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Introduction
A Derivative is a financial instrument that derives its value from an underlying asset. Derivative is an financial contract whose price/value is dependent upon price of one or more basic underlying asset, these contracts are legally binding agreements made on trading screens of stock exchanges to buy or sell an asset in the future. The most commonly used derivatives contracts are forwards, futures and options, which we shall discuss in detail later. The main objective of the study is to analyze the derivatives market in India and to analyze the operations of futures and options. Analysis is to evaluate the profit/loss position futures . Derivates market is an innovation to cash market. Approximately its daily turnover reaches to the equal stage of cash market In cash market the profit/loss of the investor depend the market price of the underlying asset. Derivatives are mostly used for hedging purpose. In bullish market the call option writer incurs more losses so the investor is suggested to go for a call option to hold, where as the put option holder suffers in a bullish market, so he is suggested to write a put option. In bearish market the call option holder will incur more losses so the investor is suggested to go for a call option to write, where as the put option writer will get more losses, so he is suggested to hold a put option.

OBJECTIVES OF THE STUDY To analyze the derivatives market in India. To analyze the operations of futures and options.
To find the profit/loss position of futures buyer and also

The option writer and option

To study the role of stock exchange

NEED OF THE STUDY To analyze the derivatives in India and to analyze the operations of future and options. Derivatives market is an innovations to cash market. Profit or loss of the investor depend on the market prize of the underlying asset. This financial contracts are legally binding agreements made on trading screens.

SCOPE OF THE STUDY The Study is limited to Derivatives with special reference to futures and Option in the Indian context and the STEEL CITY SECURITIES Pvt Ltd have been Taken as a representative sample for the study. The study cant be said as totally perfect. Any alteration may come. The study has only made a humble Attempt at evaluation derivatives market only in India context. The study is not Based on the international perspective of derivatives markets, which exists in NASDAQ, CBOT etc.,

RESEARCH METHODOLOGY: The type of research is selected on the basis of problems identified. Here the research type used is descriptive research. Descriptive research includes fact-findings and enquiries of different kinds. The major purpose of descriptive research is a description of the state of affairs, as it exists in the present system. In this dissertation an attempt has been made to discover various issues related to derivatives in the Indian market and how they help the hedge the risk.

ACTUAL COLLECTION OF DATA

Data Collection from secondary Sources

Secondary data were gathered from numerous sources. While preparation of this project report, the secondary data have been collected through:

Data was generated from general library research sources, textbooks, trade journals, articles from newspaper, treasury management, brochures, interviews with different brokers of HYDERABAD stock Exchange and Internet web site.

Limitations of the study The study is conducted in HYDERABAD only. Since the study covers the overview of derivatives market, it cannot be generalized. Data collected is only from secondary sources.

DERIVATIVES INSTRUMENTS IN INDIA

The first derivative product to be introduced in the Indian securities market is going to be "INDEX FUTURES". In the world, first index futures were traded in U.S. on Kansas City Board of Trade (KCBT) on Value Line Arithmetic Index (VLAI) in 1982.

Organized exchanges began trading options on equities in 1973 ,where as exchange traded debt options did not appear until 1982 ,on the other hand fixed income futures began trading in 1975 ,but equity related futures did not begin until 1982 .

DERIVATIVES SEGMENT IN BSE & NSE On June 9-2000 BSE & NSE became the first exchanges in India to introduce trading in exchange traded derivative product with the launch of index futures on sense and Nifty futures respectively. Index futures was follows by launch of index options in June 2001, stock options in July 2001 and stock futures in Nov 2001.Presently stock futures and options available on 41 well-capitalized and actively traded scrips mandated by SEBI.

Nifty is the underlying asset of the Index Futures at the Futures & Options segment of NSE with a market lot of 200 and the BSE 30 Sensex is the underlying stock index with the market lot of 50. This difference of market lot arises due to a minimum specification of a contract value of Rs. 2 lakhs by Securities Exchange Board of India. A contract value is contract Index lied by its market lot. For e.g. If Sensex is 4730 then the contract value of a futures Index having Sensex as underlying asset will be 50 x 4730 = Rs. 2,36,500. Similarly if Nifty is 1462.7, its futures contract value will be 200 x 1462.7 = Rs.2,92,540/-. Every transaction shall be in multiple of market lot. Thus, Index futures at NSE shall be traded in multiples of 200 and at BSE in multiples of 50.
CONTRACT PERIODS:

At any point of time there will always be available near three months contract periods. For e.g. in the month of June 2001 one can enter into either June Futures contract or July Futures contract or August Futures Contract. The last Thursday of the month specified in the contract shall be the final settlement date for that contract at both NSE as well BSE. Thus June 29, July 27 and August 31 shall be the last trading day or the final settlement date for June Futures contract, July Futures Contract and August Futures Contract respectively. When one futures contract gets expired, a new futures contract will get introduced automatically. For instance, on 30th June, June futures contract becomes invalidated and a September Futures Contract gets activated.
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SETTLEMENT : Settlement of all Derivatives trades is in cash mode. There is Daily as well as Final Settlement. Outstanding positions of a contract can remain open till the last Thursday of that month. As long as the position is open, the same will be marked to Market at the Daily Settlement Price, the difference will be credited or debited accordingly and the position shall be brought forward to the next day at the daily settlement price. Any position which remains open at the end of the final settlement day .

HISTORY OF STOCK EXCHANGE

The only stock exchanges operating in the 19th century were those of Bombay set up in 1875 and Ahmedabad set up in 1894. These were organized as voluntary non profit-making association of brokers to regulate and protect their interests. Before the control on securities trading became central subject under the constitution in 1950, it was a state subject and the Bombay securities contracts (control) Act of 1925 used to regulate trading in securities. Under this act, the Bombay stock exchange was recognized in 1927 and Ahmedabad in 1937.
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During the war boom, a number of stock exchanges were organized in Bombay, Ahmedabad and other centers, but they were not recognized. Soon after it became a central subject, central legislation was proposed and a committee headed by A.D. Gorwala went into the bill for securities regulation. On the basis of the committees recommendations and public discussion, the securities contracts (regulation) Act became law in 1956.

DEFINITION OF STOCK EXCHANGE

Stock exchange means any body or individuals whether incorporated or not, constituted for the purpose of assisting, regulating or controlling the business of buying, selling or dealing in securities. It is an association of member brokers for the purpose of selfregulation and protecting the interests of its members. It can operate only if it is recognized by the Government under the securities contracts (regulation) Act, 1956. The recognition is granted under section 3 of the Act by the central government, Ministry of Finance.

BYLAWS
Besides the above act, the securities contracts (regulation) rules were also made in 1975 to regulative certain matters of trading on the stock

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exchanges. There are also bylaws of the exchanges, which are concerned with the following subjects. Opening / closing of the stock exchanges, timing of trading, regulation of blank transfers, regulation of Badla or carryover business, control of the settlement and other activities of the stock exchange, fixating of margin, fixation of market prices or making up prices, regulation of taravani business (jobbing), etc., regulation of brokers trading, brokerage chargers, trading rules on the exchange, arbitrage and settlement of disputes, settlement and clearing of the trading etc

REGULATION OF STOCK EXCHANGES

The securities contracts (regulation) act is the basis for operations of the stock exchanges in India. No exchange can operate legally without the government permission or recognition. Stock exchanges are given monopoly in certain areas under section 19 of the above Act to ensure that the control and regulation are facilitated. Recognition can be granted to a stock exchange provided certain conditions are satisfied and the necessary information is supplied to the government. Recognition can also be withdrawn, if necessary. Where there are no stock exchanges, the government licenses some of the brokers to perform the functions of a stock exchange in its absence.

SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI).

SEBI was set up as an autonomous regulatory authority by the government of India in 1988 to protect the interests of investors in securities and to promote the development of, and to regulate the securities market and for

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matter connected therewith or incidental thereto. It is empowered by two acts namely the SEBI Act, 1992 and the securities contract (regulation) Act, 1956 to perform the function of protecting investors rights and regulating the capital markets.

BOMBAY STOCK EXCHANGE

This stock exchange, Mumbai, popularly known as BSE was established in 1875 as The Native share and stock brokers association, as a voluntary non-profit making association. It has an evolved over the years into its present status as the premiere stock exchange in the country. It may be noted that the stock exchanges the oldest one in Asia, even older than the Tokyo stock exchange, which was founded in 1878. The exchange, while providing an efficient and transparent market for trading in securities, upholds the interests of the investors and ensures redressed of their grievances, whether against the companies or its own member brokers. It also strives to educate and enlighten the investors by making available necessary informative inputs and conducting investor education programs. A governing board comprising of 9 elected directors, 2 SEBI nominees, 7 public representatives and an executive director is the apex body, which decides is the apex body, which decides the policies and regulates the affairs of the exchange.

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The Exchange director as the chief executive offices is responsible for the daily today administration of the exchange.

BSE INDICES:
In order to enable the market participants, analysts etc., to track the various ups and downs in the Indian stock market, the Exchange has introduced in 1986 an equity stock index called BSE-SENSEX that subsequently became the barometer of the moments of the share prices in the Indian stock market. It is a Market capitalization weighted index of 30 component stocks representing a sample of large, well-established and leading companies. The base year of sensex 1978-79. The Sensex is widely reported in both domestic and international markets through print as well as electronic media. Sensex is calculated using a market capitalization weighted method. As per this methodology the level of the index reflects the total market value of all 30-component stocks from different industries related to particular base period. The total market value of a company is determined by multiplying the price of its stock by the nu7mber of shared outstanding. Statisticians call index of a set of combined variables (such as price and number of shares) a composite Index. An indexed number is used to represent the results of this calcution in order to make the value easier to go work with and track over a time. It is much easier to graph a chart based on Indexed values than on based on actual valued world over majority of the

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well-known Indices are constructed using Market capitalization weighted method. In practice, the daily calculation of SENSEX is done by dividing the aggregate market value of the 30 companies in the index by a number called the Index Divisor. The divisor is the only link to the original base period value of the SENSEX. The Devisor keeps the Index comparable over a period value of time and if the references point for the entire Index maintenance adjustments. SENSEX is widely used to describe the mood in the Indian stock markets. Base year average is changed as per the formula new base year average = old base year average*(new market value / old market value).

NATIONAL STOCK EXCHANGE

The NSE was incorporated in Nov, 1992 with an equity capital of Rs.25 crs. The international securities consultancy (ISC) of Hong Kong has helped in setting up NSE. ISC has prepared the detailed business plans and initialization of hardware and software systems. The promotions for NSE were financial institutions, insurances, companies, banks and SEBI capital market ltd, Infrastructure leasing and financial services ltd and stock holding corporations ltd.

It has been set up to strengthen the move towards professionalisation of the capital market as well as provide nation wide securities trading facilities to investors.

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NSE is not an exchange in the traditional sense where brokers own and manage the exchange. A two tier administrative set up involving a company board and a governing aboard of the exchange is envisaged. NSE is a national market for shares PSU bonds, debentures and government securities since infrastructure and trading facilities are provided.

NSE-NIFTY:
The NSE on Apr22, 1996 launched a new equity Index. The NSE-50. The new Index which replaces the existing NSE-100 Index is expected to serve as an appropriate Index for the new segment of future and option. NIFTY mean National Index for fifty stocks. The NSE-50 comprises fifty companies that represent 20 board industry groups with an aggregate market capitalization of around Rs 1, 70,000 crs. All companies included in the Index have a market capitalization in excess of Rs. 500 crs each and should have trade for 85% of trading days at an impact cost of less than 1.5%. The base period for the index is the close of price on Nov 3 1995, which makes one year of completion of operation of NSEs capital market segment. The base value of the index has been set at 1000.

NSE-MIDCAP INDEX:
The NSE madcap index or the junior nifty comprises 50 stocks that represent 21st board industry groups and will provide proper representation

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of the midcap segment of the Indian capital market. All stocks in the Index should have market capitalization of grate than Rs.200 crs and should have traded 85% of the trading days at an impact cost of less than 2.5%. The base period for the index is Nov 4 1996, which signifies 2 years for completion of operations of the capital market segment of the operations. The base value of the Index has been set at 1000. Average daily turn over of the present scenario 258212 (Laces) and number of average daily trades 2160(Laces). At present there are 24 stock exchanges recognized under the securities contract (regulation Act, 1956.

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COMPANY PROFILE
PROFILE OF STEELCITY SECURITIES LIMITED:

In the beginning, we have put up our centres in southern states of India and later into other parts across the country. Steel City Holding Limited (SCHL) was incorporated on August 22, 1995 as a public limited company under the Companies Act, 1956 as a group concern under the same management with the objective to carry on the SteelCity Securities Limited: The Company was incorporated on February 22, 1995 as a public limited company under the Companies Act,1956 with Registration No. 01-19521 and obtained certificate of commencement of business on April 20, 1995 from the Registrar of Companies, Andhra Pradesh at Hyderabad. The Company was incorporated with a view to carry on the business of stock broking and obtained the Trading Membership of National Stock Exchange of India Limited (NSE) on its Capital Market Segment. The first VSAT for its Trading Work Station (TWS) at Hyderabad was installed in December 1995 and the second at Visakhapatnam in April 1996. We are the one amongst the broking companies, started stock broking services to big and
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small retail clients by putting centres at towns, semi-urban and other cities. business of share broker or sub-broker or dealer to obtain membership of the one or more stock exchanges and to deal with securities, stocks, bonds, debentures whether convertible or otherwise issued to or to be issued by any Public Limited Companies or Private Limited Companies registered under the Companies Act, 1956. SCHL was not carrying any business activity and finally, amalgamated with SCSL in 2005. Steel City Capital Services Private Limited (SCCSPL), a group concern of the Company under the same Management was incorporated on October 23, 1997. SCCSPL commenced
initially its operation as sub-broker and subsequently obtained membership of the Bombay Stock Exchange (BSE).

It has than commenced operations of Future and Options in the year 2001. SCCSPL has obtained approval from SEBI for F&O trading and Trading or Clearing Member from SEBI in the year 2001 and 2004 respectively and finally amalgamated with Steel City Securities Limited in the year 2005. Steel City Insurance Agencies Private Limited (SCIAPL) was incorporated as a subsidiary of company on August 20, 2002 as a private limited company with the objective to carry on or otherwise deal in all kinds of Insurance and Assurance business. SCIAPL is a Corporate Agent of Birla Sun Life Insurance Ltd. In the year 2004, it has disinvested 60% of its shareholding with few individual investors and presently holds 40% of its equity share capital Steel City Commodities Private Limited (SCCPL) was incorporated on October 07, 2002 as one of the group company under the same management

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with a view to commence commodities broking. It has obtained Membership of National Commodity and Derivatives Exchange of India Limited (NCDEX) and Multi Commodity Exchange of India Ltd. (MCX) in the year 2003-04 and commenced operations in commodities broking.We commenced our operations as an independent provider of information ,analyses and research covering Indian business,financial markets and economy,to institutional customers. In 1998 the company has achieved the phenomental growth in all aspects.The workforce has been given top priority to meet and enhance our ehdless support and services. In 2000 we approved as a depository participant of National Security Depository Limited,subsidiary of National Stock Exchange of India Limited.After approval of NSDL we have greather advantage to our valuable customers.We follow the one-stop service providervery few trading members having this facility.

In 2001,We became the member of the Bombay Stock Exchange with the support of 25 BOLT terminals across the state by this facility.We have great opportunity to trade in low-price scripts,which facility to trade is not available in other exchanges. In 2002,We approved as a depository participant Of Central Depository Services Limited ,subsidiary of Bombay Stock Exchange,this avails intra

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depository facility to our valuable customers,this also acts as end-to-end service provider. In 2004 we (steelcity commodities private limited)became the members of NCDEL(NATIONAL COMMADITITY EXCHANGE AND DERIVATIVES EXCHANGE LIMITED),MCX(Multi Commadity Exchange of India),this membership gives to trade on commodity futures throughVSAT and internet.Commadity futures Trading Facility is extended to the associates and partners made available through 20 centres wide our Regional offices at Hyderabad,Vijaawada and Tirupati of Andhra Pradesh. Highly remunerative,Strategic business plans and our expansion all over India,mainly aimed at readily accessible network for an easy business transparency and accountability. We also came up with Private Network (VPN),this allows us to trade in all segments of NSE/BSE/MCX/NCDEX with a single VSAT connectivity,by this mode of connectivity our BPS(Business Partners) which gives greater advantage towards capital investment,Expenditure and Surveillance. Steelcity securities limited provides services like Reuters market watch with latest news and updates ,charts, trends of international markets,bullion markets and other financial news.A part from this we also provide analysis,tecnicals and fundamentals of 6000 companies for client future investment plans.

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For our successful business functioning we have effective management solutions for business promotion and expansion.We reserve best track record of intime pay-in of funds and securities to our customers every where and every time. We strictly follow the guidelines of SEBI/NSE/BSE/NSDL/CDSL to promote healthy and wealthy business

CORPORATE STRUCTURE: A)Equity brokerage services: We are member of NSE and BSE and offer secondary market broking services to our various retail customers. As on date, we have a registered client base of 36,311 nos. We offer equity and derivatives broking services through dedicated dealers and managers. All our centres are connected via VSAT, VPN and CTCL. Brokerage services are provided to active trades, retail investors and high networth investors with advisory assistance by our dedicated dealers and managers located at our centres based on technical, fundamental and market research carried out by our research team. The retail customer acquisition has seen accelerated growth owing to wide spread branch and franchisee network of the Company. B) Depository Services We are having NSDL and CDSL Depository segments to attract our clients to open their DEMAT accounts at one stop. We are ready with the trade anywhere to integrate our DP server with the Online Back-Office platform to serve more transparently. At present, we have strong base of 46,712
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registered depository participants clients and continue to increase the number of registered DPclients services due to increase in no. of centres, internet trading and quality service. C) Commodities Brokerage Services We are having accessibility to trade in two different exchanges being member of Multi Commodity Exchange (MCX) and National Commodity & Derivative Exchange (NCDEX). We also offer commodities broking through our subsidiary company i.e. Steel City Commodities Private Limited. SCCPL offer this service to its client as integrated broking services using its infrastructure for equity broking. It has an advantage of using its existing infrastructure and other support and back-up office for effective and efficient execution of these activities. D) Margin Trade Finance We being engaged in the equity broking services and one of the key elements for enhancing the volume is availability of margin amount. At present, the Company is marginally extending this facility due to limited resources. We are permitted for margin trade finance as per SEBI guidelines, which inter alia permits brokers with a minimum networth of Rs. 30 million to offer margin-trade financing facility to its customers after seeking prior approval from the stock exchange. The Company has networth of Rs. 153.28 million as on March 31, 2005 and is in a position to offer this facility to its customers and for the same, it has already put in place all the necessary systems and procedures. This would enable it to increase its trade volumes, number of clients and at the same time additional earning from this specific activity.

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E) Distribution of Financial Products We are also in the activities of distribution of mutual funds, IPO marketing and now plan to use our strength of network, customers specially high networth individuals and corporates with high liquidity for distribution of financial products including fixed income products such as bonds, corporate debentures, corporate fixed deposits etc. The Company uses its relationship with its clients for marketing IPOs where it acts as broker and also uses its centres for mobilizing retail subscription.The retail segment is set to grow for number of reasons such as significant portion of their saving comprising of financial assets, parked in bank fixed deposits, postal schemes etc, which would now require an assets reallocations as these instruments no longer yield attractive returns. Reforms in financial sector have opened up new avenues for investments. Investors generally lack a perspective on planning for the future and need to 74 allocate their saving and earning in the right proportion to address their current and future needs. Currently, there are very few and nominal investors who invest in the equity market and it is expected that number will increase in due course. With a robust capital market, remaining investors in the population class will look for a shift to equity related instruments. Over the years, investors parked their surplus investments in high yielding debt instruments with the steep reduction in interest rate, leading to a reduction in the yield on fixed

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depositsand bank deposits. Investors need to look at alternate options, which provide greater returns.

F) Distribution of Insurance products We are also in the distribution of life insurance products through our group concern Steel City Insurance Agencies Private Limited being corporate agent of Birla Sunlife Insurance Limited. We have decided to expand this activity and propose to make it a wholly owned subsidiary. We propose to act as insurance broker and for which necessary approvals would be obtained in due course. The board of directors: Mr.G.Sree Rama Murthy Managing Director. Mr.G.Raja Gopala Reddy Executive Director Mr.K.Satyanarayna Executive Director. Mr.Satish Kumar Arya Director(operations). Mr.G.Satya Ram Prasad

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Director. Asn Associate Company Secretries.

INTRODUCTION OF DERIVATIVES The emergence of the market for derivative products, most notably forwards, futures and options, can be traced back to the willingness of riskaverse economic agents to guard themselves against uncertainties arising out of fluctuations in asset prices. By their very nature, the financial markets are marked by a very high degree of volatility. Through the use of derivative products, it is possible to partially or fully transfer price risks by locking-in asset Prices. As instruments of risk management, these generally do not influence the Fluctuations in the underlying asset prices. However, by locking-in asset prices, Derivative products minimize the impact of fluctuations in asset prices on the Profitability and cash flow situation of risk-averse investors. Derivatives are risk management instruments, which derive their value from an underlying asset. The underlying asset can be bullion, index, share,
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bonds, Currency, interest, etc., Banks, Securities firms, companies and investors to hedge risks, to gain access to cheaper money and to make profit, use derivatives. Derivatives are likely to grow even at a faster rate in future. DEFINITION OF DERIVATIVES Derivative is a product whose value is derived from the value of an underlying asset in a contractual manner. The underlying asset can be equity, Forex, commodity or any other asset. Securities Contract ( regulation) Act, 1956 (SC(R) A)defines debt instrument, share, loan whether secured or unsecured, risk instrument or contract for differences or any other form of security A contract which derives its value from the prices, or index of prices, of underlying securities. HISTORY OF DERIVATIVES MARKETS Early forward contracts in the US addressed merchants concerns about ensuring that there were buyers and sellers for commodities. However credit risk remained a serious problem. To deal with this problem, a group of Chicago; businessmen formed the Chicago Board of Trade (CBOT) in 1848. The primary intention of the CBOT was to provide a centralized location known In advance for buyers and sellers to negotiate forward contracts. In 1865, the CBOT went one step further and listed the first exchange traded derivatives Contract in the US; these contracts were called futures contracts. In 1919, Chicago Butter and Egg Board, a

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spin-off CBOT was reorganized to allow futures trading. Its name was changed to Chicago Mercantile Exchange (CME). The CBOT and the CME remain the two largest organized futures exchanges, indeed the two largest financial exchanges of any kind in the world today. The first stock index futures contract was traded at Kansas City Board of Trade. Currently the most popular stock index futures contract in the world is based on S&P 500 index, traded on Chicago Mercantile Exchange. During the Mid eighties, financial futures became the most active derivative instruments Generating volumes many times more than the commodity futures. Index futures, futures on T-bills and Euro-Dollar futures are the three most popular Futures contracts traded today. Other popular international exchanges that trade derivatives are LIFFE in England, DTB in Germany, SGX in Singapore, TIFFE in Japan, MATIF in France, Eurex etc., THE GROWTH OF DERIVATIVES MARKET Over the last three decades, the derivatives markets have seen a phenomenal growth. A large variety of derivative contracts have been launched at exchanges across the world. Some of the factors driving the growth of financial derivatives are: Increased volatility in asset prices in financial markets, Increased integration of national financial markets with the international markets, Marked improvement in communication facilities and sharp decline in their costs,

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 Development of more sophisticated risk management tools, providing economic agents a wider choice of risk management strategies, and Innovations in the derivatives markets, which optimally combine the risks and returns over a large number of financial assets leading to higher returns, reduced risk as well as transactions costs as compared to individual financial assets.

DERIVATIVE PRODUCTS (TYPES) The following are the various types of derivatives. They are: Forwards: A forward contract is a customized contract between two entities, where settlement takes place on a specific date in the future at todays pre-agreed price. Futures: A futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. Futures contracts are special types of forward contracts in the sense that the former are standardized exchange-traded contracts. Options: Options are of two types-calls and puts. Calls give the buyer the right but not the obligation to buy a given quantity of the underlying asset, at a given price on or before a given future date. Puts give the buyer the right, but not
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the obligation to sell a given quantity of the underlying asset at a given price on or before a given date. Warrants: Options generally have lives of upto one year; the majority of options traded on options exchanges having a maximum maturity of nine months. Longer-dated options are called warrants and are generally traded Over-thecounter Leaps: The acronym LEAPS means Long-Term Equity Anticipation Securities. These are options having a maturity of upto three years. Baskets: Basket options are options on portfolio of underlying assets. index options are a form of basket options. Swaps: Swaps are private agreement between two parties to exchange cash flows in the future according to a prearranged formula. They can be regarded as portfolios of forward contracts. PARTICIPANTS IN THE DERRIVATIVES MARKETS The following three broad categories of participants: HEDGERS: Hedgers face risk associated with the price of an asset. They use futures or options markets to reduce or eliminate this risk. The underlying asset is usually a moving average of a basket of assets. Equity

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SPECULATORS: Speculators wish to bet on future movements in the price of an asset. Futures and options contracts can give them an extra leverage; that is, they can increase both the potential gains and potential losses in a speculative venture. ARBITRAGEURS: Arbitrageurs are in business to take advantage of a discrepancy between prices in two different markets. If, for example they see the futures prices of an asset getting out of line with the cash price, they will take offsetting positions in the two markets to lock in a profit. FUNCTIONS OF THE DERIVATIVES MARKET In spite of the fear and criticism with which the derivative markets are commonly looked at, these markets perform a number of economic functions. Price in an organized derivative markets reflect the perception of market participants about the future and lead the prices of underlying to the perceived future level. The prices of derivatives converge with the prices of the underlying at the Expiration of the derivative contract. Thus derivatives help in discovery of future as well as current prices. The derivative markets helps to transfer risks from those who have them but may not like them to those who have an appetite for them.

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 Derivative due to their inherent nature, are linked to the underlying cash markets. With the introduction of derivatives, the underlying market witness higher trading volumes because of participation by more players who would not otherwise participate for lack of an arrangement to transfer risk. Speculative trades shift to a more controlled environment of derivatives market. In the absence of an organized derivatives market, speculators trade in the underlying cash markets. Margining, monitoring and surveillance of the activities of various participants become extremely difficult in these kinds of mixed markets. INTRODUCTION OF FUTURES Futures markets were designed to solve the problems that exist in forward markets. A futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. But unlike forward contract, the futures contracts are standardized and exchange traded. To facilitate liquidity in the futures contract, the exchange specifies certain standard features of the contract. It is standardized contract with standard underlying instrument, a standard quantity and quality of the underlying instrument that can be delivered, (Or which can be used for reference purpose in settlement) and a standard timing of such settlement. A futures contract may be offset prior to maturity by entering into an equal and opposite transaction. More than 90% of futures transactions are offset this way. The standardized items in a futures contract are:
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 Quantity of the underlying Quality of the underlying The date and the month of delivery The units of price quotation and minimum price change DEFINATION A Futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. Futures contracts are special types of forward contracts in the sense that the former are standardized exchange-traded contracts. HISTORY OF FUTURES Merton Miller, the 1990 Nobel Laureate had said that financial futures represent the most significant financial innovation of the last twenty years. The first exchange that traded financial derivatives was launched in Chicago in the year 1972. traded currency futures. A division of the Chicago Mercantile Exchange, it was called the international monetary market (IMM) and The brain behind this was a man called Leo Melamed, acknowledged as the father of financial futures who was then the Chairman of the Chicago Mercantile Exchange. Before IMM opened in 1972, the Chicago Mercantile Exchange sold contracts whose value was counted in millions. By 1990, the underlying value of all contracts traded at the Chicago Mercantile Exchange totaled 50 trillion dollars. These currency futures paved the way for the successful marketing of a dizzying array of similar products at the Chicago Mercantile Exchange, the Location of settlement

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Chicago Board of Trade and the Chicago Board Options Exchange. By the 1990s, these exchanges were trading futures and options on everything from Asian and American stock indexes to interest-rate swaps, and their success transformed Chicago almost overnight into the risk-transfer capital of the world. DISTINCTION BETWEEN FUTURES AND FORWARDS CONTRACTS Forward contracts are often confused with futures contracts. The confusion is primarily because both serve essentially the same economic functions of allocating risk in the presence of futures price uncertainty. However futures are a significant improvement over the forward contracts as they eliminate counterparty risk and offer more liquidity. Comparison between two as follows:

FUTURES

FORWARDS

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1.Trade

on

an 1. OTC in nature 2.Customized contract terms 3. hence less liquid 4. No margin payment 5. Settlement happens at end of period

Organized Exchange 2.Standardized contract terms 3. hence more liquid 4. Requires margin payment 5. Follows daily Settlement

Table 3.1

FEATURES OF FUTURES Futures are highly standardized. The contracting parties need not pay any down payment. Hedging of price risks. They have secondary markets to. TYPES OF FUTURES On the basis of the underlying asset they derive, the futures are divided into two types: Stock Futures
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Index Futures PARTIES IN THE FUTURES CONTRACT There are two parties in a futures contract, the buyers and the seller. The buyer of the futures contract is one who is LONG on the futures contract and the seller of the futures contract is who is SHORT on the futures contract. The pay-off for the buyers and the seller of the futures of the contracts are as follows:

PAY-OFF FOR A BUYER OF FUTURES

PROFIT

LOSS

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Figure 3.2

CASE 1:- The buyers bought the futures contract at (F); if the futures Price Goes to E1 then the buyer gets the profit of (FP). CASE 2:- The buyers gets loss when the futures price less then (F); if The Futures price goes to E2 then the buyer the loss of (FL).

PAY-OFF FOR A SELLER OF FUTURES

P PROFIT

E E

F LOSS L

37

Figure 3.3 F = FUTURES PRICE E1, E2 = SATTLEMENT PRICE CASE 1:- The seller sold the future contract at (F); if the future goes to E1 Then the seller gets the profit of (FP). CASE 2:- The seller gets loss when the future price goes greater than (F); If the future price goes to E2 then the seller get the loss of (FL).

MARGINS Margins are the deposits which reduce counter party risk, arise in a futures contract. These margins are collect in order to eliminate the counter party risk. There are three types of margins: Initial Margins:Whenever a future contract is signed, both buyer and seller are required to post initial margins. Both buyers and seller are required to make security deposits that are intended to guarantee that they will infect be able to fulfill their obligation. These deposits are initial margins and they are often referred as purchase price of futures contract. Mark to market margins:-

38

The process of adjusting the equity in an investors account in order to reflect the change in the settlement price of futures contract is known as MTM margin. Maintenance margin:The investor must keep the futures account equity equal to or grater than certain percentage of the amount deposited as initial margin. If the equity goes less than that percentage of initial margin, then the investor receives a call for an additional deposit of cash known as maintenance margin to bring the equity up to the initial margin.

ROLE OF MARGINS The role of margins in the futures contract is explained in the following example: Siva Rama Krishna sold an ONGC July futures contract to Nagesh at Rs.600; the following table shows the effect of margins on the Contract. The contract size of ONGC is 1800. The initial margin amount is say Rs. 30,000 the maintenance margin is 65% of initial margin.

PRICING FUTURES Pricing of futures contract is very simple. Using the cost-of-carry logic, we calculate the fair value of a future contract. Every time the observed price deviates from the fair value, arbitragers would enter into trades to
39

captures the arbitrage profit. This in turn would push the futures price back to its fair value. The cost of carry model used for pricing futures is given below. F = SerT Where: F S r T e = = = = = Futures price Spot Price of the Underlying Cost of financing (using continuously compounded Interest rate) Time till expiration in years 2.71828 (OR)

F = S (1+r- q) t Where: F S r q t = = = = = Futures price Spot price of the underlying Cost of financing (or) interest Rate Expected dividend yield Holding Period FUTURES TERMINOLOGY Spot price: The price at which an asset trades in the spot market.
40

Futures Price: The price at which the futures contract trades in the futures market. Contract cycle: The period over which a contract trades. The index futures contracts on the NSE have one-month and three-month expiry cycles which expire on the last Thursday of the month. Thus a January expiration contract expires on the last Thursday of January and a February expiration contract ceases trading on the last Thursday of February. On the Friday following the last Thursday, a new contract having a three-month expiry is introduced for trading. Expiry date: It is the date specified in the futures contract. This is the last day on which the contract will be traded, at the end of which it will cease to exist. Contract size: The amount of asset that has to be delivered under one contract. For instance, the contract size on NSEs futures markets is 200 Nifties. Basis: In the context of financial futures, basis can be defined as the futures price minus the spot price. These will be a different basis for each delivery month for each contract. In a normal market, basis will be positive. This reflects that futures prices normally exceed spot prices. Cost of carry: The relationship between futures prices and spot prices can be summarized in terms of what is known as the cost of carry. This measures

41

the storage cost plus the interest that is paid to finance the asset less the income earned on the asset. Initial margin: The amount that must be deposited in the margin account at the time a futures contract is first entered into is known as initial margin. Marking-to-market: In the futures market, at the end of each trading day, the margin account is adjusted to reflect the investors gain or loss depending upon the futures closing price. This is called marking-to-market. Maintenance margin: This is some what lower than the initial margin. This is set to ensure that the balance in the margin account never becomes negative. If the balance in the margin account falls below the maintenance margin, the investor receives a margin call and is expected to top up the margin account to the initial margin level before trading commences on the next day. INTRODUCTION TO OPTIONS In this section, we look at the next derivative product to be traded on the NSE, namely options. Options are fundamentally different from forward and futures contracts. An option gives the holder of the option the right to do something. The holder does not have to exercise this right. In contrast, in a forward or futures contract, the two parties have committed themselves to doing something. Whereas it costs nothing (except margin requirement) to enter into a futures contracts, the purchase of an option requires as upfront payment. DEFINITION
42

Options are of two types- calls and puts. Calls give the buyer the right but not the obligation to buy a given quantity of the underlying asset, at a given price on or before a given future date. Puts give the buyers the right, but not the obligation to sell a given quantity of the underlying asset at a given price on or before a given date. HISTORY OF OPTIONS Although options have existed for a long time, they wee traded OTC, without much knowledge of valuation. The first trading in options began in Europe and the US as early as the seventeenth century. It was only in the early 1900s that a group of firms set up what was known as the put and call Brokers and Dealers Association with the aim of providing a mechanism for bringing buyers and sellers together. If someone wanted to buy an option, he or she would contact one of the member firms. The firms would then attempt to find a seller or writer of the option either from its own clients of those of other member firms. If no seller could be found, the firm would undertake to write the option itself in return for a price. This market however suffered form two deficiencies. First, there was no secondary market and second, there was no mechanism to guarantee that the writer of the option would honor the contract. In 1973, Black, Merton and scholes invented the famed Black-Scholes formula. In April 1973, CBOE was set up specifically for the purpose of trading options. The market for option developed so rapidly that by early 80s, the number of shares underlying the option contract sold each day exceeded the daily volume of shares traded on the NYSE. Since then, there has been no looking back.

43

Option made their first major mark in financial history during the tulipbulb mania in seventeenth-century Holland. It was one of the most spectacular get rich quick binges in history. The first tulip was brought Into Holland by a botany professor from Vienna. Over a decade, the tulip became the most popular and expensive item in Dutch gardens. The more popular they became, the more Tulip bulb prices began rising. That was when options came into the picture. They were initially used for hedging. By purchasing a call option on tulip bulbs, a dealer who was committed to a sales contract could be assured of obtaining a fixed number of bulbs for a set price. Similarly, tulip-bulb growers could assure themselves of selling their bulbs at a set price by purchasing put options. Later, however, options were increasingly used by speculators who found that call options were an effective vehicle for obtaining maximum possible gains on investment. As long as tulip prices continued to skyrocket, a call buyer would realize returns far in excess of those that could be obtained by purchasing tulip bulbs themselves. The writers of the put options also prospered as bulb prices spiraled since writers were able to keep the premiums and the options were never exercised. The tulip-bulb market collapsed in 1636 and a lot of speculators lost huge sums of money. Hardest hit were put writers who were unable to meet their commitments to purchase Tulip bulbs. PROPERTIES OF OPTION Options have several unique properties that set them apart from other securities. The following are the properties of option: Limited Loss High leverages potential
44

 Limited Life PARTIES IN AN OPTION CONTRACT There are two participants in Option Contract. Buyer/Holder/Owner of an Option: The Buyer of an Option is the one who by paying the option premium buys the right but not the obligation to exercise his option on the seller/writer. Seller/writer of an Option: The writer of a call/put option is the one who receives the option premium and is thereby obliged to sell/buy the asset if the buyer exercises on him.

TYPES OF OPTIONS The Options are classified into various types on the basis of various variables. The following are the various types of options. 1. On the basis of the underlying asset: On the basis of the underlying asset the option are divided in to two types: Index options: These options have the index as the underlying. options contracts are also cash settle
45

Some options are

European while others are American. Like index futures contracts, index

Stock options: Stock Options are options on individual stocks. Options currently trade on over 500 stocks in the United States. A contract gives the holder the right to buy or sell shares at the specified price. 2. On the basis of the market movements : On the basis of the market movements the option are divided into two types. They are: Call Option: A call Option gives the holder the right but not the obligation to buy an asset by a certain date for a certain price. It is brought by an investor when he seems that the stock price moves upwards. Put Option: A put option gives the holder the right but not the obligation to sell an asset by a certain date for a certain price. It is bought by an investor when he seems that the stock price moves downwards. 3. On the basis of exercise of option: On the basis of the exercise of the Option, the options are classified into two Categories. American Option: American options are options that can be exercised at any time up to the expiration date. Most exchange traded options are American. European Option: European options are options that can be exercised only on the expiration date itself. European options are easier to analyze than American options, and properties of an American option are frequently deduced from those of its European counterpart.
46

PAY-OFF PROFILE FOR BUYER OF A CALL OPTION The Pay-off of a buyer options depends on a spot price of an underlying asset. The following graph shows the pay-off of buyers of a call option.

PROFIT ITM

S ATM E
1

OTM

LOSS

Figure 3.4 S = Strike price ITM = In the Money Sp = premium/loss ATM = At the Money E1 = Spot price 1 OTM = Out of the Money E2 = Spot price 2 SR = Profit at spot price E1 CASE 1: (Spot Price > Strike price) As the Spot price (E1) of the underlying asset is more than strike price (S). The buyer gets profit of (SR), if price increases more than E1 then profit also increase more than (SR) CASE 2: (Spot Price < Strike Price)

47

As a spot price (E2) of the underlying asset is less than strike price (S) The buyer gets loss of (SP); if price goes down less than E2 then also his loss is limited to his premium (SP)

PAY-OFF PROFILE FOR SELLER OF A CALL OPTION The pay-off of seller of the call option depends on the spot price of the underlying asset. The following graph shows the pay-off of seller of a call option:

48

PROFIT P

ITM

ATM

S OTM

R LOSS

Figure 3.5 S= Strike price ITM = In the Money SP = Premium / profit ATM = At The money E1 = Spot Price 1 OTM = Out of the Money E2 = Spot Price 2 SR = loss at spot price E2 CASE 1: (Spot price < Strike price) As the spot price (E1) of the underlying is less than strike price (S). The seller gets the profit of (SP), if the price decreases less than E1 then also profit of the seller does not exceed (SP).

CASE 2: (Spot price > Strike price) As the spot price (E2) of the underlying asset is more than strike price (S) the Seller gets loss of (SR), if price goes more than E2 then the loss of the seller also increase more than (SR).

49

PAY-OFF PROFILE FOR BUYER OF A PUT OPTION The Pay-off of the buyer of the option depends on the spot price of the underlying asset. The following graph shows the pay-off of the buyer of a call option.

PROFIT ITM

S E ATM OTM

LOSS

S= SP = E1 = E2 = SR =

Figure 3.6 Strike price ITM = In the Money Premium / loss ATM = At the Money Spot price 1 OTM = Out of the Money Spot price 2 Profit at spot price E1

CASE 1: (Spot price < Strike price) As the spot price (E1) of the underlying asset is less than strike price (S). The buyer gets the profit (SR), if price decreases less than E1 then profit also increases more than (SR). CASE 2: (Spot price > Strike price)
50

As the spot price (E2) of the underlying asset is more than strike price (S), The buyer gets loss of (SP), if price goes more than E2 than the loss of the buyer is limited to his premium (SP). PAY-OFF PROFILE FOR SELLER OF A PUT OPTION The pay-off of a seller of the option depends on the spot price of the underlying asset. The following graph shows the pay-off of seller of a put option.

PROFIT P ITM E
1

ATM S R LOSS E
2

OTM

Figure 3.7 S = Strike price ITM = In the Money SP = Premium/profit ATM = At the Money E1 = Spot price 1 OTM = Out of the Money E2 = Spot price 2 SR = Loss at spot price E1 CASE 1: (Spot price < Strike price) As the spot price (E1) of the underlying asset is less than strike price (S), the seller gets the loss of (SR), if price decreases less than E1 than the loss also increases more than (SR).
51

CASE 2: (Spot price > Strike price) As the spot price (E2) of the underlying asset is more than strike price (S), the seller gets profit of (SP), of price goes more than E2 than the profit of seller is limited to his premium (SP). FACTORS AFFECTING THE PRICE OF AN OPTION The following are the various factors that affect the price of an option they are: Stock Price: The pay-off from a call option is an amount by which the stock price exceeds the strike price. Call options therefore become more valuable as the stock price increases and vice versa. The pay-off from a put option is the amount; by which the strike price exceeds the stock price. Put options therefore become more valuable as the stock price increases and vice versa. Strike price: In case of a call, as a strike price increases, the stock price has to make a larger upward move for the option to go in-the money. Therefore, for a call, as the strike price increases option becomes less valuable and as strike price decreases, option become more valuable.

Time to expiration: Both put and call American options become more valuable as a time to expiration increases. Volatility: The volatility of a stock price is measured of uncertain about future stock price movements. As volatility increases, the chance that the stock will do
52

very well or very poor increases. The value of both calls and puts therefore increases as volatility increase. Risk- free interest rate: The put option prices decline as the risk-free rate increases where as the price of call always increases as the risk-free interest rate increases. Dividends: Dividends have the effect of reducing the stock price on the X- dividend rate. This has a negative effect on the value of call options and a positive effect on the value of put options. PRICING OPTIONS An option buyer has the right but not the obligation to exercise on the seller. The worst that can happen to a buyer is the loss of the premium paid by him. His downside is limited to this premium, but his upside is potentially unlimited. This optionality is precious and has a value, which is expressed in terms of the option price. Just like in other free markets, it is the supply and demand in the secondary market that drives the price of an option. There are various models which help us get close to the true price of an option. Most of these are variants of the celebrated Black- Scholes model for pricing European options. Today most calculators and spread-sheets come with a built-in Black- Scholes options pricing formula so to price options we dont really need to memorize the formula. All we need to know is the variables that go into the model.

53

The Black-Scholes formulas for the price of European calls and puts on a non-dividend paying stock are: OPTIONS TERMINOLOGY Option price/premium: Option price is the price which the option buyer pays to the option seller. It is also referred to as the option premium. Expiration date: The date specified in the options contract is known as the expiration date, the exercise date, the strike date or the maturity. Strike price: The price specified in the option contract is known as the strike price or the exercise price.

DISTINCTION BETWEEN FUTURES AND OPTIONS

54

FUTURES 1. Exchange traded, with Novation 2. Exchange defines the product 3. Price is zero, strike price moves 4. Price is Zero 5. Linear payoff 6. Both long and short at risk

OPTIONS 1. Same as futures 2. Same as futures 3. Strike price is fixed, price moves 4. Price is always positive 5. Nonlinear payoff 6. Only short at risk

Table 3.9 CALL OPTION PREMIUM INTRINSIC TIME TOTAL CONTRACT VALUE VALUE VALUE 0 2 2 OUT OF 0 5 5 THE 0 10 10 MONEY

STRIKE PRICE 560 540 520

55

500 480 460 440

0 20 40 60

15 10 5 2 Table 3.10

15 30 45 62

AT THE MONEY IN THE MONEY

PUT OPTION

STRIKE PRICE
560 540 520

PREMIUM
INTRINSIC VALUE 60 40 20 TIME VALUE 2 5 10 TOTAL VALUE 62 45 30

CONTRACT
IN THE MONEY AT THE MONEY OUT OF THE MONEY

500 480 460 440

0 0 0 0

15 10 5 2

15 10 5 2

Table 3.11

PREMIUM = INTRINSIC VALUE + TIME VALUE The difference between strike values is called interval

56

TRADING INTRODUCTION The futures & Options trading system of NSE, called NEAT-F&O trading system, provides a fully automated screen-based trading for Nifty futures & options and stock futures & Options on a nationwide basis as well as an online monitoring and surveillance mechanism. It supports an order driven market and provides complete transparency of trading operations. It is similar to that of trading of equities in the cash market segment. The software for the F&O market has been developed to facilitate efficient and transparent trading in futures and options instruments. Keeping in view the familiarity of trading members with the current capital market trading system, modifications have been performed in the existing capital market trading system so as to make it suitable for trading futures and options. On starting NEAT (National Exchange for Automatic Trading) Application, the log on (Pass Word) Screen Appears with the Following Details. 1) User ID 2) Trading Member ID
57

3) Password NEAT CM (default Pass word) 4) New Pass Word

Note: - 1) User ID is a Unique 2) Trading Member ID is Unique & Function; it is Common for all user of the Trading Member 3) New password Minimum 6 Characteristic, Maximum 8 characteristics only 3 attempts are accepted by the user to enter the password to open the Screen 4) If password is forgotten the User required to inf orm the Exchange in writing to reset the Password. BASKET TRADING SYSTEM 1) Taking advantage for easy arbitration between future market and & cash market difference, NSE introduce basket trading system by off setting positions through off line-order-entry facility. 2) Orders are created for a selected portfolio to the ratio of their market Capitalization from 1 lake to 30 crores. 1)
2)

Offline-order-entry facility: - generate order file in as specified format out side the system & up load the order file in to the system by invoking this facility in Basket trading system.

58

TRADING NETWORK

59

Fig

HUB ANTENNA

SATELLITE

NSE MAIN FRAME

BROKERS PREMISES

ure 3.12

Participants in Security Market

60

1) 2) 3) 4) 5)

Stock Exchange (registered in SEBI)-23 Stock Exchanges Depositaries (NSDL,CDSL)-2 Depositaries Listed Securities-9,413 Registered Brokers-9,519 FIIs-502 Highest Investor Population State Maharastra Gujarat Delhi Tamilnadu West Bangal Andhra Pradesh Total No. Investors 9.11 Lakhs 5.36 Lakhs 3.25 Lakhs 2.30 Lakhs 2.14 Lakhs 1.94 Lakhs % of Investors in India 28.50 16.75 10.10% 7.205 6.75% 6.05%

Table 3.13

61

62

LOT SIZES OF SELECTED COMPANIES FOR ANALYSIS

CODE

LOT SIZE

COMPANY NAME

ICICI

250

Industrial Credit & Investment Corporation of India

ACC

376

Associates Cement Companies Ltd.

GMR

2500

GMR INFRASTRUCTURE Ltd.

BHEL

150

Bharat Heavy Electrical Ltd.

The following tables explain about the table that took place in futures and options between 31/01/10 to 26/03/10. The table has various columns, which explains various factors involved in derivative trading. Date the day on which the trading took place. Closing premium Premium for that day. Open interest- No. of options that did not get exercised. Traded Quantity No. of futures and options traded on that day. N.O.C No. of contracts traded on that day. Closing PriceThe price of the futures at the end of the trading day.

63

Spot parities relation to dividends. Calculation of rate of return

ANLYSIS AND INTERPRETATION:

FUTURES:

Futures are legally binding agreement to buy or sell an asset at a certain time in the future at a certain price.

FORMULA:

Fo = So (1+r-d)

So = closing price of a market on that day.

r = Rate of return d = Dividend

T = Time period

64

FUTURES OF ICICI BANK

Table: 4.1

DATE (DD/MM/YY) 29/01/10 01/02/10 02 /02/10 03/02/10 04 /02/10 05/02/10 08/02/10 10/02/10 15/02/10 16/02/10

High Rs 837.00 847.00 839.50 844.00 855.00 810.00 818.90 819.00 825.00 837.50

Low Rs 777.10 813.30 813.05 820.50 823.10 789.00 783.30 795.55 811.50 816.75

Close Rs 827.65 831.90 815.50 835.90 825.90 796.20 805.50 798.95 816.15 833.50

Open Int ('000) 780.25 815.00 839.00 825.00 838.00 810.00 802.00 815.10 823.00 819.65

Trd Qty ('000) 14200 5600 6500 5400 6000 5700 6500 6100 3000 3300

N.O.C. 4059 16142 18617 15472 17185 16375 18472 17346 8498 5409

FO 114970 47015 53706 45173 50229 45777 51899 48970 24328 1585

65

17/02/10 18/02/10 19/02/10 22/02/10 23/02/10 24/02/10 25/02/10 26/02/10 02/03/10 04/03/10 05/03/10 08/03/10 09/03/10 10/03/10 11/03/10 17/03/10 18/03/10 23/03/10 26/03/10

847.80 851.30 837.00 848.00 849.50 845.00 854.40 887.80 901.60 912.50 907.95 925.95 930.35 928.65 934.40 954.70 964.70 946.40 956.10

801.55 834.15 815.00 828.55 828.00 833.70 832.35 843.50 885.70 888.55 895.5 912.65 906.35 908.25 912.10 936.25 948.00 923.10 933.10

837.55 839.30 830.70 831.60 844.55 840.25 851.85 872.50 889.00 898.15 903.50 923.50 921.40 918.50 933.50 949.25 961.35 927.15 951.60

801.55 837.10 825.00 837.95 828.00 826.20 843.80 850.80 889.89 905.00 905.00 915.00 924.00 920.90 912.10 937.90 955.00 941.00 933.10

6200 6800 6000 4500 6300 4500 5800 9800 5200 5300 4600 6000 6000 6200 4900 6100 6200 6000 5100

17689 19510 17182 12824 18070 12874 16435 28009 14971 15199 13091 13090 17206 17837 14021 17546 17572 17242 14531

51968 57467 49702 37743 53276 37852 48345 85118 46874 47847 41293 55036 55389 57342 45404 58134 58848 56256 48043

The above table has been given in the following graph.

Picture 4.2

FUTURES OF ICICI BANK

66

Source:
The data has been collected BUSINESS STANDARDS (paper) and Online Trading of KOTAK SECURITIES.

FUTURES OF ACC CEMENTS

Table: 4.3

67

Date dd/mm/yy 29/01/10 01/02/10 02 /02/10 03/02/10 04 /02/10 05/02/10 08/02/10 10/02/10 15/02/10 16/02/10 17/02/10 18/02/10 19/02/10 22/02/10 23/02/10 24/02/10 25/02/10 26/02/10 02/03/10 04/03/10 05/03/10 08/03/10 09/03/10 10/03/10 11/03/10 17/03/10 18/03/10

High Rs

Low Rs 861.60 863.00 870.00 874.00 848.60 825.25 830.00 865.00 875.30 871.55 911.00 905.00 890.55 900.00 900.00 888.10 895.20 892.00 913.05 927.70 940.10 955.00 972.35 975.00 981.40 951.40 944.00

Close Rs 872.30 875.80 873.60 885.05 856.85 842.65 844.45 868.00 877.55 914.75 915.15 908.50 899.65 903.85 904.75 903.20 919.15 912.05 948.60 944.50 955.30 979.25 976.55 998.80 986.40 954.20 961.50

Open Int ('000) 862.2 868.75 878.00 881.10 886.00 836.30 844.00 876.05 887.40 878.00 923.90 916.00 904.80 903.00 903.80 903.80 902.50 909.10 920.10 936.50 940.10 962.30 980.20 975.50 1001.90 962.90 944.00

Trd Qty ('000) 81 61 1000 700 1300 900 600 900 400 1100 700 400 800 800 600 1200 1100 800 1600 1000 1200 1600 1000 1400 900 1100 700 2241 1500 2774 1820 3489 2381 1605 2293 1055 3043 1935 968 2120 2020 1600 3297 2835 2097 4152 2709 3074 4208 2610 3684 2349 2945 1913 7382 4943 9190 6063 11437 7491 5092 7534 3495 10295 6696 3312 7177 6921 5467 11170 9654 7168 14714 9559 11115 15359 9651 13774 8743 10693 6893 N.O.C. FO

887.90 883.00 896.00 895.00 888.40 850.85 856.65 882.65 889.80 919.00 930.80 918.50 913.90 921.00 914.80 911.60 921.00 919.00 959.20 949.00 974.00 987.00 992.85 1003.50 1001.90 978.50 964.80

68

23/03/10 26/03/10

968.60 947.70

952.15 922.65

958.65 944.30

964.00 922.65

1300 500

3547 1422

12780 5046

The above table has been given in the following graph. Picture 4.4

FUTURES OF ACC CEMENTS

Source: The data has been collected BUSINESS STANDARDS

(paper) and Online Trading of KOTAK SECURITIES.

INTERPRETATION:
It is observed from the above mentioned table that the future price (Fo) has increased tremendously due to increase in closing price, decrease in open interest and reduction in value and volume of futures.

69

FUTURES OF GMR INFRASTRUCTURE Ltd.

Table 4.5

DATE DD/MM/YY 29/01/10 01/02/10 02/02/10 03/02/10 04/02/10 05/02/10 08/02/10 10/02/10 15/02/10 16/02/10 17/02/10 18/02/10 19/02/10 22/02/10 23/02/10 24/02/10 25/02/10 26/02/10 02/03/10 04/03/10 05/03/10 08/03/10 09/03/10 10/03/10 11/03/10 17/03/10 18/03/10 23/03/10 26/03/10

High Rs 60.50 61.85 61.90 60.05 58.60 53.10 56.80 56.75 56.20 56.85 57.50 58.75 56.10 55.95 55.85 55.75 55.60 55.80 55.65 59.00 59.60 59.70 58.60 57.95 58.15 59.10 59.60 58.15 61.40

Low Rs 58.00 59.00 58.90 58.30 54.70 50.35 53.85 54.50 55.20 54.65 56.15 55.35 54.40 54.40 54.35 54.55 52.90 53.40 54.50 57.75 58.25 58.10 57.00 56.80 57.05 57.85 58.00 57.45 60.50

Close Rs 60.20 61.15 59.35 58.70 55.00 52.50 56.30 55.20 55.50 56.45 56.55 55.55 54.80 54.90 55.60 55.30 53.45 54.65 55.45 58.20 58.90 58.40 57.25 57.60 57.50 58.20 59.15 57.85 60.85

Open Int ('000) 59.00 89.50 61.75 59.90 58.45 52.60 55.00 56.40 55.55 55.75 57.05 56.60 54.80 55.70 54.75 54.55 55.60 54.00 55.10 58.70 58.40 59.45 58.45 57.30 57.60 58.55 58.50 57.60 60.50

Trd Qty ('000) 8600 4300 4200 9200 12800 19600 9800 6100 3600 4200 5500 4900 19900 12700 17300 13000 16600 8800 4300 5500 7600 3200 3500 2700 3100 8700 11300 11800 5100

N.O.C. 3445 1716 1681 3669 5120 7855 3934 2439 1458 1665 2216 1942 7955 5060 6917 5190 6652 3508 1701 2193 3051 1287 189 110 1222 1512 2755 4703 2045

FO 5106 2604 2544 5431 7230 10149 5461 3417 2027 2317 3144 2714 10983 6993 9521 7182 8974 4824 2348 3201 4492 1895 1988 1545 1759 5089 6641 6772 3119

The above table has been given in the following graph. 70

Picture 4.6

FUTURES OF GMR INFRASTRUCTURE Ltd.

Source: The data has been collected BUSINESS STANDARDS (paper) and Online Trading of KOTAK SECURITIES.

INTERPRETATION:
The above graph shows that the future price (Fo) has been decrease due to decrease in closing price and decrease in open interest and it is observed that increase in volume and value.

71

FUTURES OF BHEL
Table 4.7

Date dd/mm/yy 29/01/10 01/02/10 02/02/10 03/02/10 04/02/10 05/02/10 08/02/10 10/02/10 15/02/10 16/02/10 17/02/10 18/02/10 19/02/10 22/02/10 23/02/10 24/02/10 25/02/10 26/02/10 02/03/10 04/03/10 05/03/10 08/03/10 09/03/10 10/03/10

High Rs 2401.75 2425.00 2403.00 2400.80 2388.00 2350.00 2337.00 2357.00 2368.50 2397.20 2417.50 2387.00 2388.10 2393.40 2388.70 2383.40 2386.20 2417.90 2457.35 2460.00 2477.95 2461.50 2453.80 2463.00

Low Rs 2293.00 2378.00 2352.00 2364.00

Close Rs 2390.85 2386.00 2365.70 2384.85

Open Int ('000) 2305.00 2387.50 2394.70 2385.00 2385.00 2299.00 2288.00 2352.00 2340.00 2359.70 2402.00 2385.00 2350.05 2389.00 2345.05 2370.00 2359.00 2370.35 2380.00 2432.00 2461.2 2452.55 2428.00 2430.00

Trd Qty ('000) 1000 700 700 500 400 600 500 500 500 800 500 300 400 1200 800 1200 500 700 1000 400 800 400 300 800 6792 4766 4825 3421 2491 4298 3069 3462 3145 5005 3193 1695 2335 8105 5292 8040 3135 4729 6704 2756 5074 2642 2258 5436 24073 17161 17207 12249 8850 14843 10598 12011 11098 17829 11452 6040 8251 28848 18832 28473 11106 16901 24427 10108 18687 9679 8262 19910 N.O.C. FO

2352.50 2360.10 2277.55 2287.90 2258.00 2325.85 2290.00 2300.85 2334.00 2349.75 2352.25 2386.95 2378.10 2388.95 2365.30 2374.85 2340.00 2355.65 2311.35 2347.05 2343.65 2379.60 2346.00 2357.50 2330.00 2378.00 2340.00 2354.05 2380.00 2436.25 2430.00 2453.65 2427.00 2436.65 2427.00 2334.85 2421.00 2426.80 2415.00 2435.45

72

11/03/10 17/03/10 18/03/10 23/03/10 26/03/10

2442.90 2412.50 2395.80 2369.60 2411.90

2416.00 2432.35 2383.45 2387.55 2381.00 2388.60 2345.55 2362.80 2362.00 2370.15

2434.00 2399.00 2388.45 2358.80 2390.10

400 1000 300 800 500

2793 6455 2213 5126 3378

10180 23235 7928 18151 12076

The above table has been given in the following graph.

Picture 4.8

FUTURES OF BHEL

Source: The data has been collected BUSINESS STANDARDS (paper) and Online Trading of KOTAK SECURITIES.

73

COMPANY NAME ICICI ACC GMR BHEL

26/3 /10 14531 1422 2045 3378

29/1/1 0 4059 2241 3445 6792

INTERPRETATION:

From the above mentioned table it is observed that the future price (Fo) has shown fluctuation due to fluctuation in closing price and volume, value is increase and it is observed that open interest is decrease.

Comparison of 4 companies in no of contracts traded on that days

74

No .of contracts
16000 14000 12000 10000 8000 6000 4000 2000 0 ICICI ACC GMR BHEL 29/1/10 26/3/10

INTREPRETATAION : In the above table comparison of 4 companies the ICICI company trading 29/1/2010 (4059) it is increased to the 26/3/10(14531).so ICICI BANK is best one to compare the others.

OPTIONS: Options are two types. They are CALL OPTION and PUT OPTION

CALL OPTION : A Call option is bought by an investor when he seems that the stock price moves upwards. A call option gives the

75

holder of the option the right but not the obligation to buy an asset by an certain date for a certain price.

PUT OPTION :

A Put option is bought by an investor when he seems that the stock price moves downwards. A put option gives the holder of the option the right but not the obligation to sell asset by an certain date for a certain price.

Formula:

Profit of the holder Premium*

(Spot

Price

Strike

Price)

(Lot Size) in case of call option.

Profit of the holder

Premium* (Lost Size) in case of Put Option.

Source: The data has been collected through BUSINESS

STANDARDS (Paper) and Online Trading of KOTAK SECURITIES.

The following table of Net pay-off explain the profit/loss of option holder/writer of ACC for the week 16/02/2009 to

20/02/2010.

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PROFIT/LOSS POSITION OF CALL OPTION BUYER OF ACC Table 1

SPOT PRICE 818.34 818.34 818.34 818.34

STRIKE PRICE 800 820 840 860

PREMIUM 27.00 10.45 5.30 1.90

WHETHER EXERCISED YES YES NO NO

BUYERS GAIN/LOSS 150.00 2737.50 -3975.00 -1425.00

WEITER GAIN/LOSS -150.00 -2737.50 13875.00 26325.00

P fit an L ss g ho th b yers ro d o rap f e u w stike p ith rice o call o tio f p n 4000 2000 0 -2000 -4000 -6000 1 2 3 4 BYR UES G IN S A /LO S S R EP IC T IK R E

Profit and Loss graph of the writer with stock price of call option
30000 20000 10000 0 -10000 1 2 3 4
h

STRIKE PRICE WEITER GAIN/LOSS

77

PROFIT/LOSS POSITION OF PUT OPTION BUYER/WRITER OF ACC Table 2

SPOT PRICE 818.34 818.34 818.34 818.34

STRIKE PRICE 800 820 840 860

PREMIUM 0.20 2.40 8.90 12.00

WHETHER EXERCISED NO NO NO YES

BUYERS GAIN/LOSS -150 -1800 -6675 900

WEITER GAIN/LOSS 150 1800 6675 -900

P ftad os r p ot e ue r i n Ls g h f h B r o a y w Si e rc oPtOi n ih t k P e f u po t r i t
20 00 0 - 00 20 - 00 40 - 00 60 - 00 80 1 2 3 4 SR E R E TI PI K C BYR UES GI / OS A LS N

78

Profit and Loss Graph of the Writer with Strike Price of Put Option
8000 6000 4000 2000 0 -2000 1 2 3 4 WEITER GAIN/LOSS STRIKE PRICE

INTERPERATATION: From the above graph it observed that the buyer get Profit when the Strike Price is less than the spot price and it is also observed that the writer get loss when the strike price is more than the spot price. The following table of Net pay-off explains the profit/loss of option holder/writer of ARAVIND MILL

PROFIT/LOSS POSITION OF CALL OPTION BUYER/WRITER OF ARAVINDMILL Table 3

79

SPOT PRICE 100.40 100.40 100.40 100.40

STRIKE PRICE 85 90 95 100 PREMIUM 12.50 8.30 4.30 2.00

WHETHER EXERCISED YES YES YES NO

BUYERS GAIN/LOSS 537.5 1182.5 3332.5 -4300

WRITERS GAIN/LOSS -537.5 -1182.5 -3332.5 9137.5

Profit/Loss Graph of the Writer with Strike Price of Call Option 6000 4000 2000 0 -2000 -4000 1 2 3 4
STRIKE PRICE WRITERS GAIN/LOSS

Profit and Loss Graph of the Buyer with Strike Price of Call Option 4000 2000 0 -2000 -4000 -6000 1 2 3 4

STRIKE PRICE BUYERS GAIN/LOSS

PROFIT/LOSS POSITION OF PUT OPTION BUYER/WRITER OF ARAVIND MILL Table 4

SPOT PRICE

STRIKE PRICE

PREMIUM

WHETHER EXERCISED

BUYERS GAIN/LOSS

WRITERS GAIN/LOSS

80

100.40 100.40 100.40 100.40 100.40

80 85 90 95 100

0.25 0.05 0.45 1.300 4.900

NO NO NO NO YES

-537.5 -967.5 -2795 -10535 5697.5

537.5 967.5 2795 10535 -5697.5

Profit/Loss graph of the Buyer with Strike Price Of Put Option 10000 5000 0 -5000 -10000 -15000 1 2 3 4

STRIKE PRICE BUYERS GAIN/LOSS

Profit/Loss Graph of the Writer with Strike Price of Put Option 15000 10000
STRIKE PRICE

5000 0 1 -5000 -10000 2 3 4

WRITER'S GAIN/LOSS

INTERPRETATION:

81

It is observed from the above mentioned tables that the strike price is less than the spot price the buyer will get profit and strike price is more than the spot price the buyer will get loss then obviously in case of writer it is vice-versa.

The

following

table

of

Net

pay-off

explains

the

profit/loss of holder/writer of BHEL

PROFIT/LOSS POSITION OF CALL OPTION BUYER/WRITER OF BHEL

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Table 5
SPOT PRICE 2010.00 2010.00 2010.00 2010.00 2010.00 STRIKE PRICE 1830 1860 1890 1920 1980 25.00 40.00 19.00 10.00 20.00 PREMIUM WHETHER EXERCISED YES YES NO NO NO BUYERS GAIN/LOSS 5700 7800 -5700 -3000 -6000 WRITER'S GAIN/LOSS -5700 -7800 5700 3000 6000

Profit/Loss of the Buyers with Strike Price of Call Option 10000 5000 0 -5000 -10000 1 2 3 4 5
STRIKE PRICE BUYERS GAIN/LO SS

Profit/Loss graph of the Writer with Strike Price of Call Option 10000 5000 0 -5000 -10000 1 2 3 4 5
STRIKE PRICE WRITER'S GAIN/LOSS

83

PROFIT/LOSS POSITION OF PUT OPTION BUYER/WRITER OF BHEL

Table 6

SPOT PRICE 1874.00 1874.00 1874.00

STRIKE PREMIUM PRICE 1800 1830 1860 20.00 28.55 31.00

WHETHER EXERCISED NO NO NO

BUYERS GAIN/LOSS -6000 -8565 -9300

WRITER'S GAIN/LOSS 6000 8565 9300

P fit/L ss G hO B yers w S ro o rap f u ith trike P rice o P t f u O tio p n 5000 0 1 -5000 -10000 2 3

S R EP IC T IK R E B Y R G IN O S U E S A /L S

84

Poit o sGa hOBy r whSr ePic o P t r f /L s r p f u es it t ik r e f u Ot n pio 100 00 80 00 60 00 40 00 20 00 0 1 2 3

S R EP IC T IK R E WIT R G IN O S R E 'S A /L S

INTERPRETATION:

From the observed that more than the strike price is that the buyer

above call option and put option tables it is the writer get profit when the strike price is spot price and the writer get loss when the less than the spot price and it is observed it is vice-versa.

85

CALCULATION OF FUTURE PRICE

On Feb 16 t h : If an investor holds the following contract of the Acc

Future closing price=R.s.818.34 Equity share capital=R.s.179.58 Net profit=4446.20 Preference dividend=0 Dividends=0.07

r = Net profit-preference dividend Equity share capital *100

r = 4446.20-0/179.58.00*100=2475.88 =818.34(1+2475.88-0.07) 3 = 818.34(15194.208) 3 =288582.23 On Feb 16 t h :

If an investor holds the following contract of the Arvind mills

Future closing price=R.s100.40 Equity share capital=R.s.195.38

86

Net profit=484.81 Preference dividend=0 Dividends=0.01

r = Net profit-preference dividend Equity share capital *100

R = 484.18-0/195.38*100=248.14 = 100.40 (1+248.14-0.01) 3 =100.40 (1+248.13) 3 =11515.31 On Feb 16 t h :

If an investor holds the following contract of the BHEL

Future closing price=R.s.2010.40 Equity share capital=R.s.32500.00 Net profit=158163.56 Preference dividend=0

87

Dividends=0.08 r = Net profit preference dividend Equity share capital r = 158163.56-0/195.38*100=486.66 = 2010.40 (1+486.66-0.08) 3 = 2010.40487.58) 3 = 518768. *100

FINDINGS

The above analysis of futures and options of ACC, ARVINDMILLS and BHELhad shown a positive market in the week.

88

 The major factors that influence the futures and options market are the cash market, foreign

institutional investor involvement, News related to the underlying asset, national and international markets, Researchers view etc. In cash market the profit/loss is limited but where in future and option an investor can enjoy unlimited profit/loss. It is recommended that SEBI should take measures in improving awareness about the future and option market as it is launched very recently.
At

present

scenario

the

derivatives

market

is

increased to a great position. Its daily turnover reaches to the equal stage of cash market. The average daily turnover of the NSE in derivative is four lacks volume. The derivatives are mainly used for hedging purpose.

SUGGESTIONS

89

o In a bearish market it is suggested to an investor to opt for put option in order to minimize Profits. o In a bullish market it is suggested to an investor to apt for call option in order to maximize Profits. o It is suggested to an investor to keep in mind the time or expiry duration of futures and options

contract before trading. The lengthy time, the risk is low and profit making. The fewer time may be high risk and chances of loss making. o At present futures and options are traded on NSE. It is recommended to SEBI to take actions in trading of futures and options in other regional exchanges. o SEBI has to take further steps in the risk

management mechanism. o Contract size should be minimized because small investors can not afford this much of huge premiums.

90

BIBLIOGRAPHY

WWW.derivativesindia.com

www.steelcitynettrade.com

www.nseindia.com

www.bseindia.com

www.sebi.com

BOOKS:

FINANCIAL MANAGEMENT

PRASANNA CHANDRA

DERIVATIVES CORE MODULE

NCFM MATERIAL

SAPM

PRASANNA CHANDRA

JOURNALS:

FINANCIAL EXPRESS

91

BUSINESS STANDARDS

92