“MARKET VOLATILITY-THE WAY TO RECOVER THE DIFFERENCE IN                EQUITY PRICES DUE TO MARKET CRASH”. AT             ...
“MARKET VOLATILITY-THE WAY TO RECOVER THE DIFFERENCE IN               EQUITY PRICES DUE TO MARKET CRASH”. ATBabasabpatilfr...
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“MARKET VOLATILITY-THE WAY TO RECOVER THE DIFFERENCE IN                  EQUITY PRICES DUE TO MARKET CRASH”. ATObjectives ...
“MARKET VOLATILITY-THE WAY TO RECOVER THE DIFFERENCE IN                  EQUITY PRICES DUE TO MARKET CRASH”. ATSampling si...
“MARKET VOLATILITY-THE WAY TO RECOVER THE DIFFERENCE IN                  EQUITY PRICES DUE TO MARKET CRASH”. AT    Never ...
“MARKET VOLATILITY-THE WAY TO RECOVER THE DIFFERENCE IN               EQUITY PRICES DUE TO MARKET CRASH”. ATBabasabpatilfr...
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“MARKET VOLATILITY-THE WAY TO RECOVER THE DIFFERENCE IN                   EQUITY PRICES DUE TO MARKET CRASH”. AT          ...
“MARKET VOLATILITY-THE WAY TO RECOVER THE DIFFERENCE IN                     EQUITY PRICES DUE TO MARKET CRASH”. ATTrading ...
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“MARKET VOLATILITY-THE WAY TO RECOVER THE DIFFERENCE IN                  EQUITY PRICES DUE TO MARKET CRASH”. AT           ...
“MARKET VOLATILITY-THE WAY TO RECOVER THE DIFFERENCE IN                     EQUITY PRICES DUE TO MARKET CRASH”. ATSENSEX-T...
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“MARKET VOLATILITY-THE WAY TO RECOVER THE DIFFERENCE IN                      EQUITY PRICES DUE TO MARKET CRASH”. AT•   Exp...
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“MARKET VOLATILITY-THE WAY TO RECOVER THE DIFFERENCE IN                    EQUITY PRICES DUE TO MARKET CRASH”. ATof financ...
“MARKET VOLATILITY-THE WAY TO RECOVER THE DIFFERENCE IN                   EQUITY PRICES DUE TO MARKET CRASH”. AT•   Intern...
“MARKET VOLATILITY-THE WAY TO RECOVER THE DIFFERENCE IN               EQUITY PRICES DUE TO MARKET CRASH”. ATBabasabpatilfr...
“MARKET VOLATILITY-THE WAY TO RECOVER THE DIFFERENCE IN               EQUITY PRICES DUE TO MARKET CRASH”. ATBabasabpatilfr...
“MARKET VOLATILITY-THE WAY TO RECOVER THE DIFFERENCE IN               EQUITY PRICES DUE TO MARKET CRASH”. ATBabasabpatilfr...
“MARKET VOLATILITY-THE WAY TO RECOVER THE DIFFERENCE IN                    EQUITY PRICES DUE TO MARKET CRASH”. AT         ...
“MARKET VOLATILITY-THE WAY TO RECOVER THE DIFFERENCE IN                    EQUITY PRICES DUE TO MARKET CRASH”. AT2) A cont...
“MARKET VOLATILITY-THE WAY TO RECOVER THE DIFFERENCE IN                      EQUITY PRICES DUE TO MARKET CRASH”. AT4. Deve...
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“MARKET VOLATILITY-THE WAY TO RECOVER THE DIFFERENCE IN                  EQUITY PRICES DUE TO MARKET CRASH”. ATIntroductio...
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“MARKET VOLATILITY-THE WAY TO RECOVER THE DIFFERENCE IN                   EQUITY PRICES DUE TO MARKET CRASH”. ATQuestion: ...
“MARKET VOLATILITY-THE WAY TO RECOVER THE DIFFERENCE IN                   EQUITY PRICES DUE TO MARKET CRASH”. ATAnswer: If...
“MARKET VOLATILITY-THE WAY TO RECOVER THE DIFFERENCE IN                     EQUITY PRICES DUE TO MARKET CRASH”. ATAnswer: ...
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“MARKET VOLATILITY-THE WAY TO RECOVER THE DIFFERENCE IN                     EQUITY PRICES DUE TO MARKET CRASH”. ATwere nev...
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“MARKET VOLATILITY-THE WAY TO RECOVER THE DIFFERENCE IN                  EQUITY PRICES DUE TO MARKET CRASH”. ATmiddle Ages...
“MARKET VOLATILITY-THE WAY TO RECOVER THE DIFFERENCE IN                  EQUITY PRICES DUE TO MARKET CRASH”. ATStock futur...
“MARKET VOLATILITY-THE WAY TO RECOVER THE DIFFERENCE IN                   EQUITY PRICES DUE TO MARKET CRASH”. AT          ...
“MARKET VOLATILITY-THE WAY TO RECOVER THE DIFFERENCE IN                   EQUITY PRICES DUE TO MARKET CRASH”. ATamongst th...
“MARKET VOLATILITY-THE WAY TO RECOVER THE DIFFERENCE IN                  EQUITY PRICES DUE TO MARKET CRASH”. AT“To offer u...
“MARKET VOLATILITY-THE WAY TO RECOVER THE DIFFERENCE IN                   EQUITY PRICES DUE TO MARKET CRASH”. AT1996.The C...
“MARKET VOLATILITY-THE WAY TO RECOVER THE DIFFERENCE IN                  EQUITY PRICES DUE TO MARKET CRASH”. ATInsurance, ...
“MARKET VOLATILITY-THE WAY TO RECOVER THE DIFFERENCE IN                  EQUITY PRICES DUE TO MARKET CRASH”. ATUdyan Bose ...
A project report on market volatility the way to recover the difference in equity prices due to market crash at reliance m...
A project report on market volatility the way to recover the difference in equity prices due to market crash at reliance m...
A project report on market volatility the way to recover the difference in equity prices due to market crash at reliance m...
A project report on market volatility the way to recover the difference in equity prices due to market crash at reliance m...
A project report on market volatility the way to recover the difference in equity prices due to market crash at reliance m...
A project report on market volatility the way to recover the difference in equity prices due to market crash at reliance m...
A project report on market volatility the way to recover the difference in equity prices due to market crash at reliance m...
A project report on market volatility the way to recover the difference in equity prices due to market crash at reliance m...
A project report on market volatility the way to recover the difference in equity prices due to market crash at reliance m...
A project report on market volatility the way to recover the difference in equity prices due to market crash at reliance m...
A project report on market volatility the way to recover the difference in equity prices due to market crash at reliance m...
A project report on market volatility the way to recover the difference in equity prices due to market crash at reliance m...
A project report on market volatility the way to recover the difference in equity prices due to market crash at reliance m...
A project report on market volatility the way to recover the difference in equity prices due to market crash at reliance m...
A project report on market volatility the way to recover the difference in equity prices due to market crash at reliance m...
A project report on market volatility the way to recover the difference in equity prices due to market crash at reliance m...
A project report on market volatility the way to recover the difference in equity prices due to market crash at reliance m...
A project report on market volatility the way to recover the difference in equity prices due to market crash at reliance m...
A project report on market volatility the way to recover the difference in equity prices due to market crash at reliance m...
A project report on market volatility the way to recover the difference in equity prices due to market crash at reliance m...
A project report on market volatility the way to recover the difference in equity prices due to market crash at reliance m...
A project report on market volatility the way to recover the difference in equity prices due to market crash at reliance m...
A project report on market volatility the way to recover the difference in equity prices due to market crash at reliance m...
A project report on market volatility the way to recover the difference in equity prices due to market crash at reliance m...
A project report on market volatility the way to recover the difference in equity prices due to market crash at reliance m...
A project report on market volatility the way to recover the difference in equity prices due to market crash at reliance m...
A project report on market volatility the way to recover the difference in equity prices due to market crash at reliance m...
A project report on market volatility the way to recover the difference in equity prices due to market crash at reliance m...
A project report on market volatility the way to recover the difference in equity prices due to market crash at reliance m...
A project report on market volatility the way to recover the difference in equity prices due to market crash at reliance m...
A project report on market volatility the way to recover the difference in equity prices due to market crash at reliance m...
A project report on market volatility the way to recover the difference in equity prices due to market crash at reliance m...
A project report on market volatility the way to recover the difference in equity prices due to market crash at reliance m...
A project report on market volatility the way to recover the difference in equity prices due to market crash at reliance m...
A project report on market volatility the way to recover the difference in equity prices due to market crash at reliance m...
A project report on market volatility the way to recover the difference in equity prices due to market crash at reliance m...
A project report on market volatility the way to recover the difference in equity prices due to market crash at reliance m...
A project report on market volatility the way to recover the difference in equity prices due to market crash at reliance m...
A project report on market volatility the way to recover the difference in equity prices due to market crash at reliance m...
A project report on market volatility the way to recover the difference in equity prices due to market crash at reliance m...
A project report on market volatility the way to recover the difference in equity prices due to market crash at reliance m...
A project report on market volatility the way to recover the difference in equity prices due to market crash at reliance m...
A project report on market volatility the way to recover the difference in equity prices due to market crash at reliance m...
A project report on market volatility the way to recover the difference in equity prices due to market crash at reliance m...
A project report on market volatility the way to recover the difference in equity prices due to market crash at reliance m...
A project report on market volatility the way to recover the difference in equity prices due to market crash at reliance m...
A project report on market volatility the way to recover the difference in equity prices due to market crash at reliance m...
A project report on market volatility the way to recover the difference in equity prices due to market crash at reliance m...
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A project report on market volatility the way to recover the difference in equity prices due to market crash at reliance money

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A project report on market volatility the way to recover the difference in equity prices due to market crash at reliance money

  1. 1. “MARKET VOLATILITY-THE WAY TO RECOVER THE DIFFERENCE IN EQUITY PRICES DUE TO MARKET CRASH”. AT CONTENTS CHAPTER – 1 EXECUTIVE SUMMORY INTRODUCTION TO STUDY OBJECTIVES OF STUDY LIMITATION OF STUDY 2 CHAPTER – 2 Industry profile NSE BSE Capital market 3 CHAPTER – 3 INTRODUCTION TO DERIVATIVES FORWARD FUTURE OPTION INDIAN DERIVATIVE MARKET 4 CHAPTER – 4 COMPANY PROFILE METHODOLOGY 5 CHAPTER – 5 ANALYSIS AND INTERPRETAION OF SERVEY DATA 6 CHAPTER – 6 FIDINGS SUGGESTIONS AND RECOMMENDATION CONCLUSION QUESTIOBabasabpatilfreepptmba.com Page 1
  2. 2. “MARKET VOLATILITY-THE WAY TO RECOVER THE DIFFERENCE IN EQUITY PRICES DUE TO MARKET CRASH”. ATBabasabpatilfreepptmba.com Page 2
  3. 3. “MARKET VOLATILITY-THE WAY TO RECOVER THE DIFFERENCE IN EQUITY PRICES DUE TO MARKET CRASH”. AT Executive Summary The in economy was booming till last year, but it has never looked as bad asit is now. Due to the recession in the world economy, India is also facing decline in growth asother countries. Investor’s confidence is of great importance for the stability of capitalmarket in particular and Indian economy in general. But due to the declining growth anduncertain inflation, investor’s tend to loose confidence in capital market. The two primary exchanges in India are the Bombay Stock Exchange (BSE)and the National Stock Exchange of India Ltd (NSE). In addition, there are 24 RegionalStock Exchanges. However, the BSE and NSE have emerged as the two leading exchangesand account for about 80 percent of the equity volume traded in India. Reliance Money is a fall service securities firm providing the entire gamut offinancial services. The firm founded in 2006 today has a pan India presence through officesin entire India. Reliance Money provides a breadth of financial and advisory services includewealth management, investment banking, corporate advisory, brokerage and distribution ofequities, commodities, mutual fund and insurance all of which are supported by powerfulresearch teams. The firm’s philosophy is entirely client centric, with a clear focus onproviding long term value addition to client, while maintaining the highest standards ofexcellence, ethics and professionalism. The entire firm activities are divided across distinctclient groups, individuals, privet clients, corporate and institutions. Financial market’s mainfunction is to facilitate transfer of funds from surplus sectors to deficit sectors. A financialmarket consists of investors or buyers, sellers, dealers and does not refer to physical location.Indian financial system consists of two markets, viz. money and capital market. The core ofmoney market is the inter-bank call money. It has two components-organized andBabasabpatilfreepptmba.com Page 3
  4. 4. “MARKET VOLATILITY-THE WAY TO RECOVER THE DIFFERENCE IN EQUITY PRICES DUE TO MARKET CRASH”. ATunorganized. Capital market provides the framework in which saving and investments takeplace. On one hand it enables companies to raise resources from the investing community andon other, it facilitate households to invest their savings in industrial or commercial activities.The capital market consists of primary and secondary segments. In primary market it dealswith the issue of new investments by the corporate sector such as equity shares, preferenceshare, and debentures. Capital market plays a major role in Indian financial system. AlthoughIndia had a vibrant capital market, which is more then a century old, the paper-basedsettlements of trades causes substantial problems like bad delayed transfer of title tillrecently. The enactment of depositories act in august 1996 paved the way for establishmentof national securities depository limited (NSDL) and central depository securities (India)limited (CSDL). NSDL was the first depository in India; it is promoted by institutions statureresponsible for economic development of the country. CSDL was promoted by the Bombaystock exchangeTopic:“Market Volatility-The way to recover the difference in equity prices due to marketcrash”.Name of the organization:-Reliance Money, Hubli.Need 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 it hasachieved in recent past, in the present changing financial environment and an increasedexposure towards financial risk, it is of immense importance to have a good workingknowledge of derivatives. The derivatives market in Hubli is still in a budding stage, it is necessary tostudy the derivatives and derivative products and understand the derivative trading in Indiaand try to gather information regarding the derivative products so that the present decline inthe share prices can be recovered keeping in view the present value of money.Babasabpatilfreepptmba.com Page 4
  5. 5. “MARKET VOLATILITY-THE WAY TO RECOVER THE DIFFERENCE IN EQUITY PRICES DUE TO MARKET CRASH”. ATObjectives of the study:- • To study the investment pattern of individuals. • To know the pattern of individuals regarding various hedging instruments. • To study the option as a profit making strategy. • To know the use of different strategy. • To study whether individual are willing to invest other than equities. • To study what are the areas of interest of individuals.Limitations • The study covers only Hubli city. • Sample size was 100so, findings are based on these sample size. • There is possibility of result not being accurate due to the sample size of the sample. Research design is a plan for collection and analysis of data in a manner thataims at maximum relevance of the study undertaken. This study is both exploratory as well asdescriptive. Exploratory because it aims as well as exploring the ways how people’sinvestment pattern changes when the bear is bull. Descriptive because it studies in detail theinvestors behavior.Methods of data collectionPrimary data. Questionnaire survey and interaction with clients in the area of Hubli toknow their investment pattern to recover equity difference.Secondary Data Collecting to books & websites etcBabasabpatilfreepptmba.com Page 5
  6. 6. “MARKET VOLATILITY-THE WAY TO RECOVER THE DIFFERENCE IN EQUITY PRICES DUE TO MARKET CRASH”. ATSampling size: The sample selected from the population was limited to 100 investors whohave invested their Money in stock market.Practical ApproachThrough my in plant project, I have learn some of the practical aspects in the organization. a) Handling the terminal. b) Handling client’s query & client relations. c) Most of the respondents invest in futures and options d) Respondents invest in derivative for profit making onlyFindings  No particular age group is highlighting  The respondents may have answered in a hurry without giving accurate consideration especially due to lack of time.  Most of the accounts trading other than equities are traded by the sub-broker.  They purely rely on sub-brokers.  The time constraint was a limiting factor as more in-depth analysis as well as the responses could not be carried out.  Some of the responses may be biased as the investors were very careful in choosing their responsesSuggestions:  Brokers should not motivate investors to invest large amount in derivative products as they are hedging instruments.Recommendations given by respondents:  Never play intraday when the market is volatile  Never use hedging instruments as a profit making toolBabasabpatilfreepptmba.com Page 6
  7. 7. “MARKET VOLATILITY-THE WAY TO RECOVER THE DIFFERENCE IN EQUITY PRICES DUE TO MARKET CRASH”. AT  Never invest blindly  Take market sentiments into considerations  Take global affairs into considerations Since the investors expect better services from RELIANCE MONEY, itshould provide more value added services to itsBabasabpatilfreepptmba.com Page 7
  8. 8. “MARKET VOLATILITY-THE WAY TO RECOVER THE DIFFERENCE IN EQUITY PRICES DUE TO MARKET CRASH”. ATBabasabpatilfreepptmba.com Page 8
  9. 9. “MARKET VOLATILITY-THE WAY TO RECOVER THE DIFFERENCE IN EQUITY PRICES DUE TO MARKET CRASH”. AT Industry profile Earliest records of securities trading India are available from the end ofeighteenth century. Before 1850 there was business conducted in Mumbai in the share ofbank and the securities of east India Company, which were consider as securities for buying,selling and exchange. The prominent shares Traded. The business was conducted under asprawling banyan tree in front of the town hall, which is known as horniman Circle Park. In 1850, the companies act was passed and that heralded the commencementof join stock companies in India. It was the America civil war that helped the commencementof join stock companies in India. In 1874 the dalal street became the prominent place for meeting of the brokersto conduct business. The broker organized an association on 9 th July 1875 known as nativeshare and stock broker association to protect the character, status of the native brokers. Thatwas the foundation of the stock exchange, Mumbai. The exchange was established with 318members. The stock exchange, Mumbai did not have to look as it started raiding high ladderof growth. The stock exchange is a market place, link any other centralize market wherebuyers and sellers can transact business in securities at giving point of a time in a convenientand competitive manner at the fairest possible prizes. In Jan 1899, Mr. James M Mac Len, MP inaugurated the brokers hall. Afterthe First World War the stock exchange was housed properly at an old building near the townhall in 1928, the present premises where acquired surrounded by dalal street, Mumbaisamachar marg and Hamam Street. A new building present location was constructed and wasoccupied on 1st dec 1930.Babasabpatilfreepptmba.com Page 9
  10. 10. “MARKET VOLATILITY-THE WAY TO RECOVER THE DIFFERENCE IN EQUITY PRICES DUE TO MARKET CRASH”. AT In 1950 the regulation of business in securities and stock exchange became anexclusively central Government sub following adaptation of constitution of India. In 1956,the security contract act was passed by the parliament of India, to regulate the securitiesmarket, SEBI was initial established on Oct 12 1988 as an interim board under control ofministry of finance, Government of India in 1992, SEBI act was passed through which theSEBI came into existence, Hence SEBI acquired statutory status on 30th Jan 1992 by passingan ordinance, which was subsequently converted into an act passed by the parliament onApril 4th 1992. The main objective of SEBI is to protect the interest of investors, regulate andpromote the capital market by creating an environment, which would facilitate mobilizationof resources through efficient allocation and to generate confidents among the investor. Assuch SEBI is responsible for regulating stock exchanges and other intermediaries who may beassociation with capital market and the process of the public companies rising capital byissuing instrument that will be traded on capital market. SEBI has been empowered by thecentral government to develop and regulate capital markets in India and there by protect theinterest of investors. In 1992, OTCI (Over the counter exchange of India) came in to existentwhere equities of small companies are listed. In 1994, NSE (national stock exchange) came into existent which brought anand to the open but cry system of trading securities which was in vogue for 150 years, andintroduced screen based trading system. BSE (Bombay stock exchange) online trading system was launched on March14th 1995. Online done who are authorized by the stock exchange. In screen based trading, investor place there buy and sale orders with brokers whose enter the orders in the automated trading system. When buy and sell order matches, a trade is generated and trade details are given to respective brokers. After a trade has taken place, the buyer as is to pay money and seller has to deliver the securities.Babasabpatilfreepptmba.com Page 10
  11. 11. “MARKET VOLATILITY-THE WAY TO RECOVER THE DIFFERENCE IN EQUITY PRICES DUE TO MARKET CRASH”. AT On the stock exchange hundred and thousands of trades take place every day.Buyers and sellers are spread over a large geographical area. Due to these problemscompleting a trade by paying cash to the seller and securities to buyer immediately onexecution of trades on an individually basis is virtually impossible. So the exchange allowstrading to take place for a specified cycle. Once the trading period is over, buyer broker paysmoney and seller broker delivers the securities to the CCCH on a predefined day. Thisprocess is called as pay in, after pay in securities are given to the buyers and seller brokers bythe CCCH, this process is called as pay out. This process of pay in and pay out is calledsettlement. Initially the trading cycle was of one fortnight or one week. The transactionsentered during this period, of a fortnight or one week, were used to be settled either bypayment for purchase or by delivery of shares certificate sold on notified days one fortnightor week of expiry of the trading. The settlement schedules are made know to the members ofthe exchange in advance. The weekly settlement was period was reduced by daily settlement popularlyknown as rolling settlement, in which each day is separate trading day. With effect fromDecember 2001. t+% rolling cycle was introduction for all equities where T is the tradingday and pay in and pay out from the settlement was done on the 5 th business day after thetrading day. For e.g. If T Was Monday, the pay-in and pay-out were done o next Monday asSaturday and Sunday are not counted as business days. T+5 cycles were further shortened toT+3 settlement cycle from April 1st 2002 and T+2 from April 2003.NATIONAL STOCK EXCHANGE (NSE) With the liberalization of the Indian economy, it was found inevitable to lift theIndian stock market trading system on par with the international standards. On the basis ofthe recommendations of high powered Pherwani Committee, the national stock exchange wasincorporated in 1992 by Industrial development bank of India, industrial finance Corporationof India, all insurance corporations, selected commercial banks and others.Babasabpatilfreepptmba.com Page 11
  12. 12. “MARKET VOLATILITY-THE WAY TO RECOVER THE DIFFERENCE IN EQUITY PRICES DUE TO MARKET CRASH”. ATTrading at NSE can be classified under two border categories:a. Wholesale debt market andb. Capital market. Wholesale debt market operations are similar to money market operations-institutions and corporate bodies enter into high value transactions in financial instrumentssuch as government securities, treasury bills, public sector unit bonds, commercial paper,certificate of deposit, etc.There are two kinds of players in NSE: o Trading members and o Participants. Recognized members of NSE are called trading members who trade on behalf ofthemselves and their clients. Participants trading members and large players link banks whotake direct settlement responsibility. Trading at NSE takes place through a fully automated screen-based tradingmechanism which adopts the principle of an order-driven market. Trading members can stayat their offices and execute the trading, since they are linked through a communicationnetwork. The prices at which the buyer and seller are willing to transact will appear on thescreen. When the prices match the transaction will be completed and a confirmation slip willbe printed at the office of the trading member.NSE has several advantages over the traditional trading exchanges.They are as follows NSE brings an integrated stock market trading network across the nation.Investors can trade at the same price from anywhere in the country since inter marketoperations are streamlined coupled with the countrywide access to the securities.Babasabpatilfreepptmba.com Page 12
  13. 13. “MARKET VOLATILITY-THE WAY TO RECOVER THE DIFFERENCE IN EQUITY PRICES DUE TO MARKET CRASH”. AT Delays in communication, late payments and the malpractice’s prevailing in thetraditional trading mechanism can be done away with greater operational efficiency andinformational transparency in the stock market operations, with the support of totalcomputerized network. Unless stock markets provide professionalized service, smallinvestors and foreign investors will not be interested in capital market operations and capitalmarket being one of the major sources of long term finance for industrial projects, Indiancannot afford to damage the damage the capital market path. In this regard NSE gains vitalimportance in the Indian capital market system.The Organization The National Stock Exchange of India Limited has genesis in the High PoweredStudy Group on Establishment of New Stock Exchanges, which recommended promotion ofa National Stock Exchange by financial institutions (FIs) to provide access to investors fromall across the country on an equal footing. Based on the recommendations, NSE waspromoted by leading financial institutions at the behest of the government of India and wasincorporated in November 1992 as a tax-paying company unlike other stock exchanges in thecountry. On its recognition as a stock exchange under the securities contracts (regulation)Act, 1956 in April 1993, NSE commenced operations in the Wholesale Debt Market (WDM)segment in June 1994. The capital market (Equities) segment commenced operations inNovember 1994 and operations in derivatives segment commenced in June 2000.NIFTY: The Nifty is relatively a new comer in the Indian market. S&P CNX Nifty is a50 stock index accounting for 23 sectors of the economy. It is used for purposes such asbenchmarking fund portfolios, index based derivatives and index funds.Babasabpatilfreepptmba.com Page 13
  14. 14. “MARKET VOLATILITY-THE WAY TO RECOVER THE DIFFERENCE IN EQUITY PRICES DUE TO MARKET CRASH”. AT The base period selected for Nifty is the close of prices on November 3, 1995,which marked the completion of one-year of operations of NSE’s capital market segment.The base value of index was set at 1000. S&P CNX Nifty is owned and managed by India index services and productsLtd. (IISL). Which is joint venture between NSE and CRISIL? IISL is a specialized companyfocused upon the index as a core product. IISL have a consulting and licensing agreementwith standard and poor’s (S&P), who are world leaders in index services.BSE (Bombay Stock Exchange) The Bombay Stock Exchange, is the oldest stock exchange in Asia, wasestablished in 1875 as Native Share and Stock Brokers Association at Dalal Street inMumbai. A lot has changed since then when 318 persons became members upon paying Re1. In 1956, the BSE obtained recognition from the Government of India- the firststock exchange to do so –under the Securities Contact (Regulation) Act, 1956. The Sensex, first compiled in 1986, is a ‘market Capitalization-Weighted’ Indexof 30 component stocks representing a sample of large and financially sound companies. TheBSE-Sensex is the bench mark index of the Indian capital markets. The BSE Sensex comprises these 30 stocks: ACC, Bajaj Auto, Bharti Tele,BHEL, Cipla, Dr Reddy’s, Gujarat Ambuja, Grasim, HDFC, HDFC Bank, Hero Honda,Hindalco, HLL, ICICI Bank, Infosys, ITC, L&T, Maruti, NTPC, ONGC, Ranbaxy, Reliance,Reliance Energy, Bharati Artile, SBI, Tata Motors, Tata Power, TCS and Wipro. Here’s atimeline on the rise of the SENSEX through Indian stock market history.Babasabpatilfreepptmba.com Page 14
  15. 15. “MARKET VOLATILITY-THE WAY TO RECOVER THE DIFFERENCE IN EQUITY PRICES DUE TO MARKET CRASH”. ATSENSEX-THE BAROMETER OF INDIAN CAPITAL MARKETSIntroduction: For the premier Stock Exchange that pioneered the stock broking activity inIndia, 128 years of experience seems to be a proud milestone. A lot has changed since 1875when 318 persons became members of what today is called “The Stock Exchange, Mumbai”by paying a princely amount of Re1. Since then, the country’s capital markets have passed through both good and badperiods. The journey in the 20th century has not been an easy one. Till the decade of eighties,there was no scale to measure the ups and downs in the Indian stock market. The +StockExchange, Mumbai (BSE) in 1986 came out with a stock index that subsequently became thebarometer of the Indian stock market. SENSEX is not only scientifically designed but also based on globally acceptedconstruction and review methodology. First complied in 1986, SENSEX is a basket of 30constituent stocks representing a sample of large, liquid and representative companies. Thebase year of SENSEX is 1978-79 and the base value is 100. The index is widely reported inboth domestic and international markets through print as well as electronic media. The Index was initially calculated based on the “Full Market Capitalization”methodology but was shifted to the free-float methodology with effect from September 1,2003. The “Free-float Market Capitalization” methodology of index construction is regardedas an industry best practice globally. All major index providers like MSCI, FISE, STOXX,S&P and Dow Jones use the Free-float methodology. Due to is wide acceptance amongst the Indian investors; SENSEX is regarded tobe the pulse of the Indian stock market. As the oldest index in the country, it provided thetime series data over a fairly long period of time (from 1979 onwards). Small wonder, theSENSEX has over the years become one of the most prominent brands in the economy.Babasabpatilfreepptmba.com Page 15
  16. 16. “MARKET VOLATILITY-THE WAY TO RECOVER THE DIFFERENCE IN EQUITY PRICES DUE TO MARKET CRASH”. AT The growth of equity markets in India has been phenomenal in the decade goneby. Right from early nineties the stock market witnessed heightened activity in terms ofvarious bull and bear runs. The SENSEX captured all these events in the most judicialmanner. One can identify the booms and busts of the Indian stock market through SENSEX. CAPITAL MARKET Capital is required to bring a business into existence, to keep it alive and see itgrowing. Achieving the goal of business requires the performance of such business functionsas production, distribution, marketing, research and development all of which involveinvestment of capital. Further, companies require capital not only for meeting their long termrequirements of funds for new projects, modernization, expansion and diversificationprogrammers also for covering operational expenses. Categories of Capital:• Long-term capital/fixed capital.• Short-term capital/working capital.Babasabpatilfreepptmba.com Page 16
  17. 17. “MARKET VOLATILITY-THE WAY TO RECOVER THE DIFFERENCE IN EQUITY PRICES DUE TO MARKET CRASH”. AT• Export capital.• Venture capital.•1) Long term capital/fixed capital: It represents the amount of capital invested in fixed assets. It is a long-terminvestment.2) Short-term capital/working capital: It represents the amount of capital invested in current assets. Current assets arethose assets, which can be converted into cash with in a year/an accounting period. Workingcapital is required for meeting the operating cost of the concern.3) Export capital: The amount of capital required for making payment in international trade iscalled export capital.The methods of payment in international trade are: Cash with order. Open account. Bills of exchange. Banker’s documentary credits.4) Venture capital: Venture capital is the capital invested in highly risky ventures.MEANING AND DEFINITION OF CAPITAL MARKET: Generally speaking, capital market is the place where in funds are raised forcompanies for meeting their long-term requirements. Capital market for long-term capital.Babasabpatilfreepptmba.com Page 17
  18. 18. “MARKET VOLATILITY-THE WAY TO RECOVER THE DIFFERENCE IN EQUITY PRICES DUE TO MARKET CRASH”. ATCapital market may be defined as the mechanism which co-ordinate the demand and supplyforces of long-term capital. The participants on demand and supply size of this market arefinancial institutions, mutual funds, agents, brokers, borrowers and lenders.COMPONENTS OF CAPITAL MARKET:Broadly speaking, capital market is composed of two segments.The new issues market or Primary market.1. The secondary market.2. The new issues market or primary market: The primary market the existing companies or the new companies offershares/debentures to the public for subscription. The primary also includes the offer ofsecurities to the existing share holders of the companies on right and bonus basis. In theprimary market the companies acquire long term funds for meeting there requirements likeproject financing, expansion, modernizations etc. primary market creates financial claims. Inthis market the public can only buy the shares. Parties involved in the primary market are theleaders and the borrowers. Merchant bankers, registrars, issue companies, under-writers,bankers to the issue, public financial institutions, mutual funds etc, are the major players inthe new issue market.The primary market:It is made up two components: Initial Public Offering and Issue of sharesThe Secondary market: In the secondary market or stock market old issue are bought and sold. In thismarket the public can buy and sell securities. This market does not create financial claims. InBabasabpatilfreepptmba.com Page 18
  19. 19. “MARKET VOLATILITY-THE WAY TO RECOVER THE DIFFERENCE IN EQUITY PRICES DUE TO MARKET CRASH”. ATthis market fund does not flow between borrowers and lenders but funds flows betweenlenders and others/buyers of security. The brokers, the investors, mutual funds and thefinancial institution are the important constituent of secondary market.Players in the capital market: In players in the capital market are divided into three categories:Companies issuing securities:- As per the SEBI Guidelines, companies intending to issue securities are dividedinto three categories, viz.a) New companies.b) Existing unlisted companies.c) Existing listed companies.A company is a new company if it satisfies all the following three conditions.1. It has not completed 12 months of commercial operations.2. Its audited operative results are not available.3. It is set by entrepreneurs with or without track record. A company is said to be an existing listed company if its shares are listed in theany one of the recognized stock exchange. Existing closely held are private companies arecalled existing unlisted companies.1. Intermediaries: Intermediaries are institutional or individual agencies who assist in the processof transforming savings into investment.The major intermediaries in the capital market are: a) Merchant bankers b) Under-writers c) RegistrarsBabasabpatilfreepptmba.com Page 19
  20. 20. “MARKET VOLATILITY-THE WAY TO RECOVER THE DIFFERENCE IN EQUITY PRICES DUE TO MARKET CRASH”. AT d) Brokers e) Depositories f) Collecting agents g) Adverting agencies h) Agents i) Stock brokers and sub brokers j) Mutual Funds2. Investors: The investors comprise the financial and investment companies and a generalpublic. Companies are employing funds in the hope of receiving future benefits. All rationalinvestors prefer return, but most investors are risk averse, attempt to maximize capital gain.Their preference for dividends is a capital gain depends on their economic status and theeffect of tax differential on dividends and capital gains. The institution and companies raisingcapital from investors frame the schemes in such way that these are suitable to all type ofinvestors.The main objectives of investments are as follows.A. Safety: Safety of money is the first objective of investors.B. Profitability: The investor makes investment for earning money. He would like to investin those securities where rate of return is higher.C. Liquidity: The liquidity refers to the receipt back of investment when the investor wantsit.D. Capital appreciation andE. Minimum risk.Structure of capital market in India: The structure of Indian capital market has under ground a remarkabletransformation over the last four and half decades and now comprises an impressive networkBabasabpatilfreepptmba.com Page 20
  21. 21. “MARKET VOLATILITY-THE WAY TO RECOVER THE DIFFERENCE IN EQUITY PRICES DUE TO MARKET CRASH”. ATof financial institutions and new financial instruments. The secondary market has becomemore sophisticated in response to the varied needs of the investors. Provision of long termcredit is entrusted with specialized financial institutions. Of these IDBI, IFCI, LIC, UTI, GICetc. constitute the largest segment. The various constitutes of capital market are: Equity market Debt market Government securities market Mutual Fund schemes.Factors influencing the growth of capital market: The growth of the capital market is influenced by several factors, which arelisted below:• The level of savings and investment of the household sector.• Economic development• Rapid industrialization• Speed in acquiring processing and acting upon information• Technological advances• Corporate performance• Political stability• Globalization of finance• Increased price volatility• Financial innovation• Advances in financial theory• Regulatory change• Foreign Institutional Investor’s (FII’s) participation in the capital market• NRI’s investment• Sophistication among investment managers• Emergence of financial intermediaries like Mutual Funds• Development of financial service sectors like merchant banking leasing venture capital financingBabasabpatilfreepptmba.com Page 21
  22. 22. “MARKET VOLATILITY-THE WAY TO RECOVER THE DIFFERENCE IN EQUITY PRICES DUE TO MARKET CRASH”. AT• International agreement• Liquidity factors• Agency costs• Tax asymmetriesBabasabpatilfreepptmba.com Page 22
  23. 23. “MARKET VOLATILITY-THE WAY TO RECOVER THE DIFFERENCE IN EQUITY PRICES DUE TO MARKET CRASH”. ATBabasabpatilfreepptmba.com Page 23
  24. 24. “MARKET VOLATILITY-THE WAY TO RECOVER THE DIFFERENCE IN EQUITY PRICES DUE TO MARKET CRASH”. ATBabasabpatilfreepptmba.com Page 24
  25. 25. “MARKET VOLATILITY-THE WAY TO RECOVER THE DIFFERENCE IN EQUITY PRICES DUE TO MARKET CRASH”. ATBabasabpatilfreepptmba.com Page 25
  26. 26. “MARKET VOLATILITY-THE WAY TO RECOVER THE DIFFERENCE IN EQUITY PRICES DUE TO MARKET CRASH”. AT INTRODUCTION TO DERIVATIVES The emergence of market for derivate products is most notably forward, futureand option. These can be traced back to the willingness of risk-averse economics agent toguard themselves against uncertainties arising out of fluctuation in asset price. By their verynature, the financial markets are marked by a very high degree of volatility. Through the useof derivative products, it is possible to partially or fully transfer price by looking-in assetprice. As instrument of risk management, these generally do not inflation and fluctuation inthe underlying asset price. However, by locking –in asset price, derivative product minimizethe impact of fluctuation in asset price on the profitability and cash flow situation of risk-averse investors.Derivatives definition: The term derivative refers to an asset that has no independent value, but derivesits value from that of an underlying asset. The underlying asset could be securities,commodities, bullion, currency, livestock or anything else. A very simple example of aderivative is petrol, which is derived from oil. The price of petrol depends upon the price ofoil, which in turn depends upon the demand and supply of oil. Derivative is a product whose value is derived from the value of one or more basicvariable, called bases (underlying asset, or reference rate), in a contractual manner. Forexample, wheat framer may wish to sell their harvest at a future date to eliminate the risk ofchange in price by that date. Such a transaction is an example of a derivative. The price ofthis derivative is driven by the spot price of wheat which is the “underlying”. In the Indian context the securities contract (regulation) Act, 1956 (SC(R) A)defines “Derivatives” to include-1) A security derived from a debt instrument, share, loan whether secured or unsecured, riskinstrument, or contract for difference or any other from of security.Babasabpatilfreepptmba.com Page 26
  27. 27. “MARKET VOLATILITY-THE WAY TO RECOVER THE DIFFERENCE IN EQUITY PRICES DUE TO MARKET CRASH”. AT2) A contract, which derives its value from the price, index of the price, of underlyingsecurities. Derivatives and securities under the future (SC(R) A) and hence trading ofderivative is governed by the regulatory framework under the (SC(R) A).BENEFITS OF TRADING IN DERIVATIVESTrading in derivative offers 4 advantages:1. It allows us to speculate. If we have a view on where the market will move, we can cash in on this view by usingderivatives.2. It allows us to hedge.Derivatives are very efficient risk management instruments. We can use derivatives to capour potential losses in the underlying asset.3. It allows us to undertake arbitrage activities.We can use derivatives to take advantage of the differences in prices of the derivative productand the underlying asset.4. It allows us to buy on marginWhen we purchase a derivative product, we simply have to pay a fraction of the price of thetraded value. In other words, we don’t have to pay up the full value of the asset at the time ofthe transaction.FACTORS DRIVING THE GROWTH OF DERIVATIVES Over the last three decades, the derivatives market has seen a phenomenalGrowth. A large variety of derivative contracts have been launched at exchanges across theworld. Some of the factors driving the growth of financial derivatives are:1. Increased volatility in asset prices in financial markets,2. Increased integration of national financial markets with the international markets,3. Marked improvement in communication facilities and sharp decline in their costs,Babasabpatilfreepptmba.com Page 27
  28. 28. “MARKET VOLATILITY-THE WAY TO RECOVER THE DIFFERENCE IN EQUITY PRICES DUE TO MARKET CRASH”. AT4. Development of more sophisticated risk management tools, providing economic agents awider choice of risk management strategies, and5. Innovations in the derivatives markets, which optimally combine the risks and returns overa large number of financial assets leading to higher returns, reduced risk as well astransactions costs as compared to individual financial assets.Types of Derivatives:1. Forward2. Future3. OptionForward: A Forward contract is a customized contract between two entities, wheresettlement takes place on a specified date in the future at today’s pre-agreed price.Future: A Future contract is an agreement between two parties to buy or sell an asset ata certain time in the future at a certain price. Future contract are special type of forwardcontract in the sense that the former are standardize exchange-traded contract.Options:Options are two types- • Call • Put Calls give the buyer the right but not the obligation to buy a given quantity ofthe underlying asset, at a given price on or before a given future date. Puts give the buyer the right, but not the obligation to sell a given quantity of theunderlying asset at a given price on or before a given date.Babasabpatilfreepptmba.com Page 28
  29. 29. “MARKET VOLATILITY-THE WAY TO RECOVER THE DIFFERENCE IN EQUITY PRICES DUE TO MARKET CRASH”. ATLeaps: The acronym LEAPS means Long-Term Equity Anticipation Securities.These are options having a maturity of upto three years.Swaps; Swaps are private agreements between two parties to exchange cash flow in thefuture according to a prearranged formula they can be regarded as portfolios of forwardcontract. The two types of commonly used swaps are:• Interest Rate Swaps These entail swapping only the interest related cash flow between the parties inthe same currency.• Currency Swaps These entail swapping both the principal and interest between the parties, withthe cash flow in one direction being in a different currency than those in the oppositedirection.Participants in the derivatives markets.The following three broad categories of participants - hedgers, speculators,And arbitrageurs trade in the derivatives market.Hedgers: Hedgers face risk associated with the price of an asset. They use futures oroptions markets to reduce or eliminate this risk.Speculators: Speculators wish to bet on future movements in the price of an asset. Futuresand options contracts can give them an extra leverage; that is, they can increase both thepotential gains and potential losses in a speculative venture.Arbitrageurs:Babasabpatilfreepptmba.com Page 29
  30. 30. “MARKET VOLATILITY-THE WAY TO RECOVER THE DIFFERENCE IN EQUITY PRICES DUE TO MARKET CRASH”. AT Arbitrageurs are in business to take advantage of a discrepancy between pricesin two different markets. If, for example, they see the futures price of an asset getting out ofline with the cash price, they will take offsetting positions in the two markets to lock in aprofit.ECONOMIC FUNCTION OF THE DERIVATIVEMARKET In spite of the fear and criticism with which the derivative markets arecommonly looked at, these markets perform a number of economic functions.1. Prices in an organized derivatives market reflect the perception of market participantsabout the future and lead the prices of underlying to the perceived future level. The prices ofderivatives converge with the prices of the underlying at the expiration of the derivativecontract. Thus derivatives help in discovery of future as well as current prices.2. The derivatives market helps to transfer risks from those who have them but may not likethem to those who have an appetite for them.3. Derivatives, due to their inherent nature, are linked to the underlying cash markets. Withthe introduction of derivatives, the underlying market witnesses higher trading volumesbecause of participation by more players who would not otherwise participate for lack of anarrangement to transfer risk.4. Speculative trades shift to a more controlled environment of derivatives market. In theabsence of an organized derivatives market, speculators trade in the underlying cash markets.Margining, monitoring and surveillance of the activities of various participants becomeextremely difficult in these kinds of mixed markets.Babasabpatilfreepptmba.com Page 30
  31. 31. “MARKET VOLATILITY-THE WAY TO RECOVER THE DIFFERENCE IN EQUITY PRICES DUE TO MARKET CRASH”. AT5. An important incidental benefit that flows from derivatives trading is that it acts as acatalyst for new entrepreneurial activity. The derivatives have a history of attracting manybright, creative, well-educated people with an entrepreneurial attitude. They often energizeothers to create new businesses, new products and new employment opportunities, the benefitof which are immense. In a nut shell, derivatives markets help increase savings and investment in thelong run. Transfer of risk enables market participants to expand their volume of activity.Among these Forward, Future, & Options are most common & widely used derivatives.Explanations of forward, Future & Options:Introduction to forward contract: A forward contract is an agreement to buy or sell an asset on a specified date fora specified price. One of the prices to the contract assumes a long position and agrees to buythe underlying asset on a certain specified future date for a certain specified price. The otherparty assumes a short position and agrees to sell the asset on the same date for the same price.Other contract details like delivery date, price and quality are negotiated bilaterally by theparties to the contract. The forward contracts are normally traded out side the exchange.The salient features of the forward contract are:• They are bilateral contract and hence exposed to counter party risk.• Each contract is custom designed, and hence is unique in terms of contract size,expiration date and the asset type and quality.• On the expiration date, the contract has to be settled by the delivery of the asset.• If the party wishes to reverse the contract it has to be compulsorily go to the same counterparty, which often result in high changed.• The counter price is not available in public domain. However forward contracts in certain markets have become very standardized,as in case of foreign exchange, there by reducing transaction costs and increasing transactionvolume. This process of standardization reaches its limits in the organized future market.Babasabpatilfreepptmba.com Page 31
  32. 32. “MARKET VOLATILITY-THE WAY TO RECOVER THE DIFFERENCE IN EQUITY PRICES DUE TO MARKET CRASH”. AT Forward contract are very useful in hedging and speculation. The classichedging applications would be that of the exporter who expects to receive payments in dollarthree months later. He is exposed to risk of exchange rate fluctuation. By using the currencyforward market to sell dollars forward, he can lock on to a rate today and reduce hisuncertainty. Similarly an importer who is required to make a payment in dollars two monthshence can reduce his exposure to exchange rate fluctuation by buying dollars forward. If a speculator has the information or analysis, which forecasts an upturn inn aprice, then he can go long on the forward market instead of the cash market. The speculatorwould go long on the forward, wait for the price to rice, and then take a reversing transactionto book profit. Speculators may well be required to deposit a margin front. However, this is generally a relatively small portion of the value of the assetunderlying the forward contract. The use of forward markets here supplies leverage to thespeculator.Limitations of forward markets:Forward markets world-wide are afflicted by several problems such as: • Lack of centralization of trading, • Liquidity, & • Counter party riskIntroduction to futures: The future markets are designed to solve the problem that exists in the forwardmarkets. A future contract is an agreement between two parties two buy or sell an asset at acertain time in the future at a certain price. But unlike forward contracts, the future contractsare standardized and exchange traded. To facilitate liquidity in the future contract, theexchange specifies certain standard features of the contract. It is standardized contract withstandard underlying instrument that can be delivered, (or which can be used for referencepurpose in settlement) and a standard timing of such settlement. A future contract can beBabasabpatilfreepptmba.com Page 32
  33. 33. “MARKET VOLATILITY-THE WAY TO RECOVER THE DIFFERENCE IN EQUITY PRICES DUE TO MARKET CRASH”. AToffset prior to maturity by entering into an equal & opposite transaction. More than 99% offuture transactions are offset this way.The standardized items in a future contract are: • Quality of underling • Quantity of underlying • The date & month of delivery • The units of the price quotation & minimum price change • Location of settlementDistinction between future and forward:FUTURE Forward1. Trade on an organized exchange. 1. OTC in nature.2. Standardized contract terms. 2. Standardized contract terms.3. Hence more liquid. 3. Hence less liquid.4. Requires margin payments. 4. No margin payments.5. Follows daily settlement.Futures terminology:Spot price: The price at which an asset trades in the spot market. Futures price: The price at which the futures contract trades in the futures market.Contract cycle: The period over which a contract trades. The index futures contracts on the NSEhave one- month, two-month and three months expiry cycles which expire on the lastBabasabpatilfreepptmba.com Page 33
  34. 34. “MARKET VOLATILITY-THE WAY TO RECOVER THE DIFFERENCE IN EQUITY PRICES DUE TO MARKET CRASH”. ATThursday of the month. Thus a January expiration contract expires on the last Thursday ofJanuary and a February expiration contract ceases trading on the last Thursday of February.On the Friday following the last Thursday, a new contract having a three- month expiry isintroduced for trading.Expiry date: It’s the date specified in the futures contract. This is the last day on which thecontract will be traded, at the end of which it will cease to exist.Contract size: The amount of asset that has to be delivered under one contract. Also called aslot size.Cost of carry: The relationship between futures prices and spot prices can be summarized interms of what is known as the cost of carry. This measures the storage cost plus the interestthat is paid to finance the asset less the income earned on the asset.Initial margin: The amount that must be deposited in the margin account at the time a futurescontract is first entered into is known as initial margin.Marketing-to-market: In the futures market, at the end of each trading day, the margin account isadjusted to reflect the investors gain or loss depending upon the futures closing price. This iscalled marking-to-market.Maintenance margin: This is somewhat lower than the initial margin. This is set to ensure that thebalance in the margin account never becomes negative. If the balance in the margin accountfalls below the maintenance margin, the investor receives a margin call and is expected to topup the margin account to the initial margin level before trading commences on the next day.Babasabpatilfreepptmba.com Page 34
  35. 35. “MARKET VOLATILITY-THE WAY TO RECOVER THE DIFFERENCE IN EQUITY PRICES DUE TO MARKET CRASH”. ATExplanation of future with an example:How to benefit from the stock futures:The share of DLF lot size is 800 at a currently quoting at Rs.392 (313600) on 29/07/2009.You believe in one month it will touch Rs.430.Question: What do you do?Answer: you buy DLF.Effect: It touches Rs.430 as your predicted –you made a profit of Rs.38 on an Investment ofRs. 392 i.e. a return of 10%in one month.Wait: can it get any better?Yes!!Question: What should you do?Answer: Buy DLF Futures instead.Effect: On buying 1 lot (800units) of DLF futures in derivatives market, but you pay a marginamount not the entire amount. For the example, if the margin is 25%, you would pay onlyRS.98 (78400). If DLF goes up to Rs430, you will still earn Rs.38 (30400) as profit. So youwill get 39% return in one month.This is the advantage of ‘leverage’ which Stock Futures provide. By investing a small margin(ranging from 20 to 30%), you can get into the same positions, as you would be able to in thecash market. The returns therefore get accordingly multiplied.Question: What are the risks?Babasabpatilfreepptmba.com Page 35
  36. 36. “MARKET VOLATILITY-THE WAY TO RECOVER THE DIFFERENCE IN EQUITY PRICES DUE TO MARKET CRASH”. ATAnswer: the risks are that looses will be get leveraged or multiplied in the same manner asprofits do. For example, If DLF drops from Rs.392 (313600) to Rs.360 (288000); you wouldmake a loss of Rs.32 (25600). The Rs.32 loss would translate to an 8% loss in the cashmarket and a 33% loss in the future market.Question: how can I reduce such losses?Answer: it is very is to reduce/minimize such losses if you keep a sharp eye on the market.Suppose, you are bullish and you hence buy DLF futures. But DLF futures are moving downafter you have bought. You can square up your position at any point of time thereafter. Youcan buy at 10:30 in the morning and sell off at 11:00 on same day. There is no restriction atall. Thus, by squaring up early enough you could stem your possible losses.Question: how long do futures last and when do they expire?Answer: Futures expire on last Thursday of every month. For example, January Futures willexpire on 31st January (last Thursday).Question: what is the implication of expiry?Answer: suppose you have bought January Futures on DLF and have not squared up till theend. On 31st January, your Futures will be compulsorily sold at the closing cash market priceof DLF and your Profit or Loss will be paid out or demanded from you as the case may be.Question: Apart from leverage, how can I use futures?Answer: A great advantage of futures (at the moment) is that they are not linked to ‘delivery’.Which means, you can sell futures (Short sell) of DLF even if you do not have any shares ofDLF? Thus, you can benefit from a downturn as well as from an upturn.If you predict an upturn, you should buy futures and if you predict a downturn, you canalways sell future – thus you can make money in a falling market as well as in a rising one –Babasabpatilfreepptmba.com Page 36
  37. 37. “MARKET VOLATILITY-THE WAY TO RECOVER THE DIFFERENCE IN EQUITY PRICES DUE TO MARKET CRASH”. ATan opportunity that till recently was available only to brokers / operators and easily to retailinvestors.Question: How can I take Arbitrage opportunity through futures?Answer: When does it make sense to enter into this arbitrage? If your cost of borrowingfunds to buy the security is less than the arbitrage profit possible, it makes sense for you toarbitrage. This is termed as cash-and-carry arbitrage. Remember however, that exploiting anarbitrage opportunity involves trading on the spot and futures market. In the real world, onehas to build in the transactions costs into the arbitrage strategy.In futures, such arbitrage opportunities arise constantly – thus futures can be understood as‘arbitrage on tap’. You should look for opportunities where futures prices are higher thancash prices. For example, if DLF is quoting at Rs.350 in the cash market and one-month DLFfutures are quoting at Rs.355 in the future market, you can earn Rs5 as difference. You willthen buy DLF in cash market and at the same time, sell DLF one-month futures.On or around the expiry day (last Thursday of each month), you will square up both thepositions, i.e. you will sell DLF in the cash market and buy futures. The two prices will be thesame (or very nearly the same) as cash and futures prices will converge on expiry. It does notmatter to you what the price is. You will make your profit of Rs.5 anyway.For example, if the price is Rs.370, you will make a profit of Rs.20 on selling your Cashmarket DLF and a loss of Rs.15 on buying back DLF futures. The net profit is Rs.5. on theother hand, if the price is Rs.325; you make a loss of Rs.25 on selling Cash market DLF and aprofit of Rs.30 on DLF futures. The net profit remains Rs.5.Your investment in this transaction will be Rs.350 on cash market DLF plus a margin of say25% on DLF futures (say Rs.88.75 approx). Thus an investment of Rs.438.75 has generated areturn of Rs.5 i.e. 1.14% per month or 13.67% per annum.Babasabpatilfreepptmba.com Page 37
  38. 38. “MARKET VOLATILITY-THE WAY TO RECOVER THE DIFFERENCE IN EQUITY PRICES DUE TO MARKET CRASH”. ATNow take a situation where only 15 days are left for expiry and you spot the sameopportunity as above. You will still generate Rs.5 which will translate into a return of 2.27%per month or 27.35%per annum.In this manner, you will generate returns whenever the future prices the are above cashmarket price.Question: What precautions should I take in such transactions and what risk am I exposed to?Answer: You need to factor in brokerage costs and Demat changes for the above transactions.The net returns should be considered for decision-making purposes.There is an execution risk in the sense that you might not get exactly the same price in thecash market and the futures market when you square up on or around the last day. Forexample, if you sell your cash market DLF shares for RS.250 and buy back DLF futures atRs.250.50, there is a small difference of Rs.0.50 which will affect your net profit. The impactmight be favorable or adverse but is nevertheless possible. It is however quit likely that thedifference might be very small on or around the last day.Question: do I need to wait till the last day?Answer: No- you might find profitable exit opportunities much before the last day also. Forexample, if the 1 lot (800) of DLF shares is Rs.280 (224000), after 3 days and DLF futuresare quoted at Rs.281 (224800), you could very exit both positions. You will make a loss off.Babasabpatilfreepptmba.com Page 38
  39. 39. “MARKET VOLATILITY-THE WAY TO RECOVER THE DIFFERENCE IN EQUITY PRICES DUE TO MARKET CRASH”. ATIntroduction to option: In this section we look at the next derivative product to be traded on the NSE,namely options. Options are fundamentally different from forward and future contracts. Anoption gives the holder of the option the right to-do something. The holder does not have toexercise this right. In the contrast, in a forward or future contract, the two parties havecommitted themselves to doing something. Whereas it costs nothing (expect marginrequirements) to enter in to a future contract, the purchase of an option requires an up-frontpayment.Babasabpatilfreepptmba.com Page 39
  40. 40. “MARKET VOLATILITY-THE WAY TO RECOVER THE DIFFERENCE IN EQUITY PRICES DUE TO MARKET CRASH”. ATDistinction between future and options:Futures. Options1) Exchange traded, with novation. 1) Same as future2) Price is zero, strick price moves 2)Strike price is fixed, price moves3)Price is zero 3) Price is always positive.4) Linear payoff. 4) Nonlinear payoff.5) Exchange defines the product. 5) Same as futures.6) Both long and short at risk only 6) Short at risk.Option terminology:Index option: These options have the index as the underlying. Some options are Europeanwhile others are American. Like index futures contracts, index options contracts are also cashsettled.Stock option: Stock options are options on individual stocks. Options currently trade on over500 stocks in the United States. A contract gives the holder the right to buy or sell shares atthe specified price.Buyer of an option: The buyer of an option is the one who by paying the option premium buys theright but not the obligation to exercise his option on the seller/writer.Writer of an option: The writer of a call/put option is the one who receives the option premium and isthereby obliged to sell/buy the asset if the buyer exercises on him.Babasabpatilfreepptmba.com Page 40
  41. 41. “MARKET VOLATILITY-THE WAY TO RECOVER THE DIFFERENCE IN EQUITY PRICES DUE TO MARKET CRASH”. ATThere are two basic types of options, call options and put options.Call option: A call option gives the holder the right but not the obligation to buy an asset bya certain date for a certain price.Put option: A put option gives the holder the right but not the obligation to sell an asset by acertain date for a certain price.Option price/premium: Option price is the price which the option buyer pays to the option seller. It isalso referred to as the option premiumExpiration date: The date specified in the options contract is known as the expiration date, theexercise date, the strike date or the maturity.Strike price: The price specified in the options contract is known as the strike price or theexercise price.American options: American options are options that can be exercised at any time upto theexpiration date. Most exchange-traded options are American.European options: European options are options that can be exercised only on the expiration dateitself. European options are easier to analyze than American options, and properties of anAmerican option are frequently deduced from those of its European counterpart.In-the-money option:Babasabpatilfreepptmba.com Page 41
  42. 42. “MARKET VOLATILITY-THE WAY TO RECOVER THE DIFFERENCE IN EQUITY PRICES DUE TO MARKET CRASH”. AT An in-the-money (ITM) option is an option that would lead to a positivecashflow to the holder if it were exercised immediately. A call option on the index is said tobe in-the-money when the current index stands at a level higher than the strike price (i.e. spotprice > strike price). If the index is much higher than the strike price, the call is said to bedeep ITM. In the case of a put, the put is ITM if the index is below the strike price.At-the-money option: An at-the-money (ATM) option is an option that would lead to zero cashflow ifit were exercised immediately. An option on the index is at-the money when the current indexequals the strike price (i.e. spot price = strike price).Out-of-the-money option: An out-of-the-money (OTM) option is an option that would lead to a negativecashflow if it were exercised immediately. A call option on the index is out-of-the-moneywhen the current index stands at a level which is less than the strike price (i.e. spot price <strike price). If the index is much lower than the strike price, the call is said to be deep OTM.In the case of a put, the put is OTM if the index is above the strike price.Intrinsic value of an option: The option premium can be broken down into two components - intrinsic valueand time value. The intrinsic value of a call is the amount the option is ITM, if it is ITM. Ifthe call is OTM, its intrinsic value is zero.Time value of an option: The time value of an option is the difference between its premium and itsintrinsic value. Both calls and puts have time value. An option that is OTM or ATM has onlytime value. Usually, the maximum time value exists when the option is ATM. The longer thetime to expiration, the greater is an options time value, all else equal. At expiration, an optionshould have no time value.Futures and options:Babasabpatilfreepptmba.com Page 42
  43. 43. “MARKET VOLATILITY-THE WAY TO RECOVER THE DIFFERENCE IN EQUITY PRICES DUE TO MARKET CRASH”. ATAn interesting question to ask at this stage is - when would one use options instead offutures?Options are different from futures in several interesting senses. At a practical level, the optionbuyer faces an interesting situation. He pays for the option in full at the time it is purchased.After this, he only has an upside. There is no possibility of the options position generatingany further losses to him (other than the funds already paid for the option). This is differentfrom futures, which is free to enter into, but can generate very large losses. This characteristicmakes options attractive to many occasional market participants, who cannot put in the timeto closely monitor their futures positions.Buying put options is buying insurance. To buy a put option on Nifty is to buy insurancewhich reimburses the full extent to which Nifty drops below the strike price of the put option.This is attractive to many people, and to mutual funds creating "guaranteed return products".The Nifty index fund industry will find it very useful to make a bundle of a Nifty index fundand a Nifty put option to create a new kind of a Nifty index fund, which gives the investorprotection against extreme drops in Nifty. Selling put options is selling insurance, so anyonewho feels like earning revenues by selling insurance can set himself up to do so on the indexoptions market.More generally, options offer "nonlinear payoffs" whereas futures only have "linear payoffs".By combining futures and options, a wide variety of innovative and useful payoff structurescan be created.Explanation of option with an example.Option-the basic frameworkQuestion: What are options?Answer: Options are derivative products, which, if you buy, give you certain rights.Babasabpatilfreepptmba.com Page 43
  44. 44. “MARKET VOLATILITY-THE WAY TO RECOVER THE DIFFERENCE IN EQUITY PRICES DUE TO MARKET CRASH”. ATQuestion: What kind of right?Answer: Call Options give a right to buy a share (at a certain specific price), whilePut Options give you a right to sell (again at a predefined price). For example, if you buy aDLF 1 lot (200) at Rs.350 (70000) in call option, you are entitled to buy DLF share at a priceof Rs.350 (70000) per share. This specific price is called as the strick price or the exerciseprice.Question: What do I pay for obtaining such rights?Answer: The cost you pay for obtaining such rights is the premium (also called price oroption value). In the above case, if you had Rs.14for the option, that would be premium.Question: So do I actually get DLF shares?Answer: Most of the time, you do not even intend to buy DLF shares. The option itself has avalue that keeps fluctuating with the price of DLF shares. For example the DLF shares pricemay have been Rs.350 when you bought the Call Option.You expect DLF price to rise. You accordingly bought the Call (instead of DLF itself). Nowif DLF rises to Rs.415 (in 10 days time), you will find that the call would also have risen inprice from Rs.14 to Rs.60. in that case, you would simply sell the Call for Rs.60. you wouldhave made a profit of Rs.46 on the Call itself without getting into DLF shares themselves.You can get DLF shares (through the Call) if you want to, but that we will discuss later.Question: So when should I buy a Call?Answer: You should buy a Call when you are bullish.Question: Why should I not buy the share itself?Babasabpatilfreepptmba.com Page 44
  45. 45. “MARKET VOLATILITY-THE WAY TO RECOVER THE DIFFERENCE IN EQUITY PRICES DUE TO MARKET CRASH”. ATAnswer: Well, you can. But in Options you will earn more. Take the above case. If you buyDLF shares at Rs.350 and sell DLF at Rs.415, you will make a profit of Rs.65, a 19% return.Now if buy the Option at Rs.14 and sell at Rs.60, you have earned 329% return.Your view is on both cases, for the same period of time and you earn for more in Options.Question: What if my view is not correct?Answer: Here again, Option are very useful. If your view wrong, you will find that yourOption value will decrease, as DLF share price decreases. For example, you will find that theOption value is only Rs.4 if DLF drops to 325 in that days they will sell off the option at Rs.4and bear the loss.If you had bought DLF, you would have lost Rs.25 per share, while here you lose only Rs.4.it is however higher in percentage terms.If DLF drops all the way to Rs.300, you will find that your option carries virtually no value.Here again, you would have lost Rs.50 per share in DLF. But in options, your maximum losswill be Rs.14, i.e. the amount you paid for buying the option.The biggest advantage of options is that your maximum loss is limited to the option price youpaid. Hence, you have limited losses but unlimited profits as a buyer of options.The accompanying graph is very useful in understanding the profit / loss possibilities of anoption. The X-axis shows the price of DLF and the Y-axis indicates the profits or losses youwill make.How can I enjoy such wonderful profile of limited losses and unlimited profits? I mean,somebody must be paying for this, isn’t it?Well, you are right. That somebody paying for this is the option seller (also called the optionwriter).Babasabpatilfreepptmba.com Page 45
  46. 46. “MARKET VOLATILITY-THE WAY TO RECOVER THE DIFFERENCE IN EQUITY PRICES DUE TO MARKET CRASH”. ATQuestion: Why does he pay for unlimited losses?Answer: The Option Writer is usually a skilled market player with an in-depth knowledge ofthe market. He is willing to take unlimited risk in return for a limited profit. The premiumyou pay is his limited income, but if his view is wrong, he will pay you for the unlimitedprofits you might make.In the above case, if DLF share price rises the Option seller will lose Rs.46 (he would havesold you the Option at Rs.14 only to buy it back at Rs.60). if DLF rises further, the Optionvalue will also rise and his losses will be that much higher.Question: When will the Option expire and what happens on expiry?Answer: Option will (like futures) expire on the last Thursday of every month. On expiry,your Call Option will be settled based on the closing price of DLF. For example, the lot size(200) DLF share price was Rs.400 (80000) on the last Thursday, you will be paid Rs50, i.e.the difference between Rs.400 and your strick Rs.350.Your net profit will be Rs.26, i.e.Rs.50 that you receive on expiry less the Rs.24 premiumthat you paid for purchasing option.Question: Who will pay difference of Rs.50?Answer: The Option seller/writer will pay the difference of Rs.50 to the exchange which willpay your broker who will pay you.This settlement is called automatic exercise of the Option.Question: What if the price of DLF on the last Thursday is below Rs.350?Babasabpatilfreepptmba.com Page 46
  47. 47. “MARKET VOLATILITY-THE WAY TO RECOVER THE DIFFERENCE IN EQUITY PRICES DUE TO MARKET CRASH”. ATAnswer: If DLF closes at say Rs.330, you will receive nothing. In that case, your loss will beRs.24 (your premium), which the Option seller would have earned as his income.Question: Can I also exercise before the expiry date?Answer: In case of stock Option (31 stocks currently), you can exercise your Option on anytrading day. You will receive the difference (if you are holding a Call Option) between theclosing price and your strick price. Such Options which can be exercised at any time arecalled American style Options.In case of index Options (2 indices currently), you can exercise only on the last day. Theseare called European style Options.Question: Are American style Options more useful/flexible?Answer: Yes, But only partly. The advantage of anytime exercise is useful for Option buyers.However, in practice, exercise is rare. You will find that it is more profitable to sell an Option(having bought it earlier) rather than exercise.You will often receive more by sale than by exercise. If you are waiting in the Ground Floorof a building want to go the 21st floor, you have two Options – one - take a lift and-two-takethe stairs. Which will you prefer, obviously the lift. In a similar manner, having bought anOption, you can exit in the two ways – one – sell the Option and - two exercise the Option.More than 95% of buyers will sell the option.Question: So when should I exercise?Answer: You will take the stairs only when the lift is not working. In a similar manner, youwill exercise the Option only when the sale possibility is not working. If the market is illiquidyou find that there are no trades happening, you may try to exit through the exercise route.Question: How to use covered call?Babasabpatilfreepptmba.com Page 47
  48. 48. “MARKET VOLATILITY-THE WAY TO RECOVER THE DIFFERENCE IN EQUITY PRICES DUE TO MARKET CRASH”. ATAnswer: Establishing a covered call is extremely simple. All you have to do is to write (sellto open) 1 contract of nearest out of the Money for every 100 shares you own.You could also choose to execute the Covered Call with At the Money call options instead.Doing so earns you a higher premium should the stock remain stagnant. The drawback ofdoing so is that you will not benefit from any gain in the stock should the stock price rise.There is another variant of the Covered Call using deep in the money options, known as theDeep in the Money Covered Call.You could also choose to execute the Covered Call with At the Money call options instead.Doing so earns you a higher premium should the stock remain stagnant. The drawback ofdoing so is that you will not benefit from any gain in the stock should the stock price rise.There is another variant of the Covered Call using deep in the money options, known as theDeep in the Money Covered CallSuch an ideal situation is, of course, rare. In most cases, the short call options will either be inthe money or out of the money at expiration.When your stock is stagnant or slightly higher upon expiration of the short call options, youwill profit on the whole value of the call options that you wrote, with whatever profit fromthe stock if it is up slightly.When your stock has gained in price beyond the strike price of the short call options uponexpiration, your stocks will be called off (assigned) and you will profit from the value of thecall options that you wrote and the value of the stock appreciation up till the strike price ofthe short call options. That is to say, you will not benefit from any rise in your stock beyondthe strike price of the short call options due to the short call options going in the money.For example: A lot size (200) DLF share price was Rs400 (80000) in cash market andderivative market price Rs.420 (84000) call Rs.20 (4000) is premium then we paid the MoneyRs.20 (4000) in future market but already purchased in cash market and sold at future market.If Rs.380 (76000) below will came the loss will start and Rs.420 (84000) above will cameBabasabpatilfreepptmba.com Page 48
  49. 49. “MARKET VOLATILITY-THE WAY TO RECOVER THE DIFFERENCE IN EQUITY PRICES DUE TO MARKET CRASH”. ATthen also loss will started so we firstly think and invest the Money. In derivative marketcontract based we using the share trading. Indian derivative market: Traditionally, equity derivative also have had a long history in India in the OTCmarket. The securities and contracts regulation act (SCRA) however banned all kind ofoptions in 1956 in India. The prohibition on options in SCRA was removed in 1995. Thesecurities laws (Amendment in SCRA) bill 1999 was introduced to bring about the much-needed changes. In December 1999, the new framework was approved. Derivatives havesince then been status of accorded the ‘securities’. Also the notification of June 1969 undersection 16 of SCRA banging forward trading was revoked in March 2000. Foreign currencyoptions in currency pairs other than rupee. Were the first options permitted by reserve bank ofIndia (RBI). RBI permitted options, interest rate swaps, currency swaps and others riskreduction OTC derivative products. Besides the forward market in currencies has been avibrant market in India for several decades. In addition the forward market has allowed thesetting up of future exchange. Today we have over 20 commodities exchanges most of whichtrade futures. E.g. the Indian pepper and spice traders association (IPSTA) and the coffeeowner’s futures exchange of India (COFEI). Last two years of this market have observedphased introduction of various derivative products including stock option and stock futures.Derivative History: The formal setup of derivative market is relatively new (since 1970s), thegeneral concept has existed around the world for years. Traders in Asian economic haveobserved and used the derivative instrument (forward, future & options) for their benefit anddevelopment processes. During the renaissance, Venetian spice traders waited for cargo onthe high seas for which they enter into future contract agreeing to price for future derivatives.Also, for hundreds of years, the Japanese and Indian rice farmers have used the future valueof their production. Looking at not distant history, options of various kinds (called Tejl &mandi & fatak) in un-organized markets were traded as early as 1990 in Mumbai. Insuranceproducts are one of the most prominent and widely use derivative instruments, although theyBabasabpatilfreepptmba.com Page 49
  50. 50. “MARKET VOLATILITY-THE WAY TO RECOVER THE DIFFERENCE IN EQUITY PRICES DUE TO MARKET CRASH”. ATwere never introduced in the form of “derivative”. Today trading procedure like future &options have been a single name and bought under the umbrella of “derivatives”. Along withthe evolution of financial derivatives, there has been adoption of a formal setup and specificrules, which did not, could not have existed before due to non-existence of systematizedfinancial markets. Till 1985, future trading in its present from was obscure in India, where in evenbankers, financial journalist and academician would not understand the trade. Although, theevaluation of derivative can be traced to forward trading that was done in ancient times. It isnot clearly established as to where and when the first forward market came into existence.Recorded evidence dates back to 2000 BC. India has had forward trading for ages. Thefollowers around the same period were the Romans too practice this form of trading in the12th century; Japan did its rice trade through forward contracts. In Japan, this was basically centered on Dojima, a district of Osaka and the tradewas known as cho-ai-mai a kinai (race-trade-on-book). This trade in rice grew and flourishedto a stage where receipts for future delivery were traded with a high degree ofstandardization. In 1730, the market received official recognitions from the tokugawashogunte (the ruling clan of shoguns or feudal lords). The Dojima rice market can thus beregarded as the first future market in the sense of an organized exchange with standardizedtrading terms. The market was its successors went through many phases including closures in1869 & 1973. The first future markets in the western hemisphere were developed in theUnited states, in Chicago. This market (in grain) had started as spot markets and graduallyevolved into future trading. This evaluation, however, was in stages. The first stage was thestarting of agreements to buy grain in the future at a pre-determined price with the intentionof actual delivery. Gradually these contracts became transferable and over a period of time,particularly during the American civil war (1860-1865), it became commonplace to sell andagreements themselves, instead of taking delivery of the physical produce. Traders found thatthe agreements were easier to buy and sell if they were standardized in terms of quality ofgrains, market lot and place of delivery. This is how modern future contrast first came intobeing.Babasabpatilfreepptmba.com Page 50
  51. 51. “MARKET VOLATILITY-THE WAY TO RECOVER THE DIFFERENCE IN EQUITY PRICES DUE TO MARKET CRASH”. AT The Chicago board of trade (CBOT), which opened in 1848, is to this day thelargest future market in the world. The general rules framed by CBOT in 1865 became atrend seller for many other markets in 1870; the New York cotton exchange was founded.The London metal exchange was established in 1877. LME is lately the leading market inmetal trading (both spot & forward). There after many new future markets were started. Thefirst financial future market was the international monetary market, founded in 1972 by theChicago mercantile exchange. This was followed by the London international financial futureexchange in 1982. Unfortunately, India has not had such a good tradition of record keeping forsuch financial trades as the west. Also, India has been invaded time and again over ages inthe last 10 centuries, which had also contributed to reduction in records being reduced to theminimum. Only the archeological findings and ancient literature, if any provide us withreference. It is there fore very difficult to trace back evidence for forward/future trading inour history. The first organized forward market in India came into existence in the late 19 thand early 20th century in Calcutta (for jute & jute goods) and Mumbai (for cotton). Severalnew markets grew over the first half of the 20th century. Chronologically, India’s experiencein organized forward trading is almost as long as that of the United Kingdom, and certainlylonger than the most development nations. However the tidal wave of price controls,nationalism and state intervention in market swept through all economics policy-makingspecifically after independence. This led to a rapid decline in the number of such future andforward markets (not known as derivative market then). Frequently markets were closed dueto the felling that they were responsible for sudden movements of price in the commodities;the underlying presumption was that speculation on forward market was creating orexacerbating price pressures. At present India have future commodity market only in fewgoods like Hessian, turmeric, pepper, castor seed, gur (jiggery), potatoes and other. Themarket is dynamic and is growing at a tremendous rate. Options might have had existed in ancient GREECE AND Rome as early as 400BC. Also there is evidence of options in wheat and other agriculturist commodities during theBabasabpatilfreepptmba.com Page 51
  52. 52. “MARKET VOLATILITY-THE WAY TO RECOVER THE DIFFERENCE IN EQUITY PRICES DUE TO MARKET CRASH”. ATmiddle Ages in England. In the 17th century Holland had presence of options on tulip bulbs.Options trading in agricultural commodities and in share revolutionized and bought under thepurview of the term “derivatives” in the United States from mid 1860s. However these werenot standardized traded options then, but one-to-one deals between traders (over-the-counter).Options trading remained peripheral and never grew as much as futures trading till the 1970s.The first traded options market was started by CBOT on April 26, 1973. This brought about,standard maturates, standard strick price and standard delivery arrangements. This also led tothe introduction of clearing house and a margin system, so that the risk of default could beremoved. Options on future contracts commenced in 1982. The introduction of traded optionsopened the way for the evolution of more complex derivatives. The first swap transaction, a currency swap, took place in 1981 between theWorld Bank and International Business Machines (IBM). Other derivative like interest rateswaps, forward rate agreements (FRAs), range forward, collars, etc, evolved since.NSEs DERIVATIVES MARKET: The derivatives trading on the NSE commenced with S&P CNX Nifty Indexfutures on June 12, 2000. The trading in index options commenced on June 4, 2001 andtrading in options on individual securities commenced on July 2, 2001. Single stock futureswere launched on November 9, 2001. Today, both in terms of volume and turnover, NSE isthe largest derivatives exchange in India. Currently, the derivatives contracts have amaximum of 3-month expiration cycles. Three contracts are available for trading, with 1month, 2 months and 3 months expiry. A new contract is introduced on the next trading dayfollowing the expiry of the near month contract.Trading mechanism: The futures and options trading system of NSE, called NEAT-F&O tradingsystem, provides a fully automated screen-based trading for Index futures & options andBabasabpatilfreepptmba.com Page 52
  53. 53. “MARKET VOLATILITY-THE WAY TO RECOVER THE DIFFERENCE IN EQUITY PRICES DUE TO MARKET CRASH”. ATStock futures & options on a nationwide basis and an online monitoring and surveillancemechanism. It supports an anonymous order driven market which provides completetransparency of trading operations and operates on strict price-time priority. It is similar tothat of trading of equities in the Cash Market (CM) segment. The NEAT-F&O trading systemis 13 accessed by two types of users. The Trading Members (TM) have access to functionssuch as order entry, order matching, and order and trade management. It provides tremendousflexibility to users in terms of kinds of orders that can be placed on the system. Variousconditions like Immediate or Cancel, Limit/Market price, Stop loss, etc. can be built into anorder. The Clearing Members (CM) use the trader workstation for the purpose of monitoringthe trading member(s) for whom they clear the trades. Additionally, they can enter and setlimits to positions, which a trading member can take.Babasabpatilfreepptmba.com Page 53
  54. 54. “MARKET VOLATILITY-THE WAY TO RECOVER THE DIFFERENCE IN EQUITY PRICES DUE TO MARKET CRASH”. AT Company profile “…..When it’s a question of your money,The answer is Reliance Money…..” Reliance money is a part of Reliance Capital Limited, One of India’s Leading& fastest growing private sector financial services companies, Ranks Among the top 3 privatesector financial services companies, in terms of net worth, With interests in AssetManagement and Mutual Funds, Life and General Insurance, Credit Cards and other activitiesin financial services. Reliance Money offers a single window platform for the financial transactions.Offering an investment avenue for a wide range of asset classes like Equity, Equity &Commodity Derivatives, Mutual Funds, IPO’s Life and General Insurance, OffshoreInvestments, Money Transfer, Money Changing and Credit Card. Their endeavor is to changethe way India transacts in financial markets and avails financial services. One of their keyfeatures is that the most cost-effective, convenient and secure way to transact in a wide rangeof financial products and services. Reliance Money is targeting the low level of retailpenetration in Indian retail financial market. Retail participation in equities in India isBabasabpatilfreepptmba.com Page 54
  55. 55. “MARKET VOLATILITY-THE WAY TO RECOVER THE DIFFERENCE IN EQUITY PRICES DUE TO MARKET CRASH”. ATamongst the lowest in the world, with less than 5 per cent of household sector financialsavings invested in equity/equity-related assets.The company has formally commenced operations in April 2007.Highlights of Reliance MoneyCost- effective: The fee charged by the affiliates of Reliance Money, through Whom thetransactions can be placed, is among the lowest charged in the Present scenario & wouldrevolutionize the broking fee structureConvenience: You have the flexibility to access Reliance Money Services in Multiple ways:through the Internet, Transaction Kiosks, Call & Transact (phone) or seek assistance throughour Business Partners.Security: Reliance Money provides secure access through an electronic Token that flashes aunique security number every 32 seconds (and ensures that the Number used for the earliertransaction is discarded). The number Works as a third level password that keeps youraccount extra safe.Single window for multiple products: Reliance Money, through its affiliates/partners,facility in equity & commodity derivative offshore investments, mutual funds, IPO’s, lifeinsurance and general insurance products.3 in 1 integrated access: Reliance Money offers integrated access to your banking, tradingand de-mat account. And transact without the hassle of writing cheques.VISION STATEMENT OF RELIANCE MONEY“To be world leader in the business by providing a convenient transparent andTrustworthy online platform for effective wealth management”MISSION STATEMENTBabasabpatilfreepptmba.com Page 55
  56. 56. “MARKET VOLATILITY-THE WAY TO RECOVER THE DIFFERENCE IN EQUITY PRICES DUE TO MARKET CRASH”. AT“To offer unparallel value by providing the customer transparent, convenient and Effectiveanytime-anywhere integrated financial transaction capability”Origin and development of the industryThe Parent CompanyReliance Capital LtdCOMPANY OVERVIEW Reliance Capital Limited (RCL) is a depository participant with NationalSecurities Depository Ltd (NSDL) and Central Depository Services Ltd (CDSL) under theSecurities and Exchange Board of India (Depositories and Participants) Regulations;Babasabpatilfreepptmba.com Page 56
  57. 57. “MARKET VOLATILITY-THE WAY TO RECOVER THE DIFFERENCE IN EQUITY PRICES DUE TO MARKET CRASH”. AT1996.The Company primarily focuses on funding projects in the Infrastructure sector andsupports the growth of its subsidiary companies. The company primarily operates in India. It is headquartered in Navi Mumbai,India and employs about 140 people. The company recorded revenues of INR6, 520 million(approximately $146.6 million) during the fiscal year ended March 2006. As compared torevenues of INR 2,956.9millions during 2005. The Operating profit of the company wasINR5, 506.1 million (approximately $123.8million) during fiscal year 2006, as compared toan operating profit of INR 1112.1millions during 2005. The net profit was INR5, 376, 1million (approximately $120.9 million) in fiscal year 2006, as compared to a net profit ofINR1, 058.1 million during 2005.BUSINESS DESCRIPTION Reliance Capital (RCL), a member of the Reliance Group, is a private sectorfinancial services company. Reliance Capital is engaged in asset management and mutualfunds, life and general insurance, private equity and proprietary investments, stock brokingand other financial services. RCL primarily focuses on funding projects in the infrastructure sector andsupports the growth of its subsidiary companies, Reliance Capital Asset Management,Reliance Capital Trustee; Reliance General Insurance of Reliance Life Insurance, RelianceCapital Asset Management, and a wholly owned subsidiary of Reliance Capital managesReliance Mutual Fund schemes. Reliance Mutual Fund and Reliance money offers investorsa well-rounded portfolio of products to meet varying investor requirements. Reliance Mutualfund is active in over 80 cities across India with an investor base of over 2 million andmanages assets over Rs 27,914 crore as on May 31, 2006. Reliance Life Insurances is an associate company of RCL offering a range ofproducts catering for individual and corporate clients. The company has a total of 16 productsin its range, covering savings, protection and investment requirements. Reliance GeneralBabasabpatilfreepptmba.com Page 57
  58. 58. “MARKET VOLATILITY-THE WAY TO RECOVER THE DIFFERENCE IN EQUITY PRICES DUE TO MARKET CRASH”. ATInsurance, a Subsidiary of RCL, is a non-life insurance company offering a range ofinsurance products covering risks including property, marine, casualty and liability,VISION OF THE COMPANY“To aspire to the highest global standards of quality and efficiency, operational performance,and customer care and to be the world leader in the Business world-class financial servicesenterprise”MISSION To attain global best practices and become a world-class financial Services enterprise – guided by its purpose to move towards greater degree of sophistication and maturity. To work with vigor, dedication and innovation to achieve excellence in service, quality, reliability, safety and customer care as the ultimate goal... To earn the trust and confidence of all stakeholders, exceeding their expectations and make the Company a respected household name. To consistently achieve high growth with the highest levels of productivity. To be a technology driven, efficient and financially sound organization. To contribute towards community development and nation building. To be a responsible corporate citizen nurturing human values and concern for society, the environment and above all, people.KEY EMPLOYEESName Job Title BoardAnil Dhirubhai Ambani Chairman Executive BoardSam Ghosh Vice Chairman No Executive BoardRajendra Chitale Director No Executive BoardC P Jain Director No Executive BoardBabasabpatilfreepptmba.com Page 58
  59. 59. “MARKET VOLATILITY-THE WAY TO RECOVER THE DIFFERENCE IN EQUITY PRICES DUE TO MARKET CRASH”. ATUdyan Bose Director No Executive BoardV R Mohan Company secretary and Senior Management managerChairman’s profileRegarded as one of the foremost corporate leaders of contemporary India,Shri. Anil D Ambani, 48, is the chairman of all listed companies of the Reliance ADAGroup, namely, Reliance Communications, Reliance Capital, Reliance Energy andReliance Natural Resources limited.He is also Chairman of the Board of Governors of Dhirubhai Ambani Institute of Informationand Communication Technology, Gandhi Nagar, Gujarat. Till recently, he also held the postof Vice Chairman and Managing Director in Reliance Industries Limited (RIL), India’slargest private sector enterprise. Anil D Ambani joined Reliance in 1983 as Co-ChiefExecutive Officer, and was centrally involved in every aspect of the company’s managementover the next 22 years.He is credited with having pioneered a number of path-breaking financial innovationsin the Indian capital markets. He spearheaded the country’s first forays into theoverseas capital markets with international public offerings of global depositaryreceipts, convertibles and bonds. Starting in 1991, he directed Reliance Industries in itsefforts to rise over US$ 2 billion. He also steered the 100-year Yankee bond issue for thecompany in January 1997.MAJOR PRODUCTS AND SERVICESBabasabpatilfreepptmba.com Page 59

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