ONLINE TRADING DERIVATIVES

Description
Derivatives are a product whose value is derived from the value of one or more basic variables, called bases (underlying asset, index, or reference rate,) in a contractual manner. The underlying asset can be equity, fore ex. Commodity or any other asset. For example, wheat farmers may wish to sell their harvest at a future date to eliminate the risk of a change in prices by that date. Such a transaction is an example of a derivative.

A Project Report on
ONLINE TRADING DERIVATIVES
Project submitted in partial fulfillment for the award of Degree of
MASTER OF BUSINESS ADMINISTRATION
DECLARATION
I hereby declare that this Project Report titled “ONLINE R!DIN"
DERI#!RI#E$% submitted by me to the Department of &usiness 'anagement(
))))( is a bonafide wor* underta*en by me and it is not submitted to any other
+ni,ersity or Institution for the award of any degree diploma - certificate or
published any time before.
Name of the $tudent $ignature of the $tudent
ACKNOWLEDGEMENT
I would li*e to gi,e special ac*nowledgement to )))( director( )))) for his
consistent support and moti,ation.
I am grateful to 'r.#.Raghunadh( !ssociate professor in finance( #i,e*ananda
$chool of Post "raduate $tudies for his technical e/pertise( ad,ice and e/cellent
guidance. 0e not only ga,e my project a scrupulous critical reading( but added
many e/amples and ideas to impro,e it.
I am indebted to my other faculty members who ga,e time and again re,iewed
portions of this project and pro,ide many ,aluable comments.
I would li*e to e/press my appreciation towards my friends for their
encouragement and support throughout this project.
))))
ONLINE TRADING IN DERIVATIVES
CONTENTS
Chapter –I Introduction
Need for the study
Objectives of the study
Methodology
Limitations

Chapter –II Stock markets in India
Financial Markets
Money Markets
Capital Markets
Stock Markets
erivative Markets
Chapter -III !heoretical frame"ork of derivative market.
Chapter -IV #ractical aspects of derivative market$
Chapter –V Summary % Suggestions

ANNEXURE &uestionnaire
'ibliography

CHAPTER-I

• IN!(O)C!ION
• N** FO( S!)+
• O',*C!I-*S
• M*!.OOLO/+
• LIMI!0!IONS

Introducton !
In our present day economy1 2nance is de2ned as the provision of
money at the time "hen it is re3uired$ *very enterprise1 "hether big1 medium
or small1 needs 2nance to carry on its operations and to achieve its targets in
fact4 2nance is so indispensable today that it is rightly said that it is the
lifeblood of an enterprise$
!he term 5o"nership securities6 also kno"n as 5capital stock 5 represents
shares$ Shares are the most universal forms of raising long7term funds from
the market$ *very company1 e8cept a company limited by guarantee1 has a
statutory right to issued shares$
!he capital of a company is divided into a number of e3ual parts kno"n
as shares$ 0ccording to Fare"ell $j1 a share is1 9the interest of a shareholder in
the company1 measured by a sum of money1 for the purpose of liability in the
2rst place1 and if interest in the second1 but also consisting a series of mutual
covenants entered into by all the shareholders interest6$ Section :;<=> of the
companies act1 ?@A= de2nes it as 9 a share in the share capital of a company1
and includes stock e8cept "here a distinction bet"een stock and shares
e8pressed or implied$
Share market is of t"o types$ !hey are cash market and derivative
market.
Ca"h #ar$et" are the secondary markets "here trading in e8isting
securities is done$ Listing of ne" issues for investment and disinvestments by
saversBinvestors takes place$ It imparts li3uidity or encash ability to stocks
and shares$ Stock e8change is a market in "hich securities are bought and
sold and it is an essential component of a developed capital markets$
!he securities contracts ;(egulation> 0ct1 ?@A=1 de2nes Stock
*8change as follo"sC 9It is an association1 organiDation or body of individuals1
"hether incorporated or not1 established for the purpose of assisting1
regulating and controlling of business in buying1 selling and dealing in
securitiesE$
0 stock e8change1 thus imparts marketability and li3uidity to
securities1 encourage investments in securities and assists corporate gro"th$
Stock e8changes are organiDed and regulated markets for various securities
issued by corporate sector and other institutions$
Der%at%e" are a product "hose value is derived from the value of
one or more basic variables1 called bases ;underlying asset1 inde81 or
reference rate1> in a contractual manner$ !he underlying asset can be e3uity1
fore e8$ Commodity or any other asset$ For e8ample1 "heat farmers may "ish
to sell their harvest at a future date to eliminate the risk of a change in prices
by that date$ Such a transaction is an e8ample of a derivative$
In the last :F years derivatives have become notably important in the
"orld of 2nance$ Futures and options are no" globally traded on many
e8changes$ For"ard contracts1 S"aps and many diGerent types of options are
regularly conducted by outside e8changes by 2nancial institutions1 fund
managers and corporate treasurers in "hat is termed the over the counter
market$ erivatives are also sometimes added to a bond or stock issue$
Further1 the very nature of volatility in the 2nancial markets1 the use of
derivative products1 it is possible to partially or fully transfer price risks by
locking in asset prices$ 'ut these instruments of risk management are
generally do not inHuence the Huctuations in the underlying asset prices$
.o"ever1 by locking asset prices1 the derivative products minimiDe the
Huctuations in the asset prices on the pro2tability and cash Ho" situations
on risk to the investor$
!he derivatives are becoming increasingly important in "orld of
markets as a tool for risk management$ erivative instruments can be used to
minimiDe risk$ erivatives are used to separate the risks and transfer them to
parties "illing to bear these risks$ !he kind of hedging that can be obtained
by using derivatives is cheaper and more convenient than "hat could be
obtained by using cash instruments$ It is so because1 "hen "e use derivatives
for hedging1 actual delivery of the underlying asset is not at all essential for
settlement purposes$ !he pro2t or loss on derivative deal alone is adjusted in
the derivative market$
erivative contracts have several variants$ !he most common
variants are for"ards1 futures1 options and s"aps$ !he follo"ing three broad
categories of participants I hedgers1 speculators1 and arbitrageurs trade in
the derivatives market$ .edgers face risk associated "ith the price of an
asset$ !hey use futures or options markets to reduce or eliminate this risk$
Speculators "ish to bet on future movements in the price of an asset$ Futures
and options contracts can give them an e8tra leverage4 that is1 they can
increase both the potential gains and potential losses in a speculative
venture$ 0rbitrageurs and in business to take advantage of a discrepancy
bet"een prices in t"o diGerent markets$ If1 for e8ample1 they see the futures
price of an asset getting out of line "ith the cash price1 they "ill take
oGsetting positions in the t"o markets to lock in a pro2t$
erivative products initially emerged as hedging devices against Huctuations
in commodity prices1 and commodity7linked derivatives remained the sole
form for such products for almost three hundred years$ Financial derivatives
came into spotlight in the post7?@JF period due to gro"ing instability in the
2nancial markets$
.o"ever1 since their emergence1 these products have become very popular
and by ?@@Fs1 they accounted for about t"o7thirds of total transactions in
derivative products$ In recent years1 the market for 2nancial derivatives has
gro"n tremendously in terms of variety of instruments available1 their
comple8ity and also turnover$
In the class of e3uity derivatives the "orld over1 futures and options on stock
indices have gained more popularity than on individual stocks1 especially
among institutional investors1 "ho are major users of inde87linked derivatives$
*ven small investors 2nd these useful due to high correlation of the popular
inde8es "ith various portfolios and ease of use$ !he lo"er costs associated
"ith various portfolios and ease of use$ !he lo"er costs associated "ith
inde8 derivatives vis7K7vis derivative products based on individual securities is
another reason for their gro"ing use$
!he 2rst step to"ards introduction of derivatives trading in India "as the
promulgation of the Securities La"s ;0mendment> Ordinance1 ?@@A1 "hich
"ithdre" the prohibition on option in securities$
!he market for derivatives1 ho"ever1 did not take oG1 as there "as no
regulatory frame"ork to govern trading of derivatives$ S*'I set up a :<7
member committee under the Chairmanship of r$L$C$/upta$ on November
?L1?@@= to develop appropriate regulatory frame"ork for derivatives trading
in India$
!he committee submitted its report on March ?J1?@@L prescribing necessary
pre7conditions for introduction of derivatives trading in India$ !he committee
recommended that derivatives should be declared as 5securities6 so that
regulatory frame"ork applicable to trading of 5securities6 could also govern
trading of securities$ S*'I also set up a group in ,une ?@@L under the
Chairmanship of #rof$,$($-arma$1 to recommend measures for risk containment
in derivatives market in India$ !hese instruments can be used to speculate or
to manage risk in the e3uity markets$
erivatives are products "hose values are derived from one of more basic
variables called bases$ !hese bases can be underlying assets such as foreign
currency1 stock or commodity1 bases or reference rates such as LI'O( or )S
!reasury (ate etc$ For e8ample1 an Indian e8porter in anticipation of the
receipt of dollar7denominated e8port proceeds may "ish to sell dollars at a
future date to eliminate the risk of e8change rate volatility by the date$ Such
transactions are called derivatives1 "ith the spot price of dollar being the
underlying asset$
erivatives thus have no value of their o"n but derive it from the asset that is
being dealt "ith under the derivative contract$ For instance1 look at an
ashtray$ It has no value of its o"n but gains its importance only "hen one
smokes and gain if one "ants to collect that ash at one place instead of
dirtying the "hole room "ith cigarette ash and its stubs$ 0 smoker can hedge
against the risk of ste"ing the cigarette stubs and ash all around the room$
Similarly a 2nancial manager can hedge himself from the risk of a loss in the
price of a commodity or stock by buying a derivative contract$ !hus
derivative contracts ac3uire their value from the spot prices of the assets that
are concerned by the contract$
!he primary purpose of a derivative contract is to transfer 9riskE from one
party to another i$e$ risk in a 2nancial sense in transferred from a party that
"ants to get rid of it to another party that is "illing to take it on$ .ere1 the risk
that is being dealt "ith is that of price risk$ !he transfer of such a risk can
therefore be speculative in nature or act as a hedge against price movement
in a current or anticipate physical position$
0 derivative is an instrument "hose value is derived from the value of one or
more underlying "hich can either in the form of commodities1 precious meat1
currencies1 bonds1 stock and stock indicesE$ 0s the price of the "heat
derivatives "ould be determined or based on the prices of "heat itself$
/iven the fast change and gro"th in the scenario of the economic and
2nancial sector have brought a much broader impact on derivatives
instrument$ 0s the name signi2es1 the value of this product is derived of
based on the prices of currencies1 interest rate ;i$e$ bonds>1 share and share
indices1 commodities1 etc$ Not going into very back1 2nancial derivatives just
came into e8istence in the early ?@LF6s$ .ere the principal instruments1
clubbed under the general term derivatives1 include
?$ Futures % For"ards
:$ Options1
M$ S"aps
<$ Narrants
A$ *8otic and are the modern tools of 2nancial risk management$
0ll pricing of derivatives is done by arbitrage1 and by arbitrage alone$ .ere1
there is a relationship bet"een the price of the spot and the price in the
futures$ If this relationship is violate1 then an arbitrage opportunity is
available1 and "e people e8ploit this opportunity1 the price reverts back to its
economic value$ !herefore1 arbitrage is the basic re3uirement for pricing$ !he
role of li3uidity i$e$ the lo" transaction costs is in making arbitrage check up
and convenient$ erivative markets in 'raDil are some of the largest markets
in the "orld even 2rst derivative dealing "ere started in )S0$ Ne can even
kno" that as the prices of the for"ard contacts are based on future therefore
it can even be termed as derivative instrument$
erivative contracts have several variants$ !he most common
variants are for"ards1 futures1 options and s"aps$ 0 brief note on the various
derivative that are used are as follo"sC
&or'ard"$ 0 for"ard contract is a customiDed contract bet"een to"
entities1 "here settlement takes place on a speci2c date in future at today6
pre agreed price$
&uture"$ 0 future contract is an agreement bet"een t"o parties to
buy
Or sell an asset at a certain time in the future at a certain price$ Future
contracts are
Special types of for"ard contracts means that the former are standardiDed
e8change
!raded contracts$
Opton"$ Options are of t"o types1
Calls option$ Calls give the buyer the right but not the obligation to
buy a
/iven 3uantity of the underlying asset1 at a given price on or before a given
future
ate$
Puts Option. #uts Option give the buyer the right1 but not
obligation to sell a
/iven 3uantity of the underlying asset at a given price on or before a given
date$
(arrant") Longer dated options are called "arrants and are generally
!raded over the counter$
S'ap") S"aps are private agreements bet"een t"o parties to
e8change cash Ho"s in the future according to a pre7 arranged formula$ !hey
can be regarded as portfolios of for"ard contracts$
Need *or Stud+!
0lthough 2nancial derivatives have e8isted for a considerable period of
time they have become major forces in 2nancial market only since the early
?@JFs$ !he ?@JFs constituted a "atershed in 2nancial history1 partly because
the 28ed e8change rate regime ;the 'retton Noods Systems> that had
operated since the ?@<Fs1 broke do"n$

!hese developments established the conte8t in "hich 2nancial derivatives
could develop1 Hourish and became a major force in "orld 2nancial markets$
Nhen the 'reton Nood Systems collapsed in the early ?@JFs1 a regime of
28ed e8change rates gave "ay to 2nancial environment in "hich e8change
rates "ere constantly changing in response to pressure of demand and
supply$ !he fact that currency prices move constantly and often substantially1
in the ne" situation meant that businesses face ne" risks$
Currency derivatives developed in response to the need to manage these
risks$ In other "ords the ne" system of variable e8change rates generated a
need to 2nd techni3ues to reduce the risks arising and simultaneously created
opportunities for speculations$ !hus 2nancial derivatives develop as a vehicle
for these t"o forms of economic activities$ Nhen an investor feels the market
"ill fall1 he can hedge this position by selling$ Say1 Nifty futures against his
portfolio$
!rading in derivatives in India "as introduced in ,une :FFF on NS* market$
!he S*'I governs this market buy providing the necessary rules and
regulations$ erivatives allo" us to manage risks more eOciently by
unbundling the risks and allo" either hedging or taking only ;or more if
desired> risk at a time$
uring the present period1 banks have increased their e8posure to O!C
derivative instruments at such a faster rate that supervisory authorities the
"orld over are getting "orried about the risks such e8posures involve for the
banks$ !he e8plosive gro"th in derivatives has been the result both of
intense competition amongst major international banks ;as the role have been
changed to pro2tability> and the need of the corporate "orld1 indeed the
"hole 9realE economy1 to hedge e8posures in volatile markets$ 0s the
increase of players entering market "hich decrease the margins$ erivatives
provide their important economic functionsC

;?>(isk management
;:>#rice discovery4 and
;M>!ransactional eOciency
!he risk "hich are generally seen in derivatives are generally of four typesC
;?>Credit risk
;:>Market risk
;M>Legal risk
;<>Operations risk
!his should be the follo"ing measure to reduce disasters "ith derivativesC 7
? 0t the level of e8changes1 position limits and surveillance procedures
should be sound$
? 0t the level of clearing houses1 margin re3uirements should be stringently
enforced1 even "hen dealing is "ith large institutions$
? 0t the level of individual companies "ith positions in the market1 modern
risk measurement systems should be established alongside the creation of
capabilities in trading in derivatives$ !he basic idea1 "hich should be
steadfastly used "hen thinking about returns1 is that risk also merits
measurement$
,ut 'h+ are der%at%e" "uch a -. ht n Indan #ar$et/
? !he derivatives products I inde8 futures1 inde8 options1 stock futures and
stock options provide a carry for"ard facility for investors to take a position
;bullish or bearish> on an inde8 or a particular stock for a period ranging
from one to three months$
? !he current daily settlement in the cash market has left no room for
speculation$ !he cash market has turned into a day market1 leading to
increasing attention to derivatives$
? )nlike the cash market of full payment or delivery1 you don6t need many
funds to buy derivatives products$ 'y paying a small margin1 one can take
a position in stocks or market inde8$
? !hey provide a substitute for the infamous '0L0 system$
!he derivatives volume is also picking up in anticipation of reduction of
contract siDe from the current (s$:FF1 FFF to (s$?FF1 FFF$
? *verything "orks in a rising market$ )n3uestionably1 there is also a lot of
trading interest in the derivatives market$
O-0ect%e" o* the "tud+!
? !o study the process of derivative market
? !o make a comparative study "ith cash market$
? !o analyDe risks and bene2ts of derivative market
? !o analyDe through 3uestionnaire ho" investors are bene2ted in
erivative market$
1ethodo2o.+!
Facts e8pressed in 3uantity form can be termed as 9dataE$ ata maybe
classi2ed either asC
i$ #rimary data
ii$ Secondary data
3 Pr#ar+ Data!
#rimary data is the 2rst hand information that a researcher gets from
various sources like respondents1 analogous case situations and research
e8periments$ #rimary data is the data that is generated by the researcher for
the speci2c purpose of research situation at hand$
For this project the primary data "ill be collected from the personnel$
!his data can also be obtained through a 3uestionnaire1 based upon "hich
some statistical techni3ues are applied$
3 Secondar+ Data!
Secondary data is already published data collected for some purpose
other than the one confronting the researcher at a given point of time$ !he
secondary data can be gathered from various sources like statistics1 libraries1
research agencies etc$ In this case the secondary information is to be
collected from ne"spapers like 9'usiness lineE and business magaDines like
9'usiness !odayE and Internet$
L#taton"!
!he project may suGer from the follo"ing limitationsC
? !he re3uired data may not be available due to "hich it cannot be accurate$
? Some of the important information is included because of time constraint$
? It "as deliberately diOcult to collect the data from the clients1 as they are
apparently busy



Chapter –II
Stoc$ #ar$et" n Inda

? Financial Markets
? Money Markets
? Capital Markets
? Stock Markets
? erivative Markets
&INANCIAL 1AR4ETS!
Financial markets are in the forefront in developing economics$ !he
vibrant 2nancial market enhances the eOciency of capital formation$ Nell7
developed 2nancial markets enlarge the range of 2nancial services$ !hus1
2nancial markets bridge one set of 2nancial intermediaries "ith another set of
players$
!he main functions of the 2nancial markets areC
? !o facilitate creation and allocation of credit and li3uidity$
? !o serve as intermediaries for mobiliDation of savings$
? !o provide 2nancial convenience1 and
? !o cater to the various credits needs of the business houses$
!ypes of Financial marketsC
On the basis of the maturity period of the 2nancial assets1 the market can be
divided intoC
1one+ #ar$et!
0 money market is a mechanism through "hich short7term funds
are loaned and borro"ed and through "hich a large part of the 2nancial
transaction of a particular country of the "orld are cleared$
!he money market is divided into M sectors namely organiDed sector1
unorganiDed sector and Cooperative sector$
Or.an5ed "ector is comparatively "ell developed in terms of organiDed
relationships and specialiDation of functions$ It consists of the (eserve 'ank
of India1 various scheduled and non7scheduled commercial banks$ !he
development banks1 other 2nancial institutions like LIC1 )!I1 discount and
2nance house of India limited are all a part of the organiDed sector$
The unor.an5ed "ector is more dominate in India$ !he only link bet"een
the organiDed and unorganiDed sectors is through commercial banks$ It
consists of the indigenous bankers1 Moneylenders1 Nidhis and Chit funds$
The cooperat%e "ector consists of the state Icooperative banks1 primary
agricultural credit societies1 Central Cooperative banks1 and State Land
evelopment bank
FIN0NCI0L S+S!*M
1IN!N2I!L
IN$I+ION$
1IN!N2I!L
'!R3E$
1IN!N2I!L
IN$R+'EN$
1IN!N2I!L
$ER#I2E$
'ONE4
'!R3E
2!PI!L
'!R3E
+norgani5ed
Organi5ed
erm lending
Instructions
$toc* 'ar*et
Industrial $ecurities
'ar*et
"ilt Edged
$ecurities 'ar*et
$econdary
'ar*et
Primary 'ar*et
$toc* E/changes
6holesale debt
'ar*et segment
2apital mar*et
$egment
1utures Options Interest rate
2all
Put
2ash $egment Deri,ati,e $egment
Capta2 #ar$et!
Capital market is an organiDed mechanism for eGective and eOcient transfer
of money capital of 2nancial resources form the investing class i$e$1 a body of
individual or institutional savers1 to the entrepreneur class i$e$1 a body of
individual or institutions engage in industry1 business or service in the private
and public sectors of the economy$
&uncton" o* capta2 #ar$et!
!he capital market is directly responsible for the follo"ing activities$
? MobiliDation of National savings for economic development
? MobiliDation and import of foreign capital and foreign investment capital
plus skill to 2ll up the de2cit in the re3uired 2nancial resources to maintain
e8pected rate of economic gro"th$
? #roductive utiliDation of resources
? irection the Ho" to funds of high yields and also strives for balance and
diversi2ed industrialiDation$
Con"ttuent" o* capta2 #ar$et!
!he capital market comprises of mutual funds1 development banks1
specialiDed 2nancial institutions1 investment institutions1 state level
development banks1 lease companies1 2nancial service companies1
commercial banks and other specialiDed institutions set up for the gro"th of
capital market like S*'I1 C(ISIL$
In"tru#ent" Capta2 #ar$et!
!he follo"ing instruments are being used for raising resources$
*3uity shares
#reference shares
Non7voting e3uity shares
Cumulative convertible preference Shares Company 28ed deposits1 banks1
and debentures1 global depository receipts$
!he capital market is divided into t"o parts namely ne" issues market and
Stock market$
Stoc$ 1ar$et!
Stock markets are the secondary markets "here trading in e8isting securities
is done$ Listing of ne" issues for investment and disinvestments by
saversBinvestors takes place$ It imparts li3uidity or encash ability to stocks
and shares$
Stock e8change is a market in "hich securities are bought and sold and it is
an essential component of a developed capital markets$
!he securities contracts ;(egulation> 0ct1 ?@A=1 de2nes Stock *8change as
follo"sC 9It is an association1 organiDation or body of individuals1 "hether
incorporated or not1 established for the purpose of assisting1 regulating and
controlling of business in buying1 selling and dealing in securitiesE$
0 stock e8change1 thus imparts marketability and li3uidity to securities1
encourage investments in securities and assists corporate gro"th$ Stock
e8changes are organiDed and regulated markets for various securities issued
by corporate sector and other institutions$
Character"tc"!
? 0n organiDation in the form of an association or company
? 0 governing body to supervise and control its activities
? 0 frame"ork of rules and regulations
? 0 common meeting place for purchasers and sellers
? Only members are allo"ed to conduct business in a stock e8change$
&uncton"!
? *nsures li3uidity of capital
? #rovides ready market for securities
? irects Ho" of capital into pro2table channels
? *valuation of 2nancial conditions and prospects of listed 2rms
? Facilitates speculation
? #romotes and mobiliDes savings
? #romotes industrial gro"th and economic development
? #latform for public debt
? Clearing house of business information
,ene6t"!
!he bene2ts of stock e8change can be studied under the follo"ing headingsC
?$ 0dvantages to the companiesC
? (eady market for securities
? Increase in price
? Increase in good"ill
? 0gent bet"een companies and the investors
:$ 0dvantage to the Investors
? Safety of investment and 'est use of capital
? More collateral value
? #ublication of price list of securities
? #o"erful hedge against inHation
M$ 0dvantage to the societyC
? .elpful in industrialiDation
? Increase in rate of capital formation
? Savings are encouraged
? Inventive for eOciency
? /overnment can raise funds for important projects
? #rovides a mirror to reHect general economic condition
!here are stock :M e8changes in India$ !hey are National Stock
*8change1 'ombay Stock *8change1 'an galore Stock *8change1 0hmedabad
Stock *8change1 Calcutta Stock *8change1 elhi Stock *8change1 .yderabad
Stock *8change1 Madhya#radesh Stock *8change1 Madras Stock *8change1
Cochin Stock *8change1 )ttar#radesh Stock *8change1#une Stock *8change1
Ludhiana Stock *8change1 /u"ahati Stock *8change1 Mangalore Stock
*8change1 -adodara Stock *8change1 (ajkot Stock *8change1 'hubanesh"ar
Stock *8change1 Coimbatore Stock *8change1 ,aipur Stock *8change1 Merrut
Stock *8change1 #atna Stock *8change1 over the counter e8change of India$
!he most prominent among these are 'ombay Stock *8change and National
Stock *8change1
,o#-a+ Stoc$ E7chan.e!
!he Stock *8change1 Mumbai1 popularly kno"n as 8,SE9 "as established in
?LJA as 8The Nat%e Share and Stoc$ ,ro$er" A""ocaton9$ It is the
oldest one in 0sia1 even older that the !okyo Stock *8change1 "hich "as
established in ?LJL$ It is a voluntary nonpro2t making 0ssociation of #ersons
;0O#> and is currently engaged in the process of converting itself into de
mutilated and corporate entity$ It has evolved over the years into its present
status as the premier Stock *8change in the country$ It is the 2rst Stock
*8change in the Country to have obtained permanent recognition in ?@A=
from the /ovt$ of India under the Securities Contracts ;(egulation> 0ct1 ?@A=$
!he *8change "hile providing an eOcient and transparent market for trading
in securities1 debt and derivatives upholds the interests of the investors and
ensures redresser of their grievances "hether against the companies or its
o"n member7brokers$ It also strives to educate and enlighten the investors
by conducting investor education programs and making available to them
necessary informative inputs$
0 /overning 'oard having :F directors is the ape8 body1 "hich decides the
policies and regulates the aGairs of the *8changes$ !he /overning 'oard
consists of @ elected directors1 "ho are from the broking community ;one
third of them retire ever year by rotation>1 three S*'I nominees1 si8 public
representatives and an *8ecutive irector % Chief *8ecutive OOcer and a
Chief Operating OOcer$
!he *8ecutive irector as the Chief *8ecutive OOcer is responsible for
the day7to7day administration of the *8change and the Chief Operating OOcer
and other .eads of epartments assist him$
!he *8change has inserted ne" (ule No$?:= 0 in its (ules1 'yla"s %
(egulations pertaining to constitution of the *8ecutive Committee of the
*8change$ 0ccordingly1 an *8ecutive Committee1 consisting of three elected
directors1 three S*'I nominees or public representatives1 *8ecutive irector %
C*O and Chief Operating OOcer has been constituted$ !he Committee
considers judicial % 3uasi matters in "hich the /overning 'oarding has
po"ers as an 0ppellate 0uthority1 matters regarding annulment of
transactions1 admission1 continuance and suspension of member7brokers1
declaration of a member7broker as defaulter1 norms1 procedures and other
matter relating to arbitration1 fees1 deposits1 margins and other monies
payable by the member7brokers to *8change1 etc$
Stren.th"!
? .uge investor base
? Familiarity of investors "ith 'ase6s operation$
? Large nation"ide net"ork of brokers and sub brokers$
? ?:F years6 e8perience in e3uity trading$
? *8pands its vast net"ork to retain business$
(ea$ne""e"!
? Monopoly lent clout that is susceptible to competition$
? Lack of transparency
? Lengthy settlement period
? Close club culture prevails
? /overnment preference for National Stock *8change$
Natona2 Stoc$ E7chan.e!
It "as incorporate in November ?@@: "ith an e3uity capital of (s$:A Cores
and promoted among others by I'I1 ICICI1 LIC1 /IC and its subsidiaries1
commercial banks including State 'ank of India$ It has a satellite based state7
of the art net"orking and fully automate screen based trading$ It lists
companies "ith paid up capital of (s$?F core or more$
Stren.th"!
? !ransparency and National reach$
? *3ual access to all members
? /overnment patronage
? Institutional patronage
? #rovides avenue for investment trading
? .i7tech infrastructure
? FIIs more comfortable "ith screen based trading
? SpecialiDing in derivatives I Futures % Options
(ea$ne""e"!
? No track record$
? Screen based trading is a ne" concept
? Short run concentration in Mumbai
? 'ack up infrastructure like communication not in place$
? #rohibitive costs of entry for small brokers$
? )ntested systems for large volumes of trade$
? ,SE6s established system1 its net"ork of brokers and sub brokers$
? )neven track record of computeriDation in India$
National Stock *8change operates t"o segments namely "holesale debt
market and capital market$
(D1 "e.#ent!
!he NM segment or the money market as it is commonly referred as1 is a
facility for institutions and corporate bodies to enter into high value
transactions in instruments such as government securities1 treasury bills1
public sector nits ;#S)> bonds1 commercial paper certi2cates of deposit$ On
the NM segment1 there are t"o types of entities$ !rading members "ho can
either trade on their account or on behalf of their clients including
participantsP Nhile participants are the organiDations directly responsible for
settlement of trades "ho settle trades e8ecuted on their o"n account and on
behalf of those clients "ho are not direct participants$
Capta2 1ar$et Se.#ent!
!he CM segment covers trading in e3uities1 convertible debentures and retail
trade in debt instruments like non7convertible debentures$ Securities of
medium1 and large companies "ith nation"ide investors base including
securities traded on other stock e8changes are traded the NSF$ !he CM
segment has t"o sub segments namely Cash Segment and erivatives
Segment$
Ca"h 1ar$et Se.#ent!
Spot trading takes place in this market "ith no for"ard transactions$ 'uying
and selling of scripts is done "ith various motives like investments1
speculation and hedging$ !he settlement cycle in this segment is ! Q : days
for payment and receipt of funds and delivery$
Der%at%e" 1ar$et Se.#ent!
!rading in derivatives is done in this segment$ 0 derivative security is a
2nancial contract "hose value is derived from the value of an under7lying
asset$ !he underlying asset can be e3uity1 fore81 commodity or any other
asset$
!he securities contract ;(egulation> 0ct1 ?@A= ;SC0> de2nes 9derivativeE to
include7
? 0 security derived from a debt instrument1 share1 and loan "hether
secured or unsecured1 risk instrument or contract for diGerences or any
form of security$
? 0 contract1 "hich derives its value from the prices1 or inde8 of prices1 of
underlying securities$ !he derivatives are securities under the SC0 and
hence the trading of derivatives is governed by the regulatory frame"ork
under the SC0
&uncton"!
1. Prce d"co%er+! !he markets indicate "hat is likely to happen and thus
assist in better price discovery of the future as "ell as current prices$
R"$ tran"*er! erivatives instruments do not themselves involve risk
they redistribute the risk bet"een the market participants$
<) 1ar$et co#p2eton! Nith the introduction of derivatives the underlying
market "itnesses higher trading volumes$
I#portance!
#rovide enhanced yield on assets$
(educe 2nding costs by borro"ers
Modify payment structure of assets to correspond to investors market vie"s1
(eHects the perception of market participants about future price of assets$
Increase trading volumes by increasing con2dence of investors
Speculative tradeRs shifts to amore controlled environment$
0cts as a catalyst for ne" entrepreneurial activity$
.elps to increase savings and investment in the long run and promotes
economic development as it depends on the rate of savings and
investment$
.elps to transfer the market risk i$e$ called hedging "hich is a protection
against losses resulting from unforeseen price and volatility changes$ !hus
derivatives are a very important tool of risk management$

2hapter 7III
Theoretca2 *ra#e'or$ o* der%at%e
#ar$et .
NS*

&UTURES!
0 Future contract is a contract to buy or sell a stated 3uantity of a
commodity or a 2nancial claim at a speci2ed price at a future speci2ed date$
!he parties to the Future have to buy or sell the asset regardless of "hat
happens to its value during the intervening period or "hat shall be the price
of the date for "hich the contract is 2naliDed$
Debt 2apital
2ash 'ar*et $egment
Deri,ati,e 'ar*et
$egment
1utures Options Interest rate
2all Put
&uture De2%er+ Contract!
Nhere the physical delivery of the asset is slated for a future date and the
payment to be made as agreedS it is future delivery contract$
.o"ever in practice all Future are settled by the himself then it "ill be
settled by the e8change at a speci2ed price and the diGerence is payable by
or to the party$ !he basic motive for a Future is not the actual delivery but the
heading for future risk or speculation$ Futures can be of t"o typesC
?$ Co##odt+ &utureC
!hese include a "ide range of agricultural products and other commodities
like oil1 gas including precious metals like gold1 silver$
:$ &nanca2 &utureC
!hese include 2nancial claims such as shares1 debentures1 treasury bonds1
and share inde81 foreign e8change$ Futures are traded at the organiDed
e8changes only$ !he e8change provides the counter7party guarantee
through its clearinghouse and diGerent types of margins system$ Some of
the centers "here Futures are traded are Chicago board of trade1 !okyo
stock e8change$
&UTURE TER1INOLOG=C
Spot #riceC !he price at "hich an asset trades in the market$
Future #riceC !he price at "hich the Future contract trades in the future
market$
Contract C+c2eC !he period over "hich a contract trades$ !he inde8 Future
contract on the NS* have one7month1 t"o months1 three7month e8piry
cycles "hich e8pire on the last !hursday of the month$ On the Friday
follo"ing the last !hursday a ne" contract having a three months e8piry is
introduced for trading$
*8piry ateC It is the date speci2ed in the Future contract at the end of
"hich it "ill cease to e8it$
Contract S5eC !he amount of asset that has to be delivered under on
contract$ For *8C !he contract siDe on NS*6S Futures market is :FF niftys$
Inta2 1ar.nC !he amount that must be deposited in the margin account
at the time a Futures contract is 2rst entered in to be kno"n as initial
margin$
1ar$n. to 1ar$etC 0t the end of each trading day1 the margin account is
adjusted to reHect the investor6s gain or loss depending upon the Futures
closing price$ !his is called Marking to Market$
1antenance 1ar.nC !his is set to ensure that the balance in the margin
account never becomes negative$ If the balance in the margin account falls
belo" the maintenance margin1 the investor receives a margin call and is
e8pected to top up the margin account to the initial margin level before
trading commences on the ne8t day$
Tradn. In &uture ContractC
$ !he customer "ho desired to buy or sell Future has to contact a broker or
a brokerage 2rm$
$ Customers are re3uired by the future e8change to establish a margin
deposit "ith the respective1 broker before the transaction is e8ecuted$ !his
is called initial margin1 "hich is bet"een A7:FT of the value of the future
contract$
$ !he margin deposit is regulated by the future e8change depending on
the volatility in the price of future$
$ Nhen the contract values moves in response to the change in the rate1
gains are credited and losses are debited to the margin account$
$ If the account falls belo" a particular level kno" as maintenance level1
the trade receives a margin call and must make up1 the account e3ual to
initial margin failing "hich his account is li3uidates

$ !hose "ho have held the positions are re3uired to li3uidate the position
prior to the last trading day of the contract or the position is settled but the
e8change$
$ 0t the end of the settlement period or at the time of s3uaring oG a
transaction1 the diGerence bet"een the trading price and settlement prices is
settled by the cash payment$
$ No carry for"ard of a Future contract is allo"ed beyond the settlement
period$

Future1 as a techni3ue of risk management provide several services to the
investor and speculators as follo"sC
0> Future provides a hedging facility to counter the e8pected movement in
prices$
'> Futures help indication the future price movement in the market$
C> Future provides an arbitrage opportunity to the speculators$
#ay oG for FuturesC
0 pay oG is the likely pro2tBloss "ould accrue to a market participant "ith
change in the price of the underling asset$ Futures contract have linear pay
oGs$ It means the losses as "ell as pro2ts for the buyer and the seller of a
Future contract are unlimited$
#ay oG for buyer of FuturesC Long Futures
!he pay oG for a person "ho buys a Futures contract is similar to the pay oG
for a person "ho held on asset$ .e has a potentially unlimited upside as "ell
as a potentially unlimited do"nside$
*$g$C 0n investor buys nifty Futures "hen the inde8 is at ?M:F if the inde8
goes up1 his Future position starts making pro2t$ If the inde8 falls his Future
position starts sho"ing losses$
#ro2t
F ?M:F Nifty

Loss
#ay oG for seller of FuturesC Short Futures
!hey pay oG for a person "ho sells a Future contract is similar to the pay
oG for a person "ho shorts an asset$ .e has potentially unlimited upside as
"ell as a potentially unlimited do"nside$

*$g$C 0n investor sells nifty Future "hen the inde8 is at ?M:F$ If the inde8 goes
do"n1 his Future position starts making pro2t$ If the inde8 rises1 his Futures
position starts sho"ing losses$
#ro2t
?M:F
F Nifty
Loss
ivergence of Futures and Spot #ricesC !he basis the diGerence bet"een the
Future price and the current price is kno"n as the basis$
!hus basis U F7S Nhere FU Future #rice SU Spot #rice

In a normal market the Future price "ould be greater then spot price and
therefore1 the basis "ill be positive1 "hile in an inverted market1 the basis is
negative since the spot price e8ceeds the future price in such a market$
!he price of Future referred to the rate at "hich the Futures contract "ill be
entered into$
!he basic determinants of future prices areC
?> Spot rate :> Other Carrying costs

!he cost of carrying depends upon theC

?> !ime involved :> (ate of Interest M> Storage Cost1 obsolescence1
insurance cost and other costs incurred till the delivery date$
/enerally longer the time of maturity1 the greater the carrying costs$ 0s the
delivery month approaches1 the basis declines until the spot and Futures
prices are appro8imately the same$ !he phenomenon is kno"n as
convergence$
#rice Futures #rice

Spot price
!ime


-aluation of Future #ricesC
!he valuation of Futures is done using the cost of carry model$ !he
assumptions for pricing future contracts as follo"sC
$ !he markets are perfect$
$ !here are no transaction costs$
$ 0ll the assets are in2nitely divisible$
$ 'id70sk spreads do not e8ist so that is assumed that only one price
prevails$
$ !here are no restrictions on short selling$ 0lso short sellers get to use the
full proceeds of the sales$

Stock Inde8 FuturesC

0 stock inde8 represents the change in the value of a set of stocks1 "hich
constitute the inde8$
0 stock inde8 number is the current relative value of a "eighted average of
the prices of a pre7de2ned group of e3uities$
NS* I AF1 NIF!+C
!.* NS* I AF inde8es called NIFI!+ "as launched by the national stock
e8change of India Limited ;NS*> in 0pril ?@@=1 taking as base the closing
prices of November M1 ?@@A "hen one year of operations of its capital market
segment "as completed$ !he base value of the inde8 has been set to ?FFF$
!he inde8 is based on the prices of shares of AF companies chosen from
among the companies traded on the NS*1 each "ith a market capitaliDation of
at least (s$AFF crores and having a high degree of li3uidity$
!he methodology used for the computation of this inde8 is market
capitaliDation "eight age as follo"ed by the S % # Nifty1 "hich is maintained
by IISL i$e$1 India Inde8 services1 and products limited1 a company set up by
NS* and C(ISIL "ith technical assistance from standard % poor6s$
In the market capitaliDation "eighted method1
Current Market CapitaliDation
Inde8 U 7777777777777777777777777777777777777777 V 'ase -alue
'ase Market CapitaliDation

Nhere Current market capitaliDation U Sum of ;Current marketing #rice V
Outstanding Shares> of all securities in the inde8$
'ase market capitaliDation U Sum of ;Market #rice V Issue SiDe> of all
securities as on base date$
.eading using Futures contractC
.eading is the process of reducing e8posure to risk$ !hus a hedge is any
act that reduces the price risk of a certain position in the cash market$ Future
act as a hedge "hen a position is taken in them1 "hich is opposite to that of
the e8isting or anticipated cash position$
In a short hedger sells Future contract "hen they have taken a long position
on the cash asset1 apprehending that prices "ould fall$ 0 loss in the cash
market "ould result "hen the prices do fall1 but a gain "ould occur due to the
short position in the Future$
In a long hedge the hedger buys Futures contract "hen they have taken a
short position on the cash asset$ !he long hedger faces the rise that prices
may risk$ If a price rise does not take place1 the long hedger "ould incur a
loss in the cash good but "ould realiDe gains on the long Futures position$
Nhen the asset "hose price is to be hedge does not e8actly match "ith the
asset underlying the Futures contract so held is called as cross hedge$ .edge
ration is the number of future contacts to buy or sell per unit of the spot good
position$ Optimal hedge ration depends on the e8tent and nature of relative
price movements of the Futures prices and the cash good prices$
.ence the points to be noted areC
?$ (eliable relationship e8ists bet"een price change of spot asset and price
change of Future contract$
:$ Choice of data depends on the hedging horiDon$ For a daily hedge1 daily
price changes can be taken$ 'ut for longer periods take "eekly1 bimonthly
or monthly charges do not take too lies tonic data like ? year1 as it "ould
give a distorted estimate of relation bet"een current and futures prices$
.edging using Inde8 FuturesC
?$ Nhen the markets are e8pected to go up
a> Long stock short inde8 FuturesC 'uy selects li3uid securities1 "hich move
"ith the inde8 and sell them at a later date$
b> .ave funds long inde8 FuturesC 'uy the entire inde8 portfolio in their
correct proportions and sell it at a later date$
:$ Nhen the markets are e8pected to do do"n$
a> Short stock long inde8 FuturesC Sell selects li3uid securities1 "hich move
"ith the inde8 and buy them at a later date$
b> .ave portfolio1 short inde8 FuturesC Sell the entire inde8 portfolio in their
correct proportions and buy them at a later date$
*ven "hen a stock picker carefully purchases stock his estimate may go
"rong because the entire market moves against the estimate even though
the underlying idea "as correct$ .ence "hen a long position is adopted a"ay
his inde8 e8posure$
Speculation using inde8 FuturesC
?$ 'ullish Inde8 Long inde8 FuturesC
Nhen you think the market inde8 is going to rise you can make a pro2t by
adopting a position on the inde8$ !his could be after a good budget or good
corporate results$ )sing inde8 Futures an investor can 5buy6 or 5sell6 the entire
inde8 b trading on one single security$

.ence id you buy inde8 Future you gain if the inde8 rises and lose if the inde8
falls$
M$ 'earish Inde8 short inde8 FuturesC
Nhen you think the market inde8 is going to fall you can make a pro2t buy
adoption a position on the inde8$ !his could be after a bad budget or bad
corporate results1 instability$ )sing inde8 Futures an investor can 5buy6 or
5sell6 the entire inde8 by trading on one single security$
.ence if you sell inde8 Futures you gain if the inde8 falls you lose if the
inde8 rises$ !o prevent large price movement occurring because of
9speculative e8cessesE and to allo" the market to digest any information
"hich is likely to aGect the Futures prices in a signi2cant "ay for most
Futures contract there are limits1 ;both minimum and ma8imum>1 on the
daily movements of their prices$
*very Future contract has a minimum limit on trade7to7trade price
changes1 "hich is called a tick say A pays or ?F pays$ Normally trading on
a contract stops one the contract is limit up or limit do"n$ .o"ever
e8changes ay change the limits "hen they feel appropriate$

OPTIONS!
Options are contracts1 "hich provide the holder the right to sell or buy a
speci2ed 3uantity of an underlying asset at an aO8ed price on or before
the e8piration of the option date$ Options provide a right and not the
obligation to buy or sell$
?> !he call optionC 0 call option provides the holder a right to buy
speci2ed assets at speci2ed on or before a speci2ed date$
:> !he put optionC 0 put option provides to the holder a right to sell
speci2ed assets at speci2ed price on or before a speci2ed date$
Options may also be classi2ed asC

?> 0merican OptionsC In the 0merican option1 the option holder can
e8ercise the right to buy or sell1 at any time before the e8piration or on
the e8piration date$
:> *uropean OptionsC In the *uropean option1 the right can be e8ercised
only on the e8piry date and not before$ !he possibility of early e8ercise
of right makes the 0merican option to be more valuable that the
*uropean option to the option holder$
M> Naked Option and covered OptionsC 0 call option is called a covered
option is called a covered option if it is coveredB"ritten against the
assets o"ned by the option "riter$ In case of e8ercised of the call option
"riter can deliver the asset or the price diGerential$ On the other hand1 if
the option is not covered by physical asset1 if is kno"n as naked option$

Option !erminologyC
Inde8 OptionC !hese Options have inde8 as the underlying
Stock OptionsC !hese Options are on individual stocks
'uyer of an optionC Is the one "ho by paying the option premium buys the
right but not the obligation$ !o e8ercise his option on the sellerB"riter$
Nriter of an optionC Is the one "ho receives the option premium and is
thereby obliged to sellBbuy the asset is the buyer e8ercises on him$
Option #riceC I s the #rice1 "hich the option buyer pays to the option seller$
*8piration #riceC !he date speci2ed in the Options contract is kno"n an
e8piration date1 the e8ercise date1 the strike date or the maturity$
Option premiumC !he buyer of the option has to but the right from the
seller by paying an option premium$ !he premium is one7time non7refundable
amount for a"aiting the right$ In case1 the right is not e8ercised later1 the
option "riter does not refund the premium$
In7the7money optionC If the actual price of the asset is more than the strike
price of a call option1 then the call is said to be in the money$ In the case of
put option1 if the strike price is more than the actual price them the put is said
to be in the money$
0t the money optionC If the spot price is e3ual to the strike price the option is
called at the money$ It "ould lead to Dero cash Ho" if it "ere e8ercised
immediately$
Out of the money optionC If the actual price is less than the strike price the
call option is said to be out of money$ In the case of put option if the strike
price is less then the actual price1 then the put is said to be of money$
Option payoGsC
!he optionally characteristics of Options results in a non7Linear payoG for
Options$ It means that the losses for the buyer of an option are limited1
ho"ever the pro2ts are potentially unlimited$ For a "rite the payoG is e8actly
the opposite$ .is pro2ts are limited to the option premium1 ho"ever is losses
are potentially unlimited$
?$ #ay oG pro2le for buyer of call optionC
!he pro2tBloss that the buyer makes on the option depends on
the spot price of underlying$ .igher the spot price them the strike price1
more is the pro2t he makes$ .is loss is limited to the premium he paid for
buying an option$ *$g$C 0n investor buys Nifty Option "hen the inde8 is at
?::F$ If the inde8 goes up1 he pro2ts$ If the inde8 falls he looses$

#ro2t
Net pay oG on call ;#ro2tB Loss>
F ?::F
#remium
Nifty
Loss
:$ #ay oG pro2le "riter of call optionC

!he pro2tBloss that the buyer makes on the option depends on
the spot of the underlying$ Nhatever is the buyer6s pro2t is the seller6s loss$
.igher the spot price1 more is he loss he makes$ I f upon e8piration the spot
price of the underlying is less than the strike price1 the buyer lets his option
e8pire une8ercised and the "riter gets to keep the premium *$g$C 0n investor
seller nifty Options "hen the inde8 is at ?::F$ If the inde8 goes up1 he looses$
#ro2t

#remium
F ?::F Nifty

Loss
M$ #ayoG pro2le for buyer of put optionC
!he pro2tBloss that the buyer makes on the option depends on the
spot price of the underlying$ If upon e8piration1 the spot price is belo" the
strike price1 he makes a pro2t$ Lo"er the spot price more is the pro2t he
makes$ .is loss in this case is the premium he paid for buying the option$ *8C
0n investor buys nifty Options "hen the inde8 is at ?::F1 if the inde8 goes up
he looses$

#ro2t
F ?::F
#remium Nifty
Loss
<$ #ayoG pro2le for "riter of put optionC
!he pro2tBloss that the seller maker on the option depends on the spot
price of the underlying$ If upon e8piration the spot prices happen to be belo"
the strike price1 the buyer "ill e8ercise the option on the "riter$ If upon
e8piration the spot price of the underlying is more than the strike price1 the
buyer lets his option e8pire un7e8ercised and the "riter gets to keep the
premium$ *$g$C 0n investor sells nifty Options "hen the inde8 is ?::F$ If the
inde8 goes up he pro2ts$
#rof
F
?::F Nifty
Loss
iGerences bet"een Futures and OptionsC
F)!)(*S O#!IONS
?$ It involves obligations it involves rights
:$ No premium is payable #remium is payable
M$ Linear payoG Non7Liner payoG
<$ #rice is Dero4 strike price moves Strike price is 28ed1 price
moves
A$ 'oth long and short at risk only short at risk
=$)ncertainty in cash Ho"s is more relatively )ncertainty thing is cash
Ho"s
Is less relatively
J$'oth parties have unlimited pro2ts Loss of option holder is
limited
0nd losses to the premium paid but gains
Is unlimited pro2t of optionP
Nriter is limited to the
#remium received but loss is
)nlimited
Va2uaton o* OptonC
Option cannot be valued in terms of the series of inHo" and outHo"s1
re3uired rate of return and the time pattern of inHo"s and outHo"s1 in these
terms because Options have characteristics that make them diGerent from
the securities$ !he valuation of an option depends upon a number of factors
relating to the underlying asset and the 2nancial market$
*Gect of iGerent factors on the valuation of Options
SL$No$ Factor Call Option #ut Option
-alue -alue
?$ Increase in value of underlying asset Increases ecreases
:$ *8tent of volatility in value of asset Increases ecreases
M$ Increase in strike price ecreases Increases
<$ Longer e8piration time Increases ecreases
A$ Increases in rate of Interest Increases ecreases
=$ Increase in Income from asset ecreases Increases
L#taton"!
!he assumption that there are only t"o possibilities for the share price
over ne8t one year is impractical and hypothetical such a strategy may not
"ork because of possibilities is reduce as the time period is shortened$
'lack % Scholes ModelC
Fisher 'lack and Myron Scholes presented an option valuation model in
?@JM$ !he model is based on the follo"ing assumptionsC
$ !he call option is the *uropean option i$e$1 it cannot be e8ercised before the
Speci2ed date$
$ !he underlying shares do not pay any dividend during the option period$
$ !here are no ta8es and transaction costs$
$ Share prices move randomly in continuous time and the percentage change
Follo"s normal distribution$
$ !he short7term risk free rate is kno"n and is constant during option period$
$ !he short selling in shares is permitted "ithout penalty$
$ -olatility of the underlying asset is kno"n and constant over the period of
time$
!he black Scholes model has the follo"ing advantagesC
$ Out of the A basic variables re3uired < are mentioned in the option contract$
-olatility1 "hich is not mentioned1 can be estimated on the basis of historical
ata$
$ !he model is not aGected by the risk perception of the investor$
$ !he model does not depend on the e8pected return on the share$
LimitationsC
$ !he basic assumption that a risk less hedge can be set up in unrealistic$
$ !he transaction costs are bound to be there is the form of brokerage and "ill
ilute the return$
$ !he estimation of the proper volatility in put remains a serious problem$
$ !he model also helps to calculate the value of put option1 through I "as
eveloped primarily to values the call Options$
Opton" o>er a nu#-er o* ad%anta.e") The+ are a" *o22o'"C
$ Fle8ibilityC Options oGer He8ibility to the buyer in form of right to buy or sell
'ut not the obligation$
$ -ersatilityC Option can be as conservative or as speculative as one6s
investment
Strategy dictates$
$ LeveragesC Options give high leverage by investing small amount of capital
in the form of premium one can take e8posure in the underlying asset of
much greater value$
$ (iskC #re7kno"n ma8imum risk for an option buyer$
$ #ro2tC Large pro2t potential for limited risk to the option buyer$
$ InsuranceC *3uity portfolio can be protected from a decline in the market by
"ay of buying a protective put$ !his option position supplies the needed
insurance to over come the uncertainty of the market place$
$ Seller #ro2tsC Selling put options is like selling insurance to anyone "ho feels
like earning revenues by selling insurance can set himself up to do so in the
inde8 Options market$
Inde7 Opton"C

0n inde8 option provides the buyer of the option1 the right but not the
obligation to buy or sell the underlying inde81 at a pre7determined strike price
on or before the date of e8piration1 depending on the type of option$
,ene6t" o* Inde7 Opton!
• .elp to capitaliDe on an e8pected market move$
• .edge price risk of the physical stock holdings against adverse market
moves$
• iversi2ed e8posure to the market as a "hole "ith a single trading
decision$
• #redetermined ma8imum risk for the buyer$
• .igh leverage i$e$1 large percentage gains from relatively small1 favorable
percentage moves in the underlying inde8$
S!(0!*/I*S FO( IN*W O#!IONSC
I$ 'ullish vie" of the marketC
8. 'uy a callC It is e8ercised if the inde8 is above the strike price$ !he pro2t is
unlimited$ It is e3ual to the value of inde8 minus break7even point$
Nhere '*# U premium paid Q strike price$ !he ma8imum loss is limited to the
premium paid$
9. Sell a putC It is e8ercised if the inde8 is belo" the strike price1 the pro2t is
limited to the premium received and the loss is e3ual to the diGerence '*#
and the inde8$
II$ 'ullish vie" but not sureC
'ull call spreadC It contains of the purchase of a lo"er strike price call and the
sale of higher strike price call1 of the same month$ It is e8cursed if the inde8 is
above the strike prices$ !he ma8imum pro2t is limited to the diGerence
bet"een the t"o strike prices minus the net premium paid the loss is limited
to the net premium paid$
III$ 'earish vie" of the marketC
?$Sell a callC It is e8ercised it the inde8 is above strike price the ma8imum
pro2t is limited to the premium received$ !he ma8imum loss is unlimited and
e3uals to the value of the inde8 minus break7even point$
:$'uy a putC It is e8ercised if the inde8 is belo" the strike price$ !he ma8imum
pro2t is e3ual to the diGerence bet"een '*# ad inde8es$
I-$ 'ear vie" but not sure
'ear put spreadC It contains of selling one put option "ith lo"er strike price
and purchase another put option "ith a higher strike price$ It is e8ercised if
the inde8 is belo" the strike price$ !he ma8imum price is limited to the
deference bet"een the t"o strike prices plus the net premium paid$
-$ Neutral vie" of the marketC
8. Long straddleC !he purchase of a call and put "ith the same strike price1
the same e8piration date and the same underlying$ Ma8imum risk is
limited to the premium paid and the ma8imum pro2t is unlimited$
:$ Long StrangleC !he purchase of a higher call and a lo"er put that are both
slightly out of the money and have the same e8piration date and are on the
same underlying$ Ma8imum risk is limited to the premium paid and the
ma8imum pro2t is unlimited$
-I$ .igh -olatility but direction unkno"nC
?$ Short StraddleC !he sale of a call and put "ith the same strike price1 same
e8piration date and the same underlying$ Ma8imum risk is unlimited and
the pro2t is limited to the premium paid$
:$Short StrangleC !he sale of a higher call and lo"er put "ith the same
e8piration date and the same underlying$ Ma8imum risk is limited and the
ma8imum pro2t is limited to the premium paid$
!he diGerence bet"een straddle and strangle is the strike price of the options$
!he strangle has strikes "hich are slightly out of the money$ !he advantage of
this strategy is that premiums "ill be less than that of a straddle as premiums
for out of money Options are lo"er$ !he disadvantage is that inde8 needs to
move even further for the position to become pro2table$ !hough strangle is
cheaper than the straddle1 it also carries much more risk stock Options$
Stoc$ Opton"!
0 stock option is a contact1 "hich conveys to its holder the right1 but not the
obligation1 to buy or sell shares of the underlying security at a speci2ed price
on or before a given date$ 0fter this given date1 the option ceases to e8ist$
!he caller of an option is1 in turn1 obligated to the sell shares to the call option
buyer or buy shares from the put option buyer at the speci2ed price "ithin the
time period the option$
'ene2ts of Stock OptionsC
? #rotect stock holdings from a decline in market price by buying a put$
? Increase income against current stock holdings by "riting a covered call$
? Fi8 buying price of a stock1 by buying a call$
? #osition for a buy market move7even "hen you don6t kno" "hich "ay
prices "ill move by buying a straddle or strangle$
? 'ene2t from a stock price6s rise or fall "ithout incurring the lost of buying
or selling the stock outright by "riting Options$
Strategies for Options of StocksC
?$ 'uy a CallC "hen the market vie" is bullish a call is bought$ It is e8ercised if
the stock prince is above strike$ Ma8imum pro2t is unlimited e3ual to the
price of the stock 7 '*#$ Ma8imum loss is limited to premium paid$
: Short stock Long CallC It6s taken to oGset a short stock position6s upside risk$
It is e8ercised if the stock price is above strike$ Ma8imum pro2t is e3ual to the
diGerence bet"een the '*# and the stock price ma8imum loss is limited to
the premium paid$
:$ Covered CallC selling call "hen you are long on the stock does it$ It is
e8ercised if the stock is above the strike price$ #ro2t is limited to the
premium paid loss is e3ual to the diGerence bet"een the '*# and the
stock price$
<$'uy a putC Nhen the market vie" is bearish a put is purchased$ It is
e8ercised if the stock price is belo" strike$ Ma8imum pro2t is e3ual to the
diGerence bet"een '*# and stock price is belo" strike$ Ma8imum pro2t is
e3ual to the diGerence bet"een '*# and stock price$ Ma8imum loss is limited
to the premium paid$
A$ #rotective #utC buying put "hen you are long on the stock does it$ It helps
to protect unrealiDed pro2ts of the stock$ Its is e8ercised it the stock price
is belo" the strike price$ #ro2t is unlimited "hile the loss is limited to the
premium paid$
=$ Covered #utC selling put "hen you are short on the stock "hen you have a
bearish vie" of the market does it$ ItRs e8ercised if the stock price is belo"
the strike price$ #ro2t is limited to the premium received and the
diGerence bet"een the strike prices is the put and the original share price
of the short position$ Ma8imum loss is unlimited$
J$ )ncovered #utC If a put is sold "ithout corresponding short stock position it
is called as uncovered put$ It is taken "hen there is a bearish vie" of the
market$ It is e8ercised if the stock price is belo" the strike price$
Ma8imum pro2t is limited to the premium received "hile the loss is e3ual
to the diGerence bet"een '*# and stock price$

Chapter -IV
#ractical aspects of erivative Market $
1:O



OPION
&+4
Last
hursday
L!t
T"#r!$%
$ELL
&uying
!s per
premium
P+
$ELL
2!LL
&+4
1++RE
; months
contract
; months
contract
$elling !s per
margin
&UTURES ? OPTIONS TRADING S=STE1!
!he Futures and Options trading system of NS*1 called N*0!7 F%O
trading system provides a fully automated screen7based trading on a nation
"ide basis and an online monitoring and surveillance mechanism$ It supports
on order7driven market and provides complete transparency of trading
operations$ It is similar to that of trading of e3uities in the cash market
segment$
!he soft"are for the F%O market has been developed to facilitate
eOcient and transparent trading Futures and Options instruments$ Xeeping in
vie" the familiarity of trading members "ith the current capital market
trading system so as to make it suitable for trading Futures and Options$
'asis of tradingC
!he Share khan limited provide trading facilities$ !he N*0! F%O
system supports on order7driven market1 "herein orders match automatically$
Order matching is essentially on the basis of security1 its price1 time and
3uantity$ !he e8change noti2es the regular lot siDe and ticks siDe for each of
the contracts traded on this segment from time to time$
Nhen any order enters the trading system it is an active order$ It tries to 2nd
a match on the other side of the book$ If it 2nds a match1 a trade is
generated$
If it does not 2nd a match1 the order becomes passive and goes and sits in
the respective outstanding order book in the system$

*N!I!I*S IN !.* !(0IN/ S+S!*MC
?$Tradn. 1e#-er" C they are member of NS*$ !hey can trade either on
their o"n account or on behalf of their clients including participants$ !he
e8change assigns a trading members I to each trading member "ho can
have more than one use$ 'ut the ma8imum number of users allo"ed for each
trading member is noti2ed by the e8change from time to time$
:$C2earn. #e#-er"! !hey are members of NSCCL and carry out risk
management activities and con2rmationY in3uiry of trades through the trading
system$
<)Partcpant"! !hey are clients of trading members like the 2nancial
institutions$ !hese clients may trade through multiple trading members but
settle through a single clearing member$
Corporate .ierarchyC
In F % I trading soft"are1 a trading member has the facility of de2ning a
hierarchy amongst users of the system$
?> Corporate ManagerC !he term is assigned to a user placed at the highest
level in a trading 2rm$ Such a user can perform at the functions such as
order and trade related activities1 receiving report for all branches of the
trading member 2rm and also dealers of the 2rm$ .e can only de2ne
e8posure limits for the branches of the 2rm$
:> 'ranch ManagerC !he term is assigned to a user "ho is placed under the
corporate manager$ .e can perform and vie" order and trade related
activities for all dealers under that branch$
M> ealerC ealers are users at the lo"est level of the hierarchy$ 0 dealer can
perform a vie" order and trade relates activities only for oneself and does
not have access to information on other dealers under either the same
branch or other branches$
-S0! Net"ork ConnectivityC
-S0! I -ery small 0perture !erminalC
-S0! is the most important component in on line trading$ NS* oGers its
services "ith over MLFF -S0!S to @AF members spread all over the country$
(e3uirementsC
!he cost of a leased line is around M$A lakhs$ For installation it re3uires a
dish antenna of ?$L meters diameter$ NS* Server !rading is done on
Mainframe$ 'ack oOce on mainframe on )ni8 servers "ith oracle database$
System re3uirements include 'randed #entium or higher II1 III1 I- processors
an *ICON car ;N0N Interface>1 "hich is around one lakh1 provided by .CL
Comet ServerQ< nodes "ith #entium or higher processor$ Nindo"s N!
Operating System for all servers and nodes$
ConnectivityC
-S0!s are connected through INS0!7M' satellite$ NS* and 'S* used leased
lines in Mumbai for providing services to corporate members each line costs ?
lakh per year$ -S0!s are connected through INS0!7M' and in turn are
connected to NS* .ub in Mumbai$ Nith more than MFFF -S0!s spread across
to country$ NS* is considered to be the top ?F on the "orld in providing
services through -S0!s$
MaintenanceC
It does not re3uire maintenance up to M years1 after M year in takes up to
(s$?FFF per month for maintenance$ .CL comnet provides all the
maintenance for NS* and provides maintenance for 'S*$ 0n annual contract
costs around ?$: lakhs$
#roblemsC
#roblems occur in connectivity due to heavy net"orking or sudden increase
in net"ork traOc because of market volatility B burst of orders$
Log in procedureC
On starting the N*0! application the log on screen appears "ith the
follo"ing detailsC
)ser I1 !rading Member I1 #ass"ord1 Ne" #ass"ord$
In order to sign on to the system1 the user must specify a valid user I1
!rading member I and #ass"ord$ 0 valid combination of the above is needed
to access the system$ 0fter entering I6s and pass"ord1 press the enter key to
complete the procedure$
Trader" Der%at%e #ar$etC
!here are three broad categories of participants in the derivatives market$
!hey are as follo"sC
?$.edgersC
.edgers face risk associated "ith the price of an asset$ !hey futures or
options markets to reduce or eliminate this risk$ (isk associated "ith the
Huctuation of commodity prices1 foreign e8changes rates1 stock prices can be
reduced$ !hey are primarily used for purposes of managing risk by those
managing funds$
:$SpeculatorsC
If hedgers are the people "ho "ish to avoid the price risk1 speculators are
those "ho are "illing to take such risk$ !hey bet on future movements in the
price of an asset$ erivatives provide them an e8tra leverage1 i$e$1 they can
increase both the potential gains and potential losses in a speculative
venture$ !hey may be ;a> day traders or ;b> position traders$ !hey use
fundamental analysis and also any other information available to form their
opinions on the likely price movements$
M$0rbitrageursC
!hey thrive on market imperfections$ 0n arbitrageur pro2ts by trading a
given commodity1 or other item that sells for diGerent prices in diGerent
market$ !hey take advantage of discrepancy bet"een prices in t"o diGerent
markets$ !hey make simultaneous purchase of securities in one market "here
the price thereof is lo" and sale in a market "here the price is comparatively
higher$ 0rbitrage may be ;a> over space or ;b> overtime$
T+pe o* Der%at%e"!
!he most commonly used derivatives contracts are for"ards1 Futures 0nd
Options$
? For"ardsC 0 for"ard contract is a customiDed contract bet"een t"o
*ntities "here settlement takes place on a speci2c date in the future at
today6s pre agreed price$
? FuturesC 0 Futures contract is an agreement bet"een t"o parties to buy or
sell an asset at a certain time in the future in the future at certain price$
!hese are standardiDed e8change traded contracts$
? OptionsC 0n Option gives the holder of the option the right to do some7
!hing$ !he holder does not have to e8ercise this right$ Options may be
call option or put Options$
? epending on this maturity the Options may be classi2ed as
? Narrants I longer dated Options having maturity of one year and are
generally traded over the counter$
? L*0#S7 long7term *3uity 0nticipation securities are Options having
maturities of up to three years$
? '0SX*!S7 Option on portfolios of underlying asset$ !hey underlying asset
is usually a moving average or a basket of assets like inde8 Options$
? SN0#SC !hese are private agreements bet"een t"o parties to e8changer
cash Ho"s in the future according to a pre7arranged formula$
a> Interest rates to s"apsC !hese entail s"apping only the interest related
cash Ho"s bet"een the parties in the same currency$
b> Currency S"apsC !hese entail s"apping both principal and interest
bet"een the parties1 "ith the cash Ho"s in one direction being the
diGerent currency than those in the opposite direction$
S%# CNW Nifty
S%# CNW Nifty is a "ell7diversi2ed AF stock inde8 accounting for :< sectors of
the economy$ It is used for a variety of purposes such as benchmarking fund
portfolios1 inde8 based derivatives and inde8 funds$
S%# CNW Nifty is o"ned and managed by India Inde8 Services and #roducts
Ltd ;IISL>1 "hich is a joint venture bet"een NS* and C(ISIL$ IISL is India6s 2rst
specialiDed company focused upon the inde8 as core products$ IISL have a
consulting and licensing agreement "ith Standard % #oor6s ;S%#>1 "ho are
"orld leaders in inde8 services$
? !he average total traded value for the last si8 months of all Nifty stocks is
appro8imately JJT of the traded value of all stocks on the NS*$
? Nifty stocks represent about =?T of the total market capitaliDation as on
0ugust M?1:FF<$
? Impact coast of the S%# CNW Nifty for a portfolio siDe of (s$A million is
F$?FT
? S%# CNW Nifty is professionally maintained and is idea for derivatives
trading$
Tradn. n N*t+
!he National Stock *8change o India Limited ;NS*> commenced trading in
derivatives "ith inde8 futures on ,une ?:1:FFF$ !he futures contracts on NS*
are based on S%# CNW Nifty$ !he *8change later introduced trading on inde8
options based on Nifty on ,une <1:FF?$
!he turnover in the derivatives segment has sho"n considerable gro"th in
the last year1 "ith NS* turnover accounting for =FT of the total turnover in
the year :FFF7:FF?$ Future details on inde8 based derivatives are available
under the erivatives ;F%O> section of the "ebsite$
Ad%anta.e"!
erivatives market is mainly useful for short7term investment "here there
can be a pro2t$ !his is because4 one need not pay ?FFT at the time of buying$
!hey can pay it in the form of M0(/IN1 "hich depends upon market volatile
position$ Market values increases per market volatile position$ !he other
advantage is as mentioned above NIF!+ can be traded$ !his is the best part of
erivative market "hich is even the sense8 can be bought and speculated$
!he sense8 is NIF!+$ It is tradable$ !his opportunity is not available is cash
market$
E).)! -
0 person bought ?FF (eliance shares "orth (s$AF1 FFF;(s$AFF #er Share$
Margin of ?F7:FT has been paid and he can start hedging or speculating$ .e
need not pay ?FFT of "hatever he bought$
D"ad%anta.e!
0s this is on contract1 "hich is for a 28ed period of time$ !he
contract ends after certain period like ? month1 : months and M months$
!here it is only shot term or for a limited time$
O#!IONSC
Options is said to be the '*S!1 as the risk is limit$ 0dvantage can be sho"n
as follo"sC
(isk 777777777777777777777à Limited
#ro2t 777777777777777777777à )nlimited
*$g$C
If the market price is in do"n"ards then1 put buy$ If the market price is in
up"ards then1 call buy$
In case of put buy there is an amount paid kno" as #(*MI)M$ !he premium
depends upon the strike price$ #remium is the amount paid "hich is e8pected
increase amount of money on the scrip$
*$g$C 7
If the market price of scrip is (s$AFF and the strike of price is decided as
(s$AF?$ !he e8tra (e$? ;AF?7AFF> is said to be premium$
Strike #riceC #rice taken from the three strike up"ards and three strikes
do"n"ards of the market price$
&UTURES!
In this there is ?FF percent risk involved$ It depends upon the time values
"here the interest is calculated$ !he interest rate depends upon the market
values of the scrip$ !he time values can be said asC
*$g$C
!he number of days bet"een the present day and the last day ;contract
ending day> is called as time value$
ANAL=SIS AND INTERPRETATION

!he present analysis is done on AF clients of sharekhanLtd in
.yderabad$ !he objective of the analysis is to 2nd out the a"areness and
utiliDation of derivative products namely future and Option by the clients$

Future and Options have been ruling the stock markets as
far as the turnover is concerned$ 'ut unlike many other broking companies
there is a lesser upraise in the F % O segment in Share khan Limited$ .ence
the study makes an attempt to 2nd out the reasons for the above by an
investor survey$
AGE GROUPS!
0/*
#articulars
L*SS!.*N
:F +*0(S
:?7MF M?7<F <?7AF AF7
0bove
!O!0L
No$ Of
responses

NIL
?? :: ?< M AF
#ercentag
e
NIL 99< ==< 9>< ?<
?FFT
0ge of the traders play an important role in their trading decision and
outlook$ Most of the traders lie in the middle7age bet"een M?7<F and <?7AF1
"hich is <<T and :LT respectively$ !he market improves if the a"areness is
created "ell among the age group :?7MF1 the market may improve due to
rapid speculation of that age grouped people$
8. Educatona2 ,ac$.round!
#articulars 0rts Commerce Science !otal #ercentag
e
Non7graduates : F F : <T
/raduates L ?M ?F M? =:T
#ost /raduates A = = ?J M<T
!otal ?A ?@ ?= AF ?FFT
0
5
10
15
20
25
30
35
40
45
less than
20 yerars
21-30
years
31-40
years
41-50
years
more
than 50
years
n
o

o
f

r
e
s
p
o
n
s
e
s
no of responses percentage
0
5
10
15
20
Arts Commerce Science
Non-graduates
Graduates
Post Graduates
Total
*ducational backgrounds of the traders play an important role in there
trading decision$ @=T of the traders are graduates and post graduates of
"hom MLT are commerce background "ith '$Com and M$'$0$ !he large
percentages of traders from Science and 0rts stream M:T and MFT sho" that
even "ithout basic formal training in commerce it is easy to operate in the
stock markets through learning and e8perience$ !hough the educational
background helps one to react as per the conditions1 sometimes that may not
"orkout$ Many a time e8perience "orkout and sometimes the kno"ledge
"orks out "here one can follo" the media ;CN'C !- est$> and grab the
present situation of the market$
1e#-er"hp!
#articulars No$ Of responses #ercentage
Members ?= M:T
Client M< =LT
!otal AF ?FFT

Sharekhanltd$ has many shareholders "ho also trade in the sock markets$
'ut the number of clients "ho are not members is close to t"o7thirds i$e$1
=LT$ In :FFF Share khan got approved as a epository #articipant of National
Security epository Limited1 subsidiary of National Stock *8change of India
Ltd$ .aving this
facility1 they have grater advantage to the valuable customers$ -ery fe"
!rading members are having this facility as a one7stop service provider$
<) E7chan.e!
#articulars NF$ Of (esponses #ercentage
NS* :< <LT
'S* J ?<T
NS* % 'S* ?@ MLT
!otal AF ?FFT
Members Client
!he percentages of investors investing in NS* is <LT "hile that of 'S* is
only ?<T1 "hich sho"s the gro"ing popularity of the NS* since its inception
and its advantage of being the national stock e8change$ !he popularity and
fame of the stock e8changes play a vital role$ .ere most of the investors are
to"ards NS* than 'S*$ !he reason may be all the derivative strategies are
follo"ed by the organiDation are NS*6s$
@) Se.#ent!
#articulars No$ Of (esponses #ercentage
Cash Segment :? <:T
F % O Segment ?F :FT
'oth Cash and F % O
Segment
?@ MLT
!otal AF ?FFT
24
7
19
NS !S NS " !S
0
5
10
15
20
25
Cash Segment
F ! Segment
"oth Cash and F !
Segment
!rading in cash segment is relatively more than the F%O segment and is also
more popular because of its simplicity$ !his can be seen from the fact that
<:T of traders trade in the cash segment "hile only :FT of traders trade in
the F%O segment$ .ence there is a need to increase a"areness about
derivatives1 "hich is relatively a ne" concept "ith advanced strategies$
@. Other ,ro$n. co#pane"!
#articulars No$ Of responses #ercentage
Came from other
broking company to
trade .ear
?? ::T
!rading Started in
SCSL
M@ JLT
!otal AF ?FFT
0
5
10
15
20
25
#0
#5
$0
$5
Came from
other %ro&ing
compan' to
trade (ear
Trading Started
in SCS)
!he percentage of traders1 "ho have already traded through some other
brokers before shifting to is ::T "hich sho"s that the services provided by
Share khan lid$1 are superior to the previous brokers$ Moreover there are JLT
of traders1 "ho have started their trading activities by ShareXhanLtd "ith $1
"hich speaks of its reputation as the best broker in .yderabad$
A) E7perence o* In%e"tor"!
#articulars No$ Of responses #ercentage
Less than ? year = ?:T
?7A years ?@ MLT
=7?F years ?L M=T
More than ?F years J ?<T
!otal AF ?FFT
!he study reveals the only ?: T of its clients have joined in the past ? year$
.ence the marketing activities of the company have to be more aggressive to
"iden its clients in the "ake of ne" brokers and sub brokers coming up in the
city$ 0ggressive publicity has to be done in order to stand against the ne"
coming brokers$
B) ,a"" *or "e2ecton o* "crp"!
#articulars No$ Of responses #ercentage
*arning #er Share < LT
Company Image ?F :FT
no of responses
0
5
10
15
20
#ess than
1 year
1-5 years $-10 years More than
10 years
Series1
#ro2tability ?? ::T
0ll !hree J ?<T
#ro2tability and
Company Image
A ?FT
*arnings #er Share
0nd Image
J ?<T
*arnings #er Share and
#ro2tability
M =T
#B* (atio M =T
!otal AF ?FFT
%asis for selection of scrips
0
2
4
$
%
10
12

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i
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Series1
!he study reveals that investors use varied parameters to make
their investment decisions1 pro2tability and image of the company are the t"o
prominent parameters used by most investors$ !he investors also use a
combination of more than one parameter$ Mostly one can rely on company
image along "ith pro2tability but in order to be updated "ith the latest
information once has to follo" the media1 "hich gives the e8act information
time to time$
C) Source" o* In*or#aton!
#articulars No$ Of (esponses #ercentage
Ne"s #apers ?= M:T
0nnual (eports ?< :LT
Share khan revie" A ?FT
0ll three J ?<T
Ne"s #aper %
0nnual (eports
A ?FT
Ne"s Channels M =T
!otal AF ?FFT
32-
2%-
10-
14-
10-
0-$-
Ne.s &apers )nn/al ,eports Share 0han re1ie. )ll three
Ne.s &aper " )nn/al ,eports Ne.s Channels
In combination "ith other sources of information by Share khan1 the study
reveals that ne"spapers and annual reports are the most popular sources of
information$ 'oth of "hich used by J=T of the investors "hither
independently revie"s and technical analysis from various "eb sites are also
popular sources of information used by :=T of traders$ !hought he
ne"spapers give the information and the status1 the Share khan revie"s and
the "ebsites analysis along "ith the follo" of media gives the running
information$
) &a%ora-2e "crpE" *or n%e"t#ent!
#articulars No$ Of responses #ercentage
INFOS+S ?: :<T
N!#C A ?FT
!ISCO J ?<T
(IL ?F :FT
0ndhra 'ank A ?FT
Miscellaneous ?? ::T
!otal AF ?FFT
0
2
$
*
+
10
12
,NF!S-S
NTPC
T,SC!
.,)
Andhra "an&
/iscellaneous
0ccording to their o"n personal judgments and investment objectives
investors have varied vie"s regarding the most favorable scrip for
investment$ 'ut Infosys1 (eliance Industries Limited1 N!#C and !ISCO are
considered to be a pro2table investment by majority of the investors$
:Purpo"e o* U"e!
#articulars No$ Of responses #ercentages
Speculation := A:T
.edging ?L M=T
0rbitrage = ?:T
!otal AF ?FFT
0
5
10
15
20
25
#0
Speculation
(edging
Ar%itrage
erivatives are primarily used for speculation1 hedging and
arbitraged$ !he most popular use of derivatives is speculation "ith more than
A:T of the traders speculating in the markets using futures and options$
Nhile only M=T of the traders used derivatives for hedging their risk of cash
market and ?:T traders using it for arbitrage to pro2t from the diGerent
market segments$ ue to lack of kno"ledge in arbitrage people are not able
to participate actively$ !hough the hedging is bit better1 that also as very little
people "ho does hedging$ In order to in these areas there should be some
classes conducted by sharekhanltd$1 so that the people are a"are of "hat
they are doing and "hat they have to do$
:Cate.or+ o* Der%at%e"!
#articulars No$ Of responses #ercentage
Futures :M MFT
Options :J JFT
!otal AF ?FFT
21
22
2#
2$
25
2*
20
Futures
!ptions
Options are less risky than futures because the ma8imum loss is
limited to the premium paid and the pro2t potential is unlimited$ !his is
supported by the study "hich reveals that JFT of the investor trade is more
in options than in futures$ 0s futures are ?FFT risk1 people are not going for
futures though it ahs ?FFT pro2t1 as risk involved is more$ Options are
encouraged much$ In the same "ay if futures are also encouraged then
improvement of it can be seen$ 'ut some changes he to make as the risk
involved in this is very high$
:<)Cate.or+ o* contract!
#articulars No$ Of responses #ercentages
? Month Contract ML J=T
: Months Contract J ?<T
M Months Contract A ?FT
!otal AF ?FFT

!rading in futures and options is done in contracts "ith three diGerent e8piry
dates$ Out of "hich trading in one7month contracts is more popular because
of the relatively predictable Huctuations of the near future$ It is very diOcult
to speculate on prices t"o months and three months later1 "hich accounts for
the lo" percentages of trades of ?<T and ?FT in these contracts$ One7month
contracts "orks out "ell here as everything closes in one "ill kno" their
status in that particular area$ So1 one7month contracts are in "ell used$ !"o
month and !hree month are also good but risk is involved "hich most of the
clients do not "ant to face$
)4no'2ed.e o* "trate.e"!
#articulars No$ Of responses #ercentage
No kno"ledge F FT
+es ;only basic
Strategies>
M= J:T
+es ;advances
Strategies
0lso>
?< :LT
!otal AF ?FFT
0
10
20
30
40
1 Month Contract 2 Months
Contract
3 Months
Contract
Series1
Xno"ledge of trading strategies of futures and options is very important for
pro2table trading in this segment$ J:T people have kno"ledge on only the
basic strategies1 "hich are easy to understand1 and implement of "hich :LT
have the kno"ledge of the more comple8 and advanced trading strategies$
Nith the basic kno"ledge people are speculating "ell1 if they are given a
better training classes by Share khan for the advanced strategies they "ill go
in deep further strategies$
:F)In%e"tor ratn.!
#articulars No$ Of responses #ercentage
/ood :L A=T
'etter @ ?LT
'est ?M :=T
!otal AF ?FFT
0
10
20
30
40
No 0no.le2ge 3es4only basic
Strategies5
3es 4a21ances
Strategies also
#eople are -ery happy "ith the performance of Share khan$ !hey say it is
good at most of the times and best at times$ If Share khan follo"s some ne"
strategies like maintenance of the people "hich means the operator should
have not more <7A people so that every one can involve easily in speculation$
0nd some ne" counters "here the clients can take the help in the areas they
are uneducated$ Ne" counters to e8plain and understand the strategies etc$
:A)Rea"on" *or tradn. n Share $han!
#articulars No$ Of responses #ercentage
Lo" 'rokerage ?: :<T
/ood facilities and
Service
?A MFT
Cooperative %
isciplined
Mgt$
?? ::T
(egular !rading : <T
0
5
10
15
20
25
30
6oo2 !etter !est
Series1
Information
Lo" elivery
Commission
? :T
/ood OOce
Maintenance
? :T
id not respond L ?=T
!otal AF ?FFT
!he study reveals the reasons for "hich Share khan limited is rated as one of
the best broking 2rms in .yderabad$ !he company charges lo" brokerage and
is prompt in pay7in and payout of shares and funds$ It provides good facilities
and services to its clients and the management is very disciplined and co7
operative$ It provides regular trading information to its client6s trough Share
khan and guides the clients in their trading activities$
0
2
4
$
%
10
12
14
1$
#o. !r o0er age 6oo2 f acilities an2
Ser 1i ce
Cooperati1e "
7i scipl ine2 Mgt'
,eg/lar *r a2ing
(nformati on
#o. 7eli1ery
Commission
6oo2 8ffice
Maintenance
7i2 not respon2
Seri es1

CHAPTER - V
• SU11AR=
• SUGGESTIONS




SU11AR=
Stock e8changes are the pivot of capital market$ !hey serve as the
channels through "hich primary issues are oGered to the investing public and
they provide the mechanism through outstanding securities are traded$ Nhile
there "e only @ recogniDed stock e8changes in ?@LF1 the number had gone up
to :M by the end of :FF=$
MinimiDe isasters "ith derivatives
0t the level of e8changes1 position limits and surveillance procedures
should be sound$ 0t the level of clearinghouse1 margin re3uirements should
be stringently enforced1 even "hen dealing "ith a large institution like 'aring$
0t the level of individual companies "ith positions on the market1 modern
risk measurement systems should be established alongside the creation of
capabilities in trading in derivatives$ !he basic idea1 "hich should be
steadfastly used "hen thinking about returns1 is that risk also merits
measurement$
Options margining "orkC
In the case of futures1 both short and long are charged initial margin1 and
after this1 both sides pay daily mark7to7mark margin$ !his is not ho" options
"ork$ In the options market1 the long pays up the full price of the options on
the same day1 and the short puts up initial margin$ 0fter this1 the long is
relieved of all responsibilities to his position1 and the short pays daily mark7to7
market margin$
!he initial margin of the option short is the largest loss that he can suGer
"ith a one7day price change that goes against his$ !his is calculated using
theoretical option7pricing formulas$
erivatives allo" a shifting of risk from a person "ho does not "ant to dear
the risk to a person "ho "ants to dear the risk$ !he only investment decision
that can be made is "hether to be in a certain area of business or not$ For
e8ample1 if a garment e8porter dislikes currency risk1 the only choice that he
faces ;in a "orld before derivatives> is "hether to be in garment e8port or not$
Nhich derivatives1 he has the ability and choice to insure against currency
e8posure$ 0nd he is able to do this by trading this e8posure "ith others in the
economy that is e3uipped to deal "ith it$
'oth futures and options markets have a signi2cant impact upon the
informational eOciency of 2nancial markets$ In the case of futuresC
?$ !he simplest and most direct eGect is that the launch of derivatives
market is correlated "ith improvements in market eOciency in the
underlying market$ !his improved market eOciency means that the
market prices of individual securities are more informative$
:$ Once futures markets appear1 a certain de7linking of roles in the t"o
markets is observed$ !he cash market caters to relatively non7speculative
orders1 and the futures markets takes over the major brunt of price
discovery$ !he futures market is better suited for this role1 because of
high li3uidity and leverage$ Nhenever ne"s strikes1 it 2rst appears as a
shock in the futures market prices1 "hich arbitrage then carries into the
cash market$
M$ 0nother uni3ue feature applies for the market inde8$ In today6s economy1
speculation on the level of the inde8 is diOcult1 because a tradable inde8
does not e8ist$
.ence informed speculators might try to take positions on individual
securities in order to implement vie"s about the inde81 but this is diOcult
because of higher transactions costs$ M@ Inde8 futures "ill hence improve
the informational 3uality of the market inde8$
In the case of optionsC
?$ Options are important to the market eOciency of the underlying in
much the same "ay that futures are important$
:$ In addition1 options play one uni3ue role of revealing the market6s
perception of volatility$ .igh73uality volatility forecasts have serious
rami2cations for decisions in portfolio optimiDation1 production
planning physical investment decisions1 etc$
'y using the option price in the market1 it is possible to infer the
market6s consensus vie" about volatility through a simple formula$ !his is a
completely uni3ue role that options play that neither the cash market nor the
futures markets can possibly play$ !his is a very important reason "hy
security options are important$ I f options of !ISCO e8isted4 the entire market
"ould be able to observe the price of options on the market1 and infer a very
good forecast about volatility on !ISCO in the coming "eeks and months$


SUGGESTIONS!
• !o succeed trade in futures and options1 a thorough understanding of
concepts and trading strategies is important1 sharekhanltd May put in
some special eGorts to educate its clients$
• sharekhanltd May conduct seminars for its clients and prospective
clients for derivative market$






ANNEXURE

)GUESTIONNAIRE
),I,ILOGRAPH=

GUESTIONNAIRE

NameC 7777777777777777777777777777777777777777777
PERSONAL DETAILS
?$ 0geC 7777777777777777777777777777777777777777777
:$ &uali2cationsC 7777777777777777777777777777777777777777777
M$ 0re you a Member ;> or a Client ;> of sharkhanltd P
TRADING DETAILSC
<$In "hich e8changes do you trade in
NS* ;>1 'S* ;>1 .S* ;>1 0ny Other 777777777777
A$In "hich segments do you trade in
Cash Market ;>1 Futures and Options ;>1 Mutual Funds ;>
=$.ave you traded through any broker;s>$ +es ;> B No ;>
If yes1 NamesC ZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZ

J$Since ho" many years have you been tradingP ZZZZZZZZZZZZZZ +ears

L$ On "hat basis do you select scrip for tradingP
*#S ;>1 Company image ;>1 #ro2tability ;> O(
0ny other ZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZ


@$ From "here do you gather information about the scrip6sP
Ne"s papers ;> 0nnual reports ;> Share khan revie" ;>
?F$"hich "ould you recommend as the three most favorable scrips for
InvestmentP
ZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZ7
III.DERIVATIVE TRADING DETAILS

??$ +ou primarily use derivates for
Speculation ;> 0rbitrage ;> .edging ;>
?:$ o you invest more in Futures ;> or OptionsP ;>
?M$ o you invest more in Inde8 futures ;> or Stock FuturesP ;>
?<$ o you invest more in Call Option ;> or #ut OptionP ;>
?A$ .o" do you rate sharekhanltd in providing brokering facilities in
.yderabadP
/ood ;> 'etter ;> 'est ;>
?=$ (easons for trading in sharekhanltdP

,I,LIOGRAPH=

Book Reference
9 Options1 Futures and Other erivative SecuritiesE
7Hull John C$
9 Modern portfolio theory and Investment 0nalysis E
Eiton Edwin.j. And Gu!" #atin j.
9 FIN0NCI0L M0N0/*M*N!E
V $ %halla.

NEWS PAPERS
*CONOMIC !IM*S
')SIN*SS LIN*

SOME INTERNET LINKS
www.nse7india.com
www.bse7india.com
www.pimanagement.org
www.naruc.org
www.businessworldindia.com
NCFM ;NS* Certi2cation in Financial Markets>

doc_911227232.doc