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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. While the money market deals in short-term credit. That means persons having excess of money lend it to those who need money to fulfill their requirement. how these two groups meet and transact with each other. (a) It provides facilities for interaction between the investors and the borrowers. The financial markets act as a link between these two different groups. (d) It ensures liquidity by providing a mechanism for an investor to sell the financial assets. (b) It provides pricing information resulting from the interaction between buyers and sellers in the market when they trade the financial assets. commercial paper. Similarly. (e) It ensures low cost of transactions and information. (c) It provides security to dealings in financial assets. treasury bills. who borrow or use the money. MARKETS Types Of Financial Market CIAL A financial market consists of two major segments: (a) Money Market. one who invest money or lend money and the others. Now you think. we find two different groups. Let us now see the main functions of financial market. So. 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‟. which deals in financial assets whose period of maturity is upto one year. These financial instruments are close substitute of [Type text] Page 4 . So. Let us discuss these two types of markets in detail. 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.3 KET Money Market The money market is a market for short-term funds. 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. money always flows from surplus sector to deficit sector. 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. promissory notes. and (b) Capital Market. etc.INTRODUCTION Financial Market We know that. It consists of individual investors. It facilitates this function by acting as an intermediary between the borrowers and lenders of money.
These instruments help the business units. also operate in the Indian money market. 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. that means. and other specialised financial institutions. The highly reputed companies (Blue Chip companies) are the major player of commercial paper market. Financial institutions and corporations normally play major role in the Treasury bill market. and redeemed at face value. Treasury bills are highly liquid instruments. fax or Internet. Commercial papers are transferable by endorsement and delivery. Money market does not imply to any specific market place. Rather it refers to the whole networks of financial institutions dealing in short-term funds. (c) Commercial Paper: Commercial paper (CP) is a popular instrument for financing working capital requirements of companies. GIC. MONEY MARKET INSTRUMENTS Following are some of the important money market instruments or securities. which are freely transferable from one party to another. Commercial banks. [Type text] Page 5 . (b) Treasury Bill: A treasury bill is a promissory note issued by the RBI to meet the short-term requirement of funds. which provides an outlet to lenders and a source of supply for such funds to borrowers. (d) Certificate of Deposit: Certificate of Deposit (CDs) are short-term instruments issued by Commercial Banks and Special Financial Institutions (SFIs). The Indian money market consists of Reserve Bank of India. (a) Call Money: Call money is mainly used by the banks to meet their temporary requirement of cash. It is repayable on demand and its maturity period varies in between one day to a fortnight. The rate of interest paid on call money loan is known as call rate. The Reserve Bank of India is the leader of the money market in India. They borrow and lend money from each other normally on a daily basis. It can be issued for period ranging from 15 days to one year. This instrument was introduced in 1990 to enable the corporate borrowers to raise short-term funds. Some Non-Banking Financial Companies (NBFCs) and financial institutions like LIC. co-operatives and companies.money. The CP is an unsecured instrument issued in the form of promissory note. other organisations and the Government to borrow the funds to meet their short-term requirement. These can be issued to individuals. etc. UTI. These bills are normally issued at a price less than their face value. Co-operative banks. Banks. Most of the money market transactions are taken place on telephone. So the difference between the issue price and the face value of the treasury bill represents the interest on the investment. at any time the holder of treasury bills can transfer of or get it discounted from RBI.
(e) Trade Bill: Normally the traders buy goods from the wholesalers or manufactures on credit. brokers. also known as new issue market. It consists of two different segments namely primary and secondary market. etc. It is an institutional arrangement for borrowing medium and long-term funds and which provides facilities for marketing and trading of securities. relatives and financial institutions or by making public issue. The primary market deals with new or fresh issue of securities and is. This trade bill can now be discounted with a bank before its maturity. which enables the drawer of the bill to get funds for short period to meet the working capital needs. When trade bills are accepted by Commercial Banks it is known as Commercial Bills. So it constitutes all long-term borrowings from banks and financial institutions. the companies have to follow a well-established legal procedure and involve a number of intermediaries such as underwriters. In any case. Biocon. 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. When buyer accepts the bill it becomes a negotiable instrument and is termed as bill of exchange or trade bill. SECONDARY MARKET The secondary market known as stock market or stock exchange plays an equally important role [Type text] Page 6 . In the present chapter let us discuss about the market for trading of securities. subsequently for the expansion of business. GAIL. etc. borrowings from foreign markets and raising of capital by issue various securities such as shares debentures.e. who form an integral part of the primary market. Capital Market Capital Market may be defined as a market dealing in medium and long-term funds. So trade bill is an instrument. It is usually done through private placement to friends. the buyer of goods.. The market where securities are traded known as Securities market. whereas the secondary market provides a place for purchase and sale of existing securities and is often termed as stock market or stock exchange. The sellers get payment after the end of the credit period. PRIMARY MARKET The Primary Market consists of arrangements. You must have learnt about many initial public offers (IPOs) made recently by a number of public sector undertakings such as ONGC. bonds. NTPC and the private sector companies like Tata Consultancy Services (TCS). if necessary. You know that companies make fresh issue of shares and/or debentures at their formation stage and. Jet-Airways and so on. On maturity the bank gets the payment from the drawee i. therefore. which facilitate the procurement of long-term funds by companies by making fresh issue of shares and debentures.
The Security Contracts (Regulation) Act was passed in 1956 for recognition and regulation of Stock Exchanges in India. The major players in the primary market are merchant bankers. fully automated screen-based trading and nation-wide coverage. This stock exchange has a corporate structure. Another stock exchange that needs special mention is Over The Counter Exchange of India (OTCEI). Of these. IFCI. It provides a place where these securities can be encashed without any difficulty and delay.30 lakh and less than Rs. of late. A number of unorganised stock exchanges also functioned in the country without any formal set-up and were known as kerb market. the turnover at this stock exchange has considerably reduced and steps have been afoot to revitalise it. IDBI. In fact. LIC etc. the Government of India initiated several capital market reforms. as of now. It was incorporated in 1992 and commenced operations in 1994. securities of those companies can be traded which are exclusively listed on OTCEI only. It helps entrepreneurs in raising finances for their new projects in a cost effective manner. the most prominent stock exchange that came up is National Stock Exchange (NSE). 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. and in the secondary market you have all these and the stockbrokers who are members of the stock exchange who facilitate the trading.in mobilising long-term funds by providing the necessary liquidity to holdings in shares and debentures. in September 1992 specially to cater to small and medium sized companies with equity capital of more than Rs. In addition. Role Of SEBI As part of economic reforms programme started in June 1991. It is also based in Mumbai and was promoted by the leading financial institutions in India. It provides for nation-wide online ringless trading with 20 plus representative offices in all major cities of the country. ICICI. Indian Stock Exchange The first organised stock exchange in India was started in Mumbai known as Bombay Stock Exchange (BSE). It has been noticed that. In fact. BSE and NSE are the two Stock Exchanges. It was also promoted by the financial institutions like UTI. which included the abolition of the office of the Controller of Capital [Type text] Page 7 . and the individual investors. and debentures are traded regularly with high degree of transparency and security. On this stock exchange. It is an organised market where shares. It was followed by Ahmedabad Stock Exchange in 1894 and Kolkata Stock Exchange in 1908. financial institutions. 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.25 crore. an active secondary market facilitates the growth of primary market as the investors in the primary market are assured of a continuous market for liquidity of their holdings. which enjoy nation-wide coverage and handle most of the business in securities in the country. mutual funds. At present we have 23 stock exchanges in the country.
a Common stock) [Type text] Page 8 . 1947 and the Securities Contracts (Regulation) Act. and other factors such as volatility. The payments between the parties may be determined by the future changes of: The price of some other. SEBI has been vested with necessary powers concerning various aspects of capital market such as: 1. which may include the timing of the contract fulfillment. 5. The value is influenced by the features of the derivative contract. conducting inquiries and audit of stock exchanges. undertaking inspection. commodities. Calling for information. promoting investors education and training of intermediaries. 7. and (d) matters connected there with or incidental thereto. Regulating the business in stock exchanges and any other securities market 2. (b) promoting the development of securities market. the value of the underlying security or commodity. Regulating substantial acquisition of shares and takeover of companies. Promoting and regulating self regulatory organizations.Issues (CCI) and granting statutory recognition to Securities Exchange Board of India (SEBI) in 1992 for: (a) protecting the interest of investors in securities. 4. 1956 as may be delegated to it by the Central Government. independently traded asset in the future (e.. Registering and regulating the working of various intermediaries and mutual funds 3.g. Performing such functions and exercising such powers under the provisions of the Capital Issues (Control) Act. 6. and 8. Another way of defining a derivative is that it is a security whose value is determined (derived) from one or more other securities. 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. or events. (c) regulating the securities market. and intermediaries and self regulation organizations in the stock market. Prohibiting insider trading and unfair trade practices.
a stock index or heating-degree-days) The occurrence of some well-specified event (e.. Future 3.. the owner of the derivative makes money. The level of some index (e. 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. Depending on the definition of the contract.g. otherwise. Types of derivative are:1.g. Options 4. they lose money. If the price of the underlying security or commodity moves into the right direction. Swap [Type text] Page 9 . Forward 2. the potential loss or gain may be much higher than if they had traded the underlying security or commodity directly.
various public sector industrial units (PSUs). A financial market consists of investors or buyers. statutory and other authorities such as state electricity boards and port trust also issue bonds. An active secondary market actually promotes the growth of the primary market and capital formation because investors in the primary market are assured of a continuous market and they can liquidate their investments in the stock exchange. It also provides liquidity to the initial buyers in the primary market to re-offer the securities to any interested buyer at a price. dealers and does not refer to a physical location. Direct mailing.INDIAN CAPITAL MARKET The function of the financial market is to facilitate the transfer of funds from surplus sectors (lenders) to deficit sector (borrowers). preference shares and debentures. The capital market consists of primary market and secondary market segments. if mutually accepted. Normally. The public sector consisting of central and state governments. The secondary market provides a trading place for the securities already issued to be bought and sold. 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 Indian financial system consists of the money market and capital market. The secondary markets consist of 23 stock exchanges including the NSE and OTCEI and Inter Connected Stock Exchanges of India ltd. sellers. The secondary market or stock exchange where existing securities are traded is an auction arena. As elsewhere in the world. Screen based trading has also made an appearance in India. household has excess of funds or savings. Screen based trading eliminates the need of trading floor. The primary market deals with the issue of new instruments by the corporate sector such as equity shares. advertisements and brokers reach the investors. which they lend to borrowers in the corporate and public sector whose requirement of funds far exceeds their savings. [Type text] Page 10 . Since 1995. trading in securities is screen based.
NSE has a market capitalization of around US$1. NSE commenced operations in the Wholesale Debt Market (WDM) segment in June 1994. NSE is mutually-owned by a set of leading financial institutions. 2799 in total.6%. insurance companies and other financial intermediaries in India but its ownership and management operate as separate entities. 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. anonymous. The Capital market (Equities) segment of the NSE commenced operations in November 1994. for both equities and derivative trading. electronic limit order book (LOB) exchange to trade securities in India. Setting up the first clearing corporation "National Securities Clearing Corporation Ltd. In April 1993. 1956. It is the 9th largest stock exchange in the world by market capitalization and largest in India by daily turnover and number of trades. 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. existent market and new market structures have followed the "NSE" model.552 listings as of December 2010. Innovations NSE pioneering efforts include: Being the first national. It is the second fastest growing stock exchange in the world with a recorded growth of 16.NSE India The National Stock Exchange (NSE) (Hindi: राष्ट्रीय शेअर बाजार Rashtriya Śhare Bāzaār) is a stock exchange located at Mumbai. India. known as the NSE NIFTY (National Stock Exchange fifty). it was recognized as a stock exchange under the Securities Contracts (Regulation) Act.59 trillion and over 1. NSCCL was a landmark in providing innovation on all spot equity market (and later. and was incorporated in November 1992 as a tax-paying company. while operations in the Derivatives segment commenced in June 2000. The NSE's key index is the S&P CNX Nifty. banks. derivatives market) trades in India. cover more than 1500 cities across India." in India. There are at least 2 foreign investors NYSE Euronext and Goldman Sachs who have taken a stake in the NSE. Origins The National Stock Exchange of India was promoted by leading financial institutions at the behest of the Government of India. As of 2006. Page 11 [Type text] . an index of fifty major stocks weighted by market capitalization. the NSE VSAT terminals. Though a number of other exchanges exist.
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
first depository in India.in Page 15 .co. India Index Services & Products Limited (IISL) Launch of NSE's Web-site: www. 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.nse.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. 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.
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. 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. by Asia Risk magazine Launch of NSE – CNBC TV 18 media centre NSE. and I-flex Solutions Ltd.IT Ltd. New Delhi Launch of Futures & options in BANK Nifty Index 'Derivative Exchange of the Year'.com NSE launches derivatives on Nifty Junior & CNX 100 NSE launches derivatives on Nifty Midcap 50 Page 16 . 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. CRISIL announce launch of IndiaBondWatch.
2010 November 9. 2010 NSCCL Rated “CCR AAA” for third consecutive year January 05. 2010 October 12. 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 July 19. 2010 Introduction of Mini Nifty derivative contracts on 1st January 2008 Introduction of long term option contracts on S&P CNX Nifty Index Launch of India VIX Launch of Securities Lending & Borrowing Scheme Launch of Currency Derivatives Launch of Interest Rate Futures Launch of Mutual Fund Service System Commencement of settlement of corporate bonds Launch of Currency Futures on additional currency pairs NSE.CME Group & NSE . 2010 October 28.January 2008 March 2008 April 2008 April 2008 August 2008 August 2009 November 2009 December 2009 February 2010 March 2010 April 2010 July 19. 2010 October 29. 2010 July 28.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. 2011 NSE receives Financial Inclusion Award [Type text] Page 17 .
Between the NEAT client and server there is another layer called the Trading Access Point (TAP). developments in information. NSE stresses on innovation and sustained investment in technology to remain ahead of competition. SQL/ORACLE FORMS Front . TAP facilitates IT Infrastructure consolidation and routes the orders and trades between Client and Server in an optimized protocol. communication and network technologies have created paradigm shifts in the securities market operations. NSE set up a separate company. procured from HP for the back office processing. Each trading member trades on the NSE with other members through a PC located in the trading member's office. WDM. which are cheaper. Currently more than 10000 users are trading on the real time-online NSE application. have [Type text] Page 18 .Band VSAT network in the world.25 protocol earlier. With upgradtion of trading hardware. Stock exchanges all over the world have realized the potential of IT and have moved over to electronic trading systems. bring about innovations in products and services.Ends. The trading members on the various market segments such as CM. 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 NSE. The Exchange uses powerful UNIX servers.Technology Used By NSE Across the globe. In recognition of the fact that technology will continue to redefine the shape of the securities industry. NSE is one of the largest interactive VSAT based stock exchanges in the world. NSE InfoTech Services Ltd. and to provide for new business opportunities. Currency Derivatives. etc. have wider reach and provide a better mechanism for trade and post trade execution. NEAT is a state-of-the-art client server based application. which provides a platform for taking up all IT related assignments of NSE. Today it supports more than 2500 VSATs and 3000 leased lines across the country. In the recent past. F&O. In order to capitalize on in-house expertise in technology. 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. At the server end. Technology has enabled organizations to build new sources of competitive advantage. 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. The latest software platforms like ORACLE RDBMS.network is the largest private wide area network in the country and the first extended C. It uses satellite communication technology to energize participation from around 200 cities spread all over the country. NSE today can handle up to 15 million trades per day in Capital Market segment. MF and IPO are linked to the central computer at the NSE through dedicated leased lines and VSAT terminals. 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. NSE's IT set-up is the largest by any company in India. SLBM. all trading information is stored in an in-memory database to achieve minimum response time and maximum system availability for users.
Calcutta and Chennai. The website has been designed to cater to the needs of Investors. There are over 500 server class computer systems which include non-stop fault-tolerant Stratus servers and high end UNIX servers. design and development of in-house systems and design and implementation of telecommunication solutions.com. connecting all the offices at Mumbai. Members. Issuers and other market participants. This corporate network enables speedy inter-office communications and data and voice connectivity between offices.nseindia. The website displays its live stock quotes which are updated online and corporate announcements. NSE today allows members to provide internet trading facility to their clients through the use of NOW (NSE on web).been used for the Exchange applications. [Type text] Page 19 . In an ongoing effort to improve NSE's infrastructure. NSE has its online presence at www. operational under one roof to support the NSE applications. a shared web infrastructure. The Exchange currently manages its data centre operations. a corporate network has been implemented. system and database administration. This coupled with the nationwide VSAT network makes NSE the country's largest Information Technology user. Delhi.
the initial margin is computed over a two-day time horizon. The most critical component of a risk containment mechanism for NSCCL is the online position monitoring and margining system.Risk Management Through Margins Margins NSCCL has developed a comprehensive risk containment mechanism for the Futures & Options segment. a TM should collect upfront margins from his clients. before the commencement of trading on the next day. applying the appropriate statistical formula. in the case of futures contracts (on index or individual securities). The methodology for computation of Value at Risk percentage is as per the recommendations of SEBI from time to time. A CM is in turn required to collect the initial margin from the TMs and his respective clients. on an intra-day basis. at the Trading/ Clearing Member level. However. Similarly.is netted at the level of individual client and grossed across all clients.is netted at Trading/ Clearing Member level without Page 20 [Type text] . Initial margin requirements are based on 99% value at risk over a one day time horizon. without any setoffs between clients. Initial Margin a. Initial margin requirement for a member: For client positions . where it may not be possible to collect mark to market settlement value. which is a portfolio based system. Span Margin NSCCL collects initial margin up-front for all the open positions of a CM based on the margins computed by NSCCL-SPAN®. NSCCL uses the SPAN® (Standard Portfolio Analysis of Risk) system for the purpose of margining. For proprietary positions . The actual margining and position monitoring is done on-line.
c. For this purpose notional value means: . 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. Premium Margin In addition to Span Margin. 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.For a futures contract – the contract value at last traded price/ closing price. The Assignment Margin is the net exercise settlement value payable by a Clearing Member towards interim and final exercise settlement and is deducted from the effective deposits of the Clearing Member available towards margins. For Index options and Index futures contracts: 3% of the notional value of a futures contract. In case of options it is charged only on short positions and is 3% of the notional value of open positions. Assignment margin is released to the CMs for exercise settlement pay-in. 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. For the purpose of SPAN Margin. Bank Guarantee. Fixed Deposit Receipts and approved securities.any setoffs between client and proprietary positions. [Type text] Page 21 . b. For option contracts and Futures Contract on individual Securities: The higher of 5% or 1. Premium Margin is charged to members.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. In case a trading member wishes to take additional trading positions his CM is required to provide Additional Base Capital (ABC) to NSCCL. ii. Assignment Margin Assignment Margin is levied on a CM in addition to SPAN margin and Premium Margin. various parameters are specified from time to time. 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.
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. 2. 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. [Type text] Page 22 . NSCCL acts as legal counter-party to all deals on NSE's F&O segment and guarantees settlement. Primarily.For an options contract – the value of an equivalent number of shares as conveyed by the options contract. In case of calendar spread positions in futures contract. Risk Management – Setting position limits based on upfront deposits / margins for each TM and monitoring positions on a continuous basis. their clients‟ trades as well as trades of other TM‟s & Custodial Participants Professional Clearing Member (PCM) A CM who is not a TM. Settlement . the CM performs the following functions: 1. Such CMs may clear and settle their own proprietary trades.e. Types of Clearing Members Trading Member Clearing Member (TM-CM) A Clearing Member who is also a TM. who clear and settle such deals through them. 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.Performing actual settlement. The calendar spread position is granted calendar spread treatment till the expiry of the near month contract. Only funds settlement is allowed at present in Index as well as Stock futures and options contracts 3. who clear and settle such deals through them. in the underlying market. based on the last available closing price. 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. . determining positions to settle. exposure margins are levied on one third of the value of open position of the far month futures contract. Clearing – Computing obligations of all his TM's i. A Clearing Member (CM) of NSCCL has the responsibility of clearing and settlement of all deals executed by Trading Members (TM) on NSE..
State Bank of India 13. IndusInd Bank 10.10 lakhs to NSCCL for each additional TM in case the CM undertakes to clear and settle deals for other TMs. 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.Clearing Member Eligibility Norms Net worth of at least Rs. Bank of India 3. 100 lakhs. Deposit of Rs. 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.. Kotak Mahindra Bank 11. Citibank 5. Union Bank of India. Further. for settling funds and other obligations to the Clearing Corporation including payments of margins and penal charges. reporting of balances and other information as may be [Type text] Page 23 .300 lakhs. 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. HDFC Bank 6. Axis Bank Ltd. 2. every clearing member can maintain and operate additional clearing accounts exclusively for the purpose of enhancement of collaterals. The net worth requirement for a CM who clears and settles only deals executed by him is Rs. IDBI Bank 9. The primary clearing account is to be used exclusively for clearing operations i. 7. Canara Bank 4. Every Clearing Member is required to maintain and operate clearing accounts with any of the empanelled clearing banks at the designated clearing bank branches. 50 lakhs to NSCCL which forms part of the security deposit of the CM Additional incremental deposits of Rs. ICICI Bank 8.e. Hongkong & Shanghai Banking Corporation Ltd. Clearing Banks NSCCL has empanelled 13 clearing banks namely 1. The clearing accounts are to be used exclusively for clearing & settlement operations.
. TMs are required to identify them as proprietary (if they are own trades) or client (if entered on behalf of clients) through 'Pro / Cli' indicator provided in the order entry screen. b. a buy trade is off-set by a sell trade and a sell trade is off-set by a buy trade. Clearing members shall not seek to close or de-activate the clearing account without the prior written consent of the Clearing Corporation Clearing Mechanism A Clearing Member's open position is arrived by aggregating the open position of all the Trading Members (TM) and all custodial participants clearing through him. but can withdraw funds from these accounts only in self-name. Proprietary / Clients‟ Open Position While entering orders on the trading system. A Clearing member can deposit funds into this accounts in any form. A TM's open position in turn includes his proprietary open position and clients‟ open positions.required by NSCCL from time to time as per the specified format.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. For a CM .sell) and client positions are calculated on gross of net positions of each client i.e. a. with TMs clearing through him .XYZ. The proprietary positions are calculated on net basis (buy . For example. Open Position Open position for the proprietary positions are calculated separately from client position.
Members with a funds pay-in obligation are required to have clear funds in their primary clearing account on or before 10. on the settlement day. 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. on the cum and ex-dates for the corporate action. 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. shall continue to remain the same as far as possible. at-the-money and out-of-money.PQR Total for XYZ 1000 7000 2000 2000 Settlement Schedule The settlement of trades is on T+1 working day basis. The payout of funds is credited to the primary clearing account of the members thereafter. Corporate Actions Adjustment The basis for any adjustment for corporate actions shall be such that the value of the position of the market participants. inthe-money.m. (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. Corporate Actions to be adjusted [Type text] Page 25 . on the last trading day of the futures contracts. This will facilitate in retaining the relative status of positions viz.30 a.
To decide whether the dividend is "extra-ordinary" (i. 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.). after the close of trading hours. 2. Bonus. For extra-ordinary dividends. the Strike Price would be adjusted. Adjustment Adjustments may entail modifications to positions and / or contract specifications as listed below. Stock Splits and Consolidations Dividends 1. 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.the corporate actions may be broadly classified under stock benefits and cash benefits. above 10% of the market value of the underlying security. 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.e. 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. The cash benefit declared by the issuer of capital is cash dividend. 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. However. and * Secured Premium Notes (SPNs) among others. in cases where the announcement of dividend is made after the close of [Type text] Page 26 . over 10% of the market price of the underlying stock. Methodology for adjustment the methodology to be followed for adjustment of various corporate actions to be carried out are as follows: A. B. The adjustments for corporate actions would be carried out on all open positions.
C. the same day's closing price would be taken as the market price. Type of Default Overnight settlement shortage of value more than Rs.5 lakhs Security deposit shortage Shortage of Capital cushion Penalty Charge per day 0. if the shareholders of the company in the AGM change the rate of dividend declared by the Board of Directors. 3. 2. 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. outstanding at the close of business on the last cum-date would be cancelled by the Exchange.07% 0. 4. 3.07% Chargeable to Clearing Member Clearing Member Clearing Members Page 27 [Type text] . that will cease to exist subsequent to the merger. The settlement price shall be the closing price of the underlying on the last cum-date. 4.market hours. the total dividend amount (special and / or ordinary) would be reduced from all the strike prices of the option contracts on that stock. GTC/GTD orders for the futures & options contracts on the underlying. In case of declaration of “extra-ordinary " dividend by any company. no fresh contracts on Futures and Options would be introduced on the underlying. Further.07% 0. On the announcement of the record date for the merger. The revised strike prices would be applicable from the ex-dividend date specified by the exchange. the exact date of expiration (Last Cum-date) would be informed to members. 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. Un-expired contracts outstanding as on the last cum-date would be compulsorily settled at the settlement price. Mergers 1.
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.
[Type text] Page 29
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.
[Type text] Page 31 . The report contains information on the total STT liability. trading member wise STT liability. client wise STT liability and also the detailed computations for determining the client wise STT liability. .Information to members a report is provided to the members at the end of each trading day.
Indices [Type text] Page 32 .
Tracks the price of Gold. These are typically index funds and GOLD ETFs. [Type text] Page 33 .ETF based on Gold prices.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. Some of the popular ETF's available for trading on NSE are: NIFTYBEES . Each unit is equivalent to 1 gm of gold and bears the price of 1gm of gold.ETF based on NIFTY index Nifty BEES Live quote Gold Bees . 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.
Sharyans Wealth Management Pvt. Ltd.. ITIAI Investment Advisory Services Pvt. In time Spectrum Finmart Pvt. ITIFSL.. Mutual Fund.. ITI is a knowledge center where it provides knowledge on Equity Commodity. ITIFSL will soon touch the pinnacles of success in the financial services industry by being a dominant force in the broking as well as the distribution arena. The Sharyans Group has an impressive portfolio of businesses under its fold which mainly fall under the real estate and financial services categories. Ltd. 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. originally promoted by the Investment Trust of India. In time Spectrum Commodities Pvt.. Ltd. Ltd. Derivatives and IPO. The prominent subsidiaries of this Group are Prebone Yamane (Country’s largest debt broking company). 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 . 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. and Collin Stewart India Ltd. In time Spectrum Securities Ltd.COMPANY PROFILE With an unblemished and reputed track record. COMPANIES BUSINESS With the objective to tap the growing potential in our capital markets. is now a part of the Sharyans Group..
ITIFSL has over 120 Branch Offices spread across the country to offer better reach and service to the investor. "To be the most Preferred Financial Advisor. Creator. 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] .MISSION AND VISION: Miss ion: ITI FSL's mission is to deliver value with commitment.. Emerging as one of the front-line Brokerage Houses and a dominant force in the Distribution arena. Wealth Manager and to deliver the Highest Standards of Service to customers and be Prominent in the horde of Finance Companies offering similar services". we are continuously engaged in the assessment of market conditions to balance risk and reward so as to optimize returns to our investors. Vision. ITI FSL has a growing network of offices across several states to ensure easy accessibility to our clients wherever they are. Our presence Headquartered in Chennai.
It provides clients with an effective platform to participate and trade in Commodities with both the leading Commodity Exchanges of the country. 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. Historically. thus providing an efficient portfolio diversification option. prices in commodities futures have been less volatile compared with equity and bonds. ITI ensures that you get the one of the finest trading experiences through: A high level of personalized and confidential service Secure . 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] . COMMODITY TRADING Commodities are now an asset class! For those who want to diversify their portfolios beyond shares. bonds and real estate. commodities are an excellent option.integrated broking system Powerful research and analytic All member having immense experience and each of them being professionally certified by the National stock exchange. 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. Commodities are one of the easiest investment avenues to understand as they are based on the fundamentals of demand and supply. ITI helps investors understand the risks and advantages of trading in commodities futures before take they take the big leap.
Relationship management desk Educating clients on commodity future market Research on agro Commodities. Mutual Funds. 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. Corporate clients and Overseas Corporate Bodies With our dedicated and superior quality service to our clients. prompt and efficient depository process. Insurance Companies. Precious metal and Energy product. 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. which include FIIs. 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. 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. Banks.
NRI service The NRI Services' Department is an exclusive arm of ITI dedicated to impart professional advice to NRIs the world over. The Research Team comprises of competent professionals with vast experience. tax planning and child education & welfare planning. ' Our exclusive single-window NRI Services’ Department integrates and simplifies multiple processes into one . 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.life & non-life Bonds Deposits IPO Small saving instrument Research Our primary strengths lie in research and operational efficiency. and insurance to recommend financial options to clients in accordance with their short-term and long-term goals. 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. Some of the issues that the specialists address are general investments. Some of ITI research reports are as follow: [Type text] Page 38 . demat account and trading account NRI’s. Apart from advising. tax laws. Our certified Investment Advisory Managers strive to understand each individual client’s needs. retirement planning. Company offer advice on and help invest in the following products: Mutual fund Insurance.opening of NRI bank account. risk profiles and investment goals to provide the best advice. they help clients build and track their investments. These experts use their knowledge of investments. insightful analytical abilities and high standards of integrity. They also regularly monitor report and recommend changes based on the performance of the portfolio.
Commodity. 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. [Type text] Page 39 .IPO Insurance. Mutual fund. Currency Derivative. DP etc. 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. ITI deals in providing market updates for Equity.
Rated among the top 20 wired companies along with RELIANCE. ORG Marg award by CNBC. HLL. The reasons behind the preferences for brands were unveiled by examining the following: Tangible features of product / service Softer.com was launched in 2000. India internet World 2008 for the “Best Finance” site. by Business Today. intangible features like imagery. ITIs ground network includes over 250 centers across 123 cities in India and having around 120000 customers and an equal number of demat customers. equity driving preference Tactical measures such as promotional / pricing schemes [Type text] Page 40 . in the Investment Advisors category. ITIs online trading and investment site www. and INFOSYSetc. 21 products and services across 21 major cities.itifinancial.ACHIEVEMENTS AND AWARDS WON BY ITI ITI. the retail broking is one of the largest stock broking houses in the country. has won the prestigious Awaaz Consumer Vote Awards 2005 for the Most Preferred Stock Broking Brand in India. This was India‟s largest Customer Study initiated by CNBC Awaaz and conducted by AC Nielson covering 7000 respondents.
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 .
Settlement. RESEARCH DESIGN STATEMENT OF PROBLEM This project studies about option derivatives.The Service Delivery Model of ITI is a blend of both tradition and technology. Carry forward. It should give the pay-off for not only individual options but also for combination of options. [Type text] Page 42 . And to know which option combination strategy would be suitable when market moves up or down. Positioning. It also compares the returns and investment between portfolios of scrip‟s and option. Covering Positions. While profits could be extremely high. which have maximum profits. To reduce Risk involved in Markets due to various factors like Timing. who actually bet on the direction of price movements. potential for losses are also large. Compare investment and returns associated with the options trading in banking stocks. SCOPE OF THE STUDY The study tries to find the best option combination for the script. This Study can also be extended to other scrip‟s and hence forth find the option combination which is most profitable. Objectives of study Find appropriate options in banking stocks which are most profitable during the period of April and May 2011. This project shows how options are useful especially for speculators. A model is to be developed which helps in trading in option derivative market.
W eb s i t es an d C o m p an y Br ochu re . 2 . S a mp l e S i z e : 1 . All options will be selected from National Stock Exchange.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. [Type text] Page 43 . It will help me to gain strong theoretical basis of the option trading. SAMPLING PLAN Put and call options of the banking stocks with strike price and expiry date. 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 . 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 . . The very basic purpose of this is to gain an insight and provide an overview of the study carried on. Theoretical background is one of the important parts of the project. PLAN OF ANALYSIS: The collected information will be tabulated and analyzed in detail. 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 . Various tabulations will be used to explain the findings clearly.
commodity or index. including forwards.DERIVATIVES MARKET EMERGENCE OF DERIVATIVES MARKET With globalization of the financial sector. 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. In the last 18 years. swaps." While some derivatives instruments may have very complex structures. futures. and equities. Derivatives include a wide assortment of financial contracts. all of them can be divided into basic building blocks of options. forward contracts or some combination thereof. as a more liberalized environment affords greater scope for financial innovation at the same time financial markets are. Government arbitrates to maintain buffer stocks. no principal is advanced to be repaid and no investment income accrues. Unlike debt securities. etc. [Type text] Page 44 . the Indian financial system did not see much innovation. isolate and manage separately the market risks in financial instruments and commodities for the purpose of hedging. extremely volatile and hence the risk factor is an important concern for financial agents. such as: interest rates. the concept of derivatives comes into the picture. financial innovation in India has picked up and it is expected to grow in the years to come. commodities. Till the mid – 1980's. speculating. and options. such as asset or index. Derivatives allow financial institutions and other participants to identify. by nature. India is traditionally an agriculture country with strong government intervention. exchange rates. The value of financial derivatives derives from the price of an underlying item. it's time to recast the architecture of the financial market. arbitraging price differences and adjusting portfolio risks. Derivatives are financial contracts whose values are derived from the value of an underlying primary financial instrument. 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. Derivatives are products whose values are derived from one or more basic variables called bases. fix prices. To reduce this risk. impose import-export restrictions.
and (e) Innovations in the derivatives markets. As instruments of risk management. providing economic agents a wider choice of risk management strategies. [Type text] Page 45 . most notable forwards. (b) Increased integration of national financial markets with the international markets. However. the financial markets can be subject to a very high degree of volatility. 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. and May well have been around before then. 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. Forward contracting dates back at least to the 12th century. (d) Development of more sophisticated risk management tools. Development of exchange-traded derivatives Derivatives have probably been around for as long as people have been trading with one another. (c) Marked improvement in communication facilities and sharp decline in their costs. reduced risk as well as transaction costs as compared to individual financial assets. futures. leading to higher returns. derivatives products generally do not influence the fluctuations in the underlying asset prices. By their very nature. Factors generally attributed as the major driving force behind growth of financial derivatives are: (a) Increased Volatility in asset prices in financial markets. 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. it is possible to partially or fully transfer price risks by locking-in asset prices. which optimally combine the risks and returns over a large number of financial assets. Through the use of derivative products.The emergence of the market for derivatives products. Merchants entered into contracts with one another for future delivery of specified amount of commodities at specified price.
SEBI permitted the derivative segments of two stock exchanges. Following the committee's recommendations. It was introduced with three month trading cycle . NSE and BSE.the BSE30 (Sensex) index futures. The National Stock Exchange (NSE) followed a few days later. The first step towards introduction of derivatives trading in India was the promulgation of the Securities Laws (Amendments) Ordinance.the near month (one). Gupta on 18th November 1996 to develop appropriate regulatory framework for derivatives trading in India. 2000.DERIVATIVES MARKET IN INDIA Derivatives markets have had a slow start in India. as there was no Regulatory framework to govern trading of derivatives. 1995. The responsibility of clearing and settlement of all trades on the exchange was given to the clearing house which was to be governed independently. the Bombay Stock Exchange (BSE) introduced India's first derivative instrument . by launching the S&P CNX Nifty index futures on June 12.The trading in [Type text] Page 46 . however. SEBI set up a 24-member committee under the Chairmanship of Dr. The committee recommended that derivatives should be declared as 'securities' so that regulatory framework applicable to trading of 'securities' could also govern trading of securities. The act granted legality to exchange-traded derivatives. 2000. but not OTC (over the counter) derivatives.C. and a regulatory framework for administering derivatives trading was laid out. It allowed derivatives trading either on a separate and independent derivatives exchange or on a separate segment of an existing stock exchange. L. On June 9. SEBI was given more powers and it starts regulating the stock exchanges in a professional manner by gradually introducing reforms in trading. Introduction of derivatives was made in a phase manner allowing investors and traders sufficient time to get used to the new financial instruments. viz. Derivatives trading commenced in India in June 2000 after SEBI granted the final approval in May 2000. the next month (two) and the far month (three). and their clearing house/corporation to commence trading and settlement in approved derivative contracts. which withdrew the prohibition on options in securities. did not take off. The market for derivatives. The derivatives exchange had to function as a self-regulatory organization (SRO) and SEBI acted as its regulator. the Securities Contract Regulation Act (SCRA) was amended in 1999 to include derivatives within the scope of securities.
there was no consensus of opinion on the issue among industry analysts and the media. For instance.89 bn. and regulations of the respective exchanges and their clearing house/corporation duly approved by SEBI and notified in the official gazette.1998. The plan to introduce derivatives in India was initially mooted by the National Stock Exchange (NSE) in 1995. Futures contracts on individual stock were launched in November 2001. 2003 on 91 day Notional T-bills. However. the path for derivatives trading was cleared with the introduction of Securities Laws (Amendment) Bill in Parliament in 1998. problems such as low market capitalization of the Indian stock markets. The introduction of derivatives was delayed for some more time as the infrastructure for it had to be set up. In spite of the opposition. Derivatives were also considered risky for retail investors because of their poor knowledge about their operation. the small number of institutional players and the absence of a regulatory framework caused further delays. Trading in derivatives gained substantial popularity. The introduction of derivatives was well received by stock market players. and soon the turnover of the NSE and BSE derivatives markets exceeded the turnover of the NSE and BSE cash markets. [Type text] Page 47 . In addition. Their involvement had been very low due to the absence of derivatives for hedging risk. bylaws. Derivatives trading eventually started in June 2000. The main purpose of this plan was to encourage greater participation of foreign institutional investors (FIIs) in the Indian stock exchanges. SEBI/RBI approved the trading in interest rate derivatives instruments and NSE introduced trading in futures contract on June 24. In June 2003. the value of the NSE and BSE derivatives markets was Rs. The pros and cons of introducing derivatives trading were debated intensely. a depository and a clearing house facility.5 billion (bn) whereas the value of the NSE and BSE cash markets was only Rs. Derivatives contracts are traded and settled in accordance with the rules. The lack of transparency and inadequate infrastructure of the Indian stock markets were cited as reasons to avoid derivatives trading. Derivatives trading required a computer-based trading system. in the month of January 2004.index options commenced in June 2001 and trading in options on individual securities commenced in July 2001.3278.
In spite of these encouraging developments. The NSE and BSE are two exchanges on which financial derivatives are traded. potential for losses are also large. 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. They help in transferring risks from risk adverse people to risk oriented people 2. They increase the volume traded in markets because of participation of risk adverse people in greater numbers 5. The combined notional values of the daily volumes on both the bourses stand at around RS. the figure is hardly 20% of cash markets. The need for a derivatives market The derivatives market performs a number of economic functions: 1. In developed markets trading in the derivatives segment are thrice as large as in the cash markets. They actually bet on the direction of price movements. [Type text] Page 48 . They increase savings and investment in the long run people Types of investors trade in derivatives markets.400 cr. Quite clearly our derivative markets have a long way to go. industry analysts felt that the derivatives market had not yet realized its full potential. They help in the discovery of future as well as current prices 3.index futures. While profits could be extremely high. In India. They catalyze entrepreneurial activity 4. Analysts pointed out that the equity derivative markets on the BSE and NSE had been limited to only four products . 1) Hedgers: Hedgers enter the derivatives market to lock-in their prices to avoid exposure to adverse movements in the price of an asset. index options and individual stock futures and options which were limited to certain select stocks.
examples are: Measured by national statistical agencies FORWARD CONTRACTS A forward contract is a particularly simple derivative.3) Arbitrageurs: Arbitrageurs enter simultaneously into contracts in two or more markets to lock in risk less profit. In India such gains are minimal as price differences on NSE and the BSE are extremely small. They are: The OTC derivatives are between two private parties and are designed to suit the requirements of the parties concerned. It is not normally traded on exchange. CLASSIFICATION OF DERIVATIVES: Derivatives are basically classified based upon the mechanism that is used to trade on them. The contract is usually between two financial institutions and one of its corporate clients. It is an agreement to buy or to sell an asset at a certain future time for a certain price. but economically intriguing. [Type text] Page 49 . 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.
Each contract is custom designed. For example. the party wishes to reverse the contract. This means that it costs nothing to take either a long or short position. FUTURES CONTRACT A futures contract is a form of forward contract. the value of a long position in the forward contract becomes positive and value of a short position of a forward contract becomes negative. The specified price in a forward contract will be referred to as the delivery price. In case. depending on movements in the price of the asset. The holder of short position delivers the asset to the holder of long position in return for a cash amount equal to delivery price. As already mentioned. which being in a monopoly situation can command the price it wants. if the price of the asset rises sharply soon after the initiation of contract. A forward contract is settled at maturity. Later it can have a positive or negative value. a forward contract is worth zero when it is first entered into. It is [Type text] Page 50 . 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. The contract has to be settled by delivery of the asset on expiration date. The main features of forward contracts are They are bilateral contracts and hence exposed to counter-party risk. The other party assumes a short position and agrees to sell the asset on the same date for the same price. The contract price is generally not available in public domain. and hence is unique in terms of contract size. expiration date and the asset type and quality. 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. it has to compulsorily go to the same counter party.One of the parties to a forward contract assumes a long position and agrees to buy the underlying asset on a certain specified future date for a certain specified price. A key variable determining the value of a forward contract at any given time is the market price of the asset.
As the two parties to the contract do not necessarily know each other. [Type text] Page 51 . The National Stock Exchange and the Bombay Stock Exchange offer such facilities for trading Futures and Option contracts an underlying financial instrument like stocks/shares. The 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). the exchange specifies certain standardized features of the contract. The futures can be on the interbank cash rate or on the forward exchange rate of the currency. Currency futures are quoted in US-dollars per unit of foreign currency. Futures may also differ from forwards in terms of margin and delivery requirements. attempt to profit from rising or falling exchange rates. Treasury-bond futures. 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. To make trading possible. Euro dollar futures. by incurring a risk. The underlying asset traded may be a physical commodity. usually a stock index. an interest-earning asset or an index. These financial derivatives can also be used to speculate and. LIBOR futures. Investors use these financial future contracts to hedge against foreign exchange risk. 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. Coffee grower may enter into a contract with a wholesale buyer to sell Coffee at a particular price on a future date. Examples include Treasury-bill futures. Investors can close out the contract at any time prior to the contract's delivery date. An interest rate future is a futures contract with an interest bearing instrument as the underlying asset.traded on a futures exchange. foreign currency. The types of futures that are traded fall into four fundamentally different categories. the exchange also provides the mechanism which gives the two parties guarantee that the contract will be honored.
and mode of settlement. but not the obligation. Contracts on Futures markets are fixed in terms of contract size. product quality. from the other party (the seller). The seller of the option. As expected. Yet. at or before a specified date. Forward contracts are mutually agreed between two parties. expiry. the only benefit of entering into a Forwards contract comes from the flexibility of having tailor-made contracts. therefore. however. [Type text] Page 52 . Forwards are important as prices in Forward markets serve as indicator of Futures prices. Futures markets. to buy or sell a specified asset at a specified price. or an obligation which is activated if the buyer exercises that right. it acts as buyer to seller and as a seller to the buyer and guarantees the trades.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. has a contingent liability. INTRODUCTION TO OPTION Definition An option is a contract between two parties in which one party (the buyer) has the right. product type. 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.
The act of enforcing the buyer‟s rights under an option contract is termed exercising the option. This fee is called the premium. The CBOE was the world‟s first formalized options market. Options on equity stocks were available on the London Stock Exchange more than a century ago. The buyer of the option is protected from unfavorable market movements but is still able to profit from movements in the buyer‟s favor. This relationship can remain in place until the options exercised or. Options. In an option contract.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. This feature of an option contract distinguishes it from other instruments. 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. but this is only if the other party (the buyer) requires him to do so. Types of Options: Options have a long history. [Type text] Page 53 . the Chicago Board Options Exchange (CBOE). The risk of loss is carried by the seller. being contracts at law. not exercised prior to or on the expiration date). alternatively. such as forward contracts or futures contracts. offering exchange-traded options on US listed equity stocks. who charges the buyer a fee for taking on this risk. allowed to lapse (i. An innovation of great significance occurred in 1973 when a new exchange. was opened. Alternatively. in which both parties to the contract have an obligation to transact at some time in the future.e. only one party (the seller) has an obligation to transact. create a legal relationship between the buyer and the seller of the option contract. 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.
This is the process whereby the nexus between the two original contracting parties is broken. Equity options and future options are the types of ET options most commonly traded on an exchange. agricultural and metals (traded on various futures exchanges).A number of US and overseas stock exchanges emulated the CBOE market. This is the case in India. currencies. where there National Stock Exchange has had a screen-based trading system since inception. there is now a trend towards electronic trading systems and it is expected that these will ultimately supersede the physical trading floor. are options that originate and are traded on a formalized exchange. associated with (although not necessarily owned by) the exchange. the identity of the other party to an ET option contract is no longer of importance. Exchange-traded (ET) Options: ET options. Around the globe. there now exists a great diversity of exchange-traded options markets on equities. In addition to exchange-traded (ET) options. Trader transacts deals through a combination of hand signals and speech. 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. It also supervises the collection and disbursement of premiums and margins. 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. there are over-the-counter (OTC) options. ET options transactions are settled through a clearing house. Thus. debt instruments and stock index instruments (traded on various exchanges) and on various futures contracts – financial. Over-the-counter (OTC) Options: [Type text] Page 54 . Trading of options on most exchanges is based on the system of „open outcry‟ on a physical trading floor. as the name suggests. Options traded on an exchange are highly standardized as to the type and maturity of the underlying instrument. 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. The clearing house tracks the positions outstanding and monitors contracts as they pass between participants. However. The other important function performed by the clearing house is novation. among the first of these being the Australian Stock Exchange which initiated a similar market on Australian listed equity stocks in 1976.
The trader of an OTC option must request a financial institution which deals in the relevant market to value the contract for him. gold). The contracts are not standardized in terms of quantity. client relationships. In the OTC market. irrespective of the financial strength of the buyer or seller. small accounts are not encouraged and prices may not reflect underlying supply and demand conditions. participants arrange deals through face-to-face meetings or more commonly on the telephone. equities.g. an OTC option is a tailor-made options agreement between two or more parties. This being the case. 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. OTC options are not. Choosing Between ET and OTC Options: In choosing between ET and OTC options. traders can easily value their portfolio of options contracts by reference to their current price. This lack of standardization has benefits in that the specification can more exactly meet the needs of the parties. the option price is market-determined. delivery date or term to maturity. Essentially. 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 . As a result. OTC markets exist in commodities (e. valuing the tailor-made specific option contract is not such a straightforward process. etc. 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. Usually. Instead. factors such as the institution‟s own book. debt instruments and foreign exchange. stock indices. but rather.OTC options are not traded at a centralized market place or through a formalized trading system. Traders control this risk through credit assessments of counterparties and the setting of exposure limits. Valuation: ET option prices are publicly available financial information. Credit dimensions: ET options are guaranteed by clearing houses. there is no clearing house for OTC options. Pricing factors: In the case of ET options. In the OTC market.
CALL OPTION A call option is a financial contract between two parties. or Right to sell the underlying asset which is called the put option. the buyer and the seller of the option. but you would have no other liability. If you decide not to use the option to buy the stock. A Call option is an option to buy a stock at a specific price on or before a certain date. However instead of just buying the shares from the market what you do is the following: You contact your friend Ram and tell him "Hey Ram. you would give up your security deposit. in fact. However I want to decide whether to actually buy it or not at the end of this month. In this way. called the strike price. Call options usually increase in value as the value of the underlying instrument increases. and left a security deposit for it. If.How call option works? Suppose you are interested in buying 100 shares of a company. the price you pay for it. For the sake of this example let us say that the company is Coca Cola and the current price of its stock is 50. When you buy a Call option. secures your right to buy that certain stock at a specified price. If you never returned. which can be Right to buy the underlying asset. called the option premium. Would that be OK?” Of course what you have in mind is the following. 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). I am thinking of buying 100 shares of Coca Cola from you at the price of 52. your only cost is the option premium. rent that property at the price agreed upon when you returned. for example. The seller assumes the corresponding obligations. which is called the call option. you wanted to rent a certain property. the money would be used to insure that you could. and you are not obligated to.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. Call options are like security deposits. Simple Call Option example . [Type text] Page 56 .
has the right. Ram will keep this money irrespective of whether you exercise your option of going ahead with the deal or not.e. the insurance company keeps your premium in return for taking on the risk. while the other party. If this happens. 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. A Put options are options to sell a stock at a specific price on or before a certain date. Deals of this type have a name. hence. 200 in total.risk of being at a loss if the price rises above 52. Put Option A put option is a contract between two parties to exchange an asset. If you buy a new car. the seller. the seller of the call option has the obligation to sell his shares even if the price rises above 52 in which case you would definitely buy it from him. If the stock price remains below 52 then you simply won‟t buy the shares from him. This is the (risk) premium or the money you are paying Ram for the risk he is willing to take . If all goes well and the insurance is not needed. In this way. Ram will be at a loss in this situation. Ram is selling (or writing) the call option to you for a price of 2 per share. You on the other hand are the buyer of the call option and have no obligation. The price of 52. by a predetermined future date. you pay a premium and are. In order to make the above deal 'fair' from the viewpoint of Ram you agree to pay ram 2 per share. the expiry or maturity. you [Type text] Page 57 . the underlying. "damages" your asset.you are not making any commitment. to sell the asset at the strike price by the future date.If the stock price rises above 52. Ram. and thus.you simply have the option to buy the shares. the buyer of the put. what you are asking Ram is the 'option' to buy those shares from him . for a specified amount of cash. After all. and then buy auto insurance on the car. you can "insure" a stock by fixing a selling price.they are called a Call Option. has the obligation to buy the asset at the strike price if the buyer exercises the option. You are buying the call option. If something happens which causes the stock price to fall. With a Put option. but not an obligation. the strike. Put options are like insurance policies. i. you can use your policy to regain the insured value of the car. In this way. protected if the asset is damaged in an accident. the put option gains in value as the value of the underlying instrument decreases. 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. One party.
and there is no "damage. In this case Ram is buying a Put Option from you. They do not pay any margin." then you do not need to use the insurance. you do not deal with any person 'personally'. Simple Put Option Example . The writers or sellers of Call and the Put option are the ones who are taking the risk and hence have to pay 'margin' amount to the stock exchange as a form of guarantee. Of course what he has in mind is that he will sell them to you if the price falls below 48. If the price of your stock goes up. and. once again. 2. buying a Call. Each Options contract for a particular stock has a specified LOT SIZE. 3.can exercise your option and sell it at its "insured" price level. writing a Put and selling a Put. the buyer of the Put Option has the option to sell the shares to you. Here are some key points to remember about real life options trading. This is the primary function of listed options.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. Difference between above option examples and 'real life options' The above examples illustrate the basic ideas underlying. In real life you sell (or write) and buy call & put options directly on the stock exchange instead of 'informally dealing' with your friend. The 2 he is willing to pay you is all yours to keep irrespective of whether Ram exercises the option or not. you the seller or writers of the Put Option have the obligation to buy the shares at the strike price. to allow investors ways to manage risk. They simply pay the Options premium [Type text] Page 58 . your only cost is the premium. 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. He has no obligation. The buyers of Call and Put options on the other hand are not taking any risk. decided by the stock exchange. 48 is the strike price of the Put Option. 1. You are writing or selling a Put Option to Ram. Options trading are directly or automatically carried through at the stock exchange. It is the risk premium. In this case. writing a call. The stock exchange acts as a 'guaranteer' to make sure the deal goes through. 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. Ram. 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.
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. Marke t Expecta tion Ma rket expected to be bullish . The spread offers a limited prof it potential if the underly ing rises and a l imited loss if the under lying fa lls. Profi t and loss character istics at expiry: [Type text] Page 59 . S ell call at higher strike ( B). Enter when the stock p rice is in be tween the two strike pric es. 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).
70 [Type text] Page 60 .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.14.194. Maximum profit occurs where the underlying rises to the level of the higher strike B or above. 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 .00 Sell 200.00 Exit 09th January 2008 Stock Price a t Rs. B r e a k .11.00 Jan Call option @ Rs.00 Jan Call opti on @ Rs.228. Simulation Reliance Natural R esources Limited [RNRL] Lot size: 7150 Style: Amer ican Construc tion Entry 03rd January 2008 Stock Price a t Rs.85 Buy 190.P rofi t: Limited to the differenc e be tween the t wo strikes minus net pr emium cost.
00 Buy 200.0 0] 200.25 [14.00-39.00 Jan Call opti on @ Rs.00 x 7150] 2) Short Put Spread Construc tion [Type text] Page 61 .Sell 190. 22/share Profit made on using Strategy [Profi t/share x Lot size ] Rs.58.300.00 Jan Call option @ Rs.47 [58.00 Eff ective Pro fit/Loss 190.57.0 0] Net Profit Rs.00 [22.39.00 Jan Call option: Loss Rs.00 Jan Call option: Profit Rs . 1 .00-11.
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. 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 . Marke t Expecta tion Ma rk et expected to be bu llish .Sell a put (B). Profi t and loss character istics at expiry: P rofi t: Limited to the net premium credited. Th e sp read offers a limited profit potential if the underly ing rises and a limited loss if the underlying falls. M aximum profit occurs where underlying rises to the level of the higher strike B or above. buy put at a lower strike (A). Enter when the stock p rice is in be tween two strike pr ices. 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 . B rea k .
20 x 7150] 3) Short Call Spread [Type text] Page 63 .00 Jan Put opti on @ Rs.5.20-12.20/share Profit made on using Strategy (Profi t/share x Lot size) Rs.00 Exit 14th January 2008 Stock Price a t Rs.00-1 1.208.222.00 Eff ective Pro fit/Loss 200.Stock Price a t Rs.15 Buy 200.00 Sell 220.0 0] 220.05 Sell 200.00 [10.27. 7 2. 10.00 Jan Put opti on @ Rs.6.00 Jan Put option: Profit Rs .00 Jan Put opti on @ Rs.11.930.12.00 Jan Put opti on @ Rs.00] Net Profit Rs.00 Jan Put option: L oss Rs.80 [6.00 [27.20 Buy 220.16.
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. buy call at higher strike ( B). The spread offers a limited profit i f the underlyi ng falls and a limited loss exposure if th e underlying rises. Marke t Expecta tion Market expect ed to be bearish.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. 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 . B r e a k . 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. 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. Maximum loss occurs where the underlying rise s to the leve l o f the higher strike B or above.Construc tion Sell a call (A) . Simulation [Type text] Page 64 .
00 Jan Call option: Profit R s.116.00-50.00 Jan Call option: Loss Rs.Reliance Energy Limite d [REL] Lot size: 550 Style: Amer ican Construc tion Entry 11th January 2008 Stock Price a t Rs.7.2485.00 Jan Call option @ Rs.50] [Type text] Page 65 .00 Buy 2500. 00] 2500.7 0 Buy 2700.00 Jan Call option @ Rs.1722.214.171.124 Eff ective Pro fit/Loss 2700.50 [116.0 0-7.3 5 Sell 2700.00 Jan Call option @ Rs.00 Sell 2500.9.00 Exit 21st January 2008 Stock Price a t Rs.41.00 Jan Call option @ Rs.00 [9.
00 [67. se ll put a t lower s trike ( A). as the pre mium received from the sold put reduces the overall cost.50 x 550] 4) Long Put Spread Construc tion Buy a put (B). The spread has th e advantage of being cheaper to es tablish than the purchase of a single put.50/share Profit made on using Strategy (Profi t/share x Lot size) Rs.125. Marke t Expecta tion Market expec ted to be bearish. 3 7. 67. Profi t & loss character ist ics at expiry: [Type text] Page 66 .Net Profit Rs. 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.
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 [Type text] Page 67 .10 Exit 21st January 2008 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.00 Jan Put opti on @ Rs. Ma x im um lo ss o ccu rs where the underlying ri ses to the level of the higher strike B or above.211.1. B r e a k .2.00 Jan Put opti on @ Rs. 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.141. 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 Buy 190.P rofi t: Limited to the differenc e be tween the t wo strikes minus net pr emium cost.
00 Jan Put option: L oss Rs.10-20. and seller.37. Option contract differs from others in two respects.00 Jan Put opti on @ Rs. 16. In option contract. who is "long of a call option" and who has the right to buy.00 [16.20] 180. the distinguishing feature of option is the right-without-obligation for the buyer.00 Jan Put opti on @ Rs. 2 5. (Thus the seller of a call is "short a call" and has the obligation to sell to the holder. who is "long a put".90 [1. the focus is on underlying asset and each counterpart has right and obligation to perform. the right and obligation to sell. For example. The primary focus is on right and obligation not on underlying asset. Thus.00 Jan Put option: Profit Rs .00 Eff ective Pro fit/Loss 190. and the seller a corresponding short position. and what the seller sells is the right.Sell 190. The writer of a put is "on the short side of the position".80-2 .18. with buyer taking the right without obligation and seller taking the obligation without right. in futures contract.760.00 [37. the buyer has the right and obligation to buy. Second.20. not the underlying asset.10 x 1600] Option Feature In other contracts. not the underlying asset. what the buyer buys is the right.10/share Profit made on using Strategy (Profi t/share x Lot size) Rs.35. and has the obligation to buy from the taker of the put option. the right and obligation are separated.) [Type text] Page 68 .00 ] Net Profit Rs.80 Buy 180. OPTION FRAMEWORKS The buyer assumes a long position.
option in "at-the-money" or "out-of the. In general. he can always meet his obligations by using the actual underlying. His potential gain is theoretically unlimited. and has created a "naked position". the option exchange acts as intermediary and quotes the market price of the option. Where the seller does not own the underlying on which he has written the option. depending on the combination of derivative features used. Additional to the intrinsic value an option has a time value. [Type text] Page 69 .where exercise is on a fixed maturity date. European contracts are easier to value and therefore to price. The seller guarantees the exchange that he can fulfill his obligation if the buyer chooses to execute. 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. Buyers and sellers of option do not (usually) interact directly. the risk for the writer of a call option is unlimited. The risk for the option holder is limited: he cannot lose more than the premium paid as he can "abandon the option". see strike price. The "in-the money" option has a positive intrinsic value. Option can be in-the-money. Generally the contract will either be American style . The maximum loss for the writer of a put option is equal to the strike price. However. he is called a "naked writer".The option style will affect the terms and valuation. at-the-money or out-of-the-money. which decreases.money" has an intrinsic value of zero.which allows exercise before the maturity date – or European style . an option writer who owns the underlying instrument has created a covered position. The contract can also be on an exotic option. The risk taken on can be anywhere from zero to infinite.
order and trade management it provides tremendous flexibility to users in terms of kinds orders that can be placed on the system. It is similar to that of trading of equities in the cash market segment. stop losses can be built into order. It supports an anonymous order driven market which provides complete transparency of trading operations and operates on strict price-time priority. The clearing members (CM) use the trader work station for the purpose of monitoring the trading members whom they clear the trades. Additionally. the option holder reduces the risk he bears by paying the option seller a premium to assume it. 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. [Type text] Page 70 . For example buying an at-the-money call option for $2 per share for a total of $200 on a security priced at $20. order matching. 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. limit/market price. will lead to a 100% return on premium if the option is exercised when the underlying security's price has risen by $2. Good –till cancelled. When using option for insurance. The Trading Members have access to functions such as order entry. Various conditions like Good-till-day. one can purchase option to create leverage. whereas buying the security directly for $20 per share. The NEAT F&O trading system is accessed by two type users. immediate or cancel. Because one can use option to assume risk. TRADING MECHANISM The future and option trading system of NSE. called NEAT-F&O trading system. would have lead to a 10% return. Good-tilldate. The payoff to purchasing an option can be much greater than by purchasing the underlying instrument directly. they can enter and set limits to positions. which trading member can take.By using option.
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. EXERCISE PRICE The exercise price is the price at which a call's (put's) buyer can buy (or sell) the underlying instrument. European Style option contracts can be closed out early. 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. mimicking the early exercise property of American style options in most cases. It usually applies to options contracts. However.GLOSSARY AMERICAN STYLE OPTION An option that can be exercised at any time from inception as opposed to a European Style option which can only be exercised at expiry. PREMIUM The cost associated with a derivative contract. STRIKE PRICE [Type text] Page 71 . European Style option contracts can be closed out early. mimicking the early exercise property of American style options in most cases. referring to the combination of intrinsic value and time value. Early exercise of American options may be warranted by arbitrage.
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 1000.00 54.00 Last Price 210.40 50.00 36.00 37.00 56.00 1000.00 1200.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 25.00 2350 280.85 15.00 45.40 32.00 48.00 1200.50 12.00 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 2200.00 2350 280.70 [Type text] Page 72 .00 Last Price 254.90 48.00 1050.00 1050.
the speculators consume information make forecasts about the prices and put their money in these forecasts. speculators are those who are willing to take such risk. Speculators: If hedgers are the people who wish to avoid the price risk. a commodity would. that sells for different prices in different markets. by taking positions. short sell. they feed information into prices and thus contribute to market efficiency. 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. Option Holder: The buyer of the option is called option holder. Depending on their perceptions. they are betting that a price would go up or they are betting that it would go down. In fact. Thus. or may hold spread positions. These are the people who take positions in the market and assume risks to profit from fluctuations in prices. Arbitrageurs: Arbitragers thrive on market imperfections. arbitrage involves making risk-less profit by simultaneously entering into transaction in two or more markets. They make a long position on.TRADERS IN OPTIONS MARKET Hedgers: Hedgers are the traders who wish to eliminate the risk of (price change) to which they are already exposed. therefore. Option Writer: The seller of the option is called option writer. An arbitrageur profits by trading a given commodity. stand to lose should the prices move in the adverse direction. or other item. they may take long or short positions on futures and/or options. In this process. [Type text] Page 73 .
The price that the market puts on this time value depends on a number of factors: time to expiry. dividends and interest rates. 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. Time decay is quantifiable and is known by the Greek term "theta". risk free interest rates and expected dividends. The most common models are the Black & Scholes and the Binomial option pricing models.Premium: Premium is the term used for the price of an option. volatility of the underlying product price. It varies as the underlying security‟s price fluctuates as well as with the passage of time. 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. Option premiums are calculated based on models that take these factors into account and take the guesswork out of valuing options. 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 premium is dependent on other factors including the volatility of the underlying security. 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. Intrinsic value of an option: [Type text] Page 74 .
it does not imply a bias toward price movement in one direction or the other. you now have the obligations inherent in the terms of that option contract. or elsewhere. if you have purchased the right to buy 1000 shares of a stock. When you are long an equity option contract: contract Short: With respect to this section's usage of the word. and are holding that right in your account. Volatility Volatility is the tendency of the underlying securities price to fluctuate up and down. and vice versa. An out. In return. you are long 1. you are long a put contract.strike price. Long: "Long" describes a position (in stock and/or options) in which you have purchased and own that security in your brokerage account. Thus. it is a major factor in determining an options premium.000 shares of stock and are holding that stock in your brokerage account.of-the-money option has zero intrinsic value.The intrinsic value of an option is the amount an option holder can realize by exercising the option immediately. you are long a call contract.underlying product price. Intrinsic value of in-the-money call option = underlying product price . and are holding that right in your brokerage account. Intrinsic value is always positive or zero. The higher the volatility of the underlying stock. the higher the premium because there is a greater possibility that the option will move in-the. as the volatility of an underlying stock increases. If you have purchased 1.money. For example. Intrinsic value of in-the-money put option = strike price . the premiums of both calls and puts overlying that stock increase. Generally. short describes a position in options in which you have written a contract (sold one that you did not own). If the owner exercises the option. If you have purchased the right to sell 1000 shares of a stock. you [Type text] Page 75 .000 shares of stock. It reflects a price changes magnitude.
spot price > strike price). limited by the fact that the stock cannot fall below zero in price. An option index is at the money when the current index equals to strike price (i. the writer of) an equity option contract: You can be assigned an exercise notice at any time during the life of the option contract. In the case of a put. In the case of a put. spot price < strike price).e. the put is at ITM if the index is below the strike price. in a sense. you are short a put contract. spot price = strike price).have an obligation to meet.. [Type text] Page 76 . When you write an option contract you are. you are short a call contract.e. At-the –money option: An at-the-money (ATM) option is an option that would lead to zero cash flow if it were excised immediately. 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. If you have sold the right to sell 1000 shares of a stock to someone else. Although technically limited.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. All option writers should be aware that assignment prior to expiration is a distinct possibility. If you have sold the right to buy 1000 shares of a stock to someone else. which is than the strike price (i. When you are short (i.e. A call option on the index is said to be out-the-money when the current index stands at a level. The writer of an option collects and keeps the premium received from its initial sale. the put is at OTM if the index is above the strike price. creating it. this potential loss could still be quite large if the underlying stock declines significantly in 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.
[Type text] Page 77 . the strategy has a limited downside (i. the returns could potentially be higher. However. Since the initial cost of a Strangle is cheaper than a Straddle. 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. As with a Straddle. Since OTM options are purchased for both Calls and Puts it makes the cost of executing a Strangle cheaper as compared to a Straddle. LONG STRANGLE A Strangle is a slight modification to the Straddle to make it cheaper to execute.money (OTM) put and a slightly out-of-the-money M) call of the same underlying stock/index and expiration data.e.ANALYSIS AND INTERPRETATION OPTION STRATEGIES 1. 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. the Call and the Put premium) and unlimited upside potential. where generally ATM strikes are purchased. This strategy involves the simultaneous buying of a slightly out-of -the.
) 43 4766 4300 Mr. paid Reward : Unlimited Strategy: Buy OTM Put + Buy OTM call Breakeven: Upper Breakeven Point = Strike Price of Long call + Net Premium Paid Lower Breakeven Point = Strike Price of Long Put.66.4300 volatility in the near term. experience very high levels of A. A pays Premium (Rs.Net Premium Paid Nifty Index Current Value Buy call Option Strike Price (Rs.) Buy Put Option Strike Price (Rs. executes a Long Strangle by buying an Rs. The net debit taken to enter the trade is Rs. An investor. Mr.When to Use: The investor thinks Example that the underlying stock/ index will Suppose nifty is at 4500 in May.) 23 Break Even Point (Rs.43.) 4234 [Type text] Page 78 . A pays Premium (Rs.) Break Even Pont (Rs.23 and an Rs4700 Nifty Call for Rs. Which is also his maxi mum Risk : Limited to the initial premium possible loss. Nifty Put for a premium of Rs.) 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.) purchased (Rs) 477 377 277 177 77 43 -23 -23 -23 -23 -23 -23 -23 -23 -23 -23 -23 -43 -43 -43 -43 -43 -43 -43 -43 -43 -43 23 57 157 257 357 457 557 Net Payoff (Rs.) 434 334 234 134 34 0 -66 -66 -66 -66 0 34 134 234 334 434 534 [Type text] Page 79 .
5 [Type text] Page 80 .45.111 and simultaneously the premium price of put option nifty decreased from Rs.25) * 50 = 3337.40.5 Put option (Strike price = 3000): (16. 40.44.80 to Rs.5 .44.90 to Rs. 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.5.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.25 where lot size is 50.80 where lot size is 50.80) * 50 = (1215) PROFIT (Rs) 2122. Calculation: Call option (Strike price = 3400): (111.40.16.
the investor makes the maximum loss (cost of the trade) and if the stock price rises to the higher (sold) strike. SELL CALL OPTION A buy call spread is constructed by buying an in-the-money (ITM) call option. This strategy is exercised when investor is moderately bullish to bullish. because the investor will make a profit only when the stock price/index rises. BULL CALL SPREAD STRATEGY: BUY CALL OPTION. [Type text] Page 81 .2. Let us try and understand this with an example. and selling another out-of –the money (OTM) call option. If the stock price falls to the lower (bought) strike. 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. The net effect of the strategy is to bring down the cost and breakeven on a buy Call (Long call) Strategy. the investor makes the maximum profit. Both calls must have the same underlying security and expiration month.
40 Net Premium Paid (Rs.40. XYZ Receives Break-Even. 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.05 [Type text] Page 82 . Mr.When to use: investor is Example : moderately bullish. XYZ buys a Nifty Call with a strike price Rs. establishing the position. Maximum profit occurs where the underlying rises to the lever of the higher strike or above.) 170.05 which is also his maximum initial premium paid in loss. Buy ITM Call Strike Price(Rs.45 4400 4100 Premium (Rs. Nifty index Current Value 4191.4400 at a premium of Rs.10 Reward: Limited to the difference between the two strikes minus net premium cost. the Risk: Limited to any net debit here is Rs.) Strike Price (Rs.135.) 135.35.170.point(BEP): Strike Price of Purchased call + Net Debit Paid Premium (Rs.) Option Mr.45 and he sells a Nifty call option with a strike price Rs.4100 at a premium of Rs.05 4235. XYZ Pays Sell OTM Call Option Mr.) 35.) Break Even Pont (Rs.
60 -164.00 3700.00 4400.40 29.95 164.45 -170.95 164.60 -264.05 -135.55 929.95 164.60 664.95 164.40 35.05 -135.00 5100.95 164.00 4235.60 -464.00 4500.05 -135.45 -170.95 164.45 -170.05 -135.55 629.45 -35.05 -135.00 4700.55 129.55 35.60 -564.00 5200.00 4600.95 164.00 3900.) -135.40 35.40 35.40 35.40 35.55 829.00 Net Payoff from call Net Payoff from Call Purchased (Rs.55 729.40 35.05 0 64.60 Net Payoff (Rs.45 -170.55 229.55 429.00 4000.40 35.60 764.60 -364.45 -170.40 35.40 35.95 164.95 164.00 4800.95 [Type text] Page 83 .The Payoff Schedule On expiry Nifty closes at 3500.00 3800.00 3600.00 4100.00 4900.05 -135.00 4200.55 329.40 35.45 -70.55 529.) sold (Rs) -170.00 5000.05 4300.45 -170.05 -135.40 -64.
111 to Rs.4100 strike price Call was purchased the breakeven point would have been Rs.4150 strike price Call was purchased the loss would have been Rs.44.5) PROFIT 2837.50 to Rs.111 where lot size is 126.96.36.199. Again simultaneously selling 1 lot of call option of nifty out of money (OTM) at strike price is 3400 at a premium of 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.111) * 50 = (3337.45) reduced the cost of the trade (if only the Rs. the premium of the Call purchased).25.50) * 50 = 6175 Put option (Strike price = 3000): (44.50 where lot size is 50. the strategy also has limited gains and is therefore ideal when markets are moderately bullish.45).The Bull Call Spread Strategy has brought the breakeven point down (if only the Rs.25 .4270.126. reduced the loss on the trade (if only the Rs.170. However.5 [Type text] Page 84 .e. When Nifty Index reached at 3410 the premium on purchase of nifty call option (Strike price = 3200) increased from Rs. Calculation: Call option (Strike price = 3200): (250.45 i.250 and simultaneously the premium price of put option nifty decreased from Rs.4100 strike price call was purchased the cost of the trade would have been Rs.
SYNTHETIC LONG CALL: BUY STOCK. The strike price can be the price at which you bought the stock (ATM Strike price) or slightly below (OTM strike price). You have caped your loss in this manner because the put option stops your further losses. BUY PUT In this strategy. In simple buying of a Call Option. You wish you had some insurance against the price fall. The result of this strategy looks like a call option Buy strategy and therefore is called a synthetic call. It is a strategy with a limited loss and (after subtracting the put premium) unlimited profit (from the stock price rise). and at the same time insuring against an adverse price moment. But the strategy is not Buy Call option Strategy. In case the price of the stock rises you get the full of the price rise. Here you have taken an exposure to an underlying stock with the aim of holding it and reaping the benefits of price rise. dividends. So buy a put on the stock. [Type text] Page 85 . This gives you the right to sell the stock at certain which is the strike price. But what if the price of the stock went down. we purchase a stock since we fill about it. bonus rights etc. In case the price of the stock falls. exercise the put option (remember put is right to sell). there is no underlying position in the Stock but is entered into only to take advantage of price moment in the underlying stock.3.
he buys an ABC Ltd. At Current Market price of ABC Ltd. XYZ. He has to recover the cost of the put option purchase price+ the stock price break even.80 Break Even Point 4143.80 (Rs) (Put Strike Price + Put Premium + Stock Price – Put Strike Price )* * Break Even is form the point of view of Mr. 143. [Type text] Page 86 . The outlook is conservatively bullish Example: Mr. XYZ pays ) Current market price of ABC Ltd . 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. XYZ IS BULLISH ABOUT ABC Ltd. He Buys ABC Ltd. (his Risk). Put option with a strike price Rs.When to use: when ownership is desired of stock yet investor is concerned about near term down side risk. Strategy : Buy Stock + Buy Put Option Buy Stocks (Mr.80 expiring on 31st July.3900 (OTM) at a premium of RS. XYZ pays ) Premium (Rs) 143. Stock.(RS) 4000 Risk: Losses limited to stock price + put premium – put Strike Price.
143.143.Example: ABC LTD.4000 + Rs.80 Maximum Gain Unlimited (as the stock rises) Breakeven Put Strike + Put Premium + Stock Price – Put Strike Rs.80/- Maximum Loss Stock Price + Put Premium – Put Strike Rs.143.80 + Rs4000 – Rs.4.80 Rs.143.143.80 per put.4000 + Rs.4000 Buy 100 shares of the Stock at Rs.4000 Buy 100 Put Options with Price of Rs.3900 Rs.4143.243.3900 = Rs. Net Debit (payout) Stock Bought + Premium Paid Rs.3900 at a premium of Rs.80 [Type text] Page 87 . Is trading at Rs.80 – Rs.3900 + Rs.
80 -143.) -243.00 3800.00 4000.80 -143.00 Payoff from the Stock (Rs.00 -200.) -600.00 3600.00 Net Payoff from the Put Option (Rs.00 4143. closes at (Rs.80 -143.00 4800.80 4200.00 -400.) on expiry) 3400.00 0 143.80 200.) 356.20 456.80 143.20 156.80 -143.00 4600.80 -143.80 -243.20 -43.20 656.80 0 56.The Pay off schedule ABC Ltd.80 -143.00 600.80 -243.80 Net Payoff (Rs.20 256.00 800.00 4400.00 400.20 [Type text] Page 88 .
80) * 50 = (1215) PROFIT [Type text] Rs.3219 where lot size is 50.80 to Rs.8335 Page 89 .80 where lot size is 50. 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. with the aim of protecting any downside risk.16.ANALYSIS: This is a low risk strategy. 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.5 – 40. Calculation: NIFTY FUTURES : (3410.50.3219) * 50 = 9550 Put option (Strike price = 3000): (16.40. Again simultaneously purchasing 1 lot of put option of nifty out of money (OTM) at strike price is 3000 at a premium of Rs.40. When Nifty Index reached at 3410 the premium price of put option nifty decreased from Rs. A good strategy when you buy a stock for medium or long term.
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.4. BEAR CALL SPREAD STRATEGY: SELL ITM CALL. [Type text] Page 90 . Let us understand this with an example. 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. In this strategy the investor receives a net credit because the call he buys is of a higher strike price than the Call sold. If the stock/ index fall both Calls will expire worthless and the investor can retain the net credit. the investor makes a profit. Provided the stock remains below that level. 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. The maximum loss is the difference in strikes less the net credit received. If the stock/index rise then the breakeven is the lower strike plus the net credit. Otherwise he could make loss.
) Break (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.2600 at a premium of Rs. Reward: Limited to the net premium received for the position i.) 2600 Option Mr.When to use: When Example: the Investor is mildly Mr.) 154 Receives Buy OTM Call Strike Price (Rs.49 Risk: Limited to the Difference between the two strikes minus the net premium.) 2800 Option Mr. He sells an ITM call option on with strike price of Rs.) Even 105 Break Even Point: Lower Strike + Net credit Point 2705 [Type text] Page 91 . XYZ Premium (Rs.2800 at a premium of Rs. XYZ is bearish on Nifty.) 49 Net premium received (Rs.e. XYZ pays Premium (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.
) 154 154 154 154 154 154 54 49 -46 -146 -246 -346 -446 -546 Net Payoff from Call bought (Rs.On expiry Nifty Closes at 2100 2200 2300 2400 2500 2600 2700 2705 2800 2900 3000 3100 3200 3300 Net Payoff from Call Sold (Rs.) 105 105 105 105 105 105 5 0 -95 -95 -95 -95 -95 -95 The strategy earns a net income for the investor as well as limits the downside risk of a Call sold. [Type text] Page 92 .) -49 -49 -49 -49 -49 -49 -49 -49 -49 51 151 251 351 451 Net Payoff (Rs.
risk and raise breakeven point (from Put exercise point of view). This strategy creates a net debit for the investor.5. then the investor reaches maximum profits. [Type text] Page 93 . 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). 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. then the investor has a maximum loss potential of the net debit. The strategy needs a Bearish outlook since the investor will make money only when the stock price/ index fall. BEAR PUT SPREAD STRATEGY: BUY PUT. If the stock price closes below the out-of – the –money (lower) put option strike price of the expiration date. While the Puts sold will reduce the investors costs. If the stock price increases above the in-the-money (higher) put option strike price at the expiration date.
) 80 Break Even Point (Rs.) Strike Price (Rs.) 2720 [Type text] Page 94 . He buys one Nifty ITM Put with a strike price Rs. I. XYZ pays Sell OTM Put Option Mr. Mr.) Premium (Rs. the premium paid for long position less premium received for short position.2600 at a premium Rs.132 and sells one Nifty OTM Put with strike price Rs. XYZ receives Strike Price (Rs. XYZ expects Nifty to fall.e.) Premium (Rs.) 2800 132 2600 52 Net Premium Paid (Rs.When to use: When you are moderately bearish on market direction Risk: Limited to the net amount paid for the spread.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 2694.2800 at a Premium of Rs.
2800 strike price Put was purchased the loss would have been Rs.132 i.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.) Sold (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.2800 strike price Put was purchased the breakeven point would have been Rs. reduced the cost of the trade (if only the Rs. the premium of the Put purchased. However. reduced the loss on the trade (if only the Rs. the strategy also has limited gains and is therefore ideal when markets are moderately bearish.e.2800 strike price Put was Purchased the cost of the trade would have been Rs.132). [Type text] Page 95 .) bought (Rs.2668).
The second factor is. The initial margin requirement for writing options and buying or selling futures becomes very high. -.FINDINGS From the report we come to know several things about Derivatives Market. [Type text] Page 96 . 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. More individual investor should come to Future and Options segment. There is no physical delivery facility available for settlement of Derivatives contracts. The market is dominated by few large players.the contracts have to be settled in cash only. -. 2 laces by SEBI which is very high for small investors. These players are large brokers. This has been pegged at Rs. About fifty percent of the business in stock market derivatives belongs to these brokers. It has great future as several measures are being taken to develop the market.the initial investment required for entering into derivatives contracts. 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. Regulatory authority should come out with regulation which create interest for attract investor. This denotes an absence of knowledge among traders. Other problem in Derivatives trading is.
It can be done by fo llowing ways: o By conducting seminars. I summarize my recommendation in the following points: Option market has surpassed the cash market in terms of turnover but it much behind the turnover in developed market like USA. SEBI should strengthen its efforts to educate investor about the Derivatives Market in India along with its other programs of education investors. The market is dominated by few large players. 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. Ther efo re the inves tors have to be educated through training programs. Etc. 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.is very high for retail investor so measures are needed to reduce that limit so that wider participation from retail investor can be encouraged. 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. UK. Some steps should be taken to encourage wider participations. 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 . 200000/. The contract‟s value of Rs. This study reveals that most of the investors are unaware of the strateg ies followed i n o p tio n s m a rk et a n d th e a w a ren es s is lim ite d to p eo p le a t w o rk in br o k in g h o u s es a nd to those who do technical analysis.
This episode reiterates the strengths of the modern development of India‟s securities markets. rolling settlement. As with most of the financial sector innovations of the last decade. no weekly settlement. India is one of the most successful developing countries in terms of a vibrant market for derivatives. and a predominantly retail market. There is unawareness regarding derivatives in case of individual. The market is dominated by few large players. banks and mutual funds are major players on the equity derivatives market. It has great future as several measures are being taken to develop the market. individuals have displayed intellectual capacity and a speed of exploiting new ideas which has just not been found with finance companies. futures. anonymous electronic trading. The new world of the equity market is working out very well: no badla. 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. . Internationally. Generally. individual investors are not having enough knowledge for derivatives market. [Type text] Page 98 . which are based on nationwide market access. and options. CONCLUSION From the report I come to know several things about Derivatives Market. The Derivatives market is developing in India.m a rk et im perfectio n.
nseindia. It is desirable to have Put-Call Open Interest Ratio below 0.7. It means that rise in Put-Call Open Interest Ratio shows bearish outlook over the Cash Market Price.com www.ITI.com www. For gathering information we have also referred to various books on “Futures & Options” written and published by different authors and publications. I cannot define the exact relationship between the Put-Call Volume Ratio and Cash Market Price.com Books Referred: [Type text] Page 99 . I have found the there exist a positive relationship between the Put-Call Open Interest Ratio and Cash Market Price.derivativesindia. Following are some of the major sources we have referred to for getting information: Web Sites Referred: www. BIBLIOGRAPHY For preparation of this project report we have collected information from various sources like visiting various websites.com www.bseindia. publications. referring to journals.
Patwari [Type text] Page 100 .D.R.C. Vohra And B. Future And Options By: N. Bagri Options And Futures – In Indian Perspective By: D.
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