Chapter – 1

Introduction

47
 Introduction

A Derivative is a financial instrument that derives its value

from an underlying asset. Derivative is an financial contract whose price/value is
dependent upon price of one or more basic underlying asset, these contracts are
legally binding agreements made on trading screens of stock exchanges to buy or
sell an asset in the future. The most commonly used derivatives contracts are
forwards, futures and options, which we shall discuss in detail later.

The main objective of the study is to analyze the derivatives market in India and to
analyze the operations of futures and options. Analysis is to evaluate the profit/loss
position futures and options. Derivates market is an innovation to cash market.
Approximately its daily turnover reaches to the equal stage of cash market

In cash market the profit/loss of the investor depend the market price of the
underlying asset. Derivatives are mostly used for hedging purpose. In bullish
market the call option writer incurs more losses so the investor is suggested to go
for a call option to hold, where as the put option holder suffers in a bullish market,
so he is suggested to write a put option. In bearish market the call option holder
will incur more losses so the investor is suggested to go for a call option to write,
where as the put option writer will get more losses, so he is suggested to hold a put
option.

47
 SCOPE OF THE STUDY
The Study is limited to “Derivatives” with special reference to futures and
Option in the Indian context and the Inter-Connected Stock Exchange have been
Taken as a representative sample for the study. The study can’t be said as totally
perfect. Any alteration may come. The study has only made a humble Attempt at
evaluation derivatives febket only in India context. The study is not Based on the
international perspective of derivatives febkets, which exists in NASDAQ, CBOT
etc.,

OBJECTIVES OF THE STUDY

 To analyze the derivatives febket in India.

 To analyze the operations of futures and options.

 To find the profit/loss position of futures buyer and also

The option writer and option holder.

 To study about risk management with the help of derivatives.

47
 IMPORTANCE OF THE STUDY

The present study on futures and options is very much appreciable on the
grounds that it gives deep insights about the F&O market. It would be essential for
the perfect way of trading in F&O. An investor can choose the fight underlying or
portfolio for investment 3which is risk free. The study would explain the various
ways to minimize the losses and maximize the profits. The study would help the
investors how their profit/loss is reckoned. The study would assist in understanding
the F&O segments. The study assists in knowing the different factors that cause for
the fluctuations in the F&O market. The study provides information related to the
byelaws of F&O trading. The studies elucidate the role of F&O in India Financial
Markets.

METHODOLOGY

The data had been collected through primary and secondary source.

Primary data:
The data had been collected through HSE staff, Project guide and Stock
brokers.

Secondary data:

47
The data had been collected through Journals, News papers, and Internet.

Chapter – 2
Literature
Review

47
Derivative
The emergence of the market for derivative 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 fluctuations in asset
prices. By their very nature, the financial markets are marked by a very high
degree of volatility. Through the use of derivative products, it is possible to
partially or fully transfer price risks by locking–in asset prices. As instruments of
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.

Derivatives are risk management instruments, which derive their

value from an underlying asset. The underlying asset can be bullion, index, share,
bonds, currency, interest etc. Banks, securities firms, companies and investors to
hedge risks, to gain access to cheaper money and to make profit, use derivatives.
Derivatives are likely to grow even at a faster rate in future.

DEFINITION:

Derivative is a product whose value is derived from the value of an

underlying asset in a contractual manner. The underlying asset can be equity,
forex, commodity or any other asset.

47
Securities Contracts (Regulation) Act, 1956 (SC(R) A) defines “derivative” to
include –

1. A security derived from a debt instrument, share, loan whether secured or

unsecured, risk instrument or contract for differences or any other form of security.
2. A contract which derives its value from the prices, or index of prices, of
underlying securities.

PARTICIPANTS:

The following three broad categories of participants in the derivatives market.

HEDGERS:
Hedgers face risk associated with the price of an asset. They use futures or
options markets to reduce or eliminate this risk.

SPECULATORS:
Speculators wish to bet on future movements in the price of an asset. Futures
and options contracts can give them an extra leverage; that is, they can increase
both the potential gains and potential losses in a speculative venture.

ARBITRAGEURS:
Arbitrageurs are in business to take advantage of a discrepancy between
prices in two different markets. If, for example, they see the futures price of an
asset getting out of line with the cash price, they will take offsetting positions in
the two markets to lock in a profit.

47
FUNCTIONS OF DERIVATIVES MARKET:
The following are the various functions that are performed by the derivatives
markets. They are:

 Prices in an organized derivatives market reflect the perception of market

participants about the future and lead the prices of underlying to the perceived
future level.
 Derivatives market helps to transfer risks from those who have them but may
not like them to those who have an appetite for them.
 Derivative trading acts as a catalyst for new entrepreneurial activity.
 Derivatives markets help increase savings and investment in the long run.

TYPES OF DERIVATIVES:
The following are the various types of derivatives. They are:

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:

47
 A futures contract is an agreement between two parties to buy or sell an
asset at a certain time in the future at a certain price.

OPTIONS:

Options are of two types - calls and puts. Calls give the buyer the right but
not the obligation to buy a given quantity of the underlying asset, at a given price
on or before a given future date. Puts give the buyer the right, but not the
obligation to sell a given quantity of the underlying asset at a given price on or
before a given date.
WARRANTS:

Options generally have lives of upto one year; the majority of options traded on
options exchanges having a maximum maturity of nine months. Longer-dated
options are called warrants and are generally traded over-the-counter.

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 assets. The

underlying asset is usually a moving average of a basket of assets. Equity index
options are a form of basket options.

47
SWAPS:

Swaps are private agreements between two parties to exchange cash flows in
the future according to a prearranged formula. They can be regarded as portfolios
of forward contracts. The two commonly used swaps are

Interest rate swaps:

These entail swapping only the interest related cash flows between the
Parties in the same currency.

Currency swaps:

These entail swapping both principal and interest between the parties,
with the cash flows in one direction being in a different currency than those in the
opposite Direction.

Swaptions:

Swaptions are options to buy or sell a swap that will become operative at the
expiry of the options. Thus a Swaptions is an option on a forward swap.

RATIONALE BEHIND THE DEVELOPMENT OF DERIVATIVES:

Holding portfolio of securities is associated with the risk of the possibility
that the investor may realize his returns, which would be much lesser than what he
expected to get. There are various factors, which affect the returns:
1. Price or dividend (interest).
2. Some are internal to the firm like –

47
  Industrial policy
 Management capabilities
 Consumer’s preference
 Labor strike, etc.

These forces are to a large extent controllable and are termed as non
Systematic risks. An investor can easily manage such non-systematic by having a
well – diversified portfolio spread across the companies, industries and groups so
that a loss in one may easily be compensated with a gain in other.
There are yet other types of influences which are external to the firm, cannot be
controlled and affect large number of securities. They are termed as systematic
risk. They are:

1. Economic
2. Political
3. Sociological changes are sources of systematic risk.

For instance, inflation, interest rate, etc. their effect is to cause prices of
nearly all individual stocks to move together in the same manner. We therefore
quite often find stock prices falling from time to time in spite of company’s
earnings rising and vice versa.

Rationale behind the development of derivatives market is to manage this

systematic risk, liquidity and liquidity in the sense of being able to buy and sell
relatively large amounts quickly without substantial price concessions.

47
 In debt market, a large position of the total risk of securities is systematic.
Debt instruments are also finite life securities with limited marketability due to
their small size relative to many common stocks. Those factors favor for the

purpose of both portfolio hedging and speculation, the introduction of a derivative

security that is on some broader market rather than an individual security.

India has vibrant securities market with strong retail participation that has
rolled over the years. It was until recently basically cash market with a facility to
carry forward positions in actively traded ‘A’ group scrips from one settlement to
another by paying the required margins and borrowing some money and securities
in a separate carry forward session held for this purpose. However, a need was felt
to introduce financial products like in other financial markets world over which are
characterized with high degree of derivative products in India.

Derivative products allow the user to transfer this price risk by looking in the
asset price there by minimizing the impact of fluctuations in the asset price on his
balance sheet and have assured cash flows.

Derivatives are risk management instruments, which derive their value from
an underlying asset. The underlying asset can be bullion, index, shares, bonds,
currency etc.

47
ANY EXCHANGE FULFILLING THE DERIVATIVE SEGMENT AT
NATIONAL STOCK EXCHANGE:

The derivatives segment on the exchange commenced with S&P CNX Nifty
Index futures on June 12, 2000. The F&O segment of NSE provides trading
facilities for the following derivative segment:
1. Index Based Futures
2. Index Based Options
3. Individual Stock Options
4. Individual Stock Futures

REGULATORY FRAMEWORK:

The trading of derivatives is governed by the provisions contained in the SC

(R) A, the SEBI Act and the regulations framed there under the rules and byelaws
of stock exchanges.

Regulation for Derivative Trading:

SEBI set up a 24 member committed under Chairmanship of Dr.L.C.Gupta
develop the appropriate regulatory framework for derivative trading in India. The

47
committee submitted its report in March 1998. On May 11, 1998 SEBI accepted
the recommendations of the committee and approved the phased introduction of
Derivatives trading in India beginning with Stock Index Futures. SEBI also
approved he “Suggestive bye-laws” recommended by the committee for regulation
and control of trading and settlement of Derivatives contracts.

The provisions in the SC (R) A govern the trading in the securities. The
amendment of the SC (R) A to include “DERIVATIVES” within the ambit of
‘Securities’ in the SC (R ) A made trading in Derivatives possible within the
framework of the Act.

1. Eligibility criteria as prescribed in the L.C. Gupta committee report may

apply to SEBI for grant of recognition under Section 4 of the SC ( R ) A,
1956 to start Derivatives Trading. 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. The exchange shall regulate the sales practices of its
members and will obtain approval of SEBI before start of Trading in any
derivative contract.

2. The exchange shall have minimum 50 members.

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

become the members of the derivative segment. The members of the
derivative segment need to fulfill the eligibility conditions as lay down by
the L.C.Gupta Committee.

47
4. The clearing and settlement of derivates trades shall be through a SEBI
approved Clearing Corporation / Clearing house. Clearing Corporation /
Clearing House complying with the eligibility conditions as lay down
By the committee have to apply to SEBI for grant of approval.

5. Derivatives broker/dealers and Clearing members are required to seek

registration from SEBI.

6. The Minimum contract value shall not be less than Rs.2 Lakh. Exchanges
should also submit details of the futures contract they purpose to introduce.

7. The trading members are required to have qualified approved user and sales
person who have passed a certification programme approved by SEBI.

47
Futures

47
DEFINITION
A Futures contract is an agreement between two parties to buy or sell an
asset at a certain time in the future at a certain price. To facilitate liquidity in the
futures contract, the exchange specifies certain standard features of the contract.
The standardized items on a futures contract are:
 Quantity of the underlying
 Quality of the underlying
 The date and the month of delivery
 The units of price quotations and minimum price change
 Locations of settlement
Types of futures:
On the basis of the underlying asset they derive, the futures are divided into
two types:

 Stock futures:

47
 The stock futures are the futures that have the underlying asset as the
individual securities. The settlement of the stock futures is of cash settlement and
the settlement price of the future is the closing price of the underlying security.

 Index futures:
Index futures are the futures, which have the underlying asset as an Index.
The Index futures are also cash settled. The settlement price of the Index futures
shall be the closing value of the underlying index on the expiry date of the
contract.

PARTIES IN THE FUTURES CONTRACT:

There are two parties in a future contract, the Buyer and the Seller. The
buyer of the futures contract is one who is LONG on the futures contract and the
seller of the futures contract is one who is SHORT on the futures contract.

The pay off for the buyer and the seller of the futures contract are as follows.

PAYOFF FOR A BUYER OF FUTURES:

47
 P
PROFIT

E
2
F E
LOSS 1

CASE 1:
The buyer bought the future contract at (F); if the futures price goes to E1
then the buyer gets the profit of (FP).
CASE 2:
The buyer gets loss when the future price goes less than (F), if the futures
price goes to E2 then the buyer gets the loss of (FL).

PAYOFF FOR A SELLER OF FUTURES:

47
 P
PROFIT

E
2
E F
1

LOSS

F – FUTURES PRICE
E1, E2 – SETTLEMENT PRICE.

CASE 1:
The Seller sold the future contract at (f); if the futures price goes to E1 then
the Seller gets the profit of (FP).

CASE 2:
The Seller gets loss when the future price goes greater than (F), if the futures
price goes to E2 then the Seller gets the loss of (FL).

MARGINS:

47
 Margins are the deposits, which reduce counter party risk, arise in a futures
contract. These margins are collected in order to eliminate the counter party risk.
There are three types of margins:
INITIAL MARGIN:
Whenever a futures contract is signed, both buyer and seller are required to
post initial margin. Both buyer and seller are required to make security deposits
that are intended to guarantee that they will infact be able to fulfill their obligation.
These deposits are Initial margins and they are often referred as performance
margins. The amount of margin is roughly 5% to 15% of total purchase price of
futures contract.
MARKING TO MARKET MARGIN:
The process of adjusting the equity in an investor’s account in order to
reflect the change in the settlement price of futures contract is known as MTM
Margin.
MAINTENANCE MARGIN:

The investor must keep the futures account equity equal to or greater than
certain percentage of the amount deposited as Initial Margin. If the equity goes
less than that percentage of Initial margin, then the investor receives a call for an
additional deposit of cash known as Maintenance Margin to bring the equity up to
the Initial margin.

ROLE OF MARGINS:
The role of margins in the futures contract is explained in the following
example.

47
 S sold a Satyam June futures contract to B at Rs.300; the following
table shows the effect of margins on the contract. The contract size of
Satyam is 1200. The initial margin amount is say Rs.20000, the
maintenance margin is 65% of Initial margin.
DAY PRICE OF SATYAM EFFECT ON EFFECT ON REMARKS
BUYER (B) SELLER (S)
MTM MTM
P/L P/L
Bal.in Margin Bal.in Margin

Contract is
1 300.00
entered and
initial margin is
deposited.

B got profit and

2 311(price increased)
+13,200 -13,200 S got loss, S
+13,200 deposited
maintenance
margin.

B got loss and

deposited
3 -28,800 +28,800 maintenance
287
+15,400 margin.

B got profit, S
got loss.
Contract settled
4 +21,600 -21,600 at 305, totally B
305
got profit and S
got loss.

47
Pricing the Futures:
The fair value of the futures contract is derived from a model known as the
Cost of Carry model. This model gives the fair value of the futures contract.

Cost of Carry Model:

F=S (1+r-q) t
Where

F – Futures Price

S – Spot price of the Underlying

r – Cost of Financing

q – Expected Dividend Yield

T – Holding Period.

Futures terminology:

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

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

Contract cycle:
The period over which a contract trades. The index futures contracts on the
NSE have one-month, two-months and three-month expiry cycles which expire on
the last Thursday of the month. Thus a January expiration contract expires on the
last Thursday of January and a February expiration contract ceases trading on the
last Thursday of February. On the Friday following the last Thursday, a new
contract having a three-month expiry is introduced for trading.

47
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 will cease to exist.

Contract size:
The amount of asset that has to be delivered under one contract. For
instance, the contract size on NSE’s futures 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 futures
prices normally exceed spot prices.

Cost of carry:
The relationship between futures prices and spot prices can be summarized
in terms of what is known as the cost of carry. This measures the storage cost plus
the interest that is paid to finance the asset less the income earned on the asset.

Open Interest:
Total outstanding long or short positions in the market at any specific time.
As total long positions for market would be equal to short positions, for calculation
of open interest, only one side of the contract is counted.

47
Options

47
 INTRODUCTION TO OPTIONS
In this section, we look at the next derivative product to be traded on the NSE,
namely options. Options are fundamentally different from forward and futures
contracts. An option gives the holder of the option the right to do something. The
holder does not have to exercise this right. In contrast, in a forward or futures
contract, the two parties have committed themselves to doing something. Whereas
it costs nothing (except febgin requirement) to enter into a futures contracts, the
purchase of an option requires as up-front payment.
DEFINITION
Options are of two types- calls and puts. Calls give the buyer the right but not
the obligation to buy a given quantity of the underlying asset, at a given price on or
before a given future date. Puts give the buyers the right, but not the obligation to
sell a given quantity of the underlying asset at a given price on or before a given
date.

PROPERTIES OF OPTION
Options have several unique properties that set them apart from other securities.
The following are the properties of option:
 Limited Loss
 High leverages potential

TYPES OF OPTIONS
The Options are classified into various types on the basis of various variables. The
following are the various types of options.
1. On the basis of the underlying asset:
On the basis of the underlying asset the option are divided in to two types:

47
Index options:
These options have the index as 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 stocks. Options currently trade on over
500 stocks in the United States. A contract gives the holder the right to buy or sell
shares at the specified price.
2. On the basis of the febket movements :
On the basis of the febket movements the option are divided into two types. They
are:
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. It is brought by an investor when he seems that the
stock price moves upwards.
Put Option:
A put option gives the holder the right but not the obligation to sell an asset by a
certain date for a certain price. It is bought by an investor when he seems that the
stock price moves downwards.

2. On the basis of exercise of option:

On the basis of the exercise of the Option, the options are classified into two
Categories.

47
American Option:
American options are options that can be exercised at any time up to the expiration
date. Most exchange –traded options are American.

European Option:
European options are options that can be exercised only on the expiration date
itself. European options are easier to analyze than American options, and
properties of an American option are frequently deduced from those of its
European counterpart.
PAY-OFF PROFILE FOR BUYER OF A CALL OPTION
The Pay-off of a buyer options depends on a spot price of an underlying asset.
The following graph shows the pay-off of buyers of a call option.

PROFIT
R

ITM

ATM E
1
OTM

E LOSS P
2

Figure 2.2

S= Strike price ITM = In the Money

Sp = premium/loss ATM = At the Money
E1 = Spot price 1 OTM = Out of the Money
E2 = Spot price 2
SR = Profit at spot price E1

47
CASE 1: (Spot Price > Strike price)
As the Spot price (E1) of the underlying asset is more than strike price (S).
The buyer gets profit of (SR), if price increases more than E 1 then profit also
increase more than (SR)

CASE 2: (Spot Price < Strike Price)

As a spot price (E2) of the underlying asset is less than strike price (S)
The buyer gets loss of (SP); if price goes down less than E 2 then also his loss is
limited to his premium (SP)

PAY-OFF PROFILE FOR SELLER OF A CALL OPTION

The pay-off of seller of the call option depends on the spot price of the underlying
asset. The following graph shows the pay-off of seller of a call option:

PROFIT

P
ITM ATM
E
2
E
1 S
OTM

LOSS

Figure 2.4
S= Strike price ITM = In the Money
SP = Premium / profit ATM = At The money
E1 = Spot Price 1 OTM = Out of the Money
E2 = Spot Price 2
SR = loss at spot price E2
CASE 1: (Spot price < Strike price)

47
As the spot price (E1) of the underlying is less than strike price (S). The seller gets
the profit of (SP), if the price decreases less than E 1 then also profit of the seller
does not exceed (SP).

CASE 2: (Spot price > Strike price)

As the spot price (E2) of the underlying asset is more than strike price (S) the Seller
gets loss of (SR), if price goes more than E2 then the loss of the seller also increase
more than (SR).

PAY-OFF PROFILE FOR BUYER OF A PUT OPTION

The Pay-off of the buyer of the option depends on the spot price of the underlying
asset. The following graph shows the pay-off of the buyer of a call option.

PROFIT
R

ITM
S
E
2
E ATM
1
OTM

P LOSS

Figure 2.5
S= Strike price ITM = In the Money
SP = Premium / loss ATM = At the Money
E1 = Spot price 1 OTM = Out of the Money
E2 = Spot price 2
SR = Profit at spot price E1

CASE 1: (Spot price < Strike price)

As the spot price (E1) of the underlying asset is less than strike price (S). The buyer
gets the profit (SR), if price decreases less than E1 then profit also increases more
than (SR).

47
CASE 2: (Spot price > Strike price)
As the spot price (E2) of the underlying asset is more than strike price (S),
The buyer gets loss of (SP), if price goes more than E 2 than the loss of the buyer is
limited to his premium (SP).

PAY-OFF PROFILE FOR SELLER OF A PUT OPTION

The pay-off of a seller of the option depends on the spot price of the underlying
asset. The following graph shows the pay-off of seller of a put option.

PROFIT
P
ITM

E ATM
1
E
2
S
OTM

LOSS

Figure 2.6
S = Strike price ITM = In The Money
SP = Premium/profit ATM = At The Money
E1 = Spot price 1 OTM = Out of the Money
E2 = Spot price 2
SR = Loss at spot price E1

CASE 1: (Spot price < Strike price)

As the spot price (E1) of the underlying asset is less than strike price (S), the seller
gets the loss of (SR), if price decreases less than E 1 than the loss also increases
more than (SR).

47
CASE 2: (Spot price > Strike price)
As the spot price (E2) of the underlying asset is more than strike price (S), the seller
gets profit of (SP), of price goes more than E 2 than the profit of seller is limited to
his premium (SP).

FACTORS AFFECTING THE PRICE OF AN OPTION

The following are the various factors that affect the price of an option they are:
Stock Price:
The pay-off from a call option is an amount by which the stock price exceeds the
strike price. Call options therefore become more valuable as the stock price
increases and vice versa. The pay-off from a put option is the amount; by which
the strike price exceeds the stock price. Put options therefore become more
valuable as the stock price increases and vice versa.
Strike price:
In case of a call, as a strike price increases, the stock price has to make a larger
upward move for the option to go in-the –money. Therefore, for a call, as the
strike price increases option becomes less valuable and as strike price decreases,
option become more valuable.
Time to expiration:
Both put and call American options become more valuable as a time to expiration
increases.
Volatility:
The volatility of a stock price is measured of uncertain about future stock price
movements. As volatility increases, the chance that the stock will do very well or
very poor increases. The value of both calls and puts therefore increases as
volatility increase.

47
Risk- free interest rate:
The put option prices decline as the risk-free rate increases where as the price of
call always increases as the risk-free interest rate increases.

Dividends:
Dividends have the effect of reducing the stock price on the X- dividend rate. This
has a negative effect on the value of call options and a positive effect on the value
of put options.

PRICING OPTIONS

An option buyer has the right but not the obligation to exercise on the seller.
The worst that can happen to a buyer is the loss of the premium paid by him. His
downside is limited to this premium, but his upside is potentially unlimited. This
optionality is precious and has a value, which is expressed in terms of the option
price. Just like in other free febkets, it is the supply and demand in the secondary
febket that drives the price of an option.
There are various models which help us get close to the true price of an option.
Most of these are variants of the celebrated Black- Scholes model for pricing
European options. Today most calculators and spread-sheets come with a built-in
Black- Scholes options pricing formula so to price options we don’t really need to
memorize the formula. All we need to know is the variables that go into the
model.

47
 The Black-Scholes formulas for the price of European calls and puts on a non-
dividend paying stock are:

Call option
CA = SN (d1) – Xe- rT N (d2)

Put Option
- rT
PA = Xe N (- d2) – SN (- d1)

Where d1 = ln (S/X) + (r + v2/2) T

v√T
And d2 = d1 - v√T

Where
CA = VALUE OF CALL OPTION
PA = VALUE OF PUT OPTION
S = SPOT PRICE OF STOCK
N = NORMAL DISTRIBUTION
VARIANCE (V) = VOLATILITY
X = STRIKE PRICE
r = ANNUAL RISK FREE RETURN
T = CONTRACT CYCLE
e = 2.71828
r = ln (1 + r)

Table 2.2

OPTIONS TERMINOLOGY

47
Option price/premium:
Option price is the price which the option buyer pays to the option seller. It is also
referred to as the option premium.
Expiration date:
The date specified in the options contract is known as the expiration date, the
exercise date, the strike date or the maturity.
Strike price:
The price specified in the option contract is known as the strike price or the
exercise price.
In-the-money option:
An in-the-Money (ITM) option is an option that would lead to a positive cash flow
to the holder if it were exercised immediately. A call option on the index is said to
be in-the-money when the current index stands at a level higher than the strike
price (i.e. spot price > strike price). If the index is much higher than the strike
price, the call is said to be deep ITM. In the case of a put, the put is ITM 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 if it
were exercised immediately. An option on the index is at-the-money when the
current index equals the strike price (i.e. spot price = strike price).
Out- of–the money option:
An out-of-the-money (OTM) option is an option that would lead to a negative
cash flow it was exercised immediately. A call option on the index is out-of-the-the
money when the current index stands at a level which is less than the strike price
(i.e. spot price < strike price).

47
 If the index is much lower than the strike price, the call is said to be deep
OTM. In the case of a put, the put is OTM if the index is above the strike price.

Intrinsic value of an option:

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 ITM, if it is
ITM. If the call is OTM, its intrinsic value is zero.

Time value of an option:

The time value of an option is the difference between its premium and its intrinsic
value. Both calls and puts have time value. An option that is OTM or ATM has
only time value. Usually, the maximum time value exists when the option is ATM.
The longer the time to expiration, the greater is an option’s time value, all else
equal. At expiration, an option should have no time value.

47
DISTINCTION BETWEEN FUTURES AND OPTIONS

FUTURES OPTIONS
1. Exchange traded, 1. Same as futures
with Novation
2. Exchange defines the 2. Same as futures
product 3. Strike price is fixed,
2. Price is zero, strike price moves
price moves 4. Price is always positive
4. Price is Zero 5. Nonlinear payoff
5. Linear payoff 6. Only short at risk
6. Both long and short
at risk

Table 2.2
CALL OPTION

PREMIUM
STRIKE PRICE INTRINSIC TIME TOTAL CONTRACT
VALUE VALUE VALUE
560 0 2 2 OUT OF
540 0 5 5 THE
520 0 10 10 MONEY

500 0 15 15 AT THE
MONEY
480 20 10 20
460 40 5 45 IN THE
440 60 2 62 MONEY

Table 2.4

PUT OPTION

47
 PREMIUM
STRIKE PRICE INTRINSIC TIME TOTAL CONTRACT
VALUE VALUE VALUE
560 60 2 62
540 40 5 45 IN THE
520 20 10 20 MONEY

AT THE
500 0 15 15 MONEY

480 0 10 10 OUT OF
460 0 5 5 THE
440 0 2 2 MONEY

Table 2.5
PREMIUM = INTRINSIC VALUE + TIME VALUE
The difference between strike values is called interval

47
TRADING

47
 TRADING INTRODUCTION
The futures & Options trading system of NSE, called NEAT-F&O trading
system, provides a fully automated screen-based trading for Nifty futures &
options and stock futures & Options on a nationwide basis as well as an online
monitoring and surveillance mechanism. It supports an order driven febket and
provides complete transparency of trading operations. It is similar to that of trading
of equities in the cash febket segment.
The software for the F&O febket has been developed to facilitate efficient and
transparent trading in futures and options instruments. Keeping in view the
familiarity of trading members with the current capital febket trading system,
modifications have been performed in the existing capital febket trading system so
as to make it suitable for trading futures and options.
On starting NEAT (National Exchange for Automatic Trading) Application, the
log on (Pass Word) Screen Appears with the Following Details.
1) User ID
2) Trading Member ID
3) Password – NEAT CM (default Pass word)
4) New Pass Word
Note: - 1) User ID is a Unique
2) Trading Member ID is Unique & Function; it is Common for all user of
the Trading Member
2) New password – Minimum 6 Characteristic, Maximum 8 characteristics
only 2 attempts are accepted by the user to enter the password’ to open
the Screen
4) If password is forgotten the User required to inform the Exchange in
writing to reset the Password.

47
 TRADING SYSTEM
Nation wide-online-fully Automated Screen Based Trading System (SBTS)
 Price priority
 Time Priority
Note:- 1) NEAT system provides open electronic consolidated limit orders book
(OECLOB)
2) Limit order means: Stated Quantity and stated price
Before Opening the febket
User allowed to set Up 1) Febket Watch Screen
2) Inquiry Screens Only
Open phase (Open Period)
User allowed to 1) Enquiry
2) Order Entry
2) Order Modification
4) Order Cancellation
5) Order Matching
Febket closing period
User Allowed only for inquiries

Surcon period
(Surveillance & Control period)
The System process the Date, for making the system, for the Next Trading day.
Log of the Screen (Before Surcon Period)
The screen shows :- 1) Permanent sign off Not allowed inquiry
2) Temporary sign off and
2) Exit Order Placing

47
Permanent sign off: - febket not updates.
Temporary sign off: - febket up date (temporary sign off, after 5 minutes
Automatically Activate)
Exit: - the user comes out sign off Screen.
Ticker Window
The ticker window displays information of All Trades in the system.
The user has the option of Selecting the Security, which should be appearing in
the ticker window.
Securities in ticker can be selected for each febket types
The ticker window displays both derivative and capital febket segment
Out Standing Order Screen
Out standing Order Screen show, Status out Standing Order enter by User for a
particular security (R.L. Order & SL Order) it Allows :- Order Modification &
Orders Cancellation.
Activity Log Screen
Activity logon screen show, all Activities performed on any order by the User, in
Reversal chronological Order
B Buying
S Selling Orders
OC Cancellation of Order
OM Modifying Order
TC BUY Order & Sell Order, Involving in
Trade are Cancelled
TM By Order & Sell Orders, involving Trade is
Modified

47
It is very useful to a corporate manager to view all the activities that have been
performed on any order (or) all ordered under his Branches & Dealers

Order status Screen

Order Status Screen Shows, Current status of “dealers” own Specified Orders
SNAP Quote Shows
Instantaneous Information About a particular Security can be shown on Febket
watch window (which is not set up in febket Watch window)
It shows Following Statistics: - Open Price, High Price, Low Price, Last Traded
Price, Traded Quantity, 52 Weeks high/Low Price.
MBP (Febket by Price)
MBP (F6) Screen shows Total Out standing Orders of a particular security, in the
Febket, Aggregate at each price in order of Best 5 prices.
It Shows: - RL Order (Regular Lot Order)
SL Order (Stop Loss Order)
ST Order (Special Term Orders)
Buy Back Order with ‘*’ Symbol
P = indicate Pre Open Position
S = Indicate Security Suspend
Security/ Portfolio List
 It Facilitate the user to set up febket watch screen
 And Facilitate to set up his own portfolios

47
 ON-LINE Bach Up
It facilitates the user to take back up of all Orders & Trade Related information, for
current day only.

ON-LINE/TABULAR SLIPS
It Select the Format for conformation slips
About Window
This window displays Software related version numbers details and copy right
information.

Most Activity Securities Screen

It shows most active securities, based on the total traded value during the day

Report Selection Window

It facilitates to print each copy of report at any time. These Reports are
1) Open order report :- For details of out standing orders
2) Order log report:-For details of orders placed, modified&cancelled
3) Trade Done-today report :- For details of orders traded
4) Febket Statistics report: - For details of all securities traded
Information in a Day
Internet Broking
1) NSE introduced internet trading system from February 2000
2) Client place the order through brokers on order routing system
WAP (Wireless Application Protocol)
1) NSE.IT Launches the from November 2000

47
 2) 1st Step-getting the permission from exchange for WAP
3) 2nd step-Approved by the SEBI(SEBI Approved only for SEBI registered
Members)
X.25 Address check
X.25 Address check, is performed in the NEAT system, when the user log on into
the NEAT, system & during report down load request.
FTP (File Transfer protocol)
1) NSE Provide for each member a separate directory (File) to know their trading
DATA, clear DATA, bill trade Report.
2) NSE Provide in Addition a “Common” directory also, to know circulars,
NCFM & Bhava Copy information.
3) FTP is connected to each member through VSAT, leased line and internet.
4) VSAT (FROM 4:15PM to 9:20AM), Internet (24 Hours).

Bhava Copy Data Base

Bhava copy data provides sumfeby information about each security, for each day
(only last 7 days bhava Copy file are stored in report directory.)
Note: - Details in Bhava copy-open price, high and low prices, closing prices
traded value, traded volume and No. of transactions.

Snap Shot Data Base

Snap shot data base provides Snap shot of the limit order book at many time points
in a day.
Index Data Base

Index Data Base provides information about stock febket indexes.

47
 Trade Data Base

Trade Data Base provides a data base of every single traded order, take place in
exchange.

BASKET TRADING SYSTEM

1) Taking advantage for easy arbitration between future febket and & cash febket
difference, NSE introduce basket trading system by off setting positions through
off line-order-entry facility.
2) Orders are created for a selected portfolio to the ratio of their febket
Capitalization from 1 lake to 20 crores.
3) Offline-order-entry facility: - generate order file in as specified format out side
the system & up load the order file in to the system by invoking this facility in
Basket trading system.

47
TRADING NETWORK

47
 HUB ANTENNA SATELLITE

NSE MAIN FRAME

BROKER’S PREMISES

Figure 2.7

47
 SUB BROKER

1) Eligibility: - 21 years, 10+2 qualification and paid up capital 5 lakhs.

2) Not convicted involving fraud and dishonesty.

3) Not debarred by SEBI previously.

4) 51% of shares as dominant promoters his/her and his/her spouse.

5) First application to stock exchange-Stock exchange send his application to

SEBI-SEBI satisfied issued Certificate Registration.

6) A registered sub-broker, holding registration, granted by SEBI on the

Recommendations of a trading member, can transact through the member

(broker) who had recommend his application for registration.

7) Maximum Brokerage Commission 1.5%

8) Purchase note and sales note issued by the sub broker with 24 hours.

Investor protection Fund

1) Investor protection fund setup under Bombay public trust Act 1950.

2) IPF maintained by NSE Exact mane of this fund is NSE Investors Protection

Fund Trust.

3) Any Member defaulted the IPF paid maximum 10 lakhs only to each investor.

4) Client against default member, customer have right to apply within 2 months

from the date of Publishing notice by a widely circulated minimum one daily

News paper.

47
 Demat of the Shares
1) Agreement with depository by security holder (at the time opening the demat
account)
2) Surrender the security certificates to “issuer” (Company)for cancellation
3) Issuer (company) informs the “depository” about the transfer of the shares.
4) Participant (Company) informs the “depository” about the transfer of the
shares.
5) “Depository” records the “transferee” name as “beneficial owner” in “book
entry form” in his records.
6) Each custodian/clearing member is requiring maintaining a Clear pool account
with depositaries.
7) The investor has no restriction and has full right to open many (number of)
depository accounts
8) Shares or securities are transferred from one account to another account only
on the instruction of the beneficial owner.

ISIN (International Securities Identification Number)

 Any company going to foe dematerialized with shares that company get
this ISIN for demat shares.
 ISIN is assigned by SEBI.
 ISIN is allotted by NSDL.

Main Objectives of Demat Trading

1) Freely transferability
2) Dematerialized in depository mode
3) Maintenance of ownership records in book entry form

47
 TYPES OF ORDERS
1) Day Order :
System cancels the order automatically at the end of day
2) GTC (Good Till Cancel) :
Order cancels from the system at the end of the day of the expiry date Period
2) GTD (Good till Date):
This order stays in the system up to specify the number of days (Not Exceed).
4) IOC (Immediate or Cancel):
When an order enters in the system, it is searching for the matching. If
Matching is not traced the order immediately cancelled.
5) Stop Loss Order :
An order which is activated when a price crosses a limit is called stop
Loss order.
Long Orders Short Order
Spot Rs.100/- Spot Rs. 100/-
Trigger Rs.95/- (Buy) Trigger Rs.105/- (Sell)
Limit Price Rs. 92/- (Sell) Limit Price Rs.108/- (Buy)
(Stop Loss Order) (Stop loss order)

EXPOSURE LIMITS IN DERIVATIVE FEBKET

For Index Futures & Options:
Liquid Net worth x 22 1/2 Times = National Value of gross open position
For Stock Future & Options:
Liquid net worth x 20 Times = National value of gross open position
For Calendar Spread:
For month MTM value (profit) x 1/2 = Open position

47
 Chapter-3

Company Profile

47
 COMPANY PROFILE
Concept:
Inter-connected stock exchange of India Limited [ISE] has been promoted by
14 Regional stock exchanges to provide cost-effective trading linkage/connectivity
to all the members of the participating Exchanges, with the objective of widening
the febket for the securities listed on these Exchanges. ISE aims to address the
Needs of small companies and retail investors with the guiding principle of
optimizing the existing infrastructure and harnessing the potential of regional
febkets. So as to transform these into liquid and vibrant febket through the use of
state-of-the-art technology and networking. The participating Exchanges Of ISE in
all about 4500 stock brokers, out of which more than 200 have been currently
registered as traders on ISE. In order to leverage its infrastructure and to expand its
nationwide reach, ISE has also appointed around 450 Dealers across 70 cities
others than the participating Exchange centers. These dealers are administratively
supported through the regional offices of ISE at Delhi [north] Kolkata [east],
Coimbatore & Hyderabad [south] and Nagapur [central], besides Mumbai.
ISE has also floated a wholly-owned subsidiary, ISE securities and services
Limited [ISS], which has taken up corporate membership of the National Stock
Exchange of India Ltd. [NSE] in both the Capital Febket and Futures and Options
Segments and The Stock Exchange, Mumbai in the equities segment, so that The
traders and dealers of ISE can access other febkets in addition to the ISE Febkets
and their local febket. ISE thus provides the investors in smaller cities A one-stop
solution for cost-effective and efficient trading and settlement in Securities.
With the objective of broad basing the range of its services, ISE has started
offering the full suite of DP facilities to its Traders, Dealers and their clients.

47
 OBJECTIVES

 Create a single integrated national level solution with access to

multiple febkets for providing high cost-effective service to millions
of investors across the country.
 Create a liquid and vibrant national level febket for all listed
companies in general and small capital companies in particular.
 Optimally utilize the existing infrastructure and other resources of
participating Stock Exchanges, which are under-utilized now.
 Provide a level playing field to small Traders and Dealers by offering
an opportunity to participate in a national febkets having investment-
oriented business.
 Reduce transaction cost.
 Provide clearing and settlement facilities to the Traders and Dealers
across the Country at their doorstep in a decentralized mode.
 Spreads demat trading across the country.

47
 SALIENT FEATURES

Network of intermediaries:
As at the beginning of the financial year 2002-04, 548 intermediaries [207 Traders
and 241 Dealers] are registered on ISE. A broad of members forms the bedrock
for any Exchange, and in this respect, ISE has pool of registered intermediaries
who can be tapped for any new line of business.

Robust Operational Systems:

The Trading, settlement and funds transfer operations of ISE and completely
automated and state-of-the-art systems have been deployed. The communication
Network of ISE, which has connectivity with over 400 trading members and is
spread across 46 cities, is also used for supporting of ISS. The trading software
And settlement software, as well as the electronic funds transfer arrangement
established with HDFC Bank and ICICI Bank, gives ISE and ISS the required
operational efficiency and flexibility to not only handle the secondary febket
functions effectively, but also by leveraging them for new ventures.

Skilled and experienced manpower:

ISE and ISS have experienced and professional staff, who have wide experience in
Stock Exchanges/capital febket institutions, with in some cases, the experience
going up to nearly twenty years in this industry. The staff has skill-set required to
perform a wide range of functions, depending upon the requirement from time to
time.

47
Aggressive pricing policy:
The philosophy of ISE is to have an aggressive pricing policy for the various
Products and services offered by it. The aim is to penetrate the retail febket and
strengthen the position, so that a wide variety of products and services having
Appeal for the retail febket can be offered using a common distribution channel.
The aggressive pricing policy also ensures that the intermediaries have sufficient
financial incentives for offering these products and services to the end-clients.

Trading, Risk Management and Settlement Software Systems:

The ORBIT [online Regional Bourses Inter-Connected Trading] and AXIS
(Automated Exchange Integrated Settlement) software developed on the
Microsoft NT platform, with consultancy assistance form Microsoft, are the most
contemporary of the trading and settlement software introduced in the country.
The applications have been built on a technology platform, which offers low cost
of ownership facilitates maintenance and supports easy up gradation and
enhancement. The software’s are so designed that the transaction processing
capacity depends on the hardware used; capacity can be added by just adding
Inexpensive hardware, without any additional software work.

Vibrant Subsidiary Operations:

ISS, The wholly-owned subsidiary of ISE, is one of the biggest Exchange
subsidiaries in the country. On any given day, more than 250 registered
intermediaries of ISS traded from 46 cities across the length and breadth of the
Country.

47
Chapter - 4

Data Analysis
&
Interpretation

47
 ONGC FUTURES & OPTIONS
PRICE CALL OPTION
DATE SPOT FUTURE 800 820 840 860 880 900 920
Jan/FRI/22 820.25 829.5 0 0 20.75 24.75 16.2 12.15 8.6
Jan/SAT/24 TRADING HOLIDAY
Jan/SUN/25 TRADING HOLIDAY
Jan/MON/26 824.9 827.7 0 42 24.6 22.2 17.2 11 7
Jan/TUE/27 817.25 812.55 42.2 22.2 25.75 19.05 11.1 10 7.2
Jan/WED/28 790.6 776.65 22 22.85 15.2 9 6.9 5.95 4.05
FEB/THU/1 799.2 792.9 22.65 22.5 15.95 9.05 0 5.5 2.45
FEB/FRI/2 800 775.2 26 15.7 12 8.1 5.5 0 0
FEB/SAT/2 TRADING HOLIDAY
FEB/SUN/4 TRADING HOLIDAY
FEB/MON/5 772.25 767.25 21.5 12 0 6.4 0 2 2
FEB/TUE/6 770.1 765.25 20.15 12 0 0 0 2.25 2.2
FEB/WED/7 765.6 750.55 16.95 8.95 0 0 0 0 0
FEB/THU/8 780 77.85 22 16.55 10.45 0 0 1.9 2.15
FEB/FRI/9 781 772.55 19.8 12.9 0 0 0 0 2.8
FEB/SAT/10 TRADING HOLIDAY
FEB/SUN/11 TRADING HOLIDAY
FEB/MON/12 792.4 792.1 24.9 15 8 0 0 0 0

Table 4.1

47
FEB/TUE/13 807.25 805.25 29.7 19.4 11.25 6.05 0 2.25 0
FEB/WED/14 780.25 759.8 12 8.2 4.5 2.2 0 1.7 0
FEB/THU/15 774.65 768.25 12 8.2 0 0 0 0 0
Feb/FRI/16 762.2 754.25 8.65 0 0   0 0 0
FEb/SAT/17 TRADING HOLIDAY
FEB/SUN/18 TRADING HOLIDAY
FEB/MON/19 792.05 791.4 16.2 9.05 0 0 0 0 0
FEB/TUE/20 790.55 781.8 11.7 0 0 0 0 0 0
FEB/WED/21 812.7 810.25 22.45 12.25 7 2.55 0 1 0
FEB/THU/22 852.25 851.45 52 25 20.55 14 11 2.2 2
FEB/FRI/22 842.25 844.75 42 28.9 14.2 14.2 0 2.7 0
FEB/SAT/24 TRADING HOLIDAY
FEB/SUN/25 TRADING HOLIDAY
ONGC FUTURES & OPTIONS
FEB/MON/26 852.2 855.6 55 28.2 20.6 8 0 1.85 1.7
PRICE PUT OPTION
FEB/TUE/27 NATIONAL HOLIDAY
DATE
FEB/WED/28 866.5 SPOT862.5 FUTURE 61 800
48 82026 840
12.5 860 2.75880 900
1.5 920 0
Jan/FRI/22
FEB/THU/29 872.7 820.25
876.7 0829.5 0 0 21.85
28 28.5
17 291.45 0 0.10 00
Jan/SAT/24 TRADING HOLIDAY
Jan/SUN/25 TRADING HOLIDAY
Jan/MON/26 824.9 827.7 25 26.1 0 0 0 0 0
Jan/TUE/27 817.25 812.55 28 0 0 0 0 0 0
jan/WED/28 790.6 776.65 0 0 0 0 0 0 0
FEB/THU/1 799.2 792.9 0 0 0 0 0 0 0 Table 4.2
FEB/FRI/2 800 775.2 0 0 0 0 0 0 0
FEB/SAT/2 TRADING HOLIDAY
FEB/SUN/4 TRADING HOLIDAY
FEB/MON/5 772.25 767.25 0 0 0 0 0 0 0
FEB/TUE/6 770.1 765.25 0 0 0 0 0 0 0
FEB/WED/7 765.6 750.55 0 0 0 0 0 0 0
FEB/THU/8 780 777.85 0 0 0 0 0 0 0
FEB/FRI/9 47781 772.55 0 0 0 0 0 0 0
FEB/SAT/10 TRADING HOLIDAY
FEB/SUN/11 TRADING HOLIDAY
FEB/MON/12 792.4 792.1 0 0 0 0 0 0 0
 FEB/TUE/13 807.25 805.25 22.25 0 0 0 0 0 0
FEB/WED/14 780.25 759.8 0 0 0 0 0 0 0
FEB/THU/15 774.65 768.25 0 0 0 0 0 0 0
FEB/FRI/16 762.2 754.25 0 0 0 0 0 0 0
Table 4.3 FEB/SAT/17 TRADING HOLIDAY
FEB/SUN/18 TRADING HOLIDAY
FEB/MON/19 792.05 791.4 0 0 0 0 0 0 0
FEB/TUE/20 790.55 781.8 0 0 0 0 0 0 0
FEB/WED/21 812.7 810.25 12.5 0 0 0 0 0 0
FEB/THU/22 852.25 851.45 2.75 4.15 12 0 0 0 0
FEB/FRI/22 842.25 844.75 0 4.95 0 0 0 0 0
FEB/SAT/24 TRADING HOLIDAY
FEB/SUN/25 TRADING HOLIDAY
FEB/MON/26 852.2 47855.6 0 0 5 0 0 0 0
FEB/TUE/27 NATIONAL HOLIDAY
FEB/WED/28 866.2 862.5 0 0 5 9 0 0 0
FEB/THU/29 872.45 876.7 0 0 0 1 0 0 0
 Table 4.4

47
 ANALYSIS
The Objective of this analysis is to evaluate the profit/loss position futures
and options. This analysis is based on sample data taken of OIL AND
NATURAL GAS CORPORATION LIMITED Scrip. This analysis
considered the FEBCH contract of ONGC. The lot Size of ONGC is
225, the time period in which this analysis done is from 22-2-2008 to 29-
2-2008.

DATE FUTURE PRICE

22/1/2008 829.5
26/1/2008 827.7
27/1/2008 812.55
28/1/2008 776.65
1/2/2008 792.9
2/2/2008 775.2
5/2/2008 767.25
6/2/2008 765.25
7/2/207 750.55
8/2/2008 777.85
9/2/2008 772.55
12/2/2008 792.1
12/2/2008 805.25
14/2/2008 759.8
15/2/2008 768.25
16/2/2008 754.25
19/2/2008 791.4
20/2/2008 781.8
21/2/2008 810.25
22/2/2008 851.45
22/2/2008 844.75
26/2/2008 855.6
28/2/2008 862.5
29/2/2008 876.7

Table 4.5

CALL PRICES

47
 PRICE PREMIUM
DATE SPOT FUTURE 800 820 840 860 880 900 920
22/1/2008 820.25 829.5 0 0 20.75 24.75 16.2 12.15 8.6
26/1/2008 824.9 827.7 0 42 24.6 22.2 17.2 11 7
27/1/2008 817.25 812.55 42.2 22.2 25.75 19.05 11.1 10 7.2
28/1/2008 790.6 776.65 22 22.85 15.2 9 6.9 5.95 4.05
1/2/2008 799.2 792.9 22.65 22.5 15.95 9.05 0 0 0
2/2/2008 800 775.2 26 15.7 12 8.1 5.5 0 0
5/2/2008 772.25 767.25 21.5 12 0 6.4 0 2 2
6/2/1/2008 770.1 765.25 20.15 12 0 0 0 2.25 2.2
7/2/2008 765.6 750.55 16.95 8.95 0 0 0 0 0
8/2/2008 780 777.85 22 16.55 10.45 0 0 1.9 2.15
9/2/2008 781 772.55 19.8 12.9 0 0 0 0 2.8
12/2/2008 792.4 792.1 24.9 15 8 0 0 0 0
12/2/2008 807.25 805.25 29.7 19.4 11.25 6.05 0 2.25 0
14/2/2008 780.25 759.8 12 8.2 4.5 2.2 0 1.7 0
15/2/2008 774.65 768.25 12 8.2 0 0 0 0 0
16/2/2008 762.2 754.25 8.65 0 0 0 0 0 0
19/2/2008 792.05 791.4 16.2 9.05 0 0 0 0 0
20/2/2008 790.55 781.8 11.7 0 0 0 0 0 0
21/2/2008 812.7 810.25 22.45 12.25 7 2.55 0 1 0
22/2/2008 852.25 851.45 52 25 20.55 14 11 2.2 2
22/2/2008 842.25 844.75 42 28.9 14.2 14.2 0 2.7 0
26/2/2008 852.2 855.6 55 28.2 20.6 8 0 1.85 1.7
28/2/2008 866.2 862.5 61 48 26 12.5 2.75 1.5 0
29/2/2008 872.45 876.7 0 0 28 17 1.45 0.1 0

Table 4.6

OBSERVATIONS AND FINDINGS

CALL OPTION

BUYERS PAY OFF:

47
  As brought 1 lot of ONGC that is 225, those who buy for 840, paid
20.75 premium per share.
 Settlement price is 872.45

Spot price 872.45

Strike price 840.00
Amount 22.45
Premium paid (-) 20.75
Net Profit 2.7 x 225= 607.5
Buyer Profit = Rs. 607.5(Net Amount)

Because it is positive it is in the money contract, hence buyer will get

more profit, incase spot price increase buyer profit also increase.

SELLERS PAY OFF:

 It is in the money for the buyer, so it is in out of the money for

seller; hence his loss is also increasing.

Strike price 840.00

Spot price 872.45
Amount -22.45
Premium Received +20.75
Loss -2.7 x 225 = -607.5
Seller Loss = Rs. 607.5(Loss)

Because it is negative it is out of the money, hence seller will get more
loss, incase spot price decrease in below strike price, seller get profit in
premium level.

PUT PRICES

PRICE PREMIUM
DATE SPOT FUTURE 800 820 840 860 880 900 920
22/1/2008 820.25 829.5 0 21.85 28.5 29 0 0 0
26/1/2008 824.9 827.7 25 26.1 0 0 0 0 0

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 27/1/207 817.25 812.55 28 0 0 0 0 0 0
28/1/2008 790.6 776.65 0 0 0 0 0 0 0
1/2/2008 799.2 792.9 0 0 0 0 0 0
2/2/2008 800 775.2 0 0 0 0 0 0 0
5/2/2008 772.25 767.25 0 0 0 0 0 0 0
6/2/2008 770.1 765.25 0 0 0 0 0 0 0
7/2/2008 765.6 750.55 0 0 0 0 0 0 0
8/2/2008 780 777.85 0 0 0 0 0 0 0
9/2/2008 781 772.55 0 0 0 0 0 0 0
12/2/2008 792.4 792.1 0 0 0 0 0 0 0
12/2/2008 807.25 805.25 22.25 0 0 0 0 0 0
14/2/2008 780.25 759.8 0 0 0 0 0 0 0
15/2/2008 774.65 768.25 0 0 0 0 0 0 0
16/2/2008 762.2 754.25 0 0 0 0 0 0 0
19/2/2008 792.05 791.4 0 0 0 0 0 0 0
20/2/2008 790.55 781.8 0 0 0 0 0 0 0
21/2/2008 812.7 810.25 12.5 0 0 0 0 0 0
22/2/2008 852.25 851.45 2.75 4.15 12 0 0 0 0
22/2/2008 842.25 844.75 0 4.95 0 0 0 0 0
26/2/2008 852.2 855.6 0 0 5 0 0 0 0
28/2/2008 866.2 862.5 0 0 5 9 0 0 0
29/2/2008 872.45 876.7 0 0 0 1 0 0 0

Table 4.7

OBSERVATION AND FINDINGS

PUT OPTION

BUYERS PAY OFF:

 Those who have purchase put option at a strike price of 840, the
premium payable is 28.50
 On the expiry date the spot febket price enclosed at 872.45

Strike Price 840.00

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 Spot Price 872.45
Net pay off - 22.45 x 225 = 7526.25
=====
Already Premium paid 28.50
So, it can get loss is 7526.25

Because it is negative, out of the Money contract, Hence buyer gets more
loss, incase Spot price decrease in below strike price, buyer get profit in
premium level.

SELLERS PAY OFF:

 As Seller is entitled only for premium so, if he is in profit and also

seller has to borne total profit.

Spot price 872.45

Strike price 840.00
Net pay off 22.45 x 225 = 7526.25
======
Already Premium received 28.50
So, it can get profit is 7526.25

Because it is positive, in the Money Contract, Hence Seller gets more

profit, incase Spot price decrease in below strike price Seller can get loss
in premium level.

DATA OF ONGC - THE FUTURES AND OPTIONS OF THE

FEBCH MONTH

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 DATE SPOT PRICE FUTURE PRICE
22/1/2008 820.25 829.5
26/1/2008 824.9 827.7
27/1/2008 817.25 812.55
28/1/2008 790.6 776.65
1/2/2008 799.2 792.9
2/2/2008 800 775.2
5/2/2008 772.25 767.25
6/2/2008 770.1 765.25
7/2/2008 765.6 750.55
8/6/2008 780 777.85
9/6/2008 781 772.55
12/2/2008 792.4 792.1
12/2/2008 807.25 805.25
14/2/2008 780.25 759.8
15/2/2008 774.65 768.25
16/2/2008 762.2 754.25
19/2/2008 792.05 791.4
20/2/2008 790.55 781.8
21/2/2008 812.7 810.25
22/2/2008 852.25 851.45
22/2/2008 842.25 844.75
26/2/2008 852.2 855.6
28/2/2008 866.2 862.5
29/2/2008 872.45 876.7

Table 4.8

\
OBSERVATIONS AND FINDINGS

 The future price of ONGC is moving along with the febket price.

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 If the buy price of the future is less than the settlement price, than
the buyer of a future gets profit.

 If the selling price of the future is less than the settlement price,
than the seller incur losses.

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Chapter - 5
Conclusions
&
suggestions

CONCLUSIONS

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 Derivatives febket is an innovation to cash febket. Approximately
its daily turnover reaches to the equal stage of cash febket. The
average daily turnover of the NSE derivative segments

 In cash febket the profit/loss of the investor depend the febket price
of the underlying asset. The investor may incur Hugh profit or he
may incur Hugh profits or he may incur Hugh loss. But in
derivatives segment the investor the investor enjoys Hugh profits
with limited downside.

 In cash febket the investor has to pay the total money, but in
derivatives the investor has to pay premiums or febgins, which are
some percentage of total money.

 Derivatives are mostly used for hedging purpose.

 In derivative segment the profit/loss of the option writer is purely
depend on the fluctuations of the underlying asset.

SUGGESTIONS

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 In bullish febket the call option writer incurs more losses so the
investor is suggested to go for a call option to hold, where as the
put option holder suffers in a bullish febket, so he is suggested to
write a put option.
 In bearish febket the call option holder will incur more losses so the
investor is suggested to go for a call option to write, where as the
put option writer will get more losses, so he is suggested to hold a
put option.
 In the above analysis the febket price of ONGC is having low
volatility, so the call option writer enjoys more profits to holders.
 The derivative febket is newly started in India and it is not known
by every investor, so SEBI has to take steps to create awareness
among the investors about the derivative segment.
 In order to increase the derivatives febket in India, SEBI should
revise some of their regulations like contract size, participation of
FII in the derivatives febket.
 Contract size should be minimized because small investors cannot
afford this much of huge premiums.
 SEBI has to take further steps in the risk management mechanism.
 SEBI has to take measures to use effectively the derivatives
segment as a tool of hedging.

LIMITATIONS OF THE STUDY

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 The following are the limitation of this study.

 The scrip chosen for analysis is OIL & NATURAL

GAS CORPORATION LTD and the contract taken is
March 2007 ending one-month contract.

 The data collected is completely restricted to the OIL &

NATURAL GAS CORPORATION LTD of March
2007; hence this analysis cannot be taken universal.

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BIBLIOGRAPHY

47
 BIBLIOGRAPHY

 BOOKS :-
 Derivatives Dealers Module Work Book - NCFM
 Financial Febket and Services - GORDAN &
NATRAJAN
 Financial Management - PRASANNA CHANDRA

 NEWS PAPERS :-
 Economic times
 Times of India
 Business Standard

 MAGAZINES :-
 Business Today
 Business world
 Business India

 WEBSITES :-
 www.derivativesindia.com
 www.indianinfoline.com
 www.nseindia.com
 www.bseindia.com
 www.sebi.gov.in
 www.google.com(Derivatives febket)

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APPENDIX

47
 LIST OF ABBREVIATIONS
BSE Bombay Stock Exchange
NSE National Stock Exchange
ISE Inter-connected Stock Exchange
ABC Additional Base Capital
BMC Base Minimum Capital
NSDL National Securities Depository Ltd.
CDSL Central Depositories Services Ltd.
CM Capital Febket
Co. Company
DCA Department of Company Affairs
DEA Department of Economic Affairs
DP Depository Participant
DPG Dominant Promoter Group
DQ Disclosed Quantity
DvP Delivery versus Payment
FI Financial Institution
FII Foreign Institutional Investors
F&O Futures and Options
FTP File Transfer Protocol
IOC Immediate or Cancel
IPF Investor Protection Fund
ISIN International Securities Identification Number

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LTP Last Trade Price
MBP Febket by Price
MTM Febk to Febket
NSCCL National Securities Clearing Corporation Limited
OTC Over the Counter
NEAT National Exchange for Automated Trading
NCFM NSE's Certification in Financial Febkets
RBI Reserve Bank of India
RDM Retail Debt Febket
SAT Securities Appellate Tribunal
SBTS Screen Based Trading System
SC(R)A Securities Contracts (Regulation) Act, 1956
SC(R)R Securities Contracts (Regulation) Rules, 1957
SEBI Securities and Exchange Board of India
SGF Settlement Guarantee Fund
SRO Self Regulatory Organization
T+2 Second day from the trading day
TM Trading Member
UTI Unit Trust of India
VaR Value at Risk
VSAT Very Small Aperture Terminal
WDM Wholesale Debt Febket

47