cheaper as compared to a Straddle. Since the initial cost of a Strangle is cheaper than 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. [Type text] Page 77 .ANALYSIS AND INTERPRETATION OPTION STRATEGIES 1. However. LONG STRANGLE A Strangle is a slight modification to the Straddle to make it cheaper to execute. where generally ATM strikes are purchased. 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. the Call and the Put premium) and unlimited upside potential.
) Break Even Pont (Rs.23 and an Rs4700 Nifty Call for Rs. A pays Premium (Rs.) 43 4766 4300 Mr. experience very high levels of A. executes a Long Strangle by buying an Rs. The net debit taken to enter the trade is Rs.4300 volatility in the near term. A pays Premium (Rs.) 4234 [Type text] Page 78 . 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.) Buy Put Option Strike Price (Rs.) 23 Break Even Point (Rs.Net Premium Paid Nifty Index Current Value Buy call Option Strike Price (Rs.When to Use: The investor thinks Example that the underlying stock/ index will Suppose nifty is at 4500 in May.43. Which is also his maxi mum Risk : Limited to the initial premium possible loss. Mr. An investor. Nifty Put for a premium of Rs.66.) 4500 4700 Mr.
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.) 434 334 234 134 34 0 -66 -66 -66 -66 0 34 134 234 334 434 534 [Type text] Page 79 .) 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.
80 where lot size is 50.16.25) * 50 = 3337.44.5 [Type text] Page 80 .80 to Rs.45.40.90 to Rs.5.111 and simultaneously the premium price of put option nifty decreased from Rs.5 Put option (Strike price = 3000): (16.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. When Nifty Index reached at 3410 the premium on purchase of nifty call option (Strike price = 3400) increased from Rs.40.44.5 . Calculation: Call option (Strike price = 3400): (111. 40. 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.80) * 50 = (1215) PROFIT (Rs) 2122.25 where lot size is 50.
This strategy is exercised when investor is moderately bullish to bullish.2. Both calls must have the same underlying security and expiration month. SELL CALL OPTION A buy call spread is constructed by buying an in-the-money (ITM) call option. and selling another out-of –the money (OTM) call option. because the investor will make a profit only when the stock price/index rises. Let us try and understand this with an example. BULL CALL SPREAD STRATEGY: BUY CALL OPTION. The net effect of the strategy is to bring down the cost and breakeven on a buy Call (Long call) Strategy. 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. If the stock price falls to the lower (bought) strike. the investor makes the maximum profit. [Type text] Page 81 . the investor makes the maximum loss (cost of the trade) and if the stock price rises to the higher (sold) strike.
05 4235.45 and he sells a Nifty call option with a strike price Rs.10 Reward: Limited to the difference between the two strikes minus net premium cost.point(BEP): Strike Price of Purchased call + Net Debit Paid Premium (Rs.) 135. Buy ITM Call Strike Price(Rs.135.) Strike Price (Rs. the Risk: Limited to any net debit here is Rs.05 which is also his maximum initial premium paid in loss.) 35.40.40 Net Premium Paid (Rs.35.170.) 170.4400 at a premium of Rs.When to use: investor is Example : moderately bullish. XYZ buys a Nifty Call with a strike price Rs.4100 at a premium of 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. XYZ Pays Sell OTM Call Option Mr. Nifty index Current Value 4191.05 [Type text] Page 82 . XYZ Receives Break-Even.) Option Mr.) Break Even Pont (Rs.45 4400 4100 Premium (Rs. establishing the position. Maximum profit occurs where the underlying rises to the lever of the higher strike or above. Mr.
55 529.40 35.00 4200.00 4400.55 629.95 164.05 -135.45 -170.40 35.55 729.40 35.55 229.45 -170.00 3800.00 4800.05 -135.05 -135.60 Net Payoff (Rs.05 4300.00 3600.45 -170.45 -170.) -135.55 929.00 4000.55 329.40 -64.40 35.55 129.95 164.95 164.95 164.05 -135.40 35.The Payoff Schedule On expiry Nifty closes at 3500.55 829.00 4235.00 5000.00 4500.45 -170.05 0 64.60 664.95 164.95 164.95 164.60 -164.95 164.45 -35.05 -135.55 35.40 35.00 3700.40 35.) sold (Rs) -170.00 Net Payoff from call Net Payoff from Call Purchased (Rs.00 4600.95 [Type text] Page 83 .60 764.60 -564.00 4700.05 -135.60 -364.00 4100.00 4900.00 3900.60 -464.60 -264.55 429.40 35.40 29.00 5100.05 -135.40 35.95 164.00 5200.45 -170.40 35.45 -70.
111 where lot size is 50.50) * 50 = 6175 Put option (Strike price = 3000): (44.5) PROFIT 2822.214.171.124. the premium of the Call purchased).111 to Rs.The Bull Call Spread Strategy has brought the breakeven point down (if only the Rs.50 to Rs.50 where lot size is 50.4100 strike price call was purchased the cost of the trade would have been Rs. 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.44. When Nifty Index reached at 3410 the premium on purchase of nifty call option (Strike price = 3200) increased from Rs.e.4100 strike price Call was purchased the breakeven point would have been Rs.25.170.25 .45).45) reduced the cost of the trade (if only the Rs. However. Calculation: Call option (Strike price = 3200): (250. Again simultaneously selling 1 lot of call option of nifty out of money (OTM) at strike price is 3400 at a premium of Rs.250 and simultaneously the premium price of put option nifty decreased from Rs.111) * 50 = (3337.4270.126.45 i. the strategy also has limited gains and is therefore ideal when markets are moderately bullish.4150 strike price Call was purchased the loss would have been Rs.5 [Type text] Page 84 . reduced the loss on the trade (if only the Rs.
In case the price of the stock falls. bonus rights etc. and at the same time insuring against an adverse price moment.3. The result of this strategy looks like a call option Buy strategy and therefore is called a synthetic call. 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. dividends. Here you have taken an exposure to an underlying stock with the aim of holding it and reaping the benefits of price rise. SYNTHETIC LONG CALL: BUY STOCK. But what if the price of the stock went down. BUY PUT In this strategy. It is a strategy with a limited loss and (after subtracting the put premium) unlimited profit (from the stock price rise). But the strategy is not Buy Call option Strategy. we purchase a stock since we fill about it. The strike price can be the price at which you bought the stock (ATM Strike price) or slightly below (OTM strike price). exercise the put option (remember put is right to sell). [Type text] Page 85 . In simple buying of a Call Option. So buy a put on the stock. You wish you had some insurance against the price fall. there is no underlying position in the Stock but is entered into only to take advantage of price moment in the underlying stock. You have caped your loss in this manner because the put option stops your further losses.
Strategy : Buy Stock + Buy Put Option Buy Stocks (Mr.80 (Rs) (Put Strike Price + Put Premium + Stock Price – Put Strike Price )* * Break Even is form the point of view of Mr. Put option with a strike price Rs. At Current Market price of ABC Ltd. XYZ pays ) Premium (Rs) 143.(RS) 4000 Risk: Losses limited to stock price + put premium – put Strike Price. 143. XYZ. he buys an ABC Ltd.80 Break Even Point 4143. XYZ IS BULLISH ABOUT ABC Ltd.3900 (OTM) at a premium of 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. Stock.80 expiring on 31st July. The outlook is conservatively bullish Example: Mr. He Buys ABC Ltd.When to use: when ownership is desired of stock yet investor is concerned about near term down side risk. He has to recover the cost of the put option purchase price+ the stock price break even. XYZ pays ) Current market price of ABC Ltd . (his Risk). [Type text] Page 86 .
Example: ABC LTD.80 per put.3900 + Rs.80 [Type text] Page 87 .80 – Rs.126.96.36.19900 Rs.4143.4000 + Rs.80 + Rs4000 – Rs. Net Debit (payout) Stock Bought + Premium Paid Rs.4000 + Rs.4.4000 Buy 100 shares of the Stock at Rs.3900 at a premium of Rs.3900 = Rs.243. Is trading at Rs.143.143.80 Maximum Gain Unlimited (as the stock rises) Breakeven Put Strike + Put Premium + Stock Price – Put Strike Rs.80 Rs.80/- Maximum Loss Stock Price + Put Premium – Put Strike Rs.4000 Buy 100 Put Options with Price of Rs.
00 3800.00 4143.80 -143.00 -200.80 -143.80 Net Payoff (Rs.80 -143.80 -143.20 656.00 800.20 [Type text] Page 88 .) -600.80 -243.80 -143.20 256.00 4400.80 -143.) -243.00 Net Payoff from the Put Option (Rs.) on expiry) 3400.) 356.20 156.00 4600.20 456.80 0 56.00 400.00 4800. closes at (Rs.80 -243.80 4200.00 -400.00 3600.00 4000.00 600.20 -43.80 200.80 143.00 0 143.The Pay off schedule ABC Ltd.00 Payoff from the Stock (Rs.
8335 Page 89 . Again simultaneously purchasing 1 lot of put option of nifty out of money (OTM) at strike price is 3000 at a premium of Rs.16.ANALYSIS: This is a low risk strategy. When Nifty Index reached at 3410 the premium price of put option nifty decreased from Rs. 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.5 – 40.3219) * 50 = 9550 Put option (Strike price = 3000): (16. with the aim of protecting any downside risk.50.80 to Rs.3219 where lot size is 50.40. A good strategy when you buy a stock for medium or long term.40.80) * 50 = (1215) PROFIT [Type text] Rs. 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. Calculation: NIFTY FUTURES : (3410.80 where lot size is 50.
Let us understand this with an example. 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. If the stock/index rise then the breakeven is the lower strike plus the net credit. The maximum loss is the difference in strikes less the net credit received. the investor makes a profit. [Type text] Page 90 . 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. If the stock/ index fall both Calls will expire worthless and the investor can retain the net credit. Otherwise he could make loss. Provided the stock remains below that level. BEAR CALL SPREAD STRATEGY: SELL ITM CALL. This strategy call also be done with both OTM calls with the Call purchased being higher OTM strike than the Call sold. 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. In this strategy the investor receives a net credit because the call he buys is of a higher strike price than the Call sold.4.
e. XYZ is bearish on Nifty.) Break (Rs.) 154 Receives Buy OTM Call Strike Price (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 at a premium of Rs. XYZ Premium (Rs.49 Risk: Limited to the Difference between the two strikes minus the net premium. He sells an ITM call option on with strike price of Rs. Reward: Limited to the net premium received for the position i.) 2600 Option Mr.) Even 105 Break Even Point: Lower Strike + Net credit Point 2705 [Type text] Page 91 .When to use: When Example: the Investor is mildly Mr.) 49 Net premium received (Rs.154 and buys an OTM call option bearish market with strike price Rs. premium received for the short call minus the premium paid for the Long call.) 2800 Option Mr.2600 at a premium of Rs. XYZ pays Premium (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.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.) 154 154 154 154 154 154 54 49 -46 -146 -246 -346 -446 -546 Net Payoff from Call bought (Rs.) -49 -49 -49 -49 -49 -49 -49 -49 -49 51 151 251 351 451 Net Payoff (Rs. [Type text] Page 92 .
While the Puts sold will reduce the investors costs. then the investor has a maximum loss potential of the net debit. 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. This strategy creates a net debit for the investor. risk and raise breakeven point (from Put exercise point of view). then the investor reaches maximum profits. BEAR PUT SPREAD STRATEGY: BUY PUT. The both Puts will have the effect of capping the investor‟s downside. The net effect of the strategy is to bring down the cost and raise the breakeven on buying a Put (Long Put). [Type text] Page 93 . If the stock price closes below the out-of – the –money (lower) put option strike price of the expiration date. If the stock price increases above the in-the-money (higher) put option strike price at the expiration date. The strategy needs a Bearish outlook since the investor will make money only when the stock price/ index fall.5.
) 2720 [Type text] Page 94 . Mr.) Premium (Rs.2800 at a Premium of Rs.e.) 80 Break Even Point (Rs. XYZ receives Strike Price (Rs. the premium paid for long position less premium received for short position.) 2800 132 2600 52 Net Premium Paid (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. 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. XYZ expects Nifty to fall.2600 at a premium Rs. He buys one Nifty ITM Put with a strike price Rs.) Strike Price (Rs.) Premium (Rs.132 and sells one Nifty OTM Put with strike price Rs. XYZ pays Sell OTM Put Option Mr.When to use: When you are moderately bearish on market direction Risk: Limited to the net amount paid for the spread. I.
e.2668). reduced the loss on the trade (if only the Rs.132). However.) Sold (Rs. the premium of the Put purchased.2800 strike price Put was Purchased the cost of the trade would have been 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. [Type text] Page 95 .132 i. the strategy also has limited gains and is therefore ideal when markets are moderately bearish.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. reduced the cost of the trade (if only the Rs.2800 strike price Put was purchased the breakeven point would have been Rs.) bought (Rs.2800 strike price Put was purchased the loss would have been Rs.
This has been pegged at Rs. [Type text] Page 96 .the initial investment required for entering into derivatives contracts. About fifty percent of the business in stock market derivatives belongs to these brokers.FINDINGS From the report we come to know several things about Derivatives Market.the contracts have to be settled in cash only. There is no physical delivery facility available for settlement of Derivatives contracts. The second factor is. Regulatory authority should come out with regulation which create interest for attract investor. The initial margin requirement for writing options and buying or selling futures becomes very high. More individual investor should come to Future and Options segment. -. It has great future as several measures are being taken to develop the market. This denotes an absence of knowledge among traders. Other problem in Derivatives trading 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. 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. The Derivatives market is developing in India. -. These players are large brokers. 2 laces by SEBI which is very high for small investors.
Ther efo re the inves tors have to be educated through training programs. UK. 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. Some steps should be taken to encourage wider participations. SEBI should strengthen its efforts to educate investor about the Derivatives Market in India along with its other programs of education investors. 200000/. 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 . It can be done by fo llowing ways: o By conducting seminars. 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. The market is dominated by few large players.is very high for retail investor so measures are needed to reduce that limit so that wider participation from retail investor can be encouraged. Etc. 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. 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. The contract‟s value of Rs. 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.
It has great future as several measures are being taken to develop the market. Generally. There is unawareness regarding derivatives in case of individual. banks and mutual funds are major players on the equity derivatives market. and options. . anonymous electronic trading. no weekly settlement. Internationally. India is one of the most successful developing countries in terms of a vibrant market for derivatives. individual investors are not having enough knowledge for derivatives market. 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.m a rk et im perfectio n. individuals have displayed intellectual capacity and a speed of exploiting new ideas which has just not been found with finance companies. futures. [Type text] Page 98 . and a predominantly retail market. The new world of the equity market is working out very well: no badla. This episode reiterates the strengths of the modern development of India‟s securities markets. which are based on nationwide market access. As with most of the financial sector innovations of the last decade. The Derivatives market is developing in India. CONCLUSION From the report I come to know several things about Derivatives Market. The market is dominated by few large players. rolling settlement.
derivativesindia. publications.nseindia.com www.bseindia. BIBLIOGRAPHY For preparation of this project report we have collected information from various sources like visiting various websites. It is desirable to have Put-Call Open Interest Ratio below 0.com www. I have found the there exist a positive relationship between the Put-Call Open Interest Ratio and Cash Market Price. It means that rise in Put-Call Open Interest Ratio shows bearish outlook over the Cash Market Price.7.ITI.com Books Referred: [Type text] Page 99 .com www. Following are some of the major sources we have referred to for getting information: Web Sites Referred: www. referring to journals. I cannot define the exact relationship between the Put-Call Volume Ratio and Cash Market Price. For gathering information we have also referred to various books on “Futures & Options” written and published by different authors and publications.
C.D. Vohra And B. Patwari [Type text] Page 100 . Bagri Options And Futures – In Indian Perspective By: D.R. Future And Options By: N.