TABEL OF CONTENTS

Page No.

CHAPTER-1 2-6

Introduction

CHAPTER-2 7-

Industry analysis

CHAPTER-3

Company profile

CHAPTER-4

Conceptual framework

CHAPTER-5

Data analysis

CHAPTER-6

Summary, suggestions and conclusion

Bibliography

Annexure

Glossary
CHAPTER – 1

INTRODUCTION

 Need for the study

 Objectives

 Methodology

 Limitations
 INTRODUCTION

Finance is the lifeblood of business. Earlier there were many companies

who use to survive only with their owned capital, but with the passage of time
and the increased competition in the economy the companies started using
borrowed capital, in other words debt capital. And with the increased awareness
among the people to invest and improvements in the economy i.e., stock
markets, financial institutions etc., their development and systematic regulation,
the companies started raising their capital from the primary markets, secondary
markets, over-the-counter market and on-line scrip less trading market.

The primary of new issue market deals with the offer and exchange of
stocks or bonds that have never been previously issued are traded in the
secondary markets, which include the organized stock exchanges and over-the-
counter market. The over-the-counter exchange of India began its operations in
the year 1990 as a second-tier source which permits smaller companies to raise
funds. In addition to these markets, national stock exchange has also started on-
line scrip less trading in India in the year 1994.Due to the increased volatility
and the risk involvement the derivatives market has been developed under
which futures and options have gained more popularity. The project deals with
Shabha securities as a member of National stock exchange, the way it functions
in; respect to futures and options market and also deals with the trading,
clearing and settlement and the regulations of Securities Exchange Board of
India in respect to Futures and Options.

Need for the Study:

 The emergence of the market for derivatives products most notably
forwards, futures and options can be traced back to the willingness of risk-
averse economic agents to guard themselves against uncertainties arising out of
fluctuation in asset prices. The futures and options, most important part of
derivative products facilitates the stock market and the investors in the
following way. Through the use of futures and options, it is possible to partially
or fully transfer price risks by locking-in asset prices.

As instruments for risk management, these generally do not influence the

fluctuations in the underlying asset prices. However, by locking –in-asset
prices, derivative products minimize the impact of fluctuations in asset prices on
the profitability and cash flow situation of risk-averse investors. Derivative
products initially emerged as hedging devices against fluctuations in commodity
prices. In recent year, the market for financial derivatives has grown
tremendously both in terms of variety of instruments available, their complexity
and also turnover.

The following factors have been driving the growth of financial

derivatives: Increased volatility in asset prices in financial markets. Increased
integration of national financial markets with the international markets, Marked
improvements in communication facilities and sharp decline in their costs,
Development of more sophisticated risk management tools, providing economic
agents a wider choice of risk management strategies, 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.

Objectives of the study:

The project is done mainly to study the activities and prospects of the
stock market and to gain knowledge about how the stock broking is done. The
project is done on the activities of one of the member of national stock
exchange i.e., Shabha securities.

The main objectives of the study are:

1. To bring into highlight the concept of on-line trading, clearing and

settlement and regulatory framework of futures and options in Shabha
securities, Guntur.

2. To study the various features of stock exchange and also concentrate on the
activities of Shabha securities, Guntur as a member of national stock
exchange in the secondary market operations.

3. To bring into picture the latest development and procedures of futures

and options and also the benefits the investors and also Shabha securities,
Guntur in terms of revenue from its operations

4. To make an individual investor to understand the importance of futures and

options in Shabha securities, Guntur.

5. To study the advantages of holding futures and options with reference to

Shabha securities, Guntur.

6. To study the risk management in futures and options with reference to

Shabha securities, Guntur.

Methodology:
 The project study is mainly based on both the primary and secondary
data. Major portion of the data is collected through direct interaction with the
officials and some of the theoretical support is also added to this like Journals,
Booklets etc., which provides information with regard to the existing system of
trading and settlement of futures and options. By the explanation of daily
activities done from the officials and the employees, By watching the on-line
trading system, By practically taking part in mock trading and working out with
different trading operations as a part of the project and By attending the classes
conducted by Shabha securities to its staff members.

Limitations

1. The in depth study on trading system is made impossible due to

constraint of time.

2. There were practically many difficulties felt while collecting the primary
data.

3. Most of the investors were not fully aware of the system and were not
clear in their answers.

4. A complex subject certainly cannot be dealt with in depth both in view of

constraint of time and constraint of work.

5. The concept of Futures and Options itself is new to India and the
awareness was comparatively very less.

It is hoped that report would give an overall view of the subject together
with the position of Shabha securities.

CHAPTER- 2
 INDUSTRY PROFILE

 Introduction to Financial Markets

 Capital Market

 Introduction to Derivatives Markets

 Legal Framework

 Securities contract (regulation) Act, 1956

 Securities and exchange Board of India Act, 1972

 Securities Exchange Board of India regulations, 1992

INDUSTRY PROFILE
Financial markets: Finance is the integral part of modern business. Financial
markets refer to the institutional arrangements for dealing in financial assets and
credit instruments of different types, such as currency, cheques, bank deposit
bills, bill of exchange etc. The main functions of the financial markets are: To
facilitate creation and allocation of credit and liquidity, to serve as
intermediaries for mobilization of savings, to provide financial convenience and
to cater to the various credits needs of the business houses.

Types of financial markets: On the basis of credit requirements for short term
and long term purposes, financial markets are divided into two categories. One
is Money market, second one is Capital market.

Money market: Money market provides short term funds and facilitated
borrowing and lending of short term funds. It deals with bills of exchange,
banker’s acceptances, bonds etc., called “Near Money”.

Capital market: A good capital market is an essential pre-requisite for

industrial and commercial development of a country. Credit is generally,
required and supplied on short term and long term basis. The money market
caters to the short term needs only. The long term capital needs are met by the
capital market. Capital market is a central coordinating and directing
mechanism for free and balanced flow of financial resources into the economic
system operating in a country.

The development of a good capital market in a country is dependent upon the

availability of savings, proper organization of its constituent units and the
entrepreneurship qualities of its people. Since independence, the capital market of
India has substantially changed and is improving. The term ‘capital market’ refers to
the institutional arrangements for facilitation the borrowing and lending of long term
funds. In the widest National Stock Exchange it consists of a series of channels
through which the savings of the community are made available for industrial and
commercial enterprises and public authorities.

The Major functions performed by a capital market are: Mobilization of financial

resources on a nation-wide scale, securing the foreign capital and know how to fill up
deficit in the required resources for economic growth at a faster rate, Effective
allocation of the mobilized financial resources, by directing the same to project
yielding highest yield or to the project needed to promote balances economic
development.

Markets for corporate securities: The corporate securities, viz; bonds or debentures,
preferred stock commonly called preference shares and common stock or equity
shares are traded in carefully regulated money markets. The markets for the three
types of corporate securities include: The primary or new issue markets, the secondary
market, over-the –counter market, On-line scrip less trading market.

The following are the three main components of a capital market.

They are:

1. New issue market

2. Stock market
3. financial Institutions

Components of Capital Market

New issue market: The issue market represents the primary market where new

securities, i.e., shares or bonds that have never been previously issued are

offered. Both the new companies and the existing ones can raise capital on the

new issue market. Its prime function is to facilitate the transfer of funds from

the willing investors to the entrepreneurs setting up new corporate enterprises or

going in for expansion, diversification, growth or modernist ion. Besides

helping corporate enterprises in securing their funds, the new issue markets

canalize the saving of individual and others into investment.

Stock market: Stock market represents the secondary market where existing

securities (shares and debentures) are traded. Stock exchanges provide an

organized mechanism for purchase and sale of existing securities.

The investors want liquidity for their investments. The securities which they

hold should easily be sold when they need cash and some who want to invest in

new securities and stock exchanges facilitates both the above functions. Stock

exchange is a body of persons, whether incorporated of not facilitating buying

and selling of securities. Stock exchanges are organized and regulated markets

for various securities issued by corporate sector and other institutions.

 COMPONENTS OF CAPITAL MARKET

Supply of money capital

Individuals New Issue market Individuals

Corporations Corporations

Institutions Stock Exchanges Institutions

Banks Entrepreneurs

Government Financial Government

Institutions

Investors clearing house for Borrowers

Lenders Long-term capital Buyers of

Sellers of Money Capital

Money Capital

(CAPITAL MARKET MECHANISM)

FUNCTIONS OF STOCK EXCHANGE:

The main functions of stock exchanges are: To ensure liquidity of capital, to
provide continuous market for securities, to facilitate evaluation of securities, to
mobilize surplus savings etc.

Segments of Stock Market:

a) Capital Market Segment

b) Derivatives Market Segment
Capital market segment: The capital market system has four types of
market, namely

Normal market: It consists of various book types where in orders are

segregated as regular lot orders, special term orders, negotiated trade orders
and stop loss orders depending on their orders attributes. All orders have to
be of regular lot size or multiples there of.

Limited physical markets: In the limited physical market, both the price
and quantity of both the orders should exactly match for the trade to take
place. This market is currently used by investors having physical securities
that are in the compulsory demat segments.

Albm market: ALBM stands for Automated Lending and Borrowing

Mechanism. This facilitates lending and borrowing of securities. These
orders do not have any special team attribute attached to them.

Auction market: In the Auction market, auctions are initiated by the

exchange on behalf of trading member for settlement related reason.

Derivatives market segment:

Meaning: Derivative is a product whose value is derived from the value of
one or more basic variables, called bases (underlying asset, index or
reference rate) in a contractual manner. The underlying asset can be equity,
forex, commodity or any other asset.

Types of Derivatives: The most commonly used Derivative contracts are

Forwards, Futures and Options. The various Derivative contracts are briefly
discussed as under.

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.

Futures: A Future contract is an agreement between two parties to buy or

sell an asset at a certain time in the future at a certain price. These are
standardized exchange-traded contracts as against forward contracts.

Options: Options are of two types call options and put options. They give
the buyer/seller the right but not the obligation to buy/sell a given quantity of
the underlying asset, at a given price on or before a given future date.

Warrants: Options generally have lives of up to one year, the majority

options are traded having maximum of nine months maturity. Longer-dated
options are called warrants and are generally traded over-the-counter.

Leaps: The acronym leaps means long term equity anticipation securities.
These are options having a maturity of up to three years.

Baskets: Basket options are options on portfolios of underlying asset is

usually a moving average or a basket of assets.
 Functions of derivative market: The derivative market performs a number
of economic functions, they are the prices reflect the perception of market
participants about the future and lead the prices of underlying to the
perceived future level, Helps to transfer risks, Provides higher trading
volumes by increasing the confidence of the investors, Speculative trades
shift to a more controlled environment of derivatives market, It acts as a
catalyst for new entrepreneurial activity and It helps in increasing savings
and investments in the long run. There are 23 stock exchanges in our country
by the end of 1993-94. Out of the 23 stock exchanges two stock exchanges
are considered more important as the volume traded is high they are:
National stock exchange– A catalyst for secondary market reforms, It was
set up in 1995 as a first step in reforming securities through improved
technology and introduction of best practices of management. Bombay stock
exchange – It existed prior to the existence of national stock exchange

Legal Framework for Capital Markets

The Securities and Exchange Board of India provide legislative and

regulatory provisions relevant from the view point of a dealer.

Before 1992 the three principal acts governing the securities market were:-

1. The Capital Issues (Control) Act, 1947.

2. The Companies Act, 1956.
3. The Securities Contracts (Regulation) Act, 1956.

Capital issues (control) act, 1947:

 The act had its origin during the war in 1943 when the objective was to
canalize the resources to support the war effort. The Act was retained with some
modifications as a means of controlling the raising of capital by companies and
to ensure the national resources were channeled into proper lines, i.e., for
desirable purposes, to serve goals and priorities of the government and to
protect the interest of investors. Under the Act any firm wishing to issue
securities had to obtain approval from the central Government, which also
determined the amount, type and price of the issue.

The Capital Issues (Control) Act, 1947 was replaced in May 1992. It
played an important part in the functioning of the Indian capital market for as
many as 45 years since 1947, and its provisions have now become the powers
and functions of the Securities Exchange Board of India. It was administered by
the Controller of Capital Issues in the ministry of Finance, Department of
Economic Affairs. While the Securities Contract (Regulation) Act mainly
regulates the secondary market, the Capital Issues (Control) Act mostly
regulated the primary or new issue market for securities. Indian Companies
were allowed access to International Capital market through issues of American
Depository Receipts and Global Depository Receipts.

Objectives of the Act: To protect the investing public, To ensure that the capital
structure of companies was sound and in the public interest, To regulate the
volume, terms, and conditions for Foreign Investment.
Securities Contracts (Regulation) Act, 1956: The previously self-regulated

stock exchanges were brought under statutory Dregulations the passage of the

Securities Contracts (Regulation) Act which provides for direct and indirect

control of virtually all aspects of securities trading and the running of stock

exchanges. This gives central Government regulatory jurisdiction over. Stock

Exchanges, through a process of recognition and continued supervision,

Contracts in securities and Listing of securities on stock exchanges. As a

condition of recognition, a stock exchange complies with conditions prescribed

by central specified recognized stock exchange. The stock exchange determine

there own listing regulations which have to conform to the minimum listing

criteria set out in the rules.

The Securities Contracts (Regulation) Act has been amended further in

December 1999 to expand the definition of securities to include derivatives so

that the whole regulatory frame work governing trading securities could apply

to trading of derivatives also.

Objectives of the Act: To regulate the working of stock exchanges or secondary

market with a view to prevent the undesirable transactions or speculations in

securities and To build up the strong and healthy investment market in which

the public could invest with confidence.

Companies Act 1956: The Companies Act (CA) covers the financial and non-

financial aspects of the working of the corporate sector. It aims at developing an

integrated relationship between the promoters, investors and company

managements. It seeks to protect interests of shareholders, and to promote their

effective participation and control of companies. The Companies Act is

administered by the Department of Company Affairs and the Company Law

Board of the Ministry, Justice and Company Affairs of the Union Government.

It deals with issue, allotment and transfer of securities and various aspects

relating to company management. It provides for standard of disclosure in

public issues of capital, particularly in the fields of company management and

projects, information about the other listed companies under the same

management and management perception of risk factors.

Objectives of the Act: To regulate the issue of capital and matters incidental

thereto, viz., content and format of prospectus, to regulate the capital structure

of the companies and to regulate the procedure for the allotment of shares and

issue of share certificates.

Securities Exchange Board of India Act, 1992:

To ensure effective regulation of the market, Securities Exchange Board

of India Act, 1992 was enacted to empower Securities Exchange Board of India
with statutory powers for protecting the interests of investors in securities,
Promoting the development of securities market and regulating the securities
market. Its regulatory jurisdiction extends over corporate in the issue of capital
and transfer of securities, in addition to all intermediaries and persons
associated with securities market. Securities Exchange Board of India can
specify the protection of investors in disclosure required for the protection on
investors in respect of issues; can issue directions of all intermediaries
associated with the securities market in the interests of investors and can
conduct inquiries, audits and inspections and adjudicate offences under the Act.
Enactment of Securities Exchange Board of India Act was an attempt towards
integrated regulation of the securities market. Securities Exchange Board of
India was given concurrent/delegated powers for various provisions under the
companies Act and Securities Contract Regulation Act.

Depositories Act, 1996: The Depositories Act, 1996 was passed to provide for
the establishment of depositories in securities with the objective of ensuring free
transferability of securities with speed, accuracy and security by De-
materializing the securities in the depository mode and providing for
maintenance of ownership records in a book entry from. In order to streamline
both the stages of settlement process, the act envisages transfer of ownership in
securities electronically by book entry without making the securities move from
person to person the transferred and other procedural requirement under the
companies act.

Regulations:
The responsibility for regulating the securities market is shared by

1. DEA (Department of Economic Affairs)

2. DCA (Department of Company Affairs)
3. RBI (Reserve Bank of India)
4. SEBI (Securities and Exchange Board of India)
5. SAT (Securities Appellate Tribunal)

Securities Exchange Board of India also provides rules and regulations for:-
Prohibition of certain dealings in securities, Prohibition against market
manipulation, Prohibition of misleading statements to induce sale or purchase
securities, Investigation into alleged contravention, Duties of the person in
respect of whom an investigation has been ordered and Investigation officer

Government has issued notifications providing that the contracts for

sale and purchase of government securities, gold-related securities, money
market securities and securities derive from these securities and ready forward
contracts indebt securities shall be regulated by Reserve Bank of India such
contracts, if executed on stock exchanges, shall however, be regulated by
Securities Exchange Board of India in a manner that is consistent with the
guidelines issued by Reserve Bank of India.

Regulatory frame work for derivatives market: The trading of derivatives is

governed by the provisions contained in the Securities Contract (Regulation)
Act, the Securities Exchange Board of India Act, the rules and regulations
framed there under are rules and bye-laws for stock exchanges.

Securities Contracts (Regulation) Act, 1956: Securities Contracts (Regulation)

Act aims at preventing undesirable transactions in securities by regulating the
business of dealing there in and by providing for certain other matters connected
there with. This is the principal Act, which governs the trading of securities in
India.

The term “securities” has been defined in the Securities Contracts

(Regulation) Act, as per section 2(h), the securities include: Shares, scrips,
stocks, bonds, debentures, stock or other marketable securities of a like nature
in or of any incorporated company or other body corporate, Derivative, Units or
any other instrument issued by any collective investment scheme to the
investors in such schemes,

Government Securities, Such other instrument as may be declared by the central

Government to be Securities and Rights or interests in securities.

Derivative is defined to include: A security derived from a debt instrument,

shares and loan whether secured or National Stock Exchange cured, 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 not withstanding 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 and
Settled on the clearing house of the recognized stock exchanges, in accordance
with the rules and bye-laws of such stock exchanges

Securities and Exchange Board of India Act, 1992: Securities Exchange Board

of India Act, 1992 provides for establishment of Securities and Exchange Board
of India (SEBI) with statutory power for Protecting the interests of investors in

securities, promoting the development of the securities market and regulating

the securities market. Its regulatory jurisdiction extends over corporate in the

issue of capital and transfer of securities, in addition to all intermediaries and

person associated with securities market. Securities Exchange Board of India

has been obliged to perform the before said functions by such measures as lit

thinks fit. In particular it has power for:

1. Regulating the business stock exchanges and any other securities

markets.
2. Registering and regulating the working of stock brokers, sub-brokers etc.
3. Promoting and regulating self-regulatory organization.
4. Calling for information from, undertaking inspection, conducting inquires
and audits of the stock exchange, mutual funds and other person associated
with the securities market and intermediaries and self-regulatory
organization in the securities market.
5. Performing such functions and exercising according to Securities
Contract (Regulation) Act, 1956 as may be delegated to it by the Central
Government.

Securities Exchange Board of India (Brokers and Sub-brokers) Regulation,

1992
Brokers: According to section 2(e) of the Securities Exchange Board of India

(Stock brokers and Sub-brokers) Rules, 1992, a stock broker means a member

of a recognized stock exchange and a stock broker must hold a certificate

granted by Securities Exchange Board of India. A stock broker applies for

registration to Securities Exchange Board of India through a stock exchange of

stock exchanges of which he or she is admitted as a member, Securities

Exchange Board of India grants a certificate to a stockbroker subject to the

following condition.

He holds the membership of any stock exchange, He shall abide by the

rules, regulations and bye-laws of the stock exchange or stock exchange to

which he is a member, In case of any change in the status and constitution he

shall obtain prior permission of Securities Exchange Board of India to continue

to buy, sell or deal in securities in any stock exchange, He shall pay the amount

of fees for registration in the prescribed manner; and He shall take adequate

steps for redresses of grievance of the investors within one month of the date of

the receipt of the complaint and keep Securities Exchange Board of India

informed about the nature and other particulars of the complaints.

 Securities Exchange Board of India shall take into account for considering

the grant of a certificate all matters relating to buying, selling or dealing in

securities and in particular the following namely whether the stock broker. Is

eligible to be admitted as a member of stock exchange, Has the necessary

infrastructure like adequate office space, equipment and manpower to

effectively discharge his activities, Has any past experience in the business of

buying, selling or dealing in securities, Is subjected to disciplinary proceedings

under the rules, regulations and bye-law of a stock exchange with respect to his

business as a stock broker involving either himself or any of his partners,

directors or employees.

Sub-broker: A Sub-broker is a person who intermediates between investors

and stock brokers. He acts on behalf of a stock broker as an agent or otherwise

for assisting the investors for buying, selling or dealing in securities through

such stock broker. But he or she must hold a certificate of registration granted

by Securities Exchange Board of India. A sub-broker may take the form of a

sole proprietor ship, a partnership firm or a company.

Securities Exchange Board of India may grant a certificate to a sub-broker,

subject to the conditions that:

1. He shall pay the fees in the prescribed manner.

2. He shall take adequate steps for redressal of grievance of the investors
within one month of the date of receipt of the complaint and keep SEBI
informed about the number, nature and other particulars of the complaints
received.
3. In case of any change in the status and constitution, the sub-broker shall
obtain prior permission of Securities Exchange Board of India to continue
to buy, sell or deal in securities in any stock exchange and
4. He is authorized in writing by a stock-brokers being a member of a stock
exchange for affiliating himself in buying, selling or dealing in securities.
In case of company, partnership and sole proprietorship firm, the
directors, the partners and the individual shall comply with the following
requirements.

Regulation for Derivatives Trading

Securities Exchange Board of India set up a 24 member committee under

the chairmanship of Dr.L.C.Gupta to develop the appropriate regulatory
framework for derivatives trading in India. Securities Exchange Board of India
approved the recommendations of the committee and also approved the
“Suggestive bye-laws” recommends. The major recommendations of L.C.Gupta
committee are given as Annexure I.
 The amendment of the Securities Contracts (Regulation) Act to include
derivatives within the ambit of “Securities” in the Securities Contracts
(Regulation) Act made trading in derivatives possible within the framework of
that Act.

1. Any exchange fulfilling the eligibility criteria as prescribed in the L. C.

Gupta committee report may apply to Securities Exchange Board of India
for grant of recognition under section 4 of the Securities Contracts
(Regulation) Act, 1956 to start trading derivatives. The derivatives
exchange/segment should have a separate governing council and
representation of trading/clearing members shall be limited to maximum
of 40% of the total members of the governing council.

2. The exchange shall have minimum 50 members.

3. The members of existing segment of the exchange will not automatically

become the members of derivative segment need to fulfill the eligibility
conditions as laid down by the L. C. Gupta committee.

4. The clearing and settlement of derivatives trades shall be through a

Securities Exchange Board of India approved clearing corporation house.
Clearing corporation/ house complying with the eligibility conditions as
laid down by the committee have to apply to Securities Exchange Board
of India for grant of approval.

5. Derivatives brokers/dealers and clearing members are required to seek

registration from Securities Exchange Board of India. This is in addition
 to their registration as brokers of existing stock exchanges. The minimum
net worth for clearing members of the derivatives clearing
corporation/house shall be Rs. 300 lakhs. The net worth of the member
shall be computed as follows.
 Capital + Free Reserves
 Less non – allowable assets Viz.,

a) Fixed Assets
b) Pledged Securities
c) Members Card
d) Non-allowable
e) Bad Deliveries
f) Doubtful debts and advances
g) Prepaid ExpeNational Stock Exchanges
h) Intangible Assets
i) 30% Marketable Securities

6. The minimum contract value shall not be less than Rs. 2 lakhs.
Exchanges should also submit also submit details of the futures contract
they propose to introduce.

7. The initial margin requirement, exposure limits linked to capital

adequacy and margin demands related to the risk of loss on the position
shall be prescribed by Securities Exchange Board of India / Exchange
from time to time.
8. The L. C. Gupta committee requires strict enforcement of “know your

customer” rule and requires that every client shall be registered with the

derivatives broker. The members of the derivatives segment are also

required to make their client aware of the risks involved in derivatives

trading by issuing to the client the risk disclosure document and obtain a

copy of the same duly signed by the client.

9. The trading members are required to have qualified approved user and

sales person who have passed a certification programme approved by

Securities Exchange Board of India.

Regulation for Clearing and Settlement: The L. C. Gupta committee has

recommended that the clearing corporation must perform full novation, i.e.,

the clearing corporation should interpose itself between both legs of every

trade, becoming the legal counter party to both or alternatively should

provide an unconditional guarantee for settlement of all trades, The clearing

corporation should ensure that none of the Board members has trading

interests, The definition of net-worth as prescribed by Securities Exchange

Board of India needs to be incorporated in the application/regulations of the

clearing corporation.
 The regulations relating to arbitration need to be incorporated in the

clearing corporation regulations, Specific provision/chapter relating to

declaration of default must be incorporated by the clearing corporation in its

regulations. The regulations relating to investor protection fund for the

derivatives market must be included in the clearing corporation

application/regulations; the clearing member shall collect margins from his

constituents (clients/trading members). He shall clear and settle deals in

derivative contracts on behalf of the constituents only on the receipt of such

minimum margin, Exposure limits based on the value at concept will be used

and the exposure limits will be continuously monitored. Clearing members

will be subject to exposure limits not exceeding 20 times their base capital.

The exposure limit shall be within the limits prescribed by Securities

Exchange Board of India from time to time, the clearing corporation must

lay down a procedure for periodic review of the net worth of its members.

The clearing corporation must inform Securities Exchange Board of India

how it proposes to monitor the exposure of its members in the underlying

market and Any changes in the bye-laws, rules or regulations which are

covered under the “suggestive bye-laws for regulations and control of

trading and settlement of derivatives contracts" would require prior approval

of Securities Exchange Board of India.

 CHAPTER – 3

COMPANY PROFILE
SHABHA SECURITIES

 Historical back ground of the organization

 Organizational structure
 Organizational activities
 COMPANY PROFILE

Historical background of the company: Shabha Securities is incorporated

on 22nd February 2005 and obtained the trading membership of the largest and

prestigious National Stock Exchange of India Limited on its capital market

segment. The first Very Small Aperture Terminals (VSAT) for its trading

workstation (TWS) at Hyderabad was installed in 1995 and the second at

Guntur in April 2006.

Since its inception the service of this organization is prompt and there is

not a single instance of payout of funds /deliveries delay to any client, from the

beginning the firm is committed to continue the same service in the future also.

Company’s basic principal is total commitment in service to all clients

with all transparency and insure that it is their sacred policy not to indulge in

own trading, therefore there is no self motives nor necessity to cancel or delay

anything. Every branch is fully equipped and independently connected to the

National Stock Exchange hub at Mumbai, every branch is having 2 to 5 trading

terminals connected to Very Small Aperture Terminals. The company’s

performance is no parallel on National Stock Exchange.

Structure of the Organization:

The chairman is the head of the organization also called as the Managing

Director (MD). Under him there are 2 Executive Directors for Systems &

Inspection and for Operations. Among all the departments the Inspection

department is very important for the transparency of the Organization. Under

the Director of Operations we have senior manager (operations) Senior Manager

(Systems) and Senior Manager (Finance & Accounts). The different branches

and franchises of the Shabha Securities report directly to the head office and

any activity taken up by these should be brought to the notice of Shabha

Securities .Shabha Securities is one of the members of National Stock Exchange

and a Depository Participant of (NSCCL). Shabha Securities is an organization

with varied functional departments. The organizations that keep it self engaged

all the times.

ORGANISATION STRUCTURE
 CHAIRMAN

EXECUTIVE EXECUTIVE
DIRECTOR
DIRECTOR
DIRECTOR (Operations)
(Surveillance)

SENIOR MANAGER
SENIOR MANAGER
(Operations) INSPECTION SENIOR MANAGER
(Finance & Accounts)

MANAGER
DELIVERIES SOFTWARE HARDWARE TRADING
DP (Operations)
 ORGANISATION STRUCTURE

DIRECTOR&OPERATIONS OF SHABHA SECURITIES

Mr.D. Satyanarayana Chairman & Managing Director

Mr. Manohar Director of Operations

Mr. Umamahaswara rao Director of Operations

Mr. Narash Director of Operations

PERSONNEL DEPARTMENT

Planning: It involves planning of human resources requirements, recruitment,

selection, training etc., it also involves forecasting of personnel needs, changing
values, attitudes and behaviour of employees. The directors of the company
usually undertake this activity.

Directing: In this company the personnel manager co-ordinates various

managers at different levels as the personnel functions are concerned. The
willing and effective co-operation of employees for the attainment of
organizational goals is possible through proper directions.

Controlling: In Shabha Securities Limited the controlling is done by the top

management, in this aspect they do auditing training programmes, directing
morale surveys, conducting separate interviews are some of the functions of the
top management in controlling.
Recruitment: It is the process of searching for prospective employees and
stimulating them to apply for jobs in the organization. In Shabha Securities, if
they want any person, they will give notification in newspaper in order to
stimulate the eligible persons to apply for that job.

Employee relation: The Company has recruited required personnel and trained
them for operations of the company at all branches and to maintain cordial
relations between the management and the employees.

Employee service: All the employees of the company from top to bottom,
dedicate their sincere services with co-operations, co-ordination, hard work and
team spirit which result in successful performance of Shabha Securities which
helped Shabha Securities become one of the best stock broking firm in India.

Selection: It is the process of ascertaining the qualifications, experience, skill,

knowledge etc., of an applicant with view to appraise his/her suitability to a job.
The top management in this organization shall do the selection. They send the
letters of appointment or rejection to the board of directors.

Placement: It is the process of assigning the selected candidates with most

suitable job. In Shabha Securities the directors do the selection of the candidates
for placement. The placement may be in the head office and in the branches of
Shabha Securities which are in different places.

Training: The selected candidates will be shown placement in one of the

branches of Shabha Securities and are gives proper training. The trainers are the
most experienced persons.
Promotions and Transfers: In Shabha Securities the personnel management
provides promotion to the skilled and eligible persons. Transfers of persons are
more in this company but they will be an increase in the salary of the persons
who are transferred to other branches.

Activities / Services of the organization: Shabha Securities provides different

services. These services are provided through various departments. They are

1. Trading (systems) Department

2. Back Office
3. Inspection Department
4. Accounts Department
5. Deliveries Department
6. Depository Participant
Trading Department:

This area mainly deals with online trading facility which is received
through Very Small Aperture Terminals into the server and finally into Hub
going to the trading system. Interacting with the clients, admitting the clients or
Investors or sub-brokers and helping out in opening the accounts and facilitating
them with the direct interaction with the online trading facility etc., are the other
works done by the Trading department. The main aspect is concerned with the
involvement of investors or clients or sub-brokers to participate in trading.

A particular day’s trading on the different scrip’s can be viewed online

which provided by the National Exchange For Automated Trading software by
National Stock Exchange and the original positions are determined by the end
of the trading day, i.e. at 3:30 p.m where itself a backup is saved and that
particular day’s trading position of each client is determined by the back office
process made by the depositary participants. So trading department plays a very
important role in a member of National Stock Exchange like Shabha Securities
to provide updated information of a day’s trading activities.
 ACTIVITIES OF SHABHA SECURITIES

Shabha Securities

Trading Settlement
Facilities of Trades

Funds Securities

Pay in Pay Out Pay In Pay Out

Securities
Loss
brought
by clients

Funds

Internal
NSE
Funds

Pay out to
Clients
Trading and Settlement: One of the basic services provided by Shabha
Securities Limited as a member of National Stock Exchange and National
Securities Clearing Corporation Limited (NSCCL) is to facilitate transfer of
securities from one Demat account to other on the instruction of the account
holder. In National Securities Clearing Corporation Limited (NSCCL)
depository system both transferor and the transferee have to give instructions to
their DP’s for delivering and receiving of securities. However, the Transferee
can give “Standing Instruction” (SI) to its Depository Receipts for receiving in
securities. If Standing Instruction is not given separate instructions each time
the securities have to be received.

Transfers of securities from one demat account to the other may be done for
any of the following purposes: - Transfer due to a transaction done on a person
to person basis (i.e. An ‘off market’ trade), Transfer arising out of a transaction
done on a stock exchange, Transfer arising out of a transmission and account
closure and a beneficiary account can be debited only if the beneficial owner
has given ‘Delivery Instruction’.

Accounts Department: The function of accounts department is to maintain a

record of all the pay in, pay our, cash received for demat account opening,
account closing, transaction charges for operating the account. Records of
expeNational Stock Exchanges incurred and incomes earned from business are
also maintained basing on which every year an Annual Report is prepared to
which the latest data is annexed in its last chapter.
Deliveries Department: Deliveries department acts as an intermediary between
stock exchange and clients and so proper knowledge is needed without which
the results may be hazardous. Proper records of all inward and outward stocks
should be maintained failing which there may be improper deliveries leading to
penalties and disagreements with clients.

In the secondary market operations when shares and securities are bought
or sold, the change of hands of the possession of there shares or securities from
seller to the buyer will discharge the delivery obligation of the seller. In case of
Bombay Stock Exchange the clearing house is Bank of India Share Holdings
Limited (BOISL) and in case of National Stock Exchange the National
Securities Clearing Corporation Limited (NSCCL) is extended the responsibility
of settling the deliveries obligation of sellers and buyers dealt in a given settling
the deliveries obligation of sellers and buyers dealt in a given settlement period.

Operations of Depository Participants:-

I. The first step in any Depository Participants is the account opening

after the fulfillment of various formalities required to be satisfied by the
Depository Participants.
II. Once the account is opened share get credited in 2 ways i.e.,
a. By dematerializing the physical shares in the name of the investor and
b. When the share dealt in the demat form are bought from the secondary
market.

And now the process of setting the selling and buying obligation takes
place through the Demat scrips issue of delivery instructions to their respective
Depository Participants and on execution automatically the bought shares get
credited to his account and sold shares get debited.
 SEBI

S to c k
D e p o s ito r ie s
E xcha ng e

BSE NSE NSCCL CSDL

C lie n ts

S to c k S to c k
B ro k e rs B ro k e rs

S u b -b r o k e r s In v e s to r s

In v e s to r s
 CHAPTER – 4

CONCEPTUAL FRAME WORK

 Introduction to futures

 Introduction to options

 Statistical Techniques

 Pay off for futures and options

 CONCEPTUAL FRAME WORK
Introduction to Futures and Options:

Forward Contracts: A Forward contract is an agreement to buy or sell an

asset on an agreed date for an agreed price. One of the parties to the contract
assumes a long position agrees to buy the underlying asset on an agreed future
date for a certain agreed price. The other party assumes a short position and
agrees to sell the asset on the same date for the same price. The contract details
like delivery date, price and quantity are negotiated bilaterally by the parties to
the contract. These contracts are normally traded outside the exchanges.

Limitations of Forward Markets: Though Forward contracts are very

useful in hedging and speculations, forward markets world-wide are afflicted by
several problems are Lack of centralization of trading, Liquidity and Counter
party risk.

It is the limitations of the forward market which lead to the introduction of

futures and options market.

Introduction to Futures:

Futures and options are now actively traded on many exchanges and
futures markets were designed to solve the problems of forward markets. A
future contract is an agreement between two parties to buy or sell an asset at a
certain time in the future at a certain price. But unlike forward contracts, the
futures contracts are standardized and exchange traded. To facilitate liquidity in
the futures contract, the exchange specifies certain standard underlying
instrument, a standard quantity and quality of the underlying instrument that can
be delivered (or which can be used for reference purposes in settlement) and a
standard timing of such settlement.
 A futures contract may be offset prior to maturity by entering into an
equal and opposite transaction. More than 99% futures transactions are offset
this way.

The standardized items in a futures contract are: Quantity of the underlying,

Quality of the underlying, the date and the month of delivery, the units of price
quotation and minimum price change and Location of settlement.

Futures Terminology: The following terms are used in the futures market.

Spot Price: The price at an asset trades in the spot market.

Futures Prices: The price at the future contract trades in the futures market.

Contract Cycle: The period over a contract trades. The index futures contracts
on the National Stock Exchange have on month, two months and three months
expiry cycles which expire on the last Thursday of every month. On the Friday
following the last Thursday, a new contract having a three-month expiry is
introduced for trading.

Expiry Date: It is the date specified in the futures contract. This is the last day
on which the contract will be traded, at the end of which it ceases to exist.

Contract Size: The amount of an asset, which has to be delivered less than one
contract. For instance, the contract size on National Stock Exchange’s future
market is 200 Nifties.

Basis: In the context of financial futures, basis can be defined as the futures
price minus the spot price. There will be a different basis for each delivery
month for each contract. In a normal market, basis will be positive. This reflects
that future prices normally exceed spot prices.
Cost of Carry: This shows the relationship between futures prices and spot
prices. This measures the storage cost plus the interest that is paid to finance the
asset less the income earned on the asset.

Initial Margin: The amount that must be deposited in the margin account at the
time of entering futures contract for the first time is known as initial margin.

Marking-to-Market: In the future market, at the end of each trading day, the
margin account is adjusted to reflect the investor’s gain or loss depending upon
the futures closing price which is known as marking-to market.

Maintaince Margin: This is some what lower than the initial margin. And is
said to ensure that the balance in the margin account never become negative. If
the balance in the margin account falls below the maintenance margin, the
investor receives a margin call and is supposed to lift up the margin account to
the required margin level before trading commences on the next day.

Introduction to Options:

Options are fundamentally different from forward and future contracts.

An option gives the holder of the option the right to do something and however
the holder does not have to exercise this right. In contrast, in a forward or
futures contract, the two parties have committed them selves to perform the
contract where it costs nothing (except margin requirements) to enter into a
futures contract, the purchase of an option requires an up-front payment.

History of Options: Although options have existed for a long time, they were
traded Over The Counter, without much knowledge of valuation, but today
exchange trade options are actively traded on stocks, stock indexes, foreign
currencies and future contracts.
 The first trading in options began in Europe and United State as early as
the 18th century. It was in the early 1900’s that a group of firms were set up
known as put & call Brokers and Dealers Association with the aim of providing
a mechanism for bringing buyers and sellers together to buy and sell options
and if no seller could be found, the firm would undertake to write the options
itself in return for a price. But however it suffered from some deficiencies. In
1973, Black, Merton and Scholes invented the famed Black Scholes formula
and since then the market for options developed rapidly form early 80’s and
since then the daily value of shares traded started increasing.

Options Terminology:

The following terms are used in the options market.

Index Option: These options have the index has the underlying. Some options
are European while others are American. Like index futures contracts, index
options contracts are also cash settled.

Stock Options: Stock options are options on individual stock. Options currently
trade on 500 stocks in the United States. A contract gives the holder the right to
buy or cell shares at the specified price.

Buyer of an Option: The buyer of an option is the one who by paying the
option premium buys the right but not the obligation to exercise his option on
the seller/writer.

Writer of an Option: The writer of a call/put option is the one who receives the
option premium and is here by obliged to sell/buy the asset if he buyer exercises
on him.
There are two basic type of options i.e., call options and put options.

Call Option: A call option gives the holder the right but not the obligation to
buy an asset by a certain date for a certain price.

Put Option: A put option gives the holder the right but not the obligation to sell
an asset on a certain date for a certain price.

Option Price: Option price is the price which the option buyer pays to the
option seller.

Expiration Date: The date specified in options contract is known as the

expiration date, the exercise date, the strike date or the maturity.

Strike Price: The price specified in the options that can be exercised at any time
up to the expiration date. It is widely used.

American Options: American options are options that can be exercised at any
time up to the expiration date.

European Options: European options are options that can be exercised only on
the expiration date itself.

In-The-Money Option: An In-The-Money (ITM) option is an option that

would lead to the positive cash flow to the holder. A call option is said to be In-
The-Money when current index stands at a level higher than the strike price. In
the case of put, the put is In-the-money if the index is below the strike price.

At-The-Money Option: An At-The-Money (ATM) option is an option that

would lead to zero cash flow it was exercised immediately. An option on the
index is At-The-Money when the current index equal to the strike price.
Out-of-the-money Option: An Out-of-The-Money (OTM) option is an option
that would lead to negative cash flows to the holder. A call option on the index
is Out-of-The-Money when the current index stands at a level, which is less
than the strike price. In the case of put, the put is Out-of-The-Money if the
index is above the strike price.

Intrinsic Value: The option premium can be broken down into two components
intrinsic value and time value. The intrinsic value of a call is the amount the
option is In-The-Money, if it is In-The-Money, if the call is Out-of-The-Money
then its intrinsic value is zero.

Time Value of an Option: Time value of an option is the difference between its
premium and its intrinsic value. A call that is Out-of-The-Money has only time
value. Usually, the maximum time values exist when the option is At-The-
Money the longer time to expiration the greater is a call’s time value all else
equal. At expiration a call should have no time value.

Futures and Options:

When would one use options instead of futures? At a practical level, the option
buyer faces an interesting situation. He pays for the option in full at the time it is
purchased, after this he only has an upside. There is possibility of generating any
further losses to him (other than the funds already paid for options). Where as in
futures, it is free to enter into, but can generate very large losses. This makes options
very attractive to the market participants who cannot put time to closely monitor their
future positions. Buying put options is buying insurance as it reimburses the full
extent to which Nifty drops below the strike price of the put option. This is attractive
to many people and mutual funds creating “guaranteed return products”. Selling put
options is selling insurance, so any one who feels like earning revenues by selling
insurance can set himself up to do so on the index options market.
 Generally, options offer “nonlinear pay offs” where futures offers only
“linear pay off”. By combining futures and option, a wide variety of innovative
and useful pay off structures can be created.

Index Derivatives: Index derivatives are derivative contracts, which derive

their value from an underlying index. The two most popular index derivatives
are index futures and index options. Index derivatives have become very
popular worldwide. And these index derivatives are also traded as scrips.

Statistical Techniques Used to Calculate Market Index Pricing Futures and

Options.

Impact Cost: Market impact cost is a measure of the liquidity of the market. It
reflects the costs faced when actually trading an index. For a stock to qualify for
possible inclusion into the Nifty, it has to have market impact cost of below
1.5% when doing Nifty trades off half a crore rupees. The market impact cost
on a trade of Rs.3 million of the full nifty works out to be about 0.2%. This
means that if Nifty is at 1000, a buy order goes through at 1002,i.e.
1000+(1000*0.002) and sell order gets 998, i.e. 1000-(1000*0.002).

Price Weighted Index Calculation: In the example below can see that Grasim
Inds and Telco have a similar weightage irrespective of the number of
outstanding shares. In a price weighted index, a small capitalization firm had a
high stock price but relatively few outstanding shares. In the present example
the base index = 1000 and the index value works out to be 1049.56.

Index = (2970.20/2829.75)*1000=1049.56
Company Share price at time 0 (Rs.) Share price at time 1(Rs.)
Grasim inds 351.55 340.50
Telco 329.10 350.40
SBI 274.60 280.40
Wipro 1335.25 1428.75
Bajaj 539.25 570.25
Total 2829.75 2970.20

Equally Weighted Index: In an equally weighted index all the components have
similar weightage irrespective of their price or their market capitalization. The
above table gives an example of how an equally weighted index is calculated. In
the above table we can see that Grasim Inds and Wipro have a similar
weightage irrespective of their share price and number of outstanding shares. In
the present example the base index = 1000 and the index value works out to be
1036.21.

340.50 350.30 280.40 1428.75 570.25

Index = 351.75 329.10 274.60 1335.25 539.25 * 1000 =1036.21
5

Market Capitalization Weighted Index Calculation: 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. In the market capitalization weighted method.

Current market capitalization

Index=
Base market capitalization

Where:
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 data.

In the example below we can see that each stop affects the index value in
proportion to the market value of all outstanding shares. In the present example,
the base index = 1000 and the index value works out to be 1002.60.

Index = (7330566.20/7311383)*1000 = 1002.62

Company Current Market Capitalization Base Market Capitalization

(Rs.Lakh) (Rs.Lakh)

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

The Cost of Carry Model: We use fair value calculation of futures to decide the
no-arbitrage limits on the price of a futures contract. This is the basis for the
cost-of-carry model where the price of the contract is defined as:

F=S+C
Where
F= Future price
S= Spot price
C=Holding costs or carry costs

This can be also expressed as

F = S (1+r) T
Where:
 R- Cost of financing
T-Time till expiration
If F <S (1+r) T or F>S (1+r) T, arbitrage opportunities would exist. Whenever the
futures price moves away from the fair value, there would be chances for
arbitrage. At times the holding cost is the cost of financing plus cost of storage
and insurance purchased etc. In the case of equity futures, the holding cost is the
cost of financing minus the divided returns.

Example: Let us take an example of a futures contract on a commodity and

work out the price of the contract. The spot price of silver is Rs. 7000/kg. If the
cost of financing is 15% annually, what should be the futures price of 100gms
of silver one month down the line?

Ans: From the discussion above we know that the futures price is nothing but
the spot price plus the cost-of-carry. Let us try to work out the components of
the cost-of-carry model.

1. What is the spot price of the silver? The spot price of silver,
S = Rs.7000/kg.
2. What is the cost of financing for a month?( 1 + 0.15)30/365
3. What are the holding costs? Let us assume that the storage cost =0.
In this case the fair value of the futures price, works out to be = Rs.708

F=S (1+r) T+ C = 700(1.15)30/365 = 708.

Black-Scholes Formula: Intuition would tell us that the spot price of the
underlying, exercise price, risk free interest rate, volatility of the underlying,
time to expiration and dividends on the underlying (stock or index) should
affect the option price. Before Black and Scholes came up with their option
pricing model, there was a widespread belief that the expected growth of the
underlying ought to affect the option price. Black and Scholes demonstrate that
this is not true.

Black and Scholes start by specifying a simple and well known equation
that models the way in which stock prices fluctuate. This equation called
Geometric Brownian Motion implies that stock returns will have a long normal
distribution meaning that the logarithm of the stock’s return will follow the
normal distribution. Black and Scholes then propose that the option’s price is
determined by only two variables that are allowed to change, time and the
underlying stock price. The other factors – the volatility, the exercise price and
the risk-free rate do affect the option’s price but they are not allowed to change.

where

and
 The Black/Scholes equation is done in continuous time. This requires
continuous compounding. The ‘r’ that figures in this is in (1+r). Example if
the interest rate per annum is 12%, you need to use in 1.12 or 0.1133, which
is the continuously compounded equivalent of 12% per annum. N ( ) is the
cumulative normal distribution. N (d1) is called the delta of the option which
is a measure of change in option price with respect to change in the price of
the underlying asset. Sigma a measure of volatility is the annualized standard
deviation of continuously compounded returns on the underlying. When
daily stigmas are given, they need to be converted into annualized sigma.

On a average there are 250 trading days in a year.

X is the exercise price, S the spot price and T the time to expiration
measured in years.

Pay Off: A payoff is the likely profit/loss that would accrue at a market
participant with change in the price of the underlying asset.

Payoff for Futures: Futures contracts have linear pay off. It means that the
losses as well as profits for the buyer and the seller of a futures contract are
unlimited.
Payoff for Buyer of Futures:

Long Futures: The pay off for a person who buys a futures contract is similar
to the payoff a person who holds an asset. He has a potentially unlimited upside
as well as a potentially unlimited downside.

Proft

1320

Loss

The figure shows the profit/losses for a long futures position. The
investor bought futures when the index was at 1320. If the index goes up, his
futures position starts making profit. If the index falls, his futures position stars
showing losses.

In the case of a speculator who buys a two-month Nifty index futures

contract. When the index moves up, the buyer makes profits and if it moves
down it starts making losses.
Pay Off for Seller of Futures:

Short Futures: The payoff for a person who sells a future contract has a
potentially unlimited upside as well as a potentially unlimited down side.

Profit

1320

Loss

The investor sold futures when the nifty was at 1320. If the index goes
down the short futures position start making profits, and when the index goes
up, it starts making losses.

Option Pay-Offs: The optional characteristic of options results in a non-linear

payoff for options. In simple words, it means that the losses for the buyer of an
option are limited; however the profits are potentially unlimited. For a writer,
the payoff is exactly the opposite. His profits are limited to the option premium;
however his losses are potentially unlimited.

These non-linear payoffs are fascinating as they lend themselves to be

used to generate various payoffs buy using combinations of options and the
underlying.
Payoff Profile of Buyer of Asset:

Long Asset: In this basic position, an investor buys the underlying asset, Nifty
for instance, for 1200, and sells it at a future date at an unknown price, SP (Spot
Price). Once it is purchased, the investor is said to be “long” the asset.

Profit

+60..........................................................................

1160 1220 1280

Nifty

Loss -60 .......................

The above figure shows the profit/loses from a long position on the index.
An investor bought the index at 1220. If the index goes up, he profits, if the
index falls he looses.
Payoff Profile for Seller of Asset:

Short Asset: In this basic position, an investor shorts the underlying asset. Nifty
for instance, for 1220, and buys it back at a future date at an unknown price,
Spot price. Once it is sold, an investor is said to be “short” the asset.

Profit

+60

1160 1220 1280

Nifty

Loss -60

The above figure shows the profit/losses from short positions on the
index. An investor sold the index at 1220. If the index falls, he profits, if the
index raises he losses.
Payoff Profile for Buyer of Call Options:

Long Call: A call option gives right to the buyer to buy the underlying asset at
the strike price specified in the option. The profit/losses that the buyer makes on
the option depend on the spot price of the underlying. If upon expiration, the
spot price exceeds the strike price, he makes a profit. Higher the spot price more
is the profit he makes. If the spot price of the underlying is less than the strike
price, he lets is option expire unexercised. His loss in this case is the premium
he paid for buying the options.

Profit

0 1250

Nifty

Loss 86.60

The figure shows the profit/losses for the buyer of a three-month Nifty
1250 call option. In the above figure as the spot Nifty rises, the call option is in-
the-money. If upon expiration, Nifty closes above the strike of 1250, the buyer
would exercise his option and profit possible on this option are potentially
unlimited. However if Nifty falls below the strike of 1250, he lets the option
expire. His losses are limited to the extent of the premium he paid for buying
the option.
Payoff for Writer of Call Option:

Short Call: A call option gives right to the buyer to buy the underlying asset at
the strike price specified in the option. For selling the option, the writer of the
option charges a premium. The profit/loss on the option depends on the spot
price of the option.

If upon expiration, the spot price exceeds the strike price the buyer will
exercise the option on the writer, hence as the spot price increases the writer of
the option starts making losses. If upon expiration the spot price of the
underlying is less than the strike price, the buyers do not exercise his option and
the writer has to keep the premium.

Profit

0 1250

Nifty
86.60
Loss

In the above figure, if upon expiration, Nifty close above the strike price
of 1250 the buyer would exercise his option on the writer and the writes would
suffer a loss to the extent of the difference between the Nifty close and strike
price, the loss here is unlimited to the premium of Rs. 86.60 charged by him.
Payoff File for Buyer of Put Options:

Long Put: A put option gives right to the seller to sell the underlying asset at
the strike price specified in the option. If upon expiration, the spot price is
below the strike price, he makes a profit. If the spot price of the underlying is
higher than the strike price, he lets his option un-exercised; his loss in this case
is the premium he paid for buying the option.

Profit

0 1250

Nifty

61.70

Loss

In the above figure the profit/losses for a buyer of a three-month Nifty

1250 put option is shown. If upon expiration, Nifty closes below the strike of
1250, the buyer would exercise his option and profit to the extent of the
difference between the strike price and Nifty close, the profit is unlimited. If
Nifty rises above the strike of 1250, he lets the option expire and his losses are
limited to the extent of premium that is 61.70.
 CHAPTER – 5

DATA ANALYSIS

 Futures and options trading system

 Futures and options market instruments

 Clearing entities and their role

 Margining and settlement for futures

market

 Margining and settlement for options

market
 TRADING SYSTEM
Trading System of National Stock Exchange: The futures and options trading
system of National Stock Exchange called National Exchange for Automated
Trading (NEAT) Futures and Options trading system provides a fully automated
screen-based trading for nifty futures on a national wide basis and an online
monitoring and surveillance mechanism. It supports an order driven market and
provides complete transparency of trading operations and is similar to that of
trading of equities in the cash market segment.

The software for the futures and options market has been developed to
facilitate efficient and transparent trading in futures & options instruments.
Many modifications have been performed in the existing capital market trading
system so as to market it suitable for trading futures and options.

Entities in the Trading System.

There are three entities in the trading system.

1. Trading Members
2. Clearing Members
3. Participants
1. Trading Member: Trading Members are a member of National Stock
Exchange, Shabha Securities Limited is one such member and these members
can trade either on their own account or on behalf of their clients including
participants. The exchange assign a trading member ID to each trading member
and each trading member can have more than one user. The number of users
allowed for each trading member is notified by the exchange from time to time.
Each user of a trading member must be registered with the exchange and is
assigned on unique user ID.

The unique trading member ID functions as a reference for all

orders/trades of different users. This ID is common for all users of a particular
trading member. It is the responsibility of the trading member to maintain
adequate control over person having access to the firm’s user IDs.

2. Clearing Member: Clearing Members are members of National Securities

Clearing Corporation Limited (NSCCL). They carryout the risk management
activities and conformation/inquiry of trades through the trading system.

3. Participants: A participant is a client of trading member like financial

institutions. These clients may trade through multiple trading members but
settle through a single clearing member.

Trading in Shabha Securities:

The Shabha Securities provides trading facilities to its clients with the
help of National Exchange for Automated Trading (NEAT) - futures and
options supports an order driven market, where in orders match automatically.
Order matching is essentially on the basis of security, its price, time and
quantity. All quantity fields are in units and price in rupees. The lot size on the
futures market is for 200 Nifties and 30 scrips are traded in Shabha Securities.
The exchange notifies the regular lot size and risk size for each of the contracts
traded on this segment from time to time. The trading of futures and options in
Shabha Securities has started from November, 2001. When any orders enter in
the trading system, it is an active order. It tries to find a match on the other side
of the book. If it finds a match, a trade is generated. If it does not find a match,
the order becomes passive and is shown in the respective outstanding order
book in the system.

Corporate Hierarchy: The futures & options trading software, a trading

member has the facility of defining a hierarchy amongst the users of the system.
In Shabha Securities the hierarchy comprises:

1. Corporate Manager
2. Branch Manager
3. Dealer
1. Corporate Manager: The term ‘corporate manager’ is assigned to a user
placed at the highest level in a trading firm. Such a user can performs all
the functions such as order and trade related activities, receiving reports
for all branches of the trading member firm and also dealers for the firm.
Additionally, a corporate can define exposure limits for the branches of
the firm. This facility is available only to the corporate manager.

2. Branch Manager: The branch manager is a term assigned to a user who

is place under the corporate manager. Such a user can perform and view
order and trade related activities for all dealers under that branch.

3. Dealer: Dealers are users at the lower most level of the hierarchy in
Shabha Securities. A dealer can perform and view trade related activities
only for oneself and does not have access to information on other dealers
under the same branch or other branches.
Market Sprea / Combination Order Entry: The National Exchange for
Automated Trading (NEAT) Futures and Options trading system also enables to
enter spread/combination trades for its trading members like Shabha Securities.

Basket Trading: order to provide a facility for easy arbitrage between futures
and cash market, National Stock Exchange introduced basket trading facility.
This enables the generation of portfolio offline order files in the derivatives
trading system and its executions in the cash segment. A trading member can
buy or sell a portfolio through a single order, once he determines its size. The
system automatically works out the quantity of each security to be bought or
sold in proportion to their weights in the portfolio.

Futures and Options Market Instruments: The futures and options segment of
National Stock Exchange provides trading facilities for the following derivative
instruments are Index based futures; Index based options and Individual stock
options.

Contract Specification for Futures: Shabha Securities, member of National

Stock Exchange trades Nifty futures contracts having one month, Two months
and three months expiry cycles. All contracts expire on the last Thursday of
every month. Thus a January expiration contract would expire on the last
Thursday of January and a February expiry contract would cease trading on the
last Thursday of February.

A two-month expiry contract say for example entered in January it will

expire on the last Thursday of the second month that in the month of is
February. A three months expiry contract say for example entered in January it
will expire on the last Thursday of the March. On the Friday following
Thursday a new contract would be introduced for trading.

Contract Cycle:

JAN FEB MAR APR

Jan 30 contract

Feb 27 contract

Mar 27 contract

Apr 24 contract

May 29 contract

June 26 contract
 Depending on the time period for which you want to take exposure index
futures contracts. You can place buy and sell orders in the respective contracts.
Each futures contract has a separate limit order book. All passive orders are
stacked in the system in terms of price-time priority and trades take place at the
passive order price. The best buy order for a given futures contract will be the
order to buy the index at the highest index level whereas the best sell order will
be the order to sell the index at the lowest index level.

Contract Specification for Options: Trading in Europe style Nifty options has
already commenced on the National Stock Exchange. Contracts at different
strikes, having one-month, two-month and three-month expiry cycles are
available for trading. In due course, there will be one-month, two-month and
three-month options, each with five different strikes available for trading.
Options contracts are specified as Expiry Month-Year-Call / Put-American /
European-Strike. Just as in the futures contracts, each option product has its
own order book and its own prices. All index options are cash settled and expire
on the last Thursday of the month. The clearing corporation does the novation.
Just as in the case of futures, trading is in minimum market lot size of 200 units.

Generation of Strikes: Let us look at an example of how the various options

strikes are generated by the exchange. Suppose we start with Nifty at 1000 and
options with strikes 00, 900, 1000, 1100, 1200, The exchange commits itself to
an inter-strike distance of say 100, When the Nifty closing price crosses 1100, a
new set of strike at 1300 start trading from the next day, When the Nifty closing
price crosses 900, a new set of strikes at 700 starts trading from the next day.

Charges: The maximum brokerage chargeable by Shabha Securities Limited in

relation to trades affected in the contract admitted to dealing on the derivatives
segment of the exchange is fixed at 0.05% of the contract value, exclusive of
statutory levies.

The transaction payable by each trading member like Shabha Securities

Limited for the trades executed by him on derivatives segment are fixed at Rs. 2
per lakh of turnover ( 0.002% each side ) or 1 lakh annually, which is higher.
The trading member contribute to investor to Protection Fund of derivatives
segment at the rate of Rs. 10 per crore of turnover (0.0001% each side)

Volumes Traded at Shabha Securities:

The volumes traded at Shabha Securities are very high and volume traded
per day is 4 crores approximately and the volume traded per month is between
80 crores to 100 crores per month which constitute a considerable part in the
overall volume traded at National Stock Exchange.

Clearing and Settlement: National Securities Clearing Corporation Limited

undertakes clearing and settlement of all deals executed on the National Stock
Exchange Futures and Options segment. It acts as a legal counter party to all
deals on the Futures and Options segment and guarantee settlement.
 Clearing Entities and Their Role: Clearing and settlement activities in the
Futures and Options segment are undertaken by the following entities.

1. Clearing Members
2. Clearing Bank

1. Clearing Members: Depending on the functions undertaken, Clearing Members

can be further categorized as: Trading member – clearing members who can
trade and settle only for their own trades and Shabha Securities is one such
member. Professional clearing members who can clear and settle their own
trades as well as those of other members.
This is in line with 2 tier membership structure stipulated by Securities

Exchange Board of India to enable wider participation in the derivatives

segment. All trades on the Futures and Options segment are cleared through a
clearing member of National Securities Clearing Corporation Limited

Proprietary position of trading member Shabha Securities on Day1

Trading member Shabha Securities trades in the futures and options segment for
himself and two of his clients. The table shows its proprietary position. A buy
position 200@1000 means 200 units at the rate of Rs. 1000

Trading Member Shabha Securities Buy Sell

Proprietary position 200@1000 400@1010

Proprietary position of trading member Shabha Securities Limited on Day 1

Trading member Shabha Securities trades in the futures and options segment for
himself and two of his clients. The table shows his client position

Trading Member Shabha Securities Open Sell Close Sell Open Buy Close Buy

Client position

Client A 400@1109 200@1000

Client B 200@100 200@1099

Clearing Bank (CB): Funds settlement will take place through clearing banks.
Clearing members can have a single bank account with one of the approved
clearing banks, which can be common across the capital market and futures and
options.

Open Position Calculation: As index futures and index options contracts are
cash settled, obligation calculation in the futures and options market would
involve the determination of open position in contracts in the Proprietary
position-net basis and Client position-gross basis.

Identification of orders as “open” or “close” is used while computing

open position of members. Open position is calculated separately for proprietary
position and separately for proprietary trades, open position. In case of
proprietary trades, open position in a given contract is arrived at by reducing the
sell quantity from the total of buying quantity, i.e., Buy-Sell quantity. If the
result is positive then it is a short position. As client trades are subject to gross
margining, “Long Open” position for the entire client pool is computed as
“Buy(open)- sell(close) quantity whereas the short open position is computed as
sell(open) – Buy (close) quantity. The trading member’s open position is the
sum of proprietary position, client open long position and client open short
position. This position will be considered for exposure and daily margin
purpose.

For example the open position for proprietary = Buy – Sell i.e., 200 – 400 =
200short. The open position for client = Buy (0) – Sell © i.e., 400 – 200 = 200
long, Sell (0) – Buy© i.e., 600 – 200 = 400short.

Proprietary position of trading member Shabha Securities on day 2

Assume that the position on Day 1 is carried forward to the next trading
day and the following trades are also executed.

Trading Member Shabha Securities Buy Sell

Proprietary position 200@1000 400@1010

Proprietary position of trading member Shabha Securities on day 2

Trading member Shabha Securities trades in the in the futures and options
segment for himself and two of his clients. The table shows his client position.

Trading Member Shabha Securities Buy Open Sell Close Sell Open Buy Close

Client position
Client A 400@1109 200@1000

Client B 600@1100 400@1099

Management and Settlement: Nifty index futures and Nifty index options are
cash settled i.e., through exchange of cash differences in value. NSCCL charges
an upfront initial margin for all the open positions of a clearing member up to
client level. It computes the initial margin percentage for each Nifty index
futures contract on a daily basis and informs the clearing members. The clearing
members in turn collect the initial margin from the trading members and their
respective clients. A similar process for margin collection will be followed for
options trading.

Margining and Settlement for the Futures Market

Settlement of Index Futures Contracts: The indexes futures are cash settled on a
daily basis by marking to market and are finally settled on expiry of the Nifty
index futures contract.

1. Daily Settlement: All open positions are market to market to the daily
settlement price of the Nifty index futures contract and the resulting losses are
collected from the loss making Clearing Members and paid to the profit making
Clearing Members

The daily settlement price for each Nifty index futures contracts is the
closing price of the Nifty index futures contract, which is typically computed by
taking the weighted average price for the last half an hour’s trades. After daily
settlement, all the open positions are reset to the daily settlement price. The
Clearing Members are in turn responsible to collect and settle for the daily mark
to market profits/losses incurred by the trading members and their clients
clearing settlement through them.

2. Final Settlement: On the maturity of Nifty index futures contract, National

Securities Clearing Corporation Limited marks the open positions of a Clearing
Member to the closing price of the underlying index and the resulting profit/loss
is settled in cash. The final settlement profit/loss is the difference between the
traded price and final settlement price of the Nifty index futures contract.

Thus final settlement is also in cash. Final settlement losses are debited to
the Clearing Members clearing bank account on T+1 morning; the Clearing
Members making profit receive credit on the same day. The total payin / payout
of funds for a CM for the purpose of daily settlement and final settlement is the
net of payin / payout of funds across all his registered trading members and
clients.

Margining and Settlement for Options Market:

Index options on the Nifty are a European style option which means that
they can only be exercised upon maturity. Exercise of options can be of two
types, voluntary and automatic. Voluntary exercise is when a clearing member
exercises as in-the-money index option contract at his violation, whereas
automatic exercise is when all in-the-money index option contracts are
automatically deemed to be irrevocably exercised, on the expiration date. Nifty
option contracts have an automatic exercise.
 Settlement for Index Option Contracts: Index options contracts on the
Nifty will have a daily premium settlement and a final settlement on the
exercise date.

1. Daily Premium Settlement: Clearing Members with long position in the index
option contracts are obliged to payin to Clearing Corporation the premium value
at which the index option contracts were purchased and Clearing Member with
a short position in the index option contracts are entitled to receive the premium
value at which the index option contracts are sold. Premium will be settled on
T+1 basis.

2. Final Settlement: On the settlement date, all in-the-money options will be

automatically exercised. If a member sells a call option contract ( 200 calls )
with a strike price of 1250 and on the expiration date the Nifty closes at 1350,
the buyer of the option will receive Rs.100*200 i.e., Rs20,000. Assignment
Clearing Member will then pass on the amount to the clearing corporation who
in turn will pass on the amount to the Clearing Member who is long in-the-
money option.

It is proposed that National Stock Exchanges derivatives market will

follow a SPAN like margining system for the entire portfolio of derivative
contracts.
TABLE 1: AGE OF INVESTORS
PARTICULARS NO.OF RESPONSES PERCENTAGES
Less than 25 5 8
25-35 24 40
35-45 22 37
45 above 9 15
TOTAL 60 100

ILLUSTRATION 1:

Age of investors

30

25

20

15 No.of responses

10

0
Less 25-35 35-45 45
than 25 above

Age and educational background of the traders play and important role in
their trading decision and outlook

Most of the traders lie in the middle aged group between 25-35 and 35-45
which is 40% and 37%respectively
TABLE 2: EDUCATIONAL BACKGROUND
PARTICULARS NO.OF RESPONSES
Non Graduates 6
Graduates 27
PG 19
Others 8
TOTAL 60

ILLUSTRATION 2:
educational Background

30
25
20
15 No.of responses
10
5
s
te

0
s
a

te

rs
u

G
a

e
d

th
ra

o
ra
g

g
n
o
N

90% of the traders are graduates and post graduate of 45% are graduates
and the remaining are the post graduates

The large percentage of traders from science and arts show that even
without basic formal training in commerce it is easy to operate in the stock
markets through learning and experience.
TABLE 3: MEMBERSHIP

PARTICULARS NO.OF RESPONSES PERCENTAGES

Member 23 33
Client 47 67
TOTAL 60 100

ILLUSTRATION 3:

No. of responses

33%
Member
Client
67%

Shabha securities have many shareholders who trade in the stock markets.
But the number of clients who are not members of clients who are not members
is close two –thirds i.e., 76%.
TABLE 4: EXCHANGE
PARTICULARS NO.OF RESPONSES PERCENTAGES
NSE 32 54
BSE 11 18
NSE AND BSE 17 28
TOTAL 60 100

ILLUSTRATION 4:
No.of responses

28%
NSE
BSE
54%
NSEANDBSE
18%

The percentage of investors investing in NSE is 54% shows the grow

thing population of the NSE since is inception and its advantage of bring the
national stock exchange.

TABLE 5: SEGMENT
PARTICULARS NO.OF RESPONSES PERCENTAGES
Cash segment 28 47
F&O segment 8 13
Both Cash and F&O 24 40
TOTAL 60 100

ILLUSTRATION 5:
Cash segment F&O segment

Trading in cash segment is relatively the F&O segment and is also more
popular because of its simplicity. This can be seen from the fact that 88% of
traders in the cash segment while only 52%jof trader’s trade in the F&O
segment .hence there is need it increase awareness about derivatives, which is
relatively a new concept.

TABLE 6: EXPERIENCE OF INVESTORS

PARTICULARS NO.OF RESPONSES PERCENTAGES
Less than 1-year 8 13
1-3 years 22 38
3-5 years 21 35
Above 5 years 9 15
TOTAL 60 100

ILLUSTRATION 6:

25
22
21
20

15
Series1
10 9
8

0
Less than 1-3 years 3-5 years Above 5
1-year years

The study reveals that only 12% if their clients have joined in the past 1-
year hence the marketing activities of the company have to be more aggressive
to wide its clients in the wake of new brokers and sub brokers coming up in the
city.

TABLE 7: OTHER BROKING COMPANIES

PARTICULARS NO.OF RESPONSES PERCENTAGES
YES 16 27
NO 44 73
TOTAL 60 100

ILLUSTRATION 7:
No.of responses

27%

YES
NO

73%

The percentage of traders, who have already traded though some other
brokers before shifting to shabha security is 27% which shows that the services
provided by shabha security , are superior to the brokers moreover there are
73%of traders who have started their activities with shabha security. Which
speaks of its reputation as the best broker’s hyd.?

TABLE 8: BASICS FOR SELECTION OF SCRIPS

PARTICULARS NO.OF RESPONSES PERCENTAGES
Earning per share 4 7
Company Image 9 15
Profitability 12 20
All thee 13 22
EPS& COMPANY 5 8
IMAGE
EPS & profitability 8 13
Profitability & 4 7
company image
Fundamental analysis 5 8
TOTAL 60 100

ILLUSTRATION 8:
No.of responses Earningper share

CompanyImage

Profitability
8% 7%
7% 15% All thee
13%
EPS&C OMPANY
IMAGE
8% 20% EPS&profitability
22%
Profitability&company
image
Fundamental analysis

The study reveals that investors use varied parameters to make their
investment decision profitability and image of the company are the two
prominent parameters used by most investors. A combination of more than one
parameter is also used by the investors.

TABLE 9: SOURCE OF INFORMATION

PARTICULARS NO.OF RESPONSES PERCENTAGES
NEWS PAPERS 17 29
ANNUAL REPORTS 16 27
SHABHA REVIEWS 5 8
ALL THREE 8 13
NEWS PAPERS 5 8
&ANNUAL REPORTS
TECHNICAL 6 10
ANALYSIS FROM
WEB SITES
NEWS CHANNELS 3 5
TOTAL 60 100

The study reveals that news papers and annual reports are the most
popular sources of information. Both of which used by 76% of the investors
either independently of or in combination with other sources of information.
Shabha and technical analysis from various websites are also popular sources of
information used by 26% of traders.

TABLE 10: PURPOSE OF USE

PARTICULARS NO.OF RESPONSES PERCENTAGES
Speculation 18 69.23
Hedging 6 23.08
Arbitrage 2 7.7
TOTAL 26 100

ILLUSTRATION 10:
No.of responses

20 18
18
16
14
12
10 No.of responses
8 6
6
4 2
2
0
Speculation Hedging Arbitrage

Derivatives are primarily used for speculation, edging and arbitrating.

The most popular use of derivatives is speculation with more than 69% of the
trader’s speculation in the marketing using futures and option. While only
23%of the traders used derivative for hedging their risk of cash market and 8%
traders using it for arbitrage to profit from the different rates in the different
market segments.

TABLE 11: FUTURES AND OPTIONS

PARTICULARS NO.OF RESPONSES PERCENTAGES
Futures 11 42.31
Options 15 57.69
TOTAL 26 100

ILLUSTRATION 11:
No.of responses

16 15
14
12 11
10
8 No.of responses
6
4
2
0
Futures Options

Options are the less risky than futures because the maximum loss is
limited to the premium paid and the profit potential is unlimited. This is
supported by the study, which reveals that 58% of the investors trade more in
options in futures.

TABLE 12: CATEGORY OF CONTRACT

PARTICULARS NO.OF RESPONSES PERCENTAGES
1 month contract 21 80.77
2month contract 3 11.54
3month contract 2 7.69
Total 26 100

ILLUSTRATION 12:
No.of responses

25
21
20

15
No.of responses
10

5 3
2

0
1 month contract 2month contract 3month contract

Trading in the futures and option is done in contract with there different
expiry dates. Out of which trading in one month a contract is more popular
because of the relatively predictable fluctuations of the near futures. It is very
difficult to speculation on price tow months and three months later, which
accounts for the low percentage of trades of 12% and 8% in these contracts.

TABLE 13: INVESTING RATING

PARTICULARS NO.OF RESPONSES PERCENTAGES
AVERAGE 11 18
GOOD 33 55
BEST 16 27
TOTAL 60 100

ILLUSTRATION 13:
No.of responses

18%
27%

AVERAGE
GOOD
BEST

55%

The study reveals the reasons for which shabha securities is rated as one
of the best broking firms in Guntur. The company charges low brokerage and is
prompt in pay in and payout of shares and funds. It provides good facilities and
services to its clients and the management to its clients through shabha review
and guide the client in their trading activities.

CHAPTER-6
SUMMARY, SUGGESTIONS AND CONCLUSION
 SUMMARY

The study was carried for about a period 2 months and has been done to bring
about the orientation about the financial markets to the general public and increase the
awareness in these aspects. The increased competition and growing need for creating
liquidity of capital has lead to the formation of stock exchanges like National Stock
Exchange and Bombay Stock Exchange etc., and systematic regulations of Securities
Exchange Board of India has provided protection to the investors and the investing
people has considerably increased from the past few years.

It has been observed that without the existence of these members of National
Stock Exchange like Shabha Securities the investor’s position would have been in a
highly troublesome state. The increased volatility in asset prices of financial markets,
integration of financial markets with the international markets, the improving
communication facilities, and development of more sophisticated risk management
tools have lead to the emergence of derivatives products, out of which Futures and
Options had gained more popularity.

The futures and options market provides the investor a market which optimally
combines the risks and returns leading to higher returns, reduced risk as well as low
transaction cost comparatively. The National Stock Exchange provides a Futures and
Options trading system called National Exchange for Automated Trading - Futures
and Options which provides fully automated screen on a national -wide basis. In
Futures and Options market indexed based futures, index based options and individual
stock options are traded. In Futures and Options market 30 scrips are traded and the
lot size on the futures market is for 200 Nifties. There is no possibility of for buying a
single share in Futures and Options market as that of capital market. The market lot is
fixed for every scrip and it is differs from scrip to scrip that is at present for Rnabaxy
the market lot is 500.
 Shabha Securities, as a member of National Stock Exchange provides trading
facilities in Futures and Options to its members. They provide different order types
and conditions basing on time, price and other conditions, a combination of them is
also allowed. Shabha Securities, as a member of National Stock Exchange trades
contracts with different expiry cycles which expire on the last Thursday of the
respective trade cycle expiry month. The best buy order for a contract will be the order
to buy the index at the highest index level where as the best sell order will be the order
to sell the index at the lowest index level. In options, basing on the strike price there
exists at-the-money option in –the-money option and our of the money options. There
is no possibility for incurring huge losses in options as may be in the case of futures.
This may be considered as an advantage to options over the futures.

Shabha Securities also acts as a clearing member for its client and provides
various services to its clients at very lower costs. The entire trading member should
make their payment to National Stock Exchange on T+1 day (Trading day+ 1 basis).
Margin of the futures market consists of daily margining that is initial margins and
market-to-market profit/loss. The Shabha Securities provides not only the day end
position to its clients, but also provides intra-day positions to its clients facilitating
them. However National Stock Exchange withdraws the trading facilities if minimum
margins are not maintained by the trading members like Shabha Securities with
National Stock Exchange. It provides daily settlement and final settlement to its
client’s futures and daily premium settlement and final settlement for options.
 SUGGESTIONS

Some of the suggestions mentioned below may improve the working of

Shabha Securities and further may increase its market share.

1. Conduct of Seminars: The clients of Shabha Securities who come to trade

in capital market segment must be made aware of the derivatives market
segment by conducting seminars to them.
2. Conduct of Mock Classes: All the employee of Shabha Securities must be
provided full knowledge of the Futures and Options market and classes
must be conducted to them in this regard.
3. Questioners: Feed back must be taken by Shabha Securities from their
client about the working of Futures and Options trading system and their
clearing and settlement.
4. Conduct of Workshops: It is good for Shabha Securities to conduct
workshops and seminars and to increase awareness of futures and options
market among the investing public.
 CONCLUSION

Futures and Options market plays a vital role in today’s economy and
India through lately entered this segment is now improving and the Government
should provide more assistance for the improvisation of the derivatives market.
Shabha Securities is the one among the few which provides trading in futures
and options volume traded would be doubled compared to the present traded
volumes in India. Let us hope that India would make its mark in the Derivatives
market and hope that Shabha Securities role in it would be remarkable in this
effort.
 QUESTIONNAIRE

1. Name ___________________________________.

2. Age

a. Less than 25.

b. 25-35

c. 35-45

d. 45&above

3. Qualification

a. Less than Graduates

b. Graduates

c. P G

d. Others

4. Are you a member ( ) or client ( ) of __________________________

5. In which exchanges do you trade in

a. NSE

b. BSE

c. HSE

d. Any other

6. In which segment do you trade in

a. Depository

b. Futures& Options

c. Both
7. Do you have knowledge of derivatives market?

Yes /No, If, yes what _________________________________

8. Since how many years have you been trading?

a. < 1year

b. 1-3 years

c. > 3 years

9. Have you traded through any other broker(s)?

Yes /NO

If yes, name: ____________________________

10. On what basis do you select scrip for trading?

a. EPS (earning per share)

b. Company image

c. Profitability

d. Any other________________________________

11. From where do you gaiter information about the scrip’s?

a. News papers

b. Annual reports

c. Friends& Relations

d. Ant other_______________________________

12. What is the objective behind you trading in derivatives?

a. Speculation

b. Arbitrage

c. Hedging

13. Do you invest more in

a. One mo nth contract

b. Two month contract

 c. There month contract

14. Which other companies do you think should be included in future and options segment?
_______________

15. Which would you recommend as the three most favorable scrip’s for investments?
___________________

Thank you,

Date: Signature

Findings of the survey

The detailed analysis of the findings of the survey is given in the

following lines.

1. As the survey included the securities policies offered by the securities

companies the market penetration for the securities seems higher but
the actual penetration for complete and comprehensive securities
policies very lower in our country.

2.
 ANNEXURE
SCRIP LOT SCRIP LOT SCRIP LOT SCRIP LOT

ABAN 200 DRREDDY 400 JSWSTEEL 550 SATYAMCOMP 600

ABB 100 EDUCOMP 150 KESORAMIND 500 SBIN 250

ABIRLANUVO 200 EKC 200 KOTAKBANK 550 SCI 1600

ACC 375 ESCORTS 2400 KTKBANK 1250 SESAGOA 150

ADLABSFILM 450 ESSAROIL 5650 LICHSGFIN 1700 SHREECEM 200

AIAENG 200 FEDERALBNK 1300 LITL 850 SIEMENS 188

AIRDECCAN 1700 FINANTECH 150 LT 200 SKUMARSYNF 2600

ALBK 2450 GAIL 750 LUPIN 350 SOBHA 350

ALOKTEXT 3350 GDL 2000 M&M 312 SRF 1500

AMTEKAUTO 600 GESCOCORP 350 MAHSEAMLES 600 STAR 850

ANDHRABANK 2300 GESHIP 1200 MARUTI 400 STER 438

ANSAINFRA 650 GLAXO 300 MATRIXLAB 1250 STELINBIO 1250

APIL 400 GMRINFRA 1000 MCDOWELL 250 STROPTICAL 1050

ARVINDMILL 4300 GNFC 2950 MOSERBAER 550 SUNPHARMA 225

ASHOKLEY 4775 GRASIM 88 MPHASIS 800 SUNTV 125

AUROPHARMA 350 GTL 1500 MRPL 8900 SUZLON 200

BAJAJAUTO 100 GUJALKALI 1400 MTNL 1600 SYNDIBANK 3800

BAJAJHIND 1900 GUJAMBCEM 2062 NAGARCONST 1000 TATACHEM 1350

BALRAMCHIN 4800 HCC 1400 NAGARFERT 14000 TATAMOTOR 412

BANKBARODA 1400 HCLTECH 650 NATIONALUM 1150 TATAPOWER 400

BANKINDIA 1900 HDFC 150 NDTV 1100 TATASTEEL 675

BANKNIFTY 50 HDFCBANK 200 NEYVELILIG 5900 TATATEA 550

BATAINDIA 1050 HEROHONDA 400 NICOLASPIR 1045 TCS 250

BEL 275 HINDAL CO 1595 NIFTY 50 TITAN 206

BEML 250 HINDALEVER 1000 NTPC 1625 TRIVENI 7700

BHARATFORG 1000 HINDPETRO 1300 ONGC 225 TTML 10450

BHARTIARTL 500 HOTLEELA 3750 ORCHIDCHEM 1050 TVSMOTOR 2950

BHEL 150 ICICIBANK 350 ORIENTBANK 1200 ULTRACEM 200

BILT 1900 IDBI 2400 PANTALOONR 500 UNIONBANK 2100

BINDALAGRO 4950 IDEA 2700 PARSVNATH 700 UNIPHOS 700

BIRLAJUTE 850 IDFC 2950 PATELENG 500 UNITECH 450

BOMDYEING 300 IFCI 7875 PATNI 650 UTIBANK 450

BONGAIREFN 4500 I-FLEX 150 PENINLAND 550 VIJAYABANK 6900

BPCL 1100 INDHOTEL 1750 P0TRONET 4400 VOLTAS 3600

BRFL 1150 INDIACEM 1450 PFC 2400 VSNL 525

CAIRN 2500 INDIAINFO 500 PNB 600 WIPRO 600

CANBK 1600 ]INDIANB 2200 POLARIS 1400 WOCKPHARMA 600

CENTURYTEX 425 INDUSINDBK 3850 PRAJIND 1100 ZEEL 700

CESC 550 INFOSYSTCH 100 PUNJLLOYD 1500

CHAMBLFERT 6900 IOB 2950 RAJESHEXPO 550

CHENNPETRO 1800 IOC 600 RANBAXY 800

CIPLA 1250 IPCL 1100 RCOM 700

CNXIT 50 ITC 2250 REL 550

COLGATE 1050 IVRCLINFRA 500 RELCAPITAL 550

CORPBANK 1200 J&KBANK 300 RELIANCE 150

COROMPGREAV 1000 JETAIRWAYS 400 RENUKA 1000 NIFTY 50

CUMMINSIND 950 JINDALSTEL 125 RNRL 7150 BANKNIFTY 50

DABUR 2700 JPASSOCIAT 300 ROLTA 450 CNX IT 50

DENABANK 5250 JPHYDRO 6250 RPL 3350 NIFTY JR 25

DIVISLAB 62 JSTAINLESS 2000 SAIL 2700 CNX 100 50

Major Keyboard Functions:

Keys - Functions Shift + Key - Functions
F1 Buy Open F1 Order Cancellation
F2 Sell Open F2 Order Modification
F3 Outstanding Orders F3 Quick Order Cancellation
F4 Market Watch setup F4 Trade Cancellation
F5 Market by Order F5 Trade Modification
F6 Market by Price F6 Regular Lot Match
F7 Activity Log F7 Security List/ Portfolio Setup
F8 Previous Trades F8 Contract Description
F9 Snap Quote F9 Online Offline Order Entry
F10 Message log F10 Market Movement
F11 Market Inquiry F11 Multiple Index Inquiry
F12 Supplementary Menu F12 Order Status
Page up Index Graph
Page down Liquidity Schedule

Alt + Key- Functions Control + Key - Functions

F1 Help F1 Ex/Pl
F2 Activity Log for Spreads F2 Offline Ex/Pl
F3 Portfolio Offline Order Entry F3 Spread/Combination Order
F4 Sign off Entry
F5 Alphabetical Sorting of F5 Client Master Maintenance
Contracts
F6 Net Position
F7 Online backup F7 Spread Market By Price
F8 Ticker Selection F8 Order Status For Spread
F10 Net Position Upload F10 Full Message display
F11 Buy Close F11 Spread Outstanding Orders
F12 Sell Close
 Page Up Calculate New Index
Page up Options Calculator

Notes:
The (+) key in the numeric pad is used for buy order entry screen
and (-) key is used for sell order entry screen.

BIBLIOGRAPHY

Futures & Option

- John C Hull
Financial Markets and institutions

- L. M. BHOLE
Financial Management

- M Y Khan & P K Jain

Investment Management

- V. K. BHALLA
Circulars from National Stock Exchange

Private Journals of SHABHASECURITIES Newspapers like Economic Times

and Business Line

Website:
 Www. nseindia.com

www.sebi.com

www.derivativesindia.com

GLOSSARY

ATO _ At Opening Price

BSE – Bombay Stock Exchange

BOISL – Bank of India Share Holdings Limited

CM – Clearing Member

HEDGING – Technique to minimize losses taking opposite actions

ISIN – International Securities Identification Number

ITM – In the Money

NCFM – National Stock Exchanges Certification in Financial
Markets

NEAT – National Exchange For Automated Trading

NSCCL – National Securities Clearing Corporation Limited

NSE – National Stock Exchange

OTCEI – Over the Counter Exchange of India

OTM – Out Of the Money

SCRA – Securities Contract Regulation Act

SCSL – Steel City Securities Limited

TM – Trading Member

VAR – Value at Risk

VSAT – Very Small Aperture Terminal