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A Project Report on RISK MANAGEMENT THROUGH DERIVATIVE IN INDIAN STOCK MARKET

Never put all eggs in a single basket

Submitted by: Mr. Himanshu Rastogi GM 11058


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INDIA INFOLINE GROUP


The IIFL (India Infoline) group, comprising the holding company, India Infoline Ltd (NSE: INDIAINFO, BSE: 532636) and its subsidiaries, is one of Indias premier providers of financial services.

IIFL offers advice and execution platform for the entire range of financial services covering products ranging from Equities and derivatives, Commodities, Wealth management, Asset management, Insurance, Fixed deposits, Loans, Investment Banking, GoI bonds and other small savings instruments.
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India Infoline Diversification


Equities Private Wealth Management Investment Banking Credit & Finance IIFL Mutual Fund Life Insurance, Pension and other Financial Products
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Vision Statement :
Our vision is to be the most respected company in the financial services space.

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CORPORATE STRUCTURE
India Infoline Investment Services India Infoline Marketing&Services India Infoline Commodities India Infoline Media& Research Services IIFL (Asia) Pte IIFL Wealth Management IIFL Realty IIFL Capital IIFL Ventures
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Moneyline Credit
India Infoline Housing Finance
India Infoline Distribution Co.

India Infoline Insurance Services India Infoline Insurance 5 Brokers

IIFL Business Model


Equities Insurance Credit & Finance Huge money

Wealth Management
Asset Management Investment Banking

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Management Team
Chairman & Managing Director Investment Banking Consumer Finance Nirmal Jain H. Nemkumar Ajit Menon, Donald DSouza Apul Nayyar Nandip Vaidya Karan Bhagat Bharat Parajia Deepesh Pandey, Manish Srivastava
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Retail Broking
Wealth Management International Operation Offshore Asset Management

Insurance Distribution
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Deepesh Pandey, Manish Srivastava

BUSINESS NETWORK
Domestic Presence A network of over 2,500 business locations spread over more than 500 cities and towns across India facilitates the smooth acquisition and servicing of a large customer base. Our Global Presence: Also prevailed in USA, Dubai, Singapore etc.

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SWOT ANALYSIS
STRENGTHS Large retail customer base Value-for-money proposition for customers Strong research which picks winners Bouquet of asset & liability products Wide branch network across India OPPORTUNITIES Booming financial services sector Institutional broking Wealth management Leverage network for more products

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THREATS Large players foraying into the space Replicable product offering Market dependence Manpower retention WEAKNESS Does not have a bank in the group Rural area have not facility of internet connection
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FINANCE DEPARTMENT
FINANCIAL RESULT
Mar'06

ESULTS
12 mths 12 mths 50.17 50.17 4.42 0.00 235.18 0.00 289.77 44.68 36.27 80.95 57.10 57.10 59.77 0.00 932.75 0.00 1,049.62 0.00 130.57 130.57

Mar '07 Mar '08

Mar '09

Mar '10

12mths

12 mths

12 mths

Sources Of Funds Total Share Capital Equity Share Capital Share Application Money Preference Share Capital Reserves Revaluation Reserves Networth Secured Loans Unsecured Loans Total Debt 45.10 45.10 4.42 0.00 123.83 0.00 173.35 1.50 80.89 82.39 56.68 56.68 11.37 0.00 980.13 0.00 1,048.18 1.70 0.10 1.80 1,049.98 57.04 57.04 0.40 0.00 1,050.67 0.00 1,108.11 1.17 496.58 497.75 1,605.86

23-Aug-12 Total Liabilities

himanshurastogi44@gmail.com 255.74 370.72 1,180.19

11

Mar 06

Mar '07

Mar '08

Mar '09

Mar '10

12mths

12 mths

12 mths

12 mths

12 mths

Application Of Funds Gross Block Less: Accum. Depreciation Net Block Capital Work in Progress Investments Inventories Sundry Debtors 8.75 5.23 3.52 0.00 100.25 0.00 5.49 73.10 24.38 48.72 0.00 171.45 0.00 130.72 98.32 35.08 63.24 0.49 915.68 1.31 342.81 143.68 44.94 98.74 4.51 869.31 0.56 103.53 108.83 60.63 48.20 1.75 1,104.22 53.76 577.50

Cash and Bank Balance


Total Current Assets Loans and Advances Fixed Deposits Total CA, Loans & Advances Deferred Credit Current Liabilities Provisions Total CL & Provisions Net Current Assets Miscellaneous Expenses Total Assets

0.15
5.64 172.36 1.95 179.95 0.00 7.67 20.30 27.97 151.98 0.00 255.75

27.12
157.84 220.32 67.96 446.12 0.00 244.54 51.03 295.57 150.55 0.00 370.72

61.62
405.74 313.89 152.75 872.38 0.00 514.85 156.74 671.59 200.79 0.00 1,180.20

264.10
368.19 244.41 166.15 778.75 0.00 552.68 148.64 701.32 77.43 0.00 1,049.99

309.86
941.12 516.71 251.98 1,709.81 0.00 1,025.81 232.31 1,258.12 451.69 0.00 1,605.86

Contingent Liabilities
Book Value (Rs)

73.00
37.46

8.00
56.88

8.00
173.35

20.85
36.58

24.17
38.84

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MARKETING DEPARTMENT
Comparison of India Infoline Ltd. with other depositories
Brokerage for Delivery SBICAP Securities Sharekhan Motilal Oswal 5 paisa Angel Broking 0.50% 0.03% - 0.50% 0.30% - 0.50% 0.25% - 0.85% 0.50% Brokerage for Intraday trading 0.05% 0.03% - 0.10% 0.03% - 0.15% 0.07% 0.02% - 0.03% MMC* NIL NIL

ICICI direct
Indiabulls HDFC Securities UTI Securities Religare Reliance Money Geogit

0.75%
0.25% - 0.50% 0.50% 0.80% 0.20% - 0.30% 0.01% 0.30%

0.15%
0.05% - 0.10% 0.15% 0.15% 0.02% - 0.03% 0.01% 0.03% card system

Indiainfoline
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0.50% *MMC=Minimum monthly commitment. himanshurastogi44@gmail.com

0.05%

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COMPARISON
5PAISA.COM IIFL Account opening charge Annual Maintenance Charges Brokerage Charges Rs.555 ICICI DIRECT Rs.975 RELIGARE Rs.500 KOTAK Rs.750 (Rs.250 credit in account) Rs.400 HDFC Rs.799

Nil

1st Year free Rs.500 2nd year onwards Rs.15 or0.05% (Intraday) Rs.25 or0.55% (Delivery) Higher of two

Rs.250

1st year free Rs.500 2nd year onwards Rs.25 or0.1% (Intraday) Rs.25 or0.50% (Delivery) Higher of two
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5paisa (Intraday) 50 paisa (delivery)

25 paisa (Delivery) 3paisa (Intraday)

6paisa (intraday) 59 paisa (Delivery)

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BROKERAGE CHARGES
Intraday Brokerage Charge
Intraday Brokerage Charges
0.3 0.25 0.25 0.2

Charges

0.15 0.1 0.1 0.05 0.05 0 Indiabulls Kotak Securities India-infoline ICICI direct Karvy Motilal oswal Sharekhan 0.05 0.1 0.1 0.1

Financial Brokerage Firms

Indiabulls

Kotak Securities

India-infoline

ICICI direct

Karvy

Motilal oswal

Sharekhan

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Delivery Brokerage Charges


Delievery Brokerage Charges
0.8 0.7 0.6 0.5 0.5 0.45 0.5 0.5 0.5 0.75

Charges

0.5 0.4 0.3 0.2 0.1 0 Indiabulls

Kotak Securities

Indiainfoline

ICICI Direct

Karvy

Motilal oswal Sharekhan

Financial Brokerage Firms


Indiabulls Kotak Securities India-infoline ICICI Direct Karvy Motilal oswal Sharekhan

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RATIO ANALYSIS
Year Ratio GROSS PROFIT OPERATING PROFIT 32.28 37.06 24.57 29.29 32.97 36.12 MAR10 MAR09 MAR08

NET PROFIT
DEBT-EQUITY RATIO CURRENT RATIO ASSETS TURNOVER RATIO DEBTORS TURNOVER RATIO EPS
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22.02
0.2 1.0 5.5 2.1 4.82

18.51
0.1 1.1 4.1 2.2 3.26
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23.45
0.2 1.2 7.9 2.8 21.52
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WORK I HAVE DONE INDIA INFOLINE


FIRST OF ALL I HAVE TAKEN TRAINING IN THE FOLLOWING AREAS

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INFORMATION OF EQUITY CAMPAIGNING F & O SEGMENT RESEARCH PART HOW TO USE HEDGING TOOLS & MODELS TRADING ON LINE & OFF LINE CHART TREND ANALYSIS FACE TO FACE INTERACTION WITH CUSTOMER HOW THE BROKERAGE & TAX IS CALCULATED
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Achievements during SIP


The business I achieved in SIP is:
Total business of Rs.40,000. I have 7 IIFL customer with me. Total conversion 6.

Got future job opportunity. Knowledge about corporate culture Professionalism Interpersonal skills Meeting with People convincing them to trade.
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RISK MANAGEMENT THROUGH DERIVATIVE IN INDIAN STOCK MARKET

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OBJECTIVE OF THE STUDY


To construct portfolio and analyses the risk return relationship. To hedge the most profitable portfolio. To construct a diversified portfolio and risk reduction by using index futures. To find out extant to which loss can be reduced by applying hedging strategies. To determine whether the hedger enjoys better returns from the use of hedgers. To identify how much reduction in risk is possible. To find out the extend of loss due to misjudgment on index movements . 23-Aug-12 himanshurastogi44@gmail.com 21

Size of Derivative Exchanges


Top-8 Derivative Exchanges (volume)
900 800 700

Top-8 Equity Index Futures (value)


9,000 8,000 7,000
billion US$

KSE: 855m (2001) ; 1930m (2002) Value $1,800 bn (#5) BM&F: 101m (2002) Value $3,200 bn (#4)

KSE: market-cap $216 bn (#14 ; 10% Tokyo, 60% Sydney) Cash trading $593 bn (#12 ; 40% Tokyo, 200% Sydney) Futures trading $1680 bn (#3 ; 200% Nikkei)

million contracts

600 500 400 300 200 100 0

6,000 5,000 4,000 3,000

2,000
1,000 0
KSE Eurex Euronext CME CBOE CBOT AMEX BM&F CME Eurex KSE CME Eurex Euronext Euronext Osaka S&P500 DAX KOSPI Nasdaq STOXXCAC40 FTSE Nikkei

Top-8 Interest Rate Futures (volume)


180 160 140
million contracts

Top-8 Currency Futures Exchanges (value)


900 800 700
billion US$

BM&F: DI-futures 44m (2001) ; 71m (2002) Value $1,180 bn (DI) + $680 bn (DDI) + $850 bn (US$ futures) Brazil: government dom debt $180 bn

KOFEX: $75 bn USD futures trading (#7) KTB futures trading $1,120 bn (#6) + OTC KTB cash trading $39 bn (Israel, Ireland) Korea: government dom debt $100 bn

120 100 80 60 40 20 0

600 500 400 300 200 100 0


CME Yen

CME Euronext BM&F Euronext SGX KOFEX Mexder BM&F BM&F CME 21-Aug-12 himanshurastogi44@gmail.com Euro Euro$ Euribor DI-future Sterling Euro$ KTB Interest DDI-$ US$

CME CHF

CME CAD

Sources: FIBV (2001) ; KSE, KOFEX, BM&F (2002)

CME KOFEX GBP US$

22 MXP

CME

SCOPE OF THE STUDY


Introduction of derivatives in the Indian capital market is the beginning of a new era , which is truly exciting. Derivatives, worldwide are recognized risk management products. These products have a long history in India, in the unorganized sector , especially in currency and commodity markets. The availability of these products on organized exchanges provided the market participants with broad based risk management tools. This study mainly covers the area of hedging and speculation. The main aim of the study is to prove how risks in investing in equity shares can be reduced and how to make Maximum return to the other investment.
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IMPORTANCE OF THE STUDY


It helps the researcher to construct a diversified portfolio. Provide an insight on return and risk analysis. It helps to make a general study on derivatives. It helps to identify and reduce by using hedging strategies and speculation.

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LIMITATION OF THE STUDY


While applying the strategies, transaction cost and impact cost are not taken into consideration. so, it will reflect in the profit calculation on each month of the study. Data were collected only on the basis of NSE trading. Hedging strategy is applied on historical data. so the direction of each trend in the stock market is known before hand for the period selected. As a result, some bias could have been done for the application of hedging strategy.
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FINDINGS
The following findings are made on the basis of data analysis from the project: 1. The study reveals the effectiveness of risk reduction using hedging strategies. It has found out that risk cannot be avoided. But can only be minimized. 2. Through the study, it has found out that, the hedging provides a safe position on an underlying security. The loss gets shifted to a counter party. Thus the hedging covers the loss and risk. Sometimes, the market performs against the expectation. This will trigger losses. So the hedger should be a strategic and positive thinker. 3. The anticipation of the hedger regarding the trend of the movement in the prices of the underlying security plays a key role in the result of the strategy applied.
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4. It has been found that, all the strategies applied on historical data of the period of the study were able to reduce the loss that rose from price risk substantially. 5. If the trader is not sure about the direction of the movement of the profits of the current position, he can counter position in the future contract and reduces the level of risks. 6. The trader can effectively use the strategy for return enhancement provided he has the correct market anticipation. 7. In general, the anticipation of the strategies purely for return enhancement is a risky affair, because, if the anticipation about the performance of the market and the underlying goes wrong, the position taker would end up in higher losses.
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CONCLUSION
Derivatives could be complex, and they have quite often been criticized for having been the source of large losses by some corporations. But are the instruments really at fault? Chance answers this with the aid of another question: is electricity at fault when someone with little knowledge mishandles it? Derivatives are powerful instruments with a high degree of leverage, thus large gains or losses can result from small price changes. Thus an effective use demands the following: Having the requisite knowledge of its structure and applicability. The reason for using it should be properly understood; there could be a high appeal to use it for speculation instead of for hedging, and this could be very dangerous. The appropriate type of derivative should be selected for different situations.
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Thanks for being patience


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