Project Report Submitted To Savitribai Phule Pune University in Partial Fulfillment of Requirement For The Award of

PRN NO.
-2051601153
A PROJECT REPORT ON
'' STUDY ON DERIVATIVE MARKET IN INDIA”
Project Report Submitted to

Savitribai Phule Pune University
In Partial Fulfillment of Requirement for the Award of
Masters of Business Administration
By NIKITA J. BALAI
Under the guidance of
Prof. UTTAM SAPATE
MARATHWADA MITRA MANDAL’S INSTITUDE OF
MANAGEMENT EDUCATION RESEARCH & TRAINING
2017-18
1
MM’s IMERT
MM’s IMERT, Pune Page 2
DECLARATION
I NIKITA J.BALAI student of MBA (semester 2) student of MM’s
Institute of Management, Education and Training (IMERT) hereby declare
that the project entitled ―A Study of Derivatives Market in India in NG
Rathi Investrades Pvt. Ltd., PUNE is submitted by me to PUNE University,
Pune in partial fulfillment for the requirements for the award of the degree
of ―Master of Business Administration (MBA). This project report is a
work prepared by me under the guidance of Prof. Uttam Sapate and
company guide Miss. Pranali Gaykar.
Place: Pune
Date: 15/10/2017
NIKITA J.BALAI
Name & sign of Research

ACKNOWLEDGEMENT
It is my privilege to have accomplished this study under the guidance of Prof.
Uttam Sapate my faculty and guide, for taking keen interest full involvement,
dynamic motivation and valuable guidance extended to me throughout the project.
I express my sincerest gratitude and thanks to honorable Miss. Pranali Gaykar for
whose kindness I had the precious opportunity of attaining Training at NG Rathi
Investrades Pvt. Ltd. under this brilliant untiring guidance I could complete the
Project being undertaken on ―A Study of Derivatives Market in India successfully
in time. Her meticulous attention and valuable suggestions have helped me in
simplifying the problem in the work. I would also like to thank the overwhelming
support of all the people who gave me an opportunity to learn and gain knowledge
about the various aspects of the industry. I am indebted to all staff members of NG
Rathi Investrades Pvt. Ltd., for their valuable support and cooperation during the
entire tenure of this project. Not to forget, the faculty members of MM’s IMERT,
Pune who have kept my spirits surging and helped me in delivering my best and
made me reach up to this platform.
NIKITA J.BALAI
MBA-FINANCE
MM’s IMERT

TABLE OF CONTENTS
Sr no. Particulars Pg no.
1 Executive Summary 6
2 INTRODUCTION 7
3 INDUSTRY PROFILE 9
4 COMPANY PROFILE 18
5 LITERATURE SURVEY 20
6 RESEARCH METHODOLOGY 49
7 DATA ANALYSIS AND INTERPRETATION 52
8 FINDINGS 61
9 CONCLUSIONS 62
10 RECOMMENDATION 63
11 BIBLIOGRAPHY 64
12 QUESTIONNAIRE SURVEY 65

1. Executive Summary
The Summer Internship Project at ―NG Rathi Investrades Pvt. Ltd. has given an
exposure into the investment scenario in India. The project while working at ―
NG Rathi Investrades Pvt. Ltd. includes advisory services i.e. educating the
existing and potential investors about stock market as an alternative source to
investment. This involves catering to the queries of the investors about the concept
of stock market, the various options that an investor can invest his money into,
funds management of investors. Analyzing the investors behavior includes
understanding the concerns a person has towards Stock Market, his stages in life
and wealth cycle, the effect of the investments made by the peer groups, effect of
the profession he/she is in, education qualification, importance of tax benefits, the
most preferred saving tool etc. and this all is analyzed with the help of a schedule
prepared. To understand the significance of Derivatives market, types of
instruments present in the Indian Stock Market such as Futures, Options and
Forwards. The various techniques used to identify the trend of the market and
analyzing the script before investing. Through the systematic investment plan
invest a specific amount for a continuous period, at regular intervals. By doing this,
the investor get the advantage of rupee cost averaging which means that by
investing the same amount at regular intervals, the average cost per unit remains
lower than the average market price.

1. INTRODUCTION
According to Securities contract, act “Derivatives” is defined as:
 A security derived from a debt instrument, share, loan whether secured or unsecured,
risk instrument or contract for differences or any other form of security.

 A contract which derives its value from the prices, or index of prices, of
underlying securities.

 Section 18A provides that notwithstanding anything contained in any other law for the
time being in force, contracts in derivative shall be legal and valid if such contracts are:

 Traded on a recognized stock exchange

 Settled on the clearing house of the recognized stock exchange, in accordance with the
rules and bye–laws of such stock exchanges.
In general, Derivative is a contract or a product whose value is derived from value of some other
asset known as underlying. Derivatives are based on wide range of underlying assets. These
include:
 Metals such as Gold, Silver, Aluminum, Copper, Zinc, Nickel, Tin, Lead

 Energy resources such as Oil and Gas, Coal, Electricity

 Agri commodities such as wheat, Sugar, Coffee, Cotton, Pulses and

 Financial assets such as Shares, Bonds and Foreign Exchange.
The products in derivative market:
a. FORWARD
b. FUTURES
c. OPTIONS
d. SWAPS
e. WARRANTS
There are three major players in the financial derivatives trading:
1. Hedgers:
Hedgers are traders who use derivatives to reduce the risk that they face from potential
movements in a market variable and they want to avoid exposure to adverse movements
in the price of an asset. Majority of the participants in derivatives market belongs to this
category.

2. Speculators:
Speculators are traders who buy/sell the assets only to sell/buy them back profitably at a later
point in time. They want to assume risk. They use derivatives to bet on the future direction of the
price of an asset and take a position in order to make a quick profit. They can increase both the
potential gains and potential losses by usage of derivatives in a speculative venture.
3. Arbitrageurs:
Arbitrageurs are traders who simultaneously buy and sell the same (or different, but related)
assets in an effort to profit from unrealistic price differentials. They attempts to make profits by
locking in a riskless trading by simultaneously entering into transaction in two or more markets.
They try to earn riskless profit from discrepancies between futures and spot prices and among
different futures prices.

2. INDUSTRY PROFILE
Financial services Financial services are the economic services provided by the finance
industry, which encompasses a broad range of organizations that manage money, including
credit unions, banks, credit card companies, insurance companies, consumer finance companies,
stock brokerages, investment funds and some government sponsored enterprises.
History of Stock Market in India
The Indian broking industry is one of the oldest trading industries that have been around even
before the establishment of BSE in 1875. BSE is the oldest stock market in India. The history of
India stock trading starts with 318 people taking membership in Native share and Stock Brokers
Association, which we know by the name Bombay Stock Exchange or BSE in short. In 1965,
BSE got permanent recognition from the Government of India. BSE and NSE represent
themselves as synonyms of India stock market. The history of India stock market is almost the
same as the history of BSE The regulations and reforms been laid down in the equity market has
resulted in rapid growth and development .Basically the growth in the equity market is largely
due to the effective intermediaries. The broking houses not only act as an intermediate link for
the equity market but also for the commodity market, the foreign currency exchange market and
many more. The broking houses have also made an impact on foreign investors to invest in India
to certain extent. In the last decade, the Indian brokerage industry has undergone a dramatic
transformation. Large and fixed commissions have been replaced by wafer thin margins, with
competition driving down the brokerage fees, in some cases to a few basis points. There have
also been major changes in the way the business is conducted. The scope of services have
enhanced from being equity products to a wide range of financial services. Financial Products
the survey also revealed that in the past couple of years, apart from trading, the firms have
started various investment value services. The sustained growth of the economy in past couple
of years has resulted in broking firms offering many diversified services related to IPO‘s, mutual
funds, company research etc.
However, the core trading activity is still the predominant form of business, forming 90% of the
firms in the sample. 67% firms are engaged in offering IPO related services. The broking industry
seems to have capitalized on the growth of the mutual fund industry, which pegged at 40% in 2006.
More than 50% of the sample broking houses deal in mutual fund investment services. The average
growth in assets under management in last two years is almost 48% company research services.
Additionally, a host of other value added services such as fundamental and technical analysis,
investment banking, arbitrage etc are offered by the firms at
different levels.
Capital Market
Capital market is a market for securities (debt or equity), where business enterprises
(companies) and governments can raise long-term funds. Capital market may be classified
as primary markets and secondary markets.
 In primary market new stock or bond issues are sold to investor via a mechanism
known as underwriting.

 In secondary markets, existing securities are sold and brought among investors or traders,
usually on a security exchange, over the counter or elsewhere. The capital market
includes e stock market (equity securities) and Bond market (debt).
Primary and Secondary Capital Markets: A company cannot easily attract investors to
invest in their securities if the investors cannot subsequently trade these securities at will.
In other words, securities cannot have a good primary market unless it is ensured of an
active secondary market.
Primary Market
Securities generally have two stages in their lifespan. The first stage is when the company
initially issues the security directly from its treasury at a predetermined offering price.
Primary market is the market for issue of new securities. It therefore essentially consist of
the companies issuing securities, the public subscribing to these securities, the regulatory
agencies like SEBI and the Government, and the intermediaries such as brokers, merchant
bankers and banks who underwrite the issues and help in collecting subscription money from
the public. It is referred to as Initial Public offer (IPO). Investment dealers frequently buy
initial offering on the primary market and the securities on the secondary market.
Secondary Market
The second stage is when an investor or dealer makes the shares, bought from a company
treasury, available for sale to other investors on the secondary market. Secondary market is the
market for trading in existing securities, after they have been created in the primary market. It
essentially consists of the public who are buyers and sellers of securities, brokers, mutual funds,
and most importantly, the stock exchanges where the trading takes place, such as the BSE
(Bombay Stock Exchange) or NSE (National Stock Exchange).
Indian Stock Exchange
Stock Market
A stock market or equity market is a public entity (a loose network of economic transaction, not
a physical facility or discrete entity) for the trading of company stock (shares) and derivatives at
an agreed price; these are securities listed on a stock exchange as well as those only traded
privately.
Stock exchange
A stock exchange provides services for stock brokers and traders to trade stocks, bonds and
other securities. Stock exchanges also provide facilities for issue and redemption of securities
and other financial instruments and capital events including the payment of income and
dividends. Securities traded on stock exchange include shares issued by companies, unit trusts,
derivatives, pooled investment products and bonds.
Equity/Share
Total equity capital of a company is divided into equal units of small denominations, each called
a share. For example, in a company the total equity capital of Rs. 2,00,00,000 is divided into
20,00,000 units of Rs 10 each. Each such unit of Rs. 10 is called a share. Thus, the company then
is said to have 20, 00,000 equity share of Rs 10 each. The holders of such shares are members of
the company and have voting rights. There are now stock markets in virtually every developed
and most developing economy, with the world‘s biggest being in the United States, UK,
Germany, France, India and Japan.
Market participants
Market participants include individual retail investors, institutional investors such as
mutual funds, banks, insurance companies and hedge funds, and also publically traded
corporations trading in their own shares.
Trading Participants
In the stock market range from small individual stock investors to large hedge fund traders, who
can be based anywhere.
Listing
Listing means admission of securities of an issuer to trading privileges on a stock exchange
through a formal agreement. The prime objective of admission to dealing on the Exchange is to
provide liquidity and marketability to securities.
Securities
A Security gives the holder an ownership interest in the assets of a company. For example,
when a company issues security in the form of stock, they give the purchaser an interest in the

company‘s assets in exchange for money. There are a number of reasons why a company issues
securities: meeting a short – term cash crunch or obtaining money for an expansion is just two.
WHAT IS SEBI AND WHAT IS ITS ROLE?

In 1988 the Securities and Exchange Board of India (SEBI) was established by the Government
of India through an executive resolution, and was subsequently upgraded as a fully autonomous
body (a statutory Board) in the year 1992 with the passing of the Securities and Exchange Board
of India Act (SEBI Act) on 30th January 1992. In place of Government Control, a statutory and
autonomous regulatory board with defined responsibilities, to cover both development &
regulation of the market, and independent powers has been set up. Paradoxically this is a positive
outcome of the Securities Scam of 1990-91.
OBJECTIVES OF SEBI
The promulgation of the SEBI ordinance in the parliament gave status to SEBI in 1992.
According to the preamble of the SEBI, the three main objectives are:
To protect the interests of the investors in securities
To promote the development of securities market
To regulate the securities market
FUNCTIONS OF SEBI
The main functions entrusted with SEBI are:
Regulating the business in stock exchange and any other securities market
Registering and regulating the working of stock brokers, share transfer agents, bankers
to the issue, trustees of trust deed, registrars to an issue, merchant bankers, underwriters,
portfolio managers, investment advisers and such other intermediaries who may be
associated with securities market in any manner.
Registering and regulating the working of collective investment schemes
including mutual funds Promoting and regulating self-regulatory organizations
Prohibiting fraudulent and unfair trade practices in the securities market
Promoting investors education and training of intermediaries in securities market
Prohibiting insiders trading in securities
Regulating substantial acquisition of shares and takeover of companies
Calling for information, undertaking inspection, conducting enquiries and audits of the
stock exchanges, intermediaries and self-regulatory organizations in the securities
market.
Since its inception SEBI has been working targeting the securities and is attending to the
fulfillment of its objectives with commendable zeal and dexterity. The improvements in the
securities markets like capitalization requirements, margining, establishment of clearing
corporations etc. reduced the risk of credit and also reduced the market.
SEBI has introduced the comprehensive regulatory measures, prescribed registration norms,
the eligibility criteria, the code of obligations and the code of conduct for different
intermediaries like, bankers to issue, merchant bankers, brokers and sub-brokers, registrars,
portfolio managers, credit rating agencies, underwriters and others. It has framed bye-laws, risk
identification and risk management systems for Clearing houses of stock exchanges, surveillance
system etc. which has made dealing in securities both safe and transparent to the end investor.
Another significant event is the approval of trading in stock indices (like S&P CNX Nifty &
Sensex) in 2000. A market Index is a convenient and effective product because of the following
reasons:
It acts as a barometer for market behavior;
It is used to benchmark portfolio performance;
It is used in derivative instruments like index futures and index options; It
can be used for passive fund management as in case of Index Funds
Two broad approaches of SEBI is to integrate the securities market at the national level, and
also to diversify the trading products, so that there is an increase in number of traders including
banks, financial institutions, insurance companies, mutual funds, primary dealers etc. to
transact through the Exchanges. In this context the introduction of derivatives trading through
Indian Stock Exchanges permitted by SEBI in 2000 AD is a real landmark.
SEBI appointed the L. C. Gupta Committee in 1998 to recommend the regulatory framework for
derivatives trading and suggest bye-laws for Regulation and Control of Trading and Settlement
of Derivatives Contracts. The Board of SEBI in its meeting held on May 11, 1998 accepted the
recommendations of the committee and approved the phased introduction of derivatives trading
in India beginning with Stock Index Futures. The Board also approved the "Suggestive Bye-
laws" as recommended by the Dr LC Gupta Committee for Regulation and Control of Trading
and Settlement of Derivatives Contracts. SEBI then appointed the J. R. Verma Committee to
recommend Risk Containment Measures (RCM) in the Indian Stock Index Futures Market. The
report was submitted in November1998.
However the Securities Contracts (Regulation) Act, 1956 (SCRA) required amendment to
include "derivatives" in the definition of securities to enable SEBI to introduce trading in
derivatives. The necessary amendment was then carried out by the Government in 1999. The
Securities Laws (Amendment) Bill, 1999 was introduced. In December 1999 the new framework
was approved. Derivatives have been accorded the status of `Securities'. The ban imposed on
trading in derivatives in 1969 under a notification issued by the Central Government was
revoked. Thereafter SEBI formulated the necessary regulations/bye-laws and intimated the
Stock Exchanges in the year 2000. The derivative trading started in India at NSE in 2000 and
BSE started trading in the year 2001.
BOMBAY STOCK EXCHANGE (BSE)

Established in 1875, BSE (formerly known as Bombay Stock Exchange Ltd.), is Asia's first &
the Fastest Stock Exchange in world with the speed of 6 micro seconds and one of India's leading
exchange groups. Over the past 141 years, BSE has facilitated the growth of the Indian corporate
sector by providing it an efficient capital-raising platform. Popularly known as BSE, the bourse
was established as "The Native Share & Stock Brokers' Association" in 1875. Today BSE
provides an efficient and transparent market for trading in equity, currencies, debt instruments,
derivatives, mutual funds. It also has a platform for trading in equities of small-and-medium
enterprises (SME). India INX, India's 1st international exchange, located at GIFT CITY IFSC in
Ahmadabad is a fully owned subsidiary of BSE. BSE is also the 1st listed stock exchange of
India.
BSE provides a host of other services to capital market participants including risk
management, clearing, settlement, market data services and education. It has a global reach
with customers around the world and a nation-wide presence. BSE systems and processes are
designed to safeguard market integrity, drive the growth of the Indian capital market and
stimulate innovation and competition across all market segments. BSE is the first exchange in
India and second in the world to obtain an ISO 9001:2000 certifications. It is also the first
Exchange in the country and second in the world to receive Information Security Management
System Standard BS 7799-2-2002 certification for its On-Line trading System (BOLT). It
operates one of the most respected capital market educational institutes in the country (the BSE
Institute Ltd.). BSE also provides depository services through its Central Depository Services
Ltd. (CDSL) arm. BSE's popular equity index - the S&P BSE SENSEX - is India's most widely
tracked stock market benchmark index. It is traded internationally on the EUREX as well as
leading exchanges of the BRCS nations (Brazil, Russia, China and South Africa).
NATIONAL STOCK EXCHANGE (NSE)
The National Stock Exchange of India is a stock Exchange that is located in Mumbai,
Maharashtra. The National Stock Exchange basically function in three market sections, that is,
(CM) the Capital Market Section); F&Q (The Future and Options Market Sections) and WDM
(Wholesale Debt Market Segment). It is important place where the trading of shares, debt etc
takes place. It was in year 1992 that the National stock Exchange was for the first time
incorporated in India. It was not regarded as a stock exchange at once. Rather, the national Stock
exchange was incorporated as a tax paying company and had got the recognition of a stock
exchange only in year 1993 the recognition was given under the provisions of the Securities
Contracts (Regulation) Act, 1956. The National Stock exchange is highly active in the field of
market capitalization and thus aiming it the ninth largest stock exchange in the said field.
Similarly, the trading of the stock exchange in equities and derivatives is so high that it has
resulted in high turnovers and thus making it the largest stock exchange in India. It is the stock
exchange wherein there is the facility of electronic exchange offering investors. This facility is
available in almost types of equitable transactions such as equities, debentures, etc. it is also the
largest stock exchange if calculated in the terms of traded values.
ORIGIN AND HISTORY OF THE NATIONAL STOCK EXCHANGE
The National Stock exchange was incorporated for the first time in November, 1992. The
national stock exchange was not incorporated as the national stock exchange; rather, it had got
the recognition of the recognized stock exchange in April, 1993. The National stock Exchange
has increased its trading facilities in June 1994 when the WDM (Wholesale Debt Market
Segment) was gone live. It is basically one of the three market segments in which the national
stock Exchange works. In the same year, 1994 November, the Capital Market (CM) segment
of the stock exchange goes live through VSAT.
The National Stock Exchange has become the first Clearing Corporation in India by the
introduction of NSCCL in April 1995. In the same year, 1995 July, it has introduced the Investor
protection fund which is a very important function introduced by the national Stock Exchange.
The National stock Exchange had grown with leaps and bounds and had shown
tremendous growth mainly in all the fields and thus making it the largest stock exchange of India
by October, 1995. The concept of NSCCL was extended by the introduction of clearing and
settlement with the help of NSCCL in year 1996. The National stock Exchange has introduced
its Index for the first time in year April 1996. The index was known as the S&P CNXNifty
Index. In year June 1996, it has introduced the Settlement Guarantee Fund. The National
Securities Depositor Fund was launched by the National Stock exchange in year 1996,
November, and thus making it the first stock exchange who becomes the first depository in
India. Because of the efforts and introduction of new concept in the field of trading, the National
stock Exchange has received the BEST IT USAGE award by the computer Society of India in
the year November, 1996. It has also received an award for the TOP IT USER in the name of
―Dataquest award‖ in year December, 1996.
The National stock exchange has also introduced another index in year December 1996 in
the name of CNX Nifty Junior in year 1996. It had again received an award for the BEST IT
USAGE award by the computer Society of India in the year December, 1996. In May, 1998 it
had launched its first website. Further in October 1999, it had launched the NSE.IT LTD. Further
in year October, 2002, it had launched the Government securities index. The growth of the
National Stock Exchange has been tremendous in every field. It had introduced several
programmers and has achieved various achievements and awards while working best in the field
in which it is working. The efforts and hard work that is contributed by the National Stock
exchange has been tremendous and thus making an important and unique stock exchange in
India.
TYPES OF MARKET
Two important terms before discussing derivatives, it would be useful to be familiar with two
terminologies relating to the underlying markets. These are as follows:
Spot Market
In the context of securities, the spot market or cash market is a securities market in which securities
are sold for cash and delivered immediately. The delivery happens after the settlement period. Let
us describe this in the context of India. The NSE‘s cash market segment is known as the Capital
Market (CM) Segment. In this market, shares of SBI, Reliance, Infosys, ICICI Bank, and other
public listed companies are traded. The settlement period in this market is on a T+2
bases i.e., the buyer of the shares receives the shares two working days after trade date and
the seller of the shares receives the money two working days after the trade date.
Index
Stock prices fluctuate continuously during any given period. Prices of some stocks might move
up while that of others may move down. In such a situation, what can we say about the stock
market as a whole? Has the market moved up or has it moved down during a given period?
Similarly, have stocks of a particular sector moved up or down? To identify the general trend in
the market (or any given sector of the market such as banking), it is important to have a
reference barometer which can be monitored. Market participants use various indices for this
purpose. An index is a basket of identified stocks, and its value is computed by taking the
weighted average of the prices of the constituent stocks of the index. A market index for
example consists of a group of top stocks traded in the market and its value changes as the prices
of its constituent stocks change. In India, Nifty Index is the most popular stock index and it is
based on the top 50 stocks traded in the market. Just as derivatives on stocks are called stock
derivatives, derivatives on indices such as Nifty are called index derivatives.

3. COMPANY’S PROFILE
NG RATHI INVESTRADES PVT LTD is one of the most renowned brokerage houses in
Pune. The promoters share 16 years of rich experience in the broking segment. It is a fully
integrated capital markets intermediary dedicated towards providing you with a technology
driven investment platform.
NGRIPL is a member of National Stock Exchange (NSE), Bombay Stock Exchange (BSE) as
well as the leading commodity exchange of India i.e. MCX. NGRIPL is also registered as a
Depository Participant of CDSL.
The management at NGRIPL is the CRUX of our foundation.
Nitin M Rathi (Chairman)
Mr. Nitin M Rathi a man of substance, versatile in business. He is Bachelors of Electronics but
his interest brought him to this field and now he contributes his rich experience of more than 16
years in the capital markets with a focus on the derivatives segment, to the growth of Dreams
Investrades Pvt. Ltd.. He has evolved as a catalyst in nurturing business for NG Rathi Investrades
Pvt. Ltd. He is a Director of Dreams Capital Pvt. Ltd
Girish Madhukar Rathi (Managing Director)
Mr. Girish Rathi has a rich and varied experience of more than 10 years in all aspects of the
Equity Capital Markets. Being the founder member of Dreams Group, he has nurtured the group
as his own child. He is one of the Board members of the Dreams Group. He is a former member
of Pune Stock Exchange.
Neha Nitin Rathi (Director)
Mrs. Neha Rathi has done her Masters in Commerce. She is a multifaceted personality with a
rich experience of more than 10 years in the capital markets. She gives credit for her knowledge
in the markets to her husband, Mr. Nitin Rathi.
Gopal Subhash Kalantri (Director)
Mr. Gopal Kalantri, a conceptually strong man with strong principal and ethics. He, too has a
rich and varied experience of 18 plus years in the Capital Markets. He has fundamentally
sound knowledge of all the companies listed on the Exchange. USP OF NG RATHI
INVESTRADES ARE:
Personalised service
Expert's advice
Dedicated research team
Experienced promoters
Training platform
Products and Services delivered by them for Wealth creation of their investors and traders:
1. Equity market-
WEALTH CREATION” a motive of each individual. NG Rathi Investrades Pvt. Ltd. Provides
support for this motive of yours. In true sense, Equity markets in India are very volatile but
undoubtedly the best source for WEATLH CREATION. Just with a little bit of guidance from
an expert at NGRIPL you can successfully achieve your motive. Make the most out of it, help us
serve you the best.
2. Derivative market-
Higher the risk better the returns, that is what a risk to return model suggests. Have the appetite for
higher risk, trade in the F&O segment. NGRIPL offers you the best platforms for trading in F&O
with the largest exchange in the country, NSE (National Stock exchange of India).
With SEBI permitting delivery in F&O segment now the segment has become all the more
alluring. Today you can, to lower your risk Hedge your open position in Cash (spot) market or
F&O market using Derivative Instruments, traders can speculate, if you prefer playing safe
you can take advantage of the arbitrage opportunities.
3. Online Trading-
When the world we get on the Internet why not WEALTH? At your finger tips, with the comfort
of your home/office or on the move, stay in touch with the market. Buy or Sell, keep trading,
CREATE WEALTH, NG Rathi Investrades Pvt. Ltd. will always be there for you. Login and

make the difference.
4. Free Trading Calls-
Want to get the best, first? NGRIPL covers the market at its entirety, let it be the Primary
market or the Secondary market, when it is Equity it means all. We also provide you with IPO
services at all our branches at Aurangabad and Nashik.
The other diversified business that the company is dealing into is construction, under the
name N.G.Rathi and Associates.
5. LITERATURE REVIEW
DERIVATIVES MARKET
Derivative is a value of a product derived from an underlying asset.

5.1. HISTORY & EVOLUTION OF DERIVATIVES MARKET –
History of Derivatives may be mapped back to the several centuries. Some of the
specific milestones in evolution of Derivatives Market Worldwide are given below:
GLOBAL HISTORY OF DERIVATIVE MARKET
 12th Century

- In European trade fairs, sellers signed contracts promising future delivery of the
items they sold.
 13th Century

- There are many examples of contracts entered into by English Cistercian
 Monasteries, who frequently sold their wool up to 20 years in advance, to foreign
merchants

 In 1975, CBOT introduced Treasury bill futures contract. It was the first successful
pure Interest rate futures.

 In 1977, CBOT created T -bond futures contract.

 In 1982, CME created Eurodollar futures contract.

 In 1982, Kansas City Board of Trade launched the first stock index futures

 In 1983, Chicago Board Options Exchange decided to create an option on an index of

stocks.
REGULATION OF DERIVATIVES TRADING IN INDIA

 The regulatory frame work in India is based on L.C.

 Gupta Committee report and J.R. Varma Committee report. It is most consistent with
the international organization of securities commission (IUSCO).

 The L.C. Gupta Committee report provides a perspective on division of regulatory
responsibility between the exchange and SEBI. It recommends that SEBI‟s role should
be restricted to approving rules, bye laws and regulations of a derivatives exchange as
also to approving the proposed derivatives contracts before commencement of their
trading. It emphasizes the supervisory and advisory role of SEBI. It also suggests
establishment of a separate clearing corporation.
DERIVATIVES MARKET IN INDIA
 In India, there are two major markets namely National Stock Exchange (NSE) and
Bombay Stock

 Exchange (BSE) along with other Exchanges of India are the market for derivatives.
Here we may discuss the performance of derivatives products in Indian market.

 The BSE started derivatives trading on June 9, 2000 when it launched “Equity
derivatives (Index futures-SENSEX) first time.

 The NSE started derivatives trading on June 12, 2000 when it launched “Index Futures
S & P CNX Nifty” first time.

 India is one of the most successful developing countries in terms of a vibrant market
for exchange-traded derivatives. There is an increasing sense that the equity derivatives
market plays a major role in shaping price discovery.
MILESTONE DEVELOPMENT IN INDIAN DERIVATIVE MARKET

November 18, 1996 L.C. Gupta Committee set up to draft a policy framework for
introducing derivatives
May 11, 1998 L.C. Gupta committee submits its report on the policy Framework
May 25, 2000 SEBI allows exchanges to trade in index futures
June 12, 2000 Trading on Nifty futures commences on the NSE
June4, 2001 Trading for Nifty options commences on the NSE

July 2, 2001 Trading on Stock options commences on the NSE
November 9, 2001 Trading on Stock futures commences on the NSE
August 29, 2008 Currency derivatives trading commences on the NSE
August 31, 2009 Interest rate derivatives trading commences on the NSE
February 2010 Launch of Currency Futures on additional currency pairs
October 28, 2010 Introduction of European style Stock Options

October 29, 2010 Introduction of Currency Options
5.3 FACTORS DRIVING THE GROWTH OF DERIVATIVES

Over the last three decades, the derivatives market has seen a phenomenal growth. A large
variety of derivative contracts have been launched at exchanges across the world. Some of
the factors driving the growth of financial derivatives are:
1. Increased volatility in asset prices in financial markets,
2. Increased integration of national financial markets with the international markets,
3. Marked improvement in communication facilities and sharp decline in their costs,
4. Development of more sophisticated risk management tools, providing economic agents a
wider choice of risk management strategies, and
5. Innovations in the derivatives markets, which optimally combine the risks and returns over
a large number of financial assets leading to higher returns, reduced risk as well as
transactions costs as compared to individual financial assets.
5.4 DERIVATIVE PRODUCTS –
5.4.1 TYPES AND CLASSIFICATION

1. On the basis of linear and non-linear: On the basis of this classification the financial
derivatives can be classified into two big class namely linear and non-linear derivatives:
(a) Linear derivatives: Those derivatives whose Over-the-counter (OTC) traded derivative: These
values depend linearly on the underling’s value are called linear derivatives. They are following:
(i) Forwards
(ii) Futures
(iii) Swaps

(b) Non-linear derivatives:
Those derivatives whose value is a non-linear function of the underlying are called non-
linear derivatives. They are following:
(i) Options
(ii) Convertibles
(iii) Equity linked bonds
(iv)Reinsurance
2. On the basis of financial and non-financial: On the basis of this classification the derivatives
can be classified into two category namely financial derivatives and non-financial derivatives.
(a) Financial derivatives: Those derivatives which are of financial nature are called
financial derivatives. They are following:
(i) Forwards
(ii) Futures
(iii) Options
(iv)Swaps
The above financial derivatives may be credit derivatives, forex, currency fixed-income,
interest, insider trading and exchange traded.
(b) Non-financial derivatives: Those derivatives which are not of financial nature are called
non-financial derivatives. They are following:
(i) Commodities
(ii) Metals
(iii) Weather
(iv)Others
Derivative contracts have several variant as seen above; the most common variants are
forwards, futures, options and swaps. We take a brief look at various derivatives contracts that
have come to be used.
Forwards:
A forward contract is a customized contract between two entities, where settlement takes
place on a specific date in the future at today's pre-agreed price. They are linear in nature.
Futures:
A futures contract is an agreement between two parties to buy or sell an asset at a certain time in
the future at a certain price. Futures contracts are special types of forward contracts in the sense
that the former are standardized exchange traded contracts.

Options:
Options are non-linear product. Options are of two types - calls and puts.
 Calls give the buyer the right but not the obligation to buy a given quantity of the
underlying asset, at a given price on or before a given future date.

 Puts give the buyer the right, but not the obligation to sell a given quantity of the
underlying asset at a given price on or before a given date.
Warrants:
Options generally have lives of up to one year; the majority of options traded on options
exchanges having a maximum maturity of nine months. Longer-dated options are called warrants
and are generally traded over-the-counter.
Swaps:
Swaps are private agreements between two parties to exchange cash flows in the future
according to a prearranged formula. They can be regarded as portfolios of forward contracts. The
two commonly used swaps are:
• Interest rate swaps:
These entail swapping only the interest related cash flows between the parties in the
same currency.
• Currency swaps:
These entail swapping both principal and interest between the parties, with the cash flows in
one direction being in a different currency than those in the opposite direction.
OVER THE COUNTER

In the modern world, there is a huge variety of derivative products available. They are either
traded on organized exchanges (called exchange traded derivatives) or agreed directly between
the contracting counterparties over the telephone or through electronic media (called over the-
counter (OTC) derivatives). Few complex products are constructed on simple building blocks
like forwards, futures, options and swaps to cater to the specific requirements of customers.
Over-the-counter market is not a physical marketplace but a collection of broker-dealers
scattered across the country. Main idea of the market is more a way of doing business than a
place. Buying and selling of contracts is matched through negotiated bidding process over a
network of telephone or electronic media that link thousands of intermediaries. OTC derivative
markets have witnessed a substantial growth over the past few years, very much contributed by
the recent developments in information technology. The OTC derivative markets have banks,
financial institutions and sophisticated market participants like hedge funds, corporations and
high net-worth individuals. OTC derivative market is less regulated market because these
transactions occur in private among qualified counterparties, who are supposed to be capable
enough to take care of themselves. The OTC derivatives markets–transactions among the
dealing counterparties have following features compared to exchange traded derivatives:
 Contracts are tailor made to fit in the specific requirements of dealing Counterparties.

 The management of counter-party (credit) risk is decentralized and located within
individual institutions.

 There are no formal centralized limits on individual positions, leverage, or margining.

 There are no formal rules or mechanisms for risk management to ensure market stability
and integrity, and for safeguarding the collective interest of market participants.

 Transactions are private with little or no disclosure to the entire market. On the contrary,
exchange-traded contracts are standardized, traded on organized exchanges with prices
determined by the interaction of buyers and sellers through anonymous auction
platform. A clearing house/ clearing corporation, guarantees contract performance
(settlement of transactions).
5.5 SIGNIFICANCE OF DERIVATIVES
Inspite of the fear and criticism with which the derivative markets are commonly looked at,
These markets perform a number of economic functions.
1. Prices in an organized derivatives market reflect the perception of market participants about
the future and lead the prices of underlying to the perceived future level. The prices of
derivatives converge with the prices of the underlying at the expiration of the derivative
contract. Thus derivatives help in discovery of future as well as current prices.
2. The derivatives market helps to transfer risks from those who have them but may not like them
to those who have an appetite for them.
3. Derivatives, due to their inherent nature, are linked to the underlying cash markets, with the
introduction of derivatives, the underlying market witnesses’ higher trading volumes because of
participation by more players who would not otherwise participate for lack of an arrangement to
transfer risk.
4. Speculative trades shift to a more controlled environment of derivatives market. In the absence of
an organized derivatives market, speculators trade in the underlying cash markets. Margining,

monitoring and surveillance of the activities of various participants become extremely difficult
in these kinds of mixed markets.
5. An important incidental benefit that flows from derivatives trading is that it acts as a catalyst
for new entrepreneurial activity. The derivatives have a history of attracting many bright,
creative, well-educated people with an entrepreneurial attitude. They often energize others to
create new businesses, new products and new employment opportunities, the benefit of which
are immense. In a nut shell, derivatives markets help increase savings and investment in the
long run. Transfer of risk enables market participants to expand their volume of activity.
5.6 VARIOUS RISK FACED BY THE PARTICIPANTS IN DERIVATIVES
Market Participants must understand that derivatives, being leveraged instruments, have
risks like
 Counterparty Risk (default by counterparty),

 Price Risk (loss on position because of price move),

 Liquidity Risk (inability to exit from a position),

 Legal Or Regulatory Risk (enforceability of contracts),

 Operational Risk (fraud, inadequate documentation, improper execution, etc.) and may
not be an appropriate avenue for someone of limited resources, trading experience and
low risk tolerance.
A market participant should therefore carefully consider whether such trading is suitable for
him/her based on these parameters. Market participants, who trade in derivatives are advised to
carefully read the
Model Risk Disclosure Document, given by the broker to his clients at the time of signing
agreement.
Model Risk Disclosure Document is issued by the members of Exchanges and contains
important information on trading in Equities and F&O Segments of exchanges.
All prospective participants should read this document before trading on Capital
Market/Cash Segment or F&O segment of the Exchanges.
5.7 INTRODUCTION OF INDEX

 Index is a statistical indicator that measures changes in the economy in general or in
particular areas. In case of financial markets, an index is a portfolio of securities that
represent a particular market or a portion of a market. Each Index has its own
calculation methodology and usually is expressed in terms of a change from a base
value. The base value might be as recent as the previous day or many years in the past.
Thus, the percentage change is more important than the actual numeric value.

 Financial indices are created to measure price movement of stocks, bonds, T-bills and
other type of financial securities. More specifically, a stock index is created to provide
market participants with the information regarding average share price movement in
the market. Broad indices are expected to capture the overall behavior of equity market
and need to represent the return obtained by typical portfolios in the country.
5.8 FUNCTIONS OF INDEX
 A stock index is an indicator of the performance of overall market or a particular sector.

 It serves as a benchmark for portfolio performance- Managed portfolios, belonging
either to individuals or mutual funds; use the stock index as a measure for evaluation of
their performance.

 It is used as an underlying for financial application of derivatives –Various

 Products in OTC and exchange traded markets are based on indices as underlying asset.

 Each stock contains a mixture of two elements - stock news and index news. When we
take an average of returns on many stocks, the individual stock news tends to cancel
out and the only thing Left is news that is common to all stocks.

 The news that is common to all stocks is news about the economy. That is what a
good index captures. The correct method of averaging is that of taking a weighted
average, giving each stock a weight proportional to its market capitalization.

 Example: Suppose an index contains two stocks, A and B. A has a market
capitalization of Rs.1000 crore and B has a market capitalization of Rs.3000 crore.
Then we attach a weight of 1/4 to movements in A and 3/4 to movement in B.
5.9 TYPES OF INDEX
Market capitalization weighted index or price weighted index:
Market capitalization is the market value of a company, calculated by multiplying the
total number of shares outstanding to its current market price.

In the example below we can see that each stock affects the index value in proportion to
the market value of all the outstanding shares. In the present example, The base index =
1000 and the index value works out to be 1002.60
 Market capitalization weighted index:


In this type of index, the equity price is weighted by the market capitalization of the
company (share price * number of outstanding shares).
Hence each constituent stock in the index affects the index value in proportion to the
market value of all the outstanding shares. This index forms the underlying for a lot of
index based products like index funds and index futures.
In the market capitalization weighted method, where:
Company Current Market Base Market

Capitalization Capitalization
Grasim Inds 1,668,791.10 1,654,247.50
Telco 872,686.30 860,018.25
SBI 1,452,587.65 1,465,218.80
Wipro 2,675,613.30 2,669,339.55
Bajaj 660,887.85 662,559.30
Total 7,330,566.20 7,311,383.40
INDEX= 7,330,566.20 *1000= 1002.62

7,311,383.40
 Current market capitalization = Sum of (current market price * outstanding shares) of all
securities in the index.

 Base market capitalization = Sum of (market price * issue size) of all securities as
on base date.

 Price weighted index:
In a price weighted index each stock is given a weight proportional to its stock price. A stock
index in which each stock influences the index in proportion to its price. Stocks with a higher
price will be given more weight and therefore, will have a greater influence over the performance
of the index.
5.9 MAJOR INDICES IN INDIA
These are few popular indices in India.
•BSE Sensex
•BSEMidcap
•BSE-100
•BSE-200
•BSE-500
S&P CNX Nifty
•CNX Nifty Junior
•S&P CNX Defty
•CNX Midcap
•S&P CNX 500
5.10 APPLICATION OF INDICES
Traditionally, indices were used as a measure to understand the overall direction of stock market.
However, few applications on index have emerged in the investment field.
Few of the applications are explained below:
 Index Funds
These types of funds invest in a specific index with an objective to generate returns equivalent to
the return on index. These funds invest in index stocks in the proportions in which these stocks
exist in the index. For instance, Sensex index fund would get the similar returns as that of Sensex

index. Since Sensex has 30 shares, the fund will also invest in these 30 companies in the
proportion in which they exist in the Sensex.
 Index Derivatives
Index Derivatives are derivative contracts which have the index as the underlying asset.
Index Options and Index Futures are the most popular
Derivative contracts worldwide. Index derivatives are useful as a tool to hedge against the
market risk.
 Exchange Traded Funds
Exchange Traded Funds (ETFs) is basket of securities that trade like individual stock, on an
exchange. They have number of advantages over other mutual funds as they can be bought and
sold on the exchange. Since, ETFs are traded on exchanges intraday transaction is possible.
Further, ETFs can be used as basket trading in terms of the smaller denomination and low
transaction cost. The first ETF in Indian Securities Market was the Nifty BeES, introduced by
the Benchmark Mutual Fund in December
2001. Prudential ICICI Mutual Fund introduced SPIcE in January2003, which was the first ETF
on Sensex.

5.11 FORWARD CONTRACT:
A forward contract is an agreement to buy or sell an asset on a specified date for a

specified price. One 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. The other party
assumes a short position and agrees to sell the asset on the same date for the same price. Other
contract details like delivery date, price and quantity are negotiated bilaterally by the parties to
the contract. The forward contracts are normally traded outside the exchanges. The salient
features of forward contracts are:
• They are bilateral contracts and hence exposed to counter-party risk
• Each contract is custom designed, and hence is unique in terms of contract size, expiration
date and the asset type and quality.
• The contract price is generally not available in public domain.
• On the expiration date, the contract has to be settled by delivery of the asset.
• If the party wishes to reverse the contract, it has to compulsorily go to the same counter-
party, which often results in high prices being charged.
i. Limitations of Forward Contract
Forward markets world-wide are afflicted by several problems:
 Lack of centralization of trading,

 Illiquidity,

 Counterparty

 Risk
In the first two of these, the basic problem is that of too much flexibility and generality. The
forward market is like a real estate market in that any two consenting adults can form
contracts against each other. This often makes them design terms of the deal which are very
convenient in that specific situation, but makes the contracts non-tradable. Counterparty risk
arises from the possibility of default by any one party to the transaction. When one of the
two sides to the transaction declares bankruptcy, the other suffers. Even when forward
markets trade standardized contracts, and hence avoid the problem of illiquidity, still the
counter party risk remains a very serious issue. Exchange Traded Derivative"

ii. FUTURES CONTRACT
Futures markets were innovated to overcome the limitations of forwards. A futures contract is an
agreement made through an organized exchange to buy or sell a fixed amount of a commodity
or a financial asset on a future date at an agreed price. Simply, futures are standardized forward
contracts that are traded on an exchange. The clearinghouse associated with the exchange
guarantees settlement of these trades. A trader, who buys futures contract, takes a long position
and the one, who sells futures, takes a short position. The words buy and sell are figurative only
because no money or underlying asset changes hand, between buyer and seller, when the deal is
signed.
iii. FEATURES OF FUTURES CONTRACT

In futures market, exchange decides all the contract terms of the contract other than price.
Accordingly, futures contracts have following features:
•Contract between two parties through Exchange
•Centralized trading platform i.e. exchange
•Price discovery through free interaction of buyers and sellers
•Margins are payable by both the parties •Quality decided
today (standardized)
•Quantity decided today (standardized)
D. FUTURES TERMINOLOGIES
a) Spot Price: The price at which an asset trades in the cash market. This is the underlying
value of Nifty on August 9, 2010 which is 5486.15.
b) Futures Price: The price of the futures contract in the futures market. The closing
price of Nifty in futures trading is Rs. 5482. Thus Rs. 5482 is the future price of Nifty,
on a closing basis.
c) Contract Cycle: It is a period over which a contract trades. On August 9, 2010,

the maximum number of index futures contracts is of 3 months contract cycle.
d) Expiration Day: The day on which a derivative contract ceases to exist. It is last trading
day of the contract. It is the last Thursday of the expiry month. If the last Thursday is a
trading holiday, the contracts expire on the previous trading day. On expiry date, all the
contracts are compulsorily settled. If a contract is to be continued then it must be rolled to
the near future contract. For a long position, this means selling the expiring contract and
buying the next contract. Both the sides of a roll over should be executed at the same
time. Currently, all equity derivatives contracts (both on indices and individual stocks) on
NSE are cash settled whereas on BSE, derivative contracts on indices are cash settled
while the contracts on individual stocks are delivery settled.
e) Tick Size: It is minimum move allowed in the price quotations. Exchanges decide the
tick sizes on traded contracts as part of contract specification. Tick size for Nifty
futures is 5
Contract Size and contract value: Futures contracts are traded in lots and to arrive at the
contract value we have to multiply the price with contract multiplier or lot size or
contract size. For S&P CNX Nifty, lot size is 50 and for Sensex Index futures contract, it
is 15.
f) Basis: The difference between the spot price and the futures price is called basis
g) Cost of Carry: Cost of Carry is the relationship between futures prices and spot prices.
h) Margin Account: As exchange guarantees the settlement of all the trades, to protect
itself against default by either counterparty, it charges various margins from brokers.
Brokers in turn charge margins from their customers.
i) Initial Margin: The amount one needs to deposit in the margin account at the time
entering a futures contract is known as the initial margin. Let us take an example -On
August 7, 2010 a person decided to enter into a futures contract. He expects the market to
go up so he takes a long Nifty Futures position for August expiry. On August 7, 2010
Nifty closes at 5439.25.
The contract value = Nifty futures price * lot size
= 5439.25 * 50 = Rs.2, 71,962.50. Therefore, Rs 2, 71,962.50 is the contract value of one
Nifty Future contract expiring on August 26, 2010.
Assuming that the broker charges 10% of the contract value as initial margin, the person

has to pay him Rs. 27,196.25 as initial margin. Both buyers and sellers pay initial
margin, as there is an obligation on both the parties to honor the contract. The initial
margin is dependent on price movement of the underlying asset. As high volatility assets
carry more risk, exchange would charge higher initial margin on them.
j) Marking to Market (MTM): In futures market, while contracts have maturity of several
months, profits and losses are settled on day-to-day basis –called mark to market (MTM)
settlement. The exchange collects these margins (MTM margins) from the loss making
participants and pays to the gainers on day-to-day basis.
Long Position: Outstanding/ unsettled buy position in a contract is called “Long

Position”. For instance, if Mr. X buys 5 contracts on Sensex futures then he would be
long on 5 contracts on Sensex futures. If Mr. Y buys 4 contracts on Pepper futures
then he would be long on 4 contracts on pepper.
k) Short Position: Outsatnding/ unsettled sell position in a contract is called “Short

Position”. For instance, if Mr. X sells 5 contracts on Sensex futures then he would be
short on 5 contracts on Sensex futures. If Mr. Y sells 4 contracts on Pepper futures then
he would be short on 4 contracts on pepper.
l) Open Position: Outstanding/ unsettled either long (buy) or short (sell) position in
various derivative contracts is called “Open Position”
m) Opening Position: Opening a position means either buying or selling a contract,

which increases client’s open position (long or short).
n) Closing Position: Closing a position means either buying or selling a contract;

this essentially results in reduction of client’s open position (long or short).
iv. COMPARISON OF FORWARDS AND FUTURES

Trade on organized exchanges No Yes
Use standardized contract terms No Yes
Use associate clearinghouses to guarantee contract fulfillment No Yes
Require margin payments and daily settlements No Yes

Markets are transparent No Yes
Marked to market daily No Yes
Closed prior to delivery No Mostly
Profits or losses realized daily No Yes
5.12 OPTIONS CONTRACT

As seen earlier, forward/futures contract is a commitment to buy/sell the
Underlying and has a linear payoff, which indicates unlimited losses and profits. Some market
participants desired to ride upside and restrict the losses. Accordingly, options emerged as a
financial instrument, which restricted the losses with a provision of unlimited profits on buy or
sell of underlying asset.
I. OPTION CONTRACTS:
An Option is a contract that gives the right, but not an obligation, to buy or sell the underlying
asset on or before a stated date/day, at a stated price, for a price. The party taking a long position
i.e. buying the option s called buyer/ holder of the option and the party taking a short position
i.e. selling the option is called the seller/ writer of the option.
The option buyer has the right but no obligation with regards to buying or selling the underlying
asset, while the option writer has the obligation in the contract. Therefore, option buyer/ holder
will exercise his option only when the situation is favorable to him, but, when he decides to
exercise, option writer would be legally bound to honor the contract. Options may be
categorized into two main types:
 Cal Option, which gives buyer a right to buy the underlying asset, is called Call
option Options.

 Put Options, is the option which gives buyer a right to sell the underlying asset, is called
Put option.
II. OPTION TERMINOLOGY

There are several terms used in the options market. They areas fallows:
1) Index option: These options have index as the underlying asset. For example options
on Nifty, Sensex, etc.
2) Stock option: These options have individual stocks as the underlying asset. For
example, option on ONGC, NTPC etc.

3) Buyer of an option: The buyer of an option is one who has a right but not the obligation
in the contract. For owning this right, he pays a price to the seller of this right called
‘option premium’ to the option seller.
4) Writer of an option: The writer of an option is one who receives the option premium and
is thereby obliged to sell/buy the asset if the buyer of option exercises his right.
5) American option: The owner of such option can exercise his right at any time on or before
the expiry date/day of the contract.
6) European option: The owner of such option can exercise his right only on the
expiry date/day of the contract. In India, Index options are European.
7) Option price/Premium: It is the price which the option buyer pays to the option seller.
In our examples, option price for call option is Rs. 221.20 and for put option is Rs. 88.75.
8) Premium traded is for single unit of nifty and to arrive at the total premium in a contract, we
need to multiply this premium with the lot size.
9) Lot size: Lot size is the number of units of underlying asset in a contract. Lot size of Nifty
option contracts is 50. Accordingly, in our examples, total premium for call option contract
would be Rs. 221.20*50= 11060 and total premium for put option contract would be Rs.
88.75*50 = 4437.5.
10) Expiration Day: The day on which a derivative contract ceases to exist. It is the last
trading date/day of the contract. In our example, the expiration day of contracts is the last
Thursday of October month i.e. 28 October, 2010.
11) Spot price (S): It is the price at which the underlying asset trades in the spot market. In our
examples, it is the value of underlying viz. 6029.95.
12) Strike price or Exercise price (X): Strike price is the price per share for which the
underlying security may be purchased or sold by the option holder. In our examples,
strike price for both call and put options is 5900.

13) In the money (ITM) option: This option would give holder a positive cash flow, if it were
exercised immediately. A call option is said to be ITM, when spot price is higher than strike
price. And, a put option is said to be ITM when spot price is lower than strike price. In our
examples, call option is in the money.
14) At the money (ATM) option: At the money option would lead to zero cash-flow if it were
exercised immediately. Therefore, for both call and put ATM options, strike price is equal to
spot price.
Note:
MONEYNESS: Concept that refers to the potential profit or loss from the exercise of the
option. An option maybe in the money, out of the money, or at the money
Call Option Put Option
In the money Spot price > strike Spot price< strike price
At the money Spot price = strike Spot price = strike price
Out of the money Spot price < strike Spot price > strike
15) Out of the money (OTM) option: Out of the money option is one with strike price worse
than the spot price for the holder of option. In other words, this option would give the holder
a negative cash flow if it were exercised immediately. A call option is said to be OTM,
when spot price is lower than strike price. And a put option is said to be OTM when spot
price is higher than strike price. In our examples, put option is out of the money.
16) Intrinsic value: Option premium, defined above, consists of two components -
intrinsic value and time value.
17) Time value: It is the difference between premium and intrinsic value, if any, of an option.
ATM and OTM options will have only time value because the intrinsic value of such
options is zero.

18) Open Interest: As discussed in futures section, open interest is the total number of
option contracts outstanding for an underlying asset.
19) Exercise of Options: In case of American option, buyers can exercise their option any time
before the maturity of contract. All these options are exercised with respect to the settlement
value/ closing price of the stock on the day of exercise of option.
20) Assignment of Options: Assignment of options means the allocation of exercised options to
one or more option sellers. The issue of assignment of options arises only in case of
American options because a buyer can exercise his options at any point of time.
21) Opening Position: An opening transaction is one that adds to, or creates a new trading
position. It can be either a purchase or a sale. With respect to an option transaction, we will
consider both:
 Opening purchase (Long on option) –A transaction in which the purchaser’s
intention is to create or increase a long position in a given series of options.

 Opening sale (Short on option) – A transaction in which the seller’s intention is to
create or increase a short position in a given series of options.

22) Closing Position: A closing transaction is one that reduces or eliminates an existing
position by an appropriate offsetting purchase or sale. This is also known as “squaring off”
your position. With respect to an option transaction:
Closing purchase – A transaction in which the purchaser’s intention is to reduce or
eliminate a short position in a given series of options. This transaction is frequently referred
to as “covering” a short position.
Closing sale –A transaction in which the seller’s intention is to reduce or eliminate a
long position in a given series of options.
 Note: An investor does not close out a long call position by purchasing a put (or any
other similar transaction). A closing transaction for an option involves the purchase or
sale of an option contract with the same terms.

23) Leverage: An option buyer pays a relatively small premium for market exposure in relation
to the contract value. This is known as leverage.
5.13. USES OF DERIVATIVES

a) RISK MANAGEMENT
The most important purpose of the derivatives market is risk management. Risk management for
an investor comprises of the following three processes:
Identifying the desired level of risk that the investor is willing to take on his investments;
Identifying and measuring the actual level of risk that the investor is carrying; and
Making arrangements which may include trading (buying/selling) of derivatives contracts
that allow him to match the actual and desired levels of risk.
b) MARKET EFFICIENCY
Efficient markets are fair and competitive and do not allow an investor to make risk free profits.
Derivatives assist in improving the efficiency of the markets, by providing a self- correcting
mechanism. Arbitrageurs are one section of market participants who trade whenever there is an
opportunity to make risk free profits till the opportunity ceases to exist. Risk free profits are not
easy to make in more efficient markets. When trading occurs, there is a possibility that some
amount of mispricing might occur in the markets. The arbitrageurs step in to take advantage of
this mispricing by buying from the cheaper market and selling in the higher market. Their actions
quickly narrow the prices and thereby reducing the inefficiencies.
c) PRICE DISCOVERY
One of the primary functions of derivatives markets is price discovery. They provide
valuable information about the prices and expected price fluctuations of the underlying assets
in two ways:
First, many of these assets are traded in markets in different geographical locations. Because
of this, assets may be traded at different prices in different markets. In derivatives markets, the
price of the contract often serves as a proxy for the price of the underlying asset. For example,
gold may trade at different prices in Mumbai and Delhi but a derivatives contract on gold would
have one value and so traders in Mumbai and Delhi can validate the prices of spot markets in
their respective location to see if it is cheap or expensive and trade accordingly.
Second, the prices of the futures contracts serve as prices that can be used to get a sense of the
market expectation of future prices. For example, say there is a company that produces sugar and

expects that the production of sugar will take two months from today. As sugar prices fluctuate
daily, the company does not know if after two months the price of sugar will be higher or lower
than it is today. How does it predict where the price of sugar will be in future? It can do this by
monitoring prices of derivatives contract on sugar (say a Sugar Forward contract). If the forward
price of sugar is trading higher than the spot price that means that the market is expecting the
sugar spot price to go up in future. If there were no derivatives price, it would have to wait for
two months before knowing the market price of sugar on that day. Based on derivatives price the
management of the sugar company can make strategic and tactical decisions of how much sugar
to produce and when.
d) What is Open Interest (OI) and Contract in the enclosed charts?
Open interest is the total number of options and/or futures contracts that are not closed out on a
particular day, that is contracts that have been purchased and are still outstanding and not been
sold and vice versa. A common misconception is that open interest is the same thing as volume
of options and futures trades. This is not correct since there could be huge volumes but if the
volumes are just because of participants squaring off their positions then the open interest
would not be large. On the other hand, if the volumes are large because of fresh positions being
created then the open interest would also be large. The Contract column tells us about the strike
price of the call or put and the date of their settlement. For example, the first entry in the Active
Calls section (4500.00-August) means it is a Nifty call with Rs 4500 strike price, that would
expire in August. It is interesting to note from the newspaper extract given above is that it is
possible to have a number of options at different strike prices but all of them have the same
expiry date. There are different tables explaining different sections of the F&O markets.
1. Positive trend: It gives information about the top gainers in the futures market.
2. Negative trend: It gives information about the top losers in the futures market.
3. Future OI gainers: It lists those futures whose % increases in open interest are
among the highest on that day
4. Future OI losers: It lists those futures whose % decreases in open interest are among the
highest on that day.
5. Active Calls: Calls with high trading volumes on that particular day.
6. Active Puts: Puts with high trading volumes on that particular day.

5.13. SETTLEMENT OF DERIVATIVES
Settlement refers to the process through which trades are cleared by the payment/receipt of
currency, securities or cash flows on periodic payment dates and on the date of the final
settlement. The settlement process is somewhat elaborate for derivatives instruments which are
exchange traded. (They have been very briefly outlined here. For a more detailed explanation,
please refer to NCFM Derivatives Markets (Dealers) Module). The settlement process for
exchange traded derivatives is standardized and a certain set of procedures exist which take care
of the counterparty risk posed by these instruments. At the NSE, the National Securities Clearing
Corporation Limited (NSCCL) undertakes the clearing and settlement of all trades executed on
the F&O segment of NSE. It also acts as a legal counterparty to all trades on the F&O segment
and guarantees their financial settlement. There are two clearing entities in the settlement
process: Clearing Members and Clearing Banks.
Clearing members
A Clearing member (CM) is the member of the clearing corporation i.e., NSCCL. These are the
members who have the authority to clear the trades executed in the F&O segment in the
exchange. There are three types of clearing members with different set of functions:
1) Self-clearing Members: Members who clear and settle trades executed by them only on
their own accounts or on account of their clients.
2) Trading cum Clearing Members: They clear and settle their own trades as well as trades of
other trading members (TM).
3) Professional Clearing Members (PCM): They only clear and settle trades of others but do
not trade themselves. PCMs are typically Financial Institutions or Banks who are admitted by the
Clearing Corporation as members.
Clearing banks
Some commercial banks have been designated by the NSCCL as Clearing Banks. Financial
settlement can take place only through Clearing Banks. All the clearing members are required to
open a separate bank account with an NSCCL designated clearing bank for the F&O segment.
The clearing members keep a margin amount in these bank accounts.

5.14. Settlement of Futures
When two parties trade a futures contract, both have to deposit margin money which is called
the initial margin. Futures contracts have two types of settlement: (I) the mark-to- market
(MTM) settlement which happens on a continuous basis at the end of each day, and (ii) the
final settlement which happens on the last trading day of the futures contract i.e., the last
Thursday of the expiry month.
Mark to market settlement

To cover for the risk of default by the counterparty for the clearing corporation, the futures
contracts are marked-to-market on a daily basis by the exchange. Mark to market settlement is
the process of adjusting the margin balance in a futures account each day for the change in the
value of the contract from the previous day, based on the daily settlement price of the futures
contracts (Please refer to the Tables given below.). This process helps the clearing corporation in
managing the counterparty risk of the future contracts by requiring the party incurring a loss due
to adverse price movements to part with the loss amount on a daily basis. Simply put, the party in
the loss position pays the clearing corporation the margin money to cover for the shortfall in
cash. In extraordinary times, the Exchange can require a mark to market more frequently (than
daily). To ensure a fair mark-to-market process, the clearing corporation computes and declares
the official price for determining daily gains and losses. This price is called the ―settlement
price and represents the closing price of the futures contract. The closing price for any contract
of any given day is the weighted average trading price of the contract in the last half hour of
trading.
Final settlement for futures
After the close of trading hours on the expiry day of the futures contracts, NSCCL marks all
positions of clearing members to the final settlement price and the resulting profit/loss is settled in
cash. Final settlement loss is debited and final settlement profit is credited to the relevant clearing
bank accounts on the day following the expiry date of the contract. Suppose the above contract
closes on day 6 (that is, it expires) at a price of Rs. 1040, then on the day of expiry, Rs.

100 would be debited from the seller (short position holder) and would be transferred to
the buyer (long position holder).
Settlement of Option:
In an options trade, the buyer of the option pays the option price or the option premium. The
options seller has to deposit an initial margin with the clearing member as he is exposed to
unlimited losses. There are basically two types of settlement in stock option contracts: daily
premium settlement and final exercise settlement. Options being European style, they cannot be
exercised before expiry.
Daily premium settlement
Buyer of an option is obligated to pay the premium towards the options purchased by him.
Similarly, the seller of an option is entitled to receive the premium for the options sold by him.
The same person may sell some contracts and buy some contracts as well. The premium
payable and the premium receivable are netted to compute the net premium payable or
receivable for each client for each options contract at the time of settlement.
Exercise settlement
Normally most option buyers and sellers close out their option positions by an offsetting
closing transaction but a better understanding of the exercise settlement process can help in
making better judgment in this regard. Stock and index options can be exercised only at the end
of the contract.
Final Exercise Settlement

On the day of expiry, all in the money options are exercised by default. An investor who has a long
position in an in-the-money option on the expiry date will receive the exercise settlement value which
is the difference between the settlement price and the strike price. Similarly, an investor who has a short
position in an in-the-money option will have to pay the exercise settlement value.

5.15. TAX IMPLICATIONS IN DERIVATIVE TRADING
Income from F&O deals is almost always treated as business income. This treatment is
irrespective of the frequency or volume of your transactions. That may come as a surprise if
you are salaried and have never run a business. Taxpayers who have business income have to
file ITR-4.
As per Indian tax laws, incomes are reported under five heads—salary, house property,
capital gains, business and profession and other sources (any residual income that cannot
be classified in other heads). F&O trade is reported under the head ‘businesses in your tax
return.
Reporting F&O trade as a business means:
*You can claim expenses from your business income
*As a result you may earn a profit or incur a loss
*Losses must be reported and losses have tax benefits
*Your total income (from all five heads) continues to be taxed at slab rates.
Businesses may be speculative or non-speculative, and the tax treatment is different. The
income tax Act says that F&O trade is considered as a non-speculative business. Intra-day
stock trades are treated as a speculative business.
Remember that cost indexation and capital gains exemptions are only allowed on sale of
capital assets such as equity shares, mutual funds, land, house, and others. Since F&O
trades are considered a business, tax rules of capital gains rules do not apply.
Calculate gross income from F&O trades; take your transaction statement for the whole
year. Look at your receipts; these may be a positive or a negative value. Sum these up for the
whole year. Expenses can be deducted from your gross income. Some expenses that you can
deduct include rent or maintenance expenses of premises used for the business; mobile or
telephone; internet charges; demat account charges; broker commission; depreciation on
laptop used for trading; and any other expense directly related to your work.Business income
is calculated for the financial year for which you are filing your return. You will also have
to prepare a balance sheet which is reported in ITR-4. It is basically a statement of your
assets and liabilities.
Many people get confused when they have more than one type of dealing in the stock
market. Some do intra-day stock transactions along with F&O trades. Some may hold stocks
as long-term investments and also invest in mutual funds. In such a situation, you should
calculate your business income from all of these separately.
F&O trade income and intra-day stock trading will have separate expenses. Don’t worry if
you have consolidated expenses; for example, you use the same premises to trade in both,
or use a single phone. Simply bifurcate these expenses on a reasonable basis. You can
allocate them using a ratio based on time spent.
If you invest in stocks for the longer run, you can treat them as capital assets. These will not
be reported as business if you don’t trade in them often.
There is an element of judgments involved and the main criteria are your intent. So,
choose carefully.
If you have some stocks that you trade often and some that you hold for longer, you can
separate them into business and capital assets.
Remember to choose on a fair basis and apply your choice consistently. You have to report
gains from capital assets under the head ‘capital gains’, which has different tax rules.
You will end up paying higher tax if you do not report your losses since losses have
tax benefits and reduce your total taxable income.
Losses from F&O can be set off from income from other heads (except salary income). Say,
your loss from F&O business is Rs.1 lakh, salary income is Rs.5 lakh, income from rent is Rs.2
lakh, and interest income is Rs.50, 000. Your total taxable income shall be Rs.6.5 lakh.
If losses are not fully set off in the same year, you can carry them forward for 8 years.
However, in the following 8 years, it can only be set off from non-speculative
business income.

If you have F&O loss, you must get your accounts audited. Audit is also mandatory if
your turnover exceeds Rs.1 crore. If accounts are not audited, a minimum penalty of 0.5%
of turnover may be levied (maximum Rs.1.5 lakh).
The due date of filing of tax returns for financial year 2015-16, where audit is mandatory,
is 30 September 2016.

5.16. CONTRACT SPECIFICATION
SR. NO TERMINOLOGIES Remark Futures Options
1. LOT SIZE Minimum 50 50
quantity traded
in lot decided
by exchange
2. SPOT PRICE Price prevailing 5500 5500
in derivative
market
3. FUTURE/STRIKE Price prevailing 5550 5550
PRICE in future/price
for which call or
put option
exercise
4. OPTION PREMIUM Amount decided - 100
by the exchange
on the basis of
strike price and
spot price
5. EXPIRY DATE Last Thursday of Last Last
a month Thursday Thursday
6. CONTRACT Next Three Feb, March, Feb, March,
Month April April
5.17. COST OF TRADING IN DERIVATIVE

Sr. Taxes Rates Futures Options
Buy 1 Lot of Nifty at 6000 ,Contract Size (50shares* 3,00,000 3,000

6000) / Buy 6000 call option at 60Rs
premium(50shares*60)
1. Brokerage 0.03% On 90Rs (0.03% on 75 Rs (2.5% on

Contract 1 3,00,000) 3,000)
Size/2.5% on
Option
Premium(Both
Side)
2. Service Tax 10.36% on 9.32(10.36% on 7.75%(10.36%

Brokerage 90Rs) on 75Rs)
Amount (both
side)
25.50 (0.0085%
3. Securities transaction tax 0.017% on 2.55(0.0085%
on
Contract on 3000Rs)
Size(only on 3, 00,000Rs.)
selling side)
4. Stamp duty 0.004% on 12(0.004% on 1.2(0.004%

Contract(both 3,00,000 Rs) *3,000Rs)
side)
5. Education Cess 2% on Tax 0.93(2% on 0.23(2% *

Amount 9.32+25.50+12) 7.77+2.55 +1.2)
6. Higher education cess 1% on 0.014 (1% on 0.0028 (1% on

Education Cess 0.93) 0.23)
7 Total 137.76 86.75

6. RESEARCH METHODOLOGY
DATA COLLECTION METHOD
 Primary Data

 Secondary Data
Primary Data- Primary research consists of a collection of original primary data collected by
the researcher. It is often undertaken after the researcher has gained some insight into the
issue by reviewing secondary research or by analyzing previously collected primary data.
Secondary Data- Under Secondary sources, information was collected from internal & external
sources. I made use of Internet sources.
SAMPLING DESIGN
 Sampling Size: 50

 Sampling Method: Convenience Sampling
The report is based on primary data. One of the most important uses of research methodology is
that it helps in identifying the problem, collecting, analyzing, the required information and
providing alternative solution to the problem. It also helps in collecting the vital information that
is required by the investors to assist them for better decision making and help them
understanding how equity derivative market work.
The survey which have been evaluated for this study are randomly selected open ended
questionnaire survey on investment in equity derivative market restricted to people working in
NG Rathi, faculty, friends and family around me were selected as a sample which was around 50
samples and also the secondary data of equity market and equity derivative products on NSE and
BSE.
DURATION OF STUDY
The study was carried out for a period of 60 days that is from 17.05.2017 to 16.07.2017.The
actual practical experience at office were only for 2 months in which I completed my NISM
DERIVATIVE Certification , to understand the equity derivative.

OBJECTIVE OF STUDY
1. To understand the basic concepts of Equity Derivatives Market in India. The

sentiments of people when they make investments in derivative market.
2. To analyze how many people basically invest in stock market and the comparison
chart of the same; through primary data by taking sample size of 50 people.
3. To analysis the equity derivatives market growth over the period of time.
4. The knowledge of derivative market amongst different types of investors.
5. The awareness to be developed among people related to derivative market among various
types of individual and the concepts related to derivatives like futures, option, swaps, etc.
SCOPE OF STUDY
According to the analysis made, three parameters are the study has been done to know the
different types of derivatives and also to know the derivative market in India.
This study also covers the recent developments in the derivative market taking into
account the trading in past years.
Through this study I came to know the trading done in derivatives and their use in
the stock markets.
The scope of my research survey is restricted to students, house-wives and the people
who were trading at the work place. They were self trading member, dealer, analyst.
IMPORTANCE OF STUDY
 The project covers the derivatives market and its instruments. For better understanding

various strategies with different situations and actions have been given. It includes the
data collected in the recent years and also the market in the derivatives in the recent years.
This study extends to the trading of derivatives done in the National Stock Markets.
 To know the investors perception towards investment in Derivative Market To know

different types of Derivatives instruments.
LIMITATION OF STUDY
 Due to wider range of equity derivative market only the basic knowledge related to
various terms such as limit, options, future, stop loss open position and so on were
studied by me. Time is critical factor limiting the study as it was only around 60 days.

 While comparing the investment in stock market I was able to find that many people
invested in banks, real estate as compared to minor investment in derivative market. The
survey is restricted to sample size of 50.

7. ANALYSIS AND INTERPRETATION
1. Gender of the respondents
Interpretation: From the questionnaire it is observed that 74.1%of the respondents are Male
and 25.9% of them are Female.
2. Occupation of the respondents

Interpretation: From the above chart it is clear that majority of the respondents are employee
with a weightage of 40.7% , Next are students with a total of 25.9% and business men being
18.5% and others.(house-wives, government officers etc.)
3. Medium of investments
Interpretation: It seems that many people invest in share market nowadays as the percentage
indicates that 59.3% invest in NSE and only 14.8%invest in BSE, these are the people who
invest in fixed deposits, mutual funds, insurance for 25.9% in aggregate. The people here, who
invest in BSE, NSE mostly trade in cash market as compared to derivate.
4. In which securities you make investments

Interpretation: From the above respondents those who invest in share market either
through NSE/BSE which were around 74.9% only 18.5% invest in derivative market
whereas majority 33.3%invest in cash market and only 11.1%invest in commodity market
whereas other make investments in fixed deposits, gold, government bonds, etc.
5. Income per Annum of the respondents
Interpretation: 14.8%of the respondents have annual income between 1,00,000 – 2,00,000/-
were as respondents having income above 3,00,000/-are 25.9%, between 2,00,001/- -
3,00,000/- are 11.1% and no income group are around 22.2%.
6. Percentage of monthly income available for investment in Derivatives

Interpretation: Out of above 33.3% of the respondents who invest only in derivative
market, finds that they have between 11 – 15% of the monthly household income in
Derivatives, were as 38.1% of the respondents would invest between 10-30% and 27% of
the respondents invest between 5 – 10% in Derivatives Market.
7. Kind of risk perceive while investing in Derivatives
Interpretation: 17.4% of the respondents feel that system risk is the major risk they perceive
while investing in Derivative Market, were as 17.4% of the respondents feel legal risk in Market
and 39.1% of the respondents feel that fear of settlement risk is the risk they perceive while
investing in Derivatives.
8. Purpose of Investing in Derivatives Market

Interpretation: 30.4% of the respondents invest in Derivatives for margin money and
flexibility, 21.7% of them invest for easy in transaction, 17.4% of the respondents for different
variety in contracts.
9. Participation in different type of Derivative instrument
Interpretation: From the above chart we find that 18.2% of the respondent would like to
participate in Index Options were as 18.2% of the respondents’ would like to invest in
Stock Options, Stock Futures and Index Futures attract 18.2% and 31.8% respectively.
10. Interest of investment in terms of time frame.

Interpretation: 43.5% of the respondents would like to invest their money for short term
34.8% of them for long term, 21.7% of the respondents for medium term. Here, short term is
assumed for 3 months contract, medium is assumed to be of 6 months -12 months contract
and 12 months and more for long term.
11. Expected return from Investment in Derivatives market
Interpretation: Majority of the respondents 34.8% of them expect between 14-17% times a
year in Derivatives, were as 21.7% respondents expects the returns between 10-14%, many
respondents feel that they get returns around 5-10% and 13% respondents feel that they get
more than 25% return, these are the investors who have taken large amount of portfolio for

trading in derivative.
Interpretation: From the above graph, it can be seen that respondents have invested
in derivative segment. The table given below gives proper explanation to graph:
Most preferred High return

Somewhat preferred Hedge the risk (accepting various
contracts)
Neutral More reliable
Not preferred Very risky
SECONDARY DATA FROM ANNUAL REPORT ON NSE

DERIVATIVES CONTRACT IN INDIA
Comparison of equity market and equity derivative market on NSE.
As on Oct 04, 2017 15:30:30 IST Traded volume PERCENTAGE
Equity market 23,340.70 3.99947
Index futures 17,079.37 2.92658
Stock futures 6.319437

36,879.91
Index option 4,84,370.02 82.99765
Stock option 21,924.89 3.756868

TOTAL
5,83,594.89
5,00,000.00
4,00,000.00
Equity market
3,00,000.00 Index futures
Stock futures
2,00,000.00
Index option
1,00,000.00 Stock option
0.00
Traded volume
Comparison of equity market and equity derivatives on BSE.

ORDERS
Equity Orders 22,73,59,072
Equity Derivatives Orders 28,71,266

Total 23,02,30,338
Equity 98.75287
F&O 1.247128

25,00,00,000
20,00,00,000 Equity Orders
15,00,00,000
10,00,00,000 Equity
Derivatives
5,00,00,000 Orders
0
CATEGORY TOTAL DATE OF RECORD

STOCK OPTION TARDED 53,692.53 13-JAN 2016
VALUE
INDEX OPTION TRADED 1047401.81 31-MAR 2016
VALUE
TOTAL F&O TRADED 648505.58 31-MAR 2016 VALUE

8. FINDINGS
 The study of research says that the majority of investors makes investment in Index
options by 82.9% more than any other equity derivative product and also the equity
market on NSE.

 As per NSE ANNUAL REPORT IN 2015-16 option market on National Stock Exchange

ranked 1st among all the derivative market in world and the index futures of NSE stand
6th in whole world.

 As per the ratio stated in research methodology states that the trade on other derivative
product is more as compared to equity market on NSE.

 The research tells that the equity market is more by 98% on BSE as compared to 2% of
equity derivative market.

 As per the survey of closed group research, nearby 43.7% of people consist of
salaried persons and house wives in which salaried people are 40.7% who trade in
equity derivative very frequently with fewer amounts between the limit of 300000-
500000 yearly as they feel that there is ease in transactions.

 The investment made by other professionals who include government employees,
legal practitioners etc, and students taken together comprises of about 44.4% who
make investment of about more than 500000 and less than 100000 respectively.

 Investors generally perceive uncertainty of returns type of risk while investing in
derivative market. As per the result purpose of investing in derivative market is to earn
higher return by taking high risk.

 As per the survey, 34.8% of investors who invest in equity derivative frequently feels
that it gives 14%-17% who includes professionals and salaried people as well as house
wives feels that they get between 5% to 14%which together account for 34.7%
(21.7%+13%) of return from investments made in equity derivative market and
remaining investors feel that they get more than 17% accounts for about around 30%.

 From this survey, the 26.1% investors feel that there is counterparty risk these are those

who are not trading in equity derivative frequently. But the majority feels that there is
settlement risk as there is the component of mark to market and the initial margin. The
other fell that there is legal risk and system risk which together accounts for 34.8%.
 The result of investment in derivative market is generally moderate but acceptable


 The test shown that there is relationship between Income and investment in different
type of derivative instruments, income category and purpose of Investing in Derivative
market, Income per annum and monthly income available for investment.

9. CONCLUSIONS
 Derivative market growth continues almost irrespective of equity cash market
turnover growth. Since 2000, cash equity turnover has fallen in developed
markets, but equity derivative turnover continues to rise steeply and steadily.

 People should learn first and then investor should consult their financial advisor
before investing. If people have adequate knowledge then they can earn good return
in equity derivative market.

 Intra trading should not be traded by normal man as they lose money due to volatility
in the market. People invest in stock market as long term investors rather than short
term because in short term risk is more and profit is less. F&O do cover risk of future
so my advice is those have adequate knowledge should invest in F&O.

 Derivative market should be developed in order to keep it at par with other equity
derivative market in the world. Nowadays more number of investors are shown their
interest in derivatives market because it includes high return by bearing high risk.

 RBI should play a greater role in supporting derivatives, because nowadays derivative
markets are increasing rapidly and it plays a major role in whole securities market.

10.RECOMMENDATIONS
 Knowledge needs to be spread concerning the risk and return of derivative market.

 Investors should have knowledge of technical analysis, especially 5 Day moving averages
as derivatives trading is for a short period of time Investors should analysis their script
with the help of 5 Day moving average before making their trades.

 Investors’ portfolio should only consist of 15 – 20% Derivatives contracts or scripts. As
derivatives trading is very risky investors should have only a small portion of their
portfolio consisting of derivatives.

 SEBI should conduct seminars regarding the use of derivatives to educate
individual investors.

 As FII play a prominent role in Derivatives trading, an individual investor should keep
himself updated with various economic trends, government policies, and company and
industry announcements.

 Speculation should be discouraged because it affects the market condition badly and new
investors are reducing their interest in the market.

 There must be more derivatives instrument aimed at individual investors.

 There is a need to have smaller contract size in futures and options. We can review
the contract size from Rs. 2 lakh to 1 lakh.

 People have very little knowledge of option market which is less risky as compared
to futures and I think SEBI should conduct the seminars for option traders.

 Derivatives should be developed in order to keep it at par with other derivative market in
the world. As per the research, we can see that nowadays more number of investors are
showing their interest in derivatives because it includes high return bearing high risk.

 RBI should play a greater role in supporting derivatives. Because nowadays derivatives
market are increasing rapidly and plays a major role in call securities market.

 Derivatives product should even be traded on equity market as maximum potential lies in
future as compared to present and past.












11. BIBLIOGRAPHY
 nseindia.com

 bseindia.com

 sebi.gov.in

 moneycontrol.com

 NISM book on equity derivative certification VIII

 ANNUAL REPORT ON BSE

 ANNUAL REPORT OF NSE

12. QUESTIONNAIRE SURVEY
SUBJECT: INVESTMENT IN EQUITY DERIVATIVE MARKET
Equity derivatives questionnaire survey

Internship research report
* Required
1. Email address *
2. Name of investors/traders *
3. Gender *
Female
Male
4. Kind of investors
or traders.
Business
Salaried person
House wife
Students
Other:
100000-200000
200000-300000
300000-500000
No income
5. Where do u make your

investment * Mark only one oval.
Fixed deposits cash market government bonds

Derivatives commodity market other
6. Objectives of investment in derivative
market * Mark only one oval per row.
Most Somewhat Not Not at all

Natural
preferred preferred preferred preferred
High return
Hedge the risk
More reliable
Safe to invest in derivative
Market
More liquid
7. What are the criteria do you consider while investing

in derivative market Mark only one oval.
Flexibility
Ease in transactions
Availability of differentiate contract
Margin money

8. Give your preference in derivative
market Mark only one oval.
Index future
Stock future
Index option
Stock option
9. What is rate of return

expected Mark only one oval.
5%-10%10%-14%
14%-17%
17%-25%
Above 25%
10. What is your preference in terms of period of investments

in derivative Markey Mark only one oval?
Short term
Long term
Medium term
11. Which type of risk is more concern while investing in

equity derivative market Mark only one oval?
System risk
Legal risk
Counter party default risk
Settlement risk
12. How much of total investment do you

invest derivative Mark only one oval?
10%-30%
30%-50%
50-75%
Above 75%
Less than 10%


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PRN NO.

Project Report Submitted to

In Partial Fulfillment of Requirement for the Award of

Masters of Business Administration

Under the guidance of

Prof. UTTAM SAPATE

MARATHWADA MITRA MANDAL’S INSTITUDE OF

MANAGEMENT EDUCATION RESEARCH & TRAINING

Name & sign of Research

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WHAT IS SEBI AND WHAT IS ITS ROLE?

can be used for passive fund management as in case of Index Funds

BOMBAY STOCK EXCHANGE (BSE)

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Nitin M Rathi (Chairman)

Girish Madhukar Rathi (Managing Director)

Neha Nitin Rathi (Director)

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4. Free Trading Calls-

Derivative is a value of a product derived from an underlying asset.

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REGULATION OF DERIVATIVES TRADING IN INDIA

MILESTONE DEVELOPMENT IN INDIAN DERIVATIVE MARKET

May 25, 2000 SEBI allows exchanges to trade in index futures

June 12, 2000 Trading on Nifty futures commences on the NSE

June4, 2001 Trading for Nifty options commences on the NSE

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November 9, 2001 Trading on Stock futures commences on the NSE

August 29, 2008 Currency derivatives trading commences on the NSE

February 2010 Launch of Currency Futures on additional currency pairs

October 28, 2010 Introduction of European style Stock Options

5.3 FACTORS DRIVING THE GROWTH OF DERIVATIVES

5.4.1 TYPES AND CLASSIFICATION

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OVER THE COUNTER

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5.6 VARIOUS RISK FACED BY THE PARTICIPANTS IN DERIVATIVES

5.7 INTRODUCTION OF INDEX

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 Market capitalization weighted index:

Company Current Market Base Market

Grasim Inds 1,668,791.10 1,654,247.50

Telco 872,686.30 860,018.25

SBI 1,452,587.65 1,465,218.80

Wipro 2,675,613.30 2,669,339.55

Bajaj 660,887.85 662,559.30

Total 7,330,566.20 7,311,383.40

INDEX= 7,330,566.20 *1000= 1002.62

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A forward contract is an agreement to buy or sell an asset on a specified date for a

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iii. FEATURES OF FUTURES CONTRACT