STUDY REPORTS ON ONLINE TRADING DERIVATIVES

ONLINE TRADING IN DERIVATIVES

CONTENTS

Chapter I

Introduction Need for the study Objectives of the study Methodology Limitations

Chapter II

Stock markets in India Financial Markets Money Markets Capital Markets Stock Markets erivative Markets

Chapter -III Chapter -IV Chapter V ANNEXURE

!heoretical frame"ork of derivative market . #ractical aspects of derivative market$ Summary % Suggestions &uestionnaire 'ibliography

CHAPTER-I

IN!(O )C!ION N** FO( S!) +

O',*C!I-*S M*!.O OLO/+ LIMI!0!IONS

Introduct on !
In our present day economy1 finance is defined as the provision of money at the time "hen it is re2uired$ *very enterprise1 "hether big1 medium or small1 needs finance to carry on its operations and to achieve its targets in fact3 finance is so indispensable today that it is rightly said that it is the lifeblood of an enterprise$ !he term 4o"nership securities5 also kno"n as 4capital stock 4 represents shares$ Shares are the most universal forms of raising long6term funds from the market$ *very company1 e7cept a company limited by guarantee1 has a statutory right to issued shares$ !he capital of a company is divided into a number of e2ual parts kno"n as shares$ 0ccording to Fare"ell $j1 a share is1 8the interest of a shareholder in the company1 measured by a sum of money1 for the purpose of liability in the first place1 and if interest in the second1 but also consisting a series of mutual covenants entered into by all the shareholders interest5$ Section 9:;<= of the companies act1 >?@< defines it as 8 a share in the share capital of a company1 and includes stock e7cept "here a distinction bet"een stock and shares e7pressed or implied$ Share market is of t"o types$ !hey are cash market and derivative market. Ca"h #ar$et" are the secondary markets "here trading in e7isting securities is done$ Listing of ne" issues for investment and disinvestments by saversAinvestors takes place$ It imparts li2uidity or encash ability to stocks and shares$ Stock e7change is a market in "hich securities are bought and sold and it is an essential component of a developed capital markets$

!he securities contracts :(egulation= 0ct1 >?@<1 defines Stock *7change as follo"sB 8It is an association1 organiCation or body of individuals1 "hether incorporated or not1 established for the purpose of assisting1 regulating and controlling of business in buying1 selling and dealing in securitiesD$ 0 stock e7change1 thus imparts marketability and li2uidity to securities1 encourage investments in securities and assists corporate gro"th$ Stock e7changes are organiCed and regulated markets for various securities issued by corporate sector and other institutions$ Der %at %e" are a product "hose value is derived from the value of one or more basic variables1 called bases :underlying asset1 inde71 or reference rate1= in a contractual manner$ !he underlying asset can be e2uity1 fore e7$ Commodity or any other asset$ For e7ample1 "heat farmers may "ish to sell their harvest at a future date to eliminate the risk of a change in prices by that date$ Such a transaction is an e7ample of a derivative$ In the last 9E years derivatives have become notably important in the "orld of finance$ Futures and options are no" globally traded on many e7changes$ For"ard contracts1 S"aps and many different types of options are regularly conducted by outside e7changes by financial institutions1 fund managers and corporate treasurers termed the over the counter market$ in "hat is erivatives are also sometimes added to a bond or

stock issue$ Further1 the very nature of volatility in the financial markets1 the use of derivative products1 it is possible to partially or fully transfer price risks by locking in asset prices$ 'ut these instruments of risk management are generally do not influence the fluctuations in the underlying asset prices$ .o"ever1 by locking asset prices1 the derivative products minimiCe the fluctuations cash flo" situations on risk to the investor$ !he derivatives are becoming increasingly important in "orld of markets as a tool for risk management$ erivative instruments can be used to minimiCe risk$ erivatives are used to separate the risks and transfer them to parties "illing to bear these risks$ !he kind of hedging that can be obtained by using derivatives is cheaper and more convenient than "hat could be obtained by using cash instruments$ It is so because1 "hen "e use derivatives for hedging1 actual delivery of the underlying asset is not at all essential for settlement purposes$ !he profit or loss on derivative deal alone is adjusted in the derivative market$ in the asset prices on the profitability and

erivative contracts have several variants$ !he most common variants are for"ards1 futures1 options and s"aps$ !he follo"ing three broad categories of participants F hedgers1 speculators1 and arbitrageurs trade in the derivatives market$ .edgers face risk associated "ith the price of an asset$ !hey use futures or options markets to reduce or eliminate this risk$ Speculators "ish to bet on future movements in the price of an asset$ Futures and options contracts can give them an e7tra leverage3 that is1 they can increase both the potential gains and potential losses in a speculative venture$ 0rbitrageurs and in business to take advantage of a discrepancy bet"een prices in t"o different markets$ If1 for e7ample1 they see the futures price of an asset getting out of line "ith the cash price1 they "ill take offsetting positions in the t"o markets to lock in a profit$ erivative products initially emerged as hedging devices against fluctuations in commodity prices1 and commodity6linked derivatives remained the sole form for such products for almost three hundred years$ Financial derivatives came into spotlight in the post6>?GE period due to gro"ing instability in the financial markets$ .o"ever1 since their emergence1 these products have become very popular and by >??Es1 they accounted for about t"o6thirds of total transactions in derivative products$ In recent years1 the market for financial derivatives has gro"n tremendously in terms of variety of instruments available1 their comple7ity and also turnover$ In the class of e2uity derivatives the "orld over1 futures and options on stock indices have gained more popularity than on individual stocks1 especially among institutional investors1 "ho are major users of inde76linked derivatives$ *ven small investors find these useful due to high correlation of the popular inde7es "ith various portfolios and ease of use$ !he lo"er costs associated "ith various portfolios and ease of use$ !he lo"er costs associated "ith inde7 derivatives vis6H6vis derivative products based on individual securities is another reason for their gro"ing use$ !he first step to"ards introduction of derivatives trading in India "as the promulgation of the Securities La"s :0mendment= Ordinance1 >??@1 "hich "ithdre" the prohibition on option in securities$

!he market for derivatives1 ho"ever1 did not take off1 as there "as no regulatory frame"ork to govern trading of derivatives$ S*'I set up a 9;6member committee under the Chairmanship of r$L$C$/upta$ on November >I1>??< to develop appropriate regulatory frame"ork for derivatives trading in India$ !he committee submitted its report on March >G1>??I prescribing necessary pre6 conditions for introduction of derivatives trading in India$ !he committee recommended that derivatives should be declared as 4securities5 so that regulatory frame"ork applicable to trading of 4securities5 could also govern trading of securities$ S*'I also set up a group in ,une >??I under the Chairmanship of #rof$,$($-arma$1 to recommend measures for risk containment in derivatives market in India$ speculate or to manage risk in the e2uity markets$ erivatives are products "hose values are derived from one of more basic variables called bases$ !hese bases can be underlying assets such as foreign currency1 stock or commodity1 bases or reference rates such as LI'O( or )S !reasury (ate etc$ For e7ample1 an Indian e7porter in anticipation of the receipt of dollar6denominated e7port proceeds may "ish to sell dollars at a future date to eliminate the risk of e7change rate volatility by the date$ Such transactions are called derivatives1 "ith the spot price of dollar being the underlying asset$ erivatives thus have no value of their o"n but derive it from the asset that is being dealt "ith under the derivative contract$ For instance1 look at an ashtray$ It has no value of its o"n but gains its importance only "hen one smokes and gain if one "ants to collect that ash at one place instead of dirtying the "hole room "ith cigarette ash and its stubs$ 0 smoker can hedge against the risk of ste"ing the cigarette stubs and ash all around the room$ Similarly a financial manager can hedge himself from the risk of a loss in the price of a commodity or stock by buying a derivative contract$ !hus derivative contracts ac2uire their value from the spot prices of the assets that are concerned by the contract$ !he primary purpose of a derivative contract is to transfer 8riskD from one party to another i$e$ risk in a financial sense in transferred from a party that "ants to get rid of it to another !hese instruments can be used to

party that is "illing to take it on$ .ere1 the risk that is being dealt "ith is that of price risk$ !he transfer of such a risk can therefore be speculative in nature or act as a hedge against price movement in a current or anticipate physical position$ 0 derivative is an instrument "hose value is derived from the value of one or more underlying "hich can either in the form of commodities1 precious meat1 currencies1 bonds1 stock and stock indicesD$ 0s the price of the "heat derivatives "ould be determined or based on the prices of "heat itself$ /iven the fast change and gro"th in the scenario of the economic and financial sector have brought a much broader impact on derivatives instrument$ 0s the name signifies1 the value of this product is derived of based on the prices of currencies1 interest rate :i$e$ bonds=1 share and share indices1 commodities1 etc$ Not going into very back1 financial derivatives just came into e7istence in the early >?IE5s$ .ere the principal instruments1 clubbed under the general term derivatives1 include >$ Futures % For"ards 9$ Options1 J$ S"aps ;$ Karrants @$ *7otic and are the modern tools of financial risk management$ 0ll pricing of derivatives is done by arbitrage1 and by arbitrage alone$ .ere1 there is a relationship bet"een the price of the spot and the price in the futures$ If this relationship is violate1 then an arbitrage opportunity is available1 and "e people e7ploit this opportunity1 the price reverts back to its economic value$ !herefore1 arbitrage is the basic re2uirement for pricing$ !he role of li2uidity i$e$ the lo" transaction costs is in making arbitrage check up and convenient$ erivative markets in 'raCil are some of the largest markets in the "orld even first derivative dealing "ere started in )S0$ Ke can even kno" that as the prices of the for"ard contacts are based on future therefore it can even be termed as derivative instrument$

erivative contracts have several variants$ !he most common variants are for"ards1 futures1 options and s"aps$ 0 brief note on the various derivative that are used are as follo"sB &or'ard"$ 0 for"ard contract is a customiCed contract bet"een to" entities1

"here settlement takes place on a specific date in future at today5 pre agreed price$ &uture"$ 0 future contract is an agreement bet"een t"o parties to buy

Or sell an asset at a certain time in the future at a certain price$ Future contracts are Special types of for"ard contracts means that the former are standardiCed e7change !raded contracts$ Opt on"$ Options are of t"o types1

Calls option$ Calls give the buyer the right but not the obligation to buy a /iven 2uantity of the underlying asset1 at a given price on or before a given future ate$ Puts Option. #uts Option give the buyer the right1 but not obligation to sell a /iven 2uantity of the underlying asset at a given price on or before a given date$ (arrant") Longer dated options are called "arrants and are generally

!raded over the counter$ S'ap") S"aps are private agreements bet"een t"o parties to e7change

cash flo"s in the future according to a pre6 arranged formula$ !hey can be regarded as portfolios of for"ard contracts$

Need *or Stud+!

0lthough financial derivatives have e7isted for a considerable period of time they have become major forces in financial market only since the early >?GEs$ !he >?GEs constituted a "atershed in financial history1 partly because the fi7ed e7change rate regime :the 'retton Koods Systems= that had operated since the >?;Es1 broke do"n$ !hese developments established the conte7t in "hich financial derivatives could develop1 flourish and became a major force in "orld financial markets$ Khen the 'reton Kood Systems collapsed in the early >?GEs1 a regime of fi7ed e7change rates gave "ay to financial environment in "hich e7change rates "ere constantly changing in response to pressure of demand and supply$ !he fact that currency prices move constantly and often substantially1 in the ne" situation meant that businesses face ne" risks$ Currency derivatives developed in response to the need to manage these risks$ In other "ords the ne" system of variable e7change rates generated a need to find techni2ues to reduce the risks arising and simultaneously created opportunities for speculations$ !hus financial derivatives develop as a vehicle for these t"o forms of economic activities$ Khen an investor feels the market "ill fall1 he can hedge this position by selling$ Say1 Nifty futures against his portfolio$ !rading in derivatives in India "as introduced in ,une 9EEE on NS* market$ !he S*'I governs this market buy providing the necessary rules and regulations$ taking only :or more if desired= risk at a time$ uring the present period1 banks have increased their e7posure to O!C derivative instruments at such a faster rate that supervisory authorities the "orld over are getting "orried about the risks such e7posures involve for the banks$ !he e7plosive gro"th in derivatives has been the result both of intense competition amongst major international banks :as the role have been changed to profitability= and the need of the corporate "orld1 indeed the "hole 8realD economy1 to hedge e7posures in volatile markets$ 0s the increase of players entering market "hich decrease the margins$ their important economic functionsB erivatives provide erivatives allo" us to manage risks more efficiently by unbundling the risks and allo" either hedging or

:>= (isk management :9= #rice discovery3 and :J= !ransactional efficiency !he risk "hich are generally seen in derivatives are generally of four typesB :>= Credit risk :9= Market risk :J= Legal risk :;= Operations risk !his should be the follo"ing measure to reduce disasters "ith derivativesB 6 0t the level of e7changes1 position limits and surveillance procedures should be sound$ 0t the level of clearing houses1 margin re2uirements should be stringently enforced1 even "hen dealing is "ith large institutions$ 0t the level of individual companies "ith positions in the market1 modern risk measurement systems should be established alongside the creation of capabilities in trading in derivatives$ !he basic idea1 "hich should be steadfastly used "hen thinking about returns1 is that risk also merits measurement$ ,ut 'h+ are der %at %e" "uch a - . h t n Ind an #ar$et/ !he derivatives products F inde7 futures1 inde7 options1 stock futures and stock options provide a carry for"ard facility for investors to take a position :bullish or bearish= on an inde7 or a particular stock for a period ranging from one to three months$ !he current daily settlement in the cash market has left no room for speculation$ !he cash market has turned into a day market1 leading to increasing attention to derivatives$ )nlike the cash market of full payment or delivery1 you don5t need many funds to buy derivatives products$ 'y paying a small margin1 one can take a position in stocks or market inde7$

 !hey provide a substitute for the infamous '0 L0 system$ !he derivatives volume is also picking up in anticipation of reduction of contract siCe from the current (s$9EE1 EEE to (s$>EE1 EEE$ *verything "orks in a rising market$ )n2uestionably1 there is also a lot of trading interest in the derivatives market$

O-0ect %e" o* the "tud+!

!o study the process of derivative market !o make a comparative study "ith cash market$ !o analyCe risks and benefits of derivative market !o analyCe through 2uestionnaire ho" investors are benefited in erivative market$

1ethodo2o.+!
Facts e7pressed in 2uantity form can be termed as 8dataD$ asB i$ #rimary data ii$ Secondary data 3 Pr #ar+ Data! #rimary data is the first hand information that a researcher gets from various sources like respondents1 analogous case situations and research e7periments$ #rimary data is the data that is generated by the researcher for the specific purpose of research situation at hand$ ata maybe classified either

For this project the primary data "ill be collected from the personnel$ !his data can also be obtained through a 2uestionnaire1 based upon "hich some statistical techni2ues are applied$

Secondar+ Data! Secondary data is already published data collected for some purpose other than

the one confronting the researcher at a given point of time$ !he secondary data can be gathered from various sources like statistics1 libraries1 research agencies etc$ In this case the secondary information is to be collected from ne"spapers like 8'usiness lineD and business magaCines like 8'usiness !odayD and Internet$

L # tat on"!
!he project may suffer from the follo"ing limitationsB !he re2uired data may not be available due to "hich it cannot be accurate$ Some of the important information is included because of time constraint$ It "as deliberately difficult to collect the data from the clients1 as they are apparently busy

Chapter II
Stoc$ #ar$et" n Ind a
Financial Markets Money Markets Capital Markets Stock Markets erivative Markets

&INANCIAL 1AR4ETS!
Financial markets are in the forefront in developing economics$ !he vibrant financial market enhances the efficiency of capital formation$ Kell6developed financial markets enlarge the range of financial services$ !hus1 financial markets bridge one set of financial intermediaries "ith another set of players$ !he main functions of the financial markets areB !o facilitate creation and allocation of credit and li2uidity$ !o serve as intermediaries for mobiliCation of savings$ !o provide financial convenience1 and !o cater to the various credits needs of the business houses$ !ypes of Financial marketsB

On the basis of the maturity period of the financial assets1 the market can be divided intoB

1one+ #ar$et!
0 money market is a mechanism through "hich short6term funds are loaned and borro"ed and through "hich a large part of the financial transaction of a particular country of the "orld are cleared$ !he money market is divided into J sectors namely organiCed sector1 unorganiCed sector and Cooperative sector$ Or.an 5ed "ector is comparatively "ell developed in terms of organiCed relationships and specialiCation of functions$ It consists of the (eserve 'ank of India1 various !he development banks1 other scheduled and non6scheduled commercial banks$ part of the organiCed sector$ The unor.an 5ed "ector is more dominate in India$ !he only link bet"een the organiCed and unorganiCed sectors is through commercial banks$ It consists of the indigenous bankers1 Moneylenders1 Nidhis and Chit funds$

financial institutions like LIC1 )!I1 discount and finance house of India limited are all a

The cooperat %e "ector consists of the state Fcooperative banks1 primary agricultural credit societies1 Central Cooperative banks1 and State Land evelopment bank

FIN0NCI0L S+S!*M

FINANCIAL INSTITUTIONS

FINANCIAL MARKETS

FINANCIAL INSTRUMENTS

FINANCIAL SERVICES

MONEY MARKET

CAPITAL MARKET

Organized

Unorganized

S"o$% Mar%e"

Term ending In!"r#$"ion!

Gi " Edged Se$#ri"ie! Mar%e"

Ind#!"ria Se$#ri"ie! Mar%e"

Primar& Mar%e"

Se$ondar& S"o$% E'$(ange! Mar%e"

)(o e!a e de*" Mar%e" !egmen"

Ca+i"a mar%e" Segmen"

Ca!( Segmen"

Deri,a"i,e Segmen"

F#"#re!

O+"ion!

In"ere!" ra"e

Ca

P#"

Cap ta2 #ar$et!

Capital market is an organiCed mechanism for effective and efficient transfer of money capital of financial resources form the investing class i$e$1 a body of individual or institutional savers1 to the entrepreneur class i$e$1 a body of individual or institutions engage in industry1 business or service in the private and public sectors of the economy$ &unct on" o* cap ta2 #ar$et! !he capital market is directly responsible for the follo"ing activities$ MobiliCation of National savings for economic development MobiliCation and import of foreign capital and foreign investment capital plus skill to fill up the deficit in the re2uired financial resources to maintain e7pected rate of economic gro"th$ #roductive utiliCation of resources irection the flo" to funds of high yields and also strives for balance and diversified industrialiCation$ Con"t tuent" o* cap ta2 #ar$et! !he capital market comprises of mutual funds1 development banks1 specialiCed financial institutions1 investment institutions1 state level development banks1 lease

companies1 financial service companies1 commercial banks and other specialiCed institutions set up for the gro"th of capital market like S*'I1 C(ISIL$

In"tru#ent" Cap ta2 #ar$et! !he follo"ing instruments are being used for raising resources$ *2uity shares #reference shares Non6voting e2uity shares Cumulative convertible preference Shares Company fi7ed deposits1 banks1 and debentures1 global depository receipts$ !he capital market is divided into t"o parts namely ne" issues market and Stock market$

Stoc$ 1ar$et!
Stock markets are the secondary markets "here trading in e7isting securities is done$ Listing of ne" issues for investment and disinvestments by saversAinvestors takes place$ It imparts li2uidity or encash ability to stocks and shares$ Stock e7change is a market in "hich securities are bought and sold and it is an essential component of a developed capital markets$ !he securities contracts :(egulation= 0ct1 >?@<1 defines Stock *7change as follo"sB 8It is an association1 organiCation or body of individuals1 "hether incorporated or not1

established for the purpose of assisting1 regulating and controlling of business in buying1 selling and dealing in securitiesD$ 0 stock e7change1 thus imparts marketability and li2uidity to securities1 encourage investments in securities and assists corporate gro"th$ Stock e7changes are organiCed and regulated markets for various securities issued by corporate sector and other institutions$ Character "t c"! 0n organiCation in the form of an association or company 0 governing body to supervise and control its activities 0 frame"ork of rules and regulations 0 common meeting place for purchasers and sellers Only members are allo"ed to conduct business in a stock e7change$

&unct on"! *nsures li2uidity of capital #rovides ready market for securities irects flo" of capital into profitable channels *valuation of financial conditions and prospects of listed firms Facilitates speculation #romotes and mobiliCes savings #romotes industrial gro"th and economic development #latform for public debt Clearing house of business information

,ene* t"! !he benefits of stock e7change can be studied under the follo"ing headingsB >$ 0dvantages to the companiesB (eady market for securities Increase in price Increase in good"ill 0gent bet"een companies and the investors

9$ 0dvantage to the Investors Safety of investment and 'est use of capital More collateral value #ublication of price list of securities #o"erful hedge against inflation

J$ 0dvantage to the societyB .elpful in industrialiCation Increase in rate of capital formation Savings are encouraged Inventive for efficiency /overnment can raise funds for important projects #rovides a mirror to reflect general economic condition !here are stock 9J e7changes in India$ !hey are National Stock *7change1 'ombay Stock *7change1 'an galore Stock *7change1 0hmedabad Stock *7change1 Calcutta Stock *7change1 elhi Stock *7change1 .yderabad Stock *7change1 Madhya#radesh Stock *7change1 Madras Stock *7change1 Cochin Stock *7change1

)ttar#radesh Stock *7change1#une Stock *7change1 Ludhiana Stock *7change1 /u"ahati Stock *7change1 Mangalore Stock *7change1 -adodara Stock *7change1 (ajkot Stock *7change1 'hubanesh"ar Stock *7change1 Coimbatore Stock *7change1 ,aipur Stock *7change1 Merrut Stock *7change1 #atna Stock *7change1 over the counter e7change of India$ !he most prominent among these are 'ombay Stock *7change and National Stock *7change1 ,o#-a+ Stoc$ E6chan.e! !he Stock *7change1 Mumbai1 popularly kno"n as 7,SE8 "as established in >IG@ as 7The Nat %e Share and Stoc$ ,ro$er" A""oc at on8 $ It is the oldest one in 0sia1 even older that the !okyo Stock *7change1 "hich "as established in >IGI$ It is a voluntary nonprofit making 0ssociation of #ersons :0O#= and is currently engaged in the process of converting itself into de mutilated and corporate entity$ It has evolved over the years into its present status as the premier Stock *7change in the country$ It is the first Stock *7change in the Country to have obtained permanent recognition in >?@< from the /ovt$ of India under the Securities Contracts :(egulation= 0ct1 >?@<$ !he *7change "hile providing an efficient and transparent market for trading in securities1 debt and derivatives upholds the interests of the investors and ensures redresser of their grievances "hether against the companies or its o"n member6brokers$ It also strives to educate and enlighten the investors by conducting investor education programs and making available to them necessary informative inputs$ 0 /overning 'oard having 9E directors is the ape7 body1 "hich decides the policies and regulates the affairs of the *7changes$ !he /overning 'oard consists of ? elected irector % directors1 "ho are from the broking community :one third of them retire ever year by rotation=1 three S*'I nominees1 si7 public representatives and an *7ecutive Chief *7ecutive Officer and a Chief Operating Officer$

!he *7ecutive

irector as the Chief *7ecutive Officer is responsible for the day6

to6day administration of the *7change and the Chief Operating Officer and other .eads of epartments assist him$ !he *7change has inserted ne" (ule No$>9< 0 in its (ules1 'yla"s % (egulations pertaining to constitution of the *7ecutive Committee of the *7change$ 0ccordingly1 an *7ecutive Committee1 consisting of three elected directors1 three S*'I nominees or public representatives1 *7ecutive irector % C*O and Chief Operating Officer has been constituted$ !he Committee considers judicial % 2uasi matters in "hich the /overning 'oarding has po"ers as an 0ppellate 0uthority1 matters regarding annulment of transactions1 admission1 continuance and suspension of member6brokers1 declaration of a member6broker as defaulter1 norms1 procedures and other matter relating to arbitration1 fees1 deposits1 margins and other monies payable by the member6brokers to *7change1 etc$ Stren.th"!

.uge investor base Familiarity of investors "ith 'ase5s operation$ Large nation"ide net"ork of brokers and sub brokers$ >9E years5 e7perience in e2uity trading$ *7pands its vast net"ork to retain business$

(ea$ne""e"! Monopoly lent clout that is susceptible to competition$ Lack of transparency Lengthy settlement period Close club culture prevails /overnment preference for National Stock *7change$

Nat ona2 Stoc$ E6chan.e!

It "as incorporate in November >??9 "ith an e2uity capital of (s$9@ Cores and promoted among others by I 'I1 ICICI1 LIC1 /IC and its subsidiaries1 commercial banks including State 'ank of India$ It has a satellite based state6of the art net"orking and fully automate screen based trading$ It lists companies "ith paid up capital of (s$>E core or more$ Stren.th"! !ransparency and National reach$ *2ual access to all members /overnment patronage Institutional patronage #rovides avenue for investment trading .i6tech infrastructure FIIs more comfortable "ith screen based trading SpecialiCing in derivatives F Futures % Options

(ea$ne""e"! No track record$ Screen based trading is a ne" concept Short run concentration in Mumbai 'ack up infrastructure like communication not in place$ #rohibitive costs of entry for small brokers$ )ntested systems for large volumes of trade$ ,SE5s established system1 its net"ork of brokers and sub brokers$ )neven track record of computeriCation in India$

National Stock *7change operates t"o segments namely "holesale debt market and capital market$ 9) (D1 "e.#ent!

!he K M segment or the money market as it is commonly referred as1 is a facility for institutions and corporate bodies to enter into high value transactions in instruments such as government securities1 treasury bills1 public sector nits :#S)= bonds1 commercial paper certificates of deposit$ On the K M segment1 there are t"o types of entities$ !rading members "ho can either trade on their account or on behalf of their clients including participantsL Khile participants are the organiCations directly responsible for settlement of trades "ho settle trades e7ecuted on their o"n account and on behalf of those clients "ho are not direct participants$

:) Cap ta2 1ar$et Se.#ent! !he CM segment covers trading in e2uities1 convertible debentures and retail trade in debt instruments like non6convertible debentures$ Securities of medium1 and large companies "ith nation"ide investors base including securities traded on other stock e7changes are traded the NSF$ !he CM segment has t"o sub segments namely Cash Segment and erivatives Segment$

Ca"h 1ar$et Se.#ent! Spot trading takes place in this market "ith no for"ard transactions$ 'uying and selling of scripts is done "ith various motives like investments1 speculation and hedging$ !he settlement cycle in this segment is ! M 9 days for payment and receipt of funds and delivery$

Der %at %e" 1ar$et Se.#ent!

!rading in derivatives is done in this segment$ 0 derivative security is a financial contract "hose value is derived from the value of an under6lying asset$ !he underlying asset can be e2uity1 fore71 commodity or any other asset$ !he securities contract :(egulation= 0ct1 >?@< :SC0= defines 8derivativeD to include6 0 security derived from a debt instrument1 share1 and loan "hether secured or unsecured1 risk instrument or contract for differences or any form of security$

0 contract1 "hich derives its value from the prices1 or inde7 of prices1 of underlying securities$ !he derivatives are securities under the SC0 and hence the trading of derivatives is governed by the regulatory frame"ork under the SC0

&unct on"! 9) Pr ce d "co%er+! !he markets indicate "hat is likely to happen and thus assist in better price discovery of the future as "ell as current prices$ :) R "$ tran"*er! erivatives instruments do not themselves involve risk they redistribute

the risk bet"een the market participants$ ;) 1ar$et co#p2et on! Kith the introduction of derivatives the underlying market "itnesses higher trading volumes$ I#portance! #rovide enhanced yield on assets$ (educe finding costs by borro"ers Modify payment structure of assets to correspond to investors market vie"s1 (eflects the perception of market participants about future price of assets$ Increase trading volumes by increasing confidence of investors Speculative tradeNs shifts to amore controlled environment$

0cts as a catalyst for ne" entrepreneurial activity$ .elps to increase savings and investment in the long run and promotes economic development as it depends on the rate of savings and investment$ .elps to transfer the market risk i$e$ called hedging "hich is a protection against losses resulting from unforeseen price and volatility changes$ !hus derivatives are a very important tool of risk management$

C(a+"er -III
Theoret ca2 *ra#e'or$ o* der %at %e #ar$et.

NS*

De*"
F#"#re!
Ca!( Mar%e" Segmen"

Ca+i"a
Ca O+"ion!
Deri,a"i,e Mar%e" In"ere!" P#" ra"e Segmen"

&UTURES!
0 Future contract is a contract to buy or sell a stated 2uantity of a commodity or a financial claim at a specified price at a future specified date$ !he parties to the Future have to buy or sell the asset regardless of "hat happens to its value during the intervening period or "hat shall be the price of the date for "hich the contract is finaliCed$ &uture De2 %er+ Contract!

Khere the physical delivery of the asset is slated for a future date and the payment to be made as agreedO it is future delivery contract$ .o"ever in practice all Future are settled by the himself then it "ill be settled by the e7change at a specified price and the difference is payable by or to the party$ !he basic motive for a Future is not the actual delivery but the heading for future risk or speculation$ Futures can be of t"o typesB >$ Co##od t+ &utureB !hese include a "ide range of agricultural products and other commodities like oil1 gas including precious metals like gold1 silver$ 9$ & nanc a2 &utureB !hese include financial claims such as shares1 debentures1 treasury bonds1 and share inde71 foreign e7change$ Futures are traded at the organiCed e7changes only$ !he e7change provides the counter6party guarantee through its clearinghouse and different types of margins system$ Some of the centers "here Futures are traded are Chicago board of trade1 !okyo stock e7change$

&UTURE TER1INOLOG<B Spot #riceB !he price at "hich an asset trades in the market$ Future #riceB !he price at "hich the Future contract trades in the future market$ Contract C+c2eB !he period over "hich a contract trades$ !he inde7 Future contract on the NS* have one6month1 t"o months1 three6month e7piry cycles "hich e7pire on the last !hursday of the month$ On the Friday follo"ing the last !hursday a ne" contract having a three months e7piry is introduced for trading$ *7piry ateB It is the date specified in the Future contract at the end of "hich it "ill

cease to e7it$

Contract S 5eB !he amount of asset that has to be delivered under on contract$ For *7B !he contract siCe on NS*5S Futures market is 9EE niftys$ In t a2 1ar. nB !he amount that must be deposited in the margin account at the time a Futures contract is first entered in to be kno"n as initial margin$ 1ar$ n. to 1ar$etB 0t the end of each trading day1 the margin account is adjusted to reflect the investor5s gain or loss depending upon the Futures closing price$ !his is called Marking to Market$ 1a ntenance 1ar. nB !his is set to ensure that the balance in the margin account never becomes negative$ If the balance in the margin account falls belo" the maintenance margin1 the investor receives a margin call and is e7pected to top up the margin account to the initial margin level before trading commences on the ne7t day$

Trad n. In &uture ContractB $ !he customer "ho desired to buy or sell Future has to contact a broker or a brokerage firm$ $ Customers are re2uired by the future e7change to establish a margin deposit "ith the respective1 broker before the transaction is e7ecuted$ !his is called initial margin1 "hich is bet"een @69EP of the value of the future contract$ $ !he margin deposit is regulated by the future e7change depending on the volatility in the price of future$ $ Khen the contract values moves in response to the change in the rate1 gains are credited and losses are debited to the margin account$

$ If the account falls belo" a particular level kno" as maintenance level1 the trade receives a margin call and must make up1 the account e2ual to initial margin failing "hich his account is li2uidates $ !hose "ho have held the positions are re2uired to li2uidate the position prior to the last trading day of the contract or the position is settled but the e7change$ $ 0t the end of the settlement period or at the time of s2uaring off a transaction1 the difference bet"een the trading price and settlement prices is settled by the cash payment$ $ No carry for"ard of a Future contract is allo"ed beyond the settlement period$

Future1 as a techni2ue of risk management provide several services to the investor and speculators as follo"sB 0= Future provides a hedging facility to counter the e7pected movement in prices$

'= Futures help indication the future price movement in the market$ C= Future provides an arbitrage opportunity to the speculators$ #ay off for FuturesB 0 pay off is the likely profitAloss "ould accrue to a market participant "ith change in the price of the underling asset$ Futures contract have linear pay offs$ It means the losses as "ell as profits for the buyer and the seller of a Future contract are unlimited$ #ay off for buyer of FuturesB Long Futures

!he pay off for a person "ho buys a Futures contract is similar to the pay off for a person "ho held on asset$ .e has a potentially unlimited upside as "ell as a potentially unlimited do"nside$ *$g$B 0n investor buys nifty Futures "hen the inde7 is at >J9E if the inde7 goes up1 his Future position starts making profit$ If the inde7 falls his Future position starts sho"ing losses$

#rofit E >J9E Nifty

Loss

#ay off for seller of FuturesB Short Futures

!hey pay off for a person "ho sells a Future contract is similar to the pay off for a person "ho shorts an asset$ .e has potentially unlimited upside as "ell as a potentially unlimited do"nside$

*$g$B 0n investor sells nifty Future "hen the inde7 is at >J9E$ If the inde7 goes do"n1 his Future position starts making profit$ If the inde7 rises1 his Futures position starts sho"ing losses$

#rofit >J9E E Loss Nifty

ivergence of Futures and Spot #ricesB !he basis the difference bet"een the Future price and the current price is kno"n as the basis$

!hus basis Q F6S

Khere FQ Future #rice

SQ Spot #rice

In a normal market the Future price "ould be greater then spot price and therefore1 the basis "ill be positive1 "hile in an inverted market1 the basis is negative since the spot price e7ceeds the future price in such a market$ !he price of Future referred to the rate at "hich the Futures contract "ill be entered into$ !he basic determinants of future prices areB >= Spot rate 9= Other Carrying costs

!he cost of carrying depends upon theB

>= !ime involved

9= (ate of Interest

J= Storage Cost1 obsolescence1 insurance cost

and other costs incurred till the delivery date$ /enerally longer the time of maturity1 the greater the carrying costs$ 0s the delivery month approaches1 the basis declines until the spot and Futures prices are appro7imately the same$ !he phenomenon is kno"n as convergence$

#rice

Futures #rice

Spot price !ime

-aluation of Future #ricesB !he valuation of Futures is done using the cost of carry model$ !he assumptions for pricing future contracts as follo"sB $ !he markets are perfect$ $ !here are no transaction costs$ $ 0ll the assets are infinitely divisible$ $ 'id60sk spreads do not e7ist so that is assumed that only one price prevails$ $ !here are no restrictions on short selling$ 0lso short sellers get to use the full proceeds of the sales$

Stock Inde7 FuturesB 0 stock inde7 represents the change in the value of a set of stocks1 "hich constitute the inde7$

0 stock inde7 number is the current relative value of a "eighted average of the prices of a pre6defined group of e2uities$

NS* F @E1 NIF!+B !.* NS* F @E inde7es called NIFI!+ "as launched by the national stock e7change of India Limited :NS*= in 0pril >??<1 taking as base the closing prices of November J1 >??@ "hen one year of operations of its capital market segment "as completed$ !he base value of the inde7 has been set to >EEE$ !he inde7 is based on the prices of shares of @E companies chosen from among the companies traded on the NS*1 each "ith a market capitaliCation of at least (s$@EE crores and having a high degree of li2uidity$ !he methodology used for the computation of this inde7 is market capitaliCation "eight age as follo"ed by the S % # Nifty1 "hich is maintained by IISL i$e$1 India Inde7 services1 and products limited1 a company set up by NS* and C(ISIL "ith technical assistance from standard % poor5s$ In the market capitaliCation "eighted method1 Current Market CapitaliCation Inde7 Q 6666666666666666666666666666666666666666 R 'ase -alue 'ase Market CapitaliCation

Khere Current market capitaliCation Q Sum of :Current marketing #rice R Outstanding Shares= of all securities in the inde7$ 'ase market capitaliCation Q Sum of :Market #rice R Issue SiCe= of all securities as on base date$

.eading using Futures contractB .eading is the process of reducing e7posure to risk$ !hus a hedge is any act that reduces the price risk of a certain position in the cash market$ Future act as a hedge "hen a position is taken in them1 "hich is opposite to that of the e7isting or anticipated cash position$ In a short hedger sells Future contract "hen they have taken a long position on the cash asset1 apprehending that prices "ould fall$ 0 loss in the cash market "ould result "hen the prices do fall1 but a gain "ould occur due to the short position in the Future$ In a long hedge the hedger buys Futures contract "hen they have taken a short position on the cash asset$ !he long hedger faces the rise that prices may risk$ If a price rise does not take place1 the long hedger "ould incur a loss in the cash good but "ould realiCe gains on the long Futures position$ Khen the asset "hose price is to be hedge does not e7actly match "ith the asset underlying the Futures contract so held is called as cross hedge$ .edge ration is the number of future contacts to buy or sell per unit of the spot good position$ Optimal hedge ration depends on the e7tent and nature of relative price movements of the Futures prices and the cash good prices$ .ence the points to be noted areB

>$ (eliable relationship e7ists bet"een price change of spot asset and price change of Future contract$ 9$ Choice of data depends on the hedging horiCon$ For a daily hedge1 daily price changes can be taken$ 'ut for longer periods take "eekly1 bimonthly or monthly charges do not take too lies tonic data like > year1 as it "ould give a distorted estimate of relation bet"een current and futures prices$

.edging using Inde7 FuturesB >$ Khen the markets are e7pected to go up a= Long stock short inde7 FuturesB 'uy selects li2uid securities1 "hich move "ith the inde7 and sell them at a later date$ b= .ave funds long inde7 FuturesB 'uy the entire inde7 portfolio in their correct proportions and sell it at a later date$ 9$ Khen the markets are e7pected to do do"n$ a= Short stock long inde7 FuturesB Sell selects li2uid securities1 "hich move "ith the inde7 and buy them at a later date$ b= .ave portfolio1 short inde7 FuturesB Sell the entire inde7 portfolio in their correct proportions and buy them at a later date$ *ven "hen a stock picker carefully purchases stock his estimate may go "rong because the entire market moves against the estimate even though the underlying idea "as correct$ .ence "hen a long position is adopted a"ay his inde7 e7posure$ Speculation using inde7 FuturesB >$ 'ullish Inde7 Long inde7 FuturesB

Khen you think the market inde7 is going to rise you can make a profit by adopting a position on the inde7$ !his could be after a good budget or good corporate results$ )sing inde7 Futures an investor can 4buy5 or 4sell5 the entire inde7 b trading on one single security$

.ence id you buy inde7 Future you gain if the inde7 rises and lose if the inde7 falls$ J$ 'earish Inde7 short inde7 FuturesB Khen you think the market inde7 is going to fall you can make a profit buy adoption a position on the inde7$ !his could be after a bad budget or bad corporate results1 instability$ )sing inde7 Futures an investor can 4buy5 or 4sell5 the entire inde7 by trading on one single security$ .ence if you sell inde7 Futures you gain if the inde7 falls you lose if the inde7 rises$ !o prevent large price movement occurring because of 8speculative e7cessesD and to allo" the market to digest any information "hich is likely to affect the Futures prices in a significant "ay for most Futures contract there are limits1 :both minimum and ma7imum=1 on the daily movements of their prices$ *very Future contract has a minimum limit on trade6to6trade price changes1 "hich is called a tick say @ pays or >E pays$ Normally trading on a contract stops one the contract is limit up or limit do"n$ .o"ever e7changes ay change the limits "hen they feel appropriate$

OPTIONS!
Options are contracts1 "hich provide the holder the right to sell or buy a specified 2uantity of an underlying asset at an affi7ed price on or before the e7piration of the option date$ Options provide a right and not the obligation to buy or sell$ >= !he call optionB 0 call option provides the holder a right to buy specified assets at specified on or before a specified date$ 9= !he put optionB 0 put option provides to the holder a right to sell specified assets at specified price on or before a specified date$ Options may also be classified asB

>= 0merican OptionsB In the 0merican option1 the option holder can e7ercise the right to buy or sell1 at any time before the e7piration or on the e7piration date$ 9= *uropean OptionsB In the *uropean option1 the right can be e7ercised only on the e7piry date and not before$ !he possibility of early e7ercise of right makes the 0merican option to be more valuable that the *uropean option to the option holder$

J= Naked Option and covered OptionsB 0 call option is called a covered option is called a covered option if it is coveredA"ritten against the assets o"ned by the option "riter$ In case of e7ercised of the call option "riter can deliver the asset or the price differential$ On the other hand1 if the option is not covered by physical asset1 if is kno"n as naked option$

Option !erminologyB Inde7 OptionB !hese Options have inde7 as the underlying Stock OptionsB !hese Options are on individual stocks

'uyer of an optionB Is the one "ho by paying the option premium buys the right but not the obligation$ !o e7ercise his option on the sellerA"riter$

Kriter of an optionB Is the one "ho receives the option premium and is thereby obliged to sellAbuy the asset is the buyer e7ercises on him$

Option #riceB I s the #rice1 "hich the option buyer pays to the option seller$ *7piration #riceB !he date specified in the Options contract is kno"n an e7piration date1 the e7ercise date1 the strike date or the maturity$

Option premiumB !he buyer of the option has to but the right from the seller by paying an option premium$ !he premium is one6time non6refundable amount for a"aiting the right$ In case1 the right is not e7ercised later1 the option "riter does not refund the premium$

In6the6money optionB If the actual price of the asset is more than the strike price of a call option1 then the call is said to be in the money$ In the case of put option1 if the strike price is more than the actual price them the put is said to be in the money$

0t the money optionB If the spot price is e2ual to the strike price the option is called at the money$ It "ould lead to Cero cash flo" if it "ere e7ercised immediately$ Out of the money optionB If the actual price is less than the strike price the call option is said to be out of money$ In the case of put option if the strike price is less then the actual price1 then the put is said to be of money$ Option payoffsB !he optionally characteristics of Options results in a non6Linear payoff for Options$ It means that the losses for the buyer of an option are limited1 ho"ever the profits are potentially unlimited$ For a "rite the payoff is e7actly the opposite$ .is profits are limited to the option premium1 ho"ever is losses are potentially unlimited$

>$ #ay off profile for buyer of call optionB

!he profitAloss that the buyer makes on the option depends on the spot price of underlying$ .igher the spot price them the strike price1 more is the profit he makes$ .is loss is limited to the premium he paid for buying an option$ *$g$B 0n investor buys Nifty Option "hen the inde7 is at >99E$ If the inde7 goes up1 he profits$ If the inde7 falls he looses$

#rofit Net pay off on call :#rofitA Loss= E #remium >99E

Nifty

Loss

9$ #ay off profile "riter of call optionB

!he profitAloss that the buyer makes on the option depends on the spot of the underlying$ Khatever is the buyer5s profit is the seller5s loss$ .igher the spot price1 more is he loss he makes$ I f upon e7piration the spot price of the underlying is less than the strike price1 the buyer lets his option e7pire une7ercised and the "riter gets to keep the premium *$g$B 0n investor seller nifty Options "hen the inde7 is at >99E$ If the inde7 goes up1 he looses$

#rofit #remium E >99E Nifty

Loss

J$ #ayoff profile for buyer of put optionB

!he profitAloss that the buyer makes on the option depends on the spot price of the underlying$ If upon e7piration1 the spot price is belo" the strike price1 he makes a profit$ Lo"er the spot price more is the profit he makes$ .is loss in this case is the premium he paid for buying the option$ *7B 0n investor buys nifty Options "hen the inde7 is at >99E1 if the inde7 goes up he looses$

#rofit E #remium Loss >99E Nifty

;$ #ayoff profile for "riter of put optionB

!he profitAloss that the seller maker on the option depends on the spot price of the underlying$ If upon e7piration the spot prices happen to be belo" the strike price1 the buyer "ill e7ercise the option on the "riter$ If upon e7piration the spot price of the underlying is more than the strike price1 the buyer lets his option e7pire un6e7ercised and the "riter gets to keep the premium$ *$g$B 0n investor sells nifty Options "hen the inde7 is >99E$ If the inde7 goes up he profits$

#rof E >99E Loss Nifty

ifferences bet"een Futures and OptionsB

F)!)(*S >$ It involves obligations 9$ No premium is payable J$ Linear payoff ;$ #rice is Cero3 strike price moves @$ 'oth long and short at risk <$)ncertainty in cash flo"s is more relatively

O#!IONS it involves rights #remium is payable Non6Liner payoff Strike price is fi7ed1 price moves only short at risk )ncertainty thing is cash flo"s Is less relatively

G$'oth parties have unlimited profits 0nd losses

Loss of option holder is limited to the premium paid but gains Is unlimited profit of optionL Kriter is limited to the #remium received but loss is )nlimited

Va2uat on o* Opt onB

Option cannot be valued in terms of the series of inflo" and outflo"s1 re2uired rate of return and the time pattern of inflo"s and outflo"s1 in these terms because Options have characteristics that make them different from the securities$ !he valuation of an option

depends upon a number of factors relating to the underlying asset and the financial market$ *ffect of ifferent factors on the valuation of Options SL$No$ Factor Call Option -alue >$ Increase in value of underlying asset 9$ *7tent of volatility in value of asset J$ Increase in strike price ;$ Longer e7piration time @$ Increases in rate of Interest <$ Increase in Income from asset Increases Increases ecreases Increases Increases ecreases #ut Option -alue ecreases ecreases Increases ecreases ecreases Increases

L # tat on"!
!he assumption that there are only t"o possibilities for the share price over ne7t one year is impractical and hypothetical such a strategy may not "ork because of possibilities is reduce as the time period is shortened$ 'lack % Scholes ModelB Fisher 'lack and Myron Scholes presented an option valuation model in >?GJ$ !he model is based on the follo"ing assumptionsB $ !he call option is the *uropean option i$e$1 it cannot be e7ercised before the Specified date$ $ !he underlying shares do not pay any dividend during the option period$ $ !here are no ta7es and transaction costs$ $ Share prices move randomly in continuous time and the percentage change Follo"s normal distribution$ $ !he short6term risk free rate is kno"n and is constant during option period$ $ !he short selling in shares is permitted "ithout penalty$ $ -olatility of the underlying asset is kno"n and constant over the period of time$ !he black Scholes model has the follo"ing advantagesB

$ Out of the @ basic variables re2uired ; are mentioned in the option contract$ -olatility1 "hich is not mentioned1 can be estimated on the basis of historical ata$ $ !he model is not affected by the risk perception of the investor$ $ !he model does not depend on the e7pected return on the share$

LimitationsB
$ !he basic assumption that a risk less hedge can be set up in unrealistic$ $ !he transaction costs are bound to be there is the form of brokerage and "ill ilute the return$ $ !he estimation of the proper volatility in put remains a serious problem$ $ !he model also helps to calculate the value of put option1 through I "as eveloped primarily to values the call Options$ Opt on" o**er a nu#-er o* ad%anta.e") The+ are a" *o22o'" B $ Fle7ibilityB Options offer fle7ibility to the buyer in form of right to buy or sell 'ut not the obligation$ $ -ersatilityB Option can be as conservative or as speculative as one5s investment Strategy dictates$ $ LeveragesB Options give high leverage by investing small amount of capital in the form of premium one can take e7posure in the underlying asset of much greater value$ $ (iskB #re6kno"n ma7imum risk for an option buyer$ $ #rofitB Large profit potential for limited risk to the option buyer$ $ InsuranceB *2uity portfolio can be protected from a decline in the market by "ay of buying a protective put$ !his option position supplies the needed insurance to over come the uncertainty of the market place$ $ Seller #rofitsB Selling put options is like selling insurance to anyone "ho feels like earning revenues by selling insurance can set himself up to do so in the inde7 Options market$

Inde6 Opt on"B 0n inde7 option provides the buyer of the option1 the right but not the obligation to buy or sell the underlying inde71 at a pre6determined strike price on or before the date of e7piration1 depending on the type of option$ ,ene* t" o* Inde6 Opt on! .elp to capitaliCe on an e7pected market move$ .edge price risk of the physical stock holdings against adverse market moves$ iversified e7posure to the market as a "hole "ith a single trading decision$ #redetermined ma7imum risk for the buyer$ .igh leverage i$e$1 large percentage gains from relatively small1 favorable percentage moves in the underlying inde7$

S!(0!*/I*S FO( IN *S O#!IONSB I$ 'ullish vie" of the marketB

>$ 'uy a callB It is e7ercised if the inde7 is above the strike price$ !he profit is unlimited$ It is e2ual to the value of inde7 minus break6even point$ Khere '*# Q premium paid M strike price$ !he ma7imum loss is limited to the premium paid$ 9$ Sell a putB It is e7ercised if the inde7 is belo" the strike price1 the profit is limited to the premium received and the loss is e2ual to the difference '*# and the inde7$ II$ 'ullish vie" but not sureB

'ull call spreadB It contains of the purchase of a lo"er strike price call and the sale of higher strike price call1 of the same month$ It is e7cursed if the inde7 is above the strike prices$ !he ma7imum profit is limited to the difference bet"een the t"o strike prices minus the net premium paid the loss is limited to the net premium paid$ III$ 'earish vie" of the marketB

>$Sell a callB It is e7ercised it the inde7 is above strike price the ma7imum profit is limited to the premium received$ !he ma7imum loss is unlimited and e2uals to the value of the inde7 minus break6even point$ 9$'uy a putB It is e7ercised if the inde7 is belo" the strike price$ !he ma7imum profit is e2ual to the difference bet"een '*# ad inde7es$

I-$

'ear vie" but not sure

'ear put spreadB It contains of selling one put option "ith lo"er strike price and purchase another put option "ith a higher strike price$ It is e7ercised if the inde7 is belo" the strike price$ !he ma7imum price is limited to the deference bet"een the t"o strike prices plus the net premium paid$

-$

Neutral vie" of the marketB

>$ Long straddleB !he purchase of a call and put "ith the same strike price1 the same e7piration date and the same underlying$ Ma7imum risk is limited to the premium paid and the ma7imum profit is unlimited$ 9$ Long StrangleB !he purchase of a higher call and a lo"er put that are both slightly out of the money and have the same e7piration date and are on the same underlying$ Ma7imum risk is limited to the premium paid and the ma7imum profit is unlimited$

-I$

.igh -olatility but direction unkno"nB

>$ Short StraddleB !he sale of a call and put "ith the same strike price1 same e7piration date and the same underlying$ Ma7imum risk is unlimited and the profit is limited to the premium paid$ 9$Short StrangleB !he sale of a higher call and lo"er put "ith the same e7piration date and the same underlying$ Ma7imum risk is limited and the ma7imum profit is limited to the premium paid$ !he difference bet"een straddle and strangle is the strike price of the options$ !he strangle has strikes "hich are slightly out of the money$ !he advantage of this strategy is that premiums "ill be less than that of a straddle as premiums for out of money Options are lo"er$ !he disadvantage is that inde7 needs to move even further for the position to become profitable$ !hough strangle is cheaper than the straddle1 it also carries much more risk stock Options$

Stoc$ Opt on"! 0 stock option is a contact1 "hich conveys to its holder the right1 but not the obligation1 to buy or sell shares of the underlying security at a specified price on or before a given date$ 0fter this given date1 the option ceases to e7ist$ !he caller of an option is1 in turn1 obligated to the sell shares to the call option buyer or buy shares from the put option buyer at the specified price "ithin the time period the option$

'enefits of Stock OptionsB #rotect stock holdings from a decline in market price by buying a put$ Increase income against current stock holdings by "riting a covered call$ Fi7 buying price of a stock1 by buying a call$ #osition for a buy market move6even "hen you don5t kno" "hich "ay prices "ill move by buying a straddle or strangle$

'enefit from a stock price5s rise or fall "ithout incurring the lost of buying or selling the stock outright by "riting Options$

Strategies for Options of StocksB >$ 'uy a CallB "hen the market vie" is bullish a call is bought$ It is e7ercised if the stock prince is above strike$ Ma7imum profit is unlimited e2ual to the price of the stock 6 '*#$ Ma7imum loss is limited to premium paid$ 9 Short stock Long CallB It5s taken to offset a short stock position5s upside risk$ It is e7ercised if the stock price is above strike$ Ma7imum profit is e2ual to the difference bet"een the '*# and the stock price ma7imum loss is limited to the premium paid$ 9$ Covered CallB selling call "hen you are long on the stock does it$ It is e7ercised if the stock is above the strike price$ #rofit is limited to the premium paid loss is e2ual to the difference bet"een the '*# and the stock price$ ;$'uy a putB Khen the market vie" is bearish a put is purchased$ It is e7ercised if the stock price is belo" strike$ Ma7imum profit is e2ual to the difference bet"een '*# and stock price is belo" strike$ Ma7imum profit is e2ual to the difference bet"een '*# and stock price$ Ma7imum loss is limited to the premium paid$ @$ #rotective #utB buying put "hen you are long on the stock does it$ It helps to protect unrealiCed profits of the stock$ Its is e7ercised it the stock price is belo" the strike price$ #rofit is unlimited "hile the loss is limited to the premium paid$ <$ Covered #utB selling put "hen you are short on the stock "hen you have a bearish vie" of the market does it$ ItNs e7ercised if the stock price is belo" the strike price$ #rofit is limited to the premium received and the difference bet"een the strike prices

is the put and the original share price of the short position$ unlimited$

Ma7imum loss is

G$ )ncovered #utB If a put is sold "ithout corresponding short stock position it is called as uncovered put$ It is taken "hen there is a bearish vie" of the market$ It is e7ercised if the stock price is belo" the strike price$ Ma7imum profit is limited to the premium received "hile the loss is e2ual to the difference bet"een '*# and stock price$

Chapter -IV
#ractical aspects of erivative Market $
F.O

FUTURE

OPTION

/UY

SELL

CALL /UY

PUT SELL

La!" T(#r!da&

Last

Thursday

/#&ing

A! +er +remi#m

0 mon"(! $on"ra$"

0 mon"(! $on"ra$" Se ing A! +er margin

&UTURES = OPTIONS TRADING S<STE1!

!he Futures and Options trading system of NS*1 called N*0!6 F%O trading system provides a fully automated screen6based trading on a nation "ide basis and an online monitoring and surveillance mechanism$ It supports on order6driven market and provides complete transparency of trading operations$ It is similar to that of trading of e2uities in the cash market segment$ !he soft"are for the F%O market has been developed to facilitate efficient and transparent trading Futures and Options instruments$ Teeping in vie" the familiarity of trading members "ith the current capital market trading system so as to make it suitable for trading Futures and Options$ 'asis of tradingB !he Share khan limited provide trading facilities$ !he N*0! F%O system supports on order6driven market1 "herein orders match automatically$ Order matching is essentially on the basis of security1 its price1 time and 2uantity$ !he e7change notifies

the regular lot siCe and ticks siCe for each of the contracts traded on this segment from time to time$ Khen any order enters the trading system it is an active order$ It tries to find a match on the other side of the book$ If it finds a match1 a trade is generated$ If it does not find a match1 the order becomes passive and goes and sits in the respective outstanding order book in the system$

*N!I!I*S IN !.* !(0 IN/ S+S!*MB >$Trad n. 1e#-er"B they are member of NS*$ !hey can trade either on their o"n account or on behalf of their clients including participants$ !he e7change assigns a trading members I from time to time$ 9$C2ear n. #e#-er"! !hey are members of NSCCL and carry out risk management activities and confirmationU in2uiry of trades through the trading system$ ;)Part c pant"! !hey are clients of trading members like the financial institutions$ !hese clients may trade through multiple trading members but settle through a single clearing member$ Corporate .ierarchyB In F % I trading soft"are1 a trading member has the facility of defining a hierarchy amongst users of the system$ >= Corporate ManagerB !he term is assigned to a user placed at the highest level in a trading firm$ Such a user can perform at the functions such as order and trade related to each trading member "ho can have more than one use$ 'ut the ma7imum number of users allo"ed for each trading member is notified by the e7change

activities1 receiving report for all branches of the trading member firm and also dealers of the firm$ .e can only define e7posure limits for the branches of the firm$ 9= 'ranch ManagerB !he term is assigned to a user "ho is placed under the corporate manager$ .e can perform and vie" order and trade related activities for all dealers under that branch$ J= ealerB ealers are users at the lo"est level of the hierarchy$ 0 dealer can perform a vie" order and trade relates activities only for oneself and does not have access to information on other dealers under either the same branch or other branches$ -S0! Net"ork ConnectivityB -S0! F -ery small 0perture !erminalB -S0! is the most important component in on line trading$ NS* offers its services "ith over JIEE -S0!S to ?@E members spread all over the country$ (e2uirementsB !he cost of a leased line is around J$@ lakhs$ For installation it re2uires a dish antenna of >$I meters diameter$ NS* Server !rading is done on Mainframe$ 'ack office on mainframe on )ni7 servers "ith oracle database$ System re2uirements include 'randed #entium or higher II1 III1 I- processors an *ICON car :K0N Interface=1 "hich is around one lakh1 provided by .CL Comet ServerM; nodes "ith #entium or higher processor$ Kindo"s N! Operating System for all servers and nodes$ ConnectivityB -S0!s are connected through INS0!6J' satellite$ NS* and 'S* used leased lines in Mumbai for providing services to corporate members each line costs > lakh per year$ -S0!s are connected through INS0!6J' and in turn are connected to NS* .ub in Mumbai$ Kith more than JEEE -S0!s spread across to country$ NS* is considered to be the top >E on the "orld in providing services through -S0!s$

MaintenanceB

It does not re2uire maintenance up to J years1 after J year in takes up to (s$>EEE per month for maintenance$ .CL comnet provides all the maintenance for NS* and provides maintenance for 'S*$ 0n annual contract costs around >$9 lakhs$ #roblemsB #roblems occur in connectivity due to heavy net"orking or sudden increase in net"ork traffic because of market volatility A burst of orders$ Log in procedureB On starting the N*0! application the log on screen appears "ith the follo"ing detailsB )ser I 1 !rading Member I 1 #ass"ord1 Ne" #ass"ord$ In order to sign on to the system1 the user must specify a valid user I 1 !rading member I and #ass"ord$ 0 valid combination of the above is needed to access the system$ 0fter entering I 5s and pass"ord1 press the enter key to complete the procedure$ Trader" Der %at %e #ar$etB !here are three broad categories of participants in the derivatives market$ !hey are as follo"sB >$.edgersB .edgers face risk associated "ith the price of an asset$ !hey futures or options markets to reduce or eliminate this risk$ (isk associated "ith the fluctuation of commodity prices1 foreign e7changes rates1 stock prices can be reduced$ !hey are primarily used for purposes of managing risk by those managing funds$ 9$SpeculatorsB If hedgers are the people "ho "ish to avoid the price risk1 speculators are those "ho are "illing to take such risk$ !hey bet on future movements in the price of an asset$ erivatives provide them an e7tra leverage1 i$e$1 they can increase both the potential gains and potential losses in a speculative venture$ !hey may be :a= day traders or :b= position traders$ !hey use fundamental analysis and also any other information available to form their opinions on the likely price movements$ J$0rbitrageursB

!hey thrive on market imperfections$

0n arbitrageur profits by trading a given

commodity1 or other item that sells for different prices in different market$ !hey take advantage of discrepancy bet"een prices in t"o different markets$ !hey make simultaneous purchase of securities in one market "here the price thereof is lo" and sale in a market "here the price is comparatively higher$ 0rbitrage may be :a= over space or :b= overtime$ T+pe o* Der %at %e"! !he most commonly used derivatives contracts are for"ards1 Futures 0nd Options$

For"ardsB 0 for"ard contract is a customiCed contract bet"een t"o

*ntities "here settlement takes place on a specific date in the future at today5s pre agreed price$

FuturesB 0 Futures contract is an agreement bet"een t"o parties to buy or sell an asset at a certain time in the future in the future at certain price$ standardiCed e7change traded contracts$ !hese are

OptionsB 0n Option gives the holder of the option the right to do some6!hing$ !he holder does not have to e7ercise this right$ Options may be call option or put Options$ epending on this maturity the Options may be classified as Karrants F longer dated Options having maturity of one year and are generally traded over the counter$ L*0#S6 long6term *2uity 0nticipation securities are Options having maturities of up to three years$ '0ST*!S6 Option on portfolios of underlying asset$ !hey underlying asset is usually a moving average or a basket of assets like inde7 Options$ SK0#SB !hese are private agreements bet"een t"o parties to e7changer cash flo"s in the future according to a pre6arranged formula$

a= Interest rates to s"apsB !hese entail s"apping only the interest related cash flo"s bet"een the parties in the same currency$ b= Currency S"apsB !hese entail s"apping both principal and interest bet"een the parties1 "ith the cash flo"s in one direction being the different currency than those in the opposite direction$

S%# CNS Nifty S%# CNS Nifty is a "ell6diversified @E stock inde7 accounting for 9; sectors of the economy$ It is used for a variety of purposes such as benchmarking fund portfolios1 inde7 based derivatives and inde7 funds$ S%# CNS Nifty is o"ned and managed by India Inde7 Services and #roducts Ltd :IISL=1 "hich is a joint venture bet"een NS* and C(ISIL$ IISL is India5s first specialiCed company focused upon the inde7 as core products$ IISL have a consulting and licensing agreement "ith Standard % #oor5s :S%#=1 "ho are "orld leaders in inde7 services$ !he average total traded value for the last si7 months of all Nifty stocks is appro7imately GGP of the traded value of all stocks on the NS*$

Nifty stocks represent about <>P of the total market capitaliCation as on 0ugust J>19EE;$ Impact coast of the S%# CNS Nifty for a portfolio siCe of (s$@ million is E$>EP S%# CNS Nifty is professionally maintained and is idea for derivatives trading$

Trad n. n N *t+ !he National Stock *7change o India Limited :NS*= commenced trading in derivatives "ith inde7 futures on ,une >919EEE$ !he futures contracts on NS* are based on S%# CNS Nifty$ !he *7change later introduced trading on inde7 options based on Nifty on ,une ;19EE>$ !he turnover in the derivatives segment has sho"n considerable gro"th in the last year1 "ith NS* turnover accounting for <EP of the total turnover in the year 9EEE69EE>$ Future details on inde7 based derivatives are available under the section of the "ebsite$ Ad%anta.e"! erivatives market is mainly useful for short6term investment "here there can be a profit$ !his is because3 one need not pay >EEP at the time of buying$ !hey can pay it in the form of M0(/IN1 "hich depends upon market volatile position$ Market values increases per market volatile position$ !he other advantage is as mentioned above erivatives :F%O=

NIF!+ can be traded$ !his is the best part of not available is cash market$ E).)! -

erivative market "hich is even the sense7

can be bought and speculated$ !he sense7 is NIF!+$ It is tradable$ !his opportunity is

0 person bought >EE (eliance shares "orth (s$@E1 EEE:(s$@EE #er Share$ Margin of >E6 9EP has been paid and he can start hedging or speculating$ .e need not pay >EEP of "hatever he bought$ D "ad%anta.e! 0s this is on contract1 "hich is for a fi7ed period of time$ !he contract ends after certain period like > month1 9 months and J months$ !here it is only shot term or for a limited time$

O#!IONSB Options is said to be the '*S!1 as the risk is limit$ 0dvantage can be sho"n as follo"sB (isk #rofit *$g$B If the market price is in do"n"ards then1 put buy$ If the market price is in up"ards then1 call buy$ In case of put buy there is an amount paid kno" as #(*MI)M$ !he premium depends upon the strike price$ #remium is the amount paid "hich is e7pected increase amount of money on the scrip$ 666666666666666666666 Limited 666666666666666666666 )nlimited

*$g$B 6

If the market price of scrip is (s$@EE and the strike of price is decided as (s$@E>$ !he e7tra (e$> :@E>6@EE= is said to be premium$ Strike #riceB #rice taken from the three strike up"ards and three strikes do"n"ards of the market price$ &UTURES! In this there is >EE percent risk involved$ It depends upon the time values "here the interest is calculated$ !he interest rate depends upon the market values of the scrip$ !he time values can be said asB *$g$B !he number of days bet"een the present day and the last day :contract ending day= is called as time value$ ANAL<SIS AND INTERPRETATION

!he present analysis is done on @E clients of sharekhanLtd in .yderabad$ !he objective of the analysis is to find out the a"areness and utiliCation of derivative products namely future and Option by the clients$

Future and Options have been ruling the stock markets as far as the turnover is concerned$ 'ut unlike many other broking companies there is a lesser upraise in the F % O segment in Share khan Limited$ .ence the study makes an attempt to find out the reasons for the above by an investor survey$

AGE GROUPS!

0/*
#articulars No$ Of responses

L*SS!.*N 9E +*0(S

9>6JE

J>6;E

;>6@E

@E60bove

!O!0L

NIL >> NIL 112 99 332 >; 142 J 52 @E >EEP

#ercentage

;@ ;E J@ JE 9@ 9E >@ >E @ E less than 9E yerars 9>6JE years J>6;E years ;>6@E years more than @E years

no o* re"pon"e"

no of responses

percentage

0ge of the traders play an important role in their trading decision and outlook$ Most of the traders lie in the middle6age bet"een J>6;E and ;>6@E1 "hich is ;;P and 9IP respectively$ !he market improves if the a"areness is created "ell among the age group 9>6JE1 the market may improve due to rapid speculation of that age grouped people$

9) Educat ona2 ,ac$.round! #articulars Non6graduates 0rts 9 Commerce E Science E !otal 9 #ercentag e ;P

/raduates #ost /raduates !otal

I @ >@

>J < >?

>E < ><

J> >G @E

<9P J;P >EEP

:> 9? 9> ? > Non-.raduate" Graduate" Po"t Graduate" Tota2

Art"

Co##erce

Sc ence

*ducational backgrounds of the traders play an important role in there trading decision$ ?<P of the traders are graduates and post graduates of "hom JIP are commerce background "ith '$Com and M$'$0$ !he large percentages of traders from Science and 0rts stream J9P and JEP sho" that even "ithout basic formal training in commerce it is easy to operate in the stock markets through learning and e7perience$ !hough the educational background helps one to react as per the conditions1 sometimes that may not "orkout$ Many a time e7perience "orkout and sometimes the kno"ledge "orks out "here one can follo" the media :CN'C !- est$= and grab the present situation of the market$

:) 1e#-er"h p! #articulars Members Client No$ Of responses >< J; #ercentage J9P <IP

!otal

@E

>EEP

Members

Client

Sharekhanltd$ has many shareholders "ho also trade in the sock markets$ 'ut the number of clients "ho are not members is close to t"o6thirds i$e$1 <IP$ In 9EEE Share khan got approved as a epository #articipant of National Security epository Limited1 subsidiary of National Stock *7change of India Ltd$ .aving this facility1 they have grater advantage to the valuable customers$ -ery fe" !rading members are having this facility as a one6stop service provider$

;) E6chan.e! #articulars NS* 'S* NS* % 'S* !otal NE$ Of (esponses 9; G >? @E #ercentage ;IP >;P JIP >EEP

>?

9;

NS*

'S*

NS* % 'S*

!he percentages of investors investing in NS* is ;IP "hile that of 'S* is only >;P1 "hich sho"s the gro"ing popularity of the NS* since its inception and its advantage of being the national stock e7change$ !he popularity and fame of the stock e7changes play a vital role$ .ere most of the investors are to"ards NS* than 'S*$ !he reason may be all the derivative strategies are follo"ed by the organiCation are NS*5s$

@) Se.#ent! #articulars Cash Segment F % O Segment 'oth Cash and F % O Segment !otal No$ Of (esponses 9> >E >? @E #ercentage ;9P 9EP JIP >EEP

:? :> 9? 9> ? > Ca"h Se.#ent & = O Se.#ent ,oth Ca"h and & = O Se.#ent

!rading in cash segment is relatively more than the F%O segment and is also more popular because of its simplicity$ !his can be seen from the fact that ;9P of traders trade in the cash segment "hile only 9EP of traders trade in the F%O segment$ .ence there is a need to increase a"areness about derivatives1 "hich is relatively a ne" concept "ith advanced strategies$

?) Other ,ro$ n. co#pan e"! #articulars Came from other broking company to trade .ear !rading Started in SCSL !otal No$ Of responses >> J? @E #ercentage 99P GIP >EEP

@? @> ;? ;> :? :> 9? 9> ? > Ca#e *ro# other -ro$ n. co#pan+ to trade Hear Trad n. Started n SCSL

!he percentage of traders1 "ho have already traded through some other brokers before shifting to is 99P "hich sho"s that the services provided by Share khan lid$1 are superior to the previous brokers$ Moreover there are GIP of traders1 "ho have started their trading activities by ShareThanLtd "ith $1 "hich speaks of its reputation as the best broker in .yderabad$

A) E6per ence o* In%e"tor"! #articulars Less than > year >6@ years <6>E years More than >E years !otal No$ Of responses < >? >I G @E #ercentage >9P JIP J<P >;P >EEP

no o* re"pon"e"
9E >@ >E @ E Less than > year >6@ years <6>E years More than >E years Series>

!he study reveals the only >9 P of its clients have joined in the past > year$ .ence the marketing activities of the company have to be more aggressive to "iden its clients in the "ake of ne" brokers and sub brokers coming up in the city$ 0ggressive publicity has to be done in order to stand against the ne" coming brokers$

B) ,a" " *or "e2ect on o* "cr p"! #articulars *arning #er Share Company Image #rofitability No$ Of responses ; >E >> #ercentage IP 9EP 99P

0ll !hree #rofitability and Company Image *arnings #er Share 0nd Image *arnings #er Share and #rofitability #A* (atio !otal

G @

>;P >EP

>;P

<P

J @E

<P >EEP

-a" " *or "e2ect on o* "cr p"

>9 >E I < ; 9 E
*a rn i Co ng # m er pa $$$ ny #r I$$$ of ita b #r 0l ility of l ! ita hr *a bili ee rn t y $ i *a ngs $$ rn #e ing $$ s $ # #A e$$$ * (a tio

Series>

!he study reveals that investors use varied parameters to make their investment decisions1 profitability and image of the company are the t"o prominent parameters used by most investors$ !he investors also use a combination of more than one parameter$ Mostly one can rely on company image along "ith profitability but in order to be updated "ith the latest information once has to follo" the media1 "hich gives the e7act information time to time$

C) Source" o* In*or#at on! #articulars Ne"s #apers 0nnual (eports Share khan revie" 0ll three Ne"s #aper % 0nnual (eports Ne"s Channels !otal No$ Of (esponses >< >; @ G @ J @E #ercentage J9P 9IP >EP >;P >EP <P >EEP

>EP EP <P >;P >EP

J9P

9IP Share khan revie" Ne"s Channels 0ll three

Ne"s #apers Ne"s #aper %

0nnual (eports 0nnual (eports

In combination "ith other sources of information by Share khan1 the study reveals that ne"spapers and annual reports are the most popular sources of information$ 'oth of "hich used by G<P of the investors "hither independently revie"s and technical analysis from various "eb sites are also popular sources of information used by 9<P of traders$ !hought he ne"spapers give the information and the status1 the Share khan revie"s and the "ebsites analysis along "ith the follo" of media gives the running information$

9> ) &a%ora-2e "cr pD" *or n%e"t#ent! #articulars INFOS+S N!#C !ISCO (IL 0ndhra 'ank Miscellaneous !otal No$ Of responses >9 @ G >E @ >> @E #ercentage 9;P >EP >;P 9EP >EP 99P >EEP

9: 9> C A @ : > IN&OS<S NTPC TISCO RIL Andhra ,an$ 1 "ce22aneou"

0ccording to their o"n personal judgments and investment objectives investors have varied vie"s regarding the most favorable scrip for investment$ 'ut Infosys1 (eliance Industries Limited1 N!#C and !ISCO are considered to be a profitable investment by majority of the investors$

99)Purpo"e o* U"e! #articulars Speculation .edging 0rbitrage !otal No$ Of responses 9< >I < @E #ercentages @9P J<P >9P >EEP

;> :? :> 9? 9> ? > Specu2at on Hed. n. Ar- tra.e

erivatives are primarily used for speculation1 hedging and arbitraged$ !he most popular use of derivatives is speculation "ith more than @9P of the traders speculating in the markets using futures and options$ Khile only J<P of the traders used derivatives for hedging their risk of cash market and >9P traders using it for arbitrage to profit from the different market segments$ ue to lack of kno"ledge in arbitrage people are not able to participate actively$ !hough the hedging is bit better1 that also as very little people "ho does hedging$ In order to in these areas there should be some classes conducted by sharekhanltd$1 so that the people are a"are of "hat they are doing and "hat they have to do$

9:)Cate.or+ o* Der %at %e"! #articulars Futures Options !otal No$ Of responses 9J 9G @E #ercentage JEP GEP >EEP

:B :A :? :@ :; :: :9 &uture" Opt on"

Options are less risky than futures because the ma7imum loss is limited to the premium paid and the profit potential is unlimited$ !his is supported by the study "hich reveals that GEP of the investor trade is more in options than in futures$ 0s futures are >EEP risk1 people are not going for futures though it ahs >EEP profit1 as risk involved is more$ Options are encouraged much$ In the same "ay if futures are also encouraged then improvement of it can be seen$ 'ut some changes he to make as the risk involved in this is very high$

9;)Cate.or+ o* contract!

#articulars > Month Contract 9 Months Contract J Months Contract !otal

No$ Of responses JI G @ @E

#ercentages G<P >;P >EP >EEP

;E JE 9E >E E > Month Contract 9 Months Contract J Months Contract Series>

!rading in futures and options is done in contracts "ith three different e7piry dates$ Out of "hich trading in one6month contracts is more popular because of the relatively predictable fluctuations of the near future$ It is very difficult to speculate on prices t"o months and three months later1 "hich accounts for the lo" percentages of trades of >;P and >EP in these contracts$ One6month contracts "orks out "ell here as everything closes in one "ill kno" their status in that particular area$ So1 one6month contracts are in "ell used$ !"o month and !hree month are also good but risk is involved "hich most of the clients do not "ant to face$

9@)4no'2ed.e o* "trate. e"! #articulars No kno"ledge +es :only basic No$ Of responses E J< #ercentage EP G9P

Strategies= +es :advances Strategies 0lso= !otal

>; @E

9IP >EEP

;E JE 9E >E E No kno"ledge +es:only basic Strategies= +es :advances Strategies also

Tno"ledge of trading strategies of futures and options is very important for profitable trading in this segment$ G9P people have kno"ledge on only the basic strategies1 "hich are easy to understand1 and implement of "hich 9IP have the kno"ledge of the more comple7 and advanced trading strategies$ Kith the basic kno"ledge people are speculating "ell1 if they are given a better training classes by Share khan for the advanced strategies they "ill go in deep further strategies$

9?)In%e"tor rat n.! #articulars /ood 'etter 'est !otal No$ Of responses 9I ? >J @E #ercentage @<P >IP 9<P >EEP

JE 9@ 9E >@ >E @ E /ood 'etter 'est Series>

#eople are -ery happy "ith the performance of Share khan$ !hey say it is good at most of the times and best at times$ If Share khan follo"s some ne" strategies like maintenance of the people "hich means the operator should have not more ;6@ people so that every one can involve easily in speculation$ 0nd some ne" counters "here the clients can take the help in the areas they are uneducated$ Ne" counters to e7plain and understand the strategies etc$

9A)Rea"on" *or trad n. n Share $han! #articulars Lo" 'rokerage /ood facilities and Service Cooperative isciplined Mgt$ (egular !rading 9 ;P % No$ Of responses >9 >@ >> #ercentage 9;P JEP 99P

Information Lo"

elivery

> > I @E

9P 9P ><P >EEP

Commission /ood Office Maintenance id not respond !otal

><

>;

>9

>E

<

S eries>

E Lo" 'rokerage / ood facilities and Service C ooperative % isciplined M gt$ ( egular !rading Inform ation Lo" elivery C om m ission / ood O ffice M aintenance id not respond

!he study reveals the reasons for "hich Share khan limited is rated as one of the best broking firms in .yderabad$ !he company charges lo" brokerage and is prompt in pay6in and payout of shares and funds$ It provides good facilities and services to its clients and the management is very disciplined and co6operative$ It provides regular trading information to its client5s trough Share khan and guides the clients in their trading activities$

CHAPTER - V
SU11AR< SUGGESTIONS

SU11AR<

Stock e7changes are the pivot of capital market$ !hey serve as the channels through "hich primary issues are offered to the investing public and they provide the mechanism through outstanding securities are traded$ Khile there "e only ? recogniCed stock e7changes in >?IE1 the number had gone up to 9J by the end of 9EE<$ MinimiCe isasters "ith derivatives

0t the level of e7changes1 position limits and surveillance procedures should be sound$ 0t the level of clearinghouse1 margin re2uirements should be stringently enforced1 even "hen dealing "ith a large institution like 'aring$ 0t the level of individual companies "ith positions on the market1 modern risk measurement systems should be established alongside the creation of capabilities in trading in derivatives$ !he basic idea1 "hich should be steadfastly used "hen thinking about returns1 is that risk also merits measurement$

Options margining "orkB In the case of futures1 both short and long are charged initial margin1 and after this1 both sides pay daily mark6to6mark margin$ !his is not ho" options "ork$ In the options market1 the long pays up the full price of the options on the same day1 and the short puts up initial margin$ 0fter this1 the long is relieved of all responsibilities to his position1 and the short pays daily mark6to6market margin$ !he initial margin of the option short is the largest loss that he can suffer "ith a one6 day price change that goes against his$ !his is calculated using theoretical option6pricing formulas$ erivatives allo" a shifting of risk from a person "ho does not "ant to dear the risk to a person "ho "ants to dear the risk$ !he only investment decision that can be made is "hether to be in a certain area of business or not$ For e7ample1 if a garment e7porter dislikes currency risk1 the only choice that he faces :in a "orld before derivatives= is "hether to be in garment e7port or not$ Khich derivatives1 he has the ability and choice to insure against currency e7posure$ 0nd he is able to do this by trading this e7posure "ith others in the economy that is e2uipped to deal "ith it$ 'oth futures and options markets have a significant impact upon the informational efficiency of financial markets$ In the case of futuresB >$ !he simplest and most direct effect is that the launch of derivatives market is correlated "ith improvements in market efficiency in the underlying market$ !his improved market efficiency means that the market prices of individual securities are more informative$ 9$ Once futures markets appear1 a certain de6linking of roles in the t"o markets is observed$ !he cash market caters to relatively non6speculative orders1 and the futures markets takes over the major brunt of price discovery$ !he futures market is better suited for this role1 because of high li2uidity and leverage$ Khenever ne"s

strikes1 it first appears as a shock in the futures market prices1 "hich arbitrage then carries into the cash market$ J$ 0nother uni2ue feature applies for the market inde7$ In today5s economy1 speculation on the level of the inde7 is difficult1 because a tradable inde7 does not e7ist$ .ence informed speculators might try to take positions on individual securities in order to implement vie"s about the inde71 but this is difficult because of higher transactions costs$ J? Inde7 futures "ill hence improve the informational 2uality of the market inde7$ In the case of optionsB >$ Options are important to the market efficiency of the underlying in much the same "ay that futures are important$ 9$ In addition1 options play one uni2ue role of revealing the market5s perception of volatility$ .igh62uality volatility forecasts have serious ramifications for decisions in portfolio optimiCation1 production planning physical investment decisions1 etc$ 'y using the option price in the market1 it is possible to infer the market5s consensus vie" about volatility through a simple formula$ !his is a completely uni2ue role that options play that neither the cash market nor the futures markets can possibly play$ !his is a very important reason "hy security options are important$ I f options of !ISCO e7isted3 the entire market "ould be able to observe the price of options on the market1 and infer a very good forecast about volatility on !ISCO in the coming "eeks and months$

SUGGESTIONS!

!o succeed trade in futures and options1 a thorough understanding of concepts and trading strategies is important1 sharekhanltd May put in some special efforts to educate its clients$

sharekhanltd May conduct seminars for its clients and prospective clients for derivative market$

ANNEXURE
)EUESTIONNAIRE ),I,ILOGRAPH<

EUESTIONNAIRE
NameB 6666666666666666666666666666666666666666666

PERSONAL DETAILS >$ 0geB 9$ &ualificationsB 6666666666666666666666666666666666666666666 6666666666666666666666666666666666666666666

J$ 0re you a Member := or a Client := of sharkhanltd L TRADING DETAILSB ;$In "hich e7changes do you trade in NS* :=1 'S* :=1 .S* :=1 0ny Other 666666666666 @$In "hich segments do you trade in Cash Market :=1 Futures and Options :=1 Mutual Funds := <$.ave you traded through any broker:s=$ +es := A No :=

If yes1 NamesB VVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVV G$Since ho" many years have you been tradingL VVVVVVVVVVVVVV +ears I$ On "hat basis do you select scrip for tradingL *#S :=1 Company image :=1 #rofitability := O( 0ny other VVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVV

?$ From "here do you gather information about the scrip5sL Ne"s papers := 0nnual reports := Share khan revie" := >E$"hich "ould you recommend as the three most favorable scrips for InvestmentL VVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVV6 III.DERIVATIVE TRADING DETAILS >>$ +ou primarily use derivates for Speculation := 0rbitrage := .edging := >9$ o you invest more in Futures := or OptionsL := >J$ o you invest more in Inde7 futures := or Stock FuturesL := >;$ o you invest more in Call Option := or #ut OptionL := >@$ .o" do you rate sharekhanltd in providing brokering facilities in .yderabadL /ood := 'etter := 'est := ><$ (easons for trading in sharekhanltdL

,I,LIOGRAPH<

Book Reference
8 Options1 Futures and Other erivative SecuritiesD 6Hull John C$ 8 Modern portfolio theory and Investment 0nalysis D Eiton Edwin.j. And G u!" #a tin j. 8 FIN0NCI0L M0N0/*M*N!D V $ %halla.

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