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  • 1. Analysis of Derivatives and Stock Broking at Apollo Sindhoori Executive SummaryTitle of the analysis “Analysis of Derivatives and Stock Broking at Apollo Sindhoori capitalInvestment ltd.”The function of the financial market is to facilitate the transfer of funds from surplussectors (lenders) to deficit sector (borrowers) Indian financial system consist of themoney market and capital market. Depository is an organization where the securities of a shareholder are held inthe electronic form at the request of the shareholder through a medium of a depositoryparticipant.To handle the securities in electronic form as per the Depository Act 1996, twoDepositories are registered with SEBI. They are 1. National Securities Depository Ltd (NSDL) 2. Central Depository Services (India) ltd (CSDL)A derivative is a financial instrument that derives its value from an underlying asset.This underlying asset can be stocks, bonds currency, commodities, metals and evenintangible. Like stock indices. There are different types of derivatives like Forwards,Futures, Options, and Swaps. A future is a contract to buy or sell an asset at a specified future date at aspecified price. Options are deferred delivery contracts that give the buyers the right,but not the obligation, to buy or sell a specified underlying at a price on or before aspecified date. ASCI computer share private Ltd. Is a joint venture between computer shareAustralia and ASCI consultant’s Ltd. India in the registry management servicesindustry. Computer share Australia is the world’s largest and only global shareregistry providing financial market services and technology to the global securitiesindustry. ASCI corporate and mutual fund share registry and investor servicesbusiness, India’s No.1Registrar and transfer agent and rated as India’s “most admiredregistrar” for its over all excellence in volume management, quality process andtechnology driven services. BABASAB PATIL PROJECT REPORT ON FINANCE 1
  • 2. Analysis of Derivatives and Stock Broking at Apollo Sindhoori Computer share has over 6000 experienced professionals; computer shareoperates in five continents, providing services and solutions to listed companies,investors, employees, exchanges and other financial institutions while ASCI hashandled over 675 issues as Registrar to Issues servicing over 16 million investorsfrom multiple locations across India. ASCI Computer share is all geared up to establish a new paradigm in servicedelivery driven by benchmark operations management practices, the highest qualitystandards and state-of –the-art technology to service its clients and the investorcommunity at large. The rapid developments in the Indian securities. This report is delivered in to 2 parts; each part is prepared on the basis of theanalysis carried on in the company, of the first part of the report makes us familiar ofthe company, its quality policy, quality objectives and its plans. The second partcontains the analysis on derivatives, stock broking process and its service offered byASCI to its clients. The objective of the analysis are to analysis of derivativesproducts, trading systems and process, clearing and settlement, to know the process ofstock broking, the calculation of brokerage, how to get registered with ASCI in orderto buy and sell the shares. BABASAB PATIL PROJECT REPORT ON FINANCE 2
  • 3. Analysis of Derivatives and Stock Broking at Apollo Sindhoori Objective of the analysis  Getting an in-depth knowledge of working of derivatives market with special reference to the stock exchanges.  Understanding the role of stock broking in capital market and derivatives market.  To know the overview of the market, to study about the settlement procedure in the stock exchange.  To analysis about the intermediaries, their functioning and importance of their presence in the capital market and study about the action trading in the stock exchangeNeed for the study Financial Derivatives are quite new to the Indian Financial Market, but thederivatives market has shown an immense potential which is visible by the growth ithas achieved in the recent past, In the present changing financial environment and anincreased exposure towards financial risks, It is of immense importance to have agood working knowledge of Derivatives.Methodology:-Methodology explains the methods used in collecting information to carry out theproject. I have collected the primary data from the internal guide and the clients who usevisit and trade in the ASCI stock broking Ltd. The secondary data about the onlinetrading is collected from the various websites. • Websites • Magazines • News papers The data for the analysis has been collected from NSE websites. BABASAB PATIL PROJECT REPORT ON FINANCE 3
  • 4. Analysis of Derivatives and Stock Broking at Apollo Sindhoori Introduction to Organization: ASCI, is a premier integrated financial services provider, and ranked among the top five in the country in all its business segments, services over 16 million individual investors in various capacities, and provides investor services to over 300 corporate, comprising the who is who of Corporate India. ASCI covers the entire spectrum of financial services such as Stock broking, Depository Participants, Distribution of financial products - mutual funds, bonds, fixed deposit, equities, Insurance Broking, Commodities Broking, Personal Finance Advisory Services, Merchant Banking & Corporate Finance, placement of equity, IPO’s, among others. ASCI has a professional management team and ranks among the best in technology, operations and research of various industrial segments The birth of ASCI was on a modest scale in 1981. It began with the vision and enterprise of a small group of practicing Chartered Accountants who founded the flagship company …ASCI Consultants Limited. It started with consulting and financial accounting automation, and carved inroads into the field of registry and share accounting by 1985. Since then, they have utilized their experience and superlative expertise to go from strength to strength…to better their services, to provide new ones, to innovate, diversify and in the process, evolved ASCI as one of India’s premier integrated financial service enterprise. Thus over the last 20 years ASCI has traveled the success route, towards building a reputation as an integrated financial services provider, offering a wide spectrum of services. And they have made this journey by taking the route of quality service, path breaking innovations in service, versatility in service and finally…totality in service. Our highly qualified manpower, cutting-edge technology, comprehensive infrastructure and total customer-focus has secured for us the position of an emerging financial services giant enjoying the confidence and support of an enviable clientele across diverse fields in the financial world. BABASAB PATIL PROJECT REPORT ON FINANCE 4
  • 5. Analysis of Derivatives and Stock Broking at Apollo Sindhoori Vision of ASCI: “To be amongst most trusted power utility company of the country by providing environment friendly power on most cost effective basis, ensuring prosperity for its stakeholders and growth with human face.” Mission of ASCI: • To ensure most cost effective power for sustained growth of India. • To provide clean and green power for secured future of countrymen. • To retain leadership position of the organization in Hydro Power generation, while working with dedication and innovation in every project we undertake. • To maintain continuous pursuit for cost effectiveness enhanced productivity for ensuring financial health of the organization, to take care of stakeholders’ aspirations continuously. • To be a technology driven, transparent organization, ensuring dignity and respect for its team members. • To inculcate value system all cross the organization for ensuring trustworthy relationship with its constituent associates & stakeholders. • To continuously upgrade & update knowledge & skill set of its human resources. • To be socially responsible through community development by leveraging resources and knowledge base. • To achieve excellence in every activity we undertake. BABASAB PATIL PROJECT REPORT ON FINANCE 5
  • 6. Analysis of Derivatives and Stock Broking at Apollo Sindhoori Quality policy of ASCI: To achieve and retain leadership, ASCI shall aim for complete customer satisfaction, by combining its human and technological resources, to provide superior quality financial services. In the process, ASCI will strive to exceed Customers expectations. Quality Objectives As per the Quality Policy, ASCI will: • Build in-house processes that will ensure transparent and harmonious relationships with its clients and investors to provide high quality of services. • Establish a partner relationship with its investor service agents and vendors that will help in keeping up its commitments to the customers. • Provide high quality of work life for all its employees and equip them with adequate knowledge & skills so as to respond to customers needs. • Continue to uphold the values of honesty & integrity and strive to establish unparalleled standards in business ethics. • Use state-of-the art information technology in developing new and innovative financial products and services to meet the changing needs of investors and clients. • Strive to be a reliable source of value-added financial products and services and constantly guide the individuals and institutions in making a judicious choice of same.Strive to keep all stake-holders (shareholders, clients, investors, employees, suppliersand regulatory authorities) proud and satisfied BABASAB PATIL PROJECT REPORT ON FINANCE 6
  • 7. Analysis of Derivatives and Stock Broking at Apollo SindhooriACTIVITIES CARRIED OUT BY ASCI STOCK BROKING LIMITED 1. Share Broking. 2. Demat & Remat Services. 3. Mutual Funds. 4. Investments. 5. Personal Tax planning. 6. Insurance Advisory.The explanation for the above –mentioned points are as follows: Services and qualities of ASCI Ltd Quality Objectives As per the Quality Policy, ASCI will: • Build in-house processes that will ensure transparent and harmonious relationships with its clients and investors to provide high quality of services. • Establish a partner relationship with its investor service agents and vendors that will help in keeping up its commitments to the customers. • Provide high quality of work life for all its employees and equip them with adequate knowledge & skills so as to respond to customers needs. • Continue to uphold the values of honesty & integrity and strive to establish unparalleled standards in business ethics. • Use state-of-the art information technology in developing new and innovative financial products and services to meet the changing needs of investors and clients. • Strive to be a reliable source of value-added financial products and services and constantly guide the individuals and institutions in making a judicious choice of same. BABASAB PATIL PROJECT REPORT ON FINANCE 7
  • 8. Analysis of Derivatives and Stock Broking at Apollo Sindhoori • Strive to keep all stake-holders (shareholders, clients, investors, employees, suppliers and regulatory authorities) proud and satisfied.The services provided by the ASCI:A). my portfolio • Portfolio planner • Risk quotient • Equity portfolio • My net worth B). Planners • Goal planner • Retirement planner • Yield calculator • Risk hedgerC). Publications • The Finapolis • ASCI Bazaar Baatein. BABASAB PATIL PROJECT REPORT ON FINANCE 8
  • 9. Analysis of Derivatives and Stock Broking at Apollo Sindhoori DERIVATIVESIntroduction: BSE created history on June 9, 2000 by launching the first Exchange tradedIndex Derivative Contract i.e. futures on the capital market benchmark index - theBSE Sensex. The inauguration of trading was done by Prof. J.R. Varma, member ofSEBI and chairman of the committee responsible for formulation of risk containmentmeasures for the Derivatives market. The first historical trade of 5 contracts of Juneseries was done on June 9, 2000 at 9:55:03 a.m. between M/s Kaji and MaulikSecurities Pvt. Ltd. and M/s Emkay Share and Stock Brokers Ltd. at the rate of 4755. In the sequence of product innovation, the exchange commenced trading inIndex Options on Sensex on June 1, 2001. Stock options were introduced on 31 stockson July 9, 2001 and single stock futures were launched on November 9, 2002. September 13, 2004 marked another milestone in the history of Indian CapitalMarkets, the day on which the Bombay Stock Exchange launched Weekly Options, aunique product unparallel in derivatives markets, both domestic and international.BSE permitted trading in weekly contracts in options in the shares of four leadingcompanies namely Reliance, Satyam, State Bank of India, and Tisco in addition to theflagship index-Sensex. BABASAB PATIL PROJECT REPORT ON FINANCE 9
  • 10. Analysis of Derivatives and Stock Broking at Apollo Sindhoori Indian derivatives markets 1. Rise of Derivatives The global economic order that emerged after World War II was a system wheremany less developed countries administered prices and centrally allocated resources.Even the developed economies operated under the Bretton Woods system of fixedexchange rates. The system of fixed prices came under stress from the 1970s onwards.High inflation and unemployment rates made interest rates more volatile. The BrettonWoods system was dismantled in 1971, freeing exchange rates to fluctuate. Lessdeveloped countries like India began opening up their economies and allowing pricesto vary with market conditions. Price fluctuations make it hard for businesses to estimate their future productioncosts and revenues. Derivative securities provide them a valuable set of tools formanaging this risk.2. Definition and Uses of Derivatives A derivative security is a financial contract whose value is derived from thevalue of something else, such as a stock price, a commodity price, an exchange rate,an interest rate, or even an index of prices. Some simple types of derivatives:forwards, futures, options and swaps. Derivatives may be traded for a variety of reasons. A derivative enables atrader to hedge some preexisting risk by taking positions in derivatives markets thatoffset potential losses in the underlying or spot market. In India, most derivativesusers describe themselves as hedgers and Indian laws generally require thatderivatives be used for hedging purposes only. Another motive for derivatives tradingis speculation (i.e. taking positions to profit from anticipated price movements). Inpractice, it may be difficult to distinguish whether a particular trade was for hedgingor speculation, and active markets require the participation of both hedgers andspeculators. A third type of trader, called arbitrageurs, profit from discrepancies in therelationship of spot and derivatives prices, and thereby help to keep markets efficient. BABASAB PATIL PROJECT REPORT ON FINANCE 10
  • 11. Analysis of Derivatives and Stock Broking at Apollo Sindhoori Jogani and Fernandez (2003) describe India’s long history in arbitrage trading,with line operators and traders arbitraging prices between exchanges located indifferent cities, and between two exchanges in the same city. Their study of Indianequity derivatives markets in 2002 indicates that markets were inefficient at that time.They argue that lack of knowledge, market frictions and regulatory impediments haveled to low levels of capital employed. Price volatility may reflect changes in the underlying demand and supplyconditions and thereby provide useful information about the market. Thus, economistsdo not view volatility as necessarily harmful. Speculators face the risk of losing money from their derivatives trades, as theydo with other securities. There have been some well-publicized cases of large lossesfrom derivatives trading. In some instances, these losses stemmed from fraudulentbehavior that went undetected partly because companies did not have adequate riskmanagement systems in place. In other cases, users failed to understand why and howthey were taking positions in the derivatives. Derivatives in arbitrage trading in India. However, more recent evidencesuggests that the efficiency of Indian equity derivatives markets may have improved.3. Exchange-Traded and Over-the-Counter Derivative Instruments OTC (over-the-counter) contracts, such as forwards and swaps, are bilaterallynegotiated between two parties. The terms of an OTC contract are flexible, and areoften customized to fit the specific requirements of the user. OTC contracts havesubstantial credit risk, which is the risk that the counterparty that owes money defaultson the payment. In India, OTC derivatives are generally prohibited with someexceptions: those that are specifically allowed by the Reserve Bank of India (RBI) or,in the case of commodities (which are regulated by the Forward MarketsCommission), those that trade informally in “havala” or forwards markets. An exchange-traded contract, such as a futures contract, has a standardizedformat that specifies the underlying asset to be delivered, the size of the contract, andthe logistics of delivery. They trade on organized exchanges with prices determinedby the interaction of many buyers and sellers. In India, two exchanges offerderivatives trading: the Bombay Stock Exchange (BSE) and the National Stock BABASAB PATIL PROJECT REPORT ON FINANCE 11
  • 12. Analysis of Derivatives and Stock Broking at Apollo Sindhoori Exchange (NSE). However, NSE now accounts for virtually all exchange-traded derivatives in India, accounting for more than 99% of volume in 2003-2004.Contract performance is guaranteed by a clearinghouse, which is a wholly ownedsubsidiary of the NSE. Margin requirements and daily marking-to-market of futurespositions substantially reduce the credit risk of exchange traded contracts, relative toOTC contracts.4. Development of Derivative Markets in India Derivatives markets have been in existence in India in some form or other fora long time. In the area of commodities, the Bombay Cotton Trade Association startedfutures trading in 1875 and, by the early 1900s India had one of the world’s largestfutures industry. In 1952 the government banned cash settlement and options tradingand derivatives trading shifted to informal forwards markets. In recent years,government policy has changed, allowing for an increased role for market-basedpricing and less suspicion of derivatives trading. The ban on futures trading of manycommodities was lifted starting in the early 2000s, and national electronic commodityexchanges were created. In the equity markets, a system of trading called “badla” involving someelements of forwards trading had been in existence for decades. However, the systemled to a number of undesirable practices and it was prohibited off and on till theSecurities and a clearinghouse guarantees performance of a contract by becomingbuyer to every seller and seller to every buyer. Customers post margin (security) deposits with brokers to ensure that they cancover a specified loss on the position. A futures position is marked-to-market byrealizing any trading losses in cash on the day they occur. “Badla” allowed investors to trade single stocks on margin and to carryforward positions to the next settlement cycle. Earlier, it was possible to carry forwarda position indefinitely but later the maximum carry forward period was 90 days.Unlike a futures or options, however, in a “badla” trade there is no fixed expirationdate, and contract terms and margin requirements are not standardized. Derivatives Exchange Board of India (SEBI) banned it for good in 2001. Aseries of reforms of the stock market between 1993 and 1996 paved the way for thedevelopment of exchange traded equity derivatives markets in India. In 1993, the BABASAB PATIL PROJECT REPORT ON FINANCE 12
  • 13. Analysis of Derivatives and Stock Broking at Apollo Sindhoorigovernment created the NSE in collaboration with state-owned financial institutions.NSE improved the efficiency and transparency of the stock markets by offering afully automated screen-based trading system and real-time price dissemination. In1995, a prohibition on trading options was lifted. In 1996, the NSE sent a proposal toSEBI for listing exchange-traded derivatives. The report of the L. C. Gupta Committee, set up by SEBI, recommended aphased introduction of derivative products, and bi-level regulation (i.e., self-regulation by exchanges with SEBI providing a supervisory and advisory role).Another report, by the J. R. Varma Committee in 1998, worked out variousoperational details such as the margining systems. In 1999, the Securities Contracts(Regulation) Act of 1956, or SC(R)A, was amended so that derivatives could bedeclared “securities.” This allowed the regulatory fMr.Xework for trading securitiesto be extended to derivatives. The Act considers derivatives to be legal and valid, butonly if they are traded on exchanges. Finally, a 30-year ban on forward trading was also lifted in 1999. Theeconomic liberalization of the early nineties facilitated the introduction of derivativesbased on interest rates and foreign exchange. A system of market-determinedexchange rates was adopted by India in March 1993. In August 1994, the rupee wasmade fully convertible on current account. These reforms allowed increasedintegration between domestic and international markets, and created a need to managecurrency risk.5. Derivatives Users in India The use of derivatives varies by type of institution. Financial institutions, suchas banks, have assets and liabilities of different maturities and in different currencies,and are exposed to different risks of default from their borrowers. Thus, they arelikely to use derivatives on interest rates and currencies, and derivatives to managecredit risk. Non-financial institutions are regulated differently from financialinstitutions, and this affects their incentives to use derivatives. Indian insuranceregulators, for example, are yet to issue guidelines relating to the use of derivatives byinsurance companies. In India, financial institutions have not been heavy users of exchange-tradedderivatives so far, with their contribution to total value of NSE trades being less than BABASAB PATIL PROJECT REPORT ON FINANCE 13
  • 14. Analysis of Derivatives and Stock Broking at Apollo Sindhoori8% in October 2005. However, market insiders feel that this may be changing, asindicated by the growing share of index derivatives (which are used more byinstitutions than by retail investors). In contrast to the exchange-traded markets,domestic financial institutions and mutual funds have shown great interest in OTCfixed income instruments. Transactions between banks dominate the market forinterest rate derivatives, while state-owned banks remain a small presence.Corporations are active in the currency forwards and swaps markets, buying theseinstruments from banks.Why do institutions not participate to a greater extent in derivativesmarkets? Some institutions such as banks and mutual funds are only allowed to usederivatives to hedge their existing positions in the spot market, or to rebalance theirexisting portfolios. Since banks have little exposure to equity markets due to bankingregulations, they have little incentive to trade equity derivatives. Foreign investorsmust register as foreign institutional investors (FII) to trade exchange-tradedderivatives, and be subject to position limits as specified by SEBI. Alternatively, theycan incorporate locally as under RBI directive, banks’ direct or indirect (throughmutual funds) exposure to capital markets instruments is limited to 5% of totaloutstanding advances as of the previous year-end. Some banks may have furtherequity exposure on account of equities collaterals held against loans in default. FIIs have a small but increasing presence in the equity derivatives markets.They have no incentive to trade interest rate derivatives since they have littleinvestments in the domestic bond markets. It is possible that unregistered foreigninvestors and hedge funds trade indirectly, using a local proprietary trader as a front. Retail investors (including small brokerages trading for themselves) are themajor participants in equity derivatives, accounting for about 60% of turnover inOctober 2005, according to NSE. The success of single stock futures in India isunique, as this instrument has generally failed in most other countries. One reason forthis success may be retail investors’ prior familiarity with “badla” trades which sharedsome features of derivatives trading. Another reason may be the small size of thefutures contracts, compared to similar contracts in other countries. Retail investorsalso dominate the markets for commodity derivatives, due in part to their long-standing expertise in trading in the “havala” or forwards markets. BABASAB PATIL PROJECT REPORT ON FINANCE 14
  • 15. Analysis of Derivatives and Stock Broking at Apollo SindhooriWhy have derivatives? Derivatives have become very important in the field finance. They are veryimportant financial instruments for risk management as they allow risks to beseparated and traded. Derivatives are used to shift risk and act as a form of insurance.This shift of risk means that each party involved in the contract should be able toidentify all the risks involved before the contract is agreed. It is also important toremember that derivatives are derived from an underlying asset. This means that risksin trading derivatives may change depending on what happens to the underlying asset. A derivative is a product whose value is derived from the value of anunderlying asset, index or reference rate. The underlying asset can be equity, forex,commodity or any other asset. For example, if the settlement price of a derivative isbased on the stock price of a stock for e.g. Infosys, which frequently changes on adaily basis, then the derivative risks are also changing on a daily basis. This meansthat derivative risks and positions must be monitored constantly.Why Derivatives are preferred?Retail investors will find the index derivatives useful due to the high correlation of theindex with their portfolio/stock and low cost associated with using index futures forhedging.Looking Ahead Clearly, the nascent derivatives market is heading in the right direction. Interms of the number of contracts in single stock derivatives, it is probably the largestmarket globally. It is no longer a market that can be ignored by any seriousparticipant. With institutional participation set to increase and a broader productrollout inevitable, the market can only widen and deepen further.How does F&O trading impact the market? BABASAB PATIL PROJECT REPORT ON FINANCE 15
  • 16. Analysis of Derivatives and Stock Broking at Apollo Sindhoori The start of a new derivatives contract pushes up prices in the cash market asoperators take fresh positions in the new month series in the first week of every newcontract. This buying in the derivatives segment pushes up future prices. Higherfuture prices are seen as indicators of bullish prices in the days to come. Thus, higherprices due to new month buying in the derivatives market lead to buying in thephysical market. This lifts prices in the cash market as well. The huge surge in open positions has coincided with the market indexesreaching historic highs. This shows that the two segments are linked. BABASAB PATIL PROJECT REPORT ON FINANCE 16
  • 17. Analysis of Derivatives and Stock Broking at Apollo Sindhoori FUTURES CONTRACT: A futures contract is similar to a forward contract in terms of its working. Thedifference is that contracts are standardized and trading is centralized. Futures marketsare highly liquid and there is no counterparty risk due to the presence of aclearinghouse, which becomes the counterparty to both sides of each transaction andguarantees the trade.What is an Index? To understand the use and functioning of the index derivatives markets, it isnecessary to understand the underlying index. A stock index represents the change invalue of a set of stocks, which constitute the index. A market index is very importantfor the market players as it acts as a barometer for market behavior and as anunderlying in derivative instruments such as index futures.The Sensex and Nifty In India the most popular indices have been the BSE Sensex and S&P CNXNifty. The BSE Sensex has 30 stocks comprising the index which are selected basedon market capitalization, industry representation, trading frequency etc. It represents30 large well-established and financially sound companies. The Sensex represents abroad spectrum of companies in a variety of industries. It represents 14 major industrygroups. Then there is a BSE national index and BSE 200. However, trading in indexfutures has only commenced on the BSE Sensex. While the BSE Sensex was the first stock market index in the country, Niftywas launched by the National Stock Exchange in April 1996 taking the base ofNovember 3, 1995. The Nifty index consists of shares of 50 companies with eachhaving a market capitalization of more than Rs 500 crore.Futures and stock indices BABASAB PATIL PROJECT REPORT ON FINANCE 17
  • 18. Analysis of Derivatives and Stock Broking at Apollo Sindhoori For understanding of stock index futures a thorough knowledge of thecomposition of indexes is essential. Choosing the right index is important in choosingthe right contract for speculation or hedging. Since for speculation, the volatility ofthe index is important whereas for hedging the choice of index depends upon therelationship between the stocks being hedged and the characteristics of the index. Choosing and understanding the right index is important as the movement ofstock index futures is quite similar to that of the underlying stock index. Volatility ofthe futures indexes is generally greater than spot stock indexes. Everytime an investor takes a long or short position on a stock, he also has anhidden exposure to the Nifty or Sensex. As most often stock values fall in tune withthe entire market sentiment and rise when the market as a whole is rising. Retail investors will find the index derivatives useful due to the highcorrelation of the index with their portfolio/stock and low cost associated with usingindex futures for hedging6.1 Understanding index futures A futures contract is an agreement between two parties to buy or sell an assetat a certain time in the future at a certain price. Index futures are all futures contractswhere the underlying is the stock index (Nifty or Sensex) and helps a trader to take aview on the market as a whole. Index futures permits speculation and if a trader anticipates a major rally in themarket he can simply buy a futures contract and hope for a price rise on the futurescontract when the rally occurs. In India we have index futures contracts based on S&P CNX Nifty and theBSE Sensex and near 3 months duration contracts are available at all times. Eachcontract expires on the last Thursday of the expiry month and simultaneously anew contract is introduced for trading after expiry of a contract. BABASAB PATIL PROJECT REPORT ON FINANCE 18
  • 19. Analysis of Derivatives and Stock Broking at Apollo SindhooriExample: Futures contracts in Nifty in July 2001 Contract month Expiry/settlement July 2001 July 26 August 2001 August 30 September 2001 September 27 On July 27 Contract month Expiry/settlement August 2001 August 30 September 2001 September 27 October 2001 October 25 The permitted lot size is 200 or multiples thereof for the Nifty. That is you buyone Nifty contract the total deal value will be 200*1100 (Nifty value)= Rs 2,20,000. In the case of BSE Sensex the market lot is 50. That is you buy one Sensexfutures the total value will be 50*4000 (Sensex value)= Rs 2,00,000.Hedging The other benefit of trading in index futures is to hedge your portfolioagainst the risk of trading. In order to understand how one can protect his portfoliofrom value erosion let us take an example.Illustration: Mr.X enters into a contract with Mr.Y that six months from now he will sell toY 10 dresses for Rs 4000. The cost of manufacturing for X is only Rs 1000 and hewill make a profit of Rs 3000 if the sale is completed. BABASAB PATIL PROJECT REPORT ON FINANCE 19
  • 20. Analysis of Derivatives and Stock Broking at Apollo Sindhoori Cost (Rs) Selling price Profit 1000 4000 3000 However, X fears that Y may not honour his contract six months from now. Sohe inserts a new clause in the contract that if Y fails to honour the contract he willhave to pay a penalty of Rs 1000. And if Y honours the contract X will offer adiscount of Rs 1000 as incentive. ‘Y’ defaults ‘Y’ honours 1000 (Initial Investment) 3000 (Initial profit) 1000 (penalty from Mr.Y) (-1000) discount given to Mr.Y - (No gain/loss) 2000 (Net gain) As we see above if Mr.Y defaults Mr.X will get a penalty of Rs 1000 but hewill recover his initial investment. If Mr.Y honours the contract, Mr.X will still makea profit of Rs 2000. Thus, Mr.X has hedged his risk against default and protected hisinitial investment. The example explains the concept of hedging. Let us try understanding howone can use hedging in a real life scenario. Stocks carry two types of risk – company specific and market risk. Whilecompany risk can be minimized by diversifying your portfolio, market risk cannotbe diversified but has to be hedged. So how does one measure the market risk?Market risk can be known from Beta. Beta measures the relationship between movement of the index to themovement of the stock. The beta measures the percentage impact on the stock pricesfor 1% change in the index. Therefore, for a portfolio whose value goes down by 11%when the index goes down by 10%, the beta would be 1.1. When the index increases BABASAB PATIL PROJECT REPORT ON FINANCE 20
  • 21. Analysis of Derivatives and Stock Broking at Apollo Sindhooriby 10%, the value of the portfolio increases 11%. The idea is to make beta of yourportfolio zero to nullify your losses. Hedging involves protecting an existing asset position from future adverseprice movements. In order to hedge a position, a market player needs to take an equaland opposite position in the futures market to the one held in the cash market. Everyportfolio has a hidden exposure to the index, which is denoted by the beta. Assumingyou have a portfolio of Rs 1 million, which has a beta of 1.2, you can factor acomplete hedge by selling Rs 1.2 mn of S&P CNX Nifty futuresSteps: 1. Determine the beta of the portfolio. If the beta of any stock is not known, it is safe to assume that it is 1. 2. Short sell the index in such a quantum that the gain on a unit decrease in the index would offset the losses on the rest of the portfolio. This is achieved by multiplying the relative volatility of the portfolio by the market value of his holdings.Therefore in the above scenario we have to shortsell 1.2 * 1 million = 1.2 millionworth of Nifty.Now let us see the impact on the overall gain/loss that accrues: Index up 10% Index down 10% Gain/(Loss) in Portfolio Rs 120,000 (Rs 120,000) Gain/(Loss) in Futures (Rs 120,000) Rs 120,000 Net Effect Nil Nil As we see, that portfolio is completely insulated from any losses arising out ofa fall in market sentiment. But as a cost, one has to forego any gains that arise out ofimprovement in the overall sentiment. Then why does one invest in equities if allthe gains will be offset by losses in futures market. The idea is that everyone BABASAB PATIL PROJECT REPORT ON FINANCE 21
  • 22. Analysis of Derivatives and Stock Broking at Apollo Sindhooriexpects his portfolio to outperform the market. Irrespective of whether the marketgoes up or not, his portfolio value would increase. The same methodology can be applied to a single stock by deriving the beta ofthe scrip and taking a reverse position in the futures market. Thus, we understand how one can use hedging in the futures market to offsetlosses in the cash market.6.3 Speculation Speculators are those who do not have any position on which they enter infutures and options market. They only have a particular view on the market, stock,commodity etc. In short, speculators put their money at risk in the hope of profitingfrom an anticipated price change. They consider various factors such as demandsupply, market positions, open interests, economic fundamentals and other data totake their positions.Illustration: Mr.X is a trader but has no time to track and analyze stocks. However, hefancies his chances in predicting the market trend. So instead of buying differentstocks he buys Sensex Futures. On May 1, 2001, he buys 100 Sensex futures @ 3600 on expectations that theindex will rise in future. On June 1, 2001, the Sensex rises to 4000 and at that time hesells an equal number of contracts to close out his position.Selling Price : 4000*100 = Rs.4,00,000Less: Purchase Cost: 3600*100 = Rs.3,60,000Net gain Rs.40,000 Mr.X has made a profit of Rs.40,000 by taking a call on the future value of theSensex. However, if the Sensex had fallen he would have made a loss. Similarly, if it BABASAB PATIL PROJECT REPORT ON FINANCE 22
  • 23. Analysis of Derivatives and Stock Broking at Apollo Sindhooriwould have been bearish he could have sold Sensex futures and made a profit from afalling profit. In index futures players can have a long-term view of the market up toatleast 3 months.6.4 Arbitrage An arbitrageur is basically risk averse. He enters into those contracts were hecan earn riskless profits. When markets are imperfect, buying in one market andsimultaneously selling in other market gives riskless profit. Arbitrageurs are always inthe look out for such imperfections. In the futures market one can take advantages of arbitrage opportunities by buyingfrom lower priced market and selling at the higher priced market. In index futuresarbitrage is possible between the spot market and the futures market (NSE hasprovided a special software for buying all 50 Nifty stocks in the spot market. • Take the case of the NSE Nifty. • Assume that Nifty is at 1200 and 3 month’s Nifty futures is at 1300. • The futures price of Nifty futures can be worked out by taking the interest cost of 3 months into account. • If there is a difference then arbitrage opportunity exists.Let us take the example of single stock to understand the concept better. If Wipro isquoted at Rs.1000 per share and the 3 months futures of Wipro is Rs.1070 then onecan purchase Wipro at Rs.1000 in spot by borrowing @ 12% annum for 3 months andsell Wipro futures for 3 months at Rs 1070.Sale = 1070Cost= 1000+30 = 1030Arbitrage profit = 40 BABASAB PATIL PROJECT REPORT ON FINANCE 23
  • 24. Analysis of Derivatives and Stock Broking at Apollo SindhooriThese kind of imperfections continue to exist in the markets but one has to be alert tothe opportunities as they tend to get exhausted very fast.6.5 Pricing of Index Futures The index futures are the most popular futures contracts as they can be used ina variety of ways by various participants in the market. How many times have you felt of making risk-less profits by arbitragingbetween the underlying and futures markets. If so, you need to know the cost-of-carrymodel to understand the dynamics of pricing that constitute the estimation of fairvalue of futures.1. The cost of carry modelThe cost-of-carry model where the price of the contract is defined as:F=S+Cwhere:F Futures priceS Spot priceC Holding costs or carry costs If F < S+C or F > S+C, arbitrage opportunities would exist i.e. whenever thefutures price moves away from the fair value, there would be chances for arbitrage. If Wipro is quoted at Rs.1000 per share and the 3 months futures of Wipro isRs.1070 then one can purchase Wipro at Rs.1000 in spot by borrowing @ 12% annumfor 3 months and sell Wipro futures for 3 months at Rs 1070. BABASAB PATIL PROJECT REPORT ON FINANCE 24
  • 25. Analysis of Derivatives and Stock Broking at Apollo Sindhoori Here F=1000+30=1030 and is less than prevailing futures price and hencethere are chances of arbitrage.Sale = 1070Cost= 1000+30 = 1030Arbitrage profit 40However, one has to remember that the components of holding cost vary withcontracts on different assets.2. Futures pricing in case of dividend yield We have seen how we have to consider the cost of finance to arrive at thefutures index value. However, the cost of finance has to be adjusted for benefits ofdividends and interest income. In the case of equity futures, the holding cost is thecost of financing minus the dividend returns.Example: Suppose a stock portfolio has a value of Rs.100 and has an annual dividendyield of 3% which is earned throughout the year and finance rate=10% the fair valueof the stock index portfolio after one year will be F= Rs.100 + Rs.100 * (0.10 – 0.03)Futures price = Rs 107 If the actual futures price of one-year contract is Rs.109. An arbitrageur canbuy the stock at Rs.100, borrowing the fund at the rate of 10% and simultaneously sellfutures at Rs.109. At the end of the year, the arbitrageur would collect Rs.3 fordividends, deliver the stock portfolio at Rs.109 and repay the loan of Rs.100 andinterest of Rs.10. The net profit would be Rs 109 + Rs 3 - Rs 100 - Rs 10 = Rs 2.Thus, we can arrive at the fair value in the case of dividend yield. BABASAB PATIL PROJECT REPORT ON FINANCE 25
  • 26. Analysis of Derivatives and Stock Broking at Apollo SindhooriTrading strategies1. Speculation We have seen earlier that trading in index futures helps in taking a view of themarket, hedging, speculation and arbitrage. Now we will see how one can trade inindex futures and use forward contracts in each of these instances.Taking a view of the marketHave you ever felt that the market would go down on a particular day and feared thatyour portfolio value would erode?There are two options availableOption 1: Sell liquid stocks such as RelianceOption 2: Sell the entire index portfolio The problem in both the above cases is that it would be very cumbersome andcostly to sell all the stocks in the index. And in the process one could be vulnerable tocompany specific risk. So what is the option? The best thing to do is to sell indexfutures.Illustration:Scenario 1:On July 13, 2001, ‘X’ feels that the market will rise so he buys 200 Nifties with anexpiry date of July 26 at an index price of 1442 costing Rs 2,88,400 (200*1442).On July 21 the Nifty futures have risen to 1520 so he squares off his position at 1520. BABASAB PATIL PROJECT REPORT ON FINANCE 26
  • 27. Analysis of Derivatives and Stock Broking at Apollo Sindhoori‘X’ makes a profit of Rs 15,600 (200*78)Scenario 2:On July 20, 2001, ‘X’ feels that the market will fall so he sells 200 Nifties with anexpiry date of July 26 at an index price of 1523 costing Rs 3,04,600 (200*1523).On July 21 the Nifty futures falls to 1456 so he squares off his position at 1456.‘X’ makes a profit of Rs 13,400 (200*67).In the above cases ‘X’ has profited from speculation i.e. he has wagered in the hope ofprofiting from an anticipated price change.2. Hedging Stock index futures contracts offer investors, portfolio managers, mutual fundsetc several ways to control risk. The total risk is measured by the variance or standarddeviation of its return distribution. A common measure of a stock market risk is thestock’s Beta. The Beta of stocks are available on the www.nseindia.com. While hedging the cash position one needs to determine the number of futurescontracts to be entered to reduce the risk to the minimum. Have you ever felt that a stock was intrinsically undervalued? That the profitsand the quality of the company made it worth a lot more as compared with what themarket thinks? Have you ever been a ‘stockpicker’ and carefully purchased a stock based on asense that it was worth more than the market price? A person who feels like this takes a long position on the cash market. Whendoing this, he faces two kinds of risks: BABASAB PATIL PROJECT REPORT ON FINANCE 27
  • 28. Analysis of Derivatives and Stock Broking at Apollo Sindhooria. His understanding can be wrong, and the company is really not worth more than themarket price orb. The entire market moves against him and generates losses even though theunderlying idea was correct. Everyone has to remember that every buy position on a stock issimultaneously a buy position on Nifty. A long position is not a focused play on thevaluation of a stock. It carries a long Nifty position along with it, as incidentalbaggage i.e. a part long position of Nifty.Let us see how one can hedge positions using index futures:‘X’ holds HLL worth Rs 9 lakh at Rs 290 per share on Jan1 2008asuming that thebeta of HLL is 1.13. How much Nifty futures does ‘X’ have to sell if the index futuresis ruling at 1527?To hedge he needs to sell 9 lakh * 1.13 = Rs 1017000 lakh on the index futures i.e.666 Nifty futures.On Jan , 2008 the Nifty futures is at 1437 and HLL is at 275. ‘X’ closes both positionsearning Rs 13,389, i.e. his position on HLL drops by Rs 46,551 and his short positionon Nifty gains Rs 59,940 (666*90).Therefore, the net gain is 59940-46551 = Rs 13,389.Let us take another example when one has a portfolio of stocks:Suppose you have a portfolio of Rs 10 crore. The beta of the portfolio is 1.19. Theportfolio is to be hedged by using Nifty futures contracts. To find out the number ofcontracts in futures market to neutralise risk . If the index is at 1200 * 200 (market lot)= Rs 2,40,000, The number of contracts to be sold is: a. 1.19*10 crore = 496 contracts 2,40,000 BABASAB PATIL PROJECT REPORT ON FINANCE 28
  • 29. Analysis of Derivatives and Stock Broking at Apollo SindhooriIf you sell more than 496 contracts you are overhedged and sell less than 496contracts you are underhedged.Thus, we have seen how one can hedge their portfolio against market risk.3. Margins The margining system is based on the JR Verma Committeerecommendations. The actual margining happens on a daily basis while onlineposition monitoring is done on an intra-day basis.Daily margining is of two types:1. Initial margins2. Mark-to-market profit/loss The computation of initial margin on the futures market is done using theconcept of Value-at-Risk (VaR). The initial margin amount is large enough to covera one-day loss that can be encountered on 99% of the days. VaR methodology seeksto measure the amount of value that a portfolio may stand to lose within a certainhorizon time period (one day for the clearing corporation) due to potential changes inthe underlying asset market price. Initial margin amount computed using VaR iscollected up-front. The daily settlement process called "mark-to-market" providesfor collection of losses that have already occurred (historic losses) whereas initialmargin seeks to safeguard against potential losses on outstanding positions. The mark-to-market settlement is done in cash.Let us take a hypothetical trading activity of a client of a NSE futures division todemonstrate the margins payments that would occur. • A client purchases 200 units of FUTIDX NIFTY 29JUN2001 at Rs 1500. • The initial margin payable as calculated by VaR is 15%.Total long position = Rs 3,00,000 (200*1500) BABASAB PATIL PROJECT REPORT ON FINANCE 29
  • 30. Analysis of Derivatives and Stock Broking at Apollo SindhooriInitial margin (15%) = Rs 45,000Assuming that the contract will close on Day + 3 the mark-to-market position willlook as follows:Position on Day 1 Close Price Loss Margin released Net cash outflow1400*200 =2,80,000 20,000 (3,00,000- 3,000 (45,000- 17,000 (20,000- 2,80,000) 42,000) 3000)Payment to be made (17,000)New position on Day 2Value of new position = 1,400*200= 2,80,000Margin = 42,000 Close Price Gain Addn Margin Net cash inflow1510*200 =3,02,000 22,000 (3,02,000- 3,300 (45,300- 18,700 (22,000- 2,80,000) 42,000) 3300)Payment to be recd 18,700Position on Day 3Value of new position = 1510*200 = Rs 3,02,000Margin = Rs 3,300 Close Price Gain Net cash inflow 1600*200 =3,20,000 18,000 (3,20,000- 18,000 + 45,300* = 63,300 3,02,000) Payment to be recd 63,300Margin account*Initial margin = Rs 45,000Margin released (Day 1) = (-) Rs 3,000Position on Day 2 Rs 42,000 BABASAB PATIL PROJECT REPORT ON FINANCE 30
  • 31. Analysis of Derivatives and Stock Broking at Apollo SindhooriAddn margin = (+) Rs 3,300Total margin in a/c Rs 45,300*Net gain/lossDay 1 (loss) = (Rs 17,000)Day 2 Gain = Rs 18,700Day 3 Gain = Rs 18,000Total Gain = Rs 19,700The client has made a profit of Rs 19,700 at the end of Day 3 and the total cash inflowat the close of trade is Rs 63,300.Settlement of futures contracts: Futures contracts have two types of settlements, the MTM settlement whichhappens on a continuous basis at the end of each day, and the final settlement whichhappens on the last trading day of the futures contract.1. MTM settlement: All futures contracts for each member are marked-to-market(MTM) to the dailysettlement price of the relevant futures contract at the end of each day. Theprofits/losses are computed as the difference between:  The trade price and the day’s settlement price for contracts executed during the day but not squared up.  The previous day’s settlement price and the current day’s settlement price for brought forward contracts.  The buy price and the sell price for contracts executed during the day and squared up. BABASAB PATIL PROJECT REPORT ON FINANCE 31
  • 32. Analysis of Derivatives and Stock Broking at Apollo Sindhoori The CMs who have a loss are required to pay the mark-to-market (MTM) lossamount in cash which is in turn passed on to the CMs who have made a MTM profit.This is known as daily mark-to-market settlement. CMs are responsible to collect andsettle the daily MTM profits/losses incurred by the TMs and their clients clearing andsettling through them. Similarly, TMs are responsible to collect/pay losses/ profitsfrom/to their clients by the next day. The pay-in and pay-out of the mark-to-marketsettlement are effected on the day following the trade day. In case a futures contract isnot traded on a day, or not traded during the last half hour, a ‘theoretical settlementprice’ is computed.2. Final settlement for futures On the expiry day of the futures contracts, after the close of trading hours,NSCCL marks all positions of a CM to the final settlement price and the resultingprofit/loss is settled in cash. Final settlement loss/profit amount is debited/ credited tothe relevant CM’s clearing bank account on the day following expiry day of thecontract. All trades in the futures market are cash settled on a T+1 basis and allpositions (buy/sell) which are not closed out will be marked-to-market. The closingprice of the index futures will be the daily settlement price and the position will becarried to the next day at the settlement price. The most common way of liquidating an open position is to execute anoffsetting futures transaction by which the initial transaction is squared up. The initialbuyer liquidates his long position by selling identical futures contract. In index futures the other way of settlement is cash settled at the finalsettlement. At the end of the contract period the difference between the contract valueand closing index value is paid.How to read the futures data sheet? Understanding and deciphering the prices of futures trade is the first challengefor anyone planning to venture in futures trading. Economic dailies and exchangewebsites www.nseindia.com and www.bseindia.com are some of the sources where BABASAB PATIL PROJECT REPORT ON FINANCE 32
  • 33. Analysis of Derivatives and Stock Broking at Apollo Sindhoori one can look for the daily quotes. Your website has a daily market commentary, which carries end of day derivatives summary along with the quotes. The first step is start tracking the end of day prices. Closing prices, Trading Volumes and Open Interest are the three primary data we carry with Index option quotes. The most important parameter are the actual prices, the high, low, open, close, last traded prices and the intra-day prices and to track them one has to have access to real time prices. The following table shows how futures data will be generally displayed in the business papers daily. Series First High Low Close No of Trade Volume (No of Value trades Open interest contracts) (Rs (No of in lakh) contracts)BSXJUN2000 4755 4820 4740 4783.1 146 348.70 104 51BSXJUL2000 4900 4900 4800 4830.8 12 28.98 10 2BSXAUG2000 4800 4870 4800 4835 2 4.84 2 1 Total 160 38252 116 54 Source: BSE • The first column explains the series that is being traded. For e.g. BSXJUN2000 stands for the June Sensex futures contract. • The column on volume indicates that (in case of June series) 146 contracts have been traded in 104 trades. • One contract is equivalent to 50 times the price of the futures, which are traded. For e.g. In case of the June series above, the first trade at 4755 represents one contract valued at 4755 x 50 i.e. Rs.2,37,750/-. Open interest indicates the total gross outstanding open positions in the market for that particular series. For e.g. Open interest in the June series is 51 contracts. The most useful measure of market activity is Open interest, which is also published by exchanges and used for technical analysis. Open interest indicates the liquidity of a BABASAB PATIL PROJECT REPORT ON FINANCE 33
  • 34. Analysis of Derivatives and Stock Broking at Apollo Sindhoorimarket and is the total number of contracts, which are still outstanding in afutures market for a specified futures contract. A futures contract is formed when a buyer and a seller take opposite positions in atransaction. This means that the buyer goes long and the seller goes short. Openinterest is calculated by looking at either the total number of outstanding long or shortpositions – not both Open interest is therefore a measure of contracts that have notbeen matched and closed out. The number of open long contracts must equal exactlythe number of open short contracts. Action Resulting open interest New buyer (long) and new seller (short) Rise Trade to form a new contract. Existing buyer sells and existing seller buys – Fall The old contract is closed. New buyer buys from existing buyer. The No change – there is no increase in long Existing buyer closes his position by sellingcontracts being held to new buyer. Existing seller buys from new seller. TheNo change – there is no increase in short Existing seller closes his position by buying contracts being held from new seller. Open interest is also used in conjunction with other technical analysis chartpatterns and indicators to gauge market signals. The following chart may help withthese signals. Price Open interest Market Strong Warning signal Weak Warning signalThe warning sign indicates that the Open interest is not supporting the pricedirection. OPTIONS BABASAB PATIL PROJECT REPORT ON FINANCE 34
  • 35. Analysis of Derivatives and Stock Broking at Apollo SindhooriWhat is an Option? An option is a contract giving the buyer the right, but not the obligation, tobuy or sell an underlying asset (a stock or index) at a specific price on or before acertain date (listed options are all for 100 shares of the particular underlying asset). An option is a security, just like a stock or bond, and constitutes a bindingcontract with strictly defined terms and properties.Listed options have been available since 1973, when the Chicago Board OptionsExchange, still the busiest options exchange in the world, first opened.The World With and Without Options Prior to the founding of the CBOE, investors had few choices of where toinvest their money; they could either be long or short individual stocks, or they couldpurchase treasury securities or other bonds. Once the CBOE opened, the listed option industry began, andinvestors now had a world of investment choices previously unavailable.Options vs. Stocks In order to better understand the benefits of trading options, one must firstunderstand some of the similarities and differences between options and stocks.Similarities: Listed Options are securities, just like stocks. Options trade like stocks, with buyers making bids and sellers making offers. Options are actively traded in a listed market, just like stocks. They can be bought and sold just like any other security.Differences: Options are derivatives, unlike stocks (i.e, options derive their value from something else, the underlying security). Options have expiration dates, while stocks do not. There is not a fixed number of options, as there are with stock sharesavailable. BABASAB PATIL PROJECT REPORT ON FINANCE 35
  • 36. Analysis of Derivatives and Stock Broking at Apollo Sindhoori Stockowners have a share of the company, with voting and dividend rights.Options convey no such rights.Options Premiums In this case, XYZ represents the option class while May 30 is the option series.All options on company XYZ are in the XYZ option class but there will be manydifferent series. An option Premium is the price of the option. It is the price you pay topurchase the option. For example, an XYZ May 30 Call (thus it is an option to buyCompany XYZ stock) may have an option premium of $2. This means that thisoption costs $200.00. Why? Because most listed options are for 100 shares of stock,and all equity option prices are quoted on a per share basis, so they need to bemultiplied times 100. More in-depth pricing concepts will be covered in detail in othersections of the course.Strike Price The Strike (or Exercise) Price is the price at which the underlying security(in this case, XYZ) can be bought or sold as specified in the option contract. Forexample, with the XYZ May 30 Call, the strike price of 30 means the stock can bebought for $30 per share. Were this the XYZ May 30 Put, it would allow the holderthe right to sell the stock at $30 per share. The strike price also helps to identify whether an option is In-the-Money, At-the-Money, or Out-of-the-Money when compared to the price of the underlyingsecurity. You will learn about these terms in another section of the course.Exercising Options People who buy options have a Right, and that is the right to Exercise.For a Call Exercise, Call holders may buy stock at the strike price (from the Callseller). For a Put Exercise, Put holders may sell stock at the strike price (to the Putseller). Neither Call holders nor Put holders are obligated to buy or sell; they simplyhave the rights to do so, and may choose to Exercise or not to Exercise based upontheir own logic. BABASAB PATIL PROJECT REPORT ON FINANCE 36
  • 37. Analysis of Derivatives and Stock Broking at Apollo SindhooriAssignment of Options When an option holder chooses to exercise an option, a process begins to finda writer who is short the same kind of option (i.e., class, strike price and option type).Once found, that writer may be Assigned. This means that when buyers exercise,sellers may be chosen to make good on their obligations. For a Call Assignment,Call writers are required to sell stock at the strike price to the Call holder. For a PutAssignment, Put writers are required to buy stock at the strike price from the Putholder.Long Term Investing Given the numerous opportunities that options convey, it is also important toknow that there are options available which can be used to implement longer-termstrategies (not one, two or three months, but those with holding times of one, two ormore years). These are called LEAPS (for Long Term Equity Anticipation Securities), andare yet another alternative that options offer to investors. LEAPS are options withexpiration dates of up to three years from the date they are first listed, and areavailable on a number of individual stocks and indexes. LEAPS have different ticker symbols than short-term options (options withless than nine months until expiration) and, while not available on all stocks, areavailable on most widely held issues and can be traded just like any other options.7.2 The Chicago Board Options Exchange The Chicago Board Options Exchange, or CBOE, was the worlds first listedoptions exchange, opened in 1973 by members of the Chicago Board of Trade.Almost half of all listed options trades still occur on CBOE.NOTE: Options also trade now on several smaller exchanges, including the AmericanStock Exchange (AMEX), the Philadelphia Stock Exchange (PHLX), the PacificStock Exchange (PSE) and the International Securities Exchange (ISE).CBOE: The Competitive Advantage BABASAB PATIL PROJECT REPORT ON FINANCE 37
  • 38. Analysis of Derivatives and Stock Broking at Apollo Sindhoori With over 1500 competing market makers trading more than one millionoptions contracts per day, the CBOE is the largest and busiest options exchange in theworld. The members of the Exchange have maintained this stature for over 25 yearsby constantly providing deep and liquid markets in all options series for all CBOEcustomers.CBOE Facts The CBOE system works to give you the options you need for yourinvestment strategy, quickly and easily and at the most efficient price. The CBOEoffers investors the best options markets, the most efficient support network, and themost intensive insight and most recognized educational division in the industry, theOptions Institute.CBOE is the market leader in the options industry, with: • Options on more than 1,332 stocks and 41 indices. More than 50,000 series listed • Over $25 billion in contract value traded on a typical day • Over 1 million options contracts changing hands daily • The second largest listed securities market in the U.S., following only the NYSE • Professional instructors teaching options trading to over 10,000 people a year • The premier portal for options information on the Web,7.3 Regulation and Surveillance: Regulation and surveillance are necessary in the options industry in order toprotect customers and firms, and respond to customer complaints. CBOE has one of the most technologically advanced and computer-automatedmeasures for regulation and surveillance, which are unparalleled in the optionsindustry. CBOE has the premier Regulatory Division, with staff who constantlymonitor trading activity throughout the industry. BABASAB PATIL PROJECT REPORT ON FINANCE 38
  • 39. Analysis of Derivatives and Stock Broking at Apollo Sindhoori The Securities and Exchange Commission (SEC) oversees the entire optionsindustry to ensure that the markets serve the public interest.Options Clearing Corporation: The formation of the OCC in 1973 as the single, independent, universalclearing agency for all listed options eliminated the problem of credit risk in optionstrading. Every options Exchange and every brokerage firm who offers its customersthe ability to trade options is a member or is associated with a member of the OCC. The OCC stands in the middle of each trade becoming the buyer for allcontracts that are sold, and the seller for all contracts that are bought. Thus, the OCCis, in fact, the issuer of all listed options contracts, and is registered as such with theSEC.7.5 Options Market Participants Contrary to some beliefs, the single greatest population of CBOE users are nothuge financial institutions, but public investors, just like you. Over 65% of theExchanges business comes from them. However, other participants in the financialmarketplace also use options to enhance their performance, including: • Mutual Funds • Pension Plans • Hedge Funds • Endowments • Corporate Treasurers Stock markets by their very nature are fickle. While fortunes can be made in ajiffy more often than not the scenario is the reverse. Investing in stocks has two sidesto it –a) Unlimited profit potential from any upside (remember Infosys, HFCL etc) orb) a downside which could make you a pauper. Derivative products are structured precisely for this reason -- to curtail the riskexposure of an investor. Index futures and stock options are instruments that enableyou to hedge your portfolio or open positions in the market. Option contracts allowyou to run your profits while restricting your downside risk. BABASAB PATIL PROJECT REPORT ON FINANCE 39
  • 40. Analysis of Derivatives and Stock Broking at Apollo Sindhoori Apart from risk containment, options can be used for speculation and investorscan create a wide range of potential profit scenarios. ‘Option’, as the word suggests, is a choice given to the investor to either honourthe contract; or if he chooses not to walk away from the contract.To begin, there are two kinds of options: Call Options and Put Options.Call options Call options give the taker the right, but not the obligation, to buy theunderlying shares at a predetermined price, on or before a predetermined date.Illustration 1:Raj purchases 1 Satyam Computer (SATCOM) AUG 150 Call --Premium 8 This contract allows Raj to buy 100 shares of SATCOM at Rs 150 per share atany time between the current date and the end of next August. For this privilege, Rajpays a fee of Rs 800 (Rs eight a share for 100 shares). The buyer of a call haspurchased the right to buy and for that he pays a premium.Now let us see how one can profit from buying an option. Sam purchases a December call option at Rs 40 for a premium of Rs 15. Thatis he has purchased the right to buy that share for Rs 40 in December. If the stockrises above Rs 55 (40+15) he will break even and he will start making a profit.Suppose the stock does not rise and instead falls he will choose not to exercise theoption and forego the premium of Rs 15 and thus limiting his loss to Rs 15. Let us take another example of a call option on the Nifty to understand theconcept better.Nifty is at 1310. The following are Nifty options traded at following quotes. Option contract Strike price Call premium BABASAB PATIL PROJECT REPORT ON FINANCE 40
  • 41. Analysis of Derivatives and Stock Broking at Apollo Sindhoori Dec Nifty 1325 Rs.6,000 1345 Rs.2,000 Jan Nifty 1325 Rs.4,500 1345 Rs.5000 A trader is of the view that the index will go up to 1400 in Jan 2008 but doesnot want to take the risk of prices going down. Therefore, he buys 10 options of Jancontracts at 1345. He pays a premium for buying calls (the right to buy the contract)for 500*10= Rs.5,000/-. In Jan 2008 the Nifty index goes up to 1365. He sells the options or exercisesthe option and takes the difference in spot index price which is (1365-1345) * 200(market lot) = 4000 per contract. Total profit = 40,000/- (4,000*10). He had paid Rs.5,000/- premium for buying the call option. So he earns bybuying call option is Rs.35,000/- (40,000-5000). If the index falls below 1345 the trader will not exercise his right and will optto forego his premium of Rs.5,000. So, in the event the index falls further his loss islimited to the premium he paid upfront, but the profit potential is unlimited.Call Options-Long and Short Positions When you expect prices to rise, then you take a long position by buying calls.You are bullish. When you expect prices to fall, then you take a short position byselling calls. You are bearish.Put Options : A Put Option gives the holder of the right to sell a specific number of sharesof an agreed security at a fixed price for a period of time. eg: Sam purchases 1INFTEC (Infosys Technologies) AUG 3500 Put --Premium 200. This contract allowsSam to sell 100 shares INFTEC at Rs 3500 per share at any time between the currentdate and the end of August. To have this privilege, Sam pays a premium of Rs 20,000(Rs 200 a share for 100 shares). BABASAB PATIL PROJECT REPORT ON FINANCE 41
  • 42. Analysis of Derivatives and Stock Broking at Apollo Sindhoori The buyer of a put has purchased a right to sell. The owner of a put option hasthe right to sell.Illustration 2: Raj is of the view that the a stock is overpriced and will fall in future,but he does not want to take the risk in the event of price rising so purchases a putoption at Rs 70 on ‘X’. By purchasing the put option Raj has the right to sell the stockat Rs 70 but he has to pay a fee of Rs 15 (premium). So he will breakeven only after the stock falls below Rs 55 (70-15) and willstart making profit if the stock falls below Rs 55.Illustration 3: An investor on Dec 15 is of the view that Wipro is overpriced and will fall infuture but does not want to take the risk in the event the prices rise. So he purchases aPut option on Wipro.Quotes are as under:Spot Rs.1040Jan Put at 1050 Rs.10Jan Put at 1070 Rs.30He purchases 1000 Wipro Put at strike price 1070 at Put price of Rs.30/-. He pays Rs.30,000/- as Put premium.His position in following price position is discussed below. 1. Jan Spot price of Wipro = 1020 2. Jan Spot price of Wipro = 1080 In the first situation the investor is having the right to sell 1000 Wipro sharesat Rs.1,070/- the price of which is Rs.1020/-. By exercising the option he earns Rs.(1070-1020) = Rs 50 per Put, which totals Rs 50,000/-. His net income is Rs (50000-30000) = Rs 20,000. BABASAB PATIL PROJECT REPORT ON FINANCE 42
  • 43. Analysis of Derivatives and Stock Broking at Apollo Sindhoori In the second price situation, the price is more in the spot market, so theinvestor will not sell at a lower price by exercising the Put. He will have to allow thePut option to expire unexercised. He looses the premium paid Rs 30,000.Put Options-Long and Short Positions When you expect prices to fall, then you take a long position by buying Puts.You are bearish. When you expect prices to rise, then you take a short position byselling Puts. You are bullish. CALL OPTIONS PUT OPTIONS If you expect a fall in price(Bearish) Short Long If you expect a rise in price (Bullish) Long ShortSUMMARY: CALL OPTION BUYER CALL OPTION WRITER (Seller) • Pays premium • Receives premium • Right to exercise and buy the shares • Obligation to sell shares if exercised • Profits from rising prices • Profits from falling prices or remaining neutral • Limited losses, Potentially unlimited gain • Potentially unlimited losses, limited BABASAB PATIL PROJECT REPORT ON FINANCE 43
  • 44. Analysis of Derivatives and Stock Broking at Apollo Sindhoori gain PUT OPTION BUYER PUT OPTION WRITER (Seller) • Pays premium • Receives premium • Right to exercise and sell shares • Obligation to buy shares if exercised • Profits from falling prices • Profits from rising prices or remaining neutral • Limited losses, Potentially unlimited gain • Potentially unlimited losses, limited gainOption styles Settlement of options is based on the expiry date. However, there are threebasic styles of options you will encounter which affect settlement. The styles havegeographical names, which have nothing to do with the location where a contract isagreed! The styles are:European: These options give the holder the right, but not the obligation, to buy orsell the underlying instrument only on the expiry date. This means that the optioncannot be exercised early. Settlement is based on a particular strike price atexpiration. Currently, in India only index options are European in nature. eg: Sam purchases 1 NIFTY AUG 1110 Call --Premium 20. The exchangewill settle the contract on the last Thursday of August. Since there are no shares forthe underlying, the contract is cash settled.American: These options give the holder the right, but not the obligation, to buy orsell the underlying instrument on or before the expiry date. This means that theoption can be exercised early. Settlement is based on a particular strike price atexpiration. BABASAB PATIL PROJECT REPORT ON FINANCE 44
  • 45. Analysis of Derivatives and Stock Broking at Apollo Sindhoori Options in stocks that have been recently launched in the Indian market are"American Options". eg: Sam purchases 1 ACC SEP 145 Call --Premium 12 Here Sam can close the contract any time from the current date till theexpiration date, which is the last Thursday of September. American style options tend to be more expensive than European stylebecause they offer greater flexibility to the buyer.Option Class and Series Generally, for each underlying, there are a number of options available: Forthis reason, we have the terms "class" and "series". An option "class" refers to all options of the same type (call or put) and style(American or European) that also have the same underlying.eg: All Nifty call options are referred to as one class. An option series refers to all options that are identical: they are the same type,have the same underlying, the same expiration date and the same exercise price. Calls Puts . Jan Feb Mar Jan Feb Mar Wipro 1300 45 60 75 15 20 28 1400 35 45 65 25 28 35 1500 20 42 48 30 40 55eg: Wipro JUL 1300 refers to one series and trades take place at differentpremiums All calls are of the same option type. Similarly, all puts are of the same optiontype. Options of the same type that are also in the same class are said to be of thesame class. Options of the same class and with the same exercise price and the sameexpiration date are said to be of the same series BABASAB PATIL PROJECT REPORT ON FINANCE 45
  • 46. Analysis of Derivatives and Stock Broking at Apollo SindhooriPricing of options Options are used as risk management tools and the valuation or pricing of theinstruments is a careful balance of market factors.There are four major factors affecting the Option premium: • Price of Underlying • Time to Expiry • Exercise Price Time to Maturity • Volatility of the UnderlyingAnd two less important factors: • Short-Term Interest Rates • Dividends7.11 Review of Options Pricing Factors1. The Intrinsic Value of an Option The intrinsic value of an option is defined as the amount by which an option isin-the-money, or the immediate exercise value of the option when the underlyingposition is marked-to-market.For a call option: Intrinsic Value = Spot Price - Strike PriceFor a put option: Intrinsic Value = Strike Price - Spot Price The intrinsic value of an option must be positive or zero. It cannot be negative.For a call option, the strike price must be less than the price of the underlying asset forthe call to have an intrinsic value greater than 0. For a put option, the strike price mustbe greater than the underlying asset price for it to have intrinsic value.Price of underlying BABASAB PATIL PROJECT REPORT ON FINANCE 46
  • 47. Analysis of Derivatives and Stock Broking at Apollo Sindhoori The premium is affected by the price movements in the underlying instrument.For Call options – the right to buy the underlying at a fixed strike price – as theunderlying price rises so does its premium. As the underlying price falls so does thecost of the option premium. For Put options – the right to sell the underlying at a fixedstrike price – as the underlying price rises, the premium falls; as the underlying pricefalls the premium cost rises.The following chart summarizes the above for Calls and Puts. Option Underlying price Premium cost Call Put2. The Time Value of an Option Generally, the longer the time remaining until an option’s expiration, thehigher its premium will be. This is because the longer an option’s lifetime, greater isthe possibility that the underlying share price might move so as to make the option in-the-money. All other factors affecting an option’s price remaining the same, the timevalue portion of an option’s premium will decrease (or decay) with the passage oftime.Note: This time decay increases rapidly in the last several weeks of an option’s life.When an option expires in-the-money, it is generally worth only its intrinsic value. Option Time to expiry Premium cost Call Put3. Volatility BABASAB PATIL PROJECT REPORT ON FINANCE 47
  • 48. Analysis of Derivatives and Stock Broking at Apollo Sindhoori Volatility is the tendency of the underlying security’s market price to fluctuateeither up or down. It reflects a price change’s magnitude; it does not imply a biastoward price movement in one direction or the other. Thus, it is a major factor indetermining an option’s premium. The higher the volatility of the underlying stock,the higher the premium because there is a greater possibility that the option will movein-the-money. Generally, as the volatility of an under-lying stock increases, thepremiums of both calls and puts overlying that stock increase, and vice versa.Higher volatility=Higher premiumLower volatility = Lower premium4. Interest rates In general interest rates have the least influence on options and equateapproximately to the cost of carry of a futures contract. If the size of the optionscontract is very large, then this factor may take on some importance. All other factorsbeing equal as interest rates rise, premium costs fall and vice versa. The relationshipcan be thought of as an opportunity cost. In order to buy an option, the buyer musteither borrow funds or use funds on deposit. Either way the buyer incurs an interestrate cost. If interest rates are rising, then the opportunity cost of buying optionsincreases and to compensate the buyer premium costs fall. Why should the buyer becompensated? Because the option writer receiving the premium can place the fundson deposit and receive more interest than was previously anticipated. The situation isreversed when interest rates fall – premiums rise. This time it is the writer who needsto be compensated. STRATEGIESBull Market Strategiesa. Calls in a Bullish Strategy An investor with a bullish market outlook should buy call options. If youexpect the market price of the underlying asset to rise, then you would rather have the BABASAB PATIL PROJECT REPORT ON FINANCE 48
  • 49. Analysis of Derivatives and Stock Broking at Apollo Sindhooriright to purchase at a specified price and sell later at a higher price than have theobligation to deliver later at a higher price. The investors profit potential of buying a call option is unlimited. Theinvestors profit is the market price less the exercise price less the premium. Thegreater the increase in price of the underlying, the greater the investors profit. The investors potential loss is limited. Even if the market takes a drasticdecline in price levels, the holder of a call is under no obligation to exercise theoption. He may let the option expire worthless. The investor breaks even when the market price equals the exercise priceplus the premium. An increase in volatility will increase the value of your call and increase yourreturn. Because of the increased likelihood that the option will become in- the-money,an increase in the underlying volatility (before expiration), will increase the value of along options position. As an option holder, your return will also increase.A simple example will illustrate the above: Suppose there is a call option with a strike price of Rs.2000 and the optionpremium is Rs.100. The option will be exercised only if the value of the underlying isgreater than Rs.2000 (the strike price). If the buyer exercises the call at Rs.2200 thenhis gain will be Rs.200. However, this would not be his actual gain for that he willhave to deduct the Rs.200 (premium) he has paid.The profit can be derived as followsProfit = Market price - Exercise price - PremiumProfit = Market price – Strike price – Premium. 2200 – 2000 – 100 = Rs.100b. Puts in a Bullish Strategy BABASAB PATIL PROJECT REPORT ON FINANCE 49
  • 50. Analysis of Derivatives and Stock Broking at Apollo Sindhoori An investor with a bullish market outlook can also go short on a Put option.Basically, an investor anticipating a bull market could write Put options. If the marketprice increases and puts become out-of-the-money, investors with long put positionswill let their options expire worthless. By writing Puts, profit potential is limited. A Put writer profits when the priceof the underlying asset increases and the option expires worthless. The maximumprofit is limited to the premium received. However, the potential loss is unlimited. Because a short put position holderhas an obligation to purchase if exercised. He will be exposed to potentially largelosses if the market moves against his position and declines. The break-even point occurs when the market price equals the exercise price:minus the premium. At any price less than the exercise price minus the premium, theinvestor loses money on the transaction. At higher prices, his option is profitable. An increase in volatility will increase the value of your put and decrease yourreturn. As an option writer, the higher price you will be forced to pay in order to buyback the option at a later date , lower is the return.Bullish Call Spread Strategies A vertical call spread is the simultaneous purchase and sale of identical calloptions but with different exercise prices. To "buy a call spread" is to purchase a call with a lower exercise price and towrite a call with a higher exercise price. The trader pays a net premium for theposition. To "sell a call spread" is the opposite, here the trader buys a call with a higherexercise price and writes a call with a lower exercise price, receiving a net premiumfor the position. BABASAB PATIL PROJECT REPORT ON FINANCE 50
  • 51. Analysis of Derivatives and Stock Broking at Apollo Sindhoori An investor with a bullish market outlook should buy a call spread. The "BullCall Spread" allows the investor to participate to a limited extent in a bull market,while at the same time limiting risk exposure. To put on a bull spread, the trader needs to buy the lower strike call and sellthe higher strike call. The combination of these two options will result in a boughtspread. The cost of Putting on this position will be the difference between thepremium paid for the low strike call and the premium received for the high strike call. The investors profit potential is limited. When both calls are in-the-money,both will be exercised and the maximum profit will be realised. The investor deliverson his short call and receives a higher price than he is paid for receiving delivery onhis long call. The investorss potential loss is limited. At the most, the investor can lose isthe net premium. He pays a higher premium for the lower exercise price call than hereceives for writing the higher exercise price call. The investor breaks even when the market price equals the lower exerciseprice plus the net premium. At the most, an investor can lose is the net premium paid.To recover the premium, the market price must be as great as the lower exercise priceplus the net premium.An example of a Bullish call spread: Lets assume that the cash price of a scrip is Rs.100 and you buy a Novembercall option with a strike price of Rs.90 and pay a premium of Rs.14. At the same timeyou sell another November call option on a scrip with a strike price of Rs.110 andreceive a premium of Rs.4. Here you are buying a lower strike price option andselling a higher strike price option. This would result in a net outflow of Rs.10 at thetime of establishing the spread. Now let us look at the fundamental reason for this position. Since this is abullish strategy, the first position established in the spread is the long lower strikeprice call option with unlimited profit potential. At the same time to reduce the cost of BABASAB PATIL PROJECT REPORT ON FINANCE 51
  • 52. Analysis of Derivatives and Stock Broking at Apollo Sindhooripuchase of the long position a short position at a higher call strike price is established.While this not only reduces the outflow in terms of premium but his profit potential aswell as risk is limited. Based on the above figures the maximum profit, maximum lossand breakeven point of this spread would be as follows:Maximum profit = Higher strike price - Lower strike price - Net premium paid = 110 - 90 - 10 = 10Maximum Loss = Lower strike premium - Higher strike premium = 14 - 4 = 10Breakeven Price = Lower strike price + Net premium paid = 90 + 10 = 100Bullish Put Spread Strategies A vertical Put spread is the simultaneous purchase and sale of identical Putoptions but with different exercise prices. To "buy a put spread" is to purchase a Put with a higher exercise price and towrite a Put with a lower exercise price. The trader pays a net premium for theposition. To "sell a put spread" is the opposite: the trader buys a Put with a lowerexercise price and writes a put with a higher exercise price, receiving a net premiumfor the position. An investor with a bullish market outlook should sell a Put spread. The"vertical bull put spread" allows the investor to participate to a limited extent in a bullmarket, while at the same time limiting risk exposure. To put on a bull spread, a trader sells the higher strike put and buys the lowerstrikeput. The bull spread can be created by buying the lower strike and selling the BABASAB PATIL PROJECT REPORT ON FINANCE 52
  • 53. Analysis of Derivatives and Stock Broking at Apollo Sindhoorihigher strike of either calls or put. The difference between the premiums paid andreceived makes up one leg of the spread. The investors profit potential is limited. When the market price reaches orexceeds the higher exercise price, both options will be out-of-the-money and willexpire worthless. The trader will realize his maximum profit, the net premium The investors potential loss is also limited. If the market falls, the options willbe in-the-money. The puts will offset one another, but at different exercise prices. The investor breaks-even when the market price equals the lower exerciseprice less the net premium. The investor achieves maximum profit i.e the premiumreceived, when the market price moves up beyond the higher exercise price (both putsare then worthless).An example of a bullish put spread. Lets us assume that the cash price of the scrip is Rs.100. You now buy aNovember put option on a scrip with a strike price of Rs.90 at a premium of Rs.5 andsell a put option with a strike price of Rs.110 at a premium of Rs.15. The first position is a short put at a higher strike price. This has resulted insome inflow in terms of premium. But here the trader is worried about risk and socaps his risk by buying another put option at the lower strike price. As such, a part ofthe premium received goes off and the ultimate position has limited risk and limitedprofit potential. Based on the above figures the maximum profit, maximum loss andbreakeven point of this spread would be as follows:Maximum profit = Net option premium income or net credit = 15 - 5 = 10Maximum loss = Higher strike price - Lower strike price - Net premium received = 110 - 90 - 10 = 10 BABASAB PATIL PROJECT REPORT ON FINANCE 53
  • 54. Analysis of Derivatives and Stock Broking at Apollo SindhooriBreakeven Price = Higher Strike price - Net premium income = 110 - 10 = 1002. Bear Market Strategiesa. Puts in a Bearish Strategy: When you purchase a put you are long and want the market to fall. A put option is a bearish position. It will increase in value if the market falls. An investor with a bearish market outlook shall buy put options. By purchasing put options, the trader has the right to choose whether to sell the underlying asset at the exercise price. In a falling market, this choice is preferable to being obligated to buy the underlying at a price higher. An investors profit potential is practically unlimited. The higher the fall inprice of the underlying asset, higher the profits. The investors potential loss is limited. If the price of the underlying asset risesinstead of falling as the investor has anticipated, he may let the option expireworthless. At the most, he may lose the premium for the option. The traders breakeven point is the exercise price minus the premium. Toprofit, the market price must be below the exercise price. Since the trader has paid apremium he must recover the premium he paid for the option. An increase in volatility will increase the value of your put and increase yourreturn. An increase in volatility will make it more likely that the price of theunderlying instrument will move. This increases the value of the option.b. Calls in a Bearish Strategy: Another option for a bearish investor is to go short ona call with the intent to purchase it back in the future. By selling a call, you have a netshort position and needs to be bought back before expiration and cancel out yourposition. For this an investor needs to write a call option. If the market price falls, longcall holders will let their out-of-the-money options expire worthless, because theycould purchase the underlying asset at the lower market price. BABASAB PATIL PROJECT REPORT ON FINANCE 54
  • 55. Analysis of Derivatives and Stock Broking at Apollo Sindhoori The investors profit potential is limited because the traders maximum profit islimited to the premium received for writing the option. Here the loss potential is unlimited because a short call position holder has anobligation to sell if exercised, he will be exposed to potentially large losses if themarket rises against his position. The investor breaks even when the market price equals the exercise price: plusthe premium. At any price greater than the exercise price plus the premium, the traderis losing money. When the market price equals the exercise price plus the premium,the trader breaks even. An increase in volatility will increase the value of your call and decrease yourreturn. When the option writer has to buy back the option in order to cancel out hisposition, he will be forced to pay a higher price due to the increased value of the calls.Bearish Put Spread Strategies A vertical put spread is the simultaneous purchase and sale of identical putoptions but with different exercise prices. To "buy a put spread" is to purchase a put with a higher exercise price and towrite a put with a lower exercise price. The trader pays a net premium for theposition. To "sell a put spread" is the opposite. The trader buys a put with a lowerexercise price and writes a put with a higher exercise price, receiving a net premiumfor the position. To put on a bear put spread you buy the higher strike put and sell thelower strike put. You sell the lower strike and buy the higher strike of either calls orputs to set up a bear spread. An investor with a bearish market outlook should: buy a put spread. The "BearPut Spread" allows the investor to participate to a limited extent in a bear market,while at the same time limiting risk exposure. BABASAB PATIL PROJECT REPORT ON FINANCE 55
  • 56. Analysis of Derivatives and Stock Broking at Apollo Sindhoori The investors profit potential is limited. When the market price falls to orbelow the lower exercise price, both options will be in-the-money and the trader willrealize his maximum profit when he recovers the net premium paid for the options. The investors potential loss is limited. The trader has offsetting positions atdifferent exercise prices. If the market rises rather than falls, the options will be out-of-the-money and expire worthless. Since the trader has paid a net premium The investor breaks even when the market price equals the higher exerciseprice less the net premium. For the strategy to be profitable, the market price mustfall. When the market price falls to the high exercise price less the net premium, thetrader breaks even. When the market falls beyond this point, the trader profits.An example of a bearish put spread. Lets assume that the cash price of the scrip is Rs.100. You buy a Novemberput option on a scrip with a strike price of Rs.110 at a premium of Rs.15 and sell a putoption with a strike price of Rs.90 at a premium of Rs.5. In this bearish position the put is taken as long on a higher strike price put withthe outgo of some premium. This position has huge profit potential on downside. Ifthe trader may recover a part of the premium paid by him by writing a lower strikeprice put option. The resulting position is a mildly bearish position with limited riskand limited profit profile. Though the trader has reduced the cost of taking a bearishposition, he has also capped the profit potential as well. The maximum profit,maximum loss and breakeven point of this spread would be as follows:Maximum profit = Higher strike price option - Lower strike price option - Net premium paid = 110 - 90 - 10 = 10Maximum loss = Net premium paid = 15 - 5 = 10 BABASAB PATIL PROJECT REPORT ON FINANCE 56
  • 57. Analysis of Derivatives and Stock Broking at Apollo SindhooriBreakeven Price = Higher strike price - Net premium paid = 110 - 10 = 100Bearish Call Spread Strategies A vertical call spread is the simultaneous purchase and sale of identical calloptions but with different exercise prices. To "buy a call spread" is to purchase a call with a lower exercise price and towrite a call with a higher exercise price. The trader pays a net premium for theposition. To "sell a call spread" is the opposite: the trader buys a call with a higherexercise price and writes a call with a lower exercise price, receiving a net premiumfor the position. To put on a bear call spread you sell the lower strike call and buy the higherstrike call. An investor sells the lower strike and buys the higher strike of either callsor puts to put on a bear spread. An investor with a bearish market outlook should: sell a call spread. The "BearCall Spread" allows the investor to participate to a limited extent in a bear market,while at the same time limiting risk exposure. The investors profit potential is limited. When the market price falls to thelower exercise price, both out-of-the-money options will expire worthless. Themaximum profit that the trader can realize is the net premium: The premium hereceives for the call at the higher exercise price. Here the investors potential loss is limited. If the market rises, the options willoffset one another. At any price greater than the high exercise price, the maximumloss will equal high exercise price minus low exercise price minus net premium. The investor breaks even when the market price equals the lower exerciseprice plus the net premium. The strategy becomes profitable as the market price BABASAB PATIL PROJECT REPORT ON FINANCE 57
  • 58. Analysis of Derivatives and Stock Broking at Apollo Sindhoorideclines. Since the trader is receiving a net premium, the market price does not haveto fall as low as the lower exercise price to breakeven.An example of a bearish call spread. Let us assume that the cash price of the scrip is Rs 100. You now buy aNovember call option on a scrip with a strike price of Rs 110 at a premium of Rs 5and sell a call option with a strike price of Rs 90 at a premium of Rs 15. In this spread you have to buy a higher strike price call option and sell a lowerstrike price option. As the low strike price option is more expensive than the higherstrike price option, it is a net credit startegy. The final position is left with limited riskand limited profit. The maximum profit, maximum loss and breakeven point of thisspread would be as follows:Maximum profit = Net premium received = 15 - 5 = 10Maximum loss = Higher strike price option - Lower strike price option - Net premium received = 110 - 90 - 10 = 10Breakeven Price = Lower strike price + Net premium paid = 90 + 10 = 100Key Regulations In India we have two premier exchanges The National Stock Exchange ofIndia (NSE) and The Bombay Stock Exchange (BSE) which offer options trading onstock indices as well as individual securities. Options on stock indices are European in kind and settled only on the last ofexpiration of the underlying. NSE offers index options trading on the NSE Fifty index BABASAB PATIL PROJECT REPORT ON FINANCE 58
  • 59. Analysis of Derivatives and Stock Broking at Apollo Sindhooricalled the Nifty. While BSE offers index options on the country’s widely used indexSensex, which consists of 30 stocks. Options on individual securities are American. The number of stock optionscontracts to be traded on the exchanges will be based on the list of securities asspecified by Securities and Exchange Board of India (SEBI). Additions/deletions inthe list of securities eligible on which options contracts shall be made available shallbe notified from time to time.Underlying: Underlying for the options on individual securities contracts shall be theunderlying security available for trading in the capital market segment of theexchange.Security descriptor: The security descriptor for the options on individual securitiesshall be:  Market type - N  Instrument type - OPTSTK  Underlying - Underlying security  Expiry date - Date of contract expiry  Option type - CA/PA  Exercise style - American Premium Settlement method: Premium Settled; CA - Call American  PA - Put American.Trading cycle: The contract cycle and availability of strike prices for optionscontracts on individual securities shall be as follows: Options on individual securities contracts will have a maximum of three-month trading cycle. New contracts will be introduced on the trading day followingthe expiry of the near month contract. On expiry of the near month contract, new contract shall be introduced at newstrike prices for both call and put options, on the trading day following the expiry ofthe near month contract. (See Index futures learning centre for further reading) BABASAB PATIL PROJECT REPORT ON FINANCE 59
  • 60. Analysis of Derivatives and Stock Broking at Apollo SindhooriStrike price intervals: The exchange shall provide a minimum of five strike pricesfor every option type (i.e call and put) during the trading month. There shall be twocontracts in-the-money (ITM), two contracts out-of-the-money (OTM) and onecontract at-the-money (ATM). The strike price interval for options on individualsecurities is given in the accompanying table. New contracts with new strike prices for existing expiration date will beintroduced for trading on the next working day based on the previous days underlyingclose values and as and when required. In order to fix on the at-the-money strike pricefor options on individual securities contracts the closing underlying value shall berounded off to the nearest multiplier of the strike price interval. The in-the-moneystrike price and the out-of-the-money strike price shall be based on the at-the-moneystrike price interval.Expiry day: Options contracts on individual securities as well as index options shallexpire on the last Thursday of the expiry month. If the last Thursday is a tradingholiday, the contracts shall expire on the previous trading day.Order type: Regular lot order, stop loss order, immediate or cancel, good till day,good till cancelled, good till date and spread order. Good till cancelled (GTC) ordersshall be cancelled at the end of the period of 7 calendar days from the date of enteringan order.Permitted lot size: The value of the option contracts on individual securities shall notbe less than Rs.2 lakh at the time of its introduction. The permitted lot size for theoptions contracts on individual securities shall be in multiples of 100 and fractions ifany, shall be rounded off to the next higher multiple of 100.Price steps: The price steps in respect of all options contracts admitted to dealings onthe exchange shall be Re 0.05.Quantity freeze: Orders which may come to the exchange as a quantity freeze shallbe the lesser of the following: 1 per cent of the market wide position limit stipulatedof options on individual securities as given in (h) below or Notional value of thecontract of around Rs.5 crore. In respect of such orders, which have come under BABASAB PATIL PROJECT REPORT ON FINANCE 60
  • 61. Analysis of Derivatives and Stock Broking at Apollo Sindhooriquantity freeze, the member shall be required to confirm to the exchange that there isno inadvertent error in the order entry and that the order is genuine. On suchconfirmation, the exchange at its discretion may approve such order subject toavailability of turnover/exposure limits, etc.Base price: Base price of the options contracts on introduction of new contracts shallbe the theoretical value of the options contract arrived at based on Black-Scholesmodel of calculation of options premiums. The base price of the contracts onsubsequent trading days will be the daily close price of the options contracts.However in such of those contracts where orders could not be placed because ofapplication of price ranges, the bases prices may be modified at the discretion of theexchange and intimated to the members.Price ranges: There will be no day minimum/maximum price ranges applicable forthe options contract. The operating ranges and day minimum/maximum ranges foroptions contract shall be kept at 99 per cent of the base price. In view of this themembers will not be able to place orders at prices which are beyond 99 per cent of thebase price. The base prices for option contracts may be modified, at the discretion ofthe exchange, based on the request received from trading members as mentionedabove.Exposure limits: Gross open positions of a member at any point of time shall notexceed the exposure limit as detailed hereunder: • Index Options: Exposure Limit shall be 33.33 times the liquid networth. • Option contracts on individual Securities: Exposure Limit shall be 20 times the liquid networth.Memberwise position limit: When the open position of a Clearing Member, TradingMember or Custodial Participant exceeds 15 per cent of the total open interest of themarket or Rs 100 crore, whichever is higher, in all the option contracts on the sameunderlying, at any time, including during trading hours. BABASAB PATIL PROJECT REPORT ON FINANCE 61
  • 62. Analysis of Derivatives and Stock Broking at Apollo SindhooriFor option contracts on individual securities, open interest shall be equivalent to theopen positions multiplied by the notional value. Notional Value shall be the previousdays closing price of the underlying security or such other price as may be specifiedfrom time to time.Market wide position limits: Market wide position limits for option contracts onindividual securities shall be lower of: *20 times the average number of shares tradeddaily, during the previous calendar month, in the relevant underlying security in theunderlying segment of the relevant exchange or, 10 per cent of the number of sharesheld by non-promoters in the relevant underlying security i.e. 10 per cent of the freefloat in terms of the number of shares of a company. The relevant authority shall specify the market wide position limits once everymonth, on the expiration day of the near month contract, which shall be applicable tillthe expiry of the subsequent month contract.Exercise settlement: Exercise type shall be American and final settlement in respectof options on individual securities contracts shall be cash settled for an initial periodof 6 months and as per the provisions of National Securities Clearing Corporation Ltd(NSCCL) as may be stipulated from time to time.Reading Stock Option TablesIn India, option tables published in business newspapers and is fairly similarto the regular stock tables.The following is the format of the options table published in Indian businessnews papers:NIFTY OPTIONSContracts Exp.Date Str.Price Opt.Type Open High Low Trd.Qty No.of.Cont. Trd.ValueRELIANCE 7/26/01 360 CA 3 3 2 4200 7 1512000RELIANCE 7/26/01 360 PA 29 39 29 1200 2 432000RELIANCE 7/26/01 380 CA 1 1 1 1200 2 456000RELIANCE 7/26/01 380 PA 35 40 35 1200 2 456000 BABASAB PATIL PROJECT REPORT ON FINANCE 62
  • 63. Analysis of Derivatives and Stock Broking at Apollo SindhooriRELIANCE 7/26/01 340 CA 8 9 6 11400 19 3876000RELIANCE 7/26/01 340 PA 10 14 10 13800 23 4692000RELIANCE 7/26/01 320 CA 22 24 16 11400 19 3648000RELIANCE 7/26/01 320 PA 4 7 2 29400 49 9408000RELIANCE 8/30/01 360 PA 31 35 31 1200 2 432000RELIANCE 8/30/01 340 CA 15 15 15 600 1 204000RELIANCE 8/30/01 320 PA 10 10 10 600 1 192000RELIANCE 7/26/01 300 CA 38 38 38 600 1 180000RELIANCE 7/26/01 300 PA 2 2 2 1200 2 360000RELIANCE 7/26/01 280 CA 59 60 53 1800 3 504000 • The first column shows the contract that is being traded i.e Reliance. • The second column displays the date on which the contract will expire i.e. the expiry date is the last Thursday of the month. • Call options-American are depicted as CA and Put options-American asPA. • The Open, High, Low, Close columns display the traded premium rates.Advantages of option trading1. Risk management: Put options allow investors holding shares to hedge against apossible fall in their value. This can be considered similar to taking out insuranceagainst a fall in the share price.2. Time to decide: By taking a call option the purchase price for the shares is lockedin. This gives the call option holder until the Expiry Day to decide whether or not toexercise the option and buy the shares. Likewise the taker of a put option has time todecide whether or not to sell the shares. BABASAB PATIL PROJECT REPORT ON FINANCE 63
  • 64. Analysis of Derivatives and Stock Broking at Apollo Sindhoori3. Speculation: The ease of trading in and out of an option position makes it possibleto trade options with no intention of ever exercising them. If an investor expects themarket to rise, they may decide to buy call options. If expecting a fall, they maydecide to buy put options. Either way the holder can sell the option prior to expiry totake a profit or limit a loss. Trading options has a lower cost than shares, as there is nostamp duty payable unless and until options are exercised.4. Leverage: Leverage provides the potential to make a higher return from a smallerinitial outlay than investing directly. However, leverage usually involves more risksthan a direct investment in the underlying shares. Trading in options can allowinvestors to benefit from a change in the price of the share without having to pay thefull price of the share.We can see below how one can leverage ones position by just paying the premium. Option Premium StockBought on Oct 15 Rs 380 Rs 4000Sold on Dec 15 Rs 670 Rs 4500Profit Rs 290 Rs 500ROI (Not annualized) 76.3% 12.5%5. Income generation: Shareholders can earn extra income over and above dividendsby writing call options against their shares. By writing an option they receive theoption premium upfront. While they get to keep the option premium, there is apossibility that they could be exercised against and have to deliver their shares to thetaker at the exercise price.6. Strategies: By combining different options, investors can create a wide range ofpotential profit scenarios. To find out more about options strategies read the moduleon trading strategies.Settlement of options contractsOptions contracts have three types of settlements, daily premium settlement, exercisesettlement, interim exercise settlement in the case of option contracts on securities andfinal settlement. BABASAB PATIL PROJECT REPORT ON FINANCE 64
  • 65. Analysis of Derivatives and Stock Broking at Apollo Sindhoori1. Daily premium settlement: Buyer of an option is obligated to pay the premium towards the options purchased by him. Similarly, the seller of an option is entitled to receive the premium for the option sold by him. The premium payable amount and the premium receivable amount are netted to compute the net premium payable or receivable amount for each client for each option contract.2. Exercise settlement: Although most option buyers and sellers close out their options positions by an offsetting closing transaction, an understanding of exercise can help an option buyer determine whether exercise might be more advantageous than an offsetting sale of the option. There is always a possibility of the option seller being assigned an exercise. Once an exercise of an option has been assigned to an option seller, the option seller is bound to fulfill his obligation (meaning, pay the cash settlement amount in the case of a cash-settled option) even though he may not yet have been notified of the assignment.3. Interim exercise settlement: Interim exercise settlement takes place only for option contracts on securities. An investor can exercise his in-the-money options at any time during trading hours, through his trading member. Interim exercise settlement is effected for such options at the close of the trading hours, on the day of exercise. Valid exercised option contracts are assigned to short positions in the option contract with the same series (i.e. having the same underlying, same expiry date and same strike price), on a random basis, at the client level. The CM who has exercised the option receives the exercise settlement value per unit of the option from the CM who has been assigned the option contract. BABASAB PATIL PROJECT REPORT ON FINANCE 65
  • 66. Analysis of Derivatives and Stock Broking at Apollo Sindhoori CLEARING AND SETTLEMENT National Securities Clearing Corporation Limited (NSCCL) undertakesclearing and settlement of all trades executed on the futures and options (F&O)segment of the NSE. It also acts as legal counterparty to all trades on the F&Osegment and guarantees their financial settlement.Clearing entities Clearing and settlement activities in the F&O segment are undertaken byNSCCL with the help of the following entities:Clearing members BABASAB PATIL PROJECT REPORT ON FINANCE 66
  • 67. Analysis of Derivatives and Stock Broking at Apollo Sindhoori In the F&O segment, some members, called self clearing members, clear andsettle their trades executed by them only either on their own account or on account oftheir clients. Some others, called trading member–cum–clearing member, clear andsettle their own trades as well as trades of other trading members(TMs). Besides,there is a special category of members, called professional clearing members (PCM)who clear and settle trades executed by TMs. The members clearing their own tradesand trades of others, and the PCMs are required to bring in additional securitydeposits in respect of every TM whose trades they undertake to clear and settle.Clearing banks Funds settlement takes place through clearing banks. For the purpose ofsettlement all clearing members are required to open a separate bank account withNSCCL designated clearing bank for F&O segment. The Clearing and Settlementprocess comprises of the following three main activities:1. Clearing2. Settlement3. Risk ManagementRisk ManagementNSCCL has developed a comprehensive risk containment mechanism for the F&Osegment. The salient features of risk containment mechanism on the F&O segmentare:  The financial soundness of the members is the key to risk management. Therefore, the requirements for membership in terms of capital adequacy (net worth, security deposits) are quite stringent.  NSCCL charges an upfront initial margin for all the open positions of a CM. It specifies the initial margin requirements for each futures/options contract on a daily basis. It also follows value-at-risk(VaR) based margining through SPAN. The CM in turn collects the initial margin from the TMs and their respective clients.  The open positions of the members are marked to market based on contract settlement price for each contract. The difference is settled in cash on a T+1 basis. BABASAB PATIL PROJECT REPORT ON FINANCE 67
  • 68. Analysis of Derivatives and Stock Broking at Apollo Sindhoori  NSCCL’s on-line position monitoring system monitors a CM’s open positions on a real-time basis. Limits are set for each CM based on his capital deposits. The on-line position monitoring system generates alerts whenever a CM reaches a position limit set up by NSCCL. NSCCL monitors the CMs for MTM value violation, while TMs are monitored for contract-wise position limit violation.  CMs are provided a trading terminal for the purpose of monitoring the open positions of all the TMs clearing and settling through him. A CM may set exposure limits for a TM clearing and settling through him. NSCCL assists the CM to monitor the intra-day exposure limits set up by a CM and whenever a TM exceed the limits, it stops that particular TM from further trading.  A member is alerted of his position to enable him to adjust his exposure or bring in additional capital. Position violations result in withdrawal of trading facility for all TMs of a CM in case of a violation by the CM.  A separate settlement guarantee fund for this segment has been created out of the capital of members. The fund had a balance of Rs. 648 crore at the end of March 2002. The most critical component of risk containment mechanism for F&O segment is the margining system and on-line position monitoring. The actual position monitoring and margining is carried out on–line through Parallel Risk Management System (PRISM). PRISM uses SPAN(r) (Standard Portfolio Analysis of Risk) system for the purpose of computation of on-line margins, based on the parameters defined by SEBI.NSE–SPAN The objective of NSE–SPAN is to identify overall risk in a portfolio of allfutures and options contracts for each member. The system treats futures and optionscontracts uniformly, while at the same time recognizing the unique exposuresassociated with options portfolios, like extremely deep out–of–the–money shortpositions and inter–month risk. Its over–riding objective is to determine the largestloss that a portfolio might reasonably be expected to suffer from one day to the nextday based on 99% VaR methodology. SPAN considers uniqueness of optionportfolios. The following factors affect the value of an option: BABASAB PATIL PROJECT REPORT ON FINANCE 68
  • 69. Analysis of Derivatives and Stock Broking at Apollo Sindhoori  Underlying market price  Strike price  Volatility(variability) of underlying instrument  Time to expiration  Interest rate As these factors change, the value of options maintained within a portfolioalso changes. Thus, SPAN constructs scenarios of probable changes in underlyingprices and volatilities in order to identify the largest loss a portfolio might suffer fromone day to the next. It then sets the margin requirement to cover this one–day loss.The complex calculations (e.g. the pricing of options) in SPAN are executed byNSCCL. The results of these calculations are called risk arrays. Risk arrays, and othernecessary data inputs for margin calculation are provided to members daily in a filecalled the SPAN risk parameter file. Members can apply the data contained in the riskparameter files, to their specific portfolios of futures and options contracts, todetermine their SPAN margin requirements. Hence, members need not executecomplex option pricing calculations, which is performed by NSCCL. SPAN has theability to estimate risk for combined futures and options portfolios, and also re–valuethe same under various scenarios of changing market conditions.CALCULATION OF BROKERAGE. Brokerage is the amount paid to the stock broker for the services rendered byhim to the client. As per the SEBI guidelines, ASCI can charge maximum 2 percent asbrokerage to the clients. Again brokerage differs from branch to branch. Along withbrokerage, Service tax at 10 percent, Cess etc., are also added to the amount chargedto the client. The brokerage is calculated at the rate of 0.5% or 0.50 paisa, whichever ishigher. In NSE &BSE, on Delivery base the brokerage is charged at the rate of 0.5%.For the clients who are trading not frequently, the rate of brokerage is 0.75%.Brokerage is calculated as follows: BABASAB PATIL PROJECT REPORT ON FINANCE 69
  • 70. Analysis of Derivatives and Stock Broking at Apollo Sindhoori=certain percentage of brokerage* price of a scripThe answer will be multiplied with number of shares traded.For example,If the rate of brokerage is –0.5%The price of a scrip is –Ts. 250And the number of shares traded of that particular scrip is –100Therefore, amount to be paid as brokerage is,=0.5*250/100=Rs. 1.25*100=Rs.125HIDDEN COST Apart from brokerage other costs like Service charges, Cess, Courier charges,Tax etc., are included in the brokerage, which is called as Hidden cost. Hidden costadds to the amount of brokerage. Apart from brokerage Service Tax is charged at therate of 12 percent, Cess is 0.2 percent and Security Transaction Tax is charged at therate of 0.13 percent (STT). STT is charged on turnover. BABASAB PATIL PROJECT REPORT ON FINANCE 70
  • 71. Analysis of Derivatives and Stock Broking at Apollo Sindhoori KEY COMBINATIONS USED FOR THE TRANSACTIONS:Buying -F1 or +Selling - F2 or -Outstanding or pending position -F3Delete -F4Cancellation -F3Market depth -F6 (no. of buyers, sellers, quantity sold, traded volume etc)Total net position -F8 (transactions traded)Market snapshot -F10 (company’s details – open, high, low, previous, close etc)Choose instruments -Ctrl +ZTotal trading information _Ctrl +N BABASAB PATIL PROJECT REPORT ON FINANCE 71
  • 72. Analysis of Derivatives and Stock Broking at Apollo Sindhoori FINDINGS 1. During the analysis I found that after opening an account, the transactions, which are made by the investors, are not updated or entered to the concerned investor’s account and because of this, sometimes the investor has to face some difficulties in accessing his account. 2. NSE follows the NEAT system and BSE follows the BOLT system for trading in the securities. Both of these are Screen Based Trading Systems. 3. The ASCI having broker and sub broker. These two are faciliting the clients to purchase and sell the securities in the secondary market, for that they charge some commission called brokerage. 4. The ASCI Stock Broking Ltd has to fulfill the conditions framed by the SEBI. BABASAB PATIL PROJECT REPORT ON FINANCE 72
  • 73. Analysis of Derivatives and Stock Broking at Apollo Sindhoori 5. Market is being divided into two parts i.e. primary market and secondary market. Primary Market helps to raise fund through IPO’s and Secondary Market helps the investor to buy the share from the stock market. SEBI is regulating both the Markets. 6. T+2 rolling settlements have been introduced in the year Aug 2003. 7. NSDL and CSDL, these two are the Depositories in India. 8. Doing the work of online buying and selling of securities on behalf of the client. 9. Trading in Derivatives products like Futures and Options. 10. Helping the client for clearing and settlements. CONCLUSION 1. Investors can use derivatives instruments in all trends of markets especially options where loss is restricted to the premium paid and profit is unlimited. 2. Introduction of derivatives in Indian market has really served its purpose of reducing the volatility in the spot market. It has made the stock market relatively safer. 3. ASCI is one of the leading brokers at Hubli and it is providing good research reports and investment advices to keep its customers profitable. 4. ASCI is providing many services to the investors along with share broking. Such as demat and Remat services, Mutual Funds, Investments, Personal Tax Planning and Insurance advisory. And it has proved it self as a leading stock broker. BABASAB PATIL PROJECT REPORT ON FINANCE 73
  • 74. Analysis of Derivatives and Stock Broking at Apollo Sindhoori Suggestions: 1. The awareness about derivatives among investors should be increased by conducting various awareness and educational programs. 2. The company can conduct seminars to promote their services. 3. The company can think of tapping the existing demat account holders and provide them enough information on derivatives and enable them to trade in the same. This will help the company to increase its earnings of brokerage income. 4. The company has to create and maintain a database of prospective customers from time to time, to keep track of the people falling in different income levels and their investing patterns. This is possible if continuous contacts are maintained with the customers. BABASAB PATIL PROJECT REPORT ON FINANCE 74
  • 75. Analysis of Derivatives and Stock Broking at Apollo Sindhoori 5. The problems faced by the customers in online trading like placing of orders, delivery, margins etc. have to be attended quickly so that they carry an outstanding and reliable image outside. BIBLIOGRAPHY WWW. APPOLLO SINDHOORI.COM WWW.GOOLGE.COM WWW.ICICIDIRECT.COM WWW.NSEINDIA.COM The data was collected from the list of Books and websites given below: Options, Futures and Other Derivatives – John C Hull BABASAB PATIL PROJECT REPORT ON FINANCE 75