Description
The emergence of the market for derivatives products, most notably forwards, futures and options, can be tracked back to the willingness of risk-averse economic agents to guard themselves against uncertainties arising out of fluctuations in asset prices.
A STUDY ON FINANCIAL DERIVATIVES
(FUTURES & OPTIONS)
Under the Esteemed guidance of
Lecturer of Business Management
Project Report submitted in partial fulfillment for the award of Degree of
Master of Business Administration
DECLARATION
I hereby declare that this project titled “A STUDY ON FINANCIAL
DERIVATIVES (FUTURES & OPTIONS)” submitted by me to the
department of Business Management !!!! is a bonafide wor" underta"en
by me and it is not submitted to any other uni#ersity or institution for the
award of any degree $certificate or published any time before%
ABSTRACT
&he emergence of the mar"et for deri#ati#es products most notably
forwards futures and options can be trac"ed bac" to the willingness of ris"'
a#erse economic agents to guard themsel#es against uncertainties arising out
of fluctuations in asset prices% Deri#ati#es are ris" management instruments
which deri#e their #alue from an underlying asset% &he following are three
broad categories of participants in the deri#ati#es mar"et (edgers
)peculators and *rbitragers% Prices in an organi+ed deri#ati#es mar"et
reflect the perception of mar"et participants about the future and lead the
price of underlying to the percei#ed future le#el% In recent times the
Deri#ati#e mar"ets ha#e gained importance in terms of their #ital role in the
economy% &he increasing in#estments in stoc"s ,domestic as well as
o#erseas- ha#e attracted my interest in this area% .umerous studies on the
effects of futures and options listing on the underlying cash mar"et #olatility
ha#e been done in the de#eloped mar"ets% &he deri#ati#e mar"et is newly
started in India and it is not "nown by e#ery in#estor so )/BI has to ta"e
steps to create awareness among the in#estors about the deri#ati#e segment%
In cash mar"et the profit$loss of the in#estor depends on the mar"et price of
the underlying asset% &he in#estor may incur huge profit or he may incur
huge loss% But in deri#ati#es segment the in#estor enjoys huge profits with
limited downside% Deri#ati#es are mostly used for hedging purpose% In order
to increase the deri#ati#es mar"et in India )/BI should re#ise some of their
regulations li"e contract si+e participation of 0II in the deri#ati#es mar"et%
In a nutshell the study throws a light on the deri#ati#es mar"et%
*12.34L/D5/M/.&
4ith the deep sense of gratitude I wish to ac"nowledge the support and help
e6tended by all the people in successful completion of this project wor"%
I e6press my gratitude to our Principal XXX for his consistent support (ead
of the Department XXX for his encouragement% I would li"e to than" all
the faculty members who ha#e been a strong source of inspiration through
out the project directly or indirectly%
XXXX
&*BL/ 30 13.&/.&)
13.&/.&) P*5/ .7MB/R)
List of tables I
List of charts and figures II
1hapter 89
Introduction 8
.eed of the study :
3bjecti#es ;
)cope < Limitations =
Research methodology >
1hapter :9
Literature re#iew ?
1hapter ;9
Deri#ati#es 8:
1hapter =9
Data analysis < Interpretations =@
1hapter >9
Recommendations and suggestions AA
1onclusions A@
1hapter ?9
Bibliography B8
LI)& 30 5R*P()
5R*P(
.3%
13.&/.&) P*5/
.7MB/R)
5raph%8 5raph showing the price mo#ements of
I1I1I 0utures
?C
5raph%: 5raph showing the price mo#ements of I1I1I
)pot < 0utures
??
5raph%; 5raph showing the price mo#ements of )BI
0utures
?B
5raph%= 5raph showing the price mo#ements of )BI
)pot < 0utures
A=
5raph > 5raph showing the price mo#ements of D/)
B*.2 0utures
A?
5raph ? 5raph the price mo#ements of D/) B*.2
)pot < 0utures
B;
LI)& 30 &*BL/)
&*BL/ .7MB/R 13.&/.& P*5/
.7MB/R
&able'8 &able showing the mar"et and
future prices of I1I1I ban"
>@
&able': &able showing the call prices
of I1I1I ban"
?:
&able'; &able showing the put prices of
I1I1I ban"
?;
&able '= &able showing the mar"et and
future prices of )BI
?=
&able' > &able showing the call prices
of
)BI
AC
&able' ? &able showing the put prices of
)BI
A:
&able 'A &able showing the mar"et and
future prices of D/) ban"
A>
&able' B &able showing the call prices
of D/) ban"
AB
&able '@ &able showing the put prices of
D/) ban"
B8
II
INTRODUCTION:-
&he emergence of the mar"et for deri#ati#es products most notably
forwards futures and options can be trac"ed bac" to the willingness of ris"'a#erse
economic agents to guard themsel#es against uncertainties arising out of
fluctuations in asset prices% By their #ery nature the financial mar"ets are mar"ed
by a #ery high degree of #olatility% &hrough the use of deri#ati#e products it is
possible to partially or fully transfer price ris"s by loc"ing'in asset prices% *s
instruments of ris" management these generally do not influence the fluctuations
in the underlying asset prices% (owe#er by loc"ing'in asset prices deri#ati#e
product minimi+es the impact of fluctuations in asset prices on the profitability and
cash flow situation of ris"'a#erse in#estors%
Deri#ati#es are ris" management instruments which deri#e their #alue
from an underlying asset% &he underlying asset can be bullion inde6 share bonds
currency interest etc%% Ban"s )ecurities firms companies and in#estors to hedge
ris"s to gain access to cheaper money and to ma"e profit use deri#ati#es%
Deri#ati#es are li"ely to grow e#en at a faster rate in future%
NEED FOR STUDY 9
In recent times the Deri#ati#e mar"ets ha#e gained importance in terms of
their #ital role in the economy% &he increasing in#estments in deri#ati#es
,domestic as well as o#erseas- ha#e attracted my interest in this area%
&hrough the use of deri#ati#e products it is possible to partially or fully
transfer price ris"s by loc"ing'in asset prices% *s the #olume of trading is
tremendously increasing in deri#ati#es mar"et this analysis will be of
immense help to the in#estors%
OBJECTIVES OF THE STUDY:
? &o analy+e the operations of futures and options%
? &o find the profit$loss position of futures buyer and seller and also the
option writer and option holder%
? &o study about ris" management with the help of deri#ati#es%
SCOPE OF THE STUDY:
&he study is limited to “Deri#ati#es” with special reference to futures and
option in the Indian conte6t and the Inter'1onnected )toc" /6change has been
ta"en as a representati#e sample for the study% &he study canEt be said as totally
perfect% *ny alteration may come% &he study has only made a humble attempt at
e#aluation deri#ati#es mar"et only in India conte6t% &he study is not based on the
international perspecti#e of deri#ati#es mar"ets which e6ists in .*)D*F 1B3&
etc%
LIMITATIONS OF THE STUDY:
&he following are the limitation of this study%
? &he scrip chosen for analysis is I1I1I B*.2 )BI < D/) B*.2
and the contract ta"en is Ganuary :CCB ending one Hmonth contract%
? &he data collected is completely restricted to I1I1I B*.2 )BI <
D/) B*.2 of Ganuary :CCBI hence this analysis cannot be ta"en uni#ersal%
RESEARCH METHODOLOGY:
Data has been collected in two ways% &hese are9
Seco!"#$ Me%&o!:
Jarious portals
• www%nseindia%com
0inancial news papers /conomics times%
? BOO'S :-
? Deri#ati#es Dealers Module 4or" Boo" ' .10M
,3ctober :CC>-
? 5ordon and .atarajan, ,:CC?- ‘Financial Markets and
Services’ ,third edition- (imalaya publishers
LITERATURE REVIE(
Be&")*o+# o, S%oc- M"#-e% Vo."%*.*%$ ",%e# De#*)"%*)e/
5ola"a 1 .athK Research Paper ,.)/-
0inancial mar"et liberali+ation since early 8@@Cs has brought about major
changes in the
financial mar"ets in India% &he creation and empowerment of )ecurities and
/6change
Board of India ,)/BI- has helped in pro#iding higher le#el accountability in
the mar"et%
.ew institutions li"e .ational )toc" /6change of India ,.)/IL- .ational
)ecurities
1learing 1orporation ,.)11L- .ational )ecurities Depository ,.)DL-
ha#e been the
change agents and helped cleaning the system and pro#ided safety to
in#esting public at
large% 4ith modern technology in hand these institutions did set
benchmar"s and standards for others to follow% Microstructure changes
brought about reduction in transaction cost that helped in#estors to loc" in a
deal faster and cheaper%
3ne decade of reforms saw implementation of policies that ha#e impro#ed
transparency in the system pro#ided for cheaper mode of information
dissemination without much time delay better corporate go#ernance etc%
&he capital mar"et witnessed a major transformation and structural change
during the period% &he reforms process ha#e helped to impro#e efficiency in
information dissemination enhancing transparency prohibiting unfair trade
practices li"e insider trading and price rigging% Introduction of deri#ati#es in
Indian capital mar"et was initiated by the 5o#ernment through L 1 5upta
1ommittee report% &he L%1% 5upta 1ommittee on Deri#ati#es had
recommended in December 8@@A the introduction of stoc" inde6 futures in
the first place to be followed by other products once the mar"et matures% &he
preparation of regulatory framewor" for the operations of the inde6 futures
contracts too" some more time and finally futures on benchmar" indices
were introduced in Gune :CCC followed by options on indices in Gune :CC8
followed by options on indi#idual stoc"s in Guly :CC8 and finally followed
by futures on indi#idual stoc"s in .o#ember :CC8%
Do F+%+#e/ "! O0%*o/ %#"!*1 *c#e"/e /%oc- 2"#-e% )o."%*.*%$3
Dr% Premalata )henbagaramanK Research Paper ,.)/-
.umerous studies on the effects of futures and options listing on the underlying
cash mar"et #olatility ha#e been done in the de#eloped mar"ets% &he empirical
e#idence is mi6ed and most suggest that the introduction of deri#ati#es do not
destabili+e the underlying mar"et% &he studies also show that the introduction of
deri#ati#e contracts impro#es liLuidity and reduces informational asymmetries in
the mar"et% In the late nineties many emerging and transition economies ha#e
introduced deri#ati#e contracts raising interesting issues uniLue to these mar"ets%
/merging stoc" mar"ets operate in #ery different economic political
technological andsocial en#ironments than mar"ets in de#eloped countries li"e
the 7)* or the 72% &his paper e6plores the impact of the introduction of
deri#ati#e trading on cash mar"et #olatility using data on stoc" inde6 futures and
options contracts traded on the ) < P 1.! .ifty ,India-% &he results suggest that
futures and options trading ha#e not led to a change in the #olatility of the
underlying stoc" inde6 but the nature of #olatility seems to ha#e changed post'
futures% 4e also e6amine whether greater futures trading acti#ity ,#olume and
open interest- is associated with greater spot mar"et #olatility% 4e find no
e#idence of any lin" between trading acti#ity #ariables in the futures mar"et and
spot mar"et #olatility% &he results of this study are especially important to stoc"
e6change officials and regulators in designing trading mechanisms and contract
specifications for deri#ati#e contracts thereby enhancing their #alue as ris"
management tools
DERIVATIVES
DERIVATIVES:-
&he emergence of the mar"et for deri#ati#es products most notably forwards
futures and options can be trac"ed bac" to the willingness of ris"'a#erse economic
agents to guard themsel#es against uncertainties arising out of fluctuations in asset
prices% By their #ery nature the financial mar"ets are mar"ed by a #ery high
degree of #olatility% &hrough the use of deri#ati#e products it is possible to
partially or fully transfer price ris"s by loc"ing'in asset prices% *s instruments of
ris" management these generally do not influence the fluctuations in the
underlying asset prices% (owe#er by loc"ing'in asset prices deri#ati#e product
minimi+es the impact of fluctuations in asset prices on the profitability and cash
flow situation of ris"'a#erse in#estors%
Deri#ati#es are ris" management instruments which deri#e their #alue
from an underlying asset% &he underlying asset can be bullion inde6 share bonds
currency interest etc%% Ban"s )ecurities firms companies and in#estors to hedge
ris"s to gain access to cheaper money and to ma"e profit use deri#ati#es%
Deri#ati#es are li"ely to grow e#en at a faster rate in future%
DEFINITION
Deri#ati#e is a product whose #alue is deri#ed from the #alue of an underlying
asset in a contractual manner% &he underlying asset can be eLuity fore6
commodity or any other asset%
8- )ecurities 1ontracts ,Regulation-*ct 8@>? ,)1R *ct- defines
“deri#ati#e” to secured or unsecured ris" instrument or contract for differences or
any other form of security%
:- * contract which deri#es its #alue from the prices or inde6 of
prices of underlying securities%
Emergence of financial derivative products
Deri#ati#e products initially emerged as hedging de#ices against
fluctuations in commodity prices and commodity'lin"ed deri#ati#es remained the
sole form of such products for almost three hundred years% 0inancial deri#ati#es came
into spotlight in the post'8@AC period due to growing instability in the financial
mar"ets% (owe#er since their emergence these products ha#e become #ery popular
and by 8@@Cs they accounted for about two'thirds of total transactions in deri#ati#e
products% In recent years the mar"et for financial deri#ati#es has grown tremendously
in terms of #ariety of instruments a#ailable their comple6ity and also turno#er% In the
class of eLuity deri#ati#es the world o#er futures and options on stoc" indices ha#e
gained more popularity than on indi#idual stoc"s especially among institutional
in#estors who are major users of inde6'lin"ed deri#ati#es% /#en small in#estors find
these useful due to high correlation of the popular inde6es with #arious portfolios and
ease of use% &he lower costs associated with inde6 deri#ati#es #isHaH#is deri#ati#e
products based on indi#idual securities is another reason for their growing use%
PARTICIPANTS:
&he following three broad categories of participants in the deri#ati#es mar"et%
HEDGERS:
(edgers face ris" associated with the price of an asset% &hey use futures or
options mar"ets to reduce or eliminate this ris"%
SPECULATORS:
)peculators wish to bet on future mo#ements in the price of an asset% 0utures
and options contracts can gi#e them an e6tra le#erageI that is they can increase
both the potential gains and potential losses in a speculati#e #enture%
* RBITRAGERS9
*rbitrageurs are in business to ta"e of a discrepancy between prices in two
different mar"ets if for e6ample they see the futures price of an asset getting out
of line with the cash price they will ta"e offsetting position in the two mar"ets to
loc" in a profit%
FUNCTION OF DERIVATIVES MAR'ETS9
&he following are the #arious functions that are performed by the deri#ati#es
mar"ets% &hey are9
? Prices in an organi+ed deri#ati#es mar"et reflect the perception
of mar"et participants about the future and lead the price of underlying to the
percei#ed future le#el%
? Deri#ati#es mar"et helps to transfer ris"s from those who ha#e
them but may not li"e them to those who ha#e an appetite for them%
? Deri#ati#es trading acts as a catalyst for new entrepreneurial
acti#ity%
? Deri#ati#es mar"ets help increase sa#ing and in#estment in long
run%
TYPES OF DERIVATIVES:
&he following are the #arious types of deri#ati#es% &hey are9
FOR(ARDS9
* forward contract is a customi+ed contract between two entities where settlement
ta"es place on a specific date in the future at todayEs pre'agreed price%
FUTURES9
* futures contract is an agreement between two parties to buy or sell an asset in a
certain time at a certain price they are standardi+ed and traded on e6change%
OPTIONS:
3ptions are of two types'calls and puts% 1alls gi#e the buyer the right but not the
obligation to buy a gi#en Luantity of the underlying asset at a gi#en price on or
before a gi#en future date% Puts gi#e the buyer the right but not the obligation to
sell a gi#en Luantity of the underlying asset at a gi#en price on or before a gi#en
date%
(ARRANTS 9
3ptions generally ha#e li#es of up to one yearI the majority of options traded on
options e6changes ha#ing a ma6imum maturity of nine months% Longer'dated
options are called warrants and are generally traded o#er'the counter%
LEAPS9
&he acronym L/*P) means long'term /Luity *nticipation securities% &hese are
options ha#ing a maturity of up to three years%
BAS'ETS:
Bas"et options are options on portfolios of underlying assets% &he underlying asset
is usually a mo#ing a#erage of a bas"et of assets% /Luity inde6 options are a form
of bas"et options%
S(APS:
)waps are pri#ate agreements between two parties to e6change cash floes in the
future according to a prearranged formula% &hey can be regarded as portfolios of
forward contracts% &he two commonly used )waps are9
") I%e#e/% #"%e S4"0/9
&hese entail swapping only the related cash flows between the parties in the
same currency%
5) C+##ec$ S4"0/9
&hese entail swapping both principal and interest between the parties with the
cash flows in on direction being in a different currency than those in the opposite
direction%
S(APTION:
)waptions are options to buy or sell a swap that will become operati#e at the
e6piry of the options% &hus a swaption is an option on a forward swap%
RATIONALE BEHIND THE DELOPMENT OF DERIVATIVES:
(olding portfolios of securities is associated with the ris" of the possibility that the
in#estor may reali+e his returns which would be much lesser than what he
e6pected to get% &here are #arious factors which affect the returns9
8% Price or di#idend ,interest-
:% )ome are internal to the firm li"e'
• Industrial policy
• Management capabilities
• 1onsumerEs preference
• Labour stri"e etc%
&hese forces are to a large e6tent controllable and are termed as non systematic
ris"s% *n in#estor can easily manage such non'systematic by ha#ing a well'
di#ersified portfolio spread across the companies industries and groups so that a
loss in one may easily be compensated with a gain in other%
&here are yet other of influence which are e6ternal to the firm cannot be
controlled and affect large number of securities% &hey are termed as systematic
ris"% &hey are9
8%/conomic
:%Political
;%)ociological changes are sources of systematic ris"%
0or instance inflation interest rate etc% their effect is to cause prices of nearly all'
indi#idual stoc"s to mo#e together in the same manner% 4e therefore Luite often
find stoc" prices falling from time to time in spite of companyEs earning rising and
#ice #ersa%
Rational Behind the de#elopment of deri#ati#es mar"et is to manage this
systematic ris" liLuidity in the sense of being able to buy and sell relati#ely large
amounts Luic"ly without substantial price concession%
In debt mar"et a large position of the total ris" of securities is systematic%
Debt instruments are also finite life securities with limited mar"etability due to
their small si+e relati#e to many common stoc"s% &hose factors fa#our for the
purpose of both portfolio hedging and speculation the introduction of a deri#ati#es
securities that is on some broader mar"et rather than an indi#idual security%
REGULATORY FRAME(OR':
&he trading of deri#ati#es is go#erned by the pro#isions contained in the )1 R *
the )/BI *ct and the regulations framed there under the rules and byelaws of
stoc" e6changes%
Re1+."%*o ,o# De#*)"%*)e T#"!*1:
)/BI set up a := member committed under 1hairmanship of Dr% L% 1% 5upta
de#elop the appropriate regulatory framewor" for deri#ati#e trading in India% &he
committee submitted its report in March 8@@B% 3n May 88 8@@B )/BI accepted
the recommendations of the committee and appro#ed the phased introduction of
deri#ati#es trading in India beginning with stoc" inde6 0utures% )/BI also
appro#ed he “suggesti#e bye'laws” recommended by the committee for regulation
and control of trading and settlement of Deri#ati#e contract%
&he pro#ision in the )1R *ct go#erns the trading in the securities% &he
amendment of the )1R *ct to include “D/RIJ*&IJ/)” within the ambit of
securities in the )1R *ct made trading in Deri#ati#es possible with in the
framewor" of the *ct%
8% /ligibility criteria as prescribed in the L% 1% 5upta
committee report may apply to )/BI for grant of recognition under section = of the
)1R *ct 8@>? to start Deri#ati#es &rading% &he deri#ati#e e6change$segment
should ha#e a separate go#erning council and representation of trading$clearing
member shall be limited to ma6imum =CM of the total members of the go#erning
council% &he e6change shall regulate the sales practices of its members and will
obtain appro#al of )/BI before start of &rading in any deri#ati#e contract%
:% &he e6change shall ha#e minimum >C members%
;% &he members of an e6isting segment of the e6change
will not automatically become the members of the deri#ati#es segment% &he
members of the deri#ati#es segment need to fulfill the eligibility conditions as lay
down by the L% 1% 5upta committee%
=% &he clearing and settlement of deri#ati#es trades shall
be through a )/BI appro#ed
clearingcorporation$clearinghouse%1learing1orporation$1learing (ouse complying
with the eligibility conditions as lay down By the committee ha#e to apply to )/BI
for grant of appro#al%
>% Deri#ati#es bro"er$dealers and 1learing members are
reLuired to see" registration from )/BI%
?% &he Minimum contract #alue shall not be less than
Rs%: La"h% /6change should also submit details of the futures contract they
purpose to introduce%
A% &he trading members are reLuired to ha#e Lualified
appro#ed user and sales persons who ha#e passed a certification programme
appro#ed by )/BI
I%#o!+c%*o %o ,+%+#e/ "! o0%*o/
In recent years deri#ati#es ha#e become increasingly important in the field
of finance% 4hile futures and options are now acti#ely traded on many
e6changes forward contracts are popular on the 3&1 mar"et% In this chapter
we shall study in detail these three deri#ati#e contracts%
Fo#4"#! co%#"c%/
* forward contract is an agreement to buy or sell an asset on a specified
future date for a specified price% 3ne of the parties to the contract assumes a
long position and agrees to buy the underlying asset on a certain specified
future date for a certain specified price% &he other party assumes a short
position and agrees to sell the asset on the same date for the same price%
3ther contract details li"e deli#ery date price and Luantity are negotiated
bilaterally by the parties to the contract% &he forward contracts are normally
traded outside the e6changes% &he salient features of forward contracts are9
&hey are bilateral contracts and hence e6posed to counterHparty ris"%
/ach contract is custom designed and hence is uniLue in terms of contract
si+e e6piration date and the asset type and Luality%
&he contract price is generally not a#ailable in public domain%
3n the e6piration date the contract has to be settled by deli#ery of the asset%
If the party wishes to re#erse the contract it has to compulsorily go to the
same counterparty which often results in high prices being charged%
(owe#er forward contracts in certain mar"ets ha#e become #ery
standardi+ed as in the case of foreign e6change thereby reducing
transaction costs and increasing transactions #olume% &his process of
standardi+ation reaches its limit in the organi+ed futures mar"et%
0orward contracts are #ery useful in hedging and speculation% &he classic
hedging application would be that of an e6porter who e6pects to recei#e
payment in dollars three months later% (e is e6posed to the ris" of e6change
rate fluctuations% By using the currency forward mar"et to sell dollars
forward he can loc" on to a rate today and reduce his uncertainty% )imilarly
an importer who is reLuired to ma"e a payment in dollars two months hence
can reduce his e6posure to e6change rate fluctuations by buying dollars
forward%
If a speculator has information or analysis which forecasts an upturn in a
price then he can go long on the forward mar"et instead of the cash mar"et%
&he speculator would go long on the forward wait for the price to rise and
then ta"e a re#ersing transaction to boo" profits% )peculators may well be
reLuired to deposit a margin upfront% (owe#er this is generally a relati#ely
small proportion of the #alue of the assets underlying the forward contract%
&he use of forward mar"ets here supplies le#erage to the speculator%
L*2*%"%*o/ o, ,o#4"#! 2"#-e%/
0orward mar"ets world'wide are afflicted by se#eral problems9
? Lac" of centrali+ation of trading
? IlliLuidity and
? 1ounterparty ris"
In the first two of these the basic problem is that of too much fle6ibility and
generality% &he forward mar"et is li"e a real estate mar"et in that any two
consenting adults can form contracts against each other% &his often ma"es
them design terms of the deal which are #ery con#enient in that specific
situation but ma"es the contracts non'tradable%
1ounterparty ris" arises from the possibility of default by any one party to the
transaction% 4hen one of the two sides to the transaction declares ban"ruptcy the
other suffers% /#en when forward mar"ets trade standardi+ed contracts and hence
a#oid the problem of illiLuidity still the counterparty ris" remains a #ery serious
I%#o!+c%*o %o ,+%+#e/
0utures mar"ets were designed to sol#e the problems that e6ist in forward
mar"ets% * 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 unli"e
forward contracts the futures contracts are standardi+ed and e6change
traded% &o facilitate liLuidity in the futures contracts the e6change specifies
certain standard features of the contract% It is a standardi+ed contract with
standard underlying instrument a standard Luantity and Luality of the
underlying instrument that can be deli#ered ,or which can be used for
reference purposes in settlement- and a standard timing of such settlement% *
futures contract may be offset prior to maturity by entering into an eLual and
opposite transaction% More than @@M of futures transactions are offset this
way%
D*/%*c%*o 5e%4ee ,+%+#e/ "! ,o#4"#!/
0orward contracts are often confused with futures contracts% &he confusion is
primarily because both ser#e essentially the same economic functions of allocating
ris" in the presence of future price uncertainty% (owe#er futures are a significant
impro#ement o#er the forward contracts as they eliminate counterparty ris" and
offer more liLuidity as they are e6change traded% *bo#e table lists the distinction
between the two
INTRODUCTION TO FUTURES
DEFINITION: * 0utures contract is an agreement between two parties to buy or
sell an asset a certain time in the future at a certain price% &o facilitate liLuidity in
the futures contract the e6change specifies certain standard features of the
contract% &he standardi+ed items on a futures contract are9
? Fuantity of the underlying
? Fuality of the underlying
? &he date and the month of deli#ery
? &he units of price Luotations and minimum price change
? Location of settlement
FEATURES OF FUTURES:
? 0utures are highly standardi+ed%
? &he contracting parties need to pay only margin money%
? (edging of price ris"s%
? &hey ha#e secondary mar"ets to%
TYPES OF FUTURES:
3n the basis of the underlying asset they deri#e the financial futures are di#ided
into two types9
? )toc" futures9
? Inde6 futures :
P"#%*e/ * %&e ,+%+#e/ co%#"c%:
&here are two parties in a future contract the buyer and the seller% &he buyer of
the futures contract is one who is L3.5 on the futures contract and the seller of
the futures contract is who is )(3R& on the futures contract%
&he pay off for the buyer and the seller of the futures of the contracts are as
follows9
PAY-OFF FOR A BUYER OF FUTURES9
0#o,*%
FP
F
6 S7 S8
FL
.o//
CASE 8:-&he buyer bought the futures contract at ,0-I if the future price
goes to )8 then the buyer gets the profit of ,0P-%
CASE 7:-&he buyer gets loss when the future price goes less then ,0- if the future
price goes to ): then the buyer gets the loss of ,0L-%
PAY-OFF FOR A SELLER OF FUTURES9
0#o,*%
FL
S7 F S8
FP
.o//
F 9 FUTURES PRICE S8: S7 9 SETTLEMENT PRICE
CASE 8:- &he seller sold the future contract at ,0-I if the future goes to )8
then the seller gets the profit of ,0P-%
CASE 7:- &he seller gets loss when the future price goes greater than ,0- if the
future price goes to ): then the seller gets the loss of ,0L-%
MARGINS:
Margins are the deposits which reduce counter party ris"arise in a futures contract%
&hese margins are collected in order to eliminate the counter party ris"% &here are
three types of margins9
I*%*". M"#1*/:
4hene#er a futures contract is signed both buyer and seller are reLuired to post
initial margins% Both buyer and seller are reLuired to ma"e security deposits that
are intended to guarantee that they will infact be able to fulfill their obligation%
&hese deposits are initial margins%
M"#-*1 %o 2"#-e% 2"#1*/:
&he process of adjusting the eLuity in an in#estorEs account in order to reflect the
change in the settlement price of futures contract is "nown as M&M margin%
M"*%e"ce 2"#1*:
&he in#estor must "eep the futures account eLuity eLual to or greater than certain
percentage of the amount deposited as initial margin% If the eLuity goes less than
that percentage of initial margin then the in#estor recei#es a call for an additional
deposit of cash "nown as maintenance margin to bring the eLuity upto the initial
margin%
PRICING THE FUTURES:
&he 0air #alue of the futures contract is deri#ed from a model "nows as the cost of
carry model% &his model gi#es the fair #alue of the contract%
1ost of 1arry9
0N) ,8Or'L-
t
4here
0' 0utures price
)' )pot price of the underlying
r' 1ost of financing
L' /6pected Di#idend yield
t ' (olding Period%
FUTURES TERMINOLOGY:
S0o% 0#*ce:
&he price at which an asset trades in the spot mar"et%
F+%+#e/ 0#*ce9
&he price at which the futures contract trades in the futures mar"et%
Co%#"c% c$c.e:
&he period o#er which contract trades% &he inde6 futures contracts on the .)/
ha#e one' month two Hmonth and three'month e6piry cycle which e6pire on the
last &hursday of the month% &hus a Ganuary e6piration contract e6pires on the last
&hursday of Ganuary and a 0ebruary e6piration contract ceases trading on the last
&hursday of 0ebruary% 3n the 0riday following the last &hursday a new contract
ha#ing a three'month e6piry is introduced for trading%
E;0*#$ !"%e:
It is the date specifies in the futures contract% &his is the last day on which the
contract will be traded at the end of which it will cease to e6ist%
Co%#"c% /*<e:
&he amount of asset that has to be deli#ered under one contract% 0or instance the
contract si+e on .)/Es futures mar"et is 8CC nifties%
B"/*/:
In the conte6t of financial futures basis can be defined as the futures price minus
the spot price% &he will be a different basis for each deli#ery month for each
contract In a normal mar"et basis will be positi#e% &his reflects that futures prices
normally e6ceed spot prices%
Co/% o, c"##$:
&he relationship between futures prices and spot prices can be summari+ed in
terms of what is "nown as the cost of carry% &his measures the storage cost plus the
interest that is paid to finance the asset less the income earned on the asset%
O0e I%e#e/%:
&otal outstanding long or short position in the mar"et at any specific time% *s total
long positions in the mar"et would be eLual to short positions for calculation of
open interest only one side of the contract is counter%
INTRODUCTION TO OPTIONS:
DEFINITION 3ption is a type of contract between two persons where one grants
the other the right to buy a specific asset at a specific price within a specific time
period% *lternati#ely the contract may grant the other person the right to sell a
specific asset at a specific price within a specific time period% In order to ha#e this
right% &he option buyer has to pay the seller of the option premium
&he assets on which option can be deri#ed are stoc"s commodities inde6es etc% If
the underlying asset is the financial asset then the option are financial option li"e
stoc" options currency options inde6 options etc and if options li"e commodity
option%
PROPERTIES OF OPTION:
3ptions ha#e se#eral uniLue properties that set them apart from other securities%
&he following are the properties of option9
• Limited Loss
• (igh le#erages potential
• Limited Life
PARTIES IN AN OPTION CONTRACT:
8= B+$e# o, %&e o0%*o:
&he buyer of an option is one who by paying option premium buys the right but
not the obligation to e6ercise his option on seller$writer%
7= (#*%e#>/e..e# o, %&e o0%*o:
&he writer of the call $put options is the one who recei#es the option premium and
is their by obligated to sell$buy the asset if the buyer e6ercises the option on him
TYPES OF OPTIONS:
&he options are classified into #arious types on the basis of #arious #ariables% &he
following are the #arious types of options%
8= O %&e 5"/*/ o, %&e +!e#.$*1 "//e%:
3n the basis of the underlying asset the option are di#ided in to two types 9
• I.D/! 3P&I3.)
&he inde6 options ha#e the underlying asset as the inde6%
• )&312 3P&I3.)9
* stoc" option gi#es the buyer of the option the right to buy$sell stoc" at a
specified price% )toc" option are options on the indi#idual stoc"s there are
currently more than 8>C stoc"s there are currently more than 8>C stoc"s are
trading in the segment%
II% O %&e 5"/*/ o, %&e 2"#-e% 2o)e2e%/:
3n the basis of the mar"et mo#ements the option are di#ided into two types% &hey
are9
• 1*LL 3P&I3.9
* call option is bought by an in#estor when he seems that the stoc" price mo#es
upwards% * call option gi#es the holder of the option the right but not the
obligation to buy an asset by a certain date for a certain price%
• P7& 3P&I3.9
* put option is bought by an in#estor when he seems that the stoc" price mo#es
downwards% * put options gi#es the holder of the option right but not the
obligation to sell an asset by a certain date for a certain price%
III% O %&e 5"/*/ o, e;e#c*/e o, o0%*o:
3n the basis of the e6ercising of the option the options are classified into two
categories%
• *M/RI1*. 3P&I3.9
*merican options are options that can be e6ercised at any time up to the e6piration
date all stoc" options at .)/ are *merican%
• /73R3P/*. 3P&I3.9
/uropean options are options that can be e6ercised only on the e6piration date
itself% /uropean options are easier to analy+e than *merican options%all inde6
options at .)/ are /uropean%
PAY-OFF PROFILE FOR BUYER OF A CALL OPTION9
&he pay'off of a buyer options depends on a spot price of a underlying asset% &he
following graph shows the pay'off of buyer of a call option%
P#o,*%
ITM
SR
6 E7 S E8
SP OTM ATM
.o//
) ' )tri"e price 3&M ' 3ut of the money
)P ' Premium$ Loss *&M ' *t the money
/8 ' )pot price 8 I&M ' In the money
/:' )pot price :
)R' profit at spot price /8
CASE 89 ,)pot price P )tri"e price-
*s the spot price ,/8- of the underlying asset is more than stri"e price ,)-% the
buyer gets profit of ,)R- if price increases more than /8 then profit also increase
more than )R%
CASE 79 ,)pot price Q )tri"e price-
*s a spot price ,/:- of the underlying asset is less than stri"e price ,s-
&he buyer gets loss of ,)P- if price goes down less than /: then also his loss is
limited to his premium ,)P-
PAY-OFF PROFILE FOR SELLER OF A CALL OPTION:
&he pay'off of seller of the call option depends on the spot price of the underlying
asset% &he following graph shows the pay'off of seller of a call option9
0#o,*%
SR
OTM
S
E8 ITM ATM E7
SP
.o//
) ' )tri"e price I&M ' In the money
)P ' Premium $profit *&M ' *t the money
/8 ' )pot price 8 3&M ' 3ut of the money
E2 - Spot price 2
)R ' Loss at spot price /:
CASE 89 ,)pot price Q )tri"e price-
*s the spot price ,/8- of the underlying is less than stri"e price ,)-% the seller gets
the profit of ,)P- if the price decreases less than /8 then also profit of the seller
does not e6ceed ,)P-%
CASE 79 ,)pot price P )tri"e price-
*s the spot price ,/:- of the underlying asset is more than stri"e price ,)- the seller
gets loss of ,)R- if price goes more than /: then the loss of the seller also increase
more than ,)R-%
PAY-OFF PROFILE FOR BUYER OF A PUT OPTION:
&he pay'off of the buyer of the option depends on the spot price of the underlying
asset% &he following graph shows the pay'off of the buyer of a call option%
Profit
Profit
)P
/8 ) 3&M /:
I&M )R *&M
loss
) ' )tri"e price I&M ' In the money
)P ' Premium $profit 3&M ' 3ut of the money
/8 ' )pot price 8 *&M ' *t the money
/: ' )pot price :
)R ' Profit at spot price /8
CASE 89 ,)pot price Q )tri"e price-
*s the spot price ,/8- of the underlying asset is less than stri"e price ,)-% the buyer
gets the profit ,)R- if price decreases less than /8 then profit also increases more
than ,)R-%
CASE 79 ,)pot price P )tri"e price-
*s the spot price ,/:- of the underlying asset is more than stri"e price ,s- the
buyer gets loss of ,)P- if price goes more than /: than the loss of the buyer is
limited to his premium ,)P-
PAY-OFF PROFILE FOR SELLER OF A PUT OPTION9
&he pay'off of a seller of the option depends on the spot price of the underlying
asset% &he following graph shows the pay'off of seller of a put option9
profit
)P
/8 ) I&M /:
3&M *&M
)R
Loss
) ' )tri"e price I&M ' In the money
)P ' Premium$ profit *&M ' *t the money
/8 ' )pot price 8 3&M ' 3ut of the money
/: ' )pot price :
)R ' Loss at spot price /8
CASE 89 ,)pot price Q )tri"e price-
*s the spot price ,/8- of the underlying asset is less than stri"e price ,)- the seller
gets the loss of ,)R- if price decreases less than /8 than the loss also increases
more than ,)R-%
CASE 79 ,)pot price P )tri"e price-
*s the spot price ,/:- of the underlying asset is more than stri"e price ,)- the
seller gets profit of ,)P- if price goes more than /: than the profit of seller is
limited to his premium ,)P-%
F"c%o#/ ",,ec%*1 %&e 0#*ce o, " o0%*o:
&he following are the #arious factors that affect the price of an option they are9
S%oc- 0#*ce: &he pay Hoff from a call option is a amount by which the stoc" price
e6ceeds the stri"e price% 1all options therefore become more #aluable as the stoc"
price increases and #ice #ersa% &he pay'off from a put option is the amountI by
which the stri"e price e6ceeds the stoc" price% Put options therefore become more
#aluable as the stoc" price increases and #ice #ersa%
S%#*-e 0#*ce: In case of a call as a stri"e price increases the stoc" price has to
ma"e a larger upward mo#e for the option to go in'the'money% &herefore for a
call as the stri"e price increases option becomes less #aluable and as stri"e price
decreases option become more #aluable%
T*2e %o e;0*#"%*o9 Both put and call *merican options become more #aluable as
a time to e6piration increases%
Vo."%*.*%$: &he #olatility of a stoc" price is measured of uncertain about future
stoc" price mo#ements% *s #olatility increases the chance that the stoc" will do
#ery well or #ery poor increases% &he #alue of both calls and puts therefore
increase as #olatility increase%
R*/--,#ee *%e#e/% #"%e: &he put option prices decline as the ris"'free rate
increases where as the prices of call always increase as the ris"'free interest rate
increases%
D*)*!e!/: Di#idends ha#e the effect of reducing the stoc" price on the 6'
di#idend rate% &his has an negati#e effect on the #alue of call options and a positi#e
effect on the #alue of put options%
PRICING OPTIONS
&he blac"' scholes formula for the price of /uropean calls and puts on a non'
di#idend paying stoc" are 9
1*LL 3P&I3.9
1 N ).,D8-'!e
'r t
.,D:-
P7& 3P&I3.
P N !e
'r t
.,'D:-').,'D:-
4here
1 N J*L7/ 30 1*LL 3P&I3.
) N )P3& PRI1/ 30 )&312
.N .3RM*L DI)&RIB7&I3.
JN J3L*&ILI&D
! N )&RI2/ PRI1/
r N *..7*L RI)2 0R// R/&7R.
t N 13.&R*1& 1D1L/
d
8 N
L
n ,)$!- O ,rO #
:
$:-t
d
: N
d
8
' #
R
$
O0%*o/ Te#2*o.o1$:
S%#*-e 0#*ce:
&he price specified in the options contract is "nown as stri"e price or /6ercise
price%
O0%*o/ 0#e2*+2:
3ption premium is the price paid by the option buyer to the option seller%
E;0*#"%*o D"%e:
&he date specified in the options contract is "nown as e6piration date%
I-%&e-2oe$ o0%*o:
*n In the money option is an option that would lead to positi#e cash inflow to the
holder if it e6ercised immediately%
A%-%&e-2oe$ o0%*o:
*n at the money option is an option that would lead to +ero cash flow if it is
e6ercised immediately%
O+%-o,-%&e-2oe$ o0%*o:
*n out'of'the'money option is an option that would lead to negati#e cash flow if it
is e6ercised immediately%
I%#*/*c )".+e o, 2oe$:
&he intrinsic #alue of an option is I&M If option is I&M% If the option is 3&M its
intrinsic #alue is +ero%
T*2e )".+e o, " o0%*o:
&he time #alue of an option is the difference between its premium and its intrinsic
#alue%
DATA ANALYSIS AND
INTERPRETATION
ANALYSIS OF
ICICI:
&he objecti#e
of this analysis
is to e#aluate
the profit$loss
position of
D"%e M"#-e% 0#*ce F+%+#e 0#*ce
:B'Dec'CA 8::?%A 8::A%C>
;8'Dec'CA 8:;B%A 8:;@%A
8'Gan'CB 8::B%A> 8:;;%A>
:'Gan'CB 8:?A%:> 8:AA
;'Gan'CB 8::B%@> 8:;B%A>
='Gan'CB 8:B?%; 8:BA%>>
A'Gan'CB 8;?:%>> 8;>B%@
B'Gan'CB 8;;@%@> 8;;B%>
@'Gan'CB 8;CA%@> 8;8C%B
8C'Gan'CB 8;>?%8> 8;>B%C>
88'Gan'CB 8=;> 8=;B%8>
8='Gan'CB 8=8C 8=:C%A>
8>'Gan'CB 8;>:%: 8;?C%8
8?'Gan'CB 8;?B%; 8;A>%A>
8A'Gan'CB 8;::%8 8;;:%8
8B'Gan'CB 8:=B%B> 8:>?%=>
:8'Gan'CB 88A;%: 88?A%B>
::'Gan'CB 88:=%@> 88:A%B>
:;'Gan'CB 88>8%=> 88>?%;>
:='Gan'CB 88;8%B> 88;=%>
:>'Gan'CB 8:?8%; 8:?>%?
:B'Gan'CB 8:A;%@> 8:AA%;
'Gan'CB 8::C%=> 8::;%B>
;C'Gan'CB 88BA%= 88BA%=
;8'Gan'CB 88=A 88=>%@
futures and options% &his analysis is based on sample data ta"en of I1I1I
B*.2 scrip% &his analysis considered the Gan :CCB contract of I1I1I
B*.2% &he lot si+e of I1I1I B*.2 is 8A> the time period in which this
analysis done is from :A'8:':CCA to ;8%C8%CB%
5raph98
OBSERVATIONS AND FINDINGS:
If a person buys 8 lot i%e% 8A> futures of I1I1I B*.2 on :Bth Dec :CCA and
sells on ;8
st
Gan :CCB then he will get a loss of 88=>%@'8::A%C> N 'B8%8> per
share% )o he will get a loss of 8=:C8%:> i%e% 'B8%8> S 8A>
If he sells on 8=
th
Gan :CCA then he will get a profit of 8=:C%A>'8::A%C> N 8@;%A
i%e% a profit of 8@;%A per share% )o his total profit is ;;B@A%> i%e% 8@;%A S 8A>
&he closing price of I1I1I B*.2 at the end of the contract period is 88=A
and this is considered as settlement price%
&he following table e6plains the mar"et price and premiums of calls%
• &he first column e6plains trading date
• )econd column e6plains the )P3& mar"et price in cash segment on that date%
• &he third column e6plains call premiums amounting at these stri"e pricesI
8:CC 8:;C 8:?C 8C 8;:C and 8;>C%
C".. o0%*o/:
D"%e M"#-e% 0#*ce 8766 87?6 87@6 87A6 8?76 8?B6
:B'Dec'CA 8::?%A ?A%B> >;%C> ;@%?> ;:%:> :=%: 8B%>
;8'Dec'CA 8:;B%A A=%?> >B%=> ==%C> ;:%A> :;%B> 8@%:>
8'Gan'CB 8::B%A> ?: >?%B> ;@%: ;C ::%@ 8B%B
:'Gan'CB 8:?A%:> 8CC%@ A>%>> ?;%A> =@%8 ;?%>> :A%=
;'Gan'CB 8::B%@> A> ?C%8 =>%B> ;=%> :?%= ::%>
='Gan'CB 8:B?%; 8C@%? @8%C> ?B%:> >8%;> ;B%?%8>
A'Gan'CB 8;?:%>> 8AC 8=;%; 8:C 8CC A@%= ?:%;>
B'Gan'CB 8;;@%@> 8=C 88@%;> 8CC B> >@%: =:%B>
@'Gan'CB 8;CA%@> 8=C 8C8 A=%;> ?:%C> =?%?> ;;%8>
8C'Gan'CB 8;>?%8> 8?C%? 8;8 88C @>%=> AC%B> >;%8
88'Gan'CB 8=;> :>C%A 8>8%B 8BB%@ 8?=%A 8;C%@ 8C=%>>
8='Gan'CB 8=8C :=C :8;%> 8=B 8;=%@ @? BB%:
8>'Gan'CB 8;>:%: 8>> 8>C%C> 8CA%> 8;=%@ ?? >:%?>
8?'Gan'CB 8;?B%; 8:B%= 8=C @C ?; AB%: ?C%@>
8A'Gan'CB 8;::%8 8:B%= 8=C @> ?A%> >C%: ;@%8>
8B'Gan'CB 8:=B%B> 8:B%= ?C >= ;A%@>%8> 8@%;
:8'Gan'CB 88A;%: >: ;?%> :?%; :=%=> 8=%>> @%@>
::'Gan'CB 88:=%@> ==%8> ;8%C> ::%>> 8:%=> 8C%;> ?%A
:;'Gan'CB 88>8%=> >C%:> ;@%; :;%:> 8A 8?%;> B%?
:='Gan'CB 88;8%B> =C%= :: 8A%C> 8:%8 @%=> >%8
:>'Gan'CB 8:?8%; BC%> ?: =C%B> :=%>> 8?%8> @%A>
:B'Gan'CB 8:A;%@> @8%B> ?8%?> ==%B ;8%= :C%:> 88%;>
'Gan'CB 8::C%=> =? :>%@> 8A%=> 8C%> =%C> :%@>
;C'Gan'CB 88BA%= 8B%?> @%C> =%> 8%= C%A> C%:
;8'Gan'CB 88=A C%=> C%> 8 8%= C%8 C%:
S%#*-e 0#*ce/
&able9:
OBSERVATIONS AND FINDINGS
CALL OPTION
BUYERS PAY OFF:
? &hose who ha#e purchase call option at a stri"e price of 8:?C the
premium payable is ;@%?>
? 3n the e6piry date the spot mar"et price enclosed at 88=A% *s it is out
of the money for the buyer and in the money for the seller hence the
buyer is in loss%
? )o the buyer will lose only premium i%e% ;@%?> per share%
)o the total loss will be ?@;B%A> i%e% ;@%?>S8A>
SELLERS PAY OFF:
? *s )eller is entitled only for premium if he is in profit%
? )o his profit is only premium i%e% ;@%?> S 8A> N ?@;B%A>
P+% o0%*o/:
S%#*-e 0#*ce/
D"%e M"#-e%
0#*ce
8766 87?6 87@6 87A6 8?76 8?B6
:B'Dec'CA 8::?%A ;@%C> 8B8%C> 8AB%B 8@A%8> 8@C%B> 8@8%B
;8'Dec'CA 8:;B%A ;=%= 8B8%C> 8AB%B 8@A%8> 8@C%B> 8@8%B
8'Gan'CB 8::B%A> ;:%8 8B8%C> 8AB%B 8@A%8> 8@C%B> 8@8%B
:'Gan'CB 8:?A%:> ::%? :>%>C 8AB%B =8%>> 8@C%B> 8@8%B
;'Gan'CB 8::B%@> ;: ;B%CC 8AB%B B: 8@C%B> 8@8%B
='Gan'CB 8:B?%; 8A%?> :>%CC ;A%C> B: 8@C%B> 8@8%B
A'Gan'CB 8;?:%>> 8:%= 8:%?C :C%8> ;=%B> =;%@> 8@8%B
B'Gan'CB 8;;@%@> 8C%8> 8:%CC :C%C> ;C =: 8@8%B
@'Gan'CB 8;CA%@> 88%@ 8>%CC :?%> ;? >8 8@8%B
8C'Gan'CB 8;>?%8> @ 88%CC 8> :>%: ;;%A =A%B
88'Gan'CB 8=;> ;%A> 88%CC 8C B%@ 8:%A> 8B%;>
8='Gan'CB 8=8C ;%A> 88%CC B%> 8: 8:%= ::%=>
8>'Gan'CB 8;>:%: ?%=> A%CC 8C 8A%=> :;%8 ;B%;
8?'Gan'CB 8;?B%; B B%CC 88%:> 8;%; ::%>> ;>%;>
8A'Gan'CB 8;::%8 A%; B%CC 8A%B :>%=> ;B%:> >?%=
8B'Gan'CB 8:=B%B> 8B%8> ;?%?C ;> ?A%B> A?%C> 88:%:
:8'Gan'CB 88A;%: 8C;%> AC%CC ?@%?> 8;>%C> 8>8%;> ::;%=
::'Gan'CB 88:=%@> 88C 8;B%@C 8;B%? 8AC%C> :8C :BC
:;'Gan'CB 88>8%=> A8 8;B%@C 8;> 8>C :8C :CC
:='Gan'CB 88;8%B> @@ 8;B%@C 8;> 8>C :8C :CC
:>'Gan'CB 8:?8%; 8>%@ :?%;> ;; >C%C> :8C :CC
:B'Gan'CB 8:A;%@> 8?%A 8@%CC ;C => >> B8%=>
'Gan'CB 8::C%=> 8B ;B%CC >C => 8CC 8=>
;C'Gan'CB 88BA%= :A%> ?C%CC B>%: 8:C 8=>%C> 8=>
;8'Gan'CB 88=A >C ?C%CC B>%: 8:C 8=>%C> 8=>
&able9;
OBSERVATIONS AND FINDINGS
PUT OPTION
BUYERS PAY OFF:
? *s brought 8 lot of I1I1I that is 8A> those who buy for 8:CC paid
;@%C> premium per share%
? )ettlement price is 88=A
)tri"e price 8:CC%CC
)pot price 88=A%CC
>;%CC
Premium ,'- ;@%C>
8;%@> 6 8A>N :==8%:>
Buyer Profit N Rs% :==8%:>
Because it is positi#e it is in the money contract hence buyer will get more
profit incase spot price decreases buyerEs profit will increase%
SELLERS PAY OFF:
? It is in the money for the buyer so it is in out of the money for the
seller hence he is in loss%
? &he loss is eLual to the profit of buyer i%e% :==8%:>%
5raph9:
OBSERVATIONS AND FINDINGS
? &he future price of I1I1I is mo#ing along with the mar"et price%
? If the buy price of the future is less than the settlement price than the
buyer of a future gets profit%
? If the selling price of the future is less than the settlement price than
the seller incur losses%
ANALYSIS OF SBI:-
&he objecti#e of this analysis is to e#aluate the profit$loss position of futures
and options% &his analysis is based on sample data ta"en of )BI scrip% &his
analysis considered the Gan :CCA contract of )BI% &he lot si+e of )BI is 8;:
the time period in which this analysis done is from :B'8:':CCA to ;8%C8%CB%
&able9=
D"%e M"#-e% P#*ce F+%+#e 0#*ce
:B'Dec'CA :;AA%>> :=8;%A
;8'Dec'CA :;A8%8> :=C@%:
8'Gan'CB :;B;%> :=8;%=>
:'Gan'CB :=:;%;> :==B%=>
;'Gan'CB :;@>%:> :=8?%;>
='Gan'CB :;BB%B :=8:%>
A'Gan'CB :=C:%@ :=8@%8>
B'Gan'CB :=?=%>> :=AB%>>
@'Gan'CB :=>=%> :=A;%8
8C'Gan'CB :=C@%? :=88%8>
88'Gan'CB :=;=%B :=>=%=
8='Gan'CB :=?;%8 :=?B%=
8>'Gan'CB :=:;%=> :=:8%B>
8?'Gan'CB :=8>%>> :=;:%;
8A'Gan'CB :=8?%;> :=:;%C>
8B'Gan'CB :;?:%;> :;AC%;>
:8'Gan'CB :8@?%8> :8@:%;
::'Gan'CB :8;A%= :8;>%:
:;'Gan'CB :;:;%A> :;8?%@>
:='Gan'CB :;=;%8> :;;>%;>
:>'Gan'CB :=CA%= :=CB%@
:B'Gan'CB :;8;%;> :;C>%>
'Gan'CB ::;C%A ::;C%>
;C'Gan'CB :::;%@> ::8A%:>
;8'Gan'CB :8?A%;> :8?@%@
5raph9;
OBSERVATIONS AND FINDINGS:
If a person buys 8 lot i%e% ;>C futures of )BI on :B
th
Dec :CCA and sells on ;8
st
Gan :CCB then he will get a loss of :8?@%@':=8;%A N :=;%B per share% )o he will
get a profit of ;:8B8%?C i%e% :=;%B S 8;:
If he sells on 8>
th
Gan :CCB then he will get a profit of :=?B%=':=8;%A N >=%A i%e%
a profit of >=%A per share% )o his total profit is A::C%=C i%e% >=%A S 8;:
&he closing price of )BI at the end of the contract period is :8?A%;> and this is
considered as settlement price%
&he following table e6plains the mar"et price and premiums of calls%
• &he first column e6plains trading date
• )econd column e6plains the )P3& mar"et price in cash segment on that date%
• &he third column e6plains call premiums amounting at these stri"e pricesI
:;=C :;AC :=CC :=;C :=?C and :=@C%
C".. o0%*o/:
S%#*-e 0#*ce/
D"%e M"#-e%
P#*ce
7?C6 7?D6 7C66 7C?6 7C@6 7CA6
:B'Dec'CA :;AA%>> 8=> @: 8C=%;> 8CB A@ ?B
;8'Dec'CA :;A8%8> 8=> @: 8C:%@> 8CB A: >@
8'Gan'CB :;B;%> 8;= @: 8C8%@> 8CB ?@%B> >@
:'Gan'CB :=:;%;> 8B@%B @: 8:;%:> 8C>%B @C%:> A?%>>
;'Gan'CB :;@>%:> 8B@%B @: @B%=> @;%? A?%? ?C%C>
='Gan'CB :;BB%B 8B@%B @: 8CC%@> B? A=%B ?C%C>
A'Gan'CB :=C:%@ 8B@%B @: @>%>> BB%8> A?%8> ?8%8
B'Gan'CB :=?=%>> 8@C @: 8:B%>> 88B%; @@%B> B=%B
@'Gan'CB :=>=%> 8AC @: 8:?%A> 8:8 @:%8> AA%=>
8C'Gan'CB :=C@%? 8AC 8@C B= A:%:> >B%B >8%B>
88'Gan'CB :=;=%B 8?C 8@C 8CB%B> @=%@> A=%?> ?=%B>
8='Gan'CB :=?;%8 :8B%> 8@C 88C%B @C%: B8%> ?=%B
8>'Gan'CB :=:;%=> :8B%> 8@C BA%B> A> ?:%?> >>%;
8?'Gan'CB :=8>%>> @? @B 8C:%8> @>%=> ?B%> ?8%@>
8A'Gan'CB :=8?%;> @? 8@C @8%B> BC ?? >>
8B'Gan'CB :;?:%;> @? 8@C ?:%8 >C%>> == ;C
:8'Gan'CB :8@?%8> ::%:> 8@C :>%; 8> 88%A
::'Gan'CB :8;A%= ::%:> 8@C :8%C> 8> 88%A 8C
:;'Gan'CB :;:;%A> ::%:> 8@C =A%C> 8> ;:%?>%;
:='Gan'CB :;=;%8> 8C= 8@C =B%: =C :?%=> :?%;
:>'Gan'CB :=CA%= 88;%A 8@C ?8%?> =B%A> ;@%B :A%?>
:B'Gan'CB :;8;%;> C C C C C C
'Gan'CB ::;C%A 8; 8> @ C C C
;C'Gan'CB :::;%@> 8; 8> @ C C C
;8'Gan'CB :8?A%;> 8; 8> @ C C C
&able9>
OBSERVATIONS AND FINDINGS
CALL OPTION
BUYERS PAY OFF:
? &hose who ha#e purchased call option at a stri"e price of :=CC the
premium payable is 8C=%;>
? 3n the e6piry date the spot mar"et price enclosed at :8?A%?>% *s it is
out of the money for the buyer and in the money for the seller hence
the buyer is in loss%
? )o the buyer will lose only premium i%e% 8C=%;> per share%
)o the total loss will be 8;AA=%: i%e% 8C=%;>S8;:
SELLERS PAY OFF:
? *s )eller is entitled only for premium if he is in profit%
? )o his profit is only premium i%e% 8C=%;> S 8;: N 8;AA=%:
P+% o0%*o/:
D"%e M"#-e%
P#*ce
7?C6 7?D6 7C66 7C?6 7C@6 7CA6
:B'Dec'CA :;AA%>> ;?:%A> ;C?%@ @C ;C; :8B%C> ::8%@>
;8'Dec'CA :;A8%8> ;?:%A> ;C?%@ @C%? ;C; :8B%C> ::8%@>
8'Gan'CB :;B;%> ;?:%A> ;C?%@ B=%@> ;C; :8B%C> ::8%@>
:'Gan'CB :=:;%;> ?C =C A;%>> ;C; :8B%C> ::8%@>
;'Gan'CB :;@>%:> ?C =C B? ;C; :8B%C> ::8%@>
='Gan'CB :;BB%B ?C =C BA%;> ;C; :8B%C> ::8%@>
A'Gan'CB :=C:%@ ?C 8>C A@ ;C; :8B%C> ::8%@>
B'Gan'CB :=?=%>> ?C 8>C >C%A ;C; 8CC ::8%@>
@'Gan'CB :=>=%> ?C 8>C >?%B ;C; A>%; ::8%@>
8C'Gan'CB :=C@%? ?C 8>C A=%:> ;C; 88:%B 8CC
88'Gan'CB :=;=%B ?C 8>C >;%8> =8 AB%; 8:>
8='Gan'CB :=?;%8 ?C 8>C ==%:> >@%@> A8%;> 8CC
8>'Gan'CB :=:;%=> =C 8>C ?@%? AB 8CC 8:B
8?'Gan'CB :=8>%>> A>%@ 8>C ?>%C> AB 8;> 8>C
8A'Gan'CB :=8?%;> A>%@ 8>C AC%=> AB @?%>> 8>C
8B'Gan'CB :;?:%;> A>%@ AC @>%C> 88B @?%>> 8>C
:8'Gan'CB :8@?%8> 8AC 8;@%; ::;%B 88B@ 8>C
::'Gan'CB :8;A%= 8AC 8;@%; ;CC 88B@ 8>C
:;'Gan'CB :;:;%A> 8AC 8;@%; 8>C 88B@ 8>C
:='Gan'CB :;=;%8> 8AC 8;@%; 88A%A 88B 8:C 8>C
:>'Gan'CB :=CA%= ;;%@ 8;@%; >:%=> 88B 8:C 8>C
:B'Gan'CB :;8;%;> C C C C C C
'Gan'CB ::;C%A ?8%? BC%B BB C C C
;C'Gan'CB :::;%@> ?8%? BC%B BB C C C
;8'Gan'CB :8?A%;> ?8%? BC%B BB C C
C
S%#*-e 0#*ce/
&able9?
OBSERVATIONS AND FINDINGS
PUT OPTION
BUYERS PAY OFF:
? *s brought 8 lot of )BI that is 8;: those who buy for :=CC paid @C
premium per share%
? )ettlement price is :8?A%;>
)pot price :=CC%CC
)tri"e price :8?A%;>
:;:%?>
Premium ,'- @C%CC
8=:%?> 6 8;:N 8BB%B
Buyer Profit N Rs% 8BB%B
Because it is positi#e it is in the money contract hence buyer will get more
profit incase spot price increase buyer profit also increase%
SELLERS PAY OFF:
? It is in the money for the buyer so it is in out of the money for the
seller hence he is in loss%
? &he loss is eLual to the profit of buyer i%e% 8BB%B%
5raph9=
OBSERVATIONS AND FINDINGS
? &he future price of )BI is mo#ing along with the mar"et price%
? If the buy price of the future is less than the settlement price than the
buyer of a future gets profit%
? If the selling price of the future is less than the settlement price than
the seller incur losses
ANALYSIS OF YES BAN':-
&he objecti#e of this analysis is to e#aluate the profit$loss position of futures
and options% &his analysis is based on sample data ta"en of D/) B*.2
scrip% &his analysis considered the Gan :CCB contract of D/) B*.2% &he lot
si+e of D/) B*.2 is 88CC the time period in which this analysis done is
from :B'8:':CCA to ;8%C8%CB%
D"%e M"#-e% 0#*ce ,+%+#e 0#*ce
:B'Dec'CA :=@%B> :>:%>
;8'Dec'CA :=@%; :>8%8>
8'Gan'CB :>B%;> :?C%B>
:'Gan'CB :?>%A> :?B%8
;'Gan'CB :?C%A :?:%B>
='Gan'CB :?C%C> :?8%>>
A'Gan'CB :?;%= :?=%=
B'Gan'CB :?C%: :?8%8
@'Gan'CB :?C%8 :?:%:
8C'Gan'CB :>@%= :?C%:
88'Gan'CB :>B%=> :?C%;>
8='Gan'CB :>A%A :>@%@>
8>'Gan'CB :>B%:> :?C%:>
8?'Gan'CB :>C%A> :>=
8A'Gan'CB :>:%; :>=%:>
8B'Gan'CB :=B :=B%C>
:8'Gan'CB ::A%; ::>%=
::'Gan'CB :C@%@> :C@%B>
:;'Gan'CB ::;%8> :8B%8
:='Gan'CB ::C%?> :8?%A>
:>'Gan'CB :;:%? :;C%>
:B'Gan'CB :=;%A :=:%;>
'Gan'CB :==%=> :=:%@>
;C'Gan'CB :==%=> :=8%=
;8'Gan'CB :>8%=> :>C%;>
&able9A
5raph9>
OBSERVATIONS AND FINDINGS:
If a person buys 8 lot i%e% 88CC futures of D/) B*.2 on :B
th
Dec :CCA and
sells on ;8
st
Gan :CCB then he will get a loss of :>C%;>':>:%>C N ':%8> per share%
)o he will get a loss of :;?>%CC i%e% ':%8> S 88CC
If he sells on 8>
th
Gan :CCB then he will get a profit of :?C%:>':>:%>C N A%A> i%e%
a profit of 8?%8> per share% )o his total loss is B>:>%CC i%e% A%A> S 88CC
&he closing price of D/) B*.2 at the end of the contract period is :>8%=> and
this is considered as settlement price%
&he following table e6plains the mar"et price and premiums of calls%
• &he first column e6plains trading date
• )econd column e6plains the )P3& mar"et price in cash segment on that date%
• &he third column e6plains call premiums amounting at these stri"e pricesI
:;C :=C :>C :?C :AC and :BC%
C".. o0%*o/:
D"%e M"#-e% 0#*ce 7?6 7C6 7B6 7@6 7D6 7E6
:B'Dec'CA :=@%B> 8A%C> ;:%=> 8;%8 @ 8B%>> 8>
;8'Dec'CA :=@%; 8?%=> ;:%=> 8:%=> @ 8B%>> 8>
8'Gan'CB :>B%;> ::%8> ;:%=> 8?%; 88%? 8B%>> 8>
:'Gan'CB :?>%A> ;8%=> ;:%=> :=%@ 8? 8=%> 8>
;'Gan'CB :?C%A ;8%=> ;:%=> :8%> 8; >%8 ;
='Gan'CB :?C%C> ;8%=> ;:%=> :8%> 8:%: >%8> ;
A'Gan'CB :?;%= ;8%=> ;:%=> :8%> 8:%: @%:> ;
B'Gan'CB :?C%: ;8%=> ;:%=> :8%> @%@> A%=> ;
@'Gan'CB :?C%8 ;8%=> ;:%=> :8%> 8C%@> ?%=> ;
8C'Gan'CB :>@%= ;8%=> ;:%=> :8%> 8A%> B B
88'Gan'CB :>B%=> ;8%=> ;:%=> :8%> 8C%A> >%C> B
8='Gan'CB :>A%A ;8%=> ;:%=> :8%> @ >%C> B
8>'Gan'CB :>B%:> ;8%=> ;:%=> :8%> 8= B%:> B
8?'Gan'CB :>C%A> ;8%=> ;:%=> :8%> >%A = B
8A'Gan'CB :>:%; ;8%=> ;:%=> :8%> A%> >%> :
8B'Gan'CB :=B ;8%=> ;:%=> @%> A%> >%> :
:8'Gan'CB ::A%; ? ;:%=> @%> A%> 8%> :
::'Gan'CB :C@%@> ? ;:%=> @%> B 8%> =
:;'Gan'CB ::;%8> ? ;:%=> @%> B =%> =
:='Gan'CB ::C%?> ? ;:%=> @%> :%8 :%@ =
:>'Gan'CB :;:%? ? ;:%=> @%> :%8 :%@ =
:B'Gan'CB :=;%A 8>%@> ;:%=> @%> :%8 :%@ =
'Gan'CB :==%=> 8>%@> ;:%=> @%> :%8 :%@ =
;C'Gan'CB :==%=> 8>%@> ;:%=> > :%8 :%@ =
;8'Gan'CB :>8%=>%8> ;:%=> =%A > C%B C%>
S%#*-e 0#*ce/
&able9B
OBSERVATIONS AND FINDINGS
CALL OPTION
BUYERS PAY OFF:
? *s brought 8 lot of D/) B*.2 that is 88CC those who buy for :BC
paid 8A%C> premium per share%
? )ettlement price is :>8%=>
)pot price :>8%=>
)tri"e price :;C%CC
:8%=>
Premium ,'- 8A%C>
=%=C 6 88CCN =B=C
Buyer Profit N Rs% =B=C
Because it is positi#e it is in the money contract hence buyer will get more
profit incase spot price increase buyer profit also increase%
SELLERS PAY OFF:
? It is in the money for the buyer so it is in out of the money for the
seller hence he is in loss%
? &he loss is eLual to the profit of buyer i%e% =B=C%
P+% o0%*o/:
S%#*-e 0#*ce/
D"%e M"#-e% 0#*ce 7?6 7C6 7B6 7@6 7D6 7E6
:B'Dec'CA :=@%B> ?%@> 8C%>> 8>%8> :C%A> :A%:> ;=%>
;8'Dec'CA :=@%; ?%: @%A> 8=%;> :C :?%? ;=%8
8'Gan'CB :>B%;> =%; A%C> 8C%A> 8>%> :8%:> :A%@
:'Gan'CB :?>%A> ; >%8 B%8 8:%8 8A%8 :;%8
;'Gan'CB :?C%A ;%=> >%@ @%; 8;%A> 8@%; :>%B
='Gan'CB :?C%C> ;%8> >%> B%@ 8;%= 8@ :>%?>
A'Gan'CB :?;%= :%8 ;%@> ?%B> 8C%@ 8?%8> ::%>>
B'Gan'CB :?C%: :%: =%:> A%= 88%A> 8A%=> :=%:>
@'Gan'CB :?C%8 8%B> ;%B ?%B> 88%: 8?%@ :;%B
8C'Gan'CB :>@%= 8%?> ;%> ?%>> 8C%@> 8?%A> :;%B
88'Gan'CB :>B%=> 8%> ;%; ?%; 8C%B 8?%B :=%C>
8='Gan'CB :>A%A 8%8 :%A >%? 8C%8> 8?%;> :;%@>
8>'Gan'CB :>B%:> C%B :%: =%@> @%;> 8>%>> :;%:
8?'Gan'CB :>C%A> 8%? ;%B> A%B 8;%? :C%@>%>>
8A'Gan'CB :>:%; 8%8> ;%C> ?%?> 8:%8> 8@%= :A%@>
8B'Gan'CB :=B 8%> ;%@> B%; 8=%A ::%A> ;8%B
:8'Gan'CB ::A%; @%A> 8?%: :=%8 ;; =:%> >:%:>
::'Gan'CB :C@%@> ::%8> ;C%B =C%8 =@%B >@%?> ?@%?
:;'Gan'CB ::;%8> 8; :C :B%:> ;A%:> =?%B >?%>>
:='Gan'CB ::C%?> 8;%B :8%; ;C ;@%= =@%8 >@
:>'Gan'CB :;:%? A 8:%? 8@%B> :B%; ;A%? =A%:>
:B'Gan'CB :=;%A 8%? =%? 8C 8A%>> :?%? ;?%:>
'Gan'CB :==%=> C%A> ;%C> B%; 8?%: :>%? ;>%=>
;C'Gan'CB :==%=> C%8> 8%?> ?%@> 8>%?> :>%> ;>%>
;8'Gan'CB :>8%=> C C C C C C
&able9@
OBSERVATIONS AND FINDINGS
PUT OPTION
BUYERS PAY OFF:
? &hose who ha#e purchase put option at a stri"e price of :>C the
premium payable is 8>%8>
? 3n the e6piry date the spot mar"et price enclosed at :>8%=>% *s it is
out of the money for the buyer and in the money for the seller hence
the buyer is in loss%
? )o the buyer will lose only premium i%e% 8>%8> per share%
)o the total loss will be 8???> i%e% 8>%8>S88CC
SELLERS PAY OFF:
? *s )eller is entitled only for premium if he is in profit%
? )o his profit is only premium i%e% 8>%8> S 88CC N 8???>
5raph9?
OBSERVATIONS AND FINDINGS
? &he future price of D/) B*.2 is mo#ing along with the mar"et
price%
? If the buy price of the future is less than the settlement price than the
buyer of a future gets profit%
? If the selling price of the future is less than the settlement price than
the seller incur losses%
SUMMARY
? Deri#ati#es mar"et is an inno#ation to cash mar"et% *ppro6imately
its daily turno#er reaches to the eLual stage of cash mar"et% &he
a#erage daily turno#er of the .)/ deri#ati#e segments
? In cash mar"et the profit$loss of the in#estor depends on the mar"et
price of the underlying asset% &he in#estor may incur huge profits or
he may incur (uge losses% But in deri#ati#es segment the in#estor
enjoys huge profits with limited downside%
? In cash mar"et the in#estor has to pay the total money but in
deri#ati#es the in#estor has to pay premiums or margins which are
some percentage of total contract%
? Deri#ati#es are mostly used for hedging purpose%
? In deri#ati#e segment the profit$loss of the option writer purely
depends on the fluctuations of the underlying asset%
SUGESSTIONS
? &he deri#ati#es mar"et is newly started in India and it is not
"nown by e#ery in#estor so )/BI has to ta"e steps to create
awareness among the in#estors about the deri#ati#e segment%
? In order to increase the deri#ati#es mar"et in India )/BI should
re#ise some of their regulations li"e contract si+e participation of
0II in the deri#ati#es mar"et%
? 1ontract si+e should be minimi+ed because small in#estors cannot
afford this much of huge premiums%
? )/BI has to ta"e further steps in the ris" management mechanism%
? )/BI has to ta"e measures to use effecti#ely the deri#ati#es
segment as a tool of hedging%
CONCLUSION
? In bullish mar"et the call option writer incurs more losses so the
in#estor is suggested to go for a call option to hold where as the put
option holder suffers in a bullish mar"et so he is suggested to write a
put option%
? In bearish mar"et the call option holder will incur more losses so the
in#estor 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%
? In the abo#e analysis the mar"et price of D/) ban" is ha#ing low
#olatility so the call option writer enjoys more profits to holders%
BIBILOGRAPHY
? BOO'S :-
? Deri#ati#es Dealers Module 4or" Boo" ' .10M
,3ctober :CC>-
? 5ordon and .atarajan, ,:CC?- ‘Financial Markets and
Services’ ,third edition- (imalaya publishers
? (EBSITES :-
? http9$$www%nseindia$content$fo$foThistoricaldata%htm
? http9$$www%nseindia$content$eLuities$eLThistoricaldata%ht
m
? http9$$www%deri#ati#esindia$scripts$glossary$inde6obasic%a
sp
? http9$$www%bseindia$about$deri#ati%aspUtypesofprod%htm
doc_649202049.doc
The emergence of the market for derivatives products, most notably forwards, futures and options, can be tracked back to the willingness of risk-averse economic agents to guard themselves against uncertainties arising out of fluctuations in asset prices.
A STUDY ON FINANCIAL DERIVATIVES
(FUTURES & OPTIONS)
Under the Esteemed guidance of
Lecturer of Business Management
Project Report submitted in partial fulfillment for the award of Degree of
Master of Business Administration
DECLARATION
I hereby declare that this project titled “A STUDY ON FINANCIAL
DERIVATIVES (FUTURES & OPTIONS)” submitted by me to the
department of Business Management !!!! is a bonafide wor" underta"en
by me and it is not submitted to any other uni#ersity or institution for the
award of any degree $certificate or published any time before%
ABSTRACT
&he emergence of the mar"et for deri#ati#es products most notably
forwards futures and options can be trac"ed bac" to the willingness of ris"'
a#erse economic agents to guard themsel#es against uncertainties arising out
of fluctuations in asset prices% Deri#ati#es are ris" management instruments
which deri#e their #alue from an underlying asset% &he following are three
broad categories of participants in the deri#ati#es mar"et (edgers
)peculators and *rbitragers% Prices in an organi+ed deri#ati#es mar"et
reflect the perception of mar"et participants about the future and lead the
price of underlying to the percei#ed future le#el% In recent times the
Deri#ati#e mar"ets ha#e gained importance in terms of their #ital role in the
economy% &he increasing in#estments in stoc"s ,domestic as well as
o#erseas- ha#e attracted my interest in this area% .umerous studies on the
effects of futures and options listing on the underlying cash mar"et #olatility
ha#e been done in the de#eloped mar"ets% &he deri#ati#e mar"et is newly
started in India and it is not "nown by e#ery in#estor so )/BI has to ta"e
steps to create awareness among the in#estors about the deri#ati#e segment%
In cash mar"et the profit$loss of the in#estor depends on the mar"et price of
the underlying asset% &he in#estor may incur huge profit or he may incur
huge loss% But in deri#ati#es segment the in#estor enjoys huge profits with
limited downside% Deri#ati#es are mostly used for hedging purpose% In order
to increase the deri#ati#es mar"et in India )/BI should re#ise some of their
regulations li"e contract si+e participation of 0II in the deri#ati#es mar"et%
In a nutshell the study throws a light on the deri#ati#es mar"et%
*12.34L/D5/M/.&
4ith the deep sense of gratitude I wish to ac"nowledge the support and help
e6tended by all the people in successful completion of this project wor"%
I e6press my gratitude to our Principal XXX for his consistent support (ead
of the Department XXX for his encouragement% I would li"e to than" all
the faculty members who ha#e been a strong source of inspiration through
out the project directly or indirectly%
XXXX
&*BL/ 30 13.&/.&)
13.&/.&) P*5/ .7MB/R)
List of tables I
List of charts and figures II
1hapter 89
Introduction 8
.eed of the study :
3bjecti#es ;
)cope < Limitations =
Research methodology >
1hapter :9
Literature re#iew ?
1hapter ;9
Deri#ati#es 8:
1hapter =9
Data analysis < Interpretations =@
1hapter >9
Recommendations and suggestions AA
1onclusions A@
1hapter ?9
Bibliography B8
LI)& 30 5R*P()
5R*P(
.3%
13.&/.&) P*5/
.7MB/R)
5raph%8 5raph showing the price mo#ements of
I1I1I 0utures
?C
5raph%: 5raph showing the price mo#ements of I1I1I
)pot < 0utures
??
5raph%; 5raph showing the price mo#ements of )BI
0utures
?B
5raph%= 5raph showing the price mo#ements of )BI
)pot < 0utures
A=
5raph > 5raph showing the price mo#ements of D/)
B*.2 0utures
A?
5raph ? 5raph the price mo#ements of D/) B*.2
)pot < 0utures
B;
LI)& 30 &*BL/)
&*BL/ .7MB/R 13.&/.& P*5/
.7MB/R
&able'8 &able showing the mar"et and
future prices of I1I1I ban"
>@
&able': &able showing the call prices
of I1I1I ban"
?:
&able'; &able showing the put prices of
I1I1I ban"
?;
&able '= &able showing the mar"et and
future prices of )BI
?=
&able' > &able showing the call prices
of
)BI
AC
&able' ? &able showing the put prices of
)BI
A:
&able 'A &able showing the mar"et and
future prices of D/) ban"
A>
&able' B &able showing the call prices
of D/) ban"
AB
&able '@ &able showing the put prices of
D/) ban"
B8
II
INTRODUCTION:-
&he emergence of the mar"et for deri#ati#es products most notably
forwards futures and options can be trac"ed bac" to the willingness of ris"'a#erse
economic agents to guard themsel#es against uncertainties arising out of
fluctuations in asset prices% By their #ery nature the financial mar"ets are mar"ed
by a #ery high degree of #olatility% &hrough the use of deri#ati#e products it is
possible to partially or fully transfer price ris"s by loc"ing'in asset prices% *s
instruments of ris" management these generally do not influence the fluctuations
in the underlying asset prices% (owe#er by loc"ing'in asset prices deri#ati#e
product minimi+es the impact of fluctuations in asset prices on the profitability and
cash flow situation of ris"'a#erse in#estors%
Deri#ati#es are ris" management instruments which deri#e their #alue
from an underlying asset% &he underlying asset can be bullion inde6 share bonds
currency interest etc%% Ban"s )ecurities firms companies and in#estors to hedge
ris"s to gain access to cheaper money and to ma"e profit use deri#ati#es%
Deri#ati#es are li"ely to grow e#en at a faster rate in future%
NEED FOR STUDY 9
In recent times the Deri#ati#e mar"ets ha#e gained importance in terms of
their #ital role in the economy% &he increasing in#estments in deri#ati#es
,domestic as well as o#erseas- ha#e attracted my interest in this area%
&hrough the use of deri#ati#e products it is possible to partially or fully
transfer price ris"s by loc"ing'in asset prices% *s the #olume of trading is
tremendously increasing in deri#ati#es mar"et this analysis will be of
immense help to the in#estors%
OBJECTIVES OF THE STUDY:
? &o analy+e the operations of futures and options%
? &o find the profit$loss position of futures buyer and seller and also the
option writer and option holder%
? &o study about ris" management with the help of deri#ati#es%
SCOPE OF THE STUDY:
&he study is limited to “Deri#ati#es” with special reference to futures and
option in the Indian conte6t and the Inter'1onnected )toc" /6change has been
ta"en as a representati#e sample for the study% &he study canEt be said as totally
perfect% *ny alteration may come% &he study has only made a humble attempt at
e#aluation deri#ati#es mar"et only in India conte6t% &he study is not based on the
international perspecti#e of deri#ati#es mar"ets which e6ists in .*)D*F 1B3&
etc%
LIMITATIONS OF THE STUDY:
&he following are the limitation of this study%
? &he scrip chosen for analysis is I1I1I B*.2 )BI < D/) B*.2
and the contract ta"en is Ganuary :CCB ending one Hmonth contract%
? &he data collected is completely restricted to I1I1I B*.2 )BI <
D/) B*.2 of Ganuary :CCBI hence this analysis cannot be ta"en uni#ersal%
RESEARCH METHODOLOGY:
Data has been collected in two ways% &hese are9
Seco!"#$ Me%&o!:
Jarious portals
• www%nseindia%com
0inancial news papers /conomics times%
? BOO'S :-
? Deri#ati#es Dealers Module 4or" Boo" ' .10M
,3ctober :CC>-
? 5ordon and .atarajan, ,:CC?- ‘Financial Markets and
Services’ ,third edition- (imalaya publishers
LITERATURE REVIE(
Be&")*o+# o, S%oc- M"#-e% Vo."%*.*%$ ",%e# De#*)"%*)e/
5ola"a 1 .athK Research Paper ,.)/-
0inancial mar"et liberali+ation since early 8@@Cs has brought about major
changes in the
financial mar"ets in India% &he creation and empowerment of )ecurities and
/6change
Board of India ,)/BI- has helped in pro#iding higher le#el accountability in
the mar"et%
.ew institutions li"e .ational )toc" /6change of India ,.)/IL- .ational
)ecurities
1learing 1orporation ,.)11L- .ational )ecurities Depository ,.)DL-
ha#e been the
change agents and helped cleaning the system and pro#ided safety to
in#esting public at
large% 4ith modern technology in hand these institutions did set
benchmar"s and standards for others to follow% Microstructure changes
brought about reduction in transaction cost that helped in#estors to loc" in a
deal faster and cheaper%
3ne decade of reforms saw implementation of policies that ha#e impro#ed
transparency in the system pro#ided for cheaper mode of information
dissemination without much time delay better corporate go#ernance etc%
&he capital mar"et witnessed a major transformation and structural change
during the period% &he reforms process ha#e helped to impro#e efficiency in
information dissemination enhancing transparency prohibiting unfair trade
practices li"e insider trading and price rigging% Introduction of deri#ati#es in
Indian capital mar"et was initiated by the 5o#ernment through L 1 5upta
1ommittee report% &he L%1% 5upta 1ommittee on Deri#ati#es had
recommended in December 8@@A the introduction of stoc" inde6 futures in
the first place to be followed by other products once the mar"et matures% &he
preparation of regulatory framewor" for the operations of the inde6 futures
contracts too" some more time and finally futures on benchmar" indices
were introduced in Gune :CCC followed by options on indices in Gune :CC8
followed by options on indi#idual stoc"s in Guly :CC8 and finally followed
by futures on indi#idual stoc"s in .o#ember :CC8%
Do F+%+#e/ "! O0%*o/ %#"!*1 *c#e"/e /%oc- 2"#-e% )o."%*.*%$3
Dr% Premalata )henbagaramanK Research Paper ,.)/-
.umerous studies on the effects of futures and options listing on the underlying
cash mar"et #olatility ha#e been done in the de#eloped mar"ets% &he empirical
e#idence is mi6ed and most suggest that the introduction of deri#ati#es do not
destabili+e the underlying mar"et% &he studies also show that the introduction of
deri#ati#e contracts impro#es liLuidity and reduces informational asymmetries in
the mar"et% In the late nineties many emerging and transition economies ha#e
introduced deri#ati#e contracts raising interesting issues uniLue to these mar"ets%
/merging stoc" mar"ets operate in #ery different economic political
technological andsocial en#ironments than mar"ets in de#eloped countries li"e
the 7)* or the 72% &his paper e6plores the impact of the introduction of
deri#ati#e trading on cash mar"et #olatility using data on stoc" inde6 futures and
options contracts traded on the ) < P 1.! .ifty ,India-% &he results suggest that
futures and options trading ha#e not led to a change in the #olatility of the
underlying stoc" inde6 but the nature of #olatility seems to ha#e changed post'
futures% 4e also e6amine whether greater futures trading acti#ity ,#olume and
open interest- is associated with greater spot mar"et #olatility% 4e find no
e#idence of any lin" between trading acti#ity #ariables in the futures mar"et and
spot mar"et #olatility% &he results of this study are especially important to stoc"
e6change officials and regulators in designing trading mechanisms and contract
specifications for deri#ati#e contracts thereby enhancing their #alue as ris"
management tools
DERIVATIVES
DERIVATIVES:-
&he emergence of the mar"et for deri#ati#es products most notably forwards
futures and options can be trac"ed bac" to the willingness of ris"'a#erse economic
agents to guard themsel#es against uncertainties arising out of fluctuations in asset
prices% By their #ery nature the financial mar"ets are mar"ed by a #ery high
degree of #olatility% &hrough the use of deri#ati#e products it is possible to
partially or fully transfer price ris"s by loc"ing'in asset prices% *s instruments of
ris" management these generally do not influence the fluctuations in the
underlying asset prices% (owe#er by loc"ing'in asset prices deri#ati#e product
minimi+es the impact of fluctuations in asset prices on the profitability and cash
flow situation of ris"'a#erse in#estors%
Deri#ati#es are ris" management instruments which deri#e their #alue
from an underlying asset% &he underlying asset can be bullion inde6 share bonds
currency interest etc%% Ban"s )ecurities firms companies and in#estors to hedge
ris"s to gain access to cheaper money and to ma"e profit use deri#ati#es%
Deri#ati#es are li"ely to grow e#en at a faster rate in future%
DEFINITION
Deri#ati#e is a product whose #alue is deri#ed from the #alue of an underlying
asset in a contractual manner% &he underlying asset can be eLuity fore6
commodity or any other asset%
8- )ecurities 1ontracts ,Regulation-*ct 8@>? ,)1R *ct- defines
“deri#ati#e” to secured or unsecured ris" instrument or contract for differences or
any other form of security%
:- * contract which deri#es its #alue from the prices or inde6 of
prices of underlying securities%
Emergence of financial derivative products
Deri#ati#e products initially emerged as hedging de#ices against
fluctuations in commodity prices and commodity'lin"ed deri#ati#es remained the
sole form of such products for almost three hundred years% 0inancial deri#ati#es came
into spotlight in the post'8@AC period due to growing instability in the financial
mar"ets% (owe#er since their emergence these products ha#e become #ery popular
and by 8@@Cs they accounted for about two'thirds of total transactions in deri#ati#e
products% In recent years the mar"et for financial deri#ati#es has grown tremendously
in terms of #ariety of instruments a#ailable their comple6ity and also turno#er% In the
class of eLuity deri#ati#es the world o#er futures and options on stoc" indices ha#e
gained more popularity than on indi#idual stoc"s especially among institutional
in#estors who are major users of inde6'lin"ed deri#ati#es% /#en small in#estors find
these useful due to high correlation of the popular inde6es with #arious portfolios and
ease of use% &he lower costs associated with inde6 deri#ati#es #isHaH#is deri#ati#e
products based on indi#idual securities is another reason for their growing use%
PARTICIPANTS:
&he following three broad categories of participants in the deri#ati#es mar"et%
HEDGERS:
(edgers face ris" associated with the price of an asset% &hey use futures or
options mar"ets to reduce or eliminate this ris"%
SPECULATORS:
)peculators wish to bet on future mo#ements in the price of an asset% 0utures
and options contracts can gi#e them an e6tra le#erageI that is they can increase
both the potential gains and potential losses in a speculati#e #enture%
* RBITRAGERS9
*rbitrageurs are in business to ta"e of a discrepancy between prices in two
different mar"ets if for e6ample they see the futures price of an asset getting out
of line with the cash price they will ta"e offsetting position in the two mar"ets to
loc" in a profit%
FUNCTION OF DERIVATIVES MAR'ETS9
&he following are the #arious functions that are performed by the deri#ati#es
mar"ets% &hey are9
? Prices in an organi+ed deri#ati#es mar"et reflect the perception
of mar"et participants about the future and lead the price of underlying to the
percei#ed future le#el%
? Deri#ati#es mar"et helps to transfer ris"s from those who ha#e
them but may not li"e them to those who ha#e an appetite for them%
? Deri#ati#es trading acts as a catalyst for new entrepreneurial
acti#ity%
? Deri#ati#es mar"ets help increase sa#ing and in#estment in long
run%
TYPES OF DERIVATIVES:
&he following are the #arious types of deri#ati#es% &hey are9
FOR(ARDS9
* forward contract is a customi+ed contract between two entities where settlement
ta"es place on a specific date in the future at todayEs pre'agreed price%
FUTURES9
* futures contract is an agreement between two parties to buy or sell an asset in a
certain time at a certain price they are standardi+ed and traded on e6change%
OPTIONS:
3ptions are of two types'calls and puts% 1alls gi#e the buyer the right but not the
obligation to buy a gi#en Luantity of the underlying asset at a gi#en price on or
before a gi#en future date% Puts gi#e the buyer the right but not the obligation to
sell a gi#en Luantity of the underlying asset at a gi#en price on or before a gi#en
date%
(ARRANTS 9
3ptions generally ha#e li#es of up to one yearI the majority of options traded on
options e6changes ha#ing a ma6imum maturity of nine months% Longer'dated
options are called warrants and are generally traded o#er'the counter%
LEAPS9
&he acronym L/*P) means long'term /Luity *nticipation securities% &hese are
options ha#ing a maturity of up to three years%
BAS'ETS:
Bas"et options are options on portfolios of underlying assets% &he underlying asset
is usually a mo#ing a#erage of a bas"et of assets% /Luity inde6 options are a form
of bas"et options%
S(APS:
)waps are pri#ate agreements between two parties to e6change cash floes in the
future according to a prearranged formula% &hey can be regarded as portfolios of
forward contracts% &he two commonly used )waps are9
") I%e#e/% #"%e S4"0/9
&hese entail swapping only the related cash flows between the parties in the
same currency%
5) C+##ec$ S4"0/9
&hese entail swapping both principal and interest between the parties with the
cash flows in on direction being in a different currency than those in the opposite
direction%
S(APTION:
)waptions are options to buy or sell a swap that will become operati#e at the
e6piry of the options% &hus a swaption is an option on a forward swap%
RATIONALE BEHIND THE DELOPMENT OF DERIVATIVES:
(olding portfolios of securities is associated with the ris" of the possibility that the
in#estor may reali+e his returns which would be much lesser than what he
e6pected to get% &here are #arious factors which affect the returns9
8% Price or di#idend ,interest-
:% )ome are internal to the firm li"e'
• Industrial policy
• Management capabilities
• 1onsumerEs preference
• Labour stri"e etc%
&hese forces are to a large e6tent controllable and are termed as non systematic
ris"s% *n in#estor can easily manage such non'systematic by ha#ing a well'
di#ersified portfolio spread across the companies industries and groups so that a
loss in one may easily be compensated with a gain in other%
&here are yet other of influence which are e6ternal to the firm cannot be
controlled and affect large number of securities% &hey are termed as systematic
ris"% &hey are9
8%/conomic
:%Political
;%)ociological changes are sources of systematic ris"%
0or instance inflation interest rate etc% their effect is to cause prices of nearly all'
indi#idual stoc"s to mo#e together in the same manner% 4e therefore Luite often
find stoc" prices falling from time to time in spite of companyEs earning rising and
#ice #ersa%
Rational Behind the de#elopment of deri#ati#es mar"et is to manage this
systematic ris" liLuidity in the sense of being able to buy and sell relati#ely large
amounts Luic"ly without substantial price concession%
In debt mar"et a large position of the total ris" of securities is systematic%
Debt instruments are also finite life securities with limited mar"etability due to
their small si+e relati#e to many common stoc"s% &hose factors fa#our for the
purpose of both portfolio hedging and speculation the introduction of a deri#ati#es
securities that is on some broader mar"et rather than an indi#idual security%
REGULATORY FRAME(OR':
&he trading of deri#ati#es is go#erned by the pro#isions contained in the )1 R *
the )/BI *ct and the regulations framed there under the rules and byelaws of
stoc" e6changes%
Re1+."%*o ,o# De#*)"%*)e T#"!*1:
)/BI set up a := member committed under 1hairmanship of Dr% L% 1% 5upta
de#elop the appropriate regulatory framewor" for deri#ati#e trading in India% &he
committee submitted its report in March 8@@B% 3n May 88 8@@B )/BI accepted
the recommendations of the committee and appro#ed the phased introduction of
deri#ati#es trading in India beginning with stoc" inde6 0utures% )/BI also
appro#ed he “suggesti#e bye'laws” recommended by the committee for regulation
and control of trading and settlement of Deri#ati#e contract%
&he pro#ision in the )1R *ct go#erns the trading in the securities% &he
amendment of the )1R *ct to include “D/RIJ*&IJ/)” within the ambit of
securities in the )1R *ct made trading in Deri#ati#es possible with in the
framewor" of the *ct%
8% /ligibility criteria as prescribed in the L% 1% 5upta
committee report may apply to )/BI for grant of recognition under section = of the
)1R *ct 8@>? to start Deri#ati#es &rading% &he deri#ati#e e6change$segment
should ha#e a separate go#erning council and representation of trading$clearing
member shall be limited to ma6imum =CM of the total members of the go#erning
council% &he e6change shall regulate the sales practices of its members and will
obtain appro#al of )/BI before start of &rading in any deri#ati#e contract%
:% &he e6change shall ha#e minimum >C members%
;% &he members of an e6isting segment of the e6change
will not automatically become the members of the deri#ati#es segment% &he
members of the deri#ati#es segment need to fulfill the eligibility conditions as lay
down by the L% 1% 5upta committee%
=% &he clearing and settlement of deri#ati#es trades shall
be through a )/BI appro#ed
clearingcorporation$clearinghouse%1learing1orporation$1learing (ouse complying
with the eligibility conditions as lay down By the committee ha#e to apply to )/BI
for grant of appro#al%
>% Deri#ati#es bro"er$dealers and 1learing members are
reLuired to see" registration from )/BI%
?% &he Minimum contract #alue shall not be less than
Rs%: La"h% /6change should also submit details of the futures contract they
purpose to introduce%
A% &he trading members are reLuired to ha#e Lualified
appro#ed user and sales persons who ha#e passed a certification programme
appro#ed by )/BI
I%#o!+c%*o %o ,+%+#e/ "! o0%*o/
In recent years deri#ati#es ha#e become increasingly important in the field
of finance% 4hile futures and options are now acti#ely traded on many
e6changes forward contracts are popular on the 3&1 mar"et% In this chapter
we shall study in detail these three deri#ati#e contracts%
Fo#4"#! co%#"c%/
* forward contract is an agreement to buy or sell an asset on a specified
future date for a specified price% 3ne of the parties to the contract assumes a
long position and agrees to buy the underlying asset on a certain specified
future date for a certain specified price% &he other party assumes a short
position and agrees to sell the asset on the same date for the same price%
3ther contract details li"e deli#ery date price and Luantity are negotiated
bilaterally by the parties to the contract% &he forward contracts are normally
traded outside the e6changes% &he salient features of forward contracts are9
&hey are bilateral contracts and hence e6posed to counterHparty ris"%
/ach contract is custom designed and hence is uniLue in terms of contract
si+e e6piration date and the asset type and Luality%
&he contract price is generally not a#ailable in public domain%
3n the e6piration date the contract has to be settled by deli#ery of the asset%
If the party wishes to re#erse the contract it has to compulsorily go to the
same counterparty which often results in high prices being charged%
(owe#er forward contracts in certain mar"ets ha#e become #ery
standardi+ed as in the case of foreign e6change thereby reducing
transaction costs and increasing transactions #olume% &his process of
standardi+ation reaches its limit in the organi+ed futures mar"et%
0orward contracts are #ery useful in hedging and speculation% &he classic
hedging application would be that of an e6porter who e6pects to recei#e
payment in dollars three months later% (e is e6posed to the ris" of e6change
rate fluctuations% By using the currency forward mar"et to sell dollars
forward he can loc" on to a rate today and reduce his uncertainty% )imilarly
an importer who is reLuired to ma"e a payment in dollars two months hence
can reduce his e6posure to e6change rate fluctuations by buying dollars
forward%
If a speculator has information or analysis which forecasts an upturn in a
price then he can go long on the forward mar"et instead of the cash mar"et%
&he speculator would go long on the forward wait for the price to rise and
then ta"e a re#ersing transaction to boo" profits% )peculators may well be
reLuired to deposit a margin upfront% (owe#er this is generally a relati#ely
small proportion of the #alue of the assets underlying the forward contract%
&he use of forward mar"ets here supplies le#erage to the speculator%
L*2*%"%*o/ o, ,o#4"#! 2"#-e%/
0orward mar"ets world'wide are afflicted by se#eral problems9
? Lac" of centrali+ation of trading
? IlliLuidity and
? 1ounterparty ris"
In the first two of these the basic problem is that of too much fle6ibility and
generality% &he forward mar"et is li"e a real estate mar"et in that any two
consenting adults can form contracts against each other% &his often ma"es
them design terms of the deal which are #ery con#enient in that specific
situation but ma"es the contracts non'tradable%
1ounterparty ris" arises from the possibility of default by any one party to the
transaction% 4hen one of the two sides to the transaction declares ban"ruptcy the
other suffers% /#en when forward mar"ets trade standardi+ed contracts and hence
a#oid the problem of illiLuidity still the counterparty ris" remains a #ery serious
I%#o!+c%*o %o ,+%+#e/
0utures mar"ets were designed to sol#e the problems that e6ist in forward
mar"ets% * 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 unli"e
forward contracts the futures contracts are standardi+ed and e6change
traded% &o facilitate liLuidity in the futures contracts the e6change specifies
certain standard features of the contract% It is a standardi+ed contract with
standard underlying instrument a standard Luantity and Luality of the
underlying instrument that can be deli#ered ,or which can be used for
reference purposes in settlement- and a standard timing of such settlement% *
futures contract may be offset prior to maturity by entering into an eLual and
opposite transaction% More than @@M of futures transactions are offset this
way%
D*/%*c%*o 5e%4ee ,+%+#e/ "! ,o#4"#!/
0orward contracts are often confused with futures contracts% &he confusion is
primarily because both ser#e essentially the same economic functions of allocating
ris" in the presence of future price uncertainty% (owe#er futures are a significant
impro#ement o#er the forward contracts as they eliminate counterparty ris" and
offer more liLuidity as they are e6change traded% *bo#e table lists the distinction
between the two
INTRODUCTION TO FUTURES
DEFINITION: * 0utures contract is an agreement between two parties to buy or
sell an asset a certain time in the future at a certain price% &o facilitate liLuidity in
the futures contract the e6change specifies certain standard features of the
contract% &he standardi+ed items on a futures contract are9
? Fuantity of the underlying
? Fuality of the underlying
? &he date and the month of deli#ery
? &he units of price Luotations and minimum price change
? Location of settlement
FEATURES OF FUTURES:
? 0utures are highly standardi+ed%
? &he contracting parties need to pay only margin money%
? (edging of price ris"s%
? &hey ha#e secondary mar"ets to%
TYPES OF FUTURES:
3n the basis of the underlying asset they deri#e the financial futures are di#ided
into two types9
? )toc" futures9
? Inde6 futures :
P"#%*e/ * %&e ,+%+#e/ co%#"c%:
&here are two parties in a future contract the buyer and the seller% &he buyer of
the futures contract is one who is L3.5 on the futures contract and the seller of
the futures contract is who is )(3R& on the futures contract%
&he pay off for the buyer and the seller of the futures of the contracts are as
follows9
PAY-OFF FOR A BUYER OF FUTURES9
0#o,*%
FP
F
6 S7 S8
FL
.o//
CASE 8:-&he buyer bought the futures contract at ,0-I if the future price
goes to )8 then the buyer gets the profit of ,0P-%
CASE 7:-&he buyer gets loss when the future price goes less then ,0- if the future
price goes to ): then the buyer gets the loss of ,0L-%
PAY-OFF FOR A SELLER OF FUTURES9
0#o,*%
FL
S7 F S8
FP
.o//
F 9 FUTURES PRICE S8: S7 9 SETTLEMENT PRICE
CASE 8:- &he seller sold the future contract at ,0-I if the future goes to )8
then the seller gets the profit of ,0P-%
CASE 7:- &he seller gets loss when the future price goes greater than ,0- if the
future price goes to ): then the seller gets the loss of ,0L-%
MARGINS:
Margins are the deposits which reduce counter party ris"arise in a futures contract%
&hese margins are collected in order to eliminate the counter party ris"% &here are
three types of margins9
I*%*". M"#1*/:
4hene#er a futures contract is signed both buyer and seller are reLuired to post
initial margins% Both buyer and seller are reLuired to ma"e security deposits that
are intended to guarantee that they will infact be able to fulfill their obligation%
&hese deposits are initial margins%
M"#-*1 %o 2"#-e% 2"#1*/:
&he process of adjusting the eLuity in an in#estorEs account in order to reflect the
change in the settlement price of futures contract is "nown as M&M margin%
M"*%e"ce 2"#1*:
&he in#estor must "eep the futures account eLuity eLual to or greater than certain
percentage of the amount deposited as initial margin% If the eLuity goes less than
that percentage of initial margin then the in#estor recei#es a call for an additional
deposit of cash "nown as maintenance margin to bring the eLuity upto the initial
margin%
PRICING THE FUTURES:
&he 0air #alue of the futures contract is deri#ed from a model "nows as the cost of
carry model% &his model gi#es the fair #alue of the contract%
1ost of 1arry9
0N) ,8Or'L-
t
4here
0' 0utures price
)' )pot price of the underlying
r' 1ost of financing
L' /6pected Di#idend yield
t ' (olding Period%
FUTURES TERMINOLOGY:
S0o% 0#*ce:
&he price at which an asset trades in the spot mar"et%
F+%+#e/ 0#*ce9
&he price at which the futures contract trades in the futures mar"et%
Co%#"c% c$c.e:
&he period o#er which contract trades% &he inde6 futures contracts on the .)/
ha#e one' month two Hmonth and three'month e6piry cycle which e6pire on the
last &hursday of the month% &hus a Ganuary e6piration contract e6pires on the last
&hursday of Ganuary and a 0ebruary e6piration contract ceases trading on the last
&hursday of 0ebruary% 3n the 0riday following the last &hursday a new contract
ha#ing a three'month e6piry is introduced for trading%
E;0*#$ !"%e:
It is the date specifies in the futures contract% &his is the last day on which the
contract will be traded at the end of which it will cease to e6ist%
Co%#"c% /*<e:
&he amount of asset that has to be deli#ered under one contract% 0or instance the
contract si+e on .)/Es futures mar"et is 8CC nifties%
B"/*/:
In the conte6t of financial futures basis can be defined as the futures price minus
the spot price% &he will be a different basis for each deli#ery month for each
contract In a normal mar"et basis will be positi#e% &his reflects that futures prices
normally e6ceed spot prices%
Co/% o, c"##$:
&he relationship between futures prices and spot prices can be summari+ed in
terms of what is "nown as the cost of carry% &his measures the storage cost plus the
interest that is paid to finance the asset less the income earned on the asset%
O0e I%e#e/%:
&otal outstanding long or short position in the mar"et at any specific time% *s total
long positions in the mar"et would be eLual to short positions for calculation of
open interest only one side of the contract is counter%
INTRODUCTION TO OPTIONS:
DEFINITION 3ption is a type of contract between two persons where one grants
the other the right to buy a specific asset at a specific price within a specific time
period% *lternati#ely the contract may grant the other person the right to sell a
specific asset at a specific price within a specific time period% In order to ha#e this
right% &he option buyer has to pay the seller of the option premium
&he assets on which option can be deri#ed are stoc"s commodities inde6es etc% If
the underlying asset is the financial asset then the option are financial option li"e
stoc" options currency options inde6 options etc and if options li"e commodity
option%
PROPERTIES OF OPTION:
3ptions ha#e se#eral uniLue properties that set them apart from other securities%
&he following are the properties of option9
• Limited Loss
• (igh le#erages potential
• Limited Life
PARTIES IN AN OPTION CONTRACT:
8= B+$e# o, %&e o0%*o:
&he buyer of an option is one who by paying option premium buys the right but
not the obligation to e6ercise his option on seller$writer%
7= (#*%e#>/e..e# o, %&e o0%*o:
&he writer of the call $put options is the one who recei#es the option premium and
is their by obligated to sell$buy the asset if the buyer e6ercises the option on him
TYPES OF OPTIONS:
&he options are classified into #arious types on the basis of #arious #ariables% &he
following are the #arious types of options%
8= O %&e 5"/*/ o, %&e +!e#.$*1 "//e%:
3n the basis of the underlying asset the option are di#ided in to two types 9
• I.D/! 3P&I3.)
&he inde6 options ha#e the underlying asset as the inde6%
• )&312 3P&I3.)9
* stoc" option gi#es the buyer of the option the right to buy$sell stoc" at a
specified price% )toc" option are options on the indi#idual stoc"s there are
currently more than 8>C stoc"s there are currently more than 8>C stoc"s are
trading in the segment%
II% O %&e 5"/*/ o, %&e 2"#-e% 2o)e2e%/:
3n the basis of the mar"et mo#ements the option are di#ided into two types% &hey
are9
• 1*LL 3P&I3.9
* call option is bought by an in#estor when he seems that the stoc" price mo#es
upwards% * call option gi#es the holder of the option the right but not the
obligation to buy an asset by a certain date for a certain price%
• P7& 3P&I3.9
* put option is bought by an in#estor when he seems that the stoc" price mo#es
downwards% * put options gi#es the holder of the option right but not the
obligation to sell an asset by a certain date for a certain price%
III% O %&e 5"/*/ o, e;e#c*/e o, o0%*o:
3n the basis of the e6ercising of the option the options are classified into two
categories%
• *M/RI1*. 3P&I3.9
*merican options are options that can be e6ercised at any time up to the e6piration
date all stoc" options at .)/ are *merican%
• /73R3P/*. 3P&I3.9
/uropean options are options that can be e6ercised only on the e6piration date
itself% /uropean options are easier to analy+e than *merican options%all inde6
options at .)/ are /uropean%
PAY-OFF PROFILE FOR BUYER OF A CALL OPTION9
&he pay'off of a buyer options depends on a spot price of a underlying asset% &he
following graph shows the pay'off of buyer of a call option%
P#o,*%
ITM
SR
6 E7 S E8
SP OTM ATM
.o//
) ' )tri"e price 3&M ' 3ut of the money
)P ' Premium$ Loss *&M ' *t the money
/8 ' )pot price 8 I&M ' In the money
/:' )pot price :
)R' profit at spot price /8
CASE 89 ,)pot price P )tri"e price-
*s the spot price ,/8- of the underlying asset is more than stri"e price ,)-% the
buyer gets profit of ,)R- if price increases more than /8 then profit also increase
more than )R%
CASE 79 ,)pot price Q )tri"e price-
*s a spot price ,/:- of the underlying asset is less than stri"e price ,s-
&he buyer gets loss of ,)P- if price goes down less than /: then also his loss is
limited to his premium ,)P-
PAY-OFF PROFILE FOR SELLER OF A CALL OPTION:
&he pay'off of seller of the call option depends on the spot price of the underlying
asset% &he following graph shows the pay'off of seller of a call option9
0#o,*%
SR
OTM
S
E8 ITM ATM E7
SP
.o//
) ' )tri"e price I&M ' In the money
)P ' Premium $profit *&M ' *t the money
/8 ' )pot price 8 3&M ' 3ut of the money
E2 - Spot price 2
)R ' Loss at spot price /:
CASE 89 ,)pot price Q )tri"e price-
*s the spot price ,/8- of the underlying is less than stri"e price ,)-% the seller gets
the profit of ,)P- if the price decreases less than /8 then also profit of the seller
does not e6ceed ,)P-%
CASE 79 ,)pot price P )tri"e price-
*s the spot price ,/:- of the underlying asset is more than stri"e price ,)- the seller
gets loss of ,)R- if price goes more than /: then the loss of the seller also increase
more than ,)R-%
PAY-OFF PROFILE FOR BUYER OF A PUT OPTION:
&he pay'off of the buyer of the option depends on the spot price of the underlying
asset% &he following graph shows the pay'off of the buyer of a call option%
Profit
Profit
)P
/8 ) 3&M /:
I&M )R *&M
loss
) ' )tri"e price I&M ' In the money
)P ' Premium $profit 3&M ' 3ut of the money
/8 ' )pot price 8 *&M ' *t the money
/: ' )pot price :
)R ' Profit at spot price /8
CASE 89 ,)pot price Q )tri"e price-
*s the spot price ,/8- of the underlying asset is less than stri"e price ,)-% the buyer
gets the profit ,)R- if price decreases less than /8 then profit also increases more
than ,)R-%
CASE 79 ,)pot price P )tri"e price-
*s the spot price ,/:- of the underlying asset is more than stri"e price ,s- the
buyer gets loss of ,)P- if price goes more than /: than the loss of the buyer is
limited to his premium ,)P-
PAY-OFF PROFILE FOR SELLER OF A PUT OPTION9
&he pay'off of a seller of the option depends on the spot price of the underlying
asset% &he following graph shows the pay'off of seller of a put option9
profit
)P
/8 ) I&M /:
3&M *&M
)R
Loss
) ' )tri"e price I&M ' In the money
)P ' Premium$ profit *&M ' *t the money
/8 ' )pot price 8 3&M ' 3ut of the money
/: ' )pot price :
)R ' Loss at spot price /8
CASE 89 ,)pot price Q )tri"e price-
*s the spot price ,/8- of the underlying asset is less than stri"e price ,)- the seller
gets the loss of ,)R- if price decreases less than /8 than the loss also increases
more than ,)R-%
CASE 79 ,)pot price P )tri"e price-
*s the spot price ,/:- of the underlying asset is more than stri"e price ,)- the
seller gets profit of ,)P- if price goes more than /: than the profit of seller is
limited to his premium ,)P-%
F"c%o#/ ",,ec%*1 %&e 0#*ce o, " o0%*o:
&he following are the #arious factors that affect the price of an option they are9
S%oc- 0#*ce: &he pay Hoff from a call option is a amount by which the stoc" price
e6ceeds the stri"e price% 1all options therefore become more #aluable as the stoc"
price increases and #ice #ersa% &he pay'off from a put option is the amountI by
which the stri"e price e6ceeds the stoc" price% Put options therefore become more
#aluable as the stoc" price increases and #ice #ersa%
S%#*-e 0#*ce: In case of a call as a stri"e price increases the stoc" price has to
ma"e a larger upward mo#e for the option to go in'the'money% &herefore for a
call as the stri"e price increases option becomes less #aluable and as stri"e price
decreases option become more #aluable%
T*2e %o e;0*#"%*o9 Both put and call *merican options become more #aluable as
a time to e6piration increases%
Vo."%*.*%$: &he #olatility of a stoc" price is measured of uncertain about future
stoc" price mo#ements% *s #olatility increases the chance that the stoc" will do
#ery well or #ery poor increases% &he #alue of both calls and puts therefore
increase as #olatility increase%
R*/--,#ee *%e#e/% #"%e: &he put option prices decline as the ris"'free rate
increases where as the prices of call always increase as the ris"'free interest rate
increases%
D*)*!e!/: Di#idends ha#e the effect of reducing the stoc" price on the 6'
di#idend rate% &his has an negati#e effect on the #alue of call options and a positi#e
effect on the #alue of put options%
PRICING OPTIONS
&he blac"' scholes formula for the price of /uropean calls and puts on a non'
di#idend paying stoc" are 9
1*LL 3P&I3.9
1 N ).,D8-'!e
'r t
.,D:-
P7& 3P&I3.
P N !e
'r t
.,'D:-').,'D:-
4here
1 N J*L7/ 30 1*LL 3P&I3.
) N )P3& PRI1/ 30 )&312
.N .3RM*L DI)&RIB7&I3.
JN J3L*&ILI&D
! N )&RI2/ PRI1/
r N *..7*L RI)2 0R// R/&7R.
t N 13.&R*1& 1D1L/
d
8 N
L
n ,)$!- O ,rO #
:
$:-t
d
: N
d
8
' #
R
$
O0%*o/ Te#2*o.o1$:
S%#*-e 0#*ce:
&he price specified in the options contract is "nown as stri"e price or /6ercise
price%
O0%*o/ 0#e2*+2:
3ption premium is the price paid by the option buyer to the option seller%
E;0*#"%*o D"%e:
&he date specified in the options contract is "nown as e6piration date%
I-%&e-2oe$ o0%*o:
*n In the money option is an option that would lead to positi#e cash inflow to the
holder if it e6ercised immediately%
A%-%&e-2oe$ o0%*o:
*n at the money option is an option that would lead to +ero cash flow if it is
e6ercised immediately%
O+%-o,-%&e-2oe$ o0%*o:
*n out'of'the'money option is an option that would lead to negati#e cash flow if it
is e6ercised immediately%
I%#*/*c )".+e o, 2oe$:
&he intrinsic #alue of an option is I&M If option is I&M% If the option is 3&M its
intrinsic #alue is +ero%
T*2e )".+e o, " o0%*o:
&he time #alue of an option is the difference between its premium and its intrinsic
#alue%
DATA ANALYSIS AND
INTERPRETATION
ANALYSIS OF
ICICI:
&he objecti#e
of this analysis
is to e#aluate
the profit$loss
position of
D"%e M"#-e% 0#*ce F+%+#e 0#*ce
:B'Dec'CA 8::?%A 8::A%C>
;8'Dec'CA 8:;B%A 8:;@%A
8'Gan'CB 8::B%A> 8:;;%A>
:'Gan'CB 8:?A%:> 8:AA
;'Gan'CB 8::B%@> 8:;B%A>
='Gan'CB 8:B?%; 8:BA%>>
A'Gan'CB 8;?:%>> 8;>B%@
B'Gan'CB 8;;@%@> 8;;B%>
@'Gan'CB 8;CA%@> 8;8C%B
8C'Gan'CB 8;>?%8> 8;>B%C>
88'Gan'CB 8=;> 8=;B%8>
8='Gan'CB 8=8C 8=:C%A>
8>'Gan'CB 8;>:%: 8;?C%8
8?'Gan'CB 8;?B%; 8;A>%A>
8A'Gan'CB 8;::%8 8;;:%8
8B'Gan'CB 8:=B%B> 8:>?%=>
:8'Gan'CB 88A;%: 88?A%B>
::'Gan'CB 88:=%@> 88:A%B>
:;'Gan'CB 88>8%=> 88>?%;>
:='Gan'CB 88;8%B> 88;=%>
:>'Gan'CB 8:?8%; 8:?>%?
:B'Gan'CB 8:A;%@> 8:AA%;
'Gan'CB 8::C%=> 8::;%B>;C'Gan'CB 88BA%= 88BA%=
;8'Gan'CB 88=A 88=>%@
futures and options% &his analysis is based on sample data ta"en of I1I1I
B*.2 scrip% &his analysis considered the Gan :CCB contract of I1I1I
B*.2% &he lot si+e of I1I1I B*.2 is 8A> the time period in which this
analysis done is from :A'8:':CCA to ;8%C8%CB%
5raph98
OBSERVATIONS AND FINDINGS:
If a person buys 8 lot i%e% 8A> futures of I1I1I B*.2 on :Bth Dec :CCA and
sells on ;8
st
Gan :CCB then he will get a loss of 88=>%@'8::A%C> N 'B8%8> per
share% )o he will get a loss of 8=:C8%:> i%e% 'B8%8> S 8A>
If he sells on 8=
th
Gan :CCA then he will get a profit of 8=:C%A>'8::A%C> N 8@;%A
i%e% a profit of 8@;%A per share% )o his total profit is ;;B@A%> i%e% 8@;%A S 8A>
&he closing price of I1I1I B*.2 at the end of the contract period is 88=A
and this is considered as settlement price%
&he following table e6plains the mar"et price and premiums of calls%
• &he first column e6plains trading date
• )econd column e6plains the )P3& mar"et price in cash segment on that date%
• &he third column e6plains call premiums amounting at these stri"e pricesI
8:CC 8:;C 8:?C 8
C 8;:C and 8;>C%C".. o0%*o/:
D"%e M"#-e% 0#*ce 8766 87?6 87@6 87A6 8?76 8?B6
:B'Dec'CA 8::?%A ?A%B> >;%C> ;@%?> ;:%:> :=%: 8B%>
;8'Dec'CA 8:;B%A A=%?> >B%=> ==%C> ;:%A> :;%B> 8@%:>
8'Gan'CB 8::B%A> ?: >?%B> ;@%: ;C ::%@ 8B%B
:'Gan'CB 8:?A%:> 8CC%@ A>%>> ?;%A> =@%8 ;?%>> :A%=
;'Gan'CB 8::B%@> A> ?C%8 =>%B> ;=%> :?%= ::%>
='Gan'CB 8:B?%; 8C@%? @8%C> ?B%:> >8%;> ;B%?
%8>A'Gan'CB 8;?:%>> 8AC 8=;%; 8:C 8CC A@%= ?:%;>
B'Gan'CB 8;;@%@> 8=C 88@%;> 8CC B> >@%: =:%B>
@'Gan'CB 8;CA%@> 8=C 8C8 A=%;> ?:%C> =?%?> ;;%8>
8C'Gan'CB 8;>?%8> 8?C%? 8;8 88C @>%=> AC%B> >;%8
88'Gan'CB 8=;> :>C%A 8>8%B 8BB%@ 8?=%A 8;C%@ 8C=%>>
8='Gan'CB 8=8C :=C :8;%> 8=B 8;=%@ @? BB%:
8>'Gan'CB 8;>:%: 8>> 8>C%C> 8CA%> 8;=%@ ?? >:%?>
8?'Gan'CB 8;?B%; 8:B%= 8=C @C ?; AB%: ?C%@>
8A'Gan'CB 8;::%8 8:B%= 8=C @> ?A%> >C%: ;@%8>
8B'Gan'CB 8:=B%B> 8:B%= ?C >= ;A%@>
%8> 8@%;:8'Gan'CB 88A;%: >: ;?%> :?%; :=%=> 8=%>> @%@>
::'Gan'CB 88:=%@> ==%8> ;8%C> ::%>> 8:%=> 8C%;> ?%A
:;'Gan'CB 88>8%=> >C%:> ;@%; :;%:> 8A 8?%;> B%?
:='Gan'CB 88;8%B> =C%= :: 8A%C> 8:%8 @%=> >%8
:>'Gan'CB 8:?8%; BC%> ?: =C%B> :=%>> 8?%8> @%A>
:B'Gan'CB 8:A;%@> @8%B> ?8%?> ==%B ;8%= :C%:> 88%;>
'Gan'CB 8::C%=> =? :>%@> 8A%=> 8C%> =%C> :%@>;C'Gan'CB 88BA%= 8B%?> @%C> =%> 8%= C%A> C%:
;8'Gan'CB 88=A C%=> C%> 8 8%= C%8 C%:
S%#*-e 0#*ce/
&able9:
OBSERVATIONS AND FINDINGS
CALL OPTION
BUYERS PAY OFF:
? &hose who ha#e purchase call option at a stri"e price of 8:?C the
premium payable is ;@%?>
? 3n the e6piry date the spot mar"et price enclosed at 88=A% *s it is out
of the money for the buyer and in the money for the seller hence the
buyer is in loss%
? )o the buyer will lose only premium i%e% ;@%?> per share%
)o the total loss will be ?@;B%A> i%e% ;@%?>S8A>
SELLERS PAY OFF:
? *s )eller is entitled only for premium if he is in profit%
? )o his profit is only premium i%e% ;@%?> S 8A> N ?@;B%A>
P+% o0%*o/:
S%#*-e 0#*ce/
D"%e M"#-e%
0#*ce
8766 87?6 87@6 87A6 8?76 8?B6
:B'Dec'CA 8::?%A ;@%C> 8B8%C> 8AB%B 8@A%8> 8@C%B> 8@8%B
;8'Dec'CA 8:;B%A ;=%= 8B8%C> 8AB%B 8@A%8> 8@C%B> 8@8%B
8'Gan'CB 8::B%A> ;:%8 8B8%C> 8AB%B 8@A%8> 8@C%B> 8@8%B
:'Gan'CB 8:?A%:> ::%? :>%>C 8AB%B =8%>> 8@C%B> 8@8%B
;'Gan'CB 8::B%@> ;: ;B%CC 8AB%B B: 8@C%B> 8@8%B
='Gan'CB 8:B?%; 8A%?> :>%CC ;A%C> B: 8@C%B> 8@8%B
A'Gan'CB 8;?:%>> 8:%= 8:%?C :C%8> ;=%B> =;%@> 8@8%B
B'Gan'CB 8;;@%@> 8C%8> 8:%CC :C%C> ;C =: 8@8%B
@'Gan'CB 8;CA%@> 88%@ 8>%CC :?%> ;? >8 8@8%B
8C'Gan'CB 8;>?%8> @ 88%CC 8> :>%: ;;%A =A%B
88'Gan'CB 8=;> ;%A> 88%CC 8C B%@ 8:%A> 8B%;>
8='Gan'CB 8=8C ;%A> 88%CC B%> 8: 8:%= ::%=>
8>'Gan'CB 8;>:%: ?%=> A%CC 8C 8A%=> :;%8 ;B%;
8?'Gan'CB 8;?B%; B B%CC 88%:> 8;%; ::%>> ;>%;>
8A'Gan'CB 8;::%8 A%; B%CC 8A%B :>%=> ;B%:> >?%=
8B'Gan'CB 8:=B%B> 8B%8> ;?%?C ;> ?A%B> A?%C> 88:%:
:8'Gan'CB 88A;%: 8C;%> AC%CC ?@%?> 8;>%C> 8>8%;> ::;%=
::'Gan'CB 88:=%@> 88C 8;B%@C 8;B%? 8AC%C> :8C :BC
:;'Gan'CB 88>8%=> A8 8;B%@C 8;> 8>C :8C :CC
:='Gan'CB 88;8%B> @@ 8;B%@C 8;> 8>C :8C :CC
:>'Gan'CB 8:?8%; 8>%@ :?%;> ;; >C%C> :8C :CC
:B'Gan'CB 8:A;%@> 8?%A 8@%CC ;C => >> B8%=>
'Gan'CB 8::C%=> 8B ;B%CC >C => 8CC 8=>;C'Gan'CB 88BA%= :A%> ?C%CC B>%: 8:C 8=>%C> 8=>
;8'Gan'CB 88=A >C ?C%CC B>%: 8:C 8=>%C> 8=>
&able9;
OBSERVATIONS AND FINDINGS
PUT OPTION
BUYERS PAY OFF:
? *s brought 8 lot of I1I1I that is 8A> those who buy for 8:CC paid
;@%C> premium per share%
? )ettlement price is 88=A
)tri"e price 8:CC%CC
)pot price 88=A%CC
>;%CC
Premium ,'- ;@%C>
8;%@> 6 8A>N :==8%:>
Buyer Profit N Rs% :==8%:>
Because it is positi#e it is in the money contract hence buyer will get more
profit incase spot price decreases buyerEs profit will increase%
SELLERS PAY OFF:
? It is in the money for the buyer so it is in out of the money for the
seller hence he is in loss%
? &he loss is eLual to the profit of buyer i%e% :==8%:>%
5raph9:
OBSERVATIONS AND FINDINGS
? &he future price of I1I1I is mo#ing along with the mar"et price%
? If the buy price of the future is less than the settlement price than the
buyer of a future gets profit%
? If the selling price of the future is less than the settlement price than
the seller incur losses%
ANALYSIS OF SBI:-
&he objecti#e of this analysis is to e#aluate the profit$loss position of futures
and options% &his analysis is based on sample data ta"en of )BI scrip% &his
analysis considered the Gan :CCA contract of )BI% &he lot si+e of )BI is 8;:
the time period in which this analysis done is from :B'8:':CCA to ;8%C8%CB%
&able9=
D"%e M"#-e% P#*ce F+%+#e 0#*ce
:B'Dec'CA :;AA%>> :=8;%A
;8'Dec'CA :;A8%8> :=C@%:
8'Gan'CB :;B;%> :=8;%=>
:'Gan'CB :=:;%;> :==B%=>
;'Gan'CB :;@>%:> :=8?%;>
='Gan'CB :;BB%B :=8:%>
A'Gan'CB :=C:%@ :=8@%8>
B'Gan'CB :=?=%>> :=AB%>>
@'Gan'CB :=>=%> :=A;%8
8C'Gan'CB :=C@%? :=88%8>
88'Gan'CB :=;=%B :=>=%=
8='Gan'CB :=?;%8 :=?B%=
8>'Gan'CB :=:;%=> :=:8%B>
8?'Gan'CB :=8>%>> :=;:%;
8A'Gan'CB :=8?%;> :=:;%C>
8B'Gan'CB :;?:%;> :;AC%;>
:8'Gan'CB :8@?%8> :8@:%;
::'Gan'CB :8;A%= :8;>%:
:;'Gan'CB :;:;%A> :;8?%@>
:='Gan'CB :;=;%8> :;;>%;>
:>'Gan'CB :=CA%= :=CB%@
:B'Gan'CB :;8;%;> :;C>%>
'Gan'CB ::;C%A ::;C%>;C'Gan'CB :::;%@> ::8A%:>
;8'Gan'CB :8?A%;> :8?@%@
5raph9;
OBSERVATIONS AND FINDINGS:
If a person buys 8 lot i%e% ;>C futures of )BI on :B
th
Dec :CCA and sells on ;8
st
Gan :CCB then he will get a loss of :8?@%@':=8;%A N :=;%B per share% )o he will
get a profit of ;:8B8%?C i%e% :=;%B S 8;:
If he sells on 8>
th
Gan :CCB then he will get a profit of :=?B%=':=8;%A N >=%A i%e%
a profit of >=%A per share% )o his total profit is A::C%=C i%e% >=%A S 8;:
&he closing price of )BI at the end of the contract period is :8?A%;> and this is
considered as settlement price%
&he following table e6plains the mar"et price and premiums of calls%
• &he first column e6plains trading date
• )econd column e6plains the )P3& mar"et price in cash segment on that date%
• &he third column e6plains call premiums amounting at these stri"e pricesI
:;=C :;AC :=CC :=;C :=?C and :=@C%
C".. o0%*o/:
S%#*-e 0#*ce/
D"%e M"#-e%
P#*ce
7?C6 7?D6 7C66 7C?6 7C@6 7CA6
:B'Dec'CA :;AA%>> 8=> @: 8C=%;> 8CB A@ ?B
;8'Dec'CA :;A8%8> 8=> @: 8C:%@> 8CB A: >@
8'Gan'CB :;B;%> 8;= @: 8C8%@> 8CB ?@%B> >@
:'Gan'CB :=:;%;> 8B@%B @: 8:;%:> 8C>%B @C%:> A?%>>
;'Gan'CB :;@>%:> 8B@%B @: @B%=> @;%? A?%? ?C%C>
='Gan'CB :;BB%B 8B@%B @: 8CC%@> B? A=%B ?C%C>
A'Gan'CB :=C:%@ 8B@%B @: @>%>> BB%8> A?%8> ?8%8
B'Gan'CB :=?=%>> 8@C @: 8:B%>> 88B%; @@%B> B=%B
@'Gan'CB :=>=%> 8AC @: 8:?%A> 8:8 @:%8> AA%=>
8C'Gan'CB :=C@%? 8AC 8@C B= A:%:> >B%B >8%B>
88'Gan'CB :=;=%B 8?C 8@C 8CB%B> @=%@> A=%?> ?=%B>
8='Gan'CB :=?;%8 :8B%> 8@C 88C%B @C%: B8%> ?=%B
8>'Gan'CB :=:;%=> :8B%> 8@C BA%B> A> ?:%?> >>%;
8?'Gan'CB :=8>%>> @? @B 8C:%8> @>%=> ?B%> ?8%@>
8A'Gan'CB :=8?%;> @? 8@C @8%B> BC ?? >>
8B'Gan'CB :;?:%;> @? 8@C ?:%8 >C%>> == ;C
:8'Gan'CB :8@?%8> ::%:> 8@C :>%; 8> 88%A
::'Gan'CB :8;A%= ::%:> 8@C :8%C> 8> 88%A 8C
:;'Gan'CB :;:;%A> ::%:> 8@C =A%C> 8> ;:%?>
%;:='Gan'CB :;=;%8> 8C= 8@C =B%: =C :?%=> :?%;
:>'Gan'CB :=CA%= 88;%A 8@C ?8%?> =B%A> ;@%B :A%?>
:B'Gan'CB :;8;%;> C C C C C C
'Gan'CB ::;C%A 8; 8> @ C C C;C'Gan'CB :::;%@> 8; 8> @ C C C
;8'Gan'CB :8?A%;> 8; 8> @ C C C
&able9>
OBSERVATIONS AND FINDINGS
CALL OPTION
BUYERS PAY OFF:
? &hose who ha#e purchased call option at a stri"e price of :=CC the
premium payable is 8C=%;>
? 3n the e6piry date the spot mar"et price enclosed at :8?A%?>% *s it is
out of the money for the buyer and in the money for the seller hence
the buyer is in loss%
? )o the buyer will lose only premium i%e% 8C=%;> per share%
)o the total loss will be 8;AA=%: i%e% 8C=%;>S8;:
SELLERS PAY OFF:
? *s )eller is entitled only for premium if he is in profit%
? )o his profit is only premium i%e% 8C=%;> S 8;: N 8;AA=%:
P+% o0%*o/:
D"%e M"#-e%
P#*ce
7?C6 7?D6 7C66 7C?6 7C@6 7CA6
:B'Dec'CA :;AA%>> ;?:%A> ;C?%@ @C ;C; :8B%C> ::8%@>
;8'Dec'CA :;A8%8> ;?:%A> ;C?%@ @C%? ;C; :8B%C> ::8%@>
8'Gan'CB :;B;%> ;?:%A> ;C?%@ B=%@> ;C; :8B%C> ::8%@>
:'Gan'CB :=:;%;> ?C =C A;%>> ;C; :8B%C> ::8%@>
;'Gan'CB :;@>%:> ?C =C B? ;C; :8B%C> ::8%@>
='Gan'CB :;BB%B ?C =C BA%;> ;C; :8B%C> ::8%@>
A'Gan'CB :=C:%@ ?C 8>C A@ ;C; :8B%C> ::8%@>
B'Gan'CB :=?=%>> ?C 8>C >C%A ;C; 8CC ::8%@>
@'Gan'CB :=>=%> ?C 8>C >?%B ;C; A>%; ::8%@>
8C'Gan'CB :=C@%? ?C 8>C A=%:> ;C; 88:%B 8CC
88'Gan'CB :=;=%B ?C 8>C >;%8> =8 AB%; 8:>
8='Gan'CB :=?;%8 ?C 8>C ==%:> >@%@> A8%;> 8CC
8>'Gan'CB :=:;%=> =C 8>C ?@%? AB 8CC 8:B
8?'Gan'CB :=8>%>> A>%@ 8>C ?>%C> AB 8;> 8>C
8A'Gan'CB :=8?%;> A>%@ 8>C AC%=> AB @?%>> 8>C
8B'Gan'CB :;?:%;> A>%@ AC @>%C> 88B @?%>> 8>C
:8'Gan'CB :8@?%8> 8AC 8;@%; ::;%B 88B
@ 8>C::'Gan'CB :8;A%= 8AC 8;@%; ;CC 88B
@ 8>C:;'Gan'CB :;:;%A> 8AC 8;@%; 8>C 88B
@ 8>C:='Gan'CB :;=;%8> 8AC 8;@%; 88A%A 88B 8:C 8>C
:>'Gan'CB :=CA%= ;;%@ 8;@%; >:%=> 88B 8:C 8>C
:B'Gan'CB :;8;%;> C C C C C C
'Gan'CB ::;C%A ?8%? BC%B BB C C C;C'Gan'CB :::;%@> ?8%? BC%B BB C C C
;8'Gan'CB :8?A%;> ?8%? BC%B BB C C
C
S%#*-e 0#*ce/
&able9?
OBSERVATIONS AND FINDINGS
PUT OPTION
BUYERS PAY OFF:
? *s brought 8 lot of )BI that is 8;: those who buy for :=CC paid @C
premium per share%
? )ettlement price is :8?A%;>
)pot price :=CC%CC
)tri"e price :8?A%;>
:;:%?>
Premium ,'- @C%CC
8=:%?> 6 8;:N 8BB
%BBuyer Profit N Rs% 8BB
%BBecause it is positi#e it is in the money contract hence buyer will get more
profit incase spot price increase buyer profit also increase%
SELLERS PAY OFF:
? It is in the money for the buyer so it is in out of the money for the
seller hence he is in loss%
? &he loss is eLual to the profit of buyer i%e% 8BB
%B%5raph9=
OBSERVATIONS AND FINDINGS
? &he future price of )BI is mo#ing along with the mar"et price%
? If the buy price of the future is less than the settlement price than the
buyer of a future gets profit%
? If the selling price of the future is less than the settlement price than
the seller incur losses
ANALYSIS OF YES BAN':-
&he objecti#e of this analysis is to e#aluate the profit$loss position of futures
and options% &his analysis is based on sample data ta"en of D/) B*.2
scrip% &his analysis considered the Gan :CCB contract of D/) B*.2% &he lot
si+e of D/) B*.2 is 88CC the time period in which this analysis done is
from :B'8:':CCA to ;8%C8%CB%
D"%e M"#-e% 0#*ce ,+%+#e 0#*ce
:B'Dec'CA :=@%B> :>:%>
;8'Dec'CA :=@%; :>8%8>
8'Gan'CB :>B%;> :?C%B>
:'Gan'CB :?>%A> :?B%8
;'Gan'CB :?C%A :?:%B>
='Gan'CB :?C%C> :?8%>>
A'Gan'CB :?;%= :?=%=
B'Gan'CB :?C%: :?8%8
@'Gan'CB :?C%8 :?:%:
8C'Gan'CB :>@%= :?C%:
88'Gan'CB :>B%=> :?C%;>
8='Gan'CB :>A%A :>@%@>
8>'Gan'CB :>B%:> :?C%:>
8?'Gan'CB :>C%A> :>=
8A'Gan'CB :>:%; :>=%:>
8B'Gan'CB :=B :=B%C>
:8'Gan'CB ::A%; ::>%=
::'Gan'CB :C@%@> :C@%B>
:;'Gan'CB ::;%8> :8B%8
:='Gan'CB ::C%?> :8?%A>
:>'Gan'CB :;:%? :;C%>
:B'Gan'CB :=;%A :=:%;>
'Gan'CB :==%=> :=:%@>;C'Gan'CB :==%=> :=8%=
;8'Gan'CB :>8%=> :>C%;>
&able9A
5raph9>
OBSERVATIONS AND FINDINGS:
If a person buys 8 lot i%e% 88CC futures of D/) B*.2 on :B
th
Dec :CCA and
sells on ;8
st
Gan :CCB then he will get a loss of :>C%;>':>:%>C N ':%8> per share%
)o he will get a loss of :;?>%CC i%e% ':%8> S 88CC
If he sells on 8>
th
Gan :CCB then he will get a profit of :?C%:>':>:%>C N A%A> i%e%
a profit of 8?%8> per share% )o his total loss is B>:>%CC i%e% A%A> S 88CC
&he closing price of D/) B*.2 at the end of the contract period is :>8%=> and
this is considered as settlement price%
&he following table e6plains the mar"et price and premiums of calls%
• &he first column e6plains trading date
• )econd column e6plains the )P3& mar"et price in cash segment on that date%
• &he third column e6plains call premiums amounting at these stri"e pricesI
:;C :=C :>C :?C :AC and :BC%
C".. o0%*o/:
D"%e M"#-e% 0#*ce 7?6 7C6 7B6 7@6 7D6 7E6
:B'Dec'CA :=@%B> 8A%C> ;:%=> 8;%8 @ 8B%>> 8>
;8'Dec'CA :=@%; 8?%=> ;:%=> 8:%=> @ 8B%>> 8>
8'Gan'CB :>B%;> ::%8> ;:%=> 8?%; 88%? 8B%>> 8>
:'Gan'CB :?>%A> ;8%=> ;:%=> :=%@ 8? 8=%> 8>
;'Gan'CB :?C%A ;8%=> ;:%=> :8%> 8; >%8 ;
='Gan'CB :?C%C> ;8%=> ;:%=> :8%> 8:%: >%8> ;
A'Gan'CB :?;%= ;8%=> ;:%=> :8%> 8:%: @%:> ;
B'Gan'CB :?C%: ;8%=> ;:%=> :8%> @%@> A%=> ;
@'Gan'CB :?C%8 ;8%=> ;:%=> :8%> 8C%@> ?%=> ;
8C'Gan'CB :>@%= ;8%=> ;:%=> :8%> 8A%> B B
88'Gan'CB :>B%=> ;8%=> ;:%=> :8%> 8C%A> >%C> B
8='Gan'CB :>A%A ;8%=> ;:%=> :8%> @ >%C> B
8>'Gan'CB :>B%:> ;8%=> ;:%=> :8%> 8= B%:> B
8?'Gan'CB :>C%A> ;8%=> ;:%=> :8%> >%A = B
8A'Gan'CB :>:%; ;8%=> ;:%=> :8%> A%> >%> :
8B'Gan'CB :=B ;8%=> ;:%=> @%> A%> >%> :
:8'Gan'CB ::A%; ? ;:%=> @%> A%> 8%> :
::'Gan'CB :C@%@> ? ;:%=> @%> B 8%> =
:;'Gan'CB ::;%8> ? ;:%=> @%> B =%> =
:='Gan'CB ::C%?> ? ;:%=> @%> :%8 :%@ =
:>'Gan'CB :;:%? ? ;:%=> @%> :%8 :%@ =
:B'Gan'CB :=;%A 8>%@> ;:%=> @%> :%8 :%@ =
'Gan'CB :==%=> 8>%@> ;:%=> @%> :%8 :%@ =;C'Gan'CB :==%=> 8>%@> ;:%=> > :%8 :%@ =
;8'Gan'CB :>8%=>
%8> ;:%=> =%A > C%B C%>S%#*-e 0#*ce/
&able9B
OBSERVATIONS AND FINDINGS
CALL OPTION
BUYERS PAY OFF:
? *s brought 8 lot of D/) B*.2 that is 88CC those who buy for :BC
paid 8A%C> premium per share%
? )ettlement price is :>8%=>
)pot price :>8%=>
)tri"e price :;C%CC
:8%=>
Premium ,'- 8A%C>
=%=C 6 88CCN =B=C
Buyer Profit N Rs% =B=C
Because it is positi#e it is in the money contract hence buyer will get more
profit incase spot price increase buyer profit also increase%
SELLERS PAY OFF:
? It is in the money for the buyer so it is in out of the money for the
seller hence he is in loss%
? &he loss is eLual to the profit of buyer i%e% =B=C%
P+% o0%*o/:
S%#*-e 0#*ce/
D"%e M"#-e% 0#*ce 7?6 7C6 7B6 7@6 7D6 7E6
:B'Dec'CA :=@%B> ?%@> 8C%>> 8>%8> :C%A> :A%:> ;=%>
;8'Dec'CA :=@%; ?%: @%A> 8=%;> :C :?%? ;=%8
8'Gan'CB :>B%;> =%; A%C> 8C%A> 8>%> :8%:> :A%@
:'Gan'CB :?>%A> ; >%8 B%8 8:%8 8A%8 :;%8
;'Gan'CB :?C%A ;%=> >%@ @%; 8;%A> 8@%; :>%B
='Gan'CB :?C%C> ;%8> >%> B%@ 8;%= 8@ :>%?>
A'Gan'CB :?;%= :%8 ;%@> ?%B> 8C%@ 8?%8> ::%>>
B'Gan'CB :?C%: :%: =%:> A%= 88%A> 8A%=> :=%:>
@'Gan'CB :?C%8 8%B> ;%B ?%B> 88%: 8?%@ :;%B
8C'Gan'CB :>@%= 8%?> ;%> ?%>> 8C%@> 8?%A> :;%B
88'Gan'CB :>B%=> 8%> ;%; ?%; 8C%B 8?%B :=%C>
8='Gan'CB :>A%A 8%8 :%A >%? 8C%8> 8?%;> :;%@>
8>'Gan'CB :>B%:> C%B :%: =%@> @%;> 8>%>> :;%:
8?'Gan'CB :>C%A> 8%? ;%B> A%B 8;%? :C%@>
%>>8A'Gan'CB :>:%; 8%8> ;%C> ?%?> 8:%8> 8@%= :A%@>
8B'Gan'CB :=B 8%> ;%@> B%; 8=%A ::%A> ;8%B
:8'Gan'CB ::A%; @%A> 8?%: :=%8 ;; =:%> >:%:>
::'Gan'CB :C@%@> ::%8> ;C%B =C%8 =@%B >@%?> ?@%?
:;'Gan'CB ::;%8> 8; :C :B%:> ;A%:> =?%B >?%>>
:='Gan'CB ::C%?> 8;%B :8%; ;C ;@%= =@%8 >@
:>'Gan'CB :;:%? A 8:%? 8@%B> :B%; ;A%? =A%:>
:B'Gan'CB :=;%A 8%? =%? 8C 8A%>> :?%? ;?%:>
'Gan'CB :==%=> C%A> ;%C> B%; 8?%: :>%? ;>%=>;C'Gan'CB :==%=> C%8> 8%?> ?%@> 8>%?> :>%> ;>%>
;8'Gan'CB :>8%=> C C C C C C
&able9@
OBSERVATIONS AND FINDINGS
PUT OPTION
BUYERS PAY OFF:
? &hose who ha#e purchase put option at a stri"e price of :>C the
premium payable is 8>%8>
? 3n the e6piry date the spot mar"et price enclosed at :>8%=>% *s it is
out of the money for the buyer and in the money for the seller hence
the buyer is in loss%
? )o the buyer will lose only premium i%e% 8>%8> per share%
)o the total loss will be 8???> i%e% 8>%8>S88CC
SELLERS PAY OFF:
? *s )eller is entitled only for premium if he is in profit%
? )o his profit is only premium i%e% 8>%8> S 88CC N 8???>
5raph9?
OBSERVATIONS AND FINDINGS
? &he future price of D/) B*.2 is mo#ing along with the mar"et
price%
? If the buy price of the future is less than the settlement price than the
buyer of a future gets profit%
? If the selling price of the future is less than the settlement price than
the seller incur losses%
SUMMARY
? Deri#ati#es mar"et is an inno#ation to cash mar"et% *ppro6imately
its daily turno#er reaches to the eLual stage of cash mar"et% &he
a#erage daily turno#er of the .)/ deri#ati#e segments
? In cash mar"et the profit$loss of the in#estor depends on the mar"et
price of the underlying asset% &he in#estor may incur huge profits or
he may incur (uge losses% But in deri#ati#es segment the in#estor
enjoys huge profits with limited downside%
? In cash mar"et the in#estor has to pay the total money but in
deri#ati#es the in#estor has to pay premiums or margins which are
some percentage of total contract%
? Deri#ati#es are mostly used for hedging purpose%
? In deri#ati#e segment the profit$loss of the option writer purely
depends on the fluctuations of the underlying asset%
SUGESSTIONS
? &he deri#ati#es mar"et is newly started in India and it is not
"nown by e#ery in#estor so )/BI has to ta"e steps to create
awareness among the in#estors about the deri#ati#e segment%
? In order to increase the deri#ati#es mar"et in India )/BI should
re#ise some of their regulations li"e contract si+e participation of
0II in the deri#ati#es mar"et%
? 1ontract si+e should be minimi+ed because small in#estors cannot
afford this much of huge premiums%
? )/BI has to ta"e further steps in the ris" management mechanism%
? )/BI has to ta"e measures to use effecti#ely the deri#ati#es
segment as a tool of hedging%
CONCLUSION
? In bullish mar"et the call option writer incurs more losses so the
in#estor is suggested to go for a call option to hold where as the put
option holder suffers in a bullish mar"et so he is suggested to write a
put option%
? In bearish mar"et the call option holder will incur more losses so the
in#estor 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%
? In the abo#e analysis the mar"et price of D/) ban" is ha#ing low
#olatility so the call option writer enjoys more profits to holders%
BIBILOGRAPHY
? BOO'S :-
? Deri#ati#es Dealers Module 4or" Boo" ' .10M
,3ctober :CC>-
? 5ordon and .atarajan, ,:CC?- ‘Financial Markets and
Services’ ,third edition- (imalaya publishers
? (EBSITES :-
? http9$$www%nseindia$content$fo$foThistoricaldata%htm
? http9$$www%nseindia$content$eLuities$eLThistoricaldata%ht
m
? http9$$www%deri#ati#esindia$scripts$glossary$inde6obasic%a
sp
? http9$$www%bseindia$about$deri#ati%aspUtypesofprod%htm
doc_649202049.doc